About Me 0002: Stock Making Money

I don’t know how many times I have heard that stock picking doesn’t pay or you can’t beat the markets over the long haul picking stocks etc. That is rubbish.

Picking stocks is exactly how you beat the markets. It is true that you need to spend time developing a successful strategy for picking stocks and your casual investor is likely better off with a conservative broad basket of ETFs, but that is not my audience, nor is it any fun, so it is not relevant to this article!

We are here to look at the market differently, turn convention on its head and uncover the best darn new technology stocks in the world and make some money.

A Friendly Market

There is no way to put this delicately. I kicked some market ass in 2010. Three buyouts of portfolio holdings, all at better than 100% premium to 52 week lows and a bunch of other 50-100% gainers. Granted this wasn’t the most difficult year to pick winners. Most everything was higher, but BulwaTechReport.com holdings are names most investors are not aware of, businesses with growth and great technology that trade at sensible valuations.

To buy these names I am not taking a ‘cloudlike’ leap of faith that people will continue to pay 100x earnings to avoid having my investment chopped in half (50x earnings is still unjustifiable in historical market terms).

I am not drawing lines on charts or punching numbers into a computer, I am out there doing research, asking questions, making projections and taking a stand on new companies that I believe make for the best investments. Here is a review of some of the BulwaTechReport.com portfolio’s best 2010 performers, what I said at the time of recommendation and what I think of the prospects after the advance.

Neo Materials (NEM.TO,NEMFF.PK)

Originally purchased and recommended in August 2010 at $3.80, Neo Materials’ stock currently trades over $7/share and hit a recent high of $7.75, for more than 100% gain. While the entire rare earth sector has been on fire, I didn’t feel comfortable buying a miner given the extreme volatility in spot price for the metals, high valuations and lack of profits. When recommending Neo, I wrote this in a research report:

The rare earth space is difficult to play as many companies are unprofitable. Neo Materials offers a diversified investment in a high growth area with exposure to a variety of alternative energy markets.

The allure of rare earth is that the materials are vital to a variety of high technology and alternative energy products including LEDs, displays, sensors and micro motors. Neo Materials specifically offers refined Neodymium and other powders to end users. Neodymium, #60 on the Periodic Table, is essential to the strongest magnetic materials known to man and used in products such as electric motors.

I believe the value of these metals is in the refined end product and this interesting comment from CEO Don Bubar of miner Avalon Rare Metals (AVL) supports this:

“the mining side in the rare earth business made up only about 10-15 percent of the final product value, and digging up ore was only the first step toward a product.”

“It’s not a mining business,” he said. “It’s a sophisticated chemical processing business to produce specialty chemical products for clean technology and high technology.”

I continue to own Neo Materials. I am not as enthusiastic as I was 100% ago but I am of the old fashioned buy low camp. Still if the rare earth boom continues as I believe it will, Neo is uniquely positioned, profitable and has a sterling balance sheet. My 24 month target for the shares is $12.

The Unwanted Acquisition

Crucell (CRXL) is a biotechnology company that licenses proprietary technologies, such as the PER.C6, a human designer cell line to develop and manufacture biopharma products, it also offers MAbstract to discover drug targets and identify human antibodies and a variety of other discovery and manufacturing platforms. The company’s shares are up over 50% for the year on a bid from Johnson and Johnson (JNJ) to acquire the company and I am not happy about it! Every so often you come across a company that truly meets all the investment criteria of you model.

One of those companies was Crucell (CRXL). I recommended purchasing more CRXL in July 2010 saying:

I still believe this is the single best stock to own over the long term. It has a disruptive technology that will alter the way the industry discovers and manufactures drugs. It has relationships with the largest companies in the industry and has already been the target of an attempted takeover. Would buy more at these levels.

This company was in the never sell category and I have owned shares for over 10 years since originally purchasing for around $6/share. I still believe if Crucell stays independent, the shares could reach over $90/share equating to a $9-10 billion market valuation.

Obviously I am not the only one who believes there is value in Crucell and its technology, as Wyeth attempted to purchase the company before Wyeth was acquired by Pfizer, thankfully killing the deal. Now Johnsons & Johnson (JNJ) is doing the bidding and looks to be winning the asset of Crucell at roughly $32.50/share US.

