Linear Technology designs and manufacturers high end linear chips which monitor, amplify or transform continuous analog signals associated with real world phenomena (temperature, pressure, weight, position, light, sound and speed) and markets them in over 4,700 products. The company has grown profits and dividends between 8-22% annually over the past 10 years earning in excess of a 20% return on equity. LLTC has experienced considerable earnings volatility of late; however, long term, it should be able to resume earnings growth because:
(1) it is broadening its product base to take advantage of infrastructure build out and the trend toward energy efficiency in industrial applications,
(2) continuing high level of investment in R&D,
(3) gains in market share,
(4) increased prices,
(5) an aggressive cost control effort.
Negatives:
(1) the consumer segment of its business is weak due to low consumer confidence,
(2) a leveraged balance sheet.
LLTC is rated B++ by Value Line, has over 50% debt to equity ratio and its stock yields 3.0%.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio Since 2003
LLTC 3.0% 5% 57% 10
Ind Ave 3.3 8* 55 NA
Debt/ Return EPS Down Net Value Line
Equity on Equity Since 2003 Margin Rating
LLTC 50% 21% 3 32% B++
Ind Ave 11 14 NA 16 NA
*most companies in LLTC’s industry don’t pay a dividend
Chart
Note: LLTC stock made good progress off its March 2009 low, quickly surpassing the downtrend off its May 2008 high (red line) and the November 2008 trading high (green line). Long term, the stock is in a trading range (straight blue line is the lower boundary). Intermediate term, it is in an uptrend (purple lines). Short term, it is in an uptrend (brown lines). The wiggly blue line is on balance volume. The Dividend Growth Portfolio owns an 85% position in LLTC. The upper boundary of its Buy Value Range is $17; the lower boundary of its Sell Half Range is $80.
The
bulls returned yesterday. The indices
(DJIA 14075, S&P 1515) smoked to the upside but remained within their (1)
short term uptrends [13509-14169, 1472-1541] and intermediate term uptrends
[13419-18419, 1421-2015].
Volume
declined, breadth continued to improve.
The VIX sold off, finishing within its short term and intermediate term
downtrends.
GLD
got hit after a couple of up days. It
remains within its short term downtrend; so the immediate direction is down and
will remain so, until that downtrend is successfully challenged.
Bottom line:
yesterday’s pin action notwithstanding, I think that the jury is still out as
to whether the Market is in a topping process or positioning itself for an attack
on the 14140/1576 levels. Whatever
occurs, our strategy hasn’t changed. If
prices continue to the upside, our Portfolios will raise more cash; if it rolls
over, they will wait for a return to more reasonable values to put their
current cash position to work.
Yesterday’s
economic data was mixed: weekly mortgage and purchase applications were down,
January durable goods orders also declined rather sizably but that was primary
a function of poor aircraft orders---ex transportation, orders rose well above
expectations. Not great but it fits.
Bernanke
did a second day on the Hill and just in case anybody had any doubts after
Tuesday’s testimony that the Fed would be printing dollars as fast as it could
buy the paper and ink, he re-emphasized the point. As you know, there wasn’t much of a question
in my mind that easing would go on for an extended time. But I think he wanted to be sure that those
who interpreted last week’s FOMC minutes as a foreboding of future Fed
tightening were completely assured that it ain’t happenin’. Obviously, investors were overjoyed to know
the Fed intends to do all it can to support stock prices irrespective of the
underlying valuation.
More
low lights from Bernanke’s testimony (medium):
One
day older and deeper in debt. The
sequestration effective date is tomorrow.
Obama continues to do what He does best---campaign, this time for tax
hikes; but so far, the GOP is hanging tough.
As you know, I believe that all the whining over the coming cuts will be
proven wrong; I believe that for there to be any chance of a return to fiscal
responsibility, the sequester has to be implemented; indeed, I believe that
there is a reasonable probability that the cuts in government spending could
have a positive impact on economic growth.
Hence, I am
encouraged; and to the extent that yesterday’s optimism reflects investors’
agreement with that position, then I understand their upbeat mood. However, a move back from ever growing budget
deficits will not be a day in the park.
