Global Patch Trading

Archive for October, 2011

Bill Gates is super rich but his once high-flying software company has been in the doldrums since mid-2002 after falling from the $35 level. The problem with Microsoft (MSFT) has been its failure to grow both its revenues and earnings at the superlative rates the company once enjoyed.

Any company the size of Microsoft, with a market-cap of $242 billion, will find growth an issue because of its size. But this is not to say the stock is dead. Far from it, Microsoft remains a viable long-term software company and is cash rich with $34 billion or $3.28 per share in cash. This gives the stock plenty of financial flexibility to develop or buy growth technologies. Microsoft just announced it would spend $1.1 billion in R&D at its MSN Internet unit in the FY07. And according to the Wall Street Journal, Microsoft is exploring the possibility of taking a stake in Internet media company Yahoo (YHOO) to take on Internet advertising behemoth Google (GOOG).

But with an estimated five-year earnings growth rate of a pitiful 12%, the company has its work cut out for it. Trading at 16.30x its estimated FY07 EPS of $1.44, the stock is not expensive but appears to be priced not as a growth stock.

Its PEG on the surface of 1.51 is not cheap, but if you discount in the cash of $3.28 per share, the estimated PEG falls to around 1,0, a decent valuation. Also, if Microsoft can improve on its estimated 12% growth rate, the PEG would decline further.

The fact is Microsoft at the current price deserves a look. If you want to play the stock but don’t want to shell out the $2,347 for a 100-share block, you may want to take a look at the long-term options, also known as LEAPS. For instance, the in-the-money January 2008 $22.50 Microsoft Call LEAPS not set to expire until January 18, 2008 currently costs $380 a contract (100 shares).

This means you risk a total of $380 for the chance to participate in the potential upside of 100 shares of Microsoft over the next 20 months. The breakeven price is $26.30. If Microsoft breaks $26.30, you would begin to make money on your LEAPS. Conversely, if Microsoft fails to do anything, your maximum risk is $380 on the initial option play.

Warning: The aforementioned example is for illustrative purposes only and not to be construed as an actual option strategy. Due to the higher risk inherent in options, I recommend you speak with an investment professional before deciding to employ any strategy involving options.

As we begin 2011, you’re probably not thinking about taxes at all. This is a mistake as deadlines are approaching for issuing and filing 1099s to independent contractors.

What is a 1099 MISC?

Generally speaking, the IRS requires you to report certain payments you made during the year to independent contractors. The 1099-MISC form is a single page on which you report to total amount you paid to the independent contractor during 2011.

The 1099-MISC forms must be issued to any person you paid at least $600 in rents, services or other income payments. For example, if you hired a contractor to renovate a room in your home and paid them $5,000, a 1099-MISC filing would be required. As with practically any IRS filing, there are additional situations that require a 1099 filing. Any payments to attorneys must be reported regardless of the amount. Royalties totaling over $10 also must be reported. Generally, you are not required to report payments to a corporation.

When and What Must Be Filed?

The 1099-MISC form is a multi-layered carbon form, so make sure the information you provide appears clearly on all of the copies. Once you fill out the form, provide Copy B to the person you are reporting to the IRS by January 31, 2011.

Copy A of the 1099-MISC form is intended for the IRS. You must file it by February 28, 2011 if you are sending the form by mail. If you prefer to file electronically, you have until March 31, 2011.

The IRS has made a major effort to cut down on red tape, but you’ll still find it with 1099-MISC filings. In addition to filing the 1099 with the IRS, you must also file a 1096 form. The 1096 form is the “Annual Summary and Transmittal of U.S. Information Returns” form. It is one page and extremely easy to fill out.

Although the IRS has an excellent web site, you can’t download 1099 forms off of it. The official forms are still multi-layered carbon paper, which means you need to get a physical copy. The IRS should send you the forms in the mail. If they don’t, you can order them off the IRS site or call the IRS to have them sent to you. If all else fails, you can usually find the forms at major post office and public library locations. If you fail to file 1099s, the IRS will penalize you $50 per 1099.

More than a few people have grumbled about filling out 1099s so early in the year, but doing so has indirect benefits. You are forced to start organizing your records for 2011.

In two previous columns, we talked about how quality management attracts Publicity, or PR. Nearly every company is constantly trying to attract the attention of the media. What brings the media to a company’s door? That’s what every public relations man or woman would love to know. For this is what PR people get paid to obtain for their clients.

Quality management is certainly a key motivation in attracting a reporter’s attention. This helps persuade the reporter or a radio/TV producer that the proposed interview isn’t going to be with someone who has “nothing to say” or just rehashing a cliché or tired, old story. The higher the title and the better known a company, the greater the “impingement” a PR pitch (that’s what publicity people use to sell a reporter) impacts upon a member of the media. If someone from the publicity department at Microsoft calls Fortune magazine to ask about profiling Bill Gates, the pitch will have major impingement value. Few names have this kind of clout, either personally or corporately.

In any event, the senior editor of the major magazine will still inquire about the story angle. The editor will want to know, “What are we going to talk about?” Ultimately, it is the outstanding story that sells magazines or newspapers, not just the big name. Not all such stories involve a big name speaking or spouting his thoughts for the day. Often, better stories evolve when there is a strong newsworthy angle. Let’s look at two recent stories – one which involves a uranium company and another one about a coalbed methane (CBM) company, which we’ve covered in this column.

On Thursday, Pacific Asia China Energy (PACE) was featured in the Financing section of Canada’s Globe and Mail newspaper. Headlined “High-Energy Performer,” the opening sentences told us why the reporter was interested: “PACE holds contracts to help China explore for and develop its coalbed methane (CBM) resources – fuel China needs to help satisfy its energy demands.”

