Wednesday, September 30, 2009

Stat of the Day: Conflicting Data Points

As the market as seen the last couple of days, the economic reports have been very conflicting to the market. Typically improvements from last month or quarter, but below expectations. Thats typically short term bad for the market, but sometimes they provide the best buying opportunities. Below we'll review the major data points this mornings and as you'll see the numbers aren't as bad as the market reacted with the 1%+ sell off:


Chicago PMI

This number that mostly measures the manufacturing activity in the Chicago region came in much weaker then expected and actually weaker period. It's a confounding number because no indication exists that September was a weak month. Think Mr Ghriskey summed is up pretty well.

  • The Institute for Supply Management-Chicago business barometer fell to 46.1 in September from 50.0 in August.
  • Economists had forecast the index at 52.0. A reading above 50 indicates expansion in the regional economy.
  • "Don't know why it looks so weak, when at least anecdotally we've been hearing that September was a good month economically, and a pickup from August," said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York.


NAPM New York
Then this report from the New York area came in much better then expected and actually topped the highest level in nearly 3 years. So this report completely conflicts with the Chicago PMI.

  • New York City business activity surged in September to the highest level since November 2006, according to the survey taken by the Institute for Supply Management-New York (ISM-NY, formerly NAPM-NY). The Current Business Conditions index rose to 72.9 in September from a revised 55.7 in August. These were the first back-to back months above the breakeven 50 mark since the US recession began in December 2007.

ADP Jobs
Now this report on private sector jobs use to not ever be followed until the last year or so. It sums up alot of what we've seen lately. The reported numbers were the best since July 2008 meaning the job market has recovered to levels not seen since pre-Lehman (by the way the stock markets hasn't yet). Yet the numbers weren't as good as hoped for so it was disappointing to the stock market. The August numbers were revised down 21K so its possible that the Sept numbers will be revised down as well closer to the estimates. Still what should sink in is that the trend is still positive. The numbers are improving and even ADP finishes with the caveat that job losses are only expected to last a few more months.

  • Nonfarm private employment decreased 254,000 from August to September 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from July to August was revised by 21,000, from a decline of 298,000 to a decline of 277,000.
  • September’s employment decline was the smallest since July of 2008 and employment losses have diminished significantly over the last two quarters. Nevertheless, employment, which usually trails overall economic activity, is likely to decline for at least several more months, with losses continuing to diminish.

Monday, September 28, 2009

Favorites Hartford Financial and Terex Close at Recent Highs

Hartford Financial (HIG) is now the top position in our Growth portfolio and Terex (TEX) is a long term holding. Both companies closed today at highs not seen since the market blewup late last year. Being that they both broke thru closing highers from the last couple of weeks, they are likely to surge even higher.

HIG: with 2010 estimates now approaching $4, HIG is likely to surpass a 10 PE sooner rather then later. I'd place at least a $50 target on this stock as the SP500 stays above the 1,000 level. So the closing price above $28.5 is still only a 7 PE.

TEX: this construction company is more difficult to value with some analysts placing the trough sales not until 2011. TEX once traded close to $100 so it seems unlikely that a price just jumping above $20 would be anywhere near a top. The way China and India have returned to growth and the demand for housing in Brazil is seems overly pessimistic that demand won't pick up much sooner then expected. MTW has also broken out and is another more speculative play.

Trade: Bought Synovus Financial

Bought an initial position in Synovus Financial (SNV) for the Growth Portfolio. SNV is a Georgia based banking institution hard hit by non performing loans. SNV recently did a $600M equity offering at $4 so the purchase around $3.8 is a 5% discount to that offering. As we've seen on most of these banking deals, the offering eliminates the 'going out of business' fear and allows for the stock to eventually trade more based on normalized earnings down the road in 2011. The extra cash also gives SNV the opportunity to snap up some of the banks that seem to fail every week in GA.

The other reasons to buy are based on the analysis by banking expert Tom Brown and the technicals suggesting prices above $3.8 are support. Do your own homework but don't take too long.

Sunday, September 27, 2009

Recovery or Not?

Alot of debate in exists in the financial community regarding whether the recovery is for real and ironically whether the market has already topped for the year. Its very interesting that the debate is so fierce. It seems so unlikely that the market would've topped out already with so many individual stocks that we follow still trading at upsurd levels. Heck our favorite play, AerCap (AER) has a roughly 4 PE. Plenty of other stocks still trade below book value.

Now its important that an investor doesn't just try to find a story that fits his thesis so that's always a concern that we're worried about. To us though, that seems to be what the shorts are doing these days. Check out this article from Minyanville.com. They are typically in the bear camp so it isn't too surprising to find an article suggesting a top, but all the jumbled up technical jargon in this report just seems like a stretch. Its been shown plenty of times that markets don't correct during a recovery at times usually going more than a year without a 10% correction. The market fell off a cliff after the Lehman collapse near 1,200 all the way to 666 then why wouldn't is just as easily melt up back to 1,200. Heck I've never heard of the 'Pinocchio', but its the reason for the market top? Hmm.... This cracks me as desperation from a website and likely a contributor that has been wrong too long. So far we've seem nothing but a healthy pullback in an uptrend and calls like these support that case.

Then on the Kudlow Report on the 22nd, Larry Kudlow who I'll admit is usually way too bullish does a good job of outlining the leading economic indicators from both the Conference Board and the ECRI. The weekly ECRI report is up 25 smacking percent. That is an incredible number that hasn't ever been seen in the 40 years of the report. Regardless Gary Shilling has tons of reasons for why the economy isn't recovering. Yet, it's almost undeniable that a recovery is underway. Considering the scale of the decline I don't understand why so many want to argue against the recovery. Of course we have weak areas and concerns in the economy and especially the jobs market, but that's typical of a period after a recession. Even Cramer was somewhat negative about the market on his Friday Mad Money show because he is concerned about whether the September jobs report will beat estimates of 180K yet it is almost unlikely that we'd see a worse then expected report and its definitely unlikely that we'd see a worst then August report. As long as the trend continues in tack, its difficult to see the market not continuing up. So many companies overcut that now they must hire back. Once the ship turns its just so unlikely that the recovery stalls at-200K jobs with weekly claims only getting back to 530K. Weekly claims will undoubtedly return to 350K if not lower and we'll see positive jobs reports. So why the week to week and month to month sweating. The numbers will fluctuate, but the end goal will be achieved.

