By Neal Goodwin, Guest Editor
Today, Investment Underground takes a look at a few of Jeremy Grantham's latest buy ideas. For those wondering why one should follow the advice of Jeremy Grantham, look no further than the continuous success of his Boston-based asset management firm Grantham May Van Otterloo (GMO). GMO has had a 10 year cumulative return of 31% versus just 16.4% in the S&P (SPY). In a recent article with businessinsider.com Jeremy predicted that stocks are subject to a boost, largely due to the Presidential Cycle we find ourselves in at this time. Year 3 of the Presidential Cycle has historically been very good for stocks because the current government does everything it can to help itself get re-elected, including flooding the economy with cheap money, in turn raising the value of stocks. So, with this in mind, what has Jeremy been buying for his investors? Here is a list of 10 of his newest buy ideas. Use this list as a starting point for your own due diligence.
Guess? Inc. (GES): Founded in 1981, GES designs, markets, distributes and licenses lifestyle collections of apparel and accessories for men, women, and children, focusing on apparel that reflects the American lifestyle and European fashion sensibilities. It also grants licenses to manufacture and distribute a range of products that complement its numerous apparel lines. Its main customers are the "style-conscious consumers primarily between the ages of 18 and 32," a highly desirable demographic because of its spending habits. GES has a P/E of 14.06, meaning this company is currently being slightly undervalued relative to its growth rate. It provides a small dividend of .80, and with a most recent trade of $43.72 this gives it a yield of 1.80%. Recently U.S. department of Commerce reported sales at clothing accessories stores rose 4.1% in the first quarter 2011, over first quarter in 2010. 2010 resulted in a 5.1% increase over the previous year. Signs point to a reversed trend of negative earnings within the apparel industry, especially considering that the department of commerce estimates a 2.6% increase in consumer spending. Recently, GES was given a downgraded outlook from projections in the beginning of the year. However, this should not affect GES considerably as similar stocks, namely, Fossil (FOSL), that had been downgraded saw healthy jumps in stock price once the company reported earnings. I believe GES is a strong hold, and a solid buy mainly because of the upward trend within the industry. It has a healthy market cap of $4.04 Billion, and should be able to sustain increased stock value through the rest of the year based on the historical trends of the apparel industry. While its outlook was recently downgraded, it has increased net income from this point in 2010 by more than 15%, pointing to continued success as I predict consumers will have more disposable income to spend on apparel goods.
The Nasdaq OMX Group (NDAQ): Nowadays, NDAQ offers trading across various asset classes, and also provides broker services that comprises technology and customized securities administration solutions. The proclaimed leader in floorless exchanges, NDAQ challenges NYSE Euronext as the world's largest stock exchange. Just this week NDAQ put in a hostile $11B bid with Intercontinental (ICE) for NYSE Euronext, but the U.S. Department of Justice takes credit for "squashing" this bid, saying it would file an antitrust lawsuit citing monopolistic attributes that would have substantially eliminated competition as a result of any such deal. This information shows that NDAQ is in a great place, and confident enough in its performance and revenues to even put in a bid for one of the other major powers in the stock exchange market. At this moment NDAQ is selling for $26.50 a share, while providing no dividends. With a beta just below 1 (.88), it is not surprising NDAQ responds almost perfectly to the market, being that it is one of the major players in the determination of the stock exchange. Considering the suspected upward trends in stocks for the remainder of 2011 as mentioned earlier in the article, I consider NDAQ a strong buy. NDAQ travels as the market does, and all signs point toward increased average stock prices across the market, as mentioned before. NDAQ has increased nearly 50% since September of last year, following the increased production from the stock market. With a P/E of 12.00, this stock may even be undervalued. Buy with confidence.
MetroPCS Communications (PCS): PCS is a wireless telecommunications carrier that offers broadband mobile services in the United States. The business plan of PCS that differentiates it from the other big cell phone companies is that coverage is offered on a monthly unlimited usage flat-rate plan for local and domestic long distance calls, and the result is one of the cheapest plans in the business. While they skipped the 3G generation of cell phones, they're greatest value is in low-end 2G cell phones, and they are getting back on the band wagon with 4G services. PCS is a much smaller company than others like AT&T (T) and Nokia (NOK). Therefore, due to company size and fact that it are only requires customers to sign month to month contracts, it is more prone to swings in the stock market. This could be good or bad. For the last few months, PCS has been on an upward trend, with an increasing stock price by 50% since January. PCS's P/E has also increased since January, from 21 to 28.45. This P/E symbolizes a healthy company, but any P/E above 30 hints that the company could be overvalued, so PCS may not have much room for improvement. However, its implementation of 4G should create potential growth in the stock price as investors price future earnings growth from it into the price. For now, this is a strong hold, and a speculative buy based on how they fully adapt and transition to the 4G market. If the transition is smooth and customers carry over, consider this stock a strong buy in the coming months.
