Risky Investing: OCN

Ocwen Financial came on my radar early in the year when my mortgage from GMAC was sold to them. Since then their stock has been shooting through the roof and I wanted to investigate if they would be a good company to start my financial position in.

Their business model is simple, buy sub-prime mortgages and get the delinquent homeowners to refinance. So far their track record has been excellent. Banks are dumping sub-prime mortgages giving Ocwen huge room to grow. Their current portfolio is 400 billion and is expected to grow to a trillion in 2 to 3 years time. Talk about a risky business with over a trillion dollars in sub-primes and the hope that they can keep reducing delinquencies.

I give them credit for staying focused. They are selling off prime mortgages and keeping the sub-prime. Interestingly, it's risky to tie up capital in prime mortgages because those homeowners usually have better credit and could refinance with someone else at a lower rate. What Ocwen wants is steady income from homeowners that can just barely afford the property but with bad enough credit that they can't leave.

Since my portfolio size is relatively small I probably won't take on this risk. It's an interesting speculative play but it's basically a company making money hand over fist on the cleanup of the housing bubble.

Hot Stock Tip: UA

During earnings week multiple sites have jumped on the Under Armour bandwagon after their great quarter. UA is being touted as the next Nike; however, I'm not ready to jump in (especially with the stock being well above all moving averages).

Source: Under Armour 2012 Annual Report

Under Armour is a sports apparel company that focused on football and grew into baseball, golf, and other footwear. Most of their business is in the US but they are expanding internationally starting with China, Latin America (because of the World Cup and Olympics), and Europe. Two things concern me about their growth strategy. Right now most of their sales is through wholesale distributors but for the international expansion they are going with company branded stores. Since they don't have a presence in these foreign countries they are going after sponsoring local athletes\teams and creating "experience" stores. This would be expensive and a departure from their working business strategy of wholesale distribution so really it's a gamble that they gain a foothold with foreigners. In addition, the UA brand is more associated with football (which is a US majority sport) so I'd be interested to see how their smaller lines like soccer catch on.

Depending on how their World Cup presence goes I'll take another look at UA. So far everthing they've done has been successful and I do like that the founder is still running the company so he's got motivation to expand.

Stock Research: SBUX

One way I evaluate companies is to create multiple hypothetical portfolios with Google Finance and compare overall gains. What I'm looking for is daily gains on one stock counteracting losses on another and Starbucks is in my best group.

Personally, Starbucks is not my go-to daily brand (for that it's Peet), but when out of town it's easy to recognize and consistently better than any diner\cart coffee. I've been to many Starbucks none of which are within a 10 mile radius of my house so I'll say I'm a customer by recognition and not loyalty.

Reading over the Q3 2013 report they are focusing on growing in-store sales with additions like baked goods, breakfast, lunch, and juices. They are also looking to bring tea sales from Teavana into the stores. While I applaud the tea angle, I'm against them throwing high-margin food products into stores hoping to increase add-on sales. If Starbucks sells pre-packaged foods at a high price they will be competing with companies like Whole Foods and Trader Joes. If they sell freshly baked foods then they in competition with Corner Bakery and Panera Bread. All areas outside Starbucks main focus of coffee. They also bought a juice company which is within the beverage business but more a move expected by Pepsi or Dr Pepper Snapple. Starbucks is trying to diversify their business but this growth can quickly turn Starbucks into a mini-mart.

A customer enters a Starbucks to get a premium drink which is why the Teavana integration is a great idea because it will attract non-coffee drinkers. Starbucks should create a more craft coffee experience to complement the artisan loose leaf Teavana offerings while renting out shelf space for the value-add baked goods. This way they can focus on the drinks business charging more for different preparations of coffee \ tea but keep people in the store with food items. Also marketing would be better targeted.


Coffee is a huge business and Starbucks has the brand recognition to handle any short term customer backlash from the changes they are making. I'll be following how Starbucks integrates these acquisitions into their stores before taking any positions.

Q2 Earnings Update : CNI

My takeaway from the Q2 earnings is that we have passed the peak season for the year. In the months before June, CNI's profits were mainly from fertilizer and grain shipments. Revenue rose across the board for all cargo except coal and automotive and they are expanding into the latest trend of crude shipments over the next 18 months. For the remainder of the year they are forecasting growth in lumber and crude.

I'm glad CNI is expanding into crude-by-rail, especially heavy crude which gives them an edge over pipeline operators who have to dilute the crude to pump it and they are perfectly suited for this move because of their long haul lines from the Gulf to Western and Eastern Canada. This should balance the cyclical nature of their grain cargo and help offset declining coal loads.

Small Cap Research: ZQK

I have a personal bias toward Quiksilver. It was my first exposure to the stock market in elementary school when we had to pick a stock and research the company behind it. This was a time when they were doing phenomenal business giving me one of the top gainers in class. To this day half my clothes are Quiksilver.

Quiksilver suffered the fate of expanding faster than demand could keep up. They took out huge debt, sponsored events and over 500 athletes everywhere, and had many different overlapping product lines requiring hundreds of suppliers, design studios, and manufactures. 

Today they are trying to cleanup that mess and I am very happy with their plan. They are cutting out the niche suppliers focusing on bulk orders, reducing their design studios to two, and consolidating product lines to three brands. Quiksilver will be focused on surf, DC on skate, and Roxy on women clothing. They are also dropping most of their athletes and event sponsorship (dominated by RedBull and GoPro today) and concentrating instead on improving the retail store. To accomplish this they have so far reorganized the executive team. CEO Andrew Mooney joined this year formally from Disney where he ran the Consumer Products division and previously Nike. Kasey Mazzone joined as Global Head of Supply Chain from Gap\Levi, and Steve Finney as Head of Retail and E-Com formally from Disney.

I plan on taking a starting position in Quiksilver soon. Right now they are dumping inventory and closing under performing stores to bring net income into the positives. Once that happens the stock should jump up.