Monday, November 30, 2009

Stat of the Day: Chicago PMI Surprises to the Upside

While everybody is focused on the relatively small issue in Dubai (it's a lot smaller then AIG after all), the Chicago PMI reported a fantastic number at 56.1 today. New orders remained strong and inventories were weak. Strong combination for future growth. The estimates were around 53 with expectations of a drop from 54.2 last month. So the number was up with expectations for a mild drop.

The Chicago PMI number bodes well for the ISM Manufacturing Index to be released on Tuesday and the ISM non-Manufacturing number on Thursday.

Highlights

Gains in new orders and a slowing in deliveries hightlight November's Chicago purchasers' report, offsetting further losses in employment and further draws in inventories. Chicgao's headline index rose nearly 2 points to 56.1 to indicate a month-to-month increase in the pace of overalll business activity in the area. New orders rose 1.4 points to a very strong 62.8, a plus-60 level that, because of its strength, will be hard to match in the coming months. Supplier deliveries rose 6.7 points to 57.4 to indicate a significant slowing in deliveries and congestion in the supply chain. Production, at 56.1, rose in the month but at a slower pace than October's very strong 63.9. Employment, at 41.9, indicates substantial month-to-month contraction but at a less severe pace than October's 38.3 level. Prices paid showed a mild month-to-month increase at 52.6, a result that raises no concern.



This graph probably highlights the current market better then any other. The Chicago PMI is now at levels not seen even prior to the financial implosion. If that isn't a 'V' then I don't know what it would be?


Tuesday, November 24, 2009

Russell 2000 Weakness

Since late September, the Russell 2000 has been particularly weak. The index of small cap stocks made a slightly higher high in mid October, but hasn't come close to the 625 high in November while the S&P500 continues to trade above the Sept/Oct levels.

Part of the reason could be that a lot of the smaller cap stocks are more domestic plays and the more international exposure you have the better. Its also been the case that financial stocks such as regional banks have been weak during that period. Regardless its led our Growth Portfolio to underperform the last month after a huge outperformance this year - up nearly 70%.

A lot of the smaller investments such as Liz Claiborne (LIZ) have been hit hard after surging. LIZ is down from a high around $7.5 all the way to $4.5. Many other examples exist as well.

Hard to explain why the smaller stocks have been so weak with the world economy showing signs of growth. They should do better in a recovering economy. Maybe people were just fearful they'd run too far, too fast. Though we've got examples of stocks like AerCap (AER) that trades at a PE of 4. Hard to argue why that stock would remain at such a compressed multiple no matter how far it has run since the bottom. Most of the small caps fell too far, too fast as well.

For now we're keeping our bets on the Russell 2000 sector. In most cases, they still appear to have the cheapest valuations even considering the YTD gains and any risk of further economic risk.


Monday, November 23, 2009

Coal Companies Wrongfully Smashed by China Imports Data

Coal companies were hit hard intraday becuase of supposed weak coal import data from China. Guess the data was negative or positive depending on how one viewed it. On one hand the imports were down 11% from September. On the other hand they were up 220% over last year. Apparently the market was looking for a number similar to Septembers. Regardless the YOY gains are enormous and the month to month numbers are bound to fluctuate. The trend still appears for bullish for longs.

Companies that we like such as Alpha Natural Resources (ANR) and the new IPO Cloud Peak Energy (CLD) were all hit hard today especially in comparison to the strong gains in the market. ANR was down 5% from its high around the opening bell.

  • U.S. coal mining shares fell on Monday after data showed China's coal imports dropped 11 percent in the last month, even though exporters expect a booming market in the Pacific region for the next few years.
  • Indeed, the latest official Chinese customs data showed coal imports rose 219.5 percent from a year earlier to 11.14 million tonnes in October.
  • But the October volume was 11.2 percent lower than in September, Reuters calculation showed. China's coal imports hit a record high of 16.07 million tonnes in June.
  • Just this month, Peabody Energy (BTU.N) Chief Executive Greg Boyce said he expects seaborne coal trade in the Pacific region to grow by more than 7 percent annually for several years, underpinned by robust demand from China and India.
  • China began importing huge volumes of coal due to the shutdown of many unsafe mines in the country.
The last point is crucial for the coal sector as oddly just this weekend China had a deadly explosion at a mine that has killed over 100 miners. This tragedy further highlights the safety issues at mines in China that should've sent US miners soaring. Focusing on October data seems very backwards looking.

  • The death toll from China’s worst coal-mine disaster in almost two years rose to 104 as authorities criticized safety lapses and dismissed senior management of the pit in the country’s northeast.

Stay long and strong as this was a massive buying opportunity. The trend didn't change because of this report and should've been further enhanced by the safety issues in China pushing them more towards imports.

