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    Sunday
    Mar012015

    Perfect Company Trade Alerts 2-27-15; Buy Perceptron

    After selling and removing one profitable trade, the Perfect Company Portfolio is up 7.72%; the S&P 500 is up 2.17% in the same period.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    2/27/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $    121.48

    12/10/2014

     $         160.00

     

    31.71%

    2

    OLED

    0.00%

     $      27.64

    12/10/2014

     $           34.39

     

    24.42%

    3

    LOAN

    8.62%

     $        3.25

    12/10/2014

     $             3.66

     

    12.62%

    4

    VIVO

    4.95%

     $      17.77

    1/27/2015

     $           19.80

     

    11.42%

    5

    SAVE

    0.00%

     $      73.77

    12/10/2014

     $           77.88

     

    5.57%

    6

    DRAD

    4.88%

     $        4.10

    2/9/2015

     $             4.27

     

    4.15%

    7

    ATNI

    1.69%

     $      67.98

    12/10/2014

     $           68.83

     

    1.25%

    8

    KIN

    0.00%

     $        6.63

    12/10/2014

     $             6.71

     

    1.21%

    9

    IBM

    2.70%

     $    162.99

    12/10/2014

     $         161.94

     

    -0.64%

    10

    FF

    3.78%

     $      12.70

    12/10/2014

     $           12.30

     

    -3.15%

    11

    WSTG

    3.85%

     $      17.64

    12/10/2014

     $           17.00

     

    -3.63%

       

    3.26%

           

    7.72%

                   

    $

    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

     

     

    $ 2,104.50

     

    2.17%

     

    Buy Perceptron (PRCP)

    Perceptron is participating in the digitizing of the manufacturing process. Their products are used in manufacturing including complex part assembly, automotive body construction, construction of automotive closures, closure installation and fitting, glass installation, adhesive and sealer application and laser cutting. The company has a $106 million market cap, no debt, $32 million in cash, slightly positive insider buying, growing sales, profitability, a dividend of 1.3%, and is buying two other companies that will expand its distribution. PRCP fits the Perfect Company profile of a growing, profitable company that, because of its cash position, is selling at a discount. See: http://perceptron.com/

    Portfolio news this week

    OLED reported that fourth quarter revenues grew 13.5%, but eagle-eyed analysts reported that profits missed expectations by 3 cents a share. One analyst reacted to this troubling news: https://www.youtube.com/watch?v=JmzuRXLzqKk

    A friend told me this story last week: “I knew a guy who was a bit of a gambler. He put $30,000 each in Enron, Worldcom, and Qualcomm. Enron and Worldcom went bust, but Qualcomm is worth a million dollars.” Could OLED provide a similar return? Let’s see: both OLED and QCOM are patent licensors. QCOM benefited from the growth in cellular technology; OLED is benefiting from the growth in screens and, it hopes, a fundamental change in lighting technology. QCOM is worth $118 billion; OLED is worth $1.6 billion. The prospects are appealing. OLED reports:

    Revenues for the fourth quarter of 2014 were $56.2 million compared to revenues of $49.5 million for the same quarter of 2013. Growth in fourth quarter revenues was led by a 10% increase in material sales, which rose to $28.1 million, up from $25.5 million in the fourth quarter of 2013, reflecting strong volume growth in green and red emitter material sales. Royalty and license fees were $28.0 million in the fourth quarter of 2014 compared to $23.1 million in the same quarter of 2013. The Company recognized $25 million in SDC licensing revenue in the fourth quarter of 2014, up from $20 million in the same quarter of 2013.

    For the full year 2014, the Company reported revenues of $191.0 million, a 30% increase from the $146.6 million generated in 2013. Material sales for 2014 were $126.9 million, a 33% increase from $95.7 million in 2013. Operating income was $58.6 million compared to $38.2 million in 2013, a 53% increase.

    OLED sells at higher multiples of cash and sales than Qualcomm, but is growing 4.5 times faster:

     

    X Cash

    X Sales

    Growth

    QCOM

    3.7

    4.5

    6.5%

    OLED

    5.5

    8.4

    30%

    OLED predicts base sales of $200 million in 2015. The company has $288.5 million in cash. I’m less concerned about a 3 cent per share miss in profits. It’s harder to grow sales than to manage profits: there are a lot of profitable, shrinking companies that I wouldn’t want to own. QCOM benefited from the growth of the #1 consumer product in history. For OLED to experience similar success, the world of illumination must change from bulbs to panels. It’s not that far-fetched.

    Spirit Airlines (SAVE) has always claimed to be different than other airlines, and this week was named Value Airline of the Year by Air Transport World at its 41st Annual Industry Achievement Awards ceremony. ATW noted that Spirit is changing the way leisure flyers approach air travel. In many cases, its main competitors are not other airlines, but the bus or automobile. Spirit Airlines was the first ultra low-cost carrier in the US, and has tapped a demand for a market that wants the very best deal. For some families, Spirit has provided the first-ever opportunity to fly rather than spend hours on the road. http://atwonline.com/airlines/value-airline-year-spirit-airlines

    Digirad Corporation (Nasdaq:DRAD) will release financial results for its fourth quarter and year ended December 31, 2014, before the market opens on Friday, March 6, 2015.

    ATNI announced earnings this week. Revenues increased 15% to $336.3 million; operating income, exclusive of transaction-related charges of $3.0 million, was $88.5 million, up 33%; net cash provided by operating activities was $82.0 million; cash position at year-end was $371.4 million.

    I like ATNI and its ability to put cash to work. They bought and sold Alltel, a wireless company, and the CEO notes, “Late in the fourth quarter, we announced ATN's entrance into the distributed generation solar power market through an acquisition that provides growth potential as well as the opportunity to generate attractive returns for investors. Similar to our initial investments in wholesale wireless and fiber operations, Ahana Renewables represents a high quality infrastructure-based business with solid cash flows from long-term Power Purchase Agreements (PPAs) with high-credit quality counterparties and offers the potential for expansion through additional investments or acquisition opportunities." There is something to this idea that “high-credit counterparties” are buying long-term solar PPAs. Apple announced recently that it is buying $850 million of solar power through First Solar: http://www.reuters.com/article/2015/02/11/us-apple-cook-idUSKBN0LE2RN20150211

    Monday
    Feb232015

    Trade Alerts 2-21-15

    Perfect Company stocks are up 9.07%; the S&P is up 2.45% since we started on 12/10/14. I sold ATAI when its core business reported negative growth. It’s up slightly this week, but I’m happy with a 19.6% profit or 104% annualized gain for the short time that I held it. Ideally, this report would have a cash portion and show overall portfolio returns. If you are aware of a free portfolio reporting service, please send me a link. I own these stocks, but not alone in a single portfolio.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    2/20/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $    121.48

    12/10/2014

     $     160.00

     

    31.71%

    2

    OLED

    0.00%

     $      27.64

    12/10/2014

     $       35.94

     

    30.03%

    3

    SAVE

    0.00%

     $      73.77

    12/10/2014

     $       81.77

     

    10.84%

    4

    VIVO

    4.95%

     $      17.77

    1/27/2015

     $       19.34

     

    8.84%

    5

    LOAN

    8.62%

     $        3.25

    12/10/2014

     $         3.52

     

    8.31%

    6

    DRAD

    4.88%

     $        4.10

    2/9/2015

     $         4.37

     

    6.59%

    7

    KIN

    0.00%

     $        6.63

    12/10/2014

     $         6.77

     

    2.11%

    8

    IBM

    2.70%

     $    162.99

    12/10/2014

     $     163.65

     

    0.40%

    9

    FF

    3.78%

     $      12.70

    12/10/2014

     $       12.45

     

    -1.97%

    10

    WSTG

    3.85%

     $      17.64

    12/10/2014

     $       17.08

     

    -3.17%

    11

    ATNI

    1.69%

     $      67.98

    12/10/2014

     $       65.00

     

    -4.38%

    S

    ATAI

    12.17%

     $        3.37

    12/10/2014

     $         4.03

     

    19.58%

       

    3.26%

           

    9.07%

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $   2,059.82

     

     

    2,110.30

     

    2.45%

     

                                 

    On Thursday, Universal Display (OLED) announced a licensing agreement with OLEDworks, a lighting company in Rochester, NY. This is significant because the lighting market is much bigger than the market for screens. OLED lights will be more efficient than LED lights, and may replace lighting as we know it: instead of bulbs in sockets, rooms may be lit by glowing panels. Ultimately, Universal Display execs expect their company to make more money in lighting, which is what they were showing off in an inventor’s symposium I attended recently in Princeton, NJ. Click here for info on OLED lighting products: http://www.oledworks.com/products/

    No news from LOAN, but I’ve learned that the company was founded with zero investment in the CEO’s basement, which is a good test of an entrepreneur. They became a profitable publisher of Yellow Pages, went public, and then decided to sell the business in 2003 in response to technological changes including Google. I like that kind of shrewdness. LOAN is a quirky little, growing company, and you can even see pictures of the projects they’re loaning to here:  http://www.manhattanbridgecapital.com/images-from-the-field/

    FutureFuel will announce year-end earnings after the market closes on Thursday, March 12, and with a conference call on Friday, March 13 at 9 a.m. EST. Call in: (877) 251-1860 or listen at http://ir.futurefuelcorporation.com/

    The most important thing to do is nothing.

    Every week, I look at about 30 stocks, and make notes about many in our online database. These are some of the reasons I don’t buy:

    • Insiders are selling. Everybody needs a new car sometimes, but if insiders are selling far more shares than they’re buying, I won’t support them. I remember the insider sales that presaged 2008.
    • Recent quarterly sales are lower than sales a year ago. I want to see sales growth, and will wait to buy at a higher price when sales are growing again – or will save myself the trouble of owning a shrinking company.
    • The company is losing money. Again, I’ll wait. I don’t have to buy at the very bottom, and will wait until a company is earning a profit. We have one money loser: KIN. It has a good plan in a high-growth business with plenty of cash and insider purchases. Also, it’s already had that crap kicked out of it. We bought lower than the insiders and, so far, they’re not selling.
    • The enterprise value is much higher than the market cap. In other words, the company has a lot of debt and relatively little cash. This might be OK for a high-growth company, but it usually indicates that the company is already richly valued. The best example is Ford (F), which people occasionally tell me is cheap with a market cap of $63 billion. Yes, but enterprise value – the real cost of the company – is $159 billion.

    This bull market has been going for much longer than most. When it turns, there will be no public service announcement: “Attention: the custom of steady gains is about to change. Loss-making, cashless, no-growth, and overvalued companies are about to lose 40 to 60% of their value. Please be advised. Also, hold onto Shake Shack – there will be a run on milk shakes.” In the event of a downturn, all will suffer, but I think we will suffer less.

    The smartest guys in the room?

    We watched the Enron movie this weekend, which reminded me that, when people have an inflated opinion of themselves, they often pop. Something about the Corporate Executive Board and LinkedIn reminds me of Enron. CEB hires young people to sell platitudes to corporations, and is valued at $2.7 billion. In the last 12 months, insiders have sold 321,651 shares and bought 1,311, which helps to explain why the company wants to buy its own shares. On the employee review site, Glassdoor, the employees don’t have a lot of great things to say about it:

    http://www.glassdoor.com/Reviews/CEB-Reviews-E8557.htm

    LinkedIn is valued at $33.7 billion. It had operating income of $36 million in the last four quarters. I cannot find a single peer who says, “Wow! I contacted someone through LinkedIn and it made a real difference to me.” It’s a pay-to-use directory that you build yourself. Trefis pegs LNKD’s value at $163; it sells at $267. Insiders are selling.

