BAGAKOAA May 5 2009
In the last two weeks, people have been asking me a lot of questions about stocks. That is an indicator that either people are really desperate or that many people realize that this may be the time to buy some sound stocks at historical lows. It is very difficult to determine what is a sound stock. Historical superficial measurements like PE ratio and Book value have become somewhat irrelevant as the media and government intervention have thrown metrics “out of whack”. That is a technical financial term meaning screwed up.
Anyway, some have asked about GE about CAT about AIG about BofA about oil stocks, about ETFs. The list gets longer everyday. To answer some of these questions for others and for myself, I thought I’d lay some basic ground work as I need to go back and check my 4th quarter investments now that year end 10Ks are now on the street.
Before analyzing stock by stock I had to go back revisit the two books I explored mid 2008 through 3rd qtr 2008. The Intellegent Investor and Security Analysis. While many of the goal posts for equities have been moved in the last six months, some of the fundamental analysis still holds true, after adjusting relevant benchmarks for current conditions. Of note, especially in banking stocks are the unusual anomaly of toxic assets.
Here is the situation with banking stocks that make valuations such a crap shoot. Take BofA fro example. Many people are saying BAC at 3.25 a share how could you go wrong? I don’t know. They are showing 2 billion in assets as of December 2008. Now if you were BAC and you had a percentage of your assets not valued properly, you would have an incentive to take the hit re-evaluate the assets and move forward. To do that would mean accepting the fact that the loan you made to Brian Cronin for 1 million dollars needs to be renegotiated to 8 hundred thousand dollars. So now your 2 billion in assets are only worth 1.6 billion. Your stock goes from 20 dollar a share to 16 dollars a share because everyone know how to evaluate the stock. But wait, here comes Superbailout. BAC got in line with AIG, and Citi and Morgan Stanley to name a few and accepted 45 Billion (20 in September and 25 in December) in help. Now you might ask why do they need 45 Billion when their questionable assets were 2 billion and annual revenue is a conservative 90 billion a year, well they bought a little company called Merrill Lynch as a favor to the government so the government lent them some money. BAC is regretting that decision as the government is telling them how to run their company. But I digress, sorry wrong book.
BAC has no incentive to devalue their holding as long as they have the ability to go to BORP. (The Bank of Obama, Reid & Pelosi). So Brian can’t renegotiate his loan, he abandons his home defaults on his payments and BAC shows it as a 1 million dollar asset. NOT. Now the home is down to a market value of 700 thousand. You get the picture. So is BAC a buy at 3.25 a share. It’s a crap shoot at best. So what to the institutional invest think? Look up the June Option chains for BAC. There are a lot more calls (orders to buy) than puts (orders to sell) on the June 09 trend. There are more than 14,000 contracts representing 14,000,000 shares in the 5.00 to 10.00 range. There are only 4,000 contracts for sells in the same range. That means that the pros favor an updside on this stock almost 6 to one.
I bought BAC at 17, 13, 10 and 8. 52 week high was 43.00. Analysts are saying 30 in 12 months. If the bank does not get nationalized I will be buying more in this range. I just don’t like banks right now. I own BAC and MS.
Now back to basics. Here is how I am analyzing non bank equities for the moment. Using my usual rules:
1. Only buy equities that you understand how they make money.
2. Know where to get in.
3. Know when to get out. My rule used to be 8% down out, 20% up out or reset for the 8% down assuring a 12% gain. This market does not allow for that, but you still need to determine where to get out.
4. Bears make Money
5. Bulls make Money
6. Pigs get slaughtered
Here is my criteria for valuing stocks. It is a point structure with a possible 17 points. (Adjusted in August for revenue, now a 21 point scale) Any money website should have all of the information below, be sure you are using annualized figures and not quarterlies. I use Google finance and Rueters.
