1 Growth, 1 Speculative And 3 Dividend Plays Worth Looking Into

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 |  Includes: MOS, MRO, NGD, SDRL, WPRT
by: Tactical Investor

This list is meant to serve as a starting point for investors. A lot of data has been provided, so it should be relatively easy for an investor to scroll down the list and decide if the stock warrants further attention. If you find the stock interesting, you can dig deeper and see if it meets with your investment criteria.

Investors should not base their decision on yield alone. There are many stocks that offer extremely high yields, but their performance over the years has been dismal. In fact, in some cases, the total rate of return has been negative for the past 3-5 years, even with the yield.

One should look at the robustness of the company, the dividend growth rate, the sustainability of the dividend and dividend history. Companies with stellar records will do everything possible to avoid cutting the dividend to maintain this record.

Novice investors can use this guide as a starting to point to help determine which stocks to buy and which ones to avoid. These are not absolute rules. They are just suggestions to help get you started. Please note, there are always exceptions to the rule. The goal is to try to satisfy as many of them as possible.

A lot of key ratios are used in this article. It is a good idea for investors to get a handle on some of the more important key ratios listed below.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company, and vice versa. For example, if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general, stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is, theoretically, the lowest possible price the stock would trade to.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders than it is making. This situation cannot last forever. In general, if the company has a high operating cash flow and access to capital markets, they can keep this practice up for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for some time. If the payout ratio continues to increase, the situation warrants close monitoring, as it isn't sustainable forever. If your tolerance for risk is low, look for similar companies with the same or higher yields, but with lower payout ratios.

Long-term debt-to-equity ratio is the total long-term debt divided by the total equity. The amount of long-term debt a company carries on its balance sheet is very important, because it indicates the amount of money the company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates a decrease in long-term debt over a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase, the balance sheet is said to be improving, and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital, which could, lead to bankruptcy in the worst case scenario.

Operating cash flow is generally a better metric than earnings per share, because a company can show positive net earnings and still not be able to properly service its debt. The cash flow is what pays the bills.

Free cash flow yield is obtained by dividing free cash flow per share by the current price of each share. Generally, lower ratios are associated with an unattractive investment and vice versa. Free cash flow takes into account capital expenditures and other ongoing costs associated with the day to day to functions of the business. In our view, free cash flow yield is a better valuation metric then earnings yield because of the above factors.

Current ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing future earnings. Ideally, the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa. Lower ratios are generally more attractive. If a company generated $400 million in cash flow and then spent $100 million on capital expenditure, then its free cash flow is $300 million. If the share price is $100 and the free cash flow per share is $5, then the company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry. This gives you an idea of how the company you are interested in holds up to other companies within the industry.

Cash ratio is the ratio of the company's total cash and cash equivalents to its current liabilities. It's used as a measure of a company's liquidity. It allows investors to determine how fast the company would be able to pay its short term debts if push came to shove. Higher numbers are better, because it makes it easier for a company to ask for new loans, increase in credit lines, etc.

Retention ratio is the amount of net income that is not paid out as dividends. In other words, it is the money the company retains that can be used to grow the business, etc. It is calculated by subtracting 1 from the dividend ratio.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn, means that there is more money to send to shareholders in the form of dividends and vice versa. A more detailed list of key ratios can be obtained here.

Company: Seadrill Ltd. (NYSE:SDRL)

Brief Overview

  1. Levered Free Cash Flow = -722.12 million
  2. Profit Margin = 23.22%
  3. Operating Margin = 44.07%
  4. Quarterly Revenue Growth = -5.2%
  5. Quarterly Earnings Growth = -52.7%
  6. Operating Cash Flow = 1.76 billion
  7. Beta = 1.97
  8. Short Percentage of Float = 3.2%
  9. Sales vs 1 year ago = 4.3
  10. Long term debt to equity = 1.49
  11. Book value = 13.04
  12. 52 week change = 8.09%

