Monday, January 16, 2012
But volatility by itself is nothing to fear. If you buy the right companies at the right prices, volatility is not really a form of “risk” but instead a well-presented opportunity. And I believe that Europe is ripe with such opportunities today. My investment rationale can be summarized as follows:
- While the sovereign debt crisis is not “over,” the risk of a Lehman Brothers-style meltdown is. The European Central Bank’s offer of virtually unlimited credit to banks, meaning any bank failures, should they happen, will be orderly.
- Europe’s politicians are gradually muddling their way towards institutional steps that should restore some amount of confidence to the markets — such as constitutional amendments requiring balanced budgets.
- Europe’s political paralysis and capital market volatility are not without consequences — the eurozone as a whole is probably already in technical recession.
- Continental recession or not, many of Europe’s finest blue chip companies have a global client base and large exposure to growing emerging markets. Five years of on-again, off-again crises have pushed down the prices of many European companies to levels we may never see again in our lifetimes.
The following Italian energy company is an example of these well-presented opportunities.
Investing in Italy
Italian energy giant Eni (NYSE:E) is an integrated energy company engaging in the exploration, production, transportation, transformation, and marketing of oil and natural gas across five continents.
Energy stocks did not have a particularly great 2011, up just 2.8% by Standard & Poor’s calculations. Investors instead flocked to consumer staples, utilities and health care — shunning the more cyclical sectors. As risk aversion begins to recede in early 2012, I see this trend reversing and I expect the more cyclical sectors to lead.
Yes, a deep recession in Europe would curtail energy consumption and likely would mean lower oil and gas prices globally. But it would appear that quite a bit of bearishness already is factored into energy prices and into the prices of energy stocks — Eni certainly is no exception. It trades for just 8 times earnings, 1 times book value and 0.5 times sales. (In comparison, Exxon Mobil (NYSE:XOM) trades for 10 times earnings, 2.5 times book value and 1 times sales.) Eni also pays an excellent dividend of 6.8%, more than triple that of Exxon.
Italy currently is ground zero in the European debt crisis, and few investors are willing to touch Italian stocks at the moment, but their squeamishness has created what I consider to be a fine opportunity in Eni. The company’s true risk of financial distress is low — its debt to-equity ratio is a very modest 50% — and even if I am slightly off on the timing, investors can collect the dividend checks until sentiment improves.
Oh, and as an added sweetener, Eni also is the best placed among major oil companies to profit from the rebuilding of Libya. Among European nations, Italy has the best and longest-lasting relationship with the Libyan government, and the current government has indicated that Eni’s contracts signed by former dictator Muammar Gaddafi will be honored.
In each of the years 2008, 2009 and 2010, significant worries emerged that Western nations might attack Iran. Here in 2012, similar concerns are once again at the surface.
Why revisit this topic again? Simply because if actions against Iran trigger a shutdown of the Strait of Hormuz, through which 40% of the world’s daily seaborne oil passes, oil prices will spike, the world’s teetering economy will slump and the arrival of the next financial emergency will be hastened. Even if the strait remains open but Iran is blocked from being an oil exporter for a period of time, it bears mentioning that Iran is the third-largest exporter of oil in the world after Saudi Arabia and Russia.
Once again, I am deeply confused as to the timing of the perception of an Iranian threat, right now at this critical moment of economic weakness. The very last thing the world economies need is a vastly increased price for oil, which is precisely what a war with Iran would deliver.
Let me back up. The U.S. has already committed acts of war against Iran, though no formal declaration of war has yet been made. At least if Iran had violated U.S. airspace with stealth drones — and then signed into law the equivalent of the recent U.S. bill that will freeze any and all financial institutions that deal with Iran out of U.S. financial markets — we could be quite confident that these would be perceived as acts of war against the U.S. by Iran.
And rightly so. From Reuters:
“U.S. Imposes Sanctions on Banks Dealing With Iran
“Dec. 31, 2011
“(Reuters) – President Barack Obama signed into law on Saturday a defense funding bill that imposes sanctions on financial institutions dealing with Iran’s central bank, while allowing for exemptions to avoid upsetting energy markets.
