Friday, May 27, 2011

Updated Covestor History

Covestor has been working hard to update the history for some of their models and I'm happy to report that they've been able to add a little over a year to my record for the Opportunistic Arbitrage Model. The validated beginning date is now 1/30/09 providing roughly 28 months of results.

As you can see below the performance is very volatile from a month to month perspective, but over time the upside has far exceeded the downside. While future performance can never be guaranteed, the longer history will hopefully give investors more confidence that the results aren't a fluke.

Click on the widget for more information about the model directly via Covestor and naturally information on how to subscribe to that model or any of my other models.



Invest like me - only at Covestor.com

Thursday, May 26, 2011

Bizarre Moves By Massey Shareholders

Several Massey Energy (MEE) shareholders attempted to block the Alpha Natural Resources (ANR) buyout in court today. Talk about shooting yourself in the foot to make a point. The crux of the lawsuit is that MEE shareholders aren't getting fair value due to reckless management. Not to mention if shareholders don't want the merger they can vote it down.

Huh? Just how exactly do they expect to reclaim that value if the deal is blocked? MEE stock would surely drop without a deal. The company has very valuable assets, but its operations continue to struggle making it very difficult to attract much more of a premium.

The funds which include several pension funds claim that Massey's stock is discounted by as much as $1.5B because of management's long disregard for safety. Hmm. Well doesn't that safety record therefore impact any future value? The new CEO would have to clean up the safety record and get operations back to normal prior to getting a higher value. By then though, the met coal market could have fizzled out.

Seems impossible to make such an argument that a company is worth more because of management mistakes. What management team doesn't make mistakes? Sounds like the judge and even the lawyer representing the pension funds understand that not only did MEE benefit from the profits of underinvestment in safety, but that shareholders might benefit from a management team at ANR that has a better safety record.

In the end, MEE shareholders have nothing to gain from a lawsuit against their very own assets. ANR isn't going to pay more so the only winners are the lawyers. If they want to sue the former CEO and BOD directly, then go for it. Maybe thats not possible. As long as it involves MEE assets and not the personal assets of management, then they have nothing to gain.

Not to mention if the goal is hold the former CEO accountable for damages, then shouldn't it be the Feds or local officials? Why of all people would it be shareholders? You can't reopen the mine by winning this lawsuit. Nor can you argue that the stock price has suffered from the explosion as MEE as easily outpaced ANR during the time period from the explosion back in April 2010.

The justification for this lawsuit and the benefits from winning are just bizarre. Let the deal happen and reap the rewards from a met coal powerhouse and a strong management team. Spend the weekend in the Hamptons and enjoy. No reason to sweat the details you can't change.

MEE is worth more in the hands of ANR!



Via Reuters:
  • The funds argue Massey's price is a discount of as much as $1.5 billion because of the impact of management's long disregard for safety, which they argue led to last year's accident in West Virginia that killed 29 miners.
  • The judge, Leo Strine, reminded Grant that shareholders also enjoyed years of windfall profits thanks to Massey's underinvestment in safety.
  • Grant acknowledged that Massey shareholders face an unpleasant choice. A vote to approve the merger puts the business in the hands of Alpha's management, which has a much better safety record.


Disclosure: Long both ANR and MEE in client and personal accounts. Please review the disclaimer page. 




Two Really Great Clips From Mark Haines

Mark Haines was the legendary CNBC anchor that was known to be tough but fair to guests. Unfortunately he passed away yesterday at the age of 65. May he rest in peace. These 2 clips top the list of my favorite interviews in his long history. Both clips were cut off sooner then I hoped so I'm still looking for longer versions.

In this clip he calls Arianna Huffington 'clueless'. Though the MSNBC co-hosts thought Mark was being harsh and grumpy, he was actually very factual. Arianna was spewing the typical mindset of the bank bailouts. The bailouts didn't save the equity investors. In most cases such as Citigroup (C) and AIG (AIG) the equity holders lost over 90% of there value. What was actually saved was the financial system and the employees of those banks.





In this clip, Mark has a disagreement with Barney Frank. The classic part is when Barney says the interview is over, Mark just goes on with the program as if losing out on the interview was no big deal.


