Friday, May 29, 2009

Interview With Paul Tudor Jones

Interesting interview from with hedge fund trader Paul Tudor Jones. He is one of the ones worth listening to. I love this quote from him in this interview:

While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and proud of it.

One aspect of trend followers and technicians that I admire is their ability to say at sometimes things are out of their hands. For some reason there is a need to understand and quantify everything, and he touches on this. I think it is due to the immense amount of information on the internet. We just feel like there is nothing we can't find the answer to. Unfortunately, in the market, there is a lot that we can't quantify. Sometimes we have to just go with the flow.

Anyway, valuable stuff here.

Have a great weekend!

Rails Get Some Breathing Room From Congress

Interesting development today as a bill which would go strip the rail industry from antitrust exemptions has lost some support.

  • A senator who co-sponsored legislation to strip the railroad industry of antitrust exemptions wants the U.S. Senate to delay action on the bill while he presses ahead with related reforms to the regulatory agency that oversees rail transportation.
  • The unexpected development comes just days before the railroad bill is scheduled for Senate debate and may give the railroad industry, which strongly opposes the bill, some breathing room to continue pressing for changes.
  • Despite his earlier support for the antitrust bill, Sen. John Rockefeller, D-W.Va., now is urging his colleagues to block the legislation.
  • Rockefeller said the legislation would undercut a different bill he is working on that would overhaul the Surface Transportation Board, the federal agency that regulates rail competition.
Rails stocks obviously like this update, and are responding. I do think there are plenty of headwinds for rails as they rely on strength in the broad economy to thrive, but they can survive under these conditions, and I do see value in their shares. I've been looking for weakness in shares to pick some up, and this isn't helping...

Disclosure: None

Thursday, May 28, 2009

Picking Up Some Silver

I picked up some silver today via the ETF (SLV). I don't claim to be an expert about metals, but I've been reading a lot about smart investors moving into metals, and I too am not that comfortable with the amount of money our government is throwing around. Many are buying gold. Specifically John Paulson and David Einhorn, two excellent hedge fund managers. But I did some research and saw the gold/silver ratio has been out of whack. The historical average (and the actual amount available on earth) is about 15:1. In more recent times, that ratio has moved higher, but now it sits around 63:1, and I think it will correct. So I asked myself, what is more likely to happen, silver to appreciate, or gold to depreciate? Normally I'd say a combination of both. But with these guys buying gold like they are, I'd say either silver is going to appreciate, or the ratio is going to get even more spread.

Just taking an educated guess on this one. There has been some great commentary on this via Seeking Alpha, so I'll just defer to the experts. Good stuff here, here, and here.

Disclosure: Long SLV.

Wednesday, May 27, 2009

Spin-Offs...Why Do They Often Outperform?

Spin-Offs often make for interesting investments. There are not that common, but tend to perform well, especially in their first couple of years as a stand-alone stock. This has been written about in a few areas, and specifically by investor and author Joel Greenblatt, as this type of stock is one of his favorite investments. Let's look at what spin-offs are and why they outperform.

Spin-Off Advisors, a company that specializes in research and portfolio management of spin-offs, define them as this:

In a pure spin-off, a parent company distributes 100% of its ownership interests in a subsidiary operation as a dividend to its existing shareholders. After the spin-off, there are two separate, publicly held firms that have exactly the same shareholder base. This procedure stands in contrast to an initial public offering (IPO), in which the parent company is actually selling (rather than giving away) some or all of its ownership interests in a division.

Barrons ran a cover story about spin-offs back in March 2006. In that article, they found some interesting results:

A study by Lehman Brothers strategist Chip Dickson of 88 spinoffs between 2000 to 2005 found that they beat the S&P 500 by an average of 45% in their first two years as independent companies. The group evaluated contained only spinoffs -- no carve-outs -- and was drawn from the top 1,500 companies in the stock market. A larger group, dating back to 1990, topped the benchmark average by 18%.

Spin-offs don't often get hyped the way an IPO would, as stock is being handed to current shareholders of the larger entity. These shareholders are often indifferent about the new company and tend to dump the shares. Here's a little more detail on this, again from Spin-Off Advisors:

The spin-off process is a fundamentally inefficient method of distributing stock to people who may not necessarily want it. For the most part, investors were investing in the parent companies business. Once the shares are distributed, often they are sold without regard to price or fundamental value. This tends to depress the stock initially. In addition, institutions typically are sellers of spin-off stocks for various reasons (too small, no dividend, no research, etc.). Index funds are forced to sell the spin indiscriminately if the company is not included in a particular index. This type of selling can create excellent opportunities for the astute investor to uncover good businesses at favorable prices.

So you have an under-hyped stock that often sees depressed prices due to new shareholders dumping the stock. The case for picking up the stock at a good price is there, but the company still has to perform well, and many spin-offs do. This can be due to a few reasons. The Barrons article sites a few of them:

  • Why do spinoffs outstrip the market? Dickson thinks they benefit from greater management focus and accountability as stand-alone public companies than they had when they were part of larger enterprises. In a like vein, Cornell argues that many spinoffs were larger companies' neglected stepchildren.
  • Spinoffs tend to be relatively small operations -- only one deal, Ameriprise, exceeded $10 billion last year -- and therefore are off most investors' radar screens.
  • There often is little or no initial coverage by Wall Street analysts of spinoffs, perhaps resulting in greater inefficiencies in their valuations, especially for those valued below $1 billion. In some cases, institutional holders of the parent reflexively sell the spinoff's shares, because the newly liberated unit isn't part of an index, such as the S&P 500, or because it's deemed too small to merit attention.

To put it simply, the management is motivated to do well. They are on their own as a publicly traded company, and will fall under more scrutiny. This is a good motivator.

I recently reviewed a book called Invest Like a Dealmaker by Christopher Mayer. He often cites Greenblatt and had a portion of his book committed to spin-offs. He writes, quoting Greenblatt:

Pent-up entrepreneurial forces are unleashed. 'The combination of accountability, responsibility and more direct incentives take their natural course.' Curiously enough, as Greenblatt points out, the biggest gains often come in the second year, not the first. This indicates that it may take some time for the changes to kick in and deliver tangible results.

Spin-offs can unlock hidden demand for a company as well. The spin-off is likely a pure-play on something and isn't engaged in a group of industries like its parent was. The stock will likely find buyers who wanted to own this business, but never before had direct access. I think of a company like GE. Many people talk about their alternative energy businesses or industrial businesses, but you can't buy them alone, you have to buy GE stock. This frees up that demand.

So how can we invest in spin-offs? Well, you can keep an eye open for them and buy stock in the indidual company once the spin-off has occurred, if you like the company. There is also an ETF option. Claymore funds created the Claymore/Clear Spin-Off ETF. This tracks the Clear Spin-Off Index. The fund is small and lightly traded, but does own stakes in recent spin-offs, and their largest holdings are:


David Einhorn, who manages Greenlight Capital, is someone I follow quite regularly. He also likes to invest in spin-offs. According to Greenlight's latest filing, they own stakes in Echo Star, Discover Financial Services, Patriot Coal, and Teradata. This is another compelling reason for me to look at some of these names.

Overall, spin-offs appear to have a niche in the market that has worked pretty well. I don't necessarily agree with buying stock in spin-offs just because of past spin-off performance, because every company is different. Sometimes a larger company is spinning off a company because they don't want it, and its not in great shape. So, like any investment, you still have to do your homework. But I do believe in the basic argument for why these work, and some are worth taking a look at for your investment portfolio.

Disclosure: Author does not own shares in any company mentioned.

Monsanto Profit to Come in Light

Seed company Monsanto was one of the few companies that appeared unscathed during the mess over the past 6 months. They were raising guidance when most were cutting. Today, we get news that earnings are going to come in on the low end of guidance, and lighter than analyst expectations.