Atwoods Oceanics Reports Solid Results

Atwoods Oceanics (ATW) as usual posted their normal earnings beat. ATW is a semi deep water focused oil/gas drilling firm. Earnings were down from the solid $1.16 last year, but they did report strong 15% YOY earnings growth for fiscal 2009. Not bad for a stock trading at roughly 10x earnings. Now with oil back around $80, the demand for their services appears to be picking up as evidenced by a couple of recent contracts. Earnings likely bottomed out this Q and analysts expect earnings of at least $4.04 for fiscal 2010. Look for earnings to continue rising with the improved demand environment and new builds on the horizon.


4:59PM Atwood Oceanics beats by $0.06, beats on revs (ATW) 37.96 +0.97 : Reports Q4 (Sep) earnings of $0.75 per share, $0.06 better than the First Call consensus of $0.69; revenues fell 18.5% year/year to $131 mln vs the $128.4 mln consensus.

Sunday, November 22, 2009

Future Stat of the Week: Weekly Jobless Claims Again

Just two weeks ago, Stone Fox Capital talked about the importance of a weekly jobless claims figure below 500K. The number didn't make it reporting in at 505K (502K originally), but that is where the key of understanding the future is a lot of times more important then the number reported.

On Wednesday, the consensus estimate for Weekly Jobless Claims by Bloomberg is 495K. The low estimate is an incredible 460K with the high only 500K which would happen on its own to be a low for this cycle. So while the market sweated the number reported last Thursday, it was without doubt that the next sequence of numbers would be lower and possibly much lower just the next week. Don't fight the trend by sweating weekly nuances. Especially considering we're most likely to see sub-400K numbers before the trend even becomes a question.


Released on 11/25/2009 8:30:00 AM For wk11/21, 2009

PriorConsensusConsensus Range
New Claims - Level505 K495 K460 K to 500 K

Friday, November 20, 2009

Buying Cloud Peak While it Trades in the Valley

The Cloud Peak Energy IPO (CLD) priced last night at $15 which was below the original range of $16-18. Very perplexing considering the commodities sector and especially coal stocks have been very hot of late. Then Reuters published some analyst comments that made us more bullish. Basically the analysts are concerned that the proceeds are going back to Rio Tinto (RTP) and that the deal was overpriced and coal demand is uncertain. Huh? Are they serious? Why has Peabody Energy (BTU) and Massey Energy (MEE) rallied so hard lately?

This really seems like Wall St playing games with a forced seller. RTP needs the money to reduce it's debt load. CLD is clearly not overvalued as both BTU and MEE sport PEs in the 20s while CLD starts in the 7-8 range. If anything CLD is extremely undervalued.

Gillette, Wyoming-based Cloud Peak raised about $459 million but almost all of the proceeds will go to Rio Tinto, which will retain a 48.3 percent stake in Cloud Peak.

Rio Tinto is saddled with debt stemming from its 2007 acquisition of Canadian aluminum maker Alcan.

"There's investor push-back because it's (money) not going back to the company and it's not for growth. It's just a Rio Tinto bailout," said IPOdesktop.com president Francis Gaskins.

Analysts expressed concerns last week that Cloud Peak's IPO was overpriced relative to its peers' stocks and that it could face uncertain demand for coal.

Cloud Peak is the third largest U.S. producer of coal and owns surface mines in Wyoming and Montana.

The disappointing pricing sent Rio Tinto shares down about 1.9 percent in early trading in Australia.

Jim Cramer came out earlier this week pushing the IPO which we thought might juice the stock and force us to sit out this deal. Oddly though, maybe the 4 day delay from his show on the 16th to the opening today was enough for this fickle market to forget. A lot of people don't like Cramer, but he seems to have more sound analysis then the average analyst. Take it from him in the below clip that CLD is cheap. Oh, and don't forget Uncle Buffet just bought Burlington Northern Railroad (BNI) which happens to get a large percentage of revenue from the Powder River Basin where CLD operates.












Remember you want to buy an IPO where the seller is distressed and not where the seller is cashing out. The analysts are confused on this matter thinking they are cashing out. RTP is keeping roughly 48% of the outstanding shares to profit from any gains.


Thursday, November 19, 2009

Remaining Bullish on Sears Holdings After Q3 Earnings

Today, Sears Holdings (SHLD) reported earnings and revenue that beat estimates. Some of the more positive notes were that KMart stores had positive comps and they bought back 3.5M shares. Continuing to shrink the float at a dramatic rate leaving very few shares not owned by strong institutions.

SHLD continues to be a very cheap stock compared to the asset base. See our previous posts on the details. Everybody will come out and scream how SHLD is a big short in the $70s because they make limited amounts of money. The PE is too large.... yada, yada, yada. SHLD is extremely cheap. Period!


