Monday, October 31, 2011

Deficient Infrastructure Costs Business

Another amazing story of how America is turning into a third world country. As China builds everything brand new, the US continues to allow our infrastructure from bridges to sewers to just crumble.

According to this Bloomberg report, 3,538 bridges were closed in 2010 while 150,000 bridges are structurally deficient.

How is it possible to not only allow a bridge to get into this state of disrepair, but also to allow a bridge to become closed? Businesses and consumers depend on them and life is majorly disrupted when one is closed.

Of course, that has become the issue and nature of the American sprawl. As communities move farther and farther from metro areas new infrastructure is built while the outdated roads and bridges are left to deterioate. This naturally encourages home buyers to move to where the infrastructure is brand new.

What would happen if the old bridges were replaced first? Would buyers or renters prefer to stay closer to downtown in that case?

Tulsa could become an interesting case study as the downtown loop was recently upgraded with every bridge stripped down and redone. Also, I-44 that passes through the middle of town is in the progress of being widened and completely redone.

While downtown looks much better, the updated I-44 involved clearing out a ton of outdated and dilapadated buildings not to mention over grown vegetation. The whole area looks 10x more attractive. Will this inspire businesses to relocate back into these areas?

Back to the article, what strikes me is that the cost to replace all the crumbling bridges at $140B nearly matches the estimated costs to businesses in 2010 alone of $130B. Whether from trips being extended by 10, 15, 20 miles or lost customers that will no longer visit a store, it amazes me that the lost productivity never makes the discussion. How can we not afford to replace them?

Minneapolis supposedly lost $73M in economic activity after the collapse in August 2007 of the Interstate 35W bridge. Imagine a FedEx (FDX) telling investors that it couldn't deliver packages for a few months because trucks didn't work.

It just seems absurd that governments are unable to fund crumbling bridges. Any city with updated roads and bridges must immediately become more attractive to new business. Whether from functionality and just appearance.

Just about anybody visiting SE Asia and specifically China claims how the US is starting to look like a 3rd world country. Maybe the spending in China can't last, but clearly the US can't afford to wait. China will become the preferred place for business if the US doesn't being spending more.

What ultimately sums up the issues is that both UPS (UPS) and FDX have had to assume bridge closers are inevitable. Naturally problems happen that can't be planned around, but when companies are spending productive time determining alternate routes knowing that government won't proactively fix problems, the US suffers.

Just like having tax professional spending millions of hours filing tax returns while other countries have them solving more meaningful issues, the country suffers. Some day the US will figure out this gigantic waste, but likely it won't happen until we're no longer the world super power.

Infrastructure and material companies would all benefit from higher spending, but just don't invest in any of them counting on it.


Highlights from the article:


  • Benton’s plight is playing out for small businesses across the U.S., where 3,538 bridges were closed in 2010, as customers shop elsewhere rather than take detours. 
  • With the average U.S. bridge seven years from the end of its useful life, and one- fourth of 600,000 crossings classified by regulators as “structurally deficient,” more places will be hurt by closings, said Barry LePatner, founder of LePatner & Associates LLP, a New York-based construction law and consulting firm.
  • The Minneapolis-St. Paul regional economy lost as much as $73 million after the collapse in August 2007 of the Interstate 35W bridge, according to a 2008 study by the University of Minnesota
  • The Sherman Minton Bridge, which carried about 80,000 vehicles a day across the Ohio River, was closed after cracks as wide as a 12-ounce soda can were found in the structural steel, according to the U.S. Department of Transportation.
  • A bridge built in 1929 over Lake Champlain in upstate New York was closed in 2009 after cracks were found. Residents had to take ferries to work and appointments. The ferry companies weren’t equipped for the volume and traffic to use them is often backed up for hours, he said. 
  • Companies like UPS, whose business model makes understanding the U.S. highway and bridge system a necessity, have developed information systems to reroute drivers when detours occur, Susan Rosenberg, spokeswoman for the Atlanta- based company, said in an interview.

Friday, October 28, 2011

Whirlpool Results Hammer Sears Holdings

Sears Holdings (SHLD) is down 5% today after disappointing results from appliance maker Whirlpool (WHR). Maybe logical if investing in Sears a decade ago, but the current ramp in the stock price has more to do with the potential leasing of unused retail space and the externalizing of brands.

SHLD had been on a huge run since bottoming below $52 in late September so a pause at $82.50 isn't that shocking. It just took a little negative news for traders to jump ship. Nothing that alarming since SHLD should not be owned based on whether Kenmore appliances are selling well.

SHLD will likely see some follow through weakness next week. The key will be holding the 10ema around $75.30.


Details from WHR press release:

  • Third-Quarter Consolidated Revenue up 2% 
  • EPS of $2.27 Versus $1.02 in Prior-Year Period 
  • Company Announces Major Cost Reduction Initiatives to Support Margin Expansion and Strengthen Global Competitive Position 
  • "During the quarter, we experienced weaker than expected global industry demand and elevated material costs," said Jeff M. Fettig, Whirlpool Corporation chairman and chief executive officer.  "Consumers continue to show strong preference for our unmatched global brand portfolio and new product innovations, and we are beginning to see the benefits from previously announced price increases.  However, our results were negatively impacted by recessionary demand levels in developed countries, a slowdown in emerging markets and high levels of inflation in material costs.  
  • The world’s largest maker of appliances, sank the most since 2008 after saying it will cut 5,000 jobs and lowering an annual profit forecast by as much as 36 percent with demand in the U.S. falling back to recessionary levels.
  • The plan, which also includes reducing factory capacity by 6 million units, will cost $500 million, Whirlpool said in a statement today. Profit this year will be in a range of $4.75 to $5.25 a share, down from a previous forecast of $7.25 to $8.25, the company said. 
  • Demand declined as U.S. consumer confidence fell, the sovereign debt crisis accelerated in Europe and inflation slowed growth in emerging markets, Chief Executive Officer Jeff M. Fettig said today in a conference call with analysts. 


