Wednesday, February 29, 2012

SodaStream Moving To US Currency

SodaStream (SODA) reported Q4'11 earnings this morning that vastly disappointed the market. The numbers were very solid and the guidance was much higher than estimates, but the market tends to hone onto the weakest numbers with SodaStream when valuing the company.

The weakest number in Q4 was the meager 8% soda maker sales increase. Though the company has been clear that a lot of retailers pulled sales into Q3 accounting for the 60% increase last Q, the market just decides to act ignorant and sell the stock hard.

My guess is that a ton of shorts chose to push the 'negative' number hard in order to exit a short position or to cause panic for larger gains. One analyst even went so far as to suggest that soda maker sales were decelerating which is a clear blatant misstatement. Every data point suggests that SodaStream distributors sold out for the holiday period, pulled sales into Q3, and management guided up for 2012. None of these data point suggests a problem down the road.

More importantly and completely ignored by the market is that SodaStream has moved to the US currency effective January 1st. This should help the stock price considerably as it was the only stock in my universe of coverage that analysts report in non-USD. For example, the numbers reported by Yahoo! Finance are in Euros causing the price to earnings ratios to be grossly under reported.

As mentioned the guidance provided by management suggests earnings of $2.11 in '12 and $2.74 in 2012 (assuming 30% growth). At the current price of $41, it trades at a forward PE of 15. Less than half the 5 year expected growth rate of 30%.

Info per the earnings release:

Fourth Quarter Fiscal 2011 Highlights
  • Revenues increased 32% to Euro 66.1 million
  • Americas revenues increased 70% to Euro 24.6 million
  • Adjusted diluted earnings per share was Euro 0.25 or $0.32*
  • Unit sales of soda makers increased 8% to 767,000 (sales pulled into Q3 + numerous sellouts)
  • Unit sales of flavors increased 24% to 4.6 million
  • Unit sales of CO2 refills increased 27% to 3.4 million
  • US retailers sold 430K units versus purchasing 220K 

Full Year 2012 Guidance

The Company expects full year 2012 revenue to increase approximately 28% over 2011 revenue of Euro 222.7 million ($289.0 million per the convenience translation of 1.2973).  On an adjusted basis, excluding the share-based payment expense, 2012 net income is expected to increase approximately 35% over the Adjusted net income of Euro 25.3 million ($32.9 million per the convenience translation of 1.2973) reported in 2011.



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



Can These Natural Gas Stocks Live Off Oil Until 2015?

Not that the expectations are for natural gas prices to remain this low until 2015, but this is when the real possibility of the US exporting natural gas begins. Until then the possibility remains that the new shale production techniques will keep production ahead of domestic demand and prices low.

Without a serious energy policy to utilize this increased resource, it is very probable that this country will begin exporting our cheap energy supplies to Europe and Asia while still importing expensive oil and gasoline. That is assuming the big producers of natural gas remain in business in a subdued pricing environment.

The main catalyst for the focus on surviving until 2015 was the huge announcement yesterday that Blackstone would invest $2B in Cheniere Energy Partners (CQP) to provide the equity financing needed for the construction of export facilities at the Sabane Pass liquefaction project in Lousiana. This will be the first natural gas liquefaction export facility in the continental United States hence ushering the domestic market into the world prices similar to oil.

Read the full article at Seeking Alpha.


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




Tuesday, February 28, 2012

Focusing On Dividends Alone Remains A Big Mistake

Investors continue to focus on dividends as the best and in some minds the only way to return capital to shareholders. That remains a big mistake as the population of stocks with a high dividend payout ratio, not to mention ones that even pay dividends has been shrinking just about every decade.

Several key factors have influenced these decisions. First, the historical tax disadvantage of dividends versus long term capital gains has worked to weaken the focus on dividends. Second, the SEC instituting rule 10b-18 back in 1982 made it easier for firms to implement buybacks without stock manipulation charges. Third, market participants place such a great emphasis on maintaining steadily increasing dividends that corporate boards prefer the flexibility of buyback programs over the negativity of reducing a dividend.

Read the full article on Seeking Alpha.


Disclosure: Long COP, GPS, KSS, TRV. Please review the disclaimer page for more details. 



Stat of the Day: Blowout Numbers From the Richmond Fed

Manufacturing activity in the central Atlantic region were off the charts bullish as reported today. The broadest indicators of overall activity - shipments, new orders, and employment - all saw noticeable jumps from January.

The February Richmond manufacturing activity increased eight points to 20 from January's reading of 12. Also, the new orders component jumped 7 points to finish at 21.

The prices paid remained in check with raw material prices increasing at a 2.25% annual rate while finished goods rose at 0.97%. These numbers are all down from considerably higher levels in 2011.

As can be seen from the chart below, this report tends to be very volatile. Since the 2008 financial crisis, this the 3rd run the index has made towards the +20 level. A level that suggests a very healthy sector. Unfortunately, the last 2 trips only saw fleeting success as the index quickly declined back towards the flatline.


Figure - Richmond Fed Manufacturing Activity


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





Sunday, February 26, 2012

China Stocks Continue 2012 Surge

As the markets open on Monday in Asia, China has jumped another 17 points after a blistering start to 2012. The Shanghai Composite as already jumped roughly 15% from the lows in early January.

Expect to start hearing correction calls this week. Sure that market needs a breather, but it isn't even back to the mid November levels. Difficult to see that as an over extended when looking over the last 6-8 months.

Our models remain invested in China stocks ChinaCache (CCIH) and Lihua Holdings (LIWA) plus numerous other stocks that benefit from a soft landing in the economy and rebounding stock market. In addition, the market action makes us more interested in finding some China stocks trading is the US that haven't moved yet.







Disclosure: Long CCIH and LIWA. Please review the disclaimer page for more details.



