FIVE UTILITIES STOCKS TO CONSIDER

Recent selling off of utilities stocks may be presenting investors with a good opportunity to entry into the sector.  

As Gary Cheng reports, Utilities stocks as represented by the Utilities Select Sector SPDR ETF (XLU) have fallen out of favor lately since the share price peaked in late April. The sector ETF has dropped 5.5% in the past four weeks and 10% since its late April peak, making it the worst-performing sector year-to-date. The interest rate sensitive sector is pulling back hard as investors speculate that the Fed may begin to taper its QE3 stimulus program and long-term interest rates begin to rise. Valuation of the group as a whole had also gotten fairly expensive relative to the market and remains pricey at 18.7 times trailing earnings while the sector's earnings are expected to grow just 3% - 5% per year, which is far below the 11% expected earnings growth for the S&P 500 Index.

The economic data released by the government in the past few months supports the notion that the economy is recovering at a slow and steady pace with gains seen in job creation and housing activities. Cheng expects the same pattern emerging in the next few months unless the Fed surprises us with a much earlier tightening time line. There will also be continuing talk about the premature end of the Fed's QE3 program, which will likely further pressure utilities stocks and XLU share price may have additional 5% downside until it reaches a stronger long-term trend line support at around the $35 - $36 level.

It's understandable that some investors may want to shun the utilities stocks altogether in an uncertain interest rate environment.  Rather than totally avoiding this sector, Cheng believes investors should tilt their utilities stock allocation to those names that have good fundamental characteristics and can benefit from a steadily improving economy. Based on data compiled from YCharts.com, Cheng feels that the regulated electric utilities as a group has the best fundamental characteristics in the utilities sector, particularly in lowest debt-to-equity ratio, lowest interest rate on debt, highest cash flow from operations, positive free cash flow, and reasonable valuation at 16.3 times trailing earnings. The electric group was also the only group among the utilities sector to post year-over-year growth in the most recent quarterly revenue.

After careful analysis, Cheng has chosen five companies with solid fundamentals, stable dividend growth, and below market valuation multiples that he feels investors should further examine.

• Cleco Corp (CNL)
• DTE Energy (DTE)
• Idacorp (IDA)
• Alliant Energy Corp (LNT)
• Pinnacle West Capital (PNW)

To read Gary Cheng’s full analysis, visit http://seekingalpha.com/article/1487242-sell-off-in-utilities-stocks-creates-a-good-entry-point-for-these-5-electric-utilities-stocks

OFFICE DEPOT SUED FOR NOT HOLDING ANNUAL MEETING

Reuters is reporting that Office Depot Inc (ODP) investor Starboard Value LP has sued the second-largest U.S. office supply retailer for not holding an annual shareholder meeting to elect directors.

Starboard Value filed the complaint with the Court of Chancery in Delaware, where Office Depot is incorporated.  The complaint states that the company had not held an annual shareholder meeting for 13 months.

Starboard has nominated six people for the 10-member Office Depot board. They cited the lack of experience among current board members and stressed the need to reconstitute the board whether or not its proposed merger with rival OfficeMax Inc (OMX) goes through.

Office Depot announced in February plans to buy OfficeMax in a deal worth $937.2 million. They have not yet decided on the combined entity's name, headquarters or CEO.  The companies are awaiting regulatory approval and will both hold special shareholder meetings on July 10 to seek investor approval.

"The proposed merger provides no basis for the company to deprive stockholders of their right to meet annually to elect directors," Starboard said in the complaint.

Starboard said it was forced to take the latest action as it did not expect directors to be elected at the special meeting.  Starboard said in its most recent regulatory filing that it held about 42 million shares of Office Depot, or about 15 percent of the company's stock.  In addition to Office Depot, Starboard reported a position of almost 8 million shares in Compuware (CPWR), 12.5 million shares of Integrated Device Technology (IDTI), 5.1 million shares of Calgon (CCC), and 7.3 million shares Wausau Paper (WPP).

This lawsuit could potentially drive down Office Depot’s stock price which is currently trading around $4.28.  While that could be a good thing for investors looking to initiate new positions it might not be the best thing for the company considering the stock-for-stock merger deal with OfficeMax.

REVLON CHARGED WITH MISLEADING SHAREHOLDERS

The New York Times is reporting that on Thursday June 14, 2013, the Securities and Exchange Commission announced that Revlon (REV) had agreed to pay an $850,000 penalty to settle accusations that it deceived shareholders and its directors in connection with a failed takeover in 2009.  To date Revlon has paid roughly $37 million in settlements to shareholders in related private lawsuits but the company has neither admitted nor denied any wrongdoing.

In 2009, during the depths of the recession, Revlon had posted losses for several years, losing market share to competitors, and suffering under heavy debt.  Ronald Perelman tried to solve the company’s problems by buying out minority shareholders and taking the company private. However, an independent financial adviser determined that the proposed deal was unfair to Revlon and the minority shareholders.

