Monday, July 27, 2009

Daily Wrapup For July 27th

Most of the day was a downer for the three major averages. After starting off in near-even territory, they sunk to a loss postion right after 10 AM. With the exception of the Dow, they stayed there until nearly the end. The NASDAQ continued to underperform the other two: it sunk the lowest, and barely eked out a gain right at the end of regular trading. The 11% increase in new home sales from last month's level did little to help the overall market; one reason for the lack of enthusiasm was sales prices still being on the decline. There also seemed to be some skepticism about the number itself, even if some people are opining that housing is bottoming. Petroleum products kept going up, and gold has been recovering from its June drop. Copper made another eight-month high.

The lowest-quintile P/E cut-off rose again today, to 10.92 from Friday's 10.87. The S&P's dividend rate remained the same, though. After ETFs and stocks with market caps of less than 500M were thrown out, as well as stocks with too-good-to-be-true yields, the Low P/E Bin was left with ninety-two stocks: a number unchanged from Friday. Here are the internal changes in the Bin, as dash-listed below:

- DCP Midstream Partners, LP
- Hillenbrand, Inc.
- San Juan Basin Royalty Trust
- SK Telecom Co., Ltd.

- Anglo American plc
- Financial Federal Corporation
- Garmin Ltd.
- Sempra Energy

DCP Midstream got in the Bin because of its yield dropping below 10%. Hillenbrand, a supplier of funeral products, arrived because the lowest quintile P/E cut-off rose to meet its own. SK Telecom's P/E fell to the point where it got back in the Bin. The last arrival, San Juan Basin Royalty Trust, is an oddity in the breed. Its yield has dropped precipitously in the last year. In July 2008, its monthly distribution was 32.15 cents. October 2008's was 45.01 cents. Starting the subsequent month, its distribution plummeted; the payout reached 0.615 cents in April. After a rise to 2.627 cents in May, its monthly payout plunged to only 0.5951 cents in June. This near-erasure of its payout made San Juan Basin one of the few royalty trusts to not qualify for the Low P/E Bin because of too low a yield. The announcement of this month's distribution, with an increase from June's to 3.5394 cents, was enough to push its yield above the S&P 500's dividend rate. If there were ever a petroleum-based income trust with a hair-raising income volatility, San Juan Basin Royalty Trust would be it.

Two of the Departures, Anglo American and Garmin, got out because their yields fell below the S&P's cut-off. Financial Federal and Sempra got out because of P/E expansion.

One Bin stock that dropped precipitously today was Cal-Maine Foods, a purveyor of shell eggs. It reported 2Q '09 EPS of 43 cents before the bell, a drop of 72.1% from 2Q '08's $1.54. This drop, as well as a reported 9.3% drop in revenue, was enough to send the stock plummeting 9.55% on the day. Cal-Maine's earnings have been quite volatile over the last year: its 2008 annual EPS were more than triple 2007's. The drop in this quarter's earning could be seen as a return to a more normal level. Pre-report, and pre-drop, Cal-Maine's P/E was 6.78; its P/E was so low in large part because the abnormality of '08's results was recognized. Its dividend was cut this morning, pushing its yield down to 4.07%. Cal-Maine was plugged by a few analysts in Barron's two weeks ago, at a price that was below today's closing. The overall rationale behind the recommendation was that, at $25.43, the stock has enough of a P/E cushion to make it a good value even if earnings dropped significantly. Anyone who bought on that recommendation, right after the market opened, still has a small gain as of now. Time will tell if the other points of optimism are borne out sufficiently to keep the stock from going much further down.

That's all for today's Daily Wrapup. Thanks for reading, and keep the egg jokes handy.


  1. Daniel,

    You mentioned gold recovering from the June dip. Do you allocate a percentage of your portfolio in gold? Even though gold has had a great run the last few years, I am slightly hesitant to invest in gold because it has no true utility.

    Thank you for your insight,
    Max Asciutto

  2. Hello, Max,

    There's only one stock with gold exposure that meets the low P/E - high yield criteria spelled out above. It's Anglo-American [ AAUK ].

    I don't have Anglo-American in my actively-managed mock fund. At any rate, it's primarily a platinum-group and base metal producer now.