NEW LOW OBSERVER

Richard Russell’s Latest Miscue

Posted on March 20, 2012 by nlo-admin | 2 comments

The New Low team has been huge fans of Richard Russell for years. We've learn much about Russell's thinking process as well as his stock market strategy in his work from 1958 to the present. However, his most recent contribution appears to be counter to the whole point of Dow Theory. The following excerpt appears on Financial Sense as well as Dow Theory Letters.

What's the best performing stock of the last few years? Would you believe it -- it's a leading seller of bolts, screws and nuts. (Their products are known as threaded fasteners in the trade.) The name of the hot company is Fastenal.

The stock has been trading for 25 years. The stock has as gone from 13 cents on October 19, 1987 to a recent $50.85. Over the past year Fastenal has gained 60%.

The company stocks thousands of varieties of bolts, nuts, screws and cotter pins in 2,600 stores and serves retail and wholesale customers. For many companies, Fastenal's products are absolutely essential. Whole factories can shut down for lack of one of Fastenal's specially threaded bolts. Fastenal has no serious competition. It would be too difficult to compete with Fastenal's thousands of products for spot delivery. In other words, while Fastenal's products are mundane, many companies can't live without them. If maybe five of a certain bolt is needed, price is absolutely no object. The particular bolt may cost a dollar a piece, but if Fastenal can supply the bolt immediately, the price doesn't mean a thing.

Fastenal had 45 stores in 1987, which was the year its owner decided to take Fastenal public. The company offered 100,000 of the million shares to its employees. Up to date, the price of Fastenal has risen 38,565% and today the company has a market value of $15 billion. It has stores in all 50 states and has also moved into Mexico, Canada, Asia and Europe.

Lesson -- Deal in products that everyone needs. Supply those products in varieties that are beyond the capabilities of any other purveyor. Then offer your products for immediate delivery.

Followers of Dow Theory should know that investment values is the cornerstone of the theory. This means that even if you don't know anything stock market technicals, buying stocks that are undervalued should be the primary focus.

Unfortunately, it seems that Mr. Russell will revert to the values of Dow Theory when it fits his "mood." Russell suggests that the market is overvalued based on the dividend yield on the Dow Jones Industrial Average being below 3%. Why then would he write about Fastenal (FAST) which is at an all-time high and trading at P/E of 43 with a book value of 4.94x? Additionally, Value Line Investment Survey has estimated that FAST has a fair value at 22x cash flow. Given their 2012 estimate of $1.65 of cash flow per share, we can conservatively say this company is worth $36.

For the sake of reference, we've highlighted Fastenal (FAST) in an April 24, 2010 article titled "Low Yielding Stocks Offer Exceptional Gains". At the heart of our article was to demonstrate that many stocks with low dividend yields can perform equally as well, if not better, than stocks with high dividend yields given the right conditions (i.e. payout ratio, historical yield range).

Sure this stock could turn out to be the next "Apple" but as an influential Dow Theorist, Russell shouldn't be preaching the merits of a company that is as over-valued as FAST.

Also, we'd like to critique Richard Russell's "lesson." The lesson rings hollow since it suggests investment in "wide moat" companies but doesn't offer up any reasonable alternatives. This implies that investors acquire shares of FAST at the current price solely based on their "moat" while overlooking the fact that the company is not undervalued. This is quite alarming since there is a broad range of companies which appears on our latest watch list.

Reference Sources:
What’s the Best Performing Stock of the Last Few Years?
Fastenal Key Statistic as of 3/20/2012
Low Yielding Stocks Offer Exceptional Gains
Dividend Watch List: March 16, 2012

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Apple Inc.: Edson Gould’s Altimeter as if AAPL were a Dividend Achiever

Posted on March 19, 2012 by nlo-admin | Leave a comment

As Apple Inc. (AAPL) announces that it will be paying a dividend of $2.65 per quarter starting in July 2012, we wondered what Edson Gould’s Altimeter would look like if it were applied to AAPL after 1995, when AAPL eliminated their quarterly dividend. We want to see how Gould’s Altimeter would react to Apple Inc. if the dividend were increased every year from 1996 to the present with the assumption that the 2013 annual dividend would be $10.60 per share.

The Altimeter was first described by Edson Gould in Barron's on February 21, 1968. Gould asserted that the relationship between the price and the dividends paid on that stock, or index, tell investors of under or overvaluation. It is important to make the distinction between Edson Gould’s Altimeter analysis and his Speed Resistance Line [SRL] analysis. Altimeters are based on the dividend payment relative to the stock price while the SRL is based strictly on the price movement.

In the case of Apple Inc. (AAPL), there hasn’t been a dividend paid since 1995. To arrive at a dividend payment from 1996 to today, we calculated a gradual annual dividend increase as would be the case with any blue chip stock like a Dividend Achiever. Dividend Achievers are stocks that have increased their dividend every year for 10 consecutive years in a row.

We're running on the assumption that the July 2012 $2.65 quarterly dividend would be the latest increase in a long string of dividend increases since 1996. Below is the assumed dividend increases from 1996 to the present:

Year	Annual	Quarterly
1996	$0.52	$0.13
1997	$1.13	$0.28
1998	$1.76	$0.44
1999	$2.40	$0.60
2000	$3.00	$0.75
2001	$3.64	$0.91
2002	$4.42	$1.11
2003	$4.88	$1.22
2004	$5.52	$1.38
2005	$6.14	$1.54
2006	$6.76	$1.69
2007	$7.40	$1.85
2008	$8.02	$2.01
2009	$8.64	$2.16
2010	$9.28	$2.32
2011	$9.89	$2.47
2012	$10.48	$2.62
2013	$10.60	$2.65

Based on the proposed annual dividend increases, we can now view what Edson Gould’s Altimeter would look like for Apple Inc. (AAPL) stock. Below is the Altimeter from 1996 to the present.

