Month: February 2014

Round Table: Standing Room Only?

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Queue Dozing?

If this persists, we may have to go to assigned seating for Pavilion seats at next year’s Round Table Awards?

Some of these long-term investors have camped out to save their place in the queue.

“Dude, if you’re gonna go with Southwest Airlines cattle car seating programs, we’re going to have to resort to this. But no worries, we do this all the time at places like Duke or Michigan State University.”

Yes, it’s true that Southwest Airlines (LUV) is in the running for one of the most prestigious categories on Saturday morning.

“No. We’re not cold. It’s not like we’re doing this in Michigan … or New York … or Wisconsin. This is a cyber event, Silly! Besides, word on the street is that Ken Kavula has been red hot with his Round Table picks lately. We want to know how hot.”

True. But you’ve got the pajamas optional part right. Attendees are welcome to drop in with a cup of coffee and don their favorite casual attire. There is no truth to the rumor that Kathy Griffin or Joan Rivers will be doing fashion commentary tomorrow. I wouldn’t rule out a few pushups by Jack Palance, particularly if he’s nudged by Billy Crystal or Ellen Degeneres.

There’s still room and long-term investors are welcome and invited to join us. Yes, you may bring your sleeping bag.

Date: Saturday — March 1, 2014
Time: 11 AM ET (but the red carpet festivities will start at 10:30 AM ET)
Register: https://www.gotomeeting.com/register/475449410

Walgreen (WAG)

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Walgreen (WAG) will likely be suggested as a sell candidate during the February Round Table. The recent surge in stock price ($68) results in a return forecast of approximately 3%. The August-2010 selection was the first Best Selection winner at the first red carpet gala. WAG has been selected by three of us, with the four most recent selections by Hugh McManus.

The stock is overbought with a relative strength index (RSI) of 79.6 and momentum (ROC) is considerable as the stock price has advanced 70.3% over the trailing 12-months.

Make no mistake.

This is an excellent company — and it has been very, very good to us.

Our $7000 invested in Walgreen in the Round Table tracking portfolio is now worth $15,801.

Closing out these positions will lock down 7-of-the-top-20 all-time results for our Round Table since inception.

What is your outlook on Walgreen? Would you sell? Would you consider covered calls for an exit strategy?

Red Carpet Ready!

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The Golden Knight monoliths are in position outside the pavilion. The crowds are already forming for this Saturday’s Round Table award ceremony. We’ll be transmitting the festivities live starting at 10:30 AM from the red carpet.

Six-of-seven of these Round Table regulars BEAT THE MARKET in 2013: Ken Kavula, Cy Lynch, Hugh McManus, Mark Robertson, Guest Damsels (Kim Butcher, Susan Maciolek, Anne Manning), Guest Knights (Herb Lemcool, Matt Spielman, Nick Stratigos) and Audience Selections.

You can still reserve your “pajama-friendly” seat at: https://www.gotomeeting.com/register/475449410

Who will win the following awards?

  • Best Stock Selection (2013)
  • Best Stock Selection (All-Time)
  • Best Picture
  • Best Accuracy (2013)
  • Best Accuracy (All-Time)
  • Best Relative Return (2013)
  • Best Relative Return (All-Time)

Join us as we explore, discover and share our favorite stock ideas for 2014 and beyond …

Red carpet preps

Annual Round Table Awards Ceremony

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Why should you care?

Our Round Table model portfolio has outperformed the Wilshire 5000 by 3-4 percentage points over the last four years.  Each month, our regular panel and a number of successful stock pickers share their favorite current ideas during this FREE webcast.  The result is a tracking portfolio and a source that has generated some rewarding ideas since inception.

Annual Round Table Awards Ceremony

Please join us for our annual red carpet and black tie edition of the Round Table.

We’ll be crowning winners for the best ideas of 2013, the best performers of the last four years … and choosing a few stocks that are currently of interest.

Ken Kavula, Cy Lynch, Hugh McManus and Mark Robertson have saved a spot for you at the table next to guest damsels Kim Butcher, Susan Maciolek and Anne Manning and guest knights Herb Lemcool, Matt Spielman and Nick Stratigos.

Arrive a few minutes early for the red carpet session (starting at 10:30 AM ET) where we’ll have celebrity interviews and remember, Mid-Michigan sponsored events feature an open microphone if you have a stock or investing topic that you’d like to discuss before the festivities get underway.

The webcast is FREE and you’re all invited to extend an invitation to friends and family.

Registration: https://www.gotomeeting.com/register/475449410

Portfolio Tips & Tricks

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Clubhouse: Portfolio Tips & Tricks

This webcast will feature Ken Kavula demonstrating the use of the dashboard worksheet function for portfolio decision analysis.

When: Tuesday, February 25 (8:30 PM ET)

Where: Register via https://www4.gotomeeting.com/register/227075095

Do some exploring and digging and bring your questions to the session.

