Oil prices, what is happening…

Since many weeks, oil prices are falling. Everyone is eagerly watching market and some are in panic for these events specially in countries where economy is based on natural resources e.g. Canada. In Canada this year so far many have lost their job and specially Alberta has suffered a lot due to dip in oil prices. But, there is an interesting question what may be the bottom of oil price?

Some people believe that it has reached bottom but some do not and believe that it might hit $12! In my opinion, oil might go down as there are political disturbance in European region specially Russia, Iran and Middle East. These countries have power to change the oil prices and one of the major reason why oil went down too much low because of excess supply of crude oil from these countries at lower prices.

Crude oil has been declined more than 50% in last one year with very sharp decline in last 8 months. What it means? Is it an indication for global economy slowdown? There are many such questions arises.

We need to consider what drives the oil prices beyond supply and demand. Let’s see who are major producers of oil – Saudi, Iran, Russia, and Canada. USA was mainly consumer and was importing oil but in recently it is becoming oil producer as well. So in general it can be think of that one of the biggest buyer is turning into a seller. What is gonna happen to commodity? simple, less demand and more supply driving prices lower. But it does not mean that it is indication of global slowdown. However, it needs to consider a major impact for global economy due to oil/energy.

Second point is that demand in China for energy increasing but is that significant increase to cover up demand due to USA? It is difficult to say at this point. However if demand for energy keep soaring in China and other Asian countries, it may lead oil prices to new heights in coming future. Various economic sources say that Chinese economy is slowing down. Keeping this fact in mind, one should not be very optimistic for oil prices to boost up in near future.

One also need to watch out political changes happening which indirectly may affect oil production in Saudi Arabia which is world’s largest oil producer with the capacity to pump more than 12 million barrels of crude oil if needed.

China, Japan and South Korea are world’s huge importers of oil. If there is even slight drop in their import e.g. 1%, it will save billions of dollars on their balance sheet. Japan is struggling with their trade deficit already.

From an academic view, market is solving demand and supply equation in new ways. There is more oil coming into the market then its demand due to oil production in USA, coming back of Libyan oil production after Quaddfi turmoil.

In simple terms, global political disturbances have significant power to change oil demand and supply equation which is one of the major point in oil market ups and down.

What do you think?

– hr

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What is happening with Oi telecom (NYSE: OIBR)

There is so much going on with this stock and recently this company is in picture with very high volume and too much volatility concerned with its future. We are actively watching this stock and recent news related to this company since many months now. Here are some thoughts:

First of all we need to understand the telecom market in Brazil. Oi is the third largest telecom company in Brazil and south America. Oi was formed when government decided to merge state owned smaller telecom companies during privatization of Brazil telecommunications system. Oi brands include: Oi Fixo (fixed telephone landline services), Oi Movil (mobile services), Oi Velox (ADSL 3G), Oi Internet (ISP), Oi Wi-Fi, Oi TV, Oi VOIP. Oi acquired Portugal telecom in 2013 and as it turn out that it was not a very good deal financially. Not every company is successful in mergers and acquisitions specially when the sold out company does not clearly discloses it’s liabilities. Similar things happened with this merger. Portugal telecom lost in billions due to its bad bet to acquire another company. This fact was it came in news was hidden from Oi officers and they did not take this into account when making offer. The result is company had to suffer financially. Second, there were political disturbances in Brazil which increased pain for the company. As it happens people take panic and start selling. The end result was that stock fall down beyond expectations.

However, we believe that Oi is survivor. As it is indicated by company management in recent months that they are aggressively looking to gain more market share and attempting to acquire other companies. For some reason their deal to acquire assets of Italian telecom company did not go well. That’s all right. Some other opportunity will come along. It does not mean that people start taking panic and loose trust in company. As we know that company is taking all necessary steps including reorganization to make sure that they want to be on profitable track again. We believe in Oi! Its just time and very soon we hope that stock will hit back to its peaks.

Now, lets see what consumers say. We have done some research and found that their customer service is excellent which is a good factor to attract more and more consumers and they also have very competitive rates for their services. The Brazilian and Portuguese operations continued to add total subscribers with approximate 75 million in Brazil and 13.1 million in Portugal till to date of writing. There may be some competition from GVT now specially when it acquired assets of Italian company Telefonica. However this is not to be take too much to worry as Oi has deeper market penetration and user support. It will take more time to get GVT complete. The only worry for Oi is its liabilities. Oi management is doing all their best to Oi’s debt. Due to bad financial deal of PT telecom, Oi seem to be struggling for now in terms of finances. WE also have to look another factor that there may be some possibility that other telecom company may buy PT assets and repay back PT’s debt. If that happens then who knows within days Oi stock bumps up to its highest. Think about it!