Wednesday, May 25, 2011

Media Ignores That Youku Raises More Cash Than LinkedIn

I'm not sure many people noticed, but Youku.com (YOKUraised approximately $400M after the close last Thursday. In total, up to an aggregate of $670M of stock was sold as pre-IPO investors cashed out close to $270M. That's assuming the over allotment of 1.8M shares were bought; those results have not been announced yet. This is remarkable considering this was a follow-on offering after the December IPO.

Youku.com is the YouTube.com or Hulu of China, depending on whom you ask. It has huge growth potential, but limited revenue so far and no profits. The company will have a market cap approaching $6B after this offering. 



Read the the full report on SeekingAlpha



Hays Advisory's Bullish Codes

Great video from Don Hayes of Hays Advisory. Don and his team does one of the best jobs of translating market data into actionable information. Whats important about his information is that it shows the real picture of whether the market is too bullish or bearish. Whether valuations are attractive. Or whether the Fed is a headwind or tailwind to the economy.

According to his latest readings, the market is in a very attractive position for stocks as valuations remain extremely attractive and the monetary conditions are very positive. His only concern is psychology was too bullish leaving April, but that now appears cleared up with the drop in May. Check out the video below:



Tuesday, May 24, 2011

Lihua International Investor Day

Last night Lihua International (LIWA) held an investor day at their HQ and manufacturing facilities. Ok, so it was really 10am local time in China, but it was at 9pm my time. The presentation portion included a video link for those that couldn't make the trip to be there in person.

Since LIWA has been caught up in the Chinese RTO conspiracy ring, it was at least symbolically important for them to host an investor day for analysts and the media to get to meet the company management and tour facilities.

The stock only bounced 2% on a very low volume of 102K shares showing how these events just don't resonate with investors that can easily discount anything they see as staged. What it will really take is analyst coverage from some major Wall Street firms or just time to elapse as the Chinese companies still standing will eventually be seen as legit.

The presentation was mostly a rehash of the data from the Q1 call or in the Piper Jaffray China Growth conference from last week. A few data points though possibly reported previously were interesting to highlight as below:


  • Most significantly was the news that the CEO bought 40K shares on Monday with a hint that it was just the beginning. 
  • Company has bought 70K more shares since the last announcement
  • the scrap license should get final approval soon. Limited imports should begin in June. Remember this should reduce costs by $150/ton. 
  • Potential additions of a new smelter and a wire drawing line would only take 3-4 months of construction since the new facility has available space. 

It will be interesting to see what if any analysts say about the trip and the investor day. Since they didn't announce the attendees or provide the names of people asking questions, it's unknown at this point if any major players attended. Naturally in a fast moving world, it would see apparent that investors would jump on any knowledge gleaned from the visit in todays trading, but all we saw was one of the least volatile days in a while. Of course, anybody located in Hong Kong or the US would've likely spent today traveling so possibly tomorrow will see some reports released. 

The story remains very bullish with LIWA as earnings will continue ramping through at least 2012. My only concern is that shorts came out of hiding right after the Puda Coal (PUDA) investor day. If LIWA makes it through this week, then I'll be a lot more certain of limited scam risk. After all, the CEO is buying shares and that should reduce the risk that a material fraud exists.


Disclosure: Long LIWA in client and personal accounts. Please review the disclaimer page as this information is provided for informational purposes and not a investment recommendation. 



Net Payout Yields Model Review

The model has now been on Covestor.com for over 6 months. As you can see from the table and widget below, the model has just barely beaten the market during that time period. Not that impressive. The good news is that other then the blip over the first few days, the model has consistently beaten the market on a monthly basis.

For 2011 YTD, the model has outperformed the SP500 8.23% versus 4.75%. It's a shame that the graph doesn't reflect the great performance of the model, but for anybody interested in investing now it is clearly working as expected. If you click on the graph, once you get to Covestor.com you can click on the YTD to see how the model has done after getting over the initial startup hiccup.

The last 2 months are great examples of how the model works in up and down down markets. In April, the model outperformed the SP500 by a slight margin in a very bullish tape (3.14% vs 2.85%). May MTD though it's easily doing better then the market by only losing 1.53% vs 3.39% for the market. So it's capturing the upside on the good months and limiting the downside on the bad months.

This continues to be a great model for retirement money or just conservative investors. The limited trading and low 1.1% management fees via Covestor.com help it outperform more aggressive trading models. If interested in investing just click on the widget below and the follow the instructions. Naturally, you can also invest directly via Stone Fox Capital for portfolios greater then $100K. Please contact us directly at info@stonefoxcapital.com.




