Daniel Hammon

Long/short equity, deep value, event-driven, research analyst
Daniel Hammon
Long/short equity, deep value, event-driven, research analyst
Contributor since: 2013
Company: Newton Analytics
Qniform, thank you so much for taking the time to check us out and for your comment. We believe that our metrics are applicable to any company as they measure many general attributes that apply to any company. That being said, we do recognize that REITs are a different beast and that often their balance sheets are highly leveraged and their working capital is constrained. Many banking operations face the same issues. Our model scores the areas low because they have more of a risk.
We do not advocate that our system should be the sole investing tool used by an investor and always encourage users to seek further advice.
Best luck!
We have 326 companies (out of 3768) in our database that have BKPS + EPS greater than Market Price per share.
All those are great comments and are considerations that should be taken into account when deciding if this stock is a good value. One of the main goals of this article/analysis was to rate this company in comparison to others in its industry based on its financials. The most recent 10-Q provides a good summary of risk factors affecting the company with the government subsidies being number one. Several other recent articles written by Seeking Alpha contributors go into greater depth about the subsidies and the pending acquisition of SYNM's patents. Thanks for your comments!
This article is a pilot for Newton Analytics. One of our values are "intuitiveness". Judging by the confusion on the valuation, we have some work to do. I do appreciate everyone's responses and we will incorporate many of the thoughts raised here in our articles moving forward.
Thank you eveyone, and best of luck out there!
Our book value calculation is based off net tangible assets. Yahoo's most likely includes intangible assets and goodwill. Net tangible assets are typically used to consider liquidation value.
EPS (calculations which are not detailed in the article) look at forward annual expected earnings. The figure would not be on Yahoo.
Thank you for your interest!
Not a typo, but you have an interesting view that has given us some consideration. The article does not detail our methodology. Perhaps further explanation on our behalf is necessary in the future. We will incorporate more valuation analysis on articles going forward. Thank you for your comment and time during our pilot article!
Correct.
Our scoring methodology flags RYN as a Cow because, like this article discusses, the company is overvalued. I would have to say though that their dividend doesn't look bad! Check out the like below for more analysis.
http://bit.ly/1gIkt3z
Thank you Zacks for the insightful article!
Netflix is missing value even though the company has decent financials. We rate the company a Bear, though it is worth noting that their score ranks highest amongst others in the industry. Check out our full analysis if you have time.
http://bit.ly/1b1Huu7
Thanks for the great article!
I wanted to take a moment and advise you that we have recently increased the number of companies in our database 8 fold.
http://bit.ly/17Swi7n
Please keep in mind that BDCs span across multiple industries depending on the specific types of services/products they offer.
Best of luck,
Daniel
I purchased BP at its lows after the oil spill. I will likely hold on to it for a long time given the high dividend and low probability of the company slipping below what I purchased it for. Dividends on my original investment is currently above 8%.... solid balance sheet.... love it!
http://bit.ly/17Swi7n
I have always enjoyed the CAPM concept rather than its practical use. I have found much subjectivity in models like CAPM to put too much weight into its use as a measure for risk/return. Then again, this subjectivity could also be used to describe the Alpha variable.
Market return, for example, can be very different depending on who you ask. It can be quite subjective depending on scope, average calculation, frequency, and index selection. Same goes for any variable within the CAPM equation. Should one use 2 or 3 years of data?; simple or geometric average?; daily, monthly or yearly?; S&P, DOW, industry, or the whole market?
Thank you for the intriguing article, and I look forward to the next one.
http://bit.ly/17Swi7n
We have QCOM rated as a Cow because it is of high quality but is overvalued. I do like the low amounts of debt, but David may have a point because the stock is near a 52 week high.
http://bit.ly/1hKsXaY
Best of luck everyone
I stand by the research done in the article published and believe that the fundamentals of the idea proposed remain intact. However, the recent dip in gold prices may cause NEM to write down more of their fair value assets causing another hit to net income and ultimately a lower book valuation. Q2 experienced this type of loss which caused the stock price to plummet.
I still like NEM because of their tenure and longevity of high yielding dividends. I also like the position the gold industry is currently in based on the premise of consolidation.
Though the price of the stock has fallen, I think it has only become more attractive and less expensive. Good luck everybody and thank you for the interest in our research.
http://bit.ly/17Swi7n
BP has strong fundamentals, a great dividend, a strong brand, good management (oil spill aside), and are well integrated. They are undervalued compared to their peers most likely due to the oil spill.
http://bit.ly/17Swi7n
jbbson
Thank you for your comment. Further clarification on our comment may help perspective readers with context and perhaps the word 'pressure' could have been further elaborated to the Fed's QE3. The Fed is putting tremendous pressure in the Treasury and MBS markets.
