Tuesday, January 31, 2012

Fracking IPOs This Week

A couple of interesting fracking IPOs this week. First, US Silica (SLCA) mines the sand for the fracking market. Second, Platinum Energy Solutions (FRAC) is a contract fracking service provider.

Both companies have interesting futures, but they are coming public when oil service companies are beaten down due to low natural gas prices.

This video from theSteet.com shows just how bearish the market has become regarding this sector. Though FRAC competitor C&J Energy Services (CJES) grew over 260% last quarter this IPO guy is hugely bearish on FRAC. He also is strangely focused on the 2 current customers when the company only has 2.5 rigs. It can only have 2 customers when you have long term take or pay contracts. Even the comment about our favorite CJES is completely off base. CJES has 24 month contracts and customers aren't just renting 'cars'. Hydraulic fracturing takes a sophisticated crew to operate these machines and properly fracture the oil wells.

If this is the typical mindset that is forcing this sector down, than I want to load the boat. Fracturing will only grow over time. With the demand for oil fracturing growing at leaps and bounds, overall demand is expected to remain strong.

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

Monday, January 30, 2012

Sears Holdings: Impossible To Cover

Sears Holdings (SHLD) has come under extreme pressure lately after a Q4 warning and fears of credit tightening around suppliers. The stock recently bounced back to above the gap down from the December warning, but it is has now closed down for five consecutive days.

What stopped the free fall to below $30 from a high above $80 in October was news that Chairman Eddie Lampert accepted management fees from his ESL Investments vehicle in Sears stock. Along with other transfers, Eddie obtained over $150M of stock in early January according to this Wall Street Journal report.

One has to wonder why a legendary investor like Eddie would take stock in a company like Sears unless he knows that bankruptcy isn't a looming issue. Would Eddie really just throw $150M down the drain?

Read the full article at Seeking Alpha.

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

Creative Uses Of Apple's Cash Hoard

As reported last week, Apple (AAPL) now has a cash hoard of over $97B while generating $17.5B in cash flow from operations in Q4 alone. Yes, that is correct. Apple has more cash than most countries have in GDP.

Most investors want Apple to return the cash via a dividend or major stock buyback. Neither are that appealing to me as a typical investor buys Apple for growth. A 5% dividend yield could easily be swamped by a 10-20% loss in normal markets and maybe something bigger if the iPad5 was to disappoint.

A stock buyback while seeming cheap with the stock trading at a roughly 10x forward PE, it doesn't provide a lot of value with the company trading at over 5x book value. Besides by the time it gets announced and implemented the stock might soar over $500.

What I want from management is bold thinking similar to product concepts. Use that cash to provide an investment opportunity that most investors don't have access too in these markets. Use that cash to fund deals in highly opportunistic investments ala what Warren Buffett has done via Berkshire Hathaway (BRK.A, BRK.B). Berkshire is now worth around $200B so these $2-5B deals don't move the needle any more.

Recall joking back in 2009 that Apple should throw off $5B in cash and create a bank. Now I'm thinking that such a move could've created some good returns for investors. Something that getting a dividend and reinvesting in the market would never generate.

The next time that Goldman Sachs (GS) needs a $5B bailout at attractive terms, I'd like to see Apple step up. Heck, why not buy a railroad such as Kansas City Southern (KSU) and spin it off to shareholders similar to what Buffett did. For less cash than what Apple will generate in Q1, investors could own that railroad.

Plenty of opportunities exist where it takes an investment of scale at a minutes notice to get the deal. Something that Apple and very few others around the world could even invest. Below are a few examples of potential opportunities:

  • With natural gas prices hitting 10 year lows, use $5-10B to invest in a major lease holder that falls into financing problems such as possibly Chesapeake Energy (CHK).
  • Sears Holdings (SHLD) continues to face fears of bankruptcy where the potential might exist to buy a ton of real estate from them on the cheap.
  • Another trade on Sears Holdings would be to actually buy the stock if due diligence found plenty of cash existed to avoid bankruptcy. Heck, a sizeable investment in the open market would scramble shorts where a limited float exists.

European sovereign debt was ripe for the picking when the Corzine trade at MF Global caused them to go bankrupt last year. George Soros stepped in to buy some of the bonds, but what if Apple had a few billion dollars lined up instead of Soros.

These of course are just examples of the investment opportunities that might present themselves. Most serious investors will just dismiss this idea as crazy, but I'd rather see something bold that creates value than just group think. Possibly just spin off the cash into an investment vehicle similar to a Blackstone Group (BX) where Apple shareholders would get shares with each cash transfer. Or maybe get more creative and give investors the option of a dividend or stock in the new investment vehicle. Even if the money was completely lost it wouldn't be a big deal as investors aren't getting any benefit from the cash now.

What investors could get though are some incredible investments. At this point, Apple can spin off every dollar of cash flow earned giving such a vehicle a stream of cash to make investments. Almost like a sovereign investment fund getting constant cash from oil earnings. Why not go bold?

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

Sunday, January 29, 2012

A Tale Of 2 Networking Equipment Earnings

After the close on Thursday, networking equipment stocks Juniper Networks (JNPR) and Riverbed Technology (RVBD) reported earnings that sent both stocks lower on Friday. One company missed estimates and focused on issues with carrier spending and the European debt crisis. The other exceeded estimates and talked about a product transition in Q1 leading to a major new product cycle.

So which stock was down 18% and which one was down 3% at the close on Friday? That might surprise most investors who read the earnings reports and listened to the conference calls.

