Washington Group International (NYSE: WNG) is my latest company of interest. Although I have yet to take a real position (it is in my Marketocracy fund), this appears to be a good one. I thought a good entry point was around $59, where I first purchased in Marketocracy. However, it is now at $66.42 and so that is where I will have to say I 'found' it.
Before getting in to WNG, this is just to show you the opportunities out there. There just never seems to be enough capital or money. Technically speaking, I should maybe back out of some of my losers, like INFT, and switch the money into WNG, but not wise. To quote Warren Buffet, "buy companies, don't rent stocks." INFT, for instance, is down 12% or so since my first mention, but the fundamentals for me buying INFT have not changed - if anything, they have improved. Sure, at some point, you have to move on, but if the fundamental reason why you have bought the company has not changed, there is no reason to sell. Certainly, you may miss out on some opportunity, but in the end, it is more important to stick to your strategy, especially if there is no material reason why the strategy should have changed. For instance, if INFT starts burning through cash, then that is a material reason to change my strategy, but that is currently not the case.
Anyway, on to WNG.
WNG recently moved to the NYSE from the NASDAQ, where it traded under the symbol WGII.
I was first introduced to this company by Jeffrey Gendell. He recently reported going over 5% in WNG via an SEC filing. Like all of his investments, I took a close look and initially, the picture was solid, but not making me jump.
WNG is in the engineering, construction, and consulting/management services to many private companies and business organizations worldwide. They will do just about anything, but seem to have a preference for servicing power plants, manufacturing plants, etc. That is the simplistic overview, but for instance, they don't build office buildings - they are typically involved in projects for facilities that are in some of the more environmentally unsavory areas.
Financially, things look good. The company has no long term debt, plenty of cash ($9+ per share), and is trading as less than 1x sales. WNG, however, is not cheap trading at 2.4x book value and 24x earnings. Originally, these ratios somewhat turned me off to WNG, but then I saw an announcement that changed my take on it.
WNG recently announced a $550M contract with Allegheny Power Plant for a clean-air retrofitting project. Basically, the project will reduce sulfur-dioxide emissions by 90% when the project is complete. Not only is this project 12% of WNG's trailing 12 months revenue, but it is also a significant project. WNG seems to specialize in such environmental retrofitting and remediation projects.
I believe that worldwide and in the USA, there is a significant need for such services - and more importantly, there may be regulations in place forcing companies to clean up their acts. A great example are the cement kilns owned by Ash Grove Cement (Pink Sheets: ASHG and one of my holdings). The mercury emissions from these plants are always sky high and exceeding mandated levels. Ash Grove typically just pays a fine, but the level of emissions is starting to cause a problem as it is a frequent topic in the news. Much of the emission levels are just a necessary by-product of production, but the time may come where regulatory pressure gets into place to require plants (chemical, power, manufacturing, etc.) to address the issue.
Obviously, there are other companies that can provide the same services that WNG does, though WNG is one of the larger and more established ones around. I need to do more research to see exactly how much money will be spent on similar projects in the 30 countries WNG serves each year over the next several years, but my guess is that WNGs share of these projects will be 50%-100% more than there current $3.5B in annual revenues. WNG also seems to agree as they have been repurchasing stock quite actively. WNG bought back $66M of stock during 2006 - about 3.5% of their current market capitalization.
WNG stock is trading near its 52-week and all-time high, which leads to some skepticism, but historically, they have produced 10%+ returns for their shareholders each year. Additionally, I believe that over the coming 12-24 months, projects like the one awarded to WNG at Allegheny will become more commonplace and provide significant upside to WNG's revenue and total return.
My 12-month target price for WNG is $80-$85 per share and I believe the stock trades at over $100 within the next 24 months.
Saturday, March 31, 2007
Tuesday, March 6, 2007
Ash Grove Cement (Pink Sheets: ASHG) & The Future of Cement in this Country
Today, I ran across an interesting article located at Motley Fool.com that was originally published March 1, 2007. The article is entitled "Time for a Hard Look at Cement." I found this article while browsing through some stocks. I try to stay informed about this business, since I am not an expert by any means, and I am an avid investor in Ash Grove Cement Company (ASHG, as we have all come to know and love...well, at least if you bought some). ASHG represents a good chunk of my portfolio and I own some directly, for each of my daughters, and my IRA. I think my brother owns a few shares himself.