So instead of taking the company private, Mr. Perelman sought to improve the company through an exchange offer, a transaction in which the company asked minority shareholders to swap their stock for preferred shares. The deal would have helped Revlon pay off a sizable loan that it owed.  There was a question about the transaction’s fairness, so Revlon asked its independent board members to assess the deal.

Among minority shareholders were those invested in its stock through the company’s 401(k) retirement plan. The plans trustee decided that members could exchange their shares only if an outside investment banker decided that the transaction was adequate.  After evaluating the deal a financial adviser determined that it was unfair and that the preferred shares being offered were not equal to the value of the common stock being exchanged.

According to the SEC, Revlon hid that decision from the retirement plan members.  The company altered the agreement with the trustee to ensure that the trustee would not share the adviser’s opinion with Revlon shareholders. They also misrepresented in securities filings that the board’s process was “full, fair and complete.”

The S.E.C. order described Revlon’s conduct as “ring fencing,” defined as withholding vital information from shareholders that would have helped them decide whether to exchange their shares. As a result of Revlon’s misconduct, the company’s board was unable to fairly evaluate the adequacy of the exchange offer, according to the SEC.

“By erecting informational barriers, Revlon kept critically important information from its board and, in turn, misled investors” said Antonia Chion, an associate director in the SEC’s enforcement division.

Shares of Revlon have risen about 40 percent over the last year. In trading Thursday, the stock rose about 3.7 percent, to $20.64.

KRAFT LAWSUIT MAY LEAD TO STARBUCKS INVESTMENT OPPORTUNITY

An ongoing legal dispute between Kraft (KRFT) and Starbucks (NASDAQ:SBUX) may end up providing investors with a solid investment opportunity with the coffee retailer.  The two companies have been battling in court since 2010 over an agreement under which Kraft distributed Starbucks’ packaged coffees, including whole beans and ground coffee, to grocery stores and other retailers.  Kraft claims that Starbucks unilaterally decided to end their agreement, and Starbucks says that Kraft failed to aggressively promote its brands, which include Seattle’s Best Coffee, in stores.  

The deal between Kraft and Starbucks began in 1998, when Starbucks was selling its coffee in just 4,000 stores with annual sales of about $50 million.  When Starbucks backed out of the agreement in 2010 sales had grown to about $500 million a year, and Starbucks packaged coffee was sold in 40,000 stores across the United States and Canada.  Starbucks reportedly approached Kraft in August 2010 about ending the partnership and made a $750 million offer to buy out Kraft’s rights in the deal.  Kraft said the offer was below fair market value and declined.  In October 2010, Starbucks sent a letter to Kraft stating that Kraft had breached the agreement.  Starbucks said that Kraft had done a poor job of marketing their products and had failed to share important information.  They also claimed that that Kraft’s Yuban coffee was unfairly competing with Starbucks.  Kraft defended its efforts on behalf of Starbucks, citing strong growth in Starbucks sales during their agreement.  

Since then the companies have continued to carry their disagreement through various legal proceedings and arbitration.  In April, Starbucks announced in its quarterly filing that it now expects a binding decision from an arbitrator to be handed down in the second half of its fiscal year ending September 2013.

The expected end to this legal battle may provide investors with a unique opportunity.  Moses Li states that, “analysts are expecting SBUX to pay at least $1 billion in addition to any legal fees to Kraft for damages.  Although these expectations are general knowledge to the public, SBUX shares are hitting all-time highs, indicating that it has not been reflected in the valuation. In addition, with roughly only $1.67Bn in available cash, it is safe to assume that SBUX will tap into debt options in order to finance the settlement and keep on-going operations. The new debt plus the payment for the settlement will almost definitely harm the company's bottom line. If we combine this with the fact that the stock is more sensitive to downside news, SBUX may take a dip after the lawsuit ruling.”  

Li also goes on to explain, Starbucks is on the path to becoming a large international powerhouse. Furthermore, the company has stated that it expects China to easily outpace the Canadian business revenues within the next couple of years. Most of these growth plans are set to impact EPS in FY2014, FY2015, which explains the current valuation; investors are paying a premium for the future's potential. We also cannot forget the continued success of SBUX's loyalty cards, channel development, and food sales growth. Much of the growth's future success depends on the competencies of management, but we have no reason to doubt Mr. Schultz and his ability to grow a company aggressively.”

Li further explains the potential investment opportunity that could arise out of this lawsuit. “Last summer, SBUX took a 29% plunge from highs of $61.67 due to general market volatility and poor earnings calls. Of course, by no means can we assume an identical decline if SBUX loses the lawsuit, but for discussion's sake, let's examine a similar decline after the lawsuit decision or another potential market correction. With 15% from today's share price of $62.46, the price will be $53.01. Furthermore, forward P/E will become 21.7. At these hypothetical valuation levels, Starbucks will be more than attractive because you will be buying the future's growth with a fair or even cheap valuation.”

In light of all of this, it might be well worth your while to take a serious look at Starbucks as a potential long term investment.

To read all of Moses Li’s analysis, visit http://seekingalpha.com/article/1484431-starbucks-kraft-lawsuit-provides-a-rare-investment-opportunity