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Deep Value - Current Sectors Trading at Depressed Prices


Myth465
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So far we have

 

Insurance Stocks - Many trading at less than book. Earnings pressure due to a soft market and low interest rates. Death by a thousand cuts. Many surviving on reserve releases, and one big cat could bring on a hard market. Can probably buy after the market hardens. Good time to pick your jockeys.

 

Parker Stocks - A catch all for all those cheap media and entertainment stocks. Perhaps cheap due to neglect.

 

Supertankers - Crude shippers, way too many ships have caused rates to fall to below or at break even. Slow steaming, scrapping, and double hull requirements will eventually bring it back into line. Hard to time, those who have tried were killed in 2009 and 2010.

 

Grocery Stocks - Still working on this one.

 

 

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With resources and the market in general rallying I thought it would be useful to begin the search for the next big sectors to recover. What I hope this thread does is provide a discussion on sectors which have not yet turned, and may be close to turning. After the sectors are identified I then hope we can begin discussing individual securities.

 

One sector I looked at for about 4 months last year was Shipping. SSW has rebound quite nicely, but all of the crude shippers are very depressed. Today I noticed they were all at lows and have begun kicking the tires again. I cant predict when this sector will turn but know rates have been in the dumps for 2-3 years. Here are some good interviews / articles I found when researching the sector.

 

A value investors take - http://www.bloomberg.com/video/65426348/  He comments on TNP.

 

An interesting read - http://seekingalpha.com/article/201632-high-conviction-tide-is-rising-for-the-global-shipping-sector?source=qp_investment_views

 

An interesting read - http://seekingalpha.com/article/243063-the-start-of-a-bull-market-in-tanker-rates?source=qp_article

 

Here is the other side - http://www.bloomberg.com/news/2010-12-16/supertankers-head-for-worst-december-in-nine-years-as-ship-glut-cuts-rates.html

 

 

 

----- Individual Stocks.

 

I have owned OSG and made and last money on it. I made money on OSP, and lost a tiny bit on OSG. I like Management but am annoyed that they were buying back shares in the 70s, 80s, and 90s due to a discount vs scrap value. That didnt work out so well. They had a monster 20% FCF yield when rates were at there highest. They have spent most of the last few years repairing the balance sheet and getting liquitity.

 

FRO - Everyone knows the Monish story with them. I dont like Management for some reason (not sure why), but he is a shipping giant and throws his weight around. Known for monster dividends and bullying other shippers.

 

NAT - Everyone likes these guys. They dont do debt and sell shares to buy ships. I dont think its that great of a stetegy.

 

TNP - My favorite of the bunch. I really like Management and they seem very conservative. The ships are also of a higher quality generally. I watched for 4 months but never pulled the trigger. Couldnt figure out when or why rates would turn.

 

With that said I may buy FRO or OSG due to the leaps on these being very inexpensive. I can get 2013s for nothing on FRO due to the dividend. If I buy shares it will likely be TNP. The stocks will move up with rates moving up. Just need to figure out what gets rates up. Its not the price of crude, but the distance of transport routes and things such as that. I was never able to get a good handle on it.

 

They definitely over built and over ordered ships leading up to 2008, but something has to eventually bring supply and demand in line. Its time to listen to a few conference calls to get some additional color.

 

 

Thoughts on Shipping and other sector suggestions.

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http://www.bloomberg.com/news/2011-01-05/supertanker-surplus-increases-cutting-the-chance-of-a-rally-in-hire-rate.html

 

http://www.bloomberg.com/news/2011-01-04/supertanker-rents-may-stagnate-after-worst-december-in-a-decade.html

 

Looks like right after Q4 releases may be the right time to buy. Anyone have any takes on supply and demand. Aside from scrapping older ships due to lower than break-even rates what can bring things into balance. If rates fall off a clip, ships are scrapped, rates stabilize, and the economy recovers causing a shortage  - we could eventually have a nice run. The last bit of the pie is getting the timing correct, any advice on that?

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How about a basket of pharmaceutical companies?

 

Don't laugh, you can buy, LLY, FRX, MRK, AZN - you re buying the value of their current products at a discount (up to 40-50% in the case of FRX), decent balance sheets, getting their pipeline, research, distribution network  for free. Get a dividend (4-5.5%) while you wait

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How about selected media, gaming and electricity sectors?

