The before and after should make this observation very clear: Continue reading
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Category Archives: investment observation
Kellogg (K) Observation
Kellogg (K) stock peaked at $72 in July 2020. Since then, the stock has fallen to $57 (-20%) in 2021. The underperformance put the stock on our radar in January 2021 (yellow arrow). Stock has been trading in range since and appears to be breaking out of that range today. Such action is bullish to a technician or chart readers. Fundamentally, the stock is undervalued based on our 10-year target. The two forces, fundamental & technical, appears to be in alignment with one another. It will be good to revisit Kellogg after 6 months or a year to review how this situation turn out.
Investment Observations: ABM Industries (ABM)
ABM Industries is a leading provider of facility services in the United States. They provide janitorial, parking, and engineering services for commercial, industrial, institutional, governmental, and retail client facilities. The company was established in 1909. This mid cap company ($2.0 Billion) first appeared on our watch list back in March this year. The stock was trading at $35 then and lost 12% since.
Posted in ABM, Coppock Curve, investment observation, investment strategy, technical review, Uncategorized
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Carbo Ceramics is Worth Considering Now
At the time that Carbo Ceramics (CRR) was trading at $82.79, we said the following in our May 28, 2012 article (found here):
“Based on the current dividend for Carbo Ceramics, we have anticipated that the stock price will decline to $62.40 before the next buy indication is triggered.”
Interestingly, Carbo Ceramics fell as low as $62.41 on a closing basis on October 10, 2012. Although this is one penny above the prior $62.40 buy indication, the recent increase of the dividend from $0.24 to $0.27 put the stock well within the buy range, as shown below. Our estimate of $62.40 was based on Edson Gould’s Altimeter which has given reasonable buy and sell recommendations in the past.
As indicated in the chart, there are points where Carbo Ceramics has fallen well below the normal buy range. On two prior occasions, Carbo Ceramics fell as low as the equivalent of today’s $43.74 and $42.12. We are not putting it past this company to accomplish a similar decline this time around. However, this is why we recommend the purchase of this stock in two phases.
When Edson Gould’s Speed Resistance Lines [SRL] are applied to Carbo Ceramics we can see that the stock has taken back a majority of the gains that have accrued from the 2008 low to the most recent peak. The SRL indicates that the extreme downside target of $60.08 is about to be reached shortly. However, there does exist the possibility of going back to point where CRR established its critical support at $26.51.
According to Dow Theory, Carbo Ceramics has the following downside targets:
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$60.29
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$43.40
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$26.51
As indicated in our portfolio (found here), we have already completed the first of the two purchases for CRR and are waiting for either the price to rise to the sell range or decline to the $43.74 level before implementing the next purchase. The sell range currently stands at $96.
Note: This stock is worth considering only with the appropriate amount of due diligence by confirming the fundamental attributes and proper consideration of the downside risk as indicated above.
Nasdaq 100 Watch List: October 5, 2012
Below are the Nasdaq 100 companies that are within 10% of their respective 52-week lows. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and rigorous due diligence.
| Symbol | Name | Price | P/E | EPS | Yield | P/B | % from low |
| INTC | Intel Corporation | 22.68 | 9.63 | 2.36 | 4 | 2.31 | 1.84% |
| EXPD | Expeditors International of Washington | 35.55 | 21.16 | 1.68 | 1.6 | 3.65 | 2.07% |
| ATVI | Activision Blizzard | 11.3 | 16.1 | 0.7 | 1.6 | 1.2 | 2.91% |
| DELL | Dell Inc. | 9.66 | 5.75 | 1.68 | 3.4 | 1.68 | 3.32% |
| MRVL | Marvell Technology Group | 9.25 | 11.84 | 0.78 | 2.6 | 1.09 | 3.35% |
| LRCX | Lam Research Corporation | 32.26 | 23.9 | 1.35 | 0 | 1.16 | 3.50% |
| WCRX | Warner Chilcott plc | 13.3 | 11.67 | 1.14 | 0 | 15.18 | 5.35% |
| CHKP | Check Point Software Technologies | 46.72 | 16.86 | 2.77 | 0 | 2.92 | 8.20% |
| BBBY | Bed Bath & Beyond Inc. | 61.6 | 14.31 | 4.3 | 0 | 3.57 | 8.60% |
| TEVA | Teva Pharmaceutical Industries | 40.12 | 11.27 | 3.56 | 2.1 | 1.55 | 8.79% |
| MCHP | Microchip Technology Inc. | 33.25 | 21.47 | 1.55 | 4.2 | 3.18 | 9.99% |
Watch List Summary
As we’ve indicated in our most recent Transaction Alert, we bought Intel (INTC). Below is the Altimeter for Intel since 2006.
