Playing Chicken

In This Issue: Playing Chicken The Weather Giveth, and the Weather Taketh Away Canada's 'Dead Money' Comes Alive? You Can Ignore the Stock Market When You're Making $106,000 a Year in Dividends Put a million dollars into our current favorite stock pick and you've got an instant side income of $106,000 a year. Of course, I don't recommend putting a million bucks into any single stock – unless you have a much bigger bankroll than I do! But the principle holds true no matter how much money you have. Spread your money among several of the high-yielders here and you can lock in a nice second income. My readers are cashing annual paychecks of $11,900, $7,400 and $6,800 for every $100,000 they invest… and their payments keep growing. Get the story here. Playing Chicken 8/29/2014 By Benjamin Shepherd As we kick off a long weekend to recognize the achievements of American workers, celebrating our nation's 110th Labor Day, most of us will be spending the weekend over barbeques and lawn games. But while hamburgers, hot dogs and even steaks have traditionally been menu mainstays, this year we'll probably be eating a lot more chicken. Severe drought conditions across much of the U.S. in 2012 caused feed prices to skyrocket, forcing many ranchers to sell off my cattle they otherwise would have that year. As a result beef herds are thinner than they have been in years, and the ongoing drought means the herds that are left aren't growing fast enough to keep up with demand, causing beef prices to soar. Pork isn't much cheaper this year, either. A new pig illness, porcine epidemic diarrhea virus, began sweeping across farms last December, killing more than 7 million piglets in the past year. That's caused pork prices to surge as well, and now pig farmers are getting paid more per pound of pork, just like the cattle ranchers. Data from the Department of Agriculture (USDA) shows that pork and beef prices are up more than 11 percent over the past year. Prices are up 47 percent since 2009 as beef now fetches and average $5.56 per pound in grocery stores, a new record high. Chicken prices have remained relatively stable though, with USDA data showing that chicken is fetching only about $1.50 per pound. Thanks to high beef and pork prices and the fact that Americans are trying to eat healthier, more chicken was eating in the US last year than any other meat. That's the first time in more than a century that we ate more chicken than beef. That's been a boon for Sanderson Farms (NSDQ: SAFM), the third-largest poultry producer in the US. Fully integrated, producing, processing, marketing and distributing fresh and frozen chicken products, revenue at the company has grown an average 11.7 percent annually over the past three years. Earnings growth has been lumpier given the swings in corn prices, but shot up 141.7 percent last year thanks to the perfect storm of falling feed prices and higher chicken demand. Fiscal 2013 sales totaled $2.7 billion with a net profit of $130.6 million, or $5.68 per share, and the company brought its long-term debt down from $150.2 million last year to $29.4 million. That full-year performance handily beat median analyst expectations and has sent the company's shares soaring. Despite that appreciation, the company is still an excellent value. Its price-to-earnings-growth ratio is currently just 0.8, meaning even the better than 40 percent gain the company's shares have made over the trailing year, it is still well behind earnings growth. The company also commands much smaller premiums to earnings and book value that its larger peers and is trading to just 0.8 times trailing twelve month sales. Sanderson has been actively expanding over the past few years, adding a deboning facility in Texas capable of processing about 1.25 million birds per week. It has also implemented a high degree of automation in its facilities, helping to keep labor costs down and maintain the consistent quality of its product. Thanks to those efforts, Sanderson expects poultry production to increase by between 2 percent and 3 percent this year. Ironically, the current conflict in Ukraine could also work to the benefit of Sanderson Farms relative to other major producers. After the U.S. and Europe hit Russia with sanctions for its role in the crisis, Moscow retaliated by imposing a total ban on poultry, beef and pork imports from the US and the European Union. While Russia typically consumes about 15 percent of Sanderson Farms exports, the company's largest export destinations are Central Asia and Mexico at about 25 percent of the company's exports each. At the same time, China is also a major destination at 14 percent of export production. Those other major customers should pick up most of the company's export slack as a result of the Russian ban, particularly since Sanderson Farms exports less product to Russia than most of its competitors. Sanderson also has an advantage in that it is totally devoted to poultry; its leading competitor, Tyson Foods (NYSE: TSN), was recently banned from exported a significant amount of pork to China due to the use of a barred feed additive at six of its plants.As a