My Favorite High-Yield Investment Right Now
Forget hungry. Investors are starved for yield.
The latest fund flow data from EPFR Global reveals investors plowed new money into high-yield bond funds for the eleventh week in a row.
What’s more alarming is that last week’s inflow of $1.84 billion pushed total inflows for 2012 above the $52 billion mark. If the year ended today, that would be the highest annual inflow since 1984.
As Bloomberg sums it up, “Investors are seeking haven in American junk bonds.”
That’s an oxymoron, of course, which should jolt us to our senses. Junk bonds aren’t safe havens. They offer higher yields because they’re higher risk. When investors finally regain their senses, prices are destined to collapse.
So, if it’s high yield you’re after, I recommend you steer clear of junk bonds and instead consider Poseidon Concepts (Toronto: PSN.TO). Here’s why…
“Necessity is the Mother of All Invention” – Albert Einstein
Based in Calgary, Alberta, Poseidon came into being because its parent company, Open Range Energy Corp. (Toronto: ONR.TO) – an exploration and production (E&P) company – needed a better way to handle water and hydraulic fracturing fluids.
It was drilling more and more horizontal wells with multi-stage fracking. In turn, its fluid storage needs jumped from 10 or 20 steel tanks to 80 tanks. Lined pits represented an established and viable option. But not a permanent solution, as environmental concerns and pressures were rising over the use of lined pits.
So Cliff Wiebe – Poseidon’s current President and COO – invented an innovative, modular and insulated fluid containment system that could hold up to 18,000 barrels of fracturing fluids.
In early 2010, the first prototype was deployed. By mid 2010, the company applied to patent the fastening system, which is key to its easy set up. And by the end of the year Poseidon was already generating revenue from leasing the tanks to other E&P companies.
Fast-forward to today and Poseidon currently rents out 400 tanks to E&P companies in Canada and 19 U.S. states. It’s active in the majority of U.S. unconventional oil and liquids-rich natural gas plays. And it boasts over 100 different customers.
On the heels of such strong growth, Poseidon’s parent company decided to spin off the tank rental business. Poseidon officially began operating and trading independently in early November 2011. Yet very few investors know the company exists. However, I don’t expect such ignorance to persist.
A Rare High-Yield, High-Growth Investment
Given investors’ insatiable appetite for yield right now, the company’s monthly dividend of $0.09 is bound to start attracting interest. It works out to an annual yield of 7.3%, which tops the average current junk bond yield of 6.7%.
The yield is notably safer, too. Poseidon’s business is high margin and predictable. In fact, over 50% of the company’s fleet is under long-term contracts through 2012. But it only needs to rent out 25% of the fleet to fund the dividend payments.
In terms of a dividend payout ratio, Poseidon checks-in at a conservative 50%.
The second reason I expect investors to start flocking to the company is because of its growth potential. Based on the number of horizontal wells drilled in North America last year (approximately 35,000), Poseidon has penetrated less than 10% of the market. Even better, as management notes, “Our addressable market keeps getting larger.”
A quick glance at the latest financials reveals the company isn’t squandering any opportunities.
In the second quarter, sales increased 469% year-over-year to a record $54.9 million. And net income increased 552% to a record $31.2 million. That was enough to exceed even the company’s own internal growth forecasts.
Bottom line: The financials leave little room for argument that Poseidon is, indeed, a “growth-oriented, yield investment.” So forget about high-yield bonds and go with this under-the-radar, rare, high-growth, high-yield dividend payer, instead.
Fair warning, though. The stock goes ex-dividend tomorrow, August 29. So if you want to start capitalizing on my favorite high-yield investment, you need to act fast.