In uncertain times and uncertain markets, it would be great for the investor to reliably identify trustworthy companies, with low investment risk that can supply an income stream and still have room for upside appreciation in price. With the current market volatility, the European Crisis, the Chinese Soft Landing and once in 10-year change in leadership and U.S. Elections this fall, there's lots of uncertainty out there right now.
This article lays out the rationale and results of a specific set of screening criteria designed to find safe investments where one can lock in a reasonable return while still having an opportunity for growth during these tumultuous times. In addition, the screening criteria zero in on stocks likely to get increased attention in the near term, offering trading potential.
Starting with stock candidates that include a solid and reliable dividend; companies with reliable management - based on some external validation; currently favorably pricing for known reasons and those that have some kind of macro market driver or other external dimension moving in their favor, the screen then looks for the stock to have at least nominal liquidity as well to prevent a value trap. Finally, the screen looks for near-term earnings announcements, looking for a potential upside surprise or other trading opportunity. The screening exercise below attempts to find such stocks: dividend, reliability, value-priced and positive external force at work with near-term earnings.
Emerging Markets (BRIC and others), Energy/Utilities/Banks market segments all have stocks offering dividends, e.g. British Petroleum (BP) or Exxon (XOM), Exelon (EXC), Bank of America (BAC), (the reasonable return part), so starting with stocks across all sectors of market for the screen makes sense. Next the screen looks at criteria for growth opportunity with reasonable risk. Clearly, it would lower risk to have external diligence and validation before investing in a single stock or two to boost portfolio returns. Metrics such as institutional buyers adding to positions show third-party validation of management and the company; institutional investors would also seek stocks with attractive financial metrics. Stock buybacks and other quantitative signs would be even better, giving comfort that a company is in it with the investor for the long haul, but are harder to find in simple screens. External macro forces showing evidence of a favorable market trajectory complete the picture of safety, income and growth.
Using the above screening concepts, translated into available metrics for stock screening data sets yields 4 companies of interest for further evaluation.
Looking at the results shows two real estate options - A Chinese residential development company - Xinyuan (XIN), and a REIT, NewCastle Diversified (NCT), along with a U.S. consumer processed food company Hillshire Brands (HSH), and a business services company, Quad/Graphics (QUAD)
Information and links for each company follows presentation of the detailed results of the screen. The following specific metrics were used in the screen: 1) Dividend (income), 2) Daily volume (liquidity), 3) Exchange (NYSE for reliability and rigorous reporting ), 4) Growing and meaningful institutional ownership (external validation of reliability), 5) Profitability with 6) Earnings in the next 5 days (run on 8/8/12).
Running Total Count
General Safety / Trust
Any dividend (yield>0)
Avg. daily volume (>100K shares)
Trusted exchange (NYSE)
Institutional ownership (>20%)
Any Increasing Inst ownership
Yield > 4% / yr
Increasing institutional (>5% in 3 mo.)
Earnings within the next few days
Hillshire Brands Company
Processed & Packaged Goods
Newcastle Investment Corp.
REIT - Diversified
Xinyuan Real Estate Co., Ltd.
HSH - Business Summary - $3 Billion Market Cap
Hillshire Brands Company engages in the manufacture and marketing of a range of branded packaged meat and bakery products for the retail and foodservice markets worldwide. Its packaged meat products include hot dogs and corn dogs, breakfast sausages, sandwiches and bowls, smoked and dinner sausages, premium deli and luncheon meats, bacon, beef, turkey and cooked ham. The company also offers frozen baked products comprising frozen pies, cakes, cheesecakes, pastries and other desserts; and bakery and dough products, including bread, buns, rolls, specialty bread, refrigerated dough, and frozen desserts. It sells its products primarily under Hillshire Farm, Ball Park, Jimmy Dean, Sara Lee, Gallo Salame, State Fair, Bristo Collection, Chef Pierre, Rudys Farm, Briar Street, Bryan Foods, and Kahns brand names. Hillshire Brands Company sells its products to mass retailers, supermarkets, mass merchandisers, distributors, restaurants, hospitals, warehouse clubs, national chains and other institutions through direct sales force and outside brokers. The company was formerly known as Sara Lee Corporation and changed its name to Hillshire Brands Company in June 2012, following the spinoff of its international coffee and tea business. Hillshire Brands Company was founded in 1939 and is based in Downers Grove, Illinois
NCT - Business Summary - $450 Million Market Cap
Newcastle Investment Corp. operates as a real estate investment and finance company that invests in and manages a portfolio consisting primarily of real estate securities. The companys portfolio of real estate securities includes commercial mortgage backed securities, senior unsecured debt issued by property REITs, real estate related asset backed securities, and agency residential mortgage backed securities. Newcastle also owns interest in loans and pools of loans, including real estate-related loans, commercial mortgage loans, residential mortgage loans, and manufactured housing loans. In addition, it owns interests in operating real estate. The company is organized to qualify as a real estate investment trust for U.S. federal income tax purposes. Newcastle was founded in 1998 and is based in New York City.
