2010 marks a very important transition for Maxwell Technologies (MXWL), one that unfortunately, won’t make life easy for the company given the state of the auto and alternative energy industries. You can see the results of that transition in the company’s somewhat disappointing earnings for the first quarter of 2010.
Maxwell really runs two businesses.
One business is composed of the older microelectronics (radiation hardened components and computers for use in space) and transmission (capacitors used in high-voltage electrical transmission lines) product lines. Back in 2006 these product lines accounted for two-thirds of the company’s sales.
The other business is composed of the company’s newer ultracapacitor BOOSTCap products. These fast-charge, fast-discharge energy storage devices are gradually winning design competitions and getting built into products from auto, truck, and bus electrical systems to wind turbines. In the first quarter of 2010 sales from the BOOSTCAP business finally exceeded sales from the microelectronics and transmission business. And, according to estimates from Needham & Co., BOOSTCap will account for 55% of sales in 2010.
In the long-term this trend is exactly what investors want to see. Needham estimates that BOOSTCap revenues will grow by 52% from 2010 to 2011.
In the short-term, however, this trend is a problem for Maxwell Technologies for two reasons.
Reason No 1: because the recession really slowed BOOSTCap revenue growth. BOOSTCap revenue actually declined from 2006 to 2007 as the global recession crushed car sales and slowed automaker’s adoption of new technologies. Maxwell Technologies has been growing revenue in this business by better than 50% a year since then but the set back in 2007 means the growth has been from a lower base.
That’s especially important because of Reason #2: margins in the new business were really, really low. A former management had booked ultracapacitor sales at negative margins in order to win initial contracts. The last of those contracts is set to expire by the middle of 2010. Margins have started to climb for the ultracapacitor business–Needham estimates to 23% in the first quarter of 2010 against 15% in the fourth quarter of 2009.
This low-margin period for the company’s fast growth business wouldn’t have been quite so big a problem except that sales in the higher margin old business have been relatively stagnant–$53 million in sales in 2008 $57 million in 2009, and $55 million projected for 2010.
That’s meant the company has been slower to move to profitability after the 2007 slump than I had projected. (It also hasn’t helped that the Securities & Exchange Commission and the Department of Justice are investigating the company’s Chinese sales representative for possible violations of the U.S. Foreign Corrupt Practices Act. Amounts that the company paid in commissions to this sales agent actually, the government charges, wound up being paid by that agent to individuals at customer companies. Maxwell Technologies has set aside $9.3 million against a settlement of the charges.)
In my estimation the story is still intact but just moving at a slower pace—that’s the story with many new energy technology companies right now. (For a status report on the state of alternative energy industries right now see my post https://jubakpicks.com/2010/06/04/the-gulf-oil-spill-is-so-bad-that-maybe-just-maybe-energy-legislation-is-alive-again/ )
As of June 22 I’m lowering my target price to $20 from the previous $25 and stretching out the schedule to April 2011 from September 2010.
Full disclosure: I own shares of Maxwell Technologies in my personal portfolio.
Jim… thanks for the update on MXWL. I bought and held for awhile and then sold about a month ago for a small profit to generate cash and not convinced that this was dead money for awhile. I’m too leery of the general economy and not convinced car sales will continue up.
I’ll continue to watch and may buy again if the price is right and the story is strong.
Thank you for all the comments. However, I would disagree with this statement from
bracr2000: “BTW, if you like the way bankers and CEOs get paid these days, realize your program would only reinforce short term results at any “expense.”” I would say this is even more likely with stocks that don’t pay a dividend, as many CEOs get stock options and so their only goal is to make decisions for the short-term that pump up the stock price for the short term. However, with stocks that pay an ever rising dividend, the goal has to be to look out for the company’s well-being for the long-term, as if they don’t, they will end up having to cut that dividend at some point… which in turn will cause the stock price to tank as everyone in the market will then realize there is a major problem with the company’s fortunes.
sigli,
Even Buffett watches his portfolio like a hawk. He doesn’t just “buy and hold”. He WILL buy and hold a company that he believes is a good value, but he will drop it if the factors making it a good value no longer apply.
>The most important thing in investing is finding an edge and staying disciplined. Find your style and your edge.<
That statement cannot be repeated enough! There are many ways to approach investing. Everyone needs to find their own investment style.
jrb,
As much as we all would like to simplify strategies and realize financial independence, it is more complicated than dividend reinvestment. BTW, if you like the way bankers and CEOs get paid these days, realize your program would only reinforce short term results at any “expense.”
I also like MXWL and am accumulating on dips. Anyone have thoughts on how much MXWL stands to gain from the stimulus funds spread around alternative energy?
Buy and hold will always work, and people will always say it is dead. Buy and hold requires excellent vision. Warren Buffett is as close to a crystal ball as you will find.
People will also tell you technical analysis doesn’t work because that’s what so called guru’s tell them ad nauseum. It works. Select few have used it and been wildly successful just as select few buy and holders have been wildly successful.