Return on Equity
< 12 = 0
12< 15= 1
16<20=2
21<30=3
>30=4
Net Income
One year over previous year=1
Two years “ “ “ =2
Three years “ “ “ =3
Four =4
Cash Flow
Def: Cash from Operating Activities
One year over prev year =1
Two years " " "=2
Three years " " "3
Four" " "=4
Debt Check
From Balance Sheet
Total Long Term Debt/Net Income
Less than 5=2
-15 =1
Over 15= 0
Profit Margins
Def: Net Profit Margins
If Its Great than Industry Average =2
If its equal to IA =1
If its less than IA =0
If is greater than their 5 year average =1
Total ratings: A = 13-17 Buy (Adjusted in Aug 18.9-21= A = BUY)
B = 16.8-18.8 Consider Buying
C = 16.7 or below, speculative or avoid
I then take the resulting number and divide it by 17 (Now 21) to give me their rating, kinda like a wine. 19 out 21 is a 90.4. I only store wines rated 88 and above. I only buy stocks 90 and above.
So with that said, here are few of the stocks I have and some of you have asked me about.
Questar STR
Questar Corporation (Questar) is a natural gas-focused energy company with four major lines of business: gas and oil exploration and production, midstream field services, energy marketing, interstate gas transportation, and retail gas distribution. Its operations are conducted through its three principal subsidiaries. Questar Market Resources, Inc. is a sub holding company that operates through four principal subsidiaries: Questar Exploration and Production Company, which acquires, explores for, develops and produces natural gas, oil and NGL; Wexpro Company manages, develops and produces cost-of-service reserves for gas utility affiliate Questar Gas; Questar Gas Management Company that provides midstream field services including natural gas-gathering and processing services for affiliates and third parties, and Questar Energy Trading Company markets equity and third-party natural gas and oil, provides risk-management services and owns and operates an underground gas-storage reservoir.
Loved it in November at 30 a share and love it more at 26. It rated a 94 getting 16 out of 17. It just barley missed a perfect score due to a Return on equity of 22.81%. (The simplest definition is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.) In this climate 22.81 is a great ROE. It is hard to find anything over 30. Its 52 week high was 74.00 a share. There is a long term 18-24 month upside to this stock. It is not all roses there as Keith Rattie is talking down 2009 revenues and earning as a result of demand for natural gas and the commodities price erosion.
Buy at 26. re-evaluate at 30. I’m thinking 34 by years end? June 09 option chains show a balance in calls and puts and all the action is in the 30-40 range. Very little action beyond July options. Nobody is guessing on October. There were a lot of insider buying in Feb by directors at the 35.00 a share price. Worth noting. Some sales, but more buys.
Grainger GWW (Thanks Ben)
W.W. Grainger, Inc. (Grainger) distributes facilities maintenance products and provides services and related information used by businesses and institutions primarily in the United States, Canada and Mexico to keep their facilities and equipment running. Grainger is the supplier of facilities maintenance and other related products in North America. Its operations are managed in three segments: Grainger Branch-based, Acklands – Grainger Branch-based (Acklands – Grainger), and Lab Safety Supply, Inc. (Lab Safety). Grainger Branch-based is an aggregation of the Grainger Industrial Supply (Industrial Supply), Grainger, S.A. de C.V. (Mexico), Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China) and Grainger Panama S.A. (Panama). Acklands – Grainger is the Company’s Canadian branch-based distribution business. Lab Safety is a direct marketer of safety and other industrial products.
Bought it in Nov at 72 ish and it is looking even better at 61. It gets a 94, which is like a 1995 Chateau Mouton Rothschild if it were a wine. ROE is an amazing 23.01, 08 income jumped to 475 million up 13 %, cash flow is an amazing 530 million up 13 % from 07, (not many companies can say that) and the debt check is a warm and fuzzy 1.02, in other words they can pay off all of their long term debt in one year if they chose. Thanks again Ben for this tip in November.
The stock is taking a hit because of the overall market and industrial demand is down. The company reported January sales down 9%. My guess is with 787 billion in stimulus moneys much of going to infrastructure, Grainger is well positioned to come back strong by 2010. Option chains do not give a strong clue for direction all of the June action is in the 65-70 range and is evenly balanced between call and puts. Remember this was a 98 dollar a share stock and is very very healthy. Buy it at 61, re-evaluate at 70.
