Month: August 2016
5 Stocks Show Value, Momentum
Posted: August 30, 2016
Stocks that are going up tend to keep going up.
Quite a few academic and professional studies have shown that, although there’s debate about whether investors can exploit the effect without running up their trading costs too much.
Momentum investing is probably the third-most popular school of investing, after growth (choosing stocks of companies with rapidly increasing earnings) and value (stocks selling below some reasonable estimate of intrinsic value).
I’m a value guy, as anyone knows who’s read this column during the past 19 years. But recognizing that many folks want to see some momentum, I usually devote two columns a year to stocks that possess both value and momentum.
Scorecard
This column you’re reading is the 29th in that series. The average 12-month return on my recommendations on the 27 columns that have a one-year history has been 15.87 percent. That compares quite favorably with the average return on the S&P 500 for the same periods, which has been 7.70 percent.
Seventeen of the 27 columns beat the S&P, and 20 showed a profit.
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.
Last year, my selections rose 10.8 percent but trailed the S&P’s 18.93 percent return. Moderate losses in Alaska Air Group Inc. (ALK) and Cooper Tire & Rubber Co. (CTB) pulled down the return.
Here are five new picks that show both value and momentum.
Cisco Systems
With a market value of $157 billion, Cisco Systems Inc. (CSCO) is the ninth-largest technology company in the United States, trailing such giants as Apple and Microsoft. Computer networking has always been its forte. These days it also sells servers, web-security products and technical support services.
Cisco’s growth, once rapid, has slowed. For that reason its stock sells for only 15 times recent earnings (13 times next year’s estimates). But the company is still quite profitable, with a 22 percent profit margin. The stock has risen about 19 percent in the past six months.
Baxter International
Baxter International Inc. (BAX), based in Deerfield, Ill., makes kidney dialysis machines, other products to treat kidney disease, and a variety of hospital supplies. The stock is up close to 20 percent in the past six months, yet sells for less than six times the past four quarters’ earnings.
The low valuation is partly an anomaly. Earnings spiked recent because of the sale of Baxter’s Baxalta unit (which specialized in treatments for rare diseases). But there are some lasting benefits from the sale. Baxter now has debt of only 37 percent of stockholders’ equity — the lowest it’s been in many years.
Sanmina
Sanmina Corp. (SANM) is up 27 percent in six months. Even after that rise, it sells for a paltry five times earnings because its industry has often been characterized by cutthroat competition and low profit margins.
Based in San Jose, Calif., Sanmina manufactures circuit boards and other electronic assemblies for customers in the technology, defense, automotive and other industries. Its largest customer in 2015 was Alcatel. Sales to the 10 largest customers account for about half of revenue.
Earnings will continue to bounce around, but at its present price I think the stock’s a bargain.
Amerisafe
Based in DeRidder, La., Amerisafe Inc. (AMSF) writes workers’ compensation insurance policies. That’s another tough business, but Amerisafe has shown a profit 10 years in a row and is having a good year this year.
The stock is up about 14 percent in the past six months and sells for 14 times earnings. The company is small, with annual revenue around $400 million, and therefore is covered by only four analysts. Three of the four rate it a buy.
Formula Systems
Shares of the Israeli company Formula Systems Ltd. (FORTY) have shot up 36 percent in the past six months, but the stock is still valued at only eight times earnings. The company, with headquarters in Or Yehuda, Israel, installs and troubleshoots companies’ computer systems and software.
In January, Formula Systems acquired 50 percent of TSG, a small company specializing in military electronic and cybersecurity, and investors seem pleased with that step. Formula Systems itself is small, with 2015 sales of $750 million. As with Sanmina, earnings are volatile. But the company has shown a profit
Disclosure: I own shares in Formula Systems for a few clients. I own Alaska Air Group for most of my clients and personally. Recently, I sold Cooper Tire but owned it (for clients and personally) for much of the past year.
