Friday, March 30, 2012

Interesting IPOs This Week

 (note: This article was originally submitted to Seeking Alpha. Due to the delay in publishing some of the info is slightly outdated, but still useful)

The Week of March 26 is chock full of IPOs with several of them providing interesting investment opportunities. Naturally the key being the pricing terms and the ability to get in on the IPO or in the after market at a reasonable price.

A perfect example was yesterday's IPO of Annie's (BNNY). The stock priced at $19 and opened over $31. Though it closed near $36, investors in the after market saw very little of the gains today and face a ton of risk. Not an ideal combination.

In a lot of cases, the key to IPO stocks is to just follow and wait for opportunities in the future. Remember that most of these companies coming public have bright futures. Its just a matter of matching up the valuation with the growth opportunity.

Unlike existing public stocks, investors haven't had an opportunity to listen to the executives via quarterly conference calls or investor presentations and match that up with actual results.

Can management deliver on guidance? Does the story presented come to fruition? This can have dramatic impacts of future stock prices.

These facts are all lacking until an IPO stock reports that first earnings after going public. Sometimes its just better to wait so that the story is fully vetted. Not to mention, reviewing the prospectus can be a nightmare when trying to understand the financials.

What we like to do is review interesting companies via the prospectus and roadshow presentation, then follow the companies progress. If the price is right in the after market, the stock might be bought immediately or the next few days. Typically though we'll just follow interesting companies for weeks, months, and even quarters until the hype over the IPO is over and an interesting story can be bought on the cheap.

With that frame of mind, several interesting stocks are set to IPO this week including CafePress (PRSS), Enphase Energy (ENPH), GasLog (GLOG), Luca Technologies (LUCA), and Millennial Media (MM). Unless one gets ignored my the market, we'll probably just watch from a distance on these for now.

CafePress operates a print on demand e-commerce site where customers create, buy, and sell personalized products. The company recorded revenue of $175.5M in 2011, an increase of 37% over the previous year. The IPO was priced at $19 for 4.5M shares, slightly above the original $16 to $18 range. The company will only net $47M from selling 2.5M shares while shareholders unload the other 2M shares.

At a market capitalization of around $300M, the stock is one of the cheaper valued IPOs on a revenue basis. The key will be whether this crowdsourcing printer can achieve higher margins and profits in the future.

Enphase Energy makes technology used to convert solar power to electricity dramatically cut the estimated price range of its IPO to $6 to $7 a share, from its earlier range of $10 to $12. The company still plans to offer 7.27M shares, but now will only raise $47M at the midpoint of the range.

The company is the clear leader in the microinverter space and benefits from the increase in the solar panel market due to lower average selling prices. Revenue grew to $150M in 2011 or nearly 150%. Gross margins are rapidly expanding though the company is still losing money.

Unfortunately the company has picked a horrible time to bring a solar equipment provider public. The valuation will be very compelling at the new offering range, but it will likely struggle in the after market for a while.

GasLog currently operates 2 LNG ships with 8 newbuilds on order at Samsung. The company also manages 12 ships for BG. 8 of the 10 ships are already under long term contracts.

The Bermuda based company expects to receive $400M in proceeds at the midpoint price of $17. This will give the company a $1.07B market cap with only $56M in revenue for 2012. Revenues will jump above $200M once most of the newbuilds are in operation. Adjusted EBITDA is expected to exceed $200M by 2015.

According to the IPO presentation, the LNG market has a planned need for 100 ships by 2016 with only 58 ships on order. If the Cheniere (LNG) project in the US reaches production, the industry will need another 25 ships leaving a large gap.

The valuation might be attractive once the newbuilds are in operation, but for now the value seems steep considering the time that will pass before the ships are built.

Luca Technologies uses proprietary technology to tap microorganisms in coal, oil, and organic-rich shale deposits to speed the fuels' conversion into methane, the main component of natural gas.

The company plans to offer 8.5M shares at a price of $11 to $13 which would raise up to $125M. Unfortunately the company has operated at a loss for the pass six years. The proceeds will be used to acquire more wells and infrastructure in Wyoming's Powder River Basin and elsewhere. The company believes an ideal opportunity exists to buy cheap wells while natural gas prices are depressed.

While an interesting technology, the company will need to prove the ability to become profitable making the stock something to watch for now.

Millennial Media operates the largest independent mobile advertising network. With a roughly 17% market share, the company only trails Google (GOOG) and recently passed Apple (AAPL).

The offering has been priced at $13, the high end of its upwardly revised range. The company raised $133M by offering 10.2M shares (10% insider). Revenue hit $104M in 2011 with the company basically reporting breakeven results. At the offering price, the stock trades close to a $1B market cap

Though revenue grew at over 100%, the company is trading at a lofty valuation. Regardless, look for a strong opening by the stock as Millennial offers a unique investment opportunity in a fast growing sector.

Conclusion
As evidenced by the Annie's deal today, the market for IPOs is exceptionally hot right now. This reminds us of the China tech IPO market last year which didn't turn out very well for after market investors. Caution is definitely warranted for anybody not looking to trade the initial pops.

All interested investors should review the retail presentations and prospectus abailable at retailroadshow.com.

Thursday, March 29, 2012

More Developments At Sears Holdings

Never a dull moment with the Sears Holdings (SHLD) stock. As mentioned in several previous posts, Sears has finally begun the process of externalizing brands [See article: Externalizing Brands Could Be Major Catalyst For Stock] and monetizing assets.

