By any measure, 2008 was a momentous year for investors. While great uncertainty remains as we look forward, we believe the probability for a reasonably strong stock market performance during the first two months of 2009 is high -- albeit with continued volatility.
Given the carnage endured with market positions, tax loss selling is the best strategy to employ. We have thus closed the model portfolio. Nearly all of the positions, however, remain attractive given the strong fundamentals enjoyed by each company. We will return to profiling some of these companies and many others in the weeks and months ahead. At some point in the future, we might open another portfolio as an education tool. For now, however, strategies with the existing portfolio are limited.
Analysis and editorial will be forthcoming in the year ahead.
Wishing you all the best in 2009,
Eric Dubin and the Investor Intelligentsia team
Wednesday, December 31, 2008
Monday, June 16, 2008
Composite Technology Corporation: Wind Power And Grid Infrastructure "Multi-bagger" Potential
This week we're going to add Composite Technology Corporation to the Investor Intelligentsia Model Portfolio. At one point, the company had a much wider following among institutional and retail investors. The stock got way ahead of the company's ability to execute and subsequently crashed. But there's gold in the shares of this fallen - somewhat scruffy - angel. The best news? Very few people have been paying attention to the company's newfound momentum and the stock represents an outstanding buy with very high odds of pulling off at least 100% share price appreciation in under 18 months.
The company has two principle business divisions: CTC Cable and DeWind. The cable segment specializes in the development of aluminum conductor composite core (ACCC) conductors for use in electrical grid infrastructure. Aluminum costs less than copper, but it presents a number of challenges for long-distance transmission lines. Peak electrical loads can result in physically hotter temperatures. Standard cables can sag under these operating conditions. Pure aluminum is also less effective than copper as an electric conductor.
The ACCC design incorporates a core of ceramic fiber-reinforced aluminum wrapped in aluminum-zirconium wires. The design boosts transmission efficiency and distance capabilities, while lowering system-wide materials cost. The company's contract momentum in China is impressive, and interest in other countries is on the rise.
Composite Technology Corporation's DeWind division was acquired in July, 2006. DeWind has outstanding turbine technology, and a history of technical excellence in Germany. Their older turbines have an installed base of over 580 units worldwide, mostly comprised of the 1.25 megawatt capacity D6 model. In the near-term, we believe the new D8.2 turbine has excellent opportunity to win large contracts for 2009 and beyond. The company has partnered with TECO Westinghouse in Texas for mass production, a major strategic leap forward for the company. Order flow could suddenly leap into the hundreds of millions of dollars within a year, should the company prove the capability to execute mass production. Our research suggest the company is on track.
Institutional investors are also taking a fresh interest. Credit Suisse owned 4% of Composite Technology Corporation from previous investment. On May 9, 2008 the company announced it had sold an additional $10 equity stake to Credit Suisse, and an option until June 30th for a further $40 million. While we can't be sure at this juncture, we see no reason why Credit Suisse will not make the additional $40 million investment.
Composite Technology Corporation trades with a market capitalization of roughly $260 million. On a trailing twelve month revenue basis given the momentum in their cable business, the stock trades at 4.7 times revenues. While this isn't cheap by conventional valuation metrics, it represents profound value in the alternative energy space, particularly when it looks like CTC is well on it's way to securing deployment contracts for the D8.2 wind system.
Before the open we will establish a limit order to purchase 17,000 shares at $1.07. We will write more about the company in the near future. The company trades on the over the counter market in the Unites States. On Yahoo Finance, the ticker is CPTC.OB
For more information, we suggest the following initial sources:
The company has two principle business divisions: CTC Cable and DeWind. The cable segment specializes in the development of aluminum conductor composite core (ACCC) conductors for use in electrical grid infrastructure. Aluminum costs less than copper, but it presents a number of challenges for long-distance transmission lines. Peak electrical loads can result in physically hotter temperatures. Standard cables can sag under these operating conditions. Pure aluminum is also less effective than copper as an electric conductor.
The ACCC design incorporates a core of ceramic fiber-reinforced aluminum wrapped in
Composite Technology Corporation's DeWind division was acquired in July, 2006. DeWind has outstanding turbine technology, and a history of technical excellence in Germany. Their older turbines have an installed base of over 580 units worldwide, mostly comprised of the 1.25 megawatt capacity D6 model. In the near-term, we believe the new D8.2 turbine has excellent opportunity to win large contracts for 2009 and beyond. The company has partnered with TECO Westinghouse in Texas for mass production, a major strategic leap forward for the company. Order flow could suddenly leap into the hundreds of millions of dollars within a year, should the company prove the capability to execute mass production. Our research suggest the company is on track.
Institutional investors are also taking a fresh interest. Credit Suisse owned 4% of Composite Technology Corporation from previous investment. On May 9, 2008 the company announced it had sold an additional $10 equity stake to Credit Suisse, and an option until June 30th for a further $40 million. While we can't be sure at this juncture, we see no reason why Credit Suisse will not make the additional $40 million investment.
Composite Technology Corporation trades with a market capitalization of roughly $260 million. On a trailing twelve month revenue basis given the momentum in their cable business, the stock trades at 4.7 times revenues. While this isn't cheap by conventional valuation metrics, it represents profound value in the alternative energy space, particularly when it looks like CTC is well on it's way to securing deployment contracts for the D8.2 wind system.
Before the open we will establish a limit order to purchase 17,000 shares at $1.07. We will write more about the company in the near future. The company trades on the over the counter market in the Unites States. On Yahoo Finance, the ticker is CPTC.OB
For more information, we suggest the following initial sources:
Visit their website: compositetechcorp.com Review their presentation at the Jefferies Global Clean Technology Conference (click here for PDF)
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Monday, May 19, 2008
Portfolio Update: Upping Energy, Technology and Base Metals
Greetings Investor Intelligentsia readers! Today, we will deploy a large portion of our cash. We will add positions in energy, base metals, and technology.
Oil Over $200? Not If, But When
Oil and natural gas prices have moved substantially higher. But exploration, production and service company stocks are trading as if the prevailing level of oil was commensurate with the $80 to $90 range for West Texas Intermediate Crude. Contrary to arguments frequently aired in mainstream media, this is not a speculative bubble. Oil will continue to surprise to the upside for the balance of this year.
It's normal to see producers and service company stocks lagging behind the underlying prices of oil and natural gas. This is a pattern we've seen throughout the entire bull market. Analysts and investors battle cognitive dissonance in the face of our inexorable energy crisis. Six months from now, current prices for exploration, production and service companies will be seen as bargains.
We're moving through what is commonly known as the "shoulder season," a time when energy demand is supposed to be seasonally weak. But rather than a brief respite before the North American driving and air conditioning season shifts into full gear, energy prices have done nothing but move higher. World demand runs at between 86 and 87 million barrels of oil equivalent per day and supplies barely match demand. Spare capacity is trivial, and entirely predicated on heavy, high sulfur oil which the world lacks spare refining capacity to process, along with natural gas condensates and refinery gains. World production of light sweet crude peaked in 2005 and it is only now that Wall Street is coming to terms with the fact that capacity gains are of lesser quality.
Oil's move comes as no surprise to us. We were on record early this year forecasting the current price level and beyond. The bottom-line is that the world is starting to come to terms with the phenomena commonly referred to as "peak oil." Wall Street number crunchers are now framing analysis to incorporate decline rates, spare capacity, supply and demand concepts in terms of flow rates per day and the challenges associated with the ramp of new oil production. They're starting to see the big picture and 2008 will see some of the sharpest gains yet in the energy bull market.
Natural gas should outperform oil over the next three to nine months. Chesapeake Energy Corp. and XTO Energy will directly benefit. Nabors Drilling has recently spiked on the back of firming natural gas prices. The stock lagged the service industry in general while North American natural gas drilling underwent a long inventory correction. The stock has much more room to run and trades at a low valuation relative to peak cycle earnings potential.