Cash Flow Can Provide Direction For Investing in Stock Market
Posted: August 22, 2016
Years ago, I sponsored a debate between two prominent money managers about which measure was a better way to pick stocks — the price-earnings ratio or price-to-cash-flow ratio. The discussion got heated, and at times personal.
Most investors don’t take their stock selection methods quite that seriously — especially if they don’t make their entire living in the market.
The truth is there’s more than one way to find a great stock. Many methods are good and none is perfect. One good one involves stocks selling for a low multiple of free cash flow.
Cash flow is reported earnings minus certain intangible or special elements. In theory, this gauge tells you how much cash a business is generating.
About once a year, I devote a column to companies selling for a low multiple of cash flow. In 12 previous columns on this subject, the average 12-month return on my recommendations has been 24.4 percent, compared to 7.8 percent for the Standard & Poor’s 500 Index.
Ten of the 12 columns have beaten the index. Nine of the 12 have been profitable.
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.
Last year
Last year’s results were poor. Three of the five stocks I recommended declined, with the biggest loss, 48.3 percent, in PDL BioPharma Inc. (PDLI). HCI Group Inc. (HCI) and Valero Energy Corp. (VLO) also lost ground.
AU Optronics Corp. (AUO) and eBay Inc. showed gains.
Overall, my picks were down 9.9 percent from Aug. 18, 2015, through Aug. 18, 2016. By contrast, the S&P 500 was up 6.6 percent.
What is cash flow?
To calculate cash flow, many people use a measure called EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. It’s not that these four elements aren’t real, but they don’t always measure how robustly cash is flowing into a business or out of it.
Free cash flow is cash flow minus the level of capital expenditures required to keep a business going. Of course, there’s room for judgment and dispute about what that level is. In practice, analysts often use some kind of average figure for the previous few years as their gauge.
Now it’s time to venture some new picks.
Dillard’s
All department stores have been suffering from the onslaught of internet retailing (especially Amazon) and from strong competition from specialty stores. Dillard’s has suffered also from a lack of excitement and innovation.
Yet the chain, based in Little Rock, Ark., has a solid business. The stock sells for only five times cash flow and seven times free cash flow. A roster of several investors I respect has moved into the stock in the past two quarters.
Atwood Oceanics
Atwood Oceanics Inc. (ATW), mentioned recently in this column, is an offshore drilling company. That’s a feast or famine business, and lately it’s been famine to near the starvation point.
Atwood sells for about one times cash flow and 1.5 times free cash flow. Cash flow may well diminish next year, but for patient holders, I think there will be substantial rewards in 2018 and beyond.
Lear Corp.
Lear Corp. (LEA) of Southfield, Mich., makes seating and electrical systems for cars. Investors worry about a slowdown in the world economy hurting car sales in Europe, China and even the United States.
That’s why Lear stock sells for only six times cash flow and seven times free cash flow. At these multiples, I think it’s an attractive buy. In the past five years, the company has increased its revenue by an average of close to 17 percent per year.
Delta Air Lines
Delta Air Lines Inc. (DAL) is a stock I recently sold for clients because I wanted to trim clients’ exposure to the airline industry. (I still have other holdings in the industry.)
Why, then, do I mention it favorably here? Because Delta stock sells for less than five times cash flow and less than seven times free cash flow. It is very attractive on that basis.
Delta has one of the oldest fleets among major airlines, and that will require substantial capital expenses. However, the stock is attractively cheap.
Net 1 UEPS Technologies
As my most speculative pick, I’ll go with Net 1 UEPS Technologies Inc., which offers charge cards and payment processing in emerging countries. The company, based in Johannesburg, South Africa, has increased its revenue from less than $300 million five years ago to about $600 million now.
Net 1 UEPS trades for only four times cash flow and less than seven times free cash flow. It is also cheap by all of the other measures I normally use.
Disclosure: I own Lear shares for clients and personally.
