CWS Market Review – August 17, 2021
Posted by Eddy Elfenbein on August 17th, 2021 at 8:38 pm

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Imagine there’s a stock that’s up more than 35-fold in the last 20 years and it’s not followed by a single Wall Street investment analyst.

This investment has crushed just about every hedge fund out there, yet Wall Street is completely unaware of it.

Worst of all, it’s stock in a company that’s known by many. In fact, it’s a favorite of people who work on Wall Street.

The stock I’m talking about is Nathan’s Famous (NATH).

That’s right, the hotdog stand. Nathan’s is not only a great New York institution, but it’s also been a big long-term winner for investors.

Nathan’s is what we call an “Orphan Stock.” That means that it has zero or near-zero analyst coverage.

I love Orphan Stocks. They’re a great place to find overlooked values. Some of the big-name stocks on Wall Street are followed by 20, 30, even 50 analysts. These stocks live in glass fishbowls, but that’s not the case with Nathan’s, which, despite its name, apparently isn’t nearly as famous as I thought.

There are lots of great Orphan Stocks. Ever heard of Atrion (ATRI)? Don’t worry. You’re not alone.

Atrion is a medical-products company based in Dallas. Even though it’s small ($1.2 billion market cap), Atrion is strong in some niche markets like soft-contact-lens disinfection cases. Do you wonder who makes valves for life vests? There’s a good chance it’s Atrion.

Twenty-two years ago, you could have picked up one share of ATRI for $7. The stock closed Tuesday at $665 per share.

Now I’m going to ask you a very easy question: Guess how many firms on Wall Street cover Atrion? I’ll give you a hint. It’s the same as Nathan’s.

That’s right. Zero.

The S&P 500’s had a good run over the years and it looks like a flat line in comparison to ATRI.

How can a stock rise so much for so long and no one on Wall Street has ever thought to start covering it? Part of the reason is that they don’t bring Wall Street any investment banking business.

That’s more of a plus than a minus. It suggests that the company hasn’t entered into any unwise mergers. Or taken on too much debt. Or been acquired at a poor price. Not needing a banker is hardly a bad thing.

Let’s also remember how hard the financial crisis blew through Wall Street. The big houses simply don’t have the big research departments like they used to. The budgets have been cut back. As a result, there are lots of companies that get no analyst coverage.

A few years ago, Jason Zweig highlighted the best-performing stock of the last 30 years. Far from being a well-known large-cap tech stock, the big winner was Balchem (BCPC) of Wawayanda, NY. The company makes “flavorings, fumigating gases and nutritional additives for animal feed.”

Sexy!

From 1985 to 2015, Balchem gained over 107,000%. Zweig noted that Balchem didn’t attract a single major institutional holder until 1999. That was after it returned an average of 21.3% for the previous decade. Even today, Balchem is followed by a grand total of three analysts. Compare that with Facebook, which is followed by over 50.

Every earnings season, investors gather to see what companies have beaten expectations and what companies have fallen short. But for Nathan’s and other Orphan Stocks, there’s no “Street consensus” because no one follows them. For an investor, that’s another bonus. You don’t have to worry about the quarterly earnings game.

Consider an Orphan stock like Chase Corporation (CCF), which is a specialty-chemical company based in Westwood, MA. Chase is one of those Warren Buffett-style stocks. The only difference is that you have to move the decimal point over a few notches. Chase is a quiet firm that consistently generates strong cash flow. It’s a well-run cyclical, with gross margins typically around 35%.

Over the last 20 years, Chase has gained over 2,700%. That’s enough to beat Microsoft (the blue line). Again, no one follows it.

These aren’t microcaps, either.

How about the wonderfully named U.S. Lime & Minerals (USLM)? Since 2003, it’s returned more than 40-fold (dividends included). Zero analysts cover it. In 1990, Century Bancorp (CNBKA) hit a low of $1 per share. Today, it’s at $114 per share, and it’s paid dividends all along the way. Number of analysts? Zero.

Another benefit of investing in Orphan Stocks it that with fewer eyes watching a stock, there may be a better chance of finding a mispriced stock. I wouldn’t say the market is efficient, but the inefficiencies have a better chance of showing up where others aren’t looking for them.

Also, these businesses tend to be fairly easy to understand. Orphans often don’t have arcane off-balance-sheet items or operating divisions around the world. A hobbyist-investor can invest an afternoon and read through a company’s SEC filings and be well-informed on the business.

If you have more questions, you can do something few investors think of: call the company and ask to speak to someone. Better-run companies are happy to speak with their investors. After all, the shareholders are the owners.

