2013 Wrap-Up And Trading Set Review - Part III

by: Nasser Khraishi

In this third article of the series (Part I, Part II), we review the remaining 13 issues in my trading set. The industries covered by this subset are technology, energy and transportation.

Apple (NASDAQ:AAPL) should be a traded as you would a retailer, as far as I am concerned. If you are starting to giggle at the thought, then just remember that they -- belatedly -- realized this fact and hired the CEO of Burberry to run their retail segment. It is a high-end gadget or a device company much more than a typical technology company. I think this is really the reason for their success, and for that matter, their competitors' failure to significantly cut into AAPL's existing market. The fact that your iPhone is running, deep inside, the same UNIX operating system you find on the highest end corporate data-center servers is something that you do not need to know nor do you care about. This is the beauty of the majority of Apple's offerings.

Since it is one of a kind, trading AAPLis a bit of a dilemma. If you are to labor on understanding Apple, then think of a "vertically integrated retailer." That is, one that starts from silicon, plastic, and intellectual property (call it software and patents), and ends with a product at their own store. Everything in between is theirs or that of a close partner. That is vertical integration as we have not seen in many decades, and it seems like it works well for this unique company.

Despite the fact that it is an investment grade company, I am more comfortable trading AAPL technically. After all, I cannot comprehend how to properly gauge its valuation, and would presume that most of the market has a similar dilemma. This is not a shortcoming of AAPL, but rather is mine and that of most analysts and writers I see. Compared to the likes of street-darling Google (NASDAQ:GOOG), AAPL's stock price growth dwarfs the fairy tale story of GOOG's. As a $500+ billion company, with a 2.19% dividend yield, a trailing PE of 14, it truly does not exhibit any of your typical technology company features; and definitely not that of its competitors. Compare Apple's statistics to Google's PE of 32 with no dividends and you start seeing my point, especially if you know that GOOG's price grew almost 60% in 2013 while AAPL's appreciated by around 5%, only. In the chart below, that lowly line with only 1000% growth over ten years is that of GOOG. AAPL achieved almost 5000% growth around same period, not including dividend.

One event relating to AAPL worth mentioning for 2014 is the unfortunate ongoing meddling in their business by minority owners. It is almost comical, especially if you look at the ten-year chart comparison with Google above, that an outsider can come in and tell the CEO and Board of Apple how to run their business.

Intel (NASDAQ:INTC), is also no longer your typical technology company. Yes, they are trading at a fraction of their early year-2000 highs, but it is a $127 billion company, with a trailing PE of 13.5, that yields 3.5%, and that has an almost complete stranglehold on entire critical segments of high tech. Actually, if you are not closely following the company, you may need to refamiliarize yourself with it, as it has many segments and businesses in several high-tech fields ranging from the classical processors and other silicon components, to communication, mobile, software, and data security among others.

The charts leave much to be desired. Actually, the decade+ charts -- not shown -- are horrific to say the least. Nevertheless, INTC of recent years is behaving as you would expect an industrial company to act, and the nice mean-reversion characteristics make it just as well-suited for technical trading as it is for long term investing.

The story behind Cisco (NASDAQ:CSCO) is not much different than that of Intel. Yet, there are two main differences. Firstly, INTC has gone through executive transformation multiple times, while CSCO still has Chambers as the executive for as long as a I have followed the company. This makes the second comment about its anemic recovery from the post financial crisis lows -- almost five years ago -- more relevant. You see the almost 50% recovery from the lows of Q1 2009, and retouching that low once or twice since, is not what you would expect from a category-killer, $117 billion company. Admittedly, a dividend yield of around 3.1% can take away some of the pain, but it seems that someone needing to jolt a large high-tech into outperforming should be eyeing CSCO and not AAPL.

Having said all that, CSCO is still a dominant company in many of its fields, and for sure, it is an investment grade and the potential for improvement is huge. CSCO does remind me of IBM (NYSE:IBM) during its "lost years" a couple of decades ago, and that story did turn out well. Yet, I prefer trading CSCO technically, even though the surprise (negative) earnings announcements have made me an investor recently. One last note, if it were not for the fact that current price levels were due to earnings misses, and that the price action exhibits very strong mean-reversion behavior, CSCO would have been on the chopping block for removal from the trading set. After all, its weekly closing price spent as much time the last five years on the negative side as it did on the positive side.

