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Jubak’s Picks Portfolio


Buy and hold? Not really. Short-term trading? Not by a long shot. So what is the stock-picking style of The Jubak’s Picks portfolio? I try to go with the market’s momentum when the trend is strong and the risk isn’t too high, and I go against the herd when the bulls have turned piggy and the bears have lost all perspective. What are the results of this moderately active—the holding period is 12 to 18 months—all-stock portfolio since inception in May 1997? A total return of 334% as of December 31, 2012. That compares to a total return on the S&P 500 stock index of 125% during the same period.

View Sells

Symbol Date Picked Price Then Target Price Price Now Today's Change Jubak's Gain/Loss
Softbank
SFTBY 02/20/2015 $29.59 $42.00
If you know Japan’s Softbank (SFTBY or 9984.JP in Tokyo) at all, it’s either as the purchaser of 80% of Sprint (S) or an early investor in Alibaba (BABA). That... more
Hain Celestial
HAIN 03/26/2015 $63.20 $72.00
One number jumps out at me from the deal between Kraft Foods Group (KRFT) and H.J. Heinz. It’s not the $16.50 a share special cash dividend that Kraft shareholders will receive... more
United Continental Holdings
UAL 02/10/2015 $67.63 $89.00
Update : Update April 9, 2015.  United Continental Holdings (UAL) doesn’t report first quarter earnings until April 23 (before the open in New York) but today’s report on March traffic and margins... more  |  Read Jim's Original Buy
Marathon Petroleum
MPC 04/08/2015 $49.28 $62.50
Update : Update April 29, 2015.  Marathon Petroleum (MPC), a member of my Jubak’s Picks portfolio since April 8, today announced a two-for-one stock split. The shares will begin trading on a... more  |  Read Jim's Original Buy
Mosaic
MOS 06/03/2015 $45.41 $52.50
Deere’s (DE) May 22 report on second quarter earnings and sales made it clear that the farm sector hasn’t yet turned the corner. The company beat Wall Street earnings expectations... more
Chesapeake Energy
CHK 03/09/2015 $14.24 $19.00
Update October 22, 2014: The rout in oil and natural gas prices—and in the prices of oil and natural gas industry shares—leaves investors with two big related but not identical questions. How low will oil... more  |  Read Jim's Original Buy
Wisdom Tree Japan Hedged Real Estate
DXJR 12/19/2014 $27.00 $32.00
After the Shinzo Abe’s original victory in 2013, Japanese real estate became a destination for overseas cash. Real estate, even in Tokyo, was cheaper than real estate in mainland China... more
EGShares India Infrastructure ETF
INXX 01/26/2015 $14.00 $17.50
How about that “other” central bank? With all the attention focused on the European Central Bank’s plan to buy more than $1 trillion in government bonds, on how the shifts in... more
American Airlines Group
AAL 12/02/2014 $47.88 $66.00
Update : Update: April 24, 2015.  Two pieces of good news for shares of American Airlines Group (AAL) today. The shares closed up 2.44% to $52.71. First, earnings for the first quarter of... more  |  Read Jim's Original Buy
Visa
V 11/05/2014 $63.65 $78.00
Update : Update: April 22, 2015.  Shares of Visa (V) popped today on news announced on the website of the government’s State Council that China will open up its credit card clearing... more  |  Read Jim's Original Buy
Itau Unibanco
ITUB 10/31/2014 $15.00 $18.00
When she won re-election to a second term as President of Brazil on Sunday, October 26, Dilma Rousseff promised change. Well, change is what the markets in Brazil got yesterday although... more
HDFC Bank
HDB 11/18/2014 $53.00 $62.00
In my search for stocks that will go up as oil prices go down, I can’t think of a market with more leverage to the downward movement in oil prices... more
Greenbrier Companies
GBX 11/18/2014 $62.91 $84.00
Update : Update: May 1, 2015.  They’ve been a long time coming. Today, May 1, regulators in the United States and Canada announced new safety rules for trains carrying oil. The rules would... more  |  Read Jim's Original Buy
FMC
FMC 06/12/2014 $76.96 $69.00
Update June 27, 2015: Update: June 24 The trouble with value stocks is that they can take forever to turn around and that can require tons of patience. Certainly my June 12, 2014 pick of FMC... more  |  Read Jim's Original Buy
Isis Pharmaceuticals
ISIS 05/22/2014 $24.95 $82.00
Update February 1, 2015: Update: January 9. Shares of Isis Pharmaceuticals (ISIS) have been on a tear lately. The stock is up 84% in the three months ended January 8. That brings my gain... more  |  Read Jim's Original Buy
Incyte
INCY 04/17/2014 $44.54 $94.00
Update : Update February 25, 2015. I’d never say that sales don’t count for biotech companies. It’s just that in the early stages of a biotechnology company’s life, its pipeline counts for... more  |  Read Jim's Original Buy
Flowserve
FLS 12/10/2013 $71.91 $92.00
Update : Update: February 17, 2015.  Nothing terribly surprising in Flowserve’s fourth quarter results reported today, February 17, after the close in New York. Earnings of $1.16 a share were 3 cents... more  |  Read Jim's Original Buy
ARM Holdings
ARMH 10/25/2013 $47.82 $60.00
Update : Update: February 11, 2015. It was all about royalties going into ARM Holdings’ (ARMH) February 11 report on fourth quarter earnings. The worry holding the stock down for much of... more  |  Read Jim's Original Buy
Cheniere Energy
LNG 06/25/2013 $26.71 $90.00
Update : Update: May 14.  Tuesday, May 12, the U.S. Department of Energy issued the final approval for Cheniere Energy (LNG) to export liquefied natural gas from a facility in Corpus Christi,... more  |  Read Jim's Original Buy
Toyota Motor
TM 02/05/2013 $98.86 $120.00
Update : Update: May 4, 2015.  One of my core rules of investing—one that I find especially useful for not falling in love with a stock—is that when the reason that you... more  |  Read Jim's Original Buy
Novartis
NVS 12/07/2012 $62.32 $71.00
On December 7 in my post http://jubakpicks.com/2012/12/07/now-that-patent-expirations-are-dropping-the-drug-sector-is-getting-oddly-harder-here-are-my-five-picks/ I added Novartis (NVS in New York and NOVN.VX in Switzerland ) to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ to replace Bristol-Myers... more
Targa Resources Partners
NGLS 11/23/2012 $36.97 $60.00
Update April 4, 2014: Not that nothing else matters—the price of natural gas and natural gas liquids is important—but my theory is that at the moment, in the current cheap money environment, the crucial... more  |  Read Jim's Original Buy
Stillwater Mining
SWC 09/25/2012 $11.43 $18.00
Update May 21, 2013: The dust has settled at Stillwater Mining (SWC) with the election of four new board members backed by the Clinton Group, an activist investor that wants the company to focus... more  |  Read Jim's Original Buy
Xylem
XYL 09/04/2012 $24.08 $47.00
Update April 29, 2014: When Wall Street doesn’t expect much of any growth, a 3.1% year-to-year increase in revenue is reason for dancing in The Street. That’s what’s happening with shares of Xylem (XYL) today.... more  |  Read Jim's Original Buy
Statoil
STO 05/10/2012 $25.92 $28.00
Update : Update: April 14. The acquisition of BG Group by Royal Dutch Shell (RDS.A) has grabbed all the oil sector headlines. $51 billion deals will tend to do that—especially when they’re... more  |  Read Jim's Original Buy
MGM Resorts International
MGM 05/04/2012 $12.43 $31.00
Update June 28, 2015: Update: March 17, 2015.  Two pieces of news today, pointing in contradictory directions, for shares of MGM Resorts International (MGM). Only one has moved the stock, however. Shares of MGM Resort... more  |  Read Jim's Original Buy
OncoGenex
OGXI 03/14/2012 $15.71 $22.00
Update March 10, 2014: Shares of biotech OncoGenex (OGXI) were up 8.9% today, March 10 at the close in New York. Why? Because March 10 is the day before March 11. The company is scheduled... more  |  Read Jim's Original Buy
Yamana Gold
AUY 02/29/2012 $17.25 $14.50
Update February 20, 2014: It’s always hard to judge the bottom of a cycle—and it’s certainly hard for gold right now. I suspect that the recent rally in gold to a close of $1320.90... more  |  Read Jim's Original Buy
Precision Castparts
PCP 02/01/2011 $144.17 $270.00
Update : Update February 21, 2015. Precision Castparts (PCP) has clawed its way back, rather nicely, from the disappointment over its December quarter earnings released on January 15 (preliminary) and January 22... more  |  Read Jim's Original Buy
Abbott Laboratories
ABT 09/24/2010 $25.80 $46.00
Update March 4, 2014: Fourth quarter earnings and guidance for 2014 announced on January 22 make it clear that Abbott Laboratories (ABT) is a second half story for 2014. (Abbott Laboratories is a member... more  |  Read Jim's Original Buy

Buy Softbank

June 28th, 2015

If you know Japan’s Softbank (SFTBY or 9984.JP in Tokyo) at all, it’s either as the purchaser of 80% of Sprint (S) or an early investor in Alibaba (BABA). That first deal has, so far, resulted in a $6 billion loss on the $22 billion price tag. The second deal has fared somewhat better: A $20 million investment in 2000 resulted in a 32% ownership stake in the Chinese Internet giant valued at $68 billion.

Right now because the Sprint deal has plunged Softbank into a costly war with wireless giants AT&T (T) and Verizon (VZ), you can pick up the ADRs of Softbank at a bargain price. The value of the company’s chunk of Alibaba and its 43% stake in Yahoo Japan exceed Softbank’s $71 billion market cap. So you’re getting Softbank’s Japanese telecommunications business plus its stake in Sprint for free. Operating profits for the fiscal year that ends in March 2015 are projected by the company at $7.6 billion.

And you’re also getting a portfolio of the next generation of still-private Asian Internet leaders. I doubt that any of these will turn out quite as well as Alibaba has but, hey, you never know.

I’ve been reminded recently of how deep Softbank’s Asian Internet venture capital strategy goes by two news stories. In the first, the company said that it would invest $10 billion in India’s Internet and e-commerce sector. India looks to me like the next big deal in Asian Internet companies. In the second, Softbank’s name popped up in the merger of the China’s two largest Internet taxi-hailing apps. Hangzhou Kuaidi Technology, known as Kuaidi Dache, will merge with Didi Dache in a deal whose details will be announced after the Lunar New Year holiday that began in China on February 18. Kuaidi Dache is backed by Alibaba, China’s biggest e-commerce company, and Didi Dache is backed by Tencent Holding, China’s e-chat leader. The joint company will benefit from a recent crackdown by regulators on car-hailing apps that rely on private vehicles acting as taxis. (If you think that’s aimed at Uber, you’re exactly right.

The merger comes less than two months after Baidu (BIDU), the owner of China’s biggest search engine, agreed to buy a stake in Uber.)

Among the list of investors in the two companies? Softbank, which participated in a $600 million private investment round by Kuaidi Dache in January.

