RD's Picks

When the economy and markets are rocky, many investors move into consumer staples and healthcare stocks on the theory that those businesses don't depend on the economic cycle. But, what if you're a bit of a contrarian who still wants some defensive holdings? Outside of consumer staples and healthcare is there anything likely to do well in a soft economy?

If a little volatility is ok, I think I've got a candidate that fills the billet. Transocean (RIG).

RIG is typically thought of as a cyclical stock, and it may be, but it currently has a full order book so the cycle will still be working for quite some time. In order to replenish reserves, oil companies will need to continue expanding their offshore operations. Valuation looks cheap with a forward PE under nine.

One of the footnotes to the most recent Fleet Status Report caught my eye. The contract for one of their rigs currently under construction has a fixed dayrate for the first three years, then the dayrate varies with the price of oil for the last two years. The variable dayrate has a floor of $400,000 per day if West Texas Intermediate is $40 per barrel or lower. Then it goes up to a ceiling rate of $500,000 per day if oil is $70 or higher. The critical piece of information there is that the high dayrates are still profitable for Transocean's customers at much lower oil prices than we have today. Even if oil drops by 50%, no one will be canceling drill rig contracts. The huge contract backlog that continues to work at much lower oil prices gives RIG some insensitivity to the economy. Unless you think oil is going back under $70/barrel again, the cash flows are there regardless of what happens in the economic cycle.

Comments: View Comments |  Wednesday June 11, 2008  |  Stocks: RIG,