Tuesday, November 30, 2010

Savient Pharma Announces First Shipment and Pricing of KRYSTEXXA

Today Savient Pharma (SVNT) announced the initial shipment to specialty distributors and pricing of KRYSTEXXA. These are two major milestones for a biotech stock basically left for dead by the market after a failed auction process back in late October.

Now the key will be how many vials of KRYSTEXXA at $2,300 a pop SVNT will be able to sell with a limited salesforce. Considering they had thousands of people wanting sign up for trials and those people are desperate for the drug the sell shouldn't be that hard. If you have been suffering from gout without any relief from existing drugs, this product should be able to sell itself.

The stock has been flat since the initial selloff. It is currently hanging out in the low $12s and offers substantial upside as the negative analyst community finally clues in that management is more then capable to go it alone having gotten the drug to market by Dec 1st nearly a month after announcing the failed auction process and a little over 2 months after getting FDA approval for the drug.

So why is the stock still below the pre approval level just below $15? Probably largely because the market fears dilution in the form of a stock offering. Though SVNT has nearly $80M in cash and the drug will only require a minimal salesforce, the market never less is overly paranoid.

It possibly comes down to how management handled the auction process. Unfortunately they gave the market the message that SVNT needed help to launch this drug. Even though they made it clear that they thought it would be more beneficial to an existing biotech firm to buy them prior to ramping up a sales force and logically it would, the market abused the process and turned it into a weakness. One that clearly doesn't exist based on this quick launch.

For any new investor, SVNT provides a great opportunity to buy a depressed stock with a FDA approved drug. This opportunity might not last long as the sales numbers get reported. The major issue continues to be the disagreement over the amount of users. If SVNT is correct, the stock will approach recent highs or nearly double todays price.

Via PR:

today announced that it is commencing shipment of KRYSTEXXA™ (pegloticase) to specialty distributors and that KRYSTEXXA will be commercially available by prescription in the United Stateseffective December 1, 2010.  A PEGylated uric acid specific enzyme, KRYSTEXXA was granted approval by the Food and Drug Administration (FDA) on September 14, 2010 for the treatment of chronic gout in adult patients refractory to conventional therapy.  KRYSTEXXA, targeted for this orphan population, is now the first and only therapy available to address this unmet medical need for highly symptomatic chronic gout sufferers who are refractory to conventional therapy here in the United States.

A specialty distribution network has been established that will allow healthcare providers direct access for ordering KRYSTEXXA.  The wholesale acquisition cost (WAC) of KRYSTEXXA will be priced at $2,300.00 per 8 mg vial for IV administration.  Savient is committed to providing patients access to our breakthrough therapy KRYSTEXXA. Through the KRYSTEXXA Connexxions™ program, Savient offers patients and healthcare providers coverage and reimbursement support, patient assistance and informational resources.  Patient assistance support is currently available for those eligible patients in the United States who do not have insurance coverage. Additionally, Savient intends to expand the KRYSTEXXA Connexxions program to include a co-payment support program in the coming weeks. For more information, please visitwww.krystexxa.com.

Update 3:10: The stock closes weak at $11.82 likely on speculation of a stock offering. Doesn't make sense that SVNT would need more cash and now isn't the time to raise more money, but you've always got to respect the price action. Is the market paranoid or does it know something?

Disclosure: Long SVNT

Monday, November 29, 2010

TARP Bailout to Only Cost $25B

And that assumes the cost won't continue to drop. The Trouble Asset Relief Program (TARP) continues to be scorned by most people costing many backers their political positions, but ironically it has turned into one of the most successful government programs ever.

Ok, its very possible that the politicians lost their jobs due to the numerous other packages enacted after TARP that weren't nearly as successful. Anybody hear of any benefits from the stimulus package?

Today the Congressional Budget Office (CBO) estimated that the $700B TARP program would only end up costing taxpayers $25B an absurdly low number considering the consternation when it was enacted. Back then lots of focus was on the $700B being a taxpayer cost instead of an investment in the financial system that was about to collapse. In fact, it would've been a lot more successful if the focus hadn't strayed to the weak companies like General Motors (GM) and AIG. Somebody explain to me how GM is back public and the government hasn't collected all its funds?

Regardless TARP clearly was successful and at the time back on 9/26/08 we wrote that it might even turn out to be profitable [The Money Making Bailout ]. Appears that it might come up just short because of the GM and AIG bailouts that clearly strayed from the original plan. More people would've been agreeable to the bailout had they known that it would be close to break even.

The biggest continued negative about it has always been the assumption that it created a moral hazard by keeping banks alive that should've been allowed to fail. That argument just doesn't pass the mustard with us as the financial system was on the verge of bringing down strong companies like Goldman Sachs (GS) and many others.

