On Wednesday, September 5, 2007, before the opening bell, Sycamore Networks (NASDAQ: SCMR) reported their financial results for the 4th Quarter and Fiscal Year Ended 2007 financial results. The markets were not pleased with the results and it sent SCMR down nearly 8% to close at $3.73. SCMR also missed analyst expectations. The markets were expecting $0.03 EPS for Q4 2007 and $46M in revenue for the same period. SCMR came in at $0.02 EPS and $38M of revenue, respectively. To seemingly make matters worse, SCMR’s Vice President of Finance and Administration stepped down. Sounds like things are falling apart at the Chelmsford, MA based manufacturer of networking hardware and equipment.
Certainly, it could be the case and SCMR could be falling apart and is dead in the water, but I want to point out some observations which suggest to me, that at the very least, SCMR is not going away.
First, since it is a short issue, as for missing analyst expectations, well, really, there is only one analyst – so, what do you expect? While it is no fun to show-off a missed quarter, one estimate – the miss does not carry a great deal of weight.
Regarding the department of the company’s finance chief, the negativity surrounding this event appears to be exaggerated. Certainly, the CFO leaving can easily be interpreted as a red flag, but it certainly does not appear that Mr. Gaynor left on bad terms. Per the conference call, Mr. Gaynor will remain with SCMR for the remainder of the month before pursuing another employment opportunity. He was not fired and it certainly seems that he did not smell a rat, as if he did, he likely would not hang around for the rest of the month. As a shareholder, you never like to see any member of your key management leave, often times, it is just the natural course of things. SCMR should be able to find a competent replacement. The headlines reading “CFO Steps Down” or “Resigns” are technically true, but imply that there is some form of accounting scandal about to come out. This can happen, as anything is possible, but per the nature of his departure, at worst, it is a neutral event.
A big element that has attracted much attention to SCMR over the past few months has been their enormous cash and cash equivalents stash, which grew to $925M from the $904M since the close of Q3 2007. This nearly $1 billion balance translates into about $3.27/share of cash, or about 88% of SCMR’s market value per their September 5, 2007 closing price. SCMR has no debt, either. Although not the ideal way to do it, SCMR continues to produce positive cash (albeit, the huge interest income makes that possible) and this provides a certain baseline to the stock price, which it seems we are close to it at these levels.
A big knock on SCMR has been their inability to produce positive cash flow from operations. Q4 2007 was no exception with a non-GAAP loss from operations of about $5.3M and an operating loss of $19.3M for FYE 2007. Again, the interest on the cash hoard has enabled SCMR to show non-GAAP income from operations. There is little discussion of the revenue growth SCMR has demonstrated the past 12 months. Granted, and SCMR blatantly acknowledges such, that the revenue growth is a result of an acquisition completed in Q1 2007. The growth is not staggering by any means, but showed 133% increase in revenue in Q4 2007 vs. Q4 2007 and 79% revenue growth when you compare the same two periods to each other. This trend, per SCMR’s numbers, appears to be sustainable and the conference call suggests the revenue growth will continue. So, here we have SCMR – showing strong revenue growth and not burning through cash to do so. That is no small accomplishment and does appear to have been ignored by the rest of the world at this stage. Consider an extreme example in XM Satellite Radio which has seen huge revenue growth, but has yet to show an operational profit. However, since they are growing – it is ok to take on debt and post operating losses. SCMR may be being a little too conservative, but imagine being able to have triple digit revenue growth, post very natural (and often widely expected) operational losses for showing revenue growth, and be able to add cash to your bank account – all without taking out loans or debt.
Another noteworthy item, which is not a big secret, is that only a few months ago, SCMR finally cleared up their stock-option backdating situation. SCMR announced that there would be some additional GSA and restructuring charges associated with the completion of the investigation and some subsequent housekeeping. SCMR clearly warned that Q4 2007 would include some additional expenses related to some of these activities. Starting fresh in Q1 2008, the GAAP financial implications of the past should, well, be a thing of the past.
Now, in the words of Yogi Berra, when you come to a fork in the road, you have to take it. That is where SCMR is at now. The healthy balance sheet and revenue growth are very attractive as is SCMR’s exposure to providing equipment to the cable companies and MSOs to service the flexible bandwidth needs of the high speed Internet and digital phone services. However, as everyone knows, SCMR has been unable to show any form of operating profit the past several years. The pieces are in place for SCMR to turn the corner and should they show an operating profit, which I believe they will in Q2 or Q3 2008 (or perhaps Q1 2008), the company’s stock price should respond very positively and very quickly.
Now obviously, SCMR needs to perform and unfortunately, some of the executive’s answers during the conference call were somewhat vague and perhaps indicate a disinterest or mild incompetence to really make this thing go.
However, even if the above is the case, SCMR is now trading where it was when it was showing less revenue growth, had less cash in the bank, and was mired in non-compliance and options back-dating issues. It would suggest that the pieces (cash, revenue growth, industry with demand) are in place for SCMR to be a potential 2x-5x bagger over the next 12-24 months. Now, granted, that may not happen and it absolutely is a gamble – but what’s the downside? Considering you are basically buying the stock at a slight premium to book value (with over 90% of that book value being in greenbacks), this looks like a win or no-lose scenario. I used today’s dip to increase my holdings by 17%.
Wednesday, September 5, 2007
Tuesday, September 4, 2007
RealNetworks (NASDAQ: RNWK) – It Looks Good, But It’s Not Great- Buy at $6.23
First, let me say that I like RealNetworks, Inc. (NASDAQ: RNWK). I think it is a safe investment – and I think at its recent closing price of $6.23, it has some upside. I feel $9-$11 is a realistic price target for this one, though it may not happen. I must admit, that I am a buyer of RNWK at these levels and have been slowly nibbling away at this one. It just looks to be a very safe play with some things coming together that can result in upside.
As for the merits of RNWK, those are no secret.
The biggest factor, I believe, that will hinder RNWK from becoming a 10-bagger is the CEO and Founder, Rob Glaser. I am not suggesting Glaser is incompetent by any means – in fact, I think he has done, at the very least, a satisfactory job of diversifying the company and expanding from a technology service to an entertainment/media company. Recall that RNWK’s primary business used to be technology licensing of their streaming media technology. RNWK still has that line of business but also has a slew of other offerings and new deals in place that can drive their more exciting business lines: music, gaming, entertainment, mobile.
Glaser, by virtue of being the founder, owns about 30% of RNWK and in 2006, from June to December, parted with over $12M of stock at around $10.50-$11.00 per share. Certainly, that is his prerogative and I do not blame him for it, but that $12M was about 12% of the $100M RNWK stock buyback program. The matter of a buyback program is nothing new. RNWK completed their 2005 and 2006 buyback programs and it appears that they will with their most recently announced repurchase program. If Glaser is not enough, note that between March 31, 2007 and June 30, 2007, institutions registered net selling of 28,427,000 shares – that dollar volume far exceeding the RNWK buyback efforts. Simple supply and demand – if there are more sellers than buyers, price goes down. To get to the point, the RNWK buyback is a good gesture but is not accomplishing the real purpose of what a buyback should accomplish. Simplistically, it is simply allowing some of the larger institutions and Glaser to part with some of his shares (albeit a small % of his shares). If there were no sellers, than the buyback would be a very bullish indicator for the stock and seem to be a prelude to higher levels.
From an acquisition standpoint, the size of Glaser’s holdings and his well publicized liquidation of shares at the $10.50-$11.00 level, even if premeditated by a company approved 10b5-1 plan, shows that he is willing to let some go at that price. If he is willing to let go of some at that price, basic logic suggests that he would be willing to take less to get rid of them all in one shot. I believe that many possible buyers of RNWK exist. Google, for sure is one of them, but it seems they are working with gBox for their digital music future. However, the RNWK gaming platform might make sense as Google has yet to offer a Google Games, a piece of the puzzle they currently do not have and their top competitors (Microsoft, AOL, Yahoo!) do. Any of the ILECs, such as Verizon or AT&T are possible suitors. The cable companies, perhaps Comcast or Time Warner, may make a good fit. Universal Group may also be a candidate to take out RNWK. Wal-Mart, Yahoo!, or Microsoft? Well, maybe, but all three already have their own digital music solutions available to their traffic base.
Unfortunately for RNWK and those looking for pie in the sky, the takeover price would likely be in the $8-$9 range – which, mind you, is still a strong premium over Friday’s closing price. However, my best guess suggests that such an offer would not be acceptable to the RNWK board and shareholders (e.g., Glaser) at this stage. I believe the opportunity is there, but really is more of a Plan B if the newly announced initiatives do not work out – consider it like a bail-out or a cushion. This will leave RNWK to fend for its own and try to drive shareholder value through its own internal efforts, which may or may not work out.
Why is the buyout price seemingly so low? Funny – who thinks a 30% premium is low? It does not seem that way, but a 30% from the company’s recent price is also 30% less than the company’s 52-week high and fractionally lower than the triple-digit price RNWK traded at during the peak of the Internet bubble.
Well, the Glaser selling spree is part of the equation as is RNWK is participating in an increasingly commodity-driven business. This element is the second aspect as to why RNWK is trading at these apparent low prices. The online music business simply is not exciting and as everyone in the world seems to get into it and the major labels become more receptive to it, it eliminates some of the premium given to the industry. Players like eMusic, which used to be public, gave way to a private equity-buyer. Napster, which is a popular name in the space, has yet to turn a profit. iTunes is the dominant leader, but only because they have the captive audience of the iPhone and iPod to basically force people to use their digital music platform. Furthermore, Apple is in the hardware business – not the digital subscription business. Even with the royalty-free usage being endorsed by some of the record labels, you are seeing Wal-Mart get into the game and will obviously do whatever it takes to be the lowest cost provider of digital music downloads around. The end-result, once Wal-Mart is in the game, the sexiness is out – hence no major market premium.
To summarize, RNWK is a solid company and it appear s there is some upside in this one based on the condition of the balance sheet and an array of new opportunities on the horizon. However, the digital music business is just not that exciting any more, now that it seems anyone can get into it. Plus, Glaser has already played his hand of the price he is willing to let go of this one. RNWK may be worth more than $6, and I agree with that sentiment, but given the status quo, it’s certainly not worth more than $10 to any potential suitor.
So, is RNWK a winner? Well, yes, I believe it is and has some upside and limited downside. Perhaps shareholders may get a boost from the plethora of new developments and agreements RNWK is moving into, especially in the gaming, music, and mobile spaces.
Just your classic case of if it’s too good to be true, it probably is. RNWK is worth $9-$11 per share – but no more – and if their new relationships do not pan out, it could be at $6-$7 for a long-time. I still like RNWK, especially at under $6.00. Be smart with this one – and be realistic – and all should fall nicely into place – particularly if your mindset is to stack nickels in your portfolio over the long-haul rather than try to shoot the moon. If you belong to the latter group of investors, well, then RNWK is not going to make you happy. The only person getting rich off RNWK will be Glaser, but the upside leaves a little bit of crumbs for the rest of us bottom-feeders. For me, for 30%-50% upside, well, I’ll bottom-feed all day.
My point is happy buying, but do not expect a double or a triple and I would advise not waiting for it. We all say we are ok with 30%-50% gains in a 12-24 month period, but considering AAPL’s double in the past year, it may be easy for your eyes to get bigger than your stomach with this one. Let’s keep it Real.
As for the merits of RNWK, those are no secret.
- Slew up upgrades, including the most recent buy rating by Pacific Growth Equities on August 31, 2007 and a $11 price target from Think Equity on August 27, 2007;
- A parade of new deals and announcements with Verizon/MTV in an effort to rival iTunes;
- Lots of cash ($4/share), nominal debt, and trading right around 1x book value.
- Significant stock buyback program in place.
The biggest factor, I believe, that will hinder RNWK from becoming a 10-bagger is the CEO and Founder, Rob Glaser. I am not suggesting Glaser is incompetent by any means – in fact, I think he has done, at the very least, a satisfactory job of diversifying the company and expanding from a technology service to an entertainment/media company. Recall that RNWK’s primary business used to be technology licensing of their streaming media technology. RNWK still has that line of business but also has a slew of other offerings and new deals in place that can drive their more exciting business lines: music, gaming, entertainment, mobile.
Glaser, by virtue of being the founder, owns about 30% of RNWK and in 2006, from June to December, parted with over $12M of stock at around $10.50-$11.00 per share. Certainly, that is his prerogative and I do not blame him for it, but that $12M was about 12% of the $100M RNWK stock buyback program. The matter of a buyback program is nothing new. RNWK completed their 2005 and 2006 buyback programs and it appears that they will with their most recently announced repurchase program. If Glaser is not enough, note that between March 31, 2007 and June 30, 2007, institutions registered net selling of 28,427,000 shares – that dollar volume far exceeding the RNWK buyback efforts. Simple supply and demand – if there are more sellers than buyers, price goes down. To get to the point, the RNWK buyback is a good gesture but is not accomplishing the real purpose of what a buyback should accomplish. Simplistically, it is simply allowing some of the larger institutions and Glaser to part with some of his shares (albeit a small % of his shares). If there were no sellers, than the buyback would be a very bullish indicator for the stock and seem to be a prelude to higher levels.
From an acquisition standpoint, the size of Glaser’s holdings and his well publicized liquidation of shares at the $10.50-$11.00 level, even if premeditated by a company approved 10b5-1 plan, shows that he is willing to let some go at that price. If he is willing to let go of some at that price, basic logic suggests that he would be willing to take less to get rid of them all in one shot. I believe that many possible buyers of RNWK exist. Google, for sure is one of them, but it seems they are working with gBox for their digital music future. However, the RNWK gaming platform might make sense as Google has yet to offer a Google Games, a piece of the puzzle they currently do not have and their top competitors (Microsoft, AOL, Yahoo!) do. Any of the ILECs, such as Verizon or AT&T are possible suitors. The cable companies, perhaps Comcast or Time Warner, may make a good fit. Universal Group may also be a candidate to take out RNWK. Wal-Mart, Yahoo!, or Microsoft? Well, maybe, but all three already have their own digital music solutions available to their traffic base.
Unfortunately for RNWK and those looking for pie in the sky, the takeover price would likely be in the $8-$9 range – which, mind you, is still a strong premium over Friday’s closing price. However, my best guess suggests that such an offer would not be acceptable to the RNWK board and shareholders (e.g., Glaser) at this stage. I believe the opportunity is there, but really is more of a Plan B if the newly announced initiatives do not work out – consider it like a bail-out or a cushion. This will leave RNWK to fend for its own and try to drive shareholder value through its own internal efforts, which may or may not work out.
Why is the buyout price seemingly so low? Funny – who thinks a 30% premium is low? It does not seem that way, but a 30% from the company’s recent price is also 30% less than the company’s 52-week high and fractionally lower than the triple-digit price RNWK traded at during the peak of the Internet bubble.
Well, the Glaser selling spree is part of the equation as is RNWK is participating in an increasingly commodity-driven business. This element is the second aspect as to why RNWK is trading at these apparent low prices. The online music business simply is not exciting and as everyone in the world seems to get into it and the major labels become more receptive to it, it eliminates some of the premium given to the industry. Players like eMusic, which used to be public, gave way to a private equity-buyer. Napster, which is a popular name in the space, has yet to turn a profit. iTunes is the dominant leader, but only because they have the captive audience of the iPhone and iPod to basically force people to use their digital music platform. Furthermore, Apple is in the hardware business – not the digital subscription business. Even with the royalty-free usage being endorsed by some of the record labels, you are seeing Wal-Mart get into the game and will obviously do whatever it takes to be the lowest cost provider of digital music downloads around. The end-result, once Wal-Mart is in the game, the sexiness is out – hence no major market premium.
To summarize, RNWK is a solid company and it appear s there is some upside in this one based on the condition of the balance sheet and an array of new opportunities on the horizon. However, the digital music business is just not that exciting any more, now that it seems anyone can get into it. Plus, Glaser has already played his hand of the price he is willing to let go of this one. RNWK may be worth more than $6, and I agree with that sentiment, but given the status quo, it’s certainly not worth more than $10 to any potential suitor.
So, is RNWK a winner? Well, yes, I believe it is and has some upside and limited downside. Perhaps shareholders may get a boost from the plethora of new developments and agreements RNWK is moving into, especially in the gaming, music, and mobile spaces.
Just your classic case of if it’s too good to be true, it probably is. RNWK is worth $9-$11 per share – but no more – and if their new relationships do not pan out, it could be at $6-$7 for a long-time. I still like RNWK, especially at under $6.00. Be smart with this one – and be realistic – and all should fall nicely into place – particularly if your mindset is to stack nickels in your portfolio over the long-haul rather than try to shoot the moon. If you belong to the latter group of investors, well, then RNWK is not going to make you happy. The only person getting rich off RNWK will be Glaser, but the upside leaves a little bit of crumbs for the rest of us bottom-feeders. For me, for 30%-50% upside, well, I’ll bottom-feed all day.
My point is happy buying, but do not expect a double or a triple and I would advise not waiting for it. We all say we are ok with 30%-50% gains in a 12-24 month period, but considering AAPL’s double in the past year, it may be easy for your eyes to get bigger than your stomach with this one. Let’s keep it Real.
Wednesday, August 22, 2007
Interest Rate Cut – Sleep it Off!
What?!?! You loaned money to people that could not afford it and now you want someone to bail you out? Big shocker. ME, ME, ME is all I hear – similar to a 4-year old in a candy store when it comes to the well-publicized events of the sub prime mortgage ‘meltdown’ and the debate of whether the Fed should cut interest rates.
I will be the first to say that I am not a heavily trained economist and I have no advanced degrees in the subject. Furthermore, I must admit that I do not have access to a fraction of the information that these people do – and in the event that I did, I would be hard pressed to make any sense of it.
However, that does not stop me from running my mouth on the issue – everyone else seems to be doing so, so why not join the party?
First, there is no doubt that things have been tough out there. We have seen a couple of Wall Street’s more adored lenders, banks, and mortgage REITs take monster hits on people. From declining stock price, to wiping out lots of net worth, to companies going under and leaving thousands of people with out jobs – it is rough. The situation is further exacerbated by the real estate market slow down – leaving many related professionals (realtors, mortgage brokers, developers, home builders, etc.) without income or a much smaller source of such. Living in South Florida, which was arguably the hottest real estate market in the country during the boom has provided me some very basic, observational insight on the situation.
