When shifting out of a recession, investors are eager to allocate more capital to cyclical names. Clorox (CLX) is a stock investors like to own during periods of slow economic growth – non-cyclical. People will continue to clean their homes despite what is going on in the economy. However, as the economy grows again, fewer investors are enticed to own a name like Clorox for reasons other than its dividend.
If Clorox bought WD-40 (WDFC), I think the company can regain appeal, and this time for all economic periods going forward. In CLX’s most recent quarter, 19% of its revenues were derived from international operations. WD-40 for its most recent quarter had 44% of revenues stem from overseas. If Clorox wanted to increase exposure to oversea markets by roughly 10-15%, such an acquisition could help them do so.
18% of WDFC’s revenues come from homecare and cleaning products. The remaining 82% comes from its multi-purpose maintenance products. I think CLX, with its strong brand name and platform, can integrate WDFC’s homecare and cleaning products into its own lines and further diversify itself by combining into other segments WDFC’s multi-purpose maintenance products, which have seen significant growth domestically and internationally.
WD-40 is profitable and financially healthy. Interest rates are low and it would not be burdensome for Clorox to bite at WD-40.
Consider the following sources:
Clorox
WD-40
Disclosure: Long WDFC.
Monday, September 6, 2010
Monday, August 16, 2010
Can a Dividend Growth Stock be Misleading?
Can a dividend growth stock be misleading? I ask myself this question after stumbling across an article about numerous companies that recently raised their dividends. To name a few, consider the following:
Community Bank System (CBU): 9.1% quarterly dividend increase (QDI) announced on April 26, 2010
Costco (COST): 14% QDI announced on April 22, 2010
Duff & Phelps (DUF): 20% QDI announced on April 29, 2010
Exxon (XOM): 4.8% QDI announced on April 28, 2010
WW Grainger (GWW): 17% QDI announced on April 28, 2010
When considering a one-year chart showing the performance of the listed companies, the main standout is Duff & Phelps, down roughly 45%. Looking at the performance of the companies from the end of April up till now, still Duff & Phelps is down by a near 35%. Buy, outperform, and hold opinions total one, two, and three, respectively, for the six analysts who cover the stock. I wonder why there are no underperform or sell opinions towards Duff & Phelps when its stock has clearly underperformed for the past six plus months.
On April 22, DUF announced that its President, Gerry Creagh will leave the company “to pursue other interests.” He left one week before the company announced the QDI. Is it possible that the QDI was an action from management to potentially offset the negative impact of Gerry leaving? Then a few weeks later, on June 15, DUF goes on to acquire Cole & Partners without disclosing the stipulations to the transaction.
On a separate note, why would DUF not raise debt for their capital structure, which has very little debt, while interest rates are so low? If they decide to issue debt, it is unlikely that it would be part of some takeover defense strategy considering the size of the company, but it would further optimize their capital structure as fixed payments on debt are tax deductible.
With DUF being near its 52-week low, investors have a lot to assimilate going forward. DUF, to me, is sending mixed signals and I would therefore stay away from owning the stock. Ideally, if I was long a financial, I would take a short position in DUF to create some kind of hedge.
Disclosure: No Positions.
Community Bank System (CBU): 9.1% quarterly dividend increase (QDI) announced on April 26, 2010
Costco (COST): 14% QDI announced on April 22, 2010
Duff & Phelps (DUF): 20% QDI announced on April 29, 2010
Exxon (XOM): 4.8% QDI announced on April 28, 2010
WW Grainger (GWW): 17% QDI announced on April 28, 2010
When considering a one-year chart showing the performance of the listed companies, the main standout is Duff & Phelps, down roughly 45%. Looking at the performance of the companies from the end of April up till now, still Duff & Phelps is down by a near 35%. Buy, outperform, and hold opinions total one, two, and three, respectively, for the six analysts who cover the stock. I wonder why there are no underperform or sell opinions towards Duff & Phelps when its stock has clearly underperformed for the past six plus months.
On April 22, DUF announced that its President, Gerry Creagh will leave the company “to pursue other interests.” He left one week before the company announced the QDI. Is it possible that the QDI was an action from management to potentially offset the negative impact of Gerry leaving? Then a few weeks later, on June 15, DUF goes on to acquire Cole & Partners without disclosing the stipulations to the transaction.
On a separate note, why would DUF not raise debt for their capital structure, which has very little debt, while interest rates are so low? If they decide to issue debt, it is unlikely that it would be part of some takeover defense strategy considering the size of the company, but it would further optimize their capital structure as fixed payments on debt are tax deductible.
