Monday, September 27, 2010

2010 - 2018 High Yield Maturity Schedule

This is a great chart from Knight Libertas highlighting the maturity schedule for high yield and leveraged loans over the next 8 years. While 2010 and 2011 looks manageable ($110bn due through 2011), maturities start to ramp up thereafter with $147bn due in 2012, $245bn due in 2013, and a staggering $405bn due in 2014. As demonstrated in the chart, the lion’s share of the 2014 maturities are comprised of leveraged loans used to finance the wave of borrowing undertaken by PE firms in the 2006 and 2007 LBO wave. While the massive inflow of capital into credit could continue for sometime, I suspect we will hear more and more about this “maturity wall” as late 2012/early 2013 approaches.

Monday, September 20, 2010

Momentum Stocks Getting Bid Up

While most equity market indices are up only a few percent year-to-date, momentum stocks with strong growth outlooks (particularly in the tech sector) have outperformed significantly. As an unrepentant value investor, this has been a source of deep frustration to me since most of these stocks hardly seemed like bargains going into 2010.

As demonstrated in the table below, I have selected a basket of 10 stocks that loosely fit the parameters of a “momentum growth” stock. The ten stocks include F5 Networks, Netflix, Akamai Technologies, Finisar,, Citrix Systems, Riverbed Technologies, NetApp, VMWare, and Acme Packet.

Nearly all are up over 50% year-to-date, recently hit fresh 52-week highs, and have business models that fit squarely into the portfolios of managers seeking growth. Unlike the bubble years of 1999, when nearly any tech stock with a “.com” at the end of its name was bid up to ridiculous levels, these 10 stocks have strong competitive positions within very attractive secular growth markets. And most importantly - All are profitable and generating decent free cash flow.

My only contention (and of course the most critical determinant to a value investor) is the massive multiple these companies trade at relative to current and 1-year forward earnings estimates. As an experiment, I am going to pretend that I purchased $10,000 of stock in each one of these ten companies as of the close of 9/20/10. If a similar experiment had been performed at the end of 2009, one would be up 111% year-to-date.

It will be interesting to see how this basket of stocks performs 6 months out when I will evaluate the results on my blog. I honestly have little conviction on how things will turn out, but the value investor in me thinks that most will be substantially lower.

Now I always like to say that I passed on Google when it came public at $85 (and I evaluated it pretty extensively pre-IPO) so my opinion on growth stocks should be taken with a healthy dose of skepticism. However, the disconnect between growth and value seems more extreme than at any point since the waning days of the tech bubble. Perhaps this experiment will lend some credence to this view (or once again make me eat my words!)

I look forward to reporting back in March of next year.

Wednesday, September 1, 2010

Brazil's Farming Revolution

The Economist ran with a great feature story last weekend on the tremendous growth of the Brazilian agriculture economy (“The Miracle of the Cerrado”). While it is a fairly in-depth article, one of the more fascinating takeaways is highlighted in the chart below. With only 50 million of its 400 million hectares of arable land currently being utilized, Brazil has significant spare farming capacity to help feed the world’s growing population. In fact, Brazil has as much spare farmland as the next two countries together (Russia and America). Given that the world’s population is anticipated to rise from 7 billion to 9 billion by 2050 (in addition to a doubling of the urban population over that timeframe), Brazil’s agricultural economy will play a vital role in feeding this growing population, which will require a 50% increase in grain output and a 100% increase in meat production.

In addition to being blessed with significant spare farmland, Brazil is awash in fresh water. According to the UN’s World Water Assessment Report of 2009 highlighted in the article, Brazil has more than 8,000 billion cubic kilometers of renewable water each year, more than any other country. Brazil alone (population: 190m) has as much renewable water as the whole of Asia (population: 4 billion).

I would encourage everyone to follow the link to the article (see above) to get a more comprehensive overview of the topic since my amateurish summary leaves a lot to be desired.