2011 Mid-Year Review

At the beginning of the year, I wrote an article that identified 19 companies that I thought would do well in 2011. It was published here and on Seeking Alpha. The premise that underlined the specific selections is one of consistently. I selected companies that were profitable in each of the prior seven years; each produced free cash each year. I considered balance sheet strength, the ability to grow sales, earnings and free cash.

There was no attempt to diversify across industry groups or differentiate by market capitalization though I did eliminate all companies trading Over-The-Counter and companies with market capitalizations of less than $100 million. I note that the market, as measured by the Dow Jones Total Stock Market Index is up about 3% for the first half of the year whereas my list of companies is up an average of 12.08%.

My list includes several well-known names including Apple, Bed Bath & Beyond, Oracle and Starbucks. Among the smaller companies we have Advanced Auto Parts with a market cap of $4.7 billion; Balchem with a market cap of $1.265 billion; FactSet Research $4.863 billion; NVE Corporation $0.275 billion and USANA Health Sciences with a market cap of $0.533 billion.

USANA had the worst performance during this period having lost nearly 23% of its value. The company develops and manufactures nutritional and personal care products. Advanced Auto sees the second largest decrease in vale by falling 10.66%. AAP is a specialty retailer of automotive aftermarket parts and accessories.

By far, our best performer is Hansin Natural, having risen 60% in this period. Hanson is a holding company whose portfolio companies manufacture and distribute non-carbonated beverages. We also saw strong performance from Balchem, Bed Bath and Beyond, Dollar Tree, priceline and Starbucks.

It has been a tough year to stay ahead of the market. These past several months saw major declines across the board. However, there Is some comfort in knowing that investing in companies that consistently perform well over the years by producing earnings and free cash without excessive debt are resilient and adaptive.

Disclosure: The author is long BBBY.

 

7 Dividend Paying ADRs Worth Considering

http://seekingalpha.com/article/266899-7-dividend-paying-adrs-worth-considering

28 Undervalued Dividend Stocks

In the past year, a friend of mine has shifted a large percentage of his portfolio to stable, dividend paying companies from growth stocks. The allure of a steady stream of dividends overcame his desire for capital appreciation. He is not alone in his quest but is he correct to place a greater emphasis on dividends than on capital appreciation?

I do not think this is an either/or proposition. Dividends contribute significantly to an investment’s total return. Ibbotson Associates estimates that over the very long term, dividends contribute as much as 40% to total return. However, the largest gains in total return are derived from capital appreciation. To resolve this dichotomy, I try to identify undervalued dividend paying stocks. The income stream provides a certain level of support while I wait for the market to recognize the value in company I select.

I constructed a screen for my database to identify such companies. I looked for companies paying an above market average dividend yield, cash flow return on invested capital greater than 12% and return on equity greater than 18%. These criteria assure me that the company is currently profitable and has meaningful free cash flow. My valuation metrics include Enterprise Value to Sales (EV/sales), Enterprise Value to Invested Capital (EV/IC) and Price to Book Value (PBV). For each metric, I estimate the “correct” multiple using factors such as EPS growth, Return on Invested Capital (ROIC), debt to capital ratios, operating margins, payout, among others. I eliminate companies in the real estate and financial sectors and companied with market capitalizations under $250 million. This screen provided a diverse list of 28 companies.

One unintended consequence of this screen is that six of the 28 companies are takeover targets or potential takeover targets. Lubrizol is being acquired by Berkshire Hathaway. The utility company DPL Inc. is being acquired by AES for $3.5 billion. Reuters Insider analysts identify Parker-Hannifin as a possible target for Berkshire Hathaway. Barron’s Magazine published a list of potential LBO candidates compiled by UBS analysts Randy Udell and Ben Canet. The list includes McGraw-Hill and Ross Stores. Lastly, there are published rumors that Johnson & Johnson is interested in Smith & Nephew.

We always look at the balance sheet. If you buy a stock for the dividend, you want to be sure the company can sustain that dividend. Growth companies need a strong balance sheet to maintain that growth.

Last, but not least, is the income statement. Are earnings projected to grow? Is there free cash flow available to fund the dividends and, perhaps more importantly, growth in dividend payout? Is the dividend payout excessive or is there room to grow here too?

