By Horacio Marquez
Contributing Editor

•  Reader Joseph A. Kurtz.

On July 21, when oil was trading at some $125 a barrel and in an apparent freefall, I issued a scaled “Buy” on Chevron Corp. (NYSE: CVX). I based this call on the stock’s ultra-low valuation and the company’s business model, which would enable it to keep posting strong profits even at lower margins. Despite the huge market sell-off – and a whipsaw market for oil that saw prices fall to as low as $90 a barrel before rebounding recently – Chevron’s stock has outperformed both the broader stock market and its oil-sector peers. At Friday’s closing price of $86.95, Chevron’s shares already are up 2.0% from that July 23 recommendation.

With the much-needed opening of offshore drilling in the continental United States, Chevron is positioned uniquely to thrive – as are its shareholders. As I noted back in July, it wasn’t “a question of if, but when” to invest in Chevron.

I bring this analysis to your attention in light of a reader’s question about Suncor Energy Inc. (NYSE: SU), where similar investment logic applies, despite major differences in the companies and in the risk-reward equations of their shares.

Suncor Energy has risen as high as $74.28 earlier this year, before falling to its three-year strong-resistance level of about $39 a share recently (the shares closed Friday at $45.37, down $1.82, or 3.86%, each).

The company disappointed investors in the first half and guided production lower for the second half, telling investors that it faced a much-harsher winter, as well as some operational problems that were subsequently remedied. A new problem – an issue with a processing unit will not affect production, but will lower the product mix quality for a few weeks – only added to investor wariness.

Take these company-specific problems, and add in the panicky markets, the massive liquidation of commodity and commodity-related positions by investment and commercial banks due to their own financial problems, and the impact of that generalized financial stress on global growth expectations, and you can see that Suncor’s stock appears to be heavily distressed relative to the company’sunderlying fundamentals.

Suncor is a riskier – yet potentially much more profitable – stock play than Chevron. Suncor Energy is a pioneer in that it is the second-largest operation exploiting the oil sands in Northern Alberta, Canada.  The Athabasca Oil Sands is the world’s largest petroleum resource, with some 175 billion barrels of crude-oil reserves.  That operation poses major challenges because of the harsh winters, the terrain, unpredictable contents of sulfur, and the fact that major scale extraction of the bitumen mineral and later extraction of oil demands technologies that are relatively new and in constant development.  To these factors, add in the recent major volatility in the price of oil and you get the picture:  Suncor represents an extremely promising stock with a huge potential upside – albeit one that‘s subject to the unpredictable vagaries of both the oil markets and the Canadian climate and some operational challenges.

What about the upside?  We should see major production increases and a lower cost of production per barrel.  Suncor has just launched a major expansion in its production capacity.  Sitting on a 9 billion barrel reservoir, the company is about $7 billion into its $20.6 billion expansion/modernization project, and will be investing between $7 billion and $8 billion a year in 2009 and 2010.  By 2012, Suncor will have boosted production from the current level of 300,000 barrels a day (and 350,000 barrels a day in the year’s second half) to some 500,000 barrels a day. As production ramps up, the company’s average cost per barrel will drop significantly – from the current cash cost of $30 to $31 to as little as $27.

At these low production prices, and with global demand for oil so tight, barring a major global recession, the risk of a profitability reversal is slim to none. And a worldwide recession of that magnitude just isn’t in the cards – even with the U.S. credit markets still under assault.

Truth be told, what we actually see happening is that the price of oil, having stabilized at these lower levels for awhile, will rise again and go through the past peak on its way to new record highs. If that happens – and it appears that this reversal is already under way – the actual risk will be borne by investors who aren’t invested in oil- and other energy-related stocks.

