Investiv Daily

  • 01 Oct
    If discount shopping is your thing, don’t ignore DLTR

    If discount shopping is your thing, don’t ignore DLTR

    I write a lot about value investing in this space; each day, I like to try to to identify areas of the market where I think good value lies, as well as where some significant investment risks lie. If you listen to a lot of talking heads on TV, when a popular, well-known stock starts to drop in price, you’ll almost always start hearing about what a great deal the stock is at that price More →

  • 28 Sep
    Which auto stock is a better investment right now: FCAU, GM or F?

    Which auto stock is a better investment right now: FCAU, GM or F?

    Earlier this week, I wrote about recent opinions I’ve seen that suggest that the stock market’s long, extended bullish run still has plenty of life left to keep going. One of the most compelling arguments supporting that opinion is the fact that, after the market’s big correction in the early part of this year, most of the market’s recovery has been led by beaten-down stocks in previously under-appreciated and oversold industries. That suggests the bullish momentum that has pushed the market higher since April when it found a corrective bottom is driven by an emphasis on value, which does offer some very compelling food for thought. Value-driven market rotation usually happens at the beginning of a bull market, not in the latter stages of one, so I think there could more than a little truth behind the notion.

    Let’s go ahead assume for the time being that this idea is correct; it begs the next question, which is naturally, where am I going to find the best values in the market right now? It’s one thing to tell you to look for beaten-down stocks in depressed industries; it’s quite another to actually recognize what some of those areas of the market are right now.



    As I previously mentioned, the auto industry is an area of the market that has really come under a lot of pressure. While the broad market has seen a nice rally since April of this year, the Big Three automakers have all seen significant drops in price. Fiat Chrysler Automotive (FCAU), Ford Motor Company (F) and General Motors Company (GM) are all down around 25% since reversing lower from their respective high points in April and June. Yes, a not-insignificant part of that drop has been driven by trade-related tensions with all four of America’s largest trading partners, and for as long as those tensions persist, there remains an element of risk that could keep pushing these stocks lower. Even so, the fact they are all down in bear market territory should at least have any sensible value-oriented investor sit up, take notice, and consider whether there is an opportunity worth thinking about.

    What follows is a comparison of all of the Big Three U.S. automakers, side by side, to determine which of the three actually poses the best value-based argument right now. Does that mean that you should think about taking a position in the winner right now? That is for you to decide.



    Earnings/Sales Growth

    • Ford: Over the last twelve months, earnings decreased by almost 52% while sales were mostly flat, declining by only about 2%. The company operates with a narrow margin profile that saw Net Income at 4.2% of Revenues over the last twelve months, and decreased to only about 2.7% in the last quarter.
    • GM: The twelve-month pattern for GM shows earnings decreasing only a little over 4%, and sales mostly flat, declining about .6%. GM’s margin profile over the last twelve months showed Net Income was a negative 3.2%, but improved in the last quarter to positive 6.5%.
    • Fiat Chrysler: Earnings over the last twelve months declined 2.63% for FCAU versus sales growth of 12.62%. The company’s margin profile showed Net Income as 3.1% of Revenues in the last twelve months, and declining to 2.5% for the most recent quarter.

    Winner: FCAU, on the basis of superior earnings and sales results in the last year versus F or GM.

    Free Cash Flow

    • Ford: F’s free cash flow is quite healthy, at more than $9.1 billion over the last twelve months. That translates to a Free Cash Flow Yield of 23.5%, which is extremely attractive.
    • GM: GM has operated with negative Free Cash Flow since the last quarter of 2016, and as of the last quarter this number was a little more than -$12.3 billion dollars.
    • Fiat Chrysler: FCAU’s Free Cash Flow over the last twelve months is healthy at a little more than $4.9 billion. That translates to a Free Cash Flow Yield of 13.8%

    Winner: F, with the highest total dollar amount in Free Cash Flow over the twelve months along with the most attractive Free Cash Flow Yield.