Everybody seems to forget that all the corrupt mortgage brokers went out of business. Lehman Brothers went bankrupt. Read the stories about the windfall profits made by the firms that gobbled up the assets of Lehman and you'll wonder why even them failing was right. Bear Sterns and Merrill Lynch were bought up at steep discounts. Wachovia and Washington Mutual were forced to accept mergers that basically wiped out fortunes of long term stockholders. AIG got a government bailout but the stockholders suffered mightily. Just about every major CEO of even the banks that did survive has been forced out.

The worst offenders lost jobs and their investors lost tons of money. Without TARP, many a secondary employee would've been without a job and Main Street would've been hurt deeply. As Bill Gross said back then, this was a bailout of Main Street. Wall Street was heavily impacted prior to TARP.

"Clearly, it was not apparent when the TARP was created two years ago that the cost would turn out to be this low," CBO said in its report.

With bailed-out firms returning to health, the government will spend less than previously thought on assistance to insurer AIG and automakers like General Motors, CBO said.

Trade: Bought Lorillard and Lockheed Martin

Both Lorillard (LO) and Lockheed Martin (LMT) were added to the Net Payout Yields portfolio. This model is now available on Covestor.

Lorillard provides a 5.4% dividend yield in addition to a generous buyback over the last 12 months making it's Net Payout Yield of 11.8% one of the highest yielding stocks with a market cap in excess of $10B. Tobacco stocks continue to pay high dividends as investors ignore them because of their social believes. At Stone Fox Capital, we strive for the highest legal return and if you wish any gains from a socially unacceptable stock can be given back to charity. 

Lockheed Martin also provides a very generous dividend yield of 4.4% combined with a big buyback for a NPY of 11.8% as well. Defense stocks have been under pressure of late with expectations for cutbacks in the US. Apparently management disagrees whether they expect higher sales in emerging markets to fill in holes as the US cuts back or if the US just doesn't cut that many programs.

Both LO and LMT highlight the focus of a Net Payout Yield portfolio. Both companies are returning a ton of cash to shareholders yet they continue to sell the stock in favor of the hot stock of the month. This portfolio requires discipline to basically buy the out of favor sector. Right now that is apparently drug, insurance, tobacco, and defense oriented stocks.

The model has been underperforming of late likely due to the concern over the extension of the Bush tax cuts on dividends. High paying dividend stocks have been struggling making this an ideal time to jump into these stocks. Especially ones like the above that have buybacks that can take advantage of a weak stock price. Further highlighting the advantages of a company that utilizes the best method for rewarding shareholders instead of being trapped into one strategy. 

Trade: Bought Limelight Networks

Added Limelight Networks (LLNW) to both the Opportunistic Long Only and Opportunistic Levered portfolios. LLNW is a play on a faster internet and the potential for being the next Akamai (AKAM). Unfortunately it could be the ugly sister in that competition and thats never good for a stock.

Some news today that triggered the move other then technical was the news that fast growing deal of the day company Groupon announced that they are using LLNW and have seen substantial improvement in their website speed. They also recently expanded an agreement with Netflix (NFLX). Both companies are at the leading edge of the web so its crucial that LLNW win these deals.

Though the question remains whether LLNW can start making money on all these deals. Thats where the ugly sister typically comes into place. Sure they'll get dates, but its usually when the pretty sister is too busy or too demanding. The stock will soar if any of these new deals start dropping to the bottom line.

Good interview with the CEO on Mad Money.

Bought around $7.03 today when the stock was hanging nicely above the 20ema. Appears that it wants to run and challenge the recent highs. Short term could depend on what they do with the recent $150M offering filing.

Wednesday, November 24, 2010

Bullish Case For China Recyclers

TheStreet.com interviews Joe Giamichael, managing director and head of China research at Global Hunter Securities, about his bull case for the recycling sector in China. A couple of stocks that we follow in the recycling area include Lihua International (LIWA) for copper and China Aramco (CNAM) for iron ore.

Along with Stone Fox Capital, Joe is bullish on LIWA. He provides some great details on the discounts for scrap copper and how cheap the stock remains. CNAM continues to be a play that we follow though it continues to struggle with its recycling facility.

Tuesday, November 23, 2010

Net Payout Yields Model Live on Covestor

The second of three models is now live on Covestor.com. The second model is the Net Payout Yields portfolio that focuses on SP500 stocks with large net payout yields which are the combination of dividends and stock buybacks. Companies with the highest yields have historically outperformed the market by a large percentage with no additional risk then investing in an SP500 index fund.

This model requires a $5,000 investment and charges 1.1% pa. Also, in order to sign up with Covestor it requires $10,000 to establish an account via Interactive Brokers. Then your able to diversify that $10K with multiple models via the $5K investment or just one model. So even with only $10K you can have 2 models replicated. Great opportunity to diversify.

For more information on Net Payout Yields please see the article I wrote a few years back The Advantage of Net Payout Yields. Also, see the virtual portfolio I've been tracking at Marketocracy.com over the last 2+ years for practical history of how it's performed. When assuming the 1.1% expense versus the 2%+ used on that site, the model has beaten the SP500 by over 5% per year. This model beat 83% of the portfolios on Marketocracy over the last 2 years even though its not designed for high performance.

