DOW to ROH: Sometimes Things Just Don't Work

Last July I wrote a blog entry that discussed the possibility of margin and multiple expansion at Dow Chemical (DOW).  The thesis of this recommendation centered around Dow Chemical’s acquisition of Rohm & Haas (ROH) and the company’s ability to pass on price increases and its ability to hold these price increases should the price of oil retreat.  While I still hold shares in Dow Chemical, the investment story behind the company has clearly deteriorated.  This has been caused in large part by the collapse of the company’s deal with Kuwait, further deterioration in the credit markets and by the U.S. economy’s significant turn for the worse.  While I am thoroughly convinced that the company would have done quite well had economic growth only slowed and not collapsed and had the company been able to complete the sale of a select group of low performing units to the Kuwaitis, it is clear that the company is facing a completely different environment then it was six months ago.

Given how awful the earning reports from Eastman Chemical (EMN) and Nova Chemicals (NCX) have been, it is clear that Dow Chemical will likely not be able to fund the repayment of the debt taken on to complete the Rohm & Haas acquisition.  Without the cash from the Kuwaiti sale, Dow Chemical simply cannot risk a purchase of Rohm & Haas in this economic environment.  Should the acquisition of Rohm & Haas go through, the bridge loan that the company will be forced to take out will be crippling.  It is clear that if Rohm & Haas had been trading freely, without Dow Chemical’s support, that it would be trading at a level well below its 52 week low of $44 dollars and no where near its current price per share.  More likely then not, Rohm & Haas’ business has suffered a significant hit as its specialty chemicals, with their considerable ties to electronics, has likely been disproportionally impacted by a significant slowing of consumer spending.

Should the management of Dow Chemical still wish to complete the deal or if they are not able to escape the confines of their agreement with Rohm & Haas, it is evident that the purchase price must be significantly reduced.  In addition, the terms of the deal must be changed so that a significant amount of the purchase is in the form of Dow Chemical stock instead of cash.  The company’s dividend, while considered sacred by most because of the company’s ability to either raise or maintain it for the last 389 quarters will likely need to be cut in any event.  However, if the Rohm & Haas acquisition is called off completely it will assuredly not need to be reduced to a mere pittance of its current value.

The deal between Rohm & Hass and Dow Chemical simply does not work in today’s world.  The economic situation will likely prevent the combined company from paying back the bridge loan that would be needed to complete the purchase given the failure of the company’s deal with Kuwaitis.  The management team of Dow Chemical and the company’s shareholders simply cannot want to be faced with the task of raising billions of dollars as the bridge loan approaches expiration, especially when the company’s core business is in a free fall.  It is time for the company to hunker down, conduct small niche acquisitions, retool plants and pay down debt.  A blockbuster acquisition cannot be supported given the current shape of the economy.

Upon the next quarterly report by Dow Chemical, we will likely see a company that has been battered by a slowing U.S. economy.  The stock will undoubtedly come under significant pressure, when this happens it will be a clear buying opportunity as it will likely signify the abysmal shape of Rohm & Haas’ business and the subsequent calling off of the acquisition. 

Disclosure: Long DOW             

Is Liquidity Returning to the Energy Sector?

There are signs that credit is flowing once again in the beleaguered energy sector and in particular within the Master Limited Partnerships (MLPs).  MarkWest Energy Partners’ (MWE) announcement that it has successfully entered into a new joint venture with NGP Midstream & Resources and expanded its credit facility are tell tale signs that this illiquid corner of the energy sector is seeing a return of financing and investment.  The new joint venture, when coupled with the increase in borrowing capacity, allows MarkWest to realign its capital expenditures to account for projects that it was required to undertake in the second half of the year.  In achieving this, a significant overhang has been removed from the stock, as the company will likely not be forced to raise dilutive equity to undertake its obligatory contracts with Newfield Exploration (NFX) and Range Resources (RRC).  These contracts, which were entered into prior to the credit crunch, mandated that MarkWest Energy Partners construct gathering pipelines according to what Newfield Exploration and Range Resources needed, regardless of whether or not MarkWest Energy Partners could effectively fund such projects. 

