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‘OXSTONE PICKS’ page contains Oxstones Best Investment Ideas and current investment positions held by Oxstone Capital Management.  We will be sharing  – Oxstone Best Ideas, and other idea generation such as Thematic Investments, Blue Chip Specials, Corporate Turnaround Plays, Potential Take Over Targets, Portfolio holdings, Investing Strategies, Secular Themes/Trends, and Watch Lists.

DROOY, DRDGOLD Ltd. – South Africa, $4.47, 1/28/11
UVV, Universal Corp – USA, $37.80, 1/20/11
CEDC, Central European Distribution Corp. – USA/Poland – $22.80, 12/21/10
IPSU, Imperial Sugar – USA – $13.40, 12/8/10
GSH, Guangshen Railway Co – China – $20.15, 11/23/10
CRIC, China Real Estate Information Corp – China – $9.45, 11/17/10
CX, Cemex – Mexico, $8.95, 11/10/10
PPC, Pilgrim’s Pride Corporation – USA, $6.30, 11/2/10
HQS, HQ Sustainable Maritime Industries – USA, $3.28, 11/1/10– SOLD – 1/18/11 at $4.82, Reason: Take Profit, concerns about China RTOs
ICLR, ICON – Ireland – $19.46, 10/27/10– SOLD – 5/31/11 – at $25.57, Reason: Take Profit, continue concerns about EU Debt Crisis
UEPS, NET1 – South Africa – $11.61, 10/20/10
TNE, TELE NORTE – Brazil – $15.19, 10/21/10
V, VISA – USA – $66.59, 9/14/10
LFC, China Life Insurance – China – $59.50, 9/14/10

DROOY, DRDGOLD Ltd.  – South Africa, $4.47, 1/28/11 DROOY is one of the largest South African gold mining companies.  DROOY has a long operating history; established in 1895.  This shows the sustainability of DROOY as an ongoing business.

DROOY is considered a small cap stock with a current market cap at $185mm.  This is a terrific advantage for the astute international investor as frontier small cap stocks are underfollowed by Wall Street analysts.  I believe frontier small caps possess the most fertile grounds for finding ‘potential oxstones’ due to market inefficiencies that individual investors can exploit by buying undervalued, underfollowed stocks and then waiting patiently to benefit once big boys finally notices and joins the party.   Current institutional ownership of DROOY is still under the radar at 6.9%.

DROOY is extremely cheap with a PE Ratio of only 4.8x and a price to sales ratio of .58.  DROOY is already trading at a significantly lower price/earnings and price/sales than the majority of publicly traded gold mining companies.  To top it off, DROOY also pays you an attractive dividend yield of 1.3% and payout is just 8% of earnings with plenty of room to grow.  DROOY also has a very strong balance sheet with positive net cash and almost no debt.  Incredibly, DROOY is trading at a significant discount – 82% of its book value.  The company is well managed as shown by its high ROE of 17% with almost no leverage.  Its ROA is 3.6%. Revenue grew 40%; benefitting from the surge in gold prices.  DROOY also has positive technical trends.  What’s not to like?

DROOY was originally established to exploit the Witwatersrand Basin – the world’s richest gold deposit (40% of the gold ever produced).  The major concern for DROOY and other gold mining companies in South Africa are the increasing strength and wage demands of unionized labor.  This has led to higher costs and DROOY already has one of the largest gold production costs in the business.  However, this concern is mitigated if you believe gold is indeed in a long term secular boom, then gold prices should continue to rise and any production by DROOY will only add to the bottom line.
DROOY is already closing less efficient mines and refocusing efforts on the better opportunities at alternative sites.  DROOY also has the world’s largest gold surface retreatment facility.

I believe DROOY has tremendous upside potential at its current depressed price of $4.47. It is already trading at multi-year lows.   I expect as gold prices continue its historic secular bull-run and global liquidity turn inflationary, it should push up stock prices of all gold miners, which are leverage plays on gold.  South Africa is one of the top frontier markets in the world.  For any investor who wants emerging markets exposure and   looking for the next top emerging economy to invest in after BRIC; should definitely consider Africa.   It is still the land of untapped potential.  And one of the few remaining places on earth where you can still find ‘potential oxstones’.

