UBS, I did it again (UBS)

As I mentioned a couple weeks ago I might do, I decided to sell my shares in global Swiss bank UBS (UBS) today.

I originally bought UBS for a few reasons -- I liked the global footprint, the lack of reliance on the US stock market compared to some other big banks and brokers, the exposure to the Swiss Franc, and their solid position in China. I also thought that they were coming out of a big period of investment in their expansion, and that they would be increasing their dividend in the near term.

So what has changed? Well, they had a slightly disappointing quarter last time around, missing analyst estimates by a bit on some poor trading results, which they blamed on the weak summer in the stock market. Perfectly reasonable, and though it didn't hit the big US brokers in the same way this same weakness was felt by nearly all the big European banks -- so that's more than forgiveable.

And I'm not necessarily crazy about them jumping on the exchange bandwagon by building a new one at a time when existing exchanges are all looking pretty expensive, but it may well turn out to be a good idea. After all, even if they cause price wars or an aggressive level of competition in European listings and trading that hurt the results of this new exchange, that would likely still help UBS in the aggregate by reducing their own trading costs. So that's at least a wash.

It's also not their outlook, which is also pretty positive -- they're shooting to become the third largest prime broker next year as they try to build their market share in services to hedge funds, and they continue to believe that their growth will be significant in global wealth management.

Really, the reason I'm selling is that it's becoming more and more clear that UBS is going to continue its acquisitions binge. The shares were undervalued last year, I'd argue, on the back of all the cost and hassle of integrating their myriad financial acquisitions -- but once that work was done, I think I and many other investors expected UBS to focus more on organic growth and returning cash to shareholders.

The CEO in August stated that they were likely to cut off their buyback early, and unlikely to raise the dividend as they focus on more acquisitions. At the time I let that roll off my back because I was so intrigued by the possibility that UBS might have a significant competitive advantage in building a Chinese brokerage business.

But with no more news on Chinese developments for UBS of any note, and with continuing developments from other companies (it looks like Citibank is going to be buying in to Guangdong Development Bank, among other moves by competitors), that's not enough of a reason to put aside my concerns.

So with the latest quarterly release and commentary not doing anything to reverse the likelihood that the company will continue burning through cash in their ambitious acquisition-fed growth, I think that UBS is faced with more acquisition and integration risk in the years to come than I originally figured.

Add that to the fact that within the wildly competitive world of financial services, I don't see UBS as having a particularly defensible niche or advantage -- it may be that all the companies will prosper, but with cutthroat competition in China, Japan and the US causing banks to throw tons of money at growth prospects, particularly in China, I'm no longer convinced that UBS is any better a choice than HSBC, or Credit Suiss, or Citibank ... or that the cutthroat competition among the big players will allow for great profitability for any of the major banks going forward.

And with that background, I don't see a reason to hold these shares when I have move conviction about other companies. I bought UBS for relatively slow long term growth and dividend growth, but with the increasing likelihood that they're not likely to return additional cash to shareholders I'll sell now and be satisfied with my 20% return in less than a year. UBS is not a bad company, and it may not be a bad investment at these levels, but it's not the company I thought I was buying.

I'll take those profits, which were more than I was expecting from UBS on an annual basis, and consider redeploying those funds in the near future in one of my better ideas -- perhaps something else in the financial sector, since I've been thinking a lot about insurance lately with my recent opining on the next Berkshire Hathaway.

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The Unmitigated Gall of This Week (UBS, CHS, EXEL, PDS)

I expect very bad results from my portfolio companies to come along every once in a while. That's part of why I maintain a very broadly diversified portfolio, and why I focus on a very long time horizon for most of my holdings.

But this week has been abysmal for the short term prospects of several of my investments.

As I wrote yesterday, Precision Drilling (PDS) -- my most recent purchase -- got caught up in the new Canadian tax proposals for trusts, bringing an immediate haircut of 15% or so. Still thinking about the long term prospects on that one, and whether it's worth holding on for what I think will be a good business, and for four more years of low-tax, high-yield dividends before the new law goes into effect.