It's a great model for retirement money since its relatively low risk and cost efficient. More importantly though it has a history of outperforming the market. Future results can not be guaranteed and this will be the first time the model has utilized real trading versus a simulated or virtual portfolio. For more information on how to sign up, please contact Coverstor.

Monday, November 22, 2010

Massey Energy Directors May Challenge CEO on Sale

While I've been a fan of how the CEO of Massey Energy (MEE) has handled the investigation of the Upper Big Branch (UBB), it does appear that his leadership places the company to direct odds with MHSA. Mr. Blankenship has done a great job of showing that government ventilation plans may have been the cause of the UBB explosion. Rolling over and taking all responsibility didn't work so well for BP in the Macondo explosion and oil leak.

According to the WSJ it appears that he BOD is willing to vote agains the long time leader of MEE. Typically this doesn't happen as the CEO usually controls the BOD like pawns. If true, MEE is likely to be sold in the near term for a nice premium. Sure the stock has run lately, but it's also below the March high.

The WSJ speculates that Mr. Blakenship might be the only vote against a deal. He appears to be arguing that MEE will be more valuable when the company emerges from their recent problems. Maybe so, but the time value of money and the possibility that issues could drag on for years suggests that now might be the time to strike. Besides the met coal market is hot now so marketing the 1.3B mt met coal asset seems ideal now.

As I've detailed many times, with our Opportunistic portfolios holding sizeable positions in both Alpha Natural Resources (ANR) and MEE in addition to China coal player Puda Coal (PUDA) we have become a lot more agnostic about the long term prospects of MEE and more interested in cashing in with a big premium buyout. Of course, if it doesn't come to pass we'll continue to plug away with a resource rich asset in MEE.

Monday morning could be interesting though it might be next Monday or a month from now. It appears that most investors involved in MEE prefer a buyout and due to their rich assets the options will be attractive. Time will tell.

Via WSJ:

the 20-year CEO of Massey may not be able to persuade fellow directors to keep the Richmond, Va., company independent during the board's annual strategy-review meeting that began Sunday at the Greenbrier Resort, in White Sulfur Springs, W.Va.
"His vote is only one of 10," and the 10-member board may choose a strategy based on a split vote, this person said. The final outcome may be based on a vote of eight to two or nine to one, according to this person.

Badge Humphries, a lawyer in Mt. Pleasant, S.C., who represents Massey shareholders suing the board, said a sale of the company could nullify the suits because the Massey shareholders would no longer have standing to pursue claims against Massey's officers and directors.

Disclosure: Long MEE, ANR, PUDA

Friday, November 19, 2010

Atwoods Oceanics Drops 5% on Solid Results

Last night Atwoods Oceanics (ATW) reported Q3 results of $.99 that easily surpassed the estimates of $.92. Revenue came in slightly ahead of expectations all suggesting the stock would pop today. Well, evidently the huge 3 month gains and possibly a better understanding by the market that 3 rigs were cold stacked caughtt the street off guard.

As far back as the end of October, ATW had made it known that three of the lowest specification rigs, Southern Cross, Seahawk, and Richmond, had been cold stacked. Maybe it caught Wall Street off guard that they don't expect any deals near term as they aren't even actively marketing the rigs. Some analysts only get news from the quarterly earnings reports and calls so maybe this was the first time getting the official word.

Although these 3 rigs aren't huge contributors to the bottom line, it is ironic that one of the companies least involved in the Gulf of Mexico was so heavily impacted by the Macondo accident. With rigs moving out of the GOM, the ATW rigs have faced higher competition forcing these low spec rigs on the sidelines.

Regardless, ATW has a very bright future. As the GOM reopens for business, naturally competition will decline. They also have one of their new ultra-deepwater floaters coming out of the shipyard around Q2 of 2011. The $470K dayrate will more then exceed the lost revenue from the 3 cold stacked rigs. This rig is headed to Australia to work on the Greater Gorgon natural gas development for Chevron.

In 2012, the other ultra-deepwater floater called the Condor comes online. Yet another great opportunity for growth. In addition, ATWs has orders for two high spec jackups in 2012. Considering the much higher demand for the high spec over the lower spec rigs in places like the Middle East and Southeast Asia, its apparent that ATWs expects these new rigs to easily find work by at the least supplanting older low spec rigs such as the ones idled by them.

So while Atwoods only has 6 of 9 rigs working now, they are for the most part the 6 best rigs. With four more rigs including two ultra-deepwater rigs on delivery schedule for the next 2 years expect ATW to see significant growth the in the near term especially if the GOM opens back up reducing competition for rigs around the world.

Its very possible that the stock is down 5% today mainly because of an overbought rally the last 3 months.  The stock has rallied from a low around $24 in August to a high around $38 just this week. Thats an outstanding gain for such a short period no matter whether it was depressed due to the Macondo accident. With earnings expectations in the $4+ range for next year, don't expect the stock to trade in the mid $30s for long. Those new rigs will quickly drive up profits.

