The Downside to Insider Ownership (GOL)

Many people talk about how important it is to buy shares of companies that have strong family or management ownership, because that means there is someone intimately involved with the day to day operations who has the same motivation as common shareholders.

And I agree ... in general. But when a family or individual has a real majority of the shares, or a majority of the voting shares, you can sometimes get into trouble. So here we have a rare opportunity to hear a shareholder be a little bit grumpy about an event that has caused a one-day 10% move UP in one of his stocks.

Case in point ... maybe: Gol Linhas Aereas Inteligentes (GOL).

This is one of my favorite holdings, an upstart low-cost airline started by the family that ran one of the more successful bus lines in Brazil, and now the second largest airline in Brazil (they even bought out the old state flagship airline, Varig, for pennies on the dollar last year to get more airport slots and expand internationally).

Gol has been taking a beating over the past several months -- my shares are underwater by a little bit even today, after our 10% jump.

Why have they fallen? Well, the immediate cause was the crash of a TAM jet on a runway that caused restrictive rules limiting air traffic in Brazil's busiest airports, and limited bad weather flying (well, bad weather landing really ... but frankly, if you can't land most people don't want to fly). Before that, a crash of a GOL jet last year (not their fault) caused more of an uproar.

But both of those events were just symptoms -- the real problem is Brazil's civil aviation infrastructure, which everyone up to and including President Lula has recognized as an issue. The country's air traffic control, as in many other countries, is still run by the military, and they have not grown airport capacity or air traffic control capacity nearly quickly enough to absorb the huge demand for air travel spurred by Gol's low price tickets and the general boom in the Brazilian economy. Brazil, after all, is a pretty massive country physically, and the roads generally stink and they don't have a nice railroad infrastructure or other similar options ... convenient mass air travel is a natural evolution for them.

So what to do? Well, a bargain hunter would say that you can now buy shares of GOL for a significant discount to their real value, as the leading low cost airline in Brazil, and potentially a leading international and South American airline, because of these problems that are not specific to this airline.

Of course, you'd have to have a strong stomach because it's unclear whether the infrastructure problems will be solved in the next year or two, or at all, though I believe the government will see the sense in investing in this area and building a modern air traffic system and expanding airport capacity in the near future.

And, whether or not you have a strong stomach, it appears that the Oliveira family does. They're the founders and controlling shareholders in GOL, and they're apparently a little bit pissed (some of the family members, anyway) that the shares have fallen close to 50% from their highs.

I understand, believe me. But it appears that one tack they might take is to buy out the balance of the shares and take the company private, which is what is behind the 10%+ bump up today in both Brazil and the US. There was a good Bloomberg article about this just a little while ago, and an AP article that covered more or less the same ground.

So that's the risk I'm talking about: When someone owns and controls a company with a significant majority of the shares and voting power, they can sometimes take your shares out from under you even if you think the shares remain significantly underpriced -- the Oliveira family has all the voting shares, and owns close to 70% of the company.

And in this case, we have the added intrigue that apparently there's some dispute within the family about what should be done -- after all, even with the rapid share price decline in recent months, GOL has certainly enjoyed the cheap funding provided by the public markets that has enabled them to grow their fleet extremely rapidly with very little debt.

Now, I obviously don't know any more than you about whether or not this will actually happen, and I don't know exactly what the rules would be for a takeunder, how many folks would have to respond to a tender before the rest could be involuntarily bought out, etc. It's probably complicated by the fact that GOL has lots of shareholders in both Brazil and the US.

But I do know that If I wanted to sell my GOL shares, I would have done so (were I prescient and brilliant) when the price was in the high-$30s. I continue to believe, as the Oliveira family apparently does, that the long term potential is spectacular as long as Brazil eventually, preferably soon, cleans up the system that GOL has to work within. I don't want the company to take these shares from me at $25 or $30 this year, should that be possible ... and with such a huge controlling interest, it might be.

I'm still a fan of big insider ownership in general, of course, but it's not always entirely a good thing for other shareholders. Even in this case it might work out, since a going private buyout would at least bring the shares up somewhat from this level, and might even bring my shares into the black -- but for those, like me, who want to wait it out and see the recovery of the industry before considering selling, owning shares in a family-controlled company can mean that our options are not as many as we would like.

I own several companies that have large insider ownership positions -- John Fredriksen's Seadrill comes to mind, for example, but large ownership can perhaps give more benefits to individual shareholders when it's large minority ownership. Fredriksen, for example, generally owns about 30% of the shares of his companies, which is enough for him to steer the company and be incentivized to benefit common shareholders (and in his case, push for high dividends), but not necessarily enough, at least on paper, to allow him to do absolutely anything he wants with the firm.

We'll see how it turns out -- Gol has failed so far to take part in Brazil's remarkable stock market performance this year, but I'm confident that the shares are low for reasons outside the company's control. Unfortunately, my shares may soon be outside my control, too, so I'll just have to take the trust that I put in the Oliveira family and see where they decide to take me.

disclosure: Just to be perfectly clear, I do own GOL shares (at an average cost of about $27) and Seadrill shares (average cost of just under $15). I don't own any other stocks or companies mentioned above.

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Big Brazilian Aviation News (GOL)

Two big pieces of news that impact Gol in a positive way hit my screen after I bought shares on Monday ... a very rare case indeed of good purchase timing by me.

The first, rumors are now swirling (according to a Brazilian news columnist) that Gol is on the verge of buying Varig and keeping the nameplate for its international flights -- though others, including regional competitor LAN, are also likely to be interested. You can see the machine translated summary here or the original in Portuguese at the Veja Magazine site. A more recent summary is available from the AP. This could be very big for Gol, as Varig comes with a brand name and some very valuable international flight and airport "slots", but of course we'll have to see what it would cost and what their plans would be before judging the prospects. I'd trust GOL management to add more international flights, though I suspect they would continue to focus on the short haul international flights that they've already been expanding throughout Latin America.

And the second, I noted in my article that I thought the real reason for the GOL/TAM price war was the tough situation in civilian air travel right now, rife with delays and cancellations due to structural problems (not either company's fault). And I said I thought the cure for this would have to be a significant upgrade to the infrastructure, especially the air traffic control system ... but that the timing would depend on political will.

Now, at almost the same time I was typing that yesterday, President Lula exhibited a little bit of that political will -- he met with aviation heads (the air traffic control system in Brazil is still controlled by the military) and later announced, according to the AP, that he wanted a "deadline, day and hour to announce that there are no more problems in Brazilian airports."

Fixing the Brazilian air traffic infrastructure sooner rather than later would be fantastic news for GOL (and TAM) ... buying Varig may or may not be good, depending on the details ... and I'm still happy that I picked up more shares earlier this week.

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Bear Stearns Downgrades, Time to Buy (GOL)

I picked up a few more shares of Gol Linhas Aereas Inteligentes (GOL) yesterday, after a nice dip that was precipitated by a Bear Stearns downgrade and some very pessimistic comments by their analyst.

I've written many times about GOL in the past year or two, including a recent note that they were going on my "Conviction Buy" list ... but I haven't bought any shares in a while.

The prices we're getting now can't be ignored, however, and I've now bought just about all the GOL I can handle for my portfolio ... I picked up shares yesterday at $25.89, just a couple percentage points above the lowest price these shares have seen in over a year.

So what was the downgrade concern? Primarily, it's a fare war between GOL and TAM, the two dominant domestic carriers. The analyst sees this slashing profits, particularly in the fourth quarter when a lot of additional capacity comes online with new plane deliveries to both of these companies.

It's possible that Bear Stearns will be right in the short term (meaning, the next year or so), but I have my doubts. This company is so much leaner and so much better run than TAM (which is not a discount airline), that I think a fare war is probably not such a bad thing in the very long run.

GOL's goal, above all else, is to build a vibrant consumer air travel economy in Brazil -- something that is just in its first stages. And to bring people into the air and pull them off the buses that rattle along Brazil's unfortunate roadways, they use low fares.

A low fare airline depends on reducing costs and cutting fares to drive traffic, and on opening up a whole new market of people who never would have considered flying before because of the cost. That's what built Southwest and RyanAir to some degree, and it's even more significant in a lower-income country like Brazil -- the percentage of people in Brazil who have never flown in an airplane is dramatically higher than in the US or Western Europe.

So fare wars bring in new customers, and they also may allow GOL to take advantage of market share incursions against the larger TAM, in my opinion, because GOL has the financial wherewithal and the cost-cutting chops to keep fares lower, longer, than TAM. That's just my opinion, of course, it's possible that TAM's stronger hold on the business flier will help them hold off GOL, but I'm guessing not.