It seemed that everyone here in the area became a realtor – everyone was looking to flip homes – everyone was writing big-ticket mortgages. For a while, things were good, but then the inevitable happened – things slowed down. Why did things slow down? Simplistically, let’s be honest – people ran out of money, especially in the area I come from. If people had more money, people would still be buying the flipped homes, realtors would be earning commissions, builders would still be building to sell to the masses, and mortgage lenders would still be madly filling out applications. But, it stopped? Again, people ran out of money. I do not want to hear that all of a sudden the mass population of Americans suddenly started subscribing to value investing and changed their financial tone. There was literally no more money left.
I would always wonder when the lack of top-quality paying jobs in the area would finally catch up with the real estate marketplace here. I could not compute the math on how people were affording high-priced homes on mediocre salaries. I was always wondering at what point does this behavior trickle into the overall local economy? Well, it has – and it is showing up here in the area. Restaurants are slower and waitresses I speak with are telling me this past winter season was the slowest in a while, the summer was slower than usual, and this upcoming year is also supposed to be slow. Membership applications to golf clubs have slowed – and in some cases, many want out but cannot sell because there are no buyers. Small businesses – especially one-man shows that do business with other one-man shows – are complaining about clients taking longer to pay them – rather than getting paid within 15-20 days, checks are showing up 40-50 days after the invoice and a phone call. It all adds up.
Next, do not kid yourself that this issue is restricted to a small, non-metropolitan area in South Florida. The signs are all there and are showing up nationwide. Some examples:
All of the major cable companies are reporting slowdown in subscriber growth for their high speed Internet and digital cable TV services. Charter, for instance, had great additions of their digital phone product, but flat growth in their cable TV subscribers. DISH Network flat out blamed the slower home market for slower sales;
Home Depot, Nordstrom, and even Wal-Mart said they are seeing weaker consumer spending. The first two also cited that payments on their company-financed credit cards to customers are coming in slower and we are seeing more late payments.
Foreclosures are up – everyone knows this.
Apple iPhone sales appear to have slowed since they first exploded onto the spot. I do not have the numbers to back this up, but think about yourself or your friends that got one. They all got them the first week they hit the market – not a lot of new iPhone buyers since then. Personally, I am not sure where people are coming up with the $600 for this device. Actually, I take that back – I know one person that actually padded his mileage on his expense report to be able to foot the bill. Harmless to a big company, right, but it comes out of someone’s pocket.
The biggest news item I have seen that overall, the average American savings rate is in the negative numbers. That is, on average, people are spending more than they are making. Eventually, the well runs dry.
Previously, Greenspan saw what was going on and warned that a recession by the end of 2007 or early 2008 was a distinct possibility. I hate to also sound like a psychic, but many of my past writing from early 2007 cited many of the above reasons and that at some point, it would have to filter into the overall economy and hit the marketplace. Of course, I had no idea on the timing of such, the absolute freezing of the mortgage paper marketplace, and the extent that albeit it for a short time, the stock market actually endured a correction (10%+) on an intra-day basis.
So, what is the source of the above issues? Since nobody is flat out saying it, I will say it. Why is everyone so surprised about this? For years, banks and credit cards have been loaning money to people that frankly could not afford it. I am not merely singling out those that are classified as sub prime. People with 750+ credit scores were being loaned boat loads of money, often unsecured, to do whatever with. Buy a bigger house, invest in a half-baked business idea, buy new cars, go out to eat all the time. Nobody is saving this money and investing it – if they were, the savings rate would not be negative, right? So, now that banks have loaned money to people that could not afford to pay it back, they want someone to bail them out.
Reward bad business decision making? That is what it sounds like, but it may be too aggressive. Consider this perspective. I have read, cover-to-cover, a big book called Responsibilities of Corporate Officers & Directors Under Federal Securities Law. It was the most boring thing ever, but the biggest thing I took with me was the discussion on what you can get busted on, for lack of a better phrase, when it comes to the collapse of a business. Obviously, anyone can sue anyone for anything these days, but realistically, what qualifies as an event that can genuinely be prosecuted? Specifically and simplistically, if you have a business plan and it appears you put thought into it with the intent to turn a profit and reward shareholders, you are in the clear. Translation, you cannot be punished for a bad business idea. Not all businesses work – that is a reality. If your intent is to defraud or steal, well, then you have problems. But, you cannot go down in flames if the business idea, with some analysis showing it might work, simply did not pan out. Even a chance of a business panning out is enough, considering that most small businesses fail. I have heard a slew of statistics from 75% in the first year to 90% within 5-years – who knows – but the reality is, most business ideas do not make it to profitability.
As for how this impacts the banks and lenders. Well, again, very simplistically their take was to loan as much money as possible to pretty much whoever. For a while, this was making the banks a lot of money – there is no question. The business plan showed that it could work in theory and for a while it did. So, all is well. Honestly, the system could have continued to work and drive things the way it did, but people stopped paying their bills. That is where we are today. Businesses, lenders, banks, and many more engaged in the practice of turning a profit and the business idea simply just did not work out.
So, with the writing on the wall, why is everyone now calling for an interest rate cut and whining to do so? I think it comes down to wanting someone to bail them out. The now famous Jim Cramer meltdown video basically saw him whining and crying about ‘how tough it is out there’ and that the Fed should come to the rescue. Remember – the Fed is not the enemy here – the practices of America as a whole is what caused this blip.
Overall, at least to me, things look good. Sure, growth has slowed in some cases, but revenues are up, profitability is up (even if at slower rates), people are employed. Business has not ceased to exist and continues to function very well. Some in the credit markets might claim exception to this, but how is this different from technology consulting companies facing the Internet Bubble collapse or travel companies facing the events of 9/11? It’s not – it is just part of doing business and there is absolutely no reason to be bailed out.
How many of you still reading this article (sorry for the length) have run into tough financial times? How many of you have had businesses you owned fall apart or have slow year? Who was there to bail you out? Nobody. Sure, clients help and the government has programs to facilitate the development of business, but nobody was just going to write you a check to cover your losses. And in the event they did, what are the odds of you tightening the belt and just walking away? Slim to none – as more often than not, people that are bailed out of their credit card debt by a family member or bankruptcy often return to the same fate. Forget statistics – I would venture to say we all have a handful of friends that are in over their head, were able to get out of it, and then fall right back into the precipice of debt.
The stock markets are pushing for a rate cut – and it very well may happen. The stock markets, though, want it now it seems and do not feel like waiting until the September 18 meeting. Many economists are now saying one will happen, and it very well may. Should such a cut happen, it will be interesting to see how that actually affects the stock markets. It makes one wonder if some of the upside is already getting priced in by the markets expecting such activity. Note today’s (August 22) climb in the major indices.
So, what happens if the Fed does not cut rates and leaves them the same, as they have been saying for a while. The panic returns and the markets continue a downward decline. Honestly, that does not seem like a horrible idea. Nobody likes their stocks going down, but it has been up-up-and-away since Fall, 2006. It may be time for a breather. Additionally, we have seen the U.S. Dollar strengthen against the British Pound and the Euro in the past few weeks suggesting that this may be a good path to go down. Overall, this is good news for the Dollar and for our economy as a whole. Sure, $1 is $1 here, but the more liquidity added, the more it is going to hurt our country’s economy in the long run.
Also, all things are possible. Explain how the interest rates in Europe are lower than ours here in the USA and yet, their respective currencies have strengthened, and their countries have avoided much of the debacle of the mortgage fall out. Honestly, I think the Fed would be amenable to lowering the rate if they were convinced that banks and Americans would change their ways somewhat and practice fiscal responsibility. However, as mentioned above, adding more liquidity would likely just contribute to the same poor spending practices by consumers and loose lending guidelines by banks.
I really believe that we need to let this situation filter out naturally. It is not some Force Majeure event – there is a very direct, logical explanation for such. Additionally, consider that the markets have yet to endure an actual correction on a closing price basis. The markets are down about 7% since their highs (less than the 10% required to officially call it a correction) and are still up about 6% YTD, despite the steep recent decline. Further consider that September and August, historically, are the stock markets two weakest months of the entire year – and the closing months of the year tends to be strong.
I am not suggesting maliciously punishing anyone, but we cannot just let the effected companies off of the hook at the expense of our entire economy – only to create a situation that will most likely spawn an even more severe situation in the future. This is a storm that must be weathered – and frankly, it is not that bad of a storm. The interest rate cut needs to be restrained until it is really needed – when inflation does start to spiral out of control or business becomes universally stagnant. Like antibiotics, you do not want to take them to much because each time you do, it makes them that much less effective when you might actually really need them.
Also, do not take me for a bear – I want things to go up, up, and away all the time myself. In fact, I have a couple of positions that I would like to see go through the roof as soon as possible. Why? Well, and I embarrassingly say this, but to ‘bail me out’ of some issues. As much as I would like that happen, I am well capable of bailing myself out and having someone bail me out now frankly would not help me for the long-haul.
So, this horrible malady that we are effected with is really not all that bad and there are intelligible, logical steps that can be done without waving the magic interest rate wand. Sleep it off.
I will be the first to say that I am not a heavily trained economist and I have no advanced degrees in the subject. Furthermore, I must admit that I do not have access to a fraction of the information that these people do – and in the event that I did, I would be hard pressed to make any sense of it.
However, that does not stop me from running my mouth on the issue – everyone else seems to be doing so, so why not join the party?
First, there is no doubt that things have been tough out there. We have seen a couple of Wall Street’s more adored lenders, banks, and mortgage REITs take monster hits on people. From declining stock price, to wiping out lots of net worth, to companies going under and leaving thousands of people with out jobs – it is rough. The situation is further exacerbated by the real estate market slow down – leaving many related professionals (realtors, mortgage brokers, developers, home builders, etc.) without income or a much smaller source of such. Living in South Florida, which was arguably the hottest real estate market in the country during the boom has provided me some very basic, observational insight on the situation.
It seemed that everyone here in the area became a realtor – everyone was looking to flip homes – everyone was writing big-ticket mortgages. For a while, things were good, but then the inevitable happened – things slowed down. Why did things slow down? Simplistically, let’s be honest – people ran out of money, especially in the area I come from. If people had more money, people would still be buying the flipped homes, realtors would be earning commissions, builders would still be building to sell to the masses, and mortgage lenders would still be madly filling out applications. But, it stopped? Again, people ran out of money. I do not want to hear that all of a sudden the mass population of Americans suddenly started subscribing to value investing and changed their financial tone. There was literally no more money left.
I would always wonder when the lack of top-quality paying jobs in the area would finally catch up with the real estate marketplace here. I could not compute the math on how people were affording high-priced homes on mediocre salaries. I was always wondering at what point does this behavior trickle into the overall local economy? Well, it has – and it is showing up here in the area. Restaurants are slower and waitresses I speak with are telling me this past winter season was the slowest in a while, the summer was slower than usual, and this upcoming year is also supposed to be slow. Membership applications to golf clubs have slowed – and in some cases, many want out but cannot sell because there are no buyers. Small businesses – especially one-man shows that do business with other one-man shows – are complaining about clients taking longer to pay them – rather than getting paid within 15-20 days, checks are showing up 40-50 days after the invoice and a phone call. It all adds up.
Next, do not kid yourself that this issue is restricted to a small, non-metropolitan area in South Florida. The signs are all there and are showing up nationwide. Some examples:
All of the major cable companies are reporting slowdown in subscriber growth for their high speed Internet and digital cable TV services. Charter, for instance, had great additions of their digital phone product, but flat growth in their cable TV subscribers. DISH Network flat out blamed the slower home market for slower sales;
Home Depot, Nordstrom, and even Wal-Mart said they are seeing weaker consumer spending. The first two also cited that payments on their company-financed credit cards to customers are coming in slower and we are seeing more late payments.
Foreclosures are up – everyone knows this.
Apple iPhone sales appear to have slowed since they first exploded onto the spot. I do not have the numbers to back this up, but think about yourself or your friends that got one. They all got them the first week they hit the market – not a lot of new iPhone buyers since then. Personally, I am not sure where people are coming up with the $600 for this device. Actually, I take that back – I know one person that actually padded his mileage on his expense report to be able to foot the bill. Harmless to a big company, right, but it comes out of someone’s pocket.
The biggest news item I have seen that overall, the average American savings rate is in the negative numbers. That is, on average, people are spending more than they are making. Eventually, the well runs dry.
Previously, Greenspan saw what was going on and warned that a recession by the end of 2007 or early 2008 was a distinct possibility. I hate to also sound like a psychic, but many of my past writing from early 2007 cited many of the above reasons and that at some point, it would have to filter into the overall economy and hit the marketplace. Of course, I had no idea on the timing of such, the absolute freezing of the mortgage paper marketplace, and the extent that albeit it for a short time, the stock market actually endured a correction (10%+) on an intra-day basis.
So, what is the source of the above issues? Since nobody is flat out saying it, I will say it. Why is everyone so surprised about this? For years, banks and credit cards have been loaning money to people that frankly could not afford it. I am not merely singling out those that are classified as sub prime. People with 750+ credit scores were being loaned boat loads of money, often unsecured, to do whatever with. Buy a bigger house, invest in a half-baked business idea, buy new cars, go out to eat all the time. Nobody is saving this money and investing it – if they were, the savings rate would not be negative, right? So, now that banks have loaned money to people that could not afford to pay it back, they want someone to bail them out.
Reward bad business decision making? That is what it sounds like, but it may be too aggressive. Consider this perspective. I have read, cover-to-cover, a big book called Responsibilities of Corporate Officers & Directors Under Federal Securities Law. It was the most boring thing ever, but the biggest thing I took with me was the discussion on what you can get busted on, for lack of a better phrase, when it comes to the collapse of a business. Obviously, anyone can sue anyone for anything these days, but realistically, what qualifies as an event that can genuinely be prosecuted? Specifically and simplistically, if you have a business plan and it appears you put thought into it with the intent to turn a profit and reward shareholders, you are in the clear. Translation, you cannot be punished for a bad business idea. Not all businesses work – that is a reality. If your intent is to defraud or steal, well, then you have problems. But, you cannot go down in flames if the business idea, with some analysis showing it might work, simply did not pan out. Even a chance of a business panning out is enough, considering that most small businesses fail. I have heard a slew of statistics from 75% in the first year to 90% within 5-years – who knows – but the reality is, most business ideas do not make it to profitability.
As for how this impacts the banks and lenders. Well, again, very simplistically their take was to loan as much money as possible to pretty much whoever. For a while, this was making the banks a lot of money – there is no question. The business plan showed that it could work in theory and for a while it did. So, all is well. Honestly, the system could have continued to work and drive things the way it did, but people stopped paying their bills. That is where we are today. Businesses, lenders, banks, and many more engaged in the practice of turning a profit and the business idea simply just did not work out.
So, with the writing on the wall, why is everyone now calling for an interest rate cut and whining to do so? I think it comes down to wanting someone to bail them out. The now famous Jim Cramer meltdown video basically saw him whining and crying about ‘how tough it is out there’ and that the Fed should come to the rescue. Remember – the Fed is not the enemy here – the practices of America as a whole is what caused this blip.
Overall, at least to me, things look good. Sure, growth has slowed in some cases, but revenues are up, profitability is up (even if at slower rates), people are employed. Business has not ceased to exist and continues to function very well. Some in the credit markets might claim exception to this, but how is this different from technology consulting companies facing the Internet Bubble collapse or travel companies facing the events of 9/11? It’s not – it is just part of doing business and there is absolutely no reason to be bailed out.
How many of you still reading this article (sorry for the length) have run into tough financial times? How many of you have had businesses you owned fall apart or have slow year? Who was there to bail you out? Nobody. Sure, clients help and the government has programs to facilitate the development of business, but nobody was just going to write you a check to cover your losses. And in the event they did, what are the odds of you tightening the belt and just walking away? Slim to none – as more often than not, people that are bailed out of their credit card debt by a family member or bankruptcy often return to the same fate. Forget statistics – I would venture to say we all have a handful of friends that are in over their head, were able to get out of it, and then fall right back into the precipice of debt.
The stock markets are pushing for a rate cut – and it very well may happen. The stock markets, though, want it now it seems and do not feel like waiting until the September 18 meeting. Many economists are now saying one will happen, and it very well may. Should such a cut happen, it will be interesting to see how that actually affects the stock markets. It makes one wonder if some of the upside is already getting priced in by the markets expecting such activity. Note today’s (August 22) climb in the major indices.
So, what happens if the Fed does not cut rates and leaves them the same, as they have been saying for a while. The panic returns and the markets continue a downward decline. Honestly, that does not seem like a horrible idea. Nobody likes their stocks going down, but it has been up-up-and-away since Fall, 2006. It may be time for a breather. Additionally, we have seen the U.S. Dollar strengthen against the British Pound and the Euro in the past few weeks suggesting that this may be a good path to go down. Overall, this is good news for the Dollar and for our economy as a whole. Sure, $1 is $1 here, but the more liquidity added, the more it is going to hurt our country’s economy in the long run.
Also, all things are possible. Explain how the interest rates in Europe are lower than ours here in the USA and yet, their respective currencies have strengthened, and their countries have avoided much of the debacle of the mortgage fall out. Honestly, I think the Fed would be amenable to lowering the rate if they were convinced that banks and Americans would change their ways somewhat and practice fiscal responsibility. However, as mentioned above, adding more liquidity would likely just contribute to the same poor spending practices by consumers and loose lending guidelines by banks.
I really believe that we need to let this situation filter out naturally. It is not some Force Majeure event – there is a very direct, logical explanation for such. Additionally, consider that the markets have yet to endure an actual correction on a closing price basis. The markets are down about 7% since their highs (less than the 10% required to officially call it a correction) and are still up about 6% YTD, despite the steep recent decline. Further consider that September and August, historically, are the stock markets two weakest months of the entire year – and the closing months of the year tends to be strong.
I am not suggesting maliciously punishing anyone, but we cannot just let the effected companies off of the hook at the expense of our entire economy – only to create a situation that will most likely spawn an even more severe situation in the future. This is a storm that must be weathered – and frankly, it is not that bad of a storm. The interest rate cut needs to be restrained until it is really needed – when inflation does start to spiral out of control or business becomes universally stagnant. Like antibiotics, you do not want to take them to much because each time you do, it makes them that much less effective when you might actually really need them.
Also, do not take me for a bear – I want things to go up, up, and away all the time myself. In fact, I have a couple of positions that I would like to see go through the roof as soon as possible. Why? Well, and I embarrassingly say this, but to ‘bail me out’ of some issues. As much as I would like that happen, I am well capable of bailing myself out and having someone bail me out now frankly would not help me for the long-haul.
