2 Stocks From Lombardia You Must Buy

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

The first thing that pops up in my mind whenever I read about Lombardia Capital Partners is that it is a successful 100% employee-owned investment firm. The firm mostly capitalizes on stocks that are undervalued because of the speculative investors. It maintains a well diversified portfolio with a focus on Financial and Service sector stocks, which represent ~50% of the firm’s assets. Analyzing the decline in its positions in the last 13F filings, I came up with three interesting stocks. The firm liquidated its holdings in Coach Incorporated (NYSE: COH), MetLife Incorporated (NYSE: MET) and Duke Energy Corporation (NYSE: DUK). I feel that decreasing its holding in Coach was a wise step by Lombardia, but both MetLife and Duke could have provided long term growth in the future, and the firm should have increased its position instead.  Let's discuss each of them in detail.

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Percentage Decrease</strong></p> </td> </tr> <tr> <td> <p>Coach Incorporated</p> </td> <td> <p>13.00%</p> </td> </tr> <tr> <td> <p>MetLife Incorporated</p> </td> <td> <p>10.00%</p> </td> </tr> <tr> <td> <p>Duke Energy Corporation</p> </td> <td> <p>6.00%</p> </td> </tr> </tbody> </table>

 Source: Whalewisdom.com

Coach

The stock price of Coach trembled down by ~15% since it declared its 2Q13 results. Despite the holiday season, the company's North American Region sales (which contributes ~72% to the total revenue) had a negative same-store-sales (SSS) growth of ~2% Y/Y. North American sales were affected by intensified competition, heavy discounting, and Hurricane Sandy. On the other side, weakness in the Japanese Yen also caused a decline in the sales revenue from the region, and even more headwinds are expected in the currency throughout FY13. These factors dragged down the overall sales growth to just 3.8% Y/Y. Additionally, I am not optimistic about the company's guidance for revenue in the second half of FY13.

It will be quite difficult for the company to either achieve a high single digit sales growth rate or a ~10% square footage growth in the second half of 2013 considering the flat comp rate for North America. 

Coach is increasingly losing customers to its competitors; for instance, for the first time it lost its share in the women's handbag segment, where a ~10% growth was expected. Looking at the brighter side, Coach expects to open 65 new stores next year, and 30 of them are planned for mainland China. Coach's Chinese region performance showed a ~40% growth in sales, and the company expects to achieve total revenue of ~$400 million in FY13. However, I feel that this won't be enough to pull up the stock in the short term. The stock is a Sell for me. 

MetLife

Recently MetLife sold its deposit business to GE Capital. As a result it transferred $6.4 billion in bank deposits to GE Capital. The sale shows the increasing focus of MetLife on its core business, i.e., insurance and employee benefits. This deal also allowed the company to initiate the de-registration process, and the company is about to exit from the regulations applicable on a bank holding company. This is a very critical move for the company, seeing as it failed the stress test last year. The Federal Reserve restricted it from declaring any dividend or conducting any share buyback. The company declared in its guidance that a long term Return on Equity of ~12% is expected from its business. However, it should be noted here that it still holds the position of a Non-Bank SIFI, and some Federal regulations do apply on the company. Hence, the company can repurchase on a single day up to 25% of the four-week average volume of shares traded in the market. Considering the current price, it is expected that the company can repurchase ~2.6 million shares in the next quarter worth ~$2 billion.

Along with that, MetLife recently disclosed its intention to purchase from Banco Bilbao Vizcaya Argentaria SA (BBVA) its pension fund Administrator AFP Provida SA in Chile.  Although the companies have not reached any agreement about this deal, MetLife has set a target of ~12% ROE from the emerging economies, including Chile. With the increased focus on Insurance and its other core businesses and the expected buyback in the next quarter, I feel that MetLife’s stock will grow. It's a Buy for me.

Duke Energy

2012 was not an ideal year for utility companies in the US, as electric output was down ~1.2%, even though heating degree days were up by ~4% Y/Y. It has been a tough year for Duke as well. It faced major regulatory hurdles with respect to its acquisition of Progress Energy in mid-2012 and the Edwardsport Settlement. But Duke has managed to bring down its regulatory risks, and all the issues involving the company with the North Carolina Utilities Commission (NCUC) regarding the acquisition of Progress Energy have been resolved. Along with that, the Indiana Utility Regulatory Commission has approved the Edwardsport Settlement case, which was filed by Duke and several others with some modifications. The recovery cost of the 618 MW IGCC (“clean coal”) plant in Edwardsport has been raised to ~$2.6 billion from the previous ~$1.98 billion. The plant will be operational by mid-2013.

With the regulatory settlements behind them, I believe that Duke Energy is ready to deliver good results. Anticipating the limitations of traditional ways of generating energy, Duke has shown its interest in renewable energy sources. In the past 5 years it has invested more than ~$2.5 billion in renewable energy and is expected to keep on increasing the same in the future. It recently acquired two hydro plants in Chile from the CGE Group with aggregate capacity of 140 MWs for ~$415mm. Along with that, its two wind power projects in Texas are also complete, which will deliver ~402 MW of energy. Though the company's short term outlook is influenced by the weak condition of the utility industry, its long term position seems strong. Hence, the stock is a buy.

Conclusion

Summing up, I don’t think the increment in stores worldwide will be enough for Coach to overcome the weak North American sales, a fluctuating Yen, and the increasing competition. Coach's stock seems to be weak in the near future. On the other hand, the selling off of its deposits and the expected ROE will help MetLife’s stock to grow. As far as Duke Energy is concerned, it is known for declaring a dividend each quarter. It has not missed even a single quarter in the last 86 years. I feel that its renewable energy ventures will help maintain the streak for many more to come.


ShwetaDubey has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. 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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