OK I know a few of you wanted cheap stocks. Keep in mind 61 for Grainger is cheap. 6 for GE is cheap. 5 for Alcoa is Cheap. Some of you were asking about Citi under a dollar. I don’t like banks. The US government after converting its preferred stock to common stock will own a controlling interest of 36%. That is called nationalization. Name one entity the government has run successfully. . . . . Yeah I give up too. Let’s take a look at C according to my criteria.
C
You know what it is so I won’t bore you.
ROE is a mind blowing MINUS 36%. Net Profit (or lack there of) a MINUS 65%. Industry average is MINUS 1%. Yes there are banks making a profit. Drop me a note if you are interested. Net Income Growth NOT. Net Income went from a high of 25 billion in 05 to a MINUS 27.6 Billion in 08. Total Long term debt sits at just under 300 Billion. In other words at 90 cents a share it’s a dog.
GE
General Electric Company (GE) is a diversified technology, media and financial services company. Its products and services include aircraft engines, power generation, water processing, security technology, medical imaging, business and consumer financing, media content and industrial products. As of December 31, 2008, GE operated in five segments: Energy Infrastructure, Technology Infrastructure, NBC Universal, Capital Finance and Consumer & Industrial. In January 2009, the Company acquired Interbanca S.p.A., an Italian corporate bank. In April 2008, Oil & Gas completed the acquisition of the Hydril Pressure Controls business from Tenaris. In September 2008, the Company announced the sale of its Japanese consumer finance business to Shinsei Bank. During the year ended December 31, 2008, the Company acquired Whatman plc; Vital Signs, Inc.; Merrill Lynch Capital, and CitiCapital.
OK this stock is at 6.00 a share. I have bought it at 20, 18, 16, 15, and today at $6.82. I won’t say how much, but if I buy anymore I think they will have to put me on the Board. Here is how the numbers shape up according to my criteria. Oooh, sorry I did that. On my scale, GE shapes up to a 53.
If it were a wine it would be bath tub wine, after the bath. Yeah know I still like it and own a slew of it. The threat to the AAA rating and the drop in dividends and the GE Captial uncertainty have played havoc with this stock. The NBC division is in the toilet as all media outlets are. BUT (Behold the Underlying Truth). The world is spending about 22 trillion on stimulus packages, GE is well positioned to glean some of that money and do it profitably. Their Gross margin on 08 is 39% versus and industry average of 21%. They have a positive cash flow of 48 Billion and have protected that by dropping their dividend. Net income is back down to 04 05 levels. Industrial demand will pick up in 12-36 months and GE has the staying power to hang in there.
June call options out weigh puts almost 2-1 with most of the action happening in the 9-11 range. There are ton of calls in the 7-10 range for January 2010. The option energy is toward a 9.00 stock. I am in and glad to be in at a weighted average price of 13.00. Get in at 6-7. re-evaluate around 10 which should be mid summer.
Corning Glass Works GLW
Corning Incorporated (Corning is a global, technology-based company that operates in five business segments: Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials and Life Sciences. Display Technologies segment manufactures glass substrates for use in liquid crystal flat panel displays. Telecommunications segment manufactures optical fiber and cable, and hardware and equipment components for the telecommunications industry. Environmental Technologies segment manufactures ceramic substrates and filters for automobile and diesel applications. Specialty Materials segment manufactures products that provide more than 150 material formulations for glass, glass ceramics and fluoride crystals to meet demand for customer needs. Life Sciences segment manufactures glass and plastic consumables for pharmaceutical and scientific applications.
A couple of you have asked about this stock. I looked at it back in October and can’t remember what I found out. It is now selling for 10.09. Let’s crunch the numbers.
Wow, way to go Ted and who ever else asked about this one. I guess I did not do my numbers in October as I would not have missed this one.
The ROE is an astounding 45.83. Net Income every one of the last 5 years and it double in 08 from 2.1 Billion to 5.2 Billion. Cash flow except for a small hiccup in 06 has grown consistently. They could pay off their long tern debt in 82 working days out of cash flow. Margins are obscene. There is a lot of option money betting on 15 by August. There are 63 thousand contract for calls between 10 and 25 for January 2010. Very little put action at all. They are optimistic about flat panel TV sales which use a lot of their product. I would and will get in at 10 and reevaluate at 13.50 by the end of summer.