Now let’s see at financials of the company. Oi’s current market cap is about 5B USD, EBTID margin 27.94, ROE 11.9. There can be upward trend found in total revenue in last 3 years. The profit margin is on declining trend. That is because of company is buying other companies and some bad debts. Net income growth is last 3 years is about 14% and on upward trend. Total equity is almost unchanged since last three years. Since there are long term debts which can be a risk. Company’s debt to asset ratio is about 50 percent which is a sign of worry. However as we said earlier some bad decision company had taken recently which is penalizing balance sheet. Nevertheless Pt deal was not that bad either. It added more customers to company’s existing customers base. And sooner or later company will benefit financially because of more subscribers. Company’s cash flow is in good conditions for next 3 years and by that time it will accumulate more revenue to pay back its long term debts.

oibr-chart-balancesheet oibr-chart-cashflow oibr-chart-income

(charts courtesy google finance)

In Brazil, Oi now has more that 18 million lines in service making it the largest fixed line provider in Brazil. Its wireless operation, Oi movil has more than 50 million subscriber and continues adding more customers and Oi is the fourth largest cellular provider with 18% market share.

A final note, since company has a very large base, any company who wants to strengthen their presence in Brazil and South America with money on hand may be very much interested in buying out Oi telecom if Oi is not able to pay back it’s liabilities, for example Amêrica Môvil.

We recommend to buy this stock (NYSE: OIBR) and hold it!!

Hope you have enjoyed our two cents. Do not forget to leave your comments 🙂

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American Apparel Inc. (NYSEMKT: APP) stock future outlook?

Since last few weeks American Apparel Inc. (NYSEMKT: APP) is in news and one can see average trading volume is in the range of ~5 million!!

There is a lot going on behind the scene. One can see  -20% to +20 fluctuations in stock price just because of some market news. Last week board of APP fired its founder and CEO. There is certainly much going on in this company. Let’s see what it means from stock perspective.

In Dec 2007, APP stock was at its peak trading at ~ US $15. Since Jan 2008, it started declining and never got a chance to cross even $5 mark. APP went into loss and to keep running the company company had to take debt. Some long term debts are going to mature very soon and in fact one lender Lion’s capital gave a kind of hard notice to repay back. Due to its brand and good will, APP attracted some foreign investors who trusted in APP brand and invested their capital in the company. Personally I think, APP brand is unique and I find APP has a quality as compared to its competitors. I like the designer cloths by APP and most importantly APP supports “no sweat shop”. Ethically APP is doing right. What is the point to support the system where workers are exploited whether it is in America or other pat of the world. Just think about it? Just wear the shoe of a worker who even does not get 50 cents a day? Is it ethical?

However many clothing companies which include very large corporations do not think this way. I think they are promoting the system where wealthy individuals exploit cheap labor in Asian countries. Also, one can see the quality of cloths manufactured in those sweat shops. These cloths do not have any quality!  these cloths are like use and throw. On one wash, their color fades away, cloths looks too dirty and old that its hard to wear.

But lets focus our attention to future outlook of APP. There had been some mistakes done by APP’s ex-CEO in past which lead company into nearly bankruptcy territoriality. However its nothing to worry about it now. We believe that new management will work on to strengthen APP’s balance sheet. In last quarter, APP made significant profit with a revenue of aprox. 139 million and sales growth of ~2.5%. We think this trend will keep going forward for APP. APP has significant high beta but need to consider that in the hands of new management there are better chance that APP financial condition will improve.

APP ex-CEO has a very eye for design but he may not be good in terms of finances. But new management will focus on financial management. We think APP stock is a long term bet. There are short term bullish kind of behavior of APP stock but one needs to be patient enough and have faith in APP brand.

(P.S. image courtesy from yahoo finance)

Let’s know what do you think. Your comments are most welcome!

Have a cheerful day!

-hr

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Hedge fund strategies – what theory says!

Hedge funds have become very popular among very wealthy communities as preferred medium of investment. To our knowledge there is no standard definition of hedge funds but common characteristics of hedge fund are: private investment fund which invest in variety of asset classes and employs a great variety of investment strategies.

Even during 2008 market crash returns reported by top hedge funds were in the range of ~ 20%-30%. Where many mutual funds, stock investments and other forms of investment vehicles went off track, hedge funds proved themselves more immune to market crash.

It is difficult to get insight into strategies what top hedge funds follow in details because of typical trade secret paradigm. Most hedge fund managers keep secrets to themselves like a magic formula. However one can look into theoretical aspects what researchers explored over the period of time and can make their own strategies. In this article we try to highlight some of the theoretical methods published in literature. Let’s have a look at most common hedge fund strategies fund managers tend to follow:

  • Equity long-short
  • Event driven and special situation
  • Merge arbitrage or risk arbitrage
  • Distressed securities
  • Macro investing
  • Fixed-income arbitrage
  • Emerging markets
  • Equity market neutral
  • Sector
  • Growth
  • Value

It depends on fund manager’s taste or preferences what strategies they like to follow. One may think of mixing different strategies based on their risk level. For example a cautious investor would like to take value investing approach which many give low returns but less risky in terms of devaluating asset value. On the other hand aggressive investor may think of investing in growth companies with high P/E and/or emerging markets where there is a good potential to make more than 100% returns.

Since emerging markets tend to be more volatile than developed, it might need a detailed analysis preferable by local analyst before taking investment decisions. On the up side in those markets the potential of growth is very big. Sometimes special situation like mergers & acquisitions (M&A) may lead to good returns in very short time. There may be couple of points worth looking at in case of M&A, e.g. what is probability for merger. If probability is very high, going long in the company which is being acquired may benefit otherwise going short. It totally depends on the assessment of the market news. Companies in distress financial situations often do restructuring or reorganization.

