Thursday, December 10, 2009
Jim Rogers, dollar bull
At least in the short-term. Here he is on CNBC (which I haven't watched since we got Bloomberg TV). Hat tip: @TheStreet_LA.
Bought Puts on Virgin Media
Virgin Media (Nasdaq: VMED) caught my eye on the Short Screen screener last night. In addition to having an Altman Z"-Score in the distress zone, the company has been losing money for the last four quarters (though those losses have narrowed somewhat over the last three), and has a fairly high debt load (about $9.5 billion in net debt, versus trailing revenue of $6.6 billion and a market cap of about $5.5 billion). Despite that, its share price has rocketed up from a low of $3.76 back in March, to $17 as of last night's close1. A quick search on Twitter showed several bullish tweets on the stock over the last few days, based on its technical trends.
Since Virgin Media has options traded on it, I figured I'd buy puts on it instead of shorting it to cap my downside risk. I bought a few of the Jun 10 put contracts with a $10 strike price (NUDRB.X) this morning for 30 cents each.
1The shares of a number of financially distressed companies have had similarly explosive run-ups from their March lows, including one we mentioned here previously, BAGL.
Update: Perennial contrarian "Commodity" makes the bullish case for VMED in this comment thread on GuruFocus. He could be right, so if you're thinking of going long or short VMED, you may want to check out his comments first.
Update on new sites
The two new blogs that will replace this one should be up next week. The plan is to post new investment-related content on one, and everything else on the other. Initially, I was just going to keep everything on one blog, but I got a package deal on the logos, and I think there may be a way to monetize an investment-themed blog down the road. I have a thought on how to do that, but more on that later.
There will be a couple of technical differences on the two new blogs. Both will use Disqus for comments. When I first came across Disqus on Fred Wilson's blog, I didn't get the point of it, but now I think it adds value. For those unfamiliar with Disqus, it allows you to embed a reply to a particular comment; it sends you an automated e-mail when someone responds to one of your comments; and it allows commenters to rate each others' comments. The first of those features makes longer comment threads easier to follow; the second keeps older comment threads alive longer (because commenters know someone will be made aware of their comments) and obviates the need for comment moderation on older posts; and the third of those features will give me a metric by which I can encourage readers to leave more intelligent comments. I'm planning on offering a prize to the commenter who earns the most points commenting on the new blogs at the end of the first month. More on that next week.
The other technical difference will be that the new blogs will be on WordPress. I don't know if that will make a difference to you as readers, but it will mean some new things for me to learn, I suppose. The main reason for the move to WordPress is that there is a greater choice of templates there, and the one my designer picked to semi-customize wasn't available on Blogger.
Finally, the second subscription-based site is currently in development and should launch... maybe by the end of the year, if all goes well. We'll see. More on that later too.
There will be a couple of technical differences on the two new blogs. Both will use Disqus for comments. When I first came across Disqus on Fred Wilson's blog, I didn't get the point of it, but now I think it adds value. For those unfamiliar with Disqus, it allows you to embed a reply to a particular comment; it sends you an automated e-mail when someone responds to one of your comments; and it allows commenters to rate each others' comments. The first of those features makes longer comment threads easier to follow; the second keeps older comment threads alive longer (because commenters know someone will be made aware of their comments) and obviates the need for comment moderation on older posts; and the third of those features will give me a metric by which I can encourage readers to leave more intelligent comments. I'm planning on offering a prize to the commenter who earns the most points commenting on the new blogs at the end of the first month. More on that next week.
The other technical difference will be that the new blogs will be on WordPress. I don't know if that will make a difference to you as readers, but it will mean some new things for me to learn, I suppose. The main reason for the move to WordPress is that there is a greater choice of templates there, and the one my designer picked to semi-customize wasn't available on Blogger.
Finally, the second subscription-based site is currently in development and should launch... maybe by the end of the year, if all goes well. We'll see. More on that later too.
Wednesday, December 9, 2009
Update on that bet against gold
In a post last Thursday ("Buying a lottery ticket to bet against gold") I mentioned buying a few puts on the gold ETF GLD. Those puts I bought were the Jan 10s with a strike price of 108, GCZMD.X. I got them at $0.74 and they closed yesterday at $2.65, so they're up about 350% since last Thursday. So far, so good for Buffetteer17's idea. When to sell is another question.