 

Radio still appears cheap (SALM, SGA) along with some cable cos (LNET, SURW) and theatres (CKEC).  Gaming machine makers (MGAM) and smaller operators (FLL) and service providers (GCA).  Electricity provider NRG is also cheap and call on NG prices.  Game developer Gravity (GRVY) sell for less than cash.  All of these are selling for less than 5x FCF. 

 

I was also looking at AM (American Greetings) who is also selling for less than 5x FCF.  A media co that is lumped in the printing cos. 

 

These are the deepest value I can find in the US market.

 

Packer

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At this point pretty high (about 60%) but I have a long time horizon (over 10 years) and am willing to take some downside (In the last crash, my portfolio was down 50% but it increased 109% the next year and more than overcame the loss).  These names will be volaltile.  That portfolio also had some subprime lenders and a larger allocation to O&G.  I have transitioned to higher FCF stocks since the 2008 crash.  With the China bubble potential I may stay more focused on cheap US ideas versus resource plays.

 

Packer

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How about selected media, gaming and electricity sectors?

 

Radio still appears cheap (SALM, SGA) along with some cable cos (LNET, SURW) and theatres (CKEC).  Gaming machine makers (MGAM) and smaller operators (FLL) and service providers (GCA).  Electricity provider NRG is also cheap and call on NG prices.  Game developer Gravity (GRVY) sell for less than cash.  All of these are selling for less than 5x FCF.   

 

I was also looking at AM (American Greetings) who is also selling for less than 5x FCF.  A media co that is lumped in the printing cos. 

 

These are the deepest value I can find in the US market.

 

Packer

 

Packer with you on the board its hard to hold cash. Why do you think all of these companies are so cheap. Do you think its a sector thing, or individual securities. I researched GCA when they orginally sold off and decided to punt due to them losing the big contract.

 

1. What happened to Reading International and what made you focus on CKEC instead. It seems to me that realty and movie theaters would be good businesses so why are these so cheap. I kind of like the land holdings for Reading given that Aussie realty prices are crazy at the moment.

 

2. GRVY - whats the back story. They seem extremely cheap and may have some good prospects with the games they develop.

 

3. How much do you put in each one of these positions. Are they all basically 2-4% positions unless one really leaps out at you?

 

--------------------

 

In terms of Pharma I understand the big reason for the sector being undervalued, but dont think I can ever understand the companies in general.

 

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I think a number of these guys are cheap due to neglect (SALM, SGA), changing business model (SURW), higher debt (LNET, CKEC) tie to NG prices (NRG). 

 

I did hold Reading for awhile then based upon discussions on this board about Australian RE prices (relatively high) and their tie to the whole China story I decided to stick to the US players.  I don't know much about Australian RE but based upon data I have been able to gather it looks like another bubble.  CKEC has a high but supportable amount of debt and will receive $30 million distribution in Q1 for its in-theatre advertising partner.  The MVIC/EBITDA is 50% less than Regal and Cinemark and FCF yield in about 2x these competitors.  I also like the downsizing theme with movies retaining or potentially growing share.  But if they just hold revenues flat the stock should sell for double.  There are risks but I don't think this industry and CKEC are going away and they are valued cheaper than other entertainment venus like amusement parks and car race tracks.

 

GCA did lose the Harrah's contract but the business is a duopoly with Global Payments so I would expect some back and forth with customers.  It is not like the business is going away.  GPN is trading at 8x EBITDA while GCA is only 5.0x times.  The guys running the business are from First Data and they have good amount owned by a PE firm Summit Pertners who has expertise in these types of RR businesses.   

 

At this poin both of these are half positions (2%) with the other firms in the 4 to 10% range. 

 

Packer

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At this point pretty high (about 60%) but I have a long time horizon (over 10 years) and am willing to take some downside (In the last crash, my portfolio was down 50% but it increased 109% the next year and more than overcame the loss).  These names will be volaltile.  That portfolio also had some subprime lenders and a larger allocation to O&G.  I have transitioned to higher FCF stocks since the 2008 crash.  With the China bubble potential I may stay more focused on cheap US ideas versus resource plays.