Thursday, November 18, 2010

Updated Portfolio Names

Anybody that has followed this blog or follows my trades over on Covestor.com has probably noticed the names I use for the different portfolios that I track. When I originally started tracking these portfolios, the typical names were either growth or value, domestic or international, small cap or large cap, etc.

Sinc I typically invest aggressively and for a high level of portfolio growth I tended to follow that logic for the names. But the names Growth, Hedged Growth, and Aggressive Growth never seemed to fit because I invest a lot of money in stocks like a Hartford Financial (HIG) that was based on a deep value play and not growth. Sure my portfolios have stocks like Riverbed Tech (RVBD) were the goal was for huge growth, but ultimately my investment style is to take what the market gives. Find value or growth stocks that are mis-priced. Whether the stock is trading below book value or below its growth rate, it doesn't matter to our management style. Not having restrictions is crucial to a portfolio manager.

Our style lets us invest in a small cap Chinese coal miner (PUDA) or a large cap tech player like Apple (AAPL) all in the same portfolio. This provides an ultimate advantage when looking for an investment manager to make the decisions.

Now if you have a CFP or want to select the sectors yourself, you'll likely find focused ETFs, mutual funds, and even focused managers more attractive. In that case, you take on sector selection risk. Maybe you pick the best manager in the small cap tech sector, but that sector drops 50% and hence you lose slightly less then the sector. Or maybe you'll select the best sector, but the manager will underperform. In that process the selections can still require a lot of work for the individual investor even though your not picking individual stocks. Why not go with a manager that makes all the decisions? Focus on finding a good manager and let him do all the work.

Ultimately through my work with Covestor.com, it became clear that my portfolios were 'opportunistic' by nature. Invest in the best ideas regardless of market size, style, or sector. Labels need not apply. Ultimately the goal is to buy the stock that now trades for $10, but will eventually hit $20 or $30. Generally one that has limited downside risk placing me solidly in the value concept though most value investors wouldn't touch a cloud computing stock like the 2 in our portfolios.

Naturally we apply certain restrictions such as the market cap greater then $50M and daily trading volume of 10K. Those are the lowest trades they'll accept on Covestor, but typically our internal restrictions are much higher. Daily volume needs to be higher and usually much higher. More like 100K+ to ensure enough liquidity. Other then that, the playing field is wide open to all stocks traded on US exchanges.

Below are the updated names. They are now more reflective of the fact the 3 Opportunistic portfolios invest in the same basic stocks but with different focuses on shorting and the use of leverage. See the right hand column of the website for more details on each portfolio.

Growth                                -------      Opportunistic Long Only
Hedged Growth                   -------      Opportunistic Hedged
Opportunistic (Aggressive)  -------      Opportunistic Levered
Net Payout Yields                -------      Net Payout Yields (no change)

Contact me at stonefox27@ymail.com for more information.

Terremark Worldwide Signs Up FCC for Enterprise Cloud Offering

More good news from Terremark Worldwide (TMRK) on landing the Federal Communications Commission (FCC) for their Enterprise Cloud platform to support its strategy to leverage cloud computing, including the agency's plan to host its web site in the cloud. 

This is yet another sign how the governments need to cut budgets either forces them or makes it more likely that they'll move more services online and ultimately into the cloud. Where they might have been more reluctant in the past to outsource into the 'cloud' it now makes economical sense and the lower costs are out ruling any concerns on security. 

TMRK is a proven government provider and a leader in the federal market. Look for more and more government agencies to move not only online but to the cloud via TMRK. FCC.gov is yet another feather in their hat. 

TMRK remains a core holding of the Opportunistic Portfolios including the Long Only and Levered. 

Terremark’s highly secure Infrastructure-as-a-Service (IaaS) offering will support the FCC’s efforts to provide richer online services to citizens through a comprehensive overhaul that includes a complete and comprehensive redesign of FCC.gov and its online systems.

“The FCC’s selection of the Enterprise Cloud serves as further validation of the compelling value Terremark’s cloud computing solutions provide our federal customers,” said Bruce Hart, COO of Terremark Federal Group. “With various federal government agencies leveraging our ultra-secure and highly scalable cloud platform to meet their real-time IT infrastructure needs, Terremark continues to distinguish itself as the cloud computing leader in the federal market. Our proven ability to comply with the highest security standards while delivering leading-edge IaaS solutions designed to fulfill each customer’s specific requirements ideally positions our company to further benefit from the U.S. government’s increasing adoption of cloud computing.”

Disclosure: Long TMRK

Stat of the Day: Philly Fed Index Crushes Estimates

So much for that much bally hooed double dip recession. The Philly Fed Index for November came in at a surprisingly rich 22.5 up from a 1.0 in October. It was also much higher then the 5.0 consensus estimates. The 22.5 reading was the largest number since last December. Leading the way were huge increases of 15 points in new orders and shipments. The main negative continues to be higher input prices due mainly to the sharp rise in commodity prices.