UVV, Universal Corp – USA, $37.80, 1/20/2011 Universal Corporation is the world’s largest leaf tobacco merchant and processor.  The company processes a wide variety of tobaccos. Its flue-cured, burley, and oriental tobaccos are used principally in the manufacture of cigarettes; and dark air-cured tobaccos are used in the manufacture of cigars, pipe tobacco, and smokeless tobacco products. UVV is currently trading very cheaply at just 7.7x P/E and price to sales of just .38.  UVV has strong net margins of 6%+ for a commodity-like business, which shows it commands market power.  It currently sports a fat dividend yield of 4.9% with room to grow as earnings continue to rebound and current payout ratio at only 37%.  More importantly UVV is temporarily trading near multi year lows and even dipping below its book value.  There appears to be plenty of upside potential in this stock.  Insiders seems to believe so too as they own 6% of the company. A review of some its institutional holders include the highly respected small cap value firm – LSV and famous contrarian asset management firm Dreman.  This provides a clue to what the smart money thinks about this company. A recent negative industry report predicted that smoking may disappear within the next 20+ years.  This report caused a small panic among some investors, but also created a terrific buying opportunity for other investors.  UVV has a long operating history; founded in 1888.  This shows the enduring strength and sustainability of its business.  Consumers in the developed world may be cutting back on smoking, but it is highly unlikely that smokers will give up their smokes completely.  Tobacco is highly addictive and price inelastic in the short to medium term. Just as one door closes, another door opens.  As the developed world consumers develop healthier habits, there are plenty of new emerging market consumers joining the new smokers’ class.  Most emerging market economies are still in the industrialization phase and in many of these countries smoking is still a very widely accepted cultural norm.  In addition, in these countries, regulations are less restrictive to tobacco companies and consumers widely accept the guilty pleasures of a smoke.  I have personally observed countless individuals smoking freely on recent travels in several emerging eastern European countries – Romania and Ukraine.  On a more alarming note, a recent video was shown internationally of a small baby in Indonesia enjoying smoking dozens of smokes a day.  This shows the alarming dangers of just how highly addictive smoking can become especially to the millions of growing youths in Asia and Middle East/Africa.  Therefore many tobacco companies and their supplies like UVV will continue   exporting their wares to many emerging market economies unabated in the near to medium term future. The continued weakness in the dollar will only add fuel to their profits.  UVV is one company that will stand to benefit from this alarming emerging market consumer trend to smoking. This is also a terrific defensive consumer staples play while also providing an added benefit from riding the secular trend in agriculture and emerging market consumers spending booms.  UVV provides a very safe and easy way to earn solid total (dividends and capital appreciation) returns with dividend yields already near 5% it does not take much capital appreciate to earn double digit returns. I’m betting that UVV will not only be standing around years from now, but also growing from supplying the new emerging smokers around the world.

CEDC, Central European Distribution Corp. – USA/Poland, $22.80, 12/21/2010 –Central European Distribution Corporation (CEDC) is the world’s largest vodka producer, with annual sales of 270 million liters.  CEDC produce, distribute, and export alcoholic beverages primarily in Eastern European countries such as Poland, Hungary, and Russia. The company was founded in 1990 and is based in Bala Cynwyd, Pennsylvania.  CEDC has leading market positions in all of its key markets: Poland, Russia and Hungary. CEDC has a branded portfolio including valuable brands like BOLS, Żubrówka, Absolwent and Soplica in Poland; Green Mark and Parliament in Russia; and Royal Vodka in Hungary. It distributes approximately 700 brands of alcoholic beverages as well as non-alcoholic beverages. The company distributes its products directly to small and medium-size retail outlets, petrol stations, supermarkets, nightclubs, hotels, and restaurants.  CEDC operated 18 distribution centers and 124 satellite branches located throughout Poland as of 12/31/09. Insiders are well represented and I always like to buy into companies where managers have a significant stake in the business (insiders own 8% of the company).  Insider ownership aligns the shareholders with the managers, and management tends to execute more shareholder wealth creating corporate policies.  When I analyze CEDC’s current valuation relative to its growth prospects it is an attractive bargain with a PEG Ratio of only .73x and a forward P/E of only 11.4x. A very wise contrarian Chinese proverb said – Crisis = Opportunity.  I completely agree.  The continue EU Debt crisis have increased risk premiums indiscriminately across all industries and corporations in Europe.  It has severely depressed the valuations of even strong corporations and has created attractive investment opportunities for those willing to stomach the short term volatility.  CEDC is clearly one of those gems that I am willing to take a risk on.  Its downside risk is limited with current prices trading at its book value.  CEDC is also currently trading at multiyear lows (5 years).  CEDC will continue to gain market share and benefit from opportunistic acquisitions of weaker competitors as the EU debt crisis rolls on.  Another catalyst is the eventual continuation of the dollar depreciation which should also help its export growth. CEDC is a sin stock as it operates in alcoholic beverages market, but it is also a perfect defensive consumer staples stock to own during a crisis.  No matter what happens whether recession or expansion; people will still drink.  In a recession people may even drink more whether to take small comfort or as a small luxury gift to share.  CEDC is also a good way to play the growth in emerging consumer consumption in emerging European retail markets as the world’s largest vodka producer.  For the patient investor this is really a wonderful Polish gift for Christmas.

