Thursday, November 15, 2012

A Retailer to Play the Housing Market


Thanks to the recent improvement in the residential housing market, Home Depot (NYSE:HD) reported an impressive Q3. Along with the results, its shares reached its 52-week high. Home Depot has increased from $30.58 in August to $63.38, delivering to shareholders a 200% gain within just 3 months. Should investors get on the ride? Is the stock already expensive compared to what the market is expecting for the business?
Home Depot, incorporated in 1978, is a biggest home improvement retailer globally, offering shoppers a variety of building materials and home improvement products and services, with 30,000 to 40,000 products in a typical Home Depot store during the year. It classifies shoppers into three groups, including Do-It-Yourself, Do-It-For-Me, and Professional Customers. The business has 4 main product groups with somehow similar revenue contribution. The two groups that have biggest contribution were plumbing electrical and kitchen (30.5% of total sales), and hardware and seasonal (29.5% of total sales). In the last 3 years, Home Depot has performed well with an increase in average ticket, weekly sales per store, and comparable sales. 

2011
2010
2009
No of customer transactions (millions)
1,317.5
1,305.7
1,274.3
Average ticket
$53.3
$51.9
$51.8
Weekly sales per store ('000)
$601.0
$581.0
$563.0
Comp sales
3.4%
2.9%
(6.6)%
Source: Home Depot 10K
Indeed, 2010 and 2011 is where we see the improvement of Home Depot’s operation. In 2011, its average ticket and average weekly sales per operating store grew 2.6% and 3.4%, respectively. 
In the third quarter of 2012, its sales were $18.1 billion, a year-over-year growth of 4.6%. Its EPS for the quarter was $0.63, 5% higher than the same period last year. It is good to see improvement in the operating figures. Its average ticket grew 2.9% to $54.55 with 331 million customer transactions. The weekly sales per operating store was $616,000, 4.4% higher than Q3 2011. Home Depot’s CEO, Frank Blake, commented that the Q3 result beat its own expectations. It is not a one-time gain, but an overall improvement of the housing market, and at the very beginning. Furthermore, Hurricane Sandy has created huge demand about the company’s products and services. The CEO said that Home Depot has shipped around 4,000 truckloads to assist communities. Hurricane Sandy would bring more sales to the retailer, but its timing is not certain. Home Depot thought that it would recognize more sales in several quarters, which might have a similar sales impact compared to Hurricane Irene’s.
Home Depot has a strong balance sheet with balanced debt and equity. As of October, its stockholders’ equity was $17.74 billion; the long-term debt was $10.78 billion and cash on hand were $2.5 billion. Currently, Home Depot is trading at $63.38 per share; the total market capitalization is $95.54 billion. Home Depot is trading at 17.1x forward earnings and 1.2x PEG. It is paying 29 cents quarterly dividend with a 1.9% dividend yield.
Home Depot’s closest competitor, Lowe’s (NYSE: LOW), has experienced the same increases, but a more volatile trend. Year-to-date, the returns of both Home Depot and Lowe’s are quite similar, but they have diverged since May. 
Indeed, Home Depot is worth it. Over the previous 12 months, Home Depot has better operating figures with inexplicably similar valuations compared to Lowe’s. 

HD
LOW
Net margin (%)
5.7
3.58
ROIC (%)
14.9
7.62
D/E
0.6
0.6
Forward P/E
17
15
Dividend yield (%)
1.9
1.9
As we can see, Home Depot had a higher net margin than Lowe’s. Its return on invested capital was nearly two times higher than that of Lowe’s. Both employed the same capital structure, paid the same dividend yield and received similar valuations. 
My Foolish Take
With a leading position in the world and  better operating figures than its peer, but similar valuations, Home Depot is definitely a better pick among the two. Investors might consider Home Depot, as it seems to be a nice play on the improving housing market in the US. 

