Wednesday, November 30, 2011

Cramer on China's Game Changing Reserve Ratio Cut

Haven't been a big fan of Cramer lately, but I 100% agree with his opinion on the cut in the reserve ratio for China banks. This is a game changer for China as the economy was beginning to show signs of slowing.

China is clearly at the beginning of the interest rate cuts. Our favorite stocks to play the reemergence of China include coal producer Alpha Natural Resources (ANR), copper producer Freeport McMoRan (FCX), crane producer Terex (TEX), oil service company Weatherford (WFT) and ChinaCache (CCIH).







Disclosure: Long ANR, FCX, TEX, WFT, CCIH. Please review the disclaimer page for more details.


Disturbing Videos on the Market

Most people will probably find these videos normal. In fact, one can probably see similar clips 100x a day.

What disturbes me is how the media has become so conditioned to a down market. How the Bloomberg reporter almost appears uncomfortable interviewing a bullish guest. One that uses a proprietary system to trigger when he is bullish or bearish. Not a raging bull that never flips depending on the market conditions.

The other video is disturbing because the host and the analysts appear to blow off todays rally as if its all smoke and mirrors. They have a very strange mindset that stock markets never goes up. Not one of fighting history. True the market could slump in 2012 before the inevitable rally. Does anyone doubt that it will eventually be higher whether 2013, 2015, or 2020? An likely much higher considering the current PE ratios and earnings will undoubtedly continue ramping year after year.


Don Hays on Bloomberg:




FastMoney analyst Louise Cooper:




Sure Denis Gartman has turned bullish, but the rest of them are very depressing.

Transocean: When Dividends Fail

Transocean (RIG) used to be regarded as the top deepwater driller in the world. Its stock was considered a must-wn large cap in the energy sector. All that changed for the worse with the dramatic blowout of the Macondo well in 2010.

Unfortunately, what seemed like an isolated event was just the beginning of a downward spiral for shareholders. Since then RIG continues to have problems meeting analyst estimates. On top of that, RIG just announced a shocking share issuance of up to 30M shares that pushed the stock down to 7 year lows. Yes, lows greater than from the financial crisis of 2008 and lows greater than 2010 lows after the explosion. Both those lows were eclipsed.

How can Brent oil exceed $110 and a former premier driller be making a run at new lows? Other drillers such as Noble Drilling (NE), Atwood Oceanics (ATW), and SeaDrill (SDRL) are all currently attempting to claw their way to 3 year highs.


Read the full article at Seeking Alpha.


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



Monday, November 28, 2011

Panera Bread Hits All Time High

Amazing to see a stock liftoff to a all time high in this market, but Panera Bread (PNRA) achieved that feat today. After a rocky summer, PNRA has rocked higher. The below 3 year chart sure suggests how individual stock picking can easily beat index funds.

Of course this isn't a stock that I've ever owned. PNRA has never seemed like the stock with a catalyst for this type of growth nor one worth a 25 forward PE, but clearly I've been very wrong.

Congrats to all the longs that have held on. While all the high flying internet stocks especially the recent IPOs like Groupon (GRPN) have been crushed, PNRA keeps creeping higher.

Very impressive chart.






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


Impressive Though Interesting Guidance from Seagate Technology

After hours, Seagate Technology (STX) provided a financial update that included dramatically raising guidance for the next 2 quarters. Considering the flooding in Thailand impacting the industry, first glance would suggest that STX is benefiting from other customers being more impacted. 

It is hard to gather the true benefit considering STX claims to be impacted by external component supply constraints even though their factories were not impacted by floods. 

The company guided to $2.8B versus the $2.64B analyst estimate for Q4 and at least $3.75B for Q1. On top of that, STX guided to higher gross margins by up to 300 basis points for each quarter. So profits should be off the charts compared to estimates. 

The question remains whether these are one time gains from the floods or just higher demand for disk drives. Maybe some analysts more familiar with the sector will be able to opine on that subject. 

Regardless, the company trades at some absurdly low PE multiples which are hard to ignore either way. Seriously, a 5.6 forward PE?


Details via PR:


  • The company continues to believe that, due to the industry impacts caused by the extensive flooding in Thailand, hard disk drive supply will be significantly constrained for several quarters. For the December 2011 quarter, the company believes the industry will ship between 110-120 million units.
  • The company believes the industry’s ability to manufacture and ship hard disks drives will gradually improve throughout calendar 2012.
  • For the December 2011 quarter, the company now expects unit shipments of approximately 43 million units and revenue of approximately $2.8 billion. Gross margin as a percent of revenue is expected to be 150-300 basis points above the high-end of the company’s long-term, targeted gross margin range of 22-26%. Operating expenses (R&D and SG&A) are expected to be approximately $400 million.
  • The company’s outlook for the March 2012 quarter assumes requisite regulatory approvals are received and the Samsung acquisition closes in December of 2011. The company also continues to work with its external suppliers to restore the component supply chain, and now expects that in the March quarter it will be capable of shipping a mix of products in terms of capacity per drive and expected market similar to pre-flood levels. Currently, for the March 2012 quarter, the company expects unit shipments to increase sequentially. Revenue is expected to be at least $3.75 billion and gross margin as a percent of revenue is expected to be at least 300 basis points above the aforementioned targeted range of 22-26%. 

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



Record Thanksgiving Weekend Sales

The headline says it all. Though analysts expect a weak consumer and poll after poll shows a very pessimistic shopper, consumers continue to spend at a record pace. 

