Author: expectingalpha

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

expectingalpha Investing ,

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

This Week’s Study Stocks (2/7/2014)

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Groundhogs, Start Your Engines!

All evidence to the contrary, there was apparently a football game yesterday? (Seriously … Congratulations to the Seattle Seahawks, Super Bowl XLVIII Champions.)

Speaking of Roman numbers… today we launch Groundhog Challenge VIII, our annual stock picking contest for individual investors and investment clubs. It’s not for the faint of heart. The Broad Assets club of St. Louis rang up a 110% total return for Groundhog VII, taking home group honors … and Andy Pagorek of Chicago picked five stocks that all beat the market, 5-for-5, with an overall total return of 77%.

We raise a glass — or a groundhog — and we press on.

This year’s selections can be found at: http://www.manifestinvesting.com/groundhog_scoreboard/2014

Participants select a minimum of five (5) stocks/funds with a maximum of (20). $1,000,000 is invested as of 2/2/2014 and the sage selections are allowed to simmer, undisturbed until 2/2/2015 when next year’s champions are crowned.

It can be interesting to scroll through the selections seeking study candidates … and we’ll do some of that in the forum this week. It’s part of launching a new approach to airing out more studies, etc. We’ll highlight items of interest and we hope that our like-minded investors will share observations, opportunities and threats about the stocks in the weekly updates as 2014 unfolds. You are all invited and welcome to share, inquire and inspire as we all try to make each other better long-term investors. The long-term results for the Groundhog Challenge don’t lie.

Dan Hess and I both were skeptical about the markets being vulnerable to a correction, even a fairly deep correction, a year ago. We both selected some hedges and cash equivalents. The result is that neither of us landed on the leader board. (Yes, that’s some serious sugar coating.) What I think we did learn was to condition and pay less attention to single/isolated momentum indicators like relative strength index. We may been more early than wrong … and Jim Stack shared reluctant expectations (higher vulnerability than even one year ago) with recent audiences.

It’s interesting to note that Dan has selected a number of energy stocks for his 2014 entry and selections.

Issue 12 is chock full of some of these companies like Schlumberger (SLB), National Oilwell Varco (NOV) and Transocean (RIG). And Dan is likely hoping that Value Line is right — most of these are near the top of a listing ranked by low total return forecast. And Morningstar is pretty energized about these stocks, too. But as we’ve pointed out in the past, S&P is less exuberant about these energy stocks — a little more selective, but the fair values at S&P are generally lower than Morningstar.

Dan also added a couple of emerging market exchange-traded funds … another area that we’ve featured in the fund column over the last few months. See the ETF Manifest we’ll be publishing with the February newsletter. I’ll probably go Groundhog shopping around the world also.

Companies of Interest

The companies in the Issue 12 update for the Value Line Investment Survey are as stratified as anything I’ve ever seen. The overall average low total return forecast is a paltry 3.0%. But there’s a John Wayne-sized blaze of opportunity at the top of the return forecast sort. These are on full display in the accompanying graphic.

At the same time, nearly half of the companies in this week’s batch have sub-zero long-term low total return forecasts.

Materially Stronger: Monsanto (MON), Scientific Games (SGMS), Gannett (GCI), World Wrestling Entertainment (WWE)

Materially Weaker: Forest Oil (FST), Harte-Hanks (HHS), Konami (KNM)

Morningstar Price-to-Fair Value Nudges

The average price-to-fair value for the companies in this week’s update according to Morningstar is 99%.

S&P Price-to-Fair Value Nudges

S&P is less optimistic about many of these companies … the overall (average) P/FV for the companies in this week’s update is 110%.

Market Barometers

The Value Line low total return forecast for the standard edition coverage is 3.0%, up from 2.7% last week.

All-Of-The-Above Investing

expectingalpha Investing , ,

Your Tuesday morning reminder as to why we practice All-Of-The-Above investing … investing in a diversified mix that includes small (rapidly growing), medium and large companies. We target and remain vigilant using the overall sales growth forecast (10-12% top line growth) of our portfolios.

You may ignore that anchor or talking head who used the Dow Jones Industrial Average to tell you how much your 401(k) “LOST” yesterday.

^vay price chart 20140204

Groundhog Challenge: 2013 Results

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Groundhog Challenge VII: Final Results (2013)

We’ll be reviewing the final results of the 2013 Groundhog Challenge and celebrating the achievements of the Broad Assets investment club of St. Louis, our group champions for the second year in a row and the king-of-the-hill finish by our friend, Andy Pagorek of Chicago, our individual champion for 2013.

