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    Saturday
    Jul252015

    Trade Alerts 7-18-15

    Iran, Greece and China all played nicely last week, which encouraged investors. The S&P 500 was up strongly to 3.24% since we started on December 10, 2014.  8 of 11 of our positions are beating the market; 3 lag, but the portfolio is up 22%. It’s nice to see good companies rewarded in good times, which is what one might expect.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    7/17/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $ 121.48

    12/10/2014

     $ 284.98

     

    134.59%

    2

    OLED

    0.00%

     $27.64

    12/10/2014

     $48.21

     

    74.42%

    3

    LOAN

    8.62%

     $3.25

    12/10/2014

     $  4.16

     

    28.00%

    4

    VIVO

    4.95%

     $17.77

    1/27/2015

     $19.54

     

    9.96%

    5

    WSTG

    0.04%

     $18.50

    5/4/2015

     $20.20

     

    9.19%

    6

    DRAD

    4.88%

     $4.10

    2/9/2015

     $  4.37

     

    6.59%

    7

    KIN

    0.00%

     $6.63

    12/10/2014

     $  7.04

     

    6.18%

    8

    ATNI

    1.69%

     $67.98

    12/10/2014

     $71.01

     

    4.46%

    9

    BZC

    0.00%

     $12.13

    6/10/2015

     $11.83

     

    -2.47%

    10

    NVDA

    1.50%

     $22.28

    4/27/2015

     $20.07

     

    -9.92%

    11

    SAVE

    0.00%

     $73.77

    12/10/2014

     $60.16

     

    -18.45%

       

    2.46%

           

    22.05%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $2,126.64

     

    3.24%

     

    Monday
    Jul132015

    Trade Alerts 7/13/15

    China rallied, Greece slid, tech stocks are out of favor, but BZC pulled up. CTMMB prepares for a 10 to 1 split.

    Despite a dramatic week, the numbers barely changed: the S&P 500 is up 0.82% since Dec 10, 2014; PerfectCompany stocks are up 20.17%.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    7/10/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $ 121.48

    12/10/2014

     $278.00

     

    128.84%

    2

    OLED

    0.00%

     $27.64

    12/10/2014

     $  48.02

     

    73.73%

    3

    LOAN

    8.62%

     $  3.25

    12/10/2014

     $ 4.12

     

    26.77%

    4

    BZC

    0.00%

     $12.13

    6/10/2015

     $  13.00

     

    7.17%

    5

    WSTG

    0.04%

     $18.50

    5/4/2015

     $  19.56

     

    5.73%

    6

    VIVO

    4.95%

     $17.77

    1/27/2015

     $  18.67

     

    5.06%

    7

    KIN

    0.00%

     $  6.63

    12/10/2014

     $ 6.71

     

    1.21%

    8

    ATNI

    1.69%

     $67.98

    12/10/2014

     $  67.91

     

    -0.10%

    9

    DRAD

    4.88%

     $  4.10

    2/9/2015

     $ 4.06

     

    -0.98%

    10

    NVDA

    1.50%

     $22.28

    4/27/2015

     $  19.75

     

    -11.36%

    11

    SAVE

    0.00%

     $73.77

    12/10/2014

     $  63.28

     

    -14.22%

       

    2.46%

           

    20.17%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $2,076.62

     

    0.82%

     

    Sunday
    Jul052015

    Trade Alerts 7-5-15

    At the close of the markets on Thursday, July 2, the S&P 500 was up less than 1% since we started on December 10, 2014. PerfectCompany stocks are up 21.24%.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    7/2/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $ 121.48

    12/10/2014

     $ 271.00

     

    123.08%

    2

    OLED

    0.00%

     $27.64

    12/10/2014

     $50.52

     

    82.78%

    3

    LOAN

    8.62%

     $3.25

    12/10/2014

     $  4.45

     

    36.92%

    4

    WSTG

    0.04%

     $18.50

    5/4/2015

     $19.97

     

    7.95%

    5

    DRAD

    4.88%

     $4.10

    2/9/2015

     $  4.38

     

    6.83%

    6

    VIVO

    4.95%

     $17.77

    1/27/2015

     $18.31

     

    3.04%

    7

    KIN

    0.00%

     $6.63

    12/10/2014

     $  6.79

     

    2.41%

    8

    ATNI

    1.69%

     $67.98

    12/10/2014

     $68.10

     

    0.18%

    9

    BZC

    0.00%

     $12.13

    6/10/2015

     $11.67

     

    -3.79%

    10

    NVDA

    1.50%

     $22.28

    4/27/2015

     $20.42

     

    -8.35%

    11

    SAVE

    0.00%

     $73.77

    12/10/2014

     $60.96

     

    -17.36%

       

    2.46%

           

    21.24%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $2,076.78

     

    0.82%

     

    Despite what you’ve heard about new highs, the market has only budged. This is the difference between the weather and the climate. The weather changes daily –often dramatically – but the climate is on a long-term trend to diminished employment, automation, and a concentration of wealth.  Given our ability to improve business processes, this is impossible to avoid: the average person – and increasingly the above average person – finds less opportunity to make a meaningful contribution to the work force, which reduces employment and holds down labor costs. For some companies, this increases profits, cash and, eventually, market dominance, and we are seeking those life boats.

    The marginal movement of the broad market highlights the need to invest in only “perfect companies” – that is, companies with such strong value and upside potential that buying 10 or 12 might produce a meaningful return. Even applying that logic, we can lose ground in good companies that fail to shine immediately (SAVE, NVDA) and risky companies in which our calculations are wrong (PDLI). Since it is so difficult to find ten-baggers and so easy to find losers, we spend more time describing “imperfect companies” than perfect ones.

    NEWS ON CURRENT POSITIONS

     

    On June 29, OLED showcased its Loop Lamp comprised of paper-thin, flexible, shatterproof OLED lighting ‘ribbon’ panels designed into a chandelier. It is cool to touch and offers a high color rendering index (CRI) that can closely mimic natural sunlight. Manufactured using Universal Display’s single layer UniversalBARRIER® encapsulation technology, the plastic based OLED panels resist exposure to moisture and oxygen, are lightweight and can bend in all directions. The Loop Lamp represents one of many concepts in the application of flexible OLED lighting solutions in home décor, architectural design, art and sculpture. Expect to see more proof-of-concept lighting ideas from OLED such as its lighting panels, which will replace traditional ceiling sockets.

    Airline stocks got crushed on Wednesday when the DOJ announced an investigation into price fixing. Spirit hit turbulence, too, until investors realized that the investigation focuses on the four largest airlines: AAL, UAL, DAL, and LUV. This unexpected investigation may help smaller carriers like Spirit, as larger carriers divert resources and possibly abandon anti-competitive practices. Notice that in the chart below, Spirit (SAVE) recovered faster than competition.

     

    If Spirit was unloved before, it is finding favor now:

    Nvidia (NVDA) remains at the center of power computing going forward:

    IMPERFECT COMPANIES ON A TEAR

    These imperfect companies have seen steady price increases. Some might be buys today, but most are fully valued.

    Valero VLO

    Valero was one of Dad’s favorite stocks for a decade, and it’s had a great run lately. We rate it a 13.5, but sales are down over the last three years and insiders have sold a net 343,000 shares in the last 12 months.

    Avago Technologies AVGO

    This semiconductor company has seen sales grow from $2.3 to $4.3 billion in three years, but returns on value are paltry. You would pay $37 billion to buy this company, so we rate it a 3.0. You would $4 billion less to buy Valero, and it makes five times AVGO’s after-tax income by pumping gas.

    Tesoro Petroleum TSO

    Another of Dad’s favorites, Tesoro Petroleum has grown from $30 billion to $40 billion in three years, but revenue in the most recent quarter fell from $10 billion to $6.5 billion. It earned about $900 million on an EV of $14 billion. We rate TSO an 8.6

    HCA Holdings HCA

    HCA owns, manages or operates hospitals, freestanding surgery centers, diagnostic and imaging centers, etc.  HCA is growing, but borrows billions to do it. We rate HCA a 3.4.

    CVS Health CVS

    Net profits in the last three years have grown from $3.9 billion to $4.6 billion, and the stock price has doubled. We rate CVS a 4.4.

    Nisource NI

    An energy holding company, Nisource is also a big borrower: the market cap is $5.4 billion and the EV is $23.4 billion. If interest rates ever go up, you’ll wish you were somewhere else. NI fell almost 5% on Thursday. We rate it a 3.5 – mainly for the real return on the cost to acquire the company.

    Eli Lilly LLY

    Lilly has jumped from $50 to $86 in three years. Annual sales are down, and year-over-year profits are down in the most recent quarter. Insiders sold a net 4.26 million shares in the last 12 months. We rate it a 2.6.

    Manhattan Bridge Capital LOAN

    LOAN, which is in our portfolio, has also had a nice run-up from $1 to $4.45 in the last three years. Its EV is higher than it used to be, but the company continues to grow, increase its profits, and pay a 7% dividend. We rate LOAN a 10.1.

    Monday
    Jun292015

    Trade Alerts  6-29-15

    The S&P was down slightly last week: it’s now up 2% since December 10. As of Friday’s close, Perfect Companies are up an average of 22.8% helped by increases in CTMMB, LOAN and DRAD.  CTMMB has a scant 268 share average daily trade, but it keeps going up, so someone likes to accumulate shares when they are available.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    6/26/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $ 121.48

    12/10/2014

     $ 275.00

     

    126.37%

    2

    OLED

    0.00%

     $27.64

    12/10/2014

     $ 52.63

     

    90.41%

    3

    LOAN

    8.62%

     $ 3.25

    12/10/2014

     $4.46

     

    37.23%

    4

    DRAD

    4.88%

     $ 4.10

    2/9/2015

     $4.40

     

    7.32%

    5

    WSTG

    0.04%

     $18.50

    5/4/2015

     $ 19.58

     

    5.84%

    6

    VIVO

    4.95%

     $17.77

    1/27/2015

     $ 18.75

     

    5.51%

    7

    KIN

    0.00%

     $ 6.63

    12/10/2014

     $6.83

     

    3.02%

    8

    ATNI

    1.69%

     $67.98

    12/10/2014

     $ 69.05

     

    1.57%

    9

    BZC

    0.00%

     $12.13

    6/10/2015

     $ 11.70

     

    -3.54%

    10

    NVDA

    1.50%

     $22.28

    4/27/2015

     $ 20.74

     

    -6.91%

    11

    SAVE

    0.00%

     $73.77

    12/10/2014

     $ 62.30

     

    -15.55%

       

    2.46%

           

    22.84%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $2,101.49

     

    2.02%

     

    Can you recommend a data source?

    We’re looking for a new data source that doesn’t require buying a new car for Factset every year. Gurufocus looks good, and Thinknum would be fine if they offered dividend data. Since investors have been cut loose to manage their own 401Ks in place of a steady pension, I think that a reliable data feed for publicly-regulated companies should be a government service – or at least a relatively inexpensive spigot. Please send your recommendations to gpaul@perfectcompany.com

    IMPERFECT COMPANIES

    ZOES

    If you’re looking for the next Chipotle, Zoe’s Kitchen might be for you. A purveyor of healthy Mediterranean fast-casual cuisine, ZOES is based in Plano, Texas, and, at the end of 2014, had 129 company-owned restaurants and 3 franchises. Sales in the last three years have grown from $80 to $116 to $173 million. The other news is that insiders sold 8.8 million shares in the last 12 months, and the company earned only $663,000 on an enterprise value of $773 million. These fast-growing restaurant stocks don’t fit the Perfect Company model because the companies are investing profits to stake out territory, and the founders are cashing in some stock. After doubling my money in Chipotle and Cracker Barrel, I walked away from continued, dramatic increases, so I could be wrong about ZOES’ imperfections. There might be more rocket fuel in Mediterranean food than helicopter winches (BZC) or chips for super computers (NVDA). Also, the public tends to bid up companies that make the products that it admires every day and whose sales are growing (AAPL, CMG) – sometimes regardless of profitability (TSLA, AZMN).  We rate ZOES at 0.1.

    ITUB

    Large banks are puzzling because they can apply arbitrary values to assets, conduct vast, bizarre campaigns like robo-signing to capitalize on trends, and upend the very people who are supposed to understand them like former Merrill Lynch CEO Stanley O’Neal. However, my friend, Stephen, likes some Brazilian banks, and I like his theory: these are family-run banks and, despite the generally bad news, Brazil is not going out of business. Some Brazilian banks are making money, and their prices are depressed to the point that they are a good value.

    ITUB earns a solid 30 Perfect Company rating: earnings are great, and it pays a 3.2% dividend. The only reason I’m leery of this bank is that the enterprise value is so high. EVs are usually unnaturally low for banks; compare, for instance, BANF, an Oklahoma-based bank with a -$831 million (that’s negative) EV.

    CHINESE FAILS

    It’s an open secret that China is over-priced, so, this weekend, I looked for the worst Chinese companies; unfortunately, the Puts for these ADRs are mainly near term. Many of the worst had already hit the slopes: AMCN, CHC, CMFO, CNIT, ISS, YGE

    Others were still climbing and losing money: CJJD and NPD (two drug-store chains), CCIH, SHI, SOHU, VNET.  NPD fell 10% today.

    IMPERFECT GREECE

    The NY Times says lots of hedge funds have bought into Greece and are starting to panic. If you invest in a bank, you’re dealing with the locals, but, if you buy a shipping company, you’re buying ships at historically low prices and sending them out into a world that needs their services. I like Navios Marine (NMM) even better because, while it’s painted with the same brush as its Greek management, it’s headquartered in Monaco.  NMM pays a 16% dividend, but earned only $10.9 million in the recent quarter versus $18.4 million the year before. We score it a 14.6. If a general panic sends NMM to $6 (around 2009 levels), it will be my first buy.

    Monday
    Jun222015

    Trade Alerts 6-22-15

    The market surged last week. As of the Friday close, the S&P was up 2.44% since 12/10/15. PerfectCompany stocks are up 19.39%. Our most recent pick, BZC, maker of helicopter winches, was up 5.11%.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    6/19/2015

     

    +/-

                   

    1

    OLED

    0.00%

     $27.64

    12/10/2014

     $54.29

     

    96.42%

    2

    CTMMB

    5.37%

     $121.48

    12/10/2014

     $ 224.74

     

    85.00%

    3

    LOAN

    8.62%

     $3.25

    12/10/2014

     $  4.17

     

    28.31%

    4

    KIN

    0.00%

     $6.63

    12/10/2014

     $  7.46

     

    12.52%

    5

    WSTG

    0.04%

     $18.50

    5/4/2015

     $19.58

     

    5.84%

    6

    BZC

    0.00%

     $12.13

    6/10/2015

     $12.75

     

    5.11%

    7

    VIVO

    4.95%

     $17.77

    1/27/2015

     $18.56

     

    4.45%

    8

    ATNI

    1.69%

     $67.98

    12/10/2014

     $68.89

     

    1.34%

    9

    NVDA

    1.50%

     $22.28

    4/27/2015

     $21.87

     

    -1.84%

    10

    DRAD

    4.88%

     $4.10

    2/9/2015

     $  3.76

     

    -8.29%

    11

    SAVE

    0.00%

     $73.77

    12/10/2014

     $62.33

     

    -15.51%

       

    2.46%

           

    19.39%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $2,109.99

     

    2.44%

    “I’m a loser baby, so why don’t you kill me?”

    Tigress Financial upgraded Nvidia to buy on June 17. The big news is that there is a firm called Tigress Financial. I was hoping for a Princeton connection, but no such luck. Still, the web site has tigers.  Two years from now, we can all look back and say, “We should have listened to Tigress Financial. NVDA was a huge opportunity.” Insider trades have been net positive on NVDA by 488 thousand shares in the last 12 months and 44 thousand shares in the last 3 months. The company is growing, makes money and pays a 1.77% dividend. We rate it a 9.7.