With other energy purchases, we're going to pick up shares of Petrobank. The stock offers exposure to Canadian oil sands, complimenting our large position in Encana. The company will also benefit as the recent excitement over the Bakken Oil Shale deposit spreads to Canada. Finally, we will increase our services industry exposure with diversified services provider Weatherford International and additional shares of Transocean, the single best value in the industry. Brazil recently announced they have locked-up 80% of the world's deep water drilling capacity in long-term contracts. The industry will be astounded by how long this cycle will run. Forward earnings estimates for Transocean have a long way higher to move - particularly for years 2010 and beyond.
Technology Catching A Bid; Global Economy Not Tanking
We're adding shares of Intel and Nokia to the portfolio. In our view, Nokia just hit a bottom and we're fearlessly going after the falling knife. Key supplier Texas Instruments reported favorable inventory trends and Nokia's shares have fallen to the point where they represent sound value in telecom. Many areas in the semiconductor space have turned around nicely, and are showing signs that the inventory overhang will be worked down. Our entry with ANADIGICS and Broadcom were superbly timed and while Intel will be a far more boring position, there's a time and a place for "boring."
Finally, we're adding shares of Brazilian base metals mining giant Valle - something we should have done months ago, but nevertheless the shares are still attractive
At the open, we will establish the following positions:
Oil Over $200? Not If, But When
Oil and natural gas prices have moved substantially higher. But exploration, production and service company stocks are trading as if the prevailing level of oil was commensurate with the $80 to $90 range for West Texas Intermediate Crude. Contrary to arguments frequently aired in mainstream media, this is not a speculative bubble. Oil will continue to surprise to the upside for the balance of this year.
It's normal to see producers and service company stocks lagging behind the underlying prices of oil and natural gas. This is a pattern we've seen throughout the entire bull market. Analysts and investors battle cognitive dissonance in the face of our inexorable energy crisis. Six months from now, current prices for exploration, production and service companies will be seen as bargains.
We're moving through what is commonly known as the "shoulder season," a time when energy demand is supposed to be seasonally weak. But rather than a brief respite before the North American driving and air conditioning season shifts into full gear, energy prices have done nothing but move higher. World demand runs at between 86 and 87 million barrels of oil equivalent per day and supplies barely match demand. Spare capacity is trivial, and entirely predicated on heavy, high sulfur oil which the world lacks spare refining capacity to process, along with natural gas condensates and refinery gains. World production of light sweet crude peaked in 2005 and it is only now that Wall Street is coming to terms with the fact that capacity gains are of lesser quality.
Oil's move comes as no surprise to us. We were on record early this year forecasting the current price level and beyond. The bottom-line is that the world is starting to come to terms with the phenomena commonly referred to as "peak oil." Wall Street number crunchers are now framing analysis to incorporate decline rates, spare capacity, supply and demand concepts in terms of flow rates per day and the challenges associated with the ramp of new oil production. They're starting to see the big picture and 2008 will see some of the sharpest gains yet in the energy bull market.
Natural gas should outperform oil over the next three to nine months. Chesapeake Energy Corp. and XTO Energy will directly benefit. Nabors Drilling has recently spiked on the back of firming natural gas prices. The stock lagged the service industry in general while North American natural gas drilling underwent a long inventory correction. The stock has much more room to run and trades at a low valuation relative to peak cycle earnings potential.
With other energy purchases, we're going to pick up shares of Petrobank. The stock offers exposure to Canadian oil sands, complimenting our large position in Encana. The company will also benefit as the recent excitement over the Bakken Oil Shale deposit spreads to Canada. Finally, we will increase our services industry exposure with diversified services provider Weatherford International and additional shares of Transocean, the single best value in the industry. Brazil recently announced they have locked-up 80% of the world's deep water drilling capacity in long-term contracts. The industry will be astounded by how long this cycle will run. Forward earnings estimates for Transocean have a long way higher to move - particularly for years 2010 and beyond.
Technology Catching A Bid; Global Economy Not Tanking
We're adding shares of Intel and Nokia to the portfolio. In our view, Nokia just hit a bottom and we're fearlessly going after the falling knife. Key supplier Texas Instruments reported favorable inventory trends and Nokia's shares have fallen to the point where they represent sound value in telecom. Many areas in the semiconductor space have turned around nicely, and are showing signs that the inventory overhang will be worked down. Our entry with ANADIGICS and Broadcom were superbly timed and while Intel will be a far more boring position, there's a time and a place for "boring."
Finally, we're adding shares of Brazilian base metals mining giant Valle - something we should have done months ago, but nevertheless the shares are still attractive
At the open, we will establish the following positions:
- Petrobank Energy and Resources (PBG: Toronto): Buy 200 shares at the open
- Chesapeake Energy (CHK: NYSE): Buy 200 shares at the open
- XTO Energy (XTO: NYSE): Buy 200 shares at the open
- Transocean Inc. (RIG: NYSE): Buy 100 shares at the open
- Nabors Industries (NBR: AMEX): Buy 300 shares at the open
- Weatherford International (WFT: NYSE): Buy 200 shares at the open
- Companhia Vale ADS (RIO: NYSE): Buy 300 shares at the open
- Intel Corp. (INTC: NASDAQ): Buy 200 shares at the open
- Nokia Corp. (NOK: NYSE): Buy 300 shares at the open
Please note: While the order to buy on the open for Petrobank is submitted before the market open Monday, it will execute on Tuesday, at the market open. Canadian stock markets are closed on Monday for the Victoria Day holiday.
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Sunday, April 20, 2008
Tuesday, April 8, 2008
Portfolio Update: Adding more Agrium, Inc.; Introducing New Portfolio Layout
This is only a brief post to update the portfolio and introduce our new layout. Click here to pull yesterday's closing quotations for the Investor Intelligentsia Model Portfolio. Holdings are now categorized by sector, and weightings are more readily visible. The comments section will be developed soon.
The model portfolio has returned about 3% since inception, Nov. 15th, 2007. While that's no great shakes, it certainly stands above the S&P 500 and we've focused all the while on some of the most volatile sectors in the market. The relative performance is actually not too shabby. The portfolio's birth and management life corresponds to the rump of the credit crisis we're muddling through.
On an intraday basis we are going to enter a limit order for another 300 shares of Agrium, Inc. (AGU: NYSE) In our judgement, the company offers the best risk/reward in the fertilizer space at this time. They are a blue-chip Canadian firm, but their recently expanded retail distribution network has some analysts and institutional investors factoring a lower multiple on earnings for the shares. We don't agree with this view. The stock should close the valuation gap with it's peers over time.
Please see our previous notes on Agrium and the fertilizer sector.
As of 11 a.m. Eastern Standard Time, a limit order set for 300 shares at $71.00 will activate, and will remain in place until canceled. This should easily execute today.
3:40PM PST Update: The April 8th closing portfolio values are now available. Click here to pull up the portfolio.
The model portfolio has returned about 3% since inception, Nov. 15th, 2007. While that's no great shakes, it certainly stands above the S&P 500 and we've focused all the while on some of the most volatile sectors in the market. The relative performance is actually not too shabby. The portfolio's birth and management life corresponds to the rump of the credit crisis we're muddling through.
On an intraday basis we are going to enter a limit order for another 300 shares of Agrium, Inc. (AGU: NYSE) In our judgement, the company offers the best risk/reward in the fertilizer space at this time. They are a blue-chip Canadian firm, but their recently expanded retail distribution network has some analysts and institutional investors factoring a lower multiple on earnings for the shares. We don't agree with this view. The stock should close the valuation gap with it's peers over time.
Please see our previous notes on Agrium and the fertilizer sector.
As of 11 a.m. Eastern Standard Time, a limit order set for 300 shares at $71.00 will activate, and will remain in place until canceled. This should easily execute today.
3:40PM PST Update: The April 8th closing portfolio values are now available. Click here to pull up the portfolio.
Monday, April 7, 2008
The Bulls Are Back In Town; We're adding ANADIGICS, Broadcom, Migao Corporation and Alliance Grain Traders Income Fund
Spend more than ten minutes watching CNBC or Bloomberg these days and it’s hard to not hear arguments about why the stock market has hit bottom. Trillions in cash has remained on the sidelines all throughout this credit crisis and bulls are getting itchy trigger fingers. We believe the stock market will move higher in the coming months, in large part on the back of improving psychology and the impact of liquidity brought forth by central banks and periodic bail-outs sourced from sovereign wealth funds.
