Saying Goodbye & Hello

Today marks the last day of my internship at CIC Wealth, and after 8 months, I have so much to be thankful for, so I will say sorry in advance if this post gets a little long. When I started my internship in September, I never knew how much responsibility I would be given, nor did I anticipate the tremendous family atmosphere I would encounter over the course of the eight months.

To start, I want to thank Michael Fein for giving me the tremendous opportunity to work alongside you. The responsibility you entrusted me with from the beginning was extremely humbling, and it forced me to adapt and learn in the real world. You made me feel that my research and analysis mattered, which meant the world to me. The only thing an intern can wish for is to feel appreciated, and you showed that every single day, I was lucky. Your leadership style was inspiring, and along with the knowledge of the financial markets, you taught me more about the psychology of the investing client and opened my eyes to what it means to advise people on their investments. It’s easy to look at investing through rose colored glasses when you’re not risking money, but through this internship you helped me realize what was truly at stake: people’s hard earned money.

I also had the pleasure of working for Frank Cappadora, head portfolio manager at CIC Wealth. Frank took the time to inquisitively listen to each crazy question I would throw his way, whether it was about Russian oil companies, discount pharmaceutical companies, or who the best golf player in the world was. Frank listened, and he listened each time. The impact that that had on me was tremendous, and the knowledge I gained through listening to each answer helped me develop my own personal investment philosophy a bit clearer. Frank has a no – nonsense demeanor about him, but he truly cares about people, and he truly loves what he does.

I didn’t get the chance to work directly with Andy Smith, but I spent countless minutes in his office talking about business, life, cars, and fitness. Andy is a renaissance man, he knows so much about such a variety of topics. His thirst for knowledge is infectious when you’re around him, and he forces you to strive to be a better person through how he lives his own life. Andy is tremendous at what he does, and he takes pride in his work.

Finally, I can’t finish this thank you without mentioning Heather Betz and Deborah Kruse. Both of them became like family aunts to me, and they always made sure the office was running in tip top shape. Heather is a ball of energy, and has a warm spirit that is contagious throughout the office. Deborah is one of the best listeners I have ever met. She cares deeply about people and truly wants to know how someone is doing and what they’re planning on doing. Deb always asked me if I was doing anything “fun” during the weekends. Unfortunately I would usually tell her that my version of “fun” is analyzing different stocks, or reading the reports on the latest emerging market economy, but it was heart-warming to talk to someone who got excited in something you found exciting yourself.

As I leave for Morgan Stanley, I am torn between extreme excitement and sadness in leaving. The family I made at CIC Wealth will stay family forever. My success, if God willing, will be in large part due to the knowledge I gained at CIC Wealth. I would not have gotten into Morgan Stanley without the knowledge and experience I gained at CIC Wealth.

I look forward very much to my new chapter at Morgan Stanley, and I will never forget the family that took me in to help me learn the starting ropes.

Thank you CIC Wealth,

Sincerely,

Brandon

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My Positions in My (Paper) Account

I want to start making monthly posts about the state of my portfolio, why I have positions the way I do, and what I am planning going forward. This will be more of a bulleted style list of things, whereas my companies analyses are droves of paragraphs. Without further hesitation, let’s roll.

Long Positions

British Pound (GBPUSD – Forex): 10.80 : 1 Risk Reward Set – Up

When Theresa May announced the Snap Election that would take place on June 8th, it got me really thinking about the state of the British Pound, and the state of the British Economy as a whole. Technically the charts set up beautifully. Looking at the weekly charts I noticed an extended triangle / wedge pattern forming, and I was waiting for the price action to shoot through the resistance line of around 1.252. I put my Buy Limit order in right above the resistance line, it got filled, and I’ve been moving my stop up ever since. I trade started out as a 3:1 risk reward ratio (my ideal setup), but when the trade quickly went my way, I moved my stop loss up proportionally, while keeping in mind my long term thesis on it. As it sits, I’m risking only 0.11% of my capital from the previous 1% entry risk, and any movement upwards over the course of next week could put me in the breakeven / small profit category WORST CASE scenario.

