Babcock & Wilcox
Posted by Eddy Elfenbein on January 14th, 2014 at 11:33 am

One of these days, I should start a Boring Portfolio of good stocks that are as dull as dirt. Sometimes I really wonder if people understand that the stock market is more than Google, Apple, Facebook and Twitter.

The truth is there are lots of great companies out there, and many of them barely make a peep. Some of them like Moog ($MOG-A) make it on to the Buy List. Harris ($HRS), a former member, is another good example. If you’ve read me for a while, you may recognize other boring standouts like ACE Limited ($ACE) or Raven Industries ($RAVN). International Flavors & Fragrances ($IFF) is another good example.

Here’s another boring stock to put on your radar, Babcock & Wilcox ($BWC). BWC has a noble history going back nearly 150 years. They developed boilers that were used on early steamships and Teddy Roosevelt’s Great White Fleet. They also helped develop the first nuclear-powered subs.

BWC was eventually forced into bankruptcy as a result of asbestos litigation. The company eventually merged from bankruptcy and was spun-off by McDermott International. BWC started trading on the NYSE three years ago.

Here’s the company’s profile via Yahoo Finance:

The Babcock & Wilcox Company operates as a specialty constructor of nuclear components for various customers in the power and other steam-using industries worldwide. Its Power Generation segment designs, engineers, manufactures, supplies, constructs, and services utility and industrial power generation systems, including boilers used to generate steam in electric power plants, pulp and paper making, chemical and process applications, and other industrial uses. This segment also offers technologies to control nitrogen oxides, sulfur dioxide, fine particulate mercury, acid gasses, and hazardous air emissions; and construction services to steam generation or environmental equipment projects, and cogeneration and combined cycle installations, as well as provides environmental equipment and components, and related services. The company’s Nuclear Operations segment manufactures naval nuclear reactors for the U.S. Department of Energy/National Nuclear Security Administration’s Naval Nuclear Propulsion Program, which in turn supplies them to the U.S. Navy for use in submarines and aircraft carriers. Its Technical Services segment offers services to the U.S. Government comprising uranium processing, environmental site restoration services, and management and operating services for various U.S. Government-owned facilities. The company’s Nuclear Energy segment fabricates pressure vessels, reactors, steam generators, heat exchangers, and other auxiliary equipment. This segment also offers engineering services, such as structural component design, 3-D thermal-hydraulic engineering analysis, weld and robotic process development, and metallurgy and materials engineering. In addition, it provides power plant construction, management, and maintenance services; and services for nuclear steam generators and balance of plant equipment, as well as nondestructive examination and tooling/repair solutions. The company was founded in 1867 and is headquartered in Charlotte, North Carolina.

The company also has zero long-term debt and trades at 14 times next year’s earnings.

Wells Fargo Earns $1 Per Share
Posted by Eddy Elfenbein on January 14th, 2014 at 9:45 am

Fourth-quarter earnings are out for Wells Fargo ($WFC). The big bank earned $1 per share which beat estimates by two cents per share. For Q4 of 2012, Wells earned 91 cents per share. For the quarter, net income was up 10% and for the year, it was up 16% to $21.9 billion.

Chief Executive Officer John Stumpf, 60, is trimming staff and expenses as rising interest rates curtail demand for home refinancings. Wells Fargo had vowed to reduce overhead after expenses surged above its target in the previous three months.

(…)

Revenue slid 6 percent in the quarter to $20.7 billion from a year earlier and 3 percent for the full year to $83.8 billion, while profit before taxes and provisions fell 5 percent. Non-interest expense dropped 6 percent and the efficiency ratio, which measures costs as a percentage of revenue, improved to 58.5 percent from 59.1 percent in the third quarter and 58.8 percent a year earlier.

Segment Results

Profit rose in all three operating segments, with the greatest percentage gains coming in wealth, brokerage and retirement, the unit run by David Carroll. Mortgage originations fell to $50 billion, a 38 percent decline from the third quarter, and mortgage-banking income fell by almost half from year-earlier levels to $1.57 billion.

