Articles of the Week 2/15-2/19

1. Tepper’s Appaloosa Buys Four Airline Stocks, Adds to Citigroup

2. BHP Says Iron Ore Spot Surge Points to Contract Level (Update1)

A 40 percent gain in contract prices would see the price of Australian ore rise to about $84 a metric ton, from about $60 a ton. The cash price, including freight and insurance, was at $128.20 on Feb. 12, according to The Steel Index.

3. Yara to Pay $4.1 Billion to Purchase Terra in U.S. (Update4)

4. Walgreen to Buy Duane Reade Chain for $618 Million (Update3)

5. Berkshire Cut Stakes in J&J, P&G as Rail Deal Neared (Update1)

6. General Growth Says Simon Offer Low, Invites Bidders (Update1)

7. Citigroup Stock Proving Irresistible to Hedge Funds (Update2)

8. Soros More Than Doubled Gold ETF Stake in 4th Quarter (Update1)

Soros is calling gold a bubble yet buying it up by the boatload. I guess thats what traders do.

9. Watsa’s Fairfax Agrees to Buy Insurer Zenith for $1.3 Billion

10. Rite Aid Rises on Speculation It’s a Takeover Target (Update1)

11. MGM Mirage Posts Larger Loss Than Analysts Estimated (Update3)

Total revenue dropped 11 percent to $1.45 billion from $1.62 billion, matching analysts’ estimates. Cash flow, or adjusted property earnings before interest, taxes, depreciation and amortization, fell 8 percent to $307 million.

Total Las Vegas Strip gambling revenue dropped 9.4 percent last year, convention attendance tumbled 24 percent and visitation fell 3 percent, official data shows.

12. Schlumberger Said to Be Close to Takeover of Smith (Update2)

13. Buffett’s ‘Dangerous Business’ Grips Bond Insurers (Update1)

Ambac, MBIA Inc. and Assured Guaranty, the three largest bond insurers, have set aside 0.04 percent of the total public finance debt they insure, or $520 million, to pay claims on municipal securities, according to regulatory filings by the companies.

“If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow,” Buffett wrote. “What mayor or city council is going to choose pain to local citizens in the form of major tax increases over pain to a far away bond insurer?”

Articles of the Week 2/8-2/12

1. Buffett Tells Hog-Product Staff They’re on Farming Superhighway

“I checked with Howie; he told me CTB was an absolute first-class company and he’d heard good things about Vic,” Buffett said. “Howie would rather spend an evening on a tractor in the field than a date with Angelina Jolie, which is not true of all members of the family, but that’s true of Howie.

Berkshire’s acquisition of CTB was valued at $177 million, according to Bloomberg data. Six years later, in 2008, the unit produced pretax earnings of $89 million, Buffett said in the company’s 2009 annual letter. CTB bought six companies in the interim, including Swine Services Specialists Inc. and Porcon group of Deurne, the Netherlands

.

2. Loews Posts Third Straight Profit on Insurance, Gas (Update4)

Oftentimes the worst time to get out of investments is right after they’ve sold off,” Tisch said. “We saw money coming out of the hedge funds, people withdrawing. That means there was going to be less capital competing for each of the different strategies,” he said. “We are the type of people that as things go down, we tend not to bail out. We tend to buy more.”

Loews’s book value, a measure of assets minus liabilities, rose to $39.76 a share from $39.54 at the end of the third quarter. Loews’s 2009 income from continuing operations was $566 million, compared with a loss of $182 million in 2008.

“Investors have been forced out of the residential mortgage-backed market and they have then gone into the corporate bond market and the municipal market,” he said. “Those markets have rallied significantly because one major sector of the market was in essence closed to them. Now, as the Fed throttles back on its mortgage purchases and as non-governmental investors move back into that market, I wouldn’t be surprised to see spreads on corporates and munis widen further.”

3. Loews CEO Tisch Says U.S. Rang Hotel ‘Death Knell’ (Update1)

“Last time I looked, we don’t have indentured servitude in the United States,” he said. “The situation is such that the good people have every incentive to leave to maximize their income.”