According to the Altimeter, Intel at it’s worst, a la the 2009 low, has a downside target of $19.35. It is very important to consider the 2009 low because according to Charles H. Dow:
“…the very foundation of investments in industrials should be knowledge of what these companies earned, say in 1893 to 1896, making, perhaps, reasonable allowances for economies under consolidation [1].”
It is important to note that the period of 1893 to 1896 had declines in the market as much as -40%. What is useful about Dow’s view on earnings is that they should be judged in comparison to the prior bear market lows for the company in question. In the instance of a company that experienced a low in earnings in a bear market or during a recessionary period, essentially Dow is advocating the use of the worst-case scenario.
According to Value Line Investment Survey, 2009 was the most recent low in earnings and reasonably reflects where we should expect the price of Intel to revert to under a worse case scenario. Although Intel fell as low as $12 a share in 2009, provided the company can afford to continue dividend increases, we believe additional purchases should take place at $16.
To reiterate, the fundamental reason for our purchase of Intel are as follows:
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Trading at 9x earnings
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At $22.47, the stock is within 3% of the one year low
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The stock has a 4% dividend yield, the ex-dividend date is approximately November 2, 2012
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INTC has increased the dividend steadily since 1992, the annual rate of increase has averaged 31% since 2003
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Trading at 5.7x cash flow; Value Line indicates that fair value is at 10x cash flow, nearly double the current price
Another stock to watch for is Microchip Technology (MCHP). This Altimeter for the stock is below:
In the chart are the upside and downside levels to look out for. As an example, the next upside target is $35.80 while the next downside target is $30.54.
Of particular interest about MCHP is the fact that it appeared on our March 20, 2010 watch list as having the highest yield in the Nasdaq 100 index. That high relative yield translated into a +35% gain one year later for a total return of +39.80%. As a way to manage risk, we may later buy Microchip Technology (MCHP) instead of Intel for our second 15% purchase for our portfolio.
Watch List Performance Review
In our ongoing review of the Nasdaq 100 Watch List, we have taken the top five stocks on our list from our October 7, 2011 list and have checked their performance one year later. The top five companies on that list can be seen in the table below.
| Symbol | Name | 10/7/2011 | 10/5/2012 | % change |
| Illumina, Inc. | 27.18 | 51.79 | 90.54% | |
| QGEN | Qiagen N.V. | 12.65 | 19.2 | 51.78% |
| BMC | BMC Software, Inc. | 36.98 | 43.34 | 17.20% |
| LIFE | Life Technologies Corp. | 36.82 | 50.29 | 36.58% |
| TEVA | Teva Pharmaceutical | 36.75 | 40.12 | 9.17% |
| Average gain: | 41.06% | |||
| NDX | Nasdaq 100 | 2202.76 | 2811.94 | 27.66% |
As reflected in the chart and table above, the top five stocks on our list achieved substantial gains on the average. Only Teva Pharmaceuticals (TEVA) was unable to keep up the pace. Six months after the watch list, all of the stocks were able to achieve our minimum annual gain of +10%.
Citation:
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George W. Bishop Jr., Charles H. Dow: Economist, Dow-Jones & Company (Princeton, 1967), page 11.
Investment Observation: Markel (MKL) at $433.72
According to Value Line Investment Survey, “Markel Corp. markets and underwrites specialty insurance products and programs to a variety of niche markets.” When reviewing the Value Line tear sheet on Markel, there are a couple of items that make the stock very compelling.
First, Value Line indicates that the company has a fair value of 1.5 times the book value. Using the most conservative full year data from 2011 provided by Value Line, Markel has a fair value of $528.15 which is a 20% premium above the current market price of $439.77. Value Line estimates that by 2017, Markel would have a book value of $447. This implies a fair value of $670.50. Assuming that Markel only achieves half of the projected growth in the book value, the fair value would be at $599. Considering that Markel typically trades above fair value, the prospects are reasonably favorable.
Next, Markel has increased their book value from $49.16 in 1996 to $352.10 in 2011. With Markel having the ability to consistently increase their book value at double digit rates is phenomenal in our view. As an added benefit, Markel has only increased the number of shares outstanding from 5.46 million to 9.62 million in the period from 1996 to 2011. This suggests that the growth of the company has not come at the expense of the shareholders.
We have constructed an Altimeter for Markel (MKL) that is based on a hypothetical dividend assuming an average payout from earnings of 13% and a compounded annual growth rate (CAGR) of the dividend at 9.9%.