The risks to this upside are mainly unforeseen operational and climatic events, and commodity and labor inflation, which might push up the costs of Suncor’s new expansion projects.  The company’s low leverage ratios and very strong cash flow ensures easy financing, even in these market conditions. The company has been able to manage each one of these challenges very well, given its long operating history, market leadership and sheer size.  This industry leadership imbues Suncor with a competitive advantage, since its proprietary technologies, in constant development, makes them more efficient.

In addition, Suncor has resisted the temptation of acquiring refiners in order to expand upon its partial vertical integration.  Its disciplined acquisition philosophy requires patience for refining margins to keep dropping in order to achieve a lower entry point in any future refinery purchases.

By investing in Suncor today, you are buying into this admittedly volatile stock at a level similar to March 2006, when oil was trading at about $60 a barrel and Suncor’s production capability was but a fraction of its output today. For this “gift” of a bargain-priced stock, we can thank the implosion of the U.S. financial sector and the resulting disarray in the credit markets, which over-penalizes companies with even minor earnings disappointments, or internal project delays. While Suncor’s turnaround won’t be immediate, the magnitude of the ultimate rebound makes this stock a very attractive buy at these valuations – especially given the massive expected increase in production, in oil prices globally, and in the company’s cost-efficiency gains.
Action to Take: Buy Suncor Energy Inc. (NYSE: SU). **

[Editor's Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you with his newly created "Shadow Stock Trader" specialized trading service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a new Money Morning feature that has most recently analyzed such companies as Potash Corp. (NYSE: POT), Garmin Ltd. (Nasdaq: GRMN), Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), Cisco Systems Inc. (Nasdaq: CS), Chevron Corp. (NYSE: CVX), Valero Energy Corp. (NYSE: VLO), General Electric Co. (NYSE: GE), and steelmaker Nucor Corp. (NYSE: NUE).]

** Special Note of Disclosure: Horacio Marquez holds no interest in Suncor Energy Inc.

News and Related Story Links:

• Wikipedia:
  Athabasca Oil Sands.
• Money Morning News:
  Crude Oil Futures Post Record Gain as “Peak Oil” Expert Calls for Rally to $500 a Barrel.
• Wikipedia:
  Cash Flow.
• Money Morning Stock Analysis Feature:
  Buy, Sell or Hold: Chevron Corp.

By Horacio Marquez
Contributing Editor

In this column back on Monday, Aug. 4, I wrote about Potash Corp. (NYSE: POT), advising investors to sell the company’s shares immediately, and to buy them back later in the year, after the outlook for the company’s business became more clear. At the time I said the reasons for taking profits on the stock included:

• A sell-off in commodities, affecting grains, driven by a rise in the U.S. dollar, by hedge funds that were forced to sell some of their holdings due to redemptions, some demand destruction due to the high fertilizer prices, and the expectations of a temperate summer.
• A very real fear that the federal government might scrap the ethanol program early next year, after the elections ended – a move that would decrease fertilizer demand.
• And necessary profit-taking by long-term investors who – fearing an increase in the capital gains tax – might wish to re-establish a much higher tax basis in the shares.

On the Friday before the column appeared, Potash shares closed at $201.60. Readers who embraced my analysis were very glad that they did (one reader actually wrote in to say so). By the following Monday – Aug. 11 – the company’s shares closed at $160.91, a decline of 20%.

Potash shares remain well below the $200 level. On Friday, in fact, the stock closed at $175.24 – but only because they’d rocketed $11.74 each, or 7.18%, on that day alone. I’d already changed my view of Potash’s prospects, however.

Today, with the massive liquidation in commodity positions in hedge funds behind us and the risk of higher capital gains taxes abating fast in the middle of a crisis that demands stimulative moves, the current stock-price action reveals that most of the tax selling has also occurred. So we return to fundamentals.

But stock fundamentals got suspended in the markets as systemic risk took over with the threat of a financial collapse threatening to rise out of control. The United States and other governments – as well as their respective central banks – acted both decisively and appropriately in recent weeks, meaning the risk of a systemic meltdown was contained.  Further measures are being implemented that not only saved the day, but also are going to allow the U.S. financial system to return to a more-normal operation, which will enable the U.S. economy – and U.S. investors – to start prospering again.

