Chicago Bridge and Iron (CBI) is in the engineering and construction business with customers in the energy and natural resources business. At first glance, the company looks inexpensive, selling at a PE of 11 times 2009 earnings estimates and only 2/3 of sales.

As is frequently the case, there is a 'but.' On 15 July, CBI pre-announced their 2nd quarter earnings. They will be taking a $317 million, or $2.38 per share, pre-tax charge to cover costs related to two ongoing construction projects in the UK. That charge is expected to cover the projects through completion. The problems stemmed from unusual weather conditions and labor issues with subcontractors. They are taking steps to reduce risk in projects going forward. Without the problems on these two projects, the CEO stated they would have beat estimates.

The company isn't in any danger of going out of business; there's plenty of net cash on the books. However, the charge off did trigger some covenants on their credit lines. They are negotiating with the creditors and those talks were reported to be going well.

I followed vanmeerten's advice and took a look at the CBI opinion on Barchart.com, nearly every indicator was a sell.

Foster Wheeler (FWLT), with a similar business profile, trades at 13 times 2009 estimates. That PE premium seems justified based on a higher projected growth rate. On a one-year chart, CBI and FWLT traded nearly in tandem until late April, probably CBI's last earnings report. They then tracked in parallel until mid-July where CBI took another drop corresponding to the pre-announcement call.

This one is a tough call. I think energy and natural resources infrastructure still has some life left, although the easy money's probably already been made. CBI does have a couple of recent, significant contract announcements. The two problem projects in the UK along with recent market weakness have CBI trading at an attractive valuation. If the most recent charge really is the last write down associated with the UK projects, the company should close the gap with its peers. It would need to tack on about 12% to get back in lock-step with FWLT. However, I'm not sure the stock price is fully discounting the problem projects. CBI's recent earnings report history isn't stellar, Yahoo finance shows they've missed estimates three of the last four reports.

If you believe the project risk problems are behind them, CBI looks attractive. However, I think FWLT is a better buy in the engineering and construction space. I didn't check, but Fluor, Jacob's Engineering, McDermott and others would also be worth a look.

Comments: View Comments |  Wednesday July 30, 2008

Seriously, what types of stocks are working lately? The market has been in turmoil since Strategy Lab Open ended and it's not clear whether oil and commodities are going to resume leadership, something else will take off, or nearly everything will tank.

My SLO portfolio is fairly well diversified, but very little has shown much strength lately. The portfolio did pop back over $10 NAV; that can be explained in three letters - WFC.

Graham Corp. (GHM) had a spurt recently that looked like momentum investors piling in; then took a $15 dive over the middle of last week.

Transocean (RIG) and Chevron (CVX) were holding up reasonably well; but oil's recent drop took a toll there. FWIW, I think anyone who sold them over the last couple days will regret that decision when earnings are reported over the next couple of weeks.

AT&T (T) jumped on in line earnings, then gave it all back. Lincoln Electric (LECO) jumped on a good earnings report and held on to most of the gains over Thursday's awful market.

Unilever (UL), Sysco (SYY), GE, NNBR, National Grid (NGG) and RPM International haven't done much of anything.

My best performer recently has been Novartis (NVS). It's the only stock in the portfolio that was up on Thursday. I've got Johnson and Johnson (JNJ) on a watchlist and it's also been doing well.

If the recent market action isn't just a rumble before continuing the old trends, it may be time to overweight traditional defensive plays like healthcare and consumer staples. If lower oil and commodity prices hold, the raw material inflation pressures on those companies will ease while the engine driving oil, drillers, miners and commodity stocks cools.

I don't think there's enough information to start making portfolio shifts yet, but the trend is worth watching. One signal flag would be if ExxonMobil and Chevron give strong reports and forecasts next week with no reaction in the stock price.

What are you seeing in your portfolios? Anything besides healthcare that's been consistently strong over the past couple of weeks?

