The Missouri Student Investment Fund bought Strayer Education (Ticker: STRA) two weeks ago on my recommendation. Since the purchase, STRA is up 7% and is outperforming the S&P 500.
Why its a buy:
-Consistently very profitable, with net margins around 20% and 4.5% dividend yield
-Continuing to expand geographic footprint
-Well positioned to meet new "Gainful Employment" regulations, which will allow it to gain market share as weaker players struggle with new rules
-Very little debt, consistently returns capital to shareholders
Risks:
-The for-profit education industry may face more regulatory pressure
-Declining margins in the short-intermediate term
-Litigation risk
If you would like the full Strayer Education Analysis report, please message me.
-Scott Thelen
Thursday, December 1, 2011
Wednesday, November 30, 2011
Global Economics Update
The European Sovereign Crisis continues to hang over financial markets, driving day-to-day volatility in stocks. One day, bad news comes out of Europe and the market falls 3%. Then on days like today, perceived goods news comes out and markets rise 3%. This sort of volatility will continue until a more permanent solution is implemented.
Today's actions by the FED and ECB are a good first step towards long-term solvency of the EU (See link: http://www.marketwatch.com/story/global-central-banks-move-to-bolster-liquidity-2011-11-30?link=MW_popular). However, further monetary intervention will be required by the ECB, who has been very resistant to the idea. U.S. banks are drastically reducing their exposure to European banks, causing interbank lending to fall and short-term rates to rise. The ECB (read Germany) must be willing to do more than buy sovereign bonds, and will eventually need to provide more liquidity.
Today's rally of nearly 4.5% is clearly based on the hope that the ECB will become more proactive. However, I believe the situation will deteriorate further before the ECB takes substantial action. A permanent fiscal plan in each of the PIGS countries is likely far from becoming reality and will be exacerbated by a slowing European economy. At some point the ECB will need to ease monetary policy, provide greater liquidity, and buy more sovereign bonds. The other option is a painful unwinding of the EU.
While the European crisis may sound frightening, and it is, the United States economy is growing at a moderate pace. The fundamental economics of the United States remains far more consistent and strong than market volatility implies. Recent economic data has been relatively strong, although certainly not great, but is largely overshadowed by the global macro issues. Lets take a look at some key data.
Employment
Although still bleak, the national employment picture is improving, especially in the private sector. The private sector added 206,000 and 130,000 jobs in November and October respectively. Local, state, and federal job cuts will likely continue, especially as the Iraq and Afghanistan wars draw down, but the private sector has seen positive job growth for several straight months now.
Consumer Spending
The consumer is beginning to spend again; retail sales were up 7.3% YOY in October and earlier indicators point towards a strong holiday sales season. The American consumer is in a better position to release pent up demand, because they are substantially deleveraged. Consumer confidence readings are also improving substantially. I believe consumers will continue to spend at a slightly faster pace through 2012, especially if job growth continues.
Housing Market
The U.S. housing market remains very weak, although existing home sales have seen a bump recently and the overall supply has decreased to 8 months. The major concern is that prices continue to fall, which is driven by many factors, but I believe the main reason is that overall economic uncertainty is keeping would be home buyers on the sideline.
Perhaps more damaging to the overall economy, is that an estimated 10.7 million households are underwater on their mortgages. Vast numbers of underwater mortgages mean foreclosures will likely remain high through 2012. New household formations are also very concerning; many new graduates are moving home and younger adults that formerly would buy a house or live alone are moving in with others. Fewer households means less spending on consumer durables.
What to Do
American economic growth will improve, but remain sluggish for the foreseeable future. I believe central banks will inevitable take the necessary steps to shore up the European sovereign debt crisis. However, political issues at home and in the Euro Union will likely ensure the crisis drags on for several months to come. I recommend investors maintain a defensive portfolio with increased exposure to the American consumer, including overweight on consumer discretionary, health care, Tech, and Utilities. High dividend, multi-nationals are selling at multiples that historically have brought good returns.
I wrote in August that Mega-cap growth companies looked very attractive relative to value and small-caps. This theme has played out, especially in small-caps which fell substantially. I maintain this stance given the great uncertainty in global economics.