While MarkWest Energy Partners will only own 60% of the combined venture with NGP Midstream & Resources, it will nevertheless no longer have to deal with an uncertain level of capital expenditures going forward into 2009 and 2010.  The assets that were transferred into the joint venture were primarily in the Marcellus Shale, showing once again that western Pennsylvania remains one of the most attractive shale development plays in North America.  NGP Midstream & Resources is at its core a private equity firm.  Despite its relatively small size, its participation will likely serve as a harbinger of things to come, as cash strapped energy companies will be forced to turn to private equity firms and the plethora of cash that they are currently carrying to fulfill pre credit crunch commitments.  However, even if private equity firms become increasingly involved in the energy sector through corporate/private equity joint ventures it is unlikely that any will ever rival Atlas Energy Resources' (ATN) universal cost advantage as derived from its partnership program.   

Despite the resolving of its capital expenditure issues, MarkWest Energy Partners is still not a buy at these levels as the firm will be significantly impacted by sub $40 oil and an abnormally low NGL to crude ratio.  As a result, unless there is a significant expansion in oil and gas prices, it is likely that MarkWest Energy Partners will not be able to cover its current distributions going forward. 

For Further Review:

MWE Press Release

Finding the Next Consolidator

The week got off to an improbable start on Monday with the announcement that Pfizer (PFE) had entered into a definitive merger agreement with fellow large cap drug maker Wyeth (WYE). Pfizer, like nearly every large drug company, has come under tremendous pressure in recent years to replace an aging pipeline with innovative new blockbuster products.  Despite ambitious attempts by Pfizer’s management team and by all of the other drug makers in a similar position, the results have been dismal.  As a result, these broken firms have been left with but with one quasi solution, and that is to merge with their rivals in an attempt to diversify and prolong the life of their pipelines.  Such mergers cannot be faulted, as they are often one of the few options that corporate management teams have left open to them when faced with ineffective R&D spending and limited internal growth.  Given the recent media speculation on a surge in deal making within the pharmaceutical industry it is interesting to ponder who will become a consolidator in the industry.  While the growth through consolidation model clearly cannot work beyond a certain point it can be tremendously profitable until sheer size prohibits further profitable acquisitions.   

Forest Laboratories (FRX) has been a tremendously well-run company over its entire history.  However, like many of its peers it is facing an especially difficult environment going forward as it struggles to deal with stagnating sales and patent uncertainties.  The company’s blockbuster depression and Alzheimer’s drugs have generated tremendous profits that have allowed the firm’s management to create the industry’s strongest balance sheet.  By specializing in two areas, Forest Laboratories has managed to become one of the most profitable drug companies in America.  This is a significant competitive advantage and will allow the company to conduct itself in a dignified manner as it races to morph itself into a truly multi-line drug company.

In looking at the company’s balance sheet, it is clear that it is in a position of strength and poised to acquire other drug manufactures in the next several years.   The company currently has no long-term debt, $1.8 billion in cash and a tremendous amount of treasury stock that can be readily issued for an acquisition.  These characteristics will allow Forest Laboratories to spend billions over the next several years to enter a world that is currently dominated by the likes of Eli Lilly (LLY), Schering-Plough (SGP) and Bristol Myers Squibb (BMY).  In doing so it will be better able to compete for the small drug companies that will eagerly sell themselves to the titans of the industry in return for substantial monetary rewards.  Forest Laboratories has done tremendously well for its shareholders over the last several decades but it is simply unable to compete and its dependency on key products will be the firm’s undoing unless it grows through acquisitions.  The firm’s large cash flow, cash on hand and large borrowing capacity have the potential to make the company a deal maker in the drug industry.