Inventories saw a big jump of nearly 13 points, but the overall number remained a -5.9 still showing that for the most part manufactures maintain very lean inventories. Hence, the likely huge jump in orders. Firms continue to underestimate the strength of this recovery.

The stock markets were already up strong from the potential Ireland bailout and the GM IPO. This news helped push the SP500 back over the 20ema around 1,192. Currently trading at 1,198 the markets appear poised a back a likely definitely run towards new recovery highs above the recent double top around 1,120.

Tuesday, November 16, 2010

Trade: Added Regions Financial on Management Shakeup

Bought some more stock of Regions Financial (RF) in the Opportunistic (Long only) portfolio. Only had a 2% position and I doubled it to roughly 4% to bring it in line with the position weighting in the newly started model on Covestor.com that will be launched to the public in about a month.

RF was down some 9% at one point today after announcing management changes in the credit risk department. Naturally the stock dropped on news of a shakeup in management especially with several individuals 'retiring' in one department . I'm sure most sellers assumed more bad news on the way or possibly even some yucky fraud situation. (ok its not that natural to always shoot first without understanding the news but thats how the market works). Whats so bad about the Chief Risk Officer and Director of Credit Risk leaving when they were the risk leaders when the problems occurred? What risk did they help mitigate anyway?

This is another example of the market flying off the handle before researching the situation. Supposedly at the Merrill Lynch Banking conference today, the CEO mentioned that the BOD wanted them to leave since RF had not rebounded quickly enough from the financial crisis. Explains why the stock surged back to only a 4.5% loss more in line with the weak market. Our purchase at $5.7 is already looking good with the $5.9+ close. As they say, panicking never makes you money.

Sounds like excellent news to us. Management should've been moved out a long time ago. Whether this helps make room for a buyout is pure speculation at this point, but RF is ripe for a deal. A struggling regional leader where shareholders are likely to favor a premium cash out as opposed to holding on to see what management can do. appears to be an ideal candidate for a consolidator.  

via Bloomberg:

  • Regions slumped 49 cents, or 7.9 percent, to $5.71 at 1:38 p.m. after disclosing late yesterday the departures of Chief Risk Officer Bill Wells and the heads of credit risk and problem-asset management. The moves weren’t prompted by additional reserves or charge-offs for bad loans, the company said. The announcement is spurring investor concern that losses on loans may mount, said Christopher Gamaitoni, an analyst at Compass Point Research & Trading LLC in Washington.
  • The group of departures “certainly signifies substantial risks toward future performance and valuation of their current assets,” said Gamaitoni in an interview. “If the economy turns down and credit just doesn’t get any better, there’s a lot of negative reaction that could happen very quickly,” crimping the stock’s price, he said.
  • These departures are not the result of any determination with regard to additional problem loan migration, loan-loss reserves or charge-offs,” Chief Executive Officer Grayson Hall said in the statement. “We are committed to having a strong leadership team in risk management and to continuing to de-risk our balance sheet.”
  • Wells resigned, according to the statement. The firm’s director of credit risk, Michael Willoughby, retired. The head of problem-asset management, Tom Neely, “has left the company,” it said.
Prime example of the mindset on Wall Street these days. Automatically assuming the worst doesn't make an analyst more rigorous though a lot of people seem to think thats the case. 

Disclosure: Long RF

Dicks Sporting Goods Jumps on Strong Earnings

Dicks Sporting Goods (DKS) remains one of the best retailers around. As they continue to expand their US footprint they can market share and have become the 80lb gorilla in the sporting goods sector. Heck, I'm a big investor in DKS, but I still can't even shop at their stores other then Golf Galaxy.

DKS reported Q3 earnings of $.22 that beat estimates of $.17 and above the $.16 from last year. Same store sales jumped by 5%. Much better then the 1-2% they forecast showing that management continues to UPOD (under promise, over deliver).

DKS also guided up for the full year and Q4 stating that they expect strong demand in Q4. The top retailers continue to perform in evident ignorance that the economy is suppose to be weak. Apparently though, good retailers aren't short of shoppers.

DKS will remain a core holding of all the Opportunistic Portfolios (Long only, Levered, Hedged - more to come on name changes).

Via PR:

-- Consolidated non-GAAP earnings per diluted share increased by 38% to $0.22 in the third quarter of 2010 from $0.16 consolidated earnings per diluted share in the third quarter of 2009 
-- Consolidated same store sales increased 5.1%, better than the previously estimated increase of 1 to 2% 
-- Full year estimates raised to $1.56 - 1.58 to reflect anticipated consolidated non-GAAP earnings per diluted share growth of 30 to 32% from 2009 consolidated non-GAAP earnings per diluted share of $1.20 

"We are encouraged by our third quarter performance and our continued progress in driving profitable growth.  As a result, we have raised our earnings expectations for the fourth quarter and full year 2010," saidEdward W. Stack, Chairman and CEO. "We are also increasingly optimistic about our future growth opportunities, including the potential to more than double our network of Dick's Sporting Goods stores and to fuel the growth of our Golf Galaxy and e-commerce businesses, while continuing to drive margin expansion and deliver long-term shareholder value."