What's also striking is the exchange in this video where Shilling discusses being correct last year as opposed to Brian Westbury and hence not only does he have more credibility but then he leaves the caveat that it almost doesn't matter if he is wrong this year because he got it right last year. It almost sounded like a concession speech from somebody to bullheaded to change. And if anything we've learned from the last 10 years, it seems like guys that get it right in one direction hardly ever are able to switch gears. Westbury has been dead on the last 6 months regarding the V shaped recovery and I'd stick with the hot hand for now. Just don't stay too long we've learned. With the Fed flashing huge signals that they aren't going to let the bears win, it just seems unlikely that the leading economic indicators whether from the Conference Board or the ECRI aren't accurate. Just about all the numbers support blowout numbers for the next few quarters.













Tom Brown on Regions Financial

Tom Brown from Bankstocks.com has some interesting points about Regions Financial (RF) and the banking industry sector as a whole from the Barclays conference. Tom is well known as one of the top banking analysts in the industry. Hes also known for being too positive and upbeat about the crisis that took place the last couple year. Whats interesting is that based on the information presented about RF, it may turn out that he wasn't that far off base. What it turns out is that the government and the naysayers were way off base in their worst case estimates. Estimates that just about brought down the global economy.


  • Government “stress test” loss estimates are way too high. I’ve said this ever since the test results were released back in tk. Now, two quarters into the eight quarters the tests cover, and with high visibility into a third quarter, the tests’ excessive pessimism is more obvious than ever. None of the 19 big banks that were tested will come anywhere close to reaching the loss levels foreseen. Regions Financial, for example, predicts its cumulative losses in 2009 and 2010 will come in somewhere between $3.4 billion and $5.9 billion. Regions’ stress test forecast for same period: $9.2 billion. As I say, not even close.

Stone Fox Capital has had a small investment in RF for a while. The forced capital raise really hurt that position so its frustrating to see that test was flawed and casued a dilutive raise for nothing. At least that investment is recovering like the market. At one point just about everybody seemed convinced that RF was destined for bankruptcy.

With the pull back last week, the technicals are lined up the sweet buying spot. The 2EMA should officially cross the 200EMA on Monday making any pullback on the stock a must buy at prices above the 20EMA.

Friday, September 25, 2009

Stat of the Day: Consumer Confidence Hits Jan 2008 Highs

The University of Michigan September sentiment numbers roared ahead this month easily surpassing consensus and sharply above early August numbers. These numbers are always very volatile and not always in tune with actual consumer spending. The impressive part of this report was the future expectations continue to reach levels not seen until prior to the financial collapse.

  • The Reuters/University of Michigan Surveys of Consumers said its final index of sentiment for September rose to 73.5 from 65.7 in August.
  • This was above economists' median expectation for a reading of 70.3, according to a Reuters poll.
  • The index of consumer expectations rose to 73.5, its highest in two years, from 65.0 in August.
  • "Consumers reported that the economy had already begun to improve and anticipated further gains in the year ahead." The index of current conditions rose to 73.4 in late September from 66.6 in August.

Thursday, September 24, 2009

SaneBull Live Ticker News

Terra Industries Announces $7.50 Special Dividend

Terra Industries (TRA) announces a $7.50 special dividend to be paid sometime in Q4 assuming they successfully complete some debt deals consisting principally of a $600M debt financing that pays for a portion of the special dividend.

  • 4:17PM Terra Industries announces plans for $750 million special cash dividend ($7.50/share) and is commencing tender offer for 7.00% senior notes due 2017 (TRA) 36.49 +0.34 : The co announces that it plans to return an aggregate of approximately $750 million in cash to shareholders through a special cash dividend of $7.50 per share, expected to be declared and paid in the fourth quarter of 2009. Terra also announced that Terra Capital, Inc. is commencing a tender offer and consent solicitation to purchase any and all outstanding 7.00% Senior Notes due 2017 of the Company (the "2017 Notes") for cash at a price equal to 104.5% of par, including a consent fee. In addition, Terra plans to raise up to $600 million of capital through a debt financing. After giving effect to the tender offer and special dividend, and assuming a debt financing of $600 million, Terra would have approximately $500 million of cash, net of prepayments.
Boy, what to make of this deal. Its clearly a ploy to block CF Industries from completing a takeover of TRA. Its also the type of moves we hate at Stone Fox Capital. Any time a company is playing around with financial instruments it gets complicated and the focus leaves the primary business. Why not just up the regular dividend to the 2-3% range to attract more investors? Who wants basically a 20% dividend that requires investors to pay taxes in 2009? I'm not sure it does much long term for investors either.

The stock is up 5% after hours so the market likes it for now. We bought this stock for the hopes management would accept the CF deal and we'd roll our stock on over and participate in the ag sector that way, but at higher prices. Its now turning into a soap opera and we wonder about the ramifications if this comes unraveled. The move after hours also supports our original thoughts that the stock price wasn't pricing in the CF deal.

Mobile Internet Tsunami

Back on August 11th, Jim Cramer promoted the Mad Money Mobile Internet Index. An index that tracks the upswing in mobile internet devices such as the iPhone from Apple (AAPL) and the Pre from Palm (PALM). Cramer thinks this is a multi-year move similar to PC revolution in the mid 90s and the internet revolution in the late '90s.

