Archive for September, 2009

Dell paying a hefty premium for Perot Systems

Monday, September 21st, 2009

Dr. Kris is spending the next two weeks communing with nature but because of the wonders of modern technology I was able to check the internet for a couple of moments before taking a hike in the redwoods.   For those of you interested in M&A deals, today Dell (DELL) offered $30 a share for Perot Systems (PER), the company that made H. Ross Perot a billionaire and household name. 

Before you even think of taking a position in this deal, consider that the analysts covering theses companies all feel that Dell is shelling out way too much moolah.  If I was a Dell shareholder, I’d be none too happy and would be on the phone to the board asking them what were they thinking?

Here’s a summary article from DealZone at Reuters: “With something like $10 billion in cash, Dell wouldn’t seem to be stretching itself to buy Perot Systems. But the $3.9 billion it is offering represents a 67 percent premium, so Dell shareholders should probably ask themselves whether Perot’s business is worth so much.

Perot is a business service company with a big component dedicated to health information. It was founded in 1988 by Ross Perot — the same Ross Perot who ran for U.S. president as an independent in 1992 and 1996.

Dell’s cash pile is burning a hole in its pocket. It has said it wants to step up acquisitions, and services businesses are a logical target area, with higher margins and steadier revenue than the business of building and selling computers that made Michael Dell (pictured in shades above) the tech mogul he is today.

But why does Perot command such a hefty premium? “We think this acquisition is expensive,” and even pricier than Hewlett-Packard’s purchase of EDS last year, said analyst Shannon Cross of Cross Research. She says the cost-saving benefits are few. Even Dell says cross-selling benefits won’t materialize until 2012.

“Dell investors should be outraged at paying such a large sum for such a small, vertical operation,” said Douglas A. McIntyre of Wall St 24/7.

Needless to say, I won’t be taking a position in this deal for the MANDA portfolio. 

Now back to nature…

**On Vacation Until October 1st**

Friday, September 18th, 2009


Please note that the Stock Market Cook Book will be on vacation until October 1st, although I still might post, time permitting.

Stay Tuned and Happy Trading!

MANDA Update

Thursday, September 17th, 2009

The continuing AT&T/CYCL Soap-Opera
The planned acquisition of Centennial Communications (CYCL) by AT&T (T)  is being extended. According to the companies, AT&T is still in discussion with the Department of Justice (DOJ) for regulatory approval of the acquisition. The deal was announced in November 2008 whereby Centennial shareholders would get $8.50 per share in cash. Shareholders approved the deal in February. AT&T said the two companies remain committed to closing the deal as soon as possible.

Believe what you want, but I’m still holding my shares in the MANDA Fund. If you can take AT&T at its word, then buying in today would be a good thing. I do think they really want this company but if the DOJ gives them a major hassle, they could drop their offer and play the waiting game.

In other news, I haven’t made any new M&A acquisitions because there has been nothing worth the while. Most of the recent offerings have involved stock swaps and I’m loathe to invest in them until closing time when there’s a reasonable chance of guessing the direction of the stock of the acquiring company.

Profiting from the coming online education revolution – Part I

Wednesday, September 16th, 2009

In a well-written and thought-provoking article appearing on MSN MoneyCentral yesterday, writer Zephyr Teachout pondered the point: “Will the Web kill colleges?” Using a parallel example of the web all but putting the final nail in the coffin of traditional newspapers, the author claims that non-brand name bricks and mortar colleges (read: the non-Ivies) will suffer a similar fate. After all, newspapers and colleges are both in the business of disseminating information and no instrument does that as cheaply nor as conveniently as the internet.

But is it too soon to pay our last respects to the university system as we know it?

Change is coming
Teachout (whose day job is teaching law) says that “It is hard to predict the precise pace of change, but it’s possible that within 15 years most college credits will come from classes taken online. In 2007, nearly 4 million students took at least one online course, and the numbers are growing. Within a generation, college will be a mostly virtual experience for the average student. The Ivys [sic] will be much less affected than the middle tier and local schools. But colleges that depend on tuition and have no special brand will be hit hard. The recession will accelerate this trend as students become warier of taking on loans and state schools experiment after funding cuts.”

