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Nasdaq 100 Watch List: July 1, 2011

Posted on July 1, 2011 | Leave a comment
Below are the Nasdaq 100 companies that are within 20% of the 52-week low. This list is strictly for the purpose of researching whether or not the companies have viable business models. These companies are deemed highly speculative unless otherwise noted.
Symbol
Name
Trade
P/E
EPS (ttm)
Yield
P/B
% from low
Akamai Technologies
31.62
33.46
0.95
N/A
2.66
0.13%
Cisco Systems, Inc.
15.94
12.44
1.28
1.60%
1.82
1.06%
Urban Outfitters, Inc.
28.88
18.92
1.53
N/A
3.42
3.27%
Staples, Inc.
15.94
12.94
1.23
2.60%
1.55
8.03%
Teva Pharmaceutical
48.9
13.15
3.72
1.70%
1.87
9.01%
Marvell Technology
15.16
12
1.26
N/A
1.84
9.30%
Qiagen N.V.
19.12
32.97
0.58
N/A
1.75
13.40%
Activision Blizzard, Inc
11.86
27.45
0.43
1.40%
1.32
14.92%
Microsoft Corporation
26.14
10.39
2.52
2.50%
4.1
15.00%
Broadcom Corporation
34.65
17.48
1.98
1.10%
3.13
15.89%
Infosys Limited
65.81
25.12
2.62
1.30%
6.09
16.01%
Amgen Inc.
58.35
12.13
4.81
N/A
2.18
16.10%
Yahoo! Inc.
15.38
18.07
0.85
N/A
1.53
18.86%
Google Inc.
517.65
20.1
25.75
N/A
3.34
19.38%
Watch List Summary
Micron Technology (MU)
On February 3, 2011 in Barron’s magazine (article here), Doug Freedman of Gleacher & Co. upgraded his ratings of Micron Technology (MU) from Neutral to Buy. The justification for the ratings upgrade was that price-cutting within the respective industries for both companies was diminishing. At the time, Micron Technology was trading just short of the 52-week high at $10.89. Soon after the buy recommendation in early February, Micron Technology stock reached a peak of $11.61 by the middle of the month.
Fast-forward to June 24, 2011 in Barron’s magazine (article here), Freedman reiterates his buy rating of Micron Technology (MU). The reiteration of the buy recommendation comes after Micron’s stock fell to $7.39 per share or –32% since his original buy recommendation on February 3, 2011. Apparently there is a story not worth repeating that Freedman is sticking to regardless of the reality that such a story is not applicable to Micron (MU). Freedman’s initial buy rating came when the stock was within striking distance of a 52-week high. The idea of transitioning from a neutral rating to a buy rating at the high seemed illogical since it was based on the premise that the previous trajectory would continue unabated.
Pre-Market Rules the Trading Day
On June 27, 2011, the stock market trading for the Nasdaq 100 was ruled by the pre-market. What do we mean by the pre-market ruling the day? Well, with all of the volume that is created during the regular hours of trading, the most impact to stock prices occurs during the pre-market. On average, the pre-market trading moved the shares of Nasdaq 100 stocks by 96.95%. The regular hours of trading only impacted market gains by 3.05%.
In addition, the volume of the pre-market is dwarfed by the regular hours however there is little to show for all of the activity during the regular trading day. As an example, Apple (AAPL) had pre-market volume of 125,033 shares and a gain of $5.96. At the close of regular trading, AAPL closed at $5.69, only a 4% difference from the pre-market close. This 4% difference from the pre-market close occurred on 12 million shares of volume. 32% of the companies on the Nasdaq 100 had no change in price after the pre-market closing price was established. Micron Technology, which had 34 million shares traded, was among those companies that didn’t budge from the pre-market closing price. This activity is not relegated to just the Nasdaq 100 on June 27th, we’ve examined this topic at great length in the past at the following link.
Garmin (GRMN) Top Formation Complete
On June 28, 2011, navigation device maker TomTom announced that expected earnings and sales would be cut for 2011. This resulted in a 26% decline in the share price of TomTom. Garmin (GRMN) was soon to follow the lead of TomTom falling by 3% in pre-market trading. Garmin was highlighted as one of the Nasdaq 100 stocks to watch when it was within 2% of the 52-week low on August 15, 2010.
With a gain of 19% in 10 months and the prospect of retracing back to the $29 level, selling Garmin now, if you haven’t done so already, shouldn’t be out of the question.
Akamai (AKAM) in Lock Step
The price action of Akamai (AKAM) seems to be following in lock step the price movement from 2005 to 2008. In the period from 2005 to 2007 the stock of Akamai rose from $10 to as high as $59.15. The subsequent declining phase lasted from early 2007 to late 2008 and stopped at $9.29.
Where do we think that Akamai is in the current cycle of decline? The most recent high was registered at $54.12 on December 7, 2010. In the last cycle, the price of Akamai stock took a break from freefall by resting at the $25.88 level. If Akamai were to do exactly what occurred the last time around (on a percentage basis), then there should be a rebound to the Dow Theory 1/3 (red line) support line of $39.18.
In the last cycle, Akamai traded in a Dow Theory line formation two times as investors and traders decided which position held the strongest hand. The first time occurred in 2006. It only took investors four months to decide that the stronger hands were the accumulators of Akamai stock. The second time a Dow Theory line started was in mid-2007. After a year of struggle it was finally determined that the distributors of Akamai stock had the strongest hand.
If we’re lucky, with Akamai (AKAM) continuously falling to a new low, the recent reversal in the stock price could ignite a price rise back to the 1/3 (red line) Dow Theory resistance level of $39.18. Akamai’s stock price getting above $31.71 (yellow line) represents fair value, a significant marker in terms of Dow Theory since it indicates where a majority of investors, as opposed to speculators, have gains in their AKAM position instead of loses. This gives less incentive to the investors to sell their stock.
As in the last cycle for Akamai, the strongest resistance level is at the $39/$40 level. Dow Theory stipulates that an investor should only expect half of what is foreseeable down the road. Since $39.18 (red line) is the foreseeable prospect for AKAM, if the price is now $35, then a fair profit could only be 5.97% or a gain of $2.09. Trite as this may seem, it is the only reasonable expectation for the stock in the short term.
The downside target for Akamai (AKAM), according to Dow Theory, is $24.24 (green line). In the past, AKAM has shown the ability to break through this support levels on downside moves in resounding fashion. Those interested in taking new positions should be willing to accept the downside risks beforehand.
First Solar (FSLR)
It was reported on June 30, 2011 that First Solar (FSLR) received $4.49 billion in conditional loan guarantees from the Department of Energy. This news pushed the price of FSLR up 6% in after hours trading.
As the above chart indicates, First Solar (FSLR) appeared on our watch list several times at opportune prices. On February 26, 2010, FSLR appeared on our watch list when the stock price was within 7% of a new low. After a brief rise in the price of FSLR low in February, the stock re-appeared on our May 22, 2010 watch list falling within 16% of the 52-week low. More recently, FSLR showed up on our watch list when the stock came within 7% of the new low on June 17, 2011.