Read the full article at Seeking Alpha.

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

Thursday, January 26, 2012

Copper Inventories Plunging

Don't look now, but copper inventories continue to plunge. Recently breaking below 350K tons at the LME Copper Warehouse according to kitco.com. According to the charts below, inventory levels have hit a 2 year low recently.

Hard to tell whether China is stockpiling, demand is increasing, or supplies are struggling. Our focus continues to be that the copper market has yet to see the demand equation of both a strong China market and a growing US market. The US peaked back in 2006 long before China approached current levels. Even in the current scenario of weak US demand, copper has struggled to keep up with demand.

Freeport McMoran Copper (FCX) is naturally the best play in copper. Still think the copper market will see prices in the $5-6 range before this cycle tops out. Naturally FCX would see record prices when that happens.

30 day chart from Kitco:

5 year chart from Kitco:

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

Wednesday, January 25, 2012

Disappointing Margins Crush Fusion-io: Storage Wars Heat Up

Though Fusion-io (FIO) reported earnings that slightly beat estimates and revenue that handily beat estimates, the stock sold off 13% after hours. With 170% year-over-year revenue growth, the report made clear that the move to flash memory storage was gaining steam.

Fusion-io provided revenue guidance for the next quarter that easily surpassed the Capital IQ analyst consensus, but that might also be weighing on the stock as investors tend to prefer more growth than basically flat sequential guidance.

Read full article at Seeking Alpha.

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

Tuesday, January 24, 2012

How Net Payout Yields Predicted Financial Stocks' Earning Results

Going into this earnings release, investors appeared a lot more bullish on Capital One Financial (COF) than Goldman Sachs (GS). Capital One's stock was trading at 6 month highs and Goldman was near the lows. All the media could focus on was how bad the investment banking and brokerage business was for Goldman Sachs.

Management, though, was telling a different story to anybody paying attention. All year Goldman Sachs has been busy buying back stock while Captial One was focused on repaying debt, either signaling that the stock wasn't that cheap or maybe the future wasn't that bright.

In our Net Payout Yields Model, these signals were used to switch out of Capital One at the end of December and into Goldman Sachs at the beginning of January. Contrary to the typical opinion in the market about stock buybacks, large caps with strong earnings profiles tend to benefit from buybacks. The media tends to focus on the failures such as Netflix (NFLX) while the winners go unnoticed.

Read full article at Seeking Alpha.

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

Stat of the Day II: Europe PMI Shows Surprising Jump

The euro-wide composite index of purchasing managers in both services and manufacturing industries improved in January. What? Thought Europe was in a deep recession. Now we're already hearing talk of the downturn bottoming out.

The composite index rose to 50.4, a five month high, from 48.3 in December according to Markit Economics. Naturally this wasn't an overly robust report and the gain was partially from a reduction in order backlog. 

Both sectors saw improvement though the services index was the only one above 50 or signalling growth at 50.5. Manufacturing was still declining but at a slower rate.

More importantly is that German manufacturing responded to a lower Euro with growth for the first time in four months.

Sure this doesn't mean that Europe is out of the woods already, but the debt crisis clearly isn't having as negative of an impact on 2012 business as most predicted when the year started.

Per Businessweek article:

  • A euro-area composite index based on a survey of purchasing managers in both industries rose to 50.4, a five-month high, from 48.3 in December, London-based Markit Economics said in a report today.
  • There is “tentative evidence suggesting that the downturn in the euro zone as a whole may be gradually bottoming out,” said Martin Van Vliet, an economist at ING Group in Amsterdam.
  • A gauge of euro-region manufacturing rose to 48.7 from 46.9, Markit said. A measure of services climbed to a five-month high of 50.5 from 48.8. Indexes of new business and backlogs fell in both industries.
  • German manufacturing expanded in January for the first time in four months and services growth accelerated, according to a separate release from Markit. The composite index of both industries reached a seven-month high.

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

Stat of the Day: Richmond Fed New Orders Surge

The Richmond Fed Manufacturing survey saw a surprise jump in just about every category for January. The overall index jumped to 12 from 3 and more than doubled estimates of 6. More importantly though was the new orders jumping to 14 from 7. This suggests continued strength heading into February.

The Richmond Fed which stretches from Maryland to South Carolina is generally not viewed as a key economic report, but it always gives the earliest insight into manufacturing for the current month. Heck, even some economists that I follow don't bother estimating the index each month.

For some reason, the Richmond Fed website isn't working so I had to pull this data from another report.

  • shipment index showed the most impressive performance January, soaring by 14 points from December to 17. 
  • employees index jumped eight points, to 4, from a negative reading in the previous month. 
  • new orders index doubled to 14 from its December showing.
  • current prices paid index rose to 2.53, up from December's reading of 1.55

Monday, January 23, 2012

401K Trends to Watch in 2012

Any followers of this blog know that I typically focus on individual stock research. My goal for 2012 is to spend some more time focusing more on trends in investments and especially more time on retirement options.

Interesting article yesterday from the Associated Press regarding trends in 401K plans. Mostly positive trends, but generally basic themes that are incredible that they weren't automatic from the beginning. Disclosing fees wasn't a requirement from day 1? Finally moving towards advice is another better late than never concept.

My number 1 frustration remains that the focus is on fees and not performance. Why not focus more on net return and less on fees? I'd rather pay 2% for a fund that makes 20% than 1% for a fund returning 10%. Sure I'd rather get 21% from the first fund with it charging only 1%. Still competition ultimately reduces fees, but net performance should be the focus.

