28 February 2006


Blog Hog John C. asked me about BlueNile.com today.

Funny, because NILE caught my eyes and ears earlier today, while seated on the elliptical at the gym (I refuse to run--it's a feat that I finally stopped riding the bike) I heard a caller during the Lightning Round ask about NILE. Cramer said something like "expensive, expensive, expensive" but that it had a solid niche on the internet. He placed it second on the web, to some company I cannot recall (hey, I'm a lawyer, not a court reporter). But then he gave the stock a bullish, but not a "Buy! Buy! Buy!" call.

My blogless friend Grimm made his second or third largest purchase at BlueNile.com. He used their site to learn all about diamonds, beyond the four C's. I even think he sent a diamond back because he wanted something better. Nevertheless, he found the entire process worthwhile. I considered going the NILE route for my so-far largest purchase (living in Manhattan means I rent my place, and don't own a car), but even an online vendor could not come close to my mom's employee discount.

So I was going into the digging-up-research phase with a positive attitude.

Morningstar gives NILE four stars, with a Fair Value Estimate of $42.00.

SmartMoney.com's competition page offers up numbers you'd expect:

NILE vs. Tiffany & Co. (TIF) and Zale Corp. (ZLC)
Net Profit Margin - 6.50% - 13.70% - 3.40%
Proj. Long-Term EPS Growth - 30.0% - 12.9% - 13.5%
Forward P/E - 46.1 - 20.5 - 14.0
PEG - 1.54 - 1.59 - 1.04
ROE - 16.00% - 18.90% - 11.90%
ROA - 11.60% - 12.50% - 6.40%

Tiffany's impeccable brand garners the highest profit margins, and returns on equity and assets. Zale lags, and thus is discounted by Wall Street. NILE has tighter profit margins, but is a leaner just-in-time retailer without the bricks and mortar costs, so it has a healthier ROE/ROA than one may expect. But the key is NILE has wonderful projected growth. Growth trumps value when it comes to share price.

But shareholders owning for growth can be a fickle bunch. Any sign of slowing growth, and many will flee for the latest growth flavor-of-the-month.

And that just happened with NILE, which is another reason I'm checking it out. Kimberly Picciola at Morningstar recently commented on a bump in the growth road:

On Tuesday, Blue Nile NILE reported disappointing fourth-quarter numbers and provided a soft outlook for 2006. Revenue was up 13.5% and operating profits grew 10% from the year-ago period, slightly lower than we expected.

Picciola goes on to relate that NILE was hurt by the increased costs relating to keyword-search-advertising. Jeff Matthews at his excellent blog also discussed this problem.

While I would not go so far as to put this bit of bad news in the BNBNRBN category, the recent drop in the price of NILE was certainly a good opportunity to enter a profitable position in a reputable leader in online jewelry.

Let's look back to rosier times, say, last August, when fool.com ran a positive piece by Alyce Lomax:

The end of spring and early summer might not spark as many marriage proposals as the holidays or Valentine's Day, but Blue Nile (Nasdaq: NILE) seems to be doing fine nonetheless. The company that pioneered online diamond sales reported some rather impressive earnings numbers yesterday evening.

Blue Nile's second-quarter net income increased 50% to $2.8 million, or $0.15 per diluted share. Sales increased 25% to $43.8 million. Average order size was $1,441, an 11% increase from this time last year. Gross profit increased 26% on a year-over-year basis, while gross margin increased to 22.8%, which Blue Nile said was its highest gross margin since the first quarter of 2004.
Plenty of Fools are Blue Nile fans -- after all, it's a Motley Fool Rule Breakers selection. Among the stock's possible catalysts are recent data showing that people are increasingly willing to buy fine jewelry online. Match that with research predicting skyrocketing use of broadband Internet -- Forrester sees broadband in 62% of households by 2010, compared with just 29% last year -- and you've got a recipe for some pretty good times for Internet retail.
Blue Nile's numbers argue that the company continues to make headway in a market that only recently seemed a questionable draw for customers. The intrusion of competitors, and Blue Nile's continued sales and earnings increases, show that the space is a solid one. If it can continue to differentiate itself from rivals, provide users with a better shopping experience, and capitalize on some of the current trends in e-commerce, Blue Nile's got the wind at its back.

Buying NILE last August, and selling it in November would have been the ideal situation. This most-recent dip is a buying opportunity, but I'm wary of the fact that NILE's elevated stock price is dependent on significant continued growth. The soft '06 outlook is refreshingly honest (again, check out Jeff Matthews' post linked above), but I'm not sure honesty will be rewarded. NILE is attractive--it's got one of the four C's covered, clarity. But like when I bought my diamond, I think I'm going to put my money elsewhere, even though I like NILE.

25 February 2006

Creepy Lifecell Update

Here is another BNBNRBN excerpt on the Lifecell story, from the AP, in the Houston Chronicle:

NEW YORK — Shares of human tissue reprocessors have reversed a noticeable dive in the five months since allegations arose that one of their suppliers stole body parts from coffins, but the stocks have yet to return to pre-October levels, even as charges are filed against the supplier.
The first of the companies to issue a recall of tissue products was LifeCell Corp. of Branchburg, N.J. Lifecell recalled products made from human tissue obtained from the supplier on Sept. 30 after a doctor the company hires to screen tissue noticed discrepancies in paperwork from Biomedical Tissue. The recall was made public Oct. 7.
However, the extent of the recall can be seen in financial filings for the quarter. LifeCell took a $1.4 million charge in the third quarter for inventory affected by the recall. The company booked $24.5 million in revenue in the third quarter. Lifecell added that Biomedical Tissue was only one of out about 40 tissue suppliers it used.

