Thursday, March 31, 2011

Factbox On Average Offshore Rig Age

Interesting stats from Reuters on the average age of offshore oil and gas drilling rigs. Its interesting because a lot has been made of the recent order boom for offshore rigs. Looking at the below data though it suggests that new rigs are very much needed. Seadrill (SDRL) is the only company in the list with an average age below 15. Now I'm sure the rigs for Diamond Offshore (DO) still do a good job, but rigs that are over 30 years old surely can't compete with new modern rigs.

Atwoods Oceanics (ATW) has been a favorite of Stone Fox Capital for a while. The company has recently gone on a building spree [see Atwoods Oceanics Is Drilling for New Rigs]. The company has 6 new rigs on order which is impressive considering the company only has 9 ships now.

The industry clearly has an issue with aging fleets. SDRL has some appeal as an investment though they are heavily indebted.  For now we'll remain focused on the investment in ATW and sleep much better knowing the building of new rigs was a smart move as fleet ages reach extreme levels.




(Reuters) - Below are the fleet sizes and their average
ages for leading operators of offshore oil and gas drilling
rigs, not taking upgrades into account.

Operator                Rigs built    Average age (years)
Transocean  (RIG.N)        139                 25
Ensco/Pride (ESV.N)(PDE.N)  69                 22
Noble Corp  (NE.N)          62                 29
Hercules    (HERO.O)        52                 31
Diamond     (DO.N)          46                 31
Seadrill    (SDRL.OL)       45                  8
Rowan       (RDC.N)         28                 16
Atwood      (ATW.N)          9                 26
Total                      450                 24
 (Compiled by Braden Reddall)

Wednesday, March 30, 2011

Barron's Analyst Roundup on Cephalon Buyout

Barron's has a good summary of the Cephalon (CEPH) buyout announcement from yesterday. What's interesting and has kept us in the stock is that Valeant Pharma (VRX) traded up 12.8% today. This is unheard of for the bidder in a hostile deal to increase especially that dramatically. Apparently the market thinks the deal is very cheap with the analyst from Hapoalim Securities speculating on a significant increase in the bid of up to $86.

Several of the analysts increased their targets on VRX suggesting that the cost savings and ability to borrow low cost debt makes this deal very appealing. The $300M in savings would be incredible for a $5.7B deal and essentially covers all of the interest payments.

All of this points to a likely bump in the bid assuming the BOD at CEPH doesn't out right block the deal. An offer potentially in the $80s would likely be deemed attractive. It will keep us around for a while. Eventually though the potential upside might be limited and risk greatly enhance of a downside plunge if the bid isn't accepted. Opportunities always exist elsewhere.

The Cross Current Research analyst on the other hand was very negative on the deal. Alex suggests that CEPH could actually turn to losing money after Provigil and Treanda go generic. Naturally he makes some 'interesting' statements about if all the R&D projects move forward that the costs would become serious. Naturally though why would a company undertake such a scenario unless the potential is significant?

Sensational analysis like this isn't helpful. Even the VRX CEO mentioned finding partners which is likely what CEPH would do as a stand alone. Ultimately its only a problem if they end up with too many good drugs a keen to having too many good running backs that all can't start. Its a good problem to have. Too many good assets won't turn into a problem.

Next week should be interesting.

Tuesday, March 29, 2011

Cephalon Gets $73 Proposal, Valeant Pharma May Find Additional Value

Interesting news after the bell today on Cephalon (CEPH). Valeant Pharma (VRX) went public with a $73 all cash offer to buy CEPH. The deal would be valued at $5.7B and represents a roughly 25% premium from the closing price. Naturally VRX claims a 29% increase from the 30 day trading average, but going back the last year CEPH recently traded at 52 week lows. Shareholders are likely happy to see an offer with the stock swooning of late, but anybody holding the stock for most of the year sure expected a higher valuation and isn't exactly happy.

The claims by VRX are normal of hostile bids suggesting that the management of CEPH has done everything to prevent this deal even going so far as to make several acquisitions themselves in order to block the deal. Possibly valid, but this isn't a scorching high valuation.

CEPH is a key holding in our Opportunistic funds, but honestly the investment has been slightly disappointing having a loss on the investment until this announcement. CEPH has consistently smashed earnings estimates the last year having beaten estimates by 15% on average (per Yahoo Finance Analyst Estimates), but investors remain hesitant to invest in a company about to have a key drug roll off patent.

For long term investors willing to hold for 3-5 years the deal likely isn't appealing, but anybody wanting a quick gain will jump on the offer especially if the stock trades at a premium tomorrow. My concern in holding the stock as a opportunistic investor not looking to trade every 10% gain is that the management team could turn down the offer and leave investors not seeing prices this high again in 2011. Hard to hold, turn down this offer, and start 2012 with less money. The VRX comment about finding additional value has appeal. Bring the offer up to $77-80 and I think most investors would be satisfied.


Via Valeant Pharma PR:


  • to acquire Cephalon for $73.00 per share in cash.  The proposal, valued at approximately $5.7 billion, represents a premium of approximately 29% over Cephalon's 30-day trading average.  
  • Valeant announced its intention to commence a consent solicitation process during the week of April 4th in an effort to replace Cephalon's current Board of Directors with its own nominees.  Valeant anticipates that the transaction will be entirely debt financed.  Goldman Sachs & Co. has provided a highly confident letter for the full amount of the financing.
  • "We have taken a close look at Cephalon's business and believe we put forward a very compelling offer for Cephalon's stockholders," stated J. Michael Pearson, chairman and chief executive officer.  "We are also committed to trying to find additional value if we are allowed to conduct due diligence.  





