Notes from Barron’s 3/10/14 – pick up the printed copy at a news stand or check out barrons.com. Below are my notes from this week’s edition.
UP & DOWN WALL STREET
US household net worth now stands at $80.6 trillion compared to $68.8 trillion in the second quarter of 2007.At the same time, the Fed’s balance sheet has increased to $4 trillion from $1 trillion representing a 90% correlation with the growth in household assets.
The increase in the Fed balance sheet hasn’t impacted t-notes, which are about even with five years ago, but it has impacted spreads on corporate bonds. High-grade corporates have come in by 125 basis points and high-yield spreads have declined by 1400 basis points. That has allowed interest costs to go down, dividends and buybacks to increase, and is helping fund mergers and acquisitions.
Chaori Solar defaults on publicly traded debit in China last week, that was a first. Jeremy Hale of Citigroup says “this default may be the tip of the iceberg.”
NEXT STOP, NASDAQ 5000
Companies with dot-com like bust valuations include TSLA at 150x future earnings, NFLX at 113x, and TWTR at 3,196x.
REVIEW
DJIA +131.01
SP500 +
10 Year T-Bonds 2.79 +0.13
The Crimean government voted to secede from Ukraine and join Russia a Russian troops continued to show their presence there. The US and Europe responded with financial sanctions.
METLIFE ON SALE FOR PEANUTS
(disclosure – we are long MET)
One of the cheapest stocks in the SP500 based on earnings and book value. Price at $53, 9x projected 2014 profit and 1.1x book value that excludes unrealized gains. Yields 2.1%. Stock could hit $60. Play on stronger stock market and higher interest rates. P/E on 2015 projected earnings is 8. ROE around 12%.
DAIMLER’S RACE AGAINST ITSELF
Positive article on Daimler, profit outpacing Volkswagen and BMW, sells at 12x projected earnings for 2014.
UP FROM THE DEPTHS
GLDD – controls 40% of the dredging industry which is big now due to hurricanes and coastal restoration. Stock is down 13% to $8.69 due to losses in the demolition business which it is selling. Scott Levine from Imperial Capital values the company at $11.50. Company works on port expansion, pipeline and tunnel digging, breakwaters, jetties, canals, beach restoration. Earnings could rise 8% this year to $0.35 and $0.53 in 2015.Has a $515m backlog.
PASSIVE-AGGRESSIVE INVESTING
(disclosure – we are long ARCC)
Bargains can be found in pass-through companies that can benefit from an improving economy such as certain MLPs, REITs and BDCs.
NTI and CVRR are downstream MLPs (they refine oil and gas and turn it into higher value products). Selling at 6x projected earnings. Big exposure to price swings and the economy. Profits depend on the crack spread which is the difference between crude and end products. Spread is currently wide. Average Wall Street target would give NTI 13% upside and CVR 19%.
EPR is a REIT that owns movie theaters, charter schools, ski and water parks and golf complexes. Sells for 13x ffo. Up over 24% in last year but yields over 6%. Shares can hit $60 from $53 according to Anthony Pallone at JP Morgan.
ARCC is an industry leading business development company. Trades at 11x and yields 8.9%.
There is risk with all of these names.
TIME TO PACK SOME SAMSONITE SHARES
BEWARE 3-D PRINTING
The technology may be good but DDD can fall 80%. DDD +370% in 2 years, SSYS +231%, XONE and VJET +140%. 2014 forecasted earnings for DDD have fallen to $0.82 from $1.31 a year ago but stock has advanced 110%. Trades at 84x. Tilson calls DDD a “dream short.”
BUFFET OR ICAHN: WHO’S THE BETTER BET?
(disclosure – long BRKB)
BRK is better bet, smaller premium to book value and more earnings power, although IEP increased asset value by 50% last year compared to an 10% increase at BRK. IEP at 50% premium to indicative asset value. BRK trades at 1.35x book value but might be at a discount to intrinsic value.
ETF FOCUS
Mentions a business development company called Garrison Capital (GARS), yields 10% and trades for less than book value. Could be a sell off due to some BDCs being dropped from indexes.