Vis Briefing.com

11:02AM Dick's Sporting Goods Q3 conf call summary (DKS) : Co expects top-line growth to be enhanced by e-commence business, which is expected to growth significantly faster than traditional business. Although e-commence is profitable, it does not currently have a meaningful impact on sales or earnings. Co had a good golf quarter and expects to be pleased with the golf business going forward. Co expects to open 5 Golf Galaxy units next year. Gun & ammunition business is still "a bit difficult". Footwear business continues to be good. Co "would anticipate that we are taking market share", but is unsure which competitor it is taking it from... Co is very pleased with back-to-school results... For Q4, co expects gross margin expected to increase and SG&A to decline as % of sales, YoY... Right now, co feels the appropriate course of action is to let their cash balance built up a bit... Co did not see any serious inflation pressures. 

Monday, November 15, 2010

Dow Worth 15,000?

Does the Dow trading at 15,000 sound crazy? That's probably the general consensus in the market these days. The Dow currently trades at 11,201 at the close today.  A 3,800 point jump to get to 15,000 amounts to a 34% gain. What's interesting about he concept of the market currently being worth X amount higher or the future value hitting X in a year is that the market commentary is almost completely void of future predictions with the market higher.

It's very bullish to turn on the TV or pull up a blog and see the latest prediction of the SP500 plunging to 900 or 600 or even lower. After a decade of the market being basically flat (ok it was very volatile in that period), most market pundits seem fixated that the market won't ever go higher. Corporate earnings have peaked if you listen to them. Heck, if you had listened to the pundits corporate profits would've never rebounded so sharply.

This brings us to one of our favorite economists, Brian Westbury at First Trust. Brian has consistently been bullish preaching the concept that the economy is better then people think. This morning he posed on his blog that the Dow should currently be worth 15,000. Actually at these interest rates, he speculated that the Dow should actually be worth 27,000. Since rates are artificially low, First Trust rightfully suggests that a 5% 10 year yield should be used in the model. If the market was to rise to the 15K level, the 10 year would surely exceed 4% and likely hit the 5% target. Remember its sub 3% now.

The best news for bulls is that First Trust and Brian get very little publicity for such a bullish prediction. In fact, watch any of his TV appearances and the commentators are usually trashing his bullish stance. Its a good reminder for all the people on the sidelines. The risk isn't always that the market will drop. In fact, the likely biggest risk is being still on the sidelines and missing the next leg up.  Possibly the leg up that leads the market to new all time highs as crazy as that sounds. After all, corporate profits are already at record highs and SP500 earnings per share will quickly approach the highs in 2011.

First Trust Analysis:

  • We use a capitalized profits approach to valuing stocks.  It’s relatively simple – divide (discount) the government estimate of corporate profits by the 10-year Treasury yield, compare the result to each quarter for the past 60 years and use it to find an average fair value for stocks.
  • Using current 10-year yields (which are being held artificially low by the Fed) gives us a fair value for the Dow of 27,000.  Wait!  Before you write us off as crazy, we do not believe that this result is correct.  The reason the model kicks out such a high number is because Treasury yields are so low.
  • But, bonds are overvalued.  With nominal GDP running above 4% growth in the past year, we think a 2.8% yield on the 10-year is too low – so we use a 5% yield in the model.  This provides a “fair value” estimate of 15,000 on the Dow, which will rise as corporate profits grow.
  • As a stress test, we estimate what yield would make the Dow fairly-valued right now.  That number is a 10-year yield of 6.75%.  And, remember, even with interest rates at this level, any gains in profits would send the valuation level higher.  And profits look set to continue their strong performance.

Terex Cashes in on Bucyrus Deal

As the largest shareholder of Bucyrus (BUCY), Terex (TEX) is a big beneficiary of the buyout of BUCY by Caterpillar (CAT).  TEX owns 5.8M shares now worth over $500M. Not only do they get the appreciation from the 30% gain today, but more importantly TEX gets to cash out their shares that they acquired via the sale of their mining division to BUCY at a premium. Having the $500M in cash on hand is a lot more valuable to them then stock in BUCY.

TEX provides one of the best stock picks for the global rebound. At $25, TEX provides one of the few remaining stocks that hasn't rebounded. The stock still remains roughly 75% below 2008 highs while some stocks have already eclipsed those highs ala BUCY. The crane industry is still struggling to recover from the financial crisis, but signs are emerging that 2011 will the recovery year and TEX likely plays catchup with the market.

TEX now enters the recovery phase of its business cycle with a rock solid balance sheet. After the close of the CAT deal, TEX will have $1.8B in cash to either pay down debt or use for a strategic acquisition. Either way, while the market is enamored with mining equipment makers it appears that TEX management has the used the opportunity to sell those assets for premium prices and can now use that cash to shore up it's more focused business lines.

