Author: Yale Bock, Y H & C Investments
Covestor model: GARP
Disclosure: Long GIGM, DGI, CLGX, CASS, DLB, JMBA
August 2011 was a terrible month for the portfolio, and for the stock market. A few companies in the portfolio were severely punished because they withdrew guidance for the rest of the year based on an uncertain economy, or issued warnings about possible problems in their business. However, the reality is the portfolio has badly lagged its benchmarks, underperforming by over 20% for the year.
September through the end of the year is historically a strong period for the stock market, and while the pain has been severe, I’m hopeful the businesses in the portfolio will perform better going into 2012. September should bring more clarity regarding the sovereign debt issues in Europe, and how the back to school shopping season went. There is certainly a great deal of negativity in the market, which usually means a turn is coming. Time will tell.
Covestor Portfolio: The Reasons for Owning the Portfolio Holdings
The company reported earnings on August 15 of -12 cents per share on revenues of $8.8 million. The company reported it is looking to sell passive investment stakes that have increased in value during the rest of the year, in order to improve its liquidity position. (Company press release
The major issues with the company are the lack of scale in its Asian gaming businesses and how quickly their pipeline of games comes to market. GIGM has now pushed back its release of a few games, including the Spongebob development, to next year. Ultimately, if an internet gaming company cannot produce games in less than two years, one has to wonder whether they can ever bring the game to market. Candidly, at this point, and based on the last two years, it is hard to have any faith in the management of this company.
Digital Globe (same report as last month)
The company reported revenues and earnings of ($.01) per share for the 2nd Quarter of 2011. Revenue came in at almost $82 million, and for the first six months of 2011 versus 2010, cash flow from operations was up to $105 million from $57 million. The thesis for owning DGI remains the same, private and public enterprises all over the globe will continue to demand high quality pictures from satellites due to security and legal issues. The growth story here remains in place. (Digital Globe Press Release. 4262950129.html?x=0&.v=1)
The company reported 2nd quarter 2011 net income of 29 cents per share on August 4, 2011. Total revenues were $396 million, down from $411 million in the 2nd quarter of 2010. (Company press release
The premise behind owning Corelogic is the mandatory need of their services from any buyer of real estate information. Operating earnings on a pretax basis were $21 million, hurt by weakness in the business and information segment, mainly due to softness in volumes of mortgage originations, which hurts the mortgage information segment. The company also reported a one-time gain of $59 million on its initial investment in RP Data. The company also named a new CFO and repurchased almost 9 million shares for $161 million. The stock got hammered and management has hired an investment banker to look at possible strategic alternatives.
There are questions regarding the exposure in the CLGX Eappraisal division, as well as the entire company’s liabilities in the underwriting process of mortgage backed securities with commercial and investment banks. Until the housing market improves, or the company gets sold to First American Financial, I expect others will stay away from this position.
Cass Information Systems (same as last month)
The nation’s leading provider of transportation, utility and telecom invoice payment and information services reported record second 2011 earnings of $.61 per diluted share, an increase compared to the $.52 per diluted share it earned in the second quarter of 2010. Net income increased to $5.7 million and revenues increased to $26.6 million.. A very solid company in the transportation industry which has a long history of being shareholder friendly and I want to continue to own it, and they should do even better if interest rates ever start to rise. (Cass Information Systems Press Release.
On August 4, 2011, the company reported earnings of $61.7 million dollars (55 cents/share) for the 3rd quarter of 2011. In the 3rd quarter of 2010, DLB reported earnings of 55 cents per share, or $63.5 million dollars. Operating weakness was in the services portion of the business. The company guided earnings for the rest of the year to $2.61-2.70 on a GAAP basis. (Company press release,
Growth areas for the company continue to be the mobile, gaming, tablet, digital television, satellite television, and 3D markets, both domestically and globally. The majority of their revenues come from licensing entertainment products, which have huge operating, cash flow, and net margins.
The lingering issue here is the ability of the company to find growth areas away from its traditional strength, the PC market. The stock got hammered because the management mentioned it is possible they won’t be included in the Microsoft 8 operating system, at the same time they guided downward.
The Company reported business results for the quarter ending June 30, 2011 on August 16, 2011. Results were much better than expected, both on the top and bottom line. As the company continues to increase its licensing revenues and new franchise agreements, both domestically and internationally, I expect margins and the revenue growth rate will improve.