The talking heads have been touting the recession word for a while. In an effort to cut off slower economic growth, the Fed has been a bit quick to lower interest for a cheap market thrill, which in my mind can only delay the inevitable market panic.

Now that the public and investors alike have been well groomed for this doomsday scenario, everyone wants to know when this so called recession will occur. Could it happen this year or perhaps in 2009? No one really knows for sure, but the mood across the country and overseas is pretty grim.

If the Fed is forced to boost interest rates just to keep inflation in check, economic growth in terms of GDP will be a little hard to come by. If this turns out to be the case, then our markets woes have only just begun to unfold.

The Fed can only really handle one thing at a time. If inflation spirals out of control and they act on it, we’ll certainly be heading for a major slowdown. High inflation coupled with slow growth is the perfect recipe for stagflation.

At some point, I suspect one of these economic wheels will fall off and force this economy to sit on the sidelines for a break and much needed repair.

So, let’s assume for one moment that everyone expects the worse. How can we take advantage of the situation without exposing our portfolio to an imbalance of short/put option positions? For starters, we could look to high yield dividend plays. But then the question becomes, “How will I capture above average gains if I’m placing my money in high income producing investment vehicles?” Well, I have the answer.

Our flight to quality has begun and I cannot wait to share with you this unique opportunity. Permian Basin Royalty Trust (PBT:NYSE) is one of those fast movers hitting one 52-week high after another. The markets go down, yet this thing consistently climbs higher.

It’s not the recent breakout that caught my eye. You see, this little wonder play has shown that it can produce some sizeable returns over the years. In early 2003, PBT was valued at a meager $6. In just over two years’ time, those same shares climbed to $17. That’s a 183% gain over this time period. The annualized returns come in at about 73% during the same time horizon.

But something strange happened. In mid 2005, the momentum seemed to be lost. It fluttered along and bottomed out around $12 before once again resuming its uptrend in mid 2007.

Now that the previous highs have been taken out, we’re left with that same ‘ol high-flyer we once knew. Why are shareholders so excited about being apart of this phenomenon?

Well, for one thing, we’re talking about a firm that has managed to produce a return on equity of 4,439% with profit margins of 98.80%!! Profitability is not a concern, but there must be more of a pull than that right?

You bet. There’s plenty of cash on hand to take care of all the financial obligations. Typically I like to see companies that can afford to pay the bills. To do this, I’ll check in to see how the quick ratio is coming along. As I’m sure you already know, we’re looking for the ratio to come in above 1.0. In this case Permian Basin has an extremely healthy ratio of 4.50. So, there’s one worry out the door.

I’m sure you’re thinking that if Permian is making new highs, isn’t the stock expensive? To solve this dilemma we’ll look at the price-to-earnings ratio. Right now PBT has a P/E ratio of only 14.50. The industry as a whole has a P/E of 19.60, so it appears as though shares are still trading on the cheap.

So, if growth isn’t anything to tout, why would this stock appreciate in value? Part of the answer can be found in the information I have provided. On the other hand, it is also common practice for low growth investments to pay out a large dividend to their investors. Most people would be happy with say 2-5% annual dividend payout.
When it comes to yields, how high is too high?

Usually it is best to stay away from companies that pay dividends that are way out of line with their peers. Some stocks have high dividends because their shares price has fallen significantly and they need to retain investor interest. If a company can’t lure potential investors through growth, such as the utility industry, then those profits need to be redistributed back to the shareholder. As a company, you can expand operations with profits, or if growth is limited, cough up those monies and keep your investors happily on board.

Permian has a current annual dividend yield of 11.97%, which is broken down and paid out on a monthly basis!

Usually these high yield dividend plays just sputter along and do not really appreciate in value – not so with PBT. I think you know what to do. Let’s push the buy button and plan to hold onto these shares for a good while.

Our recommendation: Buy shares of Permian Basin Royalty Trust (PBT:NYSE) at or near $18.76 and plan to hold for many years to come.

Good investing,

Stephen Oakes
Editor, Black Sheep Trader & Volume Spike Alert