As this deal suggests, Softbank pops up just about everywhere in Asia’s Internet sector. The company owns stakes in other Asian Internet-based taxi companies such as Grab Taxi. It owns stakes in India’s and Indonesia’s biggest e-commerce companies, snapdeal.com and tokopedia. Plus pieces of companies in advertising, media, gaming, and real estate. It’s hard for individual investors to get in on venture capital stage companies anywhere—but to find a basket that gives you exposure to Asia’s next generation?

Valuing Softbank isn’t simple—I’d begin with a value of the parts analysis for the company’s stakes in Alibaba, Sprint, Yahoo Japan, and its telecommunications business in Japan and then throw in 10% or so for all those extremely promising but unproven Internet companies. I get a one-year target price of $42 per ADR. Softbank’s ADRs closed at $29.52 on February 19. (Please note that you are taking yen currency risk with this investment—although Softbank isn’t a purely Japanese company.)

As of February 20 I’m adding these ADRs to my Jubak’s Picks portfolio http://jubakam.com/portfolios/ .

Buy Hain

June 27th, 2015

One number jumps out at me from the deal between Kraft Foods Group (KRFT) and H.J. Heinz.

It’s not the $16.50 a share special cash dividend that Kraft shareholders will receive in the deal.

It’s not the $1.5 billion in annual cost savings that Berkshire Hathaway (BRK.B) and 3G Capital estimate by 2017. (Can you say layoffs?)

And it’s not even the huge 36.7% pop in Kraft shares on March 25, the day the deal was announced.

No, the number that draws my attention is the $28 billion in annual revenue at the combined company.

It’s that number that leads me to add shares of Hain Celestial Group (HAIN) today, March 26, to my Jubak’s Picks portfolio. Yesterday the shares closed up just 0.58% after being ahead almost 4% during the day. The stock was off 0.99% at the March 26 close.

To understand why the Kraft-Heinz deal leads me to a buy of Hain Celestial Group, you’ve got to understand this deal in the context of an extreme challenge to all the big U.S. food companies from Kraft to McDonald’s (MCD). Trends in the market are moving away from them as an increasing number of customers, especially millennials (the generation of consumers who reached adulthood around 2000), increasingly demand healthier, more environmentally friendly, more local food. This trend is part of why Chipotle Mexican Grill (CMG) has been growing and McDonald’s hasn’t.

Plan A at Kraft was to try to re-invigorate growth. Revenue has been essentially flat at near $4.7 billion a quarter since the second quarter of 2013. Revenue growth was forecast at 0.9% for 2015 by Standard & Poor’s before the deal announcement.

The problem boils down to this: How to you get faster growth, given trends in the food market, out of brands such as Planters nuts and Jell-O?

The company has been trying, but the results haven’t been encouraging.

Hence Plan B.

Which is, especially given trends in the sector, a pretty good plan. Cost cutting at Heinz, which 3G acquired in 2013 have taken EBITDA margins (earnings before interest, taxes, depreciation, and amortization) up to 26% from 18%. Kraft’s current margin of 20% should see a significant improvement from 3G’s cuts. The deal will also cut interest payments at Heinz since Kraft’s investment grade credit rating will lower the interest rates that a highly indebted Heinz has to pay. The deal won’t add to the combined company’s debt load and 3G expects to be able to refinance $17 billion in Heinz debt, saving about $1 billion. The deal should also boost Kraft’s international sales since Heinz has much stronger overseas distribution than Kraft does after spinning off its snack division as Mondelez International (MDLZ) in 2012. (Only about 11% of Kraft’s revenue in 2013 came from outside the United States and most of that was from Canada.)

But Plan B is likely to make adapting to a changing food market and reigniting growth more difficult. With $28 billion in revenue it becomes hard to move the needle with internal growth and it becomes hard to find acquisitions that are big enough to provide much of a boost.

Which is where Hain Celestial comes in. The faster growing part of the food industry—those companies that emphasize natural, organic, health, and/or local—is characterized by the small size of individual players. At a market cap of $6.45 billion and annual revenue of $2.15 billion in fiscal 2014 Hain Celestial is one of the bigger companies in the natural/organic food sector. As such it’s one of the few potential acquisition targets big enough to make an attractive target for a big conventional food company looking for growth. That logic led to the immediate pop in the stock after the Kraft-Heinz story broke. And it provides substantial support for the shares.

But I’m actually more interested in Hain Celestial as a consolidator in the fragmented natural/organic good sector. At $2.15 billion in sales the company is small enough so that deals like the 2013 acquisition of Rudi’s Organic Bakery ($60 million in sales) or the 2014 acquisition of Tilda, a basmati rice brand with $190 million in sales, make sense. Hain can use its existing distribution clout to expand the customer base for acquired brands and to get them more shelf space at existing customers—and also use efficiencies of scale to cut costs. It’s a food version of the consolidator strategy that Middleby (MIDD), a member of my Jubak Picks 50 portfolio, has followed so successfully in the restaurant equipment market for years.

Standard & Poor’s projects revenue growth of 23% for Hain Celestial in fiscal 2015 including acquisitions and internal growth (I’d call it “organic” growth but that seems confusing in this context) in upper single digits.

I’ve been looking at Hain as a buy for a while but had put it off because the stock certainly isn’t cheap. It trades at a PEG ratio (PE to growth rate) of 2.14—which is expensive although Kraft trades at a PEG ratio of 3.82. But the Kraft-Heinz deal gives Hain some extra upside as a potential acquisition candidate and reduces the downside risk in the stock as well.

I’m adding it to the Jubak’s Picks portfolio with a target price of $72 a share by October 2015.

Update United Continental

Update April 9, 2015.  United Continental Holdings (UAL) doesn’t report first quarter earnings until April 23 (before the open in New York) but today’s report on March traffic and margins at the airline is an optimistic indicator for those results. Traffic in March (revenue passenger miles) did fall 0.7% for the month (from March 2014 levels) but capacity (available seat miles) also declined by 0.6%. The combination led to a 0.05% increase in passenger revenue per available seat mile. And that plus better-than-expected non-fuel costs was enough to lead management to up its forecast for first quarter pre-tax margin to 6% to 7%, from previous guidance for 5% to 7%. The company, and investors, also got a dose of good news on April 7 when Fitch Ratings upgraded United Continental’s debt rating to B+ from B citing improving costs, falling fuel prices, a good operating environment in the airline industry, and a stronger balance sheet as the company makes progress toward its goal of reducing gross debt to $15 billion. United Continental is a member of my Jubak’s Picks portfolio. The shares closed today, April 9 at $61.16, up 1.01% on the day. The position, however, is down 9.56% since I added it on February 10, 2015 as a way to profit from falling oil prices. I will have an update on my target price—now $89 a share—after the company’s April 23 earnings report.

Update Marathon Petroleum

Update April 29, 2015.  Marathon Petroleum (MPC), a member of my Jubak’s Picks portfolio since April 8, today announced a two-for-one stock split. The shares will begin trading on a split-adjusted level on June 11. The company’s board of directors also voted to maintain the current pre-split dividend of 50 cents a share. (The record date on the dividend is May 20.) The company is due to report first quarter earnings tomorrow, April 30. Since a split doesn’t change anything about the company, except the share price, I’m keeping my target price at the current pre-split $125 a share. After June 11 that will become an effective target of $62.50. At 3 p.m. New York time today, Marathon Petroleum traded at $102.30.

Mosaic

June 27th, 2015

Deere’s (DE) May 22 report on second quarter earnings and sales made it clear that the farm sector hasn’t yet turned the corner. The company beat Wall Street earnings expectations for the period that ended in April on the strength of a recovery in its construction equipment business, but lower crop prices continue to weigh on farmers’ purchases of Deere’s farm equipment. Full year equipment sales will drop, Deere forecast, by 19% in 2015. That’s down from a forecast for a 17% decline

That’s bad news, of course, not just for Deere, but also for seed and agricultural chemical companies such as Monsanto (MON), and for fertilizer producers such as Potash of Saskatchewan (POT)

On the basis of Deere’s read of the market, I’d say it’s still too early to buy into most farm equipment and farm inputs suppliers

Yes, shares are down over the course of the last two years—by 25.98% at Potash of Saskatchewan, for example—but with earnings per share still forecast at flat or down for 2015, these stocks aren’t quite as cheap as they appear. The Wall Street consensus says that earnings per share at Potash of Saskatchewan will basically hold steady at 2014 levels. Trailing 12-month earnings per share were $1.87. Analysts forecast forward earnings per share for the year that ends in December 2015 at $1.89

I’d wait to see a few more pages pulled off the calendar on most companies in the sector to see if 2016 will bring a turn in the market and how substantial that turn might be

On most companies in the sector.

But not on Mosaic (MOS), another fertilizer maker.

Mosaic is the third largest producer of potash fertilizers in the world, behind Potash of Saskatchewan and Russia’s Uralkali.

Which isn’t all that exciting in the current market because prices for potash are far more volatile than they used to be before the recent slump in farm prices disrupted the cartels that controlled prices and production. I’m not looking for a turn in potash prices in 2015 and maybe not in 2016.

But Mosaic is also the world’s top producer of phosphate fertilizers and here the story is very different thanks largely to demand from India, the world’s second largest consumer of phosphate fertilizers. Russia’s Phosagro recently signed a deal to supply state-owned Indian Potash with 1.35 million metric tons of phosphate fertilizer over three years. This comes after two years when falling prices and falling demand kept Phosagro from selling to India at all. Prices had slumped to $460 a metric ton last year from $660 a ton in 2011.

We’re still a long way from that high but prices have already recovered to $485 a ton. And look like they’re headed higher. Inventories of DAP phosphate fertilizer in India fell to less than 100,000 tons at the end of the 2014-2015 farm season. India’s purchases have already climbed to 2.2 million metric tons for delivery in the first half of 2015 from 0.9 million tons in the first half of 2014. Projections say imports could rise by 60% to 6.5 million to 7 million metric tons. Analysts are also looking at increased demand from Brazil and China in the second half of 2015.

This picture for phosphate fertilizers is the major reason that Mosaic is one of the few companies in this sector where analysts are projecting significant earnings growth in 2015 over earnings for the trailing 12 months. Projections see earnings of $3.33 a share for 2015, up from the trailing 12 month $3.05 a share.

Now granted that projected earnings growth of 9.2% isn’t exactly tearing up the track, but I think those projections are low given the news out of major markets in developing economies. Earnings projections from Wall Street analysts do tend to lag when a sector is coming off the bottom. And I think that is even more likely given Mosaic’s purchase of phosphate rock assets in Florida from CF Industries (CF) last year and its new phosphate rock mine in Peru.

My target price on a better than forecast $3.50 a share in 2015 earnings and a slight increase in multiple of 15 from the current 14.8 is $52.50 a share by December. That would be a gain of 16% from the June 2 closing price of $45.27. Mosaic also pays a 2.43% dividend. (The shares were down 26.75% over the last two years as of June 1.)

I will be adding shares of Mosaic to my Jubak’s Picks portfolio tomorrow, June 3.

