Monday, February 27, 2012

Tronox Thoughts

I was doing a little digging on Tronox (TROX) today. This is a company that I bought a couple of weeks ago for the very simple reason that Seth Klarman plopped $199m into them. They are like a case study in Greenblatt's first book, "You Can Be a Stock Market Genius". Here are some basic facts:
  • They came out of bankruptcy in December 2010.
  • They are traded in the pink slips despite a $2.36b market cap.
  • Their major product is titanium dioxide, which is a major part of paint.
  • Titanium dioxide is in short supply and prices have been rising.
  • There are only five companies in the world that produce Titanium dioxide.
  • It would take time to build new Titanium dioxide plants, and even if they were built some of the main components of Titanium dioxide are in short supply.

So at a basic level, it seems there is a clear moat for Tronox. Now I was reading Jim Jubak's blog today and he actually mentioned titanium dioxide in his blog, so of course I perked up. Here is some of what he said as he said to sell Dupont (thankfully I had already sold) due to Titanium Oxide:

"DuPont doesn’t face rising raw materials costs for many of its products. Except for titanium dioxide. And that’s a huge problem.

DuPont is the world’s biggest producer of titanium dioxide, the white pigment crucial to making paint in all colors.

The problem is that the world is experiencing a bit of a titanium dioxide squeeze because the supply of mineral sands with high concentrations of titanium dioxide such as rutile and ilmenite hasn’t kept up with supply. In 2011 the cost of rutile climbed 77% while the price of titanium dioxide climbed just 38%.
"

Now that was interesting and I immediately wondered if the same was true for TROX. I would not want to own a company who was able to increase their prices, but not enough to keep pace with the increasing raw material costs.

So I dug and found this presentation (Exxaro Mineral Sands Acquisition Investor Presentation). It actually lays out a plan of TROX to profit from this issue, which is why I believe Seth Klarman bought their stock. Tronox put into play last summer a plan to buy a company that has the raw materials. The deal is due to close in the 1st half of 2012. So not only have they cornered enough of the raw materials to supply their titanium dioxide (vertical integration), but they actually will have an excess and thus will be able to sell at what are apparently favorable prices.

TROX has a couple of other major catalysts that I am excited about. They did say they will move from the pink sheets to the NYSE after the merger is completed. I think this will increase their visibility and likely share price. Finally, they are going to re-domicle (Exxaro is South African) to Australia post-merger. They kind of skated around the issue, but it seemd clear to me that the primary driver of the re-dom was financial (ie lower tax rates). That could also increase stock price as they should bring more to the bottom line.

I already own a pretty decent stake in TROX, but I will watch the share price and may add on down days. As always, everyone should do their own due diligence.

Saturday, February 25, 2012

February 25th 2011 Monthly Tracking Portfolio

As my readers know, I create a tracking portfolio of 50 stocks from the MFI screen greater than $100m market cap 12 times a year. I then track how they perform over a one year holding period against the Russell 3000. I also create two "sub-portfolios", (1) A dividend portfolio, which is comprised of stocks with a yield of 2.6% or greater per Yahoo Finance and (2) a new portfolio, which are stocks that are not in any of the other past 11 monthly tracking portfolios.

February 25th 2011 was another poor performer, down 5.5% versus the Russell 3000 being up 5%. That makes it the 14th straight portfolio to close as a loser. That streak may not end any time soon as the next 6 portfolios are all losing as well. Here are the 50 stocks listed in descending order. There were a couple of Chinese stocks that hurt (SCEI and NEP), but it is hard to blame entirely on them.

