Danny Furman's  Instablog

 I'd like to hear why anyone in their right mind still rents movies from Blockbuster or another brick and mortar store. Perhaps you feel like a good samaritan helping the good folks at Blockbuster (BBI) pay their crippling leases or functionless employees (congrats for getting a job, but seriously...), but in doing so you pay 2 to 20 times market value for each rental, depending on rental frequency, gasoline consumed, etc. 

I have a Netflix membership and see no better option for anyone who watches movies on their computer or somewhat regularly. For those less computer savvy and occasional renters there is still a far better option than driving out of your way to pay Blockbuster $5 a pop. Redbox (CSTR) $1 DVD rental vending machines are no longer exclusive to Wal Mart (WMT) and select grocery store locations. CSTR's latest quarterly report describes recent expansion into 7 Eleven stores, gas stations and other high traffic locations, with expected future growth to many times the current number of units.

Why, then, is CSTR tanking to levels only briefly seen since March? Hollywood shadiness, of course! We Californians have high living standards and no work ethic, so don't count anything out when it comes to the creme de la creme (de la merde) maintaining their lifestyles. Universal Studios and Time Warner don't allow Redbox to rent their movies until they've been available for retail purchase, or rental at Blockbuster, for a month. This entirely unethical practice has persisted for over a year and Redbox has still performed well, however the lack of a resolution increases uncertainty about future growth and has invited an abundance of short selling (finance.aol.com/company/coinstar-inc/cst...;

I believe the movie studios are idiotic for playing their little game and are forgoing serious profits. People who buy movies are going to buy them regardless of whether or not they rent them first. I don't buy movies and there is no movie I would ever buy because I'd have to wait to see it otherwise. Movies are cheap entertainment to me, not collectibles, life lessons or even re-watchable in all but very few cases. My girlfriend, on the other hand, buys every movie her favorite actors are in and anything else she likes a lot after watching it. We may be fairly polar on the spectrum of movie watchers, however I'm confident that most people are and treat movies like either one of us. Therefore, Hollywood doesn't sell more movies by disallowing cheap rental of new releases (I ain't buyin' squat), it merely hides most of its inventory from movie buyers (if my girlfriend didn't use Netflix she would only by her favorite actors). 

My best explanation for the kamikaze abuse of Redbox is that there is a lot of middle management to pay at Time Warner, Universal and Blockbuster and their interests are being served ahead of shareholder's. Lion's Gate recently got $158M for a 5-year distribution agreement with Redbox, so Time Warner and Universal would likely receive deals worth 9 figures annually. And I'm supposed to believe current policies increase sales enough to turn a deal like that down? Sorry.

It would surprise me if government regulators (CSTR has filed lawsuits) don't rule to disallow continuation of the predatory practices taken against Redbox, Time Warner and Universal shareholders, and the American Consumer. Still, my biggest reason for investing in CSTR is that the product offers great value and people would serve themselves to use it over alternatives. Institutional ownership is both extremely high and diverse(data.cnbc.com/quotes/CSTR/tab/8.1) and the company trades for less than annual sales. 
There is significant risk in trying to catch a falling knife, but I think Coinstar is worth a few cuts (and then some).

Disclosure: Long CSTR

Two stocks I have profited from this year and generally follow, URS Corp (URS) and AECOM Tech. (ACM), sold off prior to reporting earnings last Thursday. Both are among the most internationally integrated and rapidly growing engineering and construction services companies. Each beat Q3 FY09 estimates, however ACM guided EPS for FY10 down from expectations, still fairly healthy at $1.90-$2 per share, supported by a backlong 3 times its market cap. Since reporting last Thursday, shares of ACM have rallied from $25 to currently $28+, over 12%. At 14+ times forward earnings, ACM seems fairly priced to me near $28 since it does not pay a dividend.