Friday, February 24, 2012

Big Reversal In Alpha Natural Resources

After a not so surprising weak Q4'11 report, coal miner Alpha Natural Resources (ANR) started trading down nearly 5% today. It didn't take long for the stock to reverse and is now trading up nearly 3%.

It really isn't worth focusing on the earnings report. Alpha Natural is a long term trade on the increasing demand for met coal in countries like China and India. The low cost of natural gas is having a dramatic impact on thermal coal pricing and demand placing serious margin pressure on Alpha Natural. Since it is all temporarily, it just isn't worth the effort. Nat gas prices will eventually rise and China appears to be storming back. Normalized earnings will be the key going forward.

More importantly today was the major reversal that has a tendancy to signal a bottom in the stock. With the major support now put in around $20, longs have a basis for being more aggressive. If the stock can break above the channel around $22.50, longs will get very aggressive.





Update 3pm: ANR closed at $20.46 on high volume just above the 10ema. Very bullish sign if the stock can get some follow through next week.


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



Thursday, February 23, 2012

Fund Flows Turn Slightly Positive For Equity Funds

For the week ending 2/15/12, the flows into long-term equity funds were $11.9B according to the Investment Company Institute. The kicker though is that the majority of the funds still went into bonds with only $35M flowing into domestic equities.

Along with straight bond funds that have been averaging over $7B in the last month, hybrid funds are hot. Hybrids invest in both bond and equity funds suggesting that investors still favor a high mix of bonds.

Over the last 5 weeks, equity funds have had positive flows for 3 of the weeks. Still the flow percentage for equity funds remains around 10%. Suggesting that even one of the strongest rallies ever to start a year isn't enough to draw investors back into the market.

These number put into question the investment sentiment numbers. How can investors be wildly bullish on equities if the fund flows are so benign. If anything, the suggestion is that bond investors remain overly bullish. The correction should be in bonds. 

See below table from ICI:


                      1/18/2012    1/25/2012    2/1/2012    2/8/2012    2/15/2012
Total Equity    -480              1,157    -1,698    3,640    1,043
     Domestic    -801                 834    -1,807    1,936    35
     Foreign        320    323    108    1,703    1,008
     Hybrid       1,262    2,624    2,196    2,491    2,660
Total Bond      5,989    7,674    7,491    7,054    8,196
     Taxable      4,246    6,503    5,865    5,314    6,463
     Municipal    1,743    1,170    1,626    1,740    1,733
Total                 6,771    11,454    7,989    13,184    11,899



    

Sears Squashes Shorts

With some 30% of the float short, it shouldn't be that shocking to see any hint of good news send Sears Holdings (SHLD) 20% higher as it did today.  With Q4'11 earnings, Sears announced the sale of 11 prime mall locations for $270M. Combined with a rights offering and spin-off of the Hometown and outlet for $400-500M, Sears has plans to quickly raise liquidity by $1B.

So while all the market experts focus on yet again disappointing earnings, Sears squashed the shorts that continue to fail to realize the substantial assets the company controls. For whatever reason, investors continue to forget that the valuation of a company should be the net assets plus the discounted cash flows or earnings.

In the case of Sears, most people agree that future cash flows are a big question market, but most of those people continue to ignore the vast unencumbered real estate holdings and valuable brands.

The reason for the huge jump today is that the add liquidity and especially the ability to sell so few stores for so much cash caught many shorts off guard. Many thought the company could be headed to bankruptcy. Not so fast says Chairman Eddie! Apparently many a trader missed those $160M shares purchased by Eddie when the stock slumped to $30 on liquidity fears. He has already doubled his money in just a few months.

Now I wonder if Eddie will have the cash to finish some share buybacks to further reduce the float and squeeze even more shorts. As long term investors have known for a long time, Eddie had a plan to begin monetizing these assets and the theory was that he'd wait until the float had been shrunk very low. With his big purchase, now appears to be the time.

Highlights from the announcements today:


Real Estate Transaction
  • definitive agreement for the sale of eleven Sears full line store locations to General Growth Properties for a purchase price of $270 million. ($24.5M/store - though reportedly the HA property went for $250M alone)
  • transaction is expected to close in the next 45 to 60 days
  • stores will continue to operate as Sears locations into 2013 with final closing dates to be determined and announced later this year.
  • though includes a Hawaii store, the list also includes stores in IA, OK, TN, and UT.

 Separation of Hometown and Outlet Businesses

  • separate its Sears Hometown and Outlet Businesses and certain hardware stores through a proposed rights offering that is expected to raise approximately $400 million to $500 million.
  • rights will entitle holders to purchase shares in the combined Sears Hometown and Outlet Stores businesses and certain hardware stores and will be transferred to holders of Sears Holdings common stock.
  • Edward S. Lampert, Chairman of the Board of Directors of Sears Holdings and Chairman and Chief Executive Officer of ESL Investments, Inc. (together with its affiliated funds, ESL), has advised us that ESL, which is Sears Holdings' largest shareholder, intends to exercise its subscription rights in full at the anticipated valuation, subject to the successful completion of the transaction process. 

Q4'11 Earnings

  • Just click the link and read the report. Too ugly to repost!

Links to other blog posts and Seeking Alpha articles on SHLD:

Sears Holding: Impossible To Cover
Is Sears Holdings Finally Turning Into A REIT?
Sears Holdings Externalizing Brands Could Be Major Catalyst For Stock
The Death of Sears Holdings Is Awfully Premature




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





Nasdaq 4,000?

After investing through the 2000 investment bubble, its interesting to see an analyst on CNBC talk about the Nasdaq surging through 3,000 (closed at 2,933 on Wednesday) all the way to 4,000. After the crash from over 5,000 to the 1,000s it seemed like reaching back to those lofty levels might not even happen in my lifetime. Ok, I'm not really that old so I knew it would happen at some point.