Not only did consumers come out in droves for the holiday season, but they actually spent more as well. The total ended up 16% higher than last year mostly due to consumers spending roughly 10% more than last year while more shopped than normal. 

Naturally economists will point back to the strong 2008 Black Friday period that then saw spending fizzle. This will be the feared example that a weak consumer is only willing to buy deep discounts. 

While highly possible, nothing shows that 2011 will see anything close to a repeat of 2008. The economy isn't in a recession now like 2008. Not to mention, the whole world isn't falling apart like back in the period leading up to Christmas 2008. How could consumers even think about picking up spending back then as fear of a financial collapse spread?

Cyber Monday will be telling as to whether consumers have already over spent. Retailers moved forward sales to Thanksgiving day and lured in online shoppers at record rates. Any pull forward would undoubtedly show up in weak Cyber Monday numbers. 

While the pace will naturally slow down as 16% growth is just unsustainable, what is clear is that shoppers will continue to surprise economists and analysts alike that doubt them. Whether due to more jobs in the economy, smaller mortgage payments (some from strategic defaults), or just pent up demand from several years of thrifty spending the consumer is out in full force this year. 

Don't forget no matter how the sales data gets spun on Monday, the amounts were a record by far. 



  • Americans shrugged off economic gloom to post record Thanksgiving weekend sales of $52.4 billion, the National Retail Federation said Sunday, as shoppers prepared for "Cyber Monday" online deals.
  • Sales over the long holiday weekend were up 16 percent compared to last year, marking the biggest dollar amount ever spent over the Black Friday period, the unofficial start of the Christmas shopping season, the NRF said.
  • The average holiday shopper -- 226 million of them visiting stores and websites this weekend, according to the association's survey -- spent $398.62, up from $365.34 last year.
  • Consumers were likely to continue the trend on Monday, known as "Cyber Monday" for the deep discounts offered on Internet retail sites -- with 37.8 percent of total weekend spending already made online.
  • Davis warned against over-optimism, saying that similar Black Friday figures were seen in 2008 during the recession, but afterwards, "nobody shopped for the rest of the holiday season."


Disclosure: No positions mentioned. Long retailers DKS, SHLD, LIZ, SODA. Please review the disclaimer page for more details. 



Sunday, November 27, 2011

Chart of the Day: What Euro Demise?

Great chart from Calafia Beach Pundit. If the Euro was so weak, than why has it held up so well against the greenback?

Sure the Euro isn't near the peak around $1.6, but it clearly isn't anywhere near the sub $1.20 it traded below for the first several years.

One possible answer is that traders expect some of the weak participants such as Greek to leave the Euro, therefore leaving the stronger countries like Germany that would cause a rise in the Euro. Other scenarios are that the US dollar has been just as weak.

Either way, the demise of the Euro seems very premature especially when looking at this chart. If that was about to happen wouldn't it sink below parity and fast?






Yet Another Debt Solution Floating Around Europe

Guess its good news that the European Union members continue to reach for solutions to the debt crisis. The bad news is that none of these grand ideas ever get implemented. Its only been a month since the last solution was announced but never implemented.

Now it appears the solution is for the ECB to lend the International Monetary Fund money to lend to Italy. The amount being floated amounts to roughly $800M. Presumably this would be enough to stave off the markets for 12-18 months in order to give the new Mario Monti government time to implement reforms.

Reducing the interest rates back down to 4-5% is crucial for a huge debt load. Imagine if Japan or the US had to start paying considerably high interest rates. Both countries would be sunk as only the absurdly low interest rates is holding us above water. 

Whether this new idea works is debatable, but it is a solution of significant size to give Rome time for reform. The IMF has been successful in Iceland and Ireland already. Portugal is still under a working plan, but Greece has been the great failure. Mainly due to the inability of the government to implement any meaningful reforms.

So if Italy is serious about finding a solution to reducing the debt load, than working with the IMF will solve the problem. 

Regardless, it all comes down to the EU moving forward with a a plan and almost any plan of significance would work. Italy reportedly has a fiscal surplus when eliminating financing charges. Meaning that Italy needs limited reforms to remain on course. Some initiatives to grow the economy would have huge implications on the ability to pay down debt in the future. 

Details via La Stampa:

  • If inspections in Italy IMF agreed G20 summit in Cannes have not started yet is because the director Christine Lagarde wants to give enough time to Mario Monti to launch reforms, reserving the right to help with a financial assistance program that could get to be worth up to 600 billion euros. 
  • From here the possibility of launching a "program Italy," which, according to IMF estimates circulating in the environment in Washington, could have a value between 400 and 600 billion euros in order to give the government Mountains 12-18 months to launch the necessary reforms, alleviating the need of refinancing debt. Ensuring rates between 4 and 5 percent, the IMF would offer much better conditions compared to Italy to markets where we are already more than 7-8 per cent, which would shelter from Rome to the growing pressures on government bonds.
  • The magnitude of this figure is, however, it becomes difficult for the IMF to operate only on the basis of currently available resources. Should be increased and there are several ways to do it: the issuance of new Special Drawing Rights in coordinated efforts with the European Central Bank, headed by Mario Draghi. (soon to be called Super Mario? if such a plan works)
  • This last scenario comes from the fact that the resistances in Berlin to a greater commitment by the ECB in support of states in difficulty - starting with Italy - would be less if it were money to be dished out under strict supervision of the IMF. (very key if Germany is on board with IMF solution)

Tuesday, November 22, 2011

Cluster Insider Buying at Terex

Terex (TEX) has seen 11 insiders make purchases providing a very strong insider buying signal called a "cluster-buy". The insiders purchases 32,502 shares at an average price of $14.71/share, for a total of $478K. 