Inception Nov 02, 2010Manager*S&P 500Avg Sub
Month to date (%)-1.53-3.39-
1 month (%)3.142.85-
3 month (%)7.126.03-
Annualized since inception (%)20.8518.74n/a
Since inception (%)11.0510.37n/a
Sharpe (annualized)1.721.53n/a
















Invest like me - only at Covestor.com





Monday, May 23, 2011

Stat of the Day: SP500 Earnings Estimates Soar

As the market crashes and especially the global growth stocks, earnings estimates for SP500 stocks continue to climb into record territory. Profits are now forecast to reach $104.73 in the next 12 months, according to data compiled by Bloomberg. Some analysts are even forecasting $112 for 2012.

Whats amazing about these data points is that the four-week increase in earnings on May 2nd represented the biggest gain since May 2010. Oddly that was the same period where the market sold off in 2010. The inverse correlation between raising earnings and the market selling off seems backwards, but we've now seen it 2 years in a row. Last year was a buying opportunity and this year could easily follow.

If the market were to hit those earnings numbers around $104 and trade at the historical PE multiple around 15, the SP500 would reach over 1,600. Today the market sunk over 1% on Greece debt fears and global growth concerns after weak PMI data out of China and Germany providing a great entry point around these levels of 1,317 on the SP500.

Clearly those economic issues are concerning, but the market needs to step back and consider the benefits from declining commodities that were pushing inflation into unacceptable levels in the emerging world. The 10 month low in China PMI likely allows them to cut back on interest rate hikes and possibly even stop. Not to mention that a good part of the weakness in the manufacturing sector has been the delayed impact from the Japanese destruction that led to a sharp reduction in production of parts needed around the world. That issue will resolve itself over the summer reinvigorating growth.

Is global growth dead? According to Barton Biggs and others vis this Bloomberg article, the market is overreacting to issues that will be resolved and allow the market to move higher. Earnings will support the market along with low interest rates. As inflation moderates over the summer, watch for emerging markets like China, Brazil, and India to return into favor. After all, growth hasn't really slowed in those countries, it has been the fear that inflation would eventually slow growth. The retreat in the market was just what the markets needed.


  • Standard & Poor’s 500 Index profits may reach $104.73 a share in the next 12 months as consumer demand pushes sales up 13 percent, according to data from about 9,000 analysts compiled by Bloomberg. 
  • The income estimate rose 2.8 percent in the four weeks ended May 2. Analysts are turning more optimistic as economists cut projections for 2011 
  • Analysts have raised forecasts for S&P 500 earnings during the next 12 months each month this year, according to average projections compiled by Bloomberg. They expect companies in the benchmark gauge to earn $104.73 a share, up from $96.92 forecast at the beginning of January, the data show. The four-week increase on May 2 represented the biggest gain since May 2010, data compiled by Bloomberg show.
  • “Investors are overreacting,” said Biggs, citing concerns about the European debt crisis, housing and reduced stimulus from the U.S. Federal Reserve. “All those worries are true, but I can see a number of them will be resolved in the next two months, and I do not think the global economy will slow down significantly. Stocks are very reasonably priced on earnings for next year.”
  • “Companies have executed,” said Rendino of BlackRock, which oversees $3.64 trillion in New York. “Each quarter there seems to be an abundance of bears saying, ‘This is as good as it gets,’ and the quarter after that, it’s even better. It’s emblematic of the fact that U.S. corporations have executed quite brilliantly through this cycle. Stocks are cheap.”

Friday, May 20, 2011

What inflation?

Great post at the Business Insider regarding all the deflation going on. With everybody sweating the soaring prices for energy and food, nobody seems to notice the deflation in housing and transportation. Not to mention that labor costs have been kept relatively flat.

Just because your paying more at the pump, doesn't mean that your paying more for every item.

The post has some great charts and their is nothing greater then viewing the real numbers and comparing them over the last 20 years. Even the new vehicles prices have risen the last couple of years, but they are still lower than 2003.  If an item has jumped off the 2008 lows, does it really count as inflation. And thats the biggest crux with the inflation numbers now being reported. Don't compare them to the last couple years. Compare them to 2006-07.

Maybe the most interesting chart is the household furnishings one. That category is below the lows after the dot com bust.




whats-actually-in-deflation.png



Check out the site for the other declining categories. Inflation isn't as rampant as most think. With housing, transportation, and natural gas plunging, its hard to understand the big inflation fear. Besides, if the government would every decide to quit burning our food via ethanol the food inflation might just disappear. 





