Saturday, December 29, 2012

Riding The Rails At Plains All American Pipeline

After a great 2012 in the pipeline business, Plains All American Pipeline, L.P. (PAA) completed a transaction to increase the focus on rail transportation growth. The company finalized a $500M deal to acquire several loading facilities for railroads though the existing enterprise value of nearly $22B limits the impact of this rail move.

Plains All American engages in the transportation, storage, terminalling, and marketing of crude oil, refined products, and liquid petroleum gas (LPG) products in the United States and Canada.

The move highlights the transformational currents under cutting the pipeline business. As crude oil has been unable to transverse the current pipeline system to reach the refineries on the coasts, the railroads have stepped up with more direct routes that bypass the congested Cushing, OK oil hub. Not only is it a boon to railroads struggling with weak coal shipments, but exploration and refinery companies are access to better pricing than currently available.

Read the full article at Seeking Alpha.

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

Monday, December 24, 2012

Accenture: Is The Stock Run Over As The buybacks Stall?

The stock of Accenture Ltd. (ACN) has had a great run over the last couple of years as the company has grown earnings and repurchased shares. As the stock has nearly doubled, the buybacks have stalled leaving the company with less bang for the investment.

As one of the world's leading management consulting, technology services and outsourcing organizations has seen earnings nearly double in the last few years, the stock has seen strong gains.

The company, though, hasn't been able to increase the buyback amount and in fact spent less in fiscal year 2012 versus 2011. All signs that the insiders with the best information might consider the stock price expensive.

Read the full article at Seeking Alpha.

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

What Is Wrong With Oneok Partners?

After a great 2011 and facing a promising finish to 2012, Oneok Partners, L.P. (OKS) has fallen out of favor since the start of November. First, the company provided disappointing commentary on the Q3 earnings call. Second, it announced the decision to not move forward with a Bakken pipeline. The combination turned the market away from this previously hot stock.

The company is one of the largest traded MLPs and a leader in gathering, processing, storage, and transportation of natural gas. ONEOK, Inc. (OKE) owns 42.8% of the equity interest.

The stock has plunged from over $60 in early November to just below $53 today. In fact, the stock is now down for the year and approaching a total return near flat. Is it time to buy the stock now or are investors realizing that pipeline MLPs aren't free money?

Read the full article on Seeking Alpha. The article is classified as PRO and will only be available for viewing for 30 days from 12/17/12.

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

Thursday, December 20, 2012

Investment Report - December 2012: Net Payout Yields

This model was up 0.01% in November versus a 0.3% gain for the benchmark S&P 500. The model slightly under performed the market in November, which can happen in solidly positive months. As of the end of November, the model was up nearly 20% for the year compared to 12.5% for the S&P 500.  

In general, the model had a very uneventful month with flat returns and no trades.

Bottom Performers
While the model was flat for the month, several stocks had meaningful moves in November. The weakest stocks were Kohl’s Corporation (KSS), WellPoint, Inc. (WLP) and Entergy Corporation (ETR).

Kohl’s lost nearly 16% due to a weak earnings report at the end of the month. The stock plunged from nearly $51 to below $46 on disappointing sales. The company continues a large buyback and should be able to load up on shares at these attractive levels.

WellPoint plunged at the beginning of November due to the re-election of President Barack Obama, which secured the future of his health care overhaul. Ironically, the stock has re-gained most of the November losses by early December.

Entergy plunged 12% after a weak earnings report at the beginning of November sent the stock down for most of the month. The stock now offers over a 5% dividend yield thanks to the decline.

Top Performers
Several stocks had good months to offset the weak stocks. The biggest gain though came from Lowe’s Companies, Inc. (LOW), which jumped over 11% for the month. The home improvement company continues to benefit from a rebound in the housing market.

Amazingly the stock just surpassed the all time highs from early 2006. With those gains, the stock has now become the largest position in this model making it a target for selling.  

Other big gainers were Cisco Systems (CSCO) and Time Warner (TWX) that both gained nearly 10% during the month.

2013 Predictions
As the year ends and the new year rolls around, the majority of Wall Street rolls out the annual predictions for the next year. The great part about the Net Payout Yields model is that it doesn’t rely on economic conditions or financial predictions. In essence, the model enlists the management teams of these mega cap stocks to do all the forecasting and decision-making.

Instead of undertaking massive research efforts, history has shown that the companies with the highest yields outperform. The management teams willing to execute massive buybacks combined with large dividends indicate a level of value that the market misunderstands. Those teams are forecasting cash flows that exceed what the market expects.

Specifically in the case of the expected dividend tax increases, the companies will tell the investors whether the tax rates require a shift to buybacks, a reduction of dividends, or nothing at all. The ones able to continue paying the highest yields will remain in the model.

What is your outlook for dividend taxes, and is there anyway to handicap the outcome?
Naturally the outlook is that taxes on dividends will increase at least for the top 1-2%. With a lot of dividend investors in tax-free retirement accounts, the impact is uncertain. Even with higher tax rates, investors likely don’t have better alternatives at the moment.

In general, it is difficult to handicap a political process. Fortunately, this model lets the market do the heavy lifting. Whatever stock rises to the top yield at the end of the day will offer the best potential return.

Will you continue to invest in dividend stocks? Why or why not? Is it a crowded investment?
The model is designed to purchase the highest yielding stocks whether dividends or buybacks. Naturally it will continue to keep investing in dividend stocks. Fortunately though, the model has the flexibility to be tilted towards buyback stocks that can take advantage of a system where less focus is placed on dividends.

The dividend trade is very popular now, but not too crowed as of yet. Lots of stocks still offer relative value compared to interest rates. If any trade were too crowded, it would be bonds. Until that potential bubble pops, I wouldn’t expect any issue with dividend stocks.

