Wednesday, September 9, 2009

Goodbye, And What I've Learned

Sorry to say so, but I've decided to wrap this blog up. As it turns out, I've bitten off more than I can chew with this approach; that's why it was turning into little more than a daily round-up. Also, I have to admit to being a writer at heart. Perhaps I veered out of my own circle of competence.

I have, however, learned a lot by watching low P/E, high-yield stocks. Just below, I've got the most important lessons I've learned:

1. The Low P/E strategy is counterintuitive. That's what makes it work, but it only works if done statistically. Picking and choosing, I've found, doesn't work all that well because the counterintuitiveness makes for an added barrier. More than patience, the categorical approach is needed.

2. Because the strategy is counterintuitive, active trading while using it induces specific perils. I'm sure you've already encountered the well-tested advice that it's better to stay pat than trade, but there's a specific performance-drainer that kicks in with low P/E stocks. Because their rising is usually counterintuitive, I've found, they seem to go up too fast. Consequently, active trading often means throwing a lot of the gains away.

More generally, I found that active trading also wrecks diversification. Also: it might be tempting to see the stock market as something of a casino, and to stop trading when your hot hand seems to have vanished. The trouble is, the stock market isn't a casino. Taking this approach leads to opportunity losses.

3. Low P/E stocks that suffer huge one-day plummets often, though not always, bounce back. If there's nothing wrong with the company itself, taking advantage of a big one-day drop often works out.

4. Buying low P/E companies with above-average long-term returns on their equities seems to add performance. I haven't been at this a long time, but investing - categorically - in stocks with long-term return on shareholders' equities has resulted in a mock fund with the highest positive alpha of all the ones I tried. To be specific, "long-term return on equity" is measured in this way: ([sum of net incomes over ten years] / (sum of shareholders' equities over ten years)]. If there are fewer than ten years' worth of financials available, then use what's available but cut out any stock with fewer than five years' worth.

4a. The above strategy does have vulnerabilities. The high-ROE approach would have blown a hole in the investor's portfolio in 2008 due to the bank stocks getting in. (Remember: this approach uses long-term ROE, not short-term.) It also malfunctions in the case of cyclical stocks when in the middle of a cyclical downturn. However, given the counterintuitiveness of the low P/E strategy, I have to urge caution when excluding some companies. My own experience suggests quite plainly that the stocks that shoot up are often a surprise. The best approach to selecting is to make an entire list based upon the low P/E, high-dividend, high-long-term ROE criteria and examine each of them individually. If any individual company has something wrong with it, strike it off individually. Categorical strike-offs should not be done except for cyclicals - and only if you're sure the downcycle will continue for some time. Ironically, the best approach that works is the one Ben Graham recommended for bond selection - with the exception that the only companies to be struck off are those with "clear and present dangers." It's often unclear as to what's junky and what isn't in this part of the stock universe, so confining the exclusion to explicit trouble-criteria is best.

5. Remember to reposition any low P/E portfolio once per year. This turnover rate is enough to keep it roughly current, while also providing enough time for the winners to run.

6. Except for prophylactic research, it's best to work the low P/E strategy mechanically. Once again, the counterintutive performace of many low P/E stocks is the reason why.


I hope these rules give enough basics to use the low P/E, high-dividend strategy successfully. The works of David Dreman go into more details, and supply copious evidence that shows the strategy works. I'd like to thank everyone who's checked in here, regulars as well as occasionals, and I'd also like to point out where I'm going to be in the blogosphere now. I've set up a new blog that's a real veer-off from this one; it's called The Gold Bubble. I hope the title is self-explanatory.

Note: I've read the blogs in the blogroll regularly. There's lots of talent therein; I suggest you give them a try.

Ameren Issuing More Stock, Price Drops

Once again, a non-financial company has issued plans for a secondary offering to the detriment of its stock price. Ameren, an electric utility holding company whose main operating subsidiaries are based in Illinois, has announced it will issue another 19 million shares. (With over-allottment rights of 2.85 million, the issance could be as high as 21.85 million.) Since the company plans to use the proceeds to up its investments in its subsidiaries, there's no reason to assume that the offering won't be dilutive. The best face for this offering would be an increase in regulatory capital leading to higher rates being allowed under the regulations.

Ameren's total shares outstanding as of June 30th was 214.2 million. Adding 21.85 million makes for an increase of slightly more than 10% of total shares outstanding. The money is earmarked to be spent, so there's no offset for the dilution factor except for the increase in earnings permitted by the increases in regulatory capital.

Left unspecified were the specific uses to which the funds will be put. Ameren stock dropped when cap-and-trade legislation was churining along, which leads me to suspect that the proceeds will be used to cut down the company's coal consumption by building natural gas generators.

Ameren stock was down 0.70% in regular trading, and down a further 3.12% in after-hours trading. The latter drop may not be reflected in its performance once regular trading starts again.

GE Leaps Up On Upgrade

Thanks to an upgrade of the company, from J.P. Morgan, the shares of General Electric rose 4.54%. The analyst, Stephen Tusa, now rates GE as "Overweight" because the worst seems to be over for the company; even if GE ends up raising money through a secondary offering, said Mr. Tusa, it would be good for the stock because it would dispel undercapitalization doubts.

Mr. Tusa could very well be right, but note the "even bad news is good news" thrust. Call me a worry wart, but that kind of reasoning makes me jumpy even if the troubled banks have shown the same effect over the last several months. Mr. Tusa's price target of $17 will likely be met from the latest close of $14.50, but I believe the path will be fairly jagged. I've been burned myself by "all clear ahead" bullishness.

Tuesday, September 8, 2009

Daily Wrapup For September 8th

Post-long weekend, the three major averages did quite well; so far, the widely-anticipated September Effect has yet to make its appearance except for a few down days. After opening with gains averaging about 0.5%, the averages carved out a trading range; at no point were any of them down on the day. The Dow closed up 0.59%, the S&P finished up 0.88% and the NASDAQ gained 0.94%. Light sweet crude for October delivery ended above $70 per barrel again, closing at $71.10/bbl for a gain of $3.08. Gold got top-story play today because the metal broached $1000/oz, even though it failed to hold on to most its gains in regular trading. Spot gold ended the regular session at $996.70, but moved back above $1000 later.

The lowest-quintile cut-off continued to rise today, from Friday's 11.75 to today's 11.88. The yield cut-off, being the S&P dividend yield, dropped two basis points to 2.58%. After ETFs and stocks with less then 500M market cap were discarded, along with ones yielding more than 10%, the Low P/E Bin was left with one hundred and four stocks for a gain of three from yesterday. Here are the changes in the Bin, as dash-listed below:

- AstraZeneca plc
- New York Community Bancorp, Inc.
- NiSource Inc.
- Northeast Utilities System
- SCANA Corporation
- The McGraw-Hill Companies, Inc.

- Compass Minerals International, Inc.
- General Dynamics Corporation
- Telecom Italia SpA

Three of today's six Arrivals are new: they all got in because their P/Es fell below the lowest-quintile cut-off. New York Community Bancorp, the holding company for New York Community Bank and New York Commercial Bank, is one of not many companies with a payout ratio of more than 100%: its P/E is 11.85 and its yield is 9.51%, for a dividend that has neither been raised nor cut in the last five years. Northeastern Utilities is a holding company for four utilities in the Northeastern United States: three electric, one gas. Its stock was virtually unchanged, but the Bin P/E cut-off rose above its own. McGraw-Hill got into the Bin becaue its stock plummeted 7.22% today, continuing a drop that started last Thursday. Its ratings division is facing potential lawsuits, and Warren Buffett is lowering Berkshire Hathaway's stake in the company.

The three other Arrivals have been in the Bin before. AstraZeneca, the U.K.-based major pharmaceutical company, got back in because its dividend yield ticked above the yield cut-off. Natural gas utility NiSource returned because its P/E fell below the lowest-quintile cut-off. The same cause was behind the return of electric utility SCANA.

All of the three Departures got out of the Bin because of gains in their stocks. Both Compass Minerals, a miner and seller of salt and sulfate of potassium products, and General Dynamics, a defense company, got out because their yields sunk below the yield cut-off. Compass stock gained 0.86%, and General Dynamics stock put in a much higher gain of 4.02%. The final Departure, Telecom Italia, saw its stock gain 3.15%. That leap was enough to push its P/E above the lowest-quintile cut-off.

Gains in both the stock market and metals added a real boost to the stock of metal and coal miner BHP Billiton plc. Recently, Billiton was sagging as an uptrend turned into a trading range. Today's 4.45% gain pushed it up to the top of its range from near the bottom. The company has a diversified product range - "alumina and aluminum, copper, energy (thermal) coal, iron ore, nickel, manganese, metallurgical coal, oil and gas and uranium, as well as gold, zinc, lead, silver and diamonds" - so it has benefitted from recent uptrends in those commodities. There was no company-specific news to account for its leap.

That's all for today's Wrapup. Thanks for reading, and welcome back to another post-summer season.

Monday, September 7, 2009

Now that the long weekend is here...