Growth

  1. Net Income ($mil) 12/2011 = 1482
  2. Net Income ($mil) 12/2010 = 1172
  3. Net Income ($mil) 12/2009 = 1261
  4. Net Income Reported Quarterly ($mil) = 416
  5. EBITDA ($mil) 12/2011 = 2583
  6. EBITDA ($mil) 12/2010 = 2054
  7. Cash Flow ($/share) 12/2011 = 4.33
  8. Cash Flow ($/share) 12/2010 = 3.95
  9. Sales ($mil) 12/2011 = 4192
  10. Sales ($mil) 12/2010 = 4041
  11. Sales ($mil) 12/2009 = 3254
  12. Annual EPS before NRI 12/2009 = 2.6
  13. Annual EPS before NRI 12/2010 = 2.69
  14. Annual EPS before NRI 12/2011 = 2.9


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Dividend history

  1. Dividend Yield = 8.4
  2. Annual Dividend 12/2011 = 2.89

Dividend sustainability

  1. Payout Ratio = 1.55

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 55.43
  2. Current Ratio = 0.69
  3. Quick Ratio = 0.71
  4. Cash Ratio = 0.45
  5. Interest Coverage Quarterly = 7.76

Notes

Management stated it is in the advanced discussion stage regarding a new five-year ultra deep water contract for the drill ship West Polaris, with revenue potential of $1.16 billion. The contract is expected to be finalized in July 2012.

Some highlights from the 1st quarter

  • Secured additional new contracts with a projected revenue potential of $870 million
  • Secured a 3 year contract for the ultra deepwater semi-submersible rig West Leo, with the potential to generate an additional $710 million in revenue.
  • Secured a 5 year contract for the tender rig T 18, with a revenue potential of $235 million

Company: Westport Innovations (NASDAQ:WPRT)

Basic overview

  1. Quarterly revenue growth rate = 132%
  2. Beta = 1.71
  3. Operating cash flow = -43.6 million
  4. Long term debt to equity = 0.16
  5. Sales vs 1 year ago = 75
  6. Short ratio = 6.2%
  7. 52 week change = 42%

Growth

  1. Net Income ($mil) 12/2011 = -60
  2. Net Income ($mil) 12/2010 = -12
  3. Net Income ($mil) 12/2009 = -7
  4. EBITDA ($mil) 12/2010 = -6
  5. EBITDA ($mil) 12/2009 = 1
  6. Cash Flow ($/share) 12/2010 = -0.85
  7. Cash Flow ($/share) 12/2009 = -0.88
  8. Sales ($mil) 12/2011 = 265
  9. Sales ($mil) 12/2010 = 148
  10. Sales ($mil) 12/2009 = 122
  11. Annual EPS before NRI 12/2007 = -0.11
  12. Annual EPS before NRI 12/2008 = -1.11
  13. Annual EPS before NRI 12/2009 = -1.02
  14. Annual EPS before NRI 12/2010 = -1
  15. Annual EPS before NRI 12/2011 = -1.24

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Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 30
  2. ROE 5 Year Average = -43.53
  3. Return on Investment = -21.54
  4. Current Ratio = 4.60
  5. Current Ratio 5 Year Average = 4.28
  6. Quick Ratio = 4.00
  7. Cash Ratio = 4.42
  8. Book Value = 7.76

Notes

Only individuals willing to take on a bit of extra risk should consider this play. 15.8 million shares are being shorted, and the percentage short of float stands at remarkable 38%. This makes this stock a great candidate for a short squeeze. Quarterly revenue growth is strong at 132%. It also has a strong current ratio, and estimated 3-5 year EPS growth rate of 30%. This play would fall under the "speculative category"

Company: The Mosaic Company (NYSE:MOS)

