Profit from a stupid energy policy

My two picks in this sector for 2008 are Joy Global (JOYG, news, msgs) and Burlington Northern Santa Fe (BNI, news, msgs):

• Joy Global makes equipment that powers the coal-mining boom and is one of the few survivors of a 20-year slump in the mining industry. And in the current boom, these survivors have huge pricing power. By the end of December, Joy Global had sold out its manufacturing capacity for mining shovels for the fiscal year that ends in October 2008. Fiscal 2009 capacity is completely booked, and the company is taking orders for 2010. (By going after the maker of the equipment, you also get exposure to other energy plays, such as Alberta's oil sands.)

• Burlington Northern has the most exposure to coal of any of the North American railroads, thanks to its huge share of the market for transporting coal from Wyoming's Powder River Basin. In 2006, hauling coal accounted for 20% of the company's revenue and 35% of its profits. (An additional 17% of revenue came from moving agricultural products, so this stock is a twofer.)

These five picks are obvious beneficiaries of the U.S. energy policy of delay, but there's another, less obvious side to the story. A government policy of delay that guarantees prices of $80 a barrel or better encourages the market economy to invest in present production, but it also pretty much guarantees that oil prices will remain high enough for long enough to encourage the market economy to invest in future trends.

• Talk back: What stocks will benefit from pricey oil?

In my next two columns, I'll take a look at where the market economy thinks the future of energy is going and how you can profit from those trends.

Updates to Jubak's Picks

Buy Weatherford International (WFT, news, msgs): The oil-service and oil-equipment sector outperformed the market in 2007, gaining 45%, and I think it's likely to be a winner again in 2008.

I'm going to take advantage of the pullback in oil-service stocks to upgrade Jubak's Picks by adding shares of Weatherford to replace my position in Tenaris (TS, news, msgs).

Tenaris has big exposure to the slow-growing North American drilling sector through its acquisition of U.S. steel-tube maker Maverick Tube, while Weatherford has gone hard after new business in the Caspian Sea basin, the Middle East and North Africa. Weatherford's sales outside North America climbed to 44% of total revenue for 2006 and to 50% of revenue in the third quarter of 2007.

In December, Lehman Bros. (LEH, news, msgs) projected that the global oil industry's capital spending would climb by 11% in 2008, with the bulk of the increase coming outside North America, so Weatherford has picked the right market. Wall Street is not projecting any slowdown in earnings growth for the stock: Estimated 2007 earnings growth of 31.6% is expected to be followed by 2008 growth of 31.8%.

(Note: Weatherford's participation in the Iraq oil-for-food program is being investigated by the U.S. Department of Justice and the Securities and Exchange Commission. At issue in part of the investigation is the alleged embezzlement and improper use of $175,000 at a European subsidiary that may have been used to make payments to government officials in Europe and elsewhere.)

As of today, I'm adding the shares of Jubak's Picks with a target price of $74 a share by July 2008.

Sell Tenaris (TS, news, msgs): The bulk of the growth in the oil-drilling/oil-equipment sector will come from outside the North American market in 2008. That means the October 2006 purchase of Maverick Tube by Tenaris, a move to grab more share in the North American market, was a long-term strategic coup that in the current market carries, unfortunately, significant short-term costs for investors.

As of today, I'm selling this position out of Jubak's Picks with a 10% loss since I added it to the portfolio on Dec. 8, 2006. (Full disclosure: I will sell my personal position in Tenaris three days after this column is posted.)

Sell Marriott International (MAR, news, msgs): When I added this stock to Jubak's Picks way back in November 2007, I thought it would be possible to navigate the rough seas in the U.S. economy and financial markets with a stock like this where the story was international growth. But the market clearly doesn't care about Marriott's opportunities in the midprice sector of the Chinese hotel industry. It just sees a domestic hotel operator that will go through tough times with a U.S. economic slowdown.

I still like the long-term story here: The company will open its first Courtyard by Marriott in Hong Kong in December and has just announced that it will build 20 more hotels in the country. And China isn't the only overseas growth market Marriott is tackling. About 50% of the company's 115,000 planned new rooms will be outside the U.S. But in the current stock market, it's hard to get anyone interested in a long-term story like this.

As of today, I'm selling these shares out of Jubak's Picks with a 20% loss since I added them Nov. 2.

Developments on past columns

"3 hot sectors where shares are scarce": As of today, I'm raising my target price on Yara International (YARIY, news, msgs) to $54.60 a share by March. At the end of November, the company told investors to expect $125 million to $160 million in cost savings, 7% to 9% of sales, in the company's October 2007 acquisition of Finnish phosphate fertilizer producer Kemira GrowHow.

The deal included Kemira's unopened phosphate mine at Sokli, Finland. Kemira had delayed opening the mine because of low world phosphate prices, but the price has doubled in the past year, and Yara is considering opening the mine, with its potential to produce 1.5 million metric tons of phosphate rock concentrate a year for 20 years. Fertilizer demand in the company's key markets in Latin America and India will continue to grow at double-digit rates for at least the next three years, the company estimates. Management has set a target of growing global market share to 10% from the current 7% in the next five to seven years.

(Full disclosure: I own shares of Yara International in my personal portfolio.)

"Natural gas? Play the Rocky Mountain high": I added Ultra Petroleum (UPL, news, msgs) to Jubak's Picks on Sept. 21, 2007, because the new Rocky Mountain Express natural-gas pipeline, expected to go into service in early 2008, would enable natural-gas producers in the Rocky Mountain region, the fastest-growing source of natural gas in the United States, to finally get their product out of the relatively small local market and into the bigger markets of the eastern U.S. That would gradually wipe out a discount that saw natural gas selling for $3.37 per million cubic feet less in Wyoming than in Louisiana.

Well, the Western stage of that pipeline, Rex-West, is set to open for service just about on time Feb. 1. Virtually all pipe had been bent as of mid-December, and 98% had been welded. Hydrostatic testing had been completed on 56% of the line. Pipeline operators have received commitments from natural-gas producers, including Ultra Petroleum, for almost all of the pipeline's capacity of 1.8 billion cubic feet per day. A second stage, expected to start partial service in December 2008 and full service in June 2009, will deliver gas to Ohio.

As of today, I'm raising my target price for Ultra Petroleum to $85 a share by October 2008.

(Full disclosure: I own shares of Ultra Petroleum in my personal account.)

Meet Jubak at The Money Show

MSN Money's Jim Jubak will be among more than 120 investment and finance experts sharing buy and sell advice at The World Money Show in Orlando, Fla., Feb. 6-9. Invest four days dedicated to planning and refining your portfolio by attending the event's more than 320 workshops and panel presentations.

Admission is free for MSN Money readers. To sign up, call 1-800-970-4355 and mention priority code No. 009554, or register online.

Editor's note: Jim Jubak, the Web's most-read investing writer, normally posts a new Jubak's Journal every Tuesday and Friday. Please note that recommendations in Jubak's Picks are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest-rate environment, see Jubak's portfolio of Dividend Stocks for Income Investors. For picks with a truly long-term perspective, see Jubak's 50 Best Stocks in the World or Future Fantastic 50 Portfolio. E-mail Jubak at jjmail@microsoft.com.

At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Joy Global, Tenaris, Ultra Petroleum, Verenium and Yara International. He did not own short positions in any stock mentioned in this column.

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