    DRAD continues to grow a small company doing interest things in medical imaging, and is generating good numbers. Insiders are buying.  Sales and profits are growing, and it pays a 5.1% dividend. We give DRAD a PerfectCompany score of 10.2.

    Spirit Airlines has added a new board member. Dawn Zier is a marketer trained as an MIT engineer with stops at Reader’s Digest, Chase Manhattan and AT&T. She is currently the CEO of Nutrisystem where she is credited with a turnaround. I don’t usually ascribe much value to board members, but, in this case, Spirit may have recognized that it needs to move from a Crazy Eddy barrel-scraping discounting strategy (BLACK ON YELLOW SCREAMING PRICES) to a Target good-value discounting strategy. Everybody likes a good price, but people want to feel good about their decision to pay less – particular when they fly. If Dawn Zier can sell TV dinners by mail, she may help Spirit sell airline tickets.  Spirit continues to grow and make money, and I continue to believe that Spirit is taking customers from highways as much as from other airlines. We rate SAVE a 7.4.

    A concern for Tesla, props for Ford

    Pieces of my last American car, a Chrysler Pacifica, fell off while I drove. I once worked with a guy who said his job at Ford had been to ensure that the radio components would not function beyond five years. I am not a fan of American car companies.  However, this weekend my wife and I leased a Ford Fusion plugin. The car is nicely appointed, and acquaintances who drive Fusions are very happy with them.

    Surprisingly, the numbers for the Fusion are excellent. Ford sells about 2.5 million vehicles a year, and many are high-profit gas guzzlers, so Ford has a huge incentive to sell hybrid and plug-in Fusions, which improve the Corporate Average Fuel Economy (CAFE) for their fleet. I think I’m going to save $150 to $180 a month over a similarly configured gas car in lease, fuel and maintenance costs. Also, the car has excellent pickup and terrific electronics. When I ask my Acura to find a location, it turns on the radio; Ford’s voice recognition system works flawlessly.

    Buyers of Tesla stock may think that competitors are asleep at the switch. My experience is that Ford is already making an excellent, economical plugin with a small gas engine that overcomes the limited battery range. Further, Ford has economies of scale and distribution that could make it difficult to compete in the broader market for Tesla, which manufacturers perhaps 50,000 cars a year. If TSLA becomes a luxury electric brand, will it still be worth $32.8 billion?

    I looked at hybrids three years ago, and determined that gas would have to be $7 a gallon to make it worth buying one. That is no longer true. In fact, the Fusion Plugin is a better deal. Part of the price difference is the substantial tax subsidy that is captured immediately by the leasing company. Consumer buying patterns can change quickly when people start to understand the benefits of a new product. The next five to eight years could be to electric cars what the 80s were to personal computers. Tesla could become the Osborne of electric cars. Ford, on the other hand, may have to contend with the drag of its messy gas engine business – or it could get a major shot in the arm from electrics as IBM did from PCs.

    TSLA is a personality brand right now. I talk to people who think Tesla is profitable, though it has lost over a billion dollars in the last four quarters. Cash flow in the last quarter was negative $350 million, and the company has $1.5 billion of cash and short term investments. The short interest is at 7.7 days to cover. We rate TSLA a negative 8.2. Like many technology companies, Tesla may drop before it takes off. If Tesla survives, I think there will be opportunities to buy it at a steep discount to its current price.

    It’s still early days for electrics, but here’s one attempt to keep score.

    IMPERFECT COMPANIES

    I keep looking for companies to buy. In the meantime, here is one that comes close:

    NLNK

    First, the bad news: 12 days of short interest and insiders are selling. The other news is that NLNK grew from $1 million in 2013 sales to $172 million in 2014, and it earned 11.6% on its enterprise value in the last four quarters. $169 million in sales came in the fourth quarter of last year; sales in Q1 2015 were $39 million. NLNK's growth factor would create a PerfectCompany score that is off the charts.

    “NewLink Genetics Corporation (NLNK) is a biopharmaceutical company focused on discovering, developing and commercializing immunotherapeutic products for cancer treatment. Its portfolio includes both biologic and small-molecule immunotherapy product candidates. Its biologic product candidates are based on its HyperAcute immunotherapy technology, which is designed to stimulate the human immune system. Its small-molecule product candidates are focused on breaking the immune system's tolerance to cancer by inhibiting the indoleamine-(2, 3)-dioxygenase (IDO) pathway.”

    NLNK may be too good to be true, or it may be Microsoft at $1 billion. If you understand this company or its technology, I'd like to hear from you at gpaul@perfectcompany.com

    Thursday
    Jun182015

    Trade Alerts June 15, 2015

    The Perfect Company portfolio traded twice last week, selling PDLI and buying BZC. Since Dec 10, 2014 when we started, the PC companies are up 17.3% and the S&P 500 is up 1.66%. We have also sold 6 companies, which are up an average of 9% annualized. We annualize the sells because it would be easier to sell losses quickly and focus on the winners, but annualizing the sells shows how that money was used. Ideally, I would like the annualized sells to match or exceed the gains of the portfolio. Worst case, I would like the losses of the sells to be fairly modest and for the portfolio to hold progressively larger unrealized (and untaxed) gains.

    The sale of PDLI last week was painful because we held PDLI for only 2.3 months, and the annualized loss was magnified. PDLI rose to $6.48 after we sold it, so our sells may provide a new buy indicator. PDLI is interesting, but it does not fit our model of a growing perfect company. Our next most speculative play, Kindred Biosciences (KIN), seems to be working out. The company hired the former Associate General Counsel and Director of Patent Law from Genentech on May 28; in June, the stock has risen 22%.

                   

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    6/12/2015

     

    +/-

                   

    1

    OLED

    0.00%

     $ 27.64

    12/10/2014

     $ 53.63

     

    94.03%

    2

    CTMMB

    5.37%

     $ 121.48

    12/10/2014

     $ 212.00

     

    74.51%

    3

    LOAN

    8.62%

     $3.25

    12/10/2014

     $4.20

     

    29.23%

    4

    KIN

    0.00%

     $6.63

    12/10/2014

     $7.64

     

    15.23%

    5

    VIVO

    4.95%

     $ 17.77

    1/27/2015

     $ 18.42

     

    3.66%

    6

    WSTG

    0.04%

     $ 18.50

    5/4/2015

     $ 18.76

     

    1.38%

    7

    ATNI

    1.69%

     $ 67.98

    12/10/2014

     $ 67.87

     

    -0.16%

    8

    BZC

    0.00%

     $ 12.13

    6/10/2015

     $ 12.00

     

    -1.07%

    9

    NVDA

    1.50%

     $ 22.28

    4/27/2015

     $ 21.11

     

    -5.25%

    10

    DRAD

    4.88%

     $4.10

    2/9/2015

     $3.78

     

    -7.80%

    11

    SAVE

    0.00%

     $ 73.77

    12/10/2014

     $ 63.85

     

    -13.45%

       

    2.46%

           

    17.30%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $ 2,094.11

     

    1.66%

                   
     

    LIQUIDATED POSITIONS

           

    $

    ATAI

    12.17%

     $3.37

    12/10/2014

     $4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

    $

    WSTG

    3.85%

     $ 17.64

    12/10/2014

     $ 17.55

     

    -0.51%

         

     SOLD

    3/23/2015

    Annualized:

     

    -2%

    $

    FF

    3.78%

     $ 12.70

    12/10/2014

     $ 12.34

     

    -2.83%

         

     SOLD

    3/23/2015

    Annualized:

     

    -10%

    $

    IBM

    2.70%

     $ 162.99

    12/10/2014

     $ 169.78

     

    4.17%

         

     SOLD

    5/1/2015

    Annualized:

     

    11%

    $

    PRCP

    1.30%

     $ 11.50

    12/10/2014

     $ 12.11

     

    5.30%

         

     SOLD

    5/4/2015

    Annualized:

     

    13%

    $

    PDLI

    8.52%

     $7.07

    3/30/2015

     $6.20

     

    -12.26%

         

     SOLD

    6/10/2015

    Annualized:

     

    -62%

           

    Avg Annualized:

     

    9%

     

    Thursday
    Jun112015

    PerfectCompany trade alerts 6-11-15; Sell PDLI, Buy BZC

    Since December 10, 2014, the PerfectCompany portfolio was up 18% as of Friday, June 5; the S&P 500 was up 1.6% in the same period.

    Symbol

    DIV@BUY

     BUY

    DATE IN

    6/5/2015

     

    +/-

                 

    OLED

    0.00%

     $27.64

    12/10/2014

     $55.20

     

    99.71%

    CTMMB

    5.37%

     $121.48

    12/10/2014

     $ 228.98

     

    88.49%

    LOAN

    8.62%

     $3.25

    12/10/2014

     $ 4.15

     

    27.69%

    KIN

    0.00%

     $6.63

    12/10/2014

     $ 7.13

     

    7.54%

    VIVO

    4.95%

     $17.77

    1/27/2015

     $18.48

     

    4.00%

    WSTG

    0.04%

     $18.50

    5/4/2015

     $18.61

     

    0.59%

    NVDA

    1.50%

     $22.28

    4/27/2015

     $22.26

     

    -0.09%

    ATNI

    1.69%

     $67.98

    12/10/2014

     $67.16

     

    -1.21%

    DRAD

    4.88%

     $4.10

    2/9/2015

     $ 3.82

     

    -6.83%

    PDLI

    8.52%

     $7.07

    3/30/2015

     $ 6.39

     

    -9.62%

    SAVE

    0.00%

     $73.77

    12/10/2014

     $65.37

     

    -11.39%

     

    3.23%

           

    18.08%

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     $2,059.82

     

     

     $2,092.84

     

    1.60%

     

    We have a new leader: Universal Display (OLED)

    OLED climbed to almost 100% increase in six months because the company is licensing its patents to Samsung, LG and other leading manufacturers. This article in Businessweek (June 4, 2015) notes, “Unlike LCDs, which rely on a separate light source behind the screen, OLEDs illuminate themselves, resulting in far slimmer and lighter displays. OLED TVs show deeper blacks and richer colors. ‘When you see one LCD and one OLED side by side, there’s definitely a 120 percent difference,’ says Han Sang Beom, LG Display’s chief executive officer.” And further: “LG Display expects to sell 600,000 OLED TVs this year and 1.5 million next year. Claire Kim, an analyst in Seoul with Daishin Securities, says more efficient manufacturing of OLED panels will help bring the price down.” This technology is taking off after many years in development, and Universal Display is preparing to go after the lighting business as manufacturing costs decrease.

    CTMMB declines – what happened?

    CTMMB is still a thinly traded company that increases in price more because no one is selling than because people are buying. When someone sells CTMMB lately, the price drops, but often recovers within days, which indicates that others would like to accumulate it. CTMMA, another class of stock with a market cap of $12 million versus $80 million at CTMMB, sometimes increases when CTMMB declines. My CTMMA stock is up an average of 271% since I began buying it in 2012. It was up 14% one day last week, but has declined so far this week. This is a sideshow compared to the potential for CTM’s entertainment business. The company is converting from a brochure distribution company (CTM) with an interest in comic books to an entertainment company called IDW Media Holdings with interests in games, television, graphic novels and art.

    You can argue with success.

    Making money investing is hard enough, but it’s annoying, too, when people say, “Yes, but, if you didn’t have this or that stock, you wouldn’t have that return.” (No one ever says, “Gee, you would have done even better without that loser!”) Except I did have that stock, and I usually held onto it while it sank for a while and resisted selling it while it rose. Peter Lynch extolled his 10-baggers (a metaphor for a baseball player that keeps rounding the bases), which are the stocks that propel a portfolio. If the entire economy is growing at less than 2% and the S&P 500 is running at an annual rate of perhaps 3%, then you had better have some rocket fuel to beat the market. I think all the companies in this portfolio can grow faster than the market for reasons that I have enumerated, though price increases tend to be episodic. They stew for a while – and sometimes too long – until the market discovers them or some fundamental technology shift comes into plain view. Or they begin to rot. It is as important to cut losses as to shoot the moon.

    Sell PDLI

    My riskiest pick has been PDLI, which is attempting to invest enough in time to make up for its “Queen” patents expiring in 2016. The company presented at Jeffries on Wednesday, June 3, its ex-dividend date. The stock dropped the next day, probably due to dividend sellers or perhaps because no one at the Jeffries conference was impressed. As of May 29, the short interest was at 39.9 million shares; in the first quarter, insiders purchased 88 thousand shares. When I asked the company about the Queen patents, it responded that “We have not given any guidance as to the amount of the decrease as it depends on how much we are able to increase our revenue from other assets to offset the reduction in the Queen royalties.” There are at least three interpretations:

    1. PDLI management knows it cannot make up for the loss of revenue, and is putting on a brave face by buying stock cheaply.
    2. Management is collecting huge option packages, and doesn’t mind seeing the stock price get hit because they’re going to make a fortune when they announce their next deals. If they don’t save the day, they’ll see fewer law suits; if they do, they’ll be heroes for a week.
    3. Management is not very articulate. Some people are mesmerizing: Jeff Bezos has been selling losses and minimal profits for most of Amazon’s history. In fact, in the last five years, Amazon has made 1.8 times the after-tax earnings of PDLI, yet AMZN is worth 200 times PDLI.

    If PDLI sales drop by 75%, expenses remain constant, and the tax rate remains 36%, PDLI will earn about $86 million in the first full year after the loss the Queen patents. With $419 million in cash on a $1B market cap, it’s hardly a disaster in the making.

    Whatever the truth, the ideal Perfect Company is growing, profitable, and has a sensible upside. PDLI has great history, but a murky future. It doesn’t fit our model and it’s not going up, so I’m selling.

    Buy Breeze Eastern (BZC) Helicopter Winches

    If PDLI is reticent, Breeze-Eastern makes a charming impression. Take a look at www.breeze-eastern.com  "Breeze-Eastern is the world's only dedicated helicopter hoist and winch provider." This is another small cap, but sales and profits are up, the company has lots of cash and no long-term debt, and, if you like drones, BZC is an interesting play. While many companies will make drones for moving and lifting payloads, BZC will be uniquely positioned to supply the devices that handle the payloads. Tinicum Capital Partners owns 28% of BZC, and has two seats on the board. In the last 5 years, insiders have on average purchased 237,554 shares each year. After-tax profits in the recent quarter grew from $2.8 million to $5.4 million. Breeze-Eastern has a market cap of $118 million, an enterprise value of $97 million, and a PerfectCompany rating of 16.2.

    Mark Twain on the nature of predictions

    Last Thursday, I thought it might be fun to see a real horse race at a local casino until I realized that I could see a Triple Crown race in New York on the same day. I got six seats to Belmont through SeatGeek.com, and the tickets arrived by FedEx on Friday morning. The whole experience made me wish I could invest in SeatGeek, a private company that appears to be the best of the ticket services, and to reflect on how people make predictions.

    For instance, my friends wanted to know why I didn’t make a lot of money betting on American Pharoah. Once the race was over, they all said that they knew beyond a shadow of a doubt that American Pharoah would win. No one said that beforehand, but everyone was certain afterward that they were certain beforehand. AP was the crowd favorite, so it paid only $7.60 on a $4 bet. I’m not as smart about horses as my friends, but the lack of a Triple Crown winner in the last 37 years indicated some uncertainty, which further diminished the attraction of those odds. “It is difference of opinion that makes horse races,” said Mark Twain, and it is difference of opinion that provides the opportunity for remarkable returns.

