Monthly Archives: September 2009

End of September Market Commentary

Posted on September 30, 2009 by | Comments Off on End of September Market Commentary
Today's action was a close one for the market. The Transport index, at one point, broke below the previous high from late August. The Industrial Index is still well above the previous high so nothing to worry about there. If the Transports were to closed below the previous high, we would have the first part of the non-confirmation move under the Dow Theory.
Note: If you are not familiar with the Dow Theory, please read a free description from Dow Theory Letter or StockCharts, but I recommend reading Richard Russell's Letter.
Coppock Curve
At the end of September, the Coppock Curve or Index remained bullish. People who understand the Coppock Curve may wonder why I still keep track of the curve since the buy signal was given to us in May. My answer is that I don't want to this to be a false buying signal such as the one in 2001. The curve rose by 53.8 points, the highest since the buy signal was triggered.


Summary
We are cautiously bullish on the market. We are looking to purchase Northwest Natural Gas (NWN) and Cardinal Health (CAH). This will depend on what the overall market does when we start October.
Art

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Posted in Dow Theory Bull Market indication, Dow Theory Letters

Stock to Watch: Cardinal Health (CAH)

Posted on September 29, 2009 by | Comments Off on Stock to Watch: Cardinal Health (CAH)
Cardinal Health (CAH) is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies, and related products to a broad range of health care customers. The company completed a unit spin-off, CareFusion (CFN), on 9/1/09. Any investors with shares of CAH at the end of August received 0.5 shares of CFN. As a result, CAH price was adjusted down to $25.11 on 9/1/09 from $34.58 on the previous day. Two weeks later, Goldman Sachs upgraded CAH to a "buy" rating from "neutral" with a target price of $31. The stock closed at $27.29 on that day.
I pitched Cardinal Health to my readers several times prior to this writing. The first was a simple technical look at this stock on 6/11, 7/11, and 8/20. What I saw then was a stock with great fundamental developing a strong technical pattern called "triple bottom". Today I pitch you Cardinal Health once again with the different view. If you purchased this stock without selling them as I did, you would have done very well. As an added bonus, you would've gained some shares of CareFusion which rose 10.5% since it began trading. So let's dig into the number.
Cardinal Health came back on my radar on 9/18 watch list as because it appeared to be within 20% from the yearly low. A closer look at CAH shows a revealing valuation proposition. CAH is currently trading at 1.11x book value, 12x Forward P/E, 6x Cash, and 2.6% dividend yield. The undervaluation appeared to be because of the split but CFN is also trading at a discount value when you see it is trading at 0.88x book value. CAH is estimated to grow 8.4% (based on low estimate) and with yield of 2.6% that is a good 11% return. The great thing is the top line revenue is expected to stay relatively flat which mean they will be more efficient.
Using dividend as an insurance against price decline, investors will be rewarded with $0.70 per shares or 2.6% yearly. With low earning estimate of $1.89 for 2010, the payout ratio is 37%. Taking the previous year dividend increase rate, I project that CAH will raise payout to $0.74 for 2011. Low end estimate is projected at $2.05 which brings payout ratio down to 36%.
My model shows CAH should be at $40 range but this is based on previous year results including figures from CFN.  Surely I could be wrong and price fall, but as a value investor, I will not get many chances to buy a medical company at or near its book value. Given that all CAH competitors (ABC, MCK, and OMI) are trading at more than 2.3x book value, CAH is deeply discounted at 1.1. My estimate shows any 1.95x book to be low end of CAH and that would bring share price to $47. A 74% gain! That is just crazy. I will probably re-buy this stock in the days ahead.
Art

Disclosure: All figures are from Yahoo! Finance as of 9/29/09

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Posted in CAH, Cardinal Health, Individual Stock

Dividend Achiever Watch List

Posted on September 25, 2009 by | Comments Off on Dividend Achiever Watch List
The Dow gave back 153 points (-1.56%) this week. At the end of the week, my watch list has 9 companies compared to 8 from the previous week. Here are the companies on my watch list as of September 25, 2009.
Recent Articles

