State of Play for January

Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With markets toying at all-time highs I have decided to take some money off the table, with the intention of buying into the next dip.  The S&P hasn't qualified itself as in 'profit taking' territory as defined by my Investment Strategy, but a little bit of wiggle room is allowed!  I also think the next dip will not reach the depths I like for a low-risk buy, so it will be a matter of watching the market and looking for opportunities as they appear.

I did close one position I own: Pilgrim's Pride (NASDAQ: PPC) has served me well, and reached the goal I was looking from it.  I did not add to the position on October's earnings, but the stock did manage to handily beat estimates and report a profit, when it had looked like - to me at least - a big loss was on the cards.  Analysts are looking for a next quarter loss of -$0.11 per share, so it's not entirely out of the woods.  The company emphasized its improved debt and liquidity position, which gives it some leeway of riding out tough events like this past summer.  An interesting snippet from the conference call was the idea of buying chicken in, rather than growing more chickens.  This would improve margins and better optimize inventory, where prior excesses in chicken production were marketed in its prepared food division.  It would also leave it less exposed to vagaries of feed costs. 

Pilgrim's Price sources 10% of its corn needs from South America at "competitive pricing," and is looking to source an additional 10% from this market to help offset what is sees will be continued high pricing for corn and soybean meal into 2013.  High feed prices have troubled the stock in the past.  The remaining 80% of its feed requirements will be subject to market forces, and the company did note such challenges for the next quarter.  The company had an increased spend of $56 million on feed in the last quarter, but managed to offset the cost in earnings with a 1.4% increase in sales and a strong export market (Mexico in particular, despite avian flu), which helped reduce inventory.  In light of this, Pilgrim's Pride has doubled in price since I last wrote about it in October.  While it could go higher, a current P/E of 30.5 (compared to an Industry average P/E of 16.3) with a loss expected next quarter means I am happy to take my position off the table for a very handy profit.

The two other stocks I hold from my Fool collection are Atlas Pipeline (NYSE: APL) and Freeport-McMoRan Copper (NYSE: FCX).  These were featured in March of last year.  I have made around three purchase lots into each, holding Atlas Pipeline at an average of $31.18 a share and Freeport-McMoran Copper at $33.92 a share.  Unfortunately, both stocks trade below their feature price and have significantly underperformed against the larger market.  However, I would still be considered a 'buyer' of both stocks, but I think both will trade cheaper in the months ahead.

Freeport McMoRan Copper is the weaker of the two.  The miners, as a group, have suffered inversely to the rise of all other sectors in the S&P.  Freeport McMoran has been somewhat insulated as its primary focus is base metals, but increased pressure on U.S. treasury yields translates to lower commodity prices (priced in dollars) as inflationary risks decline.  The latter trend does not look like ending any time soon. Europe is still struggling, despite aggressive bond buying (sending yields lower there too).  Potential markers for a recovery in the consumer, such as in Housing or Automotive, which would contribute to inflation and higher commodity prices, remain weak.  

There is little wrong with Freeport McMoRan itself.  It recently reported strong earnings which handily beat estimates following an 18% jump in copper sales.  The sales growth in copper was driven by the domestic market.  Ironically the weaker projections for Housing into 2013 will reduce demand for copper and impact Freeport McMoRan, placing it back on the defensive.  The company has a number of plans to expand its copper production in Africa, and North and South America, with 35% growth from 2012 expected, driven by unusually low metal production in 2012.  While the Domestic market might not meet company expectations (both for housing and automotive), it reported strong demand from the Middle East and is optimistic on renewed growth in China.  The outlook for 2013 is for 4.3 billion pounds of copper, and 1.4 million ounces of gold. 

Atlas Pipeline also has deflationary pressures to consider, although Natural Gas prices have rebounded (relatively) sharply from early 2012 lows; doubling in price before the late year decline.  The company had another $650 million offering, which keeps the cash flowing.  Better still, it added a penny to its quarterly distribution, bringing the payment to $0.58, its 9th increase for the prior 10 quarters, and with a yield of 6.8% at time of writing.  The Hedge Fund of Leon Cooperman  has built a substantial position in this stock, which confirms the long term potential of this stock.

Earnings are a bit of a roller coaster, and it either beats or misses analyst estimates by a large degree.  The past few fourth quarters haven't been stellar, so expectations for hitting $0.24 are probably low.  With a P/E of 32.3 it's also well above the Industry average of 22.9. 


fallond has positions in APL and FCX. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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!

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