With DUF being near its 52-week low, investors have a lot to assimilate going forward. DUF, to me, is sending mixed signals and I would therefore stay away from owning the stock. Ideally, if I was long a financial, I would take a short position in DUF to create some kind of hedge.
Disclosure: No Positions.
Friday, July 23, 2010
Why I Bought Call Options on Mylan
This week, some interesting news came out from Bristol-Myers (BMY), Eli Lilly (LLY), and Johnson & Johnson (JNJ). This interesting news pushed me into buying call options in Mylan (MYL), with an expiration dating out to January 2011. Mylan, a manufacturer and distributor of generic pharmaceuticals, seems only poised for significant upside coupled with minimal risk.
Consider the following:
- Bristol-Myers gave a 2013 forecast rather early to comfort investors who have been worried about generic competition. This primarily stems from its bread-winner, PLAVIX, which the patent will expire for on November 17, 2011. PLAVIX earned BMY $1,627 million for the 2010 quarter ending June 30.
- Sales in Eli’s GEMZAR decreased by 17% in its most recent quarter from the same quarter last year due to the influx of generic competition. GEMZAR’s patent just expired on May 15, 2010. The patent for CYMBALTA, another top earner for LLY, will expire on June 11, 2013. The company referenced their pipeline to make up for lost revenue. However, this soon to be lost revenue will be found elsewhere – in the generics.
- Johnson & Johnson cut its 2010 profit forecast over recalls. I think this forecast cut also has to do with generic competition. In a JNJ press release, the company did say that sales results in RISPERDAL and TOPAMAX were negatively impacted because of ongoing generic competition. The patents to RISPERDAL and TOPAMAX expired on December 29, 2007 and September 26, 2008, respectively.
Clearly, BMY, LLY, and JNJ are worried about generic competition. Generic drug companies such as Mylan and Teva Pharmaceuticals (TEVA) are thus poised for significant upside due to patent expirations and to add, healthcare reform, which will prohibit medical companies from canceling coverage for ill patients and grant more individuals with health coverage from the insurers.
Once investors catch on to this all, shares of generic drug companies should appreciate. I also feel that Mylan is a solid takeover candidate. Larger drug companies should consider such an acquisition if revenues dwindle as a result of generic competition. From a risk management perspective, if larger drug companies begin to rely on their pipelines to make up for lost revenue, what will happen if a clinical problem occurs or a drug is denied approval? The shares of those companies will be simply more susceptible to depreciation (and volatility).
Click here for the source that contains drugs’ patent expiration dates.
Disclosure: Long MYL calls at time of writing.
Consider the following:
- Bristol-Myers gave a 2013 forecast rather early to comfort investors who have been worried about generic competition. This primarily stems from its bread-winner, PLAVIX, which the patent will expire for on November 17, 2011. PLAVIX earned BMY $1,627 million for the 2010 quarter ending June 30.
- Sales in Eli’s GEMZAR decreased by 17% in its most recent quarter from the same quarter last year due to the influx of generic competition. GEMZAR’s patent just expired on May 15, 2010. The patent for CYMBALTA, another top earner for LLY, will expire on June 11, 2013. The company referenced their pipeline to make up for lost revenue. However, this soon to be lost revenue will be found elsewhere – in the generics.
- Johnson & Johnson cut its 2010 profit forecast over recalls. I think this forecast cut also has to do with generic competition. In a JNJ press release, the company did say that sales results in RISPERDAL and TOPAMAX were negatively impacted because of ongoing generic competition. The patents to RISPERDAL and TOPAMAX expired on December 29, 2007 and September 26, 2008, respectively.
Clearly, BMY, LLY, and JNJ are worried about generic competition. Generic drug companies such as Mylan and Teva Pharmaceuticals (TEVA) are thus poised for significant upside due to patent expirations and to add, healthcare reform, which will prohibit medical companies from canceling coverage for ill patients and grant more individuals with health coverage from the insurers.
Once investors catch on to this all, shares of generic drug companies should appreciate. I also feel that Mylan is a solid takeover candidate. Larger drug companies should consider such an acquisition if revenues dwindle as a result of generic competition. From a risk management perspective, if larger drug companies begin to rely on their pipelines to make up for lost revenue, what will happen if a clinical problem occurs or a drug is denied approval? The shares of those companies will be simply more susceptible to depreciation (and volatility).
Click here for the source that contains drugs’ patent expiration dates.
Disclosure: Long MYL calls at time of writing.
