For the few of you who read my blog, I apologize for the recent lack of activity. I’ve been keeping myself very busy with a whole slew of investment projects, many of which are close to fruition. Here are the latest ideas I’ve had passed along to me or that I’ve looked into myself:
NBSK pulp, paper manufacturers, and Fibrek
This was started by an article posted awhile back by Kuppy. He believes NBSK pulp could be headed higher and that these pulp manufacturers will be helped out by developing nations’ demand for toilet paper (as well as hand towels, tissues, etc.). The rising standard of living in developing nations is nothing new, the only question is when the demand for toilet paper starts to take off. I started by researching the European Tissue Symposium and gathered a lot of macro data concerning the whole paper & pulp industry. Now, I’m going through Fibrek’s filings. Fairfax Financial owns a sizable stake (25% or so) and their track record since 1985 speaks volumes. It’s hard to ignore something like this. I’ll have at least one or two posts on this in the near future.
Clinical Data CVR’s
Clinical Data (CLDA) recently announced FDA approval for their latest drug, Viibryd. There is a lot of speculation regarding their future sales and it’s very tough for me, as a newbie to the pharma industry, to get any idea of what it would be. Anyway, Forest Laboratories announced it’s intention to purchase all shares of CLDA for $30 per share in cash and also one non-transferable contingent value right (CVR) per share. The CVR’s are contingent on future sales of Viibryd and payments from Forest Labs in the future will be paid accordingly:
- $1 per CVR if sales reach $800 MM before
- $2 per CVR if sales reach $1.1 B
- $3 per CVR if sales reach $1.5 B
So, if sales reach $1.5 B over a 4-quarter time period (doesn’t have to be a fiscal year), you will receive $6 (the payments are made in aggregate). I’ll have a formal post once I get an idea of whether this is worthwhile or not. The deal looks like it could yield very high annualized returns if purchased today, the only question is whether the drug will be a blockbuster or not. I’m working through the proxy statement & various experts’ commentary on it now.
I never wrote up my full research report (although I did start), but this business is very interesting to me right now. Most readers will assume they’re a dead or dying business, but it looks like they could have a bright future in mobile phone sales. Wal-Mart had them operating kiosks in the Sam’s Club stores (didn’t have to share any revenue, not bad!), and once Sam’s Club decided they could do it themselves, Target signed up to allow RadioShack into their stores. Not necessarily earth-shattering, but it shows they have well-trained employees & are trusted agents of the three carriers (T-Mobile, Sprint, & AT&T). Their margins have been called into question, as has the sustainability of the business, but I think these questions are a little overhyped (as Wall Street usually does overreact). Best Buy is entering this mobile phone sales segment pretty heavily, but I think there is enough room for both of them. It would be nice to see the carriers drop their stores and just allow Best Buy & RadioShack act as agents for them. I still want to speak to some RadioShack employees- contact me if you know any! It’s not easy for me to get to their stores here at IU. I still haven’t pulled the trigger because my portfolio is in transition to a new broker right now, but probably will consider anything below $15.50 at this point. Also considering an options play out to 2013 with LEAPS as part of the holding because the options are pretty cheap.
Transocean & Offshore Drilling
As you know, I’m a big believer in Noble Corp., but there are other potential investments in this industry. The main players are Transocean, Ensco & Pride (upcoming merger), Noble Corp, Diamond Offshore, and SeaDrill. SeaDrill has too much debt for me to be interested, plain & simple (especially considering how cyclical the business is, a downturn would crush them). Ensco & Pride will be interesting to analyze post-merger, not interested until then. The merger makes great sense because Ensco is mostly jackups and Pride is mostly deepwater rigs. Ensco’s original strategy was one I didn’t particularly like- they’re heavily into jackups & that market looks to be headed for decreased utilization and lower dayrates globally (except for the high-spec jackups, which will command similar pricing premiums the way the new floaters are). The push into deepwater has been confirmed by just about everyone and the only concerns I have moving forward is over-supply of rigs. All the 10-k’s filed by the industry continue to claim the influx of new deepwater rigs won’t be an issue yet in terms of over-supply and most incoming rigs (90+%) have contracts. The Gulf of Mexico is still a mess… I’d like to take the effort and thank the Obama Administration for fumbling this one terribly. I’ve never been angrier when reading news than when I see the latest from the BOEMRE in the news… at least we now have the first approved permit. When I made my original investment in Noble, I didn’t think it would take this long, but I still have hope for the industry. That leaves Transocean as the only other company to analyze. Today, it’s trading at 5X op. cash flow, however some of it goes towards maintenance capex. I’m going to look into this further and consider whether owning Transocean or Noble (or both) makes the most sense for the push into deepwater. I won’t consider smaller drilling companies because they don’t have nearly as much power as the larger players and the costs for compliance, as well as insurance, make it uneconomical for them to be operating.