Although hypothetical, our assumptions of a dividend policy is the most conservative possible. We believe that, if compelled, Markel could easily maintain such a dividend policy while increasing the book value. Whenever, the Altimeter is above 180, the stock should be sold and whenever it is below 107, MKL should be bought. Below is the performance of the stock price when it falls within the parameters previously noted.
| Date | Price | Altimeter | buy/sell | % change |
| 2/23/1996 | 87 | 106 | buy | 106.61% |
| 6/8/1998 | 179.75 | 182 | sell | -31.99% |
| 3/6/2000 | 122.25 | 103 | buy | 157.67% |
| 10/5/2004 | 315 | 181 | sell | -22.14% |
| 11/20/2008 | 245.25 | 97 | buy | ???????? |
An alternative strategy, for investors with a long-term perspective, could be to accumulate the shares of Markel at or below 107 on the Altimeter (currently $395.90) without consideration of selling. We feel this would be a prudent stance since the declines experienced by the stock at the “sell” indications are not meaningful enough to warrant actually selling the stock by the time the next “buy” indication is given.
Finally, our concern for the worst case scenario is always in the back of our mind. For this reason, we assume that the lows of 2009 will be revisited and ask ourselves are we able to handle such a situation. If based on the Altimeter low of 2009, Markel could decline as low as $281.20. Our hope is that such a low is not visited again. However, with the aid of Dow Theory, we are prepared to accumulate additional shares when, and if, such an opportunity arises.
Posted in Altimeter, Edson Gould, investment observation, Markel, MKL
Investment Observation: Eli Lilly (LLY) at $35.18
Today's investment Observation is on Eli Lilly and Co. (LLY). According to Morningstar.com, "Eli Lilly is a pharmaceutical company with a focus on neuroscience, endocrinology, oncology, and cardiovascular therapeutic areas. Lilly's key products include antipsychotic Zyprexa, Cymbalta for depression and fibromyalgia, Gemzar and Alimta for cancer, Evista and Forteo for osteoporosis, Humalog, Humulin, and Byetta for diabetes, and Cialis for erectile dysfunction."
Prior to 2010, Eli Lilly (LLY) had a 41 year history of dividend increases. The normal dividend increase that takes place in February did not occur this year. However, the prospect exists that LLY may actually increase the dividend in the 2nd weeks of February of next year. The fact that there wasn't an increase does not diminish our expectations for LLY. In fact, keeping the dividend the same or reducing it reflects management's acute awareness to preserve capital for future tough times ahead. The current annual dividend of $1.96 provides for a substantial dividend yield of 5.60% at the current price.
In order to put the current stock price into perspective, we like to see how the dividend payments compare to the stock price on a relative basis. Below is Edson Gould's Altimeter which reflects the stock price relative to the dividend that has been paid since 1982.
The altimeter at the high points reflects that the stock price is overvalued compared to the dividend payment while the low points reflect the opposite. At the current level, Eli Lilly (LLY) is at historic low levels in terms of the stock price compared to the actual dividend paid.
When looking at Eli Lilly's price movement (adjusted for dividends), we intuitively see that there is a pattern that has been repeated and, more recently, overextended. The chart below shows two different periods (January 4, 1982 to September 6, 1994) and (September 4, 1990 to December 16, 2010).
The chart above demonstrates how Eli Lilly (LLY) managed to replicate much of the rise in the respective periods. Only the decline has been different. Whereas the decline from January 1992 at $12.52 (adjusted price) ended relatively quickly before going higher, the decline from August 2000 at $78.75 (adjusted price) has managed to get dragged out much longer. However, regardless of the amount of time that it has taken, both periods have settled at the altimeter levels of undervaluation of between 50 and 100 as was done in the periods of 1984 and 1994 before taking off to the races.
When viewed from the perspective of Value Line Investment Survey's fair value indicator, we arrive at an unbelievable figure of $58.85. This price is 67% above the current level of $35.18. Again, we only consider the fair value level as a marker for when long term investors, after having bought at the current price, should sell. Although we favor the consistency and accuracy of the Value Line fair value estimate, we must defer to the more conservative estimates that we can find. According to Morningstar.com, Eli Lilly (LLY) has a fair value of $42 while Dow Theory has a fair value of $46. We'll settle for the Dow Theory figure since it is close to Morningstar's estimate but well below the Value Line estimate. This leaves us with 30% upside potential for this stock.
We'd like to speak of the return on assets (ROA) and return on equity (ROE) for Eli Lilly (LLY) however they can't be used as a primary motivation for buying this company. We'll just state that according to MergentOnline, Eli Lilly registered ROA of 15.28% and ROE of 53.25% in 2009. For the year 2008, ROA and ROE was severely in the negative due, in part, by excessive financial leverage. 2008 and 1997 were the only years that negative ROA and ROE was indicated since 1983.
In closing, we have saved the most important, and best, part for last. This is has to do with what the downside risks are for the stock price. According to Dow Theory, the following are the downside targets:
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$29.22
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$20.44
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$11.66
Anyone considering investing in Eli Lilly (LLY) should be willing to accept the possibility of the stock price falling to any of the indicated level. If the prospect of falling to $11.66, or 67%, seems far fetched then talk to the share holders who bought for the long term near $100 in 2000. They are literally sitting on a price decline of 60% (excluding dividends) from the previous purchase.
