Research Request: Applied Materials (AMAT)

Posted on March 23, 2010 by | 1 comment
A research request is a response to our reader's question regarding Applied Materials: "Do you like AMAT? They just raised their dividend and seem close to an average low." Our team wrote a brief response with the article titled "Applied Material and the Chip Sector Should Be on Your Radar" but we'd like to take that analysis a little bit further.
This isn't the first time we've mentioned a company within the chip sector. Our original Speculative Observation on Mattson (MTSN) yielded more than 50% in less than 6 months. Since that write up, MTSN returned 65% while AMAT went nowhere and returned less than 1%.
In pursuit of "seeking fair profits" and being a rather conservative bunch, we had to issue a Sell Recommendation on MTSN at $3.32 on January 6, 2010. Part of our strategy is to constantly search for alternative investment opportunity with a lower risk profile and higher reward potential. With that in mind, you can see that MTSN has outperformed AMAT and the overall market by a wide margin, thus it is fair to say that risk/reward profile is now more favorable for AMAT than MTSN. So let's take a deeper look at AMAT.
Applied Materials (AMAT) is the largest supplier of semiconductor, flat panel display (LCD), and solar equipment according to VLSI Research. The company leveraged their knowledge in LCD market into the solar market in late 2008. There are many growth drivers for this company and the sector. On the chip side, you have China continuing to consume more and more electronics pushing demand for greater chips. LCD driver is coming from conversion from CRT TV to LCD. Solar may get a boost from Obama push for "greener" economy. Though sound bullish in arguments, these factors may already be in the price so we must look at the  fundamental.
As of this writing, AMAT is trading roughly around $13.25. This is up considerably (100%+) from AMAT's December 2008 low of $6.24. The company began distributing cash dividends back in 2005 for the amount of $0.09. The current 2010 dividend payout is $0.28 which amounts to a 25% annual increase in dividend. It is expected the that growth rate of the dividend can't be sustain forever but we've taken this is as a positive sign of management's commitment to the shareholders. We at New Low Observer thinks true profits are obtained when a company shows cash rather than paper profits. The current yield of AMAT sits a little above 2% and is quite high on a historical basis. Average yield should be at 1.5%. Take that average yield and you arrive at a share price of $17.35. My proprietary model, which takes into consideration cash flow, earnings, book value, and yield, shows the following price targets:
  • Dirt cheap - $6.75 (we saw AMAT at $6.24 and rocketed up)
  • Buy - $13.26 (we are in that range)
  • Fair - $17.35
  • Over Value - $26.18
*my model changes over time so don't take these prices as static.
For technical analysis on AMAT, please refer back to the article "Applied Material and the Chip Sector Should Be on Your Radar".
So what would we do?
First, we look for other alternatives and stick to our rule of buying low (within 20% of the 52 week low). Because AMAT is 28% above the low, we will not chase it. Alternative investments may be in names like Qualcomm (QCOM) which is 15% above the low. If and when the price retraces on the downside, we'll re-evaluate the situation and may be compelled to buy more.
For anyone who believes that this is an opportunity that can't be missed, I recommend allocating 15% of your portfolio into this name. On top of that, do a two part purchase. First buy 7.5% now and if the shares fall another 20% buy the remaining 7.5% later. This way, the cost basis of the stock would require only a 10% rise to break even.  Again, it is not likely that we'll buy AMAT since the alternatives provide exceptional opportunity with less downside risk.
For Research Request of companies on our most recent Watch Lists (only Dividend Achiever or Nasdaq 100), email our team here.  We'll post only one research request each week.

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Posted in amat, applied materials, Mattson Technology, MTSN

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Chipmaker Intersil Pays Cash for Semi maker Techwell

Posted on March 22, 2010 by | Leave a comment
No sooner than we published our Nasdaq 100 Watch List on Saturday March 20th outlining a preliminary case for chip manufactures than integrated circuit manufacturer Intersil Corporation (ISIL) announces today that it will pay cash for semiconductor manufacturer Techwell (TWLL).  Although it was luck that our suggestion to examine the chip sector came just before the acquisition of Techwell (TWLL), the fact that the purchase was done with cash is a testament to the fact that the chip manufacturers have abundant cash or are under priced and undervalued.  Techwell (TWLL) rose 47.75% during regular trading hours as Intersil (ISIL) will pay a premium of 48.71%. 
For all intents and purposes, the chip sector lite up like a Christmas tree on the announcement of the acquisition of Techwell (TWLL) today.  Our previous Speculative Recommendation of Mattson Technology (MTSN), another wafer equipment manufacturer, is now about to breach the old high of $4.22 if the industry continues to heat up with activity.
We have said it many times before and will continue to iterate the point that when a whole sector or industry starts to appear at or near a new low then it typically indicates that the companies within that industry are undervalued.  It only takes a cursory look to verify if this assumption is correct.  Once it can be verified that companies in a specific industry are undervalued, you can rest assured that the mergers and acquisitions will begin. The fact that cash is being used to buy up companies is the final nail in the coffin on the theory of an undervalued sector.
Since we started the New Low Observer, we have been able to identify the water sector, the biotech/pharma sector and the medical device sector as undervalued before acquisitions or substantial price gains occurred.  It should be noted that we don't have any special skills,  just the willingness to carefully observe and sometimes buy companies that have fallen to a new low.  Get the research going for the companies that are part of the chip sector, and never chase a stock that has a rising price.
-Touc
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Posted in chip manufacturers, ISIL, MTSN, sector lows, TWLL

