Apologies to readers who have been missing my articles recently. I’ve had little time to write as I have been too busy trading. Long-time readers know that I’ve been bearish since the summer of 2009, and it has been a painful two years as I maintained my short positions and puts in the face of a generally rising market.
Market Outlook
In my opinion, we are still a good distance from the bottom. The rise of the stock market over the last two years has been predicated on stimulus spending at the Federal level and Quantitative Easing (QE) from the Federal Reserve (Fed). Today, not only has stimulus spending ended, the recent debt limit deal sets the Federal government on a decidedly contractionary path. While reducing government spending is prudent in the long term, it is bound to have negative effects in the short term.
On the monetary side, rumors were circulating that the Fed might announce a third round of QE at their meeting on Tuesday, but instead the chose to keep interest rates at record low levels into 2013. As Chris Gaffney, CFA wrote in the Daily Pfennig, “the Fed was basically admitting the US economy will be stuck in a rut for the foreseeable future.” While low interest rates generally do provide a stimulus to the economy, that stimulus acts by stimulating borrowing. But both taxpayers and governments are borrowing less in an attempt to get out of debt, meaning the stimulative effect of continued low interest rates is likely to be muted.
With that backdrop, and business confidence undermined by the current decline in the stock market, a double-dip recession seems likely, assuming you believe we ever left the recession. This should lead to further market declines over the coming quarters, so I don’t think that we have reached a bottom by any means.
Buying Opportunities
On the other hand, the rapid declines over the last two weeks have lead to a combination of panic selling and forced selling due to margin calls, which is pushing many stocks out of their fair value range. Further clean energy stocks had already been pummeled by significant declines over the last two years, even as the broad market was rising.
I now believe that selected clean energy stocks are trading at prices that we are unlikely to see again because of indiscriminate selling to meet margin calls. What follows is a list of stocks I’ve purchased over the last couple weeks, and why I think they represent good values now.
New Flyer Industries (NFYIF.PK/NFI.TO)
New Flyer is currently going through a conversion from its former unusual stapled security structure to a more traditional structure (see here and here.) After conversion, management says that the stock will pay a dividend of approximately half the current level, or about C$0.48 annually. With the stock trading at C$6.59 as I write, that’s an annual dividend yield of 7.3%, which should be well covered by earnings. I most recently bought shares for US$6.66 on Wednesday.
Note: If you plan to buy before the conversion deadline of Aug 18th, make sure that your broker has not set an earlier deadline. Unconverted IDS’s will be worth less than the exchanged shares. However, if you can buy IDS’s for C$6.50 or less, I think thay will still be a excellent value even after the dilution caused when other New Flyer IDS shareholders exchange their notes for additional shares.
Beacon Power Corporation (BCON)
Beacon has been operating their first commercial scale 20MW flywheel energy storage plant at full capacity since early this year without mishap, achieving full capacity in June. They are set to begin construction of their second 20MW plant later this year, 54% of the $53 million cost of which will be covered by state and federal grants, making the funding of the plant practical even for a company with a high cost of capital like Beacon. If both plants continue the relatively trouble-free operation seen so far, that experience will pave the way for less capital-intensive turn-key sales for flywheel energy storage plants worldwide. I most recently bought shares of BCON for $0.85 on Tuesday.
Great Lakes Dredge and Dock (GLDD)
When I wrote about GLDD last year as part of my Peak Oil investments series, I said it seemed like a bargain at $4.50. The combination of disappointing second quarter results due to equipment downtime and the general market decline dropped the stock back below $4.50 on Aug 8th, when I made my most recent purchase. I’m not sure where the bottom for this stock lies, so that was a small purchase which I expect to add to if the stock continues to decline.
Waste Management (WM)
Last week, I wrote about trash stocks as possible income investments on Forbes, just as the market was beginning the current downward leg of its decline. My top pick at the time was WM due to a low debt to equity ratio and a relatively high dividend reasonably well covered by cash flow and income. I bought some at $29.60 on August 8th, and plan to buy more if the stock declines further.
Conclusion
Market panics are always a good time to pick up solid income investments at discounted prices, a description which applies to both New Flyer and Waste Management. Great Lakes Dredge recently raised their dividend to $0.08 annually, for a 2% yield at $4.50, and the dividend is very well covered by last year’s earnings of $0.59 and even this year’s expected earnings of $0.35, which does not make it an income stock, but does make it look like a good value bet.
The sole speculative company is Beacon, which is currently trading well below its book value of $1.19, and is in the process of rapidly increasing revenues, which give it significant upside potential.
In the current market climate, any of these stocks could fall significantly lower: panic selling and margin calls pay no attention to valuation. But if they do fall farther, I will be buying more, at even better values than today.
DISCLOSURE: Long NFYIF, WM, BCON, GLDD.
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August 18th, 2011 at 10:09 pm
It seems like it is still too soon to tell how the debt ceiling decision will affect the US economy. Many people pulled out of money market funds claiming that they were too risky of an investment for the present. Only time will tell if they were wise or not.