Google (GOOG)

In my opinion, the most important points about Google are as follows:

  1. Google has an amazing franchise in its Adwords (search advertising) and Adsense (banner/text ads) businesses.  These business are likely to continue to grow earnings at very high rates for the foreseeable future.
  2. At a P/E ratio of roughly 22 and with a high growth rate, Google is somewhat cheap.
  3. The biggest risk to Google is that of a competitor developing a better search engine.  In the history of technology companies, small startups like Google can quickly dethrone the market leader in the span of only a few years.  Google did this to the former market leaders such as Yahoo and Altavista.  Another company may do the same to Google.  I do not see Google as having a moat against a higher quality product.  It is not like the soft drink business where Classic Coke has a moat against better tasting products such as New Coke (now defunct) and Pepsi.  The technology industry is littered with corpses.  Not even network effects protected services such as ICQ and Myspace.

I believe that Google call options are compelling since the options minimize the tail risk and they aren’t expensive.

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Online advertising (GOOG, FB, etc.)

I believe that online advertising offers significant value compared to traditional advertising because online advertising can be tracked very easily.  Internet advertisers can track the click-through rate on their ads and how many of those clicks convert into a sale.  This gives instant feedback on the ad’s return on investment.  Advertisers can optimize their advertising budget to maximize their profits and split-test different ads and landing pages (the webpage that the ad points to).

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KBH earnings spike

KBH is up 16.4% after it announced a profitable quarter.  A quick glance at the press release shows that the profitable quarter is entirely due to an income tax benefit.  Operationally, the business has higher revenues and lower losses.  Looking at the revenues for the 2012 quarter versus 2011, revenues were $424M compared to $367M.  Total pretax loss was -$7.439M versus -$9.649M.

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Portfolio update Sept 2012

I haven’t been having a good year so far.  Going into the year, I was basically long QXM/XING, long natural gas, long junior explorers, short long-term US treasuries, and short some US stocks (AGNC and JOE mainly).  These were all the wrong trades to make.  My stock picking has not been good since I would have lost less money if I was only allowed to index asset classes.  I would have went long commodity futures (RJI is up 4.3% YTD).  I would have lost money shorting treasuries (up ~3% YTD) and also on US stocks (SPY up 17% excluding dividends).

Here’s what my portfolio looks like currently… (long junior explorers, long commodity stocks, short treasuries, short some US stocks)

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Premier Exhibitions (PRXI) revisited

Currently, Premier Exhibitions is losing some money in its exhibition business and is in the process of trying to sell its Titanic assets.  Premier paid Guernsey’s to auction its Titanic assets but it looks like this auction has failed to meet Premier’s reserve price.  The failed auction suggests that the market price of the Titanic assets is not that high.  In the future, it may be more difficult for Premier to fetch a good price for its assets as the Titanic story is getting played out, it will no no longer be Titanic’s 100th anniversary, and excitement over James Cameron’s film re-release fades away.

Premier’s operating business is likely worth no more than $30M ($30M is likely far too generous).  Premier has a market cap of $117M.  The difference between the market cap and the value of the operating business can be attributed to the implied value of the Titanic assets.  Valuing Premier basically comes down to how much these assets are worth.

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KB Home (KBH) short thesis

Homebuilder shares have been rallying strongly and there may be a short squeeze happening in KBH.  53.70% of the float is sold short according to Yahoo Finance.  It may be possible to make a small profit by shorting into the squeeze.

KBH is GAAP unprofitable and has negative cash flow from operations.  Either way you look at it, it is unprofitable.  It seems clearly overpriced as it has a price/book ratio of 2.85.

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Shorting JC Penney (JCP)

It comes down to the quality of JCPenney’s management.  If you judge management based on its results to date (e.g. 21.7% drop in same-store sales), management has been shockingly bad.  Basically, the longs think that JCPenney is a turnaround story and the shorts think that JCPenney is one of the worst managed retailers.  The short trade may be a little crowded as 41.5% of the float is sold short.  In my opinion, stocks with short interest above 20% are usually seriously flawed and the shorts will be right in the majority of cases.  However, history has shown that life is unkind to short sellers and that short selling common stock is not a good way of making money.  There are books on this… Mr. Sauer worked at a long/short hedge fund that blew up and David Einhorn got burned shorting Allied Capital.

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Selwyn update… it is bad

Russell Cranswick, Resource Capital’s nominee to the board of directors, has resigned (press release).  In my opinion, it is highly likely that Resource Capital will liquidate its position.  The Selwyn project is likely uneconomic due to the increased cost of mining (this has gone up a lot in the past several years… look at the cash costs of gold producers for example) and the fall in lead and zinc prices.

*Disclosure:  Still long.  I probably should have just cut my losses earlier and sold… it’s just that I have an aversion to selling near the yearly lows and selling into a depressed market.  I will be trying to sell.

Noront update

Noront has updated its feasibility study.  “At current metal prices (August 31, 2012), the DCF indicates an after tax NPV(8%) of $233 million and an IRR of 18%.”  If you use the 3-year trailing average for metals prices, the NPV rises to $543M.  Noront’s current market cap is around $86M, so this stock could be undervalued.

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