Earlier in the week, UBS (UBS) disappointed -- their trading results were weak and brought down the earnings for this most recent quarter, and it is starting to look like their investments in expansion are going to put the kibosh on the full exercise of their buyback and on any significant increases in the dividend in the near term. Although the same trading problems impacted most of the major foreign banks and that kind of thing is certainly to be expected from time to time, I may need to look for an alternative investment in this space -- UBS has shown some nice gains over the past year, but the future is looking a little murkier for me in this name.

Then today, both Chico's and Exelixis get pantsed ...

Chico's (CHS) is wearing a bit on my patience -- I fully expect even a company with a history of excellent merchandising to make some marketing or merchandising mistakes on occasion, and with a company as excellent as I've thought Chico's is, I'd consider most of these mistakes to be buying opportunities. But the tought times have really piled up for this retailer -- same store sales growth disappointed through the Spring, and again at the end of the Summer and for the last several months the same store sales have declined, which is unheard of for this company prior to this year. That's led to reduced third quarter guidance today from the company, and another decline by more than 8% in the share price.

Call me crazy, but I'm planning to hold through at least the next earnings call and see exactly what management is doing to fix their problems in same store sales growth. The fact that they are still successfully opening stores, as evidenced by their overall sales growth of about 10%, is encouraging, and I continue to believe that there is ample room for significant expansion for at least their Soma and White House/Black Market concepts (and I really wish they would buy out Lucy, the activewear company that has venture backing from Chico's, Maveron and others, before it gets too expensive).

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Just as an aside, Maveron has got to be the most interesting venture firm out there -- using Howard Shultz's money, among others, they've backed not only Lucy, but the Motley Fool, Potbelly Sandwich Works, iFloor, Drugstore.com, and Eos airlines. I don't know what their record is, but they definitely are funding some fun companies.

And back to the bad news, today also brought about a 15% decline in Exelixis (EXEL), one of my larger speculative biotech holdings. EXEL doesn't have any drugs in production yet, and an investment in this company is a bet that their excellent scientific reputation and well-stocked pipeline of cancer drugs is going to bring at least one significant drug to the market.

The odds dipped a little bit today, as EXEL announced a very dramatic safety concern with XL999, one of their drugs in Phase II clinical studies, and from the initial announcement it's not at all far-fetched to assume that this drug will be dropped (nor is it a guarantee, since they are still continuing the study with existing participants even as they pause new enrollments).

They basically found that close to a third of newly enrolled patients in this study had "serious cardiovascular adverse events", and that about 10% of all enrolled patients had similar "events". That sounds awful to me, though I'm not a doctor and I suppose it's possible that the drug may still have some future.

But although this is certainly negative news, it's far from catastrophic for the company -- XL999 was among the more advanced EXEL drugs, one of four in early Phase II studies (there's one in Phase III, though it carries pretty limited financial expectations), so this cuts the chances that one of those drugs will make it through -- but the company also aims to file IND applications to enter the clinic with three new drugs each year, and they have three Phase I drugs and one IND lined up just behind the lead group already.

So if you bought EXEL because you thought XL999 would be a blockbuster, which is unlikely given that none of these cancer drugs have really progressed far enough to wow investors with their efficacy, you are very disappointed today.

If, on the other hand, you bought EXEL because the pipeline is strong and deep, this isn't much of a reason to sell even if the 10-15% haircut is fair -- after all, you'd have had to predict that at least half of their Phase II drugs were unlikely to gain approval.

If you do the math, there is a certain logic to today's decline -- they have eight drugs in the clinic, so -- all else being equal -- one failed drug could conceivably make it fair to downgrade the value of the pipeline by 12.5%, roughly where we are today. Given that it might take 15 years to develop a drug, and that somewhere between 10-20% of all drugs that make it as far as Phase I eventually get approved, you could really get carried away with valuing these companies based solely on probability ... but EXEL, with their strong history in target identification and drug discovery, and their deep pipeline, remains in my portfolio and I hope they'll have better results with some of their other Phase II drugs.

So ... one cruddy week on the back of a women's retailer, an oil and natural gas driller, a biotech company, and a megacap international bank -- if anyone had predicted for me that all of these would get pounded at about the same time, and for different reasons, I'd have thought it very unlikely. Shows what I know.

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UBS' head start in China (UBS)

Back in June, I wrote with delight about the regulatory approval that UBS received to purchase a brokerage firm in China -- giving them a head start on the other global banks, all of whom want to be on the ground in the Middle Kingdom.