What are your two favorite stocks for 2013 and why?
The favorite stocks for 2013 are the ones with the largest net payout yields (See Top 10 list). Seagate Tech (STX) and Kohl’s offer the best yields, hence making them the favorite stocks for 2013.

What is the biggest opportunity where hardly anyone is looking?
Similar to the favorite stocks, the biggest opportunity lies in the stocks with the highest yields. When a stock yields 10, 15, or 20%, the market is clearly ignoring the opportunity presented. In the case of this model, the opportunity lies within stock buybacks. Market reports continuously ignore the benefits of a strong, strategic buyback plans. Typically the focus is placed on failed plans from fast growing stocks that overpaid on buybacks. Generally those stocks spend a lot of money, but it encapsulates a very small part of the market cap.

When a company is able to purchase a significant amount of the outstanding shares, the market presents an opportunity that shouldn’t be ignored. Those situations need to be distinguished from a random 1-3% buyback that isn’t material.

As the year ends, the market now ignores the possibility of any major financial collapse in Europe. The relentless headline risk that never came to fruition is basically over, yet investors aren’t exactly moving out of bonds and cash into stocks.

As with the fears over a European collapse, the markets appear fatigued by the constant fiscal cliff talks in the US. Stocks remain very complacent considering the looming danger and most of the rhetoric suggesting a resolution is far away. Dividend stocks appear the most at risk, but one has to wonder if the stocks will sell off at this point.

As repeated every month, the average stock in this model yields greater than 10% with the majority of yields coming from buybacks. This provides huge support if the market drops due to fiscal cliff failures causing the market to crash.

Disclosure: Long all the positions mentioned. Please review the disclaimer page before making any investment decisions.

Wednesday, December 19, 2012

When Will The Tesla Investment Unravel?

With the SolarCity Corp (SCTY) IPO last week, investors got another reminder of the time demands of Tesla Motors (TSLA) CEO Elon Musk. Not only is he busy attempting to make Tesla into a force in the auto sector, but also he is busy launching rockets to Mars via SpaceX and now prominently involved with another public company.

If anything highlighted the issues with his time, it had to be the IPO interview on CNBC. In general, it is odd for the chairman to be involved in the post-IPO interview. On top of that, the interviewers kept attempting to steer the questions towards Tesla. That isn't necessarily the fault of Musk, but it does highlight the issues that the stock market will place on his priorities now that he runs two public companies.

While all three of his companies are revolutionary and worthy of attention, none of the companies are exactly more than developmental at this point. Tesla, as a prime point, has been public for over two years yet the market became excited based on a tweet about being cash flow positive for a week.

Read the full article at Seeking Alpha.

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

Amgen: Will The Buyback Work This Time?

After the market close on Thursday, Amgen, Inc. (AMGN) announced an additional $2B stock buyback plan. The company executed a very successful buyback over the last year, so this additional plan is noteworthy, especially considering several companies have announced buybacks this week that aren't interesting or material.

The company is a leading independent biotechnology medicines company that previously had a $10B buyback plan that has at least partially helped the stock to all time highs.

This plan adds $2B to around $500M left on the previous plan. This leaves Amgen with $2.5B that it forecasts will be spent by early 2014. Also, the company significantly increased the dividend to $0.47 for Q113. This increases the dividend yield to 2.1%.

Read the full article at Seeking Alpha.

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

Tuesday, December 18, 2012

Is Williams Signaling A Larger Than 20% Dividend Increase?

In a rare move, Williams Companies (WMB) has been forecasting substantial dividend growth through 2014. Typically management teams prefer to keep dividend increases under wraps in order to 'surprise' the market with increases and generally temper expectations.

The company has one of the leading energy infrastructures in North America. It owns interests in or operates 15,000 miles of interstate gas pipelines, 1,000 miles of NGL transportation pipelines, and more than 10,000 miles of oil and gas gathering pipelines. It owns more than 70% of Williams Partners L.P. (WPZ), one of the largest diversified energy master limited partnerships.

On Tuesday, the company announced a significant investment of $2.4B in Access Midstream Partners (ACMP). Access conversely announced plans to purchase pipeline assets from Chesapeake Energy (CHK) for $2.16B. These transactions could improve the dividend potential at Williams by 2014.

Read the full article at Seeking Alpha.

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

Monday, December 17, 2012

Cerner Buyback: Waste Of Cash

After the market close on Wednesday, Cerner Corporation (CERN) announced a $170M stock buyback. The stock was up slightly in after-hours based on the news, but shareholders should absolutely ignore this supposedly good news.

A leading supplier of healthcare information technology had a buyback plan since 2008 that has had little use or impact.

More importantly, the company announced that the plan would only encapsulate 2.1M shares, or 1.2% of the company's shares outstanding. Why does the company even bother at that level? On top of that, why does the CEO claim that the buyback program is a good use of funds with the stock trading at 28x forward earnings? The stock trades above the expected growth rates suggesting limited value.

Read the full article at Seeking Alpha.

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

Thursday, December 13, 2012

Elon Musk Debuts A Second Company

Anybody following this blog knows that Stone Fox Capital has been negative on Tesla Motors (TSLA) because the CEO, Elon Musk, is actively involved in multiple firms. In what is seen as his 3rd firm, SolarCity (SCTY) debuted to on the Nasdaq.

The CNBC interview this morning highlights the issue with him so focused on other firms. As only Chairman, it's odd for him to be interviewed along with the CEO. Typically its the CFO if anybody that shows up on tv. Note how the conversation goes directly towards Tesla when the CEO can't hear the interviewers.

