Archive for March, 2011

  • Raven Industries — Up 210-Fold
    , March 8th, 2011 at 8:39 am

    One of the lessons I give investors is that little-known stocks or “boring” companies can be great investments. In fact, many of these types of investments have a distinct advantage over more glamorous sectors.

    The problem with investing in an embryonic industry is that there are so many players and improvements occur so rapidly that it’s hard to know who will win out.

    I’ll give you a good example. Check out the number of defunct car companies. Not many made it past about 1922 or so. Ever since I remember, we’ve always talked about the Detroit’s “Big Three.” So we went from many dozens to three, even though they’re not really three anymore.

    So I tend to shy away from high-flying stocks in popular sectors. I like predictable businesses in industries I know will be around. The lesson for investors is to concentrate on how well a business is run and not so much on finding the next “Google.” It really is astonishing to see how little interest there is in well-run but dull businesses.

    Recently, I gave you the example of Seaboard (SEB). Here’s another little-known gem, Raven Industries (RAVN).

    For starters, they’re based in Sioux Falls, SD, so I like them already.

    The company has a market cap of just under $1 billion. They’re not in any of the major indexes—and only a few analysts on the Street follow the stock. Raven has less than 1,000 employees and daily trading volume averages about 66,000 shares. In other words… Snoozesville.

    Here’s a company description from Hoovers:

    Quoth the Raven, “Reinforced plastic, electronics, flow control devices, and balloons!” Raven Industries’ engineered films division does make reinforced plastic sheeting for various applications, including hot air balloons! Its electronic systems division offers electronic manufacturing services, as well as design support, material procurement and management, and eco-stress testing. An applied technology leg manufactures high-tech agricultural aids, from global positioning system (GPS)-based chemical spray equipment to field computers and steering systems. Raven’s Aerostar subsidiary produces high altitude research balloons, parachutes, and protective wear used by US agencies. Goodrich is a major customer.

    Steering systems!

    Despite Raven’s low profile, the stock has been a massive performer over the last 30 years. Since March 1981, shares of RAVN are up 210-fold (that’s 20,900% for liberal arts majors). That’s an average of 19.5% per year. Raven has been slightly outperformed by Berkshire Hathaway (BRKA). Both stocks have beaten the S&P 500 so badly that the index looks like a girlie flat line in comparison.

    I’d bet Raven has done ever better than Buffett over the years since they pay out a dividend and Berkshire doesn’t. The company has sweetened its dividend for the last 24 years in a row. Expect #25 very soon.

    Currently, RAVN pays out a quarterly dividend of 16 cents per share which works to a yield of 1.2%. On top of that, Raven has also paid out a special dividend every so often. I love when companies do that. They’re basically saying “Yeah, we’ve so profitable, here’s some extra cash we don’t know what to do with.” In 2008 and 2010, RAVN paid special dividends of $1.25 per share.

    If you own Raven, the next time someone asks you where you’re investing, be sure to say, “Reinforced plastic, electronics, flow control devices, and balloons!”

    It’ll be our inside joke.

  • Smith Barney Name May Go Away
    , March 8th, 2011 at 7:06 am

    The financial crisis has unquestionably altered the face of Wall Street. Today’s WSJ reports that Morgan Stanley (MS) is considering getting rid of the name Smith Barney.

    If Smith Barney were to be dropped it would join a raft of Wall Street icons to disappear. Morgan Stanley itself killed off the Dean Witter name, and Citigroup offed Salomon Brothers. The financial crisis claimed the names Lehman Brothers and Bear Stearns.

    Morgan Stanley now holds 51% of the joint venture, Wall Street’s biggest brokerage force, and has said it plans to buy the rest in the coming years. Morgan Stanley Chief Executive James Gorman has made the retail brokerage business a key part of his strategy for the firm.

    A Morgan Stanley spokesman declined to comment specifically on a potential name change, but said “we regularly survey clients about a lot of things relevant to our brand, and I wouldn’t read a whole lot into this.”

    Here’s one of John Houseman’s Smith Barney ads with the famous tagline, “They make money the old fashioned way. They URRHNN it.”

