Monday, January 14, 2013

Earnings preview for the week of 1/14-1/18

I hope everyone had a great Christmas and New Year, it's time to get back into the swing of things as this week we get our 1st look at a handful of companies reporting Q4 '12 results. The broader markets are starting off the year on a high note with the S&P, Dow, and Nasdaq already up 3.2%, 3% and 3.5% respectively. There is a lot of bullish sentiment on the street to start 2013 due to the resolution of the so-called fiscal cliff. In the end, it was the Republicans getting the shorter end of the stick and we will see taxes rise for nearly every citizen in the US this year.

Above the S&P, Nasdaq, and Dow YTD

Dividend stocks, which I cover a lot of and own myself, have had a rough past few weeks, but appear to be coming back. Once again, the issue was the fiscal cliff due to the possibility of an increase in the dividend tax rate.  We saw that this was just a bunch of scare tactics, pushing these prices down to attractive levels. These consumer companies provide strong cash flow and solid forward earnings, and I see absolutely no reason to be selling them.

This week, Bank of America strategists are expecting a “great rotation” out of bonds and into U.S. stocks this year. In the past couple years, investors have been weary of stocks during the recent bull market, with trading volumes low and ownership of equity proving a hard sell. For the full year of 2012, there was only a net $3 billion that flowed into U.S. stock funds and exchange traded funds, which is minute compared to past bull markets.

Though this past week,  there was a big interest in purchasing stocks. A net $18-billion flowed into stock funds, blowing past the biggest week of inflows in 2012. In fact, according to BofA, the week’s inflows mark the biggest since June '08 and the 4th largest since 2000. This is not only happening in the US, but global as well. According to EPFR Global International, global emerging market and US fund data, $22-billion flowed into equity funds around the world during the same week, which is the second biggest inflow into stocks for data going back to 1996.

This could mark a trend in which small investors see the upside potential of equities; in turn the stock market could get a nice boost. Investors moving into a market tend to drive prices higher. Right now there are good reasons for a move into stocks: The U.S. economy is likely to pick up from a recovering housing market, with more government spending.

One trend I noticed is a 3 month chart of AutoZone compared with Ford and AutoZone. Ford is up 38%, GM is up 25%, while AutoZone is lagging 7%. Looking at a wider out chart of the three from the beginning of 2010, AutoZone has clearly outperformed both of them, up over 100%. In my opinion, this could be the year from the rotation out of the fixer-upper automobiles, into new cars. 

There is quite a bit of macroeconomic data out this week, lets run down what will be released:

8:30 AM EST Producer Price Index
Prev -0.8 % Consensus -0.1 % (range -0.8 % to 0.4 %)
less food & energy  Prev 0.1 % Consensus 0.2 %                (range 0.0 % to 0.2 %)

8:30 AM EST Retail Sales
Retail Sales
Prev 0.3 %
Consensus 0.2 %
Range 0.0 % to 0.8 %
Retail Sales less autos
Prev 0.0 %
Consensus 0.3 %
Range 0.0 % to 1.1 %
Less Autos & Gas
Prev 0.7 %
Consensus 0.5 %
Range 0.2 % to 1.4 %

8:30 AM EST Empire State Manufacturing
General Business Conditions Index
Prev -8.10 
Consensus 0.00 
Range -5.00  to 9.50 

10:00 AM EST Business Inventories
Prev 0.4 %
Consensus 0.3 %
Range 0.1 % to 0.5 %

8:30 AM EST Consumer Price Index
Prev -0.3 %
Consensus 0.0 %
Range -0.1 % to 0.3 %
CPI less food & energy
Prev 0.1 %
Consensus 0.1 %
Range 0.1 % to 0.2 %

9:15 AM EST Industrial Production
Prev 1.1 %
Consensus 0.2 %
Range -0.1 % to 0.6 %
Capacity Utilization Rate
Prev 78.4 %
Consensus 78.5 %
Range 78.3 % to 78.9 %
Prev 1.1 %
Consensus 0.4 %
Range 0.3 % to 0.6 %

10:00 AM EST Housing Market Index
Prev 47    Consensus  48   Range 46 to 50

8:30 AM EST Housing Starts
Prev 0.861 M
Consensus 0.887 M
Range 0.865 M to 0.920 M
Prev 0.899 M
Consensus 0.910 M
Range 0.870 M to 0.945 M

8:30 AM EST Jobless Claims
Prev 371 K
Consensus 368 K
Range 345 K to 385 K

10:00 AM EST Philadelphia Fed
General Business Conditions
Prev 8.1 
Consensus 6.0 
Range 2.0  to 14.5 

9:55 AM EST University of Michigan Consumer Sentiment
Prev 80.5 
Consensus 75.0 
Range 72.5  to 84.0 

There are quite a few earnings to report this week, most of them the large US banks, which will get most of the attention. I want to focus on a few others that look fundamentally undervalued and a good place to put money to start off 2013.

