Saturday, November 17, 2012

Is DROOY The Dog Finally a Buy?

DRDGold Ltd (DRD) is a beaten down gold miner with as many names as it has problems. Back when it was called DURBAN ROODEPOORT DEEP and had the ticker DROOY,  I called it Drooy The Dog. That's about the nicest thing this stock has ever been called as it has been a poster stock for miner disenchantment for the entire 10 plus years of the gold bull market. I wrote an article at Seeking Alpha back on July 15, 2011 on this called "DRDGOLD Limited: Also Known as Drooy the Dog" wherein I discuss a possible major bottoming basement forming in the stock after some overly starry eyed outlooks by management in the early years of gold's bull market ran into one major mining problem after another. It looked like an abandoned stock to me. These can be very powerful climbers if a turnaround happens. Well, a rsing from the ashes is happening apparently. There was an article on November 1 at Seeking Alpha "From Iscarus To Phoenix - A Tale Of A Miner" describing some of the past tribulations, CEO swaps, and reinvention of the business. They have pretty much given up on gold mining per se, changing to a gold processor.

The company now focuses almost entirely on extracting gold from tailings. These are the scraps thrown away by miners as uneconomical to mess with but with significant amounts of gold in them. They are also called by such dog-like names as mine dumps, culm dumps, slimes, tails, refuse, leach residue or slickens. This is quite the letdown from the days of  "megalomaniac CEO's that managed the firm in the late 90's to the mid 2000's" as Pater Tenebrarum describes the company back in the day in his November article. But with established processing abilities for tailings, they are developing safe, dependable cash flows now. You have to have capital already paid for and operational for this to be worth doing, and DRD has it. And they got the cashflow with a very cheap price/cashflow multiple of just over 4:

Their cashflow from operations is growing much faster than revenue, what I call an inverted cashflow curve, suggesting they are doing more with each revenue dollar. It has "abandoned stock" written all over it.

They have long since thrown away their hedge book and, as I noted in my other article, were rated by Wikinvest as one of the top 4 stocks in leverage to a rising gold price. The other three - Barrick, Newmont, and Anglogold - all have market caps at least 80 times that of DRD. Where you really want to search for fast movers is in the sub 50 million share float range. DRD's float is a measly 34 million, an infinitesimal portion of the 3 big names ahead of it in the leverage rankings..

In my July, 2011 article I was wary about jumping on it:

The stock hasn't followed the miners' movements very well, drifting lower throughout most of 2010 while the HUI index did a nice climb. Only lately has DROOY started twitching a finger promising an escape from the coma. Last September saw a brief rally along with the miner group as well as this March. But it is still a technical basket case while being a valuation marvel. It is certainly one to keep a close technical eye on. I wouldn't buy it until it gets its 140/200 ema moving average act together, unless you want to accumulate it and perhaps be a poodle for awhile.

In perfect 20/20 hindsight, I wish I had jumped on it. It's up 41% YTD. Since, that first article, it has definitely got its technical act together, so I'm adding it to the blog's portfolio now at $7.68 (still wary of it). It lacks a high insider ownership, but its unusual stronghanded ownership characteristics prompt me to award it an honorary high IH.

If you are looking for gold miners who are established in stable production with good valuation but small enough to really move in response to gold, you might want to think about the Dog.

Monday, August 20, 2012

Selling Seagate Technology STX

I am moving STX off my recommend list. This was on my "supplemental smartphone index" list I made up in response to Jim Cramer's Smartphone Index he introduced on Mad Money back on August 11, 2009. As my previous posts explain, I thought his original list of 21 names left out some good ones, so I picked a list of 9 supplemental choices. Originally, I had another 3 China domiciled names included, but I soon implemented a ban on all stocks reporting out of  The People's Republic - the "people" don't report there as much as the government. And I don't trust their reporting (Cramer has a similar ban, tolerating only BIDU). By the way, I made an error in my 2/18/12 post followup on the smartphone index. I had SYNA grouped with the 3 China stocks, CHU, CHA, NTE.

