Archive for July, 2010

A Tale of Two IPOs

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July 16, 2010 | Stocks | Author Asif

Tesla RoadsterThe stock of electric car company Tesla Motors (TSLA) has been more breathtaking to watch than one of its expensive $100,000+ roadsters that I happened to come across earlier this week near the post office in my city. Following its  June 29 IPO priced at $17, the stock hit a high of $30.42 the next day before promptly losing more than half its value the following week, bottoming just under $15. The stock currently trades 17% above its IPO price at $19.89. While a lot of attention has been focused on this money losing yet promising company that is backed by a $465 million government loan, a $50 million investment by Toyota Motor (TM), a $50 million investment by Daimler and top tier silicon valley VCs, investors who have a strong stomach for volatility should probably revisit another company that went public earlier this year. This company saw its stock close 44% above its IPO price on its first day of trading when compared to Tesla’s 40% opening day pop.

This company is profitable, has a proven business model and one of its founders is a Nobel laureate. Financial Engines (FNGN) priced its IPO at $12 per share in March of this year and currently trades about 11% above its IPO price at $13.42. The company has a disruptive yet proven business model where it uses technology to offer portfolio management services and investment advice. Given the importance of asset allocation to portfolio returns as discussed in our October 2008 newsletter, William Sharpe, Professor of Finance, Emeritus at Stanford University and winner of the 1990 Noble Prize in Economics decided to start Financial Engines in 1996 and use technology to offer sophisticated investment advice to individuals regardless of their wealth or investment experience.

While the average client balance for the top 100 traditional Registered Investment Advisors (RIAs) is over $1 million, the average size of a portfolio managed by Financial Engines is $72,000. In fact 43% of the portfolios managed by the company have less than $20,000 in them. Despite the low average portfolio size, Financial Engines has almost $30 billion in assets under management (AUM) as of the first quarter of 2010. Their technology based solution and partnerships with several large employers to offer advice to 401K participants has helped the company scale AUM effectively from $6 billion in 2006 to $30 billion now. The company has partnerships with 115 of the Fortune 500 companies and has signed up over 360 employers in total.

Growth:

The company has a three pronged growth strategy:

1. Grow Assets Under Contract (AUC), which are currently $289 billion, by signing on more employers, organic growth through ongoing contributions by existing 401K participants, market appreciation, net new hires by employers and a shift towards automatically enrolling employees in 401K plans.

2. Grow Assets Under Management (AUM) by increasing enrollment by 401K participants from employers under contract who have not signed on yet.

3. Entering new markets by going beyond 401Ks and into IRA.

Q1 2010 Results:

Revenue in the first quarter of 2010 increased 40% year-over-year to $24.3 million. Net income increased to $1.6 million in Q1 2010 when compared to a loss of $0.7 million in Q1 2009. Non-GAAP Adjusted EBITDA for Q1 2010 increased 130% year-over-year to $5.3 million. However due to a one-time $5.5 million stock dividend, net loss attributable to shareholders  was $3.9 million or 25 cents a share.

Valuation:

Financial Engines expects to post revenue of $105 to $110 million in 2010 and adjusted EBITDA of $24 to $26 million. Using the mid-point of their EBITDA range and the current enterprise value of $448 million, I get a EV/EBITDA value of 18. The EV/Revenue ratio works out to 4.17. The company expects long-term EPS growth of 25 to 40% at operating margins of 15 to 20%.

Running a 10 year DCF model using a 10% discount rate, 20% earnings growth for 10 years and a 2% terminal rate, I get a current value of $23.54 for the stock. If you are a growth investor, Financial Engines should definitely be on your watch list and may provide a less risky alternative to Tesla Motors.

Related Reading:

Original S-1 Filing

William Sharpe and the Capital Asset Pricing Model (CAPM)

Investor Presentation – June 2010

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Interview with Geoff Gannon of Investor Questions Podcast

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July 12, 2010 | Others | Author Asif

I was interviewed by fellow value investor Geoff Gannon of Investor Questions Podcast a few days ago and he has posted a podcast of this interview on his website. You can check out the 29 minute interview where I briefly discuss Activision (ATVI), Glu Mobile (GLUU), Teva Pharmaceuticals (TEVA), Lions Gate (LGF) and Marcus (MCS) here.

