Continuing the conversation of whether it's time to short America, we investigate the administration's plans for protectionism and a tax holiday for corporate capital repatriation. The first question that needs to be asked is, "Who benefits from this, and why do they want it done?"
Relevant news clips...
Europe faces the quandary of being unable to afford to bail out banks that are still considered too big to fail, while the global economy is heading for a slowdown economist Nouriel Roubini told CNBC.
Governments are running out of ways to counter a "massive slowdown" or the risk of a double-dip recession, Roubini said.
"A year ago we had all these policy bullets," he said. "We could push down rates to zero, we had (quantitative easing), we could do a budget deficit of 10 percent of GDP (or) backstop the financial system."
"Banks at this point are too big to fail, but also too big to be bailed, especially in Europe where the sovereigns are in trouble and therefore the ability to backstop the financial system is not there," he said.
Roubini said he was unimpressed with the June US employment report, pointing out that the jobless rate fell because of a large number of discouraged workers leaving the labor force, and also noted recently weak data on manufacturing, retail sales and housing.
"Everything signals a slowdown of the US, a slowdown of Europe, a slowdown of Japan and a slowdown of China," he said.
BoomBustBloggers should be well positioned to take advantage of this development. Starting January of this year I made it clear that the EU was "Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sov
Here is a the final list of companies culled from a group of nearly 1,800 that we feel have the most profit potential for the year going forward.
|This is a professional/institutional level document, but annual Retail subscribers and any subscribers who have been with me for a year ore more can email customer support for a copy as we show our gratitude for your continued patronage. Professional and Institutional subscribers should download this document in its entirety here: Financial and Non-Financial Short Scan Review & Analysis - Pro (392.88 kB 2010-06-28 05:33:44)|
This is the culmination of four blog posts:
- 1. Non-Financial Companies to Short in 2010: methodology and short listing results;
- 2. BoomBustBlog Bankruptcy Search: Focus on British Petroleum and Collateral Damage: an objective look at the prospects of BP’s potential insolvency;
- 3. The BoomBustBlog Pan-European Sovereign Debt Crisis Bankruptcy Search: a review the financial and bank holding companies whose economic and financial outlook do not support their current valuations;
- 4. and On Shorting Stocks, Double Dips and the UAL/CAL Merger: a drill down of suspect airlines stocks.
Note: The embedded spreadsheets contained in the posts above should be used to access the extensive fundamental data used in calculating the results below.
After two separate and rigorous short exercises, one each for financial and non-financial companies, we have narrowed down the list of potential candidates from nearly 1,800 companies to just 10 (with 13 runner-ups) – all of which we are confident are materially overvalued given their current and prospective financial condition and economic outlooks. What is of particular interest is the fact that a full 50% of these companies landed on our computer screens as finalist in 2008, before the great market melt-up of 2009. They were overvalued and in bad shape during the lower prices of the turbulent times, hence they are significantly more so after seeing their share prices ride the wave of irrational, recession double-dipping, "recovery" exuberance. We have even released forensic analysis of 4 of these 10 companies over the last two years, and all of the banks in the list were also members of the original Doo Doo 32 of May 23, 2008. Members of this list provided significant profits for bears and short sellers as their prices gyrated and collapsed and the market began to realize the precarious situation that they were in. Now that low volume melt-ups are [starting to] giving way to realistic fundamentals, one can expect more of the same. The more things change, the more they stay the same. We plan to refresh the analysis of the repeat offenders, and offer fresh analysis of those who are new to the list.
The two separate short scans that we have conducted were for the non-financial sector and the financial/banking sector resulted in a short-list of 23 companies, with 10 of those companies targeted for full blown forensic analysis, time and resources permitting.
Below is the outline of the methodology used to produce them as well as a select excerpts from one of our previous reports on a particularly egregious "valuation" repeat offender that has proved profitable in the past whose macro outlook tied to the housing sector is a gloomy as ever - despite a near 100% pop in its share price. This the obligatory "freebie" that I toss in to entice non-subscribers to take the plunge. This particular "freebie" happens to be quite actionable, at least in my humble opinion.
In continuing our search for potential bankruptcy candidates (see part 1, The BoomBustBlog Pan-European Sovereign Debt Crisis Bankruptcy Search - US Banks), we would be remiss in ignoring the malaise that is currently British petroleum and their drilling partners. I have just released a report to subscribers (see end of post) laying out our empirical analysis of the probability of insolvency and default for British Petroleum and their drilling partner, APC. Below, I have included a summary for the general public.
|Apart from the extreme headline risk British Petroleum faces:
There are very real potential and actual fundamental challenges facing it as well as its contracted partner, APC.
In order to estimate the probability of bankruptcy of BP and APC, we built three scenarios in which we have estimated the costs from the spill in Gulf of Mexico. While the cleanup costs are thus far being completely borne by BP (owning 65% and the current operator of the leaking well), the share of losses of APC (owning 25% in the leaking well) and Mitsui (owning 10%) will arise when BP contests for loss sharing in the courts. Since APC and Mitsui are only the financial owners with no strategic and operating interests in the leaking well, legal experts are giving a strong possibility that APC and Mitsui might escape most of the spill costs if it is proven that the explosion was largely owing to the negligence on the part of BP. Thus, for this initial qualitative portion of our analysis we assume the entire costs currently being borne by BP.
Tuesday, 08 June 2010 00:47
I would like to draw attention to BoomBustBlogger Shaunsnoll and his write up on Envirostar titled, "A dollar for fifty cents: EVI"
EVI is a well run company with 60%+ of shares owned by management that has an absurd amount of cash on the balance sheet, no debt, and trades at a ridiculous valuation with a few likely catalysts.
