Wednesday, June 29, 2016

Growing population - Growing Farmland Productivity

The idea that world population is steadily growing is often cited as a reason to be long (bullish) agriculture technology / farmland / anything food & protein related. While I may not necessarily disagree with this logic (although, as someone who's seen a number of farm cycles up close and personal, I think some skepticism is warranted), the idea of food scarcity is often treated as self evident - excusing the need to cite hard evidence and facts. This has created a lot of distortion around the issue.

One of the biggest misnomers I see is that farmland productivity is a new issue. As I'll show below, the number of farmable acres per person has been steadily declining since at least 1960 (as far back as worldbank.org data went back). And if you want to go back further, the Reverend Malthus did his writings in 1798 (218 years ago, but who's counting?).

So, here is a quick overview of the world's food/farming situation in 5 quick graphs. All data was sourced from worldbank.org.

1. World population is growing - as it has been for centuries. As of 2015, global population had broken above 7.3 billion. Many analysts estimate there will be 9.5 billion men, women, and children on the planet by 2050, and more than 10.3 billion by 2100. That is a lot of mouths to feed. So where will all that food come from?


2. Arable acres (i.e. land suitable for agricultural production) peaked in 1992, and despite a recent uptick from 2011-2013, has held fairly steady for the past 24 years. It hasn't been more acres farmed feeding all those people . . .


3. As a result of rising population and slow (1960-1992) to flat (1992-2014) growth in worldwide farmable acreage, arable acres per person has been declining. In 1961, there were 1.2 arable acres for each person on this plant. Today, there are just 0.6 arable acres per person.


4. However, yield per acre has been steadily rising. Now this isn't a direct proxy, but looking at yield per acre for cereal grains gives us a good indication in the improvement in farmland productivity. Since 1961, yield per acre has jumped 173%. Acreage has been flat, but rising productivity per acre has kept the masses fed.


5. This all leads to looking at productivity (yield * arable acres) per person. Again, I'm using cereal grain yields as a proxy for the improvements in all of agriculture. What we see is that productivity per person has been rangebound since the early 1980s. In other words, the amount of "product" that an acre of farmland produces per global population member hasn't been declining - it has been in a fairly steady range for 36 years. Not the ominous downtrend (population outpacing productivity) that many would have you believe.


I'm not arguing that all is well in agriculture and we can just sit back and relax. Nor am I addressing some of the uses of ag commodities (i.e. ethanol) that are large beneficiaries of farmland productivity.

What I am saying is that yes, yields will need to be improved, but unless your investment time frame is 30-40 years (many will say yes, few will follow through on that commitment), be prepared for a wild ride along the way as the ag boom/bust cycle can be particularity viscous.


Harvest Investor © 2016. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

Thursday, May 19, 2016

Stocks with low earnings volatility per unit of growth

The following tweet from Eddy Elfenbein (www.crossingwallstreet.com) prompted me to run a quick analysis on all the stocks in the S&P 500:


The criteria:
  • Companies currently in the S&P 500
  • Positive earnings in every year for the past 21 years
  • Calculate (simple) average 20 year annual EPS growth rate
  • Calculate standard deviation of 20 years annual EPS growth rate
  • Coefficient of variation = Standard Deviation / Mean Return (the lower the better)

Here, ranked by coefficient of variation, are the S&P 500 stocks with the lowest risk (standard deviation) per unit of growth.  Enjoy!




Harvest Investor © 2016. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, May 13, 2016

Historic Wheat Prices: Real vs. Nominal

I was playing around with some wheat price data from the USDA NASS (found here, hat tip to Political Calculations) and wanted to share a couple of quick graphs.

First, here is a graph of wheat prices going back to 1866.  Anytime you can show 150 years of data in a chart, it's pretty cool.


However, if we put wheat prices into "real" terms, the chart changes dramatically.  Rather than a run-up in prices since ~1950, we actually see the "real" inflation adjusted value of a bushel of wheat declining from 1950 to a bottom in 2000.


