Escaping herd mentality

By Ian L. Cooper

Wall Street fortunes are breaking down quicker than the near-term possibility of Michael Jackson regaining sanity. And like all those who enjoy living on the edge of delusional madness somewhere in this world, the Taipan team knows how to walk the line, buck the massive ego-bruising downtrends, break out of the herd mentality… and know that each time we’ll be able to jump back in safely before we lose it all.

In a damaging trend that’s continuing as you read, investors are fleeing the market faster than Saddam Hussein can run to his rat hole. What makes this scenario better is that while analysts downgrade the potential of the undervalued, those who can think beyond the herd mentality are thriving.

Late last year, for example, analysts and investors alike took a hatchet to the future of many e-commerce plays. Going against the trend, and following the historical progress of these plays in November and December, we jumped in, recommended a strong buy on seven plays, and walked away with an average 32% gain in less than two months.

That’s exactly what we’re going to do with Aquila Inc. (ILA:NYSE). Following the Enronesque selloff that sent energy stocks to new lows, this company hit our radar screens as a story stock. We’ll look to buy into this play at a later date, though. It still has plenty of room to fall.

September: bad month to be an investor

Historically, September has been a bad month to invest. But if you can find the hidden gems now, you’re in better shape than you think going into November and December… when mutual funds and institutions wrap up their tax-related selling spree and go out on the warpath for top-performing stocks to improve their portfolios.

You see, while the bears talk a good game and rub all the losses in the face of the bulls, we’re bucking the herd mentality, searching for the undiscovered gems. We’re already up 20% on CDE, another 30% on VSTY (after banking 50% and 77% gains over the past year), 5% on RYVNX, and a quick 7% on CRXL since August 26—all while the market succumbs to a falling dollar and mounting economic woes.

Insider buying on the rise

Our current state of hysteria is not as bad as it seems. Corporate insiders are slowly coming back to the table… with insider buys outnumbering insider sells by two to one. That’s not bad, considering the current state of economic affairs.

Since June 2002, three insiders have bought more than 32,500 shares of this company. And if it can muster a clean bill of health following a devastating selloff, this stock could pop. We don’t see this company going belly up any time soon.

Aquila (ILA:NYSE)

Aquila Inc. operates electricity and natural gas distribution networks, serving more than six million customers in the U.S., Canada, the UK, Australia, and New Zealand. As for its recent numbers and future outlook, try not to cringe and keep in mind that we’re not looking to sink any hard-earned gold and silver profits into this puppy until: 1) it gets cheaper, and 2) the underlying fundamentals begin to improve significantly. Until then, look to the Capitalist Pig updates for a good time to buy.

In early August, ILA reported a devastating loss, reversing last year’s profits. But that was before the geniuses at El Paso and Enron decided they’d throw a party, invite no one, get rich off the industry, and then hurl a bombshell to end all the games.

ILA posted a loss of US$810 million or US$5.69 a share after getting slammed by bad investments in a contracting economy and by costs associated with its exit from the energy trading business.

But if you exclude the one-time losses, the company actually hit expectations with 18 cents per share. Unfortunately for those invested in this company at the time, the market devastated the stock price in Q3. One look at the chart will tell you the story.

Bargain hunting in the energy wasteland

We could see a turnaround soon. Threats of war are looming and it wouldn’t surprise me if we see a January offensive in Iraq.

As for its 2002 outlook, the company took its full-year guidance down 26% to US$1 per share, blaming lower power prices. It is a contrarian’s dream. Oil has been rising and may spike above US$35, reversing the trend and expanding ILA’s margins.

Can ILA get a break?

Tuesday was not what you’d call a great day for ILA. While it may have started the day in the green, it ended in the red, burned by Moody’s downgrade and the rapid deterioration of any confidence remaining in the troubled industry. Moody’s downgraded the company’s credit to junk, triggering close to US$200 million in collateral calls. The company could face another US$200 million in collateral payments if the S&P decides to cut its credit to junk, too.

This follows last month’s debacle that saw the beleaguered company lose more than half of its value after shocking investors with disclosures in its financial statements. The company managed to knock 50% off its operating cash flow. I’d say investors were a little more than shocked. The good news: it’s clear that the credit downgrades and fear associated with energy stocks have already been priced into the current stock price. In fact, it is oversold.

Trigger-happy

Speaking of joining the herd mentality, Moody’s lowered Aquila’s credit rating to the non-investment grade Ba2 from Baa2, citing the deterioration of operating cash flows from poor returns outside the regulated utility business in the U.S. Regardless, Aquila is prepared to withstand the effects of the downgrade. Bring it on, Moody’s. Bring it on.

Later that same day, Aquila said that the downgrade requires the company to come up with US$192 million over the next 60 days to cover ratings-related triggers, which may rise to US$484 million if the company is cut to junk by the S&P. The company also said it would eventually achieve a stronger credit profile, and remains focused on executing its asset sale program and its exit from the wholesale energy business.

The news follows the company’s previous decision to sell more than US$1 billion in assets to improve its credit rating. Up for sale is the company’s 78.8% interest in Midlands Electricity, the New Zealand-based United Networks, and ILA’s gas pipeline, processing, and storage assets. That’s in addition to the price tag on the company’s 16.58% stake in the Lockport Energy facility for US$37.5 million in cash.

ILA has also terminated the Cogentrix acquisition to help expedite its departure from the wholesale energy business, reduced its dividend by 42%, completed equity and debt offerings totaling US$464 million, identified more than US$100 million in cost reductions, signed sales agreements totaling US$483 million and publicly announced bids for the sale of New Zealand and UK investments.

Better yet, Main Street AC has made an offer to purchase for cash more than eight million outstanding shares of Aquila at US$5.45 per share. The firm has promised a 25% premium over where the stock closed last week. The fact that a small company such as Main Street AC would be willing to make an offer for a beaten-down energy company shows us just how badly they’ve fallen since the Enrons and El Pasos of the world dropped the ball.

Free up some cash

On Wednesday, Standard & Poor’s confirmed Aquila’s investment grade credit rating and removed the company from credit watch, sending the credit rating down one notch to BBB from BBB-. At least it wasn’t junked. To maintain credit quality in the BBB range, the company, according to S&P, must complete asset sales, further reduce business risk, and improve upon utility operations. These were the triggers that sent ILA shares rallying in the mixed market mayhem.

In what could turn out to be the rebound stock of the year, we’re going to wait for this puppy to slide a bit further before jumping in with both feet. We’ll keep you up-to-date on the entry price and the condition of the stock in your Capitalist Pig hotlines. If you're not getting the Capitalist Pig, sign up to receive your FREE daily copy at www.247profits.com/.

This looks like a nice, unheralded bet to play the next crisis in the Middle East.

There’s no need to rush into this play with the economy in shambles. Contact: 20 West Ninth Street, Kansas City, MO 64105, tel. 816-421-6600, fax 816-467-3435. Visit: www.aquila.com.