Just the confusion on this interview highlights the risks in these stocks. Elon is clearly highly involved with this firm along with SpaceX. As the CEO of Tesla, he should be spending all of his time on that firm. The guy is obviously brilliant, but his competition is completely focused on one company and sector.

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

Ignore The Cummins Buyback

After the market close on Tuesday, Cummins Inc. (CMI) announced an additional $1B stock buyback. The stock was up roughly 1% in after-hours based on the news, but shareholders should ignore this supposedly good news.

The manufacturer of diesel engines has historically bought its own stock over the last 5 plus years so investors should not be surprised by such a move. The company continues to make strong profits so the lack of an additional buyback program would be more abnormal.

More importantly, the company approved the buyback program as the last $1B approval in February 2011 comes to a close. Effectively the company has taken nearly 2 years to complete a buyback that amounts to 5% of the outstanding shares or market value. Over 2 years, the buyback will only amount to roughly 2.5% of the outstanding shares each year.

Read the full article at Seeking Alpha.

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

Wednesday, December 12, 2012

Facebook's Nasdaq 100 Inclusion To Reduce Volatility

In a matter of a few months, Facebook (FB) has gone from a bumbling internet behemoth to a tech darling. Now prior to market open on Wednesday, the tech giant will be added to the NASDAQ-100 Index according to the news release by NASDAQ OMX Group (NDAQ). An event easily predicted, but another example that has added to the momentum for the stock.

The stock has jumped 50% since mid-November when it traded around $19. At the current price of nearly $28, the company trades at extreme valuations that could finally help the short thesis.

As a firm hoping to short Facebook stock (see articles here), the NASDAQ-100 event could be a signal of a top. Plenty of funds will be forced to buy the stock, hopefully pushing it to near-term highs.

An important question is whether being adding to the index signaled past tops? Similar to how the stock lockup that created potential added sales actually produced the November bottom and the ensuing rally.

Read the full article at Seeking Alpha.

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

Freeport Turns Cheap On Complex Purchases

Last week, Freeport-McMoRan Copper & Gold Inc. (FCX) announced monumental mergers that sent the stock plunging 20% over the next two trading days. While the deals appear attractively priced compared to the assets obtained, the market clearly doesn't appreciate complex investments in the current environment.

For those investors living under a rock, the company agreed to purchase both Plains Exploration & Production Company (PXP) and McMoRan Exploration (MMR). Since both of these companies focus on oil and gas exploration, the purity of being a strictly copper focused producer attracted plenty of investors that might disappear now.

Another major issue is that investors actually don't understand the McMoRan Exploration potential. Too many investors focus squarely on the failures of the exploratory Davey Jones No. 1 well and miss all the other wells under drilling programs. These wells are drilled with the benefits learned from the failures of the original Ultra-Deep Shallow Water well.

Read the full article at Seeking Alpha.

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

Monday, December 10, 2012

Top 10 Net Payout Yield Stocks For December

This article is a continuation of a monthly series highlighting the top net payout yield stocks that was started in June (see article). The series highlights the best stocks for the upcoming month. Please review the original article for more information on the net payout yield concept.

November Returns

Below are two charts highlighting the monthly returns of the top 10 stocks from November (see original list here). Due to limitations with YCharts, the chart was broken into the Top 5 and Next 5 lists.

Read the full article at Seeking Alpha.

Disclosure: Long AMP, COP, DTV, GS, KSS, MSI, NLY, WLP. Please review the disclaimer page for more details. 

Friday, December 7, 2012

Is Baidu Falling Off The China Cliff?

Through April of this year, Baidu, Inc. (BIDU) was one of the hottest tech properties in the investment world. The stock of the leading Chinese language internet search provider reached close to all time highs around $150 and a market value of $55B. Now the stock appears to be falling off the China cliff.

Not only is the stock facing less and less investor appetite for Chinese stocks, but now the fears are growing that all Chinese stocks face delisting possibilities due to audit issues.

While the S&P 500 remained close to recent highs on Wednesday, Baidu again plunged to a new 52 week low. Other issues continue to pop up over the conversion to mobile reducing the click through rate (CTR) and more competition from Qihoo 360 Technology (QIHU). All of these issues have pushed the stock down to a very cheap valuation with a PEG near 0.5.

Read the full article at Seeking Alpha.

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

Invest In Private Companies On The Cheap Via GSV Capital

In the past, we have been very critical of the IPO process. In 2011, the Chinese technology firms soared 100% above the IPO range and left initial public investors with considerable losses in a few months. In 2012, the social media stocks blew up after investors in the public markets paid considerably above the IPO price. In both cases, the IPO process signaled the top in these hot sectors leaving the public holding the bag as the insiders exited the firms.

Now GSV Capital Corp (GSVC) allows regular investors to participate in the potential insane gains of the IPO process. Instead of needing millions of investment capital, GSV allows investors to "hire" a management team to scout out the top private investments and diversify the risk via 40+ companies.

Read the full article at Seeking Alpha.

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

Wednesday, December 5, 2012

Important Dates For Document Security Systems

For existing investors and those seeking a new patent stock, Document Security Systems, Inc (DSS) offers a potential homerun opportunity. The previous article, Document Security Systems Has Significant Patent Monetization Plans, offered a glimpse at the potential in the stock. The real key for the stock will be the execution of those plans.
DSS is a leading developer and integrator of cloud computing data security, Radio Frequency Identification (RFID) systems and security printing technologies that prevent counterfeiting and brand fraud.
With the stock lingering around 52-week lows around $2.70, investors still have the opportunity to purchase the stock below the merger and private placements levels. That price won’t last over the next few weeks and months if the company starts executing on target dates whether with the patent cases or the merger.
The company has several major catalysts that could push the stock up starting with the Motion to Transfer for the Bascom Research patent case on December 7th through to the merger with Lexington Technology Group (LTG) that is expected to close in March.

