July 15

American markets ended the day Tuesday with mixed results. The closed under 11,000 for the first time since July of 2006, it lost 92 points on the day, closing at 10,963. Meanwhile the S&P500 lost 13.39 points, closing at 1214.91 (a two year low), while the NASDAQ managed to close slightly higher, gaining 2.84 points, closing at 2215.71. Oil had a wild day, at one point futures were down nearly $10 per barrel, however lower oil prices could not ease the markets fears of a worsen situation in the financial markets as US banks start to close. Both exchanges saw a sharp increase in volume. Oil saw its largest decline in over 17 years.
A number of things are worth looking at right now. Chairman Cox of the SEC has announced that regulators plan to make it harder to short troubled financial's such as Fannie Mae, Freddie Mac, Lehman Brothers and Wachovia Bank. Mr. Cox told legislators that the SEC would issue an emergency order to stop “naked shorting” in important financial entities. It will be very interesting to see how the markets take this news. It could easily cause a sharp rebound in these names as shorts scramble to cover positions, yet at the same time it could also offer a shorting opportunity if this does not occur. A good rule to follow is this “That which should go up, had better”, because if it doe not its pretty surely going to go down. With this new rule coming into effect the most logical thing would be for the effected stocks to rally. If they do not then the SEC may learn the lesson the British learned trying to hold up the Pound over a decade ago against George Soro's and other Global Macro funds, the lesson being that the market is going to do what its going to do, regardless of what officials would like.
With the failure of Indy Mac bank many people are worried about their own banks and what the future may hold for accounts they hold. Many are worried they will lose accounts, and in some cases this fear is made worse by a poor understanding of the FDIC rules. First of all, if you have less than $100,000 in an FDIC insured bank you have nothing to worry about. Even if you have more, in some situations you still have nothing to worry about. For example a married couple can have $200,000 in a joint account and that will be insured for the entire amount. Each person can further more have a $100,000 account, bringing the total insured amount per bank up to $400,000 per married couple if the accounts are structured correctly. For any amount of money over $100,000 (or $200,000 for a joint account, $400,000 for joint and two single accounts) you will get back fifty cents on the dollar above the amount. As an example, if you have an individual account of $150,000 at IndyMac you should expect to get $125,000 back, the first $100k being fully insured, the $50,000 being covered at fifty percent. I hope this helps out as a few people have had questions about this.
Next, the dear old Fed is wanting to put “new” rules on the books that would actually require a lender to be sure a debtor has the ability to pay back the loan. It's an amazingly complex principle, I'm shocked that the government has figured it out this quickly! The only problem is that for the most part these rules are already in place, and the fact of the matter is that if anything the Fed needs to be making it easier to get loans right now rather than harder. We are in the middle of the worst real estate bust in history and most people are finding it impossible to get loans unless they have nearly perfect credit. It gets even worse if you want a jumbo, which nearly everyone living in coastal areas or a large metro area such as Boston, New York, San Fransisco, LA etc will have to get in order to buy a suitable home. Just another example of the brainiacs in DC making things so much better for the average American.
As I've been saying for some time the sharp decline in the market presents great opportunities for the astute. Leading stocks will hold up, showing better relative strength than peers during periods of market weakness. This gives us the best opportunity to isolate them from the dismal crowd. Right now there are a few stocks with superior fundamental and technicals showing up on my radar. Names include AFAM, CELG, AMED, MMSI, TRLG, PMFG, FCN, CIR and FORR. You must keep in mind that we are in the midst of earnings season, this can make risk higher. Also, keep in mind that stocks such as MMSI, for example, are well into breakout mode. In a stock like this tomorrow is not likely to be the time to buy, however as you see the stock rest by trading sideways or down slightly, then upticks from there are generally excellent entry points for traders. I'll put some charts up with details of the trade on a few of these later.
Brandon

stocks to watch

Here in a bit I will have something to say about life and keeping on keeping on. I find myself back in the hospital with a strep infection in my hip and leg after having had to have the lymph node in my groin taken out. I have a pretty lenghty surgery again tomorrow and will likely be in the hospital for the next several weeks after having already been here from May 21st to June 18th. I came back in Saturday evening with a temp of 103.8 degrees and pulse near 150 and in terrible pain. Back on the expensive antibiotics (over $1000 a bag for Vancomyicin). Anyway if your feeling bored in a few days feel free to call me, i'll be up for chatting probably after thursday or so. I'm at Mary Greely Medical Center in Ames.

