CLNE: Sell; Q315 Update

CLNE reported its third quarter earnings on November 5.  Including a $2.4 million gain related to the previous sale of a biomethane plant, CLNE reported a positive adjusted EBITDA of $3.1 million.  This was the first quarter that CLNE reported a positive adjusted EBITDA - a major milestone for sure.  Revenue for the quarter reached $92.3 million, which was less than the $103.4 million value reported in the year-ago third quarter.  The decrease in revenue was attributed to decreased pricing for fuel and lower station construction proceeds.

CLNE delivered 80.6 million gallons of fuel, which was 17% more gallons than the year-ago quarter.  The overall fuel growth was driven by 29% growth in refuse, 13% growth in trucking, and 186% (from 3.5 million gallons to 10 million gallons) growth in industrial.  While the gallons delivered increased impressively, the gross margin per gallon delivered decreased by 2 cents, or 7%, from the year ago quarter.  The growth in industrial gallons, and the growth in Redeem gallons from 13 million to 36 million, are two bright spots in CLNE's revenue picture.

On the expense side, CLNE reduced capital expenditures by $35 million and SG&A expenses by 20% relative to the year-ago quarter.  Due to these reductions and other factors, CLNE generated
-$1.01 million of operating cash flow over the first three quarters.  Not impressed?  This is an improvement of $55 million compared to the same point last year.  I'm being slightly facetious, negative operating cash flow is unhealthy for a company regardless of how much it has improved.

CLNE continues to putter along.  However, it has reached a critical point in terms of its debt.  CLNE has $150 million of debt due by August of 2016.  With a negative cash flow, it is not likely that CLNE will be able to generate enough cash to pay this debt off without dipping into its current cash or using other options.  CLNE management stated the following during the recent conference call:

"We remain focused on our 2016 convertible notes which are due at the end of August next year.  We are in regular communication with note holders and we expect to repay these notes with a combination of cash and stock ahead of the maturity date."

Let's analyze this situation.  CLNE has $166 million in cash and short-term investments on its balance sheet.  Let's assume that CLNE needs to keep $50 million of cash on its balance sheet for working capital (cash needed to run the company while it waits to receive cash it is owed).  In that case, CLNE can use $116 million of its cash (for discussion purposes, assume cash includes short-term investments as well) and can issue $44 million in new stock to pay the $150 million debt.  The $44 million of new shares would be issued in exchange for cash, which would dilute the current shareholders (If you own 1 share out of 10 available, you own 10%.  If the company issues 5 new shares, then your new ownership stake is 1/15 of the company, or 6.7%).

CLNE has a current market capitalization (number of total shares x current stock price) of $346 million.  If CLNE issues $44 million in new shares, each shareholder will be diluted by 11%.  This is the better-case scenario.  The worst-case scenario is that CLNE would use 100% equity (stock) to repay the debt.  In this case, current shareholders would be diluted by 30%.  In summary, current shareholders are likely looking at a range of 11% to 30% dilution before August of next year at CLNE's current share price.

Okay, so one big dilution, and then in the clear going forward?  Nope.  CLNE also has $250 million debt due in October 2018 and $50 million per year due from 2018 to 2020.  When considering these debts, CLNE either has to make drastic improvements to its operating cash flow, issue more debt, or issue more equity.

To reiterate, CLNE continues to putter along.  However, a drastic acceleration in revenue growth is going to be required to turn this company into an investable stock.  As such, Common Cents is looking to sell its shares of CLNE.

While CLNE can fall even further from where it is now, there is likely a lower bound at some point due to the potential for CLNE to be acquired.  The business rationale is still intact for CLNE, as the long-term desire for cheaper, cleaner energy still exists.  In fact, companies are increasingly interested in their global footprints to the point that they may pay more to obtain an eco-friendly image to clients and the public.  CLNE is simply in a race against time to repay its debt.

Common Cents will look to sell its shares on a rebound in oil prices.  CLNE has been highly correlated with oil prices over the recent history, and any increase in oil prices will provide a much more attractive exit point than current levels.

Common Cents Take: CLNE is in a race against time to repay its debt.  It does not, and likely will not, generate enough cash to repay its debt without using current cash reserves, additional debt, or new stock.  Therefore, Common Cents will look to sell its shares of CLNE when/if oil prices rebound.

BP: Hold; 3Q15 Update

BP reported its earnings for the third quarter on October 27.  BP's profit declined by 40% year-over-year (y-o-y) to $1.8 billion; however, this profit was 39% higher than the second quarter.  Operating cash flow was reported as $5.2 billion.  In the case of BP, determining the dividend sustainability is Common Cents' primary valuation objective.  

In the third quarter, BP's capital expenditures (capex) totaled $4.4 billion, and asset sales during the quarter totaled $208 million.  To find the cash available to finance the dividend, we subtract the operating cash flow ($5.2b) by the capex ($4.4b) and add the proceeds from asset sales ($208m). This results in $1 billion available to finance the quarterly dividend.  BP's quarterly dividend approximates $1.7 billion each quarter.  Uh oh! $1 billion - $1.7 billion = -$0.7 billion!  That doesn't look good for us as investors.  BP is having trouble generating enough cash to sustain its dividend.

That's all in the past though.  Let's look forward.  BP plans to limit capex to between $17 billion an $19 billion annually, or $4.25 billion to $4.75 billion a quarter.  Asset sales are projected to total $3 billion to $5 billion in 2016, or $0.75 billion to $1.25 billion a quarter (asset sales are projected to decrease to $2 billion to $3 billion after 2016).  With the $1.7 billion quarterly dividend, BP will need to generate about $5 billion in quarterly operating cash flow to sustain the dividend in 2016.  Based on the decrease in oil prices, which directly affects BP's operating cash flow, BP will have to fire on all cylinders to meet this number.

There are multiple other moving parts to the operating cash flow number.  For one, BP is increasing production in some segments; however, oil prices are drastically decreasing the yield per a unit produced.  The elevated stress in the oil industry does not come without its benefits, though.  BP has been able to substantially decrease its cost of production due to the lowered demand for production services in the industry.  While this won't help the lower yield of production, it will help BP's operating income through lowered cost and, therefore, higher profit.

When BP can't sustain its dividend organically, it has to rely on a dividend cut or an increase in debt to fund the dividend.  BP reached its projected maximum gearing of 20% during the previous quarter.  While the concept of gearing may warrant a complex discussion, generally speaking, this means that BP has reached the maximum level of debt that it intends to take on.  However, the following excerpt was taken from BP's third quarter conference call:

"At the end of the third quarter, gearing stands at 20%, including the impact of the Consent Decree and agreements with the Gulf States.  This compares to the 10% to 20% target boundary we established in 2010 to allow greater flexibility for uncertainties, of which Deepwater Horizon was the most significant.  As mentioned, with the recent filings in the United States, we have moved a step closer to finalizing these agreements, which provide for payments over an extended period.  With that context, we will manage gearing going forward, allowing some flexibility around a 20% level while volatile market conditions remain."

In summary, BP will waiver a bit on its 20% maximum gearing.  This will help to sustain the dividend while BP's operations are in a stressed state; however, it's not exactly a good sign that management is proposing to take on more debt due to the current stressed state of the oil industry.  BP's management indicated that they expect to be able to support the dividend without extra leverage by 2017 if oil prices increase to $60.  From there, operating cash flow will continue to grow and allow for increases in the dividend.

Current estimates of oil prices in 2016 include decreases to the $20's and increases to the $60's.  Who is right and who is wrong?  Who is biased and who isn't?  Who can tell the future?  Not I.  I'll wait for further developments to confirm what the appropriate action is for my energy positions.  Until then, Common Cents feels that BP should be Held until further clarity exists on the direction of oil prices.

Common Sense Take: BP will struggle to maintain its dividend through 2016 if oil prices remain deflated, but BP has created some wiggle room for that year.  If oil prices do not increase to the $60 level by late 2016 or 2017, BP will likely have to reduce its dividend.  The trajectory of oil prices is unclear at the current time; therefore, a wait-and-see approach is warranted.

