Archive for the ‘Picks and Pans’ Category
Last Thursday, Seeking Alpha published my bullish post on a recent stock position – Take-Two Interactive.
Summary: Take-Two (TTWO) is a changed company with growing operating leverage and a secular tailwind from new console launches. Grand Theft Auto V is one of the biggest franchises in all of entertainment. Take-Two continues to innovate, win awards and launch new franchises. The company is flush with cash and cash flow and is aggressively buying back stock. The stock is inexpensive and could easily double in 6-12 months as the market digests the shift in business prospects and profitability.
You can read the full post on Seeking Alpha:
Disclosure: I own shares and call options in TTWO.
I posted an article at Seeking Alpha about my take on Bank of the Internet (BOFI) – a very undervalued bank.
Below is a quick summary and a couple of charts omitted by Seeking Alpha’s editors.
I had meant to post this prior to their earnings. While you may have missed out on the pop post-earnings, the stock is still a good buy in the 14s and 15s. It may come down rapidly if the market continues to decline – that would be another buying opportunity.
The reasons to buy BOFI:
1) A Growing Bank – a rare thing in this environment
2) Low Cost / High Yield Leader
3) Prudent Risk Management
4) Competitive Environment Favors Internet Banks
5) Inexpensive Valuation
6) Recent Product Innovations
One reason not to buy: This is a small cap, illiquid, and risky stock. If the market drops a lot more, BOFI will likely tank even further.
Here are two charts that were intended for the first section about growth:
Read more at Seeking Alpha: BOFI: The Future Costco of Banking?
I think the time is right to buy Expedia (EXPE) and short Priceline (PCLN). Admittedly, Priceline has been growing faster and has done a better job internationally. Expedia, while still larger than Priceline, did not move aggressively enough internationally. Expedia has made some odd moves but it has powerful brands and assets including TripAdvisor.
Both firms are challenged by:
- Disintermediation. The hotel chains and airlines don't like their profits going to the intermediators and are working to reduce their reliance on the biggest ones by increasing bookings on their own sites and getting better terms from competitors.
Energy shock. Rising oil prices crimps travel more than almost any other industry. If Peak Oil is imminent, the travel industry will get crushed.
Unrest and Protest. Unrest can be quite unsettling for travelers. Revolutions in the Middle East. Drug killings in Mexico. Riots in Greece and soon the other PIIGS. Saber rattling on the Korean Peninsula.
Frugality and Austerity. Saving money is a theme during these deleveraging times – travel is often the first thing to go.
You can read the full article with more metrics at Seeking Alpha:
Disclosure: I am long EXPE and short PCLN.
Is Demand Media (DMD) another case of great company but a terrible stock?
If you bought at the IPO or are otherwise able to sell your shares, I would recommend selling. It may go higher, but more likely it will go much lower.
Full Article here:
Going forward I will be publishing my full articles at SeekingAlpha. My page there is: http://seekingalpha.com/author/kevin-berk/articles
Last week I attended the Value Investing Congress in New York. The speakers were top notch and the presentations were very engaging.
I enjoyed hearing the speakers’ discuss their investment processes. Lloyd Khaner’s talk on turnarounds was very well done. Also, various presentations on the continued weak state of the housing market were very informative. Overall, the tone was pretty bearish on the economy and the markets. Many of the presenters professed concern about overvaluation but projected a sense of “the show must go on… so here are my stock picks.”
I agree that the markets feel stretched based on the woeful state of the consumer but some of the picks are worth watching. Some longs do go up when markets go down. Even better is to pick up great stocks on sale if the market does turn down again. My favorites of the conference were:
Small Cap Long Ideas – Risky companies
IRDM – Whitney Tilson and Glenn Tongue presented an interesting pitch for Iridium (yes, the formerly bankrupt satellite phone company that used to be a punchline!). According to Whitney and Glenn, Iridium has an unrivaled set of assets (satellites and services). Iridium reaches 90+% of the globe has no cell towers (e.g. ocean, dessert, mountains). The company was purchased by a SPAC a year ago on favorable terms. Non-voice data services are growing dramatically and the voice business is growing nicely. The bear case on IRDM is that they plan launch a new constellation of satellites starting in 2014. Whitney and Glenn believe that IRDM might be about to launch it without borrowing funds.