IPSU, Imperial Sugar – USA, $13.40, 12/8/2010 – Imperial Sugar Company was founded in 1843.  It operates as a processor and marketer of refined sugar.  Besides operating in the USA, the company also markets organic cane sugar, agave syrup, honey, and other specialty sugars in Mexico and Canada too.  Imperial Sugar generated $1billion in annual sales and has the dominant market share position in many southeast states including 40% of the Texas market. IPSU should directly benefit from the secular soft commodity boom.  This is a nice way to play the agricultural bull market.  The key question is whether it can finally get its manufacturing plant back online to meet strong demand.  For a small cap stock I always like to see strong insider ownership and IPSU has strong insider ownership representation at 13%.  A review of its top institutional holders include a well respected hedge fund – Passport Capital – (the Hot Dog Billionaire – John Burbank https://oxstones.com/6-currencies-to-buy-now-says-the-hotdog-billionaire/), which helps provide additional validation to this investment idea. IPSU is a small cap stock with a market cap of only $168mm which provides investors with another potential exit strategy in the form of receiving a takeover premium offer from larger overseas competitor that may want to take advantage of the weak dollar to enter into the attractive USA market. In terms of valuation, IPSU currently has a ridiculously low trailing P/E of 1.25x.  A very low valuation provides low investor expectations that can be easily met as a potential catalyst for the stock price.  P/S is .21 and it is currently trading at just 73% of its Book Value.  Profit margins are 17.57% with strong demand with quarterly revenue growth yoy 83%.  Low debt levels provide financial flexibility.  IPSU even provides a small dividend of .6% which is just 1% of payout; providing further room to increase dividends in the future.  Once its plant issue is resolved, capex should normalize and free cash flow should improve.From a big picture perspective, IPSU also plays into a growing consumer theme for small luxuries.  With the current great recession a never ending story, consumers will continue to look for small luxuries such as sweets to help provide small comforts in these difficult times.

GSH, Guangshen Railway Co – China – $20.15, 11/23/2010 – One of my investment heroes is Warren Buffett.  I closely analyze his investment picks and the sectors that he decides to invest in as hunting grounds for finding Oxstones.  Lately, one of his favorite areas for investment is the transportation network, especially trains.   That gave me an idea to look for a comparable train investment in China.  Guangshen Railway Company provides passenger and freight transportation services along the heavily used Shenzhen-Guangzhou-Pingshi railway in China.  The company was founded in 1996 and is based in Shenzhen, China. This is a nice Chinese infrastructure play.  If you believe in the continue China growth story, then this is a safe way to play it.  With rising inflation (4.4%) in China and the continue rise in oil/energy prices, train transportation will be an efficient means of mass transportation as well as an economical way for companies to transport goods. Guangshen has a reasonable P/E at only 11.8x and currently trading at only 81% of book value – a nice discount.  GSH also has very little debt on its balance sheet.  It operates a very profitable business model with profit margins at 12%.  Quarterly revenues grew at 12.9% and quarterly earnings at 32%.  GSH also pays a nice 2.8% dividend while you wait for the market to recognize the real value in Guangshen Railway share price.  Current technical trends are positive and in its favor.

CRIC, China Real Estate Information Corp – China – $9.45, 11/17/10 – CRIC is China’s equivalent to U.S. commercial real estate property analytic and information companies – Loop net and Costar.  If you work in commercial real estate or in the real estate investing business, you already understand how useful Loop net and Costar are for due diligence and valuation analysis.  China Real Estate Information Corporation provides CRIC system, a real estate information database and analysis system, which include data on specific real estate development projects and parcels of land, macroeconomic, demographic and real estate industry-specific statistics on the Chinese real estate market.  CRIC was spun off from E-House – China’s largest real estate company. CRIC is cash rich with no debts on its balance sheet.  It currently trades at an attractive valuation level. A P/E of 17x is reasonable given its decent growth opportunities shown by its PEG Ratio of 1.05x.  CRIC has a very profitable business model which generates lots of cash flow by providing users with critical property information across China.  It will continue to achieve high revenue growth whether or not China’s real estate implodes or not.  Whether you are looking to buy Chinese property or bargain hunt for foreclosures, CRIC will be in the middle of the action. As a person from a Chinese heritage, I grew up listening to my parents preach about 3 essential things that is a priority for most Chinese families – #1 is food, #2 is education, and #3 is real estate.  Those are the three things Chinese families have no problem spending money on.  In addition, there is a lack of alternative investment vehicles available for the common Chinese citizen.  With inflation rising, Chinese citizens will continue to buy real estate as a storage of value for their hard own savings. CRIC is currently trading near 52 week lows.  Addition comfort is derived from a review of the institutional holders and seeing George Soros’s hedge fund with a position in the company as well.