October 27profit in the third quarter was $1.8 billion, down 40% on the same period a year ago and 39% higher than the second quarter of 2015Operating cash flow was 5.2 billionContinuing to take costs out of the system2.6 billion divestment in first 9 months, 3-5 divest in 16, 2-3 thereafter, new assets have a mid teens to 20 return at oil price of 60
1.1 billion fcf first nine months

Brent oil has averaged around $50 per barrel this quarter, down from $62 a barrel in the second quarter. Although global demand has been stronger and U.S. production has begun to decline, OPEC production is running higher than the 2014 average and inventories continue to increase. As we have mentioned before, there is also the prospect of Iranian production coming onto the market in 2016. Saw sustained lower oil prices early last year, have been adjusting since
Around 80% of investments break even below $60, expect to move lower as costs decrease, reduction of 15% over the last year

we expect to rebalance organic sources and uses of cash by 2017 at an average Brent oil price of around $60 per barrel. Organic free cash flow is expected to grow thereafter at constant prices. This underpins our ongoing commitment to sustaining the dividend as the first priority within our financial framework and restoring growth in distributions to shareholders over the long term

In this environment and based on our planning assumptions, we would expect free cash flow growth from 2018 restoring our capacity to grow distributions to shareholders

at gearing of 20%, using debt to sustain dividend

LUV: Purchase @ $44

Common Cents purchased shares of LUV on December 11 as the share price declined on a market-wide decline and concerns over PRASM metrics.  It appears that Southwest's discounting of fares to increase market share has resulted in an unfavorable competitive environment...surprise, surprise.  The sustained competitive environment, however, will be buffered by lower fuel prices.  While lower fare prices brings in lower revenue, the profit may not change much due to the fuel prices (remember: profit = revenue - cost).

Common Cents believes that the competition will not sustain over the long term.  Airlines are in a period of profitability (finally) and, I believe, have an implicit agreement to sustain profitability through lack of intense competition.  The short-term period of competition is related to Southwest's expansion in certain markets and, according to management, is not intended to be sustained.

Going forward, Common Cents will look to add on to this position at a near 10% decline in share price or sell a portion of the position at a near 10% increase.

YTD Performance Update: December 2015

YTD performance (as of 11/30/15): -1.11%

S&P performance (as of 11/30/15): +3.01%

Common Cents Portfolio is down by 4.12%!!

Portfolio Composition by Position:

AAPL:  11%

RH: 11% 

V:  8% 

BP:  7% 

HZNP: 5% 

LUV: 5% 

T: 5% 

CLNE:  4% 

HD:  3% 

GLD:  3% 

CASH:  39% 

Portfolio Composition by Sector/Industry (excluding cash):

Retail:  23% 

Energy: 19% 

Technology:  19%

Financial Services:  14%

Healthcare: 9% 

Industrials:  8%

Communication Services:  8%

RH: Purchase @ "92.5"

On Wednesday, Common Cents purchased a January 15 $85 call option for $7.5.  The option was purchased a few days prior to RH's earnings call last night.  Going forward, Common Cents will look to sell this option on a rise in share price after RH's earnings results.

RH: Sale @ "94"

Common Cents sold its January 15 $85 call option on Friday, December 4.  The option was purchased for $7.5 and sold for $9, yielding a return of 20% off of an approximate 3.5% increase in the share price of the common stock.  The volatility in RH's share price was related to widespread volatility in the market; no news specifically pertaining to RH was released during this period.

RH: Purchase @ "92.5"

Common Cents purchased a January 15 $85 call option for $7.5 as RH's share price decreased during a market-wide selloff.  No pertinent news was released that warranted the magnitude of intraday decline in RH's share price.  Going forward, Common Cents will look to sell the option above $8.  The earnings release on December 9 will likely serve as a catalyst for rapid growth in RH's share price, as has been the case over the last several quarters.

HZNP: Buy; PT $37.9; 3Q15 Update

HZNP: 12/1/15; $21.30

From Thomson Reuters I/B/E/S Estimates:

Forward Earnings: 2.16

Forward PE: 9.86

5-yr Estimated Earnings Growth Rate (EGR): ~20%

PEG Ratio: .493

S&P Forward PE: 17.55
S&P EGR: 5.58%

Horizon Pharma reported its third quarter earnings on November 6.  After reporting a 200% year-over-year (y-o-y) increase in revenue and a 500% increase in EBITDA, HZNP raised its 2015 revenue guidance by 13% and 2015 EBITDA guidance by 30%.  These numbers come in large part due to acquisitions made by Horizon; however, they are still impressive.

Horizon is currently in a high-growth phase, which is fueled by HZNP's acquisitions of other small drug companies.  HZNP added $100 million in cash during the quarter and now has $684.3 million of cash on the balance sheet.  HZNP also has $1.274 billion of debt on the balance sheet; however, the first debt payable is due in 2021.  Until then, HZNP is only required to make "coupon" or interest payments.

Horizon has issued a plan to get to $2 billion in revenue by 2020.  Very little of this will come from organic growth.  According to HZNP management, the current environment presents several opportunities for cheap acquisitions due to the widespread decline in share price of the biopharmaceutical sector.  The decline in the sector is related to recent unfavorable headlines pertaining to multiple related companies.

HZNP has suffered a significant decline in its shares over the past 2+ months as a result of the news headlines.  HZNP specifically refuted recent negative allegations of price gouging through commentary similar to the following (taken from the recent earnings call):

"There has been a tremendous amount of noise in the marketplace and media recently about pharmaceutical companies, biopharmaceutical companies, and so-called specialty pharmaceutical companies, how they operate and do business, the cost of their medicine, and so on.  There has been a lot of misinformation and misleading commentary provided by many incented to do so."

"First and foremost, it is important to understand that at our very core, we do put patients first.  Patient access and affordability is at the heart of everything we do.  It is the cornerstone of our company culture and something that we talk with each of our employees.  In fact, I believe there's not a single company in our industry that has done a better job than Horizon in providing free medicines or medicines at greatly reduced costs to our end customers, the thousands of patients we serve."

This commentary directly addressed the criticism that caused shares of HZNP to drop to absurdly undervalued levels.  The CEO continued in the call to describe how a particular medicine that was critiqued for being a simple, higher priced combination of two generic drugs was actually helping to save lives, as people did not take the drugs separately when prescribed.  In fact, the CEO said that he suffered from stomach ulcers related to not taking both the two drugs when prescribed separately, and HZNP's combination drug helped to treat subdue the ulcers.  I have little doubt after this conference call that HZNP is a semi-reputable biopharmaceutical company that is not as ultra-risky as the recent headlines would indicate.

Being convinced of that, HZNP is severely undervalued at current levels.  Using a PEG ratio of 2, HZNP would be valued at $86.4 [ = 2 (PEG) x 20 (EGR) x 2.16 (forward earnings) ].  Due to the method that HZNP uses to achieve growth (i.e., acquisitions), the potential limitations of this method related to the availability of targets and stress on the balance sheet, Common Cents feels that it is conservative to value HZNP with an equivalent PE to that of the S&P.  Therefore, Common Cents feels that HZNP would be fairly valued @ $37.9 [ = 2.16 (forward earnings) x 17.55 (S&P PE) ].  Therefore, Common Cents feels that HZNP is an attractive buy at these levels.

Common Cents Take: Management dispelled the recent negative allegations that have caused a significant decline in HZNP's share price.  The remaining headwinds for HZNP are finding attractive acquisition targets to fuel growth, which should not be a problem in the near future due to the widespread decline in share prices of biopharmaceutical companies.

RH: Purchase @ "91.7"; Sale @ "93.2"

Common Cents purchased and sold a December 18 $85 dollar call option today.  After purchasing the option for $6.7 and selling it for $8.2, Common Cents netted a profit of 22%.  The purchase was made as RH's share price declined to the high $88's on no pertinent new information.  Going forward, Common Cents will look to repeat similar trades prior to RH's earnings release on December 10.  However, with the recent Goldman Sachs downgrade, caution is warranted in these trades, as sentiment for RH seems to be wavering a bit.

HZNP: Purchase @ $21.24

Common Cents added to its HZNP position, bringing it to 2/3 of the target allocation, after reviewing HZNP's recent earnings conference call.  Common Cents feels that the drastic decrease in share price over the past 2+ months is related to conjecture that has been dispelled by HZNP's management.  Going forward, Common Cents will look to add to its position if the share price decreases near 10% from current levels.  A post reviewing HZNP's recent conference call is pending.

RH: Sale @ "95"

Yesterday, Common Cents sold its December 18 $85 call option for $10 as RH's share price increased to the upper 93's.  Common Cents earned a return of nearly 20% on an increase of nearly 4% in RH's share price.