From a Macro Perspective, I am taking the bet that the British economy is going to be better than most people think. Yes they will have some difficulties, and if the Scots decide to leave the EU, they will take their oil with them, which is a huge factor in the success of the British economy. However, I remain long term bullish on the Brexit situation, and I believe capitalism will help bolster the nation’s currency higher. I don’t necessarily have an initial profit target, however, if the trend goes against me, I hope I am smart enough to have my stop in place.

Ocean Rig UDW INC (ORIG) – US Equity: 26.6 : 1 Risk Reward Ratio

Betting only 0.82% of my capital on this little trade here. ORIG is about as distressed a company as one can find. With mounting debt and pressure from distressed debt collectors, ORIGs life line as a company is hanging in the balance. So why would I want to invest in something like this? I am looking for a restructuring deal to take place. ORIG has a lot of assets that it can liquidate, making it a cash play for a potential buyout or restructuring process. It received over 75% support from shareholders for its new restructuring deal, and given the value of the company ($0.25 / share), the risk reward is very asymmetrical. I put my stop in at $0.21, so anything below that would stop me out of the trade.

This might be one of my most confusing bets in terms of the company itself, however I believe that in order to achieve abnormal returns, one must be willing to look in the depths and the cobwebs of the market.

Short Positions

US Dollar (DXY – Forex): -4.61 : 1 Risk Reward Ratio

On April 10th I entered a short position in the US Dollar. After looking at the price action, I noticed that on the daily charts, DXY had crossed its 50 MA in a bearish manner. So, towards the end of the trading day, I shorted the currency risking 1% of my capital, with an initial profit target for a 3:1 risk reward. As luck would have it, the trade has gone in my favor, so much so that I am able to move my stop loss to the point where if my stop does get triggered, I walk away with 1.04% profit. That’s not bad, worst case scenario is a 1.04:1 risk reward, I like the positivity about that.

Obviously I hope the trend continues to fall in my direction, as I think it might. The last three days look like a patented pullback, and hopefully the dollar moves lower into next week. Once again, no profit targets on this trade, just hoping to move my stop loss further and further down the trade.

Netflix Inc. (NFLX – US Equity): 4.01 : 1 Risk Reward Ratio

Risking only 0.50% of my capital on this bet, I decided to short Netflix from a technical and fundamental perspective. Looking at the fundamentals, Netflix has tremendous amounts of debt, and to me, a good deal of the optimism around Netflix is already discounted in the price. Netflix also failed on international subscriber numbers, which is the metric that I care about the most with the company. What I realized about companies like Netflix and Tesla is that its not the earnings numbers themselves that move the stock, its what makes up those earnings numbers. For Tesla its the amount of cars they sell, for Netflix its the amount of subscribers. In other words, Netflix could lose tremendous amounts of money each year, but if their subscriber base kept growing, investors wouldn’t care.

Looking at the weekly charts, NFLX appears to be trading in the midst of a channel, with most recently crossing below its 50 MA. I have my stop loss set at $149, which technically would indicate the reversal of my bearish hypothesis, and I would lose 0.50% of my capital. Its a trade that is completely emotionless to me.

Apple, Inc (AAPL – US Equity): 17 : 1 Risk Reward Ratio

I know I know. Go ahead. Comment and rant about how I used to be IN LOVE with Apple from a fundamental perspective and how much I LOVE their cash position and their PE Ratios. I’ll wait, don’t worry … In all seriousness, I do love the company. Last summer when it fell below $90, I remember having the conversation with my investment partner Jacob about how we should buy AAPL at these levels, because below $90, the Margin of Safety was freaking nuts. As luck would have it, that would’ve been a nice position to get into. However, at these levels, I would like to see a pullback from the all time highs.

Don’t get me wrong, I am still long term bullish on AAPL, I just don’t think current price valuations are warranted even though the company is trading less than 20 times earnings. To me, I smell a lot of animal spirits driving up this price, and I believe that a perfect release of the latest iPhone is already discounted into the price. I am only risking 1.03% of my capital on this trade, and if AAPL ticks higher than $143, I will get stopped out for a loss.

It will be interesting to see where these positions play out. I am happy having a concentrated portfolio, and I think that I will continue to lean that way as I grow as an investor. As Stan Drunkenmiller once said, “put all your eggs in one basket, then watch that basket very carefully.”

