“…Now, after that is Exxon, off 2.1% since the year began. This petro-giant is totally problematic. No great yield. Nothing new until the XTO, that natural gas deal closes and it hasn’t budged as oil has run to $80 a barrel. I don’t see it helps us out at all. I think Exxon will be lucky to creep to $70. That’s only up three from here. No more than that. Kind of a boat rowed gently up the stream.

Then there’s Chevron. Off 3.5% for the year. My charitable trust has become a seller of chevron, but merely scaling out as the company said many good things today at the analyst meeting. I am not fretting. In fact, I think this $74 and change stock can row its way to $80 perhaps with a leisurely portage now and then.” — CNBC’s Mad Money 3/9/2010

On Tuesday’s Mad Money, Jim Cramer talked about the laggards thus far this year in the Dow 30.  He made some very bullish remarks in regards to Exxon Mobil (XOM) after they announced the deal to buy XTO, as it fit perfectly into his natural gas investment thesis.  He took this move as a sign that the major integrate oil companies seeing the potential of US shale gas reserves.  It was also speculated that with the backing of the world’s largest oil company, lobbying in Washington for natural gas should get at least a little boost.  Apparently, the market has not yet been impressed with Exxon’s strategy as the stock is down nearly 8% since the deal was announced on December 14th.  For comparisons sake, the S&P 500 has returned positive 3%, and the price of oil has advanced over 10% in that time.

Cramer has also long advocated for Chevron (CVX) the Dow’s other integrated oil company, but he now says that he is starting to lighten exposure to CVX in his charitable trust.  Again, he sees the weak performance of the stock even as crude oil has crossed above $80 per barrel as a signal that the stock has broken down.  His advice to investors is to follow his lead and sell gradually as the stock may have just a little more upside.

At Ockham, we currently have Fairly Valued ratings on both XOM and CVX, but we see the recent performance of these stocks as a positive for value investors rather than a reason to sell.  These stocks are obviously highly correlated to crude oil prices and the fact that oil prices have risen while the major oil stocks have not is an opportunity not a deterrent.  Higher oil prices leads to higher revenue and presumably better earnings, and the stocks will eventually come to realize this strengthening of fundamentals.  On the other hand, analysts have recently been scared off by compressed margins in the refining and other downstream businesses, and just this morning CVX was downgraded at Bank of America/ Merrill Lynch (BAC).

Obviously, we don’t agree with Cramer’s opinion that investors should drop these stocks right now.  Instead, we would keep an eye on these two stocks because their valuation has only become more attractive recently.  According to our methodology they are not yet undervalued, but if Exxon drops into the high $50’s or CVX falls to the high $60’s, we would strongly consider upgrades.

“…Case in point, The Ford Motor Company. This company is blowing the doors off the business! 43% monthly sales gain. Stunning increase in market share from 14% to 17%. It just passed General Motors…

Yet how many times have you asked me about a different auto company in the “Lightning Round”, as right now I’m getting questions about Toyota almost daily. Are the short-term problems with Toyota an opportunity to buy the stock? I know that’s what you’re thinking. To which I say, how do I know if they are just short-term problems, for heaven’s sake? What if Toyota is a damaged company… This Toyota fiasco could be like the Audi sudden acceleration problem from a different era that gutted that firm’s reputation for years. If I were you, I’d sell Toyota, buy Ford.” — CNBC’s Mad Money 3/2/2010

Automakers recently released monthly sales reports for February, and as you might except given recent safety recalls and bad press Toyota Motor Co (TM) sales declined by 9% from a year ago.  Meanwhile, the primary beneficiary of that declining market share was Ford Motor (F) who saw sales improve by 43% over a year ago.  Admittedly, US auto sales were horrendous a year ago, but no company has made as much of a leap forward as has Ford under the leadership of Alan Mulally.

Jim Cramer has continually harped on his call to buy Ford’s preferred stock, which has turned out to be a very impressive call with those shares rising more than 700% in the last year, and as Cramer noted there is a dividend payout to be gained with the preferred share class.  Ford Motor’s common stock has also performed impressively, steadily gaining about 600% in the last year but with no dividend offered. 

At Ockham, we do not currently have research on preferred share classes, but it will come as no surprise following the stellar performance that our value-based methodology has Ford as Overvalued given the current fundamentals.  For instance, over the last ten years Ford has historically been priced by the market to deliver a price-to-sales per share metric of between .07x and .18x, but at this time the stock is trading well above that range at .36x.  Any investor can see that Ford is performing as well now is it has in quite some time, and sentiment on the stock remains bullish.  However, does that make it worth more than double the amount the market has typically been willing to pay for a given level of sales?  Maybe so, but it is clear to us that there are much cheaper stocks available.