Specifically, the following excerpt stood out:
"During the past few decades, a progressively larger share of U.S. cement assets have become foreign owned. At the same time, domestic demand for cement has been buoyed by a series of federal highway bills, the latest of which was signed into law in 2005, and will result in the spending of about $285 billion over the next half-dozen years on highways across the nation. Somewhat as a result, even when operating near their rated capacities, U.S. cement plants in the aggregate can only produce about three-fourths of the nation's demand."
For any loyal Terence blog followers, you will know that one big reason why I like ASHG is its unique position as the largest American owned cement company in the country. I believe that our country's growing demand for the product, coupled by the even more aggressive demand of foreign countries and the fact that the top 4 producers of cement in this country are owned by foreign companies will have some serious implications. ASHG's position as the largest American owned will, I believe, play into their favor in the coming years and beyond.
Apart from the $285B Highway Spending project, which is no secret, I did not know that domestically, we only produce 75% of what we need in terms of cement, thus, we rely on imports and foreign controlled cement to sate our needs. In the future, as the price of cement rises, and as China, India, and other countries use more and more of the stuff, that missing 25% of our need is going to cause a problem.
ASHG never makes it into these articles, depsite being the 5th largest cement company in the country and the largest American owned. This is mostly because ASHG likes to keep to themselves and nobody thinks of them as a public company, even themselves. I even find articles about ASHG where an employee of ASHG says they are a private company. Who knows - it's really weird. It's probably the only company in the world that does not want anyone to know about their stock.
The biggest piece of news in the business was recently Florida Rock (NYSE: FRK) got bought out. I briefly thought about looking into buying some FRK before the buy out was announced, but too bad I did not. Anyway, FRK got bought out at a huge multiple - a 42% premium on their stock price before the deal was announced. More important, it was bought out for 11.3x EBITDA, which is a 28% higher rate than Cemex (NYSE: CX, Mexico) has offered to pay for Rinker (NYSE: RIN, Aussie, but 85% of business is USA).
In short, what this is saying is that individual companies are seeing the need and the opportunity to control more cement distribution and production, especially considering the problem of the 25% domestic production gap between what we need and what we are capable of producing (and when I say "we", I mean USA production, which, by the way, is at max capacity).
So, I know this is master of the obvious, but the importance of ASHG's huge capital expenditures is starting to come into play. ASHG dropped some serious cash the past couple of years ($200M+, I think) to build a brand new plant in Nevada and to upgrade an existing Arkansas plant to double production. These expenditures and plant upgrades will start hitting the street in 2008. I must admit, I have not extensively researched the playing field, but I have not seen other cement companies, at least USA companies, investing in new plants the way ASHG has. CX, for instance invested heavily in 2006 in new expenditures, but since they are based in Mexico, I am unsure of the locations of these expansions and what they plan to use the new production capacity for.
So, short and simple, here is my point. There is big talk about buyouts in the cement industry and big talk about public companies and their EBITDA multiples in comparison to their price in the marketplace. The general consensus, if the FRK and RIN multiples are real, is that there is upward room for cement companies to move up. However, we have one problem and gaping hole in the logic.
It is clear the USA needs more cement and more domestic production. There will be lots of cement sold in the coming years, so for instance when Vulcan Materials (NYSE: VMC) pays and arm and a leg for FRK, well, VMC wants to control that cement production. Fair enough - VMC will have more product to sell. However, in the big picture, the only way to have more cement is to make more; and if we are at max production capacity today, the only way is to increase production capacity by building new plants and expanding existing ones.
ASHG is doing this - the other companies do not appear to be doing so as aggressively. The other US based companies are looking to acquire existing production - which allows them as an individual company to produce more cement and sell more, but it does not cause the 25% need vs. capacity gap to close. ASHG's new plant in Nevada and expanded plant in Arkansas have the potential to fill some of that gap, or in a worst case scenario (well, good if you are me and an owner of ASHG), merely support the gap and make sure it does not widen further, which is a definitive possibility.
Short and simple, the need to make more cement is being solved by ASHG and not many others at least at the level they are committing to. ASHG's expenditures will put more cement in the marketplace and they will own and control that gap-filling capacity. This bodes VERY well for shareholders of ASHG and my take is that this could have some serious upward effects on ASHG's stock price and dividend payouts, especially in late 2008-2009.
