Archive for March, 2011
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Follow Up on Raven Industries
Eddy Elfenbein, March 10th, 2011 at 11:55 amSince I wrote about Raven Industries (RAVN) the other day and its remarkable long-term performance, I wanted to follow up because the company reported its Q4 earnings today.
Raven had a great fourth quarter. Sales and earnings were up 27%. For the year, sales were up 32% and net income rose 42%. This is from today’s press release:
Rykhus concluded, “This past year was another one for the record books. What makes this even more significant is the fact that we accomplished growth in sales and profits during an unprecedented period of reinvestment across the company. We believe these investments will help us sustain our long-term growth track and we could see double-digit profit growth even in this coming year. We’re really just beginning to test the potential of what we can accomplish with our corporate culture of innovation and strong competitive drive.
“While the economic environment remains uncertain, our best defense is to stay focused on our market niches and run profitable businesses. Due to our strong growth opportunities, as well as scaling necessities, we are using cash to invest in organic growth more aggressively than in the recent past. Along with the continued hiring of new people we estimate our capital spending this current fiscal year will more than double last year’s $14 million. We also continue to look for complementary acquisitions. At the same time, our cash management strategy is geared to support continued growth in quarterly dividends.”
I’m not recommending the stock, but I’d love to add it one day to a future Buy List. My point is to show investors that we should concentrate on how well a company is running its business.
Too many investors do what I call “investing at 40,000 feet.” This is when their portfolio is determined by what they think is happening with the Fed or inflation or the broader economy. There are always well-run companies out there doing a good job and Raven is one of them.
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What If the Stock Market Was a Bond?
Eddy Elfenbein, March 10th, 2011 at 10:21 amHere’s an update to one of my more off-the-wall ideas. I took the data for the total return for the Wilshire 5000 going back 40 years. I wanted to see what that return would look like in “bond form.”
Weird, no? Let me explain: I took the daily changes for the Wilshire 5000 and applied them to a hypothetical consol bond (meaning one that never matures).
I had to assume a starting yield for the first data point in 1971, so there was some guesswork on my part. While this “bond” doesn’t really exist, this table below shows exactly what the stock market really did.
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Morning News: March 10, 2011
Eddy Elfenbein, March 10th, 2011 at 6:56 amMoody’s Downgrades Spain Debt Rating
ECB Says ‘Strong Vigilance’ Needed to Contain Price Risks
China Yuan Down Late; February Trade Deficit Surprises
China, HK Shares Slip, Dragged by Banks on PBOC Cash Mop-Up
Bank of Korea Raises Key Interest Rate to 3% as Inflation Breaches Target
Oil Prices Steady as Libya Conflict Rages On
Heat Damages Colombia Coffee, Raising Prices
Foreclosures Plunge 27% – Biggest Drop on Record
U.S. Solar Power Market Reaches $6 Billion In 2010, Installations Double
Catalyst To Buy Walgreen Drug-Benefit Unit For $525 Million
BMW 2010 Profit Surges on Demand for 5-Series, Mini
Hurt by Debt, Dynegy Says Bankruptcy Is a Possibility
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Inflation Expectations Soar
Eddy Elfenbein, March 9th, 2011 at 1:22 pmI think the predictions for the imminent return of hyperflation are crazy, and fortunately the market agrees. However, inflation expectations have crept up recently.
Here’s a look at the spread between the 1-year Treasury and the TIPs that’s due on April 15, 2012 (it’s not a perfect apples-to-apples comparison but it’s close enough to make the point).
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The Bull Turns Two
Eddy Elfenbein, March 9th, 2011 at 11:32 amTwo years ago today, the S&P 500 closed at 676.53. That was the market’s lowest close since September 12, 1996. The Dow was in even worse shape. Adjusting for inflation, the Dow was basically unchanged over the preceding 43 years.
As low as the market was, some folks were saying that it was headed still lower. In an article from exactly two years ago today, Bloomberg noted that David Rosenberg thought the S&P 500 “may bottom out at 600 in October.”
Bloomberg quoted Nouriel Roubini as saying “it’s highly likely it goes to 600 or below.” His reasoning was that the S&P 500 would earn $50 in 2009 and investors would pay 12 times that.
Sorry, professor. As it turned out, the S&P 500 earned $56.86 in 2009 but investors were willing to pay a lot more than 12 times earnings. In fact, the index broke 1,130 just before 2009 ended which was close to 20 times earnings.
