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Kyle Bowman's  Instablog

Kyle Bowman
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I live in Atlanta and am a CPA. I worked at Deloitte as a financial auditor for 5 years, and now do internal audits for companies as an independent consultant. I have been investing for 12 years.
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  • BDX - 1.6.2010
    Let me start by saying I know you aren't supposed to get emotionally tied to companies, but I love Becton Dickinson.  I love that when you read their annual report, they list their annual returns on equity, capital, assets...right up front.  What does that tell me?   Management likes high returns and management likes free cash low, just like me. I love their bread and butter business in medical supplies.  I love that they are growing their dividends, the consistent growth in the earnings, margins, returns, FCF, BV, etc. 

    I found BDX doing a stock screen where I was looking for companies whose shares outstanding decreased each year, whose dividend grew by 10% or so, whose BV grew by at least 10% annually for seven years, net margin above 12% , and had all returns above 15% or so.  Note:  I think these are the numbers I used or close to these numbers.

    Since then, BDX had been on my radar screen for the longest time and I just never knew when to pull trigger.  I never wanted to buy when it was going down, since it was going down, and going up, I was always thinking, well, maybe it will come back down.  Ha.  Long story short, I didn't get in at the best time.  My purchase price was around $79.50 and I just went for it and have been receiving the dividends, and am up around 6% overall.  Still like the company, but annoyed that I am not up 20%, because that was totally feasible.  Thankfully, a family member has since introduced me to technical analysis and I realized, wow, I really could have timed that better.  I no longer think fundamental analysis is the be all and end all. 

    The same family member also introduced me to options, and I have been reading a lot about them.  I have also been reading a lot about technical analysis.  I decided to try a small covered call with Becton the other day, in order to assist my measly 6% return, hoping I would not get called out of the stock.  

    On January 6, after the stock had a really nice run up, I noticed the following technicals:  

    -The ADX (part of the DMI indicator) was quite high if you looked back over a 10 year period.  
    -MACD had a bearish crossover.  
    -RSI looked like it had peaked as well.

    Below is a one year chart showing what I was looking at. 



    I am not a T/A guru, but I took these indicators as bearish signals.  So, I was anticipating a bit of a price drop, which happened.  I sold the FEB 19 11 $85 strike for $1.40 per contract.  Honestly, I am not sure I got the best price, or how to even know that, but I was feeling a little ballsy, because my TEVA and CSCO puts did well.  Anyway, I felt good when the price further softened, thinking I was going to do well. 

    However, in retrospect, I wish I had wrote this instablog prior to the trade, because I may have looked at the big picture a little more.  I think there is more risk of getting the stock called than I thought, based on the historical value.  For one, in the above chart, I am not quite sure whether it is a good idea to sell a covered call if the stock is trending above all the moving averages.  Secondly, historically, BDX has been trading with a depressed PE ratio due to the economic issues and healthcare reform.  You can see what I am talking about below in the 10 year chart.



    EPS has been a bit flat, but I think the P/E could begin to approach 18-19 or so, because I think Becton may actually benefit from health care reform.  Also,  in the past their P/E has been much higher, as you can see in the blue trend line I drew.  The current P/E is 16.92, and if it expanded to 19 prior to Feb 22, I could easily get called out of the stock.  I am beginning to see this as a distinct possibility. I am hoping the price consolidates a little in between $82 and $84 and time decay works to my advantage and either the call expires or I can buy it back cheaper and just close it out.  

    Anyway, so that is my trade.  If you have any thoughts let me know.  Always like to learn more.  Also, if you  know of a good site for charting (better than bigcharts.com), let me know.  Free is always nice too, but harder to come by.  I have also checked out stockcharts.com and have read a lot of their info.  Lastly, if you know of any excellent books on charting, let me know.  I am looking for something similar to the Benjamin Graham books but for charting / technical analysis.  