And more importantly, my supposition is that this fare war, founded as it is in a short-term desperation period for Brazilian civilian air travel, won't last long.

You see, in my opinion the major reason for the fare war is the terrible fall and holiday season experienced by Brazilian air travelers -- many people were turned off by air travel because of long delays caused by labor distress among the air traffic controllers due to overwork and anguish about being blamed for the GOL crash last year.

So it's not that the fare war came up organically because these two companies are trying to kill each other -- no, the fare war started because both airlines saw major traffic declines over a few months this winter, largely because air traffic delays made air travel unpalatable for many consumers, and had to do something dramatic and slash prices to get people back on their planes. I wrote a bit about this not long after the crash last fall here and also here, FYI.

I think this is a temporary issue, and that when air traffic control systems and staffing in Brazil are finally upgraded (which may take a couple years, I suppose, depending on political will), general consumer opinion about air travel is likely to improve to pre-last-fall levels.

And when that happens, whether it's next fall or next year or in a couple years, the marketplace can return to a more reasonable level of competition, which I think strongly benefits the smaller, nimbler, lower-cost GOL.

I don't trade much on shorter term issues, so it's possible that the shares will fall further -- but I would be surprised if they're not substantially higher within the next couple of years. At a trading PE of about 18 and a very large and growing market to address, I'm convinced that the shares are a very reasonable buy here -- the anslysts might be wrong on the estimates that give this a forward PE of about 10, but in the long run this is one of the stocks in my portfolio that I'm most convinced has a bright future.

disclosure: in case it's not obvious, I do own GOL and do not own any other companies mentioned here.

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What if Brazil Really Started to Grow?

With several investments in Brazil, principally the food company Sadia (SDA) and the airline Gol (GOL) I consider the country's prospects to be significant to my portfolio's future.

So, will Lula turn Brazil back into a huge growth engine while continuing to tame inflation and help the poor ... or will he, in trying to push additional growth, bring back the freakishly high inflation of the past and sink the Bovespa ... or will he, in trying to help all the helpless of Brazil, go too far injure the homegrown companies that have helped the country become significant on the international economic stage?

I don't know ... but I hope. Lula was just sworn in for his next term, and is now considered by many to be the most successful president in Brazilian history -- and he's certainly still popular, though perhaps not as much so as when he was more of a populist firebrand in his earlier years in office (years that gave Wall Stree the heebie jeebies, for the most part).

And while Brazil is a founding member of BRIC (or CRIB, if you prefer), the big emerging countries that stand as the bulwarks of the developing world (Brazil, Russia, India and China) ... it's certainly been, in recent years at least, the least followed one in that group.

Brazil has been the kid in the back row of the BRIC class, with much slower growth than India and China who sit up in the front and raise their hands all day long ... and thankfully, with more integrity than Russia, which, to continue the strained metaphor, is the kid selling cigarettes by the loading dock (you know he's got tons of money and all the chicks, but you're pretty sure you'd get burned if you got involved with him ... just ask your friends Belarus or Ukraine).

And really, if you consider that Brazil has grown at only 2.6% during Lula's reign in office, it seems odd to consider them to be part of this fast-growing emerging group at all -- except the stock returns have been sometimes spectacular, and the future might be more spectacular still.

Brazil doesn't have the massive population of China that makes all fiscal daydreams seem possible, nor the huge wealth of educated and English-speaking labor of India ... and they don't have quite the massive buffet of natural resources to snack at of the Russians. Really, in some ways all they've got is what the US had 100 years ago -- a growing, diversified economy based on cheap(ish) labor and lots of great arable land.

They have a large population of workers that are growing in level of education and, thank to the progressive policies of the government, slowly climbing out of poverty ... or at least, from really bad poverty into just plain run of the mill poverty. And that means they have, potentially, the second largest market in the Western Hemisphere.

And most significantly, for investors, is that the country seems to be hitting a sweet spot. Lula's regime has, by most accounts, tamed inflation. Ethanol and successful offshore drilling by PetroBras mean they're less subject to oil shocks than many markets. And because much of their trade is in agriculture and other natural resources, they might not be as susceptible to a dip in US or Japanese or European demand for finished goods the way China, India, Taiwan or Korea should be.

But make no mistake, Brazil is still a risky place to invest -- and my investments are primarily domestic in nature in Brazil, since it remains to be seen whether they can become an important player in multiple industries the way China has.

But it seems that Brazil does have, at least, a population that is slowly becoming better off, a good handle on inflation, and political stability -- that's something, and if they just continue on the path to development there will be plenty of money to be made even if they don't catch fire in quite the way their more popular (or notorious) BRIC brethren have of late.

In addition to my investments in Brazilian agriculture and airlines, which depend primarily on a building domestic and regional market, I'm intrigued by Lula's promise to liberalize financial markets and make investment in Brazil easier as a way to help spur some growth. This brings to mind a few companies that might benefit.

The first ones that come to mind with that environment are the banks, of which Brazil has two biggies that are traded in the US in Banco Bradesco (BBD) and Banco Itau (ITU), both of which have been awfully successful (though BBD has a bumpier chart than ITU). I don't know a lot about those companies, but I'm not terribly interested in investing in a bank at this point.

And second is the investment banking business ... the investment houses all have interest in Brazil too, of course, including Goldman Sachs and all their Wall Street brethren ... but the one that stands out for me in Brazil is a Canadian company, Brookfield.

Brookfield Asset Management (BAM), which I looked at for a few minutes when I was pondering the next Berkshire Hathaway, has a surprisingly high (and growing) level of involvement in Brazil (and has for most of its history) -- which intrigues me. They recently IPO'd a homebuilding business on the Brazilian exchange, which if financial markets and mortgages are going to be liberalized might be one of the more prescient moves of late, and they have a growing interest in Brazilian commercial real estate. It really feels to me at times as though Brookfield is becoming the Macquarie bank of the Western Hemisphere -- and if so, that would be fine indeed for BAM investors.

I don't know if I'm ready to become more exposed to Brazil than I already am -- I think it's unlikely that I'll invest in another Brazilian company at this point, but the more I've looked at Brookfield in the past few months the more I like it ... I just wish the valuation was a bit lower, but perhaps I shouldn't get hung up on things like reported earnings when the company has such a vast portfolio of assets ... including some juicy ones in Brazil.

full disclosure: I own shares of Sadia and Gol as of this writing, and LEAP options on Goldman Sachs. I don't own any other companies or investments mentioned.

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Gol refuses to fall (GOL)

I've been watching shares in Gol Linhas Aereas Inteligentes (GOL) for a few weeks now, waiting for them to fall in the wake of their reduced guidance and the terrible problems that are lingering for Brazilian aviation thanks to the crash a couple months ago and the fallout thereof.

But it hasn't happened, at least not to the degree I'd like to see. Late last week, in fact, the shares rallied a little bit.

It looks like GOL shares right now are pricing in more optimism than I really think is warranted in the short term -- I've been optimistic about this company for a long time now, but I wish the market would take a bit more critical eye and trade the shares down so I could fill out my position with one more bargain purchase.

What's wrong with GOL? The Brazilian air traffic controllers have been in a bit of a work slowdown since being blamed (by some) for the recent crash of a Gol flight with an Embraer business jet that killed everyone aboard the Gol plane. Gol is likely to get sued by someone, and it's certainly true that this tarnishes their brand a little bit and will cost them money (though they're insured) ... but there hasn't been any indication that the airline or its pilots did anything wrong.

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So the problem isn't with Gol specifically, but with Brazilian air traffic in general -- TAM and Varig (what's left of it) are suffering too.

Air traffic control has gummed up the system by "working to rule" and causing delays for nearly every flight, which is cutting back on the appeal of air travel and on the efficiency of Gol's flight planning -- and that, in turn, is going to reduce results, at least until they bring the air traffic control system up to full capacity and expand it to meet the growing demand.

Now, I can live with this -- I've seen the reduced guidance that Gol gave when they realized the impact that the gummed up air traffic control system would have on their earnings, and I wouldn't be surprised to see them have to reduce guidance again if the problem lingers. I've got a multi-year time horizon on this investment, and in the long run I think the potential for growing South American air travel is spectacular.

But I was really hoping that this would drive down the share price. While I was looking into Brazilian stocks a week or so ago, when I made my initial purchase of shares in Sadia, I came very close to upping my Gol holdings as well ... but I've been greedy, hoping that this temporary problem would create a fire sale.