For better or worse, the institutional money community has concluded that the Bear Stearns skewering marked a likely bottom in the stock market. They see financial services shares already having discounted sufficient carnage to cover remaining write-offs and vastly lower operating earnings going forward. While we sympathize with the former point, we still believe the share performance of financial services companies will continue to struggle for well over another six months given significant underestimation of lower operating earnings in 2008 and 2009. The stocks will continue to move higher for at least another month, but we believe the financials will not have a sustained “V” shaped recovery even while the rest of the stock market moves higher, well after the bounce in financials.
Inflation will be a big story in the second half of this year, and how the Fed deals with that problem will directly impact the direction of financial service company stock performance in the latter part of 2008. We suspect the Fed will attempt to blast rates higher near the tail end of this year, taking back cuts in a quicker than anticipated fashion. Call it one big game of monetary policy chicken. It’s unclear if the Fed will even have the wiggle room to perform such acrobatics, what with another huge wave of adjustable rate mortgage resets careening through the realestate market over the autumn and winter months. But we have seen Fed governors float “trial balloons” about the idea of raising rates quickly at the end of the year or in early 2009. Please note, this is not our forecast and we ultimately believe the Fed will remain hamstrung. But it’s important to underscore that a few months from now we will not be surprised to here arguments along these lines as but the latest and greatest excuse to declare the death of the commodities bull market. Don’t fall for it.
Shopping Time: Quality semiconductor exposure and more fertilizer
On the open, we will establish the following positions:
- Alliance Grain Traders Income Fund (AGT-UN): Buy 1,500 shares, C$10 limit price, good until canceled
- Migao Corporation (MGO-To): Buy 2,000 shares on opening price
- ANADIGICS (ANAD: NASDAQ): Buy 1,500 shares on the opening price
- Broadcom (BRCM: NASDAQ): Buy 500 shares on the opening price
We profiled Alliance Grain Traders Income fund in a stand-alone post. Click here to pull it up.
Miago Corporation is one of China’s largest suppliers of specialty potash based fertilizers. The stock cratered when the credit crunch took down many commodities companies last January. It has yet to recover, although we believe that is going to change starting this week. The stock is profoundly undervalued relative to its peers and could very well double from current prices within the next 18 months. We will profile the company in more detail in the future.
Last fall, technology was seen as a safe haven, a place one could hide from credit crisis turmoil. This false perception went through one major corrective cycle (remember the period when Apple and other high momentum stocks crashed?) and an echo before all was said and done. But today, we believe it’s appropriate to add exposure. We truly are at a stage where forward discounting of stronger business is justified.
Significant carnage has dented the shares of wireless semiconductor stocks. We feel confident in selecting ANADIGICS as a primary player in this market, and we also like Broadcom's growing wireless market design wins. Both stocks should bounce strongly in the weeks and months ahead. ANADIGICS is supremely positioned as a power amplifier supplier for the entire wireless market and they have strong design wins with the cable set top box market. Broadcom’s push into wireless has been fantastic thus far. The company is a leader in broadband semiconductor development but their wireless design wins – particularly with Nokia – greatly strengthen the company. We will cover both companies in more detail going forward, along with the rest of the technology industry.
Alliance Grain Traders Income Fund: The agriculture play you have likely never heard of
Odds are, 99% of our readers will have never heard of this company, and that is certainly part of the reason why the units are attractive. Most of the Canadian institutional money set is equally oblivious to this company’s existence. To be blunt, the company deserves criticism when it comes to shareholder outreach. They have a wonderful story, and management needs to get a grip and devote more resources to telling their story.
They’re Canada’s largest processor of peas and lentils, and they have operations in other similar products like canary seed and chickpeas. They source, split, clean, process and package these “pulse grains” for the export market, and the vast majority of their product heads towards export markets. Lentils are a staple food in countries like India and in the Middle East. Traditionally, lentils and peas have not been a staple part of the Chinese diet but pea starch is now being processed into vermicelli noodles, and with sky rocking wheat prices, Chinese imports of these processed pea products are increasing.
Alliance Grain is set-up as a business trust. Ordinary Canadians and international investors can invest in its Toronto Stock Exchange publicly traded units. However, unlike most of the other Canadian companies purchased in the Investor Intelligentsia model portfolio, we are not aware of any over-the-counter representation for US-based investors to use for direct purchase in US-based brokerage accounts. Orders by US investors will require a broker-assisted trade placed directly on the Toronto Stock Exchange. Not all brokerage firms will accommodate such broker assisted trades, but most of the bigger discount brokers will do it – for an added fee.
In 2011, the tax status of business trusts will revert to standard corporations. Alliance will likely continue on under a standard corporate model. But until such time, it will pay a quarterly distribution. The most recent distribution of C$ 0.135 per unit will be paid today, with the record date having been March 31, 2008. It’s unlikely the payment will have an impact on the share price since small accumulation in the units surfaced last week and we’re well past the ex-dividend date anyway. The yield works out to just over 5% per year, but we anticipate unit price appreciation as well as larger distributions in the quarters and years ahead.
As all food-stuff products ride an escalation price spiral, pulse grains will catch higher prices as well. To date, well over six months of the latest leg of the agriculture bull market has rocketed forward while Alliance Grain has gained almost no attention among investors. This will change, and the rate at which it happens will depend on management telling the company’s wonderful story. Alliance Grain is a dominant player in the value added processing and exportation market segments of the North American pulse grain industry and they will cash-in as prices for pulse grains rise.
For further information on the company, you can peruse their websites:
AllianceGrainTraders.com
-and-
Saskcan Pulse Trading
Recent press coverage include an informative article in Farm & Ranch Guide (click here) and last year, the company was featured on BNN Television in Canada (for a Windows Media Player video clip, click here).
Before the market open we will enter a limit order for 1,500 units at C$10 as traded on the Toronto Stock Exchange. This order will be good until canceled.
Thursday, April 3, 2008
Interim Update: Solar Stock Additions & MEMC Electronic Materials Travails
The Model Portfolio has been updated with today's solar stock purchases. The Google Documents spreadsheet is online. Click here to pull it up. If it gives you any display problems, let us know.
Today, MEMC Electronic Materials reported it has been having production problems at its Pasadena, Texas facility. Their foundry line calibration is messed-up, resulting in accelerated chemical deposit build-up during silicon production. The problem is at their new expansion unit at the facility. Manufacturing silicon at exceedingly high purity levels necessary for quality solar panels and semiconductor production is no easy task, and it's not unusual for glitches like this to show up in new production lines.
The company now expects first quarter revenue of $500 million, down from its earlier forecast of $560 million. New York trading opened with the stock down $8.41 or 11%. But the shares recovered much of the loss by the end of the day, closing at $73.76, down $2.63 or 3.44%. The company attempted to soothsay analysts by highlighting company-wide expansion efforts are proceeding better than previously guided. A conference call is scheduled for April 24th. We expect management to continue to couch the Pasadena, Texas set-back in the context of successful execution at the company overall.
Generally speaking, we are not in favor of investment in silicon producers (LDK is an exception given how far the stock has fallen). While they are immensely profitable today and will be for quite some time, the true long-term competitive advantage in the solar industry is found with solar panel developers, systems integrators, and companies that have vertical integration at multiple levels of the solar industry value chain. Producing high purity silicon is a capital intensive and sophisticated process, but it doesn't have high barriers to entry other than capital - and there sure isn't a scarcity of money sloshing around the world. Right now, China is in the process of ramping up it's silicon production capacity. In a few years, companies like MEMC are going to experience rapidly declining average selling prices. This is great news for the advancement of solar power, and the vertically integrated players like SunTech will continue to benefit from manufacturing scale economies and by adding value at multiple levels of the solar industry value chain.
Nevertheless, we'll have to keep an eye on MEMC developments. SunTech happens to be MEMC's largest customer. We don't expect SunTech's 2008 sales to be impacted, but securing stable silicon supplies remains the biggest risk factor for the company.