L Brands – A Sexy Investment Opportunity

Everyone keeps warning about the demise of the retail industry.  With all the commotion Amazon has stirred up, investor confidence in retail companies has fallen drastically.  In many cases this is completely justified.  Sears and Macy’s crashed and burned because they don’t offer any value to the customer that Amazon doesn’t.  As is often the case, there are some good companies left in an industry that is largely at risk whose stock price is dragged down with the rest.  I don’t think anyone honestly believes that there won’t be brick and mortar stores around in 30 years.  You might suspect people think differently if you read market news.  Everyone is scared of the retail industry.  This is great news for us! Because the stock market is a very emotional place, investors are dropping all retail stocks without a filter.  We are starting to see lots of great deals on retail companies pop up.  One of the companies on sale right now, and one we are very excited about, is L Brands.  L Brands is better known by the two largest brands it operates under: Victoria’s Secret and Bath & Body Works.

L Brands’ stock price has done little but fall for over a year now.  At its previous prices, yeah, we’d agree with the market.  It wasn’t a great deal.  At its current levels however, it might as well be Black Friday.  L Brands is currently sitting at around $44, where it hasn’t been since March of 2013.

Warren Buffet always talks of the reasons he loves Coca Cola, See’s Candy and Disney.  What he always says is that those companies spark an emotional reaction inside you when you hear their name and you can’t say that to the same extent about their competitors.  They are go-to brands.  Who can say that the words “Victoria’s Secret” or the scent of a Bath & Body Works don’t spark an emotional reaction?  They are go-to brands.  Victoria’s Secret is iconic, it will likely be relevant for the next couple decades.  These are great brands that we would love to own, but only if the price is right, and only if the financials are there to back it up.

Key Financials

  • P/E ratio of 10.83 is better than 82% of the industry, including its top competitors (AEO, LULU, GPS, HBI)
  • Operating margin of 15.93 is higher than 91% of the industry
  • Return on invested capital of 45.66% vs AEO at 25.98%, HBI at 18.08% and GPS at 26.83%
  • Return on assets is 14.74%, compared to the industry average of 2.74%
  • Operating cash flow is up considerably each year since 2014
  • Quick ratio is better than most of LB’s top competitors
  • Less than 4% of sales came from outside of the U.S.

Opportunities

Of course things are moving online, but that doesn’t mean doom and gloom for L Brands.  Physical storefronts are going to be around forever, mark my words, and L Brands does store experience better than anyone.  It was none other than Jeff Bezos, yes, the guy who is the main reason we are even talking about retail stocks taking such a hit, who said if a company does a physical storefront experience better than anyone, they should put their effort in THAT direction.  In an interview back when he had hair, Bezos said that the experience the customer gets when they enter a book store such as Barnes’s and Noble’s and smell the books and see the shelves is something Amazon can never replicate, there will always be a place for that.  This is why the panic over retail doesn’t shake my confidence in L Brands.  Let’s also not forget that Victoria’s Secret has a prominent online business.

There is also a huge opportunity for growth here.  As iconic as Victoria’s Secret is in America, less than 4% of its sales come from international markets.  Depending on how aggressively they pursue their expansion into other markets, they could become a worldwide powerhouse.  They have the firepower to do it.

Plan

L Brands stock is quite the bargain right now.  That’s the essence of what we do here at Rockvue Capital. We find bargains and extract all the value we can out of them, putting us at minimal risk with high upside.  The stock price is the lowest it has been in a little over 4 years, but even at this much value I would not be surprised to see it fall even more.  I would love to have the company in the mid to high 30s, I think $37 or even $35 is very possible but if the stock flattens out and stops moving I would not have issue buying at its current price.

Fonar Corp. Analysis

 

Going through the vast amounts of companies that pass my initial screener, I found Fonar Corp (FONR from here on out), and it caught my attention. With a market cap of $111.9M, this is a small company based out of NY, but it is making a big footprint in the world of MRI scanning. Due to its impressive margins, up-trending balance sheets, and a catalyst in the waiting room (sorry, the pun was there for the taking), FONR appears to be undervalued and trading at a discount to its current share price.