URS appears to be positioned and priced better than ACM. With similar market caps, URS has over 3 times the backlog and twice ACM's annual sales, not to mention greater earnings. In a day and a half of trading since URS reported, the stock is up from $40 to over $45 per share, still less than 12 times forward earnings.

I was disappointed enough with the outlook for ACM to replace it on my buy radar with other companies in the same sector. Engineering and construction services, as well as the aerospace and defense sectors, will continue to be dominated internationally by firms from The United States. Emerging nations will not chance security or infrastructure projects by using cheaper domestic firms. I consider companies like URS and Tetra Tech (TTEK), which focuses on water and environmental services, the real "multinationals." Companies like Johnson & Johnson (JNJ), while operating worldwide, still depend primarily on the American Consumer and don't have anywhere near the pricing power of a services firm. URS bids on government contracts, which logically assures profitability since a bid in excess of completion costs should never knowingly be made. Household items are easy to reproduce and it is hard to believe the rest of the world, when faced with 5 identical items with 5 vastly different price tags, will be as ignorant to generic products as Americans. On the other hand, any company able to undercut URS likely will not be able to do similar work.

While I believe shares of URS should trade near $60, I feel like I missed the boat by not buying a week ago and expect the stock to trade with the overall market in the near future. Of the engineering companies that pay a regular dividend, only Fluor Corp (FLR) appeals to me on a valuation and growth basis. Recent insider selling scared me away from General Dynamics (GD), and Northrop Grumman's (NOC) loss last year makes me skeptical of any contractor heavily dependent on Bush financing. I didn't consider Boeing (BA) because the aeroplane business doesn't excite me. I'm looking for companies that directly make places safer and more efficient, both environmentally and economically. The clearest signs of leadership are recent historic growth and new contracts, both of which make URS and TTEK top choices. In addition to liking FLR, Jacobs Engineering (JEC) made my list.

The only stock I'll discuss here that I own was recently downgraded by Goldman to "sell," meaning their analysis values the company below 12 times FY09 earnings and 9 times earnings for FY10. DYNCORP (DCP) has even reported through Q2 FY10, with net income up over 33% YOY and slightly ahead of estimates. Recent contract wins include up to $375M from AFRICAP and multiple US Air Force contracts. Total backlog is over $6.8B with FY09 sales over $3B and DCP is valued around $900M. The stock currently trades near $16.50 and has traded as high as $22.03 this year, spending most of recent months around $19. Apparently the Goldman downgrade overpowered an earnings beat and rising stock market. I bought right after the sell off on what I considered good news, but perhaps I should have paid up for URS. Regardless, leaders in engineering, construction and aerospace sit alone atop a truly competitive worldwide industry and represent some of the best value in an outrageously priced US stock market.


Disclosure: Long DCP

From the prospectus:

China Integrated Energy is a non-state-owned integrated energy company in China, which is engaged in three business segments, the wholesale distribution of finished oil and heavy oil products, the production and sale of biodiesel and the operation of retail gas stations.

Fundamentally, China Integrated Energy Inc (CBEH) is among my favorite stocks. The Company stands to benefit most certainly from increased Chinese consumer demand for gasoline, as automobile sales in China surpassed the United States earlier this year and have increased YOY each month of 2009. CBEH does own and operate 7 retail gas stations in the Shaanxi province, however the majority of revenues come from the wholesale end of the business.

With at least some of the current industrial activity in China fueled by unsustainable government spending, CBEH faces long term risks, particularly that diminished energy demand can't support recently expanded facilities. A less concrete concern may be the existence of PRC controlled oil and gas giants like PetroChina (PTR) (and their ability to undercut, etc.), however one could suppose a takeover to result in a profitable buyout. Otherwise, the stock looks unmatched based on valuation and growth. 

Guidance for FY09 is $265M+ in revenue and $35M+ in net profit, up 87%+ from FY08. The Company has achieved profitability and growth, top to bottom, every year since FY06. 