Basic overview

  1. Quarterly revenue growth rate = -1.4
  2. Quarterly earnings growth rate = -21
  3. Beta = 1.64
  4. Cash Flow 5 -year Average = 3.56
  5. Levered free cash flow = $558
  6. Long term debt to equity = 0.09
  7. Sales vs 1 year ago = 47
  8. Retention rate = 96%
  9. Short ratio = 2.7%
  10. 52 week change = -19.35%

Growth

  1. Net Income ($mil) 12/2011 = 2515
  2. Net Income ($mil) 12/2010 = 827
  3. Net Income ($mil) 12/2009 = 2350
  4. EBITDA ($mil) 12/2011 = 3777
  5. EBITDA ($mil) 12/2010 = 1737
  6. EBITDA ($mil) 12/2009 = 3366
  7. Cash Flow ($/share) 12/2011 = 5.47
  8. Cash Flow ($/share) 12/2010 = 3.03
  9. Cash Flow ($/share) 12/2009 = 5.23
  10. Sales ($mil) 12/2011 = 9938
  11. Sales ($mil) 12/2010 = 6759
  12. Sales ($mil) 12/2009 = 10298
  13. Annual EPS before NRI 12/2007 = 0.95
  14. Annual EPS before NRI 12/2008 = 4.55
  15. Annual EPS before NRI 12/2009 = 4.27
  16. Annual EPS before NRI 12/2010 = 1.9
  17. Annual EPS before NRI 12/2011 = 4.34

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Dividend history

  1. Dividend Yield = 0.90
  2. Dividend Yield 5 Year Average = 0.27

Dividend sustainability

  1. Payout Ratio = 0.06
  2. Payout Ratio 5 Year Average = 0.05

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 17.96
  2. 5 Year History EPS Growth 12/2011 = 15.63
  3. ROE 5 Year Average 12/2011 = 20.95
  4. Return on Investment 12/2011 = 16.66
  5. Current Ratio = 3.67
  6. Current Ratio 5 Year Average = 2.99
  7. Quick Ratio = 2.81
  8. Cash Ratio = 2.33
  9. Interest Coverage = 130
  10. Retention ratio = 94%

Notes

This stock is rather overbought. If you have patience, consider waiting for a test of the 26 ranges before jumping in. You could also sell puts with a strike around the 28 ranges when the stock trades down to 30. If the shares are assigned to your account, your entry price should drop to or below 26 when the premium is factored. To receive a decent premium, you will most likely have to sell puts with roughly 5-6 months of time on them.

Company: Marathon Oil Corp (NYSE:MRO)

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Brief Overview

  1. Percentage Held by Insiders = 0.87
  2. Levered Free Cash Flow = 2.01 billion
  3. Relative Strength 52 weeks = 17
  4. Cash Flow 5-year Average = 7.67
  5. Profit Margin = 15.97%
  6. Operating Margin = 28.54%
  7. Quarterly Revenue Growth = 3%
  8. Quarterly Earnings Growth = -58.1%
  9. Beta = 1.38
  10. Short Percentage of Float = 1.1%

Growth

  1. Net Income ($mil) 12/2011 = 2946
  2. Net Income ($mil) 12/2010 = 2568
  3. Net Income ($mil) 12/2009 = 1463
  4. Net Income Reported Quarterly ($mil) = 417
  5. EBITDA ($mil) 12/2011 = 6800
  6. EBITDA ($mil) 12/2010 = 6188
  7. EBITDA ($mil) 12/2009 = 4819
  8. Cash Flow ($/share) 12/2011 = 6.48
  9. Cash Flow ($/share) 12/2010 = 6.56
  10. Cash Flow ($/share) 12/2009 = 4.37
  11. Sales ($mil) 12/2011 = 15282
  12. Sales ($mil) 12/2010 = 73621
  13. Sales ($mil) 12/2009 = 54139
  14. Annual EPS before NRI 12/2007 = 5.43
  15. Annual EPS before NRI 12/2008 = 6.47
  16. Annual EPS before NRI 12/2009 = 1.63
  17. Annual EPS before NRI 12/2010 = 3.65
  18. Annual EPS before NRI 12/2011 = 3.21

