25 January 2007
Up for reading something appallingly stupid? Check out the following piece from thestreet.com:
Sony's Adult-Video Decision Stands Up
By Priya Ganapati
TheStreet.com Staff Reporter
1/25/2007 1:46 PM EST
Here are some brilliant excerpts in this case favoring Sony's prudently prudish decision to cockblock the adult film industry:
Sony has received much recent flak for its decision to not work with adult-content producers. While it hasn't said it won't allow adult-entertainment content on the Blu-ray format, it has damned content producers by not cooperating.
But even if many of those producers move to HD DVD, here's why it won't really matter:
In the 1980s, tapes and the neighborhood video rental store were probably the only way to get to adult content. Now much of it is viewed online. The Internet has made it easy and anonymous to get access to movies that are too embarrassing to request in person.
While Blu-ray or HD DVD may offer greater clarity, the big question is, how much does the average viewer want to sacrifice Internet anonymity for the pleasure of walking into a seedy video store in person to rent a hi-def disc?
This argument right here is when the reader has indisputable confirmation that the author has no idea what she's writing about. The "seedy video store" jaunt is a lame straw-man. I'm not speaking from any recent experience, but back in the late 20th century, circa 1998 and very single, the Pig bought his first DVD player. Soon thereafter, after buying classics like The Philadelphia Story and The Great Escape, I purchased my first adult DVD over the internet.
The advent of Blu-Ray and HD DVD has not altered the consumer landscape--adult discs will mostly be bought over the internet. I'm not a Netflix subscriber, but I believe they do not rent out adult DVD's. No matter--a simple Google search will pop up adult rental providers like dvdempire.com.
Betamax tapes could record content for about 60 minutes, while VHS tapes were three hours long. While bulkier, VHS tapes were perfect for recording movies, and the industry took to them.
Um. Betamax tapes were originally 60 minutes long. Common VHS tapes were not three hours long. Someone's researching with Wikipedia, and not much else. T-120 VHS tapes were the standard, with SP recording times of two hours. VHS recording times eventually grew with the introduction of VCR's that recorded on slower speeds (LP and EP/SLP) as well as manufacturers devising thinner magnetic tape for T-160 and T-180 cassettes. I digress, but it's another example of the quality of this article.
"Sony is trying to demonstrate they care about the home environment and what type of content can be played on a PlayStation 3," says Jon Peddie, president of Jon Peddie Research. "Its kind of patronizing that they would do such a thing, but it will appeal to parents who worry about their kids playing video games and what kind of content is available to them."
The Jon Peddie quote is ridiculous. Will over-concerned parents favor buying a PS3 because it may not be able to show some sexy action in HD? I would bet these same parents will be just as concerned about intensely violent HD games PS3 first-person shooters. Won't these parents just buy the Wii, with its cute, kid-friendlier repertoire?
Another bit of stupid:
This way, Sony gets to have its cake and eat it too. Sony can continue to publicly not support Blu-ray but hope that the Blu-ray lobbying group can work out a better relationship with adult-content producers.
It's also worth remembering that what really won the day for VHS were cost, recording time and licensing issues with Sony.
This piece is supposed to be favorable to Sony. I'm just reading argument after argument bolstering the Case Against:
1. Lobbyists have to repair the relationship with the adult industry--while Blu-ray is in its infancy, in the middle of a format war, where the other format is as welcoming as Seka is to John Holmes.
2. If VHS won the day with cost, recording time and licensing issues with Sony, what is the constant in the VHS/Beta and Blu-ray/HD DVD format wars? Licensing issues with Sony.
24 January 2007
I couldn't resist doing some more data mining of Super Bowl advertisers' stock performance in the week after the game. I know these data make for riveting posts, but I felt a little naked after offering up a thin gruel of a dataset.