The biggest issue with investors in DSS remains that the Bascom Research litigation against Facebook (FB), LinkedIn (LNKD), and the others starts prior to when the merger with LTG will be finalized. Could any significant progress in the case jeopardize the merger?

Other potential catalysts include the trademark lawsuit and the IPNav license program. Naturally the lawsuit is of prime focus considering it revolves around technology already owned by DSS and not dependent on a merger. While the IPNav license program could provide a significant royalty stream assuming the success of the Bascom Research case.

Catalyst 1 – Bascom Research Patent Lawsuit
Naturally this lawsuit involves the greatest interest from the investment community with the potential for vast license fees from the large revenue bases of Facebook and rapidly growing LinkedIn. As mentioned, it involves a greater risk to DSS shareholders as all the potential rewards could disappear if the merger isn’t finalized. While all the executives appear on board with the merger, a small possibility always exists when a merger needs SEC and shareholder approval.
The initial crucial date is this Friday. The Motion to Transfer occurs on December 7th with LTG hoping to have the case held in the “rocket docket” court in the Eastern District of Virginia. The defendants want the case moved to the Northern District of California court. While probably not a signal of the ultimate outcome, a decision to move the case to California could add up to a year to the outcome.
After the transfer motion, any responses are expected within a couple of weeks providing an expectation of completing the response prior to Christmas. The company expects the chances of staying in Virginia as strong based on the plaintiff, Tom Bascom, living in the district for over 20 years. Not to mention, the company was founded and operates in Virginia. On top of that, the new LTG headquarters and CEO will be based in Virginia.
Assuming the case remains in Virginia as expected, the company will have a scheduling conference by early January. This conference will set the dates for the Markman hearing and the trial date. The scheduling conference will set out the track for the trial whether 10, 12, or 14 months.
Discovery will kick off after the transfer motion and that typically kicks off the incentives for defendants to settle. At that point, costs increase as time goes on during that process. Though Facebook has plenty of cash to see this case play out to the end.
Assuming a 10-month track for the case, the Markman hearing should be between April-June with a trial between July-October. Naturally the longer trial tracks would extend the dates a few months.
Catalyst 2 – LTG Merger
The merger remains solid and on course for a March closing date. For anybody buying DSS it probably highlights the largest risk. Especially for investors looking at DSS for buying into the patent monetization plans of LTG. Until the merger is closed, investors always have the risk that the merger falls apart. While probably a small risk, it clearly is something to consider and possibly what has held the stock back.
LTG wants the patents and technology of DSS plus the access to the public stock market. The stock will be a useful currency in future patent portfolio acquisitions. An investor in DSS at these levels obtains a roughly break-even company with some strong technology and potential litigation damages of its own. The downside risk appears limited, but investors aren’t loading up on the stock regardless.
The company filed the S-4 on November 23rd. The next key date will be the SEC approval followed by the shareholder vote in hopefully February. Finally, the merger has an expected completion date of March.
Catalyst 3 –
DSS filed a lawsuit back in October 2011 against alleging breach of contract and theft of trade secrets. The case is taking place in the Southern District of New York with damages claimed in excess of $10M. The last known court hearing took place during October with a mediation in November prior to the Q3 earnings call. The company was unwilling to discuss the case on the call other than to mention that it was progressing as expected at the slower pace expected from a case in the clogged courts of New York.
At this point, the litigation experts at LTG are only able to help in a limited role until the merger is finalized. Both management teams expect the experts from LTG to be able to apply additional pressure on the case in order to improve the outcome and encourage to move forward. Otherwise, the case could take several years to complete.
Catalyst 4 – IPNav License Program
In addition to the Bascom Research lawsuits, LTG has initiated a licensing program via IPNav in order to obtain license fees from hundreds of other companies utilizing the technology created by Mr. Bascom. The potential is significant considering a majority of these companies are still in the growth phase.
The company has had initial discussions with a few companies, but most firms are waiting for the decision on the Motion to Transfer before initiating any settlements. The company is also careful about locking in any royalty rates prior to litigation of the patent cases.
Significant Dates – Timeline
Considering the company has a ton of moving parts, the key will be the company executing on the plans. Below are some of the key dates:
·      December 7th – Bascom Research patent case Motion to Transfer hearing.
·      December 21st – Bascom Research patent case response to Motion to Transfer hearing that should occur prior to Christmas.
·      December 31st – IPNav initial licensing potential based on Motion to Transfer hearing for Bascom Research patent.
·      January 2013 (early) – Scheduling conference for Bascom Research patent case.
·      February 2013 – SEC approval on LTG merger.
·      February 2013 (late) – Shareholder vote on LTG merger.  
·      March 2013 – Closing of LTG merger.
·      April-June 2013 – Bascom Research patent case Markman hearing dates based on 10-month track in Virginia.
·      July-October 2013 – Bascom Research patent case trial dates based on 10-month track in Virginia.
·      2013 hearings – Unannounced trial dates.
At this point, two key dates will kick off the other important dates. The Motion to Transfer on December 7th for the Bascom Research patent case and the SEC approval in February will kick off the LTG merger.
The stock remains at the 52-week lows and has flat lined since the original article about two weeks ago. The weakness with the general micro cap stocks was an original speculation for the stock dropping since the announced LTG merger and lawsuits. Interestingly though, most micro and small cap stocks have rallied the last week while DSS remains flat.
As the below chart shows, the stock has been very weak since announcing the deal.
3-Month Chart – Document Security Systems

While the stock has held support at the $2.50 level, the lack of a bounce actually suggests the stock could go lower. With patent stocks having exceptional years, the weakness in the stock is extremely confusing. The inability of the stock to move above the 20ema is very concerning.
Any investor looking for a huge risk/reward event might want to purchase DSS prior to the transfer motion hearing on Friday. While not dictating the ultimate case, a positive outcome that leaves the case in the Eastern District of Virginia might finally ignite some interest in the stock.

