The Big Macro, Gambling and February's New Stock Picks
Well, another month is in the books. My CAPS portfolio finally cooled off a little bit. It was bound to happen, I had been consistently, significantly outperforming the S&P 500 month after month for as long as the chart on our CAPS pages shows, September or so. Treading water versus the S&P for a period of time is nothing to be ashamed of and I still feel great about how my CAPS and real-money portfolios are positioned.
On a macro level, which I try not to pay much attention to, but on a super-high level I suppose that it is important to do so to some degree. I liken it to playing blackjack in a casino after you've had a beer or two. You might not be able count cards and know exactly how much a shoe is positive or negative, but you probably have a pretty good idea as to the direction and can adjust the timing of your bets accordingly. BTW like all table games, blackjack is a suckers game that only I play for the social interation aspect of it when I am out with a group of friends. Give me poker any day of the week. Poker is actually a game of skill that pits my abilities up against other real people, minus the rake of course. That's a lot better than a game that's inherantly designed to take your money, like all table games are. Even if you play absolutely perfect basic strategy in blackjack, you'll still just miss breaking even. Counting improves your odds, but it's not easy. I'm not Rainman :). Besides, now that I'm a family man I don't get much opportunity to go to casinos anyhow, which is probably a good thing.
I digress, back to economics. I have not personally put a ton of new money to work lately, over the past month or two. I had a feeling that the whole sequester, or fiscal cliff or whatever you call it was going to have an impact upon things. The small investments that I have made were in things that pay very high dividend yields, or in the case of AIG I added to my position in its bonds that yield over 7%. That's one of the few fixed income investments out there that's still reasonably attractive.
I'm still bullish, longer-term, but in the short run the economy may take a breather. The increase in payroll tax certainly isn't going to help things. I've noticed it myself. Neither will all of the automatic cuts that are going to be phased in if the government can't get its act together. Bernanke says that the cuts themselves may only account for 0.6% of GDP in a worst-case scenario, but...I think that there would be a significant compounding effect upon consumer confidence. And our economy is very much lead by the consumer.
Longer term, it seems to me as though the United States is fairly well positioned. All of this crying that we're like Greece like in the silly Barron's cover story is absurd. There's so much difference between the two situations, that it is barely even worth mentioning. The U.S. has actual natural resources that if we are smart about can use to become an economic powerhouse. I truly believe that we not only can become energy independent, but become a net-exporter of oil and perhaps more importantly LNG. As someone who has a spouse who works for one of the largest real estate focused companies in the world I can assure you that housing has improved dramatically and continues to do so. I myself work in the auto industry, another major drive of the U.S. economy. Auto sales have improved dramatically over the past several years and continue to grow at a measured pace.
Again, longer-term things look good. Enough economics. It's always too negative, regardless of what really is happening. There's a reason why they call it the dismal science. Economists have accurately predicted 10 of the past 3 recessions. If you focus too much on it and what all of the "experts" on he subject are saying you'll miss out on inevitable gains in the stock market. You certainly would have missed out on the rally that has taken place over the past several years. It's funny that I used to be absolutely fascinated with the subject, studying and reading everything that I could on the subject. Now I am much more of a catalyst driven special situation investor. This is the fun part. Here's the stocks that I have gone long here in CAPS in February. If I have real money behind them, I'll say so:
QEP Resources, Inc. (QEP) - CAPS and Real Money (small position)
Jana Partners is unlocking value in QEP by convincing it to form an MLP.
Crosstex Energy, Inc. (XTXI) - CAPS and Real Money (small position that I would like to add to if it drops)
Crostex Enegy manages the Limited Partnership XTEX. XTEX is in the process of a significant expansion that will enable it to significantly increase its distributions to investors. The higher its distribution is, the larger Crostex Energy's cut is as a General Partner.
Eugene Robbin of Cove Street Capital believes that XTXI's dividend yield cold rise from today's 2.8% to over 6% in the not so distant future. We're that to happen it would mean great things for the company's stock price in today's yield hungry environment.
First Financial Northwest (FFNW) - CAPS and Real Money (small position, part of my basket of demutualized stocks that I am putting together)
Following Jim Royal into FFNW after his great article on the company. Banking and demutualization activist investor Joseph Stilwell has a strong track record and a significant interest in the company, which trades below tangible book value and likely will MOU lifted inte future.