On Monday, we hear from Heartland Express.  They are a short-to-medium haul truckload carrier which provides regional dry van truckload services through its regional terminals plus its corporate headquarters. They transport freight for shippers and generally earns revenue based on the number of miles per load delivered. Their  primary traffic lanes are between customer locations east of the Rocky Mountains. With their main headquarters in Iowa, they operate nine specialized regional distribution operations in Atlanta, Georgia; Carlisle, Pennsylvania; Chester, Virginia; Columbus, Ohio; Jacksonville, Florida; Kingsport, Tennessee; Olive Branch, Mississippi; Phoenix, Arizona, and Seagoville, Texas.

The transportation index and dry land transportation in general (ex-rails) had a lousy 2012, with the Dow Jones Transportation index under performing the broader market. I see a significant turnaround for the entire sector, as we have already seen all-time highs in the Transportation index after it being up only 6% last year. Industrial demand will pick up, and more freight will need to be shipped. More companies will be moving to expand their businesses with robots, making them more efficient, and getting adequate supply out to those who demand it.

They are currently trading at a 12 month trailing P/E of 17.7 with an EV/EBITDA of 5.60.They are currently trading near 3 times book value. Their ROE for the past 12 months is 18%, with a 5 year average of 18.5% They have been profitable for every year in the past 10 years with free cash flow positive in nine of them. Free cash flow was only negative in 2011 due to a significant amount of capital expenditures spent on the upgrade of its tractor and trailer fleet.

Heartland also paid a special dividend of $1 in December, due to possible fiscal cliff troubles, as to why their share price saw a sharp decline. Long-term this will be a minor blip.

There could be some risks due to their dependence on Diesel fuel, which tends to be more expensive than regular unleaded. As I have previously posted, I believe fuel prices will also turn around this year, but the increased dry land shipping demand will cancel out the potential for increased fuel prices. The company also does not boast a very large dividend, so you are putting forth a bit more risk, when you could be investing in a safer company. Overall, I can see the shared going up 10% or more this year.

Above, a chart of HTLD, along with main competitor Knight Transportation and the Dow Jones Transports.

Next, General Electric which in my opinion has a very large potential to do well this year, because of their position in alternative energy. There will come to a point within the next century of so where we will begin to see a slowdown in the usage of oil dependency and increase in renewable energy. Wind power has been growing quietly and steadily in the U.S. for about the past decade now, to about ten times what it was from the start (4gw to 40 gw). General Electric is one of the world's largest wind turbine suppliers with over 10,000 turbine installations around the world that have amounted to over 200 million operating hours and 127,000 GWh of energy produced. Wind facilities exist in five countries so far: The US, Norway, Germany, China and Canada. GE sells the turbines and offers services that support developmental assistance and maintenance.

I believe this is a great long-term investment, they have either been in-line or beat earnings estimates the past four quarters with next quarters report out this Friday to be the highest since 2008. If they come in at expectations, that will put GE at making $1.50 a share for FY '12 with a P/E of about 14.5. There is 8% year over year growth in GAAP EPS thus far. There are 21 analysts on the name with 13 of them at a buy/overweight and 8 of them at hold. The current price target is $24.62.

Profit margins have been steady between 38-40% in the past four quarters while revenue growth has increased 3% and 2% in Q2 and Q3 respectively. Net income in Q3 was $3.49B, while the estimate for this Fridays report is expected to be $4.26B; Q1 '13 which reports in March is also expected to be higher than Q3 at $3.70B.

Overall, I believe even with the slow revenue growth and stable profit margins, this is a name to own for the future. While you will not get the instant gratification of owning the stock for a year or so, this is something to think about long-term. They boast a 3.6% dividend yield of 19 cents which they have raised by 90% since 2009, which proves that they are loyal to their shareholders (I believe we could see another dividend hike to 20 or 21 cents this year).  The dividend payout increasing overtime does not concern me due to solid operating cash flow and no real compression on margins.

Comparing GE to its main competitors, they have slightly outperformed UTX, have beat the Dow Jones Industrials, and underperformed to Siemens this past year.