Continue reading “Fonar Corp. Analysis”

Corning, Inc. (GLW)

(21 February 2017)

GLW Business Summary

GLW, once an old-line housewares company, is now a leading maker of glass substrates used by the electronics industry and fiber optic equipment used by the telecommunications industry

GLW Fundamentals

  • Price to Earnings: 8.53
  • Earnings Per Share: $3.19
  • Market Cap: 25.7B
  • Current Ratio: 3.29
  • Return on Equity: 20.21%
  • Return on Assets: 12.82%
  • Dividend Yield: 2.22%
  • Price to Sales: 2.73
  • Price to Book: 1.39
  • Price to Free Cash Flow: 45.28

Balance Sheet ($ in Millions)

  • Total Cash increased $470.
  • Total Current Assets increased $569.
  • Total Assets decreased $910.
  • Total Current Liabilities increased $457.
  • Total Liabilities Decreased $1,082.
  • Total Stockholder Equity increased $172.

Income Statement ($ in Millions)

  • Total Revenues decreased $31.
  • Income from Operations decreased $103
  • Net Income increased $1,288.
  • EBITDA increased $2,148.

Cash Flow Statement ($ in Millions)

  • Net Cash provided by operating activities increased $774.
  • Net Cash Provided by Investing Activities increased $12.
  • Net Cash used for financing activities decreased $2,287.
  • Free Cash Flow increased $741.

Highlights from Last 10 Years

  • GLW has used disproportional amounts of cash for investing activities in 2016, while at the same time using a lot of capital for financing activities.
  • Free Cash Flow steadily decreased from 2014 high of $3,633
  • Revenues trending upwards, operating income cyclically trending upwards.
  • Sharp rise in net income in 2016 after two down years in 2014 & 2015.
  • Uptrend in total cash, current assets.
  • Slowdown in the growth of total assets, with a steady increase in total liabilities.

Entry Level: $20 and Below ($15 Ideal)

  • After a dismal 2015, GLW bounced back strong, and its stock reflected it, with gains of 34% in 2016.
  • Due to the run-up in stock valuation, I would hold on buying this until it hits the $20 mark.
  • GLW is currently trading $3 above its 5-year high.
  • However, technically, it is fast approaching it’s 10-year resistance at $28 back in 2008. If it cannot break resistance, I wouldn’t be surprised to see a dip into the low $20s.

Exit Level: $40+

  • Currently Morningstar has GLW at fairly valued, but using a Discounted cash flow method, the stock is undervalued by 18%, putting a fair value at $34.14.
  • I would hold this stock into the high $30s, and if the underlying business is solid, I would sell the profits, and keep the principle in the stock, for the sake of the 2.20% dividend yield.

Research

  • I like GLW, but not at these levels. GLW has a durable competitive advantage within the glass making industry, and is the go to for many companies for glass products.
  • Going on 160 years in the industry, Corning sets the standard for quality, durability, and performance.
  • GLW works in many facets of human development, including: advanced optics, environmental technologies, Gorilla Glass, display glass, life sciences, communication networks, and many more.
  • GLW is branching out into emerging innovative industries such as Automotive, Architecture, and Antimicrobial.
    • Automotive: “Automakers around the world are working to reduce the weight of their vehicles to meet strict mobile emissions regulations. Corning® Gorilla® Glass for Automotive enables a weight reduction in glazing of more than 30% versus conventional soda lime glass. Corning Gorilla Glass for Automotive can be used in all openings of a vehicle including windshields, sidelites, sunroofs and backlites.  Corning Gorilla Glass can also be used in automotive touch/control panels” (http://www.corning.com/worldwide/en/innovation/corning-emerging-innovations.html)
    • Architecture: “Fully customizable, Corning® Gorilla® Glass shows off vibrant colors for striking looks. Light and thin, it’s also a great choice for places with weight restrictions, like elevators” (http://www.corning.com/worldwide/en/innovation/corning-emerging-innovations.html)
    • Antimicrobial: “Formulated to protect touch surfaces from microbes, Antimicrobial Corning® Gorilla® Glass is built to last the lifetime of a device. With the same toughness and optical clarity of Corning® Gorilla® Glass, it can work continuously—during every tap, swipe, and phone call. And it’s the first antimicrobial cover glass to be registered with the United States Environmental Protection Agency” (http://www.corning.com/worldwide/en/innovation/corning-emerging-innovations.html)
  • With enough patience, you can grab this company for under $20 a share. GLW is the kind of company you would want to hold forever, as long as their balance sheets are solid, and management keeps in line with the goals of the company.