Why were investors willing to pay so much? Because earnings continued to recover. Last year, the S&P 500 earned $83.78 and Wall Street currently expects $96.19 for this year. Even now, the S&P 500 is trading at 13.65 times this year’s expected earnings which is a fairly modest valuation by historical standards.
Did the perma-bears welcome the rally? Nope; they castigated it at every turn. This has been the most hated rally in Wall Street history:
Analysts Turning Bearish on S&P 500 After 14% Rally
Morgan Stanley Says S&P 500 to Drop 25%, Cuts Outlook
S&P 500 Overvalued by 40%, Set to Fall, Smithers Says
By Most Measures, Stocks No Longer Look CheapBut the numbers tell the truth. Since the end of February 2009, the market value of the Wilshire 5000 has increased by $6.6 trillion which is more than $20,000 per every American. The S&P 500 made its fastest double since the Great Depression and includes a 16% drop during the spring and summer of 2010.
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The Analysts Come Up Short
Eddy Elfenbein, March 9th, 2011 at 9:42 amWhat factors work best when looking at stocks? Three academics (Kateryna Shapovalova, Alexander Subbotin and Thierry Chauveau) took a look. Here’s an excerpt from their paper, “Returns Premia on Company Fundamentals.”
Several accounting fundamentals do generate significant return premia, regardless of whether the sensitivities to the conventional systematic risk factors and price momentum are controlled for or not. Testing a large set of accounting fundamentals, we find that the book-to-price ratio, company size, past year sales growth and the amount of reinvested return on equity (“internal growth”) have the most pronounced impact on returns. Surprisingly, indicators related to earnings and their growth and analysts’ forecasts have relatively small impact. Besides, indicators computed over the past year contain more information than the long-term averages.
This isn’t very surprising. It really doesn’t matter which value factor you look at; they all basically measure the distress factor — how much the market is discounting the stock. Much of what the analysts have to say is already factored in.
With a study like this, I think the key is to see when a “price to something” variable is down but some other factor (like ROE) is still healthy.
I should add that I really wish they’d ditch all that three-factor model stuff.
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Morning News: March 9, 2011
Eddy Elfenbein, March 9th, 2011 at 7:04 amOil Falls a Second Day on OPEC Supply Speculation, Rising U.S. Stockpiles
Brent Pushes to $114 as Libya Effect Persists
Bond Yields Soar in Portugal as Euro Drops; Stocks, U.S. Futures Fluctuate
Affordable Housing Highlighted in Curbing China’s Soaring Home Prices
Birinyi Buying as Biggest Bull Market Since ’55 Hits Third Year
Rising Gas Cost Finds the Nation Better Prepared
George Soros Says U.S. Spending Cuts to Brake Economy
Berkshire Takes $2.25 Billion in Dividends From Burlington
BofA Segregates Almost Half of its Mortgages Into ‘Bad Bank’
Daimler,Rolls-Royce EUR3.2 Billion Offer For Tognum Undervalues Co -Holder
European Aerospace/Defense Giant EADS Swings to Fourth-quarter Profit
Coffee Talk: Starbucks Chief on Prices, McDonald’s Rivalry
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Some Numbers to Consider
Eddy Elfenbein, March 8th, 2011 at 9:10 pmFrom the WSJ:
New Chinese government figures show its national debt load remains low compared with other major economies. But including the debts of local governments and many parts of the state-owned banking sector, as many economists say is proper, shows the constraints facing Beijing in the fight against inflation, its top economic priority.
In a report issued during the annual session of the National People’s Congress, China’s legislature, the Ministry of Finance said central government debt at the end of 2010 was $1.03 trillion. That number is equal to about 17% of China’s gross domestic product, far below the levels of the U.S., Japan, and major European countries.
China’s government debt is mostly held domestically. In contrast, about half of the U.S. federal government’s debt is held by China and other foreigners, a source of anxiety among policy makers and the public who fear it makes the U.S. vulnerable to pressure from foreign creditors.
China, meanwhile, sits on foreign-exchange reserves that have grown to $2.85 trillion.
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Buy List +1.53%
Eddy Elfenbein, March 8th, 2011 at 7:16 pmToday was a huge day for the Buy List. We were up 1.53% compared with just 0.89% for the S&P 500. For the year, the Buy List is up 6.50% compared with 5.10% for the S&P 500.
Here’s a look at how our stocks performed today:
Eddy Elfenbein is a Washington, DC-based speaker, portfolio manager and editor of the blog Crossing Wall Street. His