Watch List Performance Review

In our ongoing review of the Nasdaq 100 Watch List, we have taken the top five stocks on our list from July 2, 2010 and have check their performance one year later.

Symbol Company 2010 2011
% change
APOL Apollo Group, Inc. 41.86 46.6
11.32%
RIMM Research In Motion 48.14 28.83
-40.11%
DELL Dell Inc. 12.03 16.95
40.90%
YHOO Yahoo! Inc. 14.07 15.44
9.74%
QCOM QUALCOMM 32.37 57.81
78.59%
- - - Average 
20.09%
NDX Nasdaq 100 1734.41 2362.25
36.20%

Only two companies, Dell (DELL) and Qualcomm (QCOM), from our July 2010 watch list were able to beat the Nasdaq 100.  The average gain for the top 5 companies was 20.09% which was far below the 36.20% gain for the Nasdaq 100.  Apollo Group (APOL) provided a surprising gain of 11.32% in an extremely challenging environment for companies in the for-profit education business. Research In Motion (RIMM) not only was at a new low last year, it fell another -40%.  It seems that RIMM is going in a death spiral since few companies on our watch lists are near their two consecutive years in a row, let alone falling an additional -40%.  Despite the plummeting of the shares of RIMM, it should be noted that the stock rose 40% by March 2011 after showing up on our list last year.  
Disclaimer:
On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. We suggest that readers use the March 2009 low (or the companies' most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.

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Dow Theory: Waiting for Confirmation

Posted on June 30, 2011 | Leave a comment
Recent activity in the Dow Jones Industrial Average (DJIA) has given favorable indications that we may reach a confirmation of the bullish trend that has been established since July 2009. Below is a chart of the DJIA for the last six months.
On the DJIA chart are several characteristics worth noting. First, and what we believe to be the most important, is the ability for the DJIA to break above the fair value level (yellow line). The fair value level, also referred as the 50% principal, indicates where a majority of investors in the index of stocks are at a break-even point with their investment.

Next is the unconfirmed bull market indication at point A (red line). Occurring at the same time that the DJIA is above the fair value level is the fact that the index broke above point A (red line) which indicates whether or not there is any conviction in the market to go higher. For the time being, there is plenty of conviction in the market as represented in the consecutive triple digit gains that have been posted despite the worrisome foreign and domestic economic news.

There are a couple of important points to highlight about the two positives that have been mentioned. First is the often misinterpreted view by some Dow Theorists to accept that if the price of the DJIA goes above point A (red line), then we’re in a confirmed bull market. In fact, this indication, going above point A, is only telling us that the next target for the index is to the previous high (point B; green line) and the trend is bullish. The market still has the opportunity to get a non-confirmation by either the Dow Jones Transportation Average or the Dow Jones Industrial Average not advancing to a new high (point B; green line). Lack of a confirmation from either index could weigh heavily on the prospects of a market advance.

The next issue dovetails with the first. By going above the fair value plane, it could be interpreted that the market, on a short-term basis, is overvalued. Not only could the market be considered to be overvalued, we could also consider that there is a built-in upper limit for the market. Many investors could interpret the prior high (point B; green line) for the DJIA to be as much risk, in a 2-year doubling of the market, as they’re willing to accept.

Each of these concerns are at play when new information comes in that implies risk is being added to the market. The problems with Greece, US deficit and debt, municipal default, inflation in China, and nuclear threat to Japan are already factored in for the next 3-9 months. There has to be a new twist on the current themes or a black swan event, something that no one has considered, to change the current message of the market.

As a follow up to prior commentary on Dow Theory, the DJTA continues to lead the way higher. In this case, the Transports fell the most (-8.45% v. –7.11%) from the peak in May and the DJTA recovered the most (+7.18% v. +4.35%). We continue to keep a watchful eye on the Dow Jones Transportation Average for any early indications of market direction (chart below).

