Thursday, October 13, 2011

Closed End Fund Portfolio/PEP/TXI/Bought As Lottery Tickets: 50 MDCI at $4.47 and 50 STKL at 5.25/Alcoa Disappoints-Points to Slowdown

I hope to publish tomorrow a revised Gateway Post on the Lottery Ticket strategy. I recently revised the Gateway Post on Trust Certificates.  Trust Certificates: New Gateway Post In a revised Gateway Post, I will try to organized the Post better and to place snapshots of the pertinent trades at the end. Since this takes a lot of time, I will not have a post summarizing trades tomorrow.  The LT strategy is run by the RB, so it "does not have to make any sense",  the LB emphasized with a raised voice and about a million exclamation points.

I received a notice that Moody's upgrade my 2020 senior Cincinnati Bell bond to B1 from B2:

I found a copy of that report at Moody's.

This is a link to an interview of a Morningstar analyst  discussing junk bonds. He is correct in noting that junk bonds will generally be positively correlated with stocks and that junk bonds will of course be hurt by another recession.  Since many junk bonds have relatively short maturities, there is invariably a refinancing risk with a lot of these companies.

The section about California in Michael Lewis' new book "Boomerang" can be found in the current Vanity Fair issue.  I would just highlight the part about San Jose about half way through the article. The only escape for residents of that city is to leave and to allow the remaining citizens to pay for the greed of the police and fire unions.  For those who stay, it will become worse for them every year.  It is not difficult to see the many parallels with the Greek "civil servants".

The approval rating for Congress has sunk to 13%, an all time low, as politicians find ever more inventive ways to disgust the population.

1. Bought 50 MDCI at $4.47 as LT Last Monday (LOTTERY TICKET strategy) (see Disclaimer): Medical Action (MDCI) manufactures and sells a large variety of disposable medical products. A long list of the types of products can be found in MDCI's 2010 Annual Report starting at page 3: Form 10-K

The previously bought and sold this stock at higher levels. Bought 50 MDCI at 8.11 (February 2011)- Sold 50 MDCI at 9.69 (June 2011).  I sold the shares based on my negative view of a recently released earnings report. The market at that time took the shares up, and I believed that the share price needed to go down. I won that argument eventually, with a subsequent 50% or so decline in the share price. Now, I am slightly interested again, but only as a LT purchase. LB wanted to enter a limit order at $4.4 but the RB threaten to go on strike unless the shares were bought at the ask price at the time of order entry. The bid/ask spread was only 3 cents, the RB noted, and "RB was sick and tired of the LB's picayune, nickel and dime, Bull Sh__.  RB was in charge of the Lottery Ticket strategy and LB needs to butt out, go work on one of its stinking models or rules". 

2011 50 MDCI +62.44 ONLY PRIOR TRADE
An investor focusing on technicals would probably not consider purchasing this stock. The chart looks awful.  MDCI Interactive Chart The stock was trading in a channel between $18 to $25 during 2007 and it has been mostly downhill since that time.  The stock hit bottom on 3/9 at $5.55, MDCI Historical Prices, and started a robust rally thereafter. The stock topped out at $17.51 on 12/16/2009 and then started another descent. MDCI Historical  The stock hit a new 52 week low at $4.35 on the day of my purchase. 

While the technicals are awful, another issue is sinking profits.  For the Q/E 6/11, the company reported a diluted E.P.S. of 2 cents, down from 8 cents in the year ago quarter. The company does have more interest expense due to the $62.5 million cash acquisition of AVID Medical in August 2010: Form 8-K AVID was a manufacturer of custom procedure trays. 

The stock is bought as a LT based on few statistical criteria. The price to book ratio is around .49 and the price to sales ratio is .18, based on a price as of 10/10/11 and data through 6/2011.  MDCI Key Statistics  The three analysts following the company estimate 55 cents in earnings per share for the F/Y ending March 2013. That would be up from the 28 cents in the current fiscal year. If that proves prescient, the P/E is less than 10 and the company would be showing good earnings momentum. 

The revenue estimate for Fiscal 2013 is $446 million.  The current market cap is near $72 million. 

Historically, the company has had erratic earnings.  In the 2007 fiscal year, the company reported a diluted E.P.S. of 80 cents. (note 13 at page 75: Form 10-K)

Medical Action Industries closed at $4.85 yesterday, up 30 cents for the day.  

2. Bought 50 Sunopta (STKL) at $5.25 Last Tuesday (LOTTERY TICKET strategy)(see Disclaimer): The first purchase of STKL was not a LT purchase and netted a gain of $807.93:

2008 First STKL Trades=$807.93 
While I do not specifically recall the reason for the shares to pop during that time of turmoil, I decided to harvest the gain for the usual reasons. It may have had something to do with the Sunopta BioProcess unit that was later sold in 2010.  Back in 2008, I thought that it was likely that the gain would have been lost by holding onto the shares. And, I thought that the company was clearly overvalued at my last sales price of close to $15 per share.  I also recall that none of the earnings reports released during the 2008 holding period were viewed favorably. So, I was lucky in selling those shares since the shares would soon slide to less than $2. 

I next revisited STKL as a Lottery Ticket purchase in 2009. The shares had been pummeled, which perked my interest some.  Buy of 100 Sunopta at $1.65: Highly Speculative That turned out to be a good buy and I sold those shares too soon: Sold 100 LT Sunopta at $4.06:

2009 STKL Lottery Ticket Purchase Realized Gain +$224.04
Based on what was then happening with the company, it seemed reasonable to just harvest another profit, and that took my realized gains to over $1000 for this security. However, the stock continued to rise, topping out at $8.44 last January:  STKL Historical Prices

For this company, my gut tells me that it is impossible to predict the stock value based on current earnings or prior earnings history.  It seems to be valued more on changing investor perceptions about when the company will turn the corner and start delivering consistent earnings growth.  I believe that is possible but I can not say that it has happened yet. The 50 share purchase indicates a lack of confidence in a longer term favorable outcome, while the purchase in any amount indicates a continued belief in that possibility. 

