Stock talk for the main street investor.
Apr 30 2010

First Solar Blows Past Estimates… Again

First Solar (FSLR) reported numbers that surprised to the upside again. This is becoming a theme that Wall Street just doesn’t want to believe. Currently trading at less than a 20 P/E I still think this is one of the most attractive stocks available. Add in possible policy changes and this could be a $300 stock in a year.

For some reason the market and analysts don’t understand the advantage First Solar has in this market. They operate with 50% gross margins when competitors have 20% margins at best. They’re the lowest cost supplier and have a history of lowering production cost rapidly. Worst case scenario is a price war and they bankrupt all of their competitors.

Poly-silicon is the technology most competitors use and poly prices have been falling for a couple of years now. Problem is, even if prices fall to $0 their manufacturing costs are still higher than First Solar’s. So how can they compete on a mass scale.

The other change in the market is the move toward big utility scale projects from small roof-top and agricultural developments. This should also help First Solar as they’re able to compete on cost and scale where others aren’t. The capacity just isn’t there for any other supplier to build gigawatts worth of solar panels.

Look for First Solar to continue to perform well in coming quarters. Some time in 2011 when costs go lower than natural gas the demand should really pick up.

Disclosure: The Mayor is long FSLR.

Apr 27 2010

The President Talks Energy

Today the president spoke at an Iowa wind blade plant about the need for energy changes in the US. Now that health care is done (sort of) and financial reform seems to be heading through congress I wonder if this is going to be his next big push.

I’ve made no secret of liking renewable energy. I’ve been long First Solar (FSLR), Sunpower (SPWRA) and MYR Group (MYRG) for a long time and recently added Vestas Wind Systems (VWDRY). These are all fundamentally strong companies even without major changes in the US but my upside hope is that some sort of reform happens with energy. Wind and solar only need only a small nudge from the government to surpass natural gas and even coal as energy sources. When they do surpass these sources it’s like going over a demand cliff (only inverse). Wind and solar would take off.

The other challenge is power infrastructure. Hopefully some thought will be put into this area as well. For now I’m just happy to see the President talking about energy policy again. It’s about time we make some changes.

Disclosure: The Mayor is long FSLR, SPWRA, MYRG and VWDRY.

Apr 19 2010

Dreamworks Tops Box Office

In it’s fourth weekend at the box office Dreamwork’s (DWA) How To Train Your Dragon has topped the box office with $20 million last weekend. Pretty remarkable considering Wall Street was disappointed with an opening weekend of only $44 million. Turns out long term thinking pays off. Buy the panic, my favorite game on Wall Street.

Disclosure: The Mayor owns DWA.

Apr 16 2010

Goldman Gets Caught

The civil and criminal charges have started on Wall Street. I’ve mentioned in a couple of recent articles that financials are riskier than they appear and here’s another reason why.

I’m sure you’ve already seen the details of the suit by the SEC against Goldman Sachs but the bottom line is this… Wall Street is intertwined in shady relationships on almost every product it sells. You can be guaranteed you don’t know everything about the products you buy or bought from them unless it’s a standardized product purchased on an exchange.

The complicating matter is the role hedge funds play in this back office game. They’re not required to disclose anything to their investors so no one really know what they hold or what they’re involved in. There will be more shady relationships coming out in the next few months and I’m excited to see who will be involved next.

Apr 15 2010

Interactive Brokers

I’m a few days late. I apologize to my three regular readers.

Last time I wrote I talked about how increased volume on exchanges is helping NYX and how this can act as your personal tax on Wall Street. I also mentioned their biggest risk factor being the rebates demanded by market makers. Let me explain how this works and how Interactive Brokers (IBKR) fits in.

When you go to buy or sell a stock there has to be a counter-party to take the other size of the trade. These are market makers and they sit on the bid/ask of almost every stock. For instance if I’m a market maker in Starbucks (SBUX) as it’s currently trading I will buy at $24.77 if you want to sell or I will sell at $24.78 if you want to buy. You as the investor lose that $0.01 spread as a payment of liquidity to the market. This may not seem like a lot but if you trade 100 shares at a time, multiple times per minute, the profits add up quickly.

On top of this spread premium, the exchange actually pays market makers to trade. So the exchange charges you (the price “taker”) a fee, which is part of the cost for your broker, and part of that fee goes to the market maker as a price of providing liquidity. This liquidity fee is currently in the range of $0.002-$0.003 per share. This is how banks make a lot of money trading.

