Thursday, April 28, 2011

Savient Pharma: Cheap Biotech Without FDA Approval Risk

Savient Pharma (SVNT) - a small cap biotech trading 50% below the 52 week high with an approved FDA drug with blockbuster potential - provides an ideal risk/reward scenario. The approved drug also has orphan status, giving it a 7 year marketing exclusivity.
Naturally, the stock wouldn't still fall into the small cap arena if everybody agreed on the blockbuster potential of Kyrstexxa. The drug is one of the first for gout in over 40 years and provides treatment of chronic gout in adult patients refractory to conventional therapy. It treats an previously untreatable disease, providing for a under-served patient base. This is why many analysts and investors are high on SVNT and the blockbuster potential of the drug.

Read the whole story at Seeking Alpha

Wednesday, April 27, 2011

Stat of the Day: Worlds Largest Copper Producers

In the financial world these days, information is loosely passed around as fact whether correct or not. Makes the following table interesting because a lot of people talk about copper and investing in the sector, but this has to be the first table I've seen in a while with the updated production leaders in the category based on 2010 production numbers.

Freeport-McMoRan Copper (FCX) has been a big on and off investment of Stone Fox Capital. They currently rank as the top independent producer and the 2nd overall behind Chile state owned Codelco. FCX has a big lead over BHP Billiton (BHP) as well. 

This list further highlights the focus on FCX as a proxy for copper. Without doing a lot of research, the other public companies listed only have a small focus in copper. Number 9 Southern Copper (SCCO) is the only other option that is at least investable on US exchanges. SCCO has a $30B market cap so it isn't that small considering the big difference in production as compared to FCX.

 Company                                Production
1.  Codelco                                  1,757
2.  Freeport-McMoRan Copper & Gold Inc.      1,441
3.  BHP Billiton Ltd.                        1,135
4.  Xstrata Plc                                907
5.  Rio Tinto Group                            701
6.  Anglo American Plc                         645
7.  Grupo Mexico                               598
8.  Glencore International AG                  542
9.  Southern Copper Corp.                      487
10. KGHM Polska Miedz SA                       426
* according to London-based metals-consulting company CRU. Production numbers are in thousands of metric tons. 

Monday, April 25, 2011

Poll of the Day: Should the US Have a AAA Rating?

Interesting results from this poll of the day from Should the U.S. Have a 'AAA' Rating? Only 464 people votes so far, but a resounding 79% voted NO. So a majority of investors feel that the US shouldn't have a AAA credit rating.

Lots of economists argue that the US won't ever default no matter the debt levels because we can always print more money. Regardless a AAA rating is reflective of an countries ability to repay debt and the more borrowed the more risk that has to exist.

Personally I don't understand how an investor would buy US treasuries as if we could never default. It also highlight the continued issues with the credit agencies. They are just now downgrading the US to negative watch for a potential downgrade in two years. When everybody else seems to think they are already behind. Nothing new here as the agencies are very good at telling us what we already know.

Any official downgrade would never happen until the media in general already accepts it. Long after any damage had been done to investors buying based on these ratings.

Should the U.S. Have a 'AAA' Rating?
Total Votes: 464
Not a Scientific Survey
Results may not total 100% due to rounding

Thursday, April 21, 2011

Massive Backlog Build at Terex

It appears that Terex (TEX) has finally turned the corner. Up till now, TEX has remained one of the few companies to not turn around from the 2008 financial crisis. Sure TEX had clearly bottomed out, but after selling their mining equipment business to Bucyrus (BUCY) it left them with a construction heavy product portfolio that continued to remain weak.

The Q1 earnings report finally showed a turn in the cycle as opposed to the bottoming process of the last 6-9 months. Sure the backlog had increased over the last few quarters, but this time TEX reported a 30%+ QoQ increase in all 4 segments: AWP, Construction, Cranes, and Materials Processing. AWP had a whopping 45% sequential increase and a 123% increase over last year. Cranes which accounts for over 60% of the total backlog saw a surprising turnaround with a 30% sequential increase while down on the year.

