Dover Downs is a gaming and entertainment complex in Delaware.  What makes this investment unique is a simple understanding of their operations and assets.  They own and operate a race track, simulcasting, 165,000 sqft casino of a range of slot machines, a 500 room hotel, 11 suite spa, dining, conference center, and entertainment venue.

Take a minute and piece all those assets together, I am talking about the concrete, steel, construction costs and equipment; now judge that value to the $116 Million Dollar market cap.  Feels like it is priced right, or a value pick.  However in this economy an asset can be a pit for taxes if the property doesn’t have a foundation of earnings.  DDE has a nine year history of making money earning $.36 a share in 2009 in the face of an increased tax rate which reduced earnings at about $.19 a share.  The new tax hit the bottom line in 2009, but so did the economy.

Most gaming competitors are taking large losses as people are gambling less and traveling less.  This is the case for DDE, but to a smaller degree when compared to the competitors.  In a gaming recovery, DDE could be poised with positive numbers and a steady foundation for a quality jump in share price.

Growth is a unique barrier, today I believe there is enough potential in a recovery to not worry about growth, but the State of Delaware recently approved legislation to allow table gambling or games such as black jack, and roulette.  This could offer a fun and new experience for guests as the complex showcases what is new in Delaware.

In general DDE is a new position because it is a loser stock (down 60% over the past 5 years, but has a steady foundation) and it offers an easy to understand and study investment in a the gaming market, which adds to diversity.  Price @ $3.66

As I sat down to research for my stock presentation this month, I had a feeling I just couldn’t shake. “Should we really be buying more stocks right now?” I could hardly concentrate on the stock screener with the elephant of the economy breathing over my shoulder.

Business As Usual

From day one, our primary strategy has been “buy and hold”: the accepted wisdom that the stock market always trends upward when viewed over any long enough period of time, and thus we only need diversify our portfolio and wait for our snowball at the bottom.

And sure, you can look at our portfolio even now and point out that we’re technically “beating the market”, but we’ve been consistently down for many months now, and our buying record during the downturn is particularly distressing.

So instead of going “business as usual” this month, I decided to do some research. And I didn’t want to just read the usual high-profile sources and headlines, as institutional presence in the news cycle also has a rather shameful record. After all, these people don’t make money when we hold onto our cash. So I sought more independent, contrarian voices.

Buy and Hold Considered Harmful

I found one such contrarian voice in Mike Shedlock (aka “Mish”) on his Global Economic Trend Analysis blog. I’ve read a number of interesting posts of his, including a look at the suspension of short-selling, the dangers of trusting institutional advisers, and the incompetence of Bernanke, to name a few. He frequently publishes high quality posts, and he’s clearly not out to win any friends with the status quo; just what I was looking for.

One post in particular hits close to home with our humble club, and I’ve been rolling it over in my head for the past week. It’s called Long Term Buy And Hold Is Still Bad Advice, and I urge all members to read it closely.

First, he contrasts our current style of investing (injecting money into the market at regular intervals over a long period of time) with “CD laddering” (essentially buying a set of CDs staggered by year and reinvesting in long-term CDs as the short-term CDs mature.) He has the CD laddering method consistently beating the market over the long-term, and with less volatility (at least in his somewhat contrived example.) Sure, CDs aren’t nearly as sexy or complex as playing the stock market, but this strategy really puts our strategy into perspective.

The really interesting part (especially to our young club) comes next, though. Consider this excerpt:

One simple, active strategy that would have avoided the stock market holocaust in both the recent recessions would be to get out of the market when the yield curve inverts and stay out until the NBER announces the recession has ended.

(charts omitted)

Using [this strategy] one would have exited the stock Market in Spring of 2000 and reentered in November of 2001. One would have exited the stock market in Summer of 2006 and would still be out.

If my memory serves, we actually studied the yield curve and took note of its inversion in an education meeting very early on in our club’s short history! In fact, we’ve discussed this at more recent meetings, but it seems like we are somehow impotent when it comes to making this information actionable.

Interestingly, Mish says that we should still be out of the market, doomed to throw good money after bad until we know for a fact that the market is stabilized.

Regardless of what strategy one uses, it is a horrible idea to hold stocks throughout recessions.

One can’t help but cringe as they read those words…

On False Bottoms

So how do we predict when the recession is coming to a close? Mish has plenty to say about that too, of course, but I found another rare gem of a blog in the Field Check Group. Managing Director Mark Hanson (aka Mr Mortgage) posts only a handful of times monthly, but this information is priceless. His expertise and focus is on the financial and real estate sectors, that is, the major players for this recession.

