Wednesday, 27 August 2014

Beware September; A Danger Month for Equities!

1. September Has Been The S&P’s Worst Month

2. Mid-September to Early October is Worst

3. Healthcare Does Best

4. Long Bonds Are Still A Good Place to Be

5. As Is Gold

6. Gold Stocks Get a Leveraged Boost

7. Natural Gas Tends To Be A Big Sept-Oct Winner: +22% in 2 Months on Average!

8. Total A Good Natural Gas Play


  1. Equity Markets Often Suffer in September
  2. Long Bonds Tend To See Lower Yields
  3. Sectors: Technology is Worst-Hit, Healthcare Does Best
  4. Two Commodities to Like In Sept-Oct: Gold, Natural Gas
  5. Two Stocks to Like: Goldcorp, Total
Sources for charts and tables:,

Friday, 22 August 2014

Global Strategy Weekly in Charts: Stocks to return to recent highs, then what?

Macro: Better US Outlook, But Europe Worrying

1. Markit Manufacturing PMI Points to Stronger US Recovery

2. US Initial Jobless Claims Back to Cycle Lows
3. Why the Fed Can Stay on Hold Longer: High 12.2% Under-Employment Rate
4. German 10-year Bond Yield < 1% Higlights Deflation Risk: ECB to Help?

Stock Markets: Tech, Financials Hit New High, Europe Rebounds

5. US Technology, Financials Sectors Break Out to New Highs
6. German Stocks Lagged Word By Over 8%; Now Catch-Up Time

Commodities: Has Crude Oil Found A Bottom At Last?

7. Brent Crude Oil Finally Bouncing Off $102/barrel
8. Oil Services, Exploration/Production Start To Recover
9. Nearly the Season for the Energy Sector To Perform!

Risks: Watch For Mid-Term VIX to Return to <13

10. Mid-Term VIX Volatility Index Under 13 Will Flag Renewed Risk to Stocks
11. Warning: US Retail Sentiment Back to Bullish High (Contrarian Signal)

Investment Summary

  1. US Economic Recovery Seems to be Improving
  2. But High Under-Employment Means the Fed Can Wait…
  3. Risk-On Recovery Driving US Tech Financials To New Highs
  4. European Stocks Still Primed To Recover, But Hinges on the ECB
  5. Opportunity to Return to Oil Stocks As Brent Crude Bottoms
  6. Watch for the Mid-Term VIX to Dip Under 13; then risk/return may change

Why Sandisk is a Top Technology Pick

There are many reasons why I feel US semiconductor maker SanDisk (SNDK on Nasdaq) is one of my favourite Technology stocks of the moment. 

This is an interesting turnaround, because several years ago I was in fact an actual bear of the stock due to its very high valuation. These days, I am a big fan of the company and the stock for 7 key reasons:

1. Well-Positioned Thematically

Sandisk is a key technology company exposed to some of my favourite long-term investment themes - The Internet of Things, the Mobile Internet and Big Data. 

2. Wide Moat

Sandisk is a leading NAND flash memory maker, the type of memory used in USB drives, smartphones, tablet computers and solid state hard drives. This type of storage is more expensive per gigabyte than a traditional mechanical hard drive (of the sort found in desktop PCs), but has the advantage of consuming far less power (important for mobile computing), having much fast data retrieval times and also being more robust (mechanical hard drives are typically very sensitive to shocks and extreme temperatures). 

Sandisk spends a heavy 12% of sales on Research & Development, which over time has led to the building of an extensive portfolio of valuable patents, which Sandisk monetises in the form of royalty payments received from other semiconductor makers who use their designs and technologies. This, combined with Sandisk's focus on higher-end NAND flash memory applications has allowed the company to maintain gross margins well north of 50%, over 10% better than their memory maker rivals such as Toshiba and Micron, and currently as high as 53%. 