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Merger Arbitrage Mondays – July 12, 2010

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July 12, 2010 | Merger Arbitrage | Author Asif

The activity on the Merger and Acquisition front decreased last week with only one new deal being announced and three deals closing.

The new deal includes the acquisition of American Physicians Capital (ACAP) by The Doctors Company for $41.50 per share in cash.

The deals that closed include the acquisition of SenoRx (SENO) by C.R. Bard on July 06, 2010, the acquisition of Bell Microproducts (BELM) by Avnet on July 06, 2010 and the acquisition DynCorp International (DCP) by Cerberus Capital Management on July 08, 2010.

  Symbol Announced
Date
Acquiring
Company
Closing
Value
Closing
Price
Last
Price
Closing
Date
Profit Annu.

Profit

+ WX 04/26/2010 Charles River Laboratories (CRL) $1.6 billion $20.62 $16.17 12/31/2010 27.54% 58.45%
+ ATBC 05/10/2010 Jacksonville Bancorp (JAXB) N/A $2.73 $2.18 09/30/2010 25.23% 115.11%
+ AYE 02/11/2010 FirstEnergy (FE) $8.5 billion $24.69 $22.07 03/31/2011 11.85% 16.51%
+ SSE 02/23/2010 Naugatuck Valley Financial Corp (NVSL) $19.5 million $7.25 $6.4999 08/16/2010 11.54% 120.35%
+ PINN 02/24/2010 Investor Group lead by Scotia Waterous (USA) (N/A) $11 million $0.34 $0.31 08/21/2010 9.68% 88.31%
+ BGH 06/11/2010 Buckeye Partners LP (BPL) $1.14 billion $42.62 $39.79 12/31/2010 7.11% 15.08%
+ DIVX 06/02/2010 Sonic Solutions (SNIC) $323 million $7.68 $7.26 09/30/2010 5.74% 26.20%
+ EMMS 05/25/2010 JS Acquisition and Alden Global Capital (N/A) $3 billion $2.40 $2.27 09/30/2010 5.73% 26.13%
+ Q 04/22/2010 Century Link (CTL) $10.6 billion $5.73 $5.43 04/21/2011 5.57% 7.18%
+ ECLP 06/09/2010 Allscripts-Misys Healthcare (MDRX) $1.3 billion $20.41 $19.43 11/15/2010 5.05% 14.64%
+ ALOY 06/24/2010 ZelnickMedia (N/A) $126.5 million $9.80 $9.45 12/31/2010 3.70% 7.86%
+ EFJI 05/17/2010 Francisco Partners (N/A) N/A $1.50 $1.45 09/30/2010 3.45% 15.73%
+ TTIL 06/09/2010 Teoco Corp. (N/A) $58 million $3.00 $2.90 09/30/2010 3.45% 15.73%
+ PMACA 06/10/2010 Old Republic International (ORI) $228 million $7.07 $6.85 09/30/2010 3.18% 14.49%
+ PRPX 02/17/2010 L.B. Foster Co. (FSTR) $112 million $11.71 $11.35 08/31/2010 3.17% 23.15%
+ MIR 04/12/2010 RRI Energy In. (RRI) $1.6 billion $11.57 $11.30 12/31/2010 2.36% 5.01%
+ PSYS 05/17/2010 Universal Health (N/A) $3.1 billion $33.75 $32.98 12/31/2010 2.33% 4.95%
+ BNE 02/24/2010 RR Donnelley (RRD) $481 million $11.50 $11.28 09/30/2010 1.95% 8.90%
+ SWWC 03/03/2010 Institutional Investors (N/A) $275 million $11.00 $10.79 03/31/2011 1.95% 2.71%
+ WAIN 06/29/2010 Eastern Bank (N/A) $163 million $19.00 $18.64 12/31/2010 1.93% 4.10%
+ ACAP 07/08/2010 The Doctors Company (N/A) $386 million $41.50 $40.73 12/31/2010 1.89% 4.01%
+ WMZ 05/24/2010 Williams Partners L.P. (WPZ) $34.73 $34.10 09/30/2010 1.86% 8.49%
+ MAM 03/12/2010 Emera Inc (N/A) $75.7 million $45.00 $44.18 12/31/2010 1.86% 3.94%
+ SII 02/19/2010 Schlumberger (SLB) $7.5 billion $40.79 $40.06 09/30/2010 1.83% 8.35%
+ ME 04/15/2010 Apache (APA) $2.7 billion $22.78 $22.37 09/30/2010 1.82% 8.31%
+ OMNI 06/04/2010 Wellspring Capital Management (N/A) $122 million $2.75 $2.71 11/15/2010 1.48% 4.28%
+ VETS 06/02/2010 VCA Antech Inc (WOOF) $41.25 million $0.34 $0.3352 09/30/2010 1.43% 6.53%
+ GLG 05/17/2010 Man Group (N/A) $1.6 billion $4.50 $4.44 09/30/2010 1.35% 6.17%
+ STBK 03/18/2010 Roma Financial Corp (ROMA) $14.7 million $2.52 $2.4932 08/16/2010 1.07% 11.21%