A recent must-read regarding the foreclosure situation is The Next Foreclosure Wave, where Mark discusses the three indicators of foreclosure:

1. Notice-of-Default (NOD)
2. Notice-of-Trustee Sale (NTS)
3. foreclosure

What Mark and his group have realized is that foreclosures are very predictable when you watch the indicators. Where there are NODs, there will soon be NTSs. And where there are NTSs, foreclosures are sure to follow.

Graphing these indicators for 2008, our current economic crisis is clearly visible, but the wave seems to break around about September. Graphing the indicators for 2009 shows that things have only just begun, with the “second wave” dwarfing the first:

The Notice-of-Trustee Sales and foreclosures will continue to come. Notice-of-Defaults — the first stage of foreclosure and the earliest leading indicator of everything mortgage, housing and balance sheet related — have been hitting record highs since December.

The past 6-month NOD average is 45k…the 6-month average for the worst time in the summer of 2008 was only 43,500.

The subsequent foreclosures that come from this latest 6-month NOD surge will hit about the same time a mortgage mod re-default surge from the 2008 NOD surge does. At this point if new NOD’s have leveled out or even fallen by 50%, the re-defaults from bad loan mods made when mods were new and even more reckless than today will keep foreclosures as headlines through next Spring at least.

Next Spring at least?!?!? This is serious stuff, and I suggest you spend some time pondering that post with all of its lovely-yet-damning graphs. It truly seems that real estate has only just begun to weigh into this recession.

Never Too Late to Adapt

In conclusion, I would like to encourage that we take the long view. Let us not hope for things to get better or return to normalcy, but rather let us assume that things will never be the same again. We’ve been down for so long that I fear we have become complacent. But there is money to be made in any market, so we should take this opportunity to adapt to investment in the recession.

Instead of simply “buying through the downturn” and relying on the diversity of our stock picks as a hedge, I would like to see diversity in our investment strategy. What other investment vehicles do we have at our disposal, stock market or otherwise?

Here are some ideas off the top of my head I’ll mention to get the gears turning:

• foreign exchange trading (get the jump on the dying dollar)
• CD laddering or treasury strategies (”beats the market with less volatility”)
• re-evaluation of our policy on shorting (we don’t currently allow it)
• options
• …others?

What investment vehicles are you interested in utilizing to survive in a prolonged recession? As always, your thoughts are welcome in the comments.

P/E – N/A        EBITDA – 4.92 Billion           EV/EBITDA – 27.25

My intentions for this choice is to get us to think a little outside the box.  From a long term perspective the best time to buy into a company is when there is turmoil and things are uncertain (with low stock price, not the $1.20 earlier this year, but $5.75 or 18 Billion in cap), the problem is the risk of bankruptcy – in today’s world “long term” might lead you right into a goose egg.

Think about the car industry long term and macro – it is thriving because of population growth and new wealth from developing nations.

Now think about the car industry short term and micro – consumers are pinched, there is a lot of competition with brand names as well as with nations which want to identify with the indusrty, and innovation with the reduction of green house gas emissions is adding to the uncertainty.

There is a big gap here between these two perspectives and there is much to gain with a crystal ball.

So why Ford?  Lets dig into the negative before the positive.

Ford is going to have significant challenges with their sizable debt of around $150 Billion in today’s market.  The fact is Ford has managed debt this size for a very long time, but the credit market is requiring a higher interest rate which makes this debt a huge road block.  To make matters worse all the other car companies who have received bail out money from their governments in for example the US, Germany and France will have the ability to get lower rates on their loans which will free up more cash to the competition.  One more thing to add, the bankrupt competitors will have somewhat of an ability to start fresh with the books.

And now for why Ford can have long term positive results.  When the recession ends for the car industry, Ford’s business model will have made some efficiency adjustments, but it will ultimatly look profitable, freeing up credit and lowering the interest payments on their debt.  Cars should once again become a local commadity and the competition will suffer because of the strings which came with the bail outs – in general the local difference is the number of dealership closings.  Ford has been able to keep more dealerships open, this will create local markets with low competition.  The innovation difference can come with ability to react to new technologies in gas savings and emission reduction in the mass car production market.  Ford’s employees will be able to take new technologies to a large market, with less oversight by regulators.

This is a risk, $5.75 a share is still low long term (could be high short term), recommend a sell above $15 a share in three to five years when the micro conditions improve.

