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Stock Recommendations
Recommended Stocks and Mutual Funds (These change without notice. Some are even listed as recommended because they are "short sales" because of their being attractive candidates to go DOWN, so read carefully.)
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Archer Daniels Midland (NYSE: ADM)
Purchase ADM one of the world's largest food companies at $31/share. This is a defensive stock that should do well when our commodity and oil stocks falter. Let's compare ADM and Monsanto (MON). The insiders have always been selling the stock, so their sales don't concern me so much. Institutional holdings are a tad high, at 64%, but not as high as for Monsanto's 88%. MON's P/E ratio is 63x, twice that of its peers and six times higher than ADM's. ADM's Price/Book ratio is half that of its peers, at 1.8x and even more reasonable than MON's 9x. Only Price/Cash Flow makes MON look more reasonable 27x compared to ADM's 42x, both higher than their peers at 19x. Meanwhile, ADM is growing better than its peers and than MON. Median 5-year growth for ADM's revenue is 20% and that of earnings is 27%. This compares to MON's 14% and 22%, respectively. (Average for the food industry is 12% and 9%, respectively.) ADM's profitability is under par with ROE of 15% (v. 24%) and Operating Margin of 5.2% (v. 11%). In summary, ADM is a fast growing company with profitability that should continue to expand, yet it is selling at a discount to its peers. I expect it to reach $38/share by the end of the year, which would be a nice 10% gain in 4 months. Buy at under $31.US airplane lease company: Aircastle (NYSE: AYR)
July 28, 2008. AYR rents airplanes to an impressive list of clients all over the world. Thus, I classify it as a global transportation company. The company has been badly beaten down with the rest of the transportation stocks, and sells at a quarter the price it did only a year ago, despite taking no hit to either its revenues or its net income. At $10 per share, it is selling at a 30% discount to its book value of $15 and well below normal valuations. Additionally, its price to earnings ratio is 6 (compared to 24 for its peers) and price to free cash flow is 4 (v. 47 for its peers). With those numbers, you would think the company is losing money. That couldn't be farther from the truth. It is very profitable with operating margin at 30% (triple that of its competitors) and net margin of 28%. It is growing well, especially revenues which grew 93% over last year (over quadruple that of its peers).
With those tailwinds, are some weaknesses in the company? ROE is a low 11%, half that of its peers. Shareholders have seen their shares diluted by a whopping 20% over the past year, but the Finance Department seems to have been selling only when it was getting a good price, stopping sometime in Q4 when the price finally dropped below the book value. Also, although the company is not a household name, it is anything but an undiscovered stock, with 86% owned by institutions. All told, this is a se*y company at a great price, and fairly valued at $60, qualifying it for the mini-skirt label. Due to its size and volatility, I would not hold it as your only stock, but it would be a great component of a diversified portfolio and a good hedge for our oil and natural gas stocks.
Berkshire Hathaway (NYSE: BRK-B)
Warren Buffett's company is selling at relatively low valuations, possibly because of concern over his finding a successor should he not be at the helm. This is a good time to buy.China Natural Gas (NASDAQ: CHNG) and Cherniere Energy (Amex: LNG)
July 23, 2007 Let's compare these two companies, our proposed long, Chinese Natural Gas which sells on the NASDAQ market and may be represented either by CHNG or CHNG.OB. The short is Cheniere Energy (Amex: LNG). Although insider data on CHNG is unavailable, they are buying LNG, which is not something we would desire in a short. Institutional interest in LNG of 91% is way too high and has little room to go up. If they start selling because natural gas price optimism wains, it will pull the stock down.
Now let's look at the balance sheets. CHNG has absolutely no
debt, while LNG's debt is 90% of the level of its assets. Such high
level of debt is very unhealthy. Another stark contrast comes in the
area of profitability. While CHNG had an operating margin of 36% and
net profit margin of 30%, LNG's was a NEGATIVE 18,000% and NEGATIVE
24,000%, respectively. In fact, one of the things that excited me about
shorting LNG is that despite the record prices of natural gas, it has
yet to have a profitable year in the past four. In fact, 2006 was a
record year for losses amounting to $1.73 a share, even greater than
the present tangible book value. ROE has been 30% for CHNG and negative
85% for LNG.
Let's compare growth. CHNG has seen revenue growth of 600% a
year average for the past 4 years and triple last year, while LNG's has
been a mere 20% over 4 years, with a decline of 33% last year. Earnings
growth has averaged 190% over 4 years for CHNG, with as much growth
last year while LNG has seen its losses mount 60% oper year
over the past 4, increasing 90% last year. While the book value of CHNG
has risen six-fold over the past four years, LNG has managed to raise
theirs only by issuing new stock and diluting shareholder value.
