Author: Yale Bock, Y H & C Investments
Covestor model: GARP
Disclosure: Long GIGM, DGI, CLGX, CASS, DLB, JMBA
September 2011 was another poor month for the portfolio, though not because of any specific company issues. The stock market was spooked by the sovereign debt issues in Europe and fears of another U.S. recession. If one reads what business people are saying, or are paying attention at all to anecdotal evidence, recession is not in the cards. I do not believe the economy is headed into recession, especially with lower oil and commodity prices. I think the economy will do what it has been doing, treading along at 1-3% GDP growth, depending on the quarter.
As for the portfolio, earnings season begins this week and in the same way companies get punished for uncertainty, they can be rewarded for outperformance - or even by not saying the business is in an uncertain state. One of the keys to trying to be successful in the stock market is sticking with things, not just when it is going well, but also when times are tough. Time will tell and I look forward to seeing the earnings reports over the next few months.
Covestor Portfolio: The Reasons for Owning the Portfolio Holdings
1. Gigamedia: The company reported it is expanding its development of the Spongebob game with MTV to include more of a global reach, and is also including distribution on smartphones (http://finance.yahoo.com/news/Viacom-International-Media-prnews-3896822874.html?x=0&.v=1). Investors are still waiting on the company to monetize their passive investment stakes which have appreciated in order to add cash to the balance sheet. The company’s founder Arthur Wang resigned from the board of directors. It is the same old story with this company - wait until the Asian business becomes profitable (if it does) and see what happens with SpongeBob in 2012, if it comes to fruition.
2. Digital Globe: The company reported revenues and earnings of (.01) cents per share for the 2nd Quarter of 2011 (http://finance.yahoo.com/news/DigitalGlobe-Reports-Second-bw-4262950129.html?x=0&.v=1) Quarterly revenue came in at almost $82 million, and for the first six months of 2011 versus 2010, cash flow from operations was up 84% to $105 million from $57 million. The thesis for owning DGI remains the same: private and public enterprises all over the globe shuld continue to demand high quality pictures from satellites due to security and legal issues. The stock got pounded in September and the company is now buying back its 10% bonds.
3. Corelogic: The stock got hammered in September and management has hired an investment banker to look at possible strategic alternatives. The company announced it is taking another $140 million write down on a marketing division, which is another indication they may be setting themselves up for a sale, possibly to private equity or another large information provider.
4. Cass Information Systems: The nation's leading provider of transportation, utility and telecom invoice payment and information services reported record second 2011 earnings of $.61 per diluted share, a 17% increase compared to the $.52 per diluted share it earned in the second quarter of 2010 (http://finance.yahoo.com/news/Cass-Information-Systems-Inc-bw-4240021420.html?x=0&.v=1) Net income increased to $5.7 million and revenues increased 12% to $26.6 million.
This is a very solid company in the transportation industry which has a long history of being shareholder friendly and I want to continue to own it. They should do even better if interest rates ever start to rise. The stock fell in September but has started to rebound a bit as of early October.
5. Dolby Laboratories: The company guided earnings for the rest of the year to $2.61-2.70 on a GAAP basis. Growth areas for the company continue to be the mobile, gaming, tablet, digital television, satellite television, and 3D markets, both domestically and globally. The majority of their revenues come from licensing entertainment products, which have huge operating, cash flow, and net margins.
The lingering issue here is the ability of the company to find growth areas away from its traditional strength, the PC market. The stock got hammered on earnings because the management mentioned it is possible they won’t be included in the Microsoft 8 operating system, as well as reducing their guidance downward. The company also resolved their lawsuit with RIM. If they have one or two better quarters, I’m hopeful the stock should perform much better, although it cannot perform much worse.
6. Jamba Juice - The Company reported it is maintaining its guidance for fiscal year 2011 with comp store sales up 2-4%, adjusted operating margins around 20%, and openings of 50-70 stores. If so, the company will have strung together four consecutive quarters of positive comp store sales, and their licensing and franchise divisions should really start to be a driver of better earnings over the next few years. 2012 should be a very good year for the company - provided they execute on their plans.