Net interest margin, the difference between what the bank makes on lending and pays for funds, fell to 3.26 percent from 3.38 percent in the third quarter.

The annual profit represents the fifth straight record year for the lender, which doubled its size with the 2008 purchase of Wachovia Corp. It was the first year since 2009 that profit surpassed New York-based JPMorgan Chase & Co., the biggest U.S. lender by assets, which earned $17.9 billion for all of 2013 — a 16 percent drop.

Wells Fargo, which ranks fourth by assets, gained 33 percent in New York trading last year, trailing the 35 percent return for the 24-company KBW Bank Index. The stock closed at $45.56 yesterday and declined to $45.43 at 8:19 a.m. in New York.

(…)

Wells Fargo, responsible for about 1 in 5 U.S. mortgages last year, has profited from Federal Reserve policies that lowered mortgage rates and sparked a refinancing wave. As rates have risen, applications have slowed and cut into originations. Rates on 30-year mortgages averaged 4.51 percent last week, up from 3.35 percent in early May, according to Freddie Mac.

Stumpf announced 5,300 job cuts in the third quarter, and another 925 in October. The impact began to take effect in the fourth quarter, according to a Nov. 7 presentation and may reduce costs by as much as $750 million annually, Deutsche Bank AG analysts wrote in a Jan. 3 report.

The bank is also facing fewer costs tied to litigation and legal expenses than its peers. Through the first nine months of 2013, those expenses fell 1.2 percent to $413 million, according to regulatory filings.

Legal settlements and other costs related to mortgage lending and sales should continue to decline, Stumpf said during a Dec. 10 investor conference. The bank began an internal ethics review this month that could last as long as two years, with plans to examine standards for how employees should act and procedures for handling conflicts of interest across more than 80 business lines.

Morning News: January 14, 2014
Posted by Eddy Elfenbein on January 14th, 2014 at 6:39 am

Eurozone Industrial Output Surges in November

Japanese Stocks Suffer Worst Day in Five Months After U.S. Jobs Report

India Considers Lifting Ban on Airbus Superjumbos

ECB’s Nowotny Would Like Better Financing for SMEs

U.S. Lawmakers Leave IMF Resources Request Out of Spending Bill

Consumers Vent Frustration and Anger at Target Data Breach

Time Warner Cable Rejects $61 Billion Bid From Charter

Suntory Overseas Thirst Drives Higher Beam Deal Value

Volvo Cars Recorded Profits in 2013, Unlike 2012

AstraZeneca Sees 2017 Revenue in Line With 2013 Level

McKesson May Pursue Celesio Joint Venture After Failed Bid

Ranbaxy Falls on USFDA Concerns; Brokers Downgrade

Lamborghini Plans SUV in 2017 in Luxury Push Into Segment

Jeff Carter: Be Like Bill Murray

Joshua Brown: Technical and Fundamental Arguments Against the Secular Bull Thesis

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Ford is the Talk of the Auto Show
Posted by Eddy Elfenbein on January 13th, 2014 at 9:43 pm

I discussed this before, but Ford‘s ($F) new F-150 is making waves at the Detroit Auto Show. The new line’s trucks are made out of alumuninum. They’re more expensive, but they are more fuel efficient.

From the AP:

Ford Motor Co. unveiled the 2015 F-150, whose body is 97-percent aluminum, on Monday. The lighter material shaves as much as 700 pounds off the 5,000-pound truck, a revolutionary change for a vehicle known for its heft and an industry still reliant on steel. No other vehicle on the market contains this much aluminum.

“It’s a landmark moment for the full-size pickup truck,” said Jack Nerad, editorial director for Kelley Blue Book.

The change is Ford’s response to small-business owners’ desire for a more fuel-efficient and nimble truck — and stricter government requirements on fuel economy. It sprang from a challenge by Ford’s CEO to move beyond the traditional design for a full-size pickup.