Over the last week, the stock has averaged an incredibly low 50,000 shares traded a day. This limited market action suggests a stock with limited catalysts, which couldn’t be farther from reality. With a positive outcome on Friday finally kicking off the action in this stock, investors might finally jump into it.

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

Manitowoc Remains Intriguing Though Not A Favorite

Manitowoc Company Inc. (MTW) closed out last week trading at the 6-month high levels of $15. While the market envisions the company as a crane manufacturer that competes with Terex Corporation (TEX), it currently obtains higher operating income from the food service division.

The company currently has a mark cap of $2B and only trades at 5x the trailing twelve months EBITDA of nearly $400M. With limited operating margins in the crane division, the company has yet to see any rebound from the global financial crisis.

The company faces similar margin issues as Terex in comparison to a mega-cap like Caterpillar (CAT). In the last few months, a shift is occurring as stocks focused more on construction equipment have performed better than ones with mining exposure.

Read the full article at Seeking Alpha.

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

Staples Fires Warning Flare To 3D Printing Market

On Friday, Staples (SPLS) announced that it intends to launch a service providing 3D printing capabilities at stores in the Netherlands and Belgium beginning in Q113. While private companies such as Shapeways already provide the ability for designers to create and market 3D printed products, it doesn't have a store in every major city where customers can pick up the products.

Staples is already a leading provider of printed items so this was only a natural extension for the company. Honestly, it already seems odd that 3D printing demand has started to explode, yet the majority of household technology companies aren't involved.

Read the full article at Seeking Alpha.

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

Monday, December 3, 2012

Is Splunk Finally A Value?

With the market typically favoring dividend stocks over growth stocks, Splunk Inc. (SPLK) remains a conundrum trading at roughly 12x forward revenue estimates. While the company has huge growth potential, analysts only expect 35% growth next year that wouldn't normally warrant such a high valuation.

The company provides a leading software platform for real-time operational intelligence. In essence, the company is leading the "Big Data" revolution by offering software tools for analyzing the incredible amount of data created on a daily basis.

Back in the summer, the valuation didn't support the growth rate. After a sell-off in October, does the stock finally offer a good value?

Read the full article at Seeking Alpha.

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

Sunday, December 2, 2012

Facebook Upgrades Mask Real Issues

Back in mid-November, it appeared that Facebook (FB) was headed to the teens for good as investors became very pessimistic regarding the stock. Along came the much-expected massive stock lock-up on November 14th and the market was surprised to see the stock soar instead of plunging to new lows. Within weeks, the stock soared from a low around $19 to $26.15. An incredible 35% surge for a stock left for dead.

A major reason for the leader in social media surging was three analysts increasing price target this week. What has made analysts so bullish on a stock that recently traded as low as $17 to only be upgraded once the stock hit $24?

The stock remains a favorite short candidate of us, but our firm has been on the sidelines waiting for a better entry point after the market became too bearish based on the lock-up issues and the mobile monetization fears. See our previous articles here. Note the comments section has been full of warnings that the lock-up might trigger a bottom.

Read the full article on Seeking Alpha.

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

Saturday, December 1, 2012

McMoRan: Investment Remains Intact Despite Mechanical Issues

McMoRan Exploration Co. (MMR) shares plunged on Monday after the company reported more mechanical issues with the hopefully prolific Davey Jones No. 1 well. Investors had expected results from this well over a year ago, but problems continue to frustrate all involved in this historic drilling effort.

The company is attempting to lead the world in ultra-deep drilling in shallow waters off the Gulf of Mexico. It has numerous exploratory and development wells in the sub-25,000-feet zones. Investors interested in the stock should heed warnings from the CEO, Jim Bob Moffett, who was quoted in a recent Bloomberg article as saying:

"People call us pioneers. Well, that's great, I guess, (though) some people say pioneers end up with arrows in their back."

The huge expense to drill the Davey Jones and the shrinking liquidity levels have naturally made investors concerned about a potentially predatory financing to complete the ultra-deep drilling program. The concern was large enough for legendary investor Lee Cooperman, Chairman and CEO of Omega Advisors, to join the GOM update call to ask numerous questions based on his large investment in the company.

Read the full article at Seeking Alpha. As a PRO article, it will only be available for viewing for 30 days on the platform. The article was originally published on November 29th.

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

Wednesday, November 28, 2012

Main Street Capital's Dividend Isn't 'Special' Enough

Just about every company paying a dividend yield has had extremely strong stock gains over the last year. Main Street Capital Corporation (MAIN) has been no exception to this rule. Though the company continues to raise the dividend, the current yield has dropped to 6%.

The company is a principal investment firm that primarily provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies.

Now that the company has gained 69% over the last year, the question remains whether investing in a BDC that only pays a 6% dividend is worth it. The company has a primary focus in the lower middle market that has a favorable investment opportunity as fewer lenders have competitive offerings for this sector after the financial crisis.

Read the full article at Seeking Alpha.

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

Monday, November 26, 2012

Does Carrizo Oil & Gas Confuse Investors Too Much?

After reporting earnings back on November 6th, Carrizo Oil & Gas, Inc (CRZO) plunged over the next week. While the company beat earnings estimates, the market was clearly disappointed with some of the reduced production estimates even if it was due to previously announced joint ventures.

The company is an oil and natural gas exploration and production company focused on the shale plays: Eagle Ford, Niobrara, Marcellus, and now the Utica.