Not a massive amount of money, but definitely a strong signal with the purchases being so wide spread. Of course, it could just be a internal scam to trick outside investors. 

The interesting opportunity presented investors today is the ability to buy shares at prices lower the insiders. As much as people think the game is rigged, other people realize that it does present opportunities to buy at the same price as people with inside knowledge. 

TEX has been saying for a long time that its business has been picking up, but the market has ignored them for the post part. It wouldn't be the first time that insiders were blind to changes in the global economy. 

TEX is a solid holding in our Opportunistic models as below so we're definitely hoping this insiders know what they are doing. 

Data per Yahoo Market Pulse:

Stone Fox Capital holds an allocation of 3.4% in $TEX in his Opportunistic Arbitrage Long Only Covestor Model

Stone Fox Capital holds an allocation of 9.7% in $TEX in his Opportunistic Arbitrage Covestor Model


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


Saturday, November 19, 2011

The Super Committee Fail

Or at least that appears to be the path this great Super Committee has taken. Tasked with figuring out the best way to cut the federal deficit over the next 10 years, and the group can't come together on anything substantive.

Seriously? The federal deficit just reached $15 trillion and out great Congress can't figure how to slow spending over the next 10 years. Yes that's correct, the committee isn't even attempting to cut spending. It just wants to reduce the growth of spending. Possibly cut some stuff already planned to increase, but not actually decrease spending.

Without cutting back on spending, we're playing the dangerous game of relying heavily on growth to cut the annual deficit. Grow revenue faster than spending and the deficit begins to shrink. Naturally Democrats want that 1% to pay more taxes that would grow that revenue, but that isn't assured to work as it might just reduce growth.

Still, I'd probably be inclined to implement some tax increases on those making over $1M. They surely can afford to pay more. Shouldn't we figure out how to capture the extra money that Buffett assures us he'd be so happy to pay?

The really shocking news is that now the Super Fail is talking about something smaller than the already agreed upon cuts of $1.2T that will automatically start in 2013 unless another deal is reached.

What isn't clear is if the committee reaches a $600B or $700B deal what happens to the difference? Would assume that the balance would still kick in automatically. This failure is amazing because the voting public wants to see something substantive. On top of that, many analysts think something in the $3-4T range needs to brought to the table.

Remember $3T only amounts to $300M a year which is only around 20% of the current deficit.

The markets won't likely have much reaction unless a deal beyond say $2T is struck and that seems out of the realm of possibility. If anything the market reaction of late has already taken into account an expected failure of Congress. Not to mention, the market eyes have clearly been on Europe.

Honestly I don't expect anything this week. The deadline is midnight Wednesday. One would think these guys want to go on holiday break, but they sure seem to push everything to that last minute. Not to mention on top of this, voters will undoubtedly remember that these guys weren't able to solve the problems.

Why keep the gang of 12 in office? It appears clear they are unable to reduce spending so Congress apparently needs new blood that isn't tied into lobbyists or whatever it is that is keeping them from doing what is required.


Details from CNBC.com:

  • Financial markets have low expectations for the panel. Some analysts are already looking beyond it toward the impending year-end expiration of economic stimulus measures. Those are seen as Washington's next test of fiscal responsibility.
  • Automatic budget cuts, evenly split between domestic and military spending, are due to kick in in 2013 if the committee fails to reach a deal. But Congress could try to rework or undo the legislation mandating the cuts before then.
  • "It still seems mind-boggling that they could break up without doing anything. So I still think they'll get something—not $1.2 trillion, perhaps a deal around $700 billion," said Potomac Research policy analyst Greg Valliere.
  • Unlike earlier budget standoffs, a failure next week would threaten neither a government shutdown nor a debt default.
  • The threat of automatic cuts has not been enough to jolt Republicans out of their opposition to new tax increases or Democrats out of their defense of spending for social programs such as Medicare, Medicaid and Social Security.
  • House of Representatives Speaker John Boehner, the top Republican in Congress, on Friday floated an offer to try to break the logjam. His plan would save $643 billion over 10 years, about half the panel's goal, but the two sides could not even agree what was in the plan. (wow, $643B? Don't get too crazy Boehner...jeez)


Friday, November 18, 2011

Stat of the Day: Leading Indicators Jump Again

The Conference Board reported this morning that Leading Economic Indicators for October came in at 0.9% easily surpassing expectation (how is that considering the numbers are known?).  The leading indicators are usually an accurate predictor of economic conditions in the next months. This number continues to increase at a solid clip.

If only the US market could focus on leading indicators like these and jobless claims and less on Europe.

Not going to spend much time highlighting the individual components because it just doesn't matter. The numbers have been strong and will likely continue as like as monetary policy is accomondative. It likely won't change until investors become overly bullish on the stock market.

The economy will continue rolling along producing jobless claims below expectations, but the stock market will get roiled by Europe. Some day though that will end and this bullish data will matter.


10:02 AM Oct. Leading Indicators: Leading Index +0.9% vs. +0.6% expected, +0.2% prior. Coincident Index +0.2% vs. +0.1% prior. Lagging Index +0.6% vs. +0.2% prior


Says Ken Goldstein, economist at The Conference Board: “The LEI is pointing to continued growth this winter, possibly even gaining a little momentum by spring. The lack of confidence has been the biggest obstacle in generating forward momentum, domestically or globally. As long as it lasts, there is a glimmer of hope.”