CBEH has been on my radar since it was CBEH.OB. When I first bought shares in June, only one other sale of the stock was made that day. Even since being listed on the NASDAQ this summer, there have been several days the stock has traded less than a dozen times. Today has not been one of those days.

This morining, the Company announced that a public offering of 5 million shares is being priced at $5.75/share, an 8% discount from yesterday's close. CBEH traded over $7.50/share for most of early October, then the 5 million share offering was announced and selling ensued. I sold my shares about 6 weeks ago at around $7, due to fear of market weakness (since then the market has gone up and CBEH has not, but I'll gladly take lucky instead of good). 

So how attractive is CBEH now that shareholders have been diluted almost 20%? Simply, more so than ever. 

With 33M shares now outstanding and earnings over $35M, CBEH trades at a P/E near 5.5 with annual revenue and earnings growth of 22%+ and 87%+, respectively. FY09 was no aberration, with earnings for fiscal years 2006-2008 as follows: $5.3M, $8.6M, $18.7M. Best of all, over a million shares have been sold to the public today, with two hours of trading to go. It seems the days of one or two sales and bid/ask spreads of 20% are finally done for CBEH. Now all that's left is attaining a double digit P/E.



Disclosure: No current positions

 Yesterday on CNBC, Jim Rogers insisted that China and Brazil are the only BRIC countries worth investing in. Despite an election conducive to more capitalistic policy, India's ritualistic culture discourages competition, greed and other growth drivers. Russia is still in a newly liberated economic state, in which citizens have so much incentive to enjoy previously denied economic freedoms that they will make frivolous financial decisions until enough time passes or national policy encourages productivity and saving.

China's case is well documented and will not be rehashed here, as I believe Brazil is the only market worth investing in today. Brazil is the only nation with an immediate future of increased production and consumption. Unlike China, Brazil has provided more developed economies things they need, not things they want (sorry if I underestimate the value of your Pokemon cards, Playstations and Beanie Babies). The death of the American consumer only affects Brazil if it is a literal one, meaning Americans no longer need sugar, bananas or oil.

In June I recommended aggressively buying Brazil stocks (seekingalpha.com/article/141333-brazil-n...) after a commodities selloff hit the Brazil ADRs extremely hard (seekingalpha.com/article/145059-brazil-s...). Still today, despite 300%+ YTD gains in CZZ, GOL and others, Brazil is by far the cheapest market out there. SBS, CPL and BRF are still my favorite fundamental ways to play booming consumption and infrastructure growth in South America's largest country, but bargain hunting is what I do and the Brazil ADR market is littered with stocks undervalued relative to international peers. The following are attractive, albeit less popular investments in what I consider the only real bull economy.

1. Brazil Fast Food Corp (BOBS.OB):  Q209 revenues were profitably up 62% YOY. The Company sells Pizza Hut and KFC franchise licenses for $60,000 and collects 5% of total sales from each restaurant. The model is extremely supportive of increased profitability as long as revenue continues to grow. Recent growth is seemingly due to a Brazilian love affair with subpar pizza, but the real story will be The World Cup, The Olympics and millions of tourists averse to trying new food. With volume starting to pick up, this thinly traded stock is as good a candidate as I know to return 100%+ the rest of this year.

2. Navios Maritime Partners (NMM): This high-yielding MLP has been buying ships at bargain prices all year and, unlike many bulk dry shippers, seems to be actually using them. With a yield near 10% and a busy decade of importing and exporting ahead for Brazil, NMM is likely one of a few stocks Peter Schiff wouldn't yell at you for buying. Parent company Navios Maritime (NM) trades at a cheaper P/E and P/B but only yields 4-5%.

