Beware the 4th quarter...

I have been around some cable TV as of late (not mine), and have been noticing everyone saying that they should be prepared for the sky to fall. While I do think that some pullback is inevitable soon, I don't know if it will be drastic.

What I do suggest you look out for is fourth quarter earnings which in the coming months will be reported for a great deal of business. Despite what you believe about how truthful the first three quarterly reports are, I will tell you that typically the fourth quarter is as legit as it will get. This is due to companies having to report the official earnings to the government. They scrutize themselves thoroughly at this time and you will often find that major adjustments to the other quarters. I've seen GM and Goldman Sach's do this just this past year.

If you are a long term investor, often times you will follow stocks over a longer period. Notice the companies that do and do not have major adjustments after each report. Those that do not swing numbers around wildly likely chance of having both a straight forward business structure and more importantly honest business practices. I can think of a few examples, Trane before it was acquired by Ingersoll-Rand and while it was under American Standard's portfolio was extremely well honest with its practices, and has Baldor over the past 4 years or so (that I have seen).

So be careful and keep a watchful eye on your stocks, the fourth quarter is coming...

The truth about Warren B...

http://online.wsj.com/article/SB122548632193589047.html

Read it while you can, it is currently free.

This is what I have been saying to people that have responded to me with the phrase, “well Buffett is buying again.” He is getting deals we are not getting, a 10% dividend on GE and Goldman Sachs is hardly something the rest of us can get. That 10% hedges most of the activity of the stock he is holding whether it goes up or down.

It looks as if the market is starting to level out, but I still don’t think this is the end. My prediction is to see how the market reacts to the post holiday earnings reports and then judge the state of the economy.

So if you could only choose one?

Coming back from the Philippines I realized that the world smokes. Smokes cigarettes that is. I know it is a bad thing, and I don't do it, but that doesn't mean I won't invest my future on someone else's habit.

With all that said, if you could only choose between investing in two stocks in the world, what would you choose, Altria [MO] or Philips Morris International [PM]? This whole thought process was triggered in my brain when I saw something on Bernanke again and remembered this guy only invested in one stock his whole life, the old Philips Morris company. So I began researching what Philips Morris has become today, Altria and PMI. What I found is that it is truly a tale of a value stock versus a business with a bright future.

Altria (~$21 per share) is now basically just the US cigarette market, lawsuits and all. To me the stock looks really good, it's trading at a $1 over one year lows and has an annual dividend of $1.16 (5.5%). Their story over the long term would seem to look as a long growth stock. It has been anchored down by lawsuits and government taxes in the states for the past 10-15 years now and it has affected the stock price. However, this is a S&P 5 star rated stock, which typically is tied to a low price to earnings, a good credit rating, and a strong cash flow, which this stock has. The US is a mature marketplace, and they do predict a slight fall in sales volume, but they have been diligent on price increases, stock buy backs, and seem to be still a hugely profitable company. Two aspects I look for in stocks are a good return on assets, 24.5% here and profitability, 21%. I tend to think these are good measures of efficiency for a company. Anything over 15% for both measures is really, really good. Some analysts are speculating a price per share of $26 in a year which is 23% increase from the current price plus a 5.5% annual dividend, that is 28.5% increase in value over a year. I know that is a really positive outlook, but the potential is there. The downfall is that Altria is now basically a new company again, and they haven't been always known as being the most truthful company in the past (although I have never really heard of them lying about their financials), so all of this could be just a big promotion to get investors investing. Another note is the wondering of whether the US marketplace will really grow at all or just level out. If that is true then think about this company as a pure dividend play that isn't a bank, energy, or oil company.

