Thursday, March 31, 2005

Paul Kasriel

on the U.S. savings situation. Well-worth 5 or 10 minutes of your time.

Wednesday, March 30, 2005

Energy Stocks--E&P and Oil Services (sorry about the formatting)

I consider myself a long-term bull on the energy sector. Right now, my
only position is in APA (an E&P co.) but I also like XTO (E&P) and
Schlumberger (SLB) on the oil-services side. In terms of Apache (APA),
I see them ending this year with $6 in earnings and $12 in OCF/S. I like
APA because it has very low F&D costs, an approximate 50/50 oil to natural
gas split, has a diversified reserve base and has a very well respected
management team. Apache is also pretty well known for acquiring proven
assets and further developing them as opposed to strict exploration
(conservative approach). I also like the way management promotes
loyalty
. Finally, APA's balance sheet is in
great shape compared to the rest of the industry.

In the next 12 months, I do think there is downside potential in the
price of oil to maybe the high $30's. If the American consumer finally
collapses and the U.S. sinks into a recession, crude prices would certainly be
affected (I think the U.S. consumes approx. 25% of the world's oil).
Also, because the American consumer is so closely linked to the Chinese
producer, a retrenchment on our part could leave the Chinese with enormous spare
production capacity and would slow their growth rate of demand for oil.
Should such a scenario occur, I'll be loading up the truck with my
favorite energy names. Here's why: (visit this Energy Blog for more detail on
any of these points plus a lot more)


On the supply side:

There haven't been any major oil fields discovered in years.

North Sea is in decline

The amount of Saudi reserves (and other OPEC member reserves) is
questionable. Do a search on "Simmons and oil" for more on this.

Disruptions in Middle East (Iraq now, Iran later?)

Unfriendly governments (Chavez in Venezuela) and potentially Putin
in Russia

Refining capacity is extremely tight.

On the demand side:
Even if the world economy slides in the next 12-18 months, I think
long-term (5-10 years) oil demand in the developed world will grow
inthe low-single digits and will grow in the upper single digits in
thedeveloping world (China, India). There is simply not enough oil to
support this level of demand. I don't see alternative technologies
alleviating our demand for oil to any appreciable level by 2010 or
2015.

Kurt Richebacher on our precarious state

an OATS update

About a day or two after I went short on OATS, it was reported that a famous investor named Ron Burkle holds a 9% positon in the company. The shares advanced another 10% after this news. Though I'm not thrilled with this move, I don't subscribe to the idea that following an investment guru will yield outstanding results. I can remember a few years ago when Buffet and Bill Miller (I think it was Miller) bought a ton of LVLT convertibles. The price of the common stock went through the roof. I heard the argument "If it's good enough for Buffet, it's good enough for me." I found this reasoning pretty weak as a) Buffet has tens of billions of dollars and you don't (different financial position, different abilites to take risk) and b) much of the upside has already taken place (i.e. you missed the boat). If I recall correctly, after the news broke, LVLT got into the $5's or $6's. Now it's around 2.

Yes I realize that LVLT and OATS are different companies but just because a famous investor with grocery experience has a stake in the business does not diminish the significant challenges that OATS has ahead of it. One of the staunch OATS bears, an analyst from CL King put out a note today basically stating that Burkle can provide some value to OATS but that the recent move is overdone. All in all, I'm staying short.

Tuesday, March 29, 2005

Jim Puplava's Latest

Andy Xie

Monday, March 28, 2005

Stephen Roach discusses

one of the most loved

sectors over the past decade has been the orthopedic device makers (SYK, ZMH, SNN, WMGI). Investors and analysts recognize the volume gains (baby boomers), price/mix benefits and oligopolistic nature of the industry and have pushed the stocks of these firms up to pretty lofty levels. I just read a note from Prudential that urges caution with respect to these stocks. The firm feels that high single digit volume gains should persist in the U.S. but that we might start to see signs of deceleration in price & mix. They note that "mix" is not always a benefit to these companies. For example, patients could easily move away from Ceramic on Ceramic hips to hips of comparable quality that cost 1/2 the price.