Disclosure: Long SHLD. Please review the disclaimer page for more details. 


Thursday, October 27, 2011

Lorillard and Chubb: When Stock Buybacks Work

Many experts claim that buybacks don't work. To the contrary, just about everybody pounds the table on dividend yields. Why don't investors look for a high buyback yield?

When reading over the Lorillard (LO) earnings released on Monday, I was shocked to read that Q3 earnings were increased by $.18 due to the share buyback plan. Wow! That's real earnings for each remaining stockholder. And to top that off, stockholders aren't paying taxes on these earnings gains.

Read the full article on Seeking Alpha.


Disclosure: Long CB and LO. Please review the disclaimer page for more details. 



Monday, October 24, 2011

Wild Times at MF Global Holdings

Today Moody's downgraded MF Global (MF) to Baa3 putting them on the verge of junk status. Then, MF announced that it has upped the Q3 earnings report to tomorrow morning instead of Thursday. This all comes after last week MF had to increase capital after the Financial Industry Regulatory Authority (FINRA) raised concern about exposure to European sovereign debt.

All of this new has led the stock to a hit a fresh 52 week low of $3.48 today. All the way down from a 52 week high of $9.28 back in January. Considering financial like Goldman Sachs (GS) and Morgan Stanley (MS) have had huge bounces recently, it should be concerning to any investor that Wall Street knows something.

Is this extreme fear warranted? Is $6.4B of exposure to Italy, Spain, Belgium, Portugal, and Ireland with a weighted maturity of October 2012 worthy of a drop from $7.5 at the start of August?

Heck, Citigroup (C) stock is already above levels from mid-August with sights on the pre market collapse levels. Even Regions Financial (RF) that still owes TARP money to the government has rallied.

Sure all these companies are different, but it seems so unlikely that MF faces any major risk from debt exposure to Italy or Spain that matures in a year. A time period covered by the EFSF.

According to statements from the company today, it seems apparent that the company has moved up earnings so that it can address the fears in the market. Being in the quiet period prior to earnings provides a great advantage to those wanting to spread fear. Hence, Stone Fox Capital bought shares in our Opportunistic Levered (Arbitrage) model this afternoon to take advantage of the opportunity presented by the market.

As always our Covestor model positions show up on Market Pulse on Yahoo! Finance so anybody can check our investment claims. As a note, sometimes the trades are slow to appear.

Considering the risk, we've only bought a half position and will look to deploy the full position if the news tomorrow is positive. The risk appears very over stated., but it isn't prudent to go rushing in full on.

Anybody not following MF recently should know that Jon Corzine (yes the former governor of New Jersey and Chairman at Goldman Sachs) took over the CEO role about 18 months ago and is in the process of transforming MF into a GS like company. Raising their focus on investment banking and asset management.

While still early in the transition, any investment is a bet on the experience and talents of management. Considering the regulatory environment and Corzine's connections one has to think that he has an advantage especially considering MF has no target on them like GS or MS.



Statements from MF suggesting all is well:


  • As of June 30, MF Global had exposure to about $6.4 billion of securities, net of hedging, to Italy, Spain, Belgium, Portugal and Ireland with a weighted average maturity of October 2012, according to a regulatory filing in August.
  • The portfolio is “sound and well structured,” MF Global said today in a statement. All of the European government securities mature by December 2012 before the expiration of the region’s rescue fund, the European Financial Stability Facility, the company said.
  • “We are confident that we have the resources, capital, liquidity and expertise to successfully manage our European exposures to their end date maturity of December 2012,” Diana DeSocio, a spokeswoman for MF Global, said in the e-mailed statement. “The maturity characteristics, ratings profile and European support facility for lower rated credits reinforce our view that that the portfolio is sound and well-structured.” 


Disclosure: Long MF. 

 10/25 Update: Nice call. NOT! MF plunged 47% today. Should've gotten out at the open but made the classic mistake of turning a trade into an investment. The action today was unwarranted. The report was no worse than what GS produced. Considering the open of around down 10% it appears that most of the fears surround the $6.3B exposure to European debt. Considering the maturity and known of it is Greece, the market has gone crazy here. Will look to add to the position as the market stabilizes. 



10/26 Update: After another 40% drop this morning, we added more to our position in the $1.26 range. Book value remains at $7 and the European debt risk is nothing like the subprime real estate. Subprime had 80, 90% losses while the debt of Italy, Spain, Belgium only risks a 10-20% haircut in the worse case scenario especially over the next 12 months. The risk is not similar though the market has reacted the same. 


C&J Energy Services Signs Deal for Sixth Hydraulic Fracturing Fleet

C&J Energy Services (CJES) now has a two-year contract for its sixth hydraulic fracturing fleet to be deployed in December to the Permian Basis. While not disclosing the customer, it is supposedly a large independent E&P company.

The 6th fleet comprises 32,000 hp and will evidently be deployed mostly into two 16,000 hp fleets for vertical completions.

Other than that, CJES didn't provide many details. It is still on schedule for Fleets 7 and 8 in 2012. Considering the company just deployed Fleet 5 in Q3, it remains on pace for significant growth going into 2013.

On the flip side though, the stock has been amazingly weak since the IPO at the end of July.  This action remains puzzling considering CJES easily surpassed Q2 estimates and is expected to earn above $4 in 2012. Considering it just signed another 2 year contract, I'm not sure what the market is so concerned about. With the stock trading at just over $17, it is definitely one worth watching and possibly adding to any portfolios.

Anybody interested can view the Market Pulse feature on Yahoo! Finance to see exactly how much stock our models own of CJES or any other stock mentioned on this blog. As of Friday, it shows a 9.4% position in our Opportunistic Arbitrage model on Covestor.

