Tuesday, December 28, 2010

Barclays Issues 2012 Guidance for Riverbed Tech

Interesting comments from Barclays regarding Riverbed Tech (RVBD) back on the 22nd. Guess I missed their report due to the holidays. The numbers they've issued are interesting because it highlights the investing conundrum involving RVBD.

Barclays upped 2011 estimates and issued 2012 numbers. On the face, RVBD trades at nearly 50x the street estimates for 2011 earnings of $.76. That PE ratio is extremely high and places RVBD on our list for pruning our holdings. Might be time to take our money and run.

What makes the decision interesting is that as the calendar rolls into 2011, the market will begin looking towards 2012 numbers which Barclays estimate at $1.09 and possibly as high as $1.3. The best guess lowers the PE to a manageable 31 or roughly in line with the growth rate around 30%. Now if RVBD hits closer to the upper estimate the PE drops to 26 and a ratio much lower then the growth rate at that point. Hence, the dilemma of investing in high growth stocks. They only appear expensive for a short period when growth is that strong.

For now, Stone Fox Capital continues to hold our remaining shares after pruning portions earlier this year much too soon unfortunately.


Via SteetInsider.com:

Barclays analyst says, "Riverbed is continuing to gain share in a healthy WAN optimization market: We believe WAN optimization demand remains robust...We lift 2011 EPS materially and introduce 2012: We lift and introduce our 2011 and 2012 revenue growth assumptions from 25% to 31%/25% respectively. This drives 2011 split-adjusted EPS of $0.84 and 2012 EPS of $1.09. Less conservative assumptions - 38% and 32% sales growth and a 35% operating margin - yield 2012 EPS of $1.30...We expect momentum to continue for this beat-and-raise story." 






Disclosure: Long RVBD

Stat of the Day: Richmond Fed Jumps Back to Recovery Highs

The Richmond Fed reported today the December number jumped 16 points to 25. A reading close to the highs reached this summer and higher then any activity of the last 10 year. It appears that manufacturing is ending 2010 on a very high note. The Richmond Fed isn't typically seen as an important region, but it does provide the earliest insight into the December activity.

The important sub-components of Shipments and New Orders jumped to roughly 30 with the Shipments recording a new recovery high. Also interesting is that inventory levels of both finished goods and raw materials dropped signaling manufacturers will need to restock supplies.

Hiring conditions continued to improve at a moderate pace over November. Wage growth doubled so that is concerning for profit margins if it is to continue.

All in all a very solid report considering the October activity was approaching flat and within 2 months it has soared all the way to 25. Backlog Orders have gone from -12 to 14 showing the dramatic change. 2011 should be off to a strong start based on this report. Now we'll wait for the Chicago PMI on the 30th for confirmation. The market is expecting a slight dip to 61 from the 62.5 in November. The Richmond report suggests some upside to that estimate.




Business Activity Indexes

Monday, December 27, 2010

Legendary Money Manager Dies at 107

Roy Neuberger died over the weekend at 107. Maybe Warren Buffett isn't so old after all. Since Roy was already in his 90s when my financial career began, I'm not as familiar with his work, but he has an impressive track record that naturally can't be topped by living to that ripe age.

Considering he was a value investor maybe there is something to that way of investing that leads to a longer, happier life. Less worries about market swings and volatility. The Net Payout Yields portfolio attempts to follow that trend, but the rest of our portfolios are very volatile. Maybe we should adopt that philosophy. Sure would be less stress, but maybe not as much fun.

Anyway, just thought it was interesting that a pioneer in the supposedly stressful area of money management survived the stresses of the market for that long. Even more interesting is that at the ripe age of 105 he supposedly helped a Neuberger partner plow money into the market at the bottom of the financial crisis in 2008.

Via Wall Street Journal:


A New York City kid, Neuberger started his career on Wall Street just before the 1929 stock market crash, and survived to found his own firm in 1939 that managed investments for wealthy people.
In 1950, his firm started offering more middle-of the-road investors the option of mutual funds with a nearly brand-new concept: low fees. The no-load mutual fund now is an investing staple.
Neuberger’s experience with nearly every significant market boom and bust of the last century meant other investors sought out his sometimes prescient advice. Before the 1987 crash, Neuberger moved money away from stocks, fearing a runup by speculators. During the frenzy of the 2008 financial crisis, Neuberger urged a nervous Jeff Bolton, a partner at Neuberger Berman, to plow money into the market, helping Bolton call a market bottom.