Today's actions by the FED and ECB are a good first step towards long-term solvency of the EU (See link: http://www.marketwatch.com/story/global-central-banks-move-to-bolster-liquidity-2011-11-30?link=MW_popular). However, further monetary intervention will be required by the ECB, who has been very resistant to the idea. U.S. banks are drastically reducing their exposure to European banks, causing interbank lending to fall and short-term rates to rise. The ECB (read Germany) must be willing to do more than buy sovereign bonds, and will eventually need to provide more liquidity.
Today's rally of nearly 4.5% is clearly based on the hope that the ECB will become more proactive. However, I believe the situation will deteriorate further before the ECB takes substantial action. A permanent fiscal plan in each of the PIGS countries is likely far from becoming reality and will be exacerbated by a slowing European economy. At some point the ECB will need to ease monetary policy, provide greater liquidity, and buy more sovereign bonds. The other option is a painful unwinding of the EU.
While the European crisis may sound frightening, and it is, the United States economy is growing at a moderate pace. The fundamental economics of the United States remains far more consistent and strong than market volatility implies. Recent economic data has been relatively strong, although certainly not great, but is largely overshadowed by the global macro issues. Lets take a look at some key data.
Employment
Although still bleak, the national employment picture is improving, especially in the private sector. The private sector added 206,000 and 130,000 jobs in November and October respectively. Local, state, and federal job cuts will likely continue, especially as the Iraq and Afghanistan wars draw down, but the private sector has seen positive job growth for several straight months now.
Consumer Spending
The consumer is beginning to spend again; retail sales were up 7.3% YOY in October and earlier indicators point towards a strong holiday sales season. The American consumer is in a better position to release pent up demand, because they are substantially deleveraged. Consumer confidence readings are also improving substantially. I believe consumers will continue to spend at a slightly faster pace through 2012, especially if job growth continues.
Housing Market
The U.S. housing market remains very weak, although existing home sales have seen a bump recently and the overall supply has decreased to 8 months. The major concern is that prices continue to fall, which is driven by many factors, but I believe the main reason is that overall economic uncertainty is keeping would be home buyers on the sideline.
Perhaps more damaging to the overall economy, is that an estimated 10.7 million households are underwater on their mortgages. Vast numbers of underwater mortgages mean foreclosures will likely remain high through 2012. New household formations are also very concerning; many new graduates are moving home and younger adults that formerly would buy a house or live alone are moving in with others. Fewer households means less spending on consumer durables.
What to Do
American economic growth will improve, but remain sluggish for the foreseeable future. I believe central banks will inevitable take the necessary steps to shore up the European sovereign debt crisis. However, political issues at home and in the Euro Union will likely ensure the crisis drags on for several months to come. I recommend investors maintain a defensive portfolio with increased exposure to the American consumer, including overweight on consumer discretionary, health care, Tech, and Utilities. High dividend, multi-nationals are selling at multiples that historically have brought good returns.
I wrote in August that Mega-cap growth companies looked very attractive relative to value and small-caps. This theme has played out, especially in small-caps which fell substantially. I maintain this stance given the great uncertainty in global economics.
Thursday, August 11, 2011
Case for Distressed Commercial Real Estate
The commercial real estate ("CRE") market is beginning to look attractive relative to other real estate investments. During 2004-2008, the U.S. CRE market, driven by record levels of capital inflows, increased by 50%. In the subsequent collapse prices have fallen 42% nationwide from their peak, according to the CPII index. Capital has been slow to return to many parts of the real estate market. MBS issuance reached only $40 billion in 2010 and is expected to increase, but remain at low levels. Investors, in a flight to quality and in search of yield, have poured capital into core CRE, which has caused prices to return to near record levels. However, less capital is available for assets with high vacancy rates, over-leveraged balance sheets, and bankruptcy situations. An abundance of income producing, distressed assets are available at favorable prices for investors with the ability to turn around poor performing assets.