Now 4,000 wouldn't really approach the peak back in 2000, but it should be close enough to really spark the small investor back into the market. Of course, most of the gain could just be achieved via a large increase by mega stock Apple (AAPL) to $650 or $700. Too lazy to do the math, but Apple makes up a large percentage of the NAZ.

Below is the video on CNBC:






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



Wednesday, February 22, 2012

Chart of the Day: Gafisa

After a horrible 2011, this Brazilian homebuilder has had a surprising start to the new year. Gafisa (GFA) was virtually left for dead as 2011 ended, but the market has probably gotten the biggest shock to see Gafisa rally big time.

Similar to the move in Brazilian wireless provider NII Holdings (NIHD), the chart below shows a much improved technical position from the start of the year.  Not only has the downtrend been broken, but the stock shows signs of breaking out to the upside. Looks like roughly a $1 higher at $7.5 will be the key resistance level.





With all the interest rate cuts in Brazil towards the end of 2011, it really shouldn't be a big surprise that Gafisa at the very least has regained momentum. Looks like much more room to run as well as the stock has only returned to mid November levels.


Stone Fox Capital (position sizes as of 2/17/12)
Stone Fox Capital holds an allocation of 3.6% in $GFA in his Opportunistic Arbitrage Long Only Investment Model
Stone Fox Capital holds an allocation of 3.9% in $GFA in his Opportunistic Arbitrage Investment Model


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



Tuesday, February 21, 2012

DirecTV Is Cheap By The Numbers and The Yields

Investors continue to ignore that massive buyback program undertaken by DirecTV (DTV) in favor of other cable and communications providers. In fact, this $31B market cap company used $1.1B to return capital to shareholder in the form of buybacks in Q4'11 alone. Now it has announced a new $6B buyback program that amounts to 20% of the outstanding stock.

Investors are clearly enamored with dividends so much that they've clamored to cable companies and wireless providers that have higher dividend yields than DirecTV. Sure those yields are nice and far exceed treasuries, but why ignore the nearly 20% yield being offered by DirecTV?

Read the full article on Seeking Alpha.


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


Monday, February 20, 2012

TripAdvisor Takes Investors On A Wild Ride

Recent spin-off TripAdvisor (TRIP) [see Spin-Off Mania Benefits Alert Investors] had possibly the most disappointing Q4'11 earnings report reviewed so far. The spin-off from Expedia (EXPE) offered huge potential as it became independent from the bigger corporation.

TripAdvisor provides a travel research platform which aggregates reviews and opinions of members about destinations, accommodations, restaurants and activities throughout the world. In a way, the travel version of IPO filer Yelp (YELP) and recent IPO Angie's List (ANGI). With 50M monthly users and expanding Facebook interaction, TripAdvisor appeared to provide huge earnings growth potential.

Read the full article on Seeking Alpha.


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



Friday, February 17, 2012

Aruba Networks Revenue Growth Disappears In Thin Air

Aruba Networks (ARUN) continues reporting strong revenue growth as customers latch on to the BYOD (bring your own device) enterprise wireless solutions. Unfortunately though, Aruba continues to struggle at turning that revenue growth into earnings per share growth.

A main culprit is that shares outstanding continue to soar from 116.2M in Q2'11 to 120M in Q2'12. The company guided towards 122M in Q3'12. It remains very difficult to grow earnings per share with existing shareholders being diluted this quickly.

Another issue is the Non-GAAP net income margin dropped from over 17% last year to slightly over 15%. Combined with the diluted share growth explains how a fast growing next generation wireless equipment maker only grows earnings from $0.14 to $0.16 in a year of 35% revenue growth. Strong technology companies typically see earnings jump over 50% with that growth as more revenue drops to the bottom line as the company gets larger.

Read full article at Seeking Alpha.


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



Impressive Numbers At FreightCar America

FreightCar America (RAIL) had blowout earnings for Q4'11 reported this morning. Unfortunately this isn't a stock that I follow, but anybody watching the backlog numbers probably isn't that surprised. The stock has soared over 22% on the news.

RAIL reported earnings of $.71 that easily smashed the $.18 estimate. Most astonishing were the rail car deliveries and backlog growth compared to last year and even last quarter.

Deliveries

  • Q4'11 - 2,489 units
  • Q3'11 - 1,515 units
  • Q4'10 -    694 units
Backlog
  • Q4'11 - 8,303 units
  • Q3'11 - 6,311 units
  • Q4'10 - 2,054 units
It appears that most of the growth is related to a eastern coal car replacement cycle. Demand evidently jumped as more eastern coal is being shipped internationally. Getting that coal to ports evidently takes more railcars or just newer railcars. The big problem is that coal demand has slowed making the replacement cycle a big question especially to jump into a stock up 20%. 

Interesting information but investors need to beware. 


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



Thursday, February 16, 2012

Chart of the Day: NII Holdings

The below chart from finviz.com is a great example of how charts can help fundamental investors. NII Holding (NIHD) is a leading wireless provider in Latin America building 3G networks in Brazil, Chile, Mexico, and Peru.

The stock has been in a major downtrend since back in July. The original drop was in connection with the overall market drop, but the failure to rally the last few months was very frustrating to investors. All of a sudden though, NIHD broke out of the duldrums recently. Not surprising to technical analysts is that this move coincided with the break of the downtrend at the end of January. Then the stock broke the 20/50 moving averages in early February on a massive 10% up day.

As typical of these moves, most long investors were shaken out in the long frustrating process. Now though is still a good time to jump in as the stock is only back even with November levels. The closing price of $23.78 is roughly half the July level. So if you believe in wireless data potential in Latin America, then now might be the ideal time to snap up NIHD.






