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My name is Phil Mause. I am a Senior Advisor with the Pacific Economics Group, focusing on energy, regulatory and valuation issues. I retired from 40 years of law practice earlier this year. I am a yield oriented investor and in the last two years, I have done reasonably well in junk bonds,... More
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  • Apple Is Dirt Cheap: Some Revealing Comparisons

    Apple (NASDAQ:AAPL), which closed Tuesday at $426.98, has become very, very cheap. Oddly enough, the stock which seemed to lead the market up in the early phases of this bull rally has turned into one of the biggest dogs around. In my view, so much bad news is priced in now that, if one believes that the market reflects the future, then a civilization ending asteroid collision may be imminent.

    To test just how pessimistically AAPL is priced, I have compared it with some other stocks which may elicit a degree of investment pessimism. Before describing the challenges these others face, let me set forth the methodology I used. I first calculated trailing twelve month earnings per share and used it to create a price earnings ratio. I then calculated net balance sheet cash per share (a negative if debt exceeded cash) and subtracted that from the market price to calculate enterprise price (EP) per share. I then removed interest income and interest expense from income valuations to calculate enterprise earnings (NYSE:EE) per share and finally presented the EPEE (ratio between EP and EE) for each company. The table below includes data for AAPL, Altria (NYSE:MO), Frontier Communications (NASDAQ:FTR), and CONSOL Energy (NYSE:CNX). The data is from Yahoo Financial and from corporate SEC filings.



     PriceTTM EarningsPENet CashEPEEEPEE

    Mo is what is left of the old Altria company after the spin off of international operations to Philip Morris International (NYSE:PM); thus, MO's business is making and selling cigarettes in the United States. It operates under an ever darkening cloud of regulations, taxes, and lawsuits (a county near me tried to make smoking outdoors a crime recently). It is not considered to be a growth business and, although new entrants into the market are limited, there is likely to be scramble among existing players for a dwindling market. It is selling at nearly twice AAPL's PE and almost three times its EPEE.

    FTR is a small telecom company which provides landline service and broadband service to customers in largely rural areas. The state which has the largest number of FTR customers is West Virginia. The landline business is inexorably declining as fewer and fewer people use landline telephone service. The broadband business is growing but it tends to chew up capital and it is fiercely competitive. FTR does not appear to participate in the mobile market. It has a fairly large amount of debt. In fairness, telecom companies have generally been able to carry quite a bit of debt but, as the business has changed and as the landline customer base no longer provides reliable and growing cash flow, that may be changing. FTR sells at more than three times AAPL's PE and more than twice its EPEE.

    CNX derives 80% of its revenue from coal and the rest is generated largely by natural gas operations. Coal demand has been declining in the United States as the combination of cheap natural gas and unfavorable environmental regulations has led electric utilities (who traditionally consume roughly 90% of the coal in the United States) to switch to natural gas. It sells at twice AAPL's PE and almost three times its EPEE.

    I am not writing this article to trash MO (in which I own some stock), FTR, or CNX. They each have managements which have developed strategies to deal with the challenges in their respective markets. But, in each case, those challenges are real and suggest very limited ability to increase gross revenue as well as a serious danger of steadily diminishing revenue and income. Each of the companies has net balance sheet debt and in two cases it is substantial. If revenue declines too fast, debt service could become challenging. Each of these companies may wind up doing well but to say that there are "risks" and "challenges" is to be euphemistic.

    And yet they are each trading at much, much higher multiples than AAPL. We hear all the time that AAPL may stop growing at its traditional pace or even may stop having any growth at all. But are its prospects really THAT much worse than those of MO, FTR, and CNX? You can tinker with my numbers. You can say that I "cheated" by giving AAPL full credit for its cash and not taking out the tax costs associated with repatriation of foreign cash. But I also "cheated" in favor of the companies with net debt by adding interest back into income without offsetting the tax savings associated with interest expense. And the numbers are so extreme that making these changes is not going to alter the fundamental point. AAPL is still priced dirt cheap in comparison with these other companies even if you give it absolutely no credit at all for its balance sheet cash. No matter how you slice it or dice it, AAPL is now trading at a much lower multiple than companies in declining businesses and is priced not only for decline but for fairly rapid extinction.