6:09AM Sears Hldg beats by $0.28, beats on revs (SHLD) 75.77 : Reports Q3 (Oct) loss of $0.81 per share, excluding non-recurring items, $0.28 better than the First Call consensus of ($1.09); revenues fell 4.4% year/year to $10.19 bln vs the $9.92 bln consensus. Domestic comparable store sales declined 2.3% in the aggregate for the quarter, and included an increase at Kmart of 0.5%, offset by a decline at Sears Domestic of 4.6%. The Kmart quarterly increase in comparable store sales was primarily driven by the toys and home categories, as well as the impact of assuming the operations of its footwear business from a third party effective January 2009. Declines in sales for the quarter at Sears Domestic include decreases in the home appliance, lawn & garden, tools and home electronics categories, although sales in the home appliance category declined to a lesser degree as compared to previous quarters this year. Co reports $101 million reduction in selling and administrative expenses, adjusted for significant items discussed below, during the third quarter of fiscal 2009 as compared to the same quarter in 2008. Co reports cash balances of $1.5 billion at October 31, 2009 (of which $505 million was domestic and $1 billion was at Sears Canada) as compared to $1.2 billion at November 1, 2008 and $1.3 billion at January 31, 2009.

Cloud Peak Energy IPO Piques Our Interest

Cloud Peak Energy (CLD) is an IPO spin off from Rio Tinto (RTP) that has huge potential. By all accounts, the deal will be cheap as evidently RTP needs the cash. The deal is expected to price in the $16-18 range giving it a7 PE multiple. Very odd considering the PE multiples in the 20s that most coal producers trade at currently.

CLD is completely focused on the Power River Basin (PRB) area in Wyoming and Montana. The surfice coal in the PRB is much easier to mine then the mountaintop mines in the East and especially in Central Appalachia. Also, the coal is 'cleaner' then the East because of lower sulfur amounts. Now honestly just about every other energy option is 'cleaner' then coal such as natural gas, solar, and wind. Unfortunately coal is the cheapest option and the US along with emerging economies like China and India are somewhat stuck using it so demand is expected to grow.

Another issue with the Central Appalachia is that it has declining reserves and faces regulatory issues. The government is currently suspending 79 mine applications to research environmental issues. The PRB is expected to fill the loss of production from this area going forward.

What we don't like about CLD is that it's completely tied to steam coal used for energy and lacking the much more attractive metallurgical coal used in making steel. This might somewhat impact the multiple comparisons.

Watch the roadshow presentation for all the details - Roadshow.

CLD expects to price on Thursday so anything close to the current price range is very attractive. It is hopefully being overlooked though Cramer has been pumping it all week so it seems unlikely that the market will ignore it.

Wednesday, November 18, 2009

Future Stat of the Week: October Leading Indicators

The trend is your friend and that's acutely important when dealing with economic stats. One very important stat is the Leading Economic Indicators from the Conference Board that comes out on Thursday at 9am. These numbers have been soaring the last 6 months growing at an annual rate of over 10%.

The expectations for Oct is that the indicators increased by 0.4% and First Trust estimates 0.5%. Lower then the 1% in Sept but still very solid growth.

Until this number turns negative, it's difficult to turn negative on the stock market or the economy. Especially with the indicators growing substantially and the yield curve remaining very high. That combination is a recipe for huge growth and market gains.

Monday, November 16, 2009

Trade: Sold Portion of Baidu

Sold about 25% of our Baidu (BIDU) position in the Growth and Hedged Growth portfolios this afternoon around $438. BIDU has been a huge winner in those portfolios including a 243% gainer in the Growth portfolio.

BIDU appears to be trying to set up a double top so its at risk of peaking. This is similar to a lot of other stocks as well, but we also feel that BIDU is closer to the proper valuation then most stocks. Trading at over 40x next years earnings leaves BIDU with very little multiple expansion unlike most stocks in the market. Granted, BIDU could still just grow at its growth rate of over 40% and we'd be happy investors. For now, we've just cut back on 25% of our holdings in both portfolios.

After selling, BIDU broke to a new 52 week high, but then quickly traded back down with the market. Seems to be a lot of resistance so we'll stick with locking in some gains for now.

Sears Holdings Showing Strong Relative Strength

Interesting note from Briefing.com on Sears. More signs that SHLD will survive and thrive with their huge balance sheet and asset base.

9:47AM Sears Hldg - - Relative Strength (SHLD) 78.76 +4.22 : Price displays Relative Strength as it extends Friday's upward momentum up through its October 75 highs. Next area of interest lies around the August highs near 78.00/80.00 zone.

KHD Humboldt Wedag Smashes Estimates

KHD Humboldt Wedag (KHD) smashes the estimates for Q3 reporting $.25 compared to the $.05 estimate. Revenues were also much higher at $148M versus the $102M estimate.