The first thing that is noticed, in the chart above, is the fact that from 1996 to 2007, Apple traded in a range of between 50 and 17 on the Altimeter (Altimeter level; not stock price). Anytime AAPL was trading near 50 the stock was overvalued and when the stock traded around the 17 range the stock was considered undervalued.

However, the low of 2003 marked the beginning of a new relationship between Apple’s stock price and our hypothetical dividend that would have been received. Starting in 2006, AAPL’s stock would decline, at minimum, to the previous Altimeter peak. The decline from the 2006 peak stopped exactly at the 2005 peak. The decline from the 2007 peak initially flirted with the 2006 peak but ultimately succumbed to the forces in play and fell well below the 2006 peak.

Our take on this “pattern,” based on hypothetical dividend increases every year from 1996 to the present, is that the next support level for Apple’s stock price would be at the 2007 peak, at minimum. This suggests that APPL’s stock price could decline to $284.98. Such a decline would constitute a –52.59% drop from the closing price of $601.10 on March 19, 2012. Although the $284.98 level seems dismal, it is a far cry better than Edson Gould’s Speed Resistance Line [SRL] analysis which suggests that the extreme downside target is $201.66. This is an increase from the February 5, 2012 downside [SRL] analysis done on Apple (found here).

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Nasdaq 100 Watch List: March 16, 2012

Posted on March 18, 2012 by nlo-admin | Leave a comment

Below are the Nasdaq 100 companies that are within 20% of their respective 52-week lows. This Nasdaq 100 Watch List is strictly for the purpose of researching whether or not the companies have viable business models or are about to go out of business. These companies are deemed highly speculative unless otherwise noted.

Symbol	Name	Price	P/E	EPS	Yield	Price/Book	payout	% from Low
CHRW	C.H. Robinson Worldwide	65.67	25.06	2.62	2.00	8.55	50.38%	5.41%
VOD	Vodafone Group Plc	26.41	12.28	2.15	3.60	1.02	44.19%	8.64%
EA	Electronic Arts Inc.	17.46	0	-0.52	0.00	2.45	0.00%	8.79%
CTRP	Ctrip.com Int'l	24.68	22.09	1.12	0.00	3.03	0.00%	12.08%
APOL	Apollo Group	42.59	12.08	3.53	0.00	4.07	0.00%	14.86%
FSLR	First Solar	29.08	0	-0.46	0.00	0.66	0.00%	14.99%
AMZN	Amazon.com	185.05	135.07	1.37	0.00	10.82	0.00%	15.07%
RIMM	Research In Motion	14.38	3.39	4.25	0.00	0.68	0.00%	15.50%
VMED	Virgin Media Inc.	24.18	65.18	0.37	0.70	7	43.24%	17.84%
SRCL	Stericycle, Inc.	86.88	32.3	2.69	0.00	6.11	0.00%	18.93%
DTV	DIRECTV	47.47	13.68	3.47	0.00	-10.53	0.00%	19.21%
EXPD	Expeditors Int'l of Wash	45.81	25.59	1.79	1.10	4.71	27.93%	19.76%

Watch List Summary

A company that we’re considering buying is C.H. Robinson Worldwide (CHRW), the first company on our list. The primary consideration that we have is always the downside risk. We almost ignore the upside targets and projections in order to come up with an idea on the best ways to avoid loss.

The following are two perspectives on the way to view the potential downside risk of buying CHRW. First, according to Dow Theory, CHRW has three significant downside targets that should be considered carefully. The three downside targets are as follows:

$60.34 (fair value)
$52.91
$38.06

The way we approach the Dow Theory downside targets is to buy CHRW if it falls to $60.34 (fair value according to Dow Theory). However, we prepare ourselves for the worst case scenario by expecting that CHRW will decline to the $38.06 level, the low for 2009. With this assumption, we ensure that our initial purchase does not include 100% of what we'd normally invest. Instead, we only invest 30%, 50% or 65% of the amount that we'd ordinarily invest. The remainder of funds is set aside for the possibility that the stock declines. Naturally the greater the amount invested initially, the greater the loss or gain if the stock declines or rises.

The second way to view CHRW's downside risk is strictly from the "technical" patterns based on a chart from the last 5 years.

3-16-2012

From a "technical" standpoint, there are significant support levels at $63.50, $55 and $38. These technical levels are not very different from Dow Theory even though the technical levels based on the chart above are strictly based on the visual cues. We specifically chose the last 5 years because Charles H. Dow has said that best way to gauge a company's future prospects is usually through careful consideration of the period when earnings, book value, price and other fundamental attributes are at their worst. For us, the inclusion of 2007 to 2009 is the best reflection of the worst that has been experienced recently. With either approach to reviewing the downside risk of a stock, the purpose is ensure that you do not get caught off guard at the prospect of a major price decline.

Watch List Performance Review

In our ongoing review of the Nasdaq 100 Watch List, we have taken the topic 5 stocks from our March 6, 2011 Nasdaq 100 Watch List. The top 5 companies from the watch list are provided below with the closing price from March 7, 2011 to March 6, 2012.

Symbol	Company	2011	2012	% Change
CSCO	Cisco Systems, Inc.	$18.40	$20.03	8.86%
CEPH	Cephalon, Inc.	$56.17	$81.49	45.08%
AMGN	Amgen Inc.	$52.32	$67.38	28.78%
TEVA	Teva Pharmaceutical Industries	$50.32	$43.08	-14.39%
ATVI	Activision Blizzard, Inc	$11.27	$12.65	12.24%
			Average	16.12%

NDX	Nasdaq 100	$2,328.07	$2,712.78	16.52%

Our primary goal at the New Low Observer is to achieve 10% gains within the span of a year inside of our tax deferred accounts. In the case of AMGN, CEPH and ATVI our goal of 10% within a year was accomplished within the first four months. CSCO was the last 10% gain that arrived at the end of the 1-year period. Teva Pharmaceutical (TEVA) severely underperformed for the remainder of the 1-year period. CEPH did not last very long since it was acquired by none other than Teva Pharmaceutical. Cephalon was acquired by TEVA within two months of being on our watch list.