    Tech is a rough business. But is it really that much rougher than the coal, cigarette or landline telephone businesses? Or is it that AAPL is in such a horrible position within Tech that its executives must look at counterparts within MO, FTR and CNX with envy? I hate to close an article with a rhetorical question but I am beginning to wonder how long this mispricing can go on. I wrote a piece at the beginning of 2013 suggesting that Dell (NASDAQ:DELL) was mispriced at $9.97 and was quickly vindicated. There is obviously no potential for an AAPL LBO but a slow motion LBO in the form of share repurchases may be how this mispricing is resolved. I think that the next few quarters may be interesting; when a stock is priced for an expectation of really bad news, almost any news is good news.

    Disclosure: I am long AAPL, MO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: CNX, FTR, MO, AAPL, long-ideas
    Apr 10 3:35 AM | Link | Comment!

    Rip Van Winkle fell asleep for 20 years in the late 18th century and woke up in a very different world. This piece attempts to project us 20 years into the future and examine financial headlines that are likely to appear. There is a bit of "tongue in cheek" here but the trend lines leading to all of these developments are well in place and we should brace ourselves for a very different world down the road.

    1. Tax Holiday Will Lead Dollars to Return the USA and Spark Job Growth - The Bush Administration's proposal to allow US companies to repatriate dollars from overseas without any tax penalty was passed by both Houses of Congress last week and economists are projecting that it will produce 2 million new jobs. The $67 trillion of cash held by US companies in foreign locations will be returned to the US as early as next month under the complex tax exemption supported by all four political parties. No taxes will be paid but the money must be physically returned to the United States in the form of coins (most likely in $5 Justin Bieber coins) counted and wrapped by US citizens and transported in US flag vessels with all labor paid at rates subject to Davis Bacon restrictions. It is expected that the counting, wrapping and unwrapping and recounting will consume at least 14 million man years of labor with the remainder of the job growth being accounting for by transportation, handling, and infrastructure work. The Port of Los Angeles will undergo a major expansion starting next week and creating at least 30,000 new jobs alone.

    2. Eurozone Debates New Facility Designed to Stabilize Banks and Debtor Countries - At a meeting held on the Isle of Elba, leaders of the Eurozone countries debated the creation of an "Ultimate Bailout Contingency Funding Facility" which would be financed by the issuance of notes and bills secured by the 27 other special funds and facilities which have now been cross-collateralized and secured by subordinated debentures and auction rate securities supported and sponsored but not guaranteed by an undisclosed subset of 6 out of 10 of the largest European banks. Austrian Premier Arnold Schwarzenegger has accused his colleagues of "playing hide the salami" by obscuring the payment of funds to cover Greek and Spanish sovereign debt. The Greek debt situation -exacerbated by the migration of 99.97% of the Greek population to Montenegro - has vexed European leaders and led to some speculation that Greece may exit the Euro.

    3. Apple's iPhone 35 Disappoints Investors - Apple (NASDAQ:AAPL) closed today at 17 cents a share after investors reacted negatively to its latest iPhone. The new, baby aspirin sized iPhone 35, is ingestible and provides its owner with a full year's supply of nutrients so that, once the iPhone is ingested, food and beverages are not necessary for 365 days. It also facilitates time travel (although roaming charges are applicable) and provides owners with lifetime exemptions from all state and federal taxes. Selling at $9.99, pundits think it "too expensive" and are also disappointed at AAPL's projection of a 92% gross margin on the phones. AAPL now pays a quarterly dividend of $167 a share making the stock unattractive to investors because of high volatility when the stock goes ex-dividend.

    4. Trend Toward Longer Movies Continues With New Bruce Willis Thriller - Hollywood still loves long movies and the 973 minute "It Takes a Long Time to Die Hard" confirms that trend. The thriller - based on a novel by Bernie Madoff - involves an elaborate Ponzi scheme in a nursing home. Bruce Willis unravels the scheme just as terrorists are engaged in an effort to contaminate the catheter supply. Realistic footage of lengthy colonoscopies is key to the plot line.

