BAGAKOAA May 9 2010, The party is over at least for a while
May 9 2010, The party is over at least for a while
Its about nine o’clock on Sunday night and the decision I made earlier today is already causing me a bit of frustration. I have come to the conclusion, contrary to my Friday post, the rally that commenced on February 19 has come to an end. Why did I change my mind? Well I had some friends ask me, well actually I volunteered, we actually I begged for the chance to kick the tires on some of their stock picks. In the course of researching these picks, I discovered that even when you average out the high frequency trader debacle from Thursday, this rally is right back where it started, but the momentum seems to be downward momentum. On top of that I had a heck of atime finding some good places to park my money. In researching their picks which I will share with you shortly, I don’t think they’ll mind and they do not frequent the blog so what the heck. Now the reason the decision to call this rally over is now bothering me is that it appears as though we are in for a huge opening in the market tomorrow. It appears as though the European Central Bank has scraped up about 192 Billion to buy assets and keep an eye on Eurodept. That should get a lot players in the pool tomorrow. In which case we could kick of another rally making this a reset. We shall see.
Before I get into their picks, some highlights from this weeks Barron’s. As usual, it was a great issue. Andrew Bary does it again with an article called Bear Scare. The article is fairly bullish and pimps a lot of stocks that are fair valued or even cheap. He highlights int’l stocks like HSBC, BP (I own), NSRGY, TOT as well as some domestic stocks on the cheap, ODP, X, GS, and CLF. I am not recommending these as I have not done the homework but will. Bary also shows some nice ETF plays worth taking a look at. It is a good read.
Jacqueline Doherty’s article about the mechanics of High Frequency Trading scheme goes a long way to explain what probably happened Thursday and what needs to be done to fix it. On Friday I mentioned the need for human intervention and her article talks about the need for some human centric circuit breakers for situation like last week. Another good article.
And the key article in this issue is the Barron’s 500, the 500 best investment for 2010. You might want to pick up a copy of the magazine this week just to have this list. I will be combing it looking for free cash flow gems and will let you know what I find.
Below are my notes to my friend on their picks I begged to review hope they help.
Thanks for letting me look at your picks. A few assumptions might be in order. You don’t own these and they would be new additions to your portfolio, you want to preserve your initial investment as risk adverse as possible, you want to earn at least 5% annually via a combination of dividends and or the appreciation of the value of the stock, and you want to keep the investment at least 12-18 months. I don’t know if that is correct, but that is assumptions I am looking at.
MRO, Marathon Oil is popular or was popular because they had a huge first quarter. Earning were up 62% over the same period last year. (But so were a lot of other companies). I did a lot of homework on a bunch of oil companies last November. MRO was on my short list. In November they were in the process of scaling down some properties (Equatorial Guinea and Permian Basin –Texas) and as a result I did not think they would be producing enough to keep revenues in place. I was right to some degree. If you go on Morningstar and look at the 1st qtr report, they production dropped from about 520,000 barrels a day to about 419,000 a day but the commodity, oil, rose enough to cover the drop in production. In the same quarterly report, they have two new developments coming on line. One is Bakken Shales in N Dakota and the other is in the Gulf. The N Dakota property should help with production but the Gulf Property might be put on hold because of the LA spill.
The executive team is well seasoned and Cazalot is a good CEO. Corporate perks and stock options are kept to a minimum at MRO. Under his leadership they have changed from strictly an oil producer to a more diversified exploration, driller, pumper, refiner and more recently nat gas developer. Cramer talks a lot about Cazalot and Cramer does his homework on executive teams.
Now let’s take a look at the financials because a good quarter a good investment does not make. If you have been following my blog I have been on a big kick for about 3 months about Shareholder yield. In order to provide shareholder yield improvement a company has to have good free cash flow and do three things with that free cash flow. They must issue dividends, they must buy back shares, they must pay down long term debt. Any consistent combination of those three things gets me all excited. So let see how MRO does in those categories. Like I said I almost bought this in November at 35.00 until I discovered the production issues. IBD, Investors Business Daily has the stock valued at 32, Morningstar has it valued at 38. I think it valued properly at 30. After the market moves this week MRP multiple or PE Ratio is cheap at 6.5.