Maybe noteworthy of how under followed this IPO has been is that nobody has posted on this stock via Market Pulse.


Disclosure: Long CJES. Please review the disclaimer page for more details. 




4 Stocks That Could Reclaim July Highs

After a summer of watching the markets tank-- especially in the global growth sectors, the economic news and earnings reports clearly haven't backed up the market dive. This apparent fear of a 2008 repeat without the matching reality got us to thinking about what would happen if stocks reclaimed prices prior to the summer swoon. Nothing aggressive like 52 week highs or even all time highs, just a simple recent stock price that the numbers suggest shouldn't have been thrown away.

Considering numerous high fliers and leading dividend stocks were able to maintain prices at 52 week highs, why couldn't others recapture those recent highs? In some cases, levels not even close to 52 week highs.

Read the full article at Seeking Alpha.


Disclosure: Long HIG, RVBD, TEX, WFT. Please read the disclaimer page for more details. 



Friday, October 21, 2011

Great Interview with Liz Claiborne CEO

As we wrote earlier this week  on Seeking Alpha [Liz Claiborne Transformation Complete: A Look at Whats Left], the transformation at Liz Claiborne (LIZ) is now complete. CEO William McComb went on CNBC this morning to discuss the transformation and the remaining brands.

LIZ remains one of the top picks in our Opportunistic portfolios and especially in the retail sector. Most investors have not caught on that LIZ just turned into a growth company with great comps from kate spade and Lucky Brands. Juicy Couture is still struggling, but any turn around would just 'juice' the growth profile anymore. Not to mention, LIZ dramatically reduced the capital structure by using the proceeds from the sell of Liz Claiborne and various other brands to reduce the outstanding debt.

Those 100% comps at kate spade are just mind blowing. Investors might just eat that up.

Our pick for the new name is still Lucky spade!






Disclsoure: Long LIZ. Please review the disclaimer page for more details. 


Net Payout Yields Updates

Below are a few updates on the net payout yields of companies in our model that just reported. Always interesting to see what a company did with stock buybacks during a very weak stock market.


Chubb (CB)

CB reported Q3 numbers after the close on Thursday. The company continues to reduce the outstanding shares as the count has dropped by 30M shares or roughly 10% in the last year.

CB was active in the quarter buying roughly 2.5% of the outstanding shares and more impressively at prices over $5 below the current market value of $65.35. Also, the 8M shares repurchased was an increase from the average in the first six months of below 7M a quarter.

With a buyback yield of roughly 10% combined with a 2.5% dividend yield, CB maintains a very appeals 12%+ net payout yield.



  • During the third quarter, Chubb repurchased 8.0 million shares of its common stock at a total cost of $480 million (an average of $59.97 per share).  As of September 30, 2011, there were 6.9 million shares of common stock remaining under the current repurchase authorization.
  • Average diluted shares outstanding for the third quarter were 287.8 million in 2011 and 317.3 million in 2010.
  • During the first nine months of 2011, Chubb repurchased 21.6 million shares of common stock at a total cost of $1.3 billion (an average of $61.24 per share).





Microsoft (MSFT)

Also reported after the close on Thursday. MSFT repurchased $1,934M worth of stock but issued $336M worth of stock for a net $1.6B. A lot of cash for normal companies but not overly impressive for a market cap north of $220B. It also comes as a dramatic drop from the $4,339M bought back last year with a net $4,222M.

Maybe MSFT is holding back with the purchase of Skype and the rumored potential deal for Yahoo (YHOO). Otherwise, these numbers are disappointing considering the opportunity of weak equity markets in Q3.

Regardless, these numbers place MSFT as the very low end of attractive net payout yields at around 6%.  The dividend yield at 2.9% will attract many investors. Unfortunately a good yield is no longer good enough for our model where yields can easily surpass 10% these days.


Disclosure: Long CB and MSFT (will likely sell within the next 72 hours). Please review the disclaimer page for more details. 




Thursday, October 20, 2011

Surging Utilization at United Rentals Bullish for Construction Equipment Providers


United Rentals (URIreported record margins and utilization rates after the close yesterday. Though construction demand in the US remains weak, URI continues to report record numbers. Earnings of $.92 easily beat estimates of $.76.
Rental revenue increased 19% year-over-year due mainly to a 15% increase in volume. Time utilization was 73.5% and a record for the company. At that level, the company has very little down time for the large construction and industrial equipment it rents to construction and industrial customers, utilities, municipalities, homeowners, and others.

Read full article at Seeking Alpha. 

Disclosure: Long TEX. Please review the disclaimer page for more details. 


Wednesday, October 19, 2011

Amazing Numbers From Riverbed Technology

Riverbed Technology (RVBD) just reported numbers that were truly amazing. Not for the level that they beat estimates, but more for the fact that analysts spent the 90 so days since the last earnings report downgrading the stock and lowering estimates. In turn, RVBD beat the original estimates. Makes one just wonder what analysts do all day. Apparently they sit around and dream op scenarios that just aren't true.

These results back up our theme that many stocks have been unfairly punished since July highs. RVBD in escense has a double top in July around $42 and the stock traded just north of $22 today. How does a stock drop 50% when earnings actually grew faster than expected?

RVBD reported record margins, operating profit, and net income. It earned $.24 versus the reduced estimates of $.21. Revenue came in at $191M versus $185M estimate.

Guidance for Q4 was $.24 to $.25 at revenue levels around $200M. Solid numbers generally above estimates that likely will be exceeded easily. Wouldn't expect anything less than $.26.

Worth noting is that it bought back $20M worth of shares and generated $90M of operating cash flows. Not a bad use of cash considering the weak stock prices in Q3.