This is also why I’m looking at IBKR. They have two basic functions in their business, brokerage and market making. Gross margins in the market making business are over 60% and brokerage is nearing 50%. IBKR has done an outstanding job of building the electronic infrastructure to automate most of their business activities which allows them to focus on gaining more customers, growing 30% in the last two years.

I like the trends, the business model and I’ve heard great things about their majority owners. The challenge is valuing the company. Earnings can be very choppy in trading activities especially in challenging times like the last two years. Their current P/E of 18 is reasonable given their upside potential. I also like that they’re market value is only about 1.2X book value. Look for more stable earnings as the market settles down.

Disclosure: The Mayor has no position in IBKR or NYX.

Apr 11 2010

Your Personal Tax On Wall Street

It’s become apparent that Wall Street runs the world. Whether it be bailouts or incredible pay packages, they’ve gained enough power to seem nearly untouchable. So, lets make some money from Wall Street. One of the trends on Wall Street is investment banks moving more of their business into trading activities. They join hedge funds as frequent traders trying to take a little profit from every transaction. So how do we profit from this change in activity?

One way is by owning the exchange these traders use. NYSE/Euronext (NYX) is one of the largest exchange operating the New York Stock Exchange, Amex, Arca and Euronext. These exchanges provide a venue for people to trade stocks, bonds, futures, options, etc. They charge very low fees per trade and depend on volume to make their business operations profitable. A strategy that plays into the hands of trends in the market. In 2003 about 5 billion shares of stock were traded on the 10 largest exchanges, a number that has ballooned to nearly 35 billion in 2008. This is similar to trends in futures and options.

Though trends are to higher volume there is also increasing competition. Exchanges provide nothing more than a place to trade and are sensitive to prices and thereby losses of either buyers or sellers, who have very low switching costs. This is the reason for consolidation in the industry over the last few years. I believe this consolidation reasonably insulates the industry from new competition as the existing exchanges have sufficient users on both sides of the market and there is very little innovation that could steal these users.

Since this is a two-sided market there is a money side and a subsidy side. The subsidy side is the active traders who provide liquidity the market needs to provide buyers and sellers with a competitive market. The pricing pressure mentioned above is related to the amount of payment (yes, they get paid to trade) these liquidity providers receive. This is the biggest risk factor in their business, although I think it is manageable.

NYX is paying a 4% dividend currently and management has committed to increasing this in future quarters indicating confidence in their performance. A forward P/E of 11 is very reasonable and considering they’ve beaten estimates the last four quarters the company seems reasonably priced.

Tomorrow I’ll talk about playing subsidy side of the market with Interactive Brokers.

Disclosure: Author has no position in NYX.

Apr 6 2010

Utility Banks May Be The Best Solution

Last week I attended a talk by Andrew Cecere, CFA of US Bankcorp. He was a straightforward man, who I found to be very impressive.  He spoke about how US Bank had avoided many problems other banks had in the financial crisis by keeping their structure and funding simple. He also spoke about how the worst thing that could happen to the banking industry is over regulation, which would lead to a utility style financial system. This regulation would kill innovation at banks.

As an engineer, by training, and having worked at 3M, an “innovative” company I find talk of innovation by bankers a vexing topic. Innovation in financial services generally means complexity, finding ways to bend the rules and increased leverage. No matter who you think may be at fault for the credit crisis I would argue that it would not be possible without bank innovation. Credit default swaps, option ARMs, balloon mortgages, over the counter derivatives among other products are the innovations banks have made in the last 20 years. And these products are also what brought the system to it’s knees. I challenge anyone to find an innovative and new product created in the past 20 years that has been a positive for the market.

My argument is not that these products are inherently bad, although they may be. I’m simply trying to say that innovation at banks is bad. It only leads to disaster because it allows for a false sense of security while increasing underlying risk. Holding a CDS against a bond gives the sense of “insurance”, but there’s not assets backing that “insurance”, so therefore, IT”S NOT INSURANCE.

I learned a long time ago a good innovation makes things more simple than they were before. Take any product Apple makes as an example of good innovation and making things more simple than they had been before. None of the innovative products I mentioned above do anything to make the banking system more simple and therefore are inherently bad innovations.

Banks as utilities may not be such a bad idea. Innovation at banks has proven to do nothing but cause problems.

Disclosure: The Mayor does not have a position in any financial institutions.