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Applied Materials and the Chip Sector Should Be on Your Radar

Posted on March 22, 2010 by | Leave a comment
Based on our most recent Nasdaq 100 Watch List, the following question was asked regarding Applied Materials (AMAT): "Do you like AMAT? They just raised their dividend and seem close to an average low."  Based on this question, We took a closer look at the chip related companies on our watch list and noticed that all of the companies started aggressive dividend increasing policies starting around 2002.  This alone is a compelling reason to investigate these companies.
In our cursory review of data on Applied Material (AMAT) from Morningstar.com, we found that Applied Material (AMAT) is selling below the average Price-to-Book ratio over the last 10 years by 14%. Over same period of time, AMAT is selling 22% below the price-to-sales ratio. Finally, AMAT is selling 44% below the price-to-cash flow ratio.
All of these factors indicated that the stock should return to the mean at some point in the future. A glaring negative is the fact that there hasn't been the earnings to justify the stock price and dividend. Dow Theory also indicates that from the peak of $22 to the low of $7.80, AMAT is fairly valued at $14.90. So far the decline in the price from the $15 dollar level has confirmed the Dow Theory view.
However, the last time that AMAT had negative earnings was in 2003. The low in 2003 at $11.50 took the stock to the high of $25 in the same year.   Additionally, AMAT didn't fall below $15 until the market decline in 2008, which seems natural given the state of the economy during that period of time (it might not be over yet.) This means that in any given year from 2003 to 2008, AMAT would have returned as much as 46% if based on the average low price of $15 and the average high price of $22. 
An important point to consider about the technical pattern of AMAT is the double bottom that was achieved in late 2002 to early 2003.  If AMAT were to replicate the same rally on a relative basis then AMAT could rise as high as $18.43, an increase of 43% from the current level.  Already, investors are being compensated for 2% of the downside risk through the dividend if the stock were held for a year.  As long as investors are willing to stomach the potential of going to the old low of $7.80 in November 2008 then there may be opportunity for this stock.
Our opinion is that the chip sector is ripe for mergers and acquisitions. In terms of AMAT, there are few downside risks if you're willing to accept the volatility and the losses that go along with such an investment. The aggressive dividend policy may pay off in the case of AMAT.  However, for the time being, we would review the other chip-related companies with a dividend that has earnings before diving into AMAT.

Because this was a cursory review of AMAT in response to a question, we recommend that you verify all data before taking a position either long or short.  We are considering a full review of the chip sector to be posted on this site in the future. 

-Touc

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Nasdaq 100 Watch List

Posted on March 20, 2010 by | 1 comment

Below are the Nasdaq 100 companies that are within 20% of the 52-week low.

Symbol Name Price P/E EPS Yield P/B % from Low
QCOM QUALCOMM 40.05 32.14 1.25 1.70% 3.17
12.94%
FSLR First Solar, Inc. 113.3 15.05 7.53 N/A 3.65
14.78%
GILD Gilead Sciences, Inc. 47.87 16.96 2.82 N/A 6.7
15.88%
ERTS Electronic Arts Inc. 18.42 N/A -2.31 N/A 2.33
17.32%
ATVI Activision Blizzard, Inc 11.82 139.06 0.09 1.30% 1.39
20.00%
This 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.

Nasdaq 100 Watch List Summary

This week, the top performing stock from last week's watch list was Genzyme Corp. (GENZ) which was up 4.36%.  The worst performing Nasdaq 100 stock from last week was First Solar (FSLR) which fell -1.93%.

Below is the list of the highest yielding stocks that are components of the Nasdaq 100.  This isn't an endorsement of the companies on the list.  However, it is noted that the majority of the companies that pay a dividend are related to the chip sector.  Clustering of companies in a specific industry may indicate that the entire sector is undervalued.  If the companies have high dividend yields on a relative basis (compared to their historical high yields), then these companies may be worth considering despite the fact that they are not within 20% of the new low.    Linear Technology (LLTC), ADP (ADP), and Paychex (PAYX) are Dividend Achievers as well as members of the Nasdaq 100 index. 

Before pursuing any of these companies, be sure to verify the dividend history as well as the earnings capacity to pay the dividend (more commonly known as payout ratio).

