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Beat the Man at the Pump and the Best of Warren Buffet
By Michael Brush
Exclusively for InvestorIdeas.com
May 18, 2006
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If you hate filling stations each time you fork over a fortune to put gas in the tank, here’s a way to get ’em back.
Purchase shares in a company that runs both a U.S.-based refinery and gas stations -- and use any profits you earn to offset your gasoline spending. You now have that opportunity with Delek US Holdings (DK), an initial public offering (IPO) that started trading on May 4 at just above $16 per share.
The same day, insiders purchased about $1.6 million of this stock for $16 per share. That’s a good signal. And the stock has recently fallen along with everything else, to $15.70. So you can now buy it for even less than the insiders.
Delek operates a refinery in Tyler, TX, and it has 349 filling stations that also have mini-marts. They are primarily in Tennessee, Alabama and Virginia. The stores operate mainly under the names MAPCO Express, East Coast and Discount Food Mart. The company also has a wholesale fuel distribution arm.
Delek plans to expand by purchasing more mini-marts. This seems like a sensible strategy because the major oil companies have been selling off their mini-mart chains and they say they will continue to do so. Mini-marts aren’t too difficult to integrate – so you don’t have the usual worries about a roll-up strategy. Through its acquisition strategy, Delek US Holdings has nearly doubled retail sales since 2002, to $1 billion.
The company says it may also buy more refineries. It purchased the one in Texas in April 2005. Meanwhile, tight refining capacity in the U.S. should help margins at its Texas refinery.
A few red flags
As strong as the insider buy signal is, and as good a record as this company has at increasing sales, there are a few warning signs in this IPO.
First, this company is tightly controlled by a parent company called Delek Group Ltd. which holds nearly 80% of the stock. The parent company will use about 30% of the $137 million it raises in the IPO to pay down its own debt, rather than invest it in the spin out, which would help shareholders.
Next, Delek will likely be selling a lot of stock in the spin out company, starting with 40 million shares it will be free to trade around six months from now.
All this leaves the impression of an IPO designed as much for the good of the parent company as for any shareholders who buy now in the open market. Sometimes these don’t work out so well.
Still, refining capacity is tight in the U.S. and this company has a good record of growing by purchasing other chains of filling station – so this stock holds promise.
The best of Warren Buffet
This column is usually dedicated to small cap stocks. But when you see insiders buying significant amounts of stock in positions recently revealed to be part of Warren Buffet’s portfolio, you have to take notice.
In statements filed with the U.S. Securities and Exchange Commission earlier this week, Buffet revealed big stakes in two classic holdings of his -- Coca-Cola (KO) and American Express (AXP). But we also learned he has been buying another name recently, General Electric (GE). What’s great about all three names – besides the Buffet stamp of approval – is that insiders are buying them hand over fist. Here’s a quick look.
Coca-Cola
A long-time favorite of Buffet, Coca-Cola has been less popular with other investors. It trades below what it sold for a year ago. Down here, though, the stock looks cheap, according to Morningstar analyst Matthew Reilly. He suggests picking up shares below $46. The stock recently sold for $43.60. Morningstar’s conservative buy recommendations are worth listening to because the shop follows a strict value discipline. It doesn’t easily put a high rating on stocks.
Reilly looks for decent growth from emerging markets like Brazil and China. Meanwhile, Coca-Cola’s formidable distribution infrastructure should help it sell more noncarbonated beverages in more developed markets. The company gets a lot of revenue abroad which means it should benefit from continued weakness in the dollar (http://moneycentral.msn.com/content/P150385.asp).
Since early March, insiders have purchased $21.3 million worth of this stock for around $42.
General Electric
General Electric has a strong financial arm, but it’s also a tech company with a wide range of products, thanks to heavy ongoing investment in research and development. Morningstar isn’t as bullish about this stock at recent levels of $34.50. The research shop says to wait and buy the stock below $29.30. But chief executive Jeffery Immelt doesn’t agree. He recently purchased $515,700 worth of the stock at $34.38.
American Express
Amex cardholders are big spenders. In 2004, they spent $9,460 with their Amex cards, on average, or much more than averages among customers using Visa or MasterCard. This means Amex can charge merchants a higher fee of 2.6% of transactions, compared to 1.6% charged by those competitors.
Amex should see solid growth in the coming years because of partnerships with banks like MBNA and Citigroup, and China's largest card issuer, ICBC.
Since late April, two insiders have purchased $910,000 worth of the stock for around $53.50.
The bottom line: It’s tough to buy anything with the markets as ugly as they are these days. It’s a lot easier to go along with the crowd and sell. But we’ve seen in other pullbacks that it pays to follow the insiders at times like these. They don’t have a problem buying these four names around current levels. As always, remember that when following the insiders you are taking positions for the long haul. These aren’t swing trades, because insiders buy for the long term.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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