I follow quite a lot of companies, so the usefulness of a watchlist to me cannot be overstated. Without my watchlist, I'd be unable to keep up on my favorite sectors and see what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.
Today is Watchlist Wednesday, so I'm discussing three companies that have crossed my radar in the past week -- and at what point I may consider taking action on these calls with my own money. Keep in mind that these aren't concrete buy or sell recommendations, nor do I guarantee I'll take action on the companies being discussed. What I can promise is that you can follow my real-life transactions through my profile and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.
Cliffs Natural Resources
Let me preface this by saying that we aren't at the point where I’m ready to pull the trigger on Cliffs Natural Resources yet… but we’re getting pretty close. As a value seeker and contrarian investor I have a penchant for seeking out companies that have been discarded by investors with little thought to future share appreciation. Cliffs Natural Resources perfectly fits that bill.
In February, Cliffs was forced to drastically reduce its quarterly dividend by 76% from $0.625 to just $0.15 as iron ore demand fell and coal costs soured from the previous year. A weakening U.S. market as well as lower demand from China kept output down as costs crept higher.
But things aren't nearly as bad as they might appear for Cliffs. An unwanted 10.4 million share offering will dilute outstanding shareholders by 7% but boost its net debt levels from $4.15 billion to perhaps just $2.2 billion or less. The outlook for both iron ore and metallurgical coal in China and the U.S. is also improving. China has pledged to beef up its heavy infrastructure spending, which should result in a stabilization of iron ore prices. In addition, homebuilding activity is likely to increase domestically with inventories falling and builders seeing home prices edging higher. Cliffs is set up to surprise investors with a big comeback in 2014 and its nearly 3% yield is nothing to sneeze at, either!
Wall Street is completely fascinated with brand-name apparel and accessories designer Michael Kors, which has found an affinity for growing healthfully in double digits in both the U.S. and Europe despite consumer weakness in both regions. In addition, Michael Kors has managed to fund its rapid expansion entirely through operating cash flow, leaving it with a debt-free balance sheet and a bit more than $400 million in cash. Yet I feel as if I remain the lone bear on Wall Street.
I have witnessed rapid growth stories come and go in the retail sector before, and while Michael Kors may have staying power now, the sheer rule of large numbers will make its growth trajectory and valuation impossible to maintain. Growing austerity measures in Europe and higher payroll taxes in the U.S. are bound to eat into consumers' appetites for brand-name apparel and should serve to slow down sales.
Another precursor that could predict an eventual sales decline is a 25-million-share sale by insiders announced last month. While it doesn't dilute existing shareholders, it drastically reduces the holdings by insiders, which gives off the impression to shareholders that a top may be near.
As a final warning, we have the slowing growth rates of Fossil, which makes Kors' watches and allows Kors to rebrand them under its own name, and handbag maker Coach, which has languished under higher promotional usage and weaker spending budgets in the U.S. Both Fossil and Coach exhibited phenomenal growth within the past decade, but have since seen it taper off due to poor macro trends in Europe for Fossil, and weak U.S. spending trends for Coach. That doesn't mean Kors can't become an excellent long-term investment, but based on sheer valuation and a trailing P/E of 32, this simply isn't sustainable.
Last year I made a big stink about rewarding results that were simply less bad than before. Here we are in 2013, and Jamba is the latest recipient of the "It wasn't as bad as last year, so let's rally, rally, rally" award. But contrary to popular belief, things aren't anywhere near peachy or running smoothly (or should I say smoothie) in Jamba-land, and caution should be exercised.