Jubak’s Picks Portfolio

Buy and hold? Not really. Short-term trading? Not by a long shot. So what is the stock-picking style of The Jubak’s Picks portfolio? I try to go with the market’s momentum when the trend is strong and the risk isn’t too high, and I go against the herd when the bulls have turned piggy and the bears have lost all perspective. What are the results of this moderately active—the holding period is 12 to 18 months—all-stock portfolio since inception in May 1997? A total return of 229%. That compares to a total return on the S&P 500 stock index of 8% during the same period.

Symbol	Date Picked	Price Then	Target Price	Price Now	Today's Change	Jubak's Gain/Loss
Impala Platinum
IMPUY.PK	01/25/2010	$27.14	$37.00
I’m going to take advantage of the selloff in emerging market stocks and global commodities on fears that China’s government might be about to slow China’s economic growth to buy... more
Marvell Technology Group
MRVL	01/19/2010	$20.11	$26.00
Buy Marvell Technology Group (MRVL) Marvell Technology Group (MRVL) is in the right markets at the right time. (For more on what those markets are see my post http://jubakpicks.com/2010/01/19/get-your-portfolio-ready-for-the-profitless-global-economic-recovery/ )  Storage... more
Intel
INTC	01/15/2010	$20.86	$27.20
Sell on the news, is it? Well, thanks. I thought Intel (INTC) would run away from me after yesterday’s (January 14) great earnings report but apparently traders have decided to take profits... more
AmBev
ABV	01/13/2010	$103.97	$0.00
I think this one fits the recommendations for how to invest in emerging markets now that I laid out in my post http://jubakpicks.com/2010/01/07/how-to-buy-into-emerging-market-stocks-now/ AmBev, or to give the company its... more
HSBC
HBC	12/15/2009	$57.14	$67.00
This bank got its clock cleaned in the U.S. mortgage crisis. HSBC (HBC) spent $15 billion in 2003 to buy Household International in order to enter the U.S. mortgage market.... more
Ritchie Bros. Auctions
RBA	12/03/2009	$24.37	$30.00
The perfect stock for the current economic uncertainties probably doesn’t exist. These shares would have to shine if the economy recovers in 2010 as strongly as optimists now think and... more
Coach
COH	11/20/2009	$33.70	$40.00
Update January 20, 2010: Good sales and earning numbers from Coach (COH) for its fiscal second quarter but Wall Street wanted more and the stock was down almost 6% as of 11:15 in New... more    Read Jim's Original Buy
Ormat Technologies
ORA	11/17/2009	$41.08	$49.00
Procrastination and mindless delay can create profits for investors. The example I use in my book The Jubak Picks is the environment.  It’s not that we don’t recognize environmental problems; it’s just... more
Goldcorp
GG	11/05/2009	$40.44	$48.00
The Reserve Bank of India’s purchase of 200 metric tons of gold from the International Monetary Fund, announced on November 3, is a game changer for gold and investors. It clearly... more
Taiwan Semiconductor
TSM	10/20/2009	$9.93	$12.50
Update January 29, 2010: Everything is working out exactly as I planned when I bought Taiwan Semiconductor Manufacturing (TSM) on October 20, 2009—with the small exception of the share price. When the company reported fourth... more    Read Jim's Original Buy
Teva Pharmaceutical
TEVA	10/13/2009	$51.08	$61.00
No matter exactly what health care reform bill (even no bill) emerges from Congress this year, the pressure to get costs out of the healthcare system is just going to... more
Cisco Systems
CSCO	09/25/2009	$22.62	$29.00
Update February 3, 2010: The recession is certainly over for Cisco Systems (CSCO). Today, February 3, after the market close the company reported earnings for the quarter that ended in January (Cisco’s second quarter... more    Read Jim's Original Buy
Statoil Hydro
STO	09/23/2009	$23.10	$28.00
Norway's next oil frontier just got a little closer--and there's only one stock to play it. I don't follow Norwegian politics very closely so you'll have to forgive me if I've... more
GulfMark
GLF	09/17/2009	$30.55	$37.00
Update February 2, 2010: Lots happening at GulfMark Offshore (GLF) over the last quarter. Much of it good. But nothing that yet indicates the decisive turn in the company’s business that I’ve been looking... more    Read Jim's Original Buy
Johnson Controls
JCI	09/08/2009	$25.26	$36.27
Update February 4, 2010: Shares of Johnson Controls (JCI) were up more than 2% yesterday, February 3, on news that Wal-Mart (WMT) had named Johnson Controls as its sole source provider for its U.S.... more    Read Jim's Original Buy
Microsoft
MSFT	07/24/2009	$23.50	$33.00
Update October 23, 2009: When I added Microsoft (MSFT) to Jubak’s Picks on July 24, 2009 after the company announced results for its fiscal fourth quarter, I wrote “This is as bad as it... more    Read Jim's Original Buy
Potash of Saskatchewan
POT	07/23/2009	$95.78	$130.00
Update February 1, 2010: Investors get gun shy. Make every attempt to buy into a market correction a big loser and most investors won’t put a dollar in even when there’s concrete evidence of... more    Read Jim's Original Buy
Qualcomm
QCOM	07/15/2009	$46.06	$52.00
Update : Companies have characters. If you had a friend like Intel (INTC), for example, you know he’d be up late at night figuring out a way to make the family car run... more    Read Jim's Original Buy
PepsiCo Inc
PEP	04/21/2009	$49.35	$68.00
Update October 8, 2009: Before the stock market opened on October 8, PepsiCo (PEP) reported third quarter earnings of $1.08 a share (5 cents above Wall Street projections) and revenue of $11.08 billion. The earnings... more    Read Jim's Original Buy
McDonald's Corp
MCD	01/13/2009	$59.32	$72.00
Update January 22, 2010: Ronald McDonald delivered a big surprise this morning. McDonald’s announced fourth quarter earnings of $1.11 a share before the market opened on January 22. That was 9 cents a share better... more    Read Jim's Original Buy
Energy Transfer Partners LP
ETP	11/11/2008	$35.75	$47.00
Update July 30, 2009: The longer the Federal Reserve promises to keep interest rates low, the more valuable Energy Transfer Partners (ETP) is and the longer I want to hold it. In its press... more    Read Jim's Original Buy
Transocean Inc
RIG	08/01/2008	$137.61	$105.00
Update November 9, 2009: No real surprises in the third quarter earnings reported by Transocean (RIG) on November 4. The company continued to stack jack-up rigs as that segment of the... more    Read Jim's Original Buy
Middleby Corp
MIDD	05/20/2008	$57.41	$65.00
Update November 23, 2009: On November 10 Middleby (MIDD) reported third quarter earnings of 83 cents a share, four cents a share better than Wall Street projections, but still 19% down from the third... more    Read Jim's Original Buy
Rayonier Inc
RYN	11/09/2007	$46.02	$46.00
Update September 18, 2009: Considering that investing in timber seems to be falling out of favor, shares of Rayonier (RYN) have held up extremely well over the last six weeks. The stock is essentially... more    Read Jim's Original Buy
Thompson Creek Metals Co Inc
TC	06/26/2007	$15.47	$17.00
Update January 25, 2010: Today Thompson Creek Metals (TC) confirmed what the market had long expected: that when the company reports its fiscal 2009 financial results in February, it will switch to U.S. GAAP... more    Read Jim's Original Buy
Yara International ADRs
YARIY.PK	05/22/2007	$29.50	$53.00
Update January 11, 2010: Do Norwegian’s grin? Surely that was a trickle of a smile at Yara International's (YARIY.PK)  annual update for investors on December 10. The Norwegian fertilizer company reported that the nitrogen fertilizer market... more    Read Jim's Original Buy
Maxwell Technologies Inc
MXWL	01/23/2007	$12.55	$25.00
Update December 2, 2009: I hate it when this happens: A perfectly good growth stock gets adopted by momentum investors. It soars in the days before the company issues earnings on the hope that... more    Read Jim's Original Buy

Buy Impala Platinum (IMPUY.PK)

January 25th, 2010

I’m going to take advantage of the selloff in emerging market stocks and global commodities on fears that China’s government might be about to slow China’s economic growth to buy shares of Impala Platinum (IMPUY) for Jubak’s Picks. (The stock is already a member of my long-term Jubak Picks 50 portfolio.)

