Finding Value And Consistency In Consolidated Water Co.

Consolidated Water Co. Ltd. (CWCO) is a tiny company, with a market cap of only $172mm. As of its latest quarterly report ending Q3 2013, Consolidated Water was trading at 0.8x the value of net working capital. Over the past few years, CWCO has traded well under book value, but remains a small, relatively undiscovered stock. For those looking to diversify into a teeny utility company, Consolidated Water is certainly worth a look.

The stock is much more volatile than most utilities. Consolidated Water’s high beta of 1.5 is surprising, but not necessarily a deterrent. The high beta may be attributed to the small size of the company, enabling any investor with substantial buying power to push the stock up or down. The stock prices of significantly larger utility companies like American Water Works (AWK) and California Water Service Group (CWT) fluctuate much less, with lower betas of 0.29 and 0.42, respectively.

Other fundamentals that provide key insights are the P/E around 15 and the percentage of institutional ownership at 49%. As with other companies in the water supply sector…

—> To continue reading, please see the article on Seeking Alpha, where it was published. 

How the Stock Exchange Works

I subscribe to the weekly newsletter, which highlights excellent representations of data. As the name suggests, is a community of artists and designers who make data beautiful and easy to digest. Periodically the community branches out of their typical info-graphics (pictures) and into videos. This week, they sent out an excellent video how the stock exchange works:


Investing for the Average Person – Ignite Baltimore 13 Conference

Copyright Bruce F Press PhotographyEarlier this year, the Ignite Baltimore Conference Organizers selected my pitch for the 13th Ignite Baltimore Conference. Ignite Conferences are similar to TED talks – both provide a medium for passionate presenters to share their ideas. The format of Ignite is very rigid, and certainly lives up to the tagline, “Enlighten us, but make it quick.” Each speaker has five minutes to present 20 slides which advance automatically every 15 seconds. As a speaker, planning and practicing with this format in mind is essential.

My presentation, Investing for the Average Person, covered some misunderstandings, intimidation factors, and a simple investing example using index funds. The internet provides a multitude of ways to invest instead of leaving money to grow at a snail’s pace in a bank savings account. However, lacking financial education at all levels leaves many young people unprepared to navigate the countless number of investment products available to them. For the most part, much of the investing world focuses on more information than the average person needs to know. For basic investing, many people can disregard terms like derivatives, options, futures, shows like Jim Cramer’s Mad Money, and worries about large risks. The average person can largely ignore many of these distracting terms and media that is mostly focused on short term market news.

The example I presented demonstrated how an American named Sally could plan, save, and invest in index funds – a type of mutual fund – to finance a purchase of a new car. This example is not exclusive to a car, and could be applied to support retirement, a property, or savings toward a degree. Sally’s first step is to plan her investment. How much does she need for her car? Are there investment minimums she must save up to before investing? Questions like these will help Sally shape her investment planning. Once she has saved the needed funds, she invests her money and largely relaxes.

Sally planned to put half of her dollars into a stock index fund (such as ticker VGTSX), and half of her dollars into a bond index fund (such as ticker VBMFX). This plan is called a target investment allocation. Instead of picking a few stocks, investing in index funds diversifies Sally’s investment over hundreds of industries and sectors, which lowers her potential risk. For an average investor who does not care to analyze detailed earnings reports and study financial news, index funds are ideal. The only action Sally may need to take as her investment matures is to re-balance her investment back to the 50/50 target she initially planned. Sticking to her plan will help her stay on track and achieve her goal of a new car.

As I wrapped up, I touched on a few important concepts an average person should be familiar with: capital gains taxes, keeping a personal financial ledger, and inflation [Investopedia links]. With this basic knowledge, an average person will gain the confidence and organizational skills to invest their money and achieve their financial goals.

Rally Corp’s Recent IPO and Outlook

Rally Corporation (RALY) is a company based in Boulder, Colorado, and just had a very successful IPO in April. The offering price enjoyed a nice 30% bump on the day of the IPO, making any institutional investor who grabbed pre-IPO shares pretty happy. Rally develops software as a service tools for organizations that use the popular Agile Development Methodology. Agile is a methodology for teams to plan work into short “iterations” of a few weeks. This contrasts the traditional Waterfall methodology, where project requirements are defined and then developed over many months or years. Rally Corp is brand new to the public market, so the stock price doesn’t have much history for us to refer to, but we can look at the fundamentals to set the stage for our analysis. Rally is a tiny company with a Market Cap of just over 400 million, and has been burning through cash at a widening rate over the past four quarters, while increasing revenue at the same time. Founded in 2001, Rally has never been profitable, even with a strong upward trend in revenues and an upward trend in margins since 2009. Those encouraging trends may point to untapped potential and future returns. Let’s breakdown the software market, economic factors, and the company’s leadership before we make any conclusions.