  • Monsanto Co., the world’s biggest seed producer, said earnings this year will be at the low end of its previously announced forecast because of stronger-than- expected competition in its herbicide business.
  • Ongoing earnings will be about $4.40 a share, the lowest point of its forecasted range of $4.40 to $4.50, St. Louis-based Monsanto said today in a statement. The company was expected to earn $4.59 a share, the average estimate of 12 analysts in a Bloomberg survey.
  • Chief Executive Officer Hugh Grant is facing increased competition from Chinese makers of glyphosate herbicide that is cheaper than the company’s Roundup brand. Monsanto said it will earn $4.5 billion from seeds and genetic licenses, helping to reduce the effect of Roundup profit that will be $400 million less than the company’s $2.4 billion April forecast.
This isn't horrible news, but not great either. Its better to see the lack of profit from increased competition rather than poor demand. Monsanto is still in good shape, and this could be a nice opportunity to enter a position as the shares are off 4% this morning. Agriculture stocks as a whole have been strong lately, and are one of the few sectors that I believe are getting stronger right now.

Disclosure: No Position.

Tuesday, May 26, 2009

Book Review: Invest Like a Dealmaker

Today I'm taking a look at Invest Like a Dealmaker by Christopher Mayer. Christopher writes the Capital & Crisis newsletter, and this book takes a look at his investment methods. After reading this book, I'd summarize it as a how-to guide for the value investor. The author's focus is to teach investors ways to uncover value by various methods (formulas for stock screens, how to follow fund managers, finding undervalued stocks, etc).

The author references many, many investors, and maybe even a few too many. He refers frequently to some well known ones like Seth Klarman, Joel Greenblatt, and Bill Miller. A lot of his theory involves following these gurus, and he explains why. I wouldn't consider this just a recycling of these well-known investors, and their theories; Mayer does add some substance as to why these guys are worth following.

As you'd expect with a value-focused author, he takes a bottom-up approach and cares more about individual companies more than their stock, and looks at value over price. He shares with investors how great companies create wealth and how you can spot them.

I did find a fair amount of useful information in this book, and here are a couple of things in particular:

-Pay more attention to cash flow than earnings. Earnings don't often tell the whole story. A company that consistently produces strong cash flow is more likely to be good for investors.

-Take a look at spin-offs as an investment idea. There are often inherent reasons why these stocks will rise, and he explains why.

Most of the book focuses on areas to find value, and how to evaluate if it is worth investing in. He has a chapter called "Hunting Grounds", which is kind of a microcosm of the entire book.

Overall, I liked this book. It is a quick read, and I picked up some new information that will work its way into how I determine a good investment. It is a book you can re-read and each time pick up new things. Its not for trend followers or traders, but value-oriented investors with a longer time horizon. If that fits your profile, you'd probably find this book to be worthwhile.

Higher Oil Prices Keep Producing Economies Afloat

This is a fairly well-known fact, but the fates of newly emerging economies like Dubai have been closely tied with the price of oil. Although the slowdown in the UAE has been well documented, the projection of higher oil prices does bode well for economies like these. Bloomberg picked up on this theme in an article today:

  • Crude prices that have stabilized above $50 a barrel mean the Middle East’s oil-rich economies are likely to pull out of the global financial crisis sooner than the rest of the world. Saudi Arabia, the largest Arab economy and the world’s biggest oil exporter, is attracting renewed interest from investors including leveraged-buyout firm KKR & Co. Qatar and Abu Dhabi have returned to international capital markets.
  • Stock markets are rallying across the region, led by Saudi Arabia, whose Tadawul All Share Index ended last week up 26 percent for the year to date, after tumbling 56.5 percent in 2008.

“The expected resilience of oil prices puts the Gulf countries in a relatively privileged position compared to Europe and the U.S.,” says Eckart Woertz, an economist at the Gulf Research Center in Dubai. “In 2010, that is likely to lead to some resumption of growth, unlike in developed-market economies.”

The article has plenty more detail, and touches on Dubai's real estate and construction slowdown as well. Strength in these economies will continue to rebound as long as A) there is a demand for oil, and B) Oil prices stay above $60/barrel. Over the next decade, those two are both pretty likely.

Disclosure: Long T Rowe Price Africa and Middle East Fund (TRAMX).

Friday, May 22, 2009

Natural Gas Updates

I had briefly owned some UNG a couple of weeks ago. Missed most of that move, but am not feeling too bad now as its come back below where I originally bought. The supply numbers came in higher than expected, and UNG has sold off pretty hard. I like UNG going forward, but its going to take some time. There is no legit uptick in demand, and no sign of supply easing yet. The rise in price the past couple of weeks appeared to be purely speculation on the part of traders. What are the long-term catalysts for natural gas?

-It's cleaner burning than other fossil fuels. In some circles it gets touted as a "clean fuel", although drilling isn't necessarily good for the environment.

-It's domestic. Although worldwide production is been growing, the U.S. has access to a lot of natural gas, which can help us to lower our dependence on foreign sources of oil. This could literally pump billions of dollars back into the U.S. economy, which no politician will say is a bad thing.

-It can be used for a variety of things. Currently we use it mostly for power generation. But if we decide to use new sources like wind, solar, and geothermal much more for power generation, then natural gas can be used on powering vehicles, which to me is the big wild card in the whole equation.

Boone Pickens has been a big advocate of this. This theme is catching on a bit. Here's a couple of news links of local municipalities using CNG for their vehicles. Here, and Here.

I recently read the latest quarterly report of Clean Energy Fuels Corp. (CLNE), which is involved in the design and building of the infrastructure to make all this go. That is the largest barrier: fueling stations. You can buy a home filling station and buy natural gas direct, but you need to have the infrastructure out there, and without some kind of commitment from the government, you're not going to see a ton of investors bite off the cost for a CNG station. Anyway, in the report it sounded like they were getting some nice contracts (disposal trucks are a big one). If you're interested in a CNG car, Honda is the only manufacturer right now I believe.

It appears the climate/energy bill is rapidly working through Congress, so we should know more soon. The two big things I'm looking for are: 1) Natural Gas; and 2) Geothermal. What is the direction we are taking? I've done a fair amount of research on these two and have identified a few potential investments, and they could get a huge boost if Washington commits to some them in some capacity.

Disclosure: None.

Geothermal Getting Some Press

A piece about geothermal energy made the NY times yesterday, and is an interesting read. It basically says that geothermal is starting to show up on the radar in Washington. This to me will be the most important factor in becoming a major part of our new energy plan. Will Washington step up and come up with a plan that can work? We can sit and debate cap-and-trade all day long, but in the end, there will be little we can do about it. I'd rather make a plan on how to make a profit with the bill that comes through.

  • Efforts by Congress and the Obama administration to fast-track renewables development nationwide has the geothermal industry on the verge of an unprecedented expansion, the groundwork for which is being established by the departments of Energy and Interior.
  • The Energy Department is expected this month to announce its list of geothermal projects that will be helped along with the $400 million from the American Recovery and Reinvestment Act. Meanwhile, the Bureau of Land Management and the Forest Service are working together to streamline permitting for new geothermal projects that could occur on federal lands.
  • "Geothermal energy is, in our opinion, an undervalued option that needs a serious look and could pay off big if there is a long-range, year-to-year commitment to it," said Jefferson Tester, associate director of Cornell University's Center for a Sustainable Future and an expert on geothermal energy.

But, the article contends, it needs to be a multi-year commitment. Remember that with geothermal, like many renewable projects, the costs are often mostly upfront, and if you kill incentives and change legislation before you give it time to work, it will be hard for the projects to succeed.

