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Riding Buffett's Coattails

December 26, 2007

Dear Fellow Options Trader,

First off, thank you to so many of you who sent me e-mails about my co-hosting of CNBC's "Squawk Box" this morning! I appreciated all the nice words, and hope I get other opportunities like that in the future.

Since I got to ask one of my heroes, Mr. Warren Buffett, a question this morning, I thought share with you some thoughts on which parts of his purchase of the Chicago-based Pritzker family's Marmon Group were the most interesting, and potentially profitable, to all of us.

Buffett, through his Berkshire Hathaway (BRK) company, agreed to pay $4.5 billion for 60% interest in Marmon Holdings. And since this man seems to have the Midas touch when it comes to making money, let's examine what made this such an attractive investment opportunity.

The Marmon Group began in 1953 when brothers Jay and Robert Pritzker acquired the Colson Corp. with continuing sales of $3.5 million. The Pritzkers have grown Marmon into an enviable conglomerate, excelling where others have failed. Between 2002 and 2007, Marmon's operating income more than tripled. During that same period, operating margins increased from 4.9% to 12.4%.

HOW TO INVEST LIKE BUFFETT

Marmon has upward of 125 companies, but here are the ones I’d concentrate on, given their growth potential:

Transportation Services

Marmon added a state-of-the-art railroad tank car production plant. This hits the sweet spot that alternative energy has created demand for (i.e., bio fuels and the Canadian oil sands). And, given Mr. Buffett’s recent trip to China, he had to like Marmon’s ownership of a Chinese intermodal tank container leasing company -- the first wholly foreign-owned company providing such services within China.

Best Coat-tailing Stocks

* FreightCar America (RAIL) -- As a manufacturer of aluminum-bodied railcars in North America, it specializes in the production of coal-carrying railcars, which represented 96% of its deliveries of railcars in 2006.

* The Greenbrier Companies (GBX) -- This company manufactures and markets railroad freight car equipment in North America and Europe and provides railcar refurbishment and parts, leasing, and other services to the railroad and related transportation industries in North America.

* Trinity Industries (TRN) -- As a holding company of diversified industrial companies, Trinity manufactures and sells railcars and railcar parts, inland barges, concrete and aggregates, highway products, beams and girders used in highway construction, tank containers and structural wind towers.

* American Railcar Industries (ARII) -- As a manufacturer and marketer of covered hopper and tank railcars, ARII also repairs and refurbishes railcars, and provides fleet management services.

Water Treatment

Marmon is big and, under Buffett, will get bigger in Water Treatment. It recently announced a joint venture with Singapore- and China-based Hyflux (HYFXF), a big player in Asian residential and industrial water treatment.

Part of the Hyflux story is desalinization (i.e., salt and other mineral removal) and wastewater recycling, which makes water infrastructure the oil of the future.

Best Coat-tailing Stocks

Worldwide, the consumption of water is doubling every 20 years, at more than twice the rate of the increase in human population -- placing enormous pressures on aquatic ecosystems.

I trade several individual stocks based on our institutional money flows that we track with our HeatSeeker technology. Here are three of the most liquid Exchange-Traded Funds to follow and profit from this inevitable trend:

* S&P Global Water (CGW) -- Fifty stocks from around the globe are contained in this ETF, which focuses on Water Utilities/Infrastructure and Water Equipment/Materials.

* PowerShares Water Resources (PHO) -- This ETF is comprised of 25 publicly traded companies that exist in such sectors as water utilities, treatment, analytical monitoring, infrastructure/distribution, water resource management and conglomerates.

* PowerShares Global ETF Trust (PIO) -- Launched in June, this ETF has great international exposure, with 14 countries/regions represented in its 41 component stocks.

As for some individual stocks that can help you to ride the Water Treatment wave, here are two:

* Flowserve (FLS) -- This company makes pumps, valves and seals for water flow systems and also performs installation, advanced diagnostics, repair and retrofitting.

* Consolidated Water (CWCO) -- Treating and providing water for residential, commercial and government users, Consolidated services the Cayman Islands, Belize, Barbados, the British Virgin Islands and the Bahamas.

BEND IT LIKE BUFFETT

Buffett is investing in Marmon's collective vision for the myriad energy, water, transportation, construction and distribution companies it oversees. And while the Pritzker family is welcoming him into their world, we don't need to be mega-rich to invest like the "Oracle of Omaha." Like him, though, if we are going to invest capital into promising opportunities, we're doing it because we expect to make back that money (and then some!).

To do this, we need to look at the companies and sectors that are generating interest among the Buffetts of the world and use option plays to position ourselves for princely returns without having to hand over a king's ransom in the process.

Speaking of good fortune, I wish you and your family a safe, healthy and prosperous new year and look forward to making many more options trades together in 2008!


Jon "Doctor J" Najarian
Editor
ChangeWave Options Trader