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Is Volkswagen Stock Cheap Enough to Buy After Emissions Scandal?

I gave my thoughts on the Volkswagen emissions scandal to InvestorPlace (see Is Volkswagen Stock Cheap Enough to Buy After Emissions Scandal?)

Here’s an excerpt:

This is ugly. Shares of Volkswagen (VLKAY) were down nearly 20% Monday morning after news broke that the world’s largest automaker had systematically cheated on U.S. emissions tests to make its diesel engines appear more eco-friendly than they really are.

Under the Clean Air Act, Volkswagen could be on the hook for fines of $37,500 per car affected. If federal prosecutors really want to put the screws to Volkswagen, that would amount to an $18 billion fine. To put that in perspective, Volkswagen stock has a market cap of 63 billion euros, or about $71 billion, so we’re talking about a fine equal to a quarter of the company’s value.

For an idea of what may be in store for Volkswagen stock, consider the case of Vereit (VER), formerly American Realty Capital Properties. Following an accounting scandal last fall, the stock lost roughly a third of its value. There were investigations… and audits… and lots of finger pointing.

Management got the boot, and the company was even renamed to give it fresh start. By all accounts, the slate has been wiped clean, and Vereit is an attractive stock trading at a fantastic price.

Yet nearly a year after the scandal broke, VER still trades close to its 52-week low. Reputations take time to rebuild.

So, is Volkswagen stock cheap? Yes, it is. But is it a buy today? I would say no.

By all means, keep an eye on Volkswagen stock. But I would recommend waiting at least another couple months before pulling the trigger and buying.

You can read the full article here.

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The AB InBev – SABMiller Merger Isn’t Happening

I gave my thoughts on the merger rumors circulating around Anheuser-Busch InBev (BUD) and SABMiller (SBMRY) on Here’s an excerpt:

See if you can follow this logic. Anheuser-Busch InBev (BUD) — a global megabrewer that has struggled to grow in recent years due to a shift in consumer preferences to craft brews — is reportedly making an offer for its biggest megabrewer competitor, SABMiller (SBMRY) … which, like BUD, has also had a hard time generating growth of late.

Both stocks soared on the news, despite the fact that there is virtually zero percent probability that U.S. antitrust regulators will let it happen without some major divestments. BUD finished the day up nearly 7% and SBMRY finished the day up nearly 21%.

What exactly is the point of paying a massive premium to buy out your competitor, only to immediately turn around and sell its parts piecemeal? I understand that SABMiller has market share in parts of the growth where InBev is currently weak, such as Africa. I’ve written before that Africa is the last investment frontier, and I’ve specifically recommended SBMRY as a long-term play on the rise of the African consumer.

But paying a premium to buy out SABMiller for its African exposure to then potentially dump its American assets at fire-sale prices would seem like an odd strategy.

And that’s assuming the U.S. regulators let it happen at all, which — as I wrote this time last year when rumors started circulating — isn’t likely…

You can read the full article here.

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Thoughts On Prospect Capital’s Earnings Release

Prospect Capital (PSEC) released its results for the June quarter, and all in all, results weren’t bad. Net investment income was flat on a year-over-year basis, and importantly, book value was stable. In fact, it actually rose by a penny to $10.31. This means that at current prices, Prospect is trading at just 68% of book value.


That’s shockingly cheap…and yet Prospect remains a heavily shorted stock:

Who in their right mind shorts something trading at 70% of book value? $PSEC Short Interest Update

— Charles Sizemore (@CharlesSizemore) Aug. 26 at 03:08 PM

$PSEC‘s short interest is at about 9 days to cover…on a stock trading at 70% of book. That’s amazing. WHO IS SHORTING AT THAT LEVEL??? — Charles Sizemore (@CharlesSizemore) Aug. 26 at 03:23 PM

I sound like a broken record when I say this, but management continues to buy the stock aggressively on the open market. The CEO dropped $2 million of his own money into the stock in June, and other insiders chipped in an additional $1.5 million.

Large insider buying… on a stock trading at a deep discount to book value… that is paying a 14% dividend yield… and is heavily shorted, primed for a short squeeze…

Seems like a pretty good bet to me. Unless there are some serious skeletons hidden deep in the closet that I haven’t found yet, this is a stock priced to double your money in the next 12-24 months. At the very least, there would seem to be very little in the way of downside at $7.00 per share.