My buy rests on three points.

First, despite a huge rally of more than 50% in 2009, platinum still sells far below its historical price ratio to gold. Right now an ounce of platinum buys 1.41 ounces of gold. That’s about 23% below the 10-year average, according to Bloomberg. Recently commodity money has started to move from gold to platinum in a bet that the price gap to the historic average will close.

Second, while platinum is a physical store of value like gold, it is much more widely used in industrial processes. About 70% of platinum demand in 2008 came from industrial uses (including the catalytic pollution control machinery in cars) compared to the 11% of demand for gold from industrial and dental uses. That gives platinum big upside leverage to an improving global economy in general and increasing global automobile sales in 2010 and 2011 in particular. The Center for Automotive Research projects that U.S. car sales will climb 20% in 2010 and General Motors China forecasts sales of automobiles in China will increase by at least 11% in 2010. Auto sales in China increased by 46% in 2009.

Third, thanks to the global correction in commodity and emerging market stocks, shares of South Africa’s Impala Platinum have dropped 11% from January 8 through 2:50 ET on January 25. (For more on buying in this correction, see my post http://jubakpicks.com/2010/01/22/when-to-buy/ )

Earnings per share will be $1.15 in 2010 according to Deutsche Bank and then more than double in 2011 to $2.21.

As of January 25, I’m setting a target price of $37 a share by September 2010.

Full disclosure: I do not own shares of any stock mentioned in this post in my personal portfolio. I will, however, buy shares of Impala Platinum three days after this is posted.

Buy Marvell Technology Group (MRVL)

January 19th, 2010

Buy Marvell Technology Group (MRVL)

Marvell Technology Group (MRVL) is in the right markets at the right time. (For more on what those markets are see my post http://jubakpicks.com/2010/01/19/get-your-portfolio-ready-for-the-profitless-global-economic-recovery/ )

 Storage has always been the company’s core business—and it still makes up about 50% of its revenues. That’s projected as a hot sector in fiscal 2011 (The company’s 2011 fiscal year begins with the April quarter.) with revenue growth for the company forecast at 18% year-over-year by Kaufman Brothers. That’s above projected 12% to 15% growth in PC units sold for 2010, a result of the company’s continued gains in market share.

But as good as prospects for that business are, it’s growth in sales of embedded chips to the producers of consumer products from cell phone handsets to eBooks, and net books that make the stock a buy now. The company’s new Armada family of ART-based processors for smart phones, smart books, embedded devices, and displays is just starting to contribute to growth. In fiscal 2011 Kaufman Brothers projects that revenue in the mobile/wireless unit will grow by more than 20%. (Marvell Technology Group acquired Intel’s (INTC) communications and application processor business for $600 million in cash in November 2006.)

The Wall Street consensus projects that earnings will climb 45% to $1.09 a share in fiscal 2011. I think that’s likely to be low, but in any case the consensus estimate says the stock is now trading at 18.4 times fiscal 2011 earnings per share. As of January 19, 2010, I’m adding Marvell Technology Group to Jubak’s Picks with a target price of $26 a share by December 2010.

Full disclosure: I will buy shares of Marvell Technology Group for my personal portfolio three days after this is posted.

Buy Intel (INTC)

January 15th, 2010

Sell on the news, is it?

Well, thanks.

I thought Intel (INTC) would run away from me after yesterday’s (January 14) great earnings report but apparently traders have decided to take profits on the news ahead of the long Martin Luther Day weekend. And that gives me a chance to add the shares of Jubak’s Picks.

(I think it looks increasingly like the market will be able to depend on technology stocks for leadership in early 2010. Good thing because the other sector showing signs of leadership recently, financials, looks likely to stumble. See my post http://jubakpicks.com/2010/01/15/even-jpmorgan-chase-is-still-putting-new-money-away-to-cover-bad-loans/ )

Intel reported fourth quarter earnings of 40 cents a share, 10 cents a share better than Wall Street projections, and revenues of $10.57 billion (up 28.5% from the fourth quarter of 2008) and above the $10.17 consensus. Gross margin came in at 65% versus a Wall Street projection of 62.2%.

For the first quarter of 2010 Intel told Wall Street to expect revenue of $9.3 billion to $10.1 billion versus Wall Street’s pre-earnings report projections of $9.35 billion.

Intel’s results were especially strong for chips for servers where average selling prices increased, for notebooks, and for the low-power Atom processor designed for netbooks.

With Wall Street expecting an upturn in PC sales—which Intel’s results and comments confirmed—where did the surprise come from?

Some of it from a traditional Intel source, the extra margin that the company gets from relentlessly shrinking its chips. Intel is just starting to ramp its 32 nanometer lines to full production. Typically Intel sees costs drop and margins increase when it puts a new generation of production technology into full production. That seems to have started again in the fourth quarter and is likely to continue, I believe, in 2010.

In its conference call the company also noted that inventory at distributors fell in the fourth quarter from the third quarter of 2009 so it doesn’t look like the results came from stuffing the channel with unsold product.

The company’s decision to up capital spending to $4.8 billion in 2010 from $4.5 billion in 2009 also speaks to Intel’s belief that its chip business is moving into a multi-year growth cycle.

As of January 15 I’m adding Intel to Jubak’s Picks. The stock currently trades at 13 times 2009 earnings per share with Wall Street predicting earnings growth of roughly 50% in 2010. I’m setting a target price of $27.20 a share for December 2010. That’s 16 times my projection for $1.70 in earnings per share for 2010.

Full disclosure: I do not own shares of any company mentioned in this story in my personal portfolio.

Buy AmBev (ABV)

January 12th, 2010

I think this one fits the recommendations for how to invest in emerging markets now that I laid out in my post http://jubakpicks.com/2010/01/07/how-to-buy-into-emerging-market-stocks-now/

AmBev, or to give the company its full name Companhia de Bebidas Das Americas  (ABV), is the largest beer company in Brazil and the fourth largest beer company in the world.

Its 70% market share in Brazil gives it huge exposure to growth in that country’s domestic economy. And Brazil isn’t a bad beer market to dominate. Beer consumption is forecast to grow by 22% in Brazil from 2008-2015, which ranks Brazil as the second fastest growing beer market in the world behind China.

Through its 100% ownership of Quinsa, AmBev sells the leading brands in Argentina, Uruguay, Paraguay, and Bolivia. AmBev owns Canada’s Labatt. The company is also the largest Pepsi bottler outside the United States, which gives AmBev huge volumes to feed through its distribution system.

 Those volumes plus huge market shares plus a rigorous cost-cutting culture have made AmBev one of the most profitable beer companies in the world with a huge 37.8% core operating margin in 2008. That’s 15 to 20 percentage points higher than at competitors, according to Morningstar.

 AmBev is controlled by AB AmBev (AHBIF.PK), the largest brewer in the world. (InBev looks like it will soon acquire full control of Mexico’s Grupo Modelo, which will give the combined companies increased clout in heading off any challenge from Heineken, which has just bought Mexican brewer Femsa. Femsa sells the Bavaria, Sol, and Kaiser brands in Brazil.) InBev owns 84% of the voting stock. The two companies trade as separate public companies. AMBev  shares currently pay a dividend of a little more than 2%.

As of January 13, I’ll be adding these shares to Jubak’s Picks with a target price of $118 by October 2010.

Full disclosure: I don’t own shares of any stock mentioned in this post. I will buy shares of AmBev three days after this is posted.

Buy HSBC (HBC)

December 15th, 2009

This bank got its clock cleaned in the U.S. mortgage crisis. HSBC (HBC) spent $15 billion in 2003 to buy Household International in order to enter the U.S. mortgage market. The timing of that deal was just right so that write downs were about the same as what HSBC had paid to acquire the company.  The math of that deal turned into paying $15 billion to buy $15 billion in losses.

But there are advantages to things going so terribly wrong. It you survive—and the bank did rebuild its capital by raising $17.7 billion through a stock offering in April—you have good reason to examine your strategy from top to bottom. In the case of HSBC that resulted in the bank’s decision to return to its Asian roots. HSBC CEO Michael Geoghegan has announced that he will be moving his office to Hong Kong from London. That looks likely to be the key that unlocks a stock offering in China for HSBC, making the bank one of the first non-Chinese companies to list and raise money on a Chinese exchange.