Another tip: This isn’t just for investment clubs, folks. Although Ken will focus on best practices for group decision-making, this applies to any long-term investor taking care of a portfolio.

Tin cup worksheet

Am I Diversified? Rest of the Story

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This discussion provides a demonstration of Manifest Investing dashboards, takes a look at “Am I Diversified?” suggesting that a few more stocks and an emphasis on growth/size diversification is in order.

It’s a concept that Jim Cramer might want to consider sharing with his audience.

http://youtu.be/Sdl3UXM0qis

If you would like to explore the portfolio design & management and stock screening tools at subscription-based Manifest Investing, send your name/email/zip code to manifest@manifestinvesting.com for a FREE 90-day test drive.

This Week at MANIFEST (2/21/2014)

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Turning The Page

It’s that time of year when Value Line ratchets ahead to the next year on their 3-5 year forecasts. It’s also time when the analyst consensus estimates at places like finance.yahoo.com begin to provide sales and earnings forecasts for 2015.

At Manifest Investing, we’ve long held the belief that these forecasts should be embedded in our assessment of the long-term trend and characteristics … and we commence doing precisely that. The rear view mirror is important. We’re not saying that investors should ignore the road behind companies — just that a prudent amount of emphasis on the windshield is also important.

Stocks to Study

The Issue 1 update companies in the accompanying chart have the highest rankings based on the combination of return forecast and quality ranking. This display was inspired (and requested) by Irina Clements in our Saturday morning session this past weekend — A Few Moments With … Sandboxes.

The companies are ranked in descending order of Combination Rank with a minimum of 90 (top decile) of all stocks covered. The underlying fundamentals (growth, profitability and projected average P/E ratio) are displayed along with the analysis opinions of Value Line, Morningstar and S&P.

Searching For Stocks: All The Right Places

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Happy Valentine’s Day!

We all know there’s more to this stock selection and portfolio design stuff than simply grabbing a few of Cupid’s arrows and flinging them at a stock table and going with the tickers where the projectiles land.

During last night’s session, we briefly mentioned the anecdotal long-term success of investment club-based portfolios and some legends named Lynch (Fidelity Magellan) and Buffett (Berkshire Hathaway) and another venerable citizen of Graham-and-Doddsville named Walter Schloss. We might think about spending a few moments with Mr. Schloss this weekend. Why? Because he selected stocks and managed his portfolios the same way that you and I do.

We might also tip our Valentine derby in the direction of one George Nicholson, Jr. — regarded as the grandfather of the modern investment club movement and originator of our stock analysis process. His gift, a reminder about PATIENCE and DISCIPLINE, combined with a laser focus on the characteristics of growth, profitability, quality/valuation and an emphasis on trends is the stuff that superior performance can be centered on.

If you want to spend a few moments with an oldie but goodie, our presentation (video) on Searching For Stocks In All The Right Places covers many of our favorite resources and provides an overview of our StockSearch tool.

Happy Valentine’s Day, MANIFEST Nation!

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Rolling Over … Watching 2015 Roll In

Happy Valentine’s Day, MANIFEST Nation!

With Issue 13 of the Value Line Investment Survey landing this week, we’ll soon be getting our first look at some of those 2015 sales and earnings forecast — likely starting next week.

We’d like to be able to say that the carnage has abated, but we can’t. The stealthy reductions in expectations continue and the 2014 forecasts are considerably weaker to start the year than we generally see. Keep in mind that these forecasts have historically eroded from optimistic starting gate positions that steadily get smaller as the calendar pages turn. It’s a pretty unusual year where this is not the case.

We also note the population of Materially Weaker companies continues to exceed the Materially Stronger based on quarter-over-quarter changes in the Value Line long-term forecasts. We would not have been surprised to see this slow down a bit, but as displayed below, the number of weakening situations continues to outpace opportunity.

Here’s a look at the Net Profitability profile and trend for the Value Line industrials as 2013 locks in (actual results) and readies for the 2015 roll call. It’s not horrific, but it is one of the reasons I still say that people who spoke and respected recessionary pressures during 2013 were at least partially right. The current economic recovery, although steady, is still quite lackluster.

Companies of Interest

We’ll do a quick profile of KKR (KKR) based on the Value Line low total return forecast and solid overall condition of the company. We also note that Cognizant Technology (CTSH) and Infosys Tech (INFY) continue to portend better days ahead.

Western Union (WU) is favored at both Morningstar and S&P in this week’s batch and it has served Kim Butcher quite well as a long-time Round Table selection.

Materially Stronger: LinkedIn (LNKD)

Materially Weaker: EZCorp (EZPW), Mantech International (MANT), Federated Investors (FII), Amazon (AMZN), Fusion-io (FIO)

Morningstar Price-to-Fair Value Nudges

The average P/FV for the companies in this week’s update according to Morningstar is 108%.