Q3’11 Financial Highlights


  • Total non-GAAP revenue grew 29% year-over-year to $191 million
  • Product revenue grew 28% year-over-year to $132 million
  • Non-GAAP service revenue grew 30% year-over-year to $59 million
  • Record non-GAAP gross margin of 79.0%, compared to 78.0% in Q3’10
  • Record non-GAAP operating profit of $57 million, increased 38% year-over-year
  • Record non-GAAP operating margin of 30.1%, compared to 28.1% in Q3’10
  • Record non-GAAP net income of $40 million, increased 51% year-over-year
  • Deferred revenue grew 37% year-over-year to $148 million
  • Non-GAAP net income for Q3’11 was $40 million, or $0.24 per diluted share, as compared to non-GAAP net income for Q3’10 of $27 million, or $0.17 per diluted share. 
  • exited the period with $559 million in cash and investments after repurchasing $20 million of Riverbed shares and paying out $120 million for acquisitions           


Disclosure: Long RVBD. Please review the disclaimer page for more details. 


Tuesday, October 18, 2011

Apple Guides Above Street Consensus

Though the stock is trading down some 5% in after hours due to a rare earnings miss from Apple (AAPL), anybody with a half full mindset will see a more bullish stance after hearing the conference call.

iPhone sales were very disappointing at only 17M which was below consensus closer to 20M. Here is where the debate begins. AAPL has already reported the strongest launch of a new iPhone model at over 4M for the first weekend. The CFO made it clear that demand waned as rumors began circulating that AAPL would release the iPhone5 in September or October. Why buy a 4 when the price will drop after the release of the newest model?

So bears can fret over the weak Q4 numbers and bulls can relish that the going forward numbers will remain strong. Actually, it's hard to understand the bear case considering the past of AAPL. The iPhone4S had a monster launch so isn't it without a doubt that the new model launch caused the problem?

Oh well, the market doesn't work that way. Bears like to press shorts where any doubts exist. They'll press the fact that Jobs death is the new factor and the future numbers just can't be assumed. Ultimately investors looking beyond a few hours will focus on AAPL guiding above consensus for the first time in years. Not to mention that the stock trades below a EV of 10x earnings. One would think shorts would be scared to short such a cheap cash generator.

Just don't count on a company with a record launch at the start of the year end quarter heading for any long term declines. Any significant dips should be used as an opportunity to load up on the premier US company.


Per AAPL PR:


  • posted quarterly revenue of $28.27 billion and quarterly net profit of $6.62 billion, or $7.05 per diluted share. These results compare to revenue of $20.34 billion and net quarterly profit of $4.31 billion, or $4.64 per diluted share, in the year-ago quarter. 
  • Gross margin was 40.3 percent compared to 36.9 percent in the year-ago quarter. International sales accounted for 63 percent of the quarter’s revenue.
  • sold 17.07 million iPhones in the quarter, representing 21 percent unit growth over the year-ago quarter. 
  • sold 11.12 million iPads during the quarter, a 166 percent unit increase over the year-ago quarter. 
  • sold 4.89 million Macs during the quarter, a 26 percent unit increase over the year-ago quarter. 
  • sold 6.62 million iPods, a 27 percent unit decline from the year-ago quarter.     
  • “We are extremely pleased with our record September quarter revenue and earnings and with cash generation of $5.4 billion during the quarter,” said Peter Oppenheimer, Apple’s CFO. 
  • “Looking ahead to the first fiscal quarter of 2012, which will span 14 weeks rather than 13, we expect revenue of about $37 billion and we expect diluted earnings per share of about $9.30.”     


Disclosure: Long AAPL. Please review the disclaimer page fore more details.





China Growth Remains Strong Over 9%

As every pundit in the media wants to fret over 'slowing' growth at China, it makes us ponder why investors aren't happy getting the medicine that the doctor orders. Just earlier this year everybody though China was growing too fast and inflation was becoming a problem. What gives now that the government has engineered a soft landing?

The latest report shows that China GDP grew by 9.1% in Q3 after 9.5% in Q2 and 9.7% in Q4. This after inflation reported last week dropped to 6.1% for September down from the summer peak of 6.5%. Inflation is expected to drop further as commodity prices drop comparisons peak. China as inflation dropping faster than GDP providing for an ideal investing scenario.

Other encouraging news, September retail sales rose by 17.7% and industrial output rose by 13.8% both above estimates and suggesting that Q3 ended on a high note.

From the data, it's difficult to understand the hard landing fears. For a country full of savers, rising interest rates have actually increased incomes. Just the opposite of how lower interest rates tend to spur investment in the US as we are a country of spenders.

The US markets have rebounded strongly this afternoon. Whether it's from a technical bounce off the 50ema or realization that China growing at 9.1% after a induced slowdown is actually bullish. Investors seem to forget that China has the firepower to speed up growth if warranted.

Material and industrial stocks are the most appealing after being crushed this summer. Some of the China internet plays are very attractive though accounting fears continue to linger so investors have to be careful. Even Brazilian stocks are attractive as investors fret a slowdown in China will hurt the mining economy.

Per CNBC article:
  • GDP grew 9.1 percent from a year earlier, the third consecutive quarterly slowdown in growth after 9.5 percent in the second quarter and 9.7 percent in the first.

  • But other figures on Tuesday suggested the domestic economy was growing healthily. Fixed-asset investment, the main driver of growth in world's second-biggest economy, and retail sales were stronger than expected.
  • Countering the impact of the global slowdown, fixed-asset investment in the first three quarters of the year chalked up annual growth of 24.9 percent, slightly ahead of forecasts of 24.8 percent.
  • Retail sales rose 17.7 percent in September from a year earlier, topping forecasts for a rise of 17.0 percent.
  • Indeed, industrial output in September rose 13.8 percent, above forecasts for an increase of 13.3 percent, suggesting the third quarter ended on a slightly upbeat note.
  • "Although economic growth has moderated slightly, it's still stable," Sheng Laiyun, spokesman at the National Bureau of Statistics, told reporters after the data release, dismissing the risk of a sharp deterioration in the economy.