result, while analysts currently forecast that Tyson Foods' 2014 full-year earnings should grow by 34 percent, Sanderson Farms' are forecast to grow by more than 60 percent. Enjoy your chicken this weekend! Bakken Oil is More Likely to Catch Fire The Transportation Department just released a study that shows oil coming from the Bakken is more likely to catch fire. That's bad news for the railways that ship it. You see, the government just unveiled new rules for railway companies that make transporting materials like oil more difficult… and expensive. That's all great news for pipeline companies, of course. And I've found six companies that will benefit the most. I'll reveal why they're up 6 times over the S&P 500 this year – and how you can get in on the action – when you click here. The Weather Giveth, and the Weather Taketh Away 8/28/2014 By Richard Stavros It has been a perennial problem in the utilities industry: the weather's unexpected impact on earnings. And in the most recent earnings season, the weather's effect on industry financials was on full display, with most utilities reporting earnings that were largely driven by local weather patterns. But even if we must accept Mother Nature's overbearing demeanor, there are still other ways to identify value, and we'll review some of those approaches below. Historically, the weather's role in driving utility earnings has been a source of concern for investors because it makes it difficult to discern between management's contribution to creating value and factors that are beyond their control. Take, for example, Duke Energy Corp (NYSE: DUK), which reported that second-quarter earnings jumped 80 percent, prompting management to increase its earnings outlook for the year. Duke's regulated utilities benefited from higher rates and warm weather, and the firm managed to cut costs significantly. Yet, the prior year's quarter had milder weather, so it's hard to know how the next two quarters will stack up against comparable periods. Then there's CenterPoint Energy Inc (NYSE: CNP), whose regulated electricutilities reported higher revenues from customer growth, but with the caveat that "this increase was more than offset by milder weather, higher operating and maintenance expenses and higher depreciation expense." Although the utility is experiencing flat demand, the firm's weather-normalized residential sales grew 2 percent over the trailing 12-month period that ended June 30, as it's adding customers at a faster pace than many of its peers. But the question remains whether such growth can offset the weather's potential drag on earnings. Naturally, utilities' management teams are not oblivious to this problem. Some firms use financial hedges against unexpected weather, while others have developed highly sophisticated weather-modelling software that they use to predict forward earnings. And still other utilities develop business diversification strategies that they use to help smooth earnings between operations across regions with differing weather patterns, as well as varying population and demand profiles. Eventually, greater adoption of connectivity to households through real-time metering and other smart-grid technologies will allow utilities to know more about system dynamics than ever before--and how to better control costs. Add to that a constructive regulatory environment, and weather starts to diminish as a concern for utility investors. But even though management teams avail themselves of many of these tools, investors don't enjoy these same capabilities, and that means there will still be earnings surprises. In a private meeting with a major utility's chief financial officer during last year's Edison Electric Institute Financial Conference, I asked whether the firm could share the results of the weather models they use to give earnings guidance. His answer was that given the uncertain nature of the forecasts themselves, which can sometimes produce wide earnings forecast ranges, the firm wouldn't want to make a habit of sharing the results with an investor class that demands predictable earnings. So what is an investor to do? How can we be certain that a bad quarter was really a result of unexpected weather and not poor management? The answer is to focus on long-term performance, which reduces the effect of factors beyond management's control. Additionally, investors must also identify those markets and service territories that have shown superior growth in what has been an uneven recovery in electricity demand as a result of the sluggish economic rebound. By the Numbers To learn why some utilities performed better than others, we reviewed granular data on a state-by-state basis and discovered that utilities continue to trade very much in line with forecasted state-by-state gross domestic product (GDP) growth levels, population growth, and future climate change forecasts. This is a continuing trend that we first observed around the same time last year, when we reviewed the US Bureau of Economic Analysis (BEA) annual release. Before proceeding, it should be noted that the relationship between the US economy and electricity demand is changing: Growth in electricity demand has been significantly slower than GDP growth for decades. That's why other metrics were used to serve as a counterbalance, to more effectively target utility growth. According to a Texas A&M study published last year that forecasts energy consumption through 2050, population growth will be the single greatest factor in determining long-term trends in energy demand. The model projects an overall national population increase of almost 38 percent from 2010 to 2050. The states with the largest growth rates included Arizona, Nevada, Florida and Texas. Additionally, the model also used IPCC Regional Climate Projections to determine the change in energy consumption as a result of climate change in 2050. Heating and cooling degree days for each state in 2010, as well as the average temperature for each month in that state, were provided by the National Oceanic and Atmospheric Administration (NOAA). States with a combination of high population growth along with a large increase in the number of cooling degree days were determined to be Nevada, Arizona and Florida. Looking at GDP, according to BEA's 2013 data, US real GDP increased by 1.8 percent. Growth in real GDP accelerated in the second and third quarter last year after increasing at an annual rate of just 1.1 percent in the first quarter. The BEA found that after reaching a high of 4.2 percent in the third quarter, growth in real GDP decelerated to 2.8 percent in the fourth quarter. Real GDP grew steadily in 24 states through all four quarters of 2013. In the fourth quarter, real GDP increased in all states except Mississippi and Minnesota. Nondurable-goods manufacturing was the leading contributor to growth in 31 states in the fourth quarter, and it consistently led growth in Louisiana, North Carolina, and Texas through all four quarters last year, according to the report. And certainly, GDP growth figures seem to inform why some utilities are doing better than others in terms of earnings. Of course, beyond analyzing GDP, population and growth figures, there is no substitute for looking at a firm's long-term performance. That's why, in 2005, I helped create an industry model for the utility journal I used to edit that could filter out those factors that are beyond management's control. In 2013, I developed a variation of this DuPont financial model, known as the Utility Forecaster Early-Warning System. This Early-Warning System deconstructs a company's return on equity (ROE) into its individual components, which allows for greater ease in analyzing what's actually driving growth. While the Early-Warning System was developed to identify short-term improvements or weaknesses in a utility's financials to gauge a company's ability to sustain its dividend, the model also yields insights into management's contribution to earnings. Subscribers get to see the full article, which details what the model shows with regard to management's performance for two utilities that we track. This article originally appeared in the Utility & Income column. Never miss an issue. Sign up to receive Utility & Income by email. 6 "New Chips" for Double-Digit Profits We call them "New Chips." That's because they beat the pants off old blue chips by 352%. They average 12.7% average annual growth. That means you could double your money in less than 5 years. They've made Buffett and Lynch rich, and household names. We have 6 of our favorites – up 60%, 75%, and 87% since becoming shareholders. And we're looking for much more. To join us in this profit ride, click here. Canada's 'Dead Money' Comes Alive? 8/29/2014 By Ari Charney With roughly three-quarters of its exports destined for its neighbor to the south, Canada hopes to ride the coattails of a resurgent US economy. But the Bank of Canada (BoC) has observed that in recent years the linkage between US economic growth and Canadian export activity has been weaker than in the past. BoC Governor Stephen Poloz has previously stated that he believes there's a "wedge" that could be undermining this historically strong correlation, but he's still contemplating the factors that could be behind it. One explanation we've previously explored is the fact that Canadian firms chastened by the Global Financial Crisis are hoarding cash and failing to invest in new growth. Indeed, nearly two years ago, former BoC Governor and "rock star" central banker Mark Carney, who currently helms the Bank of England, famously exhorted Canadian companies to free up the "dead money" idling on their balance sheets by either investing in productivity or returning cash to shareholders. But now there's a new report from the Canadian think thank C.D. Howe Institute that acknowledges the sizable trove of cash on companies' balance sheets, but says this hasn't stopped them from investing in new assets. "Notwithstanding concerns over rising cash on corporate balance sheets, and impatience over the pace of business investment, cash in the Canadian economy remains conspicuously alive," policy analyst Finn Poschmann observes in the report. To be sure, companies' cash balances are still growing. Statistics Canada (StatCan) reported