Analyzing 5 New Contrarian Buys From Billionaire Ken Fisher

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 |  Includes: LSI, MDLZ, RHP, SCHN, SO
by: Stock Croc

Kenneth Fisher is the Chief Executive Officer and Chief Investment Officer of Fisher Investments. Despite the ongoing market volatility and global economic uncertainty, he remains bullish on U.S. equities, previously saying that the leading U.S. stocks will outperform global stocks, even as returns diminish. In this article I will review five stocks that Fisher has recently added to his investment portfolio using a relative value analysis. Kraft, LSI, Southern Company and Schnitzer Steel are buys, while Gaylord Entertainment is not compelling right now.

Gaylord Entertainment Company (GET)

Gaylord Entertainment has a market cap of $1.02 billion and is currently trading at around $21, with no price to earnings ratio. Its 52 week trading range has been between $17.39 and $38.22. It reported third quarter 2011 earnings of $225.23 million-- a decrease from second quarter earnings of $236.78 million. Third quarter net income was reported as -$1.61 million, a significant decrease from second quarter net income of $8.64 million. It has quarterly revenue growth of 42.3% and a return on equity of -2.63%.

One of Gaylord Entertainment’s competitors is Morgans Hotel Group Co (NASDAQ:MHGC), which has a market cap of $169.02 million and is trading at around $5.50. It has quarterly revenue growth of -19.1%. This data indicates that Gaylord Entertainment is outperforming Morgans.

Fisher holds 2,227,270 shares of Gaylord Entertainment, buying the entire holding in the third quarter 2011. The average purchase price per share was $25.85. Based upon the last trading price of $20.74, he has made a return of -19.77%.

Gaylord Entertainment's cash position has significantly declined in the last quarter. Its balance sheet showed $13.27 million in cash for the third quarter-- a decrease from $112.51 million in cash in the second quarter. Gaylord Entertainment’s quarterly revenue growth of 42.3%, versus an industry average of 13%, and a return on equity of -2.63%, versus an industry average of 12.20%, indicates that it has greater earnings growth than many of its peers but management are not delivering as strong return on shareholders’ equity.

The outlook for the lodging industry is quite negative. This is based on the ongoing economic uncertainty, high unemployment and negative consumer sentiment, which has seen a drop in consumer spending and subsequently demand. Moody’s recently state; “The slow economy will weigh on operators’ ability to raise rates, which will slow profit growth.”

Overall, I do not believe that Fisher’s recent investment in Gaylord Entertainment is a solid investment choice, primarily on the basis of the negative industry outlook combined with the company’s third quarter net loss and drop in balance sheet cash. Although I can see that it is trading near the bottom of its 52 week trading range, which may indicate a buying opportunity. At this time I would prefer to take a wait and see approach and rate the company as a hold.

LSI Corporation (NASDAQ:LSI)

LSI has a market cap of $3.23 billion, and currently trades at around $5.73, with a price to earnings ratio of 10.86. Its 52 week trading range is between $4.75 and $7.74. It reported third quarter 2011 earnings of $546.91 million, an increase from second quarter earnings of $500.64 million. Third quarter net income was reported at $29.34 million-- a substantial decrease from second quarter net income of $293.78 million. It has quarterly revenue growth of 20.8% and a return on equity of 6.69%.

One of LSI’s competitors is NXP Semiconductors NV (NASDAQ:NXPI), which has a market cap of $3.75 billion and is trading at around $15, with a price to earnings ratio of 8.48. It has quarterly revenue growth of -5.4% and a return on equity of 4.89%. Based on these indicators, LSI is outperforming NXP Semiconductors.

Fisher holds 429,663 shares of LSI, buying the entire holding in third quarter 2011. The average purchase price per share was $6.66. Based upon the last trading price of $5.53, he has made a return of -16.97%.

LSI’s cash position has declined, with $725.15 million in cash for the third quarter 2011, a decrease from $755.44 million cash in the second quarter. Net tangible assets have increased to $740.14 million in the third quarter from $737.36 million in the second quarter. LSI’s quarterly revenue growth of 20.8%, versus an industry average of 31.40%, and a return on equity of 6.69%, versus an industry average of 12.40%, indicates that it is underperforming many of its competitors.

The outlook for the semiconductor industry is cautiously positive, with the electronics industry and semiconductor industry both expected to continue their ongoing recovery. Nevertheless, growth is considered tentative as high unemployment, tight credit markets and ongoing economic uncertainty is negatively affecting consumer sentiment and triggering sluggish consumer demand.

When the cautiously positive industry outlook and LSI’s solid performance indicators are taken into account, I agree with Fisher’s decision to invest in LSI. This is despite the recent and substantial drop in net income, as second quarter net income was inflated by a one off non-recurring event valued at $265.38 million. In addition, once this has been accounted for, LSI’s quarterly income statement shows a history of increasing net income. Accordingly, I rate the company as a buy.

Kraft Foods Inc (KFT)

Kraft has a market cap of $60.59 billion, and currently trades at around $34, with a price to earnings ratio of 18.71. Its 52 week trading range has been between $29.80 and $36.30. Third quarter 2011 earnings of $13.23 billion were reported, a decrease from second quarter earnings of $13.88 billion. Third quarter net income was $922 million a decrease from second quarter net income of $976 million. It has quarterly revenue growth of 11.5%, a return on equity is 9.07% and pays a dividend with a yield of 3.3%.

One of Kraft’s closest competitors is Nestle SA (OTCPK:NSRGY), which has a market cap of $181.36 billion and is trading at around $56. It has a price to earnings ratio of 5.05, quarterly revenue growth of -5% and a return on equity of 18.16%. Based on this data it is being outperformed by Kraft.

