Thursday, May 27, 2010
Yesterday, the Opportunistic Portfolio bought Massey Energy (MEE) and China Armco Metals (CNAM) and covered the short on Research in Motion (RIMM). Unfortunately besides a small short on RIMM, we missed reducing exposure on the drop, but we're confident that we picked up MEE and CNAM on the cheap yesterday. Last check that portfolio is up nearly 8% today.
The basic theme was to buy what China needs and the met coal from MEE and the recycled steel from CNAM were the just the ideal options. It doesn't hurt that the stocks are down 40-60% from recent highs. Its become evident that China is going to protract any rate hikes due to the issues in Europe and hence the market is likely to flock back into the China theme which means more commodities. More on this subject later.
Wednesday, May 19, 2010
In a lot of ways, 2010 seems like the opposite of 2008. Everybody expects the Greece/Euro crisis to lead to Lehman II. The world is so different now. Asia and the US are now strong economies without the threat of a banking system collapse. In 2010, Europe has now pounced on the issue before it spread while the US waited too long thinking real estate was contained to sub-prime.
The news of the ban on naked shorting in Germany yesterday likewise drew comparisons to the ban on shorting in the US in Sept 2008. Again, similar sounding situations but likely different outcomes. Germany is no US and naked shorting should be banned.
The comparisons are naturally but to think the results will be similar is too simple minded. Everbody expects that. Good summary from the Reformed Trader on high level of negativity today.
|Is David Hefty right? Will the Dow go to 5,000 this year? * 1335 responses|
|Yes, the Dow could go to 5,000|
|No, the Dow won't go that low this year|
Not a Scientific Survey. Results may not total 100% due to rounding.
Monday, May 17, 2010
Watch the last minute if you want to just see the negative predictions.
Friday, May 14, 2010
More likely the scenario is that Mondays open created a gap in the SP500 that the market just can't stand to leave open. You won't see it on the $SPX on the market because of the sloppy open where numerous stocks are delayed several minutes before opening. The SPY though captured it. With the swoosh at the open today, that gap has been filled and in fact created another one on the opening today.
The market has bounced nicely off the $113.5 level and must eventually fill the gap back up to $116 now. That will also be where it meets the 20/50ema likely for the ultimate test of whether this market is heading back up to old highs at $122 or back into the bear market abyss.
Wednesday, May 12, 2010
On a valuation basis, RIMM isn't overly expensive trading at roughly 13x 2011 estimates. Just have to wonder if RIMM will meet those estimates considering the success of the iPhone and Android products.
Monday, May 10, 2010
The company guided towards $7-7.20 for 2010 yet the market continued to sell the stock down into the upper $50s or below 9x guidance. Its interesting that the current highest estimate is only $6.98. Analysts apparently doubt the guidance.
Though trading below the 200EMA is concerning from a technical basis. Today's weak bounce means the stock is likely to lag any rebound in the market. If it doesn't hold, we made trade it for a lower entry. The value thesis just becomes more attractive at lower prices.
Stone Fox Capital's read: Buy companies with assets outside Australia in particular we've bought Freeport-McMoRan (FCX), Massey Energy (MEE), and US Steel (X). More on them later.
Our reasoning is that the tax will limit the supply especially from new projects in Australia with limited impact to demand. It clearly makes assets outside Australia more attractive. In the end, the announcements this weekend could go a long way to pressure the government to ratchet back the tax plans. It clearly places short term risk around projects.
BHP CEO Kloppers made it clear over the weekend that the resource tax slated to begin in 2012 could stop its expansion plans at the Olympic Dam project. The massive project is expected to cost as much as $16B. As he points out, if you've got competing projects and one provides lower taxes any company is going to chose that lower cost option. Or in most cases they'll chose no option.
- BHP Chief Executive Officer Marius Kloppers said expansion plans, including its Olympic Dam project, may be “very difficult” to approve. Kloppers said the new tax, to start in 2012, would stymie investment, spur companies to move offshore and threaten an industry that comprises 9 percent of the economy.