Looking at stocks and the indexes here the markets did not act well at all today. Volume the rest of this weak should be fairly light due to the holiday. It's easy to get very pessimistic in a down market, but you really have to keep your eyes out for the opportunities you can find. In addition to making money on the short side, a very weak market is the ideal way to isolate the strongest stocks. Strong stocks will hold fast in the face of a declining market, and very often in the next move up they wil be your leaders. A few outside of the oil groups to keep an eye on include KR, VAR, IHS, MORN, WYE, AFAM, V, SB, LHCG, CHD and WYE.

Take care and I'll write again tomorrow if I don't go into surgery too early, and then as soon as I'm able once I'm done.

Visa

Visa Inc (NYSE:V) is a relatively recent IPO that provides payment solutions in support of credit and debit programs to financial institutions. The company has shown better fundamentals than most in its group, with EPS growth of 49% and 73% the quarter before. Sales growth has been strong as well, although not as strong as earnings. Last quarter saw 22%, 27% before that and 50% before that. The stock has also shown solid trends, much better than the overall markets have in recent days and weeks. When the over-all markets pullback, this often provides the very best opportunities for isolating truly strong stocks. Visa has pulled back in a nice orderly manner to support. I will be looking for buying opportunities in the stock.

On the heels of a rather dovish Fed yesterday and $140 oil today the major market averages fell sharply. The Nasdaq, which had been the clear relative strength leader fell the most, losing 79.89 points (3.33%), closing at 2321.37. It was no day at the beach for the S&P500, which lost 38.82 points, closing at 1283.15, or the Dow either, which lost 358.83 points and closed at 11,453. The selling accelerated into the close, which is often a sign of institutional based selling. Volume was up 7% on both exchanges, which while above the recent average volume figures is not a panic number that would indicate any type of capitulation on the part of investors.
Right now we remain in the clutches of a bear market. In fact, as I look across the market sectors and at individual stocks the only area of significant strength left is in commodity based groups such as Steel, Fertilizers and Oil. Many stocks in these groups are showing great strength and will likely present buying opportunities on pullbacks and breakouts. The financial group continues to show the worst performance as investors confidence sinks in the honesty of the firms. The Fed and Congress are also showing themselves to be inept at dealing with the situation. Finally we have an election cycle, where both sides have a vested interest in making things seem bad and telling us how much better it would be under them.
When markets are down sharply though it presents a very good opportunity for astute investors. The stocks that hold up best in the times when the overall markets have a strong likelyhood of being leaders when there is a recovery. Names like AMED, DV, DRG, V, I.H.S and MORN continue to show strong patterns and each of them also have relatively solid fundamentals as well. Almost Family (AFAM) which I wrote about this weekend has fallen since the breakout and I have gotten out of it for the time being. It's still showing decent strength as compared to the overall market, but at this point there is no reason to stand in front of a speeding train. I'll continue to watch it closely for buying opportunity.

Iowa City, Ia - Flooding Video

Most people probably have great memories of where they went to College, certainly I'm not exception, so seeing the floods that have effected the town of Iowa City and the campus of the University of Iowa has not been a great thing. My sister works in the recruiting office at the Department of Surgery and a co-worker made this video of the flooding at has put it up on Utube.

http://www.youtube.com/watch?v=hjwcBAjOIGU

UVE From Anthony Tsung

In my opinion, one of the best investors of our time is Peter Drucker. If you have never heard of this man, you are missing out.

Drucker has held his own legend in the sphere of executive management [almost every MBA student and CEO has heard of this man]. Accordingly, he is the father of management, writing the commandments as to how management ought to be implemented throughout a corporation. If one were to go back to the first few novels on management published by Drucker, one would find that the majority of today’s “hot executive business books” will, without a doubt, spew the main points Peter had been teaching his entire life.

Sadly, the man passed away in 2005—a reminder that in the end—we are all mortal. And it’s because of mortality that we must also be wary of the cyclical nature inherent in markets. [Note: It is also interesting to see the boom/bust phenomenon one sees in nature—refer to the topics of “environmental & ecological engineering.”] Moreover, Jack Welch was the only actual student of Peter Drucker who turned to him when he became CEO of GE to ask for advice and wisdom on how to run the company. In turn, Welch added billions of market capitalization for GE.