Philips Morris International (~$55.50 per share) is basically cigarettes around the world. The company was split from Altria so that it would be insulated from lawsuits and really grow from the rapidly expanding world market. I perused their most current financial reports and really only care about one thing, year over year revenue growth in each of the various geographic marketplaces. See when a company is this new, I don't trust the basic financial figures other than net revenue and growth. Look at it yourself here, notice the year over year net revenue increases of over 20% for Eastern Europe, Western Europe, and Latin America, and 13% for Asia. Asia being the biggest potential for huge growth in the next 10 years. Combine that with a decent dividend (3.3% currently) and a 4 star S&P rating, and the company looks like it has some potential. However, PMI recently purchased Rothman's Inc, a major player in cigarettes in Canada. It now makes this 'legal insulated' company now susceptible to lawsuits. I think that the current stock price is a little high, but after a pull back, it may be an excellent Bernanke-ish play for the long term.

So if you had to choose between these two stocks, which would you choose? Ben?

My Last Post on Baldor, I think...for awhile, & More on Recession.

Cramer and Baldor CEO John McFarland on Mad Money last Friday:

http://www.cnbc.com/id/15840232?video=780431599

Because I don't have any stupid sound effects developed yet.


So yesterday I spoke about this quote from a Fortune article:

"...the Fed remains skeptical that high commodity prices will ripple through the
economy, leading to broad price hikes and big wage increases. "The committee
expects inflation to moderate later this year and next year," the Federal Open
Market Committee said in holding the fed funds rate steady at 2%, though it did
note that "uncertainty" remains high and suggested inflation concerns could
rise."

I wanted to elaborate on the subject a little more. I work for a commodity-based product company and we are in fact completely increasing our pricing due to ripple effects in costs on all of our products and passing that cost onto our customers which will then pass that problem onto the public. We are doing that right now. Also, we are expecting large wage increases next year due to an recession with inflation environment. Additionally, if Buffett is suggesting this as well, I would damn near listen, not because Buffett is the man but because Buffett knows commodities.

Buffett typically purchases companies that are simple, balance sheets make sense, products are straight forward, and they are selling at a value at the time. Those types of companies are commodity based by default, well most of the time. When Buffett goes buying these stocks, he tends to buy enough to get someone on their board of directors, or at least get access to the companies financial situation. So it can be surmised that he is seeing this type of development in most of his investments across a large swath of products and businesses and is just speaking up. Meanwhile, our Fed is holding its breathe and hoping for the best.

Snap out of it people, we are already in the recession and high inflation is occurring and rippling through the pricing right now. If companies aren't doing this yet (i.e. airlines), then their survival may be limited. Open your eyes.

Thoughts for the week: 6/29-7/4

A few links and thoughts for the week:

Remember my post a few days ago about "Recession with High Inflation", well apparently Buffett agrees and is telling it to Bernanke. And here is a quote from it that scares the crap out of me:

...the Fed remains skeptical that high commodity prices will ripple through the economy, leading to broad price hikes and big wage increases.

"The committee expects inflation to moderate later this year and next year," the Federal Open Market Committee said in holding the fed funds rate steady at 2%, though it did note that "uncertainty" remains high and suggested inflation concerns could rise.

Determined to find some good values in the market (and keep the mind sharp), I did some good old "Magic Formula" stock screening this weekend and noticed some sectors with good stock values, at least according to the screen. They are:

Airline equipment manufacturers: LMT, NOC, RTN, GD, BA
Electronic circuit equipment manufacturers: VSEA, KLAC
Furniture manufacturers: MLHR, KNL

I am currently doing research on each and may do updates this week on each identified sector and its stocks. Most of these companies are name brands for their business sector and probably have some good long term upside. I guess I will see when I go through them.

Some other good looking stocks on the screen that came up is Garmin (GRMN) which I think I may cover, and one of Mike's (w/Rational Speculation) recently covered stocks Pfizer (PFE). I like Mike's thoughts on the company, but have recently seen PFE mentioned everywhere as a value stock potential. That can be a good or bad thing.

More thorough stuff later this week...

More BEZ: Cramer catching up...