As for valuation, both have Price/Book ratios that are above their peers, but LNG's is 45 while CHNGs is only 5. P/E ratio for LNG is negative, while CHNG's 17 is a bit below their peers' 22.
In conclusion, CHNG is better run, profitable, and growing
while still being about 1/8th the price of LNG. However,
beware that both can be very volatile, as I made 20% on CHNG just last
week alone. So, if you are risk averse, take only 2/3rds of a portion
of CHNG. But, for most people putting no more than 5% in any one stock,
I recommend a full holding of CHNG and 2/3rds of a short on LNG.
Conoco Philips (NYSE: COP)
March 12, 2007. I believe oil has hit a support level. Independently, Warren Buffett has come to the same conclusion and so if you have Berkshire Hathaway, you already own some Conoco Philips (NYSE: COP) As I'm sure you know, this is an internationally renouned energy/oil company with a great name. Five-year revenue growth has been 16% compared to 11% for its competitors. They have been just as slick in their earnings growth (24% compared to 18%). In fact it has long been running as a well oiled machine without negative earnings for over a decade. Operating margin has been above average but weak relative to its peers, 15% compared to 19%. The company has been buying a lot of shares back, so they believe it is a good value. We can see this if you compare its price to any yardstick. It's only 6 times earnings compared to 10 for other oil companies, 5 times cash flow compared to 7 for its peers, and 2.4 times book compared to 2.8 for the industry. I don't like that it is so well known with institutions owning 80% of its shares, but that is about par for any large-cap company. I have a price target of $110/share on COP, well above its $68 price now. Fill up your tank with COP at $64.20.
Eastern Insurance Holdings (NASDAQ: EIHI)
November 18, 2006: Eastern Insurance Holdings (NASDAQ: EIHI) is a domestic casualty and specialty insurance company. What appeals to me about EIHI? One, it appeals to insiders, where 26 of them have bought 802,000 shares over the past 6 months. I like it when people inside the company like their prospects. Yet, institutions have not discovered it, holding only 11% of the stock. There are good reasons to like it, too. The Operating Margin is 30% (twice that of its competitors) and the Net Margin is 21%. It is growing very quickly also. Since it began 2.5 years ago, revenue has grown 20% per year and earnings have gone from $0.21/share in 2003 to $2.17/share for the past 12 months. Yet, despite these great results, the P/E ratio is half that of its peers (7x compared to 14x) and price to cash flow is one third its peers (6x compared to 19x). EIHI is priced at $15 but I believe it is worth $60-80.
Paranaense Energia (NYSE: ELP)
November 11, 2007: A Brazilian electricity producer. What is there to like about investing in ELP besides financing the electrical needs of a developing country? It is another relatively unknown company, with 8% of it owned by institutions. It is highly profitable, with operating margins of 27% compared to the average utility's 17%. Other measures of the company's success are good, but what are very nice are the valuation ratios. Its P/E ratio is 9, half the average. Its price is only 6 times cash flow and twice book value, both of which are 50% lower than its peers. I recommend a full portion of ELP (selling at $16.29/share), with a price target of $28.Oppenheimer Holdings (NYSE: OPY)
October 6, 2006. OPY has a number of companies in its portfolio, all dealing with investments in the US, Canada, and Venezuela. I think that investment companies should do well while the baby boomers amass more wealth and start needing financial advising and innovative investments. They have been profitable since 1997. Five-year annual revenue growth is more than double that of its peers, 16% compared to 6%. Although earnings are lower compared to 2000 due to the stock market's peak that year, they have been rising with the market and should continue for the next couple of years. It is a concern that 5-year return on equity is half that of its competitors 7% compared to 16% as is operating margin 10% vs. 21%. However, it is priced at less than half the value of its peers, 2.4 times earnings (vs. 5.5x), 14 times earnings (vs. 19 times), and 2 times free cash flow (vs. 38 times). They see the value of their company and are buying back shares. I have set a price target of $38 on this stock which is selling at $32 now.POSCO (NYSE: PKX)
October 28, 2006: A South Korean steel producer named POSCO, which sells in ADR form on the NYSE under the ticker PKX. What is there to like in POSCO? First, they are in the right part of the world for the expansion of Asia. They have been profitable every year since 1998. Revenue growth and Earnings growth have not kept up with their peers, but still are not bad on absolute terms, showing an average annual rise of 14% and 20%, respectively. However, the 5-year average Return on Equity has been 80% higher than the industry average (18% vs 10%) and Operating Margins were 23% last year, compared to 15% for the industry. So, they are targeting the most profitable markets and expanding in a measured way. Meanwhile, the stock is selling cheaply by any measure. It is selling at book value compared to 3.4 times book value for the industry and at 5 times earnings compared to twice that for its peers. (Its price to free cash flow ratio is about par for the industry.) PKX has used this depressed price to buy back 0.5% of their shares in 2005. Virtually unknown among institutional investors, with virtually none owning shares, there is a lot of upside potential once the big guns start moving in. I have set a price target of $130 on this stock which is selling at $70 now. Buy a full portion of POSCO.