    The downside of holding underappreciated investments is that I may have to hold on too long while opportunities develop or I may get crushed as things get worse prior to getting better (PDLI?). For instance, I think that Spirit Airlines is cleverly expanding the airline business and that its higher margins and lower costs will help it take share from other airlines as competition ramps up. I think it has a chance to become the Wal-Mart of airlines and to roll over the middling discounters and traditional carriers who offer poor service and higher prices.  I could be wrong, though, so I protect myself by generally selecting companies that are growing and have enough cash to reduce their enterprise value to less than their market cap – in the case of Spirit by about 15%. In the worst case – Spirit’s sales fall despite new operating routes – I will admit defeat and liquidate the position. My multi-baggers will have to make up the loss.

    “What will the market do?”

    Given anemic sales growth, I think the market will probably sink through the summer and, as it has in every year since 2008, rise at the end of the year. The major indices are a popular measurement of economic health and a propellant for the end-of-year animal spirits. They are also, I believe, an indicator of the bonuses that the finance industry can unabashedly pay itself in the first quarter. Last year, Wall Street bonuses grew to $28 billion while industry profits dropped to $16 billion. This is not an industry that works for its shareholders, as it exhorts to the companies whose shares it controls. The inmates want to be paid, so, if they have anyone else’s cash lying around and the world isn’t on fire, they will throw it at the markets in the fourth quarter.

    Thursday
    Jun042015

    Perfect Company Trade Alerts 5/31/15

    Since Dec 10, 2014, Perfect Company stocks are up 19.08%; the S&P 500 is up 2.31%.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    5/29/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $121.48

    12/10/2014

     $ 249.00

     

    104.97%

    2

    OLED

    0.00%

     $  27.64

    12/10/2014

     $53.71

     

    94.32%

    3

    LOAN

    8.62%

     $3.25

    12/10/2014

     $ 4.32

     

    32.92%

    4

    VIVO

    4.95%

     $  17.77

    1/27/2015

     $18.20

     

    2.42%

    5

    WSTG

    0.04%

     $  18.50

    5/4/2015

     $18.70

     

    1.08%

    6

    NVDA

    1.50%

     $  22.28

    4/27/2015

     $22.13

     

    -0.67%

    7

    ATNI

    1.69%

     $  67.98

    12/10/2014

     $67.05

     

    -1.37%

    8

    DRAD

    4.88%

     $4.10

    2/9/2015

     $ 4.03

     

    -1.71%

    9

    KIN

    0.00%

     $6.63

    12/10/2014

     $ 6.45

     

    -2.71%

    10

    PDLI

    8.52%

     $7.07

    3/30/2015

     $ 6.68

     

    -5.52%

    11

    SAVE

    0.00%

     $73.77

    12/10/2014

     $63.57

     

    -13.83%

       

    3.23%

           

    19.08%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $2,107.39

     

    2.31%

     

    I always admired Mr. Ed for never speaking unless he had something to say, so this post is not going out to my loyal readers. Last week, our data feed was down, and I’ve been calculating PerfectCompany scores from likely candidates, but haven’t found anything that I like better than the current investments.

    IMPERFECT COMPANIES

    MKTY  PCS=22.1  This looks like a fine little company, and the CEO bought 4000 shares on May 21, but it’s only a $6 million market cap at $1.15 a share. Believe it or not, MKTY sold for $632 a share in 2000. This might be a fun company to buy for a kid and put away.  For $150, you could get 100 shares. If it ever reaches its high again, they’ll have $63,200.

    MTEX  PCS=25.6  Another small company, but one with international ambitions to sell “wellness.” Mannatech develops and sells nutritional supplements, topical and skin care products and weight-management products that target optimal health and wellness. This is another small company with a $55 million market cap, but these people appear shrewd at packaging and selling products. I don’t believe in these kinds of products, but it wouldn’t surprise me if MTEX does very well.

    This has been a Filmways Presentation.

    Monday
    May252015

    Trade Alerts May 25, 2015

    Since Dec 10, 2014, the Perfect Company portfolio isup 19.7%. The S&P is up 3.2%.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    5/22/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $ 121.48

    12/10/2014

     $249.00

     

    104.97%

    2

    OLED

    0.00%

     $27.64

    12/10/2014

     $53.46

     

    93.42%

    3

    LOAN

    8.62%

     $  3.25

    12/10/2014

     $4.39

     

    35.08%

    4

    DRAD

    4.88%

     $  4.10

    2/9/2015

     $4.31

     

    5.12%

    5

    VIVO

    4.95%

     $17.77

    1/27/2015

     $18.27

     

    2.81%

    6

    KIN

    0.00%

     $  6.63

    12/10/2014

     $6.80

     

    2.56%

    7

    WSTG

    0.04%

     $18.50

    5/4/2015

     $18.65

     

    0.81%

    8

    ATNI

    1.69%

     $67.98

    12/10/2014

     $67.38

     

    -0.88%

    9

    PDLI

    8.52%

     $  7.07

    3/30/2015

     $6.66

     

    -5.80%

    10

    NVDA

    1.50%

     $22.28

    4/27/2015

     $20.86

     

    -6.37%

    11

    SAVE

    0.00%

     $73.77

    12/10/2014

     $62.34

     

    -15.49%

       

    3.23%

           

    19.66%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $2,126.06

     

    3.22%

                   
     

    LIQUIDATED POSITIONS

           

    $

    ATAI

    12.17%

     $  3.37

    12/10/2014

     $4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

    $

    WSTG

    3.85%

     $17.64

    12/10/2014

     $17.55

     

    -0.51%

         

     SOLD

    3/23/2015

    Annualized:

     

    -2%

    $

    FF

    3.78%

     $12.70

    12/10/2014

     $12.34

     

    -2.83%

         

     SOLD

    3/23/2015

    Annualized:

     

    -10%

    $

    IBM

    2.70%

     $ 162.99

    12/10/2014

     $169.78

     

    4.17%

         

     SOLD

    5/1/2015

    Annualized:

     

    11%

    $

    PRCP

    1.30%

     $11.50

    12/10/2014

     $12.11

     

    5.30%

         

     SOLD

    5/4/2015

    Annualized:

     

    13%

           

    Avg Annualized:

     

    23%

     

    In the past week, LOAN took a hit, OLED continued climbing, Spirit crashed, and DRAD went from a 5% loss to a 5% gain. The only news on DRAD is that I inquired at the company’s Investor Relations about their PermaFix initiative, and they did not respond to me. In the short term, there is very little news, so it is hard to know why prices move.

    We like to think that we are right because our facts our right, but what if our facts are wrong? New reader, Paul, once kept this cartoon on his desk, which suggests such a situation:

     

    Has someone seen a fire at Spirit Airlines?

    Paul also mentioned the “Keynesian Beauty Contest” in which men are asked, first, to name the most beautiful woman in a room, and, second, to name which one of the women they think would win a beauty contest. The second question causes the men to speculate about ideas of cultural beauty and to agree upon a different candidate. Keynes suggests that the problem can extend to third and further degrees as participants attempt to anticipate the actions of what others think and how others may think about what they themselves think.

    There are at least three ways to attempt to anticipate price changes. I don’t use any of them.

    1. Speculate about what other people will buy.
      For most of my business life, I have dealt with executives who claim that they believe in customer service, but have rarely ever spoken to a customer. Legions of executives believe that they understand what people want, which, happily, ensures that they never have to listen to the public. For years, they have been a source of private amusement to me – especially when I ask them if they would buy the same product or service they advocate, and they will not.

      This kind of person blathers on about buying momentum stocks such as, say, a for-profit college. However, when prices rise on little more than animal spirits, they plummet on the first bad news. Owning such companies is nerve-wracking at best, and loss-making at worst.

      Neither do I feel confident in my own ability to guess what other people will buy. While I analyze companies for growth potential and value, I am often most confident about the ones whose prices linger and surprised by the ones that take off.

      If you ask them, customers will tell you what they want, and, as owners of a diversified portfolio, we are retailers waiting to see what other people will buy. I am most comfortable picking companies I would like to own at values that I think other rational people will find attractive. Once the price starts to move, momentum buyers take over, and I am often surprised how far beyond a rational value they will carry the price.

    2. Calculate trends from price and volume data.
      Many people believe that all information is built into price data. (See cartoon above for another perspective.) I once knew someone who contracted with an expensive, fool-proof system that had an excellent history of picking the right stocks each week based on price movements. However, the system sold when it should have bought, and vice versa. The results were poor, but this is what can happen when one attempts to game the market. As the beauty contest evolves to infinite mental tail-chasing and separates from its basic value – in this metaphor, beauty – you can end up with some horrific would-be winners who are eventually exposed.

    3. Scan the literature for sentiment trends.
      This is a variant of price and volume data: scan all publications for the increase of positive or negative key words, and more frequent mentions in general. Apply “big data” to stock chatter. This has been going on for years at Fidelity, and I’ve seen demonstrations from smaller operators. It seems like a good idea, but it’s another way of predicting stock-buying behavior instead of business trends. Insincere actors can also pervert the beauty contest through postings such as the fake bid for Avon to the SEC last week. Tremendous value is created and lost based on chatter unrelated to the value of the business.

    Will Spirit rise again?

    Spirit Airlines is the worst performing stock we have continued to hold. Pundits blame this week’s airline sell-off on Southwest, which said it would expand between 7 and 8% rather than just 7%. Investors are afraid that airlines will resume their historic competition bashing, which destroys profitability. However…

    • Jet fuel costs are down by a third since August.
    • Barclays maintains a $105 price target on Spirit.
    • Spirit understands the low-cost business, and has much higher operating margins than, for instance, JetBlue (see last week’s PC Trade Alerts.)
    • Spirit is taking customers from highways as well as from major airlines.
    • In short, while many airlines have stumbled into good times by bankrupting themselves again, Spirit is actually innovating in low-cost travel. Spirit, like other discounters before it, pays attention to costs. Nobody likes paying to print their boarding tickets, but second-time flyers print their own Spirit boarding tickets, save money, and make the airline more efficient. How many times have you stood around a Delta/American/United terminal while a paid employee directed you to a self-check-in terminal that wasn’t broken?

    I would buy Spirit today, so I’m holding it.

    More fun facts from Oz: People come and go so quickly here.

    ATAI, our former Chinese holding, has been rising lately, which makes me think wistfully of all the opportunities in China that I don’t understand. As a counterpoint, the Economist noted this week that Li Hejun’s Hanergy shares were cut in half when that billionaire attended a museum opening rather than his shareholder meeting. Mr. Li was once “reckoned to be China’s richest man.” Previously, Shi Zhengrong, boss of SunTech, which went bankrupt in 2013, was China’s richest man. Imagine a country where nothing is what it seems, but it seems kind of amazing. That’s China.

    IMPERFECT COMPANIES

    Freightcar America (RAIL)

    I liked Lionel O27 trains as a kid, so I like a company that makes and repairs rail cars. Also, RAIL has $89.7 million in cash on a $283 million market cap, no long-term debt, pays a 1.6% dividend, has a Perfect Company score of 9.05, is hiring in the U.S., makes lightweight aluminum cars, and is being bought by insiders. Sales in the first quarter increased from $56 million to $92 million. Also, one analyst has a $30 price target on RAIL, which is at $23 today.

    RAIL is in a basic industry that has also benefitted from technical improvements. When I was a young man, I remember being astonished that railroad companies didn’t know where their railcars were. Today, railroads have become more efficient through GPS and computer routing. Railroads are the most efficient way to move freight, and I think they will continue to improve. Perhaps trains will park at a drone stop outside of town to await final delivery. I’m kidding.

    Two things make me nervous about RAIL:

    1. It’s been a feast or famine company. Sales for the last five years are ($millions): $143 $487 $677 $290 $599. I would like to see an overall increase this year. The first quarter indicates great progress.
    2. RAIL made lots of coal cars, and we are killing off the U.S. coal industry. However, oil is now moving by rail, and, as a parts provider for other manufacturers, RAIL may benefit. I simply don’t know enough about coal and railroads to tell whether RAIL is an excellent buy at this time.

    I like RAIL, but I’m not ready to buy.

    Monday
    May182015

    Trade Alerts 5/18/15

    Since December 10, 2014, the Perfect Company portfolio is up 19.8%; the S&P 500 is up 3.1%. 

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    5/15/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $121.48

    12/10/2014

     $ 249.00

     

    104.97%

    2

    OLED

    0.00%

     $ 27.64

    12/10/2014

     $50.39

     

    82.31%

    3

    LOAN

    8.62%

     $3.25

    12/10/2014

     $4.74

     

    45.85%

    4

    KIN

    0.00%

     $6.63

    12/10/2014

     $7.29

     

    9.95%

    5

    VIVO

    4.95%

     $ 17.77

    1/27/2015

     $18.04

     

    1.52%

    6

    WSTG

    0.04%

     $ 18.50

    5/4/2015

     $18.57

     

    0.38%

    7

    ATNI

    1.69%

     $ 67.98

    12/10/2014

     $67.74

     

    -0.35%

    8

    NVDA

    1.50%

     $ 22.28

    4/27/2015

     $21.30

     

    -4.40%

    9

    DRAD

    4.88%

     $4.10

    2/9/2015

     $3.89

     

    -5.12%

    10

    PDLI

    8.52%

     $7.07

    3/30/2015

     $6.45

     

    -8.77%

    11

    SAVE

    0.00%

     $ 73.77

    12/10/2014

     $67.11

     

    -9.03%

       

    3.23%

           

    19.76%

                   

    $

    ATAI

    12.17%

     $3.37

    12/10/2014

     $4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

    $

    WSTG

    3.85%

     $ 17.64

    12/10/2014

     $17.55

     

    -0.51%

         

     SOLD

    3/23/2015

    Annualized:

     

    -2%

    $

    FF

    3.78%

     $ 12.70

    12/10/2014

     $12.34

     

    -2.83%

         

     SOLD

    3/23/2015

    Annualized:

     

    -10%

    $

    IBM

    2.70%

     $162.99

    12/10/2014

     $ 169.78

     

    4.17%

         

     SOLD

    5/1/2015

    Annualized:

     

    11%

    $

    PRCP

    1.30%

     $ 11.50

    12/10/2014

     $12.11

     

    5.30%

         

     SOLD

    5/4/2015

    Annualized:

     

    13%

             

    Avg Annualized:

     

    23%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $ 2,122.73

     

    3.05%

     

    Nvdia (NVDA) declares dividend, gets promoted on HBO’s “Silicon Valley”. Buy.

    If you buy Nvidia in the next two days (by 5/19/15), you’ll get the regular quarterly cash dividend of $0.0975 per share, payable to shareholders on 6/12/15. If you’ve been watching HBO’s hilarious Silicon Valley series, you may have noticed that Pied Piper is using GPUs to build their own specialized servers to speed up their compression algorithm. Nvidia pioneered GPUs, and is mentioned in this Reddit discussion of the show.  If you’re not watching Silicon Valley, you’re either missing out, or you’re my wife who finds the show painful because we’ve had some of the same experiences with similar real-life characters.

    Spirit or JetBlue?

    Over the last five years, Spirit Airlines stock has outperformed JetBlue by 2X. However, JBLU has flown by SAVE in the last year. What happened?

    Spirit has an image problem, and its cheeky advertisements are not helping. Spirit ran this ad about its 69th plane, and the company often flies on the edge of taste. In my experience actually traveling with Spirit, the prices are excellent and the service is efficient.  However, the best marketing approach for a low-cost supplier is to constantly tout quality. People instantly discover the best price, but they like to be assured that they are buying a quality product.

    Years ago, Elephant Diskettes succeeded with this strategy.  Like every other diskette manufacturer, Elephant met or exceeded ANSI specifications, but only Elephant advertised its ANSI qualifications. Buyers got the feeling that Elephant must be an excellent product, and shoppers discovered that Elephant was also the best price. Elephant diskettes became one of the best-selling media brands in history, and was eventually acquired by Dennison Manufacturing.