(…)

Ford is taking a big risk. F-Series trucks — which include the F-150 and heavier duty models like the F-250 — have been the best-selling vehicles in the U.S. for the last 32 years; last year, Ford sold an F-Series every 41 seconds. Ford makes an estimated $10,000 profit on every F-Series truck it sells. Michael Robinet, the managing director of IHS’s automotive group, says the trucks account for about a third of the company’s revenue in North America — $80 billion in 2012.

“Anytime you make a change with that vehicle, it’s got to be well thought out, because you are really playing with the crown jewels of that company,” Robinet said.

(…)

The 2015 F-150 goes on sale late this year. As for cost, Ford wouldn’t reveal prices, but its truck marketing chief Doug Scott says the F-Series will stay within its current price range even though aluminum costs more than steel. F-Series trucks now range from a starting price of $24,445 for a base model to $50,405 for a top-of-the-line Limited.

Pete Reyes, the F-150’s chief engineer, said Ford expects to make up the premium by reducing its recycling costs, since there will be less metal to recycle, and by slimming down the engine and other components, since they won’t have to move so much weight.

Aluminum is widely used on sporty, low-volume cars now, like the Tesla Model S electric sedan and the Land Rover Evoque. U.S. Postal Service trucks are also made of aluminum.

(…)

Improvements in aluminum are also driving the change. Three years ago, for example, Alcoa Inc. — one of Ford’s suppliers for the F-150 — figured out a way to pretreat aluminum so it would be more durable when parts are bonded together. Carmakers can now use three or four rivets to piece together parts that would have needed 10 rivets before, Alcoa spokesman Kevin Lowery said.

And Ford is able to take more risks. When the F-150 was last redesigned, in the mid-2000s, Ford was losing billions each year and resources were spread thin. But by 2010, when the company gave the green light to an all-aluminum truck, Ford was making money again. Mulally, a former Boeing Co. executive who joined Ford in 2006, encouraged his team to think bigger. After all, it was Mulally who led early development of Boeing’s Dreamliner, which replaced aluminum with even lighter-weight plastics to be more efficient and fly further.

(…)

Ford is convinced truck buyers will accept the change. The company says the new truck will tow more and haul more. The frame — which does most of that work — is still made of high-strength steel, and the engine doesn’t have to account for so much weight. It can also accelerate and stop more quickly. Aluminum doesn’t rust, Ford says, and it’s more resistant to dents.

Reyes says the company planted prototype F-150s with three companies — in mining, construction and power — for two years without revealing they were aluminum. The companies didn’t notice a difference.

The S&P 500 Drops -1.26%
Posted by Eddy Elfenbein on January 13th, 2014 at 4:35 pm

Ugly day today. At noon, the market was mostly unchanged, but then Dennis Lockhart, the president of the Atlanta Fed, said he supports more tapering (he’s not a voting member this year). The market started to head south. By the closing bell, the S&P 500 had dropped down to 1,819.20 which is its lowest close since December 20th. For the day, the index lost -1.26%.

My take: I don’t think there’s any real news here. The Fed will most likely continue with tapering this year but hold off on any rate increases.

Breaking down the market, the biggest damage today came among cyclical stocks. The energy, consumer discretionary, and financials got hit the most while utes, healthcare and staples were down least. Bonds were up, but not by much. The 10-year yield fell to 2.83% which is 21 points below its peak from December 31.

Our Buy List had a rough day. We lost 1.27% on the day which was almost the same as the S&P 500. Eighteen of our 20 stocks lost ground; only Ford ($F) and eBay (EBAY) made money. Ford made a lot of headlines with the unveiling of its new F-150 at the Detroit Auto Show. The new pickups are made out of aluminum. Although they cost more, they’re more fuel efficient.