I don't show this data to argue that wheat is historically cheap.  You can't make a judgement call on cheap or expensive without analyzing the numerous other factors influencing price including substitute products, production costs, or yields.  Rather, I just find it a fascinating truly long-term series of data.

A couple of quick observations:

  • The World War I price spike stands out as the pinnacle of wheat prices, peaking at over $42/bu. (in 2015 dollars) in 1917.  Interestingly, for many farmers in the northern great plains, the fallout from this (along with poor weather patterns / yields) in the 1918-1928 time frame made the "roaring 20s" a worse economic period than the Great Depression.
  • While World War II drove a second major run-up in wheat prices, it was nowhere near the levels of WWI.
  • The Great Grain Robbery of 1972 (when the USSR bought a large quantity of U.S. wheat at subsidized prices) also stands out.  This and a good overall history of the largest grain merchants is well covered and worth reading about in the book Merchants of Grain.
Where do wheat prices go from here?  I can honestly say I have no idea.  One quote, however, has always stuck with me, and that is "wheat is a weed."  Many of the old farmers say this to indicate that wheat is easily grown anywhere (prompting the joke "I can grow in on my land, so it must be a weed") and if a substitute commodity can be grown, it probably will be.



Harvest Investor © 2016. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, May 6, 2016

The Longest Dividend Streaks in the S&P 500

Out of curiosity, I recently spent 10 minutes seeing which stocks in the S&P 500 had the longest streak of consecutive dividend increases. I ran my list on the S&P 500 Dividend Aristocrats since that immediately culled my screen to those companies that have increased for at least 20 consecutive years.

I had no real reason beyond curiosity for running this analysis. Many of these companies have great “moats,” but only a handful will appeal to the “compounding aficionados” (or is it the “compounders mafia”) since the majority have limited reinvestment opportunities (hence the dividends). The opposite argument also crossed my mind - that the longer the dividend streak the greater the potential for a value-trap. You could argue it either way.

I present the following list without comment or judgement on valuation/attractiveness of any individual stock or the group as a whole. With that:


Note: All data taken from www.dividendinvestor.com and www.dividend.com. Unfortunately, even high-end data providers like Bloomberg only report individual stock data back 20 years, so, these online databases were key to compiling the data.


Harvest Investor © 2016. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advices, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

Wednesday, December 9, 2015

S&P 500 Sector Weightings: A Historical Perspective

There has been a fair amount of talk recently about Energy falling to a 6.5% weight in the S&P 500. While this is a big move from ~16% of the S&P 500 back in 2008, it is not outside of historic norms and only ~1 standard deviation from its long-term mean.

It hasn't had the attention of Energy, but Health Care earlier this year peaked at 15.5% of the S&P 500, nearly +2 standard deviations from its average. Is the recent pullback a warning of reversion to the mean for Health Care, or has the industry undergone a secular shift (aging population, longer life expediencies, Obamacare, etc.)?

Presented without further comment, here are the charts of all 10 S&P 500 sector weights vs. long-term averages and +/- standard deviation bands. Enjoy.










































Harvest Investor © 2015. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

Thursday, October 8, 2015

Vehicle Loans, American Workers, and Car Prices


I’ve seen some recent reports on the record amount of auto debt in the U.S. financial system floating around the web. Most of the reports reference, in one form or another, the following chart showing motor Vehicle Loans held by U.S. financial institutions.



While this measure arguably misses some of the vehicle loans in the “non-traditional” lending channel (shadow banking anyone?), it’s still a good representation of the growth in auto debt in recent years. Since the last peak (which was 12/31/05), auto loans have grown just over 21%.

However, what we also need to mention is that population has grown as well. Below I show the amount of motor vehicle loans divided by the civilian labor force. I used labor force under the assumption that only people with a job can qualify for a car loan (a dubious assumption I know, but just go with me here).



What this chart tells me is that the average working person in America has $6,356 worth of auto debt. This compares to about $100 of auto debt per American worker back in 1950.

Since the last peak (12/31/05), auto debt per worker is up just shy of 16%. While still a sizeable jump, it's better than the 21% headline growth since 2005.