Disclosure: Stone Fox Capital owns CEPH for client and personal accounts. SFC could sell those shares in the next few days based on the stock price reaching or exceeding the offer price. This is in no way advice on how to handle your personal investments and should just be used for information basis. Please review disclaimer page. 






Home Depot Issues Debt To Buy Stock

Home Depot (HD) announced after the close yesterday that they would issue $2B in debt to refinance $1B of senior notes and to accelerate a repurchase $1B of outstanding shares. Typically we're big fans of stock buybacks and place a major emphasis on stock re purchasers via the Net Payout Yields folio. Issuing debt though to repurchase shares aren't as attractive. Its the use of free cash flow and cash on hand that makes a stock appealing not debt. When a company can afford a large percentage buyback, then it clearly signals that the market likely misunderstands a stocks future.

HD has been one of the top investments in the NPY folio for a while since they have a nice 2.8% dividend combined with a history of strong buybacks. The company has already announced the intention to buyback $2.5B of stock this year placing the buyback yield at roughly 4% for this $61B market cap stock. Combined with the dividend, HD has a NPY of nearly 7% making them very attractive.

This debt enhanced buyback technically increases the yield by another 1.6%, but we're actually inclined to exclude increased debt from our focus.

Clearly management has seen a turn in the business with 2010 seeing the first increase in sales since 2006. Likely they are looking out to 2013-14 and seeing a booming house building market and much higher interest rates. Why not borrow money today at low rates and buyback stock before it jumps higher?
It might be a savvy decision, but it ultimately adds unnecessary risk. The cash will be forever gone, but the debt will remain requiring interest payments.

Wise or not, the move doesn't appeal to our portfolio that focuses on the combination of repurchases and dividends.

Via HD PR:


  • today announced the pricing of a $2 billion senior note issuance.  Net proceeds from the financing will be used to refinance $1 billion of senior notes that came due in March 2011 and to repurchase $1 billion of outstanding shares through an accelerated share repurchase program with Barclays Capital.  
  • The accelerated share repurchase is in addition to the Company's previously announced intention to repurchase approximately $2.5 billion of outstanding shares throughout 2011 using excess cash generated by the business. 
  • In February 2011, the Company announced a six percent increase in its quarterly cash dividend to 25 centsper share.  
  • The Company launched its stock repurchase program in 2002 and cumulatively through the end of fiscal 2010 had purchased approximately $30.1 billion of its outstanding common stock.  As of the end of fiscal 2010, the Company had $9.9 billion remaining in its share repurchase authorization.  

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

Capitalized Corporate Profits Model

As corporate profits continue to hit all time highs, thought it was time again to review market valuations. While most investors expect higher year end stock valuations, most only expect modest gains from current levels because the market has run to fast since the March 2009 lows. As we've said on the this blog for the last couple of years, its not wise to use that panic low as a basis for historical measurements and average returns. The market collapsed like never before and should also rebound in a like manner.

The SP500 is still considerably below its October 2007 high even though corporate profits have already surpassed those levels. Of course, valuing a market in the vacuum of a single data point can be dangerous. This is why the capitalized profits model factors in the 10-year Treasury Yield to calculate the estimated market valuation. Naturally lower rates should mean higher valuations as stocks become more attractive then bonds.

Ironically from the chart below, the SP500 has trended flat to down over the last 11 years as the 10-year Treasury Yield has slid from nearly 6.5% at the 2000 peak to 5% at the 2007 peak and all the way down to the current 3.5%.

Using the corporate profits model, First Trust calculates the fair value of the Dow to be 22,800 with the Treasury yield at 3.5%. Naturally the problem with very low interest rates is that most people in the market won't trade based on them and rightfully expect rates to rise significant if the market was to approach old highs. Accordingly the team of Brian Westbury and Bob Stein used a Treasury yield of 5% to generates a "fair value" of 16,000 on the Dow and 1715 on the SP500.

Those numbers are substantially higher then existing markets with the SP500 around 1315 today or a gain of roughly 30%. Naturally the market brushes such estimates off and continues to focus on the downside potential with supposed black swans around every corner. By the way, the tsunami/earthquake/nuclear crisis in Japan and the fighting in the Middle East and North Africa are no where close to black swan events. Short term disruptions that impact relatively small areas of the world won't disrupt the global growth thesis.

Naturally its never wise to pick a valuation thesis and just blindly follow it without ever questioning the continued validity. If the facts change, as an investor you should be willing to adjust as well. This model would've never predicted the 2008 market collapse. Neither would've most models since its difficult to predict a financial collapse or black swan event. Regardless, while looking for the next black swan make sure you understand that absent such an event the market appears headed to all time highs as record corporate profits are expected to continue expanding and are back dropped by ultra low rates. Ask yourself, why wouldn't the market hit all time highs?

Chart courtesy of chartfacts.com.






Disclosure: No positions listed. Please the disclaimer page. 