Tuesday, July 13, 2010
Still Eager to Buy Puts on Apple
Apple (AAPL) declines more than 3 percent while the broader markets rally more than 1 percent. At last, a recent influx of negative sentiment towards Apple. We have the following:
- Consumer Reports not recommending the Apple iPhone 4 because of technical issues resulting in signal loss if the smart phone is held in a particular way
- Competition – but who cares about competition, this is Apple (please notice my sarcasm)
My point is very general. For those who have read books like The Big Short or Fooled by Randomness, we know that unexpected events have crippled investors and those investors have always acted naïve as they have overlooked what they think are such rare situations, which interestingly, become common sense after they occur.
Who thought that there would be any problem with Apple’s new iPhone 4? Are analysts really in any position to assure the public that similar problems will not happen again?
What analysts who cover Apple or investors who own Apple will even mention the possibility of Apple losing market share to rivals such as Dell (DELL), Google (GOOG), and Sprint (S), among other companies down the road, and that at some point in the future, it is possible that the iPhone loses its edge?
My biggest concern is that Apple’s market cap dwindles as a result of investors overlooking the influx of other non-Apple products equivalent to the iPhones and iPods into the market and rather anticipating that Apple’s share value will realistically reflect competition throughout time, Apple will, at some point in the future, surprise during some quarter, only not to the upside. Either way, downgrades would then follow, and the ardor for Apple will shift towards another player, as history shows us, prevalently happens.
I am eager to buy puts on Apple expiring out in 2013, primarily because my catalyst carries a longer-term theme. I will not commit significant capital to outright short the company as it could easily be very burdensome and must wait until September 13, or when the equity LEAPS are added to make my move.
Full Disclosure: No Positions.
- Consumer Reports not recommending the Apple iPhone 4 because of technical issues resulting in signal loss if the smart phone is held in a particular way
- Competition – but who cares about competition, this is Apple (please notice my sarcasm)
My point is very general. For those who have read books like The Big Short or Fooled by Randomness, we know that unexpected events have crippled investors and those investors have always acted naïve as they have overlooked what they think are such rare situations, which interestingly, become common sense after they occur.
Who thought that there would be any problem with Apple’s new iPhone 4? Are analysts really in any position to assure the public that similar problems will not happen again?
What analysts who cover Apple or investors who own Apple will even mention the possibility of Apple losing market share to rivals such as Dell (DELL), Google (GOOG), and Sprint (S), among other companies down the road, and that at some point in the future, it is possible that the iPhone loses its edge?
My biggest concern is that Apple’s market cap dwindles as a result of investors overlooking the influx of other non-Apple products equivalent to the iPhones and iPods into the market and rather anticipating that Apple’s share value will realistically reflect competition throughout time, Apple will, at some point in the future, surprise during some quarter, only not to the upside. Either way, downgrades would then follow, and the ardor for Apple will shift towards another player, as history shows us, prevalently happens.
I am eager to buy puts on Apple expiring out in 2013, primarily because my catalyst carries a longer-term theme. I will not commit significant capital to outright short the company as it could easily be very burdensome and must wait until September 13, or when the equity LEAPS are added to make my move.
Full Disclosure: No Positions.
Friday, June 11, 2010
Positive Thoughts on BP: Bruce Lanni on the Kudlow Report, Volatility Index
In a follow-up to a very recently published article of mine, I felt it only necessary to share some positive thoughts regarding the BP situation from Bruce Lanni of Nollenberger Capital Partners. Consider the following analysis:
* Total expenses are estimated at $30 billion (approximately $6 billion via the cleanup and roughly $24 billion from punitive and civil claims), well under several estimates of $50-100 billion!
* BP has only a 65% interest in the situation (what about Anadarko, Transocean, and other potential players?)
* The dividend will potentially not be cut, but only suspended for one quarter, then resume
* Two relief wells are currently being drilled and once finalized, will seal the wrecked well
* …And I quote, “Bankruptcy is not even a remote possibility; the U.S. Government has a better chance of becoming insolvent before BP”
* The capture rate can maybe rise to 75-80% by as early as next week
* BP has not been deceiving us (we must not confuse deception with ambiguity that comes with operations 5,000 feet below sea level)
As I have actively wrote about put options on the VIX here and here, when the oil spill fiasco concludes, consider there will be one less detriment to the U.S. equity markets. Investors will be more willing to buy underlying stock rather than options, where committing capital is less of a burden. The VIX, also known as the investor fear gauge, can then possibly revert to its mean of roughly 21 over time (historical data beginning in January 2004), after closing at 28.79 one week before options expirations.
