Wii Love Mr. Market’s Mood Swings

• Buy NTDOY.PK around 55 

Students of the stock market know Benjamin Graham is to stock investing what Moses is to Judeo-Christian ethics. Graham’s laser-beam insights and resulting pithy advice have made many (including Graham’s famed disciple Warren Buffett) a Wall Street fortune. Over the years I have found Graham’s parable of Mr. Market to be one of the most lucrative investing and trading strategies. As the market experiences wild mood swings, now is an excellent time to load up on my favorite holiday pick: Nintendo (OTC: NTDOY.PK).

For those unfamiliar, Mr. Market is the personified version of the stock market. As Graham noted, the price action on the stock exchange does not directly correlate to the value of the businesses underlying shares of stock. Thus, when the market (i.e., Mr. Market) sways with fear, an excellent business may see its stock price decrease. Conversely, when the market rages with greed, stock prices may become much more expensive than the value of the underlying business activities.

We are all aware that recent developments in the credit markets have adversely affected the stock market. However, many excellent companies and growth businesses continue to perform their alchemy turning goods and services into cash. Therefore, as Graham would say, Mr. Market is overly pessimistic and certain high quality companies are currently selling at a discount.

Since the Street begins their holiday stock fetish in September, I have found August a prime month to start snapping up shares of my favorite holiday picks (recall: when possible, always get ahead of the herd). This year my top holiday pick is Nintendo. (My previous holiday picks include Apple — NasdaqGS: AAPL — Activision NasdaqGS: ATVI — Sirius Satellite Radio — NasdaqGS: SIRI — and XM Satellite Radio – NasdaqGS: XMSR.) Since I believe the Nintendo Wii, the Nintendo DS, and Nintendo branded games will be on top of almost every holiday “must-have” list, I believe the stock will trade higher as these lists start hitting mainstream press and analyst notes.

This year, the added juice to my holiday trade is Mr. Market’s sale. I don’t know about you, but I am very confident that when Christmas, Hanukah, and all the other gift giving holidays arrive, the subprime mortgage and LBO credit issues will not work as a persuasive rationale in response to little Johnny and Lisa’s request for a $250 Wii or $50 Super Mario game (not to mention the employed young adult crowd who do not need an institutional mascot to justify a personal reward).

This is my third update on NTDOY, so I am not going to review the gangbusters numbers as I did in a previous review of Nintendo’s quarterly results. Although, I will note that Microsoft (NasdaqGS: MSFT) reduced by $50 the price of Xbox360. I think this is a nonevent because the Wii is still $100 cheaper and offers a revolutionary advance in gameplay that neither Xbox360 nor Sony’s (NYSE: SNE) PlayStation 3 offer.

So, although Mr. Market is a bit pissed at the moment, his current unhappiness is more reason NTDOY will deliver happy holidays.

Disclosure: SmartGuyDH is long NTDOY.PK

Getting Wet: Long-term Profits in the Water Industry

• Buy PHO around 20.5 and PIO around 25.5 

I feel like Jack Nicholson in Chinatown: everywhere I turn, water issues arise. So, like a good grownup who grew up on Peter Lynch, my automated response is, “Which companies are succeeding in the water industry?”

Last April I started a position in an ETF called PowerShares Water Resources (AMEX: PHO). This water ETF corresponds generally to the Palisades Water Index, an index designed to track the performance of companies engaged in the global water industry such as pump and filter manufacturers, water utilities, and irrigation equipment manufacturers. I decided to invest in the ETF rather than individual companies in the water industry because I do not follow the industry close enough to safely say I am investing (Cf. gambling). In addition, I have subscribed to the ETF first because awareness of water industry equities has pushed up multiples and some of the best stocks are beyond my value target.

Like other water investors, I believe the industry will outperform because:

• water is a necessity which has become increasingly scarce in the face of growing demand;
• water will demand government spending and private investment no matter the status of the economy;
• water will fetch steadily increasing prices as supply remains limited while demand rises;
• water companies have virtual monopolies once they sign long-term contracts with goverment entities; and
• water, like oil and other natural resources, is an excellent way to invest in globalization.

Another play is the ETF called PowerShares Global Water (AMEX: PIO). This ETF corresponds generally to the Palisades Global Water Index. As the name implies, this ETF has more exposure to the international market. In my opinion, both ETFs are excellent long-term investments. A nice aspect of PIO is the ability to own companies that are not traded in US markets and, therefore, are not accessible as individual investments. I recommend purchasing a mix of both for a nice spectrum of exposure to an industry with earnings that will flow for lifetimes to come.