  

Symbol Company Price P/E EPS Yield P/B % from low
MCHP Microchip Technology 28.25 31.6 0.89 4.80% 3.53 43.69%
MXIM Maxim Integrated Prod. 19.14 71.69 0.27 4.20% 2.31 48.49%
PAYX Paychex, Inc. 32.17 23.52 1.37 3.90% 8.43 39.87%
LLTC Linear Technology 28.36 24.22 1.17 3.20% N/A 39.98%
ADP ADP 44.6 16.57 2.69 3.00% 3.91 34.10%
INTC Intel Corporation 21.99 28.41 0.77 2.90% 2.94 53.26%
PPDI Pharma Prod. Dev. 22.71 16.94 1.34 2.60% 1.98 26.38%
XLNX Xilinx, Inc. 26.6 24.43 1.09 2.40% 3.68 46.48%
AMAT Applied Materials, Inc. 12.49 N/A -0.07 2.20% 2.37 23.91%
CMCSA Comcast Corp. 17.53 13.9 1.26 2.20% 1.17 40.35%
KLAC KLA-Tencor Corp. 28.79 N/A -0.39 2.10% 2.25 49.25%
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Posted in ADP, amat, atvi, cmcsa, erts, fslr, GILD, intc, lltc, mchp, mxim, payx, PPDI, qcom, xlnx

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Dividend Achiever Watch List

Posted on March 19, 2010 by | Leave a comment

At the end of the week, our watch list contains 25 companies. Here is the watch list which ranks Dividend Achievers that are within 20% of the 52-week low for March 19, 2010.

Symbol Name Price % Yr Low P/E EPS Div/Shr Yield Payout Ratio
XOM Exxon Mobil Corp 67.04 5.48% 16.84 3.98 1.68 2.51% 42%
FPL FPL Group, Inc. 48.16 6.34% 12.13 3.97 2.00 4.15% 50%
MON Monsanto Company 72.20 8.46% 25.97 2.78 1.06 1.47% 38%
BRO Brown & Brown, Inc. 17.98 10.17% 16.13 1.12 0.31 1.72% 28%
CWT California Water Service 37.07 10.69% 19.01 1.95 1.19 3.21% 61%
TMP Tompkins Financial Corp. 38.37 10.75% 14.26 2.69 1.36 3.54% 51%
AWR American States Water 34.17 10.87% 21.09 1.62 1.04 3.04% 64%
T AT&T Inc. 26.24 13.15% 12.38 2.12 1.68 6.40% 79%
UMBF UMB Financial Corp. 41.18 13.32% 18.72 2.20 0.74 1.80% 34%
WEYS Weyco Group, Inc. 23.62 13.45% 21.28 1.11 0.60 2.54% 54%
LKFN Lakeland Financial Corp. 18.62 13.88% 14.78 1.26 0.62 3.33% 49%
WTR Aqua America, Inc. 17.53 13.91% 22.86 0.77 0.58 3.31% 76%
LLY Eli Lilly and Company 36.17 17.02% 9.18 3.94 1.96 5.42% 50%
OTTR Otter Tail Corp. 21.92 17.66% 30.87 0.71 1.19 5.43% 168%
SFNC Simmons First National Corp. 27.04 17.82% 15.54 1.74 0.76 2.81% 44%
SYBT S.Y. Bancorp, Inc. 23.34 17.88% 16.79 1.39 0.68 2.91% 49%
THFF First Financial Corp. 29.87 17.92% 17.27 1.73 0.90 3.01% 52%
NWN Northwest Natural Gas 46.79 18.22% 16.19 2.89 1.66 3.55% 57%
MLM Martin Marietta Materials, Inc. 87.41 18.49% 45.76 1.91 1.60 1.83% 84%
NTRS Northern Trust Corp. 55.45 18.69% 17.55 3.16 1.12 2.02% 35%
PGN Progress Energy Inc. 39.84 18.93% 14.49 2.75 2.48 6.22% 90%
UGI UGI Corp. 26.52 19.95% 12.01 2.21 0.80 3.02% 36%
PBI Pitney Bowes Inc. 24.52 20.31% 12.01 2.04 1.46 5.95% 71%
MGEE MGE Energy Inc. 35.40 20.33% 16.02 2.21 1.47 4.15% 67%
WGL WGL Holdings Inc. 34.44 20.46% 15.31 2.25 1.51 4.38% 67%
25 Companies


Watch List Summary 

The best performing stock from last week's list, once again, is 1st Source Corp. (SRCE) which rose 8.4% this week and 20% in three weeks. The stock is now 30% above the 52-week low and off our list. The worst performing stock is Weyco Group (WEYS) which fell 1.4%. Overall, the Dividend Achiever watch list gained +2.7% versus the Dow's +1.11% and the S&P 500's  +0.98%.

Several new companies are appearing on our list for the first time due to the dramatic increase in the share price from the March 9, 2009 low. Names such as Eli Lilly (LLY), Otter Tail (OTTR), and Simmons First National (SFNC) have joined the list of companies that are within 20% of the 52-week low.