If there are any other you’d like me to take a look at, don’t hesitate to ask. Most of the 4th quarter numbers are in and except for a few cash flow reports, we can crunch numbers on most equities.
Anyway, some have asked about GE about CAT about AIG about BofA about oil stocks, about ETFs. The list gets longer everyday. To answer some of these questions for others and for myself, I thought I’d lay some basic ground work as I need to go back and check my 4th quarter investments now that year end 10Ks are now on the street.
Before analyzing stock by stock I had to go back revisit the two books I explored mid 2008 through 3rd qtr 2008. The Intellegent Investor and Security Analysis. While many of the goal posts for equities have been moved in the last six months, some of the fundamental analysis still holds true, after adjusting relevant benchmarks for current conditions. Of note, especially in banking stocks are the unusual anomaly of toxic assets.
Here is the situation with banking stocks that make valuations such a crap shoot. Take BofA fro example. Many people are saying BAC at 3.25 a share how could you go wrong? I don’t know. They are showing 2 billion in assets as of December 2008. Now if you were BAC and you had a percentage of your assets not valued properly, you would have an incentive to take the hit re-evaluate the assets and move forward. To do that would mean accepting the fact that the loan you made to Brian Cronin for 1 million dollars needs to be renegotiated to 8 hundred thousand dollars. So now your 2 billion in assets are only worth 1.6 billion. Your stock goes from 20 dollar a share to 16 dollars a share because everyone know how to evaluate the stock. But wait, here comes Superbailout. BAC got in line with AIG, and Citi and Morgan Stanley to name a few and accepted 45 Billion (20 in September and 25 in December) in help. Now you might ask why do they need 45 Billion when their questionable assets were 2 billion and annual revenue is a conservative 90 billion a year, well they bought a little company called Merrill Lynch as a favor to the government so the government lent them some money. BAC is regretting that decision as the government is telling them how to run their company. But I digress, sorry wrong book.
BAC has no incentive to devalue their holding as long as they have the ability to go to BORP. (The Bank of Obama, Reid & Pelosi). So Brian can’t renegotiate his loan, he abandons his home defaults on his payments and BAC shows it as a 1 million dollar asset. NOT. Now the home is down to a market value of 700 thousand. You get the picture. So is BAC a buy at 3.25 a share. It’s a crap shoot at best. So what to the institutional invest think? Look up the June Option chains for BAC. There are a lot more calls (orders to buy) than puts (orders to sell) on the June 09 trend. There are more than 14,000 contracts representing 14,000,000 shares in the 5.00 to 10.00 range. There are only 4,000 contracts for sells in the same range. That means that the pros favor an updside on this stock almost 6 to one.
I bought BAC at 17, 13, 10 and 8. 52 week high was 43.00. Analysts are saying 30 in 12 months. If the bank does not get nationalized I will be buying more in this range. I just don’t like banks right now. I own BAC and MS.
Now back to basics. Here is how I am analyzing non bank equities for the moment. Using my usual rules:
1. Only buy equities that you understand how they make money.
2. Know where to get in.
3. Know when to get out. My rule used to be 8% down out, 20% up out or reset for the 8% down assuring a 12% gain. This market does not allow for that, but you still need to determine where to get out.
4. Bears make Money
5. Bulls make Money
6. Pigs get slaughtered
Here is my criteria for valuing stocks. It is a point structure with a possible 17 points. (Adjusted in August for revenue, now a 21 point scale) Any money website should have all of the information below, be sure you are using annualized figures and not quarterlies. I use Google finance and Rueters.
Return on Equity
< 12 = 0
12< 15= 1
16<20=2
21<30=3
>30=4
Net Income
One year over previous year=1
Two years “ “ “ =2
Three years “ “ “ =3
Four =4
Cash Flow
Def: Cash from Operating Activities
One year over prev year =1
Two years " " "=2
Three years " " "3
Four" " "=4
Debt Check
From Balance Sheet
Total Long Term Debt/Net Income
Less than 5=2
-15 =1
Over 15= 0
Profit Margins
Def: Net Profit Margins
If Its Great than Industry Average =2
If its equal to IA =1
If its less than IA =0
If is greater than their 5 year average =1
Total ratings: A = 13-17 Buy (Adjusted in Aug 18.9-21= A = BUY)
B = 16.8-18.8 Consider Buying
C = 16.7 or below, speculative or avoid
I then take the resulting number and divide it by 17 (Now 21) to give me their rating, kinda like a wine. 19 out 21 is a 90.4. I only store wines rated 88 and above. I only buy stocks 90 and above.
