Value Screen: South Jersey Industries (SJI)

Description of Business from Company’s Website:
“South Jersey Industries is an energy services holding company. Subsidiaries include South Jersey Gas, South Jersey Energy Service Plus, South Jersey Energy, Marina Energy, and South Jersey Resources Group.”

Additional information from Yahoo Finance: “South Jersey Industries, Inc., through its wholly owned subsidiaries, engages in the purchase, transmission, and sale of natural gas for residential, commercial, and industrial use. It also sells natural gas and pipeline transportation capacity to various customers on the interstate pipeline system, and transports natural gas purchased directly from producers or suppliers. The company also acquires and markets natural gas and electricity to retail end users and provides energy management services to commercial and industrial customers. It also markets an air quality monitoring system through an environmental consulting firm. The company markets wholesale natural gas storage, commodity, and transportation in the mid-Atlantic and southern states. The company develops and operates energy related projects, which provide cooling, heating, and hot water services. In addition, the company installs residential and small commercial HVAC systems, as well as provides plumbing services in southern New Jersey. As of December 31, 2005, the company served approximately 322,424 residential, commercial, and industrial customers in southern New Jersey. South Jersey Industries was founded in 1910 and is headquartered in Folsom, New Jersey.”

Has the stock’s performance equaled or exceeded the performance of the S&P? Yes.

Is the size of firm over 1 billion market capitalization? Borderline: 950M.

Price to earnings analysis: is the current P/E ratio below 20? Borderline: 19.55.

Volatility: Is the stock’s beta less than or equal to 1.00? Yes – .86.

Price to assets analysis: is the P/B ratio below 2.5? Yes – 2.19.

Price to cash flow analysis: is the current P/CF ratio below 20? Yes – 13.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes – 3.02% vs. 2.05%.

Dividend growth – does the five year dividend growth rate exceed the S&P’s dividend growth rate? No: 3.33% vs. 7.32%. However, SJI has increased the dividend each of the last eight years, they have just instituted a policy of raising it annually by a base growth level of 6-7%, and the dividend was just increased 9% on December 1.

Dividend payout analysis: Is the payout ratio less than 50%? No: 54.7%.

Current ratio analysis: Is the current ratio greater than 2.0? No: .85.

Debt to equity ratio analysis: Is the total debt ratio less than 1.0? No: 1.24.

Intrinsic valuation – is the stock selling below its forward intrinsic value? Yes, 32.43 vs. approximate intrinsic value of $35.50.

Earnings stability – has there been positive net income for each of the prior ten years? Yes.

Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes. The average long-term annual growth rate is approaching 10%.

Is the business simple and understandable? Yes.

Does the business have favorable long term prospects? Yes.

Are company insiders buying more stock than they are selling? No. There were a few small purchases in November 06, however, this was preceded by heavy sales in March 06.

Does technical analysis reveal a convincing uptrend? Yes.

SUMMARY: A few natural gas utilities have started showing up on my daily scans. Southern Jersey Industries is a bit more diversified than the others, and also has a higher dividend yield. Some of SJI’s business interests other than gas distribution are electricity marketing, air quality monitoring, plumbing and heating, and energy management services. In a recently announced new venture, they will be installing solar electric systems. This company appears to be reasonably priced from a value perspective. There are a few things I don’t like: the dividend payout ratio is too high, and the company has taken on more debt than I would like. But this is normal for utilities, and I cash flow will probably be more than sufficient to meet all obligations. I would consider buying this stock at a lower price during a market correction.

Value Screen: C&F Financial Corporation (CFFI)

C&F Financial Corporation operates as the holding company for C&F Bank, also known as Citizens and Farmers Bank, which provides commercial and retail banking services in Virginia. CFFI operates 16 branch offices in the Hampton – Richmond corridor of Virginia and plans to open two more in 2007. The company provides very little information on their website which is useful to prospective investors. It appears that residential mortgage lending is a substantial portion of their business.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes – 2.97%.

Is the stock’s beta less than or equal to 1.00? Yes – .23.

Has the stock’s performance equaled or exceeded the performance of the S&P? Yes, by a good margin, and CFFI also behaved inversely to the S$P during the 2000-03 bear market.

Is the size of firm over 1 billion market capitalization? No. CFFI has a market cap of only 132M and the stock is thinly traded.

Price to earnings analysis: is the current P/E ratio below 20? Yes – 11.4.

Price to assets analysis: is the P/B ratio below 2.5? Yes: 1.96.

Current ratio analysis: Is the current ratio greater than 2.0? No: 1.10; also, the ratio has deteriorated from 1.13 in the two preceding years.

Dividend payout analysis: Is the payout ratio less than 50%? Yes: 29%.

Earnings stability – has there been positive net income for the prior ten years? Yes.

Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes, 50% greater.

Dividend growth – is the dividend greater than five years ago, preferably at least 1/3 greater? Yes. CFFI has increased the dividend annually and it has almost doubled in five years.

Is the business simple and understandable? Yes.

Does the business have favorable long term prospects? Yes.

Are company insiders buying more stock than they are selling? Insiders have made no market purchases or sales for two years.

Does technical analysis reveal a convincing uptrend? No. For the last year, CFFI has traded sideways with an upward bias, in a trading range between 37 and 42.

SUMMARY: CFFI came to my attention through a Forbes article which championed CFFI as a bank stock which famous investors Buffett and Neff might love. Most of the numbers do look good at first glance. However, the company is quite small, and like many small companies, not very transparent when it comes to providing useful information to prospective investors. C&F’s 1.10 current ratio is rather low. Although the ratio is in the same range as many other bank stocks which are considered solvent, the deteriorating trend of the ratio in recent years is a matter of more concern, since it could portend trouble in the future.

Value Screen: FairPoint Communications Inc. (FRP)

On January 16, Verizon (VZ) announced it is selling its residential telephone business in Maine, New Hampshire, and Vermont for $2.72 billion. This operation, which serves 1.5 million customers, will be acquired by FairPoint Communications (FRP). FairPoint already owns local phone networks in 31 mostly rural markets in 18 states. The Verizon operations being sold will first be transferred to a newly created unit that will issue $1.7 billion worth of new debt before being sold to FairPoint. Of the $2.72 billion being paid by FairPoint, Verizon will receive $1.7 billion and Verizon shareholders will receive 1 share of FRP stock for each 55 shares of VZ they own. Verizon shareholders will have to decide whether to sell the new FRP shares, keep them, or perhaps buy more. I am applying my value screen to FairPoint, as things stand before completion of the transaction, to facilitate that decision.

Does the stock’s dividend yield exceed the yield of the S&P 500? Yes – the current yield is very high, 8.17%.
Is the stock’s beta less than or equal to 1.00? Insufficient data for three year beta. 1.14 per Yahoo Finance, 1.00 per Google Finance.
Has the stock’s performance equaled or exceeded the performance of the S&P? No.
Is the size of firm over 1 billion market capitalization? No, as things stand now: 672M.
Price to earnings analysis – is the current P/E ratio below 20? Yes, barely; 19.06
Price to assets analysis – is the P/B ratio below 2.5? No – 2.87.
Is the current ratio greater than 2.0? No: 1.37.
Is the dividend payout ratio less than 50%? No – 158%.
Earnings stability – has there been positive net income for the prior ten years? No. The company has lost money in six of the nine years for which data is available.
Earnings growth – is net income for the company greater than five years ago, preferably at least 1/3 greater? Yes, but the earnings history is too erratic to call this a trend.
Dividend growth – is the dividend greater than five years ago, preferably at least 1/3 greater? A dividend of 1.42 was instituted in 2005 and it has recently been increased to 1.59. This appears to be quite a bold move, considering that diluted earnings per share were .91 in 2005 and about 1.01 in 2006.
Is the business simple and understandable? Yes.
Does the business have favorable long term prospects? Not really. VZ is getting out of the landline business because of its low growth potential. FRP claims they can achieve growth by increasing broadband availability in rural areas, but it is hard to visualize FairPoint succeeding since a much larger and better capitalized firm has determined it would not be cost-effective.
Are company insiders buying more stock than they are selling? The CFO bought 20K shares from Nov. 05 to Feb. 06 and the stock has in fact doubled since then. There have been no subsequent purchases or sales.
Does technical analysis reveal a convincing uptrend? FRP has been in an uptrend for about a year.

SUMMARY:
The takeover of Verizon’s northern New England residential telephone business by FairPoint reminds me of one of those public television nature shows where you see a tiny lizard trying to swallow an insect three times its size. FairPoint says it plans to invest $200 million on infrastructure improvements and systems development in this area, with half of that that amount being spent “even before we close the transaction,” according to Gene Johnson, chairman and CEO. Johnson also says he plans to keep all 3000 Verizon employees, add 600 new workers, and significantly increase broadband internet availability in the region within 12 months after the deal closes. I am skeptical that FairPoint has the financial strength to do any of this, and I do not think FairPoint will be well received by regulatory authorities in the service area, not to mention unionized Verizon employees. My conclusion is that owning FRP shares is, at best, a very risky speculation, and I will be looking to sell mine soon after they are issued.

Value Screen: Commerce Group Inc. (CGI)

Today I am inaugurating the use of a value screen format to simplify and standardize the presentation of investment research information. This screen, which is subject to fine tuning, is loosely based on the excellent question-and-answer methodology employed by ModernGraham.com , but uses somewhat different parameters which track my personal style of value investing.