    Debt to Equity

    • Ford: F has a debt/equity ratio of 2.8. High debt/equity ratios aren’t unusual for automotive stocks, however it should be noted that F’s debt/equity is the highest among the Big Three auto companies. The company’s balance sheet demonstrates their operating profits are sufficient to service their debt, with healthy liquidity to make up any potential difference if that changes.
    • GM: GM’s debt/equity ratio is 1.81, which is also pretty high, but below that for F. The difference, however is that while GM’s operating profits should be adequate to service their debt, they may not have enough liquidity to make up any potential operating shortfall.
    • Fiat Chrysler: FCAU’s debt/equity ratio is the lowest of the group, at .46. That alone puts them well ahead of the other two in this category; but it is also worth noting that the company’s cash and liquid assets are more than 34% higher than their long-term debt. That gives them the best actual financial base to operate from out of any of the Big Three.

    Winner: FCAU. Not even close.

    Dividend

    • Ford: F pays an annual dividend of $.60 per share, which translates to a very impressive yield of more than 6% per year.
    • GM: GM’s dividend is $1.52 per year, translating to an annual yield of 4.51%
    • Fiat Chrysler: FCAU does not pay a dividend.

    Winner: F. Dividends are the low-hanging fruit that every value-oriented investor should look out for.



    Value Analysis

    • Ford: F’s Price/Book value is $9.18 per share and translates to a Price/Book ratio of 1.07 at the stock’s current price. Their historical average Price/Book ratio is 2.12, which suggests the stock is trading right now at a discount of more than 97%. The stock is also trading about 60% below its historical Price/Cash Flow ratio.
    • GM: GM’s Price/Book value is $27.38 and translates to a Price/Book ratio of 1.23 at the stock’s current price. Their historical average Price/Book ratio is 1.9, which suggests the stock is trading right now at a discount of 54%. The stock is also trading more than 129% below its historical Price/Cash Flow ratio.
    • Fiat Chrysler: FCAU’s Price/Book value is $13.87 and translates to a Price/Book ratio of 1.29 at the stock’s current price. Their historical Price/Book ratio is 1.32, suggesting the stock is trading at a discount of 2.3%. The stock is also trading 55% above its historical average Price/Cash Flow ratio, suggesting the stock remains significantly overvalued, even at its current price.

    Winner: F, edging out GM for best overall value proposition, but not by a wide margin.

    The net winner? While FCAU has the best overall fundamental profile, it offers the least upside potential, with a significant level of downside risk. That puts F squarely in the winner’s circle for the best overall opportunity among the Big Three automakers under current market conditions. On the other hand, the greatest overall risk remains with GM, who despite the upside offered by its value measurements, has some big fundamental question marks that make the value proposition hard to justify.


  • 27 Sep
    Semiconductors are struggling, but this small-cap stock could be a Diamond in the Rough

    Semiconductors are struggling, but this small-cap stock could be a Diamond in the Rough

    The semiconductor industry has been one of the interesting segments of the Technology sector to watch for a few years now. Since 2016, the industry as measured by the iShares Semiconductor ETF (SOXX) has outpaced the rest of the broad stock market by a wide margin, increasing in value by more than 140%; by comparison, the S&P 500 increased by 60% over the same time period. Since hitting an all-time high in mid-March, however, the industry has stagnated, falling almost 8% as of this writing from that peak. More →

  • 26 Sep
    GPRE: Sometimes a cheap stock is just a cheap stock

    GPRE: Sometimes a cheap stock is just a cheap stock

    If you spend a lot of time paying attention to the stock market, you start to build a pretty long list of stocks that you follow. A lot of the stocks you pay the most attention to are the ones that have been the most productive for you in terms of functional trading; they’re the ones that you’ve been able to turn back to on multiple different occasions, with generally positive results. More →

  • 25 Sep
    Not all related stocks are created equal, and HRL proves it

    Not all related stocks are created equal, and HRL proves it

    One of the regular themes of my posts for the last several months, as well as the trades I’ve been placing since the late winter and early spring months of this year, has been the need to focus on making my investment approach more conservative. That flies in the face of a lot of analysts and experts More →

  • 24 Sep
    Ford Motor Company (F) has an interesting value argument; is it worth the risk?