So, this horrible malady that we are effected with is really not all that bad and there are intelligible, logical steps that can be done without waving the magic interest rate wand. Sleep it off.
Wednesday, August 8, 2007
Earnings Perspective: Seaboard Corporation (Q2 2007) – Reward Owners Despite Tough Times Ahead
After the bell today, Seaboard Corporation (AMEX: SEB) announced its earnings and financial results for the fiscal quarter ended June 30, 2007. SEB did not hit or miss expectations because estimates or guidance are not given.
First, SEB traded down 2.95% today to close at $1,990 – it touched as low as $1,901.10 during today’s session. SEB is now down nearly 30% from its 52-week high set on April 19, 2007. Despite continuing to be profitable and being one of the more established and reputable marine shipping and cargo companies in the world, SEB has failed to keep pace with the market’s rally. Furthermore, it has failed to keep pace with the other pure-play bulk shippers. The lack of participation in the overall market and bulk-shipper rally can perhaps be explained by (1) SEB tending to march to its own beat and keep to themselves; (2) SEB’s 81% run-up since September, 2006; (3) Even more impressive 563% run-up over the past five years. Short-term, perhaps SEB has run out of gas and reading the quarterly report indicates that may be the case.
First, let us reflect on the FY 2006 shareholder letter delivered to SEB holders in which the CEO publicly comments on the performance of the company’s stock price, a technique SEB rarely practices. Mr. Bresky was upbeat on the tremendous performance of the stock price but warned the stock price is likely experiencing a spike within a steady upward trend. It certainly appears Mr. Bresky was spot on, again, at least over the short term. So, for those of you looking to trade SEB or have it go straight up every day, not only does the stock market not work that way, but it was very clearly delineated in the publicly available letter to the stockholders.
More importantly, reading the 10-Q, also filed after the bell in tandem with the earnings announcement, provides clues into SEB’s falling earnings. As for the numbers, SEB posted total revenue of $742M in Q2 2007 versus $688M generated in Q2 2006. Year to date in 2007, revenue is $1.47B, an 11% increase when compared to the $1.34B generated in the first six months of 2006. However, net income fell substantially. SEB posted earnings of $33.82 per share for Q2 2007, indicating a decline of 38% from the $54.85 Q2 2006 EPS number. YTD earnings are $72.95, a decrease of nearly 24% when compared to the same period in 2006.
The culprits: (1) higher corn costs for feeding the pigs, mostly due to ethanol demand; and (2) aggressive capital expenditures, particularly in the marine shipping business unit.
Further discussion in the 10-Q indicated that as far as the short-term goes, high corn prices will remain, high prices of hogs and pork cannot be sustained over long periods of time, and capital expenditures for the rest of 2007 will be aggressive. For those of you looking for a quick in-and-out trade, SEB is likely not the best bet. I anticipate seeing pressure on SEB EPS and profit margin numbers for the rest of 2007 and perhaps near-term downward pressure on the stock price as a result.
I know the above sounds bearish considering my previous discussions and posts on SEB, but before you assume I have done a 180, consider that maybe I was just being upfront and getting the bad news out before the good.
Despite declining earnings and reduced cash position, SEB increased book value by 3% and after today’s $1,990 close, SEB is trading at 1.9 times book value. For long-term ownership investments, I am an avid fan of companies being able to continually increase book value per share, despite business and industry challenges. Short and simple, with the increase in shareholder equity per the 10-Q and depressed stock price, you can get far more bang for your ownership dollar at this stage with SEB.
Business wise, despite the challenges, SEB continues to show strong growth in the marine shipping segment and revenue growth in their core businesses. Although profitability of their core businesses, especially hog/pork processing, will be subject to some volatility and pressure due to price of hogs/pork and corn prices, the divisions will remain profitable. Additionally, there does not seem to be any concern that any of their significantly producing business avenues will materially decline. Simple translation, SEB will continue to churn out cash and drive up book value per share for the foreseeable future.
Valuation wise, SEB still appears to be attractive. I estimate that SEB is trading at 13.8 times approximated 2007 earnings based on the performance of the first two quarters. Granted, SEB is diverse and it is not as black and white as I am suggesting, but food service peers are trading at 18-22 times 2007 earnings and shippers are trading at 18-25 times 2007 earnings. Certainly, the Bresky’s controlling interest in the company and being able to govern all decisions, lack of general Wall Street coverage, and business diversity can keep that P/E ratio down a little bit, but overall, good value. The book value number discussed above is also attractive as is the under 7 EV/EBITDA ratio.
Most importantly, amidst the challenges and pressure SEB is facing, the owners continue to be rewarded. A little before the 10-Q was filed with the Securities and Exchange Commission, SEB filed an 8-K announcing a buyback program to repurchase up to $50M of stock over the next 2 years. At today’s market price, that is approximately 2% of the total shares outstanding and by chance is very close to the number of shares sort per the latest filings. The latter may be coincidental, but interesting to note. Of course, SEB may never repurchase a single share of stock, but I anticipate they will use up the entire $50M over the next two years. Granted, 2% of the shares outstanding is not a monumental number, but considering SEB’s stringent stock issuance policy, no stock option/stock grants, and other non-dilutive practices, removing any number of shares from the public marketplace is critical. I anticipate that this buyback, once completed, if ever, will result in at an absolute minimum, a $40 per share benefit to owners. A special cash dividend could have been declared ($50M divided by 1.26M shares outstanding), but I envision that SEB feels the price of common stock may fall a little further from today’s $1,900 levels. Unfortunately, short-term, I tend to agree with that sentiment, but by buying back stock at potentially lower prices, owners will receive even more than $40 per share in value and in a tax-free/tax-deferred form. I would be surprised to see if SEB publicly discusses the results of the repurchase program – one will likely have to look at the statement of cash flows to see the results quarter by quarter. Furthermore, I am unsure which shares they will buy back, but they will not be mine.
On a more observational note, especially to those that are looking at SEB as an investment choice, I believe it is significant to note the language in which SEB presents its 10-K and 10-Q SEC filings. It is clear that SEB prefers simplicity when authoring these filings and frankly, it makes it easy for nearly anyone to understand. Sometimes, you read company filings and the language is so tortuous and complex, you wonder if they are trying to hide something. For instance, I was reading an SEC filings the other day that is performing phenomenally well in the capital markets, is debt free, and is making money hand over fist. However, despite my extensive experience and direct knowledge of the industry they are serving, it was a struggle to surmise how they generated revenue and made money. Granted, the intricacies of SEB’s operating units is very complex and dependent on an array of very elaborate (perhaps convoluted?) variables, but from reading the filings, one can generally conclude how revenue is produced. I have always said it is important to understand a business before investing, but sometimes, companies make it difficult to understand even the most basic items impacting the business. Seaboard does an exceptional job of telling it like it is. Certainly, further research to better understand the intricacies of each operating unit can help uncover hidden value or recognize traps better, but you have to start somewhere. It is a simple observation, but not one to be taken lightly or merely brushed off. It says a lot about how SEB treats their owners.
I maintain my previous price target, but honestly, hope it happens later than sooner. Such though may seem counter-intuitive from an investment standpoint, but seeing SEB is showing no weakness in terms of generating wealth for its owners over a long-period of time, I would not mind the accumulation phase lasting over the next 10 years. I certainly think SEB will perform very well over the next 10 years and outperform the markets on an annualized basis, I just would like a little more time to pick up more cheap shares. For those of you on the SEB bandwagon, as exciting as SEB’s run to $2,699 was and has been, it would have been nice for September, 2006 to have lasted longer to provide a longer window to acquire more shares at lower prices. I believe SEB is in that phase now and it makes sense to take advantage of it.
And of course, a company that increases book value quarter-over-quarter, keeps it simple, pays a consistent quarterly dividend (albeit a 0.1% yield), and buys back shares while not issuing new shares is a good one to own.
First, SEB traded down 2.95% today to close at $1,990 – it touched as low as $1,901.10 during today’s session. SEB is now down nearly 30% from its 52-week high set on April 19, 2007. Despite continuing to be profitable and being one of the more established and reputable marine shipping and cargo companies in the world, SEB has failed to keep pace with the market’s rally. Furthermore, it has failed to keep pace with the other pure-play bulk shippers. The lack of participation in the overall market and bulk-shipper rally can perhaps be explained by (1) SEB tending to march to its own beat and keep to themselves; (2) SEB’s 81% run-up since September, 2006; (3) Even more impressive 563% run-up over the past five years. Short-term, perhaps SEB has run out of gas and reading the quarterly report indicates that may be the case.
First, let us reflect on the FY 2006 shareholder letter delivered to SEB holders in which the CEO publicly comments on the performance of the company’s stock price, a technique SEB rarely practices. Mr. Bresky was upbeat on the tremendous performance of the stock price but warned the stock price is likely experiencing a spike within a steady upward trend. It certainly appears Mr. Bresky was spot on, again, at least over the short term. So, for those of you looking to trade SEB or have it go straight up every day, not only does the stock market not work that way, but it was very clearly delineated in the publicly available letter to the stockholders.
More importantly, reading the 10-Q, also filed after the bell in tandem with the earnings announcement, provides clues into SEB’s falling earnings. As for the numbers, SEB posted total revenue of $742M in Q2 2007 versus $688M generated in Q2 2006. Year to date in 2007, revenue is $1.47B, an 11% increase when compared to the $1.34B generated in the first six months of 2006. However, net income fell substantially. SEB posted earnings of $33.82 per share for Q2 2007, indicating a decline of 38% from the $54.85 Q2 2006 EPS number. YTD earnings are $72.95, a decrease of nearly 24% when compared to the same period in 2006.
The culprits: (1) higher corn costs for feeding the pigs, mostly due to ethanol demand; and (2) aggressive capital expenditures, particularly in the marine shipping business unit.
Further discussion in the 10-Q indicated that as far as the short-term goes, high corn prices will remain, high prices of hogs and pork cannot be sustained over long periods of time, and capital expenditures for the rest of 2007 will be aggressive. For those of you looking for a quick in-and-out trade, SEB is likely not the best bet. I anticipate seeing pressure on SEB EPS and profit margin numbers for the rest of 2007 and perhaps near-term downward pressure on the stock price as a result.
I know the above sounds bearish considering my previous discussions and posts on SEB, but before you assume I have done a 180, consider that maybe I was just being upfront and getting the bad news out before the good.
Despite declining earnings and reduced cash position, SEB increased book value by 3% and after today’s $1,990 close, SEB is trading at 1.9 times book value. For long-term ownership investments, I am an avid fan of companies being able to continually increase book value per share, despite business and industry challenges. Short and simple, with the increase in shareholder equity per the 10-Q and depressed stock price, you can get far more bang for your ownership dollar at this stage with SEB.
Business wise, despite the challenges, SEB continues to show strong growth in the marine shipping segment and revenue growth in their core businesses. Although profitability of their core businesses, especially hog/pork processing, will be subject to some volatility and pressure due to price of hogs/pork and corn prices, the divisions will remain profitable. Additionally, there does not seem to be any concern that any of their significantly producing business avenues will materially decline. Simple translation, SEB will continue to churn out cash and drive up book value per share for the foreseeable future.
Valuation wise, SEB still appears to be attractive. I estimate that SEB is trading at 13.8 times approximated 2007 earnings based on the performance of the first two quarters. Granted, SEB is diverse and it is not as black and white as I am suggesting, but food service peers are trading at 18-22 times 2007 earnings and shippers are trading at 18-25 times 2007 earnings. Certainly, the Bresky’s controlling interest in the company and being able to govern all decisions, lack of general Wall Street coverage, and business diversity can keep that P/E ratio down a little bit, but overall, good value. The book value number discussed above is also attractive as is the under 7 EV/EBITDA ratio.
Most importantly, amidst the challenges and pressure SEB is facing, the owners continue to be rewarded. A little before the 10-Q was filed with the Securities and Exchange Commission, SEB filed an 8-K announcing a buyback program to repurchase up to $50M of stock over the next 2 years. At today’s market price, that is approximately 2% of the total shares outstanding and by chance is very close to the number of shares sort per the latest filings. The latter may be coincidental, but interesting to note. Of course, SEB may never repurchase a single share of stock, but I anticipate they will use up the entire $50M over the next two years. Granted, 2% of the shares outstanding is not a monumental number, but considering SEB’s stringent stock issuance policy, no stock option/stock grants, and other non-dilutive practices, removing any number of shares from the public marketplace is critical. I anticipate that this buyback, once completed, if ever, will result in at an absolute minimum, a $40 per share benefit to owners. A special cash dividend could have been declared ($50M divided by 1.26M shares outstanding), but I envision that SEB feels the price of common stock may fall a little further from today’s $1,900 levels. Unfortunately, short-term, I tend to agree with that sentiment, but by buying back stock at potentially lower prices, owners will receive even more than $40 per share in value and in a tax-free/tax-deferred form. I would be surprised to see if SEB publicly discusses the results of the repurchase program – one will likely have to look at the statement of cash flows to see the results quarter by quarter. Furthermore, I am unsure which shares they will buy back, but they will not be mine.
On a more observational note, especially to those that are looking at SEB as an investment choice, I believe it is significant to note the language in which SEB presents its 10-K and 10-Q SEC filings. It is clear that SEB prefers simplicity when authoring these filings and frankly, it makes it easy for nearly anyone to understand. Sometimes, you read company filings and the language is so tortuous and complex, you wonder if they are trying to hide something. For instance, I was reading an SEC filings the other day that is performing phenomenally well in the capital markets, is debt free, and is making money hand over fist. However, despite my extensive experience and direct knowledge of the industry they are serving, it was a struggle to surmise how they generated revenue and made money. Granted, the intricacies of SEB’s operating units is very complex and dependent on an array of very elaborate (perhaps convoluted?) variables, but from reading the filings, one can generally conclude how revenue is produced. I have always said it is important to understand a business before investing, but sometimes, companies make it difficult to understand even the most basic items impacting the business. Seaboard does an exceptional job of telling it like it is. Certainly, further research to better understand the intricacies of each operating unit can help uncover hidden value or recognize traps better, but you have to start somewhere. It is a simple observation, but not one to be taken lightly or merely brushed off. It says a lot about how SEB treats their owners.
I maintain my previous price target, but honestly, hope it happens later than sooner. Such though may seem counter-intuitive from an investment standpoint, but seeing SEB is showing no weakness in terms of generating wealth for its owners over a long-period of time, I would not mind the accumulation phase lasting over the next 10 years. I certainly think SEB will perform very well over the next 10 years and outperform the markets on an annualized basis, I just would like a little more time to pick up more cheap shares. For those of you on the SEB bandwagon, as exciting as SEB’s run to $2,699 was and has been, it would have been nice for September, 2006 to have lasted longer to provide a longer window to acquire more shares at lower prices. I believe SEB is in that phase now and it makes sense to take advantage of it.
And of course, a company that increases book value quarter-over-quarter, keeps it simple, pays a consistent quarterly dividend (albeit a 0.1% yield), and buys back shares while not issuing new shares is a good one to own.
Monday, August 6, 2007
Seacoast Banking Corp – Time To Buy, After a Little Breather
Seacoast Banking Corp (NASDAQ: SBCF) is the holding company for Seacoast National Bank, a regional bank with over 40 branches in South Florida at the end of 2006. The bank primarily serves the Treasure Coast area (St. Lucie, Indian River, and Martin Counties) and has expanded its operations into the counties of Okeechobee, Orange, and Highlands.
Seacoast is trading at about a 50% discount to its 52-week high which was reached before the widespread mortgage panic hit the markets and on speculation of a buy-out, especially after National City (NYSE: NCC) bought out Ft. Pierce, Florida based Harbor Federal for a big premium.
SBCF and Harbor Federal were very similar banks – both with 70+ years of history and were serving essentially the same areas, though Harbor expanded more to the north than SBCF did. Many were expecting SBCF to be quickly scooped up by a larger bank following NCC’s acquisition of Harbor Federal, but it never happened and here are the compelling reasons why:
Now, the landscape has changed somewhat. SBCF is at $16.80 after closing up 7.5%, mostly on a big bullish day for the markets, especially financials, and fueled by discussion that private equity firms are lining up smaller regional banks in Florida and California for a roll-up.
Here is what I see unfolding, for what it might be worth. Mind you, I do not have a fantastic track record when it comes to choosing banking investments.
Although the areas SBCF serves have grown tremendously, they are in large still ‘small, hometown’ type communities. I know this because I have grown up in the area and spent most of my life on the Treasure Coast. In this area and especially in the areas to the west where SBCF has expanded, people know each other and like to do business with people they know. Large companies are certainly in the area and doing well, but that being said, for the most part, the reputable local contractors get the construction jobs and the local banks tend to get the nod from local customers. I have even seen a handful of events, which I am not privy to share in full, that indicate local banker dislike for the larger banks that have come into the area. Honestly, I too, have been impacted by the transition from a small, local bank to a large, national bank – and in many ways, I do not like it.
I believe this factor will come into play. Short and simple, the area needs a local bank with a local face – where you see the leaders of the bank at the same restaurants and food stores you may frequent. Now, the Treasure Coast is not that small and SBCF is positioned in Orlando, but it is still a local bank and that has value in this area.
A handful of privately held, local/regional banks that serve the same area as SBCF have been able to continue to reward shareholders, despite the challenging environment, by growing book value per share, issuing stock and cash dividends, and maintaining or even raising the bank sponsored buy back price of its shares. SBCF, which is susceptible to the punishment the capital markets can dish out, has well, been punished.
One of two things will happen.
Either way, it spells a win for shareholders at these levels and I am willing to go out on a limb and suggest that SBCF’s NPAs (non performing assets), loan charge offs, and bad loans are a lot smaller than the stock market is suggesting. But, do not take my word for it – on hitting fresh new 52-week lows in August, 2007, the officers and directors have come out of the wood work purchasing shares on the open market. It has not been a ton of shares, but is enough to suggest to me that that from a stock market price standpoint, the worst is behind us.
Also noteworthy is SBCF’s expansion into Broward/Dade Counties and noting that many of the privately held local/regional banks have seen their shareholders retain their value, not have it diminish in these well publicized tough times. SBCF was expensive at $32 – it’s a bargain at $16. Anything under $17 is a buy and I am looking for a return to $22 per share within the next 12 months on a buy-out or getting their on its own steam.
Seacoast is trading at about a 50% discount to its 52-week high which was reached before the widespread mortgage panic hit the markets and on speculation of a buy-out, especially after National City (NYSE: NCC) bought out Ft. Pierce, Florida based Harbor Federal for a big premium.
