Friday, December 30, 2011

German DAX Ends Down 15% for 2011

My understanding is that Germans are not as heavily invested into the stock market as the US, but a 15% drop in you countries main market index surely catches the attention of politicians.

From the chart below, the majority of the loss took place in the just the first part of August when the index plunged from around 7,200 to 5,600. Some might doubt the willingness of Germany to bailout the Southern Europeans, but such moves suggest they have more incentives than most people would think.

India Food Inflation Drops to 6 Year Low

Don't look now, but food inflation in India is now under control. Prices of primary food items rose only 0.4% in the week ended December 17 from a year ago.

Lower food inflation places less strain on the economy and lowers the overall inflation rate allowing the RBI to begin easing monetary policies. Rates were increased 13 times since March 2010 and has started having a major impact on growth.

Inflation is expected to drop to around 6% in the next few months and maybe lower if food prices are any indication.

As I wrote recently for Seeking Alpha, India stocks are ripe for buying as inflation comes under control. A lot of the fears were misplaced as the sharp drops in commodities from the credit crisis lead to artificially inflated price increases by the start of 2011. Now after some cooling of growth, inflation rates have dropped dramatically and as the world economy goes into 2012, prices for most commodities will show year over year declines.

The the deflation calls start rolling in! Who knew that onions were so crucial?

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Thursday, December 29, 2011

China PMI Improves Though Remains Negative

The HSBC Purchasing Manager's Index inched up to 48.7 in December from 47.7 in November. Though still negative it is a number that economists equate with 12-12 percent industrial output.

The number has been holding just sub 50 since July so at least the stability is suggestive of a soft landing. Not to mention China has already begun an easing process that should help going forward. Lower inflation followed by low PMIs will allow for quicker policy cuts especially on bank reserves.

  • HSBC Purchasing Manager's Index inched up to 48.7 in December from a 32-month low of 47.7 in November but fell short of the flash reading of 49.
  • HSBC believes a PMI reading of as low as 48 in China still points to annual growth of 12-13 percent in industrial output. 
  • Still, analysts are looking for signs of stabilisation in the factory sector and are anticipating a shift by Beijing to a more supportive economic policy stance to prevent a sharp slowdown.  

Chinese stocks have been attempting to stabilize near 3 year lows providing a great entry point at roughly 11x earnings. Remember that the US has typically traded at 15x earnings and the GDP has averaged something around 4% historically. If China only grew at 7%, an equivalent PE ratio would be 25x+.

Disclosure: No positions mentioned. Please review the disclaimer page for more details.

Are Surging Land Prices in Shale Oilfields Sustainable?

Interesting article from the Financial Times about a subject I've wondered about as well. Will the surge in land prices for US shale oilfields last?

Every time you read an article, one wonders why Chesapeake Energy (CHK) can't translate purchases of acres at $1,400 that is sold for $15,000 into huge stock price gains. Also, it amazes me that none of the major energy companies with vast cash hoards aren't able to beat CHK to the punch for cheap acres.

Ultimately the issue with Chesapeake is that it requires a ton of debt to grab all this land and hold onto it until it is able to drill and recover oil or nat gas.

The big surge in nat gas production from these shale plays have already led to a price collapse in the domestic market. The recent expansion into oil plays isn't likely to cause the same collapse in price as oil is an international market. If nat gas was an international market as well, prices wouldn't have collapsed. Asian and European users pay double, triple, and quadruple the price currently.

Still Chesapeake's success level might be it's own undoing. The assets are only valuable if they remain scarce. If these foreign oil companies that are buying up assets from CHK and CRZO are able to learn the process and duplicate in other countries, than CHK might regret these deals.

If oil prices remain high and Iran causes supply interruptions or Iraq never gets back online, CHK will look like a genius. Most investors though would prefer that it sign a few more deals to reduce debt. Also, quit signing up millions of acres in the next great shale play as it only adds supply and highlights a region that the industry might overlook if CHK isn't involved.

Via FT article:

  • In the Utica shale in Ohio, Chesapeake Energy acquired 1.25m acres in the 18 months to July, at an average cost of $1,400 an acre. In early November the company outlined plans for a joint venture on a portion of that land, which valued it at $15,000 an acre.
  • In late September, Indian state gas company GAIL entered a joint venture with Carizzo, a small shale oil explorer based in Houston. The $95m deal valued Carizzo’s Eagle Ford land at $23,500 an acre. The Korean National Oil Corporation, China’s National Offshore Oil Corporation and Statoil, which is majority owned by the Norwegian government, have also concluded deals in recent months. 
  • “It’s too early to say that the large companies are overpaying for assets, because there is not much transparency on all of the deals,” said Mr Ferguson. “But it will be interesting to see if prices are still as high in a year’s time.” 

Disclosure: Long CRZO. Please review the disclaimer page for more details. 

Looks Like the Gold Run Is Over

After an amazing decade run, Gold (GLD) has finally run out of steam. Nobody seems to know why gold would collapse now if Europe still a disaster area. Probably more that the trade became too crowded.

Never was a fan of owning the physical commodity, but clearly it was a profitable trade. Anybody still owning gold should be careful as the GLD has broken solidly below the 200ema. No reason for Gold to remain in the $1,500 level.

Update: Interesting post from Seeking Alpha. Note the huge difference in performance for Gold versus the Dow would make me concerned about owning last decades winner and this decades loser.

12:38 PM A nice late-year run by stocks combined with the fall in gold prices has allowed the DJIA (with dividends included) to pull aheadof the yellow metal's performance for 2011 - a massive turnaround from late summer, when gold was in the lead by 26%. Goldbugs retain a big advantage over the last decade though, +465% vs. a 54% total return for the Dow

Disclosure: No position mentioned. Please review the disclaimer page for more details. 

Wednesday, December 28, 2011

SP500 Stocks to Shatter Earnings Record

Earnings records were a big focus in the first part of 2011. Most analysts debated whether the SP500 would report 2012 earnings 5,10, or 15% above the record numbers already expected in 2011. Slap a 15 multiple on those numbers and estimates for 2012 could easily hit 1,500 to 1,650.

Fast forward to a rough summer with heightened fears of another recession as 2011 ended and the focus on the record earnings disappeared. Hardly anybody discusses earnings anymore.

It was interesting to see this Investment News article where David Cote of ING forecast 7% earnings growth in 2012 to $105. Slap a 15 multiple on those estimates and the SP500 could reach 1,575. That would be right around the record high.