Where Would Late Great Stock Guru Ben Graham Invest?
Posted: August 15, 2016
If Ben Graham were alive to see today’s pricey stock market, what would he buy?
Every year, I try to pay homage to the man widely considered the father of value investing. Graham was a professor, bon vivant, hedge fund manager, and the author of books such as “The Intelligent Investor.” Each August, I try to figure out what he would buy if he were alive.
The column you’re reading represents my 14th such attempt. Of the first 13 columns, 11 beat the Standard & Poor’s 500 Index, and 10 were profitable.
The average 12-month return on my “Graham” selections has been 22.2 percent, compared to 10.6 percent for the index.
My latest column on this subject continued the tradition. Led by EZCorp — a chain of pawn shops, of all things — my Graham-inspired selections rose 13.75 percent to the S&P’s 7.25 percent from Aug. 11, 2015, through Aug. 11, 2016.
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.
Graham criteria
For this column, I use a simplified version of Graham’s stock-selection criteria. To be considered as a potential “Graham stock,” an equity must:
• Sell for 12 times per-share earnings or less.
• Sell for 1.0 times book value (corporate net worth per share) or less.
• Have debt less than 50 percent of corporate net worth.
Finding stocks that meet these criteria isn’t easy in today’s elevated market. The S&P 500 today sells for 25 times earnings and 2.9 times book, both well above normal.
Only 16 stocks passed my Graham screen this year, out of nearly 3,200 U.S.-traded stocks with a market value of $250 million or more. As usual, I will recommend five.
Met Life
Insurance companies traditionally make much of their money by investing the “float” — money received from premiums that they don’t have to (at least yet) pay out in claims. In today’s era of unusually low interest rates, the old formula of investing the float in bonds or similar instruments doesn’t work well.
Interest rates won’t stay low forever, and I expect Met Life’s profits to improve gradually. Meanwhile, it yields 4 percent in dividends, has been raising its dividend steadily, and has plenty of room to raise it more.
This stock was in the Graham portfolio last year, and was the portfolio’s only loser, down 24.3 percent. I’m bringing it back for another try.
China Yuchai
Neglected by U.S. analysts is China Yuchai International Ltd. (CYD), a Singapore company that makes and services diesel engines in China.
Sales declined last year, which I attribute to increased competition and a slowing economy in China. Nevertheless, I believe the company has a durable franchise.
I made money in China Yuchai about a decade ago but haven’t owned it recently. With the stock at eight times earnings and 0.4 times book value, I think the potential reward outweighs the risk.
Atwood Oceanics
Atwood Oceanics Inc. (ATW) is a relatively small offshore oil-drilling company based in Houston. Partly because of its size, it has held up better in the energy downturn than many larger competitors.
Atwood has only 10 offshore rigs, plus two offshore drillships under construction. It has been able to keep its fleet fairly well occupied. Recently, eight of its 10 rigs were working and two were idle. The eight working rigs served eight different customers.
With the energy industry on its knees, Atwood shares go for less than two times recent earnings, and 0.2 times book value.
First Solar
Based in (sunny) Tempe, Ariz., First Solar Inc. (FSLR) makes solar panels and builds solar-energy installations. Its most profitable period was in 2007-10, when many states’ incentives for people to use solar energy were stronger than they are today. Its latest results are the best since 2010.
The stock peaked at more than $300 a share in 2008 and sells for about $39 now. At today’s price, First Solar stock sells for attractive ratios to fundamental measures of value — six times earnings and 0.7 times book value.
Photronics
After taking a bath in the recession of 2008-09, Photronics Inc. (PLAB) seems headed for its seventh straight year of profits, with record profits likely.
The company, with headquarters in Brookfield, Conn., makes photomasks, which are high-precision quartz plates containing microscopic images of electronic circuits. These plates are used to make semiconductor chips and flat-panel displays.
