Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you the globally rising food prices and how to hedge against it.
Keep a close eye on your grocery bill, because food prices are climbing, shoppers may soon need more green in their wallets to afford their next breakfast, lunch, dinner, salad, coffee and every meal and social events.
Growth in food production has slowed over the past decade even as rising incomes in developing countries boosted consumption, said the U.N. Food and Agriculture Organization and the Organization for Economic Cooperation and Development (OECD). Due to this the agency expect prices to rise 10 to 40 percent over the coming decade, with the cost of meat rising faster and that of grains more slowly.
According to the Agency, higher prices will have their biggest impact in developing countries where some families spend up to 60 percent of their incomes on food.
Food consumption in developing countries has grown by up to 30 percent a year over the past decade as incomes rose, while consumption in developed countries changed little, the agencies said.
China's imports of meat and oilseeds are forecast to grow as its increasingly prosperous consumers spend more on food, the agencies said.
The frequency of agricultural shocks caused by extreme weather events has also risen sharply over the past decade, and the resulting surge in food commodity prices has hit not only consumers, but everybody in the food supply chain, including farmers, agricultural traders and food manufacturers.
The prices of coffee, cocoa, wheat and other grains have risen sharply since the start of the year, because of droughts in Brazil and in the grain growing regions of the US, Ukraine and Australia.
As can be seen from below chart the S&P GSCI agricultural and livestock index has jumped almost 7.5 percent so far this year.
If the current drought conditions behind this year’s price increases continue, it will be the fourth time since 2007 there has been a jump in food commodities prices.
Meanwhile, meteorologists are forecasting a 50 per cent chance of a powerful El Niño developing in the second half of this year, which could intensify droughts and storms around the world.
The rising possibility of El Niño has farmers and traders on high alert, as it could mean that heat and dryness will affect India, and Australia, both large wheat producers. Cocoa and coffee prices could also be affected, because the weather phenomenon tends to bring dryness in west Africa and southeast Asia.
PGM CAPITAL COMMENTS:
By excluding food and energy prices from the core inflation, rising food prices will have a disastrous effect on the poor and the middle class all over the world.
Due to this share prices of food producers are the best performing shares this year, for which the stock of world's biggest food commodity producer has risen with approx. 18.5 percent during the last 6 months as can be seen from below chart.
We believe that stock of the above mentioned company will be an excellent hedge against rising food prices and due to this have a STRONG BUY rating on it.
Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of food commodities as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.
Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you the stockmarket rout that started on Friday, April 4th 2014, which brought down most markets in the West down with approx. 5 percent during the last 6 trading days.
It all started Friday, April 4th, with the Nasdaq narrowly avoiding its worst one-day as it slumped 110.01 points or 2.60 percent, to finish at 4,127.73.
During the week the sell-off continued and became broader by hitting most of the markets in the West, bringing most of them in the red for the year as can be seen from below charts.
JAPAN NIKKEI INDEX:
As can be seen from below chart, the Japan Nikkei index declined YTD 2,187.49 points or 14.32 percent as can be seen from below chart, making it up to now the worst performing market in the West.
Stocks closed sharply lower for a second straight day on Friday, April 11, as the once high-flying biotech and Internet shares tumbled again, sending the Nasdaq composite index back below 4000 for the first time since Feb. 3.
The Nasdaq plunged 54.37 points, or 1.3% to 3999.73. The Dow Jones industrial average dropped 143.47 points, or 0.9% to 16,026.75 and the Standard & Poor's 500 index fell 17.39 points, or 1% to 1815.69.
Investors remain jittery following Thursday's big sell-off that saw the Nasdaq drop 3.1%, its worst plunge since November 2011 The Nasdaq is now down 8.2% from its 2014 high of 4,357.97 set on March 5 and is 4.2% lower for the year as can be seen from below chart.
The S&P 500 has fallen 4% from its record high close of April 2 and is 1.8% lower for the year.
As can be seen from below chart the Dow has retreated 3.3 percent from its Dec. 31 record close of 16,576.66.
LINKEDIN AND TWITTER IN BEAR MARKET:
Volatility seems to be the name of the game in social media investing right now.
As can be seen from below charts Twitter (NYSE: TWTR) is down 40.67 percent this year, while LinkedIn Corp. (NYSE: LNKD) has corrected 20.16 percent, bringing both into bear market territory.
PGM CAPITAL COMMENTS:
In our New Year article and several other articles this year we have informed our readers that in accordance with fundamental analysis, the Japan and USA markets are overvalued for which social stocks are in a huge bubble and that it isn't IF but WHEN, these markets and social media stock would go through a cruel correction.
