Monthly Archives: December 2010

Deep Drilling For Dividend Stocks – Is Seadrill Still Undervalued?

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By Robert Hauver

New week, same dilemma – finding undervalued dividend stocks in this latest rally.  This rally has seen the prices of many dividend paying stocks run up quite a bit.

Is a stock still undervalued when it’s risen over 41% year to date, like Seadrill, (SDRL)? When you look at a stock’s PEG ratio, (P/E divided by EPS Growth), the only thing that can counteract a rising “P”, (Price), is strong EPS growth.

With that in mind, we looked at Seadrill’s various PEG’s:

SDRL-PEG-2010-12-31

Since it has a 7% dividend yield, we’ve added SDRL this week to our High Dividend Stocks By Sector Tables, (in the Energy Section).

Some firms in this industry have some wildly divergent numbers, which tend to skew the overall avg., but, based upon the past and future PEG’s, and its P/Book and P/Sales numbers, SDRL looks more undervalued than its peers. It’s interesting to note, that the whole industry has a very low next year PEG of .47, which is probably due to the BP oil spill fallout.

Here are additional Financial metrics for SDRL:

SDRL-ROE-2010-12-31

Again, SDRL’s numbers are better than its peers, with the exception of Debt/Equity. One of the main reasons for their heavier debt load is that SDRL has invested heavily in modern, state-of-the-art deepwater drilling rigs, which, in turn, command a premium day rate, in these days of harder to find oil.

If you’re looking for a way to further juice SDRL’s dividend yield, selling covered calls offers an interesting additional premium:

SDRL-CALL-2010-12-31

In addition to the $3.45 in dividends and call premiums, you might also receive an additional $.88 in price gain, (the difference between the  $34.12 stock price and the $35.00 Call Strike price), if your shares are assigned.  This would equal a total potential gain of $4.33/share, or 12.7% nominal yield, (23.60% annualized).

(We’ve added SDRL to our Covered Calls Table this week, where there are more details.)

If you’re leery of SDRL’s current price, you could achieve a lower entry point, and get paid to do it, by selling Cash Secured Puts:

SDRL-puts-2010-12-31

The first of these put option trades is the more conservative one, which gives you a lower break-even point, which is closer to SDRL’s current 50-day avg., but it has a lower yield than the second trade, which is more bullish.  You can find more details about this and other put options trades, in our Cash Secured Puts Table.

Company Overview: Seadrill is a leading offshore deepwater drilling company, with a fleet of 54 units for operations in shallow to ultra-deepwater areas in harsh environment and benign environments, and operates in 15 countries on four continents.

Disclosure: Author is short SDRL puts.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

2 Undervalued Basic Materials Dividend Stocks WIth Earnings Growth & High Options Yields

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By Robert Hauver

Is it still possible to find undervalued dividend paying stocks after this fall’s rally? Since the Basic Materials sector has been the leading sector during the past 3 months, having risen 16%, you’d think that there wouldn’t be any undervalued dividend stocks there, but we’ve found 2 that may fit the bill, even though they’ve both had good gains this past quarter:

Southern Copper (SCCO): As you may know, copper has been on a royal tear in 2010, up 28%, but many analysts feel that it has a long way to go in 2011.  Forbes reports that, “Copper has risen over $1,100 a metric ton or 12.5% just since Forbes recommended its purchase barely a month ago, when Goldman Sachs recommended copper– then selling for $8220 a metric ton–as the commodity to own in 2011– predicting its eventual rise to $11,000 a metric ton by the fourth quarter of 2011.  JPMorgan also has applied to introduce an ETF that will invest solely in copper and copper-related investments. If the bank does own such a large position in copper, it will increase political pressure to put a limit on the positions a single commodity trader can take.” (Source: Forbes.com)
China, the world’s largest copper consumer, recently said its November refined copper imports surged 37% compared vs. October.  On a year-over-year basis, Chinese copper imports jumped 19% to 232,298 metric tons.

