Sunday, July 31, 2011

Staggering Chart of the Decade of Losses at AMR Corp

Below is great picture from a TulsaWorld article of the continual losses by American Airlines parent AMR Corp (AMR). In good years, AMR makes a decent profit. In bad years, AMR has crushing losses. Even worse is the fact the losing years outweighed the good years 8 to 3 accumulating in a net loss of roughly $10.5B. How has this company even survived?




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AMR recently made the historic aircraft order that some say was needed to survive. Sure it makes them more competitive, more appealing to customers, but how are they going to pay for the planes. Per my recent article, still see the airplane lessors  as the winners. Companies like AerCap Leasing (AER) will continue to benefit from major airlines that need new fuel efficient planes to compete, but can't afford to buy them. 

This quote sums it up the best:
"American can't really afford to do this, but they cannot afford not to do it," said Robert Herbst, industry analyst and founder of AirlineFinancials.com. "American's in serious financial trouble. They had to order these aircraft because without more fuel-efficient aircraft requiring less maintenance, American can't compete. In the end, it could break American, but they really can't afford not to order new aircraft," Herbst said. 

Ultimately though the issues with labor unions rule the future direction of AMR as much or more than the new planes. Clearly from the losses above, AMR can't afford higher wages and benefits for unions though the minute AMR posts profits the unions want their share. Even though, looking at the cumulative losses and the massive costs of the new planes one has to wonder what report they are reviewing. 

  • Boyd and Herbst, both former American employees, said resolving the breach between management and labor is critical for American's survival. 
  • Management/labor relations are at a low point as unionized mechanics, pilots and flight attendants have been unable to reach agreement with the company on new contracts after more than four years of negotiations. 

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




Saturday, July 30, 2011

Disconnect Between Crude OIl & Gas Prices

Retail gas prices remain very elevated as seen in the chart below from Chartfacts.com. Beginning around May when oil prices plunged, gas prices remained relatively steady. Only falling as oil continued dropping below $100. According to the chart, the average price of gas needs to fall $0.30 to equal the fall in oil prices.

Supposedly a lot of the price difference is caused by the price of Brent crude being higher than the Nymex/WTI quoted version. The main culprit for the price difference is the congestion and glut in Cushing, OK. Evidently they've built more pipelines coming into Cushing than ones leaving. Nice!

Basically America has increased oil production to such an extent that now consumers aren't even getting the advantages. Brilliant! So while Congress is busy debating the debt ceiling our energy policy continues to be less than desirable.

Wonder how many Congress members read the announcement from Chesapeake Energy (CHK) on the Utica Shale discovery? Policy discussions should center around how best to use all these new assets to reduce our dependence on foreign oil, lower the cost of oil, and put thousands of people to work. Instead we're focused on how best to pay our massive debts. Ridiculous!



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Friday, July 29, 2011

Manitowoc Decimated After Earnings, Fills Gap

Incredible negative action in Manitowoc (MTW) after earnings Tuesday night. The stock dropped from $16 on Monday to $13 around the opening on Friday. Of course, the market was very weak contributing to the drop, but it was amazing to see the level of selloff in this particular stock.

MTW is a leading crane maker and competes with Terex (TEX) among other companies. What really amazes this investor is that TEX had recently reported strong sales and weak profits leading any skilled investor to know the playbook for MTW. In fact, MTW actually reported stronger cranes numbers than TEX making any serious investor dizzy seeing MTW plummet.

Luckily Stone Fox Capital unloaded MTW in the $15.8x range last Friday noting the stock was technically falling apart. Not to mention it had a gap around $14 in the charts suggesting the stock might fall substantially. Unfortunately we weren't able to return to the position in the low $13s this morning. The stock will be on are radar next week though.

MTW reported earnings of $.16 compared to estimates of $.18. Revenues were solid and the book to bill was 1.1 in the crane division. All very good numbers considering the weakness in the sector. This was the highest earnings total in a while and showed substantial improvement from last year. Sometimes the market gets too hung up on estimates and not the facts. Honestly, has the stock deserved a nearly 40% cut since April with earnings coming in $.02 shy?

Oh, and don't forget that management didn't adjust 2011 goals. Maybe they are being too aggressive, but no sign exists that the cranes market has already peaked. If anything, MTW and TEX are both struggling with a forecasting issue and not a growth issue. MTW lost $.10 in Q1 and made $.16 in Q2. Investors should focus more on the improvement and not the relative performance compared to estimates.