Thursday, December 23, 2010

Bullish Sentiment Can Be Bullish

In a time and age where every investor sentiment indicator is used as a contraian figure, its likely that most of the analysts spewing such non-sense haven't ever reviewed whether it is factual. First, just because a sentiment figure is calculated it doesn't mean that the pollsters are actually rigorous in their answers. Its easy to say your bullish these days, but not likely as easy to have actually invested cold, hard cash. Hasn't the consumer sentiment numbers taught us over the years that spending doesn't always match sentiment. Second, being initially bullish doesn't mean that investors can't an won't remain bullish for a long time. Opinions don't seem to swing that quickly.

Ciovacco Capital did some interesting work on investor sentiment and found out that it's not as indicative of a pending market crash as the procrastinators on TV would suggest. They worked with Robert Colby, author of The Encyclopedia of Technical Market Analysis, to better understand what bullish sentiment typically predicts. Per Mr. Colby:


On advisory service sentiment, there were 56.8% bulls versus 20.5% bears as of 12/15/10, according to the weekly Investors Intelligence survey of stock market newsletter advisors. The Bull/Bear ratio stands at 2.77, which is between one and two standard deviations above the long-term, 20-year mean. This is not overly excessive bullish sentiment in the second year of a bull market. Bullish sentiment tends to rise in November and December. The ratio was as high as it is now or higher in Decembers of each year 2003, 2004, 2005, and 2006, and none of these “high” readings led to bear markets. The 20-year range is 0.41 to 3.74, the median is 1.54, and the mean is 1.61. 
The VIX Fear Index fell below 8-month lows to 15.46 on 12/17/10, reflecting diminishing fear among options players. VIX is near its 3-year low of 15.23 set on 4/12/10. Before we take the current level of VIX as a sell signal, however, we might consider that VIX was as low as 9.89 on 1/24/07, nearly 10 months before the final tops in the price indexes. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.

So everybody is trying to spend the bullish sentiment as bearish, but clearly this is a cyclical number that had no impact on the bull market of the 2000s.  Its also interesting to note that the low VIX wasn't the actual sell signal, but the signal to prepare to sell.

Further, Ciovacco Capital was able to determine that such a bullish ratio led to 100% positive markets over the next 6 months when observed in the 2000s. Even better, the 2003 market which is probably most indicative of the current climate saw a 10.66% gain in the next 6 months.

Check out the data for yourself and ignore the bearish spin on the bullish sentiment. It does nothing to signal anything a top in sight.

Wednesday, December 22, 2010

China To Spend 68% More on Power Generation

That headline just seems incredible considering how much China already spends on generating power and especially the commodities such as copper and met coal. According to a research report by the China Electricity Council, China plans to spend $1.7 Trillion (yes Trillion) on power generation over the next 5 years versus the previous 5 years from 2006 to 2010.

Yes, thats a whopping 68% increase!

The expectation is that power generation capacity will rise 8.5% annually to 1.437 million megawatts by 2015. By 2015 only 33 percent of the power generation will be by non-fossil fuel and some 36% by 2020. So while the percent of non-fossil fuel will increase it appears that the fossil fuel (read coal) portion will continue to rise.

Will it ever end? Can China continue to grow at an enourmous clip? Well, until they eclipse the US in GDP, they likely can keep it up. With roughly 4x the population, China should have a bigger economy. This growth means that copper at $4.27/lb might be relatively cheap. At some point though, the high prices will subvert growth. Its clear that China expects this unstoppable growth to continue unabated as they continue to hunt for resources.

Its why Rio Tinto (RTP) has offered $3.9B for Riversdale Mining, a company that doesn't even produce any coal from its mines yet. And its also why a company with 13B mt of coal and expectations for the production of 5 to 10% of the worlds met coal should pass on the offer. Considering they expect to produce up to 20M mt of coal annually, that price sure seems cheap with China and India demand heating up.

At some point, the torrid growth in China will abate. It just doesn't appear that the next 5-10 years will be when that happens.

Original Covestor Model Tops 60% Gain for 2010

The Covestor Opportunistic Arbitrage (Levered) Model was launched on February 3rd this year. Since then the model has gained over 60% now while the SP500 is up 14.3%. Not to shabby and sure exceeds the goal of beating the market by 2-3x its gains.

The model is very aggressive with leverage probably averaging over 1.5x for the year. The model has greatly benefited from cloud computing and commodity stock gains. Lately though retail stocks such as Dicks Sporting Goods (DKS) and Liz Claiborne (LIZ) have helped out.

Please review the model on Covestor.com if you have any interest in investing in it.



