Author Archive

How to own oil–not refiners, not natural gas. Oil.

Wednesday, June 29th, 2011

It’s hard to own oil. Most of the ETFs that present themselves as vehicles for owning oil do a poor job of it. They own futures, rather than physical oil. Most of the major oil companies are a mixture of oil, natural gas, and refining operations. For example, Exxon-Mobile now only gets 60% of its value from oil production.

Tickers of major companies with a high percentage of their value from oil production: PBR, CVX, SU, CNQ, OXY, PWE, IMO, CEO. All of these get around 75% or more of their current value from oil production. (The rest is from natural gas or refining.) Source:

The four major ETFs for oil invest in futures contracts: USO, OIL, DBO, and USL. The first two have underperformed the WTI spot price index horribly, while the latter two have underperformed slightly. DBO has a longer track record than USL. You can compare the performance of stocks and ETFs to the price of West Texas oil at Bloomberg:

BNO is an ETF that tracks Brent oil–most of the oil sold in Europe rather then the US.

Why care more about oil? It is unique. Natural gas, coal, solar, hydro, wind, nuclear are ways to contribute energy to infrastructure. Mostly, they go into the electric grid, or sometimes directly to industry use. They compete with each other, and so each is less unique. Oil has little competition. There are no hybrid Boeing 747’s. The majority of the planet living on little income is not considering a Prius Chevrolet Volt for its next purchase. Biofuel is growing, but small, and potentially limited because it competes with food production. Oil is more needed, and thus more potentially profitable.

Bristol-Meyers Squibb (BMY) or Merck (MRK)

Monday, June 20th, 2011

An interesting, albeit speculative, graph of the effect of drug pipelines on revenue:
pipeline revenue vs. current revenue

The article also notes that Bristol-Meyers will have to spend a lot on research in order to achieve that result, and that “estimates are notoriously unreliable”. Still, they are equally unreliable across companies.

At first glance, BMY seems to be a good value, given that all these companies have similar valuations right now, as if the market is priced for similar growth prospects:

Bristol-Meyers Squibb (BMY)
Enterprise Value/Revenue (ttm): 2.32
Enterprise Value/EBITDA (ttm): 6.45

Novartis (NVS)
Enterprise Value/Revenue (ttm): 3.00
Enterprise Value/EBITDA (ttm): 10.30

Pfizer (PFE)
Enterprise Value/Revenue (ttm): 2.62
Enterprise Value/EBITDA (ttm): 6.97

Merck (MRK)
Enterprise Value/Revenue (ttm): 2.47
Enterprise Value/EBITDA (ttm): 6.97

Why, then, does BMY have the worst 5-year growth forecast???:

Next 5 Years (per annum) -1.60%

Next 5 Years (per annum) 4.78%

Next 5 Years (per annum) 2.81%

Next 5 Years (per annum) 4.23%

The data is inconsistent on BMY. Maybe expiring patents, in addtion to research expense, are the problem….
lost revenue by 2013

Combining the two graphs (like a Venn Diagram), suggests that MRK is the safest bet. BMY seems high risk/reward with additional risk coming from the inconsistency of data.

AT&T buys T-Mobile. What’s Sprint worth?

Sunday, March 20th, 2011

AT&T seems to be buying the operations of T-Mobile from Deutsch Telecom. In other words, it’s not assuming debt or cash. More details will be needed to be certain, but if this is correct, then the purchase price is reflective of the enterprise value (EV) of the company. At $39 billion for roughly 35 million customers, let’s say the operations of T-Mobile are worth roughly $1,000 per customer. Sprint, a comparable operation to T-Mobile, has roughly 50 million customers, meaning it would be fairly valued with an EV of $50 billion. It’s current EV is $30 billion, so it looks significantly undervalued. Sprint also has rights to more spectrum than T-Mobile, although it is also incurring more expenses building out its network.

