Digging Deeper into Four Picks from Cramer's Lightning Round
Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Do-it-yourself stock traders can get useful investment ideas simply by watching Jim Cramer's Mad Money show. Cramer has one goal: to help investors make some “mad money.” How? By presenting market insights and suggesting investment opportunities. During the Lighting Round, he makes a call on viewers' picks. He only needs a few seconds before making a call, but I think we should take some time examining his ideas. Here, I review four stocks discussed on the Dec. 3 Lightning Round.
First on the list is Duke Energy (NYSE: DUK). Cramer says he likes it, and I think he should. With a market cap of over $40 billion, Duke Energy is the largest electric power provider in the U.S., delivering electricity and gas to more than 7 million U.S. customers. The firm also owns and operates generation and power retailing businesses mainly in the Midwest, as well as hydroelectric generation assets in Latin America.
For the third quarter of 2012, reported diluted EPS declined by 19.8% due to a substantial increase in the weighted average number of outstanding shares. Nevertheless, its overall quarterly performance was impressive. Duke Energy ended the quarter with total liquid assets of $10.1 billion. Its latest financial report demonstrated an almost 26% year-to-date increase in net profit. Duke Energy could be an intriguing stock for a dividend-oriented investment portfolio. The company is a solid dividend payer of $0.765 per share, which translates into a yield of 4.8%. As of Sept. 30, 2012, the balance sheet showed a $1.55 billion differential between total current assets and total current liabilities. This should be enough to support the current dividend yield. In addition, Duke Energy aims to grow dividends within a 65-70% target payout ratio, gaining extra points among long-term investment choices.
Cramer made a bullish call on SandRidge Energy (NYSE: SD), but I disagree. I find SandRidge to be a rather risky investment mainly due to its huge debt pile. The company's primary operations focus on the exploration, and development of oil and gas properties. It holds valuable assets in the oil-rich Permian Basin and the Mid-Continent region. Other operational activities take place in West Texas, the Gulf Coast, and the Gulf of Mexico.
With its shareholders losing faith in the company's management strategy, SandRidge is swimming in turbulent waters. TPG-Axon Capital, one of the firm's top shareholders, recently called for the removal of CEO Tom Ward. Following TPG-Axon's example, Mount Kellet Capital Management, sent a letter to SandRidge's board of directors urging significant management changes.
Tom Ward took the reins of the company in 2006. He is one of the highest paid American CEOs, with his compensation reaching $150 million over the last five years. At the same time, SandRigde's stock price has been following an unstoppable downward trail. After reaching a peak of $65 in June 2008, the stock has plummeted and lost over 75% of its value. When gas prices collapsed, Tom Ward decided to make a shift towards liquids, and acquired substantial assets. These assets may provide significant returns in the long-term. However, they have caused serious cash flow bleeding. SandRidge's trailing free cash flow to net income ratio is negative by 22%. If SandRidge wants to achieve a turnaround, it really needs to deal with its expenses.
When a viewer mentioned Frontier Communications (NASDAQ: FTR), Cramer immediately rejected it. All he said was, “I only see pain ahead.” I would suggest a “hold” rating. Frontier Communications is a leading provider of communication services to residential and business customers across 27 states.
In an effort to strengthen its balance sheet, Frontier decided to cut its dividends by 25%. However, over the last five years, Frontier Communications has rewarded its shareholders substantially by offering an average dividend yield of 11.60%. As of September 2012, the stock yielded 8.50% with a payout ratio of 40%. For the first half of 2012, Frontier performed poorly and dropped from a stock price of $5 in January, to slightly above $3.50 by the end of July. Nevertheless, since August the stock has been on a comeback trail and has returned over 30%.
At the moment, Frontier is trading with a 7% discount to sales and 31 times trailing earnings. While its current P/E ratio might be quite pricey, its forward P/E ratio of 18.84 is relatively attractive. Out of eighteen analysts tracked by Wall Street Journal, only two suggest a “sell” rating. The other sixteen are torn between “buy” and “hold” ratings. Overall, the company is pursuing an aggressive growth strategy trying to remain at the forefront of the industry. This strategy is proving to be fruitful. For the third quarter of 2012, Frontier reported an operating income margin of 22%, up by 8% compared to the same period in 2011. Also, since the beginning of the year, the average monthly revenue per customer has increased by 3.3%.
Last on the list is Linn Energy (NASDAQ: LINE). Cramer thinks it is terrific. Investor sentiment is also positive about it. Based on analysts' mean target price of $44.29, Linn has at least 18% upside potential. Also, EPS for 2013 is estimated to grow by more than 28% indicating a rewarding outlook for shareholders. I think that, at current valuations, it might not be such an attractive investment. Linn is trading 6,500 cash per share. ROE is negative by more than 10% suggesting that the company's ability to generate profit is questionable. Linn Energy operates as an independent oil and gas development company. Its primary properties are located in the Appalachian Basin, the Mid-Continent, and in California. As of December 2011, it had approximately 5.1 Tcfe (Trillion cubic feet equivalent) of proved reserves in producing U.S. basins.
Over the last five years, the company had a robust sales record. Its sales followed an impressive upward pace and grew by more than 66%. However, Linn's financial performance lacks any kind of discipline. Linn has a debt-to-equity ratio of 1.92, which is significantly higher than the industry's median of 1.2. The company's current assets have increased from $434.0 million at the end of 2009, to $836.0 million by the end of September 2012. In other words, since 2009 Linn's total current assets have almost doubled. At the same time, Linn's total current liabilities accelerated fast enough to overshadow the increase in assets. For the third quarter of 2012, total current liabilities stood at $860.9 million. This amount certainly imposes a significant burden on the company's future growth prospects.
ecofinstat has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!