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As a contributor to the New Low Observer (http://www.newlowobserver.com/about-this-site), we intend to give new insights on a low risk approach to trading in dividend paying stocks for tax deferred accounts. The New Low Observer (http://www.newlowobserver.com/about-this-site) is not intended for... More
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  • Nasdaq 100 Watch List Review

    Below is the performance of the six stocks from our August 9, 2013 Nasdaq 100 watch list (found here) compared to the Nasdaq 100 Index gain of +24.41% over the last year.

    SymbolName20132014% Change
    BRCMBroadcom26.0638.19+47%
    CHRWRobinson Worldwide56.7967.7+19%
    EQIXEquinix181.18211.38+17%
    NUANNuance Comm.19.1117.83-7%
    SHLDSears41.3537.27-10%
    ISRGIntuitive Surgical391.87453.17+16%
       average+14%
         
    ^NDXNasdaq 100 Index  +24.41%

    The watch list underperformed the Nasdaq 100 by -10.41%. However, the stock that we had a strong interest in, Broadcom (NASDAQ:BRCM), garnered the following commentary:

    "Broadcom (BRCM) tops our list this week and it is the stock that interests us the most, at the moment. Right off the bat, we see that the stock has a price to book (P/B) ratio of 1.93. Among the listed companies above, this is a compelling attribute. Value Line Investment Survey says that the fair value for BRCM is 12 times cash flow. Based on full year cash flow figures for 2012, BRCM is estimated to be fairly valued at $39.96 or +53% above to current price.

    "Of concern with the data presented by Value Line is the fact that BRCM went from debt free in 2009 to nearly 15% of capital, as of the most recent reporting. In one sense, corporate borrowing at low rates is a good thing. However, we're concerned that certain types of borrowing result in loss generating (is that possible) ventures that end up going nowhere.

    "Broadcom has recently been slammed in the market based on reduced or declining guidance. This from Investopedia.com:

    'A lot of what has worried Broadcom analysts and investors appeared to come home to roost with the company's latest earnings report. Weak guidance has investors fearing that the company is losing more and more share to Qualcomm (NASDAQ:QCOM), with an overall stagnation in high-end devices leading to fears that ASPs and margins are in danger. (Stephen D. Simpson. "Fear Dominating the Broadcom Story". Investopedia. July 29, 2013. accessed August 10, 2013.link).'

    "Dow Theory has the following downside targets:

    • $24.43
    • $20.61
    • $16.79
    • $12.97

    "When we ran Edson Gould's Speed Resistance Lines, we were only able to come up with an extreme downside target of $15.78. It seems that the $24.43 target is highly achievable."

    On August 12, 2013 (one trading day later), our downside target of $24.43 was achieved on an intraday basis as BRCM declined as low as $23.25. After hitting our target low, BRCM trended higher to the tune of nearly +50% gains.

    (click to enlarge)

    It should be noted that in the 2013 article cited above, investors and analysts were fearful due to anticipated lower profit margins. Please note that the NLO team does not operate by the maxim "be fearful when others are greedy and greedy when others are fearful" as made famous by Warren Buffett. Instead, we think in terms of the words of Dow Theorist William Peter Hamilton, the fourth editor of the Wall Street Journal, when he said the following:

    "The best way of reading the market is to read from the standpoint of values. The market is not like a balloon plunging hither and thither in the wind. As a whole, it represents a serious, well-considered effort on the part of farsighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future. The thought with great operators is not whether a price can be advanced, but whether the value of property which they propose to buy will lead investors and speculators six months hence to take stock at figures from ten to twenty points above present prices.

    "In reading the market, therefore, the main point is to discover what a stock can be expected to be worth three months hence and then to see whether manipulators or investors are advancing the price of that stock toward those figures. It is often possible to read movements in the market very clearly in this way. To know values is to comprehend the meaning of movements in the market."

    Source: Hamilton, William Peter. Stock Market Barometer. Page 38.

    At the current price, Broadcom almost appears expensive when considered from where we thought investors should take an interest. However, on August 1, 2014, widely followed market commentator and analyst Charles Payne came out with an article titled "Is It a Good Time to Buy Broadcom?" According to Mr. Payne Broadcom is a compelling buy at the current price with an upside target of $47. We believe that our work has adhered to the recognition of values as outlined by Charles Dow and reiterated by William Peter Hamilton.

