Why does this darn stock keep going down? Part II
On Friday I started this post concerning a pair of stocks that have me baffled by their eroding stock prices. Part 1 was some information on what I see going on with City Bank (CTBK: 9.21 +0.13 +1.43%) and today I will complete the duo with some information on Aircastle Ltd. (AYR: 8.65 +0.15 +1.76%) the aircraft leasing company.
I first noticed Aircastle when they cut their dividend from 70¢ to 25¢ per quarter earlier this year. I started watching the company to see if their financial condition was deteriorating or improving. When the 1st quarter earnings report came out in early May the results were very positive. Revenues and earnings are rising and the company is doing a good job keeping their fleet leased out. Aircastle has less than a 10% exposure to U.S. based airlines and international air traffic is considered a growth area. I made the conclusion that there is a high probability the company will start increasing the dividend and added the stock to this site’s Income Portfolio and purchase a small holding for my own account.
After the earnings release the stock price hovered in the $16 range, then about two weeks ago started dropping. The descent has been steady, and now the stock is trading at less that $12.50. Ouch! I have not been able to find any news to justify the price decrease, and my only guess is that investors believe high fuel prices for airlines (Aircastle’s customers) will end up having a negative effect on Aircastle. At this point the stock price is trading for only 6.7 times estimated 2008 earnings and the yield is at 7.8% with the current dividend.
My purpose in writing these posts is to express a realization that as primarily a fundamental investor, it can be a disadvantage to ignore technical trends. When I see a stock I like decrease in price, my tendency is to want to buy more, but it appears that once a stock price starts a trend it is very difficult to determine when the trend will reverse, without (apparently) regards to the prospects for the company. Or I just do not have access to the level of information that is telling investors to bail out on these stocks. From my experience with these two stocks, I will be looking for some signs of a trend reversal before jumping in to start or add to a position. I think I need to study up on some basic technical analysis techniques.
Of course, I did add to my position in AYR on Friday when it looked like the stock was leveling off and today it is down another 3%. Good thing the position is still very small. If they follow last year’s schedule, Aircastle should announce the 2nd quarter dividend around the middle of this month. Keep watching!
Note: I have long positions in CTBK and AYR.
Buying on dips, or Why does this darn stock keep going down?
There are two stocks in my Income Portfolio for this site that have me completely baffled. Their stock prices continue to erode and I am at a loss to find a good reason. These two point out some of the challenges of investing in smaller cap stocks where often the only news available is the quarterly earnings report and the investor has to live with the share price swings for the 3 months in between without much information to decide whether to hold or sell or buy more. Compare this with a popular stock like Apple (AAPL: 170.12 +1.94 +1.15%) where I count 15 news headlines at Yahoo Finance for today alone (and it is still relatively early). One of my goals and challenges here is to try to find those companies and stocks where the lack of news leads to an undervalued stock. So as these stocks start to fall in price, the new challenge is are they more undervalued or is there a hidden problem?
First, up I will discuss City Bank (CTBK: 9.21 +0.13 +1.43%) of Lynnwood. WA. This mid sized ($1.3 billion in assets) bank has 30+ years of conservative management and growing profitability. It pays a quarterly 15¢ dividend which gives a yield of over 4% at the current share price and has recently paid an additional $1.00 dividend at year end. City Bank is an industry leader by most of the metrics banks are measured by. Earnings per share were $2.62 in 2007 and current estimates have 2008 earnings at $2.25. This puts the PE for 2008 at 6.3 based on today’s (still falling price).
I first reviewed and added City Bank to the tracking portfolio here in October, 2007 when the price was about $23. I was looking for a banking sector stock that was down trodden by the market distrust of financials, but was stable and profitable. I though CTBK was a good fit for what I wanted. Since then (before this recent downturn) the stock varied between $18 and $24, based on how the market was feeling about banks and has paid $1.30 in dividends. I made my initial, personal purchases in the $21 range. CTBK started the 2nd quarter at almost $24 and has been sliding downward since. I picked up some additional shares at $18 and have watched the stock continue downward to about $14 today. In the last 2 months the only news were 1st quarter earnings report and a 2nd quarter dividend announcement.