Build – A – Bear Workshop, Inc. (BBW)

(17 February 2017)

BBW Business Summary

Build-A-Bear Workshop Inc is a specialty retailer of plush animals and related products. It provides a “make your own stuffed animal” interactive retail-entertainment experience.

BBW Fundamentals

  • Price to Earnings: 99.68
  • Earnings Per Share: $1.22
  • Market Cap: 188.6M
  • Current Ratio: 1.39
  • Return on Equity: 20.88%
  • Return on Assets: 10.75%
  • Dividend Yield: 0.00%
  • Price to Sales: 0.51
  • Price to Book: 1.96
  • Price to Free Cash Flow: 33.06

Balance Sheet ($ in Millions)

  • Total Cash increased $2.
  • Total Current Assets increased $5.
  • Total Assets increased $9.
  • Total Current Liabilities increased $3.
  • Total Liabilities increased $4.
  • Total Stockholder Equity increased $3.

Income Statement ($ in Millions)

  • Total Revenues increased $9.
  • Income from Operations increased $9.
  • Net Income increased $4.
  • EBITDA increased $9.

Cash Flow Statement ($ in Millions)

  • Net Cash provided by operating activities increased $23.
  • Net Cash used in investing activities remained unchanged.
  • Net Cash used for financing activities remained unchanged.
  • Free Cash Flow increased $870.

Highlights from Last 10 Years

  • Income Statement: Since hitting a low of ($48) in 2012, BBW has increased operating income every year, along with net income, earnings per share, and EBITDA.
  • Cash Flow Statement: Since 2012, Net cash from operations has increased, however, there was a dip in 2015. Net cash used in investing increased significantly from 2014 to 2015. Net cash used in financing activities increased $24 from ’14 to ’15, something to be concerned about.
  • Balance Sheet: Besides an increase in 2014, total cash remains almost unchanged since 2011-12. Total assets have been on the uptrend since 2012. Total current liabilities have been steadily rising, as well as total liabilities. Finally, total stock holders’ equity is rising since it’s decline in 2011 – 2012.

Entry Level: $10 and Below

  • Technically, BBW has solid support at the $9.50 range, which is comforting, but with missing earnings, it will be interesting to see if they fail support, which could drag them down into the low $9s.
  • The 50 & 200 moving averages signal an intermediate bullish sentiment, and the long-term prospectus looks good.
  • BBW doesn’t pay a dividend, so it’s paramount to time the entry correct and not sacrifice too much on price. Patience for the right price is key with a stock that doesn’t pay dividends.

Exit Level: $20+

  • Morningstar rates BBW at an 18% Discount, with a fair value of ~$12.
  • I believe if the underlying business is solid, I would hold BBW into the $20 range, but would be taking profits around the $15, and dumping completely once it hits $20. At that point I would look for reentry.
  • Another possible way to play it is to sell for profits, leave the principal, and ride out the principal to wherever it may go, if the underlying qualities of the business are solid.

Research

  • Build – A – Bear screams, “Turnaround Project!”, and I agree. After hiring a new CEO, BBW is poised to take on the challenges in their markets, and to meet them head on.
  • After going back over their last 5 annual reports, what I saw was a consistent theme, a trend that they kept too and didn’t deviate from. They had goals as a company, and continued to work on them each of the successive years.
  • After closing stores, trimming down square footage overall, and enhancing their mobile and online e-commerce platforms, BBW is well positioned to capture the youth and their every shifting trend towards online / gaming.
  • With the edition of Build – A – Bear ‘BearVille’ platform, BBW is tapping into not only the entertainment and gaming industry online, they have also opened themselves up to educational platforms for infants and toddlers.
  • BBW is getting a much – needed cosmetic makeover. Alongside changing the look of their logo, BBW has changed the outlay of their store, both changes have seen increases in operating margins, and customer daily turnover.
  • Finally, BBW has a large durable competitive advantage. When you think of BBW, the first thing that pops into your mind are fluffy teddy bears being held by children that are always smiling. It’s not an exaggeration to say that you or someone you know went to a BBW store and has their very own bear. BBW possesses something that you can’t quantify on a balance sheet, it’s intangible. They have brand loyalty, and a tremendously positive brand recognition.

Goodyear Tire & Rubber Co.