    Tags: BDX
    Jan 11 2:31 AM | Link | Comment!
  • CSCO and long-term value
    I have recently seen quite a few posts / comments severely critical of Cisco, because the stock has not performed well at all in the last decade, which is true.  CSCO has not rewarded investors with dividends and the stock has fluctuated between around 13 to around 33 dollars.  The majority of time, it was it was trading in the 18-26 dollar range.  So, naturally, everyone is down on the stock.  However, I think we are coming up on a really great opportunity to buy this stock. I am noticing some large cap companies, who used to be more growth plays, whose P/E ratios have steadily decreased for the last decade...such as Microsoft (NASDAQ:MSFT), Wal Mart (NYSE:WMT), etc.  Consequently, although they have performed well in terms of their business execution, stock price has been blah. 

    Below is Cisco's chart for a decade with corresponding P/E ratio's and EPS growth for the same period. 



    As you can see, this is not a good looking chart in terms of price appreciation or any strong trend.  Ordinarily, I like charts that more or less move up in pace with EPS growth or divident growth.  I guess I am just conservative like that.  However, with Cisco, people who bought in 2002-2003 never had any appreciation because they bought at a P/E of nearly 150!  Wow.  Even after the dip, people were buying at p/e of 60.  Still very high.  Since then, the company itself has performed great in terms of growth. 

    Cisco is a dominant player its market, no doubt.  Juniper (NYSE:JNPR) and Alcatel-Lucent (NYSE:ALU) are the other competitors.  I am no expert on the future mind you, like SOOOOO many of soothsayers seem to be on Seekingalpha, but I have to think the world is only going to continue to be more networked and need more Cisco products.  Right?  All you can do is assess probability in life, and I think I am probably right. 

    So here is what I am thinking:  At some point Cisco's P/E will probably complete its contraction phase and become more range bound like a mature company and as EPS grows, the stock price will then begin to move up in unison with EPS.  I mean, I think this is a reasonable prediction.  I wish I had a lot of examples of this happening, so if you do or disagree, let me know.

    Right now, per finviz.com, Cisco's free cash flow per share is under 12.66.  I mean, I could not even buy an apartment complex in Atlanta that cash flowed like that.  Mind you, cash flow doesn't necessarily mean an increase in stock price, but it does mean they can buy companies and grow. 

    Furthermore, take a look at the shares outstanding over the last 7 years.  I got this from AAII stock screener: 



    Cisco is reducing shares outstanding and is going to implement a dividend, which will potentially smooth out the stock price.  Its BV per share is growing nearly low double digits on average, which I like to see along with revenue that grows while outstanding shares decrease.  

    So what could go wrong? 

    Timing this idea of mine is what could go wrong.  Take a look at the three year chart...I don't think it is looking so hot? 



    Here is a one year chart: 



    I think Cisco may get to $23 per share, after which the price may come down again.  If it does, and the price either begins to consolidate and or breakout out of the current down trend, I believe I will buy shares.  I already sold puts in December when the price was at $19.50 with a January 22nd strike price of $19, hoping that I would either make the money or get the shares and ride the price back up.  At the time, Cisco had poor earnings news, and the RSI went nearly to 20, which I don't think had ever happened in 10 years and the MACD was crossing over favorably.  It was only 2 contracts, but I wanted to give it a try.

    Anyway, what else could go wrong?  I don't know, another stock market crash, but besides that, the only thing I don't like about Cisco is that the ROA and ROE ratios  have decreased in the past two years, which could signify increased competition?  I think this is something to keep a watch on.  Also, I think the economy is going to pick up and demand will pick up again for Cisco's products.  Over the long-term I am not really worried about that.  

    Overall, my main point is this: I don't think the P/E will go below 12 on this, not with the future growth in technology and the internet. At some point, the P/E will finish shrinking and it will begin to go up in conjunction with EPS growth.  So, I think this is a great long-term play if you get in at the right price.  If possible, and unless something changes, I will look for a time to purchase Cisco shares with the hope of appreciation and dividends.  

    Lastly, I am mainly writing this for my own edification, because I like writing / investing, and my job is really boring.  However, please let me know what you think.  I value constructive criticism and feedback. 

     


    Tags: WMT, MSFT, CSCO
    Jan 07 6:12 PM | Link | 1 Comment
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