Exxon (XOM) remains a great bargain in our view. Exxon has been within the 10% range for 9 consecutive weeks. Monsanto's (MON) technical pattern remains intact for another week. The upside down head-and-shoulder is holding the stock above the $71 level. The team at New Low Observer have long positions in XOM and MON. - Art

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Sell Electronic Arts (ERTS) at the Market

Posted on March 18, 2010 by | Leave a comment
It is now time to recommend that Electronic Arts (ERTS) be sold at the market. The stock has performed moderately since the Speculative Observation was issued on January 11, 2010 as it now trades at $18.51.  Since our Speculative Observation, ERTS has increased 10.69%. In the pursuit of "seeking fair profits" the returns that Electronic Arts (ERTS) has provided within the last 67 days say that it is necessary to consider alternative opportunities. The key to investment success and a key principle of economics is to seek the best alternatives.

From a technical standpoint, Electronic Arts (ERTS) appears to be trying to go above the $18.66 resistance level.  If the stock can break above $18.66 and remain at that level, the stock should make an assault on the $21 price range.  However, with an annualized return on this position of nearly 58%, we are content taking 10% and letting everyone else enjoy the remaining upside prospects.
As we have indicated in the purposes and function of this site, our goal is to:
  • maximize the annual yield of each trade.
  • reduce time between buying and selling of each stock.
  • exceed the annual yield of government guaranteed alternatives in each trade.
Investment and Speculative 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, we 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 Speculative Observation was made (please avoid making this mistake.) We aim for mediocrity in our returns, therefore we are happy with 9-12% annual gains. However, since codifying this approach to investing in 2005, we 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, we would rather leave some money on the table rather than have it taken away from us by the trades that are placed by institutions and market makers.
-Touc

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Posted in erts, Sell Recommendations, Speculative Observation

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Gaining More by Limiting Our Gains

Posted on March 18, 2010 by | 1 comment
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.

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Posted in ABT, CAH, CEPH, MON, MTSN, NWN, SVU, VIVO, WTR

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Quote of the Day

Posted on March 15, 2010 by | Leave a comment

The following is the conclusion from the Examiner's report on the failure of Lehman Brothers. This full report is a must read for anyone interested in the use of GAAP acounting and its acceptability despite being illegal at times.   The full report is available here.  

"After reaching the tentative conclusion that claims existed against Fuld, O’Meara, Callan, Lowitt, and Ernst & Young, the Examiner reached out to counsel for each, advised them of the basis for the potential finding, and invited each of them to present any additional facts or materials that might bear on the final conclusion. All counsel accepted the Examiner’s offer. In the weeks leading up to the submission of this Report, the Examiner had individual, face to face meetings with counsel for Fuld, O’Meara, Callan, Lowitt, and Ernst & Young, and carefully considered the materials raised by each. While there were credible facts and arguments presented by each that may form the basis for a successful defense, the Examiner concluded that these possible defenses do not change the now final conclusion that there is sufficient evidence to support a finding that claims of breach of fiduciary duty exist against Fuld, O’Meara, Callan, and Lowitt and a colorable claim of professional malpractice exists against Ernst & Young."

Lehman Report
REPORT OF ANTON R. VALUKAS, EXAMINER
VOLUME 3 OF 9 Section III.A.4: Repo 105 Page 990.
Jenner and Block
http://www.jenner.com/

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Nasdaq 100 Watch List

Posted on March 13, 2010 by | Leave a comment
Symbol Name Trade P/E EPS Yield P/B Pct from Yr Low
QCOM QUALCOMM 38.95 31.3 1.25 1.70% 3.1 9.84%
ERTS Electronic Arts Inc. 17.77 N/A -2.3 N/A 2.3 13.18%
GILD Gilead Sciences, Inc. 47.42 16.8 2.82 N/A 6.7 14.79%
FSLR First Solar, Inc. 115.5 15.4 7.53 N/A 3.6 17.04%
SRCL Stericycle, Inc. 54.49 26.9 2.03 N/A 5.5 18.56%
APOL Apollo Group, Inc. 63.02 15.2 4.16 N/A 6.8 19.38%
GENZ Genzyme 56.91 36.9 1.54 N/A 2 20.85%

Watch List Summary

This week on the Nasdaq 100 Watch List there were several notable changes. We had Stericycle (SRCL) decline -1.55% for the week. Stericycle (SRCL) had the largest decline of stocks that were on our watch list from the prior week. It appears that SRCL is on its way to declining to the previous low of $50.62. Since May 2009, SRCL has managed to trace out higher lows. SRCL is currently selling 29% below the 10-year average P/E ratio and 24% below the 10-year average price to cash flow ratio. Counteracting those positive features is that the company is selling almost 7% above the 10-year average price to book ratio. According to Morningstar, SRCL is a wide moat company or a company that a significant advantage that is challenging for new competitors to enter the industry (SRCL chart below).