    Ford Motor Company (F) has an interesting value argument; is it worth the risk?

    Nothing has kept the market more on edge this year than trade tensions and the threat of a trade war between the U.S. and its trade partners. Things only seem to get more intense this week, as the Trump administration is set to impose new 10% tariffs on $200 billion of Chinese goods on Monday. More →

  • 21 Sep
    Among Food stocks, PPC’s no turkey

    Among Food stocks, PPC’s no turkey

    For the last few months, I’ve made defensive investing in the stock market a fairly regular theme of my daily posts. And while it isn’t unusual for me to cite concerns about trade tensions between the U.S. and its trading partners, that is just one reason that I think it’s smart to think about ways you can find value in the stock market right now. My biggest reason is far simpler: as we move into historically unprecedented territory for the bull market that began in 2009, I think you have to be more attuned than ever to the reality that no upward trend lasts forever. The elements that can force the market to finally turn and move even more than the 11% or 12% we saw in the early part of this year are hard to predict, because there isn’t really any one catalyst or set of catalysts that has set previous bear markets charging downhill. In 2000, it was the “dot-com bust”; in 2007, it was a financial crisis triggered by overaggressive lending policies.

    What will be the straw that breaks the back of this particular bull market? That’s really anybody’s guess. It’s easy to point a finger at President Trump, simply because many of his ideas – about trade, taxes, and even interest rates – fly in the face of conventional wisdom, and he doesn’t seem to care what you or I, or anybody else really thinks about it. His behavior is disruptive and forces change, which is really the one thing the markets abhor more than anything else in the short term. The truth is that an extended trade war could be a big driver to a reversal of current economic strength in the U.S. economy, but it isn’t a given that it will. Gradually rising interest rates could also set the stage for a bubble-like burst – if the economy begins to show signs of accelerating growth that forces the Fed to change the pace and size of its current policy. Again, it’s a possibility, but not a given.

    As uncertainties keep rising, expect the market to stay volatile. That means big short-term swings from high to low as investors keep trying to read the changing winds of market and political news. That also means that a lot of stocks that dominate headlines and media attention could be at risk in the short to intermediate term of extended price declines, which is another reason I think it’s smart to pay attention right now to stocks that tend to be less cyclic in nature and that are usually pretty resilient when economic trouble raises its head. The Consumer Staples industry is a good place to look, and Pilgrim’s Pride Corporation (PPC) is an interesting stock to keep an eye on.



