Tag Archives: investing

Valuation Dashboard: Consumer Staples – Update

Summary 4 key factors are reported across industries in the Consumer Staples sector. They give a valuation status of industries relative to their history. They give a reference for picking stocks in each industry. This is part of a monthly series of articles giving a valuation dashboard in sectors and industries. The idea is to follow up a certain number of fundamental factors for every sector, to compare them to historical averages. This article covers Consumer Staples. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. You can refine your research reading articles by industry experts here . A link to a list of stocks to consider is provided in the conclusion. Methodology Four industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). They are compared with their own historical averages “Avg”. The difference is measured in percentage for valuation ratios and in absolute for ROE, and named “D-xxx” if xxx is the factor’s name. For example, D-P/E = (Avg P/E – P/E)/Avg P/E . It can be interpreted as a percentage in under-pricing relative to a historical baseline: the higher, the better. It points to over-pricing when negative. ROE is already a percentage. A relative variation makes little sense. That’s why we take the simple difference: D-ROE = ROE – Avg ROE . The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors. Industry valuation table on 12/2/2015 The next table reports the 4 industry factors. For each factor, the next “Avg” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference as explained above. So there are 3 columns for each ratio.   P/E Avg D- P/E P/S Avg D- P/S P/FCF Avg D- P/FCF ROE Avg D-ROE Food&Staples Retail 22.22 19.16 -15.97% 0.44 0.34 -29.41% 44.43 33.01 -34.60% 12.01 9.78 2.23 Beverages 34.93 22.05 -58.41% 2.02 1.34 -50.75% 46.09 29.6 -55.71% 5.2 7.06 -1.86 Food 24.01 20.25 -18.57% 1.36 0.91 -49.45% 29.97 27.51 -8.94% 7.89 8.43 -0.54 Tobacco* 24.24 14.83 -63.45% 3.53 2.13 -65.73% N/A N/A N/A N/A N/A N/A Household Products 27.22 21.4 -27.20% 1.97 1.3 -51.54% 39.8 30.55 -30.28% 15.25 17.18 -1.93 Personal Products 19.31 18.05 -6.98% 1.69 1.51 -11.92% 15.74 20.7 23.96% -2.58 2.1 -4.68 * P/FCF and ROE are currently outliers in Tobacco Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Price/Free Cash Flow: Quality (ROE) Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF ( XLP ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion The Consumer Staples sector has underperformed the broad market by about 2% in the last 3 months. XLP is about 3% below its all-time high of October. The 5 most prominent S&P 500 consumer staples stocks in the recent market recovery are Costco Wholesale Corp (NASDAQ: COST ), Dr Pepper Snapple Group (NYSE: DPS ), Hormel Foods Corp (NYSE: HRL ), Molson Coors Brewing (NYSE: TAP ), Tyson Foods Inc. (NYSE: TSN ). DPS, HRL, TSN have hit an all-time high this week. TAP and COST did it last month. No industry group looks attractive when considering historical valuations and quality factors. The Personal Products industry has significantly improved its valuation factors since last month, but the quality factor is stable and bad. However, there may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in Consumer Staples beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article.

Spinoffs: Looking For Value

Investing in and around spinoffs has been an extremely lucrative endeavor over the past decade, according to the Nov. 30 issue of Value Investor Insight. Indeed, since the end of 2002, Bloomberg has maintained a U.S. Spin-Off Index, which tracks the share prices of newly spun-off companies with market capitalizations of more than $1 billion for three years after they begin trading. Over the near 13-year period tracked, Bloomberg’s U.S. Spin-Off Index has risen 557%, compared to a return of 137% for the S&P 500. Moreover, spinoff activity is close to an all-time high as companies, spurred on by activists, try to unlock value for shareholders by splitting up their businesses. This year’s total number of spinoffs is expected to be 49, the fourth-highest level on record. However, more often than not, due to a number of factors, spinoffs are mispriced by the market, which can lead to some very attractive opportunities for value investors. In this month’s issue of Value Investor Insight , four spinoff experts – Murray Stahl of Horizon Kinetics, Joe Cornell of Spin-Off Advisors, The London Company’s Jeff Markunas and Jim Roumell of Roumell Asset Management – discuss the key factors that lead to spinoff mispricing and where they’re looking for opportunity today. (click to enlarge) Spinoffs: Four key factors There are four key structural factors that can lead to spinoffs being mispriced : Limited information – The documentation filed with the SEC when companies split can be quite complex, and the pro-forma financials can be difficult to analyze. Moreover, analyst coverage tends to be limited, and investors, rather than do the legwork themselves, would rather look elsewhere. Forced selling – A spinoff may see a parent company force a SpinCo onto a shareholder that doesn’t want, or legally can’t hold the shares, which will lead to selling. An S&P 500 Index fund can’t own a spinoff company outside the index, for example. Sandbagging – SpinCo managements usually receive significant financial incentives to underperform and over-deliver. Top managers’ incentive stock plans are typically based on average share prices of the spinoff company for the first 20 or so days of trading after the spinoff, which can lead to sandbagging of the highest order before those prices are locked in. ” Capitalism works ” – According to Value Investors Insight , when a SpinCo leaves its parent, “pent-up entrepreneurial forces are unleashed” as “the combination of accountability, responsibility, and more direct incentives take their natural course.” In other words, without the parent, the newly independent company can take advantage of capitalist forces to improve performance. Spinoffs: Looking for value So what do the experts look for in a good spinoff? According to Murray Stahl of Horizon Kinetics, there are four key characteristics to look for when a company spins off an unwanted subsidiary or division. First, a higher-margin business is spinning off a lower-margin business. Second, CEO movements. If the CEO of the larger company decides the best place to be is with the spinoff it’s, “a message to heed.” There’s also the capital structure of the SpinCo to consider. Too much debt dumped on the SpinCo from the parent can be a burden that haunts the company and strangles growth. That said, if figures show that the debt can be paid down over time, this creates an opportunity, like a publicly-traded leveraged buyout, according to Murray Stahl. And the last spinoff situation that creates an opportunity for profit is the very small spinoff that those engaged in industrial-scale money management are unable or unwilling to own (market cap