Here's the kicker:

FDA spokesman Stephen King said the agency ensured all unused product had been returned after the voluntary recalls started. King said the agency and the Centers for Disease Control and Prevention determined the risk of the suspect parts communicating disease to patients is considered very low, but still unknown. The FDA is unable to comment on details of the investigation as it is still ongoing, but King said the agency is working with all affected parties, as well as all state and local officials involved.

I didn't know Mr. King was moonlighting as both an Entertainment Weekly columnist AND an FDA spokesman. King's nothing if not prolific.

And here's the good news to calm the shivers:

Shares of Lifecell have recovered the most. The company's stock closed at $21.63 on Sept. 30, then dropped 11 percent to close Oct. 7 at $17.75, hitting a low that day of $15.11. Lifecell shares close at $21.20 Friday on the Nasdaq, down 56 cents, or 2.6 percent for the day's session and down only 2 percent since announcing the recall.

24 February 2006

Portfolio Changes

I made some changes to the portfolio today, based on two bits of bad news.

The first bit of bad news came from last week's Poore Brothers conference call. The new CEO, Eric J. Kufel, apologized for the abysmal downturn in SNAK's business and promised a turn-around. I expected this, judging from the stock price and events of Q4 2005. But then I listened to the dismal roll-out of the Cinnabon-branded snacks. Kufel mentioned significant inventory write-downs, and said that Poore Brothers management was considering all options regarding the Cinnabon endeavor, including killing it.

The tasty cinnamony morsels on the Poore Brothers website were a (minor) deciding factor in my decision to start a position in SNAK at $2.65. Thoughts of cream cheese icing convinced me to add to the SNAK position at $2.60.

This afternoon, I sold my shares for $2.80, a perfectly reasonable profit after losing my justification for holding the shares.

The second bit of bad news came in the BNBNRBN variety. An ongoing criminal investigation involving a corpse tissue thief mentioned Lifecell.

From NorthJersey.com:

Ex-dentist indicted in plot to sell body parts
Thursday, February 23, 2006


The owner of a Fort Lee tissue recovery firm has been indicted in a plot to sell body parts from corpses illegally dissected in New York funeral homes, his lawyer confirmed Wednesday night.

Michael Mastromarino, a once promising dental surgeon, surrendered to authorities in Brooklyn late Wednesday night, said attorney Mario Gallucci.

Mastromarino allegedly stole tissue from the cadavers and sold it to tissue banks for use in medical and dental implants.

It was unclear whether Mastromarino would face any charges in connection with his work with New Jersey funeral homes. The majority of his tissue harvesting was conducted in New Jersey, but so far allegations have surfaced only in Brooklyn.

The Kings County District Attorney's Office would not discuss the investigation. However, a spokesman for the office confirmed that a press conference regarding the case was scheduled for 1 p.m. today.

Mastromarino will appear in court shortly after the news conference, said Gallucci, of Staten Island. The attorney said his client committed no crimes while harvesting tissue for legitimate sale and will fight the charges.

Gallucci expects that at least three other people could be indicted in the case. They likely include staff at the firm, BioMedical Tissue Service, and could include Mastromarino's alleged partner in the scheme, 49-year-old Joseph Nicelli, a former Brooklyn funeral home owner.

Gallucci said he could only speculate on what charges might be included in the indictment when it is unsealed today.

"The fact that the prosecutor hasn't told me what they are and wants him in custody before he tells me leads me to believe it includes state racketeering charges," Gallucci said.

Mastromarino might also face fraud and forgery charges, the lawyer said.

"We absolutely, vehemently deny the charges," he said. "He was not doing anything illegal or wrong when he harvested."

Mastromarino was a respected dental surgeon with offices in New York and Fort Lee before drug use sidelined his career. After surrendering his dental license in 2000, he entered the world of biomedicine, extracting bones, tendons and skin from hospitals, morgues and funeral homes.

The case involves allegations that the ring carved up the remains of "Masterpiece Theatre" host Alistair Cooke, who died of cancer in 2004 at age 95, and sold them on the open market. In another case, a Brooklyn grandmother's leg bones were replaced with pipes.

Since investigators opened the case in October, dozens of people around the country -- including at least 60 in New Jersey -- have been notified that bones and other implants they received in surgeries have been recalled. Several lawsuits have been filed.

The case also has sparked calls for tighter regulations on the tissue industry, in which more than 1 million bone, tendon and skin transplants help cancer and burn victims annually.

According to New Jersey dental board records, Mastromarino surrendered his dental license in November 2000 after he tested positive for cocaine and the narcotic meperidine. He was arrested for possessing Demerol, a painkiller.

Mastromarino, 42, and his wife, Barbara, live in a $1.5 million house on the Palisades in Fort Lee.

Mastromarino came under suspicion when Branchburg-based LifeCell, which purchased tissue from him, found irregularities while reviewing documents pertaining to the donors.

LifeCell discovered that the phone numbers for the donors' physicians were wrong. The phone numbers listed for family members who gave consent for the donations were also wrong, leading the company to believe the tissue was harvested illegally. LifeCell executives immediately alerted the U.S. Food and Drug Administration and voluntarily recalled compromised batches of tissue.

Late last year, the FDA ordered a recall of the potentially tainted products because of an exposure risk to HIV and other diseases.