Today came news on both fronts. First, reports began flying around that Sears has placed Lands End up for sale at a price tag of nearly $2B. Second, it announced that DieHard has finally released an alkaline version of its very popular automotive battery.

Lands End Sale
Of course, the market is spinning this potential sale as a desperate move for cash which couldn't be farther from the truth. In fact, shorts should be very concerned if Sears can reach any price close to $2B. Part of that cash could be use annihilate any remaining float making it impossible to cover any remaining shorts [See article: Impossible To Cover].

According to a CNBC report, Sears would like to continue to license the retailers goods to sale at its stores. That doesn't seem like a dealbreaker as any buyer wouldn't want to lose the biggest customer in the process. Now the license fee might cause problems.

The issue is whether Lands End has a value that the market will pay. Sears bought them for over $1.8B and naturally wants to sale at a gain. Bankers supposedly suggest the retailer is only worth between $1.2B and $1.6B.

A sale might not be so imminent if the valuation is that far off. The price might just signal whether Sears has a cash crunch or not. If it accepts a deal below $1.6B, it will signal that cash is tight. While an attractive price above $1.8B will continue to signal that the assets are worth a lot more than most on Wall Street expected.

Time will tell.

DieHard Introduces Alkaline Line
The other news today was that the valuable DieHard brand has finally started to expand. After 45 years of being the brand of choice for automotive batteries, it has expanded into batteries for household devices.

My question is 'What took so long?' Why didn't Sears expand into other battery segments long ago?

This was one of the highlights of my article a while back matching the valuation of the brands with external brands. One being Energizer (ENR) compared to DieHard noting the vast value of Energizer compared to Sears as a whole. Energizer alone has a valuation of almost $5B while Sears has just jumped back above $7B.

This follows the move to sell Craftsman tools in Costco and other external stores. In this case though, Sears is expanding the products sold versus the locations. Two good signs that Sears is moving on all fronts to increase value. No longer is the company stuck to historical product lines and internal sales only.

Below are a couple of figures from the release today. Figure 2 has a good commercial to be introduced on April 1st that plays off the iconic commerical for the automotive battery.


Figure 1: Package of New Alkaline Batteries


Figure 2: New Commercial - Take Off Of Old Iconic Lake Com'l







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



Wednesday, March 28, 2012

Huge Positive Close For OCZ Tech

At one point today, OCZ Technology (OCZ) was down more than 5% to below $7 before a massive end of day rally. This stock has been a major conundrum since completing a secondary at $9 to raise over $100M. The stock even hit $10 around that time. Even worse is that the market has been consistently rising during that period.

Management had previously hinted that if the company needed to raise cash it would be due to significant orders that required more cash for operations. Absent any big deal announcement since the secondary, it appears that investors have become disenchanted with this story.

Analysts expect the company to have wrapped up nearly 100% revenue growth for FY'12 and follow that up with a 35% revenue growth for FY'13. The stock currently trades at a 13 forward PE though the 5 year growth rate is over 22%. That number even appears low considering the growth rate.

On the technicals, the stock closed right around the 200ma. Being so oversold, the stock is due for a rebound. The question remains whether this flash storage provider will soar or fade away.





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



Rest Of World Shale Gas Potential Plunges

As the US shale boom produces a bounty of dry gas and now even oil, the promises of a shale gas revolution in Europe and China is fading quickly. It may still happen, but it might take a decade to develop different techniques as the methods that worked in the US clearly aren't going to work in places such as Poland where population density and harder rocks make it a more complex and costly endeavor.

The shale boom had great promise in helping Poland and the rest of Europe lessen dependence on expensive Russian supplies. Instead, the Polish Geological Institute recently cut the estimated gas reserves by 85 percent.

Now before even starting, major US corporations like Exxon Mobil (XOM), Chevron Corp (CVX) and ConocoPhillips (COP) are faced with doubts about whether the drilling will ever be feasible even if the gas does exist. This is a far cry from the scenario in the US where the technologies have already proven.

Read full article at Seeking Alpha.


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



Friday, March 23, 2012

The 'Seeking Alpha' Indicator: 3 More Promising Stocks With Less Than 100 Email Alerts Followers

As discussed in this article last week, the 'Seeking Alpha' indicator provides a new insight into the popularity of individual stocks amongst active investors.

The original 2 stocks discussed, Velti (VELT) and Green Dot (GDOT), have already seen some large increases in followers. In fact, Velti has already exceeded the 100 follower level showing that the stock is suddenly garnering investor attention.

After some more research, we've found 3 more appealing stocks that surprisingly have less than 100 followers. By the way, it wasn't overly hard to find unappealing small caps with under 100 followers.

Read the full article at Seeking Alpha.


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


Stone Fox Capital holds an allocation of 10.4% in $AER in his Opportunistic Arbitrage Investment Model
Stone Fox Capital holds an allocation of 11.2% in $RDWR in his Opportunistic Arbitrage Investment Model

Thursday, March 22, 2012

Carrizo Oil and Gas Heading to 80% Oil

This stock was crushed today, down over 5% at the close. On top of that Carrizo Oil & Gas (CRZO) is down over 33% from last years high. The main issue is that the market still sees it as a natural gas play, but clearly the company has already moved to mainly oil.

Per the interview below on Mad Money, the CEO reconfirms that the company is already 60% oil and will hit 80% oil by the end of the year.

The most interesting part of the interview was the prediction that 2013 revenues could hit $750M with the current rig count. Incredible considering analysts forecast something in the $600M range and considering the company just sold a large chunk of Barnett Shale production.

