Here’s an article we wrote on Harley Davidson that was published on Seeking Alpha. Harley Davidson is a cyclical stock that is slowly working its way higher towards the sales volume levels it was achieving at the peak of its last cycle in 2006/2007. We estimate that at current growth rates (5.6% annual volume growth since cycle low) that by 2019, the company will sell more motorcycles than at its 2006 peak. With additional revenues from new products, pricing gains, financing and accessories, and improving net margins, the stock should yield patient investors a gross return of between 15% and 20%.
Here’s an article we wrote on Apple that was just published on Seeking Alpha. We think the fundamental problem with Apple is the misalignment between shareholder and management goals, in other words poor corporate governance. Our most conservative scenario assumes that buying Apple at the current price earns you nothing over the next 5 years and the better case scenario would earn you a 15% annualized return. If you believe that Apple might launch a new blockbuster consumer product, you may get an even higher return than 15% but this is just pure speculation.
Here’s an article we wrote on Oracle that was just published on Seeking Alpha. Our view is that at these levels ($32.40), the stock offers a minimum annualized gross return of 16.8%. We are most likely in a mid-cycle slowdown, once we get through this we should see stronger organic growth and a re-rating of the stock. This could increase annual returns to 19-20%. We are going Long Oracle at these levels with a market hedge as we have some concerns regarding a mid-cycle slowdown’s effect on the market in general.
We ran an analysis on a handful of cyclical stocks. We calculated the Trailing 12 Month Revenues/Invested Capital Including Tangibles. This gives us an idea of the revenue trend of these companies excluding the distorting effect of acquisitions. Our conclusion is that the mid-cycle slowdown is in full force. Companies are struggling to squeeze revenues out of their assets. Most of the growth is coming from buybacks and cost cutting. Makes us think we should be careful buying the market right now given the risks.
We are starting to see evidence pointing to a mid-cycle slowdown. We think weak IT spend is a pretty good proxy for business expenditures. Cisco, IBM and Oracle all have short term negative revenue trends. Take a look at the article we wrote on IBM and have a look at chart 4. You can see very weak below trend revenues. This seems to explain to us why the general market is struggling here. Our best guess is that in the second half of this year we will see a recovery and fresh market highs. In the meantime we may be able to pick up some bargains and I think Oracle is one of them (down 9% at the time of writing). We’ll try get something published on Oracle in the next day or so but our quick analysis tells us that the stock offers a very decent 15% IRR at these levels. The risk here is the stock suffers from further market weakness so you might consider hedging your long Oracle position for now.
Here’s an article we wrote on Seeking Alpha about McDonalds (MCD). At the current price level of $98.70 our estimates suggest a return of 8.8%. We would not buy the stock at these levels but it gives us an idea of general market valuations for quality stuff.
Here’s an article we wrote on Seeking Alpha about IBM. At the current price level of $213.44 our estimates suggest a return of 10.7%. We would not buy the stock at these levels but it gives us an idea of general market valuations for quality stuff.
Here’s an article we wrote on Seeking Alpha about Imperial Oil, Canada’s second largest integrated oil company. Our view is that at these levels ($CAD 42.26), the stock offers a minimum annualized gross return of 15.0%. Imperial and its majority shareholder Exxon have invested in the region of $13Bn into the Kearl Oil Sands Project which is scheduled to begin production this year. We believe that the stock should really start to move in the next 12 months as operating profits start to rise from increasing levels of oil production.
Here’s an article we wrote on Intel that was just published on Seeking Alpha. Our view is that at these levels ($21.53), the stock offers a minimum annualized gross return of 12.5%. If Intel surprises and starts to build momentum in the Smartphone and Tablet space, then we could see stronger growth and a re-rating of the stock. This could increase annual returns to 18-20%.