Wednesday, May 25, 2011

Near Miss On Diamond

Yikes! I turned on the computer a few minutes ago and Diamond Foods was up $4.61 or 6.7%. Yesterday I played golf out of town and I spent today catching up on home ownership projects. Procrastination saved me. No shorting or put positions started on Diamond. Money still in the bank.

Why the performance boost? B of A/Merrill raised DMND from Neutral to Buy and Diamond had a great day. All the ratios that encouraged me to be negative on Diamond are more extended today. There's more money to be made, but after a near miss I'll wait a few days and see if there is more buying. A reading of the Merrill research will also be in order, although I don't expect any deep insight.

Thursday, May 19, 2011

Families Are Under Increasing Pressures

The commercial correctly says that "depression hurts". Beyond that human tragedy is the economic toll. Galloping food costs, spiraling gasoline prices, and increasingly expensive imported products sold at Wal-Mart are pummeling the world psyche. Whether it's the Chinese, American, Greek, or Arab worker, they are all feeling the pressure of rising prices.

Several years ago, when prices were rising but at a slower pace, consumers had a few coping mechanisms. Rising home values, home equity lines of credit, and credit cards were available to minimize the pain. European and American middle class members enjoyed a life style that they couldn't afford. Those cashflow avenues have painfully shut for millions while daily living costs have accelerated annually. The world's citizens are becoming increasingly depressed.

How do you financially cope if you do not have access to credit? First, you nix any thoughts of discretionary purchases and make do with what you already own. Second, you travel less or differently and you trade down on daily product purchases. House brands will gather steam and brand names will see margins erode to compete. Third, debt payments will be stretched, defaulted, compromised, or eventually discharged in bankruptcy. Lastly, throughout the ordeal, consumers will agitate for pay increases and look for other, higher paying, employment. Even with high unemployment, employee churn will result in some wage pressure.

The foregoing scenario is damaging to individuals, governments, companies, and the world economy. Unless consumers find more cash, problems lay ahead. Corporations, so far, aren't handing out large increases in pay as the emphasis is still on cost control and the labor pool is far from tight. The US has determined that a .7% increase in Social Security is appropriate for its senior citizens; not a lot of extra cash to help offset rising prices. We all know the problems that the European countries face attempting to bail out their member states and keeping their banks solvent, thereby leaving little to improve lifestyles. The Chinese have been raising wages, but far less than the inflation they are experiencing.

Where am I going with this rant? It's time to be very careful, but an investor will probably still be wrong. Some galloping commodities, like silver, after parabolic rises will revert to the mean. Lighten up on those parabolic performers. If inflation isn't here yet, per the Fed, it sure is developing fast. Faster than economies are recovering. Get real confident about a company's ability to sustain margins and volumes or jettison the position. Buy some protection: inverse ETFs or puts or institute some short positions.

I sold Brunswick, boats/motors/bowling, short a couple of weeks ago and am toying with doing the same to Diamond Foods. DMND has been growing by acquisition and just announced a deal for Pringles. I suspicion that P & G got the best of the deal as DMND is assuming $850MM of debt and giving P & G shareholders 57% of the resulting company. Commodity input costs are going to impact margins, the debt load will be a lot larger, the company more complex to manage, and there will be lots of selling shareholders once the stock is distributed. Diamond will also likely reduce debt by selling some additional shares. I haven't pulled the trigger yet, but I'm pretty sure i will shortly. The stock has been a darling, but it is now selling for a very extended valuation and that's before the Pringles component is added and P & G wouldn't be disposing of the division if it was a barn burner with a stellar future.

Brunswick is counting on consumers to return to the boating market and Diamond is hoping that consumers keep buying snack foods at their current pace and practice. I don't think either will happen. Someone once said " A conclusion is the place where you got tired of thinking" and I'm tired. The end.

Saturday, May 14, 2011

Smart Balance Is Behaving Better

Smart Balance's heart healthy regimen hasn't been a financial winner for Al and Crusty. My game-plan has been buy it and tuck it away for 5 years and let Steve Hughes do his magic. Hughes has done it several times before and the bet was that he'd build a billion dollar consumer products lineup and dispose of it profitably. I'm several years into that plan and it hasn't gone smoothly, especially 2010.

After being as low as $3.35 several months ago, its share price has marched up to $5.50. I wish I could justify the rise by significantly improved operational performance, but I can't. The country's milk leader, Dean Foods [DF] has awakened during the same period and enjoyed a similar trajectory. I don't care if SMBL rides DF's coattails as I'm elated that I'm finally in the black again.

The company's recent conference call was positive and their current advertising strategy of combining products in each ad is effective. Milk is doing well, spreads are struggling somewhat, and their Whole Foods venture is promising. They remain upbeat about extending the brand.

Since I've got a couple of years left in my original plan, I'm staying the course. $5.50 makes it easier, as does my new found environmental wacko-ness. Healthy, natural, and organic brands have been able to grow in spite of the economy and I continue to believe that Hughes and his team are on the right track. I hope I prove to be as smart as Al.

Crusty Is Turning Into A Tie-Dyed, Environmental Wacko

Of late I've been listening to Dead CDs, wondering if the Fish will do a Midwestern tour this summer, and thinking about joining Nebraskans for Peace. I can trace the beginning of this behavior back to my purchase of Power-One, a leading manufacturer of solar/wind power inverters. That investment led to a position in JA Solar, a Chinese solar panel manufacturer. I'm in danger of morphing into an environmental wacko. Since I'm not a total convert yet, I hope I've bought my two alternative energy positions cheap enough to make me a prosperous wacko. Also, to keep this behavior from becoming religion, I remain very happy with my nuke related investment in Shaw Engineering and a passel of oil and gas producers.

The stock market appears to hate the alternative energy space. After a number of years as "high flyers", solar companies have fallen out of flavor. Markets are concentrating on the possibility of less governmental subsidy due to budgetary restraints and have killed valuations. Companies can be had for a couple multiples of cashflow. Even if inventory gluts, reduced margins, and falling sales do materialize and cut last years earnings in half, a purchase today represents only 5-6 times EBITDA and since solar is not going away, that's a very attractive entry point.

JASO sells for 3 X EBITDA, 1 X Book, has a 30% ROE, and very little debt. It has been around for a long time and is well respected. As a local company, it will do well as China builds out its solar plans and has facilities and joint ventures in all other areas of the globe. It has been a big player in Europe, solar's number one locale, and will be a big player as the rest of the world picks up any slack from European retrenching. They just reported 1st quarter results which were excellent and the guidance was positive as well.

Renewability, high oil prices, Mid-East tensions, and cheap valuations are all working in this wacko's favor. Peace.
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