Welcome to the 32nd edition of Festival of Stocks! As always, thank you George for allowing Value Discipline to host. This is our third time to be given the privilege to host.
To our old friends, welcome back...to new ones, welcome...have a look around! Thank you especially to all of you who have been kind enough to submit your blog postings for consideration and commentary. I truly appreciate it! In an attempt to add my personal imprint, I do try to incorporate some additional materials that I find interesting and hopefully, will prove so to you as well.
Markets this week continued to advance this week with the broad-based Wilshire 5000 up 0.66%, about the same as the large cap S&P 500’s advance of 0.63%. Year-to-date, the largest 50 market cap stocks has finally moved into positive territory, but just barely, being up 0.31%. Contrast this with the 2.97% advance of the S&P 500 or the 4.03% advance of the Russell 2000. Wasn’t this supposed to be the year that large cap was to win the performance tables? As Barron’s (subscription required) points out in this weekend’s edition, “Big has become synonymous with poor stock market showings. This could very well continue unless the giants give back more to investors through dividends and buybacks.”
Sure, makes a contrarian feel pretty good about his large cap selections.
1) Kicking off this week’s Festival, we introduce Vladimir Kuznetsov, an investment banker in Moscow who offers great perspective on the Russian emerging market. His post, “Russian State-Capitalistic Model-Is This Right for Us?” comments on some recent articles that describe the stormy backdrop out of which emerging markets frequently evolve. Vladimir concludes that “these articles are too pessimistic, that Russia is still a ‘kid’ in market economy, and of course the birth and growth of this kid goes on with a lot of ‘strange and unusual’ actions.” In my view, the expropriation of Yukos under what I believe were trumped up taxation charges, underline the meager property rights that are accorded investors in Russia. Most would agree that this was a politically motivated campaign to bring down the company and its billionaire founder, Mikhail Khodorkovsky. In my view, this is a market where return of my capital is more important than return on capital. Please convince me otherwise. Your optimism is encouraging! To keep up with this market, please bookmark Equity Financing in Russia.
2) For gold bugs, TJP at Investor Trip features a post on DRD Gold (DROOY), a gold mining company which holds interests in the Porgera gold mine located in the Enga province in the highlands of Papua New Guinea; the Tolukuma mine located about 100 km north of the capital of Port Moresby in Papua New Guinea; and the Vatukoula gold mine located on the island of Viti Levu in Fiji in the South Pacific. The company also owns interests in the Blyvooruitzicht mine located near Carletonville approximately 70 km south-west of Johannesburg; the East Rand proprietary mines located approximately 25 km to the east of Johannesburg; and the Argonaut project. The company has a market cap of $241 million (US) but also carries debt of $157 million and cash of $55 million for an EV of $344 million. Here’s a link to Reuters Ratios and Analytics for DROOY.. TJP’s blog is Investortrip.com. It would be a very interesting trip indeed to visit DRD’s facilities around the world!
3) Media attention seems to be focused on the IMF’s president, Paul Wolfowitz and his battle to keep his job as a result of his securing a huge pay increase for a close female friend. However, Soxfirst.com is paying attention to some of the important deliberations and documents that have come from the IMF.
In his post, there is an excellent view of the risks of the private equity buyout craze. To quote:
"With allocations to private equity funds continuing to rise, it appears likely that in the future, more funds will be chasing fewer attractive deals. Already, rating agencies have warned that the number of viable targets has diminished. The strong demand for all elements of the capital structure of these deals means that prices are often bid up to levels that represent high multiples of earnings." The IMF recognizes that the current economic situation remains relatively benign, but adverse changes could create a domino effect on these deals and on markets n general:
"If one of these factors changes, deals that looked promising in a benign environment could suddenly appear much less attractive. It is therefore likely that some private equity deals will fail to live up to expectations. The risk from a financial stability viewpoint is that the collapse of several large and high-profile deals during the syndication stage would trigger a wider re-appraisal across a broader range of products.''