This stock was trading below $20/share only two months before JNJ made its bid at a 56% premium to the previous day’s close. I have very mixed emotion about this offer. Yes it is a nice win in the markets, but I believe I can make much more if CRXL remains independent and I am allowed to participate as a shareholder. Buried in the giant JNJ I will never get that opportunity.

There are some ‘rebel’ share holders out there that agree with me and aren’t eager to tender their shares. There is already a small discount between the offer price of $32.50 US and current quote of just under $31 because of this dissenting body of shareholders. I am considering buying shares.

The deal appears likely to go through, and at current prices that would give current share purchasers about a 4% gain and if JNJ sweetens the deal a bit for the holdouts the gain could be bigger. If the deal falls apart I will be very thankful for any selloff in reaction. I’d then re-establish a serious position in Crucell.

A Top Theme Delivers with Impressive Partnership

Stratasys (SSYS) had a terrific year with stock roughly doubling after starting the year just below $18/share and finishing around $33/share. This company is a leader in machines for rapid prototyping or 3D modeling or digital manufacture or an even fancier term– additive manufacture. The company offers 3D printing machines based on its proprietary technology Fusion Deposition Modeling (FDM). I have been writing about rapid prototyping and digital manufacture since my days at thestreet.com and this was the year the technology and the stocks really started to deliver.

In January, Stratasys announced a partnership with Hewlett Packard (HPQ) where Hewlett will distribute an entry level HP branded line of Stratasys 3D Printers. This sent SSYS shares soaring almost 50% and set the stage for a further 25% gain over remainder of the year to the current quote near $34/share.

3D Systems (TDSC) is a competitor to Stratasys and another stock that I wrote about at theStreet.com. I also owned TDSC in my bulwatechreport.com portfolio as recently as 2010 but sold it much too early in the year. After some industry due diligence, I concluded TDSC was the weakest positioned player in the field and sold only to watch the stock soar another 100% higher. This is a good example of potentially being right longer term and still losing money short term. Timing is very important! But so is sticking to your research supported conclusions.

I feel stronger now than ever that 3D Systems is facing an uphill battle competing for leadership in this exciting industry. The company’s stereolithography (SLA) and selective laser sintering (SLS) equipment produces accurate parts but is expensive to purchase and operate relative to the competition, and because it uses lasers it requires specialized environments in which to operate. RAPID PROTOTYPING IN CHINA lists some of the other disadvantages of SLA relative other technologies as:

over time, the resin will absorb moisture from the air, causing the soft part of the bend and roll thin wings.

helium – cadmium laser tube life of only 3000 hours, the price is more expensive. It is necessary to scan the entire cross-section cure, forming a longer time, so production cost is relatively high.

choose the type of material is limited (translation – the choice of material is limited*author comment), must be a photosensitive resin. Parts made from such resins in most cases cannot test the durability and thermal performance, and photosensitive resin on the environment pollution and skin allergies.

Looking at these stocks heading into 2011 I feel Stratasys (SSYS) is still well positioned given its strong market presence, premier partner in HPQ and best in class materials. I would not own 3D Systems at current prices. The company now sports the largest market cap of the players in the space and in my opinion faces the biggest challenges.

One of the largest challenges for both companies comes in the form of a large privately help competitor named Objet Geometries. This company’s machines use a technology called PolyJet™ that deliver superior accuracy at increasingly competitive pricing and Objet offers the industry’s only multi-material 3D printer.

As a longtime supporter of Stratasys and Rapid Prototyping, it is difficult for me to say, but I would not add to positions at current levels. After comparing products from entry level Stratasys machines and Objet machines, the Objet machine delivers better accuracy than Stratasys and smooth surfaces which Stratasys cannot deliver without post processing.

Stratasys’ strength lies in its higher end machines and specialty materials that offer heat tolerance and other properties that competitors cannot offer for real world functional testing. I am concerned that the HPQ partnership for entry level machines may not be the right fit given Stratasys’ product strengths and competition from Objet and other lower end products in the near future. I hope Objet Geometries decides to offer shares to the public in an IPO because I will line up to participate as this company looks like a winner going forward.

We can only hope 2011 is as good a year for stock picking as this past year. Given the rapid evolution of new technology, investment opportunities are presenting continuously. The environment for investing in new technology companies has never been better.

Long NEM.TO and Short TDSC

By Dian L. Chu, EconForecast

China has been ranked as the top growing country among the G20 since 2001 and is expected to retain that title for at least another five years (See Growth Chart). However, the news coming out of China for the past three months has not been good. It is looking more and more that it is not a question of if China is a bubble and going to burst, but when.