Photronics has a diversified customer base, which includes, among others, Texas Instruments, Micron, and AU Optronics. At 11.3 times earnings and 0.97 times book value, it squeaked into my Graham screen this year.
Stocks Clear Series of Hurdles to Land Place in ‘Sane Portfolio’
Posted: August 08, 2016
My “Sane Portfolio” gets a major shake-up this year.
As its name implies, the Sane Portfolio is intended as a moderately conservative portfolio. It’s a 12-stock portfolio revised annually.
To be eligible for membership in this portfolio, a stock must clear seven hurdles. No one of them is terribly hard, but few stocks can clear all seven.
Once I choose a stock to join the Sane Portfolio, it stays in unless and until it fails to meet one of the seven tests.
A year ago, most of the dozen stocks stayed in. But this year only three are coming back: D.R. Horton Inc. (DHI), a homebuilder; Magna International Inc. (MGA), an auto parts maker; and JetBlue Airways Corp. (JBLU), an airline.
Eligibility
The seven hurdles are:
• Market value of $1 billion or more.
• Stock price 18 times earnings or less.
• Earnings growth averaging at least 5 percent a year the past five years.
• Profitability (measured by return on stockholders’ equity) of 10 percent or better in the latest fiscal year.
• Stock price three times revenue or less.
• Stock price three times book value (corporate net worth) or less.
• Debt less than stockholders’ equity.
Usually a few dozen stocks pass these tests. I use judgment to select a handful of them for the portfolio.
History
I started The Sane Portfolio in 1999 and have written above it every August since, except for a hiatus in 2007-09. The Portfolio you’re about to read about is Sane Portfolio XV. (I couldn’t resist using Roman numerals, to mimic the Super Bowl.)
The average 12-month return for The Sane Portfolio has been 9.8 percent, compared to 8.0 percent for the Standard & Poor’s 500 Index. In 14 previous outings, the portfolio has beaten the index seven times and been profitable 11 times.
Last year’s Sane Portfolio, however, incurred a loss of 4.0 percent, while the S&P 500 gained 5.8 percent.
The biggest culprit for the bad showing was Western Digital Corp. (WDC), which fell 45 percent. It previously had been a five-time member of this portfolio, and one of my favorite stocks to own for clients. Like many tech companies, it couldn’t move fast enough as consumers shifted to mobile devices.
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.
New blood
The past year has been tough for many businesses. Along with Western Digital, eight stocks bit the dust and became ineligible in the past year.
They were The Andersons (ANDE), Chubb Corp. (CB), Cisco Systems Inc. (CSCO), Cooper Tire & Rubber Co. (CTB), Cummins Inc. (CMI), National Oilwell Varco Inc. (NOV), Norfolk Southern Corp. (NSC) and World Fuel Services Corp. (INT).
So I am anointing nine new stocks in the Sane Portfolio this year.
I’ll start with Berkshire Hathaway Inc. (BRK.B), run by the redoubtable Warren Buffett. I think a capital gain is likely here. If I’m wrong, you still get to read Buffett’s incredibly intelligent and thoughtful annual reports.
Cal-Maine Foods (CALM), based in Mississippi, is the largest egg producer in the United States. At the moment, there is an egg glut, making the stock cheap. But I think that problem is temporary.
Foot Locker Inc. (FL) sells athletic shoes and apparel. One thing I like about it is that it carries very little debt.
Lam Research Corp. (LAM) is a leader in “etch,” a crucial step in the process of affixing microscopic wires into semiconductor chips.
Lear Corp. (LEA) makes seating and electrical systems for cars. It serves most of the major car manufacturers in the world.
Pulte Group (PHM) is a homebuilder, which mostly constructs moderately priced homes. I like the whole industry, but I favor Pulte because it’s a little cheaper than most homebuilding stocks and its balance sheet is a little stronger.
Sanderson Farms Inc. (SAFM), an old favorite of mine, is one of the larger U.S. chicken farming companies. The company is debt-free.
