Author: Yale Bock, YH&C Investments
Covestor Model: GARP
Disclosures: Long GIGM, DGI, NDAQ, CASS, CLGX, JMBA
December 2010 was a month of low volume and was overall pretty non eventful. A new fiscal year brings a fresh outlook for portfolio managers, and outperformance is the goal. There are varying opinions on what to expect in 2011, and in my mind complacency is a big issue for the market. Still, results are based on earnings and individual companies ultimately reward shareholders with performance over years, not months. One bad year for a company can be reversed, while one bad three year stretch cannot. I see January as a volatile month, and I suspect the volatility will continue for a while. I will continue to own what I currently own, waiting to see what GIGM has to say and persisting with the rest of the positions as for the most part they have performed well.
Here’s why we own what we own in the Covestor GARP model:
1. Gigamedia (GIGM): Pretty much the same old same old. As I said last month, the company released two 6-K’s which essentially say their ex-employee has hijacked the online-basketball business in China. They will probably write down the division, taking a charge and losing control over the business to the ex-employee who essentially stole the business. The cash loss is estimated at $1.5 million. The business was a fraction of their total operating business. We are still waiting on an earnings release and what the company has to say. So we wait on the release, give them more time this year, and see if the stock ever will go up. I will give them another six months to give me reasons why I should continue to own it, and if not, will have to adjust as events play out.
2. Digital Globe (DGI): Again, the reason for ownership of the company is the continued increasing demand by governments and private enterprise for digital photography from satellites, to help with defense, intelligence, and information collection. The business is very good with free cash flow generation at about 70 million per year.
3. NASDAQ (NDAQ): The company announced a large buyback in which they borrowed approximately $370 million to fund a $500 million share buyback. The buyback constitutes a bit over 10% of the outstanding shares. NDAQ also announced they bought two companies – FTEN to help brokers manage risk, and Zoomvision Mamato to help investor relations firms.
4. Cass Information Services (CASS): Solid company and continues to perform well. As the economy has picked up, more activity helps their results. Interest rates have risen a bit, so they should get a nice expansion of margins in their bank. In October the company reported a dividend increase on year over year EPS.
5. Corelogic (CLGX): Tied to the housing market, the company generates a ton of cash with its information based business. In November, the company reported a loss by writing down the value its employer, legal, and marketing business. The company announced a 100 million dollar share buyback. CLGX sold their employer services and litigation support business, First Advantage, for $265 million in order to make acquisitions in core areas.
6. Jamba Juice (JMBA): Jamba Juice reported earnings typical of the last year, and revenue growth on the top line went backwards because of fewer stores. However, the company announced a new franchise agreement in Canada, building on one for South Korea. In addition, the company announced a new agreement for energy drinks with Nestle which will start in 2011. The company will be presenting in a few investor conferences in January.