CX, Cemex – Mexico – $8.95, 11/10/10 – CEMEX is the world’s 3rd largest cement company. The company is truly global with operations in every region around the world. CEMEX was founded in 1906 and is considered the corporate national pride of Mexico. It is highly regarded for its use of technology and innovation in the cement industry and for its terrific management team. However, an ill timed expansion strategy left it with a mountain of debt. But expect bankers and governments to play nice with Cemex since it’s one of those ‘too big to fail’ businesses and is also a strategically important business in Mexico. I believe due to Cemex’s symbol as a national pride – a home grown global corporate giant, the government will never let Cemex fail. This past summer my lovely wife and I honeymoon in Croatia and across the Balkans. I could not help but notice the numerous Cemex cement plants dotting the landscape among the beautiful sea side views. Cemex is there because it sees great potential in doing business with many emerging market economies including south east Europe. In addition, Asia and Africa presents enormous opportunities for infrastructure development for years to come. Cemex is a perfect leverage play on the global economic recovery story and on the emerging markets infrastructure development story. A review of the institutional holders includes very highly regarded value investing giants such as Dodge & Cox and LongLeaf Partners. Although, heavy with debt, Cemex will not fail. In this situation Crisis = Opportunity. Cemex is still a world class company with several competitive advantages including state of the art technology and dominant market positions in its home court – Mexico. It continues to receive favorable low cost energy supplies from Mexico. Trading at only 57% of book value there’s plenty of margin of safety. It is currently trading near 52 weeks low and decade lows. I believe Cemex will provide plenty of upside rewards for the investor with time and patience.

PPC, Pilgrim’s Pride Corporation – USA – $6.30, 11/2/10 – PPC – Pilgrim’s Pride Corporation is one of the largest chicken producers in the USA with a trusted brand name. Currently trades near a 52 week low. JBS is the world’s largest meat producer (please see our opinion on JBS under the Thematic Investments section), and owns a majority stakes in the company purchased at roughly $16 per share. Pilgrim can focus on executing its long term corporate strategies that will lead to long term success due to the deep pockets of its largest shareholder – JBS as well as the large insider ownership (at 77%) including members of the founding family. The company emerged from bankruptcy last December as a leaner company and with a stronger balance sheet. Closing inefficient plants and restructuring its debts from an ill time expansion during the business cycle peak. Pilgrim is very attractively priced with cheap valuation at 7.5x P/E and P/S of .23, which are at a significant discount to its peers. It will benefit from the weak dollar. The rising emerging market middle class society opens up huge export opportunities. This is a perfect play on the secular food boom and feeding the emerging market populations. Please see one of the posted articles titled ‘Brazilian Soil’ for more information on these secular trends under the ‘Finding Oxstones section’. https://oxstones.com/brazilian-soil/

HQS, HQ Sustainable Maritime Industries – USA – $3.28, 11/1/10 – HQ Sustainable Maritime Industries operates fish and shrimp seafood farms and exports fish products to the rest of world. It also produces bio-products and health products made from organic matters for sale. HQS has an incredibly cheap valuation – trading below NNWC – One of Ben Graham’s favorite value methods. HQS has a forward P/E of 3.7x, P/S of .61 and PEG ratio of .15 and is trading at only 43% of Book Value. It’s currently near 52 week lows and multi-year lows. I like that it has high insider ownership of 28%. It is also incredibly profitable at net margins of 10.85%. HQS has zero debt on its balance sheet, and cash accounts for 90% of market cap. The stock seems too cheap to be true, the key question is whether they have corporate governance issues? Earnings report this week will provide more details. It’s a perfect play on the secular food boom. For more information on the Chinese aquatic farming and this secular food trend please see one of the posted articles titled ‘From China, The Future of Fish’ under the ‘Finding Oxstones section’. https://oxstones.com/from-china-the-future-of-fish/

* Update – SOLD – 1/18/11 at $4.82, Reason: Take Profit, concerns about China RTOs

 

ICLR, ICON – Ireland – $19.46, 10/27/10 – trading near a 52 week low, its undervalued relative to peer comparisons on P/E, P/S, and PEG.  Consistently strong gross and net margins over 3-5 years.  ICON may be unfairly beaten down due to its Irish roots ( EU Debt Crisis), but crisis equals opportunity. Its a well managed business, in a defensive sector – health care / CRO. Icon stands to benefit from continue clinical trial demands from big pharma / biotech  as massive amounts of patents continue to expire in the next 5 years.

*Update – SOLD – 5/31/11 – at $25.57, Reason: Take Profit, continue concerns about EU Debt Crisis

 

UEPS, NET1 – South Africa – $11.61,  10/20/10 – trading near a 5+year low, cash rich balance sheet,  South Africa, finance/technology, smart bank cards, alternative payment system for the unbanked or underbanked population, great growth opportunities across Africa and emerging markets low income populations

TNE, TELE NORTE – Brazil – $15.19, 10/21/10 – trading near a 52 week low, fat dividend payments,  Still integrating its acquisition of Brazil Telecom. Tele Norte has a terrific brand  – Oi, strong market share leadership position, undervalued relative to cellular peers in its market, benefits from fast growing middle class Brazil and their rising income and consumption.