This number is nowhere near the $110+ estimates from the Spring time period, but very noteworthy that analysts are now looking past the recession fears and forecasting a solid '12. If the market could ever return to a focus on fundamentals, this market would rocket higher. The European issues appear to be going away bit by bit. Yields are falling and everybody involved from governments to banks, to investors are now very prepared for the potential negative outcomes.

The real question is whether record earnings bring record stocks prices next year. Very encouraging that the vast majority of the markets isn't focused on this question.

Details from IN article:

  • Doug Cote, chief market strategist at ING Investment Management, said if investors are feeling pessimistic about the markets, they are missing the picture presented by the fundamentals.
  • “Things are a lot better than most people think, because the fundamentals press on despite the global risk that's out there,” he said.
  • For example, he pointed out that the expected final 2011 tally for the S&P 500 Index ($98) will shatter the current record set in 2007, when the index earned $88 per share.
  • “Our forecast is for $105 per share in 2012,” Mr. Cote said.
  • As part of a 7% increase in earnings, he is also calling for a 12.5% gain by the S&P next year to 1425.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Top 12 Net Payout Yield Stocks For 2012

After about 14 months of running a Net Payout Yields Model on Covestor, I'm still stunned how few people understand the concept or even incorporate it into investing.
Net Payout Yields are the combination of the ever popular dividend yield and the always controversial net stock buyback yield. Or another way, the yield a company pays out to shareholders. No preference is given to whether the yield is obtained via dividends or buybacks.
It seems that most investors are in love with the dividend paying stocks, but hardly anybody can get behind stock buybacks. Oddly though, very few investors take advantage of the combination.

Read the full article at Seeking Alpha. 

Disclosure: Long DTV, LMT, TRV, LO, WLP. Please read the disclaimer page for more details. 

Carrizo Oil & Gas Smashes Oil Production Goal

Carrizo Oil & Gas (CRZO) achieved its oil production per day goal by reaching the objective of 5,000 net barrels by the end of 2011. In fact, production surpassed the goals by 20% with the oil production on December 26th reaching 6,040 barrels.

CRZO has had a challenging time of meeting quarterly targets so this should be seen as significant news. Not only that, but it is already forecasting 7K barrels from the Eagle Ford alone by the end of 2012. This doesn't include anything from the Niobrara or any other fields.

Amazingly the stock is flat for the day as the markets ignores the good news. Magnum Resources soared 17% yesterday on similar news. Not sure what else the market wanted, but this provides the new investor an opportunity to jump onto a proved fast growing producer at a cheap valuation.

Details per PR:

  • "It may have appeared optimistic when we announced our 5,000 bopd target in mid-2010 given that we were producing approximately 400 bopd at the time and had no production from the Eagle Ford or Niobrara," commented President and CEO S. P. "Chip" Johnson IV
  • The initiation of production from these last eight wells brings our well count to 23 gross producing Eagle Ford wells with another 13 gross wells drilled waiting on completion and 9 gross Niobrara wells producing with one gross well waiting on completion.
  • "Based on our well inventory and drilling and completion forecast, we expect to reach a net oil production rate of as much as 7,000 bopd by the end of 2012 from the Eagle Ford alone." 

Disclosure: Long CRZO. Please review the disclaimer page for more details. 

Tuesday, December 27, 2011

The Death of Sears Holdings Is Awfully Premature

Today Sears Holdings (SHLD) provided a Q4 update that was very disappointing to the markets. Exactly why it was that disappointing or surprising goes to show how few investors exist these days. Too many traders jump on the headlines as perceived grossly negative and begin pounding the stock down.

At the end of the day, the stock was down an amazing 27%. What was so devastating about today's news that sunk the stock? Well, honestly we're still not that sure. Comp sales are down 5% QTD and EBITDA will be roughly half of last year. Anybody paying attention should've known the numbers wouldn't be that great.

The other news was that up to 120 stores would be closed. While sounding negative, that has been the plan at SHLD for a very long time. The weak stores are closed so that the inventory can be turned into cash and the stores can be sold or leased.

The biggest question one has to answer is why do investors even care that much about retail sales. Isn't the stock more about monetizing the brands outside the Sears walls and turning the company into a REIT?

My article back in September highlighted the potential of monetizing the main brands and compared them to their counterpart public brands. At that time, the brands allowed to expand outside of SHLD stores would have a comparative value around $19B. See estimates below:

Brand potential / market value:
  • Stanley Black & Decker: $9.9B
  • Whirlpool: $4.3B
  • Energizer: $5.0B
  • Total: $19.2B

This didn't even focus on the REIT aspect. SHLD has nearly 250M square feet in over 3,700 locations. This real estate has huge potential as SHLD works through the model of leasing space. See article here.

Ultimately all the potential just doesn't matter as investors focus on the headlines and the retail stores. The stock is now at the March 2009 lows. Incredible that any stock has revisited those lows, but that is currently the fate of SHLD. When the stock finishes shaking out it will provide an incredible value. Remember that when push comes to shove, SHLD could always sale and sublease some of the stores providing a huge cash infusion.

Details from the PR:

  • Close 100 to 120 Kmart and Sears Full-line stores.  We expect these store closures to generate $140 to $170 million of cash as the net inventory in these stores is sold and we expect to generate additional cash proceeds from the sale or sublease of the related real estate.
  • Excluding the effect of store closures, we currently expect to reduce 2012 peak domestic inventory by $300 million from the 2011 level of $10.2 billion at the end of the third quarter as a result of cost decreases in apparel, tighter buys and a lower inventory position at the beginning of the fiscal year. 
  • We currently expect the store closure and inventory reduction actions to reduce peak inventory in 2012 by $500 to $580 million and reduce our peak borrowing need by $300 to $350 million in 2012 from levels that may have resulted in 2012 without such actions. 
  • At December 23rd , we had $483 million of borrowings outstanding on our domestic revolving credit facility leaving us with over $2.9 billion of availability on our revolving credit facilities ( $2.1 billion on our domestic facility and $0.8 billion on our Canadian facility).  There were no borrowings outstanding last year at this time.
  • During the fourth quarter through December 23, 2011, we have not repurchased any of our common shares under our share repurchase program.  As of December 23, 2011, we had remaining authorization to repurchase $524 million of common shares under the previously approved programs.

Disclosure: Long SHLD. Please review the disclaimer page for more details. 

Thursday, December 22, 2011

Does Sandridge Energy Have the Perfect Inverse H&S Chart?

Anybody following this blog knows that I've been talking about the inverse Head & Shoulders charts that have shown up lately. The Oil Services (OIH) still has potential as well as the numerous other individual stocks including the one I've mentioned.

