The question I normally get at this point is "why don't you buy lower if you like it??" - again time value of money and everyone has a different strategy for investing - "deep value" investors will continuously buy stocks as they fall, taking hit after hit as a "falling knife" slice their portfolio. Then once the stock rebounds they are usually making up unrealized losses, instead of gaining... Stocks that are below key technical levels can many times be there for months - going sideways (you can use that money elsewhere in the meantime). Or worst - continuing down indefinitely. Same reason I only bought a bit of Apple in the $120s and $130s and waiting to see it north of $145. Yes you pay "up", but in a healthy market, the stocks than can run and you can turnover your money much quicker, in a much safer manner. Clearly this strategy is less effective in markets that gyrate 180 degrees every 3 days; nothing is fool proof and if these stocks break back below their moving averages I'll cut back and wait for the next opportunity. I'd feel a lot more confidant in this type of purchase if not for the headline risk of the employment report or a financial company blowing up at any moment - in a pure bull market I would of gone much higher than 3%ish exposure as this would be a classical "breakout" moment we'd dream for. But market risk remains high simply due to news flow.
I am cutting back on Zhongpin (HOGS), the Chinese pork producer as it's made a nice move and now approaches double resistance as both its 50 and 200 day moving averages sit in the low $11.00s. The stock could either fall back or continue upward. But the general bet is the stock would falter here. My strategy on technical conditions like this is if/when they break above these moves averages I'll add back my position. So around $11.50 or so I'd buy back my position and the stock would be in far better shape in the near term. But I am selling here at $11.15 with the assumption of failure, and dropping Zhongpin to a 0.5% exposure.
Long both names mentioned in fund; long LDK Solar in personal account
5 comments:
speaking of HOGS, here is my updated intrinsic value analysis, FWIW.
http://spreadsheets.google.com/pub?key=p14FthGguvqPD0VRdM2E6fQ
Thank for posting it Jim,
I have not been digging of late so maybe I missed this, why the 7M extra shares in 08 over 07? You have 30M in your model.
your link was too long, so here it is in tinyurl.
http://tinyurl.com/327een
Hi Mark, the difference is the preferred shares. I use fully diluted in most of my calculations.
Some info on HOGS:
Thoughts on HOGS margin trends
Just wanted to make a few comments about margins trends at HOGS. It's appropriate to be concerned about margins...especially in the meat products segment where margins are typically tighter than they are for non-commodity businesses. So it's critical to have a clear picture of current margins & margin trends at Zhongpin.
My first thought in this regard is that you can't understand the true margins of HOGS underlying business without contemplating the accounting effect of the make good shares. After the private placement, Zhongpin management placed these shares in escrow pending certain 'make good' hurdles (net income, etc). HOGS satisfied these hurdles so the shares were released from escrow & returned to management. Had HOGS failed to satisfy these hurdles the shares would have been distributed to investors on a pro rata basis. HOGS incurred a 2.3MM charge in the 4th quarter related to the release of these shares.
This makes not one iota of difference to the underlying business or shareholders who did not participate in the private placement. Regardless of who gets them the shares were already there so there is no dilution. The transaction is non-cash in all respects so it doesn't affect the underlying business. It's just a case of management keeping the shares they already had.
To assess the financial health of the underlying business, this charge needs to be added back into operating income exactly like the liquidating damages charge needed to be added back into last year's operating income. Once that's done, you can accurately assess the margin trend at HOGS. And it's a lot better than some of you probably think. I would call it a 'knock out quarter' but I'll leave it up to each of you to decide on your own.
Segment 1q07 2q07 3q07 4q07
Chilled 8.71% 1.37% 9.32% 9.78%
Frozen 8.62% 1.31% 8.03% 9.06%
Prepared 14.53% 8.36% 14.43% 19.72%
Veggies 11.11% 5.73% 12.14% 18.67%
From this, it's obvious that the Blue Ear epidemic had its most profound impact in the 2nd quarter of 2007. I should note that these are operating margins. Although Zhongpin felt the pinch from reduced hog supply in 1q07 & 3q07the margins during those quarters are historically pretty strong.
The prepared/veggie operating margins for 4th quarter 2007 are absolutely stellar & unprecedented...it makes me pretty happy that HOGS will soon double their prepared products capacity & dramatically increase their veggie capacity. Based on this operating margin figure for prepared meat products, it has displaced the chilled products segment as the highest after-tax margin segment By quite a way, actually. Veggies remain the highest after tax segment overall since there is no tax charged on income earned through that segment, just like the chilled/frozen segments.
I talked about this phenomenon when margins first started to get squeezed due to lack of raw hog supply. In food companies, increased COGS first squeezes margins as ASP can't respond as fast as COGS increases. Later, as COGS levels off and/or goes down, margins rebound & improve to historic highs as ASP doesn't retreat as fast as COGS does. For the next several quarters, we will be in the sweet spot of that cycle.
Great quarter from HOGS. Look for more in the future.
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