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Jubak Picks 50 Portfolio


This long-term, buy-and-holdish portfolio was originally  based on my 2008 book The Jubak Picks. In that book I identified ten trends that were strong enough, global enough, and long-lasting enough to give anyone who invested in them a good chance of beating the stock market averages.

To mark the publication on January 26 of my new book on volatility, Juggling with Knives, and to bring the existing long-term picks portfolio into line with what I learned in writing that book and my best new ideas on how to invest for the long-term in a period of high volatility, I’m completely overhauling the existing 50 Picks portfolio. (You can buy Juggling with Knives at http://www.amazon.com/Juggling-Knives-Investing-Coming-Volatility-ebook/dp/B016TX4ETY/ref=sr_1_1?s=books&ie=UTF8&qid=1453757542&sr=1-1&keywords=juggling+with+knives

This will happen in stages with the first two stages already place and others to follow.

Those stages will be

1. Explaining the rationale for these changes and the new rules of the road for this portfolio

2. Cutting down the deadwood–which means the immediate drop of 12 stocks in the portfolio

3. Adding five short-side ETFs to use in hedging volatility in extraordinarily risky markets

4. Adding seven new long-term picks to the portfolio (in addition to the 5 ETFs)

5. Updating all the existing write-ups on the 38 carry-over picks and giving them a new timing rating and a clearer indication of what silo in the portfolio they belong to so the reader will understand what long-term trend I think is behind each stock and why each stock is in the portfolio.

Ok, so let’s start with steps one and two.

When I started this long-term portfolio, based on my 2008 book The Jubak Picks. my goal was simple. I wanted to create a portfolio for a long-term investor of 50 stocks backed by long-term trends (10 of them in fact) that were strong enough, global enough, and long-lasting enough to give anyone who invested in them a good chance of beating the stock market averages.

The portfolio would be largely passive with changes limited to 5 potential drops and 5 potential adds just once a year.

That worked fairly well for the first four years of the portfolio. In its first year, 2009, The Jubak Picks 50 portfolio gained 57.8% versus a gain of 28.3% for the S&P 500. Year two, 2010, the portfolio gained 20.1% versus 15.01% for the S&P 500. Then in 2011, the portfolio lost 18.6% versus a 2.1% gain for the S&P 500. Year four, 2012, the portfolio gained 6.6% versus 16% for the S&P 500. Total for four years came to a gain of 64.4% for the Jubak Picks 50 portfolio versus 72.3% for the S&P 500.

But I could already see a problem. This long-term portfolio had a lot of fundamentally solid stocks that would do well when the global economy was in a growth mode and when global stock markets were in an uptrend. (2010 is a good example of this. I discount 2009′s really great performance as a timing artifact since I started the portfolio close to the post-global financial crisis bottom.)

But in a volatile down market, this portfolio could take a deep hit. Part of that underperformance was a result of the fact that when investors get scared by a correction or bear they tend to sell their most liquid positions first and also tend to take profits in their winners. Part of it was a result of the rigidity I built into the portfolio in an effort to make it a long-term portfolio. When a sector tanked, as energy has done twice recently, the once-a-year limit on changes to the portfolio meant there was no way to respond. And partly it was a result of the way that this rigidity influenced my own stock picking: When it came time to add new stocks for the once in a year overhaul, I tended to pick stocks in trends that had done/were doing well recently. In retrospect I wound up doing that even though I recognized that this was a real danger that I should avoid. Knowing what to do doesn’t always mean that you actually do it. One result of this bias is that I went into 2015 with way, way too much exposure to energy and mining and the portfolio has paid the price in 2015 and into 2016.

As I looked at the portfolio, though, I also began to notice a missed opportunity. Being a long-term investor and having a long-term time horizon gives that investor some key advantages in a volatile market. You can buy fundamentally superlative companies at a reasonable price when they’re out of favor. You can pick up an entire sector or trend when most investors hate it. If you want to take a somewhat more active role, although something still far short of trading, a long-term investor should be able to sell at some market tops (or sector or trend tops) and buy at some sector or trend bottoms.

In the last few years I’ve made unsatisfactory stabs at adding that perspective to the portfolio. The most recent was an effort to designate some stocks each year as most timely and least timely for purchase. I haven’t found that especially productive since market volatility hasn’t been willing to cooperate with my once-a-year schedule.

In the process of writing Juggling with Knives, I’ve become convinced that I needed to 1) junk my once-a-year rigidity so I can buy and sell whenever, 2) add short-side ETFs to the portfolio to keep the need to rejigger the entire portfolio during a period of downside volatility to a relative minimum, 3) get rid of about a dozen stocks that no longer fit the best in the world paradigm either because of changes in trends or because of changes at an individual company, 4) add an explicit indicator of what trend owning this stock put you in a position of following, and 5) add explicit timing advice so a reader could tell whether this stock was, in my opinion, a bargain now, something to avoid now, or a potential bargain for another day (and a limited number of stocks would get a designation as “core” meaning I recommend holding them through just about any volatility.)

I’ve removed 12 stocks from this list effective now. They are

in energy Apache (APA), and Ultra Petroleum (UPL)

in mining and commodities Fortescue Metals (FSUMF), Goldcorp (GG), Impala Platinum (IMPUY), Lynas (LYSDY), Thompson Creek Metals (TC)

in banks HSBC (HSBC) and Standard Chartered (SCBFF)

and in emerging markets GOL (GOL), Home Inns and Hotels (HMIN), and Yingli Green Energy (YGE)

Why these drops?

Energy: The collapse of oil prices and the rise of supply from oil shales makes Apache’s expertise in late-stage recovery less valuable. With Ultra Petroleum I feel that Chesapeake Energy (CHK) is a better long-term option on natural gas prices and I’d prefer not to hold two options.

Mining: We’re looking at long-term supply surpluses, tight capital market and stressed balance sheet for a long time

Banks: I think the model of the global bank is less valuable for the next decade

Emerging markets: The growth cycle has changed, becoming a lot less predictable, and while the story of the rise of a big new middle class in developing economies is still powerful, it has more uncertainty than earlier.

Over the next week I’ll add a few stocks to the portfolio and a short ETF or two plus update at least two existing entries with my timing suggestions.


View Sells

Symbol Date Picked Price Then Price Now Today's Change Jubak's Gain/Loss
BHP Billiton
BHP 12/30/2008 $41.94
Update February 18, 2011: As tea leaves go, those presented to investors in BHP Billiton’s (BHP) February 16 post-earnings-report conference call could have been a bit clearer. I think the way to decide buy/sell/hold... more  |  Read Jim's Original Buy
Bunge
BG 12/30/2008 $50.08
Update January 15, 2010: Brazilian iron ore giant Vale (VALE) said on January 15 that it’s in talks with Bunge (BG) to buy that company’s fertilizer assets in Brazil. The deal, for as much as... more  |  Read Jim's Original Buy
Canadian National Railway
CNI 01/05/2010 $55.38
With Warren Buffett’s purchase of Burlington Northern (BNI), there’s one less trans-continental railroad in North America. And nobody is going to build another one anytime soon. Actually make that ever.  Canadian... more
Cemex
CX 12/30/2008 $8.78
Update January 19, 2011: A cement maker like CEMEX (CX) couldn’t have picked a worse set of markets for the global economic crisis if it tried. Second biggest market for the company? The United States,... more  |  Read Jim's Original Buy
Cheniere Energy
LNG 05/03/2013 $28.55
On May 20 I wrote http://jubakpicks.com/2013/05/20/a-second-lng-plant-gets-a-u-s-export-license-the-best-stock-pick-on-that-news-is-chicago-bridge-and-iron/ that that the decision to award only the second license to export liquefied natural gas from the United States to the Freeport project... more
Cisco Systems
CSCO 12/30/2008 $16.23
Update August 21, 2009: Ever since this recession began Cisco Systems (CSCO) CEO John Chambers has shown an unexpected talent for taking all the joy out of his company's earnings report. And he did it again... more  |  Read Jim's Original Buy
Coach
COH 12/30/2008 $20.36
Update July 28, 2009: Coach (COH) reported that its earnings for the June quarter matched Wall Street expectations at 43 cents a share. That's about the last good news for the fourth fiscal quarter that... more  |  Read Jim's Original Buy
Corning
GLW 12/30/2008 $9.01
Update June 5, 2012: If Mr. McGuire were to whisper to Benjamin his “just one word” of advice today, instead of 1967, it would be not “plastics” but “glass.” And the stock that he’d tell... more  |  Read Jim's Original Buy
Cummins
CMI 05/03/2013 $110.60
Update June 27, 2015: Update:  April 28, 2015. Today, April 28, Cummins (CMI) announced a penny a share miss on first quarter earnings of $2.14 a share and a disappointing 6% increase in revenue... more  |  Read Jim's Original Buy
Deere
DE 12/30/2008 $37.65
Update December 14, 2014: If you want to get really, really depressed about the near-to-medium term prospects for the agricultural sector, may I recommend Deere’s (DE) December investors presentation? (It’s posted on Deere’s web... more  |  Read Jim's Original Buy
DuPont
DD 01/18/2011 $48.96
Update December 11, 2013: E.I. du Pont de Nemours, hereafter DuPont (DD), is a clear case of addition through subtraction. After selling its performance coatings unit—which makes paints for cars and other industrial uses—for $4.9... more  |  Read Jim's Original Buy
eBay
EBAY 05/03/2013 $54.21
Update July 6, 2015: Update: July 6, 2015. PayPal began trading today on a “when issued” basis ahead of its July 20 split from eBay (EBAY). eBay shares are now available in two versions—with... more  |  Read Jim's Original Buy
Enbridge
ENB 12/30/2008 $32.23
Enbridge has an impressive number of pipeline projects set to start pumping up revenue in the next two to three years. The Alberta Clipper Expansion is projected to deliver heavy... more
ExxonMobil
XOM 12/30/2008 $78.59
Update February 4, 2016: Update February 4. On Tuesday, February 2, ExxonMobil (XOM) saw its shadow. The oil and gas industry is looking at six more weeks of winter. Maybe way more than that... more  |  Read Jim's Original Buy
Flowserve
FLS 12/30/2008 $51.33
Update August 26, 2009: Turns out the pumping business is a very good place to be in this economy. On July 29 Flowserve (FLS) announced second quarter earnings of a better than expected $1.92 a... more  |  Read Jim's Original Buy
Fluor
FLR 01/18/2011 $70.60
Doing some catch up on this stock. I added Fluor (FLR) to the Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on January 18, but this is the first time I’ve... more
Freeport McMoRan Copper & Gold
FCX 12/30/2008 $23.73
Update January 12, 2016: Update: January 11. News that Arch Coal (ACI) had filed for Chapter 11 bankruptcy under the weight of $4.5 billion in debt didn't come as a surprise yesterday. Granted the... more  |  Read Jim's Original Buy
General Cable
BGC 12/30/2008 $16.69
Update August 7, 2009: Looking for the dark side of the recovery in commodity prices?  Look no farther than the second quarter earnings reported by General Cable (BGC) on August 5. The company did indeed beat... more  |  Read Jim's Original Buy
General Electric
GE 07/22/2009 $15.82
The one-stop-shop for industrial infrastructure. Need a locomotive, steam turbines, a power plant, a nuclear reactor or just something mundane like a hundred jet engines? General Electric can sell it... more
Google
GOOG 12/30/2008 $303.11
Update July 19, 2011: Just in case you were in danger of forgetting, Google’s (GOOG) second quarter earnings report on Thursday, July 14, should remind you: It’s good to be out in front of... more  |  Read Jim's Original Buy
HDFC
HDB 12/30/2008 $72.35
Update January 27, 2011: Another day, another interest rate increase from an emerging economy central bank. On January 25, it was the turn of the Reserve Bank of India. The bank raised its benchmark repurchase... more  |  Read Jim's Original Buy
Infosys
INFY 12/30/2008 $24.45
One of the four horsemen of Indian information technology outsourcing, Infosys combines fast growth with proven management. Infosys has had to win over global clients that now include 113 members... more
Itau Unibanco
ITUB 12/30/2008 $10.84
Update December 1, 2015: Why do I want to own Itau Unibanco (ITUB)? The company is a growing regional super bank in Latin America, picking up business as the biggest global banks shed assets.... more  |  Read Jim's Original Buy
Johnson Controls
JCI 12/30/2008 $17.90
Update August 31, 2009: The long-term future for Johnson Controls (JCI) is in batteries for hybrid and electric cars, and systems for building-wide energy efficiency. Not that the near-term future is so bad. What... more  |  Read Jim's Original Buy
Joy Global
JOY 12/30/2008 $21.99
Update June 1, 2012: Are we all market timers now? What makes me wonder? My reaction to Joy Global’s (JOY) second quarter earning report yesterday, May 31, before the New York markets opened. The company beat... more  |  Read Jim's Original Buy
Lan Airlines
LFL 12/30/2008 $8.64
Update April 1, 2013: It’s all about Brazil. On March 19 LATAM Airlines Group (LFL) reported a 97% drop in earnings for 2012 to just $10.96 million. Higher taxes in Chile, the group’s home market, certainly... more  |  Read Jim's Original Buy
Luxottica
LUX 12/30/2008 $17.95
Update March 3, 2011: Not very ambitious, are they? Luxottica, the biggest maker of eyeglasses in the world and a member of my Jubak Picks 50 long-term portfolio, announced that it looking to increase sales... more  |  Read Jim's Original Buy
Middleby
MIDD 05/03/2013 $48.26
Update February 26, 2014: If more companies were reporting sales and earnings growth like Middleby (MIDD) reported on February 25, the Standard & Poor’s 500 wouldn’t be having such trouble moving above its all... more  |  Read Jim's Original Buy
Monsanto
MON 12/30/2008 $69.52
Update September 10, 2009: It’s hard to keep earnings growing when competitors cut the price you can charge for your signature product in half. That’s the reality that’s finally put an end to Monsanto’s (MON)... more  |  Read Jim's Original Buy
PepsiCo
PEP 12/30/2008 $54.88
This company delivers like clockwork. Take operating margins: 18% in 2004, 18.2% in 2005, 18.5% in 2006, and 18.2% in 2007--even as the cost of such raw materials as corn... more
Pioneer Natural Resources
PXD 01/13/2012 $97.63
I added Pioneer Natural Resources to my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13 (http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ ) To understand why I’m picking this oil and gas company... more
Potash of Saskatchewan
POT 12/30/2008 $73.80
Update July 30, 2013: The danger was clearly implied in Potash of Saskatchewan’s (POT) July 25 earnings results. Potash volumes were up, the company reported, but prices were down—and the implication was that pricing discipline... more  |  Read Jim's Original Buy
Rayonier
RYN 12/30/2008 $30.76
Rayonier owns, controls or leases about 2.7 million acres of timberland. Some of those 2.7 million acres--what's known as higher-and better-use land -- are more valuable for development than as... more
Schlumberger
SLB 12/30/2008 $42.12
Update October 19, 2015: Let’s take a look beyond this quarter’s revenue and earnings numbers at Schlumberger (SLB) at a really important number, one that shows why I put this stock alongside Cummins (CMI)... more  |  Read Jim's Original Buy
SunPower
SPWR 01/05/2010 $24.84
Demand will pick up—eventually—for solar energy companies as the global economy crawls toward recovery and as countries add more incentives for clean power. That doesn’t mean that everyone is going to... more
Tenaris
TS 12/30/2008 $20.85
You can make a very nice little $10 billion (in sales) business out of selling something as seemingly mundane as drilling pipe if you realize that as companies drill in... more
Vale
VALE 12/30/2008 $11.24
Update November 16, 2015: As of November 16, 2015, I’m keeping Vale (VALE) in my long-term 50 Picks portfolio. If you hold the shares of this Brazilian iron ore producer, I’d continue to hold.... more  |  Read Jim's Original Buy
Weyerhaeuser
WY 01/13/2012 $20.22
I added Weyerhaeuser (WY) to my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13 (See my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ on January 13 for all the changes to... more
Yamana Gold
AUY 01/13/2012 $15.68
Update August 1, 2013: It’s early in the transition of gold mining companies to the lower price of gold, but I think we can already stake out a few of the important differences among... more  |  Read Jim's Original Buy

