Monday, January 31, 2011

The New Met Coal Powerhouse

Rumors that began circulating prior to the close on Friday were finally confirmed Saturday afternoon that Alpha Natural Resources (ANR) had an agreement to purchase Massey Energy (MEE) for $69.33 a share based on Fridays closing price for ANR. This deal comes as little surprise to anybody in the market following the turbulent 2010 MEE faced after the Upper Big Branch explosion back in April. Then more recently, the company placed itself on the auction block after its long time CEO departed and ANR has been speculated as the top candidate for a merger.

The combined companies will become the 3rd largest metallurgical (met) coal miner in the world. Met coal is the coal needed by China and other BRIC nations to produce steel for the massive infrastructure projects they all have under way......

    See complete article at Seeking Alpha

    Friday, January 28, 2011

    Thank You Verizon! Terremark Gets $19 Offer

    After the close last night, Verizon Communications (VZ) agree to buyout Terremark WorldWide (TMRK) for $19. The stock closed just above $14 yesterday providing for a 35% pop today.

    TMRK was one of the larger holdings in the Opportunistic portfolios so that initially gave those portfolios a nice pop today. Unfortunately the market has become overly worried about a little disturbances in Egypt and the market has sold off since the opening. Did we learn anything from Greece?

    The main reason we're excited about this offer from Verizon is that TMRK was on the list of stocks to sell. TMRK has had a huge gain over the last year due to its cloud offerings and growth. Unfortunately though they continue to borrow money to open new centers and lack actual profits. Considering the path to profits leads us to at least 2012, this investment had become extremely risky.

    Its interesting that VZ claims the deal will have no impact on earnings in 2011. Possibly TMRK is so small that any impact will be immaterial at this point in the story, but they are losing money so it has be negative to a certain degree.

    Again, thank you Verizon! Happy to move on with a huge gain. Sold all positions at $18.96. Its possible that a higher bid will come along, but don't see that as likely.

    Via TMRK PR:

    • today announced a definitive agreement under which Verizon will acquire Terremark, a global provider of managed IT infrastructure and cloud services, for $19.00 per share in cash, or a total equity value of $1.4 billion.  
    • Pursuant to the agreement, Verizon anticipates that it will commence a tender offer between Feb. 10, 2011, and Feb. 17, 2011, for all shares of common stock of Terremark. The tender offer price constitutes a premium of 35 percent per share over today's closing price.

    Disclosure: No positions at this time.

    Wednesday, January 26, 2011

    Lihua International Announces Big $15M Share Repurchase Program

    After the markets closed today, Lihua International (LIWA) announced the approval of a $15M share repurchase program. This program equals roughly 5% of the outstanding shares. at current prices around $10.

    While not a big fan of small growth companies engaging in such uses of cash when they could potentially use the cash for further expansion, it might be prudent in this case to at least implement the program. Especially considering the numerous fraud allegations lodged at LIWA. One way to take advantage of such claims that have pushed the stock down from $12 to $10 is to buy the shares on the cheap.

    The company only has a forward PE of 5.7 so its definitely an accretive time to purchase shares. Once the stock gets back into the $14-15 range I'd hope that they just conserve cash for the next fraud allegation.

    If the company is a fraud, they wouldn't have the cash for such a transaction.

    Remember that $15M is relatively small for them. They expect to earn $40M in 2010 and end 2011 with at least $75M in cash after a big expansion. This highlights the problem of attacking a company with nice earnings and a strong balance sheet. They have the capital to fight back!

    With expectations for copper deficits over the next 2 years the recycled and copper alternatives that LIWA produces should stay in strong demand for a long time to come.

    Via LIWA PR:

    • today announced that its Board of Directors has authorized the repurchase by the Company of up to $15 million of its common shares over the next 12 months.
    • "During 2010, we achieved our primary strategic and operational objectives of expanding capacity and growing our top and bottom-line results, and entered 2011 poised for continued strong growth as copper demand in China remains robust," said Jianhua Zhu, Chairman and CEO of Lihua. "With our new refined copper production facility scheduled to come on line in the second half of the year, we believe that our shares represent a compelling investment opportunity at current levels. It is unfortunate that there have been a number of false allegations regarding our company. We work extremely hard at Lihua and have a proven track record of growth, as well as sound business and financial reporting practices that are in compliance with U.S. SEC regulations as well as PRC tax regulations. We believe these attacks are an attempt to undermine the significance of our accomplishments for the benefit of a group of short sellers. We stand by the legitimacy and validity of our financial results and internal controls that are further overseen by a top-10 auditing firm.

