While we may be unabashed in our enthusiasm for Socially Responsible Investing (SRI) that does not mean we look at Green stocks with rose colored glasses. In truth we devote more time and attention, plus number crunching to make sure the holding is justified and meets our financial criteria.
Case in point is Gaiam Corp. (GAIA)
Company description: “Gaiam, Inc., a lifestyle media company, provides a selection of information, media, products, and services to customers focusing on personal development, wellness, ecological lifestyles, and responsible media. The company engages in content creation, product development and sourcing, customer service, and distribution. It operates in three segments: Direct to Consumer, Business, and Solar segment. The Direct to Consumer segment provides an opportunity to launch and support new media releases; a sounding board for new product testing; promotional opportunities; a growing subscription base; and customer feedback and the lifestyles of health and sustainability industry?s focus and future. This segment offers content through direct response television, catalogs, e-commerce, and subscription community services. The Business segment provides content to businesses, retailers, international licenses, corporate accounts, and media outlets. The Solar segment offers turnkey services, including the design, procurement, installation, grid connection, monitoring, maintenance, and referrals for third-party financing of solar energy systems. This segment also sells renewable energy products and sustainable living resources; and offers residential and small commercial solar energy integration services. Gaiam, Inc. sells its products in the United States, Canada, Mexico, Japan, and the United Kingdom. The company was founded in 1988 and is headquartered in Louisville, Colorado.”
Current Price $6.61
NCAV $2.88
Intrinsic/Discounted Cash Flow Value $10.67
Price to Book: 1.0
Book Value $6.45
Cash per share : $2.07
LT Debt $0
Market Cap $156 million
Piotroski score: 7 out of 9 (which is good)
Altman score 5.7 (little chance of bankruptcy)
GAIA is a small cap retail stock focused on the lifestyle/yoga market/alternative energy in Colorado. The stock has pulled back along with the market albeit at a faster pace for the past two months and in our opinion is nearing a very attractive valuation as it begins to touch Book Value along with minimal expectations.
The company has met or exceeded analyst expectations for the past year and current and 2011 estimates have been firm. However this stock is thinly traded and there is only one analyst following the stock.
Back in late 2007 and 2008 when the consumer was empowered the stock traded in the high $20’s and topped at $30. The company posted a loss of (.08) for 2008 The stock does seem to be volatile long term and has a bust / boom personality as it trades in sympathy with the economy. We don’t envision that the US consumer is completely on its back:
“socially acceptable deleveraging needn’t entail the pesky inconvienence of forgoing consumption.”
Revenue growth does appear to be making an improvement with sales improving 14.8% year to year.
A comparison to competitor Lululemon Athletica (LULU) shows the contrast between the much loved LULU and the loathed GAIA. Eco-cache has a cost in terms of potential return:
Current Price $38
NCAV $2.38
Intrinsic/Discounted Cash Flow Value $12.5
Price to Book: 10.4
Book Value $3.79
Cash per share : $2.45
LT Debt $0
Market Cap $2.7 billion
Piotroski score 7
Altman Z 44 (excellent)
To be a successful investor frequently means to cut against the grain of popularity and think in terms of buying a business cheaply. LULU is an excellent example of the price you pay for “Glamour” to own what is currently in fashion and popular. No doubt there are many unhappy GAIA shareholders at present but we believe there will be a Reversion to Mean Valuation which in our definition would be appreciation above DCF valuation ($10+), a level GAIA sustained during the economic expansion of 2003 to 2007. In addition, GAIA is a candidate for tax loss selling within the next 3 to 5 months which could be the catalyst to drive the price lower.
In sum, GAIA represents good value at present however the company’s volatility requires an even greater discount to intrinsic value/DCF than the current price offers, but we’re near those values. A move in price below $6 might just be the opportunity for longer term investors comfortable with the risk of a consumer cyclical company with a very Green edge.
No positions
Brad Pappas
The media has devoted a majority of attention to the current soft patch in the economy to the point where the rare Double Dip Recession seems a predetermined conclusion. Double Dip recessions are rare but talk about them is not. To add to the popularity of deflation chatter is the drumbeat of Bernanke-san economic commentary from Paul Krugman at the NY Times. However we must keep in mind that the data do not support a double dip recession at this time and talk of deflation in 2011 is simply too far out with too many potential variables to contend with. The irony is that last week the IMF raised its outlook for worldwide GDP growth for 2010 from 4.2% to 4.6% while keeping the 2011 estimates steady at 2011. Someone forgot to tell them of the impending double dip.