Why Angie's Shouldn't Be Listing An IPO

Angie's List (ANGI) offers independent reviews of local service providers via its subscription-based web platform since it was founded in 1995. At first glance, ANGI provides a more proprietary system with a defensible moat than fellow internet listings of Groupon (GRPN) that recently listed or Zynga (ZNGA) that is in the process of listing. ANGI would appear to be a more attractive investment.

After all, the company has a long history of service provider reviews that a new service could never match. Knowing the work history of a contractor over the last 5-10 years has to be invaluable and this kind of information would prevent any startup from matching the Angie's List's offerings. Conversely, a new startup has the potential to offer a better daily deal than GRPN or a better Facebook game than Zynga.

Read the full article at Seeking Alpha.


Disclosure: No positions. Read the disclaimer page for more details.


Thursday, November 17, 2011

Investment Report - November 2011: Net Payout Yields

October was an excellent month with a 9.41% gain for this model, but the relative performance was lacking with the benchmark up 10.77%. This was the reverse of the results during the summer swoon, but mostly inline with what would be expected in this large cap model. Stocks with market caps over $10B typically underperform when the market soars.

Trades
The model had three trades in October.

FirstEnergy (FE) was sold as the stock saw decent gains during the summer months hence reducing the net payout yield below normal levels in the model. Typically the model looks to sell when a stock hits 52 weeks high and either buybacks tail off and/or the dividend yield slumps if the company doesn't raise the rate.

The other sell was Microsoft (MSFT) since it has reduced buybacks over the year making the stock less attractive. Possibly this was due to the Skype purchase or other potential deals that could be in the pipeline. Regardless the yield dropped to an unappealing level for a considerable time so the stock was sold.

The only buy for the month was DirecTV (DTV). DTV consistently ranks among the highest net payout yield stocks due to a massive buyback. The stock consistently tops the charts with yields in the 15-20% levels.

Top Performers
The top performers all hit close to 20% returns and were lead by financials such as Traverlers Companies (TRV), Hartford Financial (HIG), and Itau Unibanco Holding (ITUB). Some other top performers included Cisco Systems (CSCO) and CSX Corp (CSX).

Bottom Performers
The stocks that had negative returns were limited to only three stocks this month. Only two stocks had meaningful losses and even those were capped at 1.8%. In addition, the stocks were FE and DTV that were traded mid-month so the losses had limited impacts to the model returns. The only other loss came from Lorillard (LO) and it was only down fractionally.

Conclusion
The Net Payout Yields model reached its one year anniversary on November 2nd. During the first year the model performed just as expected especially when eliminating the couple percentage points it immediately lost upon startup. The model remains an ideal way to stay mostly fully invested in the market to catch the upside and also be protected from the downside with high dividend and buyback yields. On top of that, the model is not reliant on consistent timing of the market to where relative results from period to period could be drastically different.


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





Wednesday, November 16, 2011

Stat of the Day: Industrial Production Increases 0.7%

Industrial production continues to increase at a solid clip per the Federal Reserve report released this morning. While the market fretted during the summer about a double dip recession, the 1.2% increase in July was telling a different story. Now after a couple of flat months, industrial production has soared another 0.7% for October. This makes the year over year increase at 3.9%.

Capacity utilization ticked up to 77.8 from 77.3 also beating estimates. Interesting to note that this level of utilization is still below the '90-91 recession low of 78.8. Still lots of room for industrial companies to increase profits before having to expand.

The major group that continues to stick out is the 10.2% increase in business equipment. Also noteworthy is that it has been up over 1% sequentially in four of the last six months.

Typically this isn't a report that I review very heavily, but it caught my attention that growth remains strong and the numbers continue to beat estimates. Not exactly the type of report most investors would expect considering all the negative headlines regarding Europe. When one does the research, the numbers are much more impressive and supportive of higher equity prices.


9:16 AM Oct. Industrial Production: +0.7% vs. +0.4% expected, -0.1% prior (revised). Capacity utilization 77.8% vs. 77.6% expected, 77.4% prior.

Tuesday, November 15, 2011

Dicks Starts Paying Dividends

Dicks Sporting Goods (DKS) has long been a favorite investment pick for Stone Fox Capital. Just search this blog and you'll see plenty of articles. Not to mention the recent post of the store openings in our area.

DKS reported strong earnings this morning and surprising established a dividend. DKS announced a $.50 dividend for 2011 payable on December 28th and plans to start a quarterly dividend in 2012. Does this mean that the growth story is over?

Hopefully is just means that with $483M in cash that DKS is over flowing with money and thinks dividends are the best way to reward shareholders. Unfortunately in the past it has signaled that companies lack growth opportunities to use that cash.

DKS is now in at least 43 states with the entry into Oklahoma at the beginning of November. Little growth opportunities exist in moving into new areas. Maybe it still has growth potential in existing states. The sporting goods industry does remain fragmented and less than 500 stores doesn't appear to be excessive. Looks like I need to undergo some research on this subject.

As an example, the Tulsa area just opened 3 stores and I could see maybe 1-3 more stores. At the least one to the North and one to the South. So if a metro area of less than 1M can support 5 stores than the whole US could support at least 1,000.  1,500 stores if just using a pure 300M population times 5. Something to ponder. 