You’ll often hear that the type of value investing that Warren Buffett and Charlie Munger made their fortunes on is no longer possible in the world of mass data and Bloomberg terminals. That may be right in terms of amassing a multi-billion fortune, but there are plenty of companies operating well below Wall Street’s radar.

Here are two more:

The Hingham Institution for Savings (HIFS) dates back to 1834. In 1990, the stock was going for just over $1 per share, adjusted for splits. Today it’s at $299. Hingham has consistently increased its dividend over the last 25 years. I love how this company treats it shareholders. Last year, Hingham paid out a special dividend of $1.17 per share on top of its regular dividend.

In the chart below, Hingham is the black line. The blue line is Berkshire Hathaway.

I first told you about the Texas Pacific Land Trust (TPL) in April. The company has a colorful history. It was born over 130 years ago when the Texas and Pacific Railway went bust. The aim of the T&P was to build a southern transcontinental train route. Despite the name, the T&P never made it to California.

The railway was left with a ton of land and a ton of debt. The trust was formed with 3.5 million acres of land that the railway owned. People who held the railway’s worthless bonds got shares of the new land trust. Some oil came along, the trust made money and everyone was happy. Eventually, the shares started trading on the NYSE in 1927.

In 1995, you could have picked up a share for $3.50. Recently, TPL’s been trading at $1,425.

Even though TPL has an amazing track record and a market cap of $11 billion, I don’t want you to think that it’s completely ignored by Wall Street. Not at all!

Two analysts cover it.

We currently have one Orphan Stock on our Buy List which is Miller Industries (MLR). I have high hopes for Miller, and the company recently had a good earnings report.

I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Wall Street Drops on Poor Retail Sales
Posted by Eddy Elfenbein on August 17th, 2021 at 11:59 am

While the world has been captivated by the awful scenes coming out of Afghanistan, the financial markets continue to roll on. The S&P 500 is down today after a surprisingly poor retail sales report.

Wall Street had been expecting a decline of 0.3%. Instead, it was a decline of 1.1%. It appears that the Delta variant is having an impact on consumer behavior.

Though July saw a month-over-month decline, the $617.7 billion in sales still represented a 15.8% acceleration from the same time a year ago.

Most of the monthly decline came from motor vehicles and parts dealers, which fell 3.9%. The auto sector has been a major contributor to the inflation surge in 2021, with used car prices jumping higher amid swelling demand.

Clothing stores saw a 2.6% decline, and sporting goods, musical instrument and book stores fell 1.9%. Online sales also posted a 3.1% drop.

With energy prices continuing to rise, gasoline sales increased 2.4%, and the return of businesses to bars and restaurants pushed food and beverage sales up 1.7%. Eating and drinking establishments saw a 38.4% increase in sales from a year ago.

The retail sales report is important because it tells us how shoppers are behaving. Consumer spending makes up about 70% of the economy.

We’ll learn more about consumer behavior on Thursday when Ross Stores (ROST) releases its earnings. Their last earnings report beat expectations by 52%. Wall Street expects earnings of 94 cents per share.

Morning News: August 17, 2021
Posted by Eddy Elfenbein on August 17th, 2021 at 7:02 am

Days May Be Numbered for the World’s Oldest Bank

Janet Yellen Gets a Chance to Shape the Fed, This Time From Outside

China Steps Up Tech Scrutiny with Rules Over Unfair Competition, Critical Data

Why Cathie Wood Took Her ARKK ETF’s China Stock Exposure to Zero

Soros Joined by D1, Soroban in Timely Exit of Chinese Stakes

World’s Biggest Miner BHP Quits Oil, Piles Into Potash

My Puzzling Entry in the Crypto World

The Senate’s Infrastructure Cryptocurrency Fight was Just the Beginning

Hachette to Buy Workman for $240 Million as Publishing Continues Consolidation

Walmart Tops Estimates, Lifts Outlook as Pandemic Demand Endures

Home Depot’s U.S. Sales Slow as DIY Consumer Demand Wanes

Hotels Try Out Fees for Using the Pool and Checking In Early

Warren Buffett’s Berkshire Hathaway Cuts Stakes in 3 Drugmakers and GM, Adds to Kroger

Ben & Jerry’s Moves to Thwart Knock-Offs of Its Ice Cream in West Bank

Billionaire N.Y. ‘Bottom Feeder’ Buys Malls as Others Run Away

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Another New High Today
Posted by Eddy Elfenbein on August 16th, 2021 at 6:16 pm

Despite the distressing news today, the stock market rallied to close higher after a sluggish morning. The S&P 500 finished the day at 4,479.71. That’s another new all-time high.