Republic Services, Inc. (NYSE: RSG) is a mid-cap company (8.63 B) with its headquarters in Arizona. Republic’s operations primarily consist of the collection, transfer, and disposal of non-hazardous solid waste for commercial, industrial, municipal, and residential customers in 40 states.

The Waste Management Industry

By far and away, the waste management industry is lead by Republic Services (in large part due to their merger with Allied Waste) and Waste Management (NYSE: WMI). On paper, according to the ratios, Waste Management is a better company…today. However, with a good credit rating, a national operating platform, and an eye on future environmentally safe practices, Republic is set to gain on WMI and compete for the top spot in this industry.

Republic Services and Allied Waste Merger

The merger solidifies a national footprint for Republic and brings it to the same class as WMI. Save for being a better leveraged company, Republic falls behind WMI in most other metrics. However, the synergistic efficiencies associated with the merger are expected to produce $150 million in annual savings by the end of next year. Compare that to Republic’s net income for 2008 at $73.8 million and it’s no wonder the two companies would agree to merge to be WMI’s only legitimate competitor. Further, the best practices of two mature companies are being combined. The strengths of Republic (financials) and Allied (integrated operations, procurement) that have each been refined over a number of years complement each other well. The result is a first rate, national company poised to grow laterally and vertically.

I’m attaching the spreadsheet with financial ratios for the eight major players in the waste management industry. Additionally, there’s a tab with facility and market cap breakdowns for WMI, RSG, and WCN.

Waste Management Analysis

With that, I’ll turn it over to Jimmy…

Josh has shown us the numbers and the two major players are clear, Waste Management and Republic Services. The two reasons why I love landfill stocks today is the future rebound in consumption and power generation. Then I will break down why we recommend RSG over WMI.

Consumption

The recession has paid its toll on most stocks, but it has also reduced consumption which has lowered landfill revenues. Both companies are down over 25% on the year in part because of the gray area of where the US’s consumption is heading. Both companies will rebound with a recovery in the market and consumption.

Power Generation

Power generation is the second reason to invest in landfills moving forward. Waste generates methane gas which has four times the green house gas effects of carbon dioxide. In order to regulate the methane, policy over the past year and a half has changed to require the capping of old landfills and the flaring of the collected methane gas. I recently visited a landfill in DeKalb County and the process is simple, over many years a trash heap turns into something like a mountain, to collect the methane they drill hundreds of holes down into the mountain and vacuum it out. The gas is then taken a few hundred yards away and flared or burned. The trash mountain is then covered in a large tarp to prevent methane gas escape. With this regulation in place power generation is an easy choice. All they have to do is build a small power plant next to the trash mountain, burn the methane gas in a generator, and connect to the local power grid. I asked someone at the DeKalb landfill and they currently power 3000 homes with two generators, which only burns half of the methane (the rest is flared). They viewed it as a quality source of revenue and have a desire to expand with more generators over time. As an added bonus, I have owned stock in Allied Waste and now Republic Services and the majority of their issues are with public relations, over time I believe power generation can help change some of the negative public perception of landfills, which can have a positive effect on litigation costs and revenue from what ever doors may open.

Why RSG?

The three reasons why we recommend RSG over WMI are because RSG has a lower price per landfill, RSG has a healthy number of landfills with a high solar potential, and they have a desire to be number one. RSG’s lower price per landfill may be a trivial way of looking at these complicated companies, but it tells me their leadership may have extra opportunities in moving forward. Typically I believe it is nearly impossible to change a companies’ culture – so this under valuation could stick long term, but I think RSG with combining resources of recently acquired AW, having Bill Gates as a major stakeholder (this started only in 2002) and the shift in environmental thinking will prove a shift in culture which will uncover some of this gap in valuation. In addition as time moves forward the many tarp covered small green power plants, which are connected to the local power grid, will become an outstanding location for solar power generation on the south facing side of the trash mountains. RSG is based in Phoenix and has a healthy number of landfills located in outstanding solar locations. The final point to be made is RSG has stated in their annual reports they are on a path to be number one in waste management. This could prove to be positive or negative, but I like the prospects of a company which is growing its business right at the point of time before understanding this new shift in the perception of what a landfill will represent in the future.

Summary

As a recap, the price is ripe because of the recession’s hit in consumption and landfills are in a transformation stage which can increase value in power revenue and potentially brand. We recommend RSG over WMI because of their lower price per landfill, position to a new solar market and an “underdog” mentality.