    CEB and LNKD are non-essential services that could be good candidates for Put purchases as a hedge against a downturn.

    Sunday
    Feb152015

    Trade Company Alerts 2/16/15 – Sell ATAI

    It was a good week for the market. The S&P 500 is now up 1.8% since Dec 10; the PerfectCompany portfolio is up 9.13%. Our purchases from the last two weeks, DRAD and VIVO, have so far fared well.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    2/13/2015

     

    +/-

                   

    1

    CTMMB

    5.37%

     $    121.48

    12/10/2014

     $     160.00

     

    31.71%

    2

    OLED

    0.00%

     $      27.64

    12/10/2014

     $       35.57

     

    28.69%

    3

    ATAI

    12.17%

     $        3.37

    12/10/2014

     $         4.15

     

    23.15%

    4

    LOAN

    8.62%

     $        3.25

    12/10/2014

     $         3.63

     

    11.69%

    5

    DRAD

    4.88%

     $        4.10

    2/9/2015

     $         4.50

     

    9.76%

    6

    VIVO

    4.95%

     $      17.77

    1/27/2015

     $       19.15

     

    7.77%

    7

    SAVE

    0.00%

     $      73.77

    12/10/2014

     $       79.32

     

    7.52%

    8

    KIN

    0.00%

     $        6.63

    12/10/2014

     $         6.79

     

    2.41%

    9

    IBM

    2.70%

     $    162.99

    12/10/2014

     $     160.40

     

    -1.59%

    10

    WSTG

    3.85%

     $      17.64

    12/10/2014

     $       17.11

     

    -3.00%

    11

    ATNI

    1.69%

     $      67.98

    12/10/2014

     $       65.40

     

    -3.80%

    12

    FF

    3.78%

     $      12.70

    12/10/2014

     $       12.10

     

    -4.72%

       

    4.00%

           

    9.13%

                   
     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $   2,059.82

     

     

    2,096.99

     

    1.80%

     

    FF is up slightly, but is still a mystery. The company has not announced an earnings release date, but has 90 days beyond the end of its fiscal year, or as late as April 1. Last year, the conference call was on March 18. FF is either a great opportunity as a chemical company, or one of my worst ideas. The announcement will show whether they were able to make money in chemicals even as oil prices declined.

    My favorite local newspaper, US 1, reported on OLED last week: http://www.princetoninfo.com/index.php/component/us1more/?Itemid=6&key=2-4-15-fastlane  OLED has been trading below $40 for four years even though sales and profits have powered upward. 2014’s first three quarters of operating profit have already exceeded 2013, so the full year 2014 is likely to be good. 2015 could be the year that OLED finally shoves above $40 as the company may be catching up to expectations.

    OLED

    2010

    2011

    2012

    2013

    2014 3 qtrs

    Sales

    30,544

    61,289

    83,244

    146,639

    134,858

    Operating Income

    -10,226

    5,687

    13,676

    38,244

    41,546

     

    Sell ATAI

    In the week before its weak earnings announcement, ATAI fell 10% – another indicator that insider sales may precede a weak earnings report. I like the idea of selling educational testing in China, and I appreciate that one of the company’s major tests moved revenue from one quarter to another, but this was the fly in the ointment:

    “Delivered approximately 2.6 million billable tests, compared to 4.2 million billable tests (2.7 million, excluding the CPA exam in Third Quarter 2014)”

    The core business of billable tests actually fell by 100,000 units even excluding the CPA exam. The company is involved in many activities that I don’t understand, so, if the core business is not growing in an education-mad society like China, I am selling.

    SAVE continues to fly. Even Jim Cramer loves it: http://finance.yahoo.com/news/cramer-airline-fave-stock-soar-234224202.html

    Last week, I suggested that, sometime in the next six months, analysts might re-discover IBM. This may already be happening. Mark Hulbert of Marketwatch touted IBM on February 13:

    “Or take IBM, which is almost as popular as Pfizer among these top performers, being recommended by six of them. Its dividend yield — at 2.9% — is also far higher than the 10-year Treasury. Many fair-weather investors have dumped IBM in favor of high-tech darlings that seem to be on the cutting edge of technology, arguing that IBM represents the “old” rather than the “new” in the tech world.

    This is a mistaken view of the company, according to Steven Check, editor of Blue Chip Investor, and another of the top performers. Check points out that, contrary to the perception that IBM remains heavily dependent on a legacy hardware business, “90% of [IBM’s] profits [are] generated from software and services.”

    Also relevant to the misperception that IBM is not on the cutting edge, according to Check: The company was “awarded 6,809 U.S. patents in 2013, more than Google GOOGL, +0.94%  and Microsoft MSFT, +1.81%  combined.”

    See: http://www.marketwatch.com/story/what-true-love-looks-like-on-wall-street-2015-02-13

    IBM also announced that it is suing Priceline (market cap $57.8 billion) for patent infringement after three years of trying to settle with them. At this point, I am going to tell a true story about my interaction with some of IBM’s patent lawyers, so, if you’re looking for investment ideas, you can stop reading now.

    I meet IBM’s patent attorneys.

    About 1992, I met a disk drive maker that had solved the problem of too many motherboard designs: by bringing all the processor lines out to one riser card with translator circuitry for multiples types of expansion slots, they could offer one computer model that could handle ISA, EISA and PCI expansion slots.  I arranged to take over the pending patent, and to market the computers through a new company called “Lexar,” a brand name I created from the letters in the word, “relax.” Lexar computers also enabled processor upgrades, so we marketed them as “the last computer you may ever need.” The computers were built in an IBM factory, and this article appeared in Computerworld:

    About a year later, I opened Forbes magazine to an IBM advertisement showing the Eiffel Tower bending toward the earth and announcing IBM’s “flexible architecture.” I got one of their computers, and found that the motherboard was, chip for chip, the same design. I complained, and IBM invited my lawyer and me to a meeting in Research Triangle in North Carolina.0

    We had a chatty lunch with IBM’s seven lawyers, and, when lunch was over, I thought, “OK, here it is. Now is the time when my prescience will pay off, when we will negotiate for some small part of the hundreds of thousands of computers that IBM is selling, and Lexar will become a royalty company.” Then one of IBM’s seven lawyers said, “So sue us.”

    I could have smacked myself in the forehead. “YES, YES,” I thought. “THAT’S how it works. They only wanted to show us their army of attorneys and their fortress in North Carolina, so that I would know how fruitless it would be to send my single lawyer against their ramparts. This has nothing to do with the facts – with the pending patent, with the fact that they are actually making this design for us in the IBM factory, with anything at all. They can do whatever they want because they are huge.” Years later, I would see the movie “Flash of Genius” about the inventor who patented intermittent windshield wipers, who became a lawyer in order to defend his patent against Ford and others, and who gave up his family and his life, but eventually won $28 million from Ford and Chrysler. So what? He was miserable.

    Here’s PC Magazine, Dec 1994, on IBM’s “Selectabus flexible architecture.” What a terrific idea!

    Today, things might have turned out differently. Today, there are pools of capital available to leverage patents against asset-rich bullies, though I suspect the payout is puny for the patent owner. At that time, I was unaware of companies like Intellectual Ventures, which was not founded until 2000. I sold off the inventory and shut down the company. To add insult to injury, a guy called one day and asked if he could have the Lexar web address. “Sure,” I said. “I’m not using it.” The new Lexar company was venture backed, probably would have paid for the name, and went on to become a major memory company.

    Years later, I am hoping that IBM can get some patent cash from Priceline. That is the great thing about investing versus actually running companies. When you start up a company, you invest every hope in your daily activity while every conceivable – and inconceivable – risk threatens to rain disaster down upon you. Exiting a failing start-up is painful, and you sacrifice a chunk of your life.

    However, an investor can spread his risk over a number of hopeful situations and, if one company appears at risk, he can quickly exit. My mentor said, “The first loss is the cheapest,” an aphorism that, with an occasional exception like FutureFuel, I attempt to heed.

    Sunday
    Feb082015

    Trade Alerts 2/7/15: Portfolio up 7.5%, buy DRAD

    The Perfect Company portfolio is up 7.54% in the two months since its creation; the S&P is down 0.21% in the same period. We have made only one trade, which was to buy VIVO on 1/27/15.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    2/6/2015

     

    +/-

                   

    1

    ATAI

    12.17%

     $        3.37

    12/10/2014

     $         4.76

     

    41.25%

    2

    OLED

    0.00%

     $      27.64

    12/10/2014

     $       33.60

     

    21.56%

    3

    CTMMB

    5.37%

     $    121.48

    12/10/2014

     $     145.00

     

    19.36%

    4

    LOAN

    8.62%

     $        3.25

    12/10/2014

     $         3.73

     

    14.77%

    5

    SAVE

    0.00%

     $      73.77

    12/10/2014

     $       77.44

     

    4.97%

    6

    VIVO

    4.95%

     $      17.77

    1/27/2015

     $       17.93

     

    0.90%

    7

    ATNI

    1.69%

     $      67.98

    12/10/2014

     $       66.64

     

    -1.97%

    8

    KIN

    0.00%

     $        6.63

    12/10/2014

     $         6.47

     

    -2.41%

    9

    IBM

    2.70%

     $    162.99

    12/10/2014

     $     156.72

     

    -3.85%

    10

    WSTG

    3.85%

     $      17.64

    12/10/2014

     $       16.75

     

    -5.05%

    11

    FF

    3.78%

     $      12.70

    12/10/2014

     $       11.86

     

    -6.61%

       

    3.92%

           

    7.54%

     

    ATAI moved up this week, and notes that it will report earnings on Feb 11 with a conference call on at 8 a.m. ET on Thursday, February 12, 2015. Participant Dial-in Numbers U.S. & Canada (Toll-Free): +1 (888) 339-2688; International (Toll): +1 (617) 847-3007.

    WSTG announced disappointing earnings this week with net income for the fourth quarter down to $1.8 million from $2.5 million the prior year. Quarterly and annual sales increased (which is still hard to do – many companies that I follow are experiencing declining YoY sales), but gross margins and profits decreased. Given the price drops in the run-up to the earning announcement, I wondered if price behavior might be a predictor of unannounced earnings. It turns out that it might be, but only for disappointing earnings. Stocks tend to rise prior to earning announcements, and that tendency is further correlated with those stocks that historically experience heavier volume prior to announcements. See: http://www.nber.org/digest/mar08/w13090.html  If stocks usually rise prior to announcement, then one might interpret downward movement in the prior weeks in a rising stock like WSTG as “someone knows bad news is coming.”

    Nevertheless, WSTG is a company cushioned by cash and sales growth, so our 5% loss on bad news is not as bad as it would be in most companies. The problem at WSTG seems to be at TechXtend.com, which saw sales drop 57% for the quarter. That indicates some fundamental shift or something going terribly wrong. I checked TechXtend’s traffic at Alexa.com and Quantcast.com, and the site is virtually invisible. TechXtend sales were only $10.3 million of WSTG’s $94.1 million quarterly total, or 10.9%. It appears that WSTG is shifting away from TechXtend; perhaps they should call MartinWolf.com and sell the division. Give someone else a chance to run TechXtend, and take the cash.

    WSTG is now paying a 4% dividend with an ex-dividend date of Feb 13. The bad news is in, and the stock may rise on the dividend. I need to study this more. Curiously, WSTG is similar to Digital River (DRIV), another company that sells software over the web. DRIV has about the same sales as WSTG, but lost $5 million in the most recent quarter. However, DRIV has a more modern web site, far higher traffic numbers, and a market cap of $824 million versus just $82 million for WSTG. What’s wrong with this picture? WSTG looks like a good value and DRIV could be a short candidate; even so, DRIV popped in October from $15 to $25. Hmmmm…maybe DRIV should acquire WSTG. This would cut DRIV’s loss, double their sales, pay a bonus to WSTG shareholders and could even increase the value of DRIV. Everybody wins.