We live in a very confusing period and I’d be on guard for any person or firm that knows exactly what will happen in the future. To balance out this negative media attention is the fact that investor sentiment is now at the lowest level since March of 2009, and we know what that lead to. Negative sentiment is a good thing, especially from groups of investors who are notoriously wrong way traders who assume that the current trend will continue forward.
Last week the American Assoc. of Individual Investors (AAII) data revealed that only 21% of its members were bullish which is one of the lowest readings in the last 15 years. Bullish figures this low generally halted a move lower in stock but more frequently led to rallies of significance in 2003, 2005 and 2009 where six months later the average gain was 8.1%.
This data is confirmed by Rydex Traders who are now at a level of bearishness rarely seen. When the Bull/Bear ratio dips to .88 or below the forward return on the SP 500 has averaged 5.9% three months later with 79% of the time periods producing positive returns.
Too add to the incentive for a rally is the relative overvaluation of bonds relative to stocks along with the significant underexposure to equities by retail investors and hedge funds. Should a meaningful rally begin to form (we believe it already has) then both retail and hedge funds could pile on at a rapid rate using bonds as a source of funds. This asset allocation shift from bonds to stocks could be ferocious and rapid, about as fast as LeBron James plummet in popularity. Hence, beware of treasury bonds right now. Treasury bonds have their rightful place in portfolios but not at this time IMO.
According to Jason Goepfert at sentimenTrader.com: The last time S&P futures gapped up 1% after five straight up days was September 2006. There were two other times in history (March 2003 and September 1996) where this occurred. Both dates marked the launch of bull markets.
Be careful out there.
Brad
No positions
Bond markets can be a great barometer of whether we’re recession bound or not. While its impossible to defend the argument that the economy has softened rapidly over the last two months, the bond markets with the exception of the Treasury market do not indicate a recession. However, if you’re unemployed or significantly underemployed this is merely a matter of semantics.
We’ve noted the appearance with deference to the Gloom and Doomers, Bob Prechter and Nouriel Roubini. I’m afraid the days of economists in tweed hunkered down in their academic offices are long past, not when the bright lights of media attention beckon. But Roubini is back and without a conscience just as he was in the Spring of 2009 predicting doom. Does he acknowledge being wrong in 2009? Hardly not, not when he can milk the media for his call in 2008.
But if Mr. Roubini is correct in his depiction of doom in the economy then why are Baa and High Yield corporate bond yields not rising sharply? Corporate bond yields are a great barometer of impending economic turns. Yields have risen before almost every recession. Baa yields have risen less than 20 basis points recently and High Yield which can get downright whippy have risen only about 100 basis points from 9% to 10%. Clearly the message of the bond markets is much smoother than the message of the equity markets.
Well, that was quick……………TSLA breaks thru the offer price!
There may come a day when we’ll consider Tesla as a candidate for investment but in order for this to happen we’d need to see significant balance sheet improvement along with real revenue and profits. In the meantime it remains a developmental stage company.
If Rush and Sarah can extrapolate the conclusion that Conservationists are to blame for the BP disaster (by forcing rigs to go farther out to sea which induces a higher potential for hazard). Then, couldn’t the Left state that the austerity measures being promoted by World governments including the Obama administration based on pressures imposed by the Tea Party Movement and similar organizations could impose a severe Double Dip recession as theorized by Paul Krugman?
Be careful out there
BP
No Positions
Stock futures are signaling weakness in US markets this morning with the catalyst being China. The Conference Board revised its leading indicators lower for the month of April to the lowest rate of growth in 5 months. The Shanghai Composite is down 4.3%. We keep in mind that the China GDP grew at an annualized 11.9% in the 1q which is a risk to overheating, a more moderate GDP growth in the 7-8% range would be welcome longer term.
In addition the highly anticipated offering of the Agricultural Bank of China has been pared back which has not helped investor sentiment.
One note we’d like to express in our view of socially responsible investing and China. In our view investing in China is split between state owned businesses like the Agricultural Bank of China and those owned independent entrepreneurs and businessmen free of state ownership. We have no interest in owning state owned companies where the proximity to the Chinese government is too close for comfort. We only consider companies free of state control.