+ PFWD 04/16/2010 Oracle Corp. (ORCL) $685 million $17.00 $16.82 06/30/2010 1.07% 0.00%
+ ORCD 03/16/2010 eMusic (N/A) $12.77 million $2.05 $2.03 08/16/2010 0.99% 10.27%
+ VIRL 06/10/2010 Synopsys (SNPS) $315 million $12.00 $11.89 12/31/2010 0.93% 1.96%
+ RCNI 03/05/2010 ABRY Partners (N/A) $536 million $15.00 $14.87 09/30/2010 0.87% 3.99%
+ MDNU 06/11/2010 Danone (N/A) $62.3 million $4.00 $3.97 09/30/2010 0.76% 3.45%
+ ATSI 04/29/2010 Medtronic (MDT) $350 million $4.00 $3.97 09/30/2010 0.76% 3.45%
+ VTIV 05/06/2010 Thomas H. Lee Partners (N/A) $1.1 billion $26.00 $25.81 09/30/2010 0.74% 3.36%
+ BSMD 05/13/2010 Merit Medical Systems (MMSI) $96 million $4.38 $4.35 09/30/2010 0.69% 3.15%
+ WEL 04/09/2010 Halliburton Company (HAL) $240 million $3.00 $2.98 09/30/2010 0.67% 3.06%
+ ODSY 05/24/2010 Gentiva Health Services (GTIV) $1.0 billion $27.00 $26.82 09/30/2010 0.67% 3.06%
+ QUOT 06/11/2010 LQ Acquisition (N/A) $19 million $4.00 $3.98 09/30/2010 0.50% 2.29%
+ IDC 05/04/2010 Silver Lake & Warburg Pincus (N/A) $3.4 billion $33.86 $33.70 09/30/2010 0.47% 2.17%
+ SNWL 06/03/2010 investor group led by private equity firm Thoma Bravo LLC (N/A) $636 million $11.50 $11.45 12/31/2010 0.44% 0.93%
+ SY 05/12/2010 SAP (SAP) $5.8 billion $65.00 $64.77 09/30/2010 0.36% 1.62%
+ NADX 04/05/2010 GDC Holdings Inc. (N/A) $100 million $17.00 $16.94 09/30/2010 0.35% 1.62%
+ DBTK 05/17/2010 Vision Solutions (N/A) $242 million $10.55 $10.52 09/30/2010 0.29% 1.30%
+ SMTS 06/16/2010 Covidien (COV) $299 million $25.00 $24.94 07/31/2010 0.24% 4.62%
+ CYBS 04/21/2010 Visa Inc. (V) $2.0 billion $26.00 $25.94 09/30/2010 0.23% 1.06%
+ RBI 03/15/2010 affiliate of Oncap Management Partners L.P. (N/A) $13.55 $13.52 08/16/2010 0.22% 2.31%
+ GNA 06/02/2010 Gerdau (GGB) $1.7 billion $11.00 $10.98 08/31/2010 0.18% 1.33%
+ STST 06/30/2010 Boeing (BA) $775 million $34.50 $34.44 09/30/2010 0.17% 0.79%
+ SXE 05/07/2010 CGI Group (N/A) $904 million $37.50 $37.44 09/30/2010 0.16% 0.73%
+ CPII 05/10/2010 Comtech (CMTL) $472.3 million $15.63 $15.61 09/30/2010 0.11% 0.48%
+ AIPC 06/21/2010 Ralcorp Holdings (RAH) $1.2 billion $53.00 $52.95 09/30/2010 0.09% 0.43%
+ SBP 06/24/2010 ABLASA (N/A) N/A $12.69 $12.68 07/22/2010 0.08% 2.88%
+ MIL 03/01/2010 Merck (MRK) $6 billion $107.00 $106.93 09/30/2010 0.07% 0.30%
+ VRAD 05/17/2010 Providence Equity (N/A) $294 million $17.25 $17.24 09/30/2010 0.06% 0.26%
+ CRN 04/19/2010 GeoGroup (GEO) $685 million $27.89 $27.88 09/30/2010 0.02% 0.08%
+ TSFG 05/17/2010 TD Bank Financial Group (N/A) $61 million $0.28 $0.28 09/30/2010 0.00% 0.00%
+ CKR 03/01/2010 Apollo Management VII (N/A) $694 million $12.55 $12.55 07/07/2010 0.00% 0.00%
+ EVVV 06/01/2010 Covidien plc (COV) $2.6 billion $22.50 $22.50 07/31/2010 0.00% 0.00%
+ NGA 04/01/2010 AZZ Inc. (AZZ) $125.6 million $7.50 $7.51 08/31/2010 -0.13% -0.97%
+ VRX 06/21/2010 Biovail Corporation (BVF) $3.3 billion $51.21 $52.08 12/31/2010 -1.67% -3.53%
+ CAL 05/03/2010 United (UAUA) $1.2 billion $22.43 $22.92 12/31/2010 -2.15% -4.56%
+ ABII 06/30/2010 Celgene (CELG) $2.9 billion $71.39 $74.12 12/31/2010 -3.68% -7.81%
+ ARD 04/04/2010 SandRidge Energy Inc. (SD) $1.6 billion $32.40 $34.16 09/30/2010 -5.14% -23.44%
+ TLCR 06/07/2010 Grifols (N/A) $3.4 billion $19.00 $21.31 12/31/2010 -10.84% -23.00%
+ DTG 04/26/2010 Hertz (HTZ) $1.3 billion $39.32 $45.78 12/31/2010 -14.11% -29.95%
+ MCCC 06/01/2010 Chief Executive Rocco Commisso (N/A) $590 million $6.00 $7.01 N/A -14.41% 0.00%
+ CCE 02/25/2010 The Coca-Cola Company (KO) $12.3 billion N/A $27.68 10/01/2010 N/A N/A

