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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • Deere: Still A Buy

    Deere (NYSE:DE) just reported fiscal Q42014 earnings that beat estimates, but has been trading down based on weak guidance. With the company expecting net income in the $1.9 billion area for 2015, I interpret that as guidance for $5.24 GAAP EPS, after 3% buybacks.

    At this point, 5 year average EPS, looking forward to the end of 2015, works out to $7.44 per share. Applying a long term average multiple of 14.8 on this metric, I get a FMV of $110, as of this point next year.

    I'm long by means of options. The primary position is Jan 2016 LEAPS at the 65 strike, against which Dec 2014 calls at 97.5 were sold when the stock was at a high point.

    I'm also long Dec 2014 75/85 vertical call spreads, for which I paid $7.21, giving the position a b/e of $82.21. I would be happy to own the shares at that level.

    The market over-reacts to news on the short term prospects of agricultural machinery. Long term, a growing population with a growing appetite for meat will drive growth, with increasing use of machinery. In the meantime, tractors and combines wear out, and require repair or replacement.

    Disclosure: The author is long DE.

    Tags: DE
    Nov 26 10:49 AM | Link | 6 Comments
  • Carbo Ceramics - Taking A Position With Options

    There was a nice article by Kevin Quon today on Carbo Ceramics (NYSE:CRR) and after reading it I bought a vertical call spread, long the March 2015 40 calls and short the March 2015 45 calls, for a net debit of $3.20.

    Carbo makes ceramic proppants for fracking, and they're getting some pressure by competition from sand. The shares are down seriously, and there is still a very substantial short interest. This in spite of a very strong balance sheet.

    If you count extra cash/current assets above a ratio of 2:1, they have about $11, and no long term debt. When adjusted with this in mind, the forward P/E is about 11.

    I've been here before. I went long on a very similar situation, same stock, back in 2009 and made good money. I played it safe, with a covered combination.

    So with the stock in the $48 area, my full profit of $1.80 is earned if the stock is above $45 at expiration, and my b/e is at $43.20. Both are below the 52 week low, and are prices at which I would be happy to hold the stock long-term and wait for recovery.

    It's always fun to reheat old ideas, particularly successful ones.

    Disclosure: The author is long CRR.

    Tags: CRR
    Nov 17 4:40 PM | Link | 3 Comments
  • Working With PE5

    Early in my investment career I read Ben Graham and picked up on his suggestion to use PE5, and try to buy at a multiple of less than 15. Based on my experience, I've used a PE5 of 20 as a FMV for good quality non-cyclical stocks, and generally closed my positions before the multiple reached 25.

    The thought occurred to me, that I could use Shiller's irrational exuberance data to develop a PE5 for the S&P 500, and I have now done so. I stayed away from the inflation adjustment. Going back to 1987, when the first computerized crash ushered in the current era of investing, the PE5 for the S&P 500 averages 24.4, and currently stands at 24.

    Using Portfolio123, I averaged the PE5 for the 494 S&P 500 stocks which their system was able to compute, and arrived at a value of 28.7. The difference can probably be explained by weighting, or the lack thereof. The very large blue chips trade at low multiples, for the fact they grow slowly.

    I ran a few backtests, and it developed that as far as PE5 goes, higher seems to be better. Used as a sole selection criterion, PE5>25 produced a modest amount of alpha, PE5>30 produced somewhat more. When coupled with the site's Piotroski ranking system, and taking the 20 highest ranked, alpha ran at 5% or 6% for various long periods.

    Piotroski was trying to avoid financially troubled firms. So a high PE5, if you avoid financially troubled outfits, has a good chance of being a profitable investment. As a commenter once remarked on one of my articles, where I was exploring a similar phenomenon, they're high priced for a reason.

    Investment Implications

    Based on PE5, the S&P 500 is at an average multiple. As such, there is no reason to avoid the market. 5 year returns might reasonably be expected to be in the 6% area, consisting of 2% inflation, 2% real GDP growth, and 2% dividends, plus a little financial engineering.

    As far as individual stock selection, this analysis suggests I should be increasing my estimate of the PE5 multiple that would represent FMV for high quality, defined as companies that have little or no risk of getting in trouble financially. Perhaps 22 or 23. Then the exit on price point could be moved up to 27 or 28. The buy below point would be more like 18 or 19.

    Of course there are industries that seem to trade at chronically low PE's, it should be noted that Graham discussed the issue and compared it to dress lengths, how wide is your tie or lapel, etc.

    Nov 13 7:39 PM | Link | Comment!
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