3. Strong Free Cash Flow

This high profit margin is converted in to bundles of cash, with between $1.4-1.6bn of net free cash flow generated per year over each of the last two years. With $4.2bn of net cash already on the balance sheet, this equates to a 8-10% free cash flow yield on Sandisk's enterprise value. Even with the drag of this cash pile on profitability, Sandisk is still achieving a Return on Equity not far shy of 15%. 

4. Valuation is attractive

An ex-cash 2015e P/E of under 12x and EV/EBIT ratio of 7.8x is cheap for such an innovative growth company, which is also paying a steadily rising dividend (1.1% yield) and which is also buying back shares (Sandisk is a member of the Powershares Buyback Achievers portfolio, for instance). 

5. Profit momentum is positive

Despite continued deflationary pressures in terms of $ per gigabyte of NAND flash storage, the drive to lower manufacturing costs and also the surge in volume demand is leading to upwards revisions to both sales and earnings forecasts (the company's consensus 2015e EPS forecast is over 10% higher today than it was at the start of 2014).

6. Leading sell-side analysts are positive

The average consensus target price is $114 (vs. $97.55 now), while leading brokers such as Sanford Bernstein have a very bullish $150 target. 

7. Positive Technical Analysis

SanDisk (NSQ:SNDK) trades at $97.55 at present, while there is an upside price gap to fill on the share chart at $105.80, giving clear upside in the short-term. There is also a solid upwards price trend, in place since mid-2012. 

All in all, I see a good number of reasons to be a buyer of SanDisk (SNDK) today, although as always, you are advised to Do Your Own Research!


See more at:

Tuesday, 8 July 2014

Why I am not worried about US employment growth, I still like Bond-Sensitive Income Investments

  1. There is still plenty of spare capacity in the US labour market, lots of people want to work full-time but are still only working part-time;
  2. The Federal Reserve will raise interest rates in 2015, but only very slowly; already priced in by 2-year bonds;
  3. Long-term (30-year) bond yields are still in a falling trend… So the bond market is not worried about the risk of rising inflation;

Conclusion: I still invest in Build America Bonds, Preferred Shares, REITs as they offer a high income and will benefit from falling long-term bond yields. 

Video Link to watch (4 minutes):     

CNBC Europe Guest Host appearance: On the Importance of Dividends...

This morning's TV appearance on CNBC Europe's Squawkbox programme was a good laugh, as anchor Steve Sedgwick is very jolly and combative, a good combination!

Here is a short video segment with me discussing UK dividends with a chap from Markit:

Monday, 7 July 2014

Want High Yield and Momentum? Go for Insurance!

Time to Love Non-Life Insurance

One of the key investment themes that I continue to champion is that of the "Hunt for Yield". Here we are, in a period where global central banks are conspiring to keep short- and long-term interest rates as low as possible in order to shore up what is fragile economic growth in the "New Normal" of a post-crisis Developed World. 

At a time when government bonds, and even investment-grade corporate bonds, are no longer offering anything like attractive yields to maturity, where can income investors turn? One solution is to subscribe to Neil Woodford's new fund, which unsurprisingly is stuffed yet again with AstraZeneca (LON:AZN), GlaxoSmithKline (LON:GSK) and tobacco companies like Reynolds American, as it was back in his old funds at his former employer Invesco Perpetual. 

I prefer a stock-picking approach, focusing on sustainable value and momentum. Within the UK stock market, the sector that looks best placed on these metrics is the UK non-life insurance sector, containing such high yield gems as Brit (LON:BRIT), Amlin (LON:AML) and Catlin (LON:CGL) within the Lloyds of London reinsurance segment, and the RBS spin-off Direct Line Insurance (LON:DLG) in more classic Property & Casualty insurance. 