Steelcase Inc. (SCS) makes desks and other office furniture. The stock hasn’t done anything in a long time, but it sells for modest valuations, and the company has been expanding its profit margin of late.
Rounding out the list, Waddell & Reed Financial Inc. (WDR) is a money management firm based in Overland Park, Kan. Selling for only nine times recent earnings, it seems like a bargain to me.
Disclosure: I own Cal-Maine, Pulte and Sanderson for most of my clients and personally. I own Lear for most clients, Berkshire Hathaway and Lam Research for some clients, and Waddell & Reed for one client.
These 5 Stocks Show Combination of Value, Growth
Posted: August 01, 2016
Looks or money? Brains or beauty? Value or growth?
The world is full of false dichotomies.
In the stock market, investors seek companies with good earnings growth (the growth school) and/or companies with bargain stock prices (the value school).
It is sometimes possible to find both in one stock. Right now I think D.R. Horton Inc., Skechers USA Inc., Taro Pharmaceutical Industries Ltd., Douglas Dynamics Inc. and United Therapeutics Inc. qualify.
Each sells for 15 times earnings or less, putting them in the value camp in my book. They also show average growth of 12 percent or more in both sales and earnings for the past five years, which puts them in the growth category as well.
Track record
Beginning in 2001, I’ve written 10 columns on the subject of stocks that display both growth and value characteristics. The average one-year total return (including dividends) on my recommendations has been 19.27 percent, compared with 9.60 percent for the Standard & Poor’s 500 Index.
Keep 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.
Last year’s list was the only one of the 10 that has failed to show a profit.
After a spill, they say it’s good to get back on the horse. Here are five new value-plus-growth selections that I believe will be rewarding.
D.R. Horton
I’ve been sweet on homebuilders for more than a year now. Today I’ll focus on D.R. Horton (DHI), which has grown its sales at a 19 percent clip in the past five years and earnings at a faster pace.
In contrast to Toll Brothers, which I recommended recently and which is known for high-end homes, Horton, based in Fort Worth, Texas, is more of a starter-home builder. In 2015, the average sale price of a new home in the United States was about $295,000; Horton’s was roughly $10,000 less.
Skechers USA
Skechers USA, based in Manhattan Beach, Calif., makes fashion footwear (especially sneakers) and other clothing. At about $24, its stock fetches half the price it did a year ago.
A quarterly earnings disappointment and some insider selling have hurt the stock. Yet there’s a case to be made here. Skechers has been profitable in 13 of the past 15 years. Recently it has been earning about 19 percent on stockholders’ equity, which is praiseworthy in itself and relative to the company’s past history.
At 14 times recent earnings and a little more than 11 times estimated earnings, I find the stock attractive.
Taro Pharmaceutical Industries
Based in Haifa Bay, Israel, Taro Pharmaceutical Industries (TARO) is a midsized drug company. Its products are used in dermatological, cardiovascular, anti-inflammatory and neuropsychiatric treatments. Its sales have grown at a 19 percent clip and earnings faster than that.
The company is debt-free, which reduces risk and gives it strategic flexibility. It has been profitable in 14 of the past 15 years, with a sterling return on equity last fiscal year of more than 32 percent.
Douglas Dynamics
An old stock-market adage advises buying straw hats in January. So how about buying a maker of snowplows after the warmest winter on record?
I’m thinking of Douglas Dynamics (PLOW), based in Milwaukee. At about $27 a share, it currently trades for 12 times earnings, versus a 10-year historical average of 19.
United Therapeutics
I have owned United Therapeutics (UTHR) twice for clients but do not own it currently. However, the Silver Spring, Md.-based company still intrigues me.
This biotech company’s niche is the treatment of pulmonary arterial hypertension. It is also working on cancer therapy. Over the past 10 years the stock has sold for an average of 24 times earnings.
Today it sells for only seven times recent earnings and nine times analysts’ estimates for this year. Like Taro, this company is debt-free.