On a fun note - I got my first Marketocracy green star by doing better than 82.1% of the funds over the past six months. Since over 70 players finished ahead of me in SLO; we must have collected a fair amount of M* bling. Feel free to share any new star status.

Comments: View Comments |  Saturday July 26, 2008

Wells Fargo (WFC) released second quarter results on 16 July and the market reacted very favorably. They reported earnings of 53 cents a share, down from 67 cents in the year ago quarter, but 3 cents ahead of consensus estimates. They also raised the dividend from 31 to 34 cents a share per quarter. The stock price jumped over 30% from the previous days close. At Wednesday's closing price, the yield on the new dividend is 5%.

Earnings highlights:

The earnings release sheds some more light on the quarter; some good news and some not so great news.

The first piece of great news was in the opening safe harbor statement. Mr. Bob Strickland, Director of Investor Relations, stated "...we believe we can mitigate losses by working with customers who are experiencing financial stress and that based on the current interest rate environment most of our adjustable-rate mortgages at Wells Fargo Financial scheduled to reset during the remainder of 2008 will reset at or below their current rate." Key takeaway here is that most folks who are currently on schedule with their adjustable-rate loan payments aren't going to be reset into trouble.

Pre-tax, pre-provision income was up 34%. When things eventually get to the point that WFC doesn't need to set aside massive loan-loss provisions, earnings growth should be solid.

WFC is having some success in workouts for borrowers in trouble. Seventy percent of customers 60 or more days overdue, but not in bankruptcy or foreclosure, contacted by WFC were able work out a solution. The remainder either declined help or couldn't be contacted.

Net charge-offs as a percentage of average total loans declined to 1.55% from the previous quarters 1.6%.

Revenue, loans, core deposits and net interest margin were all up compared to the previous quarter.

Although net loan charge-offs declined since the previous quarter, loans 90 or more days past due but still accruing increased from $1.63 billion to $1.78 billion.

Commentary:

I was surprised by size of the dividend hike. I was expecting a one, maybe two, cent hike just to keep the now 21 year string running. The quarters earnings were just ok, but the 10% dividend hike really made a statement on management's opinion of the business prospects going forward.

I believe WFC is in great position to grow the business through a combination of acquisitions and organic growth. Among the big banks, they're in about the best position to sift through asset sales or make acquisitions. Citigroup and Wachovia are struggling; BAC already bought Countrywide and JPM has to digest Bear Stearns. IndyMac's recent failure should offer WFC a great opportunity to grow the business. Customers will be looking for a safe bank in a region where WFC is strong and there should be some asset sales to cherry pick. News reports covering the long lines of depositors at IndyMac branches may also prompt some people to shift accounts from weaker institutions to stronger ones.

In short, Wells Fargo painted a picture with some hope of improving business conditions. There are still a lot of problems to be worked out and there will no doubt be hiccups along the way. So far, Wells has managed the housing and credit meltdown better than most. With the dividend hike, management made a clear statement of confidence in the future.

I also recommend reading Tim Melvin's piece on Wells Fargo and agree with his conclusion that there is no reason to chase the stock up if you want to buy. My guess is short covering had some part in Wednesday's price action and buyers will get a better entry point sometime in the near future. But, maybe, just maybe, the lowest entry price is now behind us.

Disclosure: Long WFC.

Comments: View Comments |  Saturday July 19, 2008

With only a few days left, I wanted to look over what's worked for me over the course of the contest, what hasn't, what I've done well and where I need to improve.

I outlined my reasons for entering SLO and planned strategy in my first blog entry. I wanted to get some realistic portfolio management practice and help decide whether to shift my retirement accounts out of mutual funds to more individual stocks. The primary portfolio focus was on dividend paying stocks with above average yield and good prospects for raising the dividend. There was also room in the portfolio for some growth and cyclical picks. I didn't expect that strategy to be in contention for the top or bottom of the leaderboard and it wasn't.

