McGill Investment Club

Where is the crude headed???

2006-10-04T10:18:00.000-04:00

With oil trading at 58$ it might be a good time to wonder when will it be a good idea to make the leap of faith into oil stocks.

I'm posting this to get opinion on how to judge when the oil/gas sector will be a good buy???

go ahead and blog this!

Out of Fashion

2006-04-27T12:09:00.000-04:00

During the tech bubble of the late 90s, no one could have imagined that large cap techs like Intel, Dell, Microsoft and even Cisco could ever falter. Times have clearly changed. The only news coming from Intel is regarding lost market share, while Microsoft is being profiled as a dinosaur by most business magazines. Clearly, the market has found a new fashion in commodities and financials, while the telecom and tech sector have been sold-off to the Salvation Army. And while I believe that small cap techs are still overvalued, it seems that Intel at 16.5 forward P/E and Dell with at a 13.76 forward P/E are simply trading on bad press.
In the last year, all business media has focused on how AMD is taking away Intel's business. Although some market share has been lost, there is little indication that AMD and its 6 billion in revenue can match Intel. It is a fight of David versus Goliath, except the ending is dictated by Intel's capacity and ability to heavily invest in R&D. Even given the disparity in ability and size, I believe this stock will continue to get bogged down by bad press until investors realize that the threat from AMD is limited at best.
As for Dell, this stock has looked attractive since its days at $30. Most of the sell-off has come from the low growth projections, which are usually a good sign to buy. While not meeting Wall Street expectations, Dell has posted growth in the high single digits, and has seen fierce competition in the PC market. The recent Citi downgrade has focused on a price war that will greatly reduce margins. The real question is whether Dell has lost its competitive advantage? I wouldn't bet on it, given the brand name and the market share Dell commands. Although I don't see the stock rebounding in the near future, I don't think the company is broken, and I would be willing to buy at around $20.

ARMOR HOLDINGS

2006-04-25T11:54:00.000-04:00

I want to draw your attention on this stock (AH)
Armor Holdings is engaged in making military/defense goods for governments and public safety organisms. AH also has a subsidiary (Centigon) responsible for making armored cars to sell to the public covering a wide array of models, from a bullet proof windows Volvo S80 to a nuclear missile resistant Mercedes Maybach.
One important aspect of AH is that it is selling at a relative discount when compared to its peers in the defense industry. In fact AH P/E is around 16 whereas the industry average is approximately 23.
AH is has been considerably growing in the past years, having a average 5 year growth in sale of 63%. Yes, 16 P/E and 63% average growth rate... Mr. Lynch would probably like this one, refering to Mike's post.
Even though the company is a holding, it is operating at a margin of 30% when compared to an industry average of 17.31% (still 5 year average)
Heres a little graph for the trend line analyzer... the S&P 500 is the gray line

I want to add a FCFE valuation for the company. This analysis was done using bloomberg.

Using a 3 stage growth model, the estimated instrinsic value per share is: $85.13. The last price of the security was $61.70. The analysis used a high growth period of 3 years @ 22%, which then declined for 7 years to reach a stable growth of 2%. I do not expect the stock to reach its intrinsic value within a short term time frame. However, I do expect the price to appreciate significantly both on a short term and long term basis.

One of the main factor to consider would be the war in irak as well as the worldwide political climate with respect to the USA. There is no sign of an retreat of the US troops from Irak. The defense budget is forecasted to increase by approximately 5% in 2006 to reach $419bil. The bugdet has constantly increased since 2000. The budget totaled $267bil. back in 2000.

Wild Metals

2006-04-25T11:30:00.000-04:00

The performance of the energy sector, the strength of commodities has been pushing the TSX up for a couple months as of now. With crude oil barrel now over 70$/barrel and gold prices at a peak of 634$/ounce today, the exponential increase in commodities seems frightening. Some people claims that restrictions in the supply of the commodities are drawing the price up. Some other claim that a bubble is building up. Take a look at a 470 days chart for gold w/ 30 and 150 MA.

An important aspect of the graph is the HUGE increase in trading volume since the beginning of 2006. I guess this increase is not due to increasing demand but to a rush for speculation.

I will not claim that there is actually a bubble over commodity prices but I do believe that their is a substantial over valuation going on. I would tend to believe that there will be a correction within the end of the year. Take a look at copper btw... the formula Y= X² seems less predictable when compared to that graph

Some will say that the reserves of commodities are going down, and that China's demand is becoming larger and larger, but how much of the recent increase can be due to these factors is truly a debate

Lynch Inspired PEG Ratio

2006-04-20T23:50:00.000-04:00

One of the more celebrated fund managers of our time, and one of my personal favorites, is Peter Lynch. Peter Lynch's strategy, when he managed Fidelity's Magellan Fund, was to focus on companies that were somewhat proven but still had very solid growth prospects. Moreover, he felt that it was paramount to invest only in stocks that 'you could explain why you like in 20 seconds or less'. Lastly, another key issue was that the product be understandable, and, ideally, tangible. I like to think of Lynch, overall, as a more growth-focused version of Warren Buffett without as many restrictions (mostly quant). In this article, however, I will be focusing on Lynch's favorite ratio - the PEG ratio.

Of course, although the PEG ratio is in itself quantitative, it had many qualitative connotations. For example, if the P/E (numerator) part of the ratio is inflated, then this might infer that the company is a start-up that hasn't achieved normalized earnings, or that it is operating in an industry, such as internet, with high growth prospects (of course, you can argue that the denominator should also be inflated, but growth projections are usually on the conservative side). So, to get down to business - and my intention is certainly not to patronize seasoned investors - what we are looking for is companies whose PEG is below 1, as this implies that it's growth prospects exceed its valuation (more or less).

Now that we've covered the basic intuition, let's take a look at some stocks with PEG ratios below 1 and determine whether or not they would turn Peter Lynch's head. Keep in mind that these ratios are obtained from Yahoo! Finance.

Netflix (NFLX) - PEG=.97

You’re telling me Netflix is a value stock!!! You may as well tell me the Leafs are gonna win the Cup in this century. On a more serious note, the fact of the matter is that we’re using a forward P/E ratio of 29 and a growth rate of around 30% to derive this PEG, when in fact we should probably use the trailing P/E of around 48.7 and a more conservative growth estimate of around 20%.

It is crucial that people not be deceived by the PEG ratio for companies that are in a high-growth phase – because in these circumstances the assumptions of growth (in both the forward P/E and the denominator) essentially strip it of any sort of credibility.

Don’t get me wrong, I don’t think NFLX is a bad company; I just don’t think it’s a great stock at over 31$, as it was when it was below $20 and everyone excepted a huge arrival on the scene from Blockbuster. If NFLX can continue to improve its service, keep its churn rate low / subscription high, and figure out what it with do with online movie downloads, I think it can certainly gain from volume. In other words, there are huge economies of scale, especially if Reed Hastings is as keen as he appears to be on a having a comprehensive, global stock of films. This will be even more true if the business model shifts towards movie downloads, but that’s a whole other stories.