    Something is happening at CTM Media. On Friday, CTMMB jumped from $120 to $145, and CTMMA was up 49% for the day.

    Spirit Airlines announced that it was NOT spending $4 million on a Super Bowl commercial, and instead made the cheapest commercial possible that you can see here: http://www.cheapestbiggamead.com/ Also, Raymond James raised SAVE from Outperform to Strong Buy. As predicted here, the decline in the price of jet fuel is fueling airline profits.

    Trefis has re-set IBM’s price target to $204; the price is currently at $156. In the last 3 months, insider sales at IBM have moved from a net sale to a net purchase of 53,136 shares – about $8.1 million. There are many reasons for insiders to sell, but only one reason to buy: a belief that the price will increase. I believe that we will see this common herd behavior around IBM in the next six months: several analysts will discover that IBM is a great value in the tech sector; portfolio managers, seeking a stock that can absorb a large amount of cash, will cycle back into IBM, and the price will rise to $195. If you can have a frenzy for Box, Alibaba and Shake Shack, the rediscovered IBM will be a cinch.

    Future Fuel has finally had a good week. Volume jumped on Friday, but the company has not yet announced the date that it will release earnings.

     

    Buy Digirad (DRAD)

    Digirad is a medical imaging company with a market cap of $76 million, cash of $21.8 million, zero debt, and a 4.88% dividend. In the Sept quarter, sales grew from $12.41 million to $13.88 million year-over-year. In the last 12 months, there have been 15 insider purchases and no sales. If you buy by Feb 13, you’ll get the next dividend.

    The company says: “Digirad delivers convenient, effective, and efficient diagnostic solutions on an as needed, when needed, and where needed basis. Digirad is one of the largest national providers of in-office nuclear cardiology and ultrasound imaging services, and also provides cardiac event monitoring services. These services are provided to physician practices, hospitals and imaging centers through its Diagnostic Services business. Digirad also sells medical diagnostic imaging systems, including solid-state gamma cameras, for nuclear cardiology and general nuclear medicine applications, as well as provides service on the products sold through its Diagnostic Imaging business.”

    Medical imaging is likely to become more important as we continue to advance our knowledge of the body. However, the industry has experienced shortages in the last decade of Technetium-99m that is used in tens of millions of medical diagnostic procedures annually, making it the most commonly used medical radioisotope. This key ingredient has been made in aging nuclear (uranium) reactors, which has led to persistent supply problems.

    DRAD has signed a letter of intent to invest $1 million in Perma-Fix (PESI), a company that has developed a technique to create Tc-99m without uranium. Executives at PESI have a similar inclination to buy their own stock: http://www.nasdaq.com/symbol/pesi/insider-trades

    Here is the press release on the DRAD-PESI letter of intent: http://drad.client.shareholder.com/releasedetail.cfm?ReleaseID=891427

    It’s interesting to see DRAD investing in this key resource, and reminds me of Andrew Carnegie investing in the first steel plant solely to support the first bridge across the Mississippi. Thereafter, steel manufacturing – not bridge or railroad building – became the Carnegie’s key activity. This new relationship could provide DRAD with a market advantage or the company could eventually become a supplier of Tc-99m. The global radiopharmaceutical market was valued at $3.8 billion in 2012 and is poised to reach $5.5 billion by 2017.

    Of course, this is only a letter of intent. If the agreement falls through, DRAD will save $1 million, and continue to focus on its main business, which could continue to grow or be a nice acquisition for many medical behemoths.

    Monday
    Feb022015

    Perfect Company Trade Alerts 2-2-15

    The Perfect Company Portfolio closed the week of January 30 up 3.97% since its creation on Dec 10; the S&P 500 is down 3.15% in the same period. This does not include dividends; the Perfect Company portfolio currently pays about 1% per quarter based on the dividend rate at time of purchase.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    1/30/2015

     

    +/-

                   

    1

    ATAI

    12.17%

     $        3.37

    12/10/2014

     $         4.94

     

    46.59%

    2

    OLED

    0.00%

     $      27.64

    12/10/2014

     $       31.86

     

    15.27%

    3

    LOAN

    8.62%

     $        3.25

    12/10/2014

     $         3.59

     

    10.46%

    4

    WSTG

    3.85%

     $      17.64

    12/10/2014

     $       17.80

     

    0.91%

    5

    SAVE

    0.00%

     $      73.77

    12/10/2014

     $       74.14

     

    0.50%

    6

    CTMMB

    5.37%

     $    121.48

    12/10/2014

     $     120.00

     

    -1.22%

    7

    ATNI

    1.69%

     $      67.98

    12/10/2014

     $       66.43

     

    -2.28%

    8

    VIVO

    4.95%

     $      17.77

    1/27/2015

     $       17.30

     

    -2.64%

    9

    KIN

    0.00%

     $        6.63

    12/10/2014

     $         6.31

     

    -4.83%

    10

    IBM

    2.70%

     $    162.99

    12/10/2014

     $     153.81

     

    -5.63%

    11

    FF

    3.78%

     $      12.70

    12/10/2014

     $       10.99

     

    -13.46%

       

    3.92%

           

    3.97%

    January reminds me that fear is the most powerful motivator: virtually all price movements are based on fear of loss or fear of being left out. No one invests with glee except those with illegal inside knowledge. This portfolio’s gain relies on five of eleven winners, which one could criticize except for the fact that the big winner was once the biggest loser. It takes some fortitude not to sell an investment when everyone else is selling. Anyone who argues that this portfolio is a matter of timing (that is, uniquely suited to Dec 10) could also have purchased the winners on the dip and be farther ahead today than the original portfolio.

    As Ben Graham said, “You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right - and that's the only thing that makes you right.” I have my reasons for buying these companies, but time will tell whether the facts are right. Unfortunately, we cannot know all the facts, and so we are attempting to limit risk while diversifying over growth candidates.

    In truth, two months is too short a time to judge, but this week will be an interesting week. WSTG announces earnings this week. The company likes to point out, “We've been profitable and have paid dividends to our shareholders for the past 47 quarters (as of 30-Sep-14).” I like that attitude because that kind of pride in the past indicates a desire to continue into the future. Nobody wants to say, “Well, for the first time in 48 quarters, we had a bump.” WSTG does not rely on product spurts for growth, so, as long as programmers continue to use the products they distribute, I expect WSTG to continue to grow. We shall see.

    Future Fuel will also announce earnings shortly. 

    Sunday
    Jan252015

    Trade Alerts 1-23-14

    Since 12/10/14, the Perfect Company portfolio is up 4.8%; the S&P 500 is down 0.4%.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    1/23/2015

     

    +/-

                   

    1

    ATAI

    12.17%

     $        3.37

    12/10/2014

     $         4.85

     

    43.92%

    2

    LOAN

    8.62%

     $        3.25

    12/10/2014

     $         3.53

     

    8.62%

    3

    SAVE

    0.00%

     $      73.77

    12/10/2014

     $       78.39

     

    6.26%

    4

    KIN

    0.00%

     $        6.63

    12/10/2014

     $         6.95

     

    4.83%

    5

    OLED

    0.00%

     $      27.64

    12/10/2014

     $       28.20

     

    2.03%

    6

    ATNI

    1.69%

     $      67.98

    12/10/2014

     $       67.75

     

    -0.34%

    7

    CTMMB

    5.37%

     $    121.48

    12/10/2014

     $     120.00

     

    -1.22%

    8

    WSTG

    3.85%

     $      17.64

    12/10/2014

     $       17.08

     

    -3.17%

    9

    IBM

    2.70%

     $    162.99

    12/10/2014

     $     155.87

     

    -4.37%

    10

    FF

    3.78%

     $      12.70

    12/10/2014

     $       11.62

     

    -8.50%

                 

    4.80%

                   
     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $   2,059.82

     

     

    2,051.82

     

    -0.39%

     

    WSTG took a dive early in the week to $16.38, but closed at $17.08. The company bought back shares last year: “A total of 2,305,066 shares of Common Stock have been repurchased as of December 3, 2014, leaving a balance of 205,947 shares of Common Stock that the Company currently is authorized to buy back in the future. On December 3, 2014, the Board of Directors of the Company approved an increase of 500,000 shares of Common Stock to the number of shares of Common Stock available for repurchase under its repurchase plans. Giving effect to such increase, there is a balance of 705,947 shares of Common Stock that the Company currently is authorized to buy back in the future.” That a distribution company would use cash flow to buy back its own shares is positive to me: they don’t need to invest in research or other opportunities so long as their distribution mechanism is working. I asked the company if I was missing anything, and Simon Nynens wrote, “We are currently in a ‘closed window’ as we are preparing to announce our results in the first week of February. We do not have any important news, other than our results which will be made public in the first week of February.” I see no reason to change my opinion of WSTG at this point.

    This week, we have five winners (up since Dec 10), and I think they all have the potential to win big. Spirit Airlines (SAVE) popped – as it should. The fuel savings are great for them, and only Spirit and Southwest truly understand the expanding market for long distance travel. Spirit is doing an excellent job of setting customer expectations and meeting those expectations. See: http://marketing.spirit.com/how-to-fly-spirit-airlines/en/

    Speaking of energy, I wrote on December 10, 2014 in this space:

    My concern about the entire energy market is that OPEC is not only having a price war, but is punishing its future competition. The citizens of OPEC countries have two assets: oil and the ability to spend oil money. OK, one asset. If competition for that asset is allowed to grow – whether fracking, large-scale batteries, or any kind of alternative energy that, with scale, becomes more efficient – their only asset will be devalued, so they will let oil out of their dam whenever they need to drown the developing flowers of competition. For instance, if solar cells were developed that could generate power at the equivalent of $35 a barrel, OPEC would suffer a permanent devaluation. By lowering energy prices for a sustained period, OPEC will (again) destroy funding for promising alternative energy companies. Companies like Tesla may seem only nifty, not strategic, and the entire infrastructure of the growing U.S. energy sector may suffer.

    This has come to pass: the Saudis are punishing future competition. Oil companies are looking at “outright liquidation” (See: http://www.businessinsider.com/oil-drillers-going-bust-2015-1)  Tesla and almost anything related to alternative energy is down as investors in that sector drown in cheap oil that is headed for $35 a barrel. (http://www.thefiscaltimes.com/Columns/2015/01/09/Why-Oil-Prices-Are-Headed-Below-35-Barrel)

    The CEO of Future Fuel (FF) resigned on Friday. Lee E. Mickles seems like an extraordinary person: http://www.horatioalger.org/members_info.cfm?memberid=MIK08  The company’s announcement takes pains to point out that “Mr. Mikles's decision to resign is solely for personal reasons and time considerations and did not involve any disagreement with the Company, the Company's management or the Board of Directors.” FF is already re-positioning itself as a chemical – rather than biofuel – company. The same press release notes, “FutureFuel is a leading manufacturer of diversified chemical products and biobased products comprised of biofuels and biobased specialty chemical products.” Biofuels were sexy, but the future is clearly chemical.

    Perhaps Mikles thought he could re-make the fuel business through biology, and now realizes that FF must become a more prosaic chemical company. Perhaps he felt it best to resign prior to the next earnings release. It seems to me that, if you were a team player and you knew you had bad earnings coming, you would arrange to leave the company shortly after the earnings debacle. You would take the blame, and the new guy could start fresh, which now would give the company some hope. If you had good earnings coming, it wouldn’t matter as much: you could take credit and leave on a high note, or you could leave just prior to the good earnings, and let the new guy make the happy announcement and watch the company take off. Nothing but good news: good earnings and smart new guy. If you were a big shareholder, you might prefer not to dampen the earnings announcement by resigning just after the good news. Mikles has 2.28 million shares. If you were vain and wanted to avoid bad news, you would resign just before crummy earnings.

