Big Picture: No Change
Recent Developments: ADP reported that the private sector added an estimated 230,000 jobs during October. Of those jobs, only 5,000 were added by large businesses. ADP revised September's gain to 225,000 from 213,000.
The Vanguard Health Care Fund (VGHCX) is easily my best performing mutual fund so far this year and has significantly outperformed the S & P 500 index.
I initially bought shares in 2011 by liquidating my position in the Vanguard Inflation-Protected Securities Investor Fund (VIPSX) and using the proceeds to buy VGHCX. Item # 3 Exchanged VIPSX for VGHCX
This fund has benefited this year by owning shares in firms who have agreed to be acquired at premiums to the then existing market prices.
This fund had a huge position in Forest Labs (FRX) when it agreed to be acquired by Actavis as I noted in a 2/25/14 Post. FRX rose 27.52% on the day of that announcement and the merger has now been completed. The last reported VGHCX position in FRX before that announcement was in its Annual Report for the period ending 1/31/14. The number was then 26,666,866. Page 15 PDF
As of 9/30/14, Actavis is shown as the fund's largest holding, ranked by market value, at $2.064+ billion.
The fund also had a 4,994,700 share position in Covidien, as of 7/31/14, that is in the process of being acquired by Medtronic. Medtronic Inc. - Press Release 6/15/14. The same number of shares were owned as of 9/30/14.
In early October, CareFusion agreed to be acquired by Becton Dickinson. BD To Acquire CareFusion For $12.2 Billion As of 7/31/14, VGHCX owned 5,661,354 shares of CareFusion and 2,393,100 shares of Becton, Dickinson and Company (BDX). Page 13 Semi-Annual Report The fund reported that it owned the same number of CareFusion shares as of 9/30/14.
I initially bought shares in 2011 by liquidating my position in the Vanguard Inflation-Protected Securities Investor Fund (VIPSX) and using the proceeds to buy VGHCX. Item # 3 Exchanged VIPSX for VGHCX
This fund has benefited this year by owning shares in firms who have agreed to be acquired at premiums to the then existing market prices.
This fund had a huge position in Forest Labs (FRX) when it agreed to be acquired by Actavis as I noted in a 2/25/14 Post. FRX rose 27.52% on the day of that announcement and the merger has now been completed. The last reported VGHCX position in FRX before that announcement was in its Annual Report for the period ending 1/31/14. The number was then 26,666,866. Page 15 PDF
As of 9/30/14, Actavis is shown as the fund's largest holding, ranked by market value, at $2.064+ billion.
The fund also had a 4,994,700 share position in Covidien, as of 7/31/14, that is in the process of being acquired by Medtronic. Medtronic Inc. - Press Release 6/15/14. The same number of shares were owned as of 9/30/14.
In early October, CareFusion agreed to be acquired by Becton Dickinson. BD To Acquire CareFusion For $12.2 Billion As of 7/31/14, VGHCX owned 5,661,354 shares of CareFusion and 2,393,100 shares of Becton, Dickinson and Company (BDX). Page 13 Semi-Annual Report The fund reported that it owned the same number of CareFusion shares as of 9/30/14.
In the most example, LabCorp announced earlier this week that it had agreed to acquire Covance (CVD). VHGCX reportedly owned 2,486,000 Covance shares as of 9/30/14.
Closing Price on Day of Announcement: Covance (CVD) $ 100.57 +20.67 (+25.87%)
Through 11/3/14, Morningstar calculates the total returns of VGHCX as follows:
YTD: +25.4%
2013: +43.19%
2012: +15.11%
2011: +11.45%
YTD: +25.4%
2013: +43.19%
2012: +15.11%
2011: +11.45%
The total returns for the Vanguard Inflation Protected Securities Fund (VIPSX) fund were as follows:
YTD: +4.39%
2013: -8.92%
2012: +6.78%
2011: +13.24%
YTD: +4.39%
2013: -8.92%
2012: +6.78%
2011: +13.24%
Ares Capital Corp. (ARCC)
I recently discussed adding to my ARCC position: Bought 50 ARCC At $15.41-A Typical Small Lot Purchase Of An Externally Managed BDC Stock - South Gent | Seeking Alpha
Ares Capital Corporation reported third quarter core E.P.S. of $.4 per share, two cents better than the consensus forecast. The company declared its regular $.38 per share quarterly dividend.
Net asset value per share increased to $16.71 from $16.35 as of 9/30/13. The net asset value per share was reported at $16.52 as of 6/30/14: 10-Q for Q/E 6/30/14
The weighted average yield on income producing securities was 9.9%, down from 10.6% at amortized cost as of 9/30/13. Core investment income is being pressured due to yield compression. The total portfolio was weighted in first lien debt (46%) and second lien debt (17%), but there was significant exposure in subordinated debt.