Of course, thinking about the growth in debt per American worker since 1950 got me to thinking about how much a car cost in 1950. The internet (they have that on computers now) tells me that a new car cost $1,510 in 1950. Today, the average new car costs $33,560. A 22 fold increase in car prices has been met with a 64 fold increase in vehicle debt per worker.

So I downloaded consumer price index (CPI) data on new vehicles. Unfortunately, the data only goes back to 1984. Nonetheless, if we normalize the auto debt per worker for the CPI on New Vehicles (debt/workers/(Auto CPI - 100)) we get the following chart:



Normalized for inflation, the average U.S. employee had $4,010 of auto debt in December 2005 (previous peak) vs. $4,309 today, for an increase of 7.4%. While still growth, a 7% increase in the last decade is a far cry from the 21% growth in the headline number above.

I’m not sure what the takeaway is here - I need to think more about these numbers and what they actually mean. Probably the best takeaway, as usual, is that this business of investing is simple, but not easy.

Please feel free to respond and/or correct any gaps in my thinking.


Harvest Investor © 2015. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

Thursday, April 16, 2015

Buhler Industries (TSE:BUI): Inventorying this Net-Net

I have to admit, Buhler Industries (TSE:BUI) calls to me like a siren’s song.  What can I say, I have a weakness for net-net stocks.  And in many ways, BUI is my ideal net-net:
  • It’s in an industry I (sort of) understand: Farm Equipment Manufacturing.
  • It has a long history of profitability: EPS have been positive in every single fiscal year going back to at least 1993.
  • Its foray into 4WD tractors has been initially successful based on reviews of its Versatile DeltaTrack models.
  • Best of all, it trades at a discount to net current asset value (NCAV). As of December 31, 2014, NCAV was $5.56 per share, compared to the current quote of $5.20.
A historically profitable company trading at a discount to liquidation value - a rare find in this market.

Now, admittedly, there are issues surrounding BUI that give one pause, not the least of which is the ownership structure:
  • Despite having a market cap of C$130,000,000, BUI has a very low float.
    • In 2007, Combine Factory Rostselmash Ltd, a Russian manufacturer of combines, bought 80% of Buhler. The company remains headquartered and operated in Canada (with some U.S. manufacturing facilities), but the new owners have provided a potential growth avenue into Russia and Eastern Europe through co-marketing with Rostselmash.
  • John Buhler (the retired CEO, current Board member and namesake of the company) still owns 14.5% of outstanding shares as of the most recent proxy. 
  • The company’s deferred profit sharing plan owns another ~1%.
All told, BUI has a float of only ~4.5% of shares outstanding. This is 1,125,000 shares, or less than C$6 million at current prices. To say we would be minority shareholders in this stock seems like an understatement. 

While these issues certainly play into any purchase analysis, more concerning to me is the growing imbalance between revenues and inventories. In fact, many short sellers will use slowing sales and continued additions to inventory as a textbook screen for short ideas.


Now, arguably, some of this growing disparity is likely priced into shares considering they are trading for slightly less than NCAV. Yet, when we compare BUI’s numbers to peers, it is staggering how large its stockpiles of inventory and accounts receivable have become:


Among peers it has (usually by a wide margin):
  • The longest receivables collection period
  • The most days inventory on hand
  • The highest inventory per employee
  • And, despite a slowing ag economy, saw both its accounts receivables and inventory grow over the past twelve months.
In other words, I have some doubt that BUI could liquidate itself for NCAV. Additionally, BUI is having trouble converting working capital assets into cash (it has virtually no cash on hand), as evidenced by the receivables aging trends shown below:


As the above table from the 2014 annual report (year ended 9/30/14) shows, there has been a dramatic spike not just in accounts receivable, but particularly in the accounts receivable delinquent. In total, 17.2% of receivables are past due, with 10.1% of the total over 30 days delinquent. Comparatively, 6.4% of receivables were past due at the end of fiscal 2013, and a more manageable 3.5% were over 30 days delinquent.

