Tuesday, August 27, 2013

Gold Price Ratio Suggests Recession Looming, Target TGT Underperforms & Growth Stocks Nasdaq AFCE, ALXN

Relative to the United States, Canada has higher wages, higher fuel prices, stronger unions, and higher distribution costs and that often leads to higher retail prices.  Target Canada will open its first 124 stores in 2013 but it won't be an easy transition; The Canadian dollar is at a low right now (95.0c US) which compounds the problems Target will face in adjusting its prices to Canadian expectations.  Since launching in select markets earlier this year a new problem has cropped up :  consumer satisfaction dipped below 30% in August (vs May).

Target (nyse:tgt) Underperforming

Latest quarterly profit -13% weighed down by Canadian operations (expansion costs).  As of quarter-end Canada is home to 68 locations with another 56 to open by year-end.  Canada accounted for $275 million of the company's $17,120m sales this quarter but Canadian performance still not up to par.  Total North American sales were suppose to be up 2% this quarter not the realized 1.2%.  Earnings at 96 cents a share ($611m vs $704m last year) a cent below expectations.

Recession Looming ?

Signs certainly suggested it on Friday when growth in silver and gold prices contrasted with next to no change for the primarily industrially used platinum group metals. 

So far in August (1-20) investors extracted $30.3 billion from US bond mutual funds which amounts to the highest monthly outflow in 19 years.  Markets both domestic and international have benefited from the US Fed bond buying program which was originally instituted to help keep mortgage interest rates down, however what the Fed is now saying is that, even after its eventual exit from the program, short term rates shouldn't go up even though long term rates will.

The Fed purchases $85 billion worth of bonds each month - half mortgage bonds half treasury notes, as a sort of quantitative easing.  Because the Fed isn't being clear on when it will stop buying mortgage bonds, interest rates are gradually moving up consquently people wanting to buy homes are doing so before the expected spike in rates (July sales of existing homes +17.2% versus last year).  30-year fixed rates - May 1 : 3.35% ; August 23 : 4.58% highest since July 2011 ; 15-year rate @ 3.6%.
Unemployment remains a problem, it was as high as 8.2% in July.  Also, jobs numbers (+170th last month) are weak - most of the new jobs are part time and not specialized;  In June for example 400,000 people with college degrees lost jobs while 250,000 people without college degrees got jobs.  Another sign pointing to a weak economy - average age of vehicles on the road now 11.1 years, the highest on record.


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Gold To Silver Ratio Contracting Rapidly (Aug 12 : 62  Aug 27 : 58) so if you're going to be buying bullion, now is the time to stock up on silver.  Keep in mind too that silver production leader Kghm Polska recorded negative growth over the first six months of this year; output down -16.76% or -3.86 million ounces.  That's just under 1% of global silver output gone attributable to just one company !!  According to the company, low silver content of processed and purchased concentrate is to blame.

Silver premiums remain way too high - if you spend $1500 on either metal at a typical coin shop, silver premiums will account for $305 of that while for gold it's only $75.  So if you want to get the most for your money, and you have at least $1500 to spend, buy gold.  Major investors such as John Paulson only buy gold, central banks have reserves of gold not silver.  Also note that gold is the only security Kevin O'Leary owns that doesn't pay a dividend !  No metal beats gold as an inflation hedge - Investors account for 90% of gold purchases compared to only 50% for silver.  It's a well known fact that gold performs well when interest rates decline (money flows out of equity markets) but I think that it can also do well when interest rates rise!  This isn't always the case but in today's economy it certainly can.   I'll expand on that in a future post :)

Alexion Pharmaceuticals (nasdaq: alxn) Revenue To Triple By 2018

Alexion CEO recently sold $14.85 million worth of company stock.  He still owns another 10X that (1.04m shares) but his decision to sell begs the question, why now ?  Alexion price target has been better lately with a number of analysts either increasing their estimates or upping the rating from sell to hold.  Alexion also faces manufacturing issues, it recently recalled 1-2% of one lot of final vials of Soliris due to particle contamination.  Sales of soliris expected to triple over the next five years to $3 billion.  Soliris is a gamechanger in the pharmaceutical industry and makes Alexion a lucrative takeover target for Roche.  Amgen recently paid $10.5 billion for Onyx whose multiple myeloma drug Kyprolis could reach annual sales of $2 billion (slightly less than Soliris).  Like Alexion, Onyx has long term growth potential - revenue only $878m in 2014 to more than triple over the next seven years.

International Growth Propels Popeyes Chicken & Biscuits and Popeyes Louisiana Kitchen (growth stocks)

Popeys parent AFC Enterprises Inc (nasdaq:AFCE) at 52 week high.  revenue growth being recorded in all categories !  sales by company operated stores 1h2013 34.1m -> 41.4m (2q: 14.3m -> 17.5m),  franchise revenues 56.0m -> 64.3m (2q: 24.3m -> 29.1m).  Total including rents and other: 92.4m -> 108.3m (2q: 39.6m -> 47.9m). 
AFC stock at 52 week high incl +6% day quarterly report released.  latest quarterly revenue +21% vs expenses +18.4%, income tax  +31% ;  revenue - expenses - income tax = earnings of $8.5m (+28.8%). ;  9-months $18.1m (+21.5%).  the company has $15.2m cash on hand (-26.2% vs $20.6m). 
A Solvent Company
- Long term debt down -$4.7m or -7.0% in just 6 months ! ($62.1m vs $66.8m).
A Growing Company
- Capex 1000% last quarter (730% last 6-months) to $7.6m and $15.8m respectively, thanks to international expansion opportunities (last 6-months # of stores +49 -> 2153 with 7 of the 49 new stores were abroad where stores now number 432.  only 47 of the company's 2153 locations are company-operated but they account for $41.4m of the company's $108.3m revenue (38% taken over 6-month period) and $7.9m/$28.7m (up from $6.3m) of the company's operating profit.  profit margin for company-operated stores @ 19.1% up from 18.5%.

Don't Forget About United Technologies (nyse:UTX) !   stock +28% last year with revenue growth in the teens.  Stable business model : services both commercial and government agencies.  Owns key brands Pratt & Whitney, Goodrich (aerospace and industrial products company).  Goodrich was acquired last October for $16.5 billion.

additional notes
i) Government getting too big ?  For the first time ever, the majority of the richest counties in America are the ones surrounding Washington DC.  ii) In October the US will reach its debt limit of $16.7 trillion.  If congress doesn't authorize an increase, the country will face another fiscal crisis.

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