Thursday, March 24, 2011

Invest Like a Wolf or a Fox

Never heard of Michael Purves of BGC Financial, but I like his concept of trading like a wolf. I'd go for fox instead of wolf, but thats besides the point. His best quote is "you have to be agile and short-term and cannot just sit on stocks and hope". Now I don't agree as much with the short term concept, but I'm in full agreement with the concept of not just buying a stock and hoping. If the reason for buying a stock changes, then dump it. Thats the whole theory of being opportunistic. Unfortunately too many of these traders have zero focus on the damage short term trades can have when the tax man cometh.

Now the Breakout Crew at Yahoo is interesting. First time to watch their work and I'm amazed to see Jeff Macke appear again. He of the famous melt down on CNBC. Jeff appears to remain very negative and seems to be chomping at the bit to short this market. Nothing has changed even since the bottom.

Watch if you've got a few minutest to waste....



Wednesday, March 23, 2011

Dicks's Sporting Goods Eyes Store In My Area

After years of being an investor in Dick's Sporting Goods (DKS) and not being able to shop there since they aren't located in Oklahoma, it appears they are finally looking at a location in Broken Arrow just down from my office. They've owned the Golf Galaxy store in Tulsa for a while now, but this will be the first Dick's store within several hundred miles.

According to the Tulsa World, BA approved a $900K tax rebate incentive for a store at the Shops at Broken Arrow site. The deal would give Dick's a $90K sales tax rebate for 10 years. Seems like quite the deal for a strong retailer like DKS.

From a competition stand point, this location is ideal with BA having a population of close to 100K with zero access to big league sporting goods store. Not to mention any stores in Tulsa like Academy and Sports Authority are very far away. And of course they aren't much competition anyway. The store would also be within a mile of the largest high school in the state.

Hopefully the store will get built though maybe it will be a sign that DKS is becoming a mature retailer. Entry into Oklahoma would make the 43rd state and I assume the other states are North Dakota, South Dakota, Idaho, and Wyoming leaving very little growth locations in new states.

DKS will remain a great retailer but the growth might slow soon. Something to ponder.


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

China Cache Looking to Breakout

While the US tech sector its a rough patch, some Chinese tech stocks like China Cache (CCIH) are looking very bullish technically. Networking stocks like F5 Networks (FFIV) and Riverbed Tech (RVBD) along with just about all of the optical equipment stocks and even the US CDN leader Akamai (AKAM) have fallen below the 200ema. Typically this is a very bearish sign especially if the 20/50emas dip below the 200 as well.

CCIH on the other hand has regained the 20/50ema. The 200ema isn't active yet since the company hasn't been public that long.

CCIH is the leading CDN provider in China, but has dropped dramatically from its post IPO high near $35 all the way back in November. Along with the general weakness in the Chinese market that started back then, they also faced the scare that the COO leaving signaled internal issues at the company. Based on the Q4 results those issues were put to rest and the stock has been basing since then.

From looking at the chart below it appears that is CCIH can break above $22 then the stock could run back to previous highs.






















Disclosure: Long CCIH, RVBD in client and personal accounts. Please review disclaimer page. Mark is not a technical expert and this information is just provided for informational purposes.

Tuesday, March 22, 2011

Are Banks' Net Payout Yields Attractive Now?

Pre financial crisis, banks provided some of the most consistent dividends, but the crisis for the most part wiped out the money returned to shareholders. Even the better banking stocks like JPMorgan (JPM) only maintained small dividends of $0.20 or 0.4% on an annual basis. Basically just enough to claim they pay a dividend and not much more. Buybacks were all but outlawed by the regulators.

On Friday, the market got news from some of the large banks that the government will allow them to start returning capital to shareholders. Considering our focus on Net Payout Yields (combination of dividends and net stock buybacks) we wanted to analyze the forecasted payouts of the top banks to see which ones will now be at attractive yields. 





See the rest of the article at Seeking Alpha

Friday, March 18, 2011

Cisco Systems Ups Net Payout Yield With First Dividend

Today Cisco Systems (CSCO) announced its first dividend payment on April 20th to shareholders of record as of the close of March 31st. While the $0.06 quarterly or $0.24 annual dividend yields only 1.4% it does add to an already sizeable buyback program that yields over 5%. In total shareholders will get a over  6% returned to them via the combination of buybacks and dividends.

With over $25B in cash and massive annual cash flows, CSCO should be able to easily handle these payouts and as long as the stock remains below $20 the yields will be huge.

CSCO clearly has a lot of issues with their products and margins, but every stock has a value point and this might just be the spot. At least as long as the yield remains this attractive.

Via CSCO PR:

  • A quarterly dividend of $0.06 per common share will be paid on April 20, 2011, to all shareholders of record as of the close of business on March 31, 2011. Future dividends will be subject to Board approval.
  • "As the role of the network expands across the IT sector, Cisco's leadership position in the markets we serve is strong, and the time is right for Cisco to pay our first-ever cash dividend," said Frank Calderoni, Executive Vice President & Chief Financial Officer, Cisco. "This dividend complements our leading position, and is an important part of our commitment to bring value to shareholders."

Below is a detailed table of the quarterly buybacks and associated yields. All quarterly buyback numbers in 000's.

StockQ3'10Q4'10Q1'11Q2'11Buyback YieldDividend YieldNet Payout Yield
(CSCO)5738522,3271,1655.2%1.4%6.6%






Disclosure: Long CSCO. Please review disclaimer page. 

Thursday, March 17, 2011

King Coal!

