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Ultra Petroleum: A Classic High-Upside Investment With Reasonable Risk
- Ultra Petroleum is a low cost producer of natural gas with an excellent track record of lowering costs.
- Subdued natural gas prices provide UPL with significant upside over the next few years if we were to see a favorable pricing environment emerge.
- UPL is one of the most attractive natural gas producers since it's a pure-play and has managed its resources well.
- I'd value UPL at $20; consider it a bargain under $15; and a screaming buy under $10.
- I'd favor UPL over natural gas producers with more oil exposure such as Chesapeake and Devon.
Sonic Is Still A Scary Stock
- Sonic's stock has surged over the past two years, with rapidly improving same-store sales.
- There are a lot of issues lurking beneath the surface with the company, the near-zero store count growth being the biggest.
- Sonic's aggressive stock repurchase plan is a cause for concern, suggesting little future growth and results driven by financial engineering.
- Sonic may be even more cyclical than most restaurant stocks, meaning it could suffer significantly in any recession scenario.
- Overall, SONC is a stock with significant risks and limited upside potential at $32.
World Wrestling Entertainment: Intriguing Prospects, But Margin Of Safety Too Small
- WWE is selling at a historically subdued level.
- The WWE Network provides intriguing growth prospects and a new business model moving forward for WWE.
- WWE has substantial risks, with a downside around $4 and an upside potentially over $25 in the next 3 years.
- At $16 - $17, WWE is overvalued in my view based on the risks and reward potential.
- If WWE fell down below $9, it would be worth another look.
Jack In The Box: Great Company, Very Expensive Stock
- Management at JACK has made several great moves over the past decade that have significantly increased shareholder value.
- JACK's free cash flow growth has been spectacular.
- Qdoba makes JACK an interesting growth play.
- At $90+, JACK shares are overpriced based on risks and rewards and have very little "margin for safety".
- JACK shares will probably not become attractive again until a significant correction in the restaurant sector.
The Chilean Economic Miracle Is Over: Is Chile Still A Good Investment?
- The Chilean stock market has fallen over 50% from its peak due to a weakening copper market.
- Chile has consistently been ranked as one of the most "economically free" nations in the world.
- Given the plunging stock market coupled with Chile's strong economic model, it's worthwhile to explore for investment.
- Unfortunately, the political pendulum is swinging back towards the Socialist direction, creating new headwinds for the Chilean economy.
- Chilean investment could become attractive in the future, but the dual headwinds of a declining copper market and Socialist politics make the risks too high for now.
How Cash Can Boost Long-Term Returns
Tue, Feb. 17 • 21 Comments
- Liquidity management is one of the most critical aspects of investment.
- Cash earns a 0% nominal return, but allows investors to take advantage of higher-return opportunities that may emerge.
- By holding more cash, one is betting that the purchasing power will increase at a future point.
- Moderation is key with holding cash; it's rarely advisable to go to 100% cash or 0% cash.
- I'd recommend a cash position in the 20% - 40% range for most investors right now due to higher than average risks in the market.
The Most Underrated Book On Investment
Mon, Feb. 16 • 7 Comments
- David Sklansky's The Theory of Poker is the most underrated book on investment.
- Risk and reward matter more in poker than "winning" or "losing" individual hands; the same logic holds true in investing.
- Learning to deal with uncertainty is vital in both poker and investment.
A History Of U.S. Investment Taxes, Part II: The 1920's
- The 1920s saw a dramatic reversal of the World War I era tax policies.
- Under Treasury Secretary Andrew Mellon, taxes on income and capital were significantly reduced in the US from 1922 - 1926.
- The severe Depression of 1920 - 21 ended almost immediately after the first series of tax cuts.
- The 1910s was marked by a horrid economy and a flat stock market, whereas the 1920s was defined by rapid growth and booming market.
- The dramatically different tax policies of the 1910s and 1920s were likely a major driver of the divergent economic paths.
A History Of Investment Taxes In The U.S., Part I: 1913-1921
- President Obama recently proposed a significant hike in the capital gains tax.
- While trade policy has the biggest impact on the economy, tax policy can still have a significant impact on growth and the markets.
- The World War I era tax hikes were the most dramatic in American history.
- The 1910's tax hikes helped lead to the Depression of 1920 - 21 and created an awful stock market environment.
How To Analyze Insider Selling
- Insider activity can be an extremely valuable tool when analyzing an investment.
- Insider buying is typically straight-forward, while insider selling is trickier to analyze.
- Insider sells should be analyzed by their size and frequency, the number of insiders selling, and insiders' overall holdings and wealth.
- First Solar in 2007 - 08 provides a classic illustration of how large amounts of insider selling can be a red flag.
Have IBM's Share Repurchases Created Value?
- IBM has repurchased over $100 billion in its own shares since 2004 (about two-thirds of its own market cap).
- Given the large size of IBM's share purchases, it's worthwhile to examine whether the buybacks have created value for IBM shareholders.
- My analysis suggests that IBM's buybacks neither created nor destroyed value from 2004 to 2013.
How Low Can Oil Fall?