    Here’s how the numbers compare: (1) JBLU has more debt (2) JBLU earns a slightly better return on EV (3) however, JBLU’s after-tax margins dropped in the last three quarters:  without the first of these quarters, JBLU margins dropped from 8.9% to 6.8% (4) SAVE’s margins held at 12.9%. (5) JBLU has 3X the sales of SAVE; in the most recent quarter, both companies grew sales by 13% year over year. 

     

    Return 

    Q1 Sales

    Q2 Sales

    Q3 Sales

    Q4 Sales

    JBLU Enterprise Value

    $8.02B

    1,493

    1,529

    1,446

    1,523

    Last 4 Qtr profits

    $534M

    230

    79

    88

    137

    Return on EV/Margin

    6.7%

    15.4%

    5.2%

    6.1%

    9.0%

               

    SAVE Enterprise Value

    $4.55B

    499

    520

    474

    493

    Last 4 Qtr profits

    $256.8M

    65

    67

    56

    69

    Return on EV/Margin

    5.6%

    13.0%

    12.9%

    11.8%

    14.0%

     

     

     




    Executives are voting with their feet: JetBlue insiders are selling and Spirit insiders are buying:

    NET INSIDER SHARE PURCHASES

    3 MONTHS

    12 MONTHS

    JBLU

    -243,614

    -690,880

    SAVE

    144,806

    95,814

     

    JBLU’s stock has caught up somewhat with SAVE this year, but insiders are selling. JBLU is trying to stake out a middle ground, which is a hard place to be. SAVE has a marketing problem, which can be fixed faster than a positioning or logistical problem. Spirit is defining the low-end of the market, and has the systems to support it. Given the insider buying and the healthy margins, I’m sticking with SAVE.

    PDLI: Should I stay or should I go?

    That’s a challenging question. PDLI now sports a 9% dividend because of fear that the expiring Queen patents will leave the company with considerably diminished revenue. I asked the company for guidance this week; here is their response:

    Thank you for your interest in PDL BioPharma.  The revenue related to the end of royalties from the Queen et al patents will not decrease until the second quarter of 2016.  We have not given any guidance as to the amount of the decrease as it depends on how much we are able to increase our revenue from other assets to offset the reduction in the Queen royalties.

    As of 4/30, short interest was 36.7 million shares of 164 million shares outstanding. The company has $419 million in cash and short term investments for new acquisitions. In the last 12 months, insiders have purchased 264,767 shares. 95.8% of owners are investment managers – hedge funds, banks, insurance companies, investment funds, and sovereign wealth funds – Davos-goers who probably have more information about the situation than we have.

    As a patent owner, PDLI has low operating costs and is very profitable. Let’s say that, despite their best efforts, PDLI’s after-tax profitability gets cut in half from $333.9 million in the last four quarters to $166.9 million. With today’s EV, that’s a 14% return, which is worth owning.

    PDLI is not a perfect company, but it has an episodic upside that is easy to imagine: the company announces one or two acquisitions, the shorts get squeezed, and PDLI is the stock of the month. Can they do it? Many people – including the insiders themselves – seem to think they can.

    What about the stocks we have sold this year?

    I sell when I would no longer buy the company or when I have a better alternative. We replaced IBM with Nvidia because NVDA is solidly profitable, has amazing opportunities, and is even building super computers with IBM. We bought back WSTG because their sales are growing again. We sold ATAI because their educational testing sales were declining in China; their CFO resigned this week; ATAI is a crap shoot.  Biofuels look like they were a bad idea – see this Economist article. Future Fuel’s CEO left, and the company missed revenues by 34% last quarter. I wish I had sold sooner, but am glad we got out when we did.  It’s too early to tell with PRCP, but we sold at $12.11 on May 4, and it’s now priced at $11.54 in a fairly bullish market.

    Imperfect Companies

    COHU sells test handling, burn-in and thermal solutions used by the global semiconductor industry, microwave communications and closed-circuit television equipment.  The company had sales of $322 million in 2010, $333 million in 2014, and less than those in intervening years. It earned $29 million in 2014, lost $37 million in 2013, and earned $9 million in 2014. COHU is feast or famine, but, lately, insiders are buying, it’s growing, it’s making money, and it pays a 2% dividend. We give COHU a PerfectCompany score of 1.02, which is positive, but less than the 2+ that we usually seek. They lost money in the first quarter, but only half of what they lost in the same quarter last year. I’d like to see COHU put together a string of positive quarters before buying their stock.

    Feel free to look for Perfect Companies using our custom stock screener here:  http://www.perfectcompany.com/perfect-company-stock-screener/

    Wednesday
    May132015

    Trade Alerts 5-13-15

    As of Friday, May 8, Perfect Company stocks selected since 12/10/14 are up an average of 18.6%; the S&P 500 is up 2.7%. Stocks we have sold are up an average annualized rate of 23%.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    5/8/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $ 121.48

    12/10/2014

     $ 249.00

     

    104.97%

    2

    OLED

    0.00%

     $ 27.64

    12/10/2014

     $49.98

     

    80.82%

    3

    LOAN

    8.62%

     $3.25

    12/10/2014

     $4.50

     

    38.46%

    4

    KIN

    0.00%

     $6.63

    12/10/2014

     $7.10

     

    7.09%

    5

    VIVO

    4.95%

     $ 17.77

    1/27/2015

     $18.44

     

    3.77%

    6

    DRAD

    4.88%

     $4.10

    2/9/2015

     $3.99

     

    -2.68%

    7

    WSTG

    0.04%

     $ 18.50

    5/4/2015

     $17.77

     

    -3.95%

    8

    ATNI

    1.69%

     $ 67.98

    12/10/2014

     $65.04

     

    -4.32%

    9

    PDLI

    8.52%

     $7.07

    3/30/2015

     $6.67

     

    -5.66%

    10

    NVDA

    1.50%

     $ 22.28

    4/27/2015

     $20.83

     

    -6.53%

    11

    SAVE

    0.00%

     $ 73.77

    12/10/2014

     $68.14

     

    -7.63%

       

    3.23%

           

    18.58%

                   

    $

    ATAI

    12.17%

     $3.37

    12/10/2014

     $4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

    $

    WSTG

    3.85%

     $ 17.64

    12/10/2014

     $17.55

     

    -0.51%

         

     SOLD

    3/23/2015

    Annualized:

     

    -2%

    $

    FF

    3.78%

     $ 12.70

    12/10/2014

     $12.34

     

    -2.83%

         

     SOLD

    3/23/2015

    Annualized:

     

    -10%

    $

    IBM

    2.70%

     $ 162.99

    12/10/2014

     $ 169.78

     

    4.17%

         

     SOLD

    5/1/2015

    Annualized:

     

    11%

    $

    PRCP

    1.30%

     $ 11.50

    12/10/2014

     $12.11

     

    5.30%

         

     SOLD

    5/4/2015

    Annualized:

     

    13%

             

    Avg Annualized:

     

    23%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $ 2,116.10

     

    2.73%

     

    A few weeks ago, we held almost all winners, which is unusual. I expect losers, but the plan is to minimize losses and to let the winners run. I have written in detail about why OLED could be the next Qualcomm and CTMMB the next Marvel. Tiny Manhattan Bridge Capital (LOAN) announced last week a 49.8% increase in sales and a 128% increase in net income. I continue to like the idea of lending to builders in Manhattan where everyone in the world wants a residence.

    Last week’s losers were shaved for failing to meet expectations. Nvidia’s growth was held back by the weak PC market, though the company still grew, expanded its margins to a record 56.7%, increased its dividend by 15%, and amassed $4.6 billion in cash. Trefis notes, “Its strategy of creating specialized application-specific platforms continues to gain traction. These include: 1) gaming; 2) enterprise computing; 3) high-performance and cloud computing; and, 4) automotive infotainment and control. The four segments contributed more than 80% of its Q1 2016 revenue, up from 68% a year ago.” Also: “During the quarter, Nvidia announced the availability of its DRIVE PX deep learning development platform, which provides researchers with the computing platform and software tools to develop algorithms for self-driving cars. The company has started shipping DRIVE PX to developers around the world.” NVDA has a head-start in core technologies that will create major wealth in the next five years.

    KIN spent $6 million last quarter and still has no revenues, but no insider sales either. It’s #4 on our hit parade.

    ATNI is being sold for the wrong reasons. First quarter revenues increased 14% and operating income 18%. ATNI sold a loss-making wireless division in Turks and Caicos and booked the loss in the first quarter. This will stop further losses at that division, shelter future gains, and be forgotten by the end of the year. The company’s cash position increased from $326 million to $380 million in the first quarter. ATNI is a buying opportunity.

    Are we in a tech bubble?

    One Twitterer noted that the market must have hit a top because AOL has been purchased again – this time by Verizon. Are we in a tech bubble? It depends on the company. Anecdotally, most investors select investments with divining rods: “I have a good feeling about this!” Peter Lynch once suggested that anyone could have made money on L’eggs hosiery by taking notice of the egg-shaped containers proliferating in stores and shopping carts. Lynch, though, also looked at the value of a company, an activity that appears to be missing in most tech investing. You can hardly blame a “bubble” when you leap before you look.

    For instance, I love Amazon. I use their cloud service, buy everything I can in their stores, watch their Prime original programming, and sometimes even use their Mechanical Turk service. They are an amazing company, and the price keeps going up. However, if I were to own Amazon, I would be paying top dollar to lose 0.2% a year:

    AMZN Enterprise Value

     $204,820,000,000.00

    After-tax Profits last 4 qtrs

     $      (376,000,000.00)

    Return

    -0.2%

    Here is Nvidia:

    NVDA Enterprise Value

     $  7,949,000,000.00

    After-tax Profits last 4 qtrs

     $     631,000,000.00

    Return

    7.9%

    Amazon is great, but it has substantial competition in cloud (Google, Microsoft), online retailing (WalMart, Alibaba), TV (Netflix, Hulu), etc. – and they lose money. Still, the stock is going up – I should buy it, right? Who knows? How do you value such a thing? (I sold my AMZN a while ago.)

    Nvidia owns proprietary technology that is being used in the burgeoning world of GPU processing from Oculus VR to super computers – and they earned over $600 million in the last four quarters. If you owned NVDA, you’d be getting a 7.9% return plus the possibility of some real upside.

    We’re looking for more good values in growing tech companies. To see other candidates, try the Fastest Growing US Tech Companies screen at the PerfectCompany screener.  Cohu, Inc. (COHU) looks like the best of the bunch.

    Sex, debt and success

    Jay, my business partner, says…

    • A handful of factors can sometimes accurately predict complex situations. For instance, the best predictor of divorce is:  # of fights > # of sexual interactions.  Fight less or have more sex – your choice.
    • The only corporate factor that has ever back-tested with significant success is:  lower debt = better returns.

    Most Perfect Companies have less debt than their competition because we are selecting companies that have a good return on Enterprise Value.  Since cash reduces EV and debt increases it, high debt companies tend to have a lower return unless they have extraordinary earnings.

    Also, by the transitive property:  lower debt = more sex + fewer fights. But you knew that.

    Monday
    May042015

    Perfect Company Trade Alerts May 1, 2015: Sell PRCP, Buy WSTG

    After a harrowing week, the S&P 500 jumped a full point on Friday to close up 2.35% since December 10, when we launched this portfolio.  Perfect Company investments are up 16.02% in the same period. Last week, we sold IBM and replaced it with Nvidia, which is up 2.1%. We have sold four stocks with an average annualized return of 26%.  Still, this was a poor week for Perfect Company, and I will examine the prospects for our companies below.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    5/1/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $121.48

    12/10/2014

     $210.00

     

    72.87%

    2

    OLED

    0.00%

     $  27.64

    12/10/2014

     $44.59

     

    61.32%

    3

    LOAN

    8.62%

     $ 3.25

    12/10/2014

     $  4.59

     

    41.23%

    4

    PRCP

    1.30%

     $  11.50

    3/2/2015

     $12.17

     

    5.83%

    5

    KIN

    0.00%

     $ 6.63

    12/10/2014

     $  6.85

     

    3.32%

    6

    NVDA

    1.50%

     $  22.28

    4/27/2015

     $22.75

     

    2.11%

    7

    DRAD

    4.88%

     $ 4.10

    2/9/2015

     $  4.11

     

    0.24%

    8

    VIVO

    4.95%

     $  17.77

    1/27/2015

     $17.69

     

    -0.45%

    9

    ATNI

    1.69%

     $  67.98

    12/10/2014

     $66.85

     

    -1.66%

    10

    PDLI

    8.52%

     $ 7.07

    3/30/2015

     $  6.87

     

    -2.83%

    11

    SAVE

    0.00%

     $  73.77

    12/10/2014

     $69.49

     

    -5.80%

       

    3.35%

           

    16.02%

                   

    $

    ATAI

    12.17%

     $ 3.37

    12/10/2014

     $  4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

    $

    WSTG

    3.85%

     $  17.64

    12/10/2014

     $17.55

     

    -0.51%

         

     SOLD

    3/23/2015

    Annualized:

     

    -2%

    $

    FF

    3.78%

     $  12.70

    12/10/2014

     $12.34

     

    -2.83%

         

     SOLD

    3/23/2015

    Annualized:

     

    -10%

    10

    IBM

    2.70%

     $162.99

    12/10/2014

     $  169.78

     

    4.17%

         

     SOLD

    5/1/2015

    Annualized:

     

    11%

             

    Avg Annualized:

     

    26%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $  2,108.29

     

    2.35%

     

    The world was shocked this week to learn that the U.S. economy grew at only 0.2% in the first quarter. I would have been pleasantly surprised if growth had been better because few investment candidates are growing sales year-over-year and quarter-over-same-quarter in the previous year. On April 20, I noted:

    Why isn’t the market growing? The ways to create wealth are mining, farming and manufacturing. Oil and energy (mining) are suffering lately, and we now install more power plants with renewable energy than mined energy, which is great for the planet, but not for the traditional long-term economy.  [ More here: http://www.perfectcompany.com/trades/2015/4/20/trade-alerts-42015.html ]

    Indeed, many pundits blamed lack of growth on pricing in the energy sector, but problems run deeper than that. We are playing the last few rounds of musical chairs in the run-up to the singularity where every industry is optimized by one or two players, where most workers are marginalized by lack of technical skills and where consumers are marginalized by lack of compensation leverage.

    What fantastic new technology is going to re-employ the people of Baltimore? It’s hard to imagine such a future, but urban areas mainly generate jobs in government, education, health care, policing, non-profits – in short, government-supported jobs. As the private economy becomes hyper efficient, the public economy becomes more wasteful to keep people occupied. An engineer I know regales me with tales of meetings with 15 public employees who each have marginal opinions about every project – even while the public infrastructure rots.

    In New Jersey at least, it is common knowledge that public service is less about service than generating activity and ensuring that one’s family receives employment consideration. While these are time-honored traditions, the public sector is diverging from the private sector at a time when large private organizations control tax liabilities through purchased influence while eradicating smaller, inefficient organizations that once generated tax revenues.

    The economic themes in this situation appear to be (1) continued low growth (2) continued support of the economy through larger government programs (3) continued low interest rates and (4) continued technological optimization of the remaining private sector. Given the monumental public pension liabilities that no one will even contemplate, it is not unreasonable to anticipate low interest rates accompanied by inflation, which would enable the public sector to inflate its way past pension liabilities – at least those pensions not tied to the inflation rate. In any case, Cost of Living Adjustments (COLAs) are being reset since the financial crisis of 2008

    Disaster Theory and Perceptron (PRCP)

    In 2013, a hot air balloon caught fire and descended toward the earth. Just before it landed, the pilot and another man jumped out. Lightened of its load, the balloon shot back up into the air, and 19 people died. I took notice of this because it was one in a series of disasters that went from bad to worse – especially when the leader fled – such as when the captain of the Costa Concordia cruise ship swam to shore to watch his ship sink.

