Tuesday, September 30, 2008

latest thoughts

Been an interesting period what with lehman, aig, wamu and now wachovia all either gone or dealt with -- the market up until the bailout bill failed had been in a narrow range for the past week or so-- from 1180 to 1220.  with a 9% mini crash today I think we are getting closer to a better near term low -- the one from a couple of thursday's ago was manipulated due to all the policy response including the short selling rules -- incredibly stupid by the way.  This next low has the chance of being real -- based on a selling exhaustion that rises almost for no explainable reason -- that's normally what happens.  

at the end, the market just bottoms and starts rising.  there is no good news to drive it, in fact the news is universally bad at the time.  I can't imagine worse news that what we have now -- an interventionist government destroying as much value as possible -- causing a domino effect of bank failures combined with unbelievably horrible leading indicators of massively slowing growth.  earnings estimates for almost every company are wrong but stock prices reflect that in many cases.  

On the one hand I believe the market could bottom somewhere in the 800 to 900 range -- down 650 to 750 from the peak -- that would make sense from the standpoint of the worst financial crisis since the great depression.  Right now the decline barely ranks -- does that make sense given all that has happened?  

but its hard to believe we are going to get there right now -- I would say sometime in the spring of next year at best.  in the mean time maybe we drop more but I find it hard to believe after today's drubbing that we aren't getting closer to a bounce -- maybe we fall another 5-10% tomorrow but that gets you to 1000 on the S&P -- are we going to drop more than that before a near term bottom?  I wouldn't think so.  then a rally back up towards 1200 -- maybe if we are lucky.  a trading range for a couple of months and then further declines.  

but all that is just for fun -- key is stocks -- what are my latest thoughts:

well -- didn't pull the trigger on the FDS despite having opportunities to sell all my shares above $60 -- ugh!  Did sell some ILMN -- just trimming around $85 ($42.50 post split).  Also sold some CME at $400.  Sold the POWI today at $24.8 -- always use limit orders -- I put the sale order at the market in at $25.1 but my actual trade done 30 cents lower.  still with the stock around $23 by the close its not a bad trade so far.  I still like the company but wanted to raise some cash.  Of course the time to do that was in May (1400 S&P) or back in Dec (1400 to 1500 S&P) but I didn't realize the permabears were finally going to be right after predicting doom and gloom for many years.  

still looking to buy more TECH, LH and UEPS.  Today was the day to buy UEPS but I was too busy dealing with work issues -- stock closed at $21.59 -- the bottom of its range since 2005.  You either have to believe that the stock will break out of its trading range to the downside or that this is another time to pick up more shares.  granted global calamity is an excuse for breaking down but you also have the SA government finally suggesting a decision is at hand.  

I have been wary of ERII because it is a play on desalinization -- which requires really expensive plants, which requires lots of capital -- one would think that would be a problem in this environment.  Of course fresh drinking water is a priority too.   stock has remained quite resilient -- similar to MXWL.  

I bought some options on TSRA today (monday) because the stock got hit worse than other stocks and decisions on their cases should be due soon.  I bought the Nov 17.50's -- not that I am an expert in terms of picking contracts.  I decided I wanted to go further out than october but didn't want to pay too much per contract so I picked the 17.50s rather than the $15's.  

I also dipped my toes in the water on some S&P calls (actually based on SPY) I have plenty of powder dry to buy more if the market keeps selling off.  I will probably double down if the market continues to decline.  what I mean by that is to put the same amount of money on the next trade but because the price will have dropped I can buy more contracts.  

At this point the only financials I would think about buying are SCHW, CME and maybe GS.  Although I wonder about BX at some point.  SCHW because they don't make money on their own money but rather on their clients money -- which is declining for now but this gives you a nice kicker on the market.  CME because of their monopoly.  GS because they are the best, period.  BX because they have cash to take advantage of the downturn.  if you believe we are in for an extended flat to down market than none of these is a good choice.  


Tuesday, September 9, 2008

bye bye Fannie and Freddie and other gibberish

Well -- its time for my once every few weeks post -- hope to get a little better about posting soon.

FNM and FRE dying today -- about time. What sucks is not making any money off of this -- what has been an obvious call -- an understanding of economics was all that was necessary to know they would eventually have to be destroyed by the system they created -- there is no one in the mortgage finance chain that cares about anything -- everyone makes assumptions but no one really checks or really underwrites -- maybe now given all that's happened but not last year when it mattered. Think about it -- the originator doesn't care whether you are going to pay back your loan or whether the home value can support the mortgage -- they are going to sell the mortgage to fnm or fre or some other securitizer. FNM or FRE doesn't care because even know they have a guarantee fee they are nationally diversified, only guarantee loans with 20% down payments and housing prices have never declined significantly across the board in this country.

Oops -- guess we can throw that one out. nationally diversified doesn't matter much when all houses are declining. 20% down payments don't matter when the home values are dropping by that much especially given the cost of carry -- i.e. a foreclosed home has lots of costs that must be covered and included in the loss estimates -- everything from taxes to fixing what's broke.

the person buying the mortgage securities doesn't care about credit risks either because they assume someone else did it -- like the originator or fnm or fre. they also assume they have the down payments and the national diversification, etc.. etc...

I still think deleveraging is occurring and that it will impact the economy and the markets. the only risk is that stocks already reflect that but I don't see that as being possible. international growth is slowing and that will pressure exports too.

Here are the stocks I want to buy more of --

FLIR -- they have solid demand and rapid innovation -- there is almost no limit to the number of applications for their infrared tech. Latest one I heard is building energy conservation as well as safety. They can use the temp readings from the infrared cameras to know where all the bodies are in the building -- lets them adjust the HVAC and the lighting to where the bodies are. Plus in an emergency, they can determine where the bodies are or were prior to the emergency. That might help the emergency responders focus their saving efforts.

UEPS -- bought a company that licensed their early tech to offer hardware and software within Russia and the FSU. This broadens their markets to include areas outside of Africa -- its a big deal yet the stock didn't react the day of the announcement because of EPS fears (they reported the next day). EPS report went well so the stock has jumped from the $24 to $27 level. Still love the story -- its going to be huge. Haven't bought more yet but on a pull back towards $25 I will.

LH -- at the right price -- closer to $70 I would love to buy more. At $75 its a little harder. While the last quarter came in a little light, the stock's valuation is low and the secular drivers are at their back -- its all about increased testing using genetic techniques that will improve outcomes. They are one of the biggest beneficiaries of ILMN's technology yet they sell at a fraction of ILMN's multiple.

TECH -- more genetic growth at a reasonable price. I think this one will pull back more -- maybe to $70.

What I would prefer to trim at the right price:

FDS -- anytime I can sell this with a 23x PE in this kind of environment I probably will. great company but they sell to financial services firms.

POWI -- $30 would be nice but its closer to $25. its a great story but is it as good as FLIR or UEPS? doubtful.

ILMN -- great story but its too big a position size given the risks that any slowdown will be met with sharp selling pressure. something between $85 and $90 would be great.


A few other buy ideas -- MXWL, ERII, SCHW

MXWL -- they are signing deals and winning more business but now the question is at what margin -- that was the big miss last eps report. I might average down if the stock gets a 10 handle to it.

ERII -- still researching and thinking about this one -- very interesting technology but its business model is kind of weak -- all a bet on fresh water and the need to find more of it -- or in this case to make more of it. the problem with the business model is that there is no annuity to the business -- just a razor not a razor/blade business.

SCHW -- its all about asset gathering because trading commissions only account for a small percentage of schwab's revenues -- maybe 20% vs. the rest which come from asset management and net interest income -- both of which are driven by the amount of assets within schwab. they will be hurt by a fall in the markets but not as much as a fund company like AB does.

good night.

Thursday, August 21, 2008

current thoughts

About 2 weeks since the last note – too long but for the most part I have been busy with work stuff and watching the Olympics – fascinating stuff – and trying to figure out just how bearish I should be. If you look at fixed income related stuff, you would assume equities will be heading to new lows. Yet fixed income types say its all forced selling and therefore its not fixed income people making a call on the economy or credit quality or whatever. Yet its junk bonds that have gone to new lows not just mortgage related stuff -- I don't hear as much about forced selling of junk bonds but anything is possible.

That might be but for the last year the fixed income markets go down and then equities follow – why will this time be any different? Monday and Tuesday sure didn’t look different. I meant to sell most of my FDS above $66 and had the chance to do so but didn’t do it. Then it dropped $3-4 and as it dropped it became harder and harder to sell it emotionally. Sticking to my instincts sure would be helpful. In that case I should be raising more cash and buying puts because I believe the market will be going lower.

I am comfortable with many of my holdings – figuring they will hold up ok or will bounce back quickly but some make me nervous. CME – seen the bullish cases and most rely on events that I have come to believe are unlikely any time soon – a. end of the credit crisis or b. switch of OTC volumes to exchanges. I presumed that the liquidity problems of the past year would lead many to prefer trading in the open on exchanges rather than taking their chances with OTC trades. Turns out the brokers who do the OTC trades have more control then people figured – so far they are refusing to play ball because they understand that means lower margins for them. And apparently those trading with the brokers don’t care enough to want to use exchanges. Guess they prefer the greater liquidity that the brokers provide.

