Stone Fox Capital's  Instablog

Continental Resources (CLR) announced early today a huge expansion in their drilling plans for the Bakken Shale in the Montana and North Dakota area. Forbes.com has some info about the move. Basically CLR had originally expected to end 2009 with 6 rigs working, but now they expect to be using 9 rigs. Then by mid 2010, they expect to be utilizing 23 rigs. Thats 17 more rigs that CLR will be putting to work.

This is just one company operating in the Bakken Shale, not to mention Haynesville or the Marcellus Shale. Its unclear whether Bronco Drilling (BRNC) will benefit directly from this expansion, but it should benefit from the overall capacity utilization in the sector leading to higher day rates and margins.

BRNC just began benefiting from a contract for 6 more rigs in Mexico working on drilling for PEMEX. Also, with the push in the US for more reliance on natural gas, BRNC seems like one of the best plays left. Most natural gas producers have already surged off the bottom along with the bigger drillers. BRNC still trades at a fraction of its highs.

BRNC has a book value of over $14, making the current stock price of $6 very attractive. They are still losing money and will continue to for a few more quarters at leasr, but the market seems to be improving very quickly at this point.

Buy BRNC off the CLR news, but be careful as BRNC announces Q3 earnings tomorrow. The sector isn't jumping today which is surprising, but for us that provides a buying opportunity. We'd suggest buying a half position expecting the guidance going forward to be upbeat.


Disclosure: Long BRNC

After the close, Hartford Financial (HIG) reported a big jump in book value to $37.90 when they reported Q3 earnings. This wasn't all that surprising considering the rebound in the markets, but confirmation helps pound it home to people still negative on the stock. Considering its only trading at $27 in the after hours action it appears that some people are still dense.

• Book Value Per Share Jumps 18% From End of Second Quarter to $37.90

Also, HIG reported core earnings of $1.56 which handily beat the estimate of $1.11 and they raised 2009 estimates. They did report a net loss on charges and at that point the reporting for HIG gets very confusing and beyond the need of further research.

The key is that HIG will survive and prosper and book value is likely to soon bounce back over $40. Earnings will likely be estimated at over $4 and mabye as high as $5 next year. So either way you slice the valuation based on BV or EPS, HIG easily hits the $50+ range. Until then we'll avoid straining brain power on the earnings release and focus more on the macro view.

Hartford Financial continues to be one of the biggest positions in our Growth Portfolio and will remain that way until the stock rockets much closer to normal valuations.


Disclosure: Long HIG is client and personal accounts.

The Wall St Journal is reporting that the proposal to allow Tax Loss Carry Backs for 5 years is poised to be approved next week. It's been difficult to find information on this subject as we originally wrote about it on Wednesday[Tax Loss Proposal Gains Support] and hadn't seen any news about it until finding this article.

The proposal is significant because it will provide immediate capital to a lot of struggling small cap stocks such as Liz Claiborne (LIZ) mentioned in the article. Basically any company losing money now would immediately be able to receive a portion of the taxes back that they've paid the last 5 years. The more they've lost the better. The article doesn't mention financials so we're still wondering what the impact will be on companies such as Regions Financial (RF) or Synovus Financial (SNV) that both received TARP money. If those companies were to get a refund, Congress might come under fire. If excluded, LIZ or Terex (TEX) would be our favorite plays off this legislation.

Maybe that's why this proposal has gotten so little discussion from the media. Nobody wants to highlight a handout for financials and corporations in general. The media is fixated with the housing credit and the extension of the unemployment benefits, but ultimately providing a tax refund of $33B to companies that badly need funds might prove more meaningful.

Considering this legislation, the big selloff today is more confusing. Alot of questionable balance sheets would see immediate improvements leading to higher stock prices. Some of the limited details:

Large and mid-sized companies battered by the recession are on the verge of securing as much as $33 billion in refunds from the federal government for taxes paid as far back as 2003.

The firms won support for the plan from Senate Majority Leader Harry Reid (D., Nev.), who added the tax refunds to legislation extending unemployment benefits and headed for Senate approval as early as next week. The tax provision would allow businesses to carry back losses incurred in either 2008 or 2009 to offset taxes paid up to five years before.

There is also broad bipartisan support in the House for the tax loss carryback provision. If the Senate passes the jobless-benefits bill in its current form, House leaders are expected to bring it directly to the floor and vote on it without modification.

Disclosure: Long all the companies mentioned.

