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November 2009



Overvalued ski-resort: MTN (Vail Resorts)

November 30, 2009 – Comments (4) | RELATED TICKERS: MTN

Overvalued ski-resort: MTN

I've never liked this stock, but now especially I think it is way over valued. 

I live in Breckenridge, and think I have an edge on knowing what is happening out on the slopes because I go riding almost every day.  Just from my own perspective (and I have no actual data on this) this years skier numbers are WAY WAY down from years past.  I have 17 days on my pass already, and I have yet to have to deal with lift lines anywhere near what I've seen in the past.  Previously, over the Thanksgiving holiday, lift lines have been disgusting as there have been so many people out there.  Last year I even got off the gondola one day (from town to the base of the resort), took a picture of the lift line, and then left, because I didn't want to wait in that line to get on the lift.  This year, the pay parking lot at the base of the gondola hasn't even been close to full from what I've seen.  Based on this, I think Vail Resorts is likely to report both disappointing Q2 (Their fiscal year ends Sept. 30th) and full year results.

Valuation wise, it is trading at an absurd 29 times trailing earnings, 27 times forward (2011) estimates, and 49 times 2010 estimates (which as mentioned, I believe those estimates are too high, and likely to disappoint the street).  What is messed up is, on top of those valuations, the company is more expensive yet because they have $492 million in debt and just $69 million in cash, on their $1.4 billion market cap.

As of now there is less snow than I think I've ever seen on the mountain for this time of year.  We have had snow, but most of it has just evaporated away already in the sublimation process.  Even today, the run directly under the lower part of the Beaver Run Peak 9 chairlift has yet to be opened, and in all just 14 of 155 runs are open (  The weather has just been bright warm sunny day after bright warm sunny day.  Perfect for the riding I like going out and doing, but just awful for building up hype to have vacationers plan trips for.  I really would imagine that if right now people are planning a ski trip over Christmas,Breck just wouldn't be the place you'd be looking at if you are basing the decision on where it has recently been snowing.  The same goes for 3 of their other 4 resorts (Vail, Keystone, Beaver Creek), since they are all relatively close geographically.  I think all of these resorts may have some severe problems opening a lot of terrain by the winter break unless some huge snowfalls happen within the next three weeks.  And even in that case, it may be too late as people could be planning their ski trips elsewhere right now.

Today I both shorted the stock and bought put options.  If you want to go the options route, I think the April 2010 $35 puts are a bargain for $2.40 (remember each option contract is for 100 shares).

RK  [more]



Best of the Best 200 Small Companies: Part 2

November 14, 2009 – Comments (1) | RELATED TICKERS: IDCC , AVAV , HWKN

Forbes Magazine just had their special on the "200 Best Small Companies" in the November 2nd issue.  I figured this would be a great starting point to search for potential investments because of course some of these "Best Small Companies", will end up being tomorrows "Best Large Companies", so therefore some investment opportunities probably exist within this group.

After looking at all 200 of these companies, I’ve selected a group that I think are good candidates for being successful investments.  Below are the next 5 that I think are really worth taking a close look at.

IDCC (InterDigital Inc.)
InterDigital is a technology vendor to cell phone companies, along with other devices that use IEEE wireless communication, and license out the patents they have to these customers.  They have over 3,000 patents, with nearly 9,000 more in process.  This is a huge growth area as according to their last conference call, wireless data traffic is expected to grow ten-fold over the next 5 years (think youtube videos on cellphones).  They are working on developing solutions for the bandwidth crunch that is happening. 

This past quarter they grew revenues a full 37%, and earnings by 232%!  Since they are indeed highly profitable, you would think a high premium would have to be paid for this type of growth along with their vast portfolio of patents.  Fortunately this is not so.  This stock is trading at 19 times trailing earnings and just 7 times forward estimates!  Analyst have been bumping up their estimates over the past 90 days, and are predicting an average of 21% per annum growth for the next 5 years.  If they are even close with these estimates, this stock is not going to be trading at just 7 times those earnings.

Furthermore, this company is SOOO ridiculously cheap because on their $957 million market cap, they have $430 million in cash and virtually no debt!  Management has already proven they are shareholder friendly since in March they authorized a $100 million stock buyback and have purchased about a million shares already with this.

Listen to the conference call that happened on October 29th.  About 4/5ths the way through it gets funny, and then real serious.  The analyst's first words are "oh sh*it" as he thought he was disconnected from the call, then later... well, lets just say it's not the last time you'll hear the word "sh*it!" or "my God!") in the CC.  He makes some great points on how ridiculously cheap this company is and that management should be spending everything they can on repurchasing as much as this company as they can vs. earning a measly 0.5% to 1% on their cash holdings.

IEC (IEC Electronics Corp.
IEC does contract electronic manufacturing.  They have been growing revenues at a nice clip, which has been helped primarily by their expansion into aerospace and military products.  In 2005 these were less than 1% of their sales, but this has grown to over 50% of sales today.