Back to the earnings of this phenomonal retailer. DKS reported Q3 earnings of $.32 vs expectations of $.26. Easily surpassing estimates yet again. Maybe an investor should only become worried about the growth potential when DKS no longer beats estimates.


Details from the press release:


--Consolidated non-GAAP earnings per diluted share increased 45% to $0.32 per diluted share in the third quarter of 2011 as compared to consolidated non-GAAP earnings per diluted share of $0.22 in the third quarter of 2010
-- Consolidated same store sales increased 4.1% in the third quarter of 2011

-- Company raises full-year estimated non-GAAP earnings range from $1.94 to 1.96 per diluted share to a range of $2.01 to 2.03 per diluted share
-- Company declares an annual $0.50 per share dividend, payable on December 28, 2011
-- Company ended the third quarter of 2011 with $483 million in cash, without any outstanding borrowings under its credit facility

--On November 14, 2011 , the Company's Board authorized and declared an annual dividend for 2011 in the amount of $0.50 per share on the Company's Common Stock and Class B Common Stock.  The dividend is payable in cash on December 28, 2011 to stockholders of record at the close of business on December 7, 2011 . The Company currently intends to begin payments of regular quarterly dividends beginning in 2012; however, the actual declaration of such future dividends and the establishment of the per share amount, record dates and payment dates for such future dividends are subject to the final determination of the Company's Board, and will be dependent upon future earnings, cash flows, financial requirements and other factors.

--Based on an estimated 127 million diluted shares outstanding, the Company currently anticipates reporting consolidated earnings per diluted share of approximately $0.87 to 0.89 in the fourth quarter of 2011. In the fourth quarter of 2010, the Company reported consolidated non-GAAP earnings per diluted share of $0.76 , excluding litigation settlement costs.

 

Update 4pm - Via Conference Call transcript prepared by Seeking Alpha:

On the store expansion front, we have opened new Dick’s Sporting Goods stores at a rate of 8% this year. We expect this pace to increase slightly next year. Looking at the longer term, we believe we have the potential to open more than 400 additional stores over the next several years, giving us a total of at least 900 stores in the United States.

Guess that partially answers my question on store count. Plenty of room for growth. 


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

Saturday, November 12, 2011

Best Earnings Report From Wednesday: Liz Claiborne, SodaStream, or C&J Energy Services?

Wednesday was another day of the market focusing on the sovereign debt troubles in Europe, and another day of not focusing on individual fundamentals of companies other than maybe the first hour after an earnings report.

Several stocks that we own reported very impressive if not shockingly good numbers, recording numbers that easily surpassed analyst estimates, making us wonder whether analysts really were researching these stocks.

Which company had the most impressive report?

Read the full article on Seeking Alpha.


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



Friday, November 11, 2011

Why is Congress Still Allowed to Own Stocks?

Not only why are members of Congress allowed to own stocks, but why are they allowed to trade while serving in Congress? These guys have insider information and the ability to sway the political direction. Why are they allowed to gain from that?

How many decisions are made based off investments? Is that why coal seems to be favored over natural gas? Or why certain companies are brought to the capital for 'investigations'? Maybe certain politicians were short these stocks and wanted a catalyst to send them lower.

Great interview with former high flying lobbyist Jack Abramoff with insights on Congress and investing. Why is this still legal?






Thursday, November 10, 2011

Investment Report - November 2011: Opportunistic Levered

October was an exceptional month with a 47.9% gain versus the 10.8% gain for the benchmark leading to a 37.1% outperformance. Unfortunately, this was only a small recovery from the July, August and September selloff. With many stocks in the model still trading far below the July highs, substantial upside remains just to recapture those levels.

Though global GDP growth came under pressure during the summer and fall months, US corporations are reporting record profits. The yield curve remains very positive suggesting an attractive environment exists for equities. On a daily basis, it's becoming more apparent that the summer swoon was more of investor panic than a economic reason suggesting a return to even the April and May highs of 1,370 on the S&P 500 is probably warranted.

China remains a key focus of the model. While investments in China based stocks have been greatly reduced, the model still relies heavily on the demand for materials and construction related items coming out of China. With inflation easing and the Shanghai Composite index bottoming out during October, it appears that the hard landing fears are diminished providing for great upside in the sector. While some China based stocks appear awfully cheap, the risks of fraud continue to hold us back from additional investments for now.

Top Performers
Considering the strong gains in the S&P 500, it should be no surprise that this model had several stocks with very sizeable returns. The gains were led by crane manufacturers and retail. An interesting combination of global and domestic growth. Crane manufacturers Terex (TEX) and Manitowoc (MTW) both had gains of roughly 60% after both companies reported earnings better than expected. Retailers Liz Claiborne (LIZ) had a gain of 60% as it worked towards a transformation into three top brands and away from its namesake brand that it sold to JCPenny (JCP). Retailer Sears Holding (SHLD) had a 36% gain as it moves to externalize its valuable brands and monetize the vast real estate holdings. The other top gainer was Riverbed Tech (RVBD) up 38% after reporting earnings much better than expected. The stock spent Q3 selling off on expectations of weak demand, though RVBD ended up reporting stronger results than originally expected before Q3 started. Similar to the results of TEX and MTW, these companies saw massive summer sell off though results weren't even impacted. Fear over rode reality in these cases.

These gainers highlight the basic principles of this model. The model looks for stocks in the middle of a transformation like LIZ and SHLD or stocks trading at levels below their potential value such as MTW, RVBD, and TEX. These catalysts help propel the stocks to much higher levels when realized.

