Jubak Picks 50 Portfolio
This long-term, buy-and-holdish portfolio is based on my 2008 book The Jubak Picks. In that book I identified ten trends that were strong enough, global enough, and long-lasting enough to give anyone who invested in them a good chance of beating the stock market averages. To make things easier for the average investor I picked 50 stocks that are well-positioned to ride those trends. This portfolio has only been around since December 30, 2008 but that’s long enough to get tested by the near bear market of 2011. In its first year, 2009, The Jubak Picks 50 portfolio gained 57.8% versus a gain of 28.3% for the S&P 500. Year two, 2010, the portfolio gained 20.1% versus 15.01% for the S&P 500. Then in 2011, the portfolio lost 18.6% versus a 2.1% gain for the S&P 500. Total for three years comes to a gain of 54.3% for the Jubak Picks 50 portfolio versus 48.5% for the S&P 500. This is a much less active portfolio than my Jubak’s Picks portfolio; I anticipate turning over less than 10% of the portfolio annually. I made my adds and drops for 2012 on January 13, 2012 http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/.
View Sells
| Symbol | Date Picked | Price Then | Price Now | Today's Change | Jubak's Gain/Loss | |
|---|---|---|---|---|---|---|
| Apache | ||||||
| APA | 12/30/2008 | $73.64 | ||||
| It's Apache's ability to get more oil out of old fields that makes this an oil stock that I want to own during the supply crunch that awaits the world... more | ||||||
| Baidu | ||||||
| BIDU | 01/18/2011 | $108.15 | ||||
| Update June 25, 2012: I hate it when fundamentals mess up a good swing trade. Unfortunately, that’s just what has happened recently with shares of Baidu (BIDU). Earlier in 2012, you could have made... more | Read Jim's Original Buy | ||||||
| BHP Billiton | ||||||
| BHP | 12/30/2008 | $41.94 | ||||
| Update February 18, 2011: As tea leaves go, those presented to investors in BHP Billiton’s (BHP) February 16 post-earnings-report conference call could have been a bit clearer. I think the way to decide buy/sell/hold... more | Read Jim's Original Buy | ||||||
| Bunge | ||||||
| BG | 12/30/2008 | $50.08 | ||||
| Update January 15, 2010: Brazilian iron ore giant Vale (VALE) said on January 15 that it’s in talks with Bunge (BG) to buy that company’s fertilizer assets in Brazil. The deal, for as much as... more | Read Jim's Original Buy | ||||||
| Canadian National Railway | ||||||
| CNI | 01/05/2010 | $55.38 | ||||
| With Warren Buffett’s purchase of Burlington Northern (BNI), there’s one less trans-continental railroad in North America. And nobody is going to build another one anytime soon. Actually make that ever. Canadian... more | ||||||
| Cemex | ||||||
| CX | 12/30/2008 | $8.78 | ||||
| Update January 19, 2011: A cement maker like CEMEX (CX) couldn’t have picked a worse set of markets for the global economic crisis if it tried. Second biggest market for the company? The United States,... more | Read Jim's Original Buy | ||||||
| Cisco Systems | ||||||
| CSCO | 12/30/2008 | $16.23 | ||||
| Update August 21, 2009: Ever since this recession began Cisco Systems (CSCO) CEO John Chambers has shown an unexpected talent for taking all the joy out of his company's earnings report. And he did it again... more | Read Jim's Original Buy | ||||||
| Coach | ||||||
| COH | 12/30/2008 | $20.36 | ||||
| Update July 28, 2009: Coach (COH) reported that its earnings for the June quarter matched Wall Street expectations at 43 cents a share. That's about the last good news for the fourth fiscal quarter that... more | Read Jim's Original Buy | ||||||
| Corning | ||||||
| GLW | 12/30/2008 | $9.01 | ||||
| Update June 5, 2012: If Mr. McGuire were to whisper to Benjamin his “just one word” of advice today, instead of 1967, it would be not “plastics” but “glass.” And the stock that he’d tell... more | Read Jim's Original Buy | ||||||
| Deere | ||||||
| DE | 12/30/2008 | $37.65 | ||||
| Update February 13, 2013: Deere’s (DE) first quarter fiscal 2013 earnings announced this morning before the market open in New York and the guidance for the rest of the year reminds me—in direction if... more | Read Jim's Original Buy | ||||||
| DuPont | ||||||
| DD | 01/18/2011 | $48.96 | ||||
| Update August 1, 2011: In the current slow growth economic environment I’m looking for shares of companies that can turn modest top line growth in unit volume into better than expected bottom line earnings... more | Read Jim's Original Buy | ||||||
| Enbridge | ||||||
| ENB | 12/30/2008 | $32.23 | ||||
| Enbridge has an impressive number of pipeline projects set to start pumping up revenue in the next two to three years. The Alberta Clipper Expansion is projected to deliver heavy... more | ||||||
| ExxonMobil | ||||||
| XOM | 12/30/2008 | $78.59 | ||||
| Update July 30, 2012: Wall Street analysts have been busy cutting their ratings on shares of ExxonMobil (XOM) after the company’s second quarter earnings announced on July 26. If you’re a long-term investor or if... more | Read Jim's Original Buy | ||||||
| Flowserve | ||||||
| FLS | 12/30/2008 | $51.33 | ||||
| Update August 26, 2009: Turns out the pumping business is a very good place to be in this economy. On July 29 Flowserve (FLS) announced second quarter earnings of a better than expected $1.92 a... more | Read Jim's Original Buy | ||||||
| Fluor | ||||||
| FLR | 01/18/2011 | $70.60 | ||||
| Doing some catch up on this stock. I added Fluor (FLR) to the Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on January 18, but this is the first time I’ve... more | ||||||
| Fortescue Metals Group Ltd | ||||||
| FSUMF | 12/30/2008 | $1.35 | ||||
| Update September 12, 2012: This isn’t good news for Fortescue Metals Group (FMG.AU in Sydney or FSUMF in New York) and it indicates the problems increasingly facing smaller mining companies as commodity prices remain... more | Read Jim's Original Buy | ||||||
| Freeport McMoRan Copper & Gold | ||||||
| FCX | 12/30/2008 | $23.73 | ||||
| Update July 21, 2009: At least they were honest. Executives at Freeport McMoRan Copper & Gold (FCX) told Wall Street on July 21 that they weren't seeing any signs of a recovery in developed... more | Read Jim's Original Buy | ||||||
| General Cable | ||||||
| BGC | 12/30/2008 | $16.69 | ||||
| Update August 7, 2009: Looking for the dark side of the recovery in commodity prices? Look no farther than the second quarter earnings reported by General Cable (BGC) on August 5. The company did indeed beat... more | Read Jim's Original Buy | ||||||
| General Electric | ||||||
| GE | 07/22/2009 | $15.82 | ||||
| The one-stop-shop for industrial infrastructure. Need a locomotive, steam turbines, a power plant, a nuclear reactor or just something mundane like a hundred jet engines? General Electric can sell it... more | ||||||
| GOL | ||||||
| GOL | 01/18/2011 | $16.05 | ||||
| Update December 7, 2011: This morning Delta Air Lines (DAL) announced an agreement to buy a $100 million minority position in Brazil’s Gol Linhas Aereas Inteligentes (GOL). The agreement would give Gol, Brazil’s second... more | Read Jim's Original Buy | ||||||
| Goldcorp | ||||||
| GG | 12/30/2008 | $30.72 | ||||
| Update March 8, 2010: What you want in a gold stock is a company with rising reserves and falling costs. Goldcorp’s (GG) end of 2009 report on reserves shows that it’s still delivering rising... more | Read Jim's Original Buy | ||||||
| GOOG | 12/30/2008 | $303.11 | ||||
| Update July 19, 2011: Just in case you were in danger of forgetting, Google’s (GOOG) second quarter earnings report on Thursday, July 14, should remind you: It’s good to be out in front of... more | Read Jim's Original Buy | ||||||
| HDFC | ||||||
| HDB | 12/30/2008 | $72.35 | ||||
| Update January 27, 2011: Another day, another interest rate increase from an emerging economy central bank. On January 25, it was the turn of the Reserve Bank of India. The bank raised its benchmark repurchase... more | Read Jim's Original Buy | ||||||
| Home Inns and Hotels Management | ||||||
| HMIN | 01/13/2012 | $27.18 | ||||
| Home Inns and Hotels Management (HMIN) is “now the indisputable leader in economy hotels” in China according to Deutsche Bank. I’d have to say I agree which is why I... more | ||||||
| HSBC | ||||||
| HBC | 12/30/2008 | $47.08 | ||||
| Update August 19, 2009: One half of HSBC's (HBC) business is performing beautifully. Unfortunately, it's not the part that I most want to own. On August 3, HSBC reported second quarter earnings that showed that its... more | Read Jim's Original Buy | ||||||
| Impala Platinum | ||||||
| IMPUY.PK | 12/30/2008 | $13.97 | ||||
| Early 2008 wasn't an easy period for South African mining companies. Power shortages shut the country's deep mines. News that China passed South Africa to become the largest gold producer... more | ||||||
| Infosys | ||||||
| INFY | 12/30/2008 | $24.45 | ||||
| One of the four horsemen of Indian information technology outsourcing, Infosys combines fast growth with proven management. Infosys has had to win over global clients that now include 113 members... more | ||||||
| Itau Unibanco | ||||||
| ITUB | 12/30/2008 | $10.84 | ||||
| Update November 8, 2011: On November 1 Brazil’s Itau Unibanco (ITUB) reported third quarter adjusted net income, which excludes one-time items, of 3.94 billion reais (or $2.3 billion). That was up from 3.16 billion... more | Read Jim's Original Buy | ||||||
| Johnson Controls | ||||||
| JCI | 12/30/2008 | $17.90 | ||||
| Update August 31, 2009: The long-term future for Johnson Controls (JCI) is in batteries for hybrid and electric cars, and systems for building-wide energy efficiency. Not that the near-term future is so bad. What... more | Read Jim's Original Buy | ||||||
| Joy Global | ||||||
| JOY | 12/30/2008 | $21.99 | ||||
| Update June 1, 2012: Are we all market timers now? What makes me wonder? My reaction to Joy Global’s (JOY) second quarter earning report yesterday, May 31, before the New York markets opened. The company beat... more | Read Jim's Original Buy | ||||||
| Lan Airlines | ||||||
| LFL | 12/30/2008 | $8.64 | ||||
| Update April 1, 2013: It’s all about Brazil. On March 19 LATAM Airlines Group (LFL) reported a 97% drop in earnings for 2012 to just $10.96 million. Higher taxes in Chile, the group’s home market, certainly... more | Read Jim's Original Buy | ||||||
| Luxottica | ||||||
| LUX | 12/30/2008 | $17.95 | ||||
| Update March 3, 2011: Not very ambitious, are they? Luxottica, the biggest maker of eyeglasses in the world and a member of my Jubak Picks 50 long-term portfolio, announced that it looking to increase sales... more | Read Jim's Original Buy | ||||||
| Lynas | ||||||
| LYSDY | 01/13/2012 | $1.04 | ||||
| Update May 6, 2013: Whether or not the victory on Sunday of Prime Minister Najib Razak and the ruling Barisan Nasional coalition is good for Malaysia democracy or not—and it’s hard to believe that... more | Read Jim's Original Buy | ||||||
| Monsanto | ||||||
| MON | 12/30/2008 | $69.52 | ||||
| Update September 10, 2009: It’s hard to keep earnings growing when competitors cut the price you can charge for your signature product in half. That’s the reality that’s finally put an end to Monsanto’s (MON)... more | Read Jim's Original Buy | ||||||
| Nokia | ||||||
| NOK | 12/30/2008 | $15.77 | ||||
| Update December 20, 2010: Nokia (NOK) has put in a bid to be the other cell phone maker besides Apple (AAPL) to make a profit and have control over its business. Now if the company... more | Read Jim's Original Buy | ||||||
| PepsiCo | ||||||
| PEP | 12/30/2008 | $54.88 | ||||
| This company delivers like clockwork. Take operating margins: 18% in 2004, 18.2% in 2005, 18.5% in 2006, and 18.2% in 2007--even as the cost of such raw materials as corn... more | ||||||
| Petroleo Brasileiro | ||||||
| PBR | 12/30/2008 | $23.73 | ||||
| Update September 8, 2010: Disappointment on Petrobras (PBR). Although it’s disappointment that investors will ultimately get over. The government is charging Petrobras more than expected to buy 5 billion barrels of oil reserves. (Pre-transfer the... more | Read Jim's Original Buy | ||||||
| Pioneer Natural Resources | ||||||
| PXD | 01/13/2012 | $97.63 | ||||
| I added Pioneer Natural Resources to my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13 (http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ ) To understand why I’m picking this oil and gas company... more | ||||||
| Potash of Saskatchewan | ||||||
| POT | 12/30/2008 | $73.80 | ||||
| Update February 1, 2013: “Agriculture is inherently an unpredictable business,” fertilizer producer Potash of Saskatchewan said yesterday, January 31, when the company reported fourth quarter earnings. After a statement like that, investors sure weren’t expecting... more | Read Jim's Original Buy | ||||||
| Rayonier | ||||||
| RYN | 12/30/2008 | $30.76 | ||||
| Rayonier owns, controls or leases about 2.7 million acres of timberland. Some of those 2.7 million acres--what's known as higher-and better-use land -- are more valuable for development than as... more | ||||||
| Schlumberger | ||||||
| SLB | 12/30/2008 | $42.12 | ||||
| Update July 26, 2011: Yes, Schlumberger (SLB) beat on earnings ($0.87 instead of the $0.85 Wall Street expected) and on revenue ($9.62 billion instead of the estimated $9.3 billion) but the real news in... more | Read Jim's Original Buy | ||||||
| Standard Chartered Bank | ||||||
| SCBFF | 01/05/2010 | $26.30 | ||||
| Despite its London headquarters, Standard Chartered Bank (SCBFF) does most of its business outside the United Kingdom. (A good place not to be during the global financial crisis.) In fact... more | ||||||
| SunPower | ||||||
| SPWR | 01/05/2010 | $24.84 | ||||
| Demand will pick up—eventually—for solar energy companies as the global economy crawls toward recovery and as countries add more incentives for clean power. That doesn’t mean that everyone is going to... more | ||||||
| Tenaris | ||||||
| TS | 12/30/2008 | $20.85 | ||||
| You can make a very nice little $10 billion (in sales) business out of selling something as seemingly mundane as drilling pipe if you realize that as companies drill in... more | ||||||
| Thompson Creek Metals | ||||||
| TC | 12/30/2008 | $3.89 | ||||
| Update March 1, 2012: It looks like the rally in shares of Thompson Creek Metals (TC) is over, put to an end by the company’s own fourth quarter earnings report on February 27. The... more | Read Jim's Original Buy | ||||||
| Ultra Petroleum | ||||||
| UPL | 12/30/2008 | $34.03 | ||||
| What energy supply could be more secure than natural gas from Wyoming and Utah? And Ultra Petroleum owns a lot of it. I mean a lot. The company's proved reserves... more | ||||||
| Vale | ||||||
| VALE | 12/30/2008 | $11.24 | ||||
| Update April 27, 2012: I’d like to blame the weather. And there is no doubt that weather in Brazil’s rainy season hurt Vale’s (VALE) first quarter earnings reported on April 25. But when the drop... more | Read Jim's Original Buy | ||||||
| Weyerhaeuser | ||||||
| WY | 01/13/2012 | $20.22 | ||||
| I added Weyerhaeuser (WY) to my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13 (See my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ on January 13 for all the changes to... more | ||||||
| Yamana Gold | ||||||
| AUY | 01/13/2012 | $15.68 | ||||
| Now that's more like it. When I dropped Kinross Gold (KGC) from my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ on January 13 I said that what I wanted in... more | ||||||
| Yingli Green Energy | ||||||
| YGE | 01/18/2011 | $11.61 | ||||
| Last year—on January 18, 2011 to be precise—I replaced Sun Tech Power Holdings (STP) with Yingli Green Energy Holdings (YGE) in my long-term Jubak Picks 50 portfolio. (See my post... more | ||||||
Buy Apache (APA)
December 30th, 2008
It’s Apache’s ability to get more oil out of old fields that makes this an oil stock that I want to own during the supply crunch that awaits the world on the other side of the current global recession.