The fact of the matter is that we should wait for NFLX to stabilize earnings and growth (to some degree) before using PEG as a useful method of analysis. Until then, we should focus on other things like subscription, churn, profit margin, FCF and competition.

Urban Outfitters (URBN) - PEG .78

Again, Urban Outfitters is a company that is growing sufficiently fast that the PEG ratio may not be appropriate. However, I think the fact that the ratio is low, in itself, is an indication that URBN might be a good contrarian pick. What attracts me to this stock, above all else, is that the fact that in spite of strong growth of over 20% last year (both top and bottom), the stock price has dropped over 20%. Therefore, instead of paying for growth (and retained earnings, mind you), impatient investors looking for the next Google are giving the stock away. This is often the best time to buy in retail – once the company proves to investors that they don’t need to grow at 50%yoy to be a solid company. Most importantly with Urban Outfitter, however, is the outstanding product and shopping experience that they have to offer their customers, now consisting of an even larger demographic representation. Every time I step foot in the store, I am baffled by the turnover and the willingness of customers to pay a premium for average-quality, above-average-style/trendiness products.

Abercrombie & Fitch (ANF) - PEG .68

Anyone who is a teenager or young adult from the suburbs (key demographic group for large retailers) knows that ANF has been the hottest trend of the past decade of so. What’s better is that the company continually remodels its products and trends (now even raising price) to accommodate is growing, and aging, customer base. For the Tweens, they have Hollister, and for the even-younger ones there’s Abercrombie. Unlike Gap, however, ANF seems to be sufficiently focused in that they refused to diversify across different levels of quality – rather, they diversified their stores amongst age groups, which doesn’t tarnish the brand, which is so key. In my opinion, ANF’s forward P/E of only 11.5 is absurd considering that this is what diversified financial institutions trade at. Abercrombie and Fitch has proven that it can continually grow sales volume, both through same-store-sales and new locations, so why the cheap valuation? Impatience, my friends.

Corriente - your second chance

2006-04-10T23:28:00.000-04:00

I hope nobody is kicking themselves for not taking my recommendation of Corriente when it was trading around 4.08 (see "Cheap Copper"/ 3/14/2006) but we won't play that game!
Instead, let's focus our energy on the current situation, which, according to me, is still quite promising. I should tell that when I discovered CTQ.TO (now ETQ on AMEX as well), it was trading at 2.45, and, when I recommended it the first time, it was around 4$, so let's not worry about its appreciation potential - this stock has more dynamite than the "Die Hard" series.

The principle reason why I'm encouraging investors to take a serious look at CTQ or ETQ (depending on your exchange) is because of its newfound exposure. Whereas in prior periods it was a bargain because of its lack of exposure, it is now a good buy because of its newfound exposure. In other words, the laws of demand and supply are simple - given a fixed level of outstanding stock (supply), a much, much larger market (demand) will inevitably push the stock price up. Just imagine if you were a small business owner, and instead of delivering 30,000,000 flyers to potential customers, you delivered 330,000,000 flyers - in which case do you think you'd generate the most business? Of course, that is a very simplified and exagerated example, because capital does flow across borders, but the fact is that their was very little analyst (only 2) coverage, and thus little institutional investing in this stock. In some ways, it's like taking the georgeous farm girl from Kansas to L.A. - she was promising in Kansas, and she generated some buzz, but in L.A., she will be discovered and her true worth will be uncovered!

The beauty of the situation, however, is that the stock went up mostly because of Canadian investors expecting to see benefit from the growing U.S. market - none of the stock appreciation, or little of it, has stemmed from increased buying from Americans. Just imagine when J.P. Morgan or Bear Sterns initiates coverage - this will really put Corriente on the map.

In terms of political situation, this remains the big X factor for this stock. Although Ecuador's political situation is relatively stable, the same cannot be said about its neighboring countries, especially Peru, Venezuala and Bolivia. In Peru's elections, which were held yesterday, there will most likely have to be a revote for the top 2 candidates, since no-one gathered over 50% of votes. However,the leader, Ollanta Humala, is an Inca decendant who wants to 'redistribute wealth to the people' - Che anyone? If he gets into power, it will be a real downer for foreign companies in Peru. In Bolivia, the horse on the flag has been turned around so that instead of running to the right, it is running to the left - enough said. Lastly, we all know about Chavez in Venezuala and his nationalization of several foreign-owned natural ressource companies. As for Ecuador, there is turmoil - don't get me wrong. Anytime there's 7 different presidents in 9 years that'll drive up the cost of capital for any project. Moreover, the party in charge is quite liberal - however, the people of ecuador, unlike those of peru and venez., are sure of one thing - that their debt is out of control and that it must be paid off. As long as Corriente is keeping the gov't happy with its taxes, they're shouldn't be too much of a problem for now; sometimes corruption can work in your favor.
Just ask De Beers.

Two arbs and one sure thing

2006-04-10T08:56:00.000-04:00

1) AEGCF is merging with RBCV at a 1:10 shares exchange. Prices are 19.26 AEGCF:2.62 RBCV, or a ratio of 7.4:1. The arb: long 1 AEGCF for short 10 RBCV. The arb has to converge to 10:1, although there is no telling which way, and this way you are hedged. Whe I put it on at 17.2/2.45, the ratio was better at about 6.95:1. The beauty of this trade is you can currently be net short! So nominally, youre making money on borrow. Heres a rough sensitivity analysis for the optimized scenario. Might be hard to borrow is all, depends on your capabilitites:

ratio nominal Total Price Nominal
AEGCF long 1 100 100 19.26 1926
RBCV short 10 100 1000 2.6 2600

Price movements
AEGCF 20 $22 24 26
RBCV 2 $2 2.4 2.6
Nominal return 674 674 674 674

2) ARGL is a blank check company put together for the purpose of acquiring int he securities field. Some points:
-insiders locked in until 1/25/09
-insders get no liquidation rights if no acquisition consumated (either on gift stock or on 1M$ pipe done at same terms as IPO)
-rarely have i seen so much smart money in one room, read up for yourself, and people who had gone so far to ensure they cant fuck you. For Bob marbut, assuming the company made a garbage acquisition, he would stand to gain about 1.5M$ if the stock price were cut in half (over 3 years) plus he would get sued and lose crdibility. the guy is 70 and sits ont he Valero board.
-Te IPO was done with one share common, one warrant strike 5.5$, excersisable after earliest of 1/25/07 or acquisiton
-acquisition is 100% likely in my book
-I think they will buy in isreal, read the filing and tell me if you agree

I would consider buying the common, evern though its a black box, its a safe one. But theres a better play, and ere it is:

The warrants trade at an astonishing 1.25$, actually 1.5$ now, about .45$ below parity, or 30%, but still amazing. Usuallythis warrent should trade at 7.45-5.5=2$ +time premium. Before you ask, this is not a negative time premium due to non-ecersisability or risk of liquidation. So, you sit and wait for the warrant to go to parity and make 30%. Then you either sell, or wait for the acquisition. If its a dud, you get out most likely flat, and if its not (all signs point to success) then aybe the stock goes to 10, and you make 10-5.5=4.5/1.5=300%...assuming no time premium. Or you sell or 30%.