From a technical standpoint, TEX has broken above the October highs of $25 and will likely challenge the April highs at $28 near term.

Disclosure: Long TEX stock and LEAPS

Starting to Look A Lot Like Christmas at Massey Energy

More reports over the weekend of companies lining up to bid on Massey Energy (MEE). MEE has reportedly been on the auction block for a month now with rampart reports from Alpha Natural Resources (ANR) buying the company to Coal India buying a mine. Neither make much sense considering the size of ANR and lack of benefit to MEE from selling just one mine.

MEE has been struggling under higher scrutiny and regulation since the explosion at the Upper Big Branch (UBB) mine back in April. The benefit to suitors is that MEE has the largest reserves of met coal needed for the production of steel in the US. With reserves of roughly 1.3B plus another healthy 1.5B of thermal coal, MEE offers a plethora of valuable assets to potential suitors, Considering the combination of management under attack and valuable assets, its no surprise that the acquisition news is heating up.

Over the weekend, the WSJ leaked news that ArcelorMittal (MT) had been reviewing a bid for MEE for months now. MT as a suitor seems like the most credible news to be leaked so far. Not only would they more easily swallow MEE with their $52B market cap, but they are likely desperate to lock in met coal supplies at reasonable rates. As commodities like met coal become less and less of commodities, only fully integrated steel producers will survive and prosper. How can they compete if their input costs continue to soar?

Not to mention that Stone Fox Capital is a big holder of ANR stock as well so a big bid from a large steel producer would not only benefit our MEE investment since the stock hit $30, but it would also push up ANR.  So heres to a bid from MT! Not that MEE really needs a bid as they will eventually resolve the regulation scrutiny and find ways to profitably mine the massive met coal assets. Ultimately though a nice premium lets us cash out of one coal play to reduce our exposure while making some nice gains.

The BOD is supposedly scheduled to meet over the weekend so I'd expect the stock to move up on speculation. We're not huge fans of speculating on mergers, but MEE is a special situation considering the mine explosion and the strategic assets. It really appears that the only question is price. The BOD is clearly under pressure by large institutional shareholders to sell. Weekend should be interesting to follow. As the Caterpillar (CAT) buyout of Bucyrus (BUCY) shows the deals typically happen where the market isn't focused. Don't buy this stock expecting a buyout. Could easily get burned was what the market expects typically doesn't happen.

  • NEW YORK (TheStreet) -- Massey Energy(MEE_) shares have moved higher on a report that steel leader ArcelorMittal(MT_) is interested in buying the coal producer.
  • On Sunday, the Wall Street Journal reported that the Luxembourg-headquartered steelmaker has been exploring a possible deal for a few months now. The deal would help vertically-integrate its operations given that coal is a key ingredient in steel manufacturing.

Thursday, November 11, 2010

Huge Alpha Today in Risky Portfolios

Don't post daily results that often, but it's worthwhile to point out days were our portfolios end up positive and the market is very negative. These are the days were the outperformance or alpha of this portfolio really takes shape. More importantly it isn't achieved by being short the market.

Below is the results from the Growth Portfolio as tracked by Marketocracy.com. Beat the SP500 by 0.67%, but more importantly SFCG was up 0.25% on a broadly negative day. The Opportunistic Portfolio was up a more impressively 1%+, but unfortunately I don't have a way to post those results on a daily basis.

Note the columns are shifted over one column. The 0.25% should be under the 'Today' column.

SFCG 0.25%6.16%10.82%25.41%
S&P 500-0.42%3.11%7.03%11.19%

Please contact me at stonefox27@ymail.com with any questions about investing in these portfolios.

Wednesday, November 10, 2010

Lihua International Sees Strong Demand for Copper Products

Prior to the open today, Lihua International (LIWA) posted earnings that beat analyst expectations. With only a couple of analysts following LIWA, that generally isn't that worthwhile. While news that the company is upping full year guidance and that they see strong demand in 2011 is extremely useful.

LIWA reported revenue of $96.3M which was 135% over last year. EPS was $.33 versus $.13 last year. Margins were lower due to the new copper anode products having lower margins but they provide a higher return on invested capital leading to a larger bottom line and huge growth opportunities.

LIWA is a leading value-added manufacturer of copper replacement products for China's rapidly growing copper wire and copper replacement product market. LIWA is one of the first vertically integrated companies in China to develop, design, and manufacture lower cost, high quality alternatives to pure copper magnet and pure copper alternative products. Except for CCA wire, all other products such as copper rod and copper anode are made from recycled scrap copper.

LIWA continues to see higher demand then they can produce. Copper anode continues to have demand indications that exceed production even after the new facility is completed in late 2011.  Always nice to have such a problem.

