Month: February 2016
W.Pa. Represents Well in Forecasting Competition
Posted: February 22, 2016
My latest Derby of Economic Forecasting Talent, or DEFT for short, was the closest and highest-scoring in many years.
Retired attorney John Winn of Waldo, Fla., edged out two competitors to take the crown for forecasting six economic variables in 2015.
Second place went to Ralph Ross, director of human resources for GE Power Conversion in Pittsburgh. Third by a whisker was Thomas Levendusky, a retired chemical engineer from Greensburg.
Contestants must guess the year-end level of six variables: growth in real U.S. gross domestic product (GDP), the change in the Consumer Price Index, the interest rate on 10-year Treasury notes, the price of a barrel of oil, retail sales in December and the unemployment rate.
The theoretical maximum score in the contest is 18 points, but no one ever comes close to that total. Sometimes four points are enough to win. Winn had 7.6 points; Ross, 7; and Levendusky, 6.85.
A contestant who comes closest to the actual figure for each variable gets three points. Second place is good for two points, third place for one point. Ties are pro-rated.
Blindsided
As usual, when there is a drastic change in the economy, no one saw it coming. The dramatic change in 2015 was the continued fall in oil prices.
When the year began, a barrel of West Texas Intermediate oil cost $53.45, down from about $100 in mid-2014. Not a single contestant predicted that oil would continue to fall. But fall it did, to $37.13.
First
Winn, 70, had a civil law practice in Gainesville, Fla. He earned his first-place finish with a dead-on guess about GDP growth and good approximations on three of the other variables.
For 2016, Winn believes that “things will continue to be kind of slow.” He believes that government imposes too many regulations and taxes, both of which he says dampen economic activity.
The effect of the big decline in oil prices since mid-2014 “depends on whose ox is being gored,” Winn says. “If you’re not in the oil business, you’d think it would benefit you.”
Second
Ross took second place by nailing the figure for retail sales almost precisely and placing in two other categories.
He, too, looks for “slow, anemic growth,” and cites government regulations as a factor. Also noting a slowing of China’s economy and the 4-4 political deadlock on the Supreme Court, he states, “We’re running out of gas.”
Ross fears the oil price drop will be bad for the economy, because falling commodity prices may contribute to a general climate of deflation.
Third
Levendusky earned the bronze medal by scoring at least fractional points in five of the six categories. To the best of my recollection, no one has ever accomplished that.
Lewendusky shares Ross’ view that today’s low oil prices are dangerous. “The Middle East is going to be the wild card,” he says. If Saudi Arabia and Iran restrain their production, he believes that will save many endangered jobs in the United States oil patch.
Come on in
During the 14 years I’ve run this contest (1999 through 2006 and 2010 through the present), both financial professionals and amateurs have won.
Past winners have included a retired surgeon, a real estate agent, a mathematics professor and a professor of information systems. Most winners have been in some aspect of finance, but no economist has ever won, so far.
Feel free to try your luck. The rules are simple.
To enter, email me your answers to the six questions below. Or mail your entry to John Dorfman, Dorfman Value Investments, 379 Elliot Street, Suite 100H, Newton Upper Falls, MA 02464.
Entries must be sent by midnight March 11.
Include your name, address, occupation and phone number. The phone is important so that I can interview you if you win. You are not required to give the reasons behind your estimates, but I enjoy it if you do.
Here are the six questions.
• The U.S. economy, measured by gross domestic product, grew 2.4 percent last year in real (inflation-adjusted) terms. How much will it grow in 2016?
• Inflation, measured by the Consumer Price Index, was only 0.7 percent in 2015. How much will it be this year?
• The interest rate on 10-year government bonds stood at 2.27 percent when 2014 ended. What will that rate be on Dec. 31?
• A barrel of oil (West Texas Intermediate) fetched $37.13 on Dec. 31, 2015. When this year ends, what will the oil price be?
• Retailers racked up $449.11 billion in sales in December 2015 (seasonally adjusted). How much will retail sales be in December 2016?
• Unemployment fell in 2015, to 5.0 percent from 5.6 percent. Where will the unemployment rate stand at the end of this year?
The winner of the DEFT contest will receive a trophy.