Inception Feb 03, 2010Manager*S&P 500Avg. Sub.
Month to date (%)8.896.278.40
1 month (%)9.76-0.239.14
3 month (%)53.5112.5150.43
Annualized since inception (%)70.6616.30n/a
Since inception (%)60.0114.34n/a
Sharpe (since inception)1.380.87n/a





3rd Model launched: Anybody interested in a un leveraged version of that model should check out the latest model launched by Mark Holder - Opportunistic Arbitrage Long Only. This model started accumulating trading data on November 8th and provides investors the opportunity to invest retirement money or money looking for a little less risk. This model in general is a exact replication of the very successful Opportunistic Arbitrage but without using margin. It also is prevented from directly using shorts, but at times it might use ETFs that short stocks.

Currently the largest holdings are Foster Wheeler (FWLT), Apple (AAPL), Dick's Sporting Goods (DKS), Terex Corporation (TEX), and Alpha Natural Resources (ANR). You might note that the position holdings are slightly different in the models mainly due to rebalancing at the launch of the model and the direction of stocks after launching. FWLT for example has exploded higher since early November hence pushing its weighting to top of the heap.

The model is already up 4.87% versus the 2.56% for the SP500. It charges 1.5% of assets per annum with a minimum investment of $5,000. Again please contact Covestor.com if your interested.



Inception Nov 08, 2010Manager*S&P 500Avg. Sub.
Month to date (%)5.256.27-
Since inception (%)4.872.56n/a
Sharpe (since inception)2.761.61n/a

Follow Up on Regions Financial

Back on November 16th, Stone Fox Cap added to its Regions Financial (RF) position when the stock swooned on the back of the departures of the Chief Risk Officer and others in the risk management area. The initial fear and typical of Wall Street was to be concerned that this was an indication that problem loans were escalating out of control and RF would be posting some horrible numbers.

While on the surface that might be a plausible thought, it just didn't pass the rigor test. RF had performed badly during the financial crisis caught with numerous bad loans in Georgia and Florida. So if the CRO hadn't prevented RF from avoiding the housing crisis, why was the market concerned when he left? If anything, it seemed long overdue.

Back in our article on the 16th [Trade:Added Regions Financial on Management Shakeup], we suggested that this was excellent news and hence bought more shares around $5.7. Management had followed up on the resignations that the BOD wanted them to leave due to poor performance. So why did the market panic?

On December 7th, Regions announced the hiring of KPMG managing partner for the CRO position. That helped solidify the position of management that the point of the resignations were to find new and hopefully better blood.

The stock eventually swooned down to around $5.2 in the next few days so Stone Fox clearly jumped the gun when buying. Currently though RF has jumped all the way back to $6.80s providing a solid 20% gain in just a month. Not bad considering missing the bottom by a good amount.

This case continues to highlight how the market over reacts to the downside a lot of times. Ignoring the headlines can be the best way to profit. Some of the gain might be due to the always rumored buyout potential and the recent deals by Canadian banks. For the most part, we ignore those headlines other then acknowledging that when the stock swoons the buyout potential provides a floor.

The stock has had a nice run since the November lows, but it still remains below the mid $7s that it routinely traded around during late summer. After having shook off on the weak hands, the stock is poised to make a run to those highs if not higher. As financials come back into favor, 2011 might be the year of regional banks so stay tuned to this story.

























Disclosure: Long RF

Tuesday, December 21, 2010

Potential Breakout on Liz Claiborne

Interesting movement today in Liz Claiborne (LIZ). The company is still struggling to right size its business structure and return to a profitable company. The stock is up over 5% today around the $7.65 area which is close to the recent highs of $7.79 intraday and a closing high of $7.61 just on December 6th. A close at these levels and any follow through tomorrow could signal much higher prices.

Not sure what the market is telling us other then the retail environment has been strong this holiday season. Interesting though is that Jones Group (JNY) is only up 1% today and its no where near recent highs in Oct around $21 which is much higher then the current sub $16.

Maybe LIZ is in play and thats why the stock has been strong. Regardless the stock is possibly set up for a retest of the yearly highs in the $9-9.5 range reached back in late April. LIZ isn't thought to be well run so somebody apparently knows something to aggressively buy LIZ today. Its a cheap company if they can ever turn around the margins. So far though its grossly under performed expectations even in a better environment.


























Disclosure: Long LIZ

Monday, December 20, 2010

Limelight Networks Wins Appeal on Akamai Lawsuit

Today Limelight Networks (LLNW) announced that the United States Court of Appeals for the Federal Circuit had affirmed a District Court grant of LLNW's motion for judgement for noninfringement of Akamai's (AKAM) '703 patent. Basically confirmation that at the very least, AKAM can not prove that LLNW infringed on its patent.