(14 February 2017)

GT Business Summary

Goodyear Tire & Rubber Co is engaged in manufacturing of tires. The Company develops, manufactures, markets and distributes tires for various applications. It also manufactures and markets rubber-related chemicals for various applications.

GT Fundamentals

  • Price to Earnings: 7.63
  • Earnings Per Share: $5.28
  • Market Cap: 8.5B
  • Current Ratio: 1.19
  • Return on Equity: 30.31%
  • Return on Assets: 7.52%
  • Dividend Yield: 1.00%
  • Price to Sales: 0.52
  • Price to Book: 1.84
  • Price to Free Cash Flow: 23.06

Balance Sheet ($ in Millions)

  • Total Cash increased $157.
  • Total Current Assets decreased $853.
  • Total Assets decreased $632.
  • Total Current Liabilities increased $17.
  • Total Liabilities Decreased $662.
  • Total Stockholder Equity increased $30.

Income Statement ($ in Millions)

  • Total Revenues decreased $106.
  • Income from Operations increased $26.
    • Cost of revenue and sales / administrative expenses decreased by a combined $132.
  • Net Income increased $244.
  • EBITDA increased $26.

Cash Flow Statement ($ in Millions)

  • Net Cash provided by operating activities increased $910.
  • Net Cash used in investing activities increased $24.
  • Net Cash used for financing activities increased $523.
  • Free Cash Flow increased $870.

Highlights from Last 10 Years

  • Consistent decreases over the last 4 years include: Total cash, total current assets, total current liabilities, total liabilities, total revenues, and operating expenses.
  • Consistent increases over the last 4 years include: Stockholders Equity, Cash from Operations, Free cash flow, and operating income.
  • Virtually remained the same include: net cash for investing and capital expenditures.

Entry Level: $20 and Below ($14 Ideal)

  • GT presents an interesting chart. Currently it is testing its former resistance at $36 dating back to 2007, it’s last time in the $30s before the Great Recession.
  • What’s also important to note is that it hit $36 back in 1987 and failed to break through until 1992.
  • It’s 200 day MA presents a downward trend, yet it’s 50 day SMA presents upward momentum.
  • At these prices, I would love to see a pullback into the $20 – high teens.

Exit Level: $50+

  • Morningstar rates GT at a 14% discount to its fair value of $41.
  • Using discounted cash flow models, GT presents a 29% Margin of Safety with a fair price of $50.

Research

  • GT has both brand recognition and a durable competitive advantage.
  • When people think of tires, they think of Goodyear, plain and simple.
  • GT presents an interesting value / growth play at current levels.
  • Increase in Net income was mostly in part due to decreases in both input costs as well as sales, administrative, and general expenses up at the top.
  • GT was not able to receive the special tax treatment it received back in 2014 – 2015, in which they were able to carry tax losses in assets over, which now results in declines of current assets.
  • Long term growth looks good, especially under Trump’s America First policy, GT already has plants in the United States, and has spent most of its cash on developing and manufacturing plants in the United States, such as in Arizona.
  • I would love to get this company for around $20 a share, and wouldn’t necessarily touch it now, given that it has risen 15% YTD.
  • Add to the fact that GT pays a 1.00% dividend, GT is a nice mid cap exposure play for any client who is seeking a big name company with a durable competitive advantage, and a business people can understand.

Toll Brothers, Inc. (TOL)

(9 February 2017)

TOL Business Summary

Toll Brothers Inc designs, builds, markets and arranges financing for detached and attached homes in luxury residential communities.

TOL Fundamentals

  • Price to Earnings: 14.25
  • Earnings Per Share: $2.19
  • Market Cap: 5.1B
  • Current Ratio: 4.14
  • Return on Equity: 9.15%
  • Return on Assets: 4.15%
  • Dividend Yield: 0.00%
  • Price to Sales: 1.05
  • Price to Book: 1.10
  • Price to Free Cash Flow: 35.51

Balance Sheet ($ in Millions)

  • Total Current Assets decreased $47.
  • Total Assets increased $331.
  • Total Current Liabilities increased $377.
  • Total Liabilities Increased $275.
  • Total Stockholder Equity increased $85.

Income Statement ($ in Millions)

  • Total Revenues increased $585.
  • Income from Operations decreased $10.
    • Massive increase in cost of revenues
  • Operating Income decreased $9.
    • Increase in sales, general and administrative costs.
  • Net income increased $9.
  • EBITDA increased $92.