  • Morning News: March 8, 2011
    , March 8th, 2011 at 6:47 am

    Oil Slips as OPEC Discusses Output; Goldman, Merrill Raise Price Forecasts

    German Factory Orders Rose in January on Surging Domestic Demand

    Hong Kong Stocks Advance to One-Month High as Banks, Gold Gain

    Greek, Spanish, Portuguese Bonds Drop as Debt Sales Test Investor Appetite

    U.S. Home Sales Accelerate as Prices Decline Amid Rebound

    Exchanges Duel for Customers

    Attorneys General Push for Loan Reductions, Seek Bank Deal Within 2 Months

    Debit Card Fees Prompt a Push Near Deadline

    Hitachi Rises on $4.3 Billion Sale of Hard-Drive Unit to Western Digital

    Boeing Deals Show Rising Clout of Asian Airlines

    Goldman’s Pariah Status Fades as Broadbent Joins BOE Monetary Policy Committee

    Subway Runs Past McDonald’s Chain

    Howard Lindzon: Discussing Disqus…The Case for Style, Instinct and Less Due Diligence

    Paul Kedrosky: LICs Heart BRICs

    Joshua Brown: TIME’s Embarrassingly Useless “Top 25 Financial Blogs” List

  • A Case of the Mondays
    , March 7th, 2011 at 2:35 pm

    This is just an ugly day of trading. The S&P 500 has been as low as 1,303. The index has to stay above 1,297 to remain above the 50-DMA.

    Once again, the cyclicals are getting whacked hard. The Morgan Stanley Cyclical Index (^CYC) has been down as much as 1.82%. The CYC-to-S&P 500 ratio will likely close at its lowest level since November.

    The Buy List is down with the overall market. Some cyclicals like Ford (F) and Moog (MOG-A) are getting dinged. I think Oracle (ORCL) looks very good below $32 per share.

    Outside the Buy List, I see that Cisco (CSCO) is now at its lowest level in 20 months. I hate to think of all that money wasted on share buybacks.

  • Gold-Silver Ratio Falls Below 40 for the First Time Since the Early 1980s
    , March 7th, 2011 at 8:29 am

    Speaking of gold and silver, the gold-to-silver ratio just dipped below 40 for the first time since the early 1980s. This ratio has fascinated people for centuries. Way back in antiquity, Plato mentioned that the ratio was 12-to-1.

    In 1792, the U.S. Congress, at the advice of Alexander Hamilton, passed the Coinage Act of 1792. This was the government’s first attempt at price-fixing (and not the last). The act defined a U.S. dollar as 371.25 grams of silver or 24.75 grams of gold. In other words, Hamilton pegged the Gold/Silver ratio at 15. In 1834, Congress had to bump it up to 16.

  • Morning News: March 7, 2011
    , March 7th, 2011 at 6:47 am

    China Yuan Hits Record High Late On 3rd Consecutive Record-Low Fixing

    Greek Debt Rating Cut 3 Steps by Moody’s on Rising Default Risk

    Demand Offsets Impact of Oil’s Surge on Nikkei, UBS Says

    Moody’s Downgrades Greece, And Portuguese Yields Are Surging, So Of Course The Euro Is Rallying

    Russia Plans $10 Billion Fund to Attract Global Buyout Firms

    U.N. Says World Vulnerable to Food Crises

    Oil at $110 May Trigger Pain U.S. CEOs Weathered at $100

    Fed Unlikely to Remove Its Economic Stimulus Just Yet

    Japan’s Terumo To Buy Major US Medical Firm For $2.63 Billion

    James River Coal to Buy Coal Companies for $475 Million

    LVMH Moet Hennessy Louis Vuitton Takes Controlling Stake In Italy’s Bulgari

    From Guns N’ Roses Bassist to Money Manager

    Joshua Brown: The Truth About Social Media and the Brokerage Industry

    Howard Lindzon: The Facebook Over Reach and Why One Social Network Won’t Rule the Web

  • Time to Rip Up Those Sell Orders
    , March 4th, 2011 at 4:53 pm

    That’s it folks, the week is done. Gold is back over $1,428. The S&P 500 lost 0.74% and the Buy List dropped 0.79%.

