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Michael Connellan

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  • Linn Energy: How Low Can It Go? [View article]
    LINE's basic problem seems very straightforward: the company is not earning enough cash to support the dividend. Valuation is of little relevance; cash is the determinant. The company is selling stock and/or borrowing money to pay the dividends. The Statement of Cash Flows clearly tells the tale. 60 pct of the capitalization is debt so they're reaching a limit there. The more the stock drops the harder it is to sell stock to pay the dividend. The end game is clear unless operations improve markedly - LINE will be forced to reduce or eliminate the dividend. Avoid the stock.
    Jul 3, 2013. 01:39 AM | 2 Likes Like |Link to Comment
  • Recent Events Make This 8% Yielder Even More Attractive [View article]
    I like VNR but one thing an investor should always recognize about these companies,and REITs too, and that is that they are always dependent on the capital markets for their survival. This is different than Intel, for example, which throws off free cash flow in excess of (cash from operations - cap ex - dividends). VNR's cap ex plus dividend amounts exceed cash generated from operations so they constantly have to go back to the markets for debt or equity.

    Most of the analysts and pundits are naive and have never run a business so they fail to understand that the single most important number in the financial statements is cash flow from operations!
    Sep 26, 2012. 12:19 PM | 2 Likes Like |Link to Comment
  • When Royalty Trusts Cease To Be Royal [View article]
    BPT also has a $1 Billion cash reserve that's been ignored. Plus, the total reserves have risen each year; as prices goup, more oil becomes economicallyrecoverable. At $76 BPT is a buy!
    Aug 30, 2012. 03:06 AM | 2 Likes Like |Link to Comment
  • When Royalty Trusts Cease To Be Royal [View article]
    Huge volue the chart. Panicked selling. At $76 BPT is a buy!
    Aug 30, 2012. 03:04 AM | 2 Likes Like |Link to Comment
  • Philip Morris Still Going Strong [View article]
    The key item is that PM is throwing off several hundred million in free cash flow per month! Comparing it to other major tobacco stocks is like deciding which A student gets to be valedictoran. The one suggestion I would have for PM is to move its legal domicile outside the US to lower the tax rate from the current 31 percent - in Ireland it would only be 12.5 percent, for example.
    Aug 3, 2012. 10:35 AM | 2 Likes Like |Link to Comment
  • Undervalued Staples Might Acquire Office Depot, Target [View article]
    Interesting thesis about Staples making an acquisition. Having done a lot of M&A as an investment banker, I'll share with you that when all the complex financial modeling is said and done, for the deal to be immediately accretive to EPS the P/E of the target - with an assumed 30% takeover premium - has to be lower than the P/E of the acquiror. Office Depot likely passes this test; OMX does not.
    Jul 13, 2012. 10:36 PM | 2 Likes Like |Link to Comment
  • Handling Your Emotions: Using Asset Allocation And Beta [View article]
    Thanks for your interest in the article. Defining risk in a finance sense is difficult. A pure definition would tell you that risk is the possibility of loss. A finance professional might say 'risk is the possibility that returns are different from those expected.' Very often we see beta associated with risk - as in the capital asset pricing model - or sometimes used as a proxy for risk when in fact beta is only a measure of volatility relative to the overall market.

    Looking at Treasuries, for example, if risk is the possibility of loss then there is no risk if you hold to maturity. On the other hand, Treasury prices can fluctuate greatly during the holding period and if you're forced to sell at an inopportune time then you could lose money, and therefore because there was volatility there was risk involved.

