Adding Noble Corp, Seabridge Gold to Secular Trends Portfolio (NE, SA)
Posted on | September 4, 2009 Time: 11:11 am | Comments
I’ve been sitting on larger-than-desired cash position of 12.5%, and waiting out what I saw as the potential for a 4-5% pullback in the major indexes. That pullback just doesn’t seem to have gathered its critical mass, with all due nods to the anemic volumes we’re seeing of late. Meanwhile I’ve been pouring over sectors that I feel are either undervalued or due for a consolidation wave. Energy fits both criteria with a bow on top.
Valuations are largely in the eye of the beholder, but I am feeling ever more confident in the fact that S&P operating earnings for 2009 will put the market in the range of 15-18x, which is more than fine for this point in the business cycle, and gives us plenty of breathing room for further gains.
Noble Valuation Looking Regal
There’s little to bicker about with regards to Noble’s fundamentals. The stock sports a sub-7 P/E, 1.5 book, and my personal favorite, less than 5x the run-rate operating cash flow. Think what you want about the future direction of crude oil prices, this company is booked $10b solid on their rigs, and is a prime M&A candidate. Dayrates rose nearly 20% year-over-year in the latest quarter, and Noble has a high % of rigs that can reset rates mid-quarter, which should boost the company’s next few earnings reports if my hunch of $80 crude plays out.
I was strongly considering Pride International (PDE) instead of Noble, as Pride’s valuation probably has room to run following the Seahawk spinoff. My only real reservation on Pride is the concentration of rigs in the Gulf of Mexico and the lack of clarity as to how Pride’s mgt. team will handle its newfound financial leverage.
Adding 1000 shares Noble Corp. (NE) at $35.49.
Seabridge Gold - Pre-Development Gem
If I had a Rule Sub-1A of investing, it would be to avoid companies with no revenues. Seabridge violates this unwritten rule, but sometimes you just have to think outside the box a bit.
I’ve been looking to get some exposure to gold, but I have been insisting on seeing an operator that doesn’t hedge; if I’m going to speculate on a miner, I want all the upside. Why gold? I’m certainly no gold bug, and I’m not a believer in just being there to get the prerequisite 5% that so many wrote managers say is “smart”. But there is a time and a place, and several positive secular trends are in place right now.
One of them is inflation - that’s right, I’m putting inflation down as a secular trend. It’s going to be that enduring. I’ve been pounding the table on this one for so long that my hands are sore, and started doing it long before the “reflation trade” was common lexicon.
I also think the secular trend of expanding middle classes in India, Brazil, and China will produce higher raw demand for gold, and I’m quite curious to see what any real demand increase will do at the margin, considering how much gold is purchased by the bugs and hedgers of the world. Seabridge has full ownership of 8 mines, and all are in North America, which takes away some of my geopolitical fears of the larger, more diversified miners.
Based on the most recent economic assessment of Seabridge’s main project, the KSM mines in British Columbia, there’s over $11b in gold, silver, copper, and molybdenum to be extracted over a period of 7-10 years. But the company could just as easily get all the field tests in order, then sell the property to one of the alpha dogs next year. Seabridge compiled their assets during a historically low period in gold prices, and they want to leverage spot prices as much as possible.
Adding 1000 shares Seabridge Gold (SA) at $29.99.
Ryan Barnes
disclosure: Author does not hold personal stakes in the companies mentioned.
Tags: gold prices > Noble Corp > offshore drilling > S&P earnings > Seabridge Gold
Costco Breaking Out on its Fifth Attempt (COST)
Posted on | August 27, 2009 Time: 12:57 pm | Comments
Everyone’s favorite home for 5 lb. cracker bags, 50 rolls of TP, and grab-bag inventory, Costco is finally breaking through the $50 level that has plagued shares since the beginning of the March rally. On no less than 5 separate occasions, shares of this low-beta name have pushed strongly from the $46 level towards $50, but only ending a dime above that resistance level for one day before drifting back down.
But this week seems to have all the right catalysts in place. With the broad market looking ever more like a marathon runner hitting the “wall” mid-race, Costco’s value proposition and defensive stature is looking quite shiny of late. Throw in an upgrade from William Blair (one of the few firms that has some genuine ’street cred’ on the buy side) and a membership fee-driven earnings quality that is unrivaled in the retail space (more on that in my earlier post), and you have all the makings for a nice little ramp.
