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.

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

By TOM TRONCONE
STAFF WRITER


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.

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?

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.

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.

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.

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+
GSF - D C 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.

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.

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:




Woof.

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?

Whole Foods

Blog Hog JVL is an antibiotic-and-hormone-free Bull for Whole Foods.

He e-mailed me his bullish (not bullshit, that's my portion of this post) thesis. Here it is in almost it's full glory:

I'm very, very impressed with the way they've slowly expanded in the DC are--they've picked great, up and coming locations. And they've managed, despite their high-prices, to become a staple for 20-somthings who can't really afford to shop there.
...
Whole Foods isn't about picking up the staples--milk, eggs, OJ. When you go to Whole Foods, you're not "grocery shopping." You're pampering yourself in a small way--in fact, in such a way that you can convince yourself isn't that much of a luxury; after all, we all need to eat.

I'm as much of a sucker for this as anyone. My favoirte place to shop is a Whole Foods-like place called Balducci's. When I'm there, I like to just walk around the store and feel good about myself. And then I spend $70 on one bag of groceries.

And here I go back to my hobby-horse: The Whole Foods places in DC have all been positioned around areas that are young, developing, and condo-heavy. In a setting where no one can afford what used to be standard for the middle class--a single-family home--people are defining down their expectations for their adult lives. At the same time, they're trying to find other, new ways of indulging themselves to make up for this disappointment. We can't afford a 3BDR, 2Bath Cape Cod, so we buy a bag of $4 potato chips.

Since I think that the American standard of living is on an unavoidable downward spiral--too many people, not enough land--I think this is a trend we're going to continue to see. People are going to look for little luxuries to make up for the big things that they can't have anymore. (The rise of the spa culture among young women is another sign of this, btw.)

Whole Foods.

Jonathan wrote up a nice big-think piece, tying in some sociological musings with a stock idea. And in response, I pounded out the following bit of hackery, using my usual references and resources:

Whole Foods has been on the radar since I started watching Mad Money. Cramer's talked up this stock as "best of breed" for 9 months. And therein lies the problem. WFMI is now a $10B company that has risen 73.6% in the last twelve months, and 206.9% over the last three years. If you check out its chart you will see that the stock has been on a straight line upward trajectory, but is trading considerably higher than its support.

I think we missed the boat (shopping cart?)on this one. Two numbers suggest this: a PEG ratio of 2.69, meaning the price of Whole Foods stock is growing 2.69 times faster than Whole Foods' earnings. Bargain stocks tend to have a PEG of 1.0 or below. Price/Cash Flow is 33.80; a value investor looks for something below 10-12.

So the value investor in me is not finding supportive numbers.

Then I checked out Morningstar's grades: A+ for growth, A- for profitability, A+ for financial health. I haven't seen marks like that since 6th grade, from some very nurturing Quaker teachers.

A momentum investor may want to jump into the arugula for the phenomenal growth of Whole Foods, and its potential for more.

I completely buy into your theory that we spend on small luxuries because so few of us can afford the big ones. Whole Foods fits perfectly into this idea. It's tough to buy into WFMI when you see how much missed opportunity is before you. If only I had plunked down for some shares when Cramer first mentioned the stock, instead of buying those heirloom tomatoes and two-inch-thick porterhouses at Time Warner Center. (Actually, I buy such things through FreshDirect.com, but it is privately held, so allow me some poetic license.)

And in regards to JVL's last point, perhaps I should be looking into public companies that are profiting from spa culture. I'll have to dig around the apartment for the brands and companies behind the lotions, oils, sloughing agents, and perfumes that reside in various drawers, shelves, and nooks.

Another fast food IPO coming around the bend...next week

The Chipotle IPO is next week. Here's the news from MarketWatch:

11:56am 01/19/06
Chipotle IPO from McDonalds expected next week (MCD, REXI) By Steve Gelsi
NEW YORK (MarketWatch) -- Chipotle Mexican Grill is expected to offer 7.88 million shares at $15.50-$17.50 each in a bid to raise $144.5 million in an initial public offering next week. IPO analyst John Fitzgibbon expects the stock to gain $2-$3 a share once it debuts. Chipotle plans to trade under the symobl "CMG" on the New York Stock Exchange. A total of seven initial public offerings are on deck next week with the richest weighing in at $160 million from Resource Capital, a real estate investment trust managed by a unit of Resource America (REXI) .

Even though I had an enormous carnitas burrito last night (with both pinto and black beans, minus the rice), I'm still hungry for some CMG.

Wendy's and Tim Hortons Spinoff Updates

Wendy's (WEN) is in the midst of quite a run-up, from the low $40's in October to around $57 today. Versus its competition, WEN has a high PEG of 1.94 and very low ROE/ROA numbers, among others. WEN is too expensive, unlike its value menu cheeseburgers and finger-free chili. But if you own WEN stock, you will soon own shares of THI:

Wendy's will first sell up to 18 per cent of Tim Hortons in an IPO that is expected to put up to $600-million (U.S.) in the company's till. Shortly after that debut, Wendy's plans to give its shareholders new stock that represents the remaining 82-per-cent stake in Tim Hortons, according to investment bankers working with the Dublin, Ohio-based burger chain.

So should I buy WEN in order to get some THI? The Globe and Mail says no:

Many of Wendy's major shareholders are hedge funds and are expected to quickly sell their Tim's shares into the market.
...
"Wendy's is going to use the strong Canadian demand for Tim Hortons shares to get a premium valuation on the IPO, then spin out the rest of the company as quickly as possible," said one Canadian financer working on the deal.