Re-Cap On Agriculture Stocks and Portfolio Update: Adding Solar Stocks Suntech, Trina and LDK Solar
Monday, the USDA released its Prospective Plantings report for the 2008-09 season. The annual ritual moves markets and this week was no different. The USDA estimates that US corn growers intend to plant 86 million acres of corn for all purposes, down 8% from the previous year. Last year happened to be a record corn planting year, with the highest area put into production since 1944. Meanwhile, soybeans are catching the biggest jump in prospective plantings, with farmers reporting they intend to plant 74.8 million acres, up 18% from the previous year. Higher prices are supporting the increased soybeans plantings. But soybeans come with the added benefit of fixing nitrogen from the atmosphere, enabling farmers to rotate crops while cutting back on nitrogen fertilizer inputs at the margin.
The perceived short-term impact of the Prospective Plantings report can be seen in fertilizer stocks. For example, CF Industries and Terra Nitrogen are focused on the production of nitrogen fertilizers. Potash Corp. and Mosaic are more diversified. Industrial corn farming requires intense nitrogen usage. Given the dive in prospective corn plantings, investors have concluded CF Industries and Terra Nitrogen will experience moderately less revenue growth versus their less nitrogen-dependent peers.
On the open, we're going to up our exposure to the solar power industry. We will add another 350 shares to our SunTech position, along with 500 shares of Trina Solar and 400 shares of LDK Solar. Last year, these stocks moved through a full bubble and crash. They're now attractively valued and under accumulation.
We're going to experiment with Google's "Documents" website. We have uploaded the portfolio spreadsheet and you can click here to see the portfolio. Previously, we used an image file. Now that the portfolio is much larger, an image file is not very practical. We'll give Google a try for a while.
All March 25th positions were established at the market open prices in the US and Canada. Silvercorp Metals' is recorded using the opening price on the Toronto Stock Exchange times the US/Canadian exchange rate open on the same morning: 0.985. We use the primary exchange listings for holdings and adjust for currency exchange rates in order to display as realistic as possible US dollar accounting of the model portfolio. However, to reiterate for our US-based readers, it's possible to buy the same securities in their over-the-counter versions and quotations. The tickers are usually five letters, and you can look them up at Pinksheets.com or fine quote servers such as StockWatch.com during non-market hours.
We will return this week with promised analysis on the wild swings in precious metals prices. Thank you for reading, and do enter your email address into the subscription box above. We don't sell addresses. We only use your address to send an alert when something new has been posted to Investor Intelligentsia.
The perceived short-term impact of the Prospective Plantings report can be seen in fertilizer stocks. For example, CF Industries and Terra Nitrogen are focused on the production of nitrogen fertilizers. Potash Corp. and Mosaic are more diversified. Industrial corn farming requires intense nitrogen usage. Given the dive in prospective corn plantings, investors have concluded CF Industries and Terra Nitrogen will experience moderately less revenue growth versus their less nitrogen-dependent peers.
(click for larger image)
Over a period of months, this short-term divergence will diminish. With worldwide warehouse stores of grains at multi-decade lows and rising incomes in Asia creating a sharp increase in the demand for grains, we expect to see a multi-year upward price spiral for nearly all agricultural products. High wheat and soybean prices and crop rotation needs are attracting American farmers today, but corn prices blasted higher leading up to and following the Prospective Plantings report. We're happy with the Investor Intelligentsia model portfolio weightings, but we view the pull-back in CF Industries and Terra Nitrogen as opportunities for fresh capital.
Over a period of months, this short-term divergence will diminish. With worldwide warehouse stores of grains at multi-decade lows and rising incomes in Asia creating a sharp increase in the demand for grains, we expect to see a multi-year upward price spiral for nearly all agricultural products. High wheat and soybean prices and crop rotation needs are attracting American farmers today, but corn prices blasted higher leading up to and following the Prospective Plantings report. We're happy with the Investor Intelligentsia model portfolio weightings, but we view the pull-back in CF Industries and Terra Nitrogen as opportunities for fresh capital.
Rising agriculture prices will be with us for years to come. Companies that provide the inputs to increase efficiency and expand production are absolutely essential in meeting the needs of escalating crop prices. These agriculture stocks have witnessed huge moves, but this is not a bubble and the industry leaders will continue to see tremendous growth for years to come.
Model Portfolio Update
Model Portfolio Update
On the open, we're going to up our exposure to the solar power industry. We will add another 350 shares to our SunTech position, along with 500 shares of Trina Solar and 400 shares of LDK Solar. Last year, these stocks moved through a full bubble and crash. They're now attractively valued and under accumulation.
We're going to experiment with Google's "Documents" website. We have uploaded the portfolio spreadsheet and you can click here to see the portfolio. Previously, we used an image file. Now that the portfolio is much larger, an image file is not very practical. We'll give Google a try for a while.
All March 25th positions were established at the market open prices in the US and Canada. Silvercorp Metals' is recorded using the opening price on the Toronto Stock Exchange times the US/Canadian exchange rate open on the same morning: 0.985. We use the primary exchange listings for holdings and adjust for currency exchange rates in order to display as realistic as possible US dollar accounting of the model portfolio. However, to reiterate for our US-based readers, it's possible to buy the same securities in their over-the-counter versions and quotations. The tickers are usually five letters, and you can look them up at Pinksheets.com or fine quote servers such as StockWatch.com during non-market hours.
We will return this week with promised analysis on the wild swings in precious metals prices. Thank you for reading, and do enter your email address into the subscription box above. We don't sell addresses. We only use your address to send an alert when something new has been posted to Investor Intelligentsia.
Sunday, March 30, 2008
And your picture caption is?
Another wild week on Wall Street is behind us. It's time to put things in perspective, enjoy the weekend, and have a laugh or two. Feel free to drop us a line with your picture caption suggestions. We'll come back and add a few choice selections if you folks come up with hilarious ones. This was his last Easter Egg Roll at the Whitehouse. Poor chap. He'll miss the holiday. It sure beats running a country.
Tuesday, March 25, 2008
Commodities Sell-off Excessive: Adding Yamana, Monsanto, Terra Nitrogen, Powershares Agriculture ETF and more Silvercorp, Mosaic and Potash
Last week's commodity sell-off was excessive. We're going to increase our exposure to precious metals and basic materials today. We will purchase the following positions at the open:
Silvercorp is an addition to our existing position. The company will be the most profitable silver company in the world in the months and years ahead. They already pay a dividend and if you were around for the previous metals run in the 1970s and 1980s you'll recall that there were many companies that paid healthy dividends. Silvercorp carries on that tradition. Their corporate headquarters are in Canada, and their main operations are in China. There's country risk with the position, but we believe this is minor relative to the opportunity for stellar growth.
Mosaic: We're adding a honking 300 shares to our existing position, as well as another 100 shares to our Potash Corp. holdings. Mosaic is one of the world's leading producers and marketers of concentrated phosphate and they're also a big potash producer. Prices for these fertilizer components are going to continue to rise for at least another three years, and will reach levels well above current expectations. This may be hard to believe given how strong both the commodities and the shares have performed. But the agricultural boom remains in an early stage of development. Diets in developing countries are increasing quantities of meat protein consumption, which adds demand for grains worldwide. The world's grain inventory supplies are at 40 year lows and the situation is so precarious that the CEO of Potash remarked a few weeks ago that we could see global famine if weather fails to provide perfect growing conditions for any of the world's leading grain exporting nations. Investing in the companies that boost agricultural productivity also is a back-door way to invest in water and the distribution of water. Arid countries that import grains not only boost their food stocks, but they reduce the need for domestic agricultural water use. Unfortunately, this is critical for the survival of hundreds of millions of people worldwide.
Our new position in Terra Nitrogen further increases our exposure to fertilizer stocks. As their name implies, they are a large nitrogen fertilizer producer. The corn cycle is a heavy nitrogen fertilizer user and weakness in nitrogen fertilizer producers relative to companies that focus on potash and other compounds has created a buying opportunity in the shares. We believe Terra Nitrogen will bounce back this summer as expectations for stronger nitrogen fertilizer sales across the industry come into focus.