Stock Initial Price End Price Percent Change Mkt Cap
LO 74.54 130.01 74% 11,534
AGX 8.79 15.26 74% 116
PRM 4.44 7.10 60% 188
RLRN 10.65 16.62 56% 308
PDLI 4.40 6.45 47% 667
CEPH 56.22 81.49 45% 4,246
NSR 25.38 35.51 40% 1,875
RIGL 7.30 10.19 40% 370
MRX 25.58 33.81 32% 1,491
CMTL 26.15 32.82 26% 748
MSFT 25.85 31.48 22% 224,948
GME 19.72 22.73 15% 2,953
DELL 15.13 17.43 15% 29,047
APOL 45.77 52.14 14% 6,464
HRB 14.52 16.38 13% 4,549
IPXL 20.83 23.49 13% 1,332
DLX 24.27 25.35 4% 1,269
CRTX 5.49 5.71 4% 140
MFW 25.07 26.00 4% 474
RTN 49.40 50.78 3% 18,290
FRX 31.88 32.29 1% 9,134
CNXT 2.37 2.40 1% 193
USMO 14.20 14.10 -1% 343
SNDK 50.18 49.14 -2% 11,495
TSRA 17.55 16.37 -7% 866
PRSC 16.19 14.97 -8% 195
EME 30.81 27.92 -9% 1,995
TER 18.65 16.38 -12% 3,293
PETS 14.18 12.44 -12% 333
GTAT 10.94 9.02 -18% 1,344
CSGS 19.81 16.25 -18% 659
CPLA 57.06 41.45 -27% 937
CHKE 16.32 11.46 -30% 152
TNAV 10.74 7.47 -30% 455
LPS 33.08 22.67 -31% 2,948
OSK 35.70 24.46 -31% 3,216
NEP 5.11 3.42 -33% 149
ARO 26.26 17.44 -34% 2,316
AFAM 38.86 25.52 -34% 349
ASTX 3.00 1.96 -35% 177
VNDA 7.28 4.75 -35% 201
MPAA 14.10 8.40 -40% 169
VECO 48.40 28.83 -40% 1,927
LINC 15.15 8.99 -41% 344
UIS 36.74 18.97 -48% 1,543
PWER 9.07 4.67 -49% 947
CECO 23.88 11.93 -50% 1,868
CRME 5.80 2.27 -61% 338
AMED 35.32 11.99 -66% 1,008
SCEI 6.79 1.64 -76% 114


You will note that many of the best performers were divvy stocks (like LO). The dividend portfolio was up an impressive 21%:

Stock Initial Price End Price Percent Change
LO 74.54 130.01 74%
PRM 4.44 7.10 60%
RLRN 10.65 16.62 56%
PDLI 4.40 6.45 47%
HRB 14.52 16.38 13%
DLX 24.27 25.35 4%
RTN 49.40 50.78 3%
USMO 14.20 14.10 -1%
PETS 14.18 12.44 -12%
CHKE 16.32 11.46 -30%

Then the "new" stocks did well, up almost 10%:
Stock Initial Price End Price Percent Change
RLRN 10.65 16.62 56%
CEPH 56.22 81.49 45%
CRTX 5.49 5.71 4%
CPLA 57.06 41.45 -27%
VNDA 7.28 4.75 -35%

As my readers know, I like to track actual cash investments over time rather than percentages. This is because up 25% then down 25% leaves you in a different spot than up 5% then down 5%. So I track my three portfolios (plus the Russell 3000 as if you invested 100,000 evenly over 1st 12 months. Here is where you'd stand:

Category Value
Total 120,370
Total New 113,101
Total Dividend 239,090
Total Russell 3K 121,283

February 24th 2012 Portfolio

Here are the dividend stocks and New stocks in the upcoming portfolio:

Divvy
Date Stock Yield
2/24/2012 USMO 7.1%
2/24/2012 RTN 3.4%
2/24/2012 PDLI 9.3%
2/24/2012 NOC 14.0%
2/24/2012 KLAC 2.7%
2/24/2012 DLX 3.9%
2/24/2012 HRB 4.0%

New
Stock Initial Price End Price Mkt Cap New
VIAB 47.45 47.45 25,787 1
ESIC 4.70 4.70 149 1
ARTC 26.43 26.43 706 1
ATVI 12.12 12.12 13,902 1