Well I was looking into buying more BEZ today (I didn't, I think it may go a little lower again), and noticed that about a week ago Baldor's was Cramer's pick. Frankly, I am flattered. Now I am going to get away from talking about Baldor for a while, but I do think that it is funny that he recommended the stock after a run from 25.68 (April 14th) to 36.46 (April 17th). It is only a dollar down from his recommendation day, but at the time I saw the run occuring and thought a correction was coming. Regardless, it's fun to be ahead of the curb for once. Even if I think Cramer is a little bit of a tool, I do think he is funny to watch (if you ever saw theknot.com episode where the bull proposed you know what I am talking about) and fairly informative for the masses.

Anyways his thoughts:

here and here

Have a nice weekend, it is going to be beautiful in KC. (Anyone notice I use a lot of parentheses?)

The big win and the big loss...

Well just a couple of weeks ago I recommended Rockwell Automation (around $54 per share at the time) and it has subsequently tanked to a level today of $43. That sucks and I was wrong, Rockwell (ROK) committed a bad no-no and dropped 2008 expected earnings. Well it's really not a no-no as much as seeing the truth hurts. That was a mistake and I will strive not to do so again.

Herman Miller (MLHR) however has just reported profits up roughly $.71 a share for its 4Q and seen a big boost in a day of bad losses (+ ~$1.50 per share). Since mid-April it is now up nearly $3 a share. That makes me happy, I am curious as far as what to do with this stock. Their furniture is for rich people and big business so they could be insulated from the market some, but I just don't see how they will keep growing in profits in this environment. I may get out and take profits.

Baldor (BEZ) is still one of my favorite companies, they simply make stuff that is needed no matter what the market is doing. It was a classic Buffett style stock, essentially undervalued, and can make a profit in a variety of climates. Today however it has fallen significantly (roughly $3 a share) and I don't know why. No real news out there other than its peers not doing so well (see ROK). However since I recommended it on 4/29 @ $32.40 (I bought it for $27.50 a week prior) it has jumped up $3.50 a share ($6.50 a share yesterday). Honestly it has been flying and needed a pull back. I still think it is a good stock, and will continue to do well and it may be a good time to pick it up at the recent pull back, although I will wait it out for a while.

Otherwise, the market looks bad right now. Unless I find another Baldor like company I am sticking to purchasing my three ETFs (PBD, PXE, PWV) on their low days. Someone please tell me what to do with FTO. (Nevermind sold off FTO 6/27)

ROK looks cheap...

Market had a big fall on Friday and one huge loser was Rockwell Automation (-$3.02 per share). I spoke about them before when I revealed how I found Baldor, and I liked them then and still like them now. ROK stock value has been faultering ever since they missed analysts predicted earnings last quarter. Here is what baffles me the market reacted to analyst's predictions not the company's. If you review their last call you will quickly find out that there was siginificant revenue growth not only in every business category, but in every geographical location as well. Not many companies can say that and yet it has loss over $12 per share since the beginning of the year.

Take a quick look at the charts and it has been nearly three years since this stock has been this low and it is a better company now than it was then. Again the things I like are the good ROA, strong growth, ~2% dividend, extremely robust and strong product (Allen-Bradley Controls), and their firm commitment to the growth of that product by intelligent acquisitions. I should talk about the A-B product a little more, although I did cover it thoroughly before. It is a great product in the current economic climate, the controls are modular and are considered the best in the business. The controls are prodominately used in PLC applications in all sorts of industries from factories to oil rigs to building temperature controls. The whole world is modernizing these industries right now and the modular setup of A-B controls allows both new and old equipment to talk and work more efficiently.

Final thought, I'm buying tomorrow!

