Introduction: Changing fundamentals for certain companies, along with the steep rise of several stocks I have written about favorably on Seeking Alpha [such as Yahoo! (YHOO)] has led me to favor other stocks than I have praised in prior articles for new money buys.
Herewith are some stocks that were recently added to the accounts I manage; please be aware that I am not a registered investment adviser and that nothing herein constitutes investment advice in any way.
The theme of these recent purchases is finance, energy and inflation hedging, with a growth and value orientation. Here are five stocks or groups of stocks that may be of specific interest to value-oriented investors.
1. JPMorgan Chase (JPM). The chart from Yahoo! Finance tells a lot of the tale:
JPM has traded in two long horizontal channels since the 1980s. Optimistically speaking, it may now be in the process of breaking out of the higher range it first reached in the late '90s.
Recorded 12-month earnings for JPM reached record levels before the stock broke out to all-time highs recently, implying that the valuation is OK. Book value including intangibles is expected to end the year around $56/share, about where the stock is now ($55). Forward 12-month earnings are expected to be around $6/share; Value Line records a median P/E for JPM of 11.0. Thus it appears reasonable to target a possible mid-$60's price sometime next year, plus a dividend stream that is close to 3% now and which may grow faster than earnings.
JPM is a category-killer. With many stock valuations at nosebleed levels, acquiring these shares at book value (note there are a meaningful amount of intangibles in JPM's book value) and a single-digit P/E on prospective 2013 earnings appears attractive.
Are there risks in JPM? Of course, and I cannot begin to list them all. This is not the ultra-conservative bank ("House") of Morgan, but we all know that.
More broadly, following its crash, finance is now well-positioned to lead a future bull market if a major market high is pending, or else to continue market leadership if this already mature bull market continues on for some time without a sharp break downwards.
2. Helmerich & Payne (HP). With its predecessor company founded in 1920, the "original" HP has emerged as the leader in U.S. land-based oil and gas drilling, based on its proprietary and innovative FlexRigs that were designed for unconventional formations.
The consistent upward thrust of this cyclical company's chart is remarkable:
The stock chart would look even stronger if one allowed for the spin-off of its production operations in 2002 to form part of the energy producer Cimarex (XEC).
I have written about this high-quality company that is little-followed by the general public twice. In March, the company and its history were discussed in Helmerich & Payne Continues to Gain Market Share. At that time I was neutral, thinking the stock was a bit ahead of itself; this proved to be accurate. Soon, however, there was important news out of HP, which I wrote about in late May in Is Helmerich & Payne Preparing to Initiate a Share Repurchase?. The news involved HP raising a good deal of cash by selling millions of shares of its equity holdings in Atwood Oceanics (ATW). Since HP was already well-financed, the question was why it was doing this. I guessed a share repurchase might be upcoming.
As it happened, my guess was close though incorrect. Instead, HP markedly raised its dividend. It is now paying $0.50 quarterly, meaning its yield is over 3%. Even though the land rig count in the U.S. has been weak lately, the company has an upbeat approach to its future in a slide on its latest investor presentation. This says:
The U.S. Land Drilling Market Today
- Our operational outlook for the third fiscal quarter remains unchanged.
- Oil price resiliency will probably accommodate gradual growth in activity as we move through 2013.
- Customers are deliberate with their budget dollars and increasingly discriminating with the service providers they engage.
- Customers continue to shift into a developmental phase of their drilling projects where consistency, performance, safety and additional efficiency capture all become important differentiators.
All of the above suggests that HP's business, which boasts record sales and earnings, is poised to move higher. Note that the date of this presentation was June 17, and since then West Texas Intermediate oil prices have surged.
It's also a positive to me that 98% of the float is held by institutional and mutual fund investors. This suggests that it would not take much excitement in the oil patch in general, or HP in specific, for individual investors to enter this name, perhaps pushing the shares sharply higher.
We will see on the next earnings release how much HP's book value will have risen after the sales of the ATW stock, but its price:book was already well below that of the market as a whole. At a slightly lower price than today's $65, HP was marginally-qualified for a small list of Ben Graham-type value stocks presented on Seeking Alpha (link lost, apologies to the author).
HP may now be a strong buy-and-hold investment. It is, however, volatile to the downside if oil prices collapse. Whether the enhanced dividend will provide much support if that occurs has not been tested. Also, whether strong technological competition to FlexRigs will emerge is not a topic in which I have expertise.
There have been some truly fine discussions of these companies on Seeking Alpha. I'm not able to discuss these immense companies individually as an expert, and there is no need to try. They simply all look cheap, with 5-6% dividends that appear secure for now and P/E's around 8X. The negatives are well known, and are non-trivial; that's why the stocks are so cheap relative to the market. These negatives include resource depletion, weak European and global economies, the rise of alternative energy sources, BP's particular legal problems stemming from the Gulf of Mexico oil spill, and others.
Nonetheless, all these shares have much higher dividends and much lower P/E's than the common stocks of electric, natural gas and water utilities traded in the U.S.; plus, as energy stocks, they have much greater inflation protection. I also do not think that Europe, their home base, is about to disappear as an economic entity.
These giants may thus have a substantial margin of safety relative to the stock market as a whole and may be worthy of consideration for purchase by U.S.-based investors. Of course, these trade as ADR's or ADS's in the U.S., so anyone considering purchase of any of the above may benefit from a review of the attendant tax and dividend withholding implications.