With the nuclear crisis in Japan, it's become very clear that coal will remain the King fuel of the developed world and maybe even the emerging world as even China delays its nuclear program. Considering the Opportunistic portfolios managed by Stone Fox has a heavy does of coal investments this is good news. Even if the reason for the gain is because of such a horrible tragedy.

Sadly, though nuclear has many benefits it can be a very unstable fuel option. Sure coal has likely killed more people especially in the underground mining and even via the pollution caused by the burning of the material, but it never causes mass panic of a major catastrophe. With coal, the only people that really face daily danger are the miners. People supposedly paid for taking that risk and fulling understanding the danger whether they can find other employment or if that is the only option in the area. With radiation though, whole cities can be destroyed and even though a major catastrophe hasn't happened outside of a less then commercial operation in Chernobyl, the fear is bound to scare off the general public.

This brings us back to the investments that we have in Alpha Natural Resources (ANR) and Massey Energy (MEE). Search this blog and you'll see numerous articles about the two stocks. The combined company will be the 3rd largest met coal miner in the world and a major thermal coal provider. ANR also trades nearly 20% below recent highs making it an ideal investment now.

Cramer favors Peabody Energy (BTU) and Walter Energy (WLT), but ANR has the best value at this point. Check the below video from Cramer where he picks ANR as his 3rd best coal play in light of the nuclear issue in Japan.








Disclosure: Long ANR, MEE. Please review the disclaimer page. 

Wednesday, March 16, 2011

Fear of Radiation Exposure Overdone

At least that is what most experts continue to report. Market keeps getting crushed despite most of the experts downplaying all the risks on radiation. Use your own judgement on the risk of a radiation crisis in Japan, but the risks seem a lot lower then the panic on the street. Naturally I wouldn't want to hang around within 50 miles of the Fukushima plant and take even a 5% risk, but that doesn't mean investors should flee stocks.

Whats absurd today is the market swooned on reports from a EU energy minister called the situations a 'catastrophe'. Though he was only throwing in his conjecture of the whole situation the market took it to mean a radiation catastrophe was just starting. Now we're hearing news that the Japanese utility has just about got a new power line to the location that could hopefully turn the cooling system back on.

The new remains fluid, but the Chernobyl situation doesn't appear on the table and if so stocks are very cheap. Watch the Tech Ticker interview.


Bottom line: While the situation at the plant is dire, the risk of radiation throughout Japan is minimal. Americans certainly don't have anything to worry about.




Update 4:30pm cst: Unfortunately the media spent most of the day hyping escalating issues in the nuclear crisis though the only real news was the very positive possibilities of a power line hooking up the power and ending the crisis. The fear mongering was off the chart even though today was the first day without a fire or an explosion. Sure seems like somebody was attempting to push the market down via news leaks. 

Tuesday, March 15, 2011

Out Fox The $treet

Introducing the new blog name.... Out Fox The $treet (outfoxthestreet.com). Obviously the blog name goes along with the 'Fox' concept of the firm, Stone Fox Capital Advisors, ran by Mark Holder. The blog will continue to have the same general information but will now separate the advisory functions from the blog posts that are provided for general information only and should never be used as investment advise.

Some of the reasons for choosing Out Fox The $treet. It was partially chosen because it just works with the firm name. Mainly though it highlights the concept of investing better by not being part of the herd that is Wall Street. Small independent firms or just individuals willing to do the work can easily outperform the larger mutual funds or hedge funds. For one, small amounts of money can be easily invested and also you have less corporate restrictions and decision makers hampering the quick decisions needed on Wall Street.

A couple of points from Wikipedia that highlight my interest with the phrase 'outfox'.


  • to beat in a competition of wits
  • victory of intelligence over both malevolence and brute strength
These two phrases highlight the goals of this blog to provide superior information and results over those of the general market and the so called experts on Wall Street that try to win via brute strength and size. The big guys don't always appear to be based on results hence why Mark is big on transparency and low costs.

Hope everybody likes the new name. Leave a comment and let me know. 

 

4 Top Net Payout Yield Stocks

Most investors continue to focus on high dividend yielding stocks paying very little attention to stock buybacks. Unless you're a retiree living completely on fixed income, it's a mistake to not focus on the complete picture of returns of capital to shareholders. The combination of stock buybacks and dividends or Net Payout Yields (NPY) has offered higher returns in the past.

Buybacks can be a more efficient return of capital to shareholders as it reduces the tax burden of investors.....



Read the rest of the article at SeekingAlpha




Disclosure: Long WLP, GPS, and MHS. Please review the disclaimer statement. 

Monday, March 14, 2011

New Website

Finally took the time to create a professional website to separate from the blog format I've used for a while now. The website should be up any minute now assuming I've reset all the domain information and published it correctly. Which is probably a stretch.

The blog will remain the same format, but I will be rolling out a new name for it as well. Stay tuned...


www.stonefoxcapital.com

Friday, March 11, 2011

Total Yield of the SP500

On this blog I don't spend much time focusing on Net Payout Yields and the model developed to mimic this concept. By its very nature the model is very conservative and hassle free as it completely focuses on what companies do with their excess cash. Hence its typically not as exciting as discussing the investments in the more aggressive opportunistic models.

If a company pays out a large percentage of the market cap in dividends or stock buybacks, then the portfolio invests in that company. Just a few restrictions exist such as the company having a market cap in excess of $10B (at least for the Covestor model) and with manager discretion high debt companies will be excluded. In the future, I'll try to highlight the NPY stocks and better explain the concept.