Such news of restructuring often lead to price disparity in the market. Negative news often provoke widespread investor sell-off of the stock when few investors are willing to invest resulting in market devaluations. Often these times, if one focus on fundamental analysis and carefully do reanalysis of the stock, one may think of investing or pull out of investments locking more profits. Macro investing approaches take into consideration macro-economic factors. Macro investors often look for investments in bonds, currencies and hedge to make more profits.

Macro investing is more prone to political-economic situations of a country. Macro investing strategy focus on “big picture” analysis approach with political-economic considerations into analysis. For example price disparity due to geo-political situation can be identified in U.S. 10 years bonds and U.K. 10 years bonds. Some fund managers use tactical strategies which may use variety of investments e.g. commodities, forex, high frequency trading, derivative, options trading etc.

According to theoretical researchers they find empirical evidences for long/short strategy funds that these get benefit from shortening the positioning as compared to long bias funds (W. Fung et. al., 2011).

Goetzmann et. al. finds empirical evidences that Sharpe ratio of funds of funds index ranges from 0.31 to 0.39 in-spite of having too much differences in mean returns, which suggests that reward to the risk ratio for hedge fund investment has remain surprisingly constant. Their data suggests that most of the fund managers used fundamental and directional strategies with least standard deviation in returns for fundamental strategies and most for event driven strategies.

Brooks and Kat (2002) argued that the serial correlation of the hedge funds returns seems inconsistent with the notion of efficient markets.

There is more theoretical research needed in order to understand more about what are better strategies for better returns one can follow.


References:

  • Gregory Connor et. al., An introductions to hedge funds, London School of Economics.
  • William Fung. et. al. The risk in hedge fund strategies: Theory and evidence from long/Short equity hedge funds,  Journal of Finance
  • W. N. Goetzmann and Stephen A. Ross, Hedge Funds: Theory and performance, MIT.
  • Brooks et. al. The statistical properties of hedge fund index returns and their implications for investors, Journal of Alternative Investment.

 

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Apple stock split?

Today afternoon when I checked my portfolio, I was a bit shocked to see Apple Inc. (NASDAQ: AAPL) trading around ~ US$97 which was about ~ US$700 last week. Then I realized that its stock split has taken place which was announced a few months earlier. Apple’s stock went for 7-for-1 stock split thus creating more shares to offer to investors. In this split each 1 share holder will be awarded 6 more shares. Simultaneously the price of each stock will be divided by 7. To keep math simple, if you have 100 share worth ~US$70000 on friday, you will have 700 shares worth ~US$100. Your total value of holdings will be same and you will have more number of shares at lower price.

This is after 9 years when Apple’s stock has split. It happened earlier on three occasions, on a 2-for-1 basis in 1987, 2000, and 2005. Apple’s driving officers found telling that Apple wants to reach to more people and within their range. Lower the price, it uplifts psychological barrier in the mind of common investors who think that now its cheap to buy. This is purely psychological syndrome, math remains same. One needs to be careful biasing their decisions based on such events.

We expect that there will be a bullish reaction in the market and more people might jump into buying without much thinking and analyzing fundamentals. Apple is a darling brand of millions of people around the world but it does not mean that darling brand is good enough to give good returns on investments. One needs to watch out.

In recent years, Apple is facing a lot of competitions from other brands which are offering almost similar kind of devices at lower cost. Apple if finding hard to keep innovations going at same pace. After all technology has its own limitations. You might have seen news that Apple is on hunt to find new companies to acquire and keep itself in the race of innovations. However in recent years, you may not see much add ons in Apple products for the price it sells. Here is the hitch!! What if market reacts a bit badly, Apple stock loose its value. It happened in past, Apple stock was trading at ~US$1000 and suddenly it went down and even touched US$360 mark in two years just because of a some huge funds pulled of their investments from Apple and market took a panic. People started selling their shares and overall result Apple stock hit lowest in last few years.

It might be that Apple management is thinking that similar thing might happen after their WWDC which recently concluded as there was not much attraction or planned innovations in coming future. Bringing price below US$100 breaks a psychological barrier in people’s mind and more and more people might attracted to consider Apple as viable investment options. Thus increasing the investors base. However we fee a bit of greediness in this decision. Apple management seem to becoming too greedy which may be harmful in long run. Apple guys watch it out! Greedy destroys big kingdoms!

Now let us look at fundamentals:

Apple stock has strong fundamentals with P/E of ~15.7, dividend yield of ~3% and beta of 0.93. It’s P/B ratio is about ~4.6 which is okay for a technology company. Long term debt to equity is about 14.1 which is not bad either. ROI for last 5 years is about 30%, which is pretty good. However need to watch out its growth prospects. The US$45.5 billion in revenue reported in last quarter is about 4% increase than the revenue reported in the same quarter last year. If we look at upcoming product line, we find that there is no new innovative products coming in next few months. For some reason, company’s business deteriorated rapidly most recently. Not to mention Samsung, Google, LG, HTC etc. are giving though fight to Apple. The company’s profit margin’s have been shrinking since last three quarters rapidly. This gives an alarm!! Something mess is cooking in the management.

