Note from Barron’s from 2/3/2014. We encourage readers to purchase Barron’s for the complete set of news, some of which are highlighted very briefly below.

Akami (AKAM) – is the WD-40 of the internet. Movement to cloud will help. Big opportunity is selling security services. Analysts expect 14% sales gain and eps of $2.15 this year. Price is currently $48.47 and selling at 22.5x earnings, but normally 25x. A similar multiple next year puts the price at $62. CEO bought $1.1m in December when priced at about $45. Q4 earnings release is this Wednesday.

Roundtable Part 3 – Mario Gabelli – JRN – $9 – owns 13 television stations, 35 radio stations and one newspaper. EBITDA will be about $75m and eps $0.55. MG values the newspaper at 4x EBITDA, TV stations at 8-9x and the radio at 7-8x. Could be worth $13 – $15. Has pension liability that should decline with rising interest rates.

DBD – $33.63 – bloated cost structure and cutting costs. EPS $1.35. If turnaround works shares could double.

CHMT – specialty chemicals – $26 – share count could fall to 70m from 96.5m in the next 3 years. Could sell for $45 in a couple of years. In takeoff stage of turnaround.

NFG – $70 – owns gas utility in Buffalo that is worth $20/share. Has pipeline business that it has not monetized and a growing exploration and production business. Could be worth $100/share.

WFT – needs to clean up its balance sheet.

POST – $50 – CEO is recreating strategy he used at Ralson Purina via acquisitions and synergies. Could have $500m in three years. CEO is great value-adder.

Brian Rogers – AMAT – likes laggards that can turnaround. $17.50 – 2.3% yield. Consensual merger with Tokyo Electron. Will buy back 10% of shares within 12 months. In 2 years, $2-$2.50 of earnings power. Lots of upside with a  12x on that.

CNX – $36.63 – could get to $45 to $50.

CVC – $16.88, could be a $22 stock. 3.6% dividend.

ETR – could earn $5 this year. $61, 12x, yield 5.2%.  Low growth, unexciting company with a safe dividend. It wouldn’t take much to earn a total return of 15% in next year or two.

NEM – $23.80 –

PRMSX

Fred Hickey – recommends holding cash to buy things after dislocation. Like gold, CEF, sells at high discount to NAV (6%).

GG – is growing. 2.6% yield, sells below BV of $25.54 at $23.19. Mines are in good locations.

GDXJ – you can get massive moves up in gold stocks.

CCJ – uranium play. Overhang in supply is done.

Scott Black – “key is to buy businesses that generate free cash and will be able to sustain growth.” ESRX – $72.86 – Revenue should be up 10% in 2013, could earn $4.32 versus $3.74 in 2012. Revenue growth could be zero this year but earnings could be $4.92 this year due to shift to generics and better SGA. Company thinks it can grow earnings by 10-20% per annum for next few years. Will benefit as more people come into the system.

ACT – 13x future earnings at 14.3x current. $183.32/share. Earnings can be $9.35 versus $6. Can earn $12.83 (next year??). Has a set goal of 10% annual growth in eps. Has launched many generics recently.

BCEI – small energy exploration and production company in Colorado.

KLAC – $63.62 – a money machine. Great long term pick.

SNDK – leader in flash memory.

Well the market decided that everything is good again, as the SPY powered higher by 1.32% to close at $177.48. Today, economic news fell on the positive side of expectations as US jobless claims fell to 331,000 from a revised 351,000 last week which beat the forecast of 337,000. Also, worker productivity rose to 3.2% versus the 2.8% forecast.

Disney came out with better than forecast earnings, moving higher by 5.3%. GE was up 1.8% and BRK.B plus 1.3%.

The market will need to push through 180 to break through the last high and to keep the momentum going. There is a big unemployment report tomorrow.

The Dow dropped 326.05 points or 2.1% and is now down 7.3% for the year.

