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Stephen Castellano

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  • Our Updated Focus List and Portfolio Leverage Strategies [View article]
    Thanks mbkelly75 for taking the time to read and leaving a comment. I've been aiming my work toward more institutional types of readers, but also have been thinking about how something like this could be made more appropriate for a retail investor.

    I am hypothesizing that of the 40 or 50 long ideas I provide, you could pick 10 or 20 and rebalance monthly, and their returns would not differ very much on average over the long run. That's a bold statement I realize, and my former professors would cringe at that statement. Yes you would be introducing more short-term risk, and no, I have not backtested that. Nevertheless, just working with and eyeballing the data, I think it might work.

    It would be interesting to see what the outcomes would be if choosing the 10-20 out of ~50 stocks on a market cap basis, sector weighted basis or completely random basis. I'm not even sure a team of highly expert sector analysts would do much better with a monthly focus.

    I have tried various additional fundamental and qualitative factors to help narrow down the list, and I have not found any combination that consistently narrows down the list and improves performance at the same time. Technical stop-loss factors have helped in volatile down markets, but not so much in up markets. Almost any additional factor(s) I add to narrow down the portfolio, I get more volatility in the portfolio, but generally the same longer-term trend. But once again, I have not backtested this to any great degree.

    All these stocks share the same general fundamental characteristics, and I have never really noticed any crazy wide dispersion in the results.

    And if a person wanted to short, instead of shorting 40-50 names, he could just short the market with an ETF. Most investors will tell you it's much tougher to find a good short idea than a long idea, so shorting the S&P500 may be better. That certainly would have been the case over the last few months, as well as for much of 2009.

    Just as a caution again, I haven't backtested any of these hypotheses thoroughly. And in any case, most PhD quantitative analysts will tell you privately that whatever worked yesterday in a backtest won't work tomorrow. But I've been pretty pleased with the simple quant model I have here. I hope to find more time to generate some more detailed in-depth and long-term ideas from these lists.
    Mar 15, 2010. 12:57 PM | Likes Like |Link to Comment
  • Bernanke's Dilemma: Hyperinflation and the U.S. Dollar [View article]
    I appreciated reading this very much. You made a good case for pending hyperinflation and essentially the pending collapse of the entire U.S. banking system

    But your conclusions are all drawn from the most negative conjecture -- the end result of choosing a combination of the worst upon worst kind of scenarios. There are alternative and more optimistic possibilities.

    For example, lbsterling's comment above seems more realistic and makes more sense: "We pay more for health care, but spend less on defense. Household debt neither increases nor decreases, but inflation eases the pain. And basically we muddle through." And Vox Rationalis points out well how certain assumptions you are making lack substance.

    What is actually occurring now is more important than some doomsday scenario of what could happen in the future. As manifest by the reports of hundreds of public companies, earnings are growing again after a period of severe cost cutting through lay offs and asset sales/writedowns. There is a large portion of the populace that is suffering. But as the economy recovers, so will employment, tax receipts, and so will more reinvestment, etc. Maybe not back to previous levels anytime soon, but enough so that we will "muddle through."

    Credibility in the U.S. banking system will remain steadfast, and assuming any rationality there will never be any kind of substantial run against U.S. debt. Where else is China realistically going to park all its foreign exchange reserves?