Saturday, March 26, 2005

an Under the Radar play on BPO--PSPT

One trend that has certainly accelerated over the past 5 years is the outsourcing of U.S. service-type jobs to developing nations. Stephen Roach often refers to this as "global labor arbitrage." If an American CEO has a choice between two similarly skilled people for a job, an American and an Indian, the wage differences are too great not to closely examine what the Indian person (or plant or location) can bring to the table. Over the past few years, the business press has devoted considerable attention to the offshore IT outsourcers, particularly those from India. These companies include INFY, WIT, CTSH and Tata. I've looked at these companies pretty seriously but find them rather expensive. Might there be another way to play this trend towards offshore Business Process Outsourcing (BPO)?

One company that I like that's gotten beaten up of late is PeopleSupport (PSPT). They are primarily in the in-bound customer contact business and operate out of the Phillippines. Some reasons for the recent weakness include slightly weaker guidance for the coming year, a looming lock-up expiration and customer concentration risk. Despite these issues, I think there is a lot to like about the story.

  • Probably most significantly, I don't see offshore BPO slowing down. There might be some whining in Congress or certain media outlets, but I think the underlying trend is set.
  • PSPT deals with in-bound calls, email, and web chat. They aren't calling people to bother them. Also, accents from the Phillipine workers are not as harsh to American ears as some others (Indian)
  • The work force is talented. From my experience with U.S. call centers, most reps appear to be disinterested and uneducated. PSPT hires some really talented and motivated individuals. The co. received 78,000 applications in 2004 and hired 1,800 (2%). Clearly PSPT is an employer of choice.
  • Operating margins are around 18% compared to many domestic call centers whose operating margins are in the mid-upper single digits.
  • The PPS (around $8.25) is not ridiculously expensive. AG Edwards sees 2005 EPS at $0.42 and 2006 at $0.60.
  • Besides the cost saving element, PSPT also provides a workforce that are cross trained on the different channels (email, phone, chat) and will cross-sell a client's products if so instructed.
  • Client concentration risk is something that needs to be monitored. The top 4 clients (69% of revenue) are Expedia, Earthlink, a division of Expedia, and Star Number.
I do like the PSPT story a lot. I'm just not that interested on going long on too much right now. Maybe after the lock-up I'll take another look. But I do feel that PSPT can grow the top line at 20% for the next few years (and the bottom line a bit quicker). All in all, it certainly deserves a look.

Mr. Roach

on the Fed playing catch up..

Friday, March 25, 2005

couple of notes on PFE

  • PFE held an update with analysts a few weeks ago on torcetrapib trials. There really were not any surprises in terms of efficacy (raises HDL significantly) but the concern is that in some subjects, blood pressure increases were observed. However, the researcher noted that these increases were not dose dependent. This is something I'll keep an eye on.

  • PFE is also trying to get Viagra approved for Pulmonary Arterial Hypertension (PAH). The analyst over at Suntrust seems to think this will happen and will add approx. $300MM in sales to PFE.
  • Analyst day is in the first week of April. Could be a catalyst for the shares.

Wednesday, March 23, 2005

WebSide Story (WSSI)

I'm a big believer in the benefits that website analytics can bring to
an e-commerce company. Here are some of the issues that a good web
analytics program can help a marketer address:

Where are my visitors coming from, natural
search, paid search,directly to the site? How do
natural search visitors perform on my site vs.
paid search visitors? How do the different paid
search programs stack up against each other? You
can break this type of analysis down even further
by keyword. Also, one would hope to learn the best
way to optimize his site for the search engines.

On site behavior--Which products/categories are most
profitable on my site? Are we effectively converting
visitors into buyers? What does the path analysis
of a customer look like? Are they dropping off of
the site at a particular place? What impact does
shopping cart abandonment have?

Site Real Estate--What are the effective areas of
different pages on your site? Where do visitors
gravitate to? If I change something on the home
page, how will visitors be effected?

After we come up with this massive
amount of data, how can we use it? Can we segment
our customers based on certain characteristics?
Can we come up with a hi/medium/low type grouping?


There are many more components to a web analytics
solution, but this is the idea. I feel strongly
that many e-commerce companies (esp. medium sized down)
have no idea about how their customers or visitors
perform on-line. For them, it's a huge black box.
I think eventually many of these companies will
realize the benefits of digging deeper.