On the other hand, markets in Asia, specially the Hong Kong Hang Seng Index and the China CSI-300 index with a P/E ratio of around 10, are very cheap.
With Central Banks all over the world printing money out of thin air, Gold and other precious metals are a screaming buy for investors who want to protect their savings from being diluted.
Below chart shows the Gold price performance against that of the Dow Jones YTD, for which the blue and the red graph represents respectively the performance of the DOW and the Gold price year to date.
If we compare the performance of the DOW with the price movement of Palladium, - the best performing precious metal of this and last year - we can clearly see how Palladium has outperformed the Dow Jones YTD with almost 16 percent.
See below chart for details for which the blue and the red graphs represent respectively the performance of the DOW and the Palladium price year to date.
The charlatans will try to convince you that the sell-off in the USA markets and social media shares are a normal correction in a secular bull market, and that the price appreciation of Gold and other precious metals are just a dead cat bounce.
Based on fundamental analysis we believe that the sell-off in the USA capital markets still has a long way to go and that a further 10-15 percent correction can be expected, for which the correction in of the NASDAQ can reach 30 percent. Regarding the social media stocks, we believe that these are in a huge bubble and must correct at least 70 - 90 percent before they can reach a reasonable valuation.
When comparing the DOW with the Market Vector GOLD Miners ETF (NYSE : GDX) we see that the later one has outperformed the with 20 percent YTD as can be seen from below chart.
The Gold miners have a leverage on the price of gold, in both directions and are a leading indicator for the direction of the price of the yellow metal.
Last but not least, before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.
Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you, why investing in Offshore Drillers at current valuation has the potential of adding yield to your portfolio.
With the global capital markets approaching all-time highs again, it's difficult to identify stocks that are undervalued with growth potential.
So as the markets are peaking, we are looking for areas to enter that have downside protection, pay a healthy dividend and have solid growth potential. Offshore drillers meet all these criteria.
Based on speculation of possible decreasing day-rates for rigs and a weakening market as oil-companies limit capital expenditure, offshore drilling stocks have taken a beating over the past few months.
However, this weakness has created a buying opportunity as fundamentals and long-term business remain strong.
Based on the fact that their stock prices are near 52-week lows, with strong dividend, low Price to Earnings ratios we particularly like Noble Corp. (NYSE: NE), Ensco (NYSE: ESV), Transocean (NYSE:RIG) and Seadrill (NYSE: SDRL) at current prices.
|Company||Market Cap [USD]||P/E Ratio||P/B Ratio||Dividend Yield|
At the closing price of Friday April 4th 2014, of US$ 35.30. the company offers an incredible 11.2% dividend, which is hard to ignore and investors looking to add yield to their portfolio may want to consider Seadrill.
As can be seen from below chart the company which has P/E ratio of just 6.3 is trading near its 52-week low, which is a good entry point for investors wanting to limit downside exposure.
In the current market where finding value is extremely difficult, Seadrill offers too many positives to not be considered undervalued here. While the company is highly leveraged and only 3 of its 20 rigs under construction have long-term contracts, its US$20.2 billion backlog is more than enough to sustain its quarterly dividend of US$0.98 per quarter per share in the short-term.
On top of this it is worth mentioning, that SeaDrill Ltd, is registered in the island-nation of Bermuda, for which the company as well as its share holders are tax exempt in Bermuda.
Transocean had a horrible start in 2014, as can be seen from below chart. Year to date, the stock lost around 15.52% and although its stock price is showing signs of recovering, it is currently trading at its 2-year low.
Above 2-year chart shows that the stock of the company has a strong support level of US$ 40.00 a share, which should continue to provide resistance to any further declines.
With a Price to earning and price to book ratio of respectively 10.74 and 0.89, we can consider the stock cheap.
Another floor for the stock-price of the company, is its large dividend yield of 5.4%, which is twice the yield of the 10-year Treasury bond. The payout is less than half of this year's expected earnings so the company should be in no danger of cutting the dividend anytime soon.
With a current P/E of 10.27 the company looks historically cheap considering its strong growth. This creates a great opportunity for dividend investors as short-term weakness has created an impressive 4.6% dividend yield with very little downside from current levels as can be seen from below 2-year chart.
In 2013, Noble Corp. announced they would spin-off part of its standard jack-up fleet by the end of 2014. Paragon Offshore will be the new company created and will take on 34 jack-ups, 8 floaters, and 4 other rigs to be announced. This spin-off will leave Noble Corp. with a young and specialized fleet of ultra-deepwater rigs and high-spec jack-ups.