    We will get through this economic mess -- in fact we are getting through it right now. We have always proven to be an optimistic, creative and, despite recent appearances, a hard working country. We will make the tough choices as they come, we will do without if we have to, and will keep moving ahead. It's what Americans do.
    Mar 12, 2010. 04:26 AM | Likes Like |Link to Comment
  • Goldman Sachs: The 50 Most Important Stocks for Hedge Funds [View article]
    Thanks for posting this. It gave me an idea to apply a simple quantitative ranking system to stocks in the Goldman Sach’s VIP list to generate a few interesting additional long stock ideas. You can read the article on Seeking Alpha or my own website where there is a pdf:
    Mar 8, 2010. 01:28 PM | Likes Like |Link to Comment
  • Freeport McMoRan Could Be Primed to Move [View article]
    Yes, I hear you - if one is rational it is nearly impossible to argue against all the factual information and analysis out there, regarding this stock and the market in general right now. Nevertheless, the markets have looked into the abyss before and kept moving before. Consumer and business sentiment can also follow a stock market, not lead it. From what I've read, it seems like China can very quickly change the market dynamics for materials. From a diversified and balanced long/short portfolio perspective, it should just be one of the best of many cards in the deck. My speculative holding is really small and doesn't really deserve mention, but I have to anyway.
    Mar 8, 2010. 01:46 AM | Likes Like |Link to Comment
  • A Rising Tide Really Can Lift a Lot of Boats [View article]
    Thanks for your thoughts gentlemen. I should look more closely at OSK and TXT and find out why these somewhat similar company may be ranked at opposite ends.

    Funny thing about OSK, I just saw a video on Barron's -- a reporter does not like the stock because he says the M-ATV is going out of production this summer and a follow-up vehicle is not as profitable, plus the rest of the business is very cyclical. But he thinks the risk is $30. I think the economy is recovering, and for a high quality company like this, if that is indeed a true reflection of risk -- well that's pretty good. 12 sell side targets for this company range $39-$55 and average $47.

    If you subscribe to Barron's you can see the 2 minute video here:
    Mar 7, 2010. 11:48 AM | 1 Like Like |Link to Comment
  • Steelmaking Ingredients Gain Bullish Traction [View article]
    Great info, thanks. What news do you read? I used to read American Metal Market years ago.
    Mar 5, 2010. 08:08 PM | 1 Like Like |Link to Comment
  • Good Quarter and Outlook for Joy Global [View article]
    Hello mcjrn, thanks for the quality commentary. Comparing the two with each other on a few multiples adjusted for various operating metrics, it seems like JOYG has a much better value than BUCY at the moment. So while anything can happen in the short-term, if things pick up with China and JOYG can leverage those relationships you mentioned among other things, it seems that JOYG could really outperform relative to where BUCY right now. BUCY had a nice run recently -- it was one of the top performers last month in a model portfolio I've been tracking.
    Mar 4, 2010. 11:59 AM | Likes Like |Link to Comment
  • Freeport McMoRan Could Be Primed to Move [View article]
    From JOYG this morning: "...the strongest equipment demand will come from copper, international coal and iron ore, and that orders will come predominately from North and South America, Asia and Africa...We are encouraged by the improving fundamentals in the commodity markets, and by our first quarter order rate that confirms customers are beginning to act on these fundamentals..."
    Mar 3, 2010. 11:57 PM | Likes Like |Link to Comment
  • Freeport McMoRan Could Be Primed to Move [View article]
    thanks for reading... wow, should have thought of this the day before, eh?

    I try to focus on generating longer term ideas, but enjoy generating trade ideas for others and have experience doing so for high-yield and equity sales traders when I worked on the sell side. I am trying to balance out well thought-out longer-term pieces along with intuitive shorter-term ideas.

    Not in the position to systematically trade the entire model portfolio I generate but working on it. Anyhow, just purchased a small amount of way-out-of-the money options on FCX. Let's see how that goes.
    Mar 3, 2010. 11:29 AM | 2 Likes Like |Link to Comment
  • At Current Levels, Is Toyota Worth Buying? [View article]
    I think Toyota could be a good idea to look at it in 6 or 12 months from now. Just based on what I have seen happen with similar stories, the stock may drift or even head a little bit lower for a while.

    The general problem that Toyota has has been shared by a number of high-growth, high-quality companies with good but arrogant, narcissistic management teams (I'm reminded of a graphics chip maker here). Management needs time to figure out what it needs to be done and annoyed investors need time to get interested in the story again. They'll figure it out. But there are probably better stock ideas to look at right now.
    Mar 1, 2010. 02:08 PM | Likes Like |Link to Comment
  • H2 Blues: Understanding the Stock Market's Weakness [View article]
    This is great, thanks for sharing this. I believe around Dec 2007 or January 2008 Goldman Sachs economics research came out as one of the first groups to say we were in a recession. Maybe they are measuring the indicators in a similar way.