...I'd like to leave you with a trivia question. Being behind the curve as I am, I watched the Will Smith movie The Pursuit of Happyness for the first time last weekend. I spotted one anachronism in the movie, set in 1981, on first sight.

Here's the question: What was the anachronism?

Here's the answer: When the class for the trainees starts, the teacher/supervisor (played by Dan Castellanetta) hands out copies of Security Analysis...the fifth edition of it. The fifth edition (the "heterodox" one, as it was the only one whose text was not filled with Ben Graham's own writings) was first published in 1988. The only version available in 1981 was the fourth, published in 1962.

New Article In Enter Stage Right

After an end-of-summer hiatus, Enter Stage Right is back on its weekly schedule. As usual, I'm part of the line-up; this week, I center upon the current ObamaCare quagmire as an example of political cynicism gone overboard. If you're here from ESR, welcome.

I have to confess to falling back into my old habits. This long weekend, I've been plowing through Pat Buchanan's revisionist work Hitler, Churchill and the Unnecessary War. Mr. Buchanan's criticism of Churchill in the first two-thirds of the book (which is all I've read so far) have basically gone in one of my ears and out of the other. The impression that I got of Churchill was a politician who was adept at shifting with both party and popular winds. Granted that it does make him inconsistent over time, but that's what a lot of politicians are like....


My overall impression was that Britain lost its Empire because its trick that always worked, no longer did so. The U.K.'s European diplomacy strategy, centered on Europe, bears a striking resemblance to H.L. Mencken's definition of the mission of journalists: to "confort the afflicted and afflict the comfortable." In Britain's case, it was "reward the co-operative and punish the bully." The aim was to keep Europe multipolar and divided. Given this mind-set, it's hard to see how the U.K. governments could have avoided their blunders in the 1930s. Any great power has to be the cat of Aesop's fable The Fox And The Cat; it has to rely upon a single trick that always works. The trouble comes when one of the hounds eventually figures out how to cut the tree down.

Hitler was that hound with respect to the U.K.'s balance-of-power tree. Now cut, it's a wreck. The EU is showing Europe's former great powers how to settle differences peacefully. The "bullies" have figured out how to be co-operative without the U.K.'s help. How to keep France and Germany, not to mention the other EU powers, at odds with each other when they're now bound by treaty?

In geopolitics, America is now the cat with the hegemony. Its trick that always works is the assumption that war is usually unpopular with the people of the warlike States, and that any regime that attacks America's allies (or America) is ipso facto unpopular with its subjects. Mr. Buchanan fears that the extension of NATO to Russia's doorstep is the same kind of folly that humbled the U.K. Although his point is a wise one, and is informed by sound strategic considerations, it seems to me to be too schematic. America is not the U.K.; they're different breeds of cat (so to speak.)

My own opinion is that America's Achilles heel - the hound that will cut down America's hegemony tree - is a a regime that is not a democratic republic, is militarily aggressive on the world stage, but neverthless has the knack of fighting wars that are popular amongst its subjects. One of the reasons why World War 1 dragged out for so long, and why the Versailles Treaty was so vindictive, was the Allies discerning that the German people seemed to like the war.

America may face its own WWI yet.

Saturday, September 5, 2009

The Buckle Picked Up By Reuters (And Now Motley Fool)

Maybe I'm lucky, or maybe it's coincidence, but a stock I provided a rudimentary analysis for has made it into a Reuters "Buy Or Sell" feature. The stock is The Buckle, Inc., and my analysis is here. The Reuters feature on it does add some detail missing from my own work, such as the fact that the company depends on price increases to keep its margins growing. This point was made by the bear-side analyst cited in the feature. That analyst, Adrienne Tennant of FBR Capital Markets, downgraded The Buckle to "udnerperform" right after its disappointing same-store sales results for July.

The bull-side analyst is Laura Champine, chief financial analyst at Cowen and Co. She pointed to the valuation, noting that its P/E is well below its peers. Each analyst's arguments can be found in the feature.

This is the second time I've lopped into a stock before the pros did. The first was Compass Minerals: after my own rudimentary jobbie, a J.P. Morgan analyst upgraded it on more thorough grounds. To be frank, I'm just glad of the coverage regardless of any influence I have. Time constraints, plus my own dearth of intellectual capital, means that any analysis I undertake will be little more than a poke-through of the financials. Having pros take notice of the same company gives me information I can't scarf out on my own.

So, thanks. Thanks to Reuters; thanks to Nivedita Bhattacharjee, the author of the feature; thanks to both analysts; thanks to J.P Morgan and the analyst for the Compass analysis; thanks to the reporter who wrote it up...

Update: The Motley Fool has published a bullish analysis on The Buckle by Alyce Lomax, which has gotten three supportive comments so far. On the other hand, this fellow went into a Buckle store and didn't like what he saw.

Disclosure: I'm holding both Compass and The Buckle in the actively-managed Marketocracy mock fund I run.

Another Upgrade, Another Spurt-Up

This time, it's Alberta phone company Telus. The company was the beneficiary of an upgrade from Merrill/Bank of America on Thursday afternoon. Initially, the stock didn't react. On Friday, though, the stock shot up 4.46% to close at a year-to-date high. 1.42% of that gain was taken away in after-hours trading.

By my own reckoning, TELUS doesn't have the greatest of financials over the last ten years. Ten-year continuing-operations EPS growth is less than the S&P's, and its ten-year return on equity is 5.76% as calculated in C$ terms using Canadian GAAP figures. I haven't seen that upgrade, but it's likely based on recovery prospects for the Albertan economy.

What's Up With Spanish Banks?

Banco Santander stock was up 4.92% in Friday's regular trading, even though it was down 1.67% in after-hours trading. The news on the company wasn't that good: one of the items in Reuter's Key Developments for the bank was the notice that Santander, Spain's largest bank with a presence in South, Central, and even North America, was increasing its capital so as to be able to pay a dividend. It's selling 15% of its Brazil division in an IPO, after expanding said division by 600 branches. These last two items can be seen as unambigously good, even if a positive spin can be put on the dividend-payment item.

The reason it went up so much doesn't seem company-specific, though. Bancolumbia was up 4.65%, with no backtrack in after-hours trading. The reason could be the banks with Latin American presence are coming into fashion.

If so, then there was an exception: Banco Bilbao Vizcaya Argentaria. This bank, Spain's second-largest, was up only 1.68% on Friday; it too has a presence in Latin America and even the U.S. The stocks of all three banks, however, have been climbing since about mid-July.

Disclosure: I'm holding Bilbao in the actively-managed Marketocracy mock fund I run.

Friday, September 4, 2009

Daily Wrapup For September 4th

The rally that started yesterday continued today, which lessened the averages' drop over the week. This day's favourite cause was the unemployment number, released before the bell, which came in at an above-expected 9.7%. The raw job losses shrunk, though, making the rise partially caused by previously uncounted workers returning to the workforce (including the discouraged part of it.) At first, the three major averages hesitated, as an opening rally faded. By 10 AM ET, though, the averages eased back into rally mode. At noon ET, they leaped up, especially the NASDAQ, and the rest of the afternoon saw a trading range develop. Thanks to that afternoon push, the Dow closed up 1.03%, the S&P 500 gained 1.31%, and the NASDAQ ended with a much larger 1.79% gain. Light sweet crude for October delivery barely budged, closing up 6 cents a barrel to reach $68.02.

The lowest-quntile P/E cut-off was also up today, from yesterday's 11.68 to 11.75. The yield cut-off, being the S&P dividend yield, fell four basis points to 2.60%. After ETFs and stocks with less than 500M market cap were eliminated, along with ones that yield more than 10%, the Low P/E Bin was left with one hundred and one stocks for a gain of two from yesterday. Here are the changes in the Bin, as dash-listed below:

- Exelon Corporation
- FPL Group, Inc.
- General Dynamics Corporation

- Williams Pipeline Partners LP

The first Arrival is the only new one. Exelon is an electric utility holding company whose subsidiaries supply power to the Chicago and Pittsburgh areas. It got in through P/E compression; the 0.45% drop in its stock was enough to bring its P/E down to the cut-off. The second one is another utility, centered in Florida. FPL Group stock fell also, also compressing its P/E to Bin range. The third Arrival, General Dynamics, did rise, but the yield cut-off dropped faster than its own today. That differential was enough to bring the company back in the Bin.

The one and only Departure got out through a late-day rise in its stock. Williams Pipeline, a holder of natural gas storage and transporation systems, saw its stock rise 4.30% today; most of that rise took place in the last hour. Given the volume, it's possible that it will return to the Bin soon.

The markets did well, but not all stocks did. Before the bell, H&R Block announced a loss that was larger than expected: -39 cents per share vs. an expected -37 cents. That disappointment had a predictable effect on the stock, especially since the disappointment largely came from worse-than-expected continuing-operations earnings. H&R stock started the trading day with a 2.23% loss. Some of the drop was erased around noon, but the early afternoon saw a resumption in the decline that climaxed at about 2:36 PM ET. Then, it recovered somewhat to close at $16.62 - one cent below its opening price.

That's all for today's Wrapup. Thanks for reading, and enjoy the long weekend.