Update Baidu (BIDU) in my Jubak Picks 50 portfolio: Battle for mobile market share changes the fundamentals for China’s Internet stars such as Baidu (BIDU)
June 25, 2012
I hate it when fundamentals mess up a good swing trade. Unfortunately, that’s just what has happened recently with shares of Baidu (BIDU). Earlier in 2012, you could have made good, and relatively low-risk, money by buying the shares whenever they fell near $115 and selling when they went over $135. Over and over again. (Baidu is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ ) But I wouldn’t advise this trade now because the fundamentals of Baidu and the rest of China’s Internet sector have changed—for the worse in the short term. Because of increased competition in the relatively new mobile space, China’s Internet leaders are waging an expensive war for market share. That’s likely to push the shares of Baidu and competitors such as Tencent Holdings (700.HK in Hong Kong and TCEHY in New York) lower as costs rise and earnings growth slows. Although Baidu owns about 80% of the Chinese Internet search market, it has only a 34% share of the search market for mobile devices. Shenzhen Easou Technology’s Easou search engine has 22% of the mobile search market. (Easou, started in 2005, was China’s first mobile search engine.) Tencent Holdings’ SoSo service is just behind at 21%. (Next is Google (GOOG) at 11%). Baidu’s mobile traffic grew by 20% in the first quarter of 2012 (up from 15% growth in the fourth quarter), but mobile search still amounted to less than 1% of Baidu’s revenue To increase its share of mobile traffic and its mobile search revenue, Baidu is spending to launch new handset models with pre-installed Baidu apps in cooperation with such manufacturers as Changhong and ZTE (and Apple (AAPL)). The phones come with 100GB of free cloud storage and sell, in the case of the Baidu Changhong model at just 899 yuan ($130) versus, say, 1300 yuan for Shanda’s Bambook. But building out the cloud computing infrastructure to support those phones (and other parts of Baidu’s strategy) requires capital spending that cuts into operating margins and earnings. I expect the company’s investments in mobile search to pay off in the future, but at the moment, since keyword ad prices are lower on mobile search and since ad click-through is lower, investments in mobile search are cutting the company’s profit margin. On April 25 Credit Suisse lowered its estimate for 2012 earnings per share by 2% and cut its target price for the New York-traded ADRs to $127.50 from $141.70. Goldman Sachs joined in on June 15, cutting its earnings estimates by 3% to 8% and lowering its target price to $135 from $160. In recent weeks the ADRs look like they’ve been trying to carve out a new range from lows of $113 or so on June 1 to highs of $122-$123 on May 25 and June 7. I don’t think that’s a wide enough range to make this an attractive swing trade, especially with the current uncertainty on China’s growth rate. My suggestion is to take this one off your list of swing trades and wait for a stock market willing to look past temporary uncertainties and reward the company’s long-term advantages. 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 own shares of Apple and Baidu 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/Update BHP Billiton (BHP)
February 18, 2011
As tea leaves go, those presented to investors in BHP Billiton’s (BHP) February 16 post-earnings-report conference call could have been a bit clearer. I think the way to decide buy/sell/hold on BHP and on the mining sector as a whole is to look past the very confusing top down strategic message to the nitty gritty of the key commodities of iron ore and copper. (BHP Billiton is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ ) Let’s start with the murky top-down stuff first, okay? CEO Marius Kloppers said the company would increase its dividend for the first half of 2011 to 46 cents (U.S.) from 42 cents. I’m not clear what that is a sign of since the increase barely keeps pace with appreciation in the Australian dollar—for Australian shareholders, in other words, the increase is no increase at all. Kloppers also announced an expansion of the company’s current $4.2 billion share buy-back to $10 billion. That amounts to about 4% of the company’s outstanding shares. And he said that the company wasn’t actively looking at any acquisitions right now although the company has plenty of cash and cash flow: BHP Billiton reported six month profits of $10.7 billion on February 16. So was BHP Billiton saying that it thinks mining stocks are expensive now, so no acquisitions? Hard to tell because Kloppers may be feeling a bit burned on the acquisition front after a failed bid for Potash of Saskatchewan (POT) in 2010. And are the increases in the dividend and in the share buy-back plan a signal that the company thinks the commodities boom is getting near an end and it’s time to pull back on investments in its business? Nope. Kloppers also announced that BHP Billiton will spend $15 billion in 2011 to grow production. The capital budget for the next four and a half years comes to a staggering $80 billion. BHP Billiton certainly seems to be saying that it thinks the commodities boom has years and years to run. Should investors take that market call to the bank? Not if they remember the Ravensthorpe nickel mine debacle. In 2008 BHP Billiton took a $3.7 billion write down when it shut down that Australian mine. This wasn’t just a case of getting the 2008 top in the commodities cycle wrong—lots of folks (including yours truly) did that. Ravensthorpe had been announced way back in 2004 and plagued with cost overruns from the start. The cost of the project doubled during construction. BHP finally shut it down in 2008, writing down the book value to $0, when it concluded that operating the mine just wouldn’t pay. So in our search for clarity let’s look at the reported results for the key commodities of iron ore and copper. BHP Billiton expanded iron ore production by 5% in the most recent period. Production is up about 25% from three years ago and BHP Billiton has plans to increase production by another 60% by 2013. That strikes me as pretty aggressive and given the plans of other iron ore producers to also increase capacity on roughly that time table, I’d certainly think that 2012 might be a good time to revisit my exposure to iron ore producers such as BHP Billiton, Rio Tinto (RTP), and Vale (VALE). Copper production climbed by 4%, but that good news—since it was ahead of Wall Street projections—came with a ton of company warnings. At the Escondida mine for example, ore grades are declining and in 2011 production is, consequently, likely to drop by 5% to 10% from 2010 levels. Copper production volumes will be stagnant in 2011 since expanding production in the face of declining ore grades at existing mines will be slow and expensive. On the face of it, Billiton’s production report says that the copper boom has longer to run than the iron ore boom. If you’re looking to put new money to work in commodities, I’d go with copper and I think there are better copper plays than BHP Billiton—Freeport McMoRan Copper & Gold (FCX)—comes to mind where companies will have to spend less capital to increase production. (For why I like Freeport McMoRan see my post http://jubakpicks.com/2011/01/24/update-freeport-mcmoran-fcx-and-some-thoughts-on-what-to-own-in-an-emerging-economy-slowdown/ ) Given BHP Billiton’s mix of commodities, if you already own this stock, I’d hold it for 2011 and look to see if it’s smart to start lightening up in 2012. In the longer run, if there is a pull back in 2012 or so, I’d use it as a buying opportunity. 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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of BHP Billiton, Freeport McMoRan Copper & Gold, and Vale as of the end of January. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/Update Bunge (BG)
January 15, 2010
Brazilian iron ore giant Vale (VALE) said on January 15 that it’s in talks with Bunge (BG) to buy that company’s fertilizer assets in Brazil. The deal, for as much as $3.8 billion, would relieve Bunge of a unit that showed a loss of $127 million in the third quarter, and give the company cash to pay down debt that stood at $4.1 billion at the end of September 2009. For Vale, the deal would give the company, which already produces potash fertilizer at Taquari-Vassouras in northeast Brazil and is developing new projects in Brazil, Argentina, Canada, and Peru, additional scale in the short-term and in the longer-run a potential path to dominating Brazil’s fertilizer market. The deal would include, Vale said in a regulatory filing, Bunge’s 42.3% stake in Fertilizantes Fosfatados or Fosfertil, Brazil’s largest supplier of raw materials for fertilizers. The deal would also take some of the political heat off Vale to invest more in Brazil. On October 20 Vale said it would invest almost two-thirds of its 2010 capital budget in Brazil after Brazilian President Luiz Inacio Lula da Silva urged the company to invest more in the country. “Urged” may be too weak a term. Brazilian Agriculture Minister Reinhold Stephanes has noted that Vale might have to give up rights to two fertilizer deposits if it didn’t start exploration soon. In 2008 Brazil imported 70% of its fertilizers. The government has said that the country wants to be self-sufficient in fertilizer by the end of the decade.Buy Canadian National Railway (CNI)
January 5th, 2010
With Warren Buffett’s purchase of Burlington Northern (BNI), there’s one less trans-continental railroad in North America. And nobody is going to build another one anytime soon. Actually make that ever.
Canadian National Railway (CNI) generates the highest operating margins among North American railroads. Its operating ratio (that’s the ratio of operating expenses to revenue) has climbed to 63.6% from 89.9% over the last decade, according to Morningstar, and the company’s 10-year free-cash flow is more than 13% of revenue.