None of this should come as a shock to most people, especially the millions who have taken at least one class online. But who are going to be the big winners in this space? Since the entire field of online education is still in its relative infancy, predicting who the major players will be even in the not-too-distant future is difficult especially since the technologies that will enable the transition from classroom to computer are still being developed. But there are several places we can look to right now.

The obvious place to look at are the companies that are already making headway into the virtual education space–the for-profit educators. The more well-known names in this group are ITT Tech (ESI), DeVry (DV), and University of Phoenix (APOL). One nice thing about this industry group is it’s counter-recessionary nature: When the economy was sinking last year, many of these stocks were rising, presumably because those who had lost their jobs were going back to school to be retrained in more promising job areas.

Although the past couple of years have been good, what does the future portend?

Suzanne Stein, an education analyst at Morgan Stanley, said recently that she expects 12% to 15% growth in the for-profit educators over the next 12 months. Citing the large income disparity between those with college degrees and those without along with the escalating cost of higher education, Stein feels that online educational services can only grow. But she’s careful to point out that investors should focus on those education providers with lower valuations because negative changes in the regulatory environment would have less impact on them and in a positive environment they would benefit more.

Her strategy is to sell the perceived quality companies like Strayer (STRA) and Capella (CPLA) and buy the lower-priced spreads such as the Apollo Group (includes U. Phoenix), ITT Tech, DeVry, and American Public (APEI). [Note: She didn’t say what metrics she uses to value these companies, and from what I can tell, it’s not based on P/E, EPS ,or book value. The companies with the highest price-to-book ratios are ESI and STRA; the two with the lowest are APEI and DV.]

Technical considerations
Looking at the charts, the ones that she mentions as being the most undervalued also happen to be the ones that have fared the worst in recent months. American Public is off nearly a third from its 9/2008 high. DeVry, ITT Tech, and Apollo are all off 15%, 20%, and 25% respectively from their most recent highs, while Strayer and Capella are down 15% and 6%. Maybe there is something to be said for quality after all!

For those of you interested in channeling stocks, you may want to take a closer here as  some of these names have been channeling nicely over the past two years. Here’s the range for a few of the better channelers:

DeVry, DV ($51): $40 – $60
Strayer, STRA ($203): $160 – $220
Capella, CPLA ($61): $50 – $65

DV Chart 9-16-09

Looking overseas
What can be said for the prospects of American for-profit educators can be said doubly for similar entities overseas, especially China given the country’s thirst for growth. I found six Chinese concerns involved in for-profit education that trade on US exchanges: New Oriental Ed. (EDU), China Distance Ed. (DL), ChinaCast Ed. (CAST), ATA (ATAI), ChinaEdu (CEDU), and China Ed. Alliance (CEU).

All of these are priced in the $6-$7 range except for New Oriental (EDU) which trades at ten times that ($76). It is also the largest of these companies and it’s my pick of the litter based on technicals: it’s been moving up while its brethren have been languishing.

EDU Chart 9-16-09

The for-profit educators are only one aspect of the online pie that’s waiting to be divvied up. In an upcoming blog, I’ll be looking at other types of companies that stand to profit from the toppling of the Ivory Tower.

The Unsinkable Moly

Monday, September 14th, 2009

In last year’s Tax Day blog, “Good Golly Miss Moly,” I wrote about how molybdenum (aka Moly to industry insiders) would be a metal to watch in the coming years as it’s a major component in steel. As we know, steel is critical to building infrastructure and it’s also used heavily in the construction of nuclear power plants. The price of moly has been on a steady rise (except for last year’s credit crisis which tanked it along with the entire materials sector) due to the increasing steel capacity utilization rates in developing countries and improving steel capacity utilization rates in the developed nations. Over the past 50 years, annual moly growth has been averaging a steady 4%, but in 2007 that number jumped to 6.4% mainly due to increasing demand from China.

Now China is one of the world’s major moly producers but it’s appetite for the metal (and for pretty much everything else on the periodic table) has turned it into a moly importer (it now accounts for 25% of Thomson Creek’s sales) and one of the reasons why it’s been trying to partner with other miners.

Moly is commonly found along with copper so it’s natural that many companies that are principally engaged in copper mining also extract moly as a by-product. Companies that mine moly as a secondary ore are Freeport-McMoran (FCX), Rio Tinto (RTP), Southern Copper (PCU), and BHP Billiton (BHP).