Commerce Group Inc. (CGI)
1. Does the stock’s dividend yield exceed the yield of the S&P 500? Yes – 3.39%.
2. Is the stock’s beta less than or equal to 1.00? Yes – .77
3. Has the stock’s performance equaled or exceeded the performance of the S&P? Yes – significantly
4. Is the size of firm over 1 billion market capitalization? Yes – 2B.
5. Price to earnings analysis – is the current P/E ratio below 20? Yes – 8.16.
6. Price to assets analysis – is the P/B ratio below 2.5? Yes – 1.35.
7. Strong financial condition – is the current ratio (current assets/current liabilities) greater than 2.0? No – .758. Note that the Altman Z-score is only 1.89.
8. Earnings stability – has there been positive net income for the prior ten years? Yes.
9. Earnings growth – are earnings for the company greater than five years ago, preferably at least 1/3 greater? Yes – more than double.
10. Dividend record – have there been consistent dividend payments over the past ten years? Yes.
11. Dividend growth – is the dividend greater than five years ago, preferably at least 1/3 greater? Yes, 58% greater, and there was a 2-for-1 split in June 2006.
12. Is the business simple and understandable? Yes. “The Commerce Group, Inc. and its subsidiaries provide personal and commercial property and casualty insurance in Massachusetts and, to a lesser extent, in other states. We market our products primarily through our network of independent agents. Our core product line is personal automobile insurance. We also write commercial automobile and homeowners insurance. We have been the largest writer of personal property and casualty insurance in Massachusetts in terms of direct written premium since 1990.”
13. Does the business have favorable long term prospects? Yes, except to the extent that high fuel costs might result in fewer cars on the road, and fewer miles per car; also, Massachusetts has a declining population trend.
14. Does management act in the best interest of shareholders? No information to judge otherwise.
15. Are company insiders buying more stock than they are selling? No. They have not bought any in the last two years, but they have sold ~21M each year.

SUMMARY: CGI stock looks cheap, but the low current ratio and Altman Z score suggest that the company is not financially strong. Insider selling is negative. The current price of 29.39 is much higher than the forward intrinsic value of approximately 21.25. This suggests overvaluation and downside risk. This is confirmed by an apparent head-and-shoulders top with negative on balance volume.

Review of Kenneth Cole Productions (KCP)

Kenneth Cole Productions, Inc. designs, arranges manufacture, and markets consumer goods, including footwear and handbags, under the brand names Kenneth Cole New York, Kenneth Cole Reaction, Tribeca, and Bongo. I found KCP by screening for companies with a high return on invested capital which also offer generous dividend yields. The company’s stock has performed quite well relative to the S&P, and the current dividend yield is 3.00%; however, the stock is volatile with a beta of 1.23.

Kenneth Cole Productions is relatively small with a market cap of 479M. The P/E ratio is a tad high at 18.6, but the stock looks cheap in terms of the price to book value ratio of 1.91. With a current ratio of 6.6, the company appears financially sound. KCP is also selling at about a 25% discount to its apparent intrinsic value, but the stock does not appear suitable for conservative investors. Net income has fluctuated widely with cyclical changes in demand for their products. KCP has done a very nice job of raising the dividend while earnings have been rising, but the payout ratio has gotten rather high, 56%, and they might need to reduce the dividend if earnings were to falter. There have been many stock sales by company insiders but no recent purchases. I question how well this stock would hold up in a general market downturn.

Selling J. P. Morgan Chase (JPM)

I sold about 15% of my J. P. Morgan Chase into the strength yesterday. I actually like JPM quite a bit, and the stock does look cheap, but not as cheap as some of the other major banks; and I think its relative valuation may be getting a bit out of line. JPM can be a bit more volatile than most of its peers. I am concerned that it may stumble badly if their earnings do not continue to set records. This sale is also part of my ongoing campaign to raise cash and reduce portfolio beta in preparation for a possible general market decline.

Review of Hawaiian Electric Industries (HE)

HE came to my attention through a Jan. 10 post by Stockerblog, “Electric Utilities that Benefit from Lower Oil Prices“. Hawaiian Electric’s energy sources for electricity generation are Oil, 61%, Purchased Power, 39%, and according to Value Line fuel costs are 50% of their revenues, so Hawaiian Electric seems likely to benefit from the recent sharp drop in the price of oil.

But HE is more than a utility supplying electric power to the Hawaiian Islands. HE also provides banking and other financial services to consumers and businesses through its subsidiary, American Savings Bank, with 64 branch offices in the Islands. Hawaiian Electric Industries was founded in 1891. The stock currently yields 4.62% and has paid a dividend continuously since 1901. HE has an historic performance profile similar to the S&P 500 but it has been less volatile, beta .73.

