2011 May Bear a Striking Resemblance to 2010; Three Yield Pigs for the Week

Includes: GRDCY, GS, PT-OLD, PYB
by: Yieldpig

“…everybody had a good year…everybody let their hair down...everybody pulled their socks up…everybody put their foot down.” - John Lennon/Paul McCartney

If you’re a Beatle freak, you’ll remember what a glorious mess the Let It Be album was. Aside from the odd, Phil Spector finished, final product is the even odder back story. The Beatles' operating company, Apple Corps was hemorrhaging money mainly because the inmates (aka…the band) were running the asylum. Long time producer George Martin quit the project, originally titled Get Back, in disgust of the group’s behavior, infighting, lack of focus and discipline.

Drama not withstanding, the sessions did produce some memorable tunes and what would become their last live performance on top of the Apple Corps building on London’s Saville Row. The track referenced in the title was, in typical Beatle fashion, more optimistically prophetic than originally intended. The group was in a bad place but managed to crawl out of the ditch, put the negativity behind them, and move forward to produce their next effort: Abbey Road, undeniably one of their finest as well as being their swansong. I’m not completely sure I have much of a feeling about 2011, but in retrospect, John’s bridge to Paul’s verse about the “good year” rang somewhat true for 2010.

If the wheels don’t totally fall off in the next few days, the Dow and the S&P will both turn in positive, respectable, low teens returns for the year to go on to build on 2009’s 30%+ returns. Investors, primarily institutional, “pulled their socks up… put their foot down” and bought equities again. Apparently, capitalism wasn’t quite dead despite persistent unemployment, a housing market that has yet to firm, and more fiscal idiocy courtesy of the Washington wizards. Oh yeah, financial mayhem in Euroland, too. All of that and double digits? I’ll take it any day.

So what kind of feeling have we got for next year? Good question. There’s a lot of bullish (no…that’s “BULLISH”) sentiment on the T.V. Individual investors are yanking money out of bond funds like it was a contest. And God forbid you criticize Apple (NASDAQ:AAPL), or gold, or oil or other hard assets. Prepare to watch the comment posters crash the server. There’s a lot of that which makes me a little cautious.

On the other hand, there are a couple of things that make one rub the old chin and say “hmm". A few weeks ago, the great bond cataclysm was here. Treasuries were beaten to a bloody pulp and rates were set to skyrocket. Well, not exactly. The 10 year is yielding 3.35. At the beginning of the year: 3.84. Let’s round that up to 50 basis points. Sure, the great bond bull is probably a little wheezy and will get progressively wheezier. But is the great day of reckoning nigh? Let’s tip toe out there and say “not quite yet”. Are bonds a buy? No. But the fact that they’re not quite ready to fall out of bed means rates stay tame and that will always help equities, right?

So what makes sense in 2011? Take a look at Goldman Sachs (NYSE:GS). Love ‘em or hate ‘em (the general public hates ‘em although they probably don’t realize how much the firm has, most likely, saved our collective tuchas over the last few years), it’s a great franchise. If you bought at the beginning of 2010 you’ve made no money this year whatsoever. Same goes for the not quite as reviled Morgan Stanley (NYSE:MS). You’ve run in place or given up a couple of dollars. At the end of the day, you still have a moderately priced, world class name. How about some tech? Google (NASDAQ:GOOG) the merciless has had more downs than ups but, for the most part, has moved sideways. Are we wild about a $600 stock with a 24 P/E? Traditionally, no. However, GOOG does want to rule the world and they plan to get there whether it’s through your phone, your television, or your driverless car.

At best, 2010 could be called a positive mixed bag. I’ve got a feeling 2011 may bear a striking resemblance. Get back, JoJo.

I’ve got a feeling about this week’s three lil’ piggies…

“I’m on a Mexican Radio…”

Grupo Radio Centro ADR (NYSE:RC)
Recent Price: 8.24
P/E: 60.15
Current Yield: 5.00%

The Skinny

Although not nearly as sexy as Mexican soap operas (try watching one at the cocina while fighting the kids for the last glob of queso), there’s a little panache to a media company that’s been around since 1946. RC owns and operates 15 radio stations in Mexico, 12 of which are in Mexico City, as well as providing syndicated programming and advertising sales services. Interesting looking numbers: cash flow has been growing over the last three years, long term debt has been shrinking, consistent revenue and the cash position is the highest it’s been in a decade. Shares are priced about in the middle of their 52 week range.
RC also has a small foothold in the U.S.. Being a familiar brand in Mexico can’t hurt amongst a rapidly growing Hispanic population north of the border.

The Danger
Owning Latin American media companies is not for the weakly constituted. Earnings visibility is always limited. RC’s sales have been shrinking at about a 5% clip over the last 5 years. Unlike domestic companies who typically pay dividends quarterly, RC’s distribution is an annual event and it’s only 4 years old. And although there’s a rumor of a Latin American renaissance, that fact is overshadowed for Mexico as its increasingly violent drug wars dominate the headlines and contribute to instability. Not exactly great for business.

“Calling all PIIGS…”

Portugal Telecom SGPS ADR (NYSE:PT-OLD)
Recent Price: 11.63
Current Yield: 13.81%

The Skinny
I know…I know…we keep profiling these companies in the tumultuous European, PIIG periphery, but we’re value hunters…so you gotta shop where the bargains are. PT fits that bill. The company provides telco services in Portugal and Brazil and despite their domicile, the numbers ain’t bad. Operating revenues were up respectably for the most recent quarterly report YOY. PT made a tidy profit on the sale of its portion of the Vivo joint venture in Brazil and the company has also done a decent job of keeping costs down which has helped the operating revenue number. They’ve got over $2 billion in cash on the balance sheet and, in general, we’re relatively comfortable with PT’s 58% payout ratio.

The Danger

The number one concern is PT’s address: Portugal. Along with Greece, Ireland and eventually Spain and Italy, not the most financially popular regions amongst their Europeers. Growth will be slow for quite a while in those regions and, naturally, that will affect those companies that call the region home. PT has already seen that slower growth as it has to spend more to hang on to the customers it has rather than adding new ones. That’s flowed through to the numbers: EBITDA is down from last year. The road ahead will be a little bumpy for anyone living and working in any of the PIIG countries.

“Prefer Goldman?”

PPLUS Trust Series GSG 2 Trust CTF Class 5.75% (NYSE:PYB)
Recent Price: 22.97
Current Yield: 6.25%

The Skinny
We’ll translate the description: it’s a Goldman Sachs preferred. Issued at $25 par in 2003, PYB is callable within 30 days currently. The underlying company, GS, regardless of public opinion, is a helluva franchise. Their A over A1 credit passes down to the preferred shares. An “A” or better credit with a better than 6% yield is a rare find, even as rates start to creep up. The 8% discount is probably due mostly to event overhang as insider trading investigations gain momentum. And as this is a trust preferred (Basel II and Tier One yadda…yadda…yadda) as the supply shrinks, prices should remain relatively stable. If you’re lookin’ for some decent quality yield and don’t have a philosophical problem holding anything Goldman, this may be the ticket.

The Danger
These days, anything Goldman is a potential piñata. After all, they’re the bank the rabble loves to hate, thus the current discount. Second, while the current yield is attractive it could get higher. Rates are on tenterhooks and as they climb, all fixed income will feel the pain. 5.75% is still a reasonably low coupon for something with a final maturity of 2033. Finally, PYB is callable and with banks bringing in their trust preferreds over the next few years, don’t get attached to that 6.25% yield.

Disclosure: Long PYB and MS in client accounts