Crane Manufacturers Report Surging Orders, Yet Stocks Slump


The worldwide crane market was crushed during the financial crisis and still hadn't recovered as 2010 ended, even though several industrial and mining equipment manufacturers have already recovered to pre financial crisis levels such as Caterpillar (CAT), Joy Global (JOYG) and Bucyrus (BUCY).
Fortunately for U.S.-based crane makers, Q1 2011 saw a surge in orders and finally signals of a market recovery. Both Manitowoc (MTW) and Terex (TEX) saw huge backlog increases in the crane segment. MTW had a nearly 40% increase in backlog to $800M from the $572M reported at December 31st. TEX had a 30% increase in backlog and like MTW saw plenty of demand in North America. The total went from $774M to $1,004M.

Read the full article at Seeking Alpha.


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


Thursday, May 19, 2011

Cody Willard on Internet Pick and Shovel Stocks

Cody Willard has some interesting ideas about the boom in the cloud revolution. His ideas tend to dovetail ours especially the way he pushes Riverbed Tech (RVBD) that has been a big winner in our Opportunistic portfolios. What we also like is the concept of investing in the pick and shovel providers for internet companies such as the recent IPOs LinkedIn (LNKD) and Renren (REN).

Cody is very negative on the China internet plays as he basically follows Cramer's theory that all China stocks are basically scams with questionable financials. Agree that China companies have had a fair share of issues, but I don't see them that worst off then most American stocks.

With the boom of internet plays in China such as Youku.com (YOKU), Dangdang (DANG), Qihoo 360 Tech (QIHU), and RENN all provide the cash for the pick and shovel plays of China such as ChinaCache (CCIH). Maybe the company is a China scam, but at this point it provides and incredible cheap play into the sector.

CCIH recently reported Q1 numbers with 80% revenue growth. Some analysts were disappointed with earnings, but one needs to realize that the CDN market in China is just developing. Video players similar to YouTube.com are just starting up in China. CCIH has as much a need to spend on R&D and to reach scale in order to dominate the market as making profits. So far they seem to be balancing growth and a decent profit though it appears a lot of investors are disappointed that margins are going to be flat in the near term.

They guided to Q2 revenues that approach the upper 50% growth rate. The stock though has plunged. It was interesting watching Cramer interview the Salesforce.com CEO tonight on Mad Money. Cramer made a specific comment about how the blow out revenue numbers were more important then beating earnings estimates by just $.01. Funny how if that concept were applied to CCIH the stock wouldn't be trading with a Enterprise Value of 2x sales.

The future remains extremely bright, but the trading action is very perplexing. Trading might remain very frustrating near term as CCIH just doesn't have the institutional support to keep the price reasonable. Without that its too easy for them to fall prey to the scam fears.

Akamai Tech (AKAM) is the US version of CCIH or so claimed. They currently trade at 5x revenue even after weak guidance. AKAM expects sub 15% growth so go figure how they have higher multiples in a mature US market while the China market is now exploding with growth.

Watch the Cody interview and apply the concept to China.



Wednesday, May 18, 2011

Put-Call Ratio Signaled the Bottom

Apparently traders had been very busy buying puts this week as the put-call ratio hit 1.15 on Tuesday. Typically when this ratio hits this level it signals a near term bottom. Interesting that it occurred so close to the top this time, but considering a lot of the 'risk on' stocks were down 15, 20, or 25% from recent highs maybe that explains the level of fear was extreme even if the overall market didn't show it.

See the below chart from Birinyi Associates via CNBC. It shows how 4 out of 5 times since the March 2009 bottom that this ratio signaled the bottom.



CNBC_Bearish_Options_Activity_520.gif

Investment Report - May 2011: Opportunistic Levered

*Note this investment report specifically outlines the trades and returns of the Opportunistic Arbitrage model on Covestor.com though the results will be similar to anybody invested directly with Stone Fox Capital using the Opportunistic Levered portfolio. 


This model had a difficult month as it underperformed the SP500 by a disappointing margin (-1.6% versus 2.85%). The model was hit very hard from concerns over Chinese stocks and specifically the fraud allegation against Puda Coal (PUDA). PUDA contributed nearly 3% to the underperformance and along with the other Chinese stocks in the model contributed the majority of the disappointment. Most other stocks and sectors performed well.