US Global (GROW). I won't spill the beans, but do the research and you will see that this thing is the best way to play the commodities/nat res./gold bull market bar none. Its going straight to 60.

2006-04-10T02:28:00.000-04:00

* Click on pictures for a larger view.

We have steered up some good discussion on our coverage of OVEN. I have done a purely technical analysis on the price movement to get a few things straight regarding money flow and insiders trasactions.

For those of you who haven't been following the heated discussion after Jay posted his report on OVEN, take a look at http://mcgillinvestmentclub.blogspot.com/2006/03/anonymous-comment-on-oven.html"

Alright, I've posted two charts, I'll be talking mainly about the first one, but take a look at the second chart to see some major events (splits, earnings, etc) .

First off take a look at the all time chart http://finance.yahoo.com/q/bc?s=OVEN&t=my.
Notice that despite the runup through the first half of 1997, the long term has been bearish.
The Subway deal saved the stock and a major runup is followed starting roughly november 2003.

Alright, focusing exclusively on the past two years (follow the first chart) you can see the fast run starting early novermber and topping late december, notice the weak volume support, especially after hitting the top, now the second weak runup has formed a classic technical favorite pattern of head and shoulders, after which the stock has broken the neckline on very heavy volume. I can't quite figure out what caused this (fundamentally), but a 1:3 stock split was declared right before the fall and then it's all downhill.

Fast forwarding to June 2005, Jim Cramer comments and much promised speculations for a deal with starbucks or a second deal with subway caused an extreme fast run on heavy volume (greed + short covering + triggering stop buys) , but notice the strong resistance on $20, which is the right shoulder on head-and-shoulder pattern. Quite obvious at this point.

Notice the triple top formation with nice volume supports from mid June to mid August, each top lower than the other and declining volume. Even without trendlines the move is obviously bearish.

The most relevant part right now is the extensive trading range of November - March right before the earnings disappoitment. Also notice the bearish move before the announcement.

After the fall the movement has been quite bullish, which could very well be shorts covering their positions. Also as Jay said, short ratios are published about biweekly (depending on the exchange) and if someone shorted and covered within that period it wouldn't show up. Take a look: http://www.shortsqueeze.com/index.php?symbol=oven Average days to cover is roughly 18 days.

I looked up the insider roster, didn't really see any insiders buying the stock. Keep in a mind that an option exercise doesn't count. The only thing I care about is an insider buying with cold hard cash, and lots of it. So if some insider's salary is 200k and he's buying 150k stock of his own company, then I consider that significant.

I don't think the stock is going anywhere and is likely to stagnate; however, there should be quite a good buildup of stopbuys around 13, but the large positions stopbuys are between 15-16. Breaking north of 13 could easily generate enough push to trigger those higher ones. This is not something that I'd like to bet on as odds are not favorable at this point, but if the move happens then you can be sure that I thinks odds are that the breakout would easily reach 16 and you would have some time to get on the train provided you act fast. The volume by price chart speaks for itself, you can see that $13-$16 trading range is where most of the action has happened, and in near future these are the strongest supports/resistance.

From a fundamental point of view, I have to say it doesn't seem much prospect for the stock. I wouldn't say anything much more, cause it's nicely put in Jay's report.

Comments

2006-04-07T11:22:00.000-04:00

Unfortunately we had a not so pleasant experience with comments which led us to start moderating them. A mistake in the process caused all comments to be completely detered all together.

We apologize for this and to the author of anynomous posting on OVEN who fortunately has accepted our offer please send me an email: kaveh_tehrani at hotmail.com.

Once again I apologize if your comments did not appear on this blog in the past week, they should be there now.

Research in Motion

2006-04-05T23:23:00.001-04:00

RIM is about to release earnings after closing bell tomorrow.

After the huge gap up after the suit settlement, RIM stock has barely moved. Everybody knows the EPS is damaged, but the sales growth is key. It's unlikely that the upside of this scenario is anything significant, but the downside is very much open. A disappointment over sales growth is immediately attributed to competitors entering RIM's turf and likely to send the stock falling down.

RIM's business is quite similiar to cigarettes, crackberries are addictive, available, and in many ways, necessary. RIM's fat margins have lurked competitors (palm, microsoft, etc) and it's hard to see how blackberries are going to hold their firm grip on market share.

As a holder of RIM's stock, you can be sure I'll be looking for the magical .67 EPS at 4pm tomorrow.

Anonymous comment on OVEN

2006-03-29T20:10:00.000-05:00

We had someone post a comment to my late last night post on OVEN price activity. I would like to thank whoever this person was and here is his comment reposted on the blog to get the attention it deserves.

I would like to invite the person who posted this to our blog. I completley agree with your point of view on the stock and despite being bearish on the stock never quite had the guts to go short on it.

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Betting on short squeezes is dangerous. Witness MOVI, in which the flost got 60% short when it was at about 8$, and kept getting shorter down to 2.5$. Those that bet on a squeeze when it based af 5 (after falling from 35) got smoked.

Here is the short case for OVEN, written June 20, when the stock was at 18. Just so you know that money can be made shorting.

I recommend shorting Turbochef (OVEN) $18.50 because it is a business that received a very large 1x in nature contract with Subway that the market has mistakenly perceived as the next hottest restaurant trend and has given OVEN an equally hot valuation. In reality, Subway is many multiples larger than any other restaurant chain Turbochef should reasonably expect to win business with and our conversations with restaurants decision makers and industry experts do not suggest widespread interest in their products. The market is mostly limited to c-stores, sandwich chains, coffees chains, and to a lesser degree, independent units without a major kitchen on premise. We think Turbochef is more realistically valued at $6 per share, including the $3 cash per share.

BUSINESS DESCRIPTION:Turbochef sells one product: Commercial use countertop ovens that combine microwaves, convection, and infrared ray to cook food 12x faster than normal ovens. The Turbochef technology has been in existence for over 5 years but has found new life in the menu expansion trend at various Quick Serve Restaurant (QSR) chains. Turbochef is also trying to adapt the oven for the residential market. It has high hopes for this segment but the technology is only 85% complete and is slated for a mid-2006 release.