Considering the stock action of late its surprising that this news was bullish for LLNW. Eight straight down days sure suggested negative news on the horizon. Highlights the issues with tech trading. Sure it might have gotten an investor out of LLNW much higher then the intraday lows sub $6, but for all the wrong reasons. The market clearly shot first without any logical reason. It clearly wasn't apparent that LLNW would lose this appeal.

In the low $6s, LLNW provides a opportune entry point into Content Delivery Networks (CDNs) and the move to cloud computing. As pointed out a few weeks back by Stone Fox, LLNW still needs to prove they can not only grow but grow profitably. This appeal doesn't neccessarily help on that front, but in weakness in the stock price due to the pending ruling on this case is a buying opportunity.

Technically, the stock is clearly oversold at this point. Tomorrow could hold the key. Stock needs to follow through and quickly climb back over the 50ema at $6.48 in order break the downtrend.


























Disclosure: Long LLNW

Sunday, December 19, 2010

Global Hunter on Lihua International

Interesting comments on Lihua International (LIWA) by Global Hunter on theStreet.com especially considering the negative story posted all over the internet claiming fraud. So far the fraud claims seem far fetched, but you never know. Also interesting that the fraud claim wasn't addressed especially since it appears this analyst has visited their sites in China.

Global Hunter isn't a big name on Wall Street so I don't know whether this video will have a huge impact on Monday, but it will help to offset the negative story put out last Thursday. Though that story was just a rehash of previous reports from earlier this and last year it will help that it doesn't gather steam.

The analyst from Global Hunter made some interesting comments about LIWA trading at sub 4x 2011 earnings. Thats nearly $3 in expected earnings next year. The street has been much closer to $2 all year so I'm leaning towards the analyst mis-stating the number then any real research suggesting that the upside potential has changed. That would be huge, but none of the research we've done suggests that potential. Now the 2012 number might get closer to $3.

The obtaining of a license to import scrap metal will be a huge earnings catalyst starting in 2011. The estimate is that LIWA will save $150 to $200 a mt or nearly $17.5M if they import all of the 100K mt.

Again check out the video. Nice to see some real facts about a small cap Chinese stock instead of the normal 'fraud' claims around every corner.






Disclosure: Long LIWA

Friday, December 17, 2010

Accenture Pops on Results

Accenture (ACN) jumped roughly 8% today on the back of solid earnings released last night. Anybody following the Net Payout Yields would've been alerted to jump into this stock long before this report. Even after a big run the last few months, ACN has a solid dividend of 2% and repurchased $620M worth of shares during the last quarter providing a roughly 8% buyback yield. The total Net Payout Yield jumps to nearly 10% even with the jump in stock price.

ACN raised full year guidance to a mid point of $3.12 a share easily exceeding the $3.04 estimate. Part of this is due to the $.04 gain in this quarter alone from the buybacks. Then again analysts know they plan to buyback shares so that should be factored into estimates.

Lots of investors continue to slam buybacks but ACN provides an ample example of how they can work so masterfully. With the stock depressed over the last year, ACN used their good balance sheet and strong cash flow to buy back shares on the cheap. So cheap that it was very accretive to earnings. Much better then paying a 40% premium to buy other assets. Why not buy your own shares at a discount? Especially when management sees a bright future and a low stock price.

Another reason the stock jumped was the mention that customers were starting to accelerate investments to position themselves for a economic recovery and to keep up with new technology such as cloud computing. Any concept that ACN is gaining because of cloud computing will naturally send the stock higher in this cloud computing mania.

Also, management indicated that public spending remained strong in a continual contrast to the statements out of Cisco Systems (CSCO). Makes us more concerned about the CSCO position as signs continue to mount that CSCO has either missed the cloud computing sector or has just completely lost the ability to juggle all the different divisions as companies look more towards best of breed versus a complete solution.



Earnings Highlights
-- Revenues increase 12% in U.S. dollars and 14% in local currency, to $6.05 billion
-- EPS up 20%, to $0.81
-- New bookings are $6.31 billion, with consulting bookings of $3.72 billion and outsourcing bookings of $2.59 billion
-- Company raises outlook for full-year revenue growth to range of 8% to 11% in local currency and for full-year EPS to range of $3.08 to $3.16
Dividend
On Nov. 15, 2010, a semi-annual cash dividend of $0.45 per share was paid to Accenture plc Class A ordinary shareholders of record at the close of business on Oct. 15, 2010 and to Accenture SCA Class I common shareholders of record at the close of business on Oct. 12, 2010. These cash dividend payments totaled $321 million.
Share Repurchase Activity
During the first quarter of fiscal 2011, Accenture repurchased or redeemed 14.6 million shares for a total of $620 million, including 3.2 million shares repurchased in the open market. Accenture’s total remaining share repurchase authority at Nov. 30, 2010, was approximately $2.5 billion.
At Nov. 30, 2010, Accenture had approximately 711 million total shares outstanding, including 639 million Accenture plc Class A ordinary shares and 72 million Accenture SCA Class I common shares and Accenture Canada Holding, Inc. exchangeable shares.