Leap Wireless International, Inc. (LEAP) - CAPS only
The wireless phone business is a tough one, as Leap's results clearly show. Having said that, LEAP has a very valuable asset in the spectrum that it owns and its current subscriber base. It's difficult for me to personally place a alue on these things, but as I always say I'd rather be generally right than exactly wrong. I think that its sufficient to say that they are worth well in excess of Leap's current market cap.
Despite its poor performance, Leap does not appear to be in danger of filing for bankruptcy any time soon. Why? One major reason is that the company's Chairman of the Board owns a huge chunk of stock that he will likely do all that he can to protect the value of.
This is a much riskier stock than the ones that I normally play, but the upside potential for a multi-bragger is huge. Everyone needs a few small high risk, high reward positions like this from time to time.
Kudos to Columbia University's excellent Grahm and Doddsville newsletter for its recent interview with Daniel Krueger, who provided the inspiration for this pick.
Lear Corporation (LEA) - CAPS only, but I am very interested in it
I've been impressed with Mick McGuire's (Marcato Capital Management) ability to unlock value in stocks as an activist investor. Lear is his latest initiative. He's urging the company to return more money to shareholders (as he usually does) by accelerating share buybacks, raising its dividend and seeking board seats.
Air Lease (AL) - CAPS and Real Money (small position)
The type of special situation that I am going to use for this pick is called a jockey play. That means that you find an entrepreneur who has successfully started a business in the past and sold it for a large profit who is starting a new venture that you can get in on on the ground floor.
Air Lease is an airplane financing company that went public in April of last year at a higher price than it is trading at today. It was started by Steven Udvar-Hazy, who previously started a similar company called International Lease Finance and sold it to AIG.
I am personally somewhat familiar with the airplane leasing industry from my previous foray into International Lease Finance distressed bonds that I purchased during the credit crisis. I can tell you that massive recessions are not kind to airline leasing companies :). I was sweating my investment in the bonds at the time, but things eventually turned OK.
Flash forward to today and Udvar-Hazy is attempting to recreate the magic with a new airplane leasing venture. The new company seems to have a decent tailwind so to speak in that the terrible airline industry is doing about as well as it is ever going to. Add to that the need for air carriers to purchase more efficient planes in today's relatively high cost fuel environment and there should be plenty of business for AL.
In fact, Air Lease has significant orders on the books already for new planes over next three years. These orders alone should cause the company's earnings to rise from $1.20 in 2012 to $2 in 2013 and $3 in 2014. That's some pretty solid visibility into excellent earnings growth. At a multiple of only 15 times that 2014 earnings estimate, down from the 21 times that AL trades at today, the stock would be a double from its current level.
So what could go wrong? Well, the main thing would be another recession that would cause airlines to cancel these orders before they take delivery of the planes. If you're optimistic about the economy, as I am, then this shouldn't be an issue.
This isn't my typical value-type of stock pick, but a jockey play is a special situation that I will venture outside the value world for.
This idea comes courtes of John Osterweis of Osterweis Capital via an interview that he recently did with the excellent publication Value Investing Insight.
Beneficial Mutual Bancorp (BNCL) - CAPS and Real Money (small position, part of my basket of demutualized stocks that I am putting together)
Thrift conversions tend to significantly outperform the market. Beneficial will likely perform the second stage of its trrift conversion within the next year or so. When it does, according to Barron's its tangible book value will rise to around $11.50/share. BNCL's stock will likely rise to or above that level.
ONEOK Partners, L.P. (OKS) - CAPS only, but this one is looking more attractive after its recent drop
I'm a big fan of companies with below-average distributions or dividend yields that will likely increase significantly in the near future. That's exactly what we have in OKS.
While its current yield of 4.7% is a little below average compared to its competitors, the company has $7 Billion worth of expansion projects scheduled to come online over the next year or two. That's a lot of growth that will likely translate into a significant increase in its distribution and hopefully in turn its share price.
Targa Resources Partners LP (NGLS) - CAPS only, potential Real Money when I decide to put new cash to work
Targa is another interesting MLP that was featured in Barron's recent cover story on the sector. What I like about this company again is there is a story as to why its shares should rise in the future.
The story with Targa is that it is reshaping its business model towards one that is less exposed to commodity prices. Today around half of the Company's business is exposed to commodity pricing. It has a slew if new projects that are scheduled to come online by 2014, which will reduce its exposure to commodity prices to around 35%. Once the market recognizes this shift in mix to more sable business the company will likely be awarded with a higher multiple, causing its shares to rise and me who priced it in CAPS to be happy :).