SHORT THESIS:-Subway contract was a special situation and OVEN is unlikely to secure contracts of similar size in the future. -Oven only makes sense in Coffee/Sandwhich/C-stores and end market is much smaller than bulls expect in addition to a 6 year replacement lifecycle and exclusive contracts with major customers-Strong competitors and worthy product substitutes reduce the size of an already small market-Residential market unlikely to embrace OVEN & established players have similar products in the market selling poorly-Significantly overvalued given peak annual recurring unit demand of 15,000 units

SUBWAY CONTRACT WAS A SPECIAL SITUATION IN TERMS OF DEAL SIZE AND NEED FOR THE TURBOCHEF OVEN. CONTRACTS OF SIMILAR SIZE ARE UNLIKELY IN THE FUTURE:The Subway contract was a unique situation because Subway had been looking for a way to compete with toasted subs from Quiznos. Turbochef was the perfect solution given Subway’s lack of other cooking equipment and the oven’s small footprint that is well suited for Subway’s limited space. A contact at the Subway told us they had tested a number of rapid cook oven brands a few years ago and went with the OVEN oven because it had the fastest cook time. Furthermore, Coca-Cola footed half the bill as part of a recent arrangement to switch from Pepsi to Coca-Cola, after 15 years of loyalty. At 22,000 locations, Subway is almost twice the size of the next potential customer; the market does not realize that the easy pickins’ have been picked. In their favor, recent follow-ups with Subway owners lead us to believe the campaign has been highly successful, driving more than 10% same store sale growth.

SMALL END MARKET WITH 5-7 YEARS REPLACEMENT LIFE; RESEARCH SUGGESTS ~90% OF LARGE CHAINS NOT LIKELY CUSTOMERS:The oven really only makes sense in sandwich shops, c-stores, and coffee shops, where there is not a major kitchen on premise. Furthermore, Turbochef signed an exclusive agreement with Subway and cannot sell the same device into Subway’s major competitors. They will likely sign similar exclusives with all major customers. With a 5-7 year replacement cycle and our research ~90% of large restaurant chains are unlikely customers the end market appears to be a fraction of expectations. According to industry stats, there were roughly 240,000 total franchised restaurant units under 400 brands across the globe at the end of 2003. About 70% of the units are controlled by the top 40 franchises, which each have over 1000 locations. Our specific research suggests that less than 90% of these top 40 are highly unlikely to become Turbochef customers in the future. This leaves ~20,000 units, as potential rapid cook oven customers, including Starbucks, 7-Eleven, and other small convenience stores, but Turbochef will not be able to capture this entire market given the competition.
Additional research assessed the amount of industry buzz around new food concepts and the likelihood of QSRs making rapid cook oven like equipment purchases. It does not seem like any major customers beyond Starbucks (~4500 US units, 9000 total) has plans to introduce a new food concept that would require a Turbochef oven in the near future. This only represents a 1x ~ .15-.20 EPS, or .03 EPS recurring since rollout will likely be limited to full size US stores (Not kiosks etc.)

SPECIFIC CHAIN RESEARCH:
03’ Units Restaurant Chain(s)
32k Yum! Brands, KFC, Taco Bell, Pizza Hut30k McDonalds6k Dunkin Donuts6k 7-Eleven9.5k Wendy's7.5K Starbucks
FINDINGS: 91k total units researched. Yum! Brands with KFC, Taco Bell, Pizza Hut unlikely according to contacts: no new menu shifts, equipment on hand adequate, pizza chains married to current cooking process and don’t want to alter taste.
McDonalds has rolled out Enodis, Turbochef competitor in numerous countries (Canada, Australia, New Zealand) and is testing 400 Enodis conveyor style rapid cook ovens in US for a Hot deli sandwich concept. Likely to go with Enodis.
Dunkin Donuts- doesn't fit into strategy and currently testing Blodgett convection ovens for two stage donut cooking only.
7-Eleven- testing Turbochef right now but began recently. Testing usually takes 12 months minimum. Contact claims it was a little big and not much cooking room, she prefers other brands currently.
Wendy's (Baja Express, Tim Horton, Café-Express)- IR didn't think any menu changes were likely to come, new equipment is huge obstacle to them and they avoid it at all costs.
Starbucks- testing Turbochef in DC in 100 locations currently. But also testing Turbochef + Maytag’s Amana in Seattle market, will have to see how this evolves but we think it is a likely OVEN customer.

STRONG COMPETITORS AND WORTHY SUBSTITUTES REDUCE THE SIZE OF AN ALREADY SMALL MARKET:Turbochef directly competes with Amana, a commercial cooking equipment division of Maytag and Enodis, UK holding company with more than 300m in annual rapid cook technology sales. Both companies offer rapid cook ovens of similar quality & price, but Turbochef is the leader in cook time. To verify our research on the size of the market, contacts at Amana thought the market was more limited to C-stores. Management at Enodis admitted the particular market for Turbochef’s technology would start off slow but he could see it eventually growing into a larger size.
There are also many substitutes to rapid cook ovens including advanced microwaves from Panasonic that use convection to help toast. Other substitutes include standard convection ovens, which use propelled hot air to cook 2-3x faster than normal ovens. An contact from Blodgett, a major manufacturer of convection ovens, confirmed the rapid cook oven market was of small size and limited to C-stores, which is why Blodgett did not pursue the market despite once having a relationship with Turbochef. Conversations with a high level sales manager at one of the largest distributors (three distributors make up 75% of commercial cooking equipment sales in the US), who carried Turbochef, Amana, and Enodis said that this market was “not even on his radar,” however, he said it took many years for conveyors ovens to find a following and everyone uses them now.

RESIDENTIAL MARKET WILL NOT EMBRACE THE TURBOCHEF OVEN AND ESTABLISHED PLAYERS HAVE SIMILAR PRODUCTS IN THE MARKET THAT SELL POORLY:Established residential brands have experimented with rapid cook ovens for nearly 20 years but the product has never been a hit seller with consumers. Today, lines from Thermador, Maytag, KitchenAid and others cook between 2-3x faster than traditional ovens and range from $1,100 to $6,000 dollars. Turbochef wants to introduce a residential oven in mid 2006 for $6,000 that is 8-10x as fast as traditional ovens. This will likely fail because major brands will block their entry, ovens that cook more than 3x faster require precise cook times and this margin of error does not work well in the home environment (if you’re 10 seconds off in your cook time you’ll burn the food), it will not be effectively priced, and the technology isn’t even completed. In addition, it will not serve as a substitute to the microwave oven because it will take time to pre-heat just like all ovens, and it will not be a substitute for the conventional oven because it cooks too fast to be readily useable. Conversations with professionals in Maytag’s residential cooking division confirmed that Turbochef’s dreams for this market were far fetched.

