My Own Analyst

CBR: Trash or Treasure

I didn't see this until a few moments ago, but this IT outsourcing company has been hammered.  I am familiar with it because they brought in improved management over the past year and it's very beat-up to begin with.  The company took a large write-down, the most disturbing of which highlighted bad accounting systems (a cost over-run that they just figured out on a fixed-price contract).  The new CFO, who just completed his first full quarter, has done what appears to be a rather complete clean-up job.  Unfortunately, their biz isn't so great right now and they are suspending guidance.

I am going with a mild Treasure on this one - it seems like a terrible overreaction.  The stock was pretty cheap in the first place, and new management is likely to improve things.  Not on my watchlist and not super confident, but wanted to share...

More thoughts on Housing

I am getting bullish on home construction.  I will share a link soon to an article that I submitted to TradeKing highlighting the builders.  The better way to play, though, is LOW, MLI and maybe LAYN.  I wanted to share this upbeat view, though it's out of the government:

http://www.bloomberg.com/news/2011-07-03/home-prices-very-unlikely-to-fall-further-u-s-s-donovan-says.html

 

File this under "contrarian" and "turnaround"!

Question on Buying Losers

Eric asks:

With respect to SKX, with all of the upside that you see, it probably won’t occur until the market as a whole starts seeing this opportunity. Why not wait until the chart improves and we see a little momentum before increasing the position?

This is a very good question, and one that I often ask myself of my clients when they are looking at falling stocks to buy.  After all, if I really think that this stock is going to 26 or so, we could wait until 15 and it would still be fantastic. 

9 out of 10 times, I accept your logic and preach it myself.  In this case, and I could certainly be wrong, a few factors have contributed to my exercise in knife-catching.  First, the stock is very oversold.  Second, it is extremely cheap to a conservative estimate of asset value.  Third, were it not for the maniacal focus on inventory, the stock would be flying (look at other retailers).  Fourth, the stock does appear to have bottomed.  Finally, in my mind, paring another loser to buy this loser (in part), keeps us exposed to various strategies (growth, value, small, large etc.).

BCSI: Trash or Treasure

Blue Coat Systems (BCSI) has plunged to levels not seen since Labor Day, and I believe that this could be a good entry.  Note, BCSI isn't on my watchlist.  The company has a new CEO, and the founder left shortly after he arrived, which was a little disturbing to me.  The new guy has a lot of fixing to do, from what I recall, but he is a technology veteran who most recently got Avocent sold to EMC.  There have been rumors ever since he showed up, but they are premature in my view.  I do wonder somewhat about the competitive space, but the stock is cheap enough to bet on the new guy most likely.  At 20, the stock trades at 1.3X EV/S.  This could be an acquisition candidate, but they need to turn things around first.  Somewhere between 18.5 and 20 looks like a good potential entry.

TECUA

TECUA customer and rival WHR had a decent report today and the stock is acting well.  While the growth has certainly slowed, Latin America remains a bright spot for top-line growth.  It's hard to get a great read, but TECUA, not surprisingly, has been fairly well correlated to WHR.

The company has done about what I expected in terms of doing work between 9.50 and 10.50.  The next catalyst is the Q1 conference call, which they announced will be 5/11.  I continue to expect that they will name either Noelke or Connor (hopefully Noelke) as CEO,  but this really isn't likely to be a big deal one way or the other when it is announced.  I definitely have fatigue in the name - very disappointing.  It's more of a hope than an expectation, but I would like to see it get back to the 12-14 range.  I have lowered my outlook dramatically, expecting it to reach 17.50 over the next year.  The best shot at achieving this would be for the company to be sold.  The value of its assets less liabilities is currently about 24, and that doesn't reflect the massive amount of NOLs that would be valuable to certain buyers.

 

CPN Analyst Day

When I write my first book, there will likely be a chapter dedicated to CPN.  Oh, the lessons I learned back in the day.  On my recommendation, we bought the stock below 30 if I recall and quickly rode it to 60.  I know we trimmed some, but we held on.  I had caught the company cheating and called them out for it on a conference call, resulting in my my being blackballed by the company and never allowed on their public conference calls.  I should have taken that as a sign, but the story was just too great.  Well, you'll have to buy the book to hear the rest of the story, but let's just say it didn't end pretty. 