I'm thinking a potential time to get into THI is shortly after the IPO, not by buying an inflated, bloated red-head with pigtails.

Here's some more informative grist from the piece:
Tim Hortons commands a premium valuation because the company's mix of double-double coffees and crullers has posted impressive sales growth on both sides of the border. Same-store sales were up 5.8 per cent in Canada and 6.7 per cent in the U.S. during the last three months of 2005.

In contrast, Wendy's fourth-quarter U.S. same-store sales, or sales at stores open at least a year, fell 2.9 per cent at company-owned outlets and were off 1.9 per cent at franchises, the chain's fifth successive quarter of declining sales. In a recent filing with the U.S. Securities and Exchange Commission, Tim Hortons outlined its dominance of the Canadian marketplace, saying that it represents 74 per cent of the coffee and baked goods sales in the quick-service sector.

Tim Hortons stock is expected to start trading in March on the Toronto and New York stock exchanges, under the symbol THI. Investment banks RBC Dominion Securities Inc. and Goldman Sachs & Co. are leading the Tim Hortons IPO.

Tim Hortons earned $157.5-million in profit in 2004, or roughly $1.36 a share, according to research conducted by analyst Larry Miller of Prudential Equity Group LLC. In a note last month, Mr. Miller suggested that with a $600-million IPO, Tim Hortons shares could be worth between $29 and $36 apiece, with individual Canadian investors stepping up to the counter for stock. "It's a Canadian demand story," Mr. Miller said. "Retail-wise, it's going to be zero in the U.S."

Even Cramer is wary of Tim Horton's:

A viewer said that he was thinking about staying away from Wendy's initial public offering of its Tim Hortons doughnut chain because it is being offered in installments. Cramer agreed, saying he'd hold off on that IPO too.

Playing around with S&P Momentum Plays

After an eventful evening of apartment hunting, I thought I'd close out the night with some light reading on some of my favorite stock blogs. The Kirk Report linked to an S&P stock screen picking out some momentum plays. I thought I'd check out their SmartMoney numbers and Morningstar grades, to see if they look interesting beyond the fact that Wall Street is paying attention to these stocks as of late. And perhaps find some competitors that are being unfairly ignored. Before I begin, here's the Business Week article on this momentum stock screen:

STOCK SCREENS • From S&P
By Michael Kaye, CFA

Riding Stocks' Momentum Waves
S&P identifies four promising plays using the theory that what goes up must keep going -- at least for a while
One strategy we at Standard & Poor's like to touch on from time to time is momentum investing. Basically, this approach assumes that what goes up can continue to go up, using the notion that strong investor demand for a stock can continue to feed on itself for a certain period of time.

Our latest screen starts off with a widely used momentum measure: relative strength. This measures a stock's performance over a defined period against that of the broader stock market. Our first search was for stocks that have an S&P 13-week relative strength ranking greater than 90 (meaning over the past 13 weeks they have outperformed 90% of the stock universe).

BULLISH PICKS. We then wanted to ensure that the stocks on our list were attractive in other respects. So we next looked for issues with the highest score of "bullish" under S&P's proprietary technical investing measure. In addition, each stock had to have the highest rank of our proprietary insider activity rating. Favorable insider activity may signal that management and others crucial to a company's success view its prospects favorably.

To avoid speculative issues, we limited our screen to companies whose stock price is above $5 per share and whose market capitalization is greater than $500 million.

When we finished out search, these four names popped up:

Company Ticker
AAR Corp.p AIR
Fossil Inc. FOSL
Humana Inc. HUM
Meridian Bioscience VIVO

Here are some SmartMoney numbers of choice for each of these stocks, as well as their Morningstar grades:

Ticker / 5-year Sales Growth / Net Profit Margin / PEG / ROE / ROA / On-Balance Volume Index / Morningstar Grades (Growth/Profitability/Financial Health)

AIR - (2.62%) - 2.60% - 0.74 - 7.60% - 3.20% - 246 - (C C D+)
FOSL - 16.22% - 8.80% - 0.94 - 16.70% - 11.90% - 163 - (A A A)
HUM - 6.12% - 2.10% - 1.22 - 13.00% - 4.70% - 271 - (C B+ B)
VIVO - 10.73% - 13.50% - 2.35 - 23.40% - 14.70% - 162 - (B B+ A)

The numbers for AIR, in light of its competition, do not look good, as reflected in Morningstar's grades. Apart from its low PEG and Wall Street's keeness for the stock, I'm not impressed. Looking at the industry peers of AIR, complied by Morningstar, I am drawn to Ceradyne (CRDN) with its grades of A+, A, B- as well as its low PEG of 0.5 and high ROE/ROA of 28.4%/12.4%. The markets are noticing CRDN, too, as its on-balance volume index is 147. Less noticed is Flir Systems (FLIR), with similar ROE/ROA numbers to CRDN, but a higher PEG of 1.08, and a lower on-balance volume index of 52.

FOSL looks solid. One industry peer with gaudy ROE/ROA numbers, as well as "triple A" grades, is Forward Industries (FORD).

United Healthcare (UNH) looks more attractive numbers and grade-wise than HUM.

Biosite (BSTE) and Diagnostic Products (DP) receive better grades than VIVO, and have PEG ratios close to 1.0. But their on-balance volume numbers are low, so they aren't momentum plays right now.

So what are we left with for further investigation? The original four stocks spit out by the stock screen (AIR, FOSL, HUM, VIVO) have morphed into something almost completely different. AIR has been replaced by CRDN and FLIR. FOSL is joined by FORD. HUM disappears into the ether, while VIVO lives.