Also worth noting is that the company will be throwing off cash in 2013 though the CEO wants to add rigs once the company reaches that level. All in all very positive news about a stock I was becoming concerned about.

Considering the oil focused stocks have recently hit new highs and especially trade above the 2011 levels one has to wonder when Carrizo gets that respect.


Check the video below:






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


Stone Fox Capital holds an allocation of 9.1% in $CRZO in his Opportunistic Arbitrage Investment Model

Wednesday, March 21, 2012

Data Hungry iPads

Wireless providers around the world and especially in the US face a major issue with the massive data consumed by the new high resolution screen of the iPad3. According to the below Bloomberg video, users are blowing through data usage plans in only a couple of days. Wow!

The real key is whether AT&T (T) and Verizon (VZ) can charge more for higher usage. More spectrum and capital spending will be needed to keep up with exploding demand, but what the industry really needs is pricing that keeps up with technology. Either develop a way to exponentially expand capacity or charge more for high data usage to slow down demand on the network.

As mentioned by Derek Kerton, principal analyst at Kerton Group, users need to be pushed into using Wi-Fi when available such as at a coffee shop or even at home. At this point in the development of the industry, the goal can't really be to limit the wireless use of the iPad, but rather a wiser use of the available tools realizing that wireless capability of a LTE network has limits.

As with all Apple (AAPL) products, it still appears that the best way to invest in the concept is directly via Apple. Between the control of Apple and the limited group of wireless providers, equipment and network providers just don't appear to have the ability to charge premium prices or differentiate themselves. Some possible angles include Aruba Networks (ARUN), cloud software or data center providers. Either would benefit from continued increased demand for access to the internet outside of a PC.

Check out the clip below:





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



Tuesday, March 20, 2012

Australia Iron Ore Exports Set to Rise Over 50% By 2017

According to this Reuters report on CNBC, iron ore demand is set to grow at 11% through 2017. Wait, didn't stocks initially plunge today due to fears of slower demand in China for iron ore?

Talk about a confusing market with conflicting currents in the news. The actual news from BHP Billiton (BHP) today was that demand from China was "flattening" or otherwise growing in the mid single digits versus the double digit growth of the past decade. Slower growth, but still growth.

How this is news was beyond me. Everybody should know by now that China wants slower growth. Stocks like Alpha Natural Resources (ANR) are down some 75% since early 2011 peaks. The market has already harshly punished this met coal producer to the extreme making the initial 6% drop further signs of a bottom. Remember that met coal is used with iron ore to produce steel.

So now basically within 24 hours the media is spinning out reports of massive growth in iron ore demand and the expectations for the very BHP to push forward with ambitious production expansion.

Honestly don't see a peak in demand until China becomes a much larger economy and India reaches a certain level to where it has slower commodity growth. For example, it wouldn't shock me to see copper reaching $6/lb at which point new production techniques might finally allow for easier mining of the commodity or alternative sources. Until then, this just appears to be a pause in the process.

Until that happens, it just doesn't add up of owners of long term valuable commodities such as copper and met coal won't eventually rally back past 2011 highs. These items aren't getting any easier to mine making companies such as Freeport McMoran (FCX), Alpha Natural, and Walter Industries (WLT) very valuable down the road.

Don't be surprised if somebody doesn't swoop in soon attempting to buy these assets on the cheap. One has to expect that the Chinese are snooping around though highly unlikely a deal for either company would past muster.


Per CNBC report:
  • Exports will rise by an annual rate of around 11 percent to reach 767 million tonnes  i n 2016/17
  • Global iron ore demand is set to double to around 3.5 billion tonnes a year by 2030, with Chinese appetite for the steel-making material continuing to drive the market

Disclosure: Long ANR and FCX. Please review the disclaimer page fore more details. 



Hewlett-Packard's Dwindling Buyback Was A Telling Warning Sign

Hewlett-Packard (HPQ) spent the first half of 2011 buying back a ton of stock amounting to a decent percentage of the outstanding shares. A signal typically that a company has a lot more free cash flow and cash on hand than the market is giving the company credit for having.

Unfortunately, this buyback pace didn't last even though the stock steadily declined in the 2nd half of 2011. So why did the buyback dwindle if the stock didn't gain in value? Nothing worse than a company that buys high and doesn't buy low.

It can be argued that with a new management team coming in that it was just a change of strategy not a signal of a change in fundamentals. This is possible as Meg Whitman became CEO in September 2011, but she was a board member since January 2011.

Read the full article at Seeking Alpha.


Disclosure: Long TRV and WLP. Please read the disclaimer page for more details. 



Monday, March 19, 2012

Investors Too Focused On Apple's Dividend

Today Apple (AAPL) announced a new dividend (the company last paid one in 1995) and the stock surged 2.7% to close over $600 for the first time. So why didn't Apple announce a dividend years ago if this was going to be the price reaction?

Well, mainly because the stock really jumped when news started hitting the wires that Apple sold 3M of the new iPad3s over the weekend. This makes the iPad3 the strongest launch yet and further proof that the dividend announcement will and always should be overshadowed by product innovation and sales. That is until the stock is no longer an exciting, growth company like Intel (INTC) or Microsoft (MSFT) now.

The dividend news honestly is not that significant and ironically it might just lead to more sales. What do you think Apple shareholders will do with a $10.60 yearly dividend? Possibly load up on more Apple products. So while the dividend news doesn't move the needle for this stock it might just help the economy as it funnels roughly $10B into accounts and out of corporate bank accounts.