The markets in Russia, Eastern Europe, Asia, and Africa appear to be moving forward finally. KHD is up 17% today, but the market cap is only $350M after this jump and still less then the cash balance of $407M. KHD remains one of the cheapest emerging market plays right now. Anybody following us should already own this stock, but any price close to $11 is still very attractive. Keep an eye on the gap in the charts and load up if it gets closed.


  • revenues of $148.2 million with a net income of $7.5 million, or $ 0.25 per share on a diluted basis, which included restructuring charges. This compares to revenues in the third quarter of 2008 of $193.6 million and net income for that period of $30.8 million, or $1.01 per share on a diluted basis. Our margins, excluding special charges, for the third quarter of 2009 were 17 percent as compared to 19 percent in the third quarter of 2008.
  • balance sheet remains strong. As of September 30, 2009, our cash and cash equivalents increased to $407.4 million (as compared to $356.8 at the end of the second quarter); working capital was $312.2 million; and shareholders' equity was $279.8 million (as compared to $257.9 million at the end of the second quarter). KHD's current ratio was 1.79 and its long-term debt-to-equity ratio was 0.04.
  • Order intake for the quarter ended September 30, 2009, was $113.0 million, an increase of 39 percent from 2008. Of this total, 31 percent came from Russia and Eastern Europe, 25 percent came from Asia, 18 percent came from the Middle East, 15 percent came from Europe and 11 percent came from Africa. Of the third quarter 2009 order intake, $76.8 million came from cement and $36.2 million from coal and minerals.

Saturday, November 14, 2009

Performance Review - Net Payout Yield

The Net Payout Yield portfolio continues to excel. The portfolio is beating the S&P500 by nearly an 8% annualized gain with a sub 1 beta and less then 15% annualized turnover. So a superior gain with less risk and limited turnover.

A couple of the better performers have been the most recent additions of CSX and Agrium (AGU). Both stocks have gained more then 30% this year since being added. The portfolio is close to fully invested with only $25K in cash left. Stone Fox Capital continues to expect a year end rally to at least 1,150 or 1,200 on the S&Ps. At that point we'll likely increase the cash position.

The below returns are from marketocracy.com and contain assumed fees 1% higher then what Stone Fox charges for this type of portfolio. So the annualized returns of 6.93% would be 7.93%. Please contact us at stonefox27@ymail.com with any questions.


RETURNS
Last Week 2.69%
Last Month 2.48%
Last 3 Months 12.12%
Last 6 Months 32.38%
Last 12 Months 33.81%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception -1.49%
(Annualized) -1.16%
S&P500 RETURNS
Last Week 2.33%
Last Month 0.30%
Last 3 Months 9.47%
Last 6 Months 25.18%
Last 12 Months 23.09%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception -10.30%
(Annualized) -8.09%
RETURNS VS S&P500
Last Week 0.37%
Last Month 2.18%
Last 3 Months 2.65%
Last 6 Months 7.20%
Last 12 Months 10.71%
Last 2 Years N/A
Last 3 Years N/A
Last 5 Years N/A
Since Inception 8.81%
(Annualized) 6.93%

Friday, November 13, 2009

Kona Grill CEO Buys Shares

Not a huge surprise to see a new CEO buy into his new company. Especially a company seen as very undervalued if a turnaround takes place. It's only 22.5K shares at a little over $65K. Whats really intriguing though is to see 75K shares traded on a Friday which happens to be the highest volume since mid June.

We'll see in a few days whether is was one of the Private Equity groups adding shares now that they have a more friendly CEO and BOD. The really odd part is that the trades went off without pushing the stock up. Insiders were basically the only ones on the bid the last week or so and yet it didn't drive the price up. Hmm...

Keep an eye on this next week.

Thursday, November 12, 2009

Synovus Insider Buys

Interesting note from Investopeida on the insider buys at SNV. Whats even more interesting is that the stock has been crushed. Insiders evidently saw the Q3 write offs as a peak while outsiders saw fear of more of the same in the future. We're still sticking with the insider for now. After all the yield curve is on their side.

Synchronized Buying
Synovus Financial Corp. (NYSE:SNV) saw some very active buying in the last week by the company's CFO and one director, and steady buying from seven separate corporate insiders since September 22. The total number of shares purchased over that period was 162,500 with an average cost of roughly $3.00, for a total of approximately $488,000.

Investors Countinue to Pour Money into Bonds

According to this report from Morningstar, investors continue to pour money into fixed income funds and out of equities. Amazingly though more money has come into the market this year then was pulled out in 2008, but just about all of the gains went directly into bonds. Anybody think the retail investor is right this time?

With the economy starting to recover and interest rates at record lows, it seems like an odd time to be invested in bonds. Do people realize that bond funds lose money as interest rates rise? Bonds are the worst investment in rising rate environments. Wanna bet that the media convinced everybody that the market had come too far, too fast going into September/October. That bonds offer safety in a volatile environment. That bonds did better during the crash. Poor sheep listened again.