10-Q for Q/E 9/30/14
Closing Price Today: ARCC: $16.14 +0.22 (+1.38%)
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European Growth/Inflation/Unemployment:
The EU reduced its forecast for GDP growth in the Euro area. The new forecast estimates .8% growth down from the Spring 2014 forecast of 1.2%. Euro area annual inflation was estimated at .4% in October, up from .3% in September. Eurostat.PDF The unemployment rate in the Euro area was reported at 11.5% in October. Eurostat.PDF
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HCP Inc. (HCP)
HCP reported 3rd quarter FFO of $.82 per share; AFFO at $.75 per share; and FAD at $.65 per share. Of those numbers, I view funds available for distribution to be the most important. The company raised full year FAD guidance to $2.52-$2.58 per share.
When it comes to REITs, it is impossible for me to say with certainty whether the consensus estimate is a FFO or a AFFO number. Zacks asserts that HCP missed by one cent its third quarter AFFO consensus of $.76.
HCP's current 2014 guidance is for FFO between $3.03 to $3.09, up from $3.01 to $3.07. The company increased AFFO to $2.98-$3.04.
The 2014 consensus number is for $3.03 per share as of 11/4/14. HCP Analyst Estimates
Closing Price 11/4/14: HCP: $44.38 +0.43 (+0.98%)
Bought 50 HCP at $36.31 (12/31/13 Post)
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Berkshire Hills announced that it would acquire Hampden Bank (HBNK) in an all stock transaction valued at approximately $109M. Hampden operates 10 branches in the Springfield, Mass. area. HBNK shareholders will receive .81 shares of BHLB.
I recently pared my BHLB position: Pared Highest Cost Shares by Selling 50 BHLB at $25.75 (11/1/14 Post)
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Oil Prices
Oil prices fell to a three year low last Tuesday after Saudi Arabia cut prices for U.S. shipments. Bloomberg Energy stocks continued their tailspin earlier this week, though they managed slight gains today. The decline in prices have helped oil refiners due to gasoline prices falling at a far slower rate than the price for crude. I have only a small position in one refiner PBF Energy that reported better than expected earnings, as did Valero. Valero Energy Reports Third Quarter 2014 Results
Energy stocks are in a falling knife mode. I tried to catch that knife with just a 50 share purchase of Enerplus (ERF) after it had declined from $25 (7/14) to $17.6 (10/14): Bought 50 ERF at $17.6-Roth IRA I noted the falling knife problem which explained the small purchase. The price fell below $13 on Tuesday, but rose some today. ERF: $13.40 +0.71 (+5.59%)
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U.S. Dollar
The USD continues its uptrend as shown in the Dollar Index and Bloomberg Spot Dollar charts. A rise in those indexes indicates USD strength against a basket of foreign currencies.
The Bloomberg Spot Dollar index includes more foreign currencies and has different weightings than the Dollar Index. Currency | Bloomberg Index
Bloomberg Dollar Spot Index - Bloomberg
U.S. Dollar Index (DXY) Interactive Index Chart
That spike in the USD has put downward pressure on U.S. inflation. It has also been a negative for U.S. priced funds that own foreign bond and stocks.
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1. Bought 50 EMR at $64.37 (see Disclaimer): Assuming no material adverse developments, I will consider buying another 50 shares at below $60.
Snapshot of Trade:
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| 2014 Bought 50 EMR at $64.37 |
The Company provides a detailed summary of its products within each business segment starting at page 3 of its last SEC filed Annual Report: EMR 9/30/2013 10-K
Breakdown of Revenues/Profits By Business Segment:
The revenue numbers for the 2014 F/Y were negatively impacted by divestitures and currency conversions.
Emerson Electric Profile Page at Reuters
Emerson Electric Key Developments Page at Reuters
Company Website: Emerson
Morningstar has gives EMR a three star rating and estimates fair value at $69. The consider to buy price is $48.3 which I would view as unlikely barring a recession. The consider to sell price is at $93.15 which is too high in my opinion.
I would view EMR as outside a fair value range at 18 times (or higher) the consensus F/Y 2015 E.P.S. estimate of $4.05. EMR Analyst Estimates That would put the upper end of my fair value range at $72.9.
EMR's fiscal year ends in September so that would be through September 2015. The F/Y 2016 estimate is currently $4.45. If that F/Y 2016 holds by this time next year, then the top end of my fair value range would then be $80.1.
S & P has a 3 star rating with a $71 twelve month price target which I view as more realistic.
Credit Suisse has a buy rating with a $72 price target.
Argus has a buy rating and a $75 target price.
CS and Argus reports are available to Charles Schwab customers
EMR Key Statistics (based on $64.45 Price):
TTM=Trailing 12 Months
Forward P/E (F/Y 2015): 14.48
Estimated Five Year P.E.G.: 1.7
P/S: 1.83
ROA (TTM): 10.32%
ROE (TTM): 24.38%
Profit Margin (TTM): 10.32%
Operating Profit Margin (TTM): 16.44%
Revenue Per Share (TTM): 34.86
EMR's senior debt is currently rated A2 by Moody's and A by S & P according to FINRA. An EMR bond with a 5.375% coupon and maturing in 2017 has a YTM of just 1.32% based on the closing price today. Bonds Detail I pick up more than twice that yield with the common stock.
I would not view the stock as either cheap or expensive at the current price, but more within a broad fair value range based on estimated 2015 fiscal year earnings.