Interestingly, during the crisis Potash has been rising consistently, as investors started going back into commodities.  Clearly, the U.S. government’s necessary solution, very similar to those implemented in the successful interventions of many financial systems in other countries, will generate higher expectations of growth.

To add to this, the summer in the United States turned out to be not as benign as expected with crops.  Hence, the U.S. Department of Agriculture cut its projections for corn and soybean production.  This will keep supplies constrained and will send prices higher.

Staying with the fundamentals, the long-term story of escalating worldwide demand for grains due to the large and sustained growth of real incomes in the emerging markets – especially in China, India and Brazil – remains intact.  The price actions in all these markets have been greatly exacerbated by profit-taking and panic selling and all represent superb buying opportunities today.  Global growth is not suffering in the way that financial markets would lead you to believe. The effect on the real economies of these countries has so far been minimal.

And Potash is superbly positioned to use its own strong cash flow to reinvest in “the world’s best potash assets – our company – at an attractive price,” William J. “Bill” Doyle, the company’s president and CEO said recently. Less than two weeks ago, Potash launched an aggressive share-repurchase program under which it will buy back as much as 10% of its public float (currently 31.5 million shares) by Jan. 30. At the time this latest buyback plan was announced, it was valued at about $2.36 billion.

This latest buyback plan follows a just-completed buyback plan under which Potash repurchased and retired nearly 16 million shares of its stock.

No doubt, these are compelling reasons to get back into the stock at a much lower valuation.  Given last week’s rally, it is advisable not to buy everything at once, but instead to edge into the stock in stages, especially taking advantage of pullbacks.

Action to Take: Buy Potash Corp. (NYSE: POT). Given the volatile markets, right now, try not to purchase your entire position in a single trade; instead, build your position in increments, taking particular advantage of share-price pullbacks. **

[Editor’s Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you, with his newly created “Shadow Stock Trader” specialized trading service. To find out how to subscribe, please click here. “Buy, Sell or Hold” is a new Money Morning feature that has most recently analyzed such companies as Garmin Ltd. (Nasdaq: GRMN), Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), Cisco Systems Inc. (Nasdaq: CS), Chevron Corp. (NYSE: CVX), Valero Energy Corp. (NYSE: VLO), General Electric Co. (NYSE: GE), and steelmaker Nucor Corp. (NYSE: NUE).]

** Special Note of Disclosure: Horacio Marquez holds no interest in Potash Corp.

News and Related Story Links:

• Money Morning Stock Investments Feature:
  Buy, Sell or Hold: Potash Corp.

• Money Morning News Analysis:
  The Government’s Financial Crisis Fix-it Plan Sends Stocks Soaring, Though Some Argue There’s no Quick Fix for this Disaster.

• Money Morning News Analysis:
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• Money Morning Investment Research Report:
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• Reuters:
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• Money Morning News Analysis:
  The New Short-Selling Rules: A Day Late and $2 Trillion Dollars “Short?”.

By Horacio Marquez
Contributing Editor

Q: What’s the outlook for Garmin Ltd., the GPS system maker?

• Reader Diane Begue of Medina, Ohio

Garmin Ltd. (Nasdaq: GRMN), a leading producer of global-positioning systems, has a strong market position, meaning its stock should deliver nice profits if purchased at the current low valuation.

It was just about midnight, on a chilly and rainy Dec. 10, when the diesel engine of my 42-foot sailboat, “Southern Cross,” suddenly stopped dead in the middle of the Delaware Channel, just north of the Elbow of Cross Ledge, two thirds of the way up the Delaware Bay from Cape May.

I knew I was in trouble.