- “The uncertainty is in place, it would be very difficult to approve any of those projects,” Kloppers told the Australian Broadcasting Corp.’s Inside Business program yesterday. “We are not going to come out, particularly when it is very uncertain, to make blanket statements about things that affect livelihoods, communities, employees and so on.”
- The environmental impact statement on the Olympic Dam expansion is due by the end of 2011, Kloppers said. Expanding the mine would take 11 years and increase copper output almost fourfold to 750,000 metric tons a year, boost gold production eightfold and uranium by almost fivefold, according to BHP.
Peabody Energy (BTU) made it clear that the proposed resource tax was going to have a profound impact on Austrailian assets when they cut their offer for Macarthur coal by 6.5%.
- Peabody lowered its bid to A$15 a share, from A$16, after studying Macarthur’s finances and the tax was proposed, the St. Louis-based company said in a statement
In summary, all 3 companies had access to valuable assets in copper, met coal, and iron ore desperately needed in the expanding emerging markets. Previously the proximity of Australia to China gave them an advantage, but now as Australia places potential resources taxes that limit new mining expansion projects it makes external mines much more attractive. All 3 companies were already attractively priced, but now they should come more into focus from the investment world.
Sunday, May 9, 2010
AER remains the largest holding in the Growth Portfolio and returned to that title in the Opportunistic Portfolio as we added shares around $11.4 on Friday on the swoon.
Could contagion spread causing a Eurozone collapse...Yes... Will it happen... Unlikely. Greece is a completely different animal compared to the other PIIGS and very likely a one-off situation. AER has direct exposure of 2 planes to one customer in Greece. Some comments from the Earnings Conference Call from the CEO. Listen from roughly around the 23 minute point (or 4:30 of the Q&A section) and listen to the response regarding the Greece contagion fears.
- CEO expects a repeat performance of Dubai and jokes about the 200 protesters on the Greece capital (later some estimated roughly 30K but we had the same thought that the news media was giving too much credence to what appeared to be a relatively small and mild protest)
- too much focus on Roubini and others calling for the demise of the Euro. Doesn't see him and CNBC as a proxy for the real situation.
- Customers being in the Eurozone are protected from having currency collapse/devaluation preventing them from rolling over debt in US denominations.
- 1 customer with 2 planes - reinforces that its impossible for them to rollover debt if linked to a devaluing currency. Compares to Brazil crisis in the past. Good Brazilian operators couldn't service debt in collapse.
- Lower Euro is good for Manufacturing sector which helps growth in Europe. (see my previous article on European growth. Also some have speculated that Germany has been dragging its feet in order to force down the Euro to help their largely Manufacturing base)
- all assumes the EU prevents the contagion from spreading to a long term impact.
- Now the big non-European note: seeing increased demand/rates for new narrowbody planes.
- First quarter 2010 net income was $34.4 million, compared with net income of $30.0 million for the same period in 2009. First quarter 2010 net income excluding the impact of the mark-to-market of interest rate caps and share-based compensation was $46.7 million, compared to net income of $31.5 million in the first quarter 2009 on the same basis.
- First quarter 2010 basic and diluted earnings per share were $0.40. First quarter 2010 basic and diluted earnings per share excluding the impact of the mark-to-market of interest rate caps and share-based compensation were $0.55.
- Net spread, the difference between basic lease rents and interest expense excluding the impact from the mark-to-market of interest rate caps, was $133.0 million in the first quarter of 2010 compared to $112.5 million in the first quarter of 2009, an increase of 18%. This measure reflects the increase in leasing income.
- Basic lease rents for the first quarter of 2010 were $165.8 million, compared to $141.4 million for the same period in 2009, an increase of 17%. Total lease revenue (basic rents, maintenance rents and end-of-lease compensation) for the first quarter of 2010 was $175.4 million, compared to $161.2 million for the same period in 2009, an increase of 9%.
- Sales revenue for the first quarter of 2010 was $182.4 million, compared to $41.7 million for the same period in 2009, and was generated from the sale of five aircraft, three engines and parts inventory.