V, VISA – USA –$66.59, 9/14/10 – It’s one of the most dominant and widely recognized brand names in the world. Go anywhere in the world and they will accept VISA.  With the growing emerging market middle class and increase consumption; the international opportunities for VISA are limitless. VISA also benefits from the global secular trend – eco-friendly paperless electronic transactions. market leadership position, great brand name, economic moat.

LFC, China Life Insurance – China – $59.5, 9/14/10 –  China market leader,  pays nice dividend and will benefit from appreciating yuan currency.   It’s the dominant life insurance company in China and with a growing affluent middle class; the insurance market is still a growth market in China.

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EXEL, Exelixis – USA, $4.12, 11/1/10
YHOO, YAHOO – USA – $16.49, 10/30/10
ELN, ELAN – Ireland – $5.45, 10/30/10
AOL – USA – $26.68, 10/30/10
SNE, SONY – Japan – $33.84, 10/30/10
WF, Woori Finance Holdings – South Korea – $36, 9/14/10

EXEL, Exelixis – USA – $4.12, 11/1/10 –
Exelixis is in the business of discovery, development, and commercialization of small molecule drugs for the treatment of cancer, metabolic, and cardiovascular disorders. The company already has various compounds in clinical trials. It appears there has been some insider buying recently in August and September, which provides some clues that this company may be undervalued or something may be brewing in terms of a potential deal. A review of its institutional holders shows that Icahn Capital owns a stake in the company. Exelixis could become an activist target which will benefit shareholders. I see Exelixis benefiting from several catalysts, as a potential takeover target for big pharmas, a target for corporate activist strategies, and potential for big upside due to its attractive pipeline. It has collaborations with a number of large drug companies who all could be a potential buyer. Some large drug companies such as SNY and GSK have already openly declared open hunting season for buying other attractive drug companies to fill their pipeline. There will be further consolidation in biotech industry.

YHOO, YAHOO – USA – $16.49, 10/30/10, remember MSFT wanted to buy it in the $30′s?  Still has a great brand name, hidden international treasure asset – Alibaba, a China play on auctions a la Ebay and B2B ecommerce – global supply chain.

ELN, ELAN – Ireland – $5.45, 10/30/10, still has a blockbuster multiple sclerosis drug – Tysabri.  Currently trading near multi-year lows.  Massive drug patent expiration from big pharma have pushed them to M&A in order to fill their product lines with acquisitions to replace revenues lost from generic competition. Potential take over target, maybe partner – Biogen or JNJ will close the deal.  Johnson&Johnson did buy a stake for $12  a few years ago.

AOL – USA – $26.68, 10/30/10.  Still has that legendary brand name that must be worth something.  Has a nice collection of internet properties.  Relatively cheap valuation compared to peers in the industry.  Potential take over target from its larger peers to further consolidate mind share.

SNE, SONY – Japan – $33.84, 10/30/10.  Great brand name and international recognition.  Still makes great electronic products of high quality.  But missing the old legendary innovation for new products.  Maybe Apple can help ignite the old R&D by joining forces?  Sony is cheap in terms of valuation for a world class brand.  Currently trading near multi-year lows and below its book value for additional margin of safety for a high quality company.

WF, Woori Finance Holdings – South Korea – $36, 9/14/10 – attractively price, off significantly from 2007 highs by 53%+, South Korea, finance/banking, will benefit from increase privatization as the government sale off ownership stakes, international expansion opportunities across Asia and emerging markets, strong market leadership position on home front.

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NOK, Nokia – Finland, $10.21, 11/12/2010
TM, Toyota Motors – JAPAN, $69.63, 11/1/10
IRM, Iron Mountain – USA – $21.57, 11/1/10
TEVA, TEVA PHARMA – Israel – $50.80, 11/2/10
HNP, Huaneng Power International – CHINA – $22.80, 11/2/10

NOK, Nokia – Finland – $10.21, 11/12/10, Nokia is still the world’s largest cell phone maker. Its leading market share position (at 33%) helps it achieve economies of scale in low cost production through standardized features and equipment. The new CEO and additional senior management changes will seek to fuel new R&D to produce new products and better compete against Apple and RIM in the smart phone market. Financially, Nokia is in good shape with positive net cash. It currently trades at the bottom of its 52 week price range and near multi-year (5+) lows. Nokia pays a very attractive bond-like yield of 3.8%, but with all the upside potential of a stock. Current valuation is reasonable at PEG Ratio of 1.31x and a forward P/E of 11.5x. Its standardized products allows for product efficiencies. With minimal capex requirement, Nokia is still a cash machine spinning off plenty of cash for increasing dividends or investing in new product opportunities. Nokia remains a trusted brand name and has enormous opportunities to cater to the emerging market consumer markets across the globe. The long term structural weakness in the Euro will help spur increase sales through better competitive pricing.

