Money and Investing Thoughts

Politics – Dan Walters: Population increases drive state – sacbee.com

The above article from the Sacramento Bee reinforces my belief that the population growth of California will soon/someday turn home prices in an upward direction again. A quote:

“Those 438,000 additional Californians (the state number) will generate a need for at least 150,000 new housing units, which means that while the housing industry has been clobbered and there are many vacancies, within a year or two, demand will catch up.”

The numbers are the annual growth rates. Those that believe in the never-ending housing bear market seem to fail to understand where 400k new people in California are going to live. And with the price downturn in California approaching it’s 3rd birthday, I think 2008 could bring some surprises.

Bill Rempel, a.k.a. NO DooDahs! » Keeping Perspective

I am pretty much of a permanent positive guy when it comes to investing and I try to find companies with positive stories that will make me outsized returns over the longer term. The news however, and many financial blogs are full of recession, crisis of the day/week/month and other negative stories. Bill Rempel, in the post linked here gives the best argument I have seen on why negative financial news is so popular. My favorite line:

The point is, at any given period in time, there is within us the ability to focus on the negative or the positive, and focusing on the negative at any one point in time results in a point of view that, in hindsight, pretty much always looks ridiculous. Unfortunately, our focus can color our reactions, and become self-fulfilling – as anyone who’s ever sold at the bottom can attest.

This pair of companies are recent start up attempting to repeat the success of eBay in their respective markets. Mercado Libre is South American focused, headquarters are in Buenos Aires, and offers their online auction in a dozen Latin American countries. Gmarket is a South Korean company, focusing their efforts on the local market.

Mercado Libre (MELI: 96.70 +3.25 +3.48%) has been public since August 2007 and the stock has had a very nice run up, more than doubling. Gmarket (GMKT: 0.00 N/A N/A) has been traded in the U.S. for about a year and a half and is about 50% higher than the opening price. However, there have been a couple of pretty severe pullbacks along the way. Let me see if I can compare these two companies is some meaning full ways:

Financials:

• Market cap: MELI: $2.5 billion, GMKT: $1.1 billion
• PE: MELI: 320+, GMKT: 39
• Projected growth rates: both in the 40-50% range

Markets:

• South Korea, home of Gmarket, has a population of 50 million. The country has the highest Internet access percentage in Asia, at 51% and the world’s highest broadband penetration.
• Korea is a unique language country, so GMKT will succeed or fail based on how the Korean population takes to the concept.
• The market countries of Mercado Libre have a combined population of 480 million. However, internet access, especially high speed, is not readily available to a large percentage of all those people. Hooking up to the web is relatively expensive for many Latin Americans.
• These charts give you an idea of internet penetration, especially in Latin America.

My Conclusions: I think the MELI definitely has the most long term potential, with a potential population base 10 times Gmarket’s. I do think initial growth may be less than believers in the stock may hope. Latin America is a region of the world where selling through the local weekend open-air market is much more accepted than buying & selling over the internet. (Note: I am currently in Montevideo, Uruguay, which is probably more tech savvy than most Latin America areas.) At a PE ratio of over 300 I think the share price of MELI is definitely getting ahead of the growth in revenues and profits.

Gmarket is showing nice growth in earnings over the last several quarters, with one negative surprise. Future estimates show continued growth. The big question is where is the ceiling for revenues in a market the size of South Korea. Also, last quarters earning drop needs to rectified with continued growth. I think the PE ratio here is probably in-line with the companies prospects.

eBay owns 18.5% of MELI and Yahoo holds 10% of Gmarket. Either one could be a future buyout prospect. At this time I would be more interested in GMKT, looking for strong earnings growth over the next few quarters. For me, MELI is currently too rich and I think there will be opportunities to pick up stock in the company at much better valuations.

These stocks are currently listed on my Watch List, but neither has what I am looking for in my 20 Stock Portfolio.

Note: I currently do not have a position in either company.