Our worst performers today were Microsoft ($MSFT), Bed Bath & Beyond ($BBBY) and Cognizant ($CTSH). Next up, we get the earnings report from Wells Fargo ($WFC).

CADY
Posted by Eddy Elfenbein on January 13th, 2014 at 12:40 pm

There’s been a lot written lately on the Cyclically Adjusted Price/Earnings Ratio (or CAPE). I highly recommend what Josh and Jesse have written.

CAPE is the Price/Earnings Ratio but based on the last 10 years of earnings instead of the last one year. I’ve never been much of a fan of CAPE. My reasoning is pretty basic — valuations are cyclical so there’s no need to adjust the earnings side of the P/E Ratio.

I went to look at the data on Prof. Shiller’s website, but I made one small adjustment. I changed the earnings input to dividends.** So instead of the trailing 10 years of earnings, this is what the trailing 10 years of dividends looks like, or as I’m calling it, CADY (Cyclically Adjusted Dividend Yield):

We see much the same as the CAPE graph, the current market is vastly overpriced. In fact, with CADY it’s even more so. But this underscores the point Josh makes—it’s not different this time, it’s different every time. According to CADY, the market has been priced above its long-term average every month over the last 28 years. The current stock market would have to drop 64% before CADY reached its long-term average.

Sounds crazy? I would argue that CADY has a major advantage over CAPE in that we don’t have to dig through all the accounting issues (Jesse does a great jobs on this). A dividend payment, after all, is a dividend payment.

Some of you might object to CADY by noting that dividend payout ratios have fallen so the yield should be less. But that’s my point exactly. The nature of stock ownership has changed over the decades, so the valuations metrics have also changed. By looking at CADY, I hope it highlights the problems of looking at CAPE. I love looking at old stock data, but be leery of drawing too many conclusions when looking at stock data before 1960.

** For the excel file, I changed the J’s in column K to I’s, and divided by the H cell factor instead of vice versa.

GoodBrokas
Posted by Eddy Elfenbein on January 13th, 2014 at 11:59 am

Over the weekend, I saw “The Wolf of Wall Street.” I thought it was an entertaining albeit flawed movie. It’s disappointing to see a movie by one of your favorite directors about a subject you’re familiar with fall short of what you had hoped for. (I should mention that in the early 1990s, I was a cold-caller for a shady brokerage outfit in Boston, but rest assured gentle reader, it was a far cry from the buffoonish culture of Stratton Oakmont.)

I’m not in the habit of reviewing movies, so take my comments as the views of an amateur. For one, I though the movie was far too long. There’s nothing wrong with a movie going on for three hours, but so much of the “The Wolf of Wall Street” was redundant. We see similar scenes over and over again.

For example, Martin Scorsese’s attempt to capture the over-the-top lifestyle of Stratton Oakmont was itself over-the-top. We get it—there were drugs, prostitutes and debauchery, but does that has to be shown repeatedly?

But what troubled me most was that once you peel away the drug-coated layers of Jordan Belfort, there’s nothing particularly interesting about him, his character or his crimes. He’s just a petty thief, but on a larger scale. The guys at Stratton Oakmont aren’t smart or interesting.

I can’t help but think what a movie about the Great Salad Oil Swindle of 50 years ago would be like. Now those guys were smart.

I’ve never seen a movie where another movie, in this case, Goodfellas, ghostly floats through each scene. From Belfort’s rise and fall to his tempestuous marriage, so much of the Wolf of Wall Street strives to catch Goodfellas. Leonardo DiCaprio even sounds like Ray Liotta. But there’s a critical difference. We see behind the worldview, character and motivations of Henry Hill and his gangster associates. Consider this famous line:

Hundreds of guys depended on Paulie and he got a piece of everything they made. And it was tribute, just like in the old country, except they were doing it here in America. And all they got from Paulie was protection from other guys looking to rip them off. And that’s what it’s all about. That’s what the FBI could never understand. That what Paulie and the organization does is offer protection for people who can’t go to the cops. That’s it. That’s all it is. They’re like the police department for wiseguys.