Its a very attractive conservative investment option. To me, its a sleep well at night investment. The stocks in this portfolio are by nature large and financially strong. Then, due to the dividends and buybacks, they provide major downside risk as they pay higher dividends and buyback more stock the lower it goes.

World Beta does a good job explaining the NPY concept. Below is from his post highlighting why dividends are no longer providing investors with a complete picture regarding how companies return cash to shareholders. Amazingly its actually been 30 years since dividends have predictable but the market hasn't really caught on.

Check out all the links in his blog post, but this pic is very indicative of the change. Notice how buybacks bottomed shortly after the market lows in March '09 and have increased since. It appears to be more of a coincident indicator, but if you know which companies are buying the most stock and investor can clearly benefit.




totalty.png

Thursday, March 10, 2011

Don't Expect a Market Correction Anytime This Year or Next

As the two year anniversary of this bull market that started in March 2009 has come and gone, it's time to actually review some of the facts surrounding typical bull markets. From listening to numerous media reports yesterday, its common place for analysts and hosts to spew out information without researching the past.

From this Bloomberg article, numerous real facts about the market were revealed. It's also revealing that alot of the players that called the bottom remain bullish and alot of the cronies that called for a further correction are still bearish. Sometimes it makes you wonder if any of the so called bears had any real insight other then a broken clock is correct twice a day. It also makes me wonder if we'll say the same about the bulls down the road.

Clearly a two year rally without a 20% correction seems impressive and sounds like a very long time. At least thats what you get from the typical media. But is it really all that impressive? According to research, this bull market is only half over. The typical bull market after a recession lasts some 1,407 days while this rally is only 730 days old. Now most rallies tend to fade as they reach the 3rd and 4th years, so its also worth noting that the typical rally sees a gain of 131%. Prior to todays smack down, this rally was approaching 100%, but clearly thats not even close to the average.

One very important concept to grasp when reviewing these typical and average bull markets is too remember how far the market fell and that relation to history. Having one of the worst crashes in history makes the upside potential to likely exceed the average rally length and percentage gain. Also it can clearly be argued that the crash shouldn't have dropped below 800. Using that figure with the typical 131% gain would net the SP500 jumping to new highs of 1,848. Or of course just use the argument that the scope of the drop suggests a 150, 175, or 200% rally.

If those numbers seem excessive, consider that corporate profits are expected to hit a record just below $100 in 2011 and will easily reach into record territory in 2012. Even a typical 7% gain in profits would place 2012 numbers at $107. Hit that with a 15 PE and the market would reach 1,600.

The article makes an interesting point that historical market tops come with PEs above 19. Clearly by the 4th year of a rally investors become too comfortable in corporate profit growth and multiples expand to lofty levels. Then the Fed raises interest rates and we're left with a market trading at high multiples just as the Fed is slamming the brakes. That is not happening now with PEs in the 13 range.

Simple math shows the market would need to hit the much loftier original 1,848 level based on the average market rallies and actually surpass that number to reach the typical PE highs. By the 4th year of this rally, the market would need to surpass 2,000 to reach the 19+ PE.

No guarantee exists that the market will come anywhere close to these questimates. Unrest in the Middle East and North Africa could completely roil the markets with high oil prices. The end of QE2 could cause asset prices to collapse without the Fed supporting them. (At least that is the theory though the Fed still has its foot on the pedal with unreasonably low interest rates)

As the market sinks below 1,300 today, the current selloff has already hit 4%. As the data shows, its highly unlikely to come anywhere close to 20% making 10% the worst case scenario bottom and anything over 5% pushing it. With material stocks like Freeport McMoRan (FCX) and oil servicing firms like Weatherford (WFT) off over 25%, now is the time to start adding back to positions. China might have scaled back copper orders during the Lunar New Year at $4.60/lb but they'll be back buying at $4.16/lb.


Via Bloomberg:


  • Even after almost doubling in 24 months, the S&P 500’s two- year return is about 36 percentage points below the average bull-market gain of 131 percent since 1962, according to data compiled by Bloomberg and Birinyi Associates. The 730-day rally without a decline of 20 percent or more compares with an average duration of 1,407 days, the data show.
  • five straight quarters of U.S. profit growth and the biggest yearly increase since 1988 have held down valuations, data compiled by Bloomberg show. The U.S. benchmark index is trading at 15.5 times reported earnings, compared with the average ratio of 19.7 at bull-market peaks. The S&P 500’s earnings yield, or annual income divided by the index price, is 2.96 percentage points higher than the payout on 10-year Treasuries, the widest gap at the two-year point of any bull market since 1962, the data show.
  • S&P 500 companies will boost earnings by 17 percent during the next 12 months to a record $99.82 a share, according to analyst estimates compiled by Bloomberg. Profits in the MSCI All-Country Index may climb 20 percent, analyst forecasts show.

Wednesday, March 9, 2011

Radware CEO on TheStreet.com

Radware (RDWR) is a recent addition to the Opportunistic models. Being at the juncture of network speed and security makes them a very intriguing investment. Also, the stock tends to trade at a reasonable to discount to growth and the tech sector in general. Not to mention the major catch phrase 'cloud computing'.

Check out this interview with the CEO on theStreet.com.







Disclosure: Long RDWR. Please read disclaimer page. 

