Millicom (MICC) Redux

Back in the Day…

A few months ago I wrote about Millicom International Cellular (MICC) – a wireless services company that provided pre-paid mobile phone service to third world countries. Generally I recommend stocks because I feel there’s an underlying fundamental strength within the industry or company. In other words, the industry or company offers something unique that is being under-appreciated in the marketplace. This was exactly the case when I recommended MICC when it was trading at approximately $52 a share. Back then, the markets seemed to be on their way to recovery and I felt that wireless communications would be one of the first industries to recover in non-industrialized markets. I also mentioned that I felt MICC had the potential to reach $70+ and beyond based on the recovery rate of the marketplace and how much the market discounted the stock.

Where Are We Now?

Low and behold, last week MICC hit $75+ a share. If you had invested in the stock when I had wrote about it (let me know if you did, it would make my day!), you would’ve made a cool 44% in approximately 2 months – well outpacing the market and about 100 times better than any savings account in the world! Now, you may say ‘Sahil, shouldn’t I sell everything now since it has hit your price target?’ Well, like most things in investing (life?) that answer isn’t so simple. We first need to understand why MICC was able achieve this upside explosion in such a short period of time. Was the market really this wrong about the stock? Well, the main reason we saw this run-up was because the company reported profits for the last quarter that were well ahead of expectations. They basically stated the following key points about their business:

1. Number of Subscribers up 25% to 30.8 million
2. EBITDA (earnings before interest, taxes, depreciation, and amortization) up 14%
3. Free Cash flow of $59 million

I think all 3 of these points are key positive indicators for MICC and are necessary components for a company on the upswing.

Now, this surprisingly good news for MICC was even better than what I expected – yes I suspected that MICC was being given enough credit in the market for their strong business model and the many indications of economic recovery, but even I didn’t expect 44% in 2 months. I didn’t expect it to experience such a drastic recovery in its business. At the end of the day, I feel that MICC is still doing better than most people expect. I’ve now reassessed my impression of the company with the latest results and have developed a new recommendation. At the peak of the market, MICC was trading at $120+. Although I don’t think it’ll reach that point anytime soon, I am comfortable with saying that with the latest quarter’s results, I think the stock can at least get to $90. In Wall St. talk, I’m raising my price target for MICC.

This isn’t a straight endorsement to buy the stock (or not sell if you already own it), and it shouldn’t be taken as such. That really depends on your investment horizon. Short and medium term I think the stock will have a little bit of a breather. I wouldn’t be surprised to see it go down back to the $60s. But by early next year, if and when the economic recovery really begins to show signs of life, I expect to see a runup to $90. Moral of the story? Don’t jump headlong into the stock yet, but keep a very close eye on it.

Possible Downsides

There are, as always, strings attached to my recommendations. The basic assumptions I’m making here are a continuation of the recovery of the economy – especially in the international market. And don’t mistake a stock market recovery as an economic one. I really want to see fundamental economic indicators (consumer spending, GDP, manufacturing ouput, and to a lesser extent unemployment) to recover. I also am assuming that MICC will surprise the street with positive news next quarter too. The market gave it a nice shot in the arm for its last quarter, but investors are fickle, and if the good times don’t continue, the stock can hit a snag. So, with that said, I think each investor needs to make a decision on how they want to tackle MICC. If it does hit the $60s again, though, I would seriously consider buying in.

Millicom's performance vs. the S&P 500 in the last 3 months:

In case you missed my initial post on MICC, read it here:

http://investingdecoded.blogspot.com/2009/05/stock-discussion-millicom-international.html

Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.

An Example of The Crazy Types of ETF's Out There

Earlier this week I was browsing around the various finance sites (as nerdy as it sounds, I do this for fun) and stumbled upon an article about a new type of ETF coming to the market. Since I did a primer on ETF's a few posts ago, and one of the advantages I mentioned that they had was the ability to invest in unique assets, I felt this ETF was a perfect example of exactly that.

What's This New ETF?

The article is from thestreet.com (founded by CNBC's very own Jim Cramer). Titled 'Long-Short ETF Finally Makes It's Debut', the article describes an ETF the uses an interesting investing strategy in order to amplify returns.

There are two components to this ETF - the long and short. Although they are related in the overall strategy of the ETF, they are essentially the opposite concepts. 'Long' (aka going long or longing) is basically the investing strategy most people use - in effect it's the 'buy low and sell high'. When someone is 'going long', they are buying stock in the hope that it goes up and they can sell it at a higher price later.

Short (aka going short or shorting) is pretty much the exact opposite of going long. In this case you actually sell the stock first (usually after borrowing it from you broker) and buy it back later - hopefully at a lower price. Here, you basically 'sell high and buy low'.