VALUATION: Significantly overvalued given peak annual recurring unit demand of 15,000 units:We looked at valuation a number of different ways:
First, we wanted to look at an expected peak recurring earnings stream. Using conservative estimates we discovered that a total of ~63,000 stores were potential installs. To get this figure we took the 240,000 (2003 figure) restaurants chains across the globe and divided it into categories ranging from burger joints, pizza shops, coffee/snack, chicken etc. and applied a reality metric to each category to see what made sense. Our values ranged from “doesn’t make sense for this market,” or 10% of all units across globe would become customers, to “makes total sense”, meaning 75% of those establishments would install the oven
Category 03’ Units % Realistic Potential Installs
Burger 60,000 10% 6,000 Pizza 34,000 10% 3,400Coffee/Snack 40,000 50% 20,000C-Store 14,000 75% 10,500Chicken 19,000 25% 4,750Sandwich Bakery 35,000 50% 17,500Mexican 10,000 10% 1,000
Total 212,000* 63,000
*excludes customers we think have already gone with competitors
We then adjusted for modest chain growth, potential customers with multi unit installs, non quick serve restaurant chains customers, and gave Turbochef a very generous 70% market share and applied a 6 year replacement life cycle to the peak install figure.
Potential installs 63,000Franchise growth 30,000Multi-installs 25,000Non-QSR 10,000
Total potential installs128,000Turbochef 70% share 90,000Replacement life 6 yearsAnnual recurring units 15,000 ASP @ $4,800 72,000,000EBIT @ 16% 11,500,000Taxes (w/o 45m NOL) 4,000,000NI 7,500,00
EPS @ 31.59m diluted .23 cents @ 13x forward PE $3Cash per share $3
Value per share $6
A worse case scenario is 60k annual peak recurring units sold each year, which yields a $15 per share valuation. We think the probability for this is less than 5%.
Another way to look at how absurdly valued we believe the company is…. The subway contract at ~85% fulfillment (international locations are still being rolled out) generated only .26 cents in free cash flow per share.

RECENT DEVELOPMENTS: -Changed ticker from TCF to OVEN -Stock has recently rebounded from $11 to north of $18 based on:-mgmt. appearances on CNBC and Jim Cramer -expectations for a deal with Starbucks-numerous positive spins in the recent conference call on customers testing the oven-Possibility for Subway to rollout 2nd ovens at each location for another expansion of the menu
-We believe the only real concern is a possible 2nd oven rollout by Subway. This 2nd oven would be for their Pizza concept, which had been tested a number of years ago without much success as a standalone product because it did not impress the customer and the overhead of new equipment didn’t justify the concept. Based on our analysis we do not think an announcement is likely in the NEAR future for the following reasons:
- Our conversations with multiple developing agents suggested very few were currently testing the concept and virtually no one was confident it was certainly being rolled out in the US- At the very least we are multiple months away from Subway having enough data to make a solid decision on rolling out this concept
However, here are the facts to sort through about this possibility:- If Pizza is rolled out, capacity problems with current ovens would make it highly likely a second oven is needed to support new concept. During peak times a meaningful number of locations are experiencing wait time for their Turbochef ovens. - Each Turbochef oven cost $300+ a month in electricity to operate and owners do not want to front that additional bill- First Turbochef oven purchase was subsidized by Coca-Cola for roughly half the price. Store owners will likely have to pay for second oven themselves and many are opposed- Many subway locations are limited on countertop space and do not have any more room for a second oven. - Many of developing agents do not believe the concept is a smart move given contrast with the healthy subway image- Subway tests lots of products and any new food concept that comes to the table is thoroughly tried and tested. Pizza is one of many.
-Turbochef claims 30 major chains are testing their ovens and could make a decision within the next year. Again, our industry research and conversations with test kitchens and various R&D departments make this seem unlikely.
-In addition, Turbochef is 85% complete on a rapid cook oven for the residential market. A market it pegs at 16 million US households. We think the likelihood of this being a realistic market is very small. Although from a timing perspective, it does provide a fantasy for the market to trade on despite the outlook for poor earnings into the foreseeable future.

RISKS:
- A significant number of QSRs could easily adopt a menu change that requires the use of a rapid cook ovens- OVEN is able to leverage brand in Rapid Cook ovens and build into other lines. They’re already trying this with a normal convection oven. Sales will disappoint though. - Subway elects to install two ovens per location, management is hyping this possibility, it is clearly explained below- Headline risk from deals with large chain operators or even small chains that help fuel the Turbochef dream for another few quarters- At ~$4,800 ASP the Turbochef oven is not a major expenditure for most restaurants -Subway will probably grow 1000 units a year for the next few years and will provide some recurring stream

Catalyst:
CATALYSTS:
- Significant expectations have recently been built into the stock, without any major delivers the market will quickly forget the Turbochef story. If major wins occur we’ll have to wait to get paid b/c this dream will remain alive. - Residential market opportunity proven unrealistic

Trading Sites Continued

2006-03-29T13:38:00.000-05:00

Hey All,

Just wanted to add to Kaveh's post about good trading sites.

First off www.stockhouse.ca is a more complete version of Yahoo! Finance, but you can actually find info, financials, and news on Canadian Stocks. It's pretty user friendly too.

Next, www.kirkreport.com is another excellent source of information from a more personal perspective. This guy is a retired trader who now invests for a living, and he keeps his readers update with the market as well as his trades.

Lastly, the McGill Library Website (Howard Ross) has several excellent sources, especially investtext +. These are free reports from GS, MS, CIBC WM, RBC CM, etc, that you would usually have to pay for on other sites, or else have a trading account with the company.

Hope this helps.

Hot in the OVEN

2006-03-28T22:46:00.000-05:00

*Click on the picture for a wider view.

How does a stock that has fallen well over 20% within a week of not meeting earnings expectation, suddenly rises roughly 7% on a Friday on absolutely no material news, and falls 4.4% (intraday) the Monday after.

The move past the fall has been quite bullish, though more time is needed to establish the trend. Regardless, monday's fall over friday's rise a classic dark cloud cover, confimed by today's gravestone doji. Notice also that despite the bullish run the volume has been steadily falling, showing weak support for the move.

MACD is pretty useless here, since the extensive trading range of November upto early March has converged the MAs, so it's extra sensitive to a sharp move, same goes for the CMF, although it has an uptrend, much of it is due to the 1.6m gap-down on the bad news...

OVEN gets 2% of its float traded every day. Having 44% of that shorted, it's hard to see the stock moving significantly any further down, the seller pressure is pretty much exhasted and I can't help to think that maybe the boat has gotten too heavy.

The stock is likely to stagnante for a while, there's strong resistance near $13, and it's quite established that if the price is very unlikely to tap into that range anytime soon, however if it does, you can be sure that the short squeeze is not going to be anything other than spectacular.

Huge Potential at SLXA

2006-03-28T15:39:00.000-05:00

A few weeks ago, I wrote about two companies that are currently dominating the field of genetic analysis technology. Although I still think that AFFX and ILMN will continue to make great profits for investors, I am now thinking of switching to a new company called Solexa (SLXA). The company has a small market cap at $200 million, but is already attracting a lot of attention from the science community for its groundbreaking techniques of analyzing genetic material. The products that SLXA promises in the next few years will not only do a better job than the current methods, but will also be more efficient and cost-effective. Truly a disruptive technology. I believe the time to buy is now, given the type of growth AFFX and ILMN have experienced in this field. The company will report earnings today, and I expect some great guidance on the development of this new method. For those of us who missed the great growth story of ILMN, SLXA might just be the cure.

