After a long streak of weeks without potential superstock, we are finally back with a potential superstock candidate, and the company is NL ...

Weekly Superstock Scan 21 May 2018 - 25 May 2018: NL Industries, Inc.

After a long streak of weeks without potential superstock, we are finally back with a potential superstock candidate, and the company is NL Industries Inc (NL).




NL is primarily a holding company with a majority stake in CompX International Inc and also a non-controlling stake in Kronos Worldwide, Inc. Both CompX and Kronos are listed companies on the NYSE.

The structure of NL is complex. Valhi, Inc held approximately 83% of NL's outstanding common stock. NL in turn owns the following:
  • 87% of CompX - CompX manufactures mechanical and electrical cabinet locks and other locking mechanisms used in the recreational transportation, postal, office and institutional furniture, cabinetry, tool storage and healthcare applications, and also stainless steel exhaust systems, gauges, throttle controls and trim tabs for the recreational marine and other industries.
  • 30% of Kronos - Kronos is a leading global producer and marketer of value-added titanium dioxide pigments, or TiO2, a base industrial product used in a wide range of applications
  • 14.4 million shares of Valhi - This is confusing since Valhi owns 83% of NL and yet NL still owns shares of its parent company.

Technical



NL was trading in the $14 region from end 2017 to the beginning to this year. In February, price fell steeply to trade in the $8 region. Last week, price broke above the range to close at $9.60. The volume of the week was only slightly above its weekly trading volume.

The catalyst for the spike was a settlement that NL agreed to pay to fund remediation of lead paint in California. The settlement of $60 million ended 18 years of litigation. The market viewed the amount as a favorable amount and NL is happy to put the litigation behind it without acknowledging any wrongdoing as part of the deal.

Fundamentals




Including the most recent quarter, NL recorded 7 consecutive quarters of year-on-year EPS growth. 

Recovering Titanium Dioxide Prices

Since NL is primarily a holding company, I will need to analyse the subsidiaries separately. Between Kronos and CompX, Kronos is more likely to provide the catalyst for future growth. Titanium prices have been spiralling downwards for years due to oversupply brought by cheap Chinese competition. But the trend reversed as Chinese competitors failed to compete and exited the industry. 

Titanium Dioxide price recovered in 2017 and is expected to continue through 2018. In 1Q2018, Krono's average selling price was 28% higher year on year.

On the demand side, demand for Titanium Dioxide is expected to increase due to increasing prevalence in modern coating, plastic, glass, paper and other food and beauty products. New found use in solar panels will also increase the demand for Titanium Dioxide.

Stakes Exceed Market Capitalization

As at the end of the most recent quarter, NL held the following shares:
  • 35.2 million shares of Kronos - worth $873 million
  • 10.8 million shares of CompX - worth $158 million
  • 14.4 million shares of Valhi - worth $105 million
Along with $100 million of cash, these liquid assets are worth more than $1200 million. The market capitalisation of NL, however, is just $467 million based on the current price. NL has minimal debt, so the differences between the assets and the market capitalisation is the potential liability on environmental remediation and related costs. 

NL formerly manufactured lead pigments for use in paint. NL and other manufacturer have been named as defendants in various legal proceedings seeking damages for personal injury, property damage and governmental expenditures allegedly caused by the use of lead-based paints. 

NL does not believe that they have incurred any liability except for County of Santa Clara v. Atlantic Richfield Company, et al, which was the case described earlier. This case caused the value of NL to be heavily discounted as the likelihood of loss is high and yet the amount of loss cannot be estimated easily. Hence, the $60 million settlement reached last week is indeed great news for the company putting a close to 18 years of litigation and the amount is probably way less than what the market discounted NL for.

Matrices
o Small float of 8.25 million shares with a average daily trading volume of 50000 shares. The float is thus 165 times its average trading volume.
+ NLis trading at just 6 times its trailing twelve months EPS.

Risk Factors/ Things I do not like:

  • Litigation - While the case of Santa Clara is finally resolved, other CA counties or even counties in other states may file new cases against NL. While the probability of losing the case is small for NL, any loo can have a material adverse impact on NL. Certain properties and facilities used in their previous former operations are the subject of civil litigation, administrative proceedings or investigations arising under federal and state environmental laws and common laws. They have accrued more than $100 million for the environmental remediation and related costs. NL has estimated the upper limit to be $154 million, excluding certain cites that they cannot reasonably estimate the range of costs. 
  • Cyclical Titanium Dioxide Price - The Titanium Dioxide market is a cyclical market. Having seen big gains in 2016 and 2017, it can possibly have a downturn in 2018 like what happened in 2014. Also, the cost of the raw material used to produce Titanium Dioxide is increasing. Despite Kronos owning some mines for the raw material which can offset some of the impact of increasing raw material cost, there will still be some impact on the margins of Kronos.





This is the third consecutive week that I cannot find any potential superstock to blog on. Will we see a prolonged superstock drought? I do ...

Weekly Superstock Scan 14 May 2018 - 18 May 2018: Nil

This is the third consecutive week that I cannot find any potential superstock to blog on. Will we see a prolonged superstock drought? I do not know the answer but based on the scans this week, I would think it is unlikely and we should see the next potential superstock coming out really soon.