On our Buy List, we had new 52-week highs from AFLAC (AFL), Broadridge Financial Solutions (BR), Danaher (DHR), FactSet (FDS), Sherwin-Williams (SHW) and Thermo Fisher Scientific (TMO). Plus Hershey (HSY) came very close.

The NYT Profiles a Short-Seller
Posted by Eddy Elfenbein on August 16th, 2021 at 1:37 pm

The New York Times has an interesting profile of Nate Anderson and his firm Hindenburg Research.

Anderson is a short-seller which is a difficult game. He tries to identify shaky or even fraudulent companies and to profit off betting against their share price.

Last month, federal authorities charged the founder of the electric vehicle manufacturer Nikola, which had gone public in the summer of 2020, with defrauding investors. They were led there partly by the work of a little-known Wall Streeter named Nathan Anderson.

A stock researcher and investor, Mr. Anderson and his upstart firm, Hindenburg Research, are having a moment. In early August, the Securities and Exchange Commission subpoenaed the sports betting firm DraftKings after Hindenburg said in a June report that it had potentially enabled black-market betting. And shares of Lordstown Motors have fallen nearly 70 percent since Hindenburg said in March that the electric truck maker was hyping commercial interest for its vehicle. Federal authorities are investigating Lordstown’s claims.

Mr. Anderson’s five-person firm, which takes its name from the German airship that blew up in 1937, is a newbie in the world of finance. Founded in 2017, Hindenburg specializes in publishing detailed reports about publicly traded companies, poking holes in their stories and alerting investors to potential malfeasance. The boom in special purpose acquisition companies has provided Hindenburg with fertile ground.

It’s not an act of public service. Hindenburg, which has the backing of several investors, also makes financial bets that the stocks of the companies Mr. Anderson is targeting will fall after the firm issues its research. When the stocks do fall, Hindenburg makes its money in what is called a “short” trade.

“He’s become a real giant killer,” said Frank Partnoy, a former derivatives trader who is now a professor of securities law at the University of California, Berkeley, School of Law. He “seems fearless, even when going after some of the biggest corporate targets.”

I’m impressed by short-sellers but I know it’s not for me. The hard part is the waiting game. Even if you’re right, it can take a long time for markets to catch up to reality.

Wall Street Turns Defensive
Posted by Eddy Elfenbein on August 16th, 2021 at 12:00 pm

Like many of you, I’ve been watching the horrible scenes coming out of Afghanistan. The president said he will be addressing the nation at 3:45 pm, just 15 minutes before the close.

So far, the stock market is down about 0.5%. It’s a very defensive day. For example, the Nasdaq is down about twice as much as the rest of the market. Energy is down the most while Utilities, Consumer Staples and Healthcare are the leaders.

The S&P 500 Low Vol Index is up 0.57% today while the S&P 500 High Beta is down 1.38%.

The Wall Street Journal notes that corporations are hoarding cash.

Cash and short-term investments on corporate balance sheets globally are at an all-time high of $6.84 trillion, according to data from S&P Global, extrapolated from second-quarter earnings reports. That is 45% higher than the average in the five years preceding the pandemic and a 2.6% increase from the previous quarter.

In April, analysts at Goldman Sachs had lifted their 2021 forecast for spending growth by S&P 500 companies to 19% from 10%, “as uncertainty continues to fall and global economies continue to reopen.”

Morning News: August 16, 2021
Posted by Eddy Elfenbein on August 16th, 2021 at 7:05 am

Japan’s Economy Returns to Growth, But Virus Threat Looms

Higher Inflation Target Could Trigger Jobs Boom, Former Fed Staffers Say

U.S. SEC Prepares to Take on Corporate America Over Workforce Disclosures

The Delta Variant Is Already Leaving Its Mark on Business

Companies Are Hoarding Record Cash Amid Delta Fears

50 Years After Going Off Gold, the Dollar Must Go for Crypto

Democrats’ Debt Dare Risks Shutdown Fight With No Easy Way Out

Taxing Rich Peoples’ Empty Homes Isn’t Helping the Housing Crisis

Hedge Funds Are Demanding Their SPAC Money Back

A Skeptical Stock Analyst Wins Big by Seeking Out Frauds

Detroit Sticks with Trucks, SUVs Despite Lofty 2030 Goals for EVs

You’ve Never Heard of the Biggest Digital Media Company in America

The Cutthroat World of $10 Ice Cream

How a 27-Year-Old Built a $3 Billion Fortune After an Allergic Reaction

Google Infringed on Patents Owned by Sonos, a Trade Judge Says

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Morning News: August 13, 2021
Posted by Eddy Elfenbein on August 13th, 2021 at 7:01 am