Here's the 2005 advertiser list:
(ticker of advertiser - 2/4/05 close - high price between 2/7 - 2/11 - peak % change)
F - $13.22 - $13.54 - 2.42%
FDX - $96.36 - $98.57 - 2.29%
BUD - $48.46 - $48.65 - 0.78%
PEP - $55.31 - $55.71 - 0.72%
KRB/BAC - $46.89 - $47.07 - 0.38%
MCD - $32.57 - $32.85 - 0.86%
MSFT - $26.32 - $26.34 - 0.07%
LLY - $55.03 - $56.69 - 1.56% (midweek dividend of $.38)
VZ - $36.85 - $36.98 - 0.38%
MGM - $78.00 - $79.60 - 2.05%
NWS - $17.70 - $17.76 - 0.34%
Average difference between 2/4/05 close and following week peak: +1.08%
And the benchmarks:
^GSPC (S&P 500) - 1203.03 - 1208.38 - 0.44%
^DJI (DJIA) - 10716.13 - 10865.69 - 1.40%
^IXIC (NASDAQ Composite) - 2086.66 - 2095.64 - 0.43%
2005 gains matched Phil Davis' assertion that advertisers gain about 1%. The Super Bowl picks beat the NASDAQ and S&P, but lagged the Dow's performance for the week ending 2/11/05.
Here's the 2004 advertiser list:
(ticker of advertiser - 2/4/05 close - high price between 2/7 - 2/11 - peak % change)
BUD - $50.59 - $52.43 - 3.64%
PEP - $47.26 - $50.58 - 7.02%
SPLS - $26.61 - $27.00 - 1.47%
HRB - $57.93 - $59.52 - 2.74%
TWX - $17.57 - $17.72 - 0.85%
GM - $49.68 - $49.85 - 0.34%
GE - $33.63 - $33.99 - 1.07%
FDX - $67.28 - $67.85 - 0.85%
IBM - $99.23 - 100.43 - 1.21%
CSG - $29.95 - $31.98 - 6.78%
DCX - $47.53 - $47.88 - 0.74%
MNST - $24.48 - $25.82 - 5.47%
PG - $101.08 - $103.67 - 2.56%
BAY - $30.49 - $30.70 - 0.69%
GSK - $44.00 - $45.22 - 2.78%
MO - $55.59 - $55.65 - 0.11%
DIS - $24.00 - $24.03 - 0.12%
IACI (EXPE) - $32.25 - $32.45 - 0.62%
Average difference between 1/30/04 close and following week peak: +2.17%
And the benchmarks:
^GSPC (S&P 500) - 1131.13 - 1142.79 - 1.03%
^DJI (DJIA) - 10488.07 - 10634.81 - 1.40%
^IXIC (NASDAQ Composite) - 2066.15 - 2085.49 - 0.94%
2004 gains surpassed each of the major indices.
Still interested in this trading scenario? I have 2001-2003 advertiser lists ready to go. Perhaps tomorrow. I need a nice sueño soon.
23 January 2007
Phil Davis asserts that Super Bowl advertisers get a 1% boost in their share prices during the week following the Super Bowl:
Congrats to the Bears and Colts for making it to the Superbowl -- now let's make some money on it!
No, not betting (Colts by 10), but one thing I always notice is that companies that advertise in the Superbowl tend to get about a 1% move in the week following the game. While I wouldn't just invest willy-nilly, we do have some prime prospects to consider:
- Apple Computer Inc. (AAPL)!
I find this potential short-term money making opportunity too intriguing to pass up.
But wait. I need more evidence than a fudgy statement using a soft convictionless expression "tend to get about", referring to the 1% move.
I reviewed this collection of advertisements and advertisers from Super Bowl XL, played on February 5, 2006.
The stock tickers of the companies that traded publicly at that time last year were (in the order of the AdLand piece):
BAY, TM, GM, S, F, NFS, BUD, DMND, HMC, MOT, DIS, FDX, PG, PEP, UN, T, YUM, VIA
I did a wee bit of data mining on Yahoo! Finance's historical price quotes page. I recorded the closing price of each ticker on February 3, 2006, the Friday preceding the Bowl. I then wrote the highest price each stock traded during the following week, between February 6 and February 10, 2006.
What eternal statistical truths did I unearth from this tiny data sample?
These stocks averaged a peak change of +2.45% from the Friday, February 3 close. However, no pattern emerged as to when each ticker hit its highest price. Although every stock traded higher during the following week, only 13 out of 18 stocks ended up priced higher as of market close on Friday, February 10.