“The sanctions target both private and government-controlled banks — including central banks – and would take hold after a two-six-month warning period, depending on the transactions, a senior Obama administration official said.
Sanctioned institutions would be frozen out of U.S. financial markets.”
The impact of this law was quite pronounced and immediate, with the Iranian rial falling sharply against the dollar in the first few days after the bill was signed into law. As reported in Reuters:
“Iran’s Rial Falls to Record Low on U.S. Sanctions
“Jan. 3, 2012
“(Reuters) - The Iranian rial fell to a record low against the dollar on Tuesday following U.S. President Barack Obama signing a bill on imposing fresh sanctions against the country’s central bank.
“The new U.S. sanctions, if fully implemented, could hamper the world’s major oil producer’s ability to sell oil on international markets.
“The exchange rate hovered at 17,200 rials to the dollar, marking a record low. The currency was trading at about 10,500 rials to the U.S. dollar last month. Some exchange offices in Tehran, when contacted by Reuters, said there was no trading taking place until further notice.
“‘The rate is changing every second…we are not taking in any rials to change to dollar or any other foreign currency,’ said Hamid Bakhshi in central Tehran.” (more)
The "Chart of the Day" is Wyndham Worldwide (WYN), which showed up on Thursday's Barchart "All Time High" list. Wyndham on Thursday posted a new all-time high of $39.59 and closed up 1.39%. TrendSpotter has been Long since Dec 20 at $35.97. In recent news on the stock, Jefferies on Nov 22 initiated coverage on Wyndham with a Buy and a target of $49. Susquehanna on Oct 27 reiterated its Positive rating and raised its target to $42 from $39. Wyndham Worldwide, with a market cap of $6 billion, operates in the lodging, vacation exchange and rentals, and vacation ownership segments of the hospitality industry.
by Maria Kolesnikova, Bloomberg.com:
The conditions that led to the birth of Occupy Wall Street are very similar to those before the Great Depression, says former Goldman Sachs Group Inc. (GS) managing director Nomi Prins.
Prins is the author of “Black Tuesday,” a novel set in 1929 and ‘30 in which the heroine accidentally discovers dark secrets at the nation’s largest bank. Prins has also written three nonfiction books, including “It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals From Washington to Wall Street” (2009).
In an interview at Bloomberg world headquarters in New York, we discussed the past and future of the financial system and the mistakes policy makers are repeating.
Onaran: Why did you go for fiction this time?
Prins: Read More @ Bloomberg.com
When Family Dollar Stores (NYSE: FDO) announced earnings on January 6th which merely met analysts revenue and earnings estimates, their shares were savaged. Disappointed shareholders knocked $3.50 off the share price pushing the stock to technical support around $53.70, near the 50-week moving average.
Shareholders' reaction to the announcement has created a big opportunity for traders for several reasons...
First, with continued economic weakness, FDO which sells low-priced food items, apparel, electronic goods and seasonal products is likely to continue luring in cost-conscious consumers.
There are currently 7,120 Family Dollar Stores across the U.S. In 2012, the company plans to open between 450 to 500 new stores, while closing 80 to 100 less-profitable locations. By increasing its store presence, the company should continue tapping into a growing customer base hungry for low-priced items.
Second, Family Dollar Stores plans to further drive sales by offering more competitive pricing, enhancing inventory management, offering longer store hours and expanding merchandise selection.
From a technical perspective, Family Dollar Stores shares are off nearly $7 from their peak. The small white harami candle which formed this January 9th treading week suggests the majority of the selling pressure was experienced on the day and immediately after the earnings release and that bargain hunters are moving back into the stock at current levels.
FDO shares have been on a Major uptrend for the past two years. Over this time, the stock has nearly doubled, from a low near $30 in January 2010, to a high near $60 in October 2012.
From October 2012 until recently, the stock traded in a narrow range between $55 support and $60.34 resistance. This trading activity formed a rectangle consolidation pattern.