I'm pleased with how well I did over the contest. Part of my reason for playing was to evaluate whether or not I had the ability and commitment to manage my own retirement portfolio. From a performance standpoint, the answer is clear - I managed to beat the S&P500 and the stock mutual funds in my portfolio. I've also enjoyed following the market and feel like I can continue to devote the time to research and manage the portfolio.

With two days to go, the portfolio is down slightly from the July 31, '07 start. If I add in pending dividend payments, it probably sneaks above par. That doesn't sound good until you compare it to the S&P500, which is down 12.35% over the same time span. My returns from the 28 Jan start of Strategy Lab also top four of the six players in that contest.

Out of 32 stocks held at some point during the contest, I had 18 losers and 14 winners.

Stocks that performed well for me over the course of the contest were primarily energy and energy related industrials [Graham Corp. (GHM), Joy Global (JOYG), Chevron (CVX) and Transocean (GSF/RIG)]. InBev's offer for Anheuser Busch pushed BUD to my second biggest gainer. Recently, Novartis (NVS) has been doing very well after issuing good news on its cancer treatment drug.

At the other end of the spectrum, my biggest dollar loser was Cisco (CSCO). That's particularly frustrating because I let a win turn into loss and then loaded up to gamble on an earnings report - not smart. Second big loser was Rubio's (RUBO) a microcap Mexican restaurant chain that I still think has promise if they can expand out of the weak Southern California economy. RUBO is a very thinly traded stock and with M*'s order filling system, when things go bad it's very difficult to exit the position. Wells Fargo (WFC) also didn't do well for me. No surprise given the disaster in financials. What is a little surprising is when the dividend payments are factored in, my WFC position wasn't far off the S&P 500; trading around the position definitely helped. I also managed to pick what has to be the only losing gold stock in existence over the past year, Northgate (NXG).

I summarized some lessons learned from round 1 and really don't have much to add to that list. Balancing the discipline between not letting winners turn into losers and not bailing out of winners too early remains a challenge. In many ways, it seems like more of an art than science and I made mistakes in both directions over the contest - sold winners too early and held winners too long.

One benefit of running a mock portfolio is it helps with patience in real life; when things are crazy I can mess around in M* and use those moves as a 'cooling off' period or time to evaluate a new position before making changes in my real portfolio. SLO stock research resulted in adding some winners like GHM, NVS, and BUD to my real portfolio. Still waiting to see if Dresser-Rand (DRC) and General Electric (GE) will work out.

I found blogging about stock picks to be very helpful in organizing the reasons for making an investment and the associated risks. I'll plan on continuing with the blog and the M* portfolio as the experience and practice has been good for my real world investing. Hopefully Jamie will be rolling out the renovated site soon.

And, finally, the biggest benefit by far from this contest has been some new friends. I hope to continue trading e-mail, blog comments, M* forum posts, etc. with Tom, Dave, Don, Peggy, Eileen, Armin and others I've cyber-met over the past year. Thank-you all for reading my posts and for your comments, ratings and blog entries.

Best wishes to all of you. And good luck to whoever moves on to the next Strategy Lab.

Comments: View Comments |  Thursday July 10, 2008

Coal stocks, including Arch, have been strong over the course of this difficult market. A review of coal prices quickly explains why. According to a recent weekly NYMEX report issued by the Energy Information Administration, the near month price for Central Appalachian coal has climbed from a little over $44 per ton a year ago to over $138 per ton as of 27 June. In the same time frame, ACI stock has roughly doubled. At these coal prices, Santa may have to find something else for bad kids' stockings.

Last week, coal stocks got hit with a big correction on a drop in European coal prices. On 2 July, ACI dropped from just under $75 at the open to close a little above $62 per share. That was followed by an upgrade from Citigroup on the 3rd.

The key to Arch, and other coal companies, as investments going forward is whether the drop in European prices was a short-term market move or a signal of longer term pricing weakness.

ACI fundamentals still look strong. Despite a trailing PE of over 40, the stock sells for only 11 times 2009 estimates and those analyst estimates have been climbing steadily over the past few months.

