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 the early results are promising. In the first six months of 2009, The Jubak Picks 50 portfolio gained 19.2% versus a gain of 2.9% 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.
|Company||Symbol||Date Sold||Sell Price||Price Now||Today's Change||Gain/Loss Since Sale|
Seadrill (SDRL) showed last week what can happen when positive speculation meets short-sellers betting that the stock will go to $0.
ADRs (American Depositary Receipts) of the deep sea driller soared... more
|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 Sell|
|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 Sell|
|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 Sell|
Whoops! Missed one.
When I did my annual update of my long-term Jubak Picks 50 portfolio on January 13, I dropped Deltic Timber (DEL) from the portfolio in my post
Seadrill (SDRL) showed last week what can happen when positive speculation meets short-sellers betting that the stock will go to $0.
ADRs (American Depositary Receipts) of the deep sea driller soared 121% on Friday to cap a 155% move from $2.34 on March second to the $5.97 close on March 4.
The immediate catalyst for Friday’s move was news that John Fredriksen, Seadrill’s major shareholder with 24% of the company, had sold shares in Marine Harvest (MHG). Fredriksen sold shares worth $510 million in Marine Harvest, the world’s largest salmon farmer. That took his stake Marine Harvest down by about one-third to 17.7%.
Traders speculating that Fredriksen was raising cash to use in restructuring Seadrill’s debt began to drive up the price of Seadrill. And that was enough, with about 17% of the company’s float sold short, to send the driller’s stock off to the races as shorts bought shares to cover their positions. (And to take much of the energy sector with it as shorts bought shares to cover other “headed to $0″ bets.) Short positions that peaked at 22% of tradable shares were down to 14% as of Friday, March 4.
I can certainly understand the excitement. Seadrill carries a huge $11 billion in debt and has pending obligations for rigs currently under construction (although the company has been stretching out its delivery dates for those rigs.) Right now the company is facing a funding gap of about $2.5 billion through 2018–that’s the difference between cash scheduled to go out the door and cash projected to come in. The amount of cash coming in the door has been drastically reduced at Seadrill as it has at all drillers. A rig that rented out for $650,000 a day at the peak in 2013 might now rent for $260,000 a day–if the owner can find a customer at all. Everyone body who bought Seadrill higher–which includes Fredriksen in the $20s and yours truly at $36.25 in July 2012–is sure hoping to see break-even. If not on the fundamentals of the drilling business, then on some kind of miraculous restructuring of Seadrill’s debt.
Unfortunately, I think the climb to $5.97 on March 4 and the price of $5.87 at noon on Monday March 7 means that anyone long Seadrill has now taken on a huge amount of restructuring risk. Seadrill has said that it will announce a restructuring plan In June and the company is busy negotiating with lending banks and bondholders. But I’m afraid that the odds are that anyone who is expecting Fredriksen to ride to the restructuring rescue and make them whole–or wholer–is risking a big disappointment. The odds are that, at the least, current shareholders fare looking at massive dilution to the value of their positions. At the worst, they’re looking at a restructuring that sees Seadrill’s most valuable assets transferred to another company that eventually buys up all of Seadrill at a bargain price.
There’s a good likelihood that Fredriksen’s sale of $510 million in Marine Harvest shares had very little to do with Seadrill. Thanks to trouble in the Chilean salmon farming sector, the price of salmon has climbed to record levels. And the shares of Norwegian salmon farmers that have escape the Chilean troubles have climbed as well. Marine Harvest shares were trading at a 12-year high and Fredriksen’s sale could simply have been a call on “peak fish.”
Rather than speculating on Fredriksen’s motivation, though, anyone long the stock needs to look at some past history. In 2011, as the market for ocean shipping fell into chaos, Fredriksen helped “save” Frontline (FRO) from bankruptcy. The restructuring involved creating and capitalizing a new company, Frontline 2012, which bought 15 of Frontline’s newer ships and related debt and contracts for ships under construction. That saved Frontline from bankruptcy but Frontline 2012 wound up with the most valuable assets. Late in 2015 Frontline 2012 merged with Frontline in a deal that gave shareholders of Frontline 2012 about 75% of the merged company and gave shareholders of Frontline itself massive dilution to their positions.
There’s no guarantee that any restructuring of Seadrill would follow this pattern. But I think assuming that Fredriksen will put cash into Seadrill or provide a line of credit without requiring significant dilution from existing shareholders is dangerous. Creating a new vehicle–a version of Frontline 2012–to buy Seadrill’s newest ships and ships still under construction at a deep discount is one possibility. “Saving” Seadrill by buying billions in the company’s deeply discounted bonds and then converting them into equity is another possibility. I’d throw the possibility of a forced haircut for bondholders into the mix–possibly sweetened by a conversion of some percentage of debt into equity. Most of these structures will result in painful dilution to equity holders.
In my experience you very seldom get a chance to recoup all of a mistake as damaging as the one I’ve made by holding Seadrill for so long. (Even with the recent rally, my Seadrill position in the Dividend Income portfolio is down 84% from purchase in June 2012. Seadrill paid an attractive dividend for much of that holding period but not nearly enough to make up for the loss in capital.) I’ve also learned that letting investment decisions be determined by a stubborn focus on getting back to break-even is almost always a mistake. I think there’s a good chance that the restructuring plan to be announced in June will give anyone who really wants to own the valuable assets controlled, now, by Seadrill another shot at ownership at a discounted price.
We’re certainly looking at years before the fundamentals of the deep water drilling sector return to anything like those of the good old days.
I’ll be selling Seadrill today. I will continue to follow the stock.
December 20, 2010Nokia (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/
September 8, 2010Disappointment 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.
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, 2012I 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/
Whoops! Missed one.
When I did my annual update of my long-term Jubak Picks 50 portfolio on January 13, I dropped Deltic Timber (DEL) from the portfolio in 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/ but I didn’t actually remove it from the portfolio page.
I’m taking care of that today.
I dropped Deltic Timber from the portfolio not because it’s a terrible stock—it’s not—but because I wanted more exposure to the big long-term trends that would work to Deltic’s advantage than I’d get with this company.
Deltic is a relatively small timber company with 450,000 acres of timberland in Arkansas. It produces timber, lumber, and medium density fiberboard. And the company’s real estate unit sells land for commercial and residential development. The company figures that about 57,000 acres of its 450,000 fit into the higher and better use category that means they’re good candidates for the real estate market. (This land is about 12 miles from downtown Little Rock.)
You can see the potential for a company like this by looking at where it is now in relationship to where it was when the real estate bubble was still inflated. In 2011 the company sold 178,500 acres (not all higher and better use) for an average of $1,472 an acre. That was a huge increase in acres sold from the 6,200 sold in 2010. But it’s still way, way short of the 2,800,000 acres sold in 2007.
I think we’re close to bottoming in the housing market. That means that timber companies should start to see more sales of timber, lumber, and other building products, and more sales of higher and better use land at higher prices. I think that thesis will work for Deltic but I think it will work even better for a bigger timber company such as Weyerhaeuser (WY).
Which is why I added Weyerhaeuser to this portfolio on January 13 and dropped Deltic.
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 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/