Chesapeake Energy moves toward investment grade

October 22, 2014

The rout in oil and natural gas prices—and in the prices of oil and natural gas industry shares—leaves investors with two big related but not identical questions. How low will oil and natural gas prices go? And what companies will be hurt the most—and which might actually manage to come out in strong positions when prices stop falling? The consensus is that oil and natural gas prices are headed still lower. Global demand doesn’t look likely to rebound significantly in the short term. Global supply shows no signs of falling. And projections are calling for a warmer than average winter in the United States. All that suggests that the $80 a barrel level for U.S. benchmark West Texas Intermediate won’t hold. (The closing price for December 14 delivery was $80.53 on October 23.) And that natural gas prices are headed below $3.50 per million BTUs. (Closing for November 14 delivery was $3.66.) And I don’t think a drop in oil below $80 or natural gas below $3.50 is necessarily the end of the damage. The Saudis, the swing producer in OPEC, seem determined NOT to cut production now and have indicated a determination to hold onto market share even if they have to see oil prices decline for another six months or more. It’s no wonder that with prices for oil and natural gas headed down, down, down, the share prices of oil and natural gas producers have plunged too. Shares of U.S. natural gas giant Chesapeake Energy (CHK), for example, tumbled to $17.49 on October 14 from $29.61 on June 23. That’s a 42% drop. (I bring up Chesapeake Energy as my example because it is (painfully) a member of my Jubak’s Picks portfolio http://jubakam.com/portfolios/jubaks-picks/. I have a 2.2% loss on that position since I added it to the portfolio on June 7, 2013.) But Chesapeake has staged a small but significant rally beginning on October 15 and accelerating on October 16. In those two days the stock moved up 18.9%. The cause of the rally? Not a radical shift in the dynamics of oil and natural gas supply and demand. Despite a move up in oil and natural gas prices at the end of the week the fundamentals still look dismal. Instead the stock moved up on a huge improvement in company’s ability to manage through the downturn without suffering lasting damage. This was the year that a previously dangerously overleveraged Chesapeake Energy was supposed to see cash flow cover capital spending. Asset sales went to pay down debt and greater financial discipline was going to produce that milestone this year: The company would not have to borrow more money (and increase its debt load) in order to develop all the acreage that it had leased. But the drop in natural gas prices threatened to at best delay that goal and at worst send the company back down the path to the leveraged bad old days. Which is why the stock rallied so strongly on the October 16 news that the company would sell natural gas and oil shale fields on 413,000 acres of the Marcellus and Utica shale formations to Southwestern Energy (SWN) for $5.4 billion. This will be Southwestern Energy’s first major step into oil shale production after focusing almost exclusively on natural gas. (Wells that are included in the deal produce 56,000 barrels a day of oil and natural gas liquids. That will increase Southwestern’s reserves by about one-third.) )  Which may be why Southwestern was willing to pay a premium for the assets above what industry analysts thought Chesapeake could get in the current weak market. (I’ve seen estimates that put the premium as high as 50%.) And suddenly Chesapeake is back in the debt reduction game. The day after the announcement of the deal both Moody’s Investors Service and Standard and Poor’s issued positive outlooks on Chesapeake. With the deal leading to a lower net debt to cash flow ratio for the company, both ratings companies look likely to give Chesapeake’s debt an investment grade rating before too long. The company’s improving balance sheet had let it move up to the top junk bond rating at both Moody’s and S&P. And now the financial markets are anticipating that this latest asset sale will put Chesapeake over the top. For example, Chesapeake’s unsecured bonds maturing in March 202 3 and originally issued with a 5.75% coupon climbed in price on October 16 and 17 to show a yield of just 4.72%. It would be an amazing result if Chesapeake came out of this horrendous drop in oil and natural gas prices with a stronger balance sheet and an investment grade bond rating. But that does look possible. That development wouldn’t prevent the company’s shares from falling along with the rest of the sector, but it would mean that Chesapeake would be in a great position to expand production (and maybe even acquire assets—without increasing its leverage, of course) when the bearish cycle for energy prices ends. I’d hold onto these shares on that improving balance sheet and its potential in the next bull cycle for energy.

Buy DXJR Japan Real Estate ETF

January 31st, 2015

After the Shinzo Abe’s original victory in 2013, Japanese real estate became a destination for overseas cash. Real estate, even in Tokyo, was cheaper than real estate in mainland China or Hong Kong or Taiwan or Seoul or Singapore. And with interest rates near zero, returns on Japanese properties were extremely attractive.

This month’s Abe victory in a snap election that caught opposition parties in disarray has the same positive implications. With the Prime Minister riding a self-declared mandate—even through his party actually lost a few seats in this go round—interest rates will stay low, the yen will get weaker and overseas currencies stronger, and higher inflation, always good for real estate prices, remains a policy goal.

Even after big investments by overseas groups including Blackstone Group and Singapore’s sovereign wealth fund in 2014, projections are that the volume of property transactions will rise at least another 20% in 2015.

Fundamentals remain broadly positive with prices for prime office buildings in Tokyo up 20% in 2014 and likely to increase another 10% in 2015, according to real estate broker Jones Lang LaSalle. Rents continue to climb since vacancy rates continue to fall. The current vacancy rate of 5.55% is the lowest since January 2009.

My puzzle has been how to invest in the sector. Information in English for U.S. based investors is scanty. Trading volumes for individual stocks in the sector in New York are low. It’s hard to get a good handle on the risks of individual real estate companies—and that’s even though Mitsui Fudosan, Japan’s biggest real estate developer by sales sold new shares in 20014 for the first time in 32 years. And that combination of low volume and tough to quantify company-specific risks has kept me from recommending anything in the sector.

So I’m going to recommend buying the sector itself. The whole thing. Through an ETF. One that hedges currency risk for dollar-based investors.

The WisdomTree Japan Hedged Real Estate ETF (DXJR) will give you broad exposure to the sector—including stocks such as Mitsubishi Estate, Mitsui Fudosan, and Sumitomo Realty and Development—for an expense ratio of just 0.43%. The fund is hedged—if that works correctly dollar-based investors won’t take a hit if (as I expect it will) the yen resumes its decline against the dollar in 2015 once the Federal Reserve starts raising interest rates.

The ETF, which opened for business earlier this year, closed at $28.27 on December 18. The range this year has been $30.25 to $23.84. The ETF has about $30 million in assets.

I will be adding this ETF to my Jubak’s Picks portfolio tomorrow, December 19.

 

Buy India Infrastructure INXX

January 31st, 2015

How about that “other” central bank?

With all the attention focused on the European Central Bank’s plan to buy more than $1 trillion in government bonds, on how the shifts in policy at the People’s Bank of China will speed up or slow down China’s economy, on whether the Bank of Japan can revive growth and inflation, on when the U.S. Federal Reserve will raise interest rates for the first time—the surprise move on January 15 by the Reserve Bank of India to cut interest rates hasn’t gotten as much attention as it deserves from investors.

Here we’ve got the classic “good news” interest rate reduction: Inflation has tumbled and that has let the central bank cut interest rates, which will, in equally classic fashion, lead to an increase in economic growth.

Inflation measured at the consumer level rose at a 5% annual rate in December, up from 4.38% in November. Prices at the wholesale level, the measure preferred by the Reserve Bank of India, rose by 0.1% after a 0% increase in November. Industrial production climbed by 3.8% in November and is now up by 2.2% in the first eight months of the 2015 fiscal year versus a 0.1% increase in the first eight months of fiscal 2014.  India’s economy is estimated to have grown by 5.5% in the fiscal year that ends in March 2015. That would put an end to two-years of sub-5% growth.

And the country’s economy still has wind at its back thanks to falling oil prices (India imported $143 billion of oil in 2013), more interest rate cuts (the initial reduction of 0.25 percentage points left the Reserve Bank of India’s benchmark rate at 7.75%), favorable demographics (India is now collecting the same demographic bonus that had helped propel growth in China), and structural changes from the Indian government intended to improve business conditions by improving infrastructure and ease barriers to doing business in the country.  In a year when growth in China is slowing, both the World Bank and the International Monetary Fund see the Indian economy accelerating. The World Bank, for example, forecasts GDP growth in India rising to 6.8% in fiscal 2016 and to 7% in fiscal 2017.

Indian stocks have been on a tear in anticipation of these current and future trends. Mumbai’s Sensex Index is at an all time high with a 37.8% gain over the last 12 months and a 5.5% gain in 2015 through January 22.

These trends are why I added the New York traded ADRs of HDFC Bank (HDB) to my Jubak’s Picks portfolio http://jubakam.com/portfolios/ on November 18, 2014. That pick is up by 13% from that date through January 22.

But not all sectors of the Indian market have moved up as strongly—and now on interest rate cuts and prospects for more business friendly rules and investment in the government budget that will be introduced next month for the fiscal year that begins in April I think it’s time to put some more money into India and into the lagging but about to catch up infrastructure sector.

You know what companies you want to buy. Adani Ports. Ambuja Cement. Bharti Airtel. Reliance Infrastrucure.

The problem is that almost no Indian infrastructure companies sell via ADRs in New York.

The solution is an ETF such as EGShares India Infrastructure ETF (INXX). The fund is relatively small at $45 million in net assets but volume is a decent daily average of 60,000 shares. (I think that would be light for a core holding but that’s not the portfolio role I see for this ETF.) The ETF was up 19.3% in 2014 and was up 8.9% in 2015 as of January 22.

The names in the portfolio are all those I think you’re looking for. Besides the infrastructure companies I mentioned above—all owned by the ETF—you’ll get exposure to companies such as Cummins India and Tata Communications.

I’m adding this ETF to my 12-18 month Jubak’s Picks portfolio today with a target price of $17.50 by October 2015.

