Tuesday, January 22, 2008

Itch to Buy

Investors may be getting itchy fingers, watching the markets in the last few weeks and seeing the major indices dropping day after day. After all it is the sub-prime borrowers and the hedge funds who bought the securitized loans that have run out of money. The rest of us have seen our margin capacity drop, but most still have some loose change.

The question - is now the time to jump into long positions? or short-more? Since I have a long-bias as an analyst and stock picker, I am now looking for the right time to resume taking long positions. (For the record, I use bear-case option strategies in my personal portfolio.)

If you just cannot wait to see resolution of credit market and liquidity problems - the various holders of those sub-prime loans need time re-work valuation - look first at dividend paying stocks.

The key is to find a company with ample resources to continue paying a stable, consistent dividend. Then look for stocks trading off 52-week highs. In other words, look for stocks with good dividend yields.

It is important to discriminate among dividends. For example, two months ago, Bank of America Corp. (BAC: NYSE) looked interesting. In the low-40s, the stock’s dividend yield was near 6%. However, today the stock is in the mid-30s and the dividend yield has topped 7%. Unfortunately, profits in 4Q07 all but evaporated at BofA. Management spoke to “dislocations in capital markets and the slowing economy” in the earnings press release, bringing into question whether the dividend could be dislocated also.

Recession proof industries are a better place to look than the financial markets. Take for example, the waste management industry, which “keeps on truckin’” no matter what. Within the Crystal Equity Research Coverage group, the shares of hazardous waste handler American Ecology, Inc. (ECOL: Nasdaq) are currently yielding 2.97%. The shares of landfill operator and burgeoning e-scrap collector Waste Management, Inc. (WMI: NYSE) are yielding a bit more at 3.2%.

Du Pont de Nemours (DD: NYSE), which is trying to transform itself from a pollution-spewing chemical company to an environmental champion, is trading near its 52-week low in the low-40s. The dividend yield has risen to 3.84%. Du Pont’s operations are not immune to recession, but it is sufficiently diversified to withstand economic cycles.

In September 25, 2007 post entitled “Small Cap Dividends,” I provided a list of fourteen small cap names with attractive dividend yields. American Ecology was at the top of the list. The ECOL stock price and dividend yield are largely unchanged as are expectations for future sales and earnings.

The rest of the list includes some recession-strong operations like Andersons and FerrellGas Partners. There are also a few others like Centerplate that may see still lower stock prices and high dividend yields before an economic recovery is realized.

Andersons, Inc. (ANDE: Nasdaq) $42.35 (was $47.07 9/24/07) - grain, ethanol, rail services; agriculture nutrients; $758.1 million market cap; 0.70% dividend yield; 12.4 times PE

Applebee’s International, Inc. (APPB: Nasdaq) $25.48 (was $24.65 9/24/07) - casual dining restaurants; bought out by IHOP Corp. in November 2007

Calumet Specialty Products Partners LP (CLMT: Nasdaq) $32.81 (was $49.90 9/24/07) - hydrocarbon products; $965.7 million market cap; 7.76% dividend yield; 14.20 times PE

Carbo Ceramics, Inc. (CRR: NYSE) $34.02 (was $50.61 9/24/07) - building materials; $833.1 million market cap; 1.69% dividend yield; 15.20 times PE

Centerplate Units (CVP: NYSE) $11.69 (was $16.29 9/24/07) - food concession and facility management; $467.4 million market cap; 13.0% dividend yield; Neg PE

Eagle Bulk Shipping, Inc. (EGLE: Nasdaq) $19.62 (was $25.89 9/24/07) - shipping services; $916.8 million market cap; 10.0% dividend yield; 15.6 times PE

Ferrellgas Partners, LP (FGP: NYSE) $19.90 (was $22.57 9/24/07) - specialty retailer of propane gas and related equipment; $1.3 billion market cap; 9.94% dividend yield; 26.1 times PE

Forward Air Corp. (FWRD: Nasdaq) $27.75 (was $29.62 9/24/07) - trucking services; $805.0 million market cap; 1.04% dividend yield; 18.5 time PE

General Maritime Corp. (GMR: NYSE) $21.02 (was $28.13 9/24/07) - marine oil transportation services; $667.2 million market cap; 9.60% dividend yield; 12.80 times PE

Heartland Express, Inc. (HTLD: Nasdaq) $14.53 (was $14.29 9/24/07) - trucking services; $1.4 billion market cap; 0.54% dividend yield; 18.90 times PE

Health Management Associates, Inc. (HMA: NYSE) $5.24 (was $7.01 9/24/07) - acute-care hospitals in rural communities; $1.3 billion market cap; 4.5% dividend yield; 10.9 times PE

Movado Group (MOV: NYSE) $22.27 (was $31.95 9/24/07) - retailer of watches and jewelry; $581 million market cap; 1.50% dividend yield; 11.9 times PE

Schweitzer Mauduit International, Inc. (SWM: NYSE) $24.14 (was $22.79 9/24/07) - paper products; $375.7 million market cap; 2.53% dividend yield; negative PE

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Buy rating on ECOL shares.

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