SNCR, Technology with Strong Forward Potential

Synchronoss Technologies Inc. (SNCR) is a small, but growing mid-cap technology company. They provide multi-channel transaction management solutions for communication services. It enables communication service providers to have a single transaction view, which offers a centralized reporting platform for intelligent analytics’. It is presently incorporated in the I-Phone and has the potential of being incorporated in multiple different types of mobile communication devices.

This company has had strong insider buying with $1.5 million dollars in shares purchased in the last 2 to 6 months. In addition, the institutions have been steadily buying shares with approximately 16 million net shares purchased in last 9 months.

The company has had steady earnings growth with positive upward surprises vs. analyst’s expectations. It is estimated that its five-year forward earnings per share is expected to be approximately 29% a year. It has an operating margin of 26%.

The downsides to this company involve its valuation which has a forward PE of approximately 67 and its relatively small size. The unknown factors include how widespread will its proprietary devices be used, and whether it will continue to grow or even possibly be acquired in the future. It certainly has some degree of risk and unknown factors, but the insider and institutional buying plus its remarkable chart may make this a reasonable stock to have in one’s portfolio.

Disclosure: I have long positions in SNCR.

David L. Wolf

What a Difference Six Weeks Can Make

Approximately six weeks ago, I wrote an article in which I recommended that HERO was a stock that was not a timely purchase at that particular moment. The main reasons for that included falling natural gas prices, a looming hurricane season with drillers reluctant to rent rigs, and approximately a quarter of their rigs were without long term contracts.

My concerns were correct and HERO declined to approximately $25 a share. This seems to be it’s base point as it’s touched this level multiple times only to rebound. At that point several things have changed which now make me recommend HERO as a terrific value with the potential for excellent appreciation.

First, as the Wall Street Journal noted, insiders had been buying HERO shares. They have bought $1.2 million dollars in last month and $2.9 million dollars in the last year. Even more impressively, institutions have been steadily purchasing HERO’s stock and have purchased 30 million shares in the last nine months.

In addition the price of natural gas, to which the value of HERO is closely attached, has been slowly, if not steadily, increasing in value. The majority of the hurricane season is behind us with no major damage to HERO’s rigs. It seems reasonable that the number of rigs under contract may be increasing. I don’t have any direct evidence for that, but it would certainly help explain the insider and institutional buying.

In addition, the valuations are compelling. The PE is 7.64 with an operating margin of 43%. It has a return on equity of 31%. The technical charts seem to indicate an excellent point for buying.

Disclosure: I have long positions in HERO.

David L. Wolf

Agriculture- A new way of growing money

One of the key areas that have been booming for the last year has been the agricultural area. Agriculturally related companies have experienced broad and significant growth. I believe this growth is far from being done. There are a number of ways in which one can benefit from this boom, but I will concentrate on two stocks today. One way in which I would be hesitant to invest, is in the Ethanol stocks. My personal belief is that the hype that is associated with Ethanol may be overdone, considering all of the negatives including the subsidies necessary, the acreage required, and the possible political risk.

One of my favorite agricultural stocks is Monsanto (MON). Monsanto is a leading supplier of agricultural products including soybean, corn, canola and cotton seeds as well as many vegetable seeds. It also has a number of products including genetically modified corn and soybeans and other seeds that are more resistant to pests and drought. It has just recently obtained approval from Canada for its soybean technology.

The positives for the company include an operating margin of approximately 20%, a gross profit of approximately 3.5 billion dollars, and very low debt. In addition, because of the Ethanol demand, their corn seeds are in great demand. This is a global company and its products are used all over the world for a growing population with increasing wealth. The downsides that I see for the company are a trailing PE of 35, making it relatively expensive, and the fact that, while there has not been a lot of insider selling, the percentage of insider ownership is on the low side.

The other company that I think very highly of is Potash Corporation of Saskatchewan (POT). This company engages in the sale of fertilizer and feed products. It has nitrogen facilities in multiple areas of the United States and the overseas. I believe the basic factors that make this stock valuable is the growing wealth in heavily populated, emerging market areas. It requires a per-capita income of three thousand dollars a year in order to have the money to be able to purchase necessary items for their growing population. Obviously, one of their main staples is food, and the best way to increase food production is with the use of fertilizer. For every thousand dollars of fertilizer used, one is able to grow an additional three thousand dollars worth of food. Potash is particularly well positioned both because of its size and because it has a significant production reserve that allows it to increase production with the increasing demand.