    Mikles was paid $36,000 in 2013, so he doesn’t look like a blood-sucking, professional CEO. I’m betting he’s a decent guy who doesn’t want to run a chemical company, and that the earnings will be positive. Annual sales will be down versus last year – maybe around $350 million, but the company will announce that it has made the transition to a biochemical company that it is still a profitable with positive cash flow, lots of cash and no debt. I would not be surprised if FutureFuel changed its name. If I am wrong about the next earnings release, I will sell this position.

    BOX goes public

    Quote of the week goes to Sam Hamadeh who said of BOX’s public offering: "What you are seeing is a lot of buying by doctors, lawyers and dentists who just know BOX's name and didn't pay any attention to the financials. And the financials are horrendous." This is a company with sales of $153 million and a loss of $121 million. Their big idea? Online storage. I like the use of the word “focused” in this sentence: “The Company is focused on various industries, which include advertising, construction, consumer packaged goods, education, energy, financial services and insurance, government, healthcare and life sciences, high tech, legal, manufacturing, media and entertainment, and retail, among others.” Did they leave anything out?

    BOX appears to be selling three dollars for one dollar, which is one way to increase sales, but I don’t think their value-add is going to be enough to make money. BOX reminds me of FEYE, an exciting offering with abominable financials that tanked in 2014.

    Friday
    Jan232015

    Trade Alerts 1/19/15

    This was emailed to subscribers on Monday.

    As of the close on Friday, the Perfect Company portfolio is up 3.78% since 12/10/14;  the S&P 500 is down 1.96%.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    1/16/2015

     

    +/-

                   

    1

    ATAI

    12.17%

     $        3.37

    12/10/2014

     $         4.65

     

    37.98%

    2

    LOAN

    8.62%

     $        3.25

    12/10/2014

     $         3.60

     

    10.77%

    3

    KIN

    0.00%

     $        6.63

    12/10/2014

     $         7.12

     

    7.39%

    4

    WSTG

    3.85%

     $      17.64

    12/10/2014

     $       18.52

     

    4.99%

    5

    CTMMB

    5.37%

     $    121.48

    12/10/2014

     $     120.00

     

    -1.22%

    6

    ATNI

    1.69%

     $      67.98

    12/10/2014

     $       66.93

     

    -1.54%

    7

    IBM

    2.70%

     $    162.99

    12/10/2014

     $     157.14

     

    -3.59%

    8

    SAVE

    0.00%

     $      73.77

    12/10/2014

     $       70.94

     

    -3.84%

    9

    OLED

    0.00%

     $      27.64

    12/10/2014

     $       25.98

     

    -6.01%

    10

    FF

    3.78%

     $      12.70

    12/10/2014

     $       11.79

     

    -7.17%

                 

    3.78%

                   
     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $   2,059.82

     

     

    2,019.42

     

    -1.96%

     

    Four of our ten companies have increased in value in an abysmal market. OLED may have dropped last week because of a nitrogen leak at LG, their #2 customer, that killed two workers and halted production. It is unclear whether this will substantially affect earnings, but I’m guessing LG will fix the problem quickly.

    If you were watching play-off games yesterday, you may have noticed that IBM advertised its Watson initiative. I believe this is a substantial technology that will impact many industries. Compare the Watson selling proposition to the “Cloud.” The world is numb to the word, “cloud,” which is easily duplicated. Cloud, cloud, cloud. Who cares? Watson is owned by IBM, has been developed and tested over years, and could reposition IBM as the company that can solve problems unsolvable by human minds. It’s a big deal. IBM pays a 2.8% dividend.

    The market has oversold Future Fuel because of its obvious connection to “fuel,” but the company has no oil leases, deep sea platforms or other wasting assets. In fact, it derives half of its revenue from specialty chemicals, has lots of cash, has affirmed its dividend for 2015, and is a Graham-worthy investment. See www.futurefuelcorporation.com On the chemical side, FF will benefit from lower oil prices, which affect its raw materials costs. The telltale moment will be Future Fuel’s next earning report, which I think will show that the company continues to be adroitly managed. I expect a price spurt thereafter.

    There are no changes in the portfolio because I have not seen any fundamental changes in the positions of these companies. I have also looked for companies to bet against: my favorites, like CZR in 2014, lose money and have so much debt that, even if they make money, they can’t pay their interest. Bon-Ton Stores (BONT) might fall into that category, but puts are only available through July 15. Some insiders are bravely buying BONT, but others are selling. I don’t get it: with the exception of treasure hunting at TJX, which buys out a manufacturer’s entire production run, retail shopping is almost always a disappointing experience. Stores cut back on quality, selection and help, and continue to drive customers to Internet competition. Department stores are dead men walking.

    Monday
    Jan122015

    1/12/15 What happened last week?

    The Perfect Company portfolio is up 4.14% since 12/10/14; the S&P is down 0.73% in the same period.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    1/9/2015

     

    +/-

                   

    1

    ATAI

    12.17%

     $        3.37

    12/10/2014

     $         4.29

     

    27.30%

    2

    LOAN

    8.62%

     $        3.25

    12/10/2014

     $         4.05

     

    24.62%

    3

    KIN

    0.00%

     $        6.63

    12/10/2014

     $         7.43

     

    12.07%

    4

    OLED

    0.00%

     $      27.64

    12/10/2014

     $       29.10

     

    5.28%

    5

    SAVE

    0.00%

     $      73.77

    12/10/2014

     $       73.11

     

    -0.89%

    6

    WSTG

    3.85%

     $      17.64

    12/10/2014

     $       17.45

     

    -1.08%

    7

    IBM

    2.70%

     $    162.99

    12/10/2014

     $     159.11

     

    -2.38%

    8

    FF

    3.78%

     $      12.70

    12/10/2014

     $       12.08

     

    -4.88%

    9

    ATNI

    1.69%

     $      67.98

    12/10/2014

     $       64.56

     

    -5.03%

    10

    CTMMB

    5.37%

     $    121.48

    12/10/2014

     $     105.00

     

    -13.57%

                 

    4.14%

                   
     

    S&P 500

     CLOSE 12/9/14

     

    CURRENT

     

     

     

     

     $2,059.82

     

     

    2,044.81

     

    -0.73%

     

     

     

     

    What happened to push the market into a small panic? Oil prices, Greece, labor reports, terrorists?

    Everyone had a theory, but some made little sense to me. For instance, if oil prices drop, the news is doubly good for Spirit Airlines: its customers have more money to travel and Spirit saves money on its #1 cost: jet fuel.

    I think the beginning of the year can be wild because Wall Street bonuses are based on assets under management at year end. Trading is light at the end of December (the 5-day rolling average of S&P volume hit 313 million on December 31, and bounced back to 577 million by Friday.)  I believe money managers are loath to sell at year end; if anything, they would prefer to push stocks a little higher by buying. Trillions of other people’s money is available to help produce billions of dollars in bonuses. They keep a wary eye on everyone else’s trigger finger as they prepare to re-position in week one of the new year. The marginally increased selling in the first few days sets off automated selling that turns into small panics, and sets commentators looking for explanations.

    What has become of our companies?

    Most of our companies did not change from week to week, which is to say that they had very little news. The Consumer Electronics Show was somewhat positive for OLED because there were signs everywhere extolling the virtues of Organic LEDs, which are now used in curved televisions and in Oculus goggles – arguably the most sought-after demo of the show. See: http://www.engadget.com/products/oculus-vr/rift/  and http://www.ign.com/articles/2015/01/09/ces-2015-oculus-rift-crescent-bay-is-the-most-impressive-vr-demo-ive-ever-experienced

    Spirit Airlines (SAVE) reported its preliminary traffic results for December 2014:  traffic in December 2014 increased 17.7% versus December 2013 on a capacity increase of 20.1%. It would be nice to see a one-to-one increase in sales-to-investment, but that is rarely the case.

    This tiny IBM data point appeared in the past week: “Welltok, a company that uses game mechanics, social networks and IBM supercomputer Watson to encourage healthy behavior, has raised $12 million from Hearst Health Ventures and Catholic Health Initiatives.” I think we’re going to see a lot more money raised to employ IBM’s Watson in health care and other industries, and that Watson has the potential to supercharge IBM the way cell phones goosed another computer company.

    Monday
    Jan052015

    Weekly Report 1/5/15

    TRADE ALERTS 1/4/15

    As of the close on 1/3/15, the Perfect Company portfolio is up 8.48% since 12/10/14. The S&P 500 is down .08% for the same period.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    1/2/2015

    +/-

                 

    1

    ATAI

    12.17%

     $   3.37

    12/10/2014

     $     4.70

    39.47%

    2

    LOAN

    8.62%

     $   3.25

    12/10/2014

     $     4.18

    28.62%

    3

    KIN

    0.00%

     $   6.63

    12/10/2014

     $     7.44

    12.22%

    4

    FF

    3.78%

     $  12.70

    12/10/2014

     $    12.97

    2.13%

    5

    CTMMB

    5.37%

     $  121.48

    12/10/2014

     $    123.00

    1.25%

    6

    OLED

    0.00%

     $  27.64

    12/10/2014

     $    27.97

    1.19%

    7

    SAVE

    0.00%

     $  73.77

    12/10/2014

     $    74.24

    0.64%

    8

    WSTG

    3.85%

     $  17.64

    12/10/2014

     $    17.67

    0.17%

    9

    ATNI

    1.69%

     $  67.98

    12/10/2014

     $    67.77

    -0.31%

    10

    IBM

    2.70%

     $  162.99

    12/10/2014

     $    162.06

    -0.57%

               

    8.48%

     

    There is no news on ATAI.  Two theories: (1) the same people who manipulated the steep drop two weeks ago are at work on the upside. (2) Like many tech stocks, ATAI had a steep run-up early on, but it is now maturing and preparing for a long, gradual climb that fulfills its original promise. I would like to believe the second theory, but cannot yet discount the first. In the meantime, I’m happy for the gain.

    On December 29, ATNI acquired a company with 45 megawatts of solar power generation. ATNI is the same company that bought Alltel and cashed out for a huge windfall a few years later. I like this management group and what the CEO says about the acquisition: "We believe that it is much like the investment we initially made in our wholesale wireless and fiber operations, in that it is an extensive, high quality infrastructure-based business with solid cash flows and the potential for expansion and higher returns through additional investment." The cost of the acquisition was $63 million in cash plus the assumption of $39 million in debt. ATNI still has plenty of cash, and I suspect that they are buying solar at a low. Solar has recently been eclipsed by fracking, but solar cells are essentially the inverse of transistors and we are seeing consistent doubles in solar capability. Just as many refinements and inventions came together to create the enormous cell phone market, I think we will see a sudden, enormous growth of solar energy in the next ten years as panels, batteries and transmission lines improve. I like this acquisition. For more on solar:

    http://www.ucsusa.org/sites/default/files/legacy/assets/documents/clean_energy/Solar-Power-on-the-Rise.pdf  

    http://www.technologyreview.com/news/528351/record-breaking-solar-cell-points-the-way-to-cheaper-power/

    A tale of two airlines

    Spirit and Frontier are next to each other in the Philadelphia airport. Here are photos taken on January 3, 2015 of both check-in counters.

    Spirit has established financial incentives that teach its customers positive behaviors: for instance, it’s $10 to print out a boarding pass at the airport, so no one does that – and how many times do those machines break down anyway?  Check-in and boarding at Spirit is faster than any airline I have traveled. Frontier has also set financial incentives, but is so disorganized that the lines are often long, and they have taught me – if I must fly them – never to carry baggage.