Disclosure: I'm holding H&R Block in the actively-managed Marketocracy mock fund I run.

Thursday, September 3, 2009

August Same-Store Sales Out For The Buckle

This morning, demin, other casual apparel, and footwear vender The Buckle released its August same-store sales figure. Sent out before the bell, the release said that the chain's sales on that basis rose 3.6%.

That result wasn't bad, but for a (perhaps formerly) fast grower like The Buckle, it wasn't very good either. According to the same story, the retailer's same-store sales for all of 2009 were up 11.3% as compared to the same period a year ago. The company's July slip is what got it in the Bin in the first place.

Today, though, The Buckle stock was actually up 1.35%. Its stock fell in the early morning, but recovered in the afternoon. In the end, the market shrugged off the most recent same-store figure.

I earlier wrote an analysis of the company, which offered the opinion that any further slowdown has been discounted. So far, there's little call to change that opinion, even though August is one of The Buckle's big earner months. Hard evidence of margin erosion will have to wait the company's next quarterly.

Disclosure: I'm holding The Buckle in the actively-managed Marketocracy mock fund I run.

Daily Wrapup For September 3rd

Again, the macro feed was pinned as the cause of today's market action. The three major averages opened up, with about 0.4% gains for each, but their gains melted during the first fifty minutes of trading. Then, they reversed course. The cause fingered was the release of the jobless claims report, which came in at a worse-than-expected 570,000. Continuing claims kept rising. Nevertheless, the three averages themselves began rising shortly after its release. After shooting back to near-open levels, the averages rose more slowly until about 1:30 PM ET, when they began gliding down. Then, at about 2:40 PM ET, their fall once again reversed; this time, it was replaced by a more powerful rally, which continued unabated until the close. At the end of regular trading, the Dow was up 0.69%, the S&P 500 had risen 0.85% and the NASDAQ sported a gain of 0.82%. Light sweet crude for October delivery closed down slightly, to $67.96 per barrel, while gold continued its bulish run for the second straight day: the metal closed within $10 of $1000 per ounce.

The lowest-quintile cut-off also rose today, from yesterday's 11.51 to 11.68. The S&P dividend yield, which forms the yield cut-off, fell two basis points to 2.64%. Once ETFs and stocks with less than 500M market cap were also gotten rid of, as well as ones with greater than 10% yields, the Low P/E Bin was left with ninety-nine stocks for a rise of five from yesterday. Here are the changes in the Bin, as dash-listed below:

- Alliance Holdings GP, LP
- Cardinal Health, Inc.
- Herbalife Ltd.
- Holly Corporation
- Weight Watchers International, Inc.
- Williams Pipeline Partners LP

- China Petroleum & Chemical Corp.

Two of the six Arrivals are new to the Bin, while two others returned after long absences. Alliance Holdings, a coal income trust, got in because its P/E hit right on the lowest-quintile cut-off. The second new Arrival, Cardinal Health, got in due to an accounting scandal. The healthcare-products supplier was found to have defrauded its shareholders about its revenues and income; the revelation pummelled the stock last Tuesday, bringing it into Bin range.

The two returnees which have been gone for a while are, oddly enough, both in the dieting line. Herbalife, a seller of weight management, nutritional, energy, and fitness products, got back in the Bin because its yield rose to a level above the cut-off. That was due to a drop in its stock, which started almost a month ago. The same reason applies to Weight Watchers, a seller of diet foods plus associated products and services, whose stock hit its peak about a week after Herbalife's.

The other two Arrivals haven't been gone for that long. Independent refiner Holly Corp. is another one that returned because its yield rose above the cut-off, whereas natural gas storer and transporter Williams Pipeline saw the P/E cut-off rise above its own.

Finally, the sole Departure, China Petroleum, exited the Bin for the reverse reason to most of the above: its yield dropped below the S&P yield cut-off.

It looks like the TARP-repayment magic is still around. CVB Financial annouced early this morning that it had sent the cheque to the Treasury to buy back its TARP preferreds. Although its stock was slow to take off, take off the stock did. CVB's been on a downtrend for close to a month, which has likely resulted from fears about its commercial-loan portfolio. Today, however, it shot up 4.93% in regular trading. In after-hours trading, it was up a further 1.71% subsequent to it giving up most of its regular-trading gains. The TARP repayment seems to the the trigger, but the leap-up could very well be a relief rally; there's no fundamental reason for it to rally right now, and won't be unless its financials show that CRE-related fears for its loan portfolio are overblown.

That's all for today's Wrapup. Thanks for reading, and hang on for sending-back-to-school season.

Disclosure: I'm holding CVB Financial in the actively-managed Marketocracy mock fund I run.

Wednesday, September 2, 2009

Brookfield Properties CEO Says Fears Of Commercial Real Estate Collapse Overblown

That's what Rick Clark said, according to this excerpt from a CNBC interview. His words didn't help the stock of Brookfield all that much, though. It was down 4.60% to close at $9.74.

Still, that supposed doom has been very widely anticipated. A contrarian would wonder...

Barron's Pans Oil Refiners...

...and later claims that the drops in their stock shows the panning was sound. The original article claimed that there was more to the gasoline consumtion drop than hard times: Americans are trading in less fuel-efficient cars for more fuel-efficient ones, a trend that the author claims is a long-term one.

The two stocks mentioned as evidence were Sunoco Inc. and Tesoro. The former dropped 1.86% in regular trading, but the latter only dropped 0.78% Tesoro's decline was about in line with the overall market, and Sunoco's was fairly gentle compared to some other oil stocks. Both were up in after-hours trading, too. Perhaps Barron's Online was a little eager to showcase the work, although time will tell.

Interestingly, another Bin stock in refining got slaughtered today, but was not mentioned by Barron's. Recent high-flyer Holly Corp. was down 4.07%, and was unchanged in after-hours trading.

Update: Perhaps I spoke too soon. Sunoco was slaughtered the following day, with a 4.68% plummet in its stock. On the other hand, Tesoro was down only 0.85%. Its two-day drop was less than the S&P 500's one-day September 1st drop.

Update 2: Tesoro's being hammered now. So, it seems I did speak too soon.

Daily Wrapup For September 2nd

Today's market action seems tailor-made for the phrase "it could have been worse." Still following the macro meme, market participants ascribed today's somewhat disappointing performance to the ADP employment report. The 289,000 loss in jobs is an improvement over recent months, and it would have had a positive spin put on it a month or two ago. But, expectations are higher now and it is September.

There was some substance to the attribution. After opening slightly lower and churning, the three major averages dropped quickly at about 10:15 AM ET. They reached their lows of the day as of 10:30 AM ET, when all three of them were riding losses of 0.4% or above. That plunge quickly reversed itself, though, and the averages spent the next four hours in a range. For the Dow and S&P 500, the range centered around the unchanged level; for the NASDAQ, about the +0.15% level. The last forty-five minutes saw all three dropping, right to the end of regular trading. As a result, the Dow ended up down 0.32%; the S&P, down 0.33%; and the NASDAQ, creeping into loss territory for the first time in the afternoon, ended down 0.09%. Light sweet crude oil for October delivery dropped slightly, to $67.93 per barrel. Interestingly, gold had a banner day today - and the cause ascribed was the ADP report too. Usually, the U.S. dollar and Treasury securities would rally in such a case, but not this day; gold rallied. It's too early to call this jump-up anything more than a portent, but it's not inconceivable that the safety-seekers are beginning to switch from Treasuries to gold.

Along with the general market, the lowest-quintile cut-off for the Low P/E Bin dropped today, from yesterday's 11.58 to today's 11.51. The yield cut-off, that being the S&P 500 dividend yield, rose a basis point to 2.66%. After ETFs and stocks with less than 500M market cap were also screened out, along with ones yielding more than 10%, the Bin was left with ninety-four stocks for a drop of one from yesterday. Here are today's changes in the Bin, as dash-listed below:

- Merck & Co., Inc.

- Banco de Chile
- Williams Pipeline Partners LP

Merck stock hasn't had the best of times since its peak on August 27th. After exiting the Bin thanks to P/E expansion, the major pharmaceutical company is back again due to its stock dropping 1.91% today. The first Departure contrasts with Merck fairly neatly. Banco de Chile got out of the Bin thanks to a 1.06% gain, which pushed its P/E above the cut-off. The final Departure, Williams Pipeline, did drop today but not enough to keep its P/E in the lowest quintile. Consequently, it's the second and final Departure today.

More than a week ago, the Banco Santander analytical department raised Mexican stocks to "overweight" on grounds that the Mexican economy shows the greatest potential for improvement amongst major Latin American economies come a recovery. Bin stock Telefonos de Mexico, the main provider of telecommunications services in that country, has been doing fairly well over the last month: one fundamental reason was it paying off its 2009 debt commitment early. After churning along in an increasingly narrow trading range from early April to the beginning of August, Telmex stock has been largely moving up. Today, the ADSs gained 0.89% to close at $18.22 per. That trading range centered around $16.

That's all for today's Wrapup. Thanks for reading, and may trading ranges be good to you.

Tuesday, September 1, 2009

Whither GE?