Also, Noble just announced (at 5:30 today) that they received 6 new contracts for jackups with Pemex. This is phenomenal and makes 4 jackup rigs that were previously warm stacked (and thus not earning anything but incurring small costs) profitable for Noble. The news release also talked about a total of “at least eight jackups earning revenue in Mexico” and “opportunities for up to four additional jackups”. This is great news for earning power in 2011 and gives me more confidence in Noble. I will continue to believe in their management team and the company’s future. I think failure in this investment will be a function more of a failure in the whole industry than failure in Noble. I believe I’m reading into the future correctly on this one, so it looks like it’d be hard to lose on this investment (although today’s prices aren’t nearly as attractive as they were six months ago).
There isn’t much I can say about this retailer that will add to the world’s knowledge. It’s a great company. Still growing. Trading at a 14% cash flow yield. Half of that is a direct return to shareholders in the form of dividends and share buybacks. The other half is being reinvested into the company at about a 14% return (considering historical ROA & the current growth rate). I’m more than happy with that type of return and I like what I’m seeing. With my large holding in cash currently, I see this as a good substitute. I initiated a 10% holding in my portfolio last week and will hold for a long time, or at least until more opportunities come around the corner.
Just reported Q4 results. Most analysts will tell you to worry, I’m not one of them. It looks like they repurchased more shares in Q4 than in the rest of the fiscal year combined. From my analysis (based on reported figures in the news release and their last three 10-q’s/k’s), they repurchased about 6.1 million shares at an average price of $24.89 in the fourth quarter. That works out to about a 16% return on investment for the remaining shareholders (based on my estimations of earning power). Margins fell slightly due to a promotional environment, as did same-store sales, but I really didn’t they could keep up the same store sales growth when I bought this stock. The recession brought in some shoppers they normally wouldn’t have had otherwise and to me, this shows that retail may be getting back to normal. I don’t have the numbers in front of me, but I believe they’ve increased same store sales virtually every year the past decade; it’s unreasonable to expect that to continue (and a 3% drop is hardly an issue). Anyway, it looks like the stock is down 6% or so in after-hours trading. I already have a sizable stake, but am considering buying more. This is just too hard to pass up at today’s prices.
I decided to no longer hold this one (call that another quick change of heart, similar to Hallmark Financial). It was one thing with Nautilus or Zales to have no profitability and, in the case of Zales, a pretty hefty debt load. All I knew with both of them was that their businesses were worth more than the current price- not that they’re worth any particular figure. Sometimes Wall Street gets it so wrong that you don’t need to have a value in mind. It’s different with Cybex- they have no profitability & a lawsuit. I’m sure I’ll watch this one shoot up in price because I sold, but it’s not worth having money tied up when I am looking into a lot of opportunities right now. I’d rather have it in Wal-Mart or Noble than in Cybex. I’m still going to watch this for fun, but nothing more.
I have to admit fault here. I wrote a report, understood their entire business & where they’ll be in the future, but didn’t buy… or as Buffett would call it, “thumb sucking”. My friends, for the most part, all reached out and told me I was wrong and it was a good time to buy. Although rising stock prices aren’t necessarily an indicator of a mistake of omission, I believe it is here. Next time I’ll consider a modest 5% or 10% position when mature companies reach prices like that. But hey, I’m 19 years old and still learning. There’s time for more lessons right?