Disclosures: Long PSEC

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Big Oil Now Cheaper than in 1998 and 2008

Interesting comments this week in Barron’s. Quoting research from Citi, Barron’s Ben Levisohn wrote:

Sector P/Book ratio of 1.2x is now below 1Q09 and 4Q98 troughs, including making a 6-10% impairment to book values to reflect a $50-70/bbl oil world. We think the industry can drive current returns of 8% (adjusted) back to mid-cycle levels of 14%. Assuming an 8% COE and 0% growth that would put fair value at 1.75x = 45% upside [emphasis Sizemore]. Granted, the pathway will be multi-year and the industry faces headwinds over asset impairments, debt downgrades and possible dividend cuts, but we think the downside looks value-protected…

This will be a long process, but the repair (cost-cutting, better capital allocation) has now started. We recommend that investors position at least benchmark-weight in the group. We recommend taking the weighting through Total (TOT), BG (BRGYY) (cheaper way into Royal Dutch Shell (RDS.A)), ConocoPhillips (COP), Statoil (STO).

Charles here. I included a chart, courtesy of GuruFocus, to illustrate the point:


With the exception of ConocoPhillips, most of the rest of the global Big Oil majors are trading at the lowest price/book valuation in a generation. The GuruFocus numbers make no adjustments for asset impairments, of which there will no doubt be plenty. But all the same, Big Oil is cheap. It might–just might–make sense to keep at least a modest allocation to the majors, come what may in this market correction.

Disclosures: Long STO, BP

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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Is Dr Pepper a Buy after the BodyArmor Investment?

I love Dr Pepper Snapple’s (DPS) original Dr Pepper. I really do. It’s a Texas thing, and it’s in my blood.

I’ve been known to drive 100 miles from Dallas to Waco to get “real” Dr Pepper made with cane sugar, and after I’ve been overseas for any length of time, my first stop after leaving the airport isn’t my home. It’s Whataburger. I leave my suitcase (and sometimes my wife and children) in the car and gorge myself on a disgustingly greasy Whataburger with cheese, washed down with a large Dr Pepper over crushed ice. Then I go home.

Long live Texas.

Alas, I don’t drink as much Dr Pepper as I used to. I’m too old, and it goes right to my ever-expanding gut. I might have a couple sugary soft drinks per month, if that. And I’m not alone. American consumption of soft drinks has been falling for ten straight years.

Yet interestingly, while Coca-Cola (KO) and PepsiCo (PEP) have really struggled with falling unit sales of their core soft drinks, Dr Pepper Snapple has managed modest volume growth. Last quarter, DPS grew soft drink sales (which include Dr. Pepper, 7-Up and Schweppes, among a few other smaller brands) by a full 1%. And Dr Pepper has been slowly clawing market share away from Coke and Pepsi.

As a result of this bucking the trend, spunky underdog DPS stock has absolutely crushed its larger rival.


DPS stock is up about 80% over the past year, while KO is up about 20% and PEP has barely budged at all.

But being the fastest grower in a shrinking industry is still a losing proposition, which is why the market is abuzz with the news that DPS just made an investment in up-and-coming sports drink BodyArmor, a rival of PepsiCo’s Gatorade and Coca-Cola’s Powerade. Dr Pepper Snapple’s $20 million investment gives it about a 12% interest in the company. On a side note, Los Angeles Lakers star Kobe Bryant is also a major investor in BodyArmor.

BodyArmor is still a tiny niche player in a market that is totally dominated by Gatorade. Recent data shows Gatorade with a 77% share of the sports drink market, which in total does about $6.8 billion in annual sales. BodyArmor did a rather paltry $30 million in sales last year, giving it less than one half of one percent of the market.

So, which BodyArmor is a growing brand with a lot of potential, it’s not realistically going to be a major driver of revenues for Dr Pepper Snapple, which does $6.2 billion in annual sales. Or at least not any time soon.

So, where does that leave Dr Pepper Snapple, and might DPS stock still be a decent buy?

Actually, yes. DPS stock is not “cheap,” in a strict sense, trading at about 19 times next year’s expected earnings. But this is modestly cheaper than Coke and Pepsi, and DPS is also a company with very healthy margins and a fat return on equity of over 30%.

DPS stock also sports a respectable dividend yield of 2.4%, and it’s been growing that dividend at a nice clip. DPS’s quarterly dividend has more than tripled since 2010, and the company is also aggressively repurchasing its stock.

You’re probably not going to double your money in Dr Pepper Snapple any time soon. But in an overall overpriced market, I would expect DPS stock to deliver at least respectable total returns over the next year.

Disclosures: None

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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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.