Here’s a more in-depth–though, still brief–article on the differences between USL and USO.  Apparently, contango is the term used to describe the strategy of rolling over current month’s futures to the next month’s futures.

http://www.marketrap.com/article/view_article/9166/watch-out-for-contango-looking-for-the-best-long-term-oil-fund-uso-oil-usl-or-dbo

Biovail Corporation (TSE:BVF)

• Market Cap: $1.66B
• Enterprise Value: $1.38B
• Trailing P/E:  8.39
• Forward P/E (fye 31-Dec-10):  8.61
• Revenue (ttm):  $757.18M
• Gross Profit (ttm):  $560.01M
• EBITDA (ttm):  $329.78M
• Net Income Avl to Common (ttm):  $199.90M
• Diluted EPS (ttm): $1.25
• Trailing Annual Dividend Yield:  13.1%
• Payout Ratio:  90%
• Beta:  0.65

Its products include:
Xenazine — chorea associated with Huntington’s disease
Wellbutrin XL – depression in adults
Ultram ER — chronic pain in adults
Zovirax Ointment — management of initial genital herpes
Zovirax Cream — herpes labialis
Cardizem LA — blood pressure control
Tiazac/Tiazac XC — treatment of hypertension and angina
Wellbutrin SR — depression
Zyban — smoking cessation treatment
Monocor — hypertension and congestive heart failure
Retavase — tissue plasminogen activator used in thrombolytic therapy
Glumetza — hyperglycemia in adult patients with non-insulin dependent and mature onset diabetes
Ralivia – management of pain
Nitoman — hyperkinetic movement disorders, such as Huntington’s chorea, Hemiballismus, Senile Chorea, Tic and Gilles de la Tourette Syndrome, and Tardive Dyskinesia

The Company is headquartered in Mississauga, Canada.

Techne Corporation (NASDAQ: TECH) is a mid-cap company (2.02 B) with its headquarters in Minnesota. Techne and its subsidiaries develop and manufacture biotechnology products. Specifically, the company is comprised of three operating segments: Biotechnology, R&D Systems Europe, and Hematology.

Biotechnology

The Biotechnology division develops, manufactures, and sells biotech research and diagnostic products world-wide (except Europe.) This segment is currently responsible for 64.4% of Techne revenues which grew by 13% in fiscal 2008 primarily as a result of increased volume.

R&D Systems Europe

The R&D Systems Europe segment simply distributes the Biotechnology division’s products throughout Europe. This segment represents 29.4% of Techne revenues and grew by 22.6% in fiscal 2008. Whereas approximately 10% of this growth was due to the strengthening Euro, this segment’s sales growth was a solid 12.2% outside of the effect of currency fluctuations.

Hematology

The Hematology division develops and manufactures hematology (blood physiology) controls and calibrators for sale world-wide. Currently, this division only represents 6.2% of total revenues. However, like the other divisions, hematology experienced a growth of 6.1% in the fiscal year.

What drives growth at Techne?

New Product Development: Techne introduced 1,439, 1,540 and 1,390 new products in the fiscal years of 2008, 07 and 06, respectively. Releasing such a large number of products ensures a steady, cumulative revenue stream; if a few products are “duds” they are offset by the “home runs” that are also found in such a vast offering.

Product Life Cycle: On average, a product takes 4-7 years to mature and then experiences a slow growth over several decades. This creates a compounding effect where Techne not only brings in revenue from new products, but also existing products as well. Further, Techne has proven growth after the life cycles of its first products produced after its inception (1981) have expired.

Investing in What They Do Best: Year after year, Techne increases their spending on research and development, eschewing investment opportunities outside of their strategic expertise.

What Do the Numbers Say?

Summary

Techne is a proven leader in their industry. They maintain strong cash positions, hold no long term debt, and continually reinvest in research and development that will only increase their scientific knowledge and/or open new markets. The product life cycle of Techne’s products is incredible and is providing them with the opportunity to profit off of their existing products and continue to produce more and more. They’ve already proven that they can grow to stay ahead of the trailing end of the life cycles – which likens their growth to a snowball rolling downhill. Additionally, Techne offers diversity to our portfolio as we currently have no positions in the Healthcare sector.

