I follow quite a lot of companies, so the usefulness of a watchlist for me cannot be overstated. Without my watchlist, I'd be unable to keep up with my favorite sectors and see what's really moving the market. Even worse, I'd be lost when the time came to choose which stock I'm buying or shorting next.
Today is Watchlist Wednesday, so I'm discussing three companies that have crossed my radar in the past week and at what point I may consider taking action on these calls with my own money. Keep in mind that these aren't concrete buy or sell recommendations, and I don't guarantee I'll take action on the companies being discussed. But I promise that you can follow my real-life transactions through my profile and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.
Corrections Corp. of America (NYSE:CXW)
Given that the United States locks up more of citizens than any other country around the world, Corrections Corp. of America, or CCA, could represent an intriguing buy opportunity now that shares have slipped more than 15% from their 52-week high.
A couple of gray clouds overhanging CCA in recent months have hindered any chance of upside for existing shareholders. The biggest concern is that its contracts to build and operate prisons come from the government, and state and federal branches are desperately looking for ways to reduce spending. This could mean slower growth in the immediate future for CCA.
There's also the worry that CCA is carrying more than $1.1 billion in long-term debt and may turn to share offerings in order to raise cash to build or acquire new facilities. While expansion can yield greater profits, dilution from new shares could temporarily weigh on shareholders.
But there are also a number of immediate positives when it comes to CCA (and a number of long-term reasons why investors in this stock will sleep well at night). Governments' need to contract out prison services is a practical necessity, meaning CCA's cash flow is fairly predictable quarter to quarter.
CCA's dividend is impressive as well, primarily due to the company's conversion to a real estate investment trust as of 2013. As a REIT the company receives welcome tax breaks, but in turn it must pay out at least 90% of its profits to shareholders in the form of a dividend. I suspect CCA's current yield, which is over 6%, is sustainable and could double your seed investment on yield alone in as little as 12 years.
I like basic-needs stocks, and this one could help you get rich with fairly minimal risk.
NextEra Energy (NYSE:NEE)
Electric utility NextEra Energy may be nipping at a new high, but that's no excuse not to give this company serious consideration as a long-term investment.
NextEra Energy last week reported its first-quarter results, and for all intents and purposes it was a lights-out beat. Revenue for the quarter improved to $3.67 billion from $3.28 billion in the prior-year period, while adjusted net income soared $0.19 per share past Wall Street's expectations to $1.26 per share. The amazing thing about this outperformance is that NextEra noted a $0.11 negative impact from the cold winter weather during the quarter. Of course, even this negativity was offset by better-than-expected impacts from its wind resources and Maine fossil fuel assets.
The general allure of NextEra Energy is that it has the biggest portfolio of renewable-energy assets in the U.S. NextEra has an approximate electric generating capacity of 42,500 megawatts, of which well over 10,000 MW comes from wind. It is also slated to add 2,000 MW-2,500 MW of wind power between 2013 and 2015. This doesn't even mention its solar, geothermal, or hydroelectric assets.
Just to keep shareholders on their toes, NextEra also announced last week via an SEC S-1 filing that it plans to spin off its renewable energy assets into a "yieldco." Yieldcos often have predictable revenue streams that lead to steady cash flow and usually Treasury bond-beating yields. It could give NextEra's remaining portfolio much-needed access to low-cost capital, only furthering the company's comparative advantage over its peers through low-cost renewable electric generation.
While NextEra's debt might scare away investors who aren't familiar with the company, its strategy appears to be working and its recent SEC filing could mean exciting times are ahead for shareholders.
Every week I offer up a possible morsel for those hungry short-sellers out there, and this week department store chain Dillard's fits the bill.
Let me begin by saying that I've been brutally wrong about Dillard's up to this point, so you should definitely take my opinion here with a grain of salt and, as always, conduct your own deeper dive into the company. Nonetheless, I haven't changed my opinion that shares could be grossly overvalued at their present level considering a number of headwinds and valuation concerns.
Practically the entire retail sector is weak right now. We've seen pushback because of the colder winter, but we're also seeing consumers turning away from malls and department stores during critical holidays and instead using online shopping portals for convenience and price. Although Dillard's has an online presence, that presence is much smaller than a number of online stalwarts. To me this signals the potential to bleed long-term customers unless it maintains a fairly liberal stance with discounting -- and as we know, bigger discounts could yield margin deterioration.
We're also seeing more cost-cutting from Dillard's than actual top-line growth. Operating expenses for the past quarter improved 90 basis points relative to sales, but gross margin actually declined 180 basis points year over year. Furthermore, same-store sales gross was merely 2% which, even with a forward P/E of 11, isn't very encouraging. This indicates that tighter cost controls and bigger discounts are the main drivers of Dillard's profits at the moment. While that's good news for now, investors should keep in mind that cost-cutting can only drive earnings per share so high before it doesn't work anymore.
Like I said, I've been wrong in the past on Dillard's, but its convincing lack of growth in this economic environment makes it an easily passable and possibly shortable stock.
Is my bullishness or bearishness misplaced? Share your thoughts in the comment section below and consider following my cue by using these links to add these companies to your free, personalized watchlist to keep up on the latest news with each company:
- Add Corrections Corporation of America to My Watchlist.
- Add NextEra Energy to My Watchlist.
- Add Dillard's to My Watchlist.
The one top stock you'll definitely want to get on your watchlist
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Dillard's. 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.