The Ambergris Factor!

“In the American whaling industry, which got underway during the eighteenth century, whalers slaughtered the giant sperm whale for sperm oil, which came from the head and blubber and was important as a fuel for lamps. Another type of oil, called spermaceti, extracted from the head, became the chief ingredient in candles. While boiling up the blubber and parts of the Sperm whale, whalers occasionally noticed a very pleasant fragrance. It turned out this was a third oil-like substance, located in the intestines of the whales. Called ambergris, it became the basis for very expensive perfume. The problem was that the whalers found ambergris in very few of the whales they killed; nevertheless, the substance brought them a good income because the perfume manufacturers paid extremely high prices for it. So the whalers killed a lot of Sperm whales looking for those chosen few who had the right intestinal stuff.”

The Fall of First Executive, by Gary Schulte

Investing is a lot like whaling. Investors are constantly searching for that whale of a stock with the “ambergris factor.” And, that is what investors were doing last week at the Raymond James 34th Annual Institutional Investors Conference in Orlando, Florida. In attendance were nearly 800 professional investors that were listening to presentations from CEOs and CFOs of more than 300 companies. As stated, just like the portfolio managers were there looking for stocks with the right stuff, so was I.

I attended a fair number of presentations at this year’s conference, and enjoyed interacting with many PMs. A few of the presenting companies that are favorably rated by our fundamental analysts and make sense to me are as follows. Many of the attending portfolio managers were very bullish on the airlines, imbibed by the theme that the hitherto excess capacity has been rationalized via mergers. Accordingly, airlines now have pricing power and if fuel prices stabilize, or actually decline, the industry stands to make very good money. While that theme seems reasonable, most of the airline stocks have already had massive rallies. Enter HEICO (HEI/$44.16/Outperform), which is a manufacturer and service provider to the aerospace industry, providing replacement parts, electronics hardware, and repair and overhaul services. HEICO is the largest public company that manufactures FAA-approved new jet engine replacement parts at prices that are less than the original equipment manufacturers (OEM). As our fundamental analyst writes, “While recent results were below expectations, we are encouraged by management’s increased confidence for FY13 given their traditional conservatism. Looking ahead we continue to like the stock, and think there is room for upside earnings revisions due to (1) growing airline capacity, (2) increased maintenance spending, (3) operating efficiencies, and (4) accretive M&A activity.”

Sticking with the transportation theme, Kansas City Southern (KSU/$105.32/Strong Buy) made an excellent presentation. For about a year I have suggested that Mexico is likely going to be the “new China” for America since over the next couple of years the median wage in Mexico is going to be below that of China. One of the ways to take advantage of this theme is KSU since it has the “fairway” from Mexico into the Midwest of America. Indeed, KSU operates a unique north-south network stretching from Central Mexico through the heartland of the United States over the KCSR and KCSM. The KCSR is a U.S. Class I railroad operating 3,200 track miles in a 10-state region garnering the shortest route between Kansas City and the Gulf of Mexico. The KCSM operates more than 2,600 track miles providing a direct connection between the U.S. and Mexico. The PCRC is a 47-mile railroad serving as a coast-to-coast intermodal line to Pacific and Atlantic ports in Panama. Hereto our fundamental analyst notes, “Given KSU’s unique Mexican franchise, cross-border potential, and solid pricing outlook, we believe KCS remains the fastest organically growing railroad in North America. Despite 2012 being characterized as a ‘bridge year,’ EPS increased 23% y/y on a forex ‘neutralized’ basis. We continue to see sizable growth opportunities in 2014 and beyond as near-sourcing, Mexican auto, crude-by-rail, and cross-border opportunities materialize (or reach “needle-moving” size), potentially driving upside to our estimates.”

Akin to this “crude by rail” theme, American Railcar Industries (ARII/$45.20/Outperform) is a leading provider of covered hopper and tank railcars. While the majority of ARI's revenue is generated through railcar manufacturing operations, the company also offers railcar repair, refurbishment, and fleet management services as well as non-railcar related industrial product manufacturing.

Along these same lines, the economy of Texas is booming, and one way to invest in the boom is via Susser Holdings Corp. (SUSS/$47.65/Outperform). Susser is the largest non-refining convenience store operator and motor fuel distributor in the state of Texas and the 11th largest company-operated convenience store chain in the U.S. As of December 2011, Susser operated approximately 541 company-owned c-stores and distributed gasoline and other merchandise on a wholesale basis to 565 sites. The majority of the company's owned and operated c-stores are located in Texas, an area characterized by above-average demographic growth trends and macro trends that favor the c-store industry.

Along this same line, FleetCor Technologies (FLT/$70.52/Outperform) gave an intriguing presentation. FleetCor is a leading provider of customized payment card solutions to the small fleet operator market domestically and overseas. The company offers fleet operators a charge-card for its drivers to use for purchasing gas and additional items at fueling and auto repair stations and provides fleet operators with detailed spending and other transactional data about their drivers.

Other presentations of interest included: Citrix Systems (CTXS/$74.43/Outperform); Brown & Brown (BRO/$30.68/Outperform); Insulet (PODD/$23.93/Outperform); Waste Connections (WCN/$35.03/Strong Buy); Stericycle (SRCL/$98.49/Outperform); Polaris (PII/$89.61/Strong Buy); and I am certain there are many more but I was too busy talking to accounts to see them. For further information on any of these ideas, please see our fundamental analysts’ recent company comments and the conference presentation summaries filed from our conference last week.

Turning to the stock market, last week the market celebrated its fourth birthday. That makes the current “bull” one of eight, in the last 80 years, that has lasted for more than four years. Of those other bull markets lasting more than four years the average duration has extended for about six years; so, those suggesting a “bull move” can’t last more than four years should be apprised. While the official “closing low price” date was March 9, 2009, the S&P 500 (SPX/1551.18) actually bottomed on March 6, 2009, at the “mark of the devil,” price of 666.79. Since then, the SPX is up 133%, but a few of the sectors are up more than that. Indeed, the Consumer Discretionary sector is better by 230%, the Financials by 193%, and the Industrials by 172%. Speaking to the Financials, in last Thursday’s Morning Tack I wrote about the negative divergence between the Financials and the Bank/Broker CDS Index. Adding to that cautionary note, the KBW Banking Index (BKX/56.59), a capitalization-weighted composite of 24 large banks, is as far above its 200-day moving average (see chart on page 3) as it was in mid-March 2012 prior to another pullback in the overall stock market.

The call for this week : Twelve of the 14 economic releases last week were above expectations. On the earnings front, 507 stocks in the S&P 1500 saw their estimates raised upward, while 615 were lowered. Meanwhile, lost in the shuffle is the fact the SPX’s trailing P/E ratio is currently at 15.25, which is a new 52-week high. While valuations can expand in a bull market, we are currently near the median P/E valuation of most normalized stock markets. Further, today is session 49 in the current “buying stampede,” with the longest stampede chronicled in my notes of some 50 years ending at 53 sessions. Therefore, pressing the “long side” from here has negative odds. That said, Buying Power has moved to a new high while Selling Pressure is at a new reaction low. Moreover, the Buying Power index is about to cross over the Selling Pressure index. According to Lowry’s, “Throughout the 75-year history of Lowry’s Analysis, such positive crossings have always been viewed as an important sign of strength.” Therefore, any pullback should be viewed as a buying opportunity.

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