However, FDA officials insisted the risk is minimal.

The FDA shut Biomedical Tissue Services on Feb. 3 after allegedly uncovering evidence that the firm failed to screen for contaminated tissue. The agency also said it found that death certificates in the company's files contradicted state files on age of death and cause of death.

I know, it takes a while before Lifecell gets mentioned, but when it does, LIFC acted as a responsible corporate citizen. Lifecell investigated the situation, notified the FDA immediately, and recalled batches voluntarily.

I call this Bad News But Not Really Bad News. Yes, the stock dropped 4% yesterday. It dropped another 2% today, just in time for me to take my SNAK money and increase my LIFC position at $21.25 per share.

Why did LIFC drop again today after rebounding at the end of trading yesterday? I'm guessing more BNBNRBN stories from the Rochester and Syracuse newspapers:

7 got suspect tissue, report no ill effects

Matthew Daneman
Staff writer

(February 23, 2006) — Suspect bone and tissue harvested by Biomedical Tissue Services found its way into the bodies of several local patients. None has reported any ill effects.

In October, the U.S. Food and Drug Administration directed the recall of all material that originated with the company, and recommended that hospitals and physicians notify any patients who had received material from that company.

Hundreds of patients nationwide have received that notification in recent months.

Locally, the University of Rochester Medical Center found that it had used nine tissue specimens from Biomedical in medical procedures involving seven patients at its hospitals, spokeswoman Karin Gaffney said Wednesday.

A spokesman at Rochester General Hospital did not respond to a call early this week about any patients affected there. A Park Ridge Hospital spokeswoman did not return a call placed Wednesday.

The UR contacted its seven patients after it received letters from LifeCell of New Jersey and Regeneration Technologies of Florida, both of which provide tissue to UR for medical procedures, Gaffney said. In all, five regional or national tissue processors had acquired material from Biomedical Tissue, according to the FDA.

The seven URMC patients were offered counseling and free testing for HIV, hepatitis and syphilis. None of the seven has experienced any related health problems , Gaffney said.

Several people elsewhere have claimed they contracted syphilis or hepatitis from Biomedical Tissue implants.

UR went through its tissue bank and its database of tissue to make sure it had no Biomedical Tissue Services material on hand, Gaffney said. She said it was the first such recall at UR.

Two CNY patients got tissue linked to indicted supplier
Community General received products from New Jersey firm in body-parts probe.
Friday, February 24, 2006
By Delen Goldberg
Staff writer
Two patients treated at Syracuse's Community General Hospital received transplant tissue supplied by a company facing charges of harvesting skin, bones and tendons from cadavers without permission or proper screening, a hospital spokeswoman said Thursday.

The hospital would not name the patients Thursday or say whether they got sick.

Community General received products supplied by Biomedical Tissue Services Inc., a New Jersey company currently being investigated for selling stolen cadaver tissue for use in skin grafts, dental implants and hip replacements. Biomedical Tissue Services was one of dozens of companies that provided tissue specimens to LifeCell Corporation, Community General's tissue supplier.

In a short statement released Thursday night, Community General spokeswoman Maria Damiano said the hospital "conducted a thorough investigation" and "considers the matter resolved."

Damiano would not elaborate Thursday. She would not say whether the hospital offered free counseling and testing for diseases, as many of LifeCell's other clients did. Hospital President and CEO Thomas P. Quinn did not return several calls.

Late last year, the Food and Drug Administration ordered a recall of the potentially tainted products and warned that an un-

told number of patients could have been exposed to HIV and other diseases during the procedures. The FDA said the risk of infection was minimal.

On Feb. 3, the FDA shut Biomedical Tissue Services, saying it had uncovered evidence the firm failed to screen for contaminated tissue. The agency also said it found that death certificates in the company's files were at odds with those on file with the state over the age of the deceased and the causes and times of death.

Authorities on Thursday announced a 122-count indictment charging four people, including Biomedical Tissue Services founder Michael Mastromarino, with looting dead bodies.

Mastromarino, Joseph Nicelli, a Brooklyn mortician, and two other defendants, Lee Crucetta and Christopher Aldorasi, pleaded not guilty to charges including enterprise corruption, body stealing, opening graves, unlawful dissection and forgery. Each would face up to 25 years in prison if convicted, prosecutors said.

Authorities released gruesome photos of decomposed bodies that were exhumed as part of a widening investigation expected to result in more arrests. The photos offered proof that the defendants removed bone and replaced it with plastic pipe - normally used for plumbing - to conceal the theft, District Attorney Charles Hynes said.

Hynes compared the crimes to "something out of a cheap horror movie."

Among the bodies said to be tampered with was that of "Masterpiece Theatre" host Alistair Cooke, who died in 2004. Paperwork was doctored to show Cooke's cause of death as a heart attack and his age as 85. He died of cancer at age 95.

Mastromarino's defense attorney Mario Gallucci has said his client "vehemently denies doing anything illegal or wrong."

LifeCell, which used tissue from Biomedical Tissue Services for several skin graft products, issued a recall on Sept. 30. Community General conducted an investigation shortly after, Damiano said.

Community General appears to be the only hospital in Central New York to receive potentially tainted tissue. Other hospitals in the region use tissue supplied by different companies that never worked with Biomedical Tissue Services, spokespeople for those hospitals said.