Raymond James just said the questions about growth are too great now and the valuation too attractive on CME – in many ways I agree with them and hope to trim my CME only on a rise closer to $400. The point being that my concerns are probably already in the stock.

FDS – at $67 the stock was trading for over 24X next 4 quarters earnings – a little high in this market when I can buy UEPS for 13X fy09 EPS. I don’t mind TECH selling for that much because life sciences still has money to spend. FDS sells to the financial services industry and while so far they have not been impacted I wonder if it isn’t just a matter of time. What could I be hoping for at 24x? that it goes to 27x? yes the business is still showing mid teens growth but again the question is for how long. I will still look to sell some but might look to do it in pieces.

Google – its big so growth is getting harder. Its also selling in the low 20’s PE wise of course the EPS estimates are a guess since there is no guidance. Have better prospects for growth than almost any other company near its size but what difference is that if I can find growth that I am confident about in a smaller company for a lower valuation?

Key is accurately assessing the risks of being wrong – small companies fall much further on disappointments.

Deleveraging continues and will continue. That means more fixed income pain as more forced sellers lower prices. That means more losses for credit institutions. And it potentially means lower economic growth and other bad stuff if consumer spending gets whacked hard due to a true credit crunch.

Housing prices – FNM and FRE cutting back on their mortgage purchases; banks in generally deleveraging so credit availability is very suspect. I believe some CA areas require 30% down before you can qualify for a loan but since most volume is foreclosures the banks are just limiting the buyers of their own properties. In some ways they are increasing their current losses (reducing available buyers) in an attempt to lower future losses (by requiring more money down they are increasing the cushion between collateral value and loan value).

Other stock thoughts:

TSRA – rumors are they will win their current litigation so the stock is slowly rising in anticipation – just raises the downside if they lose. I am looking to take some profits over $30 – the closer we get to that prior to actual news and the more interested I should become in selling or buying puts. It is clear to me that the original goals of $50-60 are still possible based on winning the litigation and the growth in the business. If they win, would still expect close to $3 in earnings power in the next couple of years – a 20x PE gets you to $60 – pretty good.

UEPS – Baird put out a preview on Q4 today and it covered the story pretty good. I also noticed that Baron Funds – specifically the growth fund has started a small position as of June 30th. That is somewhat reassuring – someone with a good track record agrees with me. But don’t know why they bought or what they are expecting. Looking at the Baird report, they talk about $4 in EPS around 2012 and that is huge compared to $1.50 for 2008 but most of the increase is in 2010 or later and its mostly based on Nigeria.

I think there are 2 issues over hanging on the stock – first is the well known and dissected South African welfare contracts. The second is traction in countries outside of south Africa – critical mass any where else besides SA. They should sign up millions of Nigerians but that doesn’t mean they will. The moment it becomes clear they are going to sign up millions of Nigerians the stock will soar. You could easily see $40 or even $50 depending on what kind of assumptions get made within the next year and potentially $100 or more over the next 5 years. Yep a possible 4 bagger in 5 years. Once they reach critical mass in a country those users are likely locked in to UEPS -- it will be difficult to dislodge them once millions are using their smart cards to do their transactions. Think about the PEs that Visa and MA get and realize UEPS is even better because there are more services they can offer on their card --its really a portable bank account.

UEPS has a great business model too -- tons of free cash flow and very high returns on capital. Its all a bet on Nigerians and others choosing to use the cards but to me its a compelling value proposition so I believe the odds are high.

Would like to buy some more TECH figuring it will hold its value better in this environment.

ILMN is holding tough while FLIR seems to be getting nervous based on the idea of a gov spending slowdown. Since government related revenues is about 50% of the total it’s a big deal. I’m still super positive on FLIR.

That’s enough for tonight.

Monday, August 11, 2008

update

just a quick note since its been so long -- got a quarterly project working and its sucking up all my time.

TECH -- great business and great earnings this quarter. organic growth is double digit and margins are huge. free cash flow is awesome too.

MXWL -- great revenues and a broadening of the customer base will decrease the volatility but the lower margins is a potential issue. I am taking the CEO at his word that the reasons are temporary and that the goal is for GM to be in the high 30's. This technology is on the cusp of really taking off -- but they really need to get their costs down to turn profitable.

My one concern on this stock is margins -- I believe revenues will be huge but I am totally concerned that margins will always disappoint because capacitors are generally commodity products with low margins. Now in Maxwell's case they aren't selling just any old capacitor -- theirs have some high end properties and they have a manufacturing process that is much lower cost than the competitions.

energy -- taking a breather due to slower growth in demand. that said I wonder what happens next. I can see prices taking off again based on a rebound in growth. I can see the whole cycle being over -- that prices remain above $100 but don't get much higher for years because as much oil as china and india start using the developed world might stop using as the electrification of cars and transportation takes affect.

I have been switching some of my money into alternative high energy plays -- i.e. stocks that do well with high energy prices but that aren't energy companies and that can show earnings growth without steadily rising energy prices --i.e. how do most energy stocks show earnings growth when the year over year price in oil is down 20% or more -- that requires production growth.

Maxwell, Power integrations and FPL are the type of stock I am talking about in terms of plays on energy that aren't energy stocks. I would also include CLB in that group.

still have no need for most financials -- boggles my mind that MCO is up 30% from the bottom in July but CME is only up about 10%. I don't understand how MCO's business is going to be maintained while CME's trading volumes are going to collapse.

Bill Miller is trying to claim that prices shouldn't have gotten this low -- that people are reading too many newspapers and are still able to trade off of that info profitably. maybe. not sure about all that. do know that miller is sounding a little less arrogant. he is trying to justify a bit why he owned so many home builders and financial companies. somehow he blinded himself to the true risks -- the credit bubble and the resulting impact on home prices.

deleveraging is the order of the day -- forced on most

time for bed

Monday, July 28, 2008

earnings updates

Lots of interesting earnings news --- several have reported so far and here are the highlights:

ILMN -- great numbers -- demand is very strong as they beat revenues by 8% and raised forward revenue estimates by about 6%. Cowen had worried that the quarter may not be as strong as usual so the stock sold off pre-report to the low to mid $80's. The stock has soared since to the $93 range. I sold some Sep 100 calls when the stock was $92 so I'm down a bit on the trade so far but remember the delta is low so I'm making more on the stock's rise than I am losing on the option's rise.

FLIR -- Prior to the report Axsys Tech reported blow out numbers. They are a smaller competitor so I think that got a few folks excited. FLIR's report was strong but the guidance wasn't as high as people were hoping for -- stock dropped double digits of course that only takes it back to where it was a few months ago. Business trends remain very strong -- I bought some more at $38. I will buy more if it drops.

CME -- interesting comments about the slowing volumes -- they claim its caused by certain trades not being profitable right now for various reasons that they believe are temporary. As the reasons lift, that should cause volumes to rebound. They are also working on introducing new products especially within fixed income. The NYMEX deal should close now that various issues have been renegotiated. I don't think energy is done with in terms of futures volumes.

AB -- when value is out of style it appears their value funds relative performance stinks. when growth is in style it appears their growth funds relative performance is great. consistency in that sense is cool -- clients know that Bernstein is going to provide style consistent results. Obviously having more exposure to value funds now than during the last downturn say 6 years ago is hurting results but they grew alternative assets under management; private client -- higher margin, more stickier business is a bigger % of revenues and profits now. if the market drops from here than AB will drop with it. that said there is nothing structurally wrong with AB.

LH -- a good and bad story that right now is hurting the stock. The good news is that the DNA testing and personalized medicine story is playing out -- continues to play out. That means good growth in testing volumes for the higher priced tests. They talked about testing for vitamin D deficiency as an important driver for volume growth. There is also the new ovarian cancer screen test.

The bad news is that there is less insurance coverage now than a few years ago. That means less of other people's money to spend and more money has to come from the patient.

Everyone looks at demographics and points to health care's secular trend. Yes its true that the older ages are the fastest growing age groups. Its also true that you can't pay for your medical bills using demographics -- they take cash. The main trend from the early 90's to about 2001 was increased insurance coverage -- not just enrollment growth but dollars available to pay doctor bills. Today its the opposite as enrollment is declining (see managed care stock prices) and copays and deductibles are rising -- I believe the peak was when the employee share of health care cost reached about 20% vs. the historical average closer to 33%.

My hope is that the good news outweighs the bad news over time but certainly this quarter it didn't. Quest Diagnostics, the main competitor, had better results but that was probably better in terms of expectations -- their absolute growth rates were similar.

CLB -- amazingly consistent -- they beat and raised slightly but the key is that incremental operating margins were 47% -- still well above this quarter's 27% (around there anyway). strong free cash flow, rising margins, mid teens revenue growth and its all available for a high teens PE ratio. That's not bad given the quality of the business. People are nervous about all things energy related. I am confident about CLB but regular energy is likely done for awhile -- commodity not rising anymore means its harder for E&P to grow earnings unless they are growing production.

so to me the answer is likely an oil services company like CLB, nat gas plays because the price of nat gas is so cheap on a btu basis; and a bet on electricity demand such as mxwl or WGOV, AZZ, EMR, or etc.

