Monthly Archives: May 2011

Are There Any Undervalued Basic Materials Dividend Stocks?

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By Robert Hauver

Standard & Poors shows the Basic Materials as being the 2nd worst sector year-to-date in 2011, up only .84%, lagging only the dreaded Financial sector, which was down -2.99%, as of May 25th. One might think that such poor share performance would suggest lousy future growth prospects for Basic Materials stocks, but, on the contrary, Standard & Poors shows the 2011 estimated EPS growth for this sector as second only to Energy stocks:

DOW-HUN-OLN-SP-SECTOR-EPS-5-18-11

(Data Source: Standard & Poors. EPS Estimates as of 5-18-2011)

Digging back further into past years, 2006 was the record year for overall S&P earnings, and even though 2010 was a good year, only 5 out of the 10 sectors managed to exceed their 2006 aggregate EPS figures:

DOW-HUN-SP-VS-2006

The Basic Materials sector, along with most other sectors,  is projected to beat its record 2006 Operating EPS in 2011 by over 17%, and also in 2012, by over 55%.

So, with all this near-term projected future growth for this sector, we tried to find some Basic Materials dividend paying stocks with low 12-month PEG ratios, and respectable financial ratios, and we came up with 3 companies in the Major Diversified Chemicals sub-industry:

DOW-HUN-OLN-PEG

As you can see, all 3 firms had EPS challenges over the past 5 years.  However, their recent quarter-over-quarter EPS growth looks a lot better, and their EPS growth for the next 12 months is projected to be from 20% to over 25%, which gives them attractive low 12-month PEG’s.

Financial Metrics:

DOW-HUN-OLN-ROE

Although these aren’t high dividend stocks, they do have respectable dividend yields, and a conservative dividend payout ratio.  OLN’s ROE, ROI and Debt figures are the most attractive of the 3.

These 3 dividend stocks also have relatively high options yields, which far outweigh their dividend payouts over the next 8 months, paying you 3 to 6 times the dividend amount. The covered call and put options trades we’ve listed below all expire in in Jan. 2012, which gives you the further advantage of not having to pay taxes on the option $ you receive now, until 2013, (if you hold the options till 2012).

Covered Calls:

DOW-HUN-OLN-CALLS

OLN’s $25 Jan 2012 calls are the furthest out of the money, so, although the static yield is the lowest of the 3 call trades, the potential assigned yield is higher. You can find more details for these and other covered call trades in our Covered Calls Table.

Cash Secured Puts:

DOW-HUN-OLN-PUTS

If you want to achieve a lower break-even entry price, these cash secured puts also offer attractive high options yields, and they have the advantage of giving you an instant cash yield, as opposed to waiting to recoup some of your investment via quarterly dividends. You can find more details for these and other covered call trades in our Cash Secured Puts Table.

Disclosure: Author is short Dow puts, and long OLN shares.

Disclaimer: This article is written for informational purposes only, and is not intended as investment advice.

2 Undervalued Financial High Dividend Stocks

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By Robert Hauver

Looking for undervalued high dividend stocks? Check out the unloved Financials sector, which is barely up 1% year to date, and lags all other sectors.  Business Development Companies, (BDC’s), are a sparsely-covered Financials sub-industry with some high dividend paying stocks, and low PEG ratios.  In this article we’ve also included an undervalued private equity firm which uses mezzanine debt.

BDC’s are similar to venture capital funds, in that they’re created to help grow small companies in the early development stages. Many BDCs are set up much like closed-end investment funds and are listed on the NYSE, AMEX and Nasdaq. A big difference between a BDC and a venture capital fund is that BDCs allow smaller investors to invest in startups. BDCs have become popular because they provide permanent capital to their management, they allow investments by the general public and they use mezzanine financing opportunities, among other reasons.

Here are 2 dividend stocks we found that currently look undervalued on a PEG ratio basis. (We’ve also added them to our High Dividend Stocks by Sector Tables :)

Prospect Capital (PSEC): Founded in 1988, with an IPO in 2004.  A mezzanine debt and private equity firm that manages a publicly-traded, closed-end, dividend-focused investment company which completed its IPO in 2004. PSEC primarily provides non-control debt financing to management teams or financial sponsors as well as selectively making control acquisitions by providing multiple levels of the capital structure. Using both partnership and publicly traded closed-end structures, Prospect has invested more than $2.5 billion since its inception in 1988 in multiple asset classes. Prospect seeks investments with historical cash flows, asset collateral, or contracted pro forma cash flows. Prospect’s mutual fund has paid a continuous, regular dividend since inception.  Although its past expertise has been in the energy and industrial sectors, Prospect Capital has broadened its scope to include healthcare, manufacturing, and specialty minerals among others.

Solar Capital (SLRC): Founded in 2007, SLRC invests primarily in leveraged, middle-market companies in the form of senior secured loans, mezzanine loans and equity securities. SLRC invests in a very broad range of industries, and also invests in equity securities, such as preferred stock, common stock, warrants and other equity interests received in connection with its debt investments or through direct investments. The firm also invests in United States government securities, high-quality debt investments that mature in one year or less, high-yield bonds, distressed debt, non-United States investments, or securities of public companies that are not thinly traded.