HP (NYSE:HPQ), call it nostalgia, completes the technology group. The ten-year (monthly) chart can evoke so much head scratching that you may damage your scalp. How can a company this good perform so badly?

In any case, this is a -- not as large as it used to be -- $54 billion company yielding around 2.06%. The reason I view HPQ as investment grade is not their PC business, as that is a dead area not worthy of investment. Nor is it their server and services business, as IBM would be a better choice. But, HPQ is one of the best printer companies that has not indulged in the very exciting 3D printing field -- till very recently. Admittedly, HPQ stock price action is more monotonous than I would like for my technical trading, and for sure if we get a similar reversal to what the charts show in the past, they will be removed from my trading set.

Yet, if you are into 3D printing, and do not want the typical new technology wild ride, then this is an established company that (hopefully) can get you there, while you are making 2% dividend, and riding a $54 billion train with many businesses and established markets to soften a future blow.

You do need energy to produce any product. Hence energy and utility are important for inclusion in my trading set.

Of the oil companies, I chose Chevron (NYSE:CVX). It is about half the market cap of the market leader Exxon (NYSE:XOM), and a bit bigger than the European rivals -- Royal Dutch Shell (RDS-A) and BP (NYSE:BP). As most of its peers, this is a relentless growth machine that yields around 3.2%. The stock price exhibits strong mean-reversion and it is a company that I have no problem owning for the long term. Hence, it is a perfect match for my trading set and style of trading.

BP is the second company in this space, and is one of only two non-USA companies in my portfolio. The British market is close in its dynamics to the US one; I do get a bit of a currency hedge effect; and I trade the ADRs. This 4.72% dividend yield company has been marching in the same price range since the financial crisis. The reason is obvious: the Gulf of Mexico Oil Spill! Yet, as we were discussing about banks in some earlier post, the litigation overhang may very well be overrated. After all, the sheer size of these companies, the extended payment mechanics, and the tax credits, should seriously soften the blow. In any case, in addition to the dividend yield, at a trailing PE of around 6, and a "depressed" market cap of around $150 billion, it is hard to ignore BP for investment purposes. For my own purposes, BP does exhibit good cyclical price movement that allows me to execute at multiple entry points.

A note though; because of the misconception about the price of oil and the prices of oil companies, you will find always a good entry point into such companies. You see, almost all of the large oils have a consumer side, a discovery side, and a production side, among others. Further, they all work on Gas, Oil, and, now, alternative energy. As such, the discovery side is almost immune from price of oil fluctuation, as it is not necessary that every find will become productive, and hence such companies will continue to explore. After all, some of these companies act like "real-estate" companies, selling rights to finds to others. The consumer and production sides are negatively correlated, in the sense that economics suggest that the higher the price of oil, the less it is consumed, and vice versa. As such, if you are a long term investor, you can use misconceived valuation for opportunistic accumulation of more of the stock. Of course, for a technical trader, there is only one price, and that is the one on the ticker; be it misconceived or true.

To distribute energy, you need utilities. National Grid (NYSE:NGG) is a household name for many, outside the USA, and for some in the New England and New York areas. What I trade are the ADRs and not the stock (NG.L). Like BP, it provides some currency hedge -- not that this a major factor in my calculations, and it is a company with US operations. What is funny about this company is that it is larger than most US utilities, with a market cap of around $49 billion, and still yields higher than most, with around 5%, and yet you hardly hear it mentioned by writers or analysts. Here, you should be cautioned that most data services report NGG's dividend incorrectly. You see, it has a twice-a-year dividend payout, with unequal amounts. Hence, most services will report NGG's dividend around the end of year of about 3% and around the middle of the year of about 7%. Both are incorrect, as the yearly dividend is closer to 5%.

