Stocks

Pepsi (PEP)

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Pepsi (PEP) showed up during this week’s Value Line update as one of the potential companies of interest — even if the return forecast was at the lower end of the featured stock spectrum.

At a Value Line low total return forecast of 13%, that actually compares quite favorably to the median Value Line low total return forecast of 7.9%. And now we trust, but verify.

Pepsi (PEP) is ranked #13 in the MANIFEST 40 (December 2012) with an excellent quality rating.

With a sales growth forecast of 5%, net margin of 11% and a projected average P/E of 18x, the projected annual return is 10% … a little less robust after conditioning the expectations by factoring in the opinions of S&P and Morningstar.

But 10% is still pretty good for this high-quality industry leader.

Investing Round Table (January 2013)

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Photo Credit: h.koppdelaney (With Permission) cc

We’ll get together again on Tuesday night, January 29 at 8:30 PM ET to share and explore some long-term investing concepts and ideas. You’re invited to join us as Ken Kavula, Cy Lynch, Hugh McManus and Mark Robertson share their current favorite four stocks.

Why should you care? Because it’s part of a long-term demonstration of success. Ideas are shared and analysis methods discussed. Are these noble knights right all of the time? Of course not. But they’ve been sticking their necks out for years — it’s not always easy.

Chances are, you just might discover an idea worthy of further study and analysis …

As the following graphic shows, the collective performance of the selections made since July-2009 (Round Table since inception) have now outperformed the Wilshire 5000 by nearly two percentage points (yes, annualized, of course). That’s a performance level rarely achieved by “average investors” but frequently experienced by practitioners in our community based on the methods and principles of the modern investment club movement.

The +5% line is the overall long-term objective. The lower line (closer to -5%) is known as the DALBAR line and is representative of results achieved by “average investors” from 1992-2012. We also think of those levels as an example of a “Lynch Mob.” Peter Lynch has shared his frustrating, gut-wrenching, stories of personal friends who managed to experience LOSSES investing in Fidelity Magellan during a 15-year period when he achieved historical and rarely-matched +13% relative returns. This can only be achieved by performance-chasing (buying high and selling low) and Lynch anguished over watching some of his friends getting wrecked by their emotions and lack of discipline.

And yes, Virginia, most months we poll the Round Table audience and they vote on the ideas presented. To date, the collective performance of their wisdom-by-community selections is +5.0% per annum. There are times when more heads are better than one.

The Journey of Investing

Investing is a journey. And like a good vacation in paradise, it’s often done better and enjoyed more when we do it with friends.

We believe that the Round Table is one more iteration of an investment club, intended to share and explore the best ideas and practices.

We’re not bashful about channeling Jack Palance (and Billy Crystal) and others when we do this. In the past, we’ve shared thoughts on Sharing: Big, How to avoid ending up on the wrong end of spears … how patience can be genius in disguise … why we want to invest more like Spock and less like Kirk … how cow-tipping and muskrat pageantry link with prudent long-term investing … and more.

Do we talk about selling? Absolutely. In fact, Synaptics (SYNA) has been very good to the Round Table tracking portfolio — but will probably get raked over the selling coals on Tuesday night.

Stocks likely to be discussed: AeroVironment (AVAV), Body Central (BODY), Landauer (LDR), Microsoft (MSFT)

Program Note: As we do with many webcasts, we open up the “Green Room” and leave the floor open for questions, answers and socializing for up to 30 minutes before the official start of the program.

Session Archive (YouTube):  January 2013 Round Table

McDonald’s (MCD) vs. Chipotle (CMG)

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Years ago, I’d spend Thursday nights with BOTH of my grandmothers watching Verne Gagne, The Crusher and All-Star Wrestling. Go ahead. Try and explain it. No matter — the living room rumbles were rare. Tonight’s cage match includes McDonald’s (MCD) and Chipotle (CMG) … Panera Bread (PNRA) and Starbucks (SBUX) come over the top rope to keep things interesting.

Yesterday, Benzinga’s Tim Parker posed the following question: McDonald’s (MCD) Had A Great Quarter — But Is Chipotle (CMG) A Better Buy?

The article included references to Panera Bread (PNRA) and Starbucks (SBUX) … so I thought this could be an interesting opportunity to use some of the tools and resources at Manifest Investing to answer the question.

LET’S GET READY TO RUUUMMMBLE!

It’s a fascinating matchup — the seasoned stalwart, veteran blue chip, McDonald’s (MCD) versus an up-and-comer that actually got its start in the McDonald’s training gym, Chipotle Mexican Grill (CMG). McDonald’s has the growth rate of a stalwart and CMG is “bringing it” expanding rapidly and showing promising execution. Operating results continue to be promising.