As for Toyota Motor, we continue to have the stock as Overvalued but it is for different reasons.  The recent bad press has brought the stock tumbling from above $90 to the mid-seventies, but based on our methodology it may still have further to fall.  At this point price-to-sales are not a concern, but price-to-cash earnings currently stands at 19.7x while the historically normal range for TM is 8.7x to 13.3x.  The longer that this public relations nightmare continues the worse the effect on Toyota will be both in the short term and the long term.  This year’s financial results will take a hit, but also the damage to the brand is unknowable and has the potential to hurt future earnings.

On Tuesday, Cramer talked about whether or not viewers should consider taking profits in Ford and put them into Toyota’s stock.  His position is they absolutely should not, but value investors should consider dumping both stocks and finding cheaper alternatives which, according to our methodology, would not be difficult.

“One of the charts I use, professional sellers are tearing this stock to pieces. And there really isn’t any sign of large scale institutional buying. Garmin was rallying nicely ever since July, okay? Then it hit a brick wall. During the week of October 30, it fell 20% after Google said it would offer GPS services in its Android smart phones…

Here’s the bottom line on something like this: Garmin’s business may be able to hold out for a while in the near term, but the big money is betting against it, and the long-term story, which is unacceptable to me. You don’t buy a stock on life support when you know it’s in terminal condition ultimately. Why buy this company that sells a commodity product when so many proprietary technologies with faster growth or higher dividends are out there? I’m saying that Garmin is a sell, sell, sell.” — CNBC’s Mad Money 2/11/2010

Garmin Ltd. (GRMN) is a stock that on paper is a value investors dream; pristine balance sheet, sells for 10.7x TTM earnings, with a yield of almost 2.5%.  However, there is a real problem with Garmin’s business model as a leader in the field of GPS technology, which has increasingly become available for free as a feature on hugely popular smart phones.  For a company that is so reliant on this increasingly commoditized technology, this situation presents a serious threat to future growth.

Over the last year or more, Cramer has been outspoken about one of his favorite investment themes: the mobile Internet tsunami, which he claims will rival the personal computer for its transformational influence on technology stocks.  He compares Garmin’s personal navigation devices to the PDA devices that were popular just a few years ago.  The smart phone has completely cannibalized that market, as phones can handle contacts and calendars at least as well as a PDA ever did.  Why carry two devices when one will do the job?  These days he thinks GPS will follow the same fate, as they are similar in their utilitarian nature to PDA’s, as opposed to digital cameras and MP3 players which are used more for leisure activities.

The good news is that so much of the pessimism of this situation has been priced into Garmin’s stock price.  Strictly looking at the numbers Garmin remains attractive, as current price-to-cash earnings is 9.6x or just below the historically normal range of 9.7x to 24.3x.  Furthermore, price-to-sales per share is only 2.2x which compares favorably to the historical range of 2.9x to 6.9x.  Of course the higher end of this range comes from the period of 2005 to 2007 where the company was growing earnings by an amazing 52% to 64% annually, and we cannot envision any situation where the stock receives that kind of valuation.  These valuation ranges become significantly more attractive if you were to take out the company’s $9 per share in cash on hand, but those historical valuation ranges include cash on hand so it is more instructive to leave it as is.  The huge cash pile will give Garmin some amount of flexibility in the coming years, and that is not to be dismissed.

Our methodology is value-oriented and our most important factors come from the fundamental strength of the stock, which is plainly obvious from looking at our overwhelmingly positive historical valuation chart.  However, we agree with Cramer that the long term prospects for the business model are distressing, and this could be the dreaded value trap.  At the very least, it appears Garmin will need to reinvent themselves which can often be long and arduous process.  Although this stock looks like a value investors dream, we cannot advise holding this stock for the long term.