Backlog has trended from a low of $1.12B in Q210, $1.223B in Q310, $1.3B in Q410, to $1.79B in Q111. The trend has now become the friend of TEX shareholders. TEX remains roughly 60% below its 2007 highs while competitor Caterpillar (CAT) recently hit all time highs. While you can't compare both business lines completely since CAT now has a lot more exposure to hot sectors like mining, all these areas will eventually revert to the mean as you won't need mining unless construction picks up.

Read the full earnings release and presentation for full details on the company. To us though, the below details on backlog sums up the investment thesis on TEX. Aging fleets from 2-3 years of neglect will need to be replaced and much sooner then expected just 3 months ago.

BacklogBacklog for orders deliverable during the next twelve months was approximately $1,792 million at March 31, 2011, an increase of approximately 46% from March 31, 2010 and an increase of approximately 38% from December 31, 2010.
  • AWP segment backlog increased approximately 123% and 45% as compared to March 31, 2010 and December 31, 2010, respectively. Driving this increase are improved fleet utilizations, replacement of aging fleets and customer concerns about product availability later in the recovery cycle. Order activity is strong across most models in the boom, scissor and telehandler categories.
  • Construction segment backlog increased approximately 118% and 72% as compared to March 31, 2010 and December 31, 2010, respectively, primarily due to increased demand for most construction products in the Americas and Russia and material handlers globally.
  • Cranes segment backlog increased approximately 23% and 30% as compared to March 31, 2010 and December 31, 2010, respectively. The majority of these orders are going to large rental customers, with some of these orders coming from new customers ordering products such as the recently launched Roadmaster 9000 truck crane and new boom trucks. The Company is seeing good order demand for rough terrain, boom trucks and tower cranes, especially in North America.
  • MP segment backlog increased approximately 4% and 31% as compared to March 31, 2010 and December 31, 2010, respectively. Materials processing backlog increased due to expected seasonality in the timing of orders as well as low dealer inventories resulting from continued end user financing programs

Disclosure: Long TEX in client and personal accounts. Please review the disclaimer page. 

Tuesday, April 19, 2011

Huge Volume Today on ChinaCache International

As we've written on ChinaCache International (CCIH) in the past, this Chinese internet company has been completely ignored by the market. While (SINA) has soared and numerous other IPOs have garnered attention, the market had forgotten about CCIH.

Volume for two days in early April were below 50,000 shares. An absurdly low amount for a hot internet sector. Even the 3 month average volume being only 183K shares. For example, averages nearly 2M daily shares and Qihoo 360 Technology (QIHU) averages 5.7M. The difference is very surprising considering the growth rate at CCIH.

Today CCIH had 1.2M shares traded which is the highest volume on a up day since the IPO. It is also the 2nd highest day after the 1.5M shares traded on Feb 9th after the announcement of the COO resignation.

China internet stocks were hot today, but it appears the key to share gains in CCIH is for it to regain attention as China internet IPO versus a reverse takeover (RTO). Somehow CCIH had slipped down to where it appeared that investors were considering them in a skeptical light while bidding up all the big name stocks.

Hopefully the volume today signifies a change in direction. If anything, CCIH should be a huge benificiary of the internet boom in China. Numerous companies have raised significant amounts of funds to expand operations and they'll all need the CDN services offered by them.

Air Lease Jumps to $28 After IPO

Air Lease raised more then expected by selling 30.3M shares at $26.50. The $800M+ will be used to finance a growth strategy with orders for more then 150 additional airplanes on a fleet base of just 49 as of today.

This values AL at closer to 1.5 times tangible book value compared to Aercap Holdings (AER) trading below 1 times book value. See my recent article at Seeking Alpha suggesting that AER becomes a much greater value especially as AL surges past the IPO price: Skip the Air Lease IPO, Aercap Holdings Provides Better Value. 

Disclosure: Long AER in client and personal accounts. Please review the disclaimer page. 