Two potential targets exist that would allow Forest Laboratories to revolutionize itself.  It has been readily acknowledged by most industry insiders that the drug companies that wish to prosper must participate in the world of biotechs, specialty pharmaceuticals and generics.  That is why an acquisition of Mylan (MYL) and Endo Pharmaceuticals (ENDP) would go a long ways to truly diversifying Forest Laboratories while at the same time providing the company with exciting avenues for growth.  The addition of Mylan would provide generic exposure to the company as well as prepare it for the loss of its two blockbuster drugs while at the same time positioning the company well in the exciting biogenerics field.  While in acquiring Endo, Forest Laboratories would be adding increased exposure to pain management to its repertoire of branded drugs.

As it marches into the future, Forest Laboratories has the opportunity to build itself into a world-class drug maker thanks to its strong balance sheet and ability to purchase its competitors at rock bottom prices.  If the company were to hypothetically buy a Mylan or an Endo, it would move much closer to the proven model of Teva Pharmaceuticals.  Such a model is clearly successful and should be followed by all of the drug makers that are in search of a future that is better then the environment that they are currently immersed in.  

For Further Review:

Forbes: "Pfizer Weds Wyeth"

Pipeline Troubles at Forest Laboratories

Fixing Financials

Fred Joseph, co-founder of Morgan Joseph had some interesting commentary on the state of the financial industry on Bloomberg last week that I thought would be appropriate to discuss here.  The interview with Joseph on Bloomberg can be found below.  Joseph’s commentary is interesting as his firm, Morgan Joseph, is one of the more prominent investment banking firms that spends the majority of its time working almost exclusively with mid and small market companies.  His discussion of how these companies are dealing with the turmoil in the credit markets clearly shows that there is still a tremendous amount of work to be done by the Federal Reserve and the Treasury Department in their fight to restore liquidity to the credit markets.    

According to Joseph, the current state of government involvement in the operations of financial companies is the “best of both worlds” as it allows the companies to maintain their entrepreneurial spirit while at the same time allowing them to access capital that they desperately need and that would otherwise be unavailable.  Such a statement is unequivocally true, as a straight out nationalization of troubled banks would likely trigger another crisis in confidence, similar to what was seen in the fall and in mid January.  During his interview, Joseph also proposed government actions that would support mid and small market firms in their dealings with the credit market.  While large market firms have access to the Federal Reserve’s commercial paper programs, mid and small market firms do not.  This puts these firms in tight circumstances as they are essentially left with no funding sources.  Such a program could easily be structured in such a manner as to allow the government to channel money through regional banks that already pay special attention to mid market firms, such as CapitalSource (CSE).

Joseph sees another difficult year ahead and believes that mid and small market firms will be forced to restructure, conduct equity for debt exchanges and undertake debt conversions in an attempt to improve their balance sheets.  While companies will undoubtedly be pressed for cash in the year ahead, they will also have enormous opportunities to buy back debt at significant discounts, should they choose to use cash and or credit lines to repurchase debt that is trading at significant discounts to its par value.  Overall it is an interesting interview and is worth listening to.  

Disclosure: Long CSE

         

AIB: Tempting for Investors & Competitors

The news out of Ireland has been rather depressing as of late as the country has found itself at the epicenter of the world’s financial crisis.  Over the last several months, the Irish state has effectively guaranteed all of the country’s deposits, nationalized one of its more beleaguered banks and bought preferred shares in the remaining publicly traded banks.  Such events, while concerning, should not exclude the country and its financial sector from one’s investment universe.  Of particular interest is Allied Irish Banks (AIB), the diversified multinational bank holding company that I previously talked about here.  Allied Irish Banks is without a doubt the strongest, largest and most diversified of the Irish banks as its relatively strong underwriting policies, aggressive deposit growth strategies, and diversified international investments have allowed the bank to become one of the more up and coming international banks.

