Handle Cool Market's Hot Stocks With Great Care: John Dorfman

While the U.S. stock market has been little changed for the past month, a few stocks have raced ahead. Among them are a humble fertilizer maker and an online reservation service whose pitch man is the former captain of the starship USS Enterprise.

If you already own these stocks, should you let your profits ride or cash in? And if you don’t own them, should you jump onboard? The answers vary by company.

The Standard & Poor’s 500 Index, a fair gauge of the overall U.S. market, gained about 1 percent in the 30-day period that ended July 23. Meanwhile, fertilizer maker CF Industries Holdings Inc. rose 21 percent.

Fertilizer stocks were the index’s worst group for the 12 months through June, down 36 percent. They have bounced back strongly since June 30, even though fertilizer sales remain unimpressive and profits anemic.

One reason is that fertilizer makers have been on the prowl for acquisitions, and two big mining companies -- Australia’s BHP Billiton Ltd. and Brazil’s Vale SA -- have entered the acquisition derby.

CF, based in Deerfield, Illinois, boasts a stronger balance sheet than most of its rivals, with debt less than 1 percent of stockholders’ equity. Its stock is selling at eight times earnings, and looks attractive to me.

Priceline.com Inc. also increased 21 percent in the past month. The Norwalk, Connecticut, company helps consumers use the Internet to book hotel rooms or make airline reservations at a discount. Its services are advertised by William Shatner, who played Captain Kirk on the “Star Trek” TV series and now plays lawyer Denny Crane on the show “Boston Legal.”

Priceline Rebounds

Priceline stock soared to almost $1,000 a share in 1999, the year it went public. Then it collapsed, dropping to less than $7 in 2002. Since then, it has been mostly on the upswing. The shares closed Friday at about $229.

From 2006 through 2009, Priceline more than doubled its revenue, to $2.3 billion from $1.1 billion. Detractors say the stock is vulnerable because the company gets 36 percent of its revenue from Europe (mainly the U.K. and the Netherlands), which is in a slowdown.

I see little sign of a slowdown for Priceline. Its revenue in the first quarter was a record for that period, and its earnings of $1.06 a share were double the previous year’s showing of 53 cents a share.

Beware the Unexpected

Would I buy the stock? No, I would run away from it at warp speed because it is too pricey. Shares go for 30 times earnings, more than eight times book value (corporate net worth) and more than four times revenue. At those valuations, unpleasant surprises can produce major tumbles.

Another strong performer is Monsanto Co., the largest seed producer in the world. The St. Louis-based company genetically engineers seeds for increased yield, disease resistance or a speeded-up germination process. Monsanto sells both its seeds and its genetic coding to customers, mostly large agribusiness companies.

Among the factors boosting the shares 19 percent in the past month were purchases by two insiders. Chief Executive Officer Hugh Grant bought 37,500 shares at about $52 each , spending about $2 million. In 2009 he was a significant seller at higher prices.

Chief Financial Officer Carl Casale bought about 30,000 shares at about $52. He too, sold shares at higher prices last year.

My Monsanto Moment

I can’t discuss Monsanto without gritting my teeth. I owned the stock, sold it in the bear market of 2002, and then watched it rise 10-fold in about five years. Equally galling, I liked the seed business, which was then just a portion of the company’s story, and now dominates it.

Today, I regard Monsanto as a good company but a so-so stock. Analysts estimate future earnings growth of about 11 percent a year, yet the stock sells for 23 times earnings. That makes for an unattractive P/E-to-growth (or PEG) ratio of 2.1. Many investors prefer a PEG ratio of about 1.0 or less.

Halliburton Co., the top U.S. provider of onshore oilfield services, saw its shares rise 19 percent in the past month. With offshore drilling in trouble, at least for the moment, Halliburton has benefitted from its strong onshore drilling operations.

Adding Jobs

The Houston-based company reported profit of 53 cents a share in the second quarter, its best showing since the third quarter of 2008. It has just added 1,700 jobs.

For similar reasons, Baker Hughes Inc., another big driller based in Houston, gained about 15 percent in the past month. My own energy holdings are elsewhere, but I prefer Halliburton to Baker Hughes, because its valuations are more modest -- for example, 22 times earnings for Halliburton compared with 32 for Baker Hughes.

Disclosure note: I have no long or short positions in the stocks discussed in this week’s column, personally or for clients.

(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)

To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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