CORE – Kian Ghazi provided a detailed bull case for Core Mark, a convenience store distribution player. CORE is the number two operator behind Mclane (a Berkshire company). Kian claims that while distribution may not be a sexy business, it can be a defensible one if the following conditions are met: high route density for drop-offs, highly fragmented, high switching costs and small drops with lots of stops. In his opinion, CORE
benefits from all of these. His bullish case for them rests on an emerging part of their business: fresh food (prepared fruit cups, sandwiches, etc). This high margin, high growth business should more than offset the secular decline in low margin cigarette business which is a big part of CORE existing revenue.
Mid / Large Caps Long Ideas – Safer, less risk of massive downside
CXW – Bill Ackman sparked a rally in Corrections Corp when he revealed he owned a 9+% stake (which hadn’t been publicly disclosed yet). His pitch was funny and well thought out: CXW is largely an inexpensive, safe real estate play with extremely creditworthy tenants, secular growth and room for market share gains. He claimed that private prisons operate more effectively than public ones on many levels and that the trend will be towards privatization (especially for new prisons). The stock probably won’t double but he thinks it has upside to $40-50+.
LH – Zeke Ashton laid out the case for Labcorp, the number two provider of laboratory testing behind Quest Diagnostics. The growth rate of the company is high, the industry pretty defensible. The only issue is a biggie though – healthcare reform. The lab testing business has been bandied about as a rich target for cost cutting, but Zeke thinks that the concerns here are overblown. There may even be a scenario in which LH and Quest benefit from expanded coverage and testing.
Shorts – Proceed with caution
ITB – Whitney Tilson presented the housing stock ETF as a short based on an updated version of his voluminous housing “head fake” presentation. It lays out a compelling story that housing has not yet bottomed because of shadow inventory (7 million homes in various stages of delinquency and foreclosure), option-ARM exposure peaking in 2011, a stretched consumer, removal of stimulus and the eventual rise in interest rates. His take was that there are more than enough homes for those that can afford to buy them and that the housing companies should basically build nothing for years.
O – Bill Ackman spoke briefly about shorting Realty Income – the “monthly dividend company”. This is a company he has previous criticized for having risky tenants who have done sale-leaseback transactions with Realty Income. He expects that the company will have a radical valuation readjustment once the market realizes that the dividend is not safe. The company does a lot of shareholder marketing focusing on the dividend and if (when, according to Ackman) O sustains credit losses in its weak portfolio they will need to cut the dividend.
Overall, the conference was very interesting. The slides from all the presentations were available after the conference as well.
Disclosure: I do not
have positions in any of the stocks mentioned in this article.
Silicom (SILC) makes components for specialized servers and application appliances. Part of their business serves the still growing WAN optimization market (see RVBD and BCSI), part of their business provides commodity products and an emerging part is providing new products to move SILC up the value chain.
Margin of safety. Normally, a micro cap provider of commodity electronics would not excite me… but check out these financial stats: Market cap of $49.1 million ($7.22 a share), $40 million in cash in the bank ($5.88 a share), enterprise value of $9.1 million ($1.40 a share), TTM earnings of $3.7 million ($0.56 a share). EV/Earnings – 2.5! Compared to the potential (e.g. $1.02 a share in 2007), it is conceivable that SILC could earn more than its EV in a single year (e.g. 2010 or 2011).
Profitable during the crisis. While many companies have been taking big hits to earnings during the ongoing crisis, SILC has remained profitable. Admittedly, visibility is very low and revenue has suffered but they continue to sign up new customers — including a tier 1 manufacturer.
Catalysts. The SILC Q2 earnings report is on Monday July 27th – a positive report would be a catalyst for the stock. Downside is mitigated by the $6 a share in cash, and upside could be quite large if the company shows revenue and earnings growth in the quarter. Other potential catalysts include new analyst coverage, potential for share buybacks, new customer announcements and new products. Lastly, the company’s founders, the Zisapel brothers, currently own almost 30%of the company. They may continue to buy more stock or buy out the company completely.
Q2 could be a disaster – the economic environment has been bad, bad, bad
Commodity producer – may need to lower prices or risk losing customers
SILC would be a victim of US Dollar weakness or Shekel strength
Micro cap stock – extremely low liquidity – don’t invest if you need the money
Bottom Line. SILC is a very speculative investment with a good risk to reward profile. It could dive below $6 (as it did in October of last year), but should recover to cash in the bank quickly. I would not expect to hold this for the long term, but rather until the price becomes more in line with the company’s assets and performance.
Disclosure: I am long SILC at the time of this writing – 7/22/09