Looking at the trailing PE of less than 4 does not really do any good because it appears the majority of those earnings are simply a result of tax credits.  We also can't look at analyst estimates for any guidance, simply because no analyst cover this company yet.  However, we can perhaps say this last quarters results were more normalized and what future income statements will look like.  On the top line their was growth of 45%, which translated into a $1.3 million operating income.  Lets assume that with the growth they are experiencing, they are able to do that for the next three quarters (their revenues have been very steady and growing, so I do not think this is an unreasonable assumption), well, then we have a company trading at 7.5 times their operating income.  The story line takes a dip with knowing they have $9 million in debt, but with having an EBIT of 16 times greater than the interest expense, perhaps this isn't really that bad after all.  If they can continue to grow revenues, this company may be a big winner as they have much higher gross margins, operating margins, and income growth than their competitors.

HWKN (Hawkins Inc.)

This Minneapolis based chemicals company has been in business since 1938, and has two segments of Industrial (65% of sales) and Water Treatment (35% of sales).  As you could predict, the Industrial segment was down, and off by 23% last quarter, hit by the recession, but the Water Treatment segment (apparently if you live in the Midwest you've drunk water treated by their chemicals) was stable as it declined by less than 5% in sales.

So basically you have a small, but stable, long term slow growth company, and it is trading at an attractive valuation of just 9 times trailing earnings and 10 times forward estimates.  They also have a cash hoard of $37 million built up, along with no debt, making the company a further bargain yet.  The stock pays out a 2.5% dividend, which is not in jeopardy at all considering it is a small fraction of their earnings.  A ten year chart is interesting to look at to see how slow and steady the stock has been up until this year.  Since it has had a large rally this year, I'm just going to keep it on my radar screen and purchase only if the stock pulls back in a bit, even though fundamentally it does still seem priced attractively.

NPK (National Presto Inc.)
This is a nice boring company that I believe is undervalued precisely because it is such a boring (yet cash cow) company.  They make small appliance items for the kitchen primarily.  You can check out their products at their website:  Next years estimates for revenues are roughly $525 million, up from just over $300 million in 2006, so it's not like it's a non-growth company, it's just not in a sexy industry like the next non pick is.  At just 12 times both trailing and forward earnings they can easily afford their measly $1 dividend (for a 13% payout ratio), not to mention they have $0 debt and $135 million in cash.

ERII (Energy Recovery Inc.)
This company builds mega-project reverse osmosis desalination facilities.  I think this company has a bright future as demand for clean water rises and more and more communities will need these in coming years, but I can not recommend buying it yet due to the high premium (over 5 times sales and 40 times earnings) on the stock.  [more]



Best of the Best 200 Small Companies: Part 1

November 04, 2009 – Comments (1) | RELATED TICKERS: PETS , JOSB.DL , QDEL

Forbes Magazine just had their special on the "200 Best Small Companies" in the November 2nd issue.  I figured this would be a great starting point to search for potential investments because of course some of these "Best Small Companies", will end up being tomorrows "Best Large Companies", so therefore some investment opportunities probably exist within this group.

After looking at all 200 of these companies, I’ve selected a group that I think are good candidates for being successful investments.  Below is the first 6 that I think are really worth taking a close look at.

NATH (Nathan's Famous Inc.)
This company is best known for the hot dog stand that hosts the eating contest that gets by far the most coverage.  They have 254 restaurants, and the vast majority are franchised out.

Since 2007, revenues have grown slow and steady and they have been able to turn that directly into nice earnings growth.  Although the stock is trading at 16 times both trailing and forward earnings, the real value of this company to it's owners is the amount of cash they have sitting on their balance sheet.  Therefore, the company is incredibly cheap because when you take their stock price of $14.30, then deduct the $6.38 of cash they have per share, you are really in a way paying just $7.92 per share (they have no debt).  Divide that by the $0.86 in EPS and you're paying less then a 10 multiple on that enterprise value, for a nice stable company that is bound to announce a cash dividend to their shareholders at some point.

These days you can even get Nathan's Famous hotdogs from many grocery stores, so go get yourself one and mull over this annual report while enjoying a dog or 68 (the number Joey Chestnut ate at their contest this year).

QDEL (Quidel Corp)
This company makes rapid diagnostic test for illnesses such as the flu.  If this H1N1 swine flu continues to be a nasty problem, this is probably a company that will continue to have great results.  Just last quarter alone, they grew revenues by a whopping 76% and earnings by a full 215%  Paying 23 times trailing and 22 times forward earnings may seem like a high multiple, but in case this company continues to have such growth rates for any length of time, then that will prove to be quite a bargain anyways.  Additionally, the average of the eight analyst estimates has increased by almost 14% over the past 90 days.  I see no reason that these upward revisions would not continue as it is becoming more apparent the swine flu has become more and more of a worry. 