Our specific recommendation of Cephalon at $58.99 on February 15, 2011 and the subsequent acquisition explains why we’re drawn to companies at a new low.

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Posted in CEPH, Cephalon Inc., Charles H. Dow, Dow Theory, Nasdaq 100 Watch List, TEVA, Teva Pharmaceutical, Uncategorized

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Dividend Watch List: March 16, 2012

Posted on March 18, 2012 by nlo-admin | Leave a comment

The $3 billion Greek deal may have pushed some bulls back into the market. Despite all the volatilty, the markets essentially finished unchanged. The S&P 500 was virtually flat but the blue chip Dow Jones Industrial Average lost 55 points for the week.

There are some bargains to be had in our watch list this week which contains 11 companies that are within 11% of the 52-week low. A reminder to our readers, these are companies with a long track records of dividend payments.

Symbol	Name	Price	% Yr Low	P/E	EPS (ttm)	Dividend	Yield	Payout Ratio
TR	Tootsie Roll Industries Inc	22.9	2.31%	30.95	0.74	0.32	1.40%	43%
CHRW	C.H. Robinson Worldwide, Inc.	65.67	6.50%	25.06	2.62	1.32	2.01%	50%
ATO	Atmos Energy Corp.	30.71	7.69%	13.90	2.21	1.38	4.49%	62%
CLX	Clorox Co.	68.21	7.95%	16.64	4.1	2.40	3.52%	59%
CWT	California Water Service	18.22	8.80%	20.24	0.9	0.63	3.46%	70%
UNS	UniSource Energy Corporation	36.32	9.05%	13.21	2.75	1.72	4.74%	63%
PEP	PepsiCo Inc.	64.47	10.27%	16.00	4.03	2.06	3.20%	51%
CAH	Cardinal Health, Inc.	41.59	10.35%	15.40	2.7	0.86	2.07%	32%
8 Companies

Watch List Summary

Topping our list this week is Tootsie Roll (TR). Based on the work we’ve done with this stock, we are becoming less convinced of the upside based on historical valuations. Using dividend yield theory, we see very limited upside. Our estimate is that TR's fair value is at $24. There are several factors that we are increasingly concerned about. One is the declining profit margin which has been shrinking since 2001 as our chart indicates below. Next is the stagnant trend in dividend payments since 2009 (please note that they reward shareholders with 3% special dividend in the form of stock.) As for a cash payout, they have been returning 35% of their earnings to investors. Alternatively, the board opts for a share buyback which reduced the shares outstanding from 66 million shares to 55 million shares. This strategy helped offset the dilution from the 3% stock issuance. We have never been a fan of share repurchases, though a recent letter from Warren Buffett stated the benefits of share repurchases.

Readers may have noticed that the largest part of our portfolio is in Tootsie Roll (TR). The rational for such action is that we are utilizing this stock as a cash holding. Our observation is that stocks that appear and continue to show up on our watch list have a good probability of being near the bottom, rather than the top, of their respective price range. As such, we believe the downside is limited but the upside may be equally as limited for the reasons stated above. Our action may reverse if conditions in the stock price change signficantly. For now we continue to view Tootsie Roll (TR) as a cash holding.

C.H. Robinson (CHRW), one of the largest 3rd party logistic companies, is second on our list this week. The stock has been hammered because of the recent rise in the oil prices and we believe this could be a great opportunity to start your research if you have always wanted to own a cyclical stock. Value Line estimates that CHRW trades at a fair value of 22x cash flow which suggests that the stock should be trading for $75. If you’ve read our recent review of the stock market, you will know that we are cautious because the Dow Jones Transportation Index has failed to test and exceed its July 2011 high.

If cyclical stocks aren’t your cup of tea, there are three that fit the undervalued mark based on a dividend yield thesis. These companies are Clorox (CLX), PepsiCo (PEP), and Cardinal Health (CAH). The first two are great household names that are considered defensive according to Wall Street. Cardinal Health (CAH) manufactures and distributes generic drugs. On average, if these shares revert to their historical dividend yield, CAH should return somewhere between 10% to 15% in the coming year.

Top Five Watch List Performance Review

In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from March 18, 2011 (not published) and have check their performance one year later. The top five companies on that list can be seen in the table below.

Symbol	Name	2011 Price	2012 Price	% change
HGIC	Harleysville Group Inc.	30.56	57.54	88.29%
SJW	SJW Corp.	22.48	24.22	7.74%
MCY	Mercury General Corp.	37.84	43.95	16.15%
SYY	Sysco Corp.	27.7	29.63	6.97%
JNJ	Johnson & Johnson	58.57	65.12	11.18%
			Average	26.06%

DJI	Dow Jones Industrial	11,858.52	13,232.62	11.59%
SPX	S&P 500	1,279.21	1,404.17	9.77%

Companies on our watch list outperformed the market by a wide margin. The biggest driver was Harleysville (HGIC) which received a buyout bid from Nationwide Mutual Insurance. However, when you exclude the gains of HGIC, our top five retained a respectable +10.51% gain. All five of our stocks achieved the minimum 10% target within the year, which we're quite pleased with.

