16 May

Monday May 16, 2016


Good morning,

I conclude that the Fed is preparing to reverse course on scheduled interest rate hikes (or increase clandestine market manipulation avenues) when DB begins to reach new lows.

The market is pricing-in additional interest rate hikes, or maybe just one more hike this year.  What would happen if the Fed needed to reverse course to support confidence in the global banking system, therefore confidence in DB?  You got it: soaring stock prices.  That’s Warren Buffett’s thesis, as we learned a few weeks ago during his interview with CNBC, a thesis, by the way, I hold myself.  Read the CNBC article, here.  

For now, carry on as usual; the Fed still has our backs.  The Federal Reserve has yet to release its own version of an European Central Bank (ECB) bazooka.  And it will, if necessary.  So if anything all the lines of a market scare happens between these reports, we’ll send an alert reminding everyone to remain cool and wit for our timing for a stock rebound.  That’s when a lot of money is made.

Now, let’s talk about my latest stock picks and share some good news with you about last week’s trades in FNMA and GEVO.

Fannie Mae (FNMA)

I closed out FNMA Monday with an 11% profit, or $1,900.  

Though I was disappointed with the lack of momentum following the Apr. 12 announcement of released court documents clearly demonstrating FNMA’s foreknowledge of Fannie Mae’s (And Freddie Mac) profitability when it decided to change the rules in 2012, I knew there was a lot of ‘buffer’ to my long position, which in this case gave me a solid 11% return within 30 days.  That calculates to a 12-month compounded annual return 249%.  I’ll take it. 

Gevo (GEVO)

If I’ll “take” a puny 11% profit within 30 days, I’m certainly ecstatic about my GEVO trade.  I closed GEVO out Tuesday with a 30% profit, or $17,000.  

If you remember, I was expecting a nice pop from an announcement by the company regarding a scheduled date to test the company’s proprietary jet fuel with Alaska Air Group, Inc. (ALK), a.k.a Alaska Airlines, following the Apr. 12 announcement regarding ASTM International’s approval of the company’s revised jet fuel formula blend.   Well, the test flight is scheduled at some time in early June.

You may ask: why didn’t I hold GEVO’s through the earnings release Friday?  Fair question, and the answer is quite simple.   I live with the old Wall Street adage, “Bulls make money, bears make money, but pigs just get slaughtered!”  After staring at a 30% profit within 30 days, I felt it was too much of a hard-earned score to let it ride on earnings.  Which brings up an important point I’d like to make.

Have you ever heard gamblers say, “Well, I was up $10,000, so I didn’t mind gambling with the ‘house’s money’,” implying that the gambler lost his $10,000 after successfully beating the house?  Well folks, that’s how losers think.  That $10,000 was not the house’s money; it was HIS money–and he lost it foolishly.  I’m no fool, and neither are you.  Play it safe after a good score.

Cliffs Natural Resources (CLF)

As I said in my May 12 email, I’m watching CLF at current levels.  The stock is trading above its 200-day moving average ($2.71), and I’m watching the action now that the stock price has dropped below $3.  My original goal was for a $3.60 handle in the short term ($4 beyond the short-term time horizon), but I’ll let you know in an alert if I decide to pull the trigger on this trade.  Fair enough?

GoPro (GPRO)

On May 11, I emailed subscribers my purchase of GPRO at $9.85, with the notion of buying more at lower levels.  I’ll let you know in future emails of my latest moves on GPRO, now that the stock has dropped below $9.

So, what’s the big deal about GPRO right now?  A lot.  The stock is trading near all-time lows.  After reading this article from Venture Beat, titled Twitter’s Periscope will soon support livestreaming from drones, I think the market is discounting GPRO too much at this time.

Twitter subsidiary, Periscope, is pursuing the drone market in a big way, which when integrated with GoPro’s hardware may take GoPro sales to another level.  In my opinion, live feeds from Periscope’s integration in conjunction with live communications through Twitter’s proprietary model may drive sales crazy with new media news providers and amateurs across the globe.

Following its integration with GoPro earlier this year, Periscope is going after the drone market, picking up one of the better-known manufacturers: DJI. By doing so, Twitter is upping its game against Facebook, which has opened up its livestreaming API to third-party camera makers and developers, and, like Twitter, has put a great deal of resources into the live broadcast space.   

Right now, I don’t think the market is pricing-in this potential, mostly due to the stock’s performance since the start of the year.  From my research of Twitter and Facebook, news is a big market for Twitter and Facebook as they fight it out as to who will be king.  Twitter’s bias is with heavy new readers, as reported by Pew Research on May 9.

In the report, the germane point Pew Research makes is the heavy bias Twitter has with ‘new junkies’.  According to Pew Research the ratio of news junkies between Twitter and Facebook is nearly 2-to-1.  Irrespective of who will win in the race to become the live video stream king in the social network space, GoPro may truly be the big winner due to the enormous resources each company has invested in this exciting advance in global connectivity.

