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Friday, January 14, 2011

Dying For Stocks.......

“Oh..I am investing in precious metals and precious metal stocks”. If you thought that you received glazed over eyes when you responded with the aforementioned at a party when asked the question of what are you investing in, then imagine the response you will get with my next suggestion.

I am always on the lookout for good opportunities to invest in and one thing I have learned over the years is that not all good or great investments are sexy. There are some investments that reward the investor for holding on to a profitable business but they rarely make headlines.

Many solid businesses are not the kind you can name drop on the wine and cheese circuit, where you may be subject to listening to “Bob Blowhard” brag about his 10 gazillion dollar win because he is buying  Apple Inc (NASDAQ :AAPL). Of course you never hear about Bob’s losses because he never has any….yeah…right! …and I have got some prime beachfront property in a future Las Vegas after the “big one” for you too.

The recommendation I will put forth does not allow you to compete with Bob for bragging rights. In an environment like this it is better to be the turtle with part of your money rather than the hare. The companies that Bob brags about are analogous to the scene in the film “Superman I” where Marlon Brando is rushing to launch his progeny off of Krypton before their sun goes “nova”.

You see dear reader I look at a company like Netflix (NASDAQ : NFLX) and I can see many people trying to time the supernova as they are still buying the stock. Today, Netflix is a hot stock, but it is really running on fumes in my opinion for a variety of reasons. You see Netfix was a great idea but a combination of factors are lining up to destroy the business model ironically in a similar manner to the way Netflix took out Blockbuster (Pink Sheets :BLOAQ). The irony is that Blockbuster was out foxed since they were to slow to respond to the paradigm shift that Netflix put in to place and in the near future it appears that Netfilx will get its comeuppance. Netflix’s problems are many ranging from the 28 day delay to get new titles, valuation at 70 plus PE, a fully valued PEG ratio at over 2.0 and potential reductions in their margins as a result of bandwidth hogging charge backs related to streaming. Right now the street has many on the hook with Netfilx as it is sexy and you can boast about it at the neighborhood barbeque, and I am sure that I will get negative comments for this but the old saying applies here “nothing is new under the sun”. Once the last sucker is reeled in Netflix will Nova just like other story stocks before it.

You might be asking yourself at this point what all of this has to do with the eyes glazing over comment at the beginning of the article. Well as I stated earlier I like to look for businesses that are growing where the “trend is your friend”. Someone once said, “There are only two things in life that are certain death and taxes”. Some of you may find this suggestion not to your liking but the reality is that at some point we all will have to depart this mortal coil and the current demographics suggest that the funeral industry is in an uptrend as the “baby boomers” begin to age and pass on.

Thinking back to another movie, “Night Shift” (1982) there is a scene where Chuck Lumley (Henry Winkler) takes his partner Bill Blazejowski (Michael Keaton) to see what he used a portion of his ill gotten gains to purchase, as it seems Chuck has not spent a penny. They pull in to a cemetery upon which Bill quips, “Chuck, You bought a cemetery, this is great people could be dying for us…Chuck you should have bought an empty one though”. Of course in reality Chuck had only purchased a headstone for his father’s grave but you get the idea.

If you have had the unfortunate circumstance of having a loved one pass away you may know some of the players in this space and you also know the pricing structure. These businesses have strong margins even with competition for some items form Costco (NASDAQ :COST) and Walmart (NYSE : WMT) online for caskets. When one is bereaved and has a funeral to get under way one does not go bargain shopping or use “pricegrabber” on the net. As awful as it sounds the business related to the funeral industry is reasonably stable and as stated earlier has a bias toward growth as time marches on.

In the space of what is so humanely called personal services fall the category of undertaker or funeral home. The funeral home space is one that is often overlooked as it is difficult for many to stomach the idea of investing in the sector since we all grapple with our own mortality. I look at the space as a necessity and an area where once can achieve a return based upon solid trends. The two players in specific that I have been looking at ate Service Corp International (NYSE :SCI) and Stonemor LP (NASDAQ : STON). Service Corp International.

Starting with Service Corp I see a company that is currently undervalued and is in a good position going forward. By the valuation metrics I would not say that SCI is cheap nor would I say it is overvalued but it has better metrics than many in its industry.  SCI sports a trailing PE of 16.7, which is better than the industry at 26 plus. The price to sales ratio is also skewed in favor of SCI at .93 versus the average of 4.22 and the price to book is better than its peers at 1.36 vs 4.55. The actual book value of SCI is $6.01 while its shares trade at about $8.20; SCI does not meet the Graham measure of safety in this market it is not awful. While SCI has debt the current ratio of 1.0 indicates that it should not have an issue maintaining their debt obligations. SCI will also pay you a dividend of 2% and has a payout ratio of 33% meaning they should not have issues meeting their dividend obligation either. After recovering from its 2009 bottom SCI has been trending essentially sideways and the 50 and 200 day moving averages are flat to slightly down at overhead resistance. The technical set up for SCI at the moment appears neutral but the company announced a buyback program in November that is equal to $200 million or roughly 10% of its market cap which should firm up the shares and allow them to move higher as this should help the EPS going forward.  All in all it appears to me that SCI is undervalued and Market Edge and Ford Equity research are recommending reduce and avoid; I believe the “bad news” has been priced in at this point. There are many analysts that are calling for a $11 price for SCI which is roughly a 30% gain from current price, not sexy but nothing to sneeze at.

The more attractive play in this space to me is Stonemor LP (NASDAQ :STON) which is setup in a limited partnership format but trades as a stock . Many of you may be familiar with Kinder Morgan Energy Partners (NYSE :KMP), Stonemor is structured in a similar fashion. Stonemor passes earnings through to the limited partners that are not taxed, my point being if you are buying Stonemor and placing it in an IRA then you need to be aware that you may incur UBTI or unrelated business taxable income. Stonemor has been in a nice steady uptrend since about July and has had some pull backs along the way. Stonemor appears to be a bit stretched to me but one could split up their purchase to average in and take advantage of any correction in price while getting a toe hold now. If possible I would try and buy on a pull back to the 50 day MVA around $29 a share. Stonemor has been a pretty consistent performer over the last several months which is reflected in their beta of .9 indicating it is somewhat less volatile than the S & P 500. Stonemor also boast a very nice dividend yield of 7.3% and a PEG ratio of 1.45 which indicates that it is still growing earnings.  Stonemor may not be the turnaround play of SCI or the growth story of Netflix but a 7.3% yield in a stable industry is something you can take to the bank.

So you may not want to talk about these two recommendations with the Muffy, Buffy, Biff and Tad at the cocktail party but you can balance out your portfolio in private. You can’t cheat death but many people have made a living and a profit from it, taxes now that is a different ball of wax all together.

Disclosure : Looking to go long both stocks at some near future point...but for now no position yet.

Note : This post was published by me on Thursday at Benzinga.com where I have a weekly article. Additionally if you are interested you can follow me on Twitter (@monetaadvisors).

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