I chose to hold Costco through the weak times, knowing that the valuation would not be able to hold the 22x-plus level if comps spent any time in negative territory. They did just that, dipping to -1% and -2% (excluding fuel) in June & July. But now the consumer trends look to be stabilizing, as seen in the positive results from Big Lots, Whole Foods, and the like. And with gas prices on the rise, headline sales figures will get the positive juice they need to entice sideline investors and customers will go back to driving 20 miles out of their way to save $.25/gallon on fuel. And as so often happens in the case of the latter, many will come in and shop on the same trip.
So investors find themselves staring at what needs to be thought of as a relative floor in valuation, as the membership fees alone drop $1.2b per year to the bottom line like a rock. Based on today’s mkt cap, that values the company at just over 18x what is essentially guaranteed income. Throw in the fact that net margins have been in a shockingly narrow (read:stable) range for the past 5 years, and you get the whole of the retailer’s operating profits as a free kicker.
I would add to the COST position today if it wasn’t already a 6% position in the Secular Trends Portfolio. But in a market where everyone - pro, novice, and all grades between - are unsure of what’s a safe bet and what’s not, Costco sits in some rarified air.
Ryan Barnes
Musings on Petrobras, Economic Recovery (PBR)
Posted on | August 21, 2009 Time: 12:14 pm | Comments
There’s little to do when one is wrong but admit, find a lesson, and move on. In that spirit, my decision to trim the majority of the Petrobras (PBR) position in the Secular Trends Portfolio was ill-timed, to say the least. I was concerned about several straight weeks of rising crude inventories, and I didn’t like the company’s leveraged position to crude futures in that light. As mentioned in my previous post:
I’ll be looking to re-beef the PBR position as soon as crude inventories stop shooting to the moon…
Well, this week the EIA showed a surprise drop in crude inventories of 8.4 million barrels, a metric I was quite shocked to see after weeks of surprising on the upside. As a result, crude has rallied more than 7% since the release, while PBR has risen more than 5%.
I am tempted to rebuild the position today before the close, but I’m a believer in the not-so-famous axiom of “one metric could be anything, but two can set a trend” (copyright pending). So I’ll wait it out until next Wednesday’s report to see if there’s a real drain on supplies happening, or if this week’s report was just an aberration. In the meantime I’ll lick my wounds and gaze fondly at the attractive chart for Petrobras.
Mr. Market on a Confusing Diet of Uppers & Downers
Despite my constant attempts to cancel out the diverging data and anecdotes, I confess that I just can’t peg the next 10% move in the equity markets. My slight hedge is towards up, but I can’t remember a time when there were so many crosscurrents swirling around a single economy. With options expiration today and volume remaining extremely thin, there’s not a lot of conviction to be found despite the direction of the proverbial tape.
One thing that stands out to these restless eyes is that our government’s stimulus, both via direct legislation and indirect monetary means, is having a delayed effect. Meanwhile, the cost-cutting (leading to margin-boosting) efforts of Corporate America have been occurring in a parallel process, which implies some built up gunpowder going into the remainder of the year. The market anticipates this already, which is the only reason why the S&P 500 dismissed 950 so easily and shuttled its way past 1000.
Helping this process along has been the ratcheting up of 2009 S&P operating earnings estimates by nearly every macro guru, putting the market’s run-rate P/E in the range of 13-16x, depending on who you believe and at whom you scoff.
Portfolio Update
The Secular Trends Portfolio has been holding its gains steady against the broad market, but I’ve been disappointed with the near-term performance of names such as Safeway (SWY), Costco (COST), and Electronic Arts (ERTS). The cash position is a little top-heavy at 10%, so I’ll be looking to add another healthcare name in addition to possibly cutting Goldman Sachs (GS) and Peabody Energy (BTU).
As the one year mark since the Portfolio’s inception nears, I have a very base desire to crack the 35% outperformance barrier over my benchmark S&P 500. I don’t know why 35% feels so much more “validative” than the 30% I sit at now, but 35 points of alpha is my goal, and I’ve got just under a month to get there. To that end I’ll be employing all the cash on Monday, in line with my slight hedge toward an upward market bias and the fact that there’s just a few stocks out there that look ultra-attractive.
Ryan Barnes
disclosure: Author does not hold personal stakes in the companies mentioned.