Do Not Panic About Seth Klarman's Sales


Seth Klarman’s actions should be taken into consideration because of his admirable record, a return of 20% per year since 1983. In the beginning of this month, I wrote about BP (NYSE:BP), the biggest position of Seth Klarman. In the second quarter, his Baupost Group owned nearly 13.5 million BP shares, accounting for 14.2% of his total portfolio. His second biggest position was Hewlett-Packard (NYSE: HPQ), with more than 26.8 million shares, accounting for 14% of his portfolio. However, in this third quarter filing, he has trimmed down these two positions significantly. The position in BP was reduced by 16% to 11.26 million shares, whereas the position in HP was reduced by 46% to nearly 14.38 million shares. His total equity portfolio decreased from $3.8 billion in Q2 to $3.3 billion this quarter. What are the key takeaways for investors after Seth Klarman’s recent actions in equity market?
Overall, the potential fiscal cliff fear has driven investors out of equities, triggering a huge sell-off in the broad indexes. I think Seth Klarman has been raising more cash to bet on new investment opportunities arising from the recent market downturn. BP is still his biggest position with more than $477 million in value. BP is one of the major global oil/gas players with 17.75 billion BOE of proved reserves, higher than that of Chevron and Royal Dutch Shell. The company’s recent error was the Gulf of Mexico oil spill crisis (Deepwater Horizon). The company estimated that it would take $40 billion to clean up everything. In March, it reached $7.8 billion settlement for the crisis’ economic losses. To date, it has paid out $19.1 billion into a trust fund for this oil spill incident. Even including this, its balance sheet still looks strong. As of September, it had $118.8 billion in stockholders’ equity; debt was less than half at $49 billion. BP still had more than $16 billion cash on hand. In addition, it raised its quarterly dividend by 12.5% to $0.09 per share, which would be paid in the next quarter. At the current price of $40.54 per share, the total market capitalization is $128.75 billion. The market is valuing the company at only 7.3x P/E. 
Klarman’s second largest holding, Hewlett-Packard, is still a struggling business. The poor performance is due to weaker PC environment as tablets and mobile devices have replaced PC gradually. Ben Reitzes, a Barclay’s Capital analyst just cut his 2012 sales forecast from 363.92 million to 352.75 million PC units. He projected a 4% decline to 338.34 million units in 2013. He commented about Hewlett-Packard: “we are cautious on HP’s PC segment given secular pressures, share losses, market confusion over ultrabooks and Windows 8, and a slowdown in markets like China”. Famous short-seller Jim Chanos thought that HP was a value trap, as it kept growing via acquisitions. So the free cash flow after adjusting acquisition costs was a huge negative number. He was pessimistic about PC business: “Laptops will continue to lose market share to tablets and other devices. People will still buy PCs, they just won't make as much money." HP’s CEO Meg Whitman believed that the turnaround plan for the business would take time. As 2013 would be a fix-and-rebuild year, investors should not see any sign of recovery until 2014. Over the past twelve months, HP has generated losses. It is trading at $13.14 per share; the total market capitalization is $25.84 billion. The market is valuing HPQ at 0.8x P/B. 
My Foolish Take
There might be some other reasons for the reduction in two biggest positions in his portfolio. There is no reason to be panic if we are confident in our own judgments. Personally, I think HP would be an opportunistic play on the turnaround plan. Investors might buy into HP if they believe in Meg Whitman to lead the business successfully. It is really a bet in Meg Whitman. For BP, it can be considered a value play, as the business has a strong balance sheet, trades at low earnings multiple and pays a good dividend yield for investors.