On last Friday's earnings news, the rectangle resolved bearishly. Support at $55 was breached and the stock plummeted approximately 6%, from an intraday high of $56.50 to an intraday low of $53.03. Shares tested major support, marked by both the Major uptrend line -- which intersects around $53.80 -- and the 50-day moving average.
This January 9th trading week, shares have held $53 support. So long as the stock doesn't buckle, shares should slowly continue to regain lost ground. If the stock can successfully challenge $55 -- the previous support and current resistance level - it could climb back to its $60 high.
As a result, I recommend that more risk-averse traders enter the position with caution by setting a buy-on-stop order just above current resistance, at $55.09, for potential 18% gains.
Despite the market's bearish reaction to earnings news, there were many positives in the report.
First-quarter revenue hit a record high of $2.15 billion, up 7.6% from $1.99 billion in the year-ago period. However, the stock was heavily sold because sales came in slightly below analysts' expectations of $2.17 billion. Growth was below projections because sales came primarily from lower-margin consumable goods, like food, as opposed to higher margin items such as clothing and toys. However, same-store-sales -- a central indicator of retail health -- rose 4.1%, due to increased customer traffic especially over the holiday season.
With demand expected to continue for low-cost consumables, analysts' estimate second-quarter revenue will increase 8.7% to $2.46 billion, from $2.26 billion in the year-ago quarter. Over the quarter, the company plans to add 300 new food items to its store offerings. With this strategy, the company expects same-store-sales will rise 5% in the comparable second-quarter.
For the full 2012 year, analysts' project revenue will rise 8.8% to $9.3 billion, from $8.55 in 2011. Management predicts full-year comparable store sales will increase 4 to 6% from the year earlier.
The earnings outlook is also strong.
First-quarter earnings met analysts' expectations of $0.68 per share, increasing 17.2% from $0.58 per share in the comparable year-ago period. Strong demand for low-cost consumable and seasonal items drove growth.
For the upcoming second-quarter, the company expects earnings to be between $1.10 and $1.18 per share, up at least 12.2% from the $0.98 earned in the comparable year-ago quarter. For full-year 2012, management reaffirmed its earnings guidance of $3.50 to $3.75 per share, up at least 12.2% from full-year 2011.
In addition to a solid growth outlook, the company is attractively valued based on its PEG ratio (price to earnings divided by growth rate) of approximately 1 (16.6/15). The company also has a low price-to-sales ratio of approximately 0.73.
Risks to consider: With the stock testing technical support, if it breeches this level it could go lower before it turns higher. Also to maintain growth, FDO will need to continue offering competitive pricing to keep up with its main rival, Wal-Mart (NYSE: WMT). This strategy could impact profit margins in the longer-term.
Given the short-term technical risk and the longer-term profit margin risk, I will purchase the stock with caution. placing a buy-on-stop order at $55.09, meaning I will only purchase the stock if it hits or goes above this price. I have set a target above the October high at $64.98 -- I believe the company's strong fundamentals will eventually be rewarded by the marketplace.
|MONDAY, JAN. 16|
|None scheduled |
Martin Luther King Jr. Day
|Tuesday, JAN. 17|
|8:30 am||Empire state index||Jan.||11.3||9.5|
|Wednesday, JAN. 18|
|8:30 am||Producer price index||Dec.||0.1%||0.3%|
|8:30 am||Core PPI||Dec.||0.1%||0.1%|
|9:15 am||Industrial production||Dec.||0.4%||-0.2%|
|9:15 am||Capacity utilization||Dec.||78.0%||77.8%|
|10 am||Home builders' index||Jan.||22||21|
|Thursday, Jan. 19|
|8:30 a.m.||Jobless claims||1-14||375,000||399,000|
|8:30 am||Consumer price index||Dec.||0.1%||0.0%|
|8:30 am||Core CPI||Dec.||0.2%||0.2%|
|8:30 am||Housing starts||Dec.||695,000||685,000|
|10 am||Philly Fed||Jan.||10.0||6.8|
|FRIDAY, JAN. 20|
|10 am||Existing home sales||Dec.||4.70 mln||4.42 mln|