17 February 2006

A Batch of BNBNRBN Stocks

Tomorrow, I'm going to follow the progress of some potential BNBNRBN stocks. For now, I'm going to offer recaps of today's news, along with my musings on these stocks backed up by minutes and minutes of in-depth research.

And yes, my horrible acronym-of-sorts is back. I'm interested in a few stocks that the market eviscerated today, to see if any fell in price because of "Bad News But Not Really Bad News."

Here were today's losers, excerpted from MarketWatch.com's Movers and Shakers page:

Shares of Educate Inc. (EEEE :8.89, -3.01, -25.3% ) tumbled 25.3% after the Baltimore-based provider of education services posted a loss from continuing operations of $1.7 million, or 4 cents a share, down from a year-ago equivalent profit of $3.9 million, or 9 cents a share. The average estimate of analysts polled by Thomson First Call was for a profit of a nickel per share in the December period. Revenue totaled $76.6 million in the quarter, compared to Wall Street's consensus estimate of $77.4 million. "We were disappointed by our fourth quarter operating performance," said Chris Hoehn-Saric, the company's chairman and CEO. Looking ahead, the company said it expects its operating performance in the first half of 2006 to continue to be hurt by declines in enrollment in the fourth quarter, and the integration of acquired territory.

Espeed Inc. (ESPD : 8.37, -0.93, -10.0% ) shares fell 10% after the New York-based provider of electronic marketplace and trading technology posted an in-line adjusted profit of $900,000, or 2 cents a share, for the fourth quarter, but gave a disappointing forecast for fiscal 2006. The company said it sees an adjusted profit of 2 to 6 cents a share for the year on revenue of between $147 million and $150 million. The current average estimate of analysts polled by Thomson First Call is for earnings of 17 cents a share for 2006 on revenue of $165.4 million.

Expedia Inc. (EXPE :19.82, -4.43, -18.3% ) shares plummeted 18.3% after the company reported fourth-quarter earnings of $25.2 million, or 7 cents a share, down 43% from $44.1 million, or 13 cents a share, in the year-earlier period. Excluding certain items, earnings came in at 20 cents a share compared with 27 cents last year. Revenue at the Bellevue, Wash., travel-services company rose 13% to $494.7 million from $439 million. Analysts polled by Thomson First Call had forecast revenue of $505 million.

Shares of Navigant Consulting Inc. (NCI :19.83, -2.52, -11.3% ) dropped 11.3% after the Chicago-based consulting services provider said it's received an adverse order and an interim finding from an arbitrator related to its dispute with the City of Vernon, Calif. The order denies the company's right to recover unpaid fees and expenses previously billed to Vernon. For the fourth quarter, these fees and expenses totaled $1.4 million. The arbitrator also found that Vernon is entitled to recover certain amounts already paid to Navigant. In addition, the company reported fourth-quarter earnings of $11.6 million, or 22 cents a share, up slightly from a year-ago profit of $11.1 million, or 22 cents a share. The latest results include charges totaling $1.5 million, or 3 cents a share. Revenue rose 16% in the latest three months to $150.5 million from $129.3 million in the same period a year earlier. The average estimate of analysts polled by Thomson First Call was for a profit of 25 cents a share in the December period on revenue of $151.6 million.

Each of these stocks is highly rated by Morningstar, except for Navigant, which is not rated.

First off, Jonathan Schrader at Morningstar relayed the bad news at EEEE:

Educate reported fourth-quarter results Thursday that were much worse than we'd expected. The company actually posted a loss in the quarter, while consensus estimates were for a nickel per share. We've been somewhat concerned about weak demand for Sylvan's services brought about by declining consumer confidence, but it does not appear that this was an issue. Rather, the company blamed the shortfall on a declining conversion rate, meaning that a lower-than-usual percentage of the people that inquired about its tutoring services in the quarter actually enrolled. This declining conversion rate points to subpar execution by management, which is quite troubling from our perspective.

Educate admitted that it had done a poor job, suggesting that the significant number of acquisitions during 2006 distracted Sylvan's managers from their most important job: providing topnotch service to potential and current customers. In response, Educate moved its president and COO Peter Cohen back into his old post as president of Sylvan, while adding two new positions reporting directly to Cohen: vice president of company-owned centers and vice president of franchise services. Educate also replaced two of its five regional managers and hired a new director for its important contact center operation.

It appears that Educate has recognized its failure and has moved quickly to improve. Heads have rolled, but that doesn't mean that improvement will be immediate. Rather, we suspect that conversion and organic growth will gradually improve in the coming year. It should help that management has decided to turn off its acquisition machine until it rights the ship. No acquisitions, however, doesn't mean no growth. 2006 should still be a pretty good year thanks to acquisitions made in 2005, greenfield additions in Sylvan's territories--the firm has already added seven this year--and organic growth in Hooked on Phonics. We're forecasting 20% growth, at the low end of management's projection for 20%-25%.

Educate will have to spend some more money in order to make money, so we have increased our cost assumptions for 2006 and 2007. This reduced our near-term cash flow estimates--the most valuable in any discounted cash-flow model--and brought our fair value estimate down by a little more than 10%, to $15 per share. With the stock now trading near $9, we think it is an extremely compelling investment. The stock, however, is very volatile, and near-term results will likely be poor. If you don't like volatility in your investments, Educate is probably not the stock for you. But if you don't mind some volatility and have a two- to three-year window, Educate could be a good pick.

Morningstar missed this one. And the last paragraph definitely has some hedging of one's bets.