- Oil prices aren't returning to $100 any time soon.
- Technological innovation in oil extraction will keep production costs lower, while alternative technologies such as electric cars will slowly chip away at oil demand growth.
- We're more likely to see oil trading in the $40 - $75 range over the next few years.
- Low cost oil producers selling at a discount will be better investments than speculating on a high-cost producers and a return to $80 - $100 oil.
Taking A Look At Historical Natural Gas Prices
- Natural gas has been in a bear market since late 2008.
- Natural gas prices are currently about 15% - 30% below historical inflation-adjusted levels.
- If history is any guide, natural gas producers could become very attractive investments sometime in the next 2-5 years.
Share Buybacks And Value Destruction
Wed, Jan. 14 • 13 Comments
- Share buybacks are neither inherently good nor inherently bad.
- Share repurchases should be analyzed in the context of a company's intrinsic value, its market value, and its potential growth opportunities.
- Too many companies use share buybacks as a "default option" when they can't find other internal projects to invest in --- this can be a red flag.
America's Disinflationary Future?
- The US could suffer from a low-growth, disinflationary future, similar to Japan after the collapse of the Japanese asset bubble.
- Policies of the Federal Reserve, such as QE, have increased the likelihood of disinflation.
- QE incentivizes short-term investment at the expense of long-term investment.
- Interest rate suppression results in a cycle of subdued returns, lower investment, and lower growth.
- Fed policies that have suppressed interest rates will increase likelihood of future issues with pension funds, resulting in austerity (higher taxes and / or lower benefits).
Projecting The Forward Returns On The S&P 500 Index
- Savvy investors focus on forward returns, rather than the past.
- Forward returns on the S&P 500 over the next five years are likely to be in the 1% - 6% range, well below historical averages.
- The S&P 500 appears to be moderately overvalued.
- A 20% correction in the S&P 500 would be needed before hitting an expected 5-year forward return of 8%.
The Central Bank Boom Is Creating Huge Risks For Investors
- Flawed macroeconomic policies create significant market risks and can quickly undermine valuations.
- China's US bond buying binge, along with loose Federal Reserve policies, helped fuel the US housing bubble from 1997 - 2005.
- There's a significant correlation between US Federal Reserve bond buying activity and the US stock markets since 2007.
- The market's reliance on central bank stimulus is creating significant downside risks for investors.
- A defensive posture, focusing on attractively-priced dividend stocks and holding extra cash, can help cushion against potential downside risks.
Krispy Kreme: Strong Growth And Great Turnaround, But Is It Overpriced? (Value Invasion, Episode 2)
- In spite of a high P/E multiple, KKD's stock price is justified.
- Over the past decade, KKD has transformed from a dysfunctional company with insolvency risks into a cash flow machine.
- Strong management, attractive business model, great cash flow growth, and a reasonable valuation make KKD an OK buy.
- KKD has some upside potential due to deleveraging, which could make an LBO offer attractive to a private equity firm.
- High growth expectations embedded in the stock price provide KKD with less "margin of safety" than might be desirable for many value investors.
Un-Redeeming Greenspan: Why The Fed Was To Blame For The Housing Bubble
Apr. 1, 2014 • 31 Comments
- Christopher Matthews' case for "Redeeming Greenspan" is based on a flawed understanding of monetary policy.
- The Greenspan Fed aggressively lowered interest rates in the early 00's in spite of surging housing prices, strong loan growth, and high money supply growth.
- "Cheap money" policies by the Greenspan Fed altered the economics of housing, incentivizing both banks and borrowers to engage in reckless behavior.
- The Greenspan Fed deserves the lion's share of the blame for the housing bubble and subsequent financial crisis.
Bank Money Is Contracting (And Other Hidden Statistics)
- While overall money supply in the US is increasing, bank money appears to be declining, possibly due to Dodd-Frank and tighter Federal regulations.
- Tighter regulations, coupled with loose Federal Reserve policies have created an odd combination of de-leveraging in some categories and surging debt in others.
- The above-average spread between the Federal Funds Rate and US treasuries, alongside of weak loan demand may suggest that US treasuries are undervalued.
- Mortgage REITs appear attractive at current prices given economic data.
- Italy: The New 'Powder Keg' Of Europe
- The Crisis Of Modern Economics
High Margin Debt And Quantitative Easing
Feb. 4, 2014 • 9 Comments
Don't Worry About Being 'Right'; Focus On Risk Vs. Reward
Editors' Pick • Jan. 19, 2014 • 73 Comments
- Five Major Underreported Economic Threats
- 2014: Stealth Tightening, Hidden Austerity, And The Potential For Recession
- Bubbles, Crashes, And Market Corrections, Part 2: 1900 - 1925
3 Year M2 Money Supply Growth At Highest Level Since 2003
Oct. 15, 2013 • 3 Comments
- Bubbles, Crashes, And Market Corrections, Part 1: 1871 - 1900
- Amazon: Much More Profitable Than Perceived And A Foolhardy Short
- Examining Historical Margin Debt
- Now Is The Time To Be Fearful