    A great business is a great system that smoothly generates an efficient experience for customers and a profit for the owners. It’s harder than it looks: K Mart failed in large part because it could not process a sale; while customers were lining up at Wal-Mart, K Mart was doing a price check on aisle 9. Many business travelers today are snobbish about discount airlines, but most of the entrepreneurs I have admired would rather be better paid than padded: they and their personnel flew coach. I believe Spirit, if it maintains its price leadership and efficient experience, will be able to expand its business clientele as it grows.

    Stocks I have recommended in the past

    Selling EPD because, while they are providing tools for natural gas companies, I don’t want to be near that sector for a while. The September quarter was good versus the same quarter in 2013, but that was before energy dumping by OPEC.

    Selling LECO because, while sales are up, profits are down in the most recent quarter, and it's no longer selling at a discount. Insides are net sellers.

    EPD and LECO have both had excellent gains.

    Monday
    Dec292014

    Weekly Report

    The Perfect Company portfolio ended last week up 4.38% since 12/10/14 (closing prices on 12/9). The S&P 500 is up 1.41% during the same period.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    12/26/2014

    +/-

                 

    1

    LOAN

    8.62%

     $       3.25

    12/10/2014

     $           3.82

    17.54%

    2

    ATAI

    12.17%

     $       3.37

    12/10/2014

     $           3.80

    12.76%

    3

    KIN

    0.00%

     $       6.63

    12/10/2014

     $           6.87

    3.62%

    4

    SAVE

    0.00%

     $    73.77

    12/10/2014

     $        75.84

    2.81%

    5

    FF

    3.78%

     $    12.70

    12/10/2014

     $        13.02

    2.52%

    6

    OLED

    0.00%

     $    27.64

    12/10/2014

     $        28.13

    1.75%

    7

    CTMMB

    5.37%

     $  121.48

    12/10/2014

     $      123.00

    1.25%

    8

    ATNI

    1.69%

     $    67.98

    12/10/2014

     $        68.67

    1.02%

    9

    WSTG

    3.85%

     $    17.64

    12/10/2014

     $        17.81

    0.96%

    10

    IBM

    2.70%

     $  162.99

    12/10/2014

     $      162.34

    -0.40%

               

    4.38%

     

    The portfolio has been helped by its microcaps, but we did not sell ATAI when it plummeted and are benefiting from the subsequent gain. Until we see some real negative news, we’ll stick with the idea that a growing Chinese educational company with cash and a U.S. auditor has upside potential.

    As to LOAN, it’s led by an entrepreneur in a city that attracts construction money from all over the world. The owner of an insurance agency with business in New York told me last week that a condo sold in an as-yet-unbuilt building for $130 million. “How much is the monthly maintenance?” my friend asked. “$200,000”  New York is a carnival for construction in a positive environment, and, with GDP reported at 5% in the last quarter, LOAN can participate in that party. That said, LOAN’s trend has been almost vertical, so expect traders to wag it in the short term.

    I thought I might take a last-minute trip from Atlantic City to Atlanta on Spirit Airlines (SAVE). Maybe I could get those $9 fares. No such luck: Spirit’s flights are fully booked on that routes for most of the next two weeks. Spirit is flying many routes at 100% capacity. The ability to tweak flights with a direct-to-consumer booking system provides Spirit a benefit that airlines never had in the past. I have heard that investors are resurrecting the “Eastern” brand (a crummy airline that deserved to die), and money is flowing toward other mediocre brands. However, a company that understands it is a discounter will earn more than a Johnny-come-lately fueled mainly by the greedy dreams of financiers. It’s hard to put all the systems in place that make a company work, and, when it starts working, it can be hard to beat.

    By the way, here’s the brains of most airline search tools – ITA search was bought by Google in 2010 for $700 million: http://matrix.itasoftware.com/ It’s a terrific way to find the best airline deals.

    Every day, I receive emails suggesting that the Dow or the “market” may go up or down. To me, that’s like trying to predict landslides in California – too much data is required to make that prediction even after a lot of rain. Landslides do happen, but when and where is virtually unknowable. I am far more comfortable picking a handful of decent companies, and hoping that several of them carry the day while the others do little damage. With the exceptions of KIN, which has plenty of cash, and IBM, which is a technology and value play, we are invested in companies that are growing and have enough cash to weather a downturn. Most of them also pay excellent dividends.

    Tuesday
    Dec232014

    Trade Alerts 12/23/14

    Since announcing the Perfect Company portfolio two weeks ago, the portfolio is up 2.14%.

    #

    Symbol

    DIV@BUY

     BUY

    DATE IN

    12/23/2014

    +/-

                 

    1

    LOAN

    8.62%

     $       3.25

    12/10/2014

     $           3.65

    12.31%

    2

    ATAI

    12.17%

     $       3.37

    12/10/2014

     $           3.52

    4.45%

    3

    FF

    3.78%

     $    12.70

    12/10/2014

     $        13.16

    3.62%

    4

    OLED

    0.00%

     $    27.64

    12/10/2014

     $        27.82

    0.65%

    5

    SAVE

    0.00%

     $    73.77

    12/10/2014

     $        74.16

    0.53%

    6

    KIN

    0.00%

     $       6.63

    12/10/2014

     $           6.66

    0.45%

    7

    WSTG

    3.85%

     $    17.64

    12/10/2014

     $        17.69

    0.28%

    8

    CTMMB

    5.37%

     $  121.48

    12/10/2014

     $      121.48

    0.00%

    9

    IBM

    2.70%

     $  162.99

    12/10/2014

     $      162.24

    -0.46%

    10

    ATNI

    1.69%

     $    67.98

    12/10/2014

     $        67.70

    -0.41%

               

    2.14%

     

    The portfolio has been helped by avoiding energy, which has cratered. Since we suggested that OPEC may intend to squash future energy competitors, the consortium has said its output would be unchanged at $40 a barrel and the WSJ featured a front-page article suggesting the Saudi’s were afraid of U.S. shale: “Let prices slide to test how long, and at what levels, American shale producers can keep pumping.” See full article:  Investors will remember that pain, and it could salt U.S. energy’s new capital fields for years.

    KIN is moving off its low, which is interesting because price is one of the few knowable things about this company since it has no revenue. The other is that biotech intelligentsia like it. Oleg Nodelman who runs EcoR1 – “Bleeding edge science is our comfort zone” – bought 232,000 shares at about $10 in August and September. You can buy it for less than $7 today.

    On December 15, ATAI was down 24%, but bounced back for a gain. So goes the betting in China. We have no information suggesting that this growing educational testing company has changed one way or the other.

    We have looked at hundreds of interesting companies that have the capacity to grow quickly. Most are knocked out of consideration because executives are aggressively selling shares or because sales in the recent quarter have fallen below sales of the same quarter the prior year. We’ll wait for sales to rebound before buying. AHC, for instance, is an interesting company that is converting itself from a newspaper business to a new media company. The owner of cars.com, AHC has $108 million in cash and is paying a $2.25 per share dividend to owners as of 12/26/14. However, insiders have sold a net 624,000 shares in the last 12 months, and Quantcast traffic on cars.com is declining along with sales at the parent company. Like so many other imperfect companies, the stars are not yet aligned.

    Going into the first quarter, we will look for more companies in trouble. Of our two Put positions last year, DNDN now trades on the pink sheets at 13 cents and CZR fell from $18 to $8.50, but has bounced up to $15.

    Wednesday
    Dec102014

    Ten Great Companies to Buy

    Truth be told, I’m hoping for 8 out of 10, and at least one of these is positively speculative, but I have been hectored by a friend to choose a portfolio, so here it is.

    Since July, I’ve been putting notes in the Perfect Company screener, and some of those picks have worked out very well. However, while I like the screener, it has an even smaller audience than this column, so I’m returning to the old format. And writing helps me work out ideas, so here are my top ten:

    #

    Name

    Symbol

    Perfect Company Rating

    DIV@BUY

     BUY

    DATE IN

                 

    1

    ATA Inc.

    ATAI

    9.3

    12.17%

     $       3.37

    12/10/2014

    2

    Atlantic Telephone

    ATNI

    10.6

    1.69%

     $    67.98

    12/10/2014

    3

    CTMMB

    CTMMB

    15.6

    5.37%

     $  121.48

    12/10/2014

    4

    Future Fuel

    FF

    31.8

    3.78%

     $    12.70

    12/10/2014

    5

    IBM

    IBM

    7

    2.70%

     $  162.99

    12/10/2014

    6

    KIN

    KIN

    NA

    0.00%

     $       6.63

    12/10/2014

    7

    Manhattan Bridge Capital

    LOAN

    8.5

    8.62%

     $       3.25

    12/10/2014

    8

    Spirit Airlines

    SAVE

    16.9

    0.00%

     $    73.77

    12/10/2014

    9

    Universal Display

    OLED

    29.9

    0.00%

     $    27.64

    12/10/2014

    10

    Wayside Technology Group

    WSTG

    18.5

    3.85%

     $    17.64

    12/10/2014

     

    ATA, Inc  ATAI

    ATA Inc is my single Chinese investment. What if ETS were a for-profit company and had a market the size of China? The competitive Chinese people will seek online training and testing that helps them get ahead. ATAI sales and profits are growing. The company has $51 million ($US) in cash and pays a 12% dividend.

    The fly in the ointment is that plenty of Chinese companies with great numbers simply stop reporting. A friend recommends checking on the auditors; in this case, KPMG audits ATAI. Its web site is http://ir.ata.net.cn/profile.

    Sales and profits continue to rise, and ATAI just bounced off a four-year low.

    Atlantic Telephone  ATNI

    “Atlantic Tele-Network, Inc. provides Wireless and Wireline telecommunications services in North America, Bermuda and the Caribbean.” This is the management group that acquired and sold Alltel. They continue to grow prudently. Most recent quarterly sales were $89 million versus $79 million the year before. In the last 12 months, insiders have made net purchases of about $21 million at current prices.

    CTM Media CTMMB

    This company spun out of IDT, and is barely reported: you have to go to the company’s web site to find the financials. But CTMMB keeps going up because it pays a nice dividend and is in two simple businesses: those brochure stands at rest stops on the NJ Turnpike and comic book licensing. Comic books are where video games and movies get worked out today. 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.

    Future Fuel  FF

    A maker of biofuels and chemicals, FutureFuel was hit by the glut of mined products that has driven down fuel prices. However, in the last three quarters, their sales have rebounded, and they’ve made money every quarter. Their profitability is interesting because companies like this often lose scads of money when prices and sales fall at the same time. FF’s ability to make money in the worst of times says that the management is nimble and that fixed costs are low.

    Here’s my hunch for the full year:

     

    Q1

    Q2

    Q3

    HUNCH4

    2014

    SALES

    82,197

    68,039

    103,135

    100,000

    353,371

    NET

    3,722

    3,269

    8,134

    8,000

    23,125

    FF has zero debt, $195 million in cash and short-term investments and pays a 3.8% dividend, so, if my conservative earnings guesstimate is correct, they’ll make almost 10% after-tax on their enterprise value this year. If they do better, that will be terrific. Insiders purchased in May and August, and the stock was up almost 5% today.

    The market is betting against Future Fuel because the cost of oil is declining, and oil is also the feedstock for many chemicals.