Our best guess is that the upside prospects are for the DJIA and DJTA to go back to their respective highs set on April 29th and May 10th. Between now and then, investors should remain focused on our Dividend and Nasdaq 100 watch lists for new opportunities with companies that are undervalued and good long-term investments.
  • This is a follow-up to our last Dow Theory market call on April 4, 2011

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In the News: June 26, 2011

Posted on June 25, 2011 | Comments Off on In the News: June 26, 2011

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NLO Dividend Watch List: June 24, 2011

Posted on June 25, 2011 | Comments Off on NLO Dividend Watch List: June 24, 2011
The market continues to correct.  The S&P 500 is now down 7.5% from its recent peak while the Dow dipped below the 12,000 mark, a -7.3% pull back from the recent peak.  Our investment filter showed 50 companies within 11% of the low so we decided to reduce our list to those that are within 5% of the low. The list produced 24 quality companies. The following are stocks on our list that are within 6% of their 52-week low.
June 24, 2011 Watch List
Symbol Name Price % Yr Low P/E EPS (ttm) Dividend Yield Payout Ratio
NTRS Northern Trust Corp.  44.98 -0.49% 16.60 2.71 1.12 2.49% 41%
SYBT S.Y. BanCorp., Inc.  22.5 0.04% 13.16 1.71 0.72 3.20% 42%
TGT Target Corp. 46.33 0.39% 11.33 4.09 1.20 2.59% 29%
WEYS Weyco Group, Inc.  22.37 0.54% 19.45 1.15 0.64 2.86% 56%
GBCI Glacier BanCorp., Inc.  12.97 1.01% 21.98 0.59 0.52 4.01% 88%
SFNC Simmons First National Corp.  24.4 1.08% 11.35 2.15 0.76 3.11% 35%
GS Goldman Sachs Group, Inc.   130.91 1.09% 14.34 9.13 1.40 1.07% 15%
HGIC Harleysville Group Inc.  29.89 1.32% 10.71 2.79 1.44 4.82% 52%
ANAT American National Insurance 75.4 1.70% 12.76 5.91 3.08 4.08% 52%
CMA Comerica, Inc. 33.74 2.00% 18.54 1.82 0.40 1.19% 22%
CHFC Chemical Financial Corp.  18.27 2.35% 16.61 1.10 0.80 4.38% 73%
WABC Westamerica BanCorp.  48.12 2.58% 15.13 3.18 1.44 2.99% 45%
BRK-A Berkshire Hathaway Inc. CL 'A' 113,100 2.89% 17.19 6580.82 N/A N/A N/A
SUSQ Susquehanna Bancshares, Inc.  7.65 3.66% 45.00 0.17 0.08 1.05% 47%
MCY Mercury General Corp. 38.85 4.18% 14.28 2.72 2.40 6.18% 88%
HHS Harte-Hanks, Inc. 7.91 4.22% 10.01 0.79 0.32 4.05% 41%
NWN Northwest Natural Gas Co. 44.6 4.62% 17.02 2.62 1.74 3.90% 66%
TCB TCF Financial Corp. 13.56 5.12% 13.70 0.99 0.20 1.47% 20%
MDP Meredith Corp. 30.4 5.12% 10.67 2.85 1.02 3.36% 36%
AVP Avon Products, Inc. 27.53 5.40% 16.99 1.62 0.92 3.34% 57%
BXS BanCorp.South Inc. 12.21 5.53% 76.31 0.16 0.04 0.33% 25%
BOH Bank of Hawaii Corp. 45.34 5.59% 12.63 3.59 1.80 3.97% 50%
UVV Universal Corp. 37.37 5.68% 6.89 5.42 1.92 5.14% 35%
SJW SJW Corp. 23.18 5.94% 18.11 1.28 0.69 2.98% 54%
24 Companies
Watch List Summary
Northern Trust (NTRS) top our list this week. The shares of NTRS traded down and hit a fresh 52-week low at the close of Friday on big volume.  Readers may recalled that we recommended buying Norther Trust back on 9/1/10 and selling it on 12/3/10.  While the current price is about 5% lower, we believe Northern Trust may prove to be a good investment.  Investors should note that the company has not raise its dividend since 2007 but hasn't cut the dividend during the recent banking crisis either.  We view such action as a good indication by NTRS management.  The current payout ratio of 41% gives room for earning to fall by half and still meet the current dividend.  Credit Suisse cut its estimates on NTRS in this article.  Also, the company purchased a fund-administration unit from Citadel last month.

 

Target (TGT) landed in the third spot after Fitch cut its debt rating.  They've taken the rating down from A to A- on claims that Target is aggressively buying back its own shares and remodeling stores in Canada.  We've said it before that shares of Target look attractive at a 2% yield but it's even more attractive at a 2.59% yield.  This yield boost was because the company raised its dividend by 20%, from $0.25 to $0.30 per share.  Once again, IQTrend has estimated that Target is a good buy when it reaches a 1% yield.

 

Another company on our radar is American National Insurance (ANAT). Shares are trading 0.54x book value and we can't help but think that this company is about to go on the acquisition block after seeing Transatlantic (TRH) get a buyout offer at almost 0.8x book value.  In any case, investors will receive a 4% dividend as a token to wait for the price to skyrocket or get acquired.  The payout ratio for ANAT is manageable at 52%.  With $570 million in cash and only $60 million in debt, we'll be taking a closer look at this name in the coming weeks (probably will get snatched up before we can pull the trigger.)

 

Top Five Performance Review

 

In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from June 25, 2010 and have checked their performance one year later. The top five companies on that list can be seen in the table below.

 

Symbol Name 2010 Price 2011 Price % change
WAG Walgreen Co. 26.93 41.39 53.69%
MON Monsanto Co. 48.27 65.96 36.65%
SVU SUPERVALU Inc. 12.00 8.57 -28.58%
XOM Exxon Mobil Corp.   59.10 76.78 29.92%
HSC Harsco Corp. 25.05 30.88 23.27%



Average 22.99%





DJI Dow Jones Industrial 10,143.81 11,934.58 17.65%
SPX S&P 500 1,076.76 1,268.45 17.80%

 

It's interesting to note that a "boring" company like Walgreen (WAG) would outshine all those companies on the list.  It even outperformed the high flying Apple (AAPL) since that list was published.  Walgreen returned over 50% while Apple did 21.3%.  In our on-going comparison of WAG and AAPL, what we're trying to emphasis is the consistency of one stock over the other.  As AAPL's popularity waxes and wanes, WAG continues to methodically provided above average returns along with an outstanding dividend.
Disclaimer:
On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. We suggest that readers use the March 2009 low (or the companies' most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.
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Dow Theory: Price and Values

Posted on June 23, 2011 | Leave a comment
Dow Theory is as much about values as it is about squiggly lines on a chart. Charles H. Dow, co-founder and former editor of the Wall Street Journal, often expressed the idea of values in many different ways. However, there is one passage from his editorials in the Wall Street Journal that we feel is critical to the general idea of what Dow meant whenever he talked on the subject of values. On July 20, 1901, Dow said the following:
“The best way of reading the market is to read from the standpoint of values. The market is not like a balloon plunging hither and thither in the wind. As a whole, it represents a serious, well-considered effort on the part of farsighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future. The thought with great operators is not whether a price can be advanced, but whether the value of property which they propose to buy will lead investors and speculators six months hence to take stock at figures from ten to twenty points above present prices.
 