At the end of 2008 Hong Kong and the rest of Asia accounted for 26% of the bank’s assets. That percentage will climb as HSBC’s China business grows and as HSBC takes advantage of troubles at competitors to pick up Asian assets. HSBC has emerged as the front runner to buy the assets of troubled Royal Bank of Scotland (RBS) in China (13 branches), India (28 branches), and Malaysia.

With the Chinese economy set to return to 10% economic growth in 2010—how sustainable that is for the long term is another story—and with Chinese exports likely to return to growth next quarter (see my posts http://jubakpicks.com/2009/12/10/when-will-chinas-currency-strart-to-climb-against-the-dollar/ and http://jubakpicks.com/2009/12/14/chinas-economy-takes-another-step-toward-business-as-usual-and-thats-good-news-for-the-rest-of-the-world/ ), owning a bank that owns an increasing bit of Asia’s banking business seems like a good investment.

But buying HSBC isn’t without risk.

HSBC is trying to wind down its portfolio of  U.S. mortgages and loans but if the U.S. economy and the U.S. housing sector in particular dips back into recession the losses will be greater than I now expect. (My buy is based on my belief in a modest 1.5% to 2% growth in the U.S. in 2010.)  In the short-term while the business in China is promising it is still generating losses as HSBC invests in that business so HSBC can’t expect profits there to offset unexpected losses in the U.S. I think the biggest danger is that the recovery in revenue I’m looking for won’t arrive in 2010 but will be delayed until 2011. I don’t think that will happen but that is the downside. Current expectations at S&P are for operating earnings of $4.05 in 2010 so the stock isn’t expensive if that projection is accurate.

As of December 15, 2009, I’m adding this stock to Jubak’s Picks with a target price of $67 a share by December 2010. The stock pays a dividend of 2.7% as of December 15.

Full disclosure: I own shares of HSBC in my personal account and I will be buying more three days after this is posted. The stock is also a member of my long-term Jubak Picks 50 portfolio.

Buy Ritchie Bros. Auctions (RBA)

December 3rd, 2009

The perfect stock for the current economic uncertainties probably doesn’t exist. These shares would have to shine if the economy recovers in 2010 as strongly as optimists now think and do well if the recovery is only tepid and even climb if the economy slid back toward recession in 2010.

You can certainly understand why I’d want to find such as stock, right?

Probably doesn’t exist, as I said. But that doesn’t stop me from looking. And I’ve found a stock that while not perfect gets me two-thirds of the way to an all-economic-weather buy.

I’d adding shares of Ritchie Bros. Auctioneers (RBA) to Jubak’s Picks with this post.

Why is this close to an all-economic weather stock? Let me explain.

Ritchie Bros. auctions industrial equipment in 25 countries and over the Internet.

You might imagine that the financial crisis and economic slowdown have been good for business. Not quite. The potential supply of equipment to auction has indeed swelled with the tough times, but much of that supply has remained potential. Struggling companies are still in “pay and pray” mode. They’re struggling to make one more payment and praying that things will turn around soon. That’s why in the third quarter gross auction proceeds came to only $693 million, short of the company’s goal of $800 million.

But it’s what happens now—either if the economy grows slowly or as strongly as many hope in 2010—that interests me.

If the economy grows strongly, buyers will come into the market looking for equipment bargains. That will drive up prices, which are now some 40% to 50% off their peak of two years ago. And higher prices will encourage some currently reluctant sellers that this is the time to finally unload equipment that they they’ve held onto.

And Ritchie Bros. gets to ride a virtuous cycle where increased auction sales lead to increased prices which leads to increased auction sales.

If the economy grows, but not very strongly, buyers will come into the market—although in lower numbers—potential sellers will decide the economy isn’t going to bail them out and they’ll finally sell. With a slower economy prices won’t rise, since there will be fewer buyers and more sellers—but they should still manage to hold steady rather than heading south.

It the economy turns back into recession, Ritchie Bros. will pick up some business from companies trying to make capital budgets stretch farther, but sales will slump and supply will probably stagnate. In this scenario, the company’s biggest market, the United States (at 55% of sales), which was the company’s worst market in the third quarter of 2009, would continue to show declining auction sales.

But potential investors should note that the company look like it did manage to grow revenue and earnings from 2008 to 2009, certainly a tough time for the economy.

As I said, the stock isn’t a perfect all-economic-weather stock. Buying Ritchie Bros. is a bet that while growth may be slower than the stock market now anticipates in 2010, the economy isn’t going to slide back into recession next year.

Growth in that slow but not recession scenario should also get a boost from the company’s continued build out of its permanent auction sites (with three new sites currently under construction), continued expansion into non-English-speaking and emerging economies (with first-ever auctions in Turkey scheduled for the fourth to follow on the heels of the company’s first ever auction in India in the third quarter), and the addition of a new multi-lingual auction website.

The Wall Street consensus calls for 12% earnings growth in 2010. I think that’s a reasonable estimate under the slower-than-expected growth in the United States scenario. I think it underestimates the company’s growth prospects in the rest of the world and the backlog in the U.S. economy if growth is as strong as is now hoped in 2010. Under that scenario, I can see Ritchie Bros. showing 20% earnings growth in 2010.

I’m adding the stock to Jubak’s Picks as of December 3 with a target price of $30 a share by November 2010.

Update Coach (COH)

January 20, 2010

Good sales and earning numbers from Coach (COH) for its fiscal second quarter but Wall Street wanted more and the stock was down almost 6% as of 11:15 in New York. The pattern here of sell even on the good news reminds me of the market’s reaction to Intel’s (INTC) good earnings report last week. I used that selling as an opportunity to pick up shares of Intel. I’d think about doing the same with Coach. (The stock is already a member of the Jubak’s Picks portfolio.) For more on that sell on the good news at Intel and my buy on the shares see my post http://jubakpicks.com/2010/01/15/buy-intel-intc/ Earnings per share at the retailer climbed 12% from fiscal second quarter a year ago. Earnings of $241 million, or 75 cents a share, were up from $216.9 million, or 67 cents a share, a year ago. Revenues grew by 11% to $1.07 billion. Wall Street had projected earnings of 72 cents a share on revenues of $1.03 billion. The best news for Coach was that sales in its home North American market finally rebounded. Same store sales in North America climbed 3.2% for the quarter. Margins climbed in Coach’s North American outlets and gross margins for the company as a whole inched up to 72.4% from 72.1%. In China, the key growth market for the company Coach continued to expand by opening four new stores in the quarter. That brought the company’s total in China to 37 stores. (In contrast Coach has 163 stores in Japan after opening one new store in the quarter.) So where was the disappointment? Analysts had projected that North American sales would grow by 3% to 6% in the period so the 3.2% growth barely hit the bottom of the expected range. Some analysts also fretted that falling inventory levels—inventories were down about 30% from the same quarter a year ago—were a sign that the recovery in North America wasn’t sustainable. I’m not sure I follow that logic: Going into earnings season analysts that follow Coach and other retailers were worried about rising inventories if the Christmas shopping season was weaker than expected. I don’t see how this adds up to a 6% drop in the stock, but that’s what happens when traders decide to take profits on a stock that is up roughly three-times from March 2009. As of January 20, I’m leaving my target price at $40 a share by October 2010. Full disclosure: I own shares of Coach in my personal portfolio.

Buy Ormat Technologies (ORA)

November 17th, 2009

Procrastination and mindless delay can create profits for investors.

The example I use in my book The Jubak Picks is the environment.

 It’s not that we don’t recognize environmental problems; it’s just that it takes so long for us to do anything about them. And then, of course, we rush to find the fastest fix. That delay and then the rushed fix shapes what technologies, what industries, what companies profit from whatever we do to protect the environment—and what technologies and companies get filed under “Great idea. Maybe next universe.”

Well, guess what, we’re doing it again. Environmental delay, that is. And the delay is rearranging where and when the profits lie among environmental industries.

One winner from delay is Ormat Technologies (ORA). The company’s has built, either for itself or for other owners, about 10% of global installed geothermal power capacity. The 27% of the company’s revenues that don’t come from geothermal come from selling or operating power plants that produce electricity from “waste” heat. The company’s recovered energy generation clients include oil pipeline companies, cement makers, and utility companies. (Ormat’s parent company Ormat Industries trades on the Tel Aviv stock exchange, but Ormat Technologies trades on the New York Stock Exchange.)