Marathon Oil (MRO): Still being percieved as mainly a downstream refining firm, Marathon has not been credited with expansion of its exploration and production business. Divesture of underperforming refineries that don’t fit strategically could boost performance and change perceptions. Refinery upgrading projects will decrease input costs by expanding heavy-oil refining capacity and increase margins with higher diesel output. Had Q3 2010 net income of $696 million, a 69% increase from the same period a year earlier. Earnings benefited from higher oil and natural gas price realizations, improved refining margins, and increased production volumes during the quarter. Production available for sale during the quarter rose to 405,000 barrels of oil equivalent per day, at the upper end of the company’s previous guidance.(Source: Morningstar)

Both stocks have low next year and 5 year PEG ratios, and below average Price/Free Cash Flow/Share:

MRO-SCCO-PEG-2010-12-24

The 2 stocks appear evenly matched in growth valuations, but MRO has quite the edge in Price/Book and Price/Free Cash Flow/Share.  SCCO is also above the Metal Mining industry avg. for Price/Book of 8.16, but below the very high industry avg. of 71.41 for Price/Free Cash Flow/Share. MRO’s Price/Book is way below its industry avg. of 2.12, and P/FCF/Share is miniscule vs. the industry avg. of 34.96.

Management Metrics are much more of a mixed bag:

MRO-SCCO-ROE-2010-12-24

While SCCO has a much higher dividend payout ratio and more debt, it’s the clear winner in ROE, ROA, ROI, and profitability.

The following Covered Calls and Cash Secured Puts trades illustrate the big difference in the volatility of these 2 firms – MRO’s 1-month volatility is 16.09, while SCCO’s is 24.43

The Covered Call option yield for SCCO is over double that of MRO:

MRO-SCCO-CALLS-2010-12-24

Also, note how the above call options yields are much higher than each firm’s dividend yield – SCCO’s call option yield is over 6 times its dividend yield, while MRO’s is over 4 times.

(You can find more details in our Covered Calls Table.)

Again, SCCO has much higher options yields than MRO in these Cash Secured Put options trades, with SCCO’s put yield almost 2 times that of MRO:

MRO-SCCO-PUTS-2010-12-24

(There are further details in our Cash Secured Puts Table.)

Here’s a snapshot of both stocks’ share performance and some technical trading info:

MRO-SCCO-PERF-2010-12-24

Like many other stocks in 2010, both of these stocks have made most of their year-to-date gains in the last quarter. They’re both sitting just below their 52-week highs, and have similar relative strength,  above the overbought threshold of 60.

So here we’re presented with an interesting conundrum: even though their PEG valuations seem low, the fact that they’re near their 52-week highs would cause most traditional value investors to either wait for dips before buying them, or to sell cash secured puts.

SCCO is certainly being carried along in the current Copper rush, and copper stocks should benefit if JP morgan does start a copper-related ETF. Here’s more fuel for the fire: a discounted future earnings calculation values SCCO at over $73.00, and MRO at over $67.00.

Disclosure: No positions at this time.

Disclaimer: This article is written for informational purposes only.

3 Small Cap Dividend Stocks With Good Earnings Growth

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By Robert Hauver

Small cap stocks have outperformed large and mid caps this year, and growth stocks have outperformed value stocks in all 3 market cap sizes.  With that in mind, we went hunting for some small cap dividend paying stocks that have past, present and future earnings growth, low PEG’s, and reasonable debt loads.  We came up with these 3 dividend stocks:

Advance America, Cash Advance Centers (AEA): Largest provider of payday cash advance services in the United States, as measured by the number of payday cash advance centers operated. Payday cash advances are small-denomination, short-term, unsecured advances that are typically due on the customer’s next payday. They provide these services primarily to middle-income working individuals.

Ennis inc. (EBF): One of the largest private-label printed business product suppliers in the United States. Ennis offers an extensive product line from simple to complex forms, laser cut-sheets, negotiable documents, internal bank forms, tags, labels, presentation folders, commercial printing, advertising specialties, screen printed products, and point-of-purchase display advertising.

Textainer Group (TGH): World’s largest lessor of intermodal containers with a total fleet of more than 1.3 million containers, representing over 2,000,000 TEU. They lease containers to more than 400 shipping lines and other lessees, including each of the world’s top 20 container lines. Yhey are also the primary supplier of leased containers to the U.S. Military.

Selected Financial & Management Metrics vs. S&P 500:

AEA-EBF-TGH-ROE-2010-12-16

The dividend yield is above average for all 3 stocks, and TGH has the edge in ROE and margins. TGH has a higher debt load, due to its capital intensive industry.