Two US Moly Miners
As for those enterprises that mine moly as their principal ore, several are privately held.  There are only two that trade publicly in this country: Thomson Creek (TC) and General Moly (GMO). Thomson Creek has been physically mining the metal while General Moly is still in the planning and permitting stages of developing its two mine areas. Their Mt. Hope project in Nevada is purported to be the largest and highest grade moly deposit in the world with 1.3 billion pounds of extractable ore. The company owns 80% of this project along with Posco (PKS) steel.

One big problem facing General Moly is that it’s going to need big bucks–on the order of $700 million–to actually get the ore out of the ground. How it’s going to accomplish that has been a matter of message board speculation.

According to rknapton commenting on the Motley Fool’s Caps board on 5/19/09: “Will they [GMO] trade off a further portion of thier [sic] interest in the project to fund this? Raise a lot of debt? Issue (and dilute) more shares? These are huge questions and it’ll be interesting to see how it plays out. But, with the current low prices for moly, I think the general outlook for this company is dismal -which is already fully reflected in the stock price. That is why I think it might be a good buying opportunity here. As soon as the infrastructure demand for steel gets back on track, moly, with its low inventory levels should see a huge run up in price, and thus the moly producers such as TC (and GMO if they ever actually produce) will have a great run.”

Since this comment, the stocks of both companies have nearly doubled. However, there seems to have been some recent profit-taking in TC after it closed over $15 on August 1. Not so for GMO which broke $3 resistance only two days ago.

Barring a trade war with China, it’s possible to see speculators bid up General Moly to its next resistance area in the $5 to $5.20 region. If the company does receive its required financing at Street-acceptable terms, the stock could easily push past this level. For me to be a buyer of Thomson Creek, I’d need to see it resume its upward momentum and blow through the $15 level.

A safer, but less pure, play would be to buy the XME, the Metals & Mining ETF. All-in-all, current inventories of moly are at very low levels (estimated supply about one month) and unless the world sinks into another recession, demand for it can only rise.




“Rumors of my death are greatly exaggerated”

Thursday, September 10th, 2009

Just a quick note to my adoring public who I’m sure has been suffering significant withdrawal at the recent absence of my blog.  Please do not fret!  Dr. Kris is alive and well and in the process of forming an LLC (this is taking an inordinate amount of time), fielding emails from my fans (all two of them), and hanging out on the beach–I mean, doing vital and necessary research.  A-hem…

But I promise to get something out this week.  You probably won’t believe me when I say that not getting a blog out hurts me more than it hurts you because I feel as if I’m letting other people down.  Talk about carrying the weight of the world on my shoulders!  (Stop, I need a kleenex to dab away the tears welling in my eyes. I’m temporarily verklempt, and I’m not even Jewish.)

Yesterday I was going to write about how straddling the market sounds like a good thing (since the market has been under consolidation) but when I checked out how much at-the-money put and call options are on the index tracking stocks (DIA, SPY, QQQQ), the idea didn’t seem quite so brilliant.  And today when the bulls finally emerged victorious, I was seeing a lot of “crap” going by on the stock ticker, i.e., those low-priced, thinly traded issues with five letters in their stock symbols.  When this situation has presented itself in the past, it has typically been a harbinger of investor overexuberance, and we all know what that means.*

But if we are ultimately in for a correction, it may not be for a while so I think that tomorrow I might blog about some of these limburger stocks especially those that have been moving up quickly.  That’s where a ton of money has been made recently and since we’re just as good as everyone else, we might as well hitch a ride on this bandwagon–er, garbage truck–while we can. 

Okay, I’m off to chat with my dental hygenist (actually she does the talking and I do the listening).  Until the morrow, mes amis!

*For those of you who just fell off the turnip truck, when people start throwing good money into bad companies, that’s a sign that the market is overheated and is due for a correction.  (See Alan Greenspan, irrational exuberance, and tech bubble.)

M&A Updates

Thursday, September 3rd, 2009

There hasn’t been much M&A activity of late–only about a handful of mergers were announced in August. Most of these recent deals involved some element of stock swapping which is something I try to avoid because you never really know where the stock of the parent company is going to be come deal close. Depending on market and sector conditions, it could be a lot lower than its current value which makes buying the stock of the acquiree (i.e., the company that is being taken over) too soon an unprofitable move.

