Fare thee well, Health Fitness

It has been a lucky month. One holding, Health Fitness, acquired by a third party; another, Overhill Farms, proving today (or so it appears) that sound cash management counts for something after all; no major portfolio blowups; and a handy performance in the last 10 days of January to beat the SPX.

Best of all, a bullet was dodged by avoiding Art Technology Group (mentioned here before as a potential holding). Hitherto a promising outfit for admirers of cash generation, management have decided - to my profound disappointment - to dilute shareholders by circa 20% with a massive cash call.

Clearly they are bent on buying something. But it is hard not to wonder about the cost of $240m odd of equity capital. The new bill for it all will settle around $10m-$12m annually (or between 30% and 40% of free cash flow). Course, you have to accept that equity actually has a cost in order to assign any weight to those numbers.

But there are other fish in the sea. Final decisions on the proceeds of the Health Fitness win to come post-Rasteau (the 'Excellent Value' tip of the moment and permit me to suggest Chapoutier's product).

End-2009 commentary: 'This aggression will not stand, man!'

Some holiday break, final 2009 thoughts and tit-bits:

• If on a Amsterdam-Detroit flight with a dodgy curry in the gut look forward to being described as “verbally aggressive” when the crew cut short your bog time and forcibly check your underpants for explosives.
• A single, inattentive blunder is all a competitive son requires to put an end to patronising chess “coaching”. When he’s nine this may send you back to strategy books.
• Three helpings is more than enough to show one's appreciation of the cook.
  
• If you need to get out of petro industry contractual obligations whilst working a mid-east war zone have colleagues tell the clingy hosts you already left. Then skip town on the next bus to Jordan.
• Considering a career in cosmetics television advertising? The phrase “collagen biospheres” will get you more airtime than your viewers will appreciate.
• The Slacker King not only gave the title of this post, he's still cool. Embrace it, man. But in light of point 1 maybe don't actually go in person to Amsterdam for the Good Stuff.
  

In other news, this was the year (pending December numbers) to ride the ‘Convertible & equity arbitrage’, ‘Latin American equity’ and ‘Technology’ waves in the alternative investment space (league table via Absolute return+alpha). These latter two are also comfortably the highest returning longer-term strategies (or so suggests the downloadable data AR make available).




For the purposes of this blog, vanilla US long/short returned a respectable 14% or so - which truly lets the smug-times roll for DBS (pending the inevitable disaster). But then vanilla probably has less volatility.

May 2010 keep you healthy, happy and curious (at least oeneologically-speaking)!

Short (and drink) 1977 Warre, long GSI Technology

SHORT 1977 WARRE'S
LONG GSIT@$4.42

Is this the year to open the '77 Warre's? Certainly little point leaving it behind in a dusty cellar for another 30 odd years during prime eating season.

Port is easy to understand (Wikipedia have one of their better entries on it) and its "vintage" incarnation has always been the outstanding bargain of wine world. And still is - the price of the 1977 is the same as it was 5 or 6 years ago (with a little shopping around). With that kind of price appreciation it better be delicious.

Some companies, it can be said, exhibit similar 'delicious' financial characteristics and remain similarly unloved. I have one before me that holds 30% of its share price in cash; has a free operating cash yield of over 13%; trades at x1.3 book; and has been profitable for the last 14 quarters. The last 14 quarters - not easy.

The cheapness, much like that for vintage port, can be explained by a perceived lack of 'sophistication' (OK, and size). GSI find it hard to explain that they are not producing a commodity product. They don't, if you like, just produce port - they also produce the equivalent of a quite special vintage port.

A few days ago, this perception problem appeared to change when the firm announced what appeared to be a technological breakthrough on performance. Cue massive buying followed a remarkable drawback - but on much lower volume. Short term plungers got theirs and done left. We could talk technical analysis guff about "the key $4.50 level" but it really won't matter a rat's backside to DBS.


Separately, the woes with the tracker continue. Where is the freaking portfolio?!! Plus, there can be no way that label in the picture is an original from 1977...

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Change of Portfolio tracker tool

There seems to be a dearth of simple, web-embeddable trackers covering international equities. The FT have the international bit covered but nothing easy to run in a web page. The new tool provisionally settled upon in the margin at right is from "Stockalicious" and does not solve this problem.

It does, however, appear to have a more complete database of US listings than its predecessor. Alongside this, wherever possible, the ADR or ADS for a foreign holding has been used after appropriate fx and size translations.