POWI -- so far that trade is looking horrible -- sell BLUD before a $4 increase in price and buy POWI before a $5 decline in price. Power integrations reported last week and they lowered guidance due to less visibility of orders this quarter. continue to think this is temporary and that longer term the number of apps using their tech is growing.

getting late -- time to call it a night. so far earnings season is OK for me but some big dogs are reporting in August. I am becoming more convinced that in the current environment you need to have the falling prices rising volume aspect like FLIR has and like AXYS might have; MXWL might have too. that's the strongest secular growth and probably the one whose investors underestimate.

Monday, July 21, 2008

Electricity and market thoughts

Well the near term bottom occurred last tues/wed when the S&P was around 1200 -- and we rallied 60 points over the next couple of days. Lots of signs that the bottom was near -- too much depression talk on realmoney.com; one of two things had to change -- either financials had to rally or the rest of the stocks had to drop because there is no way the rest of the market can make their numbers if last week's prices are correct for financials -- there isn't enough of a financial services industry at those prices to finance our economy anywhere near what current non-financial prices suggest.

Internally, my chief of compliance reminded everyone they were not allowed to speculate in the company stock and that included shorting it -- they had received several inquiries about it.

Now what? Well no way the financials have bottomed -- we are going to head back down although I doubt every financial will hit new lows -- some won't. But many will for one simple truth -- housing prices are still declining which is pushing more and more homeowners to be underwater in their homes, which encourages them to walk away or default.

More defaults means more bank loan losses, means more capital required means lower stock prices. The key question remains what does this mean for non-financials? tough to answer that question. If we are headed back to the lows of last week then my guess is that the economy is going to get uglier -- worry is a true credit crunch where deserving businesses and consumers are denied credit, which impacts their ability to grow or spend which has a cascading effect on the economy. that's the worry. in the meantime its back to secular growth stories -- the biggest one of all that I have found is the growth in electricity.

We continue to see growth of electricity demand for electronics as well as from one of the largest users of electricity -- oil and gas industry!

Efficiency does not reduce demand it merely transforms it. So even though people tout LEDs to save on lighting costs or in my own case my new 13 SEER ac unit which has helped my electric bill -- the savings get spent elsewhere.

Even bigger than the use of electricity for electronics will be the use of electricity for transportation -- think hybrid cars. Plus think about the growth in electricity demands from overseas as emerging markets continue to develop at a rapid pace. So electrical infrastructure would seem to be a safe bet given that in the US is operating close to capacity; the grid/transmission net is old; and emerging markets are building new infrastructure like crazy. I think of companies like Emerson Electric, ABB, Siemens, AZZ, Cooper Industries, Eaton, etc. when I think of infrastructure.

Then there are demand management or efficiency plays such as Comverge and Eneroc or Echelon or Itron or others that are making smart grid appliances like automated meters.

I have looked at many of these plays and I'm sure that there are plenty of winners but for me the most interesting idea outside of Power Integrations is Maxwell Technologies (MXWL) which makes ultracapacitors -- they are complementary to batteries. While batteries are able to store lots of energy they can only discharge a little bit power at a time and it takes them forever to recharge and there are only so many times a battery can charge before it stops working.

Ultracapacitors store only about 10% of the power that a battery can store but it can release all of that power within a second or two. They can also be recharged quickly and can cycle through charging and discharging a million times before they are finished. They claim the ultracapacitors will last the life of the product they are loaded into.

So what can you do with one? they are used in wind turbines for temp storage of power as well as for use in realigning the blades to get maximum coverage from the wind. They can be used in combo with batteries to reduce the number of times the batteries are used which extends battery life. They can be loaded on to a bus so that the energy from braking the bus can be temp stored in the capacitor and then used to restart the bus or reaccelerate the bus -- that saves energy from batteries or fuel. There are lots of potential applications all of which are about improving efficiency and deploying electrical power in more places than today.

Maxwell is the main developer of ultracapacitors and has been trying to get them used in various applications to date. They have lowered the cost of a farad (capacitance measure) from $2700 in 1996 to $30 today. That reminds me of FLIR -- say 10 or more years ago. They are trying to lower costs so that more applications will find ultracapacitors to be economical. As costs drop volumes soar and margins improve -- last few quarters Maxwell has reported incremental gross margins near 100%. Most analysts that are following the stock have been there for awhile and have been disappointed in how long this process has taken -- they are waiting for the volume inflection point and it keeps getting pushed out.

There are two ways of playing this -- buy it for the long term knowing that over time the economics are only going to get better in terms of capacitance use or wait until profitability and a demand inflection occurs and while you will give up some on the stock you could save a fortune if demand keeps getting pushed out. Batteries are the main form of competition -- flywheels too.

the company has announced they have won a deal to be included in a 100-200k annual volume car for use as a temp store of power to help manage overload situations -- i.e. when every electrical part of the car is operating at once. they have $100 per car so about $10 mill in new revenues starting in 2010. The ultimate potential is enormous -- they could easily reach a billion in revenues in 10 years or so. My hope is that if this is truly successful would be for the company to be worth $10 bill up from $270 mill now. That will take 10 years or so.

still speculative so I won't buy much but at least some. I sold my MCO last friday at $34.85 so I was basically flat on the stock over the last several months including the options.

Sunday, July 13, 2008

when will it end?

No idea --despite the straight down nature of the decline there has been little panic. Too many have waited for a rally to sell only to regret and sell at a lower price. It reminds me of late 2000 or 2001. On the other hand the volume on friday was enormous -- freddie mac traded over half of its shares outstanding! In one day almost 400 mill shares traded in that stock -- granted I think they are insolvent and a bail out is coming but anyone that wanted out could have easily gotten out on Friday.

Freddie wasn't the only one either -- MCO traded about 4 times their average volume. The stock broke to new lows so the trading range doesn't appear to be holding. If I had any discipline to my investing I would have bought the puts and sold the stock on friday but I didn't based on the idea that Friday was a washout and that this week will bring a respite.

PHX -- can you believe that stock? I didn't buy any yet because I was still trying to figure out what to sell to buy it but man did it take off -- going from near $31 to almost $37 in a week when the markets were crushed! ugh!!!! no news other than the idea they are shifting to the NYSE, which granted should help their exposure. still going to try to figure out getting into that one.

FLIR keeps pumping out new wins yet the stock paused -- I know the estimates are going up the question is how much. lot of expectations there. Its finally getting to a size that matters a little more to me -- I would still love to have that stock be a bigger position in the portfolio but I continue to struggle to find the right sale candidate or the right time -- when I think about selling one I look at FLIR and the stock is up big -- looking for that time when my candidate is up big and FLIR is pulling back some. Perhaps this week -- I'm pretty sure my candidate is reporting -- its GOOG -- I think the world of GOOG but I could also see trimming it some to pay for more FLIR. I think FLIR has more opportunity given its smaller size.

Looking at LH I learned a couple of reasons why the stock is flagging -- economy hurting volume growth -- not surprising that its an issue but they have some offsets like the growth in esoteric testing. The other issue is they have tied themselves to managed care through contracts and yet managed care appears to be struggling -- their stocks certainly are struggling -- wow. UNH though is also seeing membership declines so that hurts Lab Corp's prospects given that UNH is almost 10% of revenues. I continue to see the promise of dna or molecular testing helping LH's growth.

I did finally do the trade between BLUD and POWI. I did it because I think POWI is a better fit with my secular strategy -- the growth in electricity and the need for energy efficiency. Its true that BLUD is benefiting from market share gains but the market itself isn't growing. in POWI's case the market is growing and they have the potential to gain share too. market growth occurs both in terms of unit growth, new applications and market share gains. That plus the business model allows for margin expansion whereas BLUD has peaked. Also the valuations were very different -- POWI is much cheaper.

TSRA -- no resolution yet to their cases although on Monday the ITC case gets started. the Amkor arbitration should get wrapped up soon in terms of a decision. There is talk that the case cared about whether the patents were good or not -- this is a contract dispute so the patents should be considered a given.

The risk to TSRA -- Amkor bought a company that had bought a license from TSRA but as far as Amkor was concerned they didn't use TSRA's technology and therefore they stopped paying. TSRA argues they are owed not only on the one subsidiary that was a licensee but on the rest of the company's volume too. So I can see Amkor arguing that since they themselves didn't sign the license, that they didn't agree to TSRA's patents and therefore the patent questions are eligible for discussion. Don't know if the judges will let them get away with that or not. Reality is the patents are in force regardless of what Amkor thinks. Then its a matter of proving that Amkor packages chips using CSP technologies. If they do, then they owe. Some argue that TSRA is a house of cards just waiting to fall -- I don't see it that way -- I think they have a great franchise. in the next few months we should figure out who is right -- stock will either be $10 or $40 in my mind.

UEPS -- still getting the delay from south africa -- hopefully they will get an answer sometime soon. I still fervently believe in this story.

The trouble for me with TSRA and UEPS is that in my past whenever I have thought something was so attractive I have realized later that there were problems with the story I either ignored or didn't know about. Whenever I have averaged down over time -- as in over years to buy more of a story whose stock just doesn't seem to keep up with the fundamentals I have usually never done really well. My best ideas have usually been stocks that I have had to average up in -- ILMN, FLIR, LH, etc.

