Buy Opportunities Like These Do Not Come Along Very Often 40 comments
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On Friday, I was about to write that it appears the continuing bad news makes me want to just go sit in the sidelines and wait for better days. The housing down turn is turning into a 4 year odyssey of pain for homeowners. Gas prices are causing SUV owners to trade in for Vespas. The recession that has been forecast by many actually appears to be arriving.
Every time the stock market makes a modest gain, it gives it up and then some over the next few sessions. Stocks I believe are good values lose 50% of that value. Finally, the floods in Iowa strike close to home both personally and in regards to some of my investment choices. So by market close on Friday I was ready to pack it in for a few months.
Then I started thinking about some the the stocks that have been so disappointing and realized that opportunities like we have now do not come along very often. Many stocks are priced like their entire sector or industry is going out of business.
First, off many energy companies are going to do very, very well in this environment. My exposure is probably a little light here, but some of the stocks in my Income Portfolio should do very well over the next couple of years. Take a look at Penn West Energy Trust (PWE), Inergy (NRGY) and Atlas Pipeline (APL) for growing earnings and dividends. On the growth side, Headwaters (HW) is rolling out technologies to clean waste coal and process oil sludge into extra energy sources.
The market is also acting like every airline will go bankrupt due to high fuel prices. A well run profitable, fuel efficient airline like Copa Holdings (CPA) should pick up market share and continue to be profitable. My big loser so far is the aircraft leasing company, Aircastle, Ltd. (AYR). The stock price has been cut in half on the fears that some of its leasing customers will be turning in aircraft. One is US Airways (LCC), which has indicated it will return some leased aircraft, however, it has not been disclosed who those aircraft are leased from.
At this time AYR stock is trading at 4.5 times last years earnings and is yielding 11% on a dividend that is 55% of net income and 35% of free cash flow. Global air travel would have to have a severe meltdown to make Aircastle worth any less than it is today.
Then in financials you have a company like City Bank (CTBK) of Linnwood, WA. This is a bank with 30+ years of growing profits, is conservatively managed and is in a part of the country that has not been hit badly in the real estate down turn. There is almost no news besides quarterly earnings reports on this stock, yet it has fallen from the low $20s to $12. When was the last time you saw a quality company with a PE of 4 and a yield of 5%, just because of its industry?
I see stocks growing earnings and getting their share prices hammered because the market believes the numerous problems mentioned above will affect all companies the same. At this time it looks to me like we may not see stocks at these bargain prices for a long time.
Note: I have long positions in AYR, CTBK, PWE, NRGY and HW.
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I live in CTBK's area and have been following them for many years. They have substantial exposure to builders and raw land, which has, in some cases, decreased by 50%.
Go PWE!
Commercial real estate for the WA area has been relatively stable due to minimal overbuilding and due to thriving businesses (high % of technology and export.) Thus, less commercial construction defaults.
All in all, the valuation of CTBK is highly appealing for the investor looking to hold for at least 6 months.
Not talking about commercial. Pull their Call Report. They have substantial exposure to raw land via single family home builders.
They are known as conservative lenders and have always been over capitalized, so I don't think dilution will happen. Long term, they will be a great buy, but small banks tend to move in a pack, so adjust your time horizon out to at least 18-24 months.
PWE was $24 and change in January..now over $34...PLUS dividends...this includes a 14 year plus reserve base. A real dog!
a.
1. 1-4 family residential construction loans 571,706
($0 charge offs as of 3/31/2008)
2. Other construction loans and all land development and other land loans 300,540
($53 charge offs as of 3/31/2008)
Dollar amount in thousands.
*from Call report
Alex, your interpretation of exposure is subjective. Do you know the profile of the borrowers in question? I don't. No one does.
Also, Goldman Sachs sees broad rebound in the banking sector starting in the 1st quarter of 2009. Well...that is 7 months away. Stock prices reflect what will happen 6 months from now. biz.yahoo.com/ap/08061...
I suspect that about $700 million of that billion will be used to retire debt to get debt-to-cash-flow ratio of 1-to-1, and that the other $300 million will be used to slightly increase dividends (which are already pretty high) and to increase drilling program.
By the way, please note that the second quarter is almost over and that oil and gas have probably averaged close to $120 and $11 this quarter. Therefore, I expect record cash flow this quarter of about $750 million, with record free cash flow of almost $200 million, and a payout ratio of about 42-47%.
If someone thinks PWE is NOT a buy, tell me what fact or what analysis I have missed above.
Jack
Full disclosure: I have HTE,PGH,PVX and PWE.
Must be that the projected cash flow continues to be projected.
Indeed, HTE cut its dividend last year from 38 to 30 cents per month, whereas PWE has paid the same dividend for over two years.
Also, HTE's refinery will prevent HTE from recording the same benefits from a high commodity price environment relative to its peers because crack spreads have been squeezed and I think will continue to be squeezed.
Jack
Sorry, Tim: you picked a loser in HW! But then, it made it easier to evaluate the rest of your recommendations.
An investment in any of the Can Trusts is a bet on continued high oil/gas prices. If you are convinced that prices will stay high, you will have made a good investment. If prices drop, you probably will not. Why will a drop in energy prices result in a fall in the price of these stocks (as well as Penn)? The dividends include a return of capital and they do not retain enough cash to sustain production on a flat energy price basis. The trusts have to keep issuing more shares to buy more producing properties to keep their production growing or even flat. What investors should always look at with these stocks is the production and cash flow per share. In the near term, there is nothing to worry about as the numbers you present suggest. In the longer term it’s all about the price of Oil and gas. I am not saying you should not buy Penn. I may just do so.
I was very interested in CTBK, read their 10q & K and could not find where their construction exposure is located. I called them and they told me that all of their exposure was local, nothing out of Washington and most in a couple of counties where they are located. I only have a general idea of what is going on in the Washington real estate market, but from what I read it is still one of the best markets in the country with little or no drop in prices due to the strength of tech and aerospace industries. Therefore it would seem that their construction book would be better than most banks in other regions? However, their nonperforming loans have been going up quite rapidly over the past 3qs. On the positive side, they have 17+% capital and a 6% net interest margin. Not many banks like that sell for 80% of book value. Any other thoughts or perspectives on the Washington market?
Thanks
75% of their loan book is construction and land, w/ 65% of that number being 1-4 family. Very high #s. Their primary market is the suburbs and x-urbs of seattle, which are now seeing price drops anywhere from 10-30%, depending on how far away from the city you are. Most of the nation's real estate markets peaked mid to late '06, while our market peaked late summer '07, almost a year later. There will be write-offs, probably by the 4th Q. This downturn will be much more powerful than the one we experienced in 1990. I know for a fact that some x-urbs are seeing lot prices discounted as much as 50% from the peak.
I do know the profile of their borrowers, a couple are friends of mine. They are leveraged builders. The commercial part of their loan book should be firm, as that market has not seem much price deflation yet and vacancies are low here.
As far as Goldman's call goes, i really don't think they were talking about small local banks leveraged to the construction industry.
Thanks for the local color. I will keep my eye on this over the next few months.