Wednesday, 26 December 2012

Ford Valuations and Inaccuracies in Reporting

After a pretty breathtaking 2 day jump, Ford is now all over the news.  That's no surprise, in the last 3 days, F has jumped almost 10%, large for any stock.  Of course, whenever there's such a move, questions abound about valuations and whether its jumped too much for its earnings.

Unfortunately, reading through some reporting, its astounding how poor some research news are.  Lets look at a couple of data points.

1 - F is now trading at $12.79.  As you can see the 1 year chart below, that's not a crazy all time high in the stock.  As recently as April, it was trading at that level and while it has jumped a lot in the last 2 days, it is part of a very steady and relatively gradual rise since the August bottom.  A typical gradual drop earlier in the year and a gradual rise later in the year helps give confirmation that its a reasoned fundamental based change rather than a bubble/speculative play.  The 50 day moving average just passed its 200 day moving average only a few weeks ago.

If you look further back to 3 yrs, you can see we're nowhere near its post recession highs as it hit over $18 just 2 years ago.

Based on this, the price point is not indicating too much speculative bubble behavior.

2 - Valuation.  Price to earnings is obviously a very important measure.  If you go to Finviz, it'll show Ford has a P/E Ratio of 2.81 and a forward P/E ratio of 8.5.  Wow, a P/E Ratio of 2.8?!  A crazy bargain for a company that's generating profits, why wouldn't you buy it?  But this is where I see a lot of misreporting.  Like this article from Insider Monkey:     

From a valuation standpoint, Ford is cheaper than most of the other top-tier car companies. The stock trades at a current P/E of only 3x, while General Motors Company (NYSE:GM)'s earnings multiple is more than thrice that of Ford. We also find the profitability argument very compelling; Ford has the highest margins – 12% EBITDA margin and 8% operating margin - of the five stocks listed here. Based on next year’s EPS estimates, Ford could see upside of 20% by Christmas 2013, and a 1.6% dividend yield is better than most automakers will pay.

That's great, 3x better P/E than GM, its most comparable company?  Well there's a common saying about news being too good to be true.  If you dig into its earnings, from Wikiinvest, It reported Dec 31 net income of 13.6B but the other quarters has been 1.65B, 1.4B, 1.04B, and 1.6B.  Which one of these is unlike the other?  It turns out that in Dec 2011, Ford was able to record an one time $12.4B tax credit:

  • Full year net income was $20.2 billion, or $4.94 per share, an increase of $13.7 billion, or $3.28 per share, from a year ago. Net income includes a favorable one-time, non-cash special item of $12.4 billion from release of almost all of the valuation allowance against net deferred tax assets in the fourth quarter
  • Fourth quarter pre-tax operating profit was $1.1 billion, or 20 cents per share, a decrease of $189 million from fourth quarter 2010. Ford has posted a pre-tax operating profit for 10 consecutive quarters
  • Fourth quarter net income was $13.6 billion, or $3.40 per share, a $13.4 billion increase from fourth quarter 2010. As noted, one-time special items positively affected net income

So if you strip that tax credit out, Ford's P/E is much more in line with its competitors, at approximately 7-8 vs GM at ~10.  Now that's not saying Ford is overvalued, its just that its not nearly as a value purchase as poor reporting make it out to be.  

If you look at Ford's P/E over the last 2 years (from Bigcharts): You'll see it has hovered around PE ratios of approximately 6-11 range.  With a return to its historical ranges, you can expect some small bump in Ford price still possible as an 7-8 P/E is still somewhat on the lower end (though not by much).

So overall conclusion, Ford was undervalued from a fundamental valuation perspective during the summer bottoms and the last few months has seen it coming back to its appropriate ranges.  So Ford's stock price is unlikely to be an unsustainable run up and more of a proper valuation.  Based on its historical values, you can expect some upside still (long term) though the low hanging fruit of August prices has been picked rather handily already.

Disclosure: Am long on F stock.

Wednesday, 19 December 2012

Life Expectancy and Fertility Rates

Was browsing through Google public data looking for GDP figures and came across this.  Its an interactive chart of Fertility Rate and Life Expectancy by country/region.  As most are aware, many of the richer more industrialized countries are facing an aging crisis where their population is rapidly greying and there's not enough youth to sustain them.