Update BHP Billiton (BHP)

February 18, 2011

As tea leaves go, those presented to investors in BHP Billiton’s (BHP) February 16 post-earnings-report conference call could have been a bit clearer. I think the way to decide buy/sell/hold on BHP and on the mining sector as a whole is to look past the very confusing top down strategic message to the nitty gritty of the key commodities of iron ore and copper. (BHP Billiton is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ ) Let’s start with the murky top-down stuff first, okay? CEO Marius Kloppers said the company would increase its dividend for the first half of 2011 to 46 cents (U.S.) from 42 cents. I’m not clear what that is a sign of since the increase barely keeps pace with appreciation in the Australian dollar—for Australian shareholders, in other words, the increase is no increase at all. Kloppers also announced an expansion of the company’s current $4.2 billion share buy-back to $10 billion. That amounts to about 4% of the company’s outstanding shares. And he said that the company wasn’t actively looking at any acquisitions right now although the company has plenty of cash and cash flow: BHP Billiton reported six month profits of $10.7 billion on February 16. So was BHP Billiton saying that it thinks mining stocks are expensive now, so no acquisitions? Hard to tell because Kloppers may be feeling a bit burned on the acquisition front after a failed bid for Potash of Saskatchewan (POT) in 2010. And are the increases in the dividend and in the share buy-back plan a signal that the company thinks the commodities boom is getting near an end and it’s time to pull back on investments in its business? Nope. Kloppers also announced that BHP Billiton will spend $15 billion in 2011 to grow production. The capital budget for the next four and a half years comes to a staggering $80 billion. BHP Billiton certainly seems to be saying that it thinks the commodities boom has years and years to run. Should investors take that market call to the bank? Not if they remember the Ravensthorpe nickel mine debacle. In 2008 BHP Billiton took a $3.7 billion write down when it shut down that Australian mine. This wasn’t just a case of getting the 2008 top in the commodities cycle wrong—lots of folks (including yours truly) did that. Ravensthorpe had been announced way back in 2004 and plagued with cost overruns from the start. The cost of the project doubled during construction. BHP finally shut it down in 2008, writing down the book value to $0, when it concluded that operating the mine just wouldn’t pay. So in our search for clarity let’s look at the reported results for the key commodities of iron ore and copper. BHP Billiton expanded iron ore production by 5% in the most recent period. Production is up about 25% from three years ago and BHP Billiton has plans to increase production by another 60% by 2013. That strikes me as pretty aggressive and given the plans of other iron ore producers to also increase capacity on roughly that time table, I’d certainly think that 2012 might be a good time to revisit my exposure to iron ore producers such as BHP Billiton, Rio Tinto (RTP), and Vale (VALE). Copper production climbed by 4%, but that good news—since it was ahead of Wall Street projections—came with a ton of company warnings. At the Escondida mine for example, ore grades are declining and in 2011 production is, consequently, likely to drop by 5% to 10% from 2010 levels. Copper production volumes will be stagnant in 2011 since expanding production in the face of declining ore grades at existing mines will be slow and expensive. On the face of it, Billiton’s production report says that the copper boom has longer to run than the iron ore boom. If you’re looking to put new money to work in commodities, I’d go with copper and I think there are better copper plays than BHP Billiton—Freeport McMoRan Copper & Gold (FCX)—comes to mind where companies will have to spend less capital to increase production. (For why I like Freeport McMoRan see my post http://jubakpicks.com/2011/01/24/update-freeport-mcmoran-fcx-and-some-thoughts-on-what-to-own-in-an-emerging-economy-slowdown/ ) Given BHP Billiton’s mix of commodities, if you already own this stock, I’d hold it for 2011 and look to see if it’s smart to start lightening up in 2012. In the longer run, if there is a pull back in 2012 or so, I’d use it as a buying opportunity. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of BHP Billiton, Freeport McMoRan Copper & Gold, and Vale as of the end of January. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Update Bunge (BG)

January 15, 2010

Brazilian iron ore giant Vale (VALE) said on January 15 that it’s in talks with Bunge (BG) to buy that company’s fertilizer assets in Brazil. The deal, for as much as $3.8 billion, would relieve Bunge of a unit that showed a loss of $127 million in the third quarter, and give the company cash to pay down debt that stood at $4.1 billion at the end of September 2009. For Vale, the deal would give the company, which already produces potash fertilizer at Taquari-Vassouras in northeast Brazil and is developing new projects in Brazil, Argentina, Canada, and Peru, additional scale in the short-term and in the longer-run a potential path to dominating Brazil’s fertilizer market. The deal would include, Vale said in a regulatory filing, Bunge’s 42.3% stake in Fertilizantes Fosfatados or Fosfertil, Brazil’s largest supplier of raw materials for fertilizers. The deal would also take some of the political heat off Vale to invest more in Brazil. On October 20 Vale said it would invest almost two-thirds of its 2010 capital budget in Brazil after Brazilian President Luiz Inacio Lula da Silva urged the company to invest more in the country. “Urged” may be too weak a term. Brazilian Agriculture Minister Reinhold Stephanes has noted that Vale might have to give up rights to two fertilizer deposits if it didn’t start exploration soon. In 2008 Brazil imported 70% of its fertilizers. The government has said that the country wants to be self-sufficient in fertilizer by the end of the decade.

Buy Canadian National Railway (CNI)

January 5th, 2010

With Warren Buffett’s purchase of Burlington Northern (BNI), there’s one less trans-continental railroad in North America. And nobody is going to build another one anytime soon. Actually make that ever.

 Canadian National Railway (CNI) generates the highest operating margins among North American railroads. Its operating ratio (that’s the ratio of operating expenses to revenue) has climbed to 63.6% from 89.9% over the last decade, according to Morningstar, and the company’s 10-year free-cash flow is more than 13% of revenue.

Update CEMEX (CX)

January 19, 2011

A cement maker like CEMEX (CX) couldn’t have picked a worse set of markets for the global economic crisis if it tried. Second biggest market for the company? The United States, epicenter for the global housing meltdown. Next biggest? Spain and the United Kingdom. And then, of course, there is No. 1 Mexico, where domestic economic activity closely follows growth (or the lack thereof) in the United States. No wonder that CEMEX almost went under during the crisis, drowning in an ocean of debt including that for its $14 billion 2007 top of the market acquisition of Rinker, an Australian cement maker with even bigger exposure to the U.S. market than CEMEX. The stock, which had looked like it was closing in on $30 a share in May 2008, bottomed below $4 in November 2008. Now, however, the market concentration that was so damaging in 2008 is turning into a plus. Growth in U.S. economy looks like it is accelerating. Mexico’s economy grew by 7.6% in the second quarter of 2010 and by 5.3% in the third quarter. The Mexican economy is projected to grow by 4.8% in 2011, according to Grupo Financiero Banamex. Volumes in Europe are still falling but they’re no longer in free fall. (Cement volumes fell by 52% in Spain and 32% in the United Kingdom from 2007 to 2009.) And it looks like CEMEX has paid down, refinanced, and restructured enough debt that it will get to the return to modest revenue growth in 2011 without getting slapped with a punitive increase in interest charges by its creditors. I’d project roughly 7% growth in revenue in 2011—nothing to get excited about unless you’re running a company that saw revenue fall by nearly 20% from 2008 to 2009. Credit Suisse sees the company’s return on invested capital crawling off the floor at 1.3% in 2010 (the company would have done better investing in a CD) to 2.8% in 2011 to 3.56% in 2012. Earnings per share, projected to bottom at a loss of 70 cents a share in 2010 are forecast, by Credit Suisse, to return to profitability with 21 cents a share in 2011 and then grow by 148% (to 51 cents a share) in 2012. I’d look for an entry point of $10.50 or less. I think the stock can go to $13.50 to $15 depending on the strength of the U.S. economy and when the Spanish economy stabilizes. Which, of course, is why I picked the stock as one of my 10 stocks for 10 years in my annual update http://jubakpicks.com/2011/01/18/6215/ to the Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ . CEMEX is an original member of that portfolio. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of CEMEX as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.  I’ll have the fund’s portfolio as of the end of December posted in a few days.