    Disclosure: Long LIWA

    Tuesday, January 25, 2011

    Intel Ups Net Payout Yield to Attractive Level

    Yesterday, Intel (INTC) upped its dividend to 72.48 cents (ok, what's up with the fractional cents?). This brings the dividend yield up to a very respectable 3.4%.

    Yet the dividend alone wouldn't make Intel a Net Payout Yield favorite. INTC also announced a $10B increase in the share repurchase plan, which increases the overall outstanding buyback to a whopping $14.2B. 

    See the rest of the article at Seeking Alpha.

    Subscribe to the Net Payout Yield Portfolio at Covestor - Net Payout Yields

    Disclosure: Long AAPL, CSCO, TXN, ACN. No position in INTC. 

    Thursday, January 20, 2011

    Did F5 Networks Management Sandbag Guidance?

    After Wednesday's close, F5 Networks (FFIV) reported Q1 2011 numbers that easily beat their previous estimate of $0.81 by a large $0.07. The $0.88 number also surpassed the estimates of analyst who on average forecast $0.83.

    The revenue number wasn't as robust, barely making the top end of the range and missing analyst estimates. With the stock plunging after hours, investors appear to either be placing too much emphasis on the revenue numbers or focusing on the Q2 guidance. Below are the numbers reported for Q1 and the guidance for Q1 provided in the Q4 report. 

    See the full article at Seeking Alpha

    Tuesday, January 18, 2011

    Stat of the Day: German Investor Sentiment Soars

    So much for the government debt issue in Europe keeping the Germans down. Earlier this morning, Germany reported a huge jump in investor sentiment. The index jumped over 15 and was much better then the expected 6.8 points.

    Though expectations for exports are slightly weaker in 2011, the private sector is expected to grow nicely. In reality, a jump in investor sentiment shouldn't be that surprising with the DAX jumping all the way back to 2008 highs. The market is booming yet analysts estimates still appear constrained and out of tune with the facts.

    Whats amazing is that the US markets such as the SP500 remain nearly 300 points below its all time high back in October 2007. Will the US eventually catch up?

    Via CNBC:

    • The Mannheim-based ZEW think tank said on Tuesday its monthly index jumped to 15.4 points from 4.3 in December. KEY DATA GERMANY JAN DEC economic sentiment 15.4 4.3 current conditions 82.8 82.6 Economists had expected the economic sentiment reading to rise to 6.8 points, according to the median in a poll of 36 economists.
    • CARSTEN BRESZKI, ING: "The confidence of the investors remains in tact despite the debt crisis and severe winter weather. It looks almost like blind faith in the strength of the German upturn. The German economy is indeed in a strong position. The growth in 2011 should be broadly based thanks to the broad range of exports, the labour market and the improving situation with private consumption." 

    Monday, January 17, 2011

    Expecting Australian Coal Mines to Remain Under Water for Months

    he recent floods in the state of Queensland in Australia have ravaged the operations of coal mines, specifically those that mine coking coal. Queensland produces roughly 90% of the coking coal in Australia, so that's a huge impact to the global trade of this commodity.
    According to this report from Mining Weeklysome of the flooded mines, especially open pit mines, could be off line for up to 6 months. It's still early in the process, but it'll be interesting to see how this will play out on demand and pricing.

    See the rest of the article at Seeking Alpha

    Wednesday, January 12, 2011

    Chinese Reverse Mergers Debate

    Interesting debate on Chinese Reverse Mergers between Herb Greenberg and David Gentry, president and CEO of RedChip Companies. Its interesting because of my investments in Puda Coal (PUDA) and Liwa International (LIWA) that fall into this category though they appear to be of the higher quality. The Chinese reverse merger sector is just as scary as any microcap US stock. They've got issues, but it doesn't appear to be as widespread as Herb suggests.

    Regardless, the investment total in my models has been kept low via diversification which is always the key when investing in small companies in the first place whether China based or not. The US isn't that much better then China regardless of what people think.

    Interesting theater so its worth watching..... Have to agree with the guy from RedChip that Herb is focusing on the wrong stuff and not the hard facts. Has he been to China to view the factories or not? Claiming all reverse mergers are fraud is just a horrible generalization. Very few frauds have actually been identified to date and plenty of analysts have been to visit factories in China to research them.

    Disclosure: Long PUDA, LIWA

    Tuesday, January 11, 2011

    The Brighter Side of Sears Holdings

    Sears Holdings (SHLD) via its Sears and K-Mart retail stores is regularly bashed in the media for declining stores and a negative future. Luckily for investors though, spending on stores isn't always meaningful to the bottom line. Sure it would drive the top line, but would all those costs to improve stores really be covered on the bottom line?