Several factors have been working together to keep Hawaiian’s stock price down. The company has been adversely affected by prolonged delays on their rate hike requests and they have not been able to earn a decent rate of return from electricity sales. The escalation of oil prices in recent years has made things even more difficult. Their banking subsidiary has been experiencing increased competition.

My first round of number-crunching for HE at Yahoo Finance resulted in a favorable impression. Price to earnings and price to book value ratios appeared satisfactory, and the stated current ratio of 11.351 really caught my attention. However, upon turning to the balance sheet for confirmation, I discovered that this is a mistake which overstates the results by a factor of ten. The current ratio for the most recent year, 2005, is actually 1.14. This is in a range comparable to many other banks and utilities, but far below the 2.0 level which would indicate good financial strength. It is noteworthy that the current ratio also shows a sharp deterioration from the results obtained in 2004 and 2003. My impression is that the current ratio for 2006 will be even worse, suggesting the possibility that a dividend cut may become necessary. Company officers have been selling their stock too. Although two directors bought a little last October, company officers have been heavy sellers. Hawaiian Electric’s daily price chart does not inspire confidence either. In my opinion, lower oil costs are not enough of a catalyst to make Hawaiian Electric an attractive investment.

An Attractive Speculation: Pengrowth Energy Trust (PGH)

The Canadian Royalty Income Trusts have been devastated by the triple whammy of the government’s proposal to levy a harsh tax against the income of those trusts, the falling price of oil and gas, and the Canadian dollar’s decline against the U.S. dollar. But there are signs that the Canadian government may soften the blow by grandfathering existing royalty trusts, or by extending the waiting period before implementation to ten years; and there are signs that the collapse of energy prices may be in a bottoming process. If energy prices stabilize, the Canadian dollar should as well.

After studying charts of several of these trusts which trade on the U.S. exchanges, I rather like Pengrowth Energy Trust (PGH). PGH has declined from a high of 25 last May to a low of 14.77 in November. But unlike most of its fellow Canadian Royalty Trusts, PGH made a higher bottom during the January plunge than it did last November. The chart exhibits a bullish short-term configuration and on-balance volume is constructive. Distributions over the last 12 months have been $3.00 Canadian, or $2.56 U.S at current exchange rates, so this security has a gross current yield of 15.13% for U.S. investors, as well as significant capital appreciation potential.

Dollar Projected to Rise

My proprietary timing indicator has just given a buy signal for the U.S. Dollar Index. In the midst of many prophecies for a collapsing dollar in 2007, the Dollar Index has quietly risen from its December low of 82.35 to the current level of 85.28, and I am projecting that the index will rise to at least the 87 level by February. There is likely to be resistance at 87, but if that is overcome, the index could rise to 90 by June.

The major currencies have been strong against the U.S. Dollar Index until recently, with the exception of the Canadian Dollar. As this chart indicates, the Loonie has been in a downward spiral of its own since November, due in large part to the sharp decline in the price of oil.

A rising dollar implies that U.S. short-term interest rates will not be cut in the near future and that they could increase. A rising dollar would reduce the cost of goods imported into the U.S., but it would also mean less demand for goods exported from the U.S. and lower profits for the big American multinational corporations.

If some unexpected geopolitical event should disrupt world oil supplies, an attractive speculation for U.S. investors would be to immediately buy the Claymore Oil Sands ETF (CLO.TO), traded on the Toronto Stock Exchange, to achieve double benefit from the rising oil price together with the Canadian Dollar appreciating against the U.S. Dollar.

The Party is Over

Yesterday the NYSE Bullish Percent Index ($BPNYA)
fell below 70%. This is a warning that the market is on shaky ground and defensive tactics should be initiated. According to the rules, all investors should avoid new purchases, except for low-beta, defensive stocks, and short-term traders should tighten stop loss orders on existing holdings. All market participants should consider using rallies to sell portfolio laggards.

The $BPNYA is simply a measure of the percentage of NYSE stocks which exhibit bullish patterns on point-and-figure charts. This venerable indicator has an excellent track record. When after a bear market it falls below 30%, then again rises above 30%, that is the all-clear signal; and when in a bull market it rises above 70%, then again falls below 70%, that is the warning that the rally has become overextended and that a correction or bear market may be imminent. The index rose above 70% last November and that fact was pointed out in this blog at the time.

The present fall of the index below 70% is not an outright sell signal, just a warning that the party is over and the easy money has already been made. The market averages could very well correct excess bullishness through a period of sideways movement, then go on to make new highs. A good number of stocks are still doing quite well. Indeed, the NASDAQ is outperforming the NYSE right now. The point is that the rising tide is no longer lifting all boats. But as long as the index stays above 50%, the bull market is intact.