Manager: Ted Dumbauld, D5 Advisors
Model: Oil and Gas Producers
Disclosure: Short TNK
For the Oil and Gas Producers model, manager Ted Dumbauld focuses on high dividend paying oil and gas producers while seeking to exploit the inefficiencies created when unsophisticated investors focus on dividend yields rather than fundamentals. Dumbauld recently shorted Teekay Tankers Ltd. (NYSE: TNK) in the model, so we asked him if he would share his reasons for shorting. His response:
In the model we trade for Covestor, we are focused on relative value – not absolute value – so when we make a decision to do a trade, it is based on that company’s valuation related to its peers. In the case of TNK, we went short the stock on 4/13/11 at a price of $10.30. We did several other trades that day, but an offsetting trade most nearly compensating for this short was covering a short position in Frontline Ltd (NYSE: FRO) at $23.14; we had initiated that short on 4/1/11 at $24.97. On 4/1/11 TNK was trading at $10.52. Therefore, from the time we initiated our short in FRO until we covered and went short TNK, FRO fell -7.33% while TNK fell only -3.04%, so from a relative value perspective, we prefer to be short TNK for the time being.
Fundamentally, we are mostly negative on the crude oil tanker market, due to depressed day rate levels, tanker supplies growing faster than previously expected and a decrease in the demand for tanker capacity as an increase in US oil supply growth reduces the need for imports. These fundamentals increase the likelihood that high yielding stocks in this sector will cut their dividends. TNK’s dividend yield is most likely unsustainable at 9.6% while FRO is less at risk in yielding only 1.9%.
Dividend Yield information from Yahoo Finance, http://finance.yahoo.com/