Looking at this week’s market moves so far, Energy (+7.59) & Materials (+3.66%) are the leading sectors, followed by Industrials (+1.92%) & IT (+1.65%).
Earnings results & oil price issues have caused some of this movement, but it is further reinforcing that people are looking for companies with lower debt, more cash and or better & safer dividends.
The Materials & IT Sectors offer this, as both have similar Debt/Equity Ratios, and where IT has high levels of cash, Materials are offering above average yields at safer Payout Ratios than most other sectors.
As I mentioned earlier in the week, I purchased shares of Advances Emissions Systems Inc. (ADES Ticker), a Micro-cap value play that filled on Tuesday at $6/share (+9% so far EOD).
Names like these should continue to thrive under these lockdown conditions, as folks will continue to seek stocks that are value-oriented, and that offer better interest in their yields than other assets are currently offering.
Financials (+.09%), Consumer Discretionary (+.32%) & Real Estate (+.7%) have all performed the worst so far this week. I don’t know that I’m ready to go deep diving into that end of the pool just yet, but will be certainly looking at those companies over the weekend.
Coming up on Friday, I’m not expecting much from tomorrow, unimpressive numbers across the board continue to show the fragility of the market, and today’s morning bump, afternoon pump was certainly reassuring on my short positions.
Seeing things like Tom Hanks typewriter message kids on CNBC after the market closes also doesn’t reassure me that we’re out of the woods just yet…
Expecting to see folks sell off risk into the weekend, especially given the number of companies set to report earnings tomorrow. Let’s see what happens!
*** I have a long position in $ADES, as well as Short positions against the S&P 500, NASDAQ & Russell, & also am Long Volatility, related to the above article***
This week I had a look into Advanced Emissions Solutions Stock, which trades under the ticker $ADES. ADES is a micro-cap stock that offers strong fundamentals & an excellent, safe dividend yield. I conducted my research over the weekend on 4/20/20, when the price was at $6.66, and all numbers in this article are reflective of that date.
ADES Stock Offers Strong Fundamentals
ADES trades at a P/E (ttm) of 3.5 & a P/B of 1.13, with a Beta of 0.9. These are very attractive levels, especially when compared to the averages of their Sector, Industry & Sub-Industry (below).
Their lower than average Beta ensure less volatility, with steady growth coming mostly from company performance, given that it is a Micro-Cap with an Estimated Market Cap of $122.3M.
Given the market fallout from COVID-19, there has been a noticeable shift into stocks that have great fundamentals, good, sustainable dividends & low-levels of debt in comparisson to their cash levels.
ADES’s Total Cash (mrq) is $12.08M, with a Total Debt (mrq) of $49.56M & a Debt/Equity (ttm) of 45.76.
Despite their small size limiting the potential for larger investors, ADES still has a 68.82% Institutional Ownership.
Examining ADES’s Stock Dividend
One of their most appealing fundamentals is their generous 15.01% Dividend Yield, which is paid out quarterly. What is especially appealing about it is that their Payout Rate is 49.99%, showing that they should be able to maintain that high level of interest payments to holders of their stock. In turbulent times this is especially helpful, as it provides a performance cushion if you intend to hold it for the entire year.
How ADES Stock Compared To Other Materials Sector Stocks
ADES stock costs 51% less than the average Materials Sector stock, trading at an 85% lower Price-To-Earnings Ratio (ttm), and 56% less than their Price To Book Value.
Their Dividend Yield is 230%+ better than the average Materials Sector stock, with a 4.15% better Debt/Equity (ttm) Ratio & a 57% higher than average % Institutional Ownership, all very strong metrics.
Their Payout Ratio is higher than the average, but still is maintable, which shouldn’t worry investors, and as mentioned earlier, as they are a Micro-Cap stock their Market Cap is 96% less than average, as is their Total Cash.
How Advanced Emissions Solution Stock Compares To Other Chemical Industry Stocks
When compared to the Chemical Industry average metrics, ADES has a 80% lower price/share, with an 81% lower P/E (ttm), a 48% lower P/B, and a fantastic 193% higher Dividend Yield, paying out 37% higher than average.
Their Beta is 28% less than average, partially because they are 97% smaller by Market Cap than the average Chemical Industry stock.
Despite this, as their Debt/Equity is 37% partnered with the above advantages, they have 21% more Institutional Ownership than the average Chemicals industry stock.
ADES Stock Vs. Specialty Chemicals Sub-Industry Stock Fundamentals
ADES is also a much stronger player than the average Specialty Chemicals Sub-Industry stock. Price/Share is 86% less, with an 83% less P/E(ttm) & a 59% less P/B.
Their Dividend is 362% higher than the average Specialty Chemicals stock, with 14% higher Institutional Ownership & 59% better Debt/Equity (ttm).
Their 31% lower Beta makes these numbers especially appealing in these tough times for the market.
ADES Stock’s Historic Performance Vs. The S&P 500 & NASDAQ
ADES Stock has grown 56.41% since it first started trading on 1/23/04, and for 3 years (12 quarterly payouts) it has yielded a dividend of ~15%, totaling 101.5% in growth.