    We consider ourselves value investors. This means buying stocks at intrinsically low valuations and never selling, regardless of market conditions. In theory, individuals who sell stocks in periods from several days to 10 years are considered traders. However, a different reality pervades our market experience. Lacking a vast pool of resources, we can only operate with an eye for values and downside risk. For those with a similar reality, we can only advise the best scenario that would ensure that the pool of investment resources is guarded against buyers remorse. With this in mind and the nearly +50% gains in BRCM, we recommend selling only the principal while letting the profits compound into perpetuity. This is our only remedy to dealing with our own personal fear of loss. We hope this will prove useful to others.

    Disclosure: The author is long CHRW.

    Aug 03 12:56 PM | Link | Comment!
  • Review: California Water Service Group

    Contributor C. Cheng asks:

    "Interesting that you should mention scarcity of water creating an upside cap on the company's profitability. Now that California is dealing with drought conditions, how do you think this will factor into CWT's performance?"

    Our response:

    On January 3, 2010 (found here), we posted an Investment Observation on California Water Service (NYSE:CWT). At that time we said that CWT has a 6-year pattern of trading in a range before breaking out to the upside, price is driven by the dividend with an upside target of $24.145 ($48.29).

    Regarding the 6-year cycle, we said the following:

    "CWT has had a pattern of trading in a range for approximately 6 years at a time before breaking out to a new and higher trading level. The following are the range in years that CWT traded before obtaining a new high:

    • 1976 to 1982
    • 1985 to 1993
    • 1993 to 1997
    • 1997 to 2004
    • 2005 to 2011 ???"

    Our expectation was that at some point in 2011, CWT would ideally be bought for the pending breakout of the stock price.

    (click to enlarge)

    The reality of the situation with CWT is that the stock finally broke out of the trading range in January 2013. Again, the 6-year trading range was only the average. However, while investors waited for the stock price to increase there was a sizable dividend being offered at the time. Coincidentally, the price of CWT has peaked at $48.28 on a closing basis as recently as March 25, 2014. This closing price is within $0.01 of our projected high set in 2010.

    Our view is that only in hindsight will we know for sure the impact of water scarcity on CWT. However, below is the trend of quarterly earnings since our 2010 posting and it seems to reflect the fact that instead of being able to see higher earnings in the face of scarcity (the rational economic view) we're seeing pre-drought earnings.

    (click to enlarge)

    What we do know is that the price performance of the CWT has a lot to do with the price paid. Given that CWT currently trades at 25.8x earnings and yields "only" 2.8% (low for a utility), the odds of the stock outperforming in the long-run are slim.

    In addition, utility companies generally issue bonds to fund their operations. With interest rates on the rise, their cost of funding will put more pressure on the future earnings. As such, our view on the risk/reward isn't as rosy for CWT.

    Tags: CWT
    Jun 16 1:30 PM | Link | Comment!
  • Dow Doesn't Deserve 17K?

    In an article titled "3 reason the Dow doesn't deserve to be at 17,000" (found here), author David Weidner outlines why "…the bull market in stocks is running for all the wrong reasons." The three reason that Mr. Weidner gives are lack of public participation, corporate earnings are flat and few alternatives investments for savers.

    We actually believe the opposite is true, the Dow (NYSEARCA:DIA) is short of the mark in terms of where it could or should be based on historical precedence. On the topic of public participation, although Mr. Weidner is correct that the public isn't as active in direct ownership of stocks, an alternative view could be that when and if the public does get involved, usually the late stage in a bull market, the Dow could easily over-shoot on the upside by a wide margin.

    In our March 13, 2013 article (found here), we pointed out that the average trading volume has been in a declining trend since June 2, 2009. Our concern was that with the decline in trading volume, indicating a lack of participation by the public, there may be a point at which stocks could not sustain their climb higher. We said the following:

    "When the increase in volume arrives, the question then becomes, will there be a dramatic increase or decrease in stock market price? Will the general public's lack of participation be the catalyst that charges the market to move higher? This situation has to be resolved at some point."

    As time has passed, we're starting to believe that if the public finally does begin to participate, even on a marginal scale, the stock market could effectively skyrocket.

    Mr. Weidner's second point is that with corporate earnings being flat, there seems to be less of a justification for the stock market to move up as much as it has. However, the stock market usually works in mysterious ways when it comes to the impact of corporate earnings. As an example, the some of the biggest stock market gains are accompanied by lower than expected or declining corporate earnings and bear markets often coincide with exceptional corporate earnings. As an example:

    "Right now, corporate earnings in the U.S. are very good. actually much better than analysts expected as recently as six months ago. But look at my Primary Trend Index (page 2 chart); it hit a new bear market low on November 4. Study the advance-decline ratio (which is a proxy for the action of all the stocks on the NYSE). The A-D ratio hit a new bear market low on the same day, November 2. Now check the daily new highs and lows. New lows have been coming in heavily, with day after day of more new lows than new highs (Russell, Richard. Dow Theory Letters. November 9, 1994. page 1.)"