Fast forward to yesterday, and this was really my first time to give serious thought to the company since they emerged from bankruptcy in 2008.  We discussed the company in an investment committee meeting last year with one of my clients, but we couldn't get our hands around their exposure to gas prices.  As one who believes that gas will be abundant and cheap for years to come, I am always looking for potential beneficiaries.  From my view, gas prices were terrible in 2010, well below what was expected, yet the stock was up only marginally at the time we were looking at it.  What I missed is that they were hedged and not really benefiting.  Also, power prices remained depressed. 

Back to yesterday, they had an analyst meeting.  I shared my thoughts on Seeking Alpha, if you are interested.  I am adding them to my watchlist (time to say goodbye to ALE).  The valuation is a bit high (almost 10X EV/EBITDA), but I think that their EBITDA growth could really pick up in the coming years.  Most importantly, I really liked the CEO.  He is a long-time industry veteran, and he really put his money where his mouth is (buying over $8mm of stock - 500K shares - out of his own pocket when he joined.  He has a lot more exposure through options he received.  I spent time talking to the CEO, CFO and also another important executive (in my view),and I think that the story is pretty solid, though complex. 

TECUA/B - Insider Buying

Chairman Kent Herrick bought 1000 TECUA at 9.60, while Director Lebowski purchased 2500 TECUB (the voting shares) at 9.1075

SKX Down Again - Why?

SKX is down again today, and Igor asks:

Can you please comment on SKX drop today in light of SCVL earnings?  Was there something mentioned on that call to spook investors of SKX?

As I conveyed yesterday, my read of what SCVL said was positive.  They moved a lot of shoes, albeit at lower prices.  They said that this remains an important category and that new product with enhanced features is moving well and at higher prices.

NKE is getting slammed today, and that is what is pressuring SKX in my opinion.  For some perspective, I attempted to "catch the falling knife" on SKX when they reported in early November.  I have stated that this isn't a quick fix, but I am hopeful that investors start to understand the misvaluation sooner rather than later.  It's been disappointing, but the story remains the same.  They will work through the inventory and come out with high earnings and high growth potential. 

P.S.  While I will never make a guarantee about what I will choose to do in the model in the future, I view the current position as too low at 5%.  My target remains 30 or so a year out.  This would be 1.5X TBV, but I can get there with 2012 earnings of about $2 with a market PE (and that's before consideration of what will likely be a huge amount of net cash on the balance sheet). 

TECUA Update

One of my institutional clients had a call today with the company and reported back to me.  I don't have any new details except on management.  I don't believe that the story changed at all this quarter.  The company's goals remain similar to before - to get to a 5% operating margin by the end of 2012.

I want to be careful about the way I say this, as I wasn't on the call, but I have reason to believe that the CEO change will be internal.  It is my understanding that the Board is looking outside, but, I have to assume, given the short time-frame, that the next CEO will come from inside.  I believe that the CFO is capable while the appointment of Mike Noelke would be very favorable.

So, this remains a deep-value turnaround that is turning around too slowly, but without any real downside threat absent a global recession.  I do need to reformulate my target somewhat lower, but I believe that the upside from the current price is high enough to justify patience.  It's a big enough position - I won't be adding in Top 20.

TECUA - Last Word (for Today)

Reviewing the trading activity today, it looks like someone heard something on the call and sold.  I was listening to the same call and have no idea why one would blow the stock out in the 9.40 zone.  With that said, let's not kid ourselves.  109K shares is just $1mm of stock - an big odd-lot and not even that much volume compared to what's typical.  In other words, a seller and no buyers.

The stock has historically been put away.  There are A-shares (13.4mm) and B-Shares (5.08mm), with the B-Shares representing the voting rights.  Most of the B shares are owned by the Herrick family and several institutional investors, like Franklin Funds (the only questioner on the call).  A shares are really put away, with the guys owning the B shares owning them too:

• Donald Smith & Co - 1.2mm
• DFA - 1.1mm
• Franklin Resources - 1.1mm
• Foundation Resources 840k
• Steinberg Asset Management - 710k (new to the name in Q4 - whoops)

Disappointed (and embarassed) by my call on this name, I am not going to toss in the towel because things are slower to improve than I had hoped (mainly as evidenced by the CEO leaving and the outlook being only slightly positive).  I certainly don't have the confidence to say buy (and won't be adding at this point to Top 20, where it has downshifted from one of the largest to just a little above average due to its crappy performance).  We already know they had a good quarter (they just guided 2 1/2 months into it), and perhaps the CEO appointment will be favorable.  There are no cash or liquidity issues that concern me, so it's safe, in my view, to look for a more graceful exit or hope for a better outcome.  With that said, what a waste of time this one has been - apologies to all.