Today though Sandridge Energy (SD) highlighted how the chart works to perfection. Not only does SD have what amounts to a near perfect shoulder setup, but the stock rocketed 23% on a JV deal. This move helped form what ultimately could be the breakout above the neckline right around todays close around $8.

Looks like a move straight up to $12 might be possible now. Anybody catching that reversal near $4.5 in early October is sitting very strong right now. See chart blow.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Update 12/23 2:40pm: SD jumped to $9 today, but has since fallen back to $8.5. Looks like a clear breakout though the stock quickly stalled. 

Investment Report - December 2011: Net Payout Yields

This report is very behind schedule this month, but I thought it was worth writing anyway. This model continues to work well and the word needs to get out more about the advantage of net payout yields over just focusing on dividends.

November was yet another solid month, with a 0.05% gain for this portfolio, on both a relative and absolute basis, as the benchmark S&P 500 lost 0.51%. When the market has down months this model continues to shine and overtime the results become much more evident. For the last 12 months, the portfolio was up 12.72% versus the 5.63% for the benchmark. Despite all the volatility in the markets, the Net Payout Yields Model has had a great absolute and relative performance.

The model had only one trade in November. Lowes (LOW) was purchased on November 1st as the net payout yield (NPY) surpassed 16% at the end of October. While LOW only paid a dividend of 2.6% at the time, 2.3% now, the company bought back a significant amount of stock in the first half of the year.

Combine a 52 week low on the stock price with a solid dividend yield and a recent significant buyback program and the recipe for higher stock prices is usually present.This also highlights how investors solely focusing on dividend yields can miss out on solid gains.

Lowes was the top performer for the portfolio during November with a 15% gain. The stock produced a 0.65% contribution for the month and more than accounted for the 0.55% active return. This highlights why actively managing this concept has numerous advantages over just handling it similar to the Dogs of the Dow Theory where investors pick the 10 highest yielding stocks on January 1st each year or any preset date.

Not surprising but Home Deport (HD) was another strong performer up 9.5% for the month as all homebuilding related stocks rose for the month. Not many investors caught these moves, even though NPYs were highlighting the undervalued position.

Bristol-Myers Squibb (BMY) and Raytheon (RTN) also has good gains for the month as defensive sectors shined.

Hartford Financial (HIG) and Activision Blizzard (ATVI) lead the bottom performers for the month as growth related and financial stocks got hit from more European debt woes.

The first full 12 months managing this model on Covestor produced good results. Active management has been shown to help, but it doesn't mean wild trading. Rather it's buying and selling positions when they hit extreme yields. No reason to time a decision only based on the calendar.

Disclosure: Long LOW, HD, BMY, RTN, HIG, ATVI. Please review the disclaimer page for more details.

Emerging Market Stocks Are Ripe For Buying: Russia Focus

This is the 4th article in a series focusing on the investing opportunities in emerging markets presented by the large selloff during 2011. The first 3 articles focused on India, Brazil, and China respectively.

Russia will be the focus this time and the country is no different than the others where inflation has been a big factor to the market declines. Russia inflation fell to 6.8% in November.

In most economies, 7% inflation would be disastrous and even in other emerging markets like China and Brazil that amount would be extremely high. In Russia though, 7% inflation has actually been closer to the lows over the last couple of decades.

Read the full article at Seeking Alpha.

Disclosure: No positions mentioned. Please review the disclaimer page for more details.

Chart of the Day: Jobless Claims Continue Decline

Jobless claims continue to drop towards the mid 300K level. A number generally consistent with solid jobs growth, but not near the lows of 300K in the mid 2000s.

Mark Perry has a great chart showing the jobless claims as a percentage of the civilian workforce. The jobless claims number provides the absolute number of how many looking for a job, but it does a poor job of relating the relative change of the number over time.

As the workforce increases over the decades, the absolute total of jobless claims will rise adjusting what should be considered normal claims levels. Unfortunately the market doesn't accurately grasp these changes. Most economics and analysts on tv still subscribe to the numbers from the '80s and '90s when the labor force was much smaller.

Seeking Alpha article from Mark:

From the chart, it is much clearer that the unemployment situation is actually better than in the '70s and '80s. Only the lows in the '00s provided a sustained level of unemployment below the current levels.

This might help explain why consumer spending has held up better than expected considering consumer confidence. Confidence might come across low because consumers got use to the boom times in the late '90s and even the mid '00s from real estate. Historically though the jobs picture is much better than normal. Not many people seem to grasp that more than 90% of the population have jobs.

How many people really know that many that are unemployed?

Disclosure: No positions listed. Please review the disclaimer page for more details. 

Wednesday, December 21, 2011

Teva Pharma Announces $3B Stock Buyback

This morning Teva Pharma (TEVA) released their financial outlook for 2012. TEVA is the leading generic drug maker in the world and is based in Israel.

The numbers were generally in line with expectations and on a fundamental basis appear very appealing. Stock traded at $42 and the company guided to $5.58. Anybody doing simple math can probably conclude that a continue earning that much money and trading at only 7x estimates is cheap.

For our Net Payout Yields model though, the fundamental picture such as PE ratio and earnings growth just don't matter.

What matters is that TEVA announced a $3B stock buyback and the potential for dividend hikes. As compared to the $5B buyback announcement of Oracle (ORCL) yesterday, the TEVA deal amounts to 8% of the current outstanding stock with company having a $37B market cap.

Clearly the TEVA deal is much more attractive, but the key will be whether the money gets spent and how quickly considering the mention of a 3 year time period. The NPY model only invests in companies that follow through with purchases.

Teva also has a 1.6% dividend yield so that also doubles the meager 0.8% yield for Oracle.

Detail on $3B Share Repurchase Program:

  • announced today that its Board of Directors has authorized the Company to repurchase (including through one or more subsidiaries) up to an aggregate of $3 billion of its ordinary shares/ADRs from time to time, based on market conditions. 
  • At Teva’s current market capitalization, this amount would represent approximately 8 percent of the outstanding common stock.     
  • Given the Company's strong cash generation and cash position, the repurchase program will be financed out of free cash flow, without the need to increase leverage.
  • In the twelve months ended September 2011, Teva has returned more than $2.5 billion to shareholders through dividends, share repurchases and redemptions of convertible bonds. (while the repurchase and issuance of debt doesn't currently factor into the NPY equation that is being explored)
  • The repurchase program has no time limits and is expected to be completed over a three-year period. 

Disclosure: No positions mentioned. Please review the disclaimer page for more details.