AAPL: Buy; PT $135; 4Q15 Update

AAPL: 11/23/15; $117.75

From Thomson Reuters I/B/E/S Estimates:

Forward Earnings: 9.85

Forward PE: 11.95

Earnings Growth Rate (EGR): ~8%

PEG Ratio: 1.49

S&P Forward PE: 17.48
S&P EGR: 5.67%

Apple reported its quarterly earnings for the fourth quarter on October 27, 2015.  Headline numbers included a 38% year-over-year (y-o-y) increase in quarterly earnings-per-share (EPS) and a 22% y-o-y increase in quarterly revenue.  For the full year, Apple grew earnings by 43% y-o-y and grew revenue by 28% y-o-y.  Those numbers are pretty astronomical for a large company facing "the law of large numbers."  However, it does appear that Apple will face slower growth going forward until one or more of its other products/services takes off in a major way (we're looking at you, Apple Watch).

Apple's revenue guidance for the upcoming quarter, which includes all of Apple's holiday season sales, indicates that Apple expects to grow the "top line" (jargon for revenue) by 2.5%.  Analysts expect Apple to grow revenues by approximately 3.5%.  Apple has traditionally exceeded analyst's estimates; however, even when exceeding an estimated 3.5% growth, that is still a significant reduction in the growth rate.

During the same quarter a year ago, Apple drastically exceeded estimates due to manufacturing more iPhones than anticipated and increasing the operating margin more than expected.  It does not seem reasonable to expect a similar outperformance this quarter; however, unexpected outperformance is not exactly something we can expect.

Thus far, iPhone sales have represented the majority of Apple's revenues and, therefore, get the majority of analyst's attention.  Apple sold 22% more iPhones overall this quarter than last and 120% more in China.  Take that China doubters.  However, minimal iPhone sales growth is expected this quarter relative to the year ago quarter.  This has been the primary driver of Apple's decrease in share price over the past few quarters and will remain a significant challenge to share price appreciation going forward.

The next quarter will be particularly important, given that it could be the first quarter that Apple posts subpar growth.  Or more dramatically, this could be the "beginning of the end" for Apple's rapid growth period.  It does seem that growth will be subdued over the near future, and potentially afterward, but Apple is by no means on the verge of becoming extinct.  There are multiple avenues to accelerate future growth, including app sales, the Apple Watch, Apple TV, and Apple in the automobile.  None of these options are credible as a significant growth driver immediately; however, time will tell.

Phew.  That was a lot of "negative" commentary.  Heres the bright side: If Apple in fact does slow its growth to the point that its shares do not continue to appreciate, then Apple can tap into its $40 billion cash on its balance sheet and $70 billion cash it generates each year.  Assuming that all of the $70 billion was returned to shareholders in the form of a dividend, each shareholder would receive $12.5 per share each year, or a dividend yield of 10.6%.  Who needs capital appreciation at that point. That is not a realistic expectation, but it is indicative of the massive ability of Apple to return value to shareholders even without the rapid growth that Apple has enjoyed for so long.

Common Cents views Apple shares as fairly valued at $135.  This valuation assumes a forward PE of nearly 14, which is 20% below the forward PE of the S&P.  However, given Apple's slowing growth and the potential for the S&P to decrease as the fed raises interest rates, Common Cents views this valuation as appropriately conservative.  At a valuation equivalent to the S&P's current PE, Apple share prices would reach $170 [17.48 (S&P forward PE) x 9.85 (AAPL EPS estimate)].  Due to Apple's current share price being significantly below the conservative valuation of $135, Common Cents views Apple as an attractive Buy.

Common Cents Take: It looks like the Apple growth engine may be slowing over the near future.  However, if that is the case, great!  Time to rake in high dividends.  Realistically, Apple has multiple mechanisms to ignite future growth through the Apple Watch, Apple TV, and Apple in the automobile, not to mention products we aren't aware of yet.  The situation is still a win-win.

YTD Performance Update: November 2015

YTD performance (as of 10/31/15): -0.67%

S&P performance (as of 10/31/15): +2.70%

Common Cents Portfolio is down by 2.37%!!

Portfolio Composition by Position:

AAPL:  12%

RH: 15% 

V:  9% 

BP:  8% 

LUV: 5% 

T: 5% 

CLNE:  4% 

HD:  3% 

GLD:  3%

HZNP:  2% 

CASH:  35% 

Portfolio Composition by Sector/Industry (excluding cash):

Retail:  24% 

Energy: 20% 

Technology:  20%

Financial Services:  15%

Industrials:  8%

Communication Services:  8%

Healthcare:  3% 

RH: Purchase @ "93.5"

Common Cents purchased an $85 call option with an expiration date of December 18.  The option was purchased for $8.5 as the price of RH's stock decreased to approximately $90.5.  The decrease in RH's share price, while a predictable pattern at this point, does not appear to be warranted given the current publicly available knowledge.  RH's stock usually increases substantially after it reports earnings, so Common Cents will look to sell the option after the early December earnings release date (if not before).

RH: Purchase @ $94.9

On November 13, Common Cents added to its RH position, which increased the position above its target allocation.  RH shares were purchased at $94.9 after a sharp intraday decrease.  The decrease was seemingly related to weaker-than-expected retail sales numbers.

RH has recently launched several new business lines and opened several full-line design galleries.  As such, its performance is not likely correlated with aggregate market retail sales.  Therefore, Common Cents views the recent pullback as unwarranted and an attractive purchase point going into the earnings call in December.

LUV: Hold; PT $53.7; Q315 Update

LUV reported its earnings for the third quarter on October 19.

LUV: 11/9/15; $46.37

From Thomson Reuters I/B/E/S Estimates:

Forward Earnings: 4.04

Forward PE: 11.48

5-yr Estimated Earnings Growth Rate (EGR): 28.9%

PEG Ratio: .40

S&P Forward PE: 17.65
S&P EGR: 5.90%

LUV reported its earnings for the third quarter on October 19.  The reported revenues and earnings for the previous quarter exceeded analyst's estimates.  LUV is benefitting from sustained lower fuel costs, as profits for the quarter increased 71% year-over-year (y-o-y) on a 10.6% increase in revenue. The increase in revenues occurred in part due to a 7.6% increase in capacity.

LUV is increasing its profitability through increased capacity, increased loading of flights, and lower costs.  This has resulted in LUV converting $0.07 more of each revenue dollar into profit.  The lower fuel costs is providing a cushion for Southwest to invest in cost-saving measures; however, the increase in y-o-y profit is substantially attributable to lower fuel costs.  As such, Common Cents feels it necessary to temper our enthusiasm on this position.

According to Thomson Reuters I/B/E/S estimates, the y-o-y growth rate in profits is estimated at 75.6%, 14.3%, and 6.1% for 2015, 2016, and 2017, respectively.  While the growth rates, particularly for the near future, are impressive, it is likely that investors will sour on Southwest when oil prices start to creep up.  The 5-year estimated earnings growth rate is heavily weighted to the early years.  As such, the PEG ratio of .4 will increase dramatically once 2015 has past due to its significantly higher y-o-y growth rate.  Therefore, the current PEG ratio is not a reliable value to estimate LUV's fair valuation.

LUV is generating substantial cash to fund share repurchases, dividend payouts, and repayment of debt.  The $1.5 billion of planned share repurchases in 2015 amounts to roughly 6% of LUV's shares outstanding; however, this level of share buybacks may not be sustainable in a rising oil price environment.

All of the previous factors make establishing a fair valuation for LUV difficult.  In the previous quarterly update for Southwest, Common Cents conservatively estimated a 5-yr growth rate of 6.65% for LUV.  While the calculation was a very crude, back-of-the-envelope estimate, Common Cents estimates that LUV would be fairly valued at a PE ratio of 13.3.  This value was reached by multiplying the growth rate by an assumed PEG ratio of 2.  Based on the forward earnings estimate of 4.04, LUV would be fairly valued at $53.7.  However, due to the arbitrary assumptions used to calculate this value, Common Cents feels that caution is warranted with this position and that LUV is not an attractive buy at these levels.  Going forward, Common Cents will look to trim its position at a 5% - 10% increase in share price and add to its position at a 5% - 10% decrease.

Common Cents Take: LUV is performing very well operationally; however, the majority of its drastic earnings improvement is related to the persistence of low oil prices.  In the low oil price environment, Common Cents expects LUV to generate significant levels of cash to return to investors through dividends and share buybacks, in addition to reducing debt.  While LUV is performing well operationally, the future performance of its stock price is heavily related to the future of oil prices.  A conservative, defensive mindset for this position is warranted until further clarity is obtained on the future of oil prices and LUV's growth after 2015.

AAPL: Sale @ "123"

Common Cents sold its December 15 $115 call option on November 3, after an increase in share price occurring over several days after AAPL's earnings release.  The call option was purchased for $5 and was sold for $8.  This represents an approximate 60% increase in value of the option relative to an approximate 11.5% increase in the share price of the common stock over the same period.