The leading stock on the Nasdaq 100 in the past week has been First Solar (FSLR), which gained 6.37%. FSLR is selling at least 60% below the 3-year average price to book, price to cash, price to earnings, and price to sales. Lacking any 10-year data on First Solar (FSLR) my intuition tells me to consider this stock only in a small portion of the portfolio and that I’m willing to lose 100% of invested funds. FSLR seems like the Whole Foods (WFMI) of the energy sector, great concept but little in the way of sustainability.
Finally, the sector that appears to be on the move is the video game group. Both Electronic Arts (ERTS) and Activision Blizzard (ATVI) gained 3.80% and 3.99% respectively. The move higher was also confirmed by Gamestop Corp (GME), which rose just over 6% for the week.
In a footnote to our Dividend Achiever Watch List, we wish to bring to your attention the recent rumors that SuperValu (SVU) is being considered as a takeover candidate. Since our Investment Observation on January 6, 2010, the stock has run up 33.72%. SuperValu (SVU) sports a price to earnings ratio of 38 and a price to sales ratio that is half of its 5-year average. The price to book ratio is currently at the 5-year average. SVU seems a bit rich for me at this time however the performance of the stock since our January 6th article does not surprise our team.
The 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.
 -Touc

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Posted in apol, erts, fslr, GENZ, GILD, GME, qcom, SRCL, SVU, WFMI

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Dividend Achiever Watch List

Posted on March 12, 2010 by | Leave a comment
At the end of the week, my watch list contains 22 companies. Here is my watch list for March 12, 2010.

Symbol Name Price % Yr Low P/E EPS Div/Shr Yield Payout Ratio
XOM Exxon Mobil Corp. 66.80 5.10% 16.78 3.98 1.68 2.51% 42%
AWR American States Water 32.50 8.62% 20.06 1.62 1.04 3.20% 64%
MON Monsanto Company 72.35 8.68% 26.03 2.78 1.06 1.47% 38%
FPL FPL Group, Inc. 47.07 8.83% 11.86 3.97 2.00 4.25% 50%
CWT California Water Service 36.55 9.14% 18.74 1.95 1.19 3.26% 61%
WTR Aqua America, Inc. 16.88 9.68% 21.92 0.77 0.58 3.44% 75%
TMP Tompkins Financial Corp. 37.98 10.09% 14.12 2.69 1.36 3.58% 51%
T AT&T Inc. 25.62 10.48% 12.08 2.12 1.68 6.56% 79%
THFF First Financial Corp. 28.06 10.78% 16.22 1.73 0.90 3.21% 52%
MLM Martin Marietta Materials, Inc. 82.06 11.24% 42.96 1.91 1.60 1.95% 84%
LKFN Lakeland Financial Corp. 18.02 11.30% 14.30 1.26 0.62 3.44% 49%
WMT Wal-Mart Stores, Inc. 53.90 13.91% 14.57 3.70 1.21 2.24% 33%
UMBF UMB Financial Corp. 40.48 14.03% 18.40 2.20 0.74 1.83% 34%
BRO Brown & Brown, Inc. 17.67 15.04% 15.78 1.12 0.31 1.75% 28%
NTRS Northern Trust Corp. 53.97 15.52% 17.08 3.16 1.12 2.08% 35%
WEYS Weyco Group, Inc. 23.95 15.81% 21.58 1.11 0.60 2.51% 54%
SHEN Shenandoah Telecom 18.71 16.21% 30.18 0.62 0.32 1.71% 52%
UGI UGI Corp. 25.47 17.05% 11.52 2.21 0.80 3.14% 36%
WGL WGL Holdings Inc. 33.67 17.77% 14.96 2.25 1.51 4.48% 67%
RBCAA Republic Bancorp, Inc. 17.64 18.31% 8.73 2.02 0.53 3.00% 26%
SYBT S.Y. Bancorp, Inc. 23.19 19.66% 16.68 1.39 0.68 2.93% 49%
SRCE 1st Source Corp. 16.66 20.38% 21.09 0.79 0.60 3.60% 76%
22 Companies

Watch List Summary 

The best performer from last week's list once again is 1st Source Corp. (SRCE) which rose 2.8% or 11% in two weeks. The worst performing stock is American State Water (AWR) which fell 6.1%. Overall watch list fell 0.5% vs the Dow gain of 0.5% and the S&P 500 gain of 1%.

Exxon (XOM) remain a great bargain in our view. This largest market cap company has been within the 10% range for 8 consecutive weeks. Once again, I'd like to flag Monsanto (MON) technical pattern for another week. The head-and-shoulder pattern remained strong this week when the stock held above the $71 level. The team at New Low Observer have long positions in XOM and MON. - Art

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Lessons Learned From Our Worst Picks

