NOTES FROM BARRONS

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Follow-Up: Gamestop (GME) got hit hard last week on disappointing sales. Good entry opportunity, now at 10x ’14 eps. $5 per cash and no debt, 50% market share. Wedbush analyst Michael Pachter has a $60 target, GME has “at least 10 years” left in its core business.
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The Eco-Oil Producer – Denbury Resources (DNR) – specializes in getting out the last 60% of oil from a well using carbon-dioxide flooding. DNR is second largest player in this space. Yield should be 3% in 2015. Price = $16.46; 4.5x FCF, industry average is 6.8. Closing the gap will get price to $20 not including dividend. Greenspring fund is an investor. 36% discount to NAV, peers trade at a 20% discount.
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The Valuation Gap at Gap – shares could climb 30%. Price = $37.30, company has set itself up for difficult sales comparisons. Same store sales were flat in December and +2% in November. 12.6x ’14. Has been buying back stock.
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Sizing up Small-Caps – Dean Foods (DF) – 1.6% yield, $300m stock buyback program. 5.7x ’14 EBITDA and 6% FCF yield.

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Trouble on the Menu – Restaurant stocks could be in for trouble, trading at 21x. During expansions, home purchases rise and spending moves towards durables and away from restaurants. Stronger economy will increase birth rate. A new child reduces a family’s restaurant spending by 10%. Low income jobs are replacing middle income jobs. MCD, BKW, DRI might have trouble.
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Ride Out the Mortgage Reit Rout – a guessing game as to what directions prices will move. LNY and AGNC are at 80% of book value. Rising rates at the long end of the curve could put pressure on book value. In a webcast last week, Jeff Gundlach said “I have no problem owning Annaly at this price; I just don’t think the price is going to go up in the near term.” But with the dividend, that could still mean a 10% return this year.
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Roundtable – “Optimists expect the global economy to pick up, bonds to tick up and stocks to mosey higher, notwithstanding the errant hiccup.” The pessimists “see crippled economies here and abroad, rotten government policies, and a sell off in stocks that could rekindle fears of yes, systemic risk.”

Bill Gross does not expect rising yields and absent higher inflation and a change in policy, bond markets should be stable. Abbey Cohen thinks they could drift higher. According to Cohen, GS is forecasting GDP growth of 3.3%. Zulauf thinks world economy will disappoint, US will be top economy. Faber says the Fed will bankrupt the world. Faber said “The Fed acted correctly to save the financial system during the financial crisis, which it created with easy-money policies in the late 1990s and early 2000s. But Ms. Yellen could be sitting on a barrel of gunpowder, pouring gasoline on top of it, and lighting a cigarette, and she wouldn’t know the danger of bubble creation.” Faber thinks sometime this year there will be a big tumble, like in 1987 and the long bond will rally. Fred Hickey says that the markets dropped 13% at end of QE1 and 17.5% at end of QE2, the market is set to blow up.

Scott Black and Cohen expect SP earnings of $116. If p/e remains steady that gets you to 1900, but if PE expands to 18-20x, which could be reasonable given core inflation, target would be 2088.

Some of Felix Zulauf’s picks, +TLT, +GDX, -EWH, -TUR.

Jae Jun’s summary of a Jim Chanos presentation:

http://www.valuewalk.com/2014/01/characteristics-of-value-stocks-and-value-traps/

Where to find yield? In order of appeal, (1) high-dividend stocks, (2) municipal bonds, (3) REITs, (4) telecom stocks, (5) convertibles, (6) electric utilities, (7) preferreds, (8) junk bonds, (9) MLPs and (10) treasuries.

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Cisco (CSC) – could be good for 20%.

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Magna (MGA) – controls 11.3% of US  auto-parts industry. 10.6 x ’14 EPS, debt free balance sheet, cash and a buy-back program. Scott Black says a valuation of 14x his firm’s estimate of $7.60 a share in ’14 puts the shares at $106 (they are about $83 today). Yield is 1.5% today.

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Interview with Robert Ewing of Putnam Investments

JPM – cheapest bank by most metrics. Single-digit forward-earnings multiple, and 1.5x book value. Maintaining or gaining share in 14 of 16 segments.

BAC – 1.2x tangible book value. Can generate 12-13% return on equity over the long term. Will benefit from rising interest rates.

Both companies should trade at 2x bv and in low double digit multiples.

Also likes RDSA.

Here is an article summarizing the Beneish M score:

http://www.valuewalk.com/2014/01/using-beneish-m-score-to-detect-earnings-manipulation/?utm_source=mailchimp&utm_medium=email&utm_campaign=EMAIL_DAILY

We reviewed the JPM Guide to the Markets which is a quarterly publication put out by JP Morgan that is filled with all kinds of really good charts. Here are some takeaways and charts of interest.

1. Chart 5 – Large blend, large growth and medium growth (style boxes) are all less than 100% when measuring current p/e as a percent of 20-year average p/e.

