Market Update10/4/13

Government Shutdown

Congress could not agree on increasing the borrowing limit to fund government operations

Controversy surrounding Affordable Care Act: Republicans using fiscal policy as a bargaining chip for the defunding of “Obamacare”

More than 800,000 government employees furloughed

Economic Ramifications

Morgan Stanley economists estimate .15% decrease in quarterly GDP

Inability to get federal loans

No jobs report on Friday

Could make Fed’s decision more difficult

Financial Markets

U.S. Dollar

Dollar fell to 8 month low against Euro

19 month low compared with Swiss franc

Fears that country could plunge into another financial crises if debt ceiling is not raised

Peter Gora, head of FX Research at BNP Paribas: “The debt ceiling is creeping into the psyche of investors, and that’s why the dollar is weaker.”

Goldman Sachs

Goldman landed the lead role on Twitter’s IPO

Pulling ahead of Morgan Stanley for lead in internet IPO deals

Rewarded Goldman’s effort to rev up internet IPO franchise

Important because of prestige: Facebook, Pandora

Looking Ahead

Despite volatile conditions, most investors expect improvement

Too much at stake not to find resolution

Keep an eye on new from Congress in coming weeks

October 17th potential debt ceiling impasse

Stock Valuation

Understanding How Stocks Are Compared And Valued

Types of Valuation

Fundamental Analysis – “A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors.” – InvestopediaIn other words you have to look at the big picture when fundamentally looking at a company.You have to consider things like; Industry (Competitors, Market), Earnings, Income, Cash Flow etc.Essentially you need to find out the Companies DNA.

How do we do this?

Balance Sheet - A statement of the assets, liabilities, and capital of a business or other organization at a particular point in time. (Loans/ Short term/long term Debt) Income Statement - a financial statement that gives operating results for a specific period. (expenses/ COG’s) Cash Flow - The total amount of money being transferred into and out of a business, esp. as affecting liquidity. (solvency, the cash health) All three things can publicly be viewed online, these statements are released Quarterly, and Annually.

What's Next? Once you have considered “The Big Picture”, you have an understanding of the companies fiscal figures, the next question I always ask myself, is where the hell is this stock going and how does it compare to its market and competitors? A great tool to use are ratios that you can use to valuate these companies and see how they match up.Most of these ratios point out if the stock is “cheap” or “expensive” or “undervalued” or overvalued”. Once you understand where the company stands in comparison to the market, you can see if these are the right “levels” to get in.

Ratio’s

Here are some of the Ratio’s used to valuate companies.

P/E – Price Earnings

PEG – Price Earnings Growth

EBITDA - Earnings before interest, taxes, depreciation, and amortization

EV/EBITDA – Enterprise Value to EBITDA

Price/EarningsThis valuation ratio compares the company's current share price to its per-share earnings.This can be a valuable tool in evaluating companies within the same industry.P/E is often used as a multiple when noting how much an investor/trader is willing to pay per dollar of earnings.You will often hear analysts or traders say, “Its trading 10 times earnings” or “At a multiple of 14 the stock seems cheap”.

Formula: Market Value per Share / Earnings per Share (EPS)

PEG (Price Earnings Growth) Ratio

A huge valuation tool for estimating potential earnings growth.A company with a low PEG ratio closer to 0 is most likely undervalued.However, just like P/E it has its limits.These are projected numbers, so of course are subject to change.This is still a great tool to see how it compares to industry leaders, also a huge tool used by Growth Investors.Formula: Price/Earnings / Annual EPS growth

EBITDA

A measurement of a company's operating profitability. It is equal to earnings before interest, tax, depreciation and amortization (EBITDA) divided by total revenue.

In essence you have a look at the company’s total profitability outlook.

Enterprise Value/ EBITDA

First Enterprise Value is not to be mistaken with market cap.Market Cap only deals with is limited to common equity.Enterprise Value sums up everything and gives you the market value of the whole business.EV/EBITDA is important because it can compare any company to another. It ignores tax structures of other countries, and it also can be a great tool for potential takeover targets. A company with a low ev/ebitda multiple is considered by some as undervalued.

DCF – Discounted Cash Flow

This a great method for evaluating what your investment may be down the road.In essence, DCF is = the money you would receive from an investment and adjusts for the time value of money.

DLTR vs. FDOJosh Silver and Brad Marshall

Business model

Dollar Tree (everything $1)

4763 stores 48 states

Family Dollar – cheap goods at low price

7100 stores 45 states

Competitors

Sector is being hit, but good future

Dollar GeneralWalmartTargetBig LotsDollar TreeFamily Dollar

Family Dollar

Dollar Tree

Key Statistics

DLTR FDO

P/E 23.5 19.5

Estimated P/E 20.8 19.1

EPS 2.5 3.7

Estimated EPS 2.8 3.8

PEG 1.3 1.7

Market Cap 13.15 Billion 8.35 Billion

Stock buy-back

Seen as a positive thing among the investors

Management thinks its stock is undervalued, so they are going to use their assets to buy cheap and sell high later on

Now, each stock will be more valuable (supply and demand)

Proposition

Add to position:

DLTR

Sell position:

FDO

Catalysts

Micro: Dollar Tree

Bad business plan

inflation -- they are stuck with $1

Macro: Economy

What happens when economy gets better?

Southern Copper Corporation

NYSE: SCCOMac Ahsler and Sean O’Toole

Company Overview

One of the largest integrated copper producers in the world.