On-the-go Web is a trend equal to the mass adoption of the PC, he said, and it will be with us for some time to come. So Cramer today created the Mad Money Mobile Internet Index to track what he expects will be a years-long growth cycle.
The index includes 21 stocks that for the most part don't interest us because most of the networking equipment and semiconductor companies margins tend to get squeezed by the big players such as APPL. Its hard to over thing this play and why not just go with the big boy benefiting from the theme. Index list by sector:

Smartphones
Apple - AAPL
Google - GOOG
Research in Motion - RIMM
Palm - PALM

Telecom Equipment
ADC Telecom - ADCT
Starent Networks - STAR
Cisco Systems - CSCO
Ciena - CIEN
Tellabs - TLAB
Tekelec - TKLC
Commscope - CTV

Handset Components
Qualcomm - QCOM
Broadcom - BRCM
RF Micro Devices - RFMD
Skyworks Solutions - SKWS
ON Semiconductor - ONNN
Cypress Semi - CY
Tessera Tech - TSRA
Sandisk - SNDK
NetLogic - NETL
Xilinx - XLNX


Its a theme that Stone Fox Capital has backed with AAPL being one of the largest positions in the Growth and Hedged Growth portfolios this year. Also, Alvarion (ALVR) is a large position in the Growth portfolio that is highly reliant on the mobile internet theme though Cramer doesn't include it in the index. Guess they aren't has highly tied to the smartphone revolution, but still they are part of the revolution to make internet access mobile.

As far as the stocks, we're not overly familiar with some of the equipment and component companies, but for the most part we don't find the same level of value in these stocks as other sectors that haven't rebounded completely from the crisis. This sector would likely be considered cheap on historical terms, but not cheap for this period. Some of the more intriguing stocks like XLNX and ONNN already have PE multiples for next year in the 15-18 range. The estimates may turn out to be horribly low, but on a relative basis I'm going to just stick with AAPL and ALVR for now. Our portfolios are also heavily invested in Baidu (BIDU) and Riverbed Technology (RVBD) that leaves very little room for more tech exposure.

Fast Money Halftime Negativity Fest 2

Watching the Fast Money Halftime show on CNBC today reminds me of how bearish traders still are these days. Back on May 13th, we hightlighted the same scenario [Fast Money Halftime Negativity Fest]. The SP500 was around 880 at that point and we all know how it rocketed to 1,080 just this week or roughly 200 points.

In a normal day after a few days of selloffs, traders would be going back and forth on whether to buy the pullback or sell more. Today though they are all jumping on the notion that this is the beginning of the big reversal and correction. All of this prior to the market even breaking the 20EMA or its uptrend. Seems more like signs of people that want or expect a certain action to take place and they are trying to will it to be. Its pretty surprising because all of these traders should be more on board with the trend of 3-4% drops to the 20EMA finding support. Spots where buying as been very profitable. None of that here and that makes me more bullish. We've been stronger supportors of the 'melt up' market concept and this just backs up our claims. Most of the market continues to look the wrong direction expecting a huge correction even though its not typical of a recovery market.

Continue to buy the dips! Watch this video if you want to be depressed. Have fun counting all the reasons this is the top. Pete Najarian made the best comment to the tune bells don't go off at the tops and at the bottoms. To me all these would be bells so.....

  1. Key reversal on Wed - higher high closed at lower low
  2. Stocks trading at pre-Lehman levels (mind you not the market but just a few stocks)
  3. Large amount of IPOs (mind you mostly just firms paying off debt)
  4. ????








Tuesday, September 22, 2009

Has Local.com Turned the Corner with Top 10 Search Ranking?

After reporting Q2 numbers that we'll discuss in more detail later, Local.com (LOCM) showed signs of actually starting to turn the corner from a serial disappointing money loser to a fast growing money maker. Then on Sept 14th, Nielsen reported that little $60M market cap Local.com made the Top 10 Search Providers for August. Its hard to tell if this really adds up to much considering they just grew with the market at 2.9% MOM, but the extra attention might just help. Local.com has always had an interesting concept of delivering great local internet searches at an easy to remember website. Unfortunately they've never caught the attention of the mass market and especially advertisers. Making these Top 10 lists might help spur on media attention and with just 0.2% of the market share they've got plenty of room for gaining share not to mention growing with the market.


Table 1: Top 10 Search Providers for August 2009, Ranked by Searches (U.S.)


Provider

Searches
(000)

M-O-M %
Growth

Share of
Searches

Total 10,812,734 2.9% 100.0%
Google Search 6,986,580 2.6% 64.6%
Yahoo! Search 1,726,060 -4.2% 16.0%
MSN/Windows Live/Bing Search 1,156,415 22.1% 10.7%
AOL Search 333,231 1.8% 3.1%
Ask.com Search 186,270 2.9% 1.7%
My Web Search 128,432 0.5% 1.2%
Comcast Search 50,328 -21.6% 0.5%
Yellow Pages Search 37,923 2.7% 0.4%
NexTag Search 31,830 0.4% 0.3%
Local.com Search 16,314 2.9% 0.2%

Source: Nielsen MegaView Search


Just making the Top 10 alone isn't cause to buy the stock. LOCM has always been high on promise and low on profits. Or make that huge losses with promises of profits just around the corner. Then came the shock of the Q2 earnings report. Low and behold, LOCM actually made a pretty decent Adjusted Net Income of nearly $1M or $0.06 per share. Its a little surprising that most analysts following this company use the GAAP number which was reported at a $.02 loss. This number includes non-cash charges such as amortization of intangibles and stock based compensation. Its very common and appropriate in the tech world to exclude these non cash charges. Now I'm more inclined to include the depreciation charges which best I can tell amount to $160K per quarter. In that case, LOCM still made $800K or a nearly 6% profit margin. If they can continue to grow the search business and increase the RKV (revenue per thousand visitors) as they did in Q2 by 16% QOQ those profits and margins will continue to soar. The Q2 income number was $.14 better then Q1 afterall.

The forecast for Q3 was even more encouraging with estimates of a 5% sequential revenue gain and based on these search rankings for August I'd guess that those gains will be easily surpassed. After being a serial disappointer the last several years, LOCM seems to have finally caught on to the UPOD (under promise, over deliver) concept. They've forecasted a Net Adjusted Income of $1M+ and $0.07+. Being able to exceed these estimates will surely spur the stock much higher.