"In reading the market, therefore, the main point is to discover what a stock can be expected to be worth three months hence and then to see whether manipulators or investors are advancing the price of that stock toward those figures. It is often possible to read movements in the market very clearly in this way. To know values is to comprehend the meaning of movements in the market."
Source: Hamilton, William Peter. Stock Market Barometer. Page 38.
Dow Theorists like Richard Russell often quote the last sentence of the above excerpt, “…to know values is to comprehend the meaning…,” without giving the proper context of what is meant. The progression of thought that precedes the last sentence is critical to understanding why knowing values and their relationship to price is so important. Let’s deconstruct the ideas laid out before us.
First, Charles Dow tells us that the stock prices of today are adjusted for what is expected in the future. The distinction between great operators [Buffett, Einhorn, Paulson, Berkowitz etc.] and average traders/investors is the ability to know values enough to project at least six (6) months down the road that, even at higher prices, the investing public will still be willing to buy more of the stock in question.
Next, these great operators are supposed to be willing to accept half the gains that they expect for 6 months and in half the time. At which point, the great operators move on to other undervalued opportunities. Dow believed that not only should the great operators be able to predict the direction of the price of an undervalued asset, they must also accept less than the full amount possible despite their confidence and accuracy of prior investments using the same approach. This idea is based on a concept called “seeking fair profits,” which we mention in every sell recommendation that is posted on our site.
We readily admit that we don’t know all there is about fundamental analysis which is critical to the understanding of values. However, the creation of this site is specifically for the purpose of pointing you in the right direction. It is not accidental that we’ve selected the two lists, dividend increasing and Nasdaq 100 stocks, for your consideration. What we understand and hope to convey is that specific stocks at or near a new low are the benchmark for testing any and all forms of fundamental analysis, in the pursuit of determining values, with reduced probability of exceptional loss.
As an example, we found a stock recommendation made by Richard Moroney of the Dow Theory Forecasts (DTF) newsletter. On June 24, 2011, DTF recommended that investors consider all of the redeeming attributes of Dish Networks (DISH). DTF had the following to say about (DISH):
“Like its service, DISH’s also shares seem attractively valued. At 10 times trailing earnings, the stock trades at a 33% discount to its five-year average and 47% below the average cable or satellite stock.
 
"Should DISH meet the 2011 consensus profit estimate of $3.16 per share and its P/E simply holds steady, the shares stand to gain 30% by early next year. DISH also boasts widening profit margins, and steady sales growth.”
Additional commentary about the pros and cons of DISH are provided with closing remarks indicating that the stock “…is a Long-Term Buy.”
However, the recommendation of (DISH) at the current price of $28.39 is very much in contradiction to what Charles Dow viewed as an attribute of a “great” operator in the market. Evidence of this is demonstrated in the chart below.
Notice that when DISH appeared on our Nasdaq 100 Watch (September 18th & December 12th), the stock rose $5 in the first six months. After rising $5, DISH rose an additional $7 and settled at the current price of $28.39 or $10 above the price when it first appeared on our watch list. An observer of the chart should take note of the fact that even though February 2010 was lower than the Sept and Dec 2010 prices, the 1-year period prior to February 2010 had price points that were much lower. Therefore, DISH did not fall within 10%-20% of the 1-year low at that time.
The recommendation of (DISH) by DTF, at the current price, seems a bit of a stretch and makes us wonder if such a recommendation can withstand a cursory market reaction, let alone a full-on bear market (a -30% decline or more.) This also makes us question the thought process of DTF when basic principles of momentum investing (buying high, hoping that the long-term is favorable) are applied under the name of a newsletter presumably based on concepts of Charles H. Dow.
We believe that adherence to Charles Dow’s explanation of values is a key contributing factor for why we have constructed our watch lists for you. We are confident that, although not experts in values, you could apply any fundamental methodology you like and feel fairly comfortable about the investment decisions that you’ve made (especially if you’re willing to wait for the long-term to arrive.)
The lack of attention paid to the price as it relates to values, in the case of the recommendation of DISH, may cost an investor a decline of 30% before a material gain is achieved unless the company is bought by a larger institution.

 

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Cree (CREE): One Year After

Posted on June 23, 2011 | Leave a comment

It's been one year since we wrote about high-flying and high-multiple stock, Cree (CREE). At the time of our first article, Cree was untouchable at 60x trailing earnings. Our take on the stock was not well received based on the commentaries in the article on SeekingAlpha - "Cree Inc. Is Overpriced." While it was too short to take any credit for our view in June, our follow up work in August seemed even more controversial to many. One comment by a reader of our article on Cree even went so far as to offer us an alternative strategy. The reader said:

"My recommendation to your readers would be to buy Cree as if you were buying Google in 2002-03. Short Veeco (VECO) and Aixtron (AIXG) against them if you want to be net neutral the sector."

As reflected in the chart below, anyone who followed the reader's strategy would have gotten crushed as Cree fell -51%, Veeco rost +31% and Aixtron jumped +25%.