This list provides a selection of companies, from mega-cap XOM to micro-cap AAON. Each company appears to be financial strong with good growth prospects. None have excessive payouts unsupported by free cash flow. Judging from the number of announced buyouts, rumors of takeovers and possible targets, others share our view that these are undervalued in today’s market and offer the possibility of a total return greater than what the market offers.

As with all lists of this sort, this is a starting point for additional thought and research.

The Best in Generic Drug Companies

Prescription pharmaceutical products in the U.S. generally are marketed as either generic or brand pharmaceuticals. Generic pharmaceutical products are bioequivalent (also known as biosimilar) of their respective brand products and provide a cost-efficient alternative to brand products. Brand pharmaceutical products are marketed under brand names through programs that are designed to generate physician and consumer loyalty.

Generic drug makers are hopeful that they will thrive over the next four or five years as some $60 billion in annual sales of branded drugs go off patent. Sandoz, the market leader for biosimilar drugs expects this market to grow to $20 billion by 2020, up from a current $250 million. There is also a second class of generic drugs, small molecule chemical drugs. Biological drugs are made of larger molecules than chemical drugs. Since generics of chemical drugs, which are made of small molecules, are relatively simple to copy, the market for generic drugs attracted a flurry of players.

The complete article can be found HERE.

Disclosure: The author has a long position in IPXL.

Semiconductor Automated Test Equipment

Today, most electronic products contain a combination of integrated circuits (ICs). As technology continues to penetrate most aspects of daily life, semiconductor devices are playing a more important role in a growing number and variety of products. Consequently, the global semiconductor industry, while experiencing significant cyclical fluctuations in its growth rate, has exhibited strong overall growth over the past 30 years.

The design and manufacture of semiconductor devices is a complex and capital-intensive multi-step process. The process involves different types of equipment used to manufacture, assemble and test semiconductor devices. Semiconductor test equipment and services are a critical part of this complex design and manufacturing process and are utilized in each of the key design and manufacturing stages. Each of these ICs has electrical circuitry that requires validation or testing during and after the manufacturing process. The final usability of the IC is determined by testing.

The complete article is here.

Paper & Paper Products Industry: Two Companies Stand Out

The paper and paper products industry has numerous market segments ranging from facial tissue to the paperboard packaging segment. The paper and paper products industry provides some overlap with the container and packaging industry in that there are companies in both may produce paperboard. However, for the purpose of this article, we are producers of containerboard and corrugated containers.

The Paperboard Packaging Council has suggested that the packaging segment will continue to see weakness for the remainder of 2011 due to reduced consumer spending but that an uptick will occur in 2012-14. They also identify several end-use markets with growth potential: pharmaceuticals and frozen and take-out foods.

The full article is available at:

 

http://seekingalpha.com/article/249590-paper-paper-products-industry-two-companies-stand-out

The Best in Coal

Coal is probably our most abundant energy resource. We have provable reserves, within our own borders, equal to a quarter of the world’s reserves and more coal than any other country in the world. Coal generates approximately 50% of our electricity, more than any other energy source. Coal can meet our domestic energy for the next 100 years. Coal also costs a fraction of alternative sources of energy such as natural gas.

The complete article is available at: http://seekingalpha.com/article/248028-the-best-in-coal-15-stocks-worth-considering?source=hp_latest_articles

 

Disclosure: The author has no position in any company mentioned in this article and will not take a position within 72 hours of publication.

Global Telecom Investment Opportunities (And Our 4 Favorite Picks)

If, indeed, we live in a global village, then the reason is due to the extraordinary growth of the worldwide telecommunications industry. Once restricted to only the wealthiest nations, telecom is now available everywhere. Here we present several opportunities for investing in telecom service providers outside the U.S. through ADRs.

http://seekingalpha.com/article/246905-global-telecom-investment-opportunities-and-our-4-favorite-picks

DIY Investing

The DIY investor has a bewildering range of styles to choose from, ranging from day trading to buy and forget. He or she has a decided advantage over the professional money manager. The private investor has flexibility whereas money managers are generally restricted to a particular style-box. The style-box, as far as I can tell, is no more than a marketing gimmick. Money managers have the additional pressure of meeting quarterly expectations.

The successful private investor chooses a strategy that works for them. Some folks like the action of momentum investing and others are much more risk averse and stick with large cap, dividend paying names. The market is big enough for everyone.