And as recently as Friday, GOL blipped up again -- presumably because the government has now charged the Embraer jet pilots in the crash, which perhaps could create a scapegoat that would take the pressure off the air traffic controllers and allow them to get back to work.

Still, I'll hope for further declines -- with the lack of investment in their aviation infrastructure over the last decade as traffic has steadily climbed, it's going to take more than just a return to normalcy for Gol's growth to continue. What is eventually needed is a significant investment in expanding air traffic control capacity, which may or may not mean moving control away from military control (I don't know enough about the situation to know whether or not that is important).

Hopefully, sometime in the next few months the sector will be hit hard with the results of a national air travel slowdown ... if so, I'll plan to be ready to buy.

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Happy Sadia Investor (SDA)

I opened a position in Sadia SA (SDA) today, purchasing shares at $30.60.

Sadia is a Brazilian food products company, primarily producing and selling pork, chicken and processed refrigerated/frozen foods. They've had a tough year thanks to some problems with the strong Brazilian currency and weakness in some of their exports (the avian flu outbreakand resultant dip in poultry demand, and a Russian ban on Brazilian pork were negatives in the recent past) ... but management believes that the recently completed third quarter is the beginning of their export and sales growth rebound, and I'm inclined to think they have a good future ahead of them. The shares, while not at their lows, are nicely priced.

Brazil has some natural advantages in this business: inexpensive and available feed grains, inexpensive labor, a good agricultural climate, and a large number of farmers. Sadia has relied on that combination of factors for many years in building both a dominant food company in Brazil, and a significant export business to the rest of the world.

And the meat and processed foods businesses, I believe, have some significant tailwinds for the years ahead -- regardless of the success of Whole Foods and the organic foods movement in the US and Europe, I think the trend is definitively pointing toward much higher consumption of processed and convenience foods worldwide -- more people are working, fewer are farming or living near farms, and convenient refrigeration continues to spread to growing lower middle class areas in Asia, South America and elsewhere.

Add that to the fact that higher standards of living internationally almost certainly will bring higher protein consumption, as they have in the past, and I think meat and frozen convenience foods are good investment opportunities. The global trend for meat consumption has it increasing at 2% a year overall, and already we're seeing eye opening statistics -- including the fact that China now consumes half the world's pork. Meat consumption has climbed something like 500% over the last 50 or so years, and I don't expect to see that trend reverse itself in any meaningful way. That's likely to be quite bad for the environment and for global sustainability, given the inefficiency of a higher protein diet and the dirtiness of the typical factory farm, but for investment purposes that concern is largely incidental.

The company's sales are roughly evenly divided between domestic consumption and exports -- exports are a bit low at 44% of the total for the most recent quarter, thanks to the problems I noted above, but management during the conference call definitely noted that they see the balance returning to the 50/50 margin they prefer.

Domestically, Sadia is primarily a seller of frozen and refrigerated processed food -- everything from frozen chicken nuggets and pizza to ice cream and margarine, including some products like chicken carrot lasagna and cheese chicken burger hot pockets that I can only assume sound better to a Brazilian than they do to me.

The export business, in contrast, is largely in lower-margin products like chicken parts and commodity poultry and pork products. They're slowly adjusting that and trying to market their value-added processed foods in foreign markets, with particular focus on other South American countries and on the Middle East.

Sadia management sees continued opportunity for margin growth as they build and invest in their business, with a goal of seeing EBITDA margins increase to 17% by 2010 -- that would be pretty remarkably high for this business, and Sadia's operating margins are already significantly better than many competitors, including US based companies like Tyson or Smithfield (Sadia doesn't really export to the US on any meaningful level, though that might change with a free trade area for the Americas still possible, so comparisons might not be very useful). Gross margins slid dramatically earlier this year, as the fall in the stock price indicates, but have already begun a rebound and ought to return to their historical levels in the high-20s.

The company has a pretty high debt level, but with continued solid sales and growth I think that ought to be manageable, and the debt is helping to finance needed expansion. Right now, as the company believes they're on the cusp of recovering sales and margins, net debt to equity is at 53%, a touch above the board-mandated maximum of 50%.

There is also always a possibility that Sadia will make big acquisitions either domestically or internationally -- they tried and failed to take over their major competitor Perdigao earlier, and have been trying to build up their pork and beef operations, partly as a way to diversify away from potential avian flu exposure.

As with other Brazilian companies, Sadia pays out a minimum portion of earnings as a dividend to shareholders as required by law. The dividend is subject to Brazilian taxation and fluctuates significantly based on the performance of the business, but the TTM dividend rings in at well over 4%, and I expect to see a yield at least equal to that going forward.

I'm planning to hold this position for a long time, and hope to buy more at lower prices if there are further avian flu or similar short-term concerns. The opportunities for increasing sales of processed foods to the growing economies of South America, and the likelihood of increased protein consumption worldwide provide some real opportunity for a company that I think is value priced right now.

As with my investment in Gol Linhas Aereas Inteligentes (which I'm also considering adding to in the near future), this is in part a bet on the growing Brazilian economy. Rising minimum wages and inflation that is (hopefully) under control should allow for more consumption of prepared foods as well as cheap airline tickets in the biggest country in South America, but the risks with this volatile economy are certainly nothing to scoff at -- continued strength of the Real can hurt their export performance, and a return to high inflation or a wildly populist turn by the government (neither of which I expect) might be disastrous. On the flip side, one of the cabinet members is the former head of Sadia, so I'd imagine the company has a significant voice in the government.

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Gol Cuts Guidance Following Crash (GOL)

So, it turns out that plane crashes are a big deal in Brazil, too.

Today, Gol Linhas Aereas Inteligentes (GOL) reduced guidance for the coming year as a result of problems with air traffic delays and reduced passenger demand following (though not directly caused by) their recent crash.

The new guidance for the current year is for a minimum of $1.73 a share, which gives us a PE of about 16 -- still reasonable, but significantly lower than the prior guidance.

For those who didn't hear, a GOL jet on September 29 collided with a small Embraer business jet from ExcelAire charters that was on its maiden voyage, on its way to being delivered to NY. The investigation of the crash has been inconclusive, but a major factor was that the Embraer jet -- a small northbound jet -- was at the altitude typically reserved for, and assigned to, the southbound jumbo jet traffic. Dozens of radio calls apparently went unanswered right before the crash, and neither plane's anti-collision system issued alerts. The Gol jet crashed, killing everyone aboard, but the Embraer's pilots were able to safely land their plane with relatively minor damage.

There are two upshots to this for GOL as a business concern -- leaving aside the humanitarian disaster, which I think Gol has handled very well in communicating with the families of all those involved.

One is that Gol is a bit tarnished as a result of the crash of their plane. It seems to me that this is likely to blow over, since of the three parties involved (the Gol pilots, the Embraer pilots, adn the air traffic controllers), the blame has so far ricocheted back and forth between the Embraer pilots and the air traffic controllers.

I haven't seen anything that indicates that the Gol pilots did anything wrong, and it's a clear case of a collision and not a defective part (except possibly for the collision warning system) or a deferred maintenance problem or something else that would tarnish Gol specifically (and GOL flies one of the youngest fleets in the world, so while they're a discount airline they're not flying beat up planes). Unlike the Valujet crash in the everglades 20 or so years ago, I don't think this is likely to precipitate the fall of the company (or lead Gol to try to hide by renaming itself).

And the second problem is probably longer lasting, and more easily quantifiable. That problem is that the air traffic controllers in Brazil are staging a bit of a protest of their working conditions, which some argue led to the crash, by doing what they call "working to rule" -- which means following the letter of the rulebook and, one presumes, not stretching their shifts or doing overtime or whatever else they might do to ease the pressures on the system.

That has brought signficant delays as the air traffic control system has been forced to cancel some flights and delay others, to the extent that some officials say the system has dropped to half capacity (others deny a significant problem), and nearly half of all flights are now delayed, with 1-3 hour delays not uncommon. That's why Gol issued new guidance, since they're already seeing that this is reducing customer demand to some degree.

And in some broader ways this is Gol's fault, too -- they have democratized the skies by slashing prices to be competitive with long bus trips, and in doing so dramatically increased demand for air travel, which means many more planes share Brazilian airspace now than five years ago ... which means air traffic controllers are overtaxed.