From the start of the index August, 2009, STX has returned +192% and still has a price/cash flow of only 4.7 and a PE of 4 ! I hate to sell something so cheap, it still looks good as this recent article over at Kiplinger attests. But it has evidence of a tiring climb, and a triple in 3 years probably already reflects a lot of good developments. If they move more forcefully into smartphone and cloud storage, there could still be a lot of climb left in this one.

I took ARMH out of the index on 3/7/12, so that leaves 7: LLTC, WRLS, SYNA, EA,OVTI, CREE, AKAM.

Wednesday, August 8, 2012

Selling JBSS

John B. Sanfilippo & Son (JBSS) is being rotated out of my recommend list here at around $19 today. It was put in at my Instablog at Seeking Alpha 11/20/09 at $13.90. This nets a +36% result. That's not too bad since the Dow is up just 27% since then ,+ 9% worth of alpha.

But there are some things going awry with the stock. The valuation numbers are no problem - price-to-sales 0.3, price-to-cash flow 9, forward PE 7. The earnings are on an upward trek with that nice 7 PE, but the cash flow from operations is flat over 5 years now and down over 3 years and has gotten erratic (counting TTM), and the 9 ratio is just market average. This is a basic food stock, which will probably be a good area for awhile, but I like to look mainly at cash flow and technicals. On both counts, this looks precarious. The nice climb the stock has been in is starting to gather a lot of volume and the action lately is starting to look like a churn top. It's fractal condition is toast. So I'm kicking it out to make room for some better stuff.

Wednesday, May 23, 2012

GRZ An Interesting Buy

Gold Reserve (GRZ) is a small US based gold miner. They used to be the epitome of high risk having only one big project located in Venezuela. They were a speculation spending $300 million on developing the property, but not quite ready to build and start bringing out the gold. Then a twist of  fate made them into maybe the epitome of low risk. This ironically happened as a result of Hugo Chavez seizing their project back in 2008. Oh, that's bad. No, that's good, because they filed a case with the World Bank demanding payment of damages caused by the Chavez government. Oh, that's good. No, that could be bad, because now they're at the mercy of what a pact of lawyers do. Oh, that's bad. No, that's good, because lawyers do what other lawyers did in similar past cases. And by that reckoning, GRZ will be granted a good portion if not all of the $2.1 billion demanded in damages. And that would be around $13 a share if only half of it were awarded - that's very good return on the $3 the stock now trades at.

I published an article on all this over at Seeking Alpha a couple days ago here. The comment by "The Vet" lays out the likely course of action the World Bank will take and its effect on the share price. All I know is this stock has some of the strongest hands holding on to it I've ever seen, as I illustrate in the chart in the article. Since then, the stock has actually dipped a little to some very strong support:

Thursday, March 22, 2012

The Bull Market In Money Printing

Now that the money printing focus has turned away from the US and toward Europe, we find that the big US banks have "exposure" to the European banks. Just what all that is remains a little murky. I don't think the customers at MF Global had a real clear handle on that. Maybe most of the murkiness is due to derivatives. These "financial weapons of mass destruction" as Warren Buffett calls them have not subsided since the crisis of 2008. They have actually gone up. You could argue that the massive growth in derivatives should be considered as quasi-money printing because, when they go wrong, a central bank somewhere has to repair the damages.

I wrote an article over at Seeking Alpha on this titled Money Printing's Biggest Show Of All Time - I suspect it will wind up being just that. I've drawn up a graphic which summarizes this new paradigm with the growth of derivatives as charted in a marketoracle piece superimposed on the Fed's recent balance sheet history (click on charts to enlarge):

Figure 1

As you can see, there was a mellowing of the official balance sheet growth since 2000 along side very mild growth of banknotes in circulation. We enjoyed mild reported inflation during this time. But the stealth, parabolic growth in all the nasty stuff was proceeding apace in the murky world of derivatives. A good portion of them blew up in 2008 and became official components of the central bank debt. Here's a comforting thought. Since that blow-up, derivatives have grown to over $900 trillion compared to the $300 trillion back then.