The current supply-demand trends in CRE provide an opportunity to earn attractive returns. Below is a list of factors that contribute to the current opportunities that exist within CRE:
· The CRE market appears to be in the very early stages of a recovery and now faces favorable supply and demand trends. Absorption rates have been positive for three consecutive quarters, which has lead to a better vacancy picture nationwide. Vacancies appear to be slowing, and in some areas improving after increasing 35% since 2008. Commercial vacancies across the U.S. are currently estimated at 16.4% which is well below the long-term U.S. average of 14.6%. New CRE supply is near an all-time low, because rents in most areas do not justify new construction. New construction represented only 1.2% of the total CRE stock in the first quarter of 2011. Increasing demand and favorable supply trends is producing a rebound in NOI, thus increasing valuations.
· Roughly $250 billion of CRE mortgage debt is currently distressed; an upcoming wave of maturities should push the amount of distressed mortgage debt higher. An estimated $2.5 trillion of commercial mortgage debt will mature over the next seven years. Lower NOI and CRE valuations will make refinancing difficult for CRE that was originally financed at historically high valuations and with significant leverage. On a weighted average basis, 34% of all CMBS loans originated during 2003-2007 are on a watch list or are delinquent. Some private equity real estate funds, such as Blackstone Real Estate, are positioned to provide the necessary capital for restructuring, recapitalization, and refinancing. Distressed property sales increased from $5 billion in 3Q 2010 to $12 billion in 4Q 2010. Lenders have been generous with distressed properties often extending loan maturities or providing some other form of restructuring, but as property values have appreciated many lenders have begun looking to remove CRE from their books.
· Limited debt capital is available to fund over-leveraged, distressed assets. Only $11 billion in CMBS was issued in 2010, down from its peak of $230 billion in 2007. CMBS is an important source of debt capital and is necessary to support a sustained recovery. Early this year the CMBS market showed signs of improvement; in the first quarter of 2011, approximately $10 billion of new CMBS issuance was in the pipeline and analysts expect total issuance for 2011 to top $35 billion. However, new CMBS issuance has recently slowed as the market has become more volatile. REIT and Private equity capital has returned to the CRE market as well, but the majority of funds have focused on core properties. REITS raised $26.24 billion in 2010 and $23.72 through the second quarter of 2011. A significant portion of this capital was used to shore up balance sheets, but REITs have also increased acquisitions. A total of 439 private equity firms are attempting to raise $160 billion for new real estate funds compared to approximately $40 billion in 2010. Capital inflows will provide some support to valuations despite unfavorable global economic conditions.
· Core real estate prices have enjoyed a strong rebound; for example, the vacancy rate in New York City's prime office market is approximately 4%. Distressed properties have not participated in the rebound, which has created favorable valuations. Stabilized core CRE often attracts several buyers; however, far fewer investors have the capital and experience to purchase distressed assets, which often requires complicated capital intensive workouts. The lack of buyers for distressed assets has created an opportunity to earn outsized risk premiums. A strong core market is good for opportunistic real estate funds because once the distressed properties have been stabilized they can be sold to core buyers for large premiums.
Despite the favorable trends in CRE, substantial risk still exists. General economic conditions, interest rates, and changes in supply and demand pose risks to CRE. Economic growth and employment are of particular importance to CRE due to the reliance on office property demand, retail spending, and hotel demand. Investors are also dependent on the availability of mortgage funds to finance the portfolio. Lack of financing and/or rising interest rates can negatively impact returns.
Comparatively, private equity opportunistic CRE looks more attractive than REITs. REITs have rebounded strongly from the great recession, gaining approximately 130% since their 2008 lows. The rebound in REIT prices is worrisome; many REITs now trade at a premium to NAV. Core real estate prices have been pushed up by REIT and private equity buyers. Core properties are selling for capitalization rates that historically have not produced outsized returns.
Monday, August 8, 2011
Why S&P's Downgrade of the U.S. Means Little
The media has made a ruckus over the U.S. debt ceiling and S&P's downgrade, but the markets are not responding with the same hysteria. In fact, the market has not had much to say about the downgrade. I think S&P's action will have little impact on the economy and financial markets. However, if over the long-term the reasons driving S&P's downgrade continue, the U.S. would be headed for trouble.
