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


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