The green-and-red bow lights of a big freighter less than a mile behind me indicated that I was smack in the middle of his intended course. And with my 11-year-old daughter sleeping deeply down below as my sole company on board – and I was powerless and adrift in one of the most-narrow shipping channels with the highest freighter traffic in the world – I understood that I had to react fast.

Within a couple of minutes I had my mainsail up and was able to steer clear of the channel, as I was being hailed over the Marine VHF radio band by the freighter whose captain realized that I had trouble and was tracking my navigation lights visually and my course and distance via his radar.  With the immediate danger resolved, I needed help to re-fire the motor and then to navigate in the middle of a rainstorm that featured the additional challenges of poor visibility and a brisk breeze. Without any help on board, I had resort to sail power. And I would have to get under way, and under sail, by running parallel to – but outside of – the channel, and to keep from running aground, despite my deep nine-foot draft.

Just a few years ago, this would have been thought too risky, or downright impossible, forcing me to drop anchor outside the channel, and then to radio for help.  Fortunately, however, I’d brought along my state-of-the-art handheld Garmin GPSMAP 478 course-plotting global-positioning system. Made by Garmin Ltd. (Nasdaq: GRMN), the Cayman Islands-based leader in portable navigation systems, the marine GPS unit enabled me to confidently steer my course, outside the channel. By watching the chart displayed on the unit’s bright screen, I watched my sailboat’s progress, watching the channel details and depth readings as I did so.

I realized that I must call Sea Tow – the AAA of the sea – immediately, if I wanted to get assistance getting my engine restarted. My Garmin GPS unit quickly allowed me to find all the Sea Tow locations, their distance from my location, and their telephone numbers. I called the nearest one, and agreed to a rendezvous a few hours later some 23 miles up-river to resolve the engine problem and then to continue safely to my destination.

Indeed, global-positioning system technology has revolutionized navigation at sea, in the air, and on land.  And with my Garmin unit, you know exactly where you are at sea or on land.  By watching your progress as it’s tracked on the GPS map display, you always know your location.

Advanced features allow you to follow the fastest, direct and alternative routes around congestion, as you see fit.  And the systems take into account historical and increasingly real-time traffic information on land, and also tell you about hotels, gas stations, ATMs and other nearby points of interest.

As GPS sales exploded in recent years, Garmin saw its stock price soar by nearly 500%. But the field has become much more crowded.  While Garmin took the early lead and has a market share of more than 50%, rivals are gaining.

Last year, the Amsterdam-based TomTom NV made a splash with its own devices, which permitted the user to enter a destination address by voice – and which featured a lower selling price. This year Garmin has leapfrogged again, this time by rivaling offerings featuring more-accurate and more-versatile voice-recognition capabilities.

Clearly, the technological leapfrogging, like voice-recognition technology and real-time traffic data is creating more market-share volatility, even as market saturation and increased competition is bringing the prices down.  To make matters worse, mobile phones – such as the Apple Inc. (Nasdaq: AAPL) iPhone, and others made by such firms as Nokia Corp. (ADR: NOK) – are adding land-navigation capabilities. This has forced Garmin to strike back by entering the mobile phone market.  This proposition is easier said than done, since penetrating this ultra-competitive market is extremely difficult and the rivals in the mobile-phone sector are goliaths.

In this environment, predicting a technological winner is difficult. And it is easy to see that profit margins and sales growth rates by manufacturer are going to keep getting compressed by endless competition.

Already we have seen Garmin miss reduced earnings estimates in the last quarter. And Nokia’s $8.1 billion purchase of U.S. digital-mapping king Navteq Corp. (NYSE: NVT) highlights the rising competition. But Garmin isn’t rolling over and will not let its lead go without a fight. It first tried to acquire a digital-mapping company of its own. When that failed – in Garmin’s typical aggressive fashion – it refused to give up and resorted to a well-thought-out Plan B.

Garmin locked up a long-term deal with Navteq – despite the sale. Then it signed up for the mapping firm’s real-time traffic services. And it continues to consider other services to offer customers – hoping to improve both its margins and its overall profitability.