With shareholder equity of 10.9 billion euros and a market cap of less then a billion dollars, Allied Irish is cheap and should be viewed as being not only attractive to investors but to its competitors as well.  A sum of the parts evaluation reveals that Allied Irish is holding a significant amount of nonessential assets that could either be sold to bolster the company’s balance sheet or acquired by a competitor through an acquisition of Allied Irish.  The company is essentially composed of five units scattered throughout the United States, European Union and the United Kingdom.  The holding company has full ownership of the domestic operations within Ireland, First Trust Bank of Northern Ireland and Allied Irish Banks (GB) out of the United Kingdom, along with a 24.2% of M&T Bank (MTB) out of New York, 70.5% of Bank Zachodni WBK out of Poland and 49.99% of Bulgarian American Credit Bank out of Bulgaria.  In addition to these investments, Allied Irish also has relatively minor investments in the U.S. and in the Baltic states of northern Europe. 

These stakes could be unloaded in such a manner as to generate significant amounts of capital for the parent company.  The sale of the company’s stake in M&T Bank would likely generate nearly a billion dollars, while the sale of the company’s stake in its Polish subsidiary would bring in well over a billion euros.  In addition, a sale of the company’s stake in its Bulgarian and Baltic subsidiaries would generate at least a hundred million dollars while a sale of the First Trust division of Northern Ireland would bring in anywhere from 500 – 800 million pounds.  In short, Allied Irish should be able to raise 3 billion euros fairly shortly if it felt compelled to boost its capital position.  However, this will likely not be necessary as the banks tier 1 capital is now at 7.5% after receiving a non-dilutive preferred stock investment from the Irish government in late 2008.  If the company were to sell the above-mentioned divisions, it could likely boost its capital ratio to at least 9.5%.  When the value of these assets are coupled with the company’s ability to sell bonds backed by the Irish government, Allied Irish should be able to hold onto the majority of its subsidiaries until valuations rise in the future.  

While loan losses are expected to be significant in Ireland the company should be able to add 1.5 billion euros in loan losses a year going forward, even with housing prices declining 30-40% and an unemployment rate that is significantly above the E.U. average.  Allied Irish’s diversified lending portfolio in Ireland and stricter underwriting policies will allow the company to escape the pitfalls that its peers, who were more weighted towards residential lending, are currently experiencing.  In addition, the company’s UK division has become a source of tremendous liquidity, as the deposit guarantee offered by the Irish government has proved immensely attractive for UK customers concerned about relatively paltry deposit limits at their country's own institutions.  This arrangement will further strengthen the company’s funding options, making it an even more attractive acquisition target. 

While Allied Irish Banks is clearly undervalued and represents an attractive opportunity to purchase a diversified international bank it is likely an infinitely more attractive investment for its U.S. subsidiary, M&T Bank out of New York.  Allied Irish’s 24.2% stake in M&T Bank is likely concerning for the management team of M&T as it puts the bank’s status as an independent institution in doubt.  Given the current environment, an acquisition by M&T Bank of Allied Irish makes perfect sense.  In purchasing Allied Irish, M&T Bank would triple its balance sheet, gain international exposure to vibrant markets, retire a quarter of its outstanding shares and dramatically reduce the extremely high portion of its shareholder equity tied up in goodwill on its balance sheet.  While M&T Bank’s capital ratios are not exceptionally high, the bank’s recent share issuance through the TARP program should provide the necessary capital to make a joint cash and stock bid for Allied Irish Banks.  M&T Bank’s ability to masterfully navigate the credit crisis has left the bank in a position where it can provide long term and above average returns for its shareholders in the years to come, should it act decisively and acquire Allied Irish.  

Allied Irish Banks recent decline has presented an opportunity to acquirer shares in a dynamic bank at bargain prices.  Once the market recovers the stock will likely trade at significantly higher levels, especially if asset sales follow in the months ahead.  If a bid from M&T Bank emerges or from some other aspiring bank it only serves as further upside for Allied Irish’s equity. 