In all the company announced plans for utilizing roughly $45B of cash over the next 3 years. At $15B a year, the amount is rather meager for a company that could generate that amount in just 1 year and already has $100B on the books. In reality, the company should probably begin a 100% net payout via the combination of dividends and buybacks. Does it really need to end 2012 with $125B+ in the bank?

Not to mention the $10B buyback is only intended to reduce the impact of stock grants so it isn't even a net impact to the stock.

Details from the announcement:
  • the Company plans to initiate a quarterly dividend of $2.65 per share sometime in the fourth quarter of its fiscal 2012, which begins on July 1, 2012.
  • Additionally, the Company’s Board of Directors has authorized a $10 billion share repurchase program commencing in the Company’s fiscal 2013, which begins on September 30, 2012. The repurchase program is expected to be executed over three years, with the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.

Apple remains a top holding in our Opportunistic models and will likely remain that way as the stock remains cheap. The recent move though probably needs a pause as the stock has become very extended after a run virtually straight up from $380 to $600.




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



The Benefits Of Fast Growing Beverage Makers Over Coca-Cola

A few days back, an interesting debate took place over whether investing in Coca-Cola (KO) or gold was a better long-term investment. Jim Grant made the point that gold had been the better investment since 1996, against an argument by Warren Buffett. Grant suggested that Coca-Cola was now the better option.

That comment just about shocked me as he pointed out that it has a current PE of 19. Slow growing Coca-Cola with a $160B market cap is a value?

Read the full article at Seeking Alpha.


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



Friday, March 16, 2012

Stat of the Day: Consumer Sentiment Remains Tepid

Even with the stock market booming and employment improving, consumer sentiment as reported by the University of Michigan remains very tepid.

The March report came in at 74.3 this mornings which was slightly below the prior 75.3 level. It was also below the consensus levels of 76. Either way these numbers remain at the high end of the range for the last few years as the chart below shows. Still this is significantly below historical levels showing how pessimistic consumers remain.

The main culprit is supposedly gas prices though most consumers are benefiting on the flip side from lower natural gas prices for utility expenses. The net impact to wallets is probably flat for consumers though the media focus is always on gas prices. Not to mention consumers don't readily see nat gas prices. Most likely pay their monthly electric bill without any notice of the fuel charge.

Now the key is whether sentiment has hit the top end of the range or whether a breakout can finally occur. Appears that only 3 months have reported numbers of 75 since March '08. Maybe more stock market gains will finally pull consumers out of the gloom. Not that it really matters for spending. Just something worth watching.






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



Thursday, March 15, 2012

The 'Seeking Alpha' Indicator: 2 Promising Stocks With Less Than 100 Email Alerts Followers

Most investors dream of finding the next big stock. The one that will double, triple or even quadruple in the next few years.

One key to success has always been finding the fast growing stock still undiscovered by the market. One with huge growth potential that the market has ignored.

Focusing on the number of analysts covering a stock was always a key highlight of whether the investment community had discovered a stock yet. If the stock was only covered by 2-3 analysts, then one could expect the market reach to grow exponentially as the stock got bigger and attracted more analysts.

Read the full article at Seeking Alpha.


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



Wednesday, March 14, 2012

OCZ Tech Collects $109M On Offering

Today's news on the closing of the secondary and the exercise of over-allotments shouldn't be that big of a deal, but the stock is down 5.5% now. Hard to tell the reason for the selloff other than maybe the over-allotment was partially exercised.

This is possibly seen as a negative in the market though I don't see this move as surprising. The secondary was for $9 and the stock is selling below those levels. Why take that deal when the open market is cheaper?

OCZ Tech (OCZ) remains a leading provider of high-performance solid state drives (SSDs) for computing devices and systems that remains in very high demand. The company will presumably use these funds to land a very large customer though the company has yet to verify or deny.

That might also be the cause of the selloff. Traders might be fleeing the stock considering the secondary has been closed and the speculated major deal has not been announced.

Sure appears like a buy the dip scenario though our models are already loaded on this stock.






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



Weatherford: A Good International Oil Services Play

Weatherford International (WFT) provides the unique opportunity to invest in an oil services play reporting record revenue and EBITDA numbers while trading well off all-time and 52-week highs. This company also provides an ideal investment in a company highly focused on the international oil service markets and domestic oil. Mostly avoiding the domestic natural gas slowdown by having a North American focus of 80% oil based. It provides this opportunity due to numerous hiccups with financial reporting, mainly focused on a continued problem with accurately reporting taxes.

International Focus
The four major domestic oil service companies include Baker Hughes (BHI), Haliburton (HAL), and Schlumberger (SLB). As the Figure 1 below shows, all of the domestic oil service provides have a diversified mix with at least 40% of revenue focused on international markets. The key for Weatherford is that outside of $100B industry leading behemoth Schlumberger, it has the highest international exposure.

Read the full article at Seeking Alpha.


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







Monday, March 12, 2012

Navistar: Cheap Enough Yet?

Navistar (NAV) makes commercial trucks, buses, step-vans, diesel engines and chassis for motor homes. Otherwise, the company focuses on the large motor vehicle sector.

This stock provides one of the most compelling valuations in the market today, if the company can hit financial goals. That remains a big 'IF' for this company considering the recent disaster of a Q1'12 reported just last week.