All three firms have a conservative dividend payout ratio:  AEA: 39%   EBF: 36%   TGH: 45%

Valuation Metrics:

AEA-EBF-TGH-PEG-2010-12-16

AEA looks like the most undervalued firm here. However, this is mainly due to its price having been beaten down this year, over concerns about possible future negative legislation cutting into its payday loan business.

AEA has already experienced some negative legislative impact in some of the states in which it operates.

AEA’s shares have fallen over 9% in 2010, as opposed to EBF, which is up almost 27%, and TGH, which is up over 84%.  It’s interesting to note, though, that even with these big price gains, EBF and TGH still have PEG’s under 1 for next year and the next 5 years. All 3 stocks are below the S&P average price to free cash flow.

There are Covered Calls available for AEA and TGH:

AEA-TGH-CALLS-2010-12-16

Note: If your AEA shares were assigned in this trade example , your net covered call premium would be $.42, since the $5.00 strike is $.18 below the current $5.18 share price. (You can find more details on these trades in our Covered Calls Table.)

There are also Cash Secured Put Options trades for AEA and TGH:

AEA-TGH-PUTS-010-12-16

(You can find more details on these put options trades in our Cash Secured Puts Table.)

Disclosure: No positions

Disclaimer: This article is written for informational purposes only.

3 Undervalued Consumer Goods Dividend Stocks With High Options Yields

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By Robert Hauver

This week we looked for undervalued dividend paying stocks in the Paper & Paper Products Industry, an industry which should benefit from an improved demand and reduced supply. We screened for dividend stocks with strong ROE, EPS growth -(historic and projected), low short ratios, and high options yields, among many other metrics.

We came up with these 3 stocks, which aren’t the highest dividend stocks around, but they do offer attractive options yields, which are listed further on this article.

Glatfelter (GLT): One of the world’s leading manufacturers of specialty papers and fiber-based engineered paper products. Many of its items are targeted at relatively small, niche markets with a limited number of suppliers. The company serves customers in a variety of sectors, including trade book publishing, envelope and converting, food and beverage, carbonless, pressure-sensitive, digital imaging, composite laminates, and feminine hygiene. Glatfelter’s papers are used for tea bags, coffee fil- ters, textbooks, metallized labels for beer bottles, postage stamps, adhesive tape, playing cards, laminate flooring, adult incontinence, and pre-moistened wipes, among other uses. Net sales in the U.S. accounted for 70% of total sales in 2009, Germany 16%, United Kingdom 11%, and other countries the remainder. (Source: Standard & Poor’s)

Neenah Paper (NP): A leading international producer and distributor of premium fine papers and technical products used in filtration, tape, abrasives, and other specialty markets.  Spun off from Kimberly Clark in 2008, NP now has two business segments. In 2009, the technical products business accounted for 55% of revenues and fine paper 45%. In its fine paper business, NP produces premium writing, text, cover and specialty papers, which are typically used in annual reports, corporate identity packages, invitations, personal stationery, and high-end packaging for point of purchase advertising. The technical products business is a leading producer of transportation and other filter media, durable, saturated and coated substrates used in tape, label, abrasives, filtration, medical packaging, wall covering, and image transfer markets. On a geographic basis, 63% of sales were generated in the United States and 37% came from Europe in 2009.  (Source: Standard & Poor’s)

Temple Inland (TIN): Following a major transformation in 2007, Temple-Inland is now focused on corrugated packaging and building products. Its corrugated packaging segment (84% of 2009 sales) makes containerboard and converts it into boxes. The building products segment (16%) produces wood products, including lumber, particleboard, medium density fiberboard, gypsum wallboard and fiberboard. The company serves over 9,000 corrugated packaging customers with 15,000 shipping destinations from its seven paper mills and 63 converting facilities. (Source: Standard & Poor’s)

Here’s an industry comparison for management and profitability:

NP-GLT-TIN-ROE-2010-12-09

The comparative ROE’s and operating margins look good, but TIN’s debt load is high, even for its capital intensive industry.

The valuations for these stocks are attractive for the coming year, (particularly next year PEG):

NP-GLT-TIN-PEG-2010-12-09

TIN and GLT shares have climbed back into positive ground during the past quarter.