Note that Apple is one of our favourite company, but being favourite is because of its products not because of its managements. So, its a question whether I like to put my money in a vehicle which is driven by poor management or rather invest somewhere else where management is efficient and honest enough!

Apple’s current market value is ~4% than its book value. The valuation seems attractive. Its price-to-sales ratio is about 3.17% which is slightly than computer hardware industry ~1.6%.  Company’s cash flow is well managed with US$137 billion cash on its books. Impressive!

Since the stock split happened today, it will have too much volatility in the market towards Apple stock. The investors who are seriously thinking to invest in Apple may wait for the tide to go over. After that there will be clear indication about who much water is beneath. We expect Apple may dip down in range to 60~70 before starts gaining upwards.

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Investment in Bonds: is it a good idea?

Present economic situation is presenting a hard challenge for bond investors. Yield of government bonds is going down. There is a significant amount volatility is present with bond investment now a days. There is threat of interest rate volatility, longer term infaltion, and ongoing European debt crises for bond investors. This is a very difficult time.

However bonds remain a very valuable source of income and diversification available to investors and are part of most investment houses. Thanks to government efforts to strengthen economic recovery by keeping rates low, bond investors are sailing in grey area.

Analysts predictions for bond investors are also not in favour of long term investment in bonds. Bond investors need to be prepared for rainy days ahead in future. Governments around the globe are facing challenge for keeping economic recovery stimulus going but they may withdraw any time.

What it means that it is a signal for everyone to get out of here. Wall street firms and well known market strategists are giving alarming signals towards investing in bonds. This might be a difficult situations specially for retirees, who often put a major portion of their savings in bonds as safe investment.

There are rumours that fed may rise the interest rates in USA. What it means that bond prices will go down. Right now almost kinds of bonds, from government securities to corporate treasury notes are hitting their low peaks.

This means that troubling times are ahead for bond investors. For example $1000 invested in 10-year bonds will loose $200 in value for a 2% increase in interest rate. Italian bonds advanced after drooping from a six week high with a 10-year yield bond after the nation met its target amount in a debt auction.

We speculate that € will rise in demand versus major other currencies. 10-year bond yield fell 0.05% downt to 4.14% after climbing to 4.23%, the highest since April 19. Italy auctioned 3B € of bonds due in May 2023 at an average yield of 4.14%.

 

However its not that bad. Some countries are doing very good in present times and hopefully will continue doing that. One of such country is Germany. Germany is such a country which is famous for their engineering, hard-working people, honesty and loyalty.

German bonds are known bunds (in Deutsch). Bunds maturity range from 2 to 30 years typically. The German government bunds are considered a gold benchmark in Germany. However European economy is facing a challenge now a days.

Germany seem to be a rock stable no matter what happens with other countries in european union. The 10-year bunds yield 1.85 according to Bloomberg. Which is considered to be very good considering current economic situation. Germany maintains AAA rating which is a very good indication about the stability and low volatility for German bunds.

German bunds sold off quickly in Jan. During the last twelve months, German bunds yield advanced 0.36 percent. However, the recent downgrade of the United States debt rating and the on-going sovereign debt crisis in the European Union has cast serious doubts into risk-free assumptions for bond-market.

German economy grew by approximately 0.1 percent in last quarter after a sharp decline in end of 2012. Recent updates about German economy suggest that there will be modest growth in 2013.

 

In the end it depends on personal risk level. One needs to ask with themselves – Where my money is going? Is it worth investing in that country’s government? How much risk avers am I?

 

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AMD bouncing back?

AMD was struggling since few months and investors were skeptical about whether to invest in this company or not to invest. Since few months its stock was depressed. Since PC sales was declined in past months, AMD was not looking good. Howvever the scenario looks a bit different now and favours AMD.

AMD is a solid engineering company. AMD has a great technology and is a leader in gaming chipset market. Major gaming device manufacturing companies (Microsoft, Nintendo, Sony, Apple) are using AMD’s graphics chipset. Considering the future outlook of the gaming market and graphics chipset providers, AMD has direct competition with NVIDIA. However AMD’s graphics chipsets are more energy efficient than others which is a major factor (You would not want your device run out of battery in a gaming battle ;-)). There are many other factors why low power chips are preferred. One can go deep into engineering comparisons (e.g. device heating, reliability, life, performance etc.)

AMD is trading at $3.28 and we expect it to rise. The company has reported positive results in third quarter of 2013 beating the market expectations. The boosting sale of gaming consoles benefited AMD and the trend looks going forward. (http://www.bloomberg.com/news/2013-10-02/worldwide-video-game-console-sales-to-rise-in-2013-idc-projects.html). AMD reported its third quarter results with revenue increasing 26 percent quarter-over-quarter and 15 percent year-over-year. The company reported $48 million profit as compared to loss of $150 million a year earlier.

(snapshot taken on Nov 11, 2013 at 13.04 hrs (Eastern daylight time), courtesy: yahoo finance)

There are many other good reasons to invest in AMD. AMD is also a leader in server chipsets. The growth of cloud computing and big data centres will benefit AMD. AMD’s SeaMicro system is most energy efficient server in the market. AMD is continuing technology innovation in the areas of server, gaming chipsets which we expect is the right direction for the company to go for AMD.