Disclosure: Long ACN

Thursday, December 16, 2010

NII Holdings Lines Up 3G Licenses

NII Holdings (NIHD) is a recent addition to the Opportunistic Long Only portfolio and on Tuesday they announced the winning of 3G licenses in Brazil that covers the majority of the population. This comes after recently winning such licenses back in October in Mexico as well. Considering the costs of $715M to buy the Brazil license and several billion to build it out, the major issue is whether they'll have the cash to fund this massive expansion.

NIHD is a leading wireless provider in Latin America and a major force in the important markets of Brazil and Mexico. They currently have over 3M subscribers in both markets along with a total of 8.6M subscribers when adding in Argentina, Chile, and Peru.

2012 will be a massive year as they begin implementing the 3G networks in Brazil and Mexico, but that leaves 2011 as a year of major capital expenditures for a company with $544M in net debt. Considering they have $2.4B in consolidated cash and investments they likely will find an affordable way to fund this expansion. According to Bloomberg, Brazil's national development bank will help finance the network which would be extremely bullish.

For 2011, several analysts now expect earnings to exceed $3 leaving the stock trading at $45 with only a 15 PE multiple. While not overly cheap, the company now has 2 major catalysts especially with Brazil likely hitting prime exposure by 2012 as the Olympics and World Cup approach. NIHD might provide an ideal way to invest in the growth of both Brazil and Latin America. Don't neglect Mexico as it was the first major stock market to retake the 2008 highs.

The stock was recently purchases in the upper $30s as fears over losing a major partner for the Mexico network caused unwarranted panic. The stock also bounced nicely off the 200ema providing an opportune investing zone. Investors need to understand that NIHD now holds major assets in these licenses. Funding issues may abound but they are a savy network operator that should easily attract an investment dollars needed.


Brazil 3G license:


- Nextel Brazil is the winning bidder in the auction for a 20MHz license in the 1.9-2.1GHz frequency band in major Brazilian metropolitan markets, covering approximately 182.4 million people, or 97% of the Brazilian population 
- Nextel Brazil plans to move forward to invest, build and deploy a nationwide 3G network with commercial service beginning in 2012 



Via Bloomberg:


  • The airwaves will double the growth potential of NII in Brazil by making the company a national competitor, Sergio Chaia, president of its Brazilian unit, told reporters today in Brasilia. The company plans to invest as much as 5 billion reais over five years on its expansion.
  • “It’s a promising market,” Chaia said. Only 8 percent of Brazilians use wireless high-speed Internet, he said. “Nextel sees room to grow in this area.”
  • NII will add the data service to its network as soon as possible, he said, without providing a date. The company will pay for the expansion with cash and financing from Brazil’s national development bank, known as BNDES, Chaia said.
  • “It gives them a material spectrum position in the largest market in Latin America,” said King, who is based in Baltimore and recommends buying NII shares. “We view this as a significant positive.”

Disclosure: Long NIHD

Tuesday, December 14, 2010

Deutsche Bank Sees SP500 at 1,550 in 2011

We've followed Binky Chadha, Chief US Equity Strategist at Deutsche Bank, over the last year or two. While his calls for a higher market get moderate coverage on CNBC or Bloomberg, he doesn't get near the play as Doug Kass predicting 2011 as flat or the PIMCO guys predicting a 'new normal' or of course the doom and gloom gang.

While 1,550 is a very aggressive 25% gain, its bullish that the market only gives him minor credibility though he has been accurate lately. Back in March he predicted the market would end the year at 1,325. As we suggested back then that number appeared too high, but it might not end much off the mark. Much more comfortable with a 1,400+ number next year as long as the market quickly dismisses such lofty targets.

Watch the below video, but the key point is that average investors have likely not heard his prediction and quickly dismiss it.






The Problems with Electric Cars

Note: This article was originally written at the end of November to correspond with a short position in TSLA. Unfortunately I failed to make the trade and now TSLA has swooned big time. It will definitely be followed for future entry points on the short side. The news of the Russian billionaire entering the market just further highlights the competition for a sexy market similar to airlines even when the leading independent company is far from profitable. 



