February 1, 2022

Inflation fears, COVID and Russia have roiled the markets since the beginning of the year. Now that the Fed has made clear that interest rates are going to move up, I think some of the volatility will level out a bit.

The market seems oversold right now, so we can expect a few up days in the near future. But we remain stock pickers, not dart throwers.

The economy is certainly continuing to gain strength. Unemployment is steadily declining, and Fed Chairman Powell said this week that he believes moderate inflation will not disturb that scenario.

Meanwhile, housing continues at a robust pace. Inventories are still depleted, and home building is exploding all over the country. Sales of existing homes, housing starts, and permits are climbing, and the demand is continuing to boost prices. Once rates begin rising, we may see some pullback in demand, but even with rate increases, rates will still be at incredibly low levels, so I don’t see a significant slowdown in home demand.

This month, I’m adding a marine shipper to our portfolio–a company that is benefiting from the shipping demand/supply equation.

I look forward to hearing from you, so please keep your emails coming.

Happy Investing!

State of the Markets

The broad market averages–The Dow Jones Industrial Average, the S&P 500, and the Nasdaq, have all taken a hit this month, with many stocks now in the oversold range. And the VIX, or CBOE Volatility Index, has jumped again, keeping the markets volatile, but I hope the interest rate news will soon be absorbed in the markets, leading to a smoother path.

Dow Jones Industrial Average

S&P 500

Nasdaq Composite Index

Feature Recommendation

Kirby Corporation has a long history, ranging from the oil business to the transportation company it is today. Kirby began its life in 1921 when John Henry Kirby created Kirby Petroleum Company, an independent oil and gas exploration and development company. After merging with Kirby VenSyn Petroleum Co. in 1956, the company’s stock became publicly traded.

The marine transportation business beckoned in 1969 when Kirby acquired Dixie Carriers, Inc. In the 1970s, Kirby became Kirby Exploration Company and began publicly trading in 1976 under the ticker “KEX”.

In 1987, the company sold its oil and gas assets in order to focus on its core marine transportation and diesel engine services businesses, and then a few years later, changed the name of the company to Kirby Corporation.

Fast-forward to today. Kirby is now the nation’s largest domestic tank barge operator transporting bulk liquid products throughout the Mississippi River System on the Gulf Intracoastal Waterway, along all three U.S. coasts, and in Alaska and Hawaii.

Its Kirby Inland Marine division operates via a 26,000-mile network of interconnected rivers and canals, of which 12,000 miles are used for domestic commerce. The company’s tank barges transport bulk liquid cargoes, including petrochemicals, black oil, refined products, and agricultural chemicals for customers on the Mississippi River, its tributaries, and the Gulf Intracoastal Waterway.

Kirby is also the largest marine diesel engine service and repair company in the country. Additionally, the company services engines in the industrial, power generation and land-based, or oilfield services, industries.

Moving offshore, Kirby Offshore Marine transports petroleum products, petrochemicals, and black oil along the U.S. coastal network and calls on ports along the Atlantic, Gulf and Pacific coasts, as well as ports in Alaska, Hawaii and on the Great Lakes.

It also operates two offshore barge and tugboat units, carrying bulk sugar from Florida to sugar refining facilities along the East Coast.

Kirby Ocean Transport operates offshore dry-bulk barge and tugboat units which primarily transport coal from the lower Mississippi River to Florida. Additionally, this division also moves coal, fertilizer, sugar, grain and other bulk cargoes.

Kirby’s Osprey Line transports heavyweight and oversized project cargo, such as manufacturing equipment, factory components, turbines, windmills, offshore rig equipment, military equipment and other oversized or overweight cargoes, via deck or hopper barges.

The company’s San Jac Marine provides American-made marine vessels for both inland and offshore applications. The transports include a wide variety of steel vessels, including towboats, large and small inland and offshore deck barges, tank barges, pressure barges and custom-designed dry-docks to fit specific customer needs.

The company owns and operates some 1,066 inland tank barges with 24.1 million barrels of capacity, 248 inland towboats, 44 coastal tank barges with 4.2 million barrels of capacity, 44 coastal tugboats, 4 offshore dry-bulk cargo barges, 4 offshore tugboats, and 1 docking tugboat.

Bottom line, if you need marine transportation, Kirby has most of the options covered.