AMD uses SOI technology (silicon-on-insulator) technology which offers significant advantages over bulk silicon technology which many other chip manufacturers uses: reduce parasitics, higher performance, lower power consumption, no latch-up (no extra circuity to prevent latchup, reduce area), increased density, low complexity process, reduced cross-talk, cold-sparing capability (higher system reliability). At nanoscale geometries (below 45nm) SOI technology offers great advantages over bulk silicon. As we see the future chipsets are coming at these nano-scale geometries, AMD has certainly an edge.

The sale of gaming consoles have given a boost to AMD. It has its processors in all major gaming consoles. Microsoft has highly customized its processors for their X-Box playstation. AMD’s Radeon brand processing units have always been favourite for gamers. AMD beats rival NVIDIA in gaming consoles.

We find from various sources that gaming revenue could cross $1B in 2014 which will turn out to be a clear win of those companies who are involved in the business. Since AMD is ahead of its competitors it will be a clear win if market projections are right. Nevertheless we suggest to buy AMD at the current price and expect it to rise up to ~10 in 4-5 months and at that time sell.

AMD’s accelerated Processing Units (APU) combine high performance processing cores (like many other competing mobile chipset vendors) enabling breakthroughs in visual computing, security, performance-per-watt and device form factor. AMD is clearly going to win in near future. AMD’s certainly has capabilities for a game changer.

We recommend to buy AMD at this current price $3.28 and hold it for few months. We expect that it will rise and be in range of ~ $10 in coming few months.

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Top performing Hedge Funds!

Hedge fund have been very successful in past to attract high worth investors. In a recent report by hedge fund research (www.hedgefundresearch.com), the total AUM (Assets Under Management) grew more than $2.4 trillion and held by more than 10,000 funds worldwide.

In the last quarter the inflow of money to Hedge funds was more than $55 billion. This is remarkable record for the industry. Recent inflow indicates a change in hedge fund strategies specially for the event driven strategies. With sharper rise in bond yields, investors preferences have been changed for credit and interest rate sensitive events.

HFRI Equity hedge index gained by 5.3 percent in the first half and looks for brighter future. Technology, healthcare and fundamental value funds gained 8.9, 8.9, and 8.6 percent respectively.

The cash-flow happened for almost all funds more than $500 million under management. In addition to cash-flow, the number of funds has also been increased. “Hedge fund managers and investors continue to position for a post-QE environment dominated by fundamental, mean-reverting and trend-following factors, with these in contrast to the macro policy and stimulus-dominated environment of recent quarters,” said Kenneth Heinz, president of HFR.

 

Top performing hedge funds to date

 

  • Metacapital Mortgage Opportunities: Metacapital Management | USA | $1B | YTD Returns: 37.8 % | Mortgage-backed arbitrage
  • Pine River Fixed Income: Pine River Capital Management | USA | $3.6B | YTD Returns: 32.9 % | Mortgage-backed arbitrage
  • CQS Directional Opportunities: CQS | UK | $1.5B | YTD Returns: 28.9 % | Multistrategy
  • Pine River Liquid Mortgage: Jiayi Chen Pine River Capital Management | USA | $1.1B | YTD Returns: 28.0 % | Mortgage-based arbitrage
  • Omega Overseas Partners A: Omega Advisors | USA | $1.4B | YTD Returns: 24.4 % | Long-Short
  • Odey European: Odey Asset Management | UK | $1.8B | YTD Returns: 24.1 % | Macro
  • Marathon Securitized Credit: Marathon Assets | USA | $1.2B | YTD Returns: 24.0 % | Asset Backed
  • Palomino: Appaloosa Management | USA | $4.9B | YTD Returns: 24.0 % | Multistrategy
  • BTG Pactual GEMM | USA | $3.6B | YTD Returns: 23.1 % | Macro
  • Third Point Ultra | USA | $1.3B | YTD Returns: 22.1 % | Multistrategy
  • Seer Capital Partners | USA | $1.2B | YTD Returns: 21.6 % | Asset backed
  • Tiger Global | USA | $6.0B | YTD Returns: 21.0 % | Long-Short
  • Eminence | Eminence Capital | USA | $3.0B | YTD Returns: 20.9 % | Long-Short
  • Jana Master | Jana PArtners | USA | $3.8B | YTD Returns: 20.4 % | Event driven
  • Structured Servicing Holdings | Structured Portfolio | USA | $1.9B | YTD Returns: 20.3 % | Mortgage-backed arbitrage
  • Citadel Tactical Trading | Citadel Advisors | USA | $1.0B | YTD Returns: 20.0 % | Long/Short
  • Viking Long | Viking Global Investors | USA | $1.7B | YTD Returns: 19.4 % | Long biased
  • Cerberus RMBS Opportunities | Cerberus Capital | USA | $1.7B | YTD Returns: 19.0 % | Distressed
  • Liber Max Partners | LiberMax Capital | USA | $2.3B | YTD Returns: 18.5 % | Structured Credit
  • Pine River | Pine River Capital | USA | $1.6B | YTD Returns: 18.5 % | Multistrategy

 

 

Sources: Bloomberg.