Automakers reported that car sales fell last month. However, the weather was terrible in most of the nation. Sales west of the Rocky Mountains, where weather was normal, were good. The 10-year treasury note rallied as the rate fell to 2.585% and gold moved higher.

The Institute for Supply Management’s index of manufacturing came in at 51.3 in January. The index was 56.5 last month and the consensus was 56.1. Again, the weather was brutal in January and we do not know how much that really impacted this number.

The psychology of the market has now clearly changed even though the economics are pretty consistent. The markets were probably propelled higher than maybe they should have been last year in large part due to QE. QE resulted in investments and decisions that might not have been made had interest rates not been manipulated in recent years. That, coupled with a change in psychology and some untimely news overseas (and all of these factors might be related in some manner) have damaged the market.

But the truth is that markets do not go up forever and sell offs can often represent opportunity. And QE had to end sooner or later. Time will tell…

This was written over the weekend but I am just posting it now as I was out of town:

The markets took a tumble in January as the SP500 (SPY) lost 3.52%, the Dow (DIA) 5.27% and the Nasdaq (QQQ) 1.92%. In terms of individual sectors, utilities (XLU) were the star performer with a  +2.98% gain and health care was up 0.94%. Consumer discretionary (XLY) lost 6% followed by energy (XLE) -4.80% and materials (XLB) -4.72%. Globally, Brazil (EWZ) -12.18%, China (FXI) -9.88% and Russia (RSX) -12.5% were the big losers. Frontier markets (countries like Bulgaria and Vietnam) managed a slight gain of 0.4%. Emerging markets as a whole (EEM) lost 8.63%. Commodities that were in the black included natural gas (UNG) +16.87% and gold (GLD) +3.42%. The falling markets pushed Treasuries higher as the 10-year Treasury note rate declined from 3% to 2.6%.

Economic news in January with not that bad, kind of split between good and bad, but the market reacted more negatively to the bad news. Below are some of the key reports for the month:

Jan 2, 2014 – jobless claims drop to a 1-month low
Jan 6, 2014 – services in US grow at slower pace than forecast
Jan 8, 2014 – German factory orders rise
Jan 9, 2014 – fewest jobless claims in a month
Jan 10, 2014 – payroll numbers miss
Jan 14, 2014 – December gains in retail sales
Jan 16, 2014 – Rising US sales for home builders
Jan 17, 2014 – consumer sentiment in US falls
Jan 23, 2014 – industrial production in the US rises for the 5^th month
Jan 24, 2014 – Emerging markets slide on disappointing China data and currency problems in Turkey and Argentina
Jan 27, 2014 – Apple I-phone sales and outlook disappoint
Jan 28, 2014 – Turkey doubles main interest rate
Jan 30, 2014 –  US economy grew at a 3.3% rate in Q4, matching estimates and consumer spending rose the most in 3-years, 3.3%, but that was less than estimates.

Companies have been reporting good earnings overall, with 65.5% beating earnings estimates and 63.8% beating sales estimates.

The market had been on an almost non-stop winning streak and sentiment was high, so it was probably time for a pullback. Even so, the overall losses have not been that great, at least so far. The market had the chance to pullback further, especially on Friday as it gapped down at the open but it managed to hold the support established earlier in the week. That for now is the line in the sand, about 176.80 on the SPY.

Futures are down sharply this morning and barring a big rally during the day, markets will close at the low for the month. Here is what economist Nouriel Roubini said yesterday, “The lesson is you take even a small Argentina that has a sharp currency movement at a time when the data of China are softer and there is political risk coming from Turkey, Thailand, Ukraine, and then you end up in a mini-perfect storm. Suddenly, not only emerging-market currencies or fixed-income or equities are under pressure, but then the transmission of contagion has been also to European and U.S. equities.”

Right now in pre-market (at 9:06 am) the SPY is at 176.90, down 1.3%. The low for the month is 176.88.

