FBRC: One Of The Cheapest Stocks I’ve Seen Is Breaking Out

FBR & Co. (FBRC) is a small-cap stock I’ve been recommending since late August ‘13. After consolidating into a range between $25.50 and $27 for the last several months, the stock has broken out in the past couple of sessions:

I’ve written about FBR a little bit here, but there have been a few developments recently.

During the first three quarters of their current fiscal year, FBR has generated a little over $90 million in net income. Management decided to use $29.6 million in NOL carry-forwards, so netting out that non-recurring boost FBR has done roughly $50 million, or $4.73 per share (based on 10.59 million shares outstanding, a calculation I’ll explain later in this post). 

FBR did $.74 per share in Q4 ‘12, and that was with weaker business activity and 12.22 million shares outstanding. Even so, assuming that the bank replicates its results from last year, FY13 EPS will come in around $5.50. At Monday’s closing price of $28.31, FBRC is trading at a paltry 5.14x ‘13 EPS.

A look at the balance sheet however shows $200 million in cash versus no debt. That’s nearly $19 per share, giving us an ex-cash share price of $9.31, and an ex-cash FY13 multiple of 1.69x. 

As for my calculation of outstanding shares, the most recent 10-Q (Q3) showed 11.33 million shares. On November 26th, the company disclosed that is buying back a block of nearly 737,000 (at $25.75) shares from some large owners. Thus, my calculation of 10.59 million. With such an enormous cash position and the context of management’s relentless buyback program since 2010, it’s plausible that even fewer shares are outstanding by year-end.

A meaty dividend, more repurchases, acquisitions etc. are all likely for FBR. Ultimately, I see management taking itself private or the company itself getting acquired at a big premium to Monday’s closing price. 

Some Brief Equity Market Views

    Kind of a weird market we’re seeing. Outperforming right now is internet-related/new economy stocks trading at 15-30x sales. A lot of these names might grow into their valuations, but I have no interest in buying something like Yelp at 20x sales. I still really like Ford - Europe is turning around faster than I expected and they should be break-even there by early 2016, adding another ~$.35-.45 to EPS. I still expect at least $2.25 in EPS by 2016, so at a conservative 10X multiple the stock should be worth at least $22.50, though they’ve got more than $10 billion in net automotive cash and should start buying back shares. Throw in a rising dividend and it’s a screaming buy, I think. 
   Check out FBRC. It’s a small niche investment bank that is the leading book-runner for companies going public worth $1.5 billion and below. They’re trading below tangible book, have $200 million in net-cash, market cap of $323 million, are buying back a ton of shares, and are trading at 5x my estimate for this year’s earnings. If you net out the cash, it looks like it’s trading at 2-3x earnings. I’ve checked the numbers a dozen times - for some reason no analysts have heard about the company and thus not many people know about it. The stock is up a couple hundred percent over the past 18 months but it’s still dirt cheap. 
   I’ve become interested in what Buffett called “work-out” situations in the early 1960s. Something where management is in the midst of a turnaround, an asset is being sold-off, a confusing share-class structure etc. These trades are often uncorrelated to the broader market and have easily identifiable downside. I think these situations offer the best return profiles right now. Like I said, I just have no interest in buying internet stocks this late in the bull cycle. They’ll go up for a while, I’m sure, but the downside risk is unidentifiable. 
   Something like Facebook might be a little different. They could do $5 billion in free cash flow next year. Netting out there cash, the stock isn’t terribly expensive and they have a goldmine of valuable analytics. I don’t want it at this price, but some of these internet companies are wrongly being lumped together with some of the .com related trash out there. 
   Forward EPS estimates for the S&P are ~$120. Even if we only do $110 and we trade at 18x, that’s 1,980 on the S&P. I’m certainly not ready to call an end to economic growth and I don’t think the market is too expensive, so I think buying dips in my favorite stocks makes plenty of sense. 