This is not creating "inflation" in the classical sense - too many bills chasing too few goods. It's creating something more hideous - gyration, you could call it. It is creating basic instability in the financial world, a world unto its own and pretty far removed from the real world of bills chasing goods on main street. You can only build a house of cards so high before a stability limit is reached. With complicated financial instruments, that limit seems to be reached at about a 30:1 leverage ratio. That's where Lehman and so many others began gyrating back down to the ground. If you take an estimated Euro-zone deficit of $30 trillion, the lion's share of global debt, and consider the $900 trillion we have in derivatives, and divide the later by the former, 30:1 is the result. I would much rather have the good old fashioned inflation than this new fangled gyration.

Money printing in the past has exhibited the same fractal growth patterns I've detailed in other articles on gold. You can review these as it relates to gold in those posts. And I wrote a piece on how our present Money Printing In Fractals can be viewed as a bull market. Here, I'll just include some examples of this fractal. It basically is composed of 3 elements, twin parabolas separated by a downtrend consolidation separator. For example, the recent bull market in Egypt:

Figure 2

This is the common 64 month or about 5 1/2 year scale. This size has a 1 year downtrend separator. Another example was the bull market of Denmark:

Figure 3

Historic money printing binges also commonly follow this fractal. For example, the Brazilian hyperinflation explosion of 2002:

Figure 4

This was the 7 to 9 year scale which is accompanied by a separator running well over 1 year in length, in this case about 1 3/4 years. The first parabola is malformed, but it looks like it was trying to follow the overall fractal.

Probably the most famous case of money printing was Germany in the 1920s. It also followed the fractal in the 64 month scale (1 year separator):

Figure 5

Germany's problems were similar to ours today in that they disconnected their currency from gold in 1918 to help pay for the war expenses. Nixon followed their example, and Bernanke has put it on steroids.

Today's money printing is global, the major banks are now webbed together with "swap" agreements and who knows what. So to look at our money printing bull today, one must not look at just an individual central bank. One needs to look at the activity of all the major central banks collectively.

Keith Springer recently wrote an analysis "It's Raining Money" doing just that very thing. He added all the balance sheets together of the leading 8 central banks of the world (US, UK, ECB, Japan, Germany, France, China, Switzerland) and formed one graph for a global central bank. Is it following this growth/collapse fractal? Here is his chart with my fractal notes added:

Figure 6

I have added the fractal components in orange, and it does appear to be following the 5 1/2 year scale to a tee. The downtrend separator is 1 year as it usually is in the 5 1/2 year scale. This would have us in some kind of collapse within about a year. What will happen? I don't know. Will "gyration" follow the fractal like inflation of the past? I don't know. But we do know that money printing in this day always is accompanied by stock market rallies, so the first chapter in this story may be a very good market. Hopefully some wise resolution of the world's debt problem will continue a good market. But wisdom seems to be in short supply these days.

Thursday, March 15, 2012

$1764 Still In Control of Gold

In past posts, I have presented Sinclair's prediction from more than a year ago that when gold gets to the $1764 level, it would encounter severe downdrafts and form the biggest resistance level of the bull market. That has certainly turned out to be right as rain. I want to just show here where we're at in this show: (click on images to enlarge, then right click and view image. Click on image again)

Sinclair predicts a huge climb once $1764 becomes history. Some more weakness near term would be in order, but that can't be guaranteed.

Wednesday, March 7, 2012

Portfolio Rotation

I think some rotation in the recommend stock list I've written about here over the last couple years is now in order. I like to let a good prospect cook through market zig zags, but patience can sometimes evolve into stupidity.

One think I've noticed in my list, and in the market in general, is the behavior of the deep cyclicals. They are not acting anything like they should be 3 years into a rebound cycle. The steel stocks are not catching any kind of recovery wave, even though for the past several months, GDP and employment have surged. If we go into another cooling of the recovery as many project, these stocks will continue to do nothing, or worse. Of the 25 companies in the list, 7 of them are cyclicals, and they are uniformly showing cash-flow weakness very unbecoming a rebounder. I don't know what our market correction is going to be yet, but before the next big move down is a good point to lighten up. So I am selling these for the following profit or loss:

LABL @$20.93 +41%
KSW @ $3.76 +21%
HW @ $3.15 -39%
TAYD @$10.68 +79%
MFRI @$ 7.83 + 9%
MTW @$14.12 +6%
BOOM @$20.45 + 3%

In addition, I am moving two others to the sidelines, Rocky Brands and ARM Holdings. Rocky is not a cyclical, it is a retailer, which in general is good. But the low end and high end retailers are the good areas. Rocky is firmly in the middle selling expensive boots and work shoes. And the results lately make it look more like the cyclicals.