in June that at the end of the first quarter, private non-financial firms had a staggering CAD630 billion in cash idling on their balance sheets, up from CAD621 billion at year-end. And Canadian companies have in the past underinvested in growth compared to their US counterparts. According to a report issued earlier this year by Deloitte, a major accounting firm and consultancy, Canadian companies invest less than half of what US firms spend on research and development. And on a per-worker basis, expenditures on machinery and equipment are just 65 percent of what US firms spend, while Canadian companies invest just 53 percent as much as their US peers on information and communication technology. But that trend could be changing. More recently, in mid-June, Jayson Myers, president of Canadian Manufacturers & Exporters, an industry association, told the Financial Post that manufacturers are "making record investments in machinery, equipment and technology and making those investments at a more rapid pace than in the United States." That assertion surely cheered the BoC, which is hoping that exporters will assume leadership of the country's economy from its debt-burdened consumers. Mr. Poloz believes a rise in export activity, particularly among manufacturers, will spur business investment, new hiring and ultimately more spending. The question over the extent to which so-called dead money is a drag on the country's economy could also have unintended consequences for companies' financials. According to the aforementioned C.D. Howe report, some policymakers are using the present situation to build a case for heavier taxation. Hopefully, the nonprofit's analysis will help to discourage such thinking. For instance, the report says that since 2011 Canadian business investment has been growing at roughly the same pace as the country's economy, with the investment share of output just above its 30-year average. In fact, capital spending has been strongest in the energy and mining sectors, where cash holdings have grown the most. Mr. Poschmann, who authored the institute's report, lauds Canadian firms for their prudent balance sheet management in the wake of the Global Financial Crisis. He attributes the run-up in cash balances to the necessary shoring up of balance sheets in response to the shock from the global downturn. But in typical Canadian fashion, the trend toward such caution was already underway at least a decade ago. Mr. Poschmann notes that over this longer-term period, Canadian companies have "steadily trimmed the share of current assets held in relatively unproductive inventories, and similarly trimmed accounts receivable." Additionally, he says that businesses "began accumulating more liquid financial assets, cash and cash-like instruments, to be deployed as investment opportunities arose." This behavior was first prompted by earlier shocks in the 1990s and early 2000s, with the goal of maintaining liquidity for both normal operations as well as during extraordinary periods such as downturns. Cash has also been boosted by changing business practices and new technologies. For instance, companies are now more easily able to convert less-liquid assets such as inventory and accounts receivable into cash through improved inventory management, faster collection of accounts receivable thanks to e-commerce platforms and automated billing, and the ability of non-financial firms to securitize their receivables. Still, it's obvious that at least some of the cash build-up is from an excess of caution. Assuming the Canadian economy continues to find greater traction, then companies will eventually have the confidence to spend more on new investment, while still maintaining solid balance sheets--the best of both worlds. Ultimately, businesses could also pursue a mergers and acquisitions spree, thereby unlocking additional value for shareholders of sought-after firms. This article originally appeared in the Maple Leaf Memo column. Never miss an issue. Sign up to receive Maple Leaf Memo by email. Artificial Intelligence is Here The days of imagining what robots can do have come and gone. Today they're everywhere. Google bought eight robotics companies in just the past two years. What's the attraction? Speed. Accuracy. Constant up time. PROFITS. But instead of putting your money into Google – or some other tech firm – hoping to hit it big with robots… I have a smarter way to play the invasion. I've found seven companies in Australia using robots in ways that will shock you. Each has the potential to show you gains up to 737%. Get the profitable details by clicking here. You are receiving this email at benjamart.ss.stock@blogger.com as part of your subscription to Investing Daily's Stocks To Watch, published by Investing Daily. To ensure delivery directly to your inbox, please add postoffice@investingdaily.com to your address book today. Email Preferences | About Us | Premium Services | Contact Us | Privacy Policy Copyright 2014 Investing Daily. All rights reserved. Investing Daily, a division of Capitol Information Group, Inc. 7600A Leesburg Pike West Building, Suite 300 Falls Church, VA 22043-2004 U.S.A.