The big story, which drew the newspaper to Pacific Asia China Energy, was China. PACE piggybacked that story because the company may be helping to offer a legitimate solution to the country’s energy mix. Part of the big story is the possible size of the recoverable gas, estimated in a technical report by Sproule International to be as large as 11.2 trillion cubic feet of gas.

Those two items enhanced the reporter’s interest in PACE. China needs alternative energy sources, such as CBM, to improve their energy mix – from a near total dependence upon coal. And, PACE has a potentially huge resource, which could last a good number of years. Such a gas resource could be sufficiently large to make an impact on China. After all, China has proven reserves of a little more than 30 trillion cubic feet. Another 11 trillion cubic feet, should the potential be proven up, would represent a significant increase of available gas in a very large country. By itself, this could later develop into a major international energy story, reported upon by a great number of news media. Another impingement about the reporter is having the satisfaction of reporting upon a good story, well before others write the story.

Chatter in the newsroom:
“Did you hear about PACE’s gas discovery in China, Bob?”
Bob’s Reply: “Oh that one. Yeah, I wrote about it eight months ago!”

Therefore, there are multiple impingement points in this story. Each “draw,” or a reason to attract eyeballs to the story, is another point the story must score, for the reporter and his editor, to overcome the hurdles of being featured in a major publication. China is a draw. The size of the PACE coalbed methane gas resource is a draw. The potential impact upon China’s energy mix is a draw. Writing about it before the rest of the pack jumps on the bandwagon? That’s a draw, too. In this case, four draws sufficiently attracted media coverage for this small CBM development company.

Sometimes, the timing is just perfect, and the overpowering “big story” accidentally introduces a lucky guy onto the world’s stage. On the same Thursday, the PACE story was carried in the Globe and Mail, the Chief Executive of a tiny Canadian uranium company impinged on a Russian news service reporter in Hong Kong. Such was the good fortune for Craig Lindsay, a Certified Financial Analyst, who has spent more than 16 years in corporate finance, investment banking and business development, according to the website of Magnum Uranium, for which he now serves as Chief Executive.

While Magnum has a market capitalization of about $15 million, and Lindsay is neither a geologist nor engineer, RIA Novosti news agency touted him as a “well-known energy expert.” Admittedly, Lindsay gave a great speech at the Hong Kong Club for foreign correspondents. Cleverly, he announced, “Uranium may be the next oil,” during his speech. As many other industry experts have predicted, Lindsay also forecast uranium “may hit $50/pound by the end of the year.” So many are now announcing this it is likely to become a self-fulfilling prophesy.

What elevated Lindsay’s publicity was not what he said in his speech. Most of his commentary has been already been reported in numerous publications, including in our columns. (What reporters really hate is rehashing old news to give someone publicity!) It was to whom Lindsay was speaking, and especially the “timing” as to when it was said. Here is how Craig Lindsay got his “15 minutes of fame.”

About six hours earlier, the very same Russian news agency reported that Russia and Kazakhstan had signed a uranium deal worth $1 billion. The photos of Russian President Vladimir Putin and Kazakh President Nursultan Nazarbayev appeared as the photo op which goes with such really big stories. This was a major event involving two very big names, and among the biggest names and countries in the uranium sector. This was also Russia’s first contract to import uranium; Kazakhstan is the world’s third largest uranium producer. All of this is “big news.”

The clever Russian freelance reporter, who attended the Lindsay speech in Hong Kong, probably text-messaged or emailed his editor by Blackberry, tried to piggyback the Russian-Kazak story with his own story. Yes, that is how timing works. As soon as a major event takes place, other journalists rush to piggyback the event with “their” story. The Russian reporter scored points with his editor and got his story filed (slang for published).

Two cunning gentlemen, the Russian stringer (slang for freelance reporter), and Craig Lindsay (whose name was spelled Kreig Lindsay in the article), both accomplished their purposes. Mr. Lindsay got his company into the world’s spotlight. The Russian stringer got a great story. The reporter threw up a softball question, for which Mr. Lindsay supplied the desired answer.

What was the question the reporter asked Lindsay? That’s pretty obvious from what the reporter published in his article. Here is a clip from the Moscow News article:

Foreign investors are ready to invest in Russia’s uranium industry, if Moscow wants this to happen and establishes a necessary legal base,” Lindsay said. “I believe that Russia is one of the most promising directions for this kind of investments, it is an undeveloped market, full of opportunities. My company will be the first to come to Russia, if the necessary conditions are created,” he added.

Nowhere in Lindsay’s speech did Magnum Uranium’s Chief Executive discuss investing in Russia. However, the reporter NEEDED a good quote. It had to tie-in with “investing in Russia for uranium development.” Lindsay accommodated. He didn’t commit to investing in Russia, but he kept the door open. Magnum Uranium recently announced the acquisition of a 1,080-acre land package in Converse County, Wyoming. The company is also exploring for uranium in both Wyoming and the Athabasca Basin. Its finances are probably already stretched from both exploration and acquisition activities. Magnum’s market capitalization would probably be insufficient to launch investments into Russia, at this time.

However, Lindsay did a great job getting his company this caliber of publicity. And he got the uranium sector excellent publicity. He capitalized upon an impinging story – a story that did show up on the world’s radar – by correctly supplying an answer the Russian journalist was trying to prod out of him.

This is the essence of how journalists and publicity-seekers work together. If the PR person gives the journalist the story angle he is looking for within the bigger story, chances are it will appear in print. Piggybacking a “main event” is the most common way to increase one’s impingement value to a reporter. And by being a cunning interviewee for his Russian reporter, Craig Lindsay just got Magnum Uranium into this column as well!