Finally, due to balance sheet leverage, the margin of safety associated with this net-net could quickly disappear. Current Assets / Total Liabilities come to only 1.89 as of Dec. 31, 2014.  Although not a hard and fast rule, I use the rule of thumb that a net-net should have CA/TL of  at least 2.0 to lessen the impact of financial leverage on my margin of safety.  At a reading of 1.89, even a small receivables write-off and/or inventory discount could significantly impact Buhler's book value and NCAV:


So all this leads me to the question: what is Buhler Industries worth?

Over the past 10 years, BUI has averaged annual EPS of $0.43. Assign a 13x multiple to this (not sure why I chose 13, but it seems right given minority shareholder status) and we get an intrinsic value of $5.59.

Backing into valuation a slightly different way, over the last decade ROE has averaged 9.0%. To get a 10% annual return on a 9.0% ROE stock we should pay 0.9x book value.  Again, assume we take a discount for minority status, and we could in theory pay 0.8x book value for shares. At a recent book value of $7.79, this comes to $6.23 (and assumes there will be NO write-downs in accounts receivable or inventory, which I’d be surprised to see happen).

If we feel intrinsic value is somewhere between $5.50 and $6.00 per share, and since I like to buy at a discount, I’m not going to get too interested in Buhler until I see a price in the low $4 range (and even then, I’ll still need to get comfortable with my standing as a minority shareholder and who is the marginal buyer of BUI).

Ironically, a price in the low $4's would be pretty close to the old Benjamin Graham rule of buying a net-net at 2/3rds of NCAV.  So all that work I just did in the preceding paragraphs could be summed up by a very simple quantitative rule developed over 80 years ago.  Maybe there's a lesson for me there?

Full Disclosure: I own a handful of BUI shares (mainly for tracking purposes). I do not consider BUI a position in my portfolio.

Harvest Investor © 2015. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, April 3, 2015

P&C Insurers and Net Investment Per Share: The 1 Column Approach to Valuation

A recent post by The Brooklyn Investor on Markel (MKL) got me thinking about the two column approach to valuing hybrid insurance / capital allocation companies like Berkshire Hathaway or Markel.

The two column approach says that an insurance company with a history of profitable underwriting (i.e. a combined ratio consistently below 100%) has two sources of valuation (actually three, but the third is an intangible aspect difficult to estimate):
  • The value of net investments per share (since investments are funded with “float,” which at a well underwrote insurer is a perpetual negative cost source of funding and therefore not a true liability).
  • Earnings (at an appropriate multiple) from non-insurance operations.
As you would expect, Warren Buffett does an immensely better job of explaining this valuation method. See the 2010 Berkshire Annual Report, page 6.

For almost all insurers, #2 above can be ignored since very few have non-insurance operations. Even Markel, which is considered a “mini-Berkshire” by many investors, earns such a small amount (at least currently) from its “Markel Ventures” subsidiary that non-insurance operations can be thought of as a rounding error (The Brooklyn Investor addressed this in a subsequent post).

So, for most insurers out there, this leaves us with 1 column: net investment per share. Many analysts feel comfortable using this metric for Markel, but it is hardly ever used when looking at the run of the mill P&C insurer. I've often wondered why that is, so I decided to run the “1 column” valuation for a group of large P&C insurers.  Net investments per share = ((cash + total investments - short-term debt - long-term debt) / shares outstanding). (Please Note: Net Investments in the table below do not adjust for deferred acquisition charges, reinsurance agreements, and other line items that may distort comparisons among companies).



The results show that Markel is not cheaper than peer P&C companies. In fact, it is above average (higher priced) when we look at the price/investments column (i.e. you’re paying $0.68 for every dollar of net investments at MKL, and only $0.575 at the average peer).

Is it justified to pay more for MKL? Many would argue yes. It has a history of solid investment portfolio performance, book value growth, and underwriting. Yet, at least over the past decade, its peers also have a history of solid underwriting (average combined ratio of 92.1% although, admittedly, many insurers have higher volatility in their combined ratio than MKL and the last decade has been somewhat benign in terms of catastrophic losses).