    I remember thinking during 9/11 that, if I had been in the second building, I would have stayed to watch the historic moment unfold. Who would have guessed that another plane would hit the second building?

    In disasters, things often go from bad to worse, and the best one can do is to get as far away as fast as possible. No one tells you that it’s a disaster right away. For instance, if there were a shooter in a school, I expect my children’s teachers would tell them to sit quietly in their classroom;  I, however, have instructed them to jump out the window and run from the building.

    Perceptron may be a disaster. The CFO resigned abruptly on April 22. The company is complaining about the Euro exchange rate. Q3 earnings estimates have swung from a gain of 9 cents to a loss of 16 cents. I like the idea of Perceptron, but I am prepared to forfeit a possible upside to avoid a loss. Sell PRCP, and wait for the business to improve.

    Buy Wayside Technology Group (WSTG)

    Speaking of improvements, WSTG announced a sales increase of 29% and earnings of 27% for Q1. I sold WSTG in March because I didn’t understand the sales decline in the TechXtend division; they seem to be de-emphasizing that division and expanding product lines at the LifeBoat division. Insiders have purchased net 27,000 shares in the last three months, and WSTG pays a dividend of 3.68%. It has a Perfect Company rating of 3.49. Buy WSTG by 5/, and you’ll get the dividend.

    Other Perfect Company stocks this week

    Many companies reported earnings in the past week. I am pleased to report that every single CEO was “pleased” with his company’s performance despite various challenges including the weather, currency fluctuations, and special situations.

    Nvidia (NVDA)

    Nvidia is better than I thought. Not only is NVDA leading at the entry level with its $33,000 “deep learning” computer, its technology is being used by IBM in two new 150 petaflop computers the two companies are building for the Department of Energy. By comparison, the US’ fastest computers today rate 17 petaflops. In addition to everything else I like about NVDA, the company now has a distribution partner in the same way that Pixar had a distribution partner in Disney.  NVDA provides serious value, which makes IBM a potential exit opportunity for NVDA shareholders.

    Manhattan Bridge Capital (LOAN)

    People tend to remember companies with stock symbols that spell something. Maybe that’s why LOAN keeps hitting new highs. No news this week, but LOAN is up 41% since Dec 10, 2014.

    Spirit (SAVE)

    Spirit was our big disappointment for the week, falling from a gain of 5% to a loss of almost 6%. Here’s what went wrong: this week’s earnings announcement stated that YoY Quarterly sales increased from $438 million to $493 million; operating income increased from $60 million to $109 million. Barclay’s dropped its price target from $110 to $105. Spirit is expanding, which causes certain performance measures such as revenue per seat mile to fall by 9.9%.  This does not concern me; I’m more impressed by the expansion of operating margins from 14% to 22%.

    Universal Display (OLED)

    OLED took a breather this week. The company will announce Q1 results after the market close this Thursday, May 7.

    Meridian Biosciences (VIVO) reports earnings

    “Overall revenues increased by 3%, 6% in constant currency, to establish a new quarterly record at $51.5 mln. Net earnings of $10.1 mln were strong, although down 2% versus the prior year period as investment spending increased to maintain our organic growth capabilities into the future. Importantly, multiple areas of the business reported solid performance from a well-balanced set of growth drivers." VIVO declined last week, but we still rate it a 2.43 and it pays a 4.5% dividend.

    ATNI

    Sales were up, and something bad happened in Turks and Caicos. I trust this management team because of their adroit handling of Alltel, their knowledge of networked businesses, their cash management, and their purchase of solar assets. It’s a keeper.

    “First quarter revenues were $85.3 million, 14% above the $75.2 million reported for the first quarter of 2014. Adjusted EBITDA for the 2015 first quarter was $35.3 million, a 20% increase over the $29.3 million reported for the 2014 first quarter. Operating income was $19.2 million, up 18% compared to last year's $16.2 million. The Company incurred a net loss from continuing operations attributable to ATN's stockholders of $3.3 million or $0.21 per share, which included a $19.9 million loss related to the deconsolidation of the non-controlling interest from the sale of its holdings in Turks and Caicos. Exclusive of this one-time loss on this deconsolidation, net income attributable to ATN's stockholders was $9.6 million, or $0.60 per diluted share. In last year's first quarter, net income from continuing operations attributable to ATN stockholders was $7.8 million, or $0.49 per diluted share.”

    DigiRad (DRAD)

    Still growing, but could be better.

    “Total revenues for the 2015 first quarter were $13.8 million, an increase of 6 percent compared to the prior year's first quarter revenues of $13.0 million. Adjusted net income for the 2015 first quarter was $261,000, or $0.01 per diluted share, compared to adjusted net income of $353,000, or $0.02 per diluted share in the prior year's first quarter. Adjusted EBITDA for the 2015 first quarter was $797,000, compared to $789,000 in for the prior year first quarter. A reconciliation of adjusted net income and adjusted EBITDA is provided later in this release.”

    PDLI

    Short interest has dropped to the lowest level since June 2014. The company will release Q1 earnings on May 6. “On April 22, 2015, David Montez, the Controller and Chief Accounting Officer of PDL BioPharma, Inc. (the Company), entered into a Separation Agreement whereby he resigned from the Company, such resignation to be effective as of May 15, 2015. Under the Separation Agreement, Mr. Montez will receive a one-time payment of $111,009.80, plus 2,772 vested shares of the Company's restricted stock and up to 12 months of COBRA coverage.” Montez joined PDLI in 2013 and was the controller, not the CFO.  He was in the solar industry before joining PDLI. I don’t think this is material. Let’s see how their earnings look this week. 

    Monday
    Apr272015

    Perfect Company Trade Alerts April 27, 2015; Sell IBM; Buy NVDA

    Since December 10, 2014, the S&P 500 is up 2.8%; the PerfectCompany stocks are up 21.3%.  Though the NASDAQ is above its highs of 2000, that was a long time ago, and we’re just getting even.  Microsoft has not ascended its 2000 peak of $59, though you could have quadrupled your money in Amazon. I don’t own Microsoft because you’re buying against the house: insiders sold net 94 million shares in the last 12 months; that’s a lot of sales to sop up.  By comparison, Amazon insiders sold net 159,393 shares.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    4/24/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $121.48

    12/10/2014

     $210.00

     

    72.87%

    2

    OLED

    0.00%

     $27.64

    12/10/2014

     $47.60

     

    72.21%

    3

    LOAN

    8.62%

     $  3.25

    12/10/2014

     $ 4.37

     

    34.46%

    4

    PRCP

    1.30%

     $11.50

    3/2/2015

     $13.19

     

    14.70%

    5

    KIN

    0.00%

     $  6.63

    12/10/2014

     $ 7.33

     

    10.56%

    6

    DRAD

    4.88%

     $  4.10

    2/9/2015

     $ 4.53

     

    10.54%

    7

    VIVO

    4.95%

     $17.77

    1/27/2015

     $19.13

     

    7.65%

    8

    SAVE

    0.00%

     $73.77

    12/10/2014

     $77.42

     

    4.95%

    9

    IBM

    2.70%

     $162.99

    12/10/2014

     $169.78

     

    4.17%

    10

    ATNI

    1.69%

     $67.98

    12/10/2014

     $70.03

     

    3.02%

    11

    PDLI

    8.52%

     $  7.07

    3/30/2015

     $ 7.02

     

    -0.71%

       

    3.46%

           

    21.31%

                   

    $

    ATAI

    12.17%

     $  3.37

    12/10/2014

     $ 4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

    $

    WSTG

    3.85%

     $17.64

    12/10/2014

     $17.55

     

    -0.51%

         

     SOLD

    3/23/2015

    Annualized:

     

    -2%

    $

    FF

    3.78%

     $12.70

    12/10/2014

     $12.34

     

    -2.83%

         

     SOLD

    3/23/2015

    Annualized:

     

    -10%

             

    Total

     

    92%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $2,117.69

     

    2.81%

    The most stunning economic fact I read this week

    Economic news continues to surprise me. This week, it was “net issuances of nonfinancial equities have been negative for 21 straight years.” This means that, excluding financial companies, we have retired more stock than we have created for 21 years in a row. Since we like to believe our economy is the product of innovation, and that our free market system funds innovation, a shrinking pool of nonfinancial equity is weird and possibly foreboding.

    How does that happen? 

    (1) Financial companies are still being funded, and those companies manipulate the markets legally for their own benefit. For instance, funds like Mitt Romney’s take companies private, strip away benefits, load up debt, and sell the zombie back to the public markets as a “lean” growth machine. 

    (2) Many companies have learned to perform financial operations on themselves. By providing 80% of top executive compensation in share incentives, boards incentivize CEOs to manipulate certain ratios to pump the share price rather than create a long-term business. Family-owned companies would almost never operate this way, but public CEOs have different plans for their progeny. One simple measurement is the Price-to-Earnings Ratio (the stock price divided by the earnings per share). If you buy back a million shares at $100 each, there are more earnings available for fewer shares, so the PE Ratio goes down – and the stock, which now looks like a bargain to many investors, goes up. That was easy – here’s your reward. However, the company no longer has the use of $100 million in cash. (The Perfect Company score penalizes any company that spends cash for shares because cash in the bank reduces the effective cost per share, so increasing debt or spending cash drives down the real earnings return by driving up the real cost to buy the company.)

    You can draw several conclusions from this astonishing fact:

    1. One writer believes that share purchases have helped destroy the middle class: http://www.marketwatch.com/story/how-the-stock-market-destroyed-the-middle-class-2015-04-24
    2. You might also conclude that funding is still happening, but that it’s coming through the side-door of financial companies, which have continued to see increases.
    3. If so much funding is coming through the side door, then whatever gets to the front door is probably smallish, already owned by financiers, or a hobo in a suit.  For example: some of our companies, such as LOAN, DRAD, CTMMB, and PRCP are too small to attract attention from financial investors. Facebook was already owned by the smart money before it got to market, and some of them took suitcases of cash off the table immediately. I mean, like, billion dollar suitcases. Then there are hobos like the magical Alibaba, which earned bankers $300 million in fees. (China! Alibaba is the Internet in China! Give Alibaba your money now!) You won’t find the major U.S. financial companies in the list of top BABA owners – with the exception of T. Rowe Price, which is placing shares in retirement accounts. (China! Diversify into China! Did we mention “Internet” and “China”?)

    The tail has been wagging the dog for 21 years now, but I think it is changing for two reasons.

    First is the broad recognition that, if our little country (just 5% of the world’s population) is going to thrive, we have to fund innovation again. We’re already toying with Kickstarter and other unconventional funding concepts. The public is transfixed by Shark Tank, a funding show for small businesses, which demonstrates a remarkable level of interest in new business. Second is the pull-back from Sarbanes-Oxley, an act passed in 2002 to avoid further scams like Enron and Worldcom. Big scams got even bigger, but Sarbanes-Oxley put the kibosh on funds for new businesses. I was told repeatedly that the cost of Sarbanes-Oxley was so onerous that a company could no longer go public until it reached $100 million in sales. That hurdle ensured that the only place to fund growing businesses for the last 15 years was a thin network of financiers.

    Here is a personal story about why new businesses are so important. I received a call this week from an acquaintance who wanted advice about creating software. She had worked for many years with her family’s GM dealership, which was closed as part of GM’s bankruptcy restructuring. She had always thought that she would take over the dealership from her father. Though experienced, personable, intelligent and attractive, her job search yielded only low-paying positions, so she earned an advanced business degree. No matter – no one is hiring older, entrepreneurial people. This is not the first time I’ve heard this kind of story. The economic model broke in 2008, and, as companies have continued to down-size, Americans are realizing that they must invent their future. This is good news if we can find a way to fund it. I think we will, which will provide plenty of excellent investing opportunities in the future.

    Why would you take a risk on small stocks?

    While making room in Gmail this weekend, I found a 2010 note to loyal reader, Emil, that said, in part, “When insiders are buying -- maybe even making formal offers to acquire the stock -- buy more.  CTMMB (spun out of IDT) was buying back at 90 cents;  now it's at $2.40.” That was five years ago. Today, CTMMB is at $210. No word on whether Emil was a buyer, but I am sad to admit that I sold in and out of CTMMB over five years. I’m very glad to be in lately.

    Sell IBM; Buy Nvidia instead.

    On April 17, IBM was down 1.4%; after last week’s earnings announcement, IBM is up 4.2%. “IBM said revenue fell 12% from a year ago to $19.6 billion, but if discontinued operations and currency impacts are counted, revenue was flat.” That’s a win, right? Analysts expected worse, so IBM rose.

    I can’t help feeling that, with IBM, I’ve been more lucky than smart. IBM is far from a perfect company. Sales and profits have declined. IBM has used its cash flow and credit lines to buy back shares rather than invest in new technologies or businesses. I hoped that IBM would capitalize on big data and its Watson initiative, but big ideas often fail to resurrect failing companies. Xerox Parc didn’t do much for Xerox; digital camera patents didn’t help Kodak; AT&T wasn’t the main beneficiary of the transistor. IBM sells at a premium to its Enterprise Value. The upside is maybe 20% over the next year, but, if sales continue to fall, a meaningful downside is just as probable.

    Nvidia (NVDA), on the other hand, is a tech company that keeps growing. Insiders bought net 467,668 shares in the last year and 570,823 shares in the last quarter. The EV is a 26% discount to its market cap, and it pays a 1.5% dividend. Sales grew last year from $4.1 to $4.6 billion and operating income increased from $496 million to $759 million. 4th qtr sales and profits also increased year over year.

    The numbers fit, but the best thing about NVDA is that it’s a focused tech company that understands high performance computing – perhaps even better than IBM. Nvidia started out in video cards, which require multiple processors to handle increasingly complex graphics. Last year, however, Nvidia created a $33,000 “deep learning” machine that roughly duplicated Google’s own $5 million deep-learning network of 1000 computers. Nvidia could reach more of the market faster than IBM, and even a small impact of this new technology could have a big impact on your investment. More info:

    Imperfect Companies

    Super Nerdy Stock Pays 12% Dividend

    “NVE Corporation develops and sells devices that use spintronics, a nanotechnology that relies on electron spin rather than electron charge to acquire, store and transmit information.” The company never went public, but met NASDAQ registration requirements and started trading in 2003. In 2014, NVE (symbol: NVEC) had an operating income of $14 million on $26 million in sales. Unfortunately, four years ago, it had operating income of $16 million on $28 million in sales. The company is very profitable and pays a 12% dividend, but doesn’t seem to be going anywhere. Also, the Enterprise Value is just 7% less than the market cap. I prefer a discount over 25%. NVEC is fairly valued and appears to be shrinking, but it’s an interesting situation.

    MSK Instruments (MKSI)

    MKSI makes technical instruments. Sales and profits are growing, and it pays a 1.84% dividend. S&P Capital IQ maintains a buy. EV is a 25% discount to market cap, but insider net sales are actually increasing. 

    Monday
    Apr202015

    Trade Alerts  4/20/15

    Rough week. Warren Buffet was on track to lose $1 billion on Friday. We should all be so lucky.