So what the 'Long Short' ETF does is invest all of its assets going long. It then attempts to amplify returns by going short an additional 30% of the assets. Since you sell the stock first when going short, and thereby receive the money for the sale in cash, the fund will then invest those funds to go long an additional 30%. Overall, for every dollar the fund has, there's actually $1.60 invested ($1 long, $.3 short, $.3 long with proceeds from short). It's an interesting and risky way to amplify returns.

My $.02

LIke I mentioned earlier, I think this is an interesting investing approach. If the models being used to determine how to allocate the long and short positions is sound, you can really make some solid returns while still having a natural hedge against adverse market movements.

But before you go ahead and sink a bunch of money in this ETF, you need to understand the risks. Shorting in its basic form is a risky proposition. When you're going long, the most you can lose is 100% (the stock goes to $0). However, when you're going short, the downside is unlimited - the stock can go forever up. Furthermore, by shorting you're going against the grain. Most people still want the market to go up (esp. the companies who's stocks are on the market). As a short position holder, you're fighting that and opening up to downside risk.

To add to those risks, you're taking the proceeds from the short position to go long. So you can have a double adverse scenario if you're short position goes up and your long position goes down. In this case, not only are you losing money in the short position, you don't even have as much power to buy the short position back (called 'short covering') since the proceeds are worth less as well. This can lead to some very tricky 'rock and a hard place' type scenarios.

The bottom line here is, 1) I would never recommend anyone try this long/short strategy on their own (i.e. without investing in this ETF or other professionally managed fund). However, if you have the appropriate risk appetite and the fund proves itself to be sound, I would look into possibly investing in the fund. Assuming the models are sound, this can be an excellent way to make some serious profits. Just make sure you understand the risks! :-)



Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.

Does Inflation Really Pose a Risk?

I was recently reading the Wall Street Journal (courtesy of the Agoura Hills Renaissance Hotel) and came across an interesting article by Scott Patterson titled 'Inflation Fears? Not In This Job Market'. In it he explains an interesting theory around inflation in a poor job market like the one we have today. I feel that this article is more relevant than usual for InvestingDecoded readers because inflation is a bigger issue than normal these days and can potentially impact investing strategies for you and me.

The Big Deal About Inflation Today

The reason why inflation is more important today is simple - the amount of government debt out there today. Inflation is a fairly simple concept with a lot of science behind it. All it is is the rising of prices over time. It's the reason why a Hershey's bar used to cost 5 cents and now costs $1.49. With the growth of industry, the scarcity of resources, and the increase of consumer buying power, prices tend to rise.

However, another driver for inflation is the supply of money. The theory is that the more money is available in a given economic system, the less value it has and, therefore, the more you'll need to buy things. Over the last few years, the government wars in Iraq and Afghanistan, TARP bailouts, and economic stimulation packages have literally cost the government trillions. To pay for these, the government has essentially had to increase the money supply substantially - they had to print more money on a scale not seen since WWII.

With this increased supply, there is a growing concern in the market that inflation will run rampant in the near future - thereby devaluing the buying power and earning power of consumers and corporations respectively.

What Patterson Has To Say

Scott Paterson's article, however, takes a more contrarian view on the inflation issue. His argument is that history has shown that inflation is not really a threat as long as the unemployment rate is high. The rare exceptions to this rule include the oil crisis of the 1970s. With 9.5% unemployment today, the chances of investors' worries about inflation running rampant is just not going to come through. Generally, economists feel you need a rate around 4.8% or lower before inflation can significantly accelerate. This rate is therefore known as Nonaccelerating Inflation Rate of Unemployment (NAIRU). What this says is that until the unemployment rate recovers significantly, we shouldn't really have to worry about inflation.

My Take On All This and What it Means For You

Scott Patterson actually has some very valid points. A lot has happened over the last 60 years that could easily cause inflation to skyrocket, and if his theory has held through that whole time, there a good chance that it'll hold through this time as well.

However, there are some very important caveats here. This downturn is distinctly different in both magnitude and source from all previous ones. The fact that the bedrock of the financial system was shaken like never before (e.g. Lehman Brothers survived a Civil war and 2 World Wars but couldn't survive this downturn) I feel speaks volumes. The percentage of our debt load when compared to GDP is close to the highest it has ever been. These things could easily turn Mr. Patterson's theory on its head. Therefore, although I don't think the inflation issue is huge at 9.5% unemployment, I think it'll be a big deal at something higher than what history suggests.

For us investors, this means that we need to plan for inflation in our portfolios. In other words, buy more commodities (Oil Included) and international based companies during inflationary periods. Stay away from companies that require a lot of foreign resources to make products that they sell locally (as much as I shouldn't say this, Accenture would be a good example).

Inflation is a dry and, for most people, not very interesting concept. However, in this environment of huge government spending, it has become a much bigger part of the equation for even individual investors and how they should allocate their portfolios.



Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.