Eclipsys Corporation is a provider of advanced integrated clinical, revenue cycle and performance management software, and professional services that help healthcare organizations improve clinical, financial, and operational outcomes. It has developed and licensed software and content that is designed for use in connection with many of the key clinical, financial and operational functions that healthcare organizations require. It also provides professional services related to its software. These services include software implementation and maintenance, outsourcing, remote hosting of its software, as well as third-party healthcare information technology applications, technical and user training and consulting. It markets its software to healthcare providers of many different sizes and specialties, including community hospitals, large multi-entity healthcare systems, academic medical centers and physician practices. In January 2009, the Company acquired Premise Corporation.

Looking at ECLP against similar companies like CERN. ECLP looks like it is poised for growth and growing. See the income statement that I like so much:

http://www.google.com/finance?fstype=ii&q=NASDAQ:ECLP

Also its P/E suggests that it is a much better value right now. P/E of ECLP 5.40 vs P/E of CERN of 18.32. In fact last year ECLP had a net income of 99mm on a revenue of 515mm where CERN had a net income of 188mm on a revenue of 1676mm suggesting that they have better operational margins.

We believe this stock is a play to take advantage of the clear push towards heatlh care modernization. As an IT solutions provider in this space we believe this stock could garner a windfall over the next few years.

Current P/E is 11.14

12/2007 EBITD margin 19.77%  (not sure how to do EV/EBITDA)

Oregon wine has gained respect in the wine world over the past decade.  The wine region in Oregon which has potential to become as iconic as Sonoma Valley is Willamette Valley.  This winery carries a brand of Willamette Valley Vineyards.  The wines here are quality and one varietal which has the potential of bringing superstardom to this region is Pinot Noir.  The grape doesn’t grow just anywhere in the world, but it does very well in Willamette Valley which over the long term can enable marketing and growth to the region.  For its financial history please look here http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=WVVI&lstStatement=10YearSummary&stmtView=Ann .  You’ll find an impressive growth in earnings, growing EBIT, and lowering of long term debt over the past decade.  To learn more about their business read the annual report at www.wvv.com

a recap: they offer products under different brand labels in Oregon ranging in price and quality from $7 to over $50 a bottle, but more important is the indication of growing the region, producing record amounts of wine (2007 was a record year in Oregon) and acquiring new property as an owner and leaser of vineyards.

This should set the stage for three reasons why this can be a great investment for Ben Hur.  A rebound in small caps coming out of a downturn, the potential gain in world market share and, one I find very interesting, inflation are all reasons to buy now.

WVVI has extremely low volume and is a very small cap at under 13 million.  The down turn resulted in no support to keep the price at normal levels, which is why the price has declined from over $8 a few years ago to $2.50 today.  Total Assets are at 19 million and total equity is 14 million both indicate this stock is at a healthy discount compared to the market cap at under 13 million.  This is a potential positive because recovery in volume can bring support to this price.

Typically the wine industry declines as the beer and bourbon industry increases during market downturns.  This is the case today, however the wine industry in Oregon has sustained small growth because of the workability of its market and the quality of its product.  These two good points are indications of the regions strong ability to gain market share especially once a recovery realigns consumers back to the wine industry.

Finally inflation is something I believe will occur starting shortly after the next recovery.  It could even reach above low levels enjoyed since the high inflation of the early 1980s.  Any company with inventory can potentially do well under inflationary periods because they sell what they have produced some time after production.  This can inflate the earnings for WVVI because wine is produced years before it is sold.  For example they have a large reserve of wine produced in 2007, lets assume (nature willing) they will also have a large reserve in 2009 which will be produced at low costs because of the current economy.  The white wines will start selling at the end of 2010 to spring 2011 and continue for another two years, the red wines will start selling in 2012 and last longer.  This means they will have low cost 2009 inventory for at least 5 years or until 2014 or 2015.  Inflation could raise the price on future bottles increasing profit.

Hope this receives you well.

Exchange Traded Flubs


This is a FORBES article illustrating that USO under performs. Basically, it holds the current month’s future oil contracts but when those expire, they have to roll into next month’s contracts, so they start buying those. Since everyone knows exactly when USO is going to start buying the next month’s contracts AND USO is so large (representing 20% of the NYMEX trading volume), other future traders can front run them and gig them a little on the price. It would be better if they didn’t know exactly when those trades would occur. Essentially, USO starts off every month in the hole because their entry price for each month is artificially inflated and then has to hope that oil prices rise more than the amount that they’re gigged just to show a gain each month.


Maybe we should look into selling USO or replacing USO with USL, an alternative listed in the article that follows the average price of crude futures over the next 12 months’ contracts.


-Joey