Cantor Fitzgerald's Espeed deals with bond market trading. All I really know about Cantor is that Lutnick pours a lot of cash into our alma mater. I knew Cantor as the name of Haverford's art gallery before I knew that it was a bond-trading powerhouse. Morningstar suggests that Espeed is run more for his and Cantor's interests, and not the other minority shareholders.

EXPE competes with Cendant's Orbitz, which is now part of the WershovenistPig Portfolio. And the competition between these two players and Travelocity is good for travelers, but does not seem to be a good deal for shareholders. And personally, I use SideStep.com for my flight, car, and hotel needs. But a compelling price is a compelling price.

Navigant provided litigation consulting services on an obscure bit of litigation I worked on for the past three years. From my perspective, if you want to talk about a growth industry, it's companies that help law firms deal with enormous document-intensive litigations. This price dip seems like a fine opportunity to me.

Such a slew of bad news for all of these stocks, and on an up day for the market, too. Out of these four, I am most interested in NCI and EXPE.

Do you agree?

16 February 2006

Rearranging the deck chairs at Pier One?

Back in August, back when this blog was a wee one, I compared DWRI and PIR. Fortunately, I did not have money to invest, because I may have flushed it into DWRI. Yes, I picked the purveyor of sorta-affordable high design furniture over the Pottery Barn wannabe Pier One.

Cramer can and does change his mind on a stock from one day to the next. I'm taking a second look at PIR six months later.

Nat Worden at thestreet.com thinks Pier One could be a Danish takeover target:

Jacobsen, a European retail magnate and chairman of an Iceland-based firm called Lagerinn ehf, franchises Jysk stores (pronounced yoo-sk), a home furnishings chain that's known as the Danish version of IKEA. Jacobsen's chain has 1,000 stores worldwide, with 23 stores in Canada and two in New Jersey under the name Inspiration. Some investors see his interest in Linens 'n Things, which has now shifted to Pier 1, as a sign that he is looking for a cheap acquisition to expand his reach in the U.S. -- the consumer capital of the world.

"It's entirely possible that he views Pier 1 as a potential takeover target," says Morningstar analyst Anthony Chukumba. "Acquiring Pier 1 would give him entry into the U.S. with a company that has a fairly well-known and well-respected name brand, a nationwide store presence and a decent amount of scale."

The presence of Jacobsen at Pier 1 adds one more wrinkle to a value play that has already attracted legendary investor Warren Buffett, whose Berkshire Hathaway (BRKA:NYSE) disclosed a 9% stake in 2004. Buffett cut his stake in half as the retailer floundered, and Berkshire now owns about 3 million shares.

Shares of Pier 1 have declined about 50% over the last two years as its sales and earnings have consistently slowed and disappointed Wall Street. So far this year, the stock has shown some signs of life after dipping below $9 in December. Despite a dreary holiday performance, shares are now up 29% for 2006, and with a major merchandise overhaul in the works, investors are starting to look at it as a glass-half-full situation.

Sanford Bernstein analyst Colin McGranahan says an investment in Pier 1 is speculative, as it is currently trading at about 86 times earnings estimates reported by Thomson First Call through 2006. But he also says the upside reward potential far outweighs the downside risk.

"It's a very cheap stock with massive potential upside if any kind of turnaround ever materialized," McGranahan said. "It looks like the downside, especially with this guy Jacobsen poking around, is minimal. The stock has bottomed out at around $9 on a few occasions.

Anthony Chukumba at Morningstar spells out the four possible reasons to pick up shares of PIR as a value bet:

We think that there are four possible scenarios for Pier 1 over the next 12-18 months that could significantly increase shareholder value. The first is the planned introduction of more modern styling to the company's products being well received by customers and spurring a sales rebound. The second is the closing of several unproductive locations, leading to higher sales and profits in the remaining store base. The third is an overhaul of top management, which is long overdue, in our opinion. Finally, with all the recent interest in the retail sector by private equity firms, we think that a leveraged buyout of Pier 1 is a distinct possibility. If none of these scenarios appears likely to play out, we will cut our fair value estimate substantially.

Morningstar puts a fair value of $17 on this $11.11 stock. I'm putting PIR in the on-deck circle.

15 February 2006

The Mighty Wind

I've made my oil investment.

Ethanol is a bunch of hooey. Nobody has convinced me that the energy used to grow, harvest, and convert corn into fuel is or will be economical without governmental handouts.

But the wind. Yes, the neverending wind. The mighty wind. And the panoply of original Quixote references, made by journalists (or headline writers) who've never read Cervantes. Speaking of, here's Claudia H. Deutsch in today's New York Times:

Investors Are Tilting Towards Windmills
"When you get the president talking about renewable energy, it has to be turning up the dial at G.E.," said Deane M. Dray, an analyst at Goldman Sachs who has an outperform rating on General Electric shares.

Certainly, it is getting attention from Energy Financial Services. The unit recently bought a wind farm in Germany and is installing new turbines there at a rapid pace. It has invested in solar energy farms in California and is in the end stage of negotiations for a large solar project in Europe. Indeed, renewable energy projects already account for $1 billion of the unit's $11 billion portfolio and are its fastest-growing niche. "The renewables space has really heated up, and I hope it will account for 20 or 30 percent of our investments in five years," J. Alex Urquhart, the unit's president, said.