In other research, we have found that even though the same portions (63%) of Facebook and Twitter users get news on the sites, there are noteworthy differences between the two. Twitter users are about twice as likely as Facebook users to say they follow breaking news there (59% vs. 31%). And they are more likely than Facebook users to directly follow news organizations, reporters and commentators (46% vs. 28%). Twitter users also report regularly seeing news about four topics at higher rates than Facebook users: sports, business, international affairs and national government and politics. 

I’ve stressed the impact a reverse in sentiment can have on a stock.  As I stated, I’ll be updating you on my thought on the trade, in progress.

Here’s a few new ideas I’m looking at this week. As always, buy and sell alerts by SMS text and email in real time when I take action.

Net 1 UEPS Technologies (UEPS) 

Net 1 is a global payments company to the world’s ‘unbanked’ population, which is estimated at five billion individuals, mostly from emerging-growth nations.  The company began its focus in South Africa, where approximately 70% of its revenue is derived, according to the company’s latest 10-Q.  South Korea is no. 2, with approximately 25% of revenue derived from customers in that country.  The remaining five percent comes from business in Europe and the U.S.  Net 1 has now embarked in the huge market of India, Nigeria and Hong Kong.  

The Korean market, alone, has potential of soaring Net 1’s revenue, as the mostly-Chinese population prefers to do business in cash, away from the banking system.  As Westerners, we don’t have a firm grasp of the Chinese psyche, as  distrust among many of banking institutions (all institutions, really) runs deep.  Although Honk Kong is also predominantly Chinese, Korea’s 51 million population and impressive purchasing power parity propels that country to the top of the list as a potential top-tier market for Net 1.

Because of Net 1’s use of biometric card technology, off-the-grid (so to speak) customers are able to be identified via fingerprints and voice, transacting in transaction code instead of card numbers.  These security features and Net 1’s business model and growth potential apparently was impressive enough for the World Bank’s International Finance Corporation (IFC), who announced jointly with UEPS on Apr. 11 a deal in which the IFC will purchase 18% interest in Net 1,  estimated to be worth US$107 million.

The news release included:

Net1 has created impressive proprietary technology for the delivery of services and demonstrated its effectiveness in South Africa. IFC and IFC AMC’s funds’ investments will help Net1 expand regionally, especially into African countries where there is limited banking infrastructure and availability of financial services for the poorest segments of the population. 

After the deal is finalized, Net 1 will have reached approximately $300 million of working capital.  That, alone, represents approximately 60% of Net 1’s $504 million market capitalization.

And if that’s not enough good news, the IFC has a partnership with MasterCard, called “The Partnership for Financial Inclusion.”  The goal of the two entities is to foster microfinance and mobile financial services in Africa.  With 1.1 billion people, the potential revenue may be staggering from that continent.  

Therefore, I suggest doing your own due diligence on UEPS.  I believe the IFC deal is the catalyst for a successful long-term play.  I like a plan of accumulation of this stock at somewhere near the $10 level.  I’ll revisit UEPS in future communications.

Aerojet Rocketdyne (AJRD)

Aerojet Rocketdyne (AJRD) is a U.S.-based propulsion provider to the aerospace and U.S. Department of Defense.  The company is relatively unknown to investors due to thin coverage by Wall Street’s analysts, which is always a nice start to our analysis.

Firstly, Aerojet has grown revenue since 2008, splitting revenue between the space market and defense market at 45% and 55%, respectively.  We like the company’s stable revenue stream and poor visibility with investors (at this time).  With annual revenue of $1.7 billion and a backlog of $4.1 billion, Aerojet has enough business for more than two years.  I believe the company is in some way protected via national security interests and will be cuddled with lucrative contracts for many years to come.

Aerojet presently trades at a discount to its competitors, Lockheed Martin Corp. (LMT), Northrop Grumman Corp. (NOC) and Raytheon Company (RTN), whose market cap.-to-EBITDA multiples of 11.5-times, 11-times and 11.9-times, respectively, are at least 47% more than AJRD’s 7.48-times.  If AJRD was given a similar multiple, the stock would trade at $26.75, compared with the stock’s present price of $17.54, a 35% discount to its competitors.

I think the stock was unreasonably spanked following the failed deal to acquire United Launch Alliance (privately held) and the dropped contract with Orbital ATK (OA), the latter of which represents 6% of 2015 revenue.  With Aerojet’s other contracts with Orbital ATK and business from United Launch growing at a rate to exceed revenue lost from the recent dropped contract with Orbital ATK, the revenue surprise expected in future 10-Q’s that I see this year may turn sentiment around and jolt the price of the stock back up to comparable EBITDA multiples of its peers.  

Even if the stock continues to trade at a discount to the LMT, NOC and RTN, I don’t expect AJRD’s EBITDA multiple to remain at 7.48 for very long.  AJRD is just too cheap for me to pass up at this time.  I want to start accumulating at the $17 level, where support appears to be strong, especially at this low market cap.-to-EBITDA level.  I’ll be recapping AJRD in future communications.

Trade green!

Jason Bond


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