The country has major infrastructure issues, troubling population dynamics, poorly aligned employment outcomes, inflation problems, a real estate bubble, an opaque and potentially insolvent banking system (had mark-to-market accounting been applied), geo-political problems with North Korea and Taiwan, and an underperforming stock market in 2010 (see stock comparison chart).

Smart Money Rushing Out

While the hot money is flooding into China, the smart local money is doing everything they can to get their money outside of China, which partly explains why Shanghai SE Composite has underperformed other markets for the past year or so (see Comparison Chart).

The many issues of China could conspire to become the biggest train wreck waiting to happen, and potentially dwarf any little budget problems in Europe by a factor of ten.

Big Trouble In Big China

China has a population related societal structural problem. The nation has tried to utilize the vast manpower to its advantage over the last two decades building a powerhouse manufacturing economy through the availability of low cost workers, which supplied the world with lower cost goods.

Nevertheless, the harsh reality is that the nation's infrastructure, quality jobs, food, and overall resources are too scarce to support such mass population, while achieving the government`s goal of a smooth transition to a developed middle class to sustain an internal demand model going forward.

If you think you have riots in Greece over the pension retirement age being raised is bad, just wait till riots breaking out in Beijing and other cities over the fact that a 90 cent bowl of noodle soup now costs four dollars due to food shortages, and a runaway inflation problem.

Loose Lending = Non-performing Projects

This is only reinforced by some of the news events taking place over the last three months. Let`s start with the raising of banks reserve requirements by the central bank, which is the sixth such increase in 2010.

These measures are meant to curb the excess lending which has fueled much of the overbuilding and real estate speculation occurred over the past two years as China`s central bank initially wanted to avert a recession by artificially creating demand for workers and construction projects to replace lagging demand from the developed economies.

The problem is that too much lending has occurred, and bad lending at that. Because of the cheap available credit, now you have cement companies and manufacturing firms getting bank loans to invest in endeavors such as real estate, which is outside of their core expertise and competency.

Real Estate Misery Loves Company – China & Spain

The result is a bunch of excess inventory and poorly thought-out construction projects which have no means of recouping the initial investment needed to repay the bank loans.

This practice is similar to Spain`s situation now where they have entire uninhabited building complexes that have yet to be marked to market, and will probably ultimately be demolished. But at least in Spain, even though it was a construction boom, it was engineered by developers in Spain, and not by some manufacturing outfits like those in China.

So, multiply the bad business project factor by ten and you get an understanding of the magnitude of bad loans on the books of Chinese banks. The problem is being further exacerbated by the practice similar to Spain`s of banks making additional loans to the businesses just so that they can then turnaround and pay back the interest owed on the original loans.

The only way this would work out is if these projects magically develop revenue streams. Unfortunately, in the case of Spain, a 20% unemployment rate, coupled with a still overvalued housing market in which prices still need to come down significantly, would suggest that by the time the Spanish economy recovers enough to support the excess inventory, the abandoned projects are run down and uninhabitable.

A similar scenario could play out in China as well.

True Smart Money Wary of the Write-off Domino

Furthermore, China`s practice of overbuilding at the height of real estate valuations makes even haircuts on loan write-offs an untenable practice for banks, and by further throwing good money after bad, the ultimate mark- to-market effect could be catastrophic for Chinese Banks.

This is the main reason all the major Chinese banks have gone to the market in 2010 to raise more capital before investors wise up to the underlying deficits these banks face, as these bad loans eventually would need to be written off the books.

Victor Shih, a Northwestern University professor estimates that Chinese local governments borrowed some 11.4 trillion renminbi at the end of 2009, and that local government financing loans to be roughly one-third of China's 2009 GDP. The most likely scenario over the next few years is that there would be increases of non-performing loans ratio from local governments. This would require a large scale of recapitalization of the Chinese banking system, which would eat up a large share of China's foreign exchange reserves and possibly slow down growth.

Although Beijing is quite capable of a few bailouts and surviving a widespread banking crisis, it most definitely will not bode well for the financial markets. So, insiders are removing capital from direct exposure to the inevitable re-pricing that will happen throughout Chinese markets from real estate to the stock market, and can be seen at this early stage by the underperformance of the Chinese stock market compared to other global markets. Remember, foreigners cannot invest directly in these markets, so these capital outflows are truly the smart money.