Furthermore, although financial information on ASHG is relatively limited in terms of availability, since they are not subject to SEC filings, I think they are in great position. Many cement companies are heavily leveraged with debt to help finance their business growth, partially due to the pressure Wall Street puts on these companies to grow earnings, etc. ASHG is not exposed to that pressure, and while they do carry debt, naturally, I would imagine that the combination of the lack of pressure and the genuine owner mentality (family owns 90% of stock), means that they are far more conservative in terms of their debt load. Simply put, better cash position, better cash flow, better rewards to owners and shareholders.
ASHG has had a great run up in the past few years, yet they still remain somewhat of a secret. I am not sure if the secret will get out or not, but ASHG is a big winner and I forecast that over the next 3-5 years, they will outperform their competitors, especially their USA competitors. Remember, they are already the largest USA owned company - and they are about to get larger. They will help support and close the domestic production gap, especially as cement becomes a more valuable commodity and we see more and more of it go to other countries.
I meant it when I said I am planning to perhaps as much as double my position in 2007 - maybe more. We'll see. My girls need more, too.
Specifically, the following excerpt stood out:
"During the past few decades, a progressively larger share of U.S. cement assets have become foreign owned. At the same time, domestic demand for cement has been buoyed by a series of federal highway bills, the latest of which was signed into law in 2005, and will result in the spending of about $285 billion over the next half-dozen years on highways across the nation. Somewhat as a result, even when operating near their rated capacities, U.S. cement plants in the aggregate can only produce about three-fourths of the nation's demand."
For any loyal Terence blog followers, you will know that one big reason why I like ASHG is its unique position as the largest American owned cement company in the country. I believe that our country's growing demand for the product, coupled by the even more aggressive demand of foreign countries and the fact that the top 4 producers of cement in this country are owned by foreign companies will have some serious implications. ASHG's position as the largest American owned will, I believe, play into their favor in the coming years and beyond.
Apart from the $285B Highway Spending project, which is no secret, I did not know that domestically, we only produce 75% of what we need in terms of cement, thus, we rely on imports and foreign controlled cement to sate our needs. In the future, as the price of cement rises, and as China, India, and other countries use more and more of the stuff, that missing 25% of our need is going to cause a problem.
ASHG never makes it into these articles, depsite being the 5th largest cement company in the country and the largest American owned. This is mostly because ASHG likes to keep to themselves and nobody thinks of them as a public company, even themselves. I even find articles about ASHG where an employee of ASHG says they are a private company. Who knows - it's really weird. It's probably the only company in the world that does not want anyone to know about their stock.
The biggest piece of news in the business was recently Florida Rock (NYSE: FRK) got bought out. I briefly thought about looking into buying some FRK before the buy out was announced, but too bad I did not. Anyway, FRK got bought out at a huge multiple - a 42% premium on their stock price before the deal was announced. More important, it was bought out for 11.3x EBITDA, which is a 28% higher rate than Cemex (NYSE: CX, Mexico) has offered to pay for Rinker (NYSE: RIN, Aussie, but 85% of business is USA).
In short, what this is saying is that individual companies are seeing the need and the opportunity to control more cement distribution and production, especially considering the problem of the 25% domestic production gap between what we need and what we are capable of producing (and when I say "we", I mean USA production, which, by the way, is at max capacity).
So, I know this is master of the obvious, but the importance of ASHG's huge capital expenditures is starting to come into play. ASHG dropped some serious cash the past couple of years ($200M+, I think) to build a brand new plant in Nevada and to upgrade an existing Arkansas plant to double production. These expenditures and plant upgrades will start hitting the street in 2008. I must admit, I have not extensively researched the playing field, but I have not seen other cement companies, at least USA companies, investing in new plants the way ASHG has. CX, for instance invested heavily in 2006 in new expenditures, but since they are based in Mexico, I am unsure of the locations of these expansions and what they plan to use the new production capacity for.
So, short and simple, here is my point. There is big talk about buyouts in the cement industry and big talk about public companies and their EBITDA multiples in comparison to their price in the marketplace. The general consensus, if the FRK and RIN multiples are real, is that there is upward room for cement companies to move up. However, we have one problem and gaping hole in the logic.