Officials have been quoted as saying that the delays are likely to last until the middle of next year as the system staffing is built to a more appropriate level. That's an awfully long time, and it's likely to continue to depress GOL's earnings a bit from the levels they might otherwise have attained -- current guidance for 2006 is a drop of anywhere from 5-15% from the guidance they had previously issued, so although GOL has not commented in detail on 2007 I would not be surprised to see that forward PE climb a bit from where it sits now at about 12.

What else is likely to happen as a result of this crash? There's certainly the potential that Gol will be blamed -- it was, after all, their plane that crashed, and their passengers and employees who were killed. I haven't noticed Gol named in any lawsuits yet, though the other plane's pilots have been, as have some of the manufacturers (Honeywell, for one, which I presume designed the collision detection equipment or other relevant cockpit gear).

The official government report has so far assigned no blame in the crash -- they said that a flurry of communication between all the parties occurred directly before the crash, but didn't lay blame on anyone ... but the two American pilots of the business jet have had their passports taken away while the investigation continues, and it's certainly in the Brazilian papers with some regularity.

But in my opinion, we're looking at a very unfortunate bump in the road for Gol. Gol is a play on increasing demand for air travel in Latin America -- pure and simple. So in the short term, as demand is depressed due to the air traffic control problems, and potentially due to the public fear of flying (well, fear of crashing, really), the performance of the company will suffer. In the long run, my expectation is that GOL will continue to grow dramatically and put all those shiny new Boeing planes that they have on order to work.

full disclosure: I do own GOL shares as of this writing.

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Gol maintains altitude (GOL)

I haven't written much about Gol Linhas Aereas Inteligentes (FARO) in the last couple months. It's been a fairly quiet summer since the drama of Varig's slow demise held my attention through the World Cup, with Brazilian soccer fans stranded in Germany thanks to Varig's inability to make payments on its leased fleet, and the Brazilian courts struggling through their first high profile bankruptcy case under a new set of laws.

But Gol's business has continued to be rock solid. For those who don't know, Gol is the second largest airline in Brazil (the largest is TAM), and is benefitting both from the rapid growth of air travel in South America and in its own competitive position as a low cost carrier in the mold of Southwest Airlines. TAM is also doing well, but I like the high insider family ownership in GOL, their excellent investor relations and disclosure policies, and the fact that they're a newer, more focused competitor (TAM has been around for much longer, though they've also in recent years moved to a discount model).

It's really a two horse race in Brazil now, with Varig, the former flagship carrier, essentially trying to be reborn as a startup ... and there may be more than one winner. Both TAM and GOL should benefit tremendously as the civilian air travel industry there grows by leaps and bounds. According to an Investors Business Daily article earlier this week, there are fewer than two airplane trips taken for every one hundred Brazilians each year -- as opposed to the US market, where each individual takes an average of more than two trips a year. Clearly, Brazil has great room for growth in this industry as their economy grows ... if they even grew to travel by air as often as Chileans, that would be more than a tenfold increase in air traffic in Brazil.

But none of that is news -- what's been going on with Gol lately, as their share price has more or less stagnated over the past six months?

Three developments have left me with continuing optimism about my GOL investment:

1) They're continuing to cut costs aggressively. They recently opened a new maintenance center so they can do their own servicing and stop paying third parties, which they believe will save them $2 million a year. Add that to the declining oil prices, and margins should continue to be excellent (they already have second-to-none profit margins).

2) They're continuing to steadily branch out and build their network into underserved areas of Brazil and neighboring countries, using the same low-cost, point-to-point strategy that has served them so well to date. GOL now flies to Argentina, Chile, Paraguay, Uruguay, Peru and Bolivia and is trying to expand to Mexico, Venezuela, Colombia, and Ecuador (the Mexican expansion, which would require building a domestic fleet in that country which is just now opening up to low cost competition, is on hold as GOL decided this summer to focus on South America for the time being).

3) Even as they bring new capacity online -- they're buying 20+ new planes this year, and the year-over-year seat miles have increased 45% -- they continue to build their efficiency as measured by the load factor (the percentage of available seat/miles that are filled). In July, that load factor hit an unbelievably high 84% as the grounded capacity of Varig continues to be absorbed. That high a number might not be sustainable, but they report it monthly and it has consistently been excellent. August, while significantly lower than July at 77%, was dramatically better than the 66% they hit in August of last year. I was a little worried that the buildout of international routes would hurt this performance, but clearly it hasn't as the company has focused on high-traffic routes and managed them very well.

4) Though prizes don't mean much on their own, GOL continues to win industry prizes and high rankings among their peers, and they stand out as one of the strongest companies in the developing world. They consistently win accolades for their investor relations and disclosure policies, as well as for their exceptional business performance, and the company is clearly proud of their status as a highly ethical leader in the marketplace. A few recent examples from just this past Summer are awards or high rankings from Latin Finance, Aviation Week and Space Technology, and the Brazilian Economic Institute.

GOL has underperformed the larger (and more international) TAM since the latter came public this past Spring (as you can see from the six month chart below), but I continue to be a believer in GOL's high insider ownership, strong track record of cost cutting and aggressive price cutting that is helping to expand their market, and excellent management.


GOL remains one of my larger holdings, and the only thing that is likely to change that would be a sustained recession in Brazil.

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Best Management?

A reader emailed today to ask what I think about Berkshire Hathaway, and, more generall, which management teams most impress me. I thought I'd answer for everyone in case anyone else is interested.

Berkshire Hathaway is still in my portfolio, and has been for about a year and a half ... but it's at roughly the same price today as it was when I bought it. I have the utmost respect for Warren Buffett, and I'm pleased that they have further clarified the Berkshire succession plan.

I like Berkshire because Buffett has done more with "free money" than anyone else -- his use of the "float" to fund long term investments has clearly been brilliant, as evidenced by his trouncing of the S&P 500 over the last several decades. My position on Berkshire is that I expect it to continue to plod along, acquiring solid companies and using their clout to be the insurer of last resort for many high risk enterprises, at significant profit. But I don't expect any rapid growth -- my fear is that Berkshire will end up so large that it effectively works as an index fund with cheap leverage from the insurance float, and even that is a fine scenario. With new money today, however, I'd be more tempted to put additional funds into Markel, as they have the kind of potential growth ahead of them that Berkshire had 25 years ago, assuming they make the right decisions ... Berkshire just can't grow that fast anymore.

And as for management -- perhaps it would be simplest to just list some of the things I like about some of the managers I trust the most:

In terms of trusting someone to make investment decisions for you, I do think it's hard to go wrong with Warren Buffett -- but if I ever sold my Berkshire shares and wanted a similar value-investing exposure in my portfolio I would have no qualms about giving the money to the investment team at Dodge and Cox Stock, which I already have some retirement money invested in, or with Martin Whitman at Third Avenue Value, who I would consider the single smartest long term stock picker available right now (but he's nearing retirement, too, I expect).

In terms of sharing information fully with investors, and making small investors feel they are on the same page as the management team, I'd trust the Oliveira family, controlling shareholders of Gol Linhas Aereas Inteligentes. Without playing a self-serving game with analysts to lowball and then beat their projections, they manage to clearly open up the books and explain their business, including monthly updates on their business performance -- it's rare for an American company to do that with such enthusiasm, and it's rarer still for what most would consider to be a risky emerging market investment.

Another thing I like to see from management is insider buying -- it always encourages me when executives put their own money, not options, into the company they know best. Of course, they know that, too, so it can be self serving ... but when executives aggressively purchase their own stock I think we'd be wise to follow. On this point, it's worth taking a look at Chesapeake Energy, of which I own preferred shares, and see CEO Aubrey McClendon buying up well over a million shares on the open market in the last couple of months at prices right around where it stands today (mostly higher, in fact). Add to that the fact that he has led the company to make strategic natural gas acquisitions now, when prices are relatively low and pessimism high, and I think you have the makings of a manager who's looking out for the long term interests of shareholders.

There are others who I like as well, for some good reasons. I am a big fan of Selim Bassoul at Middleby, who has shown a real talent for bringing focus and drive to a small company that was too diversified ... and then being aggressive about making acquisitions to shore up their core business in commercial kitchen equipment with Nu-Vu and, perhaps, Enodis if they stay in the bidding for that company.

And if you're looking for a management team that is relentless customer-focused, continuing to bring out product lines that their core consumers will buy and treating those customers like royalty, you need look no further than Chico's -- the shares are taking a beating lately, but I'd trust this management team more than any other in retail to recover from their merchandising hiccup and continue delighting customers. I don't think any other CEO cares as much about the soft side of customer service as Scott Edmonds does at Chico's, and their focus on their "lifetime passport members" and on personally writing to their best customers clearly creates some fiercely loyal consumers. I'm tempted to buy more here, now that it's on clearance.

