Are they lying or just inept? / A company that's selling for peanuts / It's a beautiful day in the neighborhood / Where is oil headed?
August 03, 2008
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RELATED TICKERS: CBI
, FDP
It’s a beautiful day here on the New York City area. I just spent four hours at the pool and I am now sitting on my deck working on my laptop. Days like today are nice enough to make me forget about how frustrating the stock market has been lately. Those of you who have been following my blog know that I have actually been fairly accurate with my sector and specific company calls. I’m definitely batting over .500 and probably closer to .750…yet my portfolio returns are still flat to slightly negative over the past year, mainly as a result of multiple contraction. I would be in much worse shape if I didn’t hit a home run with a 30% gain on the ten or so stocks that I shorted for a few weeks ago when the market really hit a rough patch.
As you can tell from my CAPS score, I have been significantly outperforming the -20% return of the S&P 500 over the past year, but flat to negative over an entire year still stinks, especially when one puts as much time into this as I do. I could easily get discouraged by all of this and say screw it, I’m going get drunk and waste my money on random junk like most Americans do, but that’s not my nature.
Instead of getting sad, I get mad and say “Damn it, I’m better than this!” I plan on working even harder over the next year to make sure that my portfolio performs even better. That means reading more, spending less, and saving more. I have been getting some amazing deals on stocks over the past six months. Even my beloved energy stocks, are on sale in many instances right now.
One such stock has been hit by a double whammy lately, multiple contraction in the infrastructure sector combined with poor operational performance. The company that I am talking about is Chicago Bridge and Iron (CBI). I did my original full write-up on CBI back on February 25th (see post: It’s not a bridge builder from Chicago, but it is an excellent investment opportunity) after it fell significantly, along with the rest of the infrastructure sector at the beginning of the year. At that time it was trading at $45. Today its stock sits at $32.
Part of the drop was sector related, but a large portion of it comes from huge charges that CBI had to take as a result of cost overruns at a Liquefied Natural Gas plant in the U.K. I was fully aware of the issues that with this project when I wrote-up CBI, but I thought that with the project almost complete they would not be a big deal. I was wrong and I fully admit that. So, is this a messed up company that will continue to fall, or an investment opportunity? After doing some research and thinking about it for a little while, on July 19th I wrote that I believe this is an excellent buying opportunity (see post: Should you buy a collapsed bridge?).
An article in this week’s Barron’s agrees with me. The piece titled “Metal Bender With a Modern Mission” states that CBI could rally to $40/share with in a year and more than double to $75 in five years. This company is involved a number of sectors that I personally find very attractive like natural gas, nuclear, chemical plants, refineries, water and oil storage tanks, etc… and it has been performing relatively well, winning tons of contracts and completing them on time and on budget…except for those darn U.K. LNG plants.
The company’s CEO recently said “If you took away these U.K. projects, our backlog and outlook would suggest earnings per share in excess of three bucks” instead of the $0.60 that it now expects to report. I know that this is like me saying “If you took away my flabby abs I would be an underwear model.” But the LNG projects are mercifully nearing completion. If the company can restore investor confidence in it by executing well from here on, we’re looking at a home run investment.
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This week’s Barron’s also had an interesting blurb on Fresh Del Monte Produce (FDP). Del Monte has dropped from a high of 40 back in July all the way to the 22 level that it closed at on Friday on concerns about a recent acquisition, low profit margins, and general market weakness. This is another one of those CHEAP stocks that are floating around out there right now. Del Monte is selling for peanuts (I know it’s bad, but I couldn’t think of any fruit analogies :) ).
The company has a solid brand name, management that has delivered industry-leading returns, and it trades at only 10 times its estimated earnings for this year. The most attractive stat about this stock is that it trades for right around book value. We’re not talking one of those hocus pocus fictional book values that so many companies out there report either. Del Monte has real assets on its books at reasonable valuations, like farmland reported at cost, ships, etc…
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After a several week hiatus, one of my favorite writers, Barron’s Alan Abelson is back with an excellent column this week. I found two sections of his article particularly interesting this week. The first is his usual bashing of the government’s employment statistics. One can always count on Abelson to tell it like it is on the employment front.
Over the past year, the Bureau of Labor Statistics has reported that the U.S. economy has lost 535,000 jobs. That in itself is disturbing, but wait until you read this. The BLS’ absurd birth / death adjustment that I have mocked numerous times in the past added an astounding 853,000 pretend jobs to the official total. Without this fictional adjustment, the straight job loss was three times larger, a whopping 1,388,000! One has to wonder if the BLS is lying to everyone or just inept. Neither one is acceptible, but I would prefer the former to the latter.
Furthermore, a better way to look at the current jobs situation would be to look at “labor underutilization.” That number includes those who are officially unemployed plus those who have been forced to work part-time because they cannot find full-time employment and those who want to work but have given up trying to find a job. The labor underutilization rate currently sits at a massive 10.3%. This is the highest recorded level since September 2003 when the U.S. was still recovering from the bursting of the dot-com bubble and 9/11. If one looks further back than that, this is the highest level since October 1994.
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The other interesting part of Ableson’s article was his discussion on where the price of oil is headed. He cited a recent report by Barclays Capital Research, which he believes is one of the best research departments in terms of looking at commodities. This report called oil’s run to nearly $150/barrel a “short-run overshooting of prices,” but stated that it’s retreat has been orderly and hardly “a bubble burst.” The report goes on to state “The demand side of the market does not seem to be quite as soft at the global level in reality as it currently is in market sentiment.” Barclays sees oil swinging from $115 to $140 for the rest of the third quarter, with an average price of $128.
While I am quite heavy on oil stocks in my personal portfolio, I tend to be conservative in that I have not been buying companies that only have exposure to oil sands or shale. Similarly I have not been purchasing companies that have tons of debt. I prefer traditional E&P companies with relatively conservative management that use their tremendous cash flow to pay down their debt quickly. If that means that I give up a little upside for safety, so be it. At anything over $100, these companies are going to be printing money. It is only a matter of time before Mr. Market gives them the respect that they deserve.
Deej
Long CBI
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