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



Investment Report - February 2012: Net Payout Yields

January was yet another solid month on an absolute basis, with a 3.9% gain for my Net Payout Yields portfolio, but on a relative basis the portfolio underperformed the benchmark S&P 500 that was up 4.4%. Though not unexpected as these large cap stocks will tend to slightly underperform on large up months.

For the last 365 days the model continues to greatly outperform the market by outperforming during weak months.

Dividend Risks
As the market entered 2012, too much focus in the market was being placed on dividend yields with no concept of capital loss potential. As the dividend stocks rose into year end, this created the risk of capital losses in stocks yielding only 3-4%. Investors typically expect and want higher gains for a year. What happens when the stock drops for the year wiping out the benefit of the dividend?

This highlights the benefits of a model that focuses not only on dividends but also stock buybacks. The typical stock owned in this model has 60-70% of its yield focused on stock buybacks with only 30-40% placed on dividends. The trades in January further highlight the benefits of this thesis.

Trades
As typical of this model, only two trades were executed in January. Since the model goal is to remain fully invested (less than 10% cash), this usually means the immediate rotation from a low yielding stock into a higher yielding stock.

Bristol Meyers (BMY) was sold in early January around $35 as the stock jumped to all time highs causing the net payout yield to slump below acceptable levels. Also, the RSI exceeded the 70s suggesting the stock had hit overbought levels. The combination suggested that was an ideal time to sell. The stock currently trades in the $32 range which would've wiped out any benefits of holding a 4% dividend yielding stock.

Goldman Sachs (GS) was bought in early January with the proceeds from the Bristol Meyers sell. At a purchase price of $92.85, Goldman currently trades considerably higher at over $110. While Goldman currently only has a dividend yield slightly over 1%, a significant buyback program at the end of 2011 contributed to a net payout yield soaring to over 19%

Conclusion
Entering 2012, the market focus was clearly on dividend paying stocks such as Bristol Meyers without any fear of downside risk. Investors have so far learned the hard lesson that capital gains and losses can have much bigger impacts on total return. On the flip side, Goldman Sachs was a screaming buy with a much higher percentage of the market cap being returned to investors. Focusing only on the dividend yield would've left investors in Bristol Meyers and watching Goldman Sachs move higher. Focusing on the net payout yield, highlighted that Goldman was clearly the cheaper stock.

Investors continue to overlook quality stock buybacks due to the high profile failures of a few growth companies. This model remains happy to take advantage of those stocks overlooked by the market.



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







Wednesday, February 15, 2012

People Express To Fly Again....Why?

The announcement that People Express might return as the new PeoplExpress Airlines further highlights why the airline business is just too competitive. With American Airlines recently filing for bankruptcy, why in the world would another investment group jump into the frying pan?

For anybody like me that wasn't familiar with the original People Express, it was a leading lost cost carrier from the '80s that at one time was the #5 airline in the US. Excerpts on the history from Wikipedia:

People Express Airlines, stylized as PEOPLExpress, also known as People Express Travel, was a U.S. no-frills airline that operated from 1981 to 1987, when it merged into Continental Airlines. The airline's headquarters was in the North Terminal of Newark International Airport in Newark, New Jersey
In 1985 People Express bought out Denver-based Frontier Airlines. The combined company became the United States' fifth largest airline, with flights to most major U.S. cities, as well as a transatlantic route to Brussels. During this period, People Express also purchased midwest commuter carrier Britt Airways and Provincetown-Boston Airlines (PBA), a regional airline with route networks in New England and Florida. 
In the end, People Express was forced to sell entirely to Texas Air Corporation for roughly $125 million in cash, notes, and assumed debt. Due to concerns about regulatory approval for the purchase, Texas Air purchased the assets of Frontier from People Express in a separate transaction worth $176 million. People Express ceased to exist as a carrier on February 1, 1987, when its operations were merged into the operations of Continental Airlines, another Texas Air subsidiary, under a joint marketing agreement. 
People Express' spartan, no-frills service earned the carrier several derisive nicknames, including "People Distress" and "Air Bulgaria" (a sarcastic reference to the poor customer service associated with Eastern Bloc countries during the Cold War).[3]
Reading the Wikipedia report sure screams don't invest to me. It doesn't sound like a concept to resurrect.

According to a Fox News report, the new version expects to obtain 7 to 10 Boeing planes in order to operate in mostly underserved markets on the East Coast. Though it apparently still needs to raise more funds.

Honestly don't understand the rush into investing in airlines. It might be true that a underserved market exists, but that won't prevent competition from joining into the fight. Or a stronger American Airlines out of bankruptcy might engage in a pricing war. Either way, the only winner will be the airplane lessors like Aercap Holdings (AER) or Air Lease Corp (AL).


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





Paulson Does Some Agitating At Hartford Financial

After the close last night, Paulson & Co filed a 13D disclosing a presentation to the BOD and a letter sent to the CEO. The goal being for Hartford Financial (HIG) to begin the process of a spin-off of it's Property & Casualty business.

Simply Paulson believes that Hartford has an industry low valuation due to the combination of both the P&C and Life business lines that competitors all spun-off long ago. He makes a compelling pitch that the ultra low valuation for the company is based on the thesis that analysts just don't follow or understand it due to the combined business lines. A Travelers (TRV) that focuses on P&C or a Lincoln Financial (LNC) that focuses on Life have higher multiples since the analysts follow either business line, but not both.

Without doing all that research I could've told them that Hartford was incredibly cheap trading at close to 40% of book value. Paulson though has an army of analysts that did some incredible research.