On a more strictly financial point, I also should mention John Fredriksen, whose right-hand-man Tor Olav Troim heads SeaDrill. Often described as a viking raider, Fredriksen is not someone I'd probably like, and I don't know that he's the person I'd want managing my business if it was something I wanted to hold forever, but as a controlling shareholder he has a track record of being extremely aggressive in unlocking value in high priced assets and returning cash flow directly to shareholders ... including himself, of course. Sometimes his massive dividending out of cash might not be the best long term move for the companies he owns, but it certainly benefits shareholders immensely when he times it right, as he did with Frontline a couple years ago ... and as I hope he'll do with SeaDrill over the next two or three years.

Those are just a few things I like about management -- a focus on investing your money wisely, a propensity for insider buying, eagerness to share information with investor without trying to manipulate them with pointless press releases, a strong focus on their customers and a track record of pleasing them, and a desire to return cash to shareholders. It's not often, if ever, that I find all those things in one company ... but even one of those things, if the story fits well enough, can be enough to get me interested,

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Varig Slowly Dying -- Gol Continues to Benefit (GOL)

Still more news this week from the sad story of Varig, Brazil's flagship airline that is continuing to fall apart even as the bankruptcy proceedings near a close.

I seem to write about this a lot, but it's a fascinating story of an industry leader facing the first big bankruptcy filing in a developing country that is trying to let capitalism work. Think of what the French are calling the "industry champions" of Europe, and imagine whether they would allow their leading companies, storehouses of national pride, to fall like this, and in so doing allow better, younger, stronger companies like GOL and TAM to emerge fairly. Heck, this even calls to mind Nortel Networks in Canada, which probably should have gone bankrupt a dozen times over in the past few years but is, at least according to some, being protected by the Canadian government.

Now, nearly half of Varig's international flights have been cancelled due to lack of planes (they remain the dominant international airline for Brazil, though their domestic market share is now tiny). Actually, they still have the planes -- they just can't pay for them, so a US judge has issued injunctions to stop flying on behalf of leasing creditors.

The employee group that is still trying to buy Varig to keep it afloat (and keep their jobs and pensions intact) is having a tough time of it -- they're looking for a huge cash inflow that they need to invest in the airline by the end of this week in order to confirm their winning (and only) bid from the bankruptcy auction. It's push and go whether they'll get the $75 million they need by Friday to meet the judge's edict, some commentators believe the banks will refuse to lend them the operating capital they need but others believe the government development bank will come through as a last resort (summary of this news is here).

At the same time, other possible buyers have completely disappeared -- a TAP executive (that's a big Portuguese airline that was a reputed possible savior) confirmed to an AP reporter that "It turned into a high-risk operation and yes, I can confirm that the deal is off."

It's no real surprise that no one but the employees wants Varig at anything approaching the prices the bankruptcy judge demanded, and even the employee bid was well below the limit set. It's no surprise why -- their highly leveraged fleet doesn't have that much value given the much higher efficiency of newer aircraft and the fact that most of their planes are being repossessed, and their brand must be dying a slow death in Brazil.

Who would want to buy an airline if all you get are the employees whose unions make it impossible to compete against TAM and GOL, an albatross of a leveraged fleet, and a brand name that is now associated with thousands of trips lost and tickets made worthless? This isn't as bad as a plane crash, like the one that forced ValuJet to change its name to AirTran, but it's pretty bad -- would anyone who heard about an airline cancelling flights and not refunding tickets want to fly them again?

On the other hand, GOL and TAM are taking those Varig passengers that they can, without charge, and counting on some recompense from the government. That should help both by expanding the universe of people who have been exposed to GOL's improved customer service and efficiency, and by giving GOL and it's larger competitor TAM the halo of a good samaritan, helping passengers in their time of need.

This situation remains very fluid and there's no way of knowing whether Varig will survive, but my guess is that it will endure for the near term as a mere shell of its former shelf with employee concessions and government loans, with very little chance of returning to profitability. Still good news for GOL, as you can see from the quick incline in the stock price when the latest Varig cancellations were announced this morning.

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Investing with the World Cup?

I've been twiddling my thumbs for several days while I look for somewhere to deploy my cash and get fully invested during this downturn. I've been mostly looking at energy and materials stocks since they've fallen farther and faster than many others, and for reasons that I don't believe are sustainable.

But I haven't been willing to pull the trigger yet -- Pride International still looks incredibly cheap to me but I fear the scandal and wonder if we might see a further decline if and when more details emerge ... SeaDrill is now looking like a bargain, something it has not been for about six months, but I already have a large underwater SDRL.OL position and I'm a little cautious. And I just bought Chesapeake Preferred for some safer natural gas exposure and would rather wait for more downwared movement before adding to that position. I'm sure there are other great candidates out there as well, I'm keeping my eyes open.

But in the meantime I've been watching and listening to the World Cup games and wondering, in the back of my mind, whether there are any investment lessons or ideas in the world's greatest sporting event. Probably not, but I'll humor myself. Here's what came to mind.

If there are any lessons to take away for me, the significant one is probably "be patient" -- successful soccer teams can't press all their men forward at all times, they have to wait for good opportunities and then jump in with both feet to press the attack. Patience has been hard to learn as US team follower, I was shocked at how terribly they performed in their first game, but the patient fan waited to judge ... and they dramatically outplayed Italy in their second game. Now my lesson is to be patient while I chew my nails awaiting the Ghana game on Thursday.

But might there be some ideas for investing here? In the US, this is still a minor sport -- but for the first time all the games are available nationwide on both TV and radio. I well remember watching previous Cups on Univision because many of the games weren't televised in English, and, frankly, my college Spanish didn't do me much good on the radio broadcasts (though it's still thrilling to hear Andres Cantor scream "GOOOOOOOLLLLLLLLLLLLLLLL!" -- even if you cant' tell which team or player scored). Hopefully soccer is catching up with hockey here at home, though I'm not holding my breath, and I've been thrilled to be able to catch almost every game.

But that probably doesn't make much money for everyone. Sure, I imagine a few soccer diehards signed up for XM radio (XMSR) in order to get the broadcasts of every game ... but XM has already warned that they'll be missing their customer acquisition targets for this year, and I don't imagine this will make the difference.

And Disney (DIS), owner of the US World Cup broadcasters ABC and ESPN, is doubtless making more money on showing a US soccer game on saturday afternoon than they would on MacGyver reruns, and hopefully ESPN gets better ratings for the other games than they do for poker ... but it's probably not going to move the needle. I actually like Disney partly because of the dominance of the ESPN franchise, but I wouldn't buy at these post-Pixar prices and didn't pay enough attention to buy a year ago when it was a certifiable bargain.

So what about other countries? I have focused a lot on international investing of late -- India (IFN) is probably the weakest major nation in the world when it comes to sports, and Norway (home to my SeaDrill investment) isn't setting anything on fire unless it's the Winter Olympics, but a lot of my other holdings are in cup-crazy lands.

Korea is still riding high from their strong performance in the last Cup, and they've done well so far this year. Thanks in large part to the utter disappearance of the French team, they've got a chance to make it to the next round. If we read into this, is Korea a better investment than France? I think you don't need to know what an offsides trap is to know that's pretty likely -- Korea is low priced explosive growth, France is a few dominant international companies and a domestic economy totally crippled by tradition. I actually own a Swiss company as well, UBS, but I'd like to see the Koreans beat the Swiss and outpoint France to move forward.

Cemex (CX) is one of the materials companies I've been keeping a very close eye one, and it's one of the largest companies in the Mexican market. Will Mexico's possible advancement make any difference to this major international cement company? Not likely -- infrastructure development around the world, continued residential and commercial construction in the US and elsewhere ... that's what moves CX's needle. Oil prices and the US consumer have more of an impact on the Mexican economy than does soccer fandom, I expect.

On the other hand, if Angola manages to really clobber Iran, and Mexico falls badly to Portugal, group favorite Mexico would be sent home -- so would a huge success in the next round or a failure to advance have more of an impact on beer consumption in Mexico? Not sure whether Mexicans drink more in celebration or in wallowing, but I still like FEMSA, brewer of Dos Equis and Tecate and remain interested if I can get a good price on those shares.

