The environment’s still excellent for stocks: here’s what we’re buying and selling – YH&C

Author: Y H & C Investments
Covestor model: GARP
Disclosure: Long DGI, CLGX, GIGM, CASS, JMBA, DLB

February 2011 was a good month for the stock market. The environment is still excellent for stocks, with the caveat being global events like the political events in the Middle East and how they affect prices of crucial inputs like oil, and potentially the sovereign debt issues in Europe. With relatively low interest rates across all spectra of the bond curve, inflation seen as benign (according to the government), and record corporate profitability, stocks are my preferred asset class – but they always are.

I sold Nasdaq (NDAQ) in February as it the stock had risen substantially in the past year, reached a full valuation, and faces a severe business challenge with the potential merger of the NYSE.

Digital Globe (DGI) and Corelogic (CLGX) reported disappointing quarters, and in Dolby I added an excellent company at what I consider a fair price. Gigamedia (GIGM) remains, as always, the fly in the ointment.

Gigamedia stock continues to underperform as shareholders await the report concerning the 4th quarter of 2010. In checking on the company, in my opinion it is evident management is occupied with building the Everest Poker business in France, and the results of increasing usage are evident over the last 3 months, at least according to the web site The online poker business in France is a difficult market because of the regulatory environment, but GIGM has a large incentive to grow the business in order to cash in on the second part of the agreement with Mangas Gaming.

In analyzing the Asian portion of its business, it is apparent the focus is on internal development and adding new games and markets, and in that light investors are dependent on management to prove successful in their efforts to grow those businesses. The key point here is the prize, as one only has to look at a company like Zynga and its strong revenues and profits garnered in a short time frame to see what can happen if a game takes off. As of now, the comparison is not appropriate, as the Asian business does not have scale. The bottom line is time will tell for the Asian business, as the results coming in March and later in the year will be self evident.

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 company released earnings on February 28 and DGI slightly missed analysts’ concensus estimates on revenue and earnings. Just as important, though, the company hired a new CEO, Jeffrey Tarr, who held positions at Dunn & Bradstreet and Hoover’s. For 2011, DGI reported it expects revenues in the range of $345-$365 million, EPS from $0.20-0.40 for the year, and adjusted EBITDA of $223-$243 million.  (Source: Yahoo Finance)

Cass Information Services (CASS): On January 27, the company reported revenues of $25 million and EPS of $0.54 a share for the 4th quarter of 2010, a 20% and 17% increase of their respective numbers year over year. CASS maintained the dividend at $0.16 per share and opened an office in the Netherlands in February.  (Source: Yahoo Finance)

Corelogic (CLGX): The company announced earnings on February 24, 2011 for the 4th quarter of 2010. Total revenue came in at $394.5 million, excluding a business which was sold. The company took a write down on the sale of the business, as well as a non-cash charge regarding an investment in an affiliate. In sum, the company had an EPS loss of $0.30 a share. On the positive side, adjusted EBITDA was $91 million and the business and information segment racked up quarterly gains of 10% with EBITDA coming in at $57.3 million versus $52 million in 4Q2009. Also, CLGX bought back 1.64 million shares for $30 million. Once the non-cash charges and losses from investing in other companies end, I expect CLGX to consistently report solid numbers, as cash flow is a huge strength.  (Source: Yahoo Finance)

Jamba Juice (JMBA): Jamba Juice reports earnings on March 7, 2011. I took the opportunity from the sale of NDAQ to purchase more shares of Jamba Juice at what I consider an attractive price. Developments included the company expanding its partnership with Inventure Foods to include national distribution of smoothies, and the opening of another licensed location at the University of South Florida.

Dolby (DLB): The company sells products and technology throughout the entertainment industry on a global basis. From a qualitative standpoint, the business is excellent with a balance sheet of over $700 million dollars of cash and no debt, operating margins slightly below 50%, and net margins north of 30%. Free cash flow in 2010 almost reached $300 million. The company was bought at a price close to $51.50 per share. Dolby has offered guidance for 2011 of GAAP earnings of $2.57-2.73 and non-GAAP EPS of $2.82-2.98, which means if the company hits the low end of its numbers, I paid 20X EPS or about 10X Enterprise Value/EBITDA. If however, the company does better than the guidance, the price would be even cheaper. The reason why the stock has been punished is because of lower guidance for sales in the PC market. I believe Dolby has other growth opportunities in tablets, mobile devices, cars, and gaming devices to more than make up for the PC market’s weakness. (Source: Yahoo Finance)