Do I still have a list of momentum plays, or did I create more of a stock salad with these switches? Using some rudimentary technical analysis, and a quick look at stockcharts.com, CRDN and VIVO are clearly on the upward trajectory. FOSL and FORD are also on the rebound after some serious hemorrhaging of investor cash in late '05. FLIR has momentum--the negative kind.

Does the recent dip mean a good time to buy BBBY?

Sorry for the blog hiatus to any remaining readers. I blame the holidays, the flu, and changes at work for my lack of posts. But I was also lacking in inspiration.

As the lethargy and phlegm remnants of the flu fade, I'm feeling the investing juices flowing again. And I'm a mere $300 in savings away from starting my long-awaited portfolio, so let's check out a potential first purchase...



Does the recent hit to Bed Bath & Beyond's stock mean that I should look to pick up some BBBY soon?

Let's take the familiar quick look at SmartMoney competition numbers, as well as Morningstar's grades:

Company/Ticker
5-year Sales Growth / 5-year Earnings Growth / Net Profit Margin / PEG / ROE / ROA /(Morningstar Growth, Profitability, Financial Health Grades)

Bed Bath & Beyond - BBBY
19.06% - 26.64% - 9.90% - 1.14 - 23.00% - 16.00% (A- A+ A+)

Linens 'n Things - LIN
11.86% - (4.44%) - 1.30% - 2.84 - 4.10% - 2.10% (C+ B- B+)

Willams-Sonoma - WSM
13.76% - 29.50% - 6.10% - 1.29 - 20.70% - 11.90% (B+ A A)

Restoration Hardware - RSTO
9.79% - n/a - 0.20% - 2.97 - 1.00% - 0.40% (B D F)

I buy into the theory that a great time to buy stocks of solid companies is right after a market sell-off. I've previously discussed my awkward acronym on the blog, BNBNRBN, i.e. bad news but not really bad news. Usually, the Movers & Shakers column at MarketWatch.com tips me off on stocks that tank, as well as those that make big moves, stocks that I would otherwise have missed.

After a quick look at BBBY's numbers and its competition, it's clear to me that BBBY is a prosperous and profitable company that had an earnings shortfall that disappointed Wall Street. The numbers still look good to me, with only Williams-Sonoma coming close. However, WSM the stock is not currently on sale like BBBY. The value investor in me likes a discount, much like my wife and I enjoy taking advantage of Bed Bath & Beyond coupons (Note to readers: save expired BBBY coupons, as well as their competitors, since in my experience, they honor them with no fuss. Quite a consumer-friendly business move on their part.)

Looking at the moving averages on the chart atop this post, I will buy some shares of BBBY if the stock stays below $40 by the time I'm ready to purchase. Otherwise, I think I will wait until another BNBNRBN opportunity comes along.

Tim Hortons Spinoff

You may recall in a recent post on Joel Greenblatt's old book, "You Can Be A Stock Market Genius", that spinoff companies' returns beat the S&P 500 by a considerable margin. You also may remember that the parent companies beat the S&P as well.

At the time, I was excited to read news of McDonald's spinning off its winning Mexican chain, Chipotle. While that spin-off is in the works, investors are still pressuring MCD to sell off its corporate-owned stores and become more like a REIT.

A few days ago, I read on Fark that Wendy's investors have successfully pressured my favorite fast-food establishment to spin off its own fast-growing chain, Tim Hortons.

Tim Hortons coffee chain in $600M IPO
Wendy's filing follows lobbying from hedge fund Pershing; burger chain retreats from '05 forecast.
December 2, 2005: 8:02 AM EST

NEW YORK (Reuters) - Wendy's International Inc. filed for a $600 million initial public offering of its Tim Hortons coffee shop chain Thursday and said it could not back its 2005 earnings forecast due to several one-time items, including a fourth-quarter charge for store closings.

Wendy's (Research), the No. 3 U.S. burger chain behind McDonald's Corp. (Research) and Burger King Corp., said it will take $79 million to $95 million in charges for closing some Wendy's, Baja Fresh and Tim Hortons restaurants as well as asset impairment.

The company is closing 40 to 45 Wendy's restaurants, five Tim Hortons and four Baja Fresh outlets.

A currency hedge is also expected to affect the company's fourth-quarter tax rate, and Wendy's said it was therefore unable to affirm its earnings outlook for the year.

Wendy's will record gains of $60 million to $70 million for selling about 200 of its hamburger restaurants to franchisees and third parties.

The company said in October it was expecting earnings of $2.12 to $2.15 per share.

Dublin, Ohio-based Wendy's has been struggling to reverse sluggish sales at its namesake restaurants for more than a year. In July, the company said it would spin off fast-growing Tim Hortons so it could focus on the battle of its flagship brand against a revitalized McDonald's.

The IPO move followed months of public lobbying by activist hedge fund Pershing Square Capital Management, which owns a stake in Wendy's exceeding 10 percent of its shares.

Bill Ackman, Pershing's principal, told Reuters he believed the Tim Hortons spinoff would do well.

"We're very impressed with the reported numbers for the business, we think it's a great company and we think there's going to be a glowing reception," he said at a seminar run by The Daily Deal newspaper in New York on Thursday.

He added that the Wendy's developments would be a boost to his campaign to have McDonald's spin off 65 percent of its company-owned restaurants in an IPO.

"This is a company that is not capitalized correctly," Ackman said, adding that McDonald's makes the lion's share of its money through real estate and franchising fees, not through food sales.

The expected price range and the number of shares to be offered in the Tim Hortons IPO have not been set. The offering will be underwritten by Goldman, Sachs & Co. and RBC Capital Markets, according to the filing with the Securities and Exchange Commission.