Read the article for more details on the trends. Below are the 9 trends with my view on each:

1. Higher contribution limits

Good to see the limits increase with time. Most investors don't contribute anything close to this amount so it shouldn't be much of an issue. 

2. Improved fee disclosure
Amazing that it still doesn't require all fees to be disclosed. Absurd that investors won't know all the charges even after the new rules go into place. 

 3. Declining fees
As I mentioned above, lower fees are better if investors are getting the same quality. Net returns remain the key.

4. More ways to get advice

Oh brother, unbiased computer model? Ok, these computer models are good for modeling how much you need at retirement and how much to contribute. Novice investors still need advice that gets them in the correct investments for them. 401K providers should really ramp up advice for employees with say $100K+ in assets. 

Maybe as an investment advisor I'm just seeing potential clients.

5. More companies restoring 401(k) matches
Doesn't this seem ironic that corporate profits are at record levels and companies are just now restoring matching contributions. Would've thought just about all companies that suspended matches would've restored them by now and not only 75%. 

My other thought is that this will be more money into the stock market.

6. Larger number of ETFs and index-fund selections
As a stock picker I'm naturally against these, but some make sense for retirement accounts where the more important issue is for investors to contribute $$$ and returns are secondary. Also, the lack of advice in 401K plans makes basic investments sometimes better. Not to mention that most plans lack investment options so anything new would help.

7. Automatic features will rise
This just speaks to the sad state of the general public. The fact that auto enrollment boosted participation from 63% to 95% is incredible. Those 28% were just too lazy to sign up? The more incredible part that this report doesn't list was the amount of investors that left match money on the table. Free money and people were turning it down.

8. Options for generating income will grow
Ummm... not much details here, but the annuity concept concerns me.

9. Number of multiple employer plans will climb   
Great way for employers to save money though highlights why the system is so inefficient. Why not have the employers just contribute the money directly to employee directed IRAs at a custodian like Vanguard or Fidelity. Makes no sense that I get more control over my 401K plan after leaving a company than while employed. 

So the 401K concept is getting better, but it still has too many restrictions. More advice and less fees are great, but still too little. Investors should have the money contributed to an IRA where the employees could get an RIA to help manage the money. This way it would be outside the employers control which further reduces the reasons for so many restrictions. My old 401Ks always had too few options. 

Change is always too slow!


Saturday, January 21, 2012

Investment Report - Opportunistic Levered: January 2012

After a strong 2009 and 2010, 2011 was a year to forget for this portfolio. The market hit highs around the end of April and this model was soaring to new heights at the time. Many of the holdings had valuations nowhere near the 2007/08 peaks or even close to what would normally be considered rich. Regardless, leverage was reduced since some gains were significant. Then, unfortunately most of the stocks collapsed and even in a few cases approached 2009 lows. With too much leverage left, the model was hit very hard.

The good news is that valuations started the year as attractive as during the financial collapse of 2009.

2012 Outlook

Portfolio Construction
The portfolio remains overweight on the global growth theme. Most of the stocks in this sector trade as if emerging markets are headed towards a recession instead of continued growth.

The biggest challenge to our investment strategy in 2011 was the major inflation fears in emerging markets like China, India, and Brazil. As 2011 ended, all these countries were reporting inflation numbers at the lows for the year which is supportive of monetary easing that has already started in most cases. This removes a significant headwind for the global growth theme going forward.

2011 ended so badly that finding stocks that exceeded expectations for the year was difficult. Liz Claiborne (LIZ) was probably the best performer as the transformation away from the namesake brand towards kate spade, Juicy Couture, and Lucky Brands was completed. With the announcement of the new Fifth & Pacific (FNP) name and stock symbol, the stock surged to 52 week highs. As kate spade continues reporting astonishing sales comps, more is expected out of Liz in 2012.

Just about every other stock was uniformly disappointing. Even stocks like Riverbed Technology (RVBD) that met original earnings estimates were hit hard. Of course, I'd be remiss in not mentioning the fraud accusations against Puda Coal (PUDA) that sent the stock to the pink sheets and the bankruptcy of MF Global (MF) that wiped out a small position in the speculative stock.

Our top sectors for 2012 include Emerging Markets, Networking Equipment, Life Insurance, and Oil Services. Though the model doesn't generally focus on a sector lead approach, these sectors provide such great opportunities that the model has found multiple investment options.

Global Markets
As mentioned above, emerging markets were a theme from 2011 that has become even more attractive following dramatic selloffs in stock markets such as China and India. Europe though remains the biggest concern. As 2012 began it appears that the ECB 3 year liquidity program has had an unexpected impact on lowering Spain and Italian bond yields. This has led to at least a short term repreve from fears of European contagion. As long as this continues, cheap US stocks can rally. Until the Europeans resolve long term funding issues, the threat will always hang over the market.

As far as individual stocks, the model is more invested in companies benefiting from emerging market growth than headquartered in those countries. Look for that to change as the year progresses.

Some top picks include Weatherford International (WFT) that will benefit from increasing oil demand and Foster Wheeler (FWLT) that will see revenues grow from the need for the construction of more power plants and LNG terminals.

Crane manufacturers, Manitowoc (MTW) and Terex (TEX), are seeing a pick in both domestic and international markets as the need for global construction equipment finally rebounds from the crisis. While Alpha Natural Resources (ANR) will benefit from its positioning as the #3 metallurgical coal miner in the world.