In our previous articles, we expressed the view that multiples were going to contract as competition heated up. One year later, a recent report from Bloomberg on LEDs suggested that price will "plummet" by 2015 reconfirming our thesis. But let's back up and dig into the fundamental numbers and see what we can learn.

Back in June 2010, the consensus of analysts had predicted that Cree would earn somewhere between $0.66 to $1.68. However, Cree ended up earning $1.71, beating the highest estimate. The 2011 estimates in June 2010 were even more bullish. The earnings estimates ranged from $1.68 to $2.30. Since then, that range has tighten considerably. Analysts now expect Cree to earn anywhere from $1.66 to $1.78. Even more outrageous was a commenter's prediction of Cree earning $4.50.

The chart below depicts a graphic picture of the stock's fundamental and price collapse. How can we explain this phenomenon? We're not quite sure. But based on many news feeds about the price of LEDs falling, companies entering the space, and bullish comments on Cree, it was apparent to us that it should be something investors needed to avoid. The risk/reward profile wasn't going to be good from our assessment.

Cree Price Stock Chart

Now that the price of this stock has fallen by 50%, what's the next move? At this point, any investor interested in buying Cree should start running the numbers. The stock's risk/reward profile has reversed course and it may be worth considering. The P/E is now at 20x, which is very close to its historical low of 18. Many analysts have turned bearish on the shares (46% have either hold, sell, or underperformed). Some analysts even expect Cree earnings to fall to $1.61 in 2012.

Despite many of the negative concerns, Cree carries no debt and typically has very strong free-cash flow. The book value continued to rise during the price collapse. As a result, Cree is now trading at 1.67x book, almost as low as the 2009 low (around 1.19x book). A technology company with great IP such as Cree could easily get taken out at 2x book value. Its competitor Toyoda Gosei (TGOSY.PK) currently trades at 2x book.

It appears that our view on Cree has come full circle. This company makes great products but in our view was a bad investment one year ago. Now that everyone appears to be against the company, we can no longer ignore the value attributes of Cree. Although we believe that there is still some downside risk, we recommend considering this stock's compelling fundamental attributes for your next technology stock investment.

References:
It's a Matter of Economics, Cree is Overpriced (6/3/10) - New Low
LED's Bright Prospects Could Dim (6/3/2010) - MarketWatch
From Macro to Micro, Cree Follow Up (8/11/10) - New Low
LED Lighting Prices to ‘Plummet’ By 2015, VantagePoint Says (6/16/11) - Bloomberg

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Biogen Management Should Provide Proper Sell Signal

Posted on June 21, 2011 | Leave a comment
In recent articles we’ve noted that, based on the price action, Biogen Idec (BIIB) is worthy of selling. Biogen continues to register new highs after first showing up on our Nasdaq 100 watch list on October 30, 2009. The performance of Biogen Idec since October 2009 has been over 135%.

It is worth noting that the last time Biogen (BIIB) was at a high on October 15, 2007, the board of directors approved a plan to put the company up for sale. Biogen retained Goldman Sachs and Merrill Lynch to act as advisors for any eventual deal. The announcement of the intent to sale the company came after-hours on Friday October 12, 2007. After-hour trading of Biogen stock pushed the price up over 18% resulting in the high for the stock the following Monday.

Our interpretation of management’s desire to sell “at the top” in 2007 reflects that they didn’t expect the price to go much higher and with a market that had plenty of liquidity the best option would be to seek alternatives. The management of Biogen was accurate in their choice and timing. Biogen stock fell by over 50% after the announcement of the sale of the company.

For current holders of Biogen stock, we’d be paying close attention to the management team for indications of a merger or sale of the company. Any indication of managment "cashing out" should provide ample insider information about the expectations going forward.

Source:
Bowe, Christopher, and James Politi. "Biogen shares soar as group considers sale." Financial Times. Saturday October 13, 2007.

 
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In the News: June 18, 2011

Posted on June 18, 2011 | Comments Off on In the News: June 18, 2011

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Nasdaq 100 Watch List: June 17, 2011

Posted on June 17, 2011 | Leave a comment
Below are the Nasdaq 100 companies that are within 20% of the 52-week low. This list is strictly for the purpose of researching whether or not the companies have viable business models. Although these companies are very risky, they provide significant opportunity to outperform the market in the coming year.
Symbol Name Trade P/E EPS Yield P/B % from low
URBN Urban Outfitters, Inc. 28.27 18.53 1.53 0.00% 3.44 0.60%
MRVL Marvell Technology 13.79 10.92 1.26 0.00% 1.72 0.95%
CSCO Cisco Systems, Inc. 15.05 11.75 1.28 1.60% 1.76 1.83%
RIMM Research In Motion 35.33 5.57 6.34 0.00% 2.06 1.90%
SPLS Staples, Inc. 15.05 12.23 1.23 2.70% 1.48 2.03%
AKAM Akamai Technologies 29.47 31.19 0.95 0.00% 2.49 2.72%
MSFT Microsoft 24.00 9.53 2.52 2.70% 3.78 5.57%
BRCM Broadcom 31.77 16.03 1.98 1.10% 2.95 6.25%
TEVA Teva Pharmaceutical 47.76 12.84 3.72 1.60% 1.85 6.46%
FSLR First Solar, Inc. 118.83 16.96 7.01 0.00% 2.87 6.67%
ATVI Activision Blizzard, Inc 11.10 25.69 0.43 1.50% 1.25 7.56%
INFY Infosys Technologies 61.64 23.53 2.62 1.40% 5.75 8.66%
QGEN Qiagen N.V. 19.16 33.03 0.58 0.00% 1.77 13.64%
YHOO Yahoo! Inc. 14.78 17.36 0.85 0.00% 1.5 14.18%
GOOG Google Inc. 500.37 19.43 25.75 0.00% 3.3 15.39%
AMGN Amgen Inc. 58.34 12.13 4.81 0.00% 2.18 16.08%
LLTC Linear Technology 31.51 13.36 2.36 3.00% 18.15 16.57%
PCAR PACCAR Inc. 46.12 29.01 1.59 1.00% 2.98 19.48%