I think both those technologies are clear winners from global climate change delay.

This past weekend President Barack Obama, his Asian hosts (including China), and Denmark, the host of next month’s Copenhagen meeting on global climate change, bowed to reality and admitted publicly that no binding treaty was going to come out of the meeting. Instead the goal of Copenhagen will be a political commitment that will be translated into a binding treaty in 2010.

The delay means that as concerted international effort to lower carbon emissions, to move the world toward non-carbon emitting alternative sources of energy production, to reconfigure the world’s energy infrastructure are just that much further down the road.

Now you may think that delay in this realm is a good thing since global climate change is a bunch of hokum dreamed up by environmental extremists and venture capitalists bent on world domination. If you believe that, this isn’t an investment for you. (Unless, of course, you’re paranoid or cynical enough to believe that the environmental conspiracy will push a global climate change down the world’s throat whether it’s needed or not.)

But if you think that global climate change is real and that the world does indeed need to do something about it and PDQ, then the delay in addressing the problem turns an already interesting Ormat Technologies into a winner deserving a buy from Jubak’s Picks.

For two reasons.

First, geothermal is one of the few alternative energy technologies that can provide base load electrical power. That is geothermal power plants produce electricity 24-hours a day and 7-days a week. Wind produces electricity only when it blows, sun only when it shines. Now that’s not a problem if your wind turbines and solar cells and thermal towers are hooked up to a sophisticated electricity grid that allows you to transfer over a continent-sized grid. But I think the delay in some kind of global climate agreement exactly the kind of event that delays the huge coordinated infrastructure investment that a high-tech national grid requires. (I don’t think this delay slows down smart-grid technologies that can be deployed by single utilities. More on that in another post.) That means that when the world finally gets serious about alternatives, it’s going put up solar and wind capacity as fast as it can, but because of under-investment in continent-wide grids, it’s going to be very hungry for non-carbon base load power. Delay will have made geothermal extra valuable. (And because the world’s supply of potential geothermal sites is limited, the companies that stake out claims now will own a limited resource increasingly in demand.)

Second, the company’s recovered energy generation plants are exactly the kind of easily built quick solutions using proven technology that a world that has dithered over global climate change will need. They can be built just about anywhere that an industrial process throws off heat. We know the technology works. They can be hooked into the current grid (to provide base load power in many cases.) And they require capital in increments that lie within most corporate budgets.

Ormat Technologies plans to add about 100 megawatts of new capacity each year. A tough financing environment could keep the company from reaching that target but Morningstar still figures that Ormat could increase capacity by 10% a year through 2013. That would produce 16% growth in annual revenue.

On November 4, the company reported third quarter earnings of 52 cents a share, up from 35 cents a share in the third quarter of 2008. Revenue was $120 million, an increase of 20% from the third quarter of 2008.

As of November 17, 2009, I’m adding shares of Ormat Technologies to Jubak’s Picks with a target price of $49 a share by November 2010.

Full disclosure: I will buy shares of Ormat Technologies for my personal portfolio three days after this I posted.

Buy Goldcorp (GG)

November 5th, 2009

The Reserve Bank of India’s purchase of 200 metric tons of gold from the International Monetary Fund, announced on November 3, is a game changer for gold and investors.

It clearly signals that major sellers of gold over the last 20 years—the world’s central banks—have become buyers again. That switch introduces a new set of buyers that are capable of soaking up a significant portion of the world’s annual gold production. And it makes me recalibrate my end of 2010 target for gold from $1150 an ounce to $1350. (For more on this the Reserve Bank of India’s buy see my November 4 post http://jubakpicks.com/2009/11/04/is-gold-the-new-dollar/ .)

At $1150 an ounce it was too late to buy into the gold play with gold already trading near $1100. At $1350 an ounce there’s still time—especially if you make your play by buying shares of a gold miner that’s showing expanding production.

Which one would I pick?

With this post I’m adding Goldcorp (GG) to Jubak’s Picks with a target price of $48 a share by October 2010.

Goldcorp reported third quarter earnings after the market close on November 4. The short-term news was that the company beat Wall Street earnings estimates by three cents a share and revenue projections by $77 million.

In the long-term, however, the more important news was, first, that the company increased its estimate of gold production for 2009 to 2.4 million ounces from 2.3 million ounces, and, second, that total cash costs for producing an ounce of gold would be $300 an ounce in 2009 rather than the $365 an ounce estimated earlier.

This is a great example of the kind of leverage investors get from gold mining stocks over owning gold itself. The company is increasing profits by producing more gold and by earning a higher spread on each ounce because of falling costs.

Add this to the general argument in favor of rising gold prices and you’ve got a solid reason to buy Goldcorp.

Gold prices have been climbing as the value of the U.S. dollar has been falling. Anyone who wants to hedge against a decline in the world’s reserve currency has been buying gold and that has sent the price upwards.

To those buyers you can now add the world’s central banks.

For the last 20 years, the world’s central banks had been sellers. In 1989 the global average for the percentage of currency reserves held in gold peaked at 32.7%. It’s been all downhill since then with central banks year by year selling gold. By the end of 2008 just 10.3% or the world’s reserves were in gold.

That trend has now gone into reverse, the buy by the Reserve Bank of India signaled. And central banks, especially developing economy central banks have a lot of catching up to do.

China has been quietly buying gold for years, doubling its holdings over the last six years. But the country still holds only 2% of its reserves in gold.

Even after India’s big buy, that country has just 6.2% of reserves in gold.

Contrast that not just to the 32.7% peak in 1989 or to the 10.3% global average at the end of 2008, but to the 60% average in Europe or the 77% of reserves that the U.S. holds in gold.

The Reserve Bank of India had 20% of its reserves in gold fifteen years ago. Before this recent buy, reserve levels had tumbled to just 3.2% in gold.

A buy the size of India’s is certainly big enough to change the supply/demand side of the global gold market. Its purchase of 200 metric tons of gold is equal to about 8% of the total annual output from the world’s gold mines.

Full disclosure: I will buy shares of Goldcorp for my personal portfolio three days after this is posted.

Update Taiwan Semiconductor (TSM)

January 29, 2010

Everything is working out exactly as I planned when I bought Taiwan Semiconductor Manufacturing (TSM) on October 20, 2009—with the small exception of the share price. When the company reported fourth quarter 2009 earnings on January 28, it confirmed the two major parts of my investment thesis. First, a global recovery in the PC, wireless handset, and digital consume product markets has started to drive up sales. In the fourth quarter sales grew by 43% from the fourth quarter of 2008. For 2010 Taiwan Semiconductor forecast a 29% growth rate for the semiconductor foundry industry. Second, Taiwan Semiconductor’s investment in research and development and in new manufacturing plants has so far distanced the company from its competitors that it is seeing rising prices and margins for its next generation chips. In 2009 Taiwan Semiconductor worked through problems with electricity leakage in its new 40 nanometer generation of chips that had kept yields low. (In semiconductor manufacturing how many working chips you get from each piece of silicon is a critical determinant of profit margin. For example, if enough electricity leaks from a chip's circuits—especially in chips that pack transistors extremely tightly together, the manufacturer has no alternative but to throw the chip away.) Competitors are still struggling with these problems and that’s given Taiwan Semiconductor an effective market share of 91% in 2009 in the newest and most profitable 40 and 28 nanometer chip generations, according to Deutsche Bank. And because of the company’s manufacturing and R&D advantages that share, Deutsche Bank estimates, will be 89% in 2010 and 86% in 2011. The company’s customer list for 40 nanometer chips reads like a who’s who of next generation technology products: Intel (INTC), Qualcomm (QCOM), Broadcom (BRCM), Marvell Technology Group (MRVL), and Nvidia (NVDA). That’s a long time to have control of a new chip cycle. And exactly when the profit margins on a chip generation are highest. The only thing wrong with shares of Taiwan Semiconductor is the current correction in the technology sector. Once that’s over—and it will end—I think the stock price is headed up on the fundamentals. See why you want cutting edge technology stocks in your portfolio to combat the effects of a profitless recovery http://jubakpicks.com/2010/01/19/get-your-portfolio-ready-for-the-profitless-global-economic-recovery/ As of January 29, I’m upping my target price slightly to $12.50 a share by May from the former target of $12. Full disclosure: I own shares of Marvell Technology Group, Qualcomm, and Taiwan Semiconductor Manufacturing in my personal portfolio.