Via MTW PR:


  • reported sales of $949.8 million for the second quarter of 2011, up 15.9 percent from $819.3 million in the second quarter of 2010. 
  • sales increase was primarily due to a 22.9 percent increase in Crane segment sales, coupled with a 7.4 percent increase in Foodservice segment sales.     
  • adjusted earnings from continuing operations were $20.2 million, or $0.16 per diluted share, in the second quarter of 2011, versus adjusted earnings from continuing operations of $14.5 million, or $0.11 per diluted share, in the second quarter of 2010.
  • Crane segment backlog totaled $839 million as of June 30, 2011, an increase of 4.9 percent from the $800 million backlog at March 31, 2011, and up 58 percent from one year ago. Orders of $588 million generated a book-to-bill ratio of 1.1.     
  • Given second-quarter results that were in-line with its expectations, the company is reaffirming its full-year guidance for 2011, with increased confidence concerning Crane top-line performance.     

Anybody should be careful picking a bottom, but todays action was very constructive. 





















Disclosure: Long TEX and might purchase MTW within the next 3 trading days. Please review the disclaimer page. 


Fastest Earnings Growth: Accuride and Meritor


his is the third in a series on stocks with the fastest estimated earnings growth in 2012. The first two articles focused on Take Two Interactive(TTWO) with estimates expected to grow over 400% and Patriot Coal(PCX) with numbers expected to nearly triple. The third fastest growing company is Manitowoc (MTW) with earnings expected to grow over 220%. Since we recently wrote a report on the crane sector which included MTW and the number six fastest grower in Terex (TEX), this article will focus on the next two stocks on the SteetAuthority list.
Accuride (ACW) and Meritor (MTOR) supply parts to the automobile industry. Both companies were forecasted to grow earnings by roughly 220% next year. Likely both companies are relatively unknown by the investment community, which is one of the major benefits of such analysis. Focusing on just the names that hit the media outlets can cause investors to ignore under the radar investment ideas.

Read the full article at Seeking Alpha. 


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



Tuesday, July 26, 2011

Nice Results from Radware

After disappointing results from Riverbed Tech (RVBD) and F5 Networks (FFIV) in the cloud networking space, Radware (RDWR) came through with excellent numbers today. RDWR continues to be the under the radar play in this general sector partly because they maintain a reasonable growth rate of only 17% half that of the numbers reported by RVBD.

RDWR reported earnings of $.32 that beat estimates by $.03. Revenue of $41.1M was also slightly ahead of estimates. More importantly, RDWR guided to $.33 - .35 versus the $.33 analyst estimate. Not to mention that the CEO provided the tidbit that the numbers were conservative.

RDWR is taking advantage of the move to cloud computing and data center consolidation. They also are in the process of opening up some key OEM relationships that could lead to a further revenue surge.

It remains a core holding in our Opportunistic models and based on these results they should stay that way for a long time. Our goal is to hold these stocks for years if the numbers remain compelling, therefore, reducing trading costs and taxable transactions.

Details from Q2 report:

  • reported record quarterly revenues of $41.1 million for the second quarter of 2011. This represents an increase of 17% compared with revenues of $35.2 million for the second quarter of 2010, and an increase of 6% compared with revenues of $38.6 million in the first quarter of 2011.
  • Net income on a Non-GAAP basis for the second quarter of 2011 was $7.3 million or $0.32 per diluted share, compared with net income of $4.3 million or $0.21 per diluted share in the second quarter of 2010.
  • During the second quarter 2011 Radware generated $11 million in cash and ended the quarter with $204 million in cash, cash equivalents, deposits and marketable securities.
  • Guidance (per CC) of $.33 - $.35 and $42 - $43M with upside potential from OEM sales. 

Monday, July 25, 2011

Puda Coal Receives Draft Merger Agreement from Chairman

The buyout of Puda Coal (PUDA) is becoming increasingly likely considering the Chairman of the Board submitted a draft merger agreement last week. Though slightly delayed from the expectations of a submission in June, it still backs up his intent to follow through with the proposal from April 29. The delay also isn't too surprising considering the ongoing investigation into his supposed illegal transfers of company assets.

Naturally the details of the merger agreement are more important than just the submission. No guarantee exists that the terms are agreeable. Or whether the price matches the desires of at least some shareholders that think $12 is too low. Will the special committee and BOD be able to negotiate a higher price? It would seem a difficult pill for most shareholders to swallow if Ming Zhao was able to cause the fear and parlay that into a cheap buyout.