It will take time; and the burdens of too much inefficient government
spending will continue to impact growth for several years. So even in the best case, corporate profits
are not going to suddenly explode to the upside; and I suspect that the
readjustment of the US economy will cause sufficient heartburn that multiples
aren’t going to expand until it is truly clear that the ruling class has the
will to complete the task. In sum, with
stocks already overvalued, I can’t make a case for higher prices under even the
optimum scenario.
A
failing Italian economy and political process couldn’t dampen investor
enthusiasm. However, I believe that the
third Act of this play has not yet started---and this is a tragedy. The news is not likely to improve.
The
Germans are upset; but it may not matter (medium):
Bottom
line: I continue to be encouraged by the
economic progress the US
is making. In addition, I am encouraged
that the sequestration process could prove to the first step back in the
direction of fiscal responsibility.
While not a magic elixir that will smooth over years of profligate
behavior, if it proves to the tipping point then that is enough for today.
That said, I
believe that the Fed is digging itself into such a hole that it will never be
able to right the sum total of its wrongs without causing either a more
significant economic slowdown or a more destructive level of inflation than
would otherwise occur with a less aggressively expansive monetary policy.
In addition, I
am losing what little confidence I had in the eurocrats’ ability to fix a
hangnail much less the growing sovereign/bank insolvency problem. This is a stick of dynamite stuck up the
global financial system’s ass. A wrong
move could be very painful for us all.
News on Stocks in Our Portfolios
courtesy of Seeking Alpha
Expeditors
International (EXPD):
Q4 EPS of $0.4 misses by $0.03. Revenue of
$1.53B (+2% Y/Y) beats by $0.02B.
Ecolab (ECL): Q4
EPS of $0.89 in-line. Revenue of $3.0B misses by $0.04B.
HollyFrontier
(HFC):
Q4 EPS of $1.92 misses by $0.32. Revenue of
$5.14B (+3.5% Y/Y) beats by $0.21B.
Home Depot (HD):
Q4 EPS of $0.68 beats by $0.04. Revenue of
$18.2B (+13.9% Y/Y) beats by $0.54B.
ONEOK Partners (OKS):
Q4 EPS of $0.66 beats by $0.04.
Economics
This Week’s Data
The
International Council of Shopping Centers reported weekly sales of major
retailers up 0.1% versus the prior week and up 2.9% versus the comparable
period a year ago; Redbook Research reported month to date retail chain store
sales up 1.4% versus the similar time frame last month and up 1.7% on a year
over year basis.
The
December Case Shiller home price index rose 0.9%% versus expectations of an
increase of 0.8%.
The
February Richmond Fed’s manufacturing index was reported at +6 versus forecasts
of -3.
Weekly
mortgage applications fell 3.8% while purchase applications dropped 5.0%
January
durable goods orders declined 5.2% versus expectations of a decrease of 4.0%;
however, ex transportation, orders were up 1.9% versus estimates of up 0.2%.
Other
Politics
Domestic
Interesting---wealth
versus immigration (short and a must read):
The
indices (DJIA 13900, S&P 1496) rebounded yesterday, though the pin action
was largely that of an oversold bounce.
The Market is starting to give the impression that it is drifting into
another one of its schizophrenic phases (lots of volatility, no
direction). That said, the Averages
remain within their (1) short term uptrends [13509-14164, 1469-1539] and (2)
intermediate term uptrends [13410-18410, 1421-2015].
Volume
declined; breadth recovered. The VIX
fell but finished within both a short term and intermediate term downtrend.
GLD
rallied hard, though it is well within its short term downtrend. The recent recovery has been on above average
volume, suggesting the potential that we have seen the lows. However, we won’t know or consider taking
action until the current short term downtrend has been successfully challenged.
Bottom line: the
recent churn on better volume is suggestive of a pitched battle between the
bulls and bears and/or, more ominously, a topping process. We likely won’t know which for a while; but
the erratic pin action relieves somewhat the pressure of being under invested. For the moment, equities remain in a
technical uptrend---and will remain so until they are not.
If investors are
rethinking their overactive optimism, the Averages will tell us when given the
chance to challenge those uptrends. If
not, our Portfolios will continue to Sell into rising prices.
Lots
of economic data was reported yesterday and it was universally good: weekly
retail sales showed growth, the Case Shiller home price index was up more than
expected, new home sales were very strong as was consumer confidence and the
Richmond Fed’s manufacturing index was up versus estimates that it would be
negative. In sum, very supportive of our
forecast and clearly a reason for investors’ positive mood.
