In continuance of the bearish trend in the US equity markets since the end of April 2011, from when the US debt ceiling fiasco leapt onto the news pages, August, 2011 was the most chaotic month with multiple events that created history. In particular, the first “third” of August was devastating as the last-minute deal on “debt ceiling raise” and downgrade of the credit rating of United States spooked the market sentiment and ultimately caused a one-tenth loss of value in the Dow Jones Industrial Average (DIA).
The day of August 9th was an exception as all three major indices bounced back strongly (average 4% rise - citing US Federal Reserve’s interest status quo statement) after a disastrous Monday when they were down 5.5%. Jim Cramer, a former hedge fund manager and host of the famous program “Mad Money”, came out with his eighteen buy recommendations on August 9th. Among those recommendations, I present my five picks and their performance until now.
Bristol-Myers Squibb Company (BMY)
Bristol-Myers Squibb Company is one of the top fifteen pharmaceutical companies of the world. It is also one of the relatively higher dividend yielding stocks of the market with an impressive 4.3% yield. The stock also tops our list of Cramer’s stock picks with a whopping 14% return from August 9th, based on its Friday closing. Since the disorderly year of 2006 which saw a 57% skid in BMY’s bottomline when the company was rocked by a collusion scandal, the financial performance of BMY has progressed impressively during the next four years, both relatively and absolutely.
In the backdrop of a mundane topline 4-year CAGR of 5%, net income of the company reflected a sharp 26% average annual growth due to increasing operational efficiencies as depicted by improving margins during this period. However, current surge in the scrip’s price has caused it to reach an “indifferent” zone.
With the offering of better dividend yields by BMY’s closest competitors and industry stalwarts like Pfizer Inc. (PFE) and Merck & Company (MRK) (4.6% and 4.9% respectively) and consensus forecast of a 10% drop in BMY’s 2012 earnings, the price has little room to perk further.
Alaska Communications (ALSK)
Alaska Communications provides integrated communication services across the state of Alaska and is the first provider of 3G wireless network and the only provider that owns fully integrated infrastructure for major telecommunication platforms. It is the second best performer among our list of Cramer’s buy calls, registering a 7% price return since Cramer’s endorsement on August 9th.
In the above-mentioned edition of his program, Cramer termed ALSK as better than Frontier Communications Corporation (FTR) and Centurylink Inc. (CTL) despite their recent history of several times higher revenues and sustainable profitability levels than ALSK whose financial history portrays a highly volatile picture as it only managed to reach a green bottomline twice during the last decade.
Considering its financial performance during the last five years, the topline of the company shows symptoms of a “structural stagnation” with most of the figures hovering around a mean of US $347 million. In bottom line terms, apart from a staggering US $144 million profit in 2007 and a mild US $13 million profit in 2006, ALSK failed to pass the rope in each of the successive years till 2010. The company’s debt portion in the balance sheet reached an alarming level of 89% in 2010 in comparison to a decade-low level of 65% in 2007.
It is also interesting to note that ALSK has maintained a constant dividend payout (in dollar terms) despite a negative cumulative free cash flow during the last five years which explains its increasing level of debt in the balance sheet. However, with a consensus expectation of a green bottom line in 2011 and 129% growth in its 2012 earnings, ALSK offers an amazing 12% yield which makes it a must buy even at this level.
Core Laboratories N.V. (CLB)
Core Laboratories N.V. is the worldwide provider of diverse services to the oil and gas industry including reservoir description, product enhancement and reservoir management services. At current levels, the stocks is slightly lower than the level at which Cramer thumped it a buy recommendation, especially comparing and preferring it to Carbo Ceramics Inc. (CRR).
The financial picture of CLB depicts a consistent pattern over the last five years with an average 10% revenue growth and an inspiring 35% net income growth. In the absence of any significant capex requirements, the company’s free cash flow has averaged over US $100 million during the last half-decade which, with very low dividend payout (only started from 2008), has caused the percentage of debt (in the balance sheet) to reduce substantially from 60% in 2006 to 23% in the last year.
Though, there is a consensus on the expected growth in 2012 earnings at 30% which yields a (leading) price earnings ratio of 20.3, leaders in the oil and gas services industry like Schlumberger N.V. (SLB), Baker Hughes Incorporated (BHI) and even CRR offer better terms. Against the expected earnings growth and resultant price earnings ratio of CLB, consensus 2012F earnings growth rates of SLB, BHI and CRR stand at 43%, 37% and 36% respectively with price earnings ratios of 11.2, 8.3 and 16.0 respectively. Accordingly, CLB is appropriately priced under the current scenario and chances of a tangible rise in its share price are limited.
Clean Energy Fuels Corporation (CLNE)
One of Cramer’s minor likings, Clean Energy Fuels Corporation (CLNE), founded a decade ago, is engaged in the business of promoting natural gas as an alternative fuel for vehicles in United States and Canada. Since, August 9th, the stock has lost 6% of its value despite Cramer’s recommendation. Over the past five years, despite 23% CAGR of its revenue, the company has not been able to pass the zero-barrier even for a single time in terms of net income.
Further analysis suggests a continuous stream of equity injections during the last five years (with its listing in 2007) in order to strengthen the balance sheet which is corroborated by very low levels of (interest bearing) debt during this period. With expectation of continuance of losses till (at least) 2012 and the company’s uniqueness in terms of finding a true comparable, it is expected that the market would continue to focus its revenue growth (2012F: 36%) in order to comprehend CLNE’s progress towards profitability.
Cliff Natural Resources (CLF)
Despite Cramer’s “reinforcement” of Cliff Natural Resources (CLF) in his August 9th program, the stock is the worst performer in our list of his stock pics and has lost more than one-fifth of its value. CLF is a mining and fabrication company specializing in iron ore, steel and allied products with considerable interests in coal mining as well. Steadiness has remained the theme of CLF’s financial performance during the last five years with respective compound annual growth rates of 22% and 31% respectively for the top line and the bottom line.
Due to the nature of the business, CLF has a history of low dividend payouts which enhances the importance of earnings and their quality for its fundamental evaluation. In the light of the above-mentioned factors, the recent slump in CLF’s share price is an excellent example of complexity of the market dynamics and the possible extent of the dichotomies between bulls and bears.
Not withstanding the unswerving nature of the company’s past and consensus expectation of a juggernaut 80% net income expansion in the current year alone, the scrip continued to suffer the hammering which has made it attractive on almost all counts. CLF is currently trading at an unprecedented forward price earnings multiple of 3.86 which is colossally lower than its competitors, industry and even all major indices. Any improvement in this “crisis of confidence” should cause a strong uproar in the stock’s price from its current levels.