Right now analysts forecast a $0.02 GAAP loss or equal to the Q2 amount. Every indication is that they'll easily beat that number, but I'm still concerned that the general market for some reason focuses on this number instead of the more important non cash number. LOCM is finally generating enough cash that they actually bought back shares during the first half of this year. Maybe it was only 131K shares for roughly $335K, but it was pretty bold to spend precious cash in such a difficult market.

Using the Non-GAAP numbers which is standard in the industry, LOCM is likely to earn greater then $0.40 in 2010. This number could easily expand if they are able to continue growing the RKV and organic traffic numbers. The organic traffic numbers were up 61% YOY and are very key to profit margins. In the past, LOCM only seemed able to grow based on paid listings where they got traffic from other sites and in many cases had a negative ROI. Continuing to grow these numbers would rapidly expand margins and hence the stock price.

Search leader Google (GOOG) trades at 8x revenue and has long suggested that local search is where future high margin growth exists. If local.com can continue to grow and gain marketshare they could easily expand margins and multiples. Currently trading at just roughly 1x revenue is incredibly low considering their inclusion in the Top 10 rankings. It can sometimes be a fools game with these microcap stocks because a giant like GOOG or Yahoo! (YHOO) can quickly easily target them for extinction so investing in such a stock requires focusing on the results on a daily basis. Its a high risk/high reward scenario not for the faint of heart.

The good news for anybody buying now is that the good news of the last 3-6 months has all but been ignored. LOCM appears to have turned the corner and only trading at 1x revenue with positive cash flow somewhat limits the downside. The Q3 earning report will be very crucial for proving the trend is for real.


Performance Review: Hedged Growth Up 20%+ as First Year Comes to a Close

Stone Fox Capital originally started the Hedged Growth Portfolio on 10/1/08 to provide a more structured asset allocation that included at least 1/3 of the portfolio to be either short or in cash. This portfolio has performed above our wildest dreams having an annualized return of over 28.5%. Even considering that the tracking vehicle of marketocrazy.com doesn't allow short sells so the only instruments for executing that strategy are short ETFs.

What is remarkable about this portfolio is that it has kept up with the market with only 2/3s of the portfolio long the last 6 plus months. Stone Fox Capital has been right on to have most of that potential short exposure in cash during this period. We also we're pretty fortunate to have a decent amount of short exposure during the crash back in Oct and Nov of last year.

Some of the largest positions such as Apple (AAPl), CSX (CSX) and Baidu (BIDU) have had exceptional returns. In the case of BIDU, the stock is up 211% in this portfolio. Thats the beauty of this portfolio. It has such stable dividend paying stocks such as Bristol-Myers (BMY) and Verizon to bring in cash and stability, but then it also has the ability for growth in a stock like BIDU. That flexibility has helped this portfolio greatly outperform the market over the last 12 months in what has been a very wild time period.

With just 6 trading days left in Sept, this portfolio is up 23% intraday since inception while the market is down roughly 5%. Now if we can only repeat that performance over the next 12 months.


As always, you can follow this portfolio on a daily basis at marketocracy.com.


RETURNS
Last Week 1.77%
Last Month 4.40%
Last 3 Months 15.66%
Last 6 Months 29.03%
Last 12 Months N/A
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 20.88%
(Annualized) 21.46%
S&P500 RETURNS
Last Week 1.48%
Last Month 3.91%
Last 3 Months 19.57%
Last 6 Months 32.30%
Last 12 Months N/A
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception -5.87%
(Annualized) -6.01%
RETURNS VS S&P500
Last Week 0.29%
Last Month 0.49%
Last 3 Months -3.92%
Last 6 Months -3.27%
Last 12 Months N/A
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 26.75%
(Annualized) 27.48%

Monday, September 21, 2009

Stat of the Day: Leading Economic Indicators Hit 8.9% Annual Rate

For the 5th month in a row, the Leading Economic Indicators soared higher. All this time, the leading economists have dismissed the rally in the markets. Now the LEIs have reached a point of 8.9% annual growth over the last 6 months and still most of the 'experts' commenting about the numbers only suggest that the recession is over, but the recovery is questionable. The data suggests otherwise and its foolish to base your decision on the Lagging Indicators which seems to be the typical error.

  • The Conference Board Leading Economic Index™ (LEI)for theU.S. increased 0.6 percent in August, following a 0.9 percent gain in July, and a 0.8 percent rise in June.
  • "Since reaching a peak in July 2007, the LEI fell for twenty months – the longest downtrend since the mid 1970s – but it has been rising since April and its gains have become very widespread," says Ataman Ozyildirim, Economist at The Conference Board. "The six-month growth rate of the LEI continues to accelerate. At the same time, the downtrend in the coincident economic index, measuring current economic activity, seems to be stabilizing, with the index flat so far this quarter."
  • Says Ken Goldstein, Economist at The Conference Board: "The LEI has risen for five consecutive months and the coincident economic index has stopped falling. Taken together, this suggests that the recession is bottoming out. These numbers are consistent with the view that after a very severe downturn, a recovery is very near. But, the intensity and pattern of that recovery is more uncertain."

Some interesting reading from a Yahoo! Finance report:

  • The recession's end "is no longer a source of heated discussion ... but whether or not the economy can keep grinding forward (and at what speed) is still a big question mark," Jennifer Lee, an economist at BMO Capital Markets, wrote in a note to clients Monday.
  • A measure of supplier deliveries, rising stock prices, an increase in consumer expectations, a jump in building permits and the "interest rate spread" boosted the index in August.
  • The leading indicators index jumped 4.4 percent -- an 8.9 percent annual rate -- in the six months through August. That's the fastest six-month growth rate since March 2004. The increase in the six months through July was 3.3 percent. (This is a sign that the 6 month and annual rate could accelerate even more)

Sunday, September 20, 2009

Merger of Genesis Lease and AerCap

This expected merger was announced on Friday morning. Its expected to create the largest independent airplane lessor in the world with a market cap just over $1B. Its also expected to create a serious increases to the 2010 EPS estimates for Genesis Lease (GLS) shareholders per slide 9 of the merger presentation. The estimate goes from $0.77 to $1.75. That has to be the largest increase Stone Fox Capital has ever seen on a merger announcement. At the same time it also enhances the Leasing EPS for AerCap (AER) slightly. This is important because analysts and investors typically prefer a steady recurring revenue stream over the lumpy earnings that AER typically generates from airplane and engine sales. Adding in those earnings give the potential for an EPS total closer to $2 for 2010.