It is clear the USA needs more cement and more domestic production. There will be lots of cement sold in the coming years, so for instance when Vulcan Materials (NYSE: VMC) pays and arm and a leg for FRK, well, VMC wants to control that cement production. Fair enough - VMC will have more product to sell. However, in the big picture, the only way to have more cement is to make more; and if we are at max production capacity today, the only way is to increase production capacity by building new plants and expanding existing ones.
ASHG is doing this - the other companies do not appear to be doing so as aggressively. The other US based companies are looking to acquire existing production - which allows them as an individual company to produce more cement and sell more, but it does not cause the 25% need vs. capacity gap to close. ASHG's new plant in Nevada and expanded plant in Arkansas have the potential to fill some of that gap, or in a worst case scenario (well, good if you are me and an owner of ASHG), merely support the gap and make sure it does not widen further, which is a definitive possibility.
Short and simple, the need to make more cement is being solved by ASHG and not many others at least at the level they are committing to. ASHG's expenditures will put more cement in the marketplace and they will own and control that gap-filling capacity. This bodes VERY well for shareholders of ASHG and my take is that this could have some serious upward effects on ASHG's stock price and dividend payouts, especially in late 2008-2009.
Furthermore, although financial information on ASHG is relatively limited in terms of availability, since they are not subject to SEC filings, I think they are in great position. Many cement companies are heavily leveraged with debt to help finance their business growth, partially due to the pressure Wall Street puts on these companies to grow earnings, etc. ASHG is not exposed to that pressure, and while they do carry debt, naturally, I would imagine that the combination of the lack of pressure and the genuine owner mentality (family owns 90% of stock), means that they are far more conservative in terms of their debt load. Simply put, better cash position, better cash flow, better rewards to owners and shareholders.
ASHG has had a great run up in the past few years, yet they still remain somewhat of a secret. I am not sure if the secret will get out or not, but ASHG is a big winner and I forecast that over the next 3-5 years, they will outperform their competitors, especially their USA competitors. Remember, they are already the largest USA owned company - and they are about to get larger. They will help support and close the domestic production gap, especially as cement becomes a more valuable commodity and we see more and more of it go to other countries.
I meant it when I said I am planning to perhaps as much as double my position in 2007 - maybe more. We'll see. My girls need more, too.
Monday, March 5, 2007
Seaboard Corporation (AMEX: SEB) Earnings & Road Trip
Today, Seaboard Corporation reported earnings after the bell. The numbers were not stellar and the company actually reported a 3% decline in net income in 2006 when compared to 2005, although sales were up. The departure of Harry Bresky, the original founder, from the board of directors was also announced. These might have some deflating effects on the company's stock price over the coming days, though I am not too sure how much as the company is off about 15% from its recent all time high of $2,300.
So, I suppose it is not stellar earnings growth, but regardless, Seaboard paid down $91M in debt, generated $284M in operating cash flow, paid out $3/share of dividends to shareholders, and added more cash to the balance sheet. With the added cash and reduced debt, even without a further decline in the company's stock price, SEB should be at less than 2x book value. SEB also added $230M in shareholders' equity, which is a key metric of the company's overall worth.
In the company's annual report to shareholders, Steven Bresky, current CEO and son of Harry Bresky, the company's founder that has formally retired as of today, there was brief discussion of the company's stock price and it's recent performance. While the ascent has been exciting, the recent activity, especially the past month, is likely more of a spike during an uptrend rather than an actual realistic valuation of the company. From a today standpoint, he is likely correct. However, I think in the coming years, SEB is in great position to add additional value to shareholders by creating shareholders' equity at a $240M year clip. In short, I think that translates into a $300-$400 per year stock price appreciation, at least over time.
It's funny as I just looked back at the 5 year stock price of the company and back in 2001, SEB was trading at around $200 per share. Fast forward 5 years, and the stock is trading about $1,800 higher. How is that for 5 years at $300-$400 per year - it's right on - it just did not happen cleanly over the course of 5 years; it happened pretty much all at once over about 2-3 years. So, as of today, SEB is probably valued right where it needs to be, but looking 5 years out, SEB is cheap. This is good as the market has not yet priced in SEB's future performance; it might take sometime, but eventually, that will come into play and should push SEB to $2,800-$3,000 sometime within the next 12-18 months.