The table below shows their share performance, ownership, market caps, and more selected valuation metrics:

NP-GLT-PERF-VAL-2010-12-09

GLT and NP look more undervalued than TIN on a Price/Sales, Price/Book, and Price/Free Cash Flow basis.

You can greatly improve upon the dividend yield of each of these stocks by selling covered calls or cash secured puts.

Here’s how the  Covered Call options stack up:

NP=GLT-TIN-CALL-2010-12-09

In addition to the static yields listed above, you also have the potential for price gains.  For example, even though GLT’s static yield is only 9.83%, since there’s $1.83 spread between the current price and the strike price, you’d realize an additional 23% if the shares are assigned. (There are more details on these call options trades in our Covered Calls Table.)

The Cash Secured Puts for these stocks also offer attractive yields:

NP-GLT-PUTS-2010-12-09

There are more details on these put options trades in our Cash Secured Puts Table.

Disclosure: No positions at this time.

Disclaimer: This article is written for informational purposes only.

An Undervalued Micro Cap Dividend Stock With A 9 % Dividend Yield

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By Robert Hauver

When government currency printing presses go into full swing worldwide, many investors typically look to diversify their assets, via collectibles, such as coins, stamps, and memorabilia.  Another historically proven trend is that micro cap stocks tend to do well in post-recession eras. One way to play both of these trends is to buy one of the strongest microcap dividend paying stocks available, Collector’s Universe, (CLCT).

With its approx. 9%-plus dividend yield, CLCT sits atop our High Dividend Stocks by Sector Tables, (in the Consumer Discretionary sector).

CLCT also has some of the strongest financial metrics in the universe of micro cap stocks:

CLCLT-ROE-2010-12-02

CLCT also has a reasonable 62% dividend payout ratio.  They recently increased their quarterly dividend to $.325/share, from $.30/share, which equals a 9.18% dividend yield, at their current price of $14.16/share.  Their next ex-dividend date should be around the first week of February.  The 52-week price range is $7.59 – $16.95.

CEO McConnell stated recently, “We have chosen to invest prudently in sales and marketing expense to drive future growth and are specifically encouraged by the early results in Europe through our Paris office.  Your Board remains committed to a strong and stable dividend policy, while maintaining sufficient corporate financial flexibility.”

CLCT’s Valuations look favorable vs. other Micro Caps:

CLCT-PEG-2010-12-02

CLCT looks pretty good vs. these other micro-caps, but how does it fare against its industry group?

It looks very good vs. the broad Business Services industry:

CLCT-BIZSERV-2010-12-02

Unfortunately, CLCT’s closest competitors, Beckett Media, H.R. Harmer, and Krause Publications, are all privately held, so their financial info isn’t as readily available as Collector’s Universe. (Source: Yahoo Finance)

In their first fiscal quarter 2011, (ending 9/30/2010). CLCT’s normalized net income before special tax items was $1.86/share, vs. $1.84  a year earlier.   (The results for the first quarter of fiscal 2011 reflect a tax provision of $0.7 million as a result of the release of valuation allowances against deferred tax assets at June 30, 2010, which represented an increase of $0.6 million, as compared to the tax provision in last year’s first quarter.  Cash taxes paid remain minimal.)

There are no covered calls or cash secured put options available for CLCT.

CORPORATE PROFILE: Collectors Universe, Inc. is the leader in third-party grading and authentication services for high-value collectibles. The Collectors Universe brands are among the strongest and best known in their respective markets. We authenticate and grade collectible coins, trading cards, tickets, autographs, memorabilia and stamps. We also compile and publish authoritative information about United States and World coins, collectible sports cards and sports memorabilia and collectible stamps.

Grading and Authentication Services – Coins, trading cards, autographs, memorabilia and stamps comprise our principal authentication and grading markets. Our brands in those markets include: Professional Coin Grading Service (PCGS), the world’s leading third-party coin grading service; Professional Sports Authenticator (PSA); the world’s leading third-party sports card grading service; PSA/DNA Authentication Services (PSA/DNA), the largest and most respected autograph authentication provider; and Professional Stamp Experts (PSE), the world’s leading third-party stamp grading service.(Source: CLCT website)

Disclosure: Long shares of CLCT

Disclaimer: This article is written for informational purposes only.