This Discount Marketplace is No Discount for Investors


Everybody would like to purchase goods and services at a discount. That is why the discount marketplace business has become more and more popular. However, those businesses might face difficulties in the future due to increasing competition. Groupon (NASDAQ:GRPN), a leader in this field, had been a stock market darling, with the stock price as high as $26 in November 2011. However, the stock has experienced a downward spiral, with Groupon gradually declining to only $2.69 now, one tenth of what it was trading for one year ago.
Groupon created a discount marketplace, where it negotiated good deals with merchants, then offered those deals to customers in the form of discount coupon. In this value chain, all three parties benefit. Merchants can rely on this for both sales and marketing for their products and services. Customers can use those products and services at a deep discount. Of course, Groupon would get the benefits with its intermediary services too.
Recently, the company announced its better than expected results for Q3 2012. Its revenue was nearly $569 million, a 32% year-over-year growth. The impressive double-digit growth was due to an increasing number of active customers. Its EPS improved from a loss of $0.18 in 2011 to break even this year. Notably, the weighted average basic shares outstanding doubled, from 308 million shares last year to more than 653 million shares this year.
Andrew Mason, Groupon’s CEO is quite optimistic about the company’s future:
“Our solid performance in North America was offset by continued challenges in Europe. Groupon Goods have evolved into a second major category that our customers clearly love. With deals on everything from designer sunglasses to big-screen televisions to most-wanted toys, we think it will be a great gifting destination this holiday season.” 
As of September 2012, Groupon had nearly $800 million in stockholder equity, no debt, and $1.2 billion in cash. Out of $1.23 billion in liabilities, the accrued merchant payables and accrued expenses were $573.5 million and $245 million, respectively.
Even with the impressive growth in Q3, investors are still pessimistic about Groupon; after all, the growth is just an improvement from a loss to a break even. Furthermore, it is a “low barrier to entry” service business. That is why even though the industry is quite trendy, it is hard for investors to pick the winner in the long run. Groupon has been a leader because it has a wide coverage of merchants to offer the best deals to customers. It has the fixed price, which is valid until a certain amount of customers accept the deal. For merchants, Groupon doesn’t charge fees for marketing services; it instead made its money by taking a percentage of each coupon it can sell.
Unfortunately, competitors including LivingSocialTravelzoo (NASDAQ: TZOO), andAmazonLocala partnership between LivingSocial and Amazon (NASDAQ: AMZN), have been fighting to take market share from Groupon. According to Yipit, in the North American market Groupon’s market share fell to 53% in Q2 this year, 3% lower than the previous quarter, whereas LivingSocial was up 2% to 22%. Travelzoo moved up a little to 3% of the total market, and AmazonLocal took 2% of the market.
Even with a much smaller market share, AmazonLocal has tremendous advantages, as it is a combination of LivingSocial and Amazon. It can leverage the huge customer database and relationship of Amazon and use its parent's reputation to build the business. With its fame, Amazon is a company that merchants love to attach their names to. By cooperating with AmazonLocal for their deals, consumers might have a perception that the merchants have been endorsed by Amazon.
Groupon is trading at $2.69 per share; the total market capitalization is $1.76 billion. Over the past twelve months it has been generating losses, so its P/E ratio is not valid. The market is valuing Groupon at 2.3x its book value. Its smaller peer, Travelzoo, is generating profits. It is trading at $17.61 per share, with total market capitalization of $278.25 million. The market is valuing Travelzoo at 13.6x P/E and 5.9x P/B. It seems to be reasonably, priced with its PEG ratio of 1.0x.
My Foolish Take
Groupon is still the leader in the industry, but other competitors are fighting back vigorously to bite more shares of this market. It is hard to predict what would happen in the future. The industry will be prospering, but nobody knows who will come out as a winner in the future. I would rather stay away from all these companies for now.