Hopefully this agitating does some good for the cheap valuation. While Paulson may be the single largest shareholder, as seen below Hartford is possibly the most important stock owned in the Stone Fox Capital models. Not only does it remain one of the largest holdings in the Opportunistic Levered (Arbitrage) model, but it is also the only stock in all 3 main models. Falling not only under the opportunistically cheap mantra, but also large enough for the conservative Net Payout Yields model. See ownership details below via MarketPulse on Yahoo! Finance:


Stone Fox Capital


Stone Fox Capital holds an allocation of 4.0% in $HIG in his Opportunistic Arbitrage Long Only Investment Model
Stone Fox Capital holds an allocation of 9.7% in $HIG in his Opportunistic Arbitrage Investment Model
Stone Fox Capital holds an allocation of 2.8% in $HIG in his Net Payout Yields Investment Model


As an investor it is frustrating to think that our markets have gotten to the point that analyst coverage structure determines the valuation. It didn't seem that Hartford had an issue prior to the financial crisis so it might just be a new phenomenon that will work itself out. Or maybe Paulson is correct that this is ultimately the best option for the business.

Some interesting details from the letter to the CEO:


  • Sees valuation around $32 or 60% gain after the spin-off (actually seems drastically low considering the upper $40s book value)
  • Life valuation based on Lincoln Financial trading at only 60% of book value (again seems low especially considering LNC is a core holding based it being cheap). 
  • Managements fears on debt and leverage of the separated units is overblown. Company would be inline with peers and has numerous outlets for reducing debt if needed
  • Only 3 of 19 P&C analysts cover Hartford
  • Only 3 of the 15 Life analysts that cover Hartford cover its P&C peers
  • Almost all multi-line insurers other than Hartford have already separated

Now management really needs to bring to the table the benefits of being a multi-line insurer. The competition split already and the analysts follow them separately. It is definitely a crude way to decide a business plan, but absent any bonafide benefits than the split only makes sense. 

Or else management just isn't getting the message across since the financial crisis. It has to be one or the other and Paulson's story is very compelling. He also might highlight why nobody has made a run at it. The multi-line business isn't apparently desirable to the industry. Maybe split-up suitors would come knocking at these levels. 

Management fired back that they were willing to have discussions with Paulson & Co. Trading should be interesting tomorrow. If nothing else it will shed some light to the extremely low valuation of HIG. 


Disclosure: Long HIG, LNC, TRV. Please review the disclaimer page for more details. 


Tuesday, February 14, 2012

Here's What's Cooking With The Fast Casual Dining Valuations

The fast casual dining sector has been on fire this year basically picking up where it has been ever since the March 2009 bottom. The three leading stocks of Buffalo Wild Wings (BWLD), Chipotle Mexican Grill (CMG), and Panera Bread (PNRA) have had virtually no pause in the rally for the last three years. Not even the market downturns in 2010 and 2011 could pull them down.

Though continuing to grow fast all these stocks face steep valuations and at some point the wall of large numbers will hit them. Chipotle already has a market cap over $11B and annual sales above $2.2B.

As an example, Darden Restaurants (DRI) with its main restaurants of Olive Garden and Red Lobster has succumbed to much lower multiples even though operating several successful chains. The company will approach $8B in fiscal 2012 revenue, but only has a market cap of $6.4B.


Read the full article on Seeking Alpha.


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




Sunday, February 12, 2012

4 Under-The-Radar Housing Stocks

The housing market has been depressed for over 5 years now. During that time period several smaller, housing-related internet stocks have gone public to mostly limited fanfare. These stocks could provide some under-the-radar opportunities as the housing market rebounds in the coming years.

The market is well aware of the homebuilding stocks that have soared this year such as KB Homes (KBH) or the major home improvement retailers like Home Depot (HD) and Lowe's (LOW). What about the internet-related housing stocks such as Bankrate (RATE), Market Leader (LEDR), Move (MOVE), or Zillow (Z)?

The market is very infatuated with the social media stocks such as the upcoming Facebook IPO or Zynga (ZNGA). Instead of focusing on these stocks, why not buy into a sector of the internet that isn't hot?

Read the full article at Seeking Alpha.


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



Thursday, February 9, 2012

Analysts Downgrading Every Day!

While the market appears overbought and everybody claims to be bullish, several indicators of action show a different story. The sentiment versus action debate in investors is beginning to match that of the consumer confidence reports. 

Bespoke had an interesting graph yesterday showing that analysts have not had a single day of net upgrades this year. During the rally upwards in 2012, every day analysts come out downgrading stocks only to see them go higher. 

This action related number gives a completely different view than the investor sentiment polls. Considering analyst actions typically are great contrarian indicators does this mean the market goes higher? Considering the 8th appears to have been the most negative day of the year so far with 25 more downgrades. Wow!





Cloudy Earnings In The Cloud Software Sector

Over the last couple of weeks, several cloud software stocks have issued guidance that disappointed the markets. In most cases, the original estimates weren't that aggressive for stocks with relatively high valuations. Not being able to make estimates was beyond disappointing.

Back a few months ago, this article analyzed the sector after SuccessFactors (SFSF) agreed to be bought out by SAP for a 52% premium. At the time, I highlighted how the stocks had very aggressive valuations for the expected earnings growth. Now, even that potential upside doesn't appear to be coming forth.

So why are these companies struggling to hit earnings estimates if the sector is supposedly booming? Part of the issue is that these companies spend a lot of money to sign contracts where upfront expenses aren't always matched with 1-2 year contracts. The faster the growth in billings, the more difficult it can be to produce earnings in the short term.

Read the full article on Seeking Alpha.


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



Wednesday, February 8, 2012

Jive Software Earnings (Losses)

Jive Software (JIVE) continues to be one of the most interesting recent IPOs. Jive provides social business software and is the first publicly traded pure play.