That's my caveat to TSRA and UEPS -- and potentially CME and others.

AB -- their assets under management fell 7% in the month of June -- that's a bigger hit than I expected but its still roughly in line with the market meaning their cash flows aren't hurting them too bad. This stock follows the market -- when its up the stock is up and when its down the stock is down. I reinvest dividends to have this longer term volatility working for me. I bought shares at $90+ near the peak and I will buy shares near $40-50 this time. For me the dividend purchases are considered free shares -- I don't consider this putting more money into the stock because the money is coming from the company in the first place. Economically speaking that's wrong -- I could easily reinvest the dividend into another company. Still I believe this is one of my best opportunities -- I think AB is well managed and that over time they have been a winner in the market. Getting hurt now but that just means buying more shares that will be worth a lot more later. During the tech bubble burst I bought shares in the $30s only to see the stock hit $90 a few years later. I think the same thing will happen this time -- I believe the stock will bottom higher than last cycle and the next peak will be meaningfully higher than $94. If I had to guess, I am thinking the next cyclical peak will be near $150.

good luck this week

Monday, July 7, 2008

bottom or heading for new lows?

that's the big question now that the S&P 500 is near the march lows again. are we stopping here or are we heading much lower? My thought is I have no idea. What I do know is to focus on individual stocks that are attractive based on their secular growth prospects, competitive barriers to entry, good or improving profitability and reasonable valuation.

Heard about an interesting nat gas company to compliment Contango. Its symbol is PHX --Panhandle. They have 18 employees and they own the mineral rights in thousands of acres in Oklahoma, Texas and Arkansas. They are moving from just taking the mineral right royalty to having a working interest in the wells drilled on their property. Its more risk but if they choose wisely they can make a lot more . Just like Contango these guys outsource everything to actual operators.

There are a few issues to consider with PHX -- natgas prices are very cheap relative to oil (6 to 1 btu ratio between oil to gas). If nat gas prices reach $20, this stock is very cheap but so are most other nat gas companies. The next key is how much reserves they are going to add in the next couple of years. reserves have been growing at 20% or so a year -- there are billions of mcf in probable reserves plus plenty in possible reserves. Management talks about thousands of potential wells, which gives you some idea of future potential.

spent some time reading over the rails this weekend too. not sure I want to buy one but I am still learning the ins and outs of what drives the rail company earnings. I am intrigued by kansas city southern because of the mexican link especially to a seaport where they are the only rail connection. I also like the fact that they only have 10% of revenues from coal -- while Burlington Northern is convinced that coal will be powering utilities or years to come as the largest electricity fuel -- I'm not as convinced. many of the other rails get 20% of revenues from coal.

MCO -- planning on selling some put options -- betting that the trading range for MCO holds based on their business not really being able to get much worse and buffett owns 20% and presumably would buy more at the right price. if I sell a $30 put for August then I have the chance to make $2-3 per option assuming the stock stays above $30 for another 6 weeks. I am pretty confident that MCO will rally along with the rest of the market so unless the market just tanks, we should get a rally in MCO back towards $40. My plan is to sell puts at this price and calls if we get closer to $40. This way I can make money at both ends of the trading range.

I did sell a aug $95 call on ILMN last week -- the stock has done very well but the valuation is getting a little high.

Wednesday, July 2, 2008

CME and market

Buy and Sell Discipline -- key to buy discipline is to have some kind of disciplined view of a stock's attractiveness for purchase. It could be based on valuation, the chart pattern, earnings momentum or other factors or a combination of everything. Point is to have a plan; use factors that you are able to identify that lead to strong performance and then be consistent.

Discipline is what its called when you turn away tons of potential candidates because they don't meet your criteria for what is an attractive opportunity.

Sell discipline is also critical to investment success -- you have to know when to take profits -- to realize that an investment has either reached its peak potential or is about to have fundamental troubles or you have to be able to admit a mistake -- that your original thesis was wrong and you need to sell before you lose a lot of money. The key is to be dispassionate in your analysis -- to base your decisions on the best info available at the time without emotion -- as if you didn't have a bunch of money riding on the decision.

Key in these two processes is to understand critical factors that will impact a stock's future potential -- what are the drivers of a company's future profitability? Key metrics to follow and understand how they will change over time.

In CME's case one critical variable that I should have known was that interest rate futures made up about 50% of the daily contract volumes. Then I should have made the jump that with the fixed income market imploding it was inevitable that volumes would drop. The breakdown though was in the sell discipline -- deciding not to sell some shares when the stock was $700 and I even mentioned in this blog it was fully valued. Had plenty of chances to sell the stock for roughly what I paid for it yet didn't -- kept buying into the idea that volumes would continue to grow. Now estimates are dropping because volumes have dropped -- the PE has plummeted from 35 to around 20. I refuse to sell now because its too cheap but I'm kicking myself for not dumping some when it spiked to $440 on the buyback news.

Now in the past their volume issues have been temporary but I'm guessing the shrinking of financials will lead to a volume plateau that will keep a lid on the stock.

I still believe FDS is going to make it through this downturn without too many issues -- its that good of a business. I do plan on selling calls when it is near its high end of range -- something I just missed doing when the stock was $66 a couple of weeks ago. best not to try to top tick these things -- close enough still works.

MCO -- recent investigation into the "cover up" ratings on those european instruments resolved favorably so that removes an issue from the stock. important to realize the story is about international growth and non-ratings growth. that should allow them to grow from the 2008 base at a 10% rate, which is made easier by the fact that up to 5% of the stock is repurchased each year.

AB -- obviously in a bear market the earnings get hit as asset values drop but haven't seen anything that would lead me to believe they are in trouble like legg mason or any of the brokers/banks.

I still think sometimes about MXB (MSCI Inc.) but reality is I should have less exposure to financials -- even the non-endangered ones that I have -- because the opportunities elsewhere are so much better -- utilities, railroads, energy, technology, genetic analysis, etc.

FLIR -- impressive new contract wins adds visibility to the 2009 growth story which is boosting the multiple. Obviously I nailed this story but didn't buy enough of it. Little secret -- often times the stocks that I really like that don't seem to go anywhere but I keep adding to them -- they almost never work out but the ones I keep averaging up on -- they work out great. FLIR would be a candidate for averaging up because I don't see the stock getting back into the 20's unless we have a really bad recession.

ILMN -- wow. saw some stats on their latest product offerings -- the innovation they are producing is astounding. that should drive their growth but the expectations on that stock are huge -- even bigger than for FLIR. I have almost sold calls on the stock -- aug 95 for over $3 but haven't yet because we are so close to a potential rally -- although EVERYONE is expecting a rally so there is a high chance it won't happen until we go lower. Continue to struggle with this one given the stock's strength and its valuation but so far holding on has been the right choice.

TSRA and UEPS -- still holding pattern but nothing has changed -- sure am hoping these two don't fizzle out -- they look like incredible opportunities, which means they are likely not that good.

LH -- this one boggles my mind probably the most -- they have some risks in terms of slower volume growth and bad debt expense given the slow economy but the stock is at 13x next 12 months estimates -- in the past they have gotten as low as a 10% free cash flow yield. At that valuation it sure makes you wonder why they don't just go private. LH tries to do deals with their free cash flow but if they have none that look attractive, they buy back shares. at current values they should be able to retire close to 7-8% of the stock each year. That's a huge amount.

TECH -- last 2 quarters beaten by about 10 cents each time yet they keep saying its due to unsustainable factors so the estimates don't go too crazy afterward. will this be the third quarter in a row or are they finally going to be right that the upside was temp.

BLUD -- hoping they report earnings this week or early next -- they usually report around the 1st of the month following their quarter end -- May 30th in this case so they should be reporting now but haven't. hoping for big upsides driven by pricing. that might get the stock up towards $30. Still comparing BLUD with POWI -- blud has higher margins now but POWI's are rising. similar revenue growth prospects and similar story in that they are selling integration/automation. POWI has very little non-cash assets so their returns are huge. I don't like the fact that there is little growth in blood typing market -- its huge already. most of power integrations growth is market share but I believe their market should be growing due to growth in electricity and their ability to produce new products that can increase their served market.

S&P 500 -- looked at the chart today and what did I see? downward sloping 200 day moving average which will put downward pressure on prices until the 50 day flattens out -- see 2002's price pattern on the S&P for an example. that means hope for a rally is just to get near 1400 -- more likely the next rally takes us to 1350 or so -- basically where we were only a week or two ago.

Sunday, June 29, 2008

3 weeks later.....

Well I didn't expect that -- to take a 3 week break from writing. Certainly knew a week off because of a trip but the rest was just getting too busy and not finding the time.



Why was I busy? part of it was looking into a few new secular trends to decide about potential new investment ideas.



First -- on a trip out west I saw the longest train ever -- container after container load. It was at that moment that I realized why rails have been doing so well -- why Buffett bought them. I just couldn't see it before -- I saw railroads as slow growers that could never earn their cost of capital and would produce negative free cash flow forever. That's changed -- consolidation has reduced competition within the railroads and rising energy prices has reduced competition outside of rails. Globalization has created lots of new trade, which is driving up demand too. The stocks have all gone up huge in the last several years but they probably have more room to go especially if energy prices stay high.


don't know enough to understand, which rail is best or what the differences are between them. Probably won't buy one but its something to keep in mind.