General Electric is the second-biggest Bin stock in terms of market cap, and probably the one best known. Like so many stocks that rocketed up in the past few months, it's been hammered recently. Today, it closed down 4.03% to reach $13.34.

On the one hand, "GE exec sees another 12-18 tough months ahead." That statement comes as part of its new "framework" approach to guidance, which has replaced specific targets. On the other hand, Sanford & Bernstein analyst Steven Winoker sees the reduction of uncertainty - which GE itself called a flattening of the downtreand - as good for the stock; his target price is currently $16.

I can't presume to forecast what GE stock will do in the near future, but I believe there's a near-term downtrend in place. I'll stipulate that there were downtrends in place for many industrial stocks in June that were sharply reversed. This time, though, there isn't any plausible catalyst in place to do so (except for company-specific items.) I don't see any in GE's near future that might do so; today's overall market drop in the face of good economic news suggest that the previous catalyst - discounting recovery - is spent.

My own hunch says that GE is going to keep dropping. It peaked at about the time when near-troubled banks like CVB Financial and United Bankshares have. Even though there's more to GE than its financial arm, there's no replacement for the recovery catalyst which would help the overall company reverse the stock's current downtrend.

Welcome to September, after which follows October.

Disclosure: I'm holding CVB Financial in the actively-managed Marketocracy mock fund I run.

Daily Wrapup For September 1st

It's only September 1st, and they're already talking about the "September Effect." [Example.] Despite two pieces of good news, one on the home front and the other in the manufacturing arena, the three major averages went into a tailspin shortly after the items' release. The day started off unambiguously bullish, with all three averages solidly up by the 10 AM ET release time. Had the market still been macro news driven, the rally would have continued. Pending home sales kept rising, even though it's almost unprecedented for them to do so six months in a row. (The first-time house buyer tax credit had a lot to do with it.) Manufacturing activity shifted into expansion, while new orders shot up. The two production-related readings are consistent with the recession finally ending. Nevertheless, soon after both items' release, the averages plummeted: what were solid gains turned into unambiguous losses. The downtrend continued at a much slower rate from 11 AM to 12 PM ET, and settled into a trading range for the rest of the afternoon. A fitting end to today's trading came when an end-of day rally was choked off in the last few minutes. The Dow finished down 1.96%, the S&P 500 lost 2.21%, and the NASDAQ dropped an even 2.00%. Light sweet crude oil, for October delivery, also joined in the plunge party: it was down $1.91 a barrel to close at $68.05 in regular trading.

The lowest-quintile P/E cut-off also plunged, from yesterday's 11.80 to 11.58. Inversely with the S&P 500 itself, the yield cut-off shot up six basis points to 2.65%. Once ETFs and stocks with less than 500M market cap were also eliminated, along with ones yielding more than 10%, the Low P/E Bin was left with ninety-five stocks for a drop of four from yesterday. Here are the changes in the Bin, as dash-listed below:

- Williams Pipeline Partners LP

- Cooper Industries, Ltd.
- France Telecom SA
- Harvest Energy Trust
- Telkom SA Limited

The sole Arrival got back in the Bin because its stock plopped. Williams Pipeline Partners, an operator of natural gas storage and transportation systems, saw its P/E drop below the lowered cut-off due to a 2.54% decline in its stock.

Of the five Departures, three got out because they no longer fell into the Bin's dividend range. The indicated dividend of CRH plc, a European purveyor of home building materials, dropped to well below the S&P cut-off. Harvest Energy, a Canadian oil, natural gas and refined petroleum products income trust, saw its yield go above 10% due to a 5.29% drop in its stock. Today's carnage spared the stock of Telkom entirely, wich closed unchanged; the S&P yield cut-off rose above its own yield.

The other two got out thanks to their P/Es ending above the lowest-quintile cut-off. France Telecom's stock dropped 1.20%, less than the overall market, and its P/E got above the cut-off. The final Departure, circuit protection device and tool maker Cooper Industries, is the oddity of the bunch: its stock was actually up by 1.02% today. An interesting counter-move, especially given that it was booted off the S&P 500 recently. Cooper's P/E expanded, pushing it above the cut-off.

Speaking of gainers, there's an even odder one in the Bin. It gained 2.53% today, on no news: this leap is enough to make it an outlier. What makes its gain even more unusual is its line of business. Hugoton Royalty Trust is an express trust that own several producing oil and gas properties in Texas. Given both the market's and oil's fate, you would expect a stock like this one to be down a lot today. (Contrastedly, Harvest was.) Yet, for whatever reason, Hugoton stock put in a performance more August-worthy. Until a week ago, it was hanging around $14 in a narrow short-term trading range, which it now has risen above: Hugoton closed at $15.02 today. Whether there's good fundamental reason, ow whether it's been spared for a more technical reason, remains to be seen.

That's all for today's Wrapup. Thankls for reading, and may your pleasant surprises be understandable ones.

Disclosure: None.

Monday, August 31, 2009

Upgrades Don't Always Help

Example: oil/ore tanker operator Frontline Ltd. Today, it got an upgrade from "Underperform" to "Market Perform" by an analyst at FBR Capital. If this news helped the stock, it didn't help much: Frontline lost 4.26% to close at $22.27.

Of course, the upgrade wasn't much of one. The analyst said that Frontline is no longer squeezed for cash, and its "above-average day rates" are making the company's prospects look less doleful. The old target for the stock was $14, and the new target is $23 - only slightly above where Frontline stock ended up.

Still, it shows that upgrades don't always have the potency sometimes ascribed to them. That's good in a way, because an immediately ineffectual upgrade gives people time to act on it without chasing a mini-bubble. It's kind of hard of traders, though.

Daily Wrapup For August 31st

Trading ended for August today, and the last day wasn't exactly a good day. News that the government of China is planning to cut back on bank lending sent the Shanghai market plummeting; so did the American market. On fear of interrupted global recovery, the three major averages all opened up with more than 0.5% losses. They fell further before 10 AM ET, to recover somewhat in early-mid morning. Most of the rest of the day was spent with the averages in trading ranges. A shortlived rally, beginning at about 2:30 PM ET, was largely erased but was replaced with a more durable rally starting an hour later. Thanks to a end-of-day added push, none of the three averages closed below 1.0% loss territory. The Dow closed with a 0.50% drop, the S&P declined 0.81%, and the NASDAQ ended the trading month with a 0.97% loss on the day. Oil also plummeted on the same news from China, as the connection between China's slowing economy and less demand for oil was quickly seen. Light sweet crude for October delivery plummeted $2.78 per barrel to end the day at $69.96.

The lowest-quintile cut-off also dropped today, from Friday's 11.95 to 11.80. Due to a readjustment, the S&P dividend yield cut-off remained unchanged at 2.59%. Once ETFs and stocks with market caps of less than 500M were gotten rid of, along with ones possessing greater than 10% yields, the Low P/E Bin was left with ninety-nine stocks for a drop of one from Friday. Here are the changes in the Bin, as dash-listed below:

- China Petroleum & Chemical Corp.
- Cooper Industries, Ltd.
- France Telecom SA
- Hubbell Incorporated

- FPL Group, Inc.
- Plains All American Pipeline, LP
- PriceSmart, Inc.
- SCANA Corporation
- Williams Pipeline Partners LP

All of the Arrivals got back in through drops in their stocks. The first Arrival is the only new one. China Petrolem and Chemical is an integrated major oil company; given the troubles both in the Shanghai and oil markets, it's not that surprising to see it show up in the Bin. The next Arrival, circuit protection device and tool maker Cooper Industries, had the worst stock decline of the four. A 4.10% drop, largely caused by the company being booted out of the S&P 500, brought its P/E below the Bin cut-off. France Telecom got back in for the same reason, even if its stock only dropped 1.15%. The final Arrival also returned for the same reason as the other three. Hubbell Inc., a maker of electrical components used in construction of homes/offices and components for electrical power transmission, hasn't been in the Bin for more than a month. A 3.24% drop in its stock brought it back.

A similar unanimity exists for today's Departures: all of them got out because the P/E cut-off fell below their own. Only one, liquid petroleum products storer and transporter Plains All-American Pipeline, saw its stock price rise today. The others declined, but didn't outpace the fall in the cut-off. Florida-based electric and natural gas utility FPL Group, international warehouse-club operator PriceSmart, North and South Carolina based utility SCANA, and natural gas transporter/storer Williams Pipeline all saw their stocks decline less than 1% today; those falls, as noted just above, weren't enough to keep them in the Bin.

Brookfield Properties Corp., a Canadian commercial real-estate company with holdings in several major North American cities, sent out a double annoucement today; both concerned a new preferred-stock offering. The first annoucement, made early in the afternoon, said that Brookfield would be selling C$150 million worth of preferreds yielding 6.75% for the first five years of their existence at C$25 per share. The second announcement, made after markets closed, upped the amount to C$250 million; the terms are the same. It's not every day that a share offering is bumped up 67% a few hours after the initial allotment has been announced. Brookfield common didn't do all that well today, suffering the same fate as other recent high-flyers. The stock dropped 3.35% to $10.97, even though dilution of this issue wasn't a factor. It was just a bad day for stocks that had rocketed up in the last couple of months; Brookfield common has been one of them.