This is a company I wish I could own outright. A cash producing machine that has made the founding family worth about $1.8 billion and yields them about $2.4 million in annual dividends, not to mention Steve Bresky's annual salary of $1.5 million. Not bad. Although $2.4M and $1.5M is a lot of money either way, note that the Bresky's, as owners, are making most of their money by owning the shares via the dividends. Even when you exclude the $1.8 billion of worth they have and take into consideration SEB has a payout ratio of only 1%. Note the payout ratio is defined as: "The percentage of a firm's profits paid to shareholders in the form of dividends."
Compare to some firms that payout 25%-50%, 1% of profits back to shareholders does not seem very generous, but in the case of SEB, it is not like the officers are padding their pockets. Sure, they get paid well and far more than most of us will ever make, but they are not taking 8 digit salaries; there is no issuance of stock or stock options causing dilution to the owners of the company; and there is proven performance in the business model to generate cash flow and shareholders' equity.
I like SEB a great deal and it is a fantastic ownership investment. I like where it is now because there seems to be limited downside to its stock price. Sure, it is subject to fluctuations and may decline some more, but in all fairness, it has had quite a huge run up the past 36 months and even the past 6 months. Regardless, based on what it tends to produce in shareholders' equity, which really is the true measure of the worth of a company, as of today, it is likely not undervalued, nor is it overvalued. The secret is somewhat out of the bag on this one and I believe SEB will continue to show strong results from operations going forward and if you can forecast out to 2010, it is clear SEB is undervalued at today's trading price. Prepare for a possible double, and while it won't happen in 1 year, I do not think, it is not going to take 7 years either.
On top of that, I have decided to quite possibly take a road trip - April 23-24, 2007. So, where am I going? Well, this is me we are talking about, so in that spirit, I may find myself visiting Shawnee Mission, KS and Overland Park, KS on these days. April 23 is the annual meeting of Seaboard Corporation and right down the street about 3 miles away is Ash Grove Cement in Overland Park. I might go pay them a visit, too. After all, I do own the company...both of them actually :-).
So, I suppose it is not stellar earnings growth, but regardless, Seaboard paid down $91M in debt, generated $284M in operating cash flow, paid out $3/share of dividends to shareholders, and added more cash to the balance sheet. With the added cash and reduced debt, even without a further decline in the company's stock price, SEB should be at less than 2x book value. SEB also added $230M in shareholders' equity, which is a key metric of the company's overall worth.
In the company's annual report to shareholders, Steven Bresky, current CEO and son of Harry Bresky, the company's founder that has formally retired as of today, there was brief discussion of the company's stock price and it's recent performance. While the ascent has been exciting, the recent activity, especially the past month, is likely more of a spike during an uptrend rather than an actual realistic valuation of the company. From a today standpoint, he is likely correct. However, I think in the coming years, SEB is in great position to add additional value to shareholders by creating shareholders' equity at a $240M year clip. In short, I think that translates into a $300-$400 per year stock price appreciation, at least over time.
It's funny as I just looked back at the 5 year stock price of the company and back in 2001, SEB was trading at around $200 per share. Fast forward 5 years, and the stock is trading about $1,800 higher. How is that for 5 years at $300-$400 per year - it's right on - it just did not happen cleanly over the course of 5 years; it happened pretty much all at once over about 2-3 years. So, as of today, SEB is probably valued right where it needs to be, but looking 5 years out, SEB is cheap. This is good as the market has not yet priced in SEB's future performance; it might take sometime, but eventually, that will come into play and should push SEB to $2,800-$3,000 sometime within the next 12-18 months.
This is a company I wish I could own outright. A cash producing machine that has made the founding family worth about $1.8 billion and yields them about $2.4 million in annual dividends, not to mention Steve Bresky's annual salary of $1.5 million. Not bad. Although $2.4M and $1.5M is a lot of money either way, note that the Bresky's, as owners, are making most of their money by owning the shares via the dividends. Even when you exclude the $1.8 billion of worth they have and take into consideration SEB has a payout ratio of only 1%. Note the payout ratio is defined as: "The percentage of a firm's profits paid to shareholders in the form of dividends."
