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What Happens When My Stock Get Delisted?

Even Wall Street has standards.

I know that might sound hard to believe, but to benefit from the liquidity, capital-raising power and prestige that come with a listing on the New York Stock Exchange or Nasdaq, a company has to follow a few rules.

Among other requirements, to maintain a listing on the NYSE, a company has to have an average market cap and stockholders’ equity of at least $50 million and must have an average share price of $1 or more over a 30-day period. Nasdaq continued listing requirements are slightly different, but the same concepts regarding assets, market cap and share price apply.

For both NYSE and Nasdaq listing, companies are also required make timely financial disclosures.

Enter Ocwen Financial Corporation (OCN), which recently made the news for failing file its annual report in a timely manner.

Ocwen Financial received a deficiency letter from the NYSE. In plain English, this essentially means that OCN is on the naughty mat until it learns how to obey the rules.

Ocwen stock is not at immediate risk for being delisted, however.

OCN has six months to get its house in order before the NYSE takes any further action. And if after that six-month period Ocwen still has yet to publish its annual filings, the NYSE has the option to allow another six months to pass before initiating delisting. Of course, the NYSE could also opt to delist the company now if it felt that something dodgy was going on.

I expect Ocwen Financial to get its books in order well before a delisting happens. But this brings up a good question — one that all investors should learn the answer to:

What happens when the shares of a company you own get delisted?

A delisting is scary. And frankly, you generally have no business owning a stock facing delisting because, with few exceptions, a company that fails the continued listing requirements is almost always on the express train to bankruptcy.

Take RadioShack Corporation (RSHCQ) and its newly minted ticker, for example. Back in February, RadioShack’s plunge reached a low point when, after receiving two delisting warnings, the company was delisted by the New York Stock Exchange after failing to submit a business plan. RadioShack then filed for Chapter 11 bankruptcy protection days later.

Here are some general rules you should follow with respect to companies at risk of delisting or already trading over the counter:

  1. If the delisting is due to financial distress, stay away. Yes, the company might pull a rabbit out of a hat and recover, but chances are better that delisting is merely a stop on the road to bankruptcy.
  2. The over-the-counter market is a playground for manipulators and fraudsters. This is Jordan Belfort “Wolf of Wall Street” territory. Take any information you get on a non-listed stock with a major grain of salt.
  3. If the stock also trades on a well-regulated market overseas, it is fair game so long as its over-the-counter ADRs trade with sufficient trading volume. (A couple hundred thousand shares per day in volume is adequate liquidity for most investors.)

A recent high-profile example of this last point would be German industrial giant Siemens (SIEGY), which opted to be delisted from the NYSE last year due to the reporting headache of being registered in both Germany and the U.S.

However, Siemens actually provides a few examples of what to expect during a delisting. Holders of Siemens’ NYSE-traded ADRs woke up one morning to find that the ticker symbols on their shares had been changed from “SI” to “SIEGY.” The five-letter ticker symbol is typical of stocks that trade on the Pink Sheets or Over-the-Counter Bulletin Board (“OTCBB”), which is where most delisted stocks end up. The Pink Sheets and OTCBB are essentially the Wild West of investing, as there is very little in the way of regulation or oversight here.

Several quality stocks that I have owned over the year trade over the counter, such as Siemens, Nestle (NSRGY) and Daimler (DDAIF). But all of these stocks have one thing in common: They are blue-chip companies subject to a high standard of financial regulation in their home markets (Germany, Switzerland and Germany, respectively). For these companies, the U.S. over-the-counter listing is merely a way to allow Americans to buy the stocks at home, in dollars.

Bottom Line

As a general rule, stay away from companies at risk of delisting. Most already have a host of potholes to deal with.

Plus, while in theory, nothing will change with respect to your equity in the company, in practice you might find your shares a lot harder to sell. Over-the-counter stocks tend to have low volume and low liquidity because they are shunned by institutional investors. And because of the lax reporting requirements, they are a lot harder to research.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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Prospect Capital and the Best Stocks for 2015

10BEST2015_200x150-166x125The following is an update to the Best Stocks for 2015 contest. 

In December of last year, I wrote that I expected to see Prospect Capital Corporation (PSEC) generate returns of 40% or more over the course of 2015.

Well, as we near the end of the first quarter, we have a little catching up to do. Prospect Capital is sitting on gains of about 4%. That’s beating the S&P 500 year to date, but it’s certainly nothing to write home about. Meanwhile, one of my competitors, Rave Restaurant Group (RAVE), is already up 116% and another, Ambarella Inc (AMBA), is up 43%.

Up against competition like that, it is time to throw in the towel?

Absolutely not.

With more than nine months left in the year, Prospect Capital is still very much in the running.