ChinaCache (CCIH) is the leading CDN provider in the fast growing China internet market. Look for that market to continue growing and the stock to rebound as investors become more comfortable that not all China stocks are frauds. Look for more direct investments in Brazil and India as the year progresses.

US Market
US stocks enter 2012 extremely cheap. If Europe ever retracts from the headlines, this market will rally strong. Economics data was strong as 2011 ended suggesting better times ahead.

The presidential election remains a big concern as the year progresses. Obama losing the presidential race would generally be good for the markets at least in the short term. Unfortunately though a good stock market early in the year due to a strong economic rebound could actually place Obama in a position to win the election. This could actually tank the markets in the 2nd half.

US stocks are lead by opportunistic investments in Monster Worldwide (MWW) and SodaStream (SODA). Both stocks were absolutely crushed in 2011 that the model picked them up on the cheap later in the year. These stocks could rally even without a strong economy. SodaStream especially has the chance to expand market share in the home beverage market that will happen irregardless of the economy.

A couple of oil related stocks will continue to benefit from the expanding unconventional shale plays in the US. As the US looks to move closer to energy independence both oil producer Carizzo Oil & Gas (CRZO) and hydraulic fracturing company C&J Energy Services (CJES) will benefit from high oil prices. Low natural gas prices have held the stocks down, but that might not last long as the US looks to begin exporting LNG in the future.

Look for networking equipment stocks Riverbed Tech and Radware Systems (RDWR) along with storage equipment provider OCZ Tech (OCZ) to benefit from the need for faster corporate networks and cloud computing.

Insurance providers Hartford Financial (HIG) and Lincoln National (LNC) trade below 50% of book value and continue to provide solid earnings that increases book value each quarter. Look for the financial sector to break away from group trading as the financially fit such as these two rebound.

At the end of the day, though 2011 was very disappointing the returns for the first 3 years of the model were still exceptional. Investors should understand that this is a high risk, high reward model that will be very volatile at times. Investing after the model has gone through a rough patch typically provides better returns to investors than after a good year.

Thursday, January 19, 2012

Kraft Foods Is Worth How Much?

Yesterday, Kraft Foods (KFT) provided an update on fiscal 2011 results. Operating EPS was guided to $2.28 or slightly above analysts estimates. Naturally the company got a lot of media attention.

What didn't get a lot of attention is that Kraft now trades at a rich multiple for a company with just 6.5% organic revenue growth. The forward PE (2012) is now over 15. A very rich price when the S&P500 trades at roughly 13x 2012 estimates.

Kraft is a solid company, but the PEG ratio sits at 1.7 with a 5 year growth rate just short of 10%. Also, the dividend yield has dropped to only 3.1% with the stock jumping from the low $30s at the start of October to nearly $39 today.

Is Kraft worth paying that much? That would be my major concern when investing in the stock.

Read the full article at Seeking Alpha.

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

Wednesday, January 18, 2012

Met Coal Conundrum

Friday was a wild day in the metallurgical (MET) coal sector as Patriot Coal (PCX), Walter Energy (WLT), and Norfolk Southern (NSC) all made noteworthy announcements. With Patriot Coal and fellow met coal producer Alpha Natural Resources (ANR) both sinking more than 10%, one would assume that all of the announcements were negative.

Summary of the announcements from Friday:

  • Before the market opened, Patriot Coal put a major damper on the sector by announcing the closure of several high-cost met coal mines due to slumping demand for seaborne coal.
  • During the day, Norfolk Southern announced the loading of the largest volume cargo in the history of Pier 6 at Lamberts Point.
  • After the market closed, Walter Energy announced a reduction in 2012 production due to equipment and facility issues while announcing the market remains robust. (Walter still expects roughly 19% to 34% production growth for the year)

Naturally the news for Patriot Coal is disastrous for the company. Yet another warning in a year full of missed opportunities to climb the met coal food chain.

Read full article at Seeking Alpha.

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

St. Croix Refinery Being Closed By Hess

At first glance, this seems like good news for the US Virgin Islands. Why in the world would a beautiful Caribbean island want a disgusting, old refinery? Why not tear it down and build a golf course? Or at least that is my thought.

The Hovensa, a joint venture between Hess (HES) and Petroleos de Venezuela S.A, refinery in St. Croix is being closed due to various reasons such as lower demand since the financial crisis and modern refineries in the emerging markets. Also, another reason for the closure is that it is an oil-fueled operation leaving it at a disadvantage versus one fueld by nat gas. Isn't this just short sighted? That advantage will flip flop numerous times over the next 10-20 years.

The 350,000 barrel per day refinery has been in operation since the 1960s and clearly provides a huge tax income for the island. Looking at the picture below I still wonder why paradise would want such a disgusting operation. Of course, the real question is whether Hovensa will tear it down or just let it fall apart.

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

Tuesday, January 17, 2012

What BHP Billiton Production Report Tells Us About Minerals

Always interesting to see what the major miners such as BHP Billiton (BHP) are producing and developing. Most noteworthy for BHP are the iron ore, met coal, and copper production figures from their 2nd half 2011 production report. All 3 commodities are in hot demand in China and BHP had all the incentive in the world to increase production in 2011 over 2010.

  • Iron Ore production increased 23% for the 2nd Half (2H). Production in Western Australia delivered a quarterly record. Full year production for 2012 is expected to increase. 
  • Met Coal production dropped 2% in the 2H over 2010. The December quarter did see a 9% increase over last year. No real prediction on 2012 production levels. 
  • Copper production dropped 16% for the 2H and 7% for the Dec quarter. Production is forecast to drop in 2012
These results are consistent with the general opinion that iron ore is relatively easy to mine while copper and met coal are much more difficult and hence will become much more valuable commodities as time progresses.