Tuesday, December 20, 2011

Oracle Announces Additional $5B Stock Buyback Program

Though missing earnings and revenue estimates, Oracle (ORCL) announced an additional $5B stock buyback program. Unfortunately the earnings report lacks details on the Q112 details regarding stock buybacks.

Having a model that focuses on Net Payout Yields (NPY), combination of net stock buybacks and dividends, these headlines naturally grab our attention for future additions to the model.

Considering ORCL has a roughly $150B market cap, a $5B stock buyback is not likely to make the top of the list. The small dividend doesn't help much either. This isn't that surprising as most of the large tech companies have piles of cash and strong earnings, but most of them like CSCO and MSFT still only have NPY yields in the 5-6% range. The companies are cheap on the payouts or the market caps are too expensive to get top yields.

Below is a chart with the NPYs from the last 5 quarters. Note how the net stock buyback has been rather pathetic until the prior quarter:


Yields are picking up and a quick spend of the $5B program would jack up the yield quickly. The model only adds stocks once the buyback occurs and not based on announcements that may or may not be implemented.

ORCL will likely remain on the sideline.

Disclosure: No positions mentioned. Please review the disclaimer page for more details.

Spanish Bond Yields Plunge After Positive Bond Sale

Spain's Treasury had a very positive auction this morning leading to plunging rates for 3 & 6 month bonds. Though getting some play in the media, these auction results are being somewhat ignored. Not that the market has ignored them with the roughly 3% rise in US markets.

Spain was able to sell a little over $7B in 3 & 6 month bonds at interest rates 300 bps below the previous auction in November. That is an incredible drop as follows:

  • sold €3.7 billion in three-month bills at 1.735%, compared with 5.11% in November 
  • sold €1.9 billion of six-month paper at 2.435%, compared with 5.227% last month. 

What debt crisis? Or at least in the case of Spain. Maybe it will only be a short term phenomenon as this comes one day prior to the ECB launches new three-year lending facilities for the area's banks.

Of course, Spain had another good auction a week or so ago when it sold more bonds than planned. Either way, it's a good sign that some of the European programs are starting to help. At the very least, Spain appears out of trouble for the moment. Now if only Italy could join them in the low rate situation the US equity markets could boom.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Emerging Market Stocks Are Ripe For Buying: China Focus

This is the 3rd in a series or articles focusing on the emerging markets that have come under fire this year. The first 2 articles focused on India and Brazil, while this one will explore the opportunities in China.

The main culprit for the emerging market declines has been the supposed rampant inflation. China has been no exception to this fear. Inflation, though, has decidedly peaked in China with the November figure showing month over month declines.

This has allowed China to lower bank reserve ratios once already and will likely lead to further cuts especially since the government raised ratios to over 20% at the start of this year.

Read the full article at Seeking Alpha.

Disclosure: Long CCIH. Please review the disclaimer page for more details. 

A Tale of 2 IPOs

Any investor paying attention should know this last week was the busiest IPO week in the U.S. in years. The slate was headlined by well-known Facebook game maker Zynga (ZNGA), with secondary focus on Jive Software (JIVE) and luxury retailer Michael Kors (KORS). The rest of the IPO's had limited focus.

Already knowing the issues with Zynga are similar to Groupon (GRPN) and Angie's List (ANGI), we quickly zipped past that offering (dropped 5% on first trading day Friday). Read Why Angie's List Shouldn't Be Listing for more details.

MIchael Kors is interesting as well, but the stock looks pricey and investors already have plenty of luxury retailers to buy.

Read the full article at Seeking Alpha.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Friday, December 16, 2011

Inverse Head & Shoulder Candidates

The more I look at charts of the stocks I own and follow, I keep seeing a similar pattern of either strong support or the inverse head & shoulders chart. Not a technical expert, but viewing the charts gives a good picture of what the market thinks about a stock. 

Below are some of the stocks that appear setup for a inverse head & shoulders chart which would be very bullish if the stock can break to the upside. Most of them are on the borderline of the right shoulder extending too far so a resolution is likely on the way. Either a breakdown to test a double bottom or a breakout back to potentially the July highs. For many stocks that would be significantly higher. 

Weatherford Int'l (WFT) - oil services stock so not surprising that it has similar pattern to the OIH that Cramer profiled a few days ago. 

Lincoln Financial (LNC) - not a very well defined left shoulder, but it still has the same binary setup. 

Monster Worldwide (MWW) - not sure this qualifies as the right shoulder made more of a higher low, but once $10 is broke to the upside this stock flies to $15. 

Would love to have some feedback on what readers think about these setups. Clearly not the biggest technical expert so let me know what you think. 

Disclosure: Long WFT, LNC, MWW. Please review the disclaimer page for more details. 

Thursday, December 15, 2011

Decent Guidance From Accenture

Accenture (ACN) remains a key holding in the Net Payout Yields Model. After the close it reported earnings that beat estimates by $.02. Solid results as usual.

Not much to say as ACN always reports solid numbers. The one issue worth noting is that it pointed out currency losses due to the stronger dollar in the last quarter. Not a big deal at this point, but it could become an issue down the road if the US Dollar continues to rally.

Company only bought back $285M this quarter as well slightly lower than normal.

Good summary from

4:10PM Accenture beats by $0.02, beats on revs; guides Q2 revs in-line; lowers FY12 EPS on FX, in-line, reaffirms FY12 revs guidance (ACN) 56.13 +0.10 : Reports Q1 (Nov) earnings of $0.96 per share, $0.02 better than the Capital IQ Consensus Estimate of $0.94; revenues rose 17.0% year/year to $7.07 bln vs the $6.86 bln consensus. Co issues in-line guidance for Q2, sees Q2 revs of $6.5-6.8 bln vs. $6.6 bln Capital IQ Consensus Estimate. Co issues guidance for FY12, lowers EPS to $3.76-3.84 from $3.80-3.88 on FX, vs. $3.82 Capital IQ Consensus Estimate; reaffirms FY12 revs +7-10% YoY to ~$27.3-28.1 bln vs. $27.65 bln Capital IQ Consensus Estimate.

Stone Fox Capital holds an allocation of 4.6% in $ACN in his Net Payout Yields Covestor Model

Disclosure: Long ACN. Please review the disclaimer page for more details. 

Emerging Market Stocks Are Ripe For Buying: Brazil Focus

This is the 2nd article in a series focusing on whether now is the time to invest in emerging markets. The first article which focused on India concluded that while some appealing stocks were at very discounted levels, investors need to wade into the stocks carefully, in order to not catch the proverbial falling knife.