High and Sustainable/Growing Yields

Each of these four insurers offer prospective dividend yields in excess of 5%, up to 10% in the case of recently refloated Brit (LON:BRIT)

Dividend payout ratios are of the order of 60% except in the case of Brit (LON:BRIT), and Returns on Equity are typically between 10% and 13% this year and next. All of which suggests that not only are these high dividend yields sustainable (except in the case of a sharp unexpected drop in earnings), but that long-term dividend growth should be in the region of 4-6% going forwards. Perhaps not exceptional, but certainly more than enough to compensate for inflation.  

Value aplenty too

To read the rest of this article, please click on the web link below:

Friday, 4 July 2014

Value Small-Cap of the Month: The Mission Group (TMMG) - Media Sector

Every month, I will be focusing on a compelling mid- or small-cap value story. This month, I a going to focus on a UK media company called The Mission Group (code LON:TMMG), whose current market value is £39m, and is listed in the AIM segment of the London market.

What Do They Do?

The Mission Group is comprised of a number of marketing, advertising and public relations agencies (11 in total), based in the UK, San Francisco and Singapore. Key clients include Tesco, Volvo, Scania and Virgin Atlantic. 

You can find a lot more information about The Mission on their web site.

Where is the Value?

In simple terms, The Mission is cheap on a number of traditional value metrics including forecasts P/E, price/book value and price/sales (Figure 1):

1. TMMG is Cheap!
Source: Stockopedia

For lovers of combining Value and Quality criteria, The Mission comes out extremely well on Piotroski's combination of low price/book value ratio (0.6x) and his F-score of quality, where the Company scores a high 8 out of a possible 9. So The Mission looks great value at least. 

The Total Shareholder Yield also looks strong, combining a 2.3% dividend yield with a £1.7m reduction in net debt worth another 5% or the Company's market cap, so a total yield of well over 7%, in line with the Free CashFlow Yield of just under 10%. 

What about Momentum?

Secondly, price momentum over the last 3 and 12 months has been very positive, with the shares gaining some 16% and 82% over these two periods respectively. 

2. TMMG Has Already Made Some Impressive Price Gains

3. But There is a Long Way to Go To Regain Prior Highs

But back in late 2007, the stock reached a high of 150p, if only briefly. So even after such impressive gains over the last 12 months, it would need to nearly triple to get back to historic highs. 

And Is There a Reason to Buy the Company Now?

Key highlights from The Mission's 2013 Annual Report were encouraging:
  • Revenue +9% to £51.6m;
  • Profit Before Tax +3% to £5.0m;
  • Net Debt sharply lower to £10.7m, -£1.6m versus FY2012;
  • Annual dividend of 1.0p put in place, versus nil before.
So operating trends certainly look promising, while back in February this year, the Investor's Chronicle publication highlighted The Mission as a very cheap recovery stock. 

A key driver for the Company, as for all advertising-related companies, is the strong underlying economic growth being experienced in the UK, with London the epicentre. Normally, domestic economic growth has a leveraged effect both on top-line revenues (clients want to spend more on advertising) and also on profitability (as the major cost of ad agencies are their staff salaries, plus office rent, which are largely fixed). 

What are the Risks?

  1. Even after nearly halving the debt in 4 years since 2009, there is still nearly £11m of net debt outstanding (Figure 5).That said, this is less than 1.5x the 2014e forecast EBITDA of £7.7m, so normally this should not be a big issue.
  2. The promised boom for advertising from the growing economy may not materialise as expected.
  3. Most of the stated book value is net Goodwill (£71m), so who knows what the true economic worth of TMMG's intangibles like branding, network etc. really is?  

5. TMMG's Balance Sheet

Investment Summary

Overall then, TMMG is very cheap, with a share price that is moving up nicely (has broken through recent price highs) but which has plenty of scope to move up further before hitting all-time historic highs, together with plenty of leverage to the improving UK economy. 

On Stockopedia's StockRanks system, this all adds up to a near-maximum 99 combined StockRank (Figure 6)!

6. TMMG's Combined StockRank is 99!
Source: Stockopedia

So The Mission (TMMG) is the first company to go into my UK Model Portfolio, at an entry price of 54.75p.