Below are the valuation targets for Aqua America (WTR) for the next 10 years. Continue reading
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AquaAmerica Has Prevailed…So Far
On November 29, 2009, in an article titled "What About Utilities?", we submitted our thoughts about the merits of buying the electric utility Consolidated Edison (ED). Our response was that, in terms of a company in the exact same industry group, Southern Company (SO) was probably the best peer to choose from. In addition, we indicated that, although not in the exact same industry group, AquaAmerica, Inc. (WTR) was a far superior alternative to Consolidated Edison (ED).
Below is a chart of the performance of all three stocks from November 30, 2009 to December 3, 2010. It should be noted that the chart only reflects the change in price and not the dividends paid.
As you can see, AquaAmerica, Inc. (WTR) came out on top by generating a return of 32.23% in the last year. Second in the ranking was Southern Company (SO) which returned 18.79%. Finally, Consolidated Edison (ED) returned 14.24%. If viewed strictly on a price appreciation basis, AquaAmerica exceeded the return of Consolidated Edison by more than double.
When analyzed from the more relevant basis of total return (dividend plus price appreciation), the performance was as follows:
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WTR-36.50%
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SO-25%
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ED-20.32%
We invite the curious to re-read the piece we wrote (located here) at the time to gain the “insight” that we were trying to convey. That “insight” is to always seek the best alternative. To the New Low team, the best alternative is the stock nearest the low that has the most viable upside prospects. Those that wish to suggest that “…no long-term holder of stocks would care about the one-year performance of a utility...” are correct. However, what we are trying to demonstrate is the value of assessing the proper time to buy.
Although we outlined our rationale for selecting AquaAmerica over Consolidated Edison, we’re more than willing to submit to the idea that we’re just lucky. As my economics professor used to say, “It is better to be lucky than smart.”
Posted in Aqua America, Consolidated Edison, ED, SO, Southern Company, WTR
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Odds and Ends
Question:
Do you think Richard Russell has been overrated regarding his abilities to forecast the directions of the markets? It seems like one good call (1975) allows one in his position to reap benefits for years despite demonstrating no skill when one goes back and, with the benefit of hindsight, takes a critical look at the entire record.
Our Thoughts:
Anyone, including NLO team, who attempts to predict the stock market is under extraordinary pressure. The challenge that Russell presents is that he often ignores that he has a bias towards the market falling rather than rising. This becomes a problem when, against his experience and better judgment, Dow Theory might be indicating that the direction is up despite all the negative market fundamentals.
Again, Dow Theory is supposed to include all the current and foreseeable hopes and fears as it relates money. I think that if Russell would follow Dow Theory or even his PTI indicator more often he would get a more accurate readings on the market.
It should be noted that within the content of his Dow Theory Letters from 1958 to the present, there are many great calls. As I post more reviews of Russell’s letters, I will be able to point out too many instances of where Russell was spot on.
Unfortunately, Russell often didn’t stick to his guns or he forgot his earlier good advice or information. As an example, Russell talks about the importance of compounding. This cannot be accomplished if you’re buying and selling based on Dow Theory. Another example is Russell’s commentary on values. You can’t speak of values if you’re primarily focused on ETFs, index funds or stocks that don’t increase their dividends when plenty of them exist.
The pace and excitement of the markets become challenging for anyone to remain focused on the fundamentals. Russell has fallen astray of the basic principals of Dow Theory and value investing. Although the two seem mutually incompatible, there is a middle ground which Russell hasn’t attempted to address in all the years of his work.
Question:
I'm curious that you write "In my observations, market volume has increasingly become an addendum to Dow Theory." Meaning, only as a sidelight, or as an increasingly important variable? It does seem harder to judge given increased manipulation on light volume. Looks like lots of stick saves last week.
Answer:
It may be a function of the markets being driven by various large institutions (mutual funds, hedge funds, index funds, ETFs etc...) but volume seems to be less reliable when trying to determine sentiment and trends on the NYSE. I suspect that the diminished impact of smaller participants and derivative markets have had a lot to do with my concerns about volume not being a strong indicator. However, I will continue track volume just in case.
Question:
What did you do with the proceeds from the sale of WTR?
Answer:
After investing in WTR we recommended CEPH and SVU which generated 13% and 11% gains respectively. Both stocks were on our Watch Lists and in each case we accomplished our targets and made subsequent sell recommendations. In addition to our posted recommendations, we also participated in CWT and GENZ. Both positions accomplished our short-term after tax goals which allowed for the purchases of new stocks on our dividend Watch List.