Some Stocks Are Best Kept at Arm’s Length
Posted: February 15, 2016
Like a politician’s promise, some stocks have an alluring story but little to back it up.
You are definitely walking into danger if you buy a stock that sells for 100 times revenue or more. These are concept stocks, the shares of companies that have done little or nothing yet but are expected to come up with a driverless car, a cure for a major disease, a blockbuster gold mine or some other fantastic breakthrough.
Most often, investors’ hopes are dashed.
Over the years (2000-2006 and 2012 to the present), I have compiled 11 lists of stocks selling for 100 times revenue or more. The one you’re about to read is the 12th.
On average, the stocks from warning lists have lost 32.6 percent in the 12 months after publication. By contrast, the Standard & Poor’s 500 Index has gained an average of 7 percent.
The warning list has shown losses, as I expect it should, in nine years out of 11. Twice (2003 and 2004), it showed a gain, but only once (2004) has it beaten the S&P 500.
All four stocks on last year’s list fell. In the biotech arena, Acadia Pharmaceuticals Inc. (ACAD) fell 48 percent, and Neuralstem Inc. (CUR) dropped 80 percent. Also in the medical sector, Accelerate Diagnostics Inc. (AXDX) lost 50 percent. The other stock on the list, Armour Residential REIT Inc. (ARR) declined 13 percent. Collectively, the four stocks on last year’s warning list were down 47.9 percent from Feb. 17, 2015, through Feb 12.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
What’s expensive
The average U.S. stock sells for 1.77 times revenue. I consider any stock that sells for five times revenue expensive. A stock that sells for 100 times revenue is ridiculously expensive in my judgment — a valuation so extravagant as to make gains unlikely.
Of course, it’s possible that investors’ sky-high hopes will be rewarded. Of the 58 stocks I’ve warned against because they sold for 100 times revenue or more, 44 declined in the next 12 months.
Here are three that I recommend investors stay away from. If you’re a short seller who bets on selected stocks to decline, you might want to look at these as potential shorts.
Acadia Pharmaceuticals
Even after its 48 percent decline in the past year, Acadia Pharmaceuticals is the most expensive stock on my overpriced list, selling for 22,078 times revenue. This San Diego biotech company has drugs in Phase II or Phase III clinical trials for the treatment of Parkinson’s disease, Alzheimer’s disease and schizophrenia. The company had revenue last year of $120,000 and has a market value of a little over $2 billion.
For Acadia’s drugs, the “addressable market” is huge, but even if its drugs can prove safety and efficacy, many questions remain unanswered regarding marketing arrangements, royalties and future competition. Several directors have sold shares in recent months at high prices than today’s $18 or so. And the company issued new shares in January, diluting existing shareholders.
Many traders are looking for a big drug approval here as soon as May. That may happen, but there’s still a long road ahead.
Like a politician’s promise, some stocks have an alluring story but little to back it up.
You are definitely walking into danger if you buy a stock that sells for 100 times revenue or more. These are concept stocks, the shares of companies that have done little or nothing yet but are expected to come up with a driverless car, a cure for a major disease, a blockbuster gold mine or some other fantastic breakthrough.
Most often, investors’ hopes are dashed.
Over the years (2000-2006 and 2012 to the present), I have compiled 11 lists of stocks selling for 100 times revenue or more. The one you’re about to read is the 12th.
On average, the stocks from warning lists have lost 32.6 percent in the 12 months after publication. By contrast, the Standard & Poor’s 500 Index has gained an average of 7 percent.
The warning list has shown losses, as I expect it should, in nine years out of 11. Twice (2003 and 2004), it showed a gain, but only once (2004) has it beaten the S&P 500.
All four stocks on last year’s list fell. In the biotech arena, Acadia Pharmaceuticals Inc. (ACAD) fell 48 percent, and Neuralstem Inc. (CUR) dropped 80 percent. Also in the medical sector, Accelerate Diagnostics Inc. (AXDX) lost 50 percent. The other stock on the list, Armour Residential REIT Inc. (ARR) declined 13 percent. Collectively, the four stocks on last year’s warning list were down 47.9 percent from Feb. 17, 2015, through Feb 12.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
What’s expensive
The average U.S. stock sells for 1.77 times revenue. I consider any stock that sells for five times revenue expensive. A stock that sells for 100 times revenue is ridiculously expensive in my judgment — a valuation so extravagant as to make gains unlikely.