That's all for today's Daily Wrapup. Thanks for reading, and may patience be your salve (if not salvation.)

Saturday, August 29, 2009

Lockheed Martin: Dip Or Pause?

A few days ago, Jonathan Goldberg posted a bullish analysis of Lockheed Martin. He used his equity value per share model, combined with a 3% growth assumption, to come up with an intrinsic value of $108.50 per share. Since its current price of $74.95 is slightly below Mr. Goldberg's margin-of-safety entry point of $76, he concluded that it was undervalued.

This post is intended to be a complement to his own analysis.

Lockheed Martin is a well-known defense contractor, with about 93% of its revenues coming from the U.S. government. Its four segments are Electronic Systems, Information Systems and Global Services, Aeronautics, and Space Systems. The company has done rather well for itself over the last ten years, with the notable exception of 2000 and 2001. 10-year return on equity, as calculated by dividing a 10-year sum of net incomes by a 10-year sum of shareholders' equities, is 18.26% for 1999 t0 2008. Growth in continuing-operations earnings per share, as calculated by a brute-force method using 2008 and 1999's EPSs, was 15.26% over the same timeframe. Long term, the company's grown a fair bit.

Its presence in the Low P/E Bin could be explained by a combination of the recent bear market, creating fears that Lockheed's earnings will implode, and a new Democratic Administration that might cut back on defense expenditures. The first risk factor has not shown up in Lockheed's earnings, and the second has not made itself evident yet. There's only been a bit of an earnings slump relatively recently.

Nevertheless, Lockheed's performance in 2000 and '01 was disappointing. Continuing-operations EPS were -$1.05 and $0.18 respectively. Another major defense company, General Dynamics, suffered no such blow to its own earnings in that time. General Dynamics is no longer in the Bin, but recently it was.

A glance at Lockheed's 10Ks for the period show why the company got itself into the trouble that it did. A large part of the losses were the result of an abortive attempt to get into global telecommunications. It could have been caused by tech-bubble mania back then. No similar effort has been launched by the company as of now; as noted above, almost all of its revenue comes from the U.S. government. Given the company's standing as a defense contractor, that 93% is indicative of Lockheed management sticking to the company's knitting. They venturing beyond that confine didn't work out too well last time. As of 2000, only 70% of Lockheed's sales were made to the U.S. government. A year later, it had wound down its global-communications segment. It seems that Lockheed's earlier troubles taught it a lesson, subsequently learned.

Its latest earnings have seen somewhat of a slump. As of June 30th, according to its latest 10-Q, 2Q '09 diluted EPS were $1.88 as compared with 2Q '08's $2.15. Diluted EPS for the first half of '09 were $3.55 as compared with $3.90 in '08. In 2008, the last year of EPS growth, all quarterly EPSs were above the EPSs of the same quarters a year ago.

The order backlog is also rising, which ostensibly is good news. The backlog was virtually steady from 2001 to 2007, though: those years saw EPS growth much higher than the 10-year results. The last jack-up of the backlog was in 2003, and the following year saw EPS growth of 20.9%. On the other hand, the backlog grew smartly in 2000 and 2001. Both years were real disappointments for Lockheed. I don't believe that next year will be a repeat of 2001 because Lockheed has not moved beyond its core business this time 'round. I include this discussion to point out that a rising backlog isn't always as good as it seems.

Disappearance in EPS growth explains why Lockheed's in the Bin. Also, the company's growth over the last eight years came in large part from the wars the U.S has been in. Anyone buying this company as a growth engine at a discount is assuming that there will be similar compelling reasons for the U.S government to buy Lockheed's higher-margin products. It's an assumption that has good odds behind it, as post-WWII U.S. history shows, but it may not hold up during this Administration. The trouble with Lockheed is that its 3.04% dividend yield isn't that great, so there's not much pay for waiting. It has increased its dividend every year in the last six, but that growth took place in tandem with EPS growth. That growth can't be expected in the near future, even though its dividend is solidly covered.

Should this Administration and Congress turn out to be dovish, then Lockheed's earnings won't do all that much. However, there's nothing on the horizon to suggest future disaster will afflict the company. It may prove to be a churner, but there's no sign it's a disaster in the making.

Friday, August 28, 2009

Biovail Gets Turfed Out Of Court

Canada has stricter anti-defamation laws and customs than the United States, so it's not that much of a surprise that a Canadian company used to Canadian norms would have its defamationesque lawsuit thrown out by an American court. That was the fate of a lawsuit launched by drug-delivery technologies maker Biovail Corp. against SAC Capital Advisors, in which Biovail accused SAC of producing misleadingly negative research for the benefit of SAC's short positions of Biovail stock.

It seems that Biovail hasn't exactly been an obedient corporate citizen with respect to the regulators, although that factor didn't influence Judge Goldman's dismissing its lawsuit. He said that he lacked jurisdiction, and that Biovail had failed to meet its burden of showing entitlement to damages.

As it turns out, Biovail is one of those companies that's claimed as a victim of so-called naked shorting. As a related post in Blogging Stock points out, the company's checkered past doesn't make it much of a poster child for any campaign against naked short sellers.

The headquarters of the naked-shorter watch is, of course, Patrick Byrne's Deep Capture Website. Those not impressed with the crew (or the company Mr. Byrne's CEO of, label those guys conspiracy theorists.

Biovail is the first Low P/E Bin company associated with this crew. Those unenchanted by the Deep Capture world emphasize that cries of 'abusive shorters' tend to be made by companies whose stocks basically deserve to be shorted, or at least avoided. Ironically, Biovail has the highest 52-week change in the entire Bin: up 35.81%.

Update: Subsequent to the original part of this post, Biovail has dropped 6.92%. This item provides a certain closure to the tale: one of the defendants in that thrown-out lawsuit, analyst David Maris, has moved on to yet another firm. He had initiated coverage of Biovail with a "sell" recommendation while still with Bank of America, and was dropped out of the lawsuit when he left BoA.

That last point, an analyst might do well to take to heart.

Also, has an excerpt of Judge Goldman's reasoning, in which he stated that a mere drop in share price does not constitute damages under the rubric of trade libel. In order to claim damages in this manner, a company has to prove that it was cut off from access to credit, or had another kind of financing ruined, as a result of the stock price drop. Biovail didn't.
[I got this article from]

Daily Wrapup For August 28th

The week ended with the three major averages stuck in a holding pattern. After opening with all three in positive territory, particularly the NASDAQ, the averages began a drift downwards starting at about 10 AM ET. The University of Michigan consumer confidence index, released at about that time, showed a "Consumer Mood at Four-Month Low." Quantitatively, the Reuters-University of Michigan index dropped from 66.0 to 65.7. Oddly, it contradicted the Conference Board's own number released three days ago; the latter exhibited a surprising leap upwards. Suffice it to say that the current picture consumer-wise is murky. Other consumer-related data released today showed a small rise in spending combined with flat incomes for July.

The downdrift in the three major averages continued to just before 12:30 PM ET, when they all showed losses. The rest of the day saw a slow trundle upwards, although faster for the NASDAQ. At the end of the regular trading day, the Dow was down 0.38%, the S&P 500 was down 0.20%, but the NASDAQ was up 0.05%. Encouraging results from Dell before the bell, along with the recent performance of the NASDAQ itself, encouraged speculation that tech might save the overall market from an expected September-October correction.

The lowest-quintile P/E cut-off rose from yesterday's 11.92 to today 11.95. Also rising was the yield cut-off, being the S&P dividend yield, which inched up a basis point to 2.59%. Once ETFs and stocks with less than 500M market cap were thrown out, along with ones that yield more than 10%, the Low P/E Bin was left with one hundred stocks for a drop of three from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:

- PriceSmart, Inc.
- Snap-on Incorporated

- Cooper Industries, Ltd.
- France Telecom SA
- General Dynamics Corporation
- PartnerRe Ltd.
- Safety Insurance Group, Inc.

Both Arrivals have been in the Bin before, with one of them straddling the borderline. The stock of PriceSmart, a chain of warehouse shopping clubs, dropped 0.67% today; that drop brought its P/E down below the lowest-quintile cut-off. The second Arrival, tool maker Snap-On, got back in for the same reason; its stock dropped 0.62%.

Three of the five Departures got out because their yields dropped below the S&P 500 yield cut-off. France Telecom, defense company General Dynamics, and international reinsurer PartnerRe were the three. Of the other two, only one got out of the Bin due to a rise in its stock. Cooper Industries saw a gain of 1.79%, putting its P/E above the Bin cut-off. On the other hand, the stock of Safety Insurance dropped 0.92% today. That fall put its market cap below the 500M cut-off.

J.P. Morgan's upgrade of Compass Minerals International seemed to have set off a cascade. This last week, two other investment firms have added Compass to their watch lists and assigned it a "buy" and an "outperform" respectively. The first firm was KeyBanc, which initiated coverage last Monday with the "buy." The second is BMO Capital Markets, which initiated coverage today with the "Outperform." The latter recommendation notes that winter's a'comin, and expects the sulfate of potassium market to pick up. [It also assumes normal winter conditions.] Considering that two firms have already followed in his or her wake, the J.P. Morgan analyst responsible has something to eat out on.