China’s Port Shutdown Raises Fears of Closures Worldwide

Oil Extends Losses as Delta Variant Slows Demand Recovery

Mystery Hedge Fund Bolsters 500% Return on Curious Nasdaq Stock

As Fed Shifts Gears, Shaping Consensus Gets Trickier for Powell

The Way the Senate Melted Down Over Crypto Is Very Revealing

Fortune Raised 429 Ether—About $1.3 Million—In Its First-Ever NFT Sale

Adidas Sells Reebok to Authentic Brands for $2.5 Billion

Disney+ Reaches 116 Million Subscribers, and Its Parks Division Returns to Profitability

Speaker Pioneer Sonos Fighting Google in ‘Golden Age of Audio’

Apple’s Child Protection Features Spark Concern Within Its Own Ranks

Drumbeat Grows Louder for BHP to Exit Petroleum

Reddit is Valued at More than $10 Billion in Latest Funding Round

Amazon Drops ‘Draconian’ Policy on Making Games After Work Hours

The Wedding Business Is Booming, a Short-Term Jolt to the Economy

Richard Branson Sells $300 Million Stake in Virgin Galactic

The Elan of Elon Musk

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Jobless Claims Fall to 375,000
Posted by Eddy Elfenbein on August 12th, 2021 at 11:47 am

This morning’s jobless claims report fell to 375,000, down from 387,000 last week. This was the third weekly decline in a row.

We’re still above the pandemic low of 368,000 reached twice earlier this summer. Continuing claims fell to 2.866 million. That’s the lowest in 17 months.

Jobless claims numbers have come down sharply since the spring as the economy has recovered, and they have settled near the 400,000 level in recent weeks. The four-week average is now 396,250 initial claims.

The latest jobless claims report, which reflects the first week of August, came a week after the July jobs report showed a bigger-than-expects gain in employment. There were also a record high number of open jobs at the end of July.

Eligibility of unemployment benefits, and the payouts, were expanded during the pandemic as businesses were forced to close due to public health restrictions. Some states have already ended the expanded programs, while the national program is set to expire next month.

The bond market doesn’t seem terribly worried. The yield on the five-year Treasury has crept up from 0.65% on August 3 to 0.81% yesterday, but it’s still below where it was in late June.

The futures market thinks the odds are against any Fed rate hikes over the coming 15 months.

Two More Earnings Reports
Posted by Eddy Elfenbein on August 12th, 2021 at 10:44 am

Our final three earnings reports for Q2 earnings season are due out today. The first two came out before the opening bell.

Broadridge Financial Solutions (BR) said it made $2.19 for its fiscal Q4 which matched Wall Street’s consensus.

“Broadridge delivered strong fiscal year 2021 results, with 10% Recurring revenue growth, 13% Adjusted EPS growth, and record sales driven by increased investor participation and strong demand for digital solutions,” said Tim Gokey, Broadridge’s CEO.

“We have continued to invest in our long-term growth both organically and with the recent acquisition of Itiviti. We are also continuing to return cash to our shareholders, and we are raising our annual dividend by 11% to $2.56. Broadridge has increased its annual dividend every year since we became a public company, and we have announced double digit increases in eight of the past nine years, highlighting our commitment to delivering long-term shareholder returns,” Mr. Gokey added.

“Looking ahead to fiscal year 2022, we expect another strong year, with 12-15% Recurring revenue growth, continued margin expansion, and 11-15% Adjusted EPS growth. Broadridge continues to execute on our long-term strategic goals across Governance, Capital Markets and Wealth & Investment Management, and we remain on track to deliver at the higher end of our three-year financial objectives.”

For the coming year, Broadridge expects earnings growth of 11% to 15%, recurring revenue growth of 12% to 15% and operating margins around 19%.

For the year, Broadridge’s revenues rose 12% to $1.532 billion. Annual EPS was $5.66. That’s up from $5.03 per share last year.

The company is increasing its quarterly dividend from 57.5 cents per share to 64 cents per share. That’s an increase of 11.3%. This is Broadridge’s 15th annual dividend increase in a row.

Middleby (MIDD) said it made $2.11 per share for Q2. Wall Street had been expecting $2.04 per share. Sales rose 71.4% to $808.8 million. At the end of the quarter, MIDD’s backlog stood at $994.2 million compared with $522.7 million at the end of the fiscal 2020.

“Our strong second quarter results reflect the ongoing recovery in our foodservice businesses with measurable progress toward our long-term growth initiatives and realized profitability improvements at all three of our business segments,” said Tim FitzGerald, CEO of The Middleby Corporation. “We continued to make investments in technology solutions to capture rapidly-evolving market trends and execute upon our strategic sales initiatives as we position for the future.”

Disney‘s (DIS) earnings are due out after the close.