Putting all your eggs in one basket is risky business
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Dear Mr. Berko:
I have $3,500 to invest in my Independent Retirement Account, and I am looking at buying either 100 shares of Alexandria Real Estate Equities or 200 shares of Atwood Oceanics Inc. Please recommend one of these stocks, because I do not want to invest half my money in one and the remaining half in the other. I’m 46 years old, so my goal is long-term growth. Though it seems that income is the main goal for many of your readers, it is not to me. I can afford to speculate. But because both issues are trading at or near their 12-month lows and way down from their 12-month highs, I don’t think either is speculative. They both seem good, but I can’t decide between them.
R.A., Rochester, Minn.
Dear R.A.:
Atwood Oceanics (ATW-$22.10), with $581 million in 2008 revenues, is small beer compared with Diamond Offshore Drilling Inc. (DO-$74.11), with $3.5 billion in revenues, Nabors Industries Ltd. (NBR-$15.35), with $5.5 billion in revenues, and Transocean Ltd. (RIG-$65.20), with $13 billion in revenues.
ATW has only 10 drilling rigs, and its shares are way down from their $63 peak in July 2008. In 2008, ATW earned $3.64 a share and, even with a lot of negative news figured into ATW’s earnings estimates, the consensus for 2009 is $3.84 a share and $4.32 in 2010. About 97 percent of ATW’s revenues derive from foreign operations in Southeast Asia, India, the Mediterranean, the Black Sea, Africa and Australia.
There are 10 analysts who follow ATW — four of whom are strongly bullish with a 12-month target price of $36. However, six analysts rank ATW as a “hold.” Meanwhile Vanguard, Fidelity, T. Rowe Price, Barclays, Wellington and Evergreen are large shareholders. I recently spoke to a manager of one of the above mutual funds. He told me that ATW has two more rigs coming on line in 2010 and 2011, and that he believes ATW deserves to trade at nine to 10 times earnings. At the current price-earnings ratio of less than 6, I think shares might be undervalued. I like the stock.
The prestigious Argus Research Co. has a “buy” rating on Alexandria Real Estate Equities Inc. (ARE-$34.42) with a target price in the next 12 months of $70 to $75 a share. (I suspect that’s wishful thinking.) ARE, which in the last dozen months traded at more than $110 a share, participates in a rather unique real estate niche. This company owns, operates, manages, develops, redevelops and acquires properties solely for the life sciences industry.
ARE’s 159 properties are buildings specifically constructed for scientific research-and-development laboratories. These unique properties are leased to universities, pharmaceutical companies, biotechnology companies, medical device companies and government research labs. ARE has 11.7 million square feet of rentable space, 900,000 square feet under development and 11.1 million square feet in its pre-development pipeline. Management believes ATW can double its rentable space in the coming three to four years. If the Screw-Up Fairy doesn’t become involved, there’s an excellent probability that this goal can be a reality by 2013.
A consensus of seven analysts believes ARE will earn $5.71 a share in 2009. Argus reduced Alexandria’s earnings projections for 2010 from $6.55 a share to $6.40. So, with a comparatively low price-to-earnings ratio of 11-to-1, Argus’ estimated share price of $70 to $72 in the next 12 months seems reasonable to some investors. This $470 million in revenues company trades for $11 under its $46 book value. The dividend, which has been increased in every one of the past 10 years, is a smart $3.20, which equates to a yield of 9.3 percent. I like this stock also.
Because you won’t divide your $3,500 into 100 shares of ATW and 50 shares of ARE, I suggest you get yourself two envelopes. On the outside of one envelope write ATW and on the second envelope write ARE. Put both envelopes in a box, close your eyes and, using Berko’s “50-50-90 Rule,” remove one envelope. It will be the stock you’re going to own.
I call this my “50-50-90 Rule” because there’s a 50-50 chance one of those issues will do well this year but a 90 percent chance you will pick the wrong one. So, please, buy them both to double your probability of success.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © 2009 Creators Syndicate Inc.
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