That's all for today's Daily Wrapup. Thanks for reading, and have a restful weekend - whether it be hot or cold.

Disclosure: I'm holding Compass Minerals in the actively-managed Marketocracy mock fund I run.

Thursday, August 27, 2009

Hidden Aggravator Of Corporate Fraud: CEO Ego Stroking From Media

The article discussing it, "Ego And The CEO", comes from the Globe and Mail:

Which is the biggest red flag for a potential accounting fraud: Bad corporate governance, an overinflated share price or too many stock options?

None of the above, according to a new study by researchers from three Canadian universities.

They argue that the biggest risk factor for fraud is a CEO with a truly oversized ego....
It makes sense. People who are puffed up either get the idea that they can pull magic rabbits out of hats, making any rule-breaking apparently "harmless," and/or feel pressured to live up to the hype even if it requires chicanery to do so.

Back in the olden days, many a CEO shunned publicity. That may have been the result of seeing the same lesson taught in the 1920s.

Thankfully, many value companies are below the publicity radar. Many CEOs of value companies are "below temptation." It makes for a relatively nice world, if not necessarily Arcadiaesque.

Note: I got this article because it was quoted in today's edition of the Casey Research Daily Dispatch

Cracker Barrel Old Country Store: Example Of A Muted Response To Upgrade

Cracker Barrel Old Country Store, the operator of a chain of restaurants and retail stores, was the beneficiary of an upgrade eight days ago. The upgrader, Bryan C. Elliott of Raymond James, reclassified it to "Market Perform" from "Underperform." Since then, the stock has moved from $27.59 to today's $29.13. The response has been muted, but it could be argued that the upgrade was muted too. Suffice it to say that Cracker Barrel has moved up, but not by much.

The company hasn't done all that badly in the last ten years, despite some restructurings that lopped a fair bit of earnings from its continuing-operations record. Absent discontinued operations, 10-year 1999-2008 EPS growth (as calculated by logarithmic regression) was 12.62%; the current P/E is 10.35. Return on equity over the same time period, as calculated by a 10-year sum of net incomes divided by a 10-year sum of shareholder's equities, was 15.23%. Quarterly EPS for the latest reported quarter, which ended May 31st of this year, was up 13.0% from the EPS of the same quarter a year previously. Operations cash flow for the nine months ending May 31st was up 7.47% from the same period last year, and free cash flow was up almost 75% due to a large drop in capital expenditures. EPS growth hasn't slowed down.

The company's balance sheet would give a value investor pause, though. Its current ratio, as of May 31st, was only marginally above 1. The quick ratio was below 0.5. The debt-equity ratio is 6.77 to 1; debt as a percentage of total capitalization is an eye-opening 87.1%. If this company does stumble, it could get itself into a repayment crisis. Shifting to the earnings side, its earnings before interest and taxes was 2.28 times interest expense as of May 31st. The high leverage has likely been justified by earnings power, as 2.28 isn't a very uncomfortable margin. Provided the company doesn't stumble on the earnings front.

The upgrade itself, and its effect on Cracker Barrel's stock price, shows one of the weak points of technical analysis. A downtrend on the chart shows a stock getting lower-priced over time. If the fundamentals have't changed, then said downtrend shows a stock getting cheaper over time. The reason given for the upgrade was Cracker Barrel moving into fairly-valued territory.

Daily Wrapup For August 27th

It didn't start off as a very good day, but it ended up as one. From the get-go, until about 10 AM ET, the three major averages plummeted. Then, they began a slow but durable climb that changed the losses into gains. After an aborted start between 10 and 11 AM ET, the first wave of the upswing clicked in; it took the Dow up to slightly positive territory. After a near-hour pause, the second wave kicked in at about 1:30 PM ET. That wave had all three averages sporting gains as of 2:30 PM ET. After the day's high was reached about fifteen minutes later, the averages drifted down for the rest of the day except for the NASDAQ; it benefitted from an end-of-day rally. At the close of regular trading, the Dow was up 0.39%, the S&P 500 gained 0.28%, and the NASDAQ put in a gain of 0.16%. Light sweet crude for October delivery stopped dropping, closing up $1.06 at $72.49 per barrel. Natural gas, though, continues to plumb new multi-year lows.

The lowest-quintile cut-off for the Low P/E Bin advanced slightly, from yesterday's 11.91 to 11.92. The yield cut-off, being the S&P 500's dividend yield, dropped one basis point to 2.58%. Once ETFs and stocks with less than 500M market cap were eliminated, as well as stocks with greater than 10% yields, the Bin was left with one hundred and three stocks for an increase of three from yesterday. Here are the changes in the Bin, as dash-listed below:

- Cooper Industries, Ltd.
- Raytheon Company
- United Bankshares, Inc.


Two of the three Arrivals got back in because of declines in their stocks; the third one re-arrived because the dividend cut-off fell below its own. The stock of Cooper Industries, a maker of circuit protection devices and tools, dropped 0.93% and brought its P/E back into Bin range. The same was true for United Bankshares, except more so: the stock dropped 2.39%. The final Arrival, Raytheon, is another of those companies whose stats drift around the Bin's cut-offs. The stock of the defense company rose 0.34%, but the drop in the dividend cut-off put its yield slightly above the S&P 500's.

Often, an upgrade does wonders for a Bin stock. Olin Corporation got one today, and its stock rocketed up 13.67% to close at $17.05. The company, which makes chlor alkili products and Winchester small arms, got upgraded from Equal Weight to Overweight by Barclay's Capital. Barclay's new target for the stock is $22.00. After a spill about a month ago, the company's been inching up. Today's leap comes at the end of that near-month uptrend.

That's all for today's Daily Wrapup. Thanks for reading, and keep in mind that patience still pays.

Wednesday, August 26, 2009

Daily Wrapup For August 26th

For the second day in a row, a wild ride in the market ended with the three major averages virtually unchanged. Before the lastest releases, the averages opened down, and were all losing more than 0.5% by 9:50 AM ET. Then, two economic-aggregate items hit the wires. Durable goods orders for July increased 4.9% overall, but the market didn't react all that much to it. That lassitude wasn't true of the other datum, from a series more closely watched. New home sales for July rose 9.6%; the median price was virtually unchanged from the previous month. The second item added an extra push to the subsequent rally, which carried the averages from loss to gain. As was the case yesterday, though, the rally fizzled. Until a much weaker rally kicked in at about 2 PM ET, the averages were in loss territory once the morning one backslid. The second rally also faded; had it not been for a third one in the last minutes, the averages would have ended up in negative territory. Instead, like yesterday, they were virtually unchanged. The Dow was up 0.04%; the S&P and NASDAQ, both 0.01%. Yesterday's drop in oil continued today, with light sweet crude for October delivery closing down 62 cents per barrel to end the day at $71.43.

The lowest-quintile cut-off also fell, slightly, from yesterday's 11.95 to today's 11.91. Once again, the yield cut-off remained unchanged: the S&P dividend yield stayed at 2.59%. After ETFs and stocks with market caps of under 500M were thrown out, along with ones yielding more than 10%, the Low P/E Bin was left with one hundred stocks for a gain of one from yesterday. Here are the changes in the Bin, as dash-listed below:

- Banco de Chile
- Bancolombia SA
- FPL Group, Inc.
- Williams Pipeline Partners LP

- Altria Group, Inc.
- Cooper Industries, Ltd.
- CPFL Energia SA

Three of today's Arrivals are new to the Bin. The first, Banco de Chile, got in because a 3.64% drop in its stock put its P/E well below the Bin's cut-off. FPL Group, an electric utility based in Florida, also saw its stock drop and its P/E lowered to Bin levels. The third new Arrival got in for the same reason. The stock of Williams Pipeline Partners, which transports and stores natural gas, dropped 1.07% and its P/E dropped below the cut-off. Bancolumbia got out only yesterday: a 0.56% drop in its stock puts its P/E below the lowest-quintile cut-off, but only slightly so.

The Altria Group do-si-do continued today. The stock of the American arm of Phillip Morris was up slightly, edging its P/E slightly above the Bin cut-off. Cooper Industries, a maker of electrical circuit protection products and tools, fared better today. Its stock was up 0.93%, making for enough P/E expansion to put it out of the Bin too. The final Departure was a recent Arrival, whose stock put in an even bigger gain. CPFL Energia, a Brazilian electric utility, saw its P/E go above the Bin maximum with a 1.80% gain in its stock.

Sunoco's a Bin stock that was easy to underestimate. About a month and a half ago, it had hit a 52-week low. The company, which is the only major oil to not have any significant upstream operations, was poleaxed by collapsing crack spreads that ended up hitting its second-quarter income statement to the tune of a 47 cent per share loss. Since then, though, the stock has undergone a quiet, slow but largely steady recovery. Crack spreads have improved subsequently, and the alarm that had permeated the petroleum-products market is now gone. Today, the stock's recovery was a little on the quick side: it gained 5.01% to close at $27.69. Not bad for a stock that was below $22 as of July 8th.