Andy felt pretty good about his total return greater than 80% for 2013, until he saw the St. Louis group come in at over 110% for the annual contest. In a note he sent to me several weeks ago, he applauded the St. Louis gang for their repeat performance, acknowledging them in his perpetual quest for effective and successful long-term investing methods.

Join us for a FREE webcast where we’ll explore what worked and how our collective Groundhog Nation performed versus some celebrity rhinos. What didn’t work so well? Well, if confession is good for the soul, we’ll be visiting my selections that narrowly avoided finishing in last place for 2013. (In case you’re worried, I’m still near the top of the all-time leader board.)

Time: 10:30 AM ET (February 1)

Registration: http://www.manifestinvesting.com/events/142-a-few-moments-with-groundhog-nation-february-1-2014

Groundhog VIII: Join our next ‘Iditarod’

Entries from individual investors and groups (clubs) currently being accepted via the MANIFEST Forum and/or email to: manifest@manifestinvesting.com.

There aren’t many rules.  Participants select a minimum of five (5) stocks with a maximum of (20).  Selections are distributed in $1,000,000 based on stock prices on February 2, 2014. (1/31/2014)  The winner is the highest value on February 2, 2015.  An individual champion and group champion is crowned each year and all-time performance is also in focus.  (We have seven years under our belts now.)

State of the Round Table (January 2014)

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State of the Round Table Portfolio

We took a look at some of the stocks that have delivered a solid long-term performance for the tracking portfolio as well as sharing our favorite current stock ideas and some analysis. What is your favorite stock idea right now?

The state of the Round Table tracking portfolio is SOLID. The relative return (internal rate of return minus the Wilshire 5000 since inception, July 2010) is +3.6% with an out performance accuracy of 56%. The objective is 60% and for context, the “average” investor generally achieves a 30-40% accuracy based on observations of the Motley Fool CAPS program.

Keep in mind that the tracking portfolio has a permanent home at:

http://www.manifestinvesting.com/dashboards/public/round-table

Stock Studies:

  • Apple (AAPL)
  • Computer Programs & Systems (CPSI)
  • McDonalds (MCD)
  • Shoretel (SHOR)

Fundamental Screening Results

Technical Analysis & Second Opinions On Parade

Hugh’s Noodling for Deeper Value

The audience selected Computer Programs & Systems (CPSI) as their January choice.

Annual Super Bowl Poll (2014)

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It’s time for our annual Super Bowl survey.

There’s not a clear “old NFL” team again this year. But, the Denver Broncos are clearly an “old AFL” team, so for investing purposes and in homage to the Super Bowl indicator, we’d have to lean on those upstart Seattle Seahawks despite Peyton Manning and his “Omaha-rich” assault on the record books this year.

It’s time to get out there and BUY SOME STOCKS. 🙂

We’re 6-for-8 having mistakenly selected the 49ers over the Ravens last year.

XLVII: San Francisco 49ers (Super Bowl won by Baltimore Ravens)
XLVI: New York Giants (defeated the New England Patriots)
XLV: Green Bay Packers (defeated the Pittsburgh Steelers)
XLIV: New Orleans Saints (defeated the Indianapolis Colts)
XLIII: Pittsburgh Steelers (defeated the Arizona Cardinals)
XLII: New England Patriots (Super Bowl won by New York Giants)
XLI: Indianapolis Colts (defeated the Chicago Bears)
XL: Pittsburgh Steelers (defeated the Seattle Seahawks)

Groundhog Challenge VIII (2014)

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Bring out your best.

Groundhog VII (2013 edition) comes to an end on February 2, 2014. we have seen a number of photo finishes over the years in our annual stock selection challenge.

This will not be one of those years.Last year’s group champion, The Broad Assets investment club of St. Louis has dusted the field — and barring calamity and collapse at a couple of their key positions during January — currently has a 111% total return for 2013. (That’s NOT a typo) In similar fashion, Andy Pagorek of Chicago is up 82% for the individual championship. More on them to follow in the February newsletter.

For now, it’s time to start your Groundhog shopping for 2014. $1,000,000 is evenly invested in 5-20 stocks (or funds) on 2/2/2014 and we stand back and watch the selections grow for the next 52 weeks until the 2/2/2015 finish line. Five selections is the minimum … and yes, dividends are reinvested. This is a total return contest.

Individuals and groups are encouraged to join the fray. Discuss it during your January club meeting and either post your 2014 entry in the MANIFEST forum under the Groundhog Challenge or submit selections to markr@manifestinvesting.com BEFORE February 2, 2014.