Why do I think S&P's downgrade doesn't really matter? First, Moodys and Fitch confirmed a Triple-A rating on the U.S., which means financial institutions that are mandated to hold Triple-A paper do not have to sell Treasuries. Also, the Federal Reserve and the Federal Deposit Insurance Corp. issued a statement saying banks would not have to increase bank capital that was backed by Treasury or other federal-government-backed obligations. Financial institutions could be negatively impacted if S&P's downgrade of the U.S. leads to downgrades of financial institutions. S&P has yet to take any action on this front.
Second, S&P's ratings are just a label; supply and demand still determines the rates the U.S. will pay on its debt. Through this whole debt debacle and subsequent downgrade, Treasury yields have gone down which means the cost for the U.S. to borrow has actually gone down! Treasury yields have fallen because of recession fears, but even before the recent poor economic data was released Treasury yields (except for near term T-bills) were not going up.
The true concern is what will happen over the long-term if the U.S. continues on this path. S&P's downgrade is a first step towards higher borrowing costs. If China and other large holders of U.S. debt decide to diversify away from Treasuries the dollar will slowly lose its reserve status and the cost of financing our debt will go up. This process will play itself out over several years because large holders of U.S. debt will not want to dump large quantities onto the market thus decreasing the value of their Treasuries.
Investors are currently flocking to Treasuries in a "flight to quality" which shows that for now, U.S. Treasuries are still the preferred safe haven for investors.
Why do I think S&P's downgrade doesn't really matter? First, Moodys and Fitch confirmed a Triple-A rating on the U.S., which means financial institutions that are mandated to hold Triple-A paper do not have to sell Treasuries. Also, the Federal Reserve and the Federal Deposit Insurance Corp. issued a statement saying banks would not have to increase bank capital that was backed by Treasury or other federal-government-backed obligations. Financial institutions could be negatively impacted if S&P's downgrade of the U.S. leads to downgrades of financial institutions. S&P has yet to take any action on this front.
Second, S&P's ratings are just a label; supply and demand still determines the rates the U.S. will pay on its debt. Through this whole debt debacle and subsequent downgrade, Treasury yields have gone down which means the cost for the U.S. to borrow has actually gone down! Treasury yields have fallen because of recession fears, but even before the recent poor economic data was released Treasury yields (except for near term T-bills) were not going up.
The true concern is what will happen over the long-term if the U.S. continues on this path. S&P's downgrade is a first step towards higher borrowing costs. If China and other large holders of U.S. debt decide to diversify away from Treasuries the dollar will slowly lose its reserve status and the cost of financing our debt will go up. This process will play itself out over several years because large holders of U.S. debt will not want to dump large quantities onto the market thus decreasing the value of their Treasuries.
Investors are currently flocking to Treasuries in a "flight to quality" which shows that for now, U.S. Treasuries are still the preferred safe haven for investors.
Thursday, August 4, 2011
My Investment Pick for a Slowing U.S. Economy
The DOW is down around 8% in the last two weeks mostly due to concerns over an economic slowdown. Major economic indicators are pointing towards a slowdown in U.S. growth, which has given rise to fears of another recession. I believe large cap stocks are set to outperform in the coming years. Specifically, I recommend Vanguard's Mega Cap 300 Growth ETF (MGK). In general, I am a value investor, but I like MGK because of the reasons outlined below.
First, I like large caps over small caps because they have the ability to generate revenue overseas, which could cushion a downturn in the U.S. economy. The top 10 holdings of MGK are in order: Apple, IBM, Coca Cola, Oracle, Microsoft, Google, Phillip Morris, Schlumberger, Pepsi, and Wal-Mart. All of these companies have strong balance sheets and many generate a significant portion of their revenue overseas. Historically, large caps have performed better than small caps during periods of slower growth. Small caps have also performed very well since the recession and they look expensive relative to large caps. For example, Vanguard's Small Cap Growth ETF sells for 31 times earnings, while MGK sells for only 17.7 times earnings.
I like growth right now because the price of growth relative to the broad market is attractive. In comparison to Vanguard's Mega Cap 300 (MGC), MGK offers strong growth potential without a large premium. MGK is currently selling for 17.7 times earnings with a growth rate of 12.7% and return on equity of 25%. In comparison, MGC sells for 15.4 times earnings with a growth rate and return on equity of only 6% and 21.1% respectively. If the U.S. economy slumps, companies that can grow revenue and earnings will receive a large premium.
