A First Peek Into 2009's Market

It is not a business I would want to work in, but I am more than happy to invest in it. The returns are spectacular. Sales have been growing at better than 19% annually. The return on equity for the company is over 35%. This may slow down in 2009 as commodity prices remain weak. Analysts are estimating that earnings will fall off to 53 cents a share next year. Even if they are correct, the stock trades at a single-digit price-to-earnings ratio and an enterprise-value-to-EBITDA ratio of less than 3. That is cheap for a company that dominates its space and has no competition except for local operators.

Darling has substantial size and cost advantages and is the market leader in the industry. The basic business is strong and will grow quickly in an economic recovery. As a bonus, there is a potential biofuel payoff in the future as well. At this price, I believe long-term investors have to own the stock.

I like convertible bonds at these levels as well. I talked about this market a few weeks ago, and although it has recovered a little, it remains underpriced. Convertible arbitrage hedge funds have gotten killed in 2008, and they have dumped a lot of bonds on the market. Right now I like playing the market by buying shares in closed-end funds.

I mentioned Calamos Convertible & High Yield(CHY Quote) and Gabelli Convertible(GCV Quote) as two of my favorite funds. Both of these have rebounded sharply and no longer trade at a discount to net asset value.

The Nicholas Applegate Convertible Fund(NCV Quote) does trade at an 18% discount to NAV and is the fund I am focusing on right now. The fund is about 33% leveraged but has a very diversified portfolio of convertible securities. Should the Gabelli or Calamos funds trade at a wide enough discount in the future, I will buy more of those as well.