This article focuses on the largest Latin America economy, Brazil. It faces similar problems, where high inflation led to numerous interest rate increases by the central bank, leading to a slowing down of the economy. The major difference, though, is that Brazil has already been aggressive-- with three rate cuts of 50 basis points each-- while India is still pondering whether to cut rates.

The country also has two potential catalysts, with the World Cup arriving in 2014 and the Summer Olympics in 2016. Both events will require large infrastructure spending that should benefit not only the economy, but a lot of the stocks traded in the U.S.

Read the full article at Seeking Alpha.

Disclosure: Long GFA, ITUB and NIHD. Please review the disclaimer page fore more details. 

India Food Inflation Hits 4 Year Lows

As I've been saying the last few months, the inflation scare was a tad overdone. A good part of the emerging market inflation had to do with plummeting of prices in 2009 followed by the sharp rise in 2010. This lead to the misleading year over year increases instead of looking at a smoother change over the last 3-5 years.

Last night, India reported food inflation had dropped to 4.35% for the week ending December 3rd. This was the lowest reading since February 2008. Amazing that India didn't report any numbers below that for the rest of the crisis especially in late 2008 or early 2009.

On top of this,, the economic advisor listed in the Reuters report expects a drop to 3% within a month.

We're working on a series of reports focusing on the emerging market opportunities especially now as inflation fears come under control and central banks have begun loosening monetary policies.

Not many better investments exist than buying high growth stocks at 1, 2, or 3 year lows right into the start of an expansion cycle.

Links to first two reports below:

Emerging Markets  Are Ripe For Buying: India Focus
Emerging Markets Are Ripe For Buying: Brazil Focus

Disclosure: No positions mentioned. Please review the disclaimer page for more details.

Were Joy Global Numbers That Bad?

Joy Global (JOY) plunged 10.8% today after reporting Q4 earnings and 2012 guidance that apparently weren't pleasing to investors. Not sure I understand the disappointment with the numbers. It appears that JOY forecasted solid numbers for next year. Maybe expectations were too high, but that seems odd considering the European debt crisis.

Sure management discussed demand concerns, but they were clear that destocking of copper and coal in China and India were basically over. Also, mining companies are better positioned to finance mining projects this time as compared to 2008. Not to mention that companies learned the hard way what happens when long term projects get delayed for a small term economic downturn.

Honestly, what is the logic of delaying a copper mine expected to open in 2013 due to macro economic issues now? Supply remains weak in the commodities sector and it is clear that emerging market demand is nowhere close to peaking. Has anybody seen the lack of infrastructure in India or even the US.

Caterpillar (CAT) also reconfirmed 10-20% sales growth in 2012. Clearly neither CAT nor JOY provided any news that warranted the sharp selloff in the sector on Wednesday. The global economy would have to fall into a recession for the situation to change for this sector.

Otherwise, nothing provided in these reports should've changed investors moods. Both companies talked about robust growth, but provided cautious tones due to the potential economic headwinds.

Details from JOY earnings report:

  • Fourth quarter bookings increased 33 percent to $1.4 billion in fiscal 2011, compared to the fourth quarter of last year. 
  • Operating income increased 31 percent to $296 million on a revenue increase of 27 percent to $1.3 billion. Income from continuing operations was up 33 percent to $195 million, or $1.83 per fully diluted share, compared to income from continuing operations of $146 million, or $1.39 per fully diluted share, for last year’s fourth quarter.  ($1.90 excluding LeTourneau charges)
  • expect our fiscal 2012 revenues to be between $5.3 billion and $5.5 billion. 
  • expect to continue to deliver operating leverage of 25 percent, and this will translate into earnings per fully diluted share between $7.00 and $7.40. LeTourneau is expected to contribute $400 million to 2012 revenues and $0.41 to earnings per share. This includes $0.15 of purchase accounting charges, of which $0.08 is expected to continue beyond LeTourneau’s first year,” concluded Sutherlin.     

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Wednesday, December 14, 2011

Inverse Head And Shoulders in the Oil Services

As I've tweeted about a few times, the market has numerous stocks set up with inverse head and shoulder formations. These are usually indications of a bullish pattern where a stock or ETF is the process of a significant breakout off a bottoming process.

In most cases, the breakout corresponds with the lows from the July/August plunge. Assuming stocks form this bullish technical indicator, it can be expected to reach back to levels where the plunge began. In some cases this calls for a major rally.

Naturally that doesn't seem likely these days with the European debt crisis and fears of a major slowdown in China. Unfortunately for most investors that is exactly why and when it happens. The least amount of investors expect a major rally in stocks so they all pile on the upswing.

It was interesting tonight to see Cramer focus on the potential H & S in the Oil Services ETF (OIH). Having not seen much mention of this occurence in other stocks, I wasn't beginning to wonder if it was just my crazy view.

Well apparently it has become more mainstream than I thought. While Stone Fox Capital typically doesn't play the individual ETFs, we're currently heavily invested in Weatherford Int'l (WFT) that has a similar setup to the OIH and should benefit just the same on any breakout.

See video below:

Agree with most of what Cramer says, except for his idea that it will take much longer to complete the pattern. When actually both shoulders have similar time frames, therefore, any breakout would need to happen this month not 5 months from now. Yes, that's within the next couple of weeks or the right shoulder becomes very extended. Time will tell.

As I posted the other day, the VIX is starting to show some fatigue suggesting that the shorts or at least the people looking for protection is running out of steam. Could be another part of the signal.

Disclosure: Long WFT. Please review the disclaimer page for more details. 

Tuesday, December 13, 2011

Boeing Logs Biggest Order Ever, Yet Again

Boesing (BA) announced today its first firm order for the new 737 MAX fuel-efficient, narrowbody plane, from Southwest Airlines (LUV). BA claims this is the largest order ever which apparently passes a few other recent orders that I thought had the same claims.

This industry appears ripe with orders, but deliveries remain a different story.

LUV ordered 208 narrowbody planes for $19B (list price not actual price). This includes an order for 150 MAX aircraft that won't even start deliveries until 2017 (or '18 or '19 if the historical delay pattern continues).

BA is reporting commitments for 948 MAX planes that could climb to 1,500 by the end of next year.

This truly has to be the most interesting industry where customers order hundreds of planes at a time for delivery in 5-10 years. Makes me wonder if the industry won't eventually face stiff competition from a Brazil, China, or Russia made model that is able to make planes in a more timely manner.

Until then airplane leasing companies like AerCap Holdings (AER) and Fly Leasing (FLY) will continue to provide a very valuable service. Access to new planes without having to fund the purchase. FLY just announced as well that it sold 2 planes for more than book value continuing to show how undervalued these stocks trade.

