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BERKO: Linn Energy a good recommendation


Dear Mr. Berko:

My broker recommends that I buy 200 shares of Linn Energy for dividend income, dividend growth and capital gains. I’m not sure about the stock, as gas doesn’t seem to interest me. He actually told me to write you. He thinks you’ll give Linn a thumbs up. Also, my daughter asked me to ask you what you think of Facebook. She and her husband are nurses, and they would like to buy 100 shares in an IRA.

W.L., Bethlehem, Pa.

Dear W.L.:

I don’t know your broker, but I agree with his recommendation. Linn Energy LLC (LINE-$40.14), with a $2.90 dividend yielding 7.2 percent, is getting a lot of attention, and 14 of Wall Street’s sages have it on their “buy” scopes. LINE is also getting press from quite a few investment services that have boarded the bandwagon. Most are trumpeting a potential 12-month price target to $45, predicting 20 percent higher revenues to $2.5 billion, a 30 percent growth in profits to $2.36 a share and a possible $3.30 dividend in 2013. Considering that natural gas is trading at its lowest level in years, these numbers could be conservative. And if the price of natural gas rises, as many believe it soon will, LINE’s dividend is likely to move much higher. This sounds like the kind of stock that I would want to own. Even though JP Morgan, Allianz, Putnam, Morgan Stanley, Omega Advisors, Credit Suisse, UBS and PNC already own millions of shares, I think it would be a capital idea if you bought 200 shares for your joint account. Meanwhile, your brokerage, Merrill Lynch, has a strong buy on LINE, also with a $45 price target. Credit Suisse and Barclays also have reports that are worth a peek if you need more convincing.

LINE is an independent oil and gas company that engages in the acquisition and development of oil and gas properties, primarily in the Mid-Continent (Texas, Kansas and Oklahoma), the Permian Basin, the Williston Basin and properties in Michigan and California. Its assets are heavily weighted toward natural gas, though LINE is seeking oil properties to provide balance to its energy portfolio of 7,700 wells and 4.2 trillon cubic feet of natural gas and oil reserves. LINE’s assets have long reserve lives that almost ensure stable quarterly distributions and reduce management’s need to frequently replace properties due to natural decline in inventory. LINE has been public for six years, but $3 billion invested in accretive acquisitions of prominent properties at favorable costs, plus 2,700 (proven) future drilling locations and a 21-year average reserve life, suggests that the shares trade at a premium to its peers. Meanwhile, LINE’s size places management in the position to cherry-pick smaller drillers to complement its portfolio. Of course, you know that almost all of LINE’s dividend is not subject to federal taxes.

When someone asks me about Facebook Inc. (FB-$29.22), I’m reminded of the new color “clong,” the puerile fad promoted by the ponces in the fashion industry a few years ago. FB is clong. Tell your daughter that Madison Avenue is concerned FB advertising may not provide retailers with sufficient revenues to justify the cost. GM came to that conclusion months ago, and other retailers are beginning to agree. Still, it’s foolhardy to dismiss the fact that FB’s 900 million active users represent an enormous potential revenue source, whether it’s the massive treasure trove of intimate personal data to be mined and sold or the 500 million monthly mobile users, which at some point may be converted into active advertising dollars. And some aficionados believe FB will offer an advertising network that can provide a similar audience reach to broadcast TV and accelerate the transition of advertising revenues from offline to online. However, the advertising industry’s overriding concern is that advertising dollars spent on a social network produce less effective results than dollars spent on other media platforms. However, because I think FB is primarily a platform for the socially challenged and immature, my opinions may not be objective. But if FB were to charge its users $1.10 per month to maintain an account, I’d recommend the stock.

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