 

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Columbia Laboratories (NYSE: CBRX)

Summary:

Founded: 1986

Business areas: R&D, drug discovery, women healthcare, infertility and harmonal deficiencies.

Employees: 11 (aprox.)

Financials (in millions otherwise stated):

 

  2012 2011 2010
Revenue $25.8 $43.1 $45.7
Gross profit $13.04 $31.36 $36.65
Income(Loss) $9.9 $20.5 $(21.8)
Total Assets $36.93 $36.08 $29.85
Cash Flow $3.08 $(11.51) $6.87
Price to book ratio $1.98 $0.92 $
Dividends 0 0 0
Employees 11 14 24
Earnings/Share 0.11 0.24 (0.30)

Highlights:

CBRX is in the business of research and development of special kind of drugs targeted to women’s health care. To date, they have developed six products: ive bioadhesive vaginal gel products that provide patient- friendly solutions for infertility, pregnancy support, amenorrhea, and other women’s health conditions, and a bioadhesive buccal system for male hypogonadism – CRINONE 8%, CRINONE 4%, STRIANT, Replens Vaginal Moisturizer, RepHresh Vaginal gel, Advantage-S, Legatrin PM. CBRX net revenue comes from 1) net product revenue 2) Royalty revenues.

On March 3, 2010 the company and Actavis entered into a purchase and collaboration agreement. Actavis transaction closed on July 2, 2010. In consideration for the sale of purchased assets and shares (11.2 million) Actavis paid the company $47 million in cash. Actavis agreed to make royalty payments to the company of 10 to 20 percent of annual sale of certain Progesterone products until at least 2020. The parties entered into various ancillary agreements.

CRINONE is sold outside US by Merck Serono S.A. in almost 60 countries. Miphram S.p.A sells STRIANT in Italy. In June 2004, Lil’ Drug Store Products Inc. entered into a five year agreement for RepHresh Vaginal Gel and foreign sales of Replens Vaginal Moisturizer. In Sept. 2007 CBRX and Ascend entered into a five year license and supply agreement for PROCHIVE 4% progesterone gel. In April 2011, March 2011, and July 2011 the Company entered into license agreements for the Company’s STRIANT testosterone product with Actient Pharmaceuticals LLC, The Urology Company Ltd, and Invaron Pharmaceuticals, Inc., for the U.S., Europe, and Canada, respectively. The Company is currently engaged solely in one business segment — the development, licensing, manufacturing and sale of pharmaceutical products.

Looking at marketing strategies it is evident that company is in collaboration with partners who have strong presence in country specific market. This is a cool business model with low cost and just to focus on research and development activity and eat royalties.

Risk Factors:

The major risk for the company’s business if it fails in research and development. Do R&D, sell license and make money via royalties is the main business theme of CBRX which in fact is very good considering marketing risks and various costs involved in that process. The Company spent $0.8 million in 2012, $2.8 million in 2011, and $8.6 million in 2010 on research and development activities. Generally company’s drug development activity takes three major stpes: 1) Company formulates an active drug ingredient into BDS 2) files IND (Investigational New Drug) application and waits for FDA approval 3) Company does clinical studies. Following all the major steps company and its development partners analyze the data and demonstrate its safety and effectiveness. After that drug comes into market.

(snapshot taken on July 03, 2013 at 1.18pm (Eastern daylight time), courtesy: yahoo finance)

Financial Analysis:

CBRX’s net revenue was $25.8 million at the end of fiscal year 2012 as compared to $43.01 million in 2011 and $45.6 million in 2010. There is a declining trend observed in net revenue. The similar negative trend is observed in gross profits which were $13.04 million at end of fiscal year 2012 as compared to $31.37 million in 2011 and $36.67 million in 2010.

However net profit(loss) from continuing operation says different story. CBRX’s net profit(loss) from continuing operation was reported negative ($21) million at the end of fiscal year 2010 as compared to positive $20.52 million in 2011 and positive $9.9 million in 2012. Company loss money in forming strategic alliances but fortunately come back in following years. This is a positive sign. The similar trend is observed in comprehensive income as well. CBRX’s comprehensive income was reported negative ($21.83 million) at the end of fiscal year 2010 as compared to positive $20.43 million in 2011 and $10.09 million in 2012.

CBRX’s total assets were $34.13 million at end of fiscal year 2011 as compared to $35.9 million in 2012. The total assets has grown by 5% in 2012. There is an upward trend observed in total assets. CBRX’s total liabilities were reduced from $14.85 million in 2011 to $5.02 million in 2012. This is a positive sign.

Another thing to be noted that at present company is not in debt which is a very good sign in the favor of investment into this company.

CBRX’s interest income are increased in 2012 to $238.03 thousands as compared to $107.25 thousands in 2011 and $28.84 thousands in 2009. Interest income increased by almost 100% in 2012. The company gets tax benefits from state government for research and development activities as well.

CBRX’s shareholder’s equity was increased by almost 50% to $31.36 million as compared to $20.63 million in 2011. There is a growth pattern found in the cash and cash euivalents at the end of fiscal year 2012 as compared to 2011. In Dec, 2012 cash and cash equivalent were $13.20 million as compared to $10.11 million in 2011. These are increased by almost 30 percent.