Special Request Stock Lookup: Ingersoll-Rand (IR)

Grant over at The Corner Office Blog asked me to look into a stock last week, namely Ingersoll-Rand (IR). This stock has had some recent interest by many investors due to the big purchase by the Big P.O.P.P.A. (Pimp Oracle of Potential Plays in omahA, aka Mr. Buffet). If you haven't read much about IR over the past two years, it has gotten rid of most of its industrial units including its most famous, Bobcat. What's left is a mishmash of industrial tool, refrigeration, and security units making up a roughly 9.5 billion dollar company. None of these businesses I find particularly exciting, although it should be said that their brands in each of their markets are either the leaders or top 2 companies in the industry. For example Schlage security and locks compete closely with Stanley security and locks. On paper, they look as if they have made each of their industries rather efficient and profitable.

The future for IR is the purchase of Trane, in my opinion, the foremost supplier of key HVAC components for business and commercial markets. IR claims that they would like to get into less cyclical market places and with their freed up capital, Trane looked like a good fit. Trane too has had its own set of splits over the last two years. Formerly American Standard, Trane was the result of a three way split of the former company. The new Trane is roughly a 9.5 billion dollar commercial and industrial HVAC company. Trane has an excellent company mix of products and services that is compromised of the markets highest efficiency residential HVAC units, commercial HVAC units, commercial chiller systems, and excellent technical services. This focus on high efficiency equipment will keep the company firmly planted for current and future commerce due to many companies needs for costs savings and government tax credits on energy saving projects. Trane is also known in the contract engineering world as the “go to” company for assistance in spec'ing components on new projects due to their own extensive technical support group. That status obviously pushes contracts towards utilizing Trane equipment. I should know I purchased a new chiller last year and found that the engineering companies in the Midwest area all work with Trane engineers first before drawing out the specifications for a project. Trane has seen some softness in it's residential market (roughly ~24% of the business) and plans on seeing more ahead, but in its most recent annual report believes that it's commercial unit has and will more than cover that loss for now. One other fact though, is much like the rest of IR's porfolio, is that Trane is a very competitive company in a very competitive market, competing with other good players Carrier, York, McQuay, and Danfoss.*

Much like my report on Baldor. Trane has products for the commercial market that will consistently need replacement. Industrial HVAC and chiller systems are always being replaced due to new more higher efficient machines or for old equipment failure. Their service department does most of the installations as well, so somewhere in the range of 65-75% of its revenue is tied up with the commercial contract dealings. From my contacts in the industry, this is a stable, profitable place to be.*

Upon further examinations I found the Trane annual report informative and helpful in formulating a position on the companies current financial status. However, IR's report was not very revealing of the companies current financial status. So I next searched the basics. IR has a absurdly low P/E of 3.2 and Trane's rather high P/E of 52.6, neither of which I don't really think is reliable. IR is particularly good at their profit margin at 44% compared to Trane's 2.37% and Return on Assets roughly the same at IR (5.33%) and Trane (7.19%). Although I am unsure how clear this data is affected by IR's sale of Bobcat and Trane's split from Amercian Standard. So I am uncomfortable with this analysis.**

Research of products from both companies fruited some good products including Trane's CenTraVac Chillers, Trane's CleanEffects air cleaning system, Trane's residential XV Furnaces, and IR's lightweight pneumatic tools. The Trane CenTraVac Chillers could be big money makers.

I do feel that when IR finalizes its purchase of Trane, it should provide some stabilization to each of the companies due to the amount of splitting, selling, and purchasing that each has experienced over the last two years. But again, my opinion though is that IR brings less to the table than Trane. Trane's infrastructure is mature and set in its ways, but like any large business purchase or merger, IR will want to put their imprint on the business. If they are not to careful, IR could really screw up a great company, but the great company looks as if it needs to cut costs (especially if the ROA is accurate for Trane). After seeing mergers from the inside out, it will take roughly six months to a year for the two companies to properly integrate into one another and see potential synergy savings. After that both companies might be able to flourish.

Official opinion: Wait on IR for now. I think the stock will dip back below $42.50 or lower and then start looking to buy. If it were my money though, I would wait four months from today and reevaluate. There is just too much unknown and too much competition to make me feel good about this right now.