And things are looking up for the marine business. Kirby just reported fourth-quarter earnings of $0.27 per share, beating consensus estimates of $0.25 per share. Revenues were $591.27 million. The company said its inland marine business was improving, due to strong refinery and petrochemical plant utilization and increased customer volumes, and despite supply chain disruptions and poor weather. Average 2021 fourth-quarter barge utilization was in the mid- to high-80% range compared to the high-60% range in the 2020 fourth quarter and the low-80% range in the 2021 third quarter.

Distribution and services revenues for the 2021 fourth quarter also improved to $240.7 million, compared with $190.3 million for the 2020 fourth quarter.

Looking forward to this year, the company said it expects 2022 capital spending to range between $170 to $190 million. And Kirby anticipates it will generate net cash provided by operating activities of $400 million to $480 million, with free cash flow of $210 million to $310 million in 2022.

Analysts are forecasting earnings growth of 311.10% next year. And hedge funds are beginning to nibble at the shares. Norman Fields, Gottscho Capital Management, LLC, just added shares of Kirby to his portfolio, accumulating about 4,000 shares. And BTIG recently upgraded the shares to “Buy.”

The shares of Kirby appear to be gathering momentum, and as COVID eventually releases its hold on the world, the supply chain should return to normal, and that will serve to boost Kirby’s top and bottom lines. Buy.

Top Institutional Holders

Source: Yahoo! Finance

Technical Analysis

The shares of Kirby Corporation have been on a nice rise since August and are now trading above their moving averages. There is some resistance at the $67, $71, and $73 levels, but momentum looks good.

Price Target: $85.25

Stop Loss: $53.00

Sector Round-Up

Sectors are mixed so far this year, with Energy (+18.77%) and Financials (+.03%) leading the way. The three worst-performing sectors are Consumer Discretionary (-9.53%), Health Care (-6.86%), and Technology (-6.84%).

Flows for 1/24/2022 - 1/28/2022

Source: ETF.com

Portfolio Updates

Conservative Stocks
As a conservative investor, you are less willing to accept market swings and significant changes in the value of your portfolio in the short- or long-term. Capital preservation is your primary goal, and you may plan on using the principal from your investments in the near-term, preferably as a steady income stream. The average level of return you expect to see is 5%-10%, annually.

The Coca-Cola Company (KO)
Coke and Molson Coors Brewery are partnering on a new hard juice, Simply Spiked Lemonade, which will be available in strawberry lemonade, watermelon lemonade, blueberry lemonade and regular lemonade flavors.

The shares of Coca-Cola are being scooped up by a host of hedge funds, as well as being promoted on a number of “Best stocks for 2022” lists. The attraction: steady growth and a good dividend yield.

Continue to Hold.

Sun Life Financial Inc. (SLF)
Sun Life will report earnings on February 9. Current estimates are EPS of $1.22.

The shares are still a Buy.

Mueller Water Products, Inc. (MWA)
Mueller Water will report earnings on February 3. Analysts expect the company to report EPS of $0.09 on $252.9 million in revenues. Buy

TC Energy Corporation (TRP)
February 15 is the earnings announcement date for TC Energy. Forecasts are for EPS of $0.85 on revenues of $2.83 billion.

Our shares are up 25%. Hold for now.

Moderate Stocks
As a moderate investor, you seek longer-term investment gains. You are comfortable with some swings in your portfolio’s performance, but generally seek to invest in more conservative stocks that build wealth over a substantial period of time. The average level of return you expect to see is 10%-25% annually.

National Storage Affiliates Trust (NSA)
NSA will announce fourth-quarter earnings on February 2. Estimates call for earnings per share of $0.35 on $156.6 million in revenues. There are now 21 hedge funds invested in the stock–an all-time high.

Our shares are up 120%. Continue to Hold.

Spirit Realty Capital, Inc. (SRC)
This REIT will report earnings on February 15. Analysts expect EPS of $0.34 on $155.81 million in revenues.

Continue to Buy.

The Toronto-Dominion Bank (TD)
Banks have been “teching up” for the last few years, and TD had announced that it is hiring an extra 2,000 tech pros in 2022, in order to expand products and capacity in engineering, automation, artificial engineering, cloud technology and cybersecurity.

Our shares are up 96%. If you don’t own it, ok to Buy a little here. Otherwise, Hold.

Aggressive Stocks
As an aggressive investor, you primarily seek capital appreciation and are open to more risk. Swings in the market, whether short term or long term, do not impact your investment decisions and you have confidence that volatility is necessary to achieve the high return on investment you are looking for. You typically expect a 25%+ return, annually, though you do not need your principal investment immediately.