Will Markel's management be able to continue growing book value at double digit rates and finding attractive investment opportunities? That is the $64,000 question isn't it? While valuation relative to net investments per share can give us a feel for how richly priced shares are, like almost all Financial companies with no competitive advantage outside of people/culture, it all comes down to our faith in management.

And that brings me to the main point of thinking about this. Why don’t more large P&C insurers follow the hybrid / capital allocation model? The benefits of negative cost “float,” the inherent leverage in using unearned insurance premiums, and the virtuous cycle of reinvesting cash flows from high quality investments are all well documented. Wouldn't the entire insurance industry benefit from skewing in this direction?

Of course, this is a little bit like asking why don’t more people buy stocks when they’re cheap (or as Will Rogers once wrote: “Buy stocks that go up; if they don’t go up, don’t buy them”). Finding a really good capital allocator (like Warren Buffett or Tom Gaynor) is beyond needle in a haystack difficult. On top of this, finding an insurance organization with the discipline to consistently underwrite profitable policies (and more importantly walk away from unprofitable policies) is just as difficult.

But still, there is room for improvement. Couldn't an activists target Allstate to capture some of the value of its investment portfolio? I see hedge funds going to the trouble of starting their own reinsurance companies to get “permanent funding” . . . isn't W.R. Berkley a ready made target for permanent capital (I do realize there would be plenty of conflicts of interest in being an activist in a P&C insurer and then inserting yourself into the management of said insurers investment portfolio). Conversely, why hasn't a large insurer scooped up MKL in an effort to capture its hybrid business model on a larger asset base? (obvious answer: why would you buy a smaller company just to replace yourself and your entire executive team?).

Maybe I’m just way off base and don’t understand insurance accounting well enough. Maybe the hybrid model only works when its built from the ground up (Warren Buffett does spend a lot of time discussing culture and partnership in his writings). Or, Maybe I've been brainwashed by the value investing communities infatuation with all things Buffett. 

Whatever the answer, the “1 column” valuation approach seems to show that MKL already has some premium built in (compared to peers) for its capital allocation and underwriting skills. Is the premium high or low? Time will tell.


Disclosure: Long MKL


Harvest Investor © 2015. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

Wednesday, March 25, 2015

Return on Invested Capital: Adding a Grain of Salt

I typically don’t post on the more theoretical aspects of value investing, but wanted to make an exception for a quick rant related to Return on Invested Capital (ROIC). 

Follow any number of financial blogs and you might be tempted to say that ROIC has developed a cult following. It is spoken of in hushed tones, as the holy grail of investing (after all, Buffett endorses it, right?). It has been referred to as the key to finding “moats” (a concept itself so overused as to have lost all meaning); a guide to companies with high and sustainable profits. 

Now don’t get me wrong - I’m as big a fan of a high ROIC company as the next guy. Who doesn't like to find a company that makes lots of money on very little investment? And when I've gone back and looked at the best performing stocks of the past 10, 20, and 30 years, high (and almost more importantly consistent) ROIC, while not universal, had a clear correlation among the top performers.

Where my issue with the ROIC zealots lies is in the interpretation of the output. Like almost every financial metric, ROIC suffers from the garbage in, garbage out limitation. It’s a snapshot in time indicator, and, for the better or worse, encumbered by the rules of GAAP accounting.

Perhaps I should use an example. My feeble brain needs simple examples, and since I’m a bit of a farmer at heart, lets talk about a farm consisting of 1 acre. The farm has no other assets (all machinery is rented, etc.), and no liabilities.

In my neck of the woods, that one acre would cost you $1,000. In that respect, your invested capital would be $1K.

Now just ballparking some figures here, but we can average 50 bushel winter wheat on that land once every two years (we have to let the land lie “fallow” every other year to catch up). So at $5.80/bu., we get revenue of $290. Knock off $170 for operating expenses, and you get operating income of $120 on your one acre. But remember, we have to divide that by two since the above numbers are for a two year operating cycle. Annually, our operating income averages $60/yr. Take away 30% for taxes, and we’re left with $42/yr.