There are a lot of factors that play into this and its hard to say what is really a cause, effect, or merely symptoms of the same issue.  Factors such as women being part of the workforce in industrialized countries (less free time to raise families), higher (longer) educational attainment (pursuit of life and career over family), more retirement security (no longer needing to have multiple kids to support yourself at old age), etc., all have been described in multiple surveys and studies.

Nonetheless, its interesting to see a few trends from the data:

  • Up until the late 70s, the curve looks more like a negative exponential chart with Europe being on the high end.
  • After the 70s, the curve becomes much more linear as most regions such as East Asia and Latin America move towards the upper life expectancy enjoyed by the West.  The only exception is Sub-Sahara Africa which failed to catch up with most of the world.
  • Though it is still far below the rest of the world, Africa life expectancy did improved, going from 30-40 yrs to 50-66 yrs today (along with a drop in Fertility from 7 to 5).  A significant improvement.
  • On the other hand, the true natural lifespan potential of human beings is starting to show.  Whereas 1960 maxed out at ~75 yrs, a half century of improvements only bought us another ~5 yrs of additional life span.  Does this mean that humans are maxing out?  Does the future of genomics research give us more potential?  Do we even want that?  Imagine if the US congressmen can stay in power for ~150 yrs...goodbye progress!
  • Overall fertility rates as a whole have dropped about 30-60% for almost all countries over the last 50 yrs.
  • Many many countries and regions (Europe and Asia especially) are now below the magic 2.1 fertility number which is the level needed to maintain a population size.  Japan is at 1.4, Singapore at 1.2, US at 2, and even China is at only 1.6.

What does this mean from an investing standpoint?  Well its well known that a large working age population is highly correlated to economic growth as they join the work force and start businesses and consume goods and services.  It can be argued that the US baby boom had a huge influence on the rise of the US economic engine.  On the other hand, an aging population has the opposite effect where consumption slows, as does growth and productivity.  So a key economic indicator to look at is countries with large populations and high fertility rates about 10-20 yrs ago as those people will be joining the workforce in the near future.

Examples of which countries fit that 10-20 yr trend?  A few that stands out: India, Pakistan, Nigeria, Indonesia, Philippines, Egypt, and Bangladesh.  Indeed, a few of those countries are already standing out as big growth engines today.  China is very interesting in that it fitted those parameters about 30-40 yrs ago which correlates well with China's growth for the last 20 yrs (and potential fade for the next 20 yrs).

The chart below highlights where a few of those countries were for GDP growth in 2009 (incomplete data post 2009).  I couldn't find an easy way to edit the axis so you're stuck with the not as useful log scale unfortunately.  While they were not at the top of the GDP growth scale, they were better others.  Additional GDP data from 2011 onwards confirms growth for many of those countries as well.  Philippines as an example, grew GDP by ~7% in 2012.

So if you want to use this measure as a predictor for potentially hot and growing countries 20 yrs from now?  Looks like Nigeria, Ethiopia, Uganda, Tanzania, and Congo fits that bill...

Now granted, population is only one factor but its interesting food for thought nonetheless.

See data at: Google Public Data

Holidays....and Austerity Crises

Its almost the holiday vacation season and can't wait to get off of work!  Was reading about Greece and its a bit scary to think of the problems when a country is in virtual bankruptcy.  From Bloomberg:

In the Greek mountain town of Kastoria, less than an hour from the Albanian border, Kostas Tsitskos, 88, can’t afford fuel to heat his home against the winter’s cold. So he and his son live in a single bedroom, warmed by a small electric heater.

“One room is enough,” said Tsitskos, who lives on a 734 euro-a-month ($971) pension and doesn’t have the 1,000 euros a month he needs to buy heating oil.

Greece is facing a heating-oil crisis. With an economy that has contracted for five years and an unemployment rate at a record 25 percent, residents in northern Greece can’t heat their homes. Kastoria hasn’t received funds from the central government to warm schools and the mayor said he will close all 53 of them rather than let children freeze, a step already taken in a nearby town. Truckloads of wood are arriving from Bulgaria as families search for alternative fuels.