Trading Websites - Part I

2006-03-27T17:30:00.000-05:00

Due to popular demand, I'd like to share some of the websites I think are essential for traders and are all FREE.

http://www.tradingmarkets.com/.site/
Awesome website. Provides free delayed Level II NASDAQ quotes. What else could I say?

finance.yahoo.com
money.msn.com
www.reuters.com
All three are good, sometimes you wouldn't find the info you liked on one but the other.

www.shortsqueeze.com
For real traders, not the faint of heart.

www.investopedia.com
A plathora of financial articles, I particularly like the "buzz words" section and the dictionary.

www.fool.com
I'd like to think we're their rival... ;)

www.stockcharts.com
If you're a technican, you already know this. If you're not, you better get on it and read the "Chart School."

http://www.vss2000.com/index.asp
Another great technical analysis website.

And lastly...
http://www.musonline.mcgill.ca/content/MICnews.html
Oh yeah... We rock. Big Time.

Keep an eye for a sequel.

Lord, Won't You Buy Me a Mercedes Benz

2006-03-26T22:35:00.000-05:00

In the late nineties, the cool thing to do on Wall Street was to merge and realize all those synergies. While many companies like AOL and Time Warner discovered that their synergies were negative, some companies did manage to create value. One of the biggest deals of that decade that did not live up to the hype was the DaimlerChrysler (DCX) international marriage. The result was better engineering for low margin Chrysler vehicles, and plastic interiors for the high margin Mercedes cars. The stock and Mercedes, in particular, took a beating over the lower quality and the lack of imagination in design.
Fast forward to 2006, Chrysler just had a great year with the new lineup that includes the 300m, while Mercedes has rolled out the beautiful CLS coupe. With the redesigned S-Class hitting the US market this summer, the future looks bright for the Mercedes division.
Right now, DCX trades at a current 17 P/E (like Toyota), but at a future discount to Toyota at a 12 forward P/E. This means that although future earnings are projected to be much higher, the price of the stock has not yet moved. It seems people want to wait for a blow-out quarter before getting in. Another reason is that the car industry as a whole is looking weak, but I see it as an opportunity to gain market share for Chrysler in the US market. As well, the margins are extremely low at around 2% for profit margin. I think with the new cars creating buzz and demand around the Mercedes brand, the company will regain pricing power and squeeze out another percent. At a 12 P/E and a 3.40% dividend, everyone can afford a Mercedes.

Timmy Ho

2006-03-26T22:21:00.000-05:00

it's amazing how one single stock can do for a whole industry. having had chipotle's stock doubling on the first day of trading, it's quite surprising to see how tim horton's shares literally got "flipped" on their first trading day. a market open of $31.95, high of $33 a few hours later and all the way downhill to close at $28.17, still a nice one-day return over the IPO price of $23.16. on such high volume, it's quite evident that many couldn't really wait to take their profit.

it's quite interesting to see the market open tomorrow to see how traders have thought this through over the weekend.

Unhealthy Investing

2006-03-22T17:42:00.000-05:00

Following in the footsteps of Chipotle and Burger King, Canada's favorite, Tim Hortons, is planning an IPO of its own. While it seems investors should be getting a bellyache from all of the food IPOs, the appetite for fast food chains has never been greater. Apart from commodities, it seems like the restaurant industry is becoming the new tech. Maybe in a few years, everyone will quit their financial sector jobs and begin the glamorous career of owning a donut shop. Until then, I personally think there is too much hype around all of these IPOs, especially for Tim Horton's and Burger King. Even though Tim Horton's has twice the penetration in Canada that McDonald's (MCD) has in the states, investors will still buy into the wild growth prospects pitched by every investment bank on the deal. In my opinion, the stock will trade high on emotion until the earnings will bring it back to reality, a few months later. If you want a great coffee and a donut, go to Tim Horton's, but if you want to make money, buy established good stocks like McDonald's.

A cyclical play - Actuant Corp. (ATU)

2006-03-17T10:06:00.000-05:00

The state of the US economy is a common topic of debate. Don’t worry, that won’t be the topic of this post. For now, the economy is flying and there are several stocks that will go up as a result. That is a pretty simple reason to invest in them, but I will go into more detail. ATU is the one that has caught my eye as being better than the rest. Not a better company, but a better stock. This company provides industrial tools, electrical tools and engineering solutions. Its customers are oil companies, aerospace companies and industrial machinery companies. These are three industries that are booming and they will be sending money ATU’s way.

Now to the important stuff: ATU has a market cap of approx. 1.6B. It is trading at 17.5x earnings and 1.5x sales. The company also has a ROE of 46%. ATU has shown annualized EPS growth over 20% for the last 5 years, which leads me to believe that the current multiple is factoring in slow growth ahead. ATU management has been very successful in finding growth internally and through acquisitions and I see no reason to believe that in the current global expansion they won’t be able to succeed.

This stock is not for weak holders and will fall hard in the event of a major slowdown. It is important to monitor it closely and be able to sell it at a loss if there are signs that it is breaking apart. That being said, if the economy stays strong, this stock should yield major returns through multiple expansion and major earnings growth. If you are looking for a safer play, Rockwell Automation (ROK) is a larger cap play on the industrial economy with very strong fundamentals.

Grilling the Chipotle Mexican Grill

2006-03-16T18:05:00.000-05:00

Well, when I read Alex's post on CMG, I didn't quite believe him. So I decided to do my own detailed DCF and check it out for myself.
I used a 10-year period FCFE, using the following assumptions:

- Revenue growth rate of 50% for 2006 and gradually declining to 22% by 2015.
- Dep & CapEx growth rates of 15%
- Change in WC of .2%
- Tax rate 41% (taken from CMG investor relations page, keep in mind they had a tax loss carry-forward)
- Terminal growth rate 4%
- Cost of Capital of 13.5% (the IPO proceeds were used to retire CMG's debt, and company plans to keep the debt level minimal, so really it's just cost of equity)

Now, under the above assumptions, I get the fair value to be $60.87
Changing a couple variables to more realistic level of:
- Dep & CapEx of 17%
- Cost of Capital of 15%

Value per share drops sharply to roughly $40.

Keep in mind that the analysis is largly dependent on the massive growth factored in. By the end of 2015 the company's revenues would have had ballooned to a whopping $12.3 billion. Even McDonald's revenue of $20b looks challenged...

Using multiples, it's pretty obvious that the company is trading at a high multiple of 80 times estimated earnings (22 for the industry) and a Price/Sales of 2.9 vs a modest .9 for the industry. The company might do just that and catch up to such expectations, but such growth expectations have to be met, for many years to come.

Considering that McDonalds is holding 88% of CMG shares, it's quite interesting to see what would happen once the lock-in period of 180 days ends in July. McDonalds has the right to sell any amount of shares it owns, and just the initial spark of a massive sell-off would send the stock plunging.

Since Monday, the stock has soared 28%. It's something to think about.