SBCF and Harbor Federal were very similar banks – both with 70+ years of history and were serving essentially the same areas, though Harbor expanded more to the north than SBCF did. Many were expecting SBCF to be quickly scooped up by a larger bank following NCC’s acquisition of Harbor Federal, but it never happened and here are the compelling reasons why:
- At the time. SBCF was trading at over 3x book value – indicating a buy out premium of 3.5x – 4.5x book value would have been required. Not good value.
- If you have ever spent time on the Treasure Coast, you will see that many of the major banks are already here in the area, including Bank of America, Wachovia, and others. Citigroup has even begun to make strides into the area.
Now, the landscape has changed somewhat. SBCF is at $16.80 after closing up 7.5%, mostly on a big bullish day for the markets, especially financials, and fueled by discussion that private equity firms are lining up smaller regional banks in Florida and California for a roll-up.
Here is what I see unfolding, for what it might be worth. Mind you, I do not have a fantastic track record when it comes to choosing banking investments.
Although the areas SBCF serves have grown tremendously, they are in large still ‘small, hometown’ type communities. I know this because I have grown up in the area and spent most of my life on the Treasure Coast. In this area and especially in the areas to the west where SBCF has expanded, people know each other and like to do business with people they know. Large companies are certainly in the area and doing well, but that being said, for the most part, the reputable local contractors get the construction jobs and the local banks tend to get the nod from local customers. I have even seen a handful of events, which I am not privy to share in full, that indicate local banker dislike for the larger banks that have come into the area. Honestly, I too, have been impacted by the transition from a small, local bank to a large, national bank – and in many ways, I do not like it.
I believe this factor will come into play. Short and simple, the area needs a local bank with a local face – where you see the leaders of the bank at the same restaurants and food stores you may frequent. Now, the Treasure Coast is not that small and SBCF is positioned in Orlando, but it is still a local bank and that has value in this area.
A handful of privately held, local/regional banks that serve the same area as SBCF have been able to continue to reward shareholders, despite the challenging environment, by growing book value per share, issuing stock and cash dividends, and maintaining or even raising the bank sponsored buy back price of its shares. SBCF, which is susceptible to the punishment the capital markets can dish out, has well, been punished.
One of two things will happen.
- SBCF will be acquired…Most likely by a private buyer that wishes to have a banking establishment in this part of the country and perhaps even keep the familiar Seacoast name intact. A private buyer can likely buy out SBCF (either a majority stake or an all out acquisition) for $19-$25 per share (let’s say $22) and get a great bargain.
- SBCF will remain independent…For the next several years and thrive as one of the few local banks servicing the area – it’s stock price may not do what long term holders want it to do, but ultimately, it will turn around. SBCF continues to build its cash position and stockholder equity numbers, despite an alleged challenging environment.
Either way, it spells a win for shareholders at these levels and I am willing to go out on a limb and suggest that SBCF’s NPAs (non performing assets), loan charge offs, and bad loans are a lot smaller than the stock market is suggesting. But, do not take my word for it – on hitting fresh new 52-week lows in August, 2007, the officers and directors have come out of the wood work purchasing shares on the open market. It has not been a ton of shares, but is enough to suggest to me that that from a stock market price standpoint, the worst is behind us.
Also noteworthy is SBCF’s expansion into Broward/Dade Counties and noting that many of the privately held local/regional banks have seen their shareholders retain their value, not have it diminish in these well publicized tough times. SBCF was expensive at $32 – it’s a bargain at $16. Anything under $17 is a buy and I am looking for a return to $22 per share within the next 12 months on a buy-out or getting their on its own steam.
Tuesday, July 31, 2007
The Value in ValueClick (NASDAQ: VCLK) - $21.59
ValueClick (NASDAQ: VCLK) is a leading online interactive marketing agency and solution provider. Their business offering is diverse and provide an array of ways for advertisers, marketers, and other agencies to take a marketing message online. Whether you are looking to buy banner impressions on major web sites or hire an online direct sales force (among other things), VCLK is a place to look.
VCLK took a 20% hit on Monday after announcing its earnings. The company missed expectations and reported slightly lower earnings and revenue guidance (though they are still expecting double digit growth in both EPS and revenue for the next year). VCLK is also off over 40% from its 52 week high it reached a few weeks ago, primarily on buy-out speculation when the other interactive agencies (DCLK, AQNT, etc.) were being scooped up.
VCLK pulled a surprise move by announcing earnings a week ahead of their originally planned date and really shocked many by announcing the change of earnings date on a Friday afternoon after the market close. Furthermore, they did not give anyone time to breathe by announcing them the following morning before market opened.
First, a brief comment on the timing of the earnings announcement and the date change. In all likelihood, it makes me wonder if VCLK has another announcement of some form that will take the place of the original earnings date announcement. That is simply food for thought.
A buy-out of VCLK is certainly still a strong possibility, though I do not think we will see the same premium given to its peers. Realistically, I am unsure exactly who is left to buy VCLK, though the person that buys you is never who you think it is going to be. VCLK being acquired is certainly a possibility, though I would not bet on exactly when or for how much. In short, what I mean is that if you like the company, then this is a great time to buy. If you are looking for a buy-out, well, it’s a gamble to say the least because as much as it makes sense, typically, the last person to leave dinner gets stuck with the check.
There is a great deal to like about VCLK, especially when it comes to controlling avenues of Internet marketing distribution. I have had the experience of directly working with all of the leading Internet agencies, and in terms of being an advertiser looking to acquire more customers via the web, I am most impressed with VCLK’s Commission Junction (CJ) offering. Simply put, as an advertiser, you sign up for the service, pay a set-up fee, set a commission you are willing to offer other web sites to sell your product/service, and CJ pushes it out to its very well built out affiliate marketing network of webmasters and web site business owners. For a small business, particularly an e-commerce retailer or B2C service provider, there is not a more cost-effective, easy to launch program that yields actual results. CJ gets paid a transaction fee each time the advertiser sells something via the network – and since the advertiser only pays for real results (e.g., an actual sale, not a click), it is a win-win and easy to measure return on investment. CJ adds a handful of merchants every day (paying $2,500+ to sign up) and continually adds to its transactional revenue volume. The more sales that are handled through CJ’s affiliate marketing network, the more money for VCLK.
What is noteworthy is that one of CJ’s biggest competitors, LinkShare, was acquired for $425M in October 2005 by a Japanese company.
In conclusion, VCLK is a good buy at these levels for the long-term, especially with what I believe is their market-leading CJ program for advertisers. There is Value in VCLK and seeing it recover to the $25-$28 mark over the next 6-12 months is within reach. An acquisition is less likely than the VCLK business model churning out cash.
VCLK took a 20% hit on Monday after announcing its earnings. The company missed expectations and reported slightly lower earnings and revenue guidance (though they are still expecting double digit growth in both EPS and revenue for the next year). VCLK is also off over 40% from its 52 week high it reached a few weeks ago, primarily on buy-out speculation when the other interactive agencies (DCLK, AQNT, etc.) were being scooped up.
VCLK pulled a surprise move by announcing earnings a week ahead of their originally planned date and really shocked many by announcing the change of earnings date on a Friday afternoon after the market close. Furthermore, they did not give anyone time to breathe by announcing them the following morning before market opened.
First, a brief comment on the timing of the earnings announcement and the date change. In all likelihood, it makes me wonder if VCLK has another announcement of some form that will take the place of the original earnings date announcement. That is simply food for thought.
A buy-out of VCLK is certainly still a strong possibility, though I do not think we will see the same premium given to its peers. Realistically, I am unsure exactly who is left to buy VCLK, though the person that buys you is never who you think it is going to be. VCLK being acquired is certainly a possibility, though I would not bet on exactly when or for how much. In short, what I mean is that if you like the company, then this is a great time to buy. If you are looking for a buy-out, well, it’s a gamble to say the least because as much as it makes sense, typically, the last person to leave dinner gets stuck with the check.
There is a great deal to like about VCLK, especially when it comes to controlling avenues of Internet marketing distribution. I have had the experience of directly working with all of the leading Internet agencies, and in terms of being an advertiser looking to acquire more customers via the web, I am most impressed with VCLK’s Commission Junction (CJ) offering. Simply put, as an advertiser, you sign up for the service, pay a set-up fee, set a commission you are willing to offer other web sites to sell your product/service, and CJ pushes it out to its very well built out affiliate marketing network of webmasters and web site business owners. For a small business, particularly an e-commerce retailer or B2C service provider, there is not a more cost-effective, easy to launch program that yields actual results. CJ gets paid a transaction fee each time the advertiser sells something via the network – and since the advertiser only pays for real results (e.g., an actual sale, not a click), it is a win-win and easy to measure return on investment. CJ adds a handful of merchants every day (paying $2,500+ to sign up) and continually adds to its transactional revenue volume. The more sales that are handled through CJ’s affiliate marketing network, the more money for VCLK.
What is noteworthy is that one of CJ’s biggest competitors, LinkShare, was acquired for $425M in October 2005 by a Japanese company.
In conclusion, VCLK is a good buy at these levels for the long-term, especially with what I believe is their market-leading CJ program for advertisers. There is Value in VCLK and seeing it recover to the $25-$28 mark over the next 6-12 months is within reach. An acquisition is less likely than the VCLK business model churning out cash.
Saturday, July 21, 2007
Sometimes, It Is Just Too Obvious – Ash Grove Cement (ASHG) and Seaboard Corp. (SEB)
Ash Grove Cement – Cement Demand In Nevada
Yes, I know I just wrote about ASHG the other day. It was more of a technical discussion, short-term article, but I did make reference to believing in the strong fundamental position of Ash Grove Cement. Furthermore, I said to go read my other stuff if you wanted more of the basics rather than some rhetoric about bids and asks. Perhaps I had it coming, but I am going to touch on some of those fundamentals right now.
Sometimes, a winner is just looking you right in the face and it is just painfully obvious what is going on. I am not talking about finding the stock that is going to double in two days – sure, that would be nice, but not a good investment approach. I am talking about the obviousness of the long-term success and merits of a company’s business model.
ASHG has made it well publicized that they are building a monster cement plant in Southern Nevada. By chance, I happen to be in Las Vegas while I am writing this article. I was actually hoping to have the chance to visit the site of the plant, which is only a handful of months away from going online. Currently, it is being built. I called ASHG and wanted to ask if I could visit the site just to check it out. My call went unreturned, but likely for the best – I mean, I had plenty to do while I was here.
While I was here, I was looking at the view from a house in Henderson, NV – the town right next store to Las Vegas. The view of the mountains was fantastic, but paled in comparison to the view of the strip from the elevated, unobstructed by anything patio. What do I see? I see a 6 mile gap between the South Point Hotel and the Mandalay Bay, which is the first/last hotel on the strip for those not familiar with the landscape of Las Vegas.
From discussions with the locals and other information about the real estate in the area, I quickly learned that plans are well in motion to continue to build the strip out. Basically, in several years, that 6 mile gap will be filled and South Point will be the first/last hotel on the strip. The gap will be filled with huge resorts and residential sky rises. The resorts that are slated to be built are momentously huge – and there is an outside chance (though very small) that the tallest building in the world will be built in the vicinity. My point is, the growth in this area is not done – and with new casinos, many being backed by the large, established organizations, we are looking at many new jobs to support the new resorts. My thought – it is going to take lots, lots, and lots of cement.
It is abundantly clear that the demand for the cement in this area is going to be huge and the $200 million ASHG is spending on building the place is no small change, especially for a family owned/operated company that happens to have a handful of shares floating around. Sure, we know we need more cement and concrete – that is no secret. However, the sheer magnitude it is going to take to build these monster buildings in the strip’s gap is almost overwhelming. I do not have any specific numbers on what it is going to take to build these new resorts and the surrounding areas – nor do I know how much cement will be needed. All I know is that ASHG will be more than well positioned to take advantage of the impending boom and return on investment is likely sooner than anyone is giving them credit for.
In summary, sometimes choosing what company to invest in for the long-term is painfully obvious in terms of the success that will be enjoyed by the business model. It does not take an economic scholar nor expert fund manager to easily see what is happening here in Las Vegas and what is to come. Short and simple – 6 miles of empty space, plans for new casinos and resorts, lots and lots of concrete – buy ASHG.
Seaboard Corporation – Aren’t They a Dry Bulk Shipper?
This is more of an alert rather than rhetoric, so it will be brief. In the past few trading days, SEB has declined under $2,200/share. The bigger news is that during this time, marine transport and dry bulk-shippers were going through the roof. SEB did not take part in the rally. Why? Perhaps since SEB is diversified with a multitude of cash producing businesses, I guess they are not a bulk shipper. Who knew, right?
SEB continues to see growth in their marine shipping business, is buying new ships (a big chunk of capital expenditures slates for 2007 and see June 14, 2007 announcement on www.seaboardmarine.com), and is one of the largest operators (perhaps the biggest?) in the Caribbean. I still like how SEB retains the huge majority of their free cash flow to reinvest in the business, rather than paying out huge dividends like some of these other shippers.
Short and simple – they are a bulk shipper, they are huge, they are expanding their fleet, they are keeping most of their money (helping to reduce taxes and allow for growth). I think that the high dividend payouts of many of the other bulk shippers will be their downfall over the long-term. Not investing more in their respective fleets and not saving cash for a rainy day could be troublesome, especially with how leveraged some of these shippers are. SEB, fortunately, is not highly leveraged. Well, I digressed a little bit – best of luck to the other bulk shippers. Of course, I wish I bought a handful of them a year ago when I started researching the shipping industry, but you cannot win them all.
SEB is not nearly as obvious as ASHG’s position in Nevada, but when a strong company shows weakness when the rest of the sector is showing strength, especially during the short term, one should take notice, particularly if there have been no material changes in the company’s financial status. I am not going to say buy more here – I will leave that up to you and timing the market. SEB can certainly drop further than it has in the past couple of weeks. Regardless, I think the future of SEB – and subsequently their stock price is obvious. And it really does not take a genius to see it – it is merely simple business principles. What am I doing with SEB, you ask? Well, that should be obvious, too.
Yes, I know I just wrote about ASHG the other day. It was more of a technical discussion, short-term article, but I did make reference to believing in the strong fundamental position of Ash Grove Cement. Furthermore, I said to go read my other stuff if you wanted more of the basics rather than some rhetoric about bids and asks. Perhaps I had it coming, but I am going to touch on some of those fundamentals right now.
Sometimes, a winner is just looking you right in the face and it is just painfully obvious what is going on. I am not talking about finding the stock that is going to double in two days – sure, that would be nice, but not a good investment approach. I am talking about the obviousness of the long-term success and merits of a company’s business model.
ASHG has made it well publicized that they are building a monster cement plant in Southern Nevada. By chance, I happen to be in Las Vegas while I am writing this article. I was actually hoping to have the chance to visit the site of the plant, which is only a handful of months away from going online. Currently, it is being built. I called ASHG and wanted to ask if I could visit the site just to check it out. My call went unreturned, but likely for the best – I mean, I had plenty to do while I was here.
While I was here, I was looking at the view from a house in Henderson, NV – the town right next store to Las Vegas. The view of the mountains was fantastic, but paled in comparison to the view of the strip from the elevated, unobstructed by anything patio. What do I see? I see a 6 mile gap between the South Point Hotel and the Mandalay Bay, which is the first/last hotel on the strip for those not familiar with the landscape of Las Vegas.
From discussions with the locals and other information about the real estate in the area, I quickly learned that plans are well in motion to continue to build the strip out. Basically, in several years, that 6 mile gap will be filled and South Point will be the first/last hotel on the strip. The gap will be filled with huge resorts and residential sky rises. The resorts that are slated to be built are momentously huge – and there is an outside chance (though very small) that the tallest building in the world will be built in the vicinity. My point is, the growth in this area is not done – and with new casinos, many being backed by the large, established organizations, we are looking at many new jobs to support the new resorts. My thought – it is going to take lots, lots, and lots of cement.
It is abundantly clear that the demand for the cement in this area is going to be huge and the $200 million ASHG is spending on building the place is no small change, especially for a family owned/operated company that happens to have a handful of shares floating around. Sure, we know we need more cement and concrete – that is no secret. However, the sheer magnitude it is going to take to build these monster buildings in the strip’s gap is almost overwhelming. I do not have any specific numbers on what it is going to take to build these new resorts and the surrounding areas – nor do I know how much cement will be needed. All I know is that ASHG will be more than well positioned to take advantage of the impending boom and return on investment is likely sooner than anyone is giving them credit for.
In summary, sometimes choosing what company to invest in for the long-term is painfully obvious in terms of the success that will be enjoyed by the business model. It does not take an economic scholar nor expert fund manager to easily see what is happening here in Las Vegas and what is to come. Short and simple – 6 miles of empty space, plans for new casinos and resorts, lots and lots of concrete – buy ASHG.
Seaboard Corporation – Aren’t They a Dry Bulk Shipper?
This is more of an alert rather than rhetoric, so it will be brief. In the past few trading days, SEB has declined under $2,200/share. The bigger news is that during this time, marine transport and dry bulk-shippers were going through the roof. SEB did not take part in the rally. Why? Perhaps since SEB is diversified with a multitude of cash producing businesses, I guess they are not a bulk shipper. Who knew, right?
SEB continues to see growth in their marine shipping business, is buying new ships (a big chunk of capital expenditures slates for 2007 and see June 14, 2007 announcement on www.seaboardmarine.com), and is one of the largest operators (perhaps the biggest?) in the Caribbean. I still like how SEB retains the huge majority of their free cash flow to reinvest in the business, rather than paying out huge dividends like some of these other shippers.
Short and simple – they are a bulk shipper, they are huge, they are expanding their fleet, they are keeping most of their money (helping to reduce taxes and allow for growth). I think that the high dividend payouts of many of the other bulk shippers will be their downfall over the long-term. Not investing more in their respective fleets and not saving cash for a rainy day could be troublesome, especially with how leveraged some of these shippers are. SEB, fortunately, is not highly leveraged. Well, I digressed a little bit – best of luck to the other bulk shippers. Of course, I wish I bought a handful of them a year ago when I started researching the shipping industry, but you cannot win them all.
SEB is not nearly as obvious as ASHG’s position in Nevada, but when a strong company shows weakness when the rest of the sector is showing strength, especially during the short term, one should take notice, particularly if there have been no material changes in the company’s financial status. I am not going to say buy more here – I will leave that up to you and timing the market. SEB can certainly drop further than it has in the past couple of weeks. Regardless, I think the future of SEB – and subsequently their stock price is obvious. And it really does not take a genius to see it – it is merely simple business principles. What am I doing with SEB, you ask? Well, that should be obvious, too.