Rates (particularly the 10yr) in our posting refer to the treasury yields and MBS coupon rates. Both yield and rate are heavily influenced by Fed purchasing of such assets. The nature of systematic and large purchases of MBS and Treasury products by the Fed is thought of as large demand in the marketplace. In any scenario, more demand puts pressure on prices and may be seen in the respective rate/yield of given products.
If QE3 was suspended, tapered, removed, and supply held constant, both Treasury yields and MBS coupon rates would spike. Such a spike would adjust valuations of mREITs unfavorably.
The near term for mREITs is bleak given the tremendous pressure rates are under. However, while payoffs/paydowns are unfavorable to MBS investments, we do not believe they are as dramatic as one would intuitively think because of other economic varibles.
We investigated what happens to MBS paydowns in rising interest rate environments. MBS factor data was collected on 283 MBSs during a 5 year period when rates consistently rose to over 45% during 2002-2007. We found MBS factors to remain very similar to dropping rate environments. Further exploration of this issue explained the counter-intuitive notion that rates play less of a significance in paydowns because of the increase in property values during 2002-2007. The increase in values led many to perform cash-out refinances or upgrade their homes by selling and moving. This is much like the environment we are currently facing; as rates increase along with property value, MBS paydowns remain intact.
These findings are significant when calculating the book value of mREITs such as Annaly's because fair value calculations consider duration of assets. Misjudging asset duration causes an incorrect valuation for subject assets.
We suspect, that mREITs solvency will continue to remain manageable so long as rates do not spike beyond break even points over spreads. That being said, spreads will likely be squeezed causing a decrease in earnings and therefore dividends.
For data, and further reading on our research, please visit:
http://bit.ly/17Swi7n
and find the article under "Our Research" called "Valuations of Mortgage REITs and Underlying MBS Assets in a Rising Interest Rate Environment."
We just added this company to our database because of your article. Based on the preliminary algorithm, it looks to be in great shape. Full Newton analysis will be available tomorrow (11/12) if anyone is interested. If what you say is accurate, that the company has strong revenue potential in the near future, this stock may really take off!
http://bit.ly/17Swi7n
We used a standard deviation of a population of daily returns over a one month time period to calculate the aggregate risk of each sector. Returns were calculated using the first day and the last day difference in price for the same selected time frame. We did not factor the interest rate environment.
That being said, it is widely believed that the stock market is subject to an interest rate risk. That when treasury rates rise, more investors switch from stocks into bonds, thus weakening demand and prices of stocks.
It is intuitive to believe such a interest rate risk notion regarding stocks and bonds. Please do remember that rates (10 year Treasury) increased 83% from 5/2/2013-9/5/2013 while the S&P500 increased 4.6% over the same time period. These types of results make it difficult to determine the rate subjectivity of stocks in a rising interest rate environment. The markets have many variables and it is difficult to say how the stock market would have behaved if there was not a dramatic increase in the Treasury yield.
Newton Analytics wrote an sort article, published only on newtonanalytics.com, illustrating the correlation to the Treasury Yield curve and the S&P500 over the last few market bubbles. I encourage you to check it out and download the corresponding "support" macro-enabled spreadsheet. Ensure your Excel window enables macros and press the 'play me' button. The article is titled "8/14/2013 - Treasury Yield Curves Used as a Stock Market Indicator " and can be found in the "Our Research" link on the left side of the page. No membership is required to access the articles.
Thank you for your interest and commentary.
Frank
We did not use any averages, instead we used the aggregate for all companies. We also did not look at specific industries, but instead focused on the macro (sectors).
That being said, I will attempt to answer your questions with data from Newton Analytics:
Aggregate delta of each sector's CapEx from 2010-Q2:
Healthcare 21.85%
Services 34.42%
Technology 43.55%
Financial 32.08%
Utilities 30.03%
Basic Materials 51.72%
Industrial Goods 38.98%
Consumer Goods 12.43%
All sectors have increased Capitol Expenditures supporting the notion that debt has been used to expand operations. The question remains, who used the debt most effectively?
