Tuesday, May 25, 2010

Finding a Bottom on BP


It’s been just about a month since the explosion of the Deepwater Horizon and BP has fallen ever since. The market, in a broader sense, has been in a panic and at some point BP will reach a bottom and prove to be an extremely smart play, especially with their dividend yield. I do not wish to go any further in depth on BP since everything has already been discussed on every medium you could imagine. But today I drew up this graph and it may be helpful in finding a bottom/entry point on BP. It shows the share price of BP for the last month against Exxon Mobil from 1989, one month before and three months after the Exxon Valdez situation. The S&P is also shown very faintly. As you can see the gap between BP and the S&P has been growing, and is much larger than that of Exxon. The crisis points are aligned and set at March 24th, 1989 on this particular graph. A month later Exxon would reach a low and would never look back. Will that happen for BP? It’s probably not comparable, considering Exxon had the inflation of the 90s to help it, but take this graph for what it's worth and formulate your own opinion.


Friday, May 21, 2010

The Best Value Play You’ve Never Heard Of:

5/21/2010 – Dover Corporation (DOV)

Price - $44.45

52 Week - $30.26 - $55.50

Trailing EPS – 3.151

Dividend - $1.04

P/E – 19.24

Beta – 1.23

Fear cavalier. Renegade steer clear!

A tournament, a tournament, a tournament of lies.

Offer me solutions, offer me alternatives and I decline.

It's the end of the world as we know it.

It's the end of the world as we know it.

It's the end of the world as we know it and I feel fine.

R.E.M. front-man Michael Stipe could not have said it better. We are in tumultuous times and many investors have fled the market. From historic oil spills, European sovereign debt defaults, Icelandic volcanic activity, Chinese cleaver attacks, ‘fat-fingers’, and German naked shorts, the world is spiraling out of control and taking the market with it. Major fluctuations have become the norm: down 350 one day, up 100 the next. The Dow saw record setting intraday loses on May 6th, bounced up showing signs of life the next week, and has since confirmed that this life is teetering.

So what does the everyday investor do in this case? Cash out? Well prices are too low to do this right now and this is exemplified by the individual middle aged man who tried to get out on the 6th and in the process lost around $15,000 on Proctor & Gamble because of the incredible timing of his transaction. To this he blames his broker, but in truth it was an anomaly that no one could have predicted. But I digress. It is not the time to leave the market. In fact, most fundamentalists would say it’s the perfect time to get in. But in the process one must avoid risk and capitalize on available guaranteed profits. This is a time when value dividend investing is more useful than ever before.

With this in mind we will dive into one of the safest dividend plays you’ve never heard of: Dover Corp (DOV). It gets mentioned in passing in several articles but never truly examined. It’s safe but sometimes too safe, and certainly not sexy. But right now Dover is priced at $44, $11 below its 52 week high just a month ago on the day they reported an amazing first quarter earnings of 65 cents/share beating estimates by 14 cents. Like any company 2009 was not kind to Dover, but never did they cut dividends (more on this later). EPS for 2008 was at $3.67 and was followed by a $1.99 performance in 2009. But now analysts have an estimated EPS of $2.90 for 2010 and up to $3.71 in 2011. Keeping this in mind, dividends are expected to be raised to 27 cents a share quarterly in 2010 and possibly reach 29 in 2011. That gives a current yield of a meek 2.3% annually.

Here’s the good news. There is almost no chance of this dividend going away. It is a pure ‘buy and hold’ type position. And by “no chance” I mean that this stock has had an increasing annual dividend ever year for 54 years. Let me repeat that, 54 YEARS! No dividend cuts, no dividend suspensions, and a few splits mixed in. How does this company do it, you may be asking? Well Dover falls under the umbrella of industrials but Dover’s personal umbrella is massive. They own over 40 companies, several of which own multiple companies/subsidiaries of their own. These companies make anything from industrial microwaves and refrigerators to beverage can producers to sucker rods (I don’t know what this is either) to diamond drill-hole tools to ATMs to fuel pumps to hydraulic cylinders to garbage truck parts. Dover is practically diversified for you and relatively impervious to small scale industry news. And the role of the people whom run Dover Corp is to simply (probably not as simple as I would think) pick strong companies to acquire and reap the rewards. And given their historical success one can only assume that they are very, very good at it.

Why would someone want to waste their time with such a low dividend when other seemingly equally safe companies are offering dividends in the range of 6-8%? Well, as mentioned the risk is essentially negligible with Dover. They boast a strong balance sheet; stable long term debt, an increase in treasury shares 2 years ago, reliable revenues, and an increase in inventories, which I am not a fan of but it was not by a scary amount. Another reason why this stock is appealing is its relatively low P/E multiple, currently at 19.24, and the forward is around 14. And the last reason is the discount it can be purchased at right now assuming the world comes to some kind of normalcy in the next couple years. There are only 10 analysts on Bloomberg following Dover and the consensus is a buy. 7 of ten have price targets listed and 6 of those are over $60. As you can see below Dover has been affected by the rollback type loses of the last 2 weeks and perhaps $55 is a bit of a pipedream until the growth prospects are further confirmed next quarter but $44 is most certainly a steal.

