Portfolio Update: PE and CNI

There are two strategies to picking stocks: studying the fundamentals or the technicals. Fundamental analysis involves researching a company's balance sheet and management plans to make an investment decision. You are betting on the company's ability to grow and generate more income. Technical analysis involves looking at past metrics of the stock price's performance to model a future trajection. You are betting on other investor's ability to recognize the company's potential and drive the price up (or failures and down if shorting).

As an investor you want to do both by creating a buy list of stocks that satisfy the fundamentals but hold out on trading until it meets the technicals. This is the boat I'm in with a list of stocks that are great fundamentally but priced far from my technical entry point.

With that in mind I have doubled my Parsley Energy position (PE) based on the technicals and news of their expanded field purchases. Looking at the daily chart Parsley has reached a bottom on its MACD indicator (I bought right as the black line crossed the red line) and trading volume is below 50 on the RSI indicator.

For Canadian National Rail (CNI) I'm paying attention daily for the sign to lock in my profits. It's my only stock in the oversold territory (note the RSI around 80) but the MACD isn't leveling off for a crossover yet. As soon as it does and turns downward I'll put in my sell order.

Stock Research: WYNN

I was recently in a conversation about Las Vegas so I decided to do some research on the casinos stocks and of all the resorts Wynn Resorts (WYNN) and really Steve Wynn has impressed me the most.

I first read the conference call of Las Vegas Sands (LVS) and found they have the largest presence in table and room space in Macau. In contrast, Wynn is operating on a scale one tenth of Sands but are seeing a better rate of return. To quote Steve Wynn from his 2014 Q2 call, "...we are approximately half as profitable in Macau as The Sands, with only 10% of the rooms." Wynn is careful in deploying capital for expansions and does not under estimate his competition. Wynn Palace is a new property under construction in Macau scheduled to be open in 2016 with the focus being on not cannibalizing their existing properties consistent 98% occupancy rate.

On the finance side Wynn has operating margins above 20% and excellent EPS of 8.11. Looking at their chart the stock price is close to the 50 day moving average, RSI is below 50 and MACD is tracking close for a crossover. The casino stocks have all come down from fear of Chinese government intervention and tourist exhaustion from the World Cup which makes now a good buying opportunity.

The Shortlist

Edit: I thought I'd update this post with a chart source that better illustrates what I'm seeing.

Under Armour (UA):
At $70 a share and a P/E of over 90 UA is very expensive. Analyst estimates are at $70 a share so there needs to be a major pull back before I can buy some and it won't be until UA reports less then stellar growth numbers for the stock to return to realistic valuations. I'm waiting for under 60.

Church & Dwight (CHD):
It's P/E is at 24 which is higher than the average for this sector at 20. Low 60s would be my starting position.

EOG Resources (EOG):
The low barrel price of oil is hitting the energy sector and with a P/E of 24 and price of around $106 I could pick up half a position now but I'm waiting patiently for a down day.

Portfolio Highlight: FB

You would think for one of my most profitable holdings I would have written a post about it by now but I didn't buy Facebook (FB) based on its balance sheet or future revenue. I bought Facebook because it has no competition and is being run by its founder.

In order for a competitor to overtake Facebook they would need to provide added value, expand their user base extremely fast, have solid reliability, and hope their founders can resist the urge of selling out to a larger corporation. Back in the days when Facebook started standards were low. Personally I know many people who moved from Myspace to Facebook simply because HTML was too confusing. Facebook has brand recognition and it's impossible to make all your friends/family move onto a new service. A new rival competitor would have to start out with small groups of "technology-savy" users who vet the service and slowly convince friends/family to migrate; giving plenty of lead time to cash out of the stock. Today it's more profitable to create tech demo disrupt services that get bought out.

Facebook's biggest risk is itself. Just a few years ago there were so many new features being added that it drove people away but lately they seem to have their act together and are streamlining and simplifying the experience. I'm a holder of the stock until Mark leaves the company. These types of high value companies are just vehicles for their founder's ideas and their high valuations live and die by them. As with Amazon and Bezos, Apple and Jobs, Google and Page/Brin I would expect growth to slow without them.

Portfolio Updates

The latest change to my portfolio has been to dump The TJX Companies (TJX) for a few reasons. To begin with the retail industry has been performing terribly these past few months with same store sales being relatively flat. TJX's growth is suppose to come from its European expansion, especially for the HomeGoods brand, but with Russian sanctions and poor exchange rates as seen affecting other company earnings I'm not optimistic. Also I bought TJX with the impression that it could be a stable grower but after more research I found the retail sector to be too competitive and unpredictable. I made the mistake of focusing only on the individual company performance and not the industry as a whole.

On the opposite side I more than doubled down on my Rite-Aid (RAD) position when it was at $6 which helped bring down my cost basis. With the remodels, McKesson distribution deal, and health management acquisitions there is a lot of potential that has yet to be realized.

Finally, now that it makes up a considerable percentage of my portfolio I've included my cash position with my holdings. I have a shopping list of stocks but at these valuations everything is too expensive so I plan on holding a sizable chunk in cash in preparation for any sell-offs toward the end of the year.

Stock Research: APC

Anadarko Petroleum Corporation (APC) is another oil exploration company that attracted my interest because they have contracts with ENSCO and Rowan for ultra deepwater drillships and are still considered a growth company.

Oil production is split between US and International for 2014 but if you compare with last year's numbers it's interesting to see US production alone went from 96 to 146 million barrels of oil per day (MBOPD) versus International growth of 62 to 92 MBOPD. Further almost all capital investment for 2014 is allocated to the lower 48 states with large chucks dedicated to expanding the profitable Wattenberg field in Colorado and Delaware basin/Eagleford fields in Texas where wells counts have doubled since last year.

Capital expenditure paints the picture of where you get the most bang for your buck and right now that's in the US. The bulk of the capital will be used to expand operations in the Rockies and Texas so I'll be paying attention to their success in those regions. Considering Anadarko is only a few points off it's 52 week high I won't be buying any stock unless it drops low enough to justify the higher P/E and recent lackluster ROA/ROE track record. At the moment I don't see any advantage Anadarko has over their competition so I'm not willing to pay up for it.

Stock Research: EOG

With offshore drillers in a state of softness from the over supply of rigs and reduced number of contracts I need to bring in a different type of sub-industry to my group of energy stocks. EOG Resources (EOG) is one company I started researching because they have a large presence in all of the major US oil fields, primarily the Eagle Ford shale.

Financially EOG is in a good position with low debt, cash on hand, and enough of a backlog in good wells that they can be picky in operating only the most profitable drill sites. They have some international exposure with sites in the Caribbean and United Kingdom which will keep them diversified from the core US locations. Operationally they are primarily an onshore producer using horizontal fracking techniques to extract oil.

What I like about EOG is they are large enough to provide stable earnings but are still a growth company. The dividend is currently at 0.62 and they have a market cap of 59 billion so they are not monolithic yet. While researching other oil companies I found almost all of them started a stake in the US because it's much easier/profitable to extract oil using modern fracking techniques than the more expensive deep water drilling or drilling in unstable regions. Until something changes to cause oil production in the US to cost more then offshore drilling I think EOG would be a good investment. Just a few years ago I remember everyone was drilling in the Gulf of Mexico, then natural gas production exploded in the US, and now crude production is what's hot.