Brazil, home of one of my other large positions, GOL Linhas Aereas Inteligentes, might shut down if they win the Cup yet again -- but even in what might be the world's most soccer-crazed nation I don't expect it will cause travel behavior to change. It might get very interesting if 5,000 Brazilian Cup fans get stranded by the possible cancellation of Varig flights to Europe, but I think the largest impact might be that a nation distracted by Ronaldo's enlarged tummy might have not payed enough attention to the final wrapup of the bankruptcy proceedings, which have now led to purchase by an employee and investor group. I expect GOL's executives are cheering just as loudly for this purchase as they are for Ronaldinho, Varig was incapable of managing itself efficiently before because the airline was run largely for the benefit of the employees -- how much worse might that get now that the airline will be answerable directly to the employee and retiree unions?

I was actually a little surprised when I didn't hear Cramer running out his standard shtick for any large sporting event. During the Super Bowl and during the NCAA Final Four, he yelled for investment in companies that profit from online streaming video and big screen TVs -- I may have missed it, but I didn't hear that this month, though certainly plenty of folks around the world are catching highlights from their desks and buying new big screen TVs to watch their heroes compete. I expect that's because the market has been in a precipitous downturn this time around and there has been recent fear of an inventory glut from Corning and AU Optronics on large screen components (even though Best Buy and Circuit City recently announced that they sold many more of these sets than anyone expected -- too bad none of those sales were to me).

But I actually do still like Akamai very much -- Cramer has been pooh-poohing it in the short term, probably rightly as most stocks that have more than doubled in the past year are seeing a lot of selling pressure, but I imagine Akamai's getting a fair amount of business from their clients around the world as they manage streaming Cup video clips and, perhaps in some countries, full games.

So probably no lessons or real investment knowledge to be gleaned from the World Cup -- but at least a few interesting things to think over as we wait for the next great game.

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Gol and Varig (GOL)

It's been an interesting month or two for Gol Linhas Aereas Inteligentes (GOL). Brazil's quest for the World Cup has overshadowed the fight over Varig, the former flagship airline of Brazil and one of it's most well known companies, but the fight should be over before the champions take a victory lap in Berlin next month.

And I think it's not likely to matter that much for Gol in the long run.

Varig's bankruptcy has been an irresistible story -- the first company to go through the new Brazilian bankruptcy filing process ... Brazil's dominant international air carrier forced to ground planes and cancel flights to europe just as thousands of futbol fans are trying to reach Germany (and get home) ... and a fight for ownership of Varig's assets that has illustrated just how far this star has fallen. Leasing companies, including Wells Fargo, GE and others, are all trying to get their planes back but are temporarily being blocked by the bankruptcy judge, and about a quarter of Varig's planes are already grounded for failure to make maintenance or lease payments.

Varig was put up for auction by the bankruptcy courts earlier this year as a way to infuse new cash and management into the company after their debt is written off ... but the closest bid to the minimum of $800+ million was a bid for about $450 million from a group of employee and retiree unions.

And that's why I'm not so worried for Gol.

Even if these employee groups do succeed in buying Varig -- and it's up in the air whether they can raise enough money for even their minimal bid -- they'll still be beholden to themselves. Part of Varig's problem is much like General Motors' -- massive legacy and pension costs, and a company that has been run with much more focus on benefitting the employees and maintaining share than on benefitting shareholders. I don't think any company that is going to remain loyal to its longstanding employees and maintain those contracts will be able to compete effectively with Gol and TAM, the current market share leader in the country.

If the fallback position that's been developing -- that a consortium of investors led by Portugues carrier TAP and Air Canada will buy Varig -- comes through, I'm still not so worried. I think that it's too late for Varig to embrace a new business model and dramatically lower costs, though they may return to profitability as a legacy carrier much as some in the US have done. But if we draw that out further, I don't really think that a recovery by American Airlines or Delta, for example, threatens the continued success of Southwest.

GOL is creating new markets in Brazil, not just taking share from Varig. Gol apparently decided not to bid on Varig, though some of their planes and routes may have been attractive, and my guess is that's probably going to end up being a wise move. Why buy someone else's problems when you're doing an excellent job of growing and taking share on your own?

Gol had a good month in May -- traffic was up about 50% year over year domestically, and more than 100% internationally as they have been growing their route system. Yield per passenger kilometer has declined slightly, largely due to some longer flights, but they continue to have great load factors and incredible margins due to their efficiency programs. And they're using new cash raised through offerings and some new debt to significantly boost their fleet.

All that is to say, as the air transport business continues to expand in South America and Gol continues to add significant capacity without harming their admirable profit margins, I think it matters less and less what happens with Varig, the former titan that is now reduced to fighting for its life ... and for its paltry 14% domestic market share.

I feel bad for all the Brazilians who might be stranded in Germany if Varig's mess isn't figured out in the next couple weeks ... but I hope the games are worth it.

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GOL Seconday -- Sensible? (GOL)

A couple readers and associates have asked me recently about Gol Linhas Aereas Inteligentes (GOL) in the wake of their secondary offering, recently announced, that has punished the company's shares.

My take, as a long term investor? Seems pretty sensible to me. It's true that we're going to see some dilution here -- the grand total is about 4.4 million new shares, on a base of about 200 million.

A major shareholder, ASAS Investment, is also registering to sell 10 million shares -- but those shares already exist, they're just going to add to the float and perhaps create some selling pressure until they're absorbed into the marketplace. No dilution from those.

So in the end, we're talking about dilution of about 2% from the new offering.

Not a big deal in the grand scheme of things, though they're also offering up some debt, which they have generally shyed away from -- but this is convertible debt, and I'm guessing that with their share performance over the past year they're going to get great terms on this issue.

What it amounts to, basically is some cheap money for GOL's coffers, at the cost of a bit of dilution for current shareholders. Dilution can often be bad, of course, if companies are diluting just to pay stock options (good 'ol Cisco), or selling stock because they can't make money by selling their products.

But with a very successful company like this, which is still in hyper growth mode, they need a way to expand faster than their operating cash flow alone can provide. That's especially true in light of the situation in Brazil, which has opened up the potential for GOL and TAM to fight over Varig's declining market share -- now is certainly the time to take advantage. New planes are expensive, and GOL has also recently announced a significant ramp-up in it's fleet growth plans, which means an additional two new planes added this year, and ten additiona next year.

The upshot for GOL is that 2006 will be a bit more expensive in terms of capital outlays, and that 2007 will be a year of dramatic growth in the fleet, with most of that coming from purchased high-efficiency Boeing 737-800s and 700s (they're buying 13 next year and leasing one).

With the performance we've seen from GOL, and their general shareholder-friendliness (the company is largely owned by a Brazilian family, so they're diluting themselves as well), I'm happy to see them using a variety of relatively low cost financing options to pay for their major fleet expansion. The secondary doesn't bother me in this case, though with my large GOL holdings the associated swoon in the shares isn't enough to get me to further overweight this position.

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Cramer Flies Gol? (GOL)

Jim Cramer touted Gol Linhas Aereas Inteligentes (GOL) on his CNBC Mad Money show last night, and it seems to have helped the shares slightly today, providing a further little boost to within a dollar or so of the 52-week high.

His rationale was much the same one that pushed GOL up by 15% over the last several days: GOL is one of the major beneficiaries, the other one being TAM, of Varig's problems. Varig is now likely to be bought out by it's former cargo division that was spun off a while back, but they're still going to be in a world of hurt as they try to cope with their declining market share and still very high costs.

Varig still has the lion's share of the long-haul international flights into and out of Brazil, and my assumption would be that they would focus their energy on holding that market share and managing that part of the business, where they have less competition from GOL, which flies only short international legs in South America, and TAM. I also expect that their international routes make them more money, though I don't know that for sure. If Varig does focus on international and doesn't try to effectively rebuild domestic market share, that's almost as good for GOL and TAM as if they go completely belly up.

What Cramer did not say, but what I believe, is that GOL is a great long term investment even if Varig is doing very well. We're getting a short term boost from Varig's problems here, but even with a strong and effective Varig there is still huge potential for growth in air travel in South America, and Gol is doing the best job of spurring that growth and profiting from it.

GOL is doing it on their end of the economic scale the same way Southwest did, creating customers by slashing costs and lowering prices to the level that they can compete with the existing travel infrastructure (long bus rides) and make air travel an affordable option for the millions of people in the southern cone who have never been on a plane. Air Travel in South America is decades behind the US in terms of market penetration, but GOL is changing that.