Here are the peak percentage gains for each ticker:
BAY +2.64%, TM +3.46%, GM +3.11%, S +2.14%, F +2.06%, NFS +0.37%, DMND +0.33%, HMC +1.46%, MOT +3.68%, DIS +2.03%, FDX +2.58%, PG +0.37%, PEP +1.41%, UN +1.52%, T +3.10%, YUM +3.21%, VIA +2.45%.
Who had the most spots last year? BUD, YUM and PEP. Only YUM exceeded the average 2.45% gain for the group, so having the most spots doesn't necessarily predict success.
If I'm remembering correctly, FDX and UN had the most critically-acclaimed ads, if I can go so far as to use such a description. FDX beat the average; UN didn't.
That 2.45% average gain is lacking context with the larger market. So, of course, I looked up the February 3 closing numbers for the Dow Jones Industrial Average, NASDAQ Composite, and S&P 500 indices, and compared them to the highest points these indices rose to during the subsequent week.
Each index attained its highest levels on 2/9/06. The DJIA rose 1.94%, the NASDAQ rose 0.13% on 2/9/06, and the S&P rose 0.83%. Clearly, the Super Bowl advertisers outperformed the markets by a significant margin over such a limited period. If anyone out in the Blog ether reading this would care to compile advertisers in Super Bowls XXXIX and prior, and perform the same stock price comparison, please take the ball and run with it.
Switching sports for cliche purposes, who's on deck this year?
The list of rumored advertisers during the Super Bowl XLI broadcast is eerily familiar:
BAY, F, FDX, PEP, GRMN, NFS, DMND, HMC, BUD, GM, TM, AAPL, MSFT, S, TWX, T
The newbies here are GRMN, AAPL, and MSFT.
I'm not going to analyse any of these picks--the Phil Davis excerpt above is good enough for starters.
How would I play this strategy? I'm going to look up each of these stocks on Groundhog Day and price out the at-the-money and just-in-the-money February call options. I will favor stocks with low time value premia, as the decay of time value over the course of the following week could very well negate an average gain of 2.45%. And as my limited data set showed me, there is no need to rush like Westbrook on Monday morning and load up on calls.
17 January 2007
Sony Ericsson reported on Wednesday that fourth-quarter profit more than tripled, blowing past analysts' forecasts, as record sales of high-end and Walkman-branded phones helped it gain market share from Korean rival Samsung.
"Sony Ericsson is pretty much in a sweet spot right now. They have cool, attractive models supported by cool, attractive brands," said Neil Mawston, associate director in the wireless practice of consultancy Strategy Analytics.
"They have become a phenomenally well-run company over the last year," Mawston said.
I was too flippant in my disregard of Morningstar analyst Bare's report regarding Sony's cell phones.
Let's just say, mistakes were made.
Big-time porn studio Vivid has announced its first Blu-ray porn movie, so there’s obviously a leak somewhere in the Blu-ray condom. Even the Blu-ray disc Association has reacted quickly by saying there is no ban against adult movie content.
So is one key argument in the case against Sony gone limp? Not entirely:
It’s true that Sony doesn’t care for porn on its devices. It was unhappy when porn started arriving on the UMD disc format for the PSP and from certain quotes by porn makers, Sony is not actually being that helpful with Blu-ray. It’s not blocking them but, at the same time, it’s not exactly pointing them in the direction of Blu-ray disc manufacturers that can help them out. Many are having to find their own production sources.
So Sony's neither cock-blocking the adult entertainment industry, nor is it lubricating the way for them either.
This report demonstrates the need to keep up on the news stories relating to investment positions, current as well as potential.
16 January 2007
When I did my usual digging around Google Images for a visual accompanyment for this post, I found the above photo of Michele Wie struggling at the recent Sony Open.
I know, I know. Wrong Wii.
This is the only Wie struggling with Sony.
Enough with the homonyms. Here's how I'm structuring this lengthy post: First, present a link to each recent news story, magazine article, or research piece I'm using to justify my conclusions on how to trade Sony; and second, outline the major points with my sparklingly irreverent commentary. At the bottom of the post, I'll leave you with my current strategic plan on how I'm going to invest in SNE.