Whats amazing is that the stock for AER trades sub $9 at the close. This for a stock expected to earn $2 in 2009 and 2010. So why does the stock trade at a sub 5 PE? Its really difficult to answer that question. Most message boards like Yahoo Finance and others are devoid of any interest on the stock. The airplane leasing industry faced serious pressure in 2008 and early 2009 due to fears of customers (traditionally weak airlines) going bankrupt and thoughts that the lessors would break loan covenants and face issues with refinancing loans. The surprising fact has been the ability of airlines to almost instantly re-lease planes at rates similar in value to the bankrupt lease usually signed during the bull market and the fact that they had very few relative planes to re-lease in the first place.

The emerging market demand for leased planes has been resilient. That should be encouraging to any investor in this sector. It should help fuel the steady increase in share price in the sector as well.

So why does AER trade at such a low PE? Our main speculation is that the sector and more specifically AER is just unknown and understood. If anything, this buyout of GLS elevates the concept of this stock to the market. Once underfollowed, it should now garner a lot more attention from analysts and institutional investors. Investors that will increasing question why a company expected to have recurring earnings of $1.75 next year is trading at sub $9. For the most part stocks like AER and GLS have traded more like financial instruments then global growth concepts and maybe this will revert now. In a lot of cases banks and insurance companies have soared of late while those stocks still have uncertain balance sheets with massive amounts of toxic assets, AER doesn't face those same risks.

AER also has growth opportunities with 80+ most pre-leased planes already on order from Airbus. This should provide future growth to 2010 estimates as well. Not to mention that the combined scale of these two companies could provide additional opportunities for cherry picking some distressed plane sales.

And to all those investors that think GLS shareholders got the raw end of the deal since it's book value is substantially higher then the initial offer price.

John McMahon, Chairman & CEO of Genesis added, "Genesis' board and management are committed to enhancing shareholder value. This transaction, through the solid profitability and strong cash flows of Genesis, combined with AerCap's scale and order book, which is nearly all placed, provides our shareholders with a significant and immediate premium to recent stock trading levels and positions them to participate in enhanced earnings and business growth in the future."

It's very clear after doing some low level analysis that not only is AER trading at least 50% below value of a more normal 10x eps or $18. It's also clear that GLS shareholders got one heck of a deal in the process. One share of AER is clearly worth a lot more then 1 share of GLS.

Not long after putting this together I see that the Wall Street Journal has come out with an article about the merger and the potential for the sector heating up. This is the exact type of news that I expect to get AER closer to a resonable valuation. It'll just take a few fund managers reading this article to realize the value in this stock and sector.

Thursday, September 17, 2009

Performance Review: Growth Portfolio Positive

The Growth Portfolio has now turned positive since the tracking was launched on June 19th last year. During this time period the SP500 is still down nearly 18%. On a annualized basis the portfolio is now outperforming by over 17%.

Its been a very long roughly 16 months now and the total performance isn't that much to write home about, but the relative performance has been spectacular especially the last 6 months. Having survived the downturn slightly worse then the market, Stone Fox Capital has been able to pick typical fast growth companies to outshine the market lately. The Portfolio is up 95% the last 6 months.



RETURNS
Last Week 9.31%
Last Month 17.79%
Last 3 Months 29.62%
Last 6 Months 94.82%
Last 12 Months 21.03%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 2.29%
(Annualized) 1.83%
S&P500 RETURNS
Last Week 3.45%
Last Month 9.29%
Last 3 Months 16.99%
Last 6 Months 40.65%
Last 12 Months -9.54%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception -17.81%
(Annualized) -14.56%
RETURNS VS S&P500
Last Week 5.86%
Last Month 8.50%
Last 3 Months 12.63%
Last 6 Months 54.17%
Last 12 Months 30.57%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 20.10%
(Annualized) 16.39%

Foster Wheeler Upgraded by Goldman Sachs

Interesting timing by Goldman Sachs (GS) considering FWLT has nearly doubled over the last couple of months and we've already noted that its broken above key technical levels in early August when it burst above $23. Possibly time to take some profits knowing how these upgrades work. Long term though FWLT is likely to benefit big time from the push for LNG in Australia. The Gorgon Project is a huge. Stone Fox is still betting that FWLT returns to old highs in the $70s so the $41 target is meaningless especially from a company that watched the stock bounce from $23 to $34 recently without uttering a word.

Foster Wheeler (FWLT Quote) upgraded at Goldman from Neutral to Buy. Company trades at a reasonable valuation and has leverage to Australia LNG growth. $41 price target.

Stat of the Day: Philly Fed Highest Since June '07

The Philly Fed Index reported a sharp increase for Sept of 14.3 above the consensus of 8. Making this the best report since June 2007 and the first 2 month increase since October last year showing that manufacturing has completely turned the corner. The interesting notes were that inventories and hours worked continued to decline showing that even with the corner turned, pent up demand is going to be huge. Profits as well will be strong with more shipments from fewer employees.

All of this news seems bullish for the market though not somewhat bearish for employees.

Monday, September 14, 2009

Genesis Lease Confirms M&A Discussions

In a rather unusual twist, Genesis Lease (GLS) confirms that they are actually in M&A discussions backing up a earlier story today. No guarantee that it will work out, but it's surprising to see that the article was at least partially accurate. In the past it tends to work out that such articles are only half accurate. The article suggested that AerCap (AER) was in the process of buying GLS for a 40% premium or a price that would work out to $9.60. So don't be surprised if it's actually another acquirer or if the purchase price is materially different.

The deal would still be way below the $14 book value of GLS, but Stone Fox Capital has argued that since AER also trades at a similar BV discount it'd be advantageous for GLS shareholders to take the 40% bump and then participate in any AER rally. A rally likely to be quicker with the attention such a deal would bring. In addition, we suggested just less then a month ago that AER was the best investment in the airplane leasing sector: AirCap Leads the Airplane Leasing Sector.