    Fundamental and Value Profile

    Pilgrim’s Pride Corporation is a retail feed store. It is a producer and seller of chicken with operations in the United States, Mexico and Puerto Rico. It is engaged in the production, processing, marketing and distribution of fresh, frozen and value-added chicken products to retailers, distributors and foodservice operators. It offers a range of products to its customers through national and international distribution channels. Its fresh chicken products consist of refrigerated (non-frozen) whole chickens, whole cut-up chickens and selected chicken parts that are either marinated or non-marinated. Its prepared chicken products include ready-to-cook and individually frozen chicken parts, strips, nuggets and patties, some of which are either breaded or non-breaded and either marinated or non-marinated. As of December 25, 2016, the Company marketed its portfolio of fresh, prepared and value-added chicken products across the United States, Mexico and in approximately 80 other countries. PPC’s current market cap is $4.7 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings decreased by more than 43% while revenues posted an increase of almost 26%. That’s typically a sign the company is becoming less efficient, and the truth is that PPC has been under pressure from rising material costs, such as feed, and in interest expense. The company also operates with a pretty narrow margin profile, which isn’t unusual in the Foods industry. Net Income over the last year was 5.3% of Revenues, and decreased in the last quarter to about 3.65%. Not all of the news is bad: export volumes and revenues, from Mexico as well as Europe are expected to increase into next year, along with volume in the U.S., and the company is positioning itself to benefit from expanding its products into wider-margin areas including prepared foods.
    • Free Cash Flow: PPC’s free cash flow is quite healthy, at more than $472 million over the last twelve months. That translates to a Free Cash Flow Yield of 10%, which is pretty attractive.
    • Debt to Equity: PPC has a debt/equity ratio of 1.26, which is higher than I normally prefer to see, but is also not unusual for food stocks. The company’s balance sheet demonstrates their operating profits are more than adequate to service their debt.
    • Dividend: PPC does not pay an annual dividend.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for PPC is $8.25 per share and translates to a Price/Book ratio of 2.28 at the stock’s current price. Their historical average Price/Book ratio is 4.3, which suggests the stock is trading right now at a discount of nearly 88%, and that puts the stock’s long-term target at about $35.50 per share. That is just a couple of dollars per share away from the stock’s 52-week high, reached in November of last year before the stock began its current downward trend.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward trend from December 2017 to its low in August of this year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. Since finding that bottom at around $16, the stock has hovered in a narrow range between $16 on the low side and $19 on the high side. That marks a consolidation range that could provide a catalyst for a sizable trend reversal – but the stock would need to break above that resistance at $19 first, and probably get to about $21 to make that trend reversal sustainable.
    • Near-term Keys: This is an interesting stock because its price activity over the last few years doesn’t really indicate much in the way of downside that the stock hasn’t already seen. It could, of course, break below $16 and test even lower ranges that date as far back as 2013, when the stock was below $10; but given the size of the decrease the stock has already seen since December of last year, and the generally positive fundamental strength the company demonstrates, that seems unlikely. The long-term value proposition is excellent, and so if you’re looking for a straightforward value play, and are willing to work with a long-term perspective, this could be an excellent stock to consider. If you’re a short-term trader, don’t consider buying the stock for any kind of momentum or swing-based move until the stock breaks resistance at around $19; the best signal point would likely be at around $21 based on the stock’s current price levels. At that point, there could be a good opportunity to buy the stock or to start working with call options with an eye on the $25 price level as indicated by the 38.2% retracement line.


  • 20 Sep
    Want to get defensive? D is an undervalued Utility stock you should pay attention to

    Want to get defensive? D is an undervalued Utility stock you should pay attention to

    A basic tenet of economic and market analysis asserts that the longer a bull market lasts, the more likely it becomes to experience a significant reversal. It may seem strange to some to be writing about a potential downturn when most reports indicate that the U.S. economy continues to be healthy and strong; but one of the early indications that a significant shift from expansion to contraction, and consequent bearish conditions in the financials market often comes when risks begin to increase and appear in unexpected areas.

    One of those risks comes from the simple, extremely extended state of the current market and U.S. economy, which is now well into its ninth year and beginning to move into historically unprecedented territory. No bull market lasts forever; it will inevitably shift to the bearish side just as bearish markets will eventually, and inevitably swing back to the upside. Another potential risk that most did not anticipate before the beginning of 2018 was the threat of global trade war; and yet the Trump administration announced a new set of $200 billion worth in tariffs against China. And while the government continues to negotiate with Canada and the European Union, it is also true that tariffs against those governments and Mexico persist as the U.S. maintains its hard line. The effects of tariffs against those countries, and the retaliatory tariffs they have imposed on the U.S., still hasn’t been seen, but that doesn’t mean the threat isn’t real, only that it could take longer to become apparent.



    A smart investor takes steps to stay engaged in the market while bullish conditions persist, while at the same time looking for ways to minimize risk exposure. One method is to focus on industries whose businesses aren’t subject to the same cyclicality most pockets of the economy experience. One of those industries is the Electric Utilities industry, where the largest and most-established companies continue to maintain healthy revenue streams even when the economy suffers. The industry has been one of the strongest performers in the market of late, increasing about 15% from a February bottom and staging what is now an intermediate upward trend from that point.

    One of the largest players in the industry is Dominion Energy Inc. (D), a company that has followed that broader trend to an increase of about 12% over the same period. The really interesting part of this stock’s story is that despite its bullish performance so far this year, the stock remains significantly undervalued, offering a sizable value-oriented opportunity over the long term on a high-dividend stock with a solid financial base.