Bottom Performers
Amazingly, even in such a strong month the market has losers. As previously noted in a Covestor blog post, the model made an ill timed entry into MF Global that resulted in a 60% loss to the position in October. See blog post here for more details. The other bottom performers were not big contributors to the models monthly performance mainly due to position sizes. The losers were Savient Pharma (SVNT), Atwood Oceanics (ATW), and SodaStream (SODA).

Conclusion
The momentum has clearly turned in favor of being long this market. The model remains highly leveraged to take advantage of the opportunities for individual stocks to rebound to summer highs. Europe still remains a major concern, but European leaders appear set on finding a solution which eliminates a global disaster scenario. It also makes equities very attractive at these levels.



Disclosure: Long TEX, MTW, LIZ, SHLD, RVBD, SVNT, ATW, SODA. Please review the disclaimer page for more details. 




China Inflation Drops, Signaling Materials To Boom

Tuesday night, China reported October inflation close to expectations at 5.5%. Though the whisper numbers expected something possibly around 5.3% and could cause a minor market sell-off on Wednesday, the news was wildly bullish.

Short term the market always trades off estimates. Long term though, the trading is based on the trend. The trend for inflation in China is clearly downward.

Inflation in October eased from the 6.1% annual rate in September with food prices declining 0.2% in the month.


Read the full article at Seeking Alpha.


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



Tuesday, November 8, 2011

Impressive Grand Opening for Dick's Sporting Goods in Tulsa Metro Area

After years of being an investor in Dick's Sporting Goods (DKS) and not actually being able to shop at the retail locations, the company finally opened a sporting goods store in my area. In fact it opened three stores in the Tulsa metro area over the weekend.

As a sports enthusiast and investor, DKS probably provides me the ultimate junction of hobby and professional life of any stock worth owning.

The grand opening was complete with one of the biggest media blitzes that I've seen or maybe just noticed. Possibly its just that I listen to the sports show on the radio or read the local sports section that I happened to notice the advertising by DKS more than say a women's clothing store or the Chipotle Mexican Grill (CMG) when it arrived.

Most people have probably witnessed grand openings of DKS prior so this is already first hand knowledge, but the grand opening ordeal was complete with autograph sessions of OKC Thunder players, past local football greats like Barry Sanders and Thurmon Thomas, not to mention OU legendary coach Barry Switzer.

The ordeal also included fishing demonstrations via a portable outside tank and several other promotions.

Within a weekend, DKS probably already owns the sporting goods market in Tulsa. The competition is already out gunned by the store numbers with Sports Authority and Academy only claiming 2 stores each. On top of that neither store provides a compelling or interesting reason to visit the store other than by default.

As an investor, I've always been impressed by the consistently strong results of this stock. DKS has dominated the sector by providing a better retailing experience and a dominating marketing presence. Now I know something new. As somebody that has only shopped at a few stores outside Oklahoma over the years, I never experienced the overwhelming marketing blitz.

From the outside, I've noticed how it made impressive buyouts in California and the NW during the financial collapse. The company is strong and makes moves on strength to take advantage of weaker competitors. This weekend just solidified the investment thesis. A new store probably hardly known by consumers now owns the market.

Good job Dicks!

Below is the portfolio data copied from Market Pulse on Yahoo! Finance. It provides weekly stock positions of the models Stone Fox Capital runs via Covestor. This transparency isn't available via other investments outlets such as mutual funds or hedge funds.

Stone Fox Capital
Stone Fox Capital holds an allocation of 7.1% in $DKS in his Opportunistic Arbitrage Long Only Covestor Model
Stone Fox Capital holds an allocation of 4.6% in $DKS in his Opportunistic Arbitrage Covestor Model


Disclosure: Long DKS. Please review disclaimer page for more details. 


Monday, November 7, 2011

Mixed Results in Engineering and Construction

Earnings results for Flour (FLR) and Foster Wheeler (FWLT) were less than stellar last week after horrible numbers for McDermott (MDR) the previous week.

Looking into the details for at least FLR and FWLT the numbers weren't as bad as first glance. Revenues have been increasing since the lows in 2010 and order expectations remain strong for 2012. Not to mention FLR reported a record backlog.

For this sector, it really comes down to global growth expectations and confidence. Everybody knows that demand will exist in the future has power demands continue to grow. The question is when companies will move forward with large multi billion dollar projects. Projects that will utilize any existing over capacity in the industry there by pushing up margins.

Even though margins are not overly robust both FLR and FWLT have great balance sheets that allow for strong share repurchase programs. FWLT has reduced the float by 8M and FLR by 5M in the last 12 months so shareholders are getting paid to wait.

Earnings numbers didn't meet estimates in Q3, but revenues, backlog, balance sheets, and industry outlook provide some expectations for a better future.


Details from FWLT earnings report:
  • Scope revenues at highest level since 4Q 2009.
  • Earnings impacted by equity investment in Chile operations hit by 2010 earthquake.
  • Excluding items from both quarterly periods, net income in the third quarter of 2011 was $38.8 million, or $0.33 per diluted share, compared with $50.1 million, or $0.40 per diluted share, in the year-ago quarter.    
  • The company repurchased 3,526,194 shares during the third quarter of 2011 for approximately $80 million. As of September 30, 2011, the company had approximately $261 million remaining under its authorized share repurchase program.    

