Archive | March, 2011

21 Mar 2011 – UP 20.5% YTD

21 Mar

Adding the cash generated from exit positions including merg-arb in Genzyme and exit from BRCD. NDN position also exited after takeover proposal.

Advertisements

Sold out NDN UP 30% new position CLNE

18 Mar

My logic for purchasing 99 Cents Stores Only were its deep value, growing positive economic fundamentals for the business and consumer bias towards value in the face of food inflation – the price of milk, eggs, bread and gasoline. Consumers in this environment tend to purchase fewer ipods and consumer electronics and focus on the bread and butter.  The buyout offer from Leonard Green and Partners offers a good opportunity for the private equity firm to scale up the business across the US growing their base out of California. Even at the buyout valuation at approx 10X this mirrors the peer valuation for the group and is still fairly cheap. The primary headwind for the group is increasing commodity costs which will pressure margins; however, the products normally shelved at such franchises are normally sub-tier for the most part which should ensure margins at least remain appropriately profitable and with higher purchase volumes this should allow value franchises to mitigate cost pressures.

Clean Energy Fuels Corp (CLNE) is the latest addition with a purchase px at 12.9 this stock offers incredible value. Fundamentals normally drive stocks and if the Street appreciates the value of LNG for transportation then CLNE is going to be a significant gainer. T Boone Pickens is the largest stockholder and he has a very good record in the energy sector. I don’t necessarily believe the bias here will be towards clean energy but instead simply because LNG is incredibly cheap compared to oil and there is an abundance in the US and Canada. However, the infrastructure for transporting LNG and natural gas pipelines still need a lot of development across the US and CLNE can certainly aid that process. Not too long ago CLNE had good support around $20 so now that the company is profitable and with a 60% increase in YOY sales these are good drivers for a lot of strong upward momentum in the stock.

Contrarian view on nuclear power and CCJ

16 Mar

Despite heavy losses on CCJ which I would have held is this a time to sell? Protection would protect a lot of the losses but imagine if the situation in Japan surprises. Clearly if this nuclear problem can be contained nuclear despite now almost worldwide concern can on the contrary have a positive future. Also Japan is situated alongside a number of well known tectonic plates which induces a greater likelihood of natural disturbances.  This geographical positioning does not affect all countries equally.

Also aren’t countries with a nuclear bias already too entrenched in their nuclear developments? I don’t believe so but like the disaster in the Gulf of Mexico short-term market dynamics and momentum are not a good indicator of longer term performance. In fact we will now face greater scrutiny around nuclear generated power, and typically where regulation constrains a market typically the price of that commodity or instrument rises. Take a crude example such as illegal drugs or something more closer to home like healthcare, generally higher regulation = higher costs of doing business. In fact it has been noted that a double in the price of uranium would only increase a nuclear power plants cost by 7% because the cost of uranium itself is not the main input cost, it is the cost of maintaining a nuclear power plant.

Right now it is better to stay away from this sector altogether if you have no risk exposure to it but over the  longer term the fundamentals for nuclear remain positive if you can withstand some short-term volatility. The known reserves of uranium are dwindling; old Russian missile supplies which still count for a significant proportion of the uranium market are being pressured, and their ongoing supply is dicey.  The S&P 500 has just turned negative YTD 2011; it is surprising that there are number of hedge funds charging 2-20 and yet are not providing any returns.

Larry Summers – Japan quake may lead to temp. GDP increments

13 Mar

http://www.cnbc.com/id/15840232?play=1&video=1837577735

Firstly, this is a tragedy and our thoughts are with the people who have suffered in this quake. This is the problem when we have a distorted view of what economic growth is. Indiscriminate spending does not contribute to economic growth. Summers basically believes in the ‘broken window’ philosophy and quite clearly one has to recognise that the spending that will ensue to rebuild Japan will not contribute to the productive capacity of the nation; rebuilding Japan will require increased borrrowing from Japanese citizens to rebuild buildings and infrastruture that were already functioning and efficient. So this will not contribute to GDP growth but it will add to their structural deficit and heighten their bond market awakening.

Radioshack (RSH) value trap or value play?

13 Mar

Radioshack has fallen almost 20% YTD 2011. Most of that relates to the downward Q4 revision 2010 and the upcoming retirement of their CEO and Chairman. Additionally there are concerns re: increasing competition from Amazon and Best Buy and issues around margin compression basically from introducing new products offerings like the T-Mobile wireless services and outreach kiosks in Target stores. Lower earnings than the Street expected have also heightened pressure on RSH stock.