Posted on March 11, 2010 by | 1 comment
In response to our “Worst Performing Picks” article, a reader asks:
“Is there some common trait among these 5 that, if known, could be used as a red flag or indicator not to repeat a future sub-optimal purchase?”
Touc’s response:
This is the payoff question and is worth its weight in your favorite commodity.
First and foremost, in four of the 5 stocks, we didn’t adhere to our own rules. One rule is to side-step stocks that have had recent cuts or no annual increase in the dividend. At the time, we didn’t wait to confirm if Masco (MAS) would increase the dividend in April 2008. Also, we didn’t wait to see what would happen after the dividend cut by Nucor (NUE) in March 2008. The concept of confirmation is incredibly important in Dow Theory, by ignoring this principle we cornered ourselves with bad recommendations.
What we should have done is wait one full year after the cut, or lack of an increase, to determine the viability of the company. Keep in mind that a cut in the dividend isn’t a death sentence. In fact, cutting the dividend might be the best management move to make. However, current shareholders of the company might abandon the stock if they have a policy to hold stocks with a steady dividend (as we advise investors to do.) We jumped the gun on Masco (MAS) and Nucor (NUE) when all the economic tealeaves were saying things weren’t looking good. I mean, how could we ignore the fact that a home building supplier and a steel maker were going to have some troubles with a declining housing market?
The next rule of ours that we violated was not issuing a sell on Illinois Tool Works (ITW) and American National Insurance (ANAT) after substantial gains in a short period of time. Illinois Tool Works (ITW) rose 9% in one month while American National Insurance (ANAT) rose 15% in less than one month. It is not that we want to be traders however, if the market gives you in one month what is considered to be the historical annual average gain over the last 100, 50, 25, and 10 years then we should thank our lucky stars and move on. In the 15 recommendations that were made in 2008, 10 were successful and exceeded the historical long-term market averages. We had nothing to prove yet we managed to allow these opportunities to get away from us.
On the matter of Mine Safety Appliance (MSA) there are no explanations for the reason this didn’t succeed. To think that we’d be 100% on the mark every time would be fooling ourselves. Mine Safety Appliance (MSA) was simply a bad recommendation on our part, that is, unless you bought the stock at substantially lower levels.
There are several points that must be made about our investment strategy. First, we’re trying to take responsibility for the recommendations that we make. We don’t want to make a recommendation and leave it hanging out there in the open without accountability. Too often we see Strong Buy, Buy, Accumulate, Strong Conviction, Hold, and Market Perform recommendations without the clarity that is needed for investors. Adding to the lack of clarity is the issue of the absence of sell recommendations. Our Investment and Speculation Observations are meant to alert an investor to start their own research. Our Sell recommendations are meant to alert investors that exceptional gains have been made, compared to the historical average, and that selling wouldn’t be the worst strategy. Although we issue sell recommendations, investors can clearly chose what they wish to do if they actually bought a stock that we issued an observation on.
We also want to demonstrate that what we’re doing is a matter of discipline that can be applied by anyone. We’d like to believe that what we’re doing is more than just randomness and luck. We’ll probably be proven wrong soon enough. However, until that time comes we’ll continue to gladly show our mistakes that happen to be exceptions that prove our rules.
When we make a recommendation, our goal is to buy the stock at a lower point than the recommended date. We assume that an investor or trader has to do some due diligence before deciding to invest in our recommendations. This means that if the stock ran up then don’t buy but if the stock fell since the recommendations and the fundamental attributes are intact despite the relatively low price then an acquisition of the stock might be in order.
Finally, we use the investment/speculative observation date and price as the worse case scenario for our recommendations. We hold ourselves to this as an objective measure of whether we’re making the right calls or not. If we’re right then great however, if we’re wrong then we modify the method. Since codifying our approach, as outlined in the About This Site section, we’ve had very little need to make changes. Make no mistake we’re ready and willing to change if necessary. So far we’re able to say that luck has been on our side for quite a while.
-Touc 
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Posted in ANAT, Confirmation, Dow Theory Confirmation, ITW, MAS, msa, NUE

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Values According To S.A. Nelson

Posted on March 11, 2010 by | Leave a comment
S.A. Nelson is credited with coining the term "Dow's Theory." In fact, Nelson tried to convince Charles Dow to write a book about his articles in the Wall Street Journal but did not succeed. After failing to get Dow to write a book, Nelson wrote his own based on Dow's writing. The book titled ABC of Stock Speculation neatly lays the groundwork for Dow's Theory to be recognized and interpreted throughout history.
In one excerpt from the book A Treasury of Wall Street Wisdom, Nelson says:
"...stocks have recovered after artificial depression and relapsed after artificial advances to the middle point which represented value as it was understood by those who bought or held as investors."
This means that if an index or stock that has fallen below the halfway point of the previous advance or risen above the halfway point of a previous decline, then the index/stock is either undervalued or overvalued. If the index/stock has fallen close to the prior level of where the advance started and the index/stock is still fundamentally sound then the index/stock could be considered extremely undervalued. Likewise, if the index/stock has risen far above the prior high then it is considered overvalued.
When I start to consider investing in an individual stock, I only want to know if the price of the stock has reached a new 1-year low. From this vantage point, I can determine if the stock is trading at an extreme relative to the halfway point of the previous advance and decline. Again, this approach can only work if the company is generally in fair condition. This means that earnings exist, the dividend payout ratio isn't too high and management has a track record of rewarding the shareholders and etc.
The halfway point of the previous advance or decline is the point at which "long-term" investors would consider the stock or index fairly valued. Traders can take advantage of this fact and use it to their benefit. In the chart below, I show the Dow Jones Industrial Average since 1997.
What is important to notice is that the artificial advance and artificial depression meet at the halfway point of 10,302.31 (dark blue horizontal line.) If drawn backwards to the point when the Dow first went above 10,000, we can see an enormous amount of time spent at or around 10,302.31 (as is currently the case.) This indicates that, for now, "long-term" investors fairly value the market at around the 10.3K level. 
Take note of the fact that the Dow volume has fallen as the index has risen since the March 2009 bottom.  This is in stark contrast to the bottom in 2003 which had volume more or less in a flat to higher range.  As it stands, we have the upside limit to this market at the 11,722 level.  Basically, we're still in a bull market rally, or cyclical bull, within the context of a secular bear market. 
-Touc
This article was originally published in May 2009 on our former site Dividend Inc.