Our article titled “Meridian Biosciences and Other Profitable Market Lessons” provides a framework for the strategy we’d like to employ when investing in Dividend Achievers. Another article that weighs heavily on our investment decisions is titled “It Isn’t Easy Being Green.” That article outlined Hetty Green’s approach to handling her funds when not invested in stocks. We’ve simply applied a similar strategy to Dividend Achievers and Nasdaq 100 stocks at a new low (after careful analysis).
Question:
Would you venture to provide a top pick from your current dividend achievers list?
Answer:
As you can tell, the current list has too many companies that are candidates for investment. Without providing any detailed analysis, I would say that my top four choices for additional research would be Ritchie Bros Auctioneers (RBA), Northern Trust (NTRS), Dentsply (XRAY), and Meridian Biosciences (VIVO). We expect, and hope, that the price of these stocks will fall further while we get more research in. We're using the March 2009 low as our benchmark for all investment analysis going forward and we hope that you do the same.
Russell Blurb:
For what it is worth Richard Russell’s commentary today (July 12, 2010) seems to fly in the face of the commentary that he gave on Friday July 9, 2010. Go figure:
“The recent non-confirmation by the Transports may have served as an entry spot for bold speculators, but I doubt if the 2007 highs in the Averages will be approached or bettered. Nevertheless, we may see a brief period of better markets, a "breather" in the long life of the bear. I believe this primary bear market will extend into 2016.
A near-term marker or target is to see whether the Dow and the Transports can better their recent June highs. Those highs were 10450.64 for Industrials and 4467.25 for Transports. Write those figures down. I'm betting that the two D-J Averages will not be able to better the June highs. Let's wait and see.”
All I can say is, at least he indicated an upside target that matches the one we came up with yesterday. Can't understand how he was so bullish on Friday and is now sounding so skeptical today.
Email our team here.
Sell Aqua America (WTR) at the Market
Is it possible that your ship can come not once but twice? We think so. This is a situation where shareholders of AquaAmerica (WTR) get to understand exactly what Geraldine Weiss, author of Dividend's Don't Lie, means when she says that a stock trades in its own value range.
In our research recommendation (found here) of WTR, it just so happened that we managed to pick the proverial bottom in the stock's price. The stock has not fallen below the level indicated in the last year. However, in our haste to obtain 10% profits, we sold our position in the stock on our sell recommendation of December 15, 2009. On an annualized basis, we landed a 79.35% gain on our invested capital in 46 days. Just a note about our view on investing, we want 10% returns in the shortest time possible with the fallback provision being the compounding of dividends if we happen to be wrong in our timing.
In the chart above, you can see our own buy and sell points along with the two most opportune times to exit WTR after our sell recommendation. With WTR reaching a new high in the stock price and exhibiting signs of topping out on a technical basis, it may be worth selling this stock. If you had bought based on our research your total return so far (including dividends) would be 22.77% or an annualized gain of 33.44%.
We know for a fact that better alternatives exist in the world of Dividend Achievers based on our Watch List and strongly recommend that you capture the sizable gains that have been made thus far. An opportunity to cash out now is the equivalent of your ship coming in for the second time since May.
Gaining More by Limiting Our Gains
One of the biggest challenges to buying and holding a stock for the long term is the wait through thick and thin for the expectations of a particular stock to materialize. In a process of elimination, the New Low Observer team has narrowed down the steps to determining quality stocks by relegating it to those that have increased their dividend every year for at least 10 years in a row. Furthermore, we only seek out those high quality dividend paying stocks, as well as Nasdaq 100 index constituents, when the companies are within 20% of the 1-year low. Having these requirements allows us to select quality companies at (potentially) ideal times to invest.
However, once we have decided on the company that we're interested in investing and we've committed money to, we are still at the whims of "Mr. Market." Although it might seem surprising to some, we are incredibly risk averse and always try to avoid losses whenever we can. We are so risk averse that we have a general rule that if the investment in a particular stock exceeds the gains of the market over the last 100, 50, 25, or 10 years on an annual basis (after expenses) then we tend to sell that stock to seek alternative investment opportunities. If nothing else, we secure the exceptional gains and bide our time until the next "undervalued" opportunity arrives.While the buy-and-hold crowd cries foul at the thought that we're speculating rather than investing when buying and selling high quality stocks at arguably undervalued prices, we have noticed a pattern that keeps emerging from our strategy that sets apart our approach from merely speculating. One of the best recent examples of the value in our investment philosophy is the case of Meridian Biosciences (VIVO).