Stock Checkup: Nacco Industries Inc. (NC)

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Posted in Dividend Achiever Watch List

Stock to Watch: Abbott Laboratories (ABT)

Posted on September 24, 2009 by | Comments Off on Stock to Watch: Abbott Laboratories (ABT)
Abbott Laboratories (ABT) is a worldwide health care products provider. This $72.5 billion company, based on market capitalization, employs 69,000 employees worldwide. One of their well known products include FreeStyle, which is a blood glucose monitoring system. There are more products that ABT sell that I do not know but I am less concern about that. What struck me most about ABT is the valuation and its inability to move up during the most recent bull market run. This may be because upside momentum traders are trading name like Research In Motion (RIMM), Apple (AAPL), or Freeport McMoran (FCX). I'm just the opposite of a upside momentum trader, the less upside momentum, the easier it is for me to consider buying.
Fundamentals 

Currently, ABT is trading around $47, has a price-to-earnings (p/e) ratio of 14, sells at 10x cash flow, and has a dividend yield of 3.4%. ABT is less than 15% above its one year low. My model shows ABT is undervalued with a dividend yield of 3% or 13 p/e, 10x Cash flow or below $49. I weight more valuation on dividend yield and thus I believe the shares are relatively undervalued at this price. One of the most impressive things about this company is their ability to raise the dividend by 11% in April. The dividend payout went from $1.44 to $1.60.
Technicals 

The technicals are another aspect I pay strong attention to prior to buying any stock. I wrote about ABT's technical back on 6/8/09 and showed a possible reversal or head-and-shoulderpattern.

To follow up with what I am seeing today, I have drawn the chart below. Two strong pattern I see are the golden cross which is when short-term moving average crosses mid-term moving average and an ascending triangle.

Finally, in the chart below we have the altimeter for ABT. The altimeter really puts thing in perspective.

As we can see, ABT has a low range at 103 and a high range at 171. In two prior instances, I have circled the areas where ABT went up and then fell back down before rising to a new overvalued level. Currently, ABT is either in the middle of another temporary rise before falling a little bit further or we could be in a full scale move straight to overvaluation. In either case, if you bought now, according to the altimeter, you wouldn't be overpaying for this stock.

I believe Abbott is at the right valuation and urge you to start looking at it. Do your research before committing your capital.

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Posted in ABT

Stock Checkup: Nacco Industries Inc. (NC)

Posted on September 24, 2009 by | Comments Off on Stock Checkup: Nacco Industries Inc. (NC)
I wrote about Nacco Industries Inc. (NC) back on February 6, 2009 and March 13, 2009 when the stock was trading between the $20 and $40 price range. Please note that during the time of the write up, the market was going through a major breakdown. March 9, 2009 marked the low in the stock market.
My original article on NC was about its valuation. The company was trading at a ridiculously low valuation based on the book value (assets less liabilities) of $50. The stock was trading at $37.75 or 25% below book value. The dividend yield was 6%. At the time, my concern was the possibility of the dividend being cut and the significant amount of debt. My thesis was also on the prospects for inflation, which didn't really materialize.
On March 13, the company reported a loss of $51.69 per share. The headline might have scared some people but a closer look showed that things weren't so bad after all. Nacco was forced to take an impairment charge because of the extreme amount of the decline in the stock price. Here is a statement from the 4Q08 conference call.

Because the company’s stock price at year-end was significantly below the company’s book value of tangible assets and its book value of equity, accounting rules effectively required that the company take a non-cash write-off of goodwill and certain other intangible assets totaling $436 million or 431.6 million net of taxes of $4.1 million.

