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

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.

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.

China Digital TV Holding Company (NYSE:STV) is a small cap company (367 M) based in Beijing and they are the leading provider of Conditional Access (CA) systems in the fast-growing digital television market in China.

Conditional Access Systems

CA systems allow networks to control distribution of content and value added services to their subscribers. These systems are comprised of three components: head-end software for the network operators, terminal-end software for set top box manufacturers, and securely encoded smart cards. As of September 2008, 184 networks and 115 set top box manufacturers utilize STV’s CA system. Of note, STV derives a majority of its revenue in smart cards. It has shipped in excess of 20 million smart cards and third party sources report that STV has captured approximately 50% of the smart card market in China.

Additional Products and Services

STV also provides Subscriber Management System (SMS) software that maintains a database of subscribers, handles billing, processes orders for new services, etc. Most importantly, whereas this product is easily integrated with STV’s CA system, it is an independent product. It is compatible with, and may be sold separately to, clients using other CA vendors. Approximately 30% of the network operators using STV’s CA system also integrate their SMS. Further, STV also licenses set top box designs to manufacturers that are not surprisingly engineered for easy integration with STV’s CA and SMS systems.

Summary

STV is a solid company because they do not have a single point of failure. As their products and services are highly adaptable to other systems and independent of each other, they are poised to deal with major issues better than most companies. Further, their list of clients is highly diversified and not dependent on a few networks, content providers, and manufacturers – so if a few of those companies fail, STV will be virtually unaffected.

Currently, the Chinese government is looking to expedite the digitalization process in China with mandates for business tax waivers on subscription fees and complete digital roll-out by 2010 and discontinuation of analog signal by 2015. With their nearest competitor holding 17.8% of the CA system market share, as compared to STV’s 50%, they are positioned to dominate this market moving forward and their stock is likely to reflect in kind as China embraces the digital revolution over the coming years.

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