Economic factors benefit Rally immensely. The Technology sector – the primary user group of Rally’s products – still enjoys unemployment around 5%, well under the national average. A healthy tech sector that shows no signs of slowing means more users, demand, and growth. Unlike the automotive industry, which is tied closely to overall economic health, Rally’s products are not cyclically tied to sweeping changes in the economy. Like other software services, adopting Rally’s core product can be a subject of great debate in a workplace, purely for the fact that software adoption is difficult to change quickly, and because software developers can be very opinionated. Just as a company can take forever to shut down a legacy system, a long time is needed to migrate away from Rally, especially in slow moving, monolithic companies that Rally is increasingly providing services to. For investors however, this ensures that Rally’s revenue stream will remain consistent and protected, thanks to the slow-to-change clients and the still booming tech sector.

Rally is the market leader in agile development software. The twelve year old company has an impressive customer list, with more than 1/3 of Fortune 100 companies as clients according to their S-1 filing. An important trend to consider that will continue to support Rally’s income is that more and more companies are adopting the agile development methods that Rally is designed to complement. The increased effectiveness of Agile shown by numerous studies has turned thousands of CEOs in all industries to lead their organizations to adopt Agile. With more organizations operating in the Agile framework,  Rally’s customer base continues to expand.

Regarding profitability, Rally has tried to expand its product line horizontally, by offering another SaaS product called Rally Portfolio Manager that plugs into the existing suite, but at an additional cost. I attended the company’s RallyON conference in 2012 before the company went public, immediately after the launch of Rally Portfolio Manager. Both users and employees admitted that the product was lacking in features at the time. While the Rally Portfolio Manager is the logical next step for the company, at this time I wouldn’t expect it to quickly start adding to the bottom line. I’m extremely familiar with Rally’s core product, and must admit that nothing is stopping another company from offering a similar product for a lower price – or worse – for free. The barrier to entry in the big business market is too great for a small start-up though, and such a competitor wouldn’t be able to pop-up overnight and immediately steal all of Rally’s Fortune 100 clients. From an investor perspective, due to the high visibility of the B2B software industry, any competing company will be seen and analyzed by Wall Street analysts well in time to make any trades.

The leadership at Rally Corp is exactly what an investor would like to see at a recently IPO’ed start-up. CEO Timothy Miller has been with Rally for the past ten years, continuing his career in technology. Ryan Martens, the Founder and CTO, has prior start-up experience and extensive experience in application development. CFO Jim Lejeal has founded and managed several companies, and has the most experience of the bunch in regard to publicly traded companies. These leaders are well-positioned to guide the company to customer growth and financial success.

The Fiscal Cliff and Your Portfolio

With the fiscal cliff looming, someone must be making money out there as the bears rear their ugly heads. Expect investors to go back to the commodity market for a base as the US government looks unlikely to reach a compromise in the next few days. I’ve noticed higher volumes in several commodity stocks over the past 3 days as the push for a compromise reaches a climax. My pick is STTYF, a company called Sandstorm Metals and Energy, which I expect to move into the new year with momentum, especially if the United States heads over the fiscal cliff. Sandstorm Metals and Energy buys contracts with mines to add commodities like copper and silver to their balance sheet at a fixed price.

Sandstorm’s CEO, Nolan Watson, recently gave a great interview with Seeking Alpha that provides insight into the company’s potential from the horses’ mouth. Keep an eye on this penny stock in the coming days as we head toward yet another financial meltdown.

A Little Company with a better ROI than Berkshire Hathaway

For those of us who aren’t day traders, keeping your long positions in check should always be a priority. Deciding on a long position can be daunting – so much analysis and information is available for mutual funds and blue chip stocks that finally taking a position rarely comes without a feeling of relief. Any good long position will rise in value and yield a nice ROI for the shareholder. Two excellent investments are Berkshire Hathaway and a micro-finance company called Microplace (acquired by PayPal in 2006).

Warren Buffet’s Berkshire Hathaway has delivered one of the best ROIs for decades. [Please note, any mention of Berkshire Hathaway in this article refers to BRK.B, which has a 1/1500 value of BRK.A. Both are forms of Berkshire Hathaway common stock.] Mr. Buffett certainly knows how to make his company look attractive at a glance. Berkshire is head and shoulders above other picks: a low beta of 0.51, unheard of earnings per share of $7073.35, and a as-low-as-you can get price to earnings ratio of 0.01. But what about the return? Between January 2002 and January 2012, shares have climbed 61%. An amazing gain, but the volatility of the past decade is hidden in this number. The biggest year-over-year gain for Berkshire during that decade was only 22%, and the biggest loss? -52%. Ouch. Average year over year return for BRK.B from 2002-2012 is a surprisingly modest 3.2%.

Microplace’s investment vehicles are a strategy that remains untapped to many investors. In a nutshell, investors can fund projects that help the world’s poor in four categories – rural areas, women, green, and fair trade. The initial investment is repaid at a set date and at a set return. Microplace must state the usual jargon about risk and that your investment may lose value, but as stated on their site,

“With the caveat that past performance is no guarantee, we’re proud to report that no issuers have defaulted on payments to MicroPlace investors since our inception in 2007.”

