Sunday, December 05, 2010

3 December 2010 I Can Dig It


3 December 2010 I Can Dig It

(This blog was started Friday Afternoon. Sorry we did not get it published sooner.)

We were ready this morning. We got up real early, got out our lucky Masters Green Chair, and waited for the Jobs Data Report. OMG. (I am not using him name in vain Aunt Kay, promise.) The number was bad. What a surprise! Well it was a surprise if you did not read this Blog all week. After a good October number I guess everyone was hoping the euphoria of all the good data points would be reflected in the jobs data. Well it didn’t happen. The market started out ugly then people realized that the private sector number was bad but not as bad as the public sector jobs. We kept hearing about how bad the retail segment of the report was and what a huge surprise that was. Let me share a quick story with you that might explain the retail job anomaly. I assure you will not find this story anywhere but here.

A summer ago, one of my buddies and a reader based in Bristol England, graciously arranged for me to go fly fishing in the Lake District of England. We were to have fished Lake Blangdon, but due to poor fish counts our guide took us to another lake. Chew Valley Lake if my memory serves me correct. We were fishing for trout and pike on fly rods. Our guide took us to his first trout “honey hole” (guides have their secret places where they can almost always catch fish. They are referred to as honey holes.) After a couple of minutes we were hooked up with about a 6 pound Pike. (If you are not familiar with Pike, it is commonly referred to as the fresh water barracuda. It looks prehistoric and has big gnarly teeth and insatiable appetites.) Keep in mind we a re fishing for pound to five pound trout. Please bear with me as this is really relevant to the jobs report. We went to another “honey hole” for trout and caught 5-12 pound pike. Since catching 10 pound pike on 8 weight fly rods is so much fun, our guide gave up on the trout and went to his big pike “honey holes”. Guess what we caught? No not trout, gotcha! We caught big giant pike. My fishing buddy, another one of our readers, Jimmie James ( a world renowned music critic), caught a 19 pound pike. We actually had to use a sea anchor (go look it up as I don’t have time to explain) to bring the beast into the boat. As we headed for the beach for a fabulous lunch, our guide said, “I am surprised we did not catch any trout.” Jimmie James and I looked at each other and made a profound observation. Perhaps the 20 pound Pike were eating all the one to five pound trout?

So what has that to do with a surprising weaker retail sector jobs report? Figure it out yet? No, the Pike are not eating all the retail worker, but I like the way you think. Get it yet? Ok, here is my observation. Cyber Monday hit one billion dollars on revenue for the first time ever. On line shopping is on target to be 26% higher than last year and 22% higher than the year before. Despite what you may have heard, CEOs and Chairman’s of Boards are pretty smart people. If they are doing their job and they know that 3-10% of their traditional retails sales, are shifting to on line environments, they will not be hiring as many holiday employees as in years past. So once again, they all should be reading our blog. (Before I get too many e-mails, I promise to only tell fishing stories when they are really really relevant.)

We took a nice profit on a call option for HGSI originally bought last week. It was a nice 37% gain for a weeks hold. We did get a catch on the KIRK call option we mentioned last night, but PAY was too hot in the before hours trading. Our buy is still on the table, but we do not think will get our price. For the record, we did get the April $12.50 cent call option on KIRK Kirklands at 1.65 a contract. (For people new to options a contract is a block of one hundred shares. So, one contract at $1.65 would cost $165.00. You are in essence controlling 100 shares of the underlying stock which in this case is KIRK worth $13.21 a share. So for $165.00 you are managing $1,321 dollar worth of KIRK.) CAUTION OPTIONS ARE EXTREMELY VOLATILE AND SCARY. As an illustration, when I caught the KIRK option this morning at 6:30 am I was 22% down. As I am writing this, at 10:47 am, it is up 8%. VOLATILE AND SCARY.

Dredging up some value stocks.

Just to reassure those who do not want to get option crazy, here are a couple of value plays. We discovered this as a result of a conversation this week with a couple of readers (Tom and Ben). We were discussing the widening of the Panama Canal, which is slated to open in 2012. It will allow “capsize” freighters from points west (Asia) to by pass the Cape Horn in South America. However this amazing engineering feat has caused some infrastructure issues in the US as many harbors and ports are not ready to receive the large “capsize” ships. That requires port authorities and those cities to find the funds to dredge their harbors and ports. They are included to do so as it will be much needed revenue for said cities.