Not that I want to dismiss these types of plays entirely, but the smarter way to play them is to wait about a month or so before the expected closing date of the merger. Check out the stock of the parent company and if it looks like it’s rising and the market is rising along with it, then buying the stock of the acquiree can be a profitable move.

Why? Because when the deal closes, the stock swap will be worth more. (You’ll see that in M&A deals involving stock swaps, the stock chart of the acquiree will mimic that of the acquirer for this very reason.)

Let’s take a brief look at two such deals.

The first is oil services company Baker Hughes’ (BHI) proposed acquisition of BJ Services (BJS). This is a cash and stock swap deal that will pay $2.69 in cash plus 0.4005 shares of BHI per one share of BJS. The second is Disney’s (DIS) proposed acquisition of Marvel Entertainment (MVL) for $30 in cash plus 0.745 DIS share per share of Marvel. Both deals have board approval and they both are expected to close sometime near the end of the year.  Both must also meet customary shareholder and regulatory (anti-trust) approval. (In most instances, regulatory approval has been a formality but lately government agencies have been scrutinizing these deals more closely as we’ll see below.)

Since this past Monday when both deals were announced, the stock charts of each of the merging companies have paralleled each other. (DIS/MVL is down; BHI/BJS is up.) So, when would be a good time to buy into these deals? I’d say check out company news starting about a month or so before expected deal close. If shareholder approval has been met and there doesn’t seem to be any regulatory hurdles, then buy into the deal if the price of the parent  company (and the market) is rising.

But take note of resistance and support levels! Right now, Disney is trading over $25. It has major support levels at $25, $22, and $19. Baker Hughes (BHI) has been channeling between $34 and $42. Lately it’s been staging a bounce off lower support but the cycles have been short (about a month and a half) so that you should be able to catch another bottom around mid-October. If, on the other hand, the stock breaks down, next major support isn’t until $27.

Current MANDA holdings
There are only four holdings in my M&A portfolio (MANDA) and three of them are on thin ice–wah!  First off, what’s up with AT&T’s (T) bid for Centennial Communications (CYCL)? The deal was expected to close by summer but has been pushed back to September 30th. There’s silence on both sides which has led investors to speculate that the DOJ has some antitrust issues with the merger. Some feel that AT&T may resent the DOJ’s bully tactics and walk away from the deal, according to a recent Wall Street Journal article. I certainly hope not! Right now, CYCL is below the price I paid for it in MANDA. Today, it bounced off of previous support on higher volume, an encouraging sign. With only a few weeks left, we don’t have long to see if this one will pay off.

But the US doesn’t have a monopoly on government intervention. Today, European Union regulators launched an in-depth probe into the Oracle (ORCL)/Sun Micro (JAVA) merger. The deal has already been cleared by the government here and this new wrench in the gears could push back the closing date to sometime next January. According to a Reuter’s article, this push-back could erode share price giving competitors time to steal customers.

The good news is that legal experts and analysts following the review feel that the deal will ultimately be approved pending certain concessions. I’ll take their word for it and hang in there but if I see the price of CYCL drop below $9.00, I’m exiting my position.

The third MANDA holding, Varian (VARI), is being hit with various shareholder lawsuits involving the proposed merger with Agilent (A) for $52 per share in cash. Shareholders are angry because the stock was trading at $70 in 2007 and they feel they deserve more, even considering the stock was trading at $20 at the March low. Could they reasonably expect more? Who knows, but I think the thing that really got their goat was the no-solicitation provision and the $46 million termination fee.

I guess I’d be angry, too, but I’m wondering if the Varian board isn’t really all that stupid. Might they not know something that we don’t? Food for thought.

My other MANDA holding, master limited partnership Hiland Partners (HLND), is free from any sort of legal entanglements–surprise! But there’s still time left before the deal closes, and what with my luck…

*Daily Blue Plate Special* – September 3

Thursday, September 3rd, 2009

The server that puts up my daily Blue Plate column  on the right side of the page is down for the moment so I’m publishing it here.