  • Gawell said his members want more money spent on technology to reach existing underground resources and to locate the best sites for drilling. The Bush administration consistently cut funding for such work, industry observers say.
  • "The stimulus money would be a blessing compared to the zero dollars [the industry] has gotten in the past," Tester said. "But I'm equally as concerned about what happens next. If things go back to where they were before, it's the kiss of death."
  • "I think we have more geothermal projects under development now than at any time in history," said Gawell of the Geothermal Energy Association.

Anyway, take a look at this article. It is a good read and has a lot of info.

Meanwhile, Ormat Technologies (ORA), the geothermal stock I'm watching has come down a bit, but I'd like to get my first batch of shares below 35. We'll see, and I'll update the blog if I buy any shares.

Disclosure: None.

Will Stocks Come "Back to Reality?"

The day before a holiday weekend often sees lighter trading, and you don't want to read too much into any move, but I'm still looking at a few things today. The market has turned lower after futures rallied overnight and into this morning. There is a lot of talk about this rally sputtering out, and some of it is coming from some respected names:

-Yesterday I posted that David Rosenberg thought we will re-test our March lows. Click here to read that post.

-Today I read a brief story from Bloomberg with comments from Michael Steinhardt. Here's what he had to say:

Michael Steinhardt, whose hedge funds returned more than 20 percent a year
for almost three decades, said the steepest U.S. stock market rally since the
1930s will probably end.

“The economy is still a scary place,” Steinhardt said in a Bloomberg
Television interview. “My net feeling is that this rally doesn’t have all that
much more to go and the dangers out there remain consequential.”

“Can the stock market do well in a muddling period in the economy, where at
best it grows at a percent or two for a period of time? Maybe,” Steinhardt, 68,
said. “But it’s not a period where you see an effusive stock market.”

This goes back to the theory that this rally may sputter out due to lack of catalysts. What is going to move stocks higher? Most bulls say there is lots of cash on the sidelines waiting to buy the dips. That could be true to some extent, but in this crisis, people, as well as corporations are de-leveraging major amounts. More than usual in this type of cycle. I also have seen that some fund managers haven't performed well in this rally, which means they were still short, or at least weren't adding much to the long side. Will they jump in at lower prices now? Maybe.

This, along with the inflation vs deflation-should you buy gold debate, are the major talking points now. We know the big banks will survive, no matter how cloudy their outlooks may be. The government is content with flooding the market with new money from every which way. But how will this effect the market in the next couple of months?

The battle continues.

Thursday, May 21, 2009

Will We Re-Test March Lows?

This debate has been gaining some traction. First, we have to take a look at where we're at. The S&P recent highs are around 930. Last week I expected to test a support level of around 875. I believe we got to around 880. I continue to believe we will have to move lower before we can make a longer-term move through 930 and beyond. But to re-test March lows of 666, we have to think about what conditions were then:

-Large-scale financial failure was still on the board. In my opinion, those fears have eased.

-Sentiment was very negative. The fact that stocks have now rallied this far will likely bring out more people willing to buy on the dips.

And now:

-Some economic indicators have slowed or stopped in their decline. This isn't a strong case for me, as employment is still weak, and the consumer is still in trouble.

My take: I think we should look at 875 first. If we break through that, we could continue further on the downside. Stocks don't have many catalysts like they had over the past couple of weeks (earnings, stress test results). This could lead to a "back-to-reality" sentiment in the market, which would put more downside pressure on stocks.

Here's an interesting video with David Rosenberg via Bloomberg on this debate.

I did say a couple of days ago that I'm more bullish than I was, and that is true. I will look to buy more stocks if I get a chance at better prices. But I need to see more on the positive side economy-wise before I can say we're in for a sustainable move higher. Any opinions out there?

Rails Good Indicator of Economic Reality

I've been studying various railroads lately, with the idea of picking up some shares on recent and possibly further weakness in the economy. Rails provide us one of the clearest pictures into the health of our broad economy. They haul food, building materials, metals, chemicals, autos, and energy products. The short answer to this is that railroad volumes are continuing to drop across all metrics. No sign of a bottom yet. As someone looking to buy some stock, that's a good thing; better deals are coming. As someone trying to figure out of the economy has recovered, its not so good.

This page shows some excellent data (railfax report).

After looking at this data, I'm continuing to see Burlington Northern (BNI) as the strongest among the US majors. They actually have gained a little market share during this, and they have the least amount of exposure to autos, which have basically be cut in half. Quite frankly, autos will still be a huge question mark: what will happen with GM?

If you're looking to buy BNI, also be aware that Warren Buffett has a huge position in it. This can be good and bad. Good in that you have proof its a good company; bad in that the stock will carry a couple % points "Buffett Premium". Still I wouldn't let that prevent you from buying.

Also, you can find a nice post on rails at The Pragmatic Capitalist.

Keep in mind, this won't be a "fast money" trade. Rails won't be bought up by speculators on hopes of "green shoots." They will need some recovery in the economy first, which could be a little while off. But when the economy returns, rails will have a lot of advantages like efficiency and some insulation to higher energy prices. You can be patient here, and wait for a better price. I'll post when I buy some shares.

Disclosure: None.

Tuesday, May 19, 2009

Update on Railroads

A couple of days ago, I said I was looking at purchasing some railroad shares. They are a longer term play on the broader economy, and there are a couple of big factors I like in the industry. Those are efficiency, lower fuel costs than trucking, access to moving commodities, which I think will be coming back strong. You can see more of that analysis here.

My update is that I did some more research, and I'd like to adjust what I'm looking to buy a bit. Norfolk Southern, which I mentioned before, is a good company with strong margins. But they have too much exposure to automobiles for me. I'm looking at some of the west coast names a little harder, and those are Burlington Northern Santa Fe (BNI) and Union Pacific (UNP). They both have exposure to the agriculture and coal industries, and are better positioned to ship goods en route to Asia, where a lot of demand comes from.

I'll have more info on this forthcoming, but for now take a look at a great presentation on data on BNI. (pdf file).

Disclosure: No Positions.

Energy Independence Helpful in Building Sustainable Economies

I was searching for more information on Ormat Technologies (ORA), the geothermal stock I'm looking to buy, and came across this article from Green Chip Stocks, via Reuters. It talks about Indonesia, and their past reliance on oil (they are the only member of OPEC in Southeast Asia). But recently, they have been expanding their horizons and are moving into geothermal energy:

With its population spread out over more than 17,000 islands, many Indonesians live in cities, yet some are in areas so remote that electricity access is almost zero.

Indonesia is also the only OPEC member in Southeast Asia, but in recent years it's actually become a net importer of oil. (Production is down from aging oil fields, consumption is up, and the government in Jakarta feels the fire of an energy crisis bubbling beneath the surface.)

But trouble isn't the only thing simmering under this archipelago nation. That's because geothermal energy is about to break out from an underexploited state to become a primary resource for Indonesia's energy needs.

Indonesia's largest listed oil and gas company, PT Medco, is about to break ground on a 330 MW geothermal plant in Northern Sumatra. That project will cost about $800 million to be split with Ormat Technologies (NYSE:ORA) and Japan's Itochu. For Ormat, geothermal is a normal day's work. For Medco, this marks a major reality check for its regional energy ambitions.

For Ormat, its nice to see them ink a project in an area like this. But the main point is that I believe we're going to see countries like Indonesia realize that they can help build sustainable economies by becoming energy independent. The geopolitics of oil have changed the economics of oil for everyone. The major consumers (US, China, etc) are trying to gain possession on these resources to feed their demand. But other countries end up paying higher prices for oil because of lack of access and production. Taking steps like this are allowing countries to stay out of that battle. Its no surprise that leaders in alternative energies aren't who you'd think they'd be (Solar-Germany; Wind-Denmark, Spain). Hopefully, the U.S. and China will become the major drivers in the next push in this industry. Until then, watch for more projects like the one in Indonesia.

Disclosure: None.

Monday, May 18, 2009

Monday Update/Trade

The market is strong today following the election news out of India. Here's a nice analysis of what's going on over there via Bloomberg.