Today, alternative energy financing is barely a footnote in G.E.'s revenue stream. But the G.E. machine is gearing up for change. On Jan. 30 — a day before the president bemoaned the nation's "addiction to oil" — Mr. Urquhart carved out a separate group to focus solely on renewable energy projects. Lorraine Bolsinger, who runs G.E.'s Ecomagination program, says she has begun to "run the financial projects through our scorecard process" to see which ones she should include in her group of G.E.'s "green" products.

The pace is quickening in G.E.'s industrial camp, too. Energy equipment and related services, which accounted for about $42 billion of G.E.'s $149.7 billion in revenue last year, is G.E.'s largest industrial business. Alternative energy products like wind generators accounted for less than $6.3 billion of last year's sales.

Four years ago, G.E. bought Enron's wind-turbine unit, and it is now a $2 billion business, heading rapidly toward $4 billion. In five years, G.E. expects that alternative energy products will account for more than a quarter of energy equipment revenue.

Institutional investors are backing this strategy as well:

G.E. is not alone in backing renewables, of course. In November, Goldman Sachs committed to investing $1 billion in renewable energy, and it is already "well on its way" to achieving that, according to Lucas van Praag, a Goldman spokesman.

J. P. Morgan Chase , too, has said it will invest more than $250 million in wind-energy projects. And venture capitalists have for some time been investing in smaller renewable energy projects and technologies.

Cramer had an alternative stock suggestion back on January 20th. Here's the Mad Money recap:

Chasing Windmills
General Electric (GE:NYSE) , the parent company of CNBC, which airs "Mad Money," reported earnings Friday. While Cramer wouldn't say whether the conglomerate is a buy or a sell, he did say that its performance could indicate which sectors warranted a closer look.

Wind power was one of the most exciting things happening at GE in the latest quarter, he said. So for a wind power play, Cramer suggested taking a look at Zoltek (ZOLT:Nasdaq) , a stock recommended to him by Will Gabrielski, co-author of TheStreet.com Stocks Under $10 newsletter.

Zoltek is not strictly speaking a wind power company, but it makes carbon fibers used to reinforce windmill blades, Cramer said. It supplies its products to Spanish and Danish wind power companies, and it doesn't really have any competition, he added.

If Zoltek were the best play on wind power on earth and everyone thought so, the stock would be expensive, Cramer said, but right now no one knows about it and it's near its 52-week low.

There is some risk here because the company issues warrants, which Cramer said is not the best way to raise money. But it's a well-positioned wind power play.

So while he was excited about Zoltek, he cautioned viewers to use limit orders if they want to buy it because it is such a small stock.

Zoltek (ZOLT) is trading at around $14.70 right now, up 4% for the day, and up about 40% since Cramer's mention. Talk about the wind blowing this stock up. ZOLT is not profitable, with a large and growing negative free cash flow. But who cares about that--this is a momentum play based on windmill write-ups in the Times, an off-note portion of the State of the Union delivered by our former-oil-man President, and attention by James J. Cramer.

As you would expect, Morningstar has not rated ZOLT.

GE gets 4 stars and a fair value of $38 from Morningstar. GE currently trades at around $33.35, with a 2.72% yield, near its 52-week low. It's a classic mega-cap multinational that seems to be trading right now at a bit of a discount.

ZOLT could jolt one's portfolio. I personally wouldn't even consider ZOLT as a speculative play until it pulls back considerably. GE looks like the staid, safe investment it is. If the Times article is correct, GE is a long-term alternative energy play that is priced right, right now.

14 February 2006

Three stocks priced 50% or more below Morningstar's fair value

Beautiful blizzard this weekend. On such a snowy Sunday, I had my first snowboarding experience--in Riverside Park, of all places. Didn't fall as much as I expected, but my ass did find a bit of concrete under the 26 inches of snow once. But after a quickly-muttered "ouch", I gracefully got back on my own two (bound to a slippery board) feet. When I say gracefully, I mean something completely different.

Speaking of falling, I found three stocks using stock screening tools at Morningstar. I wanted some real outliers, so I requested stocks that are priced at 50% or more below Morningstar's fair value. What each stock shares in common is a precipitously falling chart and membership in a very exclusive club.

The three are Domstar (DTC), Lear (LEA), and TVL.

Here's some extensive research, Dykstra-style (i.e. cribbed from Morningstar):

DTC: Canada-based Domtar is one of North America's leading integrated paper and forest products producers. The company maintains four operating divisions. Its flagship paper division produces coated and uncoated paper. The company is also involved in the distribution, warehousing, and marketing of paper products, timber harvesting, and lumber manufacturing. Its packaging division, a 50%-owned joint-venture operation, produces corrugated packaging material and containers.

DTC closed yesterday at $4.86. Morningstar's fair value for the stock is $10.00.

Why the disparity?

Paper is a commodity, with the attendant slim profits and minimal pricing power that comes with the production of a fungible good. Contributing to these economic constraints are higher prices for energy and pulp. DTC is countering these effects by restructuring, cutting costs and closing inefficient plants. Buying DTC shares is not a speculative bet on a company growing from nothing into something--it's a value bet that DTC will eventually rebound and generate profits from its significant operations.

LEA: Lear is a leading provider of vehicle interiors, including seating, flooring, door panels, and electronics. The company employs more than 110,000 people worldwide with revenue of about $17 billion. The seating segment makes up about two thirds of revenue, about another fifth comes from interiors, and the remainder comes from electronics. Lear has been named the most admired company in the auto-parts sector by Fortune magazine.

LEA closed yesterday at $22.36. Morningstar's fair value for the stock is $56.00.

