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Todd and I will be spending the next two weeks finalizing our 2006 Company selections. As always, member feedback and/or company suggestions are welcomed. We thank those members that took the time to communicate their investment opinions with us this year.
What Is Out
Besides gold producers – which remain a membership favorite – we received a lot of interest this year in energy related companies. Despite considerable effort, it is unlikely that any energy company will be selected this year. Rather, our look at the group uncovered two names: Meridian Resource Corp. and Harvest Natural Resources Inc. Meridian is an NG turnaround play that is highly speculative, and Harvest - probably the most undervalued oil/gas stock on paper – has the Chavez factor to deal with.
Another area we looked at is auto parts manufacturers. Lear Corp. is the one company that stuck out from an operations and valuation perspective. However, that Johnson Controls – Lear’s primary (more diversified) competitor in seating – is performing strongly while Lear restructures is reason enough for pause. As for Wilbur Ross talking about creating 2 or 3 mammoth parts suppliers, it should be remembered that Mr. Ross goes by the theory that sum is worth more than the parts (unlike say Icahn who follows the viewpoint that the parts are worth more than the sum.) In other words, Wilbur is usually not about creating value for the small shareholders focused on buying and holding common stocks, but profiting after the destruction of common stock.
Incidentally, Wilbur looked like a crackpot when he started accumulating bankrupt and pension laden steel producers and he is probably going to look like a crackpot if he continues to accumulate beaten down auto parts dealers. But as the 10,000+ parts suppliers slowly grow smaller in number it will become quite clear that looks are deceiving, and that Wilbur has done it again. This day is years away.
What Is In
With no widespread investment themes currently attractive, small cap stocks having already ran, and larger cap issues catching the attention of momentum seekers since late October, this years Wish List is going to focus on stocks of all shapes and sizes. As an example, Todd and I recently spent some time trying to analyze the recurring revenues and competitive market position of a $4.3 million penny stock while at the same time trying to gauge the future direction of a $19 billion technology cash cow. Neither Findex.com or Symantec is likely to make this years Wish List, but it goes to show that we are leaving no stone left unturned.
In short, how a wide collection of stock prices move in the next two weeks will determine whether we end up adding two or twenty companies to the Wish List.
Watch List Watch
The Swiss Water Decaffeinated Coffee Income Fund cut it monthly distribution payout from $0.1085 to $0.0708 yesterday. Following the news SWS units declined by nearly 40%. CEO, Frank Dennis, said that sales volumes should be up in 2006, but that pricing pressures and 1-unsigned contract make for an uncertain capacity picture going forward. Given these and related uncertainties (i.e. the Canadian dollar, natural gas prices, and coffee prices/competition) it is difficult to roundly argue that Swiss Water is an attractive buy. Nevertheless, at $7.30 a unit the annualized yield is 11.6%, and 7 cents a month may be sustainable in the short term if no cost overruns from the new line arise.
The problem we have selecting SWS now is that the trust has no answer to the rising Loonie issue (forwards do nothing to spur sales to US), and this negative does not appear to be going away anytime soon. Tim Horton’s may be set for great things in the US and continued success in Canada, but there is little evidence to suggest that Swiss Water will be an obvious benefactor south of the border.
Disclosure: I purchased a small entry position in SWS yesterday, and Todd and I seriously considered adding the Trust to the Wish List (to note: this does not constitute a recommendation to buy SWS. There remains the strong possibility that unit prices will weaken further. Todd does not own shares in SWS.).
--- On November 21, 2005 Nevada Chemicals filed a 8-K saying “Non-Reliance on Previously Issued Financial Statements”. Although the company was quick to put out damage estimates (only 10% of equity may disappear), it was not quick to disclose exactly when the IRS started its investigation, and/or when the board figured out that the old statements were wrong. The company had meetings on November 15 and 18, and the 8-K came out on the November 21. You have to assume that the IRS started its investigation on November 15.
NCEME shares were hurt by the announcement and delisting warning, but, unfortunately for the sidelined value seeker, not in a big way. Nevada Chemicals is a company that warrants attention, especially with the skyrocketing price of gold providing a degree of insurance that activity will not decline anytime soon. It is worth remembering that since NCEME does not own more than a 50% stake in Cynaco that the company is not required to consolidate its percentage of Cynaco’s balance sheet into its own. The restatements are expected in Dec 05/Jan 06. No one at FallStreet.com has an investment position in NCEME.
--- Husky Injection Molding shares jumped by more than 11% yesterday following the company’s outlook for ‘profits’. With the outlook for profits and China operations picking up some steam, the company seems to have stopped dreaming about punching out car bodies and changing the entire beer industry over to plastic. It should be remembered that the realization of dreams may be the only thing that will give the company a noteworthy boost in margins in today’s challenging environment.
--- UST reached an intra-day low of $36.71 on Monday and shares closed at $39.66 yesterday. Along with a JP Morgan upgrade and Cramer takeover speculation, UST shares have benefited from another hike in the dividend. UST’s yield is attractive and it doesn’t hurt the bottom dwellers confidence any that shares are off by 30% since March. However, the company is likely to continue to encounter declining premium brand sales. While buy on weakness was the idea before yesterday, weakness may not return for a little while.
BWilett@fallstreet.com
TAlway@fallstreet.com
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