On March 17, 2010, as the Dow Industrials and Dow Transportation Average were confirming the Dow Theory trend to the upside, Meridian Biosciences (VIVO) was dropping like a rock on news that the future earnings would have to be revised lower. In one fell swoop, Meridian Biosciences (VIVO) erased 9 months of hard earned gains in the stock price. I say 9 months because after our recommendation to sell VIVO, the stock increased in value an additional 27% in 3 months at the peak in September 2009.
At the time of our sell recommendation, Meridian Biosciences had risen 11.75% from our Research Recommendation on March 26, 2009. We were content in our gains and smug at being so smart at selling while the going was good. However, we watched, in almost horror, as the stock continued to climb higher going from our sell point of $20.35 all the way up to $26. We began to wonder if selling a company that we were convinced was of the highest quality was the best choice. After all, Meridian Biosciences (VIVO) is one of the only Dividend Achievers to match the gains of Google (GOOG) on a percentage basis from the date of Google's (GOOG) IPO to the peak in late 2007/early 2008.
With a tinge of regret we moved on hoping that our next investment would make up for our blunder of selling VIVO at such a cheap price. In the nine months since our sell recommendation of Meridian Biosciences (VIVO) we've made eight Investment Observations that were followed by Sell Recommendations. Below are the stocks we mentioned and the percentage gains that were secured since our sell recommendation of VIVO on June 12, 2009:
- Cardinal Health (CAH) +23%
- Abbott Labs (ABT) +16.80%
- SuperValu (SVU) +11.87%
- Nor'wst Nat (NWN) +10.53%
- AquaAmer. (WTR) +10%
- Cephalon (CEPH) +13.41%
- Mattson (MTSN) +24%
- Monsanto (MON) +22%
With the reduction of earnings estimates and the subsequent collapse of Meridian Biosciences (VIVO), the stock has fallen below the level of the original sell recommendation that was given on June 12, 2009. In addition, we've highlighted eight companies that have provided double digit returns in a complete buy and sell cycle all within a nine month period. The chart below illustrates the recommendation dates in green and the sell dates in red with the post-collapse price in yellow.
Today the New Low Observer team breathes a sigh of relief, not in the lose that has afflicted current Meridian Biosciences shareholders but based on the fact that we stayed the course with our investment philosophy which provided gains that, to this point, have gone beyond our expectations by actually limiting how much we are willing to accept on the upside.The lesson that should be learned about Meridian Biosciences is that although the price is nearly the same as a year ago doesn't mean that there was no movement or activity. In fact, the stock went up as much as 44% in 5 months. This is the hard lesson that most buy-and-hold investors should have learned about where the major indexes have gone over the last 10 years. Within all the drama that occured since 2000, many opportunies presented themselves but may have never been realized if holding for the long-term was the only investment strategy. For most investors, the real challenge becomes whether or not to sell a stock after exceptional gains.
Our Current Take on Meridian Biosciences
In our sell recommendation of Meridian Biosciences at the $20.35 level, we said that VIVO would easily go to the $23.33. Since the peak in the price at $26.20 in September 2009 and the recent decline to $19.60, Dow Theory indicates that for this stock, the upside move should take the price at least to the $23 level before going back to the old high of $26.20 or back down to the $19 range. Our expectation that a reaction of 11% to 13% upside move would not be unusual.For those who are interested in justifications of Meridian Biosciences (VIVO) as an investment candidate (since the negative news is already out), there are several compelling factors to watch for.
First and foremost is the recent confirmation of the bullish move of the stock market according to Dow’s Theory. This gives the investor that chance to make mistakes without paying a hefty price. More specific to Meridian Biosciences (VIVO) is the fact that the company is selling 16% below the 8-year average price-to-earnings ratio according to Morningstar.com. VIVO is also selling 3% below the average price-to-cash flow ratio over the last 10 years. Bolstering the case for VIVO is the fact that the company carries little or no debt. We will be watching Meridian Biosciences (VIVO) closely for any indication that the stock will decline from the current level. Our hope, as it always is, is to buy the stock at a much lower price and take reasonable gains in the shortest period of time possible. It is our hope that others can see the value of our approach of taking gains that exceed the historical average annual return and seeking alternative investment opportunities whether it is in cash or another quality stock that is at or near a new low.
- Don't know the historical average annual gains for 100, 50 or 10 years. Go to Moneychimp.com's CAGR of the Stock Market Calculator. Pick just about any time frame and see what you've been missing (even on an inflation adjusted basis).
- Want more info about the strategy mentioned above, then go to our article title "When Timing Meets Opportunity" on SeekingAlpha.com. The article was posted in July of 2009 and has more relevancy than ever before.