Mining, smelting, refining in Mexico and Peru

Also produce and sell zinc, silver, molybdenum

Exploration into Chile, Argentina, and Ecuador

Overview continued

Worlds largest copper miner by reserves (168 billion pounds of proven and probable reserves as of year-end 2012)

Among the largest by annual output (1.4 billion pounds in 2012),

Very low cost open-pit mines

Location

Business Model

Copper industry is largely impacted by demand and price for the commodity.

Much of this is out of their control

Management focus on cost control, product enhancement, and exploration to stay profitable.

Equity Overview

Price (at close yesterday) - $26.95

Market Cap- 22.73B

Volume/ 30-day Average – 1.77M/ 1.59M

Shares 842.13 M

Beta – 1.46

EPS- 1.91

Price to Earnings Ratio (P/E)

SCCO Current P/E - 14.2

Industry Average P/E - 13.2

SCCO 5 YR. Average P/E - 18.9

P/E Definition

Market Value per Share/ Earnings per Share (EPS)

Compares share price to per share earnings.

High P/E generally means investors expect high earnings growth in the future.

Compare P/E to the market or other companies in the industry.

AKA “price multiple” or “earnings multiple”

Price to Book Ratio (P/B)

SCCO Current P/B - 4.4

Industry Average P/B – 2.3

SCCO 5 YR. Average P/B – 7.0

P/B Definition

Stock Price/ (Total Assets – Intangible Assets and Liabilities

Measures stock value compared to accounting value of company

Generally, a lower P/B ratio could mean stock is undervalued.

Compare P/B to other companies in the industry.

AKA “price- equity ratio”

Price to Sales Ratio

SCCO Current Price/Sales - 3.7

Industry Average Price/Sales – 2.3

SCCO 5 YR. Price/Sales Average – 5.4

Price/Sales Definition

Share Price/ Revenue Per Share

Compares stock to its own past performance

A low ratio suggests a company may be undervalued

Be careful. Price/Sales doesn’t account for debt or expenses. Can be misleading

Dividend Yield (%)

SCCO Current Yield - 12.2

Industry Average Yield - 7.1

SCCO 5 YR. Average Yield - 7.0

Returns

*assumes $100 dollars invested in 2007

Risk Factors

Dependent on price of copper

Labor relations have been tense in recent years

Success of expansion projects uncertain

•Majority steak (81.3% ownership) by Grupo Mexico

Straight from the Annual Report

Straight from the Annual Report

Recommendation

•We believe this stock is fairly valued

•Appears that it can show sustainable growth in the future.

•Buy until it is 2% of portfolio

•Nuverra Environmental Solutions Inc.

Chris and Pete

4,500 shares @ Mkt price

Company Overview

• Strategic focus on providing comprehensive environmental solutions in industrial and energy markets (exploration and production solutions)

• Services include delivery, collection, treatment, Recycling and disposal

• Asset base has become a significant aspect of company

Segment BreakdownSolutions Delivery Collection Treatment Recycling Disposal

- Fresh water to drilling sites for hydraulic fracturing

-E&P liquid waste from fracking

- Used motor oil (UMO) into Reprocessed Fuel Oil (RFO)

- Used oil filters - Liquid waste

- Drilling fluids - E&P liquid waste from ongoing production

- Oily waste water - Anti-freeze

- E&P solid waste - E&P flowback water

- Used oil filters

- Anti-freeze Asset Delivery & Collection

Treatment & Recycling Disposal

- Over 1,200 trucks

- Appalachian Water Services, LLC plant - a wastewater treatment recycling facility specifically designed to treat and recycle water involved in the hydraulic fracturing process in the Marcellus Shale area

- 46 liquid waste disposal wells

- Approximately 4,200 frac tanks and 1,900 upright and other tanks

- 34 Thermo Fluids, Inc. treatment facilities - process UMO into RFO

- Over 200 rail cars

- 50 miles of freshwater deliver pipeline

- 50 miles of produced water collections pipeline

Risks • Indebtedness

• Specifically $400MM 2018 note that includes a $150 payment in 2017

• It is a VRN, interest rate varies through time

• Real risk that NES will not be able to refinance

• Acquisition integration and rapid growth

• TFI and Power Fuels may not be able to created the anticipated synergies

• Government regulation and litigation

• Former China water bottling business, which was disposed of in 2011, law suit could materially adversely affect NES

NES Summary 2012 2011 2010

Profitability Profit Margin 1% -14.67% -97%

EBITDA Margin 8% 16% -74%

Gross Margin 13% 21% 25%

Liquidity Current Ratio 1.92 2.83 3.72

Working Capital 79,421.00

90,342.00

148,671.00

Working Capital Turnover 4.43 1.74 0.10

Operating Cash Flow Ratio 0.35 -0.28 -0.08

Cash Ratio 0.28 1.78 1.62

Solvency Total Debt to Total Assets 0.34 0.27 0.08

Solvency Ratio 0.08 -0.01 -0.35

Valuation Price to Earnings 116.50 -17.00 -1.25

Price to Book Ratio 0.69 1.24 1.70

Price to Book Tangible -1.00 1.40 2.13

Return on Equity 0.30% -6.73% -4.85%

Forward PE 77.67

58.25

Add to Position

•Sole provider focusing on surface-related environmental services.

• Key advantage is in the holistic logistical network based which provides competitive advantage

• Only really competition in Tervita, R360 Environmental Services and Clean Harbors

• Growth company with strengthening fundamentals

• “U.S. Rises to No. 1 Energy Producer”

• Energy output has been surging (22 MM barrels per day)