TM, Toyota Motors – Japan – $69.63, 11/1/10, Toyota is the world’s largest car maker. This is also a contrarian play on the Japanese stock market. After going through a 20 year secular bear market, this may be a good time to buy a high quality play in a cheap market. Still has a great brand name. Reputation was damaged the past year with safety issues. However, I see this as an opportunity to buy a high quality blue chip stock at a great price. Toyota should directly benefit from the global recovery story. Currently trades near multiyear (5 year) lows and also below its book value. There’s amble margin of safety with risk and reward in your favor. Expect the Japanese government to continue to execute quant easing and manipulate its currency in the open market in order to support key export businesses. A weaker Yen is also likely in the long run due to the country’s fundamental structural weaknesses. This should help support car makers like Toyota. Reasonable P/E of 16x. PEG Ratio is only .55 and P/S of .46. Toyota should benefit from its next door neighbors – the rising emerging market Asian consumer society and rising consumer incomes levels.

IRM, Iron Mountain – USA – $21.57, 11/1/10, A boring business usually makes a good investment. Iron Mountain is the trusted brand name in the storage of critical documents, information management, and corporate customer data. Warren Buffett is a shareholder which provides additional validation of our due diligence. Currently trades near multiyear lows. It pays a dividend of 1.1%.

TEVA, TEVA PHARMA – Israel – $50.80, 11/2/10, the world’s largest generic drug company. Benefits from two strong themes – growing political focus to contain rising healthcare costs, generic medicine will play an important role, and benefits from the trend of global drug patent expirations by many of the most popular drugs. Teva will continue to have great opportunities to profit from replicating products as they come off patent protection. Its size provides economies of scale in production. High quality management runs company operations efficiently; quickly getting new products to market. Currently trades near a 52 week low and with a dividend yield of 1.3%. Forward P/E of just 9.79x and PEG of only .83. A very profitable company with net margin of 17%. Teva just reported strong revenue and earnings growth. The beauty of the generic business is you don’t need to spend a lot of money on R&D. You just wait and replicate an existing product. Sales continue to grow from a robust pipeline of generic products coming on board while capex is minimal; which generates enormous free cash flow. With payout at only 21% there is a lot of to increase dividends and execute stock buybacks to reward investors. Teva is also a complete drug company with a diversified business which also includes branded products as well as a woman’s health care unit it acquired.

HNP, Huaneng Power International – CHINA – $22.80, 11/2/10. High quality blue chip power producer company operating in China and Singapore. Currently trades near a 52 week low and near 5 year lows. High dividend yield of 4.8%. Cheap valuation at 10x P/E and .48 P/S considering the growing population and urbanization trends in China’s major cities will continue to require high electricity demand. With another expected harsh winter approaching we can expect more power outages as demand for electricity by consumers and businesses strain the available power supplies. Using the Big Mac Index to roughly gauge currency valuations, the Chinese Yuan may be about 40% undervalued. With continue external pressures from trade partners as well as internal pressures for the need to control inflation; China will most likely gradually re-value the Yuan over time which will provide investors with an extra boost in returns from a strengthening currency when translating yuan dividends back into dollars. With greater purchasing power by citizens we can expect continue domestic growth and consumption of products that will lift electricity usage and prices.

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SSCC, Smurfit – Stone Container Corp – USA, $21.65, 11/16/10 – SOLD – 2/10/11 – at $38.73, Reason: Take Profit, Take Over by Rock-Tenn
WINN, Winn-Dixie Stores – USA, $6.5, 11/1/10
VSTO, VISTEON – USA – $59, 10/12/10

SSCC, Smurfit – Stone Container Corp – USA – $21.65, 11/16/2010 – Smurfit is one of the industry’s leading containerboard and corrugated packaging producers. It offers corrugated containers that are used to transport various products around the world, generating revenue of $5.57 billion in 2009.  Smurfit-Stone Container was founded in 1926.  It emerged from bankruptcy this past summer.  After restructuring its legacy debts and stream lining operations, Smurfit is a much stronger and more efficient business. Smurfit is trading at a mid cap level (2.1B); providing a potential take-over target for its larger competitors like WY and IP.  It has an attractive valuation at a forward P/E of 9.8x, P/S of .36, and just trading at 89% of its Book Value.  Its legacy tax credits from loss carry forward will provide a competitive advantage against its competitors who will have higher future tax burdens as well as higher debt loads.  I always like to invest along with the owners/managers and in this situation the insiders own 19% of the company. The longer term trend is also positive.  The weak dollar should provide a growing future catalyst to re-invigorate the American manufacturing operations.  Expect future declines in the dollar with further quant easing II and potentially quant easing III & IV due to long term structural issues.  The debasement of the dollar may fuel increases in direct foreign investments as international companies begin to in-source their manufacturing operations in order to take advantage of their stronger currencies and buy into the large U.S.A. domestic market. In addition, the growing emerging market middle class society and rising consumption patterns will provide support for continue exports from the U.S.  Growing trade with Asia will likely lead to high demand for containers and paper boxes.  Smurfit should directly benefit from the US and global economic recovery story. The irony is that the USA may likely switch global roles with Asia, as U.S. may turn into an export based economy, and Asia transitions into a domestic consumption based economy.