Also, most people don't understand the difference between a bond and a bond fund. A bond in theory doesn't lose value as long as your willing to hold till maturity. You collect the payments and don't really care about the trading value. Unless of course you've got a bond from some company about to stop paying. That's a completely different discussion though. A bond fund on the other hand is all about trading value. Its value is updated daily based on what you could sell the bonds for at the closing each day. Basically mark to market versus hold to maturity. Mark to market can be brutal as we saw last year.

Back to the details of the report:

  • Most of the money flowing into fixed income funds came from the record $3.6T in money market accounts in January. That total is now down to a still very high $3.2T.
  • Bond funds had an inflow of nearly $42B in October and $296B YTD.
  • Equity funds had a $3B outflow in October and only $12B inflows YTD.
  • Domestic equity funds were decidedly negative with net outflows YTD of over $4B.
  • International equity funds fared much better with inflows of $16B YTD.
This leaves one to wonder what happens when money flows into equities and domestic funds in particular. Even though stock markets are up huge off the lows, nobody has been convinced to join from the sidelines. As we wrote about the Yield Curve in our previous article, this might sum up why equities tend to do well in the initial phases of interest rate hikes by the fed. All this money in fixed income is likely to come flooding out as bonds begin losing value. The money must find a home with the options of either next to nothing in money market accounts or the 'promise' of big returns in equity funds (nobody tell them that they are late to the party yet again).


p.s. Just don't tell these party crashers until I have my clients money out of the market.


Disclosure: Fully invested in domestic and international stocks

The Ultimate Leading Indicator: Yield Curve

As we've been fond of pointing out this year, the leading indicators tell us where the market is going. A lot of investors have fought the trend by concentrating on lagging jobs reports or focusing on future write downs at banks. Those are all concerns, but the leading indicators have told us for months that the future is bright.

One of the best leading indicators around is the Yield Curve. Unlike most indicators whether leading or lagging this one can be followed on a daily basis and doesn't rely on random sampling or questionable government reports. The old addage of don't fight the fed is alive and well. As the chart below shows, when the Yield Curve is above 3% or the difference between the 10 yr and 90 day Treasury bills yields that is the time to buy stocks. Conversely, when the yield flattens out and becomes flat is the time to sell stocks. The negative yields in both 2000 and 2007 were huge warning signs of impending problems.

One interesting note going back to the addage of not fighting the fed. It's usually been portrayed that you shouldn't fight the Fed from day 1 of a change in rate policy. Instead its usually not until the Feds policies change the economic situation up to a year later that you should be concerned.

As we know all to well from 2007/2008 is that even while the Fed cut interest rates sending the yield curve soaring up, the market kept plummeting. Similar to what happened in 2000. The reverse happened in 2004 when the Fed started tightening or increasing rates, but the market kept going up for a couple of years. Ultimately the yield curve became negative and most domestic related stocks hit their peaks in 2006. It was only because of commodity stocks and emerging market growth that major markets peaked in 2007.

Back to today, the yield curve is hanging strong over 3.4% providing huge incentives for the economy to expand. For everybody expecting the impending correction, this indicator suggests it isn't going to happen. In fact, it won't be until nearly a year after the Fed starts raising rates that the economy will suffer and hence stocks should be sold. So many people seem to fear the first rate increase, but instead that's a sign to remain bullish. The Fed Funds Rate going from 0.25% to 0.50% isn't going to derail this economy. Mainly because the following economic reports will be strong making people confident that the higher rates aren't having an impact. Then wham, after the 10th raise in 12 months, the economy will finally stall.

If anything, this leads us to the ultimate issue with the Fed playing yo-yo with interest rates. It takes 12 months for rate changes to impact the economy and yet the Fed decides to make drastic changes within 6-9 month periods. Almost like a kid that embarks on a 12 hour drive and wants to know if we're there yet after 2 hours.

This behavior in Fed policy and the havoc is has on the economy is one reason the 'buy and hold' strategy hasn't worked very well this decade. So many experts claim that the strategy is dead, but we maintain that depends on the Fed and what the Yield Curve tells us. Forget the forecasting, just let the indicators tell you what to do next. For now, they say stay long risky assets.






Note: Our first mention of the hugely positive Yield Curve was on Nov 17th. Basically when most stocks hit bottom. The market made a lower low in March, but the average stock didn't.

Stat of the Day: Weekly Jobless Claims at Low of the Year

As Stone Fox Capital posted earlier this week in our new focus Future Stat of the Week [Future Stat of the Week: Weekly Jobless Claims], it's important to pay attention to where economic stats are headed and not so much where they've been.