We can quibble about my numbers (and argue about the economics of farming) some other time, but my main point is that the ROIC of my 1 acre farm is 4.2%.

Let’s assume now that you bought that 1 acre 15 years ago. Back then, you would have paid $400 for the land. The farm has no need to retain earnings (which, if I’m analyzing the business, is its core advantage, but that’s a topic for another day), so over the past 15 years all income has been paid out as dividends. 

In this scenario, your “invested capital” is $400, and the ROIC is now 10.5%. Exact same business. Exact same economics. Yet, one has a much higher ROIC just due to semantics.

My point is that, while high (and consistent) ROIC is important, it’s a starting point, and in many cases a misleading one. Age of assets, cash levels, dividends, share buybacks, goodwill, intangibles, financing arrangements, depreciation, amortization, tax structure, type of assets, structure of competitors, industry dynamics, and a host of other line items need to be looked at before dismissing a stock as . . . shudder . . . low ROIC.

This is closely related to a developing investment theme that overpaying for a high ROIC company is somehow okay. The future earnings power of that business will bail you out no matter what you pay, so who care about current price. 

Can this (mathematically) happen? Absolutely. But it’s a slippery slope from that thought back to the “nifty-fifty” of the 1960s or the tech bubble of the 1990s. In both instances, and increasingly among ROIC aficionados, an infinite future earnings stream discounted back (at any discount rate) is still infinite, so it doesn't matter what you pay for a stock today. At the risk of stating the obvious, this is a mistake. (Read about the St. Petersburg Paradox, which is also discussed in the excellent Fortune’s Formula).

And while both Charlie Munger and Warren Buffet espouse the benefits of investing in high ROIC companies, I can find no evidence in the writings of either gentlemen that overpaying for anything is ever a good idea. In other words, finding high ROIC companies may be a good investment strategy, but it should never be confused with a “margin of safety.” ROIC is about the future (i.e. competitive advantage), while margin of safety is a fallback for being wrong about the future. Confusing the two as one in the same is a dangerous shortcut.

Bottom line, don’t let someone convince you to pay three times capital for “farm #2” above (the one with invested capital of $400) when you can get farm #1 at $1,000.

As the saying goes . . . Price is Paramount.


Harvest Investor © 2015. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.

Friday, March 13, 2015

A “Smooth” Screen for Cheap Stocks

The concept of “smoothing” earnings is nothing new to value investors. Finding a company that has been thrown in the bargain bin after one or two bad years, with no regard for true (long-term) “earnings power,” has been the bread and butter of many great track records.

Yet, I’m surprised how often the “CAPE” ratio (cyclically adjusted price to earnings ratio), as it has come to be known, is applied to general market indexes while its application to individual stocks is largely ignored. This is somewhat ironic since, long before Professor Robert Shiller made the metric famous, Graham and Dodd were looking at the “average earnings” of individual stocks in their classic tome Security Analysis.

Now, admittedly, using a 10-year average P/E on raw data comes with a whole host of problems/issues, not the least of which are:
  • A company with rapidly growing earnings may have an unfairly high CAPE (i.e. its earnings from 5-10 years ago may be incredibly small, and not representative of its current earnings power).
  • A company with rapidly declining earnings may have an unfairly low CAPE (i.e. its earnings from 5-10 years ago may be too high and not representative of its current earnings power).
Yet, I would argue that most fundamental investors would want this type of “messy” data - an idea screen where there a lot of false positives, and where analytical ability can be used to pick diamonds in the rough (or is it nickels in front of bulldozers?). 

So, with that background, I decided to run a screen to find the stocks with the lowest current CAPE ratios. My criteria:
  • All data is from Bloomberg as of March 12, 2015
  • CAPE is defined as: Current Price / 10 Year Average Diluted EPS
    • Note: Diluted EPS does not adjust out discontinued operations. This (good or bad) adds to the “messiness” of the data.
  • Minimum market cap: $15 million
  • Stocks traded on a U.S. exchange and domiciled in the U.S.