Of course, it’s possible that investors’ sky-high hopes will be rewarded. Of the 58 stocks I’ve warned against because they sold for 100 times revenue or more, 44 declined in the next 12 months.
Here are three that I recommend investors stay away from. If you’re a short seller who bets on selected stocks to decline, you might want to look at these as potential shorts.
Acadia Pharmaceuticals
Even after its 48 percent decline in the past year, Acadia Pharmaceuticals is the most expensive stock on my overpriced list, selling for 22,078 times revenue. This San Diego biotech company has drugs in Phase II or Phase III clinical trials for the treatment of Parkinson’s disease, Alzheimer’s disease and schizophrenia. The company had revenue last year of $120,000 and has a market value of a little over $2 billion.
For Acadia’s drugs, the “addressable market” is huge, but even if its drugs can prove safety and efficacy, many questions remain unanswered regarding marketing arrangements, royalties and future competition. Several directors have sold shares in recent months at high prices than today’s $18 or so. And the company issued new shares in January, diluting existing shareholders.
Many traders are looking for a big drug approval here as soon as May. That may happen, but there’s still a long road ahead.
AR Capital
AR Capital Acquisition Corp.(AUMA) is a blank-check company (no substantive operations yet) controlled by real-estate and brokerage titan Nicholas Schorsch. Mr. Schorsch is currently defending a lawsuit brought by teachers’ unions among others, accusing him of accounting irregularities and unfair self-enrichment at American Realty Capital Properties, another company he has controlled.
AR Capital shares go for about 39,000 times revenue. Of course, the company, formed to make one or more acquisitions, hasn’t made any yet.
Pdv Wireless
Based in Woodland Park, N.J., pdv Wireless Inc. (PDWV) makes wireless communications systems that help companies with mobile workforces stay in touch. The initials pdv come from the company’s former name, Pacific DataVision. It has been public for only a year and so far has posted losses. The stock is followed by only two analysts from smallish brokerage firms, both of whom recommend it strongly.
Pdv shares fetch 105 times revenue. By contrast, AT&T trades at 1.5 times revenue and Verizon at 1.6. Let’s not forget what a harshly competitive field telecom is.
Disclosure: I hold a short position in Armour Residential REIT for one client. I have no positions in the other stocks discussed in today’s column, personally or for clients.
AR Capital Acquisition Corp.(AUMA) is a blank-check company (no substantive operations yet) controlled by real-estate and brokerage titan Nicholas Schorsch. Mr. Schorsch is currently defending a lawsuit brought by teachers’ unions among others, accusing him of accounting irregularities and unfair self-enrichment at American Realty Capital Properties, another company he has controlled.
AR Capital shares go for about 39,000 times revenue. Of course, the company, formed to make one or more acquisitions, hasn’t made any yet.
Pdv Wireless
Based in Woodland Park, N.J., pdv Wireless Inc. (PDWV) makes wireless communications systems that help companies with mobile workforces stay in touch. The initials pdv come from the company’s former name, Pacific DataVision. It has been public for only a year and so far has posted losses. The stock is followed by only two analysts from smallish brokerage firms, both of whom recommend it strongly.
Pdv shares fetch 105 times revenue. By contrast, AT&T trades at 1.5 times revenue and Verizon at 1.6. Let’s not forget what a harshly competitive field telecom is.
Disclosure: I hold a short position in Armour Residential REIT for one client. I have no positions in the other stocks discussed in today’s column, personally or for clients.
These Companies Show Financial Might
Posted: February 09, 2016
Alphabet Inc., the parent to Google, is back on my Balance Sheet Powerhouse list for a fifth time.
This list honors companies that show unusual financial strength. I have compiled it 12 times, 2001-06 and 2011 to the present.
Benchmark Electronics Inc. (BHE) of Angelton, Texas, which makes circuit boards and other electronic assemblies, joins the list for a fourth time. Aside from Alphabet and Benchmark, no companies that made the roster this year have been on it more than twice.