Cash Flow Statement ($ in Millions)

  • Net Cash provided by operating activities increased $783.
  • Net Cash used in investing activities decreased $22.
  • Net Cash used in financing activities increased $452.
  • Free Cash Flow increased $794.

Highlights from Last 10 10-Qs

  • Small increasing trend in current / total assets.
  • Big increase in current liabilities for Q4/16
  • Like Meritage Homes, very cyclical revenue and income cycles.
  • Cash flow from operations trend is all over the place, but big increase in most recent quarter.
  • Decreasing trend in cash used for investing over the last two quarters.
  • TOL is using more cash for financing than previous quarters.

Entry Level: $26-27

  • Given the cyclical nature of the companies balance sheets, the charts indicate similar patterns. Right now, I am comfortable with the $27 price, because it has an upward trending support line along $24 – $26 – $27.

Exit Level: $40+

  • Right now, I believe the price is overvalued, however, on the sell side of things; the charts present solid resistance at the $40 level. So, if you enter at the $26 range, I would feel much obliged to sell at the $40 level, to prevent from hitting resistance and falling, thus losing profits.

Reasoning

  • For their last earnings call, TOL reported Q4 EPS of $0.67 vs. $0.99 expected, however they did increase revenues, $1.855B vs, $1.79B estimate.
  • Between Meritage and TOL, I prefer Meritage. TOL has no margin of safety, and at current prices, seems overvalued. Yes it is trading at under 20 times earnings, however, its trading at 54 times owner earnings, and it’s trading at 46 times its free cash flow.
  • It’s Cash to debt is not good, at 0.17, it’s ranked lower than 64% of the companies in it’s industry.
  • Also, it is trading at 1.19 times its Tangible Book value, and 2 times its NCAV.
  • Finally, the cyclical nature of the homebuilders business is something that doesn’t sit well with me in terms of a long term investment.
  • Also, another thing to consider is the possibility of a recession or a pullback in US GDP and Consumer Spending. If we see a retraction in the US Economy, it will make it extremely difficult for businesses like TOL and MTH to survive, given that they operate in the luxury real estate construction.

Meritage Homes Corps. (MTH)

(9 February 2017)

MTH Business Summary

Meritage designs, builds, and sells single-family homes, ranging from entry-level to semi-custom luxury in Arizona, Texas, California, Nevada, Colorado, Florida, and North Carolina

MTH Fundamentals

  • Price to Earnings: 9.48
  • Earnings Per Share: $3.54
  • Market Cap: 1.4B
  • Current Ratio: 7.97
  • Return on Equity: 11.42%
  • Return on Assets: 5.42%
  • Dividend Yield: 0.00%
  • Price to Sales: 0.53
  • Price to Book: 0.82
  • Price to Free Cash Flow: N/A

Balance Sheet ($ in Millions)

  • Total Current Assets decreased $13.
  • Total Assets increased $112.
  • Total Current Liabilities increased $48.
  • Total Liabilities Increased $72.
  • Total Stockholder Equity increased $40.

Income Statement ($ in Millions)

  • Total Revenues decreased $45.
  • Income from Operations decreased $7.
  • Net Income decreased $3.
  • EBITDA decreased $7.

Cash Flow Statement ($ in Millions)

  • Net Cash provided by operating activities decreased $9.
  • Net Cash used in investing activities increased $1.
  • Net Cash provided by financing activities increased $34.
  • Free Cash Flow decreased $10.

Highlights from Last 10 10-Qs

  • Trends are crucial, and when it comes to cash from operating activities, MTH presents a very cyclical trend; down, up, down, up … etc.
  • After experiencing a horrible Q1, MTH rebounded nicely, losing less money in cash flow in Q2, but increasing their losses in cash flow by Q3.
  • Revenues are also cyclical, with an average of 3 quarters of growth, followed by a quarter of decline. If the trend continues the way it is going, it could be due for another slow quarter in Q4.
  • Operating income just as cyclical. Q4/14 was followed with steep decline in Q1/15. Q4/15 followed by a steep decline in Q1/16.
  • Net income, same story.
  • In terms of current assets, MTH is in the middle of a downturn cycle.
  • However, total assets do present a consistent upward trend.
  • Both current and total liabilities present an upward trend as well.