Hence the question on whether the stock is cheap enough to buy considering the constant inability to hit targets. The last 4 quarters have seen 3 profits misses all by at least $.15. These misses have caused 2013 earnings estimates to plunge from $8.13 only 90 days ago to $6.52 now. The most pessimistic analyst is already down at $5 showing a growing distrust with the ability to hit targets.

Read the full article at Seeking Alpha.


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



Investment Report - March 2012: Opportunistic Levered


This model gained a solid 21.4% in February versus 4.1% for the benchmark S&P 500. This model typical outpaces the major indices by a large margin in up periods and last month was no exception.

Since the end of 2011, this model has been running on the theme that the majority of stocks would retrace the losses experienced since the July 2011 levels. In essence, our theory all along has been any losses since that time period were from irrational fear of a second financial collapse that the Europeans were unlikely to allow. Naturally this fluctuates on a case by case basis where any individual stock could move a lot higher or lower depending on circumstances since then.

This conviction has allowed us to hold onto a highly leveraged portfolio and see significant gains this year as stocks like Apple (AAPL), Dicks Sporting Goods (DKS), Liz Claiborne (LIZ), and Radware (RDWR) all reached those July levels by February.

Other stocks like Manitowoc (MTW), Sears Holdings (SHLD), and Terex (TEX) have made major runs by the end of February to reward investors for holding on during the rough summer months. Amazingly though neither of these stock had reached the July levels even after significant rebounds.

What’s even more amazing about the strong gains in the model is that several stocks have remained around 52 week lows including Alpha Natural Resources (ANR), NII Holdings (NIHD), and Savient Pharma (SVNT). Other stocks still remain far from last July levels leaving plenty of upside.

Trades
Trading for the month was limited especially as a percentage of assets. Small positions were  initiated in Freeport McMoran (FCX) and NII Holdings (NIHD), while also adding to an existing position in OCZ Technology (OCZ) .


Conclusion
The market in general remains in a uptrend that likely will lead to multi year highs and possibly eventually to all time highs in the S&P 500. This model while fully invested now will likely allow leverage to unwind with any more gains.

While a few stocks are approaching valuations that might trigger closing positions, most of the stocks owned or followed trade at extremely low valuations. Investors need to understand that growth stocks have underperformed the market during this rally since last October in favor of dividend stocks. It would not surprise us to see a period over the next few months where growth stocks surged ahead even as the S&P 500 stalls.



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



Saturday, March 10, 2012

Short Interest Remains Incredibly High At Sears Holdings

Anybody half way following the market this year has to know that Sears Holdings (SHLD) has had a tremendous run this stock. The stock is up over 150% for the year, leading the S&P 500. Oddly though according to the Bloomberg report on Sears remains 2nd in the list of highest short percentage.

The data is only as of Feb 29th so maybe a few shorts covered during last weeks rally.

Another important point is that Bloomberg lists the equity float as 36 million shares. This number could be considerably lower when adding a few mutual funds that control shares unlikely to be sold to the public.

It's possible that most stocks have similar fund holdings so at least the comparison is likely apples to apples giving a great starting point for more research.

From the list below, Sears has an incredible 34% of the float short. This continues to highlight my theory that the large purchase by Chairman Eddie Lampert and the subsequent aggressive moves on monetizing assets has set off the Impossible to Cover theory.


Figure 1 - Largest S&P 500 Short Interest

                              Short Interest   Short Interest  Equity Float 
Ticker  Name                      / Float %     (In mln shrs)   (In mln shrs)
=============================================================================
GME     GAMESTOP CORP-A              41.05         54.85        133.62
SHLD    SEARS HOLDINGS               34.34         12.53         36.48
SVU     SUPERVALU INC                33.27         70.09        210.69
RRD     RR DONNELLEY & S             31.29         55.42        177.12
FSLR    FIRST SOLAR INC              31.23         18.60         59.56






The below chart highlights that Sears is now in an overbought situation especially with the RSI printing above 80. Though as a non-chartist I'll still question how a stock can be that overbought if it has just 
returned to the level from October. Don't be surprised by a pause, but the market shouldn't expect a selloff. 


Figure 2 - SHLD Chart





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



Friday, March 9, 2012

Investment Report - March 2012: Net Payout Yields


This model gained a solid 4.9% in February versus 4.1% for the benchmark S&P 500. As typical of this conservative model it tends to gain alongside the market on the way up and outperform during periods of weakness.

Trades
February was a slightly more active month for this model with 4 trades mainly switching out of two positions with reduced yields for two positions with attractive yields.

Gilead Sciences (GILD) and Banco Itau (ITUB) were both sold during the month.

Gilead Sciences is a leading biotech firm that greatly reduced their stock buyback program in order in purchase Pharmasset. This virtually eliminated the net payout yield as the company confirmed on the Q4’11 earnings call leading us to selling the stock as it surged on earnings. See blog post for more details.

This was very fortunate for the model as either luck or the reduction of the buyback foretelling weakness ahead, the company announced disappointing drug information just a couple of weeks later leading to a big drop in the stock price.

Banco Itau is a leading bank in Brazil that has failed to keep the yield at an attractive level. In addition, the model decided to reduce the risk of being exposed to a emerging market bank, even though, the total beta of this model was below that of the benchmark S&P 500.

ConocoPhillips (COP) and Kohl’s (KSS) were both bought during February to replace the previously mentioned low yielding stocks sold during the month. Remember that the goal is this model is to stay virtually fully invested (no more than 5% cash) at all times.

ConocoPhillips was purchased with a yield consistently hitting the 14-15% range anchored by a solid 3.4% dividend yield. It was also the top yielding basic materials stock providing for diversification and reduced volatility in the model.