After the close yesterday, the company reported it's first quarterly report as a public company. Both revenue and earnings beat estimates. The company guided to numbers for Q1'12 and FY'12 that beat estimates. All great numbers compared to expectations. The only problem though is the company still expects a loss around $.40 in 2012 on revenue around $110M.

So even though the company has one of the more interesting market opportunities to develop, the valuation for the stock is relatively high at nearly $1B. The revenue estimate for 2013 quickly jumps to $150M so any material drop in the stock price during 2012 would provide an appealing entry point.


Nice picture that Jive provided via the earnings release to highlight the quarterly numbers:




Guidance:

  • First Quarter 2012 Guidance: Total revenue is expected to be in the range of $23.5 million to $24.5 million. Non-GAAP loss from operations is expected to be in the range of $7.0 million to $7.5 million. Non-GAAP loss per share is expected to be in the range of $0.13 to $0.14 based on approximately 61.4 million weighted-average diluted shares outstanding.
  • Full Year 2012 Guidance: Total revenue is expected to be in the range of $108.0 million to $112.0 million. Non-GAAP loss from operations is expected to be in the range of $23.0 million to $25.0 million. Non-GAAP loss per share is expected to be in the range of $0.40 to $0.45 based on approximately 61.7 million weighted-average diluted shares outstanding. Free cash flow is expected to be in the range of ($5.0) million to ($7.0) million.



Great interview with the CEO Tony Zingale on CNBC:






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


Investment Report - February 2012: Opportunistic Levered

After a bad 2011, this year got off to a fantastic start with the model seeing a 25% gain in January easily outperforming the 4.4% gain for the S&P500. The model spent most of the month accumulating cheap stocks in order to take advantage of the market rallying against the proverbial 'wall of worry'.

January was an interesting month with stocks rising even in the face of what appeared like continued negative news out of Europe. With the continued focus on Greece, most investors stayed out of the stock market and missed that yields on Italian and Spanish bonds saw dramatic declines. The ability to isolate the problems to Greece and Portugal to a lessor extent were a big relief to a market pricing in a European blowup in December.

In addition, the decline in emerging markets inflation was a big benefit to the under performing stock class in the new year. Specifically fast growing countries like China and India saw multi year lows in inflation rates allowing monetary policy to pause and potentially ease as 2012 progresses.

Top Performers
The crane manufacture stocks of Terex (TEX) and Manitowoc (MTW) both saw massive gains in January. Signs of increasing construction demand in the US and the potential for continued strong growth in emerging markets conversed onto this sector that was still trading close to 52 lows.

The most impressive gain came from ChinaCache (CCIH) gaining nearly 75% jumping from $4 to $7. Unfortunately it was a very small portion of the portfolio at that point so the contribution to model  gains for the month were slight.

Other big gainers were Sears Holdings (SHLD) and SodaSteram (SODA). Sears was mostly a bounce back from sharp declines in the last couple months of 2011 because Chairman Eddie Lampert bought $150M+ in shares. On the other hand, SodaStream bounced from a long 5 month consolidation period. With all signs of a bullish holiday season for a home beverage maker, it could be positioned for a big run in 2012.

Bottom Performers
Hard to imagine that a portfolio that jumped 25% in one month could have losers, but this one managed to have 3 stocks with more than a minimal loss. The main culprit was the the drop of natural gas to 10 year lows. While the model attempted to focus on stocks benefiting from the high prices of oil or met coal, stocks with natural gas exposure were hit during the month.

The biggest loser was C&J Energy Services (CJES). The stock was down over 20% even though the hydraulic fracturing stock is focused mostly on oil plays. In fact, the company confirmed in early February that all of it's fracking fleets were now working on oil plays. Due to it's depressed stock price and huge earnings potential, C&J remains one of our top picks for the rest of 2012.

Carrizo Oil & Gas (CRZO) also had a bad month as the nat gas price declines impacted it. Noteworthy though, the company exited 2011 with more than 50% of its revenue coming from oil projects specifically in the Eagle Ford. The oil percentage will probably rise to 60-70% in a short time if nat gas remains this low. Currently, Carrizo is obtaining prices of NYMEX plus $9 for that oil.

The other major loser for the month was Monster Worldwide (MWW) dropping roughly 10% after a disappointing Q4'11 earnings report. The company actually had sizable gains heading into month end, but it dropped over 20% after the weak guidance for 2012.

Trades 
All of the trades in January were purchases as the model levered up with the rising tide. Foster Wheeler (FWLT) was added in a couple of purchases around $20. The stock was added back after dumping it towards the end of 2011. Foster Wheeler will benefit from a rebounding global need for construction of energy projects. Gafisa (GFA) was also added back to the model after dropping it in 2011.

The only new stock was OCZ Technology (OCZ). This leading provider of solid state drives (SSDs) saw exceptionally fast growth last year and expects to continue growing at a fast clip in 2012. With the tech stock valued at only 1x sales, the stock was too cheap to ignore.

Existing positions were increased in Lincoln Financial (LNC), Monster Worldwide, and Savient Pharma (SVNT) as the stocks appeared ready to rebound from 2011 lows.

Conclusion
The year got off to a solid start with more gains expected. The potential even exists for a market breakout to challenge 2007 highs. Clearly risks remain and investors have to remain diligent to manage risks.

For now, this model remains levered and ready to take advantage of fund flows out of bonds and dividend paying stocks into growth and emerging market stocks.


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


Tuesday, February 7, 2012

Hartford Financial Reports 17% Increase in Book Value

Following on the report from Lincoln Financial (LNC), Hartford Financial (HIG) reported solid earnings of $.69 that beat estimates by $.07. More importantly though Hartford reported the book value jumped to $47.25, up 17% on the year.