Also notable, PUDA submitted plans to regain compliance with NYSE listing standards. Though this might not be that meaningful if a merger agreement is finalized. Clearly they need this option to help with negotiations. Ultimately PUDA needs to be able to regain compliance so the stock could re-trade without a merger agreement.

How will this end? Will PUDA need a new auditor and a completed investigation before accepting a merger agreement? There is actually justification for accepting the $12 if legal matters exist surrounding ownership. Shareholders would likely be best served to take the $12 and run if that becomes a factor. It would be unfortunate because PUDA has very valuable assets likely worth multiples of $12, but fighting a fight on principle to only lose in the end might not be worth it.

Ultimately though, Chairman Ming Zhao has the assets to make PUDA shareholders whole if wrongdoing is proven. A deal in the $15-17 range would likely alleviate most hard feelings surrounding the suggested fraud. Not to mention my investors money is tied up waiting for the investigation and merger to be resolved. PUDA suggests negotiations could take a couple of weeks so maybe we'll hear by mid August at this rate.


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

Friday, July 22, 2011

Schlumberger Earnings Portend Good News for Weatherford

Schlumberger (SLB) reported growing international demand (finally!) this morning on the Q2 earnings report suggesting that Weatherford (WFT) will have good results as well. Naturally WFT isn't as good of an operator as SLB so it could still surprise the market.

WFT gets over 60% of its revenue from outside the US so it only benefits to a minor degree on the huge increase in US land drilling. It has also had problems this year with accounting issues and hence the stock price was recently approaching 52 week lows while big brother SLB and Haliburton (HAL) hit highs.

Interesting to see bullish comments about deepwater markets, Egypt, and Bahrain. Also, noteworthy is that oil producers are ramping up production in other areas to make up for the lost production in Libya.

All the news points to significant gains by WFT if they can turn it around. Looking at the charts below, it has a lot of catching up to get back to where SLB has gone this year.


SLB Q2 PR:



  • Income from continuing operations attributable to Schlumberger, excluding charges, was $1.18 billion—an increase of 22% sequentially and 45% year-on-year. Diluted earnings-per-share from continuing operations, excluding charges, was $0.87 versus $0.71 in the previous quarter, and $0.68 in the second quarter of 2010.
  • Oilfield Services revenue of $8.99 billion increased 11% sequentially and 51% year-on-year. Pretax segment operating income of $1.75 billion was up 20% sequentially and 56% year-on-year.          
  • Second-quarter results showed strong growth worldwide. All Product Groups grew at double-digit rates. In North America, a prolonged Canadian spring break-up and poor weather in the northwest were offset by very strong growth in the rest of US land and a significant contribution from deepwater operations as the rig count increased and renewed interest in exploration activity in the Gulf of Mexico led to high multiclient seismic data sales.
  • Internationally, the trend towards higher deepwater rig count, and higher exploration spending continued. This activity was coupled with a surge in development and workover activity as producers moved to compensate for reduced Libya barrels and to profit from higher prices. As a result, all Groups had standout product lines in the quarter and technology sales showed good progress. Strong advances were made in all Technologies linked to deepwater exploration and complex development drilling including WesternGeco, Drilling & Measurements, M-I SWACO, and openhole Wireline and Testing services. The Drilling Group continued to record strong synergistic revenue with the legacy Smith Bits and Drilling Tool businesses in many areas of the world. At Reservoir Production, in addition to the strong North American stimulation market, high growth rates were experienced internationally as operators moved to improve production and to test unconventional gas plays in several markets.     





WFT 1 year chart:




















SLB 1 year chart:





















Disclosure: Long WFT in client and personal accounts. Please review the disclaimer page for more details. 



AMR Takes a Flyer by Ordering Historical Amount of Planes


Wednesday morning, AMR Corp (AMR), the parent company of American Airlines, announced the greatly anticipated orders for 460 planes and options for 465 more. While the market focused on the shift of a US airline from a Boeing (BA)-only focus to Airbus, everybody seems to have missed the announcement last week that American Airlines was going to sell/lease back up to 35 Boeing planes with AerCap Holdings (AER).
Clearly it's justified to focus on not only the historical size of the order from American (some estimates are close to $40B) but also the shift in plane manufacturers. While the analysts call the order a split, the additional options clearly favor Airbus in a major way. If all the options are taken, Airbus will receive around 65% of the orders. Considering that fact, the media was generous to BA executives to only focus on a split of the orders instead of a major shift towards Airbus.