Kohl’s as a leading discount retailer has one of the highest yields topping out over 20% recently. As with ConocoPhillips, most of the yield comes from a large buyback program, but the stock has an attractive 2.7% dividend yield as well.

Conclusion
The market in general remains in a uptrend that likely will lead to multi year highs and possibly eventually to all time highs in the S&P 500. This model will remain fully invested to capture as much upside as possible while protecting against any major downside from owning solid large cap stocks with high yields.

The biggest concern to this model would be tax hikes to dividends that might be possible under an Obama administration. This could hurt dividend stocks in the short term as it appeared to during the end of 2010 when the Bush tax cuts were on threat of expiring.



Disclosure: Long COP and KSS. Please review the disclaimer page for more details. 





Monster Worldwide Breaks Downtrend

Anybody following the general market and especially this blog already knows about the CEO placing this company up for sale. See previous article on this blog with a link to an article I wrote for Seeking Alpha for more details.

Today the stock for Monster Worldwide (MWW) is up another 4% mainly with the general market. Possibly though the technicians are jumping on board as the stock has finally broken a couple of downtrends the last few days.

For numerous valuation reasons, it's very logical for the stock to continue pressing above $10 prior to any deal announcements. The biggest risk to price is the next earnings report in April when the attractive balance sheet and brand meets the weak earnings situation.

Until then, I'd expect the stock to remain in an uptrend. The biggest question could possibly be whether to cash out if the stock hits in the $12-13 range prior to a deal or wait it out for a possible $15+ as a few analysts suggest might be possible in a deal.

For now though, the chart below will surely attract new money from the technical traders. The downtrend is broken!





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



Thursday, March 8, 2012

One Monster Of A Premium In Store?

As we wrote back on Monday, the official announcement of Monster Worldwide (MWW) hiring an advisor was a promising sign. The CEO had mentioned on the 1st that the stock was too cheap and that the company would seek a strategic deal to enhance shareholder value. Then on the 2nd, Oppenheimer questioned the true seriousness of a deal causing the stock to sell off. Not too surprising to see some doubters as Monster is always rumored as a buyout candidate. A rumor that so far has not come true.

This time though appears different. Monster has actually acknowledged the interest and followed through with the hiring of an advisor. Possibly suggesting that some of the rumors in the past came from executives unhappy with the stock price and contemplating a deal.

Read the full article at Seeking Alpha.


Disclosure: Long MWW. Read the disclaimer page for more details. 



Copper Market Remains Tight

Dr. Copper continues to attract plenty of debate regarding the future. The bulls point to the fast declining inventories at the LME long followed as the leading inventory indicator. The bears will point to the fast increasing supplies at the Shanghai Futures Exchange warehouses suggesting that China demand is slowing.

It's very possible that both opinions are correct and the truth is somewhere in the middle. Codelco, the leading copper producer in the world, shared some interesting thoughts on the copper market as it revealed the plans for spending a record $4.3B this year on increasing output.

So why is the largest copper producer spending to increase production if the worlds largest copper user is slowing down? Naturally because the company sees a tight market partially due to strong demand and also due to weak supply.

Codelco expects copper production from its mines to actually decline this year. Highlighting the ultimate problem with any bears of copper. If demand just shows fractional increases, the major producers are having a very difficult time keeping up as old mines continuously run into weaker ore grades. The good sections have already been mined.

Another major issue is the political one highlighted by the Indonesia's government plan that mines be required to have 51% domestic ownership. This means that any new copper mines will be significantly delayed or cutback as potential investors analyze the situation. It also calls into question the massive Grasberg mine operated by Freeport McMoran (FCX). Freeport claims that the existing contract will be honored, but that doesn't mean Freeport will put effort into increasing production knowing the questionable future in the country.

Another major positive continuously overlooked by the market is the number 2 user of copper has finally turned the corner. Increasing demand in the US could tighten a market not use to growing demand in the US combined with huge demand from China. Also surprising was to hear that Europe has seen a pickup in demand. While not long enough to be considered a trend, it would further place pressure on the market.

Freeport remains the best vehicle to benefit from a strong copper market. To us, the key remains the US market. Doesn't appear logical that China will see additional growth in demand, but even the forecasted 4-5% growth in demand would be immense pressure on this market.


Codelco details via Rueters report:


  • The world's top copper producer, Chile's Codelco, said on Tuesday it will invest a record of more than $4.3 billion this year and sees output dipping slightly in what it forecasts will remain a tight market, with firm demand from No. 1consumer China.
  • The state miner expects its output to dip to 1.7 million tonnes in 2012 from 1.735 million last year, before picking up sharply as of next year as new projects come on line.
  • Codelco has several key projects planned as part of a long-term investment valued at about $17 billion to boost output to more than 2.1 million tonnes by 2020 and counteract dwindling ore grades.
  • Among crucial projects are the $3.8 billion transformation of century-old Chuquicamata, the world's No. 1 open-pit mine, into an underground operation and the expansion of Andina, aimed at doubling that mine's output to around 600,000tonnes per year.
  • Hernandez said European demand had picked up in recent weeks and stronger-than-expected economic data in the United States suggested that market would help compensate for a potential sag in Chinese demand.
Disclosure: Long FCX. Please review the disclaimer page for more details.

Wednesday, March 7, 2012

Brazil Slashes Interest Rates For Fifth Time

It wasn't surprising that Brazil slashed interest rates for the 5th time tonight, but it was a little surprising to see a 75 basis point cut. One needs to understand though that Brazil still maintains one of the highest interest rates in the world after this cut to 9.75%. This even after 275 basis points of rate cuts in the last 6 to 7 months.