While I feel bad for the people in Greece that are suffering from the austerity, there's also the part of me that's wondering, what the heck is happening.  How has the austerity program which to some degree is government based (needing to cut their budget), propagating so much throughout their entire economy?  What happened to this guy's savings?  Where is his family?  Why doesn't the school have money from alternate sources like property taxes in the US?  Why can't they reduce costs?

How much of these problems are unavoidable because of sheer numbers and physics and how much is from laws and regulations that is preventing a more steady state situation?  An interesting section from the article:

The household price for heating oil in Greece reached 1,266 euros per 1,000 liters (264 gallons) in the second quarter of 2012, surging 48 percent from a year earlier, according to the International Energy Agency, a Paris-based organization. The same quantity cost 700 pounds (861 euros) in the U.K., according to the IEA, and $1,045 (790 euros) in New York, according to a state agency.
Greeks pay both excise and value-added taxes on heating oil that can make up 42 percent of the total cost. The mayors of the region are petitioning the government to be exempted from the tax.
Greece’s oil prices are high because of laws that protect the country’s two refining companies and prevent competition, said Pavlos Eleftheriadis, a lecturer in law at the University of Oxford in England, who studies monopolies.
...and another:
Sales of wood for heating have soared 40 percent from last year, according to Alexis Tsekouras, a Kastoria wood seller. Because of limits imposed by the forestry service on the amount of timber that can be harvested, wood is imported from Bulgaria, he said.
So interesting point there...  While it wouldn't solve the issue, the lack of competition and efficiency in the system is serving to make the entire system worse off than it should.  So this is an example where rules created to "protect" specific causes while tolerable in good times, long term the inefficiency can catch up and worsen things.  
The most interesting question:  Is there a similar situation in the US?  The US prides itself in efficiency and competition and capitalism but are we?  Refineries has not been built in the US for several decades, taxi cabs in major cities are blocking new smartphone based methods of booking, etc etc.  While I believe the US is not as bad off, I think many would be surprised to see how similar we are to certain Greek systems.  So what do I think of austerity?  Well IMF demanded austerity programs in Europe and during the Asian financial crises of the 90s have certainly proven disastrous in many ways, a slower but steadier system of cuts is much more preferable.  I don't believe most of those countries can be stimulated to grow fast enough to really negate the need for austerity however.  Maybe a new system of financing governments is needed?  You can either buy bonds or stocks in corporations, why not the same for governments?  I'll be scared to see that balance sheet however!

Monday, 17 December 2012

Apple Stock - Support Line, Can it hold?

As has been on the news in multiple places, Apple stock has taken a huge beating in the last 2-3 months.  After hitting a high of ~$700 back in Sept, its now trading down 26% to $518, hitting below $500 at one point today.  While I did make a call for a short term bottom around $620, that unfortunately didn't pan out as Apple resumed its downward trend.  So the next support line is ~$520 where it is today.  Will Apple hold the line?  

Remember, AAPL is still up 28% for the year, that's hardly something to sneeze at.  So while one metric you can use to determine if something is oversold is its yearly gain, 28% is still an justifiable fair value gain.  Another argument about the stock is that its PE ratio is very low, currently 11.75, if you look at its historical PE:

You can see that Apple did hit similarly low PEs in 2009 and in early 2012.  While 11.75 is below its historical average, it is a big strange considering Apple's earnings growth.  Forward PE is estimated at only 7-8, an incredible bargain.

So why is Apple being undervalued so much by these metrics?  Two words...iPhone competition.  For all the talk of iPads, Macs, iTunes, etc etc, the vast vast bulk of Apple's revenue (over 52%) comes from the iPhone.  With Samsung starting to gain more and more marketshare via its extremely successful Galaxy line, Windows 8 Phones launching, Blackberry 10 (don't laugh!) launching next month, its hard to see the iPhone making much headway against all that competition.  With recent reports of order cuts from supply chain checks, the market is very jittery over Apple's future dominance in the smartphone industry.  If iPhone starts dropping, Apple sales will follow and thus the fear over Apple's future.