4. Everest Re (RE). The former Prudential Re, this Bermuda-based reinsurer was spun off by Prudential (PRU) to shareholders in 1995. Since then, it has outperformed the general indices. Few individuals appear to own this other than through funds: according to Yahoo! Finance, 122% of the float is held by institutions and mutual funds. Insiders own 21% of the shares outstanding. The company has high financial strength ratings from the various agencies and a #1 rating for safety from Value Line. It trades around book value after accounting for some unrealized bond profits and a trailing P/E of 7.4.
The company has been a decent underwriter of reinsurance as well as primary insurance, and has been an excellent allocator of capital regarding its own stock. About a decade ago, the stock had surged and often traded well above book value. The company then sold new shares into the market, taking advantage of the overvaluation. Later in the decade, RE began trading under book value. Since then, it has been a steady acquirer of its stock, shrinking shares outstanding.
One of the aspects of investing in reinsurers that appeals to me is that earnings are known to be so volatile that quarterly earnings are almost meaningless. It's nice to own some names wherein I don't feel as though I have to reassess the merits of the company every three months.
The reinsurance market is strong now, so I hope for additional shareholder-friendly actions along with possible growth in underlying asset value. This is especially so given management's large stake in the company.
The reinsurance market is inherently very risky. Overall, though, relative to the universe of stocks I follow, I like the risk-reward in RE.
5. Silver [various funds, best known is iShares Silver Trust (SLV)]. Silver has lost about 60% from its spike 2011 high. This is equivalent to about four consecutive 20% bear markets and is an extreme event, just as its ascent was extreme. I like silver here because is not merely trading below its 2008 high, as are several other commodities such as oil and copper:
Silver is trading below its 1980 spike highs.
Not only did silver reach around $50/ounce during the attempted cornering of the market by the Hunt Brothers and their Arab partners, but after the Iraq-Iran War broke out later in the year, silver spiked again to the mid-twenties. 33 years of inflation later, for silver to be back within that trading range is interesting to me. After all, simultaneously with the outbreak of the Iraq-Iran War, spot oil prices only spiked to the high $40's. Oil prices are now more than double that spike high; thus, silver may be fundamentally a bit too cheap.
The price of silver is often compared to that of gold, with a modern "normal" ratio around 50. The current ratio is around 65. If this ratio were to revert back to 50 over time while gold's price stayed the same, then silver would be back at $26 an ounce rather than just under $20. That $26 price also happens to be where support broke some months ago, after which there was nonstop carnage to the price, which finally bottomed (for now!) around $18. Income-oriented investors can purchase SLV and also sell covered calls; or can sell naked puts.
The froth is finally gone from the silver market. Sprott Physical Silver Trust (PSLV), which once traded at more than 30% above net asset value (NAV), is now trading right around NAV. Trading volume in SLV and similar vehicles has collapsed from frantic levels. As this chart from FINVIZ shows, the net positioning of traders in silver futures is at its most bearish (or, least bullish) in years:
Of course, this guarantees nothing, but it may suggest at least some degree of capitulation.
I look at SLV and PSLV as reasonably efficient hedges against negative interest rates, as well as ways to participate in a general global industrial revival. In addition, there are parts of the world such as India where silver is treated as an accepted form of wealth storage; and periodically this view comes to be more broadly accepted in the United States than it is now.
Silver prices can now take a long time to revisit the $25-30 range and even after fund expenses nonetheless outperform fixed income returns. So I think it's a reasonable asset to again add in a small quantity to either a diversified or fixed income-heavy portfolio.
Additional comments: The lack of fear in this market reminds me of the late '90s and keeps my stock allocation low and tilted toward less volatile, value names. As an example, one year ago I settled for a two point gain in Mattel (MAT) in the low-to-mid $30s. Why? Because the stock was a bit expensive based on fundamentals. What did I know? Not much, at least so the traders thought. The stock soared after I sold. But it was almost all due to P/E expansion.
MAT announced a big miss in earnings and a miss in sales this morning (Wednesday). While the stock is down big, it is still trading around $43, about $8-10 dollars a share above where I thought it was richly-valued one year ago. The company also had an earnings miss in the key December quarter, so that's two misses out of three quarters. In a "normal" market, the chart might now look terrible. Not so! MAT is still trading around 5X book value and 20X trailing earnings, and at more than 2X sales per share. It is far more expensive than any of the stocks I have mentioned above. It is more expensive than Apple Inc. (AAPL) stock was at its $705 peak, yet its earnings momentum is worse. And Apple is only amongst the greatest large-cap growth stories the world has seen in recent years, perhaps the single greatest, that's all. Mattel's a fine company, but it's no Apple.
MAT could fall by 30% from here, simply based on existing fundamentals (not to mention a further worsening) and still appear overvalued. There are many companies out there that lack MAT's many strengths but are trading at similar, or higher, valuations. These are comments that could have been made in the intermediate-to- late stages of the Roaring '90s boom.
Summary: We live in a highly financialized time. Bill Gross of PIMCO quantified this in Midnight Candles, his November 2009 investment letter. PIMCO's research showed that financial leverage and other factors had already pushed "paper" returns on investments to double where PIMCO calculated they "should" have been compared with 1956 levels taking into account the performance of the real economy.
Both stock and bond markets have appreciated a good deal further since late 2009 compared with the performance of the real economy. Thus, asset prices are high all round. High bond prices (i.e. low interest rates) help justify high stock prices.
QE or no QE, it makes little sense for stocks, bonds and oil prices to all continue to move up in tandem forever. That's one of those trios for which something has to give at some point. At least so I tend to think.
My strategy for dealing with this situation is to have an enhanced focus on underlying asset value along with current growth prospects. Perhaps some of the stocks and assets described herein will fill that prescription reasonably well.