Grant its your turn, my stock Petrobras (PZE).

Also, if anyone else wants me to look at a stock for them and give an opinion, I'm up to it. My expertise are industrials, green energy, and raven-haired ladies. The only expectation is that you do the same for me.

*Stats from Trane's 2007 Annual Report and IR' s 2007 Annual Reports

**Stats from Yahoo's Finance coverage for IR and TT

Playing with BigCharts & Justifying Herman Miller

So after a trip to see my brother during the holiday weekend, I spent some time playing with a new-to-me website called BigCharts which is a service of MarketWatch. After throwing in some stocks of mine like FTO, HMC, and a stock Grant wanted me to research IR, I got back to MLHR. See the interactive 1 year chart of Herman Miller right here. Adjust the settings to show the three to four years of trending.

My point is that here is a company that has shown increasing earnings consistently for over four years, increased it's dividend each year, consistently great earnings reports each quarter, low p/e of 10.1, and yet it is near its 52 week low on share price. Why aren't people screaming for this stock to go up? Maybe because they make furniture, I don't know. You all should take a look and tell me what I am not seeing.

(Edit later on 5/27/08): Found a good article by someone named Paul Price on Seeking Alpha about MLHR here. Also, he has me interested in Coca-Cola now.

Stock Analysis BEZ and ROK

I look for stocks in several different manners, I do screens, I read the news to understand so called expert opinions, and I look for trends. I am definitely a value investor but also have been known to make purchases based on dividend investing (largely influenced by my friend Grant). A past simple example of a trending purchase included Microsoft before it released Vista and Office 2007. The stock was cheap and new programs were coming out that would significantly affect there bottom line. In my mine easy money.

Well a current trend that my own job is closely tied to is the modernization of manufacturing. Over the past 10 years the costs for modernizing a production facility has significantly decreased due the wider availability of new efficient electronic controls. Two companies that should do well going well into the future are Rockwell Automation (ROK) and Baldor (BEZ). These two are interrelated somewhat due to recent sale of Reliance motors and Dodge gearboxes and bearings from Rockwell to Baldor. More on that later.

Rockwell Automation owns a key product that will provide profitable business for years to come, namely Allen-Bradley. Allen-Bradley is the Cadillac of the PLC Factory controls world. They are the most expensive, most well made, most utilized PLC setup for most factories in the US. Their programming is straight forward, their controls are extremely durable, and system is modular by design and easier allows for constant updating of a manufacturing process. So what you say, well based on that ease of use companies are willing to shell out more money for a safe, reliable product. Let's put it this way, you own a factory making 1,000,000 widgets a day. Well every minute that line is under repair you are losing a roughly 700 widgets that could possibly be made. So every minute counts, and when every minute counts an engineer or a maintenance department can justify Allen-Bradley equipment really quickly due to its proven reliability, its wide availability and modular integration (aka less downtime).

Analysis of the stock shows that they failed to meet analysts predicted profit this last quarter and the price of the stock has fallen significantly. Personally, I am sitting back and waiting for the stock to even out. Over the long term this should be a good stock with good ROE 12.5%, nice divided yield 2.10%, and strong international earnings potential. As stated before they sold their Reliance and Dodge brands to Baldor this last year and now should see some benefits from concentrating on the programing and controls part of the business. Also, it previously (before the latest quarter) had shown up on my two favorite screens, earnings momentum and the Magic Formula.

Funny enough, through the analysis of ROK is when I found Baldor. Baldor makes motors, lots of them, in all sorts of useful sizes and types, and most importantly, at high electrical efficiencies. Baldor happened to be the last three motor purchases for my factory due to their competitive pricing, excellent customer and technical service, and a robust, reliable product that is made in the USA. Their acquisition of Reliance and Dodge was an excellent move. They essentially bouught their biggest competitor and doubled their business. Baldor typically made small to medium size motors, Reliance made medium to large size motors, it was a real good fit for both parties with only a little bit of overlap. Additionally, Reliance was known for all of the same things as Baldor (reliability, pricing, service, made in USA). The Dodge gearbox and bearing acquisition was brilliant as well, due to most of these Baldor and Reliance motors being directly fitted up internally with these bearings and to gearbox at the end user's factory.

