Let's look at preferred once more!

Markets are looking for direction and its good thing. After multiple weeks of ascent, markets finally took a pause and little slide as happened last week is good for health of rally. With Q3 results starting in 2 weeks, markets would trade in range between 9300 to 9800. So this is good time to identify some picks with great risk/reward ratios. With that in mind, let's look at preferred securities once more. Check out my previous blog on this topic which I wrote when DOW was at 7000.

Here are some preferred which could offer great upside and quarterly returns in terms of dividend.

• SFI-D ($7.70), SFI-E ($7.5) and SFI-G ($7). All these are preferred of istar financial (SFI). Most probably istar would survive this downturn in which case these preferred should trade near their face value ($25). Even in these times, board has not cancelled dividends on these preferred. The yield on these preferred are about 25%
• IDG ($17), IGK ($18). These are preferred of dutch financial giant ING Group. Much safer than SFI preferred but offers yield of about 11-12% and upside of about 25%
• RNP ($9 to 9.50) - this is mutual fund which invests in preferred securities. It is selling at 16% discount to its NAV and offers yield of over 8%
• For those of us with most tolerance to risk, CIT-A ($3.90). This is purely speculative play on survival of CIT. If CIT restructures its debt out of bankruptcy court, this preferred could easily double or triple (similar to preferred of many banks). CIT needs to present its restructuring plans by Oct 1. Based on recent movements of prices of its bonds and equities, market is betting that it may be able to skip BK. Let's see what happens. Caution: This is extreme risk/reward and you could lose all your investment in CIT-A. So invest with extreme caution!

Indian festival season has started with Navaratri, Vijayadashmi and Diwali. We were also polishing our Garba and Dandiya skills to get ready.

Have a great weekend !

/Shyam

Gold or S&P: 1200 ?

Last couple of weeks both Gold and S&P crossed crucial 1000 mark with Gold at 1020 and S&P over 1060. Normally these two indicators go in opposite directions. People worried about inflation and economic turmoil rush to gold while people more optimistic about future rush invest in S&P. So it is kind of odd that both these are moving in same direction. So which would touch 1200 first and offers better opportunity over next 12 months.

In my opinion, investing in gold is like not investing at all. You should buy gold only to make things you (or your other half) want to wear - rings, necklaces and so on. Gold as investment may be good hedge against inflation over short-run but over long-run it does not pay off. It does not pay any dividends and upside potential is very limited.

S&P has lot of volatility but since it covers America's biggest 500 companies, offers lot of potential and 1-2% yield over long-run. So If you are looking for which one would touch 1200 first, I would bet on S&P (and forget about gold as investment)

Sept 2009 turning out to be quite different than expected. Many people (including myself) were thinking that long-pending correction would come in Sept. But exactly opposite is happening. Sept is turning out to be one of best month in this 6 month rally. Last week major indexes went up by 2.5% bringing my year-end target for DOW 10000 within striking distance. I won't be surprised if DOW crosses 10000 in next 4 weeks. Question is what after that ? It all depends on Q3 results which should start coming out in 3 weeks. Till now pre-announcements about warnings are not there. Technology sector should get another boost with upcoming Window 7 release on 10.22 and upcoming holiday shopping season. So till new year, coast seems to be clear for indexes to keep on going up.

My favorite sectors are still Energy (see last week's picks which did very well), REIT, Private Equity and Banks (especially regional banks like RF, KEY).

Recently I have started studying some other sectors and this week's pick is in transportation.

Company: YRC Worldwide Inc

Symbol: YRCW

Buy price: $3.90

Target in 12 months: $6

Company info:

YRC Worldwide, a Fortune 500 company and the #1 company in industry in the Fortune "America's Most Admired Companies" list, is one of the largest transportation service providers in the world. YRC Worldwide Inc. (YRC Worldwide) is a holding company, through its wholly owned operating subsidiaries offers the customers a range of transportation services. The Company's operating subsidiaries includes YRC National Transportation (National Transportation), YRC Regional Transportation (Regional Transportation), YRC Logistics, and YRC Truckload (Truckload).

Selection criteria:

• Recently had a union pact which would save over $1B over next few years
• Revenues of over $7B
• Enterprise Value: $1.5 B Market Cap < $ 250 M.
• 52-week Hi/low: $19/$.89
• Company has upcoming debt negotiation of $150 M coming.
• Once that debt gets negotiated, chances of staying out of bankruptcy would increase substantially
• Once economy picks up, demand for services offered by company would increase
• As investment, it provides good risk/reward potential
• Caution: Be ready to lose all your money since this is "survival" play

Have a good weekend !

/Shyam

Re-energize Your Portfolio !

Markets are at 11 month high and Lehman demise anniversary (Sept 15) approaching next week - after 6 month streak and 50% gains, markets seem to be running out of air and taking a pause waiting to figure out what lies ahead in 3rd quarter results.