Cheniere Energy (LNG)

May 23rd, 2013

On May 20 I wrote http://jubakpicks.com/2013/05/20/a-second-lng-plant-gets-a-u-s-export-license-the-best-stock-pick-on-that-news-is-chicago-bridge-and-iron/ that that the decision to award only the second license to export liquefied natural gas from the United States to the Freeport project in Texas wouldn’t hurt Cheniere Energy (LNG), the holder of what had been the only permit until May 20. Freeport projects that it will be able to ship gas in 2017, I noted, which just draws a line under Cheniere’s projected ship date of 2015.

I’ve spent a few days thinking about that post—in which I added stock pick Chicago Bridge & Iron (CBI), the leading candidate to get the work to build Freeport, to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ And I’ve concluded that I missed part of the Freeport story, which adds even more value to shares of Cheniere Energy. You see Cheniere has a second proposed LNG plant to go with the Sabine Pass plant in Louisiana. This one, in Corpus Christie, Texas, doesn’t yet have an export license. The Department of Energy permit for Freeport with its crucial finding that the export of U.S. natural gas is consistent with the public interest raises the odds that the Corpus Christie LNG plant will get an export permit too. The ruling also increases the odds that Cheniere Energy will be able to easily secure the $3 billion to $4 billion in debt financing the company is currently seeking. Doing that deal as debt rather than equity would prevent shareholder dilution.

All this makes me even more certain that adding Cheniere Energy to my long-term Jubak’s Picks portfolio http://jubakpicks.com/jubak-picks-50/ on May 3 as part of my annual revision to that portfolio was the right move.

Right now by date of filing with the Federal Energy Regulatory Commission (FERC), Cheniere’s Corpus Christie plant stands fourth in line of LNG projects awaiting approval from the Department of Energy. Cheniere’s ability to fund production trains 1-4 at Sabine Pass and to line up contracts for the full capacity of those trains certainly won’t hurt Corpus Christie in front of FERC and the Department of Energy. (Cheniere is now moving to add an additional two trains at Sabine Pass.)

Right now it looks like Cheniere has a two- to four-year window before enough competitors in the United States and Australia start production to significantly reduce the extraordinary premiums that U.S. and Australian LNG will earn in Asian markets.

In the near-term, say the next 12 to 18 months, the driver for the price of Cheniere Energy shares will be progress toward production at Sabine Pass and the rising odds that the company will get a second Department of Energy permit for Corpus Christie. Shares of Cheniere Energy traded at $28.55 a share when I added them to the Jubak Picks 50 portfolio on May 3 and closed at $29.92 on May 23.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Cheniere Energy as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Update Cisco Systems (CSCO)

August 21, 2009

Ever since this recession began Cisco Systems (CSCO) CEO John Chambers has shown an unexpected talent for taking all the joy out of his company's earnings report. And he did it again when, on August 5, Cisco Systems reported earnings of 31 cents a share for the company's fiscal fourth quarter that ended on July 25.  That beat Wall Street estimates by two cents a share. (Both Cisco's and Wall Street's numbers exclude things like stock compensation that I think should be deducted as costs but, hey, that's how Wall Street scores the quarterly earnings game.) Revenue did fall 18% from the fiscal fourth quarter of 2008, but still beat Wall Street estimates of $8.51 billion by about $300 million. Gross margins held steady at 64%. But investors who might have hoped that Chambers would call this quarter the bottom or forecast a looming turnaround would have been disappointed. "If we continue to see these positive order trends for the next one to two quarters, we believe there is a good chance we will look back and see that the tipping point occured in our business" in this quarter, he said in a company statement. Chambers' tempered tone is about right for the short-term given that most of Cisco's ability to beat earnings targets comes from cost-cutting. The company set out to cut about $1 billion in annual costs by July and it looks like  the company met or exceeded that target. But it also masks the way that Cisco's very positive long-term story has gotten even stronger during the recession. Unlike some cash-strapped competitors, Cisco will come out of this down turn sitting on a mountain of cash. It finished the quarter with $35 billion in cash and cash equivalents. That's up from $26.2 billion a year ago at the end of the fiscal July 2008 quarter. That cash stockpile provides plenty of fuel to drive Cisco's traditional growth by technology acquisition stategy over the next year or more. Over it's history Cisco has been remarkably successful in using its cash to acquire smaller companies with promising technologies and then using its marketing muscle to push those technologies out into the market. Having all this cash is especially valuable now because even if the recession is winding to an end, many small technology companies will run out of cash before their sales can turn up or before the financial markets become hospitable again to risky equity offerings. But Cisco's cash isn't just an edge in going after small companies and small but fast growing markets. The company is using its muscle to push into markets controlled by former partners. For example, Cisco Systems has started selling its Unified Computing System, a mix of computer servers, storage devices, and networking gear, in an effort that pits it head to head against Hewlett-Packard (HPQ) and IBM (IBM), long-term partners in selling Cisco's networking equipment. Cisco's cash is an especially important weapon in that battle since it enables the company to finance sales, a necessity when potential customers are struggling to find financing. The battle with IBM and Hewlett-Packard won't be won easily. Those companies are one and two, respectively, in the 53 billion global server market, according to the research by Gartner. Cisco doesn't show up on Gartner's rankings.

Update Coach (COH)

July 28, 2009

Coach (COH) reported that its earnings for the June quarter matched Wall Street expectations at 43 cents a share. That's about the last good news for the fourth fiscal quarter that Coach had to announce, however.  Coach certainly hasn't escaped the collapse in retail sales--although it is weathering the downturn better than most. For investors who can get past the bad news of this quarter, though, the stock remains a compelling way to profit from the increasing number of middle-class consumers in China. That's why I put the stock in my book, The Jubak Picks, and why it stays in that portfolio. Here's more of the bad news for the recently concluded quarter. Net income dropped to $145 million from $214 million in the June quarter of 2008. Revenue held up better but still fell about 1% to $778 million from $782 million in the 2008 period. Gross margin dropped to 70.4% from 75.9% in the June quarter of 2008, and operating margin tumbled to 28.2% from 35.9% in the June quarter of 2008. Comparable store sales in North America declined 6.8% in the quarter. Sales in Japan were flat on a constant currency basis. The one bright spot was China--and that's especially good news because Coach and investors are counting on that country for future sales and earnings growth. Comparable store sales climbed at a "douible-digit rate," the company said. Whatever that means exactly, it was enough to make the company accelerate its planned store openings there. The company told investors that it now plans to open 15 new stores in China, most of those on the mainland instead of Hong Kong, in the 2010 fiscal year that ends in June 2010. (Full disclosure: I own shares of Coach in my personal portfolio.)

Update Corning (GLW) in my long-term Jubak Picks 50 portfolio

June 5, 2012

If Mr. McGuire were to whisper to Benjamin his “just one word” of advice today, instead of 1967, it would be not “plastics” but “glass.” And the stock that he’d tell Benjamin to buy would almost certainly be Corning (GLW). (Corning is a member of my Jubak Picks 50 long term portfolio http://jubakpicks.com/jubak-picks-50/ ) This is a golden age for glass. New larger, brighter, and more detailed displays require larger and purer glass. The world’s army of mobile devices requires new tougher but thinner glass for screens. Reducing energy use in brighter LCD and OLED displays requires more uniform and flexible glass to use in a new generation of backplane substrates that allow the use of smaller and faster transistors. And from new product announcements this week and from teasers about new products at recent company presentations, it’s clear that these high technology glass products will be followed by others. On June 4, for example, Corning announced that had shipped samples of Willow Glass to device manufacturers that include (AAPL) and Samsung. The glass is so flexible that it can be manufactured in a roll and wrapped around a device or a structure. The company is hoping that Willow Glass will start showing up in consumer products in 2013. Further out, according to recent company presentations are such products as an anti-microbial glass. Corning has always been a stock that you buy as much for its tomorrows as for its products today. It is one of the world’s great research and development companies. Sometimes, frankly, the company gets ahead of itself, building out capacity for a new product—optical fiber, for example—faster than the market can ultimately absorb it. Sometimes the market’s uptake of a new Corning technology such as the extra tough Gorilla Glass for mobile displays lags behind the company’s enthusiasm for a technology. And sometimes, and this becomes a real problem during a market slump, Corning convinces itself that the superior technology of its glass will keep sales growing even as the company’s customers are seeing their end sales drop. Those moments give you your buying opportunities in the stock—if you can wait on the sidelines as the company eventually comes around to rationalizing supply and demand. I think you’re looking at one of those now. The big deal for Corning over the past year or so has been a global oversupply that has depressed the price of display glass. The company’s display technologies segment, which accounted for about 40% of sales in 2011, saw prices and sales slump as the global economic slowdown reduced demand for flat screen displays especially in the TV and PC segments. That slump occurred even though Corning’s proprietary manufacturing processes allow it to produce larger, thinner and higher-quality pieces of glass than competitors. That had allowed Corning and its 50%-owned subsidiary, Samsung Corning Precession, to grab more than 50% of the display glass market. But that market share—and Corning’s high margins in this business—didn’t protect the company’s display revenues when the global economic slowdown ate into consumer purchases of TVs and PCs and Corning’s customers stopped ordering as they worked down inventories. That slump is forecast to gradually end in the second half of 2012, which should lead to stable margins by the end of the year and some margin expansion in 2013. According to Standard & Poor’s sales will grow by 4% in 2012 and 7% in 2013. Margins and earnings should pick up in 2013 because Corning will have completed spending on upgrades and additions to manufacturing capacity. Wall Street projects that 2012 will mark the earnings trough for this cycle at $1.34 a share and that 2013’s projected 14% earnings growth will begin the recovery to the 9% or so growth earnings growth rate that the company averaged over the last five years. The stock now trades at just 7.6 times trailing 12-month earnings and at 9.1 times projected 2012 earnings. The company showed $6.8 billion in cash and cash equivalents on its balance sheet at the end of the March 2012 quarter and $3.1 billion in long-term debt. The shares pay a 2.45% dividend. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Corning as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Update Cummins

June 27, 2015

Update:  April 28, 2015. Today, April 28, Cummins (CMI) announced a penny a share miss on first quarter earnings of $2.14 a share and a disappointing 6% increase in revenue to $4.71 billion that nonetheless beat analyst forecasts of $4.53 billion. For the year, Cummins said revenue would grow by just 2% to 4% to $19.6 billion to $20 billion versus a consensus estimate of $19.81 billion. Hardly tearing up the track. The stock is in fact down 5% over the past 12 months. (Cummins is a member of my 12-18 month Jubak’s Picks portfolio and my long-term Jubak Picks 50 portfolio.) But with a company like Cummins, which has successfully navigated the ups and downs of the cyclical market for diesel engines, what you should pay attention to aren’t the results in those down parts of the cycle. Instead you should check to see that the company continues to follow the very simple formula that has driven its success up cycle and down cycle—and to see that formula is still working. In the case of Cummins a simple rule for those times when the stock is lagging the market might be “If it ain’t broke, buy it.” Cummins is currently cheap with a trailing 12-month price to earnings ratio of 15.4 and a forward PE of 13.62. I don’t think the current weakness in the global economy that has slowed growth at Cummins is likely to end in 2015 so I’d certainly understand if you wanted to wait until you saw signs that the cycle was about to head up. (And it’s the weakness in that global economy that leads me to reduce my target price for Cummins to $154 by December 2015 from the previous $181.) On the other hand, I’ve personally missed the turn of the cycle on Cummins more than once and the shares do pay a dividend of 2.2%. That’s higher than the 2% yield on 10-year U.S. Treasuries so you do get paid something if you’re early. Update: April 28, 2015:  It’s pretty clear what was wrong with revenue and earnings at Cummins this quarter and, according to company guidance, what will be wrong for the rest of 2015. A strong U.S. dollar whacked revenue and earnings. And weak global economic growth in general and in Brazil and China in particular offset solid growth in North America and a decent recovery in Europe. But Cummins continued to execute. Here’s what I saw in the quarter that was more important than the cyclical swing in revenue and earnings. Cummins continued to pick up market share in key markets. The company already has a 72% share of the North American market for medium-duty truck engines and forecasts a 36% share of the North American market for heavy-duty truck engines in 2015. Internationally, Cummins saw its share of the diesel truck market grow to 12% from 10% in the quarter. Gains in market share in China compensated for anemic growth in that market in general. For example, Cummins said it was on track to deliver more than 100,000 light-duty truck engines in China this year. That would be growth of 28% in a market that is projected as flat for the year. A second part of the Cummins formula is to invest—even in a weak market--in technology and quality improvements that cut costs. Warranty costs are one measure of that effort since fewer engines sent back for repairs at company expense is a good measure of product quality. In its conference call Cummins said that it expects warranty costs to fall in the second half of 2015 from the first half of this year and from the last half of 2014. This attention to growing market share and cutting costs means that Cummins is a cash flow cow. The company has used that cash flow to grow dividends at a compounded annual growth rate of 34% over the last five years. (It has also bought back $1.5 billion in stock over the last three years.) With the payout ratio at just 34% of free cash flow, Cummins has plenty of room to keep the dividend growing. The company has a history of announcing dividend increases in May. In May 2014 Cummins raised its quarterly dividend to 78 cents a share from 62.5 cents. The shares closed at $137.25, down 1.44%, on April 28.