Standard & Poor’s P/FV Nudges

The average P/FV for the companies in this week’s update according to S&P is 100%.

Market Barometers

The Value Line low total return forecast is 3.2%, up from 3.0% last week.

3M Company (MMM) & The Buyback

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3M announces $12B buyback.

3M (MMM) is launching a $12B stock buyback program that will replace the diversified-machinery company’s existing authorization and is good for repurchasing 14% of its outstanding shares. 3M spent $5.2B on buybacks in 2013, including $1.7B just in Q4. Will the firm issue new debt to pay for additional repurchases? It ended Q4 with $4.9B in cash/investments and $6B in debt.

MMM. Hmmmm?

If you were a financial advisor to MMM, would you recommend that they continue/expand their share buyback program?

Why or why not?

Response #1

It seems to me that if the long term after tax cost to borrow exceeds the dividend yield then buybacks are not a good idea. Looking at the numbers that seems to be the case. In addition, I view 3M as over-priced at the current quote of $128/share [2/5/14 intra-day price]. Morningstar rates 3M @ 2 stars, which suggests that it is over-priced. They call FV @ $120. The 52 week range is $101 to $140. Yes, it is down from the high, but I see is as too expensive to buy back at current prices.

In non-financial terms,3M has always been known as an innovator. You would think that an innovative company could find opportunities to profitably grow the company for the long term benefit of the stockholders.

By the way,I’m not a fan of buybacks. Firstly, it is a financial engineering fad – everyone is doing it – so we must follow. Secondly, to me, it signals a company that is stagnating and can’t find opportunities for quality internal growth.

Response #2

Here is one rational for why borrowing to buy back shares makes sense.

Lets assume the CEO’s compensation is based upon EPS achieved. i.e. Stock options. So if MMM borrows $12B at an interest rate of 4% the annual interest to be paid would be about $480M. They could expense about 30% of this as a tax deduction so the real cost would be about $336M. The PTPM of MMM is about 21%. So MMM would borrow money at 4% and with a PTPM of 21% this would provide a substantial boost to EPS. If MMM bought back shares at $130 the $12B would buy back about 92M shares or about 13.7% of outstanding shares. This would seem to boost 2014 EPS to about $7.64 even without any additional EPS growth from the company. The CEO makes a hefty profit and in case the board does not think this is a good idea the CEO arranges for the board to obtain some stock options as well. Also the shareholders now own a larger piece of the MMM pie. So everyone is happy.

Now some may say borrowing $12B, raising the total MMM debt to about $18B may sound like taking excessive risk. However others may counter with the MMM business being a very stable business generating about $4B in FCF per year and taking on more debt is simply reasonably increasing the leverage to enhance shareholder returns since share prices are usually based upon EPS growth.

I do admit $2B sounds like a very large number but then I notice MMM at a recent analysts meeting indicated they would spend $13B to $22B from 2013 thru 2017.

Or maybe the cold weather in St Paul has simply gotten to the CEO and his team. (Big Grin)

Rest of the Story

You both get Nobel Prize nominations! I think we have consensus here … and a pretty solid example of a buyback strategy gone astray.

Why?

As Dan mentioned, the executive compensation algorithms could be a factor. And, to me, that’s a little like the tail wagging the dog. It shouldn’t be possible for Capital Structure gymnastics to affect the outcome. The all-knowing consultants who build these packages need to take a step back. Turn the metric into something a little immune to gymnastics. For example, if it were based on % net margin, the whole buyback shell game charade with EPS goes out the window. We’ll leave the notion of “EPS Growth” for another day. Suffice to say, Cy Lynch is right. George Nicholson and Ben Graham were also right about an emphasis/vigilance on profitability characteristics and trends.

But we don’t have to complicate things.

If we believe that 3M has something on the order of 5% top line growth and 14% net margins (P/E ~ 15x) the return forecast (PAR) is 4%. That’s a whole lot closer to a sell than a buy.

That’s right … when PAR is low, 3M should be selling shares, not buying them!

3M’s effective interest rate is 3.96% ($140 mil / $3533 mil long-term debt) and they may be able to get an interest rate somewhere between 0-4% and improve that effective interest rate a tad. LTD is 17% of total capital now. They have $3 billion in cash assets and $13B in current assets … and Dan is right, the cash flow is formidable.

But another $12B??? I think 3M management should proceed immediately to White Bear Lake. Do NOT pass Go. Do NOT collect $200. Chop a hole in the ice. (There will probably be a bunch of ice fisherman there, borrow an auger.) Jump in.

Repeat until you come to your senses.

Business Model Analysis

Mmm model 20140207

Profitability Analysis

Mmm margin 20140207

Projected Average P/E

Mmm pe ratio 20140207

Chronicle of Stock Price & Return Forecast

Mmm chronicle 20140207

Technical Analysis

Mmm technicals 20140207