This is important as India is one of the key drivers of global economic growth. They, along with China, are the rising stars of that region.

If you've been reading my posts lately, you can see that I'm growing more bullish, and have been buying some stocks. I don't know if this current rally will hold, but I'm looking more on a stock by stock basis, and am seeing some value out there. I'm not touching bank stocks, as I still feel the fundamental are impaired. I expect to be writing more posts like those earlier today describing the bull case for a few stocks.

I sold out of my DXO (double-long oil) position. I purchased it at the end of last week, and didn't expect it to sell it so quickly, but it moved up strongly today. I'm a medium to long term bull on oil, but wouldn't be surprised to see prices come back a bit. It was about a 7% gainer for me. Thanks to Todd Sullivan at Value Plays for that one.

Disclosure: No Positions.

I'm Bullish on MEMC

I've been looking at taking a position in MEMC Materials (WFR). They sell silicon wafers for two segments: electronics, and the solar industry. They have been hit hard with a drop in demand, but the company is in good financial shape with plenty of cash, and will benefit when demand resurfaces.

Here's the highlights from Q1:

  • The St. Peters, Mo.-based company, which sells products to the semiconductor and solar industries, said late Thursday it earned $2 million, or a penny per share, compared with a loss of $41.8 million, or 18 cents, in the same period a year earlier.
  • Excluding nonrecurring items the company posted an operating loss of $26.4 million. Revenue fell by 57 percent in the quarter to $214 million.
  • Jefferies & Co. analyst Paul Clegg recommended the company's stock, rating it "Buy" and raising his 2009 profit estimate to 62 cents from 56 cents. "With virtually no debt and solid liquidity, we see MEMC as a clear survivor and eventual beneficiary of a market recovery," Clegg said.

David Einhorn of Greenlight Capital took a large position in MEMC earlier this year. He's someone who's opinion I value.

I also saw a bullish note on semi's in today's Tech Trader via Barrons. MEMC recieved and upgrade today as well.

I don't see a lot of downside risk at current levels, and the upside is sizeable.

No Current Position.

Prospects Strong for Norfolk Southern

I'm starting to look at picking up some deals in stocks that will perform well when the economy picks up again. One of those is Norfolk Southern (NSC). Railroads were hot over the past five years, largely due to soaring energy prices. When Warren Buffett started investing in railroads, its seemed everyone was jumping on the bandwagon. I've done some research on a few of the majors, and I like Norfolk Southern the best. They all will be in pretty good shape when the economy rebounds, and the thesis is mostly the same for each. I did some work on NSC a couple of weeks ago when I did a piece for Fund my Mutual Fund. You can read that here.

I wanted to pass along a nice quote from their CEO at the annual meeting that sums up why to invest in railroads:

"Rail's future and our potential to help solve our nation's transportation crisis are as promising today as they have ever been," (CEO) Moorman said.

"The fundamentals of our business are very strong," he said. "The factors that drove our growth over the past five years -- higher fuel efficiency in a world with rising energy costs along with ever-increasing highway congestion -- are still there, along with our superior performance in terms of emissions and sustainability."

He outlined a couple of the main areas of strength for railroads, and I do agree with him. Who doesn't believe we're going to see high energy prices again? Its almost a guarantee. This is a major, major thing.

You can buy NSC for 1.33x book value and 9.5x forward earnings, which isn't bad. This is the type of stock you can likely wait for, and pick up when it pulls back. I don't think its going to run away from us.

Now, to be fair, railroads are one of the purest plays on the broad economy, which is still weak. They rely on high levels of output and goods moving from place to place. No question that is down right now. But that is why the stock is attractive. If you're willing to hold the stock for a while, I think railroads could really pay off, and especially Norfolk Southern.

No Current Positions.

Saturday, May 16, 2009

Soros Cuts Petrobras, Picks up Retail and Nuclear

The fund filings are out. If you're wondering, these are the funds I like to track, and sometimes follow by buying the same stocks:

-George Soros (Soros Fund Management)
-Seth Klarman (Baupost Group)
-John Paulson (Paulson & CO.)
-Warren Buffett (Berkshire Hathaway)
-David Einhorn (Greenlight Capital)
-Bill Ackman (Pershing Square Capital Management)
-Steve Cohen (SAC Capital Advisors)

Today, I'm going to take a quick look at Soros' holdings.

Soros Fund Management LLC, the investor’s hedge-fund firm, sold 5 million U.S. shares of Petrobras, as the Brazilian company is known, according to a filing today with the U.S. Securities and Exchange Commission. The New York-based firm’s remaining 32 million shares of the state-controlled oil company were valued at $963 million at the end of the quarter.

The hedge fund also held 5.6 million shares of Saskatoon, Saskatchewan-based Potash at the end of the quarter, compared with 5.9 million shares as of Dec. 31.

Soros bought 9.28 million shares of Macy’s Inc., the second-biggest U.S. department-store chain, bringing its holding to 9.85 million shares. The firm added 4.26 million shares of Lowe’s Cos., the second-largest home-improvement retailer, bringing its investment to 5.36 million shares.

Soros also added 1.35 million shares of Wal-Mart Stores Inc., the world’s largest retailer, lifting his stake to 1.82 million shares of the Bentonville, Arkansas-based firm.

Soros also bought 968,000 shares of Entergy Corp., the second-largest U.S. operator of nuclear power plants, and 3.59 million shares of Houston-based Plains Exploration & Production Co. in the first quarter. Soros sold off its stake in Schlumberger Ltd., the world’s largest oilfield-services provider, and U.S. coal producer Consol Energy Inc.

My take on his holdings/moves:

I was surprised he owned that much Petrobras to begin with. The long-term outlook is great for them, but they need oil prices to be higher to be very profitable (much of their reserves are deep offshore and will require high costs to extract). Overall, a stock I like though.

I'm not surprised he bought retail. With the consumer in trouble, these many of these stocks were flat out cheap (especially in early March, when he was probably buying).

I'm most intrigued with him picking up a stake in Entergy (ETR). They are the second largest producer of Nuclear power in the U.S. They just reported an okay quarter. The numbers were down, but they reaffirmed '09 guidance. They don't serve a lot of industrial clients which has helped them from being hit too hard by the recession. I do like the idea of buying into nuclear a bit. There is a lot of pressure coming down soon on carbon-burning plants with the talk of cap-and-trade, or something like it coming. Nuclear might benefit, even if it just means people moving their money out of the other stocks and into these.

I like their chart too. I'm not a professional with technical analysis, but one of the indicators I watch fairly close are the moving averages and volume. The 20 day EMA just crossed over the 50 day EMA and was supported by strong volume. This is typically a bullish sign. This was largely due to the pop after earnings, so I don't want to read too far into it, but it could be a positive. I'm going to watch this stock, and might be interested in taking a position.

Disclosure: None

Friday, May 15, 2009

A Couple End of the Week Purchases

It was nice to see the market pull back a bit this week. I was thinking we were going to see S&P 875, and we got close. We'll see what next week brings. I did make a couple of small purchases to take advantage of weakness in case we rally out of the gate next week.

I picked up some News Corp. (NWSA). They just reported a great quarter, and are killing it in many of their companies. I'll talk more about it later, but you're in good company if you own this one. Its one of Seth Klarman's largest holdings. I picked up some great info on this from Todd Sullivan.

I also purchased a small amount of the double long oil fund (DXO). Oil pulled back 3% today, and I do feel we're going to be moving higher more sooner than later.

That's it for now. Have a great weekend. I'll follow up with more details on these purchases soon.

Disclosure: Long NWSA and DXO.

Obama Laying the Groundwork For a Tax Hike?