Naturally short term pricing will be dependent on a strong China economy and to a lessor extent on the recovery in the US. What lies ahead for the markets when both economic powers see strong demand at the same time will be interesting. Everybody seems to forget that US demand has been down since 2006 while China surged ahead. If demand increases in the US for housing and cars, serious pressure could be placed on the supply of copper and met coal.

Disclosure: Long ANR (met coal) and FCX (copper). Please review the disclaimer page for more details. 

Monday, January 16, 2012

Indian Inflation Continues The Descent

India's headline inflation plummeted in December following the previously announced sharp drop in food prices. The inflation figure came in at 7.5% down from 9.11% rate reported for November.

While generally inline with consensus, the reading provides solid confirmation that India has been able to use monetary policy to slow the inflation rate. Now the real question is how low the rate will drop and whether this will provide enough room for the RBI to drop interest rates.

Simple math suggests the rate will see further drops as such a huge drop suggests month over month inflation is flat lining.

Of the components, manufacturing inflation remained at 7.4% while fuel inflation only saw a modest decrease to 14.9%. Just don't see how fuel inflation can remain so high if oil is virtually flat this year. Only currency could explain stubbornly high prices and that will reverse in due time.

Per CNBC.com report:

  • The wholesale price index (WPI), the main inflation gauge, rose 7.47 percent from a year earlier, slowing from a 9.11 percent rise in November, roughly in line with the 7.50 percent increase forecast in a Reuters poll.
  • Food inflation tumbled to 0.74 percent in December from 8.54 percent in November 
  • Fuel inflation was 14.91 percent compared with 15.48 percent
  • Manufacturing inflation was at 7.41 percent compared with a reading of 7.7 percent in the previous month.

To Stone Fox Capital, this is just more evidence that the emerging market inflation scare of 2011 was overdone. The BRIC nations could see very robust equity returns in 2012. 

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

Analyzing The Unknown Domestic Oil Service Companies

After watching a Mad Money feature on little known Key Energy Services (KEG), it got me to wondering what other oil service plays I didn't really know. Everybody has heard of the big players in the sector such as Haliburton (HAL), Schlumberger (SLB), and Baker Hughes (BHI). What about the second tier companies?

Hydraulic fracturing and horizontal drilling remain all the rage, even with natural gas prices plunging to 10 year lows this year. Even with expected rigs drilling for natural gas declining, it wouldn't be surprising to see them move directly into oil shale plays as oil remains around $100. Not to mention one needs to be careful when focusing on the current price of natural gas as future prices on the NYMEX remain in the $4-5 range.

Read full story on Seeking Alpha.

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

Friday, January 13, 2012

Fastest Earnings Growth For 2012 Revisited

Back in July of last year, I did a series of articles about companies with relatively cheap valuations that were expecting the fastest earnings growth in 2012 (See 1, 2, 3, 4). These companies offered the potential for huge stock gains if earnings estimates were met.

Unfortunately, just as I wrote those articles the global economy went into a tailspin due to the European debt crisis and stock prices collapsed along with the earnings estimates of the majority of those stocks

Now as global stock markets appear ready to head upwards, it seemed like a good time to revisit this list. It is always a good idea to check the outcome of a previous concept. How did the stocks perform? Were earnings estimates met? What about the valuation now?

Read full article on Seeking Alpha.

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

Investment Report - January 2012: Net Payout Yields

December was yet another solid month on a absolute basis, with a 0.53% gain for this portfolio, but on a relative basis the portfolio underperformed the benchmark S&P 500 that was up 0.85%. For 2011, the portfolio was up 6.82% versus 0.0% for the benchmark. Despite all the volatility in the markets, the Net Payout Yields Model had a good absolute and relative performance for the year.

2012 Outlook 
Since this portfolio is not dependent on fundamental analysis or economic forecasts, it isn't always prudent to focus on the prognosis for the stock market and economy. The whole goal is to find high net payout yielding stocks and then harvest the benefits of huge dividends and stock buybacks. In a way, let the management teams earn their money while investors enjoy the spoils.

Naturally as an investment advisor with other active portfolios, I definitely have opinions on the market and economy but it just doesn't seem prudent to focus on them here. Anybody interested can view my 2012 outlook from my other models.

What I will say is that a lot of dividend only stocks appear overvalued. [See my article on Seeking Alpha: Dividend Stocks Priced For Perfection] Investors have jumped into them at the end of 2011 to chase yield at reckless abandon almost as if capital gains or losses are irrelevant. Those 4% dividends won't appear that attractive if the stock is down 4% for the year netting zero gains, but a nice little tax bill on those dividends for taxable accounts.

My thought is that high buyback stocks might shine this year as those purchases at lower prices finally begin paying off. Regardless this model invests in the highest yielding stocks whether dividend based or stock buyback focused. It lets the market and management teams tell us which option is cheap.

December was a normal month for trades with only one trade executed. Capital One Financial (COF) was sold as its yield never recovered from the financial crisis making it no longer appealing.

Though December was a slight positive month for both the portfolio and the benchmark, the portfolio had several stocks with large losses including DirectTV (DTV), Hartford Financial Services (HIG), and Accenture (ACN) all down more than 8%.