Tim Hortons intends to apply for New York and Toronto Stock Exchange listings under the symbol THI.



Tim Hortons is ubiquitous in Canada. The chain was founded by its namesake, the late Toronto Maple Leaf pictured to the left. Of the 2842 locations, 2564 are north of the border, with almost 1400 locations in Ontario alone. New Brunswick, a much smaller province, has 122 locations. Putting those numbers in perspective, there are 11.4M residents of Ontario and 730K residents of New Brunswick. So there is approximately one Tim Hortons in Ontario for every 8150 people. In New Brunswick, one location for every 6000 people.

There are almost twice as many Tim Hortons locations in Canada as there are McDonald's.

Growth in Canada? Hmm. I'm not lovin' it.

But how about right here in the United States? Out of the currrent 278 locations, 30 are in Rhode Island, while New York has 71 (though none in NYC) and 73 in Michigan. My calculations show that each Tim Hortons in RI serves 35K people, while in Michigan, it's one Tim Hortons per 135K people. New York, one for every 268K people. Now there is the opportunity for expansion.

Hints of the expansion plans are right there on the franchise section of the Tim Horton's website:

As of July 2005, there are over 260 Tim Hortons locations in the United States. These are situated in Michigan, Ohio, New York, West Virginia, Kentucky, Maine, Rhode Island, Connecticut, Massachusetts and Pennsylvania. Future expansion and opportunities will continue in these markets for the next several years.

...

Certain states regulate the offer and sale of franchises. We have not applied for registration (or exemption from registration) under the laws of Hawaii, Maryland, Nebraska, North Dakota, South Dakota, and Utah. If you are a resident of one of these states, we will not offer a franchise to you at this time.

We're looking at possible expansion in New England, parts of the Rust Belt, and into the South, while ignoring for now a bunch of thinly-populated states (save for Maryland).

I'm getting excited about maple-frosted donuts and coffee. And I may not have to wait 'til my next trip to Montreal to get some sweet satisfaction.

So should I wait for the THI offering, or buy into WEN right now? Or perhaps do both? Or should I continue to wait for the McDonald's spin-off of Chipotle?

Here are some quick comparison numbers from SmartMoney and Morningstar between WEN and MCD:

Net Profit: 1.40% vs. 11.80%
PEG: 2.10 vs. 2.04
Price/Sales: 1.70 vs. 2.20
Price/Cash Flow: 22.20 vs. 11.60
ROE: 2.90 vs. 16.60
ROA: 1.60 vs. 8.70
Morningstar Growth: B vs. B
Morningstar Profitability: B vs. B+
Morningstar Financial Health: A vs. A

WEN is near its 52-week high. The stock has done really well this year, even with its lagging fundamentals. I appreciate the hedge fund pressure to extract shareholder value. I cannot make a fundamental case for buying WEN. However, this activist-investor pressure, plus Greenblatt's point that parent companies beat market returns, is keeping me interested in WEN. I will keep abreast of the THI IPO as well.

I am also still very much interested in the McDonald's/Chipotle story. There could be some fast returns in fast food.

Outsized Gains from a Value Investing Perspective - John Dorfman's Small Stocks

John Dorfman is a Bloomberg.com columnist with a value-investing perspective. He recently wrote a column on small stocks that fit his investing criteria. He says he likes small stocks because he has a better shot of finding a bargain amongs issues that are under the market cap necessary to get on Wall Street's radar.

A year earlier, he made seven picks that returned an average of 21 percent. Caught my attention right there. Dorfman backed up this claim with his list and results:

Here's the scorecard on last year's picks:

Gymboree Corp. (GYMB) was up 75 percent.

Perini Corp. (PCR) rose 57 percent.

Escala Group Inc. (ESCL), formerly Greg Manning Auctions Inc. (GMAI),
returned 50 percent.

United Fire & Casualty Co. (UFCS) gained 37 percent.

Metal Management Inc. (MTLM) inched up 5 percent.

America Service Group Inc. (ASGRE) dropped 24 percent.

Cal-Maine Foods Inc. (CALM) was the big loser, down 55 percent.

Quite a bit of volatility on that list. Six out of seven positions hit big or missed big.

This year's list are another seven companies with market caps below $1 billion. Here's Dorfman's picks with analysis. I will follow with my thoughts on his choices, plus some small-to-medium-sized alternatives.

We'll start with Deckers Outdoor Corp. (DECK) of Goleta, California.
The company designs and markets footwear, such as Teva sandals and Ugg
boots.

Deckers stock has fallen 48 percent this year. My firm sold the stock
short in late 2004 at about $46, betting that it would go down. We
covered our position in April at about $26.

Attractively Cheap

Now that Deckers is down to less than $25, I find it attractive. That
price works out to 11 times earnings, 1.9 times book value (assets
minus liabilities per share) and 1.2 times revenue.

Deckers has debt equal to only 8 percent of stockholders' equity, and
it earned a stellar return of 24 percent on equity last year.

Safety Insurance Group Inc. (SAFT) sells auto insurance and other
property-and-casualty insurance in Massachusetts. The Boston-based
company's stock has risen 37 percent this year, yet still appears
attractively cheap at eight times earnings and one times revenue.

Safety had a combined ratio (claims plus expenses, divided by premiums
collected) of 91 percent last year, which is considered very good in
the insurance industry.

Steel Bargain

Next up is Novamerican Steel Inc. (TONS), based in Dorval, Quebec. It
produces steel tubing and flat-rolled steel.