    I wrote a sell order for NICK but then decided to rip it up. Naturally, this got plenty of laughs.

  • Well…It’s Not a Completely Jobless Recovery
    , March 4th, 2011 at 11:55 am

    Since the recession ended (yes, ended), the U.S. economy has created a grand total of 22,000 jobs.

    Here’s the table from today’s nonfarm payroll report:

    Month NFP Change
    Jun-09 130,493 -502
    Jul-09 130,193 -300
    Aug-09 129,962 -231
    Sep-09 129,726 -236
    Oct-09 129,505 -221
    Nov-09 129,450 -55
    Dec-09 129,320 -130
    Jan-10 129,281 -39
    Feb-10 129,246 -35
    Mar-10 129,438 192
    Apr-10 129,715 277
    May-10 130,173 458
    Jun-10 129,981 -192
    Jul-10 129,932 -49
    Aug-10 129,873 -59
    Sep-10 129,844 -29
    Oct-10 130,015 171
    Nov-10 130,108 93
    Dec-10 130,260 152
    Jan-11 130,323 63
    Feb-11 130,515 192

    According to NBER, the recession ended in June 2009. Since then, the number of nonfarm payroll jobs has increased from 130,493 to 130,515.

  • NFP = 192,000
    , March 4th, 2011 at 8:34 am

    The employment report for February just came out. The economy created 192,000 jobs last month which was below Wall Street’s forecast of 200,000. Nonfarm payrolls for December were revised up to 152,000 from 121,000. January’s NFP was revised to up 63,000 from 36,000.

    The unemployment rate ticked down to 8.9%. That’s the lowest rate since April 2009. The Wall Street Journal notes that if labor-force participation were at pre-recession levels, unemployment would be 11.5% instead of 8.9%

    Private hiring, which excludes government agencies, rose by 222,000 in February, exceeding the 200,000 median forecast in the Bloomberg survey. Private payroll gains averaged 145,000 during the first two months of the year, compared with 120,000 during the last half of 2010.

    Factory payrolls increased by 33,000 last month, exceeding the survey forecast of a 25,000 gain.

    Service Employment

    Employment at service-providers rose 122,000. Construction payrolls rose 33,000 and transportation and warehousing jobs increased by 22,000. Retail trade employment declined 8,100.

    Government payrolls decreased by 30,000 last month reflecting cuts at the state and local level. Federal government employment was unchanged.

    Average hourly earnings rose to $22.87 from $22.86 in the prior month, today’s report showed. The average work week for all workers held at 34.2 hours.

    The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — decreased to 15.9 percent from 16.1 percent.

    The report also showed a decrease in long-term unemployed Americans. The number of people unemployed for 27 weeks or more was little changed as a percentage of all jobless, at 43.9 percent.

  • CWS Market Review – March 4, 2011
    , March 4th, 2011 at 7:55 am

    Next week, the bull market turns two years old. This has probably been the most hated rally in Wall Street history. At nearly every point, some talking head has declared that it’s a bogus rally built on cheap money.

    Well…maybe. But still, the market has continued to climb higher and higher and higher. The lesson is that focusing on high-quality companies is much more profitable over the long term than is making broad pronouncements of doom.

    Measuring from March 9, 2009 to Thursday, the S&P 500 has gained 96.73% (excluding dividends). That’s not a bad return for five or six years, but for two years…heavens to murgatroid, it’s pretty darn impressive. As strong as the market’s been, our Buy List has done even better. Over that same period, the Buy List is up an amazing 133.40% (that’s adjusted for rebalancing the Buy List each year).

    I recently said to expect a sideways market this spring, and ever since President’s Day, that’s pretty much what we’ve seen. I don’t think we’ll see a major downturn-it will probably be closer to a range-bound market for the next few weeks. On Thursday, the S&P 500 closed at 1,330.97 which is its highest close since the mini sell-off began nearly two weeks ago. This latest swoon may already be over. We’re now less than 0.9% from making a new two-and-a-half year high on the S&P 500.