China
Concerns abounded over Chinese Reverse Mergers including the two such stocks held in the model: PUDA and Lihua International (LIWA). Allegations surfaced (See blog post) during the month that led to a 51% decline in the stock price of PUDA and the halting of the stock. An investigation on the supposed illegal transfer of ownership by the Chairman is on going. In the meantime, the Chairman has proposed a buyout at $12 or 100% above the halted price. This price matches the recent secondary offering and roughly equals the price prior to the fraud reports. While this offer solidifies our opinion that PUDA shareholders still maintain significant value and could be made whole, no guarantee exists that the buyout will be completed. Our opinion remains that PUDA has a value north of the buyout offer and the potential exists that the investigations surrounding the fraud could help remove any questions surrounding the stock once resolved. Naturally assuming shareholders don't lose a large ownership position in the company in the process.

LIWA lost over 8% in the month mostly due to the fraud fears pushing all such stocks down. They continue to report solid growth and earnings in addition to starting a stock buyback program that hopefully helps support the stock. China Cache International was also down roughly 8% and though they were a legitimate IPO, it hasn't kept them from feeling the downside pressure as well.

Trades
Trading was limited this month to the selling of Cephalon (CEPH) and the purchase of NuVasive (NUVA) in order to maintain exposure to the healthcare sector. At the time, CEPH was trading above the offering price of a buyout hence the decision to the sell the stock. Since then, they've had a higher offer from Teva Pharma (TEVA), but even that upside didn't justify the risk of holding the stock. In addition, NUVA was up 16% in April with plenty of remaining upside proving that the risk/return ratio favored the switch even if the model didn't catch the highest bid in the CEPH buyout.

Top Performers
The model had numerous big winner this month, but unfortunately they were all overshadowed by the PUDA losses. The main gainers were in the healthcare sector with Rigel Pharma (RIGL) up over 28%, NUVA up 16%, and Savient Pharma (SVNT) up 9.6%. They mainly benefited from a shift to the underperforming sector as emerging markets struggled. Other gainers were AerCap Holdings (AER) up nearly 14% and Liz Claiborne up nearly 17%. Though LIZ struggled during Q1 it is becoming more apparent that they might have finally turned the corner. They've struggled for a couple of years to turn popular brands like Lucky Brands, Juicy Couture, and kate spade around and it might finally have taken hold especially as we go into the fall.

Bottom Performers
In addition to the China disasters, United States Steel (X) and Limelight Networks (LLNW) both lost around 11%. X had disappointing earnings yet again, but could finally hit the sweet spot with Q2 earnings. The stock traded above $180 back in 2008 and yet only trades in the upper $40s now providing excellent upside potential as global growth continues. LLNW got hit from competitors Akamai's (AKAM) weak report. Considering the content delivery network (CDN) sector remains under immense margin pressure and the company is still losing money, the position was exited in early May.

Conclusion
The model remains under extreme volatility even though a majority of the companies have extremely attractive valuations. The fear in China appears greatly overblown and provides some attractive investment opportunities either via commodity stocks or China based companies.


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

Tuesday, May 17, 2011

Atwood Oceanics Rallies 5.5% Off Early Lows

Interesting trading today in Atwood Oceanics (ATW) after what started as another weak day. Competitors like Transocean (RIG) ended lower, and Diamond Offshore (DO) and Seadrill (SDRL) ended basically flat on the day while ATW rallied 5.5% off the lows to end close to the highs.

Possibly ATW is getting a bid due to takeover speculation or possibly its positive news on the new drillship. The Atwood Osprey was expected to arrive on location in Australia in mid-May. This will be there first ultra-deepwater rig with a depth of 8,200 feet. Also, with day rates at $490K and a small fleet the revenue will be a huge increase for Q3. Either way hopefully ATW holds up as other stocks in the general sector continue to fold.

From Briefing.com:

2:45PM Atwood Oceanics pushes more than 5.5% off early low, stalls slightly under its 20 ema and last week/range top high at 42.15/42.21 -- session high 42.09 (ATW) 41.98 +1.16 :  









Monday, May 16, 2011

China Stocks Set for Crazy Rally

At least thats the opinion of Jim O'Neil, chairman of Goldman Sachs Asset Management, of BRIC fame. He appears to be a lot more bullish on China and other emerging markets like Russia, Turkey, Indonesia, and Mexico then the general market.