CBRX’s financial leverage (liabilities/assets) was found to be 14% at the end of fiscal year 2012 and 41% in 2011 (see figure). There is a decresing trend in financial leverage which is a good sign. The current ratio (current assets / current liabilities) at the end of fiscal year 2012 was 538% as compared to 514% in 2011. CBRX’s ROE is almost 21% which is above average.

Conclusions and Recommendations:

CBRX performed well to recover from economic crises and its internal shortcomings of 2010 and showed improved performance. Currently common stock of CBRX is trading at $0.68 per share on stock market (52 weeks range: 0.55 – 1.23). The company was in loss in 2010 and was able to come back in 2012. Currently it has no debt. Since last sixmonths its stock is on progressive trend as well. The business model which this small company is ver good in nature with very low cost and higher profits (royalties based revenues). Its current P/E ration is roughly 11.71 with beta 1.54. Company has strategis partners across the globe for marketing its innovative drugs. We this this is a good investment for short term (~6-8 months).

 

 

 

 

References:

Form 10-K, Annual report Columbia Laboratories Inc., Fiscal year ended Dec 31, 2012.

 

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Rusal Inc. (EURONEXT: RUSAL)

Summary:

Year founded: 2007

Business areas: Aluminum, Alumina, Bauxite.

Employees: 71000 (aprox.)

Financials:

  2011 2010 2009
Revenue $12,291 $10,979 $8,165
Income(Loss) $1,794 $2,031 $(63)
Dividends 0.0 0.0 0.0
Total Assets $25,345 $26,525 $23,886
Cash Flow $2,193 $2,261 $1,365

 

Key Strengths:

Rusal has 16 aluminum smelters which are located in four countries – Russia (13 plants), Ukraine (1 plant), Sweden (1 plant), and Nigeria (1 plant). It has access to low-cost and relatively abundant hydro power generation. Rusal has 12 alumina refineries which are located in 6 countries – Ireland (1 plant), Jamaica (2 plants), Ukraine (2 plants), Italy (1 plant), Russia (4 plants), Guinea (1 plant). Rusal’s Mining assets comprise 16 mines and mine complexes, including eight bauxite mines, two quartzite mines, one fluorite mine, two coal mines, one nepheline syenite mine and two limestone mines.

Rusal’s 5.13% shareholding in Norilsk Nickel, the world’s largest nickel and palladium producer and one of the leading producers of platinum and copper.

Risk Factors:

Rusal’s business, financial condition or results of operations may be impacted by a number of risk factors including exposure to o interest rate risk due to interest rate fluctuations in the floating rate of its long-term borrowings; exposure to o foreign currency risks on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of the Group entities, primarily USD but also the Russian Rou- ble, Ukrainian Hryvna and Euros. In 2011, the LTIFR for the Group reached 0.21, compared with 0.25 in 2010 and 0.27 in 2009, which are all lower than the 2010 average LTIFR of 0.34 reported by the IAI. In 2011, there were 11 fatal accidents involving employees and four involving contractors. In 2010, there were 11 fatal accidents involving employees and three involving contrac- tors, whereas in 2009, there were 7 and 2, respectively.

The Group’s competitive position in the global aluminium industry is highly dependent on continued access to inex- pensive and uninterrupted electricity supply, in particular, long-term contracts for such electricity. Increased electricity prices (particularly as a result of deregulation of electricity tari↵s), as well as interruptions in the supply of electricity, could have a material adverse e↵ect on the Group’s business, financial condition and results of operations.

 

The Group’s business activities expose it to a variety of lawsuits and claims, which are monitored, assessed and con- tested on an ongoing basis. Where management believes that a lawsuit or other claim would result in the outflow of the economic benefits for the Group.

Horizontal Analysis (analysis over time):

Gross profit of Rusal was $3,505 million at the end of fiscal year 2011 which grew by 0.6% since 2010 ($3,484 million). However the percentage gross profit from previous year was on inclined trend from 2008 to 2010 and then it declined.

Net cash from operations for Rusal was found to be almost stable in 2010 and 2011 at $1,781 million. However it in- creased by 441% in 2010 from 2009 ($321 million).

Rusal’s total assets at the end of fiscal year 2011 were $25,345 million as compared to $26,525million in 2010, and $23,886 million in 2009. The total assets increased by 11% in 2010 and then decreased by 6% in 2011.

Rusal’s total liabilities were $14,806 million at the end of fis- cal year 2011 as compared to $15,069 in 2010 and $17,554 in 2009. The total liabilities were decreased by 1.7% in 2011 and by 14% in 2010 from previous year. There is a downward trend found in total liabilities from 2009 to 2011.

 

Vertical Analysis (common-size analysis):

Rusal’s net revenue growth was 11% in 2011 as compared to 34% in 2009 from previous year.

Rusal’s gross profit grew by 13.9% to $3,484 million at the end of fiscal year 2010 from 2009 ($1,455 million). There was not much change (0.06% growth) in gross profit in 2011.