Ensco, which is the second largest offshore driller with 71 active rigs and 6 more under construction, offers an impressive 5.7% yield and has seen strong support at a price level of US$48 as can be seen from below chart.
At current prices around US$51-US$52 a share, there is very little downside to this investment which offers both strong upside potential and pays a healthy dividend.
As can be seen from below 5-year chart, the company doubled its dividend in 2013 to US$3.00 a share and has shown its commitment to returning value to shareholders through strong dividends.
What's even more impressive is that the company has the lowest payout ratio of any major offshore driller with a dividend yield over 3% as can be seen from below chart.
PGM CAPITAL COMMENTS:
Offshore oil drillers such as Transocean, Seadrill, Noble and Ensco look like ideal picks for income investors. After all, they each sport huge dividend yields of at least 5%, with Seadrill's 10% yield leading the pack. This towers above the dividend yield of the overall stock market.
And yet, none of these oil drillers have received much love from investors over the past year. In fact, their share prices barely budged while the S&P 500 Index rallied. This has to do with the questionable outlooks facing oil drillers, primarily the potential of a tighter supply and demand balance for oil rigs. As oil majors see less compelling returns on new projects, they're cutting capital expenditures that are likely to lead to lower day rates and utilization for oil drillers.
On the other hand, for investors with a long term horizon, these drillers at current price and dividend yield offer a great buy and hold opportunity.
Since the end of March of this year we have a STRONG BUY rating on the stock of SeaDrill, a BUY rating on the stock of Ensco and a MODERATE BUY on the shares of TransOcean and have start adding these stocks in several clients' portfolio.
Last but not least. before following any investing advice, always consider your investment horizon and risk tolerance and financial situation and be aware that stock prices don't move in a straight line and that sharp corrections may happen in the short term.
Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of March 3rd, 2014.
- Brasil foods income grew with 38 percent in 2013.
- Warren Buffett cuts on bond allocation.
- Nestlé bulls pay record prices for call options, after L'Oreal stake sale.
- India's BSE Sensex at all time High.
BRF SA INCOME GROWS 38% IN 2013:
Brasil Food S.A., (NYSE: BRFS) world's largest poultry and a processed-food exporter, reported on Friday, February 28th, 2014, that it closed 2013 with net profit of R$ 1.1 billion, 38% higher than in 2012. Adjusted EBITDA totalled R$ 3.6 billion, an increase of 35.3%, with improvement in EBITDA margin, which reached 11.9%, compared to 9.4% in 2012.
- Net revenue for the year reached R$ 30.5 billion, 7% higher than in 2012
- Net revenues on 2013 4th quarter (4Q2013) grew by 0.8% compared to last year´s same period and reached R$8.2 billions.
- Net income reached R$208 millions and Adjusted EBITDA reached R$954 millions, resulting in an adjusted EBITDA margin of 11.6%.
- In total the company exported in 2013, 2.5 million tons of processed food, an increase of 1.5% in relation to the previous year
WARREN BUFFETT CUTS ON BOND ALLOCATION:
Warren Buffett cut the allocation to bonds at Berkshire Hathaway Inc.'s (NYSE: BRK-A)’s insurance units to the lowest in more than a decade as the company warns that low yields will hurt results.
Fixed-income assets made up 14 percent of investments at the insurers as of Dec. 31, 2013, according to the company’s annual report. The year-end figure has typically been 20 to 25 percent since 2002, according to Berkshire documents. The US$186.8 billion portfolio included US$114.8 billion of stocks.
Buffett has said low yields mean that insurers and other bond investors are holding “wasting assets.” To counter that he struck private deals for higher-paying securities and added equities. Omaha, Nebraska-based Berkshire also made acquisitions and invested in its railroad and energy utilities.
Buffett has also been favouring shorter-duration bonds. As of Dec. 31, Berkshire had about US$8.5 billion of bonds that were due in a year or less. That compares with US$6 billion at the end of 2012. The holdings typically offer lower yields than longer-duration securities while providing more flexibility.
NESTLÉ BULLS PAYS RECORD PRICES FOR CALL-OPTIONS AFTER L'OREAL STAKE SALE:
In February of this year, Swiss food group Nestle (NESN.VX), the biggest food producing company on earth sold an 8 percent stake in L'Oreal S.A (OR.PA) to the French cosmetics firm for 6.5 billion euros (US$9 billion), loosening their 40-year partnership and allowing both firms to boost earnings per share.