Wired Magazine offers up a broad hit piece.
- Sony introduced the PS3 at E3, the Electronic Entertainment Expo in 2005...and again in 2006. The revolutionary new bit of information released in '06 was the staggeringly outsized price of $600.
- Rootkit software embedded on CDs that prompted recalls and plaintiffs attorneys to crap out some class action lawsuits.
- Sony is making attempt number 42 at a proprietary format: "[Sony's]become oddly fixated on imposing its own standards – Betamax for VCRs, the Mini-Disc for digital music players, the Universal Media Disc for PlayStation Portable, the Memory Stick for anything you can think of – despite the world's unwavering rejection of those standards."
- Is Sony too far ahead the consumer taste and demands with its expensive, yet technologically advanced microchip and Blu-ray combo? "[T]he Cell [processor at the heart of the PS3] has caused a lot of headaches for developers. Tim Sweeney, cofounder of the North Carolina-based developer Epic Games, figures it will take at least twice the effort to fully exploit the PS3's potential as to take the Xbox 360 to the max. Until that happens, it's unlikely there'll be much discernable difference between games on the two platforms. "The Cell has more theoretical computing power," says Sweeney, "but it might be years before we see that reflected in actual performance. So it's a fundamental question whether the long-term direction in computing is with architectures like the Cell.""
- "Blu-ray is equally fraught. For starters, the whole business of high-definition disc drives seems designed to invite cynicism. With DVD players now in 85 percent of US homes, sales fell in 2005 for the first time – so some manufacturers may need a next-gen disc player, but it's not clear consumers do."
- Wii, with its flailable wiimote, is fun. Xbox has Xbox Live's online gaming community. What is PS3's winning angle?
- An argument in Sony's favor: the corporate suits are sweating the (up until very recently) crap performance of SNE shares: "A couple of months ago, Howard Stringer and Ryoji Chubashi, Sony's president, reported to a luxury hotel in Tokyo's Shinagawa district to face 7,200 shareholders at Sony's annual meeting. It was not an enviable assignment. With the company in the red yet again in its most recent quarter, Japanese investors were in an unhappy mood. "I bought shares in mighty Sony," cried a woman whose holdings had lost nearly two-thirds of their value. "What are you going to do about this?""
Zacks Investment Research issued a recent negative report on Sony.
- Zacks named SNE Bear of the Day for 1/12/07. Investors apparently didn't notice this as SNE jumped $2.03 (4.45%) to $47.68.
- Zacks has a Sell rating and a $35 price target on the stock.
- Sony's LCD business is facing competitive pressures and lowering prices.
- Sony's brand image hurt by the global recall of notebook computer batteries.
- PS3's hefty price tag and launch delays, especially the failure to launch in Europe during the '06 holiday season.
- Rich valuation: "In spite of its difficulties, Sony is currently trading at a rich 68.3x extimated fiscal 2007 ending March 31, 2007 EPADR, a significant premium to its peer group." Even the six-month price target of $35 represents a robust P/E multiple of 52.2x of estimated 2007 EPADR of $0.67.
Fark.com linked to this, which used this post as its source:
"The MD of US development studio Valve Corporation has labelled Sony's PlayStation 3 "a total disaster" and predicted that Nintendo's Wii will win the next-gen console battle."
Why is this guy pissed? I think this issue is developing games for PS3:
Just say, 'This was a horrible disaster and we're sorry and we're going to stop selling this and stop trying to convince people to develop for it.'
Sony gets a 3-star rating from Morningstar, and a fair value estimate of $50 per share.
Morningstar analyst Rod Bare's report dated 12/7/06 is oddly dissonant in its use of positive adjectives like "leading" "robust" and "intriguing" to describe Sony's fortunes:
Sony's Bravia line of flat-panel televisions is a growing success. Sony Ericsson phones have leading market share among profitable high-end customer segments, and Walkman phones are showing real promise. Sales of the PlayStation Portable video game player are robust, and the PlayStation 3 is selling well, when it's available. More importantly, these investments have partners with skin in the game. They represent an intriguing consortium of tech-savvy allies with a very Sony-friendly set of incentives.