Monday, April 18, 2011

Small Investors Still Cheated by the IPO Process

On Thursday, two more stocks IPO'ed at significant gains. Unfortunately small investors were left out of the process until the stocks opened significantly higher. By that time though, these investments aren't attractive anymore and if anything the small investor comes rushing in and loses money. Nothing new in the investment world that continues to be rigged against the average small investor.
Both Zipcar (ZIP) and Arcos Dorados (ARCO) rose over 25% on the first day of trading....

Read the full article at Seeking Alpha

Disclosure: Long CCIH. Please review the disclaimer page. 

Sunday, April 17, 2011

Two Attractive Networking Cloud Stocks to Buy on Weakness

After a few months of weakness since the disappointing guidance of F5 Networks (FFIV) back in mid January, most of the networking cloud stocks have been under pressure. It tends to be a normal pattern for new disruptive services to go through extreme highs followed by lows that shake out longs. The pattern will repeat several times over the next couple of years as cloud computing becomes mainstream. FFIV is now down 35% from its highs back in January. Have the future prospects really changed that much?

Read the rest of the article on Seeking Alpha

Disclosure: Long RVBD and RDWR. Please read the disclaimer page. 

Friday, April 15, 2011

Evidently Everybody Fears China Inflation Except For China Stock Market

Last night, China reported inflation numbers for March that were slightly hotter then expected at 5.4% and at a 32 month high. Naturally the market tanked. Or wait, the Shanghai Stock Market was up slightly yesterday after initially falling. On top that, the market is up at breakout levels after having recently broken above a double top at 3,000.

So why didn't the market tank overnight? Partially because China has been busy fighting inflation by raising interest rates and reserve requirements for banks. Mainly though because most analysts view inflation closer to peaking. The monetary restrictions combined with a weak market in 2010 leaves China an ideal place to invest in 2011.

One of the biggest issues with inflation hawks is that they tend to not let interest rate/reserve changes work their way through the economy. It takes up to 9 months for rate increases to work through the system yet hawks will jump all over this hot inflation number as a reason for more immediate moves. If we've learned anything from the boom, bust cycle in the US during the 2000s is that drastic changes in interest rates have little immediate impact, but eventually it contributes to a dramatic change in economic course.

The US is now benefitting from extremely low rates, but watch out a few years from now after the FED raises rates by 300-400 basis points if not more. Eventually they'll raise rates one too many times and the economy will come to a halt.

  • Inflation had long been expected to run higher in March because of a lower base of comparison. The base effect also suggests that inflation is likely to level off in the coming months before jumping again in June and July, though officials are confident that it will wane in the second half of the year.
  • Accepting this relatively sanguine view, many economists had thought that the central bank was near the end of its tightening cycle. The median forecast of Reuters poll last week was for just one more interest rate increase over the rest of this year.

Puda Coal Faces Fraud Allegations

Puda Coal (PUDA) is a coal mine consolidator and met coal washer in China that has been hit by fraud allegations from a noted short seller. At question is whether the Chairman of PUDA illegally transferred shares from a subsidiary 90% owned by PUDA to himself, then sold 49% of the shares to CITIC (China govt fund) and further pledged the other 51% for a massive loan that could threaten to bankrupt the company. With all of the recent news regarding fraud amongst China Reverse Mergers, the stock plummeted 50% within a week . 

The company issued a press release prior to the stock opening on the 11th that the allegations might have some validity and announced they were launching an investigation. The stock was halted on the 11th and has yet to reopen. Also the margin requirements were raised to 100% which means the stock can no longer be margined. Although the Opportunistic Arbitrage model heavily relies on margin, the model hasn't been impacted with this increased requirement since the other stocks in the model have enough available margin. 

For now we have to wait until the investigation is finalized and the stock resumes trading which could take days or even months. As investors, all we know is that the allegations might have some merit, but whether the dire conclusions of the shorts are accurate remain in question. What we know is that the Chairman owned roughly 50% of PUDA at the time of these transfers and his alledged sell to CITITC could've impacted his ownership in PUDA rather then other shareholders. Regardless, any such transactions were not properly reported. The Chairman also has numerous other assets including a partnership with PUDA that could be used to make shareholders whole. 