Read the full article at SeekingAlpha.com. 

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


Thursday, July 21, 2011

Record Margins Should Remain the Focus for Riverbed Tech


After the close Tuesday night, Riverbed Tech (RVBD) reported inline earnings and revenues that were slightly lower than estimates. The stock was crushed in after hours as traders overreacted to the revenue disappointment and ignored the record margins.
The encouraging news was RVBD reporting record gross and operating margins. This means that RVBD wasn't cutting prices to just make the estimates. If anything, it backs up the claim that weakness in EMEA was as much about closing deals as competition.
Other good news was that it used a part of its $611M cash hoard to invest in two new companies, Aptimize and Zeus Tech, that will be accretive in 2012. Also, US product sales grew by 50% and sales would've met the midpoint of analysts estimates if it had been able to ship the surge of orders in the last few days.

Read the full article at SeekingAlpha.com. 

Disclosure: Long RVBD in client and personal accounts. Please review the disclaimer page for more details. 




Net Payout Yield MedcoHealth Solutions Agrees to $29B Buyout

Great news for one of the weakest stocks in our Net Payout Yield model. Express Scripts (ESRX) agreed to purchase MedcoHealth Solutions (MHS) for $29B. The deal gives MHS shareholders $71.36 based on the closing prices on 7/20 amounting to $28.8 in cash and 0.81 shares of ESRX. Considering ESRX is up 6% today the value of the deal got much more attractive now worth nearly $74. Oddly though, MHS has only traded up to around $65 most of the day.

The nearly $9 gap suggests the market is concerned about the deal not completing. Anti-trust issues could pop up as the combined company will be a nearly $60B behemoth in the pharmacy benefits sector.  Interestingly though ESRX shareholders are excited enough about the deal to send their shares much higher. Maybe investors just aren't that good with math and are missing the share rise of ESRX and subsequent increase in the value to MHS shares in the deal.

The combined company is promising to lead the effort to lower costs of prescription medicines for American families. Not sure the government will buy that concept when reviewing the anti-trust impact but UnitedHealth's (UNH) move into this area and dropping of MHS ultimately lead to this deal. Also, CVS Caremark (CVS) is a legitimate competitor so maybe the regulatory framework shouldn't be that concerning.


Reasons for deal per ESRX PR:


Driving Out Pharmacy-Related Waste Creates Value for the Nation's Employers, Health Plans, Unions and Government Agencies
Express Scripts and Medco believe the transaction will deliver value to clients and their members, shareholders, and other stakeholders by:

  • Generating greater cost savings for patients and plan sponsors
  • Creating more efficiency in the supply chain
  • Closing gaps in care and achieving greater adherence through our combined behavioral and clinical approach
  • Utilizing our collective expertise to better manage the cost and care associated with specialty medications
  • Optimizing our ability to respond to an increasingly complex Medicare and Medicaid environment
  • Enhancing mail pharmacy technology to optimize patient care and satisfaction
  • Accelerating the research, development and deployment of trend management solutions to address inefficiencies in the marketplace
  • Continuing to advance evidence-based and safety solutions for innovative pharmaceuticals and biosimilars
  • Advancing our efforts against fraud, waste and abuse
  • Attracting other leading healthcare entities to collaborate on next-generation solutions

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


Tuesday, July 19, 2011

Fastest Earnings Growth: Patriot Coal


Last week we started a series on the companies with fastest growing earnings next year. The first article was written about Take Two Interactive (TTWO) that topped the list with earnings expected to grow by roughly 463%. The second fastest grower is Patriot Coal (PCX).
While TTWO doesn't impress us as a stock with sustainable earnings momentum, PCX on the other hand has some growth initiatives combined with expiring legacy contracts that will provide much higher margins once rolled over. In fact, the two coal supply agreements that expire will add a whopping $150M in EBITDA by 2013.


Please read the full article at SeekingAlpha.com. 

Disclosure: Long ANR for client and personal accounts. This information should not be construed as investment. Please review the disclaimer page. 


5 Stages of Grief for Optimistic Dyslexics

Laszlo Birinyi remains one of our favorite market prognosticators with his willingness to literally stick his neck on the line with very bullish calls that the market will at least exceed 2,000 in the next 13 months. In other stories, he has even predicted the eventual bull market could top out around double the current level.