A preliminary review of AAPL's earnings release appears to be favorable, especially in regards to concerns over AAPL sales in China.  An in-depth review of the earnings release is forthcoming.

YTD (3Q15) Performance Update: October 2015

YTD performance (as of 9/30/15): -7.16%

S&P performance (as of 9/30/15): -5.29%

Common Cents Portfolio is down by 1.87%!!

Portfolio Composition by Position:

AAPL:  14%

V:  11%

RH:  9% 

LUV:  9% 

BP:  8% 

CLNE:  5%

T:  5% 

HD:  3% 

GLD:  3%

HZNP:  2% 

CASH:  31% 

Portfolio Composition by Sector/Industry (excluding cash):

Retail:  19% 

Technology:  19%

Energy:  18%

Financial Services:  17%

Industrials:  16%

Communication Services:  8%

Healthcare:  3% 

3Q15 Review: Common Cents did not distinguish itself in the third quarter.  Significant losses were obtained due to the "call options experiment." The poor performance trading options has accounted for a significant portion (estimated at 5% - 10%) of the portfolio's underperformance since mid summer.  It's good news that the actual positions themselves are outperforming the S&P; however, the losses due to options trading has been abysmal.

There was quite a bit of volatility during the 3rd quarter due to fears of a slowdown in China, and probably some other headline events that escape me at the moment.  The gist of the current China conversation is that mining/manufacturing (and related) industries are slowing in China, but the consumer and service industries are growing.  This is the result of a socioeconomic population shift from rural to middle class.  In short, the middle class is growing in size and wealth, and is likely looking to shift spending from necessities to luxuries.

Common Cents attempted to capitalize on this volatility through use of options, along with some purchasing of common stock.  The options strategy inflates both your good and bad guesses.  In addition, it pits you against time, which is what my traditional portfolio management strategy attempts to negate.  I am still gathering data to see if there is room in the portfolio for options trading; however, I have single-handedly wiped out my gains for the year while attempting to figure it out.

Going forward, I will continue to modify the options strategy and will perform a review at year-end to see if the strategy is appropriate for the Common Cents portfolio.  Looking into the future, it appears that the restlessness (volatility) has subsided momentarily; however, future fed funds rate hikes will likely cause individuals to move assets from stocks to bonds.  This will likely cause some level of declines in most stocks; however, the magnitude and timing of these moves is anybody's guess.

LUV: Sale @ $45.25

Common Cents sold a portion of its LUV position at $45.25 after a sharp rise in share price due to its recent earnings report.  Common Cents feels that upside from this level may be limited; however, an evaluation of the current earnings report is currently being performed.  A preliminary review of the earnings report does not indicate that any significant negative events occurred during the quarter, so the previously established price target is likely in the ball park of the revised target going forward.

Going forward, Common Cents will look to purchase more shares at an approximate 10% decrease from this level.

AAPL: Expiration of October 16 Call Option

Common Cents' October 16, $115 call option expired worthless.  This option expiration illustrates the need to abandon an option trade at a certain predetermined level when the short-term trade does not pan out as planned.  Common Cents continues to evaluate its option trading strategy, including if it is appropriate for the portfolio, with each trade.

For a discussion of call options, consult Investopedia.

LUV: Sale @ $41.26

On October 22, 2015, Common Cents sold a portion of its LUV position at $41.26.  This portion was purchased at $37.5 and was sold after an approximate 10% increase.  This sale brought the LUV position to its target allocation.

V: Sale @ $76

Common Cents sold a portion of its V position at $76 on October 16, 2015.  This portion was previously purchased at $69 with an intention to sell after an approximate 10% increase in share price.  The V position is now at its target allocation.

Going forward, Common Cents will look to make this trade again on an approximate 7% - 10% pullback from its current levels.  At $76, Common Cents feels that V is approximately fairly valued.  However, a potential acquisition of Visa Europe may alter the current valuation.

Recent Trades

Common Cents has been trading quite a bit of call options recently.  The posts pertaining to these trades may not make a lot of sense, but once I refine a strategy for trading options, I will create a 101 post to clarify what options are, how to trade them, and (hopefully) how to incorporate them into your portfolio strategy successfully.  In the meantime, I will continue to wreck the performance of the Common Cents portfolio by attempting to figure out a profitable strategy.  But hey, the more mistakes I make, the more you get to learn from without using your own money!

Managing Your Portfolio

A method for portfolio management is probably the most important concept to nail to have a high probability of successful investing.  Improper portfolio management can ruin your performance, even if you have selected the proper investments.  We'll cover several topics that will get you started on your path to active portfolio management in a conservative and intuitive way.  These methods will put you way above the average novice investor in terms of skill and performance.

Portfolio Composition

Diversification.  I'll say it again, DIVERSIFICATION.  Why shouldn't you put all of your money in your favorite stock? Because there is one thing we can be sure of, we can very accurately predict that the market will be unpredictable.  What if you invested in only tech stocks during the dotcom bubble?  You would've been completely wiped out.

Diversification of a portfolio can be accomplished by selecting a minimum of 5 stocks, each in different industries.  Examples of industries include technology, energy, financials, healthcare, metals & mining, retail, etc. etc.  Diversification also means that any one of your positions should not occupy a substantial portion of the portfolio.  I like to keep an individual investment, and an industry, to less than 20% of my portfolio.

Diversification, a mundane topic, can be exciting to watch.  On days when part of my portfolio goes down, another part of the portfolio goes up.  To illustrate this fact, let's look at an example of diversification with an energy and airline stock.  When oil prices go down, energy companies like BP go down, but airlines like LUV go up!  The lower oil prices mean lower revenues for BP, but also lower fuel costs for LUV.  Bingo!

Buying

A typical mistake for beginner investors is to find a stock we love and buy it all at once.  This may work the first time (though probably not), but I can ensure you that you are not the one individual on the earth that can always accurately time the market.  No worries though, we don't even have to try to.  The way to work around the timing issue is to buy our position in increments.  I typically use increments of 1/3.  If I want 60 shares total of a company, I will buy 20, then another 20 as the price declines, then the final 20 as the price declines further.  I don't always get to fill my desired position (3/3), but that usually means that I am making money because the share price is going up rather than down.  Declines between 5% and 10% are typically good values to use between increments.  Common Cents uses 7% to 10%.

Let's illustrate a model portfolio with actual numbers to get a better idea of how this strategy works.  A model portfolio with a total value of $10,000 will include 5 positions of $1,650, and each position will be comprised of 3 increments of $550 each.  But that only totals $8,250.  One of the most important positions in everybody's portfolio, which will total $1750 in this portfolio, is CASH.  Keeping cash on hand will allow us to take advantages of market volatility (see next section below).  Also, cash goes down 0% when the market declines, so it is a good way reduce the impact of widespread market declines.  Here are a couple of summary equations for portioning your portfolio:

Desired allocation for each position = Total portfolio value / (desired # of stocks + 1) Position increments = Desired allocation for each position / 3

Let's quickly review the example above.  Desired allocation = $10,000 / (5 stocks+1cash) = $1,666 or approximately $1,650.  Position increments = $1,650 / 3 = $550.

The desired number of positions and 1/3 increments are not hard and fast rules.  They are just guidelines to get started.   The number of positions can be increased (decreasing below 5 may not be the best idea), and the incremental buying strategy can be used with 1/2, 1/3, 1/4, or any other increment.  However, it is important to consider transactional costs when selecting an increment.

Trading Around a Position
Trading around a position is how we use our cash on hand to take advantage of market declines.  When trading around a position, you aim to repeatedly buy low and sell high.  Easy enough, right?  Well, actually it is.  When Common Cents gets a full position (i.e. all 3 increments have been purchased) and the stock declines further, I will add another 1/3 to the position (totaling 4/3 of the desired position).  If the share price moves up a substantial amount, typically between 5% and 10%, Common Cents will sell that last 1/3 of a position to bring the allocation back down to 3/3, or back to the "full position."  The more this happens, the better.  This helps to keep a cool head when the market is declining because, while the value of your portfolio is declining, you can view the lower share prices as a sale that you can profit off of!  It can truly be a win-win for you, regardless of the market direction!

Common Cents Take: Buy in chunks as the share price declines.  Trade around your position to take advantage of market volatility.  And be diversified!!  These strategies will drastically improve your chances of success when investing and will allow you to profit regardless of the market direction.

