2014)

December 22, 2014December 22, 2014 expectingalpha Investing, Stocks

Merry Christmas! Bless Us, EVERYONE!

Holidays. We have much to be thankful for … notably the smiles on the faces of investors who have persisted through the Great Recession and experienced/realized fairly massive returns over the last few years. As we approach the end of our 10th year at Manifest Investing, all of us extend the warmest Seasons Greetings to all of you!

We’re already looking forward to celebrating our 10th birthday — and the launch of our 11th year — as Groundhog Day 2015 (2/2/2015) approaches. We’ll celebrate in a variety of ways, continuing to extoll the virtues of investment clubs and community-centered investing. The Round Tables will be part of that and we’re thankful for the contributions of Ken Kavula, Cy Lynch and Hugh McManus. We’re equally thankful for our guest damsels and knights: Kim Butcher, Herb Lemcool, Susan Maciolek, Anne Manning, Matt Spielman, Nick Stratigos … and last but certainly not least, our audiences who cast their votes monthly. You guys are the BEST.

We’re planning additional festivities which you’ll be hearing about soon. And you can listen for the sound of reindeer on your roof knowing that you’re in the hands of Kurt Kowitz, our technology manager. We’ve said it before, but without Kurt, the cost to deliver Manifest Investing to you would increase by at least one digit, maybe two. We’ll be unwrapping some cool gifts soon … and the prototype tinkering with the Equity Analysis Guides is likely the tip of a features iceberg. Thanks, Kurt!

For now, we nudge you as you unwrap this week’s batch … and we share a compendium of correspondence. You are not alone.

Merry Christmas, everyone!

A Bridge To Better Understanding

We’ve shared similar letters of consternation from investors in the past … and they come in many flavors. One of our all-time favorites was our visit to Narnia and our suggestion that The Couch Is Alright. Another memorable exchange came with “Nell” as we helped her to Make It Through The Night.

Where am I going wrong? I check out a stock, like it, and check it out on Manifest Stock Research. It looks good, you like it too. For confirmation I dig deeper — and [audit and verify assumptions using MyStudy]. Next thing I know, I feel like I get shot down when you show four or more reasons why the company is not worth an investment and say the quality is not to our standards. Is one screen looking at long term and the other at short term? Are you practicing April Fool tricks five months early?

We asked for an example. Chicago Bridge & Iron (CBI) was provided. CBI is actually a very compelling opportunity. There are some strong market drivers, long term. And the company is part of this week’s update batch — so let’s take a closer look.

I’m wondering where we differ. The PAR is 20-25% or so — making it somewhat speculative. The global recession has taken its toll with a fairly substantial price drop over the last several months. (From $89.20 down to $37.78 … -58%)

I don’t know but I wonder if investors and pundits are troubled over the Shaw acquisition?

Here’s a look at a Value Line data-based Equity Analysis Guide for CBI:

Be sure to account for the Shaw acquisition in your analysis. (This means you probably have to ignore anything before 2012 on a traditional SSG.) The step change in sales in 2012 was due to buying Shaw. When imagining what the future holds, be sure to emphasize the information that deals with the new, combined, company.

That could also lead to some significant differences between your study and the analyst consensus.

S&P has a fair value of $80.80 (recently adjusted downward from $87), so they think it’s significantly under priced at $41.

Thanks for the suggestion but, while I only mentioned one example when writing you, the same thing occurred over fifteen investigations. It leaves you with the feeling the entire market is overpriced so it might be better to hibernate until the pull back. I was particularly disturbed over CBI as they seemed a good candidate. Perhaps Lady Luck will lead me to a candidate where research and analysis will both agree. Thanks for your input.

Although luck is definitely involved in investing … we can look beyond Lady Luck a bit.

I think we’re seeing a symptom that’s related to the recent run in stock prices. This has been going on at the same time as an erosion of fundamentals. We’ve commented on this before — noting that in many cases, the only way to realize these return forecasts is if relatively high P/E ratios come home to roost.

I think CBI is a great candidate. The price has dropped enough to capture the attention of Hugh McManus. (grin)

Seriously, for a non-core stock (but one with relatively high quality) we need to demand a higher return forecast when considering purchase. We also must admit that a persistent or deepening recession will do things to CBI that are similar to 2008-2009. The stock price suggests, at least to me, that many people consider this to be a work already in progress.

If they’re wrong, it’s a heckuva buying opportunity. And for a long term investor with a long term perspective, CBI is probably a lot like BP (BP), Schlumberger (SLB) and others in the oil patch these days. The next year or two could be rough and represent an opportunity for accumulation. But make sure the companies are built for survival if you decide to “go there.”