 

Packer

 

It is rare to see anyone who has a 10-year horizon. I wish I could have the same patience like you.

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I remember doing my dd in the shipping sector years (before meltdown) ago.

I remember they were "cheap" then to (from a P/E perspective anyway).

 

What I remember is many were high debt animals and possibilites of growth were not great.

Now, Im not saying that is the case now or with some of the companys discussed here-  thats just what i remember. I do remember high prob of buyouts of one or two of the companys i was following and that event did occur.

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Beerbaron

 

Can you please share some names.

 

I like EXC....its cheap on various metrics, pays 5% divi, cheapest electricity producer and play on eventual rising Natural gas prices which are currently causing low electricity prices. Also if the carbon tax credit were to get off the ground, this would benefit. Management is very good at building shareholder value.

 

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Packer thanks for your thoughts. Always helpful. I will likely follow you into a few of these but will avoid declining businesses (LNET, and the radio stocks). I dont see why theaters especially ones which are mostly digital would be trading at a 20% cash yield.

 

As far as utilities, I have too many direct bets on raising gas prices would hate to add indirect ones. I also dont see gas prices raising.

 

------

 

I am pretty excited about these shipping stocks. Q4 will blow hopefully sending the stocks down. I feel good about the industry after listening to most of the presentation provided by OSG.

 

They predict higher growth than projected, slow steaming, and ship scrapping to cover the overhang in tonnage.

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Another basket of companies to consider--many retailers are very cheap right now.

 

Wal-Mart is trading at 12x forward earnings. Best Buy is trading at 10x forward earnings. Aeropostale, a designer and retailer of teen apparel, is selling at 10x forward earnings as well and consistently has shown return on assets of approximately 30%.

 

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American Greetings is a very interesting company, though I'm a bit stale as I looked at it roughly 9 months ago.  Seems to have very strong customer captivity (a greeting card company typically controls an entire retailer's category).  In exchange, AM pays an upfront fee to the retailer and maintains the shelf space (an AM employee visits each location on a regular basis to freshen the display, restock and take note of slow moving items).  Switching costs are somewhat burdensome, because a new card company needs to remove the old shelving and displays and replace with their own.  Not a time consuming process for one store but can lead to disruption across a large chain.  Plus, the frequent customer visits helps with service.  As a result, the SG&A for this company is rather large because they need to support this direct shipping arrangement, leading to somewhat high fixed costs.    They basically operate mini retail shops within their retail customers.

 

Volume trends were less then stellar, and I could not get comfortable with whether those trends were more secular or cyclical (are consumers purchasing fewer greeting cards per capita or are they merely backing off during challenged economic times?).  Pricing was favorable, and the Papyrus products were also very popular (I believe they sold the stores but continue to own the label and sell Papyrus through Target and their other retail customers).

 

Capital allocation also seems reasonable to me, but I'd be interested to hear thoughts on the cyclical versus secular issue for greeting card demand.

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Beerbaron

 

Can you please share some names.

 

I like EXC....its cheap on various metrics, pays 5% divi, cheapest electricity producer and play on eventual rising Natural gas prices which are currently causing low electricity prices. Also if the carbon tax credit were to get off the ground, this would benefit. Management is very good at building shareholder value.

 

 

I was referring to Caribbean Utilities Company, it's the only power provide on Caymen Islands. It walks hand in hand with the local authority.

 

The fuel costs are fully passed to the customer with no mark down.

They have an exclusivity agreement as sole provider for the islands until 2026.

The local authority's target is a ROIC of 9-12%. (They are running below 8% now so rate increase are to be expected in the summer)

Dividend around 7%, which is all earnings.

 

If I wanted to buy a junk bond I would buy this instead, it's a high yield with low risk to the principal and cash flow.

 

BeerBaron

 

 

 

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I think many big pharma stocks qualify. My current favourite is Abbott Labs. Stock yields 3.6% (should announce a 10% increase soon taking yield to just under 4%). Top line should grow at low double digits the next few years. PE for 2011 should be under 12 (unfortuantely, as with most pharma, there is alot of noise - and one time items - in earnings). Stock was trading at current level in Dec 1998. Since then, their earnings, dividend and business have grown significantly. I hold ABT and view it almost like a bond holding (high dividend with great upside as business chugs along waiting for sentiment to change).