One has to wonder if Carrizo isn't running into some of the investor's frustrations as with Halcon Resources (HK) and SandRidge Energy (SD). The numerous joint ventures along with previous sales of Barnett Shale assets make the company difficult to value. With Wall Street focused specifically on quarterly production growth numbers, the constant shifting of assets leads to confusion.

Read the full article at Seeking Alpha.

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

Savient Pharma: Still Struggling To Grow KRYSTEXXA Sales

After reporting Q3 earnings, Savient Pharma (SVNT) plummeted back to a $1 from the meteoric rise to nearly $3 during the quarter. The company reported disappointing sales numbers for the promising gout drug and failed to break out one-time costs to provide investors a clearer picture of the 2013 earnings view.

As written in a previous article, Savient Pharma: The Pharma Rising From The Dead, the company was able to complete a restructuring that provided time to build the revenue base. While all of those moves left the company better equipped to survive long enough for the promising new drug to thrive, Savient has yet to prove to the market that the drug will ever meet the original estimates. Will the lowered cost structure even be sufficient enough to survive?

The company is a specialty biopharmaceutical company focused on developing and commercializing KRYSTEXXA (pegloticase) for the treatment of chronic gout in adult patients refractory to conventional therapy.

Read the full article at Seeking Alpha.

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

Sunday, November 25, 2012

Document Security Services Significant Patent Moneitzation Plans

When Document Security Systems, Inc (DSS) announced plans to merge with Lexington Technology Group, Inc (LTG), the company signaled a shift in business plans to focusing on monetizing IP assets. With DSS in the process of a lawsuit against over misappropriated trade secrets and breached confidentiality agreements, the merger with a manager of IP assets appears to provide benefits to both shareholder grou ps.

DSS is a leading developer and integrator of cloud computing data security, Radio Frequency Identification (RFID) systems and security printing technologies that prevent counterfeiting and brand fraud.

With the LTG merger, the company plans on becoming a dominant patent monetization company with the goal of being the Blackstone Group LP (BX) of the sector.

DSS Q3 Highlights

Below are the highlights from the Q3 earnings report:
  • Revenues for Q3 2012 were $4.2 million, a 15% increase over Q3 2011.
  • Gross profit for Q3 2012 was $1.5 million, a 20% increase over Q3 2011.
  • Absent the merger costs, net loss for Q3 2012 would have decreased 19% from Q3 2011 to a loss of $635,000.
  • The company reached a significant financial milestone in September 2012, achieving the company's first month of operating profitability as measured by adjusted EBITDA.
  • Adjusted EBITDA was a loss of $61,000, an 89% improvement from Q3 2011.
  • The company reported positive adjusted EBITDA for the first month in September. While a good sign, this further questions the ability to finance patent litigation if the company has operations that drain cash.
The relatively low revenue totals highlight how the company hasn't previously been successful at monetizing assets. The technology appears to be widely used by governments around the world yet the company has been unable to obtain payments for the technology.

Lexington Technology Group Merger

Back on October 2nd, the company announced the merger with LTG that will effectively place the management team from Lexington in charge of the operations. The planned new CEO, Jeff Ronaldi, and CIO, Peter Hardigan, have extensive experience in the monetization of patents from previous work at Turtle Bay Technologies and IP Navigation Group (IPNav), respectively.

The combination of the companies provides a solid base of IP assets with the extensive patents held by DSS combined with the LTG patents recently acquired from Bascom Research. The assets provide not only the ability to expand markets, but they also provide a platform for adding patent portfolios in the future.

A primary reason for selecting a merger with DSS is that LTG needs an operating company to not only demand injunctions and lost profits, but also to provide access to the public markets if the company needs to raise capital in the future for patent deals. A non-operating, non-public entity lacks the necessary structure needed to build the patent monetization platform.

DSS IP Assets

While most of the focus on the merger has been on the IP assets of LTG, DSS has significant IP assets in the security printing and cloud security services areas recently estimated with a present value of $245M by ipCapital Group.

That amount doesn't even include the ongoing lawsuit against for breaching confidentiality of printable technology shared with the firm on a trial basis back in 2006. The company thinks has placed that technology on billions of internet generated coupons during this time period. A licensing agreement or positive verdict could amount to millions of dollars in royalties.

Along with more than 50 patents, DSS has a solid technology base for the future management team to implement the patent monetization platform.

Bascom Research Patent Suits

On October 3rd, LTG via Bascom Research announced the filing of patent lawsuits against social and business networking companies Facebook (FB), LinkedIn (LNKD), Jive Software (JIVE), BroadVision (BVSN), and Novell.

The claims are based on patents filed by Tom Bascom of Bascom Research that provide for the basic data structure of sharing and storing objects via social networks.

John Ford details some possible revenue outcomes via an article, Facebook Lawsuit Could Send Document Security Systems Share Price Soaring. The figures are staggering considering the combined merged entity would only have a market value approaching $150M.

Those Facebook revenue estimates are unlikely to be met in future years. The company is unlikely to grow revenues by 33% each year for the next 5 years. Regardless, it will have a substantial revenue base and a massive user base of over 1B people that could generate substantial fees for LTG. In fact, LTG would prefer royalties based on incremental users rather than revenue.

Besides the size of Facebook, LinkedIn has a 2013 revenue base forecast to hit $1.4B. Also, analysts forecast Jive to hit $150M in revenue for 2013 with 35% revenue growth. The combined revenue estimates for those three firms hits nearly $8B in 2013. Using the 1.5% license rate suggested by John, the fees would amount to $12OM.

In addition to the lawsuits, the company has initiated a licensing program via IPNav in order to obtain license fees from hundreds of other companies utilizing the technology created by Mr. Bascom. The potential is significant considering a majority of these companies are still in the early growth phase.