After a 2.7% GDP print for 2011, its just natural that the interest rate would drop from such lofty levels. What is ironic is that the original surprise cut back in August last year was so criticized. Just imagine now if the central bank hadn't started so soon. This economy might be headed to a recession if not for the fast action.

One also needs to understand that interest rate cuts take up to 9-12 months to have an impact on the economy to a great extent. The original cut was only some 7 months ago. Though this does further highlight the typical problem with rate cuts. The Brazilian central bank has already made 5 rate cuts before the first one has even had the chance at impacting the economy.

Of course, they don't have much of an option with rates above 10%, but this also highlights the issues with raising rates to lofty levels in the first place. When will central banks learn that slow measured changes are the best medicine?

Another issue I'd like to further understand is why Brazil has such a structurally high interest rate. If the rate in Columbia stands at 5.25%, it doesn't add up that Brazil would be roughly double on a continual basis.

Look for stocks like Gafisa (GFA) and Gerdau (GGB) to see a lift from the lower rates tomorrow. Wireless provider NII Holdings (NIHD) might see a smaller bump from the rate cut, but the stock now trades around 52 weeks lows even after the other rate cuts. 

 Details from CNBC report:

  •  In what could be its most controversial move since a surprise rate cut in August, the central bank lowered its benchmark lending rate to 9.75 percent from 10.50 percent in a split decision. Two of the bank's seven directors voted for a smaller rate cut to 10.0 percent.
  • "Generally the central bank slows the rhythm (of interest rate cuts) when it's near the end of a cycle, but now it's accelerating. We can expect more cuts to the Selic rate," said Eduardo Velho, chief economist with Prosper Brokerage.   
  • Official data on Tuesday showed Brazil's economy grew just 2.7 percent in 2011 after barely avoiding a recession in the second half of the year. That was a far cry from 2010, when the economy grew 7.5 percent, the fastest pace in more than two decades. 
  • In theory, lower rates would help limit capital inflows by reducing the returns of investors seeking higher profits in emerging markets. But even at 9.75 percent, Brazilian interest rates would remain among the world's highest.  
  • Inflation slowed to an 11-month low of 6.22 percent in January. Analysts see annual inflation easing further to 5.84 percent in February.
  • Rates in Brazil are much higher than those of regional peers such as Mexico and Colombia where rates stand at 4.50 percent and 5.25 percent respectively.

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


Tuesday, March 6, 2012

The Defense Sector Yields Too Much To Ignore

Nothing like taking a financially strong sector combined with fears of cutbacks to provide for some exciting yields.

With major government budget cutbacks expected in the US, the defense sector went through a few rough quarters in 2011. Investors feared the worse. At the end of the day though, the companies remain strong and according to a Bloomberg report, most of the top dividend yielding stocks in the Capital Goods sector belong to the defense sector.

Read the full article at Seeking Alpha.


Disclosure: Long LMT and RTN. Please read the disclaimer page for more details. 




Where Is The Free Cash Flow At Equinix?

As a telecom industry veteran, I'm all too familiar with companies that build data centers and networks for the future. All too often, service providers spent billions on networks that needed to be upgraded by the time they were installed.

These companies always promised huge earnings in the future. Massive free cash flows were always around the corner once this feature was added or this connection made. Unfortunately, the competition always had the same plan leading to quick margin erosion and evaporating profits.

While reading the Q4'11 earnings conference call transcript for Equinix (EQIX), this statement in the opening remarks by CEO Stephen Smith got me thinking back to the internet bubble years.


Read the full article at Seeking Alpha.


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



Monday, March 5, 2012

Monster Worldwide Follows Through On Hiring Advisor

A day after Oppenheimer questioned whether Monster Worldwide (MWW) was serious about selling the business, news leaked after the close that it had indeed hired investment bankers. Clearly this doesn't mean a deal will be done, but it shows the intent does exist.

To step back a little, Monster's CEO had made an announcement at a conference earlier last week suggesting the company was looking for strategic alternatives to boost the stock price. The stock sprang up nearly 20% that day, but quickly settled back down as reality set in helped by Oppenheimer.

Trading should be interesting tomorrow and the rest of the week. The stock remains very cheap and any real intent to sell the company could likely fetch numbers back towards the July level of $13-15.

SunTrust analyst Tobey Sommer suggests an acquirer could ring out $100M in costs savings from reducing redundant management, marketing, and general administrative expenses. It has long been suggested that Monster has a bloated cost structure. Combine this cost savings with what still remains a strong brand and Monster might just be able to pull off a squeeze of the 14M short shares.

My suggestion is that investors be prepared to unload this stock as it hits a target in the teens. Any price jump from a deal or even potential deal would lead to highly speculative trading and the stock might not last at a target price in the mid teens for long. Just don't see this stock attracting a premium back towards the 52 week high over $18, but any sizable gain from the $7.50 level would be highly attractive at this point.






Disclosure: Long MWW in client and personal accounts. Please review the disclaimer page for more details. 




Sunday, March 4, 2012

The 400% Man

SmartMoney.com has an interesting story about a college dropout in Utah that has a successful fund. Very interesting to see a guy that is successful is this business by picking strong companies for the long term instead of attempting to make a dime every minute on every bit of information.