This Discount Marketplace is No Discount for Investors


Everybody would like to purchase goods and services at a discount. That is why the discount marketplace business has become more and more popular. However, those businesses might face difficulties in the future due to increasing competition. Groupon (NASDAQ:GRPN), a leader in this field, had been a stock market darling, with the stock price as high as $26 in November 2011. However, the stock has experienced a downward spiral, with Groupon gradually declining to only $2.69 now, one tenth of what it was trading for one year ago.
Groupon created a discount marketplace, where it negotiated good deals with merchants, then offered those deals to customers in the form of discount coupon. In this value chain, all three parties benefit. Merchants can rely on this for both sales and marketing for their products and services. Customers can use those products and services at a deep discount. Of course, Groupon would get the benefits with its intermediary services too.
Recently, the company announced its better than expected results for Q3 2012. Its revenue was nearly $569 million, a 32% year-over-year growth. The impressive double-digit growth was due to an increasing number of active customers. Its EPS improved from a loss of $0.18 in 2011 to break even this year. Notably, the weighted average basic shares outstanding doubled, from 308 million shares last year to more than 653 million shares this year.
Andrew Mason, Groupon’s CEO is quite optimistic about the company’s future:
“Our solid performance in North America was offset by continued challenges in Europe. Groupon Goods have evolved into a second major category that our customers clearly love. With deals on everything from designer sunglasses to big-screen televisions to most-wanted toys, we think it will be a great gifting destination this holiday season.” 
As of September 2012, Groupon had nearly $800 million in stockholder equity, no debt, and $1.2 billion in cash. Out of $1.23 billion in liabilities, the accrued merchant payables and accrued expenses were $573.5 million and $245 million, respectively.
Even with the impressive growth in Q3, investors are still pessimistic about Groupon; after all, the growth is just an improvement from a loss to a break even. Furthermore, it is a “low barrier to entry” service business. That is why even though the industry is quite trendy, it is hard for investors to pick the winner in the long run. Groupon has been a leader because it has a wide coverage of merchants to offer the best deals to customers. It has the fixed price, which is valid until a certain amount of customers accept the deal. For merchants, Groupon doesn’t charge fees for marketing services; it instead made its money by taking a percentage of each coupon it can sell.
Unfortunately, competitors including LivingSocialTravelzoo (NASDAQ: TZOO), andAmazonLocal, a partnership between LivingSocial and Amazon (NASDAQ: AMZN), have been fighting to take market share from Groupon. According to Yipit, in the North American market Groupon’s market share fell to 53% in Q2 this year, 3% lower than the previous quarter, whereas LivingSocial was up 2% to 22%. Travelzoo moved up a little to 3% of the total market, and AmazonLocal took 2% of the market.
Even with a much smaller market share, AmazonLocal has tremendous advantages, as it is a combination of LivingSocial and Amazon. It can leverage the huge customer database and relationship of Amazon and use its parent's reputation to build the business. With its fame, Amazon is a company that merchants love to attach their names to. By cooperating with AmazonLocal for their deals, consumers might have a perception that the merchants have been endorsed by Amazon.
Groupon is trading at $2.69 per share; the total market capitalization is $1.76 billion. Over the past twelve months it has been generating losses, so its P/E ratio is not valid. The market is valuing Groupon at 2.3x its book value. Its smaller peer, Travelzoo, is generating profits. It is trading at $17.61 per share, with total market capitalization of $278.25 million. The market is valuing Travelzoo at 13.6x P/E and 5.9x P/B. It seems to be reasonably, priced with its PEG ratio of 1.0x.
My Foolish Take
Groupon is still the leader in the industry, but other competitors are fighting back vigorously to bite more shares of this market. It is hard to predict what would happen in the future. The industry will be prospering, but nobody knows who will come out as a winner in the future. I would rather stay away from all these companies for now.

Wednesday, November 14, 2012

Insiders Are Selling This Freight Transporter, Should You?


Insiders sell their company’s stock for a variety of reasons. It may or may not indicate their bearish attitude toward the company. However, investors should be worried when insiders execute large sell orders. Investors need to dig deeper into the fundamentals of the company to determine whether they should follow the insiders and sell, or not. In November, two insiders of Landstar System (NASDAQ: LSTR) including its Chairman, CEO Henry Gerkens, and Lead Independent Director, Diana Murphy, sold ~ $2.7 million. The CEO alone has sold more than 36,000 shares, at the price of around $51.10.
Landstar is in the business of freight transportation and supply chain solutions. The company uses third parties for truck capacity providers, including BCO independent contractors, truck brokerage carriers, ocean and air cargo carriers, etc. The majority of revenue was generated via BCO independent contractors, with $1.37 billion, and truck brokerage carriers, with more than $1 billion in 2011. The good thing is that Landstar has a quite diversified customer base from many industries and regions. In the fiscal 2011, its top 100 customers accounted for around 44% of total sales. 
Looking at historical profitability of Landstar, I was quite impressed with the company’s capability of generating double-digit returns consistently. Since 2002, it has managed to deliver more than a 20% return on invested capital. For the trailing twelve months, the ROIC was as high as 27.15%. It is a low margin business, the net margin has fluctuated in the range of 3.18% to 4.76%, but it has a high return on equity, nearly 40% over the previous 12 months. The high return on equity was due to high asset turnover of 3.29x and good amount of financial leverage, of 2.45x.
Compared to its peers including J.B. Hunt Transport Services (NASDAQ: JBHT) and Swift Transportation (NYSE: SWFT), Landstar seems to be the most balanced choice for investors. 