Details on order via BA PR:

  • Southwest Airlines today announced a firm order for 150 fuel-efficient 737 MAX airplanes. Southwest is the first customer to finalize an order for the 737 MAX and becomes the launch customer for the new-engine variant. The Dallas -based carrier also ordered 58 Next-Generation 737s.
  • The firm order is the largest in Boeing history both in dollar value, nearly $19 billion at list prices, and the number of airplanes.
  • 737 MAX is the new-engine variant of the world's best-selling airplane and builds on the strengths of today's Next-Generation 737. The new-engine variant, powered by CFM International LEAP-1B engines, reduces fuel burn and CO2 emissions by an additional 10-12 percent over today's most fuel-efficient single-aisle airplane.
  • 737 MAX has orders and commitments for more than 900 airplanes from 13 customers, while the Next-Generation 737 family has won orders for more than 6,600 airplanes and Boeing has delivered more than 3,800.

Details from a Reuters report:

  • Boeing reported commitments for 948 MAX airplanes and said the figure could climb to 1,500 by the end of next year.
  • The traditional discount carrier has a fleet of 699 planes, including 88 Boeing 717s acquired when it bought AirTran this year. (apparently even this huge order for 5-10 years still only replaces a small portion of its fleet)
  • Boeing on Tuesday also announced inaugural list prices for its 737 MAX aircraft. The 737 MAX 8 will sell for a catalogue price of $95.2 million, Boeing said on its website, while the larger 737 MAX 9 will sell for $101.7 million.
  • He said Boeing would likely garner more orders for its 737 MAX from existing customers, and noted the company was currently competing with chief rival Airbus (Paris:EAD.PA) for an order from United Continental Holdings (NYSE:UAL), the world's largest carrier.

Back on the largest order ever issue:

American Airlines (AMR) order was not all firm so it was surpassed by this LUV order. Per my article [AMR Takes a Flyer By Ordering Historical Amount of Planes] back in July, AMR plans to acquire 200 planes from the 737 family with an option for 100 more. It mentions that starting in 2017, AMR will become the first airline to take delivery of "next generation" planes so apparently LUV jumped in line or the AMR bankruptcy changed plans.

  • Under the agreement with Boeing, American plans to acquire a total of 200 additional aircraft from the 737 family, with options for another 100 737 family aircraft. American has the flexibility to convert the new deliveries into variants within the 737 family, including the 737-700, 737-800 and 737-900ER.

Private Indonesian carrier Lion Air placed an order for 230 planes, including 201 of the MAX, but those orders weren't firm either.

Disclosure: Long AER. Please review the disclaimer page for more details. 

Emerging Market Stocks Are Ripe For Buying: India Focus

After a very cool summer in the markets, emerging market equities appear ready to emerge from the depths of massive losses for a warm winter. Inflation fears pushed investors away from the fast growing sector in droves in 2011, but now that inflation has begun easing now might be the time to return to the sector.

Almost all of the emerging markets are down for the year, especially the leading BRIC markets.

These inflation fears were somewhat misplaced since they were based on year over year comparisons of very volatile commodities. For example, copper prices soared to $4.6/lb in February which was a lot higher than in 2010, but only slightly higher than the peak back in 2008. Is that really inflation especially rampant inflation?

Read the full article at Seeking Alpha.

Disclosure: Long IBN. Please review the disclaimer page for more details. 

Monday, December 12, 2011

Volatility Drops Even as Market Plunges

Typically the Volatility Index ($VIX) does the inverse of the stock market. If the market plunges, investors seek protection and the $VIX soars.  Today the market close down roughly 1.5% yet the $VIX dropped 2.7%.

On top of that, while the market has churned the last 3 trading days, the $VIX is much lower. 

This could be a very bullish sign for the markets as less volatility tends to lead to better markets. Less fear and panic means investors are becoming more comfortable with the debt crisis in Europe. Maybe not more comfortable that all the plans will work, but clearly comfortable that the risks of a collapse have been removed. 

Click to enlarge. 

Friday, December 9, 2011

Bob Auer on C&J Energy Services

Anybody following this blog should know by now that C&J Energy Services (CJES) is one of our favorite stocks at Stone Fox Capital. As the stock dropped below $14 back in early October, we started thinking maybe our thesis was crazy.

Now with the stock attempting to break above $22, its nice to see that a respected mutual fund manager is behind the stock. Bob Auer of the Auer Growth Fund looks for stocks with a 25% increase in earnings, a 20% increase in revenue, and ones that trade below 12 times earnings.

Surprised that he finds many stocks like that other than a rare bird like CJES.

Supposedly he grew $100K in 1986 to $34M by the end of 2007 by sticking to that strategy.

His comments on CJES via CNBC report:

5. C&J Energy Services [CJES  22.75    1.54  (+7.26%)   ] is riding the oil-shale boom as a provider of a wide range of premium hydraulic fracturing services for oil-shale drillers.

The company has a market value of $1 billion and a forward P/E of 5.1.

Auer said the company has been in the business for at least 10 years and went public in June. "They have had eight consecutive quarters of year-over-year triple-digit sales and earnings growth."

Auer said analysts' consensus estimate is for 2011 sales of $784 million, growing to $1.2 billion in 2012, or up 55 percent, and earnings of $3.19 per share this year, growing to $4.24 per share in 2012.

"Yet the stock is at $21 and it is in the hottest thing going," he said of oil-shale production.

Nice chart below. Stock broke resistance at $22 on heavy volume and has the appearance of an inverse head & shoulders. 

 Disclosure: Long CJES. Please review the disclaimer page for more details. 

Thursday, December 8, 2011

Hartford Financial Plummets on 2012 Outlook

Or at least that is the theory. Hartford Financial (HIG) dropped 8% today on the back of disappointing news out of Europe and supposedly the tepid news from the investors presentation today.

The news out of the conference appears very bullish for the stock regardless of the headlines. The company expects to have core earnings of $3.45 next year which is generally inline with analyst estimates. More importantly though, the stock currently trading just above $17 has a forward PE.

More importantly, HIG already has a book value of $46 and that will approach $50 by the end of 2012. Anybody buying at these levels would get an incredible 200% gain once this investment is valued at fair value. Trading at 1x BV has historically been low for the sector as well.

A competitor in Lincoln National (LNC) was down 5% today so one can presume that the stock only fell 3% due to the news from the presentation. The main thrust was clearly Europe, though I just don't get why investors want to sell a stock so far below book value no matter what the earnings are next year. As long as this company is making money, its worth more than book.