Compare to some firms that payout 25%-50%, 1% of profits back to shareholders does not seem very generous, but in the case of SEB, it is not like the officers are padding their pockets. Sure, they get paid well and far more than most of us will ever make, but they are not taking 8 digit salaries; there is no issuance of stock or stock options causing dilution to the owners of the company; and there is proven performance in the business model to generate cash flow and shareholders' equity.
I like SEB a great deal and it is a fantastic ownership investment. I like where it is now because there seems to be limited downside to its stock price. Sure, it is subject to fluctuations and may decline some more, but in all fairness, it has had quite a huge run up the past 36 months and even the past 6 months. Regardless, based on what it tends to produce in shareholders' equity, which really is the true measure of the worth of a company, as of today, it is likely not undervalued, nor is it overvalued. The secret is somewhat out of the bag on this one and I believe SEB will continue to show strong results from operations going forward and if you can forecast out to 2010, it is clear SEB is undervalued at today's trading price. Prepare for a possible double, and while it won't happen in 1 year, I do not think, it is not going to take 7 years either.
On top of that, I have decided to quite possibly take a road trip - April 23-24, 2007. So, where am I going? Well, this is me we are talking about, so in that spirit, I may find myself visiting Shawnee Mission, KS and Overland Park, KS on these days. April 23 is the annual meeting of Seaboard Corporation and right down the street about 3 miles away is Ash Grove Cement in Overland Park. I might go pay them a visit, too. After all, I do own the company...both of them actually :-).
Sunday, March 4, 2007
2007 - The Year of the Owner - The Week Ahead & The Week Past
Last week, the stock market suffered its worst week in over 4 years. Everything was hit hard last week - and not just here in the USA, but overseas as well. The biggest loser was the Chinese stock market, losing 9% in a single day. European markets took big hits - this was especially noted by NBG declining 11%+ from its recent $11.25 high to close the week at a little over $10.00 per share.
Honestly, in short, I have not seen anything like this in years, or maybe ever. Sure, it has happened before, and long term, this will be yet another blip on the stock market's radar (knock on wood), but just about everything was down. Typically, you see general market weakness, but maybe a particular sector or industry shows strength. For instance, technology may be down, but energy or natural resources may be up. Not this time - everything was down - energy, materials, transportation, financial services, technology, etc. Greenspan coming out of the weeds to comment about a possible recessions by the end of the year did not help the cause of stocks.
Here is my take on it, for what it is worth. I think that last week's action was very health in terms of a correction. Although it would be nice if it could, the stock market cannot go up in a straight line forever. Even with last week's loss, the markets are still up 10% from a year go. If you take a look at my Marketocracy fund, even after last week's debacle, my fund is still up 0.9% YTD and while the NASDAQ, Dow Jones, and S&P 500 have not been as fortunate (down 2%, 2.8%, and 1.9% respectively). All I am saying, is that this is not the end of the world.
I think that the U.S. economic outlook does look good for 2007 as does the outlook for the entire global economy. I think that we will see growth in the stock market, but there will be an even increasingly strong focus on fundamentally sound and cash generating companies. I think this is so because even amidst last weeks problems, Merck (NYSE: MRK) and AIG (NYSE: AIG) both performed well as both reported very positive outlooks and results and MRK even got an upgrade. Simply put, the market is ready to reward companies that produce strong financial results, but those that are lagging will be susceptible to correction.
There is still a lot of value out there - even after the big run up, the stocks I am in still look cheap from a long term standpoint, especially NBG, PFE, MRK, SEB, and ASHG. I will be looking to add to all of these positions. Of course, I am in the automatic investing plans with PFE and MRK, so those are forgone conclusions. I added 15% to my NBG position last week and will look to increase some more, perhaps in the Spring, post dividend (assuming there is one), as that is when, at least historically, NBG trades a little weaker. If NBG can stick to their projections outlined in their 2007-2009 presentation, this one is worth $24-$28 in the next 2-3 years.
For 2007, I would like to increase my position in ASHG by 50%-100%, especially considering their recent stock activity, raising their dividend by 5%, and I expect strong financial improvements from this company to hit in 2008-2009 as their huge capital expenditures (e.g., Nevada plant development and Arkansas plant expansion) come online. Although it has not been a huge factor yet, I still believe that ASHG being the largest American owned Cement producer in the USA will be a very strong factor for this company - perhaps even a geo-political one. We'll see.