To take a word of wisdom from Drucker:

Profit serves three purposes. One is it measures the net effectiveness and soundness of a business’s efforts. Another is the “risk premium” that covers the costs of staying in business—replacement, obsolescence, market risk and uncertainty. Seen from this point of view, there is no such thing as “profit”; there are only “costs of being in business” and “costs of staying in business.” And the task of business is to provide adequately for these “costs of staying in business” by earning an adequate profit. Finally, profit ensures the supply of future capital for innovation and expansion, either directly, by providing the means of self-financing out of retained earnings, or indirectly, through providing sufficient inducement fro new outside capital in the form in which it is best suited to the enterprises objectives.
– 'Practice of Management', Drucker

Key Action Point: Profit is the ultimate test of business performance. Decide to pull the plug on an unprofitable business if it is not covering the cost required to stay in business or providing enough capital for future growth.

Q: What does this have to do with Universal Insurance Holdings Inc. (UVE)?

A: Everything!

Market Theory 101:

As investors, we need to find companies that separate themselves from the crowd—and the best way to do this is by looking at their performance in the realm of profit and cost control—the spread between keeping the lights on and getting a check. Moreover, the market, over time, does reward companies who manage to execute on their business. In essence, there is a lot of money that is required to be put to work by fund managers all over the world and very few places for these ideas to obtain the required rate of return that would satisfy either high net wealth individuals or sovereign wealth funds.

UVE remains relatively undiscovered and has been doing better than its competition in a time of stress for the financial industry—thus permitting me to bestow upon them my own AAA status.

About UVE: The Company is a vertically integrated insurance holding company. Through its subsidiaries, the Company is currently engaged in insurance underwriting, distribution and claims. UPCIC, which generates revenue from the collection and investment of premiums, is one of the top five writers of homeowners' insurance policies in the state of Florida and has aligned itself with well-respected service providers in the industry.

Oddly enough, with much preoccupation with Oil, Capital Hill, Inflation and Bernanke, investors have left open, in such times of chaos and fear, investments that otherwise would not go unnoticed. UVE is actually a text book situation Buffett-like value players would be happy to obtain at these levels.

1. In Q1 2008, UVE diluted earnings grew by 16.7% vs. Q1 2007. At the same time, stockholders' equity grew by 19.1% to $84.4 million from $72.6 million between the months of Dec 2007 to March 2008. Continued growth in UVE was exemplified in their policy counts—as the company was servicing approximately 399,000 clients, up from 374,000.

a. For year end 2007—a significant earnings environment as this was the avalanche month for financial companies—total premiums earned and other revenues increased 43.8% in Q4 and 189.4% in FY 2007.

b. For the year-end 2007, earnings per diluted shares grew 20% in Q4 and 222% in FY 2007.

c. Stockholder equity [last time I checked, this was book value] increased to $72.6 million FY 2007, up from $22 million FY 2006. This represents book value return of 230% between 2006-2007.

2. Year-end EPS was $1.31 per diluted share, providing an earnings yield of 39%. Compared to most investments out there—this is by far one of the most attractive ones. [For die hard p/e investors, this is a little less than 3x earnings you are paying based on 2007 year end data.]

a. In the 12 months of FY2007, gross premiums written increased 34.2 percent to $498.7 million from $371.8 million for the same period in 2006, primarily attributable to an increase in new business as well as premium rate increases. The increase in new business is partly attributable to the 2004 and 2005 Florida windstorm catastrophes, which have provided an opportunity in the otherwise competitive marketplace, as certain companies are not accepting new business, as well as marketing initiatives the Company has undertaken. Also in FY2007, net premiums earned increased 185.4 percent to $154.4 million from $54.1 million in the 2006 period, primarily due to an increase in new business, premium rate increases and changes in the reinsurance program.

Playing with Shareholder Equity: Some Basic approaches to open investors' eyes to UVE.

UVE shareholder equity [book value] grew from $9,916,000 in 2005 to $72,575,000 in 2007. Lets assume that $9.9 million is the present value of a loan, and that in 2 years, the future value of the loan is now worth $72.5 million. The investment yield, or IRR compounded annually, would be 170.54%

• IRR compounded quarterly would be 113%
• IRR compounded half-monthly would be 101.62%
• IRR compounded monthly would be 103.77%

The owners of UVE have done a great job, and while insiders' stake of shares outstanding is 58%, it will probably be diluted thereafter as the company begins to initiate its PR. Even still, this is a huge stake by management to do well and grow the company with an aggressive stance for profits without sacrificing unwanted growth [not all growth is good-growth for the sake of growth is not good, as it destroys enterprise value].

