Tuesday, December 06, 2005

Bye Bye Big Sky

Sold out of Big Sky for the initiative, which pushed the portfolio over the under/over performance line. Thank heavens.

Monday, December 05, 2005

SFBC International, Inc.

This is a very interesting opportunity--momentum wise, contrarian-wise, and value-wise. Here's the story:

The stock went through a triple whammy over the past month, and dropped from around $40 bucks to $18.75 today.

Wammy #1: Hurricane Wilma affected some of their clinical trials for a couple of days, but management explicitly states that it has only a minor impact on their net income and finances.

Wammy #2: A scathing article alleging that the company has horrible testing facilities and environment, and treat human test subjects like dogs and doesn't have any respect what-so-ever. A second article came out after that one alleging that the CEO himself went to patients and forced them to sign dismissals of these allegations which were brought forth by journalists--cursing them out and threatening deportation (most test subjects are immigrants). Management took about a month to host conference calls and agreed to many regulatory probes with full confidence that none of the things in the articles were true and that the entire story was fabricated.

Wammy #3: On Thursday, there was an issue with the company's compliance with building regulations and they are forced to shut down about half of their facility down which took the stock down as well. On Friday, company came out saying that that would not affect their business at all, in that they weren't even operating that particular facility at full capacity and that they will have no future problems meeting capacity even if those beds were shut down.

I personally love these situations where the sale of stock is based on non-valuation metrics. This company is now trading at an EV/EBITDA multiple of 8X, and comparable companies are trading at 12 - 13X. SFBC has solid growth potentials and sustainable revenue (management explicitly stated that they are not expected to lose clients or test subjects as a result of the article because they have had a reputation for regulatory compliance and humane treatment of patients for 25-years and this is the first time anything like this has ever happened).

Thus, I believe that the company should at least be trading at the industry average of around 12X. 4th quarter earnings doesn't show any signs of slowing down. Management maintains their earnings guidance for the 4th quarter on Nov 3, saying GAAP EPS would be $1.66 to $1.72 and excluding non-cash amortization of intangibles and one time charges it would be $1.96 to $2.02.

I think we might have a pretty good investment on our hands.

Friday, December 02, 2005

Twiddle Dee

It certainly has been a very exciting trip managing the initiative over the past couple of weeks. I swear I dream in stock ticks and valuation fundamentals now. Sometimes, I think I even have deja vu when a stock goes up and down the following day. Of course, this is far from healthy, but I think I'm getting used to this more and more--and though the stocks are falling in the short term, I'm pretty comfortable holding them for the initiative. They are great companies, but volatile as hell since they are under-covered and small-cap. It wouldn't be half as bad I think if it weren't for the fact that I have the pressure of reporting an over performance every week. Sometimes, catalysts simply don't kick in, and until they kick in, your stocks keeps getting killed. I'm crossing my fingers that they will kick in by the end of February, or the portfolios are indeed going to be screwed this year. NO--actually, I take that back. Eternal Technologies won't have a 10-K out until March 30th historically, and they usually don't announce 4Q earnings before then. That's another 3 months of waiting.

So I better get crackin' on some Christmas ideas for 4th quarter.