The approach that works well with us focuses on quantitative measures. We are not too interested in the “story” behind a name or management’s explanations or expectations. We rather let the numbers do the talking.

Our approach emphasizes valuation, cash flow generation, profitability and price momentum. Valuation and cash flow generation appear to be the most important drivers of excess returns.

One of our favorite valuation ratios is enterprise value to EBITDA. In the long run, no company succeeds without strong cash flow generation. The measure we look at is cash return on invested capital. There are several measures of profitability. Many investors are attracted to companies reporting high return on equity. The potential for excess returns is diminished if the market does not recognize the opportunity offered by a particular company. By combining low valuation as measured by EV/EBITDA, successful execution by the subject company (ROE and CFROI), and price momentum, we have the opportunity to generate excellent returns.

The companies listed here satisfy our criteria and are worth a close look.

		01/07/11
ticker	company	Price	CFROI	EV/EBITDA	ROE_12m	52W Price Range %
ALK	Alaska Air Group, Inc.	62.72	12.13	6.53	22.30	98.78
AGP	AMERIGROUP Corporation	46.83	15.84	4.29	22.40	98.74
ASMI	ASM International N.V. (USA)	34.45	19.21	6.85	25.30	86.63
CBPO	China Biologic Products Inc	16.06	25.45	5.40	62.00	85.60
CLW	Clearwater Paper Corp	81.20	23.38	7.06	21.60	92.77
CLD	Cloud Peak Energy Inc.	22.46	16.54	6.12	78.30	87.00
SOLR	GT Solar International, Inc.	10.50	17.45	6.91	64.80	97.22
IPXL	Impax Laboratories, Inc.	20.68	44.31	2.25	110.50	88.74
KS	KapStone Paper and Packaging C	16.10	22.89	6.63	21.00	96.72
NSR	Neustar, Inc	26.99	18.23	7.42	20.40	97.28
PZZA	Papa John’s Int’l, Inc.	28.14	14.38	7.31	27.50	90.45
SNDK	SanDisk Corporation	52.37	19.47	7.64	25.90	96.35
TEO	Telecom Argentina S.A. (ADR)	25.65	26.23	6.95	30.70	87.86
TSP	Telecomunicacoes de Sao Paulo	24.27	15.68	4.09	24.50	83.27
TER	Teradyne, Inc.	13.70	27.76	5.41	40.00	86.79
USMO	USA Mobility, Inc.	18.33	42.53	3.12	25.20	90.12
WTI	W&T Offshore, Inc.	18.04	27.61	4.69	39.20	83.46

 

Disclosure: Author has long positions AGP, NSR, SNDK and TEO.

Starting Lineup for 2011

At the start of the calendar year, there is a tradition of offering stock picks for the year. Our list totals nineteen names. There is no attempt to diversify across industry groups or to focus on market capitalization. The companies represent a narrow grouping of technology, retail, consumer and a smattering of industrial companies. Five of the companies are in the retail sector. They range in size (on the basis of market cap) from $271 million to $294,998 million.

The thread that binds all these companies is one of consistency. Each of these companies has been profitable in each of the past seven years; each has been free cash flow positive each year. They all have strong balance sheets and demonstrate the ability to grow sales, earnings from continuing operations, and free cash flow. Each company is expected to grow earnings going forward.

We believe each of the listed companies will show strong results in 2011. That being said, it is not a static list. Circumstances change as does our opinion. Readers should do their own due diligence and make up their own minds about each name.