Per Briefing.com:

4:18PM Hartford Financial beats by $0.07 (HIG) 19.12 -0.21 : Reports Q4 (Dec) earnings of $0.69 per share, $0.07 better than the Capital IQ Consensus Estimate of $0.62.

2011 was a difficult year for Hartford with record cat weather related losses. Yet the company still reported earnings of $1.94 for the year.

More importantly the company was able to repurchase 3.2 million shares at $15.93 per share in Q4'11. It has already bought another 2.6 million shares in Q1'12 at $16.58 per share. Not only were these purchases at roughly 35% of book value, but so far they were done at prices lower than the current market price of $19. With a $400M authorization left, management should've bought all they could in Q4.

Per the chart below the stock is in breakout territory. A move above the 200ema and the October high around $20 would quickly usher in a move back to the July highs around $26. Incredible considering this only gets the stock back to 50% of what the book value is likely to hit at the end of 2012.








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




Lincoln Financial Book Value Soars 20% in 2011

Lincoln Financial (LNC) reported after the close that earnings for Q4'11 were $1 which helped increase the book value 20% for the year. Now try explaining to a non investor why the stock price for Lincoln declined for the year. The company is worth more by every measure, but the stock is worth a lot less.

Another mind boggler is that the short term earnings picture remains reasonable, even though low interest rates are keeping income artificially low. So not only did Lincoln report huge earnings in 2011, but it also has the potential for higher earnings down the road.

Speaking of book value, it increased to $48.59. The main increase was due to earnings, but Lincoln also repurchased $575M shares during 2011 reducing the diluted shares by 6%. Anytime a company can buy shares at 50% of book value it provides huge value to shareholders.

The company also raised the quarterly dividend 60% to $.08 to yield 1.3%.  It also repaid $250M of Senior Notes.

The question still remains what will kick investors into buying the stock. The value is cheap, earnings remain solid, and future will get better with higher interest rates. Investors though just ignore the stock.


Some other details from the PR:


Fourth Quarter 2011 Operating Highlights:
  • Consolidated deposits of $5.5 billion
  • Consolidated net flows of $1.6 billion up 21%
  • Total account balances of $160 billion
  • Life Insurance sales of $229 million up 11%
  • Retirement Plan Services net flows of $219 million
  • Group Protection sales of $207 million up 33%
Full Year 2011 Operating Highlights:
  • Consolidated deposits of $21.6 billion
  • Variable annuity deposits of $8.7 billion up 6%
  • Retirement Plan Services net flows of $0.5 billion versus $(0.3) billion in 2010
  • Life Insurance sales of $0.7 billion up 10%
  • Group Protection loss ratio of 72.9% versus 76.2% in 2010


The chart formed a nice base in the fall and is the process of breaking out. Just reclaiming the July highs get the stock quickly back to $30. 







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




Monday, February 6, 2012

Revisiting Stocks That Could Recalim July Highs

Back in October I wrote an article about how stocks could reclaim highs from July. At the time, numerous stocks were down 50-60% from those July highs after the dramatic summer sell-off that didn't appear to be justified.

Since that article, numerous stocks such as Toll Brothers (TOL) and F5 Networks (FFIV) have already recaptured the July highs and more. Much to my surprise, homebuilders lead the market higher. Not to mention the Nasdaq composite has soared to 11 year highs.

Clearly the theory has worked in some situations, such as the above growth stocks and particularly with most dividend-paying stocks. Numerous stocks still trade considerably below those July highs, providing opportunities for investors.

The original report focused on Riverbed Tech (RVBD), Terex (TEX), Hartford Financial (HIG), and Weatherford International (WFT). None of these stocks has recaptured those July highs providing plenty of opportunity for investors to still get in on these stocks.

Read the full article at SeekingAlpha.com.


Long RVBD, TEX, WFT, HIG, and NIHD. Please review the disclaimer page for more details. 



Is the Technology Sector Really Overextended?

Just about every stock segment I caught on Friday and over the weekend talked about the tech sector being very extended. The talk is of massive gains that reach bubble levels. The Nasdaq Composite hit 11 year highs so clearly it must be time to sell. Or is it?

When finally taking a closer look at the Technology SPDR Select ETF (XLK), I'm actually dumfounded by all the pessimism. Sure the XLF has hit new highs. Sure the RSI and CCI are both showing an ETF that is overbought.

Though I wonder about the accuracy of those measurements or the immediacy of the negative outcome.

First, the index is only at $27.72 after first reaching over $26.50 back in mid February 2011 so over a year ago. Second, not more than 2 months ago the index was at $26.50 again. Third, the index hit similar overbought numbers in October 2010 and continued rallying the next couple of weeks prior to a shallow pull back and another 3 month run.

Facing a similar run as Sept 2010 though Feb 2011 one would have to be nimble to catch any temporary pullback. One that will inevitably happen, but unless you correctly catch the top and bottom you'll just end up wasting trading fees.

Chart of the XLK going back 2 years:





Honestly, the market is getting to that point that Stone Fox is looking at shorts such as the XLK to protect some downside risk. Unfortunately, it's difficult to imagine a market where an ETF that just broke through quadruple year long resistance as a shorting opportunity.

More importantly, the tech stocks owned in our models such as Radware (RDWR) and Riverbed Tech (RVBD) aren't anywhere near 2 or 11 year highs. Some of the big tech stocks might need a breather, but the small to mid-cap plays remain in good shape.


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


Friday, February 3, 2012

Dumping Gilead Sciences On Buyback Elimination

Gilead Sciences (GILD) had been about a 5% weighting in our Net Payout Yields model. The company had been on a huge buyback plan making the stock very attractive for this model that focuses on stocks with high yields from the combination of net stock buybacks and dividends.

