Stone Fox Capital's  Instablog

Cloud Peak Energy (CLD) is an IPO spin off from Rio Tinto (RTP) that has huge potential. By all accounts, the deal will be cheap as evidently RTP needs the cash. The deal is expected to price in the $16-18 range giving it a7 PE multiple. Very odd considering the PE multiples in the 20s that most coal producers trade at currently.

CLD is completely focused on the Power River Basin (PRB) area in Wyoming and Montana. The surfice coal in the PRB is much easier to mine then the mountaintop mines in the East and especially in Central Appalachia. Also, the coal is 'cleaner' then the East because of lower sulfur amounts. Now honestly just about every other energy option is 'cleaner' then coal such as natural gas, solar, and wind. Unfortunately coal is the cheapest option and the US along with emerging economies like China and India are somewhat stuck using it so demand is expected to grow.

Another issue with the Central Appalachia is that it has declining reserves and faces regulatory issues. The government is currently suspending 79 mine applications to research environmental issues. The PRB is expected to fill the loss of production from this area going forward.

What we don't like about CLD is that it's completely tied to steam coal used for energy and lacking the much more attractive metallurgical coal used in making steel. This might somewhat impact the multiple comparisons.

Watch the roadshow presentation for all the details - Roadshow.

CLD expects to price on Thursday so anything close to the current price range is very attractive. It is hopefully being overlooked though Cramer has been pumping it all week so it seems unlikely that the market will ignore it.

Sold about 25% of our Baidu (BIDU) position in the Growth and Hedged Growth portfolios this afternoon around $438. BIDU has been a huge winner in those portfolios including a 243% gainer in the Growth portfolio.

BIDU appears to be trying to set up a double top so its at risk of peaking. This is similar to a lot of other stocks as well, but we also feel that BIDU is closer to the proper valuation then most stocks. Trading at over 40x next years earnings leaves BIDU with very little multiple expansion unlike most stocks in the market. Granted, BIDU could still just grow at its growth rate of over 40% and we'd be happy investors. For now, we've just cut back on 25% of our holdings in both portfolios.

After selling, BIDU broke to a new 52 week high, but then quickly traded back down with the market. Seems to be a lot of resistance so we'll stick with locking in some gains for now.

KHD Humboldt Wedag (KHD) smashes the estimates for Q3 reporting $.25 compared to the $.05 estimate. Revenues were also much higher at $148M versus the $102M estimate.

The markets in Russia, Eastern Europe, Asia, and Africa appear to be moving forward finally. KHD is up 17% today, but the market cap is only $350M after this jump and still less then the cash balance of $407M. KHD remains one of the cheapest emerging market plays right now. Anybody following us should already own this stock, but any price close to $11 is still very attractive. Keep an eye on the gap in the charts and load up if it gets closed.

• revenues of $148.2 million with a net income of $7.5 million, or $ 0.25 per share on a diluted basis, which included restructuring charges. This compares to revenues in the third quarter of 2008 of $193.6 million and net income for that period of $30.8 million, or $1.01 per share on a diluted basis. Our margins, excluding special charges, for the third quarter of 2009 were 17 percent as compared to 19 percent in the third quarter of 2008.

• balance sheet remains strong. As of September 30, 2009, our cash and cash equivalents increased to $407.4 million (as compared to $356.8 at the end of the second quarter); working capital was $312.2 million; and shareholders' equity was $279.8 million (as compared to $257.9 million at the end of the second quarter). KHD's current ratio was 1.79 and its long-term debt-to-equity ratio was 0.04.

• Order intake for the quarter ended September 30, 2009, was $113.0 million, an increase of 39 percent from 2008. Of this total, 31 percent came from Russia and Eastern Europe, 25 percent came from Asia, 18 percent came from the Middle East, 15 percent came from Europe and 11 percent came from Africa. Of the third quarter 2009 order intake, $76.8 million came from cement and $36.2 million from coal and minerals.

Not a huge surprise to see a new CEO buy into his new company. Especially a company seen as very undervalued if a turnaround takes place. It's only 22.5K shares at a little over $65K. Whats really intriguing though is to see 75K shares traded on a Friday which happens to be the highest volume since mid June.

We'll see in a few days whether is was one of the Private Equity groups adding shares now that they have a more friendly CEO and BOD. The really odd part is that the trades went off without pushing the stock up. Insiders were basically the only ones on the bid the last week or so and yet it didn't drive the price up. Hmm...

Keep an eye on this next week.

Kona Grill (KONA) has long been a favorite concept of Stone Fox Capital with its blend of sushi with western foods, but it clearly lost its way over the last couple of years due to questionable management. Last Monday, KONA announced a new CEO plus a new BOD member. Positive signs that they've finally got quality management on board to turn the concept around. KONA was always criticized for being run by a hedge fund manager instead of an industry expert. Now we'll see.

Mr. Buehler was the Chief Executive Officer of LS Management, Inc., the owner and operator of the Lone Star Steakhouse & Saloon/Texas Land and Cattle Steak House restaurant concepts, as well as Lone Star Business Solutions, an external accounting, IT and HR provider, where he served from July 2007 to May 2009. Lone Star Steakhouse & Saloon consists of 141 company restaurants, 5 domestic franchise restaurants, and 10 international franchise restaurants, while Texas Land and Cattle Steak House consists of 28 company restaurants.