Time for tariffs?
Calls from some quarters for tariffs on Chinese imports to the U.S. are nothing new, but this one in yesterday's Financial Times, from a former University of Chicago professor named Robert Aliber, caught my attention, "Tariffs can persuade Beijing to free the renminbi". Excerpt:
Americans have been patient - too patient - in accepting the loss of several million US manufacturing jobs because of China's determined pursuit of mindless mercantilist policies. The absurdity of the current situation is that China's currency protectionism has more of an impact on American manufacturing employment than US fiscal policy.
The US can help China make the necessary adjustments toward a reduction in imbalances by adopting a uniform tariff of 10 per cent on all Chinese imports, based on their values when they enter the US. Six months after the establishment of this tariff, the rate would increase by one percentage point a month until the Chinese trade surplus with the US declines to $5bn a month.
The precedent is clear. In August 1971 the US adopted a 10 per cent tariff on dutiable imports to induce Japan and several European countries to allow their currencies to float. The measure quickly accomplished its goal - the European countries stopped pegging their currencies immediately and the Japanese allowed the yen to float a week later. The tariff was eliminated after a few months.
[...]
It should not take long for the Chinese to learn that they are much more dependent on access to the US market than Americans are dependent on Chinese goods. Virtually all of the goods that the US imports from China could be sourced at home or in Indonesia, the Philippines or South Korea. China would find it difficult to find other foreign markets for the goods that it no longer sold in the US.
The Chinese might huff and puff about US protectionism and threaten that they will no longer finance the US trade deficit - but that chatter would be hollow because the single most important cause of that deficit is Chinese purchases of US securities. Such an initiative by the Obama administration would be much more significant as a jobs-creation measure than anything else it could adopt.
The Chinese authorities can hide behind the smokescreen of American protectionism to undertake the adjustments that some in the People's Bank of China must already recognise is inevitable. The experience of the early 1970s suggests that once the logjam has been broken and imbalances reduced, the Americans and the Chinese can focus on North Korea, Iran and other contentious issues.
Saturday, December 5, 2009
Stupid Cheap?
That's how Aaron Edelheit ("issambres839") describes shares of Destiny Media Technologies (OTC BB: DSNY.OB) in his latest comment on the Value Investors Club:
Attempting to value a company based in its future earnings makes sense, particularly for little-followed micro caps such as DSNY (or AYSI1, for that matter). If you think you can see future earnings that the market hasn't priced into the stock yet, you can profit by buying the stock now, before those earnings materialize and the market values the stock accordingly. As Niels Bohr said though, "Prediction is very difficult, especially if it's about the future.". For an example of that, let's look back at what Edelheit wrote about DSNY at the beginning of 2008:
So, two years ago, Edelheit predicted that DSNY would earn 10 cents a share in its fiscal 2009 (and 20 cents in its fiscal 2010). It ended up earning 1 cent per share, in its fiscal 2009, most of which was the result of a refund of previously paid taxes. I don't fault Edelheit for getting those predictions wrong -- like Niels Bohr said, predictions about the future are tough. But I don't see how confident he can be in his current earnings prediction. Edelheit seems unchastened by his 2009 predictions being off by an order of magnitude. I tried to ask him about this on his blog, but for some reason my comment didn't post.
To reiterate a point I've made here before about Destiny Media Technologies, I like the company's story, and it has been moving in the right direction recently by becoming profitable, growing its revenue and earnings, etc. My concern is its price relative to its future earnings.
1I could certainly be off with AYSI, but the math seems simpler and clearer to me in its case. During its best quarter it earned 6.8 cents per share. That was with one mill running at full capacity. Now it has two mills running at full capacity, spurred in part by a long-term supply deal with one of the largest mining companies in the world. Let's say the company earns 10 cents per quarter next year with two mills running at full blast. Annualize that and give it a 10x multiple and you have a $4 target (that doesn't take into account the other two mills the company says it plans to build, its recent deal in Indonesia, other possible business, etc.). An exogenous event (e.g., China's economy falling off a cliff) could nix that scenario, but in the event that doesn't happen, I doubt my low-end prediction of 40 cents in 2010 earnings will be off by a factor of ten. We'll see though.
