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    Tuesday, May 11, 2004

    Today everything's a buy

    Last week I recommended three purchases and mentioned two more that I thought were good value but not necessarily at a great price. Well AES has now fallen to $7.99, Oil Sands Split Trust has fallen to 21.81CAD and I’d be a buyer of both at current prices. In fact I’d be a buyer of the whole portfolio that I’ve mentioned recently (AES,OCA,RRPIX, and Pfizer LEAPS).

    Here is a breakdown of a few of the key reasons for buying AES, OCA, RRPIX and (The leveraged play on COSWF). I’ll write about PFE calls and QQQ Puts some other time.

    AES is a global power company. Based on a discounted cash flow analysis they are worth over $15. They are leveraged to a worldwide recovery as well as a Latin American recovery. Even aside from that they project earnings growth of up to 23% without any additional financing. With additional financing they expect growth over 23%. The management team has shown that they execute flawlessly on their plans and have adopted a much disciplined approach to cost reduction and reinvesting in their business. The company has a lot of debt though most is only held at the project level (so the project can default without the company defaulting). They are continuing to deleverage their business by paying down debt.

    OCA is in the business management sector specifically for orthodontists. They historically affiliated with a number of orthodontists and both the orthodontists and OCA own a steak in the profits of the practices. More recently OCA does not affiliate with existing practitioners but continues to help its current practitioners grow their practices through the addition of new offices and additional orthodontic and other staff. This core business shows good growth prospects and they have opened many new centers (stores) which are not producing any profit but within 6-12 months will be. Furthermore they have opened practices overseas but these are not currently returning cash flow to the parent. They seem to have a lot of potential overseas, specifically in Japan.

    Finally OCA is starting another business line which will provide their existing business management services to normal dentists for a fee with no ownership of the business or revenue/ profit sharing – just management fees. They have a lot of potential in the overseas and services only business but the core business itself is probably 50% undervalued based on a discounted cash flow model.

    The reason OCA is so cheap is two fold. They merged with another company that has created a lot of litigation that’s unresolved. The litigation will either lead to OCA receiving cash or worst case nothing. There is no possible downside in terms of the business, to the litigation. The second problem is that the company, or more specifically the management, has made a series of steps that have eroded investor confidence of late. They delayed their year end earnings announcement at the last minute but once it came out there were no problems. The stock rallied after there were no problems and then the company announced that they had fired their auditor. The stock then dropped and after hours on Friday they just announced that they were delaying their 1st quarter earnings and 10Q filings so that their auditors can complete their work. They have also had three CFO’s in the last 18 months or so. Finally there is a large contingent of shorts who believe that there are fundamental accounting problems at the company. I could write forever about why the above issues are just minor blips but this provides a reasonable overview. OCA’s balance sheet is great and they produce free cash flow.

    RRPIX Rising Rates Opportunity Profund
    RRPIX is an economy play rather than an investment in a business. The Profunds Rising Rates Opportunity Fund tracks 125% of the inverse of the price of the longest dated 30 year bond. For ever 10 basis point (1 percentage point) increase in the yield of the 30 year bond, RRPIX goes up by the duration (this duration does not mean the time to maturity but rather is a measure of the relationship between the yield and price of a bond) of the 30 year *125% which equals (14.7 * 1.25) 18.375%. There is a 1.95% management fee plus the negative cost of carry (because when you short a bond you need to make the interest payments). All in all this probably comes to about 6% a year in costs to make the trade (I’m going to get a more exact number but I need to contact Profunds). This isn’t a long term investment but over the next 12-24 months I’m confident that the 30 year bond will approach it long term average of 8.3%, which is a 50% rise less expenses.

    Canadian Oil Sands / Oil Sands Split Trust
    I’ve written extensively about Canadian oil sands (COSWF, in recent posts (here, here)and mentioned Oil Sands Split Trust ( which is a leveraged play on COSWF. OST provides 200% of the capital appreciation of COSWF with a dividend yield of 2% rather than the 4% from COSWF (though OST has been paying out some special dividends to the capital shares and these could take the yield up close to 5%). The difference goes to pay for the leverage. As I’ve said before the details are contained in their SEDAR filings but OST is likely to buy out its preferred securities once COS gets to around $58. Then the leverage is completely free and the dividend would be closer to 8%. Finally OST is actually undervalued compared to COS as there is a conversion factor and OST is trading below that factor.