    Fundamental and Value Profile

    Dominion Energy, Inc., formerly Dominion Resources, Inc., is a producer and transporter of energy. Dominion is focused on its investment in regulated electric generation, transmission and distribution and regulated natural gas transmission and distribution infrastructure. It operates through three segments: Dominion Virginia Power operating segment (DVP), Dominion Generation, Dominion Energy, and Corporate and Other. The DVP segment includes regulated electric distribution and regulated electric transmission. The Dominion Generation segment includes regulated electric fleet and merchant electric fleet. The Dominion Energy segment includes gas transmission and storage, gas gathering and processing, liquefied natural gas import and storage, and nonregulated retail energy marketing. As of December 31, 2016, Dominion served utility and retail energy customers, and operated an underground natural gas storage system with approximately one trillion cubic feet of storage capacity. D’s current market cap is $46.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 23% while revenues posted an increase of almost 10%. In the last quarter, earnings declined 24% versus the quarter prior, while revenues dropped about 11%. The company operates with an impressive margin profile, with Net Income running at about 22.5% of Revenues for the last twelve months, and 14.5% in the last quarter.
    • Free Cash Flow: D’s free cash flow has been negative for more than four years, but has been increasing steadily since mid-2016, when it bottomed at more than -$2 billion to its current level at about $110 million in the last quarter. That’s a positive increase of nearly $1.9 billion, or 95% in the last two years. Negative free cash flow generally isn’t a positive, but it also hasn’t been unusual for the industry in the last few years. The more important point is the upward direction D’s free cash flow trend.
    • Debt to Equity: D has a debt/equity ratio of 1.6, which is higher than I normally prefer to see, but is also not unusual for utility stocks. The company’s balance sheet demonstrates their operating profits are more than adequate to service their debt.
    • Dividend: D pays an annual dividend of $3.34 per share, which translates to an annual yield of about 4.72% at the stock’s current price. That’s better than the average yield of the S&P 500 or even of 30-year Treasury notes, which investors also like to gravitate to when they perceive greater risk in the marketplace.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for D is $30.65 per share and translates to a Price/Book ratio of 2.3 at the stock’s current price. Their historical average Price/Book ratio is 3.36, which suggests the stock is trading right now at a discount of about 46%, and that puts the stock’s long-term target at nearly $103 per share. That is well above the stock’s all-time high, reached earlier this year a bit above $85 per share, but is also makes that high – which translates to a long-term upside opportunity of more than 20%.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward trend from December 2017 to its low in June of this year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. Since finding that bottom at around $61.50, the stock has increased about 15%. Since August, the stock has moved into a narrow, sideways range that technical traders like to consider a consolidation range. Support is around $70, and resistance is about $72.50.
    • Near-term Keys: The thing about a narrow trading range such as that maintained right now by D is that it makes defining technical signal points pretty easy. A break above $72.50 could mark an interesting opportunity to buy the stock or to work with call options for a short-term bullish trade, while a drop below $70 could provide a good opportunity for a bearish trade by shorting the stock or working with put options. If you like the stock’s value proposition right now, the sideways range also provides a good opportunity to take a long position and take advantage of the passive income offered by its healthy dividend yield.


  • 19 Sep
    Retail stocks are up – but there’s a good reason why DDS isn’t following suit

    Retail stocks are up – but there’s a good reason why DDS isn’t following suit

    Perhaps it’s an indication of over-exuberance that the market has lately seemed to just shrug off the latest global trade news. It could also be that investors have come to accept tariff threats and trade tensions as “the new normal.” Either way, it is interesting that while the Trump administration imposed a new set of tariffs on China, the market today decided to use the fact that the tariffs were set at a lower-than-expected 10% instead of the 25% that many had feared as a catalyst to drive higher. More →

  • 18 Sep
    MU could be the best bargain in the stock market right now – but be careful!

    MU could be the best bargain in the stock market right now – but be careful!

    Over the last month or so, market fears and uncertainty have centered primarily around global trade. In July and August, one of the most affected pockets of the economy was the tech sector, with particular bearishness bearing down on semiconductor stocks. As measured by the iShares Semiconductor ETF (SOXX), that industry is down about 5.5% since peaking in early June. More →

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