That does it for the basics.  You should have all the tools you need to get your feet wet in investing.  Just remember, assume you will lose all of your money when you first start, so don't invest more than you are willing to risk losing.  Paper trading, where you keep track of your investments on paper without actually transacting, can be a useful way to get accustomed to the market without risking hard-earned greenbacks.

So go have fun and make some money!  Investing can be extremely rewarding (and frustrating) both monetarily and personally.  Use your tools, keep a check on your emotions, and absolutely never forget your COMMON SENSE!!!

AAPL: Purchase @ "120"

Common Cents purchased a December 18 $115 call option for $5 as AAPL's share price declined to near $110.  Recent news releases has been favorable in regards to iPhone and China sales.  The call options will last through the upcoming quarterly release on October 27.  Common Cents expects the earnings release to be favorable; however, as per usual, the reaction to the earnings release by the analyst community is unpredictable.  Going forward, Common Cents will look to sell the options for at least $5.50.

RH: Sale @ "94.8"

Common Cents sold its November 20 $90 call option for $4.8 (purchased for $6.8) on October 2, 2015, as RH's share price declined sharply.  The option was sold to limit the amount of losses attained from Common Cents' options trades; however, no news pertinent to RH's earnings was released.

RH: Purchase @ "$96.80"

Common Cents purchased a November 20 $90 call option for $6.80 as RH's share price declined to near $92.50 on a market-wide pullback.  Common Cents will look to sell this option at a minimum of $7.50, which will require RH's share price to increase by up to 5.5% by November 20.

RH continues to report good earnings growth, and recent developments in the market do not indicate that RH's future prospects have decreased.  Therefore, Common Cents maintains that RH is still an attractive buy, particularly at the low $90's.

CLNE: Expiration of September 20 Call Option

Common Cents' CLNE $6 September 20 Call Option expired...worthless!  This call option was a mistake upon a mistake.  It was purchased with little analysis performed other than hope for an increase in CLNE share price.  Lesson learned...hopefully.

Common Cents is continuing to test the use of options in its portfolio, to dismal performance so far.  CC will continue to develop an options strategy; however, it has not yet been determined that options investing will enhance portfolio returns on a consistent basis.

YTD Performance Update: September 2015

YTD performance (as of 8/31/15): -4.28%

S&P performance (as of 8/31/15): -2.88%

Common Cents Portfolio is down by 1.40%!!


Portfolio Composition by Position:

AAPL:  14%

V: 11% 

LUV:  9%

RH:  9% 

BP: 8%

T: 5% 

CLNE: 4% 

HD:  3% 

HZNP: 3% 

GLD:  3%

CASH: 31% 

Portfolio Composition by Sector/Industry (excluding cash):

Energy:  19% 

Technology:  19%

Retail:  18%

Financial Services: 17% 

Industrials:  14%

Communication Services:  8%

Healthcare:  4%

RH: Sale @ "$99"

Common Cents sold its November 20 $90 call option as RH's share price increased due its quarterly earnings release.  The options, which were purchased for $7, were sold for $9.  Common Cents earned a return of 78% versus an approximate 5% increase in RH's share price.  Bingo!

Going forward, Common Cents will look to sell some shares of RH if the share price increases to near $105.  Further purchases of options will likely be suspended until after the fed interest rate decision in mid September.

RH: Purchase @ "$97"

Common Cents purchased a November 20 $90 call option for $7.00.  Common Cents will look to sell this option at a minimum of $8.00, which will require RH's share price to increase by up to 8.9% by November 20.

RH will release its quarterly earnings on September 10.  As stated in a previous RH post, RH has typically increased in share price after these earnings release while gradually decreasing afterward.  Any slowdown in product sales due to a West Coast Port slowdown was likely accounted for by analysts, who lowered estimates after the last quarterly release due to this issue.  Therefore, it is likely that RH's share price "pop" after its earnings release will occur for the next release.

A risk to this trade is the fear of a possible Fed interest rate hike in mid September.  This may cause an initial downturn in the stock market; however, I think the hike, if it actually occurs, will be forgotten a month or so afterward.  In addition, the lack of a rate hike may cause a short-term boost in the markets.

Common Cents Take: RH has a high likelihood of overachieving for the quarterly earnings release on September 10.  Some short-term headwinds exist that may keep RH's share price down; however, RH's actual business is generally not affected by the headwinds.

RH: Sale @ "$99.3"

Common Cents sold its November 20 $90 call option on Thursday, September 3, as the share price of RH neared $95.  Common Cents achieved a 27% return on its investment versus a 3.8% increase in RH's share price.

Since the sale, RH's share price has reduced to $91 - $92.  I am considering making a similar trade before the earnings release on September 10; however, chatter about a fed interest rate hike in mid September may create some short-term headwinds for the market as a whole.  This factor is important to consider when deciding on adding the risk of options.

RH: Purchase @ "$97.3"

Common Cents purchased November 20 2015 call options with a strike price of 90 for $7.30.  The options were purchased when RH's share price neared $91.50.  Going forward, Common Cents plans to sell the options for at least a 10% profit (~$8.00).  For this to happen, RH's share price will need to increase by up to 8.7%.

RH's stock has declined quite a bit recently due to the marketwide decline and, in part, due to an unpleasant forecast of future earnings by Williams Sonoma during its recent quarterly report.  As far as the marketwide decline, much of it is due to declining oil prices and fears over a slowing Chinese economy.  Declining oil prices are, at a minimum, neutral for RH.  Any decline in fuel prices increases the funds available to spend at RH stores; however, I believe that most of RH's customers are in the affluent category and are not overly affected by oil prices.

The fears of a slowing Chinese economy does not have a direct affect on the US economy, (All of RH's stores are located in the US).  A much more significant economic slowdown in China may creep over to the US economy (and elsewhere) eventually, but we are nowhere near that severity at this moment.

RH reports earnings on September 10.  The stock usually spikes on the positive earnings reports, and analysts have decreased earnings estimates since the last report.  Therefore, RH is prime to overachieve the lowered expectations on this next earnings call, barring a surprisingly large effect of port slowdowns on the supply chain.

Common Cents Take: RH's share price has decreased substantially due to market volatility on factors that have little to do with RH's business.  Thus, the low $90's are attractive prices to purchase RH shares.

V: Purchase @ $69

Common Cents purchased shares of Visa at $69 after an approximate 10% pullback from its 52-week high.  The pullback is likely related to an overall decline in the S&P in addition to concerns about economic slowdowns in China and other foreign markets.

While the concerns are partially valid, V has performed well with similar concerns thus far.  China, while currently the hot topic of debate, is not a key market for V.  Slowing of the Chinese economy could cause other dependent economies to slow, which could then hurt spending and, consequently, V's revenues.  I'd like to wait and see evidence of that before I get too concerned, though.

V has several factors working in its favor.  The declining price of oil (will it ever stop?) typically means consumers have more money to spend on non-fuel-related items-after they pay down some of their credit card debt, of course.  And, as discussed in the previous V post, V will likely acquire its sister Visa Europe company in the near future.  This will lead to cost synergies and an immediate increase in profit.

Going forward, Common Cents will look to trim this added portion of the V position when it hits new 52-week highs.  Upon a further 7% - 10% decline in share price from $69, Common Cents will gladly add to this position.

Making Your First Purchase

Now we have all the tools we need to research a company and decide to make a purchase.  So let's do it-let's buy our first stock.  Grab a cold beverage, this material isn't the most entertaining.

In the old days, whatever those are, we would likely have a full-service broker that we would call up on a payphone, relay our order, and pay a relatively high commission to complete our order.  Progress has provided us with online brokerages, which put us in full control of our portfolios and typically cost less per trade (typically on the order of $7 - $10) than the full-service brokers.

Examples of online brokerages include E*TRADE, Scottrade, Fidelity, and TDAmeritrade, among many others.  Kiplinger, a personal finance magazine, has assembled a list of its top 10 online brokerages, which can be a good starting place to research and compare multiple options.  It is difficult to go wrong with any of the well-known brokerages.  Keep in mind, if you plan on trading frequently, slightly higher fees can add up over the long term.

Typically, the brokerages will require you to deposit some minimum amount into the account to open it.  Novice investors may want to stay close to the minimum until they feel comfortable with independently managing a portfolio.  To run a portfolio in the manner that I will explain in an upcoming 101 post, a minimum initial account value of $10,000 is an appropriate amount.  Just remember, never invest more than you are willing to lose.  There is no guarantee that you will make money.  Assume that the money you start out with may be the cost you pay to learn how to manage a portfolio, so any money that you lose can be considered an educational expense (no, not in the IRS's eyes).