Considering the typical analysts will hardly predict 1,450 on the market much less 1,500 his prediction really sticks out. Most analysts still debate whether the market will avoid another recession and anybody predicting doom and gloom obtains more press coverage.

Below are some details and a clip from his interview on Breakout. My only concern is that uber-bear and host Jeff Macke sure appears to be turning bullish. Or at least he doesn't push back on Laszlo that much allowing his bullish case to remain unscathed.

Birinyi puts the market into context via a model which categorizes a bull move into a template of four phases. Think of it as the 5-stages of Grief for optimistic dyslexics:


The Take off / Strong Rally: Nobody believes. March 2009, S&P 666. I don't think I need to elaborate.


Consolidation and Digestion: The skeptics see a return to darkness. In the situation today, consider this: The market is higher for the year. Turn on your television for as long as it takes you to feel dark about the future. Long enough to hear about Rupert Murdoch's News Corp (NWSA) Watergate moment, Cisco's (CSCO) lay-offs, or the collapse of Europe should be sufficient. Turn off your television and ponder the news versus stock disconnect.



Acceptance and Capitulation: Investors surrender to the idea that there will never be a meaningful pullback and start getting long accordingly.


All In: Everybody's long; a life-altering, vicious sell-off begins.




Monday, July 18, 2011

Apple Hits All Time High, Just the Beginning?

Apple (AAPL) hit an all time high today over $374. Ok, so its not the beginning since the stock was only $80 during the great recession and much lower in the early 2000s. Still AAPL appears to have plenty of room to run considering the forward PE based on typically overly low analyst estimates is below 13.

JPMorgan (JPM) made a call to buy August $365 call options to position for potential upside ahead of the company's quarterly earnings. A very unusual call and one that concerns us that AAPL will see a pullback after the earnings report. The stock has already soared from $310 to current $373 price in less than a month. Though it did breakout of stiff resistance in the $350-360 range suggesting major upside possibly to hit the JPM target of $450.

The high 2012 earnings estimate is $33.30. A modest 20 PE would suggest a $666 stock price. Hmm, maybe that will the signal to sell.

AAPL has been a long term hold in our models going back to the beginning. See the Portfolio Management page for more details on the models Stone Fox Capital offers. As far as AAPL, it's a core stock to just hold until the gravy train runs out. Don't be foolish to Buy & Hold for eternity, but clearly it's a company to hold until the story peaks out.























Disclosure: Long AAPL in client and personal accounts. Post is provided for informational purposes and should not be relied upon as financial advice. Please review the disclaimer page. 

Friday, July 15, 2011

Stat of the Day: June's Sum of US Equity Fund Outflows, Index Fund Inflows Highest Since '09

Whew! That is a complex header. According to InvestmentNews  investors fled actively managed US equity funds at the same level as the March 2009 generational low. Naturally the market has doubled since then so the percentage of the total market isn't comparable, but it does highlight the fear factor in the market. In a way, this backs up the market selling cyclicals very hard and consumer staples rallying.

What was really staggering is that Fairholme Fund (FAIRX) had outflows of $1B. After being the manager of the decade, investors were very quick to flee Bruce Berkowitz in June. What a tough industry! Maybe I should reconsider.

Via InvestmentNews:


  • U.S. investors pulled $19 billion more out of actively managed U.S. stock funds in June than they put in, while U.S. index stock funds saw $1.1 billion in net inflows. 
  • March 2009 - investors pulled $18.3 billion out of actively managed U.S. stock funds than they put in, and passively managed equity funds saw $2.4 billion in inflows.
  • Big losers among actively managed equity funds in June were the American Funds Growth Fund of America (AGTHX), which lost $2.9 billion; the Fairholme Fund (FAIRX), and Fidelity Investments' Magellan Fund (FMAGX), which both lost $1 billion, and the Davis New York Venture Fund (NYVTX), which saw $780 million in net outflows.



Disclosure: No postions. Provided for informational purposes only. Please review the disclaimer page. 



Fastest Growing Earnings: Take Two Interactive

After reading an article from StreetAuthority about companies with the fastest growing earnings, it got me looking into the companies not already owned in Stone Fox Capital's Opportunistic models. The companies expecting huge earnings growth next year appear to be overlooked, but one should use the list as a starting point for research. The report is only as good as the underlying data. Not to mention that analyst estimates typically aren't up to date so reports can easily give false positives.