Since Microplace investments survived the chaos of the financial meltdown, investing in the world’s poor looks like the closest thing to a guaranteed investment as you can get. The return on investment for different funds ranges from 0.5% to 3.5% yearly.

Now that we’ve scratched the surface on Berkshire and Microplace, let’s compare them side by side in the following four categories: Access to investment, Investment Benefits, Risk, and Return.

Berkshire Hathaway (BRK.B) Microplace
Access to Investment Highly Liquid Highly Illiquid
Investment Benefits Benefits BRK.B Shareholders Benefits those in Poverty
Risk Moderate Risk Low Risk
Return 3.2% Average YOY 3.5% YOY (4 year notes)

Access to investment: Berkshire Hathaway
Like any stock, BRK.B can be sold with a few clicks. Compared to any investment in Microplace that cannot be touched until the expiry date, Berkshire handily wins any liquidity comparison.

Investment Benefits: Microplace
Microplace is really a revolutionary way to invest and allocate your money, and is clearly the more socially-responsible way to bring in a return. Beyond the direct impact, consider the indirect impact – you’ll be able to stand above any wall-streeter at cocktail parties. Mentioning that your money is generating interest while helping women, fair trade, and other causes in countries like Afghanistan, Haiti, and Zambia is sure to turn heads. Everyone owns stocks – few people are directly invested in helping the world’s poor.

Risk: Microplace
As quoted earlier, Microplace has never been snubbed on any money it has distributed. For investors that means their returns come with very low risk. On the other hand, if you invested in Berkshire in January of 2008, in one year you would lose 52% of your investment. I would call that risky.

Return: Berkshire Hathaway
Surprisingly, Microplace can provide a more consistent yearly return on investment (3.5%) than a titan company like Berkshire Hathaway (3.2%). The 3.5% return at Microplace is only attainable through 4 year FINCA Microfinance Notes, yielding a total return of 12.8%. Most other Microplace investments are shorter term, with a lower ROI. Berkshire’s higher potential return gives Buffet’s company the nod in this category.

Full Disclosure: I have previously invested in both Microplace and Berkshire Hathaway.

Exelon Greenifies their Power Portfolio

Utilities have always sparked my interest due to their extremely low volatility. Exelon (EXC) for example, has a Beta of just 0.53, making it fluctuate only half as much as the market. The recovery from the crash in 2008 hasn’t been so kind to Exelon and other utilities as it has been to other industries. Since 2007 the industry a whole has been down an alarming 27%, leading some columnists and publications to remain bearish on the energy sector. However, with Exelon’s recent purchase of Constellation energy and their management of the acquired assets, I believe the current price of $37 to be undervalued.

In 2011, Exelon Corp agreed to merge with Constellation energy – another energy provider based in the northeast. The merger instantly made Exelon America’s largest utility, and added a number of new plants to their portfolio. On Monday, Exelon agreed to sell its stake in 5 California power plants gained from the acquisition to the Japanese IHI corporation for an undisclosed sum. On the surface this looks like it would provide a boost to Q3 earnings, but let’s jump into the details a little further. Out of the five power plants, two were coal-based and three were bio-mass. The combined capacity of all five plants is 70 Megawatts, which is enough to power around 50,000 California homes. However, compared to the 17,000+ MW capacity of their 19 Nuclear power plants, the sale to IHI corporation is a drop in Exelon’s bucket. The sale will of course add more revenue, which at this point has not been quantified.

On August 9th, Exelon sold three coal power plants in Maryland to for $400m. Another sale of assets acquired by Constellation – But let’s dig deeper. Selling coal plants will not only increase Exelon’s cash on hand, but greens their portfolio of power generating plants. Why is this important? States can sue utilities for increased emissions level from their plants. The majority of US power comes from coal plants, but even clean coal is considered quite dirty by environmental groups. Dirty power pollutants have seen tightening regulations in recent years. Under the Clean Air Act, all coal plants must comply with tough new emissions standards by 2014. Exelon wins in two ways with this sale – $400m in the company and investor pockets and less revenue lost down the road to EPA compliance measures.

For the fiscal year 2012, Exelon projects that they will earn between $2.55 and $2.85 per share. Analysts expect the company to reach $2.75 EPS. As with many utilities, a big portion of investor gains from taking a stake come from the dividend paid and not just fluctuations in the stock price. Exelon’s dividend is yield is a healthy 5.61%, greater than 89% of it’s electric utility peers. The company has a long history of consistent dividends which shows no signs of slowing. With Exelon realizing the gains of plant sales in Q3 and a strategy focused on green energy, expect their stock to outperform the market.

Full disclosure: I currently have a stake in Exelon Corporation. I do not plan sell shares or buy any additional shares in the next 72 hours.