* Update – SOLD – 2/10/11 – at $38.73, Reason: Take Profit, Take Over by Rock-Tenn

 

WINN, Winn-Dixie Stores – USA – $6.5, 11/1/10 – Winn operates as a food retailing company primarily under the Winn-Dixie banner. The company’s stores offer grocery, meat, seafood, bakery, health and beauty, and other general merchandise items. Its stores also provide pharmacy, liquor, and fuel products. It operates 514 stores in 5 states in the southeastern United States; and 401 pharmacies, 80 liquor stores, and 5 fuel centers at its stores. Having successful emerge from bankruptcy several years ago it continues to execute its corporate business strategy in a very difficult economic environment. Although I do not like the low margin retail business and usually do not invest in this area of intense price competition. However, I cannot ignore the cheap valuation. A small market cap of only 400mm; its a potential takeover target for its bigger competitors in the food retail business. Winn currently trades at only 47% of its book value and P/S of only .06. This is a super cheap stock. With very little debt and over a quarter of its balance sheet in cash it has the financial flexibility to weather the storm and get through this harsh economic climate. Its prior bankruptcy also provides a competitive advantage over its more heavily in-debt peers. Winn was able to clean its balance sheet of legacy debts and stream line its operations.

VSTO, VISTEON – USA – $59, 10/12/10 – turnaround, special situation play, well known brands, international growth opportunities, benefit from weak dollar export market to emerging car markets, under the radar to investors and hated due to bankruptcy, market leadership positions, lower debt levels, restructured balance sheet, leaner operations.

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GAME, Shanda Games – China – $5.51, 11/30/10
BWC, Babcock and Wilcox Company – USA – $23.09, 11/5/10
CPN, Calpine – USA, $12.02, 11/1/10
ECA, Encana Corp – Canada, $28.20, 11/1/10
JBSAY, JBS – Brazil – $7.55, 11/3/10
NRG, NRG ENERGY – USA – $19.69, 11/2/10 – SOLD – 7/1/11 – at $24.83, Reason: Take Profit, concerns about nuclear cut backs

GAME, Shanda Games – China – $5.51, 11/30/10 – Shanda Games is a gaming company that develops and operates its own online games in China.  Its online game portfolio includes the very popular MMORPGs (massive multiplayer online role playing games).  Shanda games was spun off from its parent company – Shanda Interactive Entertainment.

• No matter where I go – from the most remote places in China to the smallest villages – I can always find reliable and fast internet connections.  This is an incredible discovery for me.

• The second most important observation is whenever you go to any internet café in any city you will find an incredibly large number of Chinese youths spending endless hours in these internet cafes playing online games all day long.

China’s internet market has now climbed to 420 million, more than the entire population of the United States. However, the penetration rate of internet users still remains low at only 31.8 percent, compared with a more mature U.S. market of near 70 percent.  You can expect the Chinese population will continue to increase their use of digital media such as instant messaging, social networks, gaming, and streaming video.

Online gaming is incredibly popular to Chinese youths as I have observed first hand.  However, China remains a very difficult market for foreign companies to compete, mostly due to local market-specific factors such as language barriers, different regulatory policies and cultural differences.  Homegrown online gaming companies such as Shanda Games have a natural competitive advantage over foreign competitors and will have a sustainable competitive edge in China’s online gaming market.

An inspection of its institutional investors provides added comfort in my due diligence process.  Highly regarded fund companies such as Longleaf and Fidelity also owns shares.  Top institutional ownership also include highly regarded hedge funds like Tiger Global Management, Citadel, and Sovereign Wealth Fund of Singapore.

Shanda Games has no debt and a cash rich balance sheet. Trailing P/E of 8x and forward PE/ of 7.6x seems quite a low multiple for a rapidly growing company. This is an incredibly profitable business model that spins off excess cash flow.  Net margins are at 29% and operating margins are at 33%.  Shanda Games is creating shareholder value with an ROE of 66% and ROA of 29%.

BWC, Babcock and Wilcox Company – USA – $23.09, 11/5/10 – Babcock and Wilcox is an engineering and government contractor specializing in power generation and environmental control systems primarily for large utility and industrial customers. It manufactures power generation systems and nuclear components in the United States and internationally. It was founded in 1867, and recently spun off from McDermott International. Peak Oil Theory may be coming into play sooner than we think as oil approaches $90. The world is now focused on alternative sources of renewable energy in preparation for that day. Nuclear power will increasingly become an important energy source especially in emerging markets. Growing populations and increasing urbanization will strain existing power plants and increase demand for electricity for consumer electronics and future wide use of electric cars will only further strain power supplies. Governments and utility companies around the world will provide plenty of opportunities for Babcock and Wilcox in power generation systems and environmental controls. It is in a strong financial position with a cash rich balance sheet and very little debt. Its forward P/E is 13.6x, which is a reasonable valuation compared to its peer group.