Why do I think Baldor is great purchase for a long time? Easy, factory conversions from DC Motors to AC Motors. What's that you say? Forget the literal electrical stuff and I will explain it in simple terms. Lots and lots of processes run on variable speed electric motors. Examples of variable speed applications could be belt speeds on a conveyor belt, turning speed of a farm's irrigation system, or rpm speed of a milling machine. A lot of the equipment that is still utilized today were originally designed and built in the 80's and 90's with DC Motors. It was the only option available at the time that allowed for adjustable speed. Consequently DC Motors over time get really dirty and eventually fail. They can be rebuilt several times over, but that can be quite costly, or they can be replaced with new DC Motors which can be quite costly, or they can be replaced with new AC drives and motors which is quite costly. The “drive” is the electrical control that commands the motor, if you switch from DC to AC then a new drive has to be purchased as well. Why a switch from DC to AC? AC setups are 20-40% more efficient electrically and have minimal maintenance costs, usually no more than a bearing change every few years.

Enter Baldor's product line. First they are one of the few remaining companies that produce new DC Motors, and as such, they charge a premium. Second, Baldor and Reliance make high efficiency AC motors and drives that are among the best in the business. These motors and drives are well priced as well (not the lowest and not the highest). Third, the leaders in the drive market is still considered to be Allen-Bradley owned by Rockwell Automation. Well because Rockwell Automation is no longer in the motor business but recently sold the Reliance motors to Baldor, they still sell their AC motor and drive package with Reliance Motors and they charge a premium price. Which should means that Baldor may lose a sale on a drive but should still retain the same profitability of the motor.

To sum up, if you need a DC Motor, Baldor has a strong chance at a sell, if you want to switch to an AC motor and drive, Baldor has high likely hood of at least a new motor sale, and heck if you want to repair your DC motor, Baldor may even be your supplier of spare parts. This is the kind of market that even a Buffet fan would love. This DC to AC motor conundrum will probably continue to occur for the next 3-10 years until the majority of the equipment is AC driven. High usage DC Motors need overhauls every 3-5 years, so every overhaul is a good possibility of money in Baldor's pocket. That will provide a constant stable income for Baldor during these difficult economic situations in just repair sales. When you add that to strong OEM sales, an excellent quarterly reporting last week (23% increase net income), and decent dividend of 2.01%, it looks great for a long term prospect, especially when the economy turns up again. The one bad thing is Baldor's stock has increased ~10% since the quarterly report and may be a little high right now. I purchased shares $27.50 last week and already the stock is at $33.88, but I still think there is room to grow.

Good luck and in this market, happy hunting.

Short and Sweet...Stock Market Down...

Stock Market is pretty crazy right now, I have pulled back my cash on PBD, STP, and NSC. I made money on STP and lost on PBD and NSC. STP and PBD, I will probably look to put money back into once the market fall out is complete. Both are green plays. NSC is still a profitable company, I am going to keep a watchful eye on them.

Alternatively I have identified a new crop of stocks that I am going to do research on. Two good ones seem to be Herman Miller (MLHR) and Frontier Oil (FTO). Frontier Oil showed up on a couple of screens that I run and Herman Miller on another.

My method for stock picking is a little odd. I enjoy running screens, reading various magazines, and predict new trends. In each I research the hell out of my findings. So on this blog I will try to write it all out but you will probably see my stock picks come in two posts. The first post will identify my group of stocks that I am researching, and maybe why. The second will show my pick(s), why I picked it, and the price I am willing to pay for it.