Reasons that further compliment the argument for a decline in the VIX do not pertain to this article.
Disclosure: Long VIX puts at time of writing.
* Total expenses are estimated at $30 billion (approximately $6 billion via the cleanup and roughly $24 billion from punitive and civil claims), well under several estimates of $50-100 billion!
* BP has only a 65% interest in the situation (what about Anadarko, Transocean, and other potential players?)
* The dividend will potentially not be cut, but only suspended for one quarter, then resume
* Two relief wells are currently being drilled and once finalized, will seal the wrecked well
* …And I quote, “Bankruptcy is not even a remote possibility; the U.S. Government has a better chance of becoming insolvent before BP”
* The capture rate can maybe rise to 75-80% by as early as next week
* BP has not been deceiving us (we must not confuse deception with ambiguity that comes with operations 5,000 feet below sea level)
As I have actively wrote about put options on the VIX here and here, when the oil spill fiasco concludes, consider there will be one less detriment to the U.S. equity markets. Investors will be more willing to buy underlying stock rather than options, where committing capital is less of a burden. The VIX, also known as the investor fear gauge, can then possibly revert to its mean of roughly 21 over time (historical data beginning in January 2004), after closing at 28.79 one week before options expirations.
Reasons that further compliment the argument for a decline in the VIX do not pertain to this article.
Disclosure: Long VIX puts at time of writing.
Market Sentiment and BP
May 2010, what a down month – will June be similar? I prefer the contrary. For the 14 down days in May, the DJIA had officially closed on average 130 points above intraday lows, potentially suggesting that investors have been buying more often than seldom on weakness.
On June 9, an excessive selloff in BP (BP) implied that investors had taken advantage on June 10 as BP had closed above 12%. Consider the following press release where BP stated how they are generating significant cash flow to thoroughly respond to the situation and that the movement on June 9 was again, excessive and not at all warranted.
As a speculative investment, an appropriate allocation to BP can be shrewd. With roughly 42,000 claims and 20,000 payments already made, I do not see claims against BP growing significantly months on out. Although BP does expect claims to rise throughout the month, I assume the majority who would file a claim against BP already have taken action or will within the next 2-3 months. The moral hazard of businesses and individuals that have not been affected by BP’s situation seeking to take advantage of the company coupled with potential civil lawsuits I feel is not enough fuel to drive BP towards a bankruptcy filing.
As of March 31, 2010, BP had $6.8 billion in cash and cash equivalents. BP’s current ratio, a simple calculation of current assets to current liabilities, reads 1.1281. Even when subtracting from cash and cash equivalents the current cost of $1.5 billion from the oil spill and another, let’s say, $5 billion to compensate for continued expenses, holding all other items constant, the current ratio is still 1.0229, meaning BP is still capable of meeting its short-term obligations.
Criticism from environmental organizations and especially the Obama Administration should also be expected but not confused for set-in-stone decrees that could bring BP to its demise. The Obama Administration must, for its own reputation, scare investors out of BP, or at least make them think twice about owning the company. However, a failed BP would be terrifying for Europe and therefore potentially detrimental to US equities. So does the Obama Administration really want to bring BP down? Most likely not.
Soon enough, BP will find the solution and everyone will then again move forward.
Full disclosure: No positions
On June 9, an excessive selloff in BP (BP) implied that investors had taken advantage on June 10 as BP had closed above 12%. Consider the following press release where BP stated how they are generating significant cash flow to thoroughly respond to the situation and that the movement on June 9 was again, excessive and not at all warranted.
As a speculative investment, an appropriate allocation to BP can be shrewd. With roughly 42,000 claims and 20,000 payments already made, I do not see claims against BP growing significantly months on out. Although BP does expect claims to rise throughout the month, I assume the majority who would file a claim against BP already have taken action or will within the next 2-3 months. The moral hazard of businesses and individuals that have not been affected by BP’s situation seeking to take advantage of the company coupled with potential civil lawsuits I feel is not enough fuel to drive BP towards a bankruptcy filing.
As of March 31, 2010, BP had $6.8 billion in cash and cash equivalents. BP’s current ratio, a simple calculation of current assets to current liabilities, reads 1.1281. Even when subtracting from cash and cash equivalents the current cost of $1.5 billion from the oil spill and another, let’s say, $5 billion to compensate for continued expenses, holding all other items constant, the current ratio is still 1.0229, meaning BP is still capable of meeting its short-term obligations.