Disclosure: No positions mentioned. Please review the disclaimer page for more details. 



Liz Claiborne Transformation Complete: A Look At What's Left

Last Wednesday, Liz Claiborne (LIZ) announced numerous transactions that not only generated $328M in cash to drastically reduce debt, but most importantly, greatly reduced the complexity of the brand focus ending years of transforming the company.

The press release highlights just how complex the structure remained even after years of selling off brands. LIZ sold the namesake brand Liz Claiborne and Monet to JCPenny (JCP), Dana Buchman to Kohl's (KSS), terminated a license for DKNY, and sold three more minor brands to Bluestar Alliance. This was on top of the joint venture for MEXX and the Elizabeth Arden transaction recently announced . It also doesn't include numerous other brands sold off over the last 3-4 years of streamlining the focus of the company.

Read the full article at Seeking Alpha.


Disclosure: Long LIZ. Please review the disclaimer page for more details. 





Sunday, October 16, 2011

Kinder Morgan Buying El Paso for $21B

Interesting surprise when checking the financial news on a lazy Sunday afternoon. Kinder Morgan (KMI) agrees to buy El Paso (EP) for over $21B. The deal provided a 37% premium to the closing price on Friday. It also amounted to 20%+ above the 52 week high.

Numerous interesting facts about this deal. First, this deal involves natural gas pipelines at a time that nat gas prices remains in the dumps. Second, KMI was willing to pay such a premium over the 52 week high when most investors have fled the markets. Third, KMI was recently re-joined the public markets in February after a nearly four year haiedus.

The combination will form the largest natural gas pipeline network in North America. It also creates the fourth largest energy company in North America with an enterprise value of $94B. Even more importantly, the deal with be cash flow accretive from the beginning.

The deal also provides approximate cost savings of $350M per year amounting to 5% of EBITDA. So again another reason for being an investors and not a employee.

While not particularly interesting to the portfolios run by Stone Fox Capital, it is beneficial to see one of the smartest energy guys in the world willing to pay up for assets. Richard Kinder is definitely one worth following.  Clearly he sees the country converting to more and more natural gas usage.

More details on the merger:


  • The total purchase price, including the assumption of debt outstanding at El Paso Corporation and including the debt outstanding at El Paso Pipeline Partners, L.P. (NYSE:EPB - News) is approximately $38 billion.
  • The consideration to be received by the EP shareholders is valued at $26.87 per EP share based on KMI’s closing price as of Oct. 14, 2011, representing a 47 percent premium to the 20-day average closing price of EP common shares and a 37 percent premium over the closing price of EP common shares on Oct. 14, 2011. 
  • The offer is comprised of $14.65 in cash, 0.4187 KMI shares (valued at $11.26 per EP share) and 0.640 KMI warrants (valued at $0.96 per EP share) based on KMI’s closing price on Oct. 14, 2011. The warrants will have an exercise price of $40 and a five-year term.     


  • Largest owner and operator of natural gas pipelines and storage assets in North America with approximately 67,000 miles of natural gas transportation pipelines. Pipelines are connected to many important natural gas shale plays including Eagle Ford, Marcellus, Utica, Haynesville, Fayetteville and Barnett. Largest provider of contracted natural gas treating services and significant other midstream gathering assets.
  • Largest independent transporter of petroleum products in the United States, transporting approximately 1.9 million barrels per day of gasoline, jet fuel, diesel, natural gas liquids and crude oil through more than 8,000 miles of pipelines.
  • Largest transporter of CO2 in the United States, transporting 1.3 billion cubic feet per day. Carbon dioxide is used in enhanced oil recovery projects.
  • Second largest oil producer in Texas, producing over 50,000 barrels per day.
  • Largest independent terminal owner/operator in the United States. Liquids terminals have capacity of 107 million barrels and store refined petroleum products, ethanol and more. Dry bulk terminals are expected to handle over 100 million tons of materials in 2011, including products like coal.
  • Only oilsands pipeline serving the West Coast. The Trans Mountain pipeline system transports 300,000 barrels of crude oil per day to Vancouver, B.C., and Washington state.       


Disclosure: No positions. Please review the disclaimer page. 


Friday, October 14, 2011

Investment Report - October 2011: Opportunistic Levered

The best thing about the 3rd quarter is that it finally ended. The global growth stocks in this model were absolutely crushed while large cap dividend stocks held up much better than in 2008. This led the model to seriously underperform the benchmark.

The good news is that many stocks in the model such as Alpha Natural Resources (ANR), Foster Wheeler (FWLT), Hartford Financial (HIG), and Terex (TEX) reached levels similar and as attractive as the 2009 lows. Considering most of the companies have seen little to no impact from the financial crisis in Europe, the sell off was unwarranted.

The bad news is that risk still remains that the European Union will be unable to solve the crisis before it implodes or that China's economy might have a much feared hard landing. A good chance exists that the market has already priced in either outcomes. Being that the model remains highly leveraged in order to take advantage of the cheap valuations, the risk of more downside can not be ignored.

In summary, it has been a very disappointing few months to see equity prices implode after so much progress had been made in the recovery off the 2009 lows. For investors not in the market yet, this provides an opportunity to enter at more compelling prices. Indications exist, that the substantial declines were more from a panic of a repeat of 2008, than the reality. Many indicators reached 2008/09 inflection levels suggesting the panic might of run its course by the end of September.

The model remains committed to taking advantage of the opportunities presented.


Disclosure: Long ANR, FWLT, HIG, TEX. Please review the disclaimer page for more details. 




Wednesday, October 12, 2011

Huge Reversal in the Shanghai Market Last Night

For months now, the weakness in the Chinese stock market has hampered any recovery in US. The fears of a hard landing in China added on top of a EU blowup has just been too much for the markets.