I am doing some historical research and came across this quote from the Barron’s issue dated 2/16/98:

“With production flowing to countries with cheap labor and consumption moving from cheap, standardized goods to more customized products and services, problem-solvers and strategic thinkers are more valued than ever-and found more often in offices than in labs or on shop floors. Microsoft, to cite one example from the study, triumphed over Apple Computer not because of technological prowess but because of superior marketing and competitive maneuvering.”

A good example of how who is on top today may not be there tomorrow and the reverse.

The big time spill in the market least week was blamed on currency problems in Turkey and Argentina, but one has to remember such events have happened in the past. We came across this in the January 12, 1998 edition of Barron’s:

“With wave after wave of bad news blasting across the Pacific, the Dow Industrials slumped almost 100 points Thursday, then went into a 222-point power dive Friday that plunged the index to a loss of more than 4% for a trading year that began only six days earlier.”

“Driving the losses were three straight days of selloffs in Southeast Asia, led most notably by a one-day, 26% rout of the Indonesian rupiah on fears that an IMF rescue package would be torpedoed. But virtually no market and no currency was spared, with the Philippine bourse closing at its lowest point since 1993, Hong Kong’s Hang Seng index gettering hammered below 9,000 and Japan’s Nikkei unable to push through the 15,000 barrier for any extended time. Chaos was the rule: Indonesia was swept by rumors that President Suharto’s palace was ringed by army tank; Koreans sold and donated thousands of pounds of gold to the government; a distraught Thai broker jumped to his death from a high-rise in Bangkok.”

Sounds somewhat similar to today. But a week later, the market had rebounded. We will see if the same script plays out this time.

Notes from Barron’s 1/27/2014

Streetwise – A Chinese manufacturing slowdown as well as lower earnings growth hit the markets. Based on 16% of the SP500 reporting, q4 growth came in at 5.4% versus a projected 9.6% from last October. Companies make look to M&A to generate growth. Low financing costs have results in both the buyer and seller sometimes rising in price (in the past only the seller would normally rise).

Super Bowl Package – The Ultimate Sportsman Package includes a Rangers hockey game on Friday, a Saturday matinee to The Book of Mormon, Saturday night floor seats to the Knicks-Heat, the Super Bowl and a Billy Joel concert on Monday. Price – $12,000.

Hyundai – bulls see a 30% rise.

The Talk of Davos – Different from past years, attendees were generally upbeat.

Hey, Big Spender – Many companies are buying back shares at prices that are too high as measured by comparing the current p/e ratio versus a 7-year average. Better to pay a dividend instead of buying back stock at a premium.

Technology Week – Netflix keeps pounding the bears. Company forecast faster growth in new subscribers and now sells at 56x next year’s projected EPS of $6.92 and 47x this year’s projected EBITDA. EBITDA margin is only 8%.

Urban Outfitters – Same store sales +3% for November and December but less than the 5% Wall Street projections. Company owns Urban Outfitters, Free People and Anthropologie chains. Good growth in the latter two chains offset decline in Urban Outfitters. EPS should be $1.86 this year versus $1.62. 2015 should be $2.15.

Currently trades at 17x ’15 numbers which is less than the 20x multiple it normally gets. Company has strong management, consistent sales increases, strong balance sheet and cash flow.

Price is $36.52 and Richard Jaffe of Stifel Nicolaus sees the stock rising to $48. Neely Tamminga of Piper Jaffray sees $55 within a year

Weekday Trader – Genesee & Wyoming (GWR) – small railroad with a  big future. $93 today but can get to $120 per Justin Long of Stephens, “The management team is extremely strong, with a great track record of completing deals and integrating acquisitions.” Controls 20% of US short-line market. 16x ’15 EPS and has 15-20% long term earnings growth.

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IQT’s Lucky 13 portfolio – ABT, BAX, CVX, KO, COP, CVS, XOM, MCD, OXY,PEP, PM, RS and UNP.

