End of an Era

This Week at MANIFEST (6/5/2015)

The End of an Era

For the last several years, I’ve shared the story about proper storage, layup and preparation and the joy it delivered as my annual tug-of-war with the grass cutting machine nearly killed me. And then some words of wisdom from my Dad, “Run it dry when you shut down in November” put an end to the agony.

2014 was the tenth year in a row.

Result? A first pull start for a decade or so. This is an amazing thing.

This year, that wonderful streak came to an end. The prep was sufficient and I even changed the oil, bought the best gas, etc. — but I may have primed one too many pumps of the bulb.

But it started on the second pull this year!!! We’ll take that as almost as good. There’s no comparison to the brutal wrestling matches of yore or trips to the repair shop of the past.

Companies of Interest: Value Line

The average Value Line low total return forecast for the companies in this week’s update batch is 5.7% — higher than the 3.7% for the Value Line 1700.

Materially Stronger: Balchem (BCPC)

Materially Weaker: Peabody Energy (BTU), Chesapeake Energy (CHK), Gulfmark Offshore (GLF), Encana (ECA), Ruckus Wireless (RKUS), Itron (ITRI), EOG Resources (EOG)

Standard Coverage Initiated:

Discontinued: Arch Coal (ACI), Alpha Natural Resources (ANR), Penford (PNX), Aruba Networks (ARUN)

Market Barometers

Value Line Low Total Return (VLLTR) Forecast. The long-term low total return forecast for the 1700 companies featured in the Value Line Investment Survey is 3.7%, unchanged from last week. For context, this indicator has ranged from low single digits (when stocks are generally overvalued) to approximately 20% when stocks are in the teeth of bear markets like 2008-2009.

Stocks to Study (6/5/2015)

  • Alliance Resource Partners (ARLP) — Highest MANIFEST Rank
  • Southwestern Energy (SWN) — Highest Low Return Forecast (VL)
  • Peabody Energy (BTU) — Lowest P/FV (Morningstar)
  • Consol Energy (CNX) — Lowest P/FV (S&P)
  • Alliance Resource Partners (ARLP) — Best 1-Yr Outlook (ACE)
  • Chesapeake Energy (CHK) — Best 1-Yr Outlook (S&P)
  • Phillips 66 (PSX) — Best 1-Yr Outlook (GS)

Market Barometers (Continued)

Is “Winter” Coming?

I don’t know. But the combination of a declining $USHL — remember, the number of 52-week highs crests well before a bear market, much like the first signs of falling leaves in Autumn — with the historical low overall return forecasts is cause for vigilance. I’ve started exploring some of the work of Harry Dent, the demographics-centered economist. Dent’s forecasts back in the 1990s certainly merit a closer look because he’s concerned about the outlook for 2015 and 2016. Stay tuned.

In the meantime, quality is your friend. When buying, demand high quality and leadership financial strength.

It’s Quiet. Too Quiet?

During an investment club visit this morning, one of the experienced investors made an observation about the relative lack of volatility in the market right now. My answer was framed around the reality that lower volatility generally leads to lighter paychecks on Wall Street (traders can make more money with more amplitude and frequency in both directions) and that if anything — being “too quiet” is actually disquieting for long-term investors because the rhinos can get restless and go on a misbehaving rampage. It’s the type of condition that fostered the leverage insanity of a few years ago and let’s face it, very little has actually been remodeled or remedied since those tumultuous days a few years ago. $VIX is a measure of general volatility and we see the quiet-too quiet days of 2007 which led up to the Great Recession and the current conditions.

Southwestern Energy (SWN)

Four years ago (3/11/2011) Southwestern appeared — as it often has — among our stocks to study during our weekly update. The stock price at the time was 36.12. And although the price reached 49.2 during 2014, the persistent backslide over the last year to 24.54 means that SWN has delivered an annualized return of -9.2%. The Wilshire 5000 has gained 14.8% during the Southwestern swoon.

Business Description

Southwestern Energy is primarily engaged in the exploration & production (E&P) of natural gas and oil.

2011 Outlook

Our forecast at the time featured 10% sales growth, 26% net margins and a projected average P/E ratio of 19x for a projected annual return of approximately 9%.

Equity Analysis

What’s gone wrong? Overall, the sales growth forecast has remained intact. It seems reasonable to expect 7-10% from this relatively small and well-managed company.

The profitability is what has waned. Value Line’s 3-5 year forecast was 31% four years ago and we took some “shots” at that optimism at the time with some duct tape. Optimism is a good thing — in moderation.

The P/E of 20x or so is still OK. This is a good company.

Yes, Virginia, stock prices follow earnings. .

If it’s reasonable to expect the conditions shown in the accompanying analysis, the Southwestern stock price is going to ultimately follow the blue arrow. But it might gurgle for a while.

Why? Because the economic environment and the prices on gas pumps matter. When they tumble, like from $4.29 to $2.19 rather rapidly, companies like SWN get hammered — some more than others. Check out this side-by-side of the SWN stock price swoon versus the price of oil ($BRENT) as a proxy for “energy prices in general.” Believe it or not, Southwestern is less impacted than most and generally recovers faster than most. The natural gas and oil portfolio diversification of their operations probably helps here.

Q: Does the price of energy fluctuate?

A: Yes.

 brent 20150306


Many of us, including Hugh, have been talking about the accumulation opportunity that we’re currently experiencing with companies like BP (BP), Schlumberger (SLB) and others.

Looking at the preceding graph, unless you expect that long-term moving average (blue line) to invert and start heading “south”, energy prices will be higher at some point in the future. Companies like Southwestern will persist and ultimately do better.

Personally, I look at the long-term characteristic of that trend (+6.3% annualized over the last 6 years) and see $130-$150 price levels in 3-5 years. It’s possible. Virginia would like to remind all of us that stock prices follow earnings … eventually.