Tags: Crude Oil > economic stimulus > Petrobras > S&P 500 > Secular Trends
Trimming Petrobras, Caterpillar in Secular Trends Portfolio (PBR, CAT)
Posted on | August 10, 2009 Time: 11:50 am | Comments
There hasn’t been a lot of activity here for a couple of weeks, the unfortunate result of other obligations and my ongoing intent to put in 5-6 hours of good reading and research time for every hour spent writing up my conclusions. But hey, if it’s not broke; The Secular Trends Portfolio continues it’s alpha generation, beating the S&P by roughly 30% since its inception last September.
I’ve said repeatedly that I’m not a big believer in technical analysis, and it will certainly never be the sole impetus for a change to the Secular Trends Portfolio. But I’m a little worried about the crude oil chart in the face of rising inventories and a possible shift in regulatory stipulations surrounding speculators. And because Petrobras (PBR) tracks crude so closely, I want to reduce the potential risk of this larger-than-average position in the portfolio. I’ll be looking to re-beef the PBR position as soon as crude inventories stop shooting to the moon…
Trimming about 2/3 of the existing position, 1000 shares, at $41.85:
Caterpillar has been on an extraordinary run, and the position size is now nearly 10% of the overall model - just too high. I continue to believe CAT is well positioned to generate outsized gains relative to the market. But after reading through the latest conference call and analyst day notes, I’m a little worried about how the Street will view a “dip” in earnings during the 3rd quarter, which could occur on a superficial level. And only a greedy bastard would look a 30 day, 50% rally gift horse in the mouth for too long. Trimming just 20% of the exiting position of 2180 shares by selling 400 shares at $46.80:
WYSIWYG!
As with all activity to the Secular Trends Model, trades and position sizes can be accessed from the Portfolio Page. 100% full transparency is the only method of presentation allowed here.
Ryan Barnes
Tags: Caterpillar > Crude Oil > Petrobras > Secular Trends Portfolio
Caterpillar Crushes Estimates, Raises EPS Guidance for 2009 (CAT)
Posted on | July 21, 2009 Time: 6:34 am | Comments
The Secular Trends Portfolio looks to gobble up a few more scraps of alpha today as largest holding Caterpillar (NYSE: CAT) breezed past consensus estimates for $.22 per share in Q2. Net profit (that’s right folks, net) came in at $.60/sh, or $371 million. Ex-out the one-time restructuring costs and Caterpillar posted $.72, so it appears that the first quarter of 2009 will be the only one with a net loss. Considering the company’s leverage to early-business cycle activity, that’s an astounding feat. CAT shares are up over 12% in pre-market trading, and headed right into the range I identified yesterday as the destination of choice should they toss up a great quarter:
They (CAT) have footprints in many businesses on the leading edge of the business cycle, so their comments tomorrow will very quickly determine if CAT shares will hit new highs for the year (around $42) or stay mired in the mid-30’s as has been their fate thus far. Caterpillar is the second-largest holding in the Secular Trends Portfolio, and barring a meltdown within the CAT Financial division, nothing will change the overweighting of this stock.
Dealer Inventory Drop Leads to Top Line Miss
The top line actually came in slightly below estimates, with $7.98 billion revenue vs $8.36b; CEO Jim Owens said the shortfall here was mainly due to a “significant drop” in inventories at the company’s dealers. Owens noted that $1.5 billion have been drained from dealer inventories so far this year, and the number could reach $3b by year’s end. This is actually good news, as it reduces the burden on the Cat Financial division while building up an expected future revenue stream when inventories become flush again.
CAT Financial Keeps its Head Above Water
As I mentioned yesterday, my biggest - and only real - concern for Caterpillar was its financing division, but it appears that Owens was straight with shareholders from the beginning when he saw no outsized risk of a GE Financial-type meltdown. The Cat Financial division posted a $89 million profit after tax in Q2, still down big YoY but more than good enough for these eyes.
Full-Year Guidance Tightened & Raised
Caterpillar raised its full-year earnings guidance to $1.15 - $2.25 from earlier estimates for about an even buck per share. This is quite the wide range, but there’s obviously a lot of income statement leverage lying around the home offices in Peoria these days. Revenue range has been tightened to between $32 - $36b.
I’ll be listening to the CC and diving into the 8-K later today to get a feel for the geographic mix of sales, effects of currencies, and to listen to Owens’s color on the global landscape; he’s as sharp as any CEO out there, and he’s an economist at heart - my kind of guy.
Ryan Barnes
disclosure: author does not hold a personal stake in Caterpillar. CAT shares are held in the Secular Trends Model Portfolio.