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Market Watch – Todd Market Forecast wrote “The Dow has been up for five years in a row. Since 1901, there have been three other times when this has happened. The 1920s, the 1940s and the late 1980s. There has been only one period when there were more than five up years in a row. That was in the 1990s, when the Dow moved up nine years consecutively. In other words, we are overextended. Based on history, we are due for a down year…”.

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The Trader – 580 days since last correction.

Aqua America (WTR) – water utility – 19.5 x ’14, discount to 23x long-term median. 2.6% yield. 10-year record of compounding its net income by 10% per year and its dividend by 8%.

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Roundtable Part II

Abby Joseph Cohen – rally is more growth oriented. If p/e remains stable GS forecast for S&P is 1900. If p/e expands to 18 then S&P could hit 2088. Mexico should benefit  from improvement in US. Ishares ETF is EWW.

HFC – Energy sector is now much cheaper than SP. $49.79 100% in US. 9.3 p/e. 6.4% yield. Could earn $5.35 this year, consensus is $4.40.

IP – 2.6% yield. $48.93 (as of 1/10) $45.56 as of Friday. $4.40 this year compared to $.20 in 2013. P/E is 11x ’14.

WYN – $4.60 in ’14 v. $3.85 last year. Consensus if $4.32. Trading at a market p/e of 15.9, 1.6% yield. Risks – time share business.

JWN – $61.11 on 1/10, $58.16 on Friday. Should earn $3.68 for FY ending 2/2 and $4.20 next year, 2% yield. Same store sales could accelerate to 5% from 3%. 16.6x ’13.

EXR – FFO could rise to $2.42 in ’14 from $1.97. 3.4% yield. Negatives could be rise in cost of capital and a slowdown in average rent charged to customers.

Marc Faber – Short the Russell 2000 (IWM), buy 10-year treasuries. Likes GDXJ but owns physical gold. Short a basket of momentum stocks (TSLA, NFLX, FB, TSTR, VEEV, DDD). Also has recommendations on foreign stocks.

Meryl Witmer – likes WYN. Good capital allocator. Shares outstanding have shrunk over time. FCF of $820m. After tax cash FCF of $7.30 to $8 in a couple of years. With a 13-15 multiple gets price to $95 to $119 from about $72.

SPB – repeat of a 2013 pick. $69.80. $7 FCF in ’14. Should trade 30% higher.

ESL – $101.67/share. Avionics and controls, sensors and systems and advanced materials. Operating profit margins are below peers, new CEO has had success previously. Opportunity to improve margins. In 2015, $6.62 + $1.80 in amortization gets you to $8.42 in FCF, At 14-15x, +$7 in free cash this year, equals $125 to $133. FCF can get to $10 in ’16 or ’17.

CSTM – specialized aluminum, trades at $22.98. More use of aluminum in autos.$2 in 2013, can earn $2.50 in 2-3 years. Significant upside.

Bill Gross

PDI – fund can do well if housing market holds up. Trades at 5% discount to NAV.

PML – municipals, 7% yield, no Puerto Rican or Detroit debt.

UTG – utility income.

HYS – maturities are 5 years or less, high yield.

Last week we penned the same question and answered “student loans”. Today we look at the threat from China, specifically the Chinese shadow banking system. Fear that the system is about to implode led to worldwide drops in the markets over the last couple of days including a 300-point drop in the Dow yesterday.

China has built up this huge property and infrastructure system that was driven by easy credit that often ignored if the project made economic sense. As an example, there are stories of new airports that get maybe one or two flights a day. Excess like that cannot last.

The shadow system is composed of loans that were packaged together and sold to investors. Sound familiar? Maybe it brings back memories of subprime deals in the US. In a CNBC interview from Davos, the Chairman of a the Industrial and Commercial Bank of China said that the bank wouldn’t bail out investors in the event of a default.

China depends on cheap credit. A default in the system might have a Lehman like effect in China. The Chinese government may or may not bail out the investors and the collapse of the shadow economy may or may not happen. But in the last couple of days the markets didn’t want to wait to find out.

Another potential crisis to watch.

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