After a week long holiday, Mondays' lame action in the Shanghai Composite was seen as very disappointing. Investors were hoping that the major reversal in the US markets last Tuesday would lead to a major rally, but instead nothing happened. Then, Tuesday was very volatile. Finally on Wednesday, the Shanghai started up down and then had a strong rally. The bullish engulfing pattern is typically a very bullish reversal.

Tonight will be telling as even positive market action would be the first positive confirmation since July when the market traded above the 10ema. The CPI numbers come out Thursday night and that will definitely move the markets. Inflation has been the biggest fear with China. The August numbers cooled down and September should follow as commodity prices imploded during the month.

Below is a chart showing the last 8 months on the Shanghai Composite. It peaked 600 points higher or 25% from here back in April. Many stocks owned in our models benefit from China growth so a big reversal in this market would be huge.




Sears Holdings Reclaiming July Levels

Sears Holdings (SHLD) is up nearly 8% today due to the strong market and probably the positive comps news from WalMart (WMT). So far nobody is giving Stone Fox Capital credit for this jump like a few weeks back. Back then Barron's blog and others specifically suggested this Seeking Alpha article led to the huge gains in SHLD. Guess our 15 minutes of fame are up already. 

Incredibly SHLD has nearly closed the gap from the July highs. The stock mostly traded in the $75 range that month, but it did have a spike to $80. Currently trading around $72.75 puts it just a few bucks below that $75 resistance level. 

This theory of comparing a stock to the July highs is going to be a theme of ours for the rest of the year. Based on recent economic news, it is becoming more and more apparent that most if not all the drop since July 1st was pure panic about a financial crisis that isn't going to happen. In addition, China had a major reversal in its markets (more on that in another post) last night suggesting that the hard landing fear might be over as the government comes in to support the markets now. 

SHLD broke above the 200ema today signaling future gains. As mentioned in the article, SHLD remains an attractive investment as they continue to monetize brands and lease real estate. This might just be the start though expect some pullbacks as the CCI reaches an extended 200 and the RSI hits 70. 





























Disclosure: Long SHLD. Please review the disclaimer page for more details. 


Tuesday, October 11, 2011

Complete Production Services Buyout Pushes Us Back Into C&J Energy Services


Early Monday morning, Superior Energy Services (SPNagreed to mergewith Complete Production Services (CPX) by paying a 61% premium over Friday's selling price. According to the press release, the combination creates a premier diversified mid-cap oilfield services company.
In essence, SPN wanted scale in order to compete successfully with the likes of Haliburton (HAL) and Schlumberger (SLB) in the fast growing hydraulic fracturing market in the US and enhanced size to grow internationally. Not to mention that the huge sell-off in CPX stock over the last few months provided an attractive entry point. CPX peaked over $42 in July and hasn't even cracked above $30 with this huge premium offered.

Read the full article at Seeking Alpha.



Disclosure: Long CJES. Please review the disclaimer page for more details. 


Monday, October 10, 2011

Radware Refines Guidance Within Previous Range

Somehow I missed this, but last week Radware (RDWR) refined guidance to within the previous range. of $42-43M in revenue and $.33 to $.34 in earnings. This cuts off the higher end of the previously range, but clearly the market had no expectations for RDWR hitting those numbers.

The numbers are actually higher than the estimates provided by Yahoo! Finance and are still supportive of strong growth. 

RDWR is a leader of application delivery and application security solutions for virtual and cloud data centers. The stock remains one of the cheapest technology companies and a solid investment in our Opportunistic models. 

The company also announced a $20M stock repurchase (this was the part we saw last week). With a market cap of only $475M now, $20M does provide for a decent percentage of the outstanding shares, but it's not how we prefer small cap techs too spend money. 


Per the RDWR PR:
  • the company refined its expectations for its third quarter 2011 results to be within previously provided guidance. Quarterly revenues are expected to range between $42 to $42.2 million for the third quarter of 2011 within previously provided guidance of $42 to $43 million and Non-GAAP EPS is expected to range between $0.33 to $0.34 per diluted share within previously provided guidance of $0.33 to $0.35.
  • announced that its board of directors has authorized a share repurchase plan allowing the repurchase of up to $20 million of ordinary shares.


Disclosure: Long RDWR. Please review the disclaimer page for more details. 


Dow, Saudi Aramco to Build Massive $20B Chemical Facility

On Saturday, Dow (DOW) and Saudi Aramco signed the Joint Venture agreement to create Sadara Chemical company. Sadara will be a $20B project comprised of 26 manufacturing untis, several of which constitute "mega projects". The complex will be one of the largest integrated chemical facilities and the largest ever built in one single phase. 

The plan is for the facility to take advantage of the cheap feedstock from Aramco and combine that with DOWs chemical expertise. Also, it will take advantage of cheap labor in Saudia Arabia. 

This project was originally discussed in 2007, but eventually delayed due to the financial crisis. 

It should be a boon for Engineering & Construction companies such as Flour (FLR) and possibly other like Jacob's Engineering (JEC) and Foster Wheeler (FWLT). FLR already has $1.9B contract for connecting all the utilities for the complex, but all companies in the sector will benefit as the project soaks up industry capacity. 

Would imagine that construction equipment companies such as Caterpillar (CAT) and specifically crane makers Manitowoc (MTW) and Terex (TEX) will benefit as demand bounces back in the Middle East. 

The project is supposedly going forward already as the site is being prepared for initial construction of a mixed feed cracker. 

Considering the implications from the 2007 delay this could further indicate that not only is the recession fears over blown, but global growth demand has now created pent up demand. Will be interesting to follow. 