“The show stopper when it comes to dividend hikes, that name is Ross Stores, as in Ross, dress for less. This low-price retailer raised its quarterly dividend from 11 cents to 16 cents last Thursday. Do you know that is a 45% dividend surge? That’s extraordinary. Still, they have a pint sized yield, but that’s not the theme of this week…

Think of a massive dividend hike as being similar to a Babe Ruth-style called shot. The people running Ross Stores tell us they think their business is in a position to hit it out of the park. And to keep on doing it over and over and over again. You don’t just raise the dividend and pay it once, you pay it throughout. Ross Stores is trying to beat this fact into our heads…

With the economy recovering, companies are back in growth mode. Looking to move into new regions in 2010. Ross Stores has about 1,000 locations in 27 states, very little presence in the Northeast or Midwest, a lot of room to grow.” — CNBC’s Mad Money 2/10/2010

On Mad Money this week, Jim Cramer is identifying companies that are raising dividends because that is a great signal to the market that management is confident about the future.  In the case of Ross Stores (ROST), they announced a massive dividend hike last week following the close of their fiscal fourth quarter in January.  The company is not scheduled to report results for this quarter until March 18th, but this corporate action is showing the market that management believes the company has performed quite well recently.  The dividend yield is not huge, but after the 45% lift the implied dividend yield is a respectable 1.4%.

Obviously, a dividend hike of this magnitude is certainly something that investors like to see, and with the payout ratio still just 18%, the company still will have plenty of earnings to reinvest in the company to propel growth.  Ross Stores has benefited from a shift in consumer behavior to more frugality, and we think that this is a trend that likely will not soon fall away.  There are still very persistent pressures on consumers such as unemployment and shrinking consumer credit that may take years to reverse.

Ross is one stock that analysts seem to be able to nail earnings on in the past.  Considering the fact that quarterly earnings estimates have been in-line with results each of the last four quarters, and consensus estimates were never more than 2 cents off dating back to 2007.  If earnings estimates continue this consistency, Ross stands to grow earnings by about 52% in fiscal 2010 (ended in January) and then a still impressive 10% growth in fiscal 2011 that just began.  While we view these projections to be quite impressive, the stock is not all that cheap at current levels after advancing 46% in the last year.  We currently have a Fairly Valued rating on ROST although it is clear that the company is seeing significantly better fundamentals recently.

When we look at how the market has historically valued Ross Stores, we think that the fundamentals are being adequately recognized in this market.  For example, over the past ten years ROST has historically traded for between 8.7x to 14.4x cash earnings, but the current price-to-cash earnings is right around 10x.  Furthermore, the current price-to-sales is .79x which is near the middle of the historically normal range of .60x to 1.00x.  Last week’s announcement about raising their dividend is certainly a positive in our analysis, but at this time it is not a significant enough event to budge us from our current neutral stance.

“Opportunity for all of you home gamers. Use the fear of chart readers to create the value in price that you need to buy Schlumberger at your price. We’ll catch it some other time. It’s not running away any time soon, not in this tough market.” — CNBC’s Mad Money 2/9/2010

Jim Cramer discussed the sector ETF for Oil Service companies OIH on his Off the Charts segment in which he looks at the security from a technical perspective.  In short, he saw the OIH chart as bearish in general, and with the recent weakness in crude oil prices he told viewers to expect further declines to around the $103 level for support.  If the ETF breaks that support, the chartists believe it may drop all the way down to the mid $80’s.  However, he told his viewers why waste your time on a sector ETF when the best company in the sector may present a better opportunity.

Cramer’s advice for his viewers was to use the expected weakness for the sector to bring Schlumberger (SLB) down to a more attractive price level.  Enough people follow the technicals that a chart as weak as OIH’s may become a self-fulfilling prophecy.  He said he would use the fear among technical analysts to drive a great company like SLB stock lower making it a terrific buying opportunity.  Among the reasons that he believes Schlumberger is a best of breed oil service company, many of its biggest clients are national oil companies, most of which are in the Middle East as one would expect.  These state-controlled oil companies will continue to be relied upon for state revenue over the coming years to keep their main source of revenue as strong as possible.  That means they really have no choice but to drill no matter what the price of oil; in other words, SLB’s business may prove to be more stable than their peers.

At the current price level, we have a Fairly Valued rating on SLB and from a fundamental analyst’s perspective, and we agree with Cramer that investors would be wise to wait for lower prices.  For example, the current price-to-cash earnings is 12.5x, which is comfortably within the historically normal range over the last ten years of 8.9x to 16.8x.  Similarly, we have calculated the historically normal price-to-sales range as 2.1x to 4.1x, with this current valuation metric sitting at 3.3x.  Clearly, based on these two valuations the stock is neither cheap nor expensive for the current fundamentals.  We would recommend investors begin to look more aggressively towards shares of SLB if it drops down into the low-$50’s.  However, SLB has not been that low since last August, so barring a notable decline in the price of oil, it may not reach that level soon.