Only 15 American companies made the Powerhouse list this year, the fewest since 2002. Companies are borrowing more money, and maintaining more scant reserves against unexpected events. That’s partly because interest rates have been low, and partly because the years since the financial crisis of 2007-09 have been challenging.
To make the list this year, a company needed to jump these hurdles:
• A market value of$1 billion or more
• Headquarters in the United States
• Debt no more than 10 percent of stockholders’ equity
• A current ratio (current assets to current liabilities) of 3 or more
• Positive earnings
• Interest coverage of at least 4 (that’s earnings before interest and taxes divided by interest paid)
To make the Powerhouse list is a distinct honor, but not necessarily grounds for a stock recommendation. These are excellent companies, and often priced as such. As a stock picker, I’m seeking strong companies that are also underva0lued.
The honorees
Nine companies are on the list for a second time: Atmel Corp. (ATML), Cal-Maine Foods Inc. (CALM), Coherent Inc. (COHR), Foot Locker Inc. (FL), First Solar Inc. (FSLR), Guess? Inc. (GES), Sanderson Farms Inc. (SAFM), Simpson Manufacturing Co. (SSD) and UniFirst Corp. (UNF).
It’s a diverse lot. Atmel makes semiconductor chips, Cal-Maine is an egg farmer, Coherent manufactures lasers, Foot Locker retails athletic shoes and clothes, First Solar makes and installs solar panels, Guess produces jeans, Sanderson Farms raises chickens, Simpson makes construction products, and UniFirst provides workplace uniforms.
We welcome to the Powerhouse list four new companies: Arista Networks Inc. (ANET), Atlantic Tele-Network Inc. (ATNI), Columbia Sportswear Co. (COLM), and Ellie Mae Inc. (ELLI).
Absent from this year’s list were some companies that won honors frequently in the past. Qualcomm Inc. (QCOM), a 10-time honoree, has taken on close to $11 billion of debt and no longer meets the debt-to-equity standard. Microsoft Corp. (MSFT), on the list six times in the early years, now has debt equal to 58 percent of equity.
Past picks
Each year, I select a small number of companies on the Balance Sheet Powerhouse list as stock recommendations.
In 11 outings, my picks averaged an annual return of 18.2 percent, compared to 6.7 percent for the Standard & Poor’s 500 Index. My selections were profitable in six of the 11 years, and beat the index seven times.
Bear in mind that results for my column picks are theoretical and don’t reflect trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t necessarily indicate future results.
New picks
From this year’s 15 stocks, I recommend four: Benchmark Electronics, Cal-Maine Foods, First Solar and Sanderson Farms.
Benchmark is in a brutally competitive niche, contract circuit-board manufacturing. Its net profit margin, just more than 3 percent, would be considered bad in many industries but is good in this one. As I noted in a recent column, Benchmark is selling for less than its book value (corporate net worth per share).
Cal-Maine, based in Laurel, Miss., is the largest egg producer in the United States. It has acquired a number of organic farms, and is benefitting from consumers’ willingness to pay more for organic products. It pays a fat dividend of $2.40 a share, which seems secure. The estimate dividend yield over the next six months is above 6 percent.
First Solar is coming back from weak years in 2011 and 2012 but is far from the profitability level it achieved in 2007-2010. The Obama administration has been a big advocate of solar power. The company’s future will be influenced to some degree by the election, but I think solar will continue to gain market share from coal and other fuels.
I’m recommending Sanderson Farms for the second year in a row. As I’ve noted in past columns, chicken continues to gain market share from beef. Periodic outbreaks of bird flu depress Sanderson’s price from time to time, but I consider it a solid holding.
Disclosure: I own Cal-Maine Foods and Sanderson Farms shares personally and for most of my clients. I have no positions in other stocks mentioned in today’s column.
Stocks Show Value, Momentum
Posted: February 02, 2016
Not many stocks have momentum after a sour January. But a few stocks managed to eke out gains, and they are precious specimens to investors who believe the best time to buy a stock is when it’s rising.