While the long-term situation in electronics is always one of flux and needs to be monitored closely, the reality is that Garmin’s shares have taken a dramatic beating, plunging 73% from their all-time high of $125.68. Garmin shares closed Friday at $34.46, up 82 cents, or 2.44%.

With a current Price/Earnings Ratio of 8.3, a forward P/E of 9.7 and a Price/Earnings to Grow Rate (PEG) ratio of about 0.5 – and with the Christmas shopping season looming – Garmin is now a value stock with strong growth to come.

The current “doomsday-scenario” pricing doomsday scenario pricing sets an absurdly low bar for an industry leader to jump over, meaning the stock represents a solid – if not downright attractive – value at these levels.

Now featuring the top voice-recognition technology, and adding other important features and services, Garmin is demonstrating a bare-fisted response to competitive changes has underscored a willingness to defense its market leadership. Buy this high-tech growth stock at a value-stock valuation.

Action to Take: Buy Garmin Ltd (Nasdaq: GRMN) for its GPS-market leadership. At current levels, you’re buying a high-growth stock at low-growth, value-stock valuations. It’s too much of a bargain to ignore. **

[Editor’s Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you, with his newly created "Shadow Stock Trader" specialized trading service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a new Money Morning feature that has most recently analyzed such companies as Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), Cisco Systems Inc. (Nasdaq: CS),  Chevron Corp. (NYSE: CVX), Valero Energy Corp. (NYSE: VLO), General Electric Co. (NYSE: GE), and steelmaker Nucor Corp. (NYSE: NUE).]

** Special Note of Disclosure: Horacio Marquez holds no interest in Garmin Ltd.

News and Related Story Links:

• Money Morning News:
  European Antitrust Regulators to Review Nokia’s $8.1 Billion Bid for Digital Mapmaker Navteq.
• Sea Tow: Web Site.
• Money Morning News:
  GPS-Maker Garmin Sees its Shares Plummet on Profit Worries.
• Wikipedia:
  Global Positioning Systems.
• Wikipedia:
  Marine VHF radio band.
• Garmin.com:
  Garmin GPSMAP 478.
• Wikipedia:
  Voice/Speaker Recognition Technology.
• Apple.com:
  iPhone.
• Money Morning News:
  Garmin Withdraws Tele Atlas Bid; May Become Takeover Target.

By Horacio Marquez
Contributing Editor

Several Money Morning readers have written to ask about steel-sector stocks, which have taken investors on a roller-coaster ride in the past year. After analyzing the sector, I came to one very strong conclusion: With its terrific fundamentals, Nucor Corp. (NYSE: NUE) is poised for significant gains.

Steel stocks, which had seen a 36% climb this year, have sold off dramatically and are now down about 16% for the year.  That’s a 42% drop from their peak. Wow!

Shares of the Charlotte, N.C.-based Nucor could not escape the carnage and have endured an even bigger swing: From their low of $50.30 a share in early January, the shares of the No. 1 U.S. steelmaker soared 66% to a trade at a high of $83.56. From their peak, Nucor’s shares have declined 42%, closing Friday at $48.45. They’re down 18% for the year.

This sell-off came on the heels of spectacular second-quarter earnings, where earnings per share jumped 70% to $1.94 a share on the back of major strengthening in global steel prices.  The disappointment came from a charge to inventory and forward-looking guidance of $1.80 to $1.85 a share, which was below Wall Street’s expectation of $1.91 a share.

Nucor remains one of the most admired companies in the steel sector, thanks to its superb management, ability to innovate, unquestionable leadership in the mini-mill steelmaker sector, and its disciplined business model.

Wall Street has soured on the overall steel sector. Just last Thursday, investment banking giant Goldman Sachs Group Inc. (GS) downgraded the sector from "Attractive" to "Neutral." It maintained its "Buy" rating on both Nucor and United States Steel Corp. (X), but removed the latter from its "Conviction Buy" list. 