We feel your frustration but we still believe that a good StockSearch, directed at high-quality companies with elevated return forecasts can do a lot to populate the area underneath just about any investing Christmas tree.

Coming Events and Attractions

Our expanded coverage of the update stocks this month continues as part of our quarter long test drive of this feature and the studies and shared ideas it delivers. Please tell us what you think and feel free to join in the Forum discussions for the deeper dives on some of the stocks.

Save the Date: The December Round Table will be held on December 30 at 8:30 PM ET. Register via: https://www2.gotomeeting.com/register/256833802

Round Table Tracking Portfolio

Stocks Likely To Be Covered:

Chicago Bridge & Iron (CBI)
Copa Holdings (CPA)
Qualcomm (QCOM)

Companies of Interest: Value Line

The average Value Line low total return forecast for the companies in this week’s update batch is 4.7%.

The number of companies with slightly reduced fundamentals combines with the price increases over the past month to produce some fairly low return forecasts.

Trex (TREX) has been a personal favorite since my Better Investing days … and it leads a lonely group of companies with bolstered fundamentals. As a reminder, we monitor changes in the long term forecasts by Value Line and share those that have been adjusted 20-25% or more (up or down) as “Materially Stronger” (Up) or “Materially Weaker” (Down). We consider this a best practice and a nudge for stock watchers or shareholders to update/audit existing analyses. In some cases, it may trigger a study of opportunity.

Materially Stronger: Trex (TREX)

Materially Weaker: Owens Corning (OC), Layne Christensen (LAYN), Tile Shop Holdings (TTS), Enernoc (ENOC), Rayonier (RYN)

Standard Coverage Initiated:

Discontinued: Kimball (KBALB), Foster Wheeler (FWLT), TIBCO Software (TIBX), Concur Technologies (CNQR), Conversant (CNVR), Compuware (CPWR), URS (URS)

Companies of Interest: Morningstar

The average price-to-fair value (P/FV) ratio at Morningstar for the companies in this week’s update batch is 106%.

Companies of Interest: S&P

The average price-to-fair value for the companies in this week’s update batch is 105% — according to S&P.

Market Barometers

The median Value Line Low Total Return (VLLTR) Forecast is at 3.4%, plummeting from 4.2% last week as the Thanksgiving Swoon gives way to a Christmas Rush of multiple 1-2% daily gains in the overall market.

Stocks to Study

The following update stocks are ranked in the top 10th percentile of all companies we follow (MANIFEST Rank > 90):

Manifest Investing is a subscription site (ONLY $79/year for individual investors). Contact us (via manifest@manifestinvesting.com) if you would like to explore our resources as an investment club. We offer group discounts to clubs. Discover and explore our research on stocks and funds, our seminars and tools for portfolio design & management. Experience the demonstrations of a 7-decade old time-honored philosophy and method that has supported legions of long-term investors. Go to http://www.manifestinvesting.com and create a trial account today. Send us an email if you’d like to access a FREE fully-functional test drive through 2/28/2015 without providing a credit card. Merry Christmas!

Energy Patch: Black Gold or Minefield?

December 13, 2014January 3, 2015 expectingalpha Investing, Stocks $XLE, Energy Sector

The recent swoon in the energy sector has prompted some to suggest that it’s time to back up the tanker truck — what could possibly go wrong? “All of these companies are on sale.”

Not so fast. As we pointed out in last week’s update, we expected reductions in forecasts from the likes of Morningstar and others and it’s gently underway. As a case in point, Morningstar’s fair value for Schlumberger (SLB) has been recently reduced from $145 to $124. Other companies seem to be following suit. S&P already had suppressed expectations (relative to Value Line and Morningstar) and they have actually trimmed a number of estimates.

As the following graphic shows … after an extended trading range, the price of $BRENT has been pummeled, now down some -42.5% for the trailing 52-weeks:

The S&P energy sector fund (XLE) has been punished also — with some lag — and with less damage, at least so far, as the sector leaders are down -15% over the trailing 52-weeks:

There are 44 companies in XLE and we’ve listed the top 16 here (with one exception … BP is not part of XLE … but we listed BP here in response to the Forum discussions) and you’ll see a number of industry leaders and stalwarts. The majority of companies in XLE are components of the S&P 500. Note that these 16 companies account for 75% of the index performance and the top three: Exxon Mobil (XOM), Chevron (CVX) and Schlumberger (SLB) account for 40% all by themselves.

