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Option1307 (30.27)

My Favorite Buys for 2011

Recs

14

December 30, 2010 – Comments (23) | RELATED TICKERS: ALIF , MDC , SAN

It’s that time of year again and Santa Claus has brought me a list of his sure fire buys for 2011, Merry Christmas and Happy New Year to me!

 I don’t necessarily expect them all to have an “outstanding” performance in 2011, rather I like these plays for varying time periods (months to years) and think they present excellent buying opportunities at their current prices. In a sense, I feel most confident about these plays and feel they have great risk/reward ratios. I like all 3 to the same degree, but for clearly different reasons, and I don’t specifically have a “top” favorite thus they are not presented below in any specific order.

1) Artificial Life (ALIF)

I recently wrote this up in a blog, so if you want the full scoop see here. In the meantime I will try and summarize and copy/paste my thoughts below:

What better way to take advantage of the continued Apple success than by hitching a ride on a company that supplies Apple with a large percent of their applications that run on all those i-Pads, i-Phones, i-Pods, i-whatever.

ALIF has sold 20M apps in the last 2 years and is also aggressively converting its apps to Android and Windows 7 servers which will continue to be released later this year and in 2011. Important to note is that these are not just some random games/apps but rather some of the most desired/highest rated applications. ALIF consistently has apps that are in the “top 10” of their respected categories. They produce some pretty good stuff in regards to i-phone/pod apps.

All this translates into increasing sales for ALIF the last few years with no end in sight. Check these numbers below (Revenue, EPS)

2006: 0.86M, -0.01

2007: 5.8M, 0.03

2008: 22.45M, 0.22

2009 27.45M, 0.15 (they significantly diluted the earnings via share offerings)

2010 through Q3: 27.72M, 0.2

(Q3 had record sales and record net profit, times are good for ALIF)

Those are some pretty sweet numbers if you ask me! I strongly believe their sales are going to continue being propelled by strong i-phone/pad/pod sales as well as an overall increase in smart phone usage in the US/World going forward.

Let’s assume ALIF puts in another quarter like last (conservative estimate IMO considering the likely high holiday sales etc.) That would give them another 0.08 EPS this year for a grand total of 2010 EPS of 0.28. That puts LAIF at a current P/E of just under (Yes under!) 4. Wow, cheap cheap cheap!

There are of course a few risks that must be considered before jumping aboard. First, it is a thinly traded stock and thus prone to volatile moves, also the true value may not be unlocked for quite some time because of the small amount of daily volume. Second, the argument has been made that ALIF has a nasty habit of diluting shareholders via stock offerings. This is definitely a valid concern; however, if you look at the total amount raised from stock offerings it is small potatoes in comparison to the yearly revenue and profit increases. Thus, ALIF is issuing new shares but their continued growth is not coming from this, they are actually growing organically (read: their growth is real!).

2) MDC Holdings (MDC)

Partially stolen from my pitch, see the rest here.

The thing about homebuilders that many people fail to understand is that they do NOT need the overall housing market to rebound in regards to price. Residential home prices have fallen significantly the last several years, but more importantly, the input costs for builders have fallen even further. Thus they can be profitable regardless or not if home prices rise again.

 I firmly believe now is precisely the time to start nibbling on a few shares here and there of your favorite home builder stocks, for instance the gem that is MDC.

1) Buying sectors that are absolutely hated usually works out well in the end, we are close to reaching those levels of hatred necessary.

2) MDC has a technical resistance in the $27/share level which we are quickly approaching and another solid support at ~$23/share.

3) Most importantly, times are tough for RE right now but that doesn't mean that things will always be this way. With the recent sell off, MDC (etc.) have already priced in crappy revenues/overall RE outlook for the next several years. So by buying MDC I am not advocating that things are all sunshine and lollipops and the RE market is going to magically rebound. No. Instead I am betting that even if the RE market takes years, literally years, to begin healing itself we have put in somewhat of a floor here in regards to stocks and RE in general.


4) MDC has loads of cash and arguably some of the best lands positions out there. See Floridabuilder (
http://caps.fool.com/player/floridabuilder2.aspx) to understand the importance of land etc. This all points to the fact that MDC has essentially zero (0!) chance of rolling over and going bankrupt. You just need to ride out the storm.