Deere

December 14, 2014

If you want to get really, really depressed about the near-to-medium term prospects for the agricultural sector, may I recommend Deere’s (DE) December investors presentation? (It’s posted on Deere’s web site at http://investor.deere.com/files/doc_financials/Investor-Presentation-Dec14-FINAL.pdf ) On the other hand, if you want to read a strong case for Deere’s own long-term prospects, I’d recommend the same document. This stock remains in my long-term Jubak Picks 50 portfolio because of that case http://jubakam.com/portfolios/ . The depressing news? In fiscal 2015 (which ends in October 2015) Deere expects sales of agricultural equipment across the sector to be 25% to 30% lower than in fiscal 2014 in the U.S. and Canadian market, 10% lower in the European Union, 10% lower in South America and slightly down in Asia. Sales of large agricultural equipment—the big tractors that Deere sells, for example—will drop more than the sector as a whole with big equipment sales falling 40%. That will bring the two-year drop in big equipment sales to about 60%. Deere expects that it’s sales will hold up slightly better than that—with sales down 15% in 2015—but we’re still talking about a crushing downturn in the sector. Credit Suisse calls it one of the worst U.S. farm downturns ever—made worse by declines overseas. And yet—Wall Street analysts expect Deere to earn $5.53 a share in fiscal 2015. Granted that’s a huge drop 37% drop in earnings per share from fiscal 2014’s $8.75. But it’s still a long way from a loss—and a pretty stunning accomplishment in the midst of a 60% drop in sector sales. In fiscal 2016 Credit Suisse expects Deere’s earnings per share back to near the $8.75 of fiscal 2014. That’s a pretty good performance for a horrendous sector downturn. But if you’re looking for hope rather than just the assurance that things aren’t as bad as they could be, I’d suggest reading deeper into the Deere presentation. The company spends a couple of slides talking about integrating data from farm operations with its equipment. Granted that doesn’t pop right out at you as a big innovation, but it is. And it puts Deere, along with other sector players such as Monsanto (MON), at the leading edge of a big trend in farming. With the cost of farm inputs—fuel, seed, fertilizer, water, etc.—soaring, farmers are looking for companies that can not just sell them products but that can also do the heavy Big Data number crunching that lets them use those products most efficiently. That’s why Monsanto has moved into the weather data business through the 2013 acquisition of The Climate Corp. for $1.1 billion. And why Deere acquired Brazil’s Auteq Telematica on December 4. Auteq Telematica is an onboard software and computer company that specialized in technology solutions for sugarcane growers. The deal expands Deere’s presence in Brazil and in the sugarcane industry, but just as important it is an example on the growing importance of Big Data services in the farm sector. Deere, according to its press release on the deal, sees the acquisition as a way to help customers leverage the data produced by onboard computers used in the equipment that plants, cultivates and then harvests the sugarcane crop. The important trend here is to put data collection and crunching together with farm equipment in order to increase the productivity of farmers. Always glad to see a company pushing the envelope like this in the middle of tough times for the sector. As with that strategy at Cummins (CMI), another long-term Jubak Picks 50 stock, competitors have to match these moves while they are stressed by the sector downturn, or give up future market share to Deere. I think there’s a good likelihood that Deere will be cheaper sometime in 2015 as investors get discouraged by a farm sector downturn that is likely to drag on and on and on. Today, December 9, I'm rating these shares "Neutral" on price. I’d like to get these shares at $80 or lower. They closed on December 9 at $89.20.A horrible

Stock pick DuPont is highlighting its seed business by subtraction

December 11, 2013

E.I. du Pont de Nemours, hereafter DuPont (DD), is a clear case of addition through subtraction. After selling its performance coatings unit—which makes paints for cars and other industrial uses—for $4.9 billion in February, and after the planned spin off of its performance chemicals unit—which makes titanium dioxide pigments used in paint and paper, Teflon, and fluorochemicals—DuPont will look like a totally different company. By subtracting the coatings and chemicals businesses, DuPont will have increased the percentage of revenues coming from such faster growing units as agriculture, nutrition and health, and industrial bioscience. For example, the agriculture unit, which includes Pioneer Hi-Bred, the world’s largest seed company, will go to 37% of revenue from 24% in 2011. Acquisitions and divestitures have added faster growth and subtracted slower growth. For example, the acquisition of enzyme company Danisco added a business with long-term revenue growth projected at 7% to 9% a year; the spin off of the performance chemicals unit will subtract a business with a projected revenue growth rate of 3% to 5%. The resulting stripped down company looks more like a pure play seed company with major businesses in nutrition and health and in industrial bioscience attached. What would you rather own? A chemical company that makes paints or a seed company that developed the AQUAmax line of drought resistant seed corn? Because investors still think of du Pont as a chemicals company, the shares trade at a substantial discount to those of a stock such as Monsanto (MON) that is thought of as a pure play seed company (despite the drag of its big agricultural chemicals business.) DuPont trades at 16.1 times forward earnings per share while Monsanto trades at 21.3 times forward earnings per share. DuPont also pays a 2.93% dividend yield. (The stock is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of du Pont or Monsanto as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.

After the eBAY/PayPal split, I’d keep PayPal

July 6, 2015

Update: July 6, 2015. PayPal began trading today on a “when issued” basis ahead of its July 20 split from eBay (EBAY). eBay shares are now available in two versions—with or without rights to PayPal. Shareholders will get one share of PayPal for each eBay share at the split. At today’s “when issued” price, PayPal had a market valuation of about $45 billion or approximately 60% of eBay’s pre-split valuation. I own eBay in my long-term 50 Best Stocks in the World portfolio. After the split I’m going to hold onto my shares of PayPal and sell my shares of eBay. Why that decision? PayPal is growing faster than eBay, which faces huge competition in ecommerce from the likes of Amazon (AMZN) and Alibaba (BABA). Revenue at PayPal grew by 19% in 2014 and customers increased by 15%. Not that PayPal doesn’t have hefty competitors of its own in the payment market in Google (GOOG), Apple (AAPL), Alibaba, and someday soon Amazon. But at the moment, all that competition is expanding the market for electronic payments as everyone from Apple to Square to PayPal scrambles to add customers. In the next few years at least the growth in the market as a whole will be enough to power PayPal’s own growth. And, in addition, the company has a pretty clear path to adding transaction volume as, first, its split from eBay opens up partnerships with merchants who didn’t want to do business with the payment platform of competitor eBay and, second, as PayPal builds its international presence. The deal last week to buy Xoom (XOOM), an international electronic remittance company, for about $900 million in cash, is a good indicator of PayPal’s strategic direction. (As someone who started to use Xoom for an international cash transfer and then never completed the transaction because it didn’t seem secure, I see the upside potential in adding PayPal’s brand to Xoom.) Recent pre-split acquisitions include Venmo, a money transfer app for splitting the cost of a meal or rent, and Braintree, the developer of a mobile app to automate online payments. PayPal’s ability to grow its mobile payments business is a key to future growth rates. The split does carry risks for PayPal. The eBay marketplace provided a captive audience for PayPal transactions and I’d expect some attrition after the split. But the eBay market place accounts for less than 30% of payment volume now and is forecast to fall to less than15% in three years. The split will leave PayPal with $6 billion in cash for acquisitions and PayPal itself could be an acquisition candidate as competitors try to build volume. Either way, I see an independent PayPal as a good investment for sharing in the growth of the electronic payments market.

Buy Enbridge (ENB)

December 30th, 2008

Enbridge has an impressive number of pipeline projects set to start pumping up revenue in the next two to three years. The Alberta Clipper Expansion is projected to deliver heavy crude from Alberta’s oil sands to Wisconsin by mid-2010. The Southern Access Expansion will deliver heavy crude to Chicago and southern Illinois from Wisconsin in 2009. The Clarity pipeline will transport natural gas from the Barnett Shale and Anadarko Basin in Texas.

Update ExxonMobil–feeling the pinch

February 4, 2016

Update February 4. On Tuesday, February 2, ExxonMobil (XOM) saw its shadow. The oil and gas industry is looking at six more weeks of winter. Maybe way more than that for the oil services sector. For the fourth quarter of 2015 Exxon reported earnings of $2.78 billion, a 58% drop from fourth quarter 2014 earnings. The figure was still above Wall Street expectations and the profit for the quarter, lower though it was, stands in stark contrast to the losses reported by Chevon (CVX) and BP (BP) for the period. Losses at those companies came to $588 million and $2.2 billion, respectively, for the quarter. Simply showing a profit doesn't mean, however, that Exxon isn't pressing ahead with plans to cut capital spending. Capital spending for 2016 will be 25% lower to $23.2 billion after a 19% cut in 2015. Exxon's business behaved the way that an integrated oil major is supposed to behave. Earnings from refining and marketing (retail gasoline sales) doubled in the quarter from the fourth quarter of 2014 to $1.4 billion from $479 million as margins for those units climbed. That helped offset, to a degree, the 84% drop in profits from oil and gas production. Exxon's capital spending budget was conservative even before the projected cuts for 2016. With this recent reduction Exxon's budget for 2016  of $23.2 billion is below Chevron's projected $26.6 billion budget. Cash from operations in all of 2015 totaled $30.3 billion. After capital spending and share repurchases Exxon had to borrow to cover its dividend payout of $12.1 billion for 2015. That's not a problem for a company like Exxon with its deep credit lines, but it does suggest how tight things must be for oil producers with less access to bank credit. Exxon is a member of my Jubak Picks 50 long-term portfolio where it's a core member of the commodities trend silo. I'd say that it's still early to buy more shares of ExxonMobil--I think we've got one more move lower in this sector before oil prices stabilize and then move up by $10 or $15 a barrel by the end of 2016--but I'd be looking to add to positions sometime before the middle of 2016. For oil service stocks, I think the continued budget cutting at Exxon--even Exxon--suggests that the turn is further out and the pain before that turn is still substantial.

Update Flowserve (FLS)

August 26, 2009

Turns out the pumping business is a very good place to be in this economy. On July 29 Flowserve (FLS) announced second quarter earnings of a better than expected $1.92 a share and raised its earnings forecast for 2009. The company increased its target for 2009 earnings to $7.15 to $7.75 a share from an earlier target of $6.75 to $7.50. Sales climbed to $1.09 billion. That was an increase of 6% from the first quarter of 2009 but a decrease of 6% from the second quarter of 2008. Taking out the effect of a stronger U.S. dollar, on a constant currency basis sales climbed 4% year-over-year.  Bookings, a key measure of future sales trends, climbed by 7% from the first quarter of 2009. The company still has a way to go, though, to recover all the ground it has lost in the global slowdown: bookings decreased by 21% (13% on a constant currency basis) from the second quarter of 2008. The company’s order backlog was a little over $2.7 billion at the end of the quarter. The book-to-bill ratio, which compares the value of new orders to the value of orders shipped, came in at 0.95. Investors can see some very promising growth ahead—in 2010 I’d estimate—in preliminary orders from solar thermal power operators (which concentrate sunlight on a central tower to generate electricity) of $31.5 million for boiler feed water, condensate, cooling water and molten salt pumps. And in $45 million in orders for valves to be used in two nuclear power plants now under construction in the United States. (Full disclosure: I own shares of Flowserve in my personal portfolio.)

Buy Fluor (FLR)

February 8th, 2011

Doing some catch up on this stock. I added Fluor (FLR) to the Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on January 18, but this is the first time I’ve had an opportunity to explain why in detail or to actually add it to the portfolio. I’m working on explaining the other sells and buys announced on January 18 from that group over the next week or so.