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Insider Weekends – July 09, 2010

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July 11, 2010 | Insider Buying | Author Asif

Welcome to the fifth edition of Insider Weekends. We saw a reversal of roles last week with insider buying dropping precipitously from $59 million to just $6.6 million last week even as the Dow posted its best week in a year with a gain of 5.3%. One could attribute this drop to the short four day week. However insider selling picked up in pace with insiders selling $217.5 million worth of stock.

Sell/Buy Ratio:

The insider Sell/Buy ratio is calculated by dividing the total insider sales in a given week by total insider buying in that week. The adjusted ratio for last week jumped up to 32.90. In other words, insiders sold almost 33 times as much stock as they purchased. This compares unfavorably with the week prior when the ratio stood at just 2.55. We are calculating an adjusted ratio by removing transactions by funds and trying as best as possible only to retain information about insiders and 10% owners who are not funds.

Notable Insider Buys Last Week:

1. China Marine Food Group Ltd. (CMFO) $4.74

For the second week in a row, CMFO made it into the top 5 insider purchases of the week. CEO Pengfei Liu acquired 110,000 shares of this food processing and packaging company paying an average of $4.34 per share for a total amount of $477,400. 10% holder Kent C McCarthy also acquired 65,000 shares paying an average of $4.15 per share for a total amount of $269,830. These purchases are perplexing in light of the critical articles that have been written an anonymous short seller called “Chinese Company Analyst”. Check out his recent article titled “China Marine Food Group: Auditor’s Role in Another Alleged Fraud“.

Key Statistics:

P/E: 7.74 Forward P/E: 4.51 Industry P/E: N/A
P/S: 1.74 Price/Book: 1.36 EV/EBITDA: 4.72
Market Cap: $135.05 million Avg. Daily Volume: 327,503 52 Week Range: $3.07 – $8.63

2. Agilysys (AGYS) $7.52

Agilysys makes its appearance on our list for a third week in a row with Director Andrew Cueva acquiring 98,233 shares of this IT services provider through his fund MAK Capital, paying $7.17 per share for a total amount of $704,189.