As usual, I have not scrubbed the data. There may be incredible inaccuracies. Please do your own research and due diligence.

Without further delay, what follows is a listing of the 100 cheapest U.S. stocks based on a 10 year CAPE.  Happy hunting!

Cheapest 10 Year CAPE Securities as of March 12, 2015
RANK
COMPANY
TICKER
CAPE
MARKET CAP
1
RADIOSHACK CORP
RSHCQ
0.30
$18,629,942
2
YASHENG GROUP
HERB
0.85
$74,446,728
3
FIRST MARBLEHEAD
FMD
0.85
$72,064,624
4
ITT EDUCATIONAL
ESI
1.49
$175,393,152
5
LIGHTING SCIENCE
LSCG
1.53
$65,083,476
6
OTELCO INC-A
OTEL
1.64
$15,022,044
7
SPECTRUM GROUP
SPGZ
1.90
$16,890,048
8
MILLER ENERGY RE
MILL
1.99
$59,692,124
9
MMA CAPITAL MANA
MMAC
2.01
$67,262,992
10
DOVER DOWNS GAMI
DDE
2.91
$37,511,552
11
HANDY & HARMAN L
HNH
2.94
$466,910,592
12
ALASKA COMM SYS
ALSK
3.26
$86,199,224
13
WEIGHT WATCHERS
WTW
3.58
$554,638,784
14
CREXENDO INC
CXDO
3.69
$26,036,280
15
MCDERMOTT INTL
MDR
3.74
$755,999,040
16
ENZON PHARMACEUT
ENZN
4.04
$45,949,388
17
APPROACH RESOURC
AREX
4.08
$270,270,208
18
CIM COMMERCIAL T
CMCT
4.20
$1,727,194,240
19
QC HOLDINGS INC
QCCO
4.54
$34,603,476
20
DIAMOND OFFSHORE
DO
4.76
$3,749,623,552
21
AEROPOSTALE INC
ARO
4.78
$292,753,408
22
AMBASSADORS GRP
EPAX
4.81
$42,097,752
23
BOOKS-A-MILLION
BAMM
5.08
$38,678,260
24
GULFMARK OFFSHOR
GLF
5.56
$369,037,760
25
NATURAL RESOURCE
NRP
5.63
$913,579,712
26
HARVEST NATURAL
HNR
5.84
$22,372,442
27
TIDEWATER INC
TDW
5.93
$1,136,976,640
28
WEBCO INDS INC
WEBC
6.09
$57,836,000
29
EMERSON RADIO
MSN
6.13
$35,268,780
30
FULL HOUSE RESRT
FLL
6.13
$28,126,254
31
COMDISCO HOLDING
CDCO
6.19
$25,986,734
32
DAWSON GEOPHYSIC
DWSN
6.20
$103,464,000
33
BP PRUD BAY-RTU
BPT
6.24
$1,260,460,032
34
MARATHON OIL
MRO
6.28
$17,352,826,880
35
MITCHAM INDS
MIND
6.28
$65,133,060
36
NEW ULM TELECOM
NULM
6.42
$40,300,540
37
FIRST INTER/MT-A
FIBK
6.51
$1,235,635,328
38
INTL SHIPHOLDING
ISH
6.53
$95,034,152
39
CNB CORP
CNBW
6.62
$83,050,352
40
PEABODY ENERGY
BTU
6.64
$1,584,323,456
41
INTERNET PATENTS
PTNT
6.73
$17,683,220
42
CRESTWOOD EQUITY
CEQP
6.88
$1,154,074,624
43
CONTANGO OIL & G
MCF
7.03
$429,474,080
44
FRIEDMAN INDTRY
FRD
7.10
$43,651,752
45
ROWAN COMPANIE-A
RDC
7.11
$2,378,658,816
46
PROSPECT CAPITAL
PSEC
7.13
$3,064,334,080
47
ADDVANTAGE TECH
AEY
7.17
$23,486,380
48
US ENERGY CORP
USEG