Market Commentary: Pessimism in US markets is quite high now and cycle projections indicate a rally in US shares could commence very soon. However, I believe this is a rally that should be used to lighten equity holdings as September is generally the worst performing month of the year. Market action in the September/October time frame will be very important going forward. Should the market stage a significant sell off in September/October it may create the combination of very attractive valuations and high degree of pessimism (a market positive) that could propel stocks higher into 2011. Should the September/October weakness be shallow or non existent it will likely be borrowing from 2011 upside potential which will increase the odds of a bear market in 2011.
The 10-year Treasury bond is gaining a great deal of attention this week as it approaches the prices of early 2009 when our economic outlook was in question. There are other possible reasons for this move which include the US being a haven of security from European sovereign bonds. Regardless this move higher bears watching:
“Malaise” seems to be the word of the day as markets cope with incompetence in both business and political realms.
Will the leak caused by BP in the Gulf ever end?
Will the war in Afghanistan as highlighted by Rolling Stone ever end or remain in FUBAR?
Will the Obama administration ever make job creation are real priority rather than lip service?
Will China (which is much more important than Europe) achieve the soft landing in its economy?
Despite the chatter about “double dip recessions” economic data just doesn’t support the dd premise. Growth isn’t robust but it moderate and lumpy and expectations have pulled back sharply in expectations since the start of the year……..a good thing.
Capital Goods orders were up 2.1%.
Durable goods orders were up 0.9% and now have been up in 5 out of the last 7 months and up to 20% ytd.
“Malaise” as been bantered about now on CNBC and Jim Cramer is not the type of attitude existent at market tops but more often at market bottoms when economic blemishes are visible to all and the bulls have turned to bears.
The soft patch we find ourselves in presently could change in quick order should something good happen.
Earnings have been growing nicely but have been largely ignored this year. We’re using an earnings estimate of $90 for the S&P 500 in 2011 which makes the market 12x times 2011 earnings. Historically the S&P has been nominally valued at 15.3x earnings with comparable interest rates and inflation, and up to 17x. There is significant upside potential looming and with negativity growing rapidly the bottom in the current correction may be soon. My best guess is the “real” rally would likely be in the 4th quarter but the risk at present is not great by my estimation.
“In speculation, interestingly enough, contrary-mindedness is often a virtue. A layman might suppose that profits lie with the majority. Because the mass of people have the weight of the money, he might imagine that the crowd would tend to be on the winning side of things. Not for long, in my experience. If the majority confidently knows something, that one thing is probably already reflected in the structure of prices, and the market is vulnerable to a surprise. Markets are moved by the unexpected and the unexpected is what the crowd isn’t anticipating. The financial future may be imagined, but it can never be positively known. What people know is the past and present, and they often project the familiar out into the unknown, with unsatisfying results”
— Jim Grant, Minding Mr. Market: Ten Years on Wall Street With Grant’s Interest Rate Observer
Interesting story on whats under the hood of SRI ETF’s:
Buyer Beware: What’s Really in Your Socially Responsible ETF?
Summer doldrums markets as participants are waiting for the FOMC message later today. While few expect any real change, the tone reflected in the post meeting communique tends to move markets.
NDR continues to predict that no Double Dip recession is on the horizon. Their Recession Probability Model remains at 0%. Economic activity advanced in 47 states in May and over the past three months.
Industrial Goods manufacturer Hawk Corporation (which we have a position in for clients) makes fuel cell components has raised their 2010 guidance based on an improving economy. The stock is responding nicely up $2 to $23.
Chinese Health Club owner Soko Fitness and Spa SOKF may be finally coming to life on news of two new facilities in the Harbin area. Soko is an example of a company where the valuation is hard to ignore with earnings capable of .50 cents a share in 2010 and .80 or more for 2011. While the stock has done little in light of the weakness in the Chinese stock market it has held up reasonably well. Should present growth rates continue for another year the valuation would be very compressed. Selling at just 2x book value and 7x present earnings with no long term debt, .70 in cash along with +50% revenue growth and 80% member retention rate this has some serious potential. But beware SOKF can be volatile and isn’t heavily traded with a big spread between bid and offer.
From the Carbon Disclosure Project: Corporate Clean Energy Investment Trends in Brazil, China, India and South Africa pdf
Long HWK, SOKF (client and personal accounts)