    5. Fed Testimony Suggests Quantitative Easing Likely to Continue - The Federal Reserve issued a release today indicating that QE41 - involving the purchase of old clothing from middle class households with newly created money - is likely to continue, at least until unemployment drops below 7%. With inflation at .0001% and economic growth still sluggish, the $435 billion a week program has been subject to criticism as being "ineffective" and badly targeted but suspension of the program is viewed as "too risky" by Fed economists. Concerns that interest rates may increase roiled bond markets yesterday driving yields on 10 year treasuries above 1% for the first time this decade. In a separate release, the Fed indicated that it will keep short term rates between 0 and .00000001% for a "extending period of time" lasting at least until 2078.

    6. Fundamentalist Group Proves that Rich People Go to Heaven - A well-financed "experiment" by a fundamentalist religious group has demonstrated that rich people generally go to Heaven after they die. For a number of years, there has been concern about a troubling passage in the New Testament suggesting that it is harder for a rich man to go to Heaven than for "a camel to pass through the eye of a needle." Literal interpretations of this text is mandatory in certain fundamentalist circles but its implications tended to undercut fundraising efforts. The experiment - conducted under the supervision of fundamentalist leaders - involved 263 camels which were slaughtered and pulverized in an Alabama facility. The resulting fluid was combined with stabilizing chemicals and drawn into a thread-like substance which was then pulled through the eye of an off the shelf needle. An announcement issued by the sponsor of the research indicated that "it is actually fairly easy for a camel to pass through the eye of a needle" and thus likely that most rich people go to Heaven.

    7. Baffin Island Beach Resort Property Boom - The growth of the Baffin Island beach resort industry continues apace as five new beachfront hotels open this Spring for the beginning of the tourist season. The hotels are all air conditioned because of the 95 degree weather which commences in March. Consistent with the recent trend the hotels are on the "north shore" of the island - facing the Arctic Circle - and taking advantage of the "cooler" 120 degree summer temperatures which have given the north shore a decided advantage over the sweltering south shore facing the North Atlantic.

    Reading these through, I realize that our best years are ahead of us and temporary setbacks should be taken in stride because of these promising long term trends.

    Disclosure: I am long AAPL.

    Mar 05 11:33 AM | Link | 5 Comments
  • Non-Agency Mortgage REITs: Part 9 - "Fellow Travelers"

    In the 1950's, during the Red Scare, the term "fellow traveler" was used to demean those who took positions similar or identical to the positions taken by actual, hard-core "card carrying" communists (I often wondered how they would classify an absent-minded communist who was always misplacing his card or leaving it at home). I am using the term to mean companies similar in operation to the companies covered in this series of articles. This section is devoted to companies which are former REITs, often confused with REITs and similar to REITs and engage in business activities the same or analogous to the activities of the REITs in this sector. That means, they are primarily engaged in owning, originating or managing mortgages or mortgage backed securities that are not guaranteed or sponsored by a federal agency. One of the companies is a former REIT; I have often been asked about the others because they are frequently confused with REITs. Each of these companies may be of interest to the same group of investors who are interested in the companies featured in the first 8 articles in this series.

    The table below provides information concerning Ellington Financial (NYSE:EFC), Walter Investment (NYSE:WAC), Municipal Mortgage & Equity (OTCQB:MMAB) and Centerline Holding (CLNH). With respect to each company, I have provided the symbol, Monday's closing price, the Pre-Crash high, the Post-Crash low, and the current dividend yield. All numbers are based upon data obtained from Yahoo Finance.


    EFC was not publicly traded until the Fall of 2010, so that there are no Pre-Crash numbers. Of the four companies, only EFC currently pays dividends. WAC's Pre-Crash high has been adjusted to reflect a reverse split. It is obvious that the three companies which existed prior to the Crash were devastated and that investors have become somewhat gun shy with these stocks. The non-agency mortgage space was brutal through the Crash and these stocks really got trashed.