There are four main players in this space: WebSide
Story, Omniture, Coremetrics and Web Trends. Both
Omniture and Coremetrics are private and have roughly
the same annual revenues as WebSide Story ($20-40MM).
I have some experience at my current job at a direct
marketing company with Web Trends and am not that
impressed. The interface is a bit clunky and support
is mediocre at best. Also, Web Trends is a part of
Net IQ. I have no interest in the other parts of Net
IQ so that pretty much rules them out as an investment
for me. Note that Web Trends is the industry leader
(at least in terms of rev) at something like an $80MM
annual rate.

I encourage you to do more research into this space,
but I think a CAGR through 2010 will be in the 25% range.
Specifically, I like WSSI for the following reasons:
well respected offering (Forrester)

WSSI offers subscription based model. This creates
a good deal of revenue visability.

operating leverage. Right now op income is around 14%.
Management would like to drive this to 25%-33%
recent acquisition of Atomz brings two important
elements to WSSI: on-site search and bid management

Even though I like the story, I'm not interested
in going long on too many stocks now (WSSI included).
Maybe if it pulls back to 10.50 from its current price
around 12.50, I'll pull the trigger.

Mark Rostenko is the Sovereign Strategist

Mr. Rostenko publishes a free e-newsletter once every week or two. It's certainly worth a look. Here's what he sent out today.

Spring Has Sprung and the Market’s Done?

Have you noticed? Stocks are falling. Oh, not enough to
give the bulls nightmares at this point. Perhaps it’s just
another dip in the eternal bull market, yet another buying
opportunity. On the other hand, there’s a very good
chance that recent weakness is signaling the end of the
cyclical bull and re-emergence of the secular bear.

While the overall trend remains upward, cracks that began
to appear some time ago continue to grow wider. A
glaring divergence between the Nasdaq Composite and
the other major indices tops the list.

Those familiar with Dow Theory understand the
importance of confirmation between the Industrials,
Transports and Utilities. I’m not so sure that the Dow
retains the significance it once did and prefer an updated
version of the theory which observes relationships
between the Dow Industrials, S&P 500 and the Nasdaq
Composite. In a strong and healthy bull market we like to
see all three indices moving generally in tandem.

It’s no secret that the Nasdaq was visibly absent at the
recent new cyclical bull market high party for the Dow and
S&P 500. That first major sign of weakness was
confirmed last week when the Nasdaq fell below its
January low, thus extending the bearish intermediate-term
trend which began in earnest on the first trading session
of this year.

Arguably the Nasdaq hasn’t moved quite in tandem with
the other indices for some time so we might be tempted to
dismiss the apparent significance of this development.
We might, were it not for the fact that both the Dow and
S&P 500 failed dismally at their recent new highs. What
should have been a bullish event ushering in new buyers
and renewed bull market enthusiasm instead woke up
sellers who grabbed the ball and ran with it, to almost a
5% decline in two weeks (S&P 500).

Now just for sport, let’s engage in typical investor/media/
government/Fed practice and all stick our heads in the
sand and ignore all those obvious danger signs. (Click
your heels together three times and mutter “Bubbles never
pop! This time it really is different!” for good measure.)
With heads firmly planted underground, we’re more likely
to experience a swift kick in the rump by a few other
unmistakably foreboding divergences.

Take a gander at the financial stocks. Or just at XLF, the
Financial Sector “SPiDeR” if you’re exceedingly lazy like
me. What we have here is a series of descending highs
indicating that buyers have grown weary. Top it off with
last week’s breakdown that confirmed a major top.
Meanwhile the energy stocks are in the stratosphere.
Bearish financials coupled with bullish energies doesn’t
generally paint a rosy picture for the market as a whole.

While you’re at it, take a peek at the CRB Index which hit
a new 24-year high last week. Prices of tangibles, real
goods, continue to climb while paper assets struggle. The
18-20 year paper/tangibles cycle that I discuss from time
to time is obviously in full swing and still only in its early
stages. Should paper (stocks) regain long-term strength,
it’d be in direct defiance of a consistent and undisputed
130-year pattern.

But somehow I doubt that things are different this time, my
primary evidence being that they never are. Only the
faces of the clowns who insist that “this time it really is
different” change. (But not nearly fast enough for my
tastes.)

Anyone expressing any semblance of surprise at the sell-
off and growing weaknesses simply hasn’t been paying
attention. Or perhaps paying far too much attention to
Chief Spin Doctor at the Ministry of Economic Propaganda
and Fantasticallacious Financial Delusions, Alan
Greenscam who, as usual, delivered yet another long-
winded and painfully dull reiteration of the ”everything is
fine and under control” song on Tuesday.