Disclosure: Long AIB

For Further Review

Article Discussing AIB's Polish Operations

AIB Press Release Discussing Government Share Purchase

Contemplating the Demise of BAC, JPM & C

The collapse in the share prices of our country’s three largest money center banks over the last week has been truly stunning and is assuredly a crisis of confidence.  What started out as a growing unease that the losses of the past year would continue into late 2009 and early 2010 for Bank of America (BAC), J.P. Morgan (JPM) and Citigroup (C) has now snowballed into utter fear that these banks, along with their European peers, could potentially face nationalization as government regulators strive to save a financial system that is still on the brink of cataclysmic failure.  Bank of America, Citigroup and J.P. Morgan have all reported results over the last week and they have ranged from being appalling and awful to just plain bad.  One bright spot has been that each of these banks appears to have reduced their exposure to various mortgage securities and derivatives to acceptable levels when compared to where they were in 2007; however, this has come at an enormous cost.  Primarily in the form of vast infusions of dilutive government capital that these banks have been required to take since the passage of the first half of the U.S. government’s TARP program. 

While losses associated with Bank of America’s, Citigroup’s and J.P. Morgan’s exposure to securities tied to the credit market has likely peaked, each of these banks still face enormous pressures from the rapid economic deterioration that has engulfed the United States and the world.  In essence, the banks that toiled in credit market sensitive instruments are facing a double blow; as they must now deal with deterioration in the core of their balance sheets as loans to consumer across the United States begin to deteriorate in quality.  What began with subprime mortgage backed securities and spread to the credit market and its alphabet soup of credit derivative products is on the verge of engulfing Main St. U.S.A. and the bread and butter of these institutions productive assets.  Whereas the regional banks received TARP money to bolster their balance sheets for what was widely viewed as a coming storm, it is painfully apparent that the TARP money received by Bank of America, Citigroup and J.P. Morgan was only used to help the companies recover partially from the implosion of the credit markets.  This has left them acutely exposed to a worsening U.S. economy.   

As it stands now, the big three U.S. money center banks are clearly unprepared to deal with a severe and deep recession.  Had Bank of America, Citigroup and J.P. Morgan found themselves in a position where they did not have to worry about a deteriorating macroeconomic environment the TARP money that they have already received would have been more then enough; however, this is not the case as December's unemployment data shows.  With unemployment creeping up to 7.2% from 6.2% in September and with no sign of any improvement in payrolls we can be assured that the statement made recently by the Chicago Fed Board president that unemployment will rise significantly throughout 2009 and into 2010 is accurate.  For Bank of America, Citigroup & J.P. Morgan such a rise will likely be a deathblow as their significant earnings power will be unable to catch up to surging defaults in their consumer banking divisions.  Given their current reserves and their own acknowledged expectations for unemployment rates going forward the balance sheets of these banks will begin to become impaired yet again as the unemployment rate rises above 7.5% and it is likely that they will face near catastrophic stress should the unemployment approach 8.5% - 9%.  As a result, it is without a doubt that a significant portion of the second half of the TARP will be designated to these banks, as their capital bases will likely become impaired beyond self-repair in 2009.

In September, J.P. Morgan stated that the bank would face nearly $56 billion in loan losses should unemployment rise to 8% and $42 billion in losses should unemployment rise to 7.5%, yet in its most recent quarterly report, J.P. Morgan stated that it is only likely to experience $32 - $36 billion in losses going forward.  This is curious as such a loss projection pays little attention to their past expectations and most importantly to the recent surge in the unemployment rate.  Instead of breaking out their losses in relation to the unemployment rate, as they did previously, the bank is now correlating their losses to a decline in housing prices.  Such a correlation is surprising as home prices could easily stabilize before the unemployment rate.  Given the bank’s $81 billon in tangible capital and $136 billion in tier 1 capital it is clear that it could survive under its current expectations but increasingly doubtful should the unemployment rate approach and pass 8.5%.  If we use the bank’s September numbers as a guide, J.P. Morgan could face an additional $10 billion in losses for each .5% rise in the unemployment rate above 8%. 