Next I was reading a conference call transcript from a call given by the CEO of Alliance Bernstein -- one of my largest holdings. He made a comment about the coming electrification of the automobile and the impact that might have on various industries. It reminded me that a couple of guys -- Peter Huber and somebody named Mills have written an investment newsletter for several years about power. So I searched on google and at forbes.com for awhile and realized they have written a book. The Bottomless Well that basically says we have unlimited amounts of energy its a question of what form its in.

They make the case that electricity is the real secular growth story within energy. Over the last several decades the amount of electricity used has been steadily rising. Certain processes on the industrial side that used to be mechanical in nature now use electrical parts -- one example is a steel mill which now uses an electric arc furnace rather than one driven by burning coal -- i.e. a blast furnace. All the computers, networks, data centers, etc. -- they all rely on electricity. Their case is that improvements in power semiconductors would translate into an electric drive train partly out of energy efficiency but mostly because electricity is easier to control than mechanical processes -- you can more fine tune the process.

so that leads to multiple thoughts on how to play this secular trend.

1. Utilities -- especially ones that produce non-regulated or wholesale power using a low cost fuel option such as nuclear, hydro or wind. Utility prices are often set by the fuel costs used for producing peak power. Since natural gas is most often what is used for peak power, that means has natural gas prices rise, power prices rise too -- even if that power is produced by nuclear, wind or hydro (none of them have fuel costs that amount to much).

After some review, I chose FPL -- florida power and light because its one part regulated and one part non-regulated. This provides some risk reduction since I am buying in after utilities have outperformed for years. FPL's regulated territory has been growing -- they gained 1 mill new customers in the last 10 years or about 33% growth. Their fuel for the regulated side is nat gas, coal and nuclear.

They have a merchant power business that sells power all over the country -- large part is nat gas but the rest is nuclear and wind -- they are growing their wind production from 5 gigawatts to 13 gigawatts over the next 5 years. Other large merchant companies don't have diversified territories or their fuel is not low cost or their valuation is high or their stock has been an unbelievably strong performer.

2. electrical equipment manufacturers -- for me their are only 2 possible answers here -- Emerson Electric or Eaton. Emerson is my main choice because they have been well managed for decades. Eaton is more of a turnaround. Trouble is that even though Emerson has incredible management and strong prospects and an attractive valuation, its stock returns have been mediocre at best. over 20 years the stock barely keeps ahead of the market. Now the good news is that it is ahead of the market. The bad news is that many of the utility stocks I was researching outperformed Emerson over long periods -- boring utilities yet they have strong performance. As the stock drops I continue to think about it.

3. Power semiconductors -- most of these are commodities but there is one company -- Power Integrations POWI -- that is a differentiated product that sells power supply chips based on an integrated solution -- majority of current solutions are discretes or other older technologies. they are cheap and low cost but take up space and are not energy efficient. Power Integrations has a similar cost but its partly due to much fewer components. I'm still researching and debating this one.

Also trying to determine how to come up with the cash to invest in these kind of ideas. I realize now that I have too much in financials -- MCO, FDS, CME and AB -- although they aren't lenders and aren't caught up in the problems of today, their growth potential is tied to the size of financial services in general -- MCO is about growth in debt during a deleveraging period. FDS is about giving employees the tools they need to do the job so employment in money management is key. CME is providing a market for traders to trade derivatives -- fewer traders means less derivative trading.

that's plenty to think about tonight -- will hopefully have more to say this week.

Sunday, June 8, 2008

catching up

This one will be quick updates on various stocks and maybe a market issue or two.

CME -- stock has just been dropping like a rock. Finally dawned on me that almost half their trading related revenues come from fixed income products -- interest rate futures. its a huge portion of volume but lower pricing means its only half of revenues. Just realizing that potentially that's a problem -- as the fixed income market deleverages -- banks, brokers, hedge funds, CDOs, etc. -- they might use less hedging -- as in less futures. In addition, while we all got excited earlier this year about the volume that comes from high levels of volatility, bear markets usually mean less volume. So you get a spike in volume and then everything flattens out for awhile. so now we have two reasons to see less volume and potentially lower eps estimates. Then you realize that they went from being an organic growth story to a roll up and you realize that the future won't be as good as the past -- sure stinks to figure that out now some 150 points below our cost. ugh.

Not intending to sell it at this price -- stock is pretty cheap even if you assume the estimates drop. don't forget its still an almost 60% operating margin business with lots of free cash flow.

MCO -- well it didn't take long for the market to decide that cover up of wrong ratings wouldn't be a big deal. I know the deal with the NY attorney general and the analyst day were mostly responsible but if everyone was still concerned about the cover up the stock would never have gone up $8 off the bottom. The deal with the NY AG is critical because while it removes a conflict of interest -- ratings shopping -- it also could have the affect of reducing competition. Not to mention they will now get paid for due diligence when in the past they wouldn't. I wrote some more calls when the stock was $40 -- next day could have gotten a dollar more but then came Friday's whack and I'm in the black again. Analyst day showed me that they have a lot of growth drivers to get the business growing in the 10% range. Add share buybacks to that and its not bad. I thought about selling the $45's but decided to do the $40's instead. Hoping to get lucky on these to sell at a profit and maybe over time shift my selling to the $45's. I think its going to work its way slowly higher -- presuming we don't have another financial panic or a big rout in the market.

BLUD -- FY 2009 guidance -- no big deal. hoping they were conservative and that there will be good upside after they report in a few weeks. still wondering about this one.


New ideas again ---

Ritchie Bros Auctions -- RBA -- all that cap ex that I mentioned last note is for their 30+ facilities around the world. They are auctioning used heavy construction and farming equipment so it takes up a lot of space. They have 25% of their winning lots online but the rest is bought in person at the facility -- the buyer has kicked the tires on the actual piece of equipment. So in some sense they are like a retailer -- always growing stores and also fixing up their stores. Their cap ex is running near 17% of sales -- this compares to someone like FLIR which is near 7% -- that's 10% less for shareholders. Moody's probably runs around 3% of sales for cap ex in most years. Analysts are arguing that they will not be affected by the economic cycle -- maybe true but they are affected by the industry cycle -- boom times for heavy equipment which supports equipment prices by having plenty of buyers. When the infrastructure boom ends, who are all the users going to sell their now excess supply of equipment to? Right now the slowdown in the US is not a big deal because they can sell the equipment to overseas users in the mid east and asia. What happens when the mid east and asia slowdown and the US can't absorb it all? bummer.

Hope is that when that time comes the analysts will still be pushing the no problem thesis and you can get out at a higher price than you should be able to. Trouble is to spot the slowdown before everyone else. Now truth is that every stock I could buy will face a slowdown so that's not a reason to exclude these guys. But its also true that heavy equipment demand is going through a really strong cycle, which means the downturn will be bad when it comes. For me its key to understand the secular drivers for the company and the cyclical ones -- once the cyclical (current heavy equipment demand) wears off what will be left of the secular -- enough to be a reason to own the stock? Especially when that stock comes at 30X earnings -- ouch. When the cyclical runs out this thing will be at 20X if we are lucky.

All that said, I like the way RBA is managed -- like a family owned business that knows how to take care of customers. that is what you want in a management team.

market -- obviously the whack on friday was ugly -- could be the beginning of something uglier. banks have been hitting new lows and lots of talk about Lehman's future -- they are at 30x leverage. they raised $8 bill last week but who cares -- tell me when they either shrink to $400 bill in assets from $700 bill or when they raise another 30-40 billion in capital. at that point the leverage will be too low rather than ridiculously too high. Oil prices -- we may be getting near a point where the economy finally can't handle the high price -- we would see demand fall off and that should put a lid on the price of oil but then again I have invested the last 5 years betting against those that made that argument so take it with a grain of salt.

got to run

Monday, June 2, 2008

potential new ideas

I recently received the quarterly report from Baron funds run by Ron Baron. He is definitely a bit promotional about his stocks and his funds but if you look through that he has a great track record. His process is close enough to mine that I can often find great ideas -- He owns Factset (I didn't get that from him, I'm a user of the service), CME, FLIR, CLB, etc.

This report mentioned a few interesting ideas -- Ritchie Brothers Auctioneers (heavy equipment), an industrial distributor whose name escapes me (MSM is the symbol), CoStar (commercial real estate data base) and MSCI (MSCI indexes and Barra).

MSM is a great business but it is completely tied to the US. They are about using the Internet to reach more customers with more products. The stock got crushed during March but then they beat numbers and it exploded upward. Perhaps on another pull back but now it seems fairly valued.

CoStar -- great looking business that has way too high expenses -- supposedly to build out their infrastructure. They have built a database of info on 3 million commercial real estate buildings in the US and UK. Now that they have finally reached good coverage they are trying to boost revenues without growing expenses -- operating leverage. They should have margins about 2X what they are based on other similar businesses -- Factset and Navteq. Trouble is when I went to the yahoo message board to see what was there all the discussion is about what a horrible place to work it is and how there is constant huge turnover of sales people (like 60% a year). That's not good -- the business is good enough so that it doesn't hold them back too much but its bad enough that I don't want to get involved -- too many other choices that don't have those issues.