The top holdings in PHO are:

Valmont Industries Inc. (NYSE: VMI); Veolia Environnement SA (NYSE: VE); Tetra Tech Inc. (NasdaqGS: TTEK); URS Corp. (NYSE: URS); Itron Inc. (NasdaqGS: ITRI); Layne Christensen Co. (NasdaqGS: LAYN); IDEX Corp. (NYSE: IEX); Roper Industries Inc. (NYSE: ROP); Franklin Electric Co. Inc. (NasdaqGS: FELE).

The top US holdings in PIO are:

Valmont Industries Inc. (NYSE: VMI); Tetra Tech Inc. (NasdaqGS: TTEK); ITT Corporation (NYSE: ITT); Watts Water Technologies, Inc. (NYSE: WTS); Pentair Inc. (NYSE: PNR); Danaher Corp. (NYSE: DHR); General Electric Co. (NYSE: GE).

Disclosure: SmartGuyDH is long PHO.

Nintendo: A homerun in the fast growing video game industry

• Buy NTDOY.PK around 42.60

Nintendo (OTC: NTDOY.PK) manufactures hardware and software in the fast growing video game industry. Thus, the company makes the razors and the blades. More importantly, Nintendo is the only video game console maker with a profitable operation. On the game side, the company created such industry icons as Mario and Donkey Kong and launched franchises like The Legend of Zelda and Pokémon.

The video game industry has been growing gangbusters for the past decade. In fact, video game sales now rival sales of other major media including music, books, and movies. For those with a futurist bend, video games are sensory-rich experiential mediums evolving toward the inevitable virtual reality.

In addition to the exciting macro trend, Nintendo has recently taken center stage as a gorilla in the new console cycle. The Wii console offers revolutionary game play through controllers with sensitivity to full-scale motion. In English, this means Wii gamers swing the controller like a bat while playing baseball, or shadow box while boxing. This exciting development makes me believe the Wii is the new media killer app and will dethrone the iPod as the must have product of the times.

During the month of May, Nintendo continued it’s stronghold on the market holding down the two top spots for hardware sales with the Wii and handheld Nintendo DS, and lassoing four of the five top-selling game titles for the month. Also note that in Japan (a critical market for success) the Wii has outsold the PS3 fivefold and Microsoft’s Xbox 360 at a 2-1. One word comes to mind: domination.

The macro and micro story is firing on all cylinders, and a check under the hood reveals that Nintendo has the financials to support a solid long-term investment. The company had record operating profits of $1.91billion (FY ‘07), more than double FY ‘06. In addition, net income is up 77%.

I recommend nibbling on the stock whenever it pulls back. Keep your eye on Japanese interest rates because their rise will affect NTDOY, but not Nintendo’s super surging global growth.

Disclosure: SmartGuyDH is long NTDOY.PK

Covanta Holding Corporation: An overlooked area of renewable energy portfolios

• Buy CVA around 24.40

Covanta Holding Corporation (NYSE: CVA) operates waste-to-energy plants across the United States. The company generates one revenue stream from processing municipal solid waste, and a second from selling energy created from the waste. A Motley Fool writer likened the powerful two-punch revenue model to an imaginary one in which coffee bean growers paid Starbucks to pick up their beans, and then Starbucks made money again on the other side selling coffee created from the same beans.

As a strategic consultant with clients in the renewable energy industry, I am well aware that this sector is in the beginning of a nice multi-year (or multi-decade) bull run. Covanta is a hidden jewel in the space because Wall Street has been sun bathing in solar, blowing in the momentum of wind, and obsessing over ethanol. Although waste-to-energy is not as sexy as a Toyota Prius, Covanta’s financials have more juice: the company reported Q1 earnings of $0.08 per share (excluding non-recurring items), $0.07 better than the Reuters Estimates consensus of $0.01, and revenues rose 8.1% year-over-year to $330.2M versus the $310.9 M consensus.

One of the main drivers for this stock’s appreciation is growth. Covanta recently took a 40% interest in a new waste-to-energy partner in China, and they are exploring opportunities in the UK and Italy (two countries as hot on renewable energy as Wall Street). A keen investor knows that executing growth requires free cash flow, and Covanta has the green to make good on their plans. In the latest quarter, levered free cash flow (i.e., free cash flow minus payments of interest on debt and any dividends to preferred shareholders) was 14.2% of sales.

The main risks to Covanta’s success are capital expenditures and lead times. The cost of processing waste and generating energy is high. However, excellent free cash flow and long term contracts (e.g., waste processing and purchase power agreements) mitigate this risk. On another note, the time between proposing a new plant and generating revenue can take a few years. Thus, investors must be patient for new plants in China to begin hitting the bottom line.

Covanta’s PE and PEG are a bit rich here, but I think both growth and future earnings predictions are on the light side. Couple that with some exciting announcements about new domestic and international projects, and I think the stock has some nice room to continue powering ahead.

Disclosure: SmartGuyDH is long CVA