There are other fertilizer companies and many have done well. (POT) is one of the largest fertilizer companies and unlike many; it has a global reach, and an ability to increase their production. The positives include: significant growth, an excellent chart, a strong net profit margin, and minimal debt. The negatives include phenomenal growth with almost 400% return in three years, and a trailing PE of 32.5.

While both of these company’s have had strong run-ups, I believe that the basics of what they do and how well these companies are run, make a compelling case for strong further increases in their stock value.

Disclosure: I have long holdings in both Potash Corporation of Saskatchewan (POT) and Monsanto (MON).

What do you do when one of your stocks is a big winner?

Most of us are trying to pick stocks that will appreciate, unless of course you are going short. Your purchasing of stocks then depends on whether you are primarily trading, or primarily investing. In my mind, trading means that you purchase and sell stocks frequently, and look for quick moves, based on either momentum, or news. A trader will frequently own a stock for a few days to a few months.

An investor on the other hand, has a longer term approach in which daily or even weekly results are much less important than the long-term view. Now this long-term view can vary from months to years. There are some investors who will own stocks for multiple years. I personally am usually not quite that patient, unless the stock has exhibited consistent growth while maintaining a reasonable PE ratio for a long period of time. I rarely if ever try to time the market or move in and out quickly. The one exception to this is when you purchase a stock that suddenly has some significant downside potential, either from news, financial performance, or some other factor. In that case, I have no problems in letting those stocks go quickly. I am not a great fan of “stops” as I have experienced these stocks being picked up at this stop point, only to quickly regain a higher price.

But what if you have picked a real winner? To me, that is a stock that goes up 40% or more in a year. There are many theories as to what should be done. Some talked about selling the stock and taking your profits. Certainly you never go broke that way, but have you made the most of this opportunity? Others talk about rebalancing your portfolio and bringing the percentage of the stock down to the same percentage as your other holdings. Again, this is not an unreasonable approach, although I still feel that it may be excessively conservative under many circumstances. But indeed, if that stock had risen to greater than 12-15% of your overall holdings, than the rebalancing certainly makes sense. Otherwise, you just have too many eggs in one basket.

My approach requires a little more homework and obviously varies from stock to stock. First of all, I do look at what percentage of the overall portfolio the stock makes up. I am certainly willing to sell some if this stock is over-weighted to a major degree in my holdings. For each person, that level of over-weighting depends on your risk tolerance.

Next, I look at the stock itself in a careful bottom-up approach. Are their revenues, earnings, and overall momentum continuing in an upward direction? Is the product reaching a saturation point in it’s market, or being commoditized so that the profitability of this product is being reduced? Do they have proprietary products or patents that will protect them from significantly lowered margins? Has their PE ratio’s gone up significantly, so they are now either fully priced or “priced to perfection”, meaning that if they fail to significantly meet or beat analysts predictions, will they be likely to have a significant downside?

After reviewing these and other questions regarding the company and its product, I feel that I have a much better idea of whether the company has significant upside potential left. If I cannot find any information, analyst reports, or data to support a belief that this company has lost it’s competitive edge and it’s momentum, then I will continue to own the stock. It makes no sense to me to automatically rebalance portfolios. What this really means to me is that one lightens up on your winners and buys more stocks that have not performed as well, or stocks that are new to your portfolio.

An extreme example of this would be Brookshire Hathaway. Imagine if you had bought it in 1965 for less than $100 a share, and then sold it when it reached $500 a share. You would have done well, but you would have missed approximately $99,000.00 worth of gain per share. Obviously, this is an extreme example. But there are many examples including APPL, RIMM, HANS, BLUD, CROX, and numerous other stocks, that have had long-term runs, in which selling too early or rebalancing your portfolio would have cost a great deal of upside gain.

So my personal philosophy, assuming the stock is within my comfort level as a percentage of my overall portfolio, and I feel that this stock has significant upside potential left, is to watch the stock closely, but to let it run. I will hold it as long as it continues to meet my criteria for value and upside vs. downside risk. Only in this way, do you get a chance to fully achieve what these few, but remarkable companies, can do for your portfolio and overall net worth.