To start, Rave Restaurant Group is a microcap stock, and Ambarella is a volatile, high-beta stock. I consider it very likely that one—or both—of these stocks crashes and burns long before year end.

I’m a little more concerned about Louis Navellier’s pick this year, Apple Inc (AAPL) I myself am long Apple and consider it a worthy competitor. But as much as I like Apple as a long-term holding, I consider Prospect Capital the better buy in 2015.

Let’s take a look Prospect’s recent developments. Prospect had a lackluster earnings release last month,  with EPS coming in at 24 cents per share rather than the 28 cents Wall Street expected.

But the far more important news in the earnings release was that book value remained stable. Net asset value per share was $10.35, a decline of 38 cents from the previous year. But substantially all of this decline was due to Prospect’s large dividend, which for much of 2014 was well in excess of current earnings. With the turbulence in the energy sector, there were concerns that Prospect might have some significant write-downs. Thus far, this has proven to not be the case.

This is a big deal because I specifically mentioned Prospect’s large discount to book value as a major reason to own the stock. If Prospect’s book value had seen serious deterioration, it would have blown a hole in my bullish argument. At year end, Prospect was trading at 80 cents on the dollar. Today, that valuation has crept up to 83 cents on the dollar.

That’s still ridiculously cheap. I don’t know about you, but I don’t come across too many 83-cent dollars, so I tend to pick them up when I find them.

Now let’s talk dividends. Prospect Capital slashed its dividend last year, which is a major reason why investors are so sanguine towards the stock these days. To many investors, a dividend cut is a breach of trust, and that is not always easy to mend. But in Prospect Capital’s case, it was the right move. As management de-risked Prospect’s balance sheet last year, the lower-risk, lower-return Prospect was not able to sustain its dividend at the current level. Today’s 8.33-cent monthly dividend is far more sustainable.

It also equates to a 12% yield at current prices. And 12% yields aren’t particularly easy to come by these days.

So, what sort of returns should we expect from here? A return to book value—which I believe is warranted—would add about 20% in capital gains. Add to that about 1% per month in dividends, and we get another 9% for a total of 29%. Add to that the 4% we’re already returned thus far, and we’re looking at 33%. And we could see returns significantly better than that if we see a special dividend or if Prospect trades at a premium to its book value—as it has for much of its life.

Is that a recipe for 100% gains in a single year? No, of course not. But it’s still a lot better than I expect the S&P 500 to produce over the next 2-3 years. And I expect that come December 31, it will be enough to make Prospect Capital the Best Stocks for 2015 winner.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

 

 

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March Madness Round 2: ExxonMobil vs Kinder Morgan

March Madness

This piece is part of InvestorPlace’s 2015 Stock Market March Madness contest. Follow the link and vote for your favorite stocks.

I’m torn as we enter Round 2 of InvestorPlace’s Stock Market March Madness, as I have to choose between two of my favorite energy stocks, ExxonMobil Corporation (XOM) and Kinder Morgan Inc (KMI).

Exxon beat rival oil major Chevron Corporation (CVX) in Round 1. (You can read my Round 1 pregame predictions here.) While I consider Exxon to be the better buy of the two majors because of its better potential for dividend growth and its massive holdings of Russian drilling rights bought for a song, Chevron was no pushover. The fan voting made this one of the tighter races.

Kinder Morgan’s win over Duke Energy (DUK) was a blowout, however. Kinder Morgan took 81% of the vote, and justifiably so. Kinder Morgan is a blue-chip pipeline operator in position to buy up assets from distressed shale producers on the cheap, whereas Duke is a slow growth utility that will face very serious headwinds once rates bond yields eventually start to rise.

I expect Round 2 to be a close game, but I’m going with Kinder Morgan. Let’s take a look at each team.

Kinder Morgan

Kinder Morgan is not an “oil major,” per se, as it has little international reach and little in the way of upstream energy exploration, but it is the largest energy infrastructure company in North America with about 80,000 miles of pipelines in operation. And while Kinder Morgan has not been completely immune from the effects of falling energy prices, the damage has been pretty minimal. About 85% of KMI’s cash flows are fee-based, meaning they have virtually no exposure to falling energy prices, and most of the remaining 15% of cash flows are hedged.

After its reorganization last year that saw it merge with its popular master limited partnerships, Kinder Morgan now sports a gargantuan $87 billion market cap. This pales in comparison to ExxonMobil’s $353 billion market cap, but it’s enough to make Kinder Morgan the fourth-largest holding in the Energy Select Sector SPDR ETF (XLE). ExxonMobil is the largest holding, of course.

My choice of Kinder Morgan comes down to dividends. Kinder Morgan sports a higher current yield than Exxon (4.5% vs. 3.3%), and while all dividend forecasts have to be taken with a grain of salt following the collapse in the price of crude oil, Kinder Morgan should also be in better position to raise its dividend in the years ahead, come what may with energy prices.