Update CEMEX (CX)
January 19, 2011
A cement maker like CEMEX (CX) couldn’t have picked a worse set of markets for the global economic crisis if it tried. Second biggest market for the company? The United States, epicenter for the global housing meltdown. Next biggest? Spain and the United Kingdom. And then, of course, there is No. 1 Mexico, where domestic economic activity closely follows growth (or the lack thereof) in the United States. No wonder that CEMEX almost went under during the crisis, drowning in an ocean of debt including that for its $14 billion 2007 top of the market acquisition of Rinker, an Australian cement maker with even bigger exposure to the U.S. market than CEMEX. The stock, which had looked like it was closing in on $30 a share in May 2008, bottomed below $4 in November 2008. Now, however, the market concentration that was so damaging in 2008 is turning into a plus. Growth in U.S. economy looks like it is accelerating. Mexico’s economy grew by 7.6% in the second quarter of 2010 and by 5.3% in the third quarter. The Mexican economy is projected to grow by 4.8% in 2011, according to Grupo Financiero Banamex. Volumes in Europe are still falling but they’re no longer in free fall. (Cement volumes fell by 52% in Spain and 32% in the United Kingdom from 2007 to 2009.) And it looks like CEMEX has paid down, refinanced, and restructured enough debt that it will get to the return to modest revenue growth in 2011 without getting slapped with a punitive increase in interest charges by its creditors. I’d project roughly 7% growth in revenue in 2011—nothing to get excited about unless you’re running a company that saw revenue fall by nearly 20% from 2008 to 2009. Credit Suisse sees the company’s return on invested capital crawling off the floor at 1.3% in 2010 (the company would have done better investing in a CD) to 2.8% in 2011 to 3.56% in 2012. Earnings per share, projected to bottom at a loss of 70 cents a share in 2010 are forecast, by Credit Suisse, to return to profitability with 21 cents a share in 2011 and then grow by 148% (to 51 cents a share) in 2012. I’d look for an entry point of $10.50 or less. I think the stock can go to $13.50 to $15 depending on the strength of the U.S. economy and when the Spanish economy stabilizes. Which, of course, is why I picked the stock as one of my 10 stocks for 10 years in my annual update http://jubakpicks.com/2011/01/18/6215/ to the Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ . CEMEX is an original member of that portfolio. 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, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of CEMEX as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/. I’ll have the fund’s portfolio as of the end of December posted in a few days.Update Cisco Systems (CSCO)
August 21, 2009
Ever since this recession began Cisco Systems (CSCO) CEO John Chambers has shown an unexpected talent for taking all the joy out of his company's earnings report. And he did it again when, on August 5, Cisco Systems reported earnings of 31 cents a share for the company's fiscal fourth quarter that ended on July 25. That beat Wall Street estimates by two cents a share. (Both Cisco's and Wall Street's numbers exclude things like stock compensation that I think should be deducted as costs but, hey, that's how Wall Street scores the quarterly earnings game.) Revenue did fall 18% from the fiscal fourth quarter of 2008, but still beat Wall Street estimates of $8.51 billion by about $300 million. Gross margins held steady at 64%. But investors who might have hoped that Chambers would call this quarter the bottom or forecast a looming turnaround would have been disappointed. "If we continue to see these positive order trends for the next one to two quarters, we believe there is a good chance we will look back and see that the tipping point occured in our business" in this quarter, he said in a company statement. Chambers' tempered tone is about right for the short-term given that most of Cisco's ability to beat earnings targets comes from cost-cutting. The company set out to cut about $1 billion in annual costs by July and it looks like the company met or exceeded that target. But it also masks the way that Cisco's very positive long-term story has gotten even stronger during the recession. Unlike some cash-strapped competitors, Cisco will come out of this down turn sitting on a mountain of cash. It finished the quarter with $35 billion in cash and cash equivalents. That's up from $26.2 billion a year ago at the end of the fiscal July 2008 quarter. That cash stockpile provides plenty of fuel to drive Cisco's traditional growth by technology acquisition stategy over the next year or more. Over it's history Cisco has been remarkably successful in using its cash to acquire smaller companies with promising technologies and then using its marketing muscle to push those technologies out into the market. Having all this cash is especially valuable now because even if the recession is winding to an end, many small technology companies will run out of cash before their sales can turn up or before the financial markets become hospitable again to risky equity offerings. But Cisco's cash isn't just an edge in going after small companies and small but fast growing markets. The company is using its muscle to push into markets controlled by former partners. For example, Cisco Systems has started selling its Unified Computing System, a mix of computer servers, storage devices, and networking gear, in an effort that pits it head to head against Hewlett-Packard (HPQ) and IBM (IBM), long-term partners in selling Cisco's networking equipment. Cisco's cash is an especially important weapon in that battle since it enables the company to finance sales, a necessity when potential customers are struggling to find financing. The battle with IBM and Hewlett-Packard won't be won easily. Those companies are one and two, respectively, in the 53 billion global server market, according to the research by Gartner. Cisco doesn't show up on Gartner's rankings.Update Coach (COH)
July 28, 2009
Coach (COH) reported that its earnings for the June quarter matched Wall Street expectations at 43 cents a share. That's about the last good news for the fourth fiscal quarter that Coach had to announce, however. Coach certainly hasn't escaped the collapse in retail sales--although it is weathering the downturn better than most. For investors who can get past the bad news of this quarter, though, the stock remains a compelling way to profit from the increasing number of middle-class consumers in China. That's why I put the stock in my book, The Jubak Picks, and why it stays in that portfolio. Here's more of the bad news for the recently concluded quarter. Net income dropped to $145 million from $214 million in the June quarter of 2008. Revenue held up better but still fell about 1% to $778 million from $782 million in the 2008 period. Gross margin dropped to 70.4% from 75.9% in the June quarter of 2008, and operating margin tumbled to 28.2% from 35.9% in the June quarter of 2008. Comparable store sales in North America declined 6.8% in the quarter. Sales in Japan were flat on a constant currency basis. The one bright spot was China--and that's especially good news because Coach and investors are counting on that country for future sales and earnings growth. Comparable store sales climbed at a "douible-digit rate," the company said. Whatever that means exactly, it was enough to make the company accelerate its planned store openings there. The company told investors that it now plans to open 15 new stores in China, most of those on the mainland instead of Hong Kong, in the 2010 fiscal year that ends in June 2010. (Full disclosure: I own shares of Coach in my personal portfolio.)Update Corning (GLW) in my long-term Jubak Picks 50 portfolio
June 5, 2012
If Mr. McGuire were to whisper to Benjamin his “just one word” of advice today, instead of 1967, it would be not “plastics” but “glass.” And the stock that he’d tell Benjamin to buy would almost certainly be Corning (GLW). (Corning is a member of my Jubak Picks 50 long term portfolio http://jubakpicks.com/jubak-picks-50/ ) This is a golden age for glass. New larger, brighter, and more detailed displays require larger and purer glass. The world’s army of mobile devices requires new tougher but thinner glass for screens. Reducing energy use in brighter LCD and OLED displays requires more uniform and flexible glass to use in a new generation of backplane substrates that allow the use of smaller and faster transistors. And from new product announcements this week and from teasers about new products at recent company presentations, it’s clear that these high technology glass products will be followed by others. On June 4, for example, Corning announced that had shipped samples of Willow Glass to device manufacturers that include (AAPL) and Samsung. The glass is so flexible that it can be manufactured in a roll and wrapped around a device or a structure. The company is hoping that Willow Glass will start showing up in consumer products in 2013. Further out, according to recent company presentations are such products as an anti-microbial glass. Corning has always been a stock that you buy as much for its tomorrows as for its products today. It is one of the world’s great research and development companies. Sometimes, frankly, the company gets ahead of itself, building out capacity for a new product—optical fiber, for example—faster than the market can ultimately absorb it. Sometimes the market’s uptake of a new Corning technology such as the extra tough Gorilla Glass for mobile displays lags behind the company’s enthusiasm for a technology. And sometimes, and this becomes a real problem during a market slump, Corning convinces itself that the superior technology of its glass will keep sales growing even as the company’s customers are seeing their end sales drop. Those moments give you your buying opportunities in the stock—if you can wait on the sidelines as the company eventually comes around to rationalizing supply and demand. I think you’re looking at one of those now. The big deal for Corning over the past year or so has been a global oversupply that has depressed the price of display glass. The company’s display technologies segment, which accounted for about 40% of sales in 2011, saw prices and sales slump as the global economic slowdown reduced demand for flat screen displays especially in the TV and PC segments. That slump occurred even though Corning’s proprietary manufacturing processes allow it to produce larger, thinner and higher-quality pieces of glass than competitors. That had allowed Corning and its 50%-owned subsidiary, Samsung Corning Precession, to grab more than 50% of the display glass market. But that market share—and Corning’s high margins in this business—didn’t protect the company’s display revenues when the global economic slowdown ate into consumer purchases of TVs and PCs and Corning’s customers stopped ordering as they worked down inventories. That slump is forecast to gradually end in the second half of 2012, which should lead to stable margins by the end of the year and some margin expansion in 2013. According to Standard & Poor’s sales will grow by 4% in 2012 and 7% in 2013. Margins and earnings should pick up in 2013 because Corning will have completed spending on upgrades and additions to manufacturing capacity. Wall Street projects that 2012 will mark the earnings trough for this cycle at $1.34 a share and that 2013’s projected 14% earnings growth will begin the recovery to the 9% or so growth earnings growth rate that the company averaged over the last five years. The stock now trades at just 7.6 times trailing 12-month earnings and at 9.1 times projected 2012 earnings. The company showed $6.8 billion in cash and cash equivalents on its balance sheet at the end of the March 2012 quarter and $3.1 billion in long-term debt. The shares pay a 2.45% dividend. 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 Corning 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/Deere continues to deliver as a global food play–use any weakness to add to positions
February 13, 2013
Deere’s (DE) first quarter fiscal 2013 earnings announced this morning before the market open in New York and the guidance for the rest of the year reminds me—in direction if not in degree--of the earnings Cummins (CMI) reported on February 6. Like Cummins, Deere announced a substantial 25 cents a share earnings surprise—15 cents for Deere if you back out lower than expected tax rates for the quarter. As at Cummins, sales growth didn’t keep up with the earnings surprise. Revenue climbed 11% year over year to $6.79 billion, just slightly ahead of the $6.74 billion Wall Street consensus. And then, following the earnings announcement, Deere, like Cummins, lowered guidance for the next quarter. Not as drastically as Cummins, which talked of weakness in the first half, but Deere did guide down for the second quarter. The company lowered sales guidance for the next quarter to $9.78 billion from the Wall Street consensus of $9.83 billion. For the full 2013 fiscal year, Deere told analysts to expect 4% revenue growth to annual sales of $35.5 billion. The Wall Street consensus before the call was $35.3 billion. Deere also raised its forecast for 2013 net income to $3.3 billion from the consensus $3.2 billion. The increase in full-year guidance is pretty much a reflection of the just announced first quarter surprise. In other words Deere isn’t looking forward to any big jump in farm, construction, and forestry equipment sales in the rest of 2013. That makes sense given Deere’s forecast for a slight drop in U.S. farm cash income to $393.2 billion from $402.5 billion. When farmers have less money, even a little less money, then tend to buy less equipment. To the degree the company has a problem beyond the normal fluctuations in farm income sales that come with weather and commodities prices, it is in the construction and forestry equipment unit. Although farm equipment sales climbed 16.2% in the quarter year-over-year, construction and forestry sales fell 6.7%. And in contrast to farm equipment, where margins climbed 1.8 percentage points year over year to 14%, margins in construction and forestry came in at a low 5.5%. So how do you think about this quarter and about Deere? (The stock is a member of my long term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ ) I think the continued sales strength in farm equipment and the continued strong margins in that business support Deere’s position as one of the best stocks to use to profit from the growth in food commodity prices that is being driven by increasing global demand for more and better food as world incomes rise. If there is any weakness in the stock caused by worries over second quarter earnings after today’s lowered guidance, I’d use it as a chance to add to positions in the stock. With Deere, I don’t think you have to worry much about industry cycles as you do with a Cummins. This is one to hold as long as the prices for food commodities remain strong and as long as the market isn’t questioning the long-term uptrend in those prices. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. All my personal portfolio is invested in the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ . That fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Cummins or Deere 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/Update DuPont (DD)
August 1, 2011
In the current slow growth economic environment I’m looking for shares of companies that can turn modest top line growth in unit volume into better than expected bottom line earnings growth. And that’s exactly what EI DuPont (DD) reported on July 28 for its second quarter of 2011. Earnings of $1.37 a share were 2 cents a share above consensus and revenue climbed 19% from the second quarter of 2010 to $10.26 billion, above the Wall Street estimate of $9.9 billion. But to see what I mean look at how DuPont got that 19% increase in revenue. Just 2 percentage points came from higher volumes while a whopping 11 percentage points came from higher local prices. (Exchange rates and a shift in the company’s sales mix toward higher margin products account for the rest of the revenue gain.) This was true in business segment after business segment and most importantly for investors looking beyond the current quarter in DuPont’s performance coatings—known to you and me as auto paints—unit. Sales in that segment rose 15% from the second quarter of 2010. Of that 1 percentage point came from higher volumes and 14% from higher prices. Why is that important? A company that can maintain pricing pressure in a slow growth economy is positioned to crack on the earnings growth when volumes pick up. (It’s also likely to be able to stay ahead of rising raw materials costs.) DuPont raised its projections for growth in industry wide auto production to 5% for 2011 from an earlier projection of 4%. That’s not much of an increase but with DuPont able to leverage every bit of volume growth into extra profits using its pricing power, it’s one reason that the company was able to raise its earnings guidance for 2011 to $3.85 to $4.00 a share from the earlier $3.65 to $3.85. (The new and old projections don’t include the recently concluded acquisition of enzyme-maker Danisco.) Don’t forget these shares also pay a dividend yield of 3.1%. DuPont shares are up were up 6.8% as of the July 28 close from when I added them to my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ back in January. I think a 12-month target price on these shares is $64 if the U.S. economy can keep growth above a 2% annual rate. I’d put the target at $60 if growth is between 1.5% and 2%. The stock closed at $52.30 on July 28. Full disclosure: I don’t own shares of DuPont 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 own shares of DuPont at 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/Buy Enbridge (ENB)
December 30th, 2008
Enbridge has an impressive number of pipeline projects set to start pumping up revenue in the next two to three years. The Alberta Clipper Expansion is projected to deliver heavy crude from Alberta’s oil sands to Wisconsin by mid-2010. The Southern Access Expansion will deliver heavy crude to Chicago and southern Illinois from Wisconsin in 2009. The Clarity pipeline will transport natural gas from the Barnett Shale and Anadarko Basin in Texas.
