Sunday, March 23, 2008

Madame-X: Individual Stocks

These form a very small part of the portfolio but maybe it's useful as an example to show what I look at when first thinking about a stock. There's not much to like about ALU (Alcatel-Lucent), while XRX (Xerox) could be interesting. Both stocks are pretty cheap here and so I wouldn't be selling either unless you want a tax loss and that won't be much. The commission to sell ALU hardly is worth paying :)

Both companies didn't really go anywhere much until the great NASDAQ bubble when they soared only to crash back to a lower level. Since then XRX recovered somewhat while ALU has continued to perform poorly:

Xerox has a forward price earnings ratio of 10.7 while analysts estimate that its earnings will increase at 12% per annum over the next five years. Earnings have actually increased by 36% p.a. over the last five years. The company has had a series of positive earnings surprises. Analysts have tended to upgrade or recommend the stock. Several mutual funds and other managers have massive holdings in the firm including Dodge and Cox (almost 10% of the company), Neuberger and Berman, State Street, Fidelity, Vanguard, Backrock and others. Digging deeper into the accounting data, cash flow from operations exceeds net income and capital expenditures are low. This means free cash flow per share exceeds earnings per share. The company is buying back shares rather massively and pays a 1% dividend. So all this tells me this is a cheap stock doing some good things with moderate growth potential and good "sponsorship". It's at least a hold if not a buy IMO. Now I'd do further research obviously before actually buying the stock or not but this would qualify as something for further investigation.

Alcatel-Lucent also has a low forward P/E based on analysts estimates - just 8.5- but the company lost money last year - though it appears this was due to a writedown. The company has had massive negative and positive earnings surprises, so it's hard to take analyst estimates seriously. Analysts have been more likely to downgrade this company, especially recently. It seems that institutions have been selling down their holdings though I don't have detailed information on institutional holdings. Operating cash flow has been erratic - positive some years when the company made a loss and vice versa. Capital expenditures are high and as a result, free cash flow is low or negative. The company is borrowing heavily, paying a dividend of 6.9% and not buying back stock. The share price has fallen 54% in the last 12 months, while XRX only fell by 12%. It has a beta of 2.23 according to Yahoo - exaggerating movements in the market (probably has a negative alpha...) XRX has a beta of near one - moves in line with the market. In sum ALU looks pretty horrible. I wouldn't investigate it further as a potential investment.


Madame X said...

Very interesting, thank you!

mOOm said...

I did a bond fund one, and then think I'll do an international and US stock one and then sum up. Hopefully, people will learn something about picking funds, at least the way I see it.