Oil v. alternative energy

Wednesday, December 22nd, 2010

Alternative energy is getting none of the boost that it has previously gotten from high oil prices. The reasoning has always been that high oil prices incentivizes investment in alternatives. It makes them cost competetive, and it makes the public conscious of the need to develop a diversity of sources. Yet, this graph suggests the reasoning is not present in the markets at the moment. The red and blue lines represent the price of oil (USL) and the iShares energy ETF; the green and pink lines are solar (TAN) and wind (FAN) ETFs, respectively:


One likely expalanation is that wind and solar are primarily candidates for power generation, and as such compete with coal, natural gas, and nuclear. Oil, since it’s portable, is a transportation fuel.

Schwab: sectors

Tuesday, December 21st, 2010

The Charles Schwab site is rather big and complicated, and has gotten bigger and complicateder in the last few years. Sometimes, even customer service doesn’t quite know where to find things. For months, the site featured Credit Suisse’s Focus List under Research/Markets/Idea & Strategies. Then it disappeared, and four customer service discussions later, I still don’t know where it went.

Here’s a simple way to use the tools at Schwab that makes sense. Both Schwab and Ned Davis provide sector ratings, and all the ETFs associated with sectors are covered by MarketEdge’s technical indicators.

Currently, there three sectors that have a net positive rating from Schwab and Ned Davis. I gave a +1 for a positive rating, a 0 for neutral, and a -1 for a negative rating.

  • Energy +1 (Ned Davis)
  • Industrials +1 (Ned Davis)
  • Information Tech +2 (Both)

VGT (Vanguard Information Technology ETF) has a “Long/buy” rating from MarketEdge. Another way to go is the mutual fund BUFTX (Buffalo Science And Technology Fund), which is a no-load fund rated 4-stars by Morningstar. However, any mutual fund locks you in for 90 days on Schwab, unless you’re willing to pay a redemption fee. Both VGT and BUFTX are up about 4% since 11/22 (same as the broader market), when Ned Davis switched its rating to positive.

There are some net negative sectors also, but no unanimity:

  • Consumer staples -1 (Ned Davis)
  • Financials -1 (Schwab)
  • Telecom -1 (Ned Davis).

Health care and materials are “battlegrounds”–they have conflicting positive and negative ratings, but no neutral ratings.

Brazil: bubble?

Monday, December 20th, 2010

Scary article about Brazil in Bloomberg:

Late payments on credit-card and other consumer loans jumped 23 percent in November from a year earlier, the biggest increase since 2001, according to Experian Plc, a credit-risk consulting firm in Dublin. Brazil, the fourth fastest-growing of the Group of 20 nations, is also attracting a flood of foreign capital and facing its highest rate of inflation in five years.

A surge in credit-card issuance — tripling since 2003 to 153.4 million in circulation, according to the industry’s national association — has helped bring the debt load of Brazilian consumers to 18 percent of total disposable income, compared with 13 percent in the U.S., according to data compiled by Morgan Stanley.

Late payments rose for a seventh straight month in November, according to Experian, based on data from credit-card payments, bills for services and bank loans. Total consumer loan defaults — credit payments overdue for 90 days or more — fell to 6 percent in October, from 8.1 percent a year earlier, according to the central bank.

That’s a tell-tale sign of a bubble: unsustainable borrowing.

Brazil’s central bank is acting to prevent a credit bubble by raising reserve and capital requirements to slow consumer lending. Reserve requirements on time deposits will rise to 20 percent from 15 percent, and an additional requirement for non- interest-bearing accounts will climb to 12 percent from 8 percent. Banks will also have to use more capital to back consumer loans whose payment terms exceed 24 months.

Finance Minister Guido Mantega, who will keep his post when Rousseff takes office next month, said in a Nov. 30 interview that Brazil will cut funding for its development bank by 50 percent next year as part of a plan to slow public spending.

The government is also looking to rein in Brazil’s unregulated credit-card industry, Meirelles said in the interview last month. The central bank president said there should be more oversight and that a task force will study the need for government supervision.

It’s starting to sound a bit recessionary….

Adding to the credit anxiety are foreign investors lured by an inflation-adjusted interest rate of 5.12 percent, second only to Croatia among 46 countries tracked by Bloomberg. Investors “chasing yield” are taking the liquidity the Federal Reserve is pumping into the U.S. economy and investing it in emerging markets such as Brazil and China, where the payoffs are bigger, said Russ Certo, a managing director and co-head of rates trading at New York-based Gleacher & Co.