Our only other concern with this stock is if it somehow gets "Mercked." Merck (MRK) was found to have passed off marketing material as clinical studies that indicated that their drug Vioxx was safe at the same time that people were dying from the very same treatment. We can only hope that such a scenario does not darken the door of Eli Lilly in the coming years.
Good luck on your follow-up research on Eli Lilly. We believe the venture will be worth the effort.
Investment Observation: ConAgra (CAG) at $21.48
Today’s Investment Observation is on ConAgra (CAG). According to Yahoo!Finance, “ConAgra Foods, Inc. operates as a food company in North America and internationally. It operates in two segments, Consumer Foods and Commercial Foods. The Consumer Foods segment provides branded, private label, and customized food products, which are sold in various retail and foodservice channels. The Commercial Foods segment provides commercially branded foods and ingredients principally to foodservice, food manufacturing, and industrial customers.”
After a cut in 2006, ConAgra (CAG) has had a steady, albeit irregular, increase of the dividend. Prior to 2006, ConAgra had a 28-year history of consecutive dividend increases according to Mergent’s Handbookof Dividend Achievers. As recently as September 21, 2010, ConAgra announced a 15% increase of the dividend from the previous year.
In our analysis of ConAgra (CAG), we’ll first address the technical pattern of Edson Gould’s Altimeter. The altimeter suggests to us that ConAgra is reasonably undervalued in relation to the dividend. The green horizontal line in the chart below is the indicated level where ConAgra would normally be considered undervalued at $21.40 per share. On the opposite end at the overvalued range, ConAgra would trade at approximately $29.72 as indicated by the red horizontal line. The extremes of the under and over valuation are indicated in green and red text, respectively. We adjusted the altimeter to reflect the cut in dividend of 2006. This means that the percentage decrease of the dividend was applied to periods before 2006 to obtain a representative perspective on the altimeter.
According to Value Line Investment Survey dated October 29, 2010, ConAgra (CAG) is expected be around the $40 range by 2014. We opted to err on the side of caution on this matter and have taken the view that, from the current price of $21.48, we could reasonably expect that ConAgra could rise to $30 or 39.7% over the next 3-4 years. However, our investment strategy requires that if we get a 10% gain in less than a year in a tax-deferred account then we’ll consider the next best investment alternative if we can identify one at that time.
Value Line also indicated that ConAgra is fairly valued at 12 times cash flow. Using the full year cash flow figure for 2010, ConAgra should return to a fair value of $30. Again, this is far above the current price by 39.7% and in perfect alignment with Gould’s Altimeter; which shows that ConAgra’s range established since 1999 is still intact.
Dow Theory ascribes a fair value for ConAgra of $20.04 based on the peak of March 23, 2010 and the trough on December 4, 2008. The Dow Theory downside targets from the current level are:
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$20.04
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$17.96
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$13.80
The downside risk, in our opinion, is 36% below the current price of $21.48. We believe that anyone considering ConAgra should carefully assess their willingness to accept such downside risk.
In a recent posting (link here), we submitted that for the “buy-and-hold” investor, a company like ConAgra would outperform, in the long run, the performance of gold and silver companies like Newmont Mining (NEM) and Coeur D’Alene (CDE); later changed to Hecla Mining (HL) for its continuous price history through the 1970s. We intentionally used the period of the gold and silver bull market to compare ConAgra to the stocks mentioned. We included the silver stocks because we have frequently written that in the past, as is the case presently, silver outperforms gold.
Critics argued that Coeur D’Alene wasn’t exactly the best-run company around. Others said that the timeframe of 1970 to 1983 was biased against precious metal stocks since the peak in gold and silver was in 1980. To answer these critics, we only used Newmont Mining at its lowest price in the period from 1970 to 1980 which occurred on December 13, 1974. We then compared the performance of ConAgra to Newmont until November 21, 1980. The chart below, courtesy of Morningstar.com, is even more astounding than the one initially created. As the chart below demonstrates, instead of outperforming Newmont by 7x, ConAgra beat Newmont by almost 17x.
The last critic standing on our comparison of Newmont Mining, Coeur D’Alene
Investment Observation: West Pharmaceutical Services (WST) at $36
Our investment observation today is on West Pharmaceutical Services (WST). On October 4, 2010, WST announced that it would increase the dividend payment for the 18th consecutive year by 6.25%. The dividend will be paid to shareholders of record on October 20, 2010.
