Read Equity Position Update 9-11 text version

SEPTEMBER 2011

To answer the question all investors eventually ask, "Why do we still own this dog?"

Highlighted in this issue

Caterpillar (CAT) $84 CAT gets 62% of their sales from overseas. In 2008, their previous high water mark, CAT did $51 billion in sales and made about $5.50 per share in earnings. In 2012 CAT will do maybe $64 billion in sales and make $9 per share. In the summer of 2007 the stock traded at $87 and now is $88. Stuck in the mud. Either the world is way too optimistic on CAT's sales and earnings, or the price has to "give". S&P has a one year target price on the stock of $142 and we think $125 is nearly a slam-dunk. (The stock got to $116 earlier this year) The stock pays a 2% dividend while you wait. One thing is for sure, in this country the politicians all yap about "infrastructure jobs" and in emerging markets there is a lot of new construction and dirt being moved around. CAT will get their fair share of the business. Clients have covered calls from $90 up to $120.

Avon Products (AVP) $22 This is not your mother's Avon. Today it's an $11B in revenue company with a big presence in emerging markets. Most sales are still done by women - to women, but the big growth areas are Central and South America, Eastern Europe, and the Mid-East. 65% of revenues come from overseas. Big dividend yield of over 4%. Stock got as high as $36 last fall and is now in the low-$20s. We bought it right at about $21. Street is looking for $30+ next year. Some clients have $23 calls written.

Below are short descriptions of equity positions we own in many of our managed accounts as well as fair value guesstimates, dividend yields and representative current option positions. Option positions and strike prices vary from account to account depending on date and purchase price. The below list is loosely organized from newest to oldest. Opinion is ours...we're not always right but we are confident!

CSX Corp. (CSX) $20 For all you Monopoly aficionados 100 years ago CSX was known as the Baltimore & Ohio, B&O railroad...one of those properties you would get rich from. Jacksonville based company with the largest rail network on the eastern seaboard. Last year Buffett bought Burlington Northern and when CSX dropped 22% in price over the summer, the price was too good to pass up. 2.3% dividend, solid books. The stock was at $27 a couple of months ago and most 1 year targets for the stock are $30. In option accounts we are covering positions with $22.50 calls.

Boeing (BA) $63 If we have to tell you what Boeing makes you shouldn't be investing in stocks. We sold Boeing in May in our Dividend Growth accounts at $77 (smart move since it is now in the low $60s) to make room for Lockheed-Martin beHalliburton (HAL) $39 cause LMT had a higher yield. We kept it in HAL is a pure play oil and gas services comour option accounts with calls written on it pany. Right now the oil service sector is quite from $62.50 to $80. Great company, street unloved, thus the opportunity. The stock target is $86 and even the most bearish anapeaked at $58 earlier this year. The compalyst thinks it should hit $70. Good dividend of ny's revenue is split between domestic and 2.6%. A great hold to keep selling calls foreign. Last year revenues were up 22% against and a decent buy again at today's and this year should grow 27%. Meanwhile level. earnings grew 54% and 64% respectively. Besides growing sales and earnings like a General Electric (GE) $15 gusher, financially the company is super solid. GE of course was the darling of the 90's trad$6.4 billion of excess cash in the checkbook ing as high as the $50s while the world and only $3.8 billion of long-term debt. In the "partied like it's 1999". The meltdown nearly last 10 years, even with the bad press about melted GE and the stock dropped below $10. Iraq and offshore drilling the stock has conThe company is really almost a bank with a sistently traded between a P/E of 10 and 20. lot of manufacturing done in the basement. If you use the mid-point of 15 you would get a Anyway, after the collapse the company target of $68. The street is looking for anywacked their dividend down but started inwhere from $63 to $70. We have just started creasing it again last fall. The stock pays a using it in our option accounts with $45 calls. yield of 3.8%. The analysts all have targets of $23 to $25 in the next year. It is sort of a Alleghany Tech. (ATI) $44 smelly stock because they have so much Is one of the largest specialty metals outfits in debt, but if they didn't go under in `08 they will the world. Sales of about $4.7B to nearly eveprobably keep on ticking. In our option acry industry imaginable. Makes stuff like titanicounts we are buyers and selling covered um, nickel alloys, stainless, zirconium, and a calls at $17. bunch of other metals that end in ...ium. Earnings this year should be $2.72, +230% Paychex (PAYX) $26 and next year $4.45, +63%. Clean books, a Paychex does exactly what you would think lot of cash, forward P/E of 10. High beta of they do, namely process payroll checks for 1.74. Seven analysts follow it and have a memostly small to medium sized employers. We dian one year target of $80. Earlier this year use them and they do a great job. Before the the stock peaked at $72, now is in the mid"Great Recession" the stock was in the $40s. $40s. Clients have purchased it between the We bought the stock at $30ish in our Dividend high $40s to the high 60s. A lot of calls are Growth accounts. The stock pays a 4% diviwritten at $65 and $70 strikes although a few dend and in the last decade the company has lucky folks got in lower and have $50 options. raised their dividend 3 fold. As employment The stock has a great shot at recovery and coughs to life Paychex should benefit. making a profit for all our current holders.