    IBM

    I have never been an IBM fan, but am recommending it for these reasons:

    • On its $196 billion enterprise value, IBM has earned 8.24% in the last four quarters. That beats bank interest.
    • The stock has dropped to $162 from $192 in September; Trefis pegs it at $228.
    • Everybody else hates it.
    • Warren Buffett likes IBM, and he was right about railroads: his railroad made a fortune carrying oil a few years after he bought it. I think he has some fundamental reason to buy IBM, and the most interesting technology in IBM is Watson. Besides TV game shows, Watson could fundamentally change many industries. Watson is old news, but that’s fine: tech always takes a few years to settle in before it takes off. Here’s a Watson article from November 6, 2014: http://www.cio.com/article/2843710/big-data/10-ibm-watson-powered-apps-that-are-changing-our-world.html
    • It’s impossible to know how low IBM will go. While we’re waiting, though, it pays a 2.7% dividend.

    Kindred Biosciences KIN

    KIN is not a “perfect company” because it has no revenue and loses money. I put in a 60-day, low-ball bid, and woke up one day find that I owned the stock at $6.36.  Reasons to buy: (1) In the last 12 months, insiders have purchased 675,000 shares. (2) They are making drugs for the pet market, which requires less regulation than the human market. (3) People spend ridiculous amounts on pet medicine today: witness the pet care palaces springing up around you. (4) As human drugs becomes less profitable, human drug companies will buy successful pet drug companies.

    Manhattan Bridge Capital  LOAN 

    Manhattan Bridge Capital is a microcap that pays a 8.5% dividend. The company makes short-term, secured, nonbanking loans to real estate investors to fund their acquisition and construction of properties located in the New York Metropolitan area. The loans are principally secured by collateral consisting of real estate and, generally, accompanied by personal guarantees from the principals of the businesses. New York is the playground for the world’s rich; I think it’s a good bet for secured loans, and the company is growing.

    Spirit Airlines  SAVE

    Since early 2013, Spirit has taken off like one of its planes. I’ve always avoided airlines, but they are now helped by many factors: (1) Newer, more efficient planes (2) Internet reservation systems that can be tweaked at a moment’s notice to fill up planes (3) lower fuel prices and (4) the realization among managements that they are bus companies and that customers will tolerate almost anything. This last point is important: I despise Frontier Airlines for the abuse it has heaped on me, but I will fly it again because its small airport is five minutes away. If Frontier can remain fully loaded, a well-run airline like Spirit will soon fly to Mars.

    Now consider Spirit’s other competitors – big companies, many with old planes and a habit of declaring bankruptcy every 10 years to stay alive. Spirit knows its place in the airline industry – it tells customers on its web site that the seats are tight, and even its stock symbol says what it is: SAVE. Delta, United and the rest are the Sears and Penney’s of flying: not a great deal and not particularly comfortable either.

    Delta has a market cap of $36.8 billion; American Airlines $31.7 billion; Spirit only $5.5 billion. On its $4.9 billion enterprise value, it has earned 8.9% in the last four quarters. I’m betting that Spirit will keep growing, but not everyone agrees. The stock was down 12.7% today when Raymond James downgraded it to “market perform.”

    Universal Display (OLED)

    Universal Display is the Qualcomm of screens: that is, they develop technology, patent it, and license the patents to companies like Samsung, which use the higher cost, but lower power Organic LEDs (hence, the stock symbol, OLED) in smaller, high value screens. However, like Qualcomm, UD will keep pushing down the cost of its superior technology, and they are already turning to lighting, which is a larger market. Rather than directional, high-intensity lighting, we may soon have ceilings or walls that glow like the outdoors. The company appears to concentrate its royalty collections in the second and fourth quarters, and the stock appears to reflect that “news,” so we are buying in anticipation of a good quarter.

    Wayside Technology Group WSTG

    This technology distributor gets little hype, but you may remember their brands as Programmer’s Paradise and Lifeboat. It continues to grow prudently, and pays a 3.83% dividend. A director purchased 3000 shares in November.

    Energy Stocks

    Many energy related stocks are appealing right now. For instance, Adams Energy (AE) is engaged in the business of marketing crude oil, natural gas and petroleum products, tank truck transportation of liquid chemicals, and oil and gas exploration and production. Adams has fallen from $89.74 in March to $43.85 today. It’s a growing company and a great value.

    My concern about the entire energy market is that OPEC is not only having a price war, but is punishing its future competition. The citizens of OPEC countries have two assets: oil and the ability to spend oil money. OK, one asset. If competition for that asset is allowed to grow – whether fracking, large-scale batteries, or any kind of alternative energy that, with scale, becomes more efficient – their only asset will be devalued, so they will let oil out of their dam whenever they need to drown the developing flowers of competition. For instance, if solar cells were developed that could generate power at the equivalent of $35 a barrel, OPEC would suffer a permanent devaluation. By lowering energy prices for a sustained period, OPEC will (again) destroy funding for promising alternative energy companies. Companies like Tesla may seem only nifty, not strategic, and the entire infrastructure of the growing U.S. energy sector may suffer.

    Wednesday
    Jul022014

    Monday
    Jun162014

    The Whack-a-Mole Market

    The most fascinating thing printed about the market in the last year is the story of the $13 billion anonymous charity. Three mathletes grew tired of federal interference, stopped trading other people’s money, and started trading their own instead. They did well enough to give away $13 billion to help cure Huntington’s Disease and support other causes. To put this in perspective, their Huntingdon’s funding is larger than the Carnegie and Rockefeller Foundations combined.

    Let that sink in. While you were working and investing, these three earned an historic fortune. They are playing a completely different game: they didn’t scrimp to invest in the next innovator or rake a fee off a mountain of other people’s money; they hoover-ed mass quantities of cash out of the market.

    I suspect mathletes love the current market, which, despite constant announcements of new “record highs” is up only 4.7% in six months. If you listened to the news, you might think that stocks are crazy on fire. Last year at this time, the S&P was up 14%.

    Here is the defining behavior of 2014: a good value pops up and then shoots back down. It’s like the carnival game, Whack-a-Mole: the smart money pumps up a good value, investors follow, and the smart money dumps out. Money churns through sectors pushing stocks up and pulling them down. We’re buying right, but we should be selling sooner.

     

    What to do?

    For many months now, it’s been harder to find perfect companies. Other events also indicate that we’re pushing on the ceiling: the economy grew by just 0.1% last year, investors are pouring into penny stocks in hopes of better returns, and companies are resorting to buying competitors for growth.

    Anecdotal evidence suggests the consumer class is evaporating: Red Lobster can’t make it, housing sales are down, and fewer people are working. The labor force participation rate has hit 1978 levels of 62.8% with 91.8 million people seeking other ways to pass their time – including almost 11 million are on disability. My biggest concern is that the U.S. populace is being squeezed to the point that domestic growth will be difficult. Who will buy all the houses if the next generation can’t get decent jobs? How long can companies increase profits by laying off employees? And who will be left to buy more stuff and increase sales?

    Predictably, the government is responding by easing up on mortgage rules and keeping rates down. The mortgage problem is one reason that I’m holding EFC: shrewd operators may have opportunities as the mortgage market is reconfigured.

    Our current strategy is:

    • Buy only companies with a PCS greater than 2 and positive discount rate (DS).
    • Sell winners that have a PCS score of 2 or less.
    • Sell faster in this choppy market.
    • Hedge the downside with long-term puts on companies that will crater if the market tanks.

    RECENT TRADES BOUGHT

    • HCI on 4/24/14. It’s up 8.94%  PC Score: 6.88
    • AV on 4/30/14 at $17.75. This UK insurance company has refocused, pays a 2.7% dividend, and makes $3.5 billion on a negative EV. (The PC score for AV appears to have a computational issue; AV is down 1%.)

    RECENT TRADES SOLD

    • Sold CPSI for a 17% gain.
    • Sold these for gains: MGIC, AIRT, FSLR, MYGN, SUP
    • Sold HVB at breakeven. The fourth quarter loss blew out returns, and sales are shrinking.
    • Sold BANC at a loss.  BANC is now selling at a premium. PCS is -0.02
    • Sold AMSWA at a loss.

    BOUGHT THESE PUTS AS A DOWNSIDE HEDGE

    I bought Puts on two companies on our “Worst U.S. Companies” screen. These companies have contracting sales, inflated values, lots of debt, and relatively little cash. Dendreon sells an expensive cancer drug that competes against J&J and another strong competitor. The Feuerstein-Ratain Rule predicts that drug companies with market caps less than $300 million will fail phase III clinical trials. While the rule does not specifically apply to DNDN, its market cap is now at $323 million. DNDN is at a competitive disadvantage, is already leveraged, and may not be able to weather a new drug submission.

    Caesars is a company that makes most of its money screwing its customers; how long until it screws its shareholders, too? The public can now gamble everywhere in the U.S., and profits have moved to Macau. Caesars’ debt has swelled to almost $21 billion, and interest of $592 million overwhelmed operating profit of $71 million in the last quarter. Bondholders claim default.

    • DNDN  Jan 15 '16 $1 Put
    • CZR  CZR Jan 15 '16 $15 Put Executed @ $3.9

    CURRENT RECOMMENDATIONS

    • FF Future Fuel is a great buy again. PC Score: 6.08  I continue to hold FF.
    • AGX Argan is an ambitious company that buys companies that supply services to growth industries. It’s mainly Gemma power, which has a backlog of over $800 million in projects. Pays a 2.45% dividend. PC Score: 6.42  I bought AGX on 6/16/14 at $31.54.
    Monday
    Apr142014

    Trade Alerts 4/14/14 >> Try the new PC Scanner

    Try the Perfect Company Stock Screener

    Try our stock screening engine here: http://perfectcompany.squarespace.com/perfect-company-stock-screener/

    It’s easy, fast, and potentially profitable. We look forward to your feedback.

    Trade Alerts 4/14/14

    As logical as we like to think we are, we are still driven by emotions.

    Just two weeks ago, I capitulated on Sears. To keep from losing money, I broke even on my Sears Puts. The next Monday morning, SHLD fell from $4.3 billion to $3.3 billion. It was a sad day: I would have more than doubled my money. Perhaps investors were waiting for the Land’s End spinout before dumping Sears.

    Tech got dumped, too, though these were mostly fat tires in search of a nail. Is it any surprise that the ability to deliver fast food (GRUB) is worth only $2.6 billion or that strip-mining coupons (GRPN) has fallen to only $4.7 billion? For the last four quarters, Groupon lost $18 million pre-tax; GRUB shows pre-tax earnings of $14.9 million. If depression is the inability to imagine a future, these companies make me depressed. I cannot imagine that we are all going to buy our schlock from Groupon mailings, that we’re dying to get more TV dinners from GrubHub, or that we’ll pay more than $2.6 billion for the pleasure of a 0.6% pre-tax return.

    Curiously, a lot of tech companies don’t make much money, and they are hard to value.

    How do you value Amazon, a technology company that owns the leading online retailer, the #1 e-book maker, the premier cloud storage business and a host of other excellent businesses, but which still earns very little money? (Even Facebook earned twice the operating profit of Amazon last quarter.) Or Facebook which paid $19 billion for a virtually free messaging system? These may or may not be excellent businesses, but each company is valued at over $140 billion, and both are in the top 200 market caps world-wide (http://www.ft.com/indepth/ft500). They’re too big to be snapped up at a premium, so do they deserve their current valuations? Who knows?

    Further, large tech companies cannot increase margins as easily as one might imagine: Amazon just halved its hosting fees to compete with Google. Rather than hope for increased profits, at Perfect Company we’re seeking companies that are growing, profitable, and would still offer a decent return if you were to buy the whole company. Two years ago, lots of companies were turning around and looked like great investments. Lately, it’s harder to find good candidates, but here is one:

    Buy EFC
    It pays a 13% dividend, sells at below book value and is profitable in the mortgage business. The CTO and founder bought 500,000 shares in Nov ’13. You can read about him in Wikipedia: http://en.wikipedia.org/wiki/Mike_Vranos Probably the only Harvard guy who was also Mr. Teen Connecticut Body Builder, he’s got something to prove. Also, I like a big owner who wants to pay himself a dividend because we’ll get paid, too. I’m guessing that the mortgage business is a mess, and that there are opportunities for operators like Vranos who understand them.