TransGlobe Energy (Amex: TGA)
December 10, 2007. TGA is involved in exploration for and development and production of oil and gas abroad. What is there to like about TGA? It is very profitable, with a 37% operating margin (1.2 times that of its peers) and a 24% net margin. The company has been growing well, over 30% per year for sales, book value and earnings/share. Meanwhile, the book value is lower than its peers by 20%. So, TGA is a is highly profitable company, growing well, and relatively undiscovered with insitutional ownership at only 14%. The price for part of TGA is also reasonable. Buy a normal helping of TGA.Tivo (NASDAQ: TIVO)
September 8, 2008. I have no doubt that if you don't have a TiVo player, one of your friends does. (My sister has one.) You can record multiple programs on a hard disk while watching another channel. You can program these recordings ahead of time. I'll admit that it is pretty neat. But, it is not a necessity and it is not rocket science. The barriers to entry are low and people worried about paying their bills will likely postpone purchases of these products.That is the TiVo product. Now let's look at the company. First of all, insiders seem to be negative on the stock, with 15 sales of 175,000 shares transacted since March. At the same time, the company has been issuing stock, increasing the float by 4%. Shares outstanding have doubled since 2002. All this shows a negative view on the valuation of TIVO shares by insiders. However, institutions have not caught on and have increased their holdings to an higher than normal 80% of outstanding shares.
What is there to be negative about? First of all, TiVo has not had a profitable year in its life, although this would change if it has a profitable 3rd quarter this year. However, the last two profitable quarters have not resulted from a phenomenal growth in revenues. Revenues in Q2 were up less than 5% and Q1 less than 1%. The profit has come from a reduction in hardware inventory, which has halved since the beginning of the year, and from a reduction in sales and marketing related expenses. These have been reduced over 90% to barely 1% of sales. These are both unsustainable levels of expenses that will draw TiVo back into the red when they return to more normal levels. It looks like window dressing to me.
What about growth? Earnings growth is impressive only if you don't dig to the depth I did above. Meanwhile, revenues have slowed to low single digits.
What about valuation? Price to earnings is negative. Price is 35 times book and 543 times free cash flow, compared to 16 and 18, respectively, for its peers.
Over the past 4 years, TIVO has been trading between $4 and $8 per share and is now on the top end of its range. I don't see this range going up any, and believe it will fall if the company drops back into the red.
I recommend shorting 2/3 of a portion of TIVO at $8. Warning: shorting this stock is risky. Speculation of a buyout has been circulating for a long time. The recent window dressing is likely aimed to attract a suitor. Thus, this trade is speculative and should be entered into with funds not needed. We will also guard against a buyout by buying a $15 January Call. This will limit our loss to $7 per share in case a buyout comes in above $15.
Toyota Motor Company (NYSE: TM)
June 16, 2008. Toyota Motors (NYSE: TM) is a household name for good quality, energy efficient cars. It is in the beaten-down and undervalued Japanese stock market, which I think has great prospects long-term. Although it is the largest auto company in the world, it is remarkably unfollowed by the professionals, with only 3% of the stock owned by institutions. In an industry that is under pressure and turbulence, Toyota's autos are drawing great prices and the company is showing operating margins of 9%, triple that of its competitors. Weak revenues last quarter hurt earnings severely, but the growth in earnings and revenues over the past five years is approximately in line with its peers. What makes this company's stock a great buy is its relative discount to the prices its peers are drawing. At 1.5 times book and 10 times earnings, TM is selling at less than half the price of its peers which are drawing 4 times book and 16 times earnings. TM is worth at least 25% more than the price it is fetching on the market. This week, the United Kingdom’s Environmental Transport Association named the Toyota Yaris “Green Car of the Year 2008.” Toyota has promised two more hybrid models using Lithium ion technology by 2010. This car will plug-in to recharge.
iShares MSCI Brazil Index (NYSE: EWZ)
September 8, 2008. EWZ is an ETF that tracks the Brazilian stock market. EWZ has over half of its assets in seven stocks, and all of them are either in energy (Petrobrasileiro), commodities, or financial services. In all, 78% of their holdings are in these three sectors. Being short the first two will enable us to hedge our overweight posture in those sectors. The Brazilian stock market has done the best over the past year and EWZ has an average price-to-book value ratio of 3.0, 50% higher than the S&P 500. Thus, it is likely overvalued.Rydex Japan Fund (Symbol: RYJPX)
Japanese equity fundUSAA Precious Metals Fund (Symbol: USAGX)
Precious metals fundUltraShort Financials ProShares (NYSE: SKF)
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