After second quarter earnings, you have to ask if ExxonMobil (XOM) deserves its premium to other super-major oil stocks
July 30, 2012
Wall Street analysts have been busy cutting their ratings on shares of ExxonMobil (XOM) after the company’s second quarter earnings announced on July 26. If you’re a long-term investor or if you own ExxonMobil because it pays more than a 10-year U.S. Treasury bond (2.6% yield on ExxonMobil versus 1.54% on 10-year Treasuries)—and you suspect ExxonMobil is less risky than the U.S. government, you’re likely to simply shake off some of these downgrades. So what if an analyst thinks the current low price of oil is the reason to take the stock from buy to hold? So what if an analyst thinks the current valuation is stretched? You know in your heart that the cash flow at ExxonMobil is very safe and very dependable. But what if your heart is wrong? What if a few of the downgrades raise questions about the quality of ExxonMobil earnings? Here’s the problem in the company’s second quarter earnings. Net income rose by 49% to $15.9 billion from the second quarter of 2011—if you include $7.5 billion in asset sales. If you don’t, the quarter’s results show ExxonMobil producing less oil and natural gas and selling them at lower prices and weak sales from the company’s chemical unit in Asia and Europe. Absent the asset sales ExxonMobil’s operating profit was just $8.4 billion, the lowest since the third quarter of 2010, and down from $8.5 billion in the second quarter of 2011. If you’re a long-term investor who owns ExxonMobil for its cash flow and dividend, what you now have to decide is whether the negative trends in the second quarter are signs of long-term problems or will be relatively quickly reversed. Standard & Poor’s is in the quickly reversed camp. S&P projects that ExxonMobil earnings will fall to $8.00 a share in 2012 from $8.42 in 2011, but then rebound to $9.10 in 2013. The Wall Street consensus isn’t so sure. The consensus sees earnings dropping to $7.64 in 2012 and then rebounding to only $8.25 in 2013. That would still be below the 2011 figure. What worries me is the company’s production projections for the next few years. Total production of oil and nature gas fell by 5.6% from the second quarter of 2011—that was much worse than the 3% decline for the entire 2012 year that the company projected in March. The company recently told Wall Street that it expects production to be down for 2012 as a whole but to increase in 2013 as the company’s Kearl Canadian oil sands project comes on line. The company’s capital budget is pegged at $37 billion a year for the next few years, but the company is still projecting just 1% to 2% production growth annually from 2011 through 2016. In my book companies that trade at big premiums to their peers shouldn’t show big uncertainties, but that’s exactly what I see with ExxonMobil. S&P calculates a 12-month target price for the shares of $103—up 18% from today’s price of $87.29—but they get to that price target by assuming that ExxonMobil should trade at 6x projected 2012 EBITDA (earnings before interest, taxes, depreciation, and amortization) instead of the 4.5x ratio for other super major oil companies. Credit Suisse, in contrast, has a 12-month target price of $85. If you don’t see the basis from that kind of premium—and I don’t—then you don’t get to that target price. When I picked ExxonMobil for my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ in December 2008, I wrote that ExxonMobil was the one oil major that had found a way out of the box of higher spending and falling production. I’m not so sure now and I’ll be taking a hard look at the stock—especially versus competitors such as Chevron (CVX) and Statoil (STO)—when I review that portfolio in December. 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 ExxonMobil as of the end of March but it did own shares of Statoil. 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/ .Update Flowserve (FLS)
August 26, 2009
Turns out the pumping business is a very good place to be in this economy. On July 29 Flowserve (FLS) announced second quarter earnings of a better than expected $1.92 a share and raised its earnings forecast for 2009. The company increased its target for 2009 earnings to $7.15 to $7.75 a share from an earlier target of $6.75 to $7.50. Sales climbed to $1.09 billion. That was an increase of 6% from the first quarter of 2009 but a decrease of 6% from the second quarter of 2008. Taking out the effect of a stronger U.S. dollar, on a constant currency basis sales climbed 4% year-over-year. Bookings, a key measure of future sales trends, climbed by 7% from the first quarter of 2009. The company still has a way to go, though, to recover all the ground it has lost in the global slowdown: bookings decreased by 21% (13% on a constant currency basis) from the second quarter of 2008. The company’s order backlog was a little over $2.7 billion at the end of the quarter. The book-to-bill ratio, which compares the value of new orders to the value of orders shipped, came in at 0.95. Investors can see some very promising growth ahead—in 2010 I’d estimate—in preliminary orders from solar thermal power operators (which concentrate sunlight on a central tower to generate electricity) of $31.5 million for boiler feed water, condensate, cooling water and molten salt pumps. And in $45 million in orders for valves to be used in two nuclear power plants now under construction in the United States. (Full disclosure: I own shares of Flowserve in my personal portfolio.)Buy Fluor (FLR)
February 8th, 2011
Doing some catch up on this stock. I added Fluor (FLR) to the Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on January 18, but this is the first time I’ve had an opportunity to explain why in detail or to actually add it to the portfolio. I’m working on explaining the other sells and buys announced on January 18 from that group over the next week or so.
It’s only one deal but it’s an important one: Last month Fluor (FLR) announced that it had won a $3.5 billion contract to build a liquefied natural gas project in Australia.
Why is one deal so important? First, because it demonstrates that Fluor can sign big energy infrastructure deals in the face of intense competition from Asian engineering and construction companies—in the Asian companies’ backyard. Second, the deal will add to a near record order backlog at the end of the third quarter. (Fluor reports its fourth quarter numbers on February 23.) Third, most Wall Street estimates for Fluor’s earnings in 2011 are based on a shift in the mix of the company’s projects from energy to lower-margin mining work. Standard & Poor’s, for example, sees revenue climbing at a double digit rate in 2011—after a 5% decline in 2010—but with operating margins falling from the 5.2% rate in 2010 on a shift toward mining and away from energy. More energy projects in 2011 would push margins above analyst estimates. And I’d say there’s a good chance for higher than expected levels of energy work with oil prices pressing $100 a barrel at the moment. (Brent Crude futures traded at $99.29 a barrel on February 7.)
Fluor looks to be a major beneficiary of the huge surge in capital spending in the oil and gas industry (For example, Chevron has announced a $26 billion capital spending budget for 2011, up from a $21.6 billion budget in 2010), in the mining industry (Rio Tinto, for example, reports that it will raise its capital budget for 2011 to $11 billion from $5 billion in 2010), and in infrastructure spending by governments from China to Brazil.
New Fluor CEO David Seaton, who just took over the top slot, says that Fluor can double its sales and order backlog over the next ten years. There’s a measure of the new guy’s desire to rally the troops in that prediction, but Fluor actually shouldn’t have a big trouble in reaching those targets. Revenue went from $9 billion to $22 billion from 2001 to 2009.
The shares aren’t cheap at the moment trading at 21 times trailing 12-month earnings per share. The market seems to be looking past a projected 45% drop in earnings per share in 2010, caused by delays in some projects due to a spotty global economic recovery, to a projected 60% increase in earnings for 2011. In November the shares sold off on the company’s earnings report—stocks that have outperformed the market and then miss a quarter tend to do that. If you don’t own shares or want to add to a position, you might wait for something similar after the February 23 earnings report to give you a good buying opportunity.
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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Fluor as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
Update Fortescue Metals and its balance sheet problems
September 12, 2012
This isn’t good news for Fortescue Metals Group (FMG.AU in Sydney or FSUMF in New York) and it indicates the problems increasingly facing smaller mining companies as commodity prices remain depressed. (For more on Fortescue’s problems and those for the iron ore sector see my post http://jubakpicks.com/2012/08/31/plunge-in-iron-ore-prices-stresses-fortescue-metals-balance-sheet/ ) Fortescue is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ Yesterday Bank of America (BAC), the underwriter on a syndicated $1.5 billion loan, extended the syndication deadline for a month, Bloomberg reported. That’s usually a sign that the syndicate leader is having trouble lining up enough syndicate members to sell the entire loan without significantly sweetening the terms. Fortescue Metals Group, Australia’s third largest iron ore miner and by far its youngest, shows $7.6 billion in debt and the company needs an iron ore price of $105 a metric ton, Citigroup estimates, to service the debt it has taken on to develop its mines and transportation infrastructure. On August 29 Moody’s Investors Service announced that it had put its Ba3 rating—junk bond territory--for Fortescue under review because of the 24% drop in iron ore prices in the last month. On September 5 Fitch Ratings revised the Australian miner’s outlook to negative from stable to reflect the “increasing pressure on liquidity and covenants that Fortescue is facing as a result of a precipitous fall in iron-ore prices.” Fortescue Metals Group is the largest issuer of junk bonds in the mining sector. The stock fell 5.07% overnight yesterday in Sydney and 1.79% yesterday in New York on the news. 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 Fortescue Metals Group as of the end of June. 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/Update Freeport McMoRan Copper & Gold FCX
July 21, 2009
At least they were honest. Executives at Freeport McMoRan Copper & Gold (FCX) told Wall Street on July 21 that they weren't seeing any signs of a recovery in developed economies that would lead the company to restart its idled U.S. copper mines. So where did the amazing 69 cents a share earnings surprise, that the company announced on July 21, come from? Not from revenue, that's for sure. Revenue fell by 32% from the second quarter of 2008. And not from a huge increase in production. Second quarter production of gold did did rise by 600,000 ounces (and that sure didn't hurt), but production of copper just inched up (by about 10%) and molydenum production fell. Rather look at an unexpected jump in the price of copper and a huge drop in costs. Any investor buying in now is hoping that those moves can be duplicated next quarter. The company itself has some doubts.
In the quarter Freeport was able to sell copper at an average of $2.22 a pound. That's a huge improvement from January--a 75% gain in price--but still a daunting 37% decline from the price a year ago. Freeport sees a $200 million increase in cash flow for every 10 cent a pound increase in the price of copper.
But increases in copper prices--and in gold production--only hit the bottom line if costs are stable or falling. Toward the end of the commodities boom in 2007 production costs for everything from diesel fuel to truck tires were rising so fast that they were eating into mining company profits even though commodity prices were at peaks. Now the companies are seeing the other side of the cycle as costs plummet. With commodity prices stabilizing that can produce a huge swing in profits like that Freeport reported this quarter.
This quarter the company saw a 55% drop in the cost of diesel fuel and a 30 fall in the post of power. The production cost of producing a pound of copper fell to $1.24 from $1.84 in the second quarter of 2008.
For the third quarter Freeport expects sales of copper to retreat about 10% from this quarter's numbers, gold sales to fall by about 25%, and molybdenum sales to decline by about 25%.
Investors buying these shares now are then looking for a big increase in copper and molybdenum prices for their profits. That's iffy unless the developed world economies do grow faster than current projections.Pretty much everyhbody in the mining industry is sitting on idle capacity so it will take a big pickup in demand to keep copper prices climbing once that capacity comes back into production.
Deutsche Bank now projects that colpper prices will decline for current spot prices near $2.40 a pound to $1.90 by the end of 2009, recovery only slightly in 2010, and not return to the $2.40 level until 2011.
Update General Cable (BGC)
August 7, 2009
Looking for the dark side of the recovery in commodity prices? Look no farther than the second quarter earnings reported by General Cable (BGC) on August 5. The company did indeed beat Wall Street earnings estimates by 20 cents a share but that doesn't mean that earnings were actually good in the quarter. Adjusted earnings in the quarter fell to $1.02 a share from $1.37 in the second quarter of 2008. Operating income dropped 35%. Revenue came up short of projections at $1.13 billion instead of the $1.21 consensus. That was a drop of 17% from the second quarter of 2008. But the worst was yet to come. The company told investors to expect just 45 cents to 55 cents in earnings per share in the third quarter instead of the 72 cents a share Wall Street was looking for. Revenue will drop too, but not nearly as sharply: The company expects to miss Wall Street revenue estimates for the quarter by $80 million to $130 million. Why the much bigger drop in earnings than in revenue? That's where the dark side of the commodities rally comes in. As a maker of all kinds of cable, General Cable is a huge buyer of copper. And copper prices have been on a tear in 2009. Copper sold for roughly $1.50 a pound at the beginning of the year. The metal had tacked on about 50 cents a pound, a 33% increase, by May. And recently on heavy buying from China and heavier speculation that Chinese buying meant the global economic recovery was at hand, it climbed another 75 cents a pound to close at $2.75 on August 6. That's a move of $1.25 a pound or 83% in less than eight months. No way that General Cable could pass much of that on to its customers that quickly. Even if the global recovery is just around the corner, General Cable's customers are still struggling to sell their product at current prices. A price hike big enough to cover the company's costs would dry up orders overnight. So the company will eat a good percentage of the jump in raw materials and wait for a return to economic growth--or a decline in copper prices as speculative fever subsides--to bring margins and earnings back up. Fortunately, for long-term investors--and this stock is one of the 50 long-term picks in my book The Jubak Picks--General Cable has managed through commodity booms and busts before. Despite a U.S. recession and a global slowdown, the company managed to stay on the right side of cash flow (Operating cash flow hit $152 million in the second quarter) and to actually reduce its debt load by about 10% in the quarter. With that kind of financial base the company has been able to continue its strategy of building market share through acquisition. Nothing as big as the buy of the cable business of Freeport McMoRan Copper and Gold (FCX). That was a before the recession deal. This past quarter General Cable acquired Gepco International, a maker of high-end broadcast cable products. (Full disclosure: I own shares of General Cable in my personal portfolio.)Buy General Electric (GE)
December 30th, 2008
The one-stop-shop for industrial infrastructure. Need a locomotive, steam turbines, a power plant, a nuclear reactor or just something mundane like a hundred jet engines? General Electric can sell it to you. And infrastructure is the fastest growing part of GE’s business.