Significant Upside Potential at Lihua International

Early this morning, Lihua International (LIWA) officially reported Q4 earnings. The results were not much of a surprise after having preannounced on the 6th. The company reported sales growth of 164% for the quarter and 129% for the year. The company reported a whopping $.45 in earnings yet the stock trades sub $12.

The company currently forecasts $53M in net income for 2011 or roughly $1.8 per share. The key though is that the company tends to underestimate earnings on a routine basis and they clearly point out a couple of drivers to higher earnings. First, the projections only forecast one quarter of sales from its new copper recycling facility. Second, the company is not assuming any reduction in costs of goods sold if they receive the importers' license.

Both items will contribute to significant growth in 2012 earnings so the question really remains a mute point on whether 2011 garners more benefits. The importers' license will allow them to source scrap copper from international suppliers at a much cheaper rate basically by cutting out the middle man. Some analysts have placed $10M in benefits to the bottom line from this deal. The earlier production probably won't provide too much upside though a few pennies here and there always contributes to a happier shareholder base.

Although LIWA continues to operate on an exceptional basis the market has largely ignored the progress. Still maintain that the two going private deals could have a huge impact on equity valuations in Chinese small caps and especially in stocks like LIWA. Fushin Copperweld (FSIN) being seen as the closest comparison to LIWA could provide for a significant boost in their stock as investors increasing see downside protection from insiders.

Highlights via LIWA PR:


Fourth Quarter 2010 Financial Highlights
  • Sales increased 164% year-over-year to $135.5 million.
  • Gross profit increased 90% year-over-year to $20.7 million.
  • Net income increased to $9.9 million, or $0.33 per diluted share, compared with $4.2 million, or $0.18per diluted share in the fourth quarter of 2009.
  • Non-GAAP net income(1) was $13.4 million, a 73% increase over $7.7 million in the fourth quarter of 2009.(2)
  • EBITDA increased 88% year-over-year to $18.8 million.(3)
  • Strong balance sheet, with $90.6 million in cash and cash equivalents, or $3.02 per diluted share, as ofDecember 31, 2010, compared with $34.6 million as of December 31, 2009.
  • Cash flow from operations of $2.4 million, compared with cash used in operations of $627,000 in the fourth quarter of 2009.

Outlook
Lihua is targeting 2011 gross profit of $80.0 million to $82.0 million and non-GAAP net income of $52.0 million to $54.0 million, representing year-over-year growth of 29-32% and 30-35%, respectively. The Company expects that 2011 growth will be largely the result of continued strong demand in China for recycled copper and copper alternatives in the household appliance, consumer white goods and infrastructure markets.
The Company noted that its current 2011 projections assume one quarter of production and sales contribution from its new copper recycling facility, which is currently under construction and due to be completed and commence production by the fourth quarter of 2011, and no favorable impact on cost of goods sold from the importers' license for which the Company has applied. Launching production at its new facility in the timeframe currently anticipated, or receipt of its importers' license from the Chinese government is expected to provide upside to the Company's current gross profit and non-GAAP net income expectations.



Disclosure: Long LIWA. Please review disclaimer page. 

Tuesday, March 8, 2011

Investment Report - March 2011: Net Payout Yields

February was a disappointing month for this model on a relative basis as it underperformed the SP500 (1.88% versus 3.2%). Large caps in general continue to struggle as the market works its way upwards. Other then a few losing positions, the model mostly lacked the big gainers to keep up with the market.

Trades
For a second consecutive month, no trades were made in this model. This is very normal for this model as transactions are limited to reduce costs and realized capital gains. Though it is expected that some transactions will me made over the next few months to move out of positions where stock gains have reduced dividend yields and buybacks have declined significantly.

Top Performers
Walt Disney (DIS) was the top performers in February with a 12.5% gain. DIS is a prime example of a stock where the yield has continued to fall making them less attractive to this model.

Wellpoint (WLP) had the second largest gain of 7%. This move was not surprising as they've consistent bought back enormous amounts of stock leaving them with a net payout yield that has exceeded 17% at times.

Yum Brands (YUM), Hartford Financial Services (HIG), and CSX Corp (CSX) all had gains in excess of 5%. Yum Brands (YUM) also falls into the category of stocks likely to exit this model as the yield continues to drop as the stock has had significant gains.

Bottom Performers
Cisco Systems (CSCO) was by far the worst performer for the month losing over 12%. CSCO had a very disappointing earnings report for the 2nd consecutive quarter. This time the analysts derived that the company is losing share and hence their huge drop didn't derail market which lead to the massive relative underperformance. CSCO does have a decent buyback so the lower prices only help them buy more stock on the cheap. Also the company is likely to initiate a dividend this year to add to the yield support.

The other two significant bottom performers were Millicom International Cellular (MICC) and Microsoft (MSFT). MICC was taken down by the weakness in emerging markets while MSFT likely fell due to the CSCO weakness.

Summary
Whenever this market returns to normalcy of having down months, this model should show better relative performance. The yield support and buybacks are more successful in down markets, but for now the rapid rise is swamping the dividends and providing little opportunity for companies to buyback stock on weakness. As mentioned earlier, expect more transactions in the next few months as yields shift faster then normal due to unusually strong market gains.


Disclosure: Stone Fox Capital owns the stocks mention for clients that invest in the Net Payout Yields model. Mark Holder owns these stocks in his personal account. Please review the disclaimer page. 