The risk in these Chinese stocks was widely known, therefore this model kept relatively low investments in this sector to minimize risk regardless of the due diligence and the value in the sector. One important development is that in the process of the short attack  they have validated the operations meaning that the company could have more value once the ownership transfer issue is cleared up. Of course, on the flip side shareholders could be significantly impacted if the short theory comes to fruition. 

Disclosure: Long PUDA in client and personal accounts. Please review the disclaimer page. 

Wednesday, April 13, 2011

Quote of the Day: Brent Spread Will Keep Going Up Until It Stops

Tonight on Fast Money on CNBC, Dennis Gartman had some sound advice on investing in general. Specifically though he was talking about the spread difference between Brent Crude and WTI. As he says during this clip, the spread will keep going until it stops. While that might sound a little arrogant to some, it really highlights how markets work.

The oil market in 2008 kept going up until it stopped. All this nonsense on predictions just aren't that useful. An asset will keep going up until it stops. Just like tech stocks in April 2000 and housing a few years back. People kept calling them bubbles and stayed away, but in the process they missed out on huge gains. The key is to recognize when the rally ends. Buy and hold can work in non-bubble markets, but the worst thing an investor can do is ride an asset class up and then let all the gains evaporate.

Anyway, this an important lesson for any novice investors or anybody that wants a target price. The market just doesn't work that way. Assets keep going until they stop and predicting the stopping point isn't the goal. The goal is to recognize the end of the ride.

Tuesday, April 12, 2011

Nice Earnings By Riverbed Tech After The Close

Great guidance from Riverbed Tech (RVBD) after the close today. The stock has been completely hammered the last couple of weeks with a whopping 6.5% drop today. Apparently this was enough to cause management to rush out the numbers for Q1.

Not sure why the market continues to think that RVBD will miss estimates. This company provides a best of breed network optimization product that reduces network costs. Tomorrow should be a great day for the stock as they continue to produce record results though the stock was down 30% from recent highs.

Tomorrow should be the start of a good run. RVBD will top street highs with that $.20 estimate. The 2012 top estimate is $1.44. Using that estimate that is completely achievable based on todays results, RVBD was only trading at 21.5x earnings. Note below that earnings just double for Q1 '11 and the PEG on RVBD is remarkably low.

5:40PM Riverbed Technology sees Q1 revs of $163-164 mln vs $160.1 mln Thomson Reuters consensus, sees Non-GAAP EPS of $0.19-0.20 vs $0.18 consensus (RVBD) 30.92 -2.15 : Co guides Q1 above expectations... Co said, "With a strong start to 2011, Riverbed exceeded revenue and earnings expectations in the first quarter. We executed well, achieving 45% year-over-year revenue growth, and non-GAAP operating profits doubled compared to the first quarter last year. Sales increased on an annual basis across all major geographies as spending on WAN optimization remains a priority."

Disclosure: Long RVBD in both client and personal accounts. 

Thursday, April 7, 2011

A Look At a Fund Manager's Top Takeover Picks

Our philosophy isn't to pick stocks based on ones potential for a buyout, but this report caught our attention. Harry Rady of Rady Asset Management owned biotech company Cephalon (CEPH) that recently got a buyout offer from Valient International (VRX). Since Stone Fox Capital also owned CEPH in our Opportunistic folios it was intriguing to see what else he picks, since we might have similar investment styles.

Looking over his list we actually already own one of his top picks in Savient Pharma (SVNT). He also lists
Activision Blizzard (ATVI) and NuVasive (NUVA) that have been on our radar. Might be time to double up research on these picks.

Rady sees 100% gains in both SVNT and NUVA and interesting that they are both in the medical/health sector like CEPH. SVNT has been a long term holding that we've ridden to the $20s only to see it crash back below $10 when the sale of the company failed. With the new management team in place, they appear to be the strongest pick in the group.

NUVA is also interesting as they've mainly been hit by issues surrounding insurance reimbursement following ObamaCare approval last year. Assuming that gets worked out this company should be back on track. The chart looks much improved after basing for the last 5 months making an appealing entry point.

ATVI becomes much more appealing if they can continue moving into online games, but with analysts expecting sales to decline 17% this year the stock might need to wait until growth returns.