Bernanke
kept the party going by:
(1) promising to keep the presses running into infinity and shrugging
off the risks associated with an ‘all in’ liquidity surge. As long as all that money remains as reserves
on bank balance sheets, he will be correct.
But when, as and if velocity ever picks up, he [and the rest of us] will
have a problem,
(2) doubling down by supporting the doomsayers on sequestration. Given the Keynesian economic model and
orientation of the Fed staff, this opinion is not a surprise. I was a bit taken back that Bernanke ventured
into fiscal policy---something the Fed normally eschews. I can understand that if he believes that the
economy could weaken and worries that everyone will be looking at the Fed for
even more ease to offset that weakness, then he would rightfully be nervous
about expanding the Fed’s balance sheet beyond its current gluttonous and ever
growing size.
Frankly, the
only reason that I even care about Bernanke’s opinion on sequestration is the
extent to which he could influence the GOP determination to hold fast. Obama will likely be blitzing the media with
Bernanke’s comments and urging the public to pressure their congressmen to ease
up. The good news is that He only has
two days to do it. The line in the sand
is still there.
Must read
excerpts from Bernanke’s testimony (medium):
Investors chose
to ignore the potential fall out from the Italian elections---probably because
no one seems to know exactly how things will play out. However, the Italian and Spanish bond markets
paid attention and the result was whackage.
My guess is that the political crisis in Italy
won’t be disregarded by US investors for long.
Can the euro
exist without a fiscal union (medium):
Bottom
line: yesterday’s economic data was
welcome after a period of more ‘mixed’ results.
Bernanke’s re-emphasis of monetary easing was not surprising, though his
pitch for backing off sequestration concerns me. If Obama uses it to successfully bludgeon
republicans into backing off their stance, it would be.....unfortunate.
Just because
investors elected to overlook the potential financial problems that could
result from an anti austerity administration in Rome
doesn’t mean that they don’t exist.
I like our cash
position.
Steve Cook
received his education in investments from Harvard, where he earned an
MBA, New York University, where he did post graduate work in economics
and financial analysis and the CFA Institute, where he earned the
Chartered Financial Analysts designation in 1973. His 40 years of
investment experience includes institutional portfolio management at
Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Strategic
Stock Investments is to help other investors build wealth and
benefit from the investing lessons he learned the hard way.
General Dynamics
is a leading defense contractor supplying products and technology to marine
systems, combat systems, information systems and aerospace (basically
submarines, tanks, aircraft and command and control systems). The company has
grown earnings and dividends 14% and 12% respectively over the last 10 years
and has earned a consistently high 17-18% return on equity. GD should be able to continue to match that
record because of:
(1) growth in
commercial aerospace division,
(2)
acquisitions,
(3) an aggressive
cost reduction program
Negatives:
(1) a large percentage of its sales are
dependent on government spending both in the US
and Europe,
(2) its backlog has declined recently.
GD has a debt to
equity ratio of approximately 17%, is rated A++ by Value Line and its stock
provides a yield of 3.1%.
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio Since 2003
GD 3.1% 8%
29% 10
Ind Ave 2.3 11* 24 NA
Debt/ EPS Down Net Value Line
Equity ROE Since 2003 Margin Rating
GD 17% 16% 0 8% A++
Ind Ave 39 18 NA 9 NA
*most companies in GD’s industry
don’t pay a dividend
Chart
Note:
GD
made good initial progress off its March 2009 low, quickly surpassing
the
downtrend off its September 2008 high (straight red line) and the
November 2008
trading high (green line). However, the
advance soon stalled thereafter and the stock has been in an
intermediate term
trading range (purple lines) since. Long
term, GD is also in a trading range (blue lines). As you
can see, the stock is near challenging
its 50 day moving average (wiggly red line).
The Dividend Growth Portfolio owns a full position in GD---though
GD has
been traded, selling in the high 60’s/low 70’s and buying back in the
low
60’s, The upper boundary of its Buy
Value Range is $38; the lower boundary of its Sell Half Range is $80.
The
indices (DJIA 13784, S&P 1487) had a roller coaster day, opening up big and
falling out of bed later. Nonetheless,
they ended within their (1) short term uptrends [13462-14116, 1465-1535] and (2)
their intermediate term uptrends [13398-18398, 1418-2013].