With over 1 billion portable electronic devices being sold world wide annually, freedom from the recharging cable will make some company’s investors rich. The idea of a refuelable or disposable fuel cell that will power cell phones, PDAs, ipods and laptop computers for extended periods of time without recharging is the goal of several companies. The development of tiny fuel cells that are safe, reliable and cost effective is on the horizon. Here is a list of publicly traded companies hard a work to develop the product that is battery of the future for small electronic devices.

• Neah Power Systems: This company has taken the direct methane fuel cell (DMFC) in a different direction by replacing the typical polymer membrane with a porous silicon wafer that is claimed to be generate a higher level of power in a smaller format. Neah Power trades on the OTC symbol: NPWS.

• Medis Technology: Here they have developed what they call Direct Liquid Fuel Cell (DLFC) technology using liquid borohydride. The DLFC is claimed to be passive technology without the internal fluid transfer mechanics required in the methane powered fuel cells. The stock is listed on the NASDAQ: MDTL.

• VIASPACE Inc.: The VIASPACE Energy subsidiary is working on disposable DMFC technology. VIASPACE uses technology licensed from NASA’s Jet Propulsion Laboratory. The stock trades on the OTC bulletin board: VSPC.

• MTI Micro: This subsidiary of Mechanical Technology Inc. (MTI) has their version of DMFC’s called Mobion. With 80 patents that improve the technology, MTI has licensing agreements with Samsung and Duracell to help get their technology into the market. MTI stock is NASDAQ traded: MKTY.

• Power Air Corporation: Power Air has developed a technology called the Zinc-Air Fuel Cell (ZAFC). Obviously, they use zinc vs. methane as fuel for their products. The company was covered by this site here, and are aiming to have products commercially available by next fall. Stock is OTC BB: PWAC.

Of these companies only Medis is not currently a penny stock. The others are micro-cap issues trying to make their technology the next big thing. Medis has a market cap of $450 million. After reading some of the on-line literature I like what Power Air Corp is trying to do. These are not companies I would invest in at this time, but definitely need to check in on them occasionally to see if a breakout is ready to happen.

Note: I do not have a position in any company discussed here.

I have looked closely at a few stocks over the last two weeks and have found one that I think has good prospects. My focus is to look as smaller cap stocks, usually under $2 billion, with either strong growth potential or an above average income stream from dividends. Inergy L.P. (NRGY: 18.50 +0.805 +4.55%) a master limited partnership provides a good dose of both growth opportunity and income.

Inergy is in the propane distribution business. The primary business is distribution of propane to residential and commercial customers in 30 states. The company also provides what they call midstream operations: storage, transport and processing of propane and natural gas as well as wholesale distribution.

The company has several factors going for it:

• Growth opportunity exists by purchasing smaller propane distributors. The industry is very fragmented and Inergy has already absorbed over 50 smaller distributors. Many opportunities still exist in this area.
• Midstream operations are also growing with added storage capabilities.
• Management appears to do a very good job managing expenses to maintain margins in an industry with tremendous seasonality.

Looking at the financials, the earnings per share are very seasonal, ranging from big quarterly losses in summer and fall to larger quarterly gains in winter and spring. Distributable cash is significantly higher than earnings due to significant non-cash charges against earnings. The cash distributions are what make this company attractive, and they have been very attractive!

Quarterly distributions have risen consistently from an annualized $1.43 per share in 2003 to a current $2.38. Distributable cash from operations for FY 2007 were $2.47 so the dividends are covered. The dividend yield at the current stock price is 7.7%. The dividend has increased 70% over the last 5 years and 8% over the last year and the stock has consistently carried a 7%+ yield. I see this as a pretty nice combination of growth and income.

I am adding NRGY to this site’s 20 Stock Portfolio, which now totals 14 stocks and one ETF. Check in often and see how the stocks I review and pick perform.

Note: I currently do not have a position in NRGY.