As shown in the following dashboard, the comparison suggests that return forecasts for all four companies, including contenders Panera Bread (PNRA) and Starbucks (SBUX) is slightly greater than the average market return forecast of 7.3% (MIPAR, median projected annual return).

From a long-term perspective, all four companies are at least a strong hold with Panera and Chipotle bordering on “buy.”

Incidentally, only 59 companies (out of a 2400-stock population) have a quality rating of 84.3 or higher — so we’re dealing with four top shelf companies for this battle.

Value Line Outlook

As shown here, the Value Line low total return forecasts are a little more subdued, particularly for Panera Bread (PNRA). The average low total return forecast (for the overall market) is 7.9% — so again, MCD, CMG and SBUX are basically priced at levels slated to generate “market returns” going forward.

More Second Opinions Heard From — S&P and Morningstar

A quick check of price-to-fair value (P/FV) ratios from Standard & Poor’s and Morningstar provides a couple more opinions. In this case, S&P doesn’t think any of the four companies are a bargain. (A price-to-fair value ratio less than 100% is a potentially undervalued stock.) In the current opinion of S&P, all four companies have P/FV ratios greater than 100%.

Morningstar is a little more giddy over Starbucks (SBUX) but even Morningstar would probably like to see a P/FV ratio approaching 80% — to provide some margin of safety.

Turning to the Judge’s Scorecard

It’s something of a split decision. All four companies are acceptable from a long-term perspective. The MANIFEST ranking is the combination of return forecast (PAR) and quality rating … and all four companies rank in the top 12% of all 2400 companies. All have excellent quality ratings and return forecasts at least slightly greater than the average return forecast.

But we like buying opportunities with some upside. And in this case, at least for what could be the short term, Chipotle (CMG) gets a standing 8-count with a bearish overall trend. There’s no way to make that up on the judge’s scorecard until some momentum is restored. McDonald’s (MCD) is clearly what the crowd is chanting with a sentiment rank head-and-shoulders above the other three.

Panera Bread is closest to being potentially oversold based on the relative strength index (RSI) approaching 30. McDonald’s is closer to overbought than oversold at 67.1.

In the end, all four fundamentally-based MANIFEST rankings are fine — but we roll up our batch of technical indicators into the Fusion Rank (which also includes the aforementioned MANIFEST ranking) and we see that Panera Bread (PNRA) gets the overall nod — ranking in the top percentile (99) based on both fundamental and technical analysis.

Apple Sauce & Speed Bumps (AAPL)

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Photo: Lynn Ostrem

Jeff Gundlach shared that he believed that Apple would see $425 before it revisited $600 during his Year of the Snake Q&A earlier this month.  He reinforced that yesterday on CNBC: http://www.benzinga.com/media/cnbc/13/01/3268485/jeff-gundlach-apple-is-broken-over-owned-stock

A year ago, we urged investment conference audiences to always remember that “Speed Bumps Happen.”  We also joined with Joshua “Reformed Broker” Brown to compare the price target gold rush for Apple to what we saw from the late 1990s and companies like Qualcomm.

Is 2012 Apple The New 1999 Qualcomm? (From April 3, 2012)

This week, we take a look at 1999 Qualcomm vs. 2012 Apple. My investment club was an active participant in QCOM 1999, something that Ken Janke called “the WILDEST RIDE he’d ever experienced in nearly 50 years of long-term investing.” What can we learn from history?

  • During a recent webcast, Barry Ritholtz of The Big Picture raised the question as to whether business and stock price conditions at Apple could be similar to Qualcomm a little over a decade ago. (www.ritholtz.com/blog is a TROVE of investment information.)
  • At the recent Mid-Michigan regional investing conference, we reviewed portfolios that were dripping Apple juice. It’s a good problem to have. Should we sell?
  • I urged attendees, particularly Apple loyalists to carefully ponder a couple of realities: (1) Apple has historically been VERY successful at protecting market share. Rabid advocates take customer loyalty to a whole new level.
  • (2) Apple has historically been weak at capturing incremental market share beyond the rabid faithful.
  • (3) Treat any analysis of Apple in much the same way that we regard Pfizer/Pharmacia/etc. and other bolt-on acquisitions. Even though the Apple new markets/divisions come from within, they behave with the characteristics of bolt-on acquisitions ultimately … a form of hybrid M&A. Be careful with those 60-80% quarterly year-over-year results.