StreetAuthority makes a good point that these stocks expect to more than double earnings, yet they all trade for a PE of less than 13. Based on that combination, all of the stocks appear cheap. Now the question is whether the growth will continue on into calendar year 2013-- or if it's just a one year fluke. Another telling sign will be the direction of estimate changes for next year. It's typical for analysts to not update estimates leaving a wide variation, so if the numbers are dropping then watch out. 





Read the full article at Seeking Alpha. 




Disclosure: Long MTW, TEX, X, and MF in client and personal accounts. The information and data is believed to be accurate, but no guarantees or representations are made. The information contained herein is for informational purposes only and should not be relied upon as advice.

Wednesday, July 13, 2011

SP1500 Most Heavily Shorted Stocks

Great list of the most heavily shorted stocks by Bespoke Investment. Amazed to see that 3 stocks in our Opportunistic models appear on this list. Sears Holdings (SHLD), Savient Pharma (SVNT), and Liz Claiborne (LIZ) all have roughly 30% of the outstanding float short.

Hopefully one day these short levels will lead to a massive short squeeze. SHLD continues to buy back stock meaning that the float will continue to shrink likely leading to higher and higher percentages. What the shorts don't seem to understand is that SHLD while a troubled retail operation has a ton of valuable assets and a solid balance sheet. The short story just doesn't add up.

SVNT on the other hand just raised $100M plus to fund the sales rollout of FDA approved KRYSTEXXA that helps patients with extreme gout problems not solved by existing drugs. Shorters appear willing to bet that a slow sales start is because the drug lacks a market rather than the initial lack of a sales team. With the cash in hand, this doesn't appear to be an appealing short.

LIZ is a struggling retailer that has worked for 4-5 years to turn operations around. Now that it finally appears on track for improved operations the shorts are out in full force. The women's apparel sector has been weak, but it just might be time for those stocks to make a run.

The list is lined with other Consumer Discretionary names. Ironic considering so many top retailers are hitting 52 week highs.

Typically this list can be a great list of stocks to research though one should expect a few of them to completely collapse. Shorters have to see some reason to so heavily short a stock, but they aren't always right.






Disclosure: Long LIZ, SHLD, SVNT in client and personal accounts. Please review the disclaimer page as this should not be construed as investment advice. Please consult your own investment advisor. 


Tuesday, July 12, 2011

Investment Report - July 2011: Opportunistic Levered

The Opportunistic Levered (Arbitrage on Covestor.com) model had another rough month. The model was again hit by fraud concerns among Chinese companies and emerging markets stocks fell due to concerns over inflation pulling down growth.

Over the 29 months of tracking this model, it has had numerous months of 10% plus swings. Unfortunately some cases were to the downside. In those cases the stock holdings just got more attractive in the process. Even with China fraud scares, the three stocks owned in this model still appear to be worth more than our original purchase prices not to mention multiples of that.

The size of declines in some of the stocks in this model caught us off guard. It didn't surprise us that June was weak, but the level of weakness in several sectors such as industrials and emerging markets such as China caught us off guard.

Bottom Performers
The bottom performers were again lead by the China stocks in the model. ChinaCache International (CCIH) and Lihua International (LIWA) were both down roughly 20%. The extreme level of weakness in CCIH caught us completely off guard. The company is the leading content delivery network (CDN) provider in China. Think Akamai (AKAM) of China. The stock has dropped from a post IPO high of $35 during November 2010 to $6.40 during June. Somehow this IPO got caught up in the reverse merger scare and now provides one of the best growth opportunities around. It is rare to find a company growth around 50%, but still trading at 1x market cap ex cash.

LIWA on the other hand offers a solid play on the demand for recycling copper and producing copper products in China. While no legitimate fraud has ever been brought against LIWA, the stock has suffered alongside all the other china plays. LIWA also bottomed out in June at $5.19. The sector appears to have hit a tipping point during that month as the fear matched the financial crisis in the US during March 2009.

The risk remains that something under the surface exists that could take down these two stocks, but every day that passes increases the odds that both companies are legitimate businesses. If we are correct, both companies along with the halted Puda Coal (PUDA) will show up on the Top Performers list later this year.

Other weak stocks were Liz Claiborne (LIZ), Gafisa (GFA), and Foster Wheeler (FWLT). Both GFA and FWLT suffered from a fear that China and emerging markets would slow down resulting in less demand for their goods. LIZ on the other hand is a levered turnaround play in women's apparel that would suffer if the US entered another recession.