Update American Airlines

Update: April 24, 2015.  Two pieces of good news for shares of American Airlines Group (AAL) today. The shares closed up 2.44% to $52.71. First, earnings for the first quarter of 2015, announced before the open today, April 24, rose to a record $1.2 billion, or $1.73 a share. That was slightly above expectations for $1.71 a share and tripled earnings (excluding special credits) in the first quarter of 2014. Revenue fell 1.7% to $9.83 billion, but that was in line with projections. While passenger revenue per available seat mile fell 1% domestically and 4.1% internationally, operating expenses dropped by 7.1% from the first quarter of 2014 thanks to a huge 42.2% plunge in fuel costs as oil prices collapsed. American Airlines Group closed its last hedges on fuel costs in July 2014 and has been naked ever since. Pretax margins, excluding special charges rose to a record 12.7%, up 8.6 percentage points from the first quarter of 2014. Second, American Airlines put off delivery of five Boeing 787 Dreamliners intended for international routes. Four will not be delivered in 2017 and the last will be delivered in 2018. American also announced that it would speed the retirement of some older MD-80s and 757s. The goal is to reduce supply growth, especially on international routes were capacity growth has been cutting into fares. American now projects that its international seating capacity will climb 1% in 2015, down from earlier projections for a 1.5% increase. The really good part of this second piece of news is that American’s U.S. competitors seem to be following suit. Last week Delta Air Lines (DAL) announced that it would cut expansion in global markets by 3% in the fourth quarter. United Continental Holdings (UAL) this week said it would reduce growth outside the United States by 0.7%. (Both American and United Continental are members of my Jubak’s Picks portfolio.) Although this trend certainly isn’t great for Boeing (BA), which is still looking to increase production on the 787 so it can move into the black for each airplane it produces, capacity restraint is the key to airline profits. The industry has a tendency to expand capacity so fast in good times that it posts huge losses in any drop in traffic. The longer the industry can put off that development in this cycle, the longer it will remain profitable I added American Airlines Group to my Jubak’s Picks portfolio back on December 2, 2014 at $47.76 as a hedge on falling oil prices since the airline would see a rapid drop in fuel costs if oil continued its plunge. The question now that oil looks to have bottomed is how much longer to hold the shares. Fuel costs always lag the price of oil so American Airlines still has several quarters of falling fuel costs to go by my estimation. In the fourth quarter fuel fell to $2.52 a gallon. For the first quarter that dropped even further to $1.83 a gallon in comparison to $3.10 in the first quarter of 2014. Credit Suisse projects that fuel cost at American will rise slightly to $1.94 in the second quarter (versus $3.03 a gallon in the second quarter of 2014), then to $2.06 in the third quarter (vs. $2.98), then to $2.16 in the fourth quarter (vs. $2.52). In 2016 fuel costs will, at $2.36 on average for the year, exceed average fuel costs for 2015 of $2.00 a gallon. That would suggest that on falling fuel costs alone the stock would be a reasonable hold into the third quarter of 2015. At that time investors might begin looking ahead at the higher costs per gallon in 2016 and they will certainly see, if the Credit Suisse projections are correct, a pattern of a declining reduction in fuel costs on a year to year comparison. Falling fuel costs aren’t the only thing this stock has going for it in 2015. The integration of operations between American and U.S. Airways after the 2013 merger is now substantially complete and with the issuance of a single operating certificate this month the group can now move workers and equipment to maximize efficiency. The group has also now unified its frequent flier and other market programs. Summer is usually a good time for air travel and for airlines if capacity discipline stays in place. I wouldn’t forget that this is a notoriously cyclical industry so I’m not raising my target price on yesterday’s news a great deal. As of April 24, I’m tweaking my target price to $66 by September from the current $64.

Update VISA

Update: April 22, 2015.  Shares of Visa (V) popped today on news announced on the website of the government’s State Council that China will open up its credit card clearing market to foreign companies. Right now China’s UnionPay has close to a monopoly position in the $6.84 trillion market for processing credit card transactions in China. That market grew by 33% last year. Starting June 1 foreign companies will be able to apply for a license to enter that market. Right now Visa and MasterCard (MC) pay a fee to UnionPay to process Visa or MasterCard transactions in China. Don’t expect Visa or MasterCard to start processing credit card transaction in China on June 2. The companies have to set up China-based units to handle the processing and the People’s Bank still needs to write up complete regulations. But this will happen if only to resolve a festering long-term dispute between China and the United States. In 2012 the World Trade organization ruled that China’s policies on credit card processing discriminated against foreign credit card companies. Today’s 4.2% gain in the shares took Visa to $68.09. That’s above the $67.50 target price I set when added the stock to my Jubak’s Picks portfolio on November 5, 2014. As of today, April 22, I’m raising my target price to $78 a share by September 2015.

Itau Unibanco

November 23rd, 2014

When she won re-election to a second term as President of Brazil on Sunday, October 26, Dilma Rousseff promised change.

Well, change is what the markets in Brazil got yesterday although it was change of a kind that surprised just about everyone. And the surprise is big enough and has enough positive long-term implications for Brazil’s finances and stocks that I will be adding the New York traded ADRs of Itau Unibanco (ITUB) to my 12-18 month Jubak’s Picks portfolio http://jubakam.com/portfolios/jubaks-picks/  tomorrow, October 31.

The surprise?

In the Banco Central do Brasil’s first meeting after the election, Brazil’s central bank raised its benchmark Selic interest rate by 0.25 percentage points to 11.25%. The bank had pretty much sat on its hands during the election campaign while inflation climbed well above the upper edge of the bank’s target. In-country and overseas investors and economists decried the inaction as evidence of the central bank’s lack of independence. Of course, the critics said the bank wouldn’t raise interest rates in any already slow economy when any further slowing might cost Dilma the election. Worries about the politicization of the bank rose to such a pitch that the markets had started to anticipate that Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings would move relatively quickly to downgrade the country’s debt.

A 0.25 percentage point rate increase isn’t a huge move and it certainly doesn’t restore the central bank’s reputation, but given how pessimistic financial markets had become, this surprise produced a rally in Brazilian stocks a day after they had sold off on Dilma’s victory. The iBovespa stock index climbed 2.52% in today’s session in Sao Paulo.

The positive market reaction to a move that will cost the economy growth in the short-term is extremely interesting—and is the reason that I’m buying Itau Unibanco now.

The move to raise rates, the markets believe today, is a sign that Dilma’s second term will move back toward a more orthodox policy of fighting inflation in order to restore faith in Brazil’s economy and its financial discipline. While we’ll have to wait and see how far this move toward fiscal discipline goes—it’s going to take work from Dilma to curb the appetite of the legislative arm of Workers’ Party for more spending and more subsidies—Dilma has the opportunity to send the markets a powerful signal when she appoints a new Finance Minister to replace the thoroughly discredited Guido Mantega. (“Discredited” is what happens when you predict 4% growth and deliver 1% with 6.3% inflation.)

If her choice—and this seems likely after the Banco Central do Brasil’s move—is seen as a voice for fiscal discipline, the markets will cheer. And Brazil will be likely to stave off a credit rating downgrade.

That’s the background for my pick of Itau Unibanco and the reason that I’m pulling the trigger on this pick now.

But I like Itau Unibanco as an individual stocks because the bank, the largest privately owned bank among the six banks that control about 75% of Brazil’s market, has worked hard to control costs and to prevent an erosion of loan quality during Brazil’s consumer credit boom. In the second quarter of 2014, for example, the 90-day delinquency ratio fell by 10 basis points. Net interest income in that quarter grew by 8.9% from the previous quarter as net interest margins improved by 70 basis points.

Going forward Itau Unibanco has a strong domestic and Latin American story to tell. The company is the market leader in credit cards in Brazil with 62 million accounts through its Hipercard and Itaucard brands. (In 2012 it bought the remainder of Redecard, Brazil’s second-largest credit card payment processor. That market share in credit cards would give Itau Unibanco a huge boost to revenue and earnings–if Brazil can right its economic ship so that the economy can generate a little more growth so that tapped out consumers have a little more room on their balance sheets.

In Latin America Itau Unibanco has been a major beneficiary of the divestiture trend by the world’s biggest banks. Partly out of a need to raise capital but also partly out of evidence that it is really, really hard to run a bank that does business everywhere, big global banks such as Banco Santander (SAN), HSBC Holdings (HSBC) and CitiGroup (C) have been selling off banking units to super-regionals such as Itau Unibanco. In 2014 Itau Unibanco acquired control of Chile’s Corpbanca (BCA), which had already acquired Helm Bank in Colombia. Itau is also making a strong push into Mexico where CitiGroup, one of the market leaders, has experienced a series of scandals.

The ADRS of Itau Unibanco popped 10.7% on October 30 on the central bank’s surprise. The move to $14.75 at the October 30 close in New York still leaves the ADRs well short of their September 2 high at $18.32 and even the October 14 “Dilma is trailing in the polls” high of $16. (Caveat investor—this is very volatile stock right now. In between those highs, Itau Unibanco has seen $13.25 on October 1 and $12.86 on October 27, the “Dilma wins” plunge.)

A return to $18, near the September 2 levels, would be a 22% gain from the October 30 close. I think that’s a reasonable initial target price while we see if Dilma can keep surprising the financial markets. One of the advantages of being as disliked by the financial community as she was before the election is that gaining a higher approval rating is a relatively easy task.

It does get harder from there, of course.

HDFC Bank

November 23rd, 2014

In my search for stocks that will go up as oil prices go down, I can’t think of a market with more leverage to the downward movement in oil prices than the Indian stock market. And I can’t think of an individual stock in that market with more upward leverage to falling oil pries than Indian bank HDFC Bank (HDB)—which is why I will be adding the bank’s New York traded ADRs to my Jubak’s Picks portfolio http://jubakam.com/portfolios/jubaks-picks/  tomorrow, November 18.

The structure of the Indian economy—the country imports 80% of its fuel—and the Indian fiscal and financial cycles are powerfully concentrating the effects of falling oil prices. For example, the government of Prime Minister Narendra Modi has used falling oil prices as an opportunity to end price controls and subsidies to consumers on diesel fuel and natural gas. That’s had the effect of reducing the government’s budget deficit at the same time as the falling cost of fuel imports has reduced the country’s current account deficit. India’s current account deficit has dropped to its lowest level in six years. Expectations are that the Reserve Bank of India will see enough of a decline in inflation (from lower fuel prices) and enough of an improvement in the national accounts to start lowering interest rates around the end of the fiscal year in March 2015. (Consumer price inflation dropped to 5.52% year over year in October, below the central bank’s target of 6%. The Reserve Bank next meets on December 2.) The central bank’s short-term benchmark repo interest rate is at 8%.

Lower oil and fuel prices plus a cut in interest rates would give a big boost to an Indian economy that the State Bank of India, the country’s biggest bank, estimates will grow by 5.8% in fiscal 2015. The Modi government has set a target to increase the growth rate to 7% to 8% within two to three years.

You can get exposure to that story through a broad-based India ETF such as the iShares MSCI India ETF (INDA.) That ETF has gained 31.8% from November 18, 2013 through the close on November 17, 2014.

Or you can look for an individual stock that is likely to leverage those trends even further.

A bank such as HDFC Bank, one of the largest privately owned banks in India, will benefit from a general recovery of growth in the Indian economy and from any interest rate cuts from the Reserve Bank of India. And it will benefit more than almost any other Indian bank. Almost 50% of the bank’s loan book is made up of retail loans—demand for retail loans is likely to pick up with the economy at a faster pace than corporate loan demand and retail loan interest rates tend to come down relatively more slowly than the benchmark so HDFC should see rising net interest margins. The bank has done a good job of keeping lending standards high during the economic slowdown—the gross bad loan ratio is just 1%–and the bank’s capital ratios are in good shape with a capital adequacy ratio of 15.7% as of September 30.

The bank also looks to be positioned to benefit as well from a more relaxed attitude from the Reserve Bank of India and the Modi government as growth picks up and as the country’s fiscal posture improves.

On November 14 India’s Foreign Investment Promotion Board approved an increase in permitted foreign ownership for HDFC Bank to 74% from a previous limit of 49%. That will let the bank go ahead with a 100 billion-rupee ($1.6 billion) sale of shares that will boost the bank’s capital available for lending just as the economy starts to speed up.

