Here's a one page summary of leading stories from this weekend's (August 5) Barron's (paid sub. req.), noting stocks to watch for Monday morning when the market opens and brief comments on the Barron's articles. Note: clicking on a stock ticker pulls up opinion, analysis and a quote for that stock; clicking on a headline takes you to the full Barron's article (paid sub. req'd.). You can get this summary emailed to you every week by signing up here.
Aussie Upstart By Leslie P. Norton
Highlighted companies: Macquarie Global Infrastructure Utilities & Dividend Income (MFD), Macquarie Global Infrastructure Total Return (MGU), and Macquarie Infrastructure Co. (MIC)
Summary: Allan Moss' Australian Macquarie Bank has managed to acquire some of the most recognized American infrastructure assets, including One California Plaza in Los Angeles, Wells Fargo Center in Denver, the Chicago Skyway and Indiana Toll Road, becoming in the process the largest foreign investor in U.S. real estate. Macquarie earnings have more than tripled in the past five years, and the investment bank currently sports a market cap of $11.5. Since its Australian IPO in 1996, the stock has returned more than 1400%. Macquirie funds that invest in real estate and infrastructure have attracted a great deal of international interest; three are traded in the US (listed above). Australia's mandatory 9% salary deduction for retirement contributes greatly to Macquarie's success, providing constant asset inflows, but Macquarie is now facing greater domestic competition for infrastructure investment and higher international interest rates raise costs for its highly leveraged deals.
Quick comment: As noted, there are very few publicly-traded infrastructure plays, so given Macquarie's liquidity and considerable 'seed assets,' the funds and Australian-listed stock tend to attract investors who are in the long haul.
Putting It Down on Paper By Kopin Tan
Highlighted companies: International Paper (IP), Weyerhauser (WY)
Summary: Investors 'stopped buying paper stocks a lot soon than consumers stopped buying paper.' With booming demand for paper in emerging markets and stable usage in the U.S., International Paper has shaken off the soaring costs of its raw materials (timber, chemicals, oil) to post its strongest second-quarter sales in six years. Yet the stock has barely moved in six years. IP, one of the largest landowners in the U.S., has been selling millions of acres of forestland as it removes itself from the logging business to concentrate on its core paper and packaging business. Proceeds from the sales are now expected to reach $11 billion, allowing share buybacks, debt reductions, and investment in corporate projects. Meanwhile, predictions of paper's demise due to increased computer use have simply not panned out, and the industry's consolidation and shrunken overcapacity have permitted constant raising of prices. There's a good deal of speculation that competitor Weyerhaeuser will sell its printing paper business, further removing capacity from the sector. Bottom line: Expect earnings surprises from IP, a possible dividend hike, and a price reaching 40.
Quick comment: IP's sale of its timberlands would remove the attractive element of this asset for a business of IP's sort -- forestry-related industries tends to have low correlation to the broader economy. So IP, as noted by Barron's, will be very much exposed to a general downturn of the U.S. economy. Can the fact that the company derives 20% of its revenue from outside North America compensate for that?
The Corn Conundrum By Bill Alpert
Highlighted companies: Archer-Daniels-Midland Co. (ADM), Pacific Ethanol Inc. (PEIX), VeraSun Energy Corp. (VSE), Aventine Renewable Energy Holdings Inc. (AVR), Bunge (BG)
Summary: Surging demand for ethanol, joined with bountiful harvests that have kept corn prices low, have driven investor enthusiasm for ethanol stocks such as Archer Daniels Midland and Pacific Ethanol. Recent IPOs of ethanol companies VeraSun and Aventine Renewable Energy, meanwhile, have raised more than $700 million in total. Some industry executives speculate that ethanol use could triple in the next year, but there's an important limitation to consider: 'America's entire corn crop would satisfy just 12% of gasoline consumption, leaving no corn to feed livestock and humans. So there just won't be enough corn for corn ethanol to grow from a fuel additive into a large-scale substitute for fossil fuel.' While other crops can make motor fuel, corn is the best-proven technology, and the Energy Policy Act of 2005's Renewable Fuels Standard stipulates that gasoline blenders must raise the amount of ethanol mixed into gasoline from 4 billion gallons last year to 7.5 billion gallons by 2012 (about 5% of expected gasoline consumption in that year). Ethanol pure-play Pacific Ethanol has an enterprise value that's twice the replacement cost of the plants that it's building. It's a similar story for VeraSun, the number 2 national ethanol producer behind ADM, whose enterprise value is twice the replacement cost of its planned refining capacity. Aventine stock also appears considerably overvalued in relation to its refinery replacement cost. Bottom line for the whole industry: 'Unless gasoline prices continue their steep rise, tight corn supplies will clamp down on the huge crush spreads [difference between corn price and ethanol price] that started the stampede to invest in ethanol refineries.'
Quick comment: Market Participant, another critic of the ethanol stock craze, explains what this industry lacks from a growth investor's perspective. See more on ethanol stocks, and for those with technical interests, here's Everything You Wanted To Know About Ethanol Production But Were Afraid To Ask.
Japan's Aging Rally By Leslie P. Norton
Highlighted companies: Hitachi (HIT), Mitsubishi (OTCPK:MSBHY), Nintendo (OTCPK:NTDOY)
Summary: Veteran Japan strategist Jonathan Allum of KBC Financial Products (London) says we are not witnessing another false dawn for the Nikkei. Instead, "expectations and reality are much more correctly aligned." The Topix 1st section is currently valued about 10% below his year-end target of 1,700. Allum is bullish short-term: "I think we've seen the bottom in the markets for the current year and are trudging back up the slope." However, he thinks we've experienced the best part of the great Japanese rally and expects the expansion cycle to top out in '07. Allum still seems optimistic long-term, citing capex increases and potential gains in productivity. He currently recommends larger-cap value over smaller caps and is eyeing oversold domestic demand plays while avoiding the more defensive areas.
Quick comment: Good timing and breadth and depth of Q&A in Norton's interview of Allum, which could spark some foreign investor interest in Japan again. Expect volatility to continue over summer and remember the big political election in September. Allum's interview contrasts sharply with Dr. Enzio von Pfeil's, "Signs of an Impending Japanese Crash Abound." Allum's other stock picks include: Toshiba Plant Systems & Services (JP: 1983), Toshiba Machine (JP: 6104), Kadokawa (JP: 9477), and Token (JP: 1766).
How to Fix a Busted Icon By Jay Palmer
Highlighted companies: Dell Inc. (DELL)
Summary: Something is seriously wrong at Dell, which has seen its stock collapse 45% in the past year, and recently pre-announced a huge earnings miss (30% short of expectations) for this quarter. Barron's believes Dell -- the top PC maker worldwide and #2 in servers -- must take four bold steps to redeem itself: (1) Stop Denying Problems: the most recent earnings shortfall should have been acknowledged much earlier, and it might be time for CEO Kevin Rollins to go; (2) Freshen Up the Operating Model: Dell's built-to order production and direct sales no longer provide a competitive advantage, as they've been broadly copied -- consider adopting Apple's store model; (3) Seize the High Ground in Product Design: Bring design innovation and 'marketing sizzle' to the brand; (4) Restore Customer Confidence: inadequate customer service needs more than the $100 million Dell recently allocated to its improvement.
Quick comment: Carl Howe notes that Dell marketed its efficiency for years, but that Apple could now teach it a thing or two in that department as well. 'Superinvestor' Wallace Weitz is buying Dell at these levels, citing 'its cost structure, balance sheet, returns on investment and strong management [that] provide the company with significant and sustainable competitive advantages.' Dell has managed to gain PC market share during the past quarter. Read Dell's latest conference call transcript.
Silver's Golden Moment By Andrew Bary
Highlighted companies: Silver ETF (SLV), Apex Silver (SIL), Coeur d'Alene Mines (CDE), Pan American Silver (PAAS), Hecla Mining (HL), Silver Standard (SSRI), Silver Wheaton (SLW)
Summary: Silver hit a 23-year high recently and has begun emerging from its longtime status as 'gold's poorer cousin.' Now at $12/oz., silver pricing has benefited from its traditional role as a hedge against inflation and from the new iShares Silver Trust ETF, which now holds $1.2 billion of silver -- the equivalent of 15% of annual mine production. Meanwhile, demand from the photography industry, which accounted for 25% of silver use last year, is falling fast amidst the digital photo boom. Given the fact that many large silver miners are in politically unstable regions such as Bolivia and Peru, many prefer buying the silver ETF -- one share equals ten ounces of silver. Individual silver companies are rather small -- the top six combined have a market cap of just $8 billion -- and tend to be volatile and highly valued as opposed to other mining companies. Apex Silver, Silver Standard Resources, and the largest silver stock -- Silver Wheaton -- are actually not producing any silver right now. Silver Wheaton is a Goldcorp (GG) spinoff that owns the rights to future silver production from that mining giant. Pan American Silver 'may be the best mining play because the company's silver output has risen every year for the past decade' and is reducing its exposure to Peru. Apex is 'hostage to the nationalist [Bolivian] government of Evo Morales,' and Coeur d'Alene is also risky because of its high percentage of Bolivian reserves.
Quick comment: The silver ETF was controversial when it launched, as many silver buyers were concerned it would artificially drive up the commodity price, but some now believe that the industrial market for the metal is just no longer there, and all price action is influenced by metals investing. London-based metals expert Roland Watson asks if the old gold/silver ratio of 16 is still alive today. Roger Nusbaum discusses taking risks with junior miners.
Chips Are Up for WiFi By Bill Alpert
Highlighted companies: Intel (INTC), Broadcom (BRCM), Texas Instruments (TXN), Atheros Communications (ATHR)
Summary: While the semiconductor sector has generally disappointed this year, WiFi specialist Atheros saw revenues climb 70% this quarter, to $73 million. Atheros has managed to stay nimble in the fast-moving WiFi space where the giants couldn't, while maintaining cost-competitive products. The company is well-positioned to take advantage of WiFi's expansion beyond PCs and into consumer electronics and longer-range WiMax technology. It trades at 18.5 times its expected earnings for next year, less than the WiFi market's probable growth rate.
Quick comment: Other smaller companies competing for share in the emerging 802.11n WiFi standard are Metalink (OTCQB:MTLK) and Marvell (MRVL) -- Shlomi Cohen says there's room for everyone. Networking analyst Paul Callahan finds Atheros impressive, but sees Marvell (MRVL) breathing down its neck. He also notes that Atheros is winning handsets in Asia. Read the company's latest conference call transcript for more insight on its business.
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