Per DOW PR:


  • Today’s event is another major step forward for Sadara, which will be comprised of 26 manufacturing units, several of which constitute “mega projects” in themselves. Once complete, the JV complex will be one of the world’s largest integrated chemical facilities, and the largest ever built in one single phase. Saudi Aramco and Dow announced their respective Board authorizations to form the JV on July 25, 2011.
  • Just over 100 kilometers from where Al-Falih and Liveris signed the agreement, bulldozers, graders and rollers are proceeding with site preparations on the world-scale, mixed feed cracker, which will be integrated with Saudi Aramco’s extensive hydrocarbon infrastructure.
  • “Sadara is an extraordinary and unique venture that will build upon the strengths of both Dow and Saudi Aramco to deliver the diversified and specialty materials and chemicals needed to drive growth in the entire region and beyond," said Andrew Liveris, Dow’s Chairman and Chief Executive Officer.     
  • Sadara is expected to deliver annual revenues of approximately $10 billion within a few years of operation while contributing significantly to Saudi Arabia’s industrial diversification. The planned product portfolio will add value chains to the Kingdom’s vast natural resources and complement the existing chemical landscape. Ultimately, the JV will be instrumental in Saudi Arabia’s strategy to become not only a strategic chemicals and plastics producer, but also a hub for future downstream manufacturing.     


Disclosure: Long FWLT, MTW, and TEX. Please review the disclaimer page for more details. 






Friday, October 7, 2011

Investment Report - October 2011: Net Payout Yields

September was another decent month for the Net Payout Yields model with a return vs. benchmark of 3.46% - the portfolio was down 3.72% while the S&P500 fell 7.18%. Naturally on an absolute basis the results are disappointing, but this model is not designed to time the markets. The goal remains to outperform on the way down and remain even on the way up, in the effort to produce superior returns over time. For 2011, the model remains roughly 7.0% higher than the benchmark. As of the end of September, year to date the model was down 2.92% while the S&P500 fell 10.04%.

Trades
The model was inactive for the second month during September as the weak market increased the yields and hence the valuation attractiveness of most of the equities in the model. A few stocks though have recently reached new 52 weeks highs causing the yields to decline. For example, Bristol-Myers Squibb (BMY) has seen the dividend yield drop to 4% and without a buyback the Net Payout Yield (NPY) has reached below normal yields in the model. 

Top Performers
The best performing stocks in such a weak stock market were naturally the healthcare, consumer staples, and utility stocks. As mentioned, BMY hit 52 week highs during the month with a 5% gain. Other big gainers included WellPoint (WLP) up 3.5%, Entergy (ETR) up 3%, FirstEnergy (FE) up 2.8%, and Campbell Soup (CPB) up 1.6%. 

Bottom Performers
Naturally in such a weak market the bottom performers were stocks tied to global growth. The five worst performers had declines of over 13%. Vale (VALE) had the largest drop at over 17% while Hartford Financial (HIG), CSX (CSX), Capital One Financial (COF), and Itau Unibanco Holding (ITUB) all had losses between 13 and 15%. 

Conclusion
The market has seen significant weakness over the summer, but this model has held up well leaving investors in a good position to rebound with any fall rally. Also since a few sectors held up well, the model has the ability to rotate into weaker sectors that are now yielding more. 

Dividend paying stocks have held up much better during this market selloff than during 2008. Whether it's due to stronger balance sheets this time or that investors have been rotating to dividend paying stocks  that yield more than government bonds, these stocks still remain very attractive. Large companies continue to  announce large buybacks and increased dividend yields as opposed to the cutbacks during 2008 and 2009 suggesting an economic outcome better than most think. Regardless, this model solely focuses on the highest yielding large caps and will continue looking for opportunities to rotate into even higher yielding stocks than what the model currently owns. 




Disclosure: Long all stocks mentioned. Please review the disclaimer page for more details. 



Monster European Employment Index Up 18%

The Monster Employment Index Europe demonstrated year-over-year growth of 18 percent. Thought Europe was headed to a massive recession? Ok, the index is actually flat to down since peaking at 140 in June. Clearly the trend is not optimal, but it's not as dire as most in the media would suggest.

The top growth areas were Engineering, Manufacturing, Transport, Telecommunication, and Real Estate. Clearly Europe lacks the mining and oil exploration growth that the US is seeing. This has and will be a major hamper to their economy as growing commodity prices can't be escaped via production increases.

The regional data is much more telling. Germany continues to soar up 37% YOY while all other regions have seen major declines since June. Even Belgium, France, Netherlands, and Sweden have seen declines. Not surprising to see Italy drop, but it does highlight why Germany wants the European Union to survive. The weakness in the other European countries is holding down the euro and making it more attractive for German exports. Without that weakness, Germany's currency would be soaring and their exports wouldn't be competitive.

Monster Worldwide (MWW) has been a recent addition to our model portfolios as the stock was crushed during the first part of 2011 yet employment trends remain positive.


             
Disclosure: Long MWW. Please review the disclaimer page for more details. 


Thursday, October 6, 2011

The Alpha Wildcatter

Forbes has a fascinating story about Chesapeake Energy CEO Aubrey McClendon. His risk taking has made Chesapeake Energy (CHK) into the 2nd biggest producer of natural gas in the US and the largest land owner in the prolific shale plays in the US.

Unfortunately his level of risk taking has made investors shy away from the stock. Reading the detailed Forbes article makes a normal investors head spin. All the joint ventures, hedging, VPPs, and oil services make it very complex for an investor to understand the risks involved in an investment which will likely depress the stock in the future.

As skeptics point out, this all sounds eerily close to Enron though probably not fair. CHK is just the opposite in that it is actually hedging and selling production it owns. Building up land positions in shale areas and selling a portion for a profit is very smart. Sure beats the majors sitting around and missing the opportunity completely.