    If tech is over-valued, finance is getting no respect. Try this search in the Perfect Company Scanner:

    pcs > 3 and dy >3 and sector in (fina) and country in (usa) and gr > 1.1 and mc > 100M

    These are growing, profitable U.S. financial companies with market caps greater than $100 million that pay a dividend greater than 3%.

    Sell Comtech (CMTL)
    Like JCS, CMTL is a medium-sized communications company with good numbers that bobs up and down. We took an 18% gain since June ’13 plus 4% dividends.

    Sell CRWS
    It’s a fine company that has been paying down debt for years, but the demographics are against it (they sell baby products), and it’s not a fast grower. We earned a 14.9% return since 9/16/13 plus dividends. A short, happy ride.

    Sell TRST
    We’ve got two banks – MNRK and TRST plus financials CFR and ORI. We took a 4.3% gain in TRST since 10/21/13 and look to re-deploy it in something that may grow faster.

    2014 Performance

    As of Friday, Perfect Company is up 1.91% for the year and the S&P 500 is down -1.77%. For the last few years, our goal has been to beat the S&P. If the market continues to churn, we may use our new technology to trade shorter term positions.

    Wednesday
    Mar052014

    Believe your eyes

    I take large-scale statistics with a heavy dose of salt because they are quietly revised months later – sometimes grossly revised after the world has moved on. On the other hand, most of us do not believe our eyes when we see unlikely people buying monster houses. We think they must know something we don’t, but they didn’t and we know what happened. Why we think we can predict complex outcomes but cannot fathom discrete events is one of life's mysteries.

    Here is what I see today:

    • Many businesses are growing again.
    • Young people are eager to work.
    • Some young people are dropping out of school rather than accumulating student debt.
    • Some people are getting multiple job offers for the first time in years.
    • Lots of age-unemployable but competent people in their 40s and 50s are starting interesting businesses.
    • Technology marches on, and it’s giving businesses even better, cheaper tools to compete with. 

    People don’t like to do nothing, and many are finding better ways to work. I believe 2014 is going to be a good year because people and companies have re-positioned themselves since the Great Recession.

    After 2013, the doomsters are out in force: “You won’t see the next shock coming,” etc., etc. They will be right one day, but will have missed the entire party proceeding it and be poorer for it.

    No one can consistently time the market, which is the ultimate large-scale statistic. The only logical “top” is that moment when nothing is worth buying: no growing companies are priced at enough of a discount that continued growth would profit their owners.

    To be fair, there are indicators of a top: values are harder to find and new investors are rushing back to speculate. Just today, I spoke with a man who sat out last year’s formidable run-up, but is now making “30% a day” in battery companies like PLUG (Sales: $26 million Loss: $36 million Equity: $4.7 million Market cap: $782 million.) These companies are basking in the halo of Tesla, a real company investing in batteries, and speculators are buying into the fuel cell story, which, as I understand it, is unlikely to pan out. It’s like shooting Bitcoins in a barrel: pure speculation that can unravel in a day.

    The Perfect Company portfolio is benefiting from companies that continue to grow, and we’re looking for more to buy. After many market gyrations this year, the portfolio is up 4.1% in 2014 versus the S&P 500 at 1.4%

    SEARS PUTS

    Sears had an awesome fourth quarter – the all-important quarter from November to January when retailers go into the black. Sears execs were pleased to report that the company lost only $358 million compared with $489 million the prior year. The net loss for the fiscal year was $1.4 billion compared to $838 million the prior year. During the year, the company sold profitable assets, and sales at American stores open at least a year dropped 7.8 percent, while comparable sales at Kmart stores fell 5.1 percent.

    These spectacular results caused rejoicing and snapping-up of Sears shares by people who think they spot value or who call themselves hedge funds. It reminds me of my dogs playing with an old tennis ball. First, they rip off the felt cover, and then they chew it until it is more shred than ball. They leave it in the yard, but still can’t resist tossing the rubber shred around.

    The dogs tell themselves stories about the secret wealth in Sears real estate, which one writer compares to owning a gold mine in Antarctica: it might be valuable, but how do you access it? One morning, Wal-Mart says to itself, “OMG, we need some smallish, expensive mall stores with escalators! And fast!” Seriously, who would ever want this real estate? Penney’s?

    The crazy thing is that we’re playing with some really big dogs: Eddie Lampert, the CEO, is a famous hedge fund manager and Force Capital recently revealed a 5% holding. However, Lampert sold SHLD shares to pay his fund redemptions in December (click here), and Force Capital sold its entire stake in Sears Canada. When things go south, hedge fund managers will compete to jump ship like Italian sea captains.

    The only things that matter at retail are price, selection and check-out times. Is Sears good at any of these? My Sears Puts, which once hit 117%, are now up only 44%. I expect the euphoria will pass when the ship strikes reality.

    Buy CVR by March 5 to get the special dividend

    One of the great stocks of the last 25 years was Fastenal, a distributor of fasteners. You think Apple’s so great? Here’s FAST vs AAPL since 1990. You would have been a zillion times better off buying and holding a chain of fastener stores. (Key: 1 zillion = approx. 26,000%)

    So when Chicago Rivet (CVR) popped up, we took notice of a nice American company that’s well run and has room to grow. What to like:

    • Perfect Company score of 1.67 – top 15%
    • Pays a 1.8% dividend
    • Growing Sales: 2012: $34.2 million; 2013 numbers are not in, but the last four consecutive quarters are $35.97 million
    • Recent Quarter Sales over Same Quarter last year: $9.4m vs $8.5m
    • Operating Income: Recent Quarter over Same Quarter Last Year: $1.139 million vs $662,000
    • Cash $6.87 million
    • Debt $0
    • Market Cap: $38.7 million.

    Small companies with simple mission statements can grow for a long time. “Our mission is to provide our customers with the highest quality products at a competitive price.” That sounds like what you need in a rivet.

    Holders of CVR at the close of business on March 5 will get a special dividend of 40 cents per share. 

    Buy First Solar (FSLR)

    I love charts like First Solar’s:

     

    In the beginning, a new technology is lionized by speculators. The Internet, Fuel Cells, Solar Power, etc. is going to CHANGE THE WORLD. (CHANGE THE WORLD, I TELL YOU!) Sales and profits don’t materialize as expected, and know-nothings argue about what will happen through the Time of Angst. One day, the speculators capitulate. It’s over. This isn’t ever going to happen, and the know-nothings go home. This is the time for real innovation when management can stop hyping the stock and start working the plan. This is the time to invest, too. You could have bought Amazon AFTER the Internet crash for $6 a share.

    The argument for First Solar is that it’s a real company today in an industry that, like the Internet, could change the world. It makes money and is not overvalued. In 2013, FSLR went from an operating loss of $38 million to an operating profit of $369 on $3.3 billion in sales.

    Solar cells, like computer chips, are doubling in power as technology improves. This Economist article suggests that chip stacking could soon convert 50% of sunlight. The world is built on power, and sunlight is the cleanest, most accessible source. First Solar’s video makes a compelling case for its advantages in the market: https://www.youtube.com/watch?v=Z774c2G2ilA#t=117

    Top Gainers

    Top stocks still in the portfolio are ANCUF up 99% since 6/4/12, CTMMA up 93% since 8/7/12, and MGIC up 76% since 2/13/13.

    Two stocks in the last newsletter on Feb 9, 2014 are up: CWCO 13% and MYGN 16%.

    Sunday
    Feb092014

    Upside Risk in Technology

    As of Friday evening, the Perfect Company portfolio was up by 0.08%; the S&P 500 was down 2.78%.

    We were helped out by Sears Puts, which are now up 117%, by CPSI, which was up 17% last Friday, by selling winners the week before, which continued to decline, and by holding several other good values, which can rise during general declines.

    CPSI designs and installs Electronic Health Records systems in community hospitals of 300 or fewer beds. CPSI is benefitting from the long-term trend to tie together all medical records, and reported improved guidance in their recent conference call:

    In the fourth quarter, we installed our Financial and Patient Accounting System in 8 hospitals and our core clinical departmental applications at 10 facilities. Additionally, 10 hospitals implemented nursing point of care and 37 customers went live with physicians applications, which consist of ChartLink, CPOE and Physician Documentation. Add-on sales to existing clients were $11.9 million or 23% of total revenue for the quarter.

    CPSI is growing, profitable, pays a 3.4% dividend, and has a Perfect Company score of 1.72, which puts it in the top 5% of technology companies that we rate.  

    Read entire transcript here:  http://seekingalpha.com/article/1985841-computer-programs-and-systems-management-discusses-q4-2013-results-earnings-call-transcript?source=yahoo

    BUY CWCO

    I don’t often buy utilities, but I like Consolidated Water because this desalination play has plenty of cash, pays a 2.6% dividend, and has room to grow. CWCO will benefit from new technologies, and they will either expand their business to new markets or will be purchased by a larger utility for their expertise. CWCO has a market cap of $170 million ($44 million in cash, $5.6M in debt), so they have plenty of room to grow. The price dove on November 19, 2013 and took another header on February 6; chartists will recognize the bottom of a nice “W.”

    Farmers in California point out that they are already drip-irrigating their crops – water conservation is not the problem.  There is simply not enough water in the snow pack in the mountains to maintain the food supply, and Californians are already debating billion dollar desalination plants and $15 billion water tunnels. CWCO is a bet on higher water prices and improving technology for desalination. It’s also a bet on a profitable company that’s a decent value.

    BUY MYGN

    Myriad Genetics is a company whose stock price has not kept up with its growth.

     

    Results announced Feb 4 include:

    • Total revenue for the first half of fiscal 2014 was $406.5 million, an increase of 44 percent over the $282.6 million reported for the first half of fiscal 2013.
    • Operating income for the first half of fiscal 2014 was $165.9 million, an increase of 59 percent over the $104.2 million reported for the same period of the prior year.
    • Net income for the first half of fiscal 2014 was $105.8 million, an increase of 62 percent over the $65.2 million in the first half of the prior year.
    • In the first half of fiscal 2014, diluted earnings per share increased 72 percent to $1.33 compared to $0.78 for the same period in the prior year.

    By comparison, sales at Merck for the last three years are declining:  $48,047B  $47,267B   $44,033B.  Merck will be disrupted by or will buy companies like MYGN.

    I like the profitable growth at Myriad and their emphasis on genetic research that can make a material difference in the market cap of $2.4 billion. MYGN has $354 million in cash and zero long-term debt. Growth, profitability, explosive technology, healthcare, and a modest valuation. Good deal.

    UPSIDE RISK

    Ray Kurzweil likes to point out that, while we perceive progress as linear, growth is really geometric. Lots of small innovations create a long low curve that, when many innovations come together, shoots straight up. Cell phones are a great example: towers, networks, CDMA, miniaturized computers – many inventions coalesced to create the ubiquitous cell phone, but most of us didn’t see it happening. These independent developments enabled Apple to reap the cash that it now hordes.

    Now consider the investments that Amazon and Google are making in robotics, the fact that Google spent $400 million for an artificial intelligence company on January 27, that IBM announced another billion dollar investment in its Watson project, and that the CIA and Jeff Bezos (Amazon) bet on quantum computing. http://business.time.com/2014/02/06/9-ways-quantum-computing-will-change-everything/ These investments in thinking and moving machines will change the world in ways that we can barely comprehend.