LSTR
JBHT
SWFT
Net margin (%)
4.56
5.68
3.05
ROIC (%)
27.15
20.21
6.44
D/E
0.3
0.7
7.6
P/E
18.4
24.1
12.8
Dividend yield (%)
0.5
0.9
N/A
Over the previous 12 months, Landstar delivered the highest return on invested capital, and that high ROIC has been consistent in the last 10 years. Its leverage level was the lowest among the three. I do not think Swift Transportation is the company of choice, as it had the lowest return on invested capital, quite high debt level, and does not pay dividends to shareholders. J.B Hunt had the highest net margin, but its ROIC ranks second after Landstar’s. In addition, J.B Hunt is valued the most expensive among the three, with 24.1x P/E. Currently, Landstar is trading at $50.31 per share, with a total market capitalization of $2.34 billion. J.B Hunt is trading at $60.04 per share, with a total market capitalization of $7.10 billion. Swift Transportation is the smallest company among the three, with a market capitalization of $1.33 billion. Its shares are trading at $9.55.
My Foolish Take
Landstar seems to be the best among the three for investors to consider investing in. However, insiders are selling large amount of shares in the market. Furthermore, insiders do not own a large amount of stocks in the company. It is reported that those two selling insiders, the Chairman and CEO is holding 104,451 stocks, and Diana Murphy is holding only 44,726 stocks directly. All key insiders own only 0.76% of total shares outstanding. Those factors make me restrain from investing in this stock now.

Small Cap Series: This Retailer is a Screaming Buy


Small cap investing is fun, rewarding and quite interesting. As Warren Buffett once mentioned that he would confidently deliver 50% annualized compounded returns if he managed around $1 million. His partner, Charlie Munger said if we wanted success, we should go to where we did not have any competition.  That is true. The key is to invest in small, profitable businesses, which haven't been spotted by any radars or covered by numerous analysts on Wall Street. However, investors need to be very patient, because sometimes it takes years for the stock to move, and sometimes several opportunities are quite illiquid. In this small-cap opportunitiesseries, I will present small cap ideas suitable for investment.
This business is a specialty retailer of home appliances, consumer electronics, mattress, computers, etc. It has been in the business for 57 years, operating 208 stores in different states in the US. The company differentiates itself from other home appliance retailers by giving the customers’ educational shopping experience and next day delivery services. The name of the retailer is hhgregg (NYSE: HGG). Over the past 10 years, HGG has managed to increase its revenue and profits gradually.
USD million
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Revenue
617
753
803
900
1,059
1,257
1,397
1,534
2,078
2,493
Net income
25
28
29
22
21
21
36
39
48
81
For the past 10 years, its revenues have grown from $617 million to nearly $2.5 billion, marking a 15% compounded annualized growth. Its net income was $25 million in 2003. It was $81 million ten years later, marking an annualized growth rate of 12.5%. In the same period, HGG has reduced its number of shares outstanding from 60 million in 2003 to only 36 million this year.
In terms of profitability, since 2008, the retailer has delivered a double-digit return on invested capital. In 2012, the ROIC was more than 25%, increasing from 13.17% in just 5 years.

2008
2009
2010
2011
2012
Net Margin (%)
1.7
2.61
2.55
2.32
3.26
Asset Turnover
4.05
4.11
3.21
3.6
4.18
Financial Leverage
4.04
2.8
2.39
1.74
1.79
ROE (%)
43.7
35.29
20.71
16.92
24.07
ROIC (%)
13.17
18.58
14.01
14.65
24.07
In the last 5 years, HGG has managed to perform several improvements. It has increased its net margin to the highest level of 3.26% in 2012. Along with the improvement in net margin, the asset turnover fluctuated but reached the highest level in fiscal 2012 too, of 4.18x. The decreasing trend in its ROE was due to the reduction in financial leverage over time.
Operationally, the retailer still had a continuous decrease in its comparable store sales. However, the decrease has been gradually narrowed down, from -8.3% to only -1.1%.