MSCI -- another one whose margins should be higher -- they have just recently been spun out of Morgan Stanley so their margins are still ramping. They dominate international indexes to serve as benchmark's for funds as well as ETF's -- they get fees for access to index data and they get asset based fees from the ETF's. Its a great buisness as long as ETF's based on these indexes keep growing. They probably will but the risk is more growth in more actively managed ETF's of the power.... something funds or with the Wisdom Tree type funds. Those ETF companies use their own indexes. They also have the Barra business which is a risk analytics type business -- pretty good except its all based on mathematical models which rely on standard deviation -- as you know I believe standard deviation is a concept that should be banned from finance because there are no normal distributions to be found anywhere. I would have to swallow my high horse and just focus on the business prospects regardless of whether I thought it was a good product or not to buy into this stock. Of course the index business represents most of the profits anyway. but this is the one I'm most likely to think about buying.

Ritchie brothers looks interesting except they have very heavy cap ex spending -- need to understand why because as an auctioneer I wouldn't think they would have a lot of cap ex needs. stock has a perfect chart.

Thursday, May 29, 2008

latest thoughts

Market -- pretty close to the top with last week's comments huh? Anyway, going to stick to stocks today:

FLIR -- wow - news keeps getting better and better for them. Big gov win that's almost as big as the business is now! no firm orders but they will come over the next year or so. stock has been moving up persistently so no chance to get in yet but there will be.

MCO -- wow again -- a cover up would be about the worst thing that could happen unless it turns out to be just an isolated incident which is what anyone owning or buying the stock is betting on. If it turns out to be widespread behavior, then the firm is gone -- a scapegoat for the ratings troubles. People seem to be overlooking the fact that despite the errors Moody's had the same ratings as S&P, which supposedly didn't have errors or a cover up.

ILMN -- conference and some other commentary suggest innovation is occuring faster than expected. they have released data about the performance of their 2nd gen system that was better than anyone expected. Cowen did a survey of smaller labs -- the ones buying about 60-70% of units so far and concluded that the market for next gen sequencing was bigger than thought and much more sticky -- people in small labs were going to choose a provider (generally either ILMN or ABI) and stick with them with subsequent units because the training and start up costs were too great to repeat. that means ILMN's 6-9 month lead is very important to the size of this business. Feeling better about the business -- strong as can be is my guess but with the stock flattening out much of this good news is already reflected. not sure what will get the stock moving again other than dramatically higher numbers.

TSRA -- small DRAM shop that was part of the DRAM suit set for September at the ITC has settled. This is good news is the sense of validation of the IP but not a big deal because they were small. Probably not much meaning in terms of what the big guys will do. That's why the stock popped but only back to $20. A real win will get this up to $30 or higher.

Tuesday, May 20, 2008

market

They say that the market always does what will frustrate the most people. I would say that over the last few weeks the persistent upward bias has probably frustrated most everyone -- very few people have had the guts to be aggressively long since March 17th knowing that the market was going up more than others expected.

I think quite a few have been cautiously bullish figuring the next correction was always right around the corner. Others have been downright bearish -- figuring the housing and consumer troubles would bring about a deep recession that the market wasn't prepared for. The stocks posting the best gains have been those tied to energy and global demand -- its a broad group that includes more areas of the market than most realize. I haven't kept track in the last week of all financials but I suspect that moody's performance is in the minoritiy -- most are probably flat.

Health care stocks -- too US driven so they don't benefit from overseas demand. They also don't have the product cycles to boost demand -- that business is finished because the generics and PBMs make growth difficult. The life sciences area is different -- lots of product cycles. Labs too -- not enough of the cost structure for the managed care and medicare people to attack like they have the hospitals although bad debt expense is something we will have to watch (consumer related).

everything consumer is suspect given all the issues.

lots of industrials though -- Emerson for one have strong demand. Energy is obvious. Technology -- its about product cycles and global demand and some techs have it and some don't.

At some point this rally will run out of gas -- the short covering will be over; the long only funds will have been pressured into buying; etc. Could be soon given yesterday's reversal. Are we headed lower again like January and March? That depends on whether there are more problems lurking within financials, whether overseas economies slow down, whether the dollar takes another plunge; rates rise; etc. we are like ducks on the water -- above everything looks calm and that is one reason the market is rising. below the water there is a lot going on and that is why we are likely to pull back at some point -- very useful prediction huh? right now I don't think we are headed for new lows. I expect the double bottom to work -- maybe it becomes a triple bottom. that said, I think I said similar bullish comments in october the last time the S&P was over 1400 (closer to 1550 actually).

once again its best to stick with stocks -- my musings on the market are for fun. stick with attractively priced stocks with strong secular tail winds and the competitive advantages to benefit from them.

Thursday, May 15, 2008

FLIR

Did you see that WSJ editorial about the sniper in Iraq never saw it coming when he was blown up? Fascinating story of the use of predator unmanned planes in Iraq and Afghanistan. The marines called in for help and the air force sent a remote controlled (from Arizona) plane with a Hellfire missile.

The plane used an infrared camera just under the nose to locate the sniper's muzzle fire and locked in on that location. The missile took him out while he was still firing. FLIR makes those infrared cameras and I'm pretty sure has some of the ones in those predators.

Cool stuff.

I know I said UEPS is my biggest opportunity -- depends on time horizon. I believe FLIR has the chance to be a big winner too but I don't see the same gains in the next 3-5 years -- might take them 10 years -- partly driven by the valuation since FLIR has a PE that is about 2X UEPS. Starting point matters -- the cheaper at the start the more money you can make.

One aside on Bill Miller too -- His issue is arrogance in my mind -- read his writings they scream of someone that can't imagine they could be wrong. But another point is I wonder if he was so focused on being different that he forgot that for his investments to be successful other investors have to follow him and bid the price up. Sometimes investing with the consensus can be very profitable -- energy stocks being a prime example. He has avoided them from the beginning -- missed them at the bottom and didn't want to chase. That's fine -- he has to stick to his discipline but on the other hand...... he has continually underestimated how big this cycle was going to be -- in 2005 he could have easily bought in and though he would have missed the first couple of years he would have captured the last 3. Look at Buffett buying those railroad stocks AFTER they had already doubled.

Wednesday, May 14, 2008

more on UEPS but first......

MCO -- yes I know this is one of the few non-energy stocks out there that is going up consistently and yet I've sold away my upside through the calls I wrote. oh well. I still have till June so no telling what kind of pull back we might see between now and then. Reality is that AFTER I sold my calls I realized that about 25% of the non-Buffett owned float was short the stock. that pretty much limits the downside. business is picking up but its still pretty slow and it has to pick up some just to make current estimates. so now we are around 21-22X estimates, which would seem to be the high end in this environment but who knows -- fundies are improving so should the valuation.

DFR -- key question -- what is forward earnings potential given all the changes to the company? some argue its 40 cents per year. that is possible but unlikely that too many others believe it given the $1 stock price. certain aspects worse than I thought so that is a little worrisome.

FLIR -- just saw a commercial about franklin resources (mutual funds) and they claimed to have made money owning an infrared supplier -- most likely FLIR. DRS Tech was a competitor too so the deal should help support FLIR's stock too.

I have owned UEPS for about 2 years now and so far the stock has done nothing. The business has continued to get more valuable and that is key but this is testing my patience. The stock has bounced since the earnings report but is still relatively flat with the last few years around $28.

When MA pulled back towards $100 some time in the last couple of years I wondered if I should buy some. I decided not to primarily because I thought UEPS had far more opportunity. Well the market has its own thoughts on opportunities.

This is an important lesson -- one which I continually relearn. Expanding margins and increasing returns on capital are key drivers of big returns in stock prices. MA's margins and returns have soared since they came public (Visa is working on similar improvements). MA has enjoyed strong earnings relative to expectations driven by higher margins. Revenues have been good too but they are not growing at the rates that UEPS has the potential to produce over the next couple of years. Between wage payment in SA, Nigeria, Ghana, Iraq, etc. UEPS has huge opportunities that should triple the earnings in 5 years. Margins though are already above 40%.

But the main issue for UEPS is timing -- it takes a long time to negotiate a contract and then to implement the process/strategy and then have enough new cards with people choosing to use them at merchants (rather than just getting cash). But once the cards are in place and people are using them for their shopping and their bill paying and other services, those cards are likely to be in place for many many years.

no reason for most to switch so UEPS ends up with a long term annuity on the growth and usage of their cards -- same business model as Visa and Mastercard although because UEPS is a smart card there are many more services that can be performed on these cards than on regular credit cards. More services per card offsets at least somewhat the disadvantage that UEPS is at from a spending per card basis -- obviously first world consumers spend more on their cards than third world types.

Once the SA contract is resolved and some of their current countries reach critical mass (i.e. enough cards and merchants that people that don't have one feel a pull to get one) the business will be very profitable (little incremental costs post set up) with high free cash flow and still pretty good growth potential. They will have a long term annuity from all their existing cards that will make this business very valuable -- I find it hard to believe they won't have a 20's PE.