This Week at MANIFEST (12/5/2014)

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

Companies of Interest: Value Line

The average Value Line low total return forecast for the companies in this week’s update batch is 2.8%.

Materially Stronger: Zebra Technologies (ZBRA)

Materially Weaker: Rhino Resource Partners (RNO), Clean Energy Fuels (CLNE), Gulfmark Offshore (GLF), UGI (UGI), Kronos World (KRO), Marathon Oil (MRO)

Coverage Initiated: Methanex (MEOH), Concho Resources (CXO)

Discontinued: Walter Energy (WLT)

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 91%!

It will be interesting to see if the Morningstar analysts make any downward adjustments in fair value for the energy stocks during this turbulent ride.

Southwestern Energy (SWN) checks in at 55% — a stock that Morningstar apparently believes is significantly undervalued.

Companies of Interest: S&P

The average price-to-fair value for the companies in this week’s update batch is 101% — according to S&P.

There are always a couple of things to check during a swoon. One is whether the perceived opportunity is too good to be true. Companies with P/FV ratios less than 70% … or PAR values greater than 16% come to mind. The other is when companies are guilty by association when they don’t deserve it. Is it possible that Imperial Oil (IMO) should be less affected?

Ecolab (ECL) makes the S&P short list at a P/FV of 89% and a quality ranking of 86 — suggesting that it may be worthy of further study.

Market Barometers

The median Value Line Low Total Return (VLLTR) Forecast is at 3.7% — unchanged from 3.7% last week.

Stocks to Study

The following update stocks are ranked in the top 10th percentile of all companies we follow (MANIFEST Rank > 90) and this display provides a wide berth of dueling opinions, as usual.

All Right. All Right. All Right. AMEN!

All Right, All Right, All Right … AMEN!

It was vintage Matthew McConaughey on Sunday night as he thanked God first for his Best Performance by An Actor in a Leading Role in his acceptance speech. (You could have heard a pin drop in the Hollywood audience.)

We have noted here previously that McConaughey nearly stole the show at Wolf of Wall Street despite a sparse few minutes at the very beginning of the movie. I will also confess that I was relieved that Leonardo, Jonah Hill, Meryl Streep and Julia Roberts remained in their seats all Sunday night. Maybe there’s more to thespian excellence than a spewing epidemic of the F-word.

I have not seen Dallas Buyer’s Club, recipient of several awards including Matthew’s but I probably will. Our own buyer’s club, this community of long-term investors, celebrated its own annual achievement awards this past weekend too. Manifest Investing and the Mid-Michigan chapter of NAIC teamed up to present this year’s red carpet, black tie, and latte-toting pajama party on Saturday morning. The Guest Knights (Herb Lemcool, Matt Spielman and Nick Stratigos) stole the show and the Audience toted home their first Golden Knight. It won’t be their last. The Wisdom of Crowds, Communities and Clubs is formidable, indeed. The awards for 2013:

  • Best Stock Selection (2013): Audience Choice, Ken Kavula, Cy Lynch for Priceline (PCLN)
  • Best Stock Selection (All-Time): Hugh McManus for Southwest Airlines (LUV)
  • Best Picture: Mark Robertson for Crossing Wall Street, highlighting the exploits of one Eddy Elfenbein
  • Best Accuracy (2013): Guest Knights Herb Lemcool and Matt Spielman
  • Best Accuracy (All-Time): Guest Knights Herb Lemcool, Matt Spielman & Nick Stratigos
  • Best Relative Return (2013): Ken Kavula
  • Best Relative Return (All-Time): Guest Knights Herb Lemcool, Matt Spielman & Nick Stratigos

A wonderful community steeped in collective (and shared) wisdom. Join us for the next Round Table on March 25.

All right. All right. All right. AMEN.

Companies of Interest

I have troubling drumming up much excitement for Issue 3 of the Value Line Investment Survey.

Maybe it’s the average Quality Rank of 57. Or the average EPS Stability of 55.

This week’s update batch is chock full of companies that get whipsawed by economic tides … and that makes them non-core in our investing universe. There are a few exceptions — like some of the specialty chemical companies, some of David L. Babson’s places to remain vigilant for price swoons. But for the most part, these companies can be treacherously volatile on the operating performance side. And that obviously translates to the stock prices. It’s generally a pretty good idea to double check against S&P fair values for the companies in this batch.

Materially Stronger: Interdigital (IDCC), Chesapeake Energy (CHK), Avery Dennison (AVY), Magellan Midstream (MMP), Zebra Technologies (ZBRA), Minerals Technology (MTX)

Materially Weaker: Encana (ECA), American Vanguard (AVD), Arch Coal (ACI), Boardwalk Pipeline (BWP), Alpha Natural Resources (ANR), Walter Energy (WLT)

Morningstar P/FV Nudges

The average price-to-fair value (P/FV) for the companies in this week’s update batch — according to Morningstar — is 99%.

S&P P/FV Nudges

The average price-to-fair value (P/FV) for the companies in this week’s update batch — according to S&P — is 115%. (!) The two research giants clearly have a difference of opinion this week.

Market Barometers

The average Value Line low total return forecast held steady at 3.4%, unchanged from last week.

Coming Attractions

This coming Saturday (March 8), we’ll spend some time with the retirement savings plan for government employees in a FREE webcast. We’ll take a look at the items on the menu — as we do for any qualified plan — take a look at how these components have performed, and some perspective on the outlook.

Time: 10:30 ET

Please feel free to share this opportunity with friends and family who have access to the Thrift Savings Plan. “Seating” is limited.

Registration: http://www.manifestinvesting.com/events/146-a-few-moments-with-thrift-savings-plan-march-8-2014