So with that said, here are few of the stocks I have and some of you have asked me about.
Questar STR
Questar Corporation (Questar) is a natural gas-focused energy company with four major lines of business: gas and oil exploration and production, midstream field services, energy marketing, interstate gas transportation, and retail gas distribution. Its operations are conducted through its three principal subsidiaries. Questar Market Resources, Inc. is a sub holding company that operates through four principal subsidiaries: Questar Exploration and Production Company, which acquires, explores for, develops and produces natural gas, oil and NGL; Wexpro Company manages, develops and produces cost-of-service reserves for gas utility affiliate Questar Gas; Questar Gas Management Company that provides midstream field services including natural gas-gathering and processing services for affiliates and third parties, and Questar Energy Trading Company markets equity and third-party natural gas and oil, provides risk-management services and owns and operates an underground gas-storage reservoir.
Loved it in November at 30 a share and love it more at 26. It rated a 94 getting 16 out of 17. It just barley missed a perfect score due to a Return on equity of 22.81%. (The simplest definition is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.) In this climate 22.81 is a great ROE. It is hard to find anything over 30. Its 52 week high was 74.00 a share. There is a long term 18-24 month upside to this stock. It is not all roses there as Keith Rattie is talking down 2009 revenues and earning as a result of demand for natural gas and the commodities price erosion.
Buy at 26. re-evaluate at 30. I’m thinking 34 by years end? June 09 option chains show a balance in calls and puts and all the action is in the 30-40 range. Very little action beyond July options. Nobody is guessing on October. There were a lot of insider buying in Feb by directors at the 35.00 a share price. Worth noting. Some sales, but more buys.
Grainger GWW (Thanks Ben)
W.W. Grainger, Inc. (Grainger) distributes facilities maintenance products and provides services and related information used by businesses and institutions primarily in the United States, Canada and Mexico to keep their facilities and equipment running. Grainger is the supplier of facilities maintenance and other related products in North America. Its operations are managed in three segments: Grainger Branch-based, Acklands – Grainger Branch-based (Acklands – Grainger), and Lab Safety Supply, Inc. (Lab Safety). Grainger Branch-based is an aggregation of the Grainger Industrial Supply (Industrial Supply), Grainger, S.A. de C.V. (Mexico), Grainger Caribe Inc. (Puerto Rico), Grainger China LLC (China) and Grainger Panama S.A. (Panama). Acklands – Grainger is the Company’s Canadian branch-based distribution business. Lab Safety is a direct marketer of safety and other industrial products.
Bought it in Nov at 72 ish and it is looking even better at 61. It gets a 94, which is like a 1995 Chateau Mouton Rothschild if it were a wine. ROE is an amazing 23.01, 08 income jumped to 475 million up 13 %, cash flow is an amazing 530 million up 13 % from 07, (not many companies can say that) and the debt check is a warm and fuzzy 1.02, in other words they can pay off all of their long term debt in one year if they chose. Thanks again Ben for this tip in November.
The stock is taking a hit because of the overall market and industrial demand is down. The company reported January sales down 9%. My guess is with 787 billion in stimulus moneys much of going to infrastructure, Grainger is well positioned to come back strong by 2010. Option chains do not give a strong clue for direction all of the June action is in the 65-70 range and is evenly balanced between call and puts. Remember this was a 98 dollar a share stock and is very very healthy. Buy it at 61, re-evaluate at 70.
OK I know a few of you wanted cheap stocks. Keep in mind 61 for Grainger is cheap. 6 for GE is cheap. 5 for Alcoa is Cheap. Some of you were asking about Citi under a dollar. I don’t like banks. The US government after converting its preferred stock to common stock will own a controlling interest of 36%. That is called nationalization. Name one entity the government has run successfully. . . . . Yeah I give up too. Let’s take a look at C according to my criteria.