4. Cheung Kong Says H.K. Property Is Due for Correction (Update2)

“House prices now are still almost 50 percent below the 1997 high and affordable to households,” said Buggle Lau, chief analyst for properties at Hong Kong-based Midland Holdings Ltd. “It is too early to call it a bubble.”

“When people make their buying decisions, they should be cautious,” Chiu said. “Low interest rate environment will not last forever.”

5. Cablevision Spins Off MSG to Focus on Cable Franchise (Update1

Without Madison Square Garden, Cablevision has an estimated free-cash-flow yield of about 17 percent this year, compared with Comcast Corp. and Time Warner Cable Inc., which both hover around 10 percent, Moffett said. Paying off some debt, allocating a special dividend, or buying back shares are all options that would benefit investors, he said.

6. Electronic Arts Falls After Forecast Trails Estimates (Update1)

7. Activision Posts Loss on ‘Guitar Hero,’ Sets Buyback, Dividend

The shares rose after the Santa Monica, California-based company set a $1 billion stock buyback and its first dividend. The company, which has $3.3 billion in cash and investments, plans to pay a dividend of 15 cents a share a year

For the year, Activision predicts profit of 70 cents a share, excluding some items, on adjusted revenue of $4.4 billion. That compares with 69 cents and sales of $4.78 billion for all of 2009.

8. Buffett Takes on Chicago Chokepoint With Burlington (Update2)

9. McDonald’s January Sales Rise 2.6%, Topping Estimates (Update2)

10. Jobless Suffer as Corporate Cash Hits $1.18 Trillion (Update1

11. Philip Morris Profit Tops Estimates; Buyback Planned (Update2)

12. Boston Scientific Drops After Forecast Falls Short (Update4)

“I’ve done as much tire-kicking here as is humanly possible,” Elliott said during the call. “This is a big ship, and I don’t care how smart you are you don’t turn this around in a quarter or two.”

13. Midas Fund Turns Gold’s Rise Into Return on Miners (Update1)

Among the miners that meet Winmill’s investment test is Northern Dynasty Minerals Ltd. The Vancouver-based company is developing Alaska’s Pebble gold and copper project in partnership with Anglo American Plc. Shares of Northern Dynasty, which is 20 percent owned by Rio Tinto Group, rose 124 percent in 2009. This year, the stock rose 3 percent to trade at $8.52 on Feb. 10. “They’ve got experienced, well-capitalized partners who really know how to get the ore out of the ground,” Winmill says.

14. Ross Said to Get $1.1 Billion From Einhorn, Elliott to Buy Bank

15. Beijing Seen Vacant for 50% as Chanos Predicts Crash (Update1)

Contango Reports Second Quarter Results and Updates Operations

Contango Reports Second Quarter Results and Updates Operations

The numbers look good and the drilling schedule looks very promising.

Kenneth R. Peak, the Company’s Chairman and Chief Executive Officer said, “We had another solidly profitable quarter. We expect to be very busy the rest of this year and may have three Gulf of Mexico (“GOM”) wells drilling in March 2010. Our Dude prospect (Matagorda Island 617) should spud in February 2010 with two more GOM wells scheduled to spud in the March-April 2010 time frame. Concerning natural gas prices, the weather is cooperating on the demand side, but natural gas supply continues to hold steady. I wouldn’t be surprised by either $3.00 or $6.00 natural gas over the next year or so, but we have good prospects and are aggressively moving forward to drill