One real big positive for the stock price could be the plans for a ramped up stock buyback. HIG can automatically buy stock at 40 cents on the dollar. That will be a huge boon for shareholders. Share count will fall quickly and earnings will jump if it can buy stock below $20. It doesn't really add up that the company has cash to buy stock, but investors are willing to sell it below book.

What is the market thinking?

Per a Reuters story:

  • S&P Capital IQ analyst Cathy Seifert, in a note, said the company "is still a work in progress" but added the stock was undervalued compared to the sector.
  • Barclays Capital analyst Jay Gelb said there was downside risk to the Hartford's 2012 guidance, particularly if the company has to add to reserves in its property and casualty business.
  • The Hartford said it expects core earnings of $3.30 to $3.60 per share next year. Analysts polled by Thomson Reuters I/B/E/S expected anything from $3.22 to $4 a share next year, with a mean estimate of $3.51.
  • For the current quarter, the company said it expects earnings in a range of 80 cents to 85 cents per share. Analysts on average expected earnings of 83 cents.
  • The Hartford also plans to ramp up a share buyback program soon, with a goal of completing it by early in the second quarter.

Disclosure: Long HIG and LNC. Please review the disclaimer page for more details.

Buffett's Solar Deal Appears Opportunistic, Not Bullish On The Industry

Before anybody gets carried away, remember that when Warren Buffett buys something it's because the deal is too good to pass up. Or the seller might just be that desperate. In this case, it doesn't appear that First Solar (FSLR) was overly desperate to unload the project, but rather Buffett's MidAmerican Energy saw an opportunity to buy at an attractive price with locked in high power rates.
Contrary to initial Reuters reports about the deal, this isn't likely a Buffett endorsement of the solar industry and if anything could be a signal that he and the executives at MidAmerica expect the solar model going forward to be not as appealing and possibly negative enough to limit supply.
Would he really buy into a market where rates are going to crater due to oversupply? Well, maybe with a 25 year iron clad contract; though I'd be worried about the contract being voided if pricing deteriorated too far.

Read the full article at Seeking Alpha. 

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Tuesday, December 6, 2011

Mind Blowing Numbers From Seismic Equipment Maker

Mitcham Industries or MIND supplies rental or new seismic equipment to the oil and gas industry, seismic contractors, government agencies and universities. It also manufactures specialized seismic equipment through its Seamap brand.

Have never heard of this company before, but I was just blown away by the results reported after hours today.

MIND reported earnings of $.52 versus and estimate of only $.22. It also reported 40% revenue growth to a record of $28M. Beating estimates by 150% is very impressive. The other impressive number was that leasing revenue jumped 116%.

Not being familiar with this sector I can't provide much in the way of opinion other than the stock is benefitting from the boom in demand for higher resolution 3D imaging in the shale plays and increased utilization in Latin America.

Is this just the start for MIND? Does it have a recently developed competitive advantage? Don't know, but would love to hear from any readers.

Details on the quarter:

  • Total revenues for the third quarter increased 40% to a record $28.0 million from $20.0 million in the third quarter of fiscal 2011
  • equipment leasing revenues rose 116% to $17.4 million from $8.1 million a year ago.  
  • Net income for the third quarter increased to $6.8 million , or $0.52 per diluted share, compared to $727,000 , or $0.07 per diluted share, in the third quarter of fiscal 2011. 
  • Bill Mitcham , the Company's President and CEO, stated, "We are extremely pleased with our third quarter results as this is the best quarter in the history of our Company in terms of total revenues, leasing revenues, net income and EBITDA.  These results are even more extraordinary since the third quarter is usually the second weakest quarter of the year.  Our third quarter leasing revenues of $17.4 million actually exceeded those in the first quarter, a first-time occurrence for the Company.  Historically, our first quarter has always produced the strongest leasing revenues of the year.
  • "We remain encouraged by the level and quality of the inquiries and order activity as we continue to receive orders for longer-term jobs with higher channel counts.  We also look forward to the upcoming winter seasons in Russia and Canada , which we expect to be strong.  Additionally, we expect to continue to see a positive environment in Latin America and to experience new activity in North America , Europe and North Africa and, therefore, anticipate strong results for the full year." 

Disclosure: No position. Please review the disclaimer page for more details. 

Alpha Natural Resources Settles with DOJ

Earlier today, Alpha Natural Resources (ANR) announced that it had reached an agreement with the government to resolve the civil proceedings resulting from the Upper Big Branch (UBB) mine explosion that killed 29 people.

This event happened at Massey Energy back in April 2010 and subsequently ANR bought out Massey. 

The settlement for $209M hopefully allows ANR to move forward with less government scrutiny. One of the biggest issues with the coal miners in the Appalachian is higher costs from stricter regulations. 

The stock initially jumped higher at the opening, but has settled back to a 3-4% loss. Having this issue resolved should be good for the stock going forward. 

The $209M settlement includes money for the families of the killed and injured employees plus increased expenses on safety. The expenses are as follows:
  • to invest $80 million over the next two years in added safety measures at legacy Massey mines and Alpha mines, including ongoing safety skills and compliance training, construction of a state-of–the-art safety training facility, and the development and installation of next-generation mine safety equipment;
  • to establish a $48 million trust to fund research and development projects designed to improve mine health and safety;
  • to pay $46.5 million to families of the fallen miners and two individuals affected by the UBB explosion, of which $16.5 million has already been paid as part of or will be paid as part of settlements and anticipated settlements, in accordance with the Non-Prosecution Agreement;
  • to pay $34.8 million in connection with the resolution of outstanding citations, violations, and orders related to MSHA's investigation arising from the UBB explosion and other non-UBB related matters involving legacy Massey entities prior to Alpha's acquisition of Massey on June 1 , 2011.  

ANR remains one of the cheapest stocks in our portfolios. Hard to tell whether this pending issue was holding the stock down or whether just fears of a global slowdown is the reason for the weak results in 2011. 

ANR with the met coal from the Massey buyout is currently one of the most appealing coal miners in the world. It won't be long before this stock regains traction.

Models with ANR - allocations based on 11/25:

Stone Fox Capital holds an allocation of 13.3% in $ANR in his Opportunistic Arbitrage Covestor Model

Stone Fox Capital holds an allocation of 5.0% in $ANR in his Opportunistic Arbitrage Long Only Covestor Model

Disclosure: Long ANR. Please review the disclaimer page for more details.

Monday, December 5, 2011

Who Is Going To Replace the Postal Service?

