Recall the familiar Market cycle that we shared in Jobs Lead or Lag Recovery? CNN vs. Historical Evidence (courtesy of Schwab's Liz Ann Sonders) and also in slide four of our Which Way from Here presentation in January 2010. It's always important to keep this in perspective (click to enlarge):
Several of our holdings initiated during the out-of-favor period are now benefiting from positive shifts in sentiment:
- Seaspan (SSW) was upgraded by Wells Fargo last week on favorable fundamentals and potential for meaningful dividend hikes, which is our primary thesis. Yet, our understanding is that Wells Fargo and other positive brokerage firms have fair value estimates in the mid-teens. Given the stable business model and growing streams of distributable cash flow, we still believe a more reasonable intrinsic value is between $24-30 per share. For what it's worth, before the financial crisis -- as a much smaller company -- Seaspan traded in the $20s-30s. Here's the long-term chart from Yahoo Finance (YHOO):
- Let's again emphasize the company's historical and future, in-the-books growth from latest Seaspan management presentation (click to enlarge):
- Yes, it's true that Seaspan was actively purchasing ships at elevated, boom-time prices (and simultaneously contracting them under long-term leases to major ocean liners). However, we expect average invested capital across the company's fleet will balance out over the long-haul, across shipping cycles. Assuming the global economy keeps growing, we expect shares will once again achieve the $20s-30s even with dilution related to capital raised during the downturn to fund new builds. As "built-in" growth materializes through 2011 and 2012, we expect brokerage "price targets" will consistently bump higher.
- Next, Casella Waste Management (CWST) was upgraded by at least two firms last month on improved operating results and potential for near-term asset sales. Management has been talking on the latter point for the past two years and, in our view, is executing to plan. For more information, please see Casella's latest results and fiscal 2010 annual letter to shareholders (*not currently on Web site for some reason - perhaps soon; we received via U.S. mail last fall). Here's Casella's long-term chart from Yahoo Finance:
- For what it's worth, shares used to trade consistently between $10 and $15 per share. The company operates a stable business and owns irreplaceable disposal assets in the Northeast. Per our original Casella Waste Systems thesis, we own the company as a levered asset play that should benefit from management's strategy to selectively reduce the asset base to repay debt incurred to expand capacity to support long-term waste fundamentals. We see incremental upside.
- Finally, shares of Weight Watchers (WTW) are also working their way higher as Wall Street regains interest in the "story." We discussed the company in our 11/8/10 post, Alternatives to Weight Watchers (WTW) and President Clinton's Example. Bank of America Merrill Lynch (BAML) upgraded shares on 12/7/10 from Underperform (= Sell) to Buy with a $48 price target. The firm's change of heart was based primarily on the new PointsPlus weight loss program, more confidence in improving fundamentals and the fact that Weight Watchers operates a high-quality, high-margin, high-ROIC business model with a powerful franchise. The last point formed the basis of our original thesis back in fall 2009. Here's the company's long-term chart from Yahoo Finance:
- While the margin of safety and potential returns are narrowing for new buyers of the stock, we continue to believe reasonable fair values are in the $40+ range and could extend into the $50s IF historical multiples are awarded to the company.
- To help tell the story, Weight Watchers' CEO David Kirchhoff made the media rounds last week. We share two videos below. Both include slightly different questions/commentary and worth watching:
- Weight Watchers is leading provider of weight management services, with David Kirchhoff CEO. Airtime: Mon. Jan. 3 2011.
- Weight Watchers CEO David Kirchhoff: Expanding Customers Not Waistlines - NEW YORK (TheStreet) - - Weight Watchers looks to expand its customer base with its new points program. Tue 01/04/11 09:51 AM EST.
TO SUMMARIZE: Normal human psychology makes the mental decisions to purchase out-of-favor companies inherently difficult. At these times -- as in late 2008 and early 2009 (or whenever a sector or company is shunned) -- doomsday pundits will be most vocal, and, even professional investors are afraid to stick their necks out to recommend companies where/when fundamentals are hazy. Most analysts feel more comfortable recommending companies when visibility is 20/20. Yet, history indicates that the greatest returns are generated by swimming against the tide and accumulating ownership stakes when everyone else is running scared.
Of course, risk always exists and company-specific risk factors can't be ignored. Confidence to move against the crowd can come from several sources, including whether or not the business in question provides a necessary product or service that people can't live without (e.g. garbage collection). Also, balance sheet strength, management capabilities, and valuation are critical considerations. For all three of the above businesses, we gained comfort that risk factors were mitigated and that the companies would likely be bigger, better, stronger over the course of time, at some point garnering upward revaluations from the Market.
We continue to see different degrees of upside potential for Seaspan, Casella Waste Systems, and Weight Watchers. Now that the Market is in a more favorable place, where can we look to find a still forlorn company begging for more attention?
Among the overlooked ideas we've highlighted here on CS$, one leading candidate is 1-800-Flowers.com (FLWS), where we see a strengthening "moat" for an increasingly diversified business. We can again relay that, by the time fundamentals turn positive and we see broker upgrades along with funds clamoring for a piece of the company, the stock will probably already be back at $3-4 on the way to $5-6.
Somehow the economy and the "Market" are almost always more resilient than most participants expect. As a result, the "Market" tends to work like clockwork: so long as we're talking about well-positioned, viable businesses, valuations and sentiment almost always come back around.
Disclosure: long SSW, YHOO, CWST, WTW, FLWS.
© 2011 Jeffrey Walkenhorst
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