At one point, Nacco was trading a little more than a quarter of their book value ($14 stock price v. $50 book value.) For this reason, accounting rules forced Nacco to write down their asset value. Operations were fine and this change in the book value was just an accounting slight of hand.
So where are we?
Nacco is currently trading around $60 with a book value of $44.85 (1.38x book). The dividend for the last four quarters remained unchanged ($0.5175) and is currently yielding 3.4%. With negative earnings, they are paying their dividend ($4.3 million/qtr) through existing cash of $178.80 million. With large amount of debt and low earnings, we will have to see how Nacco navigate the coming hard times. I expect the dividend to remain unchanged or for the company to raise it by a small amount.
If you purchased this stock based on my writing, I would recommend taking your profits. The risk of the dividends being cut remains a factor at this time. On the upside, if you choose to hold this stock, a possibility of write-up does exist. Those non-cash write-down in fourth quarter could be a catalyst for a NC to pop back to $80 or $100. You have to decide for yourself if you are brave enough to hold on after such nice gains.
The charts below show where NC was and where it is.
I all my writing, I urged readers to consider the technical pattern. In this case, I recommended buying if, and when, NC broke above $41. I didn't act on my own advice because my attention was diverted to other companies. We will have to see where NC goes from here. For now, let's take the easy money.

Art

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Posted in Nacco Industries, NC

Dow Theory

Posted on September 24, 2009 by | Comments Off on Dow Theory
November 4, 2008 is proving to be a significant challenge for the stock market. I have mentioned many times the considerable amount of resistance that November 4th would have on the The Dow Industrials and Dow Transports. However, if viewed from the perspective of a composite index, an index that includes all the stocks in the Dow Industrials, Dow Transports and Dow Utility Indexes, we get a picture that is undeniably negative in the short term.

In the chart below, we see a one year diagram of the Dow Jones Composite index of 65 companies. The composite index briefly exceeded the November 4, 2008 high of 3407.33 by only 1.82 points on September 16, 2009. It is important to know that the high for the day of September 16, 2009 did not exceed the high for the day of November 4, 2008. The fact that the market cannot go above November 4, 2008 so far has much broader implications than just in the financial arena.

Since the September 16th peak the Dow Jones Composite Index has traced out an interesting pattern lower. This same pattern could not be seen if you looked at any one of the individual indexes alone. In the chart below, we can see where the next destination might be for the markets on the downside.

The following are the prospective downside targets for the Dow Jones Composite Index as represented in the inverted chart above:

  • 3293.86-A
  • 3185.02-B
  • 3151.72-C
  • 3125.28-D
  • 2812.05-E

Why have I inverted the chart of the index? Because there is uniform agreement among all great Dow Theorists that calling a peak is the most challenging thing to do. It is the nature of humans to be positive, otherwise most progress isn't possible. With the chart showing a bottom instead of a peak we can feel comfortable seeing the prospects for the future. In terms of Dow Theory, the inverted chart allows us to see a bear market from the same context that we can see a potential bull market.

Now, to play further mind games on you, I recommend that you look at the most recent trend of the Composite Index. After posting above the 3407.33 on September 16th at 3409.15, the market has exhibited two lower peaks on the September 18th and September 22nd. This indicates that a market breakdown to the 3293.86 level (point A) is a probability.
The declines that I have mentioned are in the context of a cyclical bull market within a larger secular bear market. Any of the declines that I have pointed out are all acceptable and constructive for a bull market. Soon after the declines are out of the way we can expect that the market will retest the old high before going higher (both Transports and Industrials) or confirming the previous declining trend.

If you have questions or thoughts then please email me at the following link.

Please revisit Dividend Inc. for editing and revisions to this post.

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Northwest Natural Gas (NWN) Altimeter

Posted on September 22, 2009 by | Comments Off on Northwest Natural Gas (NWN) Altimeter
Today's altimeter is on Northwest Natural Gas (NWN) and there is a lot to appreciate when we exam the pattern that has been established so far. NWN has increased its dividend for 53 years in a row. With such a history of dividend increases, I think NWN will do everything it can to avoid cutting or leaving the dividend the same. At the price of $42.29, NWN is within 16% of the 52-week low.

NWN has a challenging altimeter to decipher until you take a closer look. The pattern that has been established since 2000 until the present is an exact replication of the move from the period 1995 to 1997 (shown in the inset.) After the 1995 to 1997 moves we can see that the stock traded in a wide range until the ultimate low in 2000. From the 2000 low the stock traded in a narrow ascending range, offering several clear opportunities to buy and sell the stock.