Update Gol (GOL)
December 7, 2011
This morning Delta Air Lines (DAL) announced an agreement to buy a $100 million minority position in Brazil’s Gol Linhas Aereas Inteligentes (GOL). The agreement would give Gol, Brazil’s second biggest airline, a counter to the hookup of Tam’s (TAM), Brazil’s largest airline, with Lan Airlines (LFL), Latin America’s largest airline. And it would give Delta a way to win some market share in Latin America, a market where it trails American Airlines and United Continental Holdings (UAL). Gol’s U.S.-traded ADRs (American Depositary Receipts) were up 4.9% as of 2:20 p.m. New York time on the news. (Gol is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ ) The agreement, which gives Delta 3% of Gol, will also give Delta a seat on the Brazilian airline’s board of directors. (Delta has agreed not to sell the stake for at least 12 months and not to buy additional shares without Gol’s permission.) The two airlines will shares booking codes on flights so that they can take reservations for travel on either airline. They will also honor each other’s frequent flier programs. This is Delta’s second investment in a foreign airline this year. In August Delta paid $65 million for a piece of Grupo Aero Mexico. 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 own shares in Gol and Lan 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/Update Goldcorp (GG)
March 8, 2010
What you want in a gold stock is a company with rising reserves and falling costs. Goldcorp’s (GG) end of 2009 report on reserves shows that it’s still delivering rising reserves. We’ll see how the company is doing on costs when it reports after the market closes on March 11. In 2009, the company said in February reserves grew by 5.3% to 48.8 million ounces from 46.3 million ounces at the end of 2008. But that's not all that Goldcorp mines. The company also reported silver reserves of 1.3 billion ounces (up from 1.25 billion ounces at the end of the end of 2008), copper reserves of 1.23 billion pounds (down from 1.37 billion pounds at the end of 2008), lead reserves of 10.7 billion pounds (down from 12.5 billion pounds at the end of 2008) and zinc reserves of 27.8 billion pounds (down from 34.8 billion pounds).Update Google (G OOG)
July 19, 2011
Just in case you were in danger of forgetting, Google’s (GOOG) second quarter earnings report on Thursday, July 14, should remind you: It’s good to be out in front of the market, but as an investor you don’t want to be too far out in front. I can pick a ton of holes in Google’s competitive position and the challenges it faces over the next couple of years. But the market right now doesn’t want to hear about anything so far off. The news that counts is that Google is producing great numbers from its current dominance of the Internet search space. For the second quarter Google reported earnings of $8.74 a share (excluding one-time items). That was 91 cents a share above the Wall Street consensus estimate of $7.83. Net revenue (for Google you have to subtract the cost of acquiring traffic from the revenue the traffic brings in) climbed 26% from the second quarter of 2010 to $9.03 billion. (Wall Street was looking for $8.63 billion.) Operating income grew to $3.32 billion for the quarter from $2.67 billion in the second quarter of 2010. Analysts who dinged the company last quarter on rising costs were relatively quiet on that front this quarter even though operating expenses climbed 49% from last year. Operating expenses increased to 33% of revenue from 29% of revenue in the second quarter of 2010. And recent criticism that the company was throwing too much cash at too many ideas was also muted. The focus was on things that are working—the Android operating system and the Chrome browser—and not on things like the company’s effort to develop a driverless car that have drawn attention in recent quarters as signs that the company lacks discipline. But that’s what happens when a company reports earnings that kill on analysts’ favorite metrics. The company’s 32% gain in quarterly revenue was a faster growth rate than that for the global search market as a whole. Given that Google’s market share for search held steady this quarter, the increase in revenue was a sign that Google was converting more of its traffic into dollars. For core search and YouTube, paid clicks grew by 18% from the second quarter of 2010. That’s an impressive number to analysts who have been fretting at the valuations of Internet companies LinkedIn (LNKD) and wondering if these companies could turn traffic into revenue. All that said, from a longer-term perspective this wasn’t the greatest quarter for Google. The company lost a bidding war against the Rockstar Bidco consortium to buy 6,000 patents that once belonged to Nortel Networks. This follows Google’s loss of another patent auction last year to another consortium in bidding for 882 patents owned by Novell. The winning consortium in each case included Apple (AAPL) and Microsoft (MSFT). The losses point to a troubling weakness at Google: the company owns just 600 patents in the United States compared to Apple’s 4,000 and Microsoft’s 17,000. That wouldn’t be a big deal except that a number of critical Android phone makers have either lost recent patent battles to Microsoft or to Apple (preliminarily in the case of Android phone maker HTC.) Microsoft signed a licensing agreement with HTC last year and now collects $5 for every Android phone HTC sells. And Microsoft has sold licenses to four other Android phone makers in the last month or so. The long-term worry for Google—and Google investors--is that this imbalance in patents will work to disadvantage Android and advantage Microsoft and Apple’s phone software and hardware. Not now but somewhere down the road. I’d say it certainly bears watching. But it’s not a big enough worry now for you not to enjoy Wall Street’s love affair with Google’s revenue and earnings growth. In the hours after Google reported results on July 14 and before the market opened for trading the next day, just about every analyst on Wall Street upped his or her earnings estimate for 2011 on the stock. Briefing.com calculates that the total came to an increase of 3.5% in 2011 estimates by the time trading opened on July 15. So worry all you want about Google’s fight with Apple and Microsoft in the quarters and years to come. But enjoy Wall Street’s focus on the earnings here and now. The stock closed today at $594. With Wall Street analysts calling for target prices of $725 to $830, I doubt that Wall Street will rethink its enthusiasm for Google’s earnings growth until we see the $700 a share marker. Full disclosure: I do not own shares of Google, Apple or Microsoft 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 own shares of Apple and Google 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/ A full list of the fund’s holdings as of the end of June will be posted this week.Update HDFC Bank (HDB)
January 27, 2011
Another day, another interest rate increase from an emerging economy central bank. On January 25, it was the turn of the Reserve Bank of India. The bank raised its benchmark repurchase rate to 6.5% from 6.25%. The Reserve Bank of India raised interest rates six times in 2010 and the benchmark rate is now at a two-year high. I don’t think the Reserve Bank of India is done either. The bank’s most recent projections are pointing to inflation of 7% by the end of the country’s fiscal year on March 31. That’s a huge increase from earlier projections of 5.5% inflation. (The bank is also calling for GDP growth of 8.5% for the year that ends in March. That’s unchanged from earlier projections.) And the Reserve Bank’s projection is very likely low. Inflation in wholesale prices, India’s preferred inflation measure, hit an annual rate of 8.4% in December. Not surprisingly Indian stocks fell on the news of the interest rate increase with the Mumbai market’s Sensex 30 Index closing down 1%. The drop was widespread—Infosys Technologies fell 0.8%, for example--but property and bank stocks were among the shares suffering the biggest declines. Even before the interest rate increase India’s over-heated real estate market was showing signs of slowing. Home registrations in Mumbai, the country’s most expensive real estate market, fell in November to their lowest level in 20 months. (Property prices climbed 30% to 70% across India in 2010.) India’s banking sector is already reeling from a scandal in which officials at some of the country’s state-run banks took bribes to approve loans and it still hasn’t completely recovered from a rise in bad loans during the global financial and economic crisis. Of India’s big private banks the one that worries me most here is ICICI Bank (IBN). The bank had just started to recover from two years of deteriorating credit quality but non-performing loans still made up 5% of the bank’s portfolio at the end of the October quarter. (Contrast that to the 2% non-performing loan ratio at competitor HDFC Bank (HDB) at the peak of its non-performing loan problem in mid-2009.) Higher inflation, much of which is a result of higher food prices, cuts deeply into the purchasing power of India consumers and then ripples out into consumer and corporate loans. I certainly wouldn’t be adding to any bank positions in India until the Reserve Bank gets closer to the end of this interest rate cycle. And I would be actively reducing positions in ICICI Bank right now. HDFC Bank is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ 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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of HDFC Bank and ICICI Bank as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.Buy Home Inns and Hotels (HMIN) in my Jubak Picks 50 portfolio
January 17th, 2012
Home Inns and Hotels Management (HMIN) is “now the indisputable leader in economy hotels” in China according to Deutsche Bank. I’d have to say I agree which is why I added the stock to my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13 (See my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ on January 13 for all the changes to the portfolio.)
With the acquisition of Shanghai’s Motel 168 chain, Home Inns and Hotels strengthened its multi-brand strategy in the economy segment and expanded its geographic coverage. As the end of the third quarter the company operated 1,004 hotels (500 leased and operated and 504 franchised and managed) in 174 cities in China. Another 202 hotels were contracted or under construction at the end of the period. The company’s occupancy rate was 94.1% as of the end of the quarter. That was down slightly from 96.7% in the third quarter of 2010 and from 94.0% in the second quarter of 2011 due to more new hotels going into operation in the quarter than in those earlier quarters.
The past year hasn’t been kind to either the Chinese hotel industry or shares of Home Inns and Hotels. The industry built out rapidly when China’s economy was growing at 10% or better and has gone into a period of consolidation as economic growth slowed below 10% in 2011 and looks headed to 8.5% for 2012 as a whole. That has slammed the price of shares of hotel companies—for example, shares of Home Inns and Hotels were down 37% in 2011.
But the downturn is actually a long-term advantage to the stronger companies that can consolidate this market since it will leave them with a bigger market share when growth kicks up. The long-term trend that links increased household income with increased consumption of travel services including hotels remains intact. Between 2003 and 2008 the number of households with annual disposable incomes of more than $5,000 grew at a 31.7% compound annual rate. By 2020 the number of households in that category is projected to grow to 341 million from 134 million in 2008. During that same 2003 to 2008 period domestic tourism spending in China grew at an annual compound rate of 20.5%.
I think these shares may face tough going in the first half of 2012 if, as I suspect, investors focus on China’s slowing growth. But that fear should peak in mid-2012 and then gradually lessen as evidence accumulates that the growth rate of China’s economy has bottomed. The U.S. traded ADRs (American Depositary Receipts) closed at $27.18 on January 13. That’s toward the low end of the $44.86 to $22.09 price range for the shares over the last 52 weeks. If you have a shorter holding period than my long-term Jubak Picks 50 portfolio, I think you can look for a target price of $40 a share or so by December 2012 after that rough first six months of 2012.
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 own shares of Home Inns and Hotels Management 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/
Update HSBC (HBC)
August 19, 2009
One half of HSBC's (HBC) business is performing beautifully. Unfortunately, it's not the part that I most want to own. On August 3, HSBC reported second quarter earnings that showed that its investment banking and trading had doubled its pre-tax profit for the first half of 2009. For the division in charge of that business, the Global Banking and Markets group, that added up to a $6.3 billion pre-tax profit. That was enough to push the bank as a whole into the black with earnings of 21 cents a share. In the rest of the business restructuring remained the order of the day. The company took a charge of $13.9 billion for losses in its North American retail banking and mortgage lending operations as the company continues to exit the mortgage market and cut back on North American operations in favor of its traditional core strength in Asia. That strength in Asia is one of the reasons that the bank is in The Jubak Picks 50 portfolio. On that front, the bank showed some progress. In the first half 52% of earnings came from Asia and the bank added $17 billion in customer accounts in Hong Kong, India, and China in the first half of 2009. But the bank is still a small player in China, the big prize in the region. All foreign banks are, let's be clear. China only "fully" opened its banking industry to overseas banks in December 2006. Today overseas banks account for about 2.2% of total banking assets in China. HSBC now has 88 outlets in China, up from 79 at the end of 2008. The other reason to own this stock for the long term is that HSBC is one of the world's great deposit gathering machines. That hasn't changed in this crisis. In the second quarter the bank announced a loan to deposit ratio of just 80%. With so much more money coming in as deposits than going out as loans, the bank is well positioned to expand in Asia as the global economy recovers.Buy Impala Platinum (IMPUY)
December 30th, 2008
Early 2008 wasn’t an easy period for South African mining companies. Power shortages shut the country’s deep mines. News that China passed South Africa to become the largest gold producer in the world strengthened the impression that the industry’s best days were behind it in South Africa. But in the case of platinum specifically and the platinum metal group of platinum, rhodium, and palladium in particular, nothing could be further from the truth. South Africa was the source of 50% of newly mined metal in the platinum metal group in 2007 Deutsche Bank projects that figure will climb to 55% in 2008. Impala Platinum, the second largest of South Africa’s three major platinum producers, was the only one to increase its output in 2007.
Buy Infosys (INFY)
December 30th, 2008
One of the four horsemen of Indian information technology outsourcing, Infosys combines fast growth with proven management. Infosys has had to win over global clients that now include 113 members of the Fortune 500. These companies can do business with anyone in the world and the fact that they’re doing business with Infosys should give an investor confidence in the company. In effect, these international clients have vetted the company for you. (Full disclosure: I own shares of Infosys in my personal portfolio.)