While most of America is enamored with the supposed benefits of lower emissions of electric cars, the real beneficiaries appear to be utilities and coal and natural gas producers.  Lots of people debate whether electric cars reduce emissions. After all, power plants that use coal fuel electric cars. People seem to assume that batteries get charged by fairy dust.

The Washington Post had a great article a few weeks back detailing why utilities are both thrilled and worried about electric cars. Something about utilities being thrilled that concerns me, but the fact they are also worried should be doubly troubling.

Anybody following the progress of electric cars probably already realizes that one of the major hurdles with them are the ability to charge the cars. Apparently the charging process is alot more challenging then even I thought.

The average new electric vehicle like the Chevy Volt and the Nissian Leaf uses 3300 watts to charge which is more then the average home. Place a couple cars like that in one neighborhood and boom the transformer might blow. What immediately sets my alarms off is that since an electric vehicle is similar to the electricity requirements of a small home then why aren't the purchases planned through the utility? If my neighbors bought electric vehicles and I lost power because the neighborhood transformer wasn't expanded, that would be rather upsetting. In fact, it seems awfully irresponsible of the automakers to not plan better.

Another disturbing issue is that the costs of upgrading transformers might be passed along to all customers of a particular utility. Now that doesn't seem right. Why aren't they recouping costs from customers that are using more energy? Utilities should even consider implementing higher rates for high usage customers. If the electric car is the one causing the $7-9K added expense for an upgraded transformer, shouldn't they be paying for it?

The Houston Chronicle had an article about the emissions of electric cars. Every argument for electric vehicles is that is produces zero emissions if your talking to somebody clueless about the energy source to half efficient from somebody with knowledge on the subject. I've actually read studies where the emissions where higher because of using a coal based system.

Since I can't seem to find those articles, we'll just discuss the information dug up by the Chronicle. According to them, an NRG Energy study found that even a plug-in hybrid electric vehicle charged with electricity from a coal plant would result in 25 percent less carbon dioxide emissions. Great, but is that the goal? Its possible that emissions will be much lower if you can argue that wind power will power those vehicles, but it seems irresponsible to assume such. Any additional power requirements will require the use of coal and natural gas. That wind power could have gone to power houses and businesses already hooked up to the grid. If anything, electric vehicles will just transfer the benefits to them instead of lower existing emissions.

What the study found was that compressed natural gas was the real clean option. Electric vehicles are cleaner, but they won't truly be clean unless coal power is drastically reduced. That won't happen so long as new electric vehicles strain existing systems and completely overwhelm any renewable additions. So why aren't we moving forward with an CNG/LNG option where the transferred car leads to immediate emissions reductions and no impact to power requirements in neighborhoods?

Another concern is that the increased power requirements causes the input costs to surge. More demand for coal and nat gas could strain the system and push prices higher. So while electric vehicles claim savings versus gas that might quickly change as demand increases. Theoretically when the market reaches a tipping point, gasoline will decline as demand decreases and electricity rates will soar as demand climbs. In 5-10 years, it might just become cheaper to use gas instead of electricity.

This all leads us to believe that Tesla Motors (TSLA) is the biggest overhyped stock today. Not only is the future of electric vehicles cloudy, but the market has become crowded. Over 50 electric vehicles were at the LA Auto Show. So while TSLA won't even get a massed produced car to market until 2012 that it will cost $57K, the competition will be fierce and benefits seem very minimal. Not to mention that they are losing over $30M a quarter until they can launch that car. '

Sure sounds like the internet bubble when losing money was acceptable. Be careful with that stock though as it continues to ramp ever higher on the backs of the successful GM IPO and the hype surrounding electric cars.


Via Washington Post:

Plugged into a socket, an electric car can draw as much power as a small house. The surge in demand could knock out power to a home, or even a neighborhood. That has utilities in parts of California, Texas and North Carolina scrambling to upgrade transformers and other equipment in neighborhoods where the Nissan Leaf and Chevrolet Volt are expected to be in high demand.

Not since air conditioning spread across the country in the 1950s and 1960s has the power industry faced such a growth opportunity. Last year, Americans spent $325 billion on gasoline, and utilities would love even a small piece of that market.

Driving 10,000 miles on electricity will use about 2,500 kilowatt-hours, or 20 percent more than the average annual consumption of U.S. homes. At an average utility rate of 11 cents per kilowatt-hour, that's $275 for a year of fuel, equivalent to about 70 cents per gallon of gasoline.