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Lockheed Martin (LMT) $73 Al-Qaeda hates this company. Defense stocks are not particularly popular in these days of budget issues...but defense spending has increased every year since 1776 and has tripled in amount since 1996. Lockheed's dividend is 3.7% and the company's P/E ratio is as low as it has been in 15 years. Solid finances. Average target price is $87. We are in it around $80 and have just started using it in option accounts with $80 and $82.50 strikes. BE Aerospace (BEAV) $32 We bought B/E Aerospace back in May in the high $30s in our growth accounts. B/E is one of those companies you've never heard of but your rump is familiar with them. They are the largest provider of aircraft seating and interior fixtures. Earnings growth should average 35% per year for the next couple of years, they have loads of cash on the balance sheet and a forward P/E of only 15. Our option accounts bought it between $30 and $40 and have calls between $40 and $45. Las Vegas Sands (LVS) $48 Casino operator. The growth in the casino business is in Asia and Sands is one of only two U.S. companies with a presence in Macau (Wynn, which we also own, is the other). Macau is the only location in China that permits casino gaming. And LVS is the only one with a property in Singapore. Earnings should more than double over the next two years. Some risk, but huge growth. We have nice profits in our growth accounts and in our option accounts calls are on at $45, give or take. Cummins (CMI) $92 Cummins makes big engines. The recession put a crimp in truck engine sales but now between an aging truck fleet, more stringent EPA emission standards and global growth Cummins is in a big growth mode. Earnings should grow 50% this year and over 20% next. Over half of their business is international, the company has very conservative finances and a P/E of only 10. We started buying it around $100. S&P thinks Cummins is "near the start of a new earnings up-cycle that will last several years". Has been volatile in the last few weeks getting as high as $115 and as low as $80. S&P has a $150 one year price target. We would take half that. Option accounts have calls all the way from $90 to $120. Timken (TKR) $35 Ball bearings, roller bearings. You have a bunch of their bearings in your car. Industrial stocks are in a growth mode although you

would never know it from recent performance. 30% earnings growth, forward P/E of 7, super clean balance sheet. We started buying it in the high $40s. The street's target is $65 within a year. At today's level the stock is a bargain. Calls are written between $45 and $55. Whiting Petroleum (WLL) $44 Whiting is a mid-sized Denver based oil and gas E&P company. Market cap is $5.2 billion and they have 275mm barrels of proven reserves. Earnings this year should grow 58% and next year 25%. Forward P/E of 9 is below the market. We started buying Whiting in the high $50s and it has since fallen with the rest of the market. The stock peaked earlier this year at $76. All American. They have active wells in the Rocky Mountains, Texas, Oklahoma, Louisiana, and Michigan. The street target is $73. The quick drop has been disappointing although we have confidence the position will work out, might take a few option cycles. Calls are sold from $50 to $65.

raised their dividend 38 years in a row so we may be back if it gets cheap again. TAL International (TAL) $28 TAL is one of the world's largest leasing companies of containers used on ships, trains and trucks, intermodal containers. The company came public in 2006 and raised their dividend 3 years straight until the "great recession". In 2009 they cut it back to a penny, but for the last 7 quarters have raised it back up. Currently the stock yields over 7%. Insiders own the majority of the shares. Option clients have calls at $30 and $35.