3. Braskem (BAK): This may be the stock that has performed the best since Rio de Janeiro was named host of the 2016 Olympics. I've been following BAK, a petrochemical company, for about 6 weeks and kicked myself for not buying at $9.50 when it first hit $11/share. Today it trades near $14/share and is up about 20% in the last week. Q2 was a record quarter with earnings over $2/share and, while Q3 forecasts are less rosy, refined oil consumption in Brazil has nowhere to go but up. I consider BAK a better investment than PBR because it is only dependent on domestic consumption, not international demand for oil. Any market pullbacks will hit BAK hard so this Brazil ADR is one I wouldn't rush into. 

Disclosure: Long SBS

When I began doing stock market research this February, investor sentiment was overwhelmingly bearish. Despite the late 2008 collapse, however, all the negativity from analysts was hard for me to swallow. Based on the most commonly used valuation metrics, stocks were "filthy cheap." Profitable companies, smallcaps in particular, were trading for less than cash, low single digit P/Es and minimal fractions of book value. Additionally, much of my inspiration to commit everything I could to cheap, profitable, growing companies came from watching an extensive interview with Jim Rogers, whose emotionless, fundamental approach has crushed indexes year after year and earned him "arguably the best investor ever" status. More than once in the interview, Mr. Rogers exclaimed (with a wry smile) "crisis begets opportunity."

The progressive change in sentiment during this 50% rally has likely been seen as comically (and profitably) predictable to many technical experts and market historians. Bullish sentiment is higher now than it was in April or May, when a +5% week was the norm for worldwide indexes. In fact, August 2009 investor confidence is higher than any reading since October 2007 (seekingalpha.com/article/154817-bullish-...), just before a monumental decline.

Of the many things I've learned by immersing myself in the world of equities, none has impacted my thinking more than the realization that greed and fear drive financial markets. "Contrarian thinking" has little to do with countering trends, fundamentals or even general sentiment. It simply requires skepticism and the absence of emotion in decision-making. All that matters is buying low and selling high, which is apparently a more difficult concept for some to grasp than others.

Dr. Larry Kudlow (multiple Phds, including: Cheerleadology, Counter-argument Dismissology and King Dollarology) recently admitted that his V-shaped recovery theory is discouraged by continually worsening unemployment. While it is easy to understand that employment is a lagging indicator, it may be the most important one. Hiring can't be done until economies improve, however it must be done when they do.

Humility from such a cartoonishly boisterous character really made me scratch my head. After some thought, I came to the following conclusion: Individual companies that are recovering, have recovered or never struggled recently are currently hiring aggressively. A significant percentage of any investment is made in the people at a particular firm and human capital is currently extremely cheap in the US. For months, analysts have been screaming from the rooftops about takeover opportunities in internet technology and biotech. Just like underfunded businesses represent buying opportunities, so too do underfunded intelligence, skills and work ethic. Jobs, especially high paying ones, are scarce and qualified workers are desperate.

In screening stocks since my Dr. K assisted revelation, I am placing significant emphasis on company job listings. This may be "old hat" to many investors, but current conditions dictate that few companies are hiring while conditions are ideal for doing so. Evaluating smaller companies in this way is much easier than doing so with members of the DJIA, but sufficient research allows for comparisons of quality and quantity of available jobs at any number of similar companies, regardless of size. This is very telling for investors seeking growth, and information is easily accessed on corporate websites.

As always, I look for extraordinarily cheap companies that are profitable and growing. Adding a hiring metric limits candidates further, but the last two stocks I've bought shares of satisfy my stingy requirements:

Versar Inc (VSR): Versar is an international professional services company specializing in homeland defense, infrastructure and management services. The Company is a worldwide leader in facilities design and management involving chemically and biologically sensitive materials. Versar doubled annual revenues to $115M from 2006 to 2008 and is earning construction opportunities in additional fields thanks to a strong relationship with the US Government and successful efforts in Iraq and Afghanistan. VSR is a $35M company with a trailing P/E of 12 and was 14th on Fortune Small Business' FSB 100 list (seekingalpha.com/article/149185-fsb-s-li...). Versar has over 40 career openings in the US, mostly technical and management positions. Jacob's Engineering (JEC), AECOM (ACM) and URS all started somewhere...