    Today SHLD reported that Q4 results would easily surpass the expectations of analysts. Q4 won't end until Jan 29th so the period still has roughly 3 weeks remaining, but SHLD is confident enough to guide to between $3.39 and $4.12 per share compared to analysts in the low $3 range. The number though will be just flat versus last year so no real improvement on that front.

    The key to SHLD is that it still isn't a retail play. It always has and always will remain an asset play. The company will end the quarter with roughly $1.1B in net cash plus approximately $8.3B in inventories. Remember the market cap is only $8.2B and this doesn't include any of the valuable brands or real estate that could be sold to generate cash.

    SHLD bought back 1.2 million shares for $77M and has authorized $187M more for buybacks. The share count continues to shrink at what should be an alarming rate to shorts. With the profits they continue to create, management will continue to reduce shares from the float until ultimately ESL Investments owns just about all the outstanding shares. Remember that Eddie Lampert is the CEO and via his investment partnership owns some 65M shares controlling some 60% of the outstanding stock. Just a couple of years back he owned only 50%.

    Official earnings won't be released until February 24th. The story remains the same. Good cash generating assets that are being used to reduce the outstanding shares greatly increasing future shareholder value.

    Via SHLD PR:

    • We currently expect net income attributable to Holdings' shareholders for the quarter ending January 29, 2011 will be between $370 million and $450 million, or between $3.39 and $4.12 per diluted share. 
    • We currently expect to end the fiscal year with approximately $1.1 billion in net cash balances (cash less commercial paper borrowings).  Approximately $600 million of net cash is expected domestically and $500 million at Sears Canada.  The expected net cash balances do not give effect to any share repurchase activity after January 10, 2011.  We currently expect to end the fiscal year with approximately $8.3 billion in domestic merchandise inventories.  
    • During the fourth quarter through January 10, 2011, we repurchased 1.2 million common shares at a total cost of $77 million (or $66.35 per share) under our share repurchase program.  As of January 10, 2011, we had remaining authorization to repurchase $187 million of common shares under the previously approved programs.

    Disclosure: Long SHLD

    Thursday, January 6, 2011

    Investment Report - January 2011: Net Payout Yields

    This article focuses on the Net Payout Yields Model offered via where investors can subscribe to the trading data of Mark Holder. 

    The Net Payout Yields model recently started up and spent most of November and the early part of December allocating cash in the model. The model is now basically fully invested and will typically remain that way. The goal of the model is not to time the market or follow economic conditions, but rather to invest in companies with the highest Net Payout Yields (buybacks + dividends).

    The model struggled over the last couple of months of 2010. Hard to tell whether it was investors cashing out of dividend stocks fearing a tax increase in 2011 or large cap stocks with market caps above $10B struggling to keep up with a surging market.

    For December, the model returned 6.08% though the relative performance was disappointing considering the 6.53% gain of the SP500.

    The largest weightings are now CSX Cosp (CSX), Walt Disney (DIS), Home Depot (HD), Wells Fargo (WFC), and Chubb Corp (CB). The goal is to maintain a relatively equal weighting of roughly 20 stocks so weightings usually just reflect price movements since the portfolio start and any specific investment decision of a particular stock.

    The only trades for the month were Medco Health Solutions (MHS) and Gilead Sciences (GILD). Both stocks that have had major buybacks in the recent year that will continue to support earnings and provide downside support as the buybacks likely continue.

    A lot of investors aren't high on buybacks, but they do provide a more tax efficient use of corporation cash especially for investors not needing income. Also, buybacks by top management teams can signal ideal entry and exit points. When a company stops buying back stock, it can signal the stock has become expensive.

    The model typically has a even split between dividend and buyback stocks, but no hard rule is used and hence it has the flexibility to adjust the market.

    Going forward look for limited trading which helps reduce transactions costs and taxes.

    Investment Report - January 2011

    This report focuses solely on the Opportunistic Levered Portfolio, but contains general information that relates to all of the Opportunistic models. The investment returns relate to subscription data available at 

    December was another excellent month for the Opportunistic Arbitrage model as the streak of months exceeding 9% gains extended to 4. The model was up 10.92% versus 6.53% or a active return of 4.39%. Not bad, but not as much relative performance as hoped for in this risky model.