So now my stock is down 1/3 and I scour the news daily for reasons: Nada. I check Seattle area news to check if there is an economic change there: Still appears relatively strong. My only guesses on the price meltdown are that City Bank’s large portfolio in construction loans is in big trouble, and we will not find out until the next earnings report or the many individual share holders (very little institutional ownership) are bailing out as the stock continues to fall. At this point, I plan to hold my position until actual financial results are revealed.
My other falling stock that I do not understand is Aircastle Ltd. (AYR: 8.65 +0.15 +1.76%). I have expounded enough for today, so check back tomorrow or Monday for my thoughts on Aircastle.
Note: I have long positions in CTBK and AYR.
Hardinge, Inc. not getting it’s act together
Back in February I added Hardinge, Inc. (HDNG: 12.45 -0.31 -2.43%) to this site’s stock tracking as a turnaround candidate. In the 3rd quarter of 2007, the stock price was hammered by 50% when the company showed a zero earnings quarter. Previously, the company had been a steady generator of growth and profits. My thought was when the company was able to start generating profits at historical levels, the stock price would make a nice recovery.
In February, the 4th quarter earnings came in with a small net loss (-1¢), with the company claiming a decrease in net margins due to the unloading of some old inventory. Now, today, 1st quarter results are out with another quarterly loss! They reported a loss of 6¢ per share for the quarter on decreased sales and gross margin. Hardinge management blames a significant portion of their woes on currency exchange issues with their customers in Europe and Asia.
At this point in time, I see a company with 3 quarters in a row of negative earnings results. It appears management does not yet have a handle on how to return the company to its former profitability. For this reason I am removing HDNG from this site’s Special Situations Stock Portfolio. The share price after the news today is down a few bucks from where I added the stock to the portfolio. For me, there are better more interesting opportunities for stock investing at this time.
Note: I currently do not have a position in HDNG.
Portfolio name change
I keep thinking and this blog keeps evolving, I hope for the better! Last fall, when I decided to start tracking a portfolio of stocks I was interested in, I set up a 20 Stock Portfolio of companies I believed would be good investment prospects. After about 7 months of building up and tracking the 20 Stock Portfolio, I felt my interests were naturally divided into two areas, and thus I split my portfolio into two: an Income Portfolio and a Growth Portfolio. I started tracking the separate portfolios for the 2nd quarter of 2007.
I have come to think the Growth Portfolio was severely misnamed. Although there are some pure growth stocks in the portfolio, it is far from a 100% strict “growth” orientation. In my research I am trying to find stocks that I believe have a good chance to double or better over the next few years. Also, I have some particular interests such as South American stocks and markets. This means the stocks in the portfolio could fit in a wide range of categories: growth, value, turn around, international, cyclical. I have my own criteria and methods to evaluate whether I think a company and it’s stock are a good investment, and I do not stock to any particluar discipline.
One general criteria I have is market cap. For U.S. companies (and most foreign) I try to stick to those in the $2 billion or less market cap range. I believe an individual investor and researcher like myself can find an edge in smaller companies vs. the well researched and over-analyzed large cap companies.
The result of all of this deep thinking is a decision to change the name of my Growth Portfolio to Special Situations Portfolio. For now the portfolio itself is the same and the old links to the Growth Portfolio still work. As of now, the stocks are still tracked on a equal dollar, quarterly basis with no buying and selling. Hopefully, more advanced portfolio tracking is the next step for my evolution here.
End of the month with new portfolio system
On this blog I have been tracking a portfolio of selected stocks since September of 2007. I started with a 20 stock portfolio of those companies I had researched and believed had great potential for profit. As my portfolio evolved, I discovered I was interested in stocks of two distinct varieties so Starting in April 2008 I have divided the stocks I track into two separate portfolios, an Income Portfolio and a Growth Portfolio.
I have been tracking my portfolios on a quarterly basis, starting with an equal dollar amount of each stock at the beginning of each quarter. If I add a stock in the middle of a quarter, it starts with the same dollar amount. I have not tried to time any buying or selling in the portfolios.