According to Value Line Investment Survey, “West Pharmaceutical Services manufactures systems and component parts (stoppers, seals, syringe components) used in the delivery of injectible drugs. Also supplies packaging and delivery system components to food processors and makers of personal care products.”
With the stock of West Pharmaceutical Services (WST) trading around the $36.00 range, Value Line has estimated that the fair value is $42.60. This means that there exists 18.33% of price appreciation that has gone unrecognized so far. Value Line also indicates that WST is conservatively expected to increase to the $50 level with an annualized total return of 11% by 2013.
Although Value Line has a favorable fair value target on West Pharmaceutical Services (WST), we must take the most conservative fair value target that we can find to build into our expectations. The best alternative to arriving at fair value is with Dow’s Theory.
According to Dow Theory, West Pharmaceutical Services (WST) is fairly valued at $39.90. From the current price of $36.00, WST could easily rise 10.83% within the next six months. However, any price above the fair value mark should be considered as exceptional. According to Dow Theory, West Pharmaceutical Services (WST) has the following targets:
- $51.67
- $43.82
- $39.90 (fair value)
- $35.97
- $28.12
WST has been on our watch list for so long that it was sufficiently overlooked until we pulled up Edison Gould’s Altimeter and realized the technical support/resistance exhibited at the $29.28 level was too pronounced to be ignored. In the chart below, you will notice that the altimeter support level is in perfect alignment with the resistance level set from 1994 to 2004 (blue line).
Our best guess of the upside and downside targets based on the altimeter are as follows:
| Upside Targets | Downside Targets | ||||
| $39.04 | $28.96 | ||||
| $44.16 | $21.45 | ||||
| $57.12 | $12.00 | ||||
| $60.96 | |||||
The prospect that West Pharmaceutical Services (WST) could fall below the altimeter support level of $28.96 is not out of the question. Anyone interested in investing in this stock should put heavy emphasis on the downside targets as a means to measure personal risk tolerance. In our view, the price action at this stage reflects the market's assessment on whether or not this company can operate as a going concern. As investors, we should only seek to acquire WST at a price below fair value with the expectation that the stock should be sold at or above fair value. Any purchases of a stock above fair value should be considered speculation at best.
Investment Observation: Northern Trust (NTRS) at $47.26
Today’s Investment Observation is Northern Trust (NTRS). Although Northern Trust has not increased the dividend in the last couple of years, the company has an exceptional dividend history given the turmoil that has transpired in the financial services industry for the last 3 years. According to Value Line Investment Survey, “Northern Trust is a leading provider of investment management, asset and fund administration, fiduciary and banking solutions for institutions and affluent individuals worldwide.”
Based on Value Line’s June 18, 2010 issue, Northern Trust (NTRS) has a fair value of $63. The stock has had an increase in the number of shares outstanding by 7% since 1999. However, the book value for NTRS has increased by slightly less than 3 times (286%) since 1999. Although Value Line has NTRS with a timeliness rating at the lowest end of the scale, NTRS is expected to increase in value to $70 by 2013, which is an annualized total return of 11%.
According to Dow Theory, Northern Trust (NTRS) has the following downside targets:
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$44.48
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$38.84
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$33.20
At the current price, the worst-case scenario of NTRS falling to $33.20 is 27.17%. In our investment strategy, declines of 25% would initiate the second of 3 purchases for either short-term speculators or long-term investors. The upside targets for this stock are:
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$58.58 (fair value)
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$70.71
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$83.95
Edson Gould’s Altimeter indicates that while Northern Trust (NTRS) isn’t at the all time low, it may be forming a base in the stock’s price. At the current price of $41.47, NTRS hit a critical base (blue line) in March 2003 and December 2008. The short-term upside target is $62 as represented by the blue circle. The $62 mark coincides with Value Line’s $63 fair value price and Dow Theory’s fair value of $58.58. The most optimistic outlook for NTRS is for the stock price to rise to $83.85 as indicated by the green circle.
As a side bar, if NTRS were to rise as high as the September 2000 peak the stock would be priced at $156. However, we cannot, at this time, take the position that NTRS would rise to such a level of overvaluation unless and until the stock exceeds the $83.85 level.
Our worst-case scenario is that NTRS declines to the $28 level as represented by the red circle. We are adamantly against investors ruling out the prospect of losing at least 50% of their position. For this reason, NTRS falling to $28 is just as real in our minds as the prospect of rising to the $62 level.
As a potential sign of things to come, it was announced on Tuesday August 31, 2010 that Northern Trust was granted a Beijing branch license. Although the prospects of China have been a topic of much debate since Columbus tried to do an end run around Marco Polo’s silk road, we believe that Northern Trust is methodically positioning itself to reap rewards regardless of the rumors of China’s opportunities.