So the linkage play here would be to find the best of breed dredging companies and invest for a 12-36 month play in this dirty business of dredging. After some intensive homework and calling every publically held company trading on all indexes and asking, “Do you do dredging of harbors and ports?” Here is the short list and two of our picks.

GLDD Great Lakes Dredge & Dock Corporation engages in the business of marine construction, primarily dredging, and commercial and industrial demolition principally in the east, west, and Gulf Coasts of the United States. It operates in two segments, Dredging and Demolition.

At it’s closing price of 7.56, GLDD is trading at a future PE ratio of 13.9 makes it faired value over all and decent for its sector. Operating margins are almost double the industry average and net margins are about 5 times industry averages. The banter on is relatively positive. Their income and free sash flow are doing well and continuing to recover from a lackluster 2007. They have some debt but it appears to be reasonable and it is common in the heavy industry sector. We will be looking at getting in at the 7.50 level and looking for 9 by the end of Q 1 2011. Do your homework.

MTW The Manitowoc Company, Inc. engages in the manufacture and sale of cranes and related products, and foodservice equipment. The company operates through two segments, Cranes and Related Products, and Foodservice Equipment.MTW is a player in this sector but its fundamentals are not as nice as GLDD. They carry a lot of debt and their cash flow seems to be receding. With the right contracts and if managed properly, it could come of its 12 dollar price point and make ti back to its 16 point price range, but I would not gamble a lot of money on that dent.

ORN Orion Marine Group, Inc. operates as a marine specialty contractor serving the heavy civil marine infrastructure market. The company provides a range of marine construction and specialty services on, over, and under the water along the Gulf Coast, the Atlantic Seaboard, and the Caribbean Basin, as well as the Pacific Northwest.

At a market cap of 400 million dollars it is a relative small player in the segment.  Its fundamentals do not look all that bad.  It has no dent but has been rewarded for it as it is selling for almost 15 a share and a fair value appears to be about 16 so there is no astounding margin of safety.  There is no dividend so there is no reason to buy it and sit on because we don’t see any upwards movement for at least 3- 6 months.  Keep it on a watch list for the moment.

TFX Teleflex Incorporated primarily develops, manufactures, and supplies single-use medical devices used by hospitals and healthcare providers worldwide. Its Commercial segment designs, manufactures, and distributes steering and throttle controls, and engine and drive assemblies primarily for the recreational marine market; and rigging products and services for oil exploration, dredging, mooring, construction, and associated applications.

This came up on our radar but must have less than 200 million in revenue coming from the marine construction segment. We know this, (pay attention boys and girls) because if a publically traded company has 10% or more of their revenue from a product or segment, they have to give it some attention in their quarterly filings with the SEC. TFX does not, but I found the fundamentals interesting and its forays into the medical device market interesting.

The stock is trading at 50 dollars a share, has a nice safety of margin, (selling for $50 estimate value are in the low sixties), an 11.7 percent P\E ratio makes it cheap, price to book and price to sales are attractive, it throws a sustainable 2.67 dividend yield, and its net margin and Return on Equity are at attractive levels.

Rather tying up a lot of cash chasing this I am going to use an April call option at $45.00. Part of the reason is the chart of the stock. When you use a 50 day, 100 day, 200 day moving average it is not quite the way I like it to look. Here is what I mean:

We highlighted the 50 day GREEN, 100 day RED, and 200 BLUE day averages legend with the big black arrow. On the chart you can see that the 200 day is above the 50 which is above the 100. We like them to be in order and heading up before we do an option play or short term long trade. So as you can see in the EGY chart below, you have 50 over 100 over 200 all headed up.  You'll also noticed we are seeing some decent positive volume (circled on the bottom) That is one reason we bought the April 16, 2011 options for $1.25.

We will get around to the Barron’s review and the week ahead later tonight perhaps. Right now, we are going to enjoy a few minutes of the Indi Dallas game.

Salve Lucrum


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