2008
2009
2010
2011
2012
Comp sales growth (%)
4.8
-8.3
-6.6
-4
-1.1
Cash conversion cycle
25.87
29.89
27.84
26.62
33.45
The cash conversion cycle (CCC) is a ratio, which tells investors how many days it takes a retailer to convert its payables, inventories and receivables into cash. The lower the ratio is, the better. The higher CCC in 2012 was mainly due to lower payables period. So the retailer needed to pay its suppliers quicker.
At this time of writing, HGG is trading at $8.11 per share. The total market capitalization is $280.61 million. The market is valuing HGG at a cheap earnings multiple, of only 4x P/E, which is only a third or less of its average historical valuation.
It is quite a tiny retailer compared to its other competitors such as Best Buy (NYSE: BBY), and Wal-Mart (NYSE: WMT). However, HGG’s operating figures are far more superior. Trailing twelve months, Best Buy is currently delivering a loss while trading at 50% of its book value, but it offers its shareholders a 4.3% dividend yield. Wal-Mart had a net margin of 3.53%, delivered a return of 13%. It pays investors 2.2% dividend yield. The market is valuing Wal-Mart at 15.2x P/E. 
My Foolish Take
From all operating and profitability numbers, HGG seems to be a screaming buy for long-term and patient investors. Personally, it could be a buy for me. However, investors need to see whether HGG is suitable for themselves, and for their portfolios as well as their liquidity needs before initiating a position in this retailer.

Iron Ore and Three Companies to Avoid


Iron ore is one of the most important natural resources. It is a raw material to produce steel, the most commonly used metal in the world, accounting for more than 95% of metals used per year. The price of iron ore has experienced a nice run up in several years. At the end of 2008, the iron ore price was around $60. It shot up to more than $170 in the second quarter of 2010, reaching the top of nearly $190 in the first quarter 2011. However, it has experienced a gradual decline to $114 now. With that high volatility in iron ore pricing, should investors buy or sell iron ore? What should we do with commodity companies, which are involved in iron ore/steel making activities?
First, let's have a look at iron price's chart from 2009. It experienced a nice increase and has been trending down. 
Source: FTalphaville.ft.com
Looking at a longer horizon, it is the most booming period over the last 20 years.
Source: indexmundi.com
However, the trees can’t grow to the sky. Everything should follow the common nature of economics, supply and demand. Several global steel companies have warned investors about the demand slowdown in global iron ore demand. On 30th August this year, Baosteel’s senior executive said that as supply kept rising, the global iron ore demand might drop in the second half of this year. That would put the downward pressures in steel and iron ore prices. BHP Billiton (NYSE: BHP), the biggest global miner, commented that iron ore demand from China has slowed down by more than 50%. Alberto Calderon, BHP’s chief commercial officer said: “Demand will grow less, although still quite impressively and the producers, in general, are more prepared. This doesn’t mean that the boom has ended, but it does mean to expect that prices will grow or even stay at very high levels, you would do it at your own peril.”
David Einhorn, one of the famous short-sellers and hedge fund managers, also showed his bearish attitude towards the iron ore as he selected it as one of his short targets. He said that the higher prices would attract everybody in the field, with new players and new supplies, and there would be a huge amount of supply, which was going to be online in the market. Iron ore is the main raw material for steel production. Einhorn thought that the last year which steel had double-digit growth in its demand was 2010. There would be big projects built in 2010/2011 were coming into the field with massive supplies, and of course, the projects couldn’t be postponed as it would cost project owners a lot of money. That would cause the significant declines in both steel and iron ore prices. Deputy director at Lange Steel Information Research Center, Wang Guoping predicted that the imported iron ore prices might fall to $70 a ton next year. It was reported by China Daily that many Chinese iron ore producers stopped their production, stockpiled a huge amount of iron ores across the country.
Because of the pressures in iron ore and steel market, several global producers would take a hit, including BHP, Vale (NYSE: VALE) and The United States Steel Corporation (NYSE: X). Those three companies were in the “loss list” of Einhorn as well. BHP produced nearly 39.77 million tons of iron ore in the quarter ended September 2012, marking a year-over-year growth of 1% but a sequential decline of 3%. However, BHP has a strategy of diversifying its commodities. As of fiscal 2012, iron ore’s revenue was $22.6 billion, accounting for 31.3% of total revenue. BHP is trading at $71.22 per share; the total market capitalization is $114.36 billion. The market is valuing BHP at 12.3x P/E and 2.9x P/B. In contrast, iron ore has made up a big chunk of Vale’s operating revenues. Sales of iron ore and iron ore pellets were $43.1 billion, accounting for 71.5% of total revenue in 2011. Vale is trading at $18.10; the market capitalization is $93.28 billion. The market is valuing Vale at 4.5x P/E and 2x P/B. United States Steel has three main steel products: flat-rolled, USSE and Tubular with total sales of $19.7 billion in fiscal 2011. It has been a constant dividend payer with 5 cents quarterly dividend since 2009. The share is trading at $21.10; the total market capitalization is $3.04 billion. Currently, US Steel is valued at 0.8x P/E in the market. Because it has trailing twelve month losses, so its P/E is not valid. 
My Foolish Take
Personally, I think iron ore is the commodity to be shorted in the future, until the iron ore and steel market is in equilibrium or towards demand shortage again. Among the three companies, BHP seems to be the least exposed because of its commodity diversification strategy. However, the overall iron ore supply/demand has prevented me from making a bet in this field.