It’s only one deal but it’s an important one: Last month Fluor (FLR) announced that it had won a $3.5 billion contract to build a liquefied natural gas project in Australia.

Why is one deal so important? First, because it demonstrates that Fluor can sign big energy infrastructure deals in the face of intense competition from Asian engineering and construction companies—in the Asian companies’ backyard. Second, the deal will add to a near record order backlog at the end of the third quarter. (Fluor reports its fourth quarter numbers on February 23.) Third, most Wall Street estimates for Fluor’s earnings in 2011 are based on a shift in the mix of the company’s projects from energy to lower-margin mining work. Standard & Poor’s, for example, sees revenue climbing at a double digit rate in 2011—after a 5% decline in 2010—but with operating margins falling from the 5.2% rate in 2010 on a shift toward mining and away from energy. More energy projects in 2011 would push margins above analyst estimates. And I’d say there’s a good chance for higher than expected levels of energy work with oil prices pressing $100 a barrel at the moment. (Brent Crude futures traded at $99.29 a barrel on February 7.)

Fluor looks to be a major beneficiary of the huge surge in capital spending in the oil and gas industry (For example, Chevron has announced a $26 billion capital spending budget for 2011, up from a $21.6 billion budget in 2010), in the mining industry (Rio Tinto, for example, reports that it will raise its capital budget for 2011 to $11 billion from $5 billion in 2010), and in infrastructure spending by governments from China to Brazil.

New Fluor CEO David Seaton, who just took over the top slot, says that Fluor can double its sales and order backlog over the next ten years. There’s a measure of the new guy’s desire to rally the troops in that prediction, but Fluor actually shouldn’t have a big trouble in reaching those targets. Revenue went from $9 billion to $22 billion from 2001 to 2009.

The shares aren’t cheap at the moment trading at 21 times trailing 12-month earnings per share. The market seems to be looking past a projected 45% drop in earnings per share in 2010, caused by delays in some projects due to a spotty global economic recovery, to a projected 60% increase in earnings for 2011. In November the shares sold off on the company’s earnings report—stocks that have outperformed the market and then miss a quarter tend to do that. If you don’t own shares or want to add to a position, you might wait for something similar after the February 23 earnings report to give you a good buying opportunity.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Fluor as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Update Freeport and mining sector

January 12, 2016

Update: January 11. News that Arch Coal (ACI) had filed for Chapter 11 bankruptcy under the weight of $4.5 billion in debt didn't come as a surprise yesterday. Granted the shares fell 31% in the session before trading was halted for news but the stock had already dropped to 83 cents at yesterday's close. And it certainly wasn't surprising that the news from Arch Coal took down shares of other coal companies. Peabody Energy (BTU) plunged 20%, for example. The problem of severely lower demand for coal--plus longer-term pressure to move away from coal in electricity generation in order to combat global warming--has hit all coal companies so it's not surprising that a bankruptcy filing from Arch Coal would ripple through the sector. What is surprising--to me anyhow--is now far those ripple extended yesterday given how much damage has already been done to many companies operating in what can most broadly be defined as the "mining sector." Mining equipment big dog Joy Global (JOY) fell 6.27% for the day even though it was already down 79% for the last 12-months. Copper miner Freeport McMoRan Copper & Gold (FCX),which had already suspended its dividend last month and where shares are down 80% over the last 12 months, fell 20%. I think that it's safe to say that we're seeing another ratcheting down of expected revenue and earnings for this wider universe. JoyGlobal didn't fall so far yesterday, for instance, because it does so much business with Arch Coal that a bankruptcy filing by that company would have a huge effect of sales and earnings at the mining equipment maker. The drop reflects a belief that Arch won't be the last bankruptcy filing and that indeed the mining sector is about to enter a period of even greater financial stress which sees a significant number of producers following Arch to bankruptcy court or something worse. So what do you, as an investor, do about that possibility. It's be no means a certainty but I do think it's likely. The analysis I laid out for the rising financial stress on oil producers in 2016 as bank lending gets tighter and as hedges expire applies to other commodity sectors too. (On my subscription site JubakAm.com see my post http://jubakam.com/2015/12/sector-monday-why-the-saudis-will-win-and-then-lose-the-oil-wars-in-2016/.) Unless China's economic growth rates turn around quickly, which I think is unlikely, then 2016 is going to be ugly indeed. But at the same time I've also noted that some of the best companies and stocks are now trading at prices that are so low that they constitute, for all intents and purposes, extremely long-dated options. Given how much uncertainty there is about when a recovery in demand might occur--and even more uncertainty about when financial markets might start to anticipate a recovery. (And, of course, there's the problem/opportunity of potential anticipated recoveries that turn out to be false dawns.) Way back in 2015 when Brazilian iron ore miner Vale (VALE) was flirting with a drop below $4 a share on its ADRs, I suggested that long term investors consider adding a position of this member of my long-term 50 Stocks portfolio somewhere around $3.70 to $3.20. Well, today the American Depositary Receipts fell another 2.3% to $2.54 per ADR. Vale is now down 68.7% for the last 12 months and 22.8% for 2016 alone. I think that $2.54 for the world's low cost producer of iron ore is a good price--even with all the turmoil in Brazil and all the extra capacity coming on line from Vale and its peers over the next few years. Is it the best price we're conceivably going to get in this commodity recession/depression? Doesn't look like it and I'd be tempted to wait longer for an even better price. However, $2.54 is a reasonable option price for Vale. But only because, as I read the company's balance sheet, it is extremely unlikely (never say never in Brazil these days) to go the way of Arch Coal. Vale at $2.54 is an option worth buying because the company is almost certain to be around come the turn in commodities. I'd say the same thing about Freeport McMoRan and about BHP Billiton (BHP) among the stocks in the long-term 50 Stocks portfolio. Other commodities companies I am not so sure of and after today's market reaction to the Arch Coal news I think it's worth going through every commodity stock you still own to calculate the odds of the company being around so you can cash in those cheap options. I'm doing that right now on the 50 Stocks portfolio and I'll have recommendations over the next few days on which "long-term commodity options" in that portfolio aren't worth the risk of holding through 2016.

Update General Cable (BGC)

August 7, 2009

Looking for the dark side of the recovery in commodity prices?  Look no farther than the second quarter earnings reported by General Cable (BGC) on August 5. The company did indeed beat Wall Street earnings estimates by 20 cents a share but that doesn't mean that earnings were actually good in the quarter. Adjusted earnings in the quarter fell to $1.02 a share from $1.37 in the second quarter of 2008. Operating income dropped 35%. Revenue came up short of projections at $1.13 billion instead of the $1.21 consensus. That was a drop of 17% from the second quarter of 2008. But the worst was yet to come.  The company told investors to expect just 45 cents to 55 cents in earnings per share in the third quarter instead of the 72 cents a share Wall Street was looking for. Revenue will drop too, but not nearly as sharply: The company expects to miss Wall Street revenue estimates for the quarter by $80 million to $130 million. Why the much bigger drop in earnings than in revenue? That's where the dark side of the commodities rally comes in. As a maker of all kinds of cable, General Cable is a huge buyer of copper. And copper prices have been on a tear in 2009. Copper sold for roughly $1.50 a pound at the beginning of the year. The metal had tacked on about 50 cents a pound, a 33% increase, by May. And recently on heavy buying from China and heavier speculation that Chinese buying meant the global economic recovery was at hand, it climbed another 75 cents a pound to close at $2.75 on August 6. That's a move of $1.25 a pound or 83% in less than eight months. No way that General Cable could pass much of that on to its customers that quickly. Even if the global recovery is just around the corner, General Cable's customers are still struggling to sell their product at current prices. A price hike big enough to cover the company's costs would dry up orders overnight. So the company will eat a good percentage of the jump in raw materials and wait for a return to economic growth--or a decline in copper prices as speculative fever subsides--to bring margins and earnings back up. Fortunately, for long-term investors--and this stock is one of the 50 long-term picks in my book The Jubak Picks--General Cable has managed through commodity booms and busts  before. Despite a U.S. recession and a global slowdown, the company managed to stay on the right side of cash flow (Operating cash flow hit $152 million in the second quarter) and to actually reduce its debt load by about 10% in the quarter. With that kind of financial base the company has been able to continue its strategy of building market share through acquisition. Nothing as big as the buy of the cable business of Freeport McMoRan Copper and Gold (FCX). That was a before the recession deal. This past quarter General Cable acquired Gepco International, a maker of high-end broadcast cable products. (Full disclosure: I own shares of General Cable in my personal portfolio.)

Buy General Electric (GE)

December 30th, 2008

The one-stop-shop for industrial infrastructure. Need a locomotive, steam turbines, a power plant, a nuclear reactor or just something mundane like a hundred jet engines? General Electric can sell it to you. And infrastructure is the fastest growing part of GE’s business.

Update Google (G OOG)

July 19, 2011

Just in case you were in danger of forgetting, Google’s (GOOG) second quarter earnings report on Thursday, July 14, should remind you: It’s good to be out in front of the market, but as an investor you don’t want to be too far out in front. I can pick a ton of holes in Google’s competitive position and the challenges it faces over the next couple of years. But the market right now doesn’t want to hear about anything so far off. The news that counts is that Google is producing great numbers from its current dominance of the Internet search space. For the second quarter Google reported earnings of $8.74 a share (excluding one-time items). That was 91 cents a share above the Wall Street consensus estimate of $7.83. Net revenue (for Google you have to subtract the cost of acquiring traffic from the revenue the traffic brings in) climbed 26% from the second quarter of 2010 to $9.03 billion. (Wall Street was looking for $8.63 billion.) Operating income grew to $3.32 billion for the quarter from $2.67 billion in the second quarter of 2010. Analysts who dinged the company last quarter on rising costs were relatively quiet on that front this quarter even though operating expenses climbed 49% from last year. Operating expenses increased to 33% of revenue from 29% of revenue in the second quarter of 2010. And recent criticism that the company was throwing too much cash at too many ideas was also muted. The focus was on things that are working—the Android operating system and the Chrome browser—and not on things like the company’s effort to develop a driverless car that have drawn attention in recent quarters as signs that the company lacks discipline. But that’s what happens when a company reports earnings that kill on analysts’ favorite metrics. The company’s 32% gain in quarterly revenue was a faster growth rate than that for the global search market as a whole. Given that Google’s market share for search held steady this quarter, the increase in revenue was a sign that Google was converting more of its traffic into dollars. For core search and YouTube, paid clicks grew by 18% from the second quarter of 2010. That’s an impressive number to analysts who have been fretting at the valuations of Internet companies LinkedIn (LNKD) and wondering if these companies could turn traffic into revenue. All that said, from a longer-term perspective this wasn’t the greatest quarter for Google. The company lost a bidding war against the Rockstar Bidco consortium to buy 6,000 patents that once belonged to Nortel Networks. This follows Google’s loss of another patent auction last year to another consortium in bidding for 882 patents owned by Novell. The winning consortium in each case included Apple (AAPL) and Microsoft (MSFT). The losses point to a troubling weakness at Google: the company owns just 600 patents in the United States compared to Apple’s 4,000 and Microsoft’s 17,000. That wouldn’t be a big deal except that a number of critical Android phone makers have either lost recent patent battles to Microsoft or to Apple (preliminarily in the case of Android phone maker HTC.) Microsoft signed a licensing agreement with HTC last year and now collects $5 for every Android phone HTC sells. And Microsoft has sold licenses to four other Android phone makers in the last month or so. The long-term worry for Google—and Google investors--is that this imbalance in patents will work to disadvantage Android and advantage Microsoft and Apple’s phone software and hardware. Not now but somewhere down the road. I’d say it certainly bears watching. But it’s not a big enough worry now for you not to enjoy Wall Street’s love affair with Google’s revenue and earnings growth. In the hours after Google reported results on July 14 and before the market opened for trading the next day, just about every analyst on Wall Street upped his or her earnings estimate for 2011 on the stock. Briefing.com calculates that the total came to an increase of 3.5% in 2011 estimates by the time trading opened on July 15. So worry all you want about Google’s fight with Apple and Microsoft in the quarters and years to come. But enjoy Wall Street’s focus on the earnings here and now. The stock closed today at $594. With Wall Street analysts calling for target prices of $725 to $830, I doubt that Wall Street will rethink its enthusiasm for Google’s earnings growth until we see the $700 a share marker. Full disclosure: I do not own shares of Google, Apple or Microsoft in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple and Google as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/ A full list of the fund’s holdings as of the end of June will be posted this week.  