Not too long ago hype around TPG/Blackstone offers circa $3bn propelled the stock upwards and provided a comfortable level of support. Basically this stock offers deep value at around 5x P/E backing out cash – back of the envelope analysis. Long term the fundamentals don’t look good for the brick-and-mortar side of the business but in the medium term until franchises like Amazon offer reliable post-service purchase support for electronic products consumers will still prefer to purchase the higher priced electronics and white goods direct from the retailer. This type of mindset may take a decade to reverse because quite clearly pure play online retailers don’t offer the post-purchase support or the direct interface with the product like a traditional brick-and-mortar. Visibility and the aesthetics of the product itself are critical here. Amazon have introduced more video displays of products but mainly reserved within electronics to the more portable products, which are more conducive to online purchasing.

Radioshack is very attractive right now without considering any takeover premium. RSH still also has an accelerated $500m share repurchase program outstanding. Their clear appreciation of the mobile euphoria  and their positioning to capitalise on that shows that RSH management are credible and prior succession planning should ease the concerns on the Street.

The last 2 years have also shown us that even in difficult economic circumstances consumer electronics esp. mobile products have remained strong and are experiencing double digit annualised growth; Radioshack online offerings can also boost marketability and help towards alleviating margin compression.   Our fickle nature as humans require that we have products (that we deem to have a need for) immediately; online purchases delay the consumer and the ability to cross-sell is markedly reduced compared to brick-and-mortar. Taking a quick look at Youtube and forums consumers point out that RSH staff lack product knowledge and that some stores are frequently empty; private equity would root out any locational inefficiencies and would focus on upskilling existing staff. RSH needs to address these issues ASAP especially at single-fronted stores away from the main malls. At the same time Best Buy’s adventure offshore widening its market exposure may benefit Radioshack (RSH) in that this may provide opportunities to capitalise on any domestic weakness BBY may exhibit.

Radioshack does need to normalise in this new environment and assess its store positioning and geography and assess the feasibility of its current locations. Obviously margins need to be improved so cost reductions and efficiencies are going to be ongoing issues for the next couple of quarters and over the next few years. Some of the dynamics at Best Buy and Radioshack are reminiscent of Blockbuster – falling margins, online competition, more demanding consumers, price inelasticity, and industry consolidation. However, the key difference is that Netflix created an altogether new platform and commoditised the process; the process of renting DVDs became a homogenous process; Radioshack is a multi-product offering so the risk is somewhat spread and less concentrated.

Radioshack though is not a long-term hold, I expect an upward correction to fair value and it is difficult to estimate the px quite frankly but is markedly above current levels. I would not be at least surprised if Best Buy (BBY) sought to purchase RSH to anchor its domestic foothold on the consumer electronics market in order to rationalise and focus on its global footprint with its full attention. Seagate recently purchased Hitachi’s hard drive business further consolidating that market and the px of the remaining players in that niche rose because competition is now reduced offering the remaining players more flexibility and control on pricing and margins.

Children’s Place (PLCE)

12 Mar

This was an add to my portfolio at approx $42.  The market cap at the time was $1.07 BN approx.  Children’s Place is a pure play on apparel/clothing and is also held by the hedge fund Metropolitan Capital – Karen Finerman. Basically at that valuation it was trading at 7X P/E  approx backing out cash and looking at their balance sheet fundamentals. The stock had a lot of downward momentum following Q3 2010 downward guidance revision however at that valuation this was at a comfortable level that offered a considerable amount of margin of safety.

Additionally, PLCE had already announced a $100M buy-back, a significant amount of the outstanding shares almost creating a put level in the stock. PLCE is a premier franchise in children’s apparel/clothing; children’s clothing is price elastic and better able to weather price increases; parents seeing their child in adorable clothing are less likely to be as price sensitive relative to other apparel markets.  PLCE therefore can better able manage margin compression with rising cotton and input prices.  At that valuation takeover/private equity etc. would also seem to be a viable possibility with an appropriate premium.

Now at approx 9X this is still at an attractive valuation and still below the px before Q3 2010 downward earnings revision.

The current portfolio $100M total 12 MAR 11 YTD: 19.55%

12 Mar

%d bloggers like this: