Seeking Alpha

Chuck Walston's  Instablog

Chuck Walston
Send Message
I am a graduate of the U.S Army Ranger school and a former member of the 1st Ranger Battalion and The Old Guard (U.S Army Honor Guard.) I am currently employed as a law enforcement officer in California. I am a retail investor with approximately a decade of experience in stocks and ETFs. The... More
View Chuck Walston's Instablogs on:
  • Citigroup: Deeply Undervalued. Any Catalyst Should Result In Outsized Gains

    CITIGROUP INC

    By practically every measurement, Citigroup Inc (NYSE:C) is an undervalued stock. With a PEG of 1.2 and a forward PE of 9.9, the company is cheaper than most competitors. Boasting a one year EPS growth rate exceeding 70%, it is difficult to fathom the lack of investor interest in the company.

    Ironically, the recent failure by Citigroup of the Federal Reserve's annual stress tests may prove a profitable development for value investors. Citigroup trades for well over 80% of its tangible book value of $55 and for ten times projected 2014 profits. Since the Fed's actions prevent the company from increasing dividends or engaging in share buyback programs, it is reasonable to believe the company's book value will increase relative to its current stock price.

    It should be noted, Citigroup has a diversity lacking in many U.S. competitors that could prove advantageous in the future: half of the company's revenues come from overseas operations.

    The recent revelation of fraudulent loans in Citigroup's Mexico unit, Banamex, resulting in up to $400 million in losses, has not been helpful to investors. However, it is widely speculated that the investigation may serve as an impetus for Citibank's divestiture of the troubling operations in Mexico. Should the speculation lead to reality, a sale of Banamex could become the catalyst that finally leads to an appreciation in the stock price.

    Among the last to repay its bailout money in full, Citi has struggled with issues related to management and strategy, apparently weighed down by weakness in key business areas such as mortgages and fixed-income trading.

    Earlier this year, I made a very profitable trade in Bank of America (NYSE:BAC) when that company had a similarly depressed valuation.

    Bank of America now trades at 1.3 times tangible book value, JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) for 1.5 and two times TBV, respectively.

    In my estimation, Citigroup's share price must increase at some point to a value near that of competitor's stock.

    While an investment in Citigroup does not meet my investment style, I would not question the investor that deemed Citi a worthwhile value investment.

    I will be watching Citigroup for any catalyst that could lead to a profitable trade, including technical signals pointing to upward movement in the shares.

    For additional information regarding C, use this link.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: C, long-ideas
    Apr 09 3:18 AM | Link | 1 Comment
  • Thirteen Reasons I Am Investing In Apple!

    THE NEW VERSION OF iOS7 AND ITS IMPLICATIONS

    Apple (NASDAQ:AAPL) just rolled out the latest update to iOS7. While many of the changes are rather mundane, an important aspect of the new version of iOS7 includes an improvement to its iBeacon software, enabling iPhones and iPads to utilize Bluetooth connections to seek out beacons and send and receive signals even when the devices are shut off. If the iPhone owner has an app installed, the phone will receive messages from the retailer once the device is within a certain distance of a participating business.

    Previously an iPhone owner had to open each app as he entered a store. Now, as shopper walks down an aisle, the iPhone will "advise" the customer of needed items or merchandise on sale. Utilizing Touch ID the iPhone becomes a mobile payment device.

    Forrester Research predicts Americans will spend $90 billion through their phones and tablets by 2017. Apple is positioning the company through iBeacon and Touch ID to take advantage of this lucrative arena, and even a small fraction of that market would be represent serve as a significant catalyst for Apple's revenues.

    Hardware, however, is not the only ace up Tim Cook's sleeve in this quest for market share. A recent study of consumer habits covering the period from Black Friday through Christmas day indicates iPhone and iPad users purchased five times as much merchandise as Android owners. This in spite of the fact that up to 80% of smartphone owners carry Android products.

    CARPLAY

    The new iOS7 update also links the iPhone to the CarPlay. Last week Apple launched CarPlay, an automotive version of iOS. The CarPlay system was revealed at the Geneva Motor Show and currently is operative in the Ferrari, Mercedes-Benz and Volvo vehicle lines. In 2014 CarPlay will be available in Honda, Hyundai and Jaguar vehicles and will expand into BMW, Chevrolet, Ford, Kia Land Rover Mitsubishi, Nissan, Opel, Peugeot-Citroen, Subaru, Suzuki and Toyota models in the near future. CarPlay will serve, once again, to expand the Apple ecosystem and provide an additional source of revenue.

    DEVELOPMENTS IN iWatch

    I must admit I am growing weary of the endless conjecture concerning upcoming Apple products. I believe collectively the articles concerning the iPhone have claimed the new product will do everything except babysit for married couples and provide pheromones for the singles.

    In the case of the iWatch, however, there is some concrete evidence of Apple's intent, and ability, to develop a blockbuster product. Marcelo Lanini Lamego, began working at Apple in January. Lamego is the former CTO of Cercador a company that focuses on the development of "noninvasive monitoring technologies." Lamego holds 70 patents related to noninvasive medical advancements.

    Lamego also sojourned at Masimo, where he was instrumental in the development of "a noninvasive monitoring platform enabling the assessment of multiple blood constituents and physiologic parameters that previously required invasive or complicated procedures."

    Apple hired another Masimo employee, Michael O'Reilly, last summer.

    In late 2013, Apple hired Nima Ferdosi an algorithms architect for embedded bio and motion sensors and Ravi Narasimhan, both former employees of Vital Connect.

    These four, along with other known experts in the field of noninvasive monitoring technologies working for Apple, lend credence to the notion that something great is afoot at the company in terms of a potential iWatch.

    NEW STRATEGIES IN ASIA

    Apple is beginning to make inroads in India, the second largest mobile market the world. Apple is moving forward with plans to open a large number of strategically placed stores in major population centers in an effort to gain greater access to this potentially lucrative market. Apple's strategy relies on providing devices with lower price points. For example, the iPhone 4 and iPhone 4s are now sold in India and other emerging markets in an effort to provide a relatively inexpensive Apple alternative to consumers with less disposable income. Apple is a targeting higher income neighborhoods as well as locations with large student populations. Although Apple's market share in India is still a fraction of competitors, the company doubled sales in the last year.

    Apple bulls point to the company's agreement with China Mobile as the means by which Apple will gain smartphone market share. China Mobile had 1.4 million iPhone 5S units on hand in mid- January. Analysts predict Apple could sell 17 million phones through China Mobile in the coming year.

    If analysts' prognostications are correct, and assuming China Mobile sells iPhones at the non-subsidized price of $525, 17 million handsets could raise revenue estimates for Apple by 5 percent in 2014.

    THE NEW GALAXY S5

    The recent release of the Galaxy S5 was greeted with favorable reviews. In contrast, The Apple 5s was seen as lacking in several areas. The highlights of one review are as follows:

    The S5 has a

    · Larger, better display

    · More powerful camera

    · Longer battery life

    · It is water resistant

    · Provides better security

    · Has a heart rate monitor and health features.

    Forgive me for my skepticism, but is this all Android has to trump the upcoming iPhone? While I do not pretend to know what Apple will offer, it strains the imagination to believe Apple can not provide a significantly better product.

    WHILE THE PC MARKET IS SUFFERING DOUBLE DIGIT DECLINES, MAC PURCHASES SOAR

    While the global PC market declined significantly over the last two years. In 2013, global PC sales suffered a 10% drop, the worst decline in the market's history. This setback followed a previous record decline of 3.9% in 2012. The 6.9% drop in the fourth quarter marked the seventh consecutive quarterly loss in PC shipments.

    Meanwhile, the Mac share of the domestic market increased by 28.5 percent. It is my position that the increase in Mac sales is the beginning of a market shift created by consumer's embrace of other Apple products, primarily the iPad and iPhone.

    APPLE'S PRICE SKIMMING STRATEGY IS THRASHING THE COMPETITION

    Apple bears and concerned investors point to the company's relatively small and sometimes shrinking share of the market for smart phones and tablets. There is evidence, however, that the Apple's strategy is designed to maximize profits without need for controlling more than a fraction of a given market segment.

    While Microsoft PC makers sell their products at an average price of $311, Apple's ASP stands at $1300. Meanwhile iPhones command an average price of $650. In fact, Apple's iPhone sales profit exceeded the combined sales of LG, Nokia, Huawei, Lenovo, Motorola and the sales of Samsung's entire mobile unit (the mobile unit includes PCs, netbooks and tablets).

    The latest data from Canaccord Genuity estimates Apple garnered 56% of the operating profits for feature and smartphones in the third quarter of 2013. With the exception of Sony, every other competitor lost money in that quarter. Apple does not require an increasing share of the global market to continue to be profitable in this arena.

    THE APPSTORE IS GATHERING STEAM IN A HIGH MARGIN BUSINESS

    While Apple's iPhone is currently thrashing competitors in terms of profitability, the company's AppStore is beginning to provide significant revenue. From its genesis in June of 2008, the AppStore has contributed $21 billion in sales. In December alone, the AppStore rang up $1 billion in sales, and this in a very high margin business.

    Apple's total iTunes business is believed to be nearly half the size of Google's search business. Recent estimates place Apple's gross revenues for Apple's iTunes, Software and Services group at $7 billion per quarter.

    APPLE'S POSITION AS THE TOP BRAND

    For the sixth consecutive year, Apple topped Fortune Magazine's list of most admired companies. For the first time in this century, The Coca-Cola Company (NYSE:KO), toppled by Apple, does not stand at the top of Interbrand's list of best global brands. While Apple basks in the accolades of Interbrand and Fortune magazine, the company also boasts fervent, devoted followers keen to own the next Apple product. It is my opinion that most owners of Android and Microsoft products continue to purchase particular products due to their familiarity with the operating system or because of price points. On the other hand, many Apple customers would refuse to consider any products other than Apple's.

    In a recent survey of iPhone owners, 78 percent of respondents stated they "couldn't imagine having another type of phone now." Sixty percent of respondents admitted to "blind loyalty" regarding Apple iPhones, while 54 percent noted their current phone was not the first iPhone they had owned. This despite the fact that only half of the respondents were impressed with iPhones capabilities.

    Apple has a "cool factor" that drives many, especially the young, to purchase Apple products at what most would consider premium prices. In addition, this phenomenon is not confined to the United States or the Western world.

    APPLE'S INROADS IN EDUCATION

    Apparently, college football coaches and their teams use Apple products extensively. There are now colleges that require incoming freshmen own an iPad to enroll and attend classes.

    Entire school districts are embracing the iPad as the new paradigm in education. From the Netherlands to Los Angeles, Apple has agreements with school districts to provide iPads preloaded with educational apps for teachers and students.

    In an Idaho school district transitioning to iPads, a school principal was quoted as claiming savings associated with reduced paper costs were substantial.

    It has been noted for some time, that the introduction of iPads into school systems was reducing sales of computers; however, since almost all school systems employed PCs, the primary loss has come at the hands of Apple's competitors.

    In the third quarter of last year, Apple recorded over $1 billion in education sales for the first time, and iPads held a 94% tablet market share in schools.

    For me, this paints an ominous future for Apple's competitors. As Apple gains traction in schools across the country, those in the youngest age cohort grow accustomed to Apple products and the Apple ecosystem. It is a very short leap of faith to forecast greater sales for Apple products as those students mature into independent consumers. While this trend may not translate into short term profit (excluding the sales to educational institutions), it could certainly result in a great deal of long-term support for the stock price, as consumers transition from one Apple product to another throughout their life spans.

    APPLE'S EXPANDING POSITION IN GOVERNMENT AND COMMERCE

    Apple is also making substantial inroads into the business world and government sector. The most recent estimates indicate 94% of Fortune 500 companies are either using or testing iPads. It is estimated that Apple will garner 11% of global and government spending on tablets and computers. This compares favorably to Apple's 1% share in 2009 and 8% share in 2012. Oftentimes, corporation's decisions to purchase Apple products follow initiatives in which employees choose the devices they prefer for business activities. A few examples of iOS device penetration into the enterprise market:

    · Pfizer's 90,000 employees will soon transition from Blackberry devices to Android and Apple products.

    · Google, a staunch rival of Apple, recently revealed it boasts a fleet of approximately 43,000 Macs.

    · A recent report by Intermedia, gathered from a pool of 700,000 medium and small business users, determined that 76% of all business activations through the first 10 months of 2013 were of iOS devices.

    STOCK BUYBACKS

    Perhaps pressured by activist investor Carl Icahn, Apple took advantage of a recent dip in the company's stock price to purchase $14 billion in shares. This came on the heels of previous stock buyback programs that resulted in a total of $40 billion worth of shares removed from the company's float during the last year.

    APPLE'S INCREASED R&D EXPENDITURES

    There is a perception that Apple has been ahead of the competition for so long that additional blockbuster products are required to maintain the company's momentum. The argument boils down to a belief that iPhone and iPad can only be improved to a given extent. This borders on a claim that science has reached a position where continued advancements in consumer electronics should not be expected, and that is patently absurd.

    Apple has tremendous resources, and although there is no guarantee that the company will father the next great product, there is ample reason to believe Apple is the leader in the quest for the next-great- thing. I also believe many of the above listed initiatives will serve to bolster Apple's share price.

    When Apple was engineering the iPhone, the company spent $1.25 billion in Research and Development over a two-year period. Apple spent $1.33 billion in R&D in the last quarter alone. There are few corporations that rival Apple's resources. While money alone cannot assure Apple's success, it should be noted that Apple has a certain mystique that often attracts the best and brightest minds.

    (To further enable an investigation of Apple, I offer links to Apple's web site and to a number of recent earning's reports.)

    Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: AAPL, long-ideas
    Mar 13 12:18 PM | Link | Comment!
  • A Juicy Dividend And Huge Growth. But What Are The Risks?

    Late this summer, I was running a screen on high dividend stocks when I stumbled across Hi-Crush Partners LP (NYSE:HCLP). HCLP is involved in the business of supplying fracking sand to oil companies. I thought to myself, "What the heck is fracking sand?" I conducted an internet search for fracking sand; the first article I found had a title akin to, "Fracking Sand: The New Gold"

    All sorts of thoughts began to waltz through my head.

    "Sand is gold?!"

    I've got a nice stream that courses across my property, and the whole channel it cuts through is several feet deep in sand. "Sand! It's gold now! Sand is gold!" I ran a quick check of gold prices which were somewhere around eleventeen hundred dollars an ounce. I rushed to my window and looked down at our shimmering little stream in the distance and gasped, "There must be thousands of pounds of sand down there!"

    I ran into my garage and grabbed one of the shovels hanging on the wall, started my truck and was backing out of my garage headed towards my new sand mine. Just as I was backing out, my wife pulled up in her car.

    She bent down so she could see me through the passenger's window. "Where ya going?" she asked in her pleasant, sweet little way.

    "The stream! The stream! There's gold in our stream!"

    "What! There's gold in our stream?!" My wife looked confused.

    "Yeah, fracking sand is the new gold!"

    (If you've read my articles, you know my wife has several post-graduate degrees. One of my sons is in pre-med and another is studying to be an Astrophysicist. I have two kids in their mid-twenties that aren't in college because one is running a bank and another a large business. If my house was a shed, I would be the dullest tool stored within.)

    My wife rolled her eyes and suddenly appeared exhausted. "Honey, what makes you think the dirt in our creek bed is fracking sand?"

    WHAT THE HECK IS FRACKING SAND?

    Obviously, fracking sand is used in oil drilling operations. Fracking sand is a durable, rounded sand containing high-purity quartz. The sand's aforementioned characteristics serve to prevent fractured rock from collapsing back onto itself while at the same time allowing liquids to pass through and flow into a well. Ceramic beads, sintered bauxite and small aluminum beads are used as substitutes for fracking sand.

    Fracking sand ranges in size from 0.1 millimeters to over 2 millimeters in diameter; however, most of the fracking sand consumed by drillers is between 0.4 and 0.87 millimeters in size.

    It should be noted that operations are largely suspended during periods when freezing temperatures prevail due to certain processes required in the production of the product.

    In other words, fracking sand can't be found just anywhere, like in the stream bed flowing through the back of our property.

    (Information for this portion of my article was gleaned from Geology.com What is Frac Sand? For more in depth information regarding the subject, refer to that article.

    There is controversy concerning the health effects surrounding the mining and use of fracking sand. I will not pursue that path aside from informing investors that those concerns exist and could conceivably affect your investment. However, point/counter-point articles addressing those concerns can be found in two Forbe's aricles: ProPublica's Hysteria over Fracking Sand and Chemicals and Why Sand Is The Latest Front On The War On Fracking (Yes, Sand) and in New Republics Scott Walker's Sand Grab: Wisconsin Wants a Piece of the Fracking Boom, No matter who Gets Hurt.

    Hi-Crush Partners LP

    As of New Year's day, HCLP last close was 37.98. HCLP provides a yield of 5.16% with a dividend coverage of 7.3. Thomson Reuters predicts a mean 12 month target price of $32.90. The tables below provide a snapshot of the company's fundamentals and earnings.

    HCLP EARNINGS
    PEGTTM P/EFWD P/EEPS GROWTHREV. GROWTH
    .516.414.4134.53%47.7%
    HCLP FUNDAMENTALS
    NETCURRENTQUICKROAROEROI
    46.88%4.53.325.1042.4126.54

    Undeniably impressive figures.

    Here is a brief description of HCLP as provided in their most recent 10Q report.

    We are a pure play, low-cost, domestic producer and supplier of premium monocrystalline sand, a specialized mineral that is used as a proppant to enhance the recovery rates of hydrocarbons from oil and natural gas wells. Our reserves consist of "Northern White" sand, a resource existing predominately in Wisconsin and limited portions of the upper Midwest region of the United States, which is highly valued as a preferred proppant because it exceeds all American Petroleum Institute ("API") specifications.

    So far so good, but as I read further into the companies' 10Q report, I found reason to pause. Read the excerpt below.

    A substantial amount of our revenue is generated from three customers. One of these customers is not investment grade. Our customers are generally pressure pumping service providers. This concentration of counterparties operating in a single industry may increase our overall exposure to credit risk in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions. If a customer defaults or if any of our contracts expires in accordance with its terms, and we are unable to renew or replace these contracts, our gross profit and cash flows, and our ability to make cash distributions to our unitholders may be adversely affected.

    In other words, HCLP relies on three customers for the bulk of their business.

    Give me just a minute guys. I have to conduct a complex arithmetical analysis known only to those who have provided two or more contributions to Seeking Alpha.

    (This little piggy went to market,

    This little piggy stayed home,

    This little piggy had roast beef,

    This little pi…uh-oh!)

    HCLP didn't pass the complex analysis known as the This Little Piggy customer base test. As a matter of fact, I couldn't even make it through the pair of piggies that dine on their fellow barnyard buddies. I have a ridiculously high standard in that I require most companies in my portfolio to serve more customers than a baby has toes on one foot.

    I had to ask myself, "What can happen to HCLP stock if they lose a customer?"

    Can HCLP lose customers or is fracking sand of such high worth that oil exploration outfits are knocking on their door and begging them for more product? Drill deeper into their 10Q and you can find some insight into that subject. An excerpt from the latest 10Q report follows:

    In May 2012, Hi-Crush Operating LLC, a subsidiary of the Partnership, entered into a supply agreement for frac sand with Baker Hughes Oilfield Operations, Inc. ("Baker Hughes"). On September 19, 2012, Baker Hughes provided notice that it was terminating the contract and on November 12, 2012, Hi-Crush Operating LLC formally terminated the supply agreement and filed suit in the State District Court of Harris County, Texas. On October 8, 2013, Hi-Crush Operating LLC entered into a settlement agreement with Baker Hughes pursuant to which Hi-Crush Operating LLC and Baker Hughes agreed to jointly dismiss the lawsuit between the parties and, in connection with the settlement, the parties entered into a six-year supply agreement that requires Baker Hughes to purchase minimum volumes of frac sand each month.

    Here are my concerns:

    #1 There are several substitutes for fracking sand: Ceramic beads, sintered bauxite and small aluminum beads.

    #2 Fracking sand operations are largely curtailed when temperatures dip below freezing. HCLP mining operations are conducted in Wisconsin.

    #3. There are health concerns surrounding the production and use of fracking sands.

    #4 Considering the high demand for fracking sand and the concerns listed above, can a competitor provide a product that adversely affects HCLP profits?

    #5 HCLP relies on three customers for the bulk of their sales. In the past, one of those customers and HCLP had a major conflict which resulted in the termination of their contract.

    I can understand how others would find HCLP a compelling stock. For those that purchase HCLP, I concede that it has the possibility of increasing greatly in value. I concluded, however, that HCLP would not appear on my buy list.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Jan 03 2:14 PM | Link | 3 Comments
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.