Buy Teva Pharmaceutical (TEVA)

October 13th, 2009

No matter exactly what health care reform bill (even no bill) emerges from Congress this year, the pressure to get costs out of the healthcare system is just going to get more intense. (For why see my October 13 post, http://jubakpicks.com/2009/10/13/losers-and-5-winners-from-health-care-reform-and-why-well-be-fighting-over-who-pays-for-a-decade/ )

In that effort requiring that health plans replace proprietary drugs with generics is an easy way to cut costs (or to look like you’re cutting costs).

So generic drug makers win once, because any legislation will expand the number of insured able to afford drugs, and twice, because economics will continue to move patients, doctors, and health care bill payers to generics.

No wonder that Teva Pharmaceutical Industries (TEVA) is guiding Wall Street to 30% earnings growth in 2010.

Teva is the world’s largest generic drug maker. In generic drugs bigger is better since it allows a company to spread development, manufacturing, and marketing costs over a larger customer base. So, for example, the company’s 2008 acquisitions of Barr, the #4 generic drug company, and Bentley Pharmaceuticals, added market share in Europe, which in 2008 accounted for just 28% of the company’s sales.

In the longer range—say five years out or so—Teva looks to be one of the best-positioned generic companies to tackle the new market for biogenerics. These drugs are generic versions of the drugs developed by biotech companies. So far this market has been extremely limited in size by the lack of an appropriate regulatory framework for ruling on what constitutes a safe generic version of a biotech drug. Legislation is likely this year or next and Teva is one of a small number of generic companies with the financial resources to tackle this new market. The company estimates that it will cost about $100 million to $150 million per drug to reverse engineer a biosimilar drug from a biotechnology company versus about $10 million to $15 million to reverse engineer a conventionally small molecule drug.

As of October 13, 2009, I’m adding Teva Pharmaceutical Industries to Jubak’s Picks with a target price of $61 a share by October 2010. That values Teva at about 14 times my estimate of 2010 earnings of $4.35 a share. As of October 13, the stock traded at 14.25 times Standard & Poor’s estimate of 2009 earnings.

Full disclosure: I do not own or control shares of any company mentioned in this post.

Update Cisco Systems (CSCO)

February 3, 2010

The recession is certainly over for Cisco Systems (CSCO). Today, February 3, after the market close the company reported earnings for the quarter that ended in January (Cisco’s second quarter of fiscal 2010) of 40 cents a share. That was 5 cents a share better than Wall Street projections. Tech stocks had already finished strong for the day before Cisco reported. The positive surprise could be enough to keep what was one of the weakest sectors in January on the mend. (For more on the January slide in the technology sector and what it means for the market as a whole see my post http://jubakpicks.com/2010/01/28/odds-that-this-is-a-10-correction-and-not-just-5-rise-as-tech-stocks-sink/ ) Chances are pretty good since unlike a lot of tech companies that have followed great earnings reports with disappointing guidance, Cisco raised projections for the next quarter in its conference call. In the call Cisco Systems projected fiscal third quarter revenue would grow by 23% to 26% from the third quarter of fiscal 2009. That works out to revenue of $10 to $10.3 billion. Wall Street had projected $9.5 billion for the quarter. This quarter revenue at Cisco climbed 8% from the second quarter of fiscal 2009 to $9.81 billion. The Wall Street consensus had looked for revenue of $9.41 billion. Cash flow from operations climbed to $2.5 billion in the quarter. That was up from $1.5 billion in the first quarter of fiscal 2010 but down from the $3.2 billion of the second quarter of fiscal 2009. Cisco Systems finished the quarter with $39.6 billion in cash and cash equivalents, a $5.2 billion increase from the second quarter of fiscal 2009. Looking at that cash balance, I’d say Cisco has enough cash to keep buying back its stock—the company bought back 63 million shares for $1.5 billion in the second quarter of 2010—and simultaneously stay on the hunt for acquisitions as well. As of February 3, I’m leaving my target price at $29 by June 2010. Full disclosure: I own shares of Cisco Systems in my personal portfolio.

Buy Statoil Hydro (STO)

September 23rd, 2009

Norway’s next oil frontier just got a little closer–and there’s only one stock to play it.

I don’t follow Norwegian politics very closely so you’ll have to forgive me if I’ve been a little slow on the uptake.

The re-election of Norwegian Prime Minister Jens Stoltenberg on September 14 moves the country a little closer to opening the oil-rich but environmentally fragile Lofoten Islands to oil and natural gas drilling.

In the country’s general election parties that favor exploration and production in Norway’s share of the Arctic waters including the Barents Sea added seats. The government is still a coalition with a fragile majority so no one expects quick movement on the contentious issue of drilling in this area, one of the most pristine in Norway. But with Norway’s management plan for the area–which is currently out of bounds for drilling–up for review in early 2010, the odds are that Norway will get more aggressive in exploiting the potential reserves in the waters of the Arctic continental shelf. On the latest numbers a majority of voters are not opposed to drilling in this region.

And the prime beneficiary of any expansion of drilling in the area will be Statoil Hydro (STO), Norway’s national oil company.

Shares of Statoil have been depressed by questions of how the oil company will replace production from its old and declining oil and gas fields off the Norwegian coast. The company doesn’t have a stellar record in finding reserves outside its home waters, so expanding production from Norway’s Arctic continental shelf is critical for Statoil. Estimates say that the Lofoten region holds 2 billion barrels of oil equivalent.

You can see the potential upside for Statoil in the Arctic continental shelf in the Shtokman project of  Russia’s Gazprom  (OGZPY). Statoil Hydro and Total (TOT) are partners with Gazprom in the company building the infrastructure to develop the field. (Just to be clear Gazprom owns the gas.) Thanks to the 2006 merger of Statoil with Hydro the joint company is one of the world’s leading oil infrastructure providers. The giant Shtokman field is projected as the world’s largest offshore gas field with natural gas reserves of 3.8 trillion cubic feet. Gazprom projects that gas will  flow in 2013 if the construction partners can solve the infrastructure problems posed by one of the world’s most hostile climates. (For example, how do you protect drilling platforms from giant icebergs set loose by global warming?)

Nothing that Statoil has discovered in these waters in recent years rivals Shtokman. But the company has added about 233 to 335 million barrels of oil through discoveries in the Norwegian Sea. (On the plus side, nothing Statoil has discovered will be nearly as expensive to develop as Shtokman where final costs are estimated at $30 billion.) And all these discoveries are close to existing infrastructure.

At the current price of about $23 a share the market is assuming that Statoil Hydro will collect cash flows from its proven reserves for another 10 years at a price of about $58 a barrel. That pretty much ignores the potential in the Arctic continental shelf and of the company’s other drilling ventures including  the Gulf of Mexico and the Caspian basin. It also, I think, undervalues Statoil Hydro’s oil infrastructure business (with its deep sea drilling expertise) and its natural gas pipeline system. With Gazprom the company essentially has a duopoly on delivering natural gas to Europe. (The company recently constructed its first floating wind turbine. I don’t know how to value Statoil’s business in this area.)

I think you can take your time in accumulating this one since the long-term story is unfolding slowly. I’m adding the shares to Jubak’s Picks today with a target price of $28 a share by July 2010.

(Full disclosure: I own shares of Statoil Hydro in my personal portfolio.)