Details from FLR earnings report:
  • Q3 new awards of $6.7B
  • Backlog rises to a record $41.8B
  • 2011 EPS guidance narrowed to a range of $3.2 to $3.4
  • 2012 EPS guidance established at a range of $3.4 to $3.8
  • announced today that its board of directors has approved a new 12 million share repurchase program. This new authorization is equivalent to approximately 7.1 percent of Fluor's shares outstanding at October 28, 2011.
  • Diluted shares decreased by 5M over the last 12 months.    


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


Interesting Modified Dutch Auction Offer by Amgen

Very interesting announcement today by Amgen (AMGN) that the company would buy $5B of it's outstanding shares via a modified dutch auction. This would amount to roughly 10% of the outstanding stock.

This puts AMGN into play for out Net Payout Yields model that looks for high yielding dividend and stock buyback companies.

AMGN just recently became a dividend payer yielding roughly 2%. Also, previous buybacks have yielded about 4% over the last 12 months giving it a previous 6% NPY. Not to shabby considering most investors get excited about 3-4% dividend yields.

Unfortunately AMGN announced a Senior Notes Offering to at least partially pay for this share auction. While studies aren't conclusive on whether buying stock with cheap debt is long term beneficial to shareholders, our model tends to stray away from such financial engineering.

Companies that are so cheap that it can pay high NPYs via free cash flow are much more attractive. Regardless, AMGN will make our list to research for inclusion in the model.

This dutch auction is worth watching because AMGN is going directly to the public and offering to buy shares. The price is roughly in line with the current price so I'm not sure where the demand will come from. Small investors could have already sold and institutional investors looking to dump large lumps of shares could've already worked with the share repurchase plan that has bought $2B worth in the last 12 months.

The tender offer lasts through December 7th so keep this on your radar.


Details from PR:


  • plan to launch a modified Dutch auction tender offer to purchase up to $5 billion of its common stock
  • Amgen will offer to purchase up to $5 billion of Common Stock at a price not greater than $60.00 nor less than $54.00 per share.
  • A modified Dutch auction tender offer allows stockholders to indicate how much stock and at what price within the range described above they wish to tender their stock.  Based on the number of shares tendered and the prices specified by the tendering stockholders, Amgen will determine the lowest price per share that will enable it to purchase $5 billion of Common Stock at such price, or a lower amount depending on the number of shares that are properly tendered and not properly withdrawn. 
  • representing approximately 9.5 percent to 10.6 percent of outstanding Common Stock as of Nov. 7, 2011.
  • Amgen's public offering of its senior notes will be made pursuant to an effective shelf registration statement on file with the SEC.  Amgen expects to use the net proceeds from the offering to fund Amgen's stock repurchase program, including the modified Dutch auction tender offer described above, and for general corporate purposes. 

Friday, November 4, 2011

Apple Dominates Wireless Operating Profits

According to a report by Canaccord Genuity posted on All Things D, Apple (AAPL) appears to be the only wireless handset maker with a decent profit margin. Incredibly AAPL was able to capture more than a third of the operating margins in the industry.

Yet another sign of why market share analysis tends to focus on the wrong measurement. Lots of news lately about Samsung selling more phones in Q3 and of course Google (GOOG) selling more operating systems via the Andriod than AAPL.

The ultimate score card shows AAPL with margins roughly double that of Research in Motion (RIMM) and Samsung. Also, notable is that the majority of the operating profit gains since 4Q09 went directly to AAPL. Profits were shifted from Nokia to Samsung and HTC though.

By having a limited supply of really good products, AAPL has figured out the holy grail of profit generation. Less is more. Like in investing, the 15th best idea just isn't going to make money like the best idea so why spend time and money on it.

The only concern is that by limiting products, AAPL does allow competitors to gain market share. Will it become like AMD to Intel (INTC) in the chip sector where AMD only obtains the scraps. Or will it become like the computer market where the market share eventually lead to domination by the Microsoft (MSFT) led platform.

So far it appears that the process by where carriers subsidize the price of the phone has allowed AAPL to maintain strong market share and profits. Consumers would unlikely pay the $600-700 for the phones upfront, but unless the current process changes I'd expect AAPL to dominate where it didn't in the computer market.







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


Thursday, November 3, 2011

The MF Global Debacle

Prior to the collapse last week, MF Global (MF) appeared to be an excellent candidate to take market share in the financial sector. MF was already a respectable commodities trader and primary broker dealer. On top of that, it hired prominent figure John Corzine with experience at both Goldman Sachs (GS) and the political arena to expand into the investment banking sector.

The combination provided a catalyst for a what could be a game changer. Unfortunately last week the concept completely collapsed as MF couldn't handle the high leverage of European Soveriegn debt. Debt that likely will payoff as expected, but debt that unfortunately scared the market into a panic.

Lesson revisited that perception trumps reality at least in the short run.

Last week we wrote about the thesis for buying into MF prior to the earnings report and even after [See Wild Times at MF Global Holdings]

At the time, the trade seemed to have a good risk/reward thesis. The stock had already been cut to half of book value. Unfortunately it didn't work out for investors. Luckily though we sold the 2nd investment prior to closing on Friday at just a small loss.

As mentioned in our original write up, only half a position (actually closer to a third) was purchased as the risk was extremely high. This greatly reduced the exposure even in the case of the collapse.

The Jefferies (JEF) news today further highlights this concept of perception versus reality. It came to light that JEF has exposure to European debt and investors panicked. It doesn't appear to matter whether the debt is to Italy or Greece. Whether it matures in 6 months or 6 years. Or whether JEF has short positions to hedge the longs. The market doesn't appear to care. European debt is basically deemed worthless though most of the countries involved won't ever come close to defaulting.

