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Eugene Eliot Narrett was born on December 27, 1948. He died on the night of December 6, 2013. Having just left an art gallery in Brattleboro, Vermont, where his paintings were on display, he crossed Union Street and was struck by a hit and run driver. Professor Narrett was the first of five sons... More
  • Read Charts, Buy The Story & Hold, Maybe: A Tale Of 4 Mid-Caps 1 comment
    Jan 14, 2013 3:29 PM | about stocks: CVA, HLX, INTC, KRO, MCD, MCP, MO, TJX

    Investors and traders read lots of charts but seemingly objective, stat and math-based interpretations and conclusions can fail badly. You've got to know the story, how a product fits into the entire economy and socio-political situation which often is volatile. If you're not a day-trader, if the story and fit are good, hold while fitting your entries and exits to your time horizon. Just as in life, entries and exits hugely affect degree of success or failure, joy or pain. "There is a tide in the affairs of men which taken at the flood leads on to fortune; omitted all the voyage of life is bound in shallows and in miseries."

    "We must take the current when it serves, or lose our ventures."

    Three mid-caps from diverse sectors proved these points this year and the vicissitudes of a fourth offers a general lesson on equity investing.

    Kronos Worldwide, Inc (KRO) produces and markets titanium dioxide pigments. This is not exotic but simply makes opaque whiteness in paints, plastic and paper. That is, KRO provides the quality, utility and look of products used throughout the economy. Its senior management, Chairman, CEO, CFO and CTO has been together nine years so they know the company, their material and market. The PE (6.96) and PB (2.27) are low, debt is reasonable and sales grew 34% in 2011. It's a good story. EPS are solid and KRO rewards shareholders with a dividend yielding about 3.05%. This $2.29 B mid-cap would seem to fit snugly among buy-and-holds.

    Things are not so simple. January 10th was a volatile day for Kronos with an 80-cent swing that settled at $19.67. You will find more volatility in its 3-month, 6-month, annual, 3-year and 5-year share price. Recent action seems great with KRO roaring out of a pre-election trough by 65%; the product and market are established and the team is knowledgeable. But look at the history which is not all attributable to commodity prices for titanium (which after the 2008 collapse have been fairly stable between $7 -8/kilo). But KRO, after rising from a July bottom to $19/ early in August, -- not far from the top it reached last week - when the market as a whole was starting to hum began a painful 10-week plunge that hit $12.65 by election time. The action dwarfs the small dip and recovery in titanium price.

    From March to November a position lost half its value. That doesn't support the 'buy-and-hold' dogma.

    There's an interesting aside to this and a lesson about the limits of charts and those who specialize in trend-analysis, a modern form of divination. One such on KRO urged those with limited pain tolerance to sell if the autumn slide reached $14/share. As above noted, the price fell through that level. Those who sold at $14 soothed their bruises as the price continued to erode. They cannot be too pleased now that it has recovered mightily. Relief yields to regret. Not all who follow moving averages have the iron, savvy or time to exit and enter at precisely the right moment to ride the ladder up.

    It took Kronos eighteen months to crawl off the March 2009 floor and its strong year-long rise from fall 2010 to late summer 2011 lagged titanium price recovery by a year. Then, having hit $34 it pitched onto its forehead till after sixteen months of descending tops and bottoms it arrived at the current inflection point. If you bought in 2009, even late in the year between $2 and $5, long after the indices had surged back, and held till March 2012 at about $24 you'd have done very well. If you were a genius or you would have sold in August 2011 at about $30 and been a genius. But life isn't a film for must of us…

    Maybe "it's the economy, stupid!" And the fiscal manipulations that distort it. Median individual net worth is down to 1969 levels, and so on.

    There are three lessons to draw from the price action of this solid company: chart and trend analysis offers the illusion of objectivity in an environment, economy, finance and markets that is far more irrational than the Liberal Arts (at least until the postmodern era when the core curriculum became "a plastic fantastic lover" and $1 trillion student debt reflects the goof). Good companies have substantial peaks and valleys with enormous beta seasonally not to speak of year over year. Even if you know and love the story and buy to hold and accrue via dividends, you need to have an exit point suited to your circumstances. This could be as simple as making a good profit. Resist the impulse, common to good people to fall in love with a stock. If you're going to marry an asset and hold for years at a time, buy a mutual fund or an entrenched mega-cap like McDonald's (MCD), Altria (MO) or Intel (INTC) and even then you probably should have broad parameters for when you will trim or add to your holdings. "To have and to hold" properly is for one's spouse. Stocks are held to exit for cash or a better play.

    Use the charts, history and trend to buy low and after gains sell when downturns start occurring. Otherwise buy funds or ETF's with a strong record and overweight to equities until the Fed allows the bond markets to correct. We all are players and need to choose "our exits and entrances" with skill.

    Covanta Holding Corp (CVA) is a mid-cap from a different sector that compares usefully with KRO. Covanta's cap (about )$2.5 B and yield (3.14%) are similar though it has a fraction of the EPS. Like KRO it has a low PE and PB. Sales growth in 2011 at around 5% was far less than Kronos. Producing energy from waste, CVA seems perfectly suited to recent weather from DC: plenty of waste; should be plenty of energy: it's a green story. Since its collapse from $30 early in 2008 to a March bottom at about $13 Covanta has had a slow steady recovery half of it since the June lows. For three years it did practically nothing until the 2012 gains. At the trajectory it's on it looks like a hold if you have it.