Key Statistics:

P/E: 48.83 Forward P/E: 22.12 Industry P/E: 19.47
P/S: 0.27 Price/Book: 0.86 EV/EBITDA: 16.29
Market Cap: $172.48 million Avg. Daily Volume: 171,227 52 Week Range: $3.95 – $12.50

3. NL Industries (NL) $7.17

Chairman of the Board and CEO Harold C Simmons acquired 103,100 shares of this components products manufacturer company paying $6.54 per share for a total amount of $674,170.

Key Statistics:

P/E: N/A Forward P/E: N/A Industry P/E: 13.59
P/S: 2.85 Price/Book: 1.86 EV/EBITDA: 276.56
Market Cap: $348.61 million Avg. Daily Volume: 43,436 52 Week Range: $5.35 – $9.00

4. Actel Corporation (ACTL) $13.74

Director Jeffrey C Smith acquired 39,694 shares of this specialized semiconductor company paying $12.61 per share for a total amount of $500,352.

Key Statistics:

P/E: N/A Forward P/E: 10.73 Industry P/E: 22.05
P/S: 1.80 Price/Book: 1.48 EV/EBITDA: 14.89
Market Cap: $360.58 million Avg. Daily Volume: 99,244 52 Week Range: $10.25 – $17.10

5. Kronos Worldwide (KRO) $19.34

Chairman of the Board Harold C Simmons acquired 8,471 shares of this Titanium Dioxide producer paying $19.26 per share for a total amount of $163,193.

Key Statistics:

P/E: 27.32 Forward P/E: 32.78 Industry P/E: 11.77
P/S: 0.78 Price/Book: 2.68 EV/EBITDA: 20.60
Market Cap: $947.08 million Daily Volume: 7,888 52 Week Range: $5.44 – $21.01



Notable Insider Sales Last Week:

1. Hans Natural Corporation (HANS) $42.73

Chairman  & CEO, Rodney Sacks sold 300,000 shares of this beverage company, generating $12.6 million at an average selling price of $42.09. Vice Chairman & President, Hilton Schlosberg also sold 296,500 shares, generating $12.5 million at an average selling price of $42.09

Key Statistics:

P/E: 20.13 Forward P/E: 16.50 Industry P/E: 17.23
P/S: 3.28 Price/Book: 5.87 EV/EBITDA: 10.32
Market Cap: $3.79 billion Avg. Daily Volume: 1,133,400 52 Week Range: $24.01 – $44.99

2. SuccessFactors (SFSF) $20.91

CEO & President, Lars Dalgaard sold 101, 250 shares, generating $2.05 million at an average selling price of $20.23. CFO Bruce C Felt Jr. also sold 10,000 shares, generating $203,154 at a selling price of $20.32. CIO & VP, Operations, Randall Womack sold 12,000 shares of this software-as-a-service (SAAS) provider, generating $244,468 at a selling price of $20.37. These were all planned sales under the 10b-5 rule. However this week, the amount sold by the CEO was much larger than the 27,000 shares per month he has been selling over the last few months.

Key Statistics:

P/E: N/A Forward P/E: 149.36 Industry P/E: 23.98
P/S: 9.23 Price/Book: 7.28 EV/EBITDA: -178.54
Market Cap: $1.51 billion Avg. Daily Volume: 805,750 52 Week Range: $8.30 – $23.68

3. Boston Scientific Corporation (BSX) $6.46

Director and founder John Abele, sold 300,000 shares of this Medical Instruments & Supplies company, generating $1.8 million at an average selling price of $6.03. Director and founder Peter Nicholas also sold 100,000 shares, generating $601,898 at an average selling price of $6.02. Once again these were planned sales under the 10b-5 rule. These two insiders have been selling a combined 100,000 shares every single day for the last few weeks.

Key Statistics:

P/E: N/A Forward P/E: 15.76 Industry P/E: 20.68
P/S: 1.19 Price/Book: 0.90 EV/EBITDA: 7.39
Market Cap: $9.80 billion Avg. Daily Volume: 25,813,800 52 Week Range: $5.41 -$11.77

4. OpenTable (OPEN) $44.85

Senior VP, Operations, Joel T. Brown sold 23,500 of this restaurants reservation solutions provider, generating $967,920 at an average selling price of $41.2. Senior VP, Sales, Michael E. Dodson also sold 19,000 shares, generating $783,902 at a selling price of $41.26. CFO Matthew Roberts sold 7,000 shares, generating $289,450 at a selling price of $41.35 and Senior VP, Engineering sold 5,834 shares, generating $239,264 at a selling price of $41.01. These were planned sales under the 10b-5 rule. For some interesting analysis by a hedge fund analyst regarding OpenTable’s valuation, check out this articled titled “What is Priced into OpenTable’s Valuation?