 Watch List Performance Review

The performance of our watch list after one year is to remind us of the possible outcome of investing in the stocks on our list.  It is hoped that we can gain greater insight in the investing process and refine that process as we go along. 
Below is the performance of the top five stocks on our Nasdaq 100 watch list from June 6, 2010 of last year.
Symbol Name 2010 2011 % change
GILD Gilead Sciences, Inc. 34.71 40.91 17.86%
SYMC Symantec Corporation 13.92 18.44 32.47%
ERTS Electronic Arts Inc. 15.81 23.8 50.54%
APOL Apollo Group, Inc. 51.48 44.71 -13.15%
QCOM QUALCOMM 35.3 56.48 60.00%
Average 29.54%
^NDX Nasdaq 100 1832.04 2274.48 24.15%

As a group, the top five from our list last year did fairly well by exceeding the index by more than 5%.  The only stock to decline was Apollo (APOL). Qualcomm (QCOM) was clearly the standout in the performance ranking of our watch list.  Likewise, Electronic Arts (ERTS) managed to crank out returns just north of 50% in the last year. 
It is important to note that, at the time, these stocks were not favored very highly in terms of expected growth of the stock price.  In fact, as our watch list was being posted in June 2010, many Wall Street analysts were actively downgrading these stocks.  Considering that the entire list from last year gained an average return of 21.51%, the outcome was quite reasonable.
    
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Transatlantic Holdings (TRH) Is Making Waves

Posted on June 16, 2011 | Leave a comment
On August 27, 2010, we recommended that investors consider the purchase of Transatlantic Holdings (TRH). In our assessment of TRH, we felt that the stock had a good chance of rising to $67 within 3 years. On the extreme end of overvaluation, we felt that Transatlantic Holdings (TRH) could be worth between $84 and $162. In the same article we said the following:
“…our investment strategy requires that if we get a 10% gain in less than a year in a tax-deferred account then we’re considering the next best investment alternative.”
Our aversion to excessive gains had paid off. On November 2, 2010 we recommended that holders of Transatlantic Holdings (TRH) sell their shares with a gain of 10.78% in approximately 68 days. As demonstrated in the chart below, such a recommendation came within two days of the high for the last year. After our recommendation to sell, TRH fell from $53.52 to $44.00 in the following 7 months.
Now, Transatlantic Holdings (TRH) is in the cross hairs of Allied World Holdings (AWH). With TRH selling comfortably below book value and AWH’s takeover offer also coming in below book value there is serious opportunity for TRH to move considerably higher. TRH sports a book value that is estimated between $66 and $79 per share depending on the source you chose. With the battle for the company that is expected to come over TRH, we can expect that if a merger or takeover does occur it should start at the $66 level which is in stark contrast to Allied World Holdings' offer of $51.50.
As soon as the deal was announced, Transatlantic’s largest shareholder, Davis Selected Advisors LP, indicated that they might oppose the deal because they believe that the $51.50 offer is too low (Bloomberg article here). Not far behind Davis Advisors, Tweedy Browne Co. has said that they’re also against a merger that prices TRH below book value (Bloomberg article here).
Our most recent Dividend Watch List (June 12, 2011) made specific reference to Transatlantic Holdings as a potential investment opportunity. We believe that as the market goes through its corrective phase, purchases of TRH, a company that has increased the dividend for over 20 years in a row, would be reasonably rewarded.
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Monsanto (MON) Chart: 1929 to 1937

Posted on June 14, 2011 | Leave a comment
Below is an excerpt from a 1937 issue of Barron’s showing the price history of Monsanto (MON) from 1929 to 1937. The high price set in 1929 at $40 was marked down over 75% in 1932. Subsequent price movement brought the stock of Monsanto back to the 1929 high by the end of year 1933. By late 1935, Monsanto (MON) was just short of $100 a share.
We’re not totally clear about the specific dynamics that allowed for the price rise of MON at the market bottom. However, prior experience with the market decline from 2007 to 2009 and research of markets like 1837, 1857, 1866, 1873, 1884, 1893, 1907, 1929 and 1973 has shown us that the reaction to the devastating forces of stock price deflation is nearly equal in magnitude and timing.
We found this chart in line with our previous articles titled “Dow Jones’ Decline Largely Impacted by Index Changes” and “After the Crash, Recovery was Faster Than Most People Think” on the topic that the decline and recovery of many stocks was much quicker than most would imagine after 1929. In the case of Monsanto, the stock is shown to have recovered much quicker than previously indicated.

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Richard Russell Review: Wrong About the Industrial Production Index

Posted on June 12, 2011 | Leave a comment
On June 6th, Richard Russell wrote an article on the Financial Sense website titled “Are We Fated to Live 1929-1930 All Over Again?” In that article, Russell discussed the Barron’s Monthly Index of Physical Volume of Industrial Production [BMIPVIP] reflecting on the movements of the index as compared to the Dow Jones Industrial Average in the period from the peak of the stock market in 1929 to the bottom in 1932.

Richard Russell pointed out that from November 1929 Barron’s Monthly Index of Physical Volume of Industrial Production [BMIPVIP] gave ample warning that the direction of the U.S. economy was still headed lower despite the rebound of the Dow Jones Industrial Average from November 1929 to April 1930 as depicted in the chart below.

Source: Persons, Warren. Barron's. May 15, 1933; pg. 18
Because the BMIPVIP was discontinued in 1938, we’ve used the closest approximation which is the Federal Reserve’s Industrial Production Index (INDPRO) found at the St. Louis Federal Reserve website.  In order to make a comparison to the two indexes, we checked the performance of the INDPRO to the BMIPVIP.  Below is the chart of the Barron’s adjusted and unadjusted BMIPVIP index and the Federal Reserve’s INDPRO from 1919 to 1933.