BSQUARE (BSQR): BSQUARE provides software and engineering services in the smart device market.  The majority of revenue comes from sales of Microsoft Windows CE and Embedded software, with TestQuest Pro services also contributing significantly. BSQR supports Google's (GOOG) Android platform, on which many of China's 3G phones will operate and T Mobile recently introduced in the US. The Company provides services to enhance system functionality and efficiency to retailers, hospitals, military divisions and other businesses with smart device networks. BSQR has grown revenues steadily over the last 5 years and operated profitably since FY2007. First half FY2009 revenues are up profitably YOY and a collaboration with Coca-Cola (KO), in which BSQR will develop software for a vending machine capable of dispensing 100+ different drinks, was recently announced. The Company is valued at $23M, has $11.8M in cash (plus $7.7M in AR, including $4.1M from Ford (F)) and is currently looking to hire dozens of software engineers.

My picks may be too speculative for some, but the aforementioned companies are growing, profitable and capitalizing on a favorable labor market. 

Disclosure: Long BSQR, VSR

With Goldman's raised price target for Google (GOOG), investors are piling into large cap tech. If related sectors are in for a upward move, the stocks listed below, small caps in good financial shape, represent opportunities for much more upside and limited downside. Money has been chasing the same few names (AAPL, CRM, PALM), which induces massive pullbacks as stocks approach fair value. Research in Motion (RIMM) is the best example of a good tech company that is range bound because, despite fundamental strength, valuing the stock above $80/share is "mathematically curious" and simultaneously invites short-selling and profit-taking. As always, relatively thinly traded, small companies experience greater price volatility than sector stalwarts. For that reason, as well as potentially finding buyout candidates, investors are best served to apply more stringent valuation analysis to cheaper stocks. 

1. BSQUARE Corp (BSQR): BSQR provides training, support, testing and development services in the mobile software space. A recent collaboration with Coca-Cola (KO) seeks development of software for a new vending machine capable of dispensing 100+ different beverages. The Company is valued at $23M, has $11.8M in cash (plus $7.7M in AR, including $4.1M from Ford (F)) and profitably grew revenues in H1 FY2009 to $32.8M.

2. Spark Networks (LOV): This operator of several online dating sites trades at an all-time low, with a P/S near 0.5 and sub-15 P/E. Free networking sites like Myspace and "anti-capitalist" Craigslist pose major challenges to the future of costly internet dating services, but LOV's specialized services have a solid niche and some segments have shown growth in 2009. Despite declining revenues, first half FY2009 earnings forecasts of 11 cents per share were met and analysts maintain strong ratings on the stock. 

3. TSR Inc (TSRI): This IT staffing firm provides a weak outlook for the future as business with IBM continues to dwindle. The stock still appears to be undervalued, as expenses were reduced sufficiently to maintain profitability in fully reported FY2009. TSRI is debt-free and valued at $8M, has a book value over $12M, cash over $4M and recorded 2009 revenue of $42M.

4. Sapiens International Corp (SPNS): Yet another IT company, SPNS has inched towards profitability each of the last five years. The Company develops customizable software modules for insurance companies and remains involved with clients through consulting and support services. Costs are down significantly through H1 FY2009, with EPS of 9 cents compared to an 8 cent per share loss in H1 FY2008. With over $10M in cash, this $25M company appears cheap and focused on growing profitability.

5. Artificial Life (ALIF.OB): Artificial Life develops mobile web applications for various platforms. Most revenue is generated by the Company's 60+ iPhone games, including collaborations with Red Bull, BMW, platinum recording artists and professional sports teams. Q2 FY2009 was ALIF.OB's second straight quarter of record revenue and 8th consecutive profitable quarter. With a trailing P/E near 4, high profit margins and revenue growth, the share price is likely stagnant due to recent dilution to raise capital for continued growth.

Disclosure: Long ALIF.OB