    The above commentary was during a period when the stock market traded in a range from August 1993 to February 1995.

    "The word is out - corporate earnings in the period ahead will be leveling off or declining. Investors are switching to defensive shares (Russell, Richard. Dow Theory Letters. October 11, 1995. page 6.)"

    The above commentary was during a bull market in stocks that saw the Dow Jones Industrial Average rise +144% from October 11, 1995 to January 10, 2000.

    "The market is saying that corporate earnings are fated to decline, that price/earnings ratios are due to shrink and that business will be facing much tougher times (Russell, Richard. Dow Theory Letters. August 12, 1998. page 3)"

    The above commentary was near the 1998 low and the Dow achieved a +24% gain by January 10, 2000 (excluding dividend reinvestment). Additionally, a new investment at the 1998 date would have gained +67% by October 2007 with only a -11.77% loss at the 2003 stock market low after the crash of 2000.

    "The stock market, since August 1982 has presented us with four major lessons. Lesson I: The market has its own wisdom and it can move completely opposite to the obvious fundamentals. In August 1982, the fundamentals for the economy, the international picture and for corporate earnings looked terrible. And I'm not sure things have changed that much since late-1982 (except in the interest rate sector). But the market, despite this, surged to record highs (Russell, Richard. Dow Theory Letters. February 9, 1983. page 1)"

    Since the above statement regarding the market from August 1982, the Dow has gained +1,209%. It is necessary to note the fact that Russell said "…The market has its own wisdom and it can move completely opposite to the obvious fundamentals…" This is huge and explains why we're choosing to adopt the view that maybe the opposite of what is expected will prevail.

    Mr. Weidner's third point is that, "…there are no alternative investments…" and that the Federal Reserve's "…easy credit seems to be inflation in the stock market." The widely held view that the stock market has moved up due to Fed policy seems to miss the mark by a wide margin. As outlined in our article titled "Is the Fed Responsible for the Stock Market Rise Since 2009?" (found here), in the period when there was no central bank from 1836 to 1914, the stock market averaged a gain of +167% after large declines. If the Dow Jones Industrial Average were to rebound +167% from the March 2009 low, then the index would sit at 17,500.

    Aside from the incorrect claim that the Fed is the reason for the stock market, Weidner goes through the list of "lacking" alternative investments. The first "investment" that is mentioned is fixed-income products like the 10-year Treasury (NYSEARCA:DTYL). Yet, short-term treasuries aren't investments per se, they are savings instruments that carry the lowest risk available (aside from cash). Yes, short-term treasuries should have some role in your financial plan and can be beneficial in declining interest rate environments and market panics. Also, treasuries are a great place to park your money before the next big investment.

    Weidner isn't interested in high yield junk bonds (NYSEARCA:JNK) because the issuance level exceeds what it was at the peak of the 2008 market. This assessment doesn't tell the full story since the junk debt market will continually increase in size. Simply stating that the market is two times higher than a select point in the past doesn't put the information into its proper perspective.

    Weidner doesn't like housing because it seems to be a game for only the cash rich investors, however, this would fit the billing as an investment alternative to the stock market. After all, committed investors are putting real money on the line in order to secure real estate.

    On gold (NYSEARCA:GLD), Weidner says that it is down -30% from the peak. That's it!!! Weidner has nothing else to say about a metal that is revered by many and is held in central banks around the world for some strange reason. Sounds like an opportunity to investigate the pros and cons of gold. Weidner doesn't go there and therefore confirms his view that there are no investment alternatives.

    You'd think that Weidner would like oil (NYSEARCA:OIL), after all, it is only up by +20% in the last year. However, Weidner says, "…Nice, but it's still trailing the stock market." So, it would seem that if the asset is truly an investment, you should not have to compete with cash in the real estate market, gold is down so no interest there, oil is up so no interest there and junk bonds are being issued too much. All this leave a saver with no investment alternatives.

    It is important to put the facts in a comprehensible order before making any claim. First and foremost, savers should only become investors when they are willing to accept the risk of loss. Once the acceptance of the risk of loss is established the many investment alternatives need to be examined in their proper context. Keep in mind that the stock market is adept at doing the opposite of what investors expect. Finally, from a historical standpoint, wider public participation in any investment always takes place in the latter stages of a rising trend.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: DTYL, DIA, GLD, JNK, OIL
    Jun 14 11:32 PM | Link | Comment!
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