We've been seeing massive amounts of money committed by the federal government since President Obama took office in January. The budget is exploding, we've got a huge stimulus package to pay for, and Social Security and Medicare are going bankrupt. I also see a couple more possibilities:

-A major health care plan. We've already heard that it could be coming this year even. Where are we going to get the money to pay for it?

-Another stimulus package. I would not be surprised if this happens as the idea has already been floated.

-Bailouts for state governments. California is in the worst shape, but many others are not far behind.

-Bailouts for commercial real estate loans and the next round of foreclosures. There is a massive amount of rate resets coming in 2010 and 2011. See the chart for more details.

So, Obama finally spoke about the economic realities we have to face yesterday.

President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

Earlier this week, the Obama administration revised its own budget estimates and raised the projected deficit for this year to a record $1.84 trillion, up 5 percent from the February estimate. The revision for the 2010 fiscal year estimated the deficit at $1.26 trillion, up 7.4 percent from the February figure. The White House Office of Management and Budget also projected next year’s budget will end up at $3.59 trillion, compared with the $3.55 trillion it estimated previously.

He said it himself. We can't keep borrowing. But, he wants to keep spending, and increasing the rate of that spending. The money has to come from somewhere. There is no where else but through increasing taxes. It is coming.

Wednesday, May 13, 2009

Healthy Pullback

Its nice to see stocks pull back a bit. I was originally targeting 875 on the S&P as a number where I thought we'd pull back to, and I'll stick with that for now. If we reach it quite quickly, I might re-adjust that.

Set up a nice trade on SDS yesterday, but was shaken out when I set my stop just a bit too tight. It gets a little frustrating when you get the move right, but don't execute properly.

I'm going to be taking a look at adding a few long positions in the next couple of days...

-Natural Gas (UNG) is finally pulling back, and I may re-establish a position in that.

-I also like Diamond Offshore (DO), which would be longer-term hold.

-I'm also following General Growth Properties (GGWPQ). It went into bankruptcy in April and now trades on the Pink Sheets. It isn't your typical bankruptcy as the company is operating well, but the freeze in the credit markets prompted the filing. Take a look at Todd Sullivan's commentary regarding this, he is all over this one.

Disclosure: None

Tuesday, May 12, 2009

More Deals Likely in Oil Sector...But Not Quite Yet

Interesting take today via Bloomberg. Naturally with commodity prices depressed (although not as much as they were a month ago), we'd expect consolidation among the industry. Cash-rich companies are naturally going to buy up smaller names in order to grow. This may still be coming as these companies have recently been worrying about price hedges, but that will change:

Quantum Energy Partners, the Houston private-equity firm that put together a $3.5 billion bankroll to go bargain-hunting for acquisitions after oil and natural-gas prices plunged, is waiting for a better time to pounce. Buyers will accelerate acquisitions late this year and in early 2010 as the hedging contracts that shielded potential takeover targets from tumbling prices expire, said Wil VanLoh, Quantum’s chief executive officer.

“By the first quarter of next year, we’ll be pretty darn active,” VanLoh said in an interview at his downtown office. “Many companies are very well hedged for 2009, so the squeeze hasn’t happened yet. The point of capitulation probably will arrive in the fourth quarter or the first quarter of 2010.”

The record drop in crude prices from 2008’s all-time high hasn’t triggered a surge in takeovers because would-be sellers are demanding mid-2008 valuations, said Michael Bodino, director of research at Sanders Morris Harris Inc. in Dallas. That will change, Bodino and VanLoh said, as hedging contracts drop off, forcing the weakest producers to sell or face bankruptcy.

  • The number of oil and gas deals last month fell 35 percent from a year earlier, and the value of transactions dropped 60 percent to $5 billion, according to data compiled by Bloomberg. UTS Energy Corp. of Calgary repulsed a third and final takeover bid of C$830 million ($680 million) by Total SA last month, saying the company is worth more.

Take a look at Canadian oil producers. Many are extracting oil from the oil sands, which is lengthy and expensive process. If oil prices stay depressed, some companies won't be able to continue to produce. This is the same thesis for natural gas, and many other commodities. There will be consolidation and lowering of output in the short term. In the intermediate term, this will help put upside pressure on prices.

  • In the Canadian province of Alberta, home to an oil industry that five years ago surpassed Saudi Arabia as the biggest crude exporter to the U.S., cratering stock values and lower energy prices have prompted the C$70 billion ($61 billion) Alberta Investment Management Corp. to step up the search for investment opportunities.
  • “With commodity prices where they are now, Alberta is looking like it’s going to present a lot of opportunities for us,” Chief Operating Officer Jagdeep Singh Bachher said in a telephone interview.
  • Edmonton-based AIMCO, as the Crown corporation is known, agreed last month to acquire a 20 percent stake in Calgary-based Precision Drilling Trust, Canada’s largest oil driller. AIMCO’s next move will be to sift through the market wreckage and find companies with assets and management teams most likely to excel even if energy prices remain depressed, said Brian Gibson, senior vice president for public equities at AIMCO.
We already saw the Suncor-Petro Canada merger in this sector. I'd expect others, especially if commodity prices stay at these levels or lower.

No Positions.

Earnings/Follow Up Commentary

I wanted to follow up on the earnings results and subsequent market reaction of a couple of names I was watching.

First, Advanced Battery Technologies (ABAT). I've never held any positions in this, and it caught my eye purely because of last weeks 1 million share buy by their CEO, just before earnings. The market was thinking the same thing I was apparently. The stock shot up to end the week, and after the results, it sold off. The earnings were fine, but no blowout like many thought possible. I do like their product (lithium ion battery sales-mostly in China), and their balance sheet (solid amount of cash for a company of its size). On the technical side, there is little support near current levels, and the stock could fall a bit more. I may look at buying it if it gets back to the 2.50-3.00 range.

Also, there was Granite City Food and Brewery (GCFB). We had the big run-up last week (stock gained 213% in one day). Earnings were not very good, as expected. They were able to increase margins due to cost cutting, but not at the levels as some of their peers. This stock will likely continue to drop as the rise was mostly earnings-related speculation.

Ormat Technologies (ORA) is taking a break after yesterday's nice run. Their results were solid and outlook fairly strong. I continue to like the Geothermal industry and feel its been overlooked. I'd probably buy this stock if I could get it in the low to mid 30's. Definitely one I'd pick up if the market as a whole moves lower.

Thats it on individual stocks. The markets continue to pause as we've been basically running out of news. I'm in the camp that would like to see a pullback here to even things out. Its still anybody's guess though as the behavior of the market in regard to bank stocks is still driving the action. Its a very difficult thing to predict right now. I have some short exposure through symbol SDS, which I would add to if any downward trend emerges.

If you've got a minute, take a look at this video I found today. Its astonishing.

Disclosure: Long SDS.

Monday, May 11, 2009

Thoughts on Expected Value

I wanted to pass along a little info that got me thinking. I've been reading More Than You Know by Michael Mauboussin. He talks about process vs. outcome and expected value. Here are a couple of good quotes:

"But investors often make the critical mistake of assuming that good outcomes are the result of a good process and that bad outcomes imply a bad process. In contrast, the best long-term performers in any probabilistic field-such as investing, sports-team management, and pari-mutuel betting- all emphasize process over outcome."

The idea here is that a sound process, implemented over time, will likely lead to strong results. There may be times when the results are skewed, but they usually catch up. Take a look at a casino for example. Sure there are times when gamblers make lots of money, but in the long term, the house wins. This is due to their "process" or the odds being in their favor.

Now look at what he has to say about expected value:

"The goal of an investment process is unambiguous: to identify gaps between a company's stock price and its expected value. Expected value, in turn, is the weighted-average value for a distribution of possible outcomes. You calculate it by multiplying the payoff (i.e., stock price) for a given outcome by the probability that the outcome materializes."

