ChuckCarnevale

Kinder Morgan Energy Partners LP (KMP) is the country’s largest pipeline master limited partnership.  Perhaps the clearest way to think about a pipeline MLP is as a toll road. According to their website, Kinder Morgan Energy Partners LP owns an interest in or operates approximately 75,000 miles of pipelines and 180 terminals. The company’s pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide (CO2) and store a variety of energy-related products and materials at their terminals.  These would include gasoline, jet fuel, ethanol, coal, petroleum coke and steel. Master Limited Partnerships (MLPs) were authorized in 1997 by Congress under the Internal Revenue Code Section 7704 in order to promote investment in the energy sector. The law greatly facilitated the formation of midstream MLPs such as Kinder Morgan Energy Partners LP. Midstream energy is mainly the transportation of oil and gas through pipelines. Since an MLP must by law derive 90% of their income from “sources related to income from specific sources, including dividends, rents, interests, capital gains, and mining and natural resources income identified in Section 613 of the tax code”, we believe that cash flow is more relevant than earnings as a gauge for valuation. As we will soon
Read More »

We often write about valuation because we believe it is one of the most misunderstood aspects of investing in common stocks.  This causes many people to hold what we consider to be unjustified biases that are based primarily on price action.  For example, the concept of the lost decade, which many almost gleefully point to as evidence validating that stocks are poor investments, fail to recognize that the true culprit was overvaluation during the appropriately labeled “irrational exuberance” days. However, one of the most misunderstood aspects of overvaluation is how wide ranging and relative it is. To clarify, one company can technically be labeled overvalued, but due to other important factors, still be a good investment or even an above-average investment. It all comes down to the degree of overvaluation the market is applying, relative to the potential long-term growth the business is capable of achieving. Starbucks Corp. (SBUX): Overvalued High Growth We offer  Starbucks Corporation (NASDAQ:SBUX) as an example of a stock that is technically overvalued, but not necessarily a poor long-term investment. First of all, by looking at the earnings and price correlated F.A.S.T. Graphs™ below, we discover that the market has historically placed a high valuation on this high-quality growth stock
Read More »

Not having the confidence that they know the true worth of their stocks, is one of the most common laments expressed by many individual investors. Even more importantly, knowing the price of all their stocks, but not knowing their value, is often a major source of shareholder losses. Expressed differently, when you don’t know the value of what you own, it’s very easy to be taken advantage of.  It’s an undeniable fact, that people are emotionally attached to their money.  Therefore, it’s no wonder that all the price volatility accompanying an often irrational stock market can be quite unnerving. As a result, investors often buy when they should sell, and sell when they should buy. Making matters even worse is the reality that there is no precise or absolute calculation of intrinsic value or what we like to call true worth. This stems from the fluid nature of a business where future prospects can rapidly change.  Think financial stocks in late 2006, going into 2007 and 2008.  Once apparently very healthy and profitable enterprises, the fortunes of many financials collapsed with a vengeance.  The following earnings and price correlated F.A.S.T. Graphs™ on Citigroup Inc. (NYSE:C)  provides a vivid portrayal of how quickly a company’s
Read More »

This article is Part 3 of a series of articles focusing on finding value in the S&P 500 today.  In Part 1, we laid out several classifications of equities that comprise the S&P 500.  In our follow-ups we are focusing on each of these classifications one at a time, in order to focus on finding fair valuation within each category.  There’s a lot of discussion, much of it suggesting that stocks are overvalued today.  We disagree, because we conducted a thorough examination of each of the S&P 500 constituents, we did indeed find a lot of value in this market. Here is a link to Part 1, where we laid out our thesis of a market of stocks rather than the stock market, and identified the categories that we are writing about in these subsequent articles. In Part 2 we focus exclusively on high-growth stocks that are constituents of the S&P 500 and we believed were fairly valued today. In this part 3, we turn our attention to the highest yielding stocks that are constituents on the S&P 500.  However, we submit that there are essentially two primary reasons that explain why these stocks offer such high yields.  The most prominent is that these
Read More »

Introduction Whenever there is a rise in stock values as we have experienced over the past year or so, it seems to be human nature to automatically assume that valuations have become too high.  However, although it is possible that this is true, it is not necessarily so.  A lot has to do with where valuations were before the run-up occurred.  For example, if valuations were extremely low, then even after a rise, they can continue to be low or perhaps only have risen to becoming fairly valued. On the other hand, if valuations were already extended prior to the run, then current valuations may have become dangerously high. The important point here is that valuation is a very relative concept.  Moreover, we would argue that valuation needs to be evaluated on a company-by-company basis.  This is simply an extension to the concept that it is a market of stocks, rather than a stock market, that we introduced in our last article found here. A Good Run Broadly Based The following graph, courtesy of the leading financial blog, Seeking Alpha, clearly illustrates just how good and how broad recent stock price rises have been.  We suggest the reader focus on the
Read More »