Monsanto's seed sales should surprise to the upside, and the stock has corrected severely over the last month. This wild trading is common with Monsanto given it's high valuation. But the earnings growth story here is powerful and remains intact. Few companies have the dominating position that Monsanto controls, regardless of industry. When selecting companies that will benefit from the agricultural commodities super cycle boom, Monsanto is a logical selection.
Finally, as a way to stash some of our excess cash into non-dollar assets, we are adding 1000 shares of the Powershares ETF that holds roughly equal positions in the futures contracts of corn, sugar, wheat and soy beans. In our view, the Powershares DB family of commodities ETF deal with the potential problem of contract roll-over negative yield situations better than other ETFs, and they also track performance of underlying commodities well. The managers have a history of being able to generate respectable income distributions at the end of the year as well. At a later date, when we want to liberate some cash, we'll sell this position. But last week's sell-off in the grains was excessive and weather conditions remain supportive of stable to higher prices going into the summer.
We will return with our take on last week's events and our outlook for the near-term.
- Yamana Gold (AUY: NYSE): Buy 1000 shares at the open
- Silvercorp (SVM.To: Toronto): Buy 2000 shares on the open
- Mosaic (MOS: NYSE): Buy 300 shares on the open.
- Monsanto (MON: NYSE): Buy 100 shares on the open
- Terra Nitrogen (TNH: NYSE): Buy 100 shares on the open
- Potash Corp. (POT: NYSE): Buy 100 shares on the open
- Powershares DB Agriculture ETF (DBA: AMEX): Buy 1000 shares on the open
Silvercorp is an addition to our existing position. The company will be the most profitable silver company in the world in the months and years ahead. They already pay a dividend and if you were around for the previous metals run in the 1970s and 1980s you'll recall that there were many companies that paid healthy dividends. Silvercorp carries on that tradition. Their corporate headquarters are in Canada, and their main operations are in China. There's country risk with the position, but we believe this is minor relative to the opportunity for stellar growth.
Mosaic: We're adding a honking 300 shares to our existing position, as well as another 100 shares to our Potash Corp. holdings. Mosaic is one of the world's leading producers and marketers of concentrated phosphate and they're also a big potash producer. Prices for these fertilizer components are going to continue to rise for at least another three years, and will reach levels well above current expectations. This may be hard to believe given how strong both the commodities and the shares have performed. But the agricultural boom remains in an early stage of development. Diets in developing countries are increasing quantities of meat protein consumption, which adds demand for grains worldwide. The world's grain inventory supplies are at 40 year lows and the situation is so precarious that the CEO of Potash remarked a few weeks ago that we could see global famine if weather fails to provide perfect growing conditions for any of the world's leading grain exporting nations. Investing in the companies that boost agricultural productivity also is a back-door way to invest in water and the distribution of water. Arid countries that import grains not only boost their food stocks, but they reduce the need for domestic agricultural water use. Unfortunately, this is critical for the survival of hundreds of millions of people worldwide.
Our new position in Terra Nitrogen further increases our exposure to fertilizer stocks. As their name implies, they are a large nitrogen fertilizer producer. The corn cycle is a heavy nitrogen fertilizer user and weakness in nitrogen fertilizer producers relative to companies that focus on potash and other compounds has created a buying opportunity in the shares. We believe Terra Nitrogen will bounce back this summer as expectations for stronger nitrogen fertilizer sales across the industry come into focus.
Monsanto's seed sales should surprise to the upside, and the stock has corrected severely over the last month. This wild trading is common with Monsanto given it's high valuation. But the earnings growth story here is powerful and remains intact. Few companies have the dominating position that Monsanto controls, regardless of industry. When selecting companies that will benefit from the agricultural commodities super cycle boom, Monsanto is a logical selection.
Finally, as a way to stash some of our excess cash into non-dollar assets, we are adding 1000 shares of the Powershares ETF that holds roughly equal positions in the futures contracts of corn, sugar, wheat and soy beans. In our view, the Powershares DB family of commodities ETF deal with the potential problem of contract roll-over negative yield situations better than other ETFs, and they also track performance of underlying commodities well. The managers have a history of being able to generate respectable income distributions at the end of the year as well. At a later date, when we want to liberate some cash, we'll sell this position. But last week's sell-off in the grains was excessive and weather conditions remain supportive of stable to higher prices going into the summer.
We will return with our take on last week's events and our outlook for the near-term.
Friday, March 7, 2008
Weekend Humor: Bush Endorses McCain
Eldorado Gold Reopens Kisladag Mine - We're Getting In Before the Crowd
The conventional market has been nothing but a horror show all week. Just when it seems some good news might float to the surface - such as a realistic end-game bailout for beleaguered bond insurance company AMBAC - the demonic ticker churns out the latest balance sheet write-off and company-busting margin call. Welcome to the bear market. This wicked volatility isn't going to change anytime soon.
Where To Hide?
Investments in commodities have weathered the storm reasonably well, due in large part to the withering value of the US dollar, supply constraints for some commodities combined with reasonably robust demand, and finally, the realization among a growing number of institutional investors that accelerating inflation will prove to be a major problem as the months advance. In the near-term, avoiding bear teeth isn't going to be easy, but these supportive trends in commodities will continue and select long positions in the sector still offer protection and opportunity for profit.
The Federal Reserve's Open Market Committee will meet to cut interest rates on March 18th. Leading up to the meeting there will be days where gold will come under pressure by central bank coordinated efforts to attempt to keep the price under $1,000. The last thing market massagers want to see is gold well over $1,000 before the Fed slashes the Federal Funds rate. We're looking for a 75 basis point cut and while the impact of that cut is partly priced into the commodities markets, the situation with rising inflation in the second half of the year still has a supportive roll to play for much higher gold prices.
Stealth management of the price of gold is just as real as open and acknowledged as management of currencies. Gold is, in fact, a currency, and it traditionally has functioned as the smoke alarm for the financial system. The establishment press virtually jokes about passing around tin foil hats every time the gold management subject is aired. We will not attempt to prove the case of gold management in this essay - another time and place, perhaps. In the event you're skeptical and inclined to research, we suggest spending a few hours at GATA.org.
We will not be surprised to see gold crash $20 or $30 in a single day leading up to the Fed's meeting. But it will not be a product of fundamentals. Buying physical metal should such a pull-back occur is something we will be doing for our own accounts. Ultimately, gold will blast through $1,000. By the end of April, we expect gold to have at least traded through $1,100 per ounce, with $1,000 widely seen as a "new floor." Similarly, we would not be surprised to see silver slice through $23 with $20 seen as a new floor.
Eldorado Gold Reopens Kisladag Mine - We're Getting In Before the Crowd
In early July, Eldorado Gold appeared to be coming into it's own. Gold was trading in the mid $600 range and Eldorado was increasingly seen by the institutional investor community as a go-to firm among a select number of mid-sized gold companies with expanding reserves and low production costs. With little warning, the shares were pummeled with the announcement from a Turkish court that Eldorado's flagship Kisladag mine would have to be closed on account of inadequate environmental permitting.
Few in the know questioned the level of support among the executive and legislative bodies of the Turkish government. Furthemore, Eldorado's management was meticulous in putting the original operational plan and permitting process together. They didn't cut any corners. This was simply a case of a European NGO with a beef against the mining industry taking advantage of the Turkish court system. With the support of the federal government, the injunction that closed the mine expired and Thursday, Eldorado's management released the news that the mine will soon be back in production. Following an initial halt of trading, the shares quickly moved up to about $7.50, drifted a bit, but ultimately closed near the high.
We believe the stock is profoundly undervalued. Gold has rocketed from about $650 to almost $1,000 since last July's Eldorado stock crash, but today's price is not far from the levels Eldorodo traded at before the mine closure. Similar mid-sized producers have seen huge share price increases over the same period of time. It will take about a month for institutional investors to feel comfortable again with Eldorado's outstanding growth story, but our read of the politics on the ground convince us this re-opening is the real deal.