Twice a year, I list some stocks that combine value (a stock price relative to per-share earnings) with momentum (better price action than average). For today’s column, I considered a stock to have momentum if it was up at least 1 percent in the past six months (when the S&P 500 was down 6.77 percent) and up at least a small fraction in January. I deemed it a value if it sells for 15 times earnings or less and had debt less than stockholders’ equity. Neither the value criteria nor the momentum criteria were very tough, in and of themselves. However, only 13 stocks met both.
Sanderson Farms
Among them, Sanderson Farms Inc. (SAFM) is my favorite. Sanderson is the third-largest U.S. chicken producer. Based in Laurel, Miss., it processes chickens at 11 plants, all of them in the South.
The average person in the United States eats about 90 pounds of chicken per year. That’s up from about 37 pounds per year fifty years ago, and the rise has been fairly steady. “A chicken in every pot,” indeed. Over the same 50 years, consumption of beef has fallen from nearly 75 pounds per person to about 54 pounds.
Short sellers have been betting against Sanderson and other chicken producers. I believe they reason that bird flu will continue to afflict the companies and that the companies will be unable to resist overproducing as they have periodically in the past.
Those are legitimate worries. But when you can own Sanderson shares for only nine times earnings, I believe the price takes the risks into account.
Pilgrim’s Pride
I also like Sanderson’s big rival, Pilgrim’s Pride Corp. (PPC), the largest U.S. chicken producer. The case for it is very similar to the case for Sanderson. But I see a shade of difference in the companies’ balance sheets. Pilgrim’s Price at the moment has debt equal to 81 percent of stockholders’ equity, while the figure for Sanderson is less than 1 percent.
Graco
From Minneapolis comes Graco Inc. (GGG), which makes fluid handling equipment — pumps, meters, mixers, sprayers and the like. This is the kind of prosaic business I love because if you buy the stock, you are not paying a glamour premium. Most analysts rate the stock a mere “hold,” but they have been raising their earnings estimates, which is usually a good sign.
Ennis
Ennis Inc. (EBF) was known as Ennis Business Forms. These days, forms are usually computerized, but they are still at the heart of Ennis’ business. The Midlothian, Texas, company has diversified into related areas such as labels, point-of-sale advertising and T-shirt making. The stock has advanced 19 percent in the past six months, while the overall market fell. At 13 times earnings and less than 1.0 times sales, I think the stock is attractive.
First Solar
I’ve been wary of solar stocks because they depend on government subsidies that could be yanked away. However, First Solar Inc. (FSLR) attracts my attention. It has risen 55 percent in the past six months yet sells for only 12 times earnings. The Obama administration has been a big solar proponent, and any successor Democratic administration probably would be, too. On the Republican side, it depends on the candidate. So look for this stock to gyrate with the political winds this year.
The other eight stocks that passed the value-and-momentum screen were Amerisafe Inc. (AMSF), Arrow Financial Corp. (AROW), CBIZ Inc. (IASI), CNB Financial Corp. (CCNE), ePlus Inc. (PLUS), First Defiance Financial Corp. (FDEF), FirstMerit Corp. (FMER) and Super Micro Computer Inc. (SMCI).
Track record
This is the 28th column I’ve written (usually, two each year) on stocks that combine value and momentum. On average, my selections have risen 16.1 percent in the year after publication, compared with 7.3 percent for the Standard & Poor’s 500 Index.
Of the 26 columns for which one-year results can be calculated, 19 have been profitable and 17 have beaten the S&P.
The column from one year ago contained two winners and two losers. JetBlue airways Corp. (JBLU) returned about 32 percent and Take-Two Interactive Software Inc. (TTWO) had a 16 percent gain. But China Mobile Ltd. (CHL) fell 16 percent and Bed Bath & Beyond Inc. (BBBY) plunged 44 percent. Overall, my picks fell 3.2 percent, just edging out the S&P 500, which eased 3.3 percent.
Bear in mind that my column selections are theoretical and do not involve actual trades, trading costs or taxes. Past performance is not a reliable indicator of future results. And my column record shouldn’t be confused with the results I achieve for clients.
Disclosure: I own Sanderson Farms shares personally and for most of my clients. I own Ennis shares for one or two clients.