What actually scares me is that McClendon appears a lot more like WorldCom's Bernie Ebbers. Always wheeling and dealing whether within the business or outside via farmland, wine, or art. As a WorldCom employee that lived through the rise and fall of Bernie, the similarities are stark. The ultimate similarity was the willingness to take huge risk of buying the companies stock with borrowed money. Both seem to think the business can grow forever that they don't know when to stop. Why would anyone take such risks as a billionaire is beyond me?

McClendon has become so successful that he is forcing natural gas prices too depressed levels in the US. Sure it will spur demand, but at what price and when? CHK has all these leases to drill now and demand might be years away. Has CHK just pushed up acreage prices while pushing down nat gas prices? If it finds another nat gas shale play should it pounce on the opportunity or just keep it quiet hoping to buy cheaper later. After all, it isn't likely that gas pries rise until 2013 or 2014.

Whats so great about the Marcellus Shale at $3.5 nat gas? It can't be shipped to foreign markets to collect much higher prices and nat gas apparently is abundant now. The liquid plays like the Eagle Ford shale and potentially the Utica shale hold immense value now. CHK should've kept all the Eagle Ford assets and avoid a partner in the Utica shale as oil prices are likely to stay high for a long time as the global demand for oil increases.

Read the article for now. The stock on the other hand needs more research. CHK is a fascinating story on value creation, but the riskiness of the assets are concerning. Ultimately the success of McClendon might be his undoing as demand might never grow with the supply creation. This is a potentially bad situation for a risk taker being ahead of the market.


Disclosure: No position mentioned. Please review the disclaimer page for more details.



Corning Ups Net Payout Yield Potential

Always looking for companies with high Net Payout Yields (NPY) potential, Corning (GLW) threw their cap into the ring last night. Remember that NPY is the combination of dividends and net stock buybacks. Stock buybacks continue to be ignored by most investors when considering the yield equation. Top companies only pay out roughly 30% of the yield via dividend these days.

GLW announced that the dividend would be increased 50% and that a stock buyback program of up to $1.5B through the end of 2013. This brings the dividend yield up to a solid 2.5%. With any decent contribution from buybacks, the total yield or NPY could jump into the 5-6% range. Now it needs to jump higher than that to make our portfolio that has many stocks exceeding 10% yields. Though a 5% yield would have to be attractive in this market of low interest rates.

According to the corresponding statement from GLW, lower capital spending in 2012 will drive up cash flow prospects. Accordingly this might signal that most of the buybacks will be a 2012 story. This isn't good for our portfolio's thesis that only invests in companies that actually buy stock, but it does signal future potential considering GLW hasn't bought stock recently if ever (Smartmoney.com only shows the last 5 quarters).

This move also highlights the difference between 2008 and now. GLW is highly leveraged to global growth and instead of burying their head in the sand, it is moving forward with plans to enhance shareholder value. In 2008, company after company lowered dividends which isn't the case this time around.

For more information on our Net Payout Yields model, please visit the Portfolio Management section of our website:


Per GLW PR:

  • declared a 50% increase in the company’s quarterly common stock dividend. Corning’s quarterly dividend will rise to $0.075 per share of common stock held, versus $0.05 per share previously. The fourth-quarter dividend will be payable on Dec. 16, 2011 to holders of record Nov. 16, 2011.
  • The board also authorized a stock repurchase program for purchasing up to $1.5 billion of the company’s common stock from time to time through open market or private transactions. The stock repurchase authorization expires at the end of 2013.     
  • “We believe our future free cash flow prospects are excellent, driven by business performance and lower capital spending starting in 2012, as some major projects are finished. Corning’s board also is committed to using the company’s free cash flow going forward to enhance shareholder returns,” Weeks explained.    


Disclosure: No positions. Please review the disclaimer page for more details. 


Is Acme Packet's Bad News Actually Good News?

After the bell Tuesday, Acme Packet (APKT) reported disappointing numbers for Q3 due to the delay of a major order until Q4. The company actually reaffirmed guidance for 2H making us ponder whether the supposed bad news is actually full of good news.

The stock has already been cut in half since the April $84.50 high yet the worse it can offer the market is that one of the top two service providers in the U.S. delayed a major order until the first part of Q4.


Read the full article at Seeking Alpha.


Disclosure: No positions mentioned. Please review the disclaimer page for more details. 


Wednesday, October 5, 2011

Why This Isn't 2008 FCX Style

Most people either love or hate Jim Cramer, but they're making a mistake to just ignore his research. Last night Cramer had a great example of why 2011 will not be a repeat of 2008. Corporate balance sheets are much stronger now. For the most part, companies have shored up their balance sheets with the massive profits in 2010 and so far in 2011.

Freeport McMoRan (FCX) is no exception to that common thought process. In the video below, he highlights the massive shift from a large net debt position in 2008 to a positive cash position now. So while FCX was forced to cut the dividend in the midst of the 2008 market crash now it might just increase the payout as it keeps earning loads of cash.

Naturally this is just one focus point in a market with thousands of data points, but the vast majority of companies are in the same position. Record profits combined with tepid spending and hiring leaves companies in positions where they don't have to cut back spending, fire employees, or cut dividends. The opposite is actually happening where firms are increasing buybacks contrary to vast drop off in buybacks during 2008/09.





Disclosure: Long FCX. Please review the disclaimer page for more details. 



Are Sizzling Utilities Too Hot To Handle?

My utility holdings are making me nervous. First, utility stocks like Southern Co (SO), FirstEnergy (FE), Dominion Resources (D) and American Electric Power (AEP) have hit recent 52-week highs, with some even hitting all-time highs. Second, market analysts have become more bullish on the sector, making me more concerned the sector is too popular.

The main reason for the recent strong performance of the sector is that high-dividend-paying stocks are in favor with government bond yields at historical low rates. Combine the yield with the relative security of the sector, and the stocks have held up in this weak market.


Read full article at Seeking Alpha.



Disclosure: Long FE. Please read the disclaimer page for more details.