Dick's Sporting Goods Continues to Shine

Another quarter and another solid report from Dick's Sporting Goods (DKS). DKS has to be one of the best run retailers in the world. They continually take market share in a fragmented sporting goods market that has mainly weak competitors. This trend should continue for years.

For Q4, DKS reported earnings of $0.76 after forecasting roughly $0.70 on the Q3 report. They achieve this growth mostly by seeing 9% comp sales growth gained mostly from an 8.6% increase at Dick's Sporting Goods stores and a whopping 36% increase in e-commerce. As they continue to gain market share, its possible that the e-commerce site becomes the go to destination with a preference for in store returns to a superior retailer.

See the rest of the story at Seeking Alpha.


Disclosure: Long DKS. Please review disclaimer page.

Monday, March 7, 2011

Investment Report - March 2011: Opportunistic Levered

After a disappointing January, February was a welcome return to outperforming the market. The model returned 6.17% versus the 3.2% of the SP500. The market remained strong even in the face of Middle East turmoil and continuous calls that the market is overbought. Certainly the returns have been strong since the beginning of September, but a review of the first year of this model and market has only gained roughly 20% over that time period. While thats a great return for the 13 month life of this model, it isn't anything excessive considering the massive market drop during the financial crisis. Also investors need to consider that corporate profits are returning to the peak levels of 2007 all while the SP500 is still some 250 points below the all time high of 1,576. In that context the market appears cheap and has plenty of room to run.

Definitely cognizant that the market needs a breather or even a minor 5% or so correction. Though market participants need to understand that a 10% correction even from late February highs of 1,344 would leave the market close to 1,200. A level some 25% below the peak back in 2007 even as the corporate profit levels reach back to the highs.

Added Long Exposure
In that context with corporate profits soaring and the Fed extremely cheap, this model used the late February weakness to add back long exposure. Freeport McMoRan Copper & Gold (FCX) was added back to the model while three new stocks were added. ICICI Bank (IBN), ChinaCache (CCIH), and Radware (RDWR) were added. The main theme of adding FCX, IBN, and CCIH was to increase exposure to the emerging markets. Exposure had been reduced to the sector over the last few months as it has fallen out of favor. By February the valuations had become too inexpensive to pass up with all three stocks down nearly 20% from recent highs. CCIH was down 50% from its highs reached after its very successful IPO providing for an apparent bargain.

RDWR on the other hand was added to gain more exposure to the fast growing network and cloud computing space. The main thrust of the trade being to add back exposure after selling Terremark Worldwide (TMRK) in January following its purchase by Verizon Communications (VZ).

Top Performers
Ironically the top performer was a stock just added towards the end of the month. CCIH had a whopping 27% gain in less then a week. CCIH is the Akamai (AKAM) of China and has enormous potential but the departure of the COO has placed the future in doubt providing an opportune risk/reward entry point.  Also after a weak few months, the China markets have started to heat up providing for an attractive entry point to US listed China stocks at their lows. Most market commentators have apparently missed the run up as the focus remains on the violence in Libya and potential protests in oil rich Saudi Arabia. A strong domestic Chinese market typically leads the US  market by several months.

Two tech stocks had good months. Even with the chorus mostly claiming that tech was overbought and expensive, Riverbed Tech (RVBD) enjoyed a 15% gain and Limelight Networks (LLNW) was up 11%.

The other top 5 performers were Atwoods Oceanics (ATW) with a 12.6% gain and Sears Holdings (SHLD) up 10.5%. ATW is a deepwater driller so not too surprising that it had a good month with oil spiking and the prospects for drilling offshore much more attractive now that the investment community has been reminded that the risks of a accident on an oil rig is less then the political stability in most oil producing countries.

Bottom Performers
AerCap Holdings (AER) had the worst month as the airplane lessor was impacted by the spiraling costs of oil and the fears of reduced travel demands. Although AER isn't nearly as impacted as the market always believes, they tend to trade violently during these time periods. The company has extremely long leases with a diverse group of airlines and the continual increase in demand for global travel will always override these minor setbacks. Not to mention, AER has a relatively young fleet of fuel efficient planes that are in higher demand as oil prices rise. The company survived the financial crisis with minimal impacts so investors shouldn't be so quick to sell this stock.

The remaining weak performers were mostly due to concerns over higher inflation in emerging markets or a reduction of work form the turmoil in the Middle East. Puda Coal (PUDA), Cephalon (CEPH), and ICICI Bank (IBN) were all down between 4-5%. Not great results but not horrible considering the top performers were up 10%+ highlighting the volatility of stocks in general and further demonstrating how even a diversified portfolio that had good absolute and relative returns for the month had some weak individual stocks.

Largest Position
The combination of Massey Energy (MEE) and Alpha Natural Resources (ANR) remains the largest position in the model by far. MEE alone has the largest weighting at 9.33%. Over time this combined position will be reduced as the model aims to keep all positions below 10%. The significant drop of ANR following the mostly stock buyout agreement with MEE lead to the decision to keep both stocks for now. Metallurgical coal remains in high demand due to emerging market growth and reduced supplies because of the Australia floods. The ANR/MEE combination makes for a global powerhouse in the met coal area and a very attractive investment option. Regardless some stock will be sold into strength to reduce exposure.