Patent Platform

The company has bigger plans than capitalizing on the existing IP assets of the merged entity. The new DSS wants to establish a platform for acquiring patent assets where the company forms a partnership model with acquired patent holders, thereby reducing the risk via spreading the wealth across the platform.

In a way, the idea is similar to how biotech firms look for multiple drugs so that the company is not dependent on the FDA ruling on one drug. Conversely, DSS doesn't want to be dependent on one patent portfolio or one lawsuit.

The ultimate goal is to obtain 5 to 7 IP portfolios that will allow for a constant flow of patent claims from the early and mid stage to the verdict or royalty collection stage. Again the process would be similar to the different phases of the drug approval process to reduce the risk of one failure.

Starting with the two existing portfolios via patents from Bascom Research and DSS, the company hopes to add a couple portfolios by the end of 2013 dependent on opportunities in the market. Once a successful platform is proven, the company might be able to attract top patent assets to participate in the rewards of a proven concept.

The platform also includes the building of the management team with significant experience in patent monetization. Not only does the company now have an experienced CEO and CIO, but also the board will include Warren Hurwitz that is very experienced in enforcing and protecting the rights of IP assets via this firm, Altitude Capital Partners. Also, the former CEO of LTG, Will Rosellini, will remain on as an advisor. Will previously worked as a scientific advisor for IPNav.

Capital Levels

One of the biggest concerns with the combined entity will be the ability to monetize these assets based on the limited assets currently on the books.

A part of the merger announcement, the company finalized a private placement for $2.7M. Considering the $10B cash hoard of Facebook, the company faces a steep challenge with limited resources compared to the defendants.

LTG is expected to have anywhere from $7-10M in cash at the time of the merger that will provide enough capital to complete the initial litigation process. Don't forget that any litigation costs remain with LTG until the merger is complete so the DSS cash level isn't important to that business at this point.


The stock remains at 52-week lows due to the weakness with the general micro cap stocks. Not to mention the recent turnover of executives isn't going to help investor confidence.

The stock has had little to no reaction since the announcement of the merger agreement with LTG. Surprisingly the news of the potential license revenue has had no impact on the stock.

1-Year Chart - Document Security Systems

For any investor with limited patent knowledge or the inability to derive the likely outcomes of the lawsuits, the current price action is concerning. The market must expect a major capital raise or some other materially negative event for the stock to remain this low. Possibly the market just doesn't grasp the potential yet, though the support at $2.50 suggests the stock might be finally bouncing off the bottom.

Patent Stocks

Based on the VirnetX Holding Corp (VHC) stock results, the market reaction on DSS has been surprising. Investors might not be aware of the stock and the potential yet. In fact, after an initial bump in the daily volume, trading has dried up to less than 100k shares per day. Another hot patent stock, Vringo, Inc. (VRNG), has averaged over 8M shares traded on a daily basis.

Another example of the relative obscurity of DSS is that only 285 investors subscribe to article alerts on Seeking Alpha. VirnetX has over 2,100 subscribers and Vringo tops the group with more than 4,700 subscribers. Clearly a group of investors interested in technology patent stocks has yet to discover DSS.

For investors not aware, VirnetX traded for less than $2.50 at the end of 2009. After huge gains in 2010, the stock shot from $12.50 to $40 in a few months in 2011 based on the expectations of a solid outcome on a patent suit with Google (GOOG). The stock has been very volatile lately due to disappointment over the recent Google award of only $30M and the large verdict against Apple (AAPL).

DSS Total Return Price data by YCharts

Interestingly, VirnetX trades at a $1.6B market value or nearly 10x the expected merged value of DSS. Could DSS eventually see major stock gains from the expectations of a large royalty?


Based on the recent stock weakness, investors might want to place this stock on the watch list for now. Based on the chart below, VirnetX had a consistently upward movement prior to its significant jumps in August 2011 and March 2012.

3-Year Chart - VirnetX Holding

The company has incredible potential for creating a patent monetization platform rivaled by none. Until the market realizes the potential or some positive outcome jolts the market into realizing this potential, investors might be disappointed with a stock stuck in a trading range.

In reality, until the merger finalizes in early 2013, DSS doesn't have the Facebook lawsuit or the experienced IP monetization management from LTG on its team yet. Maybe this significant fact is holding back the stock. Regardless, current investors in DSS get access to an IP portfolio that exceeds the current valuation of the stock and a breakeven technology business. The risks appear low while the rewards could be substantial. Investors should stay alert for when the market realizes the potential of this stock.

See printable version on Seeking Alpha.

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

Buying Alongside Halcon Resources Insiders

Ever since the old Petrohawk management team purchased Ram Energy and invested millions of dollars last December, analysts have suggested buying the new Halcon Resources Corporation (HK). Unfortunately, unless investors bought during the first two days, anybody holding now is under water. In essence, any investors buying the stock this year have lost money.

The domestic land E&P firm is building positions in leading unconventional shale plays, such as the Eagle Ford, Bakken, Utica, and the Tuscaloosa Marine. Investors now though get the option of following those insiders who made significant purchases in the $5 area last week. Oddly though, after a strong surge Tuesday on the news of the insider purchases, the stock has started sinking again. Should investors jump in with the insiders or dump the stock?

Read the full article at Seeking Alpha.

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

Tuesday, November 20, 2012

Glu Mobile Rebounds On Insider Purchases

Glu Mobile (GLUU) has absolutely plunged the last few months as the mobile game developer struggled with a slew of failed games during Q3. Unfortunately investors continue to forget that short-term failure shouldn't lead to the outright collapse of the stock. Long-term valued can still exist.