Newer reports say the PS3 isn't selling well and has plenty of availability. Dunno about you, but all I've read and heard on the phone front is the promise of the Apple I-Phone and Motorola's Razr/Krazr glut. I have read nothing about Walkman phones or Sony Ericsson phones. Either Bare's analyst report is stale (after only a month and change) or it's off-the-mark.
Jim Cramer, on the 1/11 edition of Mad Money, pushed Sony as a value play, hated by Wall Street. How did he equate SNE with value? By comparing it to the current beauty queen of the market, Apple. Apple commands a market premium because investors love the Apple story and its innovative products. Unlike Sony, Apple has had tremendous success with foisting its proprietary music format on consumers via I-Tunes.
Cramer then bizarrely talked about the value of Sony broken up into its indvidual businesses and valued the entire package in a wide range between $61 and $72.
If Howard Stringer announces that he's going to spin off valuable parts of the Sony conglomerate, then yes, Cramer's value thesis would take purchase on the Pig, but until that happens, I think the Sony-as-an-investing-alternative-to-Apple thesis is a stretch.
I am in complete agreement with Jonathan Last, and his argument against Sony at Galley Slaves.
JVL says to short Sony for two huge reasons: PS3 sales are severly lagging expectations, and Blu-ray purchasers will be unable to go on Rome adventures with Barbara Dare.
Here is the first site cited by JVL, plus a related post at The Guardian.
Sony doesn't want porn produced on Blu-Ray discs. Apparently Sony made this same mistake with Betamax. Porn helped VHS win the videotape format war. Didn't Blockbuster's policy of no porn/no NC-17 videos save the mom-and-pop video store from oblivion by leaving a tremendous revenue source in the marketplace? Is Sony doing the same thing here? Or is Sony worried that it currently cannot manufacture enough Blu-Ray discs and doesn't want the market dominated by Digital Playground and Vivid titles? This is negative for Sony's bottom line, either way.
Here is the second site mentioned by JVL.
Sony has sold only 687,000 PS3 units, whereas Nintendo sold 1.1 million Wiis and Microsoft sold 4.5 million Xbox 360's. 'Nuff said.
Finally, a brilliant commentator kicked Sony around in November 2005 over its penchant for awful DRM software. He also didn't care for the stock's fundamentals either. Of course, SNE stock shot up from $32 to $50 soon after this post.
Which makes a perfect segue for some second-guessing:
- A hot must-have game for PS3 could generate considerable interest and demand, much like what Halo did for Xbox.
- What is the forecast for the yen versus the dollar? Last week's weaker yen drove up Japanese stocks, including Sony.
I'm not going to make this post any longer by recapping the cons (and pros) for Sony. The case against Sony is wholly convincing.
What am I looking at investment-wise? Puts that are barely out-of-the-money. As I write this, SNE is trading at around $46.90. The April $45 puts are $1.45/1.55 bid/ask. The July $45 puts are $2.15/2.25. The January '08 $45 puts are $3.10/3.20. If Sony rises a bit, then I'll also consider the $50 puts.
Before I pull the trigger on any of these, I'm going to do three things: 1. Look up the yen/dollar exchange rate and yen forecasts; 2. Check for any new Sony news reports, especially on PS3; and 3. Make sure it's a bullish day for Sony and Wall Street.
09 January 2007
Blog Hog John C. recently said hello and suggested the Pig sniff out a truffle-y morsel called Western Union (WU).
I haven't had my value-investing cap on recently, so no wonder WU failed to get noticed by yours truly. So I went to Morningstar, Seeking Alpha, and Google News to dig up some reports and insight into this well-known, and recently spun-off stock.
Western Union is a $17B company that specializes in worldwide money transfer services. Morningstar's Mark Weber has has a fair value of WU of $32 a share. WU closed today at $21.96, putting it in deep 5-star territory. Weber likes WU's industry-dominant position over competitors like MoneyGram (MGI), and its high profits and billion-plus-and-growing free cash flow. Western Union is a long-standing, trustworthy brand in a business that thrives on convenience and reputation.