The company also has about $214 million in cash, up from a mere $48,000 in 2005 [2 years ago]. What this tells me is the ability of a firm to generate cash. Now most investors may quip on how this is not being plowed back into growth and acquisitions. Actually it is, but with care—which is the best type of decision making I enjoy seeing when a firm is starting to get big—it doesn’t get ahead of itself and remains within the guidelines of operations that brought it to where it is today.

Bottom Line: UVE is a great situational stock to have in your portfolio. While it may be small with a market cap of about $158 million, the firm has enough cash reserves that it would have to take something catastrophic to put it out of business. Strong relative strength and market appreciation in such a heated financial environment proves that UVE is favored by the market. [Looking at relative strength is the best way to look at whether your stock will stand up and outperform in the given quarter or not.]

Risk: I would have a risk position to be stopped out at $1.57. Accumulate slowly over weeks to months and pyramid into your trades. The time frame for this position trade is 6 to 18 months. While this may be 5% of your entire portfolio, if you are an aggressive investor, with strong gains over time, the returns and portion of your trading account will increase. Size and heft will come as returns come. In trading, there is no need to start off with your max desired position. It is best to build into them as your positions return a profit within a few weeks of holding. This diminishes risk and increases probability of success.

Happy Speculating.

Disclosure: Long

Salesforce.com Riding SaaS (Software as a Service) Growth to Increasing Profits

This is an article written by my business partner Anthony. The original can be found on Seekingalpha @ http://seekingalpha.com/article/82532-salesforce-com-riding-saas-growth-to-increasing-profits

It has been known since the early days of management that consumerism is what drives capitalism. For any business, you provide a service which provides a utility for the individual who is seeking some form of satisfaction—either through the beauty of the brand [Ferrari] or, in Salesforce’s (CRM) case, the satisfaction of starting your own company at a low cost.

Brief Background of CRM [SalesForce]

• Founded in 1999, and based in San Francisco California, Salesforce.com is the leading provider of hosted, outsourced CRM [customer relationship management] application software that is delivered through the web on a subscription basis [rather than the perpetual license model of most software vendors].
• With the launch of AppExchange and APEX, Salesforce.com has opened on-demand markets beyond CRM. As of FY2007, the company had revenues of $749 MM.

While there has been increased recognition that SaaS is sustainable and likely to be a pervasive trend, there are still firms who remain skeptical as to the SaaS penetration into the overall enterprise software market. Nevertheless, the strategic moves by industry players such as IBM (IBM), Salesforce, Google (GOOG) and Microsoft (MSFT) to invest in SaaS and PaaS technology have strengthened this technological progress.

The dramatically more economically efficient shift of SaaS application software makes SaaS a bigger generational improvement than what client-server architecture has had on mainframe computing. Fundamentally, SaaS provides an edge in application software due to technology usage [i.e. stack efficiency], improved success rate, higher ROI and innovation optimization.

The awareness of SaaS is growing and we see trends only increasing from here. A 2008 survey by McKinsey and The Sand Hill Group of 857 executives shows that respondents cite SaaS and SaaS platforms as the most important trends impacting their business, 62% believe that “software industry innovations over the past two years are nothing compared to the innovations we are about to see,” and that they expect to increase the proportion of their IT budget spent on software from 31% in 2007 to 35% in 2010.

Indeed, investors may quip that new rollouts by that of Microsoft may decrease margins but many users will argue the effectiveness of CRM [Salesforce] in their product offerings and execution. By comparing products, technologically savvy users [who are the demographic using this] will find that CRM wins because of the ease of use/intuitiveness and great marketing.

While MSFT’s tight integration with outlook is a big selling point, in action it seems less differentiated than what many users have come to expect [not uncommon for MSFT to blunder on a major revenue generating platform]. Overall this explains why CRM has over 1.1 million subscribers and is expected to surpass $1 billion in revenue this fiscal year, while MS Dynamics [MSFT] CRM online is still garnering limited revenues.

Anthony can be reached at anthony.tsung@gmail.com