The Fed is “sowing the seeds of the next volatile moves in markets because these policies are destabilizing,” Certo said. “These economies are afraid of what happens when all this hot money leaves, because when it leaves, it’s going to be tumbleweeds.”

Speculation fueled by easy money, in this case low interest-rates in the US, is another sign of a bubble. On the other hand, the Brazilian stock market has a low PE ratio, at around 14. If there is a bursting bubble, money will flow back into high-quality, boring stocks, the dollar and the yen.

Memory chips (MU, SMOD)

Sunday, December 19th, 2010

Micron (MU) is really cheap for a company of its size.

  • Forward P/E (fye Sep 2, 2012): 6.62
  • PEG Ratio (5 yr expected): 0.63
  • Price/Book (mrq): 1.00
  • Enterprise Value/Revenue (ttm): 0.87
  • Enterprise Value/EBITDA (ttm): 2.02

Book value is mostly tangible, and earnings & cash flow are very high in relation to market cap. It’s got a lot of cash: $3 billion in cash and another $3 b in receivables and inventory. Total liabilities are only $6 b. Its profit margins are around 20%.

However, 2010 seems to have been an unusually good year: 2010 Was a Boom Year in Chip Sales and One Tech Buy, One Tech Sell. Profit margins will decline, but the low valuations suggest negative expectation is already priced into the stock.

SMOD reported results last week, reinforcing the thesis that DRAM prices are pointed down: “Smart Modular said prices of DRAM chips were decelerating at 20-25 percent, hurting profits, especially in its key Brazil markets that account for over half of its revenue.” (Weak DRAM prices hurt Smart Modular results, outlook) Its stock is similarly cheap, although likely to be volatile due to the recent report. The problem may be more acute in Brazil than elsewhere, and perhaps SMOD’s other business segments are worthy of investment (the-smart-money-is-buying-today)

Micron is pretty much a pure play on memory chips. Smart Modular is more eclectic:

SMART Modular Technologies (WWH), Inc. designs, manufactures, and supplies value added subsystems to original equipment manufacturers worldwide. Its subsystem products include memory modules; solid state drives (SSD); and embedded computing and thin film transistor-liquid crystal display (TFT-LCD) products. The company operates in two segments, namely Memory, Display, and Embedded segment, and Adtron segment. The Memory, Display, and Embedded segment offers dynamic random access memory (DRAM) modules, flash memory cards and modules, and SRAM based SIMMs, DIMMs, and SO-DIMMs for industrial and other applications. The SRAM modules are also used in communication systems, point of sale terminals, electronic verification equipment, industrial instrumentation, medical instruments, disk drives, servers, graphics products, and workstations. This segment also offers eFlashTools and FlashTools, embedded computing products, and display products targeting gaming, kiosk, ATM, point-of-service, digital signage, and industrial control systems. The Adtron segment offers products, such as XceedLite, XceedUltra, XceedUltraX, Xceed IOPs, XceedSecure, XceedSCSI, and Xcel-10 that are industrial grade storage products. These products target defense, aerospace, industrial automation, medical, transportation, and enterprise industries. SMART Modular Technologies (WWH), Inc. also offers custom supply chain services, including procurement, logistics, inventory management, temporary warehousing, kitting, and packaging services. It sells its products directly and through a network of independent sales representatives principally to major OEMs that compete in the computing, networking, communications, printer, storage, and industrial markets.

Infosonics (IFON)

Wednesday, December 15th, 2010

From recent quarterly report:

We are a provider of wireless handsets and accessories to carriers, distributors and OEMs in Latin America and Asia Pacific. We distribute products of original equipment manufacturers (OEMs), such as Samsung, and we also design, develop, source and sell a proprietary line of products under our own verykool ® brand, which includes entry-level, mid-tier and high-end products.

The wireless business is extremely competitive. We must develop and deliver a constant flow of new and innovative products and foster close relationships with carriers and other customers. We also focus on cost and operational efficiencies so that our products can be price-competitive in the marketplace. It is important for us to manage our supply chain closely to provide timely delivery of product to our customers and to minimize exposure to inventory levels. We provide distribution and solution services, including integration and product testing, approval and certification, warehousing, logistics services (packing, shipping and delivery), marketing campaigns, warranty services and end-user support.