If you don't have a Morningstar subscription, here is a no-subscription-required interview with Mark Weber, discussing why he would buy WU if his employer permitted. Weber makes a key point regarding the competitive advantage of the Western Union brand:
Western Union is one of he world's most-recognized brands. More importantly, it's a trust brand. Most of the firm's customers are immigrants to wealthier countries from poorer ones...They need to know that the cash they send home will be available to their families. After years of reliable service, Western Union has established a solid reputation among migrant communities. Immigrants know that their hard-earned cash will get from point A to point B if they use Western Union. Given how important the transaction is to the customer, it's hard to get him or her to switch to a competing service when Western Union has never let them down.
Fat Pitch Financials on Seeking Alpha distilled Weber's arguments (and on the surface, his $32-a-share valuation model) making the long case for WU. Fat Pitch likes WU's wide business moat and vast network that grows with minimal incremental costs.
BusinessWeek just published a piece on a remittance transfer upstart called Microfinance International (MFIC) that is supposedly going to stir up the industry. The MFIC business model/article thesis is a lovely bit of Nobel-inspired optimistic hooey.
We'll just ignore those parts.
Here's a good bit from the article:
In the U.S. alone, 12.6 million Latin American immigrants will send home $45 billion in remittances in 2006. Over the last two years, the percentage of Latin American immigrants regularly sending money home to their relatives has increased from 61% to 73%, and the average amount of each remittance increased from $240 to $300.
These figures are great news for WU. 12% more immigrants sending 25% more money home should equate to increased revenues and cash flow for WU, and higher share prices for WU shareholders.
Here's an even better bit from the article, including use of the "some say" journalistic crutch, but with an actual, live, named source:
Traditionally, the remittance industry has been dominated by Western Union (WU), which made almost $1 billion on sales of almost $4 billion last year, and Moneygram (MGI), companies some say haven't had the customer's best interests at heart.
"They're gouging. Their profit margins are 30%, so if you can serve the poor efficiently charging an appropriate rate, then that's great. It's a great opportunity," says Geoff Davis, president and CEO of Unitus...
Blah blah blah.
Okay, I'm not so heartless as to not want to profit off of the gouging of the poor.
C'mon, don't cry.
Price gouging and ridiculous profit margins are good for investors. And Western Union should feel secure in their ability to generate those margins. Congress isn't going to go after Western Union. Immigrants don't vote much. The poor--not so much either. We can start to worry if AARP-card-carrying seniors start using Western Union's services, and then complain to their Representative. And anyway, another W stock, Wal-Mart (WMT), already has the starring role of corporate whipping boy.
One of Western Union's hometown papers ran a supportive piece last Saturday:
One of Brian Barish's hot stock picks: Western Union, the money-transfer business spun off by First Data.
The Douglas County-based company is a good example of a "misvalued" stock he likes.
Barish, lead manager of the Cambiar Opportunity Fund, cites uncertainty surrounding Western Union and notes investors have worried about a drop in business along the "U.S.-Mexico corridor" amid the immigration reform debate.
"It's had a chilling effect," he said.
I think this creepy photo has a chilling effect, Brian.
Perhaps this short-term uncertainty argument is why the stock is a relative bargain.
The Watch List grows...
04 January 2007
Okay, so the CNE logo is not as eye-catching a graphic as Salma, but until Playboy runs a spread on the women of the oil patch, this'll have to do.
Canetic is one of many income trusts that Canadians, especially retirees, invest in for the large monthly dividends. Nice thing is, this one trades on the NYSE as well, unlike COS.UN, the income trust I examined back in 2005.
Canetic, along with all other Canadian trusts plummeted in October after the Tory finance minister, Jim Flaherty, shocked Canuck investors by sunsetting existing trusts' tax benefits in 2011.
Cramer noticed. The Canadian Press noticed:
After roiling financial markets and riling investors, the federal government's decision to tax income trusts has been named 2006 business story of the year by CP and Broadcast News.
Cramer took a look at CNE (as well as another interesting trust, Enterra) back on November 15:
In response to all the email he gets regarding Canadian energy trusts, Cramer told viewers these stocks are worth owning now.