Directly from their conference call on October 19th, management said this: "We had a very significant benefit during the quarter from our influenza test sales driven by a considerable increase in influenza like illness beginning in mid August", and "The emergence of the 2009 H1N1 virus, and an increase in a number of physicians using rapid flu tests to aid in the diagnosis of influenza, are the key contributing factors".  Now, it's not as if these orders are going to just dry up because distributors and end users do not have a supply anywhere close to getting through this winter which is just starting.  "With regard to influenza tests, we estimate that the majority of our domestic distributor inventories are at roughly three week supply of current end-user demand. We have also recently surveyed physicians, and based upon their feedback, believe their test on hand to be relatively low as well, with 75-percent of them expecting to reorder in the near term".  Therefore we should probably expect QDEL to have a couple very nice quarters in a row.

One more little bright spot with this company, they have $65 million in cash (which has been growing year after year), and just $6 million in debt, therefore, I would assume a cash dividend or share buyback would be announced sometime within the foreseeable future.


NVE Corp develops and sells sensors that are used to acquire and transmit data  in industrial, scientific and medical applications.  The uniqueness of their products is that the devices us "spintronics" (a nanotechnology that relies on electron spin rather than electron charge to acquire, store, and transmit information.  I've seen pictures of these products, and they are much smaller then a fly, and some apparently weigh less then a mosquito. They have 52 patents that provides them with a moat with this technology.

Usually I avoid recommending any company who's products I don't understand fully, and I really have no idea what the competitive landscape for this company may look like in a decade from now, but I'll give this one an exception based on their great financial.  This company makes a whopping 42% profit margin!  That is insane!  I can't think of one other company that consistently can kick out that kind of margin.  Then add in their growth over the past 5 year average of 16% on their top line and 44% on their bottom line, and compare that to their trailing earnings multiple of 17 and forward estimates of 14, and you have quite a deal, especially when you consider they have $4 million in cash and no debt.

So again, although I have no idea what this may mean (from their annual report) "A limited number of other companies claim to either make or have the capability to make GMR and TMR sensors. Also, several competitors make solid-state industrial magnetic sensors including silicon Hall-effect sensors and anisotropic magnetoresistive (AMR) sensors. We believe those types of sensors are not as sensitive as our GMR or TMR sensors." I'll still be placing a small bet on this company due to the great growth rates it is experiences combined with it's incredibly fat profit margin.

TRCR (Transcend Services Inc.)
Transcend provides medical transcription services to the medical industry.  While it is trading at 25 times trailing earnings, and 17 times forward estimates, the growth rates it is having along with its great financial condition can justify this.  Last quarter they increased revenues by 44% and earning by 22% (I'd prefer to see them gaining some economies of scale and be able to translate revenue growth into a higher percentage of growth in their earnings).  None the less though, these are some great growth rates that if can continue at for any length of time, then this may be a nice bargain.  Once again, this is another company that has basically no debt (less than half a million), but has almost $8 million in cash.

JOSB (Jos. A. Banks Clothiers)

This mens apparel retailer has 425 stores in 42 states.  Even with in the face of a recession they have been able to grow revenues 27% since 2007 and earnings by 35%.  This seems company seems like quite a bargain considering it is trading at just 13 times trailing earnings and less than 11 times forward estimates (which have been getting bumped up over the past 90 days).  Add in the fact they have $0 debt and $126 million in cash, well you've got an even better deal yet.  I've yet to shop at one, but I'll be buying some stock in the company because they've proven they can manage steady growth even in rough times and are positioned excellently with their huge cash hoard.  Eventually I'd expect this company will also announce a cash dividend.  One more interesting fact: Institutional investors own 109% of this company.  You read that right.  109%.

PETS (1-800-PetMeds)
This is Americas largest Pet Pharmacy.  The research I've done in the past (while as an analyst on the Summit Investment Fund) has lead me to be a perma-bull on the future how much growth there is to still be had in the amount we spend on our pets.  This website where people can easily order all the pet medications, supplements, food, and whatever else they may need for their pets.  This company is having great growth as they have increased revenues from $162 million in 2007, up to $219 million this year.  Valuation wise this is quite attractive as this stable, recession proof company trades at 14 times trailing earnings and 12 times next years estimates.  AND, once again, this overstates the true price you are paying because the company has $0 debt, and $56 million in cash.  They've already proven investor friendly by upping their cash dividend, and I would expect with their huge cash hoard and stable earnings, that this dividend will increase further yet in the future.

Technically this stock is also trading at a very attractive level right now too.  Take a look at a 10 year chart, and from 2001 on, you can draw a very consistent support trendline on the chart.  The substantial pull-back over the past two weeks brings the stock right back to this trendline (which also matches up on a one year chart).



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