- Our article titled "Seeking Fair Profits" outlines Charles H. Dow's philosophy of fair expectations when investing in the stock market. Charles Dow was the co-founder of the Wall Street Journal and the Dow Jones Indexes.
Tell a friend about us. Thank you.
Water Utilities on the Move
Yesterday, water utilities were on the move because Los Angeles-based, Dividend Achiever Southwest Water Company (SWWC) announced that it was being bought by Water Asset Management, LLC in a deal valued at $427 million. The stock of Southwest Water Company (SWWC) jumped 46% during market hours. On the news, almost all other water utility companies moved higher as seen in the table below.
It should be noted that of the eight companies listed above, San Jose Water (SJW), American States Water (AWR), California Water Service (CWT), AquaAmerica (WTR), American Water Works (AWK) and Consolidated Water (CWCO) are Dividend Achievers. In the last month, San Jose Water (SJW), California Water (CWT), AquaAmerica (WTR) and American States Water (AWR) have been on our Dividend Achiever Watch List at the same time. The New Low Observer had issued Investment Observations on AquaAmerica (WTR) on October 31, 2009 and the other on California Water Service (CWT) on January 3rd.
As a general observation of our Dividend Acheiver Watch List and our Nasdaq 100 Watch List, when companies from an industry start to cluster on the list we know that whatever cyclical forces are at play require us to look closely at that industry and those companies. Although we have sold our initial investment in AquaAmerica (WTR), we subsequently acquired a "substantial" position in California Water Service (CWT).
Anyone interested in the qualitative elements of water utilities should be mindful of our boiler plate warning on investments in the industry:
"Although 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, municipalities 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 companies like these due to the critical importance of the resource being sold."
Despite my personal concerns on the water utility industry, I encourage readers to follow our Watch Lists closely for potential signs of other exceptional investment opportunities.
-Touc
Email our team here.
3 Stocks Back on the Dividend Achiever Watch List
There are three stocks that I wish to bring to your attention that are on our Dividend Achiver Watch List. The most important element of these three stocks is that they were individually recommended by our team in the past and are now worth re-examining at this time to verify their respective merits.
First on our list is Matthews International (MATW). Matthews International was initially recommended on March 31, 2009 near the lows of the bear market. At the time, according to Dow Theory, we felt that the company had upside targets of $31, $40, and $49. On August 4, 2009, we issued a sell recommendation of (MATW) when it was trading at $31.95. Subsequently, (MATW) was able to get within $0.50 of the $40 target. After hitting the $39 range, (MATW) has fallen to the current level of $32.50. (MATW) has increased the dividend for 14 consecutive years in a row.
According to Value Line, (MATW) has a book value of $14.32. If we assume the lowest quarterly earnings during the worst of the economic crisis from Q4 2007 to Q1 2009 and project those earnings (the most conservative estimate) into the future, we get a Q1 2011 P/E ratio of 16.92. Value Line also considers (MATW) at fair valuation around $41.86 or 13 times cash flow per share. Using the most optimistic scenario according to Dow Theory, (MATW) is considered fairly valued at $35.77.
The next company of interest on the Dividend Achiever Watch List is AquaAmerica (WTR). For what it is worth, our team recommended (WTR) at one of the lowest points in 2009 on October 31, 2009. Our December 16, 2009 sell recommendation achieved a gain of 10% in 46 days. After hitting the high of $17.89, (WTR) has fallen to the current level of $16.59.
According to Value Line, (WTR) is considered at fair valuation when it trades at $19.30. If we take the worst period of earnings during the market decline from Q4 2007 to Q1 2009 and project those earnings into the future, AquaAmerica would have a P/E ratio of 37.70. Again, we're seeking the worst case scenario in our future projections. This allows us to better assess the risks we are about to take. As long as WTR can stay above the $14 low of 2008, the fair value should be around $18.70.
Finally, the stock with the most potential among the three is Northwestern Natural Gas (NWN). NWN was recommended on October 3, 2009 when the stock was trading a $40.94. At the time the recommendation was made the stock was at a relative low and proceeded to move higher. In the research that I did on (NWN) I found that since 1970, the stock has typically bottomed in the first four months of the year 72% of the time. Additionally, NWN has bottomed in the month of February eleven of the last 39 years or 28% of the time. This makes the decline from December at the price of $46 all the more interesting. We issued a sell recommendation of NWN on December 21, 2009 when the stock was selling around $45.25.
According to Value Line, NWN is considered to be fairly valued at $36.66. This implies that (NWN) has further to fall. However, with the consistency of hitting bottom in the first quarter of the year, especially in February, NWN is worthy of consideration at these levels. Suffice to say, I am most tempted by NWN and will continue to follow this stock for ideal entry points.