Company	Ticker	Price	Comment
Advanced Auto Parts Inc.	AAP	$66.15	Advance Auto Parts, Inc. (Advance) is a specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States.
Apple Inc.	AAPL	$322.56	Apple Inc. (Apple) designs, manufactures and markets a range of personal computers, mobile communication and media devices, and portable digital music players, and sells a range of related software, services, peripherals, networking solutions, and third-party digital content and applications.
Balchem Corporation	BCPC	$33.81	Balchem Corporation (Balchem) is engaged in the development, manufacture and marketing of specialty performance ingredients and products for the food, nutritional, feed, pharmaceutical and medical sterilization industries. It has three reportable segments: Specialty Products; Food, Pharma & Nutrition; and Animal Nutrition & Health.
Bed Bath & Beyond Inc.	BBBY	$49.15	Bed Bath & Beyond Inc., along with its subsidiaries, is a chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS), Harmon and Harmon Face Values (Harmon) and buybuy BABY
C.H. Robinson Worldwide Inc.	CHRW	$80.19	C.H. Robinson Worldwide, Inc. (C.H. Robinson) is a third party logistics company. It provides freight transportation services and logistics solutions to companies of all sizes, in a variety of industries.
Dollar Tree Inc.	DLTR	$56.08	Dollar Tree, Inc. (Dollar Tree) is an operator of discount variety stores offering merchandise at the fixed price of one dollar.
FactSet Research Systems Inc.	FDS	$93.76	FactSet Research Systems Inc. (FactSet) is a provider of global financial and economic information, including fundamental financial data on tens of thousands of companies worldwide.
Family Dollar Stores Inc.	FDO	$49.71	Family Dollar Stores, Inc. (Family Dollar) operates a chain of more than 6,800 general merchandise retail discount stores in 44 states, providing primarily consumers with a selection of priced merchandise in neighborhood stores.
Hanson Natural Corp.	HANS	$52.28	Hansen Natural Corporation (Hansen) is a holding company. The Company, through its subsidiaries develops, markets, sells and distributes alternative beverage category natural sodas, fruit juices, juice blends, juice drinks, energy drinks and energy sports drinks, fruit juice smoothies and functional drinks, non-carbonated ready-to-drink iced teas, children’s multi-vitamin juice drinks,
Joy Global Inc.	JOYG	$86.75	Joy Global Inc. is a manufacturer and servicer of mining equipment for the extraction of coal and other minerals, and ores.
NetApp Inc.	NTAP	$54.96	NetApp, Inc. (NetApp) is a provider of storage and data management solutions. The Company offers solutions for storing, managing, protecting and archiving business data.
Novo Nordisk A/S (ADR)	NVO	$112.57	Novo Nordisk A/S is a Denmark-based health care company. It also focuses within areas, such as haemostasis management, growth hormone therapy and hormone replacement therapy. The Company operates in two business segments: diabetes care and biopharmaceuticals.
NVE Corporation	NVEC	$57.83	NVE Corporation (NVE) develops and sells devices that use spintronics, a nanotechnology. The Company manufactures spintronic products, including sensors and couplers that are used to acquire and transmit data.
Oracle Corp.	ORCL	$31.30	Oracle Corporation is an enterprise software company. The Company develops, manufactures, markets, distributes and services database and middleware software, applications software and hardware systems, consisting primarily of computer server and storage products.
PetSmart Inc.	PETM	$39.82	PetSmart, Inc. (PetSmart) is a specialty provider of products, services and solutions for the lifetime needs of pets. The Company offers a line of products for all the life stages of pets, and offers various pet services, including professional grooming, training, boarding and day camp.
Priceline.com Inc.	PCLN	$399.55	priceline.com Incorporated (priceline.com) is an online travel company, which offers a range of travel services, including hotel rooms, car rentals, airline tickets, vacation packages, cruises and destination services.
Starbucks Corp.	SBUX	$32.13	Starbucks Corporation (Starbucks) is the roaster and retailer of specialty coffee in the world, operating in more than 50 countries. Starbucks purchases and roasts whole bean coffees and sells them, along with handcrafted coffee and tea beverages and a variety of fresh food items, through Company-operated retail stores.
USANA Health Sciences Inc.	USNA	$43.45	USANA Health Sciences, Inc. (USANA) develops and manufactures high-quality, science-based nutritional and personal care products, with a commitment to continuous product innovation and sound scientific research.
Varian Medical Systems Inc.	VAR	$69.28	Varian Medical Systems, Inc. is engaged in he design, manufacture, sale and service of equipment and software products for treating cancer with radiotherapy, stereotactic radiosurgery and brachytherapy.

 

Someone may argue that I missed the boat on this list and they may be right. The average 52 week gain for these stocks is 52%. Gains ranged from a low of 27% for BBBY to 83% for PCLN. These market beating gains are not the result of short-term fads. All of these companies are proven to be consistent winners.

Disclosure: Author has long positions in AAP, BCPC, FDS and NVEC.