Update HDFC Bank (HDB)

January 27, 2011

Another day, another interest rate increase from an emerging economy central bank. On January 25, it was the turn of the Reserve Bank of India. The bank raised its benchmark repurchase rate to 6.5% from 6.25%. The Reserve Bank of India raised interest rates six times in 2010 and the benchmark rate is now at a two-year high. I don’t think the Reserve Bank of India is done either. The bank’s most recent projections are pointing to inflation of 7% by the end of the country’s fiscal year on March 31. That’s a huge increase from earlier projections of 5.5% inflation. (The bank is also calling for GDP growth of 8.5% for the year that ends in March. That’s unchanged from earlier projections.) And the Reserve Bank’s projection is very likely low. Inflation in wholesale prices, India’s preferred inflation measure, hit an annual rate of 8.4% in December. Not surprisingly Indian stocks fell on the news of the interest rate increase with the Mumbai market’s Sensex 30 Index closing down 1%. The drop was widespread—Infosys Technologies fell 0.8%, for example--but property and bank stocks were among the shares suffering the biggest declines. Even before the interest rate increase India’s over-heated real estate market was showing signs of slowing. Home registrations in Mumbai, the country’s most expensive real estate market, fell in November to their lowest level in 20 months. (Property prices climbed 30% to 70% across India in 2010.) India’s banking sector is already reeling from a scandal in which officials at some of the country’s state-run banks took bribes to approve loans and it still hasn’t completely recovered from a rise in bad loans during the global financial and economic crisis. Of India’s big private banks the one that worries me most here is ICICI Bank (IBN). The bank had just started to recover from two years of deteriorating credit quality but non-performing loans still made up 5% of the bank’s portfolio at the end of the October quarter. (Contrast that to the 2% non-performing loan ratio at competitor HDFC Bank (HDB) at the peak of its non-performing loan problem in mid-2009.) Higher inflation, much of which is a result of higher food prices, cuts deeply into the purchasing power of India consumers and then ripples out into consumer and corporate loans. I certainly wouldn’t be adding to any bank positions in India until the Reserve Bank gets closer to the end of this interest rate cycle. And I would be actively reducing positions in ICICI Bank right now. HDFC Bank is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of HDFC Bank and ICICI Bank as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.

Buy Infosys (INFY)

December 30th, 2008

One of the four horsemen of Indian information technology outsourcing, Infosys combines fast growth with proven management. Infosys has had to win over global clients that now include 113 members of the Fortune 500. These companies can do business with anyone in the world and the fact that they’re doing business with Infosys should give an investor confidence in the company. In effect, these international clients have vetted the company for you. (Full disclosure: I own shares of Infosys in my personal portfolio.)

Itau Unibanco a hold in my long term portfolio

December 1, 2015

Why do I want to own Itau Unibanco (ITUB)? The company is a growing regional super bank in Latin America, picking up business as the biggest global banks shed assets. It is also likely to pick up asset market share in Brazil as the country’s big state-owned banks pull back in the current financial and economic crisis. Itau Unibanco owns two of the biggest credit card brands, Hipercard and Itaucard, in Latin America with 58 million accounts in Brazil in a region likely to show above average growth in consumer credit after the turn in Latin American economies. And as the largest private bank in Brazil, I think it is likely to pick up market share as state-affiliated banks cut back in and after this crisis. Why don’t I want to buy these New York traded ADRS quite yet? Itau Unibanco has a great record in recent years of sticking with high quality assets and that has kept bad debt ratios from climbing even in the current economic plunge, but I don’t care how good your credit controls are a recession or a potential depression just isn’t good for a bank’s balance sheet. I’m going to keep Itau Unibanco in my 50 Stocks long term portfolio as a long term play on the expansion of credit among a growing middle class in Latin America and on my read on the way that superregional banks like Itau are picking up market share as the biggest global banks sell off assets to meet tougher capital requirements from regulators. (I’d put this in a long-term silo labeled “Rise of global middle class.) But on my new 50 Stocks timing scale I’m going to rate this “Cheap but not cheap enough—Hold. (For more on where the bottom might be in Brazil see my subscription only JubakAM.com post from December 1 http://jubakam.com/2015/12/brazil-could-be-headed-for-an-honest-to-goodness-depression/ On November 13 I wrote that I’d like to buy this around the then bottom of the ADR’s Bollinger Band at $6.46. That means something like another 10% down from the December 1 close at $7.14. That still seems like a good entry to me.

Update Johnson Controls (JCI)

August 31, 2009

The long-term future for Johnson Controls (JCI) is in batteries for hybrid and electric cars, and systems for building-wide energy efficiency. Not that the near-term future is so bad. What with the recovery, slow though it might be, in the global auto industry. Johnson Controls knows how to make auto batteries. Lots and lots of them at once while keeping costs under control. The company has a 35% share of the global lead acid auto battery market after all. And that’s important, as important as technology, when it comes to grabbing a big share of the next generation lithium-ion batteries that will power the hybrid and electric cars of coming decades. Not that the company has ignored technology: it’s joint venture with the Saft Groupe adds key experience in lithium battery systems. Batteries currently make up about 15% of sales, while building efficiency systems account for another 37% of revenue. In the company’s fiscal third quarter, reported in July, Johnson Controls swung to a profit after two consecutive quarters of losses on the strength of cost cutting. Gross margin climbed to 14.9%. The company also told Wall Street to expect stronger profits sequentially in the fourth quarter in both the  battery and building segments.

Update Joy Global (JOY) in my Jubak Picks 50 long-term portfolio

June 1, 2012

Are we all market timers now? What makes me wonder? My reaction to Joy Global’s (JOY) second quarter earning report yesterday, May 31, before the New York markets opened. The company beat Wall Street projections by 8 cents a share on earnings and reported a 45% year-to-year gain in revenue to $1.54 billion (above the $1.43 billion consensus among analysts), but the stock got savaged when the company lowered its guidance for fiscal 2012 to $7.15-$7.45 a share from the prior guidance of $7.40-$7.780 a share. Before that revision, the Wall Street consensus had been $7.64 a share in earnings for fiscal 2012. The stock closed the day at $55.86, near the bottom of its 12-month range of $53.26 to $101.44 a share. The stock is down 34% in the last year and 41% from its February 3 closing high at $95.23. The shares are well below the 50-day moving average at $68.71 and the 200-day moving average at $77.92. In fact they’re pretty much back to where they were at the October 2011 low before the stunning end of the year rally that extended into the first two months of 2012. Did I rush to buy on the bad news? Nope. My first reaction was that I should wait for the shares to move lower. They were cheap today. But they’d probably be cheaper tomorrow. That’s a totally understandable reaction to the current market environment where stocks seem to move lower every day on a steady diet of bad news from Europe, China, Brazil, and the United States; where a horrible May has pretty much wiped out all the gains from the first two months of the year for stock indexes in the United States, and where it’s hard to find a silver lining in any of the gray clouds that still crowd the horizon. But while the reaction is understandable, I’m not sure it’s the correct one. We know from work in the last few decades in behavioral finance that investors have a roughly 2-to-1 preference for avoiding losses to acquiring gains even at the best of times. And this certainly isn’t the best of times. Recently we’ve all taken losses on “good” stocks so that pulling the trigger on anything has become incredibly difficult. Better, our emotions and recent experience tell us, to wait until prices are lower tomorrow. At least that way we won’t suffer another loss. So is the long-term case that I can make for owning Joy Global relevant at all to a buy/sell/hold decision now? (Joy Global is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ ) To decide I’d start first with what the company said in its conference call when it lowered guidance for fiscal 2012. The company sees weakness in markets around the world. The U.S. market is soft. Growth in the EuroZone has slowed. China’s economy looks to be slowing. All this slowing is expected to reduce earnings by 18 cents a share in fiscal 2012. At least that’s the way things look now—they could get worse because uncertainty is so high, the company noted. The U.S. coal market is coping not just with weakness in global economies but also with increased competition from cheap natural gas in the United States. That has reduced production and revenue at mining companies—leading to a slowdown in orders. But the company expects that this market will stabilize by the end of the year. In China, Joy Global said it expects the economic slowdown to bottom in the near term and that its markets there will return to growth due to increased government spending. Investors have heard this before from many companies, of course, and we’re entitled to be skeptical about predictions for a turn in the company’s markets. The company admitted at much in its conference call saying that they don’t know whether the upside will appear in the near or longer term. Second, I’d look at the Wall Street reaction to the news. This uncertainty has left Wall Street target prices all over the map. For example, after the guidance from the company, Barclays cut its target price to $88 from $96. UBS, however, cut its target to $58 from $78. And third, I’d look at whether any of this changes the long-term positive trend for Joy Global. I think here the answer is no. World demand for mined commodities will increase over the long-term and the need to buy more mining equipment to expand mine capacity and production is intact. I’d even argue that any orders lost in the current slowdown aren’t so much lost as delayed. The average age of an electric shovel used in mining is now more than 16 years. At some point aging equipment has to be replaced and I think Joy Global is looking at the same kind of deferred demand that powered revenue and earnings growth at Cummins (CMI) once truck owners decided to upgrade their aging fleets. My conclusion: I would like to own Joy Global for the long-term and so far the short-term hiccups haven’t really changed the long-term story. But experience tells me that once a Wall Street favorite has hit a soft patch like this, the stock is likely to go through a period of further weakness as Wall Street analysts cut their target prices to catch up with the current share price. I’d wait on Joy Global for a while with an eye to watching for when analysts stop cutting their target prices by $20 at a pop and for when the spread among analysts isn’t quite so extreme. I’d put this one on my watch list http://jubakpicks.com/watch-list/ for a few months at this point. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Joy Global as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

LATAM Airlines (long-term) opportunity and (short-term) problem is Brazil

April 1, 2013

It’s all about Brazil. On March 19 LATAM Airlines Group (LFL) reported a 97% drop in earnings for 2012 to just $10.96 million. Higher taxes in Chile, the group’s home market, certainly didn’t help, but the big problem was the cost of integrating the 2012 acquisition of Brazil’s TAM and the continued doldrums of the Brazilian economy. The idea—and in the long term I think this still makes sense—is that LATAM would cement its position as the dominant airline in South America by acquiring TAM, which has roughly a 39% market share in Brazil. But the integration is taking longer than expected and the projected total synergies of $600 million to $700 million from the deal look like they’ll take three to four years materialize. LATAM has been cutting TAM’s capacity in Brazil by shutting down routes that were only 30% to 50% full. That’s had the effect of increasing the load factor in Brazil, but not as quickly as projected thanks to a slow Brazilian economy. LATAM reported that Brazilian passenger traffic rose by just 2.4% in February from a year earlier. Route cuts had reduced capacity by 11.9%. The combination resulted in the load factor for Brazil climbed to 75.1% in February, up 10.5 percentage points. But that improved load factor still lags LATAM’s typical pre-acquisition load factor for its system as a whole. It looks like EBIT margins (earnings before interest and taxes) have started to recover after cratering in 2012. EBIT margins will increase, Wall Street projects, to 5.3% in 2013 and 7.7% in 2014. But that still doesn’t make this stock a very attractive comparative investment right now. LATAM trades at a premium to Panama’s Copa Holdings (CPA)—a forward price to earnings ratio of 24.07 for LATAM versus 12.81 for Copa—but Copa shows a projected EBIT margin of 19% in 2013 and 21% in 2014. I think you need either to let more time pass before buying LATAM—so that the company is closer to those cost synergies and the expected bump in Brazilian passenger traffic from the 2014 World Cup and the 2016 Olympics—or get the stock at a cheaper price. The continued struggles of the Brazilian economy could well provide that lower price this year. I still like this stock for the long run—that’s why it’s a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/  --but I wouldn’t buy it now at this price. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of LATAM Airlines Group as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Update Luxottica (LUX)