After you fund your account, you should check for any webinars that you can use to familiarize yourself with your brokerage's "trading platform."  When you are ready to purchase a position, you can usually find a button for "buy," "sell," and/or "trade."  After selecting one of these buttons, a screen with a lot of trading options will likely pop up and sour you on the whole process.  Good thing for you, Common Cents has got your back on this one.

For starters, you need to be aware of the ticker symbol for the company you are interested in purchasing (i.e., LUV is the ticker symbol for Southwest Airlines), the price you would like to make your purchase, and the number of shares you want at that price.  Your total purchase cost will be determined by the number of shares you want to buy multiplied by the share price at which you want to purchase the shares.  So, if I want to buy 20 shares of LUV at $37.50, my total purchase cost will by 20 x $37.5 = $750.  And make sure you have enough available funds to cover the cost!

Easy enough, until you get to the order type.  Market, limit, stop loss, trailing stop loss, etc. etc. etc.  What does all this mean?  There are really only two order types we need to be concerned with: market and limit.  A market order is an order to buy shares at whatever price the stock is at when you are done inputting your order.  You may want LUV at $37.5, bust as you start to put in your order, it quickly increases to $38.00.  In this case, you would wind up purchasing your shares for $38, $0.50 higher than you intended to.  That blows.  That order type seems risky, right?  That's why limit orders are the only orders that Common Cents uses.

Why use limit orders?  When you select this option, you can input the maximum price you want to buy at or the minimum price you want to sell at.  So if I put in a limit order for LUV shares at $37.5, and it immediately pops up to $38, my purchase order will not be completed.  When selecting a limit order, we must define when we want our order to expire.  The following defines a few of the order durations:

Day - This order type will expire at the end of the trading day if it is not filled.  If it is filled during the day, the order will be completed and deactivated.

Good Until Cancelled - This order type will continue, yes you guessed it, until it is filled or cancelled.  That could be 1 second, 1 minute, 3 days, months, or years.  Exercise caution when using a long-dated order, as an extended duration can cause you to make purchases that are no longer advisable when they are executed.  For instance,  LUV may be a good buy today, but next week news may come out that makes LUV a terrible buy.  If you have an order duration that extends past a week, your order may be filled on a sharp share price decline due to the news, and you may be inadvertently stuck with a stock that you are no longer interested in purchasing.

Fill or Kill - This type of order will be immediately filled or immediately cancelled.  Not a bad idea, but this type does not allow you to put in a buy order for a lower price if you cannot watch the price of the stock all day.  If LUV is at $38, and I want to purchase it for $37.5, I can put in a limit day order for $37.5 and go on with the rest of my day.  If it gets down to this level, bingo! I got my stock.  If not, oh well, I'll try again when it gets to my price.  Conversely, a Fill or Kill limit order at $37.5 would automatically cancel in the previous example, because LUV was at $38 and, therefore, was above my maximum specified purchase price.

When using the Day and Good Until Cancelled orders, you can typically define the specific time or date/time that the order expires.  But for most cases, a limit day order that expires at the end of the trading day is usually the easiest and safest order to use.

Common Cents Take: Open an online brokerage.  Fund it with the minimum amount if you have a low risk tolerance, or a minimum of $10,000 if you are willing to "pay for your education" with losses as you go.  When you decide to purchase a stock, do so with a day limit order, which expires at the end of the day.  Easy enough.

Don't you dare pull that trigger yet!  We need a buying strategy before we start throwing money all over the place.  And for that, we need some guidance on how we want to run our portfolio as a whole.  Yep, that's next!

YTD Performance Update: August 2015

YTD performance (as of 7/31/15): +2.91%

S&P performance (as of 7/31/15): +3.35%

Common Cents Portfolio is down by 0.44%!!





Portfolio Composition by Position:

AAPL:  16%

LUV:  9%

RH:  9% 

V: 8% 

BP: 8%

CLNE:  6% 

T: 5% 

HD:  3% 

HZNP: 3% 

GLD:  3%

CASH: 29% 

Portfolio Composition by Sector/Industry (excluding cash):

Energy:  21% 

Technology:  20%

Retail:  19%

Industrials:  14%

Financial Services:  13%

Communication Services:  8%

Healthcare:  5%

V: Hold; PT $75; 3Q15 Update

V: 8/10/15; $74.38



From Thomson Reuters I/B/E/S Estimates:

Forward Earnings: 2.84

Forward PE: 26.19

Earnings Growth Rate (EGR): ~15%

PEG Ratio: 1.75 

S&P Forward PE: 17.01
S&P EGR: 7.23%







V reported its quarterly earnings on Thursday, July 23.  The reported revenues and earnings both topped analyst estimates.  Revenue increased 12% year-over-year (y-o-y), and EPS increased almost 28% y-o-y.  The revenue growth was especially impressive considering the inconsistent international economies and the significant reduction in oil/gasoline prices.







In addition to the profit and revenue numbers, two other noteworthy topics were presented in the earnings call.  One was an announcement that Visa is contemplating a merger with Visa Europe.  This merger would increase V's exposure to Europe and would likely include significant synergies (cost-savings due to consolidation), leading to higher profits.  V also announced that a total of 15.5 million shares were repurchased during the third quarter, bringing the total for the first 3 quarters to 44.1 million shares.  The current repurchase authorization is worth $2.8 billion of stock, which is just over 1%.  Over the past three quarters, V has repurchased just under 0.6% of its shares per quarter.







All-in-all, it's still steady as she goes with V.  Visa continues to strive for innovation in mobile payments and tokenization (security).  In addition, V has shown continued success in co-branding through re-signing a deal with Southwest Airlines and stealing the Costco account from American Express.  The stock has a rich valuation, which is warranted given the steady nature of the company's performance.  If/when the global economy heats up, V should reap the rewards of even better performance due to increased overall spending by consumers and businesses. 







While the long-term prospects of V are attractive and appear safe, Common Cents views the current valuation of Visa shares as fairly valued.   



Common Cents Take: The long-term prospects of V appear attractive and safe; however, V's current share price appears to already factor this in.  Significant updates to the long-term story may occur in the near future (i.e., a merger with Visa Europe), but until then, V's valuation does not support a significant growth in the near future.

HD: Sale @ $117.75

Common Cents sold a portion of is HD position at $117.75 on Friday.  The shares were sold after a gradual near-7.5% increase above where previously purchased.  HD shares were fairly valued at that price level, and while the long-term prospects of HD are still exciting, discipline warranted locking in some of the gains in HD.  Going forward, Common Cents will look to add to this position on a significant decline.

LUV: Buy; PT $44; Q215 Update

LUV: 7/30/15; $36.31

From Thomson Reuters I/B/E/S Estimates:

Forward Earnings: 3.34

Forward PE: 10.87

Earnings Growth Rate (EGR): 22.5%

PEG Ratio: .48

S&P Forward PE: 17.82
S&P EGR: 7.12%



LUV reported its quarterly earnings Thursday, July 23.  The reported revenues and earnings for the previous quarter were slightly above analysts estimates.  LUV is achieving significant growth in its earnings due to drastically lowered fuel costs and through its AirTran acquisition, which occurred in May 2011.  The 43% year-over-year (y-o-y) earnings growth was accomplished with only 2% y-o-y revenue growth.



In addition to the earnings and revenue numbers, two other noteworthy topics were presented in the earnings call.  One was a re-signed agreement with Chase bank for the Rapid Rewards Chase credit card.  The amended agreement will contribute $500 million in yearly revenue, or $125 million a quarter.  This amounts to nearly 2.5% of the revenue reported for the second quarter, which is significant considering revenue grew only 2% y-o-y.  This agreement should continue to support a modest y-o-y revenue growth for Southwest.



Another noteworthy topic is Southwest's share repurchase plan.  LUV has completed $380 million of its current $1.5 billion share repurchase authorization.  The $1.5 billion value amounts to approximately 6.2% of LUV's market capitalization.  This effectively means, if all of the $1.5 billion repurchase allotment is used, LUV will increase its EPS by 6.2% without earning a single dollar more of profit (same profit but less shares to divide into the profit).  In addition, LUV increased its dividend distribution recently and now sports a .84% yield.  Pretty pathetic, but still an indicator of the substantial cash flow LUV is generating.



As far of LUV's current valuation (PE) goes, it seems like LUV is greatly undervalued relative to the S&P index.  Considering the growth rate of 22.5%, LUV also seems to be undervalued using a PEG analysis.  However, while LUV is achieving tremendous growth this year, analysts expect the future consecutive years to grow at low single digits.  For this reason, a lower PE for LUV is likely warranted, as the majority of its growth over the next 5 years will be obtained this year.  Therefore, we need to come up with a more realistic valuation.



