Skillsoft is an educational provider to small to medium sized businesses.  The numbers are healthy, a small cap company (730 million), increasing revenue and income, and a PE under 13.  The stock price has been hit with the downturn as the past 6 months has seen a 28% decrease in price.

However the operatunity for SKIL is in the market turmoil.  The reasons are simple, a small cap & work force.  A small cap company has a much greater ability to adapt to new technologies and business models and SKIL is spending about half of there profits into R&D – uncommon for most US companies today.  The work force across almost all sectors is changing, with change comes training, especially the kind of training Skillsoft provides to small and medium size companies who will redefine how business is done over the next 5 years.

Recap: this small cap will adapt to the new markets quickly because of their managable size and they will provide new services to new business who will have a lot of training ahead.

To understand TBT, first we must look at another ETF, iShares Barclays 20+Year Treasury Bond Fund (TLT).  This bond fund is comprised of 9 different US Treasury Bonds with maturities ranging from 2029 through 2038.

Fundamentals of TLT (as of 12/31/08)

Over the past year and half, as investors have become increasingly more risk averse with the economic downturn, many investors have been moving their money from equities into much safer US Treasuries.  The flood of new investors into the US government bond arena has raised bond prices which, in turn, lowers bond yields.  In other words, investors are willing to pay a hefty premium for much lower returns on US Treasury Bonds because they are guaranteed by the US government.  In a sense, investors are parking their money in Treasuries until it’s “safe” to get back in the equity pool.


For a quick bond refresher, bonds, like the US Treasury Bonds, have $1,000 face values which is considered to be a $100 par value (why?  I don’t know).  So, let’s assume that a 30yr US Treasury bond is issued with a coupon rate of 4% and we have a expected rate of return of 4%.  We would be willing to purchase that bond for $1,000, because it would be at par value.  However, if our expected rate of return is greater than the coupon rate, then we would expect to receive a discount on the price of the bond like maybe $950, or if our expected rate of return were less than the coupon rate we would be willing to pay a premium for the bond like $1050.  In fact, very rarely does a bond trade for par value.  It usually trades at a discount (<$100) or at a premium (>$100).


As of right now, the average weighted price of TLT is $131.01, which means you would have to pay $1,310.10 to receive $50/year and $1,000 after 25.72 years (according to the weighted averages listed above).  Buying this basket of bonds and holding them to maturity would yield us 3.25%.  Historically speaking, 3.25% is extremely low for 30 year Treasury yields (see chart below):

So now the question becomes, “How can we take advantage of such historically low yields in long term US Treasury Bonds?”


Enter ProShares UltraShort Lehmans 20+YR Treasury Fund ETF (TBT).

In the world of bonds, yields are inversely related to prices.  As yields go down, prices go up.  As yields go up, prices go down.  Clearly, yields have fallen steadily since 1980, but have really dropped off even more sharply in the last few months, or so, to what I think are unsustainable levels.  Right now, investors are more comfortable with an expected rate of return of 3.25% which causes the long term US Treasury Bonds to be priced at $131.01.  However, as the economy gets back on its feet and the stock market becomes more attractive, investors will begin having a much higher expected rate of return and US Treasury Bond yields will go back up.  As they go up, the bond prices will have to fall, hopefully approaching their par value of $100.  TBT is setup to take advantage of the falling Treasury prices by shorting TLT with leverage, so instead of a -1 correlation, there will be a -2 correlation.  A 10% fall in TLT should produce a 20% gain in TBT.  The leverage doesn’t always work out nicely because of daily fluctuations, but in general, if we see a large fall in TLT, TBT should come out a huge winner.

-Joey

What is a sustainable business?  There is no answer, but a common one may sound like a business which posts stable earnings which increase over time.  Sounds good, but how about a business who is continually prepared to maximize earnings under market conditions.  The former appears healthy, but there can be costs with keeping stable earnings.  The latter can focus on business models and then judge market conditions to earnings.

Think about financing debt, a sector recently compromised to greater risk in an effort for many companies to stabilize earnings.  As a business model financing debt works, market conditions should determine risk and then rates for financing assigned to customers.  Relying on market conditions can result in earnings flux, but flux doesn’t mean the business model is unsustainable.

A true price or one with no “noise” could be a judgment of the functionality of a business model over time and how a company has performed when compared to market conditions.

Now think about companies who function healthy business models, which are currently losing money because of these market conditions.

A look at Visa is about future potential.  For example the current PE of 85 has no real reflection of the existing market today.  However perspective exists in the potential earnings.  http://moneycentral.msn.com/investor/invsub/analyst/earnest.asp?Symbol=V

Here you will see a September 2010 average estimates of $3.18  which takes the future PE in 21 months to 18.2 the current price is $57.88.

Master card is currently $164.13 a share with average earnings in 12 months predicted at $10.39 or a 15.8 PE in just one year.

One clear commonality is the earnings are going to improve for credit card companies, the thought for the extra price on Visa is likely they will be taking market share of a significant portion of the growth.

I write this to the cause of selling our shares in Visa.  Today’s market contains value which doesn’t have to wait one, two or three years as in the case with Visa.  The market cap of Visa is at 50 billion, which is surely below the potential high in the future, but clearly reduces the likelihood of the price multiplying by say ten, which is common with stocks priced at extremely high PEs.  So though this stock is at that great stage of IPO with potential, we must realize a huge portion of the potential has been in the past.  I believe there are many conservative companies priced at value which can multiply at the same rate as Visa, so why take the risk in the requirement of future potential earnings?  I am a sell with taking a month to review other positions in the market.