He quotes former Treasury Secretary Robert Rubin for an example:

"A focus on probability is sound when outcomes are symmetrical, but completely inappropriate when payoffs are skewed. Consider that roughly 90 percent of option positions lose money. Does that mean that owning options is a bad idea? The answer lies in how much money you make on the 10 percent of options positions that are profitable. If you buy ten options each for $1, and 9 of them expire worthless but the tenth rises to $25, you'd have an awful frequency of success buy a tidy profit."

" So some high-probability propositions are unattractive, and some low-probability propositions are very attractive on an expected-value basis. Say there's a 75 percent probability that a stock priced for perfection makes its earnings number and, hence, rises, 1 percent, but there's a 25 percent likelihood that the company misses its forecast and plummets 10 percent. That stock offers a great probability but a negative expected value."

This is the type of thing when I look at where I want to invest, and if I want to buy a particular stock. Now take Ormat Technologies, for example. I've been following the stock for awhile. To me, it was priced nearly to perfection, and they were to report earnings during a pretty shaky time period in the economy. Expectations were fairly high, and they did deliver. Now the stock has responded, and those are gains that I missed by not being in the stock. But to me, the risk of an earnings miss (the stock would have dropped a lot likely) outweighed this gain to me. Maybe to you it is different. I'm trying to show examples of my reasoning, and where I find these ideas.

Its a great book by the way, and I'd recommend it.

Strong Earnings From Ormat Technologies

Well, the earnings for Ormat Technologies (ORA) are now out. A solid beat at 0.32 v 0.25 expected. The stock is shooting higher in the pre-market. Here are a couple of highlights:

  • For the three month period ended March 31, 2009, total revenues were $99.9 million, an increase of 44.0% from $69.4 million in the first quarter of 2008, consisting of a $3.1 million increase in revenues from the Electricity Segment, and a $27.4 million increase in revenues from the Products Segment.
  • For the quarter, the Company reported net income of $14.5 million or $0.32 per share (basic and diluted), as compared to net income of $10.0 million, or $0.24 per share (basic and diluted), for the same period a year ago. The increase in net income is primarily attributable to an increase in sales within the Products Segment primarily derived from EPC contracts for the construction of two large geothermal projects and additional energy generated year-over-year in our Electricity Segment.
  • Commenting on the quarter's results, Dita Bronicki, Chief Executive Officer of Ormat, stated: "Growth continued during the quarter with improvements in both our revenues and net income. Revenue from our Products Segment accounted for a significant portion of this quarter's growth. Revenues from our Products Segment are expected to continue to grow throughout the year with an expected increase of 20% to 30% compared to last year. An increase in generation in our Electricity Segment compared to last year also contributed to our record results but its impact was not fully reflected, primarily because of lower energy rates at our Puna facility, the only facility which is sensitive to oil prices. While North Brawley has not yet reached commercial operation, the 35 MW expansion of our Olkaria III power plant in Kenya, is operating as planned.
  • Commenting on the outlook for 2009, Ms. Bronicki said, "With regard to our Electricity Segment, due to the delays in the commercial operation of North Brawley we expect electricity revenues for 2009 to be between $265 million and $275 million. We also expect additional revenues of approximately $9 million from our share of electricity revenues generated by the Mammoth complex, the investment in which is accounted for under the equity method. With respect to our Products Segment, we currently expect that our 2009 revenue will be between $110 million and $120 million."

A good sign on these results. The stock has been priced to perfection, and will be even more so now. I do like this company a lot if you're looking for a geothermal play, but a good example that you have to pay up for quality. I'd also like to see the conference call to determine their outlook industry-wise, and see if they're hearing anything coming soon in terms of regulations/incentives etc. But as of now this looks good.

No Position.

Earnings/Monday Ideas

A couple of earnings releases I'm watching today:

-Ormat Technologies (ORA) reports this morning. I haven't seen anything out yet, but I'll do a post once I see those results. I'm looking to Ormat for an outlook on the geothermal industry, as they are a major player there.

-Advanced Battery Technologies (ABAT) reports after the close. This is a stock that I haven't followed, and quite frankly haven't done a ton of research on. I was intrigued by their CEO buying 1 million shares last week and the stock ramped up going into this release. Be careful here, as their is a lot of risk trying to play earnings, but I'll definitely be interested to see their results.

-Granite City Food and Brewery (GCFB) announces after the bell. This is a stock I've watched for some time. It was dead for quite awhile, but some some major buying last week. I'm interested to see if they too have done better than expectations like its peers.

On other fronts, excellent video/analysis by Brian Shannon out last night. This guy is an awesome technician. He has one of the two subscription blogs on The video is free and there are some great long and short ideas. Its worth your time to take a look.

Futures appear to be broadly lower this morning. More info is coming out on the stress tests, and its all a little fuzzy. Fairly quiet news day overall.

No positions in stocks mentioned.

Saturday, May 9, 2009

Big Time Insider Buy on This Stock

As I've said over the past couple of weeks, I like to track the trends of insider buys/sells. The trend has been that the insiders have been selling at a higher than average margin. There are a few opinions as to why this is happening, and they are likely one of the following:

1) They have been waiting to sell shares but didn't want to sell at previous depressed levels

2) They don't have a ton of confidence in this recent rally and want to get out of their shares

3) They anticipate higher tax rates on the horizon (Got this from Todd Sullivan at Value Plays).

When I read, I take a look at the insider buying and selling. Today I saw a pretty good sized buy that caught my eye.

Advanced Battery Technologies (ABAT) CEO Zhiguo Fu bought 1,000,000 shares this week at $2.65/share. Advanced Battery is announcing quarterly earnings after the market close on Monday. That's quite interesting. Investors also found it interesting this week as the stock rallied up to $3.73 on Friday.

To me this is a sign they might surprise to the upside on Monday. It could mean nothing at all, but a buy that large that close to earnings seems like a sign. If he was trying to cushion the blow of bad earnings and present a positive image, he'd be buying after a negative report came out. But he's buying pre-earnings. I'm going to watch this stock closely on Monday. Typically I lighten up on a stock pre-earnings due to the risk involved, but this may be one of those times you could look to take a chance.

The overall insider buying/selling has returned to a high bearish ratio. Lots more selling this week.

No Position in Stock Mentioned.

Friday, May 8, 2009

All Good Today

The market shrugged off yesterday's losses and is strongly higher again. Unemployment numbers came in better than expected, so the market obviously liked that. We also saw numbers from the past couple months revised lower, but that doesn't matter anymore. The trend is showing signs that we saw the worst of unemployment in January. If this trend holds, and its looking like it will, that is a major positive for the market and broad economy.

There are still plenty of issues regarding the banks, but the market is content to overlook them for now. The larger question now is what type of recovery will we see? V-Shaped? L-Shaped? This is going to be the next debate.

Most traders I've been reading would be a little more comfortable if we have a slight pullback. Its going to happen at some point, but for now, the trend is higher.

I haven't been able to post much in the past day or two. I just opened an account with Think or Swim, and I've been spending time with that. I've heard a lot of great things about them, so I'll give them a try. They have a really expansive platform and its taking a little getting used to, but looks very nice. If anyone has experience with them and wants to share it, I'd appreciate it. Or if you have questions, feel free to ask me and I'll do the best I can.

Thursday, May 7, 2009

An Overdue Pullback

Stocks finally taking a break today on little news. It seems it was a lot of profit taking and traders getting a little nervous as many stocks have outrun their support levels. Interesting seeing the DOW down 100 points today. Just a few short weeks ago, this seemed to happen almost every day. Now it seems like a HUGE event. Funny how a few weeks can change the sentiment in the market.

Clearly the consensus is that we've seen the bottom. I can't argue with it based on how the market is reacting to economic data and/or news. We've seen too much evidence that the market won't mark down these banks much more. The government has determined their comfort level with these institutions via their stress test. They are way too far down this path to let any of these institutions to fail, so that risk is basically off the board. That in itself helps to put some sort of a floor under this market, how much, I can't say. But some.