    Let’s look at the positive news: The S&P 500 is still above its 50-day moving average. Historically, the market generally does well as long as we stay above the 50-DMA. On Thursday, the index closed above its 50-DMA for the 126th trading session in a row. That’s a tie for the seventh-longest streak since 1932. The reason the streak has gone on so long isn’t merely due to rising prices, but it’s also due to low volatility. Low volatility isn’t a good thing in itself, but it’s a sign that investors aren’t as nervous as they used to be.

    The stock market has also risen for both January and February. Historically, that’s a very good sign. Since 1938, the market has risen in both January and February 26 times. Every single time since then, the stock market closed higher for the next ten months of the year. The record is a perfect 26-0. The average annual gain in those years is 20.73%.

    We’re also in the crucial March-April time slot which has historically been the top-performing two-month period of the year. On average, the market has risen 3.13% over these two months.

    Another piece of good news is that the sell-off in the bond market seems to have cooled off. From August to February, the yield on the 30-year Treasury bond rose over 1.3%. That’s a big jump and those higher yields certainly tempted some stock investors to jump from equities into debt. Over the past three weeks, however, the yield on the 30-year has slowly climbed down. Please don’t get caught up in the endless screams about the collapse of the dollar or the prospects of hyper-inflation. These are certainly concerns, but as of right now, there’s zero evidence that the market is worried about them. Some of these guys you hear know that the crazier and more apocalyptic the predictions they make, the more attention they’ll get.

    The U.S. Dollar Index is down but it’s hardly in free fall. In fact, the Dollar Index is higher than it was three years ago. A good proxy for the market’s view of inflation is the spread between the yield on the 30-year Treasury and the yield on the 30-year TIPs. Right now, the spread is about 2.5%. Historically, inflation hasn’t been a problem for stocks until it’s over 5%.

    Since we’ve been focused on a business rebound, our Buy List continues to do very well. Even during this recent turbulence, the Buy List has outperformed the S&P 500 by 0.65% over the last six trading sessions. That may not sound like a lot, but it’s very good for a broadly diversified portfolio. Having said that, let me remind you that it’s very important to be well-diversified in this market. Please make sure a few different industries are represented in your portfolio.

    In each issue of CWS Review, I highlight a few Buy List stocks that look especially good at the moment. Last week, I mentioned Stryker ($SYK) and I’m happy to see that the shares broke out to another two-year high. Stryker is a very solid company and it’s already a 20% winner for us this year. The stock has been on a tear since they gave very strong guidance for 2011.

    Deluxe ($DLX) is one of the quieter names on this year’s Buy List, but don’t be fooled; it’s doing very well (+14.81% YTD). DLX hit a new 52-week high on Thursday as did Reynolds American ($RAI). Jos. A Bank Clothiers ($JOSB) is looking like it might be the next stock to break out.

    Oracle ($ORCL)also looks very good at this price. The company will release its next earnings report on March 24. Wall Street’s current consensus is for 49 cents per share. I haven’t finalized my number-crunching, but I suspect that Oracle’s earnings will come in higher than that. Actually, it might be a lot higher. ORCL is a strong buy below $35.

    Finally, Abbott Labs ($ABT) is also pretty inexpensive here. The dividend currently yields 4% which is more than a 10-year Treasury bond. In January, Abbott gave full-year guidance of $4.54 to $4.64 per share. That’s impressive growth over 2010’s EPS of $4.17. (The U.S. Treasury isn’t growing its profits like that!) I’m not sure why ABT hasn’t responded more favorably. Perhaps it will soon. Either way, ABT is a very good buy below $50 per share.

    Let me caution you not to be impressed by the recent rally in gold. The fundamentals are clearly on gold’s side, meaning low real interest rates. The problem is that I don’t believe it’s a lock that those low rates will stay for a long time. It could happen, but the Fed can call off the party at anytime. It’s not a risk worth taking.

    That’s all for now. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    Best – Eddy