- Total revenue for the first quarter of 2010 was $364.0 million, compared to $208.5 million for the same period in 2009. The increase was mainly due to the increase in sales revenue and an increase in lease revenues from higher basic lease rents.
- Committed purchases of aviation assets delivered or scheduled for delivery in 2010 are $2.2 billion, of which $0.9 billion closed in the first quarter of 2010.
- Total assets were $8.7 billion at March 31, 2010, an increase of 50% over total assets of $5.8 billion at March 31, 2009. The Genesis Transaction accounted for $1.6 billion of the increase in total assets (please refer to "Financial position" for details). The remaining $1.3 billion increase was driven primarily by deliveries of forward order aircraft.
Disclosure: Long AER in Growth and Opportunistic Portfolios.
Don't take my word on it though. Listen to the Chief Economist of JPMorgan (JPM). It actually surprised me that Europe as a whole is doing this good. PMI in the mid 50s and economic growth in the 2-4% range. Also don't forget that a lower Euro helps the export sector.
Friday, May 7, 2010
Numerous stocks that we own including AerCap Holdings (AER), Atwood Oceanics (ATW), Hartford Financial (HIG), and Teradyne (TER) now trade in the in the 6-7 PE level. Numerous other stocks trade below the 10 forward PE levels. Apple (AAPL) only trades at roughly 15x the actual 2011 estimate though they are growing at multiples beyond that.
Will 2008 repeat itself just 2 years later? That just seems very unlikely with everybody stressing on the European debt issue for months now. Everybody on CNBC continues the panic mode. Why didn't anybody pound the table to buy this market? Its cheap on historic terms. This is the opposite of 2000 and 2008 is way to fresh in peoples minds for another continued panic. Is anybody still long the market? We shall see tomorrow, but do we have to see 5 PEs before buying?
Tomorrow should be wild. I'd buy on any further dips assuming we get any. A positive vote from Germany on the bailout will likely lead to a very positive open. The Fed will remain at near zero rates for a lot longer if the market remains weak. That is very bullish and the market is missing this.
Thursday, May 6, 2010
Interesting note from First Trust on past debt crisis. The Latin American debt crisis in the 1980's had a bigger impact on US banks then this crisis. Maybe it can be argued that the European countries will impact the economy more but do you really think Italy and Spain will default? Without them running into problems, Greece and Portugal aren't big enough to do damage.
Based on this chart, the 1980's saw significant market gains even with all the countries defaulting on debt. With a positive vote from Germany tomorrow, Europe may avoid any defaults. Todays price action also pushes Germany to act quicker now. The fire engines are now on high alert to put our the financial fires that are spreading.
The fear may be great, but history suggests that leads to great buying opportunities. After all every stock in our portfolio traded at exceptional values before this crash and is probably what has held them back. After the route this week, these stocks just got 10-15% cheaper to boot.
Wednesday, May 5, 2010
Interesting interview with Richard Adkerson, CEO of Freeport McMorran Copper (FCX) and Co-Chairman of McMoRan Exploration (MMR). A few interesting points:
- FCX recently started up operations in Arizona to supply a growing US market
- the proposed 40% mining tax in Australia will cause investment dislocations (to the advantage of FCX and other miner not in Australia)
- MMR doesn't operate in the deep waters of the GOM though they do drill to very deep levels in the shallow waters. (stock has been hammered but is still uncertain whether their drilling will be impacted)
Monday, May 3, 2010
Teradyne (TER) is one such example trading on Friday's close at just 8x 2010 estimates and 5.5x the upper end of 2011 estimates. The stock is down some 85% from its 2000 peak around $100. What could the stock offer investors that were so burned by holding in the early 2000s? For starters, its gone almost unnoticed that TER just reported the highest semiconductor related orders in 10 years. Heck, Stone Fox Capital has been allocated some 20% into tech stocks like Apple (AAPL) and Riverbed Systems (RVBD), but we've mostly ignored the spaces such as semiconductors or communications equipment that dominated the trade 10 years ago. Not now after seeing the headlines of numbers not seen since 2010.