FLIC Investment Thesis

The First of Long Island Corporation has all the attributes of a great local bank in which dividends and growth can make you over 50% on your money with little overall risk. The stock is currently trading for a $170 million market cap with a ratio of market cap to shareholders equity of 146% (170M/116.5M equity). At first glance this seems expensive for any bank in this economic environment. However, I will show how the bank is trading at a very cheap multiple of 2012 earnings.
The key to this thesis is the fact that currently, the bank has a very low loan to deposit ratio of 64% (825M loan book/1.277B in deposits). These deposits are very high quality as 25% of them are costless checking deposits and 50% of them are extremely cheap money market and savings accounts. The rest are in CD’s also at low rates. This means that FLIC will be able to boost their loan portfolio by a significant amount in the next couple years and maintain less than a 100% loan to deposit ratio. With $13.5 million in 2009 earnings, the stock currently trades at what seems to be an expensive 12.6 P/E ratio. However, this does not take into effect the ability to ramp loan growth up in the next few years and drive earnings higher and also doesn’t factor in FLIC’s ability to dividend out over $40 million and still be consider a well capitalized bank. A look at the 2008 10-K shows that the company has $48 million in excess capital on a total capital to risk weighted assets basis, $67 million in excess capital on a tier 1 capital to risk weighted assets, and $41 million in excess capital on a tier 1 capital to average assets basis. Assuming they dividend out the lowest and most conservative amount of $41 million, FLIC is trading at an adjusted P/E of only 9.56.
While FLIC is cheap on a current earnings basis, is the bank a safe bank? FLIC’s credit history is near flawless. From 1995 to 2008, total net charge-offs were less than $100,000. Currently, the company has only $432,000 in non-accrual loans on their books but has 24 times that amount (1.25% allowance/total loans) as a loan loss allowance. Well than, one might ask about their securities portfolio and how safe those are. 96% of their securities portfolio is backed by the U.S. government and the rest is rated A or better.
Assuming that FLIC maintains their historical profitability average of 1.15%, their loan growth continues to grow at a 19% clip which they have achieved since 2005, their deposit growth continues at a normal 3% clip, and their securities portfolio remains the same, FLIC would earn $25 million in 2012. This means FLIC is trading at a normal 2012 P/E of 6.8 and an excess capital adjusted P/E of only 5.16. This is extremely cheap for a bank with these amazing credit statistics. If the stock were to trade at a very conservative 10X normal P/E, the stock would be 50% higher than it is now.

Contango Oil & Gas Thesis

Contango Oil & Gas is currently trading at $48.5 and has around 16.5 million fully diluted shares outstanding. The company focuses on the highest part of the value chain in the natural gas market, which is exploration. The CEO, Ken Peak, believes that the only competitive advantage in the natural gas industry is to be among the lowest cost producers. He also believes that the way to create value in the industry is through drilling successful wells and his main focus is on value creation per share. The company has a very lean operating structure with only 8 employees and they outsource their exploration to a company called Juneau Exploration. Juneau has a 66% historical hit rate when it comes to finding oil and gas versus the average 33%. The company was successful in finding 2 of the largest natural gas finds in the Gulf of Mexico in the past 30 years. The company currently has 350 Bcfe of proven producing developed reserves and just found another 90 Bcfe in their last wildcat well. This totals to 440 Bcfe for a company with only an 800 million market capitalization.

My Net Present Value (NPV) Microsoft Excel model gets a current value of $67.87 per share. This assumes the long run average natural gas price at the Henry Hub of $7 per MMBtu. This is conservative because the industry’s marginal cost of production is around $6 and they need 5-15% RoR to make it worthwhile to drill. Contango’s natural gas is 1080 BTU so they can sell it at an 11% premium to the Henry Hub and additionally they sell some higher margin oil and NGL’s. The CEO has told us that the life of these reserves is 10 years, which means they will be flowing at 120 Mmcfe per day or 44 Bcfe per year.

If we assume no more wildcatting and only count proven producing developed reserves, Contango currently trades at 71% of NAV and has very limited downside. Its limited downside comes from its lowest cost producer status. They are profitable down to $2.39 per mcf at the Henry Hub versus $6 per mcf average of large natural gas producers. Ken Peak currently owns 21% of the outstanding shares so he is highly incentivized to increase the stock price. He has done this successfully in the past, achieving a 61X market cap/net invested capital ratio for the decade. Additionally the company has no debt, $70 million in cash and a $50 million unused revolver.

