August 24, 2016

Media and traders like volatility

Unlike "King of Nothing" Jerry Seinfeld, both the business media and people who trade and invest typically like excitement and volatility.

Many people will love a heated Hillary Clinton vs. Trump election, and many love Ryan Lochte's apparent screw-up in Rio more than they love many actual Olympic events.

What they don't love is a boring, uneventful stock market -- but that's exactly what we're getting right now.

Forty-seven years ago this week, I experienced the "The Summer of Love" at Woodstock on Max Yasgur's farm in Bethel, N.Y. But this year, we're all experiencing the "Summer of Nothing" on Wall Street, with low volume and little in the way of volatility.

Hmm ... I think I might have something here. It's obviously time for me to make a "Nothing Pitch" to business TV, because they've got to have something, right?

Maybe I'll call CNBC or Bloomberg to pitch a new show whose plot is: "Hey, these pretzels are making me thirsty!"

via thestreet

August 22, 2016

What will Janet Yellen say on in her August Jackson Hole speech

A newsletter that a research acquaintance of mine recently read noted that Microsoft now has $35.3 billion in debt, up from zero less than a decade ago. Apple also has $85 billion in debt vs. $23 billion less than four years ago, while Cisco has grown its debt 122% to $28.6 billion in less than three years.

Obviously, most of this debt hasn't gone to capex or other organic growth, but to dividends, acquisitions and stock buybacks. Who can blame these companies given how low borrowing costs are?

However, we might be reaching the "productive" debt crescendo here, given that corporate revenues and earnings are in decline. 

The Bottom Line

Add up all of the above and I believe that inflation protection should be the next theme for investors to embrace as we close 2016 and enter 2017.

After all, we're facing:
* Continuing currency debasement.
* Gold prices that are gaining momentum.
* Wage growth that's ticking up.
* Energy and other commodity prices that have seemingly bottomed out.
* U.S. fiscal spending that seems poised to gain steam.
* Both Democratic presidential hopeful Hillary Clinton and Republican rival Donald Trump are proposing huge infrastructure programs.
* Central banks decidedly erring on the side of too much stimulus vs. too little.
* European and Japanese government-bond markets that have no cushion from losses if an exogenous event hits, given that they currently have manipulated prices (i.e., negative yields).

Now if the Fed were to shift gears and definitively signal that U.S. rate hikes lie ahead, that would squash my view here. But that seems unlikely through year's end.

Still, Fed chair Janet Yellen's planned Aug. 26 speech at Jackson Hole will be interesting to hear. We'll want to see what she has to say given U.S. stocks' recent record highs and the futures market putting the odds of even one 2016 Fed rate hike at less than 50/50.

August 17, 2016

Analysis on Disney stock

A number of subscribers have asked me to describe the bull case for Disney (DIS) . Examining the opposite case that one holds is a useful exercise as no one has the concession on truth in the investment business.

While I don't endorse to the bull case for Disney ... here it is, as I see it:

The bull case is the company's cost of capital -- and not operations or what resides on the income statement.

Disney has a bit more than $15 billion of net debt on its balance sheet. It also has $17 billion of 12-month trailing Ebitd. Ergo, leverage is under 1x. As a means of comparison -- Time Warner (TWX) is at 3x and Viacom (VIA) is at over 3x (and rising).

Today, Disney can borrow $30 billion or more and probably not offend the rating agency minders. Even more interesting is that the average cost of the company's debt is probably under 2% before the tax deduction. Trailing 12-month interest is only a little over $200 million. Put another way, cash flow covers interest over 85x (over 6x is viewed as reasonably conservative).

Over time and very quietly, Disney has bought stuff for cash and then paid off the purchase by using the cash flow of the acquired entity to buy back its own stock. The "stuff" includes Pixar, Marvel and LucasFilm. I suspect the latter will be paid off from its cash flow in under two years as "Star Wars: Rogue One" is released. Share count at Disney is down close to 25% from peak levels.

So, it is reasonable to expect a lot more share repurchase activity from the company.

Through nine months, the company has repurchased $6.6 billion in shares. Twelve-month trailing Ebitd is 10x, indicating a 10% return from buying the stock. Each share bought results in not having to pay the $1.42 after-tax dividend. Thus, the financing cost of share repurchase is negative.

While reasonable people may differ on the unit growth of the cable networks and Disney's least squared earnings growth projections, the company will (under almost any assumptions) generate large amounts of free cash flow.

August 16, 2016

Going long on JC Penny shares

I initiated a small starter position against my short exposure in retail in J.C. Penney (JCP)this morning, and I plan to buy more on weakness. JCP reported a solid quarter in a weak retail industry setting. Sales increased slightly (+$43 million) or +2.2% on a straight compare in units, so its market share grew modestly.

Earnings before interest taxes and depreciation (EBITD) increased by $80 million as gross margins improved and expenses were well under control. Interest expenses declined by $1 million as inventories remained under control and debt was reduced in a period where it normally increases seasonally.

While interest coverage is only 2.2 times, it is rising steadily and predictably.

The shares moved up briskly along with its retail peers on Thursday, so I plan to build on weakness.

Guidance was not increased ($1 billion this year, $1.2 billion next year in EBITD). Shares closed Friday up over 6% to $10.55.

On a short-term basis, the company is hosting an analyst day next week in Dallas, and I suspect it may strike a more optimistic tone. Valuation is reasonable. Debt is $4.2 billion compared to equity at $3 billion; enterprise value totals $7.2 billion.

Twelve-month trailing EBITD is $888 million. The 12-month multiple is 8.2 times. While this is an elevated multiplier, it's acceptable as EBITD is rising, the chain's competitive position is improving, and the company is moving into a free cash flow position.

Residual bearishness remains in this name, manifested by nearly 30% on the shares short. The short story is growing long in the tooth.

I expect the shares to climb out of its trading range and I have a year-end target of $12 to $13. (While I am comfortable with the reward/risk ratio, it's not out of balance enough to place the stock on my Best Ideas list.)

I am currently limiting my buy order to $10 per share.