NGG's charts exhibit nice mean-reversion, and they have nice and consistent rise. One point here, if you do look at the 10 year monthly chart below, do not be over-alarmed by the period around the financial crisis. Remember, this is an ADR, and hence the price in the USA is affected by the GBP-USD exchange rate. Remember that prior to the financial crisis, the GBP used to fitch up to $2.10, and dropped almost immediately after the crisis to around $1.40. In essence, this is the hidden risk of buying any ADR, and not only NGG.

The GBP-USD chart below drives this point.

NiSource (NYSE:NI) is my other choice in the US utility space. With a $10+ billion size, a 3.1% dividend yield, and operations at the national level, it is hard not to include this company in your list. What is odd is that this 100+ year company hardly gets any decent news or writer coverage. One very important point of caution though, utilities are investment heavy, and hence if you check the price movement of any of these companies around the financial crisis, you will realize that there is a systemic credit risk for this sector that is hardly ever mentioned.

In short, despite the size, durability, and returns of this sector, it is not for the fainthearted. I have listed a post financial crisis and a longer term chart for NI to drive this point. Yet, if you look at the 5-year weekly chart, you will immediately see why it is in my trading set. As a matter of fact, NI, with its relentless price appreciation, is more fit for the long-term investor that it is for technical trading.

Williams Companies (NYSE:WMB) completes my energy sector. WMB is more into distribution rather than servicing end-consumers. It is a $26 billion company with 4% dividend yield, that does exhibit very good growth and mean-reversion characteristics. Yet, in comparison to NI, I think WMB is more fit for technical trading. The credit risk aspect of the utility, and the more sophisticated ownership structure, as related to Williams Partners (NYSE:WPZ), make it overall a bit more complicated to understand the valuation than I would normally be comfortable with for investment-grade issues.

In summary, if you do want a utility in your trading set, and the focus on infrastructure that I selected for my trading set -- hence capital intensity and credit risk -- is not for you, then you can try some of the end-consumer utilities such as PG&E (NYSE:PCG) or one of the Edisons. They exhibit, generally speaking, less volatility. For my purposes, NGG, NI and WMB, at this point of time, do offer a better match for my trading style.

Products made need to be delivered. Hence, transportation is also represented in my trading set. Yet, before we move into "product movement" let us consider a different type of transportation.

You see, surprise, I view Waste Management (NYSE:WM) as a transportation company. You may not have thought of it as such. It is a decently sized ($22+ billion) company which offers a decent 3.25% yield. It is worth noting that they are -- as of recently -- venturing into alternative and renewable energy. It is not high on the "spectacular growth" scale, but offers very nice mean-reversion characteristics that make it well suited for my purposes.

Con-way (NYSE:CNW) is a larger trucking company -- yes, $2.3 billion market cap is large in that space -- that has been around for almost a century. As with some of the other choices above, you will not see much of writer or opinion coverage on this issue. Admittedly, the dividend yield is on the lower side (1.0%) and the price movement is more monotonous than most issues discussed to date. Hence, I view CNW as more suited for opportunistic technical trading, as it does exhibit good cyclical price movement.

CSX Corporation (NYSE:CSX) is a rail company that is mainly in the goods transport. And so is Norfolk Southern (NYSE:NSC). Just like DE and CAT, they do offer overlap and high correlation, and both are in the $28 billion market cap range and have a 2+% dividend yield. Both operate mainly on the east coast. As such, for a long term investor, only one need to be included to achieve the diversification goal. As for my purposes, these companies offer nice cyclicity and growth. Hence they are an excellent match for my purposes.

Just as a general note, it may be desirable to have overlapping issues within the same sectors. You see, for cyclical sectors, you may need more than one equity so as to discern whether the rise or fall is sector-wide or issue-specific. If you do note significant separation in the performance of the different issues in that sector, which are in your trading set, then it is time to analyze the sector as a whole and make decisions based on that.

Disclosure: I am long INTC, CSCO, CVX, BP, NGG, WM, CNW. 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.

Disclaimer: It is important that you understand and agree that all information provided in this newsletter rely on publicly available data and tools with no guarantees of quality or suitability for any purpose, and that I can be long or short in any of my trading-set equities, at any time, with or without regard to indicated trends and described analytics, and that I do not give buy or sell or any other financial recommendations, and that any and all actions based on this commentary are solely the responsibility of the reader.