There are certainly similarities when it comes to price behavior. Note that the relative strength index (RSI) trends are quite similar, indeed. So from a technical analysis perspective, it naturally begs the question about speed bump vulnerability.

But the price history provides a little different perspective. Although the incredible stock price surge in Apple (AAPL) is formidable, it actually pales versus the advance in Qualcomm during calendar 1999.

We also note that the Value Line low total return forecast for Qualcomm back then went seriously negative — a sign that the rhinos were pretty confused about business prospects (growth and profitability) in the wake of shedding handset manufacturing to focus on the achievable royalties from an emphasis on innovation.

The side-by-side business model analysis displays some similarities.

The biggest question revolves around achievable profit margins for Apple going forward depending on the product mix. For 1999 Qualcomm, the convergence of the bottom line (EPS) with the top line (Sales) suggested a significant shift in net margin (%) and was at the heart of the confusion at the time.

One of my most powerful memories of Y2K are the rapidly evolving forecasts as it seemed every analyst on Wall Street engaged in a game of one-up the other guy. The rhinos elbowed their way to higher fundamental expectations in a wake of “P/E ratios no longer matter any more.” “You’re such a dinosaur.” “Earnings? We don’t need no stinking earnings!”

We note the step changes in the fair value estimate from Morningstar here … and note that S&P has ratcheted from a fair value estimate of $426.70 (fairly recently) to a new plateau of $752.80!

Apple isn’t finished, yet. Whether reinventing the music business, making phones smarter, offices more portable, making meaningful Mandarin in-roads or redefining television. By the way, I find that I watch more TV on my laptop than in the living room these days — that’s clearly intriguing. At least as compelling as the day ten years ago when I realized I listened to, and bought, more music via my computer despite some crummy speakers. Remember Napster: The Original? Steve Jobs noticed and capitalized.

For all we know, Apple is working on a transporter beam … and the project is in “alpha.” 🙂

As shown here, the transformation of 1999 Qualcomm was at the heart of the mystery. Few of us saw the margin enhancement, maturation and persistence for Qualcomm at the time. In the case of present day Apple, having a vision for what is possible when it comes to profitability is at the core. (Sorry … couldn’t resist, pun intended.)

Is 2012 AAPL The New 1999 QCOM?

No. Yes. From a price momentum perspective, somewhat.

The business model transformation at 1999 QCOM was massive. The 2012 AAPL version is a little more subdued but nonetheless temporarily confusing to the rhinos. The talking head appearances are definitely approaching full deja vu status with $1000 and $1001 price targets for Apple as recently as yesterday.

Should we sell? Could Apple be a roman candle? We’d recommend consideration of trailing stops – particularly for any positions (or portions) that exceed concentration guidelines.

As the haircuts in the accompanying figure provide a reminder, speed bumps are inevitable.

Aapl 20-year chart 20120321

Seen the Remote? Universal Electronics (UEIC)

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The countdown to the Super Bowl is underway.

Do you know where your remote/clicker is?

Founded 1986, Universal Electronics (UEIC) is the global leader in wireless control technology for the connected home. UEIC designs, develops, and delivers innovative solutions that enable consumers to control entertainment devices, digital media, and home systems. The company’s broad portfolio of patented technologies and database of infrared control software have been adopted by many Fortune 500 companies in the consumer electronics, subscription broadcast, and computing industries. UEIC sells and licenses wireless control products through distributors and retailers under the One For All® brand name.

Sales Growth Forecast

A sales growth forecast of 10-12% seems reasonable and achievable for this still relatively smaller and faster-growing company.

Profitability Analysis

Valuation & Return Forecast

Value Line has a projected average P/E of 20x for their 3-5 year forecast. Based on a consensus that includes S&P, we’re using a P/E forecast of 18×.

Using the three main milestone judgments for UEIC, we arrive at a return forecast (projected annual return) of 16%.

The historical range for the return forecast (and quality rating) is shown in the company chronicle:

Universal Electronics (UEIC) was featured in our weekly memo nine months ago (4/23/2012) at a price of $16.85. From that message:

The highest ranked companies (by virtue of the combination characteristic of MANIFEST Rank that merges the return forecast with quality) are: Synchronoss Tech (SNCR), ITT Educational (ESI), Sysco (SYY), the company formerly known as Macrovision – ROVI (ROVI) and Universal Electronics (UEIC).

When it comes to the hierarchy of needs, we “get” the Sam Adams and peanut butter (popcorn too) part along with the caffeine … but the educational stuff seems to conflict with the video games for many of us, that is — unless your Facebook Friends list numbers in the hundreds and you’ve ventured in Doom or other Worlds of Warcraft, perhaps gaming with John Madden.

