Sunday, September 17, 2017

Special Situations ideas for the week of 17 September 2017

If you need a full analysis/detailed write-up, please email on kedar@kedarcap.com . I will NOT respond to anonymous emails.

Shorting at $65.00 (43.9% upside) over 1 to 2 year investment horizon. BBY offers an attractive risk-return profile for an investor willing to wait before taking a short position. In spite of fundamental challenges to its business, an extra week of holiday sales, coupled with major share buybacks and short term margin improvement, are likely to push shares into making another year end high. Despite the recent sell off, BBY trades at a historical high multiple of 6x EBITDA and a forward P/E of close to 13x. This echo’s of a company whose investors expect it to continue to beat expectations – a sentiment I do not share. On the contrary, not so palatable results might be in the cards, as the tailwinds from ‘Renew Blue’ disappear, while BBY is simultaneously expected to make major reinvestments to find new growth opportunities, replace older revenue and capture more dollars per customer. The likely results? Top line growth, profit margins and cash flow will come under pressure resulting in a definite price correction. 

Monday, September 11, 2017

Special Situations ideas for the week of 11 September 2017

Those looking into some catalyst might want to ponder over these names for the week. I have done research on few of them, the other I have read online on Barron’s, WSJ, IBD, and other publications. If you have
questions, feel free to write to me on kedar@kedarcap.com

Market View: The August-to-November window of Year Seven has shown a strong downward bias, even when the extreme case of 1987 is omitted. S&P 500 might correct 6% - 8% correction, with Russell 2000 down 13% - 14%. We are already halfway there. With the completion of this sell off, there is a good chance of another up leg—which could be the bull market’s last. A standard balanced portfolio with 60% in the S&P 500 and 40% in 10-year Treasuries has generated 8% in annualized return since 1880. The same 60/40 mix over the past 138 years provided a median portfolio yield of 4.1%, with more than half generated by income. Today, the yield 2.1%. Stocks were more overvalued in early 2000 with bonds in the 2016. Today, both are overvalued and returns could be stuck between 3% - 4% over 10 years. Investors should be on the lookout for technical indicators for some red flags. A breakdown in markets before the final culmination is a process, not a quick reaction. In 1990 bull market peaked in 1998, yet the Nasdaq and the blue-chip indexes went up for another 2 years. The very disjointed price action of the past couple of weeks could be the beginning of a topping process. A short-term correction can be followed by a new rebound before the bull market comes to an end in sometime in 2018. There is already a slowdown in the auto market with single-family housing close to peaking out. Also, the banking sector, a barometer for the health of the overall economy is acting as one would expect toward the end of an expansion phase. FDIC in its quarterly said that that total loans and leases by banks and other insured institutions rose by just 3.7% from a year earlier; a third consecutive quarterly deceleration and is down from a 6.7% pace of growth a year ago. Credit-card charge-offs soared by 24.5% in the 2Q17 marking the seventh straight increase, however, charge-offs on loans to commercial and industrial borrowers, however, declined by 9.7%, possibly due to a recovering energy sector. Add to that the Federal Reserve unwind of its balance sheet and higher interest rates. With low interest rates far too long, the level at which the rates begin to bite can be lower than commonly believed. For example, a 10-year bond yield of 3% or 3.5% might be enough for investors to dump stocks as opposed to a 5.5% to 6%, in earlier days. Adding to all this is an assumption that nothing will be done to lower individual tax rates or corporate tax rates until much later in 2018 while companies are expected to face rising wage pressures. Moreover, annual nonfarm payroll employment growth has slowed to 1.5%. In the past, when you’ve approached that level, a recession has usually been on the 12-month horizon.

DowDuPont (DWDP: NYSE):
This story might not be completely over, even though the merger is complete. There are multiple ways to win as DWDP separates into at least three companies, each with a number of incremental independent paths to further increase shareholder value. On the merger level, the story, is still unfolding. Execution on $3bn of cost synergies and $1bn of growth synergies as the merged entity then breaks up into at least three companies’ remains to be seen. There is also an under-levered balance sheet to take advantage of as net debt/EBITDA stands at 1.5x. Materials Co. -- one of the expected spinoff companies -- is likely receiving a lower implied multiple due to markets being overly bearish on the ethylene cycle. This value will be unlocked as the cycle evolves and if DWDP separates and monetizes the commodity assets. Then comes the Ag Company as it shows earnings growth in the near future with stability in seed pricing and some improvement in crop chemistry inventory levels. With Syngenta delisted, and Monsanto acquired by Bayer, Ag Copany remains the only global publically traded pure play on seeds, biotech, and crop chemistry. On the Specialty Company, the CEO Ed Breen’s history, this company can see strategic activity and can be potentially sold. Given the cost synergies, the combined company trades at 9x EBITDA which might be a bit low, if an analysis is done based on sum-of-the-parts.