I've written a lot about GOL before so I won't go into more detail -- just thought it was interesting that Cramer was joining the GOL bandwagon after the Varig news, apparently thinking that there will be more benefit for GOL than just the short-term boost we've seen since late last week. That's fine with me, though I'm not counting on more of short term gain here ... I'm thinking that Gol will continue to grow steadily and profitably for many years to come, which should be great for shareholders like me. My former posts are here if you're interested:

Gol Reaps Rewards of Varig's Problems
New buys -- GOL and MKL
GOL Scores Again
Multiple Expansion? (WFR, GOL)
This is almost too easy (GOL)
Scored more Gol (GOL)
This is ridiculous -- bought more GOL

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Gol Reaps Rewards of Varig's Problems (GOL)

Gol Linhas Aereas Inteligentes SA (GOL), one of my favorite companies and largest holdings, is enjoying a very quick move up today.

Looking at the Google Finance or Yahoo Finance pages, you might be inclined to guess that it's moving up because they announced this morning, just as the shares began to accelerate, that they were among the first foreign companies to comply with Sarbanes-Oxley.

But uhhh, no. While I love the company's disclosure policies and think they're as shareholder friendly as any foreign company I'm aware of, that's not really news -- and it's not going to bump the shares up by 13%.

No, the good news for GOL is the bad news for Viação Aérea Rio-Grandense, more commonly known as VARIG. Varig, the longtime flagship airline of Brazil, is floundering -- and president Lula just kicked them a little while they're down, reassuring investors that the government wouldn't step in to help Varig too much at the expense of their competitors.

There's a good article on this at Reuters entitled Brazil Seizes Varig Pension Fund -- not only is the government not helping Varig financially, they actually stepped in to take control of their pension fund assets so the company wouldn't be tempted to use them to cover it's unmanageably high operating costs.

But there's more detail in a Bloomberg story as well, including a quote from the CEO that "these types of actions will force Varig to ground its planes very soon." Dow Jones is reporting that "Shares in Brazilian airlines TAM SA (TAM) and Gol Linhas Aereas Inteligentes (GOL) surge on reports the government is drafting a contingency plan for the two to pick up routes from rival Varig (VAGV4.BR) in case its planes are grounded amid bankruptcy procedures," which is the first I heard that the other carriers might benefit this directly. To add fuel to this fire, some of the small upstart carriers have been hurt as well -- Oceanair has been forbidden from buying Varig's routes, and Vasp and Transbrasil have been grounded.

A slightly updated story is at the Wall Street Journal for those who subscribe, but whether or not the government will allow the workers to buy out the airline with their pension funds, or some other rescuer comes in, it appears that capitalism is being allowed to work in Brazil, even when it works to the detriment of a proud national company with a long and historic heritage (and high costs, and ridiculous union deals, and insular management...). Lula has been quoted as saying that his administration is not obligated to 'rescue private companies from bankruptcy.'

This makes me quite optimistic about Brazil in general, even though there are reports that higher US yields will hurt Brazilian investments in relative terms, and it's seems likely that Gol will benefit significantly from this fight over Varig -- the government wouldn't even let Varig sell it's routes and slots to Oceanair, a small Gol competitor, which means that all the planes and routes that Varig can't afford to fly are not being absorbed -- that means higher seat occupancy for Gol, and perhaps even higher prices, though Gol's mission has always been to lower prices. Varig is being forced to let several planes sit while it can't afford to fly them, and they've even had to return planes to the leasing agencies. This has every appearance of being a death spiral, though I expect Varig will find a way to restructure and refinance itself -- it's a measure of my faith in Gol's management that I think even a restructured Varig will have no hope of competing domestically with GOL in the long run.

Varig is still a significant presence, with a lot of activist employees who enjoy their jobs. And this fight over Varig's future is still very fluid -- it may have turned on a dime by the time you read this, and Varig may become an employee owned airline that is to some extent reenergized ... they still won't be able to compete with Gol and the other smaller, lower cost fliers, though, and this is just another sign that the government is at least going to keep the playing field relatively level.

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New buys -- GOL and MKL

I picked up one new position and added to another one late on Friday.

I wrote after their earnings release that I was still very happy with Gol and with their remarkable management team and growth prospects -- no need to rehash that here, but I found myself unable to resist nibbling a little more at the stock. After seeing the shares begin to decline in the mornign I put in a limit order at $25.50 that was filled near the end of the day at $25.47, so I'm the proud owner of a few more shares of GOL. I think I'm in near the ground floor of a remarkable growth story here, and in my opinion the only significant risks are related to the possibility that Brazil's economy might stop growing ... not a huge risk, in my opinion. I love the disclosure the company provides, their ability to beat their competitors on costs and service, and the huge untapped market. This will be enough for me for a while -- GOL is now one of my five largest holdings.

And I also wrote last week, while the market was in the doldrums, that I was looking at an investment in Markel (MKL). No time to write it up in detail now, but I picked up a small MKL position at $339.20 on Friday. Very solid insurance company with a great reputation for not writing unprofitable business, and a nice counterpart to much of my portfolio because, like Buffett's Berkshire Hathaway, Markel uses it's float to build a strong portfolio of undervalued equities. Markel is entering the profitable maritime energy insurance business and should see nice pricing in some of their lines following the hurricanes, and their overseas offices -- especially the London business -- look like they might be ready to contribute significantly to earnings going forward. Will write some more about my argument for buying Markel when I can, though reading insurance company earnings can sometimes cause drowsiness.

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GOL Scores Again

Interesting week for several of the companies I own and follow -- earnings from a bunch of them, including Middleby and Imax, which I've already written about recently, and a few others.

The most interesting to me at the moment is Gol Linhas Aereas Inteligentes (GOL -- click to register for free RT streaming quote). This low-cost Brazilian airline is continuing to gain altitude. The ADR has suffered in recent weeks thanks in large part to currency fluctuation and, I imagine, to some profit taking after a remarkable run. I was sorely tempted to buy more when it dipped down below $26 today, and I may still regret not taking that opportunity.

GOL reported more of what they always report -- they are still stimulating demand for air travel in South America by slashing prices, but at the same time they're extremely profitable ... this isn't a company that's operating at a loss in order to gain customers, instead they're achieving the highest margins of any publicly traded airline in the world. Margins continue to be very solid according to their earnings release (net margins of 20% for the fourth quarter), and it's definitely worth listening to their conference call and viewing the presentation (www.voegol.com.br/ir) -- this company is extraordinary at investor disclosure and truly seems to want investors to understand how they work.

There are certainly concerns as well -- expanded air travel in Brazil is very much tied to the performance of the Brazilian economy in general, so a decline there would definitely hurt Gol (though I submit that it would hurt their higher-cost, massively indebted competitors much more). And they pay below-market jet fuel prices thanks to the Petrobras price controls, but those prices are still climbing and they do impact on GOL's profitability.

But overall, I'll remain tempted to build a larger position if we see any more weakness here. GOL is targeting an addressable market that is truly massive -- 20 million potential customers according to their strategic plan, and they're a long way from reaching that goal. They've got about a 30% share of the growing Brazilian domestic market (and climbing) and are able to cut fares but still increase earnings through very strict cost controls ... and that doesn't even take into account their growing international presence across the cone of South America. They pay for their plane leases and maintenance obligations with free cash flow and plan to be able to continue to do so even as their fleet doubles over the next five years, meaning that debt will not be a significant burden for them. They are richly valued compared to most airlines, and though they seem expensive for an "emerging market" stock in some ways at a trailing PE over 20, their earnings growth (projected 2006) of more than 50% certainly justifies that ... and even after a remarkable year, they have still actually underperformed the Brazilian market as a whole thanks to that market's heavy weighting in oil and resource stocks.

Previous GOL articles:
Opened a GOL Position in December
GOL Annual Checkup
Added GOL in January
Scored More GOL in February

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Bear Market Blahs -- Where to invest now?

Well, when the market as a whole is taking a tumble like it's doing this week, and my portfolio is almost entirely awash in red, it's hard to get motivated to think about your holdings.

Some are still doing quite well ... PDL Biopharma (PDLI -- click to register for free RT streaming quote)got a fair amount of attention around the time of its earnings release last week -- they would have had their first quarter of positive earnings if not for some one time charges, and forecasts are for real-life earnings in 2006 that will give PDLI a PE ratio for the first time. Always exciting for a biotech. Business Week recently came out with a PDLI article and they make a few good points -- principally that PDLI, though risky, should generally be considered less risky than many similar early-stage biotechs.