    Monday, May 03, 2004

    I haven't done this before but I'm going to make three price calls. I current believe that three securities that I own are at good prices given my outlook for them. OCA is currently trading at $7.17, Rising Rates Opportunity Fund (RRPIX) is trading at $23.91, Pfizer $35 Jan 2006 calls (WPEAG.X) are trading at $4.7. I would recommend buying 50/40/10% of each. I think all three have the potential to double over the next 2 years.

    I would add that when the Nasdaq hits it's next 52 week high, I plan to wait 5 days and if it doesn't hit another high I'm going to use some method to short it, either by buying puts or going long a Nasdaq short fund or even a leveraged Nasdaq short fund.

    I possibly won't write when I sell any of the above positions but I would start selling some OCA at $14 and the some of the Pfizer calls when the options double up. As for RRPIX, perhaps when the Fed next EASES but there is a resonable chance of a long term pick up in inflation so perhaps not. Anyway I wouldn't sell any RRPIX until the 30 year reached around 8.5%.

    I also like AES and Oil Sands Split Trust ( a leveraged play on Canadian Oil Sands ( or COSWF). COSWF is probably 50% undervalued but there have been better entry points recently, similarly with AES. If you were to add these two, which I don't think you are getting the best entry price on but there is still much upside potential then I would recommend the following percentages.

    Oil Sands Split Trust - 25%
    AES - 20%
    OCA - 20%
    RRPIX - 15%
    WPEAG.X - 10%

    If you were to follow me into my short Nasdaq trade (which I may already be too late for but I think we'll see a 52 week high before the election) then I would leave aside 15% for that trade, probably into a 125% Nasdaq 100 short fund.

    Saturday, May 01, 2004

    In the most recent edition of Barrons they released results of their money managers survey. There were many implications for the positions that I hold in AES, Canadian Oil Sands (COSWF) and Rising Rates Opportunity Fund (RRPIX).

    Barrons said "The Big Money managers, on average, think oil prices will retreat to $35.83 a barrel by year end from a current $37.46. They see crude sliding further, to $34.45 a barrel, by 2005." Interestingly the consensus is still that oil is going lower. I generally like to be on the other side from common wisdom because that's where money is to be made. There is little point in being correct if everyone else is on the same side of the trade (unless you're early, but in that case you were taking the opposite side). Even if their view is correct there is 50+% upside in Canadian oil sands. If they are wrong and oil goes higher....

    Next they mentioned Latin America. AES has significant leverage to Latin America. Only 32% of managers are bullish on LA. AES is going to do very well regardless of a recovery in LA but if things go well there they will do even better (Like Host Marriot, during the property bear market, was a great buy because it was highly leveraged to a recovery in property prices which eventually happened). Analyzing AES strictly based on cashflow under values the upside potential in their assets if prices recover in LA. Most of the LA assets have been written down to zero on their balance sheet. I don't necessarily know how Latin American will do but it's good to know that if they participate in the "Globally Synchronized Boom" AES may have more than the 50% upside that they have right now.

    Now it seems that I'm on the same side as everyone in terms of bonds. "...few poll participants had a kind word for bonds. Seventy-three percent declared themselves bearish on Treasury bonds, and even more -- 77% -- disdain corporates at this juncture." and "....Similarly, rates on 10-year notes are heading higher and will top 5% in 2005, according to the managers' consensus view.". Though I expect the 30 year (which generally trades with a yield about 1% point, ten basis points, higher than the 10 year) to return closer to its long term average of above 8%. The Rising Rates Opportunity Fund (RRPIX) offers 125% of the inverse of the price movement in bonds (explained fully here and here--make sure you read the second link as it has an update on the first). This is somewhat contrarian because no one is talking about such a big move. It could take a few years though. This has the potential for 75% upside or even higher if inflation becomes a problem and bond prices fall (yields rise) significantly.


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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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