Survivors of the Shipwreck

• ByTim Melvin, RealMoney.com Contributor
• On 12:01 pm EDT, Tuesday June 9, 2009

In my ongoing effort to provide RealMoney readers with up-to-date information on what is going on in the world, I spent the weekend engaged in exhaustive research. In the company of many of the Kent Island irregulars, I spent two days searching the Chesapeake Bay for signs of economic activity. We searched several locations including marinas, dockside dining establishments and, in the interest of thoroughness, several Tiki bars.

It is slow out there. It was a perfect day to be out on the water with sunshine and low humidity but we saw relatively few boats out on the bay. The recession has had a devastating effect on the boating industry and those who depend on it for their livelihood. I spoke with a marina owner on Sunday who said that the industry in the mid-Atlantic had been blindsided by the depth of the credit crisis.

The industry in this area had sailed though the past recessions. The proximity to Washington, D.C., New York City and other pockets of wealth had allowed them to suffer only slight declines. It is a lot different this time.

It has hit boating-related stocks as well. Brunswick, one of the largest boat and engine manufacturers, reported a loss of $2.08 a share for the first quarter compared to a profit of 15 cents a share a year ago. The company makes everything from motor yachts to runabouts and is also the manufacturer of Mercury engines, one of the most popular marine engines.

Brunswick has idled half of its manufacturing plants since 2007 and in the last year has reduced its workforce by about 50%. CEO Dusty McCoy told investors on a conference call that he thinks the business is changed permanently. He does not think sales will return to 2005 levels in his lifetime.

Oddly enough, the devastation that has hit the industry may turn out to be good for Brunswick. A lot of smaller competitors have exited the industry. Many dealers of competing brands have closed as a result of difficulty obtaining floor-plan financing. Most of Brunswick's dealers have access to funding through the company's joint venture with General Electricgiving them a huge advantage going forward.

This stock is not going to soar anytime soon, but Brunswick is not going out of business either, which makes it a great candidate for options-related trading. On down days you can sell the puts in this stock a few months out. If it is put to you, immediately sell the calls. Because Brunswick is likely a survivor in a badly damaged industry, you will be able to do this several times during the course of the year.

West Marine (WMAR) is another company I think will survive the creative destruction going on in the boating industry. Like a lot of other companies, West Marine has been aggressively moving to insure its survivability. It has cut costs and reduced debt, and as a result margins actually improved in the first quarter.

The company also has benefitted form competitors leaving the business. One of its largest competitors, the Boater's World division of Ritz Camera, is currently being liquidated by the bankruptcy court. In the first quarter, West Marine was able to reduce outstanding debt by more than 14%. The stock currently trades at about 80% of tangible book value so the shares are cheap. I would not back up the boat, but owning a little bit of this stock on down days makes sense.

I do not know exactly when, but the recession will end. Boating is not just a hobby to many. Much like riders of Harley-Davidsons inherit the Harley lifestyle, boating becomes a way of life. You may delay spending on boats and accessories, but as soon as you can you will return to it. For a buyer with a long-time horizon, identifying and accumulating shares of boating-related companies makes a lot of sense.

We all know it is weak right now. Even McDonalds reported Monday that sales were slower than anticipated. Consumers are justifiably concerned about their money and are conserving it. Money will be spent at Wal-Mart and Family Dollar long before it shows up on the boat dealer's sales floor.

The green shoots seem to be dying quicker than they can emerge. It can be discouraging at times, but the world isn't going to end. It makes sense to own positions in the survivors of the hardest hit industry groups. Why speculate on the likely outcome at Citigroup when we can bet on the survival of well-run companies? Most boaters I know would skip meals to get back in the water and the industry is going to thrive again when we get a real recovery.

As always, make sure to let Mr. Market work for you and accumulate positions on downswings in the market.

Buzz up!