Today, the government reported that jobless claims declined to 502k for last week which is the lowest level since early January. Anybody sweating last Fridays Jobs report clearly is missing the trend. The 4 week average continued its decline hitting sub 520K. The jobless claims is clearly on a path to sub 500K and then probably closer to 400K in the next couple of months. Knowing that would you short the stock market?


  • The Labor Department said Thursday that first-time claims for jobless benefits dropped to a seasonally adjusted 502,000 from an upwardly revised 514,000 the previous week. That's the fewest claims since the week ending Jan. 3, and below economists' estimates.
  • The four-week average, which smooths fluctuations, dropped to 519,750, the lowest in almost a year. It has fallen by more than 20 percent since its peak in the spring.

Tuesday, November 10, 2009

Kona Grill Finally Hires a New CEO

Kona Grill (KONA) has long been a favorite concept of Stone Fox Capital with its blend of sushi with western foods, but it clearly lost its way over the last couple of years due to questionable management. Last Monday, KONA announced a new CEO plus a new BOD member. Positive signs that they've finally got quality management on board to turn the concept around. KONA was always criticized for being run by a hedge fund manager instead of an industry expert. Now we'll see.

Mr. Buehler was the Chief Executive Officer of LS Management, Inc., the owner and operator of the Lone Star Steakhouse & Saloon/Texas Land and Cattle Steak House restaurant concepts, as well as Lone Star Business Solutions, an external accounting, IT and HR provider, where he served from July 2007 to May 2009. Lone Star Steakhouse & Saloon consists of 141 company restaurants, 5 domestic franchise restaurants, and 10 international franchise restaurants, while Texas Land and Cattle Steak House consists of 28 company restaurants.

KONA just reported Q3 results that included a devastating 9.9% drop in comps. The market has turned to where most competitors are reporting more manageable 2-3% drops, but KONA is still reporting numbers matching the highs of the recession. This trend clearly must turn and quickly for KONA to be a good investment.

Just getting a new CEO with the same old board that approved numerous questionable deals involving the old CEO wouldn't have been enough to get us re-interested in this concept. The good news is that KONA also brought along a new member to the BOD replacing a long time member. Mr. Bakay is from BBS Capital Management that recently bought an 11% stake in KONA providing ample support for a much needed shakeup.

Considering both of these industry experts are willing to invest their careers, money, and time into KONA at this low point suggests that the concept indeed has a chance at turning around.

Kona Grill's Potential
KONA operates 23 restaurants in the casual dining segment with over $80M in revenue. This revenue level is after a couple of devastating years of drops in comps so the revenue number could easily expand much higher without growing stores. Up until the recent quarter, KONA still had decent restaurant operating margins of over 17% and prior to this last 12 months they were usually in the 20%+ range.

Long term, the concept can easily be expanded to 100 stores based on comparable concepts like Cheesecake Factory (CAKE) and even the 150 store concept that the new CEO oversaw at Lone Star Steakhouse.

With a market cap of under $30M, KONA offers an appealing valuation prospect if the new CEO and BOD can turn the company around. Right now its a gamble considering they have very little cash or financing available. At just $3M they have very little flexibility in this liquidity crunched environment. They also have limited debt providing for the opportunity to lever up the balance sheet without diluting existing shareholders as the lending market returns. Not having debt is a big benefit at this point in their development as most concepts are usually highly levered by this point in the growth cycle.

Private Equity is also lurking with the recent purchases by BBS Capital and the ever present Mills Road that has made 2 offers in the past that the previous management team turned down.

What's amazing is how under followed they've always been considering the IPO and the potential. With the 2 stores in development, a good CEO could easily up this company to over $100M in annual revenues yet the stock constantly trades under 10,000 shares daily. Even this big news was followed by slim trading making it very difficult for big investors to move in and out of the stock. So any new capital via shares or debt would likely expand the following and help liquidity.

Until the market pricing improves though, the Interim CEO and BOD definitely took the correct path to slow down expansion. Expansion for expansions sake isn't wise. It needs to be done profitably and KONA has lacked profits since becoming public. KONA finally has SG&A under control at a low 7.5% of revenue and with margins getting back to 17%+, they could easily hit 10% cash flows or EBITDA. That would be huge since they lack liquidity. Posting profits would also turn a new page on this investment and eliminate any downside risk from here.

Can the new CEO and modified BOD return KONA to the fast growth realm? Purchases in the low $3s look very appealing, but we wouldn't recommend chasing until we see more details from the new management.

Disclosure: Adding shares in the low $3 range.

Monday, November 9, 2009

Terremank Q2 2010 Earnings Results

Terremark (TMRK) reported basically in line numbers. The most exciting number is the revenue bookings were up 24% YOY and at record highs. Booking growth rates continue to exceed revenue growth of 17% YOY.