Energy Sector Sample. Projected Annual Return (PAR) is the consensus forecast via MANIFEST. Quality ranking is the percentile ranking of our quality characteristic based on financial strength, EPS stability and relative growth and profitability. VL Low Tot Ret is Value Line’s 3-5 year low total return forecast, adjusted for change in price and/or time horizon. Morningstar P/FV is the ratio of current price to Morningstar fair value.

The Morningstar P/FV cells that are highlighted are at least one standard deviation from the median P/FV ratio. These can be thought of as potentially “on sale” or worthy of study. The same highlighting applies to the S&P entries. The solo entry highlighted in red, Pioneer Natural Resources (PXD) has a P/FV at least one standard deviation greater than the median — potentially a selling candidate.

Our overall average forecast for the group matches the Value Line low total return forecast. The fair value reductions and continued slide in stock prices deliver an average Morningstar P/FV ratio of 77% but we’d expect further moderation of fundamentals (continued reduction in fair values). S&P is still much less optimistic (91%) with relatively few triggering the highlighted status.

Companies deemed most worthy: Exxon Mobil (XOM), Schlumberger (SLB), National Oilwell Varco (NOV), Halliburton (HAL) and BP (BP).

Sources: Value Line Investment Survey, www.morningstar.com, Standard & Poor’s

Is it time for some Christmas shopping?

Based on a multi-year chronicle for XLE, the return forecast has now reached a multi-year high — suggestive of one of the better buying opportunities over the last 7-8 years.

As always, quality matters … and the $/bbl trends are not supportive of higher cost producers, like the offshore drillers (yet).

Xle chronicle 20141212

“Oil Patch” Screening Results

… because it’s not just oil. In fact, there may be some opportunity in companies that are less directly affected by the OPEC smoldering. In any case, here’s a quick shop until you drop for the energy sector:

Oil patch screen 20141212

This Week at MANIFEST (12/5/2014)

December 4, 2014December 4, 2014 expectingalpha Stocks $SWN, $XOM, $ZBRA, BP, VLLTR, wild ride

Wild Rides, Cyber Monday!

That dull thud we all heard over the Thanksgiving holiday was the energy sector turkey. As shown above, the energy sector took it on the chin to the tune of an 11% swoon as OPEC maintained production levels providing some hefty turbulence. As the following two charts illustrate, few companies in the group were immune from the carnage. Exxon Mobil (XOM) is actually one of the tamer examples from the sessions as these 5-day charts show the disruption.

But it appears that Monday is already bringing some relief … or at least a frozen turkey bounce for some of the higher quality companies in the group …

This week’s update batch (Issue 3 in the Value Line Investment Survey for those keeping score) includes a number of the affected companies. We note several things. First of all, the forecast fundamentals for a number of these companies were already being trimmed by the Value Line analysts. It will be interesting to watch over the next quarter to see if expectations continue to be reduced. We’ve often noted a bifurcation between Morningstar and S&P when it comes to the cyclical stocks — particularly in the energy industry. In this case, Friday’s swoon delivers a price-to-fair value ratio of 91% at Morningstar, essentially screaming something on the order of a Black Friday rush. S&P says “not so fast.” The S&P price-to-fair value ratio is actually greater than 100% (101%) and S&P has been steadily and materially reducing their fair value estimates for the energy stocks over the last few weeks and months. We tend to favor the S&P cyclical expertise in a tiebreaker … so we’d urge caution and an insistence on high-quality during opportunity shopping.

As Hugh has pointed out, BP (BP) was among the tumblers and probably rates fairly well as a long-term opportunity. Exxon Mobil (XOM) is among the study candidates also along with some of the other integrated blue chippers. Keep in mind that Hugh normalizes versus the 52-week low, seeking opportunities when stock prices are near their trailing 52-week lows. Hugh’s spreadsheets compare current prices to their 52-week lows. The accompanying charts for S&P and Morningstar do the same thing — but the comparison is between the current price and the fair value. Less than 100% is potentially attractive, unless it gets “too low.” Stocks in the sweet spot would likely fall into a P/FV ratio of 80-90% representing a discount to fair value of 10-20%.

Coming Events and Attractions

We will catch up on the final November columns and we’ll be out with the December issue of Expected Returns this week.

We’ll continue our expanded coverage of the update stocks this month as part of our quarter long test drive of this feature and the studies and shared ideas it delivers. Please tell us what you think and feel free to join in the Forum discussions for the deeper dives on some of the stocks.

Save the Date: The December Round Table will be held on December 30 at 8:30 PM ET. Register via: https://www2.gotomeeting.com/register/256833802