Summary of Rady's picks:

  • Adobe Systems (ADBE) - Rady lists it as having 50% upside, but we'd be concerned about the issues with being excluded from the iPad. Apple (AAPL) rules the tablet world and this cuts them off. 
  • Activision Blizzard (ATVI) - the video game sector has been hurt by the move to Facebook and smartphone games. Or should I say, the established games developers like ATVI have been hurt because they were too focused on consoles. Rady sees a 50% upside. 
  • FLIR Systems (FLIR) - this manufacture of thermal imaging systems used by the military had been held down by fears of budget cuts. The stock has recently run so it doesn't appear to be the bargain that Rady mentions. 
  • Iridium (IRDM) - providers of mobile voice and data through satellites has been a long time struggle. They just can't ever get expenses inline with revenue while the market around them evolves faster then they can launch upgraded satellites. 
  • NuVasive (NUVA) - Rady sees a 100% gain in this stock that has dropped 50% because of worries over reimbursement of the the surgical treatments for spine disorders that their medical equipments concentrates on. Demand will only continue to grow as baby boomers get older. 
  • Savient Pharma (SVNT) - FDA approved drug for gout treatment that Rady sees a 100% gain as well. 
  • SandRidge (SD) - oil and natural gas exploration company that was a $60 stock and now trades for $13. The stock has more then doubled in the last few months and doesn't seem the bargain anymore. 

Disclosure: Long CEPH, SVNT, SD in client or personal accounts. Please review disclaimer page. 

Wednesday, April 6, 2011

Investment Report - April 2011: Net Payout Yields

March was another solid month for this model, as it beat the benchmark (up 1.95% versus 0.10 loss for the S&P 500). The model also wrapped up a solid first quarter with a 6.57% gain. For a Risk Score 1 model, the goal remains to outpace the benchmark by a slight amount eac month with greatly reduced volatility as opposed to models in higher risk scores.

For the month, the model sold Walt Disney (DIS) and United Parcel Service (UPS) as their net payout yields dropped below acceptable levels.

Those two stocks were replaced with Gap (GPS) and Entergy (ETR).

GPS maintains a modest dividend of 2%, but has made significant buybacks in the last few years. On February 24th, they announced the Board of Directors approved an additional $2 billing share repurchase authorization and a increase in the annual dividend to $.45 for 2011. For Q4 alone, they repurchased $598M of stock or an annualized rate of nearly 18% making them a top 4 net payout yield stock.

ETR is another top net payout yield stock having a solid dividend of nearly 5% plus regular stock repurchases. The stock was hit after the nuclear issues in Japan caused concerns overly their nuclear operations in northern United States providing for an ideal entry point.

Top Performer
Lorillard (LO) was the top performer with a 25.8% gain. After a weak few months, LO popped on numerous reports that their menthol cigarettes didn't propose greater risk. In fact according to a Bloomberg report, a Vanderbilt University study found that menthol cigarettes may pose a lower risk for lung cancer.

With all that said, this model doesn't research the fundamentals of the stocks it holds. Rather it lets the net payout yield speak for itself. Even after this run in the stock, the dividend yield is still 5.5% and the company has made significant stock repurchases in 2010.

This model continues to gain momentum as higher dividend stocks come into focus after a weak yearend when the dividend tax rate was in question. Many of the stocks in this model such as GPS, continue to have yields in excess of 10% making these stocks much more attractive then bonds or treasuries yielding significantly less in this low interest rate environment.

Disclosure: Long ETR, GPS, LO in client and personal accounts. Please review the disclosure page. 

China IPOs Gallop Out of the Gate: Time to Buy?

Over the last 6 months, China has had four internet related IPOs that soared nearly 100% on the first trading day. The latest came last week in the form of Qihoo 360 Technology (QIHU). The stock was up an amazing 134% in its market debut, but only ranks second trailing the 161% gain of (YOKU). Should you buy now?

Any prudent investor should take a pause after such a meteoric rise. Sure the company has a lot of potential but most companies don't live up too such grand hype. After all, there was a reason that the investment bankers priced it so much below the closing price. Do you really think they turned down extra fees intentionally?