That’s a brilliant line and it tells us so much. There’s nothing in the Wolf of Wall Street that comes close to that one line. Jordan Belfort? He’s just a dumb crook. He even distorts the famous 1991 Forbes article. For one, no one ever called him the Wolf of Wall Street. Belfort made up his own nickname. The Forbes article is one of disdain and it was clear that he was going to be caught eventually.

Even the oleaginous Gordon Gekko in “Wall Street” has a larger (but damaged) worldview. Remember that he closes his famous “greed is good” speech by saying that greed will save “that other malfunctioning corporation called the USA.” It’s that movie’s flaw that Gekko is finally done in by breaking the law instead of the consequences of how he sees the world. Chalk that up to Oliver Stone’s heavy-handedness.

A movie covering the misdeeds of Wall Street could be fascinating. But despite Mr. Belfort’s self-given nickname, Stratton Oakmont has little to do with the real Wall Street. The workings of Goldman Sachs or Morgan Stanley might as well be in another universe as some bucket shop on Long Island.

Last year, Leonardo DiCaprio played another Long Island-based fraudster who threw big parties:

If personality is an unbroken series of successful gestures, then there was something gorgeous about him, some heightened sensitivity to the promises of life, as if he were related to one of those intricate machines that register earthquakes ten thousand miles away.

There’s nothing gorgeous about Jordan Belfort. Instead of Jay Gatsby, the Wolf of Wall Street gives us a bunch of drug-addled bros.

Morning News: January 13, 2014
Posted by Eddy Elfenbein on January 13th, 2014 at 6:44 am

HSBC Sees Ruble Offering 6% Drop to Growth Effort

$51 Billion and Change: Sochi Most Expensive Olympics Ever

Cost of Cool in India? An iPhone

Chew Marks on $4 Million Has U.S. Seeing Shaggy Dog Story

Total Becomes Largest Oil Producer to Acquire U.K. Shale

With Data Vulnerable, Retailers Look For Tougher Security>

Amec Agrees to Buy Swiss Rival for $3.2 BIllion

Sanofi Pays $700 Million for Alnylam Drugs and Stake

Airbus Posts Record Orders, Ponders Higher Production

New CEO Barra A ‘Lifer’ Bent on Tearing Down Walls

BMW Aims For Another Gain in Vehicle Sales After 2013 Record

Etihad CEO Says Will Not Be Rushed on Alitalia Decision

Dollar Stores Are Now Getting Too Expensive for Many Americans

Cullen Roche: The Biggest Myths in Economics

Jeff Miller: Weighing the Week Ahead: Can Earnings Growth Propel Stocks Higher?

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With 7 Trading Days In….
Posted by Eddy Elfenbein on January 10th, 2014 at 4:42 pm

Now that the 2014 investing year is seven days old, I’m happy to report that our Buy List has a very, very, very tiny lead over the S&P 500.

Or to be more accurate, we’re down a smidgen less than they are. Through Friday, our Buy List has lost -0.29% compared with the S&P 500’s loss of -0.32%.

I do have a serious point here. I really don’t care about trading results over such a short time horizon. I believe we’ll do well over the long haul. But the important lesson here is that our Buy List is beating the market despite yesterday’s big plunge in Bed Bath & Beyond ($BBBY). That stock dropped more than 12% on Thursday.

That’s why having a well-diversified portfolio is so important. I specifically design our Buy List to be diversified so the overall portfolio is rather conservative. You’d be surprised how many investors think diversification means owning both Facebook AND Twitter. Think of portfolio diversity as a tool, not an obligation. It really does work.

How to Succeed with Brunettes
Posted by Eddy Elfenbein on January 10th, 2014 at 4:12 pm

The trading week is over, but we don’t stop bringing you valuable information. From the U.S. Navy in 1966, here’s “How to Succeed with Brunettes.”