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Broader Market and Dow Theory Suggest Proceeding with Caution

Posted on March 15, 2012 by nlo-admin | Leave a comment

As the Dow Jones Industrial Average and S&P 500 exceed the highs set in 2011, there is an alarming coincidence with 1972, just before the Dow Industrial’s -44% decline, that we’d like to bring to your attention. To set the stage, we must first point out an important factor about the Dow Industrials and S&P 500 that contributes to their ability to reach new highs.

First, the Dow Jones Industrial Average is what is considered to be a price-weighted index. According to Investopdia.com, a price weighted-index is:

“A stock index in which each stock influences the index in proportion to its price per share. The value of the index is generated by adding the prices of each of the stocks in the index and dividing them by the total number of stocks. Stocks with a higher price will be given more weight and, therefore, will have a greater influence over the performance of the index.” (read more here)

Next is the S&P 500. The S&P 500 is a capitalization-weighted index. Again, referring back to Investopedia.com, a market-cap weighted index is:

“A type of market index whose individual components are weighted according to their market capitalization, so that larger components carry a larger percentage weighting. The value of a capitalization-weighted index can be computed by adding up the collective market capitalizations of its members and dividing it by the number of securities in the index.” (read more here)

Each of these indexes are biased in the way they reflect the overall market movement. In the case of the Dow Jones Industrial Average, it is biased towards the highest priced members while the S&P 500 is tilted to the stocks that are similarly expensive, on a market-cap basis. In order to get a true sense of how all of the stocks are faring, rather than a select few that have been favored by investors, it is best to track a broadly based “equal-weighted” stock index. According to Investopedia.com, an equal-weighted stock index is:

“A type of weighting that gives the same weight, or importance, to each stock in a portfolio or index fund. The smallest companies are given equal weight to the largest companies in an equal-weight index fund or portfolio. This allows all of the companies to be considered on an even playing field.” (read more here)

For the most part, an equal-weighted index reflects how all stocks have fared in a bull or bear market. This is important because it allows for greater insight into where we are and potentially where we might be going. One equal weighted index of over 1,700 companies that has been around since 1962 is the Value Line Geometric Index (found here). In the chart below, we have compared the market action of the Value Line Geometric Index over a ten year period from 1962-1972 and 2002-2012.

What should stand out the most between both charts is the fact that, according to the Value Line Geometric Index, while the general indexes like the S&P 500 and Dow Jones Industrial Average are making new highs, the majority of stocks have not participated in the rise. In addition to not exceeding the peaks of 1968-1969 and 2007, the inability to exceed the 2011 highs is an indication of significant resistance as was experienced in 1971 and 1972 peaks.

Adding to our concern about the lack of participation by the broader stock market is the divergence between the Dow Jones Transportation Average and the Dow Jones Industrial Average since February 2012 (found here). This divergence can also be found in the chart below in the period from April 6, 1972 to January 5, 1973 between the Transports and Industrials. The declines that followed the divergence and peak of ‘72-‘73 were -59% and –44% for the Transports and Industrials, respectively.

Until the Dow Theory divergence is resolved and the Value Line Geometric Index make new highs above the 2011 and 2007 peaks, we’re concerned that the stock market is skating on thin ice.

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Posted in Dow Theory, Dow Theory Non confirmation, Uncategorized

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Gold Stock Indicator: Sell DUST

Posted on March 14, 2012 by nlo-admin | Leave a comment

Our Gold Stock Indicator is supposed to indicated whether to buy the Direxion Daily Gold Miners Bear (DUST) [short gold stocks x 3] or the Direxion Daily Gold Miners Bull (NUGT) [go long gold stocks x 3].

On January 26, 2012, the Gold Stock Indicator gave an indication to “buy” the Direxion Daily Gold Miners Bear (DUST). On February 7, 2012, we posted that the indication was for gold stocks to go down. Below are charts indicating the price level for the Philadelphia Gold and Silver Stock Index (XAU) and short gold ETF (DUST) on both dates .

Now that DUST appears to be in hyper-drive and the gains that have been registered, based on the closing price of DUST on February 7th and today, we recommend selling DUST. At $41.68, DUST is up over +32% from the closing price of February 7th. The gains achieved so far exceed the average gain of +26% in DUST represented in our chart of the Gold Stock Indicator since December 2010.

Based on the current standing of the Gold Stock Indicator, we believe that there is tremendous downside action for gold stocks. However, we believe that if there is another washout in gold stocks, a buy indication for Direxion Daily Gold Miners Bull (NUGT) [go long gold stocks x 3] will quickly follow thereafter. The moment the indication to consider buying NUGT arrives we will let you know. For now, SELLING DUST at the market should be considered.

There are several caveats that we adhere to in regards to buying DUST or NUGT:

First, DUST and NUGT are speculative trading instruments that are not for the faint of heart. If you cannot accept declines of -15% then do not participate in these transactions. As with the January 26, 2012 buy indication for DUST, there is considerable downside volatility. It is best to assume that you’ll experience a significant decline in value immediately after you purchase either of these ETFs.
Second, set a target amount that you’d be willing to accept if the position goes your way and get out at that target amount. Although you may give up a considerable amount of the upside with a low target, we’d rather that you do no experience the gut wrenching loss that goes along with being in such volatile products.
Third, we expect that between now and May/June 2012, there will be a major bottom in gold stocks and the current trend will be reversed. This will throw off our ability to accurately call the intermediate moves in gold stocks. Once the current downtrend is complete we’ll have a long bias towards gold stock investing.

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NLO Dividend Watch List: March 9, 2012

Posted on March 10, 2012 by nlo-admin | Leave a comment

It was a volatile week but the market finished unchanged. There are some bargains to be had in our Dividend Watch List this week which contains 11 companies that are within 11% of the 52-week low. A reminder to our readers, these are companies with long historical track records of dividend payments and increases.