    EFC is run by a group of math wizards and invests in roughly equal amounts of agency and non-agency mortgage backed securities. If it were a REIT, EFC would likely be considered a "hybrid" and so it should be compared with the companies in that sector. It also has a smaller amount of commercial mortgage backed securities and some commercial loans. EFC uses considerable leverage but has been able to maintain a relatively stable share price since public trading commenced. The securities EFC owns are complex and hard to value and presumably the "pinball wizards" of EFC have developed expertise at pricing and trading complex securities which are often misunderstood and misgauged by the market. The company has done well but it has not had to go through the wringer of the Crash as the others have. For fiscal year 2012, it appears that the company is on track to earn between $5 and $6 a share and so it is attractively priced.

    WAC used to be a REIT but discontinued REIT status recently, presumably so that earnings could be retained and redeployed into the business. WAC had a secondary offering in October at $42 a share and has been buying up servicing rights on pools of mortgages. WAC works on troubled loans and in some cases just has servicing rights while in other cases owns the loans themselves. It is somewhat similar to PennyMac Financial (NYSE:PMT) and would be classified as a residential non-agency mortgage REIT if it were a REIT. WAC has recently become qualified to originate Fannie Mae loans and apparently plans to transition some existing borrowers into these loans as a means of retaining the borrowers on WAC's group of serviced loans. WAS stock has had quite a roller coaster ride through the crash but seems to be stabilizing in what is a more "normal" credit environment.


    MMAB.PK originates, owns and manages tax exempt bonds secured by affordable housing that are typically issued by governmental entities. It also holds certain other assets. MMAB.PK PRESENTS VERY IMPORTANT TAX ISSUES FOR INVESTORS. MMAB.PK is a partnership treated as a pass through entity for tax purposes and each year issues each of its shareholders a K-1. Tax consequences to the individual shareholder have no relationship to distributions received by the shareholder. In other words, you can owe a lot of taxes even though you have received no dividends. For example, at the end of 2012, MMAB.PK renegotiated a loan with a lender and generated roughly $2 a share in capital gains which many shareholders will have to report on their 2012 tax returns even though the shares are worth considerably less and no distribution was received in 2012. MMAB.PK has been in a long Kabuki drama with its lenders and has periodically gotten modifications of terms allowing it to avoid default. The most recent modification was in December and appears to be significant although it is by no means an "All Clear" signal. At any rate, the stock has recently popped and there has been a fair amount of insider buying. This may be a "diamond in the rough" but it may also be another substance in the rough. I would advise potential investors to read the financials carefully and to be sure that they understand the tax consequences of investing.

    CLNH is also involved in affordable housing. Unlike MMAB, CLNH has transitioned away from partnership status and is now treated for tax purposes like a normal corporation. CLNH manages large funds or partnerships that are consolidated on its financials creating the normal amount of confusion endemic to this sector. Its website provides "adjusted" financials breaking out the consolidated SPEs. CLNH also appears to periodically renegotiate loan terms with its lenders, many of whom also appear to own significant equity in CLNH. It is still operating in the sense of originating new loans and it is difficult to discern exactly what value there is in CLNH common equity. It has been losing money but a great deal of the loss has been in the consolidated partnerships which may not really have significant impact on the value of CLNH common equity. Recently, CLNH filed at the SEC indicating its intention to implement a 1 for 5000 reverse stock split designed to reduce the number of shareholders and thereby terminate its registration as a public company which would save considerable administrative expense. Positions of fewer than 5000 shares would receive 7 cents a share cash. I have not been able to find any information indicating the timing of this transaction. This is obviously a very risky investment but, if the proposed reverse split occurs, an investor may at least be able to perceive somewhat of a "floor" under his investment.

    I have bought some MMAB.PK as a pure crap shoot but I would not advise anyone to put any money they will need any time in the near future into MMAB.PK or CLNH. EFC and WAC are interesting and I may do a follow up on one or both of them. Investors interested in this sector should keep an eye on EFC and WAC as well.

    Disclosure: I am long OTCQB:MMAB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: EFC, MMAB, WAC, reits
    Jan 30 8:13 AM | Link | 5 Comments
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