Although I have taken artistic license on the interpretation of this altimeter, I do believe that the possibility may exist that NWN will not go materially below the March 2009 low. With the recent decline in natural gas prices, NWN offers a reasonable investment opportunity with a long history of dividend increases and a fair payout ratio. NWN is definitely worth investigating at the current levels. Let us hope that the stock price declines while you're doing the research on this company. Touc.

Please revisit Dividend Inc. for editing and revisions to this post.

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Posted in Altimeter, Edson Gould, Northwest Natural Gas, NWN

Weyco (WEYS) Altimeter

Posted on September 21, 2009 by | Comments Off on Weyco (WEYS) Altimeter
Below is a chart of the Weyco (WEYS) altimeter. As we can see, WEYS trades in a range between 275 on the high end and just above 150 on the low end of the range. Given WEYS balance sheet and the products that it produces (Florsheim shoes) this company is worth investigating.

One consideration is the fact that WEYS has tremendously low trading volume. Additionally, this stock has only increased its dividend 10 years in a row which means that we can't be sure that the company can weather an true economic cycle. However, as mentioned before, this company has no debt and my be worth a second look. Touc.

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Posted in Altimeter, Edson Gould, Weyco, WEYS

Bank of Hawaii (BOH) Altimeter

Posted on September 21, 2009 by | 1 comment
The chart below is a representation of the Bank of Hawaii (BOH) altimeter. BOH has increased its dividend every year for 31 years in a row. As we can see, BOH's altimeter has been in a rising trend for quite some time.That trend was recently broken during the recent banking crisis.
The channel that BOH has managed to fluctuate within suggests that the stock is overvalued at the high end and undervalued at the low end. The period of extreme overvaluation is reflected in 2003 and started to move in a declining trend to undervaluation when BOH increased the dividend from $0.19 to $0.30.

There are two periods of extreme undervaluation in the altimeter. The first level of extreme undervaluation hit bottom in October 2000. The second period was most recently in March of this year. If the stock were to go back to the "historical" low end of the range, BOH would be priced at $54 a share. Although we do not have an extensive history on the periods of extreme undervaluation, it could be inferred that, based on the altimeter, an investment in BOH while not risk free, could be considered low risk.

At least one hitch to my assessment on BOH, in terms of the altimeter, is the fact that the low in March 2009, around the 60 level, could be part of a normal low range that is being established for the stock. If the 60 level is the low end of a new long-term range, my best guess is that the 110 level is the upper end of the range. At the 110 level, BOH stock price would be $49.50.

Only time will tell whether the escalating failure of banks is going to spread even further. However, BOH has managed to fare better than most banks of a similar size. As a further indication of BOH's strength, the dividend increase in November 2008 suggests that management believes the company will survive through the present banking liquidation cycle. Regardless of BOH's strength, I wouldn't be surprised if BOH does not increase the dividend in November. However, if a cut in the dividend takes place then I would be more cautious on the company and the stock. Touc.

related articles:


Please revisit Dividend Inc. for editing and revisions to this post.

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Posted in Altimeter, Bank of Hawaii, BOH, Edson Gould

Wal-Mart (WMT) Altimeter

Posted on September 21, 2009 by | Comments Off on Wal-Mart (WMT) Altimeter
Below is a chart of Wal-Mart's altimeter. As mentioned before, the purpose of the altimeter, created by Edson Gould, is to determine the relative value of a company based on the quarterly dividend payment and the daily price of the stock or index.

Based on the above chart, we can see that WMT is traditionally overvalued between 1100 and 1200 level. Additionally, when WMT falls to the 550 level the company is considered undervalued. What should be noticed is the double bottom that took place in the 1995 to 1997 period. After that time, WMT took off like a rocket.