We’re relieved to see worlds collide with Universal Electronics because they are involved in what has become one of the most powerful needs (and means for couch potato domination of your living room) … the remote. Most of the young people in your life would have a whole lot of trouble imagining the pre-historic savagery of having to walk to the tube to change the channel. Try this at home and watch/hear the “unimaginable horrors” that our young people will share. “Right, Dad. Now you’re probably going to try to tell me that cars didn’t always have air conditioners!”

As for me, I’m grateful that our children are available to program the remote — saving me from the agony of reading the instruction manual and one of those challenging educational services opportunities as our young people bring those indispensable handheld devices to life.

UEIC has gained 13.5% over the last nine months while the Wilshire 5000 has advanced 11.3% for a relative return of +2.2%.

Value Line Low Total Return Screen (1/25/2013)

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Speaking of inflections, check out the number of weaker long-term price forecasts (listed below) versus those that have strengthened. This trend has been in place for some time.

Much rides on the 4Q2012 earnings reports, particularly this week.

We’ll also start to get a look at a few of the 2014 annual forecasts as they come out of the blocks.  Much rides.

There’s a plethora of study and investment candidates this week. We’re a little reluctant to look at any of these with a return forecast greater than 22.5% (simply from a statistics perspective) but there are plenty of those blue chip stalwarts that are currently getting kicked around. Might the Lost Decade be found?

Universal Electronics (UEIC) and Pepsi (PEP) are among those that trigger attention — and we’ll take a look at least one of these this week.

Materially Stronger: Bridgepoint Education (BPI)

Materially Weaker: Dolby Labs (DLB), Activision Blizzard (ATVI), Treehouse Foods (THS), Village Super Market (VLGEA), Apollo Group (APOL), DTS (DTSI), Career Education (CECO), Avid Technology (AVID), Diamond Foods (DMND), ITT Educational Services (ESI), Synutra (SYUT), Zynga (ZNGA)

Note: After continuing the update (incorporating and factoring in forecast changes and the opinions of S&P and Morningstar, etc.) degradation of fundamentals in Strayer Education (STRA), Synutra (SYUT) and Nutrisystem (NTRI) would have resulted in their removal from the Companies of Interest list. In other words, their quality rating dipped below 55 (Good) and they would no longer qualify for this screen.

MSC Industrial (MSM)

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During this week’s Value Line update, we mentioned that MSC Industrial (MSM) seemed to exhibit strengthening fundamentals. The company shows up near the top of a screen based on the low total return forecast and actually scores pretty well when factoring technical elements, too.

Time for a closer look. Tighten your tool belts and let’s go!

Company Description

Make sure you start with a pretty big tool belt.

Since 1941, MSC has set the industry standard for quality, selection and customer service. More than half century later, the company’s dedication to these standards has made us one of the nation’s leading distributors of metalworking & maintenance/repair/operation (MRO) industrial supplies, with over 500,000 products.

As Ken Kavula often encourages, check out the presentation under investor relations for a quick overview and discussion of where the company has been … and where they appear to be going.

Business Model Analysis

Expectations for top line growth seem reasonable in the 9-10% range.

The historical profile shows recessionary impact pretty dramatically for 2008-2009.

Profitability Analysis

Return Forecast

Using a growth forecast of 9%, a net margin forecast of 10.7% (based on history and analyst consensus estimates) and a consensus-based projected average P/E of 18.0x, the projected annual return (PAR) is approximately 12%.

Value Line Low Total Return Screen (1/18/2013)

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The Value Line low total return forecast (for approximately 1700 stocks) is 8.2%, down from 8.5% last week.

Companies of Interest

It was nice to see Hillenbrand (HI) get an upward nudge in long-term price forecast. We featured it three and six months ago … and the price has advanced nicely. This boost restores the low total return forecast to 4.5%.

MSC Industrial Direct (MSM) markets industrial products to small- and mid-sized customers throughout the U.S. MSM distributes a full line of industrial products such as cutting tools, abrasives, measuring instruments, safety equipment, fasteners, welding supplies and electrical supplies. Like Grainger (GWW), the company has been a long-time favorite and is worthy of further study — a good opportunity if you believe in a continuing economic recovery.

Materially Stronger: Hillenbrand (HI), Middleby (MIDD), United Rentals (URI), American Water (AWK)

Materially Weaker: Digital River (DRIV), Stonemor (STON), Tecumseh Products (TECUA)