4) Back to metals for a moment and particularly zinc. Years ago, when base metals were not politely discussed because the overwhelming supply and seemingly modest demand indicated a lifetime of low prices, portfolio managers and analysts used to joke that “lead’s dead and zinc stinks.” Perhaps my built in biases against paying for commodities that trade at such a premium to production costs have caused me to avoid most mining stocks at this stage. However, here is some compelling work by Deborah, a teacher in British Columbia. Her blog, “Making Sense of My World” has an excellent post on zinc this week with some great charts. If you are wondering, “What’s Up with Zinc?” the answer is everything except inventories. Thank you Deborah!
5) Bryan, over at theFinancialWhiz.com has a fascinating blog which investigates many currency related trades effected through options and derivatives strategies. There is some really terrific work here. He has submitted a post which describes an interesting strategy to utilize leveraged ETF’s (Ultra’s) in combination with a bond ETF or a money market instrument. As Bryan indicates, the leveraged products available today provide an opportunity for average investors to engage in a greater amount of diversification while adding to returns and reducing the risk associated with market cycles.
6) Trent at The Simple Dollar has submitted a book review post of Burton Malkiel’s classic, “A Random Walk Down Wall Street.”The Simple Dollar » Review: A Random Walk Down Wall Street This is an excellent chapter by chapter review of this classic and highly readable discussion of CAPM and market efficiency. There is a lot of sage and practical advice provided in this blog! Market efficiency is presumed when well-informed investors act in a rational fashion. There is quite a difference between information and knowledge. Rational behavior is sometimes not the prevailing attitude. I refer to a Nietzsche quote, “Insanity in individuals is something rare but in groups, nations, and epochs it is the rule.”
7) Babak provides a glimpse the Solar Power Industry and associated stocks in this post at Trader’s Narrative. His interest in the sector is based on technical analysis. He mentions the following stocks:
Ascent Solar (ASTI)
Amtech Systems (ASYS)
Evergreen Solar (ESLR)
First Solar (FSLR)
Hoku Scientific (HOKU)
MEMC Electronic (WFR)
Solarfun Power (SOLF)
Suntech Power (STP)
World Water & Power (WWAT.OB)
My thoughts....Be careful out there! Most of these companies are trading near all time highs and have very steep valuations. Investigate before you invest.
8) Endless Gibberish provides a post on Montpelier Re (MRH) the reinsurance company. Mother Nature was kind last year and the winds failed to blow. Returns on equity hit the mid-30’s. Here is a link that provides some ratios and analytics courtesy of Reuters.
9) George of Fat Pitch Financials, the mothership of the Festival of Stocks has submitted a post on Broadridge Financial Solutions (BR), the ADP spin-off. I stirred up a lot of controversy and comment when I published a note on BR, the night before it opened for regular trading on the NYSE. Haste makes waste! Though my cash flow work was good, my division of EV/EBIT was horrid...I am still not sure exactly where I made my error but to all of you, I humbly apologize. Mea culpa, mea culpa, mea maxima culpa! George provides some wonderful additional competitive analysis as well as a P/E based valuation analysis. Nice work George!
10) Finally, Tom Hanna has provided us a roadmap for next week. For our American friends, top priority is filing your income taxes. Like you didn’t know!! The week will be data heavy with financial/economic data including information on the supply side of the new homes market, industrial production and manufacturing, retail sales, inventories, the leading index, investor confidence and retail price inflation. Earnings season is under way with some of the big money center banks reporting in the early part of the week.
Thanks again to everyone for your readership and for submitting your Festival of Stock posts to Value Discipline.
Next week’s festival will take place at Money Walks, presided over by Andy.
If you wish to submit an article, here is the link: Blog Carnival - Submit an Article to a Carnival. Your help is much appreciated!
To review any of the prior Festivals, please check out this link.
Disclaimer: Neither I, my family, or clients have a current position in any of the stocks mentioned in this post.