Financial Ratios:

PSEC-SLRC-ROE

Both firms have similar operating margins, but SLRC has the edge on Mgt. ratios, and it has a lower overall debt load.

Dividends:

PSEC-SLRC-DIVS

Both firms currently have high dividend yields, but the dividend history for SLRC is very short – they just started paying dividends in March 2010. PSEC converted to monthly dividends in June 2010 – its next monthly ex-dividend date is May 26, and it has already posted monthly ex-dividend dates and payout dates through August on its website.

Valuations:

PSEC-SLRC-PEG

PSEC is trading near its 5-year low P/E. Both firms are also way below the Benjamin Graham 22.5 ceiling for P/E times Price/Book, with PSEC at 9.53, and SLRC at only 6.16. SLRC looks undervalued in the near term, with a 12 month PEG of only .48, whereas PSEC has a lower long-term PEG of .64.

Performance/Technical:

PSEC-SLRC-PERFCE

Both stocks have room to grow for more institutional ownership, although PSEC looks like it has much more. PSEC is also closer to oversold territory, with a Relative Strength Index of 41.87.

Disclosure: No positions as of yet.

Disclaimer: This article is written for informational purposes only

3 Undervalued Tech Dividend Stocks With High Options Yields

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By Robert Hauver

Are there any undervalued high dividend stocks in the Tech sector? Since this sector has lagged the market in 2011, rising less than 5% thus far, we thought that just might be some overlooked dividend paying stocks that offer some growth potential also.  The Standard & Poors data below also suggests that the Tech sector may have good growth prospects this year, with an overall PEG of just .74.

SP-SECTOR-PEG-

Although Tech stocks don’t generally pay high dividends, and many don’t pay any dividend at all, we did find 3 Tech dividend stocks that appear to be undervalued.  We’ve added these 3 stocks to the Tech section of our High Dividend Stocks by Sector tables:

Comtech Telecommunications, (CMTL): Comtech designs, develops, produces and markets products, systems and services for advanced communications solutions in 3 areas: Telecom transmissions, Mobile data communications,  and RF microwave amplifiers. Their product lines include: satellite earth station modems, cell-tower traffic backhaul gear, broadband video and data transmission systems, and many others.

STMicroelectronics, (STM): One of the world’s largest semiconductor companies with net revenues of US$ 10.35 billion in 2010 and US$ 2.53 billion in Q1 2011, Switzerland-based  STM has particular strengths in Multimedia, Power, Connectivity and Sensing technologies and its sales, including wireless business conducted via ST-Ericsson, the 50/50 Joint Venture with Ericsson, are well balanced among the industry’s major sectors: Telecom (26%), Automotive (17%), Consumer (11%), Computer (14%), Industrial (8%) and Distribution (24%)

Intel, (INTC): A semiconductor chip maker, which develops advanced integrated digital technology products, mainly integrated circuits, for industries such as computing and communications.  In addition to raising its dividend over 30% in the past 6 months, Intel also increased the authorization limit for share repurchases by an additional $10 billion in January, bringing the total outstanding buyback authorization to $14.2 billion.

Selected financial ratios, dividend yields, and profitability figures:

CMTL-STM-ROE

While all 3 firms have a similar dividend yield, giant Intel clearly has superior ROE and Margin figures.

Valuations:

CMTL-STM-PEG

Small cap CMTL has a very low EV/EBITDA valuation, and also a very low long-term PEG ratio, (only .34), due to its 35% projected 5-year EPS growth rate. However, analysts are projecting earnings to decline over the next 12 months.

STM has low PEG’s for the next 12 months and long-term also. Like Intel, STM’s earnings exploded over the past 12 months, growing over 170%. Demand for broadband services is driving the fastest growth ever seen in the mobile communications industry. Mobile network operators are quickly rolling out faster services offering data rates at 14.4Mbit/s and above.  Infonetics Research sees market for LTE infrastructure, which requires several types of basestations, exceeding $11bn by 2014.

INTC has delivered earnings surprises for the past consecutive 4 quarters, and recently beat Q1 2011 estimates by over 21%. 2010 was a record year for them, and they expect 2011 to be more of the same, so their .99 PEG may even be quite conservative.

Here’s how these stocks have performed:

CMTL-STM-PERF

Intel has been surging of late, erasing its earlier losses, while STM has recently given back some of its gains. Looking back for 1 year, CMTL is actually down, while INTC is up less than 9%, and STM is up over 40%.

Covered Calls:

CMTL-STM-CALLS

All 3 firms have high options yields that outstrip their dividend payouts, by at least 3x. These October call options also offer even higher yields, should the shares get assigned. There are more details on these and other Covered Call trades in our  Covered Calls Table.

Cash Secured Puts:

CMTL-STM-PUTS

Selling cash secured put options can also secure you a much higher payout than the dividends during this term, and also give you a lower break-even price.