The most important thing in investing is finding an edge and staying disciplined. Find your style and your edge. If that’s a dividend aristocrat strategy then all the better to you. Just remember it never hurts to sell when things are looking really bubbly. Read Warren Buffett’s 1969 article in Forbes. He sold and went away. Read his post crash annual report. He regretted not selling (or maybe hedging) and going away.
I’d like to drive home the point that these people are wrong when they tell you their simple strategy will beat Mr. Jubak. These strategies are only meant for the average investor, which Mr. Jubak is not. You cannot expect to beat the market being average, so a passive index or divi strategy is best for most. But there are plenty who have a long track record of beating the average. It requires the kind of work and diligence most are not willing or don’t have time to put in. And it tends to require an exceptional brain.
jrb,
Sorry I didn’t respond sooner. Had a busy day at work yesterday.
Anyone pursuing a long term strategy like you suggest should pay attention to Warren Buffett, the ultimate long term investor. You will need to invest in value stocks that pay a dividend to fit your strategy.
I would echo what Y5T20X said. There is no more “buy and hold” any more. That strategy is dead. You will need to watch your holdings like a hawk, and be willing to dump them when the stock’s value is threatened, whether by macroeconomic forces or by sector/industry specific forces, or simply by incompetent management.
There is one other factor with dividends: If the stock’s price doesn’t go up, odds are the dividend won’t go up either. Remember, a company’s growth will drive what they pay on dividends. If they grow, the stock price should go up. If they don’t grow, then you are stuck sitting on a stock paying a dividend when you could have invested in a solid growth company and gotten a better return on your money.
Consider this scenario: You buy a 100 shares of a $100 stock that pays a 5% dividend. A year later, the stock is still at $100, but you’ve made 5% on it. On a $10,000 investment, you made $500. Alternatively, if you had bought a growth stock for the same $10,000, it would have only had to go up 5.01% to be a better investment, and well-run growth stocks can top a 5% return in a good week (sometimes a good day).
Mind you, I am NOT saying you should only buy growth stocks. Nor am I saying you should never buy dividend stocks. What I am saying is don’t get so stuck on one strategy that you ignore a great opportunity.
Y5T20X and southof8,
Regarding taxes, I use the dividend reinvestment strategy primarily in my Roth IRA account. I also agree with diversification, but I am still a bit on the younger side (late 20s), so my plan is to use this strategy with most (75-80%) of my current capital as it will take a few decades for it to pay off. I will slowly incorporate other strategies that rely primarily on capital gains and which have shorter time frames to pay off (such as Jim’s portfolio, which has a 12-18 month horizon) as I get older. I appreciate the comments though I was really hoping for more thoughts/views on this, but it was worth a shot to post.
Getting back to MXWL…
The CEO of Fex Ex was on CNBC today (we retirees have time to watch this stuff…) and is strongly endorsing ‘electric’ vehicles (as opposed to endorsing natural gas or denigrating the future of electric for the usual multitude of reasons…) for commercial vehicles in the US – specifically the Fed Ex fleet. In view of this, while I think ‘progress will be slower than originally thought’, might MXWL be hopefully aggressively pushing into this space (e.g. analogous to their Chinese bus contracts)? MXWL’s CEO in a recent webcast stated one of their major issues is that engineers are not used to the significantly increased ‘capacity’ of the Bootstrap ultracapacitors and the impact they can have as well as the proclivity of automotive engineers/CEOs to ‘not deal with any really new technology’ – an option he is apparently focused upon.
I like the guy’s leadership, management and foresight… will continue to buy on dips (e.g. $11/share).
The man makes a good point about diversification of styles based on the tax treatment of different accounts. Query whether dividends remain en vogue once the tax rate on them is lifted after the Bush tax cuts expire. Companies will be more likely IMO to buy back shares than to pay out dividends. Either way it is putting money in shareholders pockets, but the tax treatment of cap gains and dividends will be very different. I agree that a dividend strategy works best in a tax-deferred account.
jrb
Don’t want to quibble, but I was replying to the “buy and hold” aspect of you inquiry. I certainly agree with the dividend reinvestment strategy. In fact my wife’s Roth IRA is devoted to an income strategy, both through dividends and dividend reinvestement as well as selling cash secured puts on idle cash waiting for reivestment (better return than a money market sweep). The puts are only sold on stocks we want to own, for example INTC, one of the stocks you mentioned above.