That approval is likely to revive talk—and maybe even actual negotiations–of a merger between HDFC Bank and mortgage lender and parent HDFC. The recent scrapping of tough reserve requirements and the recent increase in permitted foreign ownership remove two of the biggest obstacles to a deal which would create India’s largest privately owned lender. A deal, depending on its structure, could lower the cost of funds for HDFC’s mortgage business at the same time as it allowed HDFC Bank to escape current high reserve and restrictive lending allocation requirements. I’d put the merger talk in the “buzz” category of rumors, but a little buzz never hurt a stock price either.

I calculate a target price of $62 for the ADR as of August 2015. That’s roughly a 20% gain from the November 17 closing price of $51.93.

Update Greenbrier

Update: May 1, 2015.  They’ve been a long time coming. Today, May 1, regulators in the United States and Canada announced new safety rules for trains carrying oil. The rules would require the phase-out of older oil tank cars that are more vulnerable to puncture, fire, and explosion. Tank cars built before October 2011, the DOT-111 class, would be phased out within three years. Cars in the CPC-1232 class, built after October 2011 but still built without reinforced hulls, would be replaced by 2020. That’s a faster timetable than proposed by Canada earlier this year. New cars would have thicker hulls, head shields to protect the ends of cars, pressure relief valves, and electronic pneumatic brakes. The rules would result in either replacing or retrofitting an estimated 155,000 tank cars. As you might expect, the oil industry isn’t exactly overjoyed. The regulations are estimated to cost $2.5 billion, according to projections in the rules. Benefits, again according to the rules, would range from $912 million to $2.9 billion. To me those benefit numbers seem low. In July 2013, a train carrying crude derailed in Lac Megantic in Canada. The explosion killed 47 people. Yesterday, independent of the new rules, a group of six senators proposed a fee to be imposed on companies that ship oil, ethanol or other flammable liquids in older tank cars. The fee would pay for tax breaks of up to 15% of the cost of upgrading an older tank car--for companies that use new or retrofitted tank cars built to the standards in the new rules. Shares of companies that make tank cars or brakes for railcars—Greenbrier Companies (GBX), Trinity Industries (TRN), Westinghouse Air Brake Technologies (WAB), and American Railcar Industries (ARII)—all climbed after the rules were announced. Greenbrier, a member of my Jubak’s Picks portfolio, rose 7.23% as of 3 p.m. New York time or $4.17, to $61.86. The shares are down 1.21% as of that time since I added them to this portfolio on November 17, 2014. These regulations were a key part of my logic in buying this stock so they are anticipated in my $84 a share target price

Update FMC

June 27, 2015

Update: June 24 The trouble with value stocks is that they can take forever to turn around and that can require tons of patience. Certainly my June 12, 2014 pick of FMC (FMC) for my Jubak’s Picks portfolio is testing my patience. I bought the stock as a restructuring story when it looked like FMC would split into two companies to bring out the value in its lithium, agricultural chemicals, and health and nutrition units that was being hidden by the company’s big commodity soda ash minerals business. That planned split was replaced by a purchase of Cheminova, a Danish agricultural chemicals company, for $1.8 billion and then the subsequent sale of FMC’s soda ash business to Tronox for $1.64 billion The buy/sell strategy took more time than the split strategy might have, but it was aimed at the same target: clarifying the focus of FMC by getting rid of a very cyclical commodity minerals business in order to invest in faster growing units That still makes sense to me as a sound strategy that will lead to stock price appreciation but the delivery date for that appreciation has been pushed off further into the future by the slowdown in South American economies. That slowdown is being led by Brazil where the economy managed just 0.1% growth in 2014 before slipping into contraction in the first quarter of 2015. Forecasts call for negative growth of 1.2% in 2015 Which wouldn’t be such a big problem for FMC except that South America historically accounts for the majority of sales in the company’s agricultural chemicals unit. That dependence—55% in 2014—has been reduced by the Cheminova acquisition to 46%, but that still gives FMC a big exposure to growth or the lack thereof in the region I think, however, that you should dig deep and find additional reserves of patience for the second half of 2015 and into 2016. Growth in the market for agricultural chemicals is likely to stay flat for the remainder of 2015, but the integration of Cheminova will bring substantial synergies of $120 million and year over year revenue comparisons look easy to beat. The rebalancing of global sales to give North America and Europe a bigger share should help since those markets look to be recovering faster than Latin America. (The Cheminova deal also brought FMC a plant in India, which will help the company grow share in that market.) The shares are down 21.7% in the last 12 months and trade within 10% of their 52-week low of $51.04. As of today, June 24, I’m lowering my prior $82 a share target price to $69 a share, about a 25% gain, by December 2015. The stock pays a 1.2% dividend.

Update Isis Pharmaceuticals

February 1, 2015

Update: January 9. Shares of Isis Pharmaceuticals (ISIS) have been on a tear lately. The stock is up 84% in the three months ended January 8. That brings my gain since I added the stock to my Jubak’s Picks portfolio http://jubakam.com/portfolios/jubaks-picks/ on May 22, 2014 to 190%. At $72.43 the shares are way over my target price of $55. Time to sell? Has this become just another one of those over-hyped biotechs ready for a tumble? I don’t think so and in fact I’m raising my target price, as of today to $82 a share by April 2015. The news flow recently has certainly been positive. On January 8 Isis told Wall Street that it its actual results for 2014 would be a significant improvement on earlier expectations for a 2014 net operating loss in the mid to high teens and more than $725 million in cash earned by meeting milestones in its development program. (The company is due to report fourth quarter financials on February 26.) And on January 5 Isis announced it had signed an agreement with Janssen Biotech, a unit of Johnson & Johnson (JNJ) to develop drugs to treat autoimmune disorders of the gastrointestinal tract. The deal includes $35 million in upfront payments and the potential for nearly $800 million in milestone payments (plus royalties on any successful products.) This is exactly the kind of validating agreement—big name partner commits significant milestone funds—that drives the price of a biotech stock higher as investors wait for a payoff in the form of actual sales of new drugs. But there’s actually something bigger going on here than the signing of a big new partner to fund the development of new drugs. Isis Pharmaceuticals in the midst of validating a whole new drug technology, called antisense, that works by silencing harmful genes. The company is clearly one of two leaders in drug technologies, called RNA therapeutics, that work at the level of cellular RNA. (The other company is Alnylam Pharmaceuticals, (ALNY), which focuses on RNA interference rather than antisense. On January 9 the two companies announced that they would cross-license their intellectual property in RNA therapeutics.) What that means is that Isis increasingly looks like it is on a path to become not just a biotech that has developed one or two or three significant new drugs, but one that has pioneered a whole new class of innovative drugs with the potential of Amgen’s (AMGN) recombinant protein technology. It’s certainly not guaranteed that Isis grows up to be an Amgen but it is easy to understand the market’s enthusiasm. Amgen trades with a market cap of $118 billion. Even after its huge gain this year, Isis has a market cap of just $8 billion. Isis’s first drug to market, Kynamro for a rare genetic disease that causes very high cholesterol, has been a relative disappointment in sales but it did increase confidence in Isis’s technology. The company has drugs in the pipeline for diabetes, high levels of triglycerides, and blood clotting. Isis has more than 20 drugs in Phase II or Phase III trials in 2014 number and partnerships with Sanofi, Glaxo, Roche, AstraZeneca, and Biogen. The next two years will go a long way to determining if Isis owns a drug technology platform that would make an Amgen-like growth path possible. It’s that possibility that the market is trying to price right now.

Update Incyte

Update February 25, 2015. I’d never say that sales don’t count for biotech companies. It’s just that in the early stages of a biotechnology company’s life, its pipeline counts for more. Sales are, of course, the ultimate test of the validity of the value that a market puts on that pipeline. Sales reflect, for example, all those nasty little details such competition from other new drugs, the cost of reaching the market for a specific drug, and the quality of the sales force a biotech and any big drug company partners can put behind a new drug. Sometimes, though, an investor does get both growing sales and a bulging pipeline. I think that’s what Incyte (INCY) delivered in its fourth quarter report on February 11. For the quarter product revenue grew to $106 million, an increase of 46%. For the full year, product revenue climbed to $358 million, up 52%. And the company guided Wall Street to expect 2015 product revenue of $525 million to $565 million. That’s a solid revenue stream—or at least the beginning of a solid revenue stream. It better be just the beginning since this biotech has a current market cap of some $14.6 billion. (And the company is estimating 2015 research and development spending of $450 to $500 million.) I’d divide Incyte’s pipeline into three parts. First there’s the company’s approved JAK inhibitor drug, Jakafi, which has gained regulatory approval to treat the rare blood disorder Jakafi right now has a monopoly in this market after the discontinuation of a potential competitor from Sanofi (SNY), but drugs from Gilead (GILD) and Geron (GERN) are likely on the way. (JAK inhibitors work on genes that produce the JAK family of enzymes that regulate cell proliferation.) The Food and Drug Administration has recently approved Jakafi for polycythemia vera in which the body produces an excessive amount of red blood cells. Second, there are other JAK inhibitor drugs. Farthest along is baricitinib that is now in Phase III trials for rheumatoid arthritis. The market for rheumatoid arthritis is huge—an estimated $15 billion currently—and current treatment options focus on injectable drugs. Until recently baricitinib looked like it would be the third oral treatment to hit this market but recent setbacks for competing drugs at AstraZeneca (AZN) and Pfizer (PFE) look to have improved baricitinib’s position in the market. Another JAK inhibitor is projected to go into pivotal trials for pancreatic cancer in 2015. Third, the company has a promising but early stage pipeline for oncology drugs. The company has recently begun Phase II trials for its IDO1 inhibitor. In addition Incyte and Advaxis (ADXS) have recently entered into a collaboration to assess a combination of Advaxis’s Lm-LLO cancer immunotherapy candidate with Incyte’s epadadostat. I particularly like the biotech sector in the current market. Absent huge swings toward fear by the market as a whole, biotech stocks tend to be driven by pipeline news rather than by trading on speculation on when the Federal Reserve will begin to raise interest rates or whether U.S. GDP growth will be 2.9% or 3.1% for the quarter. Incyte is trading well above my $68 a share target price but on the pipeline momentum I’m keeping the stock in my Jubak’s Picks portfolio http://jubakam.com/portfolios/ and raising my target to $94 by June 2015.

