CPB, Campbell Soup

February 17, 2016 Hamilton

Campbell soup doesn’t just make soup, they are in dozens of other food lines as well. The recipe for their chicken soup is no doubt top secret but we suspect that you start with a swimming pool full of water, add a truckload of salt, and fly a chicken over it. Tweak that with a dash of pepper and vwala you have 10000 servings. But that is not why you should sell this stock, even if, after 28 years you are still under water by 65 cents. Here is why you should:

1. It has a P/E north of 29, about twice the average. This is not a growth stock (see 10).

2. It is about to double top, always potentially a critical point in a stock’s life.

3. There is a plausible wave count that suggest everything after 2003 is a B-wave, C is next.

4. The stock is in the vertical stage, always a non-sustainable or terminal stage.

5. The stock is trading above it’s channel of 35 + years, see what happened last time.

6. Because the stock outperformed the S&P by 38% last year.

7. Because we are at a critical Fibonacci number in the stock’s price.

8. Net income declined by>20% yoy, and was just 62 (Fibo.) cents per share last quarter.

9. The 2.05% yield is less than the 2.20% on a risk-free treasury bond of 20 years.

10. The company is starting a venture capital business to find “growth”!

11. Analysts downgraded the stock on Jan.16 2016 from buy to hold. Are they right this time?

CI, Cigna again, to log or not to log.

February 17, 2016 Hamilton

Recently I was asked when you should use a semi-log scale chart or an arithmetic one. There is no simple answer but EW is very much about good looks, that is beauty is in the eye of the beholder. Here we have Cigna, a healthcare/ insurance company that we looked at many years ago. We identified, correctly, the correction in 2001/2 and called for the stock to rise substantially to $37 from $15. The $175 level was not on the radar.

Revisiting this stock today, it is hard to make sense of the meteoric rise over the past 6 years, about 30x. Is this Obama care? Low interest rates? Or just a fluke? This is when a semi-log scale is appropriate (on the right) as it compresses the chart and gives you a better sense of proportionality. All of a sudden we get a nice channel and a plausible wave count. The stock clearly has peaked or is peaking.

The other side of the channel is at about $55, and the 4th wave of previous degree at $6 to $15 depending how you count. Either way this must be a sell.

EFN, Element Financial

February 16, 2016February 16, 2016 Hamilton

The fellow that runs this company, Steve Hudson, was the founder of Newcourt Credit, a company that got into a little bit of trouble many moons ago. At one point, if I remember correctly, it’s instalment receipts were trading at a negative value. It, as is EFN, was involved in equipment, mostly cars, trucks, planes etc., leasing, financing whatever. The business model is that you can finance at a lower rate than the operator can, or alternatively can depreciate faster or operate more efficiently. In order to do this the collateral value of the equipment must at all times exceed the amount needed to finance it. In a recession or depression this is often no longer the case and that is when your external financiers no longer return your calls, or worse, start calling you.

This stock went up 5-fold in as many or fewer years. Some of the business was bought in big chunks, for instance from GE. Lower financing costs have been a God send, but things may be changing. The run up since inception is a clear 5-wave sequence. This is confirmed by the 4th wave triangle. So far there is a clear 1-2 down followed by a third wave which does not look at all finished. And all this is just wave A. Sell after a bounce to maybe $14/$15. First waves are normally retraced almost entirely.

Shanghai, China update

February 16, 2016February 16, 2016 Hamilton

We view the rise of the Shanghai index above 5000 last year as a B-wave, a correction in other words. Consequently we expect the entire rise, and perhaps some more, to be retraced. We have heard as many excuses why this is not an overvalued market as we heard when the Nikkei traded at a p/e of, I believe, something like 70X. Other arguments are , of course, that the p/e is only one out of many metrics or that you have to do it looking forward rather than backward which puts you into a circular argument.

The reality is, according to “the Simple Truth” as per Business Week/ Bloomberg is that the p/e, even after this almost 50% drop, is still at 57X. Even if we give China a p/e equal to the average/mean of about 17x and add 7% growth, we get about 24, say 25. That is roughly, very roughly, one half of where it is now. The implication is that if the p/e were to drop to a still high but “normal” level, still double Hong Kong’s or Canada’s, the Shanghai index could fall to about 1400, besting it’s 2008 low marginally. Since this index comes from 6000, 1400 would be about 1/4 of the peak value which is not substantially different from what the Nikkei actually did during the first 13 years of it’s drop. We are great believers in the adage that there is seldom something new under the sun. For your convenience, we repeat our blog of June 26, 2015;

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