Update GulfMark Offshore (GLF)

February 2, 2010

Lots happening at GulfMark Offshore (GLF) over the last quarter. Much of it good. But nothing that yet indicates the decisive turn in the company’s business that I’ve been looking for. The best I can say is that it feels closer. First, at the end of October the company announced a restructuring, scheduled for completion in the first quarter of 2010, that would merge the existing GulfMark Offshore with a wholly owned subsidiary New GulfMark Offshore, in order to limit the percentage of stock owned or controlled by non-U.S. citizens to a maximum of 22%. This is intended to preserve the company’s status as a U.S. citizen under the Jones Act, which governs maritime activity in U.S. ports. I’m sure this has engendered confusion and probably some selling but the reorganization is a neutral event (other than for the confusion that led to selling) for most investors since each common share of the existing company will be converted into one share of New GulfMark Class A stock. The new stock will be governed by the ownership provisions of the Jones Act. Second, on December 17 GulfMark Offshore announced that it had arranged a new $200 million term-loan facility to replace the prior loan facility of $220.6 million.  The interest rate on the new loan (Libor plus 2.5 percentage points) is a modest step up from the old facility (LIBOR plus 1.5 percentage points). The new facility runs through December 2012. The takeaway message here, though, is that GulfMark was able to roll over the loan and extend the maturity without paying an arm and a leg for the privilege. This is an important sign of health in a financial market where rolling over a loan isn’t guaranteed. None of the company’s debt now matures before 2012 Third, the company announced that in the third quarter revenue fell to $90.8 million, a 27% drop from the third quarter of 2008. The company’s oil services business was strong in Southeast Asia but weak in the Gulf of Mexico and the North Sea. GulfMark CEO Bruce Streeter told Wall Street analysts and investors to expect a difficult fourth quarter (GulfMark reports on February 10) but noted that the company’s new loan facility and the delivery of three new ships in the first half of 2010 put the company in a good position for the eventual turnaround in oil company capital spending budgets. (For my take on the economy in 2010 see my post http://jubakpicks.com/2010/01/22/2010-well-the-first-half-anyway-looks-good-for-stocks-despite-the-current-correction/ ) As of February 2 2010, I’m lowering my target price for GulfMark slightly to $37 a share from the prior $41 and stretching out the schedule to December 2010 from September. Full disclosure: I don’t own shares of any stock mentioned in this post.

Update Johnson Controls (JCI)

February 4, 2010

Shares of Johnson Controls (JCI) were up more than 2% yesterday, February 3, on news that Wal-Mart (WMT) had named Johnson Controls as its sole source provider for its U.S. stores for automotive, marine, motor sport, and lawn and garden batteries Goldman Sachs also upgraded the stock yesterday to neutral from sell. As of February 4, I’m leaving my target price at $36.27 by July 2010. Full disclosure: I own shares of Johnson Controls in my personal portfolio.

Update Microsoft (MSFT)

October 23, 2009

When I added Microsoft (MSFT) to Jubak’s Picks on July 24, 2009 after the company announced results for its fiscal fourth quarter, I wrote “This is as bad as it gets.” After its October 23 earnings release the company is now saying the same thing. In the post-earnings conference call Microsoft CFO Chris Liddell said that the fourth quarter may have been the bottom. Certainly the company is behaving as if it were: Microsoft resumed buying back shares in the quarter that ended in September with purchases of 1.4 billion shares. First quarter earnings for fiscal 2010 fell to 40 cents a share, but that beat the 32 cents expected by Wall Street. Revenue declined by 14% from the first quarter of fiscal 2009 to $12.92 billion. That big drop in revenue came because Microsoft deferred $1.47 billion in revenue from customers upgrading to Windows 7.  Put that back in and revenue came to $14.39 billion, a 4% decline from the year earlier period. Microsoft beat Wall Street estimates this quarter by cutting costs by more than Wall Street expected. Operating costs dropped 6.9% after the company made its first ever company-wide firings, slashed travel costs and cut the prices it pays vendors. In the conference call the company increased its cost-cutting target. The big question going forward, however, isn’t about cutting costs but about how many copies of the new Windows 7 operating system Microsoft can sell. Here too the news was good. Deferred revenue came in above analyst expectations because pre-orders of Windows 7, which officially went on sale on October 22, were higher than projected. The company sold more copies of Windows in the quarter than in any other previous quarter with sales fueled by demand for Windows 7 and by sales to netbook makers of copies of the older Windows XP operating system. In the conference call Microsoft said that it sees the potential for a corporate PC “refresh” beginning in calendar 2010 but expects companies to stretch out their replacement of older PCs (and older operating systems from Microsoft) over a couple of years. Microsoft also backed up numbers from Intel (INTC) signaling that the PC market could actually show growth of 0% to 2% in calendar 2009. Earlier in the year market analysts had projected that PC sales would decline again this year. (For another way to play the upturn in PC sales, see my recent buy of Taiwan Semiconductor (TSM) http://jubakpicks.com/2009/10/20/buy-taiwan-semiconductor-tsm/ ) As of October 23, I’m increasing my target price for Microsoft to $33 by June 2010 from the prior $31 a share. Full disclosure: I own shares of Microsoft in my personal account.

Update Potash of Saskatchewan (POT)

February 1, 2010

Investors get gun shy. Make every attempt to buy into a market correction a big loser and most investors won’t put a dollar in even when there’s concrete evidence of a turnaround. Companies do too. After seeing every projection for the price of potash fertilizer and for the company’s earnings turn out to be laughably high for the last year, management at Potash of Saskatchewan (POT) has finally come out with guidance that strikes me as laughably low. On January 28, the company announced fourth quarter earnings of 80 cents a share. That was 2 cents a share above the Wall Street consensus but a huge drop from the $2.03 a share in the fourth quarter of 2008. And then the company dropped its bomb. In the first quarter the company will earn just 70 cents to $1 versus Wall Street’s expectations for $1.10 a share. For all of 2010, earnings will total $4 to $5 instead of the $5.89 that analysts now project. The numbers don’t make a whole lot of sense except as a reaction by the company to seeing its guidance get smashed to the downside in quarter after quarter. For example, Potash announced that it sold more potash in North America in the first three weeks of 2010 than it had in the first eight months of 2009. Working backwards Potash is projecting potash prices of just $365 a metric ton well into 2011, RBC Capital calculates. That’s not much of a step up from the $336 a ton realized in the fourth quarter, even though demand has picked up and the company believes that prices will climb in 2010 from the $350 benchmark set in recent contracts. As of February 1 I’m keeping my target price at $130 a share but stretching out the schedule to July 2010 from March 2010. Full disclosure: I own shares of Potash of Saskatchewan in my personal portfolio.

Update Qualcomm (QCOM)