 

I also hold a smaller amount of GILD as it is also cheap (PE = 10) and unloved. They do not pay a dividend; they are using pretty much all their earnings (significant) to re-purchase their stock which I like (versus paying huge premiums to buy competitors).

 

I also hold a decent chunk of Teva. They a generic monster (with decent a branded business as well). While not as cheap as ABT or GILD their growth is higher (could be mid teen the next few years). 

 

Right now it appears Mr Market doesn't know how to value big pharma in aggregate and therefore is selling all companies in the sector (good or otherwise). I like the current risk/reward tradeoff.

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I also have a number or insurance companies on my watch list (FFH, WRB, PRE, RE). Given the recent move in bond yields (especially muni yields) I expect BV to take a hit when they start to report Q4 results (some more than others). And with excess capital everywhere pricing trends still look ugly which mean underwriting results will suffer (especially if reserve releases slow even further). It appears we are in the midst of an ugly 'death by a thousand cuts' for many companies. When I add it all up I see too much risk to BV and valuations (what multiple Mr. Market is willing to pay) so I have chosen to stay on the sidelines. But I am watching things closely should we get one more big leg down...

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I also have a number or insurance companies on my watch list (FFH, WRB, PRE, RE). Given the recent move in bond yields (especially muni yields) I expect BV to take a hit when they start to report Q4 results (some more than others). And with excess capital everywhere pricing trends still look ugly which mean underwriting results will suffer (especially if reserve releases slow even further). It appears we are in the midst of an ugly 'death by a thousand cuts' for many companies. When I add it all up I see too much risk to BV and valuations (what multiple Mr. Market is willing to pay) so I have chosen to stay on the sidelines. But I am watching things closely should we get one more big leg down...

 

As am I, I have my horses picked (FFH, LRE, maybe AHL) and am just waiting for that final death blow which hardens the market. I think insurance is awesome because we may get to buy at a discount precisely at the right time. I agree on the death by a thousand cuts, but these guys are awash with capital. I believe we need a big move (market or insurance related) to really bring things into line.

 

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As far as retail 10-12 times earnings is where I tend to value most stocks. I like to leave a bit on the table for the next guy and dont want to hold something for years to only make 15% per annum (I know that sounds wierd). What I am looking for is sectors that are severely stressed. Shipping and Insurance are good examples. I want to analysis the sectors in hopes of figuring out what will drive the turn in these sectors. Pharma may count, but I am just not that smart.

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supermarkets might be a cheap sector. SVU/WINN might be a good place to look.

 

I have some money in WINN.  WINN has an EV/EBITA of 2.4, no debt, plenty of cash, selling at half of book and plenty of NOLs carryforwards.  There are plenty of problems though, it's a turn around that has been hit hard during the past year, has great competitors (walmart & publix), and recently 2 main executives resigned and their general counsel will be a head of the retail operations.

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Claphands, as a heads up, I grew up near WinnDixie / Publix and the fight was just never fair. Winn never had any people in it and always felt like the depths of supermarket hell. Publix on the other hand was always brimming with people and was generally a pleasure to shop in.

 

Point is that I never understood how WinnDixie was in business and still dont.

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I want some sort of working list like this. Thanks for the help guys. I will update the first thread with the ones I like. I am looking for either industries with severally depressed cash flows or industries trading at 3-5x CF. I figure its time to get away from Oil and Gas.

 

So far we have

 

Insurance Stocks - Many trading at less than book. Earnings pressure due to a soft market and low interest rates. Death by a thousand cuts. Many surviving on reserve releases, and one big cat could bring on a hard market. Can probably buy after the market hardens. Good time to pick your jockeys.

 

Parker Stocks - A catch all for all those cheap media and entertainment stocks. Perhaps cheap due to neglect.

 

Supertankers - Crude shippers, way too many ships have caused rates to fall to below or at break even. Slow steaming, scrapping, and double hull requirements will eventually bring it back into line. Hard to time, those who have tried were killed in 2009 and 2010.

 

Grocery Stocks - Still working on this one.

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