In fact, he said he would rent a U-Haul and back up the truck. Cramer believes two Canadian energy trusts, Canetic Resources Trust ( CNE - news - Cramer's Take) and Enterra Energy Trust (ENT - news - Cramer's Take - Rating), are done going down and ready to bounce.
Even if these stocks don't move one bit, they are worth owning because they are "dividend-ilicious," he said, adding that Canetic offers a dividend of 19%, while Enterra has a 20% yield.
There is also a chance the government might change its mind and retract the law, an event that could cause both Canetic and Enterra shares to jump, Cramer said.
I agree that the monthly dividend is the real draw of Canetic. Cramer was a bit premature with his assertion that these trusts were "done going down." They both popped in the days following this Mad Money broadcast (CNE went from just over $13 to $15 a share; ENT went from $7.48 to $10.) and have since recovered from the Cramer effect.
Actually, today was a pretty rough day for oil stocks as CNE closed today at $13.25, down 4.6%.
Before I leave Cramer alone, he is also wrong (wha? Cramer wrong?) about the Canadian government changing the law. First, the Conservatives are in charge, and they pulled this unfriendly-to-investors manoeuver. The Liberals certainly won't turn away higher government revenues. Second, the Tories rightfully feared that huge traditional corporations like telecommunications giant BCE and natural gas producer EnCana would become income trusts to lessen their tax burden.
I've picked on Cramer enough. Now let's look at Kish Patel from Morningstar's reasoning behind giving CNE one miserable star:
We are reducing our fair value estimate for Canetic to $10 per unit from $11. We have reduced our production estimate for 2007 to approximately 78,000 boe/d. Since we had originally factored in some uncertainty around the Starpoint merger by utilizing an elevated cost of equity, we think it's appropriate at this time to lower Canetic's cost of equity now that some of that uncertainty has been reduced.
Our fair value estimate is based on benchmark oil price forecasts of $66 per barrel in 2006, $54 in 2007, $46 in 2008, $44 in 2009, and $46 in 2010, and natural-gas price forecasts of $6.70 per thousand cubic feet in 2006, $6.10 in 2007, $6.10 in 2008, $6.20 in 2009, and $6.50 in 2010. A 10% increase in these forecasts would result in a fair value estimate of $14 per share, and a 10% decrease in these forecasts would result in a fair value estimate of $5.50.
My beef with Morningstar's low fair value estimate comes from their 2007 oil price forecast. The Energy Information Administration of the Department of Energy recently projected crude oil to average $65 per barrel in 2007.
Morningstar used $54 in their valuation model.
But they were nice enough to show how a 10% change in the price of oil either way would change the estimate.
We're not talking about a 10% change. $65 per barrel is a bit more than 20% higher than $54 per barrel. So if a 10% increase raises the fair value of CNE from $10 a share to $14, shouldn't a 20% increase bump up CNE's fair value to around $18?
Patel is also worried about the power of the Loonie:
The trust could also be hurt by continued strength in the Canadian dollar, as it would receive less for each U.S. dollar-denominated barrel of oil it sells.
The Canadian dollar has softened to $0.85 from almost $0.91 earlier this year, alleviating some of Patel's concern.
So there are some significant risks that come with these attractive yields. Dividend-yielding stocks are usually dull, low-volatility affairs.
I should consider my options.
Theoretically, if I were to purchase say 1000 shares of CNE tomorrow, I would consider picking up ten August 07 put options with a $12.50 strike as a hedge. Each option last sold for $1.05 today. These puts would give me ample insurance against a collapse of CNE shares.
CNE is headed for the Watch List. In order to keep tabs on the stock and information that can affect its price, here are several links of note:
Here is where you can get the Canetic Trust investor fact sheet.
Here is a site to keep up on oil price forecasts.
Here are current oil prices.
Google Finance will help keep tabs on CNE's price and its competition.
Here is AccuWeather's 15-day forecast for a particular Northeast locale that can help you keep up with whether the winter weather is abnormally warm or cool, thus affecting the price of oil (and CNE)