5) Oh, and did I mention they pay out $1 per share on a yearly basis which gives us a dividend yield of ~3.8%. Furthermore, they have steadily been paying this amount out for the past 5 years (including the worst housing/stock market crash since the Great Depression), so ya it's pretty safe.

Homebuilder companies were gobbling up cheap land by the truck loads when RE prices crashed through the floor. Many are now perfectly positioned to take advantage of the eventual uptick in RE. More importantly, the last few years we have seen record LOW housing start numbers, yet our population continues to grow every year. What this means essentially is that builders are going to have a very lucrative decade.

3) Banco Santander (STD)

STD is a very solid bank that is relatively well capitalized (in regards to most other banks) and not going anywhere anytime soon. They have been beaten down a lot recently b/c of the EURO "crisis", this is simply a case of taking down the good assess with the garbage ones. Yes, Europe has some trouble spots right now and they will likely continue to have economic difficulties going forward for quite some time, but that doesn't mean that STD is going to go bankrupt.

While they are based out of Spain, a large portion of their income comes from Latin/South America, non-PIIG countries. This region is a huge growth engine going forward and will help offset any potential European woes that STD may experience in the near term. To top it all off, STD pays out a solid dividend, ~5%, while you wait things out.


 

 

 

23 Comments – Post Your Own

#1) On December 30, 2010 at 8:51 PM, Option1307 (30.27) wrote:

In the spirit of full disclosure, I guess I should mention that I currently own shares of ALIF, MDC, and STD.

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#2) On December 30, 2010 at 8:53 PM, Option1307 (30.27) wrote:

Since I'm in the charitable mood I'll add a few more thoughts...

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#3) On December 30, 2010 at 8:55 PM, Option1307 (30.27) wrote:

Obviously I believe in these three plays; however, just as improtantly I think they are all good buys right now at their current levels.

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#4) On December 30, 2010 at 9:05 PM, Option1307 (30.27) wrote:

As you might have guessed I have been bullish on the homebuilder sector for the last several months and strongly believe it will prevail going forward. MDC is definitely in my "top 3" for the sector, but this is essentially a sector bet for me.

In that regard, here are a few relevant articles in case you want more. While they don't specifically mention MDC, they are relevant nonetheless because the place the sector bet in context.

Here, here, here, and here.

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#5) On December 30, 2010 at 9:29 PM, HarryCaraysGhost (99.64) wrote:

this is simply a case of taking down the good assess with the garbage ones.

When it comes to banks, I've never been able to tell the differance...: )

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#6) On December 30, 2010 at 9:39 PM, TMFTypeoh (84.81) wrote:

OK Option......you've got my interest peaked on ALIF!

 

Time for some more DD, but I like what i see so far......... 

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#7) On December 30, 2010 at 9:44 PM, Option1307 (30.27) wrote:

When it comes to banks, I've never been able to tell the differance...: )

Ha ha ha fair enough point!

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#8) On December 30, 2010 at 11:31 PM, PickThatBooger (28.82) wrote:

Hey option, thanks for your thoughts. What's up with all of this spam on this thread?

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#9) On December 31, 2010 at 12:34 AM, Option1307 (30.27) wrote:

Glad you enjoyed them!

What's up with all of this spam on this thread?

I guess they liked my picks too! ;)

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#10) On December 31, 2010 at 5:25 AM, portefeuille (99.66) wrote:

SAN:SM is expected to pay 0.6 EUR per share as dividend for 2010 and again 0.6 EUR per share as dividend for 2011. It is currently at around 7.93 EUR, giving you a "dividend yield" of 0.6/7.93 ≈ 7.6%. The ADRs should be treated similarly. Consensus estimates for earnings per share are currently at around

eps2010e =  0.9822 EUR,
eps2011e =  1.17 EUR,

giving you p/e2011 ≈ 7.93/1.17 ≈ 6.8.

I currently have 250 SAN:SM (STD) shares in my portfolio (see here). My "fund" currently holds 4800 SAN:SM (STD) shares (see here).

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#11) On December 31, 2010 at 12:23 PM, EnigmaDude (87.69) wrote:

Wow - just checked the fundamentals for ALIF and I am impressed!  Also saw that 3M company bought a boatload of shares back in 2009.  Possible acquisition target? 