There are more details on these and other Put Options trades in our Cash Secured Puts Table.

Disclosure: Author is long INTC shares.

Disclaimer: This article is written for informational purposes only.

High Dividend Stocks – 2 Undervalued Financial Stocks

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By Robert Hauver

With the Financials sector trailing all others year-to-date, we went bottom feeding, looking for attractively priced dividend paying stocks in this unloved sector.

Sector Performance YTD shows the Financial sector up less than 2%:

SP-SECTORS-PERF-MAY 4 2011

(Source: Standard & Poors)

However, the 2011 outlook for stocks by sector tells a different story:

SP-SECTOR-PEG-

(Data Source: Standard & Poors)

Although S&P analysts favor the Basic Materials and Energy sectors, giving them the highest 2011 growth estimates of any sector, they also estimate that the Financials sector will achieve nearly 20% growth in 2011, which tops the Tech sector’s 18.5% growth estimate, and the overall S&P 500 average growth estimate of 16%.

We found 2 dividend stocks in the Assets Management sub-industry that might be bargains, both of which are listed in our High Dividend Stocks By Sector Tables.  Note: There is a big disparity in market cap between these 2 firms, as KKR’s $3.69 billion market cap is over 10x the size of small cap TICC.  Their capital structures are also different, as KKR is an LP, and TICC is a BDC.

Kohlberg, Kravis & Roberts LP (KKR): A limited partnership that operates private equity funds that take either controlling or strategic minority ownership positions for long-term appreciation; invests in leveraged loans, high-yield bonds and less liquid credit products; and, on behalf of portfolio companies, arranges equity and debt financing and offers capital market advice.  KKR is a mid cap stock, with a current market cap of $3.69 billion.

TICC Capital Corp. (TICC): A business development company primarily engaged in providing capital to technology-related companies. TICC concentrates its investments in companies having annual revenues of less than two hundred million dollar and/or a market capitalization or enterprise value of less than three hundred million dollar, with a focus on many tech sectors, including computer software & hardware, internet, medical devices, media, networking equipment, and semiconductors.  The firm invests in public or private companies these and other parameters: Up to $30 million funding size; Maturity up to 7 years. TICC is a small cap stock, with a current market cap of $344 million.

Industry Comps:

KKR-TICC-ROE

This industry has some wild profit margins, eh?  An improving economy and rising stock market valuations have helped private equity firms’ portfolio values increase over the past months. Firms have also taken advantage of increasing M&A and improving IPO markets to exit some of their investments, leading to some big profits.

Dividends: TICC has a longer quarterly dividend distribution history, having grown from paying $.54/year in 2004, to $.99 for 2011, with dips in 2008-2009.  (They just increased their quarterly dividend to $.25/share, and their next ex-dividend date is June 14th.)  KKR LP went public in July 2010, and began paying quarterly dividends in September 2010, paying $.08, then $1.5 in November, $.29 in March 2011, and just decreased their upcoming May dividend to $.21, with an ex-dividend date of May 12th.

Valuations:

KKR-TICC-PEG

Both firms look undevalued on a PEG basis, but TICC is clearly cheaper on a Price/Book basis. TICC also looks undervalued on an Enterprise Value/EBITDA basis, with a tiny ratio of  just .12, due in part to its debt-free balance sheet, and small market cap. A Discounted Future Earnings Model values KKR at $42.01, and TICC at $33.51.

Although you could sell options for both firms, only KKR has high options yields, which are listed in our Covered Calls Table and Cash Secured Puts Table.

Both firms just reported Q1 2011 results:

KKR: Generated profits from taking a number of its portfolio companies public. During the quarter, KKR-backed Nielsen Holdings, HCA Holdings, and Far East Horizon went public.

GAAP net income was $159.6 million for the quarter ended March 31, 2011, up 40% from $113.8 million for the quarter ended March 31, 2010.

Book value was $6.2 billion on a segment basis as of March 31, 2011, representing $9.08 per adjusted unit.

Economic Net Income was $742.5 million for the quarter ended March 31, 2011, an increase of $67.7 million or 10.0%, as compared to ENI of $674.8 million for the quarter ended March 31, 2010. The 6.5% appreciation of KKR’s private equity investments along with increased fees in their private markets segment were the key contributors to the positive results.

Assets Under Mgt. was $61.0 billion as of March 31, 2011, up 11.6% from March 31, 2010. The increase resulted from continued investment appreciation as well as new capital raised, partially offset by distributions to the limited partners of their funds. Fee paying assets under management (“FPAUM”) were $45.7 billion as of March 31, 2011, up 7.5% from March 31, 2010, driven primarily by new capital raised.

TICC: Total investment income rose 49%, to $9.76 million, vs. $6.56 million in Q1 2010, and was up 6.8% vs. Q4 2010.  Core net investment income was approx. $7 million, or $.22/share, vs. $.17/share in Q1 2010. Net asset value rose from $9.85 to $9.97, vs. $8.85 in Q1 2010.

Disclosure: No positions

Disclaimer: This article is written for informational purposes only.