Stockalicious also has decent enough summary performance statistics and readily malleable graphs. Basic stuff but all at the click, in the DBS case, of a link.

NB: There are 4 round trip trades since August 2008 on the Toronto exchange not reflected after the adoption of this new tracker. All are closed for an aggregate loss of CAD$1661.

Tree hugger with wine stains? Have some FSI Inc. poly-aspartic acid!

Long FSI@$1.70

A striking feature of Flexible Solutions International is the - possibly unique - incentive scheme of its 87 year old Canadian director (national life expectancy, 80.6). This involves over a quarter of a million stock options, erm, expiring through 2011.

It helps that the son and inheritor (presumably) of said director is the CEO as well as the finance chief. Helps even more that Dad is one half of the compensation committee. And holds all the patents behind all the sales.

But this is an unusual company. Visit their homepage and be forgiven for thinking that their products consist principally of evaporation and heat loss inhibitors for swimming pools. There is no talk of anything else. Yet these lines represent a mere 10% of sales, a surprisingly large >50% of assets and a shocking (30)% drag on total profit in the 9 months to September.

It takes – and I’m not making this up – some effort to deduce that a small icon labelled “NanoChem” (leading to an even sparser website than the bare bones source) might be of interest in working out just how they make money.

Eventually, with Google/Edgar and conference call transcripts it emerges (painfully) that FSI is the only company making fully biodegradable chemicals for multiple industrial and agricultural uses. For example, wine lovers (or maybe just clumsy wine lovers) will admire the environmentally sound detergent ingredient they produce. Ironically, however (given that end use), it is the fertiliser market that appears to be the immediate sales booster.

In short, if you know what poly-aspartic acid is then you are ahead of the game (and to be congratulated). And if you were led to the first mover who manufactured it entirely renewably you might be, investably speaking, interested.

Suffice to say that the Canucks leading FSI have converted an old Albertan potato factory (Ed - thought they grew?) into the only production facility that performs this feat commercially. And all that in the last 3 months with a remarkable lack of fanfare.

A lot of narrative for a dinky by capitalisation bunch of chemists. Why they don’t engage in a little more market schmoozing - actually, make that any significant market schmoozing – is a lapse. And, for pater, could be bad news for those options.


NB: Once more, my chosen a portfolio tracker lets the side down: FSI is not its database. Suggestions welcome.

Other business: some swathing reductions in gold miner holdings as their end market begins to take on a look more usually associated with that of cocaine users.

This dog is mine

There is much shite - pyramidic deposits, in fact- concealing the essence of fine wine-making. It is the reason this blog mixes the subject with investing, a surprisingly similar parallel universe.

Once upon a time I thought terroir was the most - but not the all - of wine making. I gave shelter to similar, touchingly naive in retrospect, thoughts concerning the skills of company managers. If not a financial PR bitch I was certainly a paying punter.

I recall dismissing as exaggeration (fortunately in silence) the words of an older, wiser, experienced and (though unknown to me then) dying man who simply instructed that, first, comes the sun. And it is a factor of Pareto proportions.

If one is to be really fortunate that sun follows a wet, dismal winter. Something approaching perfection might then be achieved when the rain only falls in amounts sufficient to keep a bountiful harvest honest and on track.

And so it is with business.

These are (truly) truths obscured by a vast vested marketing interest whose efforts at persuasion are akin to a flea colony arguing over who owns and controls the dog.

So place not your faith in Robert Parker and the immense business he has unwittingly spawned. Nor be a slave to even the most sensible Bloomberg interviewees be they christened Rogers, Roach, Faber or El Erian.

As skilled as they may be, first, look to the sun.

"Whispers of french onion soup and strong-willed papaya"

I like these two greatly. Unfortunately, I always wonder about guru wine descriptions such as the "kiwi brightness" offered by Ms Gaiter - especially when being told that the said earthy kiwi (what?) of the white wine might match up well with a nice winter dish. Cassoulet, say ("creamy fried oysters" not getting much of a look-in come snow in my geography). Had I a superior palette maybe I could join the fun (took a shot in the title) but articulating wine pleasure is not a strength.

In this there are similarities to the holding forth in these pixels on any "market feelings". Fair to describe these comments as sparse or, even, constipated. So it was useful to find an apt spokesman in John Hussman with his his 19 October market commentary set around this well-chosen graph. Enjoy - though I doubt 1982 to 2000 is returning soon.