QUAD - Business Summary - $740 Million Market Cap
Quad/Graphics, Inc., together with its subsidiaries, engages in the provision of print and related products and services in North America, Latin America, and Europe. It offers print solutions, including catalogs, consumer magazines, special interest publications, direct mail, packaging and other commercial and specialty printed products, retail inserts, books, and directories. The company also provides media solutions comprising creative, digital imaging, video, photography, workflow solutions, mobile and social media, and response data analytics services. In addition, it offers logistics services, such as mailing, distribution, logistics, and data optimization and hygiene services; and printing-related auxiliary equipment for original equipment manufacturers and printing companies, as well as provides ink. The company markets its products and services to various companies that operate in a range of industries and serve businesses and consumers consisting of retailers, publishers, and direct marketers. Quad/Graphics, Inc. was founded in 1971 and is headquartered in Sussex, Wisconsin.
XIN - Business Summary - $185 Million Market Cap
Xinyuan Real Estate Co., Ltd., together with its subsidiaries, engages in the development of residential real estate projects in China. The companys residential projects comprise various multiple residential buildings that include multi-layer apartment buildings, sub-high-rise apartment buildings, or high-rise apartment buildings; and small-scale residential properties. Its projects include auxiliary services and amenities, such as retail outlets, leisure and health facilities, kindergartens, and schools. The company also offers property management and other real estate-related services, such as landscaping and installing intercom systems. In addition, it leases properties, including an elementary school, a basement, three clubhouses, five kindergartens, and parking facilities. As of December 31, 2011, the company had completed 22 projects with a total gross floor area (GFA) of approximately 2,143,862 square meters and comprising a total of 24,303 units, as well as 11 projects under construction with a total GFA of 2,647,846 square meters. It primarily operates in seven tier II cities, Hefei, Jinan, Kunshan, Suzhou, Zhengzhou, Xuzhou and Chengdu. Xinyuan Real Estate Co., Ltd. was founded in 1997 and its headquarters is in Beijing, China.
(Summaries above from Yahoo finance. Screener used was Finviz)
I am long on XIN, so dove even further into the details at Finviz and found some interesting results: First, it turns out that some of the numbers reported for stocks in the screening system are not always accurate. In the case of XIN, the float is listed as 730,000 shares at Finviz.com when it is really 73,000,000 shares. This was noticeable because of the anomaly seen on the screener regarding shares short as a % of float - the reported value is off by a factor of 100! Total shares short sits at about 380,000 or 0.5% of the float total. Insiders own 40% and institutions own 25%. 25 million shares trade freely on the market.
From a macro environment perspective, the Chinese Real Estate market bottomed in the spring and has been growing since then. Another Chinese development company, the much larger Vanke, announce earnings with a 25% increase year over year.
Additionally, the Chinese sector stumbled last year, with the whole sector taking a hit due to lack of transparency and short sellers. XIN has undergone rigorous scrutiny and come out looking strong, yet the market has not yet priced it on par with other companies in the residential development sector in China. XIN has clean audits by Ernst & Young and has been evaluated in multiple ways in various posts in the literature, including Seeking Alpha, with results showing a sound business model in an expanding economy.
XIN's development model is strong and proven. It holds little inventory while building projects, so typically is able to price in tune with current market realities. A number of Chinese developers have had issues with decreasing value of undeveloped land. XIN did not have this problem due to its development methodology.
XIN 2012 projections did not include anticipating the two interest rate cuts that occurred in China recently and with them the rebound of the real estate market so soon. XIN appears ready to announce a very positive quarter. XIN has beaten estimates in 6 of the last 7 quarters.
In terms of some of the other desirable metrics, not easily found using screening data, XIN finished a $10 million share buyback in June and then announced a new $20 million additional share buyback. Even at a price of $3.33 a share - that's 6 million shares, which would further reduce the outstanding shares by about 8% or 9% and boost earnings as well.
XIN's dividend currently yields as much as U.S. junk bonds, 6% and change. Earnings are on Friday and the stock has been in a consolidating phase for about a week, hovering just over the 200-day average at $2.58 and has just crossed up across the 20-day moving average ($2.56) for the first time in a month and a half. Last time it crossed upward, the stock rallied from $2.70 to $3.00. The last time it consolidated for a week was in March; it broke out from $2.56 to $3.80 in 6 days.
At this point, XIN looks good for a short-term long trade as well as longer-term investment.
I'm long XIN and evaluating the other companies. Looking forward to discussions.
Disclosure: I am long XIN.