Like many U.S. steel stocks, Novamerican is cheap -- it sells for 8
times earnings, 1.5 times book value and 0.5 times revenue. Unlike
many U.S. steel stocks, Novamerican has a strong balance sheet, with
debt only about 19 percent of equity.

After posting big gains in 2003-2004, Novamerican stock is down 31
percent this year. I own call options on these shares for some of my
more venturesome clients.

Fourth, I recommend Gold Kist Inc. (GKIS), a chicken producer based in
Atlanta. Like other chicken stocks, it suffers from Avian flu fears.
The stock was down 12 percent in October and 7.4 percent in November.

Gold Kist has turned a profit in three of the past four years, and
seems cheap to me at six times earnings, 1.8 times book value and 0.3
times revenue.

Fifth, I suggest KHD Humboldt Wedag International Ltd. (KHDH) of Hong
Kong. Until Nov. 1, the company was known as MFC Bancorp Ltd., and was
based in Austria. I have recommended it from time to time and
currently own it for one client.

Metal, Telecom and Eggs

Previously a merchant bank, KHD now owns an aluminum rolling mill in
Germany, operates a cobalt refinery in Uganda, and has a metal-trading
operation, MFC Commodities GmbH. The stock sells for 10 times
earnings, 1.2 times book value and 0.4 times revenue.

Premier Global Services Inc. (PGI), out of Atlanta, provides
conference-call and other telecommunications services to companies.
The stock has fallen 26 percent this year, which looks to me like an
overreaction to a minor earnings shortfall in the third quarter.

Finally, I would like to try again with Cal-Maine Foods, the big loser
from last year's list. The Jackson, Mississippi, company owns about 22
million hens and produces about 13 percent of the eggs sold in the
U.S.

Profitability has been spotty, with losses in four of the past 11
years. The shares peaked near $22 in December 2003, when the Atkins
diet was riding high. They have fallen all the way to $6.31.

Now that the shares have cracked, they sell for only six times
earnings, 1.3 times book value and 0.4 times revenue -- the sorts of
ultra-cheap multiples I like.

Dorfman's first pick, DECK, seems like the worst pick. As I've blogged before, I am willfully fashion-ignorant. So when I've heard of Ugg boots, and know that they're passe, they could be as far gone as flannel shirts. Or acid-washed jeans. Maybe even as outmoded as parachute pants. I know so little of fashion that I can't even come up with good examples of stuff out-of-fashion. And I don't trust Dorfman to know this.

However, there have been a couple of recent articles at fool.com looking into DECK's woes. Salim Haji tried to put a value on DECK, taking into account the passing fads of Uggs and DECK stock:

What is Deckers worth?
To answer my questions, I thought about Deckers' intrinsic value. The
company has three primary brands -- Ugg, Teva, and Simple. According
to its most recent press release, the company expects net sales for
2005 to be about $154 million for Ugg, $85 million for Teva, and $8
million for Simple. In my mind, the only brand that has any real,
sustainable long-term value is the Teva brand. I see Ugg as a passing
fad with minimal staying power. With less than $10 million in sales
and no growth, Simple is too small to matter. That leaves the real
value of the company in Teva, which outdoor enthusiasts recognize as a
premier brand.

According to the company's 2004 10-K, Teva generates about $25 million
in cash flow on $88 million of sales, which are essentially flat. This
is a stable, healthy business that spins off significant cash. Roughly
speaking, we can value that brand at eight times cash flow (a typical
multiple for this kind of business), or about $200 million. To me,
this is what the brand would be worth to a competitor like Timberland
(NYSE: TBL) or Reebok (NYSE: RBK), companies that could simply roll
the business into their existing infrastructure. That figure would
also be close to what the brand would be worth to a private equity
firm, which could run Teva as a standalone business with minimal
corporate overhead.

Ugg is the key
To unlock this value, the strategy would be to milk the Ugg brand. In
2004, Ugg generated about $32 million in cash flow on just more than
$115 million in sales. Going forward, I would very conservatively
expect the brand to be able to generate at least that much as sales
drop off over a couple of years.

According to its 10-K, Deckers today spends about $20 million in
corporate overhead, and it is not allocated to any product line. This
amount is probably for executive salaries, corporate accountants,
corporate advertising and promotion, and a host of other costs to
support the three product lines. Most, if not all, of these
expenditures would not be required if a competitor or a private equity
firm bought Deckers and ran it as the Teva brand. However, shutting
down these corporate offices would require a one-time cash outlay for
restructuring costs.

When would Deckers become attractive?
So at what point does Deckers become attractive as a takeover
candidate for the Teva assets? If we make the simple and conservative
assumption that the cash generated from Ugg would be adequate to cover
required restructuring costs, and we ignore Simple because it is too
small to matter, the value of the company is about $200 million. If I
were doing the deal, I would want a solid margin of safety -- I would
start to become interested at $150 million, and my interest would grow
from there as the price fell. With about 12.5 million shares
outstanding and essentially no debt on the balance sheet, Deckers has
an equity value of about $12 a share, given the $150 million figure.
At anything below $10 per share, this company becomes a prime takeover
candidate.

Though the stock appears to have temporarily stabilized at around $18
per share, I'm watching this one closely. Three years ago, the stock
was trading below $5 per share. If it gets back down anywhere close to
that level, I may again take a position in Deckers. Mr. Market's
behavior opens up opportunities on both the long and short sides of a
stock. I've been successful with Deckers on the short side, and I'm
hoping an opportunity will soon arise on the long side.

DECK has risen quickly to near $30 a share since this piece appeared on November 18, 2005. That makes me sceptical of a buying opportunity here.