I estimate that Destiny can earn 5 cents a share in fiscal 2010 (ending August 31st), on at close to 100% revenue growth. The revenue growth will be driven by more music being sent digitally and an increase in their international business. Destiny only trades at around 8 times my earnings estimate, despite tremendous growth and operating margins around 50%. Operating margins in the last quarter were already 34% and trending higher. That is why the company announced a buyback as well. I expect Destiny to continue to announce great results and the share price to keep bouncing higher.
This stock is stupid cheap.
Attempting to value a company based in its future earnings makes sense, particularly for little-followed micro caps such as DSNY (or AYSI1, for that matter). If you think you can see future earnings that the market hasn't priced into the stock yet, you can profit by buying the stock now, before those earnings materialize and the market values the stock accordingly. As Niels Bohr said though, "Prediction is very difficult, especially if it's about the future.". For an example of that, let's look back at what Edelheit wrote about DSNY at the beginning of 2008:
Trading at seven times my fiscal 2009 (ends August 31st) earnings estimate, Destiny Media with its 90% plus gross margins and recurring revenue stream is a undiscovered gem for both technology and value investors alike.
[...]
The company currently has a market cap of around $30 million. Assuming my revenue estimate of $11 million is correct, the company will earn $0.10 in pre-tax profits in fiscal 2009. The company should probably be valued at a multiple of 15 to 20 times that number. That would give you a valuation of $1.50 to $2 per share.
Using a price to sales measure on $11 million, 10 times price to sales for a 90% gross margin, highly recurring business seems fair, giving the company a value of $2.11 per share.
[...]
If the company can continue to grow to my revenue estimate of $16 million in 2010, it will earn $0.20 per share, making $4 per share an easy target in 18 months.
[...]
Whether the stock goes to $2 or $4 is really a moot point with the stock at $0.68 per share.
So, two years ago, Edelheit predicted that DSNY would earn 10 cents a share in its fiscal 2009 (and 20 cents in its fiscal 2010). It ended up earning 1 cent per share, in its fiscal 2009, most of which was the result of a refund of previously paid taxes. I don't fault Edelheit for getting those predictions wrong -- like Niels Bohr said, predictions about the future are tough. But I don't see how confident he can be in his current earnings prediction. Edelheit seems unchastened by his 2009 predictions being off by an order of magnitude. I tried to ask him about this on his blog, but for some reason my comment didn't post.
To reiterate a point I've made here before about Destiny Media Technologies, I like the company's story, and it has been moving in the right direction recently by becoming profitable, growing its revenue and earnings, etc. My concern is its price relative to its future earnings.
1I could certainly be off with AYSI, but the math seems simpler and clearer to me in its case. During its best quarter it earned 6.8 cents per share. That was with one mill running at full capacity. Now it has two mills running at full capacity, spurred in part by a long-term supply deal with one of the largest mining companies in the world. Let's say the company earns 10 cents per quarter next year with two mills running at full blast. Annualize that and give it a 10x multiple and you have a $4 target (that doesn't take into account the other two mills the company says it plans to build, its recent deal in Indonesia, other possible business, etc.). An exogenous event (e.g., China's economy falling off a cliff) could nix that scenario, but in the event that doesn't happen, I doubt my low-end prediction of 40 cents in 2010 earnings will be off by a factor of ten. We'll see though.
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Short Screen offers tools and ideas for short sellers, including a screener that pulls up companies predicted to go bankrupt by their Altman Z-scores. Here is a link to a third party review of the site, Screening Stocks for Short Selling. Here is a link to a post dealing with some common questions about short selling and risk.
Short Screen offers tools and ideas for short sellers, including a screener that pulls up companies predicted to go bankrupt by their Altman Z-scores. Here is a link to a third party review of the site, Screening Stocks for Short Selling. Here is a link to a post dealing with some common questions about short selling and risk.
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