Is this overblown?  I think so.  While I agree that iPhone's best days are behind it, Apple is still going to grow a more than respectable amount, more than justifying a 7-8 PE ratio.  So my conclusion is that the market overreacted a bit (both in taking Apple to $700 and down to $500) and that there's a good potential for a decent profit from its current price.

Wednesday, 12 December 2012

Most Overbought/Oversold Stocks

As per, an interesting list of the most overbought and oversold stocks...  I wouldn't trade based on this information but find it interesting to see where various companies lie.  Ouch on Best Buy however...

Monday, 10 December 2012

Bond Market Year To Date - Vanguard ETF

Last post I went over the year to date performance of Vanguard's ETF, specifically calling out the difference in small vs mid vs large caps.  Another interesting class of assets is the bond market, with it being split among corporate, government bonds and different maturity rates.  As most people are aware, interest rates are incredibly low in the US and that shows with dramatic drops in bond yields.  So for those who like bonds, how does the yearly results look?

As you can see below, short term govt bonds are absolutely poor, a YTD result of 0.38%...You can find almost better value in a savings account!  While overall short term bonds are ok, its driven almost entirely by the corporate bonds which ended up 5.65%.  While bonds, especially corporate bonds are not as "risk-free" as govt bonds (I put in quotes because I believe default risk is not the only kind of risk you have to be aware of), if you are interested in returns at all, short term govt bonds are useless (as intended by the Fed).

Short-Term Bond

as of 12/07/2012
YTD Returns
as of
Average Annual Total Returns
as of 11/30/2012
PriceChangeSEC Yield1 Year5 Year10 YearSince Inception
Short-Term Bond ETFBSV$81.27–$0.03–0.04%0.51%A2.05%2.39%3.85%4.35%04/03/2007
Short-Term Corp Bond ETFVCSH$80.19–$0.03–0.04%1.24%A5.65%6.41%4.61%11/19/2009
Short-Term Govmt Bond ETFVGSH$60.96$0.000.00%0.16%A0.38%0.44%1.15%11/19/2009

For the intermediate term, again corporate bonds triumph with a strong 11.5% gain, much higher than govt bond at 3% and the total bond market at 4.3%.  However, these numbers are somewhat misleading because they combine price gains with dividend yields.  If you look at the yield, you'll see most of the gains have been due to price appreciation which happened as interest rates dropped due to Operation Twist and QE3.

Above, you can see the LIBOR chart for 2012 (not exactly the same interest rate I was mentioning but you get the idea).   The relatively large drop since the beginning of 2012 is responsible for the price gain which has overshadowed the yield.  For example, govt bond yield is only ~0.7% even with a 3% overall gain, and corporate bond has a 2.5% yield vs a 11.5% gain.  Once you strip out that gain they're not nearly as attractive.  In my opinion, you have to strip that effect because you can't count on itto happen again and there's a good chance it can come back to bite you later.  True, the Fed has promised rates to stay low till 2014 but you should never invest based on promises made of the future.  

Long term bond results continue the trend of short and mid term.  While corporate bonds hit an astounding 12.8% gain and govt bonds were acceptable at 5.5%, again, its again only due to the price gain from the drop in interest rates.  Though corporate bond gained 12.8%, it only yields 4.2%.  As I said above, you absolutely can not count on that happening again so moving forward, you have to factor in 3 risks:

  • The normal bond default risks (which the market places a premium of 1.8% for corp bonds over govt bonds)
  • Yield changes due to interest rates
  • Price drops also due to interest rates.  Current prices are right now very sensitive to interest rate changes and while its unlikely to change too much in the short term, eventual increase in interest rates will drop the bond price and eat into your returns from the dividend yield.

While generally most people advise holding some bonds, I have a hard time really being convinced to put too much into it today (different story if you bought already) as the interest rate sensitivity ongoing risk is too high for me considering the extremely low yields I can expect.  Better options if you want safe income options?  I haven't figured that out myself as even generally good yielding stocks such as Utilities also have issues of their own.  As an example, XLU, the utilities ETF below  has a good yield at 4% but also has shown more volatility than is typical for a safe investment.

My personal plays lately has been Preferred Shares ETF (PFF) and Intel (INTC) as they show good yields, 5.8% and 4.5% respectively, although not without risks of their own.  I'll go into that more in later posts.