The hard part is the wait -- a new country announcement is very exciting and everyone's first instinct is to ask how much is that going to help EPS -- that's a good question but don't forget the timing -- it may take 5 years for a country to be up and running and have a critical mass of users. When I first bought the stock in the summer of 2006, analysts were already talking about wage payment in SA and Nigeria as big catalysts. Here we are almost 2 years later and those are only now starting to build customers. Iraq is just finalizing the contract so it could take quite awhile to build out the infrastructure and start really having an impact on the overall P&L.

But Iraq could double the size of the company as it stands now -- so could wage payment and nigeria. Ghana continues to get bigger and they are trying to add more countries all the time -- especially because of what Ghana is doing. With all the catalysts I am comfortable they will be earning $4-5 per share in 4-5 years and receiving a 20PE on those earnings for a stock price close to $100.

This is without a doubt my biggest opportunity-- in terms of cash cost basis its one of my largest bets in the portfolio too -- I have larger positions but that is because those stocks have gained in value after I bought them. I would have bought even more of UEPS but I realize the timing of the business means catalysts can always take longer to play out. its hard in other words even though I have a lot of patience and enthusiasm for the story but in 2 years to have not much happen -- that's hard. I am confident the patience will pay off.

Bought some more CLB on Monday to get close to a full position. Thankfully I timed it well -- $123.50 so I enjoyed yesterday's pop to $133.

Monday, May 12, 2008

still here

I realize its hard to believe but I'm still here. only 9 days since my last post -- that sucks. I'm hoping this week will be better. This will have to be a short one too -- running late for work.

The big story for me last week was UEPS earnings -- everything is going great for this one except they have a major contract up for bid with the south african gov -- the total value of the contract for the next 5 years is 2 billion. UEPS is bidding on all of that as well as just parts. UEPS already serves this market so the market is nervous about them losing revenues or margins under a new contract. I think everything will balance out -- maybe not as good as now but they have so many growth opportunities that a little drop in their SA business won't slow them down too bad. I expect they could easily earn $5 per share in 2013 (5 years out) and sell for 20x earnings. not bad given the stock is only 26.

more later.

Saturday, May 3, 2008

Yes I'm still alive and making money

So its been what 10 days? I have been feeling it too -- blog withdrawl -- but life has just been tooooo busy of late. Last weekend was the party for my 2 year old and then my work presentations haven't stopped. but I do have a few moments to catch up on what I have done in the portfolio and the market stuff.

MCO -- bought back the $35 options for a $2 gain and then sold the $40's for June for $1.5. So best case I can only make 20% for owning the stock about 6 months. I can live with that. I expect this rally to peter out soon and us to have a pull back -- too many indicators flashing overbought and sentiment bullish -- if we can any kind of drop I can buy back the options for a gain and look to sell another batch later. I am not as worried about a drop in MCO after their last EPS report so that's why I moved out to the $40's.

FLIR -- wow. what a report. the increase in backlog was huge. the growth in commercial was huge. their momentum is very strong. even high 20's would have been a good buy while the $24 price was an absolute gift that I passed on. Dr John mentions where do you have the big money -- this is the stock I wish I had my big money but so far it hasn't happened. Its an average size position at most for me and it should be one of my largest. just too much of a fraidy cat so far because of the valuation -- trouble is part of the story is the potential upside to the numbers -- something have to keep in mind when worrying about valuation. If FLIR earns closer to $1.5 this year instead of the $1.20, then at $30 the stock was at 20x rather than the 25 I thought it was. A pullback towards $30 and I'll try to add some more and keep trying to get this towards a bigger position.

ILMN -- I sold some May $85 calls for $1.55 on the day after the earnings report. I sold them during the day when the stock was around $80 -- it peaked closer to $82 so I was a little early. Still a few days later when the stock was around $77 I bought them back for a $1 gain. not bad for a few days work. I am working on my timing for June calls -- still looking at the $85's but hoping to get something like $2.25 or so for them. Best case then I will end up selling ILMN for $87 or so -- that's not bad. I am reasonably confident the stock won't get too much above that and therefore worst case I roll the options forward.

DFR -- they issued a press release suggesting book value of over $3 and the stock jumped quite a bit. still haven't sold any but will definitely think about it around $1.80 or so. I am waiting also for the Q1 report. I would like to see some numbers on their current situation and future earnings power. I am betting the UBS guy is right that they can make 40 cents per year, which puts them at about 3x earnings. I think more people will be reassured and buy more of the stock post earnings then will be disappointed with their earnings power and sell.

TSRA -- more revenue than expected but lots more legal -- not surprising given all the events that occurred. Amkor won't be known for another one to two months probably -- in the meantime we wait.

CLB -- wow. what volatility huh? one moment the stock is the 100-120 range and I am debating buying it and then it spikes up to $138 and then just as quick it plummets back to the 115-120 level before jumping back around $122 or so. I listened to their EPS call and it was impressive. these guys know how to run a business. they are very focused on margins and returns on capital. that's always a good thing. they have great technologies and are gaining share in the US. I will look to buy some more of this one and will think of it as a consistent grower as long as energy prices are reasonably favorable.

markets -- lots of old fuddy duddy types out talking bearish and arguing that financials are going to shrink as a percent of the economy and that the world has changed -- no more debt financed growth and all us good US citizens are going to become huge savers. A little bit of truth -- even I have said similar stuff in that mortgage volumes would plummet and that financials would not come back quickly -- that they would become like the tech's -- which remain in the teens in terms of their percent of the market cap in the S&P 500. I expect the Financials to end up there too -- not below 10% but in the teens. I don't envision the US moving huge away from debt -- otherwise I wouldn't be owning Moody's.

Energy/commodities are just about too much money being released by the federal reserve. I'm not buying that one either -- at least when it comes to energy because there just hasn't been enough increase in supply or in production. There are too many countries like venezuela that are pumping too much oil now without spending the money on maintenance and exploration that is necessary to maintain production rates or grow them. The only argument that folks make that makes me wonder is the WSJ editorial page when they talk about the 1970's and the similarities to now. They show a chart that compares oil in dollar and euro terms and it shows that in euro terms oil hasn't gone up nearly as much. This is relatively obvious though given the fall in the dollar. I think the drop in the dollar is the clearest sign the fed has been too easy and perhaps the food shortage commodity price hikes too but energy is harder.

others argue that its due to the speculators buying futures. maybe a few dollars worth but oil is too big a market to be dominated by speculators in my mind.

that's about it for now -- I hope to post again this weekend .

Wednesday, April 23, 2008

MCO

I wasn't as sick as I let on -- Doc Holiday. At least that's the way I remember the line from Tombstone. Well Moody's reported this morning and it looks like a solid beat -- revenues about $13 mill higher than estimates (3%?) and earnings way above estimates -- 48 cents instead of the 35 cents people expected. not sure how much of that is due to operating factors -- higher rev or lower costs as opposed to lower tax rate or lower share count. I expect some is due to lower share count but a large part has to be because of the higher revenues.

I expect the stock to jump a lot today -- I'm guessing 10% based on the fact that they beat, maintained guidance while some probably figured they would cut again but the conference call is important in terms of their tone and their comments about whether there has been any improvement in the business. I know at least some of the upside was driven by non-ratings business.

Options means my upside is capped at 39.60 but I can always buy them back and then resell some calls from the next month to try to earn some money.

this is better than the alternative -- holding calls and the stock on a rapidly falling stock -- the calls only cut the losses a little bit.

quick thoughts

its getting late but its been too long since the last post -- figured its time to get something posted.

GOOG -- that will teach everyone to pay attention to those comscope or whatever they call themselves numbers. I will need to do some more work to determine a price where I might trim some -- whether it is $600 or $700, I am figuring there should be a price where I choose to trim.

CME -- ouch. they miss by a little bit but everyone freaks out and sells it down 10%? don't get it yet but I'm sure after some reading it will become clear. rate per contract fell and that is a key issue (regardless of whether it should be or not).

LH -- DGX had good results so I suspect LH might finally be ready to get moving.

ILMN -- never did the trade prior to the report tonight. realized that about 23% of the stock is sold short -- no way it was going down under those conditions but quite likely it was going up. most of that short position is probably hedge funds or similar investor types who will buy tomorrow regardless of the news -- its a discipline thing. they shorted because they believed ILMN would miss the quarter -- they didn't so now everyone has to cover and that's several days worth of volume. If the short position doesn't meaningfully drop, that's more worrisome because it means the short sellers are concerned about something else that may not be in the stock yet.

anyway, they had strong results -- in line with what Cowen said yesterday that they would report. stock was up $3-5 in after hours trading.

MCF -- the company has put itself up for sale -- question is how much are they worth? I have seen estimates between $55 and $100 or more. The idea is they will sell the stock but the undeveloped portions -- the wildcat parts will remain with a new company called Contango Energy. The name Contango comes from the futures market condition where future prices are consistently higher -- a bit cocky huh? he has created a billion dollar company out of thin air so I'll cut him some slack.