Investment Observation: Transatlantic Holdings (TRH) at $48.52
Today’s Investment Observation is Transatlantic Holdings (TRH). According to Yahoo!Finance, “Transatlantic Holdings, Inc., through its subsidiaries, offers reinsurance capacity for a range of property and casualty products, directly and through brokers, to insurance and reinsurance companies, in domestic and international markets.” Transatlantic Holdings (TRH) has increased the dividend every year for 20 years in a row. According to TRH’s May 20, 2010 press release, the company plans to increase the dividend by 5% on September 17, 2010 for shareholders of record on September 3, 2010.
In our analysis of Transatlantic Holdings (TRH), we’ll first address the technical pattern of Edson Gould’s Altimeter. The altimeter suggests to us that TRH is severely undervalued in relation to the dividend. The red horizontal line is the indicated level where TRH would normally be considered undervalued at $84 per share. On the extreme end of the overvalued range, TRH would trade at approximately $162 as indicated by the blue horizontal line.
Value Line Investment Survey has estimated that TRH would be around the $75 range by 2013. We opt to err on the side of caution on this matter and have taken the view that from the current price of $48.52, we could reasonably expect that TRH could rise to $67 or 38% over the next 2-3 years. However, our investment strategy requires that if we get a 10% gain in less than a year in a tax-deferred account then we’re considering the next best investment alternative.
According to Value Line Investment Survey, Transatlantic Holdings (TRH) is fairly valued at 10x earnings. Using the more conservative (lower) estimated earnings figure for 2010 by Value Line, TRH should return to the fair value of $65.50. Again, this is far above the current price by 35%. Value Line also indicates that TRH has a (2009) book value of $60.77 per share. Based on the current market price, TRH is selling 25.25% below book value. Dow Theory ascribes a fair value of $51.15 based on the peak of July 6, 2007 and the trough on March 9, 2009. Because the book value is higher than the Dow Theory fair value figure, I suspect that TRH will far exceed my upside targets.
When speaking of the risks to our investment view of Transatlantic Holdings (TRH), we cannot avoid the question of the black hole of AIG. The close relationship between AIG and TRH, through AIG’s prior majority ownership (59%) of TRH and funneling of business to the reinsurer, probably is the reason that TRH started moving towards the undervalued level from December 4, 2001 to March 9, 2009. According to Value Line, now that the AIG holdings of TRH stock have been sold off completely, there is one less issue to deal with in that that regard. This concern was confirmed with the following statement from TRH’s 10-Q:
“As a result of its reduced ownership percentage, the AIG Group is no longer considered a related party after March 15, 2010”
Transatlantic Holdings, 10-Q August 6, 2010 (PDF link), page 25, Accessed August 27, 2010.
There still is the matter of how TRH will do if AIG isn’t around to provide a “guaranteed” stream of business. I’m of the mindset that TRH had some really nice training wheels with AIG but the company has been more than ready and able to go it alone. Obviously we can see that the failure of AIG affected TRH but it didn’t put TRH out of business. So far, as corporate transitions go, TRH seems to have weathered the storm. Going forward, the primary concern for TRH should be catastrophic events which seem to increase, in magnitude, year after year.
Investment Observation: Wesco Financial Corp. (WSC) at $321.24
Today’s Investment Observation is on Wesco Financial (WSC). According to Value Line, Wesco Financial is a diversified company engaged “…in the insurance, furniture rental, and steel service center businesses in the United States.” Charles T. Munger heads Wesco Financial (WSC) and is 80% owned by Berkshire Hathaway (BRK-A). Wesco Financial (WSC) has increased its dividend for 38 years in a row.
Our initial interest in WSC is drawn directly from Edson Gould’s Altimeter, which puts the dividend payment in relative terms compared to the stock price. This is important since the continuous increase of the dividend is never reflected in the stock charts available. As seen in the chart below, WSC is now selling at a support level that was first established (on a relative basis) on May 12, 1997.
If we use the Altimeter’s peaks and troughs, we arrive at an upside target of $533 (point A). We expect that our upside target is too optimistic and therefore set our sights for the most realistic target of $410. Our downside target, based on the Altimeter, is $246 (point B) or 24% below the closing price of August 23, 2010. However, we would advise investors to build in the expectation that the stock could decline as much as 50% from the current level. The way the New Low Observer team deals with this issue is by buying 50% (of the intended amount to be invested) now and holding the remaining amount for the prospect of the decline.
Our previous experience investing in WSC was back in late 2007 to early 2008 (2008 transaction history). At the time, WSC had all the redeeming attributes that we see today. However, we sold the stock for a –4% loss just before the price jumped 13%. Although we were quick to pull the trigger on selling WSC with a –4% loss the subsequent 42% decline was worth avoiding.