DECK also doesn't seem to gel with Dorfman's small-stock thesis. He says he is looking for stocks followed by fewer investors, but DECK is followed by plenty of analysts, sites like fool.com, and trades at significant volume on the NASDAQ.

Fashion is fickle by its nature. I think DECK's fundamental numbers reflect their pas success with Ugg.

SAFT seems an excellent small stock choice. According to its Morningstar Report, SAFT scores an A- for growth and an A for profitability. It's PEG is an enticing 0.5. SmartMoney says its net profit of 12.2% beats the competition, while its price/cash flow is a low 6.9, and its ROE an attractive 24.6%. Among competitors, only Mercury General (MCY) garnered higher Morningstar grades. MCY, with a market cap of $3.2B, would have been screened out under Dorfman's criteria. Either seem worth a further look.

TONS is definitely an under-the-radar pick that doesn't even warrant a mention in this series of recent fool.com articles on steel picks. The pieces focus on huge players, like Korea's largest manufacturer, POSCO (PKX) and the Netherlands' Mittal (MT). One smaller player they do like is Steel Dynamics (STLD). Morningstar likes it too, giving it a growth grade of A+, profitability grade of A, and financial health grade of B. Favorable numbers against the competition include a PEG of 0.64, price/cash flow of 4.5, 5-year earnings growth of 59.33%, and net profit of 10.3%. Again, STLD's market cap of $1.5B kept it just off of Dorfman's radar. All of these SmartMoney numbers surpass the available figures for TONS.

GKIS and CALM are two picks that fly in the face of avian flu fears. We've got both the chicken in GKIS, and the egg in CALM.

Lined up against its competition, GKIS makes top marks for net profit margin (4.80%), forward P/E (6.5), PEG (0.77), and ROE/ROA (32.10%/13.40%). So what's the problem here? GKIS laid an earnings egg last quarter:

GoldKist Gets the Kiss-Off

By Stephen D. Simpson, CFA
November 18, 2005

Having heard from the likes of Tyson Foods (NYSE: TSN) and Pilgrim's
Pride (NYSE: PPC), I think most investors already know the score in
the poultry world. Feed prices (a key cost input) are down, but
poultry pricing has fallen off as well. The latest pullet producer to
report, GoldKist (Nasdaq: GKIS), seems to have suffered a real clunker
of a quarter.

Sales were down 10% as reported, and even adjusting for the extra week
in the year-ago quarter renders a negative 3% result for this quarter.
While the company did manage to ship more pounds of poultry, the drop
in realized prices more than overwhelmed that. As you might suspect,
operating leverage cuts both ways, and profitability dropped along
with revenue. Operating margin worsened by a bit, and net income
dropped more than one-fourth from the year-ago level.

GoldKist management didn't seem to have a whole lot of new things to
say. Feed prices were lower, but forward contracts kept them from
realizing the full benefit. Poultry export demand is still very
strong, but more sluggish demand in the food-service chain hurt
domestic results. Remember, GoldKist has a good-sized private label
operation, selling to companies like Wal-Mart (NYSE: WMT), Albertsons
(NYSE: ABS), Wendy's (NYSE: WEN), and SYSCO (NYSE: SYY). If there's
really weakness in the demand channel, GoldKist definitely feels it.

What I don't understand is the apparent magnitude of the earnings miss
this quarter. According to what I see online and in print, the average
estimate for the quarter was $0.77, whereas the company reported
$0.49. Perhaps I'm missing something somewhere (like analysts using an
operating number instead of a net number), but boy, does that look
like an unusually large miss for this sort of business.

At the bottom line, this is another company with very little control
over its costs (feed and energy, for instance) or final pricing.
That's a tough foundation from which to build a sustainable
competitive advantage and long-term shareholder value. While the stock
looks pretty darn cheap on a P/E basis, I'd make certain that "E" part
won't get pecked away before putting any of my nest egg into this
stock.

CALM may have bottomed out. Dorfman picked it again after suffering a 55% drop, reflected in the F grade for growth by Morningstar. But the other grades aren't so bad; CALM gets a B- for profitability and an A for financial health. I think a contrarian play, against the bird-flu scare could be a profitable long-term play. And Dorfman seems genuinely excited about CALM's bargain-basement price. Can the price really get any worse...

*cough*

*cough*

We're left with KHDH and PGI.

KHDH has some SmartMoney numbers that make it stand out clearly from its competition: 5-year sales growth (51.00%), price/sales (0.30), price/cash flow (6.40), ROE/ROA (18.00%/7.80%). Seems very solid on this very cursory review.

PGI has some decent numbers among some less savory ones: price/sales (1.10), price/cash flow (6.50), ROE/ROA (19.10%/11.10%). Morningstar grades PGI a B for growth, a D for profitability, and a B- for financial health. Dorfman is not saying this is a wonderfully run company. In spite of missing earnings forecasts, PGI has grown sales and earnings very nicely since 2001, as well as upped its free cash flow from $18M in 2002 to $41M in 2003, from $58M in 2004 to $72M in the trailing twelve months.

Let's wrap up this never-ending post. I appreciate John Dorfman's picks, but I would make some changes, even going so far as to expand the criteria beyond the $1B limit. I'm going to keep tabs on a modified Dorfman small stock list that leaves off DECK, TONS, and GKIS.

The final list, with current price as I type this: SAFT ($43.70), MCY ($58.85), STLD ($34.94), KHDH ($21.75), PGI ($8.21), CALM ($6.80).

What Was I Thinking?

Checking out another stock blog, uglychart.com, I did the unthinkable. I clicked on a Google ad, one that leered at me, offering a free newsletter of top 2006 stock picks. Curiousity got the best of me, so I used my spammy hotmail account to obtain a pdf file from NewsletterAdvisors.com.