Conclusion
The market began March with numerous concerns and some relative weakness providing numerous opportunities. Investors in general continue to focus too much on the returns off the market bottom two years ago and not enough on the returns since the market top less then four years ago. The picture remains long term bullish when looking at the complete picture as opposed to chopping off a small corner to fit an investment thesis.

Thursday, March 3, 2011

Fushi Copperweld Going Private Could Be Huge for Chinese Equity Valuations


At first glance, it might not appear that a small Chinese manufacturer of copper wire for various industries would be that crucial to the Chinese small cap sector as a whole. The key is that the Co-CEO has made an offer to take the company private for $11.50, or roughly 20% above current prices.
It could open the door to higher valuations in the sector as a whole, or maybe similar transactions across the sector as management grows increasingly tired of dealing with US investors that think every Chinese company is a scam.

Read the whole article at Seeking Alpha

Some of the comments on this article lead me to that a couple of other going private deals have been proposed. The more interesting is China Security and Surveillance (CSR). Something else worth following to see if the completion of these deals drives more investors into these stocks that offer extreme valuation. Hard to see these companies as fraud if somebody is willing to pony up $400M. 


Disclosure: Long LIWA. Please read disclaimer page. 

Wednesday, March 2, 2011

Foster Wheeler Call Volume Surges

Interesting note on Foster Wheeler today. According to Bloomberg, call volume at noon on FWLT hit 10,400 which is nearly 4x normal average.

Now the report suggests this has something to do with a contract won in Abu Dhabi. This seems like non-sense as the deal doesn't seem like anything exceptional (FWLT didn't list the value). Mainly though the majority of the calls bought today were for March '11 in the $38-40 range suggesting that some investors expect a significant increase in prices.

Though one needs to consider that the average option price of $.25 means the investor isn't heavily invested.

High option volumes can be a good indicator of something big in the works or just a huge headfake. Time will tell on this one.

Investors Fleeing Emerging Markets

Emerging markets stocks have been a major theme of the Opportunistic portfolios at Stone Fox Capital so I'm actually pleased to see investors fleeing emerging market stocks. Weak emerging market performance has reduced portfolio performance over the last 2-3 months, but it also provides opportunity for picking up long term growth stocks on the cheap.

According to this AP report, EPFR Global reported that investors pulled $5.45B out of emerging market funds during just the second week of February alone. Yes, thats correct. It only took a few scary moments in the Middle East and some high inflation for investors to jump ship.

Emerging markets have long been a traders market as investors jump in and out depending on the market direction. Oddly though, these markets provide a lot more long term growth and hence investors should be buying the dips in a lot of these markets. That doesn't appear to be the case though as I wrote yesterday about how the Chinese market has perked up this year, but its hardly been noticed.

Our models have added ICICI Bank (IBN) in India, ChinaCache (CCIH) in China, and Freeport McMoRan (FCX) as a copper play that strongly relies on emerging markets growth. These stocks were all down from 20-50% providing opportune entry points. CCIH alone was down 50% from its highs after a successful IPO. Where exactly were investors going?

It's possible that this trend last a lot longer so be careful on any entry points. Sticking to high quality names that are under pressure might be best method, but just don't fear this area like in the past. Most of these economies are stronger then the US and the developing world. And yes the governments have a lot less debt as well.


  • According to fund tracker EPFR Global, fund managers and other investors yanked $5.45 billion from emerging markets funds in China, India, Brazil and elsewhere in the second week of February and placed it in equity funds of advanced economies -- their biggest weekly inflow in more than 30 months.
  • Developed market funds recorded their seventh straight week of inflows in mid-February -- with European equity fund flows hitting 41-week highs. So far this year, investors have committed $47 billion to U.S., European, Japanese and global equity funds -- $29 billion of it into the U.S alone.
  • Meanwhile, investors have pulled out over 20 percent of the $95 billion they parked in emerging markets during 2010 since mid-January, EPFR said. Since the beginning of the year, outflows totaled $1 billion from mainland Chinese equity markets alone.
  • India's Sensex has slid 10 percent, and Brazil's Bovespa is down 4.4 percent. Indonesia's SE Composite Index has dropped 5.1 percent. Vietnam's Ho Chi Minh index is down 3.8 percent -- wiping out some small investors hoping to strike it rich.
  • Shanghai Composite index has risen 4 percent since the start of the year -- buoyed by a wall of liquidity that was engineered by Beijing to ward off the global recession and which it is now struggling to contain. (market isn't up this year b/c of liquidity)


Disclosure: Long CCIH, FCX, IBN. Please review disclaimer page. 

Tuesday, March 1, 2011

China Markets Heating Up

Don't look now, but the China markets have been heating up the last 40 days. After a significant selloff following the highs back you November, the market had completely left China for the dead. That was clearly the wrong move.

Lately it appears that China has been able to slow down its economy with PMI reporting the lowest total in the last 6 months over night.

The Shanghai Composite is on the verge of  a significant breakout if 2,950 can be broken soon. A run back at the 3,150 high made back in November is the likely target. So while financial professionals are overly focused on the US markets and the Middle East, the lack of focus on the economy that leads the world these days has taken off.

In that regard, our investments in China commodity plays like Puda Coal (PUDA) and Lihua International (LIWA) should perform well. Also, the recent purchase of ChinaCache (CCIH) appears ultimately timely a few weeks back. At the time CCIH was trading in very oversold levels, since the stock has bounced nicely from $17 to $21 and is looking even more attractive with China as a whole looking impressive.