Dear Mr. Berko:
SeaWorld’s stock crashed from $30 to $20 in one day because of lower revenues and earnings. My broker thinks this is a good buying opportunity. He believes that the decline in revenues is because of lower attendance caused by the media’s negative headlines about SeaWorld’s mistreatment of its killer whales. He recommends that I buy 1,000 shares and thinks the stock will be back to $30 in just a few months’ time. What do you think? My broker has also recommended that I buy 1,000 shares of Linn Energy on margin. He says that using the margin leverage, with which I have to put up only half the share price, would increase my current return on Linn from 9.3 percent to 17 percent. Could you please explain to me how this works?
— FK, Fort Walton Beach, Fla.
Dear FK:
I think it might be a big mistake to buy SeaWorld Parks & Entertainment Inc. (SEAS-$20). SEAS’ recent earnings disappointment and 10 percent revenue decline may be a temporary response to the negative publicity generated by the media debate over its captive orcas. That’s a good excuse, but I strongly doubt it. I think SEAS’ lower revenues and lower earnings are a function of higher ticket costs, increased operating expenses and significant declining household income for the middle-class family. Contrary to what Washington would have us believe, median consumer income has steadily declined since 2007, so Americans have fewer dollars to spend on such entertainment as going to SeaWorld. And contrary to what we are told, the costs of supporting a family in the past six years have increased significantly more than the silly 2 percent inflation rate.
It wasn’t long ago that big employers such as Maytag, Goodyear and General Motors paid Americans the equivalent of $40 to $60 an hour. Today many of America’s largest employers — e.g., Wal-Mart and McDonald’s — pay workers $8 to $12 an hour. And like it or lump it, folks making $12 an hour can’t afford to travel to SeaWorld from Oregon, Oklahoma or Ohio and pay an entry fee of $260 for a family of four plus $175 for a hotel room. So I’d not be surprised if Six Flags Entertainment Corp. (SIX-$36), Cedar Fair Entertainment Co. (FUN-$48) and other theme park companies experienced similar declines in revenues. Nor would I be surprised if SIX and FUN also reported lower earnings this year and next. And Americans’ lower family incomes are not about to improve much in the near future.
I like Linn Energy (LINE-$29), a $3.7 billion independent oil and natural gas company with nearly 20,000 mature, long-life, productive wells and proven reserves of 6.6 billion cubic feet equivalent. I like LINE because the $2.90 distribution, which yields 9.3 percent, is considered return of capital and not subject to ordinary income taxes. I like LINE because most analysts on Wall Street believe that continued strong production growth is expected to push revenues and earnings higher, because its recent Hugoton gas field acquisition (from Exxon Mobil) will double its natural gas inventory and because management may increase its $2.90 dividend to $3.15 in 2015. And I like LINE because I think the stock could, at some point late next year, trade in the mid-$30s.
Yep, purchasing 1,000 shares of LINE using a margin account, in which you put up only 50 percent of the market price, could give you a current yield of 17 percent. In a margin account, the 1,000-share buyer invests 50 percent of the purchase price — $14,500, in this case — which is called his equity. Then he borrows the remaining $14,500 (called the debit balance), on which he pays interest to the broker, at perhaps 3 percent. The 1,000 shares of LINE pay a $2,900 annual dividend. He will pay annual interest of $435 on the $14,500 he borrowed from the broker, so his net income ($2,900 minus $435) is $2,465. Therefore, his return is ($2,465 divided by $14,500) a sweet 17 percent. However, I don’t like buying stocks on margin. Though it can increase your income nicely, it also doubles your risk, and LINE is a very risky stock. Can you handle that?
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.
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