I am not attempting to predict the direction of the U.S. economy, but MGK provides downside protection in the event of continued slow growth and positions investors to benefit from a surprise upswing.
First, I like large caps over small caps because they have the ability to generate revenue overseas, which could cushion a downturn in the U.S. economy. The top 10 holdings of MGK are in order: Apple, IBM, Coca Cola, Oracle, Microsoft, Google, Phillip Morris, Schlumberger, Pepsi, and Wal-Mart. All of these companies have strong balance sheets and many generate a significant portion of their revenue overseas. Historically, large caps have performed better than small caps during periods of slower growth. Small caps have also performed very well since the recession and they look expensive relative to large caps. For example, Vanguard's Small Cap Growth ETF sells for 31 times earnings, while MGK sells for only 17.7 times earnings.
I like growth right now because the price of growth relative to the broad market is attractive. In comparison to Vanguard's Mega Cap 300 (MGC), MGK offers strong growth potential without a large premium. MGK is currently selling for 17.7 times earnings with a growth rate of 12.7% and return on equity of 25%. In comparison, MGC sells for 15.4 times earnings with a growth rate and return on equity of only 6% and 21.1% respectively. If the U.S. economy slumps, companies that can grow revenue and earnings will receive a large premium.
I am not attempting to predict the direction of the U.S. economy, but MGK provides downside protection in the event of continued slow growth and positions investors to benefit from a surprise upswing.
Tuesday, July 12, 2011
Opportunity to Short Selected Chinese Companies
Moody's released a report today raising concerns over some publicly traded Chinese firms. Moody's study looked at 61 non-financial Chinese companies in an attempt to identify problems such as "weakness in corporate governance, risky or opaque business models, poor quality of earnings or cash flow, concerns over auditors or financial statements, and business strategies geared towards fast growth."
According to the report, “In recent weeks, a variety of participants in the market, including the U.S. Securities and Exchange Commission, are looking into potential problems with the quality of financial reporting from publicly listed Chinese companies”.
One sector of concern was property companies, which were flagged more often than other non-financial companies. China's property market has been expanding at a rapid pace, raising concerns of a potential property bubble. I can't help but remember the U.S. property bubble and the many companies that failed in the subsequent collapse. During the U.S. housing boom many companies operated in an opaque, lightly regulated market. Based upon Moody's report, a similar scenario seems to be playing out in China. The scary thing is the rise in Chinese real estate prices has been greater than during the boom years in the U.S.
Identifying Chinese property companies with questionable earnings could be an excellent short opportunity even in the absence of collapsing real estate prices. I can't help but think of Countrywide Financial. Admittedly, I have not had the opportunity to look into this trade yet, but stay tuned!
According to the report, “In recent weeks, a variety of participants in the market, including the U.S. Securities and Exchange Commission, are looking into potential problems with the quality of financial reporting from publicly listed Chinese companies”.
One sector of concern was property companies, which were flagged more often than other non-financial companies. China's property market has been expanding at a rapid pace, raising concerns of a potential property bubble. I can't help but remember the U.S. property bubble and the many companies that failed in the subsequent collapse. During the U.S. housing boom many companies operated in an opaque, lightly regulated market. Based upon Moody's report, a similar scenario seems to be playing out in China. The scary thing is the rise in Chinese real estate prices has been greater than during the boom years in the U.S.
Identifying Chinese property companies with questionable earnings could be an excellent short opportunity even in the absence of collapsing real estate prices. I can't help but think of Countrywide Financial. Admittedly, I have not had the opportunity to look into this trade yet, but stay tuned!
Introduction to Coeus Investment Research
This blog is a venue for individuals to express their WELL RESEARCHED opinion on anything related to investments and financial markets. Periodically I will post my own research and ideas. The true value of an investing blog comes from the free exchange and debate of ideas. Coeus was the Titan-god of the inquisitive mind, his name meaning "query" or "questioning". While naming anything investment related after Greek mythology is certainly nothing new, and probably a little cheesy, the Greek Titan serves as a reminder that we should always question the world around us and our own assumptions.
Also, please share any good sources of market data and research.
Also, please share any good sources of market data and research.
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