Seaboard Corp (AMEX: SEB) still looks very cheap from a long term perspective and I am very tempted to add more to my position at this time, but will wait until after they report their financial results (due out this week, I think, as they keep a tight lid on it). SEB still is a cash producing machine and are a very diverse entity - they still also appear to be undervalued from a fundamental standpoint - especially after being down 13% from their recent all-time high of $2,300, which just happened 2 weeks ago. SEB is still trading at less than 1x sales, less than 10x earnings, and about 6.4x Enterprise Value/EBITDA. Also, keep in mind that these ratios are based off of the trailing 12 months (ttm) financial results, and I expect when SEB posts their financial results, we will see an increase in sales, a stronger balance sheet, stronger EBITDA, stronger EPS, and stronger free cash flow. The joys about SEB is that because of lack of analyst coverage, the stock is not as subject to 'analyst estimates' and you can focus more on the financials and cash produced by SEB rather than market hype. Short-term, this fact may also prevent SEB from reaching its full-term value, but long term, this is good. It enables you to add more to your position cheaply and long term, companies with this tight share structure and strong financials tend, at least over the long-haul, tend to become 'overvalued', which is a great place to be if you are an owner.
Ok - that is my sales pitch for those stocks, but it is a perfect transition into my thoughts about Greenspan's comments. I do think that the economy is strong and that the environment is good for companies in terms of being able to produce cash flow. I do, however, that we will see some recession-type effects here in the US. I am unsure of how broad they will impact the country or the stock markets, but the impact of American's not saving, high foreclosure rates, getting in over their heads via credit cards, etc. will take a toll. I am no expert economist, but I just don't know how people live the lifestyles they do now-a-days in terms of what they make, what they have, etc. For private individuals, the behavior is not sustainable and I think we will see some fall out of that in the coming months, which will likely impact financial results of companies in late 2007 and early 2008. The impact will be especially true with businesses that serve the individual consumer, especially in businesses that serve the "middle class." Banks will do fine - businesses that service other businesses will do fine - companies that produce cash and shareholder's equity, and reward owners via dividends and stock buy backs, at good clips will be fine.
Simplistically, 2007 is the year for the owner - not the investor. Granted, there are some years where being an 'investor' would serve you better than acting as an owner - where you looked for aggressive capital appreciation based on market dynamics, momentum, etc. Of course, there will be opportunities along those lines this year, as they always are, but I don't see a broad technology rally or sector rally where you can just ride the wave.
Look for opportunities where being an owner makes sense - where you feel you are getting some value for your investment/purchase - where if you were actually going to 'own' the company (which you do, but you know what I mean), you would feel good about forking over the money to get in on it because you know you are getting a good deal. Buy backs, dividends, cash flow, shareholders equity - those are the things to look for and I believe the stock market will reward shareholders appropriately for such (e.g., higher price per share).
To quote Gordon Gekko:
"The richest one percent of this country owns half our country's wealth, five trillion dollars...You got ninety percent of the American public out there with little or no net worth. I create nothing. I own."
Honestly, in short, I have not seen anything like this in years, or maybe ever. Sure, it has happened before, and long term, this will be yet another blip on the stock market's radar (knock on wood), but just about everything was down. Typically, you see general market weakness, but maybe a particular sector or industry shows strength. For instance, technology may be down, but energy or natural resources may be up. Not this time - everything was down - energy, materials, transportation, financial services, technology, etc. Greenspan coming out of the weeds to comment about a possible recessions by the end of the year did not help the cause of stocks.
Here is my take on it, for what it is worth. I think that last week's action was very health in terms of a correction. Although it would be nice if it could, the stock market cannot go up in a straight line forever. Even with last week's loss, the markets are still up 10% from a year go. If you take a look at my Marketocracy fund, even after last week's debacle, my fund is still up 0.9% YTD and while the NASDAQ, Dow Jones, and S&P 500 have not been as fortunate (down 2%, 2.8%, and 1.9% respectively). All I am saying, is that this is not the end of the world.
I think that the U.S. economic outlook does look good for 2007 as does the outlook for the entire global economy. I think that we will see growth in the stock market, but there will be an even increasingly strong focus on fundamentally sound and cash generating companies. I think this is so because even amidst last weeks problems, Merck (NYSE: MRK) and AIG (NYSE: AIG) both performed well as both reported very positive outlooks and results and MRK even got an upgrade. Simply put, the market is ready to reward companies that produce strong financial results, but those that are lagging will be susceptible to correction.