Here is what I like, their long term debt is about 8 billion which is not an obscene amount for an industrial. Net income which is on the rebound is about 4 billion so they can pay off their long term debt out of income in two years if they chose. I like the stock. PS Look for them to up their dividend 3rd quarter this year.
Here is what I would do, and here is what I am going to do. A good entry point would be at about 28.50-29.00 a share. I am going to put a limit order in at 28.75 for Monday’s opening. If I catch it I would be happy. I am going to ease into the position by buying 20 % at a time and advise you to do the same. Assume you wanted to buy 100 shares, buy 20 on Monday with a limit order, buy 20 more on the next dip below 30 and keep doing that until you get your position. Immediately put a stop in at about 26.25 to protect your backside. Nice pick, I like it.
Below is a chart (SORRY CAN’T SHOW THE CHART ON THE BLOG AS IT IS COPYRIGHT PROTECTED. IF ANYONE WANT A COPY PLEASE SEND ME AN EMAIL.)that will show you some of what I am talking about concerning the buy. The stock is way below its 200 (the little orange line that I drew the arrow at) day average of about 29.90 which makes it a good buy, but it also means it fell through its support level. The next support level is below 29.00. That is where we want to get in. Also if you see a stock head below its relative strength value (the white line I drew at the bottom) it is a bearish sign. Note the 4 days of negative volume (circled in white) could lead to one or two more as that is the inertia of the trade.
HAS Hasbro. I own it . It is one of the few stocks I did not get stopped out of last week. I had made a profit on it in 09. Jack (my son) talked me into this in June at 24.39 eventually acquired XXX shares and I rode it to 32.39 and sold it in January. That was in the blog as I bragged about it a lot. I got in because of the Transformer franchise and the fundamentals were sexy. Let take a quick look now.
Free cash flow is up but so is their long term debt. They have a steady dividend and they just issued a stock buyback plan last quarter. This is a 60 dollar stock selling for 38. Its Return on Equity, ROE is great at 27%, but I think we could see a little adjustment on the down side this week. Here is what I would do. Sit tight and I will keep it on my watch list. This maybe a good entry point, but let’s be sure. Be patient. On the chart you see a nice 200 day average trend (the long sloping white line that I drew) and a resistance line in white just below the 38.97 where the stock finished on Friday, but the relative trend, the arrow near the bottom is and has been down for a few days. Also I circled the higher negative volume on the stock which combined with a downward trend could lead to trouble. Let’s sit tight on HAS for a day or so. I will say when its time to buy, I will be adding to my position as I have xxx shares already.
NAT, North American Tanker was a new stock for me. I have heard Cramer talk about it and I have heard Bloomberg talk about it, but I had to start from scratch on this one. When I do that, I like to figure out how they make money, so I went to their website to see what they tell the world about what they do. First off they are a Bermuda based company (RED FLAG). Bermuda, Cayman, Antigua, based companies do not get the detailed scrutinization of the SEC or the Inernational Finance Reporting Standards. It leaves a lot of wiggle room for tax adjustments and international moving of monies and debt. If you want to avoid risk, avoid questionable domicile registrations. But putting that aside, let’s see how they look.
I would suggest you go to http://www.nat.bm/reports/201/R/1389878/348031.pdf and see the 4th quarter 2009 earnings statement. Cramer was really pimping this in Dec when the stock was selling for about 30.50 because of the yield and 50 quarters of dividends. I have the subscription to street.com silver and went back to all of his teams pimping of the stock and what he never addresses is all of the secondary offerings NAT has made over the last 5 years. They have gone from 9 million shares outstanding to 42 million shares outstanding. The have very little debt. Some of that is due to a slowly increasing income, but it is also due that they sold gobs of stock and raised money to pay down debt (Most of the debt was used to buy 7 double haul tankers for the oil and nat gas market, including one they will take possession on in June and September, -Vega and Galaxy).
