Algae for Oil-- Why Not?

Algae production is not often the first thing people think of when they think of alternative energy, but it’s quietly catching on. The numbers are very supportive and a few companies are already in production mode.

The first thing to consider is that more fuel can be produced per acre than corn or any other crop. One acre of algae production currently produces 1850 gallons of oil per year compared to corn’s 15 and soybean’s 48. It is important to consider that this is not ethanol, but oil, literally squeezed out of the algae. So why isn’t it more popular?

The government seriously researched algae as a source of oil from 1978 to 1996 but eventually concluded that it wasn’t economically competitive enough with fossil fuels. The price of oil in 1996 was about $23. Why this administration doesn’t research it now? I think you know why.

Thankfully, we have the market to take interest. A press release Monday announced that Continental Airlines (CAL), Air New Zealand, and Virgin Atlantic are backing Boeing (BA) in algae based alternative fuel research. General Electric (GE), United Technologies (UTX), and Rolls Royce are also involved in the research.

There are two main methods of producing algae. The first is pretty straightforward, lots of ponds to produce lots of algae. The second is more of a factory type method. It is composed of huge greenhouses filled with tubes of water that cultivate algae. One advantage of this is that carbon dioxide can potentially be infused to promote the growth. While the second method seems more productive per acre, price will be the ultimate factor.

There are not a lot of options to consider when looking at algae companies, but the one I like most is OriginOil (OOIL). Although I have never endorsed buying stocks below $5, if I were to bet on algae, this is where I’d be. The company uses the second method of production and has a management team seasoned in the development of small companies. Today at the National Algae Association quarterly conference, it was proclaimed as one of the most promising producers of renewable oil. The stock has be gaining steadily since its IPO in April. This is a great opportunity to take advantage of huge potential long-term upside.

The Oil Correction and CHK

Oil's correction has presented a good buying opportunity and its not too late to get in. A good way to get in on the recovery and hopefully continuance of the oil rally is Chesapeake Energy (CHK).

CHK has seen decent growth in the last year. To be honest, however, it is not normally a stock that I would consider. It's fundementals are decent, but not great. What got my attention was how much the CEO, Aubrey McClendon, has invested in the company owns. Overall, he has over 33 million shares, or $1 billion dollars of his own money in the company and more importantly, increased his holdings on July 18th, by adding $43 million dollars. I'm not sure if he planned that buy point or not, but he got a pretty good deal. That kind of investment in the company for which one works gives me a lot of confidence, as well as the fact that it is in a sector heavily influenced by oil.

The story in which I am referring is from MarketWatch @ http://www.marketwatch.com/news/story/chesapeake-energy-ceo-buys-43/story.aspx?guid=%7B9DFC0FE1%2D1304%2D45A4%2DA54C%2DA4D03C06C75E%7D&dist=TQP_Mod_mktwN

Disclosure: Long on CHK

A Look at the Week Ahead

This is a busy week for the market. The market is at a couple of technical levels of resistance, but it is also becoming overbought. If we see a substantial gain this week, it could be a sign of better performance for a few more weeks. However, this week is packed with earnings that could move the market substantially either way. Below is an overview.

Monday- Bank of America and Apple, among others release earnings. Watch both of these, they should produce some substantial moves.

Tuesday- Broadcom, Yahoo!, as well as several other companies release earnings.

Wednesday- Ambac Financial, Amazon, Anheuser-Busch, and 140 other companies release earnings.

Thursday- 267 earnings announcements!!! Notables include POT, OXY, GNW. Also, existing home sales and initial claims.

Friday- New home sales and durable orders. Earnings include TROW, CVH, NFLX.

Two Water Transport Plays... Besides DryShips

The water transportation sector has seen incredeble growth over the past years and has spawned well know success stories such as DryShips (DRYS). Like much of the rest of the market, the industry has been hit by the recent slowdown. There is no doubt in my mind, however, that when the market begins to recover, the water transport industry will be very attractive. That being said, I have found a couple of alternatives to DRYS, just in case you don't like it for one reason or another.

Genco Shipping and Trading (GNK) is a stellar company and big investors have noticed. It is almost 75% institutionally owned and is slightly undervalued when looking at its P/E ratio. It has a strong return on equity of 33% and shows very strong margins and aggressive management of its debt. On top of all of this, it pays a 6% dividend. Definitely worth a look.

Diana Shipping (DSX) has just about doubled in the last three years. While this may not sound as impressive as some of its competitors, it has the potential to make you much more than that in the next three. The stock currently pays an 11% dividend and has one of the highest EPS growth rates in the industry. It's P/E is on par with its competitors and it boast a profit margin higher than 92% of its competitors.

While both of these may be attractive, it is important to understand that we are experiencing a slowdown that has affected the entire global economy. The slowdown is likely not over and I would, therefore, wait on buying into the shipping industry. Nonetheless, these are two great companies that will be even more attractive as the market bottoms.