 It can clearly be seen that the Federal Reserve’s index (INDPRO), which is still in use today, can be used to measure against the Dow Jones Industrial Average.  Whenever the Barron’s index zigged the Fed’s index zigged, whenever the Barron’s index zagged so too did the Fed’s index.  We believe that using the Fed’s Industrial Production Index is the best and most consistent approximation to compare to 1929 to 1934 (shown below) as well as today’s market.

source: Person, Warren. Barron's. May 15, 1933. pg. 18.





According to Russell, the BMIPVIP hit its high in the month of June 1929.  This was a full 3 months before the peak in the Dow Industrials in September 1929.  The Federal Reserve index actually peak in July 1929 however, this was still ample enough time to gain inferences from the index’s movement.

Russell correctly observed that the BMIPVIP was critical in the evaluation of whether or not the economy and the stock market were on a rebound.  The great Dow Theorist Robert Rhea first introduced the use of Barron’s Industrial Production Index in his book Dow’s Theory Applied to Business and Banking.  Rhea used BMIPVIP as a means to confirm the signal provided by Dow Theory which contributed to his accurate call of a market bottom in July 1932.

Richard Russell’s point was that even though the stock market rallied strongly after the initial crash from the September 1929 high to the November 1929 low, the subsequent rebound was unsustainable when viewed from the perspective of the BMIPVIP or the INDPRO.  Unfortunately for Russell, his analysis of the BMIPVIP index and the Dow Jones Industrial Average comes to the wrong conclusion when attempting to bring actions of the past to market activity of the present.

Russell closes his article with the following thoughts:

“After April 1930, the post-crash rally ended, and a great bear market began. As the market turned down again, the US economy crumbled. By July 1930, Barron's Index of Industrial Activity had fallen to 85.5. The Great Depression was on.

“And I'm wondering about the comparison with today's action. Recently, we've seen the Dow climbing steadily from its March 2009 low, all the while with the economy neutral to weak. Then we see the Dow hitting a high last month in May with business today sluggish and even weaker than it was in January.

“And I'm wondering, ‘Are we fated to live 1929-1930 all over again?’ Is the stock market rally of March 2009 to May 2011 a repeat of the stock market rally of November 1929 to April 1930? In both instances, business weakened as the market climbed higher.

“But the scary part is that in 1930 when the Dow broke support, the Great Depression began and Barron's Business Index continued to plunge. Let's keep an eye on the March 2011 lows -- Dow......11613.30 and Transports ....4950.17.”

We’re disappointed that Russell’s remarks are uninformed and misleading with the intent of creating fear. First, Russell withholds the data necessary to test whether his assessment is accurate. Next, Russell implies that the Dow Industrials of today may be rising in spite of the Industrial Production Index falling. However, the Fed’s INDPRO has been in perfect alignment with the rise of the Industrial Average since 2007 as shown in the chart below.

Finally, Russell closes his article with an attempt at drawing the events of the past to the present.  Russell's effort lacks all substance when he speaks of targets for the Dow Industrials to watch for but doesn't introduce the Industrial Production Index nor it's relationship to 1929 and today. 

While the true test may come when the Dow Industrials and Industrial Production Index (INDPRO) attempt to exceed the prior high of 2007, there is little indication that Russell’s assessment is correct.

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NLO Dividend Watch List: June 10, 2011

Posted on June 12, 2011 | Leave a comment

The recent market correction has expanded our list.  Since our list grew to more than 50 companies within 11% of the low, we decided to reduce our list to 5% of the low.  Our list still produced 33 quality companies.  The following are stocks on our list that are within 6% of their 52-week low.

June 10, 2011 Watch List

Symbol Name Price % Yr Low P/E EPS (ttm) Dividend Yield Payout Ratio
WEYS Weyco Group, Inc.  22.32 -0.36% 19.41 1.15 0.64 2.87% 56%
TRH Transatlantic Holdings, Inc. 44.01 0.25% 14.38 3.06 0.88 2.00% 29%
CHFC Chemical Financial Corp.  18.13 0.33% 16.48 1.10 0.80 4.41% 73%
TGT Target Corp. 46.7 0.39% 11.42 4.09 1.20 2.57% 29%
SFNC Simmons First National Corp.  24.38 0.83% 11.34 2.15 0.76 3.12% 35%
WABC Westamerica BanCorp.  47.66 1.60% 14.99 3.18 1.44 3.02% 45%
TMP Tompkins Financial Corp. 36.58 1.81% 11.69 3.13 1.36 3.72% 43%
SJW SJW Corp. 22.32 2.01% 17.44 1.28 0.69 3.09% 54%
CMA Comerica, Inc. 33.78 2.02% 18.56 1.82 0.40 1.18% 22%
STBA S&T BanCorp., Inc.  16.98 2.04% 14.64 1.16 0.60 3.53% 52%
BRK-A Berkshire Hathaway Inc. CL 'A' 111,045 2.08% 16.87 6580.82 N/A N/A N/A
UBSI United Bankshares, Inc.  22.57 2.17% 13.60 1.66 1.20 5.32% 72%
HTLF Heartland Financial USA, Inc.  13.41 2.29% 12.53 1.07 0.40 2.98% 37%
ANAT American National Insurance 76 2.51% 12.86 5.91 3.08 4.05% 52%
HGIC Harleysville Group Inc.  31.11 2.64% 11.15 2.79 1.44 4.63% 52%
MDP Meredith Corp. 29.72 2.77% 10.43 2.85 1.02 3.43% 36%
NWN Northwest Natural Gas Co. 43.9 2.98% 16.76 2.62 1.74 3.96% 66%
NTRS Northern Trust Corp.  46.76 3.23% 17.25 2.71 1.12 2.40% 41%
GBCI Glacier BanCorp., Inc.  13.29 3.47% 22.53 0.59 0.52 3.91% 88%
SYBT S.Y. BanCorp., Inc.  23.33 3.73% 13.64 1.71 0.72 3.09% 42%
BXS BanCorp.South Inc. 12.14 4.30% 75.88 0.16 0.04 0.33% 25%
UVV Universal Corp. 37 4.64% 6.83 5.42 1.92 5.19% 35%
AVP Avon Products, Inc. 27.36 4.75% 16.89 1.62 0.92 3.36% 57%
C Citigroup Inc  37.92 4.75% 12.39 3.06 0.04 0.11% 1%
BMI Badger Meter, Inc. 35.61 4.80% 20.12 1.77 0.56 1.57% 32%
TDS Telephone and Data Systems 30.23 4.82% 23.25 1.30 0.47 1.55% 36%
BKH Black Hills Corp. 29.16 4.93% 17.78 1.64 1.46 5.01% 89%
GS Goldman Sachs Group, Inc.   135.92 4.96% 14.89 9.13 1.40 1.03% 15%
CWT California Water Service 35.59 5.14% 19.34 1.84 0.62 1.74% 34%
MCY Mercury General Corp. 39.26 5.28% 14.43 2.72 2.40 6.11% 88%
HHS Harte-Hanks, Inc. 8 5.40% 10.13 0.79 0.32 4.00% 41%
TCB TCF Financial Corp. 13.62 5.58% 13.76 0.99 0.2 1.47% 20%
PRK Park National Corp. 62.57 5.87% 13.87 4.51 3.76 6.01% 83%
33 Companies