Guess we'll see if the deal actually gets done. GLS is trading up 12% in after hours action. Anybody interested in how a similar deal worked out should check out the Tween Brands (TWB) takeover. Most investors suggested that TWB wasn't getting enough value in the deal with Dressbarn (DBRN). Marybe/maybe not but the stock has gone from trading at $5 before the deal to $6.75 the day off to over $8 now. And in that scenario, shareholders were more diluted with less potential for realizing the growth potential of TWB. In this case, I don't see the potential as diminished and hence would keep my stock and let it roll into AER tax free.

As usual, only invest because you think GLS is a huge value trading below book value and not because of a potential merger.

Betting Big on Brazil's Housing Market

Stone Fox Capital is invested heavily in Gafisa (GFA) which is a large home builder in Brazil. Brazil is a market that supposedly has a 7M deficit in housing units something that bodes well for long term demand. The below interview is with the CEO of a division that GFA now owns. Tenda is the largest low income builder and I believe that GFA owns 60% (Now if I only had time to verify).









Friday, September 11, 2009

Einhorn on Moody's

Couldn't agree with Einhorn more. The rating agencies did a horrible job and shouldn't be allowed to get away with the fruad they committed. Moody's (MCO) is one of the stocks were looking to short when the market turns. Right now we expect a huge melt up so its difficult to go short during such a strong market.

Einhorn is the famous hedge fund manager of Greenlight Capital that repeatedly told people to sell/short Lehman Brothers before they collapsed last year. His best quote in the below clip is "it wasn't a question of modeling error, it was a question of taking market share." Based on that its difficult to see how MCO is able to attract new business much less keep what they have. What executive in his right mind would tell an investor that such and such debt product is rated by Moody's. I'd laugh them out of the room. At the least, they'll have to provide some other 'independent' source of ratings.

This is definitely the type of stock we'd short in our Hedged Growth Portfolio. Unfortunately marketocrazy.com doesn't allow shorting so we can't utilize this idea there.





Savient Pharma Upgraded to $25

Savient Pharma (SVNT) has been one of our favorite biotechs this year. They are on the verge of drug approval for a gout drug that will have no competition and solves a problem that has had no cure for a long time. The stock has been weak after the FDA decided to not approve their drug after positive P3 trials due to a manufacturing issue. Its just about a no brainer for approval in that their drug provides a much needed cure regardless of some possible side effects.

Collins Stewart upgrades them on these facts. Including that a larger firm could come in and quickly wrap up the manufacturing issue and some other minor issues. The stock traded at just $14 prior to this upgrade today and continues to be an amazing bargain at these levels.

Savient Pharma: Collins Stewart believes SVNT is de-risked and attractive for any rheumatology company; tgt raised to $25 (14.21)

Collins Stewart raises their tgt to $25 from $21. Firm expects a Krystexxa approval for treatment-failure gout given the addressable C.M.C. issues in the Complete Response Letter. Firm believes SVNT is de-risked and attractive for any rheumatology company for the following reasons: 1) the CMC issues should be easily resolvable; 2) the draft label of "chronic gout patients who have failed to normalize serum uric acid and whose signs and symptoms are inadequately controlled by xanthine oxidase inhibitors at maximally tolerated doses" is broad, has no black box warnings and firm believes includes tophi; 3) the REMS is benign; and 4) few post-P3 pre-launch biologics exist. Firm models for ~7K U.S. patients (~19K (prev. ~18K) eligible-TFG patients) on Krystexxa in 2013, resulting in a ~$700 mln worldwide opportunity at peak at $50K/patient/year. Based on firm's conservative assumptions, they derive a take-out value of $25 -$35/share.

From flyonthewall:

Savient target raised to $25 from $21 at Collins Stewart
Collins Stewart expects Saveint's Krystexxa to receive approval for treatment-failure gout and thinks the company is an attractive acquisition candidate for any rheumatology company. The firm raised its target on shares and reiterates a Buy rating on the stock. :theflyonthewall

Disappointing Moves in Riverbed Systems

Riverbed (RVBD) has been stuck in a range between $19 and $20 ever since they reported a supposedly disappointing earnings report for Q2. The main reason the report was disappointing is that the hype in the analyst community had gotten pretty fevor pitched that RVBD would post a much better then expected Q. Instead they printed a below expectations revenue number and the stock quickly swooned from $26. Since then the market has been busy chasing the trash in the market and RVBD has been discarded as trash. With a healthy balance sheet and strong earnings potential they will be rediscovered.

RVBD is one of the few companies that has shown growth during this horrible economy so its amazing that the market has so quickly forgotten them. Not holding $20 today was a pretty bearish signal and the chart doesn't look very impressive. We think its hardly because RVBD has any issues, but rather the market chasing all the low quality stocks beaten up so bad last year. Expect that to turn back in favor of RVBD soon. Once the technicals change you'll want to jump back on this stock.

The only thing negative about the news in RVBD is that we found out that they weren't immune to the credit crunch. Customers might be deploying their equipment more then last year, but the rate of growth has slowed. So if anything it should be picking back up with the economy. Companies will still have the same desires to cut costs, but now they'll have the financial flexibility to purchase RVBD equipment.

Buy RVBD once the technicals turn.


Disclosure: Long RVBD in client/personal accounts.

Wednesday, September 9, 2009

LIZ Sees Trough in Margins

Speaking at a Gloldman Sachs conference today, Liz Claiborne (LIZ) CEO claimed that they've seen a trough in both gross and operating margins. This is a very encouraging sign that a turnaround is finally at hand. LIZ finally has inventories under control and can sell new items without huge discounts.

The CEO did throw in a nugget that the new Mizrahi line at the namesake line isn't selling that well at department stores. Would be nice to get more color on this as department sales have been weak everywhere. If the margins are increasing, then at least the concept as a whole is doing better. After all inventories and margins are sometimes more important then fashion. Still, Stone Fox Capital was looking for a homerun from this stock due to the Mizrahi refresh. If this doesn't materialize the stock will still soar, but not nearly as high.

