A weekend interlude before our next post and the week ahead...
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.
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