Update Flowserve

Update: February 17, 2015.  Nothing terribly surprising in Flowserve’s fourth quarter results reported today, February 17, after the close in New York. Earnings of $1.16 a share were 3 cents a share above the Wall Street consensus. Revenue of $1.4 billion inched ahead by 0.8% year over year and exceeded analyst projections of $1.39 billion. Bookings climbed by 5.6% (or 11.2% in constant currency) to $1.32 billion and order backlog rose to $2.7 billion, an increase of $147.3 million or 5.8% from the fourth quarter of 2013. The gross margin rose 1.3 percentage points to 35.2% and operating margin improved by 2 percentage points to 17.3%. All in all a very solid quarter. Especially considering the company’s big exposure to the oil and gas sector. (That sector contributed 41% of bookings in 2013.) In its guidance for 2015 Flowserve sounded just like its industrial peers. No surprise that the company said that the first half of 2015 would feature major headwinds from a strong U.S. dollar and continued weakness in commodity prices (especially for oil and natural gas.) The first half of 2015 will be especially challenging thanks to a very slow recovery of oil and gas prices that won’t be strong enough to encourage spending by the company’s customers on new oil and gas, chemical, water, and power infrastructure. In addition the impact of a stronger dollar will be biggest in the first half of 2015 Due to normal seasonality and an improving global economy and commodity market, earnings in 2015 will be weighted toward the second half, Flowserve noted in its earnings presentation. For the year the company guided to earnings per share of $3.60 to $4.00 versus the current $3.79 Wall Street consensus. Flowserve is a member of my Jubak’s Picks portfolio http://jubakam.com/portfolios/ and I think the stock is worth holding for the oil and gas recovery in the second half of 2015. On the solid increase in margins in a tough market for its products, I’m nudging my target price on Flowserve to $92 a share by December 2015 from the current $90.

Update ARM Holdings

Update: February 11, 2015. It was all about royalties going into ARM Holdings’ (ARMH) February 11 report on fourth quarter earnings. The worry holding the stock down for much of 2014 had been an apparent decline in royalty growth from companies that licensed ARM’s chips to 7% in the fourth quarter of 2013, then to 4% in the first quarter of 2014, and 2% in the second quarter. Royalty growth had picked up in the third quarter of 2014—to 11% year over year—and the company had guided to mid-teens growth in the fourth quarter. That looked like a recovery but would the company be able to deliver? For at least the fourth quarter, the answer is Yes. Royalty growth from the company’s licensing of its chip technology climbed to 16% year over year. (In U.S. dollar terms licensing revenue grew 30% year over year.) Net profit, consequently rose to $111 million from a loss in the forth quarter of 2013. For the rest of 2015 the company said it expects continued momentum in licensing revenue on the strength of growth in smartphone (especially iPhone 6) sales and on the introduction of new smartphones this year incorporating ARM’s 8-A architecture. Shares of ARM Holdings fell for much of 2014 on the fear that growth in royalty revenue had slowed permanently, but it now looks like stock bottomed at $39.28 on October 22. As of the close today, February 11, at $50.31 shares have gained 28%. On the technical charts, ARM finally showed the 50-day moving average crossing back above the 200-day moving average in late January. That pattern is usually an indication of a continued upward trend. The company’s product pipeline also points to continued strength. It’s new Cortex A-72 Maya processor has been licensed to a dozen companies including MediaTek. The design, ARM says, is 3.5 times faster than the ARM processors used in most smartphones sold last year and uses 75% less energy. The company’s new Mali-T880 graphics processor for mobile devices also looks to play into the heated competition among smartphone makers to add bigger displays with more graphics while increasing the speed to the user. ARM Holdings has been a member of my Jubak’s Picks portfolio http://jubakam.com/portfolios/ since October 25, 2013. My gain during that period has been an un-awe-inspiring 5.31%. But I think ARM is moving into a product and royalty cycle sweet spot. As of February 11 I’m raising my target price for June to $60 a share from the prior target of $56.

Update Cheniere Energy

Update: May 14.  Tuesday, May 12, the U.S. Department of Energy issued the final approval for Cheniere Energy (LNG) to export liquefied natural gas from a facility in Corpus Christi, Texas. The approval would allow the facility, Cheniere’s second approved export plant, to export 2.1 billion cubic feet equivalent of natural gas a year for 20 years. A day later, Cheniere announced a final investment decision to go ahead with building the Corpus Christi plant. The project would have three liquefaction trains with an aggregate capacity of 13.5 metric tons a year. Cheniere projects that the first train would begin operation in 2018. The company’s first liquefaction facility, Sabine Pass, is scheduled to begin production at the end of 2015 or in early 2016. These are obviously important milestones in Cheniere’s efforts to become the first (at least, one of the first) facilities in the U.S. approved to liquefy natural gas and then export it to any country in the world. But these steps are also important steps in de-risking the stock. And it’s de-risking that will produce the further gains that I’m looking for in this member of my Jubak’s Picks portfolio. De-risking is important for any speculative stock so the lessons here have an application beyond Cheniere. Here’s how de-risking works and why it’s important to gains from owning Cheniere Energy. At its most recent investor day Cheniere laid out projections for EBITDA (earnings before interest, taxes, depreciation, and amortization) of $15 a share with currently planned production trains or $20 a share if it were to add two additional trains. If the market were to give Cheniere a 10 multiple on that EBITDA per share number, that would work out to a $150 a share price. Not bad for a stock that closed at $75.01 today. (Even if reaching the $150 level would take two to three years.) But that $15 a share in EBITDA can only be an estimate. What if Cheniere’s projections are wrong? Then we’ve got a stock worth $75 a share now that might well be worth less in the future. And the odds that those projections might be wrong are a good reason not to price the shares at 10 times projected EBITDA. On today’s closing price the multiple on that EBITDA projection is just 5. There are lots of things that could have gone wrong for Cheniere but haven’t to date—which is why the shares are up 181% since I added them to the Jubak’s Picks portfolio in June 2013. The company could have failed to get approval for two export facilities and for all the production trains that it planned. It could have had trouble signing up customers to long-term contracts for future production. It could have seen customers cancel given the decline in prices for liquefied natural gas in Asia. It could have decided to push out its construction schedule because of that weakness. And there are still lots of things that could go wrong. Liquefied natural gas prices in Asia could fall further. Some companies that have delayed or cancelled competing projects could reverse those decisions putting more liquefied natural gas on the market around 2020. Cheniere itself could run into construction delays at Sabine Pass that endanger the company’s chance to be the first U.S. exporter out of the chute. The company could face difficulty in raising all the cash that it needs to build two plants. Those plants could run higher operating costs than now projected earnings might indeed be lower than now projected. Each time Cheniere successfully passes another milestone the risk of something going wrong diminishes and the odds that the $15 a share EBITDA projection is correct increases. So, for example, commitments to purchase liquefied natural gas from Cheniere climbed to 28.2 million tons a year at the end of the first quarter of 2015 from 18 million tons at the start of 2013. Or, to take a very recent example, the company can get the final approval it needs to move ahead to construction on the first production trains at Corpus Christi. And as the company continues to make progress and continues to de-risk those EBITDA projections, then the multiple the market is willing to pay on those EBITDA projections will rise. The plunge in oil prices has left shares of Cheniere Energy stuck in a very narrow trading range of $75 to $80 from March through the present. I think that’s got everything to do with worries about the energy sector in general and very little to do with what’s going on at Cheniere. I’d suggest that this current range is a good place to buy Cheniere for future de-risking. As of today, May 14, I’m raising my target price for October 2015 to $90 a share from the prior $79.

Update Toyota

Update: May 4, 2015.  One of my core rules of investing—one that I find especially useful for not falling in love with a stock—is that when the reason that you bought a stock disappears, vanishes, or just proves to be wrong, you should re-evaluate the purchase. And most of the time you should sell. What about that “most of the time”? When should you hold on even when the reason for your original buy has vanished? The best reason is that if another reason for the purchase—and I mean something other than a wish to get back to breakeven—steps forward. If the new reason is convincing on its own, enough so that you’d buy the stock on that basis even if you didn’t own it already, then hang on, I’d say. Toyota Motor (TM), a member of my Jubak’s Picks portfolio, is exactly such an example. Back in February 2013 when I added these ADRs (American Depositary Receipts) to the portfolio, a major reason was the weak yen policy being pursued by the Abe government and the Bank of Japan. By making massive asset purchases, the Bank of Japan would drive down the price of the yen against the U.S. dollar and other currencies. That would give a boost to overseas sales of Japanese exporters—since Japanese goods would be cheaper in dollars or whatever. The shares of these exporters would get an extra boost when sales in their stronger currencies were translated back into weaker yen on the company’s Japanese balance sheets Toyota has been a pretty good play on the weaker yen. Back in February 2013 when I added the ADRs for Toyota to the portfolio the yen traded at 93.53 to the dollar. Today, May 4, 2015, the yen closed at 120.12 to the dollar. That’s a move of 28% lower on the yen against the dollar. My position in Toyota Motor’s New York traded ADRs is up 42% in this period with some of the gain coming from the weak yen and some coming from new products and improved sales in North America. But now the Bank of Japan looks like it has lost its belief in its own weak yen policy. Growth in Japan has slowed to a crawl and the central bank pushed its goal of 2% inflation off into 2016. And despite that, the Bank of Japan says, there’s no need for more stimulus or larger asset purchases. The yen is not going to fall precipitously against the dollar over the next few quarters. So time to re-evaluate Toyota? Certainly. Time to sell? I don’t think so. For two reasons, one short term and one longer term. On the short-term side, there’s a lag between the assumptions Toyota used on the yen/dollar exchange rate in its last set of financial projections and the exchange rate now. Back in February 2015 the company forecast that the yen would trade at 115 to the dollar from January to March 2015. The yen traded at 120 to the dollar on May 4 so Toyota still has a foreign exchange wind at its back. Although, I’d say that most of that wind has been exhausted. The longer-term reason to hold onto Toyota here has to do with a significant change in the attitude of Japanese companies toward dividends and stock buy-backs. After years as among the least shareholder friendly companies in the world and with an economy-wide preference for holding onto cash rather than passing it along in dividends or buy-backs to shareholders, Japanese companies seem to be changing. A recent campaign by U.S. activist investor Daniel Loeb to get robot-maker Fanuc to distribute some of its $1.9 billion in cash to shareholders has resulted in the company deciding to double its dividend payout. Historically most campaigns to increase shareholder distributions have died quietly from neglect at Japanese companies. What’s changed is that Prime Minister Shinzo Abe has energetically pushed for Japanese companies to distribute more of their $1.9 trillion in cash to shareholders as part of his campaign to revive growth in Japan. Combined with efforts to get Japanese companies to raise wages, the two efforts are aimed at putting more cash in Japanese pockets so the Japanese will turn into more active consumers. It hasn’t hurt Abe’s campaign that Japanese companies haven’t been investing their cash either. It has just been piling up in company bank accounts. Fanuc, for example, had 20% more in cash and short-term investments at the end of calendar 2014 than it did a year earlier and almost double the level it had in 2010. Fanuc will raise its dividend payout ratio to 60% with this distribution from 30%. The payout among the companies in the Nikkei 225 Stock index was just 20% at the end of 2014 so there’s a lot of catching up to do. (That payout ratio compares to 42% for the Standard & Poor’s 500 and 62% for the EuroStoxx 50.) Toyota reports earnings for the January to March 2015 quarter on May 7 and the company is expected to announce a dividend increase for calendar 2015 and a share buyback. Management has indicated that its goal, in the short-term at least, is to increase cash returns to shareholders, either through dividends or buybacks, to 40%. A change in policy governing returning cash to shareholders could be a big deal for Toyota in global stock markets. Right now the yield on Toyota’s ADRs is just 1.8% in comparison to 4.1% at General Motors (GM) and 3.8% at Ford Motor (F) Toyota has grown its dividend by just an annual 3.8% over the last five years. How big a change should investors expect? I see a significant move by Toyota but I really don’t know how aggressively the company will join the trend in Japan. But I do think that anything which flags that Toyota has joined the movement to increase returns to shareholders will push up the share price. And increases in shareholder returns should be enough to pick up where the weak yen left off. It’s certainly worth holding through May 7 to find out.