Three Stocks With 10-Years of Increased Dividends


We invest for two kinds of return: dividends and capital appreciation. With different goals and priorities, some might prefer dividends, and others might prefer capital gains. Retired people might opt for dividend stocks because they provide a constant income stream during the investment lifetime, so that they can have income to cover their daily living expenses. However, in order to have a reliable income stream, the dividend should be sustainable. It means the company should have a strong balance sheet, and a history of paying dividends. In addition, the payout ratio should not be too high. In the search for those investment opportunities, I have run a screen with 5 different criteria: (1) 10 years of continuously increasing dividends, (2) debt/equity lower than 50%, (3) Yield higher than 1%, (4) payout ratio less than 30%, and (5) return on invested capital higher than 20%. Here are the 3 top results:
Nu Skin Enterprise (NYSE: NUS) is one of the leading global direct selling corporations in 52 countries globally. Its main product is the high-end anti-aging and nutritional supplements with two main brands, Pharmanex and Nu Skin, with 45% and 55% revenue contribution respectively. In 2011, the majority of Nu Skin revenue was generated in North Asia (43%) and Greater China (20%). Nu Skin has a long history of paying increasing dividends for more than 10 years. Currently, it is paying 20 cents quarterly. The dividend yield is 1.75%. It only pays 23% of earnings to shareholders. In the past 12 months, its return on invested capital was nearly 29.5%. Nu Skin has a quite strong liquid balance sheet. Its D/E is around 30%, with $550 million in shareholders’ equity, $183 million in long-term debt and $338 million in cash. It is currently trading at $45.61 per share; its total market capitalization is $2.68 billion. The market is valuing Nu Skin at 13.8x P/E and 4.9x P/B.
Cummins (NYSE: CMI) is a business with a long history of manufacturing diesel engines. It is considered as a leader in making diesel and natural gas engines to more deliver in more than 190 territories via the network of 600 distributor locations and 6,500 dealer locations. The majority of sales come from the domestic market in the US, accounting for around 41% of total sales in 2011. Cummins has an increasing and sustainable dividend paying history. In 2002, it paid $0.30 per share in annual dividend. Last year, the dividend increased to $1.33 per share. The current payout ratio is only 17.7%, with the yield of more than 2%. The trailing twelve-month return on invested capital was 27.6%. It has a debt/equity ratio of more than 10%. As of September, it has nearly $6.5 billion in stockholders’ equity, $1.3 billion in cash, and only 670 million in long-term debt. The stock is trading at $97.10 per share; the total market capitalization is $18.46 billion. The market is valuing Cummins at 10.1x P/E and 2.8x P/B.
ExxonMobil Corporation (NYSE: XOM) is the global leading oil/gas and energy corporation. It used to be the largest publicly traded company in the world. It was ranked #1 in Fortune 500 in May 2012 and #2 in FT Global 500 in July 2012. As of fiscal 2011, it had around 24.9 billion BOE. The company has paid increasing dividends for the last 10 years. It is currently paying 57 cents quarterly dividend. The payout ratio is only 22%, with the yield of 2.61%. Over the previous 12 months, the return on invested capital is 25.2%. For the balance sheet, it has $166.7 billion in stockholders’ equity, $13 billion in cash and only $8.9 billion in long-term debt. It is currently trading at $87.21 per share; the market capitalization is $397.62 billion. The market is valuing XOM at 9.2x P/E and 2.4x P/B.
My Foolish Take
With a history of paying increasing and continuous dividend, strong balance sheet, low payout ratio and high return on invested capital, all three companies mentioned above should be considered to be in long term portfolios of both income and value investors.  