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Celebrating Market Gains by Reviewing Our Worst Performing Picks

Posted on March 9, 2010 by | 1 comment
While champagne glasses are being raised to celebrate the nearly 62% increase in the Dow Jones Industrial Average over the bottom that was reached on March 9, 2009 we’d like to outline some of our worst performing research recommendations as part of our former website at Dividend Inc. We’re not surprised at the markets rise as outlined in our article on SeekingAlpha.com titled “The Importance of Market Perspective” issued in February 2009. Our only concern now is how much further the market could go before a mild decline of 30% or so.
As you may know, even in the worst environment for investing in stocks (during 2008) we still made recommendations for investors to look out for as new investment opportunities. Of the 15 companies that we recommended in 2008, only five under-performed. However, anyone who actually put money in these five stocks might have lost a large portion of their assets if they didn’t sell early enough.
First on the list is Mine Safety Appliance (MSA) which fell 61.93% from the Research Recommendation date to the lowest point on March 9, 2009. Almost as soon as we made the recommendation the stock fell to $35 a share from $41.61. The stock moderated for a couple of months until it finally collapsed in early October. (MSA) discontinued its policy of increasing the dividend every year which is a warning sign for the future outlook on earnings. Adjusted for dividend payments, (MSA) is in the lose column to the tune of –32.19%.
Next on our list is Masco Corp. (MAS). (MAS) also took an incredible dip right after the recommendation. Falling from $19.43 all the way down to $14.00. After a rise all the way back to the recommendation level of around $19, (MAS) made the amazing march down 81.27% to the March 9, 2009 low. Because (MAS) is in the home improvement and building industry it stands to reason that the stock would fall as much as it did. Not surprisingly, (MAS) cut their dividend which for the New Low Observer teams means sell the stock and watch what develops from the sideline. Adjusted for dividend payments, (MAS) is in the lose column to the tune of –15.41% since the initial recommendation.
The next stock is Illinois Tool Works (ITW) which was a stock that was handled in the most irresponsible manner on our part. After recommending the stock on April 2, 2008 at $50.34, we were able to watch the stock exceed a gain of 9% in less than 2 months but didn’t put in a sell recommendation. Given what we knew about the market conditions at the time, we should have been more vigilant about the movement of this stock. Subsequent to our recommendation of ITW the company’s stock fell by as much as 49.15% at its worst and has discontinued it’s record of dividend increases. Adjusted for dividend payments since the recommendation date, ITW is in the lose column by –2.14%.
American National Insurance (ANAT), one of my favorite insurance companies has had an astounding run since our recommendation. ANAT initially rose 15% after our recommendation which was great. However, we didn’t adhere to our rule of taking exceptional gains in a short period of time. The price to pay for this error was to watch ANAT fall a gut wrenching 67.87% to the low of March 9, 2009. Even more astounding is the rise from the bottom however, we cannot take any credit for the rise that has taken place since. ANAT has discontinued its record of increasing the dividend every year. One claim that can be made is that since our recommendation date, ANAT has risen by 14.97% when adjusted for dividend payments.
Finally, our recommendation of Nucor (NUE) fell by 47.75% at the lowest point on November 20, 2008. NUE later cut the dividend and has an adjusted lose of –2.97% since or initial recommendation.
It should be pointed out that our policy is to make Investment Observations at a time when we think a stock should be investigated as a potential investment opportunity. Our hope is that after the recommendation/observation the stock price will be lower than when we first pointed out the stock. If you review our 2008 Transaction Overview, you will see that we did carry a few of these stocks in our portfolio with varying results. Despite the fact that these companies cut or did not increase their dividend we will continue to follow these stocks as former Dividend Achievers.
-Touc
  • When things are going great, investigate and learn from the worst performing assets

A reader asks:
“Is there some common trait among these 5 that, if known, could be used as a red flag or indicator not to repeat a future sub-optimal purchase?”

