Tuesday, March 07, 2006

An Update from AA

Hope you are all well. I thought I would do a quick update on my picks. Since I am not a big trader, I won't in general post a lot of picks. But here is an update on the stocks I have recommended in the past plus a few you should put on the radar screen or even consider taking a position in.

1. SHLD ($120.88) and PIR ($10.12)

Sears hasn't done much since I receommended it last November. But Lampert has continued with his program and seems to be making progress. I continue to like the opportunity to invest alongside Lampert especially when he has a significant amount of his net worth tied up in the company through his hedge fund.

As for PIR, it has been a wild ride. It is down about 20% since I recommended it. The stock bottomed at $8.50 recently but has bounced back nicely. I continue to like this company as a deep value play.

2. TYC ($26)

Tyco took a bit of a beating after their earnings came in below estimates and costs of restructuring were estimated by management to be on the order of $1 billion. Oh yes, and it will take the management a year to complete the split of the company into three separately traded companies about a year. All this spooked the market. One year? $1 billion?

Well, this baffles me. What did people think? They can get this done with a $5 million budget and in 6 months?! Tyco's three businesses may not be exciting (Fire and Security, Healthcare products and Electronics components). But the sum of the parts is worth more than $30. And with all the action in private equity these days, the spin-offs will be prime targets for acquirers. I continue to like the stock and my brother and I have added to our position at these levels.

3. MORN ($41)

Up about 17% since I posted and hit a high of $43 recently. The earnings came in and they were good! This company is executing well and is still under the radar. I think they will continue to grow. If the shares drop below $37, they would be worth a look to add to your position.

4. CHAP ($47)

Up about 56% since I posted and hit a high of $49 very recently. I didn't expect to see these levels for another two years. But thanks to Mr. Mittal's bid for Arcelor, steel stocks have been on fire. I still like CHAP for the long haul especially since the non-residential construction boom is still getting going. But I might take some money off the table here.

5. CWB.TO and IIC-LV.TO

CWB is up about 7% since December's recommendation. They report earnings in a few days. I still like them as a potential take-over candidate and because of a conservative management team. My brother and I are contemplating switching our position into NA.TO which has underperformed peer banks recently.

The call on ING Canada turned out well. The stock is up about 20% and they reported strong results in Feb. I continue to hold. Lots of growth opportunity ahead.

6. Energy and Materials

I continue to like the oil sands story and so PCA.TO remains a holding. As for ECA.TO, the stock has come back down to earth as natural gas prices have declined substantially. But Encana remains the largest natural gas producer in North America with exposure to the Oils Sands. If there is a severe correction, I would look to add to add to this position. My brother and I also took a small position in Goldcorp during Q4 of last year. I never posted this so I won't dwell on it here. But Gold has done spectacularly and Goldcorp has done a nice job increasing reserves and remains a low cost producer. I like the macro fundamentals behind gold and I think it will continue to do well.

On The Radar/Consider Adding

Value - Wendy's (NYSE: WEN)
Price: $60

I am not going to get into a long expose on Wendy's here. So I refer you to my own blog at http://alagheband.blogspot.com/ . We have taken a position in WEN at around $57. I personally don't see much downside in owning the shares before Tim Horton's IPO. And if my assessment is correct, you will end up owning Wendy's shares at a bargain price with room for much more appreciation post spin-off of Tim Horton's (if you are patient). I would still take a position at these levels.

Value - Heinz (NYSE: HNZ)
Price: $38

The same billionaire investor (Mr. Peltz) who nudged Wendy's management into action, is now on Heinz's case. Yes we are talking Ketchup here. Peltz is planning to nomimate 5 to the board and the stock has moved from $34 to $38 recently. Still, it has not gone anywhere in two years. It is unclear what stake Peltz's group has taken in the company, but probably he is building a position. A Barron's article this weekend noted the company could be worth $49 on a sum of the part basis. Plus, the stock pays a nice 3% dividend and can be a nice hedge against USD since 50% of revenues come from overseas. The CEO has been divesting non-core assets and buying back shares. But there may be more to squeeze out of this one. Peltz has a solid track record. I would be willing to put my money on him and initiating a position at these levels.

Value - Electronic Arts (Nasdaq: ERTS)
Price: $51

EA is the gorilla of video games. With game machines getting ever more powerful and online gaming catching on, they are in a sweet spot. Kids spend more time playing games than watching TV these days. EA and other game companies are going through a rough patch right now. Basically what is happening is that people are postponing purchases until they can get their hands on new XBox 360 and Playstation 3 consoles. Microsoft is still trying to catch up with demand and Sony's machine has been delayed into early next year (rumors). EA stock has been holding steady through all this at these levels which should mean the bad news is priced in. They have already brought down expectations during their last earnings call. My brother and I plan to take an initial position at these levels.

Value - Mittal Steel (NYSE: MT)
Price: $34

I know, yet another steel play. And frankly, I feel like we may be a bit late to this one. MT has made a nice run since the company made a bid for Arcelor. The opportunity to get in was when the stock was trading below $30. Mittal and his son have been on a tear and have quickly but quietly built Mittal into a global powerhouse. Consolidation will further insulate the company from the boom and bust cycle of the steel industry. Plus, they have managed to build a vertically integrated company with its own iron ore and coal resources. All this gives the company a competitive advantage.

The Arcelor bid is turning out to be a major battle and it's unclear how it will all turn out. Also, the Mittal's own a majority of the company. That may make you nervous. But I personally like family owned businesses. I would have loved to have initiated a position in MT below $30.

Value - Home Depot (NYSE: HD)
Price: $41.5

Yes, another boring company that sells rakes and drills. And the first words out of people's mouths are, "but the housing bubble is going to burst!". That's all fine and well. But HD is becoming more than a retailer. The CEO is expanding the company's business into services and catering to professional contractors. There are also rumors the company is sniffing for opportunities in China.

The stock has been stuck in this range even as HD's competitor Lowe's has seen its stock soaring. The plan to add new businesses is risky but I think HD can pull it off. I think this stock is a nice long-term hold if you can get your hands on it below $40.

Value - Posco (NYSE: PKX)
Price: $60

Goodness, another steel play. Seriously, this is just coincidence. My brother had come up with the idea of buying a Korean index fund. After a bit of research we determined that we owned some Korean shares through a emerging markets index fund we already owned. So we did some digging and came up with Posco. They are THE steel company in Korea and have a monopoly on the market. As may be expected, the shares are cheap relative to other global steel players. This is the "Korea Discount". Moreover, PKX has underperformed the Korean stock market by a wide margin over the past year.

As you may have noticed Carl Icahn has recently forayed into Korea and trying to buy out the country's largest tobacco company because he thinks the stock is undervalued. Other 'experts' have also noted that the Korean market is undervalued relative to Japan and Hong Kong. Just today, the Wall Street Journal Asia had an article saying Posco could become the target of the next activist looking to prop up the shares. The company owns many ancillary businesses which can be divested. It has no debt and a nice pile of cash also. And its dividend could be increased significantly.

This would have been a nice pick up in the mid $50 range before they started moving amidst word of Mittal's bid for Arcelor. But my brother and I might take an initial position at these levels.

That's all for now.
Ali.

2 comments:

Moose said...

I agree with everything my bro says here except HD. I'm fiercly battling my brother on whether HD is a good value play here. Although they are diversifying out of the DIY market, I continue to see a risk with the stock, they are cyclical and they will be hit by a slowdown sooner or later. They are superbly managed, which would be the only reason I would consider this particular stock in a cyclical sector. I'm trying to encourage my brother to find more detail on why Buffet got in on this one... :)

Tony said...

Ali,
I gotta say that I like your HD pick here. It is moving in a narrowing channel which means it should break out -- bullish if it passes $43 and bearish if it falls below $38. This channel is 2 years in the making so it is a strong indication. The short term signs are all bukkish so I think it has a good chance of breaking to the upside..................Tony