I received a professionally-produced-seeming document featuring stock picks from a variety of subscriber-dependent stock newsletters. I had heard of the Gardners from Motley Fool, but the others were new to me.

The first pick, courtesy of Louis Navellier and his Blue Chip Growth Letter, is on the Pig Stock Watch List--Suncor Energy (SU).

Here is the second half of the report just for you, so you don't have to suffer the indignity of finding the report yourself:

Fundamentally, Suncor is probably the strongest oil company on my
current Buy List. It has incredibly healthy operating margins, and is
ready to handle the long-term energy boom.

It’s one of the largest producers of oil and natural gas in North
America.

The company recovers bitumen—a very heavy oil—from the oil
sands and refines it into useable products.

Suncor is a fully integrated energy company with a long, successful
history in the oil and natural gas businesses. In the second quarter of
this year, net earnings were $112 million, and cash flow from operations
was $305 million. The company has increased shareholders’
wealth 16-times over in the last ten years.

During the quarter, Suncor made significant progress in rebuilding
portions of the oil sands plant damaged by a January fire, and they
expect to return to full production capacity in the third quarter. Major
repairs are complete, and the remainder of the reconstruction
effort is now focused on replacing piping and
electrical systems to support operations.

Planned maintenance, which had been originally scheduled
for September, was brought ahead and was near completion
at the time of its last earnings announcement. Once that is
done, Suncor expects to commission new expansion projects at the oil
sands plant and increase production capacity by the end of the year.
Tar sands companies like Canadian Natural Resources and Suncor are
sensitive to oil prices. However, the oil they get out of the tar sands is
sweet. They use natural gas to generate a lot of steam to get the oil
out of the tar sands, extra-expensive sweet crude that’s in high
demand. These tar sands companies will be doing very well for a long
time. Yes, the cost of natural gas has gone up, but the margins
to extract the crude are still very fat.

We’ve already made a lot of money with Suncor (up 139%) and I
expect to make a lot more. We're still in the early stages of this oilsands
boom. The company will boost daily capacity to a half-million
barrels by adding their third plant. And overall, they expect to boost
output 50% by 2008. Buy it under $66.

SU is a pure play on the Alberta oil sands, and yet I've been hesitant after looking at some fundamental numbers. Comparing SU with other independent oil and gas companies at SmartMoney.com, SU has a lagging net profit margin, a price/cash flow ratio two to four times higher, and a forward P/E of 40. Take the forward P/E; two companies involved in the Canadian oil sands, Imperial Oil (IMO) and Murphy Oil (MUR) have forward P/E ratios of 16 and 13.

I wonder if oil sands optimism is already priced into SU? Or do the past numbers fail to reflect the huge potential for SU in Alberta as the biggest individual player? Is the best investment Suncor's growth, or in a more conservatively priced IMO?

If SU is using so much natural gas, is Canadian natural gas company Encana (ECA) worth a look?

Navellier mentions (not in the above excerpt) Chinese demand, and throws out a Goldman threat of $105 oil before begging off. But these arguments favor investing in oil stocks in general, not specifically in SU.

Navellier says: "Fundamentally, Suncor is probably the strongest oil company on my current Buy List." The lawyer in me is suspicious. Parsing this sentence, "probably the strongest" is flimsy support. The reader gets no further information as to the other oil stocks on Navellier's buy list. And where are the numbers, the evidence of Suncor's strong fundamentals? He cites net earnings and cash flow in a vacuum, without context. Remaining numbers mentioned in the piece: SU's return to shareholders over the last ten years (16-times!), and Navellier's personal gains (139%!).

Fine, I'm analyzing an internet sales pitch for a fee-based newsletter. The Wizard of Oz springs to mind, where there's just an old man behind the curtain using a booming microphone and flashy lights to fool me into thinking he has the answers.

I'm not convinced. I still don't know which oil play to make.

SU - Pro: Pure oil sands play plus growth potential. Con: Growth priced into its outsized P/E.
IMO - Pro: Tremendous free cash flow and oil sands exposure. Con: High PEG.

Or maybe an indie oil and gas producer like XTO or Apache (APA) - Pro: PEG below 1.0, net profit margins and ROE significantly higher than SU and IMO. Con: No oil sands exposure.

Navellier's Blue Chip Growth Letter and its ilk, as well as top stock lists, can be informative, and spur ideas. Lately they've provided some nice blog fodder. But at least for me, this stuff raises more questions than provides investible answers.

Is it time to gamble on WPTE?

Is it time to gamble on WPTE...and hedge that move with HET? Or should I forget poker tours entirely and invest in a true value and cash play, IGT?

Is WPTE priced as a value play? It's certainly near its nadir for several reasons that fool.com's Jeff Hwang discusses below:

WPT: Worth more than zero?
I tend to think of myself as being mostly indifferent with regard to WPT Enterprises (Nasdaq: WPTE), the company behind the World Poker Tour television show. But the stock has been in a freefall since Doyle Brunson's supposed takeover bid pushed the stock up to a high at $29.50 this past summer. And watching the stock hit a new low yesterday at $6.15, I just can't help but think that the stock has got to be worth more than zero.

It's Harrah's World Series of Poker vs. the World Poker Tour all the way around. But WPT is hardly alone in this battle -- its business partners have a stake in its success, as well. Really, it's Harrah's vs. everybody else on the casino front, including rival MGM Mirage, which hosts several WPT events at Borgata, The Mirage, and Bellagio. And on the slot machine front, it's International Game Technology's (NYSE: IGT) WPT slots vs. WMS' upcoming series of WSOP slot machines. On the video game poker front, it's Take-Two's WPT vs. Activision's WSOP-branded game.