Avnet (AVT) $26 Electronic components and connectors. Started buying it in the low $20s and has held up OK in a tough year. P/E of 6 is ridiculously low with earnings growth 3 times that number. Earlier this year the stock traded above $36. Revenues and profits are higher than they were in 2008, but the stock is almost half price. Growth account clients have a 14% Carnival Cruise (CCL) $33 profit and option clients have calls written in We started buying this stock in February in the the low to mid $30s. mid-$40s and it has been anything but a Love Steel Dynamics (STLD) $12 Boat for us. Stormy global seas have sent A Ft. Wayne, Indiana based company with the investors mustering toward the lifeboats. We've sold it in our Growth accounts to make highest profitability per ton of any steel company in the world. Their employees are all room for a stronger name but have held it in owners and 60% of their pay comes in the our option accounts since most folks have a cost basis below $40. Company has earnings form of incentive bonuses. The stock was at $40 in 2008. We started buying it at $14 in the growth of 30% over the next couple of years fall of 2010 and it shortly traded as high as and the forward P/E is only 10. Street target is $45 so we think our option accounts should $20. With the recent global fears steel stocks have been pounded and STLD recently eventually enjoy the cruise. dropped as low as $11. Street target is about Fastenal (FAST) $35 $19. Low debt, great earnings, and employThis company distributes every kind of screw, ees are eating their own cooking. Option clinut, bolt, tool and construction supply you can ents have calls in the high teens and it may think of and a heck of a lot you never even take a couple more option cycles to get whole. imagined. We started buying it in December of 2010 in the high $20s and has treated us Nordstrom (JWN) $46 nicely, +20% so far after a 2 for 1 split. It is a We originally bought JWN in the summer of way to play a housing and manufacturing 2010 at around $33 and have continued buyrecovery. Sales growth of 19%, earnings ing. THE premier high quality retailer. Family growth 44% this year and 20% next, no debt still owns a lot of the stock and runs the place. and giant gobs of cash. Target of $39. Option Earnings growth +50% over the next two clients have calls at $35 and $37.50. years. Option clients have calls between $45 and $48. Will be called out if Santa comes. VF Corp. (VFC) $120 We started VFC a year ago in the high $70s Nucor (NUE) $34 so it has been a great fit, up over 55%. It will Started buying last year at $39, got as high as be pruned out of our Dividend accounts soon $49 and then plummeted to $31. (Stock was because the yield has dropped due to the over $80 three years ago) It is a great compastock price gaining so much. Our option acny with very solid books, low debt, a 4.2% counts should also get called out between dividend and a non-union workforce. Option $115 and $120. VF used to be an underwear clients hang in there...calls are written from company, but now has a bunch of brands, $37 to $47. Street target is $46. Patience. none of them making tighty-whities. VF has

Sheaff Brock Investment Advisors, LLC (SBIA) obtains data from reliable sources but does not guarantee the accuracy or completeness of this report, nor does SBIA assume any liability for any loss that may result from reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are for general information only. Return, yield, earnings, and financial data is from The Wall Street Journal, Thomson Reuters, Morningstar, and Yahoo Finance. Past performance does not indicate future results. Model account returns are gross of fees but net of commissions and include the payment of dividends which are held in money market funds pending reinvestment in other portfolio securities. Client returns may differ because all securities in the model may not be owned by each client. The securities mentioned in this report can be, and often are, owned by clients and employees SBIA. Clients and prospective clients should understand that there is no assurance that capital gains made in the past will continue. There is always the chance that market conditions or portfolio performance may deteriorate in the future, and clients may experience real capital losses in their managed accounts. The model accounts are compared to the performance of the S&P 500 and sometimes to the Dow Jones Industrial Index (DJIA) or the Dow Jones Select Dividend Index although the model positions may not reflect the securities making up these indices. None of the indices may be an appropriate comparison index as our model accounts may own companies not represented in the benchmarks. There were no other strategies employed to obtain the results portrayed other than those strategies disclosed in the Sheaff Brock Investment Advisors, LLC Form ADV or other disclosure brochure.

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