The Energy Information Administration posts a lot of useful information on their coal data site. The latest International Energy Outlook 2008 Highlights predicts increasing coal demand going forward, largely due to projected increases in world electricity demand.

I don't think the drop in European prices marks the end of strong coal demand. World electricity demand is still growing and that means coal and natural gas demand will keep growing for the foreseeable future. Another potential source of coal demand is coal-to-liquid conversion for transportation fuels. I don't know what oil-to-coal price ratio makes that economically feasible, but if we get there coal companies would definitely benefit.

In addition to risk of a recession driving down coal demand, Arch faces cost risks. Mining is an energy intensive operation and those rising prices will hurt if they can't be passed on.

Rising labor costs also present a risk. If strength in the coal industry continues, labor is likely to push for pay increases to participate in the good times. If coal price hikes match or outpace costs, coal companies do well; if not, margins get squeezed.

Alternative energy presents a long-term risk to coal. If increases in wind, solar, and other renewable energy sources can grow faster than electricity demand, demand for coal would be reduced.

Energy stocks in general have been doing well in this tough market. Although there's no way to know for sure if that will continue, I don't see any reason for energy companies to start underperforming. Given that strength, having some energy exposure in a portfolio makes a lot of sense, and Arch is a good way to get that exposure.

Comments: View Comments |  Monday July 7, 2008  |  Stocks: ACI,

After missing the strong run in steel stocks and steel prices, I wanted to see if there might be a related play that hadn't participated. Steel producers have been on a roll with strong demand around the world leading to pricing power. Along with energy, agriculture and mining, steel seems to be one of the few things doing well in this market.

Consider what a company does with steel. They might cut it, drill it, mill it, bolt it, shape it, bend it, turn it or any of many operations to create a final product. But mostly, they weld it. And, as far as I know, the only publicly traded, pure play on welding equipment and consumables is Lincoln Electric (LECO). Comparing LECO to US Steel (X) and Arcelor Mittal (MT) on a one-year price chart shows the two steel companies up over 45% with LECO up less than 5%, so it hasn't participated in the steel run. I recognize LECO isn't in the steel business, but would expect the welding equipment business to be somewhat correlated to steel consumption.

The 23 April earnings call transcript paints a familiar picture for industrial companies, a mediocre US market and strong growth in the rest of the world. In his comments, CFO Vince Petrella stated, "..you will note that our sales were up 15% in the quarter with North America increasing 7% and sales recorded outside of North America up by 23%." However, even in the US some of the market segments are doing well. By region, roughly 60% of the quarter's sales came from North America, 25% from Europe and 15% from the other areas. LECO is continuing to expand operations in India and China.

Fundamentals are good. The market cap is about $3.3 billion. The company has about $133 million of debt and about $238 million in cash. Analyst estimates for '09 earnings are $5.76 a share, so at the 1 July close of $77.23, the stock is trading at 13.4 times '09 earnings. LECO pays a 25-cent quarterly dividend for a yield of about 1.3%. As of the quarterly conference call, they had 4.2 million shares authorized in their repurchase plan.

Zacks just initiated coverage with a tepid hold. Their '09 earnings estimate is a little lower than the consensus shown on Yahoo and Zacks correctly points out that LECO trades at a premium to other companies in the small tools and accessories industry. However, I'm not sure Zacks has accounted for the differences between LECO and other companies in its industry. Many of the other companies are levered to homebuilding or predominately operate in the US. With its global footprint and a business connected to strong steel demand, I believe LECO's premium is well deserved.

I had established a small position in LECO for SLO at $84/share, but sold on the Zack's coverage release. I'm gambling that their hold rating will pull the stock price down a bit and offer a better entry point.

Disclosure: No position in any company mentioned at time of posting.

ETA: After writing this, the 2 July market took LECO and the steel stocks for a big dive. I believe LECO's earnings story is still intact, but 'ol Mr. Market may offer up some more discounts as we find out how deep the bear is going to roar.

Comments: View Comments |  Wednesday July 2, 2008  |  Stocks: LECO,