LEA also has issues with commodity costs and restructuring plans. It's also dependent on those two decaying pillars of the American economy, GM and Ford.

But like DTC, LEA is one of the top companies in its sector.

TVL: LIN TV is a pure-play television company with operations in the United States and Puerto Rico. At Dec. 31, 2004, LIN operated 23 stations, including two under local marketing agreements and three low-power stations, along with equity investments in five other stations. The company has stations affiliated with eight networks.

TVL closed yesterday at $11.08. Morningstar's fair value for the stock is $28.00.

Morningstar likes TVL's Puerto Rican-focused content that it is now distributing throughout the contiguous 48 states as well as on the island. Morningstar also likes TVL's stations in places like Austin, TX, Indianapolis, IN, and Norfolk, VA, and the fact that in even years, political ad revenue drives up income.

On the downside, TVL spends too much on asset acquisition, leaving a crummy ROIC. TVL has a high debt load, and Morningstar is, well, skeptical of management.

13 February 2006

Pegging Nails on the PEG

I know it's not particularly fair to pick on Lenny "Nails" Dykstra column over at thestreet.com. He's seemed to have developed a nice niche writing up his exploits involving deep-in-the-money-calls. I'm not about to criticize his advocacy of some conservative options trading (or at least as conservative as options trading can get).

The Pig is pegging Nails on his use of the PEG ratio.

I explored the PEG early in this blog's existence. I still use it as a quick metric; one tool of many. I treat it like a phillips head screwdriver I inherited that's just a bit too big--can't use it for every screw, but sometimes it's just right.

Lenny's raves about Nabors Industries (NBR) arise from it's appealingly low PEG of 0.20 (or 0.25 according to SmartMoney.com).

Here's Dykstra's argument:

Its balance sheet, and all of its key numbers (or at least what I consider key) are off the charts. Its P/E-to-growth ratio, based on its long-term (i.e., five year) expected earnings growth rate, is 0.20. That is such an awesome number, I was afraid to type it, thinking you might not believe me. Believe it, I checked 30 times.

But guess what? This number isn't so awesome. NBR's PEG ratio is not all that much lower than its competition in the oil drilling business.

Check 'em out:

Diamond Offshore (DO) 0.37
ENSCO International (ESV) 0.28
Noble (NE) 0.35
GlobalSantaFe (GSF) 0.31
Transocean (RIG) 0.42

To give Lenny some credit, NBR is the best pick, according to the numbers. Morningstar gives NBR and its driller brethren one star, but gives NBR grades of B- for growth, B- for profitability, and A for financial health. Not a stellar GPA, but good enough to make it to the head of this special ed class:

DO - C- D+ A-
ESV - D C+ A
NE - D+ B A+
RIG - D- D B-

And Lenny does offer up some fruits of his extensive research:

After some extensive research, I have donned my work gloves, put my ear plugs in securely, and I will commence "drilling for some serious oil" this week.

Nabors Industries (NBR:NYSE) , one of the world's largest drilling contractors, is about as good as it gets. The company has nearly 600 land drilling rigs and more than 900 land workover and well-servicing rigs. Nabors Industries operates across the U.S. and in Africa, Canada, Central and South America, and in the Middle East. Its offshore equipment includes platform rigs, jack-ups, barge drilling rigs, and marine support vessels. Nabors also provides oil field hauling, maintenance, well logging, engineering, and construction services, and invests in oil and gas exploration.

I think what Lenny means by extensive research is cutting and pasting the company profile off of MarketWatch, or an 8-K filing.

I keed. I keed. Go Phils.

Dykstra overemphasizes the power of the PEG. If the PEG were so damn useful, then screw diversification, and let's load up on these "cheap" drilling stocks!

What I see Dykstra doing is very simple. He's making a simple bet that oil will head back up between now and June. Seems a very reasonable bet to me. I've made a smaller, safer version of this bet with the EEP purchase. But he's overstated his case for NBR's PEG.

07 February 2006

Let me introduce you to the Pig Portfolio

The Pig has finally, and belatedly, accumulated the seed money for the WershovenistPig Portfolio.

I established four positions yesterday. The portfolio is diversified in several ways. I used different, and competing investment theories behind the stock picks. There is variety in the market capitalizations and the risks for each of these picks. There's the small-cap speculative growth pick (Poore Brothers - SNAK); the value and spin-off play (Cendant - CD), a momentum/earnings growth choice (Lifecell - LIFC), and a high-dividend-yielding energy stock (Enbridge Energy LP - EEP).

Let's take a quick look at each of the stocks, my reasoning and justification for the purchase, and my outlook for either maintaining or selling the position. If you want some more background, just search the Pig archive.

SNAK - Position established at $2.65/share. Stock recently tanked, bottoming out in December after some lowered earnings, earnings restatements, and a brief tenure with the ticker SNAKE. Now with a new interim CEO, a PEG of 0.39, and a license to produce and market some tasty-looking Cinnabon shelf-stable cookie products, I thought it was time to plunge into owning this speculative small-cap.
Outlook: I'm looking for some significant upward movement in the next six months, perhaps when the next quarter's earnings are announced. If SNAK gets into the $5-6 range, I will probably shrink the position.

CD - Position established at $16.00/share. Beginning this spring, Cendant is spinning off some of its diverse array of holdings and abandoning its sullied moniker. This move should simplify the company, making it easier for investors to understand, and hopefully unlocking significant shareholder value. Morningstar gives CD five stars, and gives a fair value estimate of $23.00.
Outlook: I may add to this position in the near term if CD continues to drop in price. As a value play, I'm looking at a long-term hold.