Top Performers
Rigel Pharma (RIGL) was the only significant gainer, but its 10% gain was not nearly enough to offset the major losses. No real news on the stock, but it recently hit 52 week highs possibly on speculation that the new arthritis drug will have successful Phase III results. Riverbed Tech (RVBD), Freeport-McMoRan Copper (FCX), and ICICI Bank (IBN) all had decent gains around 4%.

Conclusion 
The model remains fully invested as we see significant growth opportunities once the emerging market inflation fear peaks and the European debt crisis passes. Both could possibly happen during July or take several more months. Either way, the remaining downside risk appears minor while the upside potential seems immense.


Disclosure: Long all stocks mentioned in client and personal accounts. Information presented should not be construed as investment advice. Please consult your own investment advisor. Please review the disclaimer page.

Cisco's Plan to Cut Jobs May Lead to a Downward Spiral


According to a Gleacher analyst, Cisco Systems (CSCO) is expected tocut about 5,000 jobs in August. That would be a massive 7% workforce reduction for a company with roughly 73,000 employees worldwide.
According to the analyst, that reduction would be similar to large cuts the company took back in 2001 and 2002. Clearly those cuts were successful, or at the very least didn't preclude CSCO from being a dominant tech company in the 2000s.

Read the full article at Seeking Alpha. 

Update: According to Bloomberg and other sources the job cuts might actually approach 10,000 or double the original estimate. That number is even scarier as the problems are larger than originally thought. Productivity will be disrupted in a major way with that many people cut.

Disclosure: Long CSCO and RVbD in client and personal accounts. Please consult an investment advisor about your individual position. This information is for informative purposes only and should not be construed as personal investment advice. Please read the disclaimer page. 

Monday, July 11, 2011

Like Us on Facebook

Stone Fox Capital is now putting more emphasis on a Facebook presence. They make it easy to post quick links to internet articles of interest or to link to articles impacting. Please like us on Facebook if you have any interest in following. Or let us know if you have any feedback on using social media tools.

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Friday, July 8, 2011

Sector Review Since the Financial Crisis: Airlines

This is the sixth and final article in a series focusing on the plights of certain sectors since they peaked prior to the financial crisis in 2008. All of the sectors covered have struggled mightily to recover to pre-crisis levels, while other stocks and sectors have surged on to new highs. So far the series has covered Steel ProducersEngineering & Construction,Women's ApparelLife Insurance and Large-Cap Tech.

This article focuses on the airline sector, and will be the first sector in which Stone Fox Capital neither owns a stock or expects to purchase a stock in the near future. Airlines have long been the suffering industry in the US market, and that doesn't appear to be changing. While several of the larger companies were able to reduce debt via bankruptcies in the 2000s, the companies still struggle with heavy competition and have a difficult time with passing on higher costs. The fear of ever higher fuel costs down the road and strong labor unions latch onto any profits and make the industry uninvestable. 



Read the full article at Seeking Alpha. 


Disclosure: No positions. Data sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made. The information contained herein is for informational purposes only and should not be relied upon as advice.



Thursday, July 7, 2011

Investment Report - July 2011: Net Payout Yields

June was a good month for the Net Payout Yields model on a relative basis. The model outperformed the SP500 by 0.67% with a loss of 1.16% versus the 1.83% loss for the benchmark. Naturally on a absolute basis the model had a disappointing month, but it performed as expected by being less volatile than the benchmark and holding up better during the worse parts of the big drop mid month.

The model remains fully invested with an average weight of only 2% cash for June. The goal of the model is to let the companies themselves buyback stock at lower to take advantage of any market weakness rather then trying to time the market.

Trades
Only one trade was made during the month. Wells Fargo (WFC) was sold as the stock failed to keep the Net Payout Yield at acceptable levels. The stock was replaced in July with Travelers (TRV) that has an extremely high NPY of around 20% given its consistent large stock buybacks.

Top Performers
Even considering the nearly 2% loss in the SP500 for June, this model had three stocks with over 4% gains. Accenture (ACN) had a great earnings report. Lockheed Martin (LTM) had a nice bounce as the market has become more comfortable that defense spending won't be cut as much as feared. Microsoft (MSFT) finally got a bounce after lagging for most of the year.

Bottom Performers
Naturally with a weak market, the model had several stocks with big losses for the month. The biggest loser was Cisco Systems (CSCO) that continues to post weak results even has they accumulate cash and ramp up dividends and stock buybacks. Gap (GPS) along with CSCO lost nearly 7% after posting weak results amid cost pressures with increased cost of cotton and higher costs in manufacturing areas in Asia.