    Regarding JWN, RSH -- would point out these stocks show declining trends in ROIC, whereas a number of others in Consumer Discretionary are improving. As we all know, ROIC and earnings growth (cash flow growth) are key to valuation. This is probably why there is a disconnect with the stock prices of JWN and RSH versus a number of other Discretionary stocks, which are actually showing strong improvement in ROIC.

    A model portfolio we generate each month is significantly overweight Consumer Discretionary names, both on the long side and short side relative to other sectors -- take a look:
    Mar 1, 2010. 10:57 AM | Likes Like |Link to Comment
  • The Short Case for Crown Castle International [View article]
    Over the years I've really enjoyed reading the stuff that Michael Mauboussin puts out. He's much better than any text book our course I've taken, except perhaps for any course on valuation that Professor Hevert at Babson College teaches to MBA students and management teams around the country.

    Anyhow, Mauboussin will say to add the value of the interest shield to the EBIAT calculation to get NOPAT. Hevert teaches an easier way to do this -- Adjusted Present Value -- a version of DCF that values whatever is your EBIAT and tax credits separately. APV is really easy to use because you don't have to forecast changes in capital structure.

    Take a look at the pdfs below, or any stuff these two people put out I think you'd really enjoy them.
    Feb 24, 2010. 11:28 PM | Likes Like |Link to Comment
  • The Short Case for Crown Castle International [View article]
    Here is the way I'm calculating free cash flow -- using standardized data from a third party.

    As you know there are a number of ways to calculate free cash flow. In terms of what methodology to use while finding the best/worst stock ideas, I've found the most important thing is to have a consistent approach while determining what trend is in place and what could happen to that trend going forward, and how changes in that trend will affect future cash flow and hence valuation. Multiples really just should be used to communicate in shorthand fashion the various assumptions that go into estimating a firm's future free cash flow and the discount rate.

    $mil Data point
    453 EBIT
    (7) Cash income taxes
    = 446 EBIAT

    530 Depreciation
    (174) Capital spending
    (42) Working capital investment, adjusted for required wc cash
    Feb 24, 2010. 06:39 PM | Likes Like |Link to Comment
  • The Short Case for Crown Castle International [View article]
    Seems like an ugly industry to be in, so I suppose a question is why then is the stock price moving up?

    Just looking at the numbers, seems that CCI has a track record of improving returns of capital, and consensus seems to be implying this will continue for some time.

    The ROIC does not seem to be at an impressive level -- in fact, it doesn't even seem to be able to recover it's cost of capital if you add net fixed costs to the present value of operating leases, good will and other intangibles.

    But ROIC is heading in a positive direction, benefiting from improving cash flow and declining operating capital -- driven in turn by improving margins and a drastic cut in capital spending. It looks like free cash flow was $287m in 2007 growing steadily to $760m in 2009 and possibly growing to $1b another 18 months from now.

    Maybe CCI is entering cash cow mode --low capital spending, no acquisitions, steady margins which even against some level of declining in revenue will still produce high free cash flow and at some point down the road generate a solid ROIC. I don't really like these kind of stories -- I think Verizon or AT&T tried to do that with its voice business a few years ago -- but I can see how this could be really attractive to some investors.
    Feb 23, 2010. 06:34 PM | 1 Like Like |Link to Comment
  • Are Today's Low Quality Stocks Tomorrow's Treasures? [View article]
    That's interesting, thanks for sharing that. As you know, with regards to systems like these one trick is to something a little bit different so it's unique -- in our case take value scores and adjust them according to a proprietary formula. What looks like relative value to us may seem a bit extended to others, or vice versa.
    Feb 23, 2010. 01:19 PM | Likes Like |Link to Comment