The company has significant upside from the DCF price due to its active $100 million repurchase program. Additionally, the company has a significant amount of Gulf of Mexico leases that could mean large future gas finds from wildcatting as Juneau has a 66% hit rate. Since Contango is unhedged, there is great upside from a potential black swan event in the natural gas industry where prices could shoot up to the $10-$15 mcf range. In fact, prices did hit $14/mcf in 2008. Finally, the CEO wants to sell out in the short to medium term given his age and his past attempt to sell the company where he achieved bids in the $70 to $80 range. However, he will only sell out at a fair price which was evidenced by his instituting a poison pill rights plan after opening up his books to investors right before the natural gas price collapsed from $14 to $3.
Variant View
This stock is not followed by any analysts which is why this mis pricing exists. The stock has a small market cap and is not covered by many large funds. Additionally, the stock has very concentrated wells which may scare some people who like more diverse companies. Finally, natural gas is very out of favor as people are moving more into oil and other commodities.

Articles of the Week 2/1-2/5

1. Munich Re Raises Dividend as Quarterly Profit Climbs (Update2)

Net income before minorities in the three months through Dec. 31 climbed to 780 million euros ($1.09 billion) from 105 million euros in the year-earlier period, the reinsurer said today in an e-mailed statement, citing preliminary figures. That beat the 609 million-euro median estimate of 10 analysts surveyed by Bloomberg. The reinsurer proposed raising the dividend for 2009 by 4.5 percent to 5.75 euros a share.

The Munich-based reinsurer plans to repurchase as much as 1 billion euros of its own stock before the annual shareholder meeting on April 28 as it resumes a share-buyback program that it put on hold amid the global financial crisis.

This looks like another great investment by Buffett.

2. China Property Market ‘Bubble’ Set to Burst, Xie Says (Update2)

Many properties bought for investment are now left vacant and rental yields are low, pointing to a “bubble,” Xie said.

Shanghai Zendai Real Estate Co. agreed to pay 9.22 billion yuan ($1.35 billion) for a plot of land adjacent to the city’s riverside Bund area, according to the Shanghai Real Estate Trading Center. Zendai is paying 34,148 yuan per square meter for the lot, the highest per meter price paid for land in China this year, according to property Web site Soufun.com.

“Developers paying record prices for land might get trapped this year,” Xie said.

3. Walmart-Like Shares Top S&P 500 Index With Dividends (Update3)

Wal-Mart Stores Inc., one of two Dow Jones Industrial Average shares that rose in 2008, trades at the cheapest level in at least 20 years while offering a record dividend, data compiled by Bloomberg show.

Weiss, who oversees about $50 billion as chief investment officer at City National Bank, is buying Walmart because the Bentonville, Arkansas-based retailer trades at 15 times profit from the past year, the biggest discount to the S&P 500 since at least 1990. Walmart’s dividend is 2 percent of its share price, the highest ever relative to the S&P 500.

Vodafone’s dividend is 6.4 percent of its share price, compared with an average of 2.7 percent for the Newbury, England-based company during the past 18 years, data compiled by Bloomberg show. Telephone companies in the MSCI World pay a dividend yield of 5.4 percent on average, 2.9 percentage points more than the global index’s average, close to the biggest premium since 1995.

4. Wells Fargo Shuns Carry-Trade, Braces for Risk of Higher Rates

“I applaud Wells,” said Chris Whalen, managing director of Institutional Risk Analytics in Torrance, California. “The other three are speculating, taking a position on risk, and Wells is not.”

Banks have turned to investments in securities in part because of a lack of loan demand from consumers and businesses. The recession led households to reduce debt and increase savings, leaving banks with a larger pool of deposits and fewer options to deploy them.

Some banks bought bonds guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae, taking advantage of a Fed program to purchase $1.25 trillion of the securities that pushed up prices. The program is now slated to end in March, and the Fed reiterated its intention to do so in its Jan. 27 statement. Without government purchases, the bonds may fall in value.

5. Leap Wireless Rises on Report It’s Evaluating Options (Update2)

6. Gannett Falls as TV Revenue Forecast Trails Estimates (Update1)

7. Barnes & Noble Investor Seeks Waiver of Poison Pill (Update1)

8. Westfield Advances After 47 Australian Cents-a-Share Dividend

9. AOL Reports Profit in First Earnings After Spinoff (Update2)

. Armstrong said the company plans a “substantial” pullback in international markets this year as it reworks its technology platform.

“Our expectation is in the future -- 2011, 2012, 2013 -- that we would start trending back into international markets,” Armstrong said.