Update Itau Unibanco (ITUB)
November 8, 2011
On November 1 Brazil’s Itau Unibanco (ITUB) reported third quarter adjusted net income, which excludes one-time items, of 3.94 billion reais (or $2.3 billion). That was up from 3.16 billion reais in the third quarter of 2010. That’s a 24.7% increase. The results also easily beat the analyst estimate of 3.65 billion reais for the quarter. (Reais is the plural of real.) Great numbers. But before you rush out to buy these shares—and the stock is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ --you need to get your head around this number. In the quarter the bank posted an annualized return on equity of 22.7%. That was up from 22.2% in the second quarter. As you’d expect that measure of profitability at Itau obliterates the return on equity at troubled U.S. banks. The comparable measure at Citigroup (C) is just 6.72% for the last 12 months and a negative 1.45% at Bank of America (BAC). But it also humbles the profitability at some pretty good U.S. banks. JPMorgan Chase (JPM), for example, shows a return on equity of 10.9%, PNC Financial (PNC) 11.92%, and U.S. Bancorp (USB) 14.24%. That ought to raise a big screaming question in your mind—Is the Itau Unibanco story that good? Or is there some huge burden of risk hanging over the stock that means you shouldn’t buy it even with that kind of differential in profitability? I certainly wouldn’t say that Itau Unibanco doesn’t face some risks—but they are surprisingly modest. And even after accounting for them, I think this is a bank stock worth buying. Even in the current market for bank stocks. The big risk for any bank these days is bad loans. That’s especially a worry because Brazil has been on a credit binge with average annual credit growth of 22% since 2003. That has brought total credit to the private sector to 47.3% of Brazil’s GDP in 2010 from just 26% in 2002. Households pay 20% to 25% of their incomes on debt payments. That compares to a ratio of just 14% in the United States when the credit bubble burst. But there are some solid reasons to think that Brazil isn’t headed toward a massive credit bust. First, private credit in Brazil is incredibly expensive with an average annual interest rate of 47% and short-term. Borrowing hasn’t, by and large, gone into mortgages or other long-term borrowing and it hasn’t created, by and large, a huge asset bubble. Second, unlike in the United States where just about nobody has gone to jail because of the way that banks behaved during the creation of the mortgage bubble, under Brazilian law controlling shareholders in a bank have unlimited personal liability. (Think that might focus your mind?) Third, Brazil’s banks are amazingly over-reserved against bad loans with existing reserves at Itau Unibanco, for example, equal to 156% of the bank’s non-performing loan balance in the third quarter. And fourth, the Banco Central do Brasil has begun to lower interest rates to stimulate growth. That has the effect of increasing net interest margins—the difference between what a bank pays to raise money and what it charges borrowers—and provides some relief to indebted consumers (by lower interest rates and encouraging growth.) Nonperforming loans—that is loans past due by 90 days of more—did rise at Itau Unibanco to 4.7% at the end of the third quarter, an increase of 0.2 percentage points from the second quarter. And that 4.7% number wasn’t particularly clean. Once you took account of renegotiated credits and charge-offs the increase was more like 0.5 percentage points. But bank CEO Roberto Setubal has been talking recently as if he thinks this is close to the worst that the bad loan situation will get thanks to the central bank’s interest rate cuts and the likelihood that the economy will accelerate next year. The bank told investors to expect a small increase of about 0.2 percentage points in non-performing loans when it reports fourth quarter results. At a November 7 closing price of $18.55 the ADRs (American Depositary Receipts) of Itau Unibanco trade at a price to earnings ratio of 9.8 times projected 2011 earnings per share. The analyst consensus is calling for earnings growth of 11% for all of 2011, which could well be low in the fourth quarter turns out to be a profitable as the third. I think $24 is a reasonable one-year target price for the ADRs. 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 own shares of Itau Unibanco 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/Update Johnson Controls (JCI)
August 31, 2009
The long-term future for Johnson Controls (JCI) is in batteries for hybrid and electric cars, and systems for building-wide energy efficiency. Not that the near-term future is so bad. What with the recovery, slow though it might be, in the global auto industry. Johnson Controls knows how to make auto batteries. Lots and lots of them at once while keeping costs under control. The company has a 35% share of the global lead acid auto battery market after all. And that’s important, as important as technology, when it comes to grabbing a big share of the next generation lithium-ion batteries that will power the hybrid and electric cars of coming decades. Not that the company has ignored technology: it’s joint venture with the Saft Groupe adds key experience in lithium battery systems. Batteries currently make up about 15% of sales, while building efficiency systems account for another 37% of revenue. In the company’s fiscal third quarter, reported in July, Johnson Controls swung to a profit after two consecutive quarters of losses on the strength of cost cutting. Gross margin climbed to 14.9%. The company also told Wall Street to expect stronger profits sequentially in the fourth quarter in both the battery and building segments.Update Joy Global (JOY) in my Jubak Picks 50 long-term portfolio
June 1, 2012
Are we all market timers now? What makes me wonder? My reaction to Joy Global’s (JOY) second quarter earning report yesterday, May 31, before the New York markets opened. The company beat Wall Street projections by 8 cents a share on earnings and reported a 45% year-to-year gain in revenue to $1.54 billion (above the $1.43 billion consensus among analysts), but the stock got savaged when the company lowered its guidance for fiscal 2012 to $7.15-$7.45 a share from the prior guidance of $7.40-$7.780 a share. Before that revision, the Wall Street consensus had been $7.64 a share in earnings for fiscal 2012. The stock closed the day at $55.86, near the bottom of its 12-month range of $53.26 to $101.44 a share. The stock is down 34% in the last year and 41% from its February 3 closing high at $95.23. The shares are well below the 50-day moving average at $68.71 and the 200-day moving average at $77.92. In fact they’re pretty much back to where they were at the October 2011 low before the stunning end of the year rally that extended into the first two months of 2012. Did I rush to buy on the bad news? Nope. My first reaction was that I should wait for the shares to move lower. They were cheap today. But they’d probably be cheaper tomorrow. That’s a totally understandable reaction to the current market environment where stocks seem to move lower every day on a steady diet of bad news from Europe, China, Brazil, and the United States; where a horrible May has pretty much wiped out all the gains from the first two months of the year for stock indexes in the United States, and where it’s hard to find a silver lining in any of the gray clouds that still crowd the horizon. But while the reaction is understandable, I’m not sure it’s the correct one. We know from work in the last few decades in behavioral finance that investors have a roughly 2-to-1 preference for avoiding losses to acquiring gains even at the best of times. And this certainly isn’t the best of times. Recently we’ve all taken losses on “good” stocks so that pulling the trigger on anything has become incredibly difficult. Better, our emotions and recent experience tell us, to wait until prices are lower tomorrow. At least that way we won’t suffer another loss. So is the long-term case that I can make for owning Joy Global relevant at all to a buy/sell/hold decision now? (Joy Global is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ ) To decide I’d start first with what the company said in its conference call when it lowered guidance for fiscal 2012. The company sees weakness in markets around the world. The U.S. market is soft. Growth in the EuroZone has slowed. China’s economy looks to be slowing. All this slowing is expected to reduce earnings by 18 cents a share in fiscal 2012. At least that’s the way things look now—they could get worse because uncertainty is so high, the company noted. The U.S. coal market is coping not just with weakness in global economies but also with increased competition from cheap natural gas in the United States. That has reduced production and revenue at mining companies—leading to a slowdown in orders. But the company expects that this market will stabilize by the end of the year. In China, Joy Global said it expects the economic slowdown to bottom in the near term and that its markets there will return to growth due to increased government spending. Investors have heard this before from many companies, of course, and we’re entitled to be skeptical about predictions for a turn in the company’s markets. The company admitted at much in its conference call saying that they don’t know whether the upside will appear in the near or longer term. Second, I’d look at the Wall Street reaction to the news. This uncertainty has left Wall Street target prices all over the map. For example, after the guidance from the company, Barclays cut its target price to $88 from $96. UBS, however, cut its target to $58 from $78. And third, I’d look at whether any of this changes the long-term positive trend for Joy Global. I think here the answer is no. World demand for mined commodities will increase over the long-term and the need to buy more mining equipment to expand mine capacity and production is intact. I’d even argue that any orders lost in the current slowdown aren’t so much lost as delayed. The average age of an electric shovel used in mining is now more than 16 years. At some point aging equipment has to be replaced and I think Joy Global is looking at the same kind of deferred demand that powered revenue and earnings growth at Cummins (CMI) once truck owners decided to upgrade their aging fleets. My conclusion: I would like to own Joy Global for the long-term and so far the short-term hiccups haven’t really changed the long-term story. But experience tells me that once a Wall Street favorite has hit a soft patch like this, the stock is likely to go through a period of further weakness as Wall Street analysts cut their target prices to catch up with the current share price. I’d wait on Joy Global for a while with an eye to watching for when analysts stop cutting their target prices by $20 at a pop and for when the spread among analysts isn’t quite so extreme. I’d put this one on my watch list http://jubakpicks.com/watch-list/ for a few months at this point. 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 own shares of Joy Global 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/LATAM Airlines (long-term) opportunity and (short-term) problem is Brazil
April 1, 2013
It’s all about Brazil. On March 19 LATAM Airlines Group (LFL) reported a 97% drop in earnings for 2012 to just $10.96 million. Higher taxes in Chile, the group’s home market, certainly didn’t help, but the big problem was the cost of integrating the 2012 acquisition of Brazil’s TAM and the continued doldrums of the Brazilian economy. The idea—and in the long term I think this still makes sense—is that LATAM would cement its position as the dominant airline in South America by acquiring TAM, which has roughly a 39% market share in Brazil. But the integration is taking longer than expected and the projected total synergies of $600 million to $700 million from the deal look like they’ll take three to four years materialize. LATAM has been cutting TAM’s capacity in Brazil by shutting down routes that were only 30% to 50% full. That’s had the effect of increasing the load factor in Brazil, but not as quickly as projected thanks to a slow Brazilian economy. LATAM reported that Brazilian passenger traffic rose by just 2.4% in February from a year earlier. Route cuts had reduced capacity by 11.9%. The combination resulted in the load factor for Brazil climbed to 75.1% in February, up 10.5 percentage points. But that improved load factor still lags LATAM’s typical pre-acquisition load factor for its system as a whole. It looks like EBIT margins (earnings before interest and taxes) have started to recover after cratering in 2012. EBIT margins will increase, Wall Street projects, to 5.3% in 2013 and 7.7% in 2014. But that still doesn’t make this stock a very attractive comparative investment right now. LATAM trades at a premium to Panama’s Copa Holdings (CPA)—a forward price to earnings ratio of 24.07 for LATAM versus 12.81 for Copa—but Copa shows a projected EBIT margin of 19% in 2013 and 21% in 2014. I think you need either to let more time pass before buying LATAM—so that the company is closer to those cost synergies and the expected bump in Brazilian passenger traffic from the 2014 World Cup and the 2016 Olympics—or get the stock at a cheaper price. The continued struggles of the Brazilian economy could well provide that lower price this year. I still like this stock for the long run—that’s why it’s a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ --but I wouldn’t buy it now at this price. 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 own shares of LATAM Airlines Group as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/Update Luxottica (LUX)
March 3, 2011
Not very ambitious, are they? Luxottica, the biggest maker of eyeglasses in the world and a member of my Jubak Picks 50 long-term portfolio, announced that it looking to increase sales in emerging markets by about 20% in 2011, achieve double digit growth at its premium and luxury brands (such as Ray-Ban and Oakley), and grow volumes in China and India by 120% over the next three years. Did I leave out plans to open 40 Sunglass Hut stores in India, 15 in Brazil, and 50 in China? (The company also acquired 70 stores in Mexico at the end of 2010.) Oh, and by the way, on February 28, Italian company, which also makes eye glasses under license for fashion houses such as Prada and Chanel, also reported a 16% increase in sales for the first quarter, a 1.2 percentage point increase in gross margins, and an increase in net income of 88% from the fourth quarter of 2009. For the full year, Luxottica reported a 35% increase in net income on a 14% increase in sales. The company announced that it planned to raise its annual dividend payment by 26% to 44 euro cents a share. At the March 2 closing price that works out to a yield of 1.9%. Luxottica is benefitting from the economic recovery in the United States. The company forecast 2011 sales growth of 4% to 7% in the U.S. retail segment. Sales in North America (about 60% of the company’s total sales) at the wholesale level to stores such as Target (TGT) of fashion-label licensed eyeglasses will grow by 10% to 12% in 2011, the company projects. But the big driver of sales growth will continue to be the world’s emerging markets, where the company has tripled sales in the past six years. Luxottica forecast that it will finish the year with 500 stores in China. Luxottica is in the process of turning itself into a low risk play on growth in the world’s developing economies. Of course, you get all the usual risk from volatile growth in these economies—and in this fashion business the usual risk of piracy and knock-offs—but you also get solid accounting, a management structure that’s relatively transparent, and a manufacturing and design strategy split between China and Italy. (Chairman Leonardo Del Vecchio, founded the company n 1961 and owns 68% of the company’s shares. CEO Andrea Guerra has held that job since 2004.) With an earnings growth rate projected at 16% and a forward price-to-earnings ratio on those projected earnings of 23.5 Luxottica isn’t particularly cheap. But the company’s growth strategy is sustainable in the long run in my opinion. (Which is, by the way, why the stock is a member of my Jubak Picks 50 long-term portfolio.) I think $39 is a reasonable one-year target price for the stock. 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, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Luxottica as of the end of January. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/Australian rare-earth miner Lynas soars 18% on Malaysian election results
May 6, 2013
Whether or not the victory on Sunday of Prime Minister Najib Razak and the ruling Barisan Nasional coalition is good for Malaysia democracy or not—and it’s hard to believe that 55 years of uninterrupted rule by one party is a good thing—investors in Lynas (LYC.AU in Sydney or LYSDY in New York) clearly breathed a sign of relief today. Shares of the rare earth mining company closed up 18%. The victory by the Barisan Nasional government, which has already approved an operating permit for Lynas’s plant to process rare earth minerals mined in Australia in Malaysia, just about guarantees that the courts won’t over-turn the decision and that a new government wouldn’t rescind the permit. (Lynas is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ ) The victory gave Barisan Nasional a majority with 133 seats in the 222-member parliament—but this is the second election in a row to deny the party its customary two-thirds super-majority. The relatively narrow victory is likely to push the government to move full-steam ahead on the $444 billion in infrastructure spending and investment by 2020 that the company had promised during the campaign. Plans include the construction of a high-speed rail link between Kuala Lumpur and Singapore and the construction of a new shopping district to rival Singapore’s Orchard Road. Stocks that moved up on the election results include CapitaLand (CAPL.SP in Singapore), Southeast Asia’s biggest developer and construction company Gamuda (GAM in Kuala Lumpur.) 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 own shares in Lynas 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/Update Monsanto (MON)
September 10, 2009
It’s hard to keep earnings growing when competitors cut the price you can charge for your signature product in half. That’s the reality that’s finally put an end to Monsanto’s (MON) run of eight consecutive years of earnings growth. On September 10, the company, a member of the Jubak Picks 50 portfolio, told Wall Street that earnings for the fiscal year that ends in August 2010 would be just $3.10 to $3.30 a share. Wall Street analysts had projected earnings of $4.26 a share, according to Zacks Investment Research. For the fiscal year that ended in August 2009, analysts had projected earnings of $4.41 a share, a 21% increase from the $3.64 reported for fiscal 2008. The problem is the company’s herbicide Roundup. With the market facing a glut of glyphosate-based generic competitors to Monsanto’s branded Roundup, prices have nose-dived for both the generic and branded herbicides. Competition from generics has cut Roundup prices roughly in half. In 2010 Monsanto expects to sell 250 million gallons of Roundup at $10 to $12 a gallon. In May Monsanto projected 2009 sales of 200 million gallons of Roundup at $20 a gallon. Gross profits from the seed business will climb to $5.2 billion in fiscal 2010 from the $4.5 billion that Monsanto projected in May for fiscal 2009. But that’s not enough to offset the plunge in revenue from Roundup. The bad news on Roundup is likely to give impetus to plans to carve the Roundup business into a separate company and put it up for sale sometime in 2011. (I’m projecting here from reading between the lines in CEO Hugh Grant’s June comments about a sale of the Roundup business after the company finishes its current cost cutting.)Update Nokia (NOK)
December 20, 2010
Nokia (NOK) has put in a bid to be the other cell phone maker besides Apple (AAPL) to make a profit and have control over its business. Now if the company could just get its new phone, the E7, out the door. The success of Apple’s iPhone is built on the extraordinary power that controlling both he software and the hardware gives Apple. The company can make sure everything works together because it decides what gets on the platform and what doesn’t. No lame pre-installed apps from cell phone service providers. No word processing software that works differently in different programs on the same phone. No graphics that just kind of work. Nokia is aiming for the same business model. In early November the company decided to take full and sole control of the Symbian operating system for smart phones. To a degree Nokia had no choice. Its partners in the Symbian Foundation, set up to oversee the software, Samsung and Sony-Ericsson had abandoned the platform for Google’s Android. But Nokia decided that it would make the best of the hand it had been dealt: by taking over full control of the software, the company could customize the next version of the software for its next products and use it to develop a next generation operating system called MeeGo. MeeGo is still scheduled to be introduced in 2011, but on December 14 Nokia announced that its new smart phone, designed to close some of the smart phone gap with not just Apple, but also Samsung and HTC, would miss the Christmas buying season completely. The phone wouldn’t hit stores until early 2011. The delay isn’t a killer for either the E7 or for Nokia but it sure doesn’t do anything to help the company to regain momentum in the market. (Nokia’s last major smart phone, the N8, also hit the market late.) Nokia still owned 37% of the global smart phone market as of the end of the third quarter but that was down from 45% in the third quarter of 2009. Smart phone sales rose by 96% in the third quarter of 2010 from a year earlier and accounted for 20% of the overall cell phone market. That overall market grew by 35% in the third quarter. I think Nokia does have a future. (Which is why it remains in my Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ ) The company does know how to manufacture phones. They will eventually get the design right. And 37% of the smart phone market is something they can build on. But I’d wait a bit yet on Nokia’s shares. I know the stock is down 37% from the April 5 closing high but I think the arrival of the E7 in stores will unleash another round of negative press: The phone was late. It doesn’t stack up. The Symbian operating system doesn’t cut it. And on and on. The 52-week low is $8. I think there’s a good chance you’ll be able to get the stock for $8.50. And then even a recovery to $10.00 would represent an 18% gain. 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, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Nokia as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/Buy PepsiCo (PEP)
December 30th, 2008
This company delivers like clockwork. Take operating margins: 18% in 2004, 18.2% in 2005, 18.5% in 2006, and 18.2% in 2007–even as the cost of such raw materials as corn and corn syrup soared. Part of the reason is that PepsiCo is the U.S.-based company that has done the best job at becoming truly global. Today steady North American sales get a powerful boost from a fast-growing international business. In 2008, international sales, which make up about 40% of total revenue, climbed by 15%.