Key Statistics:

P/E: 154.66 Forward P/E: 57.50 Industry P/E: 23.24
P/S: 13.43 Price/Book: 12.35 EV/EBITDA: 57.44
Market Cap: $1.02 billion Avg. Daily Volume: 232,092 52 Week Range: $24.04 – $45.68

5. EnerNOC (ENOC) $33.68

President David B. Brewster sold 50,000 shares of this energy management solutions provider, generating $1.65 million at an average selling price of $33.05.

Key Statistics:

P/E: N/A Forward P/E: 39.62 Industry P/E: 23.24
P/S: 4.05 Price/Book: 4.29 EV/EBITDA: 204.27
Market Cap: $829.17 million Avg. Daily Volume: 331,361 52 Week Range: $17.91 – $37.00

Contributing author: Ann Kumar

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SINLetter – July 2010

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July 9, 2010 | Newsletters | Author Asif

Welcome to edition 53 of Suria Investment Newsletter (SINLetter), a free monthly investment newsletter. The objective of this newsletter is to provide you with unbiased initial research and basic facts about individual stocks and other financial instruments so that you can research them further before deciding to add them to your portfolio or not. If you are reading this and are not a subscriber, you can subscribe by going to www.sinletter.com/subscribe.aspx and you will start receiving this newsletter from next month. I have provided relevant links throughout this newsletter, but if you have any questions or comments, feel free to write to me.

Recent Blog Entries

It has been an interesting few months and I took a short unannounced hiatus from publishing these newsletters to concentrate on a few things including a new blog category called Insider Weekends, another blog series called Merger Arbitrage Mondays and its accompanying Merger Arbitrage Tool, and building a quant model that assigns a score to individual stocks based on 16 different criteria. This model will be eventually used for automated algorithm based trading. In case you don’t subscribe to the blog and were not aware of these new features, check out the following blog posts that explain them in more detail. I have also included a few other noteworthy posts from the last couple of months.

If you do not receive blog entries by email, you can subscribe to receive them by email here.

Portfolio Performance:

The SINLetter model portfolio outperformed all the major indices in the first quarter of 2010 with a gain of 7.06% but the second quarter was not so kind to us. For the month of June, the SINLetter model portfolio posted a loss of 4.61%, marginally worse than the Dow’s 3.58% loss but much better than the 6.55% drop in the Nasdaq. The S&P 500 posted a loss of 5.39% as you can see below. On a year-to-date basis, we are still outperforming all the indices, albeit with a smaller loss. I plan on making significant changes to the portfolio as discussed in the Portfolio Readjustment section below that may help stem these losses and may even help us close the year in positive territory.

Performance Metric Dow S&P 500 Nasdaq SINLetter
June 2010 -3.58% -5.39% -6.55% -4.61%
Second Quarter 2010 -9.97% -12.04% -11.86% -10.84%
Year-To-Date (6/30/2010) -6.27% -7.05% -7.57% -4.54%
Since Inception (Aug 2005) -7.99% -16.57% -3.92% 88.35%

Portfolio Readjustment:

At the start of the second quarter I wrote the following words in the April newsletter “I think the market has once again forgotten about risk and is becoming complacent. My enthusiasm for new stock positions is very low at the moment and besides holding on to the positions I already have on the long side, I am mostly looking at merger arbitrage opportunities and refining a strategy with strangles”.

Had I heeded my own advice and sold some of the positions from the model portfolio, I may have mitigated some of the losses we experienced in the second quarter. My opinion has not changed much over the last three months and I still think the downside risk is greater than upside potential in this market. A number of economic indicators, from the June unemployment report last Friday that showed a 125,000 decline in non-farm payrolls to the weaker than expected data from the ISM that showed manufacturing activity sliding to 56.2 in June from a reading of 59.7 in May, are pointing to a slowdown ahead. On the other hand, I am also seeing a lot of companies trading at very attractive valuations irrespective of the criteria you pick to analyze these companies. In anticipation of additional declines in the market, I am going to sell a number of positions in the SINLetter model portfolio in order to increase the cash portion of the portfolio and to create room for some new positions.