New Highs on lower volume: CLS, GPS, LZ, MFN, TSPT
New Lows: NCTY
Speculative Leaders: NSU
Low-priced leaders: MEI, NANO
Bond Highs: Munis (too many to list)
Commodity Lows: Nat Gas (UNG, GAZ)
Metal Highs: Lead (LD), Silver (SLV, DBS, SIVR)
Darlings of the Day: Go Get Gold (& Silver & Diamonds (Harry Winston (HWK)!!); Munis keep zooming
Market Notes: Bullish signs: DTX holding support; SPX back over 1000 (barely); VIX sinking
Market Notes: Bearish signs: TRIN getting low (0.58); VIX still over 25

The Ghost of Christmas Future

Tuesday, September 1st, 2009

Continuing my summer reading at the beach, I made some notes on a provocative article in the August edition of Stocks, Futures, & Options magazine. In “I want you to pay higher taxes!”– an article with an intro graphic of Obama dressed as a finger-pointing Uncle Sam — writer/trader Matt Blackman delves into the President’s plan to raise taxes and, if adopted, what might be some of the ramifications.

To pay for the President’s proposed spending initiatives, the author contends that taxes would have to be increased by some 40% during the next five years which would add an estimated $6.5 TRILLION to the already burgeoning federal budget. According to a Stanford economist, this sum translates into an additional $200,000 in taxes that the average family would have to pay over a ten year period–and that doesn’t include Obama’s planned changes to Medicare and Social Security. I don’t know about you, but those figures scare the Dickens out of me!

The Obama tax plan seems to be all-encompassing. One way the administration plans to pay for all of this is to close perceived loopholes in the way US multinational corporations are taxed.

The impact on US multinationals
As of today, the United States ranks a close second to Japan in terms of combined corporate income tax rates (both are over 39%). This is almost 50% higher than the average of 26.6% for the thirty most industrialized nations and, if the President has his way, it’s going higher.

One thought is to limit expense deductions against foreign profits. Currently, taxes are deferred if the money is used to invest in foreign operations, a practice that is allowed pretty much everywhere else. Another plan is to eliminate the benefits of recent legislation to offset the disadvantages of a citizenship-based tax system. The author contends that the consequences of these proposals, among others, on US multinationals would be the following:

1. It would limit investment not only abroad but here in the US as well. Which means…

2. …that a slowdown in investment abroad would actually decrease the number of jobs here. (Economists have shown that the hiring of off-shore workers by US firms actually increases the number of jobs in the US, apparently because off-shore workers are supplying component parts to the final, higher value-added products finished here.)

3. It would weaken our ability to compete in the global marketplace. Sensing weakness, investors will dump these beached whales causing their stock prices (and the indices they prop up) to drop.

Lower valuations will make them ripe for foreign take-overs. As the author says, ” It does not take an accounting genius to appreciate the benefit of buying a company with higher costs and moving it to a lower-tax jurisdiction, especially when one considers that any other jurisdiction would have lower tax rates on multinationals than the US.”

The impact on the rest of us
For sure the administration is planning on raising tax rates on high-income earners but many feel that those in lower tax brackets will feel pain, too. Options for reducing one’s tax burden will be limited, but there will be a few.

One way is to work overseas. By doing so, an individual can exclude $87,600 of his or her income (double that per couple). Certain foreign housing costs can also be excluded. These are pretty decent incentives to learn another language. (I can hear folks dusting off their suitcases now.) How’s that for a brain-drain? (If this scenario pans out, I’d buy stock in Rosetta Stone and Louis Vuitton.)

Obama also wants to tax capital gains and dividend income at much higher rates. History has repeatedly shown that this is a phenomenally bad idea. It leads to decreased investment, lower stock prices, and guess what? A lower net gain for the government! Dow 10,000 may soon become a distant memory.

Is this why Munis have been making new highs?
Uncle Barry seems to want to tax everything, including lowering the limits on the home mortgage deduction.  Gasp! (Buh-bye homebuilders!) But one thing that has a good chance of remaining sacrosanct is the tax-free status of municipal bonds. Considering the sorry fiscal condition of many local governments (especially my home state of Caleeforneeya), many might consider secession if the Fed were to slap a tax on their munis.

What would Tiny Tim do?
So far, this grim specter is only the ghost of Christmas future. We need to open our eyes to what might be so that we can do something about it before it’s too late. If not, then we deserve what we get and in that case, “God bless us, everyone.”