But when you feel that they are fully valued or have a significant downside risk, it is important to be able to pull the trigger and sell these stocks, no matter how well they have done for you. This is a company, not a relationship, and one has to be completely unsentimental when it comes time to let that particular stock go. It may be that you still believe it has some upside potential, but at greater risk, and at that point it makes a lot of sense to take much, if not all, of your winnings off the table. This way you can keep what you feel is a reasonable amount of this stock, but still have realized most of your profits.

It’s these stocks, which are impossible to determine ahead of time, that can be the real driving force for your portfolio. It’s these stocks that will allow your portfolio to achieve it’s maximum possible yield. I believe that within the bounds of reasonable and well considered risk, not selling these stocks too early is the key to significant growth.

Drilling For Dollars: National Oilwell Varco, (NOV)

National Oilwell Varco, (NOV) is perhaps the dominant player in the world of drilling equipment and services. NOV provides virtually every possible product and service to a variety of drilling activity. From tools, pumps, technical equipment and tubing, right down to pair of work gloves anything that helps a crew explore complete or develop an energy asset comes from National Oilwell Varco.

The fundamentals are compelling, the company trades at 14 times projected earnings, and estimates suggest the company will grow at 28% annually for the next 5 years. Quarterly revenue growth is 43% year over year and the resulting quarterly earnings growth is 129% from the previous year. Net income reported in the past 4 quarters has grown from $147.9 million to $275.9 million, an increase of 86%.

Consider the following:

Global demand for oil services and equipment significantly exceeds capacity.
Long term debt is less than 5% of the net worth of the company.
This company has consistently beaten analyst’s earnings expectations.
It has a strong contract backlog extending into the next decade.

This company has a history of smart acquisitions, which has significantly expanded its capabilities and global footprint. If you believe as I do, that more drilling activity whether its oil or gas, land based or offshore, is both necessary and inevitable, then NOV is almost certain to be a strong beneficiary. I have a long position in National Oilwell Varco.

Emerging Markets- Investing in Companies That Make Sense

By now we have all been saturated with stories of the Emerging Markets. First, there were some mutual funds and other investments in Russia, China, Malaysia, and other Emerging Markets that had phenomenal growth and amazing returns. Then of course, there later came downturns in these markets, including talk of a “bubble” in the Chinese market and a sharp downturn in the Russian market as they began to repossess some significant holdings made by independent Russian and Western companies.

From my common sense approach, I believe I have learned two things. One is that the world has truly changed. With the flow of information, capital, and skills, it truly is a global market. Even the more socialistic countries in Europe have had to change because they realize that in order to compete in the global marketplace, they must be more efficient. In realizing the globalization of industry, of wealth, and the rapidly emerging economies of countries ranging from China, India, Dubai and others, the need for many basic materials has never been greater. If one can place themselves in this growing river of wealth, then there are some fairly straightforward ways to invest in companies that stand to benefit the most.

The second thing that I have learned is that with a few exceptions, which most notably are major companies in countries that have a longer history of capitalism, investing in individual companies in Emerging Markets is fraught with risk. The problem for me is that it is always hard to get enough viable information to feel that you truly understand the company and it’s finances. Unless one truly knows the country, knows its markets, speaks the language, and knows the major players; then you are truly investing on a wing and a prayer. Therefore, my approach for countries such as China, has generally been to invest with mutual funds that have a long and successful history in this particular country. I personally believe that this is the least risky way of dealing with most Emerging Markets.

That being said, I believe there are a number of ways to safely invest in companies that stand to grow and benefit from this global growth. For example, with all the building that’s taking place in much of the world, from major developments, to refineries, to the necessary infrastructure in these countries, there is a huge demand for expertise among the major global construction companies. Such companies as McDermott-Panama (MDR), Foster-Wheeler (FWLT), Jacobs Engineering Group (JEC), and Fluor Corporation (FLR) are all major construction companies with a global footprint. Not surprisingly, they are all doing well and have watched the number of contracts and their growing backlog of projects increase significantly (Disclosure: I have long positions in FWLT and MDR). There is every reason to assume that, as global wealth increases, these companies will remain busy for the foreseeable future.