Inflation has been a huge concern in China for what appears like two years now considering the China stock market has been flat since mid 2009. China originally led the rally off the bottom during the financial crisis so its very plausible that China might be set up for the next leg up. The economy has been growing at 10% per year and the market is virtually flat. That doesn't compute.

Tidbits from the Bloomberg interview or just watch the clip below:


  • The view that “the West is in trouble” is wrong when nations including Germany, Sweden, Australia and Canada are performing strongly, O’Neill said in an interview with Bloomberg Television in Hong Kong, recorded yesterday and broadcast today. Investors should “stop worrying so much,” said O’Neill, known for coining the BRIC acronym for BrazilRussia,India and China.
  • O’Neill, 54, said his strongest hunch is that China’s inflation may be close to easing, meaning the Chinese stock market may “go crazy” in the second half of the year. The central bank yesterday raised banks’ reserve requirements by half a percentage point to lock up cash that threatens to fuel gains in consumer prices.
  • “Every little problem that crops up somewhere in the world is not going to create another black swan,” he said, adding that “there’s far too much conservatism,” in terms of investors holding cash.








Chart of the Shanghai Composite over the last 3 years. The market has been flat for 2 years now which is likely a big surprise to most market followers. The market has recently held and bounced off the 200ma that is now slopping upwards. Some clearly bullish signs if it can break above recent overhead resistance in 3,100 range.


Stat of the Day: India Inflation Peaks?

Interesting CNBC story on the inflation story in India. The good news is that India inflation dipped in April to 8.66 from an adjusted 9.04 in March. The bad news is that the February number was revised upward by 1.23 percentage points meaning that the April number could possibly be closer to 10 percent. The bizarre news is that the fears for higher inflation consist of a widely expected increase in state-set diesel prices.

Maybe its only bizarre to me that goods that have government subsidies would be counted at the subsidy rate and not the market rate. Or at least when factoring inflation, the government should set policy based on what the market rate would be. After all, oil prices have plummeted in May so if anything the country is looking backwards and not forward. Now thats not much of a surprise for India.

Emerging market stocks have been weak this year because of the higher inflation fears and rising interest rates, but the plummeting commodity prices should be bullish but somehow the focus remains in the wrong direction. Not one mention in the article about the lower oil prices.

The market should begin to factor this reality into higher stock prices, but it is concerning that the talk is of up to 75 more basis points of rate hikes. Its disturbing when the central bank or in this case The Reserve Bank of India is expected to continue raising rates even though the most recent 50 basis point rate hike hasn't even kicked in yet.

Its very clear from reading the inflation news that the world markets and especially emerging markets needed a reprieve from higher commodity prices. So with oil and copper down 15%, when do the deflation talks begin? Based on the details of the story, maybe its when people figure out that the input costs have actually dropped.



  • The wholesale price index the country's main inflation gauge, rose an annual 8.66  percent in April, above  the median forecast for an 8.48 percent rise in a Reuters poll and below an upwardly revised 9.04 percent in March.
  • The February figure was revised to 9.54 percent, 1.23 percentage points higher than the provisional figure. Some analysts said the high quantum of revision could mean April's revised reading could be closer to 10 percent.
  • Most economists in recent Reuters poll expect the central bank to raise rates by at least another 75 basis points in 2011. The central bank's next review is June 16.
  • The government may raise diesel prices by 3-4 rupees a litre as early as this month, and there are proposals to lift prices of kerosene and cooking gas, a government source said.
  • State-run oil refiners raised petrol prices by about 8.6 percent, or 5 rupees a liter ($0.11), from Sunday, a record increase that will fuel inflation in Asia's third-largest economy.



Friday, May 13, 2011

Puda Coal's Chairman Sells Stake: Is He Raising $$ for Puda Buyout?

Yesterday, King Stone Energy Group (Hong Kong listed) released a statement that its Chairman, Mr. Wang Da Yong, had increased his holdings in the company through the purchase of 2.5 billion shares from the major shareholder Mr. Zhao Ming. Mr. Zhao Ming just happens to be the Chairman of Puda Coal (PUDA) that supposedly engaged in a illegal transfer of PUDA assets to himself and since has offered to buy the company at $12.

This deal raises about $55M and backs the believe all along that PUDA shareholders would make out ok considering Zhao Ming has a considerable amount of money to make shareholders whole or to complete a buyout at attractive prices.