Symbol	Name	Price	% Yr Low	P/E	EPS (ttm)	Dividend	Yield	Payout Ratio
TR	Tootsie Roll Industries	22.63	2.31%	30.58	0.74	0.32	1.41%	43%
CHRW	C.H. Robinson Worldwide	66.35	6.50%	25.32	2.62	1.32	1.99%	50%
CLX	Clorox Co.	67.91	7.69%	16.56	4.1	2.40	3.53%	59%
PEP	PepsiCo Inc.	63.15	7.95%	15.67	4.03	2.06	3.26%	51%
ANAT	American National Insurance	71.49	8.80%	11.10	6.44	3.08	4.31%	48%
ATO	Atmos Energy Corp.	31.09	9.05%	14.07	2.21	1.38	4.44%	62%
HNZ	HJ Heinz Co.	53.06	10.27%	17.69	3	1.92	3.62%	64%
WAG	Walgreen Co.	33.48	10.35%	11.31	2.96	0.90	2.69%	30%
BDX	Becton, Dickinson	76.82	10.39%	14.02	5.48	1.80	2.34%	33%
CWT	California Water Service	18.43	10.69%	20.48	0.9	0.63	3.42%	70%
MATW	Matthews International	31.65	10.78%	13.08	2.42	0.36	1.14%	15%
11 Companies

Watch List Summary

Topping our list this week is Tootsie Roll (TR) which took a hit in the last month, down 2.6%. Our suspicion is that the recent rise in input costs (commodities such as sugar and cocoa) has hampered the growth of TR. In the short-term, companies are not able to adjust their prices faster than their input costs, thus pressuring their margins in the short term. Value Line's estimated fair value for TR is around 19x cash flow which places the 2012 stock price at $20.90. After reviewing the historical range for TR, we see the worst case scenario at 15x cash flow. Therefore, our downside target is $16.50.

There are several companies on this list that have hit what IQTrends (www.iqtrends.com) considers “undervalued”. These are Clorox (CLX), Pepsi (PEP), Walgreen (WAG), and Becton (BDX). Based on their dividend yield thesis, the estimated upside are 26%, 48%, 92%, and 17% for these respective companies.

We are convinced that Walgreen (WAG) can emerge out of the Express Script deal better than expected. There’s no doubt that Walgreen's earnings will be hurt but we believed that many of these factors are priced into the stock. As such, our model places Walgreen fair value at $51. Value Line estimated that Walgreen trades at or around 11.5x cash flow which would put the intrinsic value at $50. We believed that the downside risk for the stock is around $30 level. The technicals also support our claim as the shares have a 1-year low of $30.74. In addition, we are anticipating a crossing over of the moving averages which should act as a buying case for the bulls. In any event, the dividend yield is at its highest point in history with a very low payout ratio. We feel comfortable holding a large amount of WAG in our portfolio.

Top Five Performance Review

In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from March 11, 2011 and have check their performance one year later. The top five companies on that list can be seen in the table below.

Symbol	Name	2011 Price	2012 Price	% change
HCBK	Hudson City Bancorp, Inc.	9.92	6.79	-31.55%
SYY	Sysco Corp.	27.83	29.93	7.55%
SHEN	Shenandoah Telecom.	16.01	10.35	-35.35%
BMI	Badger Meter, Inc.	37.68	32.01	-15.05%
WABC	Westamerica BanCorp.	50.25	47.32	-5.83%
			Average	-16.05%

DJI	Dow Jones Industrial	12,044.40	12,922.02	7.29%
SPX	S&P 500	1,304.28	1,370.87	5.11%

Companies on our watch list got hammered. Especially Hudson City (HCBK) and Shenandoah (SHEN). We said the following about Hudson City:

"On the top of our list this week is Hudson City Bancorp (HCBK). The stock has been under pressure this week. Current yield of 6% is attractive but with nearly $30B of debt and only $650M of cash on hand, it many not be worth risk/reward..."

We're glad that our intuition was right about the company and didn’t take any positions in the stock. Shenandoah paid an annual dividend which we were not fond of. As such, the name never attracted us. We highlighted Sysco (SYY) and Target (TGT) which rose 7.5% and 12.7% respectively.

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Transatlantic Holdings Acquisition Complete

Posted on March 9, 2012 by nlo-admin | Leave a comment

On March 6, 2012, the acquisition of Transatlantic Holdings (TRH) was completed by Alleghany Corp. (Y). On several occasions we have made specific reference to the undervalued nature of the Transatlantic Holdings. Below is a performance chart of TRH after appearing on our May 7, 2011 Dividend Watch List.

In several accounts that we manage, TRH was already a large holding. However, we couldn’t help but load up on additional shares after Alleghany Corp. announced that they put in a bid for TRH. We were glad that TRH reject the lowball bid by Warren Buffett’s Berkshire Hathaway (BRK-A).

When requested by Alleghany whether we wanted cash or shares, we took shares in the taxable accounts and cash in the tax-deferred accounts. As luck would have it, the redemptions of our TRH shares into cash/stock comes in time for our recommendation to reduce exposure to the stock market based on Dow Theory’s non-confirmation.

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Dow Theory Update

Posted on March 6, 2012 by nlo-admin | Leave a comment

It appears that Dow Theory is not understood, by even the best in the industry. In an article titled “The Meaning of the Transports’ Weakness,” Mark Hulbert surveyed some of the industry’s best Dow Theorists for a clue as to what the market was expected to do next. What stands out in this article is the following remark:

“Frustratingly, not all Dow Theorists agree on an answer. In fact, two of the three monitored by the Hulbert Financial Digest — Jack Schannep of TheDowtheory.com and Richard Moroney of Dow Theory Forecasts — think the appropriate point of comparison is not last summer but late October. And because, near the end of December, the Dow averages rose above their late-October highs, both Schannep and Moroney believe that the Dow Theory is solidly in the bullish camp — notwithstanding where the Dow transports might be relative to their July high.”