Other weak performers were Medco Health Solutions (MHS), Capital One Financial (COF), Chubb (CB) and Boeing (BA) which all lost roughly 5% for the month. BA has been subsequently sold in early July has they've failed to reinstate a stock buyback program leaving the NPY below attractive levels.

Besides BA, all the other companies have significant stock buyback programs that provide for downside support during the weakness. In addition, the buybacks tend to help provide earnings surprises down the road leading to long term gains.

Conclusion
As seen with the May and June results, the model tends to outperform in weak markets. In addition, the higher yields and stock buybacks from these large cap financially strong companies allows investors to sleep better at night knowing that these companies will benefit from the weakness leading to bigger gains in the future.

Investors should understand that losses during a market selloff like the last two months or even during the financial crisis should be expected in this model, but a major key to any investment is the ability to bounce back. One of the biggest issues with investors during the financial crisis is that numerous stocks such as Lehman Brothers and numerous other financial institutions went out of business or were sold at extremely low levels. Investors in those companies lost most of their capital and hence weren't able to participate in the recovery. These NPY companies may lose money from time to time, but they should always have the ability to survive and than thrive.


Disclosure: Long all stocks mentioned in the article in client and personal accounts. This article is meant for informational purposes and should not be construed as investment advice. Please review the full disclaimer page. 

Copper Soaring Towards All Time High

Copper remains on a hot streak and backs up our theory that global markets remain on a strong growth plan. It also highlights the issue with copper supply. Read just about any copper article on the internet and it'll summarize the difficulty that large copper mines are having with keeping production up. In many cases the production levels are down 10% from last year.

So in essence demand growth remains strong and supply growth remains constrained. The media focuses on peak oil, but maybe peak copper should be a bigger focus. After all oil is still being found at a rapid pace in deepwater locations and shale formations. Oil production in the US is increasing for the first time in decades and shale gas is making the possibility of moving truck fleets to LNG a real option. Hence reducing the demand for gasoline from oil.

Naturally Freeport McMoRan Copper (FCX) remains the favorite play in the sector. The stock peaked around $62 earlier this year and looks to regain that level soon. Our forecast is that FCX eventually sees a significant break of this level also seen back in early 2008. With a double top breakout to all time highs, $60 may be a distant memory.

Lihua International (LIWA) remains a favorite play in the copper sectors. The Chinese company produces and recycles copper products. The stock has naturally been crushed with all of the concerns over China fraud. The stock remains a speculative play, but it also offers huge rewards if and when the fears subside in the sector as the legit companies remain.

For those fearing a double dip, this chart speaks volumes.


Disclosure: Long FCX and LIWA in client and personal accounts. Please review the disclaimer page. This blog post is provided for informational purposes and should not be construed as investment advice. 



Tuesday, July 5, 2011

Big Investor Actually Bullish on China RTOs

Interesting to see a hedge fund manager actually bullish on Reverse Takeover (RTO) China stocks. Peter Siris is a partner at Guerilla Capital Management and has been an investor in China stocks for a long time. What gives him street creed in the current environment is that he has been short several China stocks including Longtop Financial (LFT ) that recently blew up.

He didn't talk about Puda Coal (PUDA) in this interview, but he is an investors in the stock so he has done some due diligence on the company and likely visited them. PUDA should be announcing some news shortly on the $12 buyout offer from the Chairman. PUDA was a big investment in our Opportunistic portfolios so we're hopeful that Peter is correct. The $12 buyout would be much better than nothing, but we're still looking for a higher price.

After a very one sided market, its nice to see somebody like Peter on CNBC's Strategy Session backing up my theory that the surviving China stocks will trade up. Many of the announced manager buyouts will be completed this year according to him. He also expects 5 more announcements in the next few weeks. It wouldn't surprise me to see Lihua International (LIWA) to get an offer though I can't find any evidence that Guerilla is involved in this stock.

Watch the video. If anybody takes Muddy Waters at face value, you have to also take this point of view as well. Finally somebody providing the other side of the story. Peter actually had an interesting point on the auditors that I had not heard before. Supposedly a lot of the big investors chose the auditors so its more a matter of the auditors becoming overwhelmed then the company choosing an auditor to give them a favorable opinion.







Disclosure: Long LIWA and PUDA in client and personal accounts. Please read the disclaimer page. This post is for informational purposes only and should not be construed as personal investment advice.