I'm more bullish than I was a couple of weeks ago, but its hard to overpay for stocks without any quality fundamentals. That's why any pullbacks should be helpful to at least put things in perspective.

I'm still a believer in commodities and related stocks. Natural Gas has been the strongest in the past couple of days, and I'll continue to monitor that. I do see Crude Oil rising higher as long as the market holds up.

Traders Sounding Caution

The traders that I follow have been signaling that on a technical basis, we're a bit overbought. I know that many people think we're WAY overbought, but that is a different story. A lot of people have missed a good chunk of this move by being too bearish (I confess that I'm one of them). This market has further cemented my belief that the market can be irrational for long stretches. Its much easier to go with the flow than go against it.

Brian Shannon is a wonderful technician that I'm sure many of you are familiar with. I just wanted to pass along a great video that he put out last night. It basically takes a look at where we are on the technical side, which is about the only useful analysis right now.

It is definitely worth watching. Click here for video.

Tuesday, May 5, 2009

Is the Market Taking Obama's Tax Increase Seriously?

This story hasn't caught a lot of media attention, and its surely hasn't caught the market's attention, and I have been wondering why. The story I'm talking about is President Obama's plan to close corporate tax loopholes for corporations doing business overseas. It is facing strong opposition from memebers of his own party. A couple of quick highlights:

  • President Barack Obama’s plan to end tax breaks for U.S.-based multinational companies drew a skeptical response from fellow Democrats on Capitol Hill, indicating that his proposal may face obstacles in Congress.
  • Senate Finance Committee Chairman Max Baucus, a Montana Democrat, called for “further study” of Obama’s proposals within minutes of the president’s announcement yesterday. Joseph Crowley, a Democrat on the tax-writing House Ways and Means Committee, said he doesn’t want any tax changes to “harm” Citigroup, his New York district’s largest private-sector employer.
  • Obama proposed outlawing three offshore tax-saving strategies commonly used by companies such as Citigroup, General Electric Co., and Procter & Gamble Co. In doing so, he reignited debate about whether U.S. companies can remain competitive in world markets if they have to pay billions of dollars in taxes on foreign profits.
  • The proposal, combined with a $60.1 billion plan to limit many expense deductions for American companies that take advantage of laws allowing them to defer tax on foreign profits and a $43 billion crackdown on abusive foreign tax credits would be the biggest tax increase on U.S. corporations since 1986.

My take on this:

This is clearly something President Obama is fired up about. We all knew he was going to have to raise taxes somehow, somewhere, and this is something he was counting on. The problem is, I don't think his fellow Democrats will let him do it, not to mention the Republicans. Its an unfortunate situation because most members of congress are so tied to large corporations that they don't want to touch this kind of bill. I was amused how Rep. Crowley doesn't wan't any tax changes to "harm" Citigroup. Yes, that Citigroup!

I've spent a couple of days trying to figure out why the market hasn't responded negatively to this. I mean, it could be a major factor for some of these big companies. My theory as of right now would be twofold:

1) The market is shrugging off most bad news as it continues to rally, and

2) The market doesn't think this will pass. That is probably the simplest theory.

And one more quote just for laughs:

"Natalie Ravitz, a spokeswoman for Senator Barbara Boxer, a California Democrat, said that any tax overhaul should not lead to “unintended consequences.'"

Washington is the land of unitended consquences.

Book Review: The Gone Fishin' Portfolio by Alexander Green

Today's book review is The Gone Fishin' Portfolio by Alexander Green. Mr. Green is the investment Director of The Oxford Club, as well as Chairman of Investment U.

The Gone Fishin' Portfolio is a clear and concise read. It is written for the individual investor who has limited to moderate financial knowledge. And lets face it, this is a huge audience. He says it best in the introduction, "No one cares more about your money than you do." Its a simple sentence, but its so true.

The book is broken down into three parts: 1) Get Wise; 2) Get Wealthy; and 3) Get On With Your Life.

It starts with why you should handle your own investments. It takes a simple look at items like compound interest and the power of investing over time. When looking for investment advice, he recommends Peter Lynch, John Templeton, and Warren Buffett. This outlines the idea that you can handle your own investments, and that you should.

Green, like many others, is a believer in the long-term value of common stocks. Throughout history, they have been the strongest investment for not only outpacing inflation, but providing real capital gains to investors. To help show the long-term value of stocks, he quotes Jeremy Siegel's Stocks for the Long Run, and says: "What he [Siegel] discovered is dramatic: $1 invested in gold in 1802 was worth $32.84 at the end of 2006. The same dollar invested in T-bills would have grown to $5,061. $1 invested in bonds would be worth $18,235. And $1 invested in common stocks with dividends reinvested--drum roll, please--is worth $12.7 million."

After showing of the long-term value of stocks, he puts forth ways to invest in them. Mutual funds are the most common way, and can have great success. But many funds are taking away from performance by charging too much in fees. This is why he recommends index funds, and specifically Vanguard, which is the industry standard for low-cost funds. He introduces the history of Vanguard, and the basis for its lowest-in-the-industry fee structure.

The plan itself is a fairly basic mix of diversified holdings. You buy a combination of the funds mentioned, and that will vary based on your age and risk tolerance. Once a year, you should re-balance your portfolio to meet your percentages in each fund.

Sounds simple? It should. This is about taking control of your own finances, but not letting it take control of your life. This theme should connect with a lot of middle class investors that have become disillusioned by what has happened on Wall Street in the past year.

His advice is straightforward. Trust this proven plan, and give it time to work. There are times when market hysteria tempts investors to chase speculative stocks, and there are times when fear tempts investors to sell out. Both of these emotions should be avoided. Having a plan will allow you to avoid these temptations.

In my opinion, this book accomplishes a lot. Almost anyone can read and understand it, and use it. It doesn't outline risky formulas or plans that need to be monitored daily. It allows investors to avoid unnecessary risks like trying to time the market or the risk of holding individual stocks. It is a simple program for people who don't want to hand their money over to an expensive broker, but still want an effective investment process. Although "buy and hold" and indexing has taken a lot of heat with the market underperforming over the past decade, I think Green still makes a legit case for this investment plan.

Granite City Up 213% Monday

A old holding of mine, Granite City Food and Brewery (GCFB) exploded 213% yesterday. This is a casual to upscale regional chain in the Midwest. I owned it a couple of years ago as their expansions seemed to be on track. To make a long story short, they got saddled with debt, kept opening new locations and can't seem to get profitable.

Chain restaurants have been posting better than expected earnings and Granite City could follow that trend. They are cutting costs and benefiting from lower commodity costs as well. I did some analysis on this last week if you care to see more detail.

Not So Fast, PF Chang's?
America's Hottest Sector: Casual Dining Restaurants. (via Fund my Mutual Fund).

About a week ago, I checked back in to find the stock at 0.18/share. I considered buying some shares with the mindset of "I could lose every penny, but there is also big upside." Needless to say, I got a bit sidetracked and didn't buy. The stock went up 213% yesterday. No news I could find. Likely just a buyer or two that bought quickly. The shorts started covering, and the stock jumped quickly. This can happen on a thinly traded cheap stock. Anyways, I'm not sure that I'll buy any shares, but I'll continue to keep an eye on them. Check out this chart.

No Positions.

More Overbought Indicators

Over the past week I have focused on increased levels of insider selling, and how this could be a signal the market is overbought. You can view those posts here:

Restaurant Insiders Selling More Stock.
Insider Selling Quite Strong.

This morning I saw some data regarding the number of stocks above their 40-day moving average. These figures are hitting historical highs. Take a look at this link for the analysis.

I understand its also important not to get too bearish, as the market can remain irrational for a lot longer than most expect. But its also important to keep an eye open on what's out there.