That Was Some Brutal Action

Those pesky Fed minutes…

As usual, they said nothing. The FED doesn’t even know when it’s going to start tapering, so we sure as hell don’t either. Once again, it looks like they’ll start to pare back purchases in September, but that move looks largely priced into bonds at this point. 

As for equities, today gave us the second EOD stock dump in as many days. I mentioned the other day that while I was getting bearish on US equities, I wasn’t going to get short. Well, I picked up some puts on the SPY weeklies expiring this Friday once we failed to breakthrough 1,656 (following that “algo-driven” rebound):


Didn’t quite top-tick it, but I’m sitting pretty going into this week’s last two trading days. We’ve actually pierced below today’s lows in the after hours session, which to me is screaming that the big money wants out of this market. Back-to-back EOD selloffs to the lows should be respected.

End of the bull market? I really, really doubt that. Though I definitely think that if we break 1,635 tomorrow on the e-minis then 1,560 is in the cards, setting us up nicely for a rally into the end of the year.

Sold My Nat Gas Calls

Sold my UNG September 18s @ $.75/contract yesterday following the bullish supply report - decent short term profit for sure. I’ll just be watching the action from here as I don’t think there we have enough momentum to break through resistance around $3.47. 

With regard to equities, I mentioned the other day I was getting a little bearish based on some of the internals. The XLF has now lost support below $20.35 and I don’t see much support until we get to levels last seen in May. 

This morning’s action is brutal in the context of yesterday’s selloff; we couldn’t even hold a few points on the S&Ps and invalidated support @ 1,656 overnight. I might test it from the long side at 1,650 on the futures - some psychological support and 1,650 also happens to be the June highs. 

I’m starting to get interested in gold again. I think we’re in the “return to normal” fake-out phase of the bubble cycle, catalyzed by some historic short covering. 1,400 is a good spot to try it out from the short side, we’ll see how it acts around there. 

Treasuries Sitting On Major Long-Term Support

Check out what we are approaching on the TLT:

$105 happens to be the 2008 TLT highs, a couple of months following the collapse of Lehman. We also touched off this level once in 2011 and once in 2012, only to rally off of it.

What’s interesting is that equities are rallying even as 10-year treasury yields move above 2.7% and we approach long-term support - perhaps investors are finally starting to figure out that a reduction in asset purchases doesn’t have to mean the end of the equity rally?

The SPX is only 5 points off 1,700, acting quite well in the context of what’s going on with interest rates. Very interesting spot to say the least.

Getting Slightly Bearish On US Equities

I’ve been pretty active intraday over the past few sessions and I’ve been noticing some weakness with regard to market internals:

1) Financials, as measured by the XLF, are testing levels last seen in May:

We all know financials have nearly re-taken their position as the largest sector in the S&P, and they’ve led the market higher since 2012. My favorite names in the space - Citigroup, JPM, WFC have all stalled out. Dynamic Hedge has great commentary on this over at StockTwits. 

2) A modest, bearish RSI divergence as the S&P broke and then failed to hold 1,700:

3) Waning momentum in the small-caps, which have taken an unusually important role in leading this market higher all-year (though not unusual in the context of this relatively old bull market)

4) Seasonal weakness & psychology: August and September are historically weak months for equities, and my concern is that people aren’t really used to falling markets. Investors have profits that are burning holes in their pockets and it seems like a lot of guys have been chasing returns all year; we might need a little reset here to gather enough momentum to break 1,700. 

On the shorter, intraday time frames, equities have been unable to break-through key resistance levels. Last week, the XLF and XLK kept stalling out every time the S&P ran into resistance, and I think we’re seeing that happen on the longer-term charts as well. 

Our two biggest sectors have lost their momentum, volume is weak, and the seasonal odds are against us here. It’s going to be tough to break 1,700. I do a lot of longer-term investing so I’m adding to my holdings of C, F, and my small/mid-cap holdings but with regard to trading, my bias is to the downside. Highly unlikely that I try to short this market, however. 