In 2010 we took a significant strategic step in our business as we launched our own development team in China. Previous to this, the design and development of our verykool ® phones were contracted out to third parties. Bringing design and engineering resources in-house will provide us the opportunity to focus entirely on our own branded products, accelerate time-to-market, be more responsive to our customer base and reduce our costs and expenses to improve our gross margins and profitability. The production of our verykool ® phones continues to be outsourced to EMS contract manufacturers in Asia, to which our development team is in close proximity. We recruited a team of very experienced management and technical personnel who will serve as both our design house for all markets and as the base for marketing and selling our products in Asia-Pacific. The team currently consists of approximately 40 employees, primarily engineers, located in Beijing. The quarter ended June 30, 2010 was the first full quarter of operation of our China subsidiary. Its expenses are classified as R&D expenses on our statement of operations, together with any NRE (non-recurring engineering) expenses paid to other design houses. We shipped our first product designed by our China team to a customer in China in October 2010. We expect to continue to use outside design houses to augment the efforts of our China development team. All of our manufacturing is done by contract manufacturers in China.

We decided during the second quarter of 2008 to discontinue our operations in Mexico and the U.S. Although we have essentially completed this process, we are currently working to obtain a refund of the $790,000 of VAT tax prepaid in Mexico

Historically, our primary sources of liquidity have been cash generated from operations, lines of credit (bank and vendor) and, from time to time, sale and exercise of securities to provide capital needed to support our business. However, we have incurred losses for the last three fiscal years and negative cash flow from operations for two of those years. In the nine months ended September 30, 2010, the contraction in our business has allowed us to reduce our working capital needs, decrease balances in accounts receivable by $37.4 million and inventories by $622,000, reduce accounts payable and accrued expenses by $10.0 million and generate $24.5 million in cash flow from operations during the period. This cash flow, together with our existing cash balances, enabled us to retire all $25.5 million outstanding under our bank line of credit, and at September 30, 2010 we had $17.2 million in cash and cash equivalents and no outstanding debt.

Because we outsource all the manufacturing of our proprietary verykool ® products, our business is not capital intensive. We expect that continued minor investments will be made in the form of tooling and molds for new products.

The Company believes that its current cash resources and working capital are sufficient to fund its operations for the foreseeable future.

No insider buying. Perhaps because Yahoo (not perfectly reliable) reports: “Held by Insiders: 37.92%”

Dirt cheap. As of Dec. 14:

  • Market cap of $11.7 million
  • Tangible book value of $22 million, and the majority of its assets are cash.
  • Revenue was $120 m.
  • Loss of roughly $3 m

The question is how much of that cash it will have to burn in setting up a profitable operation in China. Seems like a good gamble for the price.

International Oil (Russia, Brazil, Australia)

Sunday, December 12th, 2010

These countries have cheap stock markets (i.e. low average PE ratio) and plentiful natural resources:

  • Russia (RBL, RSX, CEE)
  • Brazil (EWZ, LAQ)
  • Australia (EWA, KROO)

CEE and LAQ are closed-end funds (CEF) that invest in Eastern Europe and Latin America, with high concentrations in Russia and Brazil. However, neither CEF is trading at a juicy discount at the moment. KROO has a higher weighting in natural resource companies than EWA; the latter is overweighted in banks, bad because Australia’s housing market looks bubbly.

Fund managers like Russia and Brazil:

According to the latest UBS survey of top fund managers, 48% say Brazil will deliver the best performance in Latin America, Europe, the Middle East or Africa next year — but 33% are going with the emerging consensus and saying they think Russia will win the prize.

However, OPEC seems to be of the opinion that the current $90 oil price is overpriced, and the fair-value range is $70-$80. See the Bloomberg story: OPEC Dismisses $90 Oil Price as ‘Blip,’ Maintains Output Quotas

Source for international PE ratios is the Financial Times. Peru and Canada are resource-based economies that look overpriced.

Disclosure: I own EWZ.

VOXX – car safety story

Sunday, December 12th, 2010

A story that cars may be required to have rearview video systems is probably increasing speculation in Audiovox shares.

There has been no insider buying in years.