The Week In Review

Welcome to the weeks of January 12th to January 22nd, 2010. We’ll be serving a Supreme Court ruling that’s shaking corporate America, huge financial arrests by President Obama on the world’s top bankers, and a deflating confidence in Chinese trust and trade. Oh, and Haiti was hit by another quake.

It seems like the whole world just fell apart in front of our eyes. It’s Friday afternoon and as I reflect on the world’s news and events this past week, I find myself wondering, “What happened?” Let’s recap. We watched with sympathy as Haiti suffered a massive earthquake, killing almost 200,000 people and leaving nearly 2 million homeless. To add insult to injury, the country was hit again with a nasty aftershock, leveling the buildings, schools, and homes that miraculously had survived the first shake. The devastation in Haiti does not concern me as a first-time investor; but as a human, I’m saddened and dismayed. I’ve given donations, in Bullworthy’s name and mine, and I hope you will take a minute and give too. Click here to give as little as $25 to a Haitian Relief fund.

Monday, January 18^th – Republican Scott Brown is elected in a Massachusetts upset race against a Democrat, which in a very Democratic state shocked the nation. The race was for the late Ted Kennedy’s Senate seat, who has served very passionately and successfully for over 40 years. Here’s the kicker though: in the Senate (the branch of legislation that is currently handling healthcare reform), there is always a majority party who has special tools at their disposal. If you’re a majority, you can pass your party’s legislation with little hassle. The Democrats (including Ted Kennedy) held the majority by one seat – the seat Republican Scott Brown won Monday night.

Healthcare reform is a democratic issue, so Brown’s unexpected win has tilted the tables in the Republican’s favor. They now have the power to delay or kill legislation brought by the Democrats. So, if you’re an investor, and you’re interested in not losing your money, stay away from healthcare stocks for right now – the future is anyone’s guess. I’m now staying away from healthcare stocks and industries.

 Tuesday, January 12^th – President Obama officially proposes new restrictions on the largest US banks including, among other things, restructuring their entire business operations. Banks have for many years profited off stock market trading for not just their clients, but their own money as well. It’s called “proprietary trading”, and it means they use their own cash to invest and trade securities, options, stocks, and other complex financial instruments on open markets. The widespread practice of proprietary trading exists in stark contrast to any bank’s core business – borrowing money from depositors, and lending it out to consumers at a profit. Nostalgically, banks should be focused on their customers, providing lending services, economic liquidity (ensuring the availability for cash), capital structure (investing in small businesses through loans), and keeping the US dollar strong. Instead, they’ve been spending their time creating lucrative and risky investment practices that eventually, as we saw in 2008, caused panic and a credit collapse in the US.  President Obama has long been expected to announce proposed regulations (whatever he announces still has to pass through Congress), but he’s really stepped up the game here. If passed, the law would break up the most profitable operations of some of America’s top banks – American Insurance Group (AIG), JP Morgan Chase, Citibank, Bank of America, and Wells Fargo, who have all watched their stock price plummet this week. I’m now staying away from financial stocks and credit service industries.

The Bad Rap Bankers

 

Wednesday, the heads of the U.S.’s top banks came under pressure by a 10 member commission created by a law President Barack Obama signed early in his term. It’s called the Financial Crisis Inquiry Commission (FCIC) and their main goal is to determine who’s responsible for the financial and credit crisis of 2008 that led to the near complete collapse of America’s economy.

They touched on a few things: executive bonus disbursements among bailed-out banks, who should take the brunt of the blame for the crisis, and what we can do in the future to prevent a repeat of these economically catastrophic events. What does it all mean for a first-time investor?

Bank bailouts are an unnecessary evil that we all need to recognize as just that. “Bailout” here refers to congress passing the Troubled Asset Relief Program in 2008, or TARP, to prop up cash strapped and quickly sinking financial institutions throughout the county. The program was designed in response to sub-prime mortgage failure to strengthen the overwhelming balance sheets of banks that lent to the tune of $700 billion dollars. Half was released; the other $350 billion sits as a cash reserve for deployment. The controversy, of course, is that the money came from the government, which actually comes from us. Its taxpayer’s money that was used to save the world’s richest, most successful investment banks, savings and loan institutions and commercial banks. Bank bailouts are not unique just to the U.S.; government sponsored aid was distributed across Chinese and European countries too.

When we talk about “banks” that received TARP funds, understand that we are actually talking about the world’s most complex, most enormous financial institutions that sell some mind-numbing and confusing products. These banks are headed by the smartest men available for work. US banks are world-leading powerhouses that sell anything from future contracts on soy bean prices (called Futures) to insurance on corporate debt (called Credit Default Swaps), to buying out life insurance contracts on your 91 year-old grandma. These people make money in every way, shape, and form – and they do it all over the world, in all kinds of markets, in every little pocket of the globe. A global financial institution, like Morgan Stanley or AIG, will make hundreds of billions over their years; and you can also bet that they compensate their officers handsomely. But we’ll get into that at the end of the article.