Nat Gas Trade Follow-Up

I took a shot this morning with some September 18s on the UNG. Today’s action makes me think that the 50% retracement level around $3.18 is being perceived as the line in the sand, so to speak:

Shaded is price support dating back to about Jan 1st of this year. We’ve touched off this level several times in the past few months and conceptually, it makes sense that a 50% retracement (from the lows ~$1.90 to recent highs) would serve as support.

On a much shorter time horizon, $3.30 is modest support, though that level isn’t nearly as important to me here. 

I put on 1/2 my position this morning, and will put on the other half if/when we get a move above the 38.2% retracement. 

I like the SEPT. 18s - gives me enough time to let this play out without paying an obnoxious amount for time premium (theta). Can’t say I love the weakness into the close today but I think this one is going to be a big winner within the next few weeks.

I’m probably out if we lose $3.20/$3.22 - I’m not really willing to take a total loss on these contracts. I’d rather manage the downside a few times and try to pick a good spot than get wiped out once.

Natural Gas Looks Good For A Potential Long Here

Quick post here. I’m looking at getting long some natural gas calls, maybe on the UNG. 

Here’s what I’m looking at technically:


50% fib. retracement coinciding with January/February lows around $3.17. If you can’t see it, that fib. retracement covers the move from the 2012 lows at $1.90 to this year’s highs. 

I generally incorporate fundamental analysis into my commodity trades when they’re longer-term, I just haven’t really taken a look yet. What I do know - on a very basic level - is that judging by the quarterlies of most of the nat gas producers I follow, some new production might be coming on line but most of these guys have shifted their resources toward drilling for oil. They hedged their nat gas prices at favorable rates near $4/mmbtu, forgot about it, and are now drilling for oil like mad.

Natural gas supplies are below last year’s levels even despite this summer’s mild weather as well. 

I need to reacquaint myself with the fundamentals this weekend but this looks like compelling risk/reward.

5 Stocks With Double-Digit Upside: Part 1 

Over at Seeking Alpha I’ve been on a bit of a hot streak with my recommendations. Most of these have moved quite a bit from my recommended entry point, but don’t let that deter you from getting into these names - there’s plenty of upside left and the downsides are generally limited by either an exceptional net-cash position, dirt-cheap multiple, lousy industry sentiment, or a combination of the three.

Over the next few days I’ll give you the short version of why these plays are so compelling.

Bitauto Holdings (BITA): I’m pretty pissed about this one. I recommended it on July 31st and it’s moved almost 40% - of course I never “got around” to getting in the name.

Bitauto operates two websites in the People’s Republic of China: Bitauto.com and Taoche.com. The former displays automobile-related info for new cars, while the latter is essentially the same services for used cars.

Chinese auto dealers pay Bitauto to advertise their offerings and vehicle specs, and Bitauto also generates some revenues from CRM solutions and marketing advice. Bitauto was very early to the Chinese automotive marketing business and as a result, established itself early on as the leader in the space. This led to a partnership with Baidu in which all auto-related searches will generate links to Bitauto via Aladdin, Baidu’s open-data platform.

They’ve got more than $2 a share in net-cash (no debt), will earn more than $1.10 per share in 2014, and trade at $16.50. Net out the cash and you’re at less than 10X 2014 EPS - ridiculous for a company growing revenues at more than 30% annually with earnings that are going to double next year. 

China has its problems. Tell me something new. Even in the face of structural reforms, real disposable income is growing at a rapid clip. There is a high propensity to purchase a car in China as disposable income rises, especially over $3,000 (in USD). Passenger vehicle sales are set to double by 2020, and the used car market is 1/4 the size of the one we have in the States, despite the fact that China’s auto market is larger than ours. 

Finally, so many Chinese over the next few years are going to be first-time buyers. They don’t know very much about cars, and will want to research as much as they can. Thus, most of them will find themselves on Bitauto’s sites. Bitauto is right in the middle of the Chinese auto boom, trades at a huge discount to the broader market, is run by an extremely intelligent individual (from what I can gather) and has a great balance sheet.

Even after the run this stock has had this year, I expect the stock to double by the end of 2014, which would mean a 20X net-cash multiple. 20X isn’t so expensive for a company growing as fast as this one is.