Dow Theory indicates that WSC is assumed to be at fair value when the stock has reached $363.35 based on the peak from March 18, 2010 to the closing price of July 2, 2010. However, to be as conservative as possible, we would take the high of 2010 and the low of 2009 and determine a worst-case scenario of fair value and arrived at $314.22. This indicates that as long as WSC can hold above the worst-case scenario of fair value, the gains in this stock are almost assured.
There are a few other features that are of particular interest regarding WSC. According to Valueline, there has been absolutely no change in the number of shares outstanding since 2002. In addition, WSC has long-term debt that is negligible and falling since 2002 while the book value has increased by 30.26% over the same period of time. Speaking of book value, based on the dividend increases since May 1997, WSC is selling at the equivalent of $224.55, a discount of 31.25% of the current indicated book value of $352. It should be noted that the current price of WSC is the same as back in 2002.
For some strange reason, we’d like to believe that WSC should mirror the performance of BRK-A even though we know this is not true. Both companies are very different not to mention the fact that BRK-A is diversified with a triple A rating. However, we couldn’t resist the temptation to include a comparison chart of WSC (blue line) and BRK-A (red line) since 1997.
In closing, we make our greatest case against WSC with the words of its CEO Charlie Munger:
“Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good but smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the 7 quality disparity in book value’s intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for investment of Wesco versus Berkshire Hathaway stock at present stock-market quotations.”Munger, Charles T. Wesco Financial Corporation, Letter to Shareholders. February 25, 2009. Page 7. http://www.wescofinancial.com/cm2008.pdf (PDF). Accessed August 23, 2010.
I’m reluctant to accept that Mr. Munger isn’t just under-promising for the sole purpose of over-performing down the road. At the time that Munger made the above statement WSC was trading at $249.24. Since February 25, 2009, WSC has climbed 30% while BRK-A has climbed 45%. I guess Munger was right. However, I’ll take the 30% increase any day of the week.
There is so much in favor of this company, from a fundamental and technical standpoint, that we recommend doing some cursory research on WSC. Despite the coming global financial collapse caused by hemorrhaging U.S. deficits, Wesco Financial will be around to match the current Dividend Achievers with continuous increases for 55 years in a row.
Posted in BRK-A, investment observation, Wesco Financial, wsc
Investment Observation: ExxonMobil (XOM) at $65.90
The next and most anticipated investment observation is ExxonMobil (XOM). XOM has been on our new low watch list since October 30, 2009. According to Mergent’s, XOM has increased its dividend 26 years in a row. XOM is described by Yahoo!Quotes.com as “Exxon Mobil Corporation engages in the exploration, production, transportation, and sale of crude oil and natural gas.”
The biggest item regarding this company is the fact that the Coppock Curve is signaling, or is about to signal, an all clear for the purchase of XOM stock. In the chart below, you can see the unique buy signal that is given whenever the stock goes into negative territory and then turns upward. Not until the signal crosses from negative to positive does it indicate the best opportunity to buy XOM.
On the following five occasions, XOM turned decidedly higher:
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September 1974 up 207% in 2 years
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January 1978 up 194% in 2 years 10 months
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March 1982 up 491% in 11 years 1 month
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June 1994 up 333% in 6 years 6 months
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February 2003 up 279% in 4 years 8 months
On average, it took 5 years and 3 months to reach the peak in the stock price before a major decline. The worst price decline immediately after the Coppock Curve buy signal was 11% in 1982.
According to Value Line dated June 27, 1997, XOM normally traded at a mean price of 10 times cash flow. In the most recent Value Line dated December 11, 2009, XOM is expected to trade at 8 times cash flow. XOM had a cash flow of $11.58 per share in 2008 and an estimated cash flow of $6.50 for all of 2009. Using the lower cash flow estimate for 2009, XOM is expected to be fairly valued at $52 per share. This is despite the fact that Value Line has a higher cash flow per share for 2010 of $8.45 per share.
Working in favor of XOM is the fact that the company has decreased the number of shares outstanding from 6.9 billion in 1999 down to 4.75 billion at the end of 2009. XOM has gone down a separate path of other companies that borrow in order to lower the number of shares outstanding. Debt remains a small part of XOM’s balance sheet.
One of the most significant elements of the downside risk to this company is the fact that, to this point, we’re in secular bear market. This means that the market could turn down at a moments notice. Therefore, I will use the Dow Theory downside targets based on the price increase from the low of $33.23 in February 2003 to the high of $95.05 accomplished October 2007. The Dow Theory downside targets are:
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$64.14 (fair value)
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$53.83
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$33.23
It remains to be seen how much XOM continues to fall. However, based on the prior Coppock Curve indications, XOM is expected to remain unchanged or fall for another three to six months by about 11% to 18%. However, if you’re willing to buck the trend of the overall market, this stock will make for a great 3 to 6 year holding. Get your research in before the upcoming dividend payment and good luck.