Mr. Herb Greenberg – Thank You….and You Are Welcome
Reading the Wall Street Journal the other day, I noticed an article written by reputable author, Herb Greenberg. I hate to say it, but it appears Mr. Greenberg took a page from my book mentioning Seaboard Corp (AMEX: SEB), Ash Grove Cement (Pink Sheets: ASHG), and J.G. Boswell (Pink Sheets: BWEL) all in the same breath. I said – wow. Of course, imitation is the highest form of flattery, but I must say it is great to be on the same page with a writer like him.
The article, “Strong, Silent Types: Some Companies Let Their Fundamentals Do the Talking” talks about how a handful of companies do not participate in the gala that is investor conference calls or earnings guidance. As my previous blog on the exclusivity of ownership discusses, I 100% agree with this stance.
There is not much to be said here, except that it was nice to be in the same light with this guy.
And, of course, to play devil’s advocate, there was a quote in the article that hit it right on – basically saying that if you are any good at something, there is no need to brag or draw attention to yourself. Things will take care of themselves. I know some will say that I am bragging and drawing attention to myself by writing rather than keeping my mouth shut, but I am just writing. If someone reads it, great….if not, well, so be it. I probably should keep my investment merits and failures to myself – the best fund managers do just that – but I am not that good at the investing or writing aspect yet, so I have to brag. :-)
The article, “Strong, Silent Types: Some Companies Let Their Fundamentals Do the Talking” talks about how a handful of companies do not participate in the gala that is investor conference calls or earnings guidance. As my previous blog on the exclusivity of ownership discusses, I 100% agree with this stance.
There is not much to be said here, except that it was nice to be in the same light with this guy.
And, of course, to play devil’s advocate, there was a quote in the article that hit it right on – basically saying that if you are any good at something, there is no need to brag or draw attention to yourself. Things will take care of themselves. I know some will say that I am bragging and drawing attention to myself by writing rather than keeping my mouth shut, but I am just writing. If someone reads it, great….if not, well, so be it. I probably should keep my investment merits and failures to myself – the best fund managers do just that – but I am not that good at the investing or writing aspect yet, so I have to brag. :-)
Mr. Herb Greenberg – Thank You….and You Are Welcome
Reading the Wall Street Journal the other day, I noticed an article written by reputable author, Herb Greenberg. I hate to say it, but it appears Mr. Greenberg took a page from my book mentioning Seaboard Corp (AMEX: SEB), Ash Grove Cement (Pink Sheets: ASHG), and J.G. Boswell (Pink Sheets: BWEL) all in the same breath. I said – wow. Of course, imitation is the highest form of flattery, but I must say it is great to be on the same page with a writer like him.
The article, “Strong, Silent Types: Some Companies Let Their Fundamentals Do the Talking” talks about how a handful of companies do not participate in the gala that is investor conference calls or earnings guidance. As my previous blog on the exclusivity of ownership discusses, I 100% agree with this stance.
There is not much to be said here, except that it was nice to be in the same light with this guy.
And, of course, to play devil’s advocate, there was a quote in the article that hit it right on – basically saying that if you are any good at something, there is no need to brag or draw attention to yourself. Things will take care of themselves. I know some will say that I am bragging and drawing attention to myself by writing rather than keeping my mouth shut, but I am just writing. If someone reads it, great….if not, well, so be it. I probably should keep my investment merits and failures to myself – the best fund managers do just that – but I am not that good at the investing or writing aspect yet, so I have to brag. :-)
The article, “Strong, Silent Types: Some Companies Let Their Fundamentals Do the Talking” talks about how a handful of companies do not participate in the gala that is investor conference calls or earnings guidance. As my previous blog on the exclusivity of ownership discusses, I 100% agree with this stance.
There is not much to be said here, except that it was nice to be in the same light with this guy.
And, of course, to play devil’s advocate, there was a quote in the article that hit it right on – basically saying that if you are any good at something, there is no need to brag or draw attention to yourself. Things will take care of themselves. I know some will say that I am bragging and drawing attention to myself by writing rather than keeping my mouth shut, but I am just writing. If someone reads it, great….if not, well, so be it. I probably should keep my investment merits and failures to myself – the best fund managers do just that – but I am not that good at the investing or writing aspect yet, so I have to brag. :-)
Thursday, July 19, 2007
Paint By Numbers – Brush Engineered Materials (NYSE: BW) and Ash Grove Cement (Pink Sheets: ASHG)
The famous Art of War by Sun Tzu sports a thought that the victory in a battle is actually determined before the battle is actually thought.
I must admit, I spend a fair amount of time watching the intra-day activity of the positions I follow and am long on. Such activity is typically not suggested for long-term investors or any investor that is betting on the merits of the company. I have heard rumors that Warren Buffett shuns the use of stock quote tools and relies strictly on SEC filings and industry information to make his investment decisions. I am unsure if that is true, but I hope you can relate to the above illustration, even if it only a rumor.
Watching the tape tick-by-tick has all sorts of negative consequences that can impact investment decision. More often than not, this behavior lends itself to allowing fear and greed in get in the way. Big long-term winners are often sold on unwelcome large dips and fear sets in. A stock that has had a 20% run-up plummets 5% in a single day and in the excitement, the sell order is placed. After all, you never went broke taking a profit. But, regardless, the stock quickly rebounds from its low and then proceeds to become a double or a triple over the next 12 months. On the converse, a stock you are looking to start a position has a break-out day – and thanks to greed, you chase the bid up, only to give in to placing a market order. The stock then pulls back, naturally, and although perhaps the stock does well over the long haul, you restricted your gain somewhat by buying higher than you should. Sound familiar? I think every investor has shared the above experiences in some form at some point.
However, watching tick-by-tick, especially over long periods of time, can provide valuable insight into the future of the company’s stock performance. The key is being able to remove yourself from the fear, greed, and other emotions that can cloud your investment decisions.
Brush Engineered Materials (NYSE: BW)
One of my recent additions to my portfolio, I jumped in BW when it was trading under $40 after it lowered its earnings guidance. Mind you, that my confidence was strengthened by the 485,000 purchase by 14% holder Tontine Capital Partners. Just recently, BW climbed back to over $47 showing a very strong short-term gain and making some of the $40 calls I bought extremely valuable. What happened? BW pulled back sharply, and traded in the $43s. Although the fundamental reason why I added BW has not changed, the pull back certainly eliminated some of the fat paper gains achieved thus far, particularly in the options which have a limited shelf-life. Watching the tape was gut-wrenching and the temptation to exit was strong, especially since 50% of my gains were lost in a single day and I was still very well in the black. However, recognizing the fundamental reason why I bought in the first place did not change, I took a deep breath and resolved that I would hold my position. I actually considered buying more, but that did not happen – though I should have.
Watching the tape over the past couple of days has been inspiring to my long-term confidence in BW at these levels. There has certainly been some volatility – not unexpected in any stock with a relatively small float and active trading environment. A big dip like BW saw lends itself to all sorts of strange variables into the equation. Momentum traders, shorts covering, shorts being scared into covering on small pops, active option contracts, and value investors looking to scoop up shares. This day to day activity can cause some frenetic activity, but among the battlefield, I noticed some very telling signs.
Intraday, BW would certainly have some swings. Nothing dramatic, but it would fall to $43.50, only to run to $44.50, and fall back to under $44. The trend I have noticed the last several days is that during the many up and down swings, volume at the levels tells the truth. There is no doubt that there is some distribution of shares going on out there. After all, BW has had quite a run up the past 12 months and is still up over 100% from its 52-week low, even after its 35% haircut from its 52-week high.
The important observation is that when BW goes on a little mini-run, money flow and buying of stock is strong. The size of the blocks and total volume in these mini-runs is far greater than it is when it takes a breather. My analysis suggests that there is net buying of BW at these levels. There is certainly stock for sale, no question and the blocks for sale come out in mass when the buyers are ready. Then, the buyers take a break and some net selling comes in – only to be met by fierce accumulation. I could certainly be wrong – I am no psychic and the marketplace is an expression of an environment far too complex to understand. However, making an educated investment decision based on rational though, BW is a buy. Exactly why it is being bought up, well, nobody really knows – everyone has a theory.
I liken it to an options contract. For instance, say a buyer (individual or a fund, more likely) thinks that BW is worth $60/share. Basic logic should say that the buyer should just buy up everything in sight, but we all know that makes no sense for many reasons. Why artificially drive the price up before $60 is due? For instance, today, say I believe that BW is going to $60 and I am willing to pay say only $44.25 for BW. If I am a fund managing large sums of money, I have to have a risk formula or reason for doing do. I may be 100% confident in the future of BW and hitting $60, and while I have some ideas of how it will get there, I do not know exactly when or how it will transpire. All I know is that each trading day that goes by is one day closer until it hits $60. So, today, I am willing to buy at $44.25, but say next week, as the $60 timeframe draws nearer (although it is an unknown), I am willing to pay $44.75. The duration is shorter, so I am willing to pay an additional premium to own the shares that I know are going to $60. So, I go in and buy everything in sight up until $44.75, then I back down…the sellers show up and maybe the stock even gets a pop on the incoming volume to $44.90. I patiently then will wait for it to come down below $44.75 to reinitiate my buying. As time goes on, as long as I remain convinced that $60 is the target price, I will be willing to pay more for it. For instance, say BW is at $44.25 and a buy out at $60 is 100% guaranteed to happen (I am not saying it is). Well, in one scenario, the buyout is 12 months away. Why buy now at $44.25? You may be able to do better elsewhere. However, if the stock is at $55 and the buyout at $60 is coming tomorrow, you would be all in.
The above is lengthy, but to summarize, the battle for the future of BW is being decided right now. The action that I am seeing, at least to me, is indicating that there are more buyers than sellers and more people that believe that BW has an upside versus those that believe it has a downside. One day, it will be very likely that the gap will be filled and BW may even be able to go on to even higher levels than it touched on earlier this year. There are no assurances of that, but the profits are being made now by the sophisticated buyers that will not get caught chasing BW up the tree when it breaks out. The activity I am seeing corroborates my fundamental business reasons for liking BW. I like when the stars align.
Ash Grove Cement (Pink Sheets: ASHG)
ASHG has not posted a trade in nearly two months. The spread occasionally moves, which is obviously indicative of some activity taking place, most likely in odd lot transactions. I know how this works because I will often go and buy 1, 5, 10, or even 25 shares – and the trade will never hit the tape, but I do own the shares. The spread, however, will change.
Armed with this knowledge, even when I am merely watching the inside market and taking notice of the change, I am able to learn a great deal about the marketplace out there. The fact that is hardly ever trades really brings some clarity to the table.
Just a couple of days ago, with no volume whatsoever, and after the spread ticked up to $240 x $265, without notice, the spread was $230 x $240. Now, instant reaction is obviously fear, but because I have watched the inside market on this one daily for over 2 years, I know what this means. I am not 100% certain of the specifics, but my strong bullish stance on ASHG (which I make no secret) screams out buying opportunity. Dips in the spread like this are common and I take advantage to nibble and add to my position. Long term, it likely will not matter that much if I paid $5 more per share, but it is nice to get a lower cost basis and to take advantage of such dips to cheaply add to your position. I think investors often forget that buy and hold really needs to be buy, buy, and buy. If it is a great company and there appears to be value in the price being offered, take it. For example, I am glad I bought and hold my first shares of ASHG that I purchased at $160 – but I am even happier that I added more at $180, $195, $205, $210, etc. Of course, in the end, I may be wrong, but only time will tell.
Anyway, seeing the spread at $230 x $240, I knew it would not last long. I added to my position at $240. About 45 minutes later, the spread went to $235 x $240. Within minutes of that, the spread moved to $235 x $243. I actually went to add more at $243, but before the order could even be placed, the spread went to $235 x $250 and then quickly to $235 x $255. I then added a little more at $255. My limit orders at $231, $236, and $240 have gone unfilled, which is typically how this stock works. Good luck buying at the bid or not at the ask, especially if you are working with odd lots. The odd lot approach makes sense as it can be done under the radar. Who knows how much a 100 or 200 share market order would do to the spread – it could be a disaster. I’ve taken out asks before with 5 and 10 share offers.
Today, the spread is $235 x $260. The $255 ask went away the following trading day. I am glad I took the $255 shares when I did – or else I would have had to pay $260. My fundamental reasons for buying ASHG have not changed and I still think it is a value at these levels, so I will continue to add where appropriate. Being attentive to the inside market and learning how this stock behaves afforded me the opportunity to add some shares at an 8% discount to what they are currently fetching – and that fire sale lasted only a few minutes.
Obviously, other people are watching ASHG closely – likely far more closely than I am. I am not sure what happened, but my theory suggests that maybe an employee or a fund wanted out of a handful of shares – bringing the price down. And as usual, someone was there to buy them to keep the marketplace clean. It could have been another fund, though I think it is the founding family doing most of the cleanup work. They will part with a handful of shares here and there for the benefit of their employees and other investors, including institutions and goofballs like myself, but that suggests that a time for these latter groups to sell will come. If you had to bet who is more likely to sell their shares first, would you bet on me or the founding family that has owned them for 100+ years. I feel confident in the future of ASHG and its business prospects (I have written about those already in other articles, so I will spare you that) and I feel even more confident that when those decide it is time to move on from ASHG, the family will acquire those shares to keep the marketplace in balance. The battle for me has already been won. When ASHG hits $300 and potentially $400 – that is when I will remember it is on days like this where there is some form of arbitrage or what not going on that the real money was made.
I must admit, I spend a fair amount of time watching the intra-day activity of the positions I follow and am long on. Such activity is typically not suggested for long-term investors or any investor that is betting on the merits of the company. I have heard rumors that Warren Buffett shuns the use of stock quote tools and relies strictly on SEC filings and industry information to make his investment decisions. I am unsure if that is true, but I hope you can relate to the above illustration, even if it only a rumor.
Watching the tape tick-by-tick has all sorts of negative consequences that can impact investment decision. More often than not, this behavior lends itself to allowing fear and greed in get in the way. Big long-term winners are often sold on unwelcome large dips and fear sets in. A stock that has had a 20% run-up plummets 5% in a single day and in the excitement, the sell order is placed. After all, you never went broke taking a profit. But, regardless, the stock quickly rebounds from its low and then proceeds to become a double or a triple over the next 12 months. On the converse, a stock you are looking to start a position has a break-out day – and thanks to greed, you chase the bid up, only to give in to placing a market order. The stock then pulls back, naturally, and although perhaps the stock does well over the long haul, you restricted your gain somewhat by buying higher than you should. Sound familiar? I think every investor has shared the above experiences in some form at some point.
However, watching tick-by-tick, especially over long periods of time, can provide valuable insight into the future of the company’s stock performance. The key is being able to remove yourself from the fear, greed, and other emotions that can cloud your investment decisions.
Brush Engineered Materials (NYSE: BW)
One of my recent additions to my portfolio, I jumped in BW when it was trading under $40 after it lowered its earnings guidance. Mind you, that my confidence was strengthened by the 485,000 purchase by 14% holder Tontine Capital Partners. Just recently, BW climbed back to over $47 showing a very strong short-term gain and making some of the $40 calls I bought extremely valuable. What happened? BW pulled back sharply, and traded in the $43s. Although the fundamental reason why I added BW has not changed, the pull back certainly eliminated some of the fat paper gains achieved thus far, particularly in the options which have a limited shelf-life. Watching the tape was gut-wrenching and the temptation to exit was strong, especially since 50% of my gains were lost in a single day and I was still very well in the black. However, recognizing the fundamental reason why I bought in the first place did not change, I took a deep breath and resolved that I would hold my position. I actually considered buying more, but that did not happen – though I should have.
Watching the tape over the past couple of days has been inspiring to my long-term confidence in BW at these levels. There has certainly been some volatility – not unexpected in any stock with a relatively small float and active trading environment. A big dip like BW saw lends itself to all sorts of strange variables into the equation. Momentum traders, shorts covering, shorts being scared into covering on small pops, active option contracts, and value investors looking to scoop up shares. This day to day activity can cause some frenetic activity, but among the battlefield, I noticed some very telling signs.
Intraday, BW would certainly have some swings. Nothing dramatic, but it would fall to $43.50, only to run to $44.50, and fall back to under $44. The trend I have noticed the last several days is that during the many up and down swings, volume at the levels tells the truth. There is no doubt that there is some distribution of shares going on out there. After all, BW has had quite a run up the past 12 months and is still up over 100% from its 52-week low, even after its 35% haircut from its 52-week high.
The important observation is that when BW goes on a little mini-run, money flow and buying of stock is strong. The size of the blocks and total volume in these mini-runs is far greater than it is when it takes a breather. My analysis suggests that there is net buying of BW at these levels. There is certainly stock for sale, no question and the blocks for sale come out in mass when the buyers are ready. Then, the buyers take a break and some net selling comes in – only to be met by fierce accumulation. I could certainly be wrong – I am no psychic and the marketplace is an expression of an environment far too complex to understand. However, making an educated investment decision based on rational though, BW is a buy. Exactly why it is being bought up, well, nobody really knows – everyone has a theory.
I liken it to an options contract. For instance, say a buyer (individual or a fund, more likely) thinks that BW is worth $60/share. Basic logic should say that the buyer should just buy up everything in sight, but we all know that makes no sense for many reasons. Why artificially drive the price up before $60 is due? For instance, today, say I believe that BW is going to $60 and I am willing to pay say only $44.25 for BW. If I am a fund managing large sums of money, I have to have a risk formula or reason for doing do. I may be 100% confident in the future of BW and hitting $60, and while I have some ideas of how it will get there, I do not know exactly when or how it will transpire. All I know is that each trading day that goes by is one day closer until it hits $60. So, today, I am willing to buy at $44.25, but say next week, as the $60 timeframe draws nearer (although it is an unknown), I am willing to pay $44.75. The duration is shorter, so I am willing to pay an additional premium to own the shares that I know are going to $60. So, I go in and buy everything in sight up until $44.75, then I back down…the sellers show up and maybe the stock even gets a pop on the incoming volume to $44.90. I patiently then will wait for it to come down below $44.75 to reinitiate my buying. As time goes on, as long as I remain convinced that $60 is the target price, I will be willing to pay more for it. For instance, say BW is at $44.25 and a buy out at $60 is 100% guaranteed to happen (I am not saying it is). Well, in one scenario, the buyout is 12 months away. Why buy now at $44.25? You may be able to do better elsewhere. However, if the stock is at $55 and the buyout at $60 is coming tomorrow, you would be all in.