Fisher holds 8,304 shares of Kraft, buying the entire holding in the third quarter 2011.The average purchase price per share was $34.62. Based upon the last trading price around $55, he has made a return of 59.85%.

Kraft’s cash position has declined with the balance sheet showing $1.98 billion in cash for the third quarter, a decrease from $2.27 billion in the second quarter. Net tangible assets have increased with -$26.42 billion reported in the third quarter 2011, from -$26.58 billion reported in the second quarter. Kraft’s quarterly revenue growth of 11.5%, versus an industry average of 8.40%, and a return on equity of 9.07%, versus an industry average of 9%, indicates that it is outperforming many of its competitors.

The earnings outlook for the food industry is quite positive. Stocks in the broader consumer staples sector are performing their traditional defensive role as stock markets have faced increased volatility and dropped further as a result of Europe’s sovereign debt crisis and a weak U.S. economy. This can be explained as the demand for food, beverage and household products is relatively inelastic.

Despite the recent decrease in earnings, net income and balance sheet cash, I believe that Kraft represents a solid investment opportunity as it has a strong international franchise and diversified product offering, which allows it to leverage off any future growth opportunities. Kraft also has solid performance indicators and an attractive dividend yield. Therefore, I agree with Fisher’s investment and rate Kraft as a buy.

The Southern Company (NYSE:SO)

Southern has a market cap of $37.14 billion and is currently trading at around $43, with a price to earnings ratio of 17.68. Its 52 week trading range has been between $35.73 and $43.97. It reported third quarter 2011 earnings of $5.43 billion, an increase from second quarter earnings of $4.52 billion. Third quarter net income was $916.00 million a significant increase from second quarter net income of $604.00 million. It has quarterly revenue growth of 2% and pays a dividend with a yield of 4.3%.

One of Southern’s competitors is NextEra Energy Inc (NYSE:NEE), which has a market cap of $23.09 billion and last traded at around $55. It has quarterly revenue growth of -6.6%, a return on equity of 10.46% and a price to earnings ratio of 15.02. It pays a dividend with a yield of 4%. Based on these indicators both companies are approximately performing on par.

Fisher holds 6,535 shares of Southern, buying the total holding in the third quarter 2011. The average purchase price per share was $40.79. Based upon the last trading price of $42.70, he has made a return of 4.68%.

Southern’s cash position has significantly improved. The balance sheet showed $1.53 billion in cash for the third quarter 2011-- an increase from $450 million in the second quarter. The net tangible assets have increased to $18.34 billion in the third quarter 2011 from $17.69 billion in the second quarter. Southern’s quarterly revenue growth of 2%, versus an industry average of 7.5%, and no return on equity, versus an industry average of 7.1%, indicates that it is underperforming many of its competitors.

The outlook for the electric utilities industry is quite positive, and has been forecast as stable as demand for energy by consumers is relatively inelastic. In addition, low prices and abundant supplies of natural gas and coal, coupled with low interest rates, and open capital market conditions, further indicate that ongoing earnings growth can be sustained.

When the positive industry outlook is considered in conjunction with Southern’s solid increase in net income for the third quarter 2011 and increased cash holdings, it is an attractive investment opportunity. On this basis I agree with Fisher’s investment and rate the company as a buy.

Schnitzer Steel Industries Inc (NASDAQ:SCHN)

Schnitzer Steel has a market cap of $1.22 billion and is currently trading at around $45, with a price to earnings ratio 10.64. Its 52 week trading range has been between $32.82 and $69.43. It reported third quarter 2011 earnings of $1.08 billion, an increase from second quarter earnings of $981.06 million. Third quarter net income was $36.71 million, an increase from second quarter net income of $33.03 million. It has quarterly revenue growth of 69.2%, a return on equity of 11.78% and pays a dividend with a yield 0.1%.

One of Schnitzer’s main competitors is Commercial Metals Company (NYSE:CMC), which has a market cap of $1.43 billion and is currently trading at around $12. It has quarterly revenue growth of 24.9%, a return on equity of -10.72% and pays a dividend with a yield of 3.8%. Based on these indicators, it is substantially underperforming Schnitzer.

Fisher holds 1,239,542 shares of Schnitzer, buying 597,005 shares in the third quarter 2011 adding to the existing holding of 638,982 shares purchased over first and second quarters 2011. The average purchase price per share was $48.29. Based on the last trading price of $43.91, he has made a return of -9.07%.

Schnitzer’s cash position has improved in the last quarter. The balance sheet showed $49.46 million in cash for the third quarter 2011-- an increase from $32.80 million in the second quarter. Schnitzer’s quarterly revenue growth of 69.2%, versus an industry average of 15.40%, and a return on equity of 11.78%, versus an industry average of 8.9%, indicates that it is outperforming many of its competitors.

The earnings outlook for the steel and iron industry is traditionally linked to demand by the automotive and construction industries, which in the U.S. has been quite subdued due to the negative economic climate, high unemployment and declining consumer demand. However, ongoing demand for steel and steel products is also being driven by the economic boom of China and, to a lesser extent India , which when combined with a weak U.S. dollar that makes U.S. exports more attractive to international consumers, bodes well for U.S. based steel manufacturers such as Schnitzer.

Based upon the increase in quarterly net income and balance sheet cash, combined with the positive industry outlook and the company’s strong performance indicators, I agree with Fisher’s decision to invest in Schnitzer . Accordingly, I rate the company as a buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.