On the flip side, Home Depot (HD) and Bristol-Myers Squibb (BMY) had gains of nearly 8% to offset some of those large losses. The latter of which was sold on January 3rd which is typical for this model. A lot of times leaders will be sold as large gains lead to smaller yields. Again letting the market let us know when to sell a drug stock instead of attempting to figure out the complexity of the drug pipeline.

2011was a good year for this portfolio that solidly outperformed the S&P 500. While generally expecting a positive year for US equities in 2012, one can be assured that this portfolio will continue harvesting strong dividends and benefiting from stock buybacks regardless of an up or down market.

Disclosure: Long DTV, HIG, ACN, and HD. Please review the disclaimer page for more details. 

Thursday, January 12, 2012

Dicks Sporting Goods Surges On Stock Buyback

After trading down 2% in after hours due to a warning from competitor Big 5 Sports (BGFV), Dicks Sporting Goods (DKS) is up 11% now based on the announcement of a $200M stock buyback and reiterating of Q4 guidance.

It appears that most market participants were expecting at the least a earnings miss. Instead they got a big buyback to support the stock price. This is what happens when investors focus too much on the weak competition. Difficult to extrapolate too much especially when it's just a regional player as well.

DKS did lower the upper guidance by $0.01, but that wasn't a shock. Comps are now expected to be flat versus the original expectation of slightly up.

The buyback is interesting as I don't see DKS stock as incredibly cheap, but the company is one of the few retailers that has the cash on hand.


  • announced today that its Board of Directors has authorized a share repurchase program of up to $200 million of the Company's common stock over the next 12 months. (roughly 4%)
  • expects consolidated earnings per diluted share to be $0.87 to 0.88 for the fourth quarter of 2011. 
  • For full year 2011, non-GAAP consolidated earnings per diluted share are expected to be $2.01 to 2.02. The Company's fourth quarter and full year 2011 revised expectations compare to original guidance of $0.87 to 0.89 and $2.01 to 2.03, respectively, as previously disclosed in its press release dated November 15, 2011.
  • expects fourth quarter 2011 consolidated same store sales to be slightly negative to slightly positive compared to the original outlook of flat to an increase of 1%.

With this news the stock is back over $40 and approaching the $41 closing highs from back in mid November. The gap is concerning, but many stocks lately are forming gaps and not filling them. At least not immediately. See Liz Claiborne (LIZ)

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

Spain, Italian Bond Yields Plunge

Evidently the 3 year funding program initiated by the ECB at the end of 2011 was more crucial to the bond markets than anybody originally thought.

Spain issued twice as many 3 year bonds as planned at a yield significantly lower than last year. The 10 billion euros were priced at 3.38% compared to 5.18% when auctioned in December.

Italy placed 12 billion euros and greatly reduced rates as well.

So much for the funding concerns that Europe was suppose to face in 2012. The ECB liquidity measure has been a boon for at least bonds 3 year or less in duration. Now extending bond sells to 5 & 10 years might be an issue. For example, Italy still has a 10-year yield of 6.6%.

This news makes me wonder how the Corzine trade at MF Global would've faired now considering the drop in rates. Those 1 year Italian notes would've paid handsomely at this point.

Some more good auctions like this and the market will put Europe on the back burner and start focusing back on fundamentals.

Per BusinessWeek article:

  • Spain sold 10 billion euros ($13 billion) of bonds, twice the target for the sale, while Italy placed 12 billion euros of bills, easing concerns the countries would struggle to finance their debts and sending bonds higher.
  • Spain sold a new benchmark three-year note due July 2015 to yield 3.384 percent, the Bank of Spain said in Madrid. That compared with 5.187 percent the last time similar maturity debt was sold in December. 
  • Italy’s Treasury sold one-year bills at 2.735 percent, less than half the 5.952 percent paid on similar- maturity securities on Dec. 12.
  • The ECB lending “means there is abundant liquidity in the system and this is something that helps ease the supply pressure,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.
  • Spain’s benchmark 10-year bond yield declined 20 basis points to 5.13 percent at 2:20 p.m. Madrid time, the lowest in more than a week. Italy’s 10-year yield slipped 35 basis points to 6.63 percent, while the yield on Italian two-year debt plunged 54 basis points to 4.17 percent.
  • “The effect of the ECB’s latest liquidity measures is palpable and has been a boon for the shorter end of the curve,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London said in an e-mail. “Few would have predicted as recently as last month that Italy would be paying as little as 2.7 percent for 1-year paper. This is on a par with Italy’s borrowing costs before it got sucked into the euro-zone crisis in July.”

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

Wednesday, January 11, 2012

Liz Claiborne at IXR Conference Today

Liz Claiborne (LIZ) stock has rallied back 3.5% today from the warning after the close on Monday that led to a 13% drop yesterday. See our note from 2 days ago.

Apparently at the ICR XCHANGE conference today, CEO presented some bullish 2012 comps news on the 3 brands. See below. He also reiterated that the majority of any decline in EBITDA expectations were due to a reduction in the expected cost cuts reached in 2012.

kate spade:        10%+
Lucky Brands:  10%
Juicy Couture:     5%

Anybody following LIZ should browse through the presentation on the website. It provides some good summaries and expectations for the global expansion of the 3 brands.

LIZ is almost like a biotech firm with 3 promising drugs that just got FDA approval. That's the feeling one gets when reading about these brands potential and how they were all held back with the restructuring in LIZ over the last 3-4 years.

Each brand has the potential for over $1B in annual sales with kate spade expected to be a multi billion brand. If that seems lofty, just note that Coach (COH) is expected to hit $4.7B in sales this year.