It should be noted that while not shown above, the 50 day moving average is a good distance from the 100 and the same goes for the 100 to the 200. There to do not appear to be any other blatant technical patterns. The trend line drawn illustrates the anticipation and confirmation of a solid earnings report.

With all of that said I do actually hold a rather large position in this stock and this is of course by no means expected to help it out. Dover’s record date is approaching quickly so we may see a small rise in price followed by a small drop afterwards. And then after that we should see the start of a climb towards $60 with some pitfalls along the way. But say it gets to $60 and you do purchase now, at $44. Even if it takes a year or two, we’re talking 35% capital gains with 2.3% dividends. Reinvest the dividends starting next week and the compounded gains over the next decade will provide a beautiful payoff.


Wednesday, May 19, 2010

RightNow is Finally the Time

RightNow Technologies Inc

Price - $15.50

52 Week - $8.60 - $19.99

2009 EPS - $0.16

Trailing EPS – $0.12

P/E – 97.48

Market Cap - 495.80 Mil

For those of you who own shares of RightNow Technologies Inc RNOW, tomorrow will hopefully signal the sign of good things to come, for tomorrow is analyst day. Several had released reports just after the market closed on Wednesday (5/19) and have been positive. From the few I read, buy ratings were maintained and one price target was set at $20, interesting given that they have not seen the sunny side of $20 since 2007, but growth prospects do seem promising.

Back in the day, when the world was peaceful, stabilizing, and not being attacked with cleavers or spewing oil, there was a very hot topic in the equities market known as cloud computing. Just saying it reminds one of simpler times; anyway, there was a multitude of companies that were thought to comprise this “sector for the next decade” with behemoths like IMB, Google, and Oracle taking a somewhat backseat to uber bulls Salesforce.com and VMWare. Around mid January I began to watch five of these very closely and had been until the world fell apart. But in this short period of time we’ve seen remarkable gains, some of which have obviously been pared in the last week as the techs took a major hit. These stocks were the aforementioned Salesforce.com CRM (which I did eventually obtain a long position in) and VMWare VMW, and Netsuite N, Terremark TMRK, and RightNow Technologies RNOW. Below you’ll see the price on Jan 25th, the close on May 19th, the percent change, and the high since then.


<><><><><>1/25.........5/19.............% Change............High

CRM - .............$64.13.....$81.60..........27.2%.....................$88.40

VMW -............$42.00.....$58.82..........40.4%.....................$62.84

N -...................$15.89......$14.67.........-7.6%......................$16.25

TMRK - ............$8.25.........$7.65...........-7.2%......................$8.57

RNOW - .........$16.95.......$15.50.........-8.6%......................$19.99

Clearly the best of breads have been just that, but is it time for one of these smaller stocks to take off? The three were heavily affected by poor earnings reports over the last 2 quarters leading to massive losses, Netsuite and Terremark slightly more so than RightNow. With that being said, CRM reports on the morning of Thursday May 20th and could set the stage for the industry for the next few months.

So what does analyst day mean to RNOW and how sustainable are their growth prospects. RightNow reported on April 28th and the majority of new price targets were set the following day, 6 of which are at $20 or above. Again, the earnings did not meet expectations and as of right now trailing EPS ($0.12) is below that of the 2009 EPS (0.16). The following graph illustrates loses that have been suffered since.

Regardless, RightNow has performed rather strongly over the past 3 weeks never falling below the $15 mark and the above trend line may indicate some support. With several analysts reiterating their buy positions or perhaps even upgrading to a buy rating this stock is step to pop even amongst the world’s volatility.

This graph shows the latest drop in the 15 moving average which began the day before the P&G debacle. The 15 day has crossed beneath the 65 day and if recent history is to repeat itself, it will not be long before another upwards swing occurs.

Fundamentally, RightNow is not the most appealing in its sector, but tech stocks come with inherent risk. They claim to difference themselves from the rest by offering CX: Customer Experience rather than CRM: Customer Relationship Management. They focus on making the website experience better while increasing customer loyalty among other things. Their clients include John Deere, Cisco Systems, and the US Social Security Administration, which of course bodes well for there chances of making it through the next year alive. Analysts agree, with 8 buys, 9 holds, and only 1 sell; though this is mainly a reflection of the industry as a whole. With that being said, there is currently an average target price in the $19.25 range with EPS growth through 2011 estimated to maintain steady growth inline with the industry. Additionally, revenue has risen steadily for the past several years and is likewise expect to continue. With this in mind we can expect to see a drop in the P/E multiple which is currently around 97. Given this data and all that preceded it I personally think that RNOW is a smart wager for the coming quarter to a year as long as the coming earnings come closer to estimates.