Within this commentary is a revealing explanation as to the reason why we believe that Schannep and Moroney got it wrong, thereby issuing a bear market indication in August 2011 and a bull market indication in late December 2011. In order to understand this, we must first point out a diagram of how Dow Theory reversals typically occur.

Courtesy of Richard Russell’s Dow Theory Letters (www.dowtheoryletters.com), Figure 1a and Figure 1b show how the Industrials and Transports need to retest prior lows established at point A. This retesting of the prior low would come after a medium-term rise at point B. Once the market rests the prior low, the market would then need to exceed the medium-term high of point B.

With the diagram above, we can now see how Schannep and Moroney could have considered that a new bull market was in the making. Once the market exceeded what they believed to be the POINT B in figure 1a and 1b, it then appeared to be a new bull market. Unfortunately, while the Dow Industrials appeared to follow the script in Figure 1a, the Transports were far behind in providing a similar pattern of retesting the previous low. This error led to an incorrect assessment of a new bull market.

Interestingly, Schannep and Moroney were inaccurate even in their call of a “bull market” using Dow Theory. Based on the diagrams of figure 1, a new bull market should have been indicated in early October instead of late December. In the chart below, it should be noted that the false bull market indication in October had much more to gain than the late December indication. Worse still, only a month later, in February 2012, the Dow Transportation Average starts to diverge from the path of the Dow Jones Industrial Average.

The current divergence between the Industrials and Transports is a confirmation of the bear market trend. Additionally, we expected that the Industrials and Transports are going to re-test the lows of 2011. However, our suspicion is that both the Transports and Industrials will sink below the 2011 lows and possibly go strait to the 9,700 level on the Industrials. The prospect remains that the bear market could potentially end if the Transports retest the lows of 2011 without falling significantly below.

As early as October 15, 2011 (article here), we indicated that the “…coming market volatility will provide great opportunities for traders and allow investors a chance to cash out of otherwise undesirable positions and take profits. Our expectation is that the Dow will go to the July 2011 highs before struggling at the May 2011 highs. Again, we’re still in a cyclical bear market until the Transports and Industrials exceed their respective 2011 highs.”

We hope that our readers have benefitted from our advice to unload undesirable positions.

Best regards.

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Posted in Dow Theory, Dow Theory Confirmation, Dow Transports, Richard Russell, Uncategorized

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NLO Dividend Watch List: March 16, 2012

Posted on February 18, 2012 by nlo-admin | Leave a comment

The $3 Billion Greek deal may have pushed some bulls back into the market. It was a volatile week but the market finished unchanged. The S&P was virtually flat but the blue chip lost 55 points for the week. There are some bargains to be had in our watch list this week which contains 11 companies that are within 11% of the 52-week low. A reminder to our readers, these are companies with a long track records of dividend payments.

Symbol	Name	Price	% Yr Low	P/E	EPS (ttm)	Dividend	Yield	Payout Ratio
TR	Tootsie Roll Industries Inc	22.9	2.31%	30.95	0.74	0.32	1.40%	43%
CHRW	C.H. Robinson Worldwide, Inc.	65.67	6.50%	25.06	2.62	1.32	2.01%	50%
ATO	Atmos Energy Corp.	30.71	7.69%	13.90	2.21	1.38	4.49%	62%
CLX	Clorox Co.	68.21	7.95%	16.64	4.1	2.40	3.52%	59%
CWT	California Water Service	18.22	8.80%	20.24	0.9	0.63	3.46%	70%
UNS	UniSource Energy Corporation	36.32	9.05%	13.21	2.75	1.72	4.74%	63%
PEP	PepsiCo Inc.	64.47	10.27%	16.00	4.03	2.06	3.20%	51%
CAH	Cardinal Health, Inc.	41.59	10.35%	15.40	2.7	0.86	2.07%	32%
8 Companies

Watch List Summary

Topping our list this week is Tootsie Roll (TR). Based on the work we’ve done on this stock, we are becoming less convinced of the upside based on historical valuation. Using dividend yield theory, we see very limited upside. Our estimate is that TR's fair value is at $24. There are several factors that we are increasingly concern about regarding. One is the declining profit margin which has been shrinking since 2001 as our chart shown below. Second is the stagnant trend in dividend payments since 2009 (please note that they reward shareholders with 3% special dividend in the form of stock.) As for a cash payout, they have been returning 35% of their earning to investors. Alternatively, the board opts for a share buyback and which reduced the shares outstanding from 66 million shares to 55 million shares. This strategy helped offset the dilution from the 3% stock issuance. We have never a fan of share repurchase, though a recent letter from Warren Buffett stated the benefits of share repurchases.

Readers may have noticed that the largest part of our portfolio is in Tootsie Roll (TR). The rational for such action is that we are utilizing this stock as a cash holding. Our observation is that stocks that appear and continue to show up on our watch list have a good probability of being near the bottom rather than the top of their respective price range. As such, we believe the downside is limited but the upside may be equally as limited for the reasons stated above. Our action may reverse if conditions in the stock price change signficantly. For now we continue to view Tootsie Roll (TR) as a cash holding.

C.H. Robinson (CHRW), one of the largest 3rd party logistic companies, is second on our list this week. The stock has been hammered because of the recent rise in the oil prices and we believe this could be a great opportunity to start your research if you have always wanted to own a cyclical stock. Valueline estimates that CHRW trades at a fair value of 22x cash flow which suggests that the stock should be trading for $75. If you’ve read our recent review of the stock market, you will know that we are cautious because the Dow Jones Transportation Index has failed to test and exceed its July 2011 high.