So how does one re-energize the portfolio for next few months ? Here are some thoughts.

From recent reports, there are signs that major economies of the world are coming out of recession and many countries (except US and UK) have even shown surprise growth even in Q2. US and UK are most likely show a growth in Q3 picking up the pace in Q4. Consumer confidence is going up and reaching 70. Unemployment though very high seems to be stabilizing and not falling off the cliff. With holiday season approaching (Diwali in India, Christmas in western world), people are going to feel more positive than normal. So in summary there are quite a few positive events in front of us.

One sector which has direct co-relation with GDP growth is energy sector. Growing economy has higher energy needs and hence higher oil/NG prices. We have started seeing this in oil prices but not in NG prices yet (these are trading near 7 year lows). If you go back to 2002, US economy was in similar state - US being largest producer and consumer of NG, state of US economy has major impact on NG prices. So when US economy starts growing at 2-3%, NG prices should start going up and could cross $5 per (currently it is $2.96).

Related to energy sector, here are some of my picks:

• XTEX ($3.75; Target: $6 in 12 months)
• EROC ($3.50; Target: $5 in 12 months)
• CMZ ($1.10; Target: $1.60 in 12 months) - this could be similar to DPTR which I recommended in Mar at around $1.70. Now it is close to $3.90
• PETD ($15: Target: $22 in 12 months)

One more risky but most likely "survival" play is MBI. At buy price of $6, it could give more than 50% returns in next 12 months (target price: $9) just based on its survival during this crisis. However this is extremely risky stock and you should be prepared to lose 50-100% of your money.

I am waiting for Dan Brown's long-awaited novel "The Lost Symbol" which is out on 9/15. Right now, I am reading "Animal Spirits - by Akerlof and Shiller" which talks about how non-economical factors like confidence, fairness have significant impact on markets and global capitalism. If you want to understand "why markets are so irrational", I would recommend reading this book.

Have a good weekend !

/Shyam

Sept 2008 "Panic" Anniversary !

Tomorrow when America would be celebrating late labor day weekend, there is another anniversary financial world would be watching - Government takeover of Freddie and Fannie which started the events which we can call as "Panic of 2008"

Let's review some of the highlights:

• Vanishing acts by many financials stalwarts like Lehman, Merril, Wachovia and so on
• Major government stakes in many other stalwarts like Citibank, Bank of America, RBS, Wells Fargo and so on
• Generational low on S&P of 666 and an opportunity for generational long-term investment - I don't think we will see such a low again for another 5-10 years
• One of the best 6 month return on S&P since 1938
• Return of financials with generational returns on big banks like C (from 1 to 5), BAC (from 3 to 18), GS (from 50 to 170), AXP (from 9 to 30) and so on

What lies ahead ?

• Mar 2009 could be like 1982 which started a secular bull market. It is possible that we could see another bull market started in Mar 2009 potentially taking DOW and S&P past their all time highs in next 5-10 years - that means DOW crossing 15000 by 2015. When Obama took oath, DOW was hovering around 8000. It is possible that by end of Obama first term, DOW could be around 12000 and by end of second term, it would have crossed 15000 !
• Financials would return to "new normal" - boring world of banking without much of excesses seen during 2003-2007. This could be good for economy as banks would be on much better footing and provide steady returns. Forget about the kind of returns we saw on these companies in last 6 months. It would take 6 years to even match those returns !
• China and India would continue to grow at 6-10% over next few years doubling their economies in 5-10 years and providing growth to world economy.
• Real estate would come back to life with long-term returns of 1-2% on real estate prices. However REITs investing in these real estate would provide a steady return of 6-8% over next few years
• Oil would hover around $50-80 over long run and Natural Gas (which is my current favorite commodity) would hover around $2.50 to $6. Investing in oil and gas would be good long-term investment no matter what.

Let's look at this week's pick:

Company: Chesapeake Energy Corporation

Symbol: CHK

Recommended Buy price: $ 20

Target price in 12 months: $ 30

Background:

Chesapeake Energy Corporation is a producer of natural gas in the United States. The Company own interests in approximately 41,200 producing natural gas and oil wells that are producing approximately 2.3 billion cubic feet equivalent (bcfe) per day, 92% of which is natural gas

Selection Criteria:

• # 1 natural gas producer in America
• Most of the NG production is hedged at higher NG prices than current market prices
• No immediate debt maturity
• When NG prices recover (and they would), stock prices of NG producers would recover.
• Pure play on energy
• NG is cleaner fuel and with Obama administration focus on energy policy, it would gain more prominence.
• In long-run, this could be a potential acquisition play for major oil players like Exxon/BP/Chevron

• Trade at a substantial discount to estimated NAV and closer to BV ($18)

  
  

So while this "Sept 2008 panic anniversary" is no reason to celebrate - look at this as "glass half full" since

it offered so many opportunities to invest in great companies at dirt-cheap prices.

Have a good labor day weekend !

/Shyam