Bottom Feeding

November 26, 2019

I haven’t written here in a while because very little makes sense to me on the Macro scale.   Here are a few items I am paying attention to:

    1. The President of the United States is a liar and possibly an agent for a foreign government.  He is doing all that he can to rip up the constitution and upend democracy..   This is a significant negative for markets, and asset values in the US.  Tracking the lies requires an army of people and the The Washington Post runs a tracker and they have a nice graph as well.
    2. The Federal Reserve has lowered rates a couple of times (from 2.25 in July to 1.75 at the end of October), to mitigate the effects of a slowing economy.
      Federal Funds Rate - November 2019
      Federal Funds Rate – Courtesy St. Louis Fed

      This has boosted asset values since there is nowhere left to put money.   There is evidence however that lowering interest rates is not increasing economic activity, it is just raising prices.  For example housing prices

Case-Schiller Home Price Index - 20191126

And equity prices

SP500 Simple - 20191126

3. Meanwhile the Federal Reserve is being forced to push money into the banking sector to keep interest rates from soaring.  This is an arcane area, but in late September lending between banks jumped to about 7% and threatened the entire market.   The NY Fed stepped in to start pushing money back into the banking system.  This is a significant policy reversal and highlights that banks will be supported and the government will continue to flood the system with money.

4. Around the world there are significant demonstrations related to the average person’s well-being.   Primarily in places like Venezuela, which we don’t hear much about any longer, but also in Chile, and Colombia.  Hong Kong has been under siege for months now, but many other areas are experiencing similar unrest.  Bolivia’s leader fled the country, Iraq is undergoing demonstrations, even non-deomcratic countries or pseudo democracies, like Iran and Russia are experiencing unrest.

On top of these items there are a wide range of environmental issues unfolding as well, with flooding (Venice, France, N. Italy), earthquakes (Albania, France), weird weather (major storms in western North America and flooding in Europe) and more.

Overall, the analysis has to be that this diverse and comprehensive system to keep the world moving forward is working.  For that reason I am going to start to look at some issues that are worth investing in, but focus on those that are already beaten down.

One of my scans looks for stocks that have recently been significantly under-performing the market.   Many of them do not warrant further examination due to issues with the company that bring too much risk or insufficient potential reward, but some warrant a closer look.

My latest review found almost 400 companies that have had substantial declines, and that number is almost twice as high as in a normal market where it is frequently around 200.  The fact that this is happening while markets are making new highs suggest that investors are focusing on the ‘best’ names and selling off some of the smaller or poorer performing companies.

Let’s look at a few of the companies:

Cubic (CUB):  Cubic is a military contractor that supplies communication equipment and provides logistics, and more to their customers.   They recently reported good earnings, but were downbeat on future growth.  Given that the stock was priced like a growth company (P/E of 37 currently) some profit taking may have been warranted.  Earnings also led to an analyst downgrade and a 20% decline in the stock price.   The company has a long history and is likely safe, even if the price decline doesn’t yet make it cheap.

20191126 - CUB

Danaos (DAC): A marine shipping company based out of Piraeus (Athens) Greece, the company has substantial assets and debt, which produce reasonable cash flow.  The company is not expensive relative to other sectors, but a drop off in commerce and marine shipping could harm the company’s cash flow.  The recent drop makes this an intriguing opportunity.

20191126 - DAC

Exterran (EXTN): A oilfield services company, the stock has been in free fall from about $13 to now about $5.50.  This is currently a difficult space to be in.  Drilling companies are retreating quickly from the ‘drill, baby, drill’ philosophy that became entrenched over the past dozen years.   As capital has exited the sector, drilling services are bound to get squeezed.   Exterran is not in bad shape, but with limited cash, a hefty debt load and shrinking revenue, it may be a while before the contraction in the oilfield services space plays out.  Best to be patient.

EXTN - 20191126

Fluidigm (FLDM):  This company produces equipment for researchers and other labratories in life sciences.  The company has recently initiated a private offering of $50MM which will double it’s debt load.  This may explain why the shares are down about 50% this month, and it may be an exciting opportunity to make an investment. The company is currently cash flow negative and further debt will increase their cash flow needs, but the addition of $50MM to their current cash balances will offer the company plenty of runway for operations, barring any acquisitions.

20191126 - FLDM

Plantronics (PLT): This well known maker of communication equipment has been knocked hard, down about 50% from the springtime highs.   In it’s most recent quarter, the company missed expectations for revenue and offered weak guidance sending the stock down sharply.   Financially, the company is quite stable, with a pretty significant debt load supported by a large cash position and positive cash flow from operations.  As a well known company with a strong balance sheet it is worth a look.

20191126 - PLT

Party City (PRTY): A well known retailer, Party City has not been celebrating their share price recently.   Down about 65%, the company has a very high debt load and is losing money.   While companies like this have powerful upside if they turn around, the high debt load makes it difficult for that to happen in the near term.   Probably best to steer clear of this party.

20191126 - PRTY

This does not constitute investment advice, and I recommend you look into these companies further before making any investment decisions.


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