    Many companies will find that their ability to solve complex problems dramatically increases, which will cause productivity and profits to skyrocket. This may be the best time in history to invest in technology companies. Of course, companies like Google will benefit, but companies working on core problems like desalination and genetic treatment may also see astonishing gains.

    Tuesday
    Jan282014

    Red Lobster and the Short Delay Charge

    Red Lobster was an aspirational restaurant for a broadly successful economy, but the new aspiration is to get a football of cheap, healthy calories at Chipotle. That Red Lobster should fall on its claws at the same time that caviar sales are soaring is notable. Even Red Lobster’s cousin, the Olive Garden, is holding off further expansion, which made me wonder about holding Cracker Barrel where sales are up, but profits against the same quarter last year are down.

    Cracker Barrel’s run-up has been partly driven by Sardar Biglari who is now its largest shareholder. He’s going to get his special meeting in which he wants to force a large dividend or presumably buy or sell the company. If he wants to buy, he’ll drive the price down, but if he wants to sell it, who will buy? A large dividend would be nice to receive, but will pull value out of the company and drive down the price – perhaps so Biglari can use some of the cash he receives to buy the company at a lower price. Good for him, but bad for the rest of us.

    We also have the problem of a short “delay charge” – that period in which a model rocket coasts upward before blowing out its parachute. For this cycle, the delay charge appears very short. Wall Street got its year-end bonuses, the Fed is tapering, and employment is not trending up as hoped, so there are few reasons to buy – which means it’s time to sell inflated values.

    The S&P 500 is down 3.6% this year and I’m down 1.7% – helped out by Sears Holdings Puts, which are up 110%.

    I’m selling companies that have been hot, keeping those that can grow, and finding new opportunities.

    Sell

    CBRL, MRVL, AOS, CODI, ABBV

    Keep

    ANCUF, CTMMA, MGIC, AIRT, CMTL, CPSI, CFR, CRWS, TRST, ORI, RFIL, BANC, ERIE, SUP, GSK, HVB, ERIE, GSK

    Buy

    MNRK 

    Monarch is a regional bank in eastern Virginia and the Outer Banks that gets a Perfect Company score of 54. You gotta love a bank that writes on its web site, “The disenchantment with big banks is spreading from Wall Street down to Main Street. In fact, it's even reached Hampton Roads. At Monarch, you can expect full, sit-down service, no lines, competitive rates, and a relaxed experience where you'll feel like the valued client you are, not a number.” The bank is growing, is undervalued, and it pays a 2.4% dividend. This purchase is part of a broader theme of buying undervalued regional banks, which I think will come back this year. See also TRST, BANC, HVB, and CFR.

    FF

    Future Fuel gets a Perfect Company score of 3.86, which puts it in the top 6% of all Basic Materials companies. It’s practically a perfect company: sales and profits are growing, it pays a 3% dividend, and it makes specialty chemicals and biofuels in Arkansas, which is where the Clintons, the Waltons and all the cool people come from.

    Cash

    I’m looking for more to buy, and am at about 30% cash now.

    Sunday
    Dec292013

    Retail is Broken, Year-End Report, Trades & EarthBucks

    Retail is Broken

    For your consideration:

    • ShopperTrak reports a sales decrease of 3.1% for the holiday season.
    • Internet sales overwhelmed U.S. delivery systems.
    • Stores like Sears handed out multiple coupons with each register receipt in a desperate attempt to coax shoppers back in the doors.
    • Retail customers waited in long lines for price checks and missing merchandise.
    • Lois on Family Guy tells Peter, “Nobody’s been in Sears for decades.” When they look in the store, they see a burned-out scene from Mad Max:  http://www.youtube.com/watch?v=zwJ9x3e-quY

    Since our last Trade Alert, Sears Put Options have swung from a 30% loss to a 56% gain. I expect even better when the disastrous fourth quarter loss is published. I was concerned that Sears’ hedge-fund-manager/CEO might have a trick up his sleeve, but the Wall Street Journal reports that investors are pulling out of his fund, and being paid part cash and part stock. If they’re getting Sears Holdings, they’re likely to sell, which will drive the stock down further.

    Retail is broken for many fundamental reasons: retailers can’t afford mall or even big box rent, inventory is too expensive to keep in mulitple locations so customers are often dissatisfied, and Internet technology creates a better shopping experience. Even worse: you can’t crush middle class incomes and expect to build an economy on consumer sales. Salaries and employment aren’t advancing, so price is the main selling attribute, and the best price is on the Internet. Retailers will continue to suffer, and many will suffer disastrously.

    Market Advances to Year End

    As predicted.  AIRT, our microcap overnight courier, was up 5% Friday, and given the inability of major shipping companies to deliver in peak periods, could become an acquisition target; insiders continue to buy this company with annual sales of about $100 million. ANCUF is now up 89% since purchase, and income continues to grow. Cracker Barrel is up 99%, CTMMA 81%, AOS 50%, MRVL 45%, and MGIC 42%.

    Overall, the Perfect Company portfolio is up 42.5% for the year versus 29.1% for the S&P. This record is built on a diversified portfolio that, as of today, consists of 14 stocks, 1 put and 10% cash. None of these are glamor names like Twitter, and many are relatively obscure companies like Alimentation Couche-Tarde that we arrived at through analysis and comparison to 4000 other companies. The portfolio had 48 trades this year.

     

    Sell RSO

    I recommended RSO on December 2, but am disappointed that it did not move up with the market. It’s already overvalued, and, when the froth falls behind the wave, the ride is over. RSO rose prior to its dividend, and I sold Friday on the ex-dividend date (the day after the day of record that entitles you to the dividend.) RSO dropped slightly, but, with the hefty quarterly dividend, I came out ahead on this transaction, though the dividend won’t be paid until January.

    Buy ATNI

    ATNI is an undervalued telecommunications company that provides wired and wireless services in North America and the Caribbean.  In September, it completed the sale of its Alltel subsidiary to AT&T, and so has plenty of cash. The Alltel purchase in 2010 for $223 million and subsequent sale for $780 was shrewd, and displays the talents of a management that can capitalize on special opportunities. ATNI pays a 1.9% dividend and dipped on Friday, the ex-dividend date. ATNI’s three-year sales growth rate is 22%, and net income has risen 23% in the same period. It has a PerfectCompany score of 3.48.

    Sell, sell, sell

    Buy value, sell exuberance. I’m taking this opportunity to sell a few laggards at a small profit. Sell GLP, a fuel distribution partnership. Sell ELSE, a very small manufacturer of sensors. Sell EPD, which is up 27% and is now overvalued.

    Currencies

    An investor recently expressed a desire to park money in something besides the U.S. dollar. After all, the U.S. has been pumping out $85 billion a month to prop up the economy (just $75 billion with tapering), and one must wonder about the continued deficits and the devaluation of the currency.

    We ran the numbers on 9 major currencies plus gold (let’s call it EarthBuck) and charted them against the dollar for the last 20 years. Lately, you would need about 20% fewer EarthBucks to buy a dollar. Since currency speculation is incomprehensible for virtually everyone, we think it would make sense to have an average like the EarthBuck that spreads the risk: you buy an EarthBuck and we buy 9 currencies plus gold for you. What do you think?

    Monday
    Dec022013

    The shift from value to growth

    Perfect Company Trade Alert 12/2/2013

    Someone once wrote that great writers are distinguished by the number of characters they can hold in their head; Shakespeare could hold perhaps six, and Beckett one. To be a truly great investor, you would have to understand multiple investment styles and be as adept shifting between them as Shakespeare moving from drama to comedy. Most of us, though, sit on the sidelines while the market moves into new modes.

    There are at least four activities that people think of as “investing”: (1) value investing in which you buy a dollar at a discount because the crowd is frightened of a particular situation (2) growth investing in which you think you have some special knowledge of the potential technology or organization (3) speculation in which you “feel” a trend and (4) gambling in which you demonstrate that you are important by throwing money at rigged game that, if you play long enough, will take all your money. Speculation is not gambling because the game is not rigged; speculation is investing on scant facts or promise.

    Fortunes are made in all of these, yet most of us adhere to one set of rules because we cannot hold more than one structure in our heads. Though I saw the logic in Bitcoin two weeks ago, I could not bring myself to speculate on it. Buying may have been the right thing to do: Bitcoin is up from $350 to $1010.

    In the broader market, we have shifted to comedy where animal spirits and values are up. With values drying up, I’m looking for companies that may be poorer values but stronger growers.

    The upsurge in prices is likely to continue because now is when Wall Street bonuses get locked in. If you had a choice of sitting on cash or driving up asset values so you could pocket a bigger bonus, which would you do? Even in 2009, the market pushed up at the end of December before plummeting in early 2010.

    How are we doing?

    TRST is up 14.7% since I bought it on Oct 21. UVE, which I recommended on Nov 12 and bought at $8.08 closed Friday at $12.40 – up 50% in two weeks. Fortunately for Dad, UVE is in his portfolio; unfortunately for me, the Perfect Company portfolio was up only 1.7% in November, and is now up 38.6% for the year versus 26.7% for the S&P 500.


    Retail Me Not: Sears

    The desperate situation in retail is neatly encapsulated in a large poster in our local Simon mall. “Retail me not,” an Internet couponing company, now hopes to bring traffic to mall stores. The demographics are against retailers:  a smaller group of young people – the group that needs to fill up new houses with stuff – cannot afford to buy. We have built too many stores, and the Internet is stealing business. Stores were open on Thanksgiving for one reason: they were losing sales on Thanksgiving Day to Internet retailers that they could not get back on Black Friday.

    My Sears June 21, 2014 Puts are down about 30%, but I’m sticking with them. The rising tide lifts driftwood, too, but I think Sears will lose a great deal of money this quarter because of increased competition, this year’s shortened selling season, the fact that Sears has sold profitable assets to raise cash, and intense margin pressure. When earnings come out next year, Sears will crater. If I didn’t already own Sears Puts, I would buy them.

    Sell TNH – and avoid MLPs

    I also took a loss on TNH, which I sold on 11/18 at $170.50. TNH is a Master Limited Partnership, that looked like a good value with a great dividend. MLPs have been hyped this year on the cover of Businessweek and by the Motley Fool because they return more cash flow to shareholders. However, these entities are operated by an outside company – in the case of TNH, CF Industries – and the operator always gets paid. Compare this structure to a company operated by an entrepreneur who has an incentive to increase the value of his shares along with yours.  Here is CF Industries versus TNH since the beginning of the year – more than a 30% spread between them.

     

    You would have been better off owning the operator. TNH tanked when the price of natural gas, a component in fertilizer manufacturing, went up, and the demand for fertilizer went down.  The special tax treatment of MLPs helped create at least one billionaire in the pipeline business as tax-disadvantaged traditional companies inevitably sold out to him. (This is akin to doctors’ offices that sell out to hospitals because Medicare pays the hospital more for the same procedures. Government allowances pervert the structure of the market.) MLPs were great for the operators, but the returns for investors have been mediocre. MLPs, like Chinese-companies, are no longer candidates for Perfect Company.

    Buy NYMT

    I wanted another high-yield investment for the dividend portfolio and chose NYMT, which had a Perfect Company score of 3.5. NYMT is a self-directed REIT that deals with prime, government-backed mortgages, and pays a 15% dividend. Insiders have on average bought over 400,000 share a year. I bought at $6.96.

    Buy RSO

    This specialty finance company has a Perfect Company score of 5.74, pays a 13% dividend and saw a director buy 81,000 shares in September. Sales and earnings are growing. Last five years of net income ($000):  (3,074)   6,339   19,447   37,716   64,443

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