Touc’s reply is here.

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Posted in ANAT, Illinois Tool Works, ITW, MAS, Masco, Mine Safety Appliances, msa, Nucor, NUE

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Water Utilities Look Affordable

Posted on March 7, 2010 by | Comments Off on Water Utilities Look Affordable
As we have indicated in our February 26th posting, “as a sector, the water utilities are the most undervalued in our Dividend Achiever Watch List." After the rumblings in the water utility sector this week with the announced acquisition of Southwest Water Company (SWWC) by Water Asset Management LLC, we have decided to outline the potential price and percentage change that the stocks would go to if they only went to the 10-year average for the respective fundamental valuation metric. However, as has been pointed out by Warren Buffett in his 2009 annual report, “Even evaluations covering as long as a decade can be greatly distorted by foolishly high or low prices at the beginning or end of the measurement period.”
Company
 Price Valuation Target % Up
American States Water (AWR) $34.62 P/Earnings $37.27 7.88%
P/Book $36.12 4.55%
P/Sales $38.80 12.30%
P/Cashflow $40.29 16.61%
San Jose Water (SJW) $23.56 P/E $22.28 -4.74%
P/B $27.89 19.25%
P/S $30.94 32.27%
P/C $32.61 39.43%
California Water (CWT) $36.90 P/E $46.02 25.09%
P/B $42.36 15.15%
P/S $40.53 10.16%
P/C $38.61 4.94%
AquaAmerica (WTR) $16.75 P/E $20.93 25.00%
P/B $23.70 41.56%
P/S $23.95 43.05%
P/C $24.76 47.92%
Data Source: Morningstar.com

Again, the target prices are based on the 10-year average for the given valuation metric. Of the water companies above, AquaAmerica (WTR) has the highest average upside potential of 39% for all four valuation categories. Although San Jose Water (SJW) is not currently on our Watch List, but it has the second highest average upside potential of 21%. California Water (CWT) and American States Water (AWR) followed closely behind with an average upside potential of 13% and 10% respectively.

The biggest risk factor for water utilities is interest rates. If, for some reason, there is a spike in interest rates, then all utilities will suffer tremendously. As we are at historical lows in the cycle for interest rates, we can only expect that there is greater risk of rates rising than falling. Even if rates were to fall, there is little to fall from, whereas, there is tremendous upside.Despite our seemingly aggressive investment strategy, we only consider the mean as the best guess of the potential for where these water stocks might go. In addition, we enter into every transaction accepting the possibility that any investment might fall at least 50% as outlined in our article titled “A Simple Way to Avoid Losing Money in Stocks.”-Touc

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Posted in AWR, CWT, SJW, water utilities

Nasdaq 100 Watch List

Posted on March 6, 2010 by | Leave a comment
Below are the Nasdaq 100 companies that are within 20% of the 52-week low. This 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 (view all here.)

Symbol Name Price P/E EPS (ttm) Yield P/B % from Yr Low
FSLR First Solar, Inc. 108.61 14.43 7.527 N/A 3.42 10.04%
ERTS Electronic Arts Inc. 17.12 N/A -2.31 N/A 2.12 15.99%
GILD Gilead Sciences, Inc. 47.61 16.87 2.82 N/A 6.51 17.21%
APOL Apollo Group, Inc. 62.39 15.01 4.16 N/A 6.53 18.19%
QCOM QUALCOMM 38.76 31.11 1.25 1.70% 3.08 18.64%
ATVI Activision Blizzard 11.03 128.26 0.09 1.40% 1.3 19.11%
SRCL Stericycle, Inc. 55.35 27.33 2.03 N/A 5.54 20.43%

Nasdaq 100 Watch List Summary

This week the lowest performing stock was Gilead Sciences (GILD). Gilead Sciences was up 0.02% for the week.

The leading gainer from last week was Qualcomm (QCOM) with a gain of 5.53%. While there are many reasons why QCOM increased so much in one week. Most market analysts attribute the gains to some syndicate operators (aka hedge fund managers or famous investors) or the fact that QCOM, in a desperate attempt to lure new investors, indicated that it would increase the dividend and buy back shares. Our reason for the shares to rise is because they were so underpriced (the value component was too difficult to ignore). It doesn't mean that QCOM can't go lower but our suspicion is that the stock could only fall for a short bit lower from the previous 52-week low. (chart below)

Pharmaceutical Products (PPDI) had the second largest gain for the week with 4.71% to the upside. PPDI is no longer on our watchlist and is tracing out a pattern of higher lows with a resistance to the upside at the $24 level. if PPDI can convincingly break above the $24 level then PPDI might be able to test the $29 level in a relatively short period of time. (chart below)

Apollo Group (APOL) gained 4.02% for the third highest gains for the week. The average gain for the last week for all companies on our Nasdaq 100 watch list was 3.02%. QCOM and APOL seem like the best companies to research for potential investment opportunties at this time.

-Touc

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