I think I also recently saw TMFUltraLong write something about these guys.  Might have to take a more serious look at them.

Thanks Dude!

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#12) On December 31, 2010 at 1:14 PM, Option1307 (30.27) wrote:

I think I also recently saw TMFUltraLong write something about these guys.

He mentioned them a while ago and that's what initially brought them to my attention. See here, here, well actually he wrote about them several times but I'm way too lazy to link them all here :)

Thanks Dude!

No problem, that's the whole point of Caps!

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#13) On December 31, 2010 at 3:06 PM, lemoneater (71.39) wrote:

I think a railroad might be my favorite buy. I haven't decided which one yet.

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#14) On December 31, 2010 at 3:20 PM, Option1307 (30.27) wrote:

I've held CSX for years and still believe in it. I'm not as excited about it as I used to be, but I haven't wanted to sell it either. I'd be interested to hear which one you eventually choose.

Happy New Year lemoneator!

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#15) On December 31, 2010 at 7:40 PM, Tagit (44.03) wrote:

Happy New Years

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#16) On January 01, 2011 at 9:13 AM, jaketen2001 (67.47) wrote:

ALIF, great, interesting.....

Couldn't disagree more with your MDC and STD (ha) picks.  Commodity prices are increasing (where did you get the data about them falling?), including energy.  Stagnant existing prices.  Possibly the only input falling is land.  MDC is going nowhere for years to come.   Your timeframe seems a little to lax/long for anyone, and I think MDC's div is in trouble.  What about demographics?  Flat in the near future.  Tougher lending standards ahead.  US is maxed out in terms of ownership.  Just say no.

STD, a country with 25% unemployment, strict employment laws that will restrict employment growth, and vacant houses as far as the eye can see? Spain's day of reckoning has yet to come.

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#17) On January 02, 2011 at 8:39 PM, dengji wrote:

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#18) On January 05, 2011 at 12:45 AM, Momentum21 (43.39) wrote:

I bought some MDC today. I do recall reading this post, so perhaps I can blame you option1307... : )

STD is one of my favorites as well. Good luck to us! 

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#19) On January 05, 2011 at 5:37 PM, Option1307 (30.27) wrote:

so perhaps I can blame you option1307... : )

Ha ha, no! 

I already own a sizable position in MDC, and the homebuilder sector looks a tad frothy considering the rapid rise these past ~4 months. However, I definitely will be a buyer again if MDC drops down to the $25-26 mark and/or there is an overall market correction sometime these next 6-12 months.

I think FB sumamarized MDC nicely (on his most recent post) when he said there is very little downside for them. I couldn't agree more!

I don't expect them to outperform quite as much (sorry only a 2-3 bagger!) as the other builder stocks in the next 5 years; however, they are the "safest" homebuilder out there and pay a solid ~4% dividend.

Why wouldn't you want them as part of your homebuilder sector bet? ;)

Best of luck to us!

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#20) On January 05, 2011 at 5:40 PM, Momentum21 (43.39) wrote:

Did you see the action on MDC today? quite a ride...

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#21) On January 05, 2011 at 8:06 PM, Option1307 (30.27) wrote:

Yes I did and it was definitely odd.

A spread of ~8% from $27-29 and some 3.5M shares traded today compared to the average volume of 600K, pretty unusual.

If this was a trade I'd be concerned but it's a long term hold for me so no worries. I can only hope that traders (or the overall market) push this a bit lower so I can scoop up more shares.

 

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#22) On January 06, 2011 at 2:05 PM, EnigmaDude (87.69) wrote:

ALIF is taking a big hit today - down 13% after announcing their new investment spin-off.  Do you think investors are unhappy with this move, or is this just typical volatility for an over the counter stock?

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#23) On January 06, 2011 at 4:10 PM, totallyoblivious (31.52) wrote:

ALIF's investment is very questionable at this time because while their earnings look impressive, the main number that increases quarter after quarter on their balance sheet is accounts receivable while their cash on hand keeps shrinking.  There's some concern out there as to how much of that 27 million in A/R they have that they're likely to ever collect on.

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