Naturally the Fed acknowledged inflation concerns to
prevent the commentary from slipping too deep into the
patently absurd and 100% laughable. Even the Fed
knows you can’t fool all the people all of the time, (just
most of the people most of the time), so it’s wise to
acknowledge some kind of risk in order to maintain some
modicum of credibility.

Say what you will about the risks of inflation, but prices
are rising and it has everything to do with a weak dollar,
the result of massive credit and money supply expansion.
More and more dollars fetching a relatively steady supply
of stuff. What’s the risk of $60 oil and $3 per gallon
gasoline? Pretty high in an economic expansion that is at
the tail end of historical average longevity. But don’t worry
about that. The White House assures us that adjusted for
inflation, gas prices aren’t much above the 1970s highs.

Next time you’re at the pump be sure and ask your
friendly neighborhood mini-mart clerk if he can break a
1970s inflation-adjusted $20 bill. Then you can fill your
tank and take the family out for an inflation-adjusted meal
at McD’s and still have enough change left over to see an
inflation-adjusted movie. Or maybe just stay at home and
regale the kiddies with exciting tales of pre-Greenspan
days when $20 bought more than a quart of generic brand
corn oil and half a Twix bar.

Or just enjoy watching the stock market come under
continued pressure. The chickens are coming home to
roost and even the inflated stock market is having a hard
time avoiding the flurry of feathers. The deficits DO
matter. The weak dollar DOES matter. Near-record lows
in national savings don’t lay the groundwork for a healthy
economic expansion.

Sure the numbers might look better but the devil continues
to reside in his favorite place: the details. We’re creating
some jobs but they’re low-paying service industry jobs.
Wages aren’t increasing. Of course that’s spun bullishly
as well. The feds call it “a lack of wage inflation
pressures.” You and I call it “not making ends meet.”

Yes, the headline numbers can be and will continue to be
manipulated, massaged and presented in as bullish a light
as possible. But just look to the markets for the real story.
With raw materials at 24-year highs, fuel prices at record
highs, and stocks into their second year of struggling with
making new highs, it’s becoming exceedingly clear that
the cyclical bull is gasping for breath. Meanwhile, spring
has sprung and the bear is scratching his armpits looking around for a
meal. Don’t let it be you...



Mark M. Rostenko
Editor
The Sovereign Strategist



Copyright 2004 Mark M. Rostenko
and The Sovereign Strategist

Dr. Doom speaks

Dr. Marc Faber's latest, always worth a read. Go down towards the bottom of the page.

Tuesday, March 22, 2005

one of the few stocks

that I'm long right now is NIC (ticker EGOV). I think the business model is compelling, operating margins are set to expand, and FCF generation is strong. You can find a pretty good initiation of EGOV at Stifel Nicolaus. Go here and type "EGOV" in the Symbol box

latest from Jim Puplava

Stephen Roach on China

"For world financial markets, the China call is obviously very important. Those banking on a prompt policy response from Beijing to the surprisingly strong Chinese data for early 2005 are likely to be disappointed. At a minimum, the authorities seem willing to let the economy run for a while before they see how the data shake out in the months ahead. Barring a growth accident elsewhere around the world, that suggests little relief on the demand side of energy or other commodity markets -- further fueling inflationary expectations, central bank tightening, and a general back-up in the bond market. My bottom line for the markets: With China’s risk-reward calculus acutely sensitive to the all-important stability constraint, I read the message from this year’s China Development Forum as pretty much a green light on the growth front. " more

Monday, March 21, 2005

Went short on OATS today

Wild Oats Markets (OATS) has been on a tear of late. In the last month, the stock has gone from around 6 to over 9 today (intraday). Much of this move can be attributed to two analyst upgrades, one from Prudential and another from KeyBanc. These upgrades also probably forced a good deal of short covering (short interest 10%+). I went short in the 8.80's today. Here is why I feel there is more downside than up at the current level:

  • Whole Foods (WFMI) shows no signs of letting up. According to WFMI management, their are 26 new WF stores in the pipeline that will compete directly with OATS. Even OATS longs can't argue with the fact that WFMI is the industry star. Gross margin is approx. 700 basis points better at WFMI and in Q4'04, SSS were up 11% at WFMI and down 3% at OATS.