Monday, May 4, 2009

Monday Update

Just wanted to pause and take a look at a few of the stocks I've been discussing, and see what they're doing:

  • Commodities are running today. Natural Gas (UNG) has bounced off what appears to be a low just under 13. Crude and related stocks have been stronger. I've been wanting to buying Diamond Offshore (DO) for a couple of weeks, but its just been running away from me. I'll be a buyer when it pulls back.
  • On the Geothermal front, Ormat (ORA) is continuing its climb. Again, I'd wait until their earnings announcement on May 11 before I do anything there.
  • In the broad market, this has been feeling a little like a trap. I understand why stocks have been rallying, but fail to see the reasoning for a new bull market emerging. So as of now, I'm cautiously optimistic. If employment numbers improve, I'll be getting more bullish.
Disclosure: No current positions in these names, but have had in the past week, and likely will again.

"Great Recession" Will Redefine Full Employment

Interesting piece out on Bloomberg today on this topic. Basically even after we reach recovery, and have "full employment" again, the landscape will likely be much different. This recession has brought about a paradigm shift in the economy. Sectors like financial services will likely be redefined as new laws and regulations are passed and thus, the financial business model is likely to change. You also have industries like automakers and newspapers facing major changes, those of them that survive, that is.

  • Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump.
  • This restructuring -- in what former Federal Reserve Chairman Paul Volcker calls “the Great Recession” -- is causing some economists to reconsider what might be the “natural” rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as “full” employment.
  • Fallout from the recession implies a “markedly higher” natural rate of unemployment, says Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. “It was 5.5 percent; maybe it will be 6.5 percent, maybe 7 percent.”
  • Laurence Ball, an economics professor at Johns Hopkins University in Baltimore, says unemployment may peak at 10 percent, and “it will be a long time before we see 5 percent” again.
  • The more time workers spend without a job, the less attractive they become to potential employers, Ball says. That in itself helps keep the unemployment rate elevated.
As we witness more power shifting to the federal government, it will be interesting to see their response to this trend. Many believe labor statistics are a little misrepresented anyway, but will this administration redefine what is "full employment"? Its likely.

The economy is always changing too. This isn't necessarily a bad thing. Just because certain business models become obsolete, it doesn't mean that others cannot arise to replace them. This is where the problem of bailouts comes in (I'll save the debate on that for another day). But if you put a band-aid on a business model that is impaired, aren't you just prohibiting what needs to happen (the new sustainable businesses replace the obsolete?)

Saturday, May 2, 2009

Another Look at Geothermal Energy

I've decided to do a follow up on Geothermal Energy. Back in December of '08 I did some research on the industry, which you can read here:

Alternative Energy: A Look at Geothermal.

More News on the Geothermal Front.

Since that point, we've seen economic pressures increase, and very recently (maybe) improve. The key to growth in the Geothermal, or any alternative energy for that matter, relies on a couple of key factors:

1) Political will. This means commitment of enticements (tax credits) or legislation requiring a switch (such as renewable portfolio standards).

2) Private capital.

#1 is happening. The Obama administration had shown that they are not going to let the financial situation stop them from plowing through their agenda. This can be both good and bad, but politics aside, its good for alternative energy. For example: Energy Sec. announces $193M for energy research.

#2 is also happening: Nevada geothermal growth: Full steam ahead. One of the main concerns about this is that lower traditional energy prices (oil and gas specifically) will cause private capital to lose focus on alternative energy because of higher costs. This hasn't totally happened, which is good. The reflation trade is starting to gain traction too, and most feel energy prices are going to rise again soon.

I found an interview with U.S. Geothermal CEO Daniel Kunz for some more insight on this.

  • Currently the biggest obstacle to geothermal development is the lack of sufficient direct economic incentives for the drilling of geothermal resources. There are no significant technical obstacles that are curtailing current growth and development.

  • The prospects look good now for some stimulus of the renewable energy sector with the Obama administration's recognition of the long-term strategic imperative to develop domestic, renewable and clean energy sources to secure the future of our country.

  • Renewable energy projects can still attract investors and funding. Geothermal energy is base-load power that can be more reliable than intermittent sources like wind and so is more desirable to a utility. The primary financing problem goes back to the cost of initial geothermal reservoir discovery and development drilling. This type of capital is higher-risk and harder to find in the difficult financial environment that Wall Street and Washington has placed upon us.

Kunz mentions a couple of the key factors:

1) Geothermal is base-load power. This means that it can provide a continuous amount of power that utilities need to provide to its customers. Wind and Solar are intermittent depending on conditions, and thus, can't provide this.

2) With Geothermal, you are basically paying for your power up-front. The infrastructure to build a plant is very expensive, but cheap once its going. That's why its difficult to secure private capital for Geothermal (the payback can be many years, which can be forever on Wall Street).

Here are the expected costs of Geothermal vs other energy types (in 2030, which is an expected date for these technologies to mature):

Geothermal energy is expected to cost about 7.3 cents per kilowatt hour by 2030 compared to 8.1 cents per kilowatt for wind, 12.5 cents per kilowatt hour for concentrating solar thermal and about 22.9 cents per kilowatt hour for solar photovoltaic, according to the Energy Department.

The stock I focused on in previous articles was Ormat Technologies (ORA). Ormat is one of the best pure plays on Geothermal. The stock remains expensive, at 22x forward earnings. They report earnings on May 11, and that's when we'll get our best take on their outlook, so I'll wait and write a follow up then.

There is also U.S. Geothermal (HTM). They've got a great name, but are still quite small. Still a little speculative, but this is the type of company that could really take off.

Raser Technologies (RZ) is another. Smallish company with plenty of debt. Still, lots of potential upside.

You've also got Calpine (CPN) and Chevron (CVX) who are major players in Geothermal, but you lose the pure-play buying these. This is sort of like buying GE for their exposure to wind.

Investment wise, none of these are jumping out to me as screaming buys, but I still like Ormat Technologies the best in this sector. The stock has seen some nice movement in price and volume in the past week, but I'd wait until earnings (May 11) before I buy.

Disclosure: Author has no positions in stocks mentioned.

Restaurant Insiders Selling More Stock

Every week when I get Barron's, I take a look at the insider transactions. I use it mostly for a barometer of market sentiment. Do these guys think their own shares are worth buying or unloading? I'm aware that there are many reasons they can sell their own stock, and it doesn't necessarily mean the stock is overvalued. But I look for trends. Large groups of insiders selling, or specifically different companies within the same sector seeing insider activity.

Well, one of the groups I've focused on in the past couple of weeks, casual chain restaurants, has seen some activity. Here are a few posts:

America's Hottest Sector: Casual Chain Restaurants. (via Fund My Mutual Fund)
Insider Selling Quite Strong.
Not So Fast, PF Chang's?

With my opinion that their latest batch of strong earnings will be tough to replicate, lets see what their insiders think. Here's the chart of this week's insider transactions. A couple of these companies have some sales:

Chipotle Mexican Grill (CMG) had 9 insiders selling 214,375 shares of stock for $17,742,000.

Yum Brands (fast food, but still a related industry) (YUM) had 5 insiders selling 227,551 shares of stock for $7,909,000.

Brinker Intl. (EAT) had 2 insiders selling 225,000 shares of stock for $4,371,000.

But this chart is only through April 27th. There were even more sales this week.

Todd Sullivan at Value Plays thinks its due to fear of tax hikes on capital gains. This is also a valid point, and there is probably some truth to it. But you can't argue with the fact that we've had a seven week stock rally, and they aren't waiting around; they are selling.

Again, it isn't a stand alone indicator. But when used with other methods of valuation and market strength, it can be useful. Especially when the insider buy vs. sell spikes one way or the other, like it has done recently. I'll continue to monitor this situation.

Disclosure: Author owns none of the stocks mentioned.