I was impressed that UBS had a good strategy for partnering with a domestic firm in China, and that they had been able to jump through all the regulatory hoops to actually make the purchase.

But now it's looking like that good strategy might end up being a great one -- because China just turned off the spigot and will not allow any more international banks to come in and open brokerages or buy existing ones, primarily because they want to give the domestic industry a chance to get going without the very tough competition that Citibank, Merrill Lynch and others would provide.

Now, I haven't heard anything final on this -- but it sounds to me like this means a block of new openings or purchases ... not a recission of existing deals.

And if that's true, that would mean that among the global titans, only Goldman Sachs and UBS would have brokerage operations in China. Even if it's only for a year or two as the government gives the local brokers a chance to build their systems and clientele (which seems to be the assumption of most analysts, who believe China desperately needs foreign expertise in this area), that seems to me to be a huge advantage ... more opportunity to build a clientele, and more opportunity to become familiar with and influence local rules and regulations before the strongest competitors have another chance to get involved.

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Great China News for UBS (UBS)

I invested in UBS for the first time at the beginning of this year, and aside from a dividend the price today is virtually identical to my purchase price of $101.

But at least one of the reasons why I purchased UBS instead of one of their large financial brethren like Bank of America or Citigroup took a step forward today.

UBS has announced that they're now in the lead among the western banks working to establish brokerages in China by investing directly in local brokerage houses. They're reportedly buying at 20% stake in Beijing Securities, and a quote from the Wall Street Journal article of this afternoon reinforces the importance of this move going forward:

"A UBS spokesman in Zurich said: 'Beijing Securities is the most important thing we have in China. It will give us access to the onshore market in China.'"

This is not final yet, and there are certainly more bureacratic mazes to negotiate, but UBS is certainly in the vanguard. UBS is a great investment for those who believe serving the wealthy around the world is likely to be a growth industry, and I especially like their wide footprint with great initiatives in Asia and elsewhere. Unlike Citigroup and Bank of America, both of whom have yields that are a bit stronger than UBS (4% versus 3%, roughly), UBS is not so closely associated with the US market that it gets a cold when Bernanke sneezes.

This is generally a quiet investment for me -- I may pick up some more before too long, but the shares seem pretty fairly valued and I'm happy to use them here to represent global financial services in my portfolio for the next several years, with some possible nice upside from their gradual reorganization after a serious global spending spree and their growing presence in Asian financial markets.

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Good EPS for UBS

UBS (UBS -- click to register for free RT streaming quote), which is currently the largest market cap company in my portfolio (thanks to their good month and Google's bad one), is declining a little bit this morning following their excellent earnings release.

UBS, which is the second largest bank in Europe and has a huge wealth management business and excellent exposure to Asia and other emerging markets, reported a 32% gain in earnings (ex an asset sale), and the stock is selling off slightly this morning. They had a big run up to this point, and I expect there are some folks taking profits, but it appears that the real disappointment in the market is that they didn't make as a big a dividend move as some had hoped.

Everyone was expecting a significant dividend boost from UBS, perhaps something to bring them in line with the other big international banks in the 4% range. UBS upped their dividend to $2.91 a share -- a significant boost, but not the kind of increase the Street was expecting, and certainly not the windfall special dividend following the asset sale to Julius Baer that some had hoped for.

I'm pretty happy about UBS's progress -- I like the higher dividend, and that they are continuing a fairly aggressive buyback program as well as looking for more opportunities to expand geographically in their real areas of expertise, wealth management and private banking. I still see significant room for long term growth and am very pleased with the growth they showed last year.

The brokers have had a pretty wild year and I am a little concerned about Merrill Lynch, Bear Stearns, JP Morgan and the like, they just seem like they're too dependent on the US stock market ... and the big banks like Citigroup and Bank of America look very worrisome to me with the inverted yield curve, even though they're looking very cheap at their current low PEs and high yields.

Compared to that group, UBS looked very good to me when I made my first purchase last month. UBS's international business and their extremely profitable private bank look to me like the best way to invest in the financial industry right now with relatively limited downside, great geographical diversification, a solid dividend and potential for real growth as the wealthiest continue to enjoy capitalism's spread and grow their assets around the world. I expect this to sit quietly in my portfolio for a long time, and am not terribly worried that the dividend is going to remain under 3%.

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