ARM Holdings has had a nice run, but it should be tracking Apple more closely. Instead it has gone into a prolonged consolidation formation and now looks like it wants to break it to the downside. I am going to sideline it until I see how that plays out.

RCKY @$11.50 + 22%
ARMH @$25.85 +342%

Until we see the recovery start to effect the more cyclical stocks, there will be much better selections elsewhere.

Tuesday, February 28, 2012

Gold's Big Fractal Fork In The Road Revisited

Back in 2010, I was following the fractal analysis of David Nichols on gold. He was a gold bull, but he was predicting the end of the gold bull market to occur around February of 2011. I was a gold bull too, so his prediction filled me with great consternation. I had been going over the past predictions of Nichols and knew that he was stunningly accurate most of the time, especially in the mid-range time frame of a few months or so. It made me wonder just what he was smoking. I studied the reasons why he was predicting the end of the gold bull in February - and found them to be very convincing.

I'm going to revisit what he was saying back then, and go over some additional fractal considerations I had found that gave me hope for the gold bull surviving past February a year ago. Allow me to excerpt two articles I wrote in 2010 "The 64 Month Bull Market Fractal" and "Gold Is At A Big Fractal Fork In The Road".

From the first article on the Nichols fractals:Link
I don't know how familiar you may be with the emerging science of fractal market analysis, but there is an element of it that has a direct bearing on gold right now. To briefly overview fractals, they have found that stocks and indexes have a strong tendency to move in repeating chart patterns at various scales (self-similar, they call it). So a stock may consistently produce say a 2 year pattern which is also evident at a 2 month time frame. Sounds silly, I know. The theory is that there are well known fractal growth patterns in nature, crystals growing under a microscope and about any basic growth in nature; and these are abundant with self-similar, geometric, repeating patterns. They've known about these nature patterns for many decades, but only recently has anyone thought that financial markets may grow by these fractal patterns too. When they investigated, they found that the unchanging human nature did indeed infuse fractals into the trading charts. David Nichols, a pioneer in this investigation, finds that there is a 64 month parabolic fractal signature that seems to show up at about every major bull market. The duration varies a couple months or so, but the pattern is a "sprouting" of a parabola, a bullish change in previously sleepy trading, followed by parabolic growth into a violent top about 64 months later. As an example, he points to Toll Brothers as a proxy for the housing bubble (click to enlarge charts):

The months are marked 1 through 65 for the parabolic progression. The Egyptian stock market did the same thing. I won't flood this piece with the other charts, but the same thing shows up in the Dow of the 1920s, the Nasdaq of the 1990s, and other bull markets. "

To see other examples of this 64 month parabolic fractal, just click the link above to the rest of the article. Nichols equated the end of this parabolic fractal to the end of a bull market. But I have found many examples where the fractal did not mean the bull's end - see article. Oil is one such case. Remember oil's recent parabolic run? It was from a sprout point in early 2003 going to the top in 2008, and it ran 63 months ! Does that mean we'll never see $130 a bbl again anytime soon? Don't bet on it. Bull markets can do the parabola fractal, cool down, then go into other forms. I show several examples of this in the article.

In September of 2010 when I wrote the above article, it certainly appeared that gold was going to be yet another case of 64 months, then a big cool down. Nichols portrayed the fractal thusly:

If you count out the months from a Sept. '05 parabola origin, you arrive at February, 2011, give or take a month or so. But as I pointed out, that end point for the gold bull creates a lot of misfits in the big picture. We are nowhere near the mania end of a parabola. Investor ownership of gold is still near historic lows, around 1% of assets, compared to historical norms of 5% or more. And as I complained in 2010:

"Nichols reckons the change in behavior "sprout" point as September 2005, although gold was already in an uptrend by then, but a very weak one. Since this chart was done, we have pretty much been following the fractal.The end of this gold parabola is early 2011. This brings up some difficult questions. If the gold bull market is to end in 5 months, does that mean the entire commodities bull also dies in 5 months? It's hard to imagine a commodities bull without gold being a part of it. Do all the world's debt and currency problems go away in the next 5 months?...