March 3, 2011

Not very ambitious, are they? Luxottica, the biggest maker of eyeglasses in the world and a member of my Jubak Picks 50 long-term portfolio, announced that it looking to increase sales in emerging markets by about 20% in 2011, achieve double digit growth at its premium and luxury brands (such as Ray-Ban and Oakley), and grow volumes in China and India by 120% over the next three years. Did I leave out plans to open 40 Sunglass Hut stores in India, 15 in Brazil, and 50 in China? (The company also acquired 70 stores in Mexico at the end of 2010.) Oh, and by the way, on February 28, Italian company, which also makes eye glasses under license for fashion houses such as Prada and Chanel, also reported a 16% increase in sales for the first quarter, a 1.2 percentage point increase in gross margins, and an increase in net income of 88% from the fourth quarter of 2009. For the full year, Luxottica reported a 35% increase in net income on a 14% increase in sales. The company announced that it planned to raise its annual dividend payment by 26% to 44 euro cents a share. At the March 2 closing price that works out to a yield of 1.9%. Luxottica is benefitting from the economic recovery in the United States. The company forecast 2011 sales growth of 4% to 7% in the U.S. retail segment. Sales in North America (about 60% of the company’s total sales) at the wholesale level to stores such as Target (TGT) of fashion-label licensed eyeglasses will grow by 10% to 12% in 2011, the company projects. But the big driver of sales growth will continue to be the world’s emerging markets, where the company has tripled sales in the past six years. Luxottica forecast that it will finish the year with 500 stores in China. Luxottica is in the process of turning itself into a low risk play on growth in the world’s developing economies. Of course, you get all the usual risk from volatile growth in these economies—and in this fashion business the usual risk of piracy and knock-offs—but you also get solid accounting, a management structure that’s relatively transparent, and a manufacturing and design strategy split between China and Italy. (Chairman Leonardo Del Vecchio, founded the company n 1961 and owns 68% of the company’s shares. CEO Andrea Guerra has held that job since 2004.) With an earnings growth rate projected at 16% and a forward price-to-earnings ratio on those projected earnings of 23.5 Luxottica isn’t particularly cheap. But the company’s growth strategy is sustainable in the long run in my opinion. (Which is, by the way, why the stock is a member of my Jubak Picks 50 long-term portfolio.) I think $39 is a reasonable one-year target price for the stock. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Luxottica as of the end of January. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Wash, dry, repeat: Middleby repeats its way to a 37 cent a share earnings beat

February 26, 2014

If more companies were reporting sales and earnings growth like Middleby (MIDD) reported on February 25, the Standard & Poor’s 500 wouldn’t be having such trouble moving above its all time highs. For the fourth quarter, Middleby reported earnings of $2.62 a share, 37 cents a share above the Wall Street consensus and a 29.1% increase from earnings in the fourth quarter of 2012. Revenue climbed 29.4% year over year to $377.4 million versus the $364.9 million consensus among analysts. As of 2 p.m. New York time on February 25 Middleby shares were up $36.07 to $299.78 for a 13.7% gain. Middleby is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/  ) Now I know that this pick is up 107% since I added it to this portfolio on May 3, 2013, but I don’t see any reason to sell here. The reason that Middleby is a long-term pick is that the company has a very simple growth strategy that it can repeat over and over again until the world stops opening and remodeling restaurants. And I don’t see that happening any time soon. Middleby noted in a 2012 investment conference presentation that it has products in one-third of all restaurants. That’s impressive—but it also means that Middleby doesn’t have products in two-thirds of the market. Simple in Middleby’s case doesn’t mean easy to execute. The company operates in a fragmented market for restaurant equipment—which means it has the opportunity to buy up promising small equipment makers. It then uses its relatively larger size to drive down costs at those companies while opening up new markets for their equipment. If you sell pizza ovens to Papa John’s, for example, you can sure sell soda vending machines too, right? But Middleby doesn’t stop there. The goal isn’t simply to cut costs but to drive innovation. In 2012 20% of sales came from new products—the goal is 40% by 2016. New products have 5% to 10% higher gross margins so you can see why Middleby wants to add new products to its revenue stream. Why do Middleby’s customers want to buy these new products? Because they cut costs by being more energy efficient, by reducing cooking times, by producing a more uniform product (thus reducing waste), and by cutting labor costs by reducing cooking staff. Middleby figures that the average time to payback on its new equipment for a customer is less than two years. Middleby’s has got two big sources of growth on its horizon in my opinion (besides that two-thirds of the market that doesn’t yet use its equipment.) First, thanks to a slowish U.S. economy, there hasn’t been a big wave of restaurant kitchen remodelings since 1998-2000. 56% of casual dining restaurant kitchens, for example, haven’t been remodeled since 2000, Middleby calculates. Second, Middleby has lots of room to grow with emerging markets. In 2011 28% of company revenues came from these economies where Middleby is already No. 1 in China, India and Latin America for chain restaurants. Middleby’s new product strategy in these markets isn’t to simply try to force existing U.S.-oriented products on these markets. The company has engineered tandoor ovens and samosa fryers, rice steams, pita ovens and gyro broilers to name a few products for restaurant kitchens in these markets, and then, to stay in touch with these customers it is manufacturing locally. I think you can continue to hold onto this one. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Middleby as of the end of December. For a full list of the stocks in the fund see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.  

Update Monsanto (MON)

September 10, 2009

It’s hard to keep earnings growing when competitors cut the price you can charge for your signature product in half. That’s the reality that’s finally put an end to Monsanto’s (MON) run of eight consecutive years of earnings growth. On September 10, the company, a member of the Jubak Picks 50 portfolio, told Wall Street that earnings for the fiscal year that ends in August 2010 would be just $3.10 to $3.30 a share. Wall Street analysts had projected earnings of $4.26 a share, according to Zacks Investment Research. For the fiscal year that ended in August 2009, analysts had projected earnings of $4.41 a share, a 21% increase from the $3.64 reported for fiscal 2008. The problem is the company’s herbicide Roundup. With the market facing a glut of glyphosate-based generic competitors to Monsanto’s branded Roundup, prices have nose-dived for both the generic and branded herbicides. Competition from generics has cut Roundup prices roughly in half. In 2010 Monsanto expects to sell 250 million gallons of Roundup at $10 to $12 a gallon. In May Monsanto projected 2009 sales of 200 million gallons of Roundup at $20 a gallon. Gross profits from the seed business will climb to $5.2 billion in fiscal 2010 from the $4.5 billion that Monsanto projected in May for fiscal 2009. But that’s not enough to offset the plunge in revenue from Roundup. The bad news on Roundup is likely to give impetus to plans to carve the Roundup business into a separate company and put it up for sale sometime in 2011. (I’m projecting here from reading between the lines in CEO Hugh Grant’s June comments about a sale of the Roundup business after the company finishes its current cost cutting.)

Buy PepsiCo (PEP)

December 30th, 2008

This company delivers like clockwork. Take operating margins: 18% in 2004, 18.2% in 2005, 18.5% in 2006, and 18.2% in 2007–even as the cost of such raw materials as corn and corn syrup soared. Part of the reason is that PepsiCo is the U.S.-based company that has done the best job at becoming truly global. Today steady North American sales get a powerful boost from a fast-growing international business. In 2008, international sales, which make up about 40% of total revenue, climbed by 15%.

Buy Pioneer Natural Resources (PXD) in my long-term Jubak Picks 50 portfolio

January 16th, 2012

I added Pioneer Natural Resources to my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13 (http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ )

To understand why I’m picking this oil and gas company from a long list of alternatives you have to get deep inside the U.S. oil boom going on now.

That boom is a result of oil companies bringing new technologies to bear on fields that were thought to be near the end of their lives or on fields that were thought to be impossible to drill.

Pioneer’s Spraberry field fits that first category. The field is one of the oldest—and largest—in the Permian Basin and despite having drilled in the area since the late 1980s, Pioneer continues to expand production by using technology to drill into deeper formations that has almost doubled estimated ultimate reserves. Pioneer has 900,000 Spraberry acres under lease.

Those estimated reserves don’t include what looks like it will turn out to be a major new Permian play from the deep Wolfcamp Shale formation. This reserve, initially thought to be a relatively small niche play, now looks to be a big horizontal reserve like that found in the Eagle Ford shale. The Wolfcamp reserve continues to look bigger as Pioneer drills more wells.

In the second category—fields that were thought impossible to drill before new technology developed in the late 1970s—I’d put the Eagle Ford shale formation, where Pioneer controls 140,000 net acres. Thanks to a $.15 billion joint venture deal with Reliance Industries in 2010, the company has been able to pursue an aggressive drilling program that targets 1,000 wells over the next five years. That will, the company believes, expand production 34-fold by 2015. About one-third of Pioneer’s Eagle Ford acreage is in formations rich in natural gas liquids and distillates rather than in natural gas.

Pioneer rounds out its Texas big three with 70,000 acres in the Barnett Shale formation.

The relatively high presence of oil and natural gas liquids in these shale reserves has let Pioneer cut new drilling activity to almost nothing on its natural gas fields in Colorado, Kansas and Texas. In the face of depressed natural gas prices, Pioneer has reduced its natural gas production by about 4% while increasing its overall production by 15% in 2011. The company now projects 18% compounded annual production growth through 2014.

If you’re interested in these shares for something shorter than the five to ten year holding period of my Jubak Picks 50 portfolio, I calculate a target price of $115 a share by December 2012. The shares closed at $97.63 on January 13.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Pioneer Natural Resources as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Potash cartel cracks leading to rout in fertilizer stocks

July 30, 2013

The danger was clearly implied in Potash of Saskatchewan’s (POT) July 25 earnings results. Potash volumes were up, the company reported, but prices were down—and the implication was that pricing discipline among the seven companies that control the global potash fertilizer market was under stress. That discipline has now cracked. Totally. Today OAO Uralkali, the world’s largest potash producer, announced that it would end limits on production that have kept potash fertilizer prices from collapsing. The company also said it would end cooperation with Belarus that controlled potash supplies from the countries that once made up the Soviet Union. The result has been a rout for potash fertilizer shares. Potash of Saskatchewan is down 18.7% as of 2 p.m. New York time. Mosaic (MOS) has tumbled 18.4%. The worst-case scenario, as articulated by Mosaic today, is that OAO Uralkali’s increased production will undermine prices in global markets that the cartel was struggling to push up to near $400 a metric ton AND lead to increased imports into Mosaic and Potash’s core North American markets. In my post yesterday on Potash of Saskatchewan http://jubakpicks.com/2013/07/29/stock-pick-potash-volumes-up-but-earnings-down-so-still-too-early-to-buy/ I said that I’d like to see some signs that potash pricing had turned up before buying the shares and that investors might see such evidence in the fourth quarter. I think that advice is even more appropriate today since now we don’t know how much production OAO Uralkali will push onto the market or whether other producers will follow suit. A key question is whether other cartel members will retain some production and pricing discipline or whether everyone will decide to produce as much as they can. For example, Potash of Saskatchewan has idled a lot of production to support prices. Will the company keep that capacity on the sidelines? I think we might have some answers on production levels by the end of the third quarter. I would be extremely reluctant to buy in the sector before I had some more information on that. Potash of Saskatchewan is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ . Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Potash of Saskatchewan as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.

Buy Rayonier (RYN)

December 30th, 2008

Rayonier owns, controls or leases about 2.7 million acres of timberland. Some of those 2.7 million acres–what’s known as higher-and better-use land — are more valuable for development than as timberland. I’d estimate that about 400,000 acres fall into that category. At the June 2009 price of $41 a share, investors who bought the stock were getting Rayonier’s land for about $7,500 an acre. (Full disclosure: I own shares of Rayonier in my personal portfolio.)