The million-dollar question is this: Are we trying to catch a falling knife, or are we poised to capitalize on a superb buying opportunity? Unlike most cases, in which a good argument can be made either way, the answer here is very clear-cut.

Indeed, the situation with Nucor’s shares stands as an interesting case study of how Wall Street – and the financial markets in general – can overlook the profit opportunities that are then left for us to discover. In this case, in fact, Nucor may actually have created the profit play.

Let me show you just what I mean.

Among other peculiarities of Goldman’s shift in opinion, coming after such a spectacular decline – where sector coverage was transferred from one analyst to another – was the investment bank’s recognition that the "valuations of some of these stocks reflect a doomsday scenario, which we believe is not what longer-term fundamentals suggest."

I could not agree more with this last assessment.

You see, I have been calling my many contacts at hedge funds, on Wall Street, and with local businesses in New York, Brazil and even China to find out exactly what the global situation is with respect to steel demand, and steel prices.

Yes, here in the United States, car sales of 13 million are a temporary disaster. But the needs in terms of infrastructure are huge. And construction of condos, which seemed doomed not so long ago, will reignite pretty soon.

Prices in the real-estate bubble areas have collapsed, and lenders have taken already huge losses. Multi-billion-dollar funds, which had been waiting up to three years to start deploying their capital, are starting to invest, and are buying entire buildings at discounts of as much as 50 cents on the dollar. And even the noted doomsday prophesier – PIMCO manager William H. "Bill" Gross – recognizes that investing in distressed mortgages represents an interesting investment opportunity.

Indeed, this is actually an understatement: When you are one of the only bidders in the market, and the banks are forced sellers, you can name your price.  And current prices of distressed mortgages have incredible discounts to the financial model prices in normal conditions, guaranteeing great returns for buyers.  These and other de-leveraging sales and recapitalizations are ultimately cleaning up the balance sheets of banks and allowing them to return to and resume their regular and profitable bread-and-butter lending business.  Non-residential construction and other steel-consuming manufacturing have barely slowed down – and in some cases are actually increasing due to strong export growth.

No wonder the U.S. economy grew at a 3.3% clip in the second quarter. The August payroll numbers indicate that it is growing at 2% or more, without counting the effect of the fiscal stimulus.  The relatively weak – but by no means recessionary – job picture guarantees that interest rates will remain on hold (at current low levels) for quite some time, helping the U.S. economy out of the temporary slump.

On the international front, my conversations with locals and other business reports I reviewed present a mixed bag for steel prices: Let’s take a look at the steel outlook in key markets around the world.

• In Brazil, there is an imbalance between the supply and demand for slab steel that will take five years to fill.
• China has slowed a bit – reaching high single-digit rates – due to the shutdown of factories and electricity in the major cities. But this was temporary, part of an overall strategy intended to clean the air and reduce overcrowding for the Summer Olympic Games. But all these activities are being restarted, even as we speak. China’s energy needs keep growing exponentially, which bodes well for the demand for steel for the new power plants. Out in China’s provinces, these needs are even more critical today, demanding that the construction of new plants and transmission lines – all of which require steel – get under way immediately. China’s Baosteel Group Corp. barely reduced prices to deal with its temporary oversupply. Japan and India did the same.
• The Middle East slowed down construction for the summer, as usual, given the high temperatures and other seasonal factors.  But South Korea’s steelmaking leader, POSCO Ltd. (PKX), a favorite of U.S. investing guru Warren Buffett, saw no need to reduce prices. And Germany’s Salzgitter AG actually has increased prices, despite all the news about a supposedly slowing economy.
• And while India’s economy has seen its growth slow to a still-robust annual pace of 7% to 8%, new steel mills are being planned in order to be able to keep up with that country’s massive infrastructure needs, for which no slowdown is seen.