    Or you could position yourself with Vanguard's Wellesley Income Fund (VWINX), average annual return 10.2% for forty-two years; balance its large cap value stocks and sound mid-term corporate issues with the Small Cap Index (NAESX), 10.5% a.a.r. since Ike was President; 18.52% this past year. Check the Lipper Ratings for these funds! Add a dollop of gold (Barrick Gold [ABX] is a value at $34 and Jeff Vinik and David Einhorn each hold over 2 million shares); the junior miners (GDXJ a value under $20) and silver (PSLV or SLV) set and forget. Check it every two months, get away from the screen and enjoy life.

    Let's round out this survey with two more mid-caps of diverse nature. Helix Energy Solutions (HLX) makes and operates undersea well intervention equipment, finding and development services. At $2.25 Billion its PE is 13, a low PB of 1.17 and solid earnings growth. Its post-election gain of 35% finds it above $21. Its 2012 performance was not much more volatile than the indices with several touches at $15-16 and several tops near or above $20. Its collapse from $41 in '08 to the trough ($3/) was horrific and its climb since then steady and powerful. There is growing need for these services as American energy returns to dominance; it is a subject of favorable reports from Byron King and of the three companies discussed here it seems the most solid buy and hold for growth. Whether energy prices rise or fall the need for its technology and services are set and it has bolstered its balance sheet by selling a promising drilling company. Again, exits and entrance times are of critical importance. Love humans, not stocks.

    So don't buy and hold, white-knuckled regardless. When you smell something rotten like the TARP or LIBOR fiddling or repeated dives in the indices on heavy trading, bail, in the case of Helix at about $25 and live to buy back around $10-12 through most of 2009-10. Now things are good to enter (especially below $20) and hold, always keeping abreast of major dislocations and aware of price history. Learn the story, watch the tides…

    The limits and necessary emendations to the buy and hold mantra are epitomized by the postscript mid-cap we'll consider, rare earth miner-refiner Molycorp (MCP). This is a great story and certain, as much as anything is certain, long term winner but the mid-term has receded and the pain is now. Molycorp is the only major rare earth miner and processor outside of China which manages it production quotas to strong arm world markets. So upgrading an abandoned California mine, Molycorp set out to become a vertically integrated miner, refiner, processor and marketer of rare earth products essential to high tech communications, military, energy and other uses. It has done so. Its market it huge; the commodity essential; the alternative to China very appealing: after its IPO in 2010, MCP rose to $80/share in early summer 2011 but sagging rare earth prices, over-production in China and, this year, cost overruns at its Mountain Pass mine and refinery upgrades and in its acquisition of Neo Materials and the facility in British Columbia battered earnings, production time table and share price. After sensational 2011 earnings growth (1012%) there have been well-publicized snags in the beautiful plan. In mid summer 2012 target estimates still called for $41/share though NAV was dropping to and below $20. It seemed like a fat-pitch play. But more cost overruns, operational issues and disputes with contractors triggered free falls from $17 to $13, then to $9.50 and finally to $5.75. That's major pain for those who bought and held. There have been several brief stabilizations and recoveries up to $13; last week to $11.50. The last was undercut by MCP's deciding that because of unexpected costs, further facility upgrades would be delayed and production targets for 2013 halved. Hence the recent 22% sell down to $8.35. The dust will settle (Friday Jan 11th saw strong recovery that continued after hours) but at this point trauma has become routine. Remember what was said above about fitting entries and exits to your time horizon and the relative merits of other income sources.

    The takeaway is that the story remains sound: the only vertically integrated rare earth miner, refiner and marketer outside of China. A growing market should offset price changes in the commodity and China just announced a production cap to support prices. The infrastructure is in place with only expansions pending. The mine is ready after decades on the shelf. Management clearly prefers reasonable expectations and sustainable growth. Production in 2013 now aims at 19,000 metric tons which should increase demand and pricing. The company is a buy at these distressed prices around $8. Buy: pain and pessimism are maximal, the story and infrastructure intact. The upside is large. Hopefully those who were in at $80 got out by the end of 2011's euphoria before the price halved to $40, still a long way up from here but attainable in two years. Sentiment is dismal so the basics urge entry: "There is a tide in the affairs of men which taken at the flood leads on to fortune…"

    Regarding this column's inquiry on strategy, the turbulent ride of these mid-caps, especially MCP suggests that buy and hold works only for a small subset of equities or proven funds: diversified mega-caps with secure production lines, available materials and large established markets. No matter how fundamentally sound the story and proposition, individual companies face uncertainties in funding, infrastructure, governance, commodity or material prices, macro-economic and geopolitical trends. You have to be ready to sell and buy back if the story is sound and the market niche certain. Companies like TJMaxx (TJX) with a steady 300% rise in the past four years are rare but available and that's a train not now at the station. For most mid and small-caps with good fundamentals (with giants like Apple, too APPL) you have to choose your entries and exits with care. You can always re-visit the store at a more opportune time. The key point for most of us is preservation of capital: growth comes on top of that. If a company puts in a double or triple top and dips start increasing, sell when you're ahead and avoid the "shallows and miseries." There are many fish in the sea.

    Disclosure: I am long HLX. 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.

    Additional disclosure: I own shares of MCP and MCD.

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  • Thanks Emmet, did well with TJX thus far thanks to your tip!! Would profit taking be right now or no? You are saying hold hold hold?
    14 Nov 2013, 08:30 AM Reply Like
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