Update Schlumberger

October 19, 2015

Let’s take a look beyond this quarter’s revenue and earnings numbers at Schlumberger (SLB) at a really important number, one that shows why I put this stock alongside Cummins (CMI) in my list of cyclical companies that know how to ride the good times and the bad times in their sectors. (For more on industrial cyclicals and timing buys in the sector see my post on my subscription Jubakam.com site from September 28 http://jubakam.com/2015/09/sector-monday-industrials-such-as-cummins-and-schlumberger-are-starting-to-look-interesting-give-them-another-few-weeks/ ) Okay, okay, I’ll start with revenue and earnings for quarter even though, at this point in the cycle for Schlumberger they aren’t terribly significant. For the third quarter revenue fell to $8.47 billion, down 33% year over year and $80 million below analyst forecasts. Earnings per share of 78 cents were down 11% from the second quarter, but beat Wall Street estimates by a penny. (Whoopee! Earnings per share in the third quarter of 2014 came to $1.49.) The number I’d like to suggest that you pay attention to is free cash flow. Despite the huge drop in revenue and earnings, Schlumberger recorded $1.7 billion in free cash flow in the quarter. Cash flow for the third quarter of 2014 was $1.83 billion. That’s not much of a drop in free cash flow considering that revenue was down 33% year over year and earnings per share were off almost 50% (and that’s even though the company bought 6.9 million shares in the quarter.) So how do you keep free cash flow so steady when revenue is plunging? Well, of course, you cut costs. But you also pursue what Schlumberger calls transformations—a combination of reorganizations of existing businesses and efforts to buy or develop internally new technologies and products that will drive future revenue by opening up new markets or allowing deeper penetration in existing customer bases. The result, as CEO Paal Kibsgaard said in the company’s conference call, is that in this downturn Schlumberger has managed to generate pretax operating margins “well above those seen in any previous downturn.” In that same conference call Kibsgaard pointed to the company’s “ability to generate significant free cash flow even in this part of the cycle” as a major competitive advantage that allows Schlumberger to actively “pursue new business opportunities as well as targeted M&A activity” even as competitors are cutting back in order to preserve cash balances. For example, on August 26 Schlumberger announced that it would acquire Cameron International (CAM), a global leader in the market for flow control technologies in the oil and natural gas industry. The acquisition, Schlumberger has said, will enable the post-acquisition company to offer the industry’s first complete drilling and production system spanning surface and subsurface technologies. Currently Cameron’s wellhead low controls are on one-third of the world’s producing wells. Schlumberger has also acquired T&T Engineering, which specializes in the design of land rig systems; bought Novatek, which is a leader in the synthetic diamonds used in drilling; begun a joint venture with Germany’s Bauer group to develop a land-rig-of-the-future; and signed an agreement with IBM (IBM) to provide end-to-end production-optimization services. Those are all moves that will pay off, in my opinion, in the future and position Schlumberger for the upturn in the cycle. First, of course, Schlumberger has to get to that turn. That means more cost cutting including more job cuts. In its third quarter guidance the company said more job cuts are on the way but didn’t give a number. Wall Street analysts estimate that another 10% of the workforce could be cut. The cost cutting is even more pressing because in that same guidance the company pushed back its estimate for a recovery of activity in its market until 2017. If you hold the stock as a long term position, as I do in my Jubak Picks Stocks (http://jubakpicks-1565237904.us-west-2.elb.amazonaws.com/jubak-picks-50/ ), I’d continue to hold. If you’re looking to add more shares to an existing position or to start a new position I think you can wait—with eyes open for any change in forecast—for the middle of 2016. The shares are up 77% since I added them to my long-term portfolio in 2008.

Buy SunPower (SPWR)

January 5th, 2010

Demand will pick up—eventually—for solar energy companies as the global economy crawls toward recovery and as countries add more incentives for clean power.

That doesn’t mean that everyone is going to make money, though, since prices are dropping like a stone and many companies, such as Q Cells, are struggling to cut costs faster than prices are falling. SunPower’s (SPWR) way out of that bind is through vertical integration from manufacturing through installation.

The services it provides to solar dealers and installers save dealers and installers significant costs, which lets the company charge slightly higher prices for its solar modules. I don’t think SunPower is ignoring the need to cut manufacturing costs, however. In fact one of the reasons that I like this solar manufacturer is that it’s roots are in the silicon chip industry so it gets the way that higher quality and increased power generation per module can make up for lower labor costs at some competitors.

Buy Tenaris (TS)

December 30th, 2008

You can make a very nice little $10 billion (in sales) business out of selling something as seemingly mundane as drilling pipe if you realize that as companies drill in ever more challenging geologies, they’ll pay extra for pipes that can withstand extremely high temperatures and pressures; than can flex to accommodate new trends in horizontal and guided drilling; and that won’t surrender to extremely corrosive conditions. As oil companies drill in deeper and hotter they need increasingly sophisticated steel pipe and pipe connections. As the global energy industry expands its production of more corrosive fuels, such as ethanol and coal to gas, it demands high technology pipes. Expect even higher margins going forward.

VALE: Cheap but not cheap enough yet

November 16, 2015

As of November 16, 2015, I’m keeping Vale (VALE) in my long-term 50 Picks portfolio. If you hold the shares of this Brazilian iron ore producer, I’d continue to hold. If you were thinking of buying because the shares look so cheap at $3.93 today, I’d say “Not yet.” I’d look to buy the New York traded ADRs (American Depositary Receipts) at $3.30 or so—about 15% below the 52-week low. (Vale was a member of my 12-18 month Jubak’s Picks portfolio until October 13, 2014. I sold it on that date at $11.47.) Two reasons to buy (or hold onto) Vale at these prices. First, the iron ore cycle will turn someday as growth in the global economy picks up and as demand/supply come back into balance. Second, Vale is expanding production at its Carajas mine, a project with one of the richest iron ore bodies in the world. Because the iron ore at Carajas is so rich it sells for a premium on world markets and it helps make Vale the low cost iron ore producer in the world. Add in cost reductions, the efficiency of the new truckless operations at Carajas, and China’s recent willingness to accept the extremely big ore carriers that Vale increasingly uses, and Vale has been able to reduce its cost by 15% in the most recent quarter to $34 a metric ton delivered in China. When the market for iron ore does finally turn Vale will be one of the big winners. But the reasons to hold off on buying are more numerous. First, the momentum in Brazil’s financial market is still thoroughly lower. ETF iShares MSCI Brazil Capped (EWZ) was down 35.07% year to date for 2015 as of November 13. Vale itself is down 33.6% year to date. Brazilian service and consumer sector leaders Kroton Educacional (KROT3.BZ in Sao Paulo) and Natural Cosmeticos (NATU3.BZ), respectively, are down 56.15% and 42.86% for the year. In the currency market the Brazilian real is the world’s worst performing currency, down 31% in 2015 to date. The country’s debt has been downgraded 4 times since 2014 by Standard & Poor’s, most recently to junk in September. Second, the country’s economy is a mess. The economy is in recession and the Banco Central Do Brasil projects that GDP will fall by 2.7% in 2015 and by 2.2% for the four quarters ending with the second quarter of 2012. The bank projects inflation of 9.5% for 2015, way above the central bank’s inflation target of 4.5% give or take two percentage points. That forecast is built on the assumption that the Selic benchmark interest rate will be 14.25% during the period. Third, the country’s politics are so convoluted with President Dilma Rousseff facing six (at last count) impeachment resolutions, that it is unlikely that the Brazilian legislature will tackle the country’s big problems (budget deficit, corruption, a bloated state sector, etc.) anytime soon. And fourth, although iron ore prices will turn someday, they are still falling and it looks like supply won’t come into balance with demand until 2017 or 2018. On balance this earns Vale a place in this long-term portfolio on the company’s potential. And a current rating of HOLD CHEAP BUT NOT CHEAP ENOUGH as of November 16, 2015. I’d put Vale in my cyclical commodity, and developing economy silos for its long-term trends.

Buy Weyerhaeuser (WY) in my long-term Jubak Picks 50 portfolio

January 18th, 2012

I added Weyerhaeuser (WY) to my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13 (See my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ on January 13 for all the changes to the portfolio.)

Why? Because as much as I’d hate to pick a precise month for the bottom in the real estate market, I think that we’re close enough to a bottom so I’m willing to put some money to work in the sector—if I get paid to wait for the precise turn. Weyerhaeuser converted to a real estate investment trust in 2010 (2.97% current dividend) so I’m getting paid a better than 10-year-Treasury-bond yield while I wait for a bottom in the second half of 2012 or sometime in 2013. And when the bottom comes Weyerhaeuser’s real estate sales on its 6.15 million acres of timberland and its concentration on products for the construction market give me plenty of leverage to the upside. About 40% of sales come from its wood products business, with about 70% of the products of that unit used in new residential construction. Weyerhaeuser Real Estate Company, 15% of sales, develops master communities, single-family houses, and residential lots.

With that business mix, as you’d expect, 2011 wasn’t the greatest year for Weyerhaeuser. The company is on track to earn 43 cents for the year (Weyerhaeuser reports fourth quarter earnings on February 3). That’s quite a come down from the $1.44 a share the company earned in 2006, but it’s quite a bit better than the $2.58 a share loss in 2010 or the $8.61 loss in 2008.

Weyerhaeuser does have one gem of a business that has kept on pulling in revenue and profits even while real estate and wood products have tumbled. The company’s cellulose fibers business (30% of sales), which produces absorbent pulp used in diapers and specialty pulp used in textiles, showed a 28% EBITDA (earnings before interest, taxes, depreciation and amortization) margin in 2010. Pricing and therefore margins in that business are likely to stay strong in 2012, Standard & Poor’s projects.

I think the stock is fairly valued in the short-term at roughly $20 a share, which is why I’m putting this in a long-term portfolio. The upside here will come from a recovery in the U.S. housing sector. Buy and hold—and collect that dividend–is an appropriate description of these shares.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Weyerhaeuser as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Too early to buy except as a trade, but stock pick Yamana is doing what a gold miner should be doing now

August 1, 2013

It’s early in the transition of gold mining companies to the lower price of gold, but I think we can already stake out a few of the important differences among the mining companies. On this scorecard, I think Yamana Gold (AUY) is a good example of what you should be looking for in the sector even if it may still be a little early in the transition to buy anything. (If you disagree with me on timing, I’d start with a stock such as Yamana. Yamana is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/  And I do think Yamana is a good trading vehicle for this market in gold.) First, write downs. This is an obvious difference and all things else being equal, you’d prefer a company with less in write downs (such as Yamana) to one with more in write downs (such as Barrick Gold (ABX.) But the absolute size of the write down is actually less important than the details. A write down is just a paper expression of the fall in the price of gold if a company is simply writing down the value of current reserves. These write downs will go back into the company accounts when gold prices rise. They are, however, important in a more lasting way if they express a more permanent impairment of assets either through a sale or a closing or abandonment of a project. Second, how aggressively the miner is moving to reduce costs. Costs in the industry will come down by themselves as contracts for mining services and the like get renewed at lower prices because of the falling price of gold. Waiting for that to happen is a very passive approach. What you’d like to see here is a company attack costs now because with the price of gold low every bit of cost reduction is important to cash flows and a company’s need for financing and its ability to maintain outlays such as dividends. To give you a benchmark on the aggressive side, all-in sustaining costs at Yamana Gold fell to $950 an ounce in the second quarter, a drop of $64 an ounce or 6%. The company sees all-in sustaining costs falling to $850 an ounce in 2014. Three, how willing the company is to sacrifice a bit of current earnings in order to reap (potentially) higher returns when gold prices climb again. Yamana Gold reported second quarter earnings per share of 7 cents, 4 cents a share below Wall Street estimates. Revenue dropped 19.6% to $430,5 million versus the $486 million analyst consensus. The obvious cause was the fall in the price of gold, but like all gold miners right now Yamana had a decision to make on how much to increase production and sales to make up for lower prices. The company did increase gold sales to 233,714 ounces in the quarter but that was a relatively modest boost from the 223,279 ounces sold in the second quarter of 2012. Companies that decide to sell less gold now so they can sell more gold later are likely to take a short-term hit to their share price. (Yamana took a big hit today on that earnings miss, falling 7.33%, or 77 cents a share.) If you have a slightly more long-term view, however, that drop in share price today means you are able to buy tomorrow’s production (at tomorrow’s price) at a lower cost. Four, you would like to see a pipeline of new mines—with projected costs at the low end of the scale—ready to come into initial production in the next year or so with a reasonable production ramp taking full production out into 2014 or 2015. Projects that are further out than that have higher execution risks—the future is indeed uncertain. In the second half of 2013 Yamana has three new mines that will be ramping to full production by the end of the year. That will give Yamana a big bump in production in the second half of 2013—about a 30% increase from the first half with full 2013 production 13% above that for 2012. I think that’s a favorable production profile with a good trade off between higher uncertainty if the ramp were further away and the likelihood of higher gold prices if the ramp were further out. Looking out a little further, with all operating mines in full production Yamana projects production 30% higher in 2015 from 2012. Five, the fate of dividends in the sector is a useful indicator of a company’s read on cash flows. I like it that Yamana has said that it feels its current dividend of 26 cents a share is sustainable. Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Yamana Gold as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.


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