In looking at Bank of America and Citigroup, one must be a little more creative as neither of these two banks are as open as J.P. Morgan is about their balance sheets and their potential exposures to assets that are in danger of becoming impaired.  As a result, we must look at their current loss rates on important sections of their loan portfolios.  For Bank of America the key figure is the fact that the bank only had $1.3 billion of reserves tied to $255 billion in first lien mortgages or about .56%.  Such a low reserve amount is shocking and will likely be the point by which Bank of America faces the worst pain going forward.  The bank’s total managed consumer portfolio was better, yet still only had reserves of 2.83% on a $694 billion portfolio.  In addition, its total commercial portfolio of $380 billion only had reserves amounting to 1.96%.  In comparison, Citigroup sports a larger loan loss reserve pool that will be needed to support a portfolio that is performing significantly worse then either of its larger domestic peers.  In a cruel twist of fate, Citigroup’s more global operations could very well prepare it better to deal with a surge in unemployment in the United States.

The future of Bank of America, J.P. Morgan & Citigroup is unquestionably tied to the rise of the unemployment rate in the United States.  Should it peak at 8%, the current valuations on these companies make them the buy of a lifetime.  On the other hand, should the economy deteriorate significantly and unemployment rise well above 8%, these three titans will become the primary recipients of the second half of the TARP fund.  The United States, despite acting faster then its European peers to battle the credit crisis, is dangerously close to following them down the path of nationalization and must take whatever measures necessary to avoid such an event.  With the inauguration of a new administration in Washington we can only hope that Obama’s massive stimulus plan will be expanded, that a national moratorium on foreclosures becomes a reality and that the idea of an “aggregator bank,” as proposed by the head of the FDIC, is given serious credence as these are likely the only steps that will limit federal ownership of Bank of America, J.P. Morgan and Citigroup to current levels. 

Following the Money

In a world where finding investment capital has become a fine art, Atlas Energy Resources (ATN) has shown its ability to do what no other energy company could even dream of undertaking in the current credit environment.  Unlike any of its competitors, Atlas Energy operates a partnership program that allows private investors to participate in its drilling activities, in return for giving up a portion of its drilling rights, the company receives a huge cost advantage and management fees that are highly accretive, in addition to the portion of the drilling interest that it keeps for itself.  In using other peoples money, Atlas Energy Resources is able to leverage its own capital position to garner projects that it would not otherwise be able to participate in if it were only operating off of its own balance sheet.

The company’s announcement this week that it has succeeded in raising over $201 million dollars in its end of year subscription program to investors shows that the company is poised to profit greatly from its competitors difficulties.  As other seek to unload properties, Atlas Energy Resources will be there to scoop them up as it appears as if it will be largely unaffected by the credit crunch and the crises affect on the energy market.  The most recent example of this occurring is the company’s recent deal with Aurora Oil & Gas (AOG).  Such opportunities will continue to come the company’s way, as it is one of the few that is still willing and able to expand its operations.  Atlas Energy Resources’ partnership program brought the company over $437 million dollars in 2008, 20% more then in 2007 and significantly below what 2009 will likely bring.  As investors seek a relative safe haven for their investment dollars in 2009, there is no doubt that Atlas Energy Resources’ unique and revolutionary partnership program will stand out as a beacon of stability and opportunity in a sea of turmoil. 

Given the company’s vibrant capital sources, an extensive drilling backlog and a massive position in the Marcellus Shale, it is clear that the company stands alone as the stock to own in the natural gas industry. While its competitors are fighting debt loads, desperately seeking joint ventures and unloading assets at fire sale prices Atlas Energy Resources is using an innovative funding structure to capitalize on the opportunities that the company currently has and those that will assuredly come its way. 