10. Cisco Predicts Faster Sales Growth, May Hire 3,000 (Update3)

Cisco will hire 2,000 to 3,000 people in the next several quarters and plans to be “aggressive” with internal innovation and acquisitions, Chambers said on a conference call yesterday

Cisco ended the second quarter with $39.6 billion in cash, up from $35 billion at the end of fiscal 2009.

“This highlights Cisco’s ability to execute through the economic cycle,” said Joel Levington, director of corporate credit at Brookfield Investment Management Inc. in New York. “Cisco’s balance sheet remains pristine, setting the stage for additional acquisitions.”

11. Taleb Says ‘Every Human’ Should Short U.S. Treasuries (Update2)

-This can be achieved by buying the ETF TBT.

Articles of the Week 1/25-1/29

1. Avery Dennison Tumbles as Earnings Miss Estimates

VIC short write up link on AVY

2. U.S. Oil Rig Count Rises to Highest Level Since 1993

Most of the increase came from gas rigs, which gained 28, or 3.4 percent, to 861. They have risen for five consecutive weeks. The gas rig count is down 46 percent from a peak of 1,606 in September 2008.

As Ken Peak, CEO of Contango (MCF) says, many companies are drilling at these uneconomical prices for a litany of reasons. These include "Hold leases, rig contracts, service costs are low “We just raised a bunch of capital,”prices will be up in 2010, hedged, need the money to pay interest and G & A, EBITDA/Interest coverage covenant".

3. Amazon.com Says Sales May Accelerate After Recession

The company said it may repurchase as much as $2 billion of its stock. The share buyback, which replaces a $1 billion program authorized in 2008, has no expiration date, Amazon.com said.

Net income in the fourth quarter jumped 71 percent to $384 million, or 85 cents a share, beating estimates. Sales also topped estimates, rising 42 percent to $9.52 billion.

This is a company that you do not want to be short, regardless of the current very low FCF yield and high P/E ratio.

4. Buffett May Boost Stake in Munich Re to More Than 5%

Munich Re is a very risk averse company which likes to make its money on its insurance side and not its investing side. It only takes on the safest investments and has a very low equity percentage investment. It is currently trading at a cheap valuation given its safety and theres no doubt why Warren likes it here.

5. Cheapest Route to Walmart From China May Skip Buffett’s Railway

China Cosco Holdings Co., Asia’s biggest shipping company by market value, and 14 other container lines said Jan. 14 they expect a “significant” increase in transpacific cargo this year on rising U.S. consumer sentiment

China Cosco VIC short thesis 2009

A Burlington Northern spokeswoman, Suann Lundsberg, said trains deliver cargo from the West Coast to the East Coast as many as nine days faster than ships using the canal.

6. Legg Mason’s Bill Miller Says 2010 Will Be Good Year for Stocks

7. Mitsubishi Heavy Expects First Europe Reactor Sale (Update1)

Could be a stock to look into.

8. Platinum Overtaking Gold as Metal of Choice on Autos (Update4)

“The benefit of holding platinum is that it has precious metals characteristics, but also a pretty good industrial component as well.”

“Platinum and palladium depend on industrial usage,” said Siegfried, based in Zurich. “What we see is that investors are very bullish that stimulus packages will eventually turn around the economy and that demand for those metals will increase. We question this recovery. The fundamental for gold is more comfortable in the long term.”

9. Japan Price-to-Assets Makes for Cheapest Stocks (Update2)

“Japan is extremely cheap on fundamentals,” said Herro, the chief investment officer for international equities at Harris, with $55 billion in assets. “When you combine the two concepts of low price and high quality to get a value proposition, especially if we see a movement towards more sustainable operating profitability by corporate Japan, this could be one of the best-performing markets over the next couple of years.”

Herro bought shares of Toyota Motor Corp., the world’s largest automaker, and Canon Inc., the biggest camera manufacturer. Analysts surveyed by Bloomberg project Toyota will return to an operating profit this year, while Tokyo- based Canon’s may climb 64 percent from 2009.

10. Vale Buys Bunge Fertilizer Assets for $3.8 Billion (Update3)

11. China Bubble Risks May Be Masked, World Bank Says (Update1)