Companies have characters. If you had a friend like Intel (INTC), for example, you know he’d be up late at night figuring out a way to make the family car run just a bit better than everyone else’s. If you had a friend like Wal-Mart (WMT), you wouldn’t be surprised to find him out in his backyard on a Saturday building a big shed to hold all the stuff he bought cheap in bulk. And if you had a friend like Qualcomm (QCOM), he would drive you crazy by never telling you what he was going to do until well after it happened. I’ve owned Qualcomm off and on over the last decade and I’ve got the scars to prove it. This company just can’t seem to figure out how to tell Wall Street when enthusiasm is running too high and earnings are about to disappoint. And that’s exactly what happened—again—when the company announced earnings for the first quarter of the 2010 fiscal year after the market close on January 27. The problem wasn’t what the company said about earnings for the just completed quarter. Qualcomm reported earnings of 62 cents a share, 6 cents a share above Wall Street expectations. It was the surprisingly dour guidance for the second quarter that did the damage. Second quarter revenue will be just $2.4 billion to $2.6 billion. That’s way below analyst projections of $2.75 billion. For the entire fiscal 2010 year the company told investors to expect $2.10 to $2.30 a share in earnings (Wall Street had been looking for $2.26) and revenue of $10.4 billion to $11 billion (Wall Street had projected $11.06 billion.) Where did that come from? The guidance left analysts and investors scratching their heads. How come a company that is clearly beating competitors, gaining market share, and rolling out impressive new products at the rate that Qualcomm is won’t turn in better results for 2010? Qualcomm should be cooking on all burners? So what’s wrong? And because the answer to that question isn’t clear, because the company hasn’t done even a half-way decent job of explaining why this is happening, investors and analysts have been left to wonder what it is that they’re missing. And if you can’t figure out why a company has surprised you once, you certainly are entitled to worry that it’s going to surprise you with even worse news just a little bit down the road. The stock is now down almost 17% from the January 27 close. And you know what? I don’t blame investors and traders for selling. Qualcomm has done a terrible job at explaining what’s going on at Qualcomm. That said, while I don’t blame sellers for selling in this situation, I do think they’re making the wrong call. I think the reasons for Qualcomm’s guidance and the apparent disconnect between the company’s good news on everything from market share to design wins and its disappointing projections for the rest of fiscal 2010 are actually pretty clear. Qualcomm isn’t an Intel. It isn’t a great manufacturing company. It’s a great intellectual property company that has a pretty great record of coming up with new chip designs that put it at the center of one advance in the wireless digital revolution or the other. But it’s never been very good at plotting out a road map that insures that those breakthroughs in intellectual property get transferred into smooth or even simply predictable growth. The problem has gotten worse, it seems, as Qualcomm has gotten bigger and as the company’s revenue stream has shifted from fees it collects from other companies that license its intellectual property to revenue it collects from the sale of actual products. So, for example, revenue from Qualcomm Technology Licensing came in at almost exactly what analysts were expecting and the continued decline in what Qualcomm collects in fees for each device was well understood on Wall Street. On the other hand, Qualcomm CDMA Technologies surprised to the upside on operating margins for the first quarter of fiscal 2010 and then provided absolutely puzzling guidance for the next quarter. The company said it would ship 89 million to 92 million devices—well ahead of what much of Wall Street was expecting and then lowered revenue guidance for the year. If this was Intel, Wall Street would get what’s happening immediately. As Intel does all the time, Qualcomm is cutting prices on its older chips—to keep market share and to make life tough for competitors—as it comes out with new, smaller platform products such as the new Snapdragon chips that Taiwan Semiconductor Manufacturing (TSM) is manufacturing on its cutting edge 40 nanometer production lines. When Intel does this kind of transition, it produces exactly the kind of bump in the road that Qualcomm just announced, but everyone on Wall Street who follows Intel understands this part of the company’s strategy and many of us who own Intel actually try to time our buys and sells by where the company stands in this transition from one chip generation to another. Qualcomm doesn’t have that history. In its years as an intellectual property company collecting licensing fees the company didn’t practice this kind of transition in manufacturing technologies. Qualcomm is a company learning new tricks. And so are Qualcomm investors. I think it’s worth sticking with the stock on its short-term very bumpy ride because in the long term the company is indeed a key player in a new generation of digital devices As of January 29, I’m going to cut my target price to $52 from an earlier $56 and stretch out the time period to December 2010 from March in recognition of the damage done by way the company hasn’t explained these bumps to investors. But I’m going to keep the stock in my Jubak’s Picks portfolio.  Full disclosure: I own shares of Qualcomm and Taiwan Semiconductor Manufacturing in my personal portfolio.

Update PepsiCo (PEP)

October 8, 2009

Before the stock market opened on October 8, PepsiCo (PEP) reported third quarter earnings of $1.08 a share (5 cents above Wall Street projections) and revenue of $11.08 billion. The earnings number was 5 cents a share above Wall Street earnings estimates, but the revenue number was $170 million light. Revenue indeed declined by 1.5% from the third quarter of 2008. Earnings were up just slightly from the $1.06 reported in the third quarter of 2008. Two factors held down results. First, the world may be emerging from recession but growth was still very low or even negative in the biggest parts of PepsiCo's market (North America and Europe) for much of the quarter. Beverage volume fell by 6% in the Americas and snack volume was down 1% in Europe. Asia/Middle East/Africa revenue climbed 13% and operating profit was up 52% but volume in these market is still so much smaller than that in the company's developed economy markets that this performance wasn't enough to make up the difference. Second, currency effects hurt revenue and earnings. PepsiCo said that in constant currency terms--correcting for changes in the exchange rates in the markets where the company does business--revenue would have been up by 5% (instead of down by  1.5%) and earning would have been up by 8%. Going forward PepsiCo anticipates that currency effects will take a "mid-single digit" percentage bite out of earnings growth. In constant currency terms the company is looking for 11% to 13% earnings growth in 2010. (Those projections include cost-cutting achieved by PepsiCo's acquisition of its two largest North American bottlers. PepsiCo said it expects that deal to close in the first half of 2010.) So why did the stock tumble? Because it had climbed going into earnings and this is a sell on the news kind of market. PepsiCo disappointed momentum investors by merely affirming its previous guidance on earnings and revenue for the rest of 2009. Without new good news, they sold. If' you've been looking to get into PepsiCo, this drop is a good entry point. I'm not changing my current price target at all today. I raised the target price to $68 a share on October 2. I'm leaving it at that level.

Update McDonald’s (MCD)

January 22, 2010

Ronald McDonald delivered a big surprise this morning. McDonald’s announced fourth quarter earnings of $1.11 a share before the market opened on January 22. That was 9 cents a share better than Wall Street had expected. In the fourth quarter of 2008 the company earned 87 cents a share. Revenue climbed 7.3% from the fourth quarter of 2008 to $5.97 billion. That too was above the Wall Street consensus (at $5.94 billion.) But the biggest surprise came on global comparable store sales There the company reported an increase of 2.3%. Wall Street had been expecting comparable store sales to fall by 0.03%. Comparable store sales growth was, however, lower than last quarter’s 3.8% increase. Europe was the star, Asia was a disappointment, and the United States was the big surprise when it came to regional comparable store sales.  Longer hours and refreshed restaurants in Europe added up to a 4.8% climb in comparable store sales for the quarter. Analysts had projected 4.3% growth. In Asia, the Middle East, and Africa comparable store sales increased 1.5% but that was well below the 2.4% growth projected by Wall Street. McDonald’s is still struggling in China where, despite the economic recovery represented by 10.7% GDP growth in the fourth quarter, many Chinese are still worried about their personal economy and are opting to save money to eating at cheaper local alternatives to McDonald’s. In the United States, the toughest market for any restaurant company over the last year, McDonald’s addition of free Internet access and its $1 breakfast menu managed to earn the company a 0.1% increase in comparable store sales for the quarter. Analysts were expecting that U.S. comparable store sales would fall by 0.6%. As of January 22, 2010 I’m leaving my target price at $72 a share by September 2010. On January 22 the stock was paying a 3.4% dividend yield.

Update Energy Transfer Partners (ETP)

July 30, 2009

The longer the Federal Reserve promises to keep interest rates low, the more valuable Energy Transfer Partners (ETP) is and the longer I want to hold it. In its press release from its June 24 meeting the Federal Open Market Committee said it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." Units of Energy Transfer Partners now yield 8.03% versus a Fed funds target rate of 0% to 0.25%. As of July 29, I'm raising my target price for this master limited partnership to $49 a unit by June 2010 from my prior target of $47 by March 2010.  (Full disclosure: I own units of Energy Transfer Partners in my personal portfolio.)

Update Transocean (RIG)

November 9, 2009

No real surprises in the third quarter earnings reported by Transocean (RIG) on November 4.

The company continued to stack jack-up rigs as that segment of the offshore drilling market showed continued weakness. Deep water activity continued to heat up in the waters off Brazil but that wasn’t enough to offset the decline in the shallow and mid-water markets.

For the quarter Transocean reported earnings of $2.19 a share, down from $3.30 in the third quarter of 2008. Revenue dropped to $2.82 billion from $3.19 billion.

Earnings per share, excluding one-time items, were 2 cents a share above the Wall Street consensus.

Those drops in earnings and revenue were clearly forecast in Transocean’s fleet report in the days before the earnings release.

In that report the company said it had stacked, or taken out of service, another shallow-water jack-up rig bringing the total to 23 jack-up rigs stacked out of the 65 the company owns. Another has been idled, a stage short of stacked.

In the mid-water market the company reported that it now has six rigs idled. In September Transocean had predicted that it would have seven of its 27 mid-water rigs idled by the end of the year.

By idling and stacking rigs so aggressively, Transocean, the owner of largest rig fleet in the world, has stabilized day rates even in this downturn. The average rate for the company’s deepwater rigs rose by 14% and the average day rate across Transocean’s fleet climbed by 17%.

The issue this quarter, as it was last quarter, is when the turn will come in the market for offshore rigs. The company continues to talk about a recovery in the first half of 2010. The company is burning through about $1 billion of its order backlog every month but with $32 billion in backlog as of November 2 the company has enough backlog to see it through this downturn unless it extends well past the mid-year timetable for a recovery.

As of November 9, I’m leaving my target price at $105 a share by June 2010.

Full disclosure: I own shares of Transocean in my personal portfolio.