Disclosure: Long ATN 

For Further Review:

Partnership Press Release

Ten Stocks for 2009

After taking a little holiday inspired break from Prudent Speculations, I have decided to rededicate myself as there are simply too many interesting things going on in the markets to stand idly by on the sidelines.  Given how awful 2008 was, 2009 should be better as I doubt we can go any lower then the November lows that were set late last year.  I still believe that when invested in the right companies investors should be able to beat the market.  Below, I have compiled a list of some of the most interesting stocks for 2009 that I put together before the New Year but that I am just now getting around to posting here on the blog.       

1. Allied Irish Bank (AIB)

An Irish bank with significant overseas assets in Eastern Europe, the U.K. and the U.S, when these assets are coupled with the company’s strong position in Ireland, the stock has a strong risk/return ratio going forward.  The bank has been battered by financial market turmoil but the bank’s balance sheet appears to be in decent shape relative to its Irish peers.  With newly added capital, Allied Irish should be able to hold onto its international divisions making it a rising international banking star.  

2. CapitalSource (CSE)

One of the more fascinating financial plays, this former MREIT acquired a California state industrial bank this last summer, securing a funding source that it can control.  The company has some of the highest capital ratios out there and limited exposure to the California residential mortgage market.  As the company begins funding an increasing number of loans through its deposits as opposed to its credit lines, the company should see a dramatic decline in its funding costs.  The bank’s large net interest margins will most likely become the stuff of legends, as its competitors will be unable to match its strong corporate client list. 

3. The Bancorp (TBBK)

A Philadelphia bank with innovative deposit gathering techniques, strong management and capital ratios and a new subsidiary that will be taken public in the near future with a mandate to acquire other bank’s payment processing and technological infrastructures.   

4. Dow Chemical (DOW)

With commodity prices declining, Dow’s costs have declined significantly.  Given these declines, the company should be able to overcome any significant demand destruction that occurs during the recession.  The stock’s recent decline should be alleviated by a new partner to replace the Kuwaitis and a lower offer for Rohm & Hass.  

5. The Phoenix Companies (PNX)

An Insurance company and asset manager that is currently engaged in a restructuring that will result in a spin off of the company’s asset management division.  This spin off should create immense value for shareholders and leave them with two companies that would both be ideal to own.   

6. Rambus (RMBS)

I have been a longtime holder of the company and it finally appears that the patience that I have had with it is finally going to be rewarded.  The company’s ability to defend its patents are going to dictate its future; however, substantial rulings against Hynix and Samsung should be handed down before a large patent trial commences in late January.  I believe that the trial will amount to little, as the cartel lined up against Rambus will begin to settle over the next two weeks causing the stock to rocket higher.  Given that the company is on the verge of a massive multi-billion dollar patent settlement with the world’s largest semiconductor companies, its current price is appalling and it likely represents the buy of the year.

7. 21^st Century Holding Co. (TCHC)

A Florida insurer that should benefit from the dismantling of Florida’s state run insurance company and a general rise in rates.  The company is cheap on all levels and a new management team appears to be running the company in a manner that allows one to realize how poor the prior management team truly was.   

8. Chesapeake Energy Corporation (CHK)

Chesapeake’s large debt load, attractive properties and cheap valuation make it a definitive buyout target for any major produce looking to replenish dwindling reserves. 

9. Sprint Nextel Corp. (S)

A Kansas City telecom giant trading at a relatively cheap valuation when compared with its peers, assuming the level of its customer defection has peaked.  The company’s new management team appears to be making strong progress in turning around a long time laggard of the telecom industry. 

10. Lorillard Tobacco (LO)

Lorillard is the cheapest of the big tobacco companies with the ability to buyback a significant amount of stock and raise its dividend substantially.  In addition, it appears that the fear of a menthol ban is significantly overdone. 

Best of luck to all in 2009 and remember to watch for the next bubble as there is far to much money floating around the system for one not to develop.  My guess is that its going to show up in government bonds; however, should the economy continue to weaken all bets are off.