Betting On The Kings Of The High Seas

Despite announcing mixed second quarter earnings last week, Frontline executives are bullish — almost enthusiastic — about the second half of 2006. A key reason is that charter rates for oil tankers are going through the roof. Charter rates that stood at $40,000 per day a year ago have doubled to an average of $80,000 per day in the third quarter. To put that in perspective, in August 2004 — previously the best month ever for tankers — charter rates were $65,000 per day.

That lofty level of pricing is highly unusual. Charter rates normally soften as the summer driving season ends. What is different this time? Tanker supplies are tight and Chinese demand is strong. And demand is not about to ebb with the winter heating season approaching. The International Energy Association estimates that the increase in demand between the third and fourth quarters should be twice what it was last year. That rising demand translates into higher charter rates — and record high profits.

Here’s another tailwind to Frontline’s stock price. It owns a minority stake in New York-based shipowner (and competitor) Ship Finance International Limited (SFL) — alongside mega hedge funds Renaissance Technologies Corporation, Citadel, and Blackrock. This stake provides investors in Frontline a leveraged bet on the upturn in the global tanker industry. Although the value of this stake has shot up in the past few months, Frontline feels that SFL stock still has plenty of juice left.

Yet Frontline is still the cheapest company in its sector, trading at a P/E multiple of 6.7 and boasting an eye-popping yield of 13.70%.

So buy Frontline (FRO) at market today, and place your stop at $38.75. For potentially even bigger profits, buy the February $45 calls (FROBI.X).

Important: Frontline goes ex-dividend tomorrow, Aug. 29. That means that if you buy the stock today, you will be entitled to a dividend of $1.50 per share, to be paid on or about September 18, 2006. That also means that you can expect the stock to drop by about the amount of the dividend in tomorrow’s trading.

PORTFOLIO UPDATE

To make room for Frontline, take your profits in Japanese banking giant Mitsubishi UFJ (MTU). You’ve done well with this one: the stock is up more than 8% since June 19 — for an annualized gain of just under 50%. Those of you who bought the options booked 40% profits.

Time to tighten some stops on some of our other holdings: Icon plc (ICLR) rises to $64.80, Teva Pharmaceuticals (TEVA) climbs to $31.30, and AstraZeneca (AZN) goes to $58.75.

On the earnings front, Global commodities giant BHP Billiton (BHP) announced that its fiscal-year net profit rose 63% to $10.45 billion on a 26% increase in sales. Chief Executive Chip Goodyear predicted continuing high commodity prices, amid insatiable demand from China and India.

P.S. Join me this fall at The Money Show in San Francisco, Oct. 16-18. Attend as my guest and receive complimentary registration. For details, go to www.intershow.com or call 800-970-4355 and mention priority code #6953.