The Kisladag is estimated to have a mine life of 13 years and should be able to support production at an estimated 240,000 ounces of gold per year, at a cash cost of $232 per ounce. The powerful cash flow Kisladag would generate was always a supporting pillar to Eldorado's expansion plans in China, Brazil, Turkey and beyond. As confidence returns in the company's ability to resurrect its full business model, we expect the stock to rapidly close its valuation gap between its peers. Had the mine never closed the shares would likely have traded above $9 or $10 by now. A quick catch-up move to $9 in the least should happen over the coming weeks.
We will buy 2000 shares today at the opening price. It would be more ideal to "work" a buy order in real time, but that's not possible with the nature of the model portfolio we are managing, where orders need to be disclosed and set before the market open. A limit order set at $8.25 or $8.50 is an option, but we have decided a market order is the best way to go. There is a large short position in the shares and it's possible that we might not get the most ideal execution on the open (short covering on the open might lead to an initial spike). Nevertheless, we believe the shares will likely close on or near the Friday intraday high and the stock is sufficiently liquid to just cast a market order.
Please note: A 2,000 share position is a moderately aggressive size stake for the size of the model portfolio. This is warranted given that Eldorado is a top quality mid-tier gold producer and not a Jr. mining firm - and it's ridiculously undervalued. In contrast, when building exposure to Jr. mining companies, please remember it is usually wise to start with positions that represent smaller portfolio weightings and to build exposure to at least ten companies - if not MANY more, depending on your abilities to keep track of business conditions. Risk management calls for this level of diversification. It also works to the investor's advantage because when Jr. mining firms strike success, share appreciation is often massive, and easily capable of averaging out the performance of laggards.
Thank God It's Friday!
We will publish over the weekend and tie some loose ends. But rest assured, fresh air is on the docket and we hope you make ample time to get away from the markets. Say, maybe you should plan a vacation to Turkey. We can only hope their marvelous culture remains open to blending the greatness of the past with modern and environmentally conscious mining practices
Where To Hide?
Investments in commodities have weathered the storm reasonably well, due in large part to the withering value of the US dollar, supply constraints for some commodities combined with reasonably robust demand, and finally, the realization among a growing number of institutional investors that accelerating inflation will prove to be a major problem as the months advance. In the near-term, avoiding bear teeth isn't going to be easy, but these supportive trends in commodities will continue and select long positions in the sector still offer protection and opportunity for profit.
The Federal Reserve's Open Market Committee will meet to cut interest rates on March 18th. Leading up to the meeting there will be days where gold will come under pressure by central bank coordinated efforts to attempt to keep the price under $1,000. The last thing market massagers want to see is gold well over $1,000 before the Fed slashes the Federal Funds rate. We're looking for a 75 basis point cut and while the impact of that cut is partly priced into the commodities markets, the situation with rising inflation in the second half of the year still has a supportive roll to play for much higher gold prices.
Stealth management of the price of gold is just as real as open and acknowledged as management of currencies. Gold is, in fact, a currency, and it traditionally has functioned as the smoke alarm for the financial system. The establishment press virtually jokes about passing around tin foil hats every time the gold management subject is aired. We will not attempt to prove the case of gold management in this essay - another time and place, perhaps. In the event you're skeptical and inclined to research, we suggest spending a few hours at GATA.org.
We will not be surprised to see gold crash $20 or $30 in a single day leading up to the Fed's meeting. But it will not be a product of fundamentals. Buying physical metal should such a pull-back occur is something we will be doing for our own accounts. Ultimately, gold will blast through $1,000. By the end of April, we expect gold to have at least traded through $1,100 per ounce, with $1,000 widely seen as a "new floor." Similarly, we would not be surprised to see silver slice through $23 with $20 seen as a new floor.
Eldorado Gold Reopens Kisladag Mine - We're Getting In Before the Crowd
In early July, Eldorado Gold appeared to be coming into it's own. Gold was trading in the mid $600 range and Eldorado was increasingly seen by the institutional investor community as a go-to firm among a select number of mid-sized gold companies with expanding reserves and low production costs. With little warning, the shares were pummeled with the announcement from a Turkish court that Eldorado's flagship Kisladag mine would have to be closed on account of inadequate environmental permitting.
Few in the know questioned the level of support among the executive and legislative bodies of the Turkish government. Furthemore, Eldorado's management was meticulous in putting the original operational plan and permitting process together. They didn't cut any corners. This was simply a case of a European NGO with a beef against the mining industry taking advantage of the Turkish court system. With the support of the federal government, the injunction that closed the mine expired and Thursday, Eldorado's management released the news that the mine will soon be back in production. Following an initial halt of trading, the shares quickly moved up to about $7.50, drifted a bit, but ultimately closed near the high.
We believe the stock is profoundly undervalued. Gold has rocketed from about $650 to almost $1,000 since last July's Eldorado stock crash, but today's price is not far from the levels Eldorodo traded at before the mine closure. Similar mid-sized producers have seen huge share price increases over the same period of time. It will take about a month for institutional investors to feel comfortable again with Eldorado's outstanding growth story, but our read of the politics on the ground convince us this re-opening is the real deal.
The Kisladag is estimated to have a mine life of 13 years and should be able to support production at an estimated 240,000 ounces of gold per year, at a cash cost of $232 per ounce. The powerful cash flow Kisladag would generate was always a supporting pillar to Eldorado's expansion plans in China, Brazil, Turkey and beyond. As confidence returns in the company's ability to resurrect its full business model, we expect the stock to rapidly close its valuation gap between its peers. Had the mine never closed the shares would likely have traded above $9 or $10 by now. A quick catch-up move to $9 in the least should happen over the coming weeks.
We will buy 2000 shares today at the opening price. It would be more ideal to "work" a buy order in real time, but that's not possible with the nature of the model portfolio we are managing, where orders need to be disclosed and set before the market open. A limit order set at $8.25 or $8.50 is an option, but we have decided a market order is the best way to go. There is a large short position in the shares and it's possible that we might not get the most ideal execution on the open (short covering on the open might lead to an initial spike). Nevertheless, we believe the shares will likely close on or near the Friday intraday high and the stock is sufficiently liquid to just cast a market order.
Please note: A 2,000 share position is a moderately aggressive size stake for the size of the model portfolio. This is warranted given that Eldorado is a top quality mid-tier gold producer and not a Jr. mining firm - and it's ridiculously undervalued. In contrast, when building exposure to Jr. mining companies, please remember it is usually wise to start with positions that represent smaller portfolio weightings and to build exposure to at least ten companies - if not MANY more, depending on your abilities to keep track of business conditions. Risk management calls for this level of diversification. It also works to the investor's advantage because when Jr. mining firms strike success, share appreciation is often massive, and easily capable of averaging out the performance of laggards.
Thank God It's Friday!
We will publish over the weekend and tie some loose ends. But rest assured, fresh air is on the docket and we hope you make ample time to get away from the markets. Say, maybe you should plan a vacation to Turkey. We can only hope their marvelous culture remains open to blending the greatness of the past with modern and environmentally conscious mining practices
Friday, February 29, 2008
Upping Jr. Mining Exposure
Earlier this month we called a bottom on the Jr. Mining sector. As it stands, it appears the market has vindicated this call. On the open, we will increase our exposure to the sector with the following positions:
We will return with analysis on the recent IMF statement about gold sales and a review of the overall precious metals markets, the US Dollar and macroeconomic conditions.
- Minefinders Corp. Ltd. (MFN: AMEX): Buy 1500 shares on the open
- Silvercorp Metals (SVM.To): Buy 800 shares on the open
- Baja Mining Corp. (BAJ.To): Buy 5000 shares on the open
- Keegan Resources Inc. (KGN: AMEX): Buy 1000 shares on the open
We will return with analysis on the recent IMF statement about gold sales and a review of the overall precious metals markets, the US Dollar and macroeconomic conditions.
Thursday, February 14, 2008
Peak Oil: Upping Energy Exposure With CNOOC, CNQ, Noble Drilling, Baker Hughes and ENCANA
The phenomena commonly referred to as "peak oil" is still not widely understood by investors, lower-level policy makers and certainly not the general public. We remain hopeful that by the end of 2008 higher oil prices might lead to greater awareness. It is encouraging to see an increasing number of top oil company executives that are willing to speak openly about peak oil. Take for example the former CEO of Talisman Energy, Dr. Jim Buckee. His recent interview with the Australian Broadcasting Corporation and additional context can be accessed via the Australian/New Zealand chapter of TheOilDrum.com. Click here to pull up the story.