There is no shortage of pundits and prognosticators willing to offer their opinions (rarely based on facts) as to whether or not stocks are cheap or expensive, or as to whether the markets are going to rise or fall.  In every case, the opinions and prognostications are directed as generalities such as stocks or markets.  In this context, the implication is that all stocks are the same, and therefore will all behave in the same manner or in tandem. In contrast, it has long been our contention that it is a market of stocks and not a stock market.  Moreover, we have also long argued in favor of making investing decisions one stock at a time instead of based on views about the general market. In our opinion, general statements about the value of markets or stocks as a class are prejudiced, and therefore we would argue illogical. Making brash and general statements about stocks is analogous to thinking like a racist.  The bottom line is that it is just plain wrong thinking. In truth, individual stocks are as unique and as different as individual human beings.  Therefore, just like human beings, individual stocks should be measured and judged based
Read More »

Introduction to Dividend Paying Stocks When people talk about dividend paying stocks, their focus is often on the dividend income they provide. This is especially true for the investors that fancy themselves purists as dividend growth investors, who seemingly care more about their dividends than they do their capital. However, this article intends to illustrate that dividend growth stocks are not only great income vehicles for retirees; they can also be terrific vehicles for providing total return. However, to understand this fully you must first consider that dividend paying common stocks come in all sizes, shapes and flavors. Therefore, some are better for current yield, some are better for a growing income stream and others offer the total package of growth and income. Furthermore, there are many nuances and degrees of growth and/or income that various classes of dividend paying stocks possess.  In other words, you can’t paint all dividend growth stocks with the same general brush. Additionally, there are certain attributes, characteristics and relationships between growth and income that various types of dividend paying stocks can have. Generally speaking, although exceptions can be found, the higher the yield, the lower the growth you can expect, and vice versa. In
Read More »

This is our fourth and final installment on assessing the relative valuation of utility stocks today.  Our first installment part 1 looked at utility stocks in general. In part 2 we covered utilities operating in the Western part of the United States, and in part 3 we looked at utilities operating in the Central states.  This final installment, part 4, will review utility stocks located in the Eastern region of the United States. As we stated in previous installments, the utility sector is experiencing a lot of change.  With growth long inhibited by regulators, utilities throughout the country have been looking for ways to diversify their businesses and/or develop new markets.  Another change that is sweeping the industry is mergers and acquisitions. A few examples in the Eastern utility sector include Duke Energy Corp (NYSE:DUK) and  Progress Energy, Inc. (NYSE:PGN) merging, and Central Vermont Public Service Corp (NYSE:CV) was acquired by Green Mountain Power Corporation (GMP). Although these actions may prove to be successful, they do make analysis more difficult because there is scant history of the combined entities to scrutinize. Eastern Utility Stocks Historical Overvaluation Is A Concern The following table looks at the 14 surviving premier publicly-traded Eastern utility companies.
Read More »

Introduction In part 1 of this series on utilities published on July 26, 2012, we looked at the utility sector with a broad brush. In this part 2, we will focus on utilities located in the western part of the United States. The series was inspired because of the apparent general impression that utility stocks are overvalued. This impression stems from the fact that utilities have been the best performing sector over the past year.  Therefore, people automatically assume that because an asset class has risen in price, that it must also be overvalued. However, if they have risen from previously undervaluation levels, this may not be the case. The following comparison of the performance of US ETF’s by sector first reported in part 1 on July 26, 2012, illustrates their recent outperformance. On the other hand, with all the volatility there is today, it’s amazing the difference just a few days can make.  Here is an update of the above graph through July 30, 2012, just five days later.  Here we discover that utilities’ performance over the past year has still been exceptional.  However, they have now moved into second place behind consumer staples but just ahead of technology, which is
Read More »

Recently, I’ve come across several discussions by dividend growth investors as to whether the utility sector is overvalued or not today.  Therefore, I decided to look into the sector’s relative valuation as a whole to see what I could find. The only way to efficiently conduct this kind of research is to rely on a broad statistical array utilizing traditional valuation metrics. However, before I report my findings there are some caveats and clarifications that I feel are very appropriate.  First and foremost, I believe that any time you attempt to make broad generalizations about anything; you are by definition applying a great injustice to it.  In other words, painting all utilities with the same broad brush is analogous to holding a prejudicial view of human beings based on attributes such as race, creed or color. This is neither rational, nor fair. Prejudice at the base level means to pre-judge something before gathering the facts.  My point is that I believe in evaluating anything, whether it is a person or an asset class, based on individual merit rather than on its membership within a group. In other words, I prefer to judge each individual utility company based on its own
Read More »

      This blog post is presented in response to questions and comments on recent articles I published.  Therefore, I offer this following post to clarify certain confusions that readers had. My articles were dealing with valuation discussions about dividend growth stocks to include utilities. Three utility companies were discussed where I felt there was some confusion regarding their current valuations.  Therefore, I offer this blog post through the lens of FAST Graphs™ the fundamentals analyzer software tool to hopefully cast a light upon the darkness. FAST Graphs™ are a “tool to think with” and as such, have no agenda of their own.  Instead, they are designed to provide “essential fundamentals at a glance” and allow the user to interpret the data according to their own philosophies, strategies and beliefs.  In this context, FAST Graphs™ are the deliverer or reporter of important information. Essentially, the FAST Graphs™ stock research tool provides investors many benefits, but there are four things they do especially well. 1. FAST Graphs provide a historical review and instantaneous perspective of how well the business behind the stock has historically performed. 2.  FAST Graphs provide an instantaneous perspective of how the market has historically capitalized or priced the company’s operating results
Read More »