Added whitehouse.gov to the federal pipeline and continue to see record bookings in the current quarter. Also, expanding into Brazil (adding 5k sf with Yahoo as first customer) and Istanbul due to customer demand. The stock continues to be a buy based on the move to cloud computing and the online push of the federal government. Just don't see many companies with a 24% increase in bookings these days.

Santa Clara datacenter is online for Q4 opening with customers like Akamai and Shutterfly already signing contracts.


  • Total revenues for the quarter ended September 30, 2009 were $69.8 million, representing an 17% year-over-year increase
  • EBITDA, as adjusted, was $18.0 million for the quarter, representing a 82% year-over-year increase
  • Income from operations was $6.6 million for the quarter ended September 30, 2009
  • Bookings were a record $34.2 million for the quarter
  • 64 new customers were added in the quarter

Future Stat of the Week: Jobless Claims

Future Stat of the Week is a new focus post by Stone Fox Capital. Too often the market focuses on the current economic stat and not the future direction of the stat. Naturally current reported numbers can impact and will impact the direction of the future number especially at inflection points. Normally though the market sweats over gyrations of a number even though the direction of the economic number is unquestioned.

Recently the employment numbers have been the major focus of the market. Both the weekly jobless claims (leading indicator) and the monthly jobless numbers (lagging indicator) are routinely hashed and rehashed by the media. Constantly focusing on the absolute monthly number and not the direction or future number. For the employment numbers, it's highly unlikely that the direction (in this case improvement) will change as long as the FED remains with its accommondating plan.

For example: when the weekly jobless claims comes in at 550K when the estimate was say 535K as an investor you shouldn't become overly alarmed when the 4 week average drops and the estimate for the following week is say 520K. Basically what we're saying is that the trend is much more important then whether or not an estimate is met. True, the market valuation is based on these estimates and it might selloff initially but the ultimate direction of the market will be based on the direction of the data. If the number is going to be 520K, 510K, and 500K, those improving numbers will quickly eliminate any negativity from missing an estimate.

For the jobless claims, Bloomberg has the consensus estimates for next week. Right now the consensus is for 512K next week or the same as last week. Importantly though the estimates range as low as 495K. A number below 500K would be very bullish for the market and is likely just around the corner if not this week. Anybody missing this point is missing the trend. This week might actually post at 520K, but its undeniable that we'll see a sub 500K and likely then a sub 400K number as well. Is the market going to selloff with that trend?

Also note the graph of how the weekly numbers and 4 week average has steadily declined. Anybody sweating each weekly number has been missing the big picture. So no matter what happens this week, it will unlikely change the ultimate trend of lower claims.


Market Consensus Before Announcement
Initial jobless claims declined 20,000 in the October 31 week to 512,000. The pace of layoffs has been on a downtrend as the four-week average was down for the ninth straight week, 3,000 lower at 523,750. Continuing claims are also declining but here the change is likely a negative, due largely to the expiration of benefits. Continuing claims, in data for the October 24 week, fell 68,000 to 5.886 million for the seventh decline in a row.


PriorConsensusConsensus Range
New Claims - Level512 K512 K495 K to 525 K


Sunday, November 8, 2009

The Leveraged Loan by Morgan Stanley to CF Industries says buy Morgan and Sell Terra

The prior weekend, it was announced that Morgan Stanley (MS) had agreed to provide CF Industries (CF) with $2.5B in financing for the potential takeover of Terra Industries (TRA). Considering that we've been bullish on this deal and negative on MS for not being more aggressive in lending, this appears to be a game changer in both ways.

Also, Bloomberg reported that this $2.5B deal is the largest leveraged lender commitment this year. It should provide plenty of fees for MS and signals a turn in MS that we find appealing. Especially considering they have chosen a very juicy sector to start loading up on. Even though the deal possibly won't go through as the drama in the numerous deals in the fertilizer sector continue to unfold.

  • Morgan Stanley’s outstanding loans and lending commitments to non-investment grade companies peaked at $43 billion as of Aug. 31, 2007, before shrinking to $18.5 billion as of Sept. 30 of this year, according to the firm’s quarterly financial statements. The firm recorded $4 billion of losses in 2007 and 2008 related to loans and lending commitments.

Buy MS on this deal and we're suggesting to stay away from TRA for now. We were originally interested in TRA based on getting into CF stock on the cheap. The new deal is for $32 per share in cash and just a fraction of shares in CF stock so that defeats the purpose of our investment. If TRA approves this deal, its mindboggling because it in no way creates long term value as you'll be cashed out and have to pay taxes and then have to reinvest in CF stock. Might still hold the stock but we won't likely add more.

MS on the other hand will likely see an increase in deals and they just one of the handful of companies able to provide the financing. The stock closed right above the 20EMA at $32.50 on Friday leaving it an ideal buying point.