Since initiating its dividend in 2011, Kinder Morgan has more than tripled its quarterly dividend. In the last year, its dividend is up a cool 9%, and management wrote last year that it expected to see dividend growth of at least 10% per year through 2020. That may be harder to achieve if domestic energy production falls off, but it is still probably a little better than what ExxonMobil will be able to produce going forward.

ExxonMobil

I should be clear on one point, however: ExxonMobil is no slouch when it comes to raising its dividend. And as I wrote back in December, ExxonMobil continued to raise its dividend throughout the 1980s and 1990s, one of the worst energy bear markets in history. From 1980 to 2000, Exxon nearly tripled its quarterly dividend from $0.075 per share to $0.22.That works out to annualized dividend hikes of about 6% per year.

That’s not too shabby at all, and if Exxon could achieve that over the next several years I would be thrilled. But I don’t think that 10% annual growth is likely unless we see energy prices rebound in a hurry.

I would be remiss if I didn’t mention that Exxon is one of only three public companies in America to still have a AAA bond rating. The other two are Microsoft Corporation (MSFT) and Johnson & Johnson (JNJ). Exxon may be operating in a tough environment right now, but this is still one of the very bluest of blue chips.

Kinder Morgan and ExxonMobil are both stocks that I’d be comfortable recommending you buy and hold, reinvesting your dividends. But in Round 2, I’m expecting Kinder Morgan to pull through with a win.

Disclosure: Long KMI, XOM, MSFT, JNJ

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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March Madness Round 2: Ford Motor Company vs. Walt Disney Company

March Madness

This piece is part of InvestorPlace’s 2015 Stock Market March Madness contest. Follow the link and vote for your favorite stocks.

In Round 1 of InvestorPlace’s Stock Market March Madness, I predicted that Ford Motor Company (F) would roll over Monsanto Company (MON), and Ford fans outvoted Monsanto fans by a three to one margin.

Alas, I was not no prescient with respect to the Walt Disney Company (DIS) vs. General Electric Company (GE) contest. While I still consider GE to be the better long-term bet, I was outvoted by a wide margin. Disney took 84% of the vote, utterly crushing GE.

Now, Round 2 pits Ford against Disney, a very uneven match-up. In Ford, we have an old-line manufacturer fighting against ugly demographic trends: As the Baby Boomers age, they are driving less, and the Millennials are less interested in cars than preceding generations. And in Disney, we have an old-line media company with an uncertain future in the era of cord-cutting and paid TV delivered over the internet.

Both companies face their challenges, but in my mind there is no real contest. Ford is cheap and essentially has nowhere to go but up. Disney is quite expensive, and investors seem to be ignoring the risks on the horizon. The clear choice here is Ford.

Ford Motor Company

Auto sales are at roughly 2005 levels, unchanged for ten years after falling to 30-year lows in 2009. Over that same period, real GDP grew by more than 16% and the US population grew by 9%. There is a big gaping black hole where auto sales should be, and one that I expect will be filled soon.

As I mentioned in Round 1, Americans have been putting off car purchases for years due to the bad economy, and the average car on the road is over 11 years old. So yes, even while Baby Boomers drive less and Millennials opt for Uber, you’re still looking at a lot of demand for new cars in the years ahead as the existing stock eventually breaks down. While not a “backlog” of orders, per se, it’s fairly close.

AutoSales

Let’s take a look under the hood at Ford. At first glance, Ford stock looks mildly pricey at 19.8 times trailing earnings. But remember, Ford’s earnings are highly cyclical, and looking at only a single year of data can be very misleading. Using the cyclically-adjusted price/earnings ratio (“CAPE”) or the current price divided by the average of the past ten years of earnings, we get a much more reasonable valuation of 8.4.

To put that in perspective, the lowest CAPE on record for Ford was 7.3. So, at today’s prices, Ford is trading not too far from its all-time valuation lows.

FDiv

Meanwhile, Ford has lately emerged as one of the highest-yielding stocks in the S&P 500 with a dividend yield of 3.8%. After a long hiatus, Ford reinstated its dividend in 2012 and has since tripled it from $0.05 per quarter to $0.15.

In Ford, we get a cheap stock paying a high dividend that is likely to get a catalyst from what I expect to be several years of rising car sales. That sounds like a winner to me.

Walt Disney Company

Though we shouldn’t count out Disney. After its performance in Round 1 it’s safe to say that Disney is a fan favorite, and with good reason. Disney’s earnings per share and revenues per share are sitting at all-time highs, and Disney may well enjoy the best summer in its history if the Avengers sequel is as big a hit at the box office as expected.

Dis

But as I mentioned in the Round 1 article, Disney is not primarily a movie studio or a theme park operator. It is first and foremost a TV studio. Its media division — which includes broadcast giant ABC and cable sports juggernaut ESPN among others — accounts for close to half of revenues in any given year.