Underweighting Tartiflette, overweighting Syntroleum

I would dearly like to chat today about the profound dangers of embroidering tartiflette with excessively strong reblochon - even if a powerful and not entirely subtle Pic Saint Loup is to hand to restore some semblance of edibility to the result.

However, given the nature of this blog, I ought to find some non heavy-handed way of paralleling this saving-of-a-meal-by-a-blunted-as-a-result-red with the large fiscal stimuli coming on stream in 2010 with a vengeance (aimed at saving us from the hole in the Credit Machine dadidadida ad nauseam). Screw that.

More interestingly, hopefully, is a growing conviction that the synthetic fuel maker, Syntroleum, will break out successfully of its historic consulting role to become the first US producer of a non-food, residual-based superior biofuel.

Educated guessing a valuation based on Chinese peers (not truly apples to apples) could, improbably, extend to decimal places. More appropriate data (perhaps) is the company's forecast operating cash flow from next year: $15m-$20m provided crude averages higher than $60/barrel.

Add some conservative capex assumptions and that suggests a free cash yield of at least 4% - though I would suggest 'realistic optimists' could argue a ratio that approaches double digits.

Overweighting the existing holding by 50% at open.


Post script (1): additionals purchased @ $2.75 (2) WNC closed @ $2.77 for technical reasons.

House cleaning. And a rare geopolitical musing.

Not since buying kosher Sauternes has an investment been so disappointing. And that's from a list including a poor Italian red Frizzante and a (just the one) medicinal Greek (which did not heal the wounds).

It is of Carnival Corporation that I speak. Much research, deep loss. I am beginning to self-confirm through such events a personal bias that the first scan of accounts and sector is usually enough to tell one the essentials. Rather than breath the firm it might be a better idea to try a new grape before some agreeable vista with friends instead.

So Carnival will be phased out in this current dip. Some other house cleaning will also occur: Human Genome Sciences will be cut back by half; the AMD short will be added to (not buying the separation of factory from research activities as a winner); and both Colgate and Campbell longs will be scaled back a half. All in the name of taking some long bias out of the portfolio.

Final equity matters. Two longs on the radar for those who like advance warning: Art Technology Group, sound financials and not far off good value in cash yield terms; and OTC-quoted GeoVax a firm best described as a risk-laden binary play on a promising preventative HIV vaccine. They have the funding in grant form (as well as take up from ever-diluting stock issues). Very large potential meriting a small investment - but the latest news release demands extremely careful reading in order not to be carried away by the PR.

Meanwhile, what about broader matters? Away from market fluctuations a question that has sat in my mind for 4 years is Iran's ("alleged", must put that in) pursuit of nuclear weapons. It has been bubbling away for so long it forms only background noise in finacial terms. Yet there are some new headlines in addition to the continued - and simplistic - definition in many press reports that it is mainly an Israeli problem.

Some of the developments around the story that look potentially catalytic: the recent Iranian election shambles; a new US President not wanting to look like Bush Jnr; and bombastic rhetoric and actions from Tehran even as an international coalition coalesces against them (including, most surely, some silent Arab nations).

The constant is a political will in Israel to act even in the knowledge it only buys time. 2000kms may be a big ask but the question that troubles this observer is not "when will they act?" or "will they act?" Assuming the international talking shops pass them the shekel there is little alternative - and it is not only students of history that should grasp this. It is "what will the fallback option be for the only regional nuclear power if the job is botched or half done?" That is where the short odds result sits in my book.

Aurizon Mines, Northgate Minerals & CGA Mining

Long Northgate Minerals: NXG@$2.65
Long Aurizon Mines: AZK@$4.75
Long CGA Mining: CGX@$2.05


Last weekend, by a stroke of fortune, I shared a bottle of 1985 Sainte Croix du Mont with friends who 'discovered' the vintage hidden away in their cellar. This is one of those appellations that sits opposite far more illustrious neighbours (Sauternes and Barsac) and, consequently, is one of the greatest bargains in wine world (look up prices for a surprise) despite rivalling the giants across the Garonne for quality. The 1985 had aged well enough and was a magnificent unclouded golden colour. Sometimes it is worth passing on the real thing for an honourable and much cheaper substitute.

Gold, also a magnificent golden colour, is another 'real thing' difficult to get worked up about as an investment unless one is a raving inflation nutter. We are in a deflationary event. Maybe the inflation will come. Maybe not.

However, the last week has seen a clear technical preference for the metal and, despite the portfolio already containing one gold miner holding as a hedge, I add these three Canadian diggers evenly in one additional position.