In the most recent period from 2007 to 2009, we can see that WMT is forming a similar double bottom. From this indication, we should look out for the stock to rise significantly over the next four years. The expected rise in WMT should be in spite of all the economic forecasts of a continued decline in the economy.

The chart below is my own interpretation of WMT if the company pursued a less aggressive policy of increasing the dividend at such a high rate.

In the first chart, you can see that after 2004 WMT fell to an extreme level of undervaluation. The reason this occur is because WMT continued in increase the dividend at a high rate even though the company didn't have the earnings to support such increases. With diminished earnings, WMT issued more shares to raise capital to fund the dividend payments at the expense of per share earnings.

My model continues to increase the dividend every year but at a rate of 50% less than what WMT did from the period of 2004 to the present. This lowers the number of shares that need to be issued. In fact, my model would not have required the issuance of new shares to cover the dividend.

At the moment, we could consider WMT undervalued. However, keep in mind the fact that the continued issuance of shares in order to keep the dividend history intact undermines future earnings growth.

related article:

Please revisit Dividend Inc. for editing and revisions to this post.

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Posted in Altimeter, Edson Gould, Wal-Mart, WMT

Altria (MO) Altimeter

Posted on September 18, 2009 by | Comments Off on Altria (MO) Altimeter
The following are Altria (MO) charts using Edson Gould's Altimeter indicator for determining if the stock is undervalued or overvalued.

In the first chart we see that MO is considered overvalued when the indicator is at 16 and above and is undervalued when the indicator is at 7 or below.

The chart below is also the altimeter for MO however, it reflects the valuation if unadjusted for the spin-off of Kraft (KFT) and Philip Morris International (PM).

Hopefully these charts give a better understanding of when might be a good time to invest in MO. As you can tell from the first chart, MO is presently considered overvalued. Touc.

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Posted in Altria, MO, overvalued, undervalued

Dividend Achiever Watch List

Posted on September 18, 2009 by | Comments Off on Dividend Achiever Watch List
The Dow continued to move higher this week and finished the week up 222.12 points (2.31%) higher.  At the end of the week, my watch list has 8 companies compared to 9 from the previous week. Here are the companies on my watch list as of September 18, 2009.

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Inflation and Equity Investors

Posted on September 15, 2009 by | 2 comments
Back on 8/24/09, I wrote about Warren Buffett and his view on equity investment during inflationary time. Today write up offers an extended commentary and example of the situation.

Why Moderate Inflation is Beneficial
Let's assume you are an owner of a basketball team. You've just picked up a great young player and decided to sign him for a 5 years contract for $5 million per year (cost). You have a fixed cost of $25 million. It's now time to sell tickets (revenue). You do not fixed your ticket price. Every year, you raise them by inflation rate. As a result, your revenue increase at a faster pace than your cost which is fixed!
I understand that not all business is set up like a sports team, but most business operate using fixed cost model and thus the Fed try to target a moderate inflation rate.

Inflation and the Dow
What happen when stock price stay stagnant or trade in a range for years while economy slowly improve? Value are being created! Price stagnant while earning begin slowly improve. Market now become cheaper every year as earning slowly begin to improve because of moderate inflation. At some point, earning exceed a certain threshold creating an undervalued market which attracts buyers. This creates the beginning of bull market. The chart below shows the Dow plot against CPI.

You can see that the Dow did nothing until it broke to the upside in 1982.
Another illustration is when I compare the Dow to the GDP. Think of the Dow as the Price (P) then using GDP as the earning (E) of our entire economy. What you have is a P/E of our entire economy. The chart below shows that the Dow fluctuated while GDP rose slowly.

As are result, this is why our government wants inflation. However, the government cannot control the stock market. The market will move up with the right value is established. Most notable range is from 4%-6% dividend yield on the Dow. During the Great Depression, yield reached 10%. The Dow reached 4% yield during the March low and is now sitting around 3% yield.