Traders Should Be Buying This “Dip”

Detroit bankruptcy, big misses on the part of Google and Microsoft, oil at $108/barrel, and we’re actually up fractionally on the cash S&P?

Think about it. We’re making record highs with a backdrop of slowing (even negative) top-lines, tanking emerging markets, rising energy costs, downward trending US GDP forecasts, tapering concerns etc. It all raises the the following questions:

1) Why are stocks continuing to rise even as the data weakens?

2) If stocks aren’t falling for reasons that so many predicted (moving towards the end of QE, weak US recovery, bubbly foreign markets), then what will make them fall?

For the first question, my thesis has been that we’re in the midst of a massive long-term mean reversion. You can call it a great rotation, a mean reversion, money coming off the sidelines, or whatever you want, but we just spent three years psychologically fighting the fact that the economy is in fact getting better and that the world isn’t ending. 

We traded at 11-13X forward EPS on the S&P as earnings were coming off generational lows and interest rates were pegged at zero - far too cheap. Of course now as revenues slow and the effect of share buybacks diminishes people are willing to pay 14.5-15X forward EPS, but that’s another story…

The public is very underweight equities, and is now starting to become cognizant of a market that is once again “investable.” It sounds boring, but yes, there is still a ton of cash sitting in CDs, bonds, savings accounts etc. that will find its way into stocks just as they get expensive. We’re not yet at the “expensive” cycle of this bull market, but we’re a hell of a lot closer than we were, say, a year ago when weak PMI data out of Europe sent the overnight Dow futures down 100 points.

As for the second question, I honestly don’t think that anything people are buzzing about right now will send stocks into an extended decline, at least for the next 6-12 months.

Let’s say analyst EPS forecasts turn out to be way too bullish and the S&P only earns $105-$110 in 2014 (in operating earnings). Would a 16 handle be unreasonable? With interest rates at 0, “with this Fed” as David Tepper would say? Given the amount of money that wants in on this market, 16 is completely reasonable. 16X $105 in op. earnings keeps us right where we are right now - 1,680. How about 17X EPS? That’s historically been a fair multiple. We’d be at 1,785-1,870 assuming the aforementioned bearish case for earnings. Almost 10% upside at the midpoint - not bad at all. 

As I see it, the broader market isn’t exactly a bargain. I don’t really want to own most tech names, I definitely don’t want to be involved in the “safe” names (Coke, JNJ, PG, utilities), and I don’t love retail here either. 

That said, the big financials (JPM, BAC, MS, C, WFC) are just such an easy buy here. I was late to the trade but have been pounding the table for them since last October. On a normalized earnings basis - and it’s quite easy to figure out what those figures are for all these guys - they’re trading at 8-10 EPS. Citi for example is trading at 8.5-9X EPS if you net out one-time charges. The multiples on these five will expand 2-3 handles as the bull market matures and they start to return cash to shareholders. Easy. Citi’s my favorite name and I’ve got a target of $65 on it by the end of next year.

Then you’ve got some cheap healthcare names: Humana, DaVita, UNH, HCA etc. The future will favor the large, integrated names, and contrary to general consensus, these names will benefit from the Affordable Care Act.

Finally, the cyclicals remain cheap. I’ve laid out my thesis for Ford (GM works here too), and I’m starting to look at some of the larger steel names (Posco - PKX) as potentially offering excellent return profiles. 

Don’t try to outsmart this market. The money won’t be made on the short side for a while. The funds with the cutesy long-short or hedged strategies have underperformed in such a huge way because they’re ignoring the underlying drivers of this bull market. 

This is nothing like the market of 2000, but even if you think it is, remember this: the guys who were short the Nasdaq as it blew through 4,000 on the upside got rocked. If you caught it on its way back from 5,000 and shorted it as went below 4,000, you made a bundle. 

Stop worrying about the Fed and the Middle East and margin debt and whatever else you think is important - the market deserves the benefit of the doubt at this point.