The bottom line is that what we have seen is panic selling due to tax strategies and hedge-fund liquidations. This is due mainly to very poor hedge fund performance this year, which is prompting the liquidation and dissolution of some. There’s also selling by hedge-fund managers who wish to take advantage of this year’s low capital-gains taxes, since investors dread the possibility of having to pay much higher tax rates next year, should a Barack Obama administration take the White House in this November’s presidential election.

Hedge fund selling not only affects stocks – it affects currencies, too. And hedge fund moves have contributed to the recent rally in the U.S. dollar.

This dollar strength has helped stoke fears that U.S. steelmakers would lose their cheap-dollar competitive advantage over foreign steelmakers, especially those from Asia.

Even on Wall Street, however, a few players have been shrewd enough to see the same scenario that we’re predicting.

Citigroup Inc. (C) maintained its "Buy" rating on Nucor’s shares, noting that "steel [stocks] have been punished amid the China slowdown and [the] crude-induced exodus from commodities. Yet underlying steel markets are far more solid," especially in the market for steel sheets, beams, bars and plates – Nucor strengths, and markets where prices remain at, or near, record highs.

Citi actually sees the potential for an earnings surprise in either the third or fourth quarter, and believes earnings for this year and next will exceed current Wall Street expectations – results that, if true, will likely cause Nucor’s shares to shoot higher.

All the technical indicators – as well as the fundamental indicators related to valuation – point to a massively oversold condition in Nucor’s shares specifically, and the steel sector in general. The panic selling that created this oversold condition has created a profit opportunity of which investors should take full advantage.

At current levels, Nucor’s shares feature a very nice dividend yield of 2.64%. The firm, which has paid 141 consecutive quarterly dividends, just declared a "special" dividend of 20 cents a share – in addition to its 32-cent-a-share cash dividend – payable to shareholders of record as of Sept. 30.

Enough is enough: This is a very strong buy.

Action to Take: Buy Nucor Corp. (NYSE: NUE). **

[Editor's Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you with his newly created "Shadow Stock Trader" service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a new Money Morning feature that has most recently analyzed such companies as Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), Cisco Systems Inc. (Nasdaq: CS), Chevron Corp. (NYSE: CVX), Valero Energy Corp. (NYSE: VLO), General Electric Co. (NYSE: GE), and Chesapeake Energy Corp. (NYSE: CHK).]

** Special Note of Disclosure: Horacio Marquez holds no interest in Nucor Corp.

News and Related Story Links:

• Bloomberg News:
  U.S. Steelmakers Fall as ArcelorMittal Cuts Prices.

• Bloomberg News:
  Goldman Cuts Outlook for U.S. Steelmakers on Slowdown.

• CNNMoney.com:
  Nucor to start production at Arizona mill.

• StreetInsider.com:
  Citi Maintains ‘Buy’ Rating on Nucor (NUE), Sees Positive for STLD, GNA and CMC.

• Answers.com:
  A Falling Knife.

• Money Morning News:
  Warren Buffett and Berkshire Hathaway Purchase Stakes in 20 South Korean Firms, Including POSCO.

• Money Morning Election Series:
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• Wikipedia:
  Steel Mill (Mini Mill).         

By Horacio Marquez
Contributing Editor

To say that trading energy stocks has been difficult in recent months is a major understatement. When you see that even an industry giant like Chesapeake Energy Corp. (NYSE: CHK) lost money in its hedging activities, you know that trading activity during that quarter was extremely wild.

At Friday’s closing price of $48.40, Chesapeake Energy shares are down 35% from their 12-month high of $74. But the cause is clear.

When crude oil shot up from about $100 per barrel to $135 per barrel a few months ago – and natural gas skyrocketed from $10 per billion cubic feet (bcf) to $13.50 per billion cubic feet at the same time, prompting all sorts of investigations into speculative activities by the Commodity Futures Trading Commission, and in turn prompting calls for Congress to make it harder for financial investors to buy energy futures – it’s no surprise to see that almost every energy producer that prudently hedges part of its production against price drops had losses in the quarter.