So far, this hasn’t been a problem for Disney. But things are changing in the world of paid TV, and it’s not entirely clear how the existing operators will fare.

Dish Network (DISH) potentially launched a game changer earlier this quarter when it released Sling TV, the first cable TV package delivered over the internet to streaming boxes like the Roku or Apple TV and to mobile devices. And now Apple (AAPL) is getting in on the action with a similar web-based TV offering.

If these services entice cord-cutters to pay for TV—and the attrition from existing cable companies tapers off—then network owners like Disney might actually be the winners in this new revolution. But if it also leads to price wars, I could see margins getting hit hard. Frankly, it’s just too early to say how it will shake out, yet investors seem to be ignoring the risk altogether. Disney’s stock is very expensive at a cyclically-adjusted price earnings ratio of 35.

My pick in Round 2 is Ford. It’s less sexy than Disney, but it’s a lot cheaper and far less at risk of a major business upheaval.

Disclosures: Long AAPL

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

 

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March Madness Round 1: Kinder Morgan is a Slam Dunk over Duke Energy

March MadnessThis piece is part of InvestorPlace’s 2015 Stock Market March Madness contest. Follow the link and vote for your favorite stocks.

In a showdown between Kinder Morgan Inc (KMI) and Duke Energy Corporation (DUK), Kinder Morgan will dribble circles around Duke. If we’re playing on college basketball metaphors, Kinder Morgan is Duke University while Duke Energy would be some obscure community college in Wyoming.

I’m probably not being fair to Duke Energy here. It is by no means a bad company within its industry. It just so happens that Kinder Morgan is a long-time holding of mine and one of my favorite stocks at current prices.

Kinder Morgan is the largest energy infrastructure company in North America with about 80,000 miles of pipelines in operation. And while Kinder Morgan has not been completely immune from the effects of falling energy prices, the damage has been pretty minimal. About 85% of its cash flows are fee based, meaning they have virtually no exposure to falling energy prices, and most of the remaining 15% of cash flows are hedged.

I expect that the slowdown in domestic production will slow the rate of growth in the amount of energy that Kinder Morgan transports. But I also expect the effects to be temporary, and in fact, Kinder Morgan is using the slowdown to its advantage. As I wrote earlier in March, Kinder Morgan has been buying quality pipeline assets from motivated sellers.

If you’re considering a purchase of Kinder Morgan or Duke Energy, the dividend of each is a major selling point. So with that, let’s dig into Kinder Morgan’s dividend. Since initiating its dividend in 2011, Kinder Morgan has more than tripled its quarterly dividend. And in the last year, its dividend is up a cool 9%.

Expect a lot more of the same going forward. When Kinder Morgan announced its business reorganization last year, management wrote that it expected to see dividend growth of at least 10% per year through 2020.

Buying Kinder Morgan today, you get to enjoy a 4.4% current dividend. But let’s now assume that hold the stock through 2020 and that management’s estimates are correct. Assuming five years of 10% dividend growth compounded annually, you’d be looking at 61% cumulative dividend growth. That would give you a yield on cost of 7.0% five years from now. And that assumes the minimum 10% annual growth; if Kinder Morgan continues to pick up assets from distressed sellers, the real growth rate might be significantly higher.

One final thing to consider on Kinder Morgan stock: When we buy KMI, we’re investing alongside the people running the company. They have serious skin in the game. Since last February, company insiders have bought a net 812,599 shares worth over $33 million at today’s prices. And Richard Kinder himself earns no compensation other than the dividends he collects on his shares. So Mr. Kinder has every incentive to continue raising Kinder Morgan’s dividend for the benefit of us all.

Now let’s take a look at Duke Energy. There is nothing necessarily wrong with Duke Energy. Its stock has outperform most of its peers in the utilities sector over the past five years, and its total return including dividends last year was nearly 28%.

But as a boring, regulated utility company, Duke cannot possible expect to keep pace with Kinder Morgan. Today, Duke offers a dividend yield that is competitive, at 4.2%. But Duke’s dividend growth rate over the past five years has been a very modest 2.2% per year, and I don’t expect it to accelerate much over the next few years.

Furthermore, Duke and many of its peers in the utilities sector have been used as bond substitutes by yield-starved investors for years. I expect bond yields to stay low for a while, but I also fully realize that the utilities sector will be the first to get slammed once bond yields really do meaningfully rise.

So in Duke, your upside is a 4.2% dividend with 2%-3% growth. That’s hard to get excited about. But in Kinder Morgan, you get one of the fastest dividend-growers in America backed by a class-act owner-operator in Richard Kinder.

The choice is clear here: Kinder Morgan is a slam dunk.

Disclosure: Long KMI

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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