That is what I am looking at this week, since the semester is starting up today, I will try and post when I can, but I am afraid it won't be weekly. I will be on twitter daily so you can catch me there: @Peter_Eller10. 

Monday, January 7, 2013

2013 Oil outlook and why EPD can rally

Two words can describe the crude oil markets from 2012: Supply & Demand. The two global benchmarks saw substantial moves where overseas inventories were light, while in the US, inventories were at all-time record highs.

The US benchmark WTI closed out the year down 7%, the first annual decline since the global financial crisis in '08. New drilling methods have unveiled discoveries with new supplies of oil and natural gas. This especially in the Marcellus shale region of the US where I am currently living right now. There is a lot of controversy from all of this drilling, but I think the benefits outweigh the costs. There are people in my area who could not find work for months, even years who now have a steady income. The concern is what would happen when the area is out of places to drill, though by then the entire economy should have recovered enough to make it easier to switch in and out of jobs.

On the other hand, the European benchmark Brent that tracks the cost for many foreign buyers as well as the US coast, is up 3% as supplies are constrained. The increase in the price of Brent this year was concerning due to uncertainties in Europe, but nonetheless, other parts of the world continue to see demand for oil.

The spread between WTI crude and Brent reached its widest point ever in 2012, at one point Brent was more than a $25 premium to WTI, though WTI did catch up and gain in the last remaining weeks of the year to go just under $20 to the price of Brent.  The gap between both benchmarks has widened and narrowed based on the oil markets views on how quickly pipelines will help reconnect US oil supplies stuck in Cushing, Oklahoma to the global market.

Natural Gas was also very volatile this year, at one point going below $2.00 or down 36%, but finished the year up 12%. 

The graph above shows why Brent has traded to a premium all year to WTI. Crude oil supply in Cushing is at an all-time high and looks to continue its upward trend. From January 1st of 2012 till the last week in December, supplies are up 70%. There are currently close to 50 Million barrels of oil stuck in Cushing that are going nowhere due to lack of pipelines. As a result, gas prices have stayed high throughout the US (as a comparison, when gas prices were at all-time highs in 2008, oil was $150 a barrel, we are only 50 cents off all time highs in gas prices, but oil prices are down 40% from their all time highs). If we could get this oil out of Cushing and into the hands of others in the US, we would see a drastic decline in the price of gasoline.

Above are graphs of Crude oil and RBOB Gasoline. There seems to be a tight correlation, but currently gas prices are at a 8% premium to oil prices (Oil is 38% off its all-time high while at the same time, gas prices are 30% off their all-time high). This shows that gas and oil prices are not trading in tandem.

Above is retail for a gallon of gas, what someone would pay for at the pump. Current prices closed out 2012 20% below their all-time high.

Another reason we have been seeing lower WTI crude prices and higher Cushing supplies is due to the amount of domestic crude production in the US this past year. Domestic production saw its biggest yearly percentage increase since the 1980's where it was up some 20%. Looking at wider graph, the pattern was a long-term down trend, reversed this year. With the exploration of more oil in the Marcellus region and North Dakota region, we see more supply through the US.

With all of the data presented above, what do I expect to happen for 2013? Well, the only way to reduce gas prices and transport this is through building more pipelines. In November of 2011, Enterprise Partners said that they would reverse the Seaway Pipeline to carry crude from Cushing, OK to the country's main refining center on the Gulf Coast. When that occurred, the Brent/WTI spread narrowed $8, but widened again in 2012 as I mentioned numerous times above. US oil output surged and current pipelines could not handle all of the excess crude.

Throughout 2012, I was watching levels of US crude supply and saw that this Seaway Pipeline reversal had relatively no effect on stockpiles this year. Still, modestly increased shipments of oil from the Midwest to the Gulf Coast refineries have started displacing oil imports. Crude imports fell 9% in October from a year earlier (2011) to 8.1 million barrels, the lowest amount imported in 13 years. This year I believe could be a turning point as new pipelines start moving oil. Goldman Sachs predicts that the WTI/Brent spread will fall to $10 as more oil gets pushed through the Seaway Pipeline.

The estimated completion time for the Seaway Pipeline should be sometime in Q1 of this year, pushing through some 400,000 barrels a day (currently, there are 150,000/day). Also, the Gulf Coast Pipeline, (Keystone XL) being constructed by TransCanada, should be complete by late Q2 to early Q4 of this year, which could carry an estimated 830,000 barrels of oil per day.