When 2008 is entirely in the rear-view mirror, we will not be surprised to learn that $108 proved to be the average 2008 price for West Texas Intermediate, with at least one price spike above $125. Rising domestic consumption rates within oil producing nations that subsidize their domestic consumption, combined with escalating rates of annual production decline of existing fields is going to keep a lid on export-available global oil supplies. Furthermore, even with a global economic slowdown, oil demand growth will not retract for an extended period of time. Making matters "worse," we subscribe to the modest slowdown camp. It's hard to believe today, but monumental levels of monetary stimulus, seasoned with a dash of fiscal policy, should help keep the global economy muddling along. China growing at 8% rather than 11% will still result in significant oil demand growth.
When 2008 is entirely in the rear-view mirror, we will not be surprised to learn that $108 proved to be the average 2008 price for West Texas Intermediate, with at least one price spike above $125. Rising domestic consumption rates within oil producing nations that subsidize their domestic consumption, combined with escalating rates of annual production decline of existing fields is going to keep a lid on export-available global oil supplies. Furthermore, even with a global economic slowdown, oil demand growth will not retract for an extended period of time. Making matters "worse," we subscribe to the modest slowdown camp. It's hard to believe today, but monumental levels of monetary stimulus, seasoned with a dash of fiscal policy, should help keep the global economy muddling along. China growing at 8% rather than 11% will still result in significant oil demand growth.
The Investor Intelligentsia model portfolio needs additional energy exposure. Today, we will establish a number of positions. We will return with a fundamental review of each company. On the open, we will establish four new positions and raise our stake in EnCana to a more appropriate weighting:
Profile, Disclosure, Compliance and Disclaimer: Click Here
- CNOOC Ltd. (CEO: NYSE): Buy 200 shares on the market open
- Canadian Natural Resources Ltd. (CNQ: NYSE): Buy 400 shares on the market open
- Noble Corp. (NE: NYSE): Buy 500 shares on the market open
- Baker Hughes Inc. (BHI: NYSE): Buy 100 shares on the market open
- EnCana Corp. (ECA: NYSE): Buy 100 shares on the market open.
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Profile, Disclosure, Compliance and Disclaimer: Click Here
Monday, February 11, 2008
Did Jr. Mining Shares Bottom Last Thursday? Regardless, Stupendous Value Exists In The Bombed-Out Sector
OK folks, grab your flack jacket, helmet and don't even think about bringing the burro. We're going in - into the bombed-out Jr. mining sector, that is. While the price of precious metals has performed admirably in the last six months, performance among Jr. mining shares has been nothing short of a horror story. Explaining what has happened is beyond the scope of a single post. We will return with more detailed fundamental analysis this week.
For now, in summary, we will simply say that the most profound values among resource stocks are found with Jr. exploration and early-stage development companies. In fact, the shares are attempting to put in a bottom right now, with a strong bounce last Friday and a subtle sentiment shift taking place throughout the precious metals sector. It's too early to be certain an exact bottom has been seen, but we are certainly in the neighborhood.
We view gold's prospects for crossing $1,000 this year as a 90% probability event, with momentum spike trading that could even exceed $1,200 per ounce. Similarly, we believe silver will have little trouble moving past $20, a threshold we view as having 90% probability, with upside on trading range spikes well into the $20s. Even base metal prices should perform reasonably well regardless of global slowdown.
At the open, we will deploy about $60,000 into a flock of Jr. mining companies. This level of additional exposure is appropriate for a moderately high risk portfolio. At this juncture, we have a large cash position. The portfolio has a barbell quality: our equities are volatile, but with ample cash and extensive diversification throughout the sectors we invest, overall portfolio volatility will be moderated. When investing in Jr. mining companies, it's imperative to not make huge investments. Diversification provides flexibility as well as risk reduction.
On the open, we will establish the following positions:
- Animas Resources (ANI.v -- Venture Exchange, Canada): Buy 2,500 shares
- Arian Silver (AGQ.v -- Venture Exchange, Canada): Buy 7,000 shares
- European Minerals (EPM.To -- Toronto Stock Exchange): Buy 5,000 shares
- Exeter Resources (XRA: AMEX) -- Buy 2,000 shares
- Full Metal Minerals (FMM.v -- Venture Exchange, Canada): Buy 2,500 shares
- Geodex Minerals (GXM.v -- Venture Exchange, Canada): Buy 6,000 shares
- Luna Gold (LGC.v -- Venture Exchange, Canada): Buy 2,000 shares
- Mansfield Minerals (MDR.v: -- Venture Exchange, Canada): Buy 2,000 shares
- Nautilus Minerals (NUS.To - Toronto Stock Exchange, Canada): Buy 3,000 shares
- First Majestic Silver (FR.v -- Venture Exchange, Canada): Buy 2,000 shares
Friday, February 8, 2008
Silver Wheaton: Goldcorp Sale Creates Outstanding Buy; Silver Should Easily Exceed $20 Per Ounce in 2008
Silver Wheaton is arguably among the very best silver stocks to own for exposure to rising silver prices. The company negotiates off-take agreements with mining firms that typically produce silver as a byproduct of mining operations. These deals are "win-win" in nature. Silver Wheaton benefits by locking in an annual stream of silver at a set price, and the partner company is able to use this contractually agreed upon revenue stream to buttress their own operations, primarily focused on other minerals. Silver Wheaton has six silver off-take agreements in place, and according to CEO Peter Barnes, the company is talking to another ten to fifteen companies. Each new contact win has been highly accretive to Silver Wheaton and given the nature of fixed price off-take agreements, Silver Wheaton has considerable leverage to rising silver prices.
Originally, the company was part of Wheaton River's assets. Following Goldcorp's 2005 takeover of Wheaton River, Goldcorp sold 18 million Silver Wheaton shares to reduce its holdings to 49%. As an independently traded pure play on silver, Silver Wheaton has outperformed the price of silver by a wide margin. But there have been exceptions to this rule, and we are currently witnessing just such a divergence. This is a fantastic buying opportunity.
Click chart to enlarge:
In the above chart we compare Silver Wheaton to the iShares Silver Trust, a reasonable proxy for silver prices. Beginning in early January, the divergence is clear: silver bullion has left Silver Wheaton in the dust. But the under performance has largely been due to the initial rumors about a pending Goldcorp sale, and now, the waiting game for the actual transaction. Goldcorp agreed to sell to Canadian investment banks its entire remaining 108 million share Silver Wheaton horde. In the deal, Goldcorp will receive C$14.50 per common share, and the investment banks will then underwrite a share offering. The discount to prevailing market prices is normal industry practice when moving large share blocks. Furthermore, when a deal like this is in the works, it's almost always the case that the stock will hover around the offering price for some time.
The offering is scheduled to close on or before February 14, 2008. The offering was over-subscribed, with many institutional investors chomping at the bit to have the opportunity to buy large blocks of Silver Wheaton without moving the stock up massively in the wake of such accumulation. Alas, dear reader, this is how the big boys play, and most individual investors never get such preferential treatment. But understanding how the game works can at least give the "little guy" an edge in picking up some table scraps. Silver Wheaton's current quote under $15 is an artifact of this Goldcorp strategic decision.
We believe by the end of February Silver Wheaton should be on its way to retesting its old high. Silver should continue to move higher this month, with prices over $18 per ounce as a distinct possibility. But our bullish expectations for Silver Wheaton's near-term performance is also colored by our belief that investors haven't fully appreciated why Goldcorp's strategic decision is highly beneficial to Silver Wheaton. Goldcorp needed development cash, and the Silver Wheaton holding was of modest consequence compared to Goldcorp's other assets. Arguably, the Silver Wheaton position wasn't fully reflected in Goldcorp's share price anyway. To Silver Wheaton's advantage, the company can now more readily negotiate silver off-take agreements with Goldcorp competitors. Silver Wheaton is now a strong, independent company and there's no need for any ongoing relationship with Goldcorp. With the overhang of Goldcorp shares removed, prospective Silver Wheaton shareholders will no longer have to wonder when and if the Goldcorp share block would potentially flood the market.