C
You know what it is so I won’t bore you.
ROE is a mind blowing MINUS 36%. Net Profit (or lack there of) a MINUS 65%. Industry average is MINUS 1%. Yes there are banks making a profit. Drop me a note if you are interested. Net Income Growth NOT. Net Income went from a high of 25 billion in 05 to a MINUS 27.6 Billion in 08. Total Long term debt sits at just under 300 Billion. In other words at 90 cents a share it’s a dog.
GE
General Electric Company (GE) is a diversified technology, media and financial services company. Its products and services include aircraft engines, power generation, water processing, security technology, medical imaging, business and consumer financing, media content and industrial products. As of December 31, 2008, GE operated in five segments: Energy Infrastructure, Technology Infrastructure, NBC Universal, Capital Finance and Consumer & Industrial. In January 2009, the Company acquired Interbanca S.p.A., an Italian corporate bank. In April 2008, Oil & Gas completed the acquisition of the Hydril Pressure Controls business from Tenaris. In September 2008, the Company announced the sale of its Japanese consumer finance business to Shinsei Bank. During the year ended December 31, 2008, the Company acquired Whatman plc; Vital Signs, Inc.; Merrill Lynch Capital, and CitiCapital.
OK this stock is at 6.00 a share. I have bought it at 20, 18, 16, 15, and today at $6.82. I won’t say how much, but if I buy anymore I think they will have to put me on the Board. Here is how the numbers shape up according to my criteria. Oooh, sorry I did that. On my scale, GE shapes up to a 53.
If it were a wine it would be bath tub wine, after the bath. Yeah know I still like it and own a slew of it. The threat to the AAA rating and the drop in dividends and the GE Captial uncertainty have played havoc with this stock. The NBC division is in the toilet as all media outlets are. BUT (Behold the Underlying Truth). The world is spending about 22 trillion on stimulus packages, GE is well positioned to glean some of that money and do it profitably. Their Gross margin on 08 is 39% versus and industry average of 21%. They have a positive cash flow of 48 Billion and have protected that by dropping their dividend. Net income is back down to 04 05 levels. Industrial demand will pick up in 12-36 months and GE has the staying power to hang in there.
June call options out weigh puts almost 2-1 with most of the action happening in the 9-11 range. There are ton of calls in the 7-10 range for January 2010. The option energy is toward a 9.00 stock. I am in and glad to be in at a weighted average price of 13.00. Get in at 6-7. re-evaluate around 10 which should be mid summer.
Corning Glass Works GLW
Corning Incorporated (Corning is a global, technology-based company that operates in five business segments: Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials and Life Sciences. Display Technologies segment manufactures glass substrates for use in liquid crystal flat panel displays. Telecommunications segment manufactures optical fiber and cable, and hardware and equipment components for the telecommunications industry. Environmental Technologies segment manufactures ceramic substrates and filters for automobile and diesel applications. Specialty Materials segment manufactures products that provide more than 150 material formulations for glass, glass ceramics and fluoride crystals to meet demand for customer needs. Life Sciences segment manufactures glass and plastic consumables for pharmaceutical and scientific applications.
A couple of you have asked about this stock. I looked at it back in October and can’t remember what I found out. It is now selling for 10.09. Let’s crunch the numbers.
Wow, way to go Ted and who ever else asked about this one. I guess I did not do my numbers in October as I would not have missed this one.
The ROE is an astounding 45.83. Net Income every one of the last 5 years and it double in 08 from 2.1 Billion to 5.2 Billion. Cash flow except for a small hiccup in 06 has grown consistently. They could pay off their long tern debt in 82 working days out of cash flow. Margins are obscene. There is a lot of option money betting on 15 by August. There are 63 thousand contract for calls between 10 and 25 for January 2010. Very little put action at all. They are optimistic about flat panel TV sales which use a lot of their product. I would and will get in at 10 and reevaluate at 13.50 by the end of summer.
If there are any other you’d like me to take a look at, don’t hesitate to ask. Most of the 4th quarter numbers are in and except for a few cash flow reports, we can crunch numbers on most equities.
posted by J.J. Phineaus at 12:49 PM
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