L'Oreal will pay for the deal with 3.4 billion euros in cash and by selling to Nestle its 50 percent stake in their Galderma dermatology venture for 3.1 billion euros, including about 500 million of debt, which Nestle will pay for in L'Oreal shares.
One of the highlights of the deal for Nestle was the Swiss group's commitment to grow its dermatology business as part of its drive to focus on health, wellness and nutrition.
As a consequence of this the company's bulls Nestlé bulls, bid up the prices for the company's call-options, convinced the food company will buy back shares and boost dividends after it sold a portion of its stake in L’Oréal.
Call prices linked to the company's stock has risen 13% since June and have reached a record versus puts on February 26.
INDIA'S SENSEX INDEX AT ALL TIME HIGH:
On Friday March 7, 2014, India's benchmark S&P BSE Sensex soared to new record high of 21,710.43 in opening trade on heavy foreign capital inflows, tracking positive domestic and global cues.
As can be seen from below chart, the 30-share index, which had gained over 567 points in the previous three sessions, zoomed to 21,710.43 by surging 196.56 points, or 0.91 percent.
The Sensex's record high of 21,525.14 surpassed its previous historic milestone of 21,483.74 hit on December 9 last year. India's CNX NIFTY ended only 0.2 percent off its record of 6,415.25 hit on the same date.
The strong rally has defied expectations that foreign investors would grow more cautious as the Federal Reserve continues to withdraw its monetary stimulus and ahead of the general elections set to kick off on April 7.
Instead, overseas investors have bought heavily into India as a sharply narrowing current account deficit and a more stable rupee have increased confidence in a country that only last year was in the midst of its biggest market turmoil since the balance of payments crisis of 1991.
PGM CAPITAL COMMENTS:
Based on its fundamentals, strong cash flow and ability to increase its dividend Year Over Year we have a STRONG BUY rating on the stock of Brasil foods.
As can be seen from below chart the shares of the company have appreciated with over 1,650 percent since it went IPO in October of 2003.
It is also worth mentioning that in accordance with the company's policy it pays a minimum of 25 percent of its net income as dividend to share holders.
During the last 10 years the company's dividend has increased from US$ 0.046 a share in 2004 to US$ 0.179 a share in January of 2014, an increase of approx. 290 percent during the last 10 years.
Below chart shows the dividend payout as a percentage of net income of the company during the last 10 years.
Buffett cuts on Bonds:
In several of our previous articles we have warned our readers, that with rising interest rates, bonds may become the cyanide pil for investors in 2014.
Due to this we have a SELL rating on all bonds and don't hold any bond in our own personal portfolio or in those of our clients.
Nestlé and L'Oreal:
L’Oréal’s agreement to buy 8% of Nestlé’s stake in February for €6 bilion, for which about €3.4 bilion was paid in cash won the support of Nestlé’s biggest owners in part because it freed money to return to shareholders.
Due to this we believe that Nestlé’s investors, who are currently bidding the company's call options, are betting on shares buy-backs and an improved dividend.
The deal will cut Nestlé's holding in L'Oreal to 23.29 percent from 29.4 percent, while the Bettencourt Meyers family's stake in L'Oreal will rise from 30.6 percent to 33.31 percent. The deal is expected to close in the first half of this year.
Explaining the deal, L'Oreal's, chairman an CEO Jean-Paul Agon said:
"Nestlé's stake reduction had to allow it to remain a strategic shareholder ... while making sure that the Bettencourt family stayed below the 33.33 percent level."
Beyond that level, the family will have to make an offer for the rest of L'Oreal's share capital.
Based on their fundamentals, strong balance sheet and ability to increase their dividend Year Over Year, we have a BUY rating on the stock of Neslé as well as on the stock of L'Oreal.
India's BSE SENSEX at all time High:
In India, the current account deficit has narrowed sharply, to 0.9 percent of gross domestic product in the October-December quarter, according to data on Wednesday, March 5th, improving sharply from the record high of 4.8 percent of GDP in the year ended in March 2013.
The improving current account deficit, and the strong foreign inflows, have also boosted the rupee, which is up 12.2 percent since hitting a record low in late August.
India's blue chips have been the main drivers of the rally. On Thursday, March 6th, ICICI Bank (ICBK.NS) gained 3.1 percent and Reliance Industries (RELI.NS) rose 1.9 percent.
The gains were widespread with the BSE mid-cap index rising 1.21 percent, including a 3.6 percent gain in Crompton Greaves (CROM.NS) (CROM.BO).
Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that emerging market shares, the price of (food) Commodities, as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.