    Since December 10, 2014, the S&P 500 is up 1.04%. PerfectCompany stocks are up 19.45%

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    4/17/2015

     

    +/-

                   

    1

    OLED

    0.00%

     $27.64

    12/10/2014

     $  48.20

     

    74.38%

    2

    CTMMB

    5.37%

     $ 121.48

    12/10/2014

     $210.00

     

    72.87%

    3

    LOAN

    8.62%

     $  3.25

    12/10/2014

     $ 4.08

     

    25.60%

    4

    PRCP

    1.30%

     $11.50

    3/2/2015

     $  13.26

     

    15.30%

    5

    DRAD

    4.88%

     $  4.10

    2/9/2015

     $ 4.58

     

    11.71%

    6

    KIN

    0.00%

     $  6.63

    12/10/2014

     $ 7.08

     

    6.79%

    7

    VIVO

    4.95%

     $17.77

    1/27/2015

     $  18.59

     

    4.61%

    8

    SAVE

    0.00%

     $73.77

    12/10/2014

     $  75.08

     

    1.78%

    9

    PDLI

    8.52%

     $  7.07

    3/30/2015

     $ 7.18

     

    1.56%

    10

    ATNI

    1.69%

     $67.98

    12/10/2014

     $  68.52

     

    0.79%

    11

    IBM

    2.70%

     $ 162.99

    12/10/2014

     $160.67

     

    -1.42%

       

    3.46%

           

    19.45%

                   

    $

    ATAI

    12.17%

     $  3.37

    12/10/2014

     $ 4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

    $

    WSTG

    3.85%

     $17.64

    12/10/2014

     $  17.55

     

    -0.51%

         

     SOLD

    3/23/2015

    Annualized:

     

    -2%

    $

    FF

    3.78%

     $12.70

    12/10/2014

     $  12.34

     

    -2.83%

         

     SOLD

    3/23/2015

    Annualized:

     

    -10%

             

    Total

     

    92%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $2,081.18

     

    1.04%

     

    Why isn’t the market growing? The ways to create wealth are mining, farming and manufacturing. Oil and energy (mining) are suffering lately, and we now install more power plants with renewable energy than mined energy, which is great for the planet, but not for the traditional long-term economy. The energy sector will be severely diminished in 20 years when solar power can deliver most of our energy needs. If this seems far-fetched, consider the problem in southern California where public utilities already refuse to buy excess solar power, and are lobbying for a tax on self-sustaining homes to support the electric grid. This week, oil field contractor Schlumberger laid off 11,000 workers.

    Neither is “the consumer” much help since the vast majority of consumers are scraping by. Consumers enjoy lower prices for goods thanks to Wal-Mart, the Internet and salary cutting, but taxes and services maintain their steady drain. At the most admired, cash rich company in the world – the one that “designs” all its products in California – store employees (“geniuses”) are routinely worked 40 or 50 hour weeks, but are classified as part-time and averaged out at 30 hours to prevent the company from incurring health care costs. This is morally repugnant, but good business practice so as long as there is no law against it. On the other hand, it hobbles the consumer class, which hobbles the economy.

    Nor is partial employment relegated to the U.S. The Economist reports April 4, 2015 that “Since Mr. Abe took office in late 2012, the number of irregular workers – often earning less than half the pay of their full-time counterparts with permanent employment contracts – has jumped by over 1.5 million. Casual and part-time employees number nearly 20 million, almost 40% of the Japanese work force.” Japan is a country where people once loved working so much that they got sick on the weekends from not working. The fact that 40% of the Japanese work force is now “casual or part-time” is a kind of amazing.

    Much of the recent increase in profits and competitiveness is the result of crushing employee costs, but that’s a one trick pony. At some point, sales must increase, and sales increase because people have more money (no), prices are going down (sometimes) or companies are innovating (maybe.) All Perfect Companies have the potential to be strong innovators. Spirit Airlines increases sales by lowering prices, but is innovating in the way they deliver their service. IBM’s Watson project could become one of the great innovations of all time, or IBM could follow the path of Kodak, an innovator that owned the digital camera, but could not capitalize on it. So far, IBM claims to be investing in Watson, and IBM has successfully managed major shifts in technology before.

    Universal Display powers up

    Zacks reports (edited for length): “Universal Display Corp. OLED jumped 4.14% after strong Samsung Galaxy S6 sales. Samsung Electronics released the Samsung Galaxy S6 and its curved-edge alternative, the Galaxy S6 Edge on Apr 10 across the globe.  Both devices got a strong reception and Samsung will hit the milestone of selling 10 million Galaxy S6 and Galaxy S6 edge units by early May. No other Galaxy S model has experienced such popularity with consumers in such a short span of time. Sales of this flagship duo are already rocketing above the sales of any previous Galaxy S device. Even pre-orders and online pre-sales of the devices had surpassed its predecessors. So the target of 10 million looks easily achievable. In the case of the Galaxy S6 and Galaxy S6 Edge, Samsung is confident that both can create a new sales record and get the company back in form. Universal Display has long claimed that Samsung Display is its single largest customer, given the application of its OLED materials in Samsung's popular high-end Galaxy smartphones.”

    These displays really are stunning, and will continue to be a big win for OLED. As the costs of OLED fall, expect to see even bigger wins for larger displays and lighting. Or Qualcomm will buy OLED for its portfolio.

    Spirit grows routes on April 16

    Spirit Airlines (SAVE) began non-stop service to 10 new destinations and increased service to 18 popular summer routes, including Cleveland, Boston, Denver, Los Angeles, Houston and Chicago. According to Department of Transportation data, on average Spirit's Bare Fare is 40 percent less than other airlines. Even after applying Frill Control, which allows consumers to add optional services, the total price on Spirit averages 30 - 35 percent less.

    PDLI arranges $100 million line

    PDLI, a company with $296 million in cash and short-term assets, arranged a $100 million loan. The company must believe that it has new opportunities for patent acquisitions.

    Drama at IBM

    IBM will announce earnings after the market close on Monday, April 20. Analysts have set price targets from $150 to $180. If software sales are strong, IBM will rise. If sales are down across the board, IBM will fall and we may sell. With almost a billion shares, every point is worth a billion dollars. A lot of people would like to get an early look at IBM’s earnings.

    Readers ask…

    Should I buy Tesla Motors?

    Tesla sold 30,000 cars last year, and had sales of $3.2 billion; Ford had sales of $144 billion. TSLA is valued at $26 billion, Ford at $62 billion. I love Tesla. I would like to own a Tesla because electric cars have awesome pickup. However, the price of gas is down for now, which marginalizes the economic attraction of electric cars, and Elon Musk is building rockets, too. Is anyone smart enough to revolutionize cars and rockets at the same time? Tesla loses money. You might get lucky, but why not look for companies that are growing, innovating, making money and selling at a decent value?

    A lot of people buy companies like Tesla because it makes them feel like they know something special: they are brave visionary investors. However, they don’t really know about the investment – they’ve got a carnival feeling that this game might work out. So far, Tesla shows promise, but there’s a decent chance the price could be cut in half or the price will stay the same for several years until profits catch up.

    Should I sell GE?

    When GE announced it was selling GE Capital, the price shot up and a prominent hedge fund sold out. The real question is: would you like to buy GE right now? If you’re not buying, you should be selling. “Revenues fell at three of the top four industrial units.” GE is one of those colossuses that is virtually impossible to analyze and is unlikely to be acquired by Apple. I would rather put my money in something I understand that has a chance of focused growth. GE will take a while to work out, so I would sell and put my money in something like Digirad. Both GE and Digirad make medical imaging equipment, but Digirad is focused on growing the market, and GE buys and sells companies like Digirad (DRAD). If you like the future of medical imaging, DRAD is a better bet; with GE, a bunch of losing industrial divisions spoil the picture. If GE buys DRAD, you make a nice return.

    What are stockholders fighting about at DuPont?

    DuPont (DD) is a fine company with lots of assets that could probably produce more value for shareholders. It’s got a PerfectCompany score of 0.89, and pays a 2.63% dividend; DD grew by $1 billion in sales two years ago and shrunk by the same amount last year. A hedge fund called Trian would like to improve governance. For instance, instead of staggering terms for directors, which ensures that they entire board cannot be suddenly replaced, Trian would like a single election date. The good thing about interlopers like Trian at old companies like DuPont is that they can light a fire. Other hedge funds are attracted and buy shares. Business may actually change for the better; an enemy can make you sharper. Like everything else, it’s a matter of degree: when hedge funds start demanding big cash payments to shareholders, it shows a lack of imagination and the possibility of devastating the business in the next downturn instead of preparing to take advantage of it. For instance, hedge funds are advocating for taking pots of money from General Motors, probably to keep the unions from getting their hands on it.

    Most boards could be better governed. Boards work like this: a swaggering bucko gets all his buddies to be “board members.” The board members get a nice check and some stock options, which buys their loyalty. At each meeting, they look at spread sheets and never ask any questions about the business. The main issues have to do with executive compensation, and “certain discussions” that cannot be recorded for liability concerns. If you ever see the minutes of a board meeting, it will say, “The board held certain further discussions.” I kid you not. The most important discussions are not recorded.

    I was on the board of a company one time where the lawyer fell asleep in every meeting. He actually slept. I pointed out the linear relationship between cash lost and months remaining; when the company ran out of cash, the lawyer woke up, began suing everyone, and then they sold the company. I once knew the director of a gigantic insurance company. He told me that going to their board meetings was like attending the world’s best business school. Teams of people worked their whole lives to serve up presentations at board meetings. As an outsider, you would have to be overawed by these astonishing presentations. No one wants to ask the dumb questions, though that’s exactly what is necessary.

    Here’s how it’s supposed to work:  the board represents the interests of shareholders and oversees the Chief Executive Officer who reports to the board. If the board members don’t do their jobs, it should be relatively easy to vote them out. If the company is doing well, the price of the company should increase; if the price does not increase, the shareholders should be able to sell the company relatively easily rather than fighting “poison pills” and other strategies designed to protect the well-paid top executives. The chairman of the board is supposed to oversee the board, but, in practice, the Super Chief often collects titles like Idi Amin -- Chairman, CEO, President, and Lord of All the Beasts of the World and Fishes of the Seas. One cannot effectively oversee oneself, so, in most large companies, the titles should be separate. Some would say, in ALL companies, but I think that in some entrepreneurial companies, the leader should be given a free hand because that’s what you’re investing in, and you don’t want a bunch of suits second-guessing the vision. However, there are very few Bill Gates, Steve Jobs and Mark Zuckerburgs who deserve the full Idi Amin deference.

    Sometimes there are even two classes of stock that enable the original founders to control the company. I’m fine with that for Google, and for truly entrepreneurial companies. However, for older, more mature companies like Ford and Newscorp, the dual stock structure that allows minority shareholders to control the business is probably reducing shareholder value.

    DuPont is mailing shareholders to promote “the next generation.” See:  http://dupontdelivers.com/media/2015/03/Letter-to-Shareholders-4-9-2015.pdf  I would vote with Trian for now. Let them mix it up a bit, but make sure Trian doesn’t get carried away.

    Sunday
    Apr122015

    PerfectCompany Trade Alerts 4/12/15

    It was a good week for the S&P, which is now up 2% since December 10, 2014, and a good week for the PerfectCompany portfolio, which is up almost 20%. Loyal reader Bill wrote, “CTMMB!” and sent me a clue why CTMMB jumped from $180 to $210 and CTMMA jumped from $86 to $160. As an owner of both, I was doing the happy dance. More on CTMMB below.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    4/10/2015

     

    +/-

                   

    1

    OLED

    0.00%

     $  27.64

    12/10/2014

     $   47.85

     

    73.12%

    2

    CTMMB

    5.37%

     $  121.48

    12/10/2014

     $ 210.00

     

    72.87%

    3

    LOAN

    8.62%

     $  3.25

    12/10/2014

     $   4.00

     

    23.08%

    4

    DRAD

    4.88%

     $  4.10

    2/9/2015

     $   4.78

     

    16.59%

    5

    PRCP

    1.30%

     $  11.50

    3/2/2015

     $   13.30

     

    15.65%

    6

    VIVO

    4.95%

     $  17.77

    1/27/2015

     $   19.49

     

    9.68%

    7

    KIN

    0.00%

     $  6.63

    12/10/2014

     $   6.98

     

    5.28%

    8

    SAVE

    0.00%

     $  73.77

    12/10/2014

     $   74.96

     

    1.61%

    9

    PDLI

    8.52%

     $  7.07

    3/30/2015

     $   7.18

     

    1.56%

    10

    ATNI

    1.69%

     $  67.98

    12/10/2014

     $   68.30

     

    0.47%

    11

    IBM

    2.70%

     $  162.99

    12/10/2014

     $ 162.86

     

    -0.08%

       

    3.46%

           

    19.98%

                   

    $

    ATAI

    12.17%

     $  3.37

    12/10/2014

     $   4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

    $

    WSTG

    3.85%

     $  17.64

    12/10/2014

     $   17.55

     

    -0.51%

         

     SOLD

    3/23/2015

    Annualized:

     

    -2%

    $

    FF

    3.78%

     $  12.70

    12/10/2014

     $   12.34

     

    -2.83%

         

     SOLD

    3/23/2015

    Annualized:

     

    -10%

             

    Total

     

    92%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $2,102.06

     

    2.05%

     

    What happened to CTMMB?

    “I’m guessing the owners want to emulate Marvel and sell out to a big media company for $4 billion. CTMMB’s current market cap is $42.6 million.” – PerfectCompany Trade Alerts, December 10, 2014

    “CTM MEDIA HOLDINGS (CTMMA; CTMMB) TO BECOME IDW MEDIA HOLDINGS, ENTERTAINMENT COMPANY TO REGISTER WITH SEC; SEEK TO MOVE LISTING FROM PINK SHEETS TO AN EXCHANGE. IDW Media Holdings, Inc. will be an integrated media company consisting of IDW Publishing, the award-winning, San Diego-based comic-book and graphic novel publisher; CTM Media Group, a distributor of print and digital advertising; IDW Entertainment, the television-development arm of IDW Publishing; San Diego Comic Art Gallery, a new comic art gallery space launching in summer 2015; Ettractions, a travel-based web portal; Top Shelf Productions, a publisher of independent and creator-driven graphic novels; IDW Games, producer of tabletop board games and card games; and IDW Limited, the high-end print collectibles division of IDW Publishing.” – CTMMA announcement, April 3 2015  

    See: http://www.ctmmediagroup.com/ctm-media-holdings-ctmma-ctmmb-become-idw-media-holdings

    CTMMB market cap is now $73.7 million; CTMMA market cap is now $8.8 million. IDW should now become more liquid and is poised for further growth.

    PDLI

    PDLI short interest reported on Friday was up slightly as of March 31, but PDLI was also up 4.7% on Friday, which may have squeezed some shorts. I continue to believe that, at the current valuation and with so many institutional holders, short sellers could help push the price up.

    Manhattan Bridge Capital (LOAN)

    It’s easy to conclude that, at some fundamental level, banks are broken. That’s a bigger discussion, but, if you consider that premise, one must wonder, which companies will take over lending? I believe that the whole category is about to open up, and that some new lenders will see spectacular growth.  See the NY Times here.

    Manhattan Bridge Capital (LOAN) may be one of them. Sales in the last two years have been up 24% and 28%.  LOAN “offers short-term, secured, nonbanking loans to real estate investors to fund their acquisition and construction of properties located in the New York Metropolitan area, and secured by collateral consisting of real estate and accompanied by personal guarantees from the principals of the businesses.” The company pays an 8% dividend.

    What’s not to like? LOAN is a tiny company with a $24.4 million market cap. On the other hand, it’s not likely to be sunk by an unknown whale in London, and the collateral is good. In its lead article on April 4, the Economist notes that “A square mile of Manhattan residential property costs $16.5 billion.” LOAN is a focused company that could grow nicely for years. So far, so good:

    KIN progresses with horses

    My cousin once paid $25,000 to put wheels on the back of his dog, and I put out $2500 to fix a ferret that swallowed a rubber worm. But when it comes to horses, money gets wacky stupid, so I’m glad to see that Kindred Biosciences is reporting a 66.7% improvement or resolution of fever in horses versus 12.5% over the placebo group. I know nothing about drug development, but I know that horse owners will pay $800 for a used show vest, so I like the idea of selling them horse-saving drugs. I also like the idea of modifying existing human drugs for animal use because it reduces development and approval risk, and has an excellent upside.