Via Houston Chronicle:

"Even in the worst-case scenario where 100 percent of that generation is from coal, there is still a net positive emissions trade-off," Stancil said. A 2007 study found that a plug-in hybrid electric vehicle charged with electricity from a coal plant would result in 25 percent less carbon dioxide emissions than a conventional gasoline vehicle, he said.



Over a lifetime, from production to transportation, disposal and the energy used to power various cars, the electric and hybrid electric vehicles emitted less pollutants than conventional internal combustion engines. Kreider's study looked at carbon dioxide, sulfur oxide, nitrogen oxide and mercury levels emitted.
Cars running on natural gas, however, fared the best.
"A Prius (hybrid) is a lot better than a conventional car if we just focus on greenhouse gases, but then the question is, 'What's the best you can do?' " Kreider said.
"The point about electric vehicles is they're not that clean. To do it really clean, you'd do compressed natural gas."

Lihua International Sees Even Higher Demand for Copper Products

Lihua International (LIWA) remains a top investment in the Opportunistic portfolios as its recycled and refined copper products remain in high demand in China. Today LIWA upped copper anodes product shipments for 2010 and increased the demand for 2011. Considering that LIWA already had demand in excess of supply even after doubling capacity, this is more great news for the company that trades at roughly 6x '11 estimates.

LIWA has already shipped 11K tons of copper anode in 2010 after only forecasting 8-10K tons back in October. Now they expect shipments of 12.5K tons for all of 2010. More great news that LIWA is exceeding internal estimates especially considering that demand continues to pile up.

Total demand has now be raised to 122-134K metric tons up from the last estimate of 110K mt. Considering they expect to increase production capacity to 75K mt in the 2nd half of 2011 it appears that demand is approaching double that of their supply. LIWA has a ton of growth opportunities to consider with this demand equation.

This stock remains a core holding and is only trading at 6x 2011 estimates due to the Chinese small cap fraud issues. LIWA continues to garner more interest in the press and could easily have a significant pop from these levels.


Via PR:


  • The Company began shipping product to this customer in the fourth quarter of 2010, and expects to supply 1,000 – 2,000 tons of copper anode per month in 2011, with specific quantities determined based upon available capacity.
  • In 2010 to date, Lihua has shipped 11,000 tons of copper anode, and expects full-year copper anode shipments to total approximately 12,500 tons. Including demand from this customer, Lihua now has 2011 copper anode supply contracts and volume demand indications totaling 122,000 – 134,000 metric tons. Upon completion of the two new smelters in the second half of 2011, Lihua expects annual copper anode production capacity to be 75,000 metric tons.
  • In order to meet the growing customer demand, Lihua recently broke ground on its second copper recycling facility, being built on 30 acres of land adjacent to the Company's existing copper recycling facility in Danyang, China. Based on the Company's construction plans, the facility will initially house two smelters, doubling Lihua's annual refined copper production capacity to 100,000 tons. The new facility is expected to commence operation in the second half of 2011.


Friday, December 10, 2010

Net Payout Yields Focus: Chubb

Chubb (CB) is a recent addition to the Net Payout Yields portfolio and provides one of the highest yields in the market these days. CB falls into the property and casualty insurance sector that continues to remain undervalued due to fears in the sector. With a PE of just 10, the stock remains cheap.

Yesterday, CB announced the continuation of its dividend plus the a new share repurchase program of up to 30 million shares or roughly 10% of the outstanding shares.

To this model, this provides the best of both worlds. First, investors get a solid 2.5% dividend providing a nice income stream and a solid return. Second, the huge stock repurchase provides a constant floor for the stock and the opportunity for a dramatic increase in earnings per share just from reducing the outstanding shares.

It remains perplexing that such stocks remain this low with such support from the company. Regardless, the Net Payout Yields portfolio will happily take advantage fo



  • declared a regular quarterly dividend in the amount of $0.37per share payable January 11, 2011 to shareholders of record onDecember 23, 2010.  
  • The Board also authorized a new share repurchase program of up to 30 million shares of the Corporation's common stock.  Purchases may be made from time to time in the open market or in privately negotiated transactions.  The program has no expiration date.  The Corporation's existing repurchase program is expected to be completed prior to the end of the year.  
  • "Today's actions reflect the Board's continued confidence in Chubb's strong financial condition as well as an ongoing commitment to the importance of our capital management strategy," said John D. Finnegan, Chairman, President and Chief Executive Officer.  


Disclosure: Long CB

Thursday, December 9, 2010

Luckily Covered lululemon Athletica Short

Back in September, the Opportunistic Levered (Arbitrage) portfolio attempted to hedge some gains with a short in lululemon Athletica (LULU). LULU had a big surge on earnings back then and seemed very stretched on a valuation basis.