  • What about Kroger or Albertson’s or WMT or TGT? I can’t speak to specifics here, but with natural foods growing at a decent clip, surely they’ll dedicate some shelf space in this direction.

  • Even though comps were down 3% in Q4 for OATS, that was better than analysts had forecasted (-5-6%) and Prudential is pointing to stronger sales growth ahead. But the key of course, is not sales growth, but profitable sales growth. Even though OATS grew the top line at a greater rate than expectations, GM declined 202bp and EBIT margins declined 263bp (to -1.7% of sales) YOY.

  • OATS has continued to revise lower its forecasts for new stores in 2005. At one point, the number was 25. Then it was revised down to 15. Now it stands at 12. I know that WFMI is anxious to go head to head and Trader Joe’s is no slouch either. I’m not sure that OATS has the balance sheet to really improve/enhance their store base. At the end of 2004, their adjusted leverage ratio (net debt to EBITDA including operating leases) stood at 5.19, pretty close to the covenant of 5.6.

  • One thing that OATS is focusing on that makes sense is private label. OATS management wants to take it’s PL percentage of total sales up from 12% to 20%. This must be beneficial to margins.

  • One chance that OATS is taking that I am betting will fail is it’s aim to add more conventional items to its product mix to try and reduce 2nd trips that it’s customers have to make (to a drug store, supermarket). This is a fine line for OATS to walk. What are you trying to be, a health food retailer or a supermarket?

  • I don’t believe in management. What is the strategy? The company operates two store formats, Wild Oats and Henry’s Farmer’s Market. Why? In the Q2/3 cc, management was excited about HFM expansion opportunities. HFM was hardly mentioned in the Q4 cc. Now the talk is on conventional items. AHH has mentioned that the HFM stores are facing increased competition from traditional super markets who are trying to recapture market share in CA following the strike there last year. The foul-ups regarding the Tree of Life/UNFI distribution situation also give me pause.

  • Another part to the share price rise is takeover chatter that kind of bounces around this name. Yes, there is a lot of M&A activity right now but why would someone want OATS with such horrible locations? And at what price? FWIW, an analyst at King thinks a buyout by someone like Kroger won’t happen because KR would have to unionize the OATS store base making them even more un-competitive with WFMI and T Joes.


Sunday, March 20, 2005

The best finance/investing book...

....I've ever read is "Financial Warnings" by Charles Mulford. It probably helps to have some understanding of financial statements and accounting principles before tackling this one. In the book, Mulford identifies companies that had severe financial problems then goes back in time to see if he can find warning signs that would help predict the difficulty. This book can help you avoid adding these "time-bombs" to your portfolio. You can even use some of Mulford's ideas in your short screens.

Really, anything by Mulford is great. More here.

Kasriel on the Fed responding to $56 oil

more from the master

Stepen Roach comments "In real terms, $56 oil represents more than a quadrupling from the lows of late 1998 -- putting this price spike very much on a par with those devastating blows of the 1970s. The apologists will tell you not to worry -- that the real price of oil is still below record levels hit in the late 1970s. That is poor macro, to say the least. Impacts to economic growth are not about levels -- but about changes. The sharp run-up of oil prices in these past few years is the functional equivalent of a tax on household purchasing power that only puts further pressure on an already over-extended American consumer. The fact that consumers haven’t caved yet doesn’t mean the Holy Grail of a new immunity to rising oil prices has been discovered. It could mean that something else has temporarily deferred the endgame." more

Thursday, March 17, 2005

plays on the over-extended U.S. consumer

I wrote this maybe 6 months ago, but it still serves as a useful intro to the Distressed Consumer Recievable industry and Asta Funding in general.
One thing that Americans love is buying stuff.  And whether it's a new
pair of shoes, a trip to Alaska, or even a Big Mac, we like to put these
items on our credit card. Acutally paying for these items, though, can cause
a problem. Since 1980, revolving consumer debt like credit cards has
grown at a 12% annual rate, from $55 billion in 1980 to $712 billion in 2002
(source: Federal Reserve). Our payment problems are also evident in
that the annual charge off rate for credit cards has jumped from 3.01% in
1985 to 5.43% in 2002 (source: Federal Reserve). According to The Nilson
Report,an industry newsletter, Mastercard and Visa charge-offs totaled $37.5
billion in 2002 and are expected to reach $72.9 billion in 2005.