Volume
rose; breadth crashed. The VIX soared
(+34%) closing near the upper boundary of a short term downtrend but well
within its intermediate term downtrend.
GLD
was up big, finishing back above the lower boundary of its short term downtrend
and above the lower boundary of its intermediate term trading range.
Bottom line:
equities took investors on a wild ride yesterday. The late day sell off on top of last week’s
hiccup seems to be telling us that investors are at last starting to be
concerned about some of the problems about which I have been harping on for far
too long. It is too soon the suggest
that prices could be heading back to Fair Value---although it is clearly
possible that the Averages will challenge the lower boundaries of their short
term uptrends. Until those boundaries
are broken, it remains probable that stocks can reach the 14140/1576 level.
Two
regional Fed banks reported yesterday: (1) the Dallas Fed’s February
manufacturing index grew but at about half the expected rate and (2) the
January Chicago Fed’s national activity index was disappointing. Not great news but not alarming within the
context of our forecast.
Overseas,
Chinese PMI was below estimates. As you know, a strong Chinese economy is a source
of strength in our outlook. So any
additional weakness would be of concern.
None
of this mattered anyway as investors focused on several of the macro themes
garnering attention of late:
(1)Obama and Boehner held dueling press conferences,
neither giving any hint of backing off their current positions on the
sequester. As you know, I consider this
a positive scenario; although Obama’s ‘end of the world’ rhetoric does seem to
be having a negative affect on investor sentiment,
(2)Bernanke testifies before congress today and Wednesday. Some investors apparently haven’t yet let go
of last week’s FOMC minutes; so some chattering about tighter money policy helped raise the level of yesterday’s
heart burn,
(3)finally and perhaps most importantly, in the Italian
elections, Berlusconi outpolled the current ruling coalition. While no one is sure whether a new government
can be formed or if new elections must be held, the anti austerity vote appears
to have been something of a wake up call for all those EU Pollyanna’s. Not that they won’t be lulled back to sleep;
but if investors are suddenly realizing that Italy, Spain, Greece, etc still
have problems and that little to nothing has been done to correct the underlying
causes of those problems, then we are apt to see more days like yesterday in
the Markets.
Bottom
line: the economy continues to track our
forecast; and I continue to believe that the risk of Fed tightening and/or the
risk of economic weakness resulting from sequestration are straw men. To be sure, we are still faced with debt
ceiling and the continuing resolution negotiations. But I just don’t see any critical economic
impacts coming out of either. There
could be a psychological plus if our elected reps actually do the right thing;
but I am not losing sleep on that outcome.
The 800 pound
gorilla is European sovereign/bank insolvency.
It is way too early to tell if the Italian elections will erode investor
confidence, drive interest rates up and spawn another funding crisis in Italy,
Spain, Greece,
etc., etc.
I like our cash
position.
The
latest from Gary Shilling (long but
worth the read):
Steve Cook
received his education in investments from Harvard, where he earned an
MBA, New York University, where he did post graduate work in economics
and financial analysis and the CFA Institute, where he earned the
Chartered Financial Analysts designation in 1973. His 40 years of
investment experience includes institutional portfolio management at
Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Strategic
Stock Investments is to help other investors build wealth and
benefit from the investing lessons he learned the hard way.
Monday Morning ChartologyAs
you can see, no technical damage was done to the S&P in last week’s
selloff. It remains solidly within its
short and intermediate term uptrends.
GLD
got trashed last week. Despite a two day
rally, it couldn’t even regain the lower boundary of its short term
downtrend.
The
VIX continues to trade within a short and intermediate term downtrend---a plus
for stocks.
This week’s Time
magazine looks at healthcare and its abuses.
Some of what follows is alarming but note the comment on the monopoly
power of drug companies and their outrageous prices. The author clearly doesn’t understand the
rationale for patents. The point here is
that part of the article is good information, part is uniformed opinion
(medium):
Steve Cook
received his education in investments from Harvard, where he earned an
MBA, New York University, where he did post graduate work in economics
and financial analysis and the CFA Institute, where he earned the
Chartered Financial Analysts designation in 1973. His 40 years of
investment experience includes institutional portfolio management at
Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Strategic
Stock Investments is to help other investors build wealth and
benefit from the investing lessons he learned the hard way.