It is possible to laud them individually but the idea boils down to politically calm geographies (bar CGX), Canadian accounting, robust cash yields and the feeling that their energy costs will fall in the near term thus boosting margins.


NB: Once again, the portfolio software on this page hits its limits and cannot take TSE listed CGA Mining. Very unfortunate for tracking purposes but there it is, with apologies.

Wabash National

Long WNC@$2.47

Now this is an interesting punt. A manufacturer of "semi-trailers". In this environment.

However, in July Wabash took on a $35m capital infusion from private equity firm, Lincolnshire Management. It is timely for the balance sheet at end June had become distinctly ragged despite what looks to have been some very careful cash management. Top line devastation can only be mitigated for so long.

This deal, which closed in August, tidies up the capital base. And the extraordinary late volume and price movement since its close (rather than since its announcement) speaks to both the fear that the deal would not make fruition and the confidence that Wabash is now well set to weather the economic storm with something in hand. Or at least it is hoped.

Separately, Wabash lost its CFO post-deal. Always worth looking at although in this case the reasons look to have been PR-ed to opacity. Possibly Lincolnshire wanted their own man, maybe the incumbent fought the agreement - but who knows.

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Syntroleum & Rentech

Long SYNM@$2.83

In the world of wine, Chaptal added sugar to Sauternes over two centuries ago to aid the fermentation process. And, of course, it opened the appellation's production process to abuse by inferior competitors.

But, in the world of synthetic (non-food) fuel, adulturation tends to provide benefits not crutches. In the case of use by aircraft it means lower fuel density (thus higher payloads) and lower emissions. More generally it is compatible with existing infrastructure (ethanol corrodes pipelines).

Synthetic fuel producers may arguably be part of a transitive technology in the renewable energy debate. They may have a chequered history (particularly where the economics of gas-to-liquids is concerned). But it appears their day may be here.

Rentech and Syntroleum are two of the 'major' players (if small caps can be thus described). DBS had the chance to buy the former at just 0.65 cents a share but passed on some, to his mind, questionable PR during the last quarterly results.

They are now $2.29 on the back of various announcements - most notably an agreement to supply ground vehicle fuel at Los Angeles airport from 2012. 2012 because they have not even broken ground on the factory to make the stuff. Nor is the financing fully in place.

Contrast with Syntroleum whose JV with Tyson is well advanced and ought to be producing from Q1 2010. They are one announcement away from a share price jump: the plant is up and running on time; achieving certification for use in airline engines; a first plant contract with a customer; and so on.

The squiggles are passable but this time it is the fundamentals and theme that carry the day.

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Health Fitness Corporation

Long FIT @$5.22

I return from holiday having hugely enjoyed visiting vineyards. An entirely different experience buying direct rather than via merchants. However, the tendency is to overindulge and put on the pounds.

Red, of course, is good, allegedly, for the heart. Or at least certain tests on certain fortunate mice suggest so. But prevention is the key to a long tasting career. That's the job of HealthFitness and their "health coaching" catchphrase. In a land of uncertain medical insurance coverage it is a convincing marketing point (if the accounts are anything to go on).

An earnings miss last month hurt the shares badly and technically the picture is miserable. Understandable after a stunning run that some might be disappointed. Yet the results are part of a continuing strong trend. Nearly everything is improved and free cash yield on a trailing basis is over 10%.

The tightfisted may wish to scale in but, over several reporting periods, there may be little point in penny-pinching the entry on such a solid operation.


NB: Portfolio software to the right not accepting the trade right now....

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Human Genome Sciences +230% in pre-market...

...as the first half of the benlysta clinical trial went well.

Maybe that pinotage was better than I thought...

Human Genome Sciences: D-Day, 20 July

Cut position 60% HGSI @$3.49

My wife bought two bottles of wine today. From Lidl. €1.99 each.

With some trepidation we tried the South African pinotage. I do not know how Lidl manage to ship this from the Cape for the price (or, for that matter, the other bottle from Chile). But it was not disgraced for what it was - a cheap, mass-targetted, one dimensional everyday drink which could sell for twice the price.

This brings me to HGSI. Nice little earner since January although it began poorly. At +75% it is giving me the feeling of the pinotage. It could double if the clinical news on Monday concerning its lupus drug, Benlysta, is favourable. Or it could half.

It would be nice to have some exposure, protect the downside and take out a small profit. Hence this cut in position.