That's all for today's Daily Wrapup. Thanks for reading, and be comforted by yet another example of market overreaction.

Tuesday, August 25, 2009

Behavioral Finance Article In The Wall Street Journal Online

This article's already been picked up by Simoleon Sense, but I'm linking to it here because I want to highlight it as an easy-to-read introduction to cognitive and emotional biases that pop in when we invest or trade. It's called "The Mistakes We Make—and Why We Make Them," and it's by Meir Statman.

He spends more time on emotional biases than the usual intro. Regret is discussed thoroughly, but anchoring isn't mentioned. Prof. Statman has the gift of matching biases to investing activity we can all relate to; it's as if he had been there himself. He even ends with why a well-known investing technique gets around our regret bias. It makes for a good read.

Daily Wrapup For August 25th

Thankfully for the bulls, the good-news parade continued today. The three major averages opened up about 0.4%, but they all got a real kicker with the release of the new consumer confidence index number. Rather than increase to 48, it shot up to 54.1. Last month's number was also revised upwards. This item added a kick in the pants to the averages, all of which were up by more than 1% shortly after the release. Then, they reversed completely. By 10:30 AM ET, they were all lower than the level they were as of the start of trading. However, a second rally ensued. More slow than the first, it also lasted longer. It too faded, though: at the day's nadir, the averages were well below the morning's lows. A late-day rally, beginning at 2:45 PM ET, held but only partially. After a session that could be called exciting, or frustrating, the Dow closed up 0.32%, the S&P 500 up 0.24%, and the NASDAQ up 0.31%. After trying yet again to break the $75 a barrel barrier, light sweet crude for October delivery plummeted $2.32 to close at $72.05.

The two main cut-offs for the Low P/E Bin barely budged. The lowest-quintile cut-off dropped one hundredth of a point, from yesterday's 11.96 to today's 11.95. The yield cut-off, the S&P 500 dividend yield, was unchanged at 2.59%. Once ETFs and stocks with market caps of less than 500M were eliminated, along with ones that yielded more than 10%, the Bin was left with ninety-nine stocks for a drop of one from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:

- Altria Group, Inc.
- CPFL Energia SA

- Bancolombia SA
- Snap-on Incorporated
- United Bankshares, Inc.

The first Arrival is one that's shifted in and out of the Bin for some time now. Altria Group, the U.S. arm of Phillip Morris, fell 0.98% today; that drop brought its P/E slightly below the lowest-quintile cut-off. The second is a newcomer. CPFL Energia, an electric-utility holding company whose operating subsidiary does business in Brazil, got into the Bin through a 3.35% drop in its stock. That plummet put its P/E well below the cut-off.

The first Departure has been a mainstay since the Bin's inception. Bancolumbia, one of Columbia's biggest banks, got out of the Bin thanks to a sustained rise in its stock. Today's 1.94% gain put its P/E over the cut-off. The same happy outcome visited Snap-On, a maker of tools and diagnostic equipment for professionals. Its stock gained 0.87%, which put its own P/E above the lowest quintile. The final Departure benefitted from a reversal in the regional banks. United Bankshares, a bank holding company whose subsidiaries operate in Virginia and West Virginia, gained 2.16% today. That rise put its P/E, like those of the other two Departures, above the Bin's cut-off.

A done deal, done with the FDIC as broker, still adds a kicker to a bank stock. Spanish bank Banco Bilbao Vizcaya Argentaria is now the new owner of most of the assets of the now-failed Guaranty Bank of Texas. The stock didn't react much when it was rumoured that Bilbao had won the bidding, but today's officiality did the trick - or added some fuel to an already-existing rally. Bilbao gained 2.90% in regular trading, and was up a little more in after-hours trading. The benefit was far smaller than BB&T's take-over of Colonial's assets last August 14th, but there still was one. Or what seemed to be one.

That's all for today's Daily Wrapup. Thanks for reading, and hold on to your valuation metrics.

Disclosure: I'm holding Bilbao in the actively-managed Marketocracy mock fund I run.

Monday, August 24, 2009

President Obama Reappointing Bernanke As Fed Chair

It's been up in the air for a long time, but Ben Bernanke - the experts' choice - is getting reappointed to the chairship of the Federal Reserve.

I have to admit to haing doubts on the matter, prompted by the annoucement delay. For a time, I was wondering if it was to be Larry Summers who got the appointment. But no, it's "Helicopter Ben" that's going to stay in charge.

In a way, it makes little difference on the inflation front. There's been so much fear of a second Great Depression, a new consensus has emerged which will put up with more inflation as the price of keeping the financial system afloat. Charima Bernanke's going to have a few more worries in the commercial real estate and Option ARM departments during his second term.

It would have been more fun to see Larry Summers in the job, though. He would have made a good G. William Miller.

Daily Wrapup For August 24th

It was supposed to be the start of another winning week, but an early afternoon drop put an end to that hope. The three major averages were up in the morning, continuing Friday's rise until about 11 AM ET. At that point, they were all up more than 0.5%; the S&P 500 was close to a 1% gain. Then, the decline started. Slow at first, like the first dip on a roller coaster, the slide took the averages into loss positions by early afternoon. A recovery attempt in mid-afternoon kept the averages at about the break-even point, but that failed to hold until an aborted 3:30 rally was replaced by a sustained last-minute rise. The Dow was the only one of the three to end regular trading in positive territory, with a miniscule gain of 0.03%. The S&P was down an almost as miniscule 0.06%, and the NASDAQ dropped 0.14%. Although disappointing, the day could have been worse. Light sweet crude oil was a mitigating factor: October crude was up 31 cents a barrel to close at $74.20. $75 is near, and the bullish comments are coming back.

The lowest-quintile cut-off for the Low P/E Bin, contrary to the averages, was also up, from Friday's 11.89 to today's 11.96. Almost like the index itself, the S&P 500's yield didn't budge from Friday's 2.59%. Once ETFs and stocks with less than 500M market cap were discarded, along with ones that yielded more than 10%, the Bin was left with one hundred stocks for a drop of three from yesterday. Here are the changes in the Low P/E Bin, as dash-listed below:

- Baytex Energy Trust
- Snap-on Incorporated
- United Bankshares, Inc.

- Altria Group, Inc.
- Holly Corporation
- Honeywell International Inc.
- NTELOS Holdings Corp.
- Telecom Corp of New Zealand
- WSP Holdings Limited

Baytex, an oil and natural gas energy trust based in Canada, was up slightly. Its P/E, though, didn't rise enough to match the rise in the P/E cut-off; that brought it back into the Bin. Snap-On got back in for the same reason, although its stock declined slightly in regular trading.

Thanks to some discouraging comments made recently about the regionals, the stocks of those banks haven't performed all that well lately. One of the stocks that was affected by today's rout in those financials was United Bankshares, Inc., a regional with subsidiaries in Virginia and West Virginia. It dropped 3.82% today; the resultant P/E compression brought it back to the Bin after an absence precipitated by a hope-induced rally in the regionals.

Despite the overall market droop, Altria Group racked up an impressive 1.61% gain today. Holly Corporation gained an even more inpressive 3.41%. These gains in the stocks of the American arm of Phillip Morris and one of America's larger independent refiners, respectively, put both companies out of the Bin as their P/Es expanded to above the cut-off. Honeywell, a well-known maker of control systems, also exited the Bin for the same reason: its stock jumped up 2.62% today.

The fourth Departure, NTELOS Holdings, continued Friday's zoom-up by posting a 6.42% gain today. That jump makes for a 12.8% two-day gain for the Virginia and West Virginia telecommunications service provider. There was no news to account for it on Friday, but there was today: NTELOS announced a stock buyback program. Perhaps it was just a relief rally, though: in after-hours trading, the stock lost all of today's gain. Unless this fall-back is due to after-hours vagaries, it looks like NTELOS will be in tomorrow's Arrivals.

New Zealand Telecom makes for the fifth of five Departures to be pushed out because of a jump in its stock. A 4.00% gain expanded NZTel's P/E enough to put it out of the Bin. The last Departure, though, got out through a drop. WSP Holdings shares' 1.44% loss on the day put its market cap below 500M.

About two weeks ago, in an earlier entry, I mentioned Suburban Propane Partners' tender offer for no more than $175 million worth of 6.875% Senior Notes due 2013. That offer included a $50 bonus, per $1000 face-value in notes, for tendering on or before the early-tender deadline. That deadline expired at 5 PM ET last Friday. Today, the company announced that holders of more than $300 million worth of the notes had tendered by that expiry date. Since the early tender option was oversubscribed, Suburban will be paying $1025 per $1000 face value for the entire buyback. My back-of-the-envelope calcualtion in the same entry, assuming 2% yield on cash, concluded that the deal would be accretive to earnings if the entire allotment was tendered. Despite that calculation, Suburban's stock dropped 0.07% today. It's still below the secondary-offering price of $41.50 for the trust-unit issuance that'll provide partially payment for the tendered bonds. Despite that discrepancy, the underwriters agreed to a partial taking up of their over-allotment option this morning: about 231,000 of the available 330,000 units.