Marshall and Ilsley Corporation (MI): MI provides diversified financial services to corporate, institutional, government and individual customers in the United States, and, it turns out is interestingly the largest bank holding company in the state of Wisconsin. MI is currently selling at $7.81 and is providing dividends of .40%, yielding at a marginal rate of %.50. There is no P/E rating for this stock, partially reflected in its high beta level of 1.60, however its forward P/E is an estimated 17.75. This high beta reading means that MI is very volatile, and while it poses a potential large return, there is just as much risk of a large drop in the stock's value. However, considering the state of the market, and the docile nature of this stock recently, MI could be due for a jump in stock return, as some investors such as Baupost Group's guru Set Klarman are bullish on stocks in MI's industry. Personally, I am skeptical on this stock based on the volatility, unimpressive returns as a stock as of recent, and the fact that it has posted a loss for 10 consecutive quarters. In a "what have you done for me lately" world, I am unimpressed with recent results, and would like to see some forward progress before buying into MI.
SureWest Communications (SURW): Usually I introduce a relatively unknown company with a description so that investors have an idea of where earnings come from, but the statistics that go along with SureWest are off the charts. First, its P/E is a ridiculous 158.7, suggesting this stock is wildly overvalued given its growth, and its beta is a miniscule 0.01, meaning no correlation whatsoever to the market. However, forward P/E is a realistic 26.78, meaning there might be something we are missing by just looking at the hood of this car. Now, back to looking at the company; SURW provides telecommunications, digital video, internet and other facilities-based communications services to residential, business, and carrier customers in northern California, and the Kansas City, area. On how the company works, Harry Long has a great analysis on why the basic statistics may be out of whack. Essentially, SURW has very low marginal costs, resulting in large cash returns ($15 Million in marginal costs versus over $50 Million in profits) but due to the size of the company, it is difficult for investors to have much confidence. SURW looks to be a very attractive acquisition for a larger telecommunications business, and if this were to happen, would provide the financial stability that investors have been looking for. In the short run, this stock seems too volatile to me to be worth of a "buy" rating. SURW is a valuable stock worthy of taking a risk on based on the potential returns of the company, especially from a potential increase in dividends resulting from the high level of profits (SURW currently has a dividend of 0.32, a 2.40% yield), however in a time of positive market influence, I am usually wary of high-volatility names, but the beta rating of .01 shows that, at least historically, the company's shares have offered some relative insulation and lack of correlation with the rest of the market. This could offer some level of diversity during market swoons.
Atmel Corporation (ATML): Atmel's chips are favored in consumer electronics, communications, industrial, military, and networking products. Looking at ATML's first quarter results of 2011 vs. 2010, net profit margin has increased from 18.53% to 28.33%, sales/asset increased from 0.1246 to 0.1390, while assets/equity decreased from 2.0137 to 1.8125. These all lead to an increased return on equity from 4.65% to 7.14%. The first two increases are indicators of a company moving in a healthy and sustainable direction, while a decrease in assets/equity means that the company is comfortable taking a risk with equity, a decision that could and should lead to more growth and more profitability in the future if it is able to sustain increases in the other statistics. The number most pertinent to investors is the increased return on equity, as that means more money for the stock holders. In latest news from ATML, just Monday morning (5/16/2011) it announced the launch of the "Industry's first EEPROM device with AES-CCM Authentication," an addition to the Atmel CryptoAuthentication Family. These new devices "offer secure data storage using the AES (Advanced Encryption Standard) authentication for industrial, consumer, computing and embedded applications with flexible key management features and secure counters. AES is a symmetric-key encryption standard adopted by governments and cryptographic experts around the world." A successful launch of a new product, especially one proclaimed to be an "Industry first" will almost always subsequently lead to a jump in stock prices. All factors point to ATML being a strong buy, and I support that assessment. Buy with confidence. We are generally bullish on all chip names at this point in the cycle, and ATML is an interesting play in this space.