SEC Filings for EMR
Prior Trades: I took my profit and liquidated my EMR position back in April 2007.
I bought back two small 25 share lots in 2008 using cash flow from dividends and interest payments. I reinvested the dividends and liquidated the position on 11/1/2010:
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| 2010 EMR 52+ Shares +$600.68 |
EMR has substantially underperformed an industrial sector ETF since I sold this lot. I calculated the annualized total returns for two industrial ETFs and EMR between 11/1/2010 through 11/4/2014:
Annualized Total Returns:
EMR: 6.42%
XLI: 16.73% XLI Industrial Select Sector SPDR ETF
VIS: 16.98% VIS Vanguard Industrials ETF
I did not miss much by selling out in November 2010. Hopefully, EMR will play catch up going forward.
EMR currently has a 1.88% weighting in the Fidelity MSCI Industrials Index (FIDU) which I own.
Chart: At the time of my purchase, the stock had broken its 50 day SMA line to the upside and was sitting about $1 per share below its 200 day SMA line. EMR Interactive Stock Chart
The YF maximum chart for EMR goes back to 1972. EMR Interactive Stock Chart Starting with the onset of the last long term secular bull market (August 1982), EMR has moved up from a split adjusted price of approximately $4.85 to its current range, though there has been some drama along the way.
Last Earnings Report: Emerson reported that underlying sales increased by 4% in its 4th fiscal quarter ending on 9/30/14. Revenues were relatively flat after divestitures and currency conversions. Revenues in North America rose "8 percent, reflecting improved economic conditions, while sales in Europe were flat due to weaker market conditions."
Excluding charges, E.P.S. increased 10% to $1.3. Operating cash flow was reported at $1.4B. 2014 Q4 Release The consensus E.P.S. estimate was for $1.23 per share. MarketWatch
Underlying orders increased by 9% during the quarter and the company exited the quarter with a record backlog of $6.7B. The company expects underlying sales growth between 4%-5% during the current fiscal year, excluding the impact of divestitures and currency conversions.
The potential divestiture of the power transmission business would reduce the number by about 2%. (June 2014 News Release: Emerson Evaluating Strategic Alternatives for the Power Transmission Solutions Business)
Rationale: With a quality company like EMR, my objective is a total annualized return in the 8% to 12% range. Part of that total return will originate from the dividend.
Emerson just raised its quarterly dividend to $.47 from $.43 per share or 9%. Emerson Increases Quarterly Cash Dividend That was one reason for buying the stock back. This was the 59the straight year of dividend increases.
The dividend growth rate is generally good at close to 7.75% over the past 10 and 25 years. Dividend
Emerson increased its dividend during the Near Depression period. Emerson Electric Dividend Date & History That needs to be contrasted with GE who slashed its dividend. The dividend data is not adjusted for stock splits. There was a 2 for 1 split in 2006.
At the current quarterly rate of $.47 per share, the dividend yield is about 2.92% at a total cost of $64.37 per share. I would like to bring the starting yield over 3% with an average down which would then bring this purchase within the parameters of my dividend growth strategy. Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds (3/22/2010 Post)
Growth in several major markets looks okay for the next twelve months. The CEO noted in the recent conference call that the U.S., Canada and Mexico "looks very solid right now". Revenues in the just completed fiscal year grew 7% in China and will probably grow "closer to 5%" in the current fiscal year.
Risks: Industrial stocks tend to be cyclical. The earnings growth of large industrial companies like Emerson are tied to worldwide GDP growth particularly in emerging markets. In short, EMR is not going to buck a recession in developed markets and/or a slowdown in emerging markets. The share price did crater during the recent Near Depression, falling to a closing low of $24.87 on 3/9/09: EMR Historical Prices
Europe is an important market for EMR. The CEO noted on the last conference call that Europe was "weakening" and "clearly heading down, potentially for its third recession since" 2008.
EMR's products are used in the energy sector and the recent decline in oil prices could have a negative and material impact on EMR's profits, a point highlighted by management on the recent earnings call. Conference Call Transcript - Pg.5 - TheStreet
The company discusses risks incident to its businesses starting at page 11 of its last SEC Annual Report. EMR 9/30/2013 10-K
Future Buys: I will consider averaging down but not up.
Closing Price Today: EMR: $64.41 +0.22 (+0.34%)
2. Sold 40 Shares AMOT at $16 (Lottery Ticket Basket Strategy)(see Disclaimer):
Snapshot of Trade:
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| 2014 Sold 40 AMOT at $16 |
Snapshot of Profit:
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| 2014 AMOT 40 Shares +$386.08 |
Company Website: Allied Motion : Motion Solutions That Change The Game
Annual Report
The company appears to be competing against larger companies like Regal-Beloit Corp (RBC) and Emerson Electric to some degree.
Rationale: I really do not have even a good feel about AMOT's future prospects. I decided to harvest the profit after buying 50 EMR rather than to risk any part of a 157% gain. Every Lotto selection has a For Sale sign attached to it. The only question is price.
There are no analyst estimates for AMOT and no research reports to read. The market capitalization at a $16 share price is around $147M.
Closing Price Today: AMOT: $15.67 -0.04 (-0.25%)
