Why I'm Buying More of This Rising Star

This article is part of our Rising Star Portfolios series.

Investing is all about getting great companies at great prices, and I believe that's what we have this month in boring little LSB Industries (NYSE: LXU  ) .

LSB is already a proud member of my real-money Rising Stars portfolio; I bought a half-position for $37.90 back in September. But thanks to a still-struggling economy and a bumbling, inept, hyperpartisan Congress, I'm going to fill out the position tomorrow at a nice discount to that price.

My original LSB Industries buy report profiles the company and lays out my reasons for buying. I also gave you my opinion of the third-quarter earnings report a couple of weeks ago, and hinted that I'd be looking to buy more shares.

Here's a quick refresher of what I like about this business:

Diversification
LSB has two main business units, chemical (63% of year-to-date revenue) and climate control (36%). Because they serve completely separate markets, bad results in one sector likely won't devastate the company. Indeed, while climate control has slowed down because of the housing and construction markets, the chemical unit has been firing on all cylinders lately.


Source: LSB Industries.

Business fundamentals and Mod-8
LSB has passed my Modified Foolish 8 screen for six months running, and it was the only company to pass it in two of those months. The Mod-8 combines elements of valuation with some tough business requirements, including better than 15% return on equity over the past four quarters, as well as each of the past three fiscal years. It's a tough requirement and is one indication of outstanding management.

The company has some nice competitive advantages with each unit. With a 38% share in the geothermal market, climate control is riding the tailwinds of the geothermal "green" movement. Plus, many buyers are eligible for tax breaks by going green. And with plants located near its customers, the chemical business benefits from location advantages that allow for lower freight and distribution costs.

Unlocking value
An analyst mentioned on the last conference call that fertilizer-related master limited partnerships, or MLPs, are trading for attractive multiples lately. These include three on U.S. exchanges: Terra Nitrogen (NYSE: TNH  ) , CVR Partners (NYSE: UAN  ) , and Rentech Nitrogen Partners (NYSE: RNF  ) . President and COO Barry Golsen says management is open to this type of structure for the chemical unit. If it happens, this would likely unlock some shareholder value, though for now the team is just keeping an eye on the market.

LSB Industries Stock Chart

LSB Industries Stock Chart by YCharts, from Sept. 17, 2011, purchase date through Nov. 22, 2011.

Foolish bottom line
As the chart above shows, LSB's stock price has been down and up and down since my original purchase. It's probably going to be volatile in the months to come, and I'm not sure which way it's headed in the short term -- mainly because of the insaneness of our global economy and our broken U.S. political system.

But with an eye on the long term, I think we're getting a good price here to fill out a full position, and tomorrow I'll be picking up $800 worth. If you're interested in keeping up with LSB Industries, I strongly suggest adding it to your free, personalized watchlist.

This article is part of our Rising Star Portfolios series, in which we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Fool analyst Rex Moore once led a horse to water and made him drink -- all while tweeting. He owns no companies mentioned in this article. The Motley Fool owns shares of LSB Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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