In addition, WPT Online -- the company's new online gaming site and the key to the stock's upside -- now has IGT as a business partner, with the latter company's recent acquisition of WPT Online partner Wager Works.

And don't let WPT's past couple of quarterly earnings (or lack thereof) fool you: There's a legitimately profitable business here.

Last week, the company posted a wider-than-expected third-quarter loss of $1.6 million, or $0.08 per share, vs. the analyst expectation for a loss of $0.05 per share. The company also forecast light on fourth-quarter revenues, as its guidance of $4.5 million to $5 million in revenues was well short of the $8.5 million analyst estimate at the time.

WPT has taken a shot in the foot in a dispute over its Professional Poker Tour series with the Travel Channel (see WPT's PPT Saga ), which airs the WPT show. As we discussed back in September, WPT had already shot its first season of the PPT and recorded expenses for the episodes, but negotiations for the series broke down between the two parties. And apparently, WPT had a three-year deal in place with Disney's ESPN for the PPT. At that point, the Travel Channel stepped in and interfered with the deal by threatening a lawsuit. WPT countered by filing suit itself against the Travel Channel back in September.

But as a result, WPT now doesn't expect to derive domestic license revenues from the PPT in the fourth quarter. Instead, the PPT will air internationally and be used as advertising for WPT Online. Still, product licensing revenues were up 481% to $930,000 in the quarter. WPT Online generated $175,000 in revenues its debut quarter, and with marketing spending picking up, is expected to do $225,000 to $275,000 in revenues in the current fourth quarter.

And despite its shortcomings, analysts still expect the company to earn $0.39 per share next year.

While WPTE is an incredibly risky investment, I think the following problems are already priced into the stock:

Amateurish WPTE business moves driving the Professional Poker Tour from the TV to the courtroom.

The Doyle Brunson-rumored takeover fiasco over the summer that pushed the stock from $20 to $30, and back down to $20 and lower over the course of a few days.

The lull between WPT television seasons is in full swing as reruns of last season are rerun again. I have to get my tv poker fix by catching the competition, like the highlight-driven WSOP events on ESPN, or watching C-listers playing D-list quality poker on Bravo's Celebrity Poker Showdown. And then there's the poker programming on FSN, so commercial-heavy that it's unwatchable without using an ad-skipping DVR or TiVo.

A not-so-brief aside: As a viewer of the World Poker Tour, I've noticed that Travel Channel has been re-running old episodes for quite a while. Where are the new episodes? Upcoming season 4 has 16 tournaments, which means 16 episodes, 16 weeks of fresh poker. That leaves 36 weeks a year of replays as well as forcing me to suffer through some of the crap offerings on the Travel Channel. Food Network couldn't handle the piss and vinegar of Kitchen Confidential author Anthony Bourdain. Travel Channel runs his show, yet it has the Rachael Ray-patina of cheeze dripping all over, with Bourdain stretching to fill an hour program with his increasingly hammy schtick. Mark DeCarlo (I think he hosted Studs from way back in my high school days) has a crap-o-rama called Taste of America. In a Nashville segment, he mocked the Loveless Cafe owner with the tired old gag about Southerners having two first names. His host abruptly disappeared, dumping DeCarlo onto his African-American biscuit maker. Bad enough that DeCarlo sheepishly pointed out to the viewer that he was rude to his host. Things degraded further when he started talking biscuits. Sure enough, he started to ease the lilt of his voice to approximate a southern black patois.

Okay, so this train wreck was entertaining, if unintentionally so. The Travel Channel needs both WPT and PPT programming. The PPT whould fill in some of those 36 weeks of reruns, while providing higher-rated, and higher-quality entertainment than what is currently on offer.

Other issues I have with WPTE may not be priced in at $7+:

- WPT is facing fierce competition in the online poker area. WPT advertisers like FullTiltPoker.net, PokerStars, and PartyPoker are the players. WPT does not have much of an online presence in the States, and operates its internet gambling business in the UK, where it's legal. This may be a good thing, as I think various state AG's may start cracking down on internet gambling at off-shore poker sites.

- WPT established itself as the premier league/circuit for poker, likening it to a sports league like the NBA. But now it looks more like the ABA, or the NHL, after Harrah's bought the World Series of Poker. HET expanded the brand beyond a few tourneys at Binyon's Horseshoe. The WSOP now includes satellite and feeder tournaments. As everyone knows, it's aired (constantly) on ESPN, far from the digital cable ghetto where Travel Channel lies. Hwang has a point that it behooves HET's competitors to support the WPT, but do I want to invest in the dominant player, or an also-ran?

Is the poker business maturing to the point where there could be some consolidation? Could a stronger player, say one of the websites that advertises on WPT, decide to buy out the WPTE stock, not at the crazy Brunson premium, but at a premium to the current trading price? I don't want to buy a stock hoping for a takeover. Talk about a longshot gamble.

What about a safer bet? Pat Dorsey's short piece with the elegantly alliterative title, 5-Star Stocks that Spit Out Cash, cut through the stock picking bullshit in asking two questions: "Is it a decent business, and is it reasonably priced?" Among his picks, WershovenistPig Stock Watch List resident, IGT:

International Game Technology IGT
Cash Return: 6.2%
Price/Cash Flow Ratio: 12
Economic Moat: Wide
Business Risk: Average

From the Analyst Report: "We continue to believe that IGT has excellent long-term prospects. Investors willing to look beyond the near-term sluggishness will, in our view, find that the market's shortsightedness has created a compelling buying opportunity."