Friday, May 7, 2010

Is It Too Late To Feel YUMmy:

5/7/2010 – Yum! Brands Inc.

Price - $39.61

52 Week Range - $31.54 - $44.00

Market Cap – 18.52 Billion

P/E – 17.54

EPS – 2.26

Dividend Yield – 2.1%

As over 16 million Americans tuned into the Kentucky Derby on Saturday, May 1st they could not have helped but notice the barrage of commercials and acknowledgements of promotion from Yum! Brands Inc (YUM). From individual commercials for KFC to Yum specific commercials that left viewers unsure what was being advertised to giant Yum logos on the horse saddle blankets. Yum tried to make its mark everywhere and nearly succeeded, but what’s interesting is the generic-ness of their ads. Does the normal American know what they are referring to if they say go eat at a Yum restaurant? Or are they looking to push their stocks? Several of the commercials were followed with a not so ambiguous NYSE: YUM.

The preceding were the thoughts I was having during the derby. The following were afterthoughts: why is the CNBC Call the Close winner not me, and why is he so short and soo fat and sooo lucky; why does Calvin Borel sound like a drunken confederate throwback and why am I so excited whenever he gives an interview; why did I not have the testicular fortitude to put a C-note of Super Saver who I picked him the Wednesday before the race but was very hesitant over it because of the track conditions and because my previous favorite horse has let me down twice in two months (thanks Rachel, who does in fact run very well in the slop (Haskell))? But I digress…

On to the meat, well, chicken, tacos, root beer, weird pizza, and fried sea food. The following graph will show the ridiculous couple of months that Yum has been having. It reached it low in Q4 2008 at around $21.50, spiked to close the year and dipped again in Q1 2009 to $22. It was then met by 3 quarters of bouncing within a $4 range in the area of $33 to $37. But since February we have seen $10 rise to the $43 range which leaves one with the question, how high is too high to buy, and how long will this bull run. Of course with the turmoil of this week; i.e. Greece falling apart in riots, BP failing to maintain the Transocean Ltd oil spill in the Gulf, and the biggest intraday drop the Dow has every seen on Thursday the 6th; Yum’s fundamentals look more and more appealing. What’s also good about this news is that little of it should affect YUM. The oil spill could put a short term rise in prices to on the inputs at Long John Silver but it will be very minimal in the overall scheme of things considering the number of LJS’s to the number of KFC’s and Pizza Huts. Unfortunately the cost of proteins are also rising which could hit the entire fast food market. With all of the aforementioned turmoil Yum fell to $39 breaking the fairly weak channel seen here. But the fact that it did rebound is very bullish from a technical standpoint. Using the previous yearlong channel we can take this range and add it to the upperband presenting a new channel with a rough range of $38 - $44 (not shown).

On the promotional front, we’ve already discussed the whoring at the Kentucky Derby, but just recently Yum has purchased the rights to the name of the former Downtown Louisville Center, now KFC Yum! Center. Additionally there has been the introduction of a new sandwich at KFC called the Double Down, offered in both original crispy and grilled, that features two pieces of chicken as the bun of a bacon and cheese sandwich. For now its price is a bit high but it should be making a killing until the novelty wears off. Taco Bell and Pizza Hut are doing the opposite in offering drastic price drops on a number of items. Pizza Hut is also sponsoring the pre game and intermissions of Versus hockey coverage. This hits about 3-4 million people of a good weeknight.

What could very well be the most important factor in determining Yum’s future growth prospects is its overseas expansion. Right now China is the biggest market to Yum outside of the United States with over 3,500 units, over 80% of which are KFC’s. But the first Taco Bell in India has just been opened with more to follow. Of course this is a giant market that needs to be capitalized on. This has been proven with the rapid expansion of Pizza Hut’s and competing Domino’s. As of 2007 there were roughly 150 of each and now Domino’s has hopes of taking this number to 700 in the next few years. If the Taco Bell is a hit then it is totally conceivable that we will see 400-500 units in the next 10 years.

Right now the average analyst price target for Yum is at $46 which could be achieved very shortly. Unfortunately Yum is an underachiever from May through September, but this means buy points may unveil themselves within this period. Earnings per share growth has been very strong over the last 5 years and the 2% dividend is nothing to write home about but it’s slightly better than the 1.6% Wendy’s/Arby’s or the 0% from Domino’s. There are not many major players in the fast food industry, but Yum is certainly the second best available behind the over priced McDonald’s. And with the restaurants Yum represents it’s almost automatically diversified. For these reasons we, like the analysts give a buy on Yum with emphasis on long term capital appreciation.