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Dividend history

  1. Dividend Yield = 2.6
  2. Dividend Yield 5 Year Average = 2.53
  3. Dividend 5 year Growth = -0.83

Dividend sustainability

  1. Payout Ratio 03/2012 = 0.22
  2. Payout Ratio 5 Year Average = 0.26

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 2.06
  2. ROE 5 Year Average = 15.63
  3. Current Ratio = 0.70
  4. Current Ratio 5 Year Average = 1.19
  5. Quick Ratio = 0.65
  6. Cash Ratio = 0.21
  7. Interest Coverage Quarterly = 27.88
  8. Retention rate = 78%

Notes

A good long term entry point would be to wait for a retest of the 21 ranges before jumping in. Consider placing a stop at 18 if you open a position in this stock. Another option would be to sell puts at or around 22, and when the premium is factored in, your average entry price should drop to below 21.00.

Company: New Gold Inc (NYSEMKT:NGD)

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Basic overview

  1. Beta = 0.98
  2. Levered free cash flow = -$143.9 million
  3. Quarterly revenue growth = -1.4%
  4. Quarterly earnings growth = 35.6%
  5. Operating margins = 38.8%
  6. Profit margins = 27%
  7. Operating cash flow = $216 million
  8. Short ratio = 1.00
  9. Cash Flow 5 -year Average = 4.28
  10. Percentage held by institutions = 61.8%
  11. Sales vs 1 year ago = 32%

Growth

  1. Net Income ($mil) 12/2011 = 179
  2. Net Income ($mil) 12/2010 = 182
  3. Net Income ($mil) 12/2009 = -194
  4. Net Income Reported Quarterly ($mil) = 35
  5. EBITDA ($mil) 12/2011 = 335
  6. EBITDA ($mil) 12/2010 = 261
  7. EBITDA ($mil) 12/2009 = -106
  8. Cash Flow ($/share) 12/2011 = 0.59
  9. Cash Flow ($/share) 12/2010 = 0.49
  10. Cash Flow ($/share) 12/2009 = 0.16
  11. Sales ($mil) 12/2011 = 696
  12. Sales ($mil) 12/2010 = 530
  13. Sales ($mil) 12/2009 = 324
  14. Annual EPS before NRI 12/2008 = -0.69
  15. Annual EPS before NRI 12/2010 = 0.29
  16. Annual EPS before NRI 12/2011 = 0.43

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Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 5
  2. ROE 5 Year Average = -2.14
  3. Return on Investment = 8.43
  4. Debt/Total Cap 5 Year Average = 12.68
  5. Current Ratio = 1.60
  6. Current Ratio 5 Year Average = 3.65
  7. Quick Ratio = 1.10
  8. Cash Ratio = 1.42
  9. Long term debt to equity ratio = 0.11
  10. EPS Vs 1 year ago = 36%

Notes

The charts are suggesting that there is a good chance that gold could trade up to the 1750-1800 ranges. As this stock is a play on the gold sector, it should also move up nicely if gold starts trending upwards. Consider opening positions in the 8.50-9.00 ranges, but then close these positions out if gold bullion trades to the 1750-1800 ranges. If you are a long term investor with a time frame of over three years, then you could hold onto your position. This stock does not pay a dividend.

Conclusion

The markets are projected to trend upwards for most of the summer. After that, the markets could experience a much larger correction. Investors should consider taking money off the table by the end of the 3rd quarter and wait for a stronger correction before committing new funds to the markets. Selling covered calls will provide some downside protection, but this won't amount to much if the correction should turn ugly.

EPS and Price vs industry charts, along with a large portion of the historical data used in this article, was obtained from zacks.com.

Disclaimer: It is imperative that you do your due diligence and then determine if the above plays fit with your risk tolerance levels. The Latin maxim "caveat emptor" -- let the buyer beware -- applies.

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