Using the 2% revenue growth number reported this quarter, the 22.5% margin reported this quarter, and the 6.2% EPS growth assuming a consistent share repurchase plan, LUV's growth rate can be estimated at 6.65%.  The calculation goes as follows: 2% revenue growth x .225 margin on the revenue growth = .45% (only 22.5% of the revenue growth will turn into profit).  Add in the 6.2% growth from buybacks to the .45% and we get 6.65%.  We can see from the above numbers that the PEG ratio for the S&P is above 2, so we can conservatively choose a fair PEG ratio of 2 for LUV.  This gives us a fair PE of 13.3 (2 x 6.65), or a share price of $44.40 (3.34 future EPS x 13.3 fair PE).  This value obtained through our very rough estimates seems reasonable considering the strong management execution and balance sheet of LUV.



Several other factors could help to support earnings performance relative to estimates.  The persistence of low oil prices may not be assumed by analysts in their current estimates.  Prolonged low oil prices may cause analysts to revise their estimates upwards, which would increase LUV's stock price.  Also, LUV is low-balling a few markets where it is trying to grow rapidly.  Ticket prices will increase once the markets are more established, which will raise revenue and earnings.  In summary, Common Cents maintains that LUV is an attractive buy and would be fairly valued at a share price of $44. 



Common Cents Take: The growth prospects for LUV are unclear after this year.  However, LUV generates a great deal of cash and returns much of it to investors through share buybacks and dividends.  Any persistence of low oil prices will only enhance the growth prospects and return of cash to shareholders.

AAPL Purchase @ "$124"

Common Cents purchased AAPL as it declined to around $122.  The purchase consisted of a call option, which represents the right to buy 100 shares of the stock at a certain price.  More specifically, Common Cents purchased an October 16 call option with a $115 strike price for $9.00.  Common Cents' goal is to sell the option for a minimum of $10.00.

We purchased this call option due to the decline in AAPL's share price since the last quarterly earnings report, which we feel was a stellar report and did not warrant the decline in AAPL's share price.  AAPL's PE multiple is well below that of the S&P and does not reflect the fantastic management execution, future prospects, or balance sheet.

AAPL: Buy; PT $160; 3Q15 Update

AAPL: 7/27/15; $122.66

From Thomson Reuters I/B/E/S Estimates:

Forward Earnings: 9.45

Forward PE: 12.98

Earnings Growth Rate (EGR): ~10%

PEG Ratio: 1.30

S&P Forward PE: 17.82
S&P EGR: 7.16%

AAPL reported earnings on Tuesday, July 21, and...it was another great quarter.  Revenue in China increased over 100% year-over-year (y-o-y), Apple Watch sales exceeded management's expectations (whatever they were), and a staggering amount of iPhones were sold (and at an average price of $100 more than a year ago).  As is customary with AAPL's quarterly reports, it just wasn't quite good enough for the analyst community, and the stock dropped over 5% on the day following the report.

So what was the beef about this time?  iPhone sales in China.  Although iPhone sales increased by 35% relative to the year ago quarter, unit sales did not meet analyst's expectations.  The "miss" was attributed, with no basis that I've come across, to slowing sales in China.  China's stock market has recently suffered a pretty significant decline, and fear is that potential iPhone buyers have lost a significant amount of spending money due to this decline.  Apple CEO Tim Cook had this to say during the quarter:

"Nothing that's happened has changed our fundamental view that China will be Apple's largest market at some point in the future...I think this is a major point that many people miss, the LTE penetration in China is only at 12%.  And China doesn't possess the level of fiber that some other countries do...Also, and I can't overstate this, the rise of the middle class there is continuing, and it is transforming China.  McKinsey, I saw a recent study from McKinsey that's projecting the upper middle class to grow from 14% to 54% of households over the ten-year period from 2012 to 2022."

The China worry has some logic to it.  Even though their market is up 90% over the last year and 20% year-to-date, volatility can create a lot of losses for the buy-high-sell-low crowd.  However, smartphones have become more of a necessity than a luxury these days.  People will find a way to buy an iPhone if they are in the market for it.  Also, as Tim Cook points out, China has enormous growth ahead of it in the smartphone market, as most of the China network does not have LTE capabilities.  The long-term prospects for Apple in China far outweigh any near-term concerns, at least that's Common Cents's opinion.

China concerns aside, gosh what an awesome quarter.  And AAPL is valued below the average S&P company?!  We still maintain that AAPL's earnings will more likely accelerate than decelerate.  And so far, 33% y-o-y revenue growth and 45% y-o-y profit growth flies in the face of the "law of large numbers" theory.

Common Cents maintains that Apple is an attractive buy and would be fairly valued at a share price of $160, assuming a PE ratio of 17.0 is conservative given the great culture, long-term track record, potential for major breakthroughs in growth, and ability to return cash to shareholders if growth slows.  The assumed PE is below the current high-17 PE of the S&P, as we see the potential for a "correction" (sell-off) of the overall market after its extended duration of growth.  In addition, the lower assumed PE of AAPL is warranted given the polarizing nature of this position with investors.

Going forward, I hope to sell part of Common Cents's position to reduce the position to its target allocation when the share price nears $140.  Any pull-backs to $121 or below will create an attractive opportunity to trade an options contract.

Common Cents Take: Apple crushed this quarter.  Any China worries represent short-term thinking that does not consider the long-term growth prospects.  It is hard to argue that Apple is worse than the average company in the S&P, especially considering the 30%+ growth shown this quarter, which is what its current PE multiple suggests.

BP Purchase @ $36

Common Cents purchased shares of BP at $36.00 on a gradual decline related to the falling price of oil.  Based on oil supply reports, oil is currently in a glut, which is causing the price to continually decline.  The low oil prices will hurt BP's earnings; however, BP management has indicated its commitment to maintaining the dividend through debt, planned asset sales, and lowering capex.  The dividend yield at this purchase price is currently 6.66%.  This purchase increases BP above its target allocation in the Common Cents portfolio; therefore, this purchase will likely be sold if the share price reaches near $40 in the near future.

V Sale @ $76.5

Common Cents sold a portion of its Visa position at $76.5 on a sharp increase related to V's quarterly earnings report.  V was fairly valued prior to the release of the quarterly results, so a portion of the portfolio was trimmed to lock in some profit.  Going forward, the long-term prospects of V are intact, and the business seems to be performing better than expected, especially in a tough global environment.

YTD (2Q15) Performance Update: July 2015

YTD performance (as of 5/31/15): +0.47%

S&P performance (as of 5/31/15): +1.23%

Common Cents Portfolio is down by 0.76%!!

Portfolio Composition by Position:

AAPL:  13%

V:  10%

RH:  9% 

LUV: 7% 

CLNE: 7%

BP:  6% 

AGNC:  5%

T: 5% 

HD:  5% 

GLD:  3%

CASH: 31% 

Portfolio Composition by Sector/Industry (excluding cash):

Retail:  21% 

Technology:  20%

Energy:  17%

Financial Services:  15%

Industrials:  11%

Real Estate:  8%

Communication Services:  8%

2Q15 Review: The second quarter of 2015 was going gangbusters-the Common Cents portfolio was significantly outperforming the S&P.  However, maybe out of greed or boredom, Common Cents purchased call options for CLNE in hopes of making a small quick profit.  The trade immediately turned south and wiped out the majority of the years profits.  In addition, LUV was a significant underperformer due to certain seemingly negative news releases, which amplified the CLNE mistake.

Why is the CLNE option trade a mistake?  Common Cents purchased the options with no other conviction than, "it will probably go up and earn us a quick buck."  While the long-term prospects are still intact, and still speculative, making a "leveraged bet" using options amplified the volatility typical of this position, which exposed the portfolio to a significant amount of risk.  Lesson learned.

The CLNE trade has recouped some of its value but is still highly volatile.  The trade still has potential to regain its value, or even to turn a profit, based on the conservative way in which it was purchased.  However, the short-term headwinds are not in CLNE's favor, and the earnings report on August 5 will be key to exit this trade with minimal detriment to the portfolio.  The good news is, the rest of the portfolio is continuing to perform well. The damage due to the CLNE trade has reached its near-full effect, and performance can only improve from here.

Common Cents Take: The CLNE option trade wiped out the entire half's gains in a matter of a few days.  Options increase the volatility of the portfolio dramatically, especially when purchased for a volatile stock.  These trades should receive increased scrutiny before purchasing for a short profit.