Well 3 months later and the stock is jumping again on the back of strong earnings. The stock jumped as much as 19% on the back of earning $.36 easily surpassing estimates of $.25. Same store sales were up a whooping 29%.

LULU also forecast numbers that will easily surpass estimates in Q4 with a high teens percentage rise in same store sales. That is phenomenal growth. Maybe they are worth the high multiples after all.

Going forward, based on a rough estimate from the guidance it seems the high end of estimates for 2011 (Jan 2012) might top out at $2. Based on the current $64 stock price, the forward PE is a lofty 32. Sure they are growing that fast this year, but will that growth be sustainable. Also for a retail operation they now have a Price to Sales ratio of 7. That is extremely lofty suggesting that margins might be stretched to the max as typically happens with such strong comps.

Interesting that the stock topped out at $66.66 today. Are four 6s bad? Anyway, luckily the short was covered back on October 26th at $46 (yikes the stock is up 43% since) as it became apparent that high end retail was thriving and the stock of LULU wasn't going to be broken. Too difficult to play at this point, but might become a good short when the momentum breaks.

Via PR:


  • Net revenue for the quarter increased 56% to $175.8 million from $112.9 million in the third quarter of fiscal 2009. Net revenue from corporate-owned stores was $143.2 million for the quarter, an increase of 46% from $98.1 million in the third quarter of fiscal 2009, and comparable-store sales increased by 29% on a constant-dollar basis.
  • Gross profit for the quarter increased by 72% to $96.8 million, and as a percentage of net revenue gross profit increased to 55% for the quarter from 50% in the third quarter of fiscal 2009.
  • Income from operations for the quarter increased by 103% to $42.4 million, and as a percentage of net revenue was 24% compared to 19% of net revenue in the third quarter of fiscal 2009.
  • Diluted earnings per share for the quarter was $0.36 on net income of $25.7 million, compared to diluted earnings per share of $0.20 on net income of $14.1 million in the third quarter of fiscal 2009. 

Freeport-McMoRan Copper Announces Stock Split, Special Dividend

Interesting news from our prime copper investment. Freeport-McMoRan Copper (FCX) announced a $1 supplemental dividend to be paid to shareholders of record on December 20. This is on top of the increase to the annual dividend from $1.20 to $2 announced back in October. All of a sudden this volatile copper and gold play is becoming a nice yielding stock. On top of the dividend news, FCX also announced a 2-1 stock split on February 1, 2011.

In general this news shouldn't do that much for the stock as I don't think one time dividends do much for shareholders and a stock split should naturally have no impact. It is good though for companies to split when stock prices soar into triple digits. For small accounts like those on Covestor, it can be difficult to make a position in stocks like FCX or Apple (AAPL) because of the high stock price. Somebody wanting to invest $500 would either have to buy 4 shares for $440 or 5 for $550. Not ideal for a diversified portfolio.

Ultimately these moves won't have a huge impact on the stock, but the short term could be meaningful. For whatever reason, these stock splits tend to attract more investors trying to daytrade the news.

More importantly though the signal by the BOD is that FCX has a very positive future and a strong balance sheet. As long as Copper and Gold continue on a race higher, FCX will see huge cash flows in 2011 and beyond.


Via PR:


  • announced today that its Board of Directors has declared a supplemental common stock dividend of $1.00 per share to be paid on December 30, 2010 to shareholders of record as of December 20, 2010. The supplemental dividend to be paid in December represents an addition to FCX’s regular quarterly common stock dividend. In October 2010, FCX’s Board of Directors announced that it has authorized an increase in its annual common stock dividend from $1.20 per share to $2.00 per share.
  • FCX also announced today that its Board of Directors has declared a two-for-one split of its common stock. The split will be effected in the form of a stock dividend payable on February 1, 2011 to shareholders of record on January 15, 2011. Shareholders will receive one additional share of common stock for each share of common stock held on the record date. The additional shares will be issued to shareholders on February 1, 2011. As a result of the stock split, the number of outstanding shares of common stock will increase to approximately 942 million from approximately 471 million.
  • James R. Moffett, Chairman of the Board and Richard C. Adkerson, President and Chief Executive Officer of FCX, said, “The authorization of this supplemental dividend reflects the strong current cash position and significant cash flows being generated by our global operations. The Board’s decision to split the stock reflects the strong share price performance of our shares and positive outlook for our business. Our financial strength combined with the positive market environment and outlook will enable us to continue to invest aggressively in our attractive portfolio of growth projects and enable us to grow our assets while providing strong returns to shareholders.”