The companies I am going to sell from the model portfolio include Precision Castparts (PCP) for a gain of 114%, Companhia Siderurgica Nacional (SID) for a loss of 26%, PowerShares Water Resources ETF (PHO) for a loss of 30%, Unilever (UL) for a loss of 14%, Icon Plc (ICLR) for a gain of 45%, Alvarion (ALVR) for a loss of 74% and Suntech Power (STP) for a loss of 58%. We sold nearly 40% of our original position in Suntech Power back in November 2007 for a gain of 151% as discussed in the blog entry Scaling Back on Suntech Power (STP) and essentially ended up with a profit of 20.62% for the overall position. Looking back at what happened to oil prices and the high correlation between solar stocks and oil prices, I should have liquidated the entire position back in 2007. The closing price of the day on July 9, 2010 will be used as the selling price for these positions.

Valuation Metrics – Book Value:

If you are familiar with book value, feel free to skip the next four paragraphs to the section about Umpqua Holdings (UMPQ) and Marcus (MCS).

Investors often have preferred valuation metrics that they look at to get the feel for a company before digging in for further research. One could compare this with a lender looking at your FICO score before requesting additional supporting documentation to see if you would qualify for a loan. One such metric I tend to use is the Book Value of a company. In very simple terms the book value is the sum of all assets of the company minus the liabilities. In more personal terms, book value could be compared to an individual’s net worth. To figure out your net worth, you would add up all your assets including your home, your car, your cash, your jewelry, etc and then subtract your liabilities such as credit card debt, student loans, the remaining loan amount on your home, the loan on your car if you financed it, etc. What is left over after you subtract your liabilities from your assets is your net worth. Similarly for companies when you add all the assets on the balance sheet (cash, investments, inventory, accounts receivables, etc.) and subtract the liabilities (debt, accounts payables), you get the book value.

While you could go through each line on the balance sheet and calculate the book value of a company, websites like Yahoo Finance and Reuters provide this information to you either as “Book value per share” or as the Price/Book ratio. If the company has a book value of $100 million and has 20 million shares outstanding, the book value per share would be 100/20 = $5. If the stock of that company is trading at $10, the Price/Book ratio will be $10/$5 = 2. Essentially you are paying 2 times the book value of the company when you purchase those shares for $10. If the stock of the company were to fall precipitously to $4, you would be paying less than the book value for the stock, as the Price/Book ratio will drop to 0.8. This may appear to be a great bargain because you are buying the business at less than the liquidation value of the company.

However just as you are relishing the thought of picking up a business for 80 cents on the dollar, you should keep in mind that the book value you see on Yahoo Finance also happens to include intangible assets. Wikipedia defines intangible assets as “identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset. There are two primary forms of intangibles – legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities (know-how, knowledge), collaboration activities, leverage activities, and structural activities).” This presents a problem as you may not recover your investment if the company were to be liquidated and its intangible assets were substantial. Removing intangible assets from your calculation of book value will give you Tangible Book Value, which is a more useful metric. Once again, you can get the Price/Tangible Book Value ratio directly from Reuters without having to calculate it from the balance sheet.

It is important to keep in mind that companies that are selling below tangible book value are usually in trouble of some sort because the market is valuing those companies below their liquidation value and essentially assigning no value whatsoever to its ongoing business. These companies are usually unprofitable and it makes sense that the market is anticipating that the company will eventually burn through its liquid assets like cash, thereby reducing its book value.

Umpqua Holdings (UMPQ) $11.95

We have covered Oregon based regional bank Umpqua Holdings a number of times in the past including the April 2010 newsletter with its focus on regional banks as well as in a section of the February 2008 newsletter titled Umpqua Holdings: Can the free cookies last?. Following the April newsletter, I decided to keep Umpqua on our watch list instead of adding it to our portfolio due to the bleak macro environment but now think it is time to consider starting a position in the company.

Three events have transpired over the last three months that have made me look at Umpqua once again. The FDIC once again picked this Pacific Northwest bank to acquire the assets of Reno based Nevada Security Bank when the bank failed in mid-June, making this the third FDIC assisted acquisition for Umpqua this year. After taking over $492 million in assets and $480 million in deposits from Nevada Security Bank, Umpqua’s total assets have now increased to almost $11 billion.