Beware of Facebook's Near-Term Volatility


Facebook (NASDAQ: FB) is an interesting business. It is not just a simple social networking site anymore. It is a society for everybody to get updates from friends, family members, and other people. When surfing Facebook, one becomes an addict, it is hard to get away from it. By uploading pictures, stories, and thoughts on the site, users have let Facebook own those data, either public or private. In the beginning of October, Facebook reported to have 1 billion users, a seventh of the world’s population. The population of Facebook is just less than China and India, and three times bigger than the United States.
It definitely sounds like a sexy business. However, should investors own it? If we should, should we own it now or later? Of course, the cheaper we buy a stock, the better.
As we all might know, Facebook’s insiders have lock-up periods, which restrict them from selling the shares in the market. I think whenever a certain lock-up is expired, that would trigger sells no matter what. That certainly affects Facebook’s stock price, especially when there is a huge amount of shares that could be sold freely by insiders. Here is the schedule for certain lock-up to be expired since October this year:
As we can see, on Wednesday, November 14, the lock-up period of the largest batch with nearly 750 million outstanding shares and 28 million shares underlying pre-2011 RSUs would be expired. Currently, Facebook has around 2.17 billion shares outstanding. So this lock-up expiration will release around 30% of the total shares. That would be a trigger for an increased volatility in the next several weeks for Facebook.
For the previous two weeks, Mai.ru Group has been a seller of Facebook shares as well. Mail.ru founder, billionaire Alisher Usmanov invested in Facebook when its valuation was in the range of $6 billion - $10 billion. He has made a good decision to sell Facebook shares before an expiration of the previous lock-up period. The sale value at that time was worth $370 million with 16 million shares reducing Mai.ru’s stake in Facebook from 1.34% in September to only 0.75% at the end of October. However, in its corporate website, it is reported that the ownership of Facebook was only 0.52%, so the stake in Facebook has reduced further for the past week. In the past, Mail.ru and its investors must be quite happy with Facebook trades. During Facebook’s IPO, it received $745 million from Facebook’s sale, and it would pay $795 million to investors in the form of special dividends.
As of September, Facebook had $14.1 billion in stockholders’ equity, $10.5 billion in cash and only $1.86 billion in total liabilities. Currently, Facebook is trading at $19.21 per share. The total market capitalization is $41.62 billion. It is valued at more than 200x P/E and 2.9x P/B. Professional networking site, LinkedIn (NYSE: LNKD) is worth one fourth of Facebook in terms of market capitalization, but with a crazier valuation. LinkedIn has experienced a continuous decline since September. It is currently trading at $95.62 per share, and valued at 625x P/E and 12.4x P/B. However, as I mentioned in my previous posts, LinkedIn had 175 million users, only one sixth of Facebook's. Thus, at the current price, each LinkedIn user is valued at $58.68 in the market, whereas each Facebook's user is valued at $41.21. A higher valuation of LinkedIn might be due to the stickiness of its business model. It is a professional networking site with people’s business contacts and resume, which often takes people more seriously. I personally think LinkedIn’s users would be more loyal than Facebook’s. Furthermore, because of its professionalism, LinkedIn became the top networking site with sticky users and the highest ability for customer base’s monetization 
My Foolish Take
Personally, I would like to get a piece of Facebook too. However, with the largest batch of recent lock-ups having expired, investors would suffer from volatility and price declines in a short period of time. In a near future, there would be more volatility and more price pressure for Facebook’s shares. I would rather wait for more declines to initiate a position in the best global social networking company.
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