If we were to invest in stocks the way that Charles H. Dow would then we would buy half of the intended amount now and purchase the second half if the price declines. For example, let's say that you wanted to invest $13,180 in this company. What you would do is buy $6,590 worth of stock now (approximately 100 shares) and hold the stock if the price goes up. If the stock goes down then you would invest the remaining $6,590 at the next level that you felt was ideal. This approach works well regardless of the market that you're in as long as you set aside the amount that you intend to invest before making the first purchase. Also, after making the first investment never invest the second half somewhere else.
The purpose of my research recommendations is to point out quality Dividend Achievers that have reached a new 52-week low. From this point begins the research to verify the quality of the stock for both short and long-term investing. These recommendations are within the context of the 3rd year of an 18-year secular bear market. A bear market that I expect to trade in a range between 16,000 and 5,000.
-Touc
Posted in Coppock Curve, investment observation, XOM
Investment Observation: California Water Service (CWT) at $36.82
The latest investment observation is on California Water Service Group (CWT). According to Yahoo!Finance, CWT "...engages in the production, purchase, storage, treatment, testing, distribution, and sale of water for domestic, industrial, public, and irrigation uses, as well as for fire protection."
As noted in our Dividend Achiever watch list dated January 1st, CWT is within 10% of the 52-week low. CWT has increased its dividend for 41 years in a row. The 10-year compounded growth rate of the dividend is an anemic level of less than 2%. Keep in mind that with a 41 year history of increased dividends, the odds favor the dividend remaining the same or being cut in the near future. A cut in the dividend would initiate the selling of the stock automatically, regardless of other fundamental attributes.
CWT has had a pattern of trading in a range for approximately 6 years at a time before breaking out to a new and higher trading level. The following are the range in years that CWT traded before obtaining a new high:
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1976 to 1982
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1985 to 1993
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1993 to 1997
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1997 to 2004
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2005 to 2011 ???
Because CWT has averaged 6 years before breaking out to a new higher price, we suspect that the current period, after trading in a range for the last 5 years, might provide relatively sizable capital appreciation over the next two and a half years. In addition, because the stock price has been range bound while the dividend has been increased each year, investors can feel comfortable knowing that either of two things are going to happen with the stock 1) the price increases or 2) the dividend yield increases. Either of these scenarios are likely if CWT can retain its overall financial standing.
According to Dow Theory, CWT has the following upside and downside targets.
Upside:
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$48.29
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$41.42 (fair value)
Downside:
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$34.55
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$27.40
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$21.04
While we am hopeful of the upside prospects, potential investors need to consider their willingness to hold this stock through the possible downside targets. Personally, we would consider selling the stock if it fell below the $27.40 level. This means that we would be accepting the potential loss of 26% before deciding if we should continue to hold the stock. However, a lot depends on market conditions at the time that CWT falls to the respective downside targets. Our goal is to obtain CWT at a lower price than the current level and sell the stock at or near the $48 level.
To put our investment observation in perspective, IQTrends.com considers CWT undervalued when the stock trades for $16.85. According to Value Line Investment Survey, CWT trades at a mean price of:
- $33.61 based on the 30-year treasury
- $33.98 based on the 20-year treasury
- $40.42 based on the 10-year treasury
Being as conservative as possible, both sources indicate that CWT is overvalued or fairly priced by as much as 54% and as little as 8.71%. In theory, a stock that is "fairly" priced has more of a chance of falling in value rather than increasing in value. Also of concern is the possibility of rising interest rates. It would be challenging to expect that the price of a utility can increase in a potentially rising interest rate environment that we might face in the long term.
As mentioned in our recommendation of AquaAmerica (WTR), although CWT is a water utility and water is critical to life, investors need to understand that companies in this industry aren't a "sure thing." The biggest reason for this is that when, and if, water becomes scarce, government regulators will step in to take over (nationalize) what should otherwise be sold at the most profitable price (thereby curbing wasteful consumption.) There is literally an upside cap on profitability to a company like this due to the critical importance of the resource being sold. Additionally, CWT should be considered a relatively risky stock because of its low daily trading volume. With a 3 month average volume of 100,000 shares, this stock may not be suitable for investors who need ready access to the cash on short notice.
The purpose of our investment observations is to point out quality Dividend Achievers that are near a 52-week low. From this point begins the fundamental research to verify the quality of the stock for both short and long-term investing. These recommendations are within the context of the 3rd year of an 18-year secular bear market. A bear market that we expect could trade in a range between 16,000 and 5,000. The secular bear market will be considered over when the Dow Transports and Dow Industrials exceed their respective peaks on high volume or the dividend yield on the Dow exceeds 6% or higher. -Touc
Posted in California Water Service, CWT, Dividend Achievers, investment observation
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