One company that has profited from this trend is Asta Funding (ASFI).
[Other competitors in the Distressed Consumer Receivable space include
Encore Capital (ECPG), Asset Acceptance (AACC) and Portfolio Recovery
Associates (PRAA).] Asta generates revenues and profits through
purchases of charged-off credit card debt and other consumer debt. They
typically purchase these pools of debt for 2 to 3 cents on the dollar in hopes of
collecting a few pennies per dollar more than that. CEO Gary Stern
established a target IRR of 30% on his company's acquired portfolios
over a 3-5 year time period.

Whereas Asta utilizes collection agencies and legal channels to
service and collect on its portfolios, they differ from their competitors in
that they have elected to utilize 3rd party providers instead of maintaining
this functionality in house. This strategy enables Asta to keep fixed
overhead very low. While its competitors manage operating margins of
around 40%, Asta checks in with hefty 70%+ margins.

For all of the Distressed Consumer Receivable companies, Wall Street
pays close attention to purchase anouncements and the percent of face value
paid for the purchased portfolios. Purchase announcements are important in
that they indicate new paper for the collectors to work on and the percent
paid helps give some indication of pricing in the market and the discipline
of DCR firms' management. Just recently Asta purchased 3 portfolios with
face values totaling $456 million at a cost of $21.3 million, or 4.7% of the
total. Though this percent paid is higher than its most recent
announcements, CEO Stern is confident in meeting the firm's internal
hurdle rates.

Despite it's strong profitability, 20%+ ROE, operational flexibility
and positive long-term outlook, Asta trades at a steep discount to its
peers. At $18, Asta trades at only about 10 times CY 2005 EPS estimates vs.
14 times for it's peers. I believe that this spread will narrow over
time with Asta ascending to the group multiple.

Wednesday, March 16, 2005

Under the Radar--West Pharmaceutical

West Pharmaceutical (WST) is certainly off of most investors' (institutional and invdividual) path. Even though the company posted $500MM+ in FY04 sales, WST doesn't have much of an IB following (just 1 analyst). Generally speaking, I like to research stocks that have a story behind them that no else seems to really care about.

WST's main business is Pharmaceutical Services. They sell the containers (pill bottles and closures) that contain the drugs that you would pick up at your pharmacy. They also sell syringes and other medical components. Their customers are big pharma, biotech and some med. device makers. Late in '04, WST exited their drug delivery business, so Pharma. Services is their core focus. Besides being an obvious baby-boomer play, WST interests me because of the amt. of regulation that goes in to "packages" that contain drugs. Co's like WST need extensive approval ( I think FDA) for their products so that they do not contaminate the drug, are tamper proof, etc. So this isn't a space that many others play in. I still need to find out more about the competition.

If you look at Q4 results, you have to note that the results are pretty dirty. YOY data is clouded by the fact that a WST plant blew up, the drug delivery business was sold plus some tax valuation issues. Looking ahead to 2005, WST is looking for 5-7% constant currency sales growth. I would guess op. margins would be in the 12% range. The 2005 PE is around 17, div is around 1.8%.

I still need to look at WST more closely but I would definitely get more interested around 20.

Monday, March 14, 2005

Just doubled down on the slot king -- IGT

International Game Technology (IGT) has been weak of late. Analysts have been taking down estimates for their upcoming quarter and FY05 (ends 9/05) primarily due to slow domestic sales. The TITO replacement cycle is in the late innings. Also last week, two counties in FL voted on slots. The bill passed in Broward but was rejected in Miami-Dade. Finally, industry watchers have been talking about Aristocrat taking share from IGT on the pennies. Despite these negatives, I decided to "double down" on IGT at 28.37 last Friday. Here are the positives:

  1. Partnership with Sammy in Japan is progressing very well. See MRQ press release. Next Japanese release scheduled for June 2005. Note though that int'l margins are not as high as domestic.
  2. New games (Fort Knox, Star Wars) should be huge.
  3. MBG (according to SSB) has yet to go to cashless gaming. Could be a sizable order in the works.
  4. In F1Q, IGT repurchased 2 million shares. Probably more to come.
  5. Co. pays a decent dividend (1.6%). Because IGT generates prodigious amounts of FCF, dividend increases are likely in the future. Furthermore, I'd expect management to opportunistically continue to buy back shares at sub-$30 levels.
  6. After going back and forth with the Indians, Arnie should get 30k slots into California in FY06 (Jeffries)
  7. Passage in PN was huge. Possibility of 30-40k in slots in 2006-07.
  8. Macau is certainly in the news as a hot gaming destination, but currently most of the gamers play the tables. Slots are something to watch in the next 5 years.
  9. Management believes size of Russian market could grow from 200k-300k in the near term.
  10. Industry leader in R&D by far. Should lead the transition to server-based gaming in 2007 and beyond.

Aeurback on "Peak Oil"

"The average American consumes 25 barrels of oil a year. In China, the average is about 1.3 barrels per year; in India, less than one. So as some 2.5 billion Chinese and Indians move to improve their living standards, their demand for energy is likely to become similarly insatiable with all that this implies for prices in the energy complex. " more here

2 more notes from Roach

Tuesday, March 08, 2005

Napster (NAPS)-one I'd love to short

I came back to my desk around lunch today and saw NAPS back up over $8 ($8.15 ish). I tried to go short, but unfortunately my broker could not comply. In order for Napster's service to work, two (at least) big trends have to shift. I think it's unlikely that either will happen.

1. Napster has to convince the current downloaders to switch from the current pay as you go format to a subscription service (about $15/month) for downloading their music. They seem to think that access to millions of songs is important to listeners. For me (and I'd imagine for most others), the quality of the collection trumps the quantity of tracks. Also, they have to sort of dance around the fact that once the $15 stops rolling in, your massive Napster song list can not be accessed.

2. Apple is clearly on a roll with I-Pods, I-Tunes and anything I-. Those that don't have an I-Pod, I-Pod Mini, I-Pod photo are clamoring for an I-Pod shuffle. The I-Pod is supposedly quite easy to operate and is certainly a "cool" accessory to have. NAPSTER'S SERVICE WILL NOT WORK WITH YOUR I-POD. So not only do you have to buy into the music as a subscription model, you have to do so knowing that it can only flourish on the second tier music devices.

Maybe NAPS can perform a miracle but I'm willing to bet against it. Also, note that I think they're spending something like $30 million on a Napster 2 Go ad campaign. If you've seen the commercials (kind of a Sir Mix A Lot thing), this money is not well spent.

The Register, a UK based tech site, has some pretty harsh things to say about Napster. See below.

Super bowl ad
Napster a flop

Bill Fleckenstein on the housing boom

Monday, March 07, 2005

Check out Wrigley (WWY)

WWY may seem like a pretty boring gum company but I think there is more to the story than you might think. I have no position now but would likely go long in the mid-upper 50's.

Background
  • Famous brands include Juicy Fruit, Doublemint, Big Red, Eclipse, Extra, Orbit, Winterfresh
  • 60% of sales come from outside the U.S.
  • should do around $4B in sales this year
  • operating margins around 20%
  • historically trades at a steep premium to packaged food sector
  • balance sheet is in good shape
What I like
  • Strong market share all over the world (US, W Europe, E Europe, Asia, Australia). In each of these markets WWY is #1 except for Asia (#2)
  • No real private label threat--This is something that is a real problem for companies like KFT and even PEP and KO with private label carbonated soft drinks (I'll post on two PL companies that I like later, RAH and COT)
  • Different strategies for different geographies
    • In the U.S and W Europe, I think WWY realizes that volume (per capita) gains will be tough to come by. WWY has done a good job, though, in the past few years at pushing through price increases and benefiting from adjustments to product mix (e.g. tablets instead of gum sticks)
    • In the int'l markets (E Europe, Asia), it's all about volume. These markets consume far less gum than in the developed markets (1.0-1.6 lbs./yr). In Asia, this number is 0.1 lbs and in E. Europe it is 0.7 lbs. WWY made a smart acquisition about a year ago (Joyco). This co. had the #1 bubble gum brands in China, India and Spain and #1 lollipop brands in China and India.
    • So the opportunity in international markets is huge. I think analysts target mid-single digit growth from the US and W Europe but 10%+ growth from China, India, and E. Europe.
  • Limited competition (Cadbury through it's purchase of Adams from PFE is a distant #2)
  • Stock might be able to hang in there in the event of a huge negative market move (moreso than tech or housing for example)
What I don't like or What I am not sure of
  • Big recent acquisition of Life Savers and Altoids brands from Kraft--Though this is part of the co's strategy to move into confections (not just gum), this is a big acquisition to digest particularly with the recent Joyco move. Analysts seem to like it though, taking up their '06 estimates
  • Valuation-But like I said, I'll wait for the mid-high 50's
  • PFE might have neglected the Adams (Trident, Dentyne) business before Cadbury took it over. Cadbury might emerge as a worthy competitor

