5 year plan

It was Warren Buffet who once commented that he invested as if the stock market would be closed for the next 5 years. I am amazed how often I hear this remark repeated by alleged value or relative value investors/. I am both amused and amazed be hearing these guys talk about holding stocks three to five years and then find in the Morningstar report they have 150% turnover in their fund. As for individuals, much of the research shows that investors hold the average mutual fund less than three years, never mind individual stocks. But, if we are buying stocks as a business and not just speculating on short term price movements, that is exactly the approach we should be using (I am not knocking short term speculation. I like it as much as the next guy and frequently write about using options to trade value but that’s not what THIS article is about).

Right now it looks pretty ugly out there. Thanks to the bernake bust up, the dollar is falling, interest rates are rising, energy costs are climbing and the backdrop for the US economy is just frugly. It is easy as investor to get paralyzed when we consider all that can wrong out there. However I decided to take a look at this as if today was it for the next five years. After today the stock market is going to close and not reopen for trading for five years. There will be no further daily price updates and the only idea of how you were ding was how well the business itself was doing. This means that getting the price and the business right is going to be crucial for success. Pretty much leaves out the big growth names. At 40 times earnings you can not uy a shorter-term glory shock like Apple. The chance that someone comes along and upstages them in the IPOD or IPHONE markets over 5 years is too risky. Goldman. Maybe. But what if rates keep rising and decimates their private equity and debt trading platforms? Five years is a long time in the trading business. A lot can go wrong and kill the value of our franchise.

So what to do? Lets find some great companies at