Another way to take advantage of this global growth is to understand that there are a number of basic materials that are necessary in order to achieve the growth and globalization that is occurring. Materials such as copper, titanium, steel are all in greater demand then ever before. Companies such as Boeing and Airbus have enormous backlogs of new planes on their books. Titanium due to its strength and lightness is vital to both the jet aircraft and their jet engines. The amount of building going on around the world including China, India and Dubai as well as many other countries, have caused the cost of basic materials such as steel, concrete, copper, and other building materials to rise sharply as the demand has exploded. There are a number of companies such as (RIO) Companhia Vale do Rio Doce, (BHP) BHP Billiton Limited, and (FCX) Freeport-McMoram Copper and Gold Inc. which are major mining concerns that produce millions of tons of the materials that are used around the world. There are steel companies such as (PKX) Posco, which are growing in an astonishing rate and other companies that specialize in titanium or copper.

Another way to play this increasing growth in both wealth and population is to understand that with increasing wealth one of the first jobs of these countries is to be able to feed their population. Therefore, a number of agricultural companies, whether they be seed companies such as (MON) Monsanto, fertilizer companies such as (POT) Potash CP Saskatchew, tractor companies such as (DE) Deere and Co. are all necessary to account for the ever-growing need for food. For instance, for each dollar that is invested in fertilizer, three dollars of food is able to be grown. As these countries have the finances to pay for these needed products, these companies should continue to dramatically grow. (Disclosure: I have long positions in RIO, POT, and MON.)

There are obviously many other ways to play this global growth of wealth and development. It truly is a river of money that is being utilized to meet the growing needs and demands of these countries. Therefore, the goal is to use common sense to try to understand what the primary needs are to sustain and enhance this growth. With that understanding, one can then invest in companies or sectors that are best positioned to benefit from this amazing and rapid change in our world.

Oil Sector Out of Favor But Not Forgotten

Oil has traded between $64 and $69 a barrel for a number of months. Meanwhile, the price of natural gas which touched $8 per million BTU has backed off to nearly the $6.50 level. If you look at most of the mid-cap oil companies and natural gas producers, they have had a rather steady decline over the last few weeks. They are obviously out of favor in the market at the moment.

This is exactly why I think they are wonderful buys. Anyone who thinks that Ethanol or wind power is going to provide a large percentage of our energy needs is either smoking something illegal or running for a public office. If one looks at the actual statistics of Ethanol, the amount of acreage required to produce x number of gallons, it’s both an inefficient use of the land, the corn, and results in a fuel that is mediocre in energy production. The subsidy that is offered to fund this requires a huge amount of tax dollars. If one also accounts for the significant increases in the price of corn and its widespread impact on multiple other commodities such as cattle, poultry, and the loss of land available for planting other grains, Ethanol, with the present technology, makes no economic sense.

There is less than 3% of the world’s natural gas supply in North America. Meanwhile, the United States still has not completed a new functioning liquefied natural gas facility in many years and while there are multiple LNG facilities being built, they are years away from being completed. In the meantime, we have a limited and decreasing amount of natural gas, which happens to be our cleanest burning fuel. It seems very likely to me that the present price of natural gas is likely to rise significantly over the next few years based on supply and demand.

There are some gas exploration and production companies that have routinely increased their natural gas reserves. My personal favorite is XTO, which I have personally held for over 10 years. It has routinely grown its reserves by 20-25% a year. It just recently acquired 2.5 billion dollars worth of property with large proven natural gas reserves from Dominion Resources. Prior to each significant purchase of reserves, XTO has sent in its skilled team of geologists, seismologists and drillers, so they have a very clear idea of the real worth of this property to them. I personally have little doubt that they will be able to recover a great deal more oil and gas, than the cost required to purchase and develop this land.

Oil, whether the politicians would admit it or not, is going to be the primary source of most of our energy needs for the foreseeable future. Much of the oil in the world happens to be located in politically unstable or dangerous places. The fact that Russia has taken control of $14 billion dollars worth of British Petroleum’s development and doesn’t seem to be afraid to use oil and gas as political weapons, seems to be generally unappreciated. Large oil companies are leaving Venezuela in spite of the fact that it has one of the largest undeveloped reserves in the world. This says a lot about the potential alteration in oil production from this country. Nigeria is unstable with a risky environment for oil production as well.

