Dykstra: McDermott Calls Traders to Action

Many analysts have predicted a correction in the equities markets for some time now. While the overall magnitude of the correction remains unclear, it is clear that money is leaving equities for the time being.

In these times I often reflect on my favorite bit of investment advice, from none other than Warren Buffett: "Be fearful when others are greedy and greedy when others are fearful."

While there are obviously problems for lenders in our economy, the problems have not spread throughout the entire economy. Unemployment and inflation remain historically low while retail expenditures remain high. The "operators on Wall Street" are getting exactly what they want: public fear, which leads to selling. Why? So they can buy all the great companies that are now on sale. And this isn't a normal sale, this is a clearance sale!

My pick today is getting cheap enough to become a possible takeover target: McDermott International (MDR Quote) closed Thursday at $73. McDermott is one of those companies that define fundamental strength; its balance sheet is about as good as it gets. Its second-quarter earnings tripled from the same period a year ago, with net income increasing to $149.4 million, from $47 million. The result easily surpassed estimates on Wall Street, as revenue rose to $1.42 billion from $1.05 billion last year, beating analysts' forecast of $1.39 billion.

McDermott's customers are utility companies, oil companies and the U.S. government. The U.S. Energy Department recently renewed its contract with them to maintain the nation's strategic crude oil reserve. The $600 million contract will provide needed protection against disruptions in the oil market. The Strategic Petroleum Reserve has a capacity of 727 million barrels of oil, and the Bush administration has proposed doubling the size of the strategic oil stockpile to 1.5 billion barrels by 2027.

In April I raved about the company's strong return on equity. That ROE provides a great measure of how well a company generates profits. McDermott's ROE continues to be outstanding, currently at an amazing 117%. This means that for each $1 of equity, McDermott generates $1.17 of profit. Additionally, it has booked $5.21 billion in revenue and $1.12 billion in cash, and it has zero debt.