Stocks and Sectors

Special K submits:

In this uncertain world when investors are scared to touch anything with a whiff of cyclicality, some incredible bargains are being thrown out there. I believe that LED technology supplier Veeco (VECO) is one of these. VECO makes capital equipment for one of the most compelling secular growth markets in technology, LEDs. The company trades at a low valuation (3.6x 2010E EBITDA, 7.8x forward earnings), generates a ton of cash and recently announced a $200M buyback. Against all this about 25% of shares are sold short, providing potential fuel for a rally. While there is a short case out there that I will address, I would argue that the shorts (especially those that shorted in the mid to high $40’s) have already made money when it is still unclear if they are right or not and face a poor risk/reward tradeoff going forward.

VECO’s primary business is designing and manufacturing metal organic chemical vapor deposition ("MOCVD") systems that are used to make LEDs or solar cells made of III-V compound semiconductors. MOCVD systems are the key process equipment used to fabricate LEDs on sapphire or silicon carbide wafers, and this is by far the most important product line for Veeco at about 80% of sales in 2H 2010, almost entirely from the LED market. MOCVD systems go for about $2.4M apiece and the market for them has been exploding this year as LEDs rapidly replace CCFLs for backlighting in LCD TVs and notebook computers. Veeco is essentially in an industry duopoly with Aixtron (AIXG), a German company. MOCVD tool shipments have grown from 45 tools in Q1 to 81 in Q2 and are expected to be in excess of 100 in Q3 and 120 in Q4. VECO is basically selling tools as fast as they can make them and last quarter they received approximately $260M in orders (106 MOCVD tools) vs. shipments of $186M (81 tools). The company is currently carrying $490M in MOCVD tool backlog, representing over 200 tools and nearly 100% of production capacity for Q3 and Q4 of 2010. Any tool orders made today essentially go into backlog for 2011, and on its most recent call the company indicated it had purchase orders not included in the backlog numbers. In the Q2 conference call and a recent investment conference the company indicated orders remain strong.

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Milwaukee Private Wealth Management, Inc submits:

Clearly the US and its sovereign states are economically challenged today. Among the most desperate states are California, Nevada, Florida and Illinois. MFRI Corp (MFRI), a Niles, Illinois company may be suffering from simple guilt by association.

MFRI is an industrial conglomerate. It reports in four segments:

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Frank Holmes submits:

Wednesday kicked off what has historically been the strongest period (September through December) of the year for mining stocks and gold. We discussed this back in August (Ready, Set, Gold!) but if you were out enjoying a family vacation, don’t worry you probably haven’t missed the opportunity.

Research from Barry Cooper at CIBC shows that while gold has historically performed well in September—prices have risen 81% of the time over the past 20 years—those investors who held their investment through the end of the year reaped the most benefits.

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Layne Christensen Company (LAYN)

F2Q2011 Earnings Call Transcript

September 2, 2010 11:00 am ET

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Zacks.com submits:

BHP Billiton Ltd. (BHP) reported better-than-expected results for fiscal 2010 with an EPADR of $4.47, much above the Zacks Consensus Estimate of $3.54. The gradual recovery in market demand as well as increase in the prices of commodities attributable to the new pricing system was the prime factor behind the encouraging results.

Analysts are optimistic about the market improvement and the recent proposed acquisition of Canada’s Potash Corp. of Saskatchewan Inc. (POT), the world’s biggest fertilizer manufacturer. However, they are concerned about the undefined upper-limit of the takeover offer price, which is expected to exceed $150 per share from $130 per share offered earlier.

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Robert Loftus submits:

The report of a 56.3 reading on the latest Institute of Supply Management Index has been cheered by economists and with good reason.

One surprising aspect of that report is that Apparel is a growing sector. Growth in this sector suggests that claims that American consumers are going out of their way to find items with the "Made in USA" label are very well founded. As anyone knows, finding American made clothing items can be quite a challenge in the modern day shopping mall, and if you ask anyone to name an American made clothing item (besides Thorlo and Wigwam socks) that you regularly see in a large number of retail outlets they will probably have to think for a minute before they can name anything. If we assume consumer demand for American made apparel is strong then those few firms that have maintained their production within the US become attractive investment opportunities.

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Harry Winston Diamond Corporation (HWD)

F2Q11Earnings Call

September 2, 8:30 a.m. ET

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Greyson S. Colvin submits:

Agriculture continues to outperform in 2010 and be one of the bright spots in a very uncertain economy. The USDA now estimates that net farm income will rise 24% in 2010 due to higher returns for soybeans, cotton, and livestock producers. The department also raised its estimates of U.S. farm exports due to strong demand for U.S. grain due to the drought in Russia and Eastern Europe and China’s unexpected transition to a net corn importer.

“Today’s reports are encouraging news. They show that while American agriculture has struggled through difficult economic times…the hard work and resilience of America’s farmers and ranchers have helped put American agriculture on the road to recovery,” said Agriculture Secretary Tom Vilsack.

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Stone Fox Capital submits:

Joy Global (JOYG) is a leading builder of mining equipment especially needed for the mining of coal. Unfortunately it’s not owned by the Stone Fox Capital portfolios, but they do provide a great insight into the world commodity markets.

JOYG reported a strong quarter (see here) and, more importantly, talked about ’some slowing’ in global commodity demand, but reiterated that demand remains at historical highs. The key takeaway is that prices for met coal, iron ore, and copper remain at elevated levels and mining capacity is above 90%. Therefore, the active prospect list is growing very fast. In essence, JOYG speaks of a marker that has taken a pause before it journeys higher. Little did they know that the ISM Manufacturing report released a couple of hours later would unleash a big rally in the markets.

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Adam Sues submits:

Vicon Industries, Inc. (VII) sells private network video surveillance systems – think of the video cameras in shopping malls or retail stores to catch shoplifters and detect intruders.

With a market capitalization of only $17m, the business is in a heavily competitive, cyclical industry, leading to large variability in Vicon’s revenue and income.

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