The above is lengthy, but to summarize, the battle for the future of BW is being decided right now. The action that I am seeing, at least to me, is indicating that there are more buyers than sellers and more people that believe that BW has an upside versus those that believe it has a downside. One day, it will be very likely that the gap will be filled and BW may even be able to go on to even higher levels than it touched on earlier this year. There are no assurances of that, but the profits are being made now by the sophisticated buyers that will not get caught chasing BW up the tree when it breaks out. The activity I am seeing corroborates my fundamental business reasons for liking BW. I like when the stars align.
Ash Grove Cement (Pink Sheets: ASHG)
ASHG has not posted a trade in nearly two months. The spread occasionally moves, which is obviously indicative of some activity taking place, most likely in odd lot transactions. I know how this works because I will often go and buy 1, 5, 10, or even 25 shares – and the trade will never hit the tape, but I do own the shares. The spread, however, will change.
Armed with this knowledge, even when I am merely watching the inside market and taking notice of the change, I am able to learn a great deal about the marketplace out there. The fact that is hardly ever trades really brings some clarity to the table.
Just a couple of days ago, with no volume whatsoever, and after the spread ticked up to $240 x $265, without notice, the spread was $230 x $240. Now, instant reaction is obviously fear, but because I have watched the inside market on this one daily for over 2 years, I know what this means. I am not 100% certain of the specifics, but my strong bullish stance on ASHG (which I make no secret) screams out buying opportunity. Dips in the spread like this are common and I take advantage to nibble and add to my position. Long term, it likely will not matter that much if I paid $5 more per share, but it is nice to get a lower cost basis and to take advantage of such dips to cheaply add to your position. I think investors often forget that buy and hold really needs to be buy, buy, and buy. If it is a great company and there appears to be value in the price being offered, take it. For example, I am glad I bought and hold my first shares of ASHG that I purchased at $160 – but I am even happier that I added more at $180, $195, $205, $210, etc. Of course, in the end, I may be wrong, but only time will tell.
Anyway, seeing the spread at $230 x $240, I knew it would not last long. I added to my position at $240. About 45 minutes later, the spread went to $235 x $240. Within minutes of that, the spread moved to $235 x $243. I actually went to add more at $243, but before the order could even be placed, the spread went to $235 x $250 and then quickly to $235 x $255. I then added a little more at $255. My limit orders at $231, $236, and $240 have gone unfilled, which is typically how this stock works. Good luck buying at the bid or not at the ask, especially if you are working with odd lots. The odd lot approach makes sense as it can be done under the radar. Who knows how much a 100 or 200 share market order would do to the spread – it could be a disaster. I’ve taken out asks before with 5 and 10 share offers.
Today, the spread is $235 x $260. The $255 ask went away the following trading day. I am glad I took the $255 shares when I did – or else I would have had to pay $260. My fundamental reasons for buying ASHG have not changed and I still think it is a value at these levels, so I will continue to add where appropriate. Being attentive to the inside market and learning how this stock behaves afforded me the opportunity to add some shares at an 8% discount to what they are currently fetching – and that fire sale lasted only a few minutes.
Obviously, other people are watching ASHG closely – likely far more closely than I am. I am not sure what happened, but my theory suggests that maybe an employee or a fund wanted out of a handful of shares – bringing the price down. And as usual, someone was there to buy them to keep the marketplace clean. It could have been another fund, though I think it is the founding family doing most of the cleanup work. They will part with a handful of shares here and there for the benefit of their employees and other investors, including institutions and goofballs like myself, but that suggests that a time for these latter groups to sell will come. If you had to bet who is more likely to sell their shares first, would you bet on me or the founding family that has owned them for 100+ years. I feel confident in the future of ASHG and its business prospects (I have written about those already in other articles, so I will spare you that) and I feel even more confident that when those decide it is time to move on from ASHG, the family will acquire those shares to keep the marketplace in balance. The battle for me has already been won. When ASHG hits $300 and potentially $400 – that is when I will remember it is on days like this where there is some form of arbitrage or what not going on that the real money was made.
Tuesday, July 10, 2007
National Bank of Greece (NYSE: NBG) - Slash & Burn, Buy Everything in Sight up to $12.00
I am raising my slash and burn, buy everything in sight on NBG to $12.00. That means, anything under $12.00 is a buy. NBG recently ran as high as $12.32 - and actually got way ahead of its Athens Stock Exchange parent in terms of valuation. NBG is currently fetching $11.93/share. In the light of earnings season, it's aggressive, yet obtainable 3-year plan, and UBS price target of about $15, I would suggest buying everything in sight up to $12.00.
Of course, that is somewhat of an exaggeration based on the Gordon Gekko quote from Wall Street, but the fundamentals of the bank and the world economy remain strong.
NBG was also featured in a recent Forbes article, "The Exchange That Launched 1,000 Ships."
NBG has a lot going for it for the long-term and is postioned as perhaps the best banking play in all of eastern Europe, especially considering its expansion into Turkey and other countries in the region. NBG, long thought of only as a Greek, regional bank is slowly evolving into a European player. They are still several years off from reaching such lofty goals, but they are moving in the right direction.
I still say $14-$15 by the end of 2007. The weakening U.S. Dollar vs the Euro also adds some upside pressure to the NYSE traded ADRs.
Of course, that is somewhat of an exaggeration based on the Gordon Gekko quote from Wall Street, but the fundamentals of the bank and the world economy remain strong.
NBG was also featured in a recent Forbes article, "The Exchange That Launched 1,000 Ships."
NBG has a lot going for it for the long-term and is postioned as perhaps the best banking play in all of eastern Europe, especially considering its expansion into Turkey and other countries in the region. NBG, long thought of only as a Greek, regional bank is slowly evolving into a European player. They are still several years off from reaching such lofty goals, but they are moving in the right direction.
I still say $14-$15 by the end of 2007. The weakening U.S. Dollar vs the Euro also adds some upside pressure to the NYSE traded ADRs.
The Best Direct Stock Purchase Plans
Direct Stock Purchase Plans (DSPPs) are just what they sound like – they let you buy stock in participating companies direct rather than going through a broker. Such programs also offer additional benefits such as automatic recurring investment and full investment of your funds, even if you cannot buy a full share initially.
These programs are offered via the transfer agents that represent the participating companies and are a great way to start to build a retirement nest egg for yourself or an education fund for your children. A DSPP can also be a great gift to a family member.
Specifically, I feel that DSPP participation by investors should be a part of a long-term investing strategy. The way the programs are set up, where it can be somewhat of a hassle to withdrawal your money, make them ideal candidates for buy and accumulate, especially with the full reinvestment of proceeds and dividends – even into fractional shares.
Some may argue that index funds are better places to stash cash for the long-term. There is certainly merit in that philosophy as the stock market as a whole is a fantastic wealth building vehicle. But, there is something to ownership and although lacking in the diversity of a DSPP, over the course of many years or even decades, you will find that some stocks outperform the market and some under perform. For a long-term perspective, both are well-received. Why? If you are investing a single stock or preferably 2-3 DSPPs to have some diversity, in the years the stock outperforms, you can get accelerated appreciation on your investment. In the event of under perform, such phases allow for accumulation of more shares at what may be a market discount. Of course, do not disregard the fundamentals of a company, but more often than not, companies participating in DSPPs are long-established, blue-chip type companies that pay out dividends to shareholders. This is not always the case, but you are more likely to find names of companies you recognize rather than under the radar companies.
I especially suggest DSPPs for your children, especially in a 529 account or a custodial account. Please consult your financial planner for the best situation for your needs, but I find it a great thing to start building for your children’s future at an early age.
DSPPs have many elements to their make-up. Some of these include:
· Minimum initial purchase
· Purchase fees
· Online access
· Electronic automatic investments
· Reinvestment fees
In many cases, the companies charge initial set up fees or ongoing fees to help maintain the account. This makes sense considering the company incurs fees from the transfer agent to administer the plan, but many plans have no fees at all to enroll and purchase shares – some even offer discounts.
May I suggest the following three DSPP for a balance, affordable direct investment strategy for your children and part of your long-term financial goals?
Pfizer (NYSE: PFE)Pfizer has not been the world’s favorite stock in 2007. Pulling multiple drugs and citing rising costs, PFE has failed to keep pace with the rest of the pharmaceuticals. However, Pfizer is a great DSPP selection. The downside is a $500 initial requirement for participation, but after that, there are no requirements for recurring investment frequency. Of course, you have the option of monthly recurring investments – with a minimum of $50 – or making one-off purchases at your convenience with a minimum of $50. Fundamentally, I like Pfizer – and while analysts are saying it may be a couple of years, at least, before Pfizer returns to growth, this provides opportunity to build up some shares at these prices. Pfizer has raided their dividend every year for as long as anyone can remember and it seems that this trend will continue. The 4.5% yield offered by Pfizer at current market prices rivals the return that most savings or money accounts will give you – all without minimum balances or service fees. I think that over the course of the next 20-30 years, Pfizer is a winner. It certainly will not be the biggest winner, but having exposure to the pharmaceutical sector makes a great deal of sense. Additionally, taking the time to acquire some shares now, especially at these levels, should pay off over the years to come as we look for dividend increases which will significantly boost the yield on your initial shares. Plus, to keep things simple, as long as there is a need for medicine, Pfizer will remain an industry leader and a safe place to put some money aside for the future.
Health Care REIT (NYSE: HCN)
The biggest knock on HCN is the $1,000 minimum requirement to establish an account – that can be a good chunk of change, especially for your two-year old. HCN sports all of the features you would expect from a solid DSPP, such as no purchase fees, full reinvestment of dividends, and option for a recurring investment. However, one thing that makes HCN stand out from many DSPPs is the 2% discount offered on initial purchase of shares, new purchases of shares, and on shares purchased through reinvestment of dividends. 2% is not a huge difference maker, but consider it like getting a match from your employer in your 401(k). Anytime you can buy stock for the long-run at even a slight discount, it is a win, especially with HCN’s history of raising dividends. As a REIT, do not expect huge growth, but HCN is well positioned to take advantage of the well documented need for healthcare and things like assisted living facilities. As of December 31, 2006, HCN’s portfolio consisted of over 550 properties, including assisted living facilities, skilled nursing facilities, independent living care retirement communities, and specialty care facilities. HCN continues to build its portfolio – adding over $400M in new acquisitions alone in the second quarter of 2007. This means more property and increased dividends over the long-term as more rents are collected. HCN has been around for nearly 40 years.
IndyMac Bancrop (NYSE: IMB)IndyMac is the 7th largest savings and loan and 2nd largest lender in the nation. The DSPP sports an affordable minimum investment requirement of $250 and company paid fees on all purchases and reinvestments. This bank has taken a hit with the recent mortgage and real estate slowdown and currently trades close to its 52-week low. The company’s trailing dividend yield is 6.4% but historical dividend yield is closer to 2.7% - inline with other banks. Even with such a high yield, the payout ratio is still under 50%, so there is plenty of room for error in the event of an issue. Insiders and mutual funds are currently buying IMB and likely for the long-term. IMB trades at less than 7x current earnings and less than 8x projects earnings. The company is also trading at a slight (10%) premium to book value. The value indicators look good and over the short term, the problems hitting the real estate market may still take their toll on IMB, but with long term goals of generating 15%+ return on equity each year, I like my chances.
Of course, there are many tremendous, established companies that offer DSPPs to investors - and most are good choices. However, if you were to ask me where I am putting some money aside for myself and my daughters, these three get the nod.
These programs are offered via the transfer agents that represent the participating companies and are a great way to start to build a retirement nest egg for yourself or an education fund for your children. A DSPP can also be a great gift to a family member.
Specifically, I feel that DSPP participation by investors should be a part of a long-term investing strategy. The way the programs are set up, where it can be somewhat of a hassle to withdrawal your money, make them ideal candidates for buy and accumulate, especially with the full reinvestment of proceeds and dividends – even into fractional shares.
Some may argue that index funds are better places to stash cash for the long-term. There is certainly merit in that philosophy as the stock market as a whole is a fantastic wealth building vehicle. But, there is something to ownership and although lacking in the diversity of a DSPP, over the course of many years or even decades, you will find that some stocks outperform the market and some under perform. For a long-term perspective, both are well-received. Why? If you are investing a single stock or preferably 2-3 DSPPs to have some diversity, in the years the stock outperforms, you can get accelerated appreciation on your investment. In the event of under perform, such phases allow for accumulation of more shares at what may be a market discount. Of course, do not disregard the fundamentals of a company, but more often than not, companies participating in DSPPs are long-established, blue-chip type companies that pay out dividends to shareholders. This is not always the case, but you are more likely to find names of companies you recognize rather than under the radar companies.
I especially suggest DSPPs for your children, especially in a 529 account or a custodial account. Please consult your financial planner for the best situation for your needs, but I find it a great thing to start building for your children’s future at an early age.
DSPPs have many elements to their make-up. Some of these include:
· Minimum initial purchase
· Purchase fees
· Online access
· Electronic automatic investments
· Reinvestment fees
In many cases, the companies charge initial set up fees or ongoing fees to help maintain the account. This makes sense considering the company incurs fees from the transfer agent to administer the plan, but many plans have no fees at all to enroll and purchase shares – some even offer discounts.
May I suggest the following three DSPP for a balance, affordable direct investment strategy for your children and part of your long-term financial goals?
Pfizer (NYSE: PFE)Pfizer has not been the world’s favorite stock in 2007. Pulling multiple drugs and citing rising costs, PFE has failed to keep pace with the rest of the pharmaceuticals. However, Pfizer is a great DSPP selection. The downside is a $500 initial requirement for participation, but after that, there are no requirements for recurring investment frequency. Of course, you have the option of monthly recurring investments – with a minimum of $50 – or making one-off purchases at your convenience with a minimum of $50. Fundamentally, I like Pfizer – and while analysts are saying it may be a couple of years, at least, before Pfizer returns to growth, this provides opportunity to build up some shares at these prices. Pfizer has raided their dividend every year for as long as anyone can remember and it seems that this trend will continue. The 4.5% yield offered by Pfizer at current market prices rivals the return that most savings or money accounts will give you – all without minimum balances or service fees. I think that over the course of the next 20-30 years, Pfizer is a winner. It certainly will not be the biggest winner, but having exposure to the pharmaceutical sector makes a great deal of sense. Additionally, taking the time to acquire some shares now, especially at these levels, should pay off over the years to come as we look for dividend increases which will significantly boost the yield on your initial shares. Plus, to keep things simple, as long as there is a need for medicine, Pfizer will remain an industry leader and a safe place to put some money aside for the future.
Health Care REIT (NYSE: HCN)
The biggest knock on HCN is the $1,000 minimum requirement to establish an account – that can be a good chunk of change, especially for your two-year old. HCN sports all of the features you would expect from a solid DSPP, such as no purchase fees, full reinvestment of dividends, and option for a recurring investment. However, one thing that makes HCN stand out from many DSPPs is the 2% discount offered on initial purchase of shares, new purchases of shares, and on shares purchased through reinvestment of dividends. 2% is not a huge difference maker, but consider it like getting a match from your employer in your 401(k). Anytime you can buy stock for the long-run at even a slight discount, it is a win, especially with HCN’s history of raising dividends. As a REIT, do not expect huge growth, but HCN is well positioned to take advantage of the well documented need for healthcare and things like assisted living facilities. As of December 31, 2006, HCN’s portfolio consisted of over 550 properties, including assisted living facilities, skilled nursing facilities, independent living care retirement communities, and specialty care facilities. HCN continues to build its portfolio – adding over $400M in new acquisitions alone in the second quarter of 2007. This means more property and increased dividends over the long-term as more rents are collected. HCN has been around for nearly 40 years.
IndyMac Bancrop (NYSE: IMB)IndyMac is the 7th largest savings and loan and 2nd largest lender in the nation. The DSPP sports an affordable minimum investment requirement of $250 and company paid fees on all purchases and reinvestments. This bank has taken a hit with the recent mortgage and real estate slowdown and currently trades close to its 52-week low. The company’s trailing dividend yield is 6.4% but historical dividend yield is closer to 2.7% - inline with other banks. Even with such a high yield, the payout ratio is still under 50%, so there is plenty of room for error in the event of an issue. Insiders and mutual funds are currently buying IMB and likely for the long-term. IMB trades at less than 7x current earnings and less than 8x projects earnings. The company is also trading at a slight (10%) premium to book value. The value indicators look good and over the short term, the problems hitting the real estate market may still take their toll on IMB, but with long term goals of generating 15%+ return on equity each year, I like my chances.
Of course, there are many tremendous, established companies that offer DSPPs to investors - and most are good choices. However, if you were to ask me where I am putting some money aside for myself and my daughters, these three get the nod.
Tuesday, June 26, 2007
Winners Among The Losers – Corus Bankshares (NASDAQ:CORS), Brush Engineered Materials (NYSE:BW)
Generally speaking, the stock market does more than an average job of pricing a stock right where it should be at a given moment. The stock market leverages all of the publicly available information about the company, including things such as SEC filings, industry trends, and even less definitive things such as earnings expectations. Furthermore, with the availability of information out there and the speed at which information travels, it becomes increasingly difficult to find companies that appear to have more value to them than the market is currently giving them credit for. Now, obviously, we should pay careful attention to defer to the stock market, as since it is a reflection of all current information and a multitude of investors, odds are, you will not outsmart it. However, to outperform, you have to take risks, and for lack of a better phrase, take bets on the unexpected or unanticipated.
Now, when a stock takes a nosedive, there is typically a good reason for it. For instance, if a company is trading at less than book value, well, there is likely a reason for it. They may be burning cash and in one year's time, the price to book will go from say 0.8 to 1.6, so it is not as good of a deal as it seems. However, sometimes companies seem to be undervalued or take a massive hit without any real justification for it. Sure, there is a news item that is driving the selling, but if you look at the numbers, it just does not make sense. This is where value can be found, though, it can sometimes take months or even years to materialize and the world to wake up.
Corus Bankshares, Inc. (NASDAQ: CORS)
CORS is a bank that primarily provides financing and loans, particularly in the commercial real estate and condominium construction arenas. CORS is typically not financing the consumer, but the developer of a condominium. The stock has basically been halved in the past year, although they continue to maintain strong book value and pay out $1 share in dividends – a 5.9% yield at current prices. CORS has also increased the dividend payable to shareholders every year the past 27 years. CORS also operates as a holding company and has an extensive portfolio of securities, primarily the common stock of other banks – about $203M, or 20% of market capitalization, per their April 30, 2007 filing with the SEC.