2. Chart 6 – returns and valuations by sector.

3. Chart 7 – SP500 earnings yield remains above the Baa yield.

4. Chart 8 – Profit margins are at all time records while total leverage is low.

5. Chart 9 – Year over year SP500 EPS growth as of Q3 was made up of better margins (8%), revenue (3.3%) and share count (0.6%).

6. Chart 10 – Year over year total return was made up of multiple expansion (18.4%), earnings (11.2%) and dividends (2.8%).

7. Chart 11- forward PE of 15.4 is just above the 14.9 average. There is a positive relationship between consumer sentiment and the forward p/e and the estimate impact of a 10 point rise in sentiment is +2 p/e multiple.

8. Chart 12 – When 10-year treasury yields are below 5%, rising rates are generally associated with rising stock prices. A scatter plot shows negative returns when rates start moving above 5%. But sectors that offer a higher yield will be more sensitive to interest rates moving higher.

9. Chart 13 – Corporate cash is close to highs.

10. Chart 14 – P/E ratios and return over a 1-year period are not that correlated. In other words, returns can be good or bad. But over a 5-year period, there is tighter correlation.

11. Chart 15 – real earnings yield is about 4% now, average is 2.6%, but there is often more room for the markets to advance even after hitting average.

12. Chart 16 – 26 of 33 years since 1980 have been positive. Chart 16 shows the intra-year declines for each year.

13. Chart 17 – Equity correlations increase with increases in volatility. As volatility begins to decline from peaks, stocks should outperform.

14. Chart 19 – Pullbacks in spending in light vehicle sales, manufacturing and trade inventories, housing starts and real capital goods orders often lead to recessions. All have been increasing except for manufacturing and trade inventories, which has been flat.

15. Chart 20 – Still an affordable time to buy a home.

16. Chart 21 – there has been significant deleveraging of the consumer balance sheet.

17. Chart 22 – Core CPI has been much less than the 50-yr average of 4.1% in recent years (in November it was 1.7%).

18. Chart 27 –  reduced US reliance on foreign oil in future years.

19. Chart 28 – if you invest at the turning points of low confidence levels your return would be very good.

20. Chart 30 – nominal and real 10-year treasury yields since 1958.

21. Chart 31 – High-yield and floating rate bonds have a negative correlation to the 10-year treasury. So do convertibles and ABS.

22. Chart 33 – Money is being held in excess reserves which means it is not multiplying through the economy, and that is why there has not big a big inflation impact from all of the QE programs, at least so far.

23. Chart 35 – there has been a huge increase in flows into high yield bonds.

24. Chart 37 – Developed market and emerging market high  yield bonds have attractive yield, negative correlation to 10-year US Treasuries and produced positive returns in 2013.

25. Chart 39 – looking at sources of global equity returns, multiple expansion was the big driver across the board except in emerging markets, where multiples declined  as did earnings.

26. Chart 40 – countries way short of their 2007 peak are Italy, Russia, Spain and China.

27. Chart 41 – EAFE index is still well off its previous 2007 peak. P/E is 13.3 and yield is 2.9%.

28. Chart 42 – Emerging markets have much higher projected growth compared to developed markets.

29. Chart 43 – Manufacturing momentum

30. Chart 44 – how important are exports to specific countries. Exports are a % of GDP for the US was 9.5% which is less than other countries.

31. Chart 45 – Urbanization ratios, India and China lag by large amounts. Another chart shows that emerging markets consumption is on the increase and now has a bigger share than the US of global consumption.

32. Chart 46 – charts include value of public companies as a % of GDP. Only the UK and the US is greater than 100%.

33. Chart 47 – emerging market sensitivity to capital flows and currency performance.

34. Chart 48 – Sovereign debt stresses – emerging markets have lower debt, better growth than developed markets but higher borrowing costs.

35. Chart 49 – global monetary policy. Emerging markets still offering real rate returns.

36. Chart 54 – Global equity markets. The US makes about half of the MSCI All Country World Index but only about 19% of global GDP.

37. Chart 56 – Global equity valuations in developed markets. Shows forward p/e’s compared to 10-year averages.

38. Chart 57 – Global equity valuations for emerging markets. Russia has a forward p/e of 4.8 versus a 7.9 10-year average.

39 Chart 58 – asset class returns.

40. Chart 59 – Correlations and volatility between different asset classes.

41. Chart 60 – alternative asset class returns.

42. Chart 61 – mutual fund flows

43. Chart 62 – equity dividend yield from major world markets and REIT yields.

44. Chart 63 – global commodities –

45. Chart 64 – historical returns by holding period for stocks, bonds and a 50/50 portfolio.

46. Chart 65 – returns and standard deviations for a traditional and a portfolio with much greater diversification.

47. Chart 66 – cash accounts.

48. Chart 67 – corporate defined benefit plans and endowments.

links – https://www.jpmorganfunds.com/cm/Satellite?UserFriendlyURL=diguidetomarkets&pagename=jpmfVanityWrapper&vanity=diguidetomarkets