    Spirit Airlines (SAVE)

    On April 1, Deutsche Bank cut ratings on big airlines on worries that international travel would slump, and airline stocks fell. Spirit, which provides international services only in the Caribbean, is still a grower. Here’s why: if you search for flights using this Google-owned service, which is the backbone of most Internet booking sites, you’ll see that Spirit doesn’t show up in near-term searches. That’s because their flights are nearly sold out. In the PHL-ATL route, US Airlines (now part of American) leads the price war because it’s a big dumb airline with overcapacity.

    http://matrix.itasoftware.com/

    The bigheads who run traditional airlines buy rivals, declare bankruptcy and repeat; shareholders crash-land again and again. Airlines have had some good years lately, but Spirit is doing a better job of reinventing the business. With a $5 billion market cap, Spirit has room to grow or to be acquired by a larger, dumber competitor. If the economy suffers, customers will move to Spirit; if the economy grows, more people will fly. Spirit’s a winner.

    Atlantic Tele Network (ATNI)

    ATNI was down 6.9% last week, which is a bad sign during a generally great week for everyone else. I see no news except that the dividend has been paid and those who disagree with the acquisition of solar may be unloading their position. This article in the Stanford Business Review provides the best guess on the competitiveness of solar power:

    http://www.gsb.stanford.edu/insights/solar-powers-bright-future

    The study suggests that commercial installations will be competitive with natural gas within 10 years. ATNI has changed the name of its solar company to Ahana Renewables (www.ahanarenewables.com) and seems to be positioning the company in the same way as Alltel – as an independent division in a growth industry that could later be sold at an extraordinary profit. Given the management’s apparent shrewdness in acquiring assets, its experience with Alltel, and its opportunity to benefit from overcapacity in solar panel production and potential breakthroughs in the technology, I like ATNI.

    IBM

    Our worst performing stock, IBM, has barely dropped. Insiders made net positive purchases of 68,623 shares in the last 3 months (over $11 million at $162), and, if you were a chartist, you would say that IBM is building a base. It still pays a 2.7% dividend. Dad used to say that people don’t like to do nothing. At IBM, they’re buying companies and coming up with new ideas. Their mainframe world fragmented, and now it’s coming back together in Big Data and, they hope, in their Watson initiative.

    IMPERFECT COMPANIES

    Emerson Radio (MSN) – Virtually free!

    Emerson seems to be a New Jersey company that has turned the corner. Sales, profits and cash are up. In fact, it has $39 million in cash and short-term investments, no debt, and a market cap of $37 million. What’s wrong with this picture? The company is the plaything of Grande Holdings, a Hong Kong company with majority ownership in MSN, which probably explains why the last investor report on their web site was posted in 2010: http://www.emersonradio.com/investors.php Welcome to opaque reporting and inside dealing.

    Cowen Group (COWN)

    Insiders bought over a million shares in the last three months. The stock has risen from $4.46 to $5.52 this year. 4th qtr 2014 sales rose from $96 million to $121 million YoY. The company stands to gain from new Regulation A+ that will make it easier for its small business clients to raise money (part of our theme of reinventing lending.)  Good things are happening at Cowen, but they lost $42 million in the fourth quarter. I’ll pay a higher price when they start to make money.

    Tessera Technologies (TSRA)

    In the last 15 months, TSRA has doubled from $20 to $40. YoY 4th quarter sales increased by $3.5 million and operating income went from $17 million to $47 million, though $21 million was from unusual negative expenses and restructuring charges. Insiders are heading for the exit: they sold net 2.1 million shares in 12 months and 1.3 million in the last 3 months.

    Manning & Napier (MN)

    Astounding increase in fourth qtr operating profits from $21 million to $71 on the same level of sales. Pays 4.8% dividend. Very few insider trades. Stock appears to have bounced off a low. Buy it by 4/13/15, and you’ll get the next dividend. Enterprise Value is 83% less than its market cap – a substantial discount, but not uncommon for finance companies that hold  assets for clients. (JPM has a negative EV.) MN is not a perfect company because it lacks growth in the most recent quarter, and because I don’t understand what lever they threw to gin up profits on the same sales. Looks like financial engineering to me, which is often corrected in subsequent quarters.

    Monday
    Apr062015

    Perfect Company Trade Alerts 4-4-15

    U.S. markets were closed on Friday, so the S&P 500 reflects the close as of Thursday: since December 10, the S&P 500 is up about 1/3 of one percent. This must be a thrilling time for fund managers because surely they have earned their clients more than 0.35%. However, we read that most managers fail to beat “the market”: CNN reports “A staggering 86% of active large-cap fund managers failed to beat their benchmarks in the last year, according to an S&P Dow Jones Indices scorecard released on Thursday. And no, that wasn't a one-off blip either. Nearly 89% of those fund managers underperformed their benchmarks over the past five years and 82% did the same over the last decade, S&P said.”

    Large-cap fund managers, however, have almost impossible analytical problems: they must analyze multiple business lines in huge, unfathomable companies trading across tens of countries each with unpredictable currencies. It’s no wonder that a dart board would be more helpful. We, on the other hand, are seeking focused companies that are beginning to grow, and may have already turned the corner toward solid, profitable growth. Perfect Companies are more likely to continue to experience meaningful growth and even acquisition than large-cap companies that are virtually unmeasurable and are unlikely to be acquired at a sizable premium.

    The problem of betting on a manager versus the market is the subject of a $1 million bet between Warren Buffet and Protégé Partners. Buffet is betting that, net of fees, a fund of funds will underperform the S&P 500 over 10 years beginning in 2008. See: http://longbets.org/362/.

    That said, the PerfectCompany portfolio is up an average of 16.43% in the same period, with five stocks having increased more than 10%. We’re down slightly from the prior week because we bought one new stock.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    4/4/2015

     

    +/-

                   

    1

    OLED

    0.00%

     $  27.64

    12/10/2014

     $   47.16

     

    70.62%

    2

    CTMMB

    5.37%

     $  121.48

    12/10/2014

     $     180.00

     

    48.17%

    3

    LOAN

    8.62%

     $    3.25

    12/10/2014

     $     3.92

     

    20.62%

    4

    PRCP

    1.30%

     $  11.50

    3/2/2015

     $   13.16

     

    14.43%

    5

    DRAD

    4.88%

     $    4.10

    2/9/2015

     $     4.52

     

    10.24%

    6

    ATNI

    1.69%

     $  67.98

    12/10/2014

     $   73.33

     

    7.87%

    7

    VIVO

    4.95%

     $  17.77

    1/27/2015

     $   18.91

     

    6.42%

    8

    SAVE

    0.00%

     $  73.77

    12/10/2014

     $   75.71

     

    2.63%

    9

    KIN

    0.00%

     $    6.63

    12/10/2014

     $     6.77

     

    2.11%

    10

    PDLI

    8.52%

     $    7.07

    3/30/2015

     $     7.01

     

    -0.85%

    11

    IBM

    2.70%

     $  162.99

    12/10/2014

     $ 160.45

     

    -1.56%

       

    3.46%

           

    16.43%

                   

    $

    ATAI

    12.17%

     $    3.37

    12/10/2014

     $     4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

    $

    WSTG

    3.85%

     $  17.64

    12/10/2014

     $   17.55

     

    -0.51%

         

     SOLD

    3/23/2015

    Annualized:

     

    -2%

    $

    FF

    3.78%

     $  12.70

    12/10/2014

     $   12.34

     

    -2.83%

         

     SOLD

    3/23/2015

    Annualized:

     

    -10%

             

    Total

     

    92%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

     $ 2,066.96

     

    0.35%

     

    PDLI Short Interest

    In recommending PDLI last week, I failed to look into the short interest, which is substantial: as of March 13, the short interest was about 21% of shares outstanding. NASDAQ will report short interest again for March 31, but will not disseminate it until April 10. I do not like to invest where there is a contest between long and short sellers because it perverts the market: the short sellers desperately promote whatever lies they can and the company props itself up with unsubstantiated promises. The truth will out, but it can be a long time coming.

    Now that I and some of my friends are in, though, what does the short interest mean to PDLI? The short sellers are betting that PDLI cannot find patents to replace its expiring “Queen” patents, and they have been partially right so far: sales failed to grow as fast as the company had predicted. On the other hand, the company has increased sales for each of the last five years, has decreased debt for the last three quarters (and over the last three years), and has increased cash to $294 million.

    The current price is where PDLI was selling at the end of 2012, and insiders are buying the shares. Here is an overlay of the short interest versus the price since 8/29/14.

     

    One interpretation of this graph is that short sellers became emboldened when the price dropped from the $10s to the $7s, but that they are now reducing their positions. Any good news for PDLI will squeeze the shorts, and accelerate a run-up. In January, Zacks noted that earnings estimates are moving higher for PDLI, and predicted a short squeeze.  90% of the stock is owned by institutional investors; BlackRock owns 11.4% of shares. PDLI appears to me to have more upside than downside risk.

    Is the economy overheating? Will growth push up interest rates?

    “First, get the facts, then you can distort them as you please.” – Mark Twain

    It turns out that getting the facts is harder than one might imagine. Hundreds of thousands of new jobs have been created, but many people are underemployed or working as jobbers, consultants and fractional employees. Loyal reader Joe directed me to GDPNow from the Atlanta Fed, which shows that at least one Fed office believes that GDP growth is close to zero. This could be an example of one government mouthpiece leaking the truth while the others equivocate.

     

    https://www.frbatlanta.org/cqer/researchcq/gdpnow.cfm

    I once noticed that our government could not accurately measure the money supply, so the truth about the entire economy will probably elude us until after world-changing events become obvious in hindsight. However, it seems to me that the optimization of every business process continues to tamp down job creation, and that the government has become the employer of last resort; it’s currently about 35% of GDP, and virtually the only employer that still takes care of its people for life. The government prints money to sustain the financial system and to thwart deflation. As long as the U.S. dollar remains the default currency, our money can purchase goods and favors in world markets. With optimization driving down costs and family earnings, we are at only modest risk of inflation.

    Money itself does not trickle down, but gathers in vast pools at the top of the system, which vie for control of productive and trophy assets. Trophy assets are those houses, jets, boats, and penthouses, which have become even more extreme of late, and with which one announces one’s extreme importance. It is one thing to have a private plane; now you need a $7 million elevator to get into it – or who, really, are you?  Just another guy huffing his way up a stair case. We know how to value productive assets, but, predictably, trophy assets are inflating.

    There is always speculation that growth must stop or that “what goes up must come down,” but that’s like saying that, given all the wars and pestilence, the population of the earth must certainly decrease. Business and population declines are rare occurrences because people like to make and consume things, and we tend to make more of ourselves except when we believe that making more people will impede our ability to consume. If we have little to consume, we commence making more people, so both the population and, eventually, the business cycle tend to increase.

    This may be the musing of a crank, but it is no weirder than what you can hear whenever anyone at all predicts what the market will do next. Fortunately, we are seeking only discrete situations that have an opportunity to increase and in which the executors of the plans have voted with their own money. There is no perfect economy, but there are some above average companies.

    Monday
    Mar302015

    Trade Alerts 3-29-15; Buy PDLI

    We sold two stocks at the beginning of last week because (1) they had declining sales overall or in important divisions and (2) they were going nowhere in a rising market.  The annualized percentage gain of all stocks sold since 12/10/14 when we started this portfolio is now 92%. The remainder of the portfolio is up 17.03% since 12/10/15; the S&P 500 is up 0.06% in the same period.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    3/27/2015

     

    +/-

                   

    1

    OLED

    0.00%

     $   27.64

    12/10/2014

     $       46.78

     

    69.25%

    2

    CTMMB

    5.37%

     $ 121.48

    12/10/2014

     $     180.00

     

    48.17%

    3

    LOAN

    8.62%

     $     3.25

    12/10/2014

     $         3.74

     

    15.02%

    4

    PRCP

    1.30%

     $   11.50

    3/2/2015

     $       12.82

     

    11.48%

    5

    DRAD

    4.88%

     $     4.10

    2/9/2015

     $         4.49

     

    9.51%

    6

    VIVO

    4.95%

     $   17.77

    1/27/2015

     $       19.12

     

    7.60%

    7

    SAVE

    0.00%

     $   73.77

    12/10/2014

     $       76.64

     

    3.88%

    8

    ATNI

    1.69%

     $   67.98

    12/10/2014

     $       70.37

     

    3.52%

    9

    KIN

    0.00%

     $     6.63

    12/10/2014

     $         6.86

     

    3.47%

    10

    IBM

    2.70%

     $ 162.99

    12/10/2014

     $     160.40

     

    -1.59%

       

    2.95%

           

    17.03%

                   

    $

    ATAI

    12.17%

     $     3.37

    12/10/2014

     $         4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

    $

    WSTG

    3.85%

     $   17.64

    12/10/2014

     $       17.55

     

    -0.51%

         

     SOLD

    3/23/2015

    Annualized:

     

    -2%

    $

    FF

    3.78%

     $   12.70

    12/10/2014

     $       12.34

     

    -2.83%

         

     SOLD

    3/23/2015

    Annualized:

     

    -10%

             

    Total

     

    92%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $ 2,059.82

     

     

     $   2,061.02

     

    0.06%

     

    There is no news to change my perception of the current stocks. A Canadian bank called CANACCORD | Genuity initiated coverage on Perceptron (NASDAQ: PRCP) with a Buy rating. ATNI declared a quarterly dividend of 29 cents; insider buys are outpacing sales in the last three months by 33,772 shares. Credit Suisse says IBM will underperform for years; the article also reports, “Of the Wall Street analysts that cover IBM, 5 assigned it buys, 22 are holds, and 5 are sells.” Bell curves don’t get any better than that. In the last three months, insider buys at IBM have outpaced sales by 73,905 shares – about $11.8 million. The upside for IBM is that it may – through its Watson initiative – participate in the application of intelligent software, which could be bigger than the Internet boom of the early 2000s. I may be too early on IBM, but am holding for now.

    BUY PDLI

    PDLI is a biotech company that licenses its antibody humanization patents and license agreements with various biotechnology and pharmaceutical companies. Insiders bought 235,662 shares in the last 3 months and 481,393 in the last 12 months; compare that to Neurocrine Biosciences (NBIX) where 63 insiders sold 840,953 shares in the last 12 months. PDLI pays an 8.52% dividend, and operating profits increased from $427 million to $540 million in 2014. The company has assembled an expertise in buying biotech patents from companies and universities, and licensing the patents – probably in bundles that can better benefit the buyers.

    Distributing intellectual property in biotech is a good idea because it reduces the high risks of development and product distribution while retaining the potential of the powerful cash flow associated with blockbuster drugs. The company notes, “Our investments are typically in assets with strong intellectual property protection and current near term product commercialization opportunities.”

    PDLI looks cheap now, and possibly for good reasons. Some patents are expiring, though PDLI is buying other portfolios. Ken Fischer doesn’t like PDLI because the price to sales ratio is low, but it’s low because PDLI is a licensing company and the profit ratios are over-sized. For instance, Fisher might like HFC, which has $19 billion in sales, an enterprise value of $7.74 billion and earned $326 million in 2014. By comparison, PDLI earned $322 million on an enterprise value of $1.3 billion and sales of $581 million.

    Can PDLI increase sales? Insider purchases show confidence. What is the company worth in the worst case situation? The most recent quarter saw an increase in S&A costs, which reduced profits to $55 million. Annualized, that’s $220 million on a $1.3 billion value or a 17% return. Qualcomm delivers an 8 % return; if we set the return 2% higher at 10%, PDLI is worth $2.2 billion -- $900 million more than the current EV or $700 million more than the market cap. But that’s the worst case: based on last year’s after-tax profits, PDLI is worth $3 billion on a 10% return.