My only point in listing those stocks from 1990 was many of them, “good stocks” at the time, would not have been good choices for “buy and hold”. And one last point, I mentioned we use a dividend strategy on my wife’s account, we use other strategies in other accounts. Not only do we diversify our specific investments we diversify our investment styles.
marr.bo,
I could be wrong (which is why I am posting this concept here, as I am looking to hear other’s thoughts), but I am not sure if your statement that any buy and hold strategy would have lost money from the late 1990s on (then again, the valuation of the stock market back then was ridiculous, so it would have been hard to pick good entry point prices for buying stocks for the long term). What I can say is that the Dow Jones US Select Dividend Index had a total return of positive 34.0% (3.3% annualized) from 2000 on, the start of the current secular bear market, while the S&P 500 was negative 37.4% (-5.1% annualized). Also, over the last seventeen years (3/92 – 3/09) the S&P 500 Index had an annualized total return of 6.1%. During the same period the DJDVY posted an annualized return of 8.9%. This would make a pretty compelling argument for a dividend re-investment strategy, no?
Also Y5T20X, to address your other specific points, yes, you do have to do your due diligence, which is why said to pick solid and (financially) strong companies. Though having a long history of paying a dividend that continually increases is in itself often evidence of a strong balance sheet. Also, to answer your specific question on when to remove the stock, you do not have to wait for the dividend cut as you can of course use some common sense on when to sell the company (I owned BAC and GE as part of this portfolio, but I sold my positions even before they announced their dividend cuts, as I could see it coming. Same for BP – I did not wait for the dividend suspension as I had no doubt it would happen. Though I was debating selling BP anyway as they had kept their dividend steady without raising it since the end of 2008).
The old addage “Past performance does not guarantee future results” is true now more than ever. There is no buy-and-hold strategy that worked throughout the late 90s and 2000s. If you bought and hold, you lost money.
Also the book you refer to falls prey to the classic rookie mistake of fitting data to a theory instead of fitting a theory to the data. Its very easy to look backwards and pick out several stocks that made enormous gains and say “Look if you would have followed my advice and pick these, you would have made a lot money”.
Also, I would not recommend buying shares in all the companies right now in one shot, but selectively choosing to buy each stock when their share prices experience temporary declines, as you have to pick good entry prices as well.
Y5T20X,
Yes, all good points. But I would also add that a condition of this dividend re-investment strategy is to immediately sell your shares in any stock that announces a dividend cut or suspension, or which fails to raise its dividend at year’s end (with a few exceptions if you really have faith the company would do so soon). Second, I would also add that I am counting on us in being a secular bear market for the next 10 years (just my opinion, time will tell on whether I am right or wrong). Such a dividend reinvestment strategy may not have worked as well during a secular bull market, so you do have to take into account the general macro-economic conditions. (But it seems reasonable to believe, as I am not sure where the growth in the US economy is going to come from). In fact, I will post an example portfolio that illustrates the strategy I am talking about for everyone’s review: ABT, ADP, AFL, CB, CL, CLX, CVX, DBD, DOV, EMR, INTC, JNJ, KMB, KO, LLY, MCD, MMM, MO, MSFT, NUE, NVS, PAYX, PEP, PG, PM, SYY, T, UTX, WMT. I may have made a mistake on one or two as I am writing this quickly but this is to illustrate the point. I think these are all solid companies that have a long history of continually paying and raising their dividends, and I would sell any of them as soon as a dividend cut is announced.
jrb
I’m not as erudite as some of the answers you’ll receive here. But I do remember 20 years ago, 1990. If you look back to some to the companies you might have invested then with this kind of strategy you might have ended up with some or all of the following; Ford, GM, US Steel,J C Penney, Toys R US, Xerox, Eastman Kodak, Woolworth, Polaroid, Montgomery Ward, Sears (pre K-Mart). No strategy is fool proof. Buy and Hold requires just as much diligence as any other strategy. When is the time to sell out of one of your holdings? What if you had owned Bank of America or Citibank just before the Lehman debacle? Would you have continued to watch it decline and hold on because the dividend hadn’t been cut?
As some one who has watched markets, stock as well as others, (for over 50 years) I can attest that there is no sure fire way to have success investing. My advice to you is study like you have but be prepared to pay “tuition” to find what works best for you. And what works best for you, may not be same for someone else and vice versa.
EdMcGon,
I would like to hear your thoughts on this in particular, as I can tell you’re pretty sharp (Jim you too of course though I know you don’t have time to respond to everyone). This is technically off-topic, but it is a general investing question that is just as good to ask any time, so this post it is. I have been doing some reading (in particular, I would note one book I recently finished called The Single Best Investment by Lowell Miller) that shows that investing in solid, strong companies that pay a dividend, and which have a strong histroy (20+ years) of steadily increasing those dividend payments each and every year, and then re-investing those dividend payments back into more stocks, is the single best way to invest that will blow away the returns of most mutual funds, and even financial geniuses such as Jim (no offense Jim, as this statement is not at all meant to detract against your investing acumen). But apparently studies show such buy-and-hold-and-buy-even-more dividend investing will give you the best returns by far — BUT OVER THE LONG TERM, meaning 20 years or more. Does anyone have any thoughts against this, assuming you can handle a 20-year timeline? Because if so, then I am going to start managing most of my portfolio according to this simple, but apparently very effective, strategy. Thanks all.