from the Mogambo Guru

His weekly column, sometimes funny, sometimes insightful.

the latest from Stephen Roach

"On an inflation-adjusted basis, average hourly earnings are no higher today than levels prevailing at the trough of the last recession in November 2001. " more

Sunday, March 06, 2005

Pfizer (PFE)

I am currently long PFE. I unfortunately bought in right before the Vioxx withdrawal and entire COX2 fiasco. It looks like the stock bottomed in the 25 range and has moved up a bit after the FDA panel allowed Celebrex and Bextra to remain on the market (Black Box warnings). I'm not adding any PFE at the moment, but there are some catalysts on the horizon that could benefit the share price.

Positives/Potential Positve Catalysts:
  • Balance sheet is in great shape
  • Yield is currently 2.8%
  • By historical standards, valuation is quite cheap.
  • COX2's allowed to stay on the market. Rx trends should improve.
  • Torcetrapib/Lipitor combination could be the biggest selling drug of all time. Note that data on torcetrapib (drug that raises good (HDL) cholesterol) will be presented this week. A Lipitor/Torcetrapib combo would be a big boost to the PFE cholesterol franchise. I believe Lipitor patent expires around 2010
  • PFE's purchasing of R&D. http://biz.yahoo.com/ap/050224/pfizer_idun_1.html
    • PFE has long been criticized for weak internal R&D so they're doing something about it here. They made another acquisition earlier in the year.
    • Much of the focus of analysts is on the current drug lineup with PFE's impressive list of blockbusters plus any Phase III studies that are going on. As far as I know, PFE management does not discuss compounds in Phase I or II. I have to assume that a fair share of these compounds, whether bought or developed in-house, will get FDA approval.
  • Sales Force Rationalization--This is something that Morgan Stanley focuses on that could be a catalyst for PFE and Big Pharma in general. There is currently an abundance of PFE sales reps who repeatedly call on the same doctor. Will the industry follow PFE's lead should PFE do any kind of reorg?
  • We'll learn more about all of these issues at PFE's annual meeting in April.

Negatives
  • Lipitor/Torcetrapib is a big deal to PFE and I expect the FDA will not make things easy. One concerning note out already.
  • Sales growth will be hard to come by over the next few years due to patent expirations and not enough big new drugs to fill the gap. I'd estimate a 2% top line CAGR through 2008.
  • A company from India (I believe) is suing PFE over its Lipitor patents. A decision should be reached in Q3. An adverse decision would be devastating.

Saturday, March 05, 2005

My First Post. Purpose of the Blog

I'm a 28 year old amateur investor. Just because I am an amateur does not mean that I will settle for mediocre or even poor returns. I consider myself an opportunistic investor. I'll invest anywhere that I think will maximize ROI while limiting risk. I consider myself a singles and doubles investor. I tend to pick a lot of stocks that move 20-30% in the direction I'd like over a 3 month to 1 year period. Because I don't have many 10 baggers in my portfolio, I need my ideas to be sound and my win % to be high. The primary purpose of this site is to lay out my investment ideas (both long and short) and the rationale behind each of these positions. My watch list will usually contain 10-20 stocks. Some of these I have positions in and others I am considering intitiation should certain circumstances occur. The profiles of these stocks will vary in depth but I will try to provide insight and points for you to consider. I will let you know when I update my watch list. I will also let you know whick stocks on the list I have positions in. Nothing on this site is a recommendation to buy or sell any security. You are responsible for your own actions. I encourage your feedback about anything I post here. If you disagree with my conclusions, tell me why. If you have a stock I should look at, let me know what it is and why I should look at it. I'll also post interesting macroeconomic and general investment articles that I come across. Thanks and Good Luck.