Why Oil Is Crashing Again And How That Affects The Markets

The stock market fell yesterday as there are rumors that the Saudis will not cut production when they meet on Friday. As a result, this is what happened to oil yesterday. If that is not bad enough, then the statistics in this chart came out yesterday: For those holding anything to do with oil or oil production, it was a real wake-up call as the world now has +158 million barrels of oil in excess of the historical average going back to 1983. That’s right, +45.8% more oil in reserve than the historical average. Then this week the oil analysts got it wrong again as they expected crude supplies to drop by -800,000 barrels, but they actually went up by +1,177,000. Basically, we are running out of places to store the oil and that is an even bigger problem. As new oil gets produced, it immediately has to be sold on the open market right away at any price, as there is no place left to store it. When things get so bad that oil needs to be “sold at any price” , just to get rid of it, then you have serious problems. I have been warning about this for over a year now, but investors are still bullish about oil and say that we may have hit the bottom. Sorry folks; if the Saudis and OPEC do not cut production, then everything will start being sold on the open market and “$30 a barrel, here we come” or another 25% drop in oil from here. Now what does this have to do with our Apple (NASDAQ: AAPL ) or Gilead (NASDAQ: GILD ) stocks, and why did they go down? Well, since a majority of stocks are in ETFs and Indexes these days, any one sector’s collapse can bring everything else down with it, no matter how strong the companies are that you hold or how great each is doing on Main Street. It does not matter one bit how strong your holdings are as anyone with a computer and a brokerage account can sell at any second in panic, and then seeing this happen high frequency trading computers join in and then we go down. The way to combat this is to: 1) diversify heavily by never putting more than 2% in any one stock, 2) never buy or sell stock out of emotion without crunching the numbers (Friedrich), 3) only buy stocks with elite management and great Friedrich numbers, and 4) when such stocks are not selling at good prices => You Just Do Not Buy Them. Friedrich has only allowed my clients to go 23% to stocks as he just can’t find many things for us to buy. It is a mistake to be fully invested at all times “just to be invested” as it’s great to do so when the bulls are running, but as I have said it is a terrible strategy when the bears and not the bulls eventually control the show. Remember, going back 235 years we have averaged two bull markets and two bear markets every 15 years, so one has to invest with a 15-year time frame in mind. Here are the last 15 years as proof: (click to enlarge) When everyone else is greedy, you sit on the sidelines; and when everyone else starts to panic, you only then get greedy. That is not my saying but that of Warren Buffett (paraphrased). As you can see my job is far from easy these days, but I sleep well at night as I always operate with the knowledge that we will have two bull and two bear markets every 15 years; and thus, I am prepared ahead of time. Not having a bear market show up since 2009 tells us that we are historically due for one. To ignore this fact will open one up to huge potential losses, such as those experienced by oil investors in the last few years, as they did not operate off of facts but on what their gut is telling them. The Friedrich Investment System works off of the facts, off of history (by using ten years of data) and by getting the story right. As a result of this analysis, we are 23% invested and 77% in cash because there is a great deal of 1) uncertainty; 2) manipulation by the government, OPEC, corporations and traders; 3) 1 & 2 allows for high frequency computers to step along with hedge funds and just amplify everything to the n’th degree. So, as you can see, investing properly is a science, which only works best when zero emotion is present along with a tremendous amount of hard work and due diligence. But in the end, Warren Buffett has only two rules for successful investing: RULE #1 = Never Lose Money RULE #2 = Never Forget Rule #1