Based on 2010 guidance, LIWA forecasts $.39 - .46 in Q4 EPS ( Net income of $38.1M to $40.3M - $26.5M for first 9 months divided by 30M shares outstanding). This easily exceeds the $.33 just reported and the $.37 analyst estimates. Higher copper anode production and sales will help increase margins on top of the higher sales.

via Q3 PR:


  • Sales increased 135% year-over-year to $96.3 million.
  • Gross profit increased 55% year-over-year to $15.1 million.
  • Net income increased to $9.9 million, or $0.33 per diluted share, compared with a net loss of $(1.3) million, or $(0.08) per diluted share in the third quarter of 2009.
  • Non-GAAP net income(1) was $10.0 million, a 49% increase, compared with $6.7 million in the third quarter of 2009. Non-GAAP net income excludes charges related to the change in fair value of warrants of $0.1 million and $8.0 million for the third quarter of 2010 and 2009, respectively.
  • EBITDA increased 65% year-over-year to $14.2 million.(2)
  • Strong balance sheet with $93.0 million in cash and cash equivalents, or $3.10 per diluted share, as of September 30, 2010, compared with $87.6 million as of June 30, 2010.
  • Cash flow from operations of $8.8 million, compared with $3.3 million in the third quarter of 2009.


As a result of the Company's strong growth outlook for the remainder of 2010, and considering the potential incremental benefit of precious metals content in copper anode to the Company's gross profit, the Company is raising its gross profit outlook for year 2010 to $57.0 million - $60.0 million.  The revised gross profit guidance reflects 57-66% year-over-year growth.  The Company's prior gross profit guidance was $52.9 million - $55.7 million, or 46-53% year-over-year growth.  The Company expects 2010 non-GAAP net income of $38.1 million - $40.3 million, or 48-57% year-over-year growth. The Company expects that 2010 growth will be largely the result of continued strong demand in China for recycled copper and copper alternative products in the household appliance, consumer white goods, automobiles and infrastructure markets.

Petroleum Inventories Plunge

While the markets focus on just the oil/crude inventories, it's more important to look at the gasoline and distillates as well. The market expected a net 2.1M decline. Instead the inventories plunged by 10.2M barrels. Thats a major decline and much, much higher then expected.

The market will typically just focus on the major miss by the headline grabber crude. Losing 3.3M barrels versus the expected gain of 0.8M barrels was a substantial miss in it's own right.

Still petroleum inventories and especially crude remain at very high levels. See info from Bespoke. Though its very key to note that these graphs show average numbers for the last 20-30 years when storage facilities and demand was lower. With gasoline and distillates plunging at an alarming rate, look for the next few reports to be critical to whether the inventory trend is finally much lower. If so, energy demand might finally be placing supply questions into the forefront.

10:34 AM EIA Petroleum Inventories: Crude -3.3M barrels, vs. consensus of +0.8M. Gasoline -1.9M vs. -0.9M. Distillates -5M vs. -2M. Futures swing to gains, +0.3% to $86.98.

Tuesday, November 9, 2010

Hot on Puda Coal!

Typically I don't post videos of companies that are mentioned on TV, but its rare to see somebody talking about one of the small caps that we own. Puda Coal (PUDA) is a leading coal mine consolidator in China and met coal washer.

Last night on CNBC Aisa, the CEO of Pacific Sun Investment Management did a great job of discussing the bright future of PUDA. As he mentions, PUDA remains a very cheap stock even  with the huge run the last month.

PUDA is a top pick in both the Growth and Opportunistic portfolios. Earnings will be on Friday and we're looking forward to hearing about the mine consolidation process.

Disclosure: Long PUDA

Monday, November 8, 2010

Trade: Bought Chubb Corporation, Sold NYSE Euronext

Bought Chubb Corporation (CB) today for the Net Payout Yield Portfolio. CB has a current yield of 13.6% based on a 2.5% dividend yield and 11.1% buyback yield. More importantly CB has been more aggressive in the last 6 months on the buyback leading to an attractive investment potential.

CB provides property and casualty insurance for both business and individuals. Interestingly insurance companies seem to have the best yields these days whether via Wellpoint (WLP) in health insurance, Medco Health Solutions (MHS) in pharmacy benefits, or CB in property and casualty insurance. CB is the only one of the three with a dividend that has the 10%+ yields in the insurance sector.

Sold NYSE Euronext (NYX) to partly pay for this purchase, but mainly due to NYX no longer buying back stock leaving the yield low for this portfolio at just 4%. Also, for the new Covestor model it's a requirement for stocks to have a market cap of $10B leaving NYX short of that requirement so we've chosen to trim them to leave the portfolios in sync as much as possible.

The Net Payout Yield Model will be officially launched on Covestor.com towards the end of this month. Covestor allows investors access to this model with as little as $5K (though it requires $10K to establish an account with Interactive Brokers). Via Stone Fox Capital the minimum will be $100K.

Please contact Covestor directly about investing via them or Mark Holder at stonefox27@ymail.com with any questions about investing directly with Stone Fox Capital.