Tags: Cat Financial > Caterpillar > company earnings > Jim Owens > Q2 financial results
If Q2 Earnings Continue This Trend, We Can Finally Get Back to Stock-Picking
Posted on | July 20, 2009 Time: 11:52 pm | Comments
As second quarter earnings roll on, an amazingly high percentage of companies are soundly beating estimates - over 70% thus far. To the eternal pessimists out there, it’s no real harbinger because estimates were set embarrassingly low. However we’re not just seeing minor beats, but an increasing number of major beats - beating estimates by 20%, 30%, or more.
Most of this has come from major improvements to gross & net margins, as companies are working harder than ever to wring efficiencies out of their business models. Yes, we all know that revenues are down year-over-year in nearly every industry. But if companies can turn in a fundamentally impressive (albeit lean) quarter, we can go a long way to bringing back the essential art of fundamental investing, which has been on a forced sabbatical for several quarters.
And trust me, that’s vital even if fundamental investing ain’t your brand of whiskey when it comes to picking stocks. Because somewhere between “a lot” and the $3.5 trillion in cash & riskless return funds sees no other way to invest, and that money has been laying in wait until it sees some concrete signs that it’s o.k. to get back to the business of evaluating companies on their metrics and merits.
Raging Capitalist Hormones…It’s a Good Thing
As I mentioned in an earlier post, we should be thankful that capitalist instincts are raging like teenage hormones again. And not in the sneaky “climb out the window to party” way of debt-laden acquisitions or off-balance sheet shenanigans, but rather the old-school methods of being miserly about costs, internal processes, and marketing practices that never provided the bang for the buck that was advertised on the label.
It’s becoming all too clear that most companies need a good smack in the face every decade or so to remind them of how important it is to look at the business from the ground up, and make the hard choices when needed. In another nod to the sour faces in the crowd, I understand that many of these cost cuts have been the elimination of jobs and the shutting of factories.
It’s sad to be sure, but labor has been - and always will be - a large and variable cost of doing business. But instead of lamenting any minor sliver of success on the corporate front, how about we all take some joy in the reality that nobody is going to hire again until they’re sure they can make money TODAY. From my modest perch, more and more companies are proving to us - and themselves most importantly - that they can fight their way back to the black.
Earnings Highlights, July 20th…After Hours Screens Go Green
Boston Scientific (NYSE: BSX) turned in a strong quarter late Monday, cruising past estimates for $.14 earnings per share with a $.20 showing (ex-one time items), while also hitting the upper range of revenue estimates. Shares were up 6% in after-hours trading. Thankfully for BSX, bad hearts seem to be a bankable secular trend for the next decade. On the back of BSX’s 5.3% rise in sales of pacemakers and related ICD’s, I see St. Jude Medical turning in a very rosy quarter on Thursday, given their recent market share gains. (BSX was recently added to the Secular Trends Portfolio)
Enterprise software producer JDA Software (JDAS) stormed past estimates with adjusted EPS of $.47 vs estimates for $.31 on a 77% rise in software licensing fees. Total revenue was up just 8%, but up is up folks, and the top line beat estimates by nearly 15%. Shares were rose over 20% after hours.
Asset Manager Legg Mason (NYSE: LM) managed to reverse a year-earlier loss with EPS of $.35 despite still seeing net fund outflows, thanks to a 32% drop in operating costs. Shares were up over 5% in post-session trading.
Midwest property/casualty insurer RLI Corp (NYSE: RLI) beat estimates by $.28 with a $1.32 EPS showing. Shares were up over 4% after hours.
And finally, toy maker Hasbro, Inc. (NYSE: HAS) posted $.32 EPS vs estimates for $.23 on the back of strong sales for merchandise related to Transformers 2 (ed. note: I remain shocked that anyone has seen this movie); shares were up over 4% in Monday’s regular session.
Parting Thoughts
At the end of the day, we still need revenues to come back, and yet must also accept that for many industries there will indeed be a “new normal” baseline level. But a big part of business - just like life - is about building the virtuous cycle. And getting lean, turning a modest profit, is without a doubt the first step. It builds confidence, and confidence builds jobs.
Not every company will wow us. And that’s exactly how it should be. The whole point of “survival of the fittest” is that some folks don’t survive. But companies with stellar management and strong balance sheets have chances to improve themselves a full order of magnitude higher than the “also-rans” out there. And that’s just what the stock-pickers of the world thrive on - ’cause we know how to find the pace-setters.