WPX Energy, Inc. (WPX) - CAPS only
Barron's recently published an interesting article about how the former Williams (WMB) spinoff WPX Energy will be able to return to profitability even without an increase in the price of natural gas by renegotiating terrible legacy mid-stream contracts that it was saddled with over the next two years. That's just the sort of story catalyst that I like to see.
Any increase in the price of natural gas, which I'm certainly not counting on would be gravy. So would the sale of the company's Argentina assets (yuck).
Penn Virginia Resource Partners, L.P. (PVR) - CAPS only
PVR was absolutely hammered by after its recent earnings release, perhaps rightfully so its results were fairly weak. Having said that, I don't think that the market fully appreciates the company's ongoing transition from heavy dependence on royalties from coal towards a more fee-dependent mid-stream pipeline and processing company. As its coal business continues to wind down and its new mid-stream projects come on-line PVR will have much more steady cash flow. That's not to say thatthe company will be completely insulated from weakness in the natural gas market, ultimately low gas prices put the brakes on drilling and impact PVR's volumes negatively. It's still a whole heck of a lot better than coal and the company's stock price will likely reflect the change at some point in the future.
With a 10% distribution after its recent hike, it looks as though PVR will be able to cover for now. However, if nat gas prices take a turn for the worse I wouldn't be surprised if the distribution needed to be cut.
I like companies with stories like PVR's change in business model. Kudos to awallejr for initially bringing this one to my attention.
SPX Corp (SPW) - CAPS only
This is a bet that Relational Investors is able to unlock value in SPX after taking an 8.76% activist position in the company.
From the filing:
"From the 13D filing: Despite the Company’s attractive business mix, total shareholder returns and profitability have lagged peers’ due primarily to excessive prices paid for acquisitions. This growth-at-any-cost strategy destroys shareholder value by overly emphasizing revenue growth over investment returns. The Reporting Persons believe that major improvements in a number of critical business processes will unlock significant intrinsic value for the Company’s shareholders. These essential improvements include: increasing operating profit margins to levels achieved by comparable peer businesses, accelerating divestment of non-core underperforming assets around the Company’s Flow business, establishing rigorous capital allocation disciplines and processes that properly balance growth and investment returns, and properly aligning executive compensation and shareholder value creation.
The Reporting persons believe that the significant drop in the company’s stock price that occurred in December of 2012 and the subsequent stock price volatility reflected the market’s lack of confidence in the board and management’s ability to properly discipline capital allocation and assess acquisition opportunities. The Reporting Persons believe the Company should focus on improving its core assets and avoid future acquisitions unless they convincingly offer risk-adjusted returns well in excess of the Company’s weighted average cost of capital and compare favorably to share repurchases. Furthermore, executive incentives should be modified to drive and reinforce this capital allocation framework.
If the Company fails to achieve operating margins consistent with peers and gain the confidence of investors, leading to a substantial increase in valuation, we believe the Company should explore strategic alternatives for better achieving the long-term intrinsic value of the assets.
The Reporting Persons intend to closely monitor the Company’s progress in each of these areas and may modify their plans accordingly.
The Reporting Persons may exercise any and all of their respective rights as shareholders of the Company in a manner consistent with their equity interests. The Reporting Persons and their representatives and advisers intend to discuss the Company and its performance with members of the Company’s board and management. In addition, the Reporting Persons may communicate with other shareholders, industry participants and other interested parties concerning the Company. Although the Reporting Persons do not have any current plans, other than the monitoring and communication program outlined above, the Reporting Persons may in the future decide to seek representation on the Company’s board of directors. Among other factors, the Reporting Persons will consider the Board’s oversight of the execution of operational improvements and capital allocation strategies for maximizing shareholder value as major factors in its decision of whether or not to nominate independent director candidates.
The Reporting Persons may from time to time (i) acquire additional Shares (subject to availability at prices deemed favorable) in the open market, in privately negotiated transactions or otherwise, or (ii) dispose of Shares at prices deemed favorable in the open market, in privately negotiated transactions or otherwise. The Reporting Persons may formulate plans or proposals for, and may from time to time explore, or make proposals relating to, transactions or actions which relate to or would result in any of the matters specified in clauses (a) through (j) of Item 4 of Schedule 13D."
Whew, that's all the picks for the month. I can't be accused of not looking for new ideas ;). Here's to a great month in March.
Thanks for reading everyone. I welcome everyone's comments on the stock picks. I love feedback, both positive and negative on that. I'm not very interested in getting into a macro debate though, so I probably won't ;).