This leads us back to our trade made last week. MF was plunging based on what appeared to be over stated fears. Sure MF had a ton of leverage. Sure MF had exposure to Italy, Spain, and Portugal debt. The debt though has an average maturity of 12 months. Anybody expect Italy or Spain to blowup in the next year? Greece was worse off 12 months ago than Italy is now and the Geek debt hasn't defaulted yet. Close, but not yet.

The Opportunistic Arbitrage model is very risky and these trades don't always pay off. This might go down as the quickest blowup in my investment career. Yet, by limiting position size it didn't have a major impact to the model. It still gained 47% in October when most of the MF losses were taken. The remaining hit the November numbers as the original purchase was sold shortly after the stock opened on Monday.

Ultimately, the outcome was unfortunate, but nothing devastating. Other blowups will occur in this model, but the key remains to stay diversified so that any one such event doesn't destroy the model.


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



Stat of the Day: Jobless Claims Below 400K

Jobless claims is one of the most useful economic stats since it is basically real time as opposed to most numbers that can be a month or two behind. It is also one of the best predictors of economic growth.

As economists an investors panicked about a recession in Q3, the jobless claims were telling a different story. Naturally it wasn't one of economic strength, but it clearly wasn't one of a double dip recession. Week after week the numbers came in around the low 400Ks and showed continual progress downward from the April peaks.

This mornings US Department of Labor reported seasonally adjusted initial claims of 397K. A decrease of 9K from the previous week's revised figure of 406K. More interesting is that the unadjusted initial claims were 367K.

Most people would be surprised to know that the unadjusted numbers have been consistently below 400K. In fact, just a few backs on October 15 the number was 357K.

Below is the difference between seasonally adjusted and unadjusted numbers that are well worth a read.



SEASONALLY ADJUSTED DATA

  • In the week ending October 29, the advance figure for seasonally adjusted initial claims was 397,000, a decrease of 9,000 from the previous week's revised figure of 406,000. The 4-week moving average was 404,500, a decrease of 2,000 from the previous week's revised average of 406,500.
  • The advance seasonally adjusted insured unemployment rate was 2.9 percent for the week ending October 22, unchanged from the prior week's unrevised rate.
  • The advance number for seasonally adjusted insured unemployment during the week ending October 22 was 3,683,000, a decrease of 15,000 from the preceding week's revised level of 3,698,000. The 4-week moving average was 3,703,250, a decrease of 10,500 from the preceding week's revised average of 3,713,750.

UNADJUSTED DATA
  • The advance number of actual initial claims under state programs, unadjusted, totaled 366,923 in the week ending October 29, a decrease of 10,433 from the previous week. There were 421,097 initial claims in the comparable week in 2010.
  • The advance unadjusted insured unemployment rate was 2.5 percent during the week ending October 22, unchanged from the prior week. The advance unadjusted number for persons claiming UI benefits in state programs totaled 3,178,790, a decrease of 16,241 from the preceding week. A year earlier, the rate was 3.0 percent and the volume was 3,759,365.
  • The total number of people claiming benefits in all programs for the week ending October 15 was 6,781,960, an increase of 103,117 from the previous week.

Wednesday, November 2, 2011

Covestor Net Payout Yields Model Completes First Year

Our Net Payout Yields model on Covestor began last year on November 2nd. It wasn't the greatest of starts as the market soared before the model was fully invested placing it behind the SP500 benchmark by 2.5% as of Nov 6th.

Invest like me - only at Covestor.com


Considering this model invests in high paying net payout yields (NPYs) and moves as a normal dividend paying fund would, recapturing a 2.5% deficeit was a very daunting task.

Ultimately though, the model has performed as expected. Even beating expectations if excluding the first week.

The model was up 6.44% for the year compared to the 2.07% for the SP500 (since inception data in the table below). Even better, YTD the model is up 3.73% versus the 3.13% decline of the SP500. That's a nearly 700 basis point outperformance on a very conservative (Covestor risk score 1) model.

Clearly once fully invested,  the model has done exceptionally. Constantly outperforming in weak months while keeping pace with gains in stronger periods.

For anybody not yet familiar with this model, NPYs are the combination of dividends and net stock repurchases. The model really gains an advantage these days as most investors ignore net stock buybacks and concentrates only on dividend yields. Since most of the stocks in this model have higher yielding buybacks, the market is typically missing the best yielding options.

Companies can repurchase nearly 20% of their outstanding float within 12 months and the market will hardly notice. Pay a decent 3% dividend and everybody goes bonkers. Would you rather have a 20% return of capital or only 3%?

Better yet, most companies in the model pay at least a 2-3% dividend while buying back 7-10% of the outstanding stock in any given year. So basically investors get above normal SP500 yields with the added bonus of a company trading far below its cash on hand and cash flow generating capabilities.


Table from Covestor model (for whatever reason didn't copy as a table. Click on the Covestor graph below and it'll take you to the model with an easier reading format)

Inception Nov 02, 2010    Manager*     S&P 500    Avg Sub
Month to date (%)    -2.34    -2.79    -2.13
1 month (%)    9.41    10.77    8.02
3 month (%)    0.43    -3.02    -0.41
Annualized since inception (%)    6.45    2.08    n/a
Since inception (%)    6.44    2.07    n/a
Sharpe (annualized)    0.32    0.09    n/a




a href="http://covestor.com/stone-fox-capital" class="Covestor_hook">Invest like me - only at Covestor.com