Healthcare sector's (44 companies available in the database) R&D from 2010 to Q2 was very stable (#s in 1000s):
2010: 39963726
2011: 39251351
2012: 41302303
Q1: 38372308 (annualized rate x4)
Q2: 39717512 (annualized rate x4)
Healthcare R&D decreased (-0.62%)
R&D is not classed as tangible on the balance sheet. It is treated as an expense on the income statement.
The direction of your question was a little unclear. I believe you are implying that increase in R&D would increase intangible assets such as patents (a direct result of successful R&D). This would not show in the NTA calculation and thus not show in results of 'effective' use of Debt as the article describes. However, R&D expenditures did not increase over the selected time period suggesting that extra LT Debt did not fund more R&D.
I like your critical thinking and appreciate your commentary. Thank you for your interest!
We have three industries cataloged in our database under the utilities sector. There were a total of 32 companies used under this sector for research. For a more detailed list with data, please visit Newton Analytics and use the 'Filter' link on the left side of the page.
Thanks for the interest.
Best of luck. I too am invested with a few mREITs and DTYS.
Energy is not a sector. Energy companies like electric companies are in the Utilities sector. Energy companies like oil are in the Basic Materials sector.
Thank you for your interest.
Borrow from Investment Banks that particpate in the Repo Market.
They do not have direct access to Fed money.
They do borrow from entities that have access to Fed rates, but not always.
The bps range is based on the Federal Funds Rate + Margin. The Fed's current target is 0-25 bps and is usually somewhere in the middle of that range. The Margin is usually less than 25 bps depending on the firm, market, duration, etc.
Diego,
Please see below to answer your question "Why would NTA decrease as a % of ( liabilities & equity ) if the new liability is used to create a contra account equity transaction in Treasury stock ?"
NTA stands for net tangible assets and is commonly calculated as Total Assets - Intangible Assets - Goodwill - Total Liabilities. Therefore any decrease in assets or increase in intangibles and liabilities causes a decrease in NTA.
For example should a company buy back shares by LT Debt:
1) LT Debt increases liabilities when $ are borrowed.
2) Cash increases assets from $ borrowed.
3) equals 0 net change to NTA.
1) Cash decreases when shares are bought back.
2) Treasury Stock is then increased (shows as negative value on BS) to reflect the buy back.
3) equals a negative net change to NTA
As for dividends, please remember that the article discusses immediate effects on the balance sheet from activities. If dividends are paid out, there will be a change in Cash which will unfavorably impact NTA.
Thank you for your interest in Newton Analytics and our article!
Good suggestion, however, the ETFs you mentioned still have a lot of price volatility. The hedge approach mentioned in the article attempts to negate most price volatility while still providing a ~6% dividend.
The idea is to capture the dividend payments from TWO without losing principal from the investment.
You can see that DTYS was down April-June while TWO was up during the same time period. The trick here is that the two companies are inversely correlated and would negate returns due from price movements. The future is difficult to predict, so this strategy takes away some of that unpredictability while leaving dividend payments in tact.
Good luck!
You are most correct. Perhaps the use of the acronym ETF was used too loosely in my article. However, the underlying concepts hold true for both ETNs and ETFs. Though it is important for readers to realize that ETNs, in nature, hold more risk as they rely on the investment bank issuing them not going bankrupt.
Thank you for your interest.
mREITs do not lend MBSs as described in your article. mREIT companies, instead, use MBSs as collateral to leverage money in the repo market. The repo market (repo stands for repurchase agreement) is a market that large institutions can borrow short term money (typically 1-3 months) in exchange for collateral like a MBSs. The repo market generally trends 15 basis points or so above the Federal Funds Rate (the rate bank's can borrow from the Federal Reserve).
If the Fed has what are call Federal Open Market Operations in which they can 'control' the Federal Funds rate. They accomplish this by buying and selling short-term Treasury Bonds. The Fed has a current target rate of 0-0.25%.
When the Fed changes the Federal Funds target rate higher, the repo market will have a rise in rates which will adversely affect mREIT's spread. mREIT's cash flows are not directly affected by a rise in MBS coupon rates (or indirectly mortgage rates and Treasury rates) assuming that the MBS is fixed. However, the valuation of MBSs held in a rising rate environment is adversely affected causing book values to drop. When rates rise, lower paying MBSs prices drop causing mark to market adjustments to be made on the company's balance sheet. These types of impairments usually cause a non-cash adjustment to Net Income, though real cash flow is not affected.
I implore that mREIT prices have fallen due to a spike in mortgage rates that triggered mark to market adjustments to MBS assets and not because of a spread crunch (assuming fixed rate MBSs).
That's right!