Unfortunately with the recent Pharmasset (VRUS) buyout announcement, Gilead has strayed from the plan of rewarding investors with capital returns toward buying growth. Typically these deals don't workout for investors of the purchasing company.

With the reporting of Q4 numbers, Gilead verified on the conference call that stock purchases have all but been eliminated as the company raised debt to buy Pharmasset.

Via Seeking Alpha transcript:

Robin L. WashingtonAnd, Geoff, relative to your share count, as we talked about with the acquisition, we did moderate and pretty much have spent our share repurchases after October of 2011. We will do moderate share repurchases in the near term to offset option dilution primarily, but our real focus of cash in the near term is going to be on debt repayment, which we expect to be back in our target. That's at the top by mid-2013. So to your question on share count, we don't expect it necessarily to go down significantly. We were just going to try to manage a current balance as much as we can.


Combine this verification with a surging stock price, Stone Fox decided to sell the shares this morning. Taking advantage of a stock price that has soared from roughly $37 in mid December to $54 today.

The stock might go higher in the short term, but the new corporate focus of raising debt versus returning cash to shareholders is our signal to sell.

Details off the sell from Market Pulse:


Stone Fox Capital sold $GILD and now holds an allocation smaller than 0.1% in their Net Payout Yields Covestor Model

Chart showing the extreme overbought condition. RSI above 90 and CCI above 220.
























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



Chart of the Day: Nonfarm Payrolls Jump

A chart speaks a thousand words so the below chart of the monthly nonfarm payrolls over the last four years speak to the recent strength in the report. We'll let the experts spin all the minute details of the report, but this charts shows how the US economy is on the verge of a major breakout. Employees flush with cash just can't hold back any longer.

The biggest concern is that this provides Obama with the ammunition that he needs fore re-election. That could subdue any Spring rally.























via wsj.com

Wednesday, February 1, 2012

Is SodaStream About To Explode Higher?

Based on the chart and earnings of associated stock Green Mountain Coffee (GMCR), it sure appears that SodaStream (SODA) is about to explode higher.

SodaStream's stock was crushed mid-year dropping from a high around $80 to a low around $30. Why? All due to very conservative guidance from a management team that continues to UPOD almost similar to the Apple (AAPL) history.  SodaStream has beaten estimates by nearly 60-80% a quarter since going public and naturally gave very conservative guidance for Q4. Why then did analysts completely take the number given by management?

Amazingly analysts have actually guided towards a drop in earnings from $.25 to $.21 in Q411. That also equates to a 50% drop from Q311. How is that possible when Q4 is such a huge quarter in the US? It is very puzzling to us as well.

As with Apple for years, analysts have quickly forgotten how management lead them towards the $.27 estimate in Q3, even though the company produced $.42.

This brings us to Green Mountain Coffee which in a way is the coffee version of SodaStream. Both companies have had dramatic growth heading into 2012, while both stocks were crushed. Analysts have taken apart the financials with a fine tooth comb. Ultimately though Green Mountain just reported a massive earnings beat after the market close leading to a 20% gain.

To us, this is more validation of the negativity in the sector. If the market had doubted the growth potential in Green Mountain, than it surely has done the same for SodaStream. With a typical beat, Soda would report earnings in the $.33 to $.37 range. It would not surprise us to see similar earnings to those reported in Q3 of $.42. Unless we're completely off base regarding the increased promotional spending.

While the UPOD can be refreshing, it is having a very negative impact on the stock price of SodaStream. Not being overly promotional will ultimately benefit the company, but short term it has been frustrating. Maybe after this next report, analysts will finally clue in that management just wants to under promise.

The chart below shows a stock that has been in consolidation for 6 months now. A rally above the 200ema could lead to an explosive move higher. The earnings from Green Mountain could be the impetus for such a move tomorrow. When that happens there just isn't a lot of resistance back to the highs around $80. Might not happen as quickly as the fall back in August, but I sure wouldn't discount it.






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



Big Earnings Beat By Radware

Before the open, leading virtualization provider Radware (RDWR) reported an earnings beat of roughly 15% reporting $.42 versus estimates of $.37. Revenue was also slightly above estimates.

Oddly though the stock originally jumped over 5%, but it has been trailing off since the open even with the market up over 1%.

The company also guided Q1 above estimates with guidance of $.35 compared to $.33 estimates. This guidance likely translates into $.37-.38 when reported.

Radware remains one of the most under followed tech stocks especially with exposure to the virtual and cloud data centers. This is possibly due to the CEO being non-promotional. The company just takes care of business and each quarter it beats estimates.


Details from the Press Release:

  • Record Annual Revenues of $167.0 Million
  • Record Quarterly Revenues of $45.1 Million
  • Record Quarterly Non-GAAP EPS $0.42
  • Record Quarterly Non-GAAP Operating Margin of 20%
  • "Strong demand for our traditional and ADC virtualization products, in combination with our string of attack mitigation successes that have protected high-profile public and private sector customers, is key to this growth."

6:08AM Radware beats by $0.05, beats on revs (RDWR) 31.47 : Reports Q4 (Dec) earnings of $0.42 per share, $0.05 better than the Capital IQ Consensus Estimate of $0.37; revenues rose 15.3% year/year to $45.1 mln vs the $44.33 mln consensus. "Strong demand for our traditional and ADC virtualization products, in combination with our string of attack mitigation successes that have protected high-profile public and private sector customers, is key to this growth."
Radware remains one of the largest positions in our Opportunistic models. Below details via Market Pulse as of January 27:


Stone Fox Capital holds an allocation of 7.3% in $RDWR in his Opportunistic Arbitrage Long Only Investment Model


Stone Fox Capital holds an allocation of 12.9% in $RDWR in his Opportunistic Arbitrage Investment Model


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