After one month with the dual portfolios, the results have been interesting. The Income Portfolio significantly out performed the Growth Portfolio for the month. The outperformance does not include any dividends, most of which have record dates in May.
The Income Portfolio had a total stock price gain of 7.57% for the month of April. This was primarily driven by an almost 30% gain in Terra Nitrogen (TNH: 121.37 -2.79 -2.25%) and Nordic American Tanker (NAT: 35.56 -2.51 -6.59%) up over 20%. NAT was boosted by the company announcing at least a doubling of the dividend for this quarter. TNH has been riding the agricultural products boom. As of yesterday, I have dropped TNH from the Income Portfolio for reasons I have written on here and here.
The Growth Portfolio was up 1.8%, significantly under performing the major stock market averages. Hardinge Inc. (HDNG: 12.45 -0.31 -2.43%) and KHD Humboldt Wedag International Ltd. (KHD: 26.86 -1.61 -5.66%) were the stars, both up around 20%. The portfolio was pulled down by Silver Wheaton (SLW: 14.30 -0.57 -3.83%), Headwaters (HW: 10.25 -0.19 -1.82%) and VeraSun Energy (VSE: 4.21 -0.25 -5.61%), all down about 15%. SLW and HW were hit by negative earnings news and VSE is stuck in the negative ethanol news and commodity trend.
The results for April were very interesting, and I look forward to what happens from here. Someone with the Income Portfolio would be tempted to take the 8% gain and go money market for the rest of the year!
Note: of the stocks listed I have positions in KHD, HW and VSE
Conflicting ethanol news side-by-side at Yahoo Finance
Sector Snap: Analyst says end of ethanol oversupply in sight
In Alternative Energy Hunt, Ethanol Under the Gun
These two news items were right next too each other on the summary page for VeraSun Energy (VSE: 4.21 -0.25 -5.61%), the largest pure play ethanol producer.
The first article reported an analyst from Oppenheimer & Co. had announced he believes the current oversupply of ethanol will disappear in the next 5-12 months. I am not sure there is really an oversupply because as far as I can tell, all ethanol producers are selling every gallon they are producing and I have not heard of any idle production. There has been a worry of an overbuilding of ethanol plants, but many have been cancelled or put on hold, and it appears production capacity will really level off the middle of 2009.
The second article focuses on the twin problems of corn ethanol’s bad public image and high corn costs that really cut into margins. There are some interesting comments on the politics of ethanol and the belief that the next administration would not be a supporter of corn ethanol as a renewable fuel. The article also discusses the hard times ethanol companies have fallen on, stock price wise, and getting financing for new plants. Again the cry for cellulosic ethanol is raised, but the article does point out that there are currently 134 producing grain ethanol plants and 61 under construction and exactly zero cellulose ethanol plants producing ethanol.
My own belief is that the U.S. will continue towards about 10% ethanol blend in all gasoline, for both clean air and reduced oil dependence reasons. This give an annual requirement of 18 million gallons and current production is about 7.5 million gallons with capacity peaking in 2010 at about 14 million gallons. The current Renewable Fuel Standard calls for 36 billion gallons by 2012 and the Democratic presidential candidates are calling for 60 million gallons by 2030. But of course they do not want it to be corn ethanol. I do not see any way to meet the RFS without significant corn ethanol production.
I also think that when/if cellulose ethanol become viable, it could benefit corn ethanol producers in several ways:
- Corn ethanol producers are natural candidates to switch to cellulose with their already built and functioning plants.
- Competition from cellulose feed-stocks should drive down corn costs as less is needed for fuel. Cellulose ethanol producers may be surprised what their feed-stocks cost once there is a market for them. See this story.
- The government will need to support ethanol prices so all of their “friends” who build cellulose ethanol plants can get a decent return on their investments.
I think VeraSun Energy, on its way to becoming the largest ethanol producer, will surprise many with its profitability over the next few years. I have started picking up a small position at current prices.
Note: I am long VSE.
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