After the technical scan this week, I would have thought that we will see more than one potential superstock this week. A total of 9 stocks passed the technical scans - 8 from the US and 1 from Singapore, which is a high number by any week's standard. They are CMFN, CRHM, DF, EMMS, GDP, MCBC, NGVC, PRPH from US and Yoma from Singapore. All except MCBC passed the fundamental screen. However, there is a no catalyst for the spike in price and it is in the financial sector which is not a sector that produces superstocks.

That is it for this week. While I cannot find potential superstock for the past few weeks, I have been keeping myself busy by studying Al Brook's books on price action. I am seeing potential on how bar by bar price actions can gel in with my long term superstock investment as well as my crypto trading. Ideally this will help me manage my trade better.

Once again this week, there is no potential superstock of the week.  Potential superstocks are few and far between this year that I will be ...

Weekly Superstock Scan 6 May 2018 - 10 May 2018: Nil

Once again this week, there is no potential superstock of the week.  Potential superstocks are few and far between this year that I will be happy if there is at least one potential superstock per month. I still do blog about superstocks here and there but most of the trading ideas did not turn out well. 



For superstocks, we are looking for very large gains while the probability of a single trade may be less than 50 per cent. For this first half of the year, my gains are mostly from BXC, which tripled within a couple of months after a blogged about it. Another of my superstock from last year, FANH, which I am still holding, provided me with the rest of my gains this year.

The risk to reward ratio of superstocks are so large that even though most of the time I may not be able to find potential superstocks, it is still worthwhile to keep as an investment strategy. If the superstock drought continues, I will consider expanding to other markets such as the Hong Kong market or Japan market to source for potential superstocks.

There is no potential superstock again this week. There were a few promising stocks from the US market, but ultimately none of them passed t...

Weekly Superstock Scan 30 April 2018 - 4 May 2018: Nil

There is no potential superstock again this week. There were a few promising stocks from the US market, but ultimately none of them passed the stringent criteria of becoming a potential superstock.



EBIO, PCMI and TZOO all passed the technical scans. EBIO is a pharmaceutical company, so by definition it is unlikely to see consecutive quarters of EPS growth. PCMI and TZOO too passed the technical screen but did not pass the fundamental screening. TZOO especially had a very convincing breakout last week but it had a few consecutive quarters of EPS fall.

This week, I will be exiting out of my positions in ULBI and CRNT. These two stocks failed to sustain the momentum from the breakout and has closed below the 10wMA last week.

The potential superstock of the week is United Community Financial Corporation (UCFC) . It is a diversified financial services company opera...

Weekly Superstock Scan 23 Apr 2018 - 27 Apr 2018: United Community Financial Corporation

The potential superstock of the week is United Community Financial Corporation (UCFC). It is a diversified financial services company operating Home Savings Bank and Home Savings Insurance Group.





UCFC is involved in commercial, consumer banking, residential mortgage, wealth management and insurance capabilities. It has offices in Cleveland, Akron/Canton, Youngstown, Columbus,
Pittsburgh and Morgantown markets:
  • 35 branch locations in Ohio and Pennsylvania
  • 12 mortgage loan production offices in Ohio, Pennsylvania and West Virginia

Technical


UCFC has been trading in a relatively tight range between $8 and $10 since the start of 2017. On a nearer term, UCFC was trading in an ascending triangle since September 2017.

Last week, price broke out above the range/triangle due to positive earnings release. The volume for the week was 465k shares, about 1.27 times its average trading volume.

Fundamentals


UCFC is a very consistent company delivering EPS growths. Including the most recent quarter, ULBI recorded 15 consecutive quarters of year-on-year EPS growth (including flat quarters). 

Expansion of Treasury Management and Wealth Teams

In the fourth quarter of FY2017, UCFC expanded its treasury management teams to have TM sales persons covering their major commercial markets. The strategy has paid off for UCFC as in the first quarter, UCFC brought in 40 new commercial deposit relationships and on the asset management front, they are up 30% over the first quarter of 2017 on assets under administration closing in $675 million.

UCFC has identified this as a main catalyst for their growth.

Successful Integration of PB&T

This is a dated catalyst as UCFC acquired OLCB in early 2017 but I believe the effects can continue till present day. On January 31, 2017, United Community completed its acquisition of OLCB.  Immediately following the acquisition of OLCB, Home Savings was merged into PB&T, and PB&T changed its name to “Home Savings Bank.”

OLCB's commercial lending expertise provides opportunity for accelerated expansion of the commercial lending platform. Indeed in the latest quarter, strong commercial loan growth in excess of 6% was a key earnings driver.

Matrices
- Big float of 48 million shares with a average daily trading volume of 70000 shares. The float is thus about 685 times its average trading volume. The chance of a spike in price is close to zero.
o UCFC is trading at 16.5 times its trailing twelve months EPS.

Risk Factors/ Things I do not like:

  • Financial Sector: The financial sector is not a superstock sector. Usually I will not shortlist banking stocks as potential superstocks. However, the treasury management team expansion is a strong catalyst that can boost the growth of the company.
  • Interest Rate Risk: While UCFC acknowledged that they are able to absorb each Fed scenario with no meaningful impact to their financial performance, they acknowledge that there is a moderate risk around the residential production income if longer-term rates grow in an accelerated pace.
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All information in The Trader Diaries (TTD) does not constitute to investment advice or recommendation to buy, sell or hold. Readers are advised to consult their financial advisors prior to making any investment or pursuing any investment strategy. TTD will not be liable for any losses resulted from information published or shared from the blog.