Umpqua’s Troubled Asset Ratio or TAR has fallen to 20.1 from 23.1 even as the national median has gone up from 14.5 to 15. Finally Umpqua’s stock has dropped more than 9% from $13.14 in April to its current price of $11.95 and was much lower earlier this week before the sharp two day rally we just experienced. At current prices, the bank is trading at a Price/Book ratio of 0.79. The Price/Tangible Book Ratio according to Reuters is 1.39. Given this increase in assets, drop in TAR and drop in price, I think it is time to once again initiate a long-term position in Umpqua. I will be purchasing 1,000 shares of Umpqua for the SINLetter Model Portfolio. The closing price of the day on June 9 will be used as the purchase price. I will also purchase Umpqua for my personal portfolio after this newsletter goes out to subscribers.

Marcus (MCS) $9.02

Marcus is yet another stock that we have featured in the newsletters and SINLetter blog numerous times. If you are not familiar with this small-cap movie theater and hotel operator, check out this February 2010 blog entry titled Marcus Revisited: The Avatar Effect, which led us to picking the stock up when it had dropped below book value. We sold the stock less than a month later from the Special Reports Portfolio for a gain of 14% when the stock rose above book value.

With the recent market slump the stock has once again fallen below book value and currently trades at a Price/Book ratio of 0.80 and a Price/Tangible Book Ratio of just 0.93. Marcus is a profitable company with a dividend yield of 3.9%. Having written off its investment in an ill-timed Las Vegas condo development, the key risk the company faces is continued softness in its hotels segment. The movie theater business has held up well and has supported the overall company even as the hotels division has suffered through this downturn. I am going to purchase 1,000 shares of Marcus for the SINLetter Model Portfolio. The closing price of the day on July 9 will be used as the purchase price.

Voluntary Disclosure: I am long Marcus in my personal portfolio.

Model Portfolio – June 30, 2010

Long Stocks

Stock Symbol Number of Shares* Cost Current Value Diff ($) Diff (%) Date Added
Chicago Bridge & Iron CBI 500@21.17 $10,585 $9,405 $-1,180 -11.15% 1/05/10
Employers Holdings EIG 600@14.92 $8,952 $8,838 $-114 -1.27% 1/05/10
Safeway SWY 500@20.29 $10,145 $9,830 $-315 -3.1% 07/01/09
Precision Castparts PCP 200@51.13 $10,226 $20,584 $10,358 101.29% 12/05/08
Activision ATVI 2200@12.64 $26,882 $23,078 $-3,804 -14.15% 08/29/08
Companhia Siderurgica Nacional SID 200@43.15 $8,630 $5,876 $-2,754 -31.91% 04/30/08
Lionsgate Entertainment LGF 1000@9.41 $9,410 $6,980 $-2,430 -25.82% 02/29/08
Powershares Water Resources PHO 400@22.1 $8,840 $6,024 $-2,816 -31.86% 10/31/07
Unilever Plc UL 200@32.53 $6,506 $5,346 $-1,160 -17.83% 05/11/07
EMC Corp EMC 600@13.85 $8,310 $10,980 $2,670 32.13% 03/31/07
ICON Plc ICLR 300@18.65 $5,595 $8,667 $3,072 54.91% 01/31/07
Alvarion ALVR 1000@6.87 $6,870 $2,020 $-4,850 -70.6% 01/03/07
Teva Pharmaceutical TEVA 300@35.05 $10,515 $15,597 $5,082 48.33% 09/01/06
Suntech Power STP 250@25.93 $6,483 $2,292 $-4,190 -64.64% 07/31/06
Procter & Gamble PG 180@55.6 $10,008 $10,796 $788 7.88% 06/30/06
Cash $42,038
Total $188,351 $88,351 88.35%

* Price and number of shares adjusted for Activision Blizzard (ATVI) and ICON plc (ICLR) to reflect splits on September 8, 2008 and August 13, 2008 respectively.

Voluntary Disclosure: From the stocks that are currently in the model portfolio, I own shares of Chicago Bridge & Iron (CBI), Empolyers Holdings (EIG), Safeway (SWY), Activision Blizzard (ATVI), Lionsgate Entertainment (LGF), PowerShares Water Resources (PHO), Suntech Power (STP), Teva (TEVA), Alvarion (ALVR) and Unilever (UL).

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