Monday, August 23, 2010

August 23, 2010 That ship has sailed


August 23, 2010 That ship has sailed

As expected there was very little pin action today. There was little earnings news and almost no economic news. The market did not go much of anywhere today.

We sold out of a bad position in DRYS after riding it down about 8%. We discovered that one while doing homework in the container shipping industry. We got out of DRYS at 4.33 a share.

Of all the container shipping companies we looked at, VLCCF, Knightsbridge Tankers Limited, looked the most promising. Through its subsidiaries, Knightsbridge engages in the seaborne transportation of crude oil and dry bulk cargoes worldwide. As of December 31, 2009, the company's fleet consisted of four double-hull very large crude oil carriers and two capesize dry bulk carriers. It serves oil companies, tanker companies, dry bulk carriers, petroleum products traders, and government agencies. Knightsbridge Tankers Limited was founded in 1996 and is based in Hamilton, Bermuda.

It looks interesting as it has managed its debt well. Is currently selling for 7.13 times its future earnings. (For the newbies, just take the current price and divide it by analyst estimates for earnings in the next twelve month price to arrive at your multiple or future Price to Earnings Ratio. At this point VLCCF is expected to earn about $2.65 a share next year which gives us the P/E Ratio of 7.13 because the stock closed today at $18.89) The other interesting thing about VLCCF is its dividend which is creating a 10.59% yield. (Take the annual dividend and divide it into the current price of the stock.) The Payout Ratio indicates that the dividend is real and sustainable. I verified that looking at the cash flow numbers. This 18.89 stock could be 28-29 by this time next year. Needless to say that even though we are cash poor at the money we added to the position at 18.95 a share today.

We also added to out INTC position today. Tonight, I read everything I could about the McAfee buyout and I won’t bore you with all of the analysis, I think long term this is a good move by Intel. Short term nothing should really change between the two companies. The 60% premium that Intel paid may dilute the value of INTC a bit, with in 12-18 months we should see some game changing products come out of Intel. If Intel can squeeze another point or two of margin (a conservative guess since McAfee margin is 80-85% and INTC is 65%.), it will be a profound investment. It should help keep and grow market share from AMD and ARM Holdings.

I know from our company and from talking to a lot of tech heads, security is one of the boogie men for any CIO worth their weight. With all the internet connected gadgets on the market and coming out, the market for smart devices is due to grow by billions (with a B) over the next few years. Each smart phone uses between 6-12 smart chips. Imbedded security on those chips is going to be a hugely demanded item.

As a result we added to the INTC position today at $18.71 a share.

In a separate trade, we added more of the October 30 dollar call options for Waste Management at $3.90 a share.

A lot of people are talking about bonds and dividend yields on stocks. I just wanted to take a minute to remind me and any readers and need how best to evaluate dividend yields. Dividends, money paid to shareholder for holding the stock, are great as long as the company can continue to pay them. A few weeks ago we explained about the payout ratio and why it is important to understand. To got out and buy a stock solely because it has a “high” dividend yield, with out doing just a little homework, can be a cause for problems. Even some of the greatest companies in the world continued to pay dividends when it was not prudent to do so. Xerox comes to mind as one of the best examples.

Evaluating the dividend payout ratio lets us focus on companies that have enough internal growth to give us those dividend increases that we want each year.

Take a quick look at the payout ratio. It is shown on most decent stock summary pages and it can be easily calculated by dividing the dividend paid by the earnings (net income) per share. A good balance is about 50%. In other words a dividend of 1.00 and two dollars of income would be 50%. In essence and terribly over simplified, they would take one dollar of income for the shareholder and keep the other dollar to continue running the company. If you see a payout ratio of 90%, or in this example 1.80 in dividends on two dollars of income, there is a good chance the company might be trying to buy your love and they will not have enough money to run the company. On the other hand if the company has a payout ratio of 10%, or in this example they are paying 20 cents dividend on two dollar income, the investor must ask what else are they doping with their cash. Think the other two legs of shareholder year which in this case would be stock buy back or elimination of long term debt. In the case of a newer company they might be acquiring other companies or investing capital requirements to get the company in a string competitive position.