Novartis

December 13th, 2012

On December 7 in my post http://jubakpicks.com/2012/12/07/now-that-patent-expirations-are-dropping-the-drug-sector-is-getting-oddly-harder-here-are-my-five-picks/ I added Novartis (NVS in New York and NOVN.VX in Switzerland ) to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ to replace Bristol-Myers Squibb (BMY.)

In that post I wrote that even though the drug sector was about to put the worst of its cascade of patent expirations behind it, a big, fat, pipeline full of lots of potential blockbusters was still a key attribute for a drug stock. In 2011 the company forecast that its pipeline would deliver seven blockbuster drugs by 2017. This year Novartis raised its target to 14 blockbusters by 2017. (The pipeline looks like more than enough to offset the erosion on Glivec, which will lose patent protection in stages through 2023.) Blockbuster candidates include cancer drugs Afinitor and Jakavi (for breast cancer), the Q-family of respiratory drugs (including QVA, Seebri, and Onbrez), Gilenya for MS, and Galvus for diabetes. Novartis has one of the most cost-effective drug research operations in the industry. The company spends about $4 billion per new molecular entity versus the industry average of $5 billion.

I’m setting a target price of $71 a share by October 2013. The stock pays a 3.93% dividend yield.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Novartis as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

More capital spending–more cash flow–for Targa Resources

April 4, 2014

Not that nothing else matters—the price of natural gas and natural gas liquids is important—but my theory is that at the moment, in the current cheap money environment, the crucial thing that investors in energy MLPs (master limited partnerships) need to know is whether one of these dividend generating machines has enough new projects to keep distributions to investors climbing. Since master limited partnerships by law must distribute all of their income to investors, the way one of these companies grows is by raising money in the financial markets and then investing it in new pipelines, distribution hubs, refineries, processing facilities, and the like. With money so cheap right now, thank you Ben Bernanke and Janet Yellen, it’s easy for a master limited partnership to profit from the spread between the cost of borrowing money and the returns that projects produce. The hard part right now—after so much money has gone into master limited partnerships to be put to work in the U.S. energy boom—is finding enough good projects to keep the cycle going. From that perspective, the March 31 update from Targa Resources Partners (NGLS) was extremely good news. The MLP announced that because of an increase in exports of liquid petroleum gas first quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) would be 60% higher than in the first quarter of 2013. Liquid petroleum gas isn’t the same as liquefied natural gas. LPG is made from natural gas liquids and it is largely made up of propane and butane rather than the methane of natural gas. Exports of liquid petroleum gas fall under a completely different regulatory scheme than exports of liquefied natural gas. The United States became a net exporter of liquid petroleum gas for the first time ever in 2012 and exports are projected to grow until the United States becomes the world’s top exporter sometime around 2020. The biggest market is Asia where it’s used both for heating and increasingly as the feedstock for chemical production. All those exports to Asia mean a lot of opportunity for investment in new infrastructure. Which along with that increase in EBITDA was the big news from Targa on March 31. Targa’s liquid petroleum gas export capacity climbed to 3.5 to 4 million barrels a month by the end of 2013 and the company projects that it will reach 5.5 to 6 million barrels by then end of 2014. In addition to the $650 million in previously projected capital spending to reach that goal, Targa will add another $50 million in capital spending in 2014 to build a plant to split liquids into butane, propane, and other components. (Total cost for the splitter will be $115 million with the splitter to go into service in 2016/2017.) The company also said it will build a new processing plant in the Bakken shale gas region. Targa is a member of both my Jubak’s Picks portfolio and my Dividend Income portfolio. (The master limited partnership paid a 4.9% dividend as of closing price on April 4.) As of April 4 I’m raising my target price on Targa to $60 a unit in both the Picks and Dividend Income portfolios. (Traditionally I haven’t put target prices on picks in the Dividend Income portfolio, but I’ve have decided to add them gradually as I update these picks.) Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own units of Targa Resources Partners as of the end of December. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

Palladium isn’t gold–thank goodness; tweaking my target price for stock pick Stillwater Mining

May 21, 2013

The dust has settled at Stillwater Mining (SWC) with the election of four new board members backed by the Clinton Group, an activist investor that wants the company to focus on the profitability of its U.S. platinum and palladium mines and cut back or end plans to expand into copper mining after a 2011 acquisition of copper reserves in Argentina. That removes a major distraction hanging over the company’ stock and should leave the shares free to reflect Stillwater’s unique position as the only U.S. producer of platinum and palladium at a time when mines in South Africa are cutting production due to strikes. (Stillwater Mining is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ ) Palladium and platinum are two of the very few commodities that remain in a supply deficit in 2013 and that are likely, Barclays projects, to remain in deficit in 2014. Because of strikes in South Africa, global platinum production fell 10% in 2013 and palladium production fell 11%. And unlike gold, where a bare 10% of consumption goes for industrial production, 60% of platinum consumption and 91% of palladium consumption goes to industrial production. That’s been especially good for palladium as demand rose 16% to a record 9.9 million ounces in 2013 as the global auto industry continued a recovery. (At least outside of Europe.) Palladium and platinum are key ingredients in automobile catalytic converters. You can see the platinum/palladium story very quickly by comparing the performance of ETFs for those metals with that of a gold ETF. While a gold ETF such as the SPDR Gold Shares (GLD) is down 16.6% year to date and down 12.57% over the last year, the ETFS Physical Palladium Shares (PALL) is up 6.23% year to date and up 23.46% over the last year. The ETFS Physical Platinum Shares (PPLT) is down 3.28% year to date but up 2.08% over the last year. Shares of Stillwater Mining are up 63.9% over the last year, but have climbed just 1.7% in 2013 to date. For the company’s first quarter, reported on April 29, the company announced production of 127,100 ounces of palladium and platinum, a 5.2% increase from the first quarter of 2012. Realized prices for palladium rose to $725 an ounce in the quarter from $671 in the first quarter of 2012 and for platinum to $1628 an ounce from $1598 in the first quarter of 2012. One of the things that I especially like about Stillwater is that its production is very heavily slanted toward palladium, my preference between these two metals in 2013. Of the company’s first quarter production 98,000 ounces were palladium and 29,000 were platinum. As of May 21, 2013, I calculate a target price of $18 a share, a slight tweak upward from my previous target of $17 a share. That’s 39.8% above the price of $12.87 at noon on May 21. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Stillwater Mining as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Finally some growth at stock pick Xylem

April 29, 2014

When Wall Street doesn’t expect much of any growth, a 3.1% year-to-year increase in revenue is reason for dancing in The Street. That’s what’s happening with shares of Xylem (XYL) today. As of 3:00 p.m. New York time the stock was up 3.22%. The catalyst? First quarter earnings of 34 cents a share, 2 cents a share above analyst forecasts, that 3.1% organic increase in revenue to $906 million (when Wall Street was expected $889 million), and earnings per share guidance of $1.85 to $2.00 a share for 2014 (when the Wall Street consensus was $1.87.) I added Xylem to my Jubak’s Picks portfolio http://jubakam.com/portfolios/ back on September 4, 2012 as a pure play on increasing global demand for clean water—and the equipment to purify and move it that Xylem makes. The stock is up 47.5% since then but Xylem has had trouble getting much revenue growth in a global economy where tight government budgets in the United States and the EuroZone have slowed spending on water projects. Organic revenues has edged lower under that pressure so that investors (like myself) who like the long-term story have been left wondering when Xylem might see any growth at all. Certainly this quarter, positive as it is, doesn’t mark a huge turnaround. In its conference call Xylem forecast that 2014 sales would growth by 2% to 4% even as it also noted that global water consumption is growing twice as fast as global population. The company’s response to the current market softness has been to look for efficiencies that would improve margins. That seems to be working: in the just reported first quarter, adjusted operating margins climbed by 150 basis points. As of April 29, I’m tweaking my current target price of $45 to $47 in recognition of Xylem’s progress on increasing operating margins. The stock pays as 1.4% dividend.   Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Xylem as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

Update Statoil

Update: April 14. The acquisition of BG Group by Royal Dutch Shell (RDS.A) has grabbed all the oil sector headlines. $51 billion deals will tend to do that—especially when they’re priced at a 52% premium to the pre-deal market price for BG Group. The acquisition makes Royal Dutch the biggest player in the world in the liquefied natural gas sector, expands the company’s presence in Brazil’s pre-salt oil projects in the South Atlantic, and gives Royal Dutch a big presence in waters off the east coast of Africa, one of the world’s most promising new areas for exploration. In short it’s not a bad deal although it is expensive: Credit Suisse calculates that the deal will dilute earnings at Royal Dutch by 10% in 2016, the year the acquisition will close, 5% in 2017, and then 1% in 2018, the year when the acquisition turns earnings positive. The big deal headlines have overshadowed a series of announcements from Norway’s Statoil (STO) that on a smaller scale promise to continue the transformation of Statoil from a company focused on the North Sea to one with a major presence in the Gulf of Mexico, the Arctic frontier, and the same East African waters that Royal Dutch has just bought into. For example, on March 30, Statoil announced the discovery of an additional 1 to 1.8 trillion cubic feet of natural gas at an exploration well in the water off Tanzania. That brings the company’s discoveries in the area to 8. I think Statoil’s discoveries, the much bigger finds by Italy’s ENI (ENI), and BG Group’s exploration success in the area has put the natural gas reserves of East Africa over the top. There’s now clearly enough natural gas in the area to make the investment in liquefied natural gas facilities to export LNG to Asia a viable and attractive proposition. Statoil already exports liquefied natural gas from its fields on the Norwegian continental shelf. Now it will be able to export LNG to the highly lucrative Asian markets from fields much closer to those markets. Shortly after that announcement, Statoil reported another find, this one in the Gulf of Mexico. Statoil, the operator of this well has a 50% interest in its oil production with Anadarko Petroleum (APC) holding a 37.5% interest. And then, finally, today, April 14, Statoil announced another natural gas find near its Aasta Hansteen field in the Norwegian Arctic. Statoil put the find at 2 billion to 7 billion cubic meters of natural gas. In the last year Statoil has increased its estimates of the size of this field by about 25%. It’s hard to tell if it’s time to buy Statoil. The company’s total costs are relatively high because of taxes imposed by the Norwegian government and hefty depreciation. That has helped push Statoil’s New York traded ADRs down 26% in the last 12 months, as of April 13, but it also means that Statoil is very highly leveraged to any recovery in the price of oil that takes the Brent benchmark back towards $65 a barrel. The ADR’s chart looks like it shows a pattern of higher highs and higher lows over the last six months but the pattern isn’t especially strong with the December 2014 high at $18.55, the February high at $19.62 and the ADRs closing at $19.55 on April 14. The dividend yield is 4.84% at the moment but Statoil isn’t covering that dividend from operating cash flow—and won’t until 2016—so it’s not clear how safe it is. I’ve owned this stock in my Jubak’s Picks portfolio since September 2009 and it is down 14.02% in that time. Certainly I can’t tell you when the plunge in oil prices is over, but I think the odds are good that we’ll finish 2015 near the $65 a barrel level that would work well for Statoil. I am cutting my target price today since I think $37 is a bit ambitious. The new target is $28 a share by October 2015.  