The Middle East is, of course, a powder keg. There are any number of scenarios that would significantly alter either the production of oil or the ability to transfer the oil through the Straits of Hormuz. The fact that nothing catastrophic has happened thus far should certainly not lull the world into thinking that major problems are unlikely to crop up. Remember there is only a 2% surplus capacity in the world’s oil production.

Most of the well-run mid-cap companies that deal in exploration and production, offshore drilling, and companies that deal with machinery, supplies, and other equipment necessary to this industry are making significant profits. These companies are also continuing to grow their revenues and earnings at a significant clip. Even though many believe that oil and gas are expensive at present, I strongly believe that there is far more likelihood of these prices increasing than there is a likelihood of them decreasing. Under that scenario, these companies will have growing demand and growing profits.

SECTORS

In my previous postings, I have introduced the key principals which are the foundations for my approach to stock selection and investing. To briefly review these, I primarily choose mid-cap value/growth stocks, companies with strong and increasing earnings, and a significant amount of insider ownership with limited selling. I look for stocks that are either undervalued when compared to the industry or that are undervalued in regards to anticipated future earnings and growth. I am a long-term investor, with no interest in short selling, or day trading.

In this writing I will discuss another important tenet of successful long-term investing when one’s goal is significant growth. My opinion is that one should pay attention to specific sectors in an effort “fish in the right pond” The fact is some sectors are far more profitable than others. I also tend to do the majority of my research in sectors where a) I understand what they do, and b) I know why and how they make money.

Sectors that I presently like include: energy, oil services, offshore drillers, certain commodities such as non-precious metals, and the agricultural area.

The sectors that I tend to avoid include: the airlines, retail grocers (supermarkets) and the semiconductors which generally have very low margins. There are also area’s in the technology group where I simply can’t get comfortable with what it is these companies do.

In each of these sectors there are some stocks that perform exceptionally well, other stocks that are steady if not remarkable, and others that generally under perform. Therefore, it’s important not only to identify the sector, but the best candidates in the particular sector.

For instance, in a sector that I followed for a great deal of time, which are the independent natural gas companies dealing with both exploration and production, XTO Energy, (XTO) is to me the stand out performer. If one looks at it over its fifteen years of existence, the level and rate of its growth is remarkable. Also, in the steady reliable category, Apache Corp. (APA) is a larger, well managed company that continues to do well, but without as much explosive growth as XTO. Pioneer Natural Resources, (PXD) is another company which on paper has much to consider attractive, but as a stock has never performed as well as one would have expected.




Another sector that I believe is very strong includes, the offshore drillers, such as Transocean (RIG), Diamond Offshore (DO), and Noble Corp. (NE). There are a half dozen more that are also in this particular field. These companies generally make a great deal of money, are in great demand, have their rigs leased for years in advance and are able to charge increasing amounts for their use. In many cases, the rigs have been transferred out of the Gulf of Mexico, to areas that have potentially less hazardous weather and for which the day rates are greater.

A related sector that also has strong performers includes the oil service industry. While Schlumberger, (SLB) and Halliburton (HAL) are by far the largest players, there are many smaller service companies that are in the mid-cap range, that are extremely profitable and have excellent growth. Examples here include National Oilwell Varco, Inc (NOV), Weatherford International (WFT) and TODCO, (THE).

The commodity sector, particularly the non-precious metals sector, is strong and continues to look strong in the future. Due to the growth in China, Dubai, India, and other areas the demand for steel, copper and other building materials is enormous. In addition, there is strong demand for titanium as it is key strategic metal in the defense and aerospace industries. Titanium is a significant component in airplanes and with both Boeing and Airbus having significant backlogs, this metal should be continued to be in increasing demand. Titanium Metals Corp. (TIE), Allegheny Technologies, Inc. (ATI) and Precision Castparts Corp. (PCP) are all very attractive in my estimation.







Another area that I strongly favor is the agricultural area. As the emerging world becomes wealthier and more developed, one of the key developments will be the increasing need for food. Therefore, the companies that supply agricultural equipment, plants and seeds, fertilizer, and other components to increase crop production, should all experience significant increases in demand. Of note, I think highly of Potash Corporation of Saskatchewan, Inc. (POT), Monsanto Co. (MON) and Deere & Co. (DE).

This is a relatively brief break down of a few sectors that I personally favor. Hopefully, I have been able to communicate not only which ones that I favor, but why I feel that they have strong potential and have a certain degree of logic and common sense in their selection.