Update Petrobras (PBR)
September 8, 2010
Disappointment on Petrobras (PBR). Although it’s disappointment that investors will ultimately get over. The government is charging Petrobras more than expected to buy 5 billion barrels of oil reserves. (Pre-transfer the company has proven reserves of 15 billion barrels.) The price of $42.5 billion, to be paid in new stock, works out to $8.50 a barrel. That’s more than the $7.50 oil industry analysts had been expecting. And since the price determines not only how many new shares the company will issue to the government, but also how many shares it will have to offer to minority shareholders in a related rights offering, the higher price works out to a lot of dilution for existing shareholders. The company will sell $32.5 billion in shares in that rights offering. The total of $75 billion is more than three times larger than the $22.1 billion raised in the Agricultural Bank of China initial public offering. That offering is the largest IPO ever The deal with the government is part of a complicated financing package. The government gets a bigger stake in the oil company and its recent finds in the deep waters of the South Atlantic and in exchange Petrobras gets 5 billion barrels of reserves that it can use to back addition loans. That’s not exactly a minor benefit since the company has estimated its capital spending needs at more than $224 billion over the next five years. But this is exactly where it gets tricky. Private investors worry that the government is already pressuring Petrobras to make big investments in the lower margin refining business because that fits the country’s need for more domestic production of refined petroleum products. In June the company announced that it was increasing its capital spending on refining to $74 billion from $43 billion over the next five years. A strange decision from a company which can invest every dollar of capital it can raise in developing higher margin, recently discovered deepwater oil reserves. It doesn’t help that this financing deal will increase government ownership in Petrobras and the government’s potential influence. Besides getting more shares outright, the government will have the option to snap up any shares in the rights offering that aren’t bought by private investors. All this has led investors, including some of the biggest of the global big boys such as George Soros’s Soros Fund Management and BlackRock, to sell their Petrobras stake. Soros Fund Management, for example, sold all of its Petrobras stock in the second quarter. In the short term this deal has certainly depressed the stock. Petrobras is down 25% this year as of September 8. In the long term, the price of stock will recover from this dilution and these worries about government influence as long as the reserves in the South Atlantic prove out to be as rich as projected. There just aren’t that many big new oil fields in the world anymore. It just may take a while. Full disclosure: I don’t own shares in any company mentioned in this post in my personal portfolio.Buy Pioneer Natural Resources (PXD) in my long-term Jubak Picks 50 portfolio
January 16th, 2012
I added Pioneer Natural Resources to my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13 (http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ )
To understand why I’m picking this oil and gas company from a long list of alternatives you have to get deep inside the U.S. oil boom going on now.
That boom is a result of oil companies bringing new technologies to bear on fields that were thought to be near the end of their lives or on fields that were thought to be impossible to drill.
Pioneer’s Spraberry field fits that first category. The field is one of the oldest—and largest—in the Permian Basin and despite having drilled in the area since the late 1980s, Pioneer continues to expand production by using technology to drill into deeper formations that has almost doubled estimated ultimate reserves. Pioneer has 900,000 Spraberry acres under lease.
Those estimated reserves don’t include what looks like it will turn out to be a major new Permian play from the deep Wolfcamp Shale formation. This reserve, initially thought to be a relatively small niche play, now looks to be a big horizontal reserve like that found in the Eagle Ford shale. The Wolfcamp reserve continues to look bigger as Pioneer drills more wells.
In the second category—fields that were thought impossible to drill before new technology developed in the late 1970s—I’d put the Eagle Ford shale formation, where Pioneer controls 140,000 net acres. Thanks to a $.15 billion joint venture deal with Reliance Industries in 2010, the company has been able to pursue an aggressive drilling program that targets 1,000 wells over the next five years. That will, the company believes, expand production 34-fold by 2015. About one-third of Pioneer’s Eagle Ford acreage is in formations rich in natural gas liquids and distillates rather than in natural gas.
Pioneer rounds out its Texas big three with 70,000 acres in the Barnett Shale formation.
The relatively high presence of oil and natural gas liquids in these shale reserves has let Pioneer cut new drilling activity to almost nothing on its natural gas fields in Colorado, Kansas and Texas. In the face of depressed natural gas prices, Pioneer has reduced its natural gas production by about 4% while increasing its overall production by 15% in 2011. The company now projects 18% compounded annual production growth through 2014.
If you’re interested in these shares for something shorter than the five to ten year holding period of my Jubak Picks 50 portfolio, I calculate a target price of $115 a share by December 2012. The shares closed at $97.63 on January 13.
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 own shares of Pioneer Natural Resources 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/
Potash of Saskatchewan says wait until spring (at least)
February 1, 2013
“Agriculture is inherently an unpredictable business,” fertilizer producer Potash of Saskatchewan said yesterday, January 31, when the company reported fourth quarter earnings. After a statement like that, investors sure weren’t expecting good news and they didn’t get it. The company reported fourth quarter earnings of 52 cents a share (excluding non-recurring items.) That was worse than the 58 cents a share expected by the Wall Street consensus. For the full year earnings fell from $3.60 a share in 2011 to $2.45 in 2012, a 32% decline. Revenue dropped 12% year over year to $1.64 billion against the $1.73 billion consensus. And as a topper the company lowered guidance for the first quarter of 2013 to 50 cents-65 cents versus a Wall Street consensus of 68 cents share. For the full 2013 year Potash told analysts to expect earnings of $2.75-$3.25 against a Wall Street consensus of $3.20. So what’s the problem at Potash? Well, it’s actually not a problem at the company but with the entire potash fertilizer sector—if that’s any consolation for the stock’s 7.6% fall in the last 12 months. (After dropping 1.2% on the earnings news to $42.50, the shares are about half way between the $36.73 52-week low and the $48 52-week high.) Potash of Saskatchewan is a member of my Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ ) The potash industry has too much capacity (and as the global swing producer Potash often cuts its own production to keep order in the market. The company announced the temporary shut down of four mines in October and November.) And there’s too little demand from China and India. China finally signed a new agreement with potash producers at the end of December but India hasn’t yet agreed to terms. The odds are good that it will now that China has inked a deal but that’s still not great news for the industry since the agreement signed with China by Potash, Mosaic (MOS) and Agrium (AGU) calls for a price $70 a metric ton lower than the agreement that expired on June 30. Potash of Saskatchewan sold 1.3 million metric tons of potash in the fourth quarter at an average realized price of $387 a ton. Wall Street had projected a price of $439 a metric ton. The company’s sales of potash in North America climbed by 39% but sales outside North America fell by 37%. For 2013 the company said it expects global potash shipments of 55 million to 57 million metric tons, up fro 51 million tons in 2012. Potash didn’t report bad news in all its fertilizer segments. For its nitrogen fertilizer unit, the company reported strong demand and higher prices. In the quarter Potash’s nitrogen unit recorded a record gross profit. That wasn’t enough to save the quarter since Potash is predominantly a potash producer, but it does suggest that fertilizer companies with a bigger exposure to nitrogen fertilizers, such as Yara International (YARIY), could do better than their potash-heavy peers. As for Potash of Saskatchewan itself, I’d wait a month of two to see how the spring planting season is shaping up and if orders are strong enough to draw down dealer stocks. 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 any stock mentioned in this post 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/Buy Rayonier (RYN)
December 30th, 2008
Rayonier owns, controls or leases about 2.7 million acres of timberland. Some of those 2.7 million acres–what’s known as higher-and better-use land — are more valuable for development than as timberland. I’d estimate that about 400,000 acres fall into that category. At the June 2009 price of $41 a share, investors who bought the stock were getting Rayonier’s land for about $7,500 an acre. (Full disclosure: I own shares of Rayonier in my personal portfolio.)
Update Schlumberger (SLB)
July 26, 2011
Yes, Schlumberger (SLB) beat on earnings ($0.87 instead of the $0.85 Wall Street expected) and on revenue ($9.62 billion instead of the estimated $9.3 billion) but the real news in the oil service giant’s July 22 quarterly earnings announcement was a return of pricing power. Schlumberger reported seeing the ability to successfully raise prices across all its product groups and all its geographies. Pricing improvement started near the end of the second quarter in its international product lines and in liquids-rich drilling in North American shale formations. To Schlumberger this doesn’t look like a short-term trend. The company says that it sees an oil-and-gas-industry-wide shortage developing for oil field services. The shortage is a result of the boom in drilling in North America—especially the exploration and development of difficult geologies such as shale—and of the expansion of activity by international oil companies—again often in difficult geologies such as very deep sea drilling—in an effort to replace the oil lost to the Libyan civil war. The potential oil services crunch is a result, in Schlumberger’s view, of simultaneous booms in North American and international exploration and development. Until recently declining activity in North American created a services supply buffer that supported international exploration and development without leading to an increase in oil service prices. The boom in North America set off by new finds of oil and natural gas in shale formations from Texas to the Appalachians has soaked up that buffer and looks like it will produce a shortage that will support higher prices. Schlumberger didn’t report an increase in gross operating margin this quarter—at 20.6% it was essentially flat with the 21.6% reported in the second quarter of 2010. But if the pricing improvement that the company reported at the end of the second quarter runs for a while, margins will follow. That should produce quite an earnings bang in 2012. Standard & Poor’s raised its earnings estimate for 2011 to $3.75 a share from $3.69, and then jumped its earnings forecast by 23 cents a share to $5.28 in 2012. I put a 12-month target price of $108 a share on the stock, which closed at $94.70 on July 25. That’s roughly a 12% gain from here. If you own the stock, I’d hold it (because I think it’s a very low risk way to make a 12% gain) and look to add shares on any pull back on general market volatility. If you don’t own shares, wait for a dip to $89 or so. That would give you a 20% gain to my target price. The stock pays a dividend yield of a little less than 1%. (The stock is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ ) Full disclosure: I do not own shares of Schlumberger 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 own shares of Schlumberger 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/Buy Standard Chartered Bank (SCBFF)
January 5th, 2010
Despite its London headquarters, Standard Chartered Bank (SCBFF) does most of its business outside the United Kingdom. (A good place not to be during the global financial crisis.) In fact 90% of profits come from its business in Africa, Asia, and the Middle East.