Read the full article at Seeking Alpha

Disclosure: Long CCIH in client and personal accounts. Please review the disclaimer page. 

Investment Report - April 2011: Opportunistic Levered

March was another volatile month. The month ended on a solid note with the Opportunistic Levered model ending with a 2.3% gain compared to a slight loss for the SP500. Considering this model ended the month with considerable leverage on the long side, its always very positive when it outperforms the market in negative months even if the loss was negligible.

As mentioned in the March Investment Report, the market was in need of a selloff and the SP500 got that in the form of a roughly 7% drop to the intra-day low of 1,249 on March 16th. While many experts continue to expect and expected a larger selloff, in our view this was the buying opportunity we were waiting on.

Added More Long Exposure
Since we expected a drop to around 1,250 to be close to a bottom in the SP500, we added more long exposure around the middle of March. Specifically we added exposure to the oil services and commodity sector to benefit from the rebuilding in Japan and continued emerging market growth. Also our research focused on stocks that had recently seen drops in the 10-20% range from recent highs in February.

United States Steel (X) was a new position expected to benefit from the increased demand for steel in Japan while also benefiting from a closure of steel mills due to the earthquake and tsunami. X also benefits from having its own source of iron ore allowing them to benefit from rising commodity costs while competitors are squeezed.

Weatherford International (WFT) was another addition added on the 15th aimed at benefitting from the higher oil prices. WFT was also hit by a tax restatement placing concern on their financial controls. While the tax issue is a concern, it doesn't appear to place any long term distress on their business. The drop has turned out to be a gift as other oil service companies were hitting high notes in mid March.

Freeport-McMoRan Copper & Gold (FCX) was a position we added to on the 16th as the market was hitting its lows. FCX was a long term holding that was trimmed earlier this year and reinitiated at the end of February. Copper hit a peak earlier this year and has struggled since, but all signs exist that copper supply will struggle to keep up with Asian demand.

The purchase of FCX concluded a string of buys that added exposure to commodity and emerging markets from mid February to mid March. All in all, ICICI Bank (IBN), ChinaCache (CCIH), and Radware (RDWR) were bought in addition to X, WFT, and FCX bringing the model to leverage of 1.7.

No Sells Yet
No positions were sold in March as the market was selling off leaving stocks more attractive to buy then sell. With the six additional positions added, the current holdings list has reached a level higher then the historical average for this model and above our desired level.

In the next few months expect the position total to drop back to the expected upper limit of 25 via either out right sells or position consolidations like the Alpha Natural Resources (ANR) buyout of Massey Energy (MEE). Also, Cephalon (CEPH) recently got a bid from Valeant Pharma (VRX) leaving the likelihood that this model will cash out of CEPH with the stock already trading above the $73 offer.

The market remains attractive at these levels. Expect some bumpy earnings reports as some sectors like technology could have Q1 numbers impacted by the disaster in Japan. Though this model is virtually fully invested, any sell offs in leading technology companies would be seen as buying opportunities and not a reason to panic sell.

Disclosure: Long all stocks mentioned in client and personal accounts. Please review the disclaimer page. 

Monday, April 4, 2011

Wireless Weddings Discussion Too U.S.-Centric

After a wild couple of weeks in the domestic wireless sector following the announcement that AT&T (T) would purchase T-Mobile from Deustche TeleKom (DTEGY.PK) in a $39B deal, the speculation in the media has centered mostly around other potential wireless mergers in the U.S.
Odd, considering that the U.S. market is very mature and past major telecom mergers a la Sprint (S) and Nextel in the wireless sector and MCI (MCIP) and WorldCom in the wireline/data sector have largely been flops. Between merging networks and combining billing systems, it's extremely time-consuming and underproductive to undertake (trust me, I know from first-hand experience of working the projects of trying to merge the billing systems of MCI and WorldCom).....

Read the full story at Seeking Alpha.

Disclosure: Long MICC and NIHD for client and personal accounts. Please review the disclaimer page.