LUV Sale @ $38.5

Common Cents sold a portion of its LUV position at $38.5 on a sharp increase related to its quarterly earnings report today.  The portion sold today was the previous portion bought for the purpose of trading.  The LUV position is now at its target allocation.

HZNP Purchase @ $35.40

Common Cents initiated a position in Horizon Pharma, a company that specializes in pharmaceuticals.  More information will follow in future posts.

AAPL Sale @ "125.12"

Common Cents sold its September 18 $115 call option for $10.12 as the price of AAPL's stock rose to slightly above $122.50.  Common Cents achieved a return of 12.4% on the sale of this option vs. an increase of 2.1% in the price of the actual stock.

Common Cents Take: Ka-Ching

AAPL Purchase @ "124"

Common Cents purchased AAPL as it declined to around $120.  The purchase consisted of a call option, which represents the right to buy 100 shares of the stock at a certain price.

More specifically, Common Cents purchased a September 18 call option with a $115 strike price for $9.00.  Common Cents' goal is to sell the option for a minimum of $10.00.  AAPL will have to increase, at a maximum, 3.3% (or to $124.00) for the option contract to reach $10.00.  More information on options trading will come in a future 101 post.

CLNE: Hold; 1Q15 Update

CLNE reported its first quarter 2015 results on May 11, 2015.  The results indicated that fuel sales are  continuing to increase by 20%+ year-over-year; however, overall revenue decreased relative to 1Q14.  The decrease was attributed to underperformance and deferred (not yet recognized) revenues related to the business segments outside of fuel sales.

The major concern with CLNE is when/if it will achieve profitability.  The main driver of profitability is likely fuel sales, as this aspect is the sustainable and predictable portion of CLNE's revenues.  CLNE has several opportunities to increase fuel sales: freight trucking, the virtual pipeline obtained through investing in NGAdvantage, rail, and marine.  Rail and marine may both be huge opportunities for growth; however, the development of these markets are not yet on the short-term horizon.  Freight trucking has been slow-growing and has not likely accelerated recently.  NGAdvantage's virtual pipeline, however, will likely have a significant impact on the next quarter's results.

CLNE inked a deal with International Paper (IP) to supply a significant amount of natgas to IP's mill in New York.  The deal should increase gallons delivered by nearly 3 million during the next quarter (relative to the first quarter).  The additional 23 accounts signed with NGAdvantage represent a minimum of 5 million gallons per a quarter, of which CLNE claims 51%.  Some or all of the gallons delivered to the remaining accounts may have been included in the previous quarter's gallons and, therefore, may not represent an increase.  There is much potential for increase in gallons delivered related solely to NGAdvantage; this next quarter may provide some clarification.

Common Cents Take: CLNE is developing multiple "shots on goal."  The stock is highly volatile on little news, but the pace seems to be continuing steadily (albeit slowly) with potential for acceleration.  "Adjusted" profitability may be achieved within a year, which will entirely change the game for investors.  Based on the uncertainties, Common Cents does not intend to add to this position in the near future.

BP: Buy; 1Q15 Update

BP reported its Q1 earnings on April 28, 2015 (wow, I'm late on this update).    The main highlights of the quarter were the increase in downstream profits and drastic decrease in upstream profits, which was related to the volatile drop in oil prices during Q1.  Oil prices have rebounded somewhat since; however, they are still down drastically from the $80 - $100 prices during the previous status quo.

The drop in oil prices greatly reduced BP's profits.  However, management has reiterated their commitment to maintaining the dividend, even in this lower oil price environment.  Several opportunities to maintain the dividend, as per management, include reducing exploration expenditure, continuing with the remaining $3 billion in planned asset divestitures, and increasing "gearing" or debt (currently at 18.4% with a management-specified cap at 20.0%).

Recently, an announcement was released that stated BP has come to an agreement to settle the claim with the United States government related to the Deepwater Horizon oil spill .  The settlement totaled $18.7 billion, which will be spread out over 15 - 18 years.  Numerous individual claims against BP have yet to be settled; however, the deadline for filing claims has passed.  Both of these developments clarify BP's exposure to the spill and will allow investors to ease their concerns about the maximum reduction in BP's profits related to the spill litigation.

Common Cents Take: BP is yet another step closer to putting the spill behind it.  The drop in oil prices has hurt BP profits; however, BP has multiple available options to create cash to maintain the dividend during this period.  Being that  Common Cents has invested in BP primarily for the dividend, Common Cents continues to view BP as an attractive Buy.  Going forward, Common Cents would like to purchase more shares when the dividend yields around 6% and at every .5% dividend increment above %6.

LUV Purchase @ $32.5

Common Cents purchased LUV at $32.5 during a steep intraday decline on July 1.  The decline was related to news of a probe into price collusion by the major airlines.

Common Cents Take: LUV just can't win.  Analysts lower earnings estimates on fears that the airline companies will increase competition, which will lower ticket prices and profits.  Then, the Department of Justice (DOJ) announces that it is launching a probe for not lowering ticket prices.  Since when is it a requirement to proactively reduce profits?  Doesn't the market (we ticket buyers) control that?

Going forward, Common Cents will look to sell the recently purchased shares near $35.50, as the position is now larger than the target allocation.

AGNC Sale @ $18.5

Common Cents closed out its position in AGNC on July 1.  The remainder of the position was sold at $18.5 per share.

Common Cents Take: The position should have been closed out earlier (near $21) when it was evident that a fed rate hike would cause the stock to decline.  There were no positive updates on the horizon at the time, and AGNC is going to have a difficult time managing its mortgage portfolio during a rising rate environment.

CLNE Purchase @ "$7.35"

Common Cents purchased CLNE today as it declined to around $7.  The purchase consisted of several call options, each of which represents the right to buy 100 shares of the stock at a certain price.

More specifically, Common Cents purchased September 18 call options with a $6 strike price for $1.35 a piece.  Common Cents' goal is to sell the options for a minimum of $1.45.  CLNE will have to increase, at a maximum, 6.4% (or to $7.45) for the option contracts to reach $1.45.  More information on options trading will come in a future 101 post.

AGNC: Sell; 1Q15 Update

AGNC reported earnings on April 28.  With a decrease in the monthly dividend from .22 to .20, and a slight decrease in the book value from the higher $25's to $25.53, I didn't get the warm-and-fuzzy's from the quarterly performance. However, neither of these events were a surprise to me.

Since the quarter, the book value has further decreased to just under $25.  The current price, in the upper $19s, represents a near 20% discount to the reported book value.  However, this discount is warranted given the risk that The Fed will raise interest rates, immediately increasing the short-term borrowing costs for AGNC.

AGNC's management seems to be handling the interest rate volatility pretty well.  They have decreased the leverage of the portfolio, which decreases the portfolio's exposure to rising interest rates.  The sweet spot for AGNC is when rates do not change.  Volatility in the rates forces the portfolio to be actively managed to reduce the effects. 

Looking forward, I don't see interest rate volatility decreasing any time this year.  While AGNC's 10%+ dividend yield is enticing, this just doesn't seem like a fight that I want to take on for the Common Cents portfolio.  Further, I quite honestly have no idea what the company is going to report in regards to book value or dividends each month.  Therefore, Common Cents maintains a SELL opinion in this position. 

YTD Performance Update: June 2015

YTD performance (as of 5/31/15): +5.82%

S&P performance (as of 5/31/15): +3.23%

Common Cents Portfolio is up by 2.59%!!

Portfolio Composition by Position:

AAPL:  13%

V:  10%

RH:  8% 

LUV: 7% 

CLNE: 6%

BP:  6% 

AGNC:  5%

T: 5% 

HD:  4% 

GLD:  3%

CASH: 32% 

Portfolio Composition by Sector/Industry (excluding cash):

Retail:  20% 

Energy:  19%

Technology:  19%

Financial Services:  15%

Industrials:  11%

Real Estate:  8%

Communication Services:  7%

LUV purchase @ $37.5

Common Cents purchased LUV today at $37.5 after an approximate 6% intra-day decline.  The decline was likely based on news of probable increases in oil prices and capacity increases by airliners, particularly Southwest.  Capacity increases, analysts justify, will increase supply at a constant demand, and, consequently, ticket prices (i.e. PRASM) will decline.  Southwest's management seems to think that demand AND supply are increasing, so the capacity increase is justified.

Common Cents Take: Great airline for customers.  Great company for employees.  Great execution by management.  None of these change with speculation on the direction of oil prices and PRASM.

Going forward, I will look to unload this chunk above $41, a 9%+ increase.