One should consider that Coach (COH) trades at a multiple of over 4x sales. LIZ has a multiple of only .5x sales. As kate spade and Lucky Brands keep popping out those double digit comp gains, look for a shift in the multiple to something greater than 1x.

The stock has already responded recently hitting 52 week highs, but the story is still in its infancy. LIZ or FNP in May is now a growth story where the focus on comp sales and new stores will be the norm. This could and should lead to dramatically higher prices. LIZ trades at very low multiples considering the franchise brand had 58% comps in Q4. Heck even Lucky Brand had 20% comps.

Now with the expectation that 2012 will be the inflection point with Juicy Couture and LIZ will become a major growth story.

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

Tuesday, January 10, 2012

Chart of the Day: Mega Caps Breaking Out

Interesting charts on mega caps Intel (INTC) and Pfizer (PFE) presented on Fast Money. It appears that after roughly a decade of no movement, at least some of these huge stocks are starting to break out of long term confined patterns. These stocks will help push the major indices up if the breakouts continue.

This is interesting as some mega cap stocks such as INTC appear on the Net Payout Yield list. The yields are incredibly high considering that the 10 year yield remains below 2%. INTC alone has a 3.3% dividend yield without counting any buybacks. Shouldn't be that much of a surprise that investors are finally catching on to these attractive yields. 

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

Monday, January 9, 2012

Liz Drops After Hours

After the close Liz Claiborne (LIZ) dropped over 11% on a release that the CFO would be leaving in March and the EBITDA numbers would be slightly lower than expected.

Not surprising to see the stock dropped based on those data points, but it shouldn't shock anybody that LIZ has struggled to hit numbers. The stock doesn't trade based on them exceeding guidance so a slight guide down for next year really shouldn't hit the stock that much.

More important is the fact that both the kate spade and Lucky brands had huge comp growth in November and December. In fact, kate spade had 39% comp store growth in December after 81% in November. That is the highest number I've seen.

Brand November December *
kate spade 81% 39%
Lucky Brand 16% 21%
Juicy Couture (7%) (5%)

The stock will have a market cap around $850M at the open or just 6.4x the 2012 EBITDA estimate. As I'll continue to argue the stock trades at a level that doesn't suggest it was trading based on the original estimates. kate spade alone could be valued at more than the current market cap.

The CFO leaving is a slight negative. It isn't until 2 months from now so it isn't something that should alarm investors. Stock might bounce back in the morning as investors might be over reacting after hours. LIZ traded at 52 week highs today.

  • Expects 2011 pro-forma adjusted EBITDA to be in-line with guidance, at the low end of the range of $80 to $90 million 
  • Revises forecasted 2012 adjusted EBITDA from a range of $130 to $150 million to $125 to $140 million 
  • Expects year end net debt to be in the range of $265 to $270 million

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

Spin-Off Mania Benefits Alert Investors

The major difference between an IPO and a spin-off is that one gets major media 'spin', while the other can be vastly ignored. The lack of a major financial transaction-- and hence, fees-- tends to reduce the push by investment houses. Just by viewing articles posted on this very website one can quickly derive that the general public has less interests in spin-offs versus IPOs, to their own detriment. This provides a major advantage to alert investors. Outside the major spin-offs, like the upcoming ones at Kraft (KFT) and ConnocoPhillips (COP), the others fall under the radar by the investing community.

Historically, spin-offs have provided solid returns for savvy investors. This is partly due to investors ignoring or not understanding the new security, but also because spin-offs allow both the parent and the spun off company to thrive, with each management team free to focus on its direct business.

A few interesting spin-offs took place around year-end to little or no fanfare.

TripAdvisor (TRIP) from Expedia (EXPE) - See presentation
WPX Energy (WPX) from Williams Energy (WMB) - See presentation
Orchard Supply Hardware (OSH) from Sears Holdings (SHLD) - see presentation

Read the full article at Seeking Alpha.

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

Friday, January 6, 2012

Savient Pharma Gets Permanent J-Code For KRYSTEXXA

Effective January 1st, KRYSTEXXA was assigned permanent J-code J2507 by the Centers for Medicare and Medicaid Services (CMS). This code allows healthcare providers an easier and quicker method for getting reimbursed for KRYSTEXXA infusions.

While already known that KRYSTEXXA would get the permanent code on January 1st, confirmation is always good. Saivent Pharma (SVNT) had a horrible 2011 due to slow sales from this new drug approved for treatment for refractory chronic gout (RCG).

The J code will undoubtedly help. By all accounts, the new drug works and the only issue has been working out the reimbursement process. Considering the time it takes to work through the system, SVNT doesn't expect a major impact until Q2.

At just $2.4 and with a market cap around $170M, SVNT has become an extremely cheap stock if this J code solves all the issues with sales. It seems bizarre that this would solve the problems, but it is an expensive drug.

  • product-specific billing code, or permanent J-code, for KRYSTEXXA® (pegloticase) became available on January 1, 2012 . The new J-code, J2507, was assigned by the Centers for Medicare and Medicaid Services (CMS) and will help simplify the billing and reimbursement process for prescribers of KRYSTEXXA, the first and only U.S. Food and Drug Administration (FDA) approved treatment for refractory chronic gout (RCG).
  • "The availability of a permanent J-code for KRYSTEXXA is a significant step toward ensuring that healthcare providers and their patients with severe and debilitating gout, or RCG, have access to the first and only product for RCG," said John H. Johnson , Chief Executive Officer and President of Savient Pharmaceuticals. 