    Despite the strong market in December with the SP500 up over 6% on a relatively straight line up, this model faced a very volatile time period with numerous big winners and several stocks that actually saw 5%+ declines. When investing in small and mid cap stocks one has to be cognizant that these stocks can be very volatile on a daily, weekly, and even monthly basis. As one wise investor once said, its better to make a volatile 15% then a straight line 12%. In the end, investors are better off ignoring the daily price swings and focusing on the end results.

    The market remains extremely cheap as the economy continues to regain growth and add jobs, but it's important to remain vigilant for market corrections as the gains since the end of August have been large. Subscribers should expect more volatility in returns over the next few months, but keep an eye out for the ultimate prize. The goal isn't where your portfolio is at in the next couple of months, but where it ends up in the next year or more.

    One of the major reasons for the volatility of this model was Puda Coal (PUDA). PUDA started the month off strong surging nearly to $17 only to have the rug pulled out from investors with a secondary offering at $12. This crushed the stock mid month only to see it rally back to near break even by the end of the month. Considering the offering is being used to finance coal mine consolidations in China any price around the offering provided an exceptional long term value. The disappointing part though was the excessive discount given in the offering.

    Regions Financial (RF) provided the biggest return of over 30% probably catching most investors off guard. The regional banks had a good rally into year end. Terex (TEX) provided the greatest contribution to the portfolio return as construction and commodity stocks mostly saw good returns. The other big gainers all fell into this category including Foster Wheeler (FWLT), Alpha Natural Resources (ANR), and Freeport McMoRan Copper & Gold (FCX). With those 5 stocks averaging gains in excess of 20%, it backs our disappointment that the model only had a 10.9% gain.

    The major loser for the month was Limelight Networks (LLNW). Whether due to pricing concerns in the CDN sector or fears that Apple (AAPL) was in the process of launching its own network, LLNW had a very weak month. The other major losses came from biotech companies and a Chinese copper recycler that had a negative allegation tarnish its stock price. Rigel Pharma (RIGL), Savient Pharma (SVNT), and Cephalon (CEPH) averaged losses of 5% for the month. Lihua International (LIWA) remains a top pick due to its involvement in copper recycling and refinement in China regardless of a repeat allegation that has been refuted by the company.

    Though the individual stocks were very volatile, the overall market wasn't. Hence, this model had zero transactions for the first month in a while. For now the portfolio will continue to ride what is expected to be another good stock market in 2011. Several short ideas have been contemplated to not only hedge recent gains but to take advantage of possibly over extended markets, but the mantra of never shorting a dull market has held true so far. That will likely end sooner then later so I'll keep on looking for the right entry points.

    BlackRock Sees Coal Stocks Doubling

    BlackRock's Daniel Rice told Bloomberg that he could see coal stocks doubling with oil and gas companies lifting only 25 to 30%. Interesting comments because even though we're bullish on coal stocks some of the bargains are in the natural gas and oil service space.

    Rice has been very successful over the last decade so maybe we should continue to follow him with our overexposure to coal stocks such as Massey Energy (MEE), Alpha Natural Resources (ANR), and Puda Coal (PUDA).

    He does make some interesting points about remaining bullish on energy stocks unless oil surges above $120. Hard to tell if that will be the tipping point as consumers have already tasted that level of oil in the past and since made adjustments, but regardless demand will start to drop when oil rockets above $100. Nobody really knows the tipping point though. Just have to remain on guard.

    Rice's largest holding is Massey Energy so he appears to share the same opinion as Stone Fox on that stock. He sees ANR as the best candidate to buy them. After the bell last night, MEE cut Q4 production amounts by a dramatic amount which has to signal that the Board of Directors is left with little option but to sell the company while the assets are in demand. Rice sees Massey as very attractive because of its inventory of undeveloped properties.

    The rest of the article has some other interesting quotes from Rice plus comments on oil and other energy prices by other analysts so check it out:

    • The gain may lift shares of oil and gas companies by 25 to 30 percent and help double the price of coal stocks, the manager of the $1.5 billion BlackRock Energy & Resources Fund forecast in an interview in his Boston office. His biggest concern, Rice said, is what happens if oil rises even higher.
    • If scientists find a way to cut carbon emissions from burning coal, a breakthrough Rice thinks is more likely to come from China than the U.S., coal’s potential could be enormous, he said.
    • The price of natural gas sank about 20 percent in 2010 under the weight of abundant supplies. Rice said that while the glut could last through 2011, supplies will begin to shrink in 2012 as exploration firms cut back on drilling. He sees gas prices climbing from the current $4.47 per million British thermal units to about $6.50 over the next two years.