It seems very unlikely that he would sell part of his stake in King Stone Energy unless PUDA is moving towards a deal.

Though we personally believe that PUDA is worth a lot more then even a sweetened bid to the $15 range, it might just be easier for all involved to take a decent offer and move on. The BOD is in a sticky situation considering that Zhao Ming has considerable assets to make PUDA whole including his existing PUDA shares. It could get messy relying on Chinese law, but they do have a fiduciary obligation to get a fair price. Would $15 be considered fair in order to avoid a legal battle and obtain a price higher then stock traded for all but a few days?

Our take is that $15-17 would make most US investors sleep well after a very trying period seeing the stock drop to $6 and be halted. The company expects to make $4/share in earnings in 2012 making such a price very attractive to Zhao Ming.

Ultimately our investment thesis suggests sticking in for the more fair value around $30+. Taking $15 next week and moving on towards other Chinese stocks that have been just as pummeled seems just as appealing then waiting for a long legal battle to work out.

Will Apple be Worth $2 Trillion?

nteresting comments this week from both Cody Willard and James Altucher that Apple (AAPL) could be worth $1 Trillion if not $2 Trillion in the future. While this might seem like crazy 2000 internet bubble like forecasts, its refreshing to see investors willing to discuss the potential of the greatest retail/tech stock in the world. Not to mention as the market heads to record earnings, it should also see companies with record market caps. At some point it was crazy to think a company could be worth $100B so its inevitable that somebody will hit $1T and AAPL is the likely winner.

As I recently wrote, the market continues to give AAPL a very cheap valuation compared to its growth rate. Most analysts continue to give them valuations x amount above the current price in the $340 range. They throw out $400-500 targets even though it gives AAPL an unreasonably cheap valuation. They never seem capable of forecasting a value other then based on the current value whether expensive or cheap, hence the typical problem with analysts and the momentum investing in the market.

Its refreshing that both Cody and James have come out with valuations based on the growth rate and potential of the AAPL franchise. Note that Cody's estimate comes out to $2000 a share.

Note that we had highlighted an article last year that forecasted the potential of AAPL getting to $1000. Personally I'd take $1000 at this point as the market continues to get trapped by the concept that AAPL is too big to keep growing.

Below are the 3 reasons Cody believes AAPL can get to $2000:

1. Apple’s trading at less than 8x next year’s $30 per share in earnings when you include the $50BB plus in net cash the company has.
2. The products are the highest quality out there and nobody can catch that, not Google, not Softee, not Sony. Not nobody.

3. The platform that Apple has locked people into is the key….almost everybody who is now using iTunes will still be using iTunes in five years, the people nurtured on iPhones 1-5 will still be using iPhones #15-20 in 10 year, and everybody using facetime will still be using facetime, and you’ll be doing so much more inside that platform/eco-system that apple’s created. And that’s the real key. And it’s not about 2011 anyway. It’s about 2021 when you live surrounded by iOS in your home, your car, your office, your gadgets.


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


Thursday, May 12, 2011

Investment Report - May 2011: Net Payout Yields

April was a decent month for the Net Payout Yields model as it outperformed the SP500 by a slight margin (3.14% vs 2.85%). This model is naturally designed to slightly exceed the market in good months like April and more comfortably outperform in down markets like back during March.

Trades
April was a more typical trading month with only one trade. Yum! Brands (YUM) was sold as its NPY had been reduced over the last several months to below acceptable levels. This was partly because the stock had run to new highs.

Top Performers
April was a very volatile month with the Top 5 gainers all up nearly 8% or more. Being a more conservative model requiring market caps of $10B it's very unusual to see three stocks up more then 10%. Millicom International Cellular (MICC) and Lorillard (LO) had 12%+ gains and WellPoint (WLP) was up 10%. Hartford Financial (HIG) and Boeing (BA) both had roughly 8% gains. The general themes of these gainers were underfollowed sectors like insurance or cigarette companies that gained investor attention during the month.

Bottom Performers
As with the top performers, the bottom performers had two stocks that lost over 8% during the month. Highly unusual for a month with the SP500 up nearly 3%. Gilead Sciences (GILD) lost 8% due to disappointing earnings. Wells Fargo (WFC) lost 8% due to the sudden departure of the CFO and disappointing earnings as well.