The point is with all the cash on companies balance sheet today, estimated at over 1.3 trillion dollars, we are going to see more merger and acquisitions happening over the next 6 months and we will hear about dividend increases. Just keep the payout ratio in mind before jumping in with both feet.

We mentioned MDT, Medtronic the other day. Medtronic, Inc. develops, manufactures, and sells device-based medical therapies worldwide. Its Cardiac Rhythm Disease Management segment offers cardiac pacemakers, implantable defibrillators, cardiac resynchronization therapy devices, atrial fibrillation products, leads, ablation products, electrophysiology catheters, information systems, diagnostics and monitoring products, and patient management tools. The company's Spinal segment offers thoracolumbar, cervical, and interbody spinal devices; bone growth substitutes; and devices for vertebral compression fractures and spinal stenosis. Its CardioVascular segment offers coronary and peripheral stents and related delivery systems, endovascular stent graft systems, distal embolic protection systems, perfusion systems, positioning and stabilization systems, products for the repair and replacement of heart valves, and surgical ablation products, as well as balloon angioplasty catheters, guide catheters, guidewires, diagnostic catheters, and accessories. The company's Neuromodulation segment offers neurostimulators, implantable drug delivery systems, deep brain stimulation systems, and urology and gastroenterology devices. Its Diabetes segment offers external insulin pumps, continuous glucose monitors, carelink therapy management software, and blood glucose meters. The company's Surgical Technologies segment offers tissue-removal systems, surgical drill systems, fluid-control products, cranial fixation devices, nerve monitoring systems, image-guided surgery systems, intra-operative imaging systems, a Mnire's disease therapy device, and a portfolio of products to treat benign snoring and obstructive sleep apnea. Its Physio-Control segment offers external defibrillators, including manual defibrillator/monitors used by hospitals and emergency response personnel; and automated external defibrillators used in commercial and public settings. Medtronic, Inc. was founded in 1949 and is headquartered in Minneapolis, Minnesota.

We don’t own and because we do not have a strong cash position, it might be worth a closer look. At 35, it is looking cheap as its P/E ratio is around 9, it has a 2.5% dividend yield (I know look at the payout ratio-now your catching on- as it is at a respectable 29%). This is going on my watch closely list and if you do your homework, I thin you’ll like it. They report tomorrow so take baby steps with this one. If they pop tomorrow, get in a little at a time and buy on the dips.

In doing the homework on this one, I trip over what appears to be a real nice sleeper. CYBX Cyberonics, Inc., a neuromodulation company, engages in the design, development, manufacture, sale, and marketing of implantable medical devices that provide vagus nerve stimulation (VNS) therapy for the treatment of refractory epilepsy and treatment-resistant depression. Its VNS therapy system consists of a pulse generator to provide the stimulation to the vagus nerve; a bipolar lead; a tunneling tool to assist with implantation surgery; a programming wand and software for setting the stimulation parameters after implantation of the generator and lead; magnets to suspend or induce stimulation manually; and instruction manuals. The company sells its products for refractory epilepsy through direct sales and marketing forces in Austria, Belgium, Denmark, France, Germany, Luxemburg, the Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom, as well as through distribution agreements with independent distributors of various territories, including Canada, Mexico, Australia, parts of Central and South America, Asia, the Middle East, and Europe. Cyberonics, Inc. was founded in 1987 and is headquartered in Houston, Texas.

I like what I see in the financials too much. I am going to read some quarterly reports, but this stock has 26 to thirty written all over it. It also has some of the makings of a takeover target. DO YOUR HOMEWORK.

And from the White House Archives:

"I'm tellin you, I even  opened my eyes under there and there is no oil anywhere."

Salve Lucrum


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