According to some news reports yesterday, the U.S. Congress is gaining support for a Tax Loss Carryback proposal. We're not seeing a lot of news about this proposal but it seems to be something that would be very bullish for the worst off stocks in this economy. Any corporation that made a ton of money in 2004-2007 and is now losing truckloads of money would be able to reclaim some taxes paid in those previous years.

It could be a huge boon to financials struggling to raise capital or manufactures that saw boom years and now are struggling to make ends meet in these lean times. It seems odd that Congress would inact such a law to help the hated banks, but then again a lot of the smaller banks could use some help to stay afloat and continue lending. On the flip side it would further help to support companies not allowing the best players to gain deserved market share. Some of the banks in strong capital shape might to see less growth potential with such a bill.

Some of our favorite financial plays such as Regions Financial (RF), Synovous (SNV), and Phoenix Companies (PNX) are all down big today and this week yet they'd probably stand to be the most to benefit. A manufacturer like Terex (TEX) would see some benefits though not to the same extent since they don't appear to face capital issues. A retailer like Liz Claiborne (LIZ) would probably see some decent benefits like the financials.

Its always interesting how the markets seem to ignore or maybe just not notice these proposals. Every article seems to focus on the housing tax credit instead. Or maybe they just need somebody to tell them the benefits before understanding. Now if I just had a large research staff that could determine the biggest beneficiaries of this proposal. Stay tuned to the news to see if this proposal gains steam and be prepared to buy the beaten down stocks. The lack of reaction could just be that insiders know it won't pass. We shall see.

 

All companies, no matter what size, would be able to apply losses in one of those years to full year taxable income for the prior four years and to 50 percent of income in the fifth year, according to a summary of a plan backed by Senate Majority Leader Harry Reid and Senate Finance Chairman Max Baucus, both Democrats.

The proposal will be offered as an amendment to an unemployment insurance bill working its way through the Senate. Negotiations are still ongoing so the details could change.
 

Disclosure: Long all stocks mentioned

Still amazes me how little attention the Leading Economic Index from the Conference Board gets from the market. The Conference Board reported a September number with a 1% increase and a 5.7% 6 month growth rate. This forecasts huge growth in Q4 and Q1 but oddly the head of the Conference Board stills tells a cautious tale. With a 6 month rate at the highest since 1983, its difficult to see any negative scenarios for the economy.


The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 1.0 percent in September, following a 0.4 percent gain in August, and a 1.0 percent rise in July.

"With the sixth consecutive increase, the LEI's six-month growth rate has improved to its highest pace since 1983," says Ataman Ozyildirim, Economist at The Conference Board. "Except for average workweek and building permits, all the leading indicators contributed positively to the index this month. At the same time, the contraction in the coincident economic index has halted in recent months, but the continued downtrend in employment is keeping this index of current economic conditions from rising faster."

Says Ken Goldstein, Economist at The Conference Board: "The LEI has risen for six consecutive months and the coincident economic index has increased in two of the last three months. These numbers strongly suggest that a recovery is developing. However, the intensity of that recovery will depend on how much, and how soon, demand picks up."

Its always comical to us how stocks continue to trade based on analyst recommendations. Especially ones without street credibility. After all we've seen in over the last decade that takes place on Wall Street, its difficult to read some of these reports with a straight face.

Last night, Riverbed (RVBD) reported great numbers with earnings beating estimates by 28% and reporting 18% Year over Year growth. They also guided higher then the Street. Also considering how easily they just beat the Q3 guidance they gave back in July its hard to take their numbers as anything other then the baseline - $104-107M and $.18.

So how could any analyst downgrade a stock after that report? Well, it turns out that one of the analysts with highest numbers decides to take management at face value. Management says $.18 so now he all of a sudden thinks they'll hit that number exactly. He does maintain the high end of the revenue. All in all he recommends a sell with a $20 target.

See report at StreetInsider.com for amusement purposes only. Its pretty diffcult to come away from RVBD's Q3 report with a negative view. They talked about a new product being demanded by customers for cloud computing (buy TMRK) to replace the Atlas product that they canceled. The Auriga guy was down on that, but didn't mention the potential of the new product.

What I don't understand is how the market reacts to just one analyst. The numbers on average for RVBD will be rising. It isn't uncommon to see one analyst lower number, but what about the 5 that will raise them. After the Q2 report the stock floundered for a couple of weeks before refilling the gap. Don't be surprised if it happens again. These numbers definitely didn't scare off JNPR or HPQ (see old news for deal rumor) and in fact the drop in the stock price might make management more willing to sell. The results make it easier to justify the price.