Another pipeline extension from Cushing to the Gulf Coast is the Seaway Twin, expected to be online by mid 2014. This will be expected to carry 450,000 barrels a day.

As all of these pipelines come online within the next year, we will finally begin to see supplies in Cushing and elsewhere decline, getting prices at the pump down as well. Building these pipelines is beneficial for everyone to consumers and those in need of a job in a rough economy. I also agree with analysts that the spread will contract this year, putting pressure on US refiners who profit from a widening spread. I believe this is the year to own pipeline names and short the refiners as more oil will finally begin to come online.

One of the pipeline names I like long-term that will be benefiting from a lot of the production of these pipelines is Enterprise Products. They are the company who plans to build both of the Seaway Pipelines to be completed next year. They had a volatile 2012, ending up 5% which in my opinion would have closed out the year much better if it was not for the fiscal cliff drama (They are already up 6% in the first few trading days of the year.) Enterprise Product Partners is one of the largest MLPs in the United States. The company has over 21,000 miles in Natural Gas pipelines and over 17,000 miles of Natural Gas Liquids and Petrochemical pipelines. With the huge boom in Natural Gas over the past few years, they also stand to benefit from this as well. A major advance like the expansion of the Seaway Pipeline is a positive achievement for the stock price. By the middle of this month, EPD expects the new full capacity of 400,000 barrels per day to be in service. This represents an increase of 250,000 barrels per day from the previous 150,000 barrels per day of capacity.

From May of last year, the shipping rate for a barrel of crude through the pipeline was $3.82. Adding more pipelines will help with their bottom line, along with growing cash flow. Their Operating cash flow was 604M in March of '12, and current Operating cash flow as of the end of September is 1.6B. They continue to maintain a healthy balance sheet while paying a 5% dividend yield, which amazingly has increased every quarter for the past 9 years (yes, even during 2008). Their shares have outperformed their main competitor Kinder Morgan by 8% this past year. I easily anticipate Enterprise to eclipse $60.00 this year on their increased revenue from online pipelines. 

Above is a 5 year chart of Kinder Morgan, TransCanada and Enterprise (blue line)

I anticipate WTI Crude prices to close out 2013 10% above where they ended in 2012 which is exactly $100 a barrel. I also believe late spring and into early summer we could see the price of WTI to be above $105 but will level out. The range for WTI this year will be between $85 and $105, which is less volatile then the past year's range of $33 ($110-$77). Long-term oil prices will remain elevated due to increased demand, the employment rate and oil prices are highly correlated and as we see more people with jobs, they will end up consuming more oil by driving their cars. Within a few years, there is no doubt in my mind the price for a barrel of oil will be over $125, by then we will be just on the path to new and less expensive ways to fill up our tanks or recharge our cars. Though until that time, get ready for elevated gas prices and WTI crude oil. 

Wednesday, January 2, 2013

My trade review from 2012

Another year has come and gone, that means it is time to look at the trade review from quite a busy 2012. Between classes and news filled market events, I gained more experience in trading, spotting patterns, where to enter and exit, while monitoring my long positions. From February, I knew it was going to be a long year, already in the hole selling losers from the previous year to not lose my entire position or more. Though it was another down year, I am more confident in my abilities to go forward and reflect on my mistakes, brush it off and push through the bad trades and prepare for a better 2013. Some of the trades I will highlight below were all out of being in the “moment” of making a few bucks, but went the wrong way.

All of this is real money, there are some Twitter “traders” out there who claim to make thousands a day but these are real profits/losses. Also, these are not recommendations for further trading ideas.

1st trade: Radioshak, after dropping nearly 30% on a bleak earnings report earlier last year, I decided to get in for a 5-8% pop in the stock that never happened. I ended up holding on to it for about a month with a stop at 7.00 (I saw further downside risk below there, looking at their report signaled under performance for the rest of the year.) The stock ended up closing out the year down some 70%+. I took a $26 dollar loss, and believe that this company could possibly file for bankruptcy in 2013.

2nd trade: Dynegy, which gave me the same mentality as Radioshak, being that the stock price was very inexpensive, I thought I could flip it if it moved a couple of cents and make a few bucks. Once again unfortunately it moved the wrong direction way too quickly on a bankruptcy filing report (unexpected, was thinking later on in yr it would happen) that made me nearly lose it all. I sold out before I lost my entire position, but still 1/3 of it was lost in the trade. I lost a total of $107.