Formed by the merger of The Chartered Bank of India, Australia and China and the Standard Bank of British South Africa in 1869, the bank has spent the financial crisis picking up bits and pieces of business from its more hard-pressed peers.
For example, the bank moved into Brazil by acquiring the Lehman Bros. team in that country. I think this is a good alternative to ING as a way to invest in the growth of financial markets in what is still so quaintly called the developing world.
Buy SunPower (SPWR)
January 5th, 2010
Demand will pick up—eventually—for solar energy companies as the global economy crawls toward recovery and as countries add more incentives for clean power.
That doesn’t mean that everyone is going to make money, though, since prices are dropping like a stone and many companies, such as Q Cells, are struggling to cut costs faster than prices are falling. SunPower’s (SPWR) way out of that bind is through vertical integration from manufacturing through installation.
The services it provides to solar dealers and installers save dealers and installers significant costs, which lets the company charge slightly higher prices for its solar modules. I don’t think SunPower is ignoring the need to cut manufacturing costs, however. In fact one of the reasons that I like this solar manufacturer is that it’s roots are in the silicon chip industry so it gets the way that higher quality and increased power generation per module can make up for lower labor costs at some competitors.
Buy Tenaris (TS)
December 30th, 2008
You can make a very nice little $10 billion (in sales) business out of selling something as seemingly mundane as drilling pipe if you realize that as companies drill in ever more challenging geologies, they’ll pay extra for pipes that can withstand extremely high temperatures and pressures; than can flex to accommodate new trends in horizontal and guided drilling; and that won’t surrender to extremely corrosive conditions. As oil companies drill in deeper and hotter they need increasingly sophisticated steel pipe and pipe connections. As the global energy industry expands its production of more corrosive fuels, such as ethanol and coal to gas, it demands high technology pipes. Expect even higher margins going forward.
Update Thompson Creek Metals (TC)
March 1, 2012
It looks like the rally in shares of Thompson Creek Metals (TC) is over, put to an end by the company’s own fourth quarter earnings report on February 27. The stock had climbed from $5.93 on November 25, the start of the current market rally, to $9.36 on February 3. Today shares closed at $7.29. I don’t own molybdenum miner Thompson Creek in my 12 to 18 month Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ anymore (having sold it out of that portfolio on May 4, 2011) but the stock is still a member of my long-term Jubak Picks portfolio http://jubakpicks.com/jubak-picks-50/. In the long-term I continue to like the stock as a way to play the growing global demand for molybdenum, a key ingredient in high-strength steel alloys. But I wouldn’t buy more or start a new position just yet. This quarter is a good reminder that for a mining company growing sales isn’t all that counts. In 2011 Thompson Creek saw record sales of 40.1 million pounds of molybdenum and record revenue of $669 million. But higher costs crushed Thompson Creek’s bottom line. Cash costs soared to $12.69 a pound in the fourth quarter of 2011 from $5.81 in the fourth quarter of 2010. For all of 2011 cash costs per pound came to $7.94, up from $6.07 in 2010. That took earnings per share—excluding one-time gains in both 2010 and 2011—down to 73 cents a share for 2011 against $1.07 a share in 2010. But rising production costs weren’t the worst part of the cost picture at Thompson Creek. The company announced that capital costs for 2012 would climb to a range of $868 million to $952 million as the company expanded its Endarko mill and continued development at its Mt. Milligan copper and gold mine. According to Deutsche Bank, that’s a big $355 million increase from previous estimates. Capital spending in 2010 came to $803 million. I don’t think this kind of capital spending revision is all that unusual in the mining industry right now where projects at lots of miners are facing big cost increases and big delays. But for a company as small as Thompson Creek—current market capitalization is just $1.22 billion—slippage of $355 million is a big deal. Right now the company is projecting that its capital budget will drop to just $205 million to $265 million in 2013. You can image what whacking $600 million or so off capital spending would do for the bottom line of a company with $669 million in annual revenue. But the problem is, after the last miss on capital spending, investors aren’t going to believe that capital spending reduction until they see it. I’d wait a quarter or two or three on these shares to see if, say, around the middle of 2012, management thinks capital spending is still on schedule for 2012 and 2013. 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 Thompson Creek as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/Buy Ultra Petroleum (UPL)
December 30th, 2008
What energy supply could be more secure than natural gas from Wyoming and Utah? And Ultra Petroleum owns a lot of it. I mean a lot. The company’s proved reserves total 2.4 trillion cubic feet of gas. But the real prize here is Ultra Petroleum’s 150,000 acres in the heart of the Green River Basin. Only about 15,000 of those acres have been developed so this company has years and years of expanding production ahead of it. (Full disclosure: I own shares of Ultra Petroleum in my personal portfolio.)
Update Vale (VALE) in my long-term Jubak Picks 50 portfolio
April 27, 2012
I’d like to blame the weather. And there is no doubt that weather in Brazil’s rainy season hurt Vale’s (VALE) first quarter earnings reported on April 25. But when the drop in quarterly earnings is the third consecutive drop in earnings, then I think you can be pretty sure something more serious is going on. (Vale is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ ) What’s most important, though, to investors who have made money on Vale in the past and have been looking to see when they might be able to make money on Vale in the future is that all these quarterly declines in earnings are setting up a potentially good second half for the stock. Vale, reported net income of $3.83 billion for the quarter. That was down 44% from the record $6.83 billion in net income for the first quarter of 2011. Net income was also down 18% from the fourth quarter of 2011. Part of the problem was indeed the wet weather. Wet iron ore sells for less than dry ore and Brazil’s heavy seasonal rains reduce production too. Iron-ore production did fall 2.2% in the quarter. Vale’s production costs rose 2% because the company hired more workers to do dredging and maintenance on its mines. But the bigger problem was falling iron-ore prices on lower demand from Europe. In the quarter Vale sold iron ore at an average of $109.26 a metric ton, 13% less than in the first quarter of 2011. Average prices for nickel and copper, metals where Vale has been expanding production to diversify from iron ore, fell 27% and 19%, respectively, from the first quarter of 2011. (Vale is the world’s biggest producer of iron ore and the second biggest producer of nickel.) In the quarter Vale sold 47% of its iron ore and pellets to Chinese customers, up from 41% in the first quarter of 2011. European customers bought just 16% of Vale’s iron ore, down from 20% in the first quarter of 2011. Vale shipped 65.2 million tons of iron ore and pellets in the quarter, a 4.2% decline from the first quarter of 2011. For the full 2012 year, Wall Street is looking for Vale’s earnings per share to fall by 13.7%. But the bulk of the damage is concentrated in the first half of the year when Vale is facing really, really tough year-to-year comparisons. In 2011 earnings per share in the first two quarters of the year were $1.29 and $1.21, respectively. That’s quite a bit better than the 74 cents the company just announced or the 84 cents projected for the second quarter. But in the second half of 2011 the company earned $1.82 a share and right now analysts are projecting $2.01 for Vale in the second half of 2012. If Vale can deliver what Wall Street projects, the second half will see an end to year-to-year earnings declines. That is a big IF, of course. But commodity traders are calling for a stronger second half of 2012 for copper and iron ore. According to the traders, it’s too soon to get in now since they expect the declines in prices for copper and iron ore in 2012 so far to continue for a while. Commodity hedge funds, for example, are still betting on further price drops. But after the summer might be a good time to enter. In the case of Vale, I’d say, after second quarter earnings get reported in July, might be a time for thinking about an entry. A reasonable 12-month target price is $30 a share in my opinion. Vale’s New York ADR (American Depositary Receipt) traded at $22.30 at 3:10 p.m. New York time on April 27. 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 Vale as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/Buy Weyerhaeuser (WY) in my long-term Jubak Picks 50 portfolio
January 18th, 2012
I added Weyerhaeuser (WY) to my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13 (See my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ on January 13 for all the changes to the portfolio.)
Why? Because as much as I’d hate to pick a precise month for the bottom in the real estate market, I think that we’re close enough to a bottom so I’m willing to put some money to work in the sector—if I get paid to wait for the precise turn. Weyerhaeuser converted to a real estate investment trust in 2010 (2.97% current dividend) so I’m getting paid a better than 10-year-Treasury-bond yield while I wait for a bottom in the second half of 2012 or sometime in 2013. And when the bottom comes Weyerhaeuser’s real estate sales on its 6.15 million acres of timberland and its concentration on products for the construction market give me plenty of leverage to the upside. About 40% of sales come from its wood products business, with about 70% of the products of that unit used in new residential construction. Weyerhaeuser Real Estate Company, 15% of sales, develops master communities, single-family houses, and residential lots.
With that business mix, as you’d expect, 2011 wasn’t the greatest year for Weyerhaeuser. The company is on track to earn 43 cents for the year (Weyerhaeuser reports fourth quarter earnings on February 3). That’s quite a come down from the $1.44 a share the company earned in 2006, but it’s quite a bit better than the $2.58 a share loss in 2010 or the $8.61 loss in 2008.
Weyerhaeuser does have one gem of a business that has kept on pulling in revenue and profits even while real estate and wood products have tumbled. The company’s cellulose fibers business (30% of sales), which produces absorbent pulp used in diapers and specialty pulp used in textiles, showed a 28% EBITDA (earnings before interest, taxes, depreciation and amortization) margin in 2010. Pricing and therefore margins in that business are likely to stay strong in 2012, Standard & Poor’s projects.
I think the stock is fairly valued in the short-term at roughly $20 a share, which is why I’m putting this in a long-term portfolio. The upside here will come from a recovery in the U.S. housing sector. Buy and hold—and collect that dividend–is an appropriate description of these shares.
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 Weyerhaeuser 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/
Buy Yamana Gold (AUY) in my long-term Jubak Picks 50 portfolio
January 23rd, 2012
Now that’s more like it. When I dropped Kinross Gold (KGC) from my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ on January 13 I said that what I wanted in a gold mining stock was a company with low production costs and rising production. Kinross, I opined, didn’t fit that bill any longer. (See my January 17 post http://jubakpicks.com/2012/01/17/sell-kinross-gold-kgc-in-my-long-term-jubak-picks-50-portfolio/ )
But my replacement for Kinross, Yamana Gold (AUY) does. The company’s cost of production is at the low end for the industry—at $450 a gold equivalent ounce in 2010–and it has one of the best profiles for increasing gold production among gold miners. That’s why I added it to the Jubak Picks 50 portfolio on January 13. (See my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ for all the changes to the portfolio.)
Low production costs for a gold mining company largely hinge on the richness of the ore grades in its mines. The richer the ore is in gold, the less of it a company has to dig, move, and smelt to recover an ounce of gold. It also helps if the ore you mine for gold contains concentrations of other valuable metals such as copper. Yamana’s flagship El Penon mine in Chile grades out at a high 7 grams of gold per ton of ore. Its Chapada mine in Brazil produced almost 150 million pounds of copper in 2010. Yamana’s Agua Rica mine, now under development, looks likely to contain reserves of 6.6 million ounces of gold and 10 billion pounds of copper. The result of these riches is lower costs.
Yamana is forecast to grow gold production by about 70% from 2010 through 2015 by beginning fold production at its Pilar, C1 Santa Luz, Ernesto, and Mercedes mines by 2013 and by increasing production at existing mines.
In the short-term you want to own Yamana because of that rising production. I’d put a $20 one-year target price on the shares, which closed on January 20 at $15.34. In the longer-run you want to own Yamana because of that rising production and the almost 100% certainty that all the money being added to the global balance sheet by the Federal Reserve, the European Central Bank, and others will eventually produce rising inflation and falling currencies in the developed world.
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 Yamana Gold 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/
Update Yingli Green Energy (YGE) in Jubak Picks 50
January 2nd, 2012
Last year—on January 18, 2011 to be precise—I replaced Sun Tech Power Holdings (STP) with Yingli Green Energy Holdings (YGE) in my long-term Jubak Picks 50 portfolio. (See my post on http://jubakpicks.com/2011/01/18/6215/ for last year’s revisions. The revisions for 2012 will be coming next week. My apologies for messy bookkeeping. While I deleted Sun tech from the portfolio I didn’t add Yingli. Today’s blurb fixes that error.)
The best that can be said for that switch is that Yingli Green Energy was slightly less terrible a pick in 2011 than Sun Tech Power. Shares of Yingli Green Energy were down 61.5% for 2011 while shares of Sun Tech Power were down 72.4%.
I replaced Sun Tech Power with Yingli Green Energy because Yingli had a significantly lower cost structure and I figured that would be important in what looked like a tough year for solar power companies—even in China.
But 2011 didn’t turn out to be just a tough year—it turned out of the part of the worst downturn ever for the solar industry. There was so much extra capacity in the industry in now as a result of a downturn in demand (from cuts to subsidies in markets such as Germany and Spain) and the overbuilding of new production lines (especially in China) that the difference between better and worse cost structures simply didn’t matter very much. A better-cost structure just guaranteed that a company would lose wheelbarrows instead of truckloads of money.
I don’t think this problem ended with 2011. The coming year is likely to be just as bad. But the Jubak Picks 50 is a long-term portfolio. The survivors of this solar winter will do well from the long-term growth in the solar industry. I just don’t expect to see that growth kick in during 2012. There’s no need to stock up on any solar stock even at current terribly depressed price levels. For more on the timing of any solar recovery and when to invest see my November 15 post http://jubakpicks.com/2011/11/15/what-solar-companies-will-survive-the-solar-winter-to-profit-from-the-solar-spring-and-when-do-you-want-to-own-them/ )
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 own shares of Yingli Green Energy 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/