Update MGM Resorts

June 28, 2015

Update: March 17, 2015.  Two pieces of news today, pointing in contradictory directions, for shares of MGM Resorts International (MGM). Only one has moved the stock, however. Shares of MGM Resort were up 10.83% to $21.79 today. The news pushing the stock up are reports that activist investor and real estate specialist Land and Buildings plans to nominate four people to the MGM Resorts board to push for restructuring the company into lodging company and a real estate investment trust (REIT) In its last earnings conference call MGM management said that it would consider a REIT conversion as one possible restructuring option. The plan put forward by Land and Buildings envisions a special dividend from MGM China to pay down debt. The U.S. real estate owned by the REIT would be worth $25 a share, Land and Buildings estimates. And the entire restructuring would value the parts at a total of $55 a share. This is an especially opportune time to do this restructuring, Land and Buildings argued, since the tax-free spin out of the REIT would avoid a projected $200 million tax bill for MGM in 2015 and the thanks to a drop in revenue across the entire Macau gaming sector, MGM shares have taken a significant hit and are now severely under valued. The negative news today, clearly overwhelmed by enthusiasm at projections that a $21.79 stock could be worth $55 a share, came from UBS. The investment bank said that its estimates showed that gaming revenue from Macau would continue to show negative year over year comparisons through the second quarter of 2015. Any recovery in the Macau market would have to wait until 2016. MGM Resorts International is a member of my Jubak’s Picks portfolio with a target price of $31 a share. The stock is up 74% since I added it to this portfolio in May 2012.

OncoGenex pops today on hopes for major cancer drug news tomorrow

March 10, 2014

Shares of biotech OncoGenex (OGXI) were up 8.9% today, March 10 at the close in New York. Why? Because March 10 is the day before March 11. The company is scheduled to report fourth quarter results on March 11 after the close of the New York market and speculation today is that the company will announce major progress on the Phase 3 trial of custirsen, its drug for metastatic prostate cancer and for advanced non-small cell lung cancer. The company recently announced that the trial had reached the specified number of events required for final analysis and that the results would be reported as soon as they are available. The speculation is that “as soon as they are available” means before the end of March. That’s a major change from 2013 when expectations were that the final results wouldn’t be released until the middle of 2014. After hitting a low at $6.70 a share on November 6, 2013, shares of OncoGenex have climbed 107%. They are still 12.7% below the $15.71 March 14, 2012 price where I added OncoGenex to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ .  But I think we’re looking at news on custirsen and the company’s second cancer drug apatorsen in 2014 that will finally move the stock to my $22 target price. The Phase 3 SYNERGY trial for custirsen is a big deal for OncoGenex since the drug represents a novel target for treating advanced prostate cancer. Success in this trial wouldn’t just give the company a substantial new drug but, more importantly, it would validate the company’s approach to cancer as a platform for developing other cancer drugs. It’s the potential for that platform that got Teva Pharmaceuticals (TEVA) to sign on for potential milestone payments of $370 million. I expect to hear something from OncoGenex on its progress in reaching those milestones on March 11. I’m also expecting to hear some news on the Phase 2 trials for apatorsen in bladder cancer. The report on the results of those trials is likely for the second half of 2014. Speculation ahead of the fourth quarter report is that this will be the year that OncoGenex demonstrates the validity of its cancer platform. After the recent run up in the shares on that speculation, the danger is that the actual news could disappoint. I’d hold through any sell on the news dip as long as the reports on the custirsen trials are solidly positive. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of OncoGenex as of the end of December. For a full list of the stocks in the fund see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.

Terrible quarter for Yamana marks bottom for company–if not for gold

February 20, 2014

It’s always hard to judge the bottom of a cycle—and it’s certainly hard for gold right now. I suspect that the recent rally in gold to a close of $1320.90 an ounce on February 20 isn’t likely to hold and that we’ll get a retreat back below $1200 before the year is done. But that’s only my best projection and the market is deeply divided right now between analysts calling for gold to move higher from here (and to finish 2014 higher) and those projecting an end of the year price at $1050 an ounce or so. In this context I can’t say whether this is the time to start buying shares of Yamana Gold. If gold moves lower so will the shares of gold miners. Those shares have by and large outperformed gold itself in 2014. But I do think that Yamana’s fourth quarter earnings report, announced on February 19, does represent something very like a bottom for the company: big impairment charge, big cuts to capital budget and to the dividend, and what looks like a stabilization of the all-in cost of production at a very low level. Impairment for the quarter came to a whopping $682 million against operations in Brazil because of a delay in starting operations and against several exploration projects. That took the loss for the quarter to $536 million. Excluding these items the company earned 5 cents a share in the quarter, down from 26 cents a share in the fourth quarter of 2012. Gold reserves fell by 8%. That is a relatively small reduction in comparison to those being declared by other gold miners recently—Goldcorp (GG), for example, declared a 15% reduction in reserves. Yamana Gold has been relatively aggressive in cutting the price assumptions it uses in calculating reserves (at $950 an ounce versus $1300 an ounce at Goldcorp) so the low price of gold in 2013 has relatively less effect on Yamana’s reserve calculations. For the year Yamana reported that it had reduced exploration spending to $30 million, a 50% reduction from 2012, and that total capital spending of $1 billion in 2013 would fall to $480 million in 2014. The company also announced a big 42% cut to its dividend to an annual 15 cents a share. All-in sustaining costs fell to $947 an ounce in 2013 thanks to cost cutting and the company projected that all-in sustaining costs would dip further to $925 in 2014. Production in 2014 will climb, the company projects, by 200,000 ounces. To me this adds up to a lot of bad news and while I can imagine another batch of negatives if gold plunged below $1,000 an ounce, I think this is enough to mark a bottom for Yamana. Given the uncertainties of the price of gold, I don’t think I’d back up the truck right now, but I’m certainly going to continue to hold the shares in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ I’d buy more if the price fell to $9.50 or less. And I’m keeping my target price at $14.50 a share although I’m stretching out the schedule for that price to November 2014. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Goldcorp or Yamana Gold as of the end of December. For a full list of the stocks in the fund see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.

Update Precision Castparts

Update February 21, 2015. Precision Castparts (PCP) has clawed its way back, rather nicely, from the disappointment over its December quarter earnings released on January 15 (preliminary) and January 22 (final). The company’s earnings beat Wall Street estimates by a penny at $3.09 a share (excluding one-time items) but revenue rose just 4.3% year over year to $2.46 billion, matching the Wall Street consensus. But the kiss of disappointment came in when the company announced downside guidance for fiscal 2016 (which begins in April.) Earnings for that year will be below the $15.50 to $16.50 per share in the company’s prior guidance. The big worries for the year, the company said, will be inventory destocking at a single aircraft maker (read Boeing) and lower demand from the oil and gas industry (ya think?). The days after the preliminary report took the stock down to $199 (on January 16) as a flock of analysts rushed to cut their target prices and to downgrade their ratings from outperform to neutral or lower. From that bottom on Janaury 16, however, the stock has climbed back to close at $219.61 today—a 10% gain in a month. Partly that’s a reaction to the over-reaction by Wall Street analysts. After all the company did say that despite those revenue worries earnings per share from continuing operations will show growth in fiscal 2016 over 2015. But a significant part of it is a reaction to improving fortunes at Boeing (BA), Precision Castparts’ biggest single customer for metal parts that go into everything from engines to engine mounts to airframes. Boeing shares have rallied to an all time high on those improved prospects for aircraft deliveries and Precision Castparts shares have gone along for the ride. Just as important, the market has started to include Precision Castparts among those industrials such as Cummins and Caterpillar that see a recovery in sales in the second half of calendar 2016. The bottom for the oil and natural gas sector now looks to many of us to be around mid-year—that development would certainly remove a worry hanging over the stock. The view that this might be a time to buy for a second half recovery got a boost when the end of the year regulatory filings from Berkshire Hathaway showed Warren Buffett taking his position in Precision Castparts to 2.9 million from 2.1 million shares. The second half recovery in the oil an gas sector in the general global economy that drives sales at Precision Castparts to the power generation sector isn’t going to be some kind of moonshot. So while I think you do want to own these shares for the second half of the year, I am cutting my target price to $270 by October from my previous target of $298. That would be a 23% gain. Shares of Precision Castparts are up 52.7% as of Friday’s close from my original purchase on February 1, 2011. The stock is a member of my Jubak’s Picks portfolio http://jubakam.com/portfolios .

Abbott Labs looks like a second half story for 2014

March 4, 2014

Fourth quarter earnings and guidance for 2014 announced on January 22 make it clear that Abbott Laboratories (ABT) is a second half story for 2014. (Abbott Laboratories is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ ) For the quarter Abbott reported earnings of 58 cents a share, matching Wall Street estimates. Revenue climbed just 0.4% year over year to $5.66 billion, less than the $5.72 billion analysts had projected. A stronger dollar worked against Abbott in the quarter but even taking out currency effects worldwide sales still grew by just 3.3%. For 2014 the company told Wall Street to expect $2.21 to $2.26 a share. That’s slightly ahead of the $2.21 consensus projection by analysts. But that earnings guidance isn’t spread evenly over 2014. In the first quarter, for example, Abbott faces tough year-to-year comparisons with the first quarter of 2013, and what are projected as lagging sales and higher marketing expenses for the period. As Abbott’s fourth quarter earnings report made clear, the company’s infant formula sales still haven’t completely recovered from product problems in Saudi Arabia, Vietnam, and, most importantly, China. Sales of pediatric products outside the United States fell by 3% in the quarter. (Growth in the third quarter hadn’t been particularly robust at 3%.) The first quarter, the company noted, will also see higher expenses related to product recalls in those markets and higher marketing expenses as Abbott spends to rebuild market share and growth. Add a very negative currency effect from dollar strength in the first quarter and the year is likely to begin with disappointingly sluggish growth. I don’t think any weakness in the stock in the first quarter is likely to be big enough to make selling and then rebuying an attractive strategy. But if you’ve been looking to add to a position in Abbott (or to start one) the days or weeks after the first quarter earnings are reported on April 16 might be your best opportunity for 2014 As of March 4 I’m raising my target price for Abbott to $46 by October from my current target of $40 a share. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Abbott Laboratories as of the end of December. For a full list of the stocks in the fund see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.


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