The company still expects over $100M in revenue next year and appears to be setting up a premier development platform. So why do investors continue to sell growth stories into oblivion? This company reached a market value below $150M yet recent deals for fast growing companies have hit 10x revenue.

6-Month Chart

The stock slumped from $5 to $2 based on the game failures during Q3 that lead to 5 games being delayed during Q4 to allow the new President to review the monetization plans.

Considering a director bought nearly $10M worth of shares back in early October at around $3, why should the new purchases prop up the stock nearly 10% today? Maybe it shouldn't though continued buying by multiple insiders sure beats following a group constantly selling the stock. 

List from Insider Moneky:

Considering the low value of the stock now, these purchases will quickly add up to a large percentage of the stock.

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

Westport Catalysts Remain Too Far Away For Investors

Westport Innovations, Inc. (WPRT) remains a leading way to invest in the transition to natural gas as a transportation fuel. As previously noted, the market is no longer impressed with the growth rate of this once market darling. The company expects to benefit greatly from the building of the natural gas highway by Clean Energy Fuels (CLNE) and a new engine from the Cummins Inc. (CMI) joint venture, though in both situations the catalyst remains months away.

The company is a global supplier of proprietary solutions that allow engines to operate on clean-burning fuels such as compressed natural gas (CNG), liquefied natural gas (LNG), hydrogen, and renewable natural gas (RNG) fuels.

Prior to the recent quarterly report, Westport dropped revenue expectations for 2012 from greater than 50% growth to a still strong 30% growth rate. These reduced numbers, while remaining strong, unfortunately point to higher than expected losses into 2013. All signs point to a strong future as US and China demand surges, yet the stock continues to show weakness as profits remain a big question mark.

Read the full article at Seeking Alpha.

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

SandRidge Energy: Should Tom Ward Go?

On first thought, the announcement by TPG-Axon that SandRidge Energy (SD) should fire the CEO that founded the company and brought it to this position seemed ridiculous. After more research, the investor might just have a point.

The activist investor submitted a letter last Thursday arguing that the Board of Directors should be realigned and the CEO should resign.

SandRidge is an oil and natural gas exploration and production company that primarily focuses on the Mid-Continent, Permian Basin, and Gulf of Mexico.

CEO Tom Ward has become a prominent leader in the oil exploration field making it further unlikely that he will be ousted. He was an original founder of Chesapeake Energy (CHK) that left to start SandRidge. The combined experience suggests that he has the knowledge to make this company successful.

Read the full article at Seeking Alpha.

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

Friday, November 16, 2012

Windstream's 12% Dividend Remains Solid

When Windstream (WIN) reported earnings last week, investors took the stock down to 52-week lows over concerns the company wouldn't have the ability to pay the dividend going forward. The local telecommunications provider missed earnings yet again, but more disappointing is that capital expenditures continue to creep higher.

In order to maintain that juicy 12% dividend, the company must produce enough free cash flow to cover the cash distribution. Lately that equation has come into question even with an increasing revenue base as capital expenditures have soared.

Read the full article at Seeking Alpha.

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

The Taxing Situation At Weatherford

Over a year after announcing accounting problems in the tax department, Weatherford International (WFT) continues to struggle to complete the restatement. For investors, the most boggling aspect of the tax restatement is that the company moved headquarters to Switzerland in order to reduce tax liabilities, yet the company continues to incur the highest in the industry.

The international oil services provider guided to an effective tax rate of 45% for all of 2012. More importantly the guidance for 2013 is for the effective tax rate to drop to a more historical 34% rate. The real improvement will come in later years as the company finally benefits from expected reduced rates.

So how should investors value the earnings of a company with temporarily high tax rates? The market spoke with dramatically lower stock prices to the tune of a 52-week low.

Read the full article at Seeking Alpha.

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

Monday, November 12, 2012

Mobile Monetization Index - November

This article is the second in a monthly series to analyze the stocks at the forefront of the monetization of the trend towards mobile data traffic. The original mobile monetization index highlighted the leading public companies. The concept was created as the market continuously lumped the new mobile stocks into the original failures of the relatively old companies such as Facebook (FB) and Google (GOOG). Recently Facebook reported a huge improvement in the monetization of mobile traffic providing hope for the sector

A range of companies benefiting from this shift to mobile traffic continues to grow. The industries range from Advertising to Real Estate to Travel with varying degrees of success and profits.

Read the full article at Seeking Alpha.

Disclosure. Long AAPL, GLUU, VELT. Please review the disclaimer page for more details. 

Thursday, November 8, 2012

SodaStream Commercial - Set The Bubbles Free

SodaStream (SODA) just released a new commercial today attacking the likes of PepsiCo Inc. (PEP) and The Coca-Cola Company (KO). As a long time investor in SODA my only hope is that it doesn't attract the angry of the sleeping giants. SODA doesn't have the balance sheet to fend off these companies yet.

Though a buyout around $100 would be nice. lol See the new commercial below:

Definitely an innovative story that should get the attention across regarding the ability to save the environment in the process of using the soda maker. One advantage to SODA is that the product can also be cheaper providing less incentive for PEP or KO to compete against them.

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

Top 10 Net Payout Yield Stocks For November

This article is a continuation of a monthly series highlighting the top net payout yield stocks that was started in June (see article). The series highlights the best stocks for the upcoming month.

Net Payout Yields Defined

The net payout yield is the combination of the dividend yield and the net buyback yield added together to calculate the yield returned to shareholders. The net buyback yield adds stock repurchases and subtracts shares issued. The yield is calculated using the amount of buybacks over the last four quarters divided by the current market cap.

Read the full article at Seeking Alpha.

Disclosure: Long COP, DTV, GS, KSS, MSI, WLP. Please review the disclaimer page for more details.