If cyclical stock aren’t your cup of tea, there are three that fit the undervalued mark based on a dividend yield thesis. These companies are Clorox (CLX), PepsiCo (PEP), and Cardinal Health (CAH). The first two are great household names that are considered defensive according to Wall Street. Cardinal Health (CAH) manufactures and distributes generic drugs. On average, if these shares revert to their historical dividend yield, CAH should return somewhere between 10% to 15% in the coming year.

Top Five Performance Review

Symbol	Name	2011 Price	2012 Price	% change
HGIC	Harleysville Group Inc.	30.56	57.54	88.29%
SJW	SJW Corp.	22.48	24.22	7.74%
MCY	Mercury General Corp.	37.84	43.95	16.15%
SYY	Sysco Corp.	27.7	29.63	6.97%
JNJ	Johnson & Johnson	58.57	65.12	11.18%
			Average	26.06%

DJI	Dow Jones Industrial	11,858.52	13,232.62	11.59%
SPX	S&P 500	1,279.21	1,404.17	9.77%

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Posted in Dividend Watch List, Uncategorized

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Correction of Errors on iShares Silver Trust (SLV) Interpretation

Posted on February 11, 2012 by nlo-admin | 1 comment

In our previous reviews of the iShares Silver Trust (SLV) (found here), we attempted to apply Dow Theory to the price movement of SLV. However, we have made an error in our analysis that has resulted in arriving at the wrong conclusion of the price potentially declining to the previous low that was established at the beginning of the bull market run on November 21, 2008 at $9.02.

Instead, we are revising our analysis to reflect that the price of silver may decline as low as $21.02 if it were to replicate the rise and decline from October 2001 to November 2008.This revision should provide a more qualitative view on the future prospects for both SLV and the price of silver.

As background to the error that was made, we first must explain that the iShares Silver Trust (SLV) is supposed to track the price of silver. However, SLV has only been in existence since April 2006.Our Dow Theory analysis of SLV was incorrect because we didn’t have an appropriate starting point, the previous low, to arrive at a correct downside target. The previous low occurred in 2001 which was long before SLV began trading.

This resulted in the mistaken belief that SLV should be expected to go back to the low of 2008 at $9.02. To remedy our error, we have obtained the price of silver from the last major low in the price, and re-ran our Dow Theory analysis. The chart below provides the three downside targets from the March 17, 2008 high of $20.99.

The downside targets from the peak were as follows:

$15.33
$12.51 (50%principle)
$9.68

In the final outcome, the price of silver fell below the third downside target of $9.68, ultimately resting at the $9.02 level before making the ascent to the recent high of $48.35.This sets the stage for our analysis of the current price action.

Our current Dow Theory analysis involves the period from the November 21, 2008 low at $9.02 to the peak of April 28, 2011 at the $48.38 level. The downside targets are as follows:

$28.70 (50%principle)
$22.14
$21.02

It should be noticed in the chart below that as time passes, the support levels increase which exerts greater pressure on the price to either rise substantially or breakdown.

Despite the revision to our numbers, our previous analysis about the expected outcome has remained accurate.Our May 5, 2011 article was on target with the claim that SLV would trade in a range before falling much further. SLV traded in a range until mid-July and ultimately fell as low as $26.16, a drop of -30.87% since that article was written.

The current indications suggest that SLV will fall as the $22.14 support level. Because silver easily fell to the third support level in the period from 2001 to 2008 (within the context of a precious metal bull market), we expect that the $21.02 is a realistic worst case scenario to watch for. We will consider buying silver and related derivatives at $22.25 and below.

We view the most recent rise from the December 2011 low as running out of steam.Therefore, the rising resistance level established at $28.70 appears to be firmly in place…for now.

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Posted in Dow Theory, Error, gold, iShares Silver Trust, SLV

NLO Dividend Watch List: February 10, 2012

Posted on February 10, 2012 by nlo-admin | Leave a comment

Despite the Euro debt fears, the market continued to churn higher. The S&P 500 is coming close to testing its April 2011 high of 1363. The momentum in the market has pushed investors to move into the cyclical names. As such, you'll see many great household names on this week watch list. Below are 15 companies that are within 11% of the 52-week low.

February 10, 2012

Symbol	Name	Price	% Yr Low	P/E	EPS (ttm)	Dividend	Yield	Payout Ratio
CRR	Carbo Ceramics	85.94	0.26%	15.29	5.62	0.96	1.12%	17%
CHRW	C.H. Robinson Worldwide	63.5	1.93%	24.24	2.62	1.32	2.08%	50%
CCBG	Capital City Bank Group	8.85	2.08%	30.52	0.29	0.40	4.52%	138%
TR	Tootsie Roll Industries Inc	23.62	3.51%	32.81	0.72	0.32	1.35%	44%
CLX	Clorox	67.75	7.44%	16.52	4.1	2.40	3.54%	59%
NFG	National Fuel Gas	47.88	7.57%	15.35	3.12	1.42	2.97%	46%
JW-A	John Wiley & Sons CL 'A'	45.39	8.36%	15.93	2.85	0.80	1.76%	28%
PEP	PepsiCo	63.95	9.32%	16.03	3.99	2.06	3.22%	52%
T	AT&T Inc	29.84	9.42%	45.21	0.66	1.76	5.90%	267%
BDX	Becton, Dickinson and	76.42	9.81%	13.95	5.48	1.80	2.36%	33%
CWT	California Water Service	18.29	9.85%	18.66	0.98	0.63	3.44%	64%
HNZ	HJ Heinz	51.87	10.39%	17.52	2.96	1.92	3.70%	65%
ATO	Atmos Energy Corp.	31.56	10.70%	13.90	2.27	1.38	4.37%	61%
KO	Coca-Cola Co	67.94	10.85%	12.49	5.44	1.88	2.77%	35%
PG	Procter & Gamble	63.88	10.98%	18.79	3.4	2.10	3.29%	62%
15 Companies

Watch List Summary

Topping our list this week is Carbo Ceramics (CRR) which is in a free fall. The manufacturer of ceramics used in hydraulic fracturing has been punished because of its ties to shale drilling. We suspect that some relief rally may be coming as CRR are heavily oversold. The historical dividend yield suggests that shares may be undervalued but further assessment should be made. Investors should have time for researching the stock since most dividend stocks typically do not make a "V shape" bottom.

