Wednesday, October 19, 2011

Insider Buying, High Yield Bonds and Barry Diller - Investment U

Insider Buying, High Yield Bonds and Barry Diller’s Misuse of IAC Funds

by Steve McDonald, Investment U Research
Monday, October 17, 2011

Legendary investor Jim Rogers said recently that he owns all commodities, but that he likes agricultural commodities most of all.

Agriculture, according to Rogers, is in the worst shape of all in terms of commodity supply. Why? No one wants to be a farmer and the world population growth is outpacing the growth of food production.

According to UN figures, farmland is in short supply and is expected to lag food demand. By 2050, food demand is projected to grow by 70 percent and increased land availability by five percent.

The seriousness of the pending food shortage and the potential wealth this situation presents has not yet hit the markets, evidenced by the fact that the S&P Global Agribusiness Index is down 16 percent this year. This despite what Barron’s reported this week as a very bright long-term outlook and strong earnings and profit gains by almost all of the major agribusiness players.

The UN’s food and agriculture organization, the FAO, predicts that, between now and 2050, we will have to produce a billion more tons of cereal and 200 million more tons of meat.

The FAO also estimates it will require an annual investment of at least $83 billion in agriculture production in the developing world and billions more in seed, fertilizer, farm equipment and irrigation just to tread water.

That’s $83 billion annually, just to meet demand expectations. Remember, this isn’t a new luxury item or techno gadget, this is food we’re talking about. No one goes hungry for long.

Roy Steiner of the Bill and Melinda Gates Foundation says this is an incredible opportunity for smart companies to make a difference, and a profit.

Sam Allen, the CEO of John Deere, says the right equipment in the right places will be able to boost food production. All of the macro trends in agriculture are favoring Deere according to Allen, and Deere is having the best year in the history of the company. The stock is off its 52-week high by almost 30 percent.

Farm income is expected to rise 31 percent this year and almost all the agriculture players are really cheap, with some paying decent dividends. Most are in the middle to low end of their 52-week range.

Right now, it’s all about seed, fertilizer, irrigation and equipment.

Some of the major players are:

Monsanto (NYSE: MON)Dupont (NYSE: DD)Agco (NYSE: AGCO)CNH Global (NYSE: CNH)Syngenta (NYSE: SYT)Potash (NYSE: POT)Agrium (NYSE: AGU) on the fertilizer side.

Insiders are Riding Avis

A group of insiders, including the CEO, Vice Chairman, President of the European, Middle East and African Operations, Executive Vice President, four directors and others, have jumped into their own stock, Avis Budget Group, with both feet.

The group has plowed around $815,000 dollars into stock in Avis, with the CEO accounting for almost half of that amount.

This was the first reported buying spree by insiders at Avis in a long time and it comes at a time when the stock hit a 52-week low.

Insider buying is one of the best indicators of positive trends in a company, not an infallible one, but one with a strong success ratio.

When this many officers buy at once it is usually a good sign of things to come. Avis Budget Group (Nasdaq: CAR) is currently about 62 percent below its 52-week high.

High-Yield Bond Prices Slipping

Prices of high yield bonds have slipped 10 percent since July and that has pushed yields to very, very attractive levels.

Barron’s says prices may slip more, but patient investors will be rewarded and anyone looking for yield should be looking at the high-yield area.

This recent drop in bond prices is the worst since the 2008 crash, with yields on a key index topping 10 percent. That’s up from seven percent in May.

Dan Janis, Senior Portfolio Manager of the John Hancock Strategic Income Fund, says there is massive value in high-yield bonds. With junk default rates running at only two percent, well below the long term average of six percent, he sees great returns with below average risk.

Kathleen Gaffney, of the Loomis Sayles Bond Fund, said this week in a Barron’s article that the bond market has already priced in a recession and much higher default rates than we are actually seeing.

One rumored reason for the big drop in bonds was a selling spree by Japanese retail investors in something called double-decker bond funds.

Barron’s described these funds as having about $900 billion in the high-yield market and are tied to the Brazilian real, which is too complex to explain here. But the point is, as the selling started in bonds, the real also dropped in value and accelerated the drop in the value of these Japanese funds.

This one-two punch accelerated selling in the Japanese market in an effort to cut losses and, voila, we have huge buying opportunity.

High-yield bonds, one of my favorites, and if you’re looking for income and capital gains, you should be looking here.

Barry Diller’s Misuse of Shareholder’s $300K

This week the cheek smacker goes to the stock holders of IAC, Barry Diller’s internet holding company.

Barry recently appointed Chelsea Clinton to the board of IAC and gave her a $50,000 retainer and a grant of $250,000 in stock.

Diller’s connection to the Clintons goes all the way back to the ’92 presidential elections.

The Journal article that announced the move this week said she doesn’t have much experience with public companies, but she did work briefly at one in her 20s.

If I were an IAC stock holder, I would have a lot to say to Mr. Diller about his choice and his use of $300,000 of shareholders’ money.

But this appointment isn’t entirely absurd. She does serve on the boards of the Clinton Global Initiative and the Clinton Foundation. Huh?

One of the most irritating parts of the article was a quote by Paul Lapides of the Corp Governance Center at Kennesaw State University; he said, “Maybe all those connections helped her.”

Ya think, Paul?

Chelsea in her new role will be rubbing elbows with fellow IAC board members Michael Eisner of Disney fame and Edgar Bronfman Chairman of the Warner Music Group.

I’m sure Chelsea’s brief stint in a public company will carry a lot of weight with these two.

Long term, it’s about delivery… Companies like Seaboard for example…

Good investing,

Steve McDonald

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