Spicy Burrito

2006-03-16T14:47:00.000-05:00

Wow! Chipotle Mexican Grill (CMG) is selling faster than the lunch special fajita burrito with black beans and some spicy salsa. The stock has defied any logic and has raced to $55, following higher than expected earnings. Out of curiosity, I set up a simple DCF, using the projected EBITDA and earnings from JP Morgan (who has a neutral rating on the stock at $45 btw). Using a revenue growth rate of 40% for the next ten years, and a TV at 4% (GDP growth), I get a value of $55/share with a 15% discount rate (all equity firm). Although my model is in no way sophisticated, a growth of 40% is tough to come by, especially when you already have $700 million in sales. Meaning that by 2015, the company will generate $14 bn in sales. On top of that, the model uses an EBITDA % of 12, instead of the 10% the business generates now, to account for economies of scale in the long term. Given these numbers, grab a burrito and start shorting.

Buy the rumor, Sell the news

2006-03-14T21:18:00.000-05:00

Alright, the mistake is obvious. I bought the news.

Knight-Ridder (KRI) is most likely being bought by McCaltchy (MNI) for a $40 cash and .5118 stock of McClatchy. At the time of annocement, the deal was worth $67.23 (40 + .5881*$53.24). The close of Monday, wiped out nearly $60m worth of the deal, with MNI closing at $51.55. Yet another drop today cut out another $9m. The offer is worth $66.19 now. It's hard to say, but quite improbable that the stock of either company goes up. With Wall Street falling out of love with old media and the heavy volume of trading going nowhere I have to admit that this was clearly a bad call. I will get out of my position tomorrow as if the deal does not go through, the breakdown will be catastophic.

Chipotle Mexican Grill (CMG) has had a whopping 12.19% gain after good earnings report. Quite interesting that the trading day prior to earnings release ended up by 4%. I am going to keep this company on my radar, I feel something good coming this way.

Mike H, I enjoyed your views on ANF and AEOS. I think AEOS has the potential to move upward of $30 per share, but the recent slowdown in consumer products and bearish signs of US economy slowing down I think there's quite a significant amount of risk involved. I do agree that despite high margins and growth potential P/E is pretty low. I'll have to dig into it deeper.

AEOS vs. ANF

2006-03-14T15:55:00.000-05:00

Two of the more interesting retail stocks over the past couple of years have been American Eagle (AEOS), and Abercrombie&Fitch (ANF). Although both have seen spectactular gains of over 600% in the past 5 years, they are still trading at modest P/E's - and the value seems to remain.

The reason why I find both of these stocks so attractive is that their trading multiples have declined as their brand equity increased. This paradoxical interaction of key investment factors is due to a simple fact; investors are impatients and expect, quarter after quarter, for record growth. The fact of the matter, however, is that companies trading at forward P/E's of 11 (ANF) and 13 (AEOS) don't really have any growth priced in. But they will grow - not only are their operations focused in the U.S. (room for geographical expansion), they also have the opportunity to target more demographic groups, including young adults (they're currently focused on tweens, teenagers, and university students). Both have innovative concepts and their stores trigal more emotional response from their customers than comparables like Gap and Nordstrom. Both companies should continue to grow, and will cut costs as they do so through economies of scale in production (they're fully integrated), distribution and marketing.

Here's an interesting chart that depicts the two stocks' growth against each other. As you will see, they are closely correlated, and the recent pullback of ANF is a good buying opportunity.
http://finance.yahoo.com/q/bc?t=2y&s=AEOS&l=on&z=m&q=l&c=anf
I would be shocked if ANF didn't bounce back to 70 by year end from 57. AEOS is at 29 and I expect it to finish the year in the 34-38 range.

Cheap Copper

2006-03-14T13:17:00.000-05:00

Hey Everyone -
First off I'd like to thank Kaveh, Alex, and Matt for putting this blog up.

My first post is about one of my favorite equities - Corriente Ressources (CTQ on TSX), a copper-gold exploration company based in Ecuador. Although the stock has more than doubled in the past year, it still isn't too late to find value. Here's why.

First of all, the NPV of the Mirador Project (a 20x80 kilometer copper belt), its principle exploration project, is valued well above the market cap of the firm - the market cap is roughly 222M, and, depending on the price of copper when it hits the market, the value of the content is between 200-600M, for this mine alone, based on independant feasibility studies. Seeing as the price of copper is continuing to rise, the the current price is in the very-upper range of the sensitivity analysis, the mine could be worth north of 600M. This, however, is not a pure play on the price of copper - it is a play on a undervalued company in a foreign country.

So why is the location, Ecuador, attractive, you may ask? There are two reasons for this. First of all, there is an absurd amount of political risk priced in, and you can often find value when this occurs (think Petro-Kazhakstan, which was trading at a P/E of 4 before finally being bought out after 2 rounds of potential takeovers at an 80% premium). The situation is very simular for Corriente - like PKZ, it is a ressource-based company that operates in a foreign country, but with Canadian ownership. Although there is much concern about political instability and a shift towards socialism (very left) in South America, this has not affected the operations of Corriente so far. In terms of the risk of inflation, the copper would be sold for U.S. dollars and repatriated to Canadian shareholders (the copper is not sold in Ecuador).
The second attractive thing about the location is its proximity to both South America (one of the fastest growing markets in the world), and China. Situated directly on the Pacific Ocean, it's just a stone's throw away from Asia (ok im exagerating...).

So anyways have a look - it's hard to find info on yahoo but you can find info on stockhouse.ca, as well as on the website at www.corriente.com.

ILMN vs. AFFX

2006-03-14T12:47:00.000-05:00

While not as famous as the Coca-Cola/Pepsi war, the battle between Illumina (ILMN) and Affymetrix (AFFX) is just as intense. The two companies are operating in the lucrative field of biotech and life sciences. As such, their main products are targeted at genetic analysis and genotyping. I won't go into much detail about the exact process used in their equipment (for lack of qualification), but I will say that the genotyping tools will lead to major breakthroughs in gene therapy. The question is: which company to invest in? According to experts, ILMN has the better technology, which allows to use wax samples (most research labs have slides since the 70s), unlike AFFX, which uses live tissue for analysis. Recently, the market has reflected the sentiment by letting ILMN quadruple in the last year, while AFFX has lost almost half its market cap. Although I hold ILMN since it was at $16.80 (now at $25.60), I think I will switch to the inferior AFFX. My reason for this is that the contracts that these companies sign have extremely high switching costs, and thus universities and biotech companies can't just drop AFFX for ILMN. By the time the contracts expire, I bet AFFX will counter with an improved product. As well, AFFX remains the more profitable of the two, with forward P/E of 40 and a P/S of 5.62. ILMN on the other hand has no profits and trades at a forward P/E of 44 and a 14.35 P/S. Given these reasons, my bet is that the two will converge, as ILMN adjusts down and AFFX trades up.