Looking a bit further into the list you'll find many great household name such as Tootsie Roll (TR), Clorox (CLX), Pepsi (PEP), and AT&T (T). Investors craving income can get on average of a 3% yield from the entire list, three of which are Dow Jones Industrial components.

Top Five Performance Review

In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from February 11, 2011 and have check their performance one year later. The top five companies on that list can be seen in the table below.

Symbol	Name	2011 Price	2012 Price	% change
ABT	Abbott Laboratories	45.56	55.11	20.96%
SYY	Sysco Corp.	28.24	29.31	3.79%
PPL	PP&L Corporation	24.75	28.45	14.95%
WABC	Westamerica BanCorp.	51	46.63	-8.57%
MCY	Mercury General Corp.	40.07	43.45	8.44%
			Average	7.91%

DJI	Dow Jones Industrial	12,273.26	12,801.23	4.30%
SPX	S&P 500	1,329.15	1,342.64	1.01%

Disclaimer
On our current list, we excluded companies that have no earnings. 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 extensive due diligence. We suggest that readers use the March 2009 low (or the companies' most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period
.

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Posted in NLO Dividend Watch List, NLO performance

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Diamond Foods and Speed Resistance Lines

Posted on February 9, 2012 by nlo-admin | Leave a comment

In retrospect, everything appears “oh so clear.” We love history and attempt to interpret events from the past as a means to project into the future, assuming everything remains the same. Which is why the chart below seems so stunning to us.

The above chart of Diamond Foods (DMND), which has recently been blown out the water due to some accounting “irregularities” and the dismissal of the CEO and CFO, demonstrates the seeming power of Edson Gould’s speed resistance lines (SRL). First, notice that the high of DMND was at$96.13, the starting point for all analysis of SRLs. Based on the high of $96.13, the conservative downside target would have been the $48.47 level. At the same time, the extreme downside target would have been the $21.00 level with an intermediate downside target of $32.04.

Amazingly, every downside target has been met with DMND reaching as low as $21.44 , on an intraday low. By the way, little mention has been made of the accounting firm that signed off on Diamond Foods spurious books.

Already, in our prior work, we've seen a Netflix (NFLX) SRL, done in December 2010, give us an extreme downside target of $66. Almost a year later, NFLX declined through the $66 level to fall to as low as $62.37 on November 30, 2011. Another SRL that we ran before it came to fruition was Green Mountain Coffee Roasters(GMCR) on October25, 2011. At the time, GMCR was trading at $64.75. We estimated, using the SRL, that GMCR had an extreme downside target of $37.21. The stock recently fell as low as $39.42 as reviewed in our February2, 2012 posting.

Below is the latest speed resistance lines for a stock that we've been curious about for some time, Clean Harbors (CLH).

Some could reasonably argue that we’re allowing correlation to equal causation, which we’d gladly confess to. However, this explains why we a reactively seeking companies which we can run Edson Gould’s SRLs beforehand to ensure some semblance of integrity in the concept. We want to run this examination through as many companies as we can before the actual decline.

A word of warning, the fact that a stock reaches the extreme downside target does not necessarily mean that the stock or index is considered to be a “buy.” Nor does it suggest that the stock or index cannot fall further. Instead, it only reflects what potentially could happen on the downside. Additionally, SRLs do not suggest a time frame that a decline is expected to occur.

For the NLO team, speed resistance lines appeal to our sense of considering the worst case scenario, which has saved us a lot of money simply by avoiding situations that would create significant loss. Using history to assist us in projecting the downside risk is the primary reason we started examining speed resistance lines.

More about SRLs here

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Posted in Clean Harbor, CLN, Diamond Foods, DMND, Edson Gould, Netflix, NFLX, speed resistance line

Gold Stock Indicator Points Down

Posted on February 7, 2012 by nlo-admin | Leave a comment

On November2, 2011, we posted an article titled “A Strategy is Needed for Lagging Gold Stocks.” In that article we made reference to a Gold Stock Indicator that we’ve been using to determine the best times to buy and sell gold stocks. Below is the same Gold Stock Indicator covering the period from November18, 2010 to February 7, 2012.

In this example of the Gold Stock Indicator, we’ve provided the percentage change when the Direxion Daily Gold Miners Bear (DUST) [in red]and Direxion Daily Gold Miners Bull (NUGT) [in green] are bought and then sold when the Gold Stock Indicator has reached the opposite trend line. In this example, the opposite of the NUGT trendline is the red trendline and vice versa. We’ve excluded the respective peaks and troughs in consideration of percentage change. We only used the periods when the indicator first crossed the opposite trend line.

DUST and NUGT are ETFs that carry the highest risk of loss because they are intended to move at 3 times (3x) the NYSE Arca Gold Miners Index. Therefore, DUST and NUGT are speculations and not investments. Additionally,as the trend for the Gold Stock Indicator has been in a long declining phase,we expect that this pattern should reverse substantially at some point. However, based on the current trajectory, we have May/June 2012 as our tentative reversal period.

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Posted in gold, Gold Stock Indicator, XAU