With news the last week so that the USPS is planning to slow down 1st class mail, one has to wonder who could fill the void. After all, huge volumes of mail count on that next day delivery.

Actually the facts were astonishing to me. 42% of mail reaches its destination within 1 day and just about all 1st class mail makes it within 3 days. That is a major portion of the mail that would now drop from 1 to 2 or 3 days. What about if the postal service stops Saturday delivery? Mail something on Thursday for a few blocks away and it might take until Monday or Tuesday to arrive.

Actually it might not be a huge deal as most people using the mail don't expect next day delivery. Still it's a reduction in service that undoubtedly some people rely on. Less services will reduce the benefit of the $3B cuts in costs. Why not focus on cutting the costs of keeping existing services? Less benefits for employees, reducing redundant processing facilities, and closing offices in small cities. Just don't cut the service that everybody has relied on for decades.

One has to wonder how the postal service plans to survive by reducing service. Is the service too costly or are the costs and efficiencies the problem? All it is talking about are the savings, but how many customers will find an alternative whether electronic bill payment or streaming videos versus Netflix (NFLX) via mail.

Unfortunately, what the public is not hearing from the USPS is innovative ways to deliver mail faster and with less costs. The postal service just doesn't seem to understand that sending items via the mail is not the ideal solution so charging more and making it take longer will only push drive away customers.

Ultimately the post office has to find a solution to cutting it's losses. Losses estimated to hit $15.5B next year. Please though, figure out that an income statement has both sales and costs. The sales won't stay stagnant!

Some details via CNBC report:
  • The changes would provide short-term relief, but ultimately could prove counterproductive, pushing more of America's business onto the Internet. They could slow everything from check payments to Netflix's  DVDs-by-mail, add costs to mail-order prescription drugs, and threaten the existence of newspapers and time-sensitive magazines delivered by postal carrier to far-flung suburban and rural communities.
  • Currently, first-class mail is supposed to be delivered to homes and businesses within the continental U.S. in one day to three days. That will lengthen to two days to three days, meaning mailers no longer could expect next-day delivery in surrounding communities. Periodicals could take between two days and nine days.
  • About 42 percent of first-class mail is now delivered the following day. An additional 27 percent arrives in two days, about 31 percent in three days and less than 1 percent in four days to five days. Following the change next spring, about 51 percent of all first-class mail is expected to arrive in two days, with most of the remainder delivered in three days.
  • The consolidation of mail processing centers is in addition to the planned closing of about 3,700 local post offices. In all, roughly 100,000 postal employees could be cut as a result of the various closures, resulting in savings of up to $6.5 billion a year. (Don't see much talk of wage and benefit cuts instead)
  • After five years in the red, the post office faces imminent default this month on a $5.5 billion annual payment to the Treasury for retiree health benefits. It is projected to have a record loss of $14.1 billion next year amid steady declines in first-class mail volume. Donahoe has said the agency must make cuts of $20 billion by 2015 to be profitable.
  •  Maine Sen. Susan Collins, the top Republican on the Senate committee that oversees the post office, believes the agency is taking the wrong approach. She says service cuts will only push more consumers to online bill payment or private carriers such as UPS or FedEx, leading to lower revenue in the future.
  • ESPN The Magazine and Crain Communications, which prints some 27 trade and consumer publications, said delays to first-class delivery could ruin the value of their news. Their magazines are typically printed at week's end with mail arrival timed for weekend sports events or the Monday start of the work week. Newspapers, already struggling in the Internet age, also could suffer. (How much revenue will be lost when these publications have to be terminated without weekend and next day mail?)

Some other points of view from Henry Blodget and Aaron Task on Daily Ticker. I'm much more in the camp of Task. Don't really understand Blodget's view about the higher prices. Nothing is stoping the government from changing the rate structure to make a distinction in the cost structure.  Want it delivered one day quicker pay $1 or pay the $.45 for the longer delivery. Something in that range seems more appealing. Maybe the separation would just cost more to process though.

Also, shrinking isn't the answer. The answer is more efficiency, but that doesn't mean offering less service.

Ultimately I don't know who would benefit the most. real benefits. A good chance of more payments being made via debit/credit cards online so maybe a V (Visa) or MasterCard (MA). The delivery companies such as FedEx (FDX) or UPS (UPS) could expand service or even capture more next day air business. All of these stocks are too big to profit from these changes

Some dark horse exists that might benefit. Possibly a online marketing firm that finds a better substitute for the mailer/flyers delivered each day.... stay tuned.

Disclosure: No postions. Please review the disclaimer page fore more details.

A Look At Cloud Software Stocks in Light of SuccessFactor's Buyout

Considering the 52% premium that SuccessFactors (SFSF) received from SAP this weekend, it made us wonder if any other cloud software stocks were worth looking into.

Generally the stocks claiming the 'cloud software' tag have lacked the profitability to warrant further research considering the normally lofty valuations. The summer sell-off and continued growth in the sector has made some valuations more compelling, especially considering the SAP offer premium.

Remember that SFSF had massive 78% revenue growth in Q3, but the company only managed to report non-GAAP income of $8.6M. Based on $95M in quarterly revenue, that is a decent profit margin. Unfortunately though the company is a big issuer of shares for compensation so that the outstanding shares crept up to 87M from 81.6M.

Read the full article at Seeking Alpha.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 

Friday, December 2, 2011

Emerging Markets Ready to Rumble Back?

After a year of crumbling stock markets some live now exists in the Emerging Markets. The main culprit has been high inflation, but for numerous reasons that is in the process of ending.

Are argument all along has been an issue in how inflation reporting focuses on the year over year numbers as opposed to inflation over time. For example, commodity prices hit the inflation numbers hard towards the end of 2010, but only when you compare them to 2009 numbers. But going back a few years to 2007 and all of a sudden the 'inflation' doesn't exist anymore.

Naturally China has been facing wage pressure along with most other emerging markets, but a lot of this was due to the relentless focus on the spiraling commodity prices. Not that pries for copper and oil have stabilized and even dropped from early 2011 highs, the numbers will start showing year over year drops even if Brent remains elevated around $110.

All of this brings us back to focusing on emerging market stocks. Such stocks have been a constant theme in our models. Now though with inflation under control and numerous BRIC countries lowering rates, it is time to bring a focus back to the sector.

Not really sure which country to focus on so far, but Tim Seymour of Emerging Money is a expert on the BRICs and he appears to favor Brazil. See the CNBC appearance below.

We'll highlight some of our favorite stocks next week. The sector hasn't been this cheap in a while.

Disclosure: No positions mentioned. Please review the disclaimer page for more details.