Thursday, October 18, 2018
It goes without saying that I remain pessimistic about the broader market picture, but the market has recovered nicely this week from last week’s steep declines. A key aspect of investment success is to listen to the market despite what one believes, and so I continue to look for interesting charts.
Today I will provide a few interesting charts that I discovered many weeks ago and with that comes both an opportunity and a warning.
Each of these companies were discovered in August, after a significant decline, however we are now almost 60 days further along, and each of them are lower than when the companies were identified.
Markets take time to find a bottom, particularly when there are structural weaknesses (the same applies to companies with significant structural changes), and patience is key to getting a good entry point. I believe the overall market is still extremely vulnerable, but there are clearly opportunities for short and intermediate term wins. Over the long term, the risk of a structural change to market dynamics should be the real concern, so be prepared to exit positions.
Here are some companies worth noting:
Babcock & Wilcox (BW) – After moving from $7 to $1, there is a good chance that the company rebounds somewhat. The fundamentals have not been reviewed in detail, but the debt is manageable. The company appears to be refocusing at a lower level, with assets sales, a recent rights offering, debt repayment and other actions to ‘right the ship’. Again, no detailed analysis here, but the shares have lost 80% of their value, so this is a bet on improvement from this new, lower level.
Costamare (CMRE) – Costamare is a major shipping company (primarily bulk carrier) and has declined significantly from a recent high. Shipping is a leading indicator for economic activity, and keeping in mind that I am negative on the economy overall, this company may be seriously impacted by further declines in trade. Patience may still be warranted, but, Costamare has good cash flow, a dividend and a modestly good balance sheet. As long as there are widely distributed supply chains, there is a good chance that the company will still be around for the foreseeable future.
Dean Foods (DF) – Dean Foods is a provider of prepared foods. If you have heard my commentary about where to invest in hard times, it focuses on three things. Food, Energy and Metals. This is an opportunity to own a piece of a major food processor, and while there are plenty of risks in doing so, the company has a long history of distributing the food people need. The stock topped out around $20 in 2016 and is now down about 60%. It offers good cash flow a healthy balance sheet and a dividend.
Diebold (DBD) – Diebold is perhaps one of the more troubled companies in today`s list, but if you assume they survive their troubles, it is also crazily undervalued. In simple terms they sell things like ATMs and point of sale (POS) systems, and they have a strained balance sheet. This company would only be appropriate for those willing to accept elevated risk. That said, the market cap is lower than their cash, and it trades for just 1.4x book value. 30% of the share float is sold short (others see some problems too!), and the company has eliminated their dividend. With a new CFO and a refinancing, there is opportunity here, but at high risk.
Jounce Therapeutics (JNCE) – Jounce is a clinical stage biotech focused on immunotherapy. My favorite company in this space remains Nektar Therapeutics, but it has had a significant valuation jump. The interest in JNCE (down 75%) is based solely on technical analysis and does not reflect any understanding in their therapies. Of course bringing drugs to market is a long and expensive process, but the volatility makes this issue attractive as it is likely to rise based on hope alone.
Please do your own research . . .