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Posted in inflation

AngloGold (AU) and Other SA Stocks Offer No Margin of Safety

Posted on September 14, 2009 by | 1 comment

If we're on the brink of a breakout to gold at $9,000 an ounce as UBS claims (source: Financial Times, requires registration) then let the party begin. By my own calculations, after halving my worst case scenario, gold could go as high as $9,414.16. Yeah, I know, make an outrageous claim and cement your fame. However, I have a logical explanation for my belief that a run up in gold is possible.

Confidence in my math on how gold could plausibly get to $9,000 is actually less important than the wait that we're in for to get to such a level. After all, the rise from $35 an ounce in 1969 to $800 an ounce in 1980 took a lot of twists and turns. I personally believe that we'd see a collapse in the price of gold and other related commodities before we move to the insane levels that I mentioned earlier.

If you compare the yields on gold stocks today to the 1970's you'd think we were on different planets. As an example, Barrick Gold (ABX), a "domestic" producer, has a dividend yield of 1% while AngloGold Ashanti (AU) has a paltry yield of 0.40%. DRDGOLD (DROOY), the old Durban Deep, has the massive yield of 1.4%. In the list of gold stock provided by Richard Russell, only 3 stocks sported no dividend. None of the publicly traded South African gold producers have dividend yields that provide a margin of safety.

In an earlier posting, I scoffed at the notion of gold stocks paying a dividend just to get investors into the market. Despite that concern, it doesn't stop me from believing that if we are really in a long term bull market in commodities (inflationary period) then it would certainly be nice to get compensate for the wait.

Keep your mind open to the prospect that even if some gold stocks are paying a dividend just to get speculators in, there might be a chance that the current run up in gold is a repeat of the early stages of a genuine gold bull market. If you happen to find gold stocks with such outrageous yields then let me know, I'm always interested (only those with earnings please.) Touc.

*See my note on commodities in the comment section of my September 12, 2009 posting.

 

Please revisit Dividend Inc. for editing and revisions to this post.

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Posted in gold, Richard Russell

Warren Buffett’s View on Inflation

Posted on September 13, 2009 by | Comments Off on Warren Buffett’s View on Inflation
I read a lot on a daily basis. Nothing gets me more excited than to see a new editorial by great investors such as Bill Gross of PIMCO and Warren Buffett of Berkshire Hathaway. I've learn a great deal from these investors on many subjects but nothing confuse me more than the subject of deflation and inflation. We are hearing these terms on a regular basis because of the recent turn of events in our economy. Misunderstand the two and how to invest during such time can be costly.

I turned to one of the greatest investor of our time, Warren Buffett, for advice on how to invest during inflationary period. What I found confused me rather than enlightened me. Back in 1977, Buffett wrote an article titled "How Inflation Swindles the Equity Investor" (Fortune, May, 1977) which implicitly suggest that investors stay away from stock (equity) during inflationary time. The quote below was taken from the context of that article.

It is no longer a secret that stocks, like bonds, do poorly in an inflationary environment. We have been in such an environment for most of the past decade, and it has indeed been a time of troubles for stocks. But the reasons for the stock market's problems in this period are still imperfectly understood.

He stated that the problem is that the return on capital hasn't risen with inflation and seems to be stuck at 12 percents. He wasn't too excited about stock during inflation. Fast forward to our current bear market. On October 16, 2008, Buffett wrote an op-ed piece in NY Times titled "Buy American. I Am." The except below was taken from the context of that article.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later.

Interesting! It appears that Buffett now favors stocks as a hedge against inflation.
My personal view is that any tangible assets, whether it be gold, silver, corn, sugar, or beans, will do just fine during inflation. Equity holder also is protected by having exposure to the underlying assets that company hold. You can find this under the balance sheet in current assets or inventory.

I had an investment in Heinz not long ago and wrote that "We were told to have gold in our portfolio for inflation hedge. The good news is that can of beans will do just that." Things were probably different in 1977 or maybe I misinterpret his article, but any investors who took his advice without educating himself may have missed the greatest bull run from 1982 to 2000. Please see the chart below. Related article.

The market will do what you want it to do, but never when.
My next article title "Inflation and Equity Investors" will have more detail on why inflation is good for equity investors. -Art

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