And Northern Orion (NTO) continues to steam ahead, enjoying the wonderful tailwind of low-cost mining production and very high copper and gold prices. That one will ebb and flow with the commodity pricing over the next several years until Agua Rica is online -- though some folks think they'll be bought out before then so a bigger company can get their hooks into Agua Rica. Either way's fine with me, this is my only real metals investment and it seems to be doing just fine.

But nearly all of my holdings are tanking this week. Tough news on interest rates is rough on the market as a whole, and especially on the more volatile sectors that I am fairly heavily weighted in like emerging markets, growth stocks and the like. Some of these companies I find tempting for additional investment during this general decline ... GOL is down about 6% today, a rough give-back of most of their recent gains ... ISRG has had a horrible month and is now extremely tempting for another add-on purchase. But I've already committed so much to these two stocks that I'm wary to double down again just yet.

On the flip side, this is the worst time to offload most of my holdings (though I may soon sell Overstock, for reasons I've covered recently, and if I wasn't overly patient I would have already lightened up on my Google position a little -- too bad I didn't foresee their ridiculous problems of the last few weeks). When the market's taking a dip like this, seems to me that it's time to look for new investments that might be going on sale. Here are a couple that I'm thinking of at the moment:

Options Express (OXPS). I've had my eye on this one for a little while as it has had an almost unmitigated upward trajectory. I like a lot of things about the company. I think they're in a great business as options trading is climbing dramatically worldwide, and should climb faster if the market becomes more volatile in the coming year as many people expect. They have a fairly distinguished product that is substantially different from what the major online brokerages can offer for options trading. Though a fairly young company, they are very profitable even though they trade at a current high PE. And they have huge insider ownership, which I always like to see. Insiders have sold a lot of shares recently which is not terribly surprising since they've just completed their first year as a public company, but that's certainly an area of concern to investigate. They also pay a small dividend, which is a nice treat.

Oh, and did I mention that they're getting clobbered today? Down close to 10% as I write this after announcing what I can only imagine are weaker performance numbers than expected. I see that their performance is still up dramatically YOY but down from last month, which might be the reason for the current panic -- I am interested in picking up shares but need to do some more research first. If the price keeps plummeting the dividend yield will be up to 1% in a few minutes.

Markel Corp. (MKL). Markel is a big insurance underwriter, and a lot of folks think of them as a junior Berkshire Hathaway (not unlike White Mountains). Like Berkshire (and Google and others) they haven't split the shares so the stock price is up north of $330 at the moment. And this week, Markel is one of the few companies I'm watching that isn't dropping like a stone.

Markel had a tough 2005 business-wise, as did all the big insurers with hurricane exposure. It now seems like it might be a reasonable time to re-purchase a MKL position for my portfolio given the firming prices for P&C insurance and Markel's excellent investment performance. I owned MKL for a while, selling back in 2004 at a small loss when they weren't doing very well, but they're looking appealing again. Like BRK, they have a large cash hoard (though much smaller than Warren's, of course) and have some solid float performance that gives them free money with which to invest. This would be a nice counterpoint to much of my portolio, given that MKL focuses on value investing in equities with their float. Haven't done much research ye to reacquaint myself with MKL after a year or two of absence, but I've got their latest filings and conference call transcripts to pore through and I'll see if I like what they're doing. 2006 is expected by analysts to be a very solid year for MKL, giving them a forward estimated PE of about 12 ... if I can have faith in those numbers, I think now is a good time to pick up some MKL holdings that I can stash in a retirement account and hopefully ignore for a good many years.

Will let you know if I take any action on these or other ideas that are mulling around in the back of my head.

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Multiple Expansion? (WFR, GOL)

I've been thinking a bit about Price/Earnings ratio expansion lately. We all know that when earnings go up the stock price should go up as well and by roughly the same amount, since we're used to big stocks that have relatively stable PE ratios.

But there are two other things that happen with some frequency -- the first is very unpleaseant, ratio compression (also called multiple compression), and that is what has bedeviled nearly all the large cap tech names except Google for the last five years. Earnings climbed dramatically over that time period for Microsoft, Yahoo, Cisco and the like ... but the multiple that the market was willing to pay for those companies shrank just as significantly and the stocks therefore more or less treaded water over that period.

The second is what you really want to see -- not only increasing earnings, but an increasing PE ratio. The Big Picture Blog last month ran a little analysis of PE expansion's role in the market boom of the late 1990s, it's worth a look and it helps to understand the downside of multiple compression that many of those big companies have suffered.

I've seen this expansion with two companies in particular in my portfolio of late, and for two very different reasons.

MEMC Electronic Materials (WFR) has really been a turnaround story, a story truly cemented by their last earnings release and guidance. This supplier of silicon wafers to the semiconductor and solar power industries went from being a very undervalued stock just a year or so ago with a PE of 10, to a fast-growing powerhouse in its segment with a PE over 20. During that time earnings have grown as well, so the shares have had a huge run of just about 200%, though I missed the bottom of the trough and at an average cost of about $16 my returns are closer to 100%. If you look at it mathematically, both the result (PE) and the denominator (earnings) have grown substantially, which means the numerator (price) had to go up quite dramatically. That's exactly what I like to see.

That tells me that the ideal scenario is to look for companies with the potential to grow earnings, but who are not trusted by Wall Street. WFR was very much unloved not only because they were seen as being in a highly cyclical industry in a downturn, but because they were coming out of a financial quagmire. As the earnings increased and the semiconductor industry recovered significantly even as the solar power industry exploded into unexpected growth, the company also began to get its financial house in order and show good earnings, sober management, and reduction of debt. That allowed the Street to trust WFR again and allow them to trade at a higher multiple.

The other company I hold that calls itself to my attention in regards to multiple expansion is Gol Linhas Aereas Inteligentes (GOL) the discount Brazilian airline. I've written a lot about GOL lately (here, here and here to start) and don't want to overstate it, but I do like them a lot and the company is currently the fourth largest holding in my portfolio.

GOL has been growing rapidly ever since the company began operations, and this year their earnings continued to climb the ladder.

But earnings weren't the only thing moving GOL's stock up -- multiple expansion has moved them up just as much. In GOL's case, I think its projected future growth, discounting of Brazilian risk, and growing excitement about management that is allowing their multiple to expand. Just since December, when I first purchased shares, GOL has moved from a trailing PE of about 20 to one near 30 -- that on its face seems ridiculous both for an airline and for a Brazilian company.

But GOL grew traffic more than 50% last year and is expanding rapidly with very little debt, and it seems to me that people are more comfortable with the leftist leanings of South American leaders given their so-far hands-off treatment of the most successful companies in the region (for the most part). GOL in fact benefits from governmental regulation, as air routes are tightly controlled and it would be very difficult for a new competitor to get approval to dramatically expand capacity (not to mention Brazil's governmental control of fuel prices, which helps dramatically to reduce GOL's costs when compared with global carriers).

The market's newfound enthusiasm for GOL, and their recognition that a dollar of GOL earnings is worth more than they had previously thought, is also related to management -- the company is family controlled and recently won an award for their top-notch investor relations and disclosure policies. A careful eye on the press release wires will call your attention to all of their detailed monthly traffic updates and clear announcements of new routes and services, and their company presentations and conference calls are truly illuminating. They seem to take very seriously the need to communicate transparently and effectively with their investors, which is important for all companies but really critical for emerging market companies -- look at Shanda for the opposite amount of disclosure, and you can understand why I love GOL but SNDA makes me very nervous (though I still own it).

That, in its way, gets back to the same thing in my opinion: Trust.

The market now trusts WFR because they have recovered from some financial problems and have clearly set priorities and goals to serve their largest markets effectively, even as they've proven their success in their industry with increasing earnings. That trust means we're willing to pay twice as much for a dollar of WFR earnings as we were a year ago.

And the market is growing to trust GOL as more than just an emerging market airline with big growth potential -- they are proving their ability to manage new services and new routes at reduced cost, and they are going above and beyond the disclosure of most other companies in the world to show their hand to investors. As a result of that (and their continuing rapid growth that we can see in their monthly traffic statistics), the market is willing to pay more for GOL than for a typical South American company.

So where do we look for other companies like this, with both the ability to grow quickly and some kind of hook that will bring them into Wall Street's good graces and allow for significant multiple expansion? One at a time is the only way I know to find them, though I guess you could screen for low and growing PE ratios to start, but it certainly takes a lot of wide reading and some patience.

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