Sunopta is based in Canada and is a natural and organic food company. Price to sales is around .34 and price to book is 1.12, both at the $5.2 price.  STKL Key Statistics  The consensus estimate is for an E.P.S. of 32 cents in 2011 and 45 cents in 2012. I would view those numbers positively, if STKL actually hit them.  

Company History: SunOpta Company History

STKL recently announced that it was considering its options for its 66.4% stake in Opta Minerals. Opta is a public company traded on the Toronto stock. (OPM.TO) At a 2.4 CAD price, the market capitalization of Opta is about $40.67M.  I see no reason for STKL to own shares in that company. 

STKL's last earnings report was not encouraging.  While STKL reported a 24% rise in revenues, earnings per share slid to 7 cents from 9 cents in the year ago quarter. That is just an example of the lack of consistency to the upside. The latest excuse was that the sunflower business was hit by higher input costs. SunOpta Inc.: Form 10-Q  SunOpta SEC Press Release The excuses do change.  (see February 2009 Press Release: SunOpta Inc.: Exhibit 99.1)  Possibly, at some point, this company will cease adding and divesting businesses and try to make what they now own more profitable.

SunOpta closed at $5.32 yesterday, up seven cents.

3. Alcoa (own): Alcoa reported an E.P.S. of 15 cents on revenues of $6.4 billion.  The consensus estimate for this quarter had been 38 cents last April. The consensus estimate had been substantially reduced since April to just 22 cents, and AA missed that lower expectation by a mile. The CEO blamed a fall in aluminum prices and the slowdown particularly in Europe. Income from continuing operations fell 47% on a sequential basis. The CEO maintained his estimate for 12% revenue growth in 2011.

I am near break-even on my AA shares. I am reinvesting the meagre dividend to buy additional shares and will hold until the shares pass $20.  I may buy 50 more on a slide to $9. The factors causing the disappointing results are not permanent. The current share price is hovering near levels where the stock traded in 1994. AA Interactive Chart  The P/S, P/B and PEG ratios are  less than 1. AA Key Statistics

Alcoa closed at $10.05 yesterday, down 25 cents, after trading as low as $9.73 intraday.

4. Pepsico (own):  PEPSICO (PEP) reported net income of $2 billion for the Q/E 9/3/11, its 3rd 2011 F/Y quarter on net revenues of $17.582 billion, up from $15.514 billion in the year ago quarter. Net income per share was reported at $1.25, up from $1.19 in the year ago quarter.  Excluding items, PEP reported earnings of $1.31 per share, beating the consensus estimate by 1 cent.

Year-to-date cash flow from operating activities was reported at $5.8 billion.

Worldwide snack volume grew 8% in the quarter. Worldwide beverage revenue increased 4%.

The company reaffirmed its 2011 target of high single digit earnings growth from its 2010 core EPS of $4.13.

This is a link to a long term chart of PEP shares.

PepsiCo traded as high as $63.62 yesterday before closing at $62.7, up $1.75 for the day.

5. Texas Industries (own 1 senior unsecured bond):  TXI announced after the close yesterday that it was eliminating its common share dividend effective immediately. The reason given was the uncertainty in the recovery of the construction industry. In late September, TXI reported a loss of $7.4 million or 27 cents per share for its Q/E 8./31/2011. That was an improvement over the $23.7 million loss experienced in the year ago quarter.   I mentioned that the company was likely to lose money in 2011 and 2012 when I bought just one of its junk rated bonds. Bought 1 Senior Texas Industries 9.25% Bond Maturing 8/15/2020 at 97.5 That bond was mentioned in a recent column appearing in Barrons.  I do not intend to buy more until I see the light at the end of a very dark tunnel for the U.S. construction industry. With the kind of losses being reported by TXI and no clear sign of a sustainable recovery in its business, it really did need to eliminate that common dividend in my opinion. While that would be my opinion regardless of my position in TXI securities, it is admittedly easier for me to have that opinion  since I do not own the common, and that preservation of capital move means more money in TXI's coffers to pay the bondholders.

6. Closed End Fund Table as of 10/12/2011: I believe that this table is up to date. With CEFs, I am interested in constructing a global balanced portfolio. I will shift the allocations up and down depending on my views about the markets and relative valuation of asset classes.

Several of the closed end bond funds were ex dividend yesterday.

One bond fund, GDO, has been under pressure as of late due to several factors. The fund has exposure to European corporate bonds, particularly those issued by financial institutions. GDO Holdings The Euro has declined recently against the dollar. CurrencyShares Euro The fund also has significant exposure to U.S. financial institutions. Lastly, while the fund owns mostly investment grade bonds, it has a weighting in high yield bonds.  Almost 26% of the assets are in BB or B graded bonds, and another 1.96% in CCC rated bonds. GDO Portfolio Characteristics All of those factors have contributed to a net asset value decline over the past few weeks.  Yesterday, junk bond had a decent rally, and the Euro rose against the USD.

This portfolio allows me to diversify further. It is primarily tilted toward income generation. There are a number of CEFs in this portfolio that pay monthly dividends. With a few exceptions, I am taking the dividends in cash. I recently ceased reinvesting the dividends in GDO and BTZ.  I am currently reinvesting only in ADX, BHK, CSQ, JQC, RMT, RVT, and SWZ. Over the past several months, I have tilted the portfolio into bonds, selling some stock CEFs. Several new municipal bond funds have been added since I last posted this table.  

I unintentionally omitted 200 IMF and 200 WIW from this table. 

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