Update Middleby (MIDD)

November 23, 2009

On November 10 Middleby (MIDD) reported third quarter earnings of 83 cents a share, four cents a share better than Wall Street projections, but still 19% down from the third quarter of 2008. Revenue fell 7.5% from the third quarter of 2008. At $154 million revenue was about $10 million below the Wall Street consensus. If you used a magnifying glass, you could find signs of improvement in the revenue number. In the second quarter of 2009 revenue was down 8.6% from the second quarter of 2008. In the third quarter of 2009 the year-to-year decline was just 7.2%. And in the earnings number too. Gross margin climbed to 40.3% in the quarter from 38.9% in the third quarter of 2008. Middleby continues to do what it has always done.  Acquire companies to increase market share. Put acquisitions and continuing operations under the cost-cutting knife. Fund acquisitions out of cash flow. And pay down debt. In the quarter Middleby paid own $26 million in debt. That helped trim interest costs by $371,000 in the quarter. The company projects that conditions in commercial kitchen equipment/cooking unit business will remain “challenging” (their word not mine) into the first half of 2010. I think this is a well run company that is positioned to take advantage of any economic recovery and the resulting upturn in store openings among restaurant chains and an increase in those companies’ spending on new equipment from Middleby that can reduce their operating costs. As of November 23, 2009 I’m keeping my target price at $65 a share but stretching out the time table to November 2010 from July 2010. Full disclosure: I own shares of Middleby in my personal portfolio.

Update Rayonier (RYN)

September 18, 2009

Considering that investing in timber seems to be falling out of favor, shares of Rayonier (RYN) have held up extremely well over the last six weeks. The stock is essentially unchanged at $42.96 on September 18 from its August 5 price of $42.29.  Now normally I don’t like to own shares of any company when its sector is falling out of favor—it puts the trend against me rather than with me—but in this case I’m willing to hold on because the negative short-term trend is a big long-term positive.  In the short-term timber seems to have fallen out of favor with pension and endowment fund managers who had stocked up on timber land in recent years. These managers liked timber land because it produced above market returns and didn’t move up and down in lock-step with stocks. But these investors seem to be cutting back on their allocation to so-called alternative assets as the overall returns on their portfolios slide. That may take a bit off Rayonier’s price in the short-term but in the longer term it gives the company a chance to put its strong balance sheet to work buying the land that pension and endowment fund managers are looking to sell. When it reported earnings at the end of July, company management said it saw opportunities to add to the 2.2 million acres of land that the company owned at the end of 2008. (In fact, Rayonier has grown its timberland base by about 2% over the last six quarters, according to Credit Suisse.) \ With the home building industry in a deep slump, this land isn’t in demand for home building now but it will be. With Rayonier’s other businesses throwing off more than enough cash to pay the $2 a share annual dividend, these land acquisitions are laying up value for the future. As of September 18, I’m raising my target price on Rayonier in my 12-18 month Jubak’s Picks portfolio to $46 a share by June 2010 from my previous target of $39 a share. Rayonier is also a member of my long-term Jubak Picks 50 portfolio.   (Full disclosure, I own shares of Rayonier in my personal portfolio.)

Update Thompson Creek Metals (TC)

January 25, 2010

Today Thompson Creek Metals (TC) confirmed what the market had long expected: that when the company reports its fiscal 2009 financial results in February, it will switch to U.S. GAAP from Canadian accounting rules. The big impact will be that the company has to mark its outstanding 24 million warrants to fair value each quarter and take a one-time charge or credit to adjust them to that fair market price.  The result for fiscal 2009 will be a pre-tax, non-cash charge of about $93 million. The charge will be large enough, the company said, to turn net income for fiscal 2009 negative. The change should have no effect on the price of the shares (no matter whether it should or not) since Wall Street analysts and institutional investors have 1) known this change was coming for months and 2) normally look past this kind of non-cash accounting charge anyway. More significant is the price of molybdenum, which had rallied by about 25% in the four weeks through January 22 to reach nearly $15 a pound from $12 in mid-December. (Prices have retreated a bit since then on worries about when the Chinese government would slow the country’s economy.) The  big questions for Thompson Creek Investors—and the stock is in my Jubak’s Picks, Jubak Picks 50, and personal portfolios—is why the price jump and where the price of molybdenum might be headed. It looks, and I emphasize “looks,” like cuts in China’s molybdenum exports, an increase in U.S. steel production, and a new contract for molybdenum on the London Metal Exchange that has resulted in a small increase in demand for the metal from traders have all played a part. I don’t see any strong reason to change my projection that molybdenum prices could reach $16 a pound in 2010, but I think the odds of that happening are now certainly much higher. And molybdenum could reach that price level in the first half of the year instead of in the second half as I was expecting. As of January 25 2009, I’m raising my target price slightly to $17.00 a share by July 2010 from the current $16.50. Full disclosure: I own shares of Thompson Creek Metals in my personal portfolio.

Update Yara International (YARIY.PK)

January 11, 2010

Do Norwegian’s grin? Surely that was a trickle of a smile at Yara International's (YARIY.PK)  annual update for investors on December 10. The Norwegian fertilizer company reported that the nitrogen fertilizer market was headed for demand-driven price increases in the first half of 2010. Urea supply, a major form of nitrogen fertilizer, should remain tight in 2010 with only three projects likely to come on line. Supply (ex-China) in 2010 will increase by 3%, according to Deutsche Bank, while demand will climb 5%, the bank projects. Chinese exports are likely to remain limited in 2010 as higher production costs limit the competitiveness of Chinese urea. Yara International plants ran at about 63% of capacity in 2009 and these scenarios should result in a pickup to near 80% of capacity. Time to up my targt price, I believe. As of January 10, 2010 I’m raising my target price for Yara International to $53 a share by November 2010 from the prior target of $47.20. (For more on my other fertilizer stock Potash of Saskatchewan (POT) see my post http://jubakpicks.com/2010/01/05/update-potash-of-saskatchewan-pot-5/ ) Full disclosure: I own shares of Yara International in my personal portfolio.

Update Maxwell Technologies (MXWL)

December 2, 2009

I hate it when this happens: A perfectly good growth stock gets adopted by momentum investors. It soars in the days before the company issues earnings on the hope that the good news already in the stock price will turn into great news in the quarterly report. When it doesn’t, the stock crashes as momentum investors move on. Unfortunately, this could also scare growth investors into selling when they should be hanging on or even buying more. (For coping with this twitch-inducing market see my November 20 post http://jubakpicks.com/2009/11/20/nervous-afraid-to-stay-in-but-scared-to-get-out-join-the-club-and-read-my-three-strategies-for-coping/ ) That’s exactly the story of Maxwell Technologies (MXWL) in the last month or so. The stock rocketed from $15.85 on September 21 to $21.53 on October 19 and then, after disappointing quarterly earnings, sank back toward those September numbers. On November 30, the stock traded at $16.44.   Were the third quarter numbers so bad that they damaged the long-term growth story? Disappointing in the short-term, sure, but from a long-term perspective I’d actually call them encouraging. For the third quarter the company showed a loss of $18 cents a share. 11 cents of that resulted from the company marking to market warrants associated with its 2005 convertible debt offering. Excluding those, the loss at 7 cents a share was 3 cents a share worse than the consensus Wall Street forecast. Disappointing, definitely, but if you own this stock for more than quarter to quarter results—which I recommend for small company growth stocks, you should be encouraged by the company’s progress. For example, Maxwell Technologies continued to penetrate new markets. The company is near completion for its first $13.5 million order of ultracapacitors for China’s diesel-hybrid bus market. Maxwell expects follow-on orders in 2011. And in the critical auto market Maxwell Technologies announced another win with Continental AG picking the company’s ultracapacitors for use in automobile electrical systems starting in 2010. The company expects deliveries to begin in the fourth quarter of 2009 and to reach 10,000 to 20,000 units in 2010. The ultracapacitor content in Continental’s system will range from $50 to $200 a car with the company estimating the average content near $100. Like most young growth companies with products that are still ramping volumes, Maxwell’s problem has been that it is still losing money on its ultracapacitor business. Here too Maxwell showed progress this quarter with gross margins climbing to 38% from 36% in the second quarter as a result of the company moving some production capacity to China. As of December 2, 2009, I’m keeping my target price at $25 a share by July 2010. Full disclosure: I own shares of Maxwell Technologies in my personal portfolio.

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