Transocean Inc. (RIG)

If the current high price of crude oil reflects a fundamental change in the world-wide demand for oil, as many suggest (see Sunday Washington Post article), then prospects may be bright for oil services stocks.  We have one oil services stock in our portfolio, Helmerich & Payne (HP).  The stock is at $52.90 per share, up from the $33.72 we paid for it last June.  HP is 6.8% of our portfolio.  HP provides contract drilling services to oil and gas producers primarily in the United States, Argentina, Colombia, Ecuador, and Venezuela.

It might be wise to diversify and include deep water drilling company.  Transocean Inc. (RIG) pops up in numerous screens and articles. Value Line describes Transocean as the world’s largest offshore drilling contractor, working in all the major offshore regions, including the Gulf of Mexico, the North Sea, the Middle East, and off the coasts of West Africa, the United Kingdom, Norway, Brazil, and Canada.  It specializes in technically demanding deep-water/harsh-environment drilling projects.

Here is a stock selection guide for Transocean.  Manifest Investing estimates a projected average return of 19.3%.  Morningstar rates Transocean 5-stars (undervalued) and calculates fair vale as $176 (current price is $133).  We should consider selling part of our position in HP and buying RIG.

Maxim Integrated Products

Maxim Integrated Products (MXIM or MXIM.PK) has been one of our disappointing holdings.  We bought an initial position in February 2005 at $39.44 per share and added to that position in June 2006 at $31.33 per share thinking the worst was over for the stock.  The stock is currently priced at $18.35, down from its $55 high in 2004.

Maxim got caught up in an options backdating scandal.  Nasdaq delisted it.  And it has taken the company a long time to restate its financials, which has resulted in significant legal and accounting fees.

Barron’s reports today:

Now there are signs that the worst may be over. The company, with a market value of $6 billion, has submitted revised financial statements to its auditors. Earnings are expected to pick up next year, as the legal expenses of the probe recede into the past. And conditions in the chip industry could start to improve markedly within a couple of years.

Result: The stock could rocket by more than 40%. The hope is that growth investors, who abandoned the shares over the past couple of years, will start returning in force. What they’ll find is a stock that trades at a sharp discount to its peers and boasts $1.2 billion of cash and no debt.

Value Line stopped covering Maxim when it was delisted.  However, Morningstar still follows the company and rates it 5-stars (undervalued) and gives it a fair value estimate of $34.  Here are some excerpts from the Morningstar Report from May:

We consider Maxim Integrated Products one of the better long-term semiconductor investments. With attractive products, sought-after talent, and a plausible plan for growth, Maxim should continue generating healthy returns on invested capital for many years. …  Maxim is well positioned in its core business of high-performance analog (HPA) chips, which are complex and proprietary by nature. Armed with one of the most talented design teams in the industry, Maxim has been able to produce superior designs that command a price premium. … We now expect Maxim to grow sales at a compound annual rate of 8.2% for the next seven years, down from the 13% assumption used in our previous model. Although we expect the consumer business to be highly competitive, we think Maxim’s gross margins will likely remain in the low 60s. … We forecast operating margins in the low 30s.

Until the SEC approves its revised financial statements, Maxim is limited on the information it may release publicly.  This makes analysis of the company difficult.

Maxim will release financial results for the fourth quarter of its 2008 fiscal year on Thursday, August 7, 2008.  A video replay of the earnigns conference can be found on the investors section of the Maxim website.

Some Portfolio Adjustments?

Here is the Public Dashboard from Manifest Investing for the Moose Pond portfolio. Overall, the portfolio shows a projected average return of 15.6% and a quality rating of 72.2.  The dashboard is forward looking. Manifest Investing uses data from Value Line, Yahoo Finance, and other sources to estimate revenue growth, profit margins, and P/E five years out.  From this projected data is is easy to project earnings per share and the future price (P/E x EPS).  So the dashboard provides a method of comparing stocks within the portfolio.  Note that the amount for a given stock is irrelevant in this analysis.  What the company might do going forward counts.

Looking across the Moose Pond portfolio, we see a few stocks that warrant a close look.

• Helmerich & Payne has a PAR of 5.7%.  This oil field services company has had a good run and is up 78% since we purchased it last June. It is 6.2% of the portfolio.  We could take a small profit and sell some of this stock.
• Brown & Brown has been a relatively unexciting holding.  We purchased in March 2004. It is down 10% and represents about 1.4% of the portfolio. We might want to consider replacing it.
• AIG has been the worst performer in the portfolio (and a good example of why diversification is so important).  It is down 64% since we bought it last June.  This is one of those financial stocks that will turn when the financial sector finally does.  At some point we may want to add to our AIG holding, if we don’t purchase Berkshire Hathaway.
• We might want to increase our position on few sticks with high PARs, Lowes (21.6%) and Garmin 26.7%.  Lowes is 2.5% of our portfolio and Garmin is 1.4%.

Take a close look at the portfolio dashboard and the portfolio valuation report at Bivio.com.  We need to make some adjustments to our portfolio.