Most analysts – myself included – are asking: “If we would have started drilling in the Continental Shelf and other such places a while ago, would this have ever happened? Probably not.” But it did. When the market supply-demand equation gets tight for any critical resource, prices have a way of getting totally out of hand. And lack of flexibility in supply is always to be blamed. In this case, it seems as if Chesapeake Energy was caught badly on the “wrong” side of the trade. Or was it?

As Chesapeake was selling natural gas futures, and as those futures were climbing exponentially, the company was taking what looked to be huge mark-to-market losses. But natural gas prices peaked shortly after June 30 and have collapsed with the demand destruction that has prompted a quick reversal in investor positions from “long” to “short.”

This brought prices down to their strong support levels of around $8 per bcf. These much lower levels were pretty stable for all of 2006 and 2007. So it turns out that Chesapeake was actually prudent in its strategy of taking advantage of high natural gas prices while it had the chance to do so. And its chief executive officer was confident enough that he was willing to take the heat over lackluster quarterly earnings for this huge temporary mark-to market hit and was not squeezed into closing these “losing positions” and realizing the loss. He took the bad mark-to-market hit at the quarter’s end and all the heat that this implied.

But do not let this quarterly loss fool you. In fact, the staggering $1.6 billion loss had, by July 25, reversed and moved up the value of Chesapeake hedges by a gorgeous $4.7 billion. CEO Aubrey K. McClendon and his team had seen what was coming and masterfully called the market’s bluff.
With Chesapeake’s staggering reported loss for the quarter and with natural gas prices now down to pre-bubble levels, the “fluff” in the stock has been removed.

Are the shares now worth a shot? You bet.

Not only is natural gas a key part of the energy solution for this energy-starved country, but Chesapeake’s long-term strategy is to tap into a very clean form of energy that is abundant in the U.S. market and to lead production in North America. Natural gas and oil sales almost doubled from a year earlier to about $2.2 billion, showing an operating gain of $479 million, which beat Wall Street estimates by a penny. What’s more, at these prices, you are already seeing strong incentives to switch some energy generation away from coal, whose prices have remained stronger, to natural gas-fired plants.

And Chesapeake is growing its reserves at about a 20% to 21% annual clip thanks to its expanding production in The Barnet, Haynesville Fayetteville and Marcellus Shale areas. This is the key to future share price growth. The shale production revolution, enabled by newer and cheaper drilling technologies and current prices of natural gas, is changing the industry, allowing for sustained reserve growth. And that will help satisfy the ever-expanding demand.

So you are buying Chesapeake at levels that now reflect the much lower prices we are seeing today in natural gas – but at a time when we are heading into the heating season, and we are counting on continued reserve growth from their shale strategy to keep growing the bottom line. What about the volatility in earnings due to hedges? It is just loud market “noise” that proved that the company really knows the market and that has provided you with this great buying opportunity.

ACTION TO TAKE: BUY shares Chesapeake Energy Corp. (NYSE: CHK).

[Editor's Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you with his newly created "Shadow Stock Trader" service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a brand-new Money Morning feature most recently analyzed Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B). It also has covered such companies as Cisco Systems Inc. (Nasdaq: CS), ABB Ltd (NYSE ADR: ABB), Cummins Inc. (NYSE: CMI), Chevron Corp. (NYSE: CVX), Valero Energy Corp. (NYSE: VLO), and General Electric Co. (NYSE: GE). Over the next several Mondays here in Money Morning, we'll be reviewing Chesapeake Energy Corp. (CHK), and will take a look back at some of our previously featured stocks.]

News and Related Story Links:

• Web Site:
  Commodity Futures Trading Commission.

• Wikipedia:
  Continental Shelf.