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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.

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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 http://stks.co/s2kpT

— 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:

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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.

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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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Stocks With “Too Much” Cash…and What They’re Doing With It

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They say that money can’t buy happiness. Well, that may or may not be true, but of one thing I am certain: Money buys you options.

When you’re looking for stocks to buy, one thing to examine is the so-called “war chest.” See, a company with a lot of cash on hand can expand its business without having to borrow funds or dilute shareholders by issuing new equity. And importantly, they can also reward their shareholders with big dividend hikes or share repurchases. Or, they can simply sit on the cash and save it for a rainy day.

Today, we’re going to look at four stocks sitting on a mountain of cash. Some have been better stewards of their cash hoards than others, but all have the options at their disposal that comes with being cash-rich.

Apple

Given the size of Apple’s (AAPL) cash stash, I feel obligated to mention Apple first.

Apple’s cash balance is the stuff of legend. If AAPL’s cash and marketable securities were a standalone company, they would be just bigger than Walt Disney (DIS) by market capitalization, and just smaller than Anheuser-Busch InBev (BUD). Even allowing for punishing tax rates on Apple’s cash held offshore, Apple has enough cash in the bank to sustain its dividend at current levels for years … without earning a single dime in additional profit.

As of this week’s earnings announcement, Apple had just under $203 billion in cash and securities. That’s about 28% of its gargantuan market cap. And the most amazing thing is that Apple’s cash hoard has continued to expand even while a disproportionate share of it gets dedicated to dividends and share repurchases.

Over the past year, Apple has raised its dividend by 11% and shrunk its shares outstanding by about 5%. And I expect plenty more to come.

Apple’s earnings release had disappointing guidance for the remainder of the year and sent shares sharply lower. I’d view any weakness here as a buying opportunity. While the iPhone 6 upgrade cycle was a one-off event not likely to be repeated, Apple shares are very reasonably priced, and its cash hoard gives it a wide margin of safety.

Google

Next up is Apple’s rival in the smartphone wars, search-engine giant Google (GOOGL).

While Apple’s cash stash gets more attention for the sheer size of the dollars involved, Google’s is nothing to sneeze at. As of June 30, Google had just shy of $70 billion in cash and marketable securities, which amounts to about 14% of its market cap.

Google could take a few lessons from Apple on how to reward its shareholders. Despite being an established tech company and one of the largest in the world by market cap, Google has yet to declare a dividend or commit to a share repurchase.

I want to like Google. I really do. But the company seems to have very little regard for its shareholders. The founders always had something of a stranglehold on the company via their control of supervoting B shares. But following Google’s reorganization last year, which resulted in the creation of non-voting C shares (GOOG), only cemented their control further.

There is a reason why Carl Icahn has focused his activism on Apple and not Google. Not even a billionaire corporate raider like Icahn can cajole an unwilling Google management to part with their cash. There aren’t enough voting shares for him to buy to make a difference.

That said, Google’s cash gives it options. Google is one of the few companies out there that could make a legitimate bid for Twitter (TWTR), for example. And Google, despite its lack of discipline, remains one of the most profitable companies in the world. It also has what Warren Buffett would call an “unassailable moat” in its control of Internet search. Virtually every site in the world, including this one, are built with the express intent of being optimized for Google search.

Google is a fine company and a seriously cash-rich stock.

Just don’t expect to see any of that cash returned to you as a dividend any time soon.

Microsoft

Rounding out cash-rich “Big Tech” companies, we come to Microsoft (MSFT). Like Apple, Microsoft had an earnings announcement this week that was something of a disappointment. While Microsoft actually beat expectations for the quarter, the outlook ahead was nothing to write home about.

The Nokia acquisition has proven to be a disaster and resulted in a massive write-off. And Windows sales remain weak due to continued sluggishness in PC sales. With the post-XP upgrade cycle now complete and Windows 10 not yet available for sale, the next quarter probably won’t be much to look forward to.

Yet the news is by no means all bad. Microsoft’s transition to a cloud-based business services company is progressing faster than expected, and the company is showing an innovative streak under CEO Satya Nadella that it rarely showed under former CEO Steve Ballmer.

And Microsoft’s cash position, at $97 billion, remains one of the largest in the world. It also represents a stunning 26% of Microsoft’s market cap.

Like Apple, Microsoft has come to be very generous with its shareholders. Microsoft has upped its dividend at a 17.5% clip over the past five years in addition to shrinking its share count by about 0.8% over the past three years. Expect more to come.

Berkshire Hathaway

 

Stepping away from the world of tech, we get to Warren Buffett’s Berkshire Hathaway (BRK.A).

Buffett is unlikely to ever “retire” from the investment business. He’s a lot more likely to die in the saddle with his boots on. But Buffett has indicated that he would like to hunt one last large elephant of a company before checking out to that big stock exchange in the sky, and accordingly, Berkshire Hathaway has been stockpiling cash.

As of its most recent filings. Berkshire had about $64 billion in cash, amounting to about 18% of the company’s market cap.

I have no special insight as to Mr. Buffett’s last big acquisition. But I can tell you that he has become a little more flexible with how his company’s cash is spent. Buffett has never paid a dividend, arguing (rightly) that it makes more sense to retain the cash for reinvestment. Considering that Buffett — arguably the world’s greatest investor — is the one doing the investing, I would have to agree.

That said, Buffett did authorize a share repurchase plan in 2011, something I never thought I would see. It makes one wonder: Might a dividend really be a possibility?

Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long AAPL and MSFT. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.

This article first appeared on InvestorPlace.

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AAII Sentiment Survey: ‘Running of the Bulls’

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It’s that time of year again.

Tomorrow morning, thousands of adventurous (or phenomenally stupid) young men from around the world will run with the bulls in the streets of Pamplona.

I was one of those adventurous (let’s be honest — phenomenally stupid) young men once (see “¡Viva San Fermin!“). Though it was over a decade ago, I remember it like it was yesterday.

Lest I get teary-eyed, I’ll cut the nostalgia short. Today, we’re going to focus on a very different “running of the bulls.” Among individual investors, it seems there is nary a bull to be found these days. According to the latest American Association of Individual Investors (“AAII”) Sentiment Survey, there are fewer bulls today than at any time since the 2008 meltdown:

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The AAII survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months. To smooth out the noise a little, I used an 8-week moving average. And as you can see, bullishness is currently at lows you might normally associate with panic bottoms.

The weekly reading shows that just 22.6% of individual investors are bullish about the market over the next six months. To give a little long-term perspective, the long-term average bullishness reading is 38.8%.

While it has become cliche to call this “the most hated bull market in history,” at least by this metric it would seem like an accurate statement.

The AAII Sentiment Survey is viewed by many as a contrarian indicator. Like most measures that depend on investor psychology, it is noisy and doesn’t always give clear signals. But the takeaway here is that the bull market probably has a little longer to run. Yes, stocks are very expensive at these levels and probably won’t offer much in the way of returns over the next 8-10 years. But that doesn’t mean the market can’t continue to drift higher for the next several months.

 

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