What I really like is how the guy spends most of his time reading and very little creating spreadsheets or detailed plans. To an extent, this reminds me of myself. Constantly read articles on Seeking Alpha or numerous other media outlets where somebody has gone into an incredible effort to forecast the future numbers for XYZ company. While useful, investing still comes down to more of a science than a precise equation.

For example, John Paulson & Co. just spent months compiling detailed information in order to persuade Hartford Financial (HIG) management on how to split the company up and provide the necessary liquidity for the 2 separate units. That information was so detailed that it almost appears he has an analyst working on the inside. Still Paulson has been no more successful in his investment on Hartford than Stone Fox Capital. Guarantee it took a lot less research on our part to realize that a company trading substantially below book value and generating a ton of cash was a good investment.

The real question was more a gut feeling on whether the insurance business was going to survive and grow or not. Those thousands of hour spent on spreadsheets weren't going to answer that question. 

In a way, investing is like fighting with a hand grenade. Close is what counts not a precise hit of the target. If you buy a stock for 10x earnings and it grows at 19% instead of 20%, you'll be a very happy investor either way. It comes down to predicting trends and finding good management as much as anything.

The odd part about the fund world is that it appears to not matter how good Mr. Mecham's stock picking has done as new investors apparently prefer a slick salesman with a fancy computer model over proven results.

What I want to know is why Smartmoney didn't include my model in the 400% club? It hit gains over 400% within the first 2 years though it gave back a sizable chunk in the downturn last year. Heck, that just provides new investors a great entry point. Even Mr. Mecham had a bad year back in 2005 so guess I should be excused for having one as well.

What I really love about my chosen industry is that the slick salesman is what everybody appears to want. Everybody goes on CNBC or Bloomberg and spews why you should follow them or buy this stock yet nobody typically sees any information of fund returns. This is where Covestor has such an advantage over just about any blog, fund, or show in the industry. Whether good or bad, each model manager can pen a monthly investment report that gets disseminated along with the returns of the model. Every potential investor gets to read the opinion while immediately seeing the real results.

Sounding good is no longer equal to a good investment.

Back to Mr. Mecham, the striking part is that after 12 years in the business with huge success he has only accumulated $80M in assets. No matter how good you produce, investors still fall for the Bernie Madoff's that promise the impossible instead of taking the proven results.

Definitely read the article. The picture from the article tells the whole story. The guy would rather let his results speak for him! Maybe someday I'll make such a respected publication.






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







Friday, March 2, 2012

Energy Price Comparison

Great picture comparing the price of the 3 main energy options: coal, nat gas, and oil. Not only does this chart show current prices, but also the futures for each item.

It is worth noting the higher prices of natural gas in the future. The price increases substantially over current prices. Unless coal sees a similar rise in the future, all the power stations converting to nat gas will cause higher utility prices down the road. Especially in case where coal plants are being closed. Maybe great for the environment, but I seriously doubt consumers will agree when they get bills during a brutally cold 2013 winter. Just guessing.






Could the S&P 500 Hit 1,700 This Year?

Of course not. Why would the market ever breakout to new highs? Aren't the financial markets headed for collapse?

According to Laszlo Birinyi, president of Birinyi Associates, in this CNBC report the possibility really exists for a further 24% increase this year to 1,700. The good news is that just about every market pundit has blown off this view that the possibility increases. A 35% gain in the markets is far from unprecedented especially when the year began with sub par valuations.

According to Birinyi, this is just a continuation of the bull market began back in 2009. According to him, this run looks similar to the 1982 and 1990 runs.




Neither is likely to be repeated, but for any investor to dismiss the possibility would probably be reckless. Especially considering any break of current levels ushers in a return to old highs in the 1,500s. A further break of that would likely lead to nice gains beyond the old high leaving 1,700 as a likely stop.

Laszlo has been bullish for a while and was likely very wrong about the outcome in 2011. Maybe he was just early one year.

Clearly our investing thesis doesn't consider this as a likely outcome. Though when looking at numerous stocks trading with forward PEs in the 5-7 range one can't wonder what the market would do if these stocks jumped to more normal levels in the 10-14 range.

As long as the pundits ignore these calls, they become a lot more likely to occur!


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



Thursday, March 1, 2012

LIZ vs SODA

Both Liz Claiborne (LIZ) and SodaStream (SODA) reported earnings (see previous post on SODA earnings) prior to the open on Wednesday that disappointed the street with both stocks dropping dramatically for the day.

Liz Claiborne reported earnings that generally met estimates, but with the stock around 52 week highs it wasn't too surprising to see a dip with the company not beating estimates. SodaStream easily surpassed estimates and guided much higher on '12 numbers. LIZ dropped 6%, SODA dropped 14%.

A strange thing happened during trading today. Liz Claiborne turned around and soared 13.5% to new 52 week highs over $11. The stock is now ahead roughly 7% since earnings. SodaStream though fizzled as the day moved along and ended slightly down for the day leaving investors hanging onto a nearly 15% loss now.

What gives? SodaStream keeps growing at a fast clip and trades at very cheap forward PE compared to it's 35% earnings growth for 2012. Liz Claiborne on the other hand is a turnaround story with a promising outcome in the next couple years. That company is back into growth mode and has several valuable brands that each could end of worth more than the current $1.3B market cap.

Honestly the market is a confusing place. Both companies offered great valuations for different reasons. Sometimes you just have to go with the punches and take advantage of what the market gives you. Neither move made much sense, but that is how the market works in the short term.

Look to snap up SodaStream on the dips and just keep holding onto Liz Claiborne as it completes the turn around story.


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