7.17
$34,633,812
49
INCOME OPP RLTY
IOT
7.38
$29,594,320
50
SAN JUAN BASIN
SJT
7.48
$604,516,096
51
INSIGNIA SYSTEMS
ISIG
7.49
$35,639,948
52
KOSS CORP
KOSS
7.64
$17,054,050
53
CASH AMER INTL
CSH
7.68
$700,230,464
54
MVC CAPITAL INC
MVC
7.71
$221,352,512
55
DENBURY RESOURCE
DNR
7.77
$2,746,093,312
56
AMBASE CORP
ABCP
7.80
$87,586,168
57
NORTHEAST BANCRP
NBN
7.92
$82,408,760
58
ALLIANCE SEMICON
ALSC
8.05
$26,603,548
59
ITT CORP
ITT
8.07
$3,643,640,064
60
UNIT CORP
UNT
8.11
$1,320,100,864
61
ANNALY CAPITAL M
NLY
8.16
$9,837,822,976
62
GUESS? INC
GES
8.30
$1,506,866,688
63
NL INDUSTRIES
NL
8.37
$347,595,776
64
INTERSECTIONS IN
INTX
8.39
$66,432,296
65
YUMA ENERGY INC
YUMA
8.40
$95,723,688
66
SERVOTRONICS INC
SVT
8.42
$15,312,430
67
COMSTOCK RES INC
CRK
8.43
$218,129,632
68
ATWOOD OCEANICS
ATW
8.50
$1,846,573,696
69
EMPIRE RESOURCES
ERS
8.62
$40,482,800
70
SCHNITZER STEEL
SCHN
8.84
$441,139,712
71
HORNBECK OFFSHOR
HOS
8.88
$693,716,864
72
EZCORP INC-A
EZPW
8.91
$578,700,544
73
ABERCROMBIE & FI
ANF
8.91
$1,462,987,520
74
JPS INDUSTRIES
JPST
8.96
$99,746,984
75
GEOSPACE TECHNOL
GEOS
9.09
$222,042,960
76
BRINK'S CO/THE
BCO
9.10
$1,302,278,272
77
APOLLO EDUCATION
APOL
9.11
$2,914,203,648
78
ACRE REALTY INVE
AIII
9.16
$27,079,310
79
US GLOBAL INV-A
GROW
9.19
$46,531,976
80
AVON PRODUCTS
AVP
9.39
$3,628,035,584
81
JOY GLOBAL INC
JOY
9.39
$3,851,165,952
82
MURPHY OIL CORP
MUR
9.46
$8,305,296,896
83
PATTERSON-UTI
PTEN
9.47
$2,538,122,240
84
EDUCATIONAL DEV
EDUC
9.59
$16,854,016
85
PARKER DRILLING
PKD
9.62
$362,480,576
86
OIL STATES INTL
OIS
9.65
$2,127,773,312
87
MESABI TRUST
MSB
9.73
$225,654,992
88
CAPSTEAD MORTGAG
CMO
9.76
$1,118,605,696
89
REPUBLIC BNCRP-A
RBCAA
9.84
$495,420,800
90
NATL PRESTO INDS
NPK
9.88
$401,178,720
91
VISKASE COS I
VKSC
9.89
$207,551,872
92
GRAFTECH INTL
GTI
9.97
$532,219,360
93
DYNEX CAPITAL
DX
10.21
$448,844,896
94
ARES CAPITAL COR
ARCC
10.23
$5,264,451,072
95
WINDSTREAM HOLDI
WIN
10.23
$4,676,486,656
96
GENCOR INDS INC
GENC
10.23
$92,623,472
97
RESOURCE CAPITAL
RSO
10.27
$612,742,720
98
AMPCO-PITTSBURGH
AP
10.33
$178,801,184
99
VALUE LINE INC
VALU
10.39
$153,571,392
100
OCWEN FINL CORP
OCN
10.52
$1,181,401,088

Disclosure:  Author may hold a position in securities listed in the table.


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