    In short, unless the insider buyers are wrong and sales and profits decline precipitously, PDLI has plenty of room to expand its market cap – or, at least, to sustain its current value.

    IMPERFECT COMPANIES WORTH WATCHING

    CPSI is an electronic health records (EHR) company, which is a hot area for medicine now. Insiders are buying, it pays a 4.8% dividend, and the products are rated best for small hospitals. However, CPSI is fully valued and the YoY quarterly sales and profits were down. I would rather buy at a greater discount or pay more when sales are going up again.

    IDT has spun out a number of excellent investments including CTMMB. It has recently declined from $22 to $17, has lots of cash, has an EV at a 35% discount to the market cap, and it pays a 4.1% dividend. Unfortunately, it’s marginally profitable and quarterly sales YoY are down.

    GHM makes steel products for the energy industry, which is its main weakness. Sales and profits are up YoY and insiders are buying. The EV sells at a 25% discount to the market cap, and it pays a 1.3% dividend

    Monday
    Mar232015

    Sell WSTG and FF

    As of the market close on 3/20/15, the Perfect Company portfolio is up 14.36% since 12/10/14; the S&P 500 is up 1.43% in the same period.

     

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    3/20/2015

     

    +/-

                   

    1

    OLED

    0.00%

     $      27.64

    12/10/2014

     $       44.48

     

    60.93%

    2

    CTMMB

    5.37%

     $    121.48

    12/10/2014

     $     180.00

     

    48.17%

    3

    LOAN

    8.62%

     $        3.25

    12/10/2014

     $         3.98

     

    22.46%

    4

    DRAD

    4.88%

     $        4.10

    2/9/2015

     $         4.54

     

    10.73%

    5

    VIVO

    4.95%

     $      17.77

    1/27/2015

     $       19.42

     

    9.29%

    6

    KIN

    0.00%

     $        6.63

    12/10/2014

     $           7.20

     

    8.60%

    7

    SAVE

    0.00%

     $      73.77

    12/10/2014

     $       79.79

     

    8.16%

    8

    PRCP

    1.30%

     $      11.50

    3/2/2015

     $       12.05

     

    4.78%

    9

    ATNI

    1.69%

     $      67.98

    12/10/2014

     $       69.32

     

    1.97%

    10

    IBM

    2.70%

     $    162.99

    12/10/2014

     $     162.88

     

    -0.07%

    11

    WSTG

    3.85%

     $      17.64

    12/10/2014

     $       17.60

     

    -0.23%

    12

    FF

    3.78%

     $      12.70

    12/10/2014

     $       12.38

     

    -2.52%

       

    3.10%

           

    14.36%

                   

    $

    ATAI

    12.17%

     $        3.37

    12/10/2014

     $        4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $   2,059.82

     

     

     $  2,089.27

     

    1.43%

    Sell FF and WSTG

    This has been a good time in the market. Since the beginning of the year, we have added three new stocks, which are up 5, 9 and 11%. In the corner of this party are two boats that do not ride the rising tide. (This is a boat party, not a mixed metaphor.) I like these companies, but I have increasing difficultly seeing a future of growth for either Future Fuel or Wayside Technology Group. FF has not articulated a plan to increase sales (I asked, but no reply), and WSTG has yet to explain the 57% drop in sales at its TechXtend division. FF saw an astonishing, but ephemeral, rise in Q4 profits while WSTG saw profits decline. Maybe these two companies have a secret plan – like Nixon had for Vietnam – unfortunately, they’re not as eager to promote their plans. In the absence of a plan for growth, I am selling FF and WSTG.

    What to buy? Is the market overvalued?

    The only time that I think that the market might be overvalued is when I can’t find anything worth buying. That is the case now. I like lots of companies, but their flaws prevent me from buying them. For instance, I like Immersion Corp (IMMR), which controls haptic patents, and which recently added Nortel’s former patent guy to their board; unfortunately, IMMR insiders have sold 909,000 shares in the last three months.

    I like AHC, which is converting from a newspaper company to cars.com.  I think it’s a valuable property, but they lost $6.9 million last quarter and insiders are selling there, too. I’ll wait.

    CSS looks like a good value, but their YoY sales are not growing and their insiders are bailing, too.

    Sunday
    Mar152015

    PerfectCompany Portfolio up 9.76%; S&P 500 down 0.31%

    Success is always temporary, but still fun. Friday was particularly gratifying as the market was down, and our portfolio was up by about the same amount. Since December 10, Perfect Company stocks are up an average of 9.76%; the S&P is down 0.31% for the same period. We sold ATAI for a gain of 19.58% on February 17.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    3/13/2015

     

    +/-

                   

    1

    OLED

    0.00%

     $      27.64

    12/10/2014

     $        41.63

     

    50.62%

    2

    CTMMB

    5.37%

     $    121.48

    12/10/2014

     $      160.00

     

    31.71%

    3

    LOAN

    8.62%

     $        3.25

    12/10/2014

     $          3.68

     

    13.34%

    4

    VIVO

    4.95%

     $      17.77

    1/27/2015

     $        19.82

     

    11.54%

    5

    DRAD

    4.88%

     $        4.10

    2/9/2015

     $          4.51

     

    10.00%

    6

    SAVE

    0.00%

     $      73.77

    12/10/2014

     $        76.58

     

    3.80%

    7

    WSTG

    3.85%

     $      17.64

    12/10/2014

     $        18.02

     

    2.13%

    8

    KIN

    0.00%

     $        6.63

    12/10/2014

     $          6.77

     

    2.11%

    9

    PRCP

    1.30%

     $      11.50

    3/2/2015

     $        11.64

     

    1.22%

    10

    FF

    3.78%

     $      12.70

    12/10/2014

     $        12.71

     

    0.08%

    11

    ATNI

    1.69%

     $      67.98

    12/10/2014

     $        65.18

     

    -4.12%

    12

    IBM

    2.70%

     $    162.99

    12/10/2014

     $      154.28

     

    -5.34%

       

    3.10%

           

    9.76%

                   

    $

    ATAI

    12.17%

     $        3.37

    12/10/2014

     $          4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $   2,059.82

     

     

    2,053.40

     

    -0.31%

     

    Future Fuel surprises with 4X our worst-case Q4 earnings

    Last week, I examined how bad Future Fuel’s 4th quarter earnings could really be. I suggested that sales might be off by 25% and that earnings could be as low as $6.6 million. In the March 12 announcement last week, sales decreased by 30%, but after-tax income increased to $30.1 million. The earnings announcement also included these statements:

    • The expiration of the BTC on December 31, 2013, along with the absence of a definitive government mandated renewable fuel standard for biodiesel, substantially weakened the economics of biodiesel in 2014.
    • Our biofuels segment benefited from the limited renewal of the $1.00 blenders' tax credit ("BTC") passed in December and retroactive to January 1, 2014
    • Partially offsetting these reductions in operating earnings was a hedging gain of $12.8 million in 2014 as compared to $1.2 million in 2013.

    FF appears to have captured the blenders’ tax credit for all of 2014 in the fourth quarter plus a big hedging gain, neither of which is sustainable in the future. Management has been clever and lucky in generating profits in a down market; now I’m wondering if they have a plan for growth.

    The case against Apple

    Apple has ridden the biggest consumer product boom in history to become the most valuable company in history. Here are indications that the ride may be over:

    • Apple will join the Dow Industrials on March 18.
    • One of the last things every great company does is to build itself a giant headquarters edifice; a few years later, they sell it and lease it back. Apple is spending $5 billion on a circular spaceship.
    • Apple milked the Chinese market for its $18 billion profit last quarter. Sales in China grew 70%, and the Chinese responded to the larger screen of the iPhone 6. China mobile manufacturer Xiaomi now offers large screen phones. Xiaomi is a hungry, private Chinese company with a market cap of $41 billion. Many American companies have briefly thrived in China only to have their kneecaps broken by upstart Chinese competitors and a local government that wants its own companies to dominate communications tools.
    • I bought an iPhone 6 Plus – Apple’s top-of-the-line phone, and I found a phone that would not send a photo to my Toshiba computer by Bluetooth, would not allow me to access the phone’s files even when attached by cable, could not accept an SD card, and, generally, is a closed, frustrating system. As I discussed this with friends, I found many people who felt the same way, and who loved their Samsung products. Apple enthusiasts, on the other hand, seem to enjoy Apple’s constraints, as if to say, “My straightjacket is made with fine Corinthian leather. It is very snug and warm. If Apple didn’t limit my options, I might be confused and hurt myself.” I returned my iPhone, and got a Samsung Note 4. I can even change the battery. It seems to me that Apple is more fashion cult than technology leader. How long can that continue?
    • Apple is now reaching for new markets to move the needle, but it’s a very big needle to move. I have yet to meet anyone who wants an Apple Watch. It’s the kind of thing around which you might build a business case, but the dogs still have to eat the dog food. Is anyone salivating for this?

    After my iPhone experience, I bought Apple Jan ’17 $110 Puts, which are up 3.71% so far. This is a bet that Apple can’t find new markets in the next two years and that competition in smart phones becomes incredibly fierce. This is pure speculation – not a perfect company recommendation. Apple could be on its way to becoming the first trillion dollar market cap, or it could face some of the same problems that diminished Blackberry and Nokia, the formerly unassailable kings of cell phones. One day, Apple’s path will have been obvious to everyone, but the time to buy Puts is when the other team is cheering. 

    Sunday
    Mar082015

    Perfect Company Trade Alerts 3-8-15

    We have a new leader: OLED got smashed two weeks ago, but powered back this week to top our list at 39.6% since we bought it on December 10. Why? Choose one: OLED added a banker to its board, or LG said publicly that it’s moving all TV development from LED to OLED. See: http://www.expertreviews.co.uk/tvs-entertainment/1402855/4k-oled-leads-lg-s-2015-tv-range-uk-models-confirmed 

    The Perfect Company portfolio is up 8.26%; the S&P 500 is up 0.56%.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    3/6/2015

     

    +/-

                   

    1

    OLED

    0.00%

     $      27.64

    12/10/2014

     $           38.58

     

    39.58%

    2

    CTMMB

    5.37%

     $    121.48

    12/10/2014

     $         160.00

     

    31.71%

    3

    DRAD

    4.88%

     $        4.10

    2/9/2015

     $             4.88

     

    19.02%

    4

    LOAN

    8.62%

     $        3.25

    12/10/2014

     $             3.65

     

    12.22%

    5

    VIVO

    4.95%

     $      17.77

    1/27/2015

     $           19.55

     

    10.02%

    6

    SAVE

    0.00%

     $      73.77

    12/10/2014

     $           75.10

     

    1.80%

    7

    PRCP

    1.30%

     $      11.50

    3/2/2015

     $           11.60

     

    0.87%

    8

    KIN

    0.00%

     $        6.63

    12/10/2014

     $             6.68

     

    0.75%

    9

    WSTG

    3.85%

     $      17.64

    12/10/2014

     $           17.25

     

    -2.21%

    10

    IBM

    2.70%

     $    162.99

    12/10/2014

     $         158.50

     

    -2.75%

    11

    ATNI

    1.69%

     $      67.98

    12/10/2014

     $           64.95

     

    -4.46%

    12

    FF

    3.78%

     $      12.70

    12/10/2014

     $           11.75

     

    -7.48%

       

    3.10%

           

    8.26%

                   

    $

    ATAI

    12.17%

     $        3.37

    12/10/2014

     $             4.03

     

    19.58%

         

     SOLD

    2/17/2015

    Annualized:

     

    104%

     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $   2,059.82

     

     

    2,071.26

     

    0.56%

                     

     

    Digirad announces earnings.

    Digirad beat the upper end of previously announced 2014 financial guidance with year over year revenue growth of 13% for the quarter and twelve months ended 2014. DRAD is up 19% in a month.

    Perceptron (PRCP) Launched its Smart3D Laser Scanning System

    3D scanning will be important, but it will also excite investors who follow 3D manufacturing. PRCP says that the overall scanning volume is compatible with the volume of most 3D printers.

    KIN will announce its fourth quarter results on March 12.

    Future Fuel – how bad can it get?

    If FF has any good news at all, it should be rising in anticipation of its earnings announcement. Its downward trend has me near capitulation (I want to dump it – logic be damned), which means that it’s probably time to buy. On the other hand, it was a bad week for many stocks. Let’s imagine the worst that FF earnings can be.

    Q3 2014 sales were 15% worse than the same quarter in 2013. Let’s say that Q4 2014 was 25% worse than Q4 2013. FF had 7.9% after-tax margins in Q2 even when sales fell to $68 million. Let’s say that Q4 margins fell to just 7%. Q4 and the year would look like this:

     

    Q1

    Q2

    Q3

    Q4

    2014

    Sales

     $82,197

    $ 68,039

     $ 103,135

     $   94,179

     $ 347,550

    AT Income

     $  6,274

    $   5,347

     $   11,451

     $     6,593

     $   29,665

     

    7.6%

    7.9%

    11.1%

    7.0%

    8.5%


    Is that a company worth owning? The enterprise value – the real cost of the company – is $332 million, so, if we’re in the neighborhood on 4th quarter earnings, FF earns about 8.9%. Compare that to everybody’s favorite company – Apple – which earned 6% against its enterprise value in the last four quarters. Exxon Mobil returns 8.7%.

    What intrigues me about FF is that it remained profitable when sales declined by 40%. Also, oil dumping appears to be over. I know this because my heating oil price increased from $2.299 in January to $2.869 this week, a 25% increase. (Yes, that’s only one data point.)

    Even if the fourth quarter is worse than Q1 2014 and margins fall to 4%, FF earns 7.8% on its EV. If the Q4 news is horrible, is it a harbinger of the future? I think not because oil has already hit its nadir. I’m willing to hold this until March 13 when earnings are released.

    A friend asks, “What do you think of Spanish bank Santander (SAN)?”

    I have recommended a few small banks in the past, which I sometimes like because I think I have a chance of understanding them, because they are sometimes oversold, because they can grow fast, and because they can be acquired by larger banks. Large banks can be oversold, but they have so many moving parts and potential hidden losses that I don’t think anyone really knows how to evaluate them; they are also not likely to grow quickly – especially in today’s environment – so I would be comparing squishy, bloated companies to lean, focused tech companies that can sell millions of a new thing. I like the growth prospects of the second better.

    That said, some investors did extremely well with the “Bernanke Put” after Ben Bernanke publicly stated he would not let big banks go bust. For investors, it was “Heads, I win, tails, you lose.” That is likely still the case, and the Fed said on March 5 that SAN would survive its stress test: http://www.marketwatch.com/story/santander-would-maintain-capital-strength-in-severely-adverse-scenario-based-on-federal-reserve-stress-test-2015-03-05 This public pronouncement may be either true or a commitment by the Fed to stand behind the bank.

    Institutions including George Soros’ fund are buying into Santander. See http://www.reuters.com/article/2015/01/12/us-santander-equity-soros-idUSKBN0KL1RO20150112

    Top holders of SAN include Soros, Wisdom Funds, Goldman Sachs, Macquarie – the smartest guys in the room. On the other hand, they are gambling on a massive scale; I don’t know if a loss of $50 million on a $200 million position would mean that much to them.

    SAN earned 3.9% on its enterprise value in the last four quarters; by comparison, Future Fuel earns 7.8% for the year including the worst imaginable 4th quarter report (see above). SAN is profitable, but not especially. We’ll never know what they’ve been stuffing into that colon of a loan portfolio, or whether they feel as well as they say feel. On the other hand, it’s a pretty fair bet that SAN will never be allowed to die – especially with so many well-known institutional holders and the far-reaching repercussions of an ugly death. SAN is an environmental bet that could yield a fine return, but it’s not the perfect company turning toward robust, profitable growth that I usually seek.