Trouble for MCF is that Peak (CEO) is moving on to the golf course and the board room. That adds some risk because it means he won't be around to handle day to day issues any more. After listening to his latest conference presentation I realized the difference -- he doesn't want to be big but profitable. He doesn't want to be in production because that is a commodity. He only wants to create new reserves out of what is currently nothing. Most every other E&P company that I have read about says some stuff about their "manufacturing" reserves but most of the time is spent on growth in production -- the commodity parts of the business. Growth in production means they care more about being bigger and less about profitability -- key is to focus on value per share not how big the production number is.

I have been trying to find another MCF to replace this one and now I realize I might as well stick with MCF's successor firm.

CLB -- this could be the other main play on the nat gas -- did some reading of their annual report, which lays out their shale play in the US using the Super HERO stuff. interesting article too in the WSJ today about saudi arabia's attempts to get their latest huge field into production -- some of the stuff they talked about are the kind of services that CLB performs.

that's it for tonight -- sleepy.

Thursday, April 17, 2008

latest thoughts

Thanks Dr John again for your insightful comments. I plan on covering my big money positions this weekend -- hopefully. This is a busy time for me -- got presentation deadlines at work that are taking too long to meet plus my son's birthday party (2 years old) next week so I have family invading soon.

I should just be able to adjust my positions to the right size -- the one I feel comfortable with -- and not worry about it. Unfortunately there are times when this analyst only cares about being right -- not the dollar impact of those decisions. So I have beaten myself up in the past because a trade I have done may have cost me a few hundred dollars -- relatively insignificant compared to the total. Ironically there are other times when I should be concerned -- like DFR -- I throw money down the drain without any agonizing. ILMN is one of those situations where regardless of the actual dollars involved I want to be right -- that's not the way to manage money -- it speaks of a lack of control of my emotions but none of us are perfect.

I'm sure one of things going through my mind is my experience with AFFX -- thankfully a round trip instead of a big loss for me but I bought in the low to mid 30's a few years ago and watched with glee as the stock rose to $60. Never sold a share until it got back down to my cost. I sold because I realized ILMN was kicking their butt. Waiting patiently for ILMN to sell off good enough to feel the risks were low enough and bought in. happy ending so far. Will ILMN head back down to the $30's? anything is possible in such a high change industry but the rational part of me says no way. the irrational part of me? well..........

Anyway, one other topic for the weekend is Pall -- I am going to cover what interests me and why I'm wary of the stock.

Made some comments about the market going to new lows in the last note and then I subsequently read Ken Fisher (Forbes) latest thoughts. He has a great track record of calling the major turning points in the market -- he considers the August to now period as just a correction so he gives himself a pass for not predicting it. So that's the issue for me and him -- he has a great record -- calling the 2000 top and the 2002 bottom (he claims to have called for a bear market in july of 1987 too) but he missed this turn and so far he continues to dismiss any actual decline or fear of decline as no big deal -- just a correction. If you missed the turn this time, you are likely to either keep missing the declines or turn bearish near the end. I doubt he will turn bearish near the end but missing the declines - yep that's possible.

Its really just an exercise for fun -- the goal is to focus on individual stocks and their future potential -- the overall market environment is obviously very interesting but probably too distracting. Time horizon -- if FLIR pulls back on a fall in demand due to the economy should I sell or buy more? I am in for the long term secular march of infrared technology. That is not impacted by the economy but rather only by potential alternative technologies or FLIR's competitive position deteriorating. No evidence of either. At this point though, I don't anticipate too much of a slowdown in FLIR's business -- 50% is government and the rest is in the midst of strong product cycles.

Speaking of the long term position, one hedge fund manager on RealMoney is short ILMN based on valuation and the potential for a slowing in momentum. He also seems to suggest if the stock gets hit that a good buying opportunity is likely to unfold -- its all about time horizon. ILMN should benefit from the genetic revolution for some time to come but that doesn't mean hiccups won't occur along the way (this is me trying to convince myself).

have fun!

Wednesday, April 16, 2008

ILMN and TSRA

ILMN got smacked today by a few dollars -- after hours it was up I think on Intel's good news but we'll see how long that lasts. Apparently Sequenom also missed last week or so -- now some are arguing that others are missing because IlMN is taking all the money for research dollars into the next gen sequencing. if that is the case then sell ILMN -- it means there isn't any growth overall and even if ILMN shows some growth now through share gains they aren't sustainable. I think downside on ILMN is between $50 and $60 -- if the stock really decides to pull back. That kind of pull back is possible if it turns out that demand for their products is slowing -- not in expectations at all.

I am bummed I didn't have the guts to sell calls when it was almost $80. Might still decide to sell some if it gets above $75. we'll see. heard stories that some consumable companies like SIAL are vulnerable due to inventory corrections -- Yikes but it could make sense -- anything in shortage experiences double ordering until demand catches up.

TSRA -- no new news on the trial front its still wait and see. on the fundamentals side the demand for tech products is slacking off -- quite a few pre-announcements of late suggesting demand is squishy at best. now many are likely pricing related whereas TSRA is driven by unit demand. But still likely some unit issues too. Intel's report suggests demand OK although I haven't read the details. a little less upside potentially but if they win the trials there is still so much revenue at stake that a few less units don't matter.

one that surprises me is LH - -consistent grower that is selling at a cheap valuation. every so often the stock goes flat for a while before jumping 10-15 bucks. we are deep into one of those periods where the stock has ranged from $70 to $80 for over a year. I think there is either a fundamental problem that has not come to light yet or this stock is a great opportunity. bad debt expense is the main issue -- slowing economy means fewer tests and more tests not paid for. That is the risk. seems like its in the stock now.

We are likely heading for new lows -- I know the double bottom but I think that is a head fake -- I think the first low in January was artificially made lower by the societe general trader. Without that the low would have been higher --meaning no double bottom. that's called rationalizing an indicator but reality is too many other indicators are not backing up the double bottom thesis. banks are underperforming on a relative basis -- last 2 times that has happened the market went to new lows. means I should be raising cash again -- hoping for a rally before that happens. The trouble will be that I had a rally to sell into but I kept hoping for more. that's the trouble -- got to know when the rally is out of gas and time to sell.

good luck

Tuesday, April 15, 2008

ILMN

a competitor to ILMN called Affymetrix (AFFX) blew up after hours last night - missed estimates for this whole year bad so stock was down 23%. ILMN was trading down a couple of dollars in sympathy. AFFX has been a dog for quite some time -- they have been beaten time and again by ILMN and others so don't read too much into their miss. On the other hand, I think the issue for ILMN is what happens if they just meet estimates and don't raise -- the valuation is too high for that kind of report. Now the last few days are taking some of the air out of the valuation but its still pretty high.

next week they report -- should be interesting -- will read up on what the analysts have to say too.

Sunday, April 13, 2008

GE, MCO and other thoughts

GE is not what it was -- actually it never was as good as people thought. Reality is that GE's financial services business has long benefited from the association to the AAA rated industrial side. Perhaps markets have adjusted some but unless I am mistaken they are still able to borrow much cheaper than most financials because of that AAA rating. Its similar to how FNM and FRE are able to borrow cheaper than anyone else because of the implicit government guarantee.

That's why they can't just spin out the financial services part of GE -- it would mean a massive hit to profitability.

Yet anyone who argues that GE is or has been cheap the last few years doesn't understand the math -- figure out what percent of profits comes from financial services and put a 10X PE on that. Then put a high teens multiple on the rest and what do you get? basically what GE has been selling at.

The trouble is their industrial side isn't doing as well as others that are more pure play companies. Pretty sure EMR, UTX, CAT, etc. have done better.

Big question though is what does GE's results mean for the rest of the market? Well the key question is the impact of funding for large cap ex projects. GE's results suggest that the Bear Stearns issues led to problems for anyone trying to get funding for large projects near the end of Q1. That could impact a large part of the economy. What is relatively safe? small dollar purchases, consumables, businesses with large international revenues, almost anything energy/materials related (those that sell the exploration and production equipment could be hurt if their customers couldn't get financing).

Stuff like LH, TECH, PEP, TSRA, UEPS, WWY, MCF, CLB, FDS, CME, ERF, etc should not be affected. ILMN's instrument growth could be impacted but most of its profits come from consumables -- same with BLUD.

Moody's did fall towards $35 but I did not cover the calls I have written on my position. I forgot that as the option moves from way in the money towards at the money the delta is not 1 -- the intrinsic value falls but the time value increases. So the stock has dropped $2.3 since I sold the calls but the calls have only dropped about $1.70. So the stock is in the money by 68 cents but the options are going for $2.90 to buy. thats about $2.2 in time value due to the high volatility of the shares of late.

I'm about to start the sharp decay of time value that occurs in the last month (we are at 5 weeks to expiration). Its true if the stock moves up then time value becomes intrinsic value. My plan is for somewhere between $1 and $2 before covering. Once I have covered then I will start looking at June's (when they start trading) to try to get some more money.

The theory is that this is a great business, selling at a reasonable valuation but that has no near term catalysts and that has options with lots of value embedded. Meaning the stock shouldn't fall too much but also isn't likely to take off either and yet too many don't realize that yet so the options offer good return. If I could make a couple of bucks in option premium every couple of months that would be a great deal on this stock -- that's why I don't think it will happen. Its why you have to take advantage of the situation when its there because good chance in another month the June 35's won't be going for $3 when the stock is $35.70. Maybe its $2 instead.