Logistic Gridlock Crimping the Middle Class

Next let`s look at the recent news regarding a severe cutback in automobile registrations in Beijing to 240,000 in 2011 from 700,000 registered in 2010 by the municipal government. Other large cities in China are bound to follow. This is most likely related to the reported 9-day traffic jam on the Beijing-Tibet expressway in August, and other extended traffic jams throughout China in 2010.

China is trying to build infrastructure projects after the fact; whereas with proper central planning these should have been established far ahead of the massive transition from a rural, agricultural based populous to that of a modern, large city based business and manufacturing concentration.

Simply put, it is impossible for all the Chinese citizens who want and can afford automobiles to be able to own and utilize this form of transport without a total breakdown in the transportation system. We are seeing the early stages of complete and counterproductive gridlock in the transportation system of China, and it is only going to get worse over the next decade.

No Jobs for College Grads

For all the talk about how China graduates more engineers each year, and other college educated young people who have strong backgrounds in the hard sciences than most developed nations combined, this is actually another sign of problems to come over the next decade in China.

China`s wealth and emergence into the second largest business economy hasn`t been built around the need for these types of mind and skill set. So literally you have a large mismatch between the types of available jobs in China, that are supported by the heavy manufacturing and construction intensive focus of the past twenty years, to that of the recently educated pool of graduates who have grown in sizable numbers over the past five years.

The Mind Is A Terrible Thing To Waste

This results in a large human asset class that China is currently wasting, as most of the newly educated workforce is working in jobs which require little or no advanced education at the university level. So you have highly educated university graduates in areas like engineering and accounting working low level service and sales jobs that pay less than many manufacturing jobs.

In short, there are too many highly educated Chinese citizens graduating each year for the number of jobs available needing their skill set because China`s economic model isn`t built around these type of jobs. This type of misaligned employment outcomes never ends well; it usually manifests itself in increased civil and social unrest.

8% Inflation in 2011

The next major challenge for China is a skyrocketing inflation, which at its root is the fact that there are too many people chasing too few resources. This fundamental flaw in population dynamics underpins many of the problems that China faces going forward.

Recent CPI data for November illustrates the inflation problem in China with a reading of 5.1% from a year ago comparison, this is up from a 4.4% reading for the previous month. Couple this with the latest 4% hike in fuel prices in China because of rising oil prices, you could expect future CPI and PPI reports to reflect even higher rates of inflation.

For now, most of the year over year spike has revolved around higher food prices as energy has mainly been flat for 2010 thanks mostly to government subsidies. Now that energy prices have entered the picture, China will start to experience even more inflation pressures in 2011.

Furthermore, with the undervalued yuan pegged to the dollar, it is only getting worse for China in 2011 due to Fed's QE2 pressures on the dollar. The real inflation rate for Chinese citizens for 2011 will probably approach 8% next year.

An Asian Contagion by China?

This escalating inflation concern is further compounded by Beijing's lack of decisive action to combat the problem by delaying a much needed currency appreciation, and hiking interest rates in a timely fashion. There is no getting around the fact that these two things need to occur as soon as possible.

By the time the Chinese government is forced to implement these tightening tools, the damage to the economy is most likely already done. The longer China delays the inevitable serious tightening measures, the harder the economic crash that will occur in the aftermath of these policy changes. And it is unlikely to end well. The resultant impact will probably take the rest of the Asian economies down with it – an Asian Contagion scenario.

History Repeats Itself

Eventually central planners and finance ministers around the world might start to understand that policies which lead to bubbles being formed in the first place are counterproductive in the long run. But until that lesson is learned, it seems like we are doomed to repeat the same mistakes over and over again.

Right now, there are more and more signs coming out of China that all is not well with its economy, and the likelihood of a more severe downturn in the future is a distinct possibility, unless its policy makers take decisive and prudent actions to minimize the damage of a hard landing.

Dian L. Chu, | Mobile Reader, Website | | Facebook | Twitter

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About Me 0002

Tuesday, 28 December 2010

Stock Making Money

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How Online <b>News</b> Evolved in 2010

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How Online <b>News</b> Evolved in 2010

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Alfred Kahn, 'Godfather' of Airline Deregulation, Dies at 93

How Online <b>News</b> Evolved in 2010

'NBC Nightly <b>News</b>' Wins 4th Quarter Ratings

Alfred Kahn, 'Godfather' of Airline Deregulation, Dies at 93

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