CORS has taken a beating during this subprime lending slowdown, and rightfully slow. CORS has increased their reserve for loss and acknowledges they will have some losses in 2007 and perhaps in the future. However, if you look at the nature of the beat down, there are many things that are not adding up.
CORS is run and owned by the Glickmans, who are regarded as very astute bankers. Now, any company or bank is potentially subject to going under or making bad decisions, but if you read the method in which this company provides financing and operates as a lender, anyone would find it hard to believe that this bank is going under – especially since it has been around for nearly 50 years. CORS is trading at 5.7x current earnings and at 7.6x forward estimated earnings – and yes, the analysts have thought hard about the increase in bad loans, loss reserves, and other negative items. CORS has raised the dividend every year the past 27 years and the other day announced a $1 special cash dividend to shareholders on top of the regular dividend. While handing out cash can look bad, considering that CORS is trading at 1.12x book value as of March 31, 2007, and it is likely that the company's book value has increased since then, this distribution has a nominal impact on the per share ratios when it comes to book value. Sure, the $1 payout will take the $1 out of the price and book value, which are essentially the same, but CORS feels pretty strongly about their position, especially considering they have a $300M free and clear cash cushion to be considered well capitalized per their recent press release.
Also playing a factor is that as of May 15, 2007, a little over 19M shares were reported as being sold short. That is impressive considering CORS has 56.25M shares outstanding and only 19.5M in the float. So, this is suggesting that the entire float is sold short? It has also been suggested that there is extensive naked shorting of CORS taking place.
Let's look at the dynamics here. We have a 50-year old bank, that yes, has taken some hits – but they have proven they are prepared for such and expected these hits. CORS continues to pay out dividends to shareholders, at only a 30% payout ratio, and has a $300M cash cushion that they will use to fund the special dividend – and perhaps additional special dividends. Furthermore, assuming the 19M shares short number holds true, in 2007, we are looking at a total of about $150M in payouts to long shareholders. $56M comes from regular dividend, $56M comes from special dividend, and $38M comes from each of the short sellers paying their $2 to the lender of the shares they have shorted. Now, it is unclear exactly where that excess $38M will go, but it will go somewhere into the hands of the longs. Some longs may not get any of that additional special treatment, but someone will. In short, we are looking at a total yield of up to 15.4% to long shareholders. Additionally, the bank remains to be well capitalized, profitable, and have plenty of breathing room – both in terms of cash in the bank and bad loan strategy.
It honestly does not seem like this bank is in as much trouble as the market is suggesting it is. I do not know how much longer the shorts will want to be writing checks to the long shareholders simply to bet that CORS will continue to go down. Sure, CORS could have bought back stock, but why? To drive the prices up only to have the short sellers drive it down? CORS is saying the special dividend is a function of having some extra cash and wanting to take advantage of the 15% tax rate on qualified dividends while it lasts. Those absolutely make sense, but there is more going on here. Without sounding too vindictive, if someone wants to bet against me and write me a check for the privilege to do so, well that is beautiful news for me. That is exactly what seems to be happening here.
Now, it is possible that CORS is trying to clean out the coffers to give back to the owners before they go belly-up, but that would be borderline fraud and illegal, so that does not sound like what is going to happen. CORS may also have nothing to do with their extra money, which is doubtful considering they could easily just invest more in banks (as they have done historically) if their prospects for new loans are slow. I am not a sophisticated banking expert by any means and yes, there is a degree of unknown risk here so zero is a possibility, but should CORS really be trading at 7.5x future earnings and right at book value? The potential for a short squeeze alone, plus the excess cash being put into the pot from the shorts is indicative of how shrewd CORS can be. It is hard to say what the actual valuation of CORS is – I have read anywhere from $0 to $40 – but nevertheless, it appears that a war is being waged here between a family of established, reputable bankers and a stock market trying to fairly value the stock based on current information. It is difficult to forecast where this one is going – it certainly can go down more, but it does not look that way. However, the stars are lining up for some very aggressive movement in the stock price – and since it is trading at book value with a slew of news priced in and a big cash pile, well, do the math and figure out what bet makes the most sense here.
Brush Engineered Materials, Inc. (NYSE: BW)
I have never been a big fan of earnings guidance, particularly for companies that are not as widely followed or held as the big blue chips. These smaller companies, relatively speaking, are more susceptible to the impacts from all sorts of factors that can have significant impacts on their operating revenue. Furthermore, because of this increased susceptibility, volatile movements in the stock price – both up or down – become more likely to happen. It is not like companies to try to sandbag their guidance or get too aggressive with it to drive the stock price to the brink, but sometimes it just pans out that way. Of course, such volatility, especially downward volatility, can bring buying opportunities into the mix.
BW engineers and supplies worldwide markets with beryllium products, alloy products, electronic products, precious metal products, and engineered material systems. Specifically, BW services a wide array of industries including telecommunications, automobile electronics, and industrial components. The beryllium and alloy products they produce help electronic devices, such as PDAs, perform better. Additionally, BW is the only fully-integrated producer of beryllium and related products in the world, giving them somewhat of a lock on the market.
BW is off about 33% from its 52 week high and when they reduced their earnings guidance for Q2, the stock took nearly 20% hit on a single day. BW altered its earnings guidance range to $2.00-$2.55 from $2.20-$2.75. While it is no fun to make less than what you thought you might, there is a strong chance that their results will fall within their original estimated range. The reason for the lower guidance? Production problems and ramp-up problems – which will impact 2Q results and hence the total year results. >However, these issues are cited as being temporary and are resolved. Additionally, the weaker market BW is blaming for some of the slowdown is not a disaster as it appears it is seasonal in nature and their other divisions are performing exceptionally well. In other words, although growth may slow somewhat, BW is still going to make a lot of money and they are serving industries that are growing and continuously have the need for better products, that BW can help provide.
Although empirical results are not the best to go off of, this is reminding me a great deal of Astec Industries' (NASDAQ: ASTE) 50% decline from its early 2006 highs. ASTE ran up to around $42 on the excitement of the 2007 Highway Spending Bill. They missed expectations and the stock took a 50%+ hit. Ignored was the fact that ASTE was producing record sales and net income and had record levels of backlog. Value investors took the time to load up – and thus far, they have been rewarded. ASTE has exceeded its previous 52-week high in recent weeks. Notably, Tontine Capital Partners led by Jeffrey Gendell was and big buyer of ASTE post-decline. Gendell is also a 10% holder of BW – and added to his positions on the BW decline to the tune of 485,000 shares purchased around $41.
Downside for BW is limited and the upside is there. BW has had a huge run up as it is still up over 100% from its 52-week low. I anticipate a return to $50 and this healthy breather may allow BW to exceed its previous 52-week high in the coming 12 months. I am hesitant to put a $75 price target on it, as I have seen floating around, but I feel it is a fairly safe bet for a deep-in-the-money options strategy – both September 2007 and December 2007 calls with a $40 strike price should yield some significant returns – and that is exactly where I am putting my money.
Now, when a stock takes a nosedive, there is typically a good reason for it. For instance, if a company is trading at less than book value, well, there is likely a reason for it. They may be burning cash and in one year's time, the price to book will go from say 0.8 to 1.6, so it is not as good of a deal as it seems. However, sometimes companies seem to be undervalued or take a massive hit without any real justification for it. Sure, there is a news item that is driving the selling, but if you look at the numbers, it just does not make sense. This is where value can be found, though, it can sometimes take months or even years to materialize and the world to wake up.
Corus Bankshares, Inc. (NASDAQ: CORS)
CORS is a bank that primarily provides financing and loans, particularly in the commercial real estate and condominium construction arenas. CORS is typically not financing the consumer, but the developer of a condominium. The stock has basically been halved in the past year, although they continue to maintain strong book value and pay out $1 share in dividends – a 5.9% yield at current prices. CORS has also increased the dividend payable to shareholders every year the past 27 years. CORS also operates as a holding company and has an extensive portfolio of securities, primarily the common stock of other banks – about $203M, or 20% of market capitalization, per their April 30, 2007 filing with the SEC.
CORS has taken a beating during this subprime lending slowdown, and rightfully slow. CORS has increased their reserve for loss and acknowledges they will have some losses in 2007 and perhaps in the future. However, if you look at the nature of the beat down, there are many things that are not adding up.
CORS is run and owned by the Glickmans, who are regarded as very astute bankers. Now, any company or bank is potentially subject to going under or making bad decisions, but if you read the method in which this company provides financing and operates as a lender, anyone would find it hard to believe that this bank is going under – especially since it has been around for nearly 50 years. CORS is trading at 5.7x current earnings and at 7.6x forward estimated earnings – and yes, the analysts have thought hard about the increase in bad loans, loss reserves, and other negative items. CORS has raised the dividend every year the past 27 years and the other day announced a $1 special cash dividend to shareholders on top of the regular dividend. While handing out cash can look bad, considering that CORS is trading at 1.12x book value as of March 31, 2007, and it is likely that the company's book value has increased since then, this distribution has a nominal impact on the per share ratios when it comes to book value. Sure, the $1 payout will take the $1 out of the price and book value, which are essentially the same, but CORS feels pretty strongly about their position, especially considering they have a $300M free and clear cash cushion to be considered well capitalized per their recent press release.
Also playing a factor is that as of May 15, 2007, a little over 19M shares were reported as being sold short. That is impressive considering CORS has 56.25M shares outstanding and only 19.5M in the float. So, this is suggesting that the entire float is sold short? It has also been suggested that there is extensive naked shorting of CORS taking place.
Let's look at the dynamics here. We have a 50-year old bank, that yes, has taken some hits – but they have proven they are prepared for such and expected these hits. CORS continues to pay out dividends to shareholders, at only a 30% payout ratio, and has a $300M cash cushion that they will use to fund the special dividend – and perhaps additional special dividends. Furthermore, assuming the 19M shares short number holds true, in 2007, we are looking at a total of about $150M in payouts to long shareholders. $56M comes from regular dividend, $56M comes from special dividend, and $38M comes from each of the short sellers paying their $2 to the lender of the shares they have shorted. Now, it is unclear exactly where that excess $38M will go, but it will go somewhere into the hands of the longs. Some longs may not get any of that additional special treatment, but someone will. In short, we are looking at a total yield of up to 15.4% to long shareholders. Additionally, the bank remains to be well capitalized, profitable, and have plenty of breathing room – both in terms of cash in the bank and bad loan strategy.
It honestly does not seem like this bank is in as much trouble as the market is suggesting it is. I do not know how much longer the shorts will want to be writing checks to the long shareholders simply to bet that CORS will continue to go down. Sure, CORS could have bought back stock, but why? To drive the prices up only to have the short sellers drive it down? CORS is saying the special dividend is a function of having some extra cash and wanting to take advantage of the 15% tax rate on qualified dividends while it lasts. Those absolutely make sense, but there is more going on here. Without sounding too vindictive, if someone wants to bet against me and write me a check for the privilege to do so, well that is beautiful news for me. That is exactly what seems to be happening here.
Now, it is possible that CORS is trying to clean out the coffers to give back to the owners before they go belly-up, but that would be borderline fraud and illegal, so that does not sound like what is going to happen. CORS may also have nothing to do with their extra money, which is doubtful considering they could easily just invest more in banks (as they have done historically) if their prospects for new loans are slow. I am not a sophisticated banking expert by any means and yes, there is a degree of unknown risk here so zero is a possibility, but should CORS really be trading at 7.5x future earnings and right at book value? The potential for a short squeeze alone, plus the excess cash being put into the pot from the shorts is indicative of how shrewd CORS can be. It is hard to say what the actual valuation of CORS is – I have read anywhere from $0 to $40 – but nevertheless, it appears that a war is being waged here between a family of established, reputable bankers and a stock market trying to fairly value the stock based on current information. It is difficult to forecast where this one is going – it certainly can go down more, but it does not look that way. However, the stars are lining up for some very aggressive movement in the stock price – and since it is trading at book value with a slew of news priced in and a big cash pile, well, do the math and figure out what bet makes the most sense here.
Brush Engineered Materials, Inc. (NYSE: BW)
I have never been a big fan of earnings guidance, particularly for companies that are not as widely followed or held as the big blue chips. These smaller companies, relatively speaking, are more susceptible to the impacts from all sorts of factors that can have significant impacts on their operating revenue. Furthermore, because of this increased susceptibility, volatile movements in the stock price – both up or down – become more likely to happen. It is not like companies to try to sandbag their guidance or get too aggressive with it to drive the stock price to the brink, but sometimes it just pans out that way. Of course, such volatility, especially downward volatility, can bring buying opportunities into the mix.
BW engineers and supplies worldwide markets with beryllium products, alloy products, electronic products, precious metal products, and engineered material systems. Specifically, BW services a wide array of industries including telecommunications, automobile electronics, and industrial components. The beryllium and alloy products they produce help electronic devices, such as PDAs, perform better. Additionally, BW is the only fully-integrated producer of beryllium and related products in the world, giving them somewhat of a lock on the market.
BW is off about 33% from its 52 week high and when they reduced their earnings guidance for Q2, the stock took nearly 20% hit on a single day. BW altered its earnings guidance range to $2.00-$2.55 from $2.20-$2.75. While it is no fun to make less than what you thought you might, there is a strong chance that their results will fall within their original estimated range. The reason for the lower guidance? Production problems and ramp-up problems – which will impact 2Q results and hence the total year results. >However, these issues are cited as being temporary and are resolved. Additionally, the weaker market BW is blaming for some of the slowdown is not a disaster as it appears it is seasonal in nature and their other divisions are performing exceptionally well. In other words, although growth may slow somewhat, BW is still going to make a lot of money and they are serving industries that are growing and continuously have the need for better products, that BW can help provide.
Although empirical results are not the best to go off of, this is reminding me a great deal of Astec Industries' (NASDAQ: ASTE) 50% decline from its early 2006 highs. ASTE ran up to around $42 on the excitement of the 2007 Highway Spending Bill. They missed expectations and the stock took a 50%+ hit. Ignored was the fact that ASTE was producing record sales and net income and had record levels of backlog. Value investors took the time to load up – and thus far, they have been rewarded. ASTE has exceeded its previous 52-week high in recent weeks. Notably, Tontine Capital Partners led by Jeffrey Gendell was and big buyer of ASTE post-decline. Gendell is also a 10% holder of BW – and added to his positions on the BW decline to the tune of 485,000 shares purchased around $41.
Downside for BW is limited and the upside is there. BW has had a huge run up as it is still up over 100% from its 52-week low. I anticipate a return to $50 and this healthy breather may allow BW to exceed its previous 52-week high in the coming 12 months. I am hesitant to put a $75 price target on it, as I have seen floating around, but I feel it is a fairly safe bet for a deep-in-the-money options strategy – both September 2007 and December 2007 calls with a $40 strike price should yield some significant returns – and that is exactly where I am putting my money.
Wednesday, May 30, 2007
National Bank of Greece (NYSE: NBG) – Buy on News Selling
A common phrase in the stock market is "buy on rumors, sell on news." Typically, this revolves around speculation on items such as a company takeover or earning results. In short, in the near-term, the price runs up on the expectation of the rumors and then once the rumor comes true, the price weakens and declines.
National Bank of Greece (NYSE: NBG) reported 1Q 2007 earnings at 10:00am on Tuesday, May 30. The rapidly expanding bank reported net income of EUR381 versus EUR250 from the same period a year ago. Analysts were expecting EUR360 of income. NBG, which are actually the American Depository Receipts for the capital stock that trades on the Athens Stock Exchange, closed at a 52-week high of $12.10 on Tuesday, May 29, one day before the earnings announcement.
Today, NBG is trading down 1.6% to $11.90 and traded as low as $11.75 on the stellar earnings report. NBG met analyst expectations for revenue, exceeded net income projections by nearly 6%, and cited strong growth in its core business and even stronger growth in its recently acquired divisions in Turkey and Eastern Europe.
So, with all of these positive, upbeat earnings report, why is the stock down nearly 2% rather than up strong?
The answer is that the market was unofficially expecting earnings to be stellar and exceed the official expectations. The rumor is that National Bank of Greece knocked the cover off the ball, which they did, but not enough. They brought the runs in, but only hit a 500 foot home run when the masses were hoping for a 600 foot bomb. Hence, a moderate sell off on average volume – the selling on the actual news of the earnings announcement has arrived. This almost predictable selling after the pre-earnings run up presents a buying opportunity on this news selling.
For long-term holders of National Bank of Greece, the future still looks bright. The company is trading at about 10.5 times projected 2008 earnings, which is slightly less than its peers. However, its peers are not showing the growth rates or the aggressive acquisition strategy like Greece's largest bank. Current price to book value of over 3.2 is a little steep, but the company has merited the temporary valuation with their growth and focus on expansion.
I forecast that NBG still has 25%-30% upside over the next 12 months, which would price the NYSE traded ADRs at around $15.00-$15.60. I am raising my slash-and-burn, get me in at a 45-degree angle price from $11 to $12 – meaning that anything under $12 is a buy. In the short term, we may see some more selling pressure, especially next week after the ex-dividend date of June 1, 2007. NBG will be paying out EUR1 per share which is about $0.27 per ADR adjusted for the Euro to Dollar exchange rate and that each ADR represents one-fifth of a full share of NBG.
I am also partial to the possibility that a larger international bank may come in and scoop up this fast growing bank – but a mere 10% at best. The management of National Bank of Greece, if anything, that getting acquired by a larger bank is not on their agenda. However, everyone has a price and within the next 12 months, if a buy out were to happen, we would see a price tag of $17-$19 for each ADR. The buy-out scenario is unlikely, but everyone has a price and it provides additional upside potential to this bank.
National Bank of Greece (NYSE: NBG) reported 1Q 2007 earnings at 10:00am on Tuesday, May 30. The rapidly expanding bank reported net income of EUR381 versus EUR250 from the same period a year ago. Analysts were expecting EUR360 of income. NBG, which are actually the American Depository Receipts for the capital stock that trades on the Athens Stock Exchange, closed at a 52-week high of $12.10 on Tuesday, May 29, one day before the earnings announcement.
Today, NBG is trading down 1.6% to $11.90 and traded as low as $11.75 on the stellar earnings report. NBG met analyst expectations for revenue, exceeded net income projections by nearly 6%, and cited strong growth in its core business and even stronger growth in its recently acquired divisions in Turkey and Eastern Europe.