Entry Level: $30

  • Given the cyclical nature of the companies balance sheets, the charts indicate similar patterns. Right now, I am comfortable with the $30 area, which presents solid support at that level.

Exit Level: $50+

  • Using discounted cash flows, it’s fair value presents at $37.99. However, if the intrinsic values and metrics of the business still prevail above that level, I would be comfortable with riding it out to $50.

Reasoning

  • Meritage Homes is part of the potential growing industry of Homebuilders that could see big gains in 2017.
  • MTH completed 2016 with 16% increase in full year net earnings, and a 15% increase in home closing revenue.
  • I like the Margin of Safety of 11%.
  • What turns me off to this stock is the cyclical behavior of it’s balance sheets, income statements, and cash flow statements.
  • However, I do not know the homebuilding industry well enough to know if this is common.
  • What I do know is that MTH’s margins are better than nearly 70% of the companies in Global Residential Construction.
  • As of right now, MTH is losing money, but they’ve been losing less and less money, which is nice.
  • Because of these reasons, I would be much more comfortable buying MTH at the $30 range.
    • At $30 buy price, you would increase your margin of safety to 21%.

Taro Pharmaceuticals, Inc. (TARO)

(6 February 2017)

TARO Business Summary

Taro Pharmaceutical Industries Ltd., a science-based pharmaceutical company, engages in the development, manufacture, and marketing of pharmaceutical products in the United States, Canada, Israel, and internationally.

TARO Fundamentals

  • Price to Earnings: 8.47
  • Earnings Per Share: $12.69
  • Market Cap: 4.4B
  • Current Ratio: 6.99
  • Return on Equity: 28.58%
  • Return on Assets: 25.08%
  • Dividend Yield: 0.00%
  • Price to Sales: 6.14
  • Price to Book: 3.17
  • Price to Free Cash Flow: 56.19

Balance Sheet ($ in Millions)

  • Total Current Assets increased $364.
  • Total Assets increased $450.
  • Total Current Liabilities decreased $65.
  • Total Liabilities Decreased $69.
  • Total Stockholder Equity increased $519.

Income Statement ($ in Millions)

  • Total Revenues increased $88.
  • Income from Operations increased $89.
  • Net Income increased $57.
  • EBITDA increased $54.

Cash Flow Statement ($ in Millions)

  • Net Cash provided by operating activities decreased $12.
  • Net Cash used in investing activities increased $193.
  • Net Cash provided by financing activities increased $4.
  • Free Cash Flow increased $17.

Highlights from Last 10 Years

  • Steady increases in all of the following: net income, revenues, cash flow, EPS, assets, and stockholders equity.
  • Over the last year, TARO was able to increase it’s assets while at the same time decreasing both current liabilities as well as total liabilities.
  • Total cash has fluctuated over the last two years, but that is expected with increases or decreases in R&D spending.
  • Free Cash flow decreased over the last year, but that was mainly due to increased spending on investment activities.

Entry Level: $106 and Below

  • Since it’s high of nearly $170 per share back in January of 2015, TARO’s share price has declined severely, down to $106 as of today.
  • However, there is significant support at this level.
  • I would buy at these levels, and dollar cost average down into the $100 range.

Exit Level: $150

  • Using discounted cash flow models, TARO’s intrinsic value is around $135, or at a 22% discount based on current stock price.
  • If the business fundamentals are still solid at that range, I would still be hesitant to hold onto it given the fact that it doesn’t pay a dividend.

Research

  • TARO has 3 Research centers: Israel, Canada, and USA.
  • TARO has become a US leader in topical prescription, with about 1 in every 8 bottles of cream/gel/lotion being made by TARO.
  • Have over 50 products, including FeverAll.
  • All in all, TARO has a strong footprint in the dermatology medication industry. Because of this, TARO presents a strong economic moat. With changes in CEO (just hired an Interim CEO), TARO looks poised to succeed in the future.
  • The main reason behind the share price drop was the courts decision on the price hiking that was going on at TARO. However, with the new Trump Administration cracking down on price hikes, situations like these might not be as common as they once were.
  • With a new CEO, a stiff slap on the wrist, and impressive competitive advantages, TARO is an undervalued growth biotechnology company that actually makes money and has extremely solid balance sheets.