3rd trade: THQ Interactive, this was going to be a long/short trade depending on how it moved. I had belief there would be a minimal turnaround in the video game market by 2012, but I was wrong. For most of the year, I was down 30 ish bucks, but took a big move down on a bankruptcy filing. This would end up being my biggest losing trade for the year, but glad I got out before where they are trading now at about 25 cents a share on the pink sheets. I ended up losing $111 on this trade.

12/08/2011 17:10:25
Bought 290 THQI @ 0.92
05/21/2012 10:07:36
Sold 290 THQI @ 0.6054

4th trade: Coldwater Creek, which was going to be another long/short trade, I was about half right on this, should have held on a little bit longer, but was hard to predict due to increased volatility in their earnings reports. I put a 50 dollar stop in and triggered it a few dollars before. I ended up losing $48 dollars.

5th trade:  This was my first go around with triple leveraged ETF’s. To catch a potential downdraft in the market, I bought some shares in the Direxion x3 inverse ETF (when the overall market goes down, this would go up). I was spotting a bullish turnaround in the market that day and got out before I lost more than I wanted. It ended up basically costing the commission I put on for the trade. In all, only $15 was lost.

6th  and 7th trades: These were both the same as above, but a bit more on the losses side from trading these. All three of these tool place within about a week, catching pullbacks of an eventual bull market from the middle of the summer. Again as beginner status, I was somewhat able to track the daily trend, but not long-term up pattern that was forming. Both combined, I ended up losing $54.

8th trade: Dryships which I bought in late 2011, I could have sold this and make a couple hundred dollard after it popped nearly 100% 4 weeks later, but pigs get slaughtered, and I took no profits when I had the opportunity. A majority of the year, it was holding nearly flat for me, but it sold off hard on its earnings report when I decided I could take no more and exited. As of the end of the year, it is more than 15% below where I sold it, and I see a bleak outlook on the entire global shipping sector due to oversupply. I ended up losing $54 dollars.
12/20/2011 14:58:19
Bought 120 DRYS @ 2.045
11/15/2012 10:12:07
Sold 120 DRYS @ 1.7601

9th trade: Petrobras, which I am still holding as of the close of 2012. This will be a long position for me going into 2013. I bought this based on fundamental analysis, revenues were up over 10% q/q from June to September of 2012. Operating cash flow was also up 2 quarters in a row, but still off highs from the beginning of 2012. Net Income is 20% of what it was from 2011, but this was due to sluggish oil demand in 2012. I am bullish energy and oil into 2013, there will be continued demand for oil, higher prices and new exploration will turn out to be profitable for big oil companies such as Petrobras. They also suspended their dividend due to almost half of their capital held by the government. The company is semi public I guess one would say, similar to PetroChina or CNOOC. Government ownership of the stock can influence decisions in order to pursue public interests, such as retail fuel prices. This is one of Petrobras main weak points, given that large state ownership means corporate objectives may not always align well with those of other shareholders. Though with it trading at a very low multiple relative to its peers, and a stock price near or below ’08 crisis level lows, I see opportunity for upside.

06/22/2012 14:05:01
Bought 12 PBR @ 19.63

I bought 12 shares in June for $255 ($10 commission included) which so far has not moved much for me. The highest the stock has gotten this year after I purchased the stock was in September when the closing high was at $24.18, 23% above where I purchased it. I could have taken a $40 gain, but decided to wait it out through next year, seeing big opportunities in oil. Closing out the year, the stock is down 21% and down 1% from where I bought it.

My other 2 long positions have seen a bit of day and night this year. Frontier, which I have now owned for over 3 years, brought me $125 worth of dividends the first 1.5 years, until I started dividend reinvestment in the summer of 2011. Since then, I have accrued an extra 22 shares (Initially I bought 100 shares @7.00) for a total of $700. With my initial dividend, I brought my cost basis down to $575 or $5.75 a share. With the dividend reinvestment, my final cost basis share price is $4.71, 10% above where it closed out the year. A simple discounted cash Flow analysis showed this stock valued at $4.21 so I will keep an eye on it through ’13, monitor the earnings reports and look for red flags.

Invesco Mortgage Retail has had a phenomenal year, the shares were up 40% this year and flat from where I bought them in August of 2011. I made +$110 dollars in dividend payments.
08/04/2011 09:31:22
Bought 40 IVR @ 19.66

I plan on holding this long-term through 2013. I see big upside potential in the housing sector as we began to see a slight turnaround toward the end of last year.

In total for the year, I ended up losing ($415) though with addition of Invesco dividends +$110 my loss was ($305). 

Follow on twitter @Peter_Eller10 for updates throughout the year.