Yellowstone Partners Blog

Sometimes work is tough. This isn’t one of those times. Each year we have the opportunity to attend the Raymond James Instiutional Investor Conference in Orlando, Florida. Each year, a number of company CEOs and CFOs provide information to anxious fund managers, analysts, and other interested parties.

This morning, we’ve already listened to presentations from a number of companies, in some cases confirming ideas and tailwinds we had already discovered, in other cases, introducing us to new ideas and opportunities. In a market that has finally begun to return to the core of investment valuatuion – corporate earnings, this is truly the meat of asset selection.

To pass along just a couple little bits, this morning, Allegiant Travel Co, (ALGT), a company that has been on our watchlist (and in a few satellite portfolio strategies), has announced that they are purchasing a number of 757 aircraft to begin offering service to Hawaii from the West Coast. While this is a departure from the model they have developed, it remains in keeping with their overall strategy and focus, and provides another avenue for significant revenue growth.

In a small breakout session with Cinemark Holdings (CNK), which we recently added to the Yellowstone All-Cap Global Strategy, there were some interesting details which materialized, which we anticipate will have a positive impact on profitability, and, in the long run, earnings. Cinemark anticipates that they will have close to 1,000 screens with 3D capability by the end of the year. Additionally, CNK has opted for equipping some key theatres with what they refer to as the “XD” experience, a larger, more sound-intense presenation, comparable to IMAX, but without the need to share revenue.

These are just a few early stories from the conference, and we anticipate that there will be many more.

As always, please remember that these statements should not be interpreted as a soliciation to buy or sell any security. Investing in securities entails risk which may not be suitable for all clients. Investments, while offering the potential for gain, may also lead to loss and no performance guarantee can or will be made.

CNK is owned in the Yellowstone Partners company 401(k), which is managed in the All-Cap Global Strategy. Neither CNK, nor ALGT is owned in personal accounts held by individuals at the firm.

Greetings from the Raymond James Investment Manager Conference in St. Petersburg, Florida. We recently listened to a very compelling presentation by Jeff Saut, Chief Investment Strategist at Raymond James Financial.

He brought out some very interesting investment ideas, some of which we were already following, and some of which provide interesting new possibilities.

First among the interesting new ideas was the effect of the recent El Nino weather pattern on the ecosystem of the Humboldt Current and the consequent decrease in a significant source of protein for both human and animal consumption.

Apparently, there is a constant upwelling of cooler water from the Antarctic coast, along the western border of South America, which creates a unique environment where fish can thrive in water with colder temperatures and higher salinity – this is known as the Humboldt Current. Since fish are abundant in this ecosystem, so also, are fishermen, and it’s estimated that as much as 25% of the global fish production is drawn from this area of the world.

The kicker, then, comes in how the El Nino weather pattern is anticipated to affect the Humboldt current. As it happens, the easterly flowing countercurrents push southward into the Humboldt current, forcing much of the abundant fish deeper underwater and thus out-of-reach for the fishing operations.

The consequence of this process will potenially be a severe drawdown in the available protein sources for a growing worldwide population. Following the law of supply and demand, there is opportunity for a derivative play on other protein sources, to include livestock, fisheries, and even soybean producers.

These kinds of investment “tailwinds” provide a tangible story and figures to monitor for confirmation on an investment idea. Stay tuned for more details on what Jeff Saut had to say at the conference.

Having seen a number of positive macroeconomic developments recently, including very positive TED Spread readings, stability in auto and existing home sales, and waining in weekly initial jobless claims, we have been paying particular attention to corporate earnings as we’ve begun the third quarter of 2009. We’re looking for fundamental confirmation that the economy and corporate profits in general are in an uptrend. What we’ve seen is that, on a general level, thus far the reports have come in strongly positive.

Of the 30 companies in the Dow Jones Industrial Index, the seven who have reported have all reported better than expected earnings. Because sucessful stock selection lies in finding unrecognized value, positive earnings surprises are key to a good market environment.

The chart below details the 3rd Quarter of 2009 earnings reports from companies in the S&P 500 Index. While it is extremely clear that companies are not seeing the kind of growth we had grown accustomed to, the number of companies reporting positive earnings surprises illustrates that at least on a corporate earnings basis, things are better than anticipated.

In our quarterly newsletter we noted that investors would likely return to the core investment philosophy of earnings analysis. The past few days have been marked by exactly that. With government action on the sidelines and corporate action on the field, its nice to finally see the bulls putting up some points.

July 20, 2009

We recently attended a conference where we heard from Victor Canto of La Jolla Economics. The title of his speech was “Around the World in 90 Days.” His discussion centered on investment opportunities in emerging economies.

In its most simple sense, what he offered was that in the next few years, there will be a great settling of the realization of value in the emerging world, and that countries which have thrived historically by producing goods to export to more mature economies, will thrive in the present as they convert to domestic production.

The following article by Fareed Zakaria echoes those sentiments.

http://www.realclearmarkets.com/articles/2009/06/boom_times_are_back_outside_th.html

At this point it also seems prudent to offer a brief discussion on the merits of overseas investment. As a general rule, American investors are inherently somewhat biased towards domestic investment. There is an unspoken idea that investing overseas is either unsafe or unpatriotic.

The truth is that overseas investment is neither unsafe nor unpatriotic. Any more, companies are increasingly more international in their scope by necessity. The following list details the domestic vs. international revenue for the 5 largest companies in the Dow Jones Industrial Index.

Domestic companies are just as international as international companies. Even as these companies are willing to go overseas in search of profits, so also should investors be willing to go overseas in search of return. Given the state of the mature global economies and the relative stability in many emerging market economies, it seems that we need to check our premises and consider the opportunities that are being presented around the world.

Today the S&P 500 logged a very important milestone in closing above its 200 day moving average.  The moving average is taken by calculating the average value of the trailing 200 days and is a significant technical indicator of momentum. 

Before the market opened this morning, the futures were showing that we would at least challenge the mark, but within minutes of opening, the S&P 500 Index crossed decisively through the 927 mark and stayed strong throughout the day to close at 943.

Just as the Index’s inability to cross through this mark in May of 2008 proved a bearish mark, we believe that at least in the short term, this proves a bullish mark.

While this is just one of many considerations, other positive indicators include a strong reading of consumer confidence, increasing impact of government stimulus action, and a strengthening credit environment.

Throughout this recent economic malaise, much has been said about a “credit crunch,” an unwillingness of banks to lend to one another because of concern over the value of toxic subprime mortgage assets.

The way we measure the level of confidence between banks, and thus the willingness to lend and eliminate the frozen credit market, is by comparing the rate that banks charge one another to lend on a short term basis, to what the government charges to lend. The spread between these two rates is referred to as the TED Spread.

Historically, the trend has been a spread of .50 to 1.00. As you can see in the chart above, distrust reached its peak in October of 2008, when Lehman Brothers failed, and the spread leapt to over 4.00. In recent weeks as companies have reported earnings and the market has begun to rally, we’ve seen significant “thawing” in the credit market, and the spread has eased to .57. This has positive implications for the financial sector and for the economy overall.