Company Profile: Harry Winston Diamond, Corporation (HWD)

No doubt you may have heard of Harry Winston Diamond. Considering their diamond mining and retail market share, you may even be wearing a piece of their jewelry right now. HWD is a Canadian based exploration, mining, and retail outfit that produces and designs diamonds for rings, watches, and various other pieces of fine jewelry across the globe. Certainly diamonds are not recession proof, but they are resilient. This past year, HWD watched its earnings take a nosedive just like everyone else. But something peculiar happened; they’re coming back up just as fast, and may emerge from economic volatility stronger than they ever were before. After all, people will always be getting married, right?
HWD is expecting Earnings per Share this year of -1.48. Earnings per Share is a measure of a company’s profitability, and -1.48 certainly hurts. But next year, EPS as an estimate will be -.12, an unbelievable accomplishment if they are on target, or better, they beat that estimate. Arguably, it can be easy for a company to lose earnings per share; it’s improving earnings per share that’s the challenge for most. HWD is certainly set to prove they can overcome, according to these estimates.
Let’s dig a little deeper into the EPS measure. If EPS is a measure that will tell you how much the company earned for each share outstanding (owned by investors), then a high EPS with a low stock price is a very good thing. Last year, HWD had an EPS of $1.15 and an EPS the prior year of $1.89. The prices of the stock at those times, respectively, were $5 and $33. The current EPS estimate of -1.49 (meaning the company will lose 1.49 for every share) can be compared to its current share price of $8.62. So why such a drastic drop? Was it warranted that the stock price should go from $33 to $5 based on a lousy 75 cents? The answer is no, and we only need one word to explain it: recession.

Company Profile: A-Power Energy Generation Systems (APWR)

Friday, December 18th 2009
A-Power Energy Generation Systems (NASDAQ:  APWR)
A-Power is a company we’ve been buying and pitching since August of 2009. At the time, the companies stock was trading at just over $10/share. This week, APWR broke 2 new 52-week highs, the highest prices they’ve been in a year – topping out at $20.15/share.
Our positions schedule with APWR for 2009 was as follows:

Date	Trade	Price	Gain/Loss
6/30/2009	buy	$8.00	40%
8/25/2009	buy	$9.70	15%
9/15/2009	sell	$11.20	55%
10/1/2009	buy	$10.15
11/24/2009	sell	$14.67	44%
12/3/2009	buy	$15.98

We bought this stock low and sold it high twice. Our last entrance was on December 3rd, 2009 at $15.96 a share. Today APWR close at $18.75, a 17% gain. We’re not selling yet; we think a $22 price target is possible in the next 6 months, and here’s our main arguments behind it.

A-Power is making deals left and right. At a time when other alternative energy companies (and really, the whole alternative energy industry) are struggling with high costs and low market share, APWR just landed the rights to build Texas’ largest wind energy farm in the US. APWR is partnering up with (and buying out) smaller wind and energy power providers, builders, and sellers. And as the world’s largest wind turbine producer, APWR is still aggressively expanding. And although APWR is building wind farms and energy grids all over the world as part of its global strategy, they still find time to land some deals in their own neighborhood: China.

Company Profile: IMAX, Corporation (IMAX)

Saturday, December 19th, 2009

IMAX Corporation (NASDAQ: IMAX)

That’s right, IMAX! The motion picture technology company that brings consumers a highly specialized, highly immersive and realistic theater experience  is also providing us investors with decent returns. That’s because IMAX has added significantly to it’s cash position recently and has projected future earnings that would impress any investor. We’re going to write a brief synopsis of IMAX, their operations, and why we’ll be coming back to this theater again and again.

IMAX operates in a blue ocean – that is, there’s no competition among them. That’s any business persons ultimate fantasy: to be the only company filling a consumer demand. IMAX builds, operates, and leases their over-sized digital screens and equipment and converts Hollywood’s blockbusters into  a 3-D format for moviegoers seeking a new, original experience. The company owns and operates over 400 theatres so far with plans for another 100 in 2010.  IMAX has more than doubled it’s revenue from 2008 to 2009 and turned a small profit this past year (while the rest of the world lost trillions). Best of all, there is no other company that competes directly with IMAX’s services and products. Their closest competitor: theater bohemouth Regal Entertainment Group (compared by market capitolization, a measure investors use to determine how large a company is, Regal is almost 3 times as big…but they’re losing money and the stock price is less than a dollar more than IMAX).