Rusal’s interest expanses were $1,289 million at the end of fiscal year 2011 as compared to $1,233 million in 2010. It is increased by 0.04% in 2011 while stable in 2010 and 2009.

Rusal’s income tax expanses were $375 million as compared to $144 million in 2010 and $18 million in 2009. Income taxes were increased by 159% in 2011 as compared to 7% from previous year.

Rusal’s cash shortfall were $2,443 million in 2011 as com- pared to $2,624 million in 2010. The shortfalls were reduced were 0.06% in 2011 as compared to growth of 3% in 2010.

Rusal’s property, plant and equipment were increased to $19,828 million in 2011 as compared to $17,455 million in 2010 and $5746 million in 2009.

Rusal’s current liabilities were increased by 58% at the end of fiscal year 2011 as compare to decreased by 2% in 2010 from previous year.

Rusal’s stock holder’s equity was increased by 11% to $11,735 million at the end of fiscal year 2011 as compared to $10,539 million in 2010 and $11,456 million in 2009.

Rusal’s working capital is negative $1,647 million at the end of fiscal year 2011. It might be a concern for new year growth. However working capital was positive at $2,237 mil- lion in 2010 and $1,010 in 2009. Its current ratio is de- creased to 81% in 2011 from 191% in 2010. It was 134% in 2009. There is a downward trend in current ratio. It might be a concern at current assets are decreasing to cover up current liabilities.

Rusal’s financial leverage is on upward trend since 2009. It was 57% in 2009, 58% in 2010 and 62% in 2012.

Rusal’s profit margin before taxes was 4% at the end of fiscal year 2011 as compared to 3% in 2010. Rusal’s change in operating cash is increased by 438% to $1,738 million at the end of fiscal year 2011. Operating cash went down by 89% in 2010 to $323 million from 2009 ($3,043 million)..

Rusal’s ROE-CI follows a downward trend. ROE-CI went down to -8% in 2011 as compared to 32% in 2010. It was 13% in 2009. ROE follows the similar downtrend since 2010. It went down to 2% in 2011 as compared to 32% in 2010 and 15% in 2009.

Rusal’s market-to-book ratio was 0.87 at the end of fiscal year 2011.

Rusal’s inventory turnover ratio was found to follow down- ward trend. It was 2.92 at the end of fiscal year 2011 as compared to 3.0 in 2010 and 3.10 in 2009.

Senstivity Analysis:

Rusal’s sensitivity analysis is also done for 10% increase in net income in 2012 and decrease in net income by 10% in 2012. We found that on 10% increase of net income, rusal’s gross profit improves by 35% to $4.7 billion. On decreasing net income by 10% Rusal’ss gross profit decreased by 35% to $2.3 billion approximately. Rusal’s operating profit has increased by 70% to $3.0 billion upon 10% increase in net income and it decreased by 70% to $520 million. Rusal’s PBT is increased by 201% to $1.8 billion on increasing 10% net income and it decreased by 154% to $619 million (loss) upon decreasing 10% in net income. rusal’s ROE is increased by 13% on net income increase by 10% and decreased by 9% on 10% decrease in net income.

Perspective Analysis and Forescasting:

We have take into account a few assumptions: 1) Rusal’s netincomeisexpectedtodecreaseby15%in2012 and increased by 5% in 2013 and by 15% in 2014. 2) Rusal’s bookvalueisexpectedtodecreaseby12%in2012 due to current economic crises in the world. Book value is expected to increase by 10% in 2013, increase by 22% in 2014 and increase by 12% in 2015.

Rusal’s expected dividends are found to be $10050 million at the end of 2012 fiscal year, $21165.61 million in 2013, and $22939.45 million in 2014. We calculated Rusal’s equity value to be $30401.94 million.

Public Perception and Recent Results:

Rusal just experienced its worst quarterly earnings margin since it went public in 2010. Rusal reported net loss of $118m in the third quarter, compared with a net profit of $432m a year earlier. Sales fell 18.9 per cent to $2.6bn, while the company’s margin for adjusted earnings before interest, tax, depreciation and amortisation fell to 5.1 per cent. Rusal is struggling to pay back $10.9bn of net debt – $1.3bn of which is due by the end of next year. The company has been hit hardest by a sharp drop in aluminium prices, which have fallen 6 per cent so far this year. Rusal’s share price is down 9.2 per cent year-to-date. Rusal is getting hurted by weak demand and declining aluminum prices, and warned that the short-term outlook for the metal remained uncertain. Rev- enue fell 19% to $2.56 billion. Rusal produced 1.04 million metric tons of aluminum in the quarter, up 0.1% from a year earlier, while alumina production fell 15% to 1.74 million tons.

Conclusions and Recommendations:

Rusal did not declare any div- idends in past and most likely it may not declare dividends in future. Rusal$#39s P/E ration is on declining trend and also its EPS. Rusal$#39s operating profit margin is also found to be on declining track. Rusa’s return on total assets declined in 2011 while it increased in 2010. Rusal$#39s net profit margin is also declined in 2011. Rusal is quite sensitive to net in- come change and it may go in debt if net income changes by 10%. Rusal stock price went down by 60% to 4.36 HKD since last month. Based on our analysis, Rusal is too volatile for investment in near future.

 

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