Email – #302
Dear Reader,
A couple of days ago, we bought Corning Inc. (NYSE:GLW) issued in a brief alert on December 9th.
Before pulling the trigger, I wanted to wait for two important indicators: import prices and last month’s retail sales numbers. You see, these numbers were confirming my research. And those confirmations were furthered by the company too…
Indeed, Corning came out a couple of days ago with its increased outlook for glass market growth, mainly because of much better LCD television sales. Obviously, the increased penetration of broadband through fiber-optics gives consumers a very strong incentive to buy an LCD TV. But that’s not all she wrote for Corning.
This is because Corning benefits on two counts, rather than one: not only do they benefit from increasing sales in glass for flat panel TVs, but they are also thriving on the fiber-optics cable front.
Corning, who invented the process of making fiber optics, dominates this technology. They have the best products, with the highest quality of transmission and the highest resistance to environmental factors. Understandably, they are making a killing here and they are bound to accelerate even more as well. Let me explain.
Cable suppliers and telecoms are into a deployment war of fiber optics in order to be able to capture the cherished “triple play” (cable TV, internet access and telephone). When Verizon Fios deployed in Princeton, carnage spread into a formerly Comcast-dominated area. Hence the competitive reaction cannot be far in every important area in the country.
It was about time that we got this technological upgrade. The U.S. seriously lags countries like South Korea and Japan on the deployment of broadband access to homes. Granted, it is much more difficult and expensive to deploy broadband in the U.S. suburban sprawl than it is to deploy it in very high-density apartment dwellings that dominate those two countries. But the strategic implications are the same nonetheless: a slower flow of information is a serious competitive handicap for any economy.
And broadband, be it via fiber optics or wireless, enables a whole upgrading cycle of a very varied menu of technologies that enhance productivity, save costs and enable new businesses. I know this directly, because I am on the board of a company whose very existence and growth depends on this.
This is why broadband appears distinctly in Obama’s stimulus plan, under the infrastructure component, including deployment to rural communities. And Obama recently stated that the impact of the stimuli would be twice as great in the next six months than it was in the first six months. So there you have the cherished second derivative of profits turning positive and increasing. In plain English: an acceleration in profits ahead, which always leads to higher stock price.
And Corning is benefitting greatly from both the pickup in the global economy, low interest rates and from a weaker US Dollar. Is this environment sustainable? Yes, say the numbers that came out Thursday and Friday.
Friday we learnt that import prices were up, but the strength comes mainly from a 6.2% rise in petroleum prices, that overshadowed a drop of in retail prices otherwise on a year on year basis. This points to the fact that high oil prices are still detracting from consumption and thus from consumer inflation.
This also gives cover for the Fed to remain easy with its monetary policy for a long period of time. Finally, confirming Corning’s revised outlook and validating our trade, we saw Friday that retail sales, especially electronics, were strong. With high-definition LCD TVs flying off the shelf. Thus we are up very nicely since we pulled the trigger, and this trend will keep getting stronger well into the third quarter of next year.
All of this will continue supporting strong growth next year for our Fibria (NYSE: FBR) position, up only 44% in the 37 days since we bought it. Similarly, Rockwood Holdings (ROC) is up 25% in a couple of months, even as carmakers are only starting to get into long term contracts for lithium-ion batteries with their suppliers. Just wait until demand kicks into high gear…
Finally, on CNBC Friday, they transmitted live from wonderful Guanabara Bay in Rio de Janeiro, Brazil, a bay that I have sailed into at the finish of the Buenos Aires-Rio de Janeiro sailboat race a couple of decades ago. I have very fond memories of sailing, traveling, and closing very good business with many Brazilian friends in Brazil. Brazil has graduated into the big leagues and this will only help it some more, including our recent purchase of the Brazil MSCI Index Fund (NYSE: EWZ), up more than 6% in a month.
With volumes already winding down to near nothing from here to year end, be sure to enjoy the Santa Claus rally and stay tuned for another play soon.
Enjoy and profit,
Horacio Marquez
