Whoo Hoo!

These are timely words for this past week. Washington Mutual is no longer an entity, and now Wachovia. The average Joe investor… or any Joe for that matter has to be wondering what other institution is going to crumble. The $700 billion bailout package didn’t pass vote, and the market is taking everyone for a wicked roller coaster ride. Do you still have faith in an economic turnaround?

Now for my recent plays. Research in Motion (RIMM) took a massive dive on Friday after the company reported quarterly results that weren’t up to par. Analysts are concerned on two fronts, increased spending, and the ever increasing competitiveness of the handset market during a time of slowing consumer weakness. I buy the latter argument, but not so much the worry about increased spending. Operating margins for the last quarter are still running at 27%. Gross margins are at 50%. There are not too many businesses that operate with such huge margin numbers. These buffers will hopefully help the company in the coming quarters. In any case RIMM is hurting the portfolio, but I’m holding.

On Friday I decided to sell my entire NutriSystem (NTRI) position. It simply came down to taking my profits with a return on investment of 14%. There is the likelihood of NutriSystem dipping below the initial sales estimates I had earlier this year. Back then, I had outlined a possible worst case scenario for NutirSystem at 5% sales declines for 2008 and 2009. This put the company at roughly $19/share. In this environment the 5% declines may have been conservative. It was time to take some profits and keep a close eye on the company in the coming months.

More job losses to strengthen enrollment numbers at for-profit colleges is looking more like a reality now. For those following the education sector, DeVry is starting to look good again dipping below 50 today. Best to watch this company as well.

Time to bunker down, finish up my Herman Miller (MLHR) analysis, and establish my playbook for the next little while. Whoo Hoo!

And the fire continues...

It's only Wednesday and the fire continues in global markets. These are the days when having a playbook of prospective stocks ready to buy comes in handy. When investors see their 401k's and investments take huge dives, their are two extreme actions.

"I'll hold on, I don't want to take losses now, and hold on to losers no matter what. Things will turn around"

or

"What the hell is going on, Lehman, Merrill, and now Morgan!???? I need to liquidate, move into cash/gold"

The least popular action these days is to buy more equities. For those without capital "buying low" is not even a possibility. With the limited capital I have left, I decided to add to my Select SPDR Financials (XLF) today, and added Southern Copper (PCU) a few days ago. "Discipline" is an overused word, but now more than ever is the time to stick with it.

An update on Student Lending

An article in the WSJ reported today that the U.S. Department of Education and Sallie Mae are battling out over who will be paying for processing student loans that are backed through the Education Department's loan purchasing program. A few months ago the US government announced it would step in to inject liquidity into the student loan market after auction rate securities that back much of these loans froze. In my analysis back in March covering the for-profit education sector I had quickly discounted ITT Educational Services (ESI) due to their large exposure to private loans. With private lenders drying up, borrowing costs increasing, and Sallie Mae's fight with the government coming to light, it is rather impressive for ESI to continue it's upward climb.

View the full ESI chart at Wikinvest

Whatever it is that ITT Educational Services (ESI) is doing, they are proving me wrong... well, partly wrong :)

We'll see what happens tomorrow with Morgan Stanley and Wachovia.

10% Dividend Yield

It's time to add to the Southern Copper (PCU) position. Here is the reasoning:

With interest rates likely to fall, risk free CD’s will still attract several investors who are currently existing equity positions out of fear. As of this morning, you can still get 3.75% return on the 6 month, and 4.00% on the 12 month. Balance this against Southern Copper which at this point is running at a lowly P/E of 8.8 (ttm), and a 10% dividend yield, the risk/reward seems relatively attractive.

Will China buy more copper in the future to sustain or lift copper prices? I don’t have an answer to that, I don’t think anyone does. The dividend yield may decrease as the company may elect to tone down their dividend payouts. Cash flow took a slight dive this past quarter to do Capital Expenditures and their continued Rambo like aggression on paying out dividends. Even if it does decrease a few percentage points, the relative returns are still higher than CD’s at the moment.

Based on my discounted cash flow analysis back in February, the worst case valuation I came up with was just over $27/share. Factoring in global demand weakness, softening copper prices, I have PCU pinned at just under $24/share, resulting in a possible 20% upside return based on today’s prices. This along with the high dividend yield payout was factored into my decision today.

Another 48 hours

Besides gas moving up from $3.81 to $4.40 gallon over the weekend, Barclays is apparently walking away from a deal to purchase portions of Lehman's business, Bank of America is in merger talks with Merrill Lynch, and AIG is planning a restructuring plan to be announced tomorrow. Time to keep an eye out for XLF, possibly another move to add to the position in the coming days if weakness unfolds. The market is going to try and make sense to sort this all out. It will be a fun Monday.

Wake up Dragon!

The olympics are over China, you can start polluting again. It's time to kick up the manufacturing dragon again and start importing some copper. Copper prices have been diving since their peaks of $4.00/lb from July, to just above $3.10/lb today.

This hasn't been kind to shares of Southern Copper (PCU) which has seen their shares weaken over the same time period. What you'll often hear is that investors are dropping commodities, and any shares tied to them (FCX, PCU, RIO, etc.) in favor of the strengthening US Dollar. While this is partly true, in the case of copper there are also basic supply and demand fundamentals which have caused the price of copper to drop.

The latest ICSG report sheds a little light on the build up in seasonally adjusted copper reserves.

World refined copper production has accelerated at a faster rate than consumption over the first 5 months of this year compared to the same period a year ago. This has resulted in a seasonally adjusted surplus of 31,000 tonnes compared to -79,000 tones the same period a year ago. Copper miners obviously chased the higher prices with higher production, but what has caused copper demand to slow down? Maybe a global economic flu? Maybe China just taking a break to watch their olympic hopeful Liu Xiang fall from grace? Maybe both?

Whatever the case maybe, I'll be keeping a closer eye on the trend to see if I am going to be adding to my Southern Copper position. From the company's last quarterly report, they were still exhibiting some labor problems, but have also made continuous investments in their Tia Maria mining project and evaluating a power purchase agreement to build and operate a coal-fired power generation plant in Mexico for long term integration/cost efficiencies. China's GDP for the first 2 quarters of 2008 is running at 10.4% growth compared the same period last year [1]. If they start picking up the pace, we can expect to see copper prices rise. The main challenge will be estimating how dramatic the global slowdown will be. Potential investors should also pay attention to the company's favorable dividend yield at these levels balanced against these risks.

References:
1. National Bureau of Statistics of China