Disclosure: Long MS

Thursday, November 5, 2009

Buy Bronco Drilling on the Continental Resources Rig Expansion Plans

Continental Resources (CLR) announced early today a huge expansion in their drilling plans for the Bakken Shale in the Montana and North Dakota area. Forbes.com has some info about the move. Basically CLR had originally expected to end 2009 with 6 rigs working, but now they expect to be using 9 rigs. Then by mid 2010, they expect to be utilizing 23 rigs. Thats 17 more rigs that CLR will be putting to work.

This is just one company operating in the Bakken Shale, not to mention Haynesville or the Marcellus Shale. Its unclear whether Bronco Drilling (BRNC) will benefit directly from this expansion, but it should benefit from the overall capacity utilization in the sector leading to higher day rates and margins.

BRNC just began benefiting from a contract for 6 more rigs in Mexico working on drilling for PEMEX. Also, with the push in the US for more reliance on natural gas, BRNC seems like one of the best plays left. Most natural gas producers have already surged off the bottom along with the bigger drillers. BRNC still trades at a fraction of its highs.

BRNC has a book value of over $14, making the current stock price of $6 very attractive. They are still losing money and will continue to for a few more quarters at leasr, but the market seems to be improving very quickly at this point.

Buy BRNC off the CLR news, but be careful as BRNC announces Q3 earnings tomorrow. The sector isn't jumping today which is surprising, but for us that provides a buying opportunity. We'd suggest buying a half position expecting the guidance going forward to be upbeat.


Disclosure: Long BRNC

Tuesday, November 3, 2009

Hartford Financial Reports Big Jump in Book Value

After the close, Hartford Financial (HIG) reported a big jump in book value to $37.90 when they reported Q3 earnings. This wasn't all that surprising considering the rebound in the markets, but confirmation helps pound it home to people still negative on the stock. Considering its only trading at $27 in the after hours action it appears that some people are still dense.

  • Book Value Per Share Jumps 18% From End of Second Quarter to $37.90
Also, HIG reported core earnings of $1.56 which handily beat the estimate of $1.11 and they raised 2009 estimates. They did report a net loss on charges and at that point the reporting for HIG gets very confusing and beyond the need of further research.

The key is that HIG will survive and prosper and book value is likely to soon bounce back over $40. Earnings will likely be estimated at over $4 and mabye as high as $5 next year. So either way you slice the valuation based on BV or EPS, HIG easily hits the $50+ range. Until then we'll avoid straining brain power on the earnings release and focus more on the macro view.

Hartford Financial continues to be one of the biggest positions in our Growth Portfolio and will remain that way until the stock rockets much closer to normal valuations.


Disclosure: Long HIG is client and personal accounts.

Monday, November 2, 2009

ISM Manufacturing Suggest Employment Turning Around

The October ISM Manufacturing report came in at a much better then expected 55.7 compared to the 53 expected and the 52.6 reported last month. It was also the highest reading since April of 2006.

This report paints that manufacturing is in a strong recovery mode with orders and production at high levels. Also very surprising was the 53 reported for the employment component which was nearly 7% points above the 46 reported last month and was positive for the first time in 14 months (CNBC reported this was the highest number in years). If employment is turning positive in Manufacturing already then it won't be long before a turn occurs in Services as well. This makes for an interesting October jobs report to be release on Friday. Looks like the consensus is for a loss of 175K jobs with about 45K coming from Manufacturing. These expectations seem much lower then what the ISM report suggests. Although employment is a lagging indicator a better jobs report could bolster the market to new post recovery levels.

*** Note: the 6.9 point increase in the employment index was the highest monthly increase since the early 1980s recovery.

Its also encouraging that this all occurred with inventories still below 50. Companies were still cutting supplies even with production soaring to over 63 and orders hitting 58. Otherwise, this ISM report would be much higher if based on actual end user demand. The inventory building cycle is likely to kick off in November.

  • The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The manufacturing sector grew for the third consecutive month in October, and the rate of growth is the highest since April 2006 when the PMI registered 56 percent. The jump in the index was driven by production and employment, with both registering significant gains. Production appears to be benefiting from the continuing strength in new orders, while the improvement in employment is due to some callbacks and opportunities for temporary workers. Overall, it appears that inventories are balanced and that manufacturing is in a sustainable recovery mode."
  • The recovery in manufacturing strengthened in October as the PMI registered 55.7 percent, which is 3.1 percentage points higher than the 52.6 percent reported in September, and the highest reading for the index since April 2006 (56 percent). A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
  • ISM's Employment Index registered 53.1 percent in October, which is 6.9 percentage points higher than the 46.2 percent reported in September. This is the first month of growth in manufacturing employment following 14 consecutive months of decline. An Employment Index above 49.7 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

Interesting chart from Ciovacco Capital. Notice how the ISM stayed around the 60 level for nearly a year. Now how would we see a double dip or a big market correction with such a scenario?