Review of Current Losing Positions: NZT, ACAS, SKM, GE

Includes: ACAS, GE, SKM, SPKKY
by: Davy Bui

A few weeks ago, a reader asked me about my current thoughts on Telecom New Zealand, which, as of 07/01/2008, was down 16.5% since I bought it last year. The blog’s hacking sidetracked me a bit and also, I’ve been “rolling” NZT and its future prospects in my head for a while. But judging from today’s visits, it looks like visitors are very worried about ACAS as well so a quick review of my current losing positions (NZT, ACAS, SKM, GE) may be of benefit to readers as well as myself:

Telecom New Zealand (NZT) — At this point, I’m willing to concede that my initial thesis was wrong on various counts:

  • I did not accurately gauge the deterioration of their operating results. My initial projections were a 6-8% decline in EBITDA the first year and an overall negative 1% growth for 5 years after. Instead, they are announcing another 5% avg EBITDA decline for next FY in conjunction with an increased capex spend (as much as 10% higher YOY).
  • Additionally, nothing in management’s discussion of the company gives me confidence that NZT has any solid plans to reverse their sliding market position. As of Q3 2008, pre & post-paid ARPUs have fallen 9% and 20% respectively and I can’t tell you any solid plans they have to change this.
  • NZT has also failed to act as a hedge against the dollar as the NZ$ has fallen roughly 5% since we’ve opened our position. While this may change as the US$ reveals the extent of its structural flaws, the New Zealand economy is not the Australian or Brazilian or even a Southeast Asian economy. New Zealand has fallen into recession, which may weigh on any positive currency effects for some time.

With all that said, the time for me to sell was a few months ago. NZT has now fallen to levels where downside risk seems fairly limited to hold, especially considering the dividend. I have yet to average down on this stock, which is probably the best indicator of my opinion on NZT. I may (or may not) sell this stock later to harvest tax-loss but not until after the pay-up Q4 divvy.

American Capital Strategies (NASDAQ:ACAS) — I got a lot of hits on my website today, apparently from concerned shareholders worried about the constantly-dropping share price.

  • Obviously, I was a little early on ACAS but after searching for news on the company, I stand by my assessment on the stock. I see no substantive new information to change my stance.
  • As Jim Cramer once stated, ACAS is a battleground stock. For me, it all boils down to this quote from the company’s 2006 annual report: “DIVIDENDS — THE MARKET CAN’T REVALUE IT AND WE CAN’T RE-STATE IT.” If the company can hold ground on the dividend through the credit crunch, shareholders are going to be amply rewarded.

Based on their track record and prudent outlook going forward, I believe CEO Malon Wilkus and company will continue proving the skeptics wrong. But investors should be prepared to collect the dividends and ride out further book value writedowns, increased non-accruing loans, aggressive shorting by hedge funds & wild volatility as ACAS gets lumped in with all the other financials. A careful perusal of my portfolio page will show that I have sold additional (as of now, in-the-money) put options for an effective price below $20 per share.

SK Telecom (NYSE:SKM) — The South Korean won has not held up well this year against the US$, with the dollar up 12% this year against the won. This accounts for most of the 16.4% drop for SKM. On an operational basis, SK Telecom remains in an intense competitive battle with KT and LGT with a government that still appears meddlesome but results have held up reasonably well. Neverthless, SKM has also been a disappointment thus far for several reasons:

  • I came to SKM via researching its competitor, KT Corp (KTC). KTC has outperformed SKM by over 9% since I opened the position. While it remains to be seen whether this trend will hold over the long-term, the market is saying I picked the wrong stock.
  • SKM pays a semi-annual dividend with a pay-up dividend at the end of the year so I miss out on the comfort of a nice dividend to cushion the declines of a bear market.

[UPDATE: 07/08/2008: Reports have the S. Korean government intervening now in the currency markets to bolster the won and promising to do more. The possibility of the government failing to achieve its goal and the fallout from that failure is a disturbing prospect.]

At this juncture, I remain comfortable with the am holding SKM. South Korea has some political turmoil due to the new President’s unfortunate foray into beef imports and the economy is showing signs of slowing. But the company continues to hold market share, margins aren’t slipping precariously and cash flow is still decent.

General Electric (NYSE:GE) — in short, I have added to my GE positions. After that last earnings miss and 7 years of a stagnant stock price, CEO Jeffrey Immelt is officially on the hot seat and will have to deliver not just improved results but an improved share price and soon. Personally, I would like to see the company sell NBCU as a start and perhaps trim down this conglomerate a bit to allow it room to grow. My sense is that Immelt’s credibility is now on the line and he will have to start taking more explicit measures to increase shareholder returns (beyond buybacks). While I’m a big fan of Immelt (even now), a change at the top may pop the share price. Patience may be required but at these levels and with a quarterly dividend approaching 5%, it should be worth it. For more on my views on GE, please see these previous posts.

Disclosure: Long all stocks.