In a September, 2007 statement, he [Nichols] says, "The most important investment theme for the next 10 years will continue to be the frenzy for tangible, hard assets ... and the best market to take advantage of this monumental trend is gold."

So here is where a fork in the fractal road is developing. Those of us who see a continuation of the currency/demand induced commodity bull market for years may have trouble digesting the 64 month bull market fractal that Nichols has recently posited as beginning with the parabolic sprout in September 2005 and abruptly ending in February 2011. It's enough to give a fiat money hater indigestion. In my article linked above on the 64 month bull fractal, I point out the amazing prevalence of this fractal - it's everywhere. And gold is showing all the signs of following this pattern. So do the world's debt and currency problems all go away over the next two months? Does the commodity bull cycle suddenly end now? Has Nichols changed his mind about the investment theme for the next 10 years? In 2008, he stated "this bull market in gold should last for many more years." His 64 month gold fractal seems to contradict this...

So what right does this fractal stuff have to upset the applecart of sound fundamental considerations? Maybe we should just forget all about this fractal hocus pocus. Well, not so fast. Nichols seems to have only recently stumbled upon the 64 month thing. But just maybe there are other scales of this same fractal out there that we should be thinking about.

First, you have to consider the basic structure of this fractal. It is composed of two parabolas separated by a distinct downtrend phase about midway. For examples, look at the currency parabola of 1920s Germany and the stock market of Denmark in the 90s: (click on charts to enlarge)

The shapes of the components vary, but the structure keeps recurring with the downtrend in the middle being a year or less with the overall time within a couple months or so of the 64 months. This is by far the most common scale of this fractal. But it does seem to occur in other sizes. There is a 3 year version. As examples of this, look at Homestake Mining, the premier gold miner of the '30s, and the Brazilian inflation of the early '90s:

These fractals do the same thing in different scales. That's what fractals do. They are all different with the only common denominator being that all the main components are sized proportional to the overall size of the fractal. The 3 year mid-course downtrends are small, less than a year, and barely noticeable; but they're there and much more clearly seen in the amplified versions of this fractal.

Could it be that there is a much larger scale of this same fractal that gold may actually be following in lieu of the common 64 month size? Does such a thing exist? It very well may. Look at these examples: the Thailand stock market of the late '80s and early '90s

The large size seems to cluster around about a 9 year length with everything scaled up including the variance on how long it runs and the duration of the downtrend in the middle, which runs around 2 to 3 years. The next example is the stock market of Turkey

This 9 year iteration has the mid-course downtrend run a whopping 3 1/2 years. This is also an example of a parabolic rise not meaning an end to a bull market as is commonly thought. The Turkish market could hardly be considered busted when the parabola was over. The next king-size example is the Australian dollar

Given that the downtrend size in the middle ran a little over 2 years, you get the impression it wanted to run to more like the 9 year length before being interrupted by the end of the world in late '08.

... the Swiss stock market of the '90s

There is one other pertinent example of the large version of this fractal, and that was gold in the '70s. It featured a two year downtrend in the middle in 1975 and 1976. The length of this downtrend is about the most reliable predictor of which scale fractal is being carried out. The distressed buy and holders of gold during those two years would like to have known this basic fact back then. Well, we here in 2009ville know. This time around, the mid course downtrend gauge has been completed as of a little more than a year ago, and it was nearly two years, suggesting that it is indeed the large scale fractal we are in, replicating the previous gold bull"

It's been a year now since the fork in the road was encountered, and it appears the larger scale fractal is what we are in. We are tracking the second of the twin parabolas. This was the projection I was making back in 2010. Here is a closer look at what gold has done:

One thing that strikes me about this fractal thing is that it projects exactly the same thing for the future of gold that Jim Sinclair does, as my my article on his model details. Jim Sinclair does not base his highly accurate projections on fractals, so these are two very independent means of analysis pointing to the same thing for gold - the high road.