Both silver and gold are in long-term bull markets. Volatility in bullion prices is often wicked, but by now it is quite clear that the current bull market for bullion is shaping up to be bigger than any previous witnessed by living investor memory. Consider this: the last time gold peaked over $800 in the 1980s, it did so for only a few trading days. The previous high was merely the "mania spike" associated with the last stage of the 1970s-80s bull market run. A similar observation can be made with silver. Today, however, you would be hard pressed to find mainstream financial media commentary placing today's sustained elevated prices in proper historical perspective -- never mind adjusting for inflation. As strange as it may seem to those new to the silver and gold market, we are in the early innings of this bull market move. Within a few years gold should easily be over $2,500 and silver, over $100.
Silver Wheaton will be among the strongest blue-chip company performers. We're adding 2,500 shares to the Investor Intelligentsia model portfolio on the open and it just may happen that we will not be selling our position until "Silver Wheaton" is a household name at the latter stage of our current precious metals bull market - a few years down the road.
Both silver and gold are in long-term bull markets. Volatility in bullion prices is often wicked, but by now it is quite clear that the current bull market for bullion is shaping up to be bigger than any previous witnessed by living investor memory. Consider this: the last time gold peaked over $800 in the 1980s, it did so for only a few trading days. The previous high was merely the "mania spike" associated with the last stage of the 1970s-80s bull market run. A similar observation can be made with silver. Today, however, you would be hard pressed to find mainstream financial media commentary placing today's sustained elevated prices in proper historical perspective -- never mind adjusting for inflation. As strange as it may seem to those new to the silver and gold market, we are in the early innings of this bull market move. Within a few years gold should easily be over $2,500 and silver, over $100.
Silver Wheaton will be among the strongest blue-chip company performers. We're adding 2,500 shares to the Investor Intelligentsia model portfolio on the open and it just may happen that we will not be selling our position until "Silver Wheaton" is a household name at the latter stage of our current precious metals bull market - a few years down the road.
Click chart to enlarge:
Additional information, click on the following links:
- Silver Wheaton CEO, Peter Barnes, discussing the Goldcorp sale on Canada's BNN
- Goldcorp PR on Silver Wheaton offering
- The Globe and Mail Silver Wheaton Profile Page
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Profile, Disclosure, Compliance and Disclaimer: Click Here
Monday, February 4, 2008
General Update & Portfolio House Cleaning
The Investor Intelligentsia portfolio was born on the opening bell, November 15, 2007. In the grand scheme of things, not much time has passed. With a modest 1.27% net return (compared to the 5.11% loss in the S&P 500 over the same period), one might think not much has transpired. We all know better! The wicked volatility seen in this period has been on par with some of the most challenging markets seen in years.
We've decided to increase the size of the Investor Intelligentsia portfolio. Given that not much has changed, and given that the portfolio is still relatively new, our thinking basically boils down to providing you with more opportunities to watch the development of a model portfolio over time. On balance, there are many opportunities in the market today and we'd like to take advantage of these while showing you avenues for profitable investing. At the open, we will add US$800,000 and change the basis of the portfolio to $1,000,000.
Sell Carpathian Gold & Comments On Jr. Precious Metals Mining In General
At the open we will liquidate the Carpathian Gold position. Management decided to invest in a property in Brazil in a diversification effort away from Romania. In our view, it would have been better to just cut back on operations in Romania, if at all necessary. A dark cloud still hangs over junior mining companies seeking to develop properties in Romania. Carpathian will likely be successful in the long-run, but we take the view that this diversification effort may unfortunately act as a distraction. At some point in the future we may revisit the stock. Today, we say goodbye.
Junior precious metals shares have failed to show much of a bounce this year. Normally, one would expect to see the sector move higher during the first quarter, following tax loss season blood letting. This year has seen gold move to new all time highs in nominal terms, and silver getting over $17 per ounce on an intra-day basis last week. But still, junior share performance has been dreadful. The valuation of juniors with identified ore bodies and producing mid-sized and major precious metals companies is about as extreme as has been seen in the last three years. At some point this year, the sector is going to make a massive turnaround. The catalysts will likely include one or more of the following:
Portfolio Additions
In our view, China's stock market hit a bottom last week. We will explain in more detail in an upcoming post. The pullback in the mainland's shares and the decline in Hong Hong has been sharp and painful. On the open, we will add to some of our existing holdings to maintain sufficient portfolio weighting while adding new positions as well:
Once all these trades have taken place the portfolio will still have over $600,000 in cash to work with. Subsequent additions will be made at a more leisurely pace in order to better demonstrate investment ideas and strategies. We will return this week with further analysis.
Click image for the closing values for Feb 2nd, 2008
Profile, Disclosure, Compliance and Disclaimer: Click Here
We've decided to increase the size of the Investor Intelligentsia portfolio. Given that not much has changed, and given that the portfolio is still relatively new, our thinking basically boils down to providing you with more opportunities to watch the development of a model portfolio over time. On balance, there are many opportunities in the market today and we'd like to take advantage of these while showing you avenues for profitable investing. At the open, we will add US$800,000 and change the basis of the portfolio to $1,000,000.
Sell Carpathian Gold & Comments On Jr. Precious Metals Mining In General
At the open we will liquidate the Carpathian Gold position. Management decided to invest in a property in Brazil in a diversification effort away from Romania. In our view, it would have been better to just cut back on operations in Romania, if at all necessary. A dark cloud still hangs over junior mining companies seeking to develop properties in Romania. Carpathian will likely be successful in the long-run, but we take the view that this diversification effort may unfortunately act as a distraction. At some point in the future we may revisit the stock. Today, we say goodbye.
Junior precious metals shares have failed to show much of a bounce this year. Normally, one would expect to see the sector move higher during the first quarter, following tax loss season blood letting. This year has seen gold move to new all time highs in nominal terms, and silver getting over $17 per ounce on an intra-day basis last week. But still, junior share performance has been dreadful. The valuation of juniors with identified ore bodies and producing mid-sized and major precious metals companies is about as extreme as has been seen in the last three years. At some point this year, the sector is going to make a massive turnaround. The catalysts will likely include one or more of the following:
- gold going over $1000 per ounce, which we expect to happen before the summer is out
- majors like Newmont or Barrick launching takeover bids for Juniors
- major new money entering the sector from sovereign wealth funds or similar investment groups
Portfolio Additions
In our view, China's stock market hit a bottom last week. We will explain in more detail in an upcoming post. The pullback in the mainland's shares and the decline in Hong Hong has been sharp and painful. On the open, we will add to some of our existing holdings to maintain sufficient portfolio weighting while adding new positions as well:
- PetroChina (PTR:NYSE): Add 200 shares at the open
- China Mobile (CHL:NYSE): Add an additional 200 shares at the open
- E-House (China) Holdings Limited: Add an additonal 1000 shares at the open
- Hanfeng Evergreens: Add an additional 1000 shares at the open
- WUXI Pharmatech: Add 300 shares at the open
- SunPower Corporation (SPWR:NASDAQ): Buy 300 shares at the open
- Tyhee Development Corp. (TDCv: Toronto Venture Exchange): Buy 10,000 shares at the open
- Transocean Inc. (RIG:NYSE): Add an additional 200 shares at the open
- AGCO Corp. (AG:NYSE): Add an additional 500 shares at the open
- Agrium Inc. (AGU:NYSE): Add an additional 400 shares at the open
- San Gold Corp. (SGRv: Toronto Venture Exchange): Add an additional 3,000 shares at the open
- EXMIN (EXMv: Toronto Venture Exchange): Add an additional 20,000 shares at the open
Once all these trades have taken place the portfolio will still have over $600,000 in cash to work with. Subsequent additions will be made at a more leisurely pace in order to better demonstrate investment ideas and strategies. We will return this week with further analysis.
Click image for the closing values for Feb 2nd, 2008
Profile, Disclosure, Compliance and Disclaimer: Click Here
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