    So I look at risk, volatility and standard deviation of returns relative to the specific investment and the planned holding period. If I'm buying a high quality bond and I'm basically certain that I'm going to hold it to maturity and that it will pay off at that time, then I ignore volatility and standard deviation since they're irrelevant to me. But if I'm looking at a very long term commitment then I study carefully the mean returns, standard deviations, Sharpe, beta and alphas when I compare alternatives.
    Dec 18, 2011. 02:38 PM | 2 Likes Like |Link to Comment
  • 'Show Me The Kwan, Jerry!' Cash Is King [View article]
    Good question! Actually, the reason is the dividend. If I can get 8%+ it's worth a small commitment [one of my rules is never commit more than 5% to anything, no matter how good it seems. Who knew about Bernie Madoff, or who ever thought BP would blow up?]. I researched ETP, and they were able to both sell stock and borrow money even in 2008 and 2009 so they've been tried under fire, and they have a lot of hard to replace tangible assets, so I gave them the benefit of the doubt. Not my favorite pipeline MLP, but a nice yield on a small investment. Now PM is another story...maybe my favorite long term hold.
    Dec 8, 2011. 11:08 PM | 2 Likes Like |Link to Comment
  • 16 U.S. Based Royalty Trusts For Income Investors [View article]
    I like royalty trusts, and have owned a couple for many years. However, the issue of diminishing oil reserves and return of capital v return on capital makes analysis difficult. Last time I looked, two major trusts both listed 10 years in their SEC filings as their remaining life, so if my 'return' includes 10% a year of getting my own money back, where does that leave the investor? Finally, some, like Prudhoe Bay, have their own peculiar issues such as the pipeline needing a minimum amount of oil to even operate.
    Nov 27, 2011. 01:19 PM | 2 Likes Like |Link to Comment
  • Most Of Our Problem, Still, Is That We Have A Dead Battery: Felix Salmon Is Wrong Edition [View article]
    While it's true that tax revenues peaked in 2000 [due to huge capital gains tax payments], it is not correct to say "we cut revenues...a decade ago". Federal data shows tax revenues were $12.534 trillion in 2002, and 10 years later it's estimated that 2011 tax revenues will be $12.851 trillion. What is correct is your statement that "we forgot fiscal discipline altogether". Regardless of a person's political views, factually it is simply indisputable that our financial problems have been caused by too much spending, financed by borrowing, rather than too little revenues.
    Oct 10, 2011. 12:05 PM | 2 Likes Like |Link to Comment
  • Most Of Our Problem, Still, Is That We Have A Dead Battery: Felix Salmon Is Wrong Edition [View article]
    As a recently retired CEO, I agree with the concept that unemployment is very likely to remain at historically high levels. Companies since 2001 have focused on increasing productivity, replacing people with less expensive technology, maintaining high cash reserves, minimizing cap ex, and not hiring unless demand requires it. Every person hired reduces the value of the business unless they contribute more value than their cost. Those hired must have computer skills, and if not they'll be permanently unemployed or underemployed. At my company we succeeded, and now handle 40% more volume with 15% fewer people - a 65% productivity gain in 10 years. I believe our experience is typical, which supports my conclusion.
    Oct 10, 2011. 10:46 AM | 2 Likes Like |Link to Comment
  • Closed-End Fund Opportunities: A Look at Royce Funds [View article]
    Interesting, but with hundreds of stocks you're better off with a small cap index fund like the S&P 600 "SLY"; SLY has produced much better results over the last 5 years than either RVT or RMT.
    Mar 12, 2011. 02:45 PM | 2 Likes Like |Link to Comment
  • U.S. Energy Policy Is Responsible for Unrest in Egypt [View article]
    Total nonsense, and clearly uninformed. Go online and read english-language versions of Middle East and Egyptian papers and blogs to get a better understanding.
    Jan 30, 2011. 09:15 AM | 2 Likes Like |Link to Comment
  • Nucor Corporation: Dividend Stock Analysis [View article]
    The analysis missed the single most important fact: cash flow from continuing operations. While analysts follow payout ratios, EPS, P/E, etc., what matters to Boards and CFOs is cash. Look at the dividend - paid, obviously, in cash - relative to cash flow from operations less maintenance cap ex, and you'll have a much more accurate understanding of a company and its dividend policy.
    Oct 1, 2010. 01:22 PM | 2 Likes Like |Link to Comment
  • Seadrill's Path To Problems [View article]
    SDRL now has about $13.2 billion in total debt, vs $2.5 EBITDA - a high 5.3x ratio. Unless they can sharply increase EBITDA or sell assets to reduce debt, either their bankers or the capital markets are going to start rationing their access to debt. Keep in mind that this company is controlled by John Fredriksen, as is Golar. Because his family trust lives off this dividend he'll keep the dividend as long as possible but ultimately markets will prevail. Sell SDRL now - they're quickly getting into a checkmate situation which is going to result in a dividend cut.
    Feb 19, 2014. 01:00 PM | 1 Like Like |Link to Comment