Conclusion
The model continues to perform well during 2011 after a rough start back in November of last year when it almost immediately underperformed by over 2% before being fully loaded. Since then it has shown consistent and stable outperformance.


Disclaimer: Long all stocks mentioned in client and personal accounts except for YUM which was sold back in April. Please review the disclaimer page. 

Friday, May 6, 2011

Disappointing Margins at Limelight Networks

Limelight Networks (LLNW) is a leading content delivery network provider sometimes seen as a sexy play on the explosive growth of mobile and connected devices and the move into the cloud. The company recently reported Q1 numbers that showed incredible revenue growth with over 100% growth in mobile internet and tablet computing revenue, online video platform, and site and application acceleration services.




Read the full story at Seeking Alpha




Disclosure: No position in LLNW. Please review the Disclaimer page. 

Wednesday, May 4, 2011

Fantastic Earnings From NuVasive

After the close today, NuVasive (NUVA) reported solid results that easily beat estimates. NUVA is a medical device company focused on developing minimally disruptive surgical products and procedures for the spine.

Clearly an attractive product concept but the company was hit very hard last year when the new healthcare bill caused insurance providers to push back on lumbar reimbursements. The stock plunged from nearly $38 in October last year to a low of $22 in December. Since this was a broken stock and not a broken company, Stone Fox Capital recently added NUVA to most of the Opportunistic portfolios.

The company reported earnings of $.24 and revenue of $124.5M including a doubling of international revenue to 8% with an office opened up in Puerto Rico and one to open up in Tokoyo later this year. Revenue increased by 14.1% over 2010 showing that growth is back on track.

NUVA management continues to expect to eventually move towards a $1B revenue company with several exciting products in the pipeline. The company currently expects roughly $535M in 2011 so the goal amounts to a doubling of revenue.

From Briefing.com:

4:33PM NuVasive beats by $0.05, beats on revs; raises FY11 guidance (NUVA) 30.60 +0.58 : Reports Q1 (Mar) earnings of $0.24 per share,$0.05 better than the Thomson Reuters consensus of $0.19; revenues rose 14.1% year/year to $124.5 mln vs the $123.2 mln consensus. Co issues upside guidance for FY11, sees EPS of $1.20-1.23 vs. $1.09 Thomson Reuters consensus, up from previous guidance of $1.07 to $1.10; sees FY11 revs of $530-540 mln vs. $530.61 mln Thomson Reuters consensus, up from previous guidance of $525 million to $535 million.


Via NUVA PR:

-- Alex Lukianov, Chairman and Chief Executive Officer, said, "Our financial performance in the first quarter of 2011 was excellent across all our key sectors. We generated revenue growth of over 14% and better than expected operating margin improvement in view of challenging spine market growth dynamics. Our performance internationally was a highlight, and is well on track to double this year to approximately 8% of revenue. We are pleased to be able to raise revenue guidance today in light of a marginally improved outlook for our U.S. lumbar business this year. As our focus shifts toward the achievement of our next milestone, the evolution of NuVasive into a $1 billion revenue company, we are laser focused on maintaining the startup mentality that is the very source of NuVasive's success as a prolific new product innovator. With speed as our competitive edge, we expect to continue to sustain industry leading growth."


2011 Full Year Financial Guidance 
-- Revenue of $530 million to $540 million; up from previous guidanceof $525 million to $535 million
-- GAAP EPS of $0.52 to $0.55; up from previous guidance of $0.39 to $0.42

-- Non-GAAP EPS of $1.20 to $1.23; up from previous guidance of $1.07
   to $1.10

-- Non-GAAP Operating Margin of ~17.5%, up from previous guidance
   of ~16.5%

-- GAAP effective tax rate of ~45%, down from previous guidance
   of ~49%
Disclosure: Long NUVA in client and personal accounts. Please review the disclaimer page.


The Absurd Focus on Apple's Earnings Estimates

Yet another quarter has passed and nearly all of the analyst and media discussions have focused on whether Apple (AAPLmet earnings estimates. Beyond that, these experts have focused on the amount of iPads sold with mind numbing focus on that particular estimate miss. Not much of the focus has been on AAPL beating earnings estimates by a mile, or more importantly, the growth rate. Just imagine how fantastically good earnings will be with ramped up production of iPads. Does anybody really doubt the growth path for the iPad regardless of any issue in Q1?


Read the full article at Seeking Alpha