That's all for today's Wrapup. Thanks for reading, and may any discrepancies you happen upon be to your advantage.

Disclosure: I'm holding Suburban Propane Partners in the actively-managed Marketocracy mock fund I run.

New Article In Enter Stage Right

I've veered into prognosticating this time around, about "The fall and rise of the religious right."

If you're here from ESR, welcome and thanks for dropping by.

Saturday, August 22, 2009

The Buckle: Too Good To Be True?

When the financials of demins, tops and footwear retailer The Buckle, Inc. are gone through, the question that occurs is: "why is its P/E in the lowest quintile?" Or, why is it in the Low P/E Bin? After lackluster earnings growth from 1999-2004, the company took off. 1999-2008 growth in earnings per share, as measured by logarithmic regression, was 12.66%. Growth in net income, calculated by the same method over the same timeframe, was 12.30%. That's a fairly creditable performance.

The last five years have been better. 2004-08-year EPS growth was 25.62%; net income growth for the same period was 23.76%. Ten-year average return on equity from 1999-2008 was 18.34%. Five-year average ROE was 20.73%. Sales per square foot and sales per store were also up smartly from 2004 to 2008.

Given this growth, one might wonder why its P/E wasn't higher. The ratio actually was at the high-flyer level, as recently as eleven months ago. The Buckle was a stock that bucked the 2008 bear market until late September. It made its 2008 high on Septenber 19th, closing at $41.05. Its price at the beginning of 2008 was about $20.64. After dropping with the general market in late 2007, the stock reversed itself and spent most of the mid-year around $30-$33. The Buckle's 2008 earnings explain why: its earnings and revenue growth were still hot last year.

The September-November period saw the stock slaughtered: from $41.05, it plummeted almost without interruption to $16.18. However, no earnings disappointment came. March 6th saw its price higher than at December 5th. A one-month tear, ending on April 9th, saw the stock go from $22.94 to $36.97. That price marked the 2009 high, after which it's been drifting down.

The earnings, however, didn't co-operate with the market. The Buckle's latest earnings report shows above-expected earnings for 2Q '09, which were 12.5% above 2Q '08's on a diluted basis. Net sales were up 13.6% in the same timeframe, so the increase in EPS can't be explained by cost-cutting. Gross margin was up, from 41.4% to 42.7%, and operating margin rose slightly from 19.6% to 19.8%. Net profit margin did decrease slightly, from 13.1% to 13.0%. This last statistic may indicate why The Buckle's growth story is "too good to be true."

Another indication of slowing growth is found in its accounts receivables: they rose 80.0% from 2Q '08 to 2Q '09. Although inventories dropped slightly in that timeframe, despite the 13.6% growth in sales, the jump in accounts receivables suggests that sales are being pushed by lowering credit standards. That could be true, but its impact wasn't that much. 2Q '09's total accounts receivable was $6.719 million. Net sales for the same period were $192.906 million. Had accounts receivable stayed at 2Q '08's level, or $3.734 million, net sales for 2Q '09 would have been $189.921 million. Revenues would still have increased by 11.9%. Using a 13.0% net profit margin, the decrease in net income for those sales would have been $388,050. 2Q '09 net income would have been reduced to $24.605 million. Earnings per share would have been reduced by one cent. The EPS increase would have been lowered to a 10.4% gain on a diluted basis. The company still would have beat expectations.

So, if accounts receivable had stayed constant from 2Q '08 to 2Q '09, The Buckle would still have been on a growth trend. The rate would have been lessened, but the earnings and revenue growth would still be there.

More serious is the slight decline in the net margin. Does it meant that The Buckle is in for a period of subnormal growth? Will its recent record prove to be too good to be repeatable?

More than 40% of its sales come from denims - jeans. Teenagers and young adults are The Buckle's target market. They're legendarily fickle, so it is possible that they may throw away the jeans for something else. That change isn't very likely, though; designer jeans have been around for more than two decades and show no sign of losing their popularity.

It could also be that The Buckle will lose its "cool," which is a more likely possibility. There wasn't any sign of it in the financials, however. Revenue hasn't slumped. The net margin has, slightly, but a more plausible explanation for that dip is the recession finally catching up with the company.

Its July same-store sales did disappoint: they were only up 2.8% from the same period a year ago. That increase is much smaller than its 13-week increase of 13.6% and its 26-week increase of 13.1%, which further indicates that the recession has finally gotten to The Buckle. The same day of the July figure's annoucement, shares in the company dropped 15.2%.

The July disappointment answers the question at the top of this post. The market's reaction to the lackluster July figure pushed the company into the Low P/E Bin.

Had The Buckle been a high P/E stock, the July figure would have been decisive for a "sell/avoid" recommendation. But is it an "avoid" at its current P/E level of 11.21? That question is more ambiguous. The Buckle proved not to be recession-proof; in this sense, the stock's overall decline in the last 11 months can be said to have discounted its eventual same-store sales slip. Seeing accounts receivable shoot up again in the next quarter would be a clear warning sign. So would a continuation of July's disappointing same-store sales results, especially since the third (back-to-school) quarter has usually been The Buckle's biggest in terms of sales.

I suggest that it's largely been discounted. Granted that this suggestion is speculative, but the lack of recession proofing in The Buckle's results does not change it as a recession-resistant company. Its same-store sales figures for July, considered in isolation, are like that of a discount store - even though it isn't one. All through this recession, The Buckle's results have been way above a full-price store like Abercrombie & Fitch.

Of course, I'm assuming that consumer spending patterns are going to return to a more normal level. A more conservative person would take the July figures as a signal to avoid until the growth comes back, regardless of the P/E ratio.

Disclosure: I'm now holding The Buckle in the actively-managed Marketocracy mock fund I run, as a recovery play. What swayed me was its long-term EPS growth (12.66%) as compared with its P/E ratio (11.21), and the fact that it's in a trading range right now.

Friday, August 21, 2009

Daily Wrapup For August 21st

[Note: Corrected number of stocks in the Bin, and added appropriate commentary.]

This time, it was the latest housing figures that supplied the rationale for another big rally. The three major averages opened up with greater than 0.5% gains, and took off like a shot just before 10 AM ET. When the spurt-up was finished, they were up around 1.50%. The rest of the day saw them range-bound until Fed Chairman Bernanke's remarks were disseminated. His suggestion that the recession seems to be over provided an extra boost near the end of the day. Although the averages drifted a little lower near the close, their gains were still strong: the Dow closed up 1.67%, the S&P ended with a gain of 1.86%, and the NASDAQ finished the week up 1.59%. Light sweet crude also gained today, closing at $73.89 per barrel and setting a 10-month record in the process. It's at about where it was in June, but this time without the blithe bullishness that accompanied its last visit to the $75 area. Interestingly, at the same time oil made a year-to-date high, natural gas hit a seven-year low.

The lowest-quintile P/E cut-off also rose today, to 11.89 from yesterday's 11.71. For the first time since this blog started, the S&P dividend yield fell below 2.60%; it ended up at 2.59%. After ETFs and stocks with market caps of under 500M were thrown out, along with ones sporting dividend yields of greater than 10%, the Low P/E Bin was left with one hundred and three stocks for a gain of one from yesterday. Here are the changes in the Bin, as dash-listed below:

- Altria Group, Inc.
- CenterPoint Energy, Inc.
- CVB Financial Corp.
- PartnerRe Ltd.
- WSP Holdings Limited

- Merck & Co., Inc.
- PH Glatfelter Company
- PriceSmart, Inc.
- Snap-on Incorporated

All of the Arrivals are former Bin members returning; all but one got in because their stocks didn't keep pace with the overall market. Altria Group, the American arm of Phillip Morris, saw the P/E cut-off rise above its own. So did electric utility CenterPoint. CVB, a company that I had mistakenly thought would be gone from the Bin permanently, is back once again: the holding company for the Californian Citizens Business Bank got in for the same reason as the two preceding. PartnerRe, an international reinsurer, returned to the Bin becasue the yield cut-off dropped below its own. The last Arrival, WSP Holdings, did keep pace; its stock rose 1.87% today. That gain put its market cap above 500M.

Three of the four Departures got out because 3+% gains in their stocks put their P/Es above the lowest-quintile cut-off. Major pharmaceutical company Merck, warehouse-club discount retailer PriceSmart, and tool maker Snap-On all got out for that happy reason. The sole exception was P.H. Glatfelter, whose stock dropped 2.67% today. There was no news to account for the drop, which put Glatfelter's market cap below the 500M cut-off.

Sometimes rallies engender relief rallies. NTELOS is a stock whose one-month beta is almost certainly negative; as the market rose, it fell. Starting on July 1st, when it had closed at $18.53, NTELOS was declining steadily until five days ago. Until four days ago, it had been stuck in a short-term trading range. Today, however, it shot up 5.79% to close at $14.79. There was no news to explain why this battered-down stock would reverse; the last item of significance was its lowering of its FY 2009 net income estimate about two weeks ago.

That's all for today's Daily Wrapup. Thanks for reading, and remember to check if those dollars at a discount are genuine or adulterated.