EVI primarily distributes commercial and industrial laundry and dry cleaning equipment including a proprietary line of dry cleaning machines (98% of revenue) with a focus on environmentally friendly dry cleaning methods and equipment. There is even a “green” angle here for you environmentalists! Overall prospects for this business are not great but not terrible. Much of their dry cleaning products sales goes into hotels, hospitals etc, which is obviously very weak. They do have some good growth into international and latin America though, which is ~20% of their sales and growing. Not exactly the most “sexy” industry but keep reading!
Valuation for this company is ridiculous given ROE, ROIC, cash flow and balance sheet and there are some clear catalysts that could unlock value in the next year. Company has ~80% of market cap in cash, no debt, is fcf positive, insiders own >60% of shares, and company has respectable ROE, ROIC and EPS growth over last few years.
Summary: So you essentially have 25% downside and 70%+ upside using relatively conservative estimates, for a 2.5x return/risk ratio with very little risk of permanent loss of capital. Impossible to know exactly what could happen but it seems under almost any scenario the company is under valued. Stock could do anything in the short term but over the next year or two I have a hard time coming up with any scenario that has less than a 40% return. Given market environment and limited downside this looks pretty compelling to me. I am a buyer at anything <$1.20. If the company starts having multiple quarters of negative net income indicating likely extended cash burn or if management shows me reason not to trust them, then I will likely exit the investment.
To read the full write-up as well as ability to download an accompanying word.doc, visit Shaunsnoll's microblog on the BoomBust by clicking here. Neither I, nor BoomBustBlog necessarily endorse this work, nor have we verified the contents, for it is independent and research and opinion posted by Shaunsnoll but I do encourage all readers to investigate, comment and share.
Any registered member may post their ideas to their own microblog, and if the content is deemed compelling I will announce it to the general population for review. You may also install the Google Ads application from within your profile and generate some ad revenue from our site's traffic.
Tuesday, 01 June 2010 06:44
In the news this morning:
Thursday, 27 May 2010 13:38
At the request of one of our Professional Subscribers, we performed a preliminary analysis of Force Protection, Inc. While it doesn't suit our needs, I have decided to put the summary out in the public domain. I urge any and all readers, subscribers or not, to forward me leads on opportunities (long or short) that you truly feel may be worthwhile. I will offer a month's professional (high end) subscription to anyone who proffers and idea that I consider actionable. Now, on the the analysis...
Force Protection, Inc. (FRPT) provides survivability solutions to support the armed forces of the United States and its allies. The company produces specialty vehicles, which are based on the blast- and ballistic-protected technology, and are designed to protect their occupants from landmines, hostile fire, and improvised explosive devices, referred to as IEDs. The company designs, manufactures, tests, delivers and supports its blast- and ballistic-protected products to increase the survivability of the users of these products. The business has only one operating segment which is ‘survivability solutions’. FRPT is a key provider of the U.S. military's Mine Resistant Ambush Protected ("MRAP") vehicle program and have sold and delivered over 3,000 vehicles under this program. FRPT currently offers four vehicle platforms the Buffalo, Cougar (includes Mastiff and Ridgeback variants), Cheetah and Ocelot. In addition to vehicle platforms the company also offers modernization and spare and sustainment services for its supplied vehicles.
Poor operating performance is a key concern for the company
Thursday, 27 May 2010 05:48
A few minutes ago, I posted an informational piece on Australia's creeping protectionism in the form of taxing multi-national mining companies in "In Australia, Tax as a Contagion". This begs the questions, "Why is Australia So Tax Happy as to Potentially Chase Away Investment in the Down Under?" Well, the answer most likely is because it is actually a "Land Down Under(water in mortgage debt) and foreign export reliance. We, at the BoomBust feel that the government is actually attempting to take a proactive stance in meeting the consequences of what is probably going to befall most export reliant countries which is why Brazil and Chile are strongly considering following suit!
As an extension of the Chinese macroeconomic discussion at BoomBustBlog throughout 2010, there may be an “Asian Contagion” spreading as a result of a Chinese
Thursday, 27 May 2010 03:57
From Blomberg: Mining Tax ‘Contagion’ Set to Spread From Australia:
May 20 (Bloomberg) -- Australia’s planned 40 percent tax on mining profits has set a benchmark for other countries weighing higher levies, reducing earnings forecasts for BHP Billiton Ltd. and Rio Tinto Group and the attraction of mining stocks.
“It could create what the miners are now describing at a global level as a type of tax contagion,” said Tom Price, commodities analyst with UBS AG in Sydney, in an interview. “They might levy a new tax at the miners in Brazil. Canada is another mineral province and South Africa.”
The new Australian mining tax coupled with rising worries over possible slowdown in China has become a serious concern for both domestic and international mining companies that have substantial exposure to Australian mining assets.
Here's a synopsis on the topic from my point of view...
Friday, 16 April 2010 18:52
After an allegedly 5.7% GDP rise in Q$-09 and a supposedly voracious appetite from China imports (you know, the nation who is supposed to lead the developed world out of recession, yet had a trade deficit last quarter), Alcoa reports a first-quarter loss of $201 million on revenue of $4.89 billion.
Alcoa's first-quarter loss narrowed as the company benefited from higher aluminum prices, which offset lower shipment volumes.
That equates to a 7% top like revenue MISS! For those that don't get the gravity of this occurrence, Alcoa is a bellwether of the global economy's use of Aluminum and there is a very slim chance the economic engine is humming along with this dismal performance.
In addition, it is very difficult to miss top line estimates by that much since it is Alcoa that guides the sell side estimates! It is not as if those Wall Street guys come up with the numbers on their own.
I will release some interesting stats on global commodities in a day or two.