Evolent Health, Inc. (EVH)
Evolent will announce earnings on February 23, with analysts predicting $0.01 earnings per share on revenues of $218.3M million. Buy

Entravision Communications Corporation (EVC)
Good news for Entravision. For the sixth year, the company is the NFL’s exclusive Spanish radio network broadcast partner. EVC will broadcast the entire 2021-2022 NFL Post Season, a total of 14 games including the Pro Bowl and Super Bowl LVI. Buy

OneMain Holdings, Inc. (OMF)
OneMain Holdings will report earnings on February 3. The company is expected to post EPS of $0.36 on revenues of $918 million. Buy

Textainer Group Holdings Limited (TGH)
Textainer shares have risen 27%, but remain undervalued. Buy

ETFs & Mutual Funds
This month, our leading ETFs and Funds are the SPDR S&P 500 ETF Trust (SPY), up 102%, and Consumer Discretionary Select Sector SPDR Fund (XLY), up 51%. Vanguard Dividend Appreciation Index Fund ETF Shares (VIG) is also performing well, up 53%.

Invesco Aerospace & Defense (PPA) and Invesco S&P Global Water Index (CGW) are still Buys.

We’ll let all our other funds and ETFs ride for now. Hold

Current Portfolio

The More You Know

As you can see from the following table, 2021 was a pretty active year for companies who decided to reverse split their stocks. Although rare, I’ve even owned a few companies that have done this. And it’s usually not a great thing for their investors.

Source: Stocksplithistory.com

Let me explain why.

But let’s begin with a definition. A reverse stock split is just the reverse, or opposite, of a stock split. It occurs when a company wants to reduce the outstanding share count. For example, a 1 for 8 split (like the one General Electric did last August) would mean for every 8 shares outstanding, the company will replace them with just one share. The share price automatically adjusts higher, so a $2 per share stock in my example would be worth $16 ($2 x 8) after the reverse split. The total market value of the company—as well as your total dollar investment in it—(price per share x shares outstanding) would remain the same (at least at the time of the split).

Why Would a Company Do a Reverse Stock Split?
You might ask, since the market cap of the company is the same after a reverse stock split, why would a company want to do one? There are a few reasons:

• The company wants to increase its share price so that its stock won’t be delisted at its exchange. Usually, that’s because the stock exchanges require shares to trade at a certain value, or they will be delisted. For instance, both the New York Stock Exchange and the NASDAQ require that shares trade at least at a value of $1 per share for an extended period.
• A higher share price may attract more investors and boost the company’s reputation. Many investors view stocks that trade at less than $10 as too risky. and if they fall into the “penny stock” category (trading at less than $1), they may be seen as far too speculative.
• Institutional investors may become interested in a stock whose shares have risen. Generally, they are not allowed to invest in stocks below certain proscribed minimum trading levels. So, if a company can boost its share price, it may attract the larger fund investors.

Is a Reverse Split Good or Bad?
The answer is it can be either. The process of creating a reverse stock split is simply a change in the structure of the company, which is neither good nor bad. However, reverse stock splits are often perceived as a sign of trouble, and that can cause investors to lose interest in the company, inciting a round of selling, which will make your share price decline. They can also lower the liquidity of a company since there are fewer shares available. And since traders love to short reverse-split stocks, that can create even more selling pressure.

Historically, companies that survive and prosper after reverse splits are a rare breed. But there have been cases in which the company did just that. Take, for example, Alcoa (AA), which spun off its Arconic (ARNC) subsidiary in 2016, via a 1-3 reverse stock split. The shares of Alcoa have more than doubled since then, and Arconic’s stock has more than tripled. General Electric’s reverse split is rare among S&P 500 companies—there have only been five since 2012.

Sometimes, the split gives the company a little room to correct its path. That happened with Priceline, which became Booking Holdings (BKNG). Following the internet boom and bust, the company did a 1 for 6 reverse stock split. Since then, BKNG shares have climbed from around $23 per share to more than $2,400!

Now, you should also know that a reverse stock split will affect any dividends your company may pay. If your company paid $2 in dividends per share prior to a 1 for 2 reverse split, your dividend would now be $4. Note that the dividend yield remains the same.

What to Do if One of Your Investments Has a Reverse Stock Split?
The first step you should take is to read the press release and SEC filings which explain the reason for the split. You may have to read between the lines, but you need to reexamine your reasons for holding the stock and decide if they are still valid. If so, continue to hold. If not, sell it and exchange it for a stock with a more promising future.

The next Wall Street’s Best Stocks issue will be published on March 1, 2022.