-Touc
Sell AquaAmerica (WTR) at the Market
It is now time to recommend that AquaAmerica (WTR) be sold at the market. The stock has performed moderately since the research recommendation was issued on October 31, 2009. It is highly recommended that anyone who bought the stock based on my research should re-read the posting. Unfortunately, it was not possible to buy this stock at any price lower than the recommended date.
WTR's stock price has gone nothing but up since the recommendation. However, in the pursuit of "seeking fair profits" the returns that this stock has provided within the last 46 days say that it is necessary to consider alternative opportunities.
WTR was recommended when it was trading at $15.64. As of December 15, 2009, WTR was quoted at $17.28. This equals a return of 10%. Selling this stock now generates a return of 2x greater than the amount of the dividend yield. Additionally, the 10% gain exceeds the return on a 30-year treasury purchased on October 30, 2009 by 2.35x (if held to maturity.)
Those not interested in following through with my sell recommendation can feel comfortable knowing that WTR is a great long-term holding with a 10% cushion since our research recommendation of October 31, 2009.
As I have indicated in the purposes and function of this site, the goal is to:
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maximize the annual yield of each trade.
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reduce time between buying and selling of each stock.
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exceed the annual yield of government guaranteed alternatives in each trade.
Research recommendations and investment observations are intended to be a starting point for investigating a quality company at a reasonable price. It is hoped that after doing the background research you can buy the stock at a lower price. Ideally the stock should be held in a tax deferred account and should not consist of less than 20% of your holdings. Personally, I prefer holding only 2-3 stocks at a time.
Sell recommendations are intended to deal with the short term reality of the market. The tracking of the Sell recommendations are the worst case scenario if you happen to have bought a stock at the time the research recommendation was made (please avoid making this mistake.) I aim for mediocrity in my returns, therefore I am happy with 9-12% annual gains. However, since codifying my approach to investing in 2005, I have had annual returns of 20% and above every year since.
It is always recommended that when selling a stock, one should not place stop orders, limit orders or orders after hours. This leaves the seller in the position of being vulnerable to the whims of the market makers. Instead, place your sell orders only as a market order during market hours. Some would complain that a market order during market hours might leave some profits on the table. However, I would rather leave some money on the table rather than have it taken away from me by the trades that are placed by institutions and market makers. Touc.
Posted in Aqua America, Sell Recommendations, touc, WTR
Investment Observation: Aqua America (WTR)
Today's investment observation is AquaAmerica (WTR). According to Yahoo!Finance's water utilities review, WTR is ranked as the second largest water utility based on market capitalization.The most important point about this investment observation is that WTR has fallen to a brand new low during market hours on Friday October 30th. This low may soon match the 2-year low of around $14.50 set in mid-October 2008. This is fascinating because the actual lowest point after the market peak of 2006 at $30 is no longer on our last 52-week radar. However, we will watch to see if the ultimate low of $14.50 is reached.According to Value Line Investment Survey, WTR normally trades around 1.6 times the per share dividend divided by the "interest rate" (1.6x $0.51/interest rate). Valueline doesn't tell us by which interest rate we should apply to the company, so I have decided to apply the 30, 20, and 10 year U.S. Treasury rate. The following are the mean prices that WTR would trade at for each interest rate:
- 30 year rate- $19.29
- 20 year rate- $19.47
- 10 year rate- $23.93
Based on the 30 year rate, WTR is selling 19.91% below the historical mean value. I chose the $19.29 value since it was the most conservative figure.
However, according to Investment Quality Trends, WTR is considered undervalued when it is selling for $12.27 or less. This indicates that WTR is not currently undervalued but could easily get to the $12.50 range if market conditions continue on the downside. Additionally, WTR has a large debt low and a high dividend payout ratio of 74%. This means that the stock could only "afford" a decline in earnings of 25% before the company has to borrow or issue more share to service the dividend.
According to Dow Theory, the following are the most important downside targets to watch for:
- $14
- $11.25 (fair value)
- $9
- $6.50
These targets are supposed to act as support levels. Support levels are points which the stock falls to but should not go below. If the stock goes below one support level then we should expect the stock to decline to the next target level.
One support level that is significant is the $15 level. This happens to be the most obvious level that the stock needs to hold above. Falling below $15 could indicate the negative nature of the markets.
Although this 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.
Take your time to consider this Dividend Achiever for the good and the bad attributes. Your careful analysis of this company might compel you to purchase the stock. It is my hope that the stock falls further before your next acquisition. Touc.
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Posted in Aqua America, investment observation, WTR