CPN, Calpine – USA – $12.02, 11/1/10 – Calpine is an independent power producer that operates one of the newest fleet of natural-gas plants. As the largest geothermal operator in the US, it is also a perfect play on the alternative energy / green technology movement. Calpine will also directly benefit from the US economic recovery as demand for energy picks up. Calpine is currently trading near a 52 week low and at multi year lows. This is also a great post bankruptcy play. Calpine emerged with a stronger and cleaner balance sheet and in better competitive shape. This becomes a competitive advantage in an industry full of highly leveraged utility rivals. It owns one of the best portfolios of efficient power plants focused on clean energy– geothermal plants and natural gas plants. One of its competitors attempted to buy Calpine to access its state of the art power plants a few years back. Calpine has a product advantage from its portfolio focused on alternative energy sources which will reduce its risks to any adverse actions from new eco-friendly EPA regulations or the pending energy policies such as cap and trade etc.. Lastly, Warren Buffett believes there’s a bright future for the utility business and his own company holdings includes a utility business. Blackstone is also recently making a bid for Dynergy. Clear signals that the utility business may be attractive at current prices. I believe the utility business has a terrific future with growing population trends, and the longer term trends in electric car usage will further spur higher demand for electricity. This is also a safe way to buy into the USA economic recovery story.

ECA, Encana Corp – Canada – $28.20, 11/1/10 – Encana is the largest natural gas company in North America. A pure play on natural gas and clean energy. I continue to expect natural gas to play a significant role in future USA energy security because of the abundance of low cost natural gas. Natural Gas also provides a bridge between oil dependence to other alternative energy sources such as solar, wind, and geothermal. Expect the friendly Canadians to be the primary energy supplier to USA. Canada is the House of Gas to Saudia’s House of Oil. Encana pays a nice fat dividend yield of 2.8%. Currently trades near its book value and 52 week lows. Will provide an extra boost in returns from currency appreciation from a commodity linked (Canadian) currency. Encana is a well managed company. With payout at only 28% it has room to increase dividends in the near future.

JBSAY, JBS – Brazil – $7.55, 11/3/10. JBS is the world’s largest meat producer. Currently trading near 52 week lows. Pays a dividend. Market share leader in meat products. Benefits from the natural competitive advantages of Brazil – from cheap and abundant fields and perfect climate for raising naturally grown cattle. Low cost labor and large scale production provides additional benefits as a low cost producer. In the sweet spot of meeting increase domestic demand from Brazil’s middle class society for protein based diet as well as exporting to emerging market economies to meet the growing consumer wealth and changing dietary preferences. A play on the secular food boom and a natural hedge to dollar weakness with soft commodity play.

NRG, NRG ENERGY – USA – $19.69, 11/2/10. Electricity producer NRG like the majority of its peers have operated under a cloud of uncertainty over the impact of cap and trade and other pending regulations. With the Republicans winning control of the House and the political gridlock will most likely halt or slow down undesirable energy policies (ex. Cap and trade) to utility companies. It is also more likely that politicians will now promote nuclear energy as a viable alternative energy source for clean and renewable power for a growing population. Nuclear power helps reduce carbon emissions and further help ensure US energy independence. NRG owns a nuclear power plant in Texas and is also applying for government loan guarantees to build more reactors. Nuclear energy will be an important part of any new energy legislation. Currently trades near 52 week low and multi-year (5) lows. Low valuation at 9x trailing P/E and 63% of book value. A solid play on the alternative energy movement.

*Update – SOLD – 7/1/11 – at $24.83, Reason: Take Profit, concerns about nuclear cut backs

 

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*** Please kindly note, these are not recommendations and Oxstones Investment Club does not take any responsibility for the investment performance of the ideas nor the execution of the ideas listed above. We are openly sharing our ideas and personal investments for the benefit of the Oxstones community. We are long term value investors. We construct a globally diversified portfolio that can produce total returns (capital appreciation and dividend income) in excess of select benchmarks. Our stock picks reflect our investment strategies and investment philosophy. Please note that the time horizon and risk tolerance may differ for each individual investor. Please remember to always protect your downside with proper risk management controls such as portfolio diversification, asset allocation, position sizing, and stop losses.  Our investment ideas are meant to ‘Enlighten’ you to potential investment opportunities and our website provides the additional tools and resources to ‘Empower’ you to ‘Evolve’ as Investors. Please feel free to also write and share your best ideas for the benefit of the entire Oxstones investment community.

 

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Liu-Yue (Louie) Lam, Co-Founder, CEO, & Chief Investment Strategist

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