Lennar Corporation (LEN): LEN is one of the nation's largest homebuilders and a provider of financial services. It builds homes, residential buildings, as well as purchases and develops and sells residential land directly through unconsolidated entities. I will start out saying that I believe this is a solid long term buy. Now for the logic: we are getting closer and closer to the "double bottom" of the housing market. In short, we did not construct so much housing prior to the housing boom that we were set for the next 10 years. As housing prices continue to fall, we will soon reach a point where a plethora of houses are going to be called on to be constructed. Being one of the top homebuilding companies in the country, LEN should be at the frontier of this housing "double boom." With a high beta of 1.79, LEN could be poised for a strong increase in stock prices once the tables turn in the housing market. LEN last traded at $17.58, is returning dividends of 0.16 for a 0.90% yield, and has a P/E of 25.66, suggesting LEN is at a healthy price level. Again, I consider LEN to be a strong buy for the long term. LEN is poised to make a strong jump in price once the housing market turns, and it is only a matter of time before that happens with POMO and continued intervention in the mortgage markets by the Federal Reserve. The very low and flat trends of starts over the past two years are a good indicator that the housing market is close to finding a market-clearing price and level of activity, and there really is only room to improve. If any major negative adjustments were to have happened, they would have happened by now in my humble opinion. While you may not see returns on LEN in the next month or two, trust that once the market turns, this stock is very likely to make you money.
Riverbed Technology, Inc. (RVBD): RVBD is in the technology sector and is trading at $36.87 and has a P/E of 128.02 with no dividends. It provides solutions to the fundamental problems of wide-area distributed computing. It offers steelhead appliances consisting of its Riverbed Optimization System (RiOS), proprietary software embedded on a general purpose hardware computing platform. Its general platform follows an "innovative approach" (back in 2002) of solving wide-area distributed computing inefficiency/performance problems by simultaneously addressing inefficiencies in software applications and wide area networks as well as insufficient or unavailable bandwidth. For the less-technology minded readers, RVBD is a major player in the new age of "cloud computing." The best way to deal with cloud computing, for those interested, is to purchase a basket of cloud computing stocks. This is due to the certainty that cloud computing will eventually be a large cash cow, combined with the uncertainty about which companies will succeed as the pioneers of the technology. RVBD is an attractive stock of this bundle due to recent successes. In Q1 of 2011, revenues were up from Q1 in 2010, earnings expectations were exceeded, and year-over-year revenue growth increased 45%. RVBD appears to be on a strong path for the future, as earnings growth has been estimated at 28% for the next five years. Also, it is probably time to refer back to the high P/E number of 128; while this is a high number, as of January P/E for RVBD was 253. RVBD has decreased its PEG (Price-to-earnings-to-growth ratio, ideally = 1) from 9 in January to 5. This is still a high number, but heading in the right direction. I would hold on this stock for now as the cloud computing market evolves, but keep an eye out for any news on the company. If it shows to be a major player in cloud computing, buy.
Ultrapar Holdings Inc. (UGP): Based out of Brazil, UGP engages in the distribution of liquefied gas, light fuel, and lubricants. It sells bottled and bulk LG to residential, commercial, industrial markets directly, as well as through its retail stores and independent dealers. UGP is currently selling at $17.17 and giving dividends of 0.56, resulting in a healthy yield of 3.30%. We think that yield is sustanable given operating cash flows and cash on hand. With a P/E of 19.65 and a one year estimate of 18.28, UGP has a solid P/E and a healthy PEG of 1.07. Both these indicators suggest UGP is being sold at a healthy price, and may even be slightly undervalued. These suggestions are consistent with UGP's first quarter results, which show that UGP had another quarter of significant and consistent earnings progression, with a 9% growth in net sales, a 23% growth in EBITDA, and a 58% growth in net earnings. In other news for the company, in April it pledged to improve corporate governance policies. The new corporate governance structure aims to deepen the alignment of interests and to ensure the company's growth. I see this company as a solid buy. With solid financials, a seemingly in-tune corporate structure, and a beta of 0.97 in an upward trending market, UGP should be a safe buy moving forward.
Agrium Inc. (AGU): In another AG-Chem captain of industry, AGU produces and markets agricultural nutrients and specialty products worldwide, and sells retail level agricultural products and services. Trading at $80.68 and offering dividends of 0.11, AGU has a minimal yield of 0.10%. AGU stock dropped earlier this week following the sale of the commodity management arm of AWB to private giant Cargill, the U.S. agribusiness and trading giant. However, AGU never had interest in this piece of AWB; it was only interested in the company's prized Landmark farm retail outlets. Sale of a piece of a company is never good for stock prices, even when the sale is pre-planned, so the drop from this sale should correct itself quickly once investors realize it was all part of the plan. AGU has a P/E of 14.35, and with an estimated 1-year target that is more than 25% above current stock price, AGU is expected to go up. Also, the floods in Mississippi, should prove to benefit AGU. Once the flood waters subside, farmers will need to get back to work and they will need more soil nutrients. AGU is one of the few companies that is likely to benefit directly from this second round of buying soil nutrients. AGU appears to have a number of factors pointing toward an increase in stock prices, which makes me classify it as a solid buy candidate. AGU is a better bet than Monsanto (MON) at this point, though shares of both companies have waned as of late, presenting a reasonable opportunity for interested buyers to pick up shares.