The CEO also eliminated any fears over bankruptcy potential because of hiring a turnaround expert. Since the chart confirms the CEO statements we'll stand behind this stock. CEOs have a tendency to tell markets what they want to hear, but charts usually don't lie. With LIZ bouncing right off the 20EMA it looks very solid technically while the financials turn around.

Per the Dow Jones story linked in at E*Trade:

  • "For us, we are at a period of true trough performance in margin and I'm speaking about gross margin and overall operating profit margin," Chief Executive Bill McComb said Wednesday, adding that better margins are "very gettable" for the women's apparel retailer.
  • Still, products have to carry appeal, and McComb said the redesign of the namesake Liz Claiborne brand has proved to be somewhat of a disappointment in department stores.
  • The Isaac Mizrahi-designed line is lingering on shelves. Merchants have said it has too much emphasis on color and fashion, "stunning" feedback since the line has long been criticized as having gone stale, McComb said. Sales progress is better at lower-end department stores and at it own outlets, although at the latter there is still "a pile of excess inventory from the old line," McComb said.
Goldman Sachs analyst is bullish:
  • "While righting the ship will remain a challenge, we do see some light at the end of the tunnel which makes Liz's share a potentially attractive play," said Rowbotham. Improving fourth-quarter gross margins, aggressive cost-reduction efforts, better trends at Liz Claiborne outlet stores and easier same-store sales comparisons "all point to a potentially better 2010 outlook," he said.

Cramer Agrees WIth Our Melt Up Theory

On Mad Money last night Cramer basically backed up our theory of a huge melt up in the markets to above 1,200. It was just last Wednesday that we wrote our theory and we had originally brought up the idea over a month ago. The comments on SeekingAlpha.com were pretty negative regarding the concept of the market moving 1,200+. Hmm...maybe we'll get the last laugh.

He uses chart analysis from Dan Fitzpatrick so its backed my more then just his crazy ideas. Fitzpatrick even thinks a move to 1,272 is very possible. See below for the video and his 6 reasons to back up the chart:

Cramer is taking a deep dive into a graphic representation of where the market can go, courtesy of Dan Fitzpatrick of RealMoney.com. The technicals point to a "head and shoulders" pattern and just about any way you look at these charts, the S&P looks to go to 1200. Based on the furthest distance from its 200-day moving average, Fitzpatrick also thinks the S&P could go to 1272, which is a 24% move. And at a minimum he believes chartists will start seeing 1200 as the level where they call a top in the S&P, which is over 17% higher than where we are right now.


First: Takeovers. In one of the most traditionally unactive times of the year - the week before Labor Day - there were no fewer than four major takeovers and takeover attempts. This is extremely notable, as Cramer points out that these kind of deals don't happen unless stocks are cheaper, not more expensive than we think.

Second: Money in. The market has been flooded with money coming in from the sidelines as people are beginning to move away from the outpouring of capital from the markets that started with Lehman Brothers. Cramer points out that this will result in better year-over-year earnings comparisons, which will energize the public to put more money into the market.

Third: Leadership is broadening. The market needs generals, says Cramer, who reminds that this rally started six months ago with oil, techs and banks leading the way. Now we have health care and transports that are picking up, along with confirmation that worldwide economic activity is picking up, thanks to positive numbers from freight and packaging companies. "This kind of broad-based leadership is a huge positive," says Cramer.

Fourth: The firings have stopped. Although hiring hasn't necessarily picked up, the last few unemployment numbers show that most of the people who are going to be laid off have already been laid off. Cramer sees this as a prelude to a new wave of economic growth and that the recovery may not be as jobless as everyone thinks.

Fifth: The housing bottom. Cramer continues to see confirmation that his call of the June 30th bottom was right on target, as existing home sales, new home sales, permits and pending sales all bottomed this summer. He also points out that other real estate owned by banks is also stabilizing and any losses will remain contained. This is confirmed by the fact that commercial real estate stocks and real estate investment trusts are all currently on the upswing and the "impending" commercial real estate collapse may no be as certain as some people are making it out to be.

Sixth and last: the combination of lowering credit card losses and positive retail numbers. Places as diverse as Tiffany [TIF 37.43 0.42 (+1.13%) ], Coach [COH 30.835 0.415 (+1.36%) ] and Williams Sonoma [WSM 19.02 -0.12 (-0.63%) ] as well as Kohl’s [KSS 56.20 0.62 (+1.12%) ], Aeropostale [ARO 42.02 0.25 (+0.6%) ], Jones Apparel [JNY 16.31 0.72 (+4.62%) ] and Gap [GPS 21.70 0.10 (+0.46%) ] have all shown that back to school was a success. The back-to-school season was not as bad as many people had made it out to be, so these stocks have also been relatively and significantly depressed.

















Tuesday, September 8, 2009

Foster Wheeler Breaking Out

With the $31+ close, FWLT has officially broken out. Nice analyst call with a $35 target and a contract in Poland. FWLT remains one of our favorite plays as the developing world continues to need new energy power generation and construction projects. We look for FWLT to easily surpass that target this year with huge projects in Australia, Middle East, and Asia to be awarded now that the global economy is back growing.

Thursday, September 3, 2009

Finally a Portfolio Manager that gets Leading Indicators

Stone Fox Capital has been literally pounding the table that the leading indicators predict substantial growth in the the US economy. While everybody else is floundering around about the August Jobs Report tomorrow Daniel Frishberg from Laffer Frishberg is on our side that it doesn't really matter as we already know the basic data sets used to calculate the number. We also know the number can be lumpy and that the trend is definitely up. The leading indicators ultimately matters. He's looking for an ultimate run to 1,150 with a possible upshoot following our 'melt up' scenario though he expects (kinda sounds like hopes) for a correction first.


















Interview from July on CNBC Asia basically highlighting the same scenario.