So, with all of these positive, upbeat earnings report, why is the stock down nearly 2% rather than up strong?
The answer is that the market was unofficially expecting earnings to be stellar and exceed the official expectations. The rumor is that National Bank of Greece knocked the cover off the ball, which they did, but not enough. They brought the runs in, but only hit a 500 foot home run when the masses were hoping for a 600 foot bomb. Hence, a moderate sell off on average volume – the selling on the actual news of the earnings announcement has arrived. This almost predictable selling after the pre-earnings run up presents a buying opportunity on this news selling.
For long-term holders of National Bank of Greece, the future still looks bright. The company is trading at about 10.5 times projected 2008 earnings, which is slightly less than its peers. However, its peers are not showing the growth rates or the aggressive acquisition strategy like Greece's largest bank. Current price to book value of over 3.2 is a little steep, but the company has merited the temporary valuation with their growth and focus on expansion.
I forecast that NBG still has 25%-30% upside over the next 12 months, which would price the NYSE traded ADRs at around $15.00-$15.60. I am raising my slash-and-burn, get me in at a 45-degree angle price from $11 to $12 – meaning that anything under $12 is a buy. In the short term, we may see some more selling pressure, especially next week after the ex-dividend date of June 1, 2007. NBG will be paying out EUR1 per share which is about $0.27 per ADR adjusted for the Euro to Dollar exchange rate and that each ADR represents one-fifth of a full share of NBG.
I am also partial to the possibility that a larger international bank may come in and scoop up this fast growing bank – but a mere 10% at best. The management of National Bank of Greece, if anything, that getting acquired by a larger bank is not on their agenda. However, everyone has a price and within the next 12 months, if a buy out were to happen, we would see a price tag of $17-$19 for each ADR. The buy-out scenario is unlikely, but everyone has a price and it provides additional upside potential to this bank.
Friday, May 25, 2007
What to Buy? New Stock Picks from INFT Winnings
1. SEB - More at $2,230
2. ASHG - More at $236
3. WNC - More at $14.10
4. SCMR - Buy at $3.68
5. GNCI - Buy at $9.05
6. TGIS - Buy at $11.00
For anyone that actively and soundly invests (or even speculates) to build wealth has heard in passing: "The stock market is just like gambling." Initially, it is easy to defensively respond to statements with some resentment, but the reality is, there are many similarities. Anything can happen, as we can see. Unexpected buyouts, miracle turnarounds, indictments of fraud coming out of nowhere – and those all play into the gambling game of the stock market. Conversely, some sports gamblers or casino gamblers will actually claim that they can research the field and find hidden value the same way that investors claim they can do the same.
I have found, however, that what separates an investor from a gambler – whether it be the stock market or a sports game – is that the investor not only makes educated decisions with sound rationale, but also has an above average success rate in coming out on top (whether it be finding a winner, cutting losers before they become total wipe outs, etc.). More importantly, the investor will take the proceeds from a win and then promptly re-invest in another position, rather than spending the money. Sports and financial 'gamblers' alike will brag about their wins, take all of the money from the wins and spend it. Short and simple, no wealth is built as all gains are disbursed out and losses, which do happen, way hard on the total performance.
My point is that I consider myself an investor and on the heels of the $4.25 buy out offer on Inforte (NASDAQ: INFT), I am taking my gains and re-investing. With the markets at all time highs, everything seems expensive, and it is hard to find value. I hate to sound fearful or bearish, but the comments from Alan Greenspan about a strong chance of us hitting recession, the recent housing data announcement making an interest rate cut unlikely, and seeing margin debt rise to levels higher than just before the 2001 market down-turn have me a little concerned about lofty valuations. Regardless, rather than sacrificing my gains to consumerism, here is the hand I will be playing next.
First, oldies but goodies.
Seaboard Corporation (AMEX: SEB)
Seaboard has had an amazing run the past several months, doubling from its Fall, 2006 lows. Back then, this one was a no-brainer, but now take a little more resolve. Seaboard has seen strong growth in its containerized cargo shipping division the past couple of years and there is no doubt that this sector has been hot. Seaboard continues to make strong capital investments in this unit and continues to maintain the efficacy of its other business lines. Off nearly 18% from its all-time high, I felt this was a good entry point to add to my position. At the close of trading on May 24, 2007, Seaboard was trading at less than 11x trailing earnings, 2.1x book value, and at less than 1.9x forward 12 months book value. An owner-friendly investment that retains much of their cash flow to fund their 20% return on equity business. I added to my position at $2,235 and I have a price target of $2,700-$2,900 per share.
Ash Grove Cement (Pink Sheets: ASHG)
Yes, this company trades on the Pink Sheets, which I know nobody really likes, but they are the 5th largest cement company in the USA and the largest American owned cement company in the country. Ash Grove Cement has committed $190M to increase capacity in its Arkansas cement plant by 70% and $250M to build only the 2nd cement plant in the state of Nevada. Ash Grove will also commit another $60M or so in 2007 to expand their cement capacity. I feel strongly that being the largest American owned cement plant will be critical in the future as cement demand increases not only domestically, but worldwide. With the growth of cement internationally expected to outpace growth in the USA over the coming years, I believe many of the international players will invest in foreign production and capacity. Of course, I would, too, but this puts the largest American player in a good position, and with the capacity, to become a more important supplier to meet the USA's substantial domestic need. Granted, I am not the cement company expert, but I do believe that the domestic vs. foreign demand issue has been somewhat overlooked. I first started my position in the Summer, 2005 at $160 per share and since then, have seen the stock rise $47% and seen the annual dividend increase by 10%. Going back further, the stock has done even better in terms of raising the dividend and providing appreciation to its owners. With the spread at $235 x $269, I have an order in to buy at $236. However, with the stock so thinly traded, I am not expecting a quick fill. Historically, I have watched the spread widen around dividend time – next ex-date is June 6, 2007 – and do expect offer price to come down post-dividend. Unfortunately, I have found on this one that if you want in, sometimes you just have to buy at the ask. It's no fun, but historically, I am glad I have done so. I do believe that upside exists to the $300-$320 range, but especially since the company does not announce financial results and is so thinly traded, patience is certainly a virtue.
Wabash National (NYSE: WNC)
One of my losers thus far, but there is value here. It will likely take several months for Wabash to see results show up in the stock price, but I believe it will happen. The stock is likely trading towards the lower end of its range and should be buoyed by the company's buy back program and some big purchases by 14% holder and heralded value/contrarian/cyclical investor, Tontine Capital Partners. The limited downside from here inclines me to add more to my position - but I will wait a little longer as the stock is up 2.8% today to $14.58 in relatively light volume. I have a target of $19-$23 and I expect Wabash to hit that in the next 12-18 months as the market for their products turns around in late 2007/early 2008, they show stronger margins in the face of growth due to their new ERP system, and see the nearly 4M shares short be forced to cover. In the meantime, this might be a long ride as the general sentiment about the industry is overwhelming negative.
New finds include:
Sycamore Networks (NASDAQ: SCMR)
This has been a storied stock its entire life on the NASDAQ. Unfortunately, it has not been a good story for most investors. The company makes networking hardware and equipment, which certainly is not very exciting and has much negativity surrounding it. Sycamore is currently delinquent in its SEC filings due to the notorious options back-dating situation. Such scandal is never a good thing from the appearance of things, but will have no cash impacts on their books. Sycamore currently has about $915M in cash, or about $3.28 per share. That is about 90% of their current market cap of just over $1B. More importantly, Sycamore has shown signs of life and reported a nearly 100% increase in sales, primarily due to an acquisition. I like the cash protecting from downside risk, signs of sales growth, and one of their core products serving the MSO/Cable companies, especially as it pertains to the new digital voice/digital phone service that runs over your cable infrastructure. Comcast, Charter, Cablevision, and Time Warner have all reported strong growth in the digital telephony arena and will need hardware to handle the traffic. Granted, Sycamore competes in a competitive landscape with companies like Cisco in the mix, but I am in at $3.68 with a price target of $4.75-$5.75 in the next 9-12 months – perhaps on an acquisition.
Gencor Industries, Inc. (OTC BB: GNCI)
A small manufacturer of construction equipment and machinery, particularly that serves the highway-construction industry. Gencor also makes equipment that has exposure to the environmental control and synthetic fuel arenas. Gencor is a partner in a joint-venture and receives royalty payments, albeit not material, but growing, for production of synthetic fuels. Gencor is trading near its 52-week low as it enters the historically slower 3rd and 4th quarters. The company is small with only $73M in sales. Gencor has no debt, $52M of cash and cash equivalents, which is about 60% of its market cap, and EV/EBITDA is 1.7. Compare the latter ratio to competitors, such as Astec Industries and its 10.8 EV/EBITDA, and there appears to be some value. Individual investor Lloyd Miller III has bought 72,500 shares since March 22, 2007 and now owns nearly 907,000 shares, which is roughly 10% of the company. A strange ownership structure with Class B shares, small float, and thinly traded status makes it hard to determine where this one could go. $9.05 is a good entry point and I think that Gencor should be trading closer to $16-$18, but its market dynamics may not allow that.
Thomas Group, Inc. (NASDAQ: TGIS)
Thomas Group is a very reputable consulting firm that has no debt, pays a dividend yield of nearly 4%, and is cash flow positive. Ratios, for the most part, show that Thomas Group is not cheap: 2x sales, 6x book value, 11x levered free cash flow. However, this company has a strong track record of success and its P/E is far lower than its peer companies. Only 3M of its 10.8M shares are in the public float, so the stock has the tendency to be volatile – in either direction, of course. The stock is trading a little under $11.00 which I feel is a good entry point. It recently traded as low as $9 in early May, 2007 and traded there in June, 2006 and August, 2006 – and bounced quickly up each time. We have seen a double-top at around $16 twice in 2006, but could we have the triple bottom at $9? Stock stands to get back to $16 and perhaps higher if they continue to show good numbers, but first will need to break through the $12 resistance. This one is more of a technical play than a fundamentals play, but it is likely not going any lower than $9-$10 and has a very strong chance, with a lot of rationale behind it, to move up to $15-$16. Enter under $11 and price target is $15.
Simplistically, I am looking for value to hedge against the lofty valuations we are currently seeing and I am strengthening my positions in those that the fundamental reasons why I bought in the first place have not changed.
2. ASHG - More at $236
3. WNC - More at $14.10
4. SCMR - Buy at $3.68
5. GNCI - Buy at $9.05
6. TGIS - Buy at $11.00
For anyone that actively and soundly invests (or even speculates) to build wealth has heard in passing: "The stock market is just like gambling." Initially, it is easy to defensively respond to statements with some resentment, but the reality is, there are many similarities. Anything can happen, as we can see. Unexpected buyouts, miracle turnarounds, indictments of fraud coming out of nowhere – and those all play into the gambling game of the stock market. Conversely, some sports gamblers or casino gamblers will actually claim that they can research the field and find hidden value the same way that investors claim they can do the same.
I have found, however, that what separates an investor from a gambler – whether it be the stock market or a sports game – is that the investor not only makes educated decisions with sound rationale, but also has an above average success rate in coming out on top (whether it be finding a winner, cutting losers before they become total wipe outs, etc.). More importantly, the investor will take the proceeds from a win and then promptly re-invest in another position, rather than spending the money. Sports and financial 'gamblers' alike will brag about their wins, take all of the money from the wins and spend it. Short and simple, no wealth is built as all gains are disbursed out and losses, which do happen, way hard on the total performance.
My point is that I consider myself an investor and on the heels of the $4.25 buy out offer on Inforte (NASDAQ: INFT), I am taking my gains and re-investing. With the markets at all time highs, everything seems expensive, and it is hard to find value. I hate to sound fearful or bearish, but the comments from Alan Greenspan about a strong chance of us hitting recession, the recent housing data announcement making an interest rate cut unlikely, and seeing margin debt rise to levels higher than just before the 2001 market down-turn have me a little concerned about lofty valuations. Regardless, rather than sacrificing my gains to consumerism, here is the hand I will be playing next.
First, oldies but goodies.
Seaboard Corporation (AMEX: SEB)
Seaboard has had an amazing run the past several months, doubling from its Fall, 2006 lows. Back then, this one was a no-brainer, but now take a little more resolve. Seaboard has seen strong growth in its containerized cargo shipping division the past couple of years and there is no doubt that this sector has been hot. Seaboard continues to make strong capital investments in this unit and continues to maintain the efficacy of its other business lines. Off nearly 18% from its all-time high, I felt this was a good entry point to add to my position. At the close of trading on May 24, 2007, Seaboard was trading at less than 11x trailing earnings, 2.1x book value, and at less than 1.9x forward 12 months book value. An owner-friendly investment that retains much of their cash flow to fund their 20% return on equity business. I added to my position at $2,235 and I have a price target of $2,700-$2,900 per share.
Ash Grove Cement (Pink Sheets: ASHG)
Yes, this company trades on the Pink Sheets, which I know nobody really likes, but they are the 5th largest cement company in the USA and the largest American owned cement company in the country. Ash Grove Cement has committed $190M to increase capacity in its Arkansas cement plant by 70% and $250M to build only the 2nd cement plant in the state of Nevada. Ash Grove will also commit another $60M or so in 2007 to expand their cement capacity. I feel strongly that being the largest American owned cement plant will be critical in the future as cement demand increases not only domestically, but worldwide. With the growth of cement internationally expected to outpace growth in the USA over the coming years, I believe many of the international players will invest in foreign production and capacity. Of course, I would, too, but this puts the largest American player in a good position, and with the capacity, to become a more important supplier to meet the USA's substantial domestic need. Granted, I am not the cement company expert, but I do believe that the domestic vs. foreign demand issue has been somewhat overlooked. I first started my position in the Summer, 2005 at $160 per share and since then, have seen the stock rise $47% and seen the annual dividend increase by 10%. Going back further, the stock has done even better in terms of raising the dividend and providing appreciation to its owners. With the spread at $235 x $269, I have an order in to buy at $236. However, with the stock so thinly traded, I am not expecting a quick fill. Historically, I have watched the spread widen around dividend time – next ex-date is June 6, 2007 – and do expect offer price to come down post-dividend. Unfortunately, I have found on this one that if you want in, sometimes you just have to buy at the ask. It's no fun, but historically, I am glad I have done so. I do believe that upside exists to the $300-$320 range, but especially since the company does not announce financial results and is so thinly traded, patience is certainly a virtue.
Wabash National (NYSE: WNC)
One of my losers thus far, but there is value here. It will likely take several months for Wabash to see results show up in the stock price, but I believe it will happen. The stock is likely trading towards the lower end of its range and should be buoyed by the company's buy back program and some big purchases by 14% holder and heralded value/contrarian/cyclical investor, Tontine Capital Partners. The limited downside from here inclines me to add more to my position - but I will wait a little longer as the stock is up 2.8% today to $14.58 in relatively light volume. I have a target of $19-$23 and I expect Wabash to hit that in the next 12-18 months as the market for their products turns around in late 2007/early 2008, they show stronger margins in the face of growth due to their new ERP system, and see the nearly 4M shares short be forced to cover. In the meantime, this might be a long ride as the general sentiment about the industry is overwhelming negative.
New finds include:
Sycamore Networks (NASDAQ: SCMR)
This has been a storied stock its entire life on the NASDAQ. Unfortunately, it has not been a good story for most investors. The company makes networking hardware and equipment, which certainly is not very exciting and has much negativity surrounding it. Sycamore is currently delinquent in its SEC filings due to the notorious options back-dating situation. Such scandal is never a good thing from the appearance of things, but will have no cash impacts on their books. Sycamore currently has about $915M in cash, or about $3.28 per share. That is about 90% of their current market cap of just over $1B. More importantly, Sycamore has shown signs of life and reported a nearly 100% increase in sales, primarily due to an acquisition. I like the cash protecting from downside risk, signs of sales growth, and one of their core products serving the MSO/Cable companies, especially as it pertains to the new digital voice/digital phone service that runs over your cable infrastructure. Comcast, Charter, Cablevision, and Time Warner have all reported strong growth in the digital telephony arena and will need hardware to handle the traffic. Granted, Sycamore competes in a competitive landscape with companies like Cisco in the mix, but I am in at $3.68 with a price target of $4.75-$5.75 in the next 9-12 months – perhaps on an acquisition.
Gencor Industries, Inc. (OTC BB: GNCI)
A small manufacturer of construction equipment and machinery, particularly that serves the highway-construction industry. Gencor also makes equipment that has exposure to the environmental control and synthetic fuel arenas. Gencor is a partner in a joint-venture and receives royalty payments, albeit not material, but growing, for production of synthetic fuels. Gencor is trading near its 52-week low as it enters the historically slower 3rd and 4th quarters. The company is small with only $73M in sales. Gencor has no debt, $52M of cash and cash equivalents, which is about 60% of its market cap, and EV/EBITDA is 1.7. Compare the latter ratio to competitors, such as Astec Industries and its 10.8 EV/EBITDA, and there appears to be some value. Individual investor Lloyd Miller III has bought 72,500 shares since March 22, 2007 and now owns nearly 907,000 shares, which is roughly 10% of the company. A strange ownership structure with Class B shares, small float, and thinly traded status makes it hard to determine where this one could go. $9.05 is a good entry point and I think that Gencor should be trading closer to $16-$18, but its market dynamics may not allow that.
Thomas Group, Inc. (NASDAQ: TGIS)
Thomas Group is a very reputable consulting firm that has no debt, pays a dividend yield of nearly 4%, and is cash flow positive. Ratios, for the most part, show that Thomas Group is not cheap: 2x sales, 6x book value, 11x levered free cash flow. However, this company has a strong track record of success and its P/E is far lower than its peer companies. Only 3M of its 10.8M shares are in the public float, so the stock has the tendency to be volatile – in either direction, of course. The stock is trading a little under $11.00 which I feel is a good entry point. It recently traded as low as $9 in early May, 2007 and traded there in June, 2006 and August, 2006 – and bounced quickly up each time. We have seen a double-top at around $16 twice in 2006, but could we have the triple bottom at $9? Stock stands to get back to $16 and perhaps higher if they continue to show good numbers, but first will need to break through the $12 resistance. This one is more of a technical play than a fundamentals play, but it is likely not going any lower than $9-$10 and has a very strong chance, with a lot of rationale behind it, to move up to $15-$16. Enter under $11 and price target is $15.
Simplistically, I am looking for value to hedge against the lofty valuations we are currently seeing and I am strengthening my positions in those that the fundamental reasons why I bought in the first place have not changed.
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