KONA just reported Q3 results that included a devastating 9.9% drop in comps. The market has turned to where most competitors are reporting more manageable 2-3% drops, but KONA is still reporting numbers matching the highs of the recession. This trend clearly must turn and quickly for KONA to be a good investment.

Just getting a new CEO with the same old board that approved numerous questionable deals involving the old CEO wouldn't have been enough to get us re-interested in this concept. The good news is that KONA also brought along a new member to the BOD replacing a long time member. Mr. Bakay is from BBS Capital Management that recently bought an 11% stake in KONA providing ample support for a much needed shakeup.

Considering both of these industry experts are willing to invest their careers, money, and time into KONA at this low point suggests that the concept indeed has a chance at turning around.

Kona Grill's Potential
KONA operates 23 restaurants in the casual dining segment with over $80M in revenue. This revenue level is after a couple of devastating years of drops in comps so the revenue number could easily expand much higher without growing stores. Up until the recent quarter, KONA still had decent restaurant operating margins of over 17% and prior to this last 12 months they were usually in the 20%+ range.

Long term, the concept can easily be expanded to 100 stores based on comparable concepts like Cheesecake Factory (CAKE) and even the 150 store concept that the new CEO oversaw at Lone Star Steakhouse.

With a market cap of under $30M, KONA offers an appealing valuation prospect if the new CEO and BOD can turn the company around. Right now its a gamble considering they have very little cash or financing available. At just $3M they have very little flexibility in this liquidity crunched environment. They also have limited debt providing for the opportunity to lever up the balance sheet without diluting existing shareholders as the lending market returns. Not having debt is a big benefit at this point in their development as most concepts are usually highly levered by this point in the growth cycle.

Private Equity is also lurking with the recent purchases by BBS Capital and the ever present Mills Road that has made 2 offers in the past that the previous management team turned down.

What's amazing is how under followed they've always been considering the IPO and the potential. With the 2 stores in development, a good CEO could easily up this company to over $100M in annual revenues yet the stock constantly trades under 10,000 shares daily. Even this big news was followed by slim trading making it very difficult for big investors to move in and out of the stock. So any new capital via shares or debt would likely expand the following and help liquidity.

Until the market pricing improves though, the Interim CEO and BOD definitely took the correct path to slow down expansion. Expansion for expansions sake isn't wise. It needs to be done profitably and KONA has lacked profits since becoming public. KONA finally has SG&A under control at a low 7.5% of revenue and with margins getting back to 17%+, they could easily hit 10% cash flows or EBITDA. That would be huge since they lack liquidity. Posting profits would also turn a new page on this investment and eliminate any downside risk from here.

Can the new CEO and modified BOD return KONA to the fast growth realm? Purchases in the low $3s look very appealing, but we wouldn't recommend chasing until we see more details from the new management.

Disclosure: Adding shares in the low $3 range.

According to this report from Morningstar, investors continue to pour money into fixed income funds and out of equities. Amazingly though more money has come into the market this year then was pulled out in 2008, but just about all of the gains went directly into bonds. Anybody think the retail investor is right this time?

With the economy starting to recover and interest rates at record lows, it seems like an odd time to be invested in bonds. Do people realize that bond funds lose money as interest rates rise? Bonds are the worst investment in rising rate environments. Wanna bet that the media convinced everybody that the market had come too far, too fast going into September/October. That bonds offer safety in a volatile environment. That bonds did better during the crash. Poor sheep listened again.

Also, most people don't understand the difference between a bond and a bond fund. A bond in theory doesn't lose value as long as your willing to hold till maturity. You collect the payments and don't really care about the trading value. Unless of course you've got a bond from some company about to stop paying. That's a completely different discussion though. A bond fund on the other hand is all about trading value. Its value is updated daily based on what you could sell the bonds for at the closing each day. Basically mark to market versus hold to maturity. Mark to market can be brutal as we saw last year.

Back to the details of the report:

• Most of the money flowing into fixed income funds came from the record $3.6T in money market accounts in January. That total is now down to a still very high $3.2T.
• Bond funds had an inflow of nearly $42B in October and $296B YTD.
• Equity funds had a $3B outflow in October and only $12B inflows YTD.
• Domestic equity funds were decidedly negative with net outflows YTD of over $4B.
• International equity funds fared much better with inflows of $16B YTD.

This leaves one to wonder what happens when money flows into equities and domestic funds in particular. Even though stock markets are up huge off the lows, nobody has been convinced to join from the sidelines. As we wrote about the Yield Curve in our previous article, this might sum up why equities tend to do well in the initial phases of interest rate hikes by the fed. All this money in fixed income is likely to come flooding out as bonds begin losing value. The money must find a home with the options of either next to nothing in money market accounts or the 'promise' of big returns in equity funds (nobody tell them that they are late to the party yet again).


p.s. Just don't tell these party crashers until I have my clients money out of the market.


Disclosure: Fully invested in domestic and international stocks