There is still a lot of value out there - even after the big run up, the stocks I am in still look cheap from a long term standpoint, especially NBG, PFE, MRK, SEB, and ASHG. I will be looking to add to all of these positions. Of course, I am in the automatic investing plans with PFE and MRK, so those are forgone conclusions. I added 15% to my NBG position last week and will look to increase some more, perhaps in the Spring, post dividend (assuming there is one), as that is when, at least historically, NBG trades a little weaker. If NBG can stick to their projections outlined in their 2007-2009 presentation, this one is worth $24-$28 in the next 2-3 years.
For 2007, I would like to increase my position in ASHG by 50%-100%, especially considering their recent stock activity, raising their dividend by 5%, and I expect strong financial improvements from this company to hit in 2008-2009 as their huge capital expenditures (e.g., Nevada plant development and Arkansas plant expansion) come online. Although it has not been a huge factor yet, I still believe that ASHG being the largest American owned Cement producer in the USA will be a very strong factor for this company - perhaps even a geo-political one. We'll see.
Seaboard Corp (AMEX: SEB) still looks very cheap from a long term perspective and I am very tempted to add more to my position at this time, but will wait until after they report their financial results (due out this week, I think, as they keep a tight lid on it). SEB still is a cash producing machine and are a very diverse entity - they still also appear to be undervalued from a fundamental standpoint - especially after being down 13% from their recent all-time high of $2,300, which just happened 2 weeks ago. SEB is still trading at less than 1x sales, less than 10x earnings, and about 6.4x Enterprise Value/EBITDA. Also, keep in mind that these ratios are based off of the trailing 12 months (ttm) financial results, and I expect when SEB posts their financial results, we will see an increase in sales, a stronger balance sheet, stronger EBITDA, stronger EPS, and stronger free cash flow. The joys about SEB is that because of lack of analyst coverage, the stock is not as subject to 'analyst estimates' and you can focus more on the financials and cash produced by SEB rather than market hype. Short-term, this fact may also prevent SEB from reaching its full-term value, but long term, this is good. It enables you to add more to your position cheaply and long term, companies with this tight share structure and strong financials tend, at least over the long-haul, tend to become 'overvalued', which is a great place to be if you are an owner.
Ok - that is my sales pitch for those stocks, but it is a perfect transition into my thoughts about Greenspan's comments. I do think that the economy is strong and that the environment is good for companies in terms of being able to produce cash flow. I do, however, that we will see some recession-type effects here in the US. I am unsure of how broad they will impact the country or the stock markets, but the impact of American's not saving, high foreclosure rates, getting in over their heads via credit cards, etc. will take a toll. I am no expert economist, but I just don't know how people live the lifestyles they do now-a-days in terms of what they make, what they have, etc. For private individuals, the behavior is not sustainable and I think we will see some fall out of that in the coming months, which will likely impact financial results of companies in late 2007 and early 2008. The impact will be especially true with businesses that serve the individual consumer, especially in businesses that serve the "middle class." Banks will do fine - businesses that service other businesses will do fine - companies that produce cash and shareholder's equity, and reward owners via dividends and stock buy backs, at good clips will be fine.
Simplistically, 2007 is the year for the owner - not the investor. Granted, there are some years where being an 'investor' would serve you better than acting as an owner - where you looked for aggressive capital appreciation based on market dynamics, momentum, etc. Of course, there will be opportunities along those lines this year, as they always are, but I don't see a broad technology rally or sector rally where you can just ride the wave.
Look for opportunities where being an owner makes sense - where you feel you are getting some value for your investment/purchase - where if you were actually going to 'own' the company (which you do, but you know what I mean), you would feel good about forking over the money to get in on it because you know you are getting a good deal. Buy backs, dividends, cash flow, shareholders equity - those are the things to look for and I believe the stock market will reward shareholders appropriately for such (e.g., higher price per share).
To quote Gordon Gekko:
"The richest one percent of this country owns half our country's wealth, five trillion dollars...You got ninety percent of the American public out there with little or no net worth. I create nothing. I own."
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