LIFC - Position established at $22.30/share. Yes, I first looked into this stock back when it was trading at $18/share. I liked it then, as did those CANSLIM-lovers at IBD. I like it now, even though Cramer boosted the stock on Mad Money last week. Here's the 2/2 Mad Money recap re LIFC:

The Skin He's In
"When I go hunting for stocks ... I look for jaw droppingly good earnings," Jim Cramer told "Mad Money" viewers Thursday, which is why he said to take a look at LifeCell (LIFC:Nasdaq - news - research - Cramer's Take).

The company makes artificial skin to repair the body and reduce scarring after complex hernia procedures, he said. While this doesn't sound like the most attractive business, Cramer said that LifeCell has very little competition.

And, he added, the competitors are using pigskin.

With 133,000 complex hernia procedures a year, Cramer sees room for growth. Plus, he said, the company could expand into the breast implant market to reduce scarring in these cosmetic procedures.

The company says it will see more than 30% sales growth a year, a number Cramer said is probably radically conservative, and better than any company he follows.

A caller wanted to know if the company was exposed to litigation risks. Cramer said that like all medical stocks, the company would have to deal with lawsuits and the threat of lawsuits.

However, Cramer said it would be no more of a concern for LifeCell than for other companies in the sector and that it would not dissuade him from buying the stock.

Outlook: I'm looking for the big move, and will be patient in the meantime.

EEP - Position established at $45.75/share. I picked this Morningstar three-star-rated pipeline partnership while seeking out a solid energy stock that has not surged to a toppy top of the stock charts. Unlike the Fort McMoney watch list stocks, EEP has a share price below its fair value estimate. Currently $7, or 20% below. Speaking of percentages, the 8% yield caught my attention. Lucky for me, I bought just in time to qualify for the upcoming dividend distribution. EEP also allows me to capitalize on the potential of the Alberta oil sands without as much risk as high-priced stocks like Suncor.

Since I have not written about EEP before, here's a very brief excerpt from a recent Morningstar analyst report:

[T]he largest portion of Enbridge Energy LP's operating profit still comes from one very large pipeline system, Lakehead. This massive system delivers 1.4 million barrels a day from the fields of Alberta to the U.S. Midwest and Northeast. Lakehead owns an impressive share of its market, with about three fourths of the crude transport capacity coming out of western Canada. Enbridge Energy LP owns the U.S. portion of this system, while its general partner, Enbridge ENB, owns the Canadian side.

Outlook: The attractive dividend and cash flow could keep me holding EEP longer than I originally envisioned. Of course, I will be keeping track of the price and demand for oil, and react accordingly.

01 February 2006

Penniless Pampering Stocks - RDEN

Blog Hog Jonathan Last started me down this perfumed path with a passing thought on our generation's futile struggle to financially surpass our parents. So in that quest to make some cash, I eventually found myself at Yahoo! Finance's small cap growth screen. There I found Elizabeth Arden (RDEN). I then moseyed over to the usual places (Morningstar and SmartMoney) for some sweet smelling insight. I found that RDEN is a dog, the runt of the litter. Here are some fundamentals and grades:

Ticker - 5-yr Sales Growth - Net Profit Margin - PEG - Price/Cash Flow - ROE/ROA - On-Balance Volume Index - Morningstar Grades (Growth, Profitability, Financial Health)

RDEN - 1.08 - 3.6 - 1.34 - 10.4 - 13.1/4.5 - 91 - (B, C-, C-)
EL - 7.37 - 4.9 - 1.53 - 13.9 - 22.6/9.9 - 476 - (B, A, A)
ACV - 8.71 - 6 - 1.55 - na - 14.4/9.5 - 215 - (B, A, A+)
IPAR - 22.74 - 5.5 - 1.74 - 20.3 - 11.8/6.3 - 133 - (A, A-, C+)
PARL - 10.33 - 11.3 - na - 16 - 19.9/15.5 - 142 - (A, B, B)

RDEN has the weakest fundamentals and growth. Even its volume indes shows that the Street is ignoring this stock in favor of some more attractive offerings.

Speaking of dogs, here are some flattering picks of two of the faces of RDEN:


Blog Hog John Coumarianos pointed me to Estee Lauder (EL). EL's brands are not tied to individuals who can age less-than-gracefully, or quickly revert to their natural Cinderella-after-midnight trailer trash state upon marrying a Cletus. EL's brands include Beautiful, White Linen, and Pleasures--all timeless, pristing, evocative names.

Parlux (PARL) and Inter Parfums (IPAR) have classy brands as well. PARL has the licenses for Todd Oldham and Perry Ellis scents. IPAR manufactures and distributes Burberry, Paul Smith, and, um, Celine (but they looove her in Vegas...and in Quebec).

Alberto-Culver (ACV) owns TRESemme, a sponsored product featured on the Best Reality Show, Project Runway. Why is it the Best? Because if I'm compelled to tune in every week to a show about fashion designers, AND Heidi Klum is shaped like an over-inflated kickball, then the show is doing many things right.

EL and ACV are the established players getting tremendous notice by the Street, at least according to their trading volumes. PARL and IPAR are smaller growth plays that are getting also getting some notice. To me, they are the difference between floral and musk scents; just depends on your nose and personal taste. They all seem fine.

Any thoughts from my seven or eight readers?