Please read the report, and keep this in your watch list. I will too. The Spill will bring a lot of uncertainty to all facets of the oil industry including the tanker industry. Sit tight, would be my recommendation.
WM, Waste Management. I have looked at this 20 times since the 1980s. If I have just bought a hundred shares each time I looked at them I’d be in good shape. It’s been at least a year so let me look again.
A year or so ago when I looked at WM and Republic, the two big boys, they were cheap (I won’t go into a long dissertation here, but as you know cheap has nothing to do with stock price. Barron’s had an article this weekend that Berkshire Hathaways-Buffets Company- is cheap at 115,000 dollars a share and is worth about 190,000 a share). I thought they were cheap for several reasons. Construction was way down, consumer consumption was way down, and consumer dining out was way down, the three biggest producers of waste.
So now let’s look at shareholder yield. Their free cash flow is OK at about 300 million. They pay a nice dividend and have instituted some good stock buybacks. They all are good for shareholder’s yield. Their only weak spot is long term debt, which I want to look at closer. My guess is that these are massive real estate deals involving land fills. I want to look at the last two annual reports to confirm this. If that is the case, it is normal business. The good news is they are fairly valued at 32. Morningstar has a value of 37 but I think they are using 2011 anticipated earning for that value. IBD has a value of 32.86 as does a couple of other sites.
So here is what we do. Let’s wait just a couple of days to see where the market momentum might take us. I will be watching the Australian and Asian Markets late tonight and will also check to see what London does at the opening (Midnight our time). If all three are positive, which I doubt because of the Greece thing and now the dysfunctional English Parliament due to the election on Thursday, I will be slowly buying into WM. You might also do some homework on IDSA, a wasted company but they specialize in electronic waste like phones computers and such. They look very hot for the next two years or so.
FNF, Fideltiy National. MMMM. Now I know why this has not come up on my radar they are actually an insurance company not a bank as I had thought. I would still classify them as a Financial. They specialize in title escrow services and insurance and in some states have liability insurance. So how do they make money. New home sales and refies create escrows and titles. FNF services both. New home sales are weak and will probably be so for a while, but at least they have stopped bleeding. Refies are flattening out now that rates are slowly creeping up. I would caution not to get too excited about FNF first quarter report as there was a one time 26 million dollar gain. More importantly FNF benefited from the new house stimulus plan which will probably not be extended for a third time now that there appears to be a recovery in the real estate market.
Their margins have improved over the last 18 months, but they did cut way back on personnel and capital expenditures. On the positive side, they did buy 4 competitors who were in bankruptcy which in theory gives the about 46% market share. Unfortunately, that market share is based upon 2008 numbers. It has come down to an estimated 38% (Barron’s and Morningstar).
I think it might be a bit early in the real estate recovery to consider this one. There is also a very mixed vote of support from shareholders about the executive suite. Foley, who is Chair is also Chairman of Fidelity Information services which is a company FNF sold off three years ago. Shareholder feel that FIS is a distraction, but Foley controls the board so don’t look for any changes soon. I’d pass on this one for at least another month or two.
It’s late so I will take a pass at the economic calendar this week. Ok I could not resist. Bank of England will leave rates alone on Monday. Look for the trade deficit to widen on Wednesday mostly due to the price of oil creeping up. (As the Euro and Pound go down). Wednesday the Treasury opens its check book for all to see. Last month it was in arrears by 65 billion. Look for a little improvement to about minus 42 billion. Thursday is jobless claims and estimates are flat. I think they will surprise to the upside. Look for a slightly positive retail sales report on Friday, say .4% which is better than the estimate. And on Friday look for big numbers in industrial production.
Now what to with that cash m m m mm