Ryan Barnes
disclosure: author does not hold personal stakes in the companies mentioned. STJ is held in the Secular Trends Model Portfolio
Tags: Boston Scientific > Capitalism > consensus estimates > Earnings Beat > fundamental investing > gross margins > St. Jude Medical
Monday Morning Coffee & Preview - Earnings Upside Continues (IBM, CAT, LVS)
Posted on | July 20, 2009 Time: 8:04 am | Comments
The weak dollar trade is back on today, as the USD is down against most major currencies. This has pushed gold, copper, and other hard commodities up to or near their highest levels of the month. Days like this are generally good for the Secular Trends Portfolio, and in early morning trade the model has picked up a quick 2 percentage points on the strength of Las Vegas Sands (LVS - up 12%), Petrobras (PBR - up 4%), Alcoa (AA - up 3.5%), and Peabody (BTU - up 4%).
Caterpillar a Key Earnings Report Tomorrow
Caterpillar is seeing strong early buying today ahead of tomorrow’s earnings report. CAT shares are up 6% this morning in advance of what is - for these eyes - the most anticipated earnings call of the season. The folks at the local “home office” paper in Peoria, IL did a nice preview piece yesterday that talks about the difficulties in estimating what kind of numbers Caterpillar will report. Sales are sure to remain down year-over-year in a big way (35-40%), but the recent weakness of the dollar is a strength to this company that does more than half its business overseas. And after taking big charges in the first quarter to curtail production and lay off workers, how much more was needed in Q2?
And let’s not forget the kind of unique viewpoint CEO Jim Owens & company have on the global industrial landscape. They have footprints in many businesses on the leading edge of the business cycle, so their comments tomorrow will very quickly determine if CAT shares will hit new highs for the year (around $42) or stay mired in the mid-30’s as has been their fate thus far. Caterpillar is the second-largest holding in the Secular Trends Portfolio, and barring a meltdown within the CAT Financial division, nothing will change the overweighting of this stock.
IBM Hat Tip
I have to take a minute to tip my hat to IBM for putting up a monster quarterly report last week. Pre-tax margins were up over 400 basis points (wow), while diluted EPS was up 18%. Gross margins have now risen for 19 of the past 20 quarters, while the company is on track to pump out nearly $13 billion in free cash flow this year. Oh, and all this on a 13% drop in revenues. So a full tip of the hat to Big Blue, and a hat nod to me for going against the call of Goldman to avoid IBM and stick with DELL going into earnings. Per my post from 10 days ago:
Goldman downgraded IBM this morning while upgrading tech hardware as a whole. Strange.
While I’m not out to do so, I seem to have a habit of zigging when they say to zag (see my earlier commentary on commodities, and on Caterpillar…I guess that makes me 1 for 2 so far, if we’re keeping score)
IBM reports earnings on July 16th, and the company has already reiterated its earnings guidance for longer than any company I follow, as they expect to earn “at least” $9.20 in Fiscal 2009 and $10 - $11 per share in Fiscal 2010.
My expectation is for the company to meet or beat on the current quarter, and in this earnings season I think that will be enough to push the stock price back into the low $110’s range.
So I guess that makes me 2/3 against Goldman, considering that IBM was up 7% on earnings day while DELL got pounded for a 10% loss. After reviewing my secular thesis I upped the IBM stake in the Secular Trends Model on July 10th. In other Goldman news, they came out today with a revised S&P 500 target for year-end of 1050, or 12% upside from here.
Non-Financials in the Spotlight
This is another jam-packed earnings week, with a key report from Texas Instruments out today, and media hype favorites Yahoo! and Apple tomorrow. I’m not particularly concerned about any of these three, and will be much more interested in the results tomorrow from CAT, CNH Global (CNH), Linear Technology (LLTC), Peabody Energy Corp (BTU), and Freeport-McMoRan (FCX). These are the companies that need to show - and give color to - improved outlooks and results because of their front-row seating in the economic recover theater.
The major medical device companies are also reporting this week, so I’ll be focusing in on results from Boston Scientific (BSX), Stryker (SYK), and St. Jude Medical (STJ).
Ryan Barnes
disclosure: author does not hold personal stakes in the companies mentioned. BTU, IBM, CAT are held in the Secular Trends Model Portfolio
Tags: Alcoa > Caterpillar > Dell > earnings reports > Goldman Sachs > IBM > Linear Technology > Peabody > Stocks
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