Criticism from environmental organizations and especially the Obama Administration should also be expected but not confused for set-in-stone decrees that could bring BP to its demise. The Obama Administration must, for its own reputation, scare investors out of BP, or at least make them think twice about owning the company. However, a failed BP would be terrifying for Europe and therefore potentially detrimental to US equities. So does the Obama Administration really want to bring BP down? Most likely not.
Soon enough, BP will find the solution and everyone will then again move forward.
Full disclosure: No positions
Tuesday, May 25, 2010
May 25 of 2010, a Bullish Day
“Sell in May and Go Away” is not the manta here. I prefer “Sell in May, Investors Are Not Going Away.” Sure the markets have been taking a beating throughout May, but there is more to it than just counting the bad days. I talked here about the Dow Jones Industrial Average for the month of May, or May 3 – May 20, giving back on average 140 points from intraday lows on down days. From May 3 – May 25, now with three more trading days added-in, the DJIA has given back on average 173 points from intraday lows on again, down days. May 25 was very ugly in early trading. The DJIA was down well below the 10,000 mark yet still managed to give back a near 270 points from the intraday low to close slightly above 10,000 at 10,043.75. That says something…
Maybe it says market analysts and reporters doubt the retail investor more than they should. We all saw the declines throughout 2008/09 and many unfortunately do regret not “Buying Low,” back in spring of 2009. However, it does not take a genius to come to the realization that now is what could turn out to be a fantastic buying opportunity for U.S. equities.
U.S. consumer confidence leaped to 63.3 in May from an April reading of 57.7. This was the third consecutive month where consumer confidence increased. Also, the recent slide in oil prices, which alas has been viewed as a negative for the markets, really is a relief to consumers who are enticed to fuel our economy even more when they pay less at the pump. Furthermore, numerous companies have been buying back stock which clearly suggests that corporate executives do see undervalued stock prices. To name a few, consider Genzyme (GENZ) buying back $2 billion of its stock, Union Bancshares (UNB) buying back 2500 shares/quarter through 2011, Ameriprise Financial (AMP) repurchasing $1.5 billion in stock through 2010, and Gilead Sciences (GILD) buying back $5 billion in stock over the next several years.
On a final note, James Bullard, President of the St. Louis Federal Reserve Bank, in a news release dated May 25, stated how the sovereign debt crisis in Europe should not be considered a catalyst to derail a global economic recovery. I found it interesting to read his remarks on “Too Big to Fail” and although controversial, the fact that governments will not permit major financial institutions to fail in a sense does eliminate what could be considered a motive for a “double dip.” The release was informative. I encourage all to read it here.
The bottom line – I am still bullish on the U.S. equity markets. I firmly believe that now is a great buying opportunity and I am very happy to have helped several family members establish positions in Altria (MO), Bristol-Myers (BMY), Exelon (EXC) and several other names at the intraday lows on both May 24 and 25.
Full disclosure: Long Altria at time of writing.
Maybe it says market analysts and reporters doubt the retail investor more than they should. We all saw the declines throughout 2008/09 and many unfortunately do regret not “Buying Low,” back in spring of 2009. However, it does not take a genius to come to the realization that now is what could turn out to be a fantastic buying opportunity for U.S. equities.
U.S. consumer confidence leaped to 63.3 in May from an April reading of 57.7. This was the third consecutive month where consumer confidence increased. Also, the recent slide in oil prices, which alas has been viewed as a negative for the markets, really is a relief to consumers who are enticed to fuel our economy even more when they pay less at the pump. Furthermore, numerous companies have been buying back stock which clearly suggests that corporate executives do see undervalued stock prices. To name a few, consider Genzyme (GENZ) buying back $2 billion of its stock, Union Bancshares (UNB) buying back 2500 shares/quarter through 2011, Ameriprise Financial (AMP) repurchasing $1.5 billion in stock through 2010, and Gilead Sciences (GILD) buying back $5 billion in stock over the next several years.
On a final note, James Bullard, President of the St. Louis Federal Reserve Bank, in a news release dated May 25, stated how the sovereign debt crisis in Europe should not be considered a catalyst to derail a global economic recovery. I found it interesting to read his remarks on “Too Big to Fail” and although controversial, the fact that governments will not permit major financial institutions to fail in a sense does eliminate what could be considered a motive for a “double dip.” The release was informative. I encourage all to read it here.
The bottom line – I am still bullish on the U.S. equity markets. I firmly believe that now is a great buying opportunity and I am very happy to have helped several family members establish positions in Altria (MO), Bristol-Myers (BMY), Exelon (EXC) and several other names at the intraday lows on both May 24 and 25.
Full disclosure: Long Altria at time of writing.
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