Natural Gas Update

2006-03-13T19:35:00.000-05:00

Today was a very crucial day for natural gas. In the past several weeks, NYMEX natural gas has been in a tight trading range. Today, however, natural gas prices broke out of the range and closed above $7/mBTU, a 5% gain on the day. Seeing the early-morning strength, I sold 1/3 of my position in Petro Canada (PCA.TO) and swapped into Chesapeake (CHK) at $30.25. I am also currently holding April 30 Calls on Chesapeake. I believe there might continue to be strength in tommorrow's gas trading as concerns about refining capacity casued today's spike.

Knight-Ridder (KRI)

2006-03-13T02:11:00.000-05:00

Knight-Ridder has been the hot topic of a buyout for a while. At this very moment, 2:15am Monday morning, finally the deal is officially out. McClatchy is buying out KRI in a cash and stock offering, paying $67 a share with 60% if cash and rest in stock.

The stock is sure to gap up on market open. I'd be aggressive buyer if the stock opens any less than $67, which is highly unlikely, but doable if the trader acts fast enough. The stock is showing a clear breakout as shown in the annotated TA attached. The stock has been trading in channel since November, and all indicators are showing a very probable breakout.

- Resistance is breached.
- MACD is not only crossing its EMA, it's stepping into positive realm.
- CMF is uptrending.
- RSI is uptreding.
- A doji is on wednesday, followed by a long-legged doji, after which BB are breached from the upside.

* Click on the picture to see a larger version.

Alright folks, I'm going to watch the market open for this one in a few hours. Expect a bullish run on heavy volume.

Night. Or morning I guess.

Chipotle Mexican Grill

2006-03-12T23:30:00.000-05:00

How do you trade a stock that has gone public since only January 26th 2006? The stock ballooned on the first trading from its IPO price of $22 to open at $45. The stock has only moved sideways ever since, closing last friday on $42.11. The volume has also dropped from a height of 13m on the first day to a disappointing 200k average ever since. From a technical analysis standpoint, that adds up to nothing at all.

From a fundamental standpoint, it's amazing how the street has already turned its back on CMG: 5 brokerage houses have given poor gradings on the stock. Meanwhile, only 1.2% of the float is sold short, which is not really puzzling as most trading days are dojis. It's clear that traders are staying away from this stock.

The company had a very favorable coverage in the Forbes magazine. With McDonald's having a controlling share in the company, and serious interest from the public, it's hard to imagine unfavorable results in the long-run. The company has strong customer loyalty, be it facebook groups, or a few fansites.

First public earnings release is due after market close tomorrow March 13th. It'd be interesting how traders bet on the movement tomorrow during the day. A strong move is to be expected, up or down, the stock is bound to breakout on heavy volume.

Cheap Energy!

2006-03-12T18:17:00.000-05:00

Last year's surge in oil prices set the stage for huge appreciation for oil and gas companies. However, with the recent warm winter leading to a larger than expected build-up in inventories of crude oil and natural gas, there many be another chance to pick up some energy companies on the cheap! Despite crude oil prices falling since their August peak, they are still quite high; a better value lies in natural gas. Natural gas prices were as high as $15/mBTU before the winter; however, a large buildup in inventories has led to natural gas prices falling to $6.50/mBTU. Despite the short term pressure on natural gas prices, many pundits feel there is a case for a higher long-term price on natural gas. Investing in natural gas can be tricking since there are very few "pure plays" in the sector. One company that would benefit the most from natural gas prices though is Chesapeake Energy (NYSE:CHK). Chesapeake has the highest percentage of its revenues in natural gas (over 90%) and operates solely onshore on North American soil. In addition to being a good bet on natural gas, Chesapeake has many good things going. First, the two founders Aubrey McClendon and Dick Ward have been steadily buying shares and now own roughly $570 million and $470 million worth of shares, respectively. Second, since Chesapeake operates only onshore in North America, there are no terrorist or natural disaster risks. Third, the management has hedged 71% of 2006's revenues at an average price of $9.43/mBTU, as a result, they will still achive huge profits (keep in mind that 2005's record profits were achieved at an average price of less than $7/mBTU). Fourth, the company has plenty of reserves and has increased it's reserve replacement significantly over the years. All in all, Chesapeake is a great company with great management. Chesapeake's shares have soared 2300% since their 1993 debut; however, with a present value of proven reserves of $21.5 billion (344 million shares out.) and a mere $5.5 billion of debt, there is room for further appreciation. Also, at 8.6 times 2006 EPS estimates, there is a large enough margin of safety to ensure against painful short term declines in gas prices. Be sure to check out Chesapeake's recently-released 2005 earnings at their website: www.chesapeakeenergy.com.

Can you smell what the Chef is cooking?

2006-03-12T17:16:00.000-05:00

Although I have to admit that the recent 20% drop-off of TurboChef (OVEN) caught me by surprise, I am still very much a fan of this stock. To me, the product is simply too good not to make money in the long-term. Everyone from Subway to 5 star chef Charlie Trotter is crazy about the ovens that can cook a turkey in 12 min. The biggest problem for the stock has been unmet promises. Ever since the big Cramer pump-up in August, management has been promising new deals with Starbucks and Dunkin Donuts. Although both firms are still in negotiations, the recent conference call yielded no new exciting contracts. The only good news was the contract with HMS Host (airport food) and Kwik Trip (convenience store). Personally, I think the big money will come from the residential ovens. Go to the website and check out the promotion for the new home oven at turbochef.com (done by the same guys that do Apple's marketing). It is honestly the nicest oven I have ever seen. The big question is: does anyone actually want a $7000 oven? If yes, the stock is worth at least $50. If no, then I can see the stock at $2-4. For now, I think the stock will trade on contracts. Starbucks has 70 people working on a hot food rollout, so a big contract might come soon. If they get a big deal, the stock will go to $20. I expect they will in the next 3 months. Until then, the stock is looking pretty toasted.

Welcome

2006-03-12T13:10:00.000-05:00

I want to thank Kaveh and Matt for making the idea of an investment blog turn into a reality. Looking ahead, I hope this blog will serve as a place to share ideas about investing with people who love to invest.

Welcome!

2006-03-12T00:52:00.000-05:00

This blog belongs to the McGill Investment Club.

The McGill Investment Club (MIC) is a multi-faceted club, open to all students in all faculties, with two main components: an Investment Management side and an Investment Banking side. The club plays a major role in bridging the gap between the classroom and the financial workplace, and proudly supports the career preparation and development processes of McGill students. The MIC strives to help educate students about the financial markets via seminars, speaker-series, information sessions, newsletters, and forums on market-specific topics. It also takes part in stock-simulation competitions against other universities from across the country. Furthermore, the MIC runs and maintains a real stock portfolio and, in tandem with this portfolio, offers students the opportunity to be part of the club's stock analyst teams, who guide the buying and selling strategies, and thus are wholly implicated in the execution of the portfolio's strategy. Ultimately, the MIC offers unprecedented opportunities for students to engage in real-world decisions. The MIC is thus the conduit of information and the access point for any and all students on campus whom are interested in learning more about the financial markets.

Please visit our website at http://www.musonline.mcgill.ca/content/micnews.html