a few stock updates

I am slowly working through conference calls and other earnings related info to get a handle on my stocks. As far as the market goes -- we have rallied to the highs and the big question is will we sell off again to retest the last low or will we keep climbing the wall of worry. My first thought has been the trading range (1025-1100) would continue for awhile longer but I am wondering if too many other folks are not expecting new highs. Various sentiment measures reached similar extremes as in mid July.

Lots of big money boys have sold calls and bought puts trying to protect gains for the year -- if we do rally, then many of those folks will panic and buy back the calls, which will force the market higher. That would seem to be a likely scenario given that it would cause the most pain. I know I am short calls so a big rally would cause my stocks to gain but my options to lose -- so I'm a bit hedged as well. Only 7 trading days to expiration....

Some stock comments:

Iridium -- I went and saw Whitney Tilson of T2 partners make a presentation and this is their largest holding. I know they own warrants but they also probably own the stock too. The 30 second version: Iridium is the only reliable way to gain global communications coverage for those that need it. Terrestrial coverage is only 10% of the earth's surface area so shippers/logistics, military, those that sell products everywhere (Coca-Cola?), etc have no other choice. Their biggest growth is from machine to machine communications -- still working on some examples of that. Anyway, if you want to play the story, make sure you buy the warrants rather than the stock. to me the warrants are undervalued and offer much greater upside potential.

Warrants exercise at $7 (IRDMW) and expire in Feb of 2013 so with the stock around $9.50 to $9.70 you have about $2.6 or so of intrinsic value and only about $1.1 of time value despite more than 3 years of time to expiration and an IV for their longest options of like 50-60%. A back of the envelope (i.e. not 100% accurate but close enough for me) model for the warrants suggests that at $3.70ish they have IV of 25-30% or well below what I would expect given that its a small cap stock and the IV for their options is 2x that level. Now, keep in mind that the warrants will be FAR more volatile than the stock -- a drop in the stock would crush the warrants so base your position size on the stock's value not on the warrant's. To really take advantage of the low IV in the warrants, you should probably delta hedge -- i.e. short some of the stock to reduce risk in case of a drop. They report earnings thursday.

ILMN -- stock bottomed near $32 same as after the June quarter. There were a few issues with the quarter as to why they disappointed. From what I understand they have a quality issue that forced them to remove product and that hurt sales. There is also delays in stimulus and a lack of projects for the genome wide arrays. These seem like short term issues to me but the longer term risk is if the quality issue leads customers to diversify away from ILMN whose market share is quite high due to their lead and strong previous track record of quality product. To me they are still leaders in one of the key areas of health care technology -- DNA analysis. I will look to sell out of the money puts to take advantage of the pull back to add exposure.

TSRA -- I think the value has to be clipped some for the DRAM business being smaller than first thought due to the volume deals but the stock more than reflects it -- they have about $9 a share in cash and an optics business worth a similar amount so you are getting a microelectronics business that generates more than $1 per year in free cash flow for about $5-6. Either that or you put the value on microelectronics and get the optics for free. its a cheap stock. They have better financials then other royalty companies and yet have a lower valuation -- over time I believe this will be resolved positively. Within a couple of years I would expect them to produce free cash flow of $2 to $3 and that should drive a stock anywhere from $40 to $60 -- well above where we are now. That presupposes they will be able to renew their major license contracts that expire in 2012 at similar terms -- new technologies like micro pilar should make this a non-issue -- the customers will renew because TSRA offer's a better solution than they could develop on their own.

ARCC -- They spent the last several months doing due diligence on ALD's portfolio before deciding to buy them for .5x book value. There is huge opportunity here for ARCC in a scavenger role. ALD has already reduced the value of their assets by probably half so to pay half book value is a further margin of safety. So there is the upside that comes from potentially paying less than the assets are worth. There is the upside from lowering ALD's funding costs, which are well above ARCC's. There is the upside from shifting ALD's portfolio into more debt and less equity to boost risk adjusted returns and generate higher income. The deal is immediately accretive and should materially increase ARCC's value over the next couple of years. What is material? I wonder why they won't be able to increase dividends to north of $2 over the next couple of years. That's about 50% higher. I think this could be a high teens stock paying a double digit yield. -- vs. $11 bucks now? still lots of opportunity despite the rally from under $4 in march. That was a ridiculous price that had no bearing on value -- it was forced selling related.

UEPS -- haven't had the chance to review the call yet but numbers all looked good. In FY09 they produced over $100 mill in free cash flow on a revenue base of $250 mill and assets of about $500 mill -- that's not bad. They bought back almost 20% of the stock last year (took out a large private equity owner) so the assets are now closer to $400 mill but the cash flow is growing. Close to 25% free cash flow return on assets. The stock has a market cap of just over $1 bill -- about 10% free cash flow yield. so over 40% free cash flow margin with great returns on assets and huge growth potential in terms of getting more smart cards in new countries -- Iraq, Russia, rest of Africa, etc. and yet the stock is super cheap. essentially everyone believes they are going to lose the SA welfare business (at least the economics so keep the deal at lower pricing) and not pick up business anywhere else in the world as an offset. My bet is that they won't lose SA and they will gain SA wage payment, Nigeria, Ghana, Iraq, Russia, etc. so that in a few years they are producing $4-5 in free cash flow (instead of the $2 now. With a more appropriate multiple, I reiterate this could be a $100 stock in a few years. in the meantime they were able to buy back 16% of the stock last quarter and still have cash at the end the quarter at about 1/3 of assets with no debt. They are a cash machine it is only a matter of time before it becomes more known. I am thinking about writing up a full discussion and submitting it to seekingalpha.com. we'll see.