Watch List Summary

Weyco (WEYS) topped out list again. The company is typically undervalue at 2.2% dividend yield.  The current yield implies that this company is undervalued by 30%. Current cost pressures may be coming from the commodity side, leather cost.  But once the company passes that cost down to the consumer, that variable cost could be key to future margin expansion.

Transatlantic Holdings (TRH) is a re-insurer and may be under pressure because of the recent catastrophic headlines.  Currently trading 30% below book value, TRH may provide sufficient margin of safety for patient investors.

You may note that Berkshire Hathaway (BRK) is on this list but doesn't pay any dividend.  We view BRK as a no-load fund that all investors should consider holding.  There's no better time to buy this company than at or near the low.

Top Five Performance Review

In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from June 11, 2010 and have checked their performance one year later. The top five companies on that list can be seen in the table below.

Symbol Name 2010 Price 2011 Price % change
SVU SUPERVALU Inc. 12.24 8.49 -30.64%
FRS Frisch's Restaurants, Inc 20.55 21.34 3.84%
CWT California Water Service 34.91 35.59 1.95%
GS Goldman Sachs Group, Inc.   135.64 135.92 0.21%
UMBF UMB Financial Corp.  37.58 40.46 7.66%



Average -3.40%





DJI Dow Jones Industrial 10,211.07 11,951.91 17.05%
SPX S&P 500 1,091.60 1,270.98 16.43%

Disclaimer:
On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. We suggest that readers use the March 2009 low (or the companies' most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.

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In the News: June 10, 2011

Posted on June 10, 2011 | Comments Off on In the News: June 10, 2011
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In the News

Posted on May 28, 2011 | Comments Off on In the News
How to Get a Special Dividend at Barron’s
The Security I like Best (PDF) by Warren Buffett
College is a scam at MarketWatch
Is Farmland A Smart Hedge Against Inflation?  at Gonzalo Lira
Fidelity and Putnam Among Fund Families Duped by Longtop at Morningstar
The U.S. Postal Service Nears Collapse at BusinessWeek
Prospects Climb at Ryanair at Barron’s
Hedge-fund secrets to beat the market at MarketWatch
Jim Cramer Calls LinkedIn IPO Action A Sham at MarketWatch
The Invisible Stock Bubble at SmartMoney
Will Illumina Find New Life At 50-Day Line? at Investor’s Business Daily
As Lenders Hold Homes in Foreclosure, Sales Are Hurt at NYT
Fleckenstein Doesn't See Technology Industry `Bubble' (Video) at Bloomberg
Facing Up to End of 'Easy Oil' at WSJ
Clearing Firm Rattles Investors at Barron’s
Tag, You're It! Too Big to Fail Risk Transferred, Not Eliminated at The Atlantic
Next Danger: "Splash Crash" at Barron’s
Death Derivatives: Wall Street’s Latest Ill-Advised Maneuver at Minyanville
Biggs Buying as S&P 500 Profit Forecasts Rise Most in a Year at Bloomberg
Berkley Forms New London Unit at Zacks
May Not Be Bearish Enough on China Real Estate: Chanos at Bloomberg
Hartford Sells Unit to CenterState at Zacks
The Dow at 115: Its Close Relationship to GDP at WSJ
Dow Theory: Still Sending a Bullish Signal? at WSJ
Target Says ‘Limited Number’ of Buyers for Card Portfolio at Bloomberg
Farmers Will Do Well at SeekingAlpha

Watch List Notes

It was reported on May 24, 2011 that Carl Icahn sold a large portion of his Biogen Idec (BIIB).  This pretty much closes the initiation of Mr. Icahn’s position in Biogen Idec (BIIB) which was started back in June 2007.  The average compounded annual gain for Mr. Icahn over the four-year period was slightly above 20%.  However, based on Biogen Idec (BIIB) being on our Watch List of October ,with our sell recommendation of Biogen Idec (BIIB) on April 21, 2011, the compounded annualized gain was 77%.
Carl Icahn Buys Biogen Idec at GuruFocus June 2007

Carl Icahn Sells 2.6 Million Shares in Biogen as Other Execs Sell at Barron’s May 2011
October 2009 Nasdaq List at NLO
April 2011 Sell BIIB/Buy TEVA at NLO

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