To backup a little, TER is the leading supplier of Automatic Test Equipment used to test complex electronics used in consumer electronics, automotive, computing, telecommunications, and aerospace and defense industries. In 2009, Teradyne had sales of $819M (remember this number for later). On the conference call, Management mentioned that the biggest drivers of growth were wireless and power management.
Now some off the charts numbers from the Q1 earnings report on 4/21:
- Q1’10 revenue of $330 million, up 23% from Q4’09 and up 173% from Q1’09
- Q1’10 diluted non-GAAP income of $0.33 per share, up from income of $0.17 per share in Q4’09 and up from a loss of $0.38 per share in Q1’09; Q1’10 diluted GAAP income of $0.24 per share
- Q2’10 guidance: Revenue of $390 million to $420 million: Diluted non-GAAP income of $0.45 to $0.52 per share; Diluted GAAP income of $0.33 to $0.40 per share-Bookings in the first quarter of 2010 were $534 million of which $460 million were in Semiconductor Test and $74 million in the Systems Test Group. Book to Bill of 1.6 (remember the $819M in revenue last year)
The EPS number $.33 easily surpassed the analyst estimates of $.22. The more shocking number though was the Q2 mid point guidance of nearly $.49 compared to estimates of only $.23. Guidance of over 100% higher then where analysts had pegged the numbers. Wow! The analyst community was caught completely off guard.
The stock price had been strong going into the report as numerous other tech stocks had reported great numbers, but not many beat by such a wide margin. So naturally the stock price must've soared the week after? Well, actually no. A week after the report and it was back down to the low $12s where it traded prior to earnings. Leaving last Friday as the opportune time to jump into the stock when it grazed back down to the 20EMA on the market weakness. See Covestor model where we added at $12.25.
Piper Jaffery upgraded the stock today and raised the target to $26 from $22. Yes, that's more then 100% above the current price. Then again, its only around 15x the upper end of estimates for 2010 in the $1.7 to 1.8 range. Its amazing that it took an analyst to convince investors to buy this stock after such a great report.
The market clearly doesn't believe the cycle will last. The conference call was chock full of discussion on whether customers were double booking or whether the orders were a one time blip. Time will tell, but the economy is just now solidly out of the Great Recession so it seems unlikely that a peak is at hand. TER has huge upside as the market comes to grips with the new reality in the testing of consumer electronic equipment. That upgrade cycle has clearly just started with the success of the iPhone and iPad.
TEX has been rumored of a buyout for a while now. They've cleaned up their business via some divestures that has really solidified the balance sheet. The stock trades nearly 70% below its 2007 high and management expects earnings of $6 in 2013. Means making $7-8/share is the likely internal goal. Why wouldn't you want to take it private if the market will let you?
Not a huge fan of buyouts, but I'm not one to turn down free money today instead of waiting 12 months for it either. Not being an insider we aren't privy to all the news nor can we affect the outcomes. If TEX wants to offer shareholders $40 this week, I'd gladly take it and move on to numerous other stock ideas. Any price below that would be ridicoulus and likely induce competiting offers for something higher. See the Dollar Thrifty Group (DTG) news of the day. DTG accepted a $41 offer from Hertz (HTZ) and now trades over $50 because Avis (CAR) came along.
Sure shareholders would likely obtain a higher share price 12-24 months down the road by holding the stock, but I doubt the price would trade higher then $40 near term and we could even get lucky to get a higher competing bid sooner rather then later. Time value of money is huge in the stock world.
Management: Don't come offering us $35 and expect open arms. Get real with the first offer.
It wouldn't surprise us to see this number move on into the mid-60s before peaking out. Especially with new orders rising to 65.7 signaling strong growth ahead. Read the report from First Trust for all the details. The 6% GDP growth is something that the market clearly does not have factored into estimates. Not sure I've heard any other economists forecast such high numbers.