Remember this stock was over $11 back in April.

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

Thursday, January 5, 2012

Storage Wars: SSDs Version

Note: This was my submitted title to Seeking Alpha, but alas the editor changed it. Must not be a fan of Storage Wars.

As cloud computing (data centers), smartphones, and tablets continue stratospheric growth rates, the market needs faster, more reliable, and less power-hungry storage options. The digital junk has to be stored somewhere, and these new devices don't have the storage capabilities of traditional desktop computers loaded with large hard disk drives.

Enter the SSDs, or Solid State Drives (read The SSD Revolution for a good overview of the sector) which provides a better alternative than traditional hard drives, though at a higher cost.

Between analysts raising estimates for Fusion-IO (FIO) and OCZ Technology (OCZ) upping estimates for Q4, the sector has startling growth potential for 2012. Numbers that caught me by surprise.

Read full article on Seeking Alpha.

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

Wednesday, January 4, 2012

Liz Claiborne Surges on Name Change

Liz Claiborne (LIZ) surged 9% today on news that its new name would be Fifth & Pacific and trade under the symbol FNP beginning May 15, 2012. Wow, guess the problem all along was a name associated with an old business line.

Guess people really liked the new name. My wife seemed to think it sounded like a hip California concept. She sure knows fashion better than me.

"While it's difficult to replace an iconic name like Liz Claiborne, we believe that Fifth & Pacific Companies telegraphs who we are today – taking inspiration from New York and California , while describing our reach and our potential. From New York to Los Angeles to Shanghai and beyond, our intrinsically American brands have global appeal, serving customers worldwide with high quality and imaginative product," said Liz Claiborne Inc. Chief Executive Officer William L. McComb .

The move was even more bizarre given that it was a known event in the works. [Read: Liz Claiborne Transformation Complete: A Look At What's Left] Sill like my name: Lucky spade.

Possibly the new name was just the catalyst for a technical move. The stock was holding in a tight pattern above important moving averages and this little catalyst was enough to juice the stock to new 52 week highs.

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

Dividend Stocks Priced For Perfection

On Wall Street it appears that a good thing has to always end in a bubble as investors follow the herd.

With interest rates on government debt so low, naturally investors finally began flocking into high dividend-paying stocks in the 2nd half of 2011. It only makes sense to grab a 4% yielding large cap when the 10-year Treasury pays a sub 2% rate.

What doesn't make sense though is that investors have begun flocking to dividend-paying stocks with reckless abandon. The thought process is apparently void of any concept that capital appreciation or at least stabilization is so crucial in that 4% dividend paying off.

Read the full article on Seeking Alpha.

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

Tuesday, January 3, 2012

Cramer Still Pounding the Table on Dividend Stocks

The dividend trade sure seems played out so I was shocked to see Cramer still pushing dividend stocks on Mad Money. Still no mention of Net Payout Yields. Still ignoring buybacks. Why?

What is a dividend after all? Isn't it just the company returning capital to shareholders? Aren't investors more concerned about where the dividend money is coming from? 

This is exactly where investors apparently get lost. What matters is the earnings yield. The profits divided by the market cap.  Is FirstEnergy (FE) a better investment because it pays a large portion of earnings to shareholders or is Apple (AAPL) better because it grows a lot faster and trades at a lower PE?

Does AAPL become a better investment by paying a 5% dividend? Everybody knows it can afford such a yield. 

Lately investors have become confused with what a company earns and what the company pays out to shareholders. Don't get those concepts confused or you'll get burned by the apparent latest bubble.

The ability to earn consistently growing profits is the ultimate key. Yes, that concept is usually manifested by the dividend yield, but your missing the forest for the trees if that is the sole focus.

Cramer video:

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

Widespread Stockouts of Sodastream Machines

Don't know anything about Monness, Crespi, Hardt $ Co., but according to StreetInsider.com the company issued a note today indicating that Sodastream (SODA) had a great Christmas.

This shouldn't be too surprising to anybody that follows SODA. The company has been reporting blowout numbers all year, but the stock cratered due to conservative guidance for the 2H of '11. The company already blasted past estimates in Q3 though it didn't help the stock.

According to the report, Monness issued a report showing a recent survey of more than 1,500 retail locations around the US including Target, Staples, Best Buy, JCPenny, and Macy's showed very little supply in stock. The items were evidently selling lot hot cakes.

The analyst estimates $.28 in Q4 which is above street estimates, but considerably below Q3 of $.42. Don't be shocked if SODA reports more mind boggling numbers this time as well.

The stock has plunged this year from the $80s to currently around $34. Incredible when considering that the company hasn't skipped a beat. The only issue remains estimating future results.

SODA ended up 6.5% today. Chart is starting to look positive for a breakout back to the July highs.

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

Who Benefits From The Resurgent Deep Gulf Drilling?

Raise your hand if you realized that by early 2012 there will be more deepwater rigs in the Gulf of Mexico than when the BP spill occurred. According to ODS-Petrodata, 40 deepwater rigs will be in the Gulf compared to 37 before the spill. As an investor and especially one that has invested in the sector, this news caught my attention as something the general investing public doesn't understand yet. So what stocks will be able to take advantage of this trend in 2012?

First, companies that focus on drilling deepwater wells in the Gulf could benefit the most with the rising demand and possibly less competition as many rigs fled the area. Second, any companies in the deepwater segment should benefit with rising sector demand and higher global utilization lifting all day rates regardless of location.

Read the full article at Seeking Alpha.

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