The S&P 500 has grown 150% over that same period, however when you compare the charts and consider the fundamentals & company type, there is a lot of opportunity to outperform.
The NASDAQ has grown 307% in that time.
Examining ADES Stock’s Technical Metrics & Chart
ADES’s 10-Day Moving Average is $6.42, with its 50-day Moving Average at $8.21 & it’s 200-Day Moving Average of $11.24.
This is weaker than the average across its Sector & Industries, which is why it is a good time to begin looking at an entry-point while it establishes it’s bottom in weakness.
Overall Assessment Of ADES
I like the fundamentals of ADES, especially when compared to it’s peers. While it’s technicals aren’t looking too great, neither are the rest of the markets’, and it appears that this is an opportunity to buy a fundamentally strong company at a great discount.
After finishing my research I placed a Buy order to fill at $6/share, which filled yesterday morning around 11:30 AM.
I plan to hold onto this for a while, as it’s 15%+ dividend yield is a great safety cushion given these volatile times if I hold onto it for the year.
Plus, a micro-cap name like this just needs a couple of big headlines to takeoff running, as typically these companies are lesser known to most traders/investors, which provides extra strength once they make the news for good reason and everyone comes piling in.
*** Please note that as mentioned above I have a long position in this stock, and always conduct your own due-diligence before marking investments & trades ***
It’s been an interesting few weeks in the markets, and it seems that most folks agree that they don’t know exactly where to go next. Fundamentals have been skewed for years, and technicals on the charts have become a bit muddled; adding to the fog.
We’re entering more bearish times, which will become messier by Federal Reserve intervention, energy prices (Oil going negative today), and bond prices all re-adjusting as people begin to follow what debt the Fed will be buying.
Add in earnings that now include COVID-19 lockdown time, and things become ever the more unclear. Here’s what we see:
Stocks To Decline Further As Investors Seek Cash & Safe Yields
We have been short Indexes as well as long Volatility for the last month or so (took a trading hiatus for 6 months for work/personal reasons), mostly utilizing inverse-leveraged ETNs & ETFs. The markets were already running on fumes & being propped up by easy-money policies & headlines more-so than any fundamental value, and the “Economy Time-Out” being imposed by most governments has caused a rush for cash, and is starting to weed out the weak from the strong.
This will make value-investments all the more important, as they focus on financial strength, blended with interest offered through Dividend Yields, and the yields’ sustainability. I’ve been analyzing 6000+ companies recently, and the trend is clear that people want safety in companies that are of high value; solid balance sheets, good debt ratings & offering a yield cushion for any future falling. Small caps may offer additional safety, as they will be less likely to move with the market, and move more based on performance. I’ll be posting notes on a new small cap value pick tomorrow.
Earnings Season Is Upon Us, What’s Next?
This earnings season will be particularly interesting, as most companies have not been posting incredible Y-o-Y improvements in their reports as it is, and now they are going to have to face the same obstacles, with a virus stay at home ruling in place. Before we go any further, remember that next earnings season will likely be even more painful…
With already limited wiggle-room, companies now have to account for additional loss of business, which will make even more issues for traders & investors.
New modeling will be forced to be done to account for so many anomalies occurring at once, and algorithms will still be running rampant, which may create additional volatility once things really kick off ($IBM is currently down 1.32% after hours as I type this)…
This may help shorts in the meantime, which are increasing again, and will create great entry points for value stocks in the near-term. The weaker companies will now start to become exposed, making money that has to earn money retreat to tried & true value picks.
How To Navigate Earnings Season For Stocks This Time Around
Numbers as we know with most companies are already manipulated a bit… now we must factor in adjustments being made for things that don’t have much previous data to model around. With such limited sampling, things will become much shakier than usual, again influencing investors into higher value names.
We recommend using your existing stock measurements for the last 1-3 years, and comparing them to the earnings moves of this quarter for themselves, their sector, industry & sub-industry to see if you can potentially draw up any trends. It’s not a perfect system by any means, but this is a time where the basic principles of KISS become even more important (Keep It Simple, Stupid…)
Remember, the trailing proven numbers are much easier to adjust than forward looking estimates… use these items for baseline benchmarks as well in comparison.
Stocks & Sectors We Like
As mentioned prior, most of the current holdings are in securities such as TVIX, SQQQ, SPXS, & RWM for the volatility and shorts portfolio. This also contains a position in Prospect Capital Corp (PSEC), as well as a order for Advanced Emissions Solutions Group (ADES) that has yet to be filled based on a sub-$6 price target (post to be published tomorrow).
The thought behind this is that the high, yet (relatively, due to PSEC’s payout ratio, ADES looks highly sustainable) sustainable yields can provide more cash to take advantage of the continuing downtrends, as well as to set up long-term value positions with leveraged long-ETF positions as well for the rebound.
As far as a sector that we think shows promise as a whole, Materials & Financials seem to have some opportunity for current growth, as well as long-term facing growth. Both are reading in at the lower end of better-valued sectors, with the exception of energy which is still a bit of a gamble. They offer safe yields, solid cash & lower debt, while being some of the underlying bigger players in the near-mid term future as the economy has to kick-start, no matter how it is done.