Buy a Farm and a Shotgun

Interesting interview as always with Dr. Marc Faber. I'd agree with the buying a farm, but I'm not so sure about the shotgun or even machine gun that he suggests as an upgrade. The Obama Administration has backed away from alot of their plans, but if the market 'melts up' as we think it might empower him to move forward with his socialistic plans such as taxing the wealthy. Still I'm basically in agreement with him that investment areas outside the US will do the best.


Wednesday, September 2, 2009

Net Payout Yield Focus: BP (BP)

With the crazy market of the last year, it's been difficult to focus on the Net Payout Yield stocks in our portfolios. The Net Payout Yield is the combination of the payout from a dividend and any stock buyback divided by the market cap of a stock. A lot of mutual funds, ETFs, and advisors focus on the values of investing in dividends, but not many focus on companies that buyback stock. Stock buybacks are more efficient ways for increasing the value of your portfolio, but more people seem to like getting the cash directly even if its less tax efficient. While getting cash can be important to clients, the total return usually rules investment decisions and the Net Payout Yield has proven to be a much better investing philosophy. Unfortunately this last year has made it difficult to pick such companies with so many of them cutting back stock buybacks to conserve liquidity and many financials eliminating dividends.

One of the better investments in our Net Payout Yield portfolio has been BP with it's 6.5% yield. BP has one of the higher yields in the portfolio yet they've also historically bought back stock giving them a net yield that has topped 10%. One of the reasons to focus on BP today is because they made a huge find of over 3 billion barrels of oil in the Gulf of Mexico. BP has severely lacked in its exploration program of late and this is encouraging news. Not only will it add 1B barrels to its proven reserves, but this also leads to the possibility of more discoveries in the gulf area where they hold a bunch of leases.

In general though, this portfolio doesn't focus as much on the prospects of the company as much as we let the yields draw the picture for us. After all, companies the size of BP don't pay out 10% yields if they lack the cash and cash flow prospects of strong long term investments. Exxon (XOM) is another one of the options in this sector. In this case, their lack of exploration and the fact that we wanted more dividends in the portfolio led us to choose BP over XOM. XOM though has a tremendous yield of 11.4% with their 9% buyback and 2.4% dividend.

History has told us that these type of stocks typically out perform the market and dividend only paying companies. Luckily for us most people just focus on dividends so that gives us a leg up. BP will be one of the stocks heavily invested in dividend portfolios, but its overlooked for its total payback.

Will the Market Melt Up?

You can't watch a clip on CNBC or Bloomberg or read an article on numerous websites without somebody talking about a correction in September. Even SeekingAlpha has a focus on buying gold to protect from the 'inevitable' downside. Guess the market got that start on the 1st day with the SP500 down over 2% and then over 0.5% soon after the bell on the 2nd day. Every poll I see the pollsters expect a much larger chance of a large drop rather then a large gain in September. The action on the first just seems overly convenient to suck in the shorts that have been expecting a huge sell off and Monday was there confirmation. But is that what will actually play out?

Watching Fast Money last night I was appalled and then delighted to see that they featured the PermaBear trio of David Rosenberg, Peter Schiff, and Roubini. One decent down day and they pull all the stops on the negative side. Though I do agree with Schiff in that investing outside the US will see better returns he doesn't come off as a bullish investor since he spends so much time hating on the US. Wish he would spend more TV time focusing on the investments he likes outside the US. It almost seems as if everybody on the show has dismissed the possibility of a positive market. That seems almost absurd considering that the average loss of o.9% in September is much better then the 2.2% loss on the first day. The average September would suggest investing now gives you a 1.3% gain the rest of the month.

As we reported back on July 28th in our Chart of the Day [Inverted Head and Shoulders], the huge drop back in September of last year is perfectly set up for a rally back to those levels above 1,200 or 12,000 on the DOW. Very few people expect a rally in this the worst trading month in the history of the markets, but isn't that exactly when it happens. When nobody expects it (or at least very few)?

The economic news of late has been extremely bullish whether it was Intel boosting revenue guidance (wasn't everybody just saying that we can't recover without revenue growth?), or the ISM Manufacturing blowing out estimates to show growth for the first time in 19 months, or more good signs that housing has truly bottomed. Yet the market has sold off for a whopping 3 days and the first question out of every host is whether this is the start of the correction. How about is this a buying opportunity? It is concerning that the market hasn't jumped on this positive data, but its not like the market is down anything material since we're still higher then the August lows around 980. Since the losses so far can be counted as no more then mild, healthy profit taking why is everybody so bearish?

To us it adds up more fuel to the argument that the market could 'Melt Up' as easily as it melted down last year. Other then a few random thoughts on this subject, its very under followed even though the graphs suggest that if the market holds the 980 to 1,000 level it doesn't have much resistance until back in the 1,200 level.

Just as I was wrapping up this report, CNBC had the Trader Talk with Art Cashin and its amazing how the tone was so negative. Rumors about this bank raising capital, or this financial collapse, or some huge commercial real estate mega default. What a coniencidence for that to happen in September. Where there is smoke there can be a fire smoldering, but I just don't buy it. It was more just weak hands selling on fear showing that the market is still too pessimistic. If it keeps up it might become self fulfilling and that is the biggest threat at this point. All economic indicators suggest the rally will continue along with a vastly improving economy. All the leading indicators continue to soar while lagging indicators continue to well lag. Anybody find it ironic that the bears focus solely on unemployment? Don't they sound desperate hanging onto a known fact that unemployment sometimes doesn't bottom until months after the economy bottoms. First Trust had a research report that its usually not until GDP grows at 3% that unemployment perks up. What will the bears do when history repeats?

We'll continue to support the idea that the markets will melt up as the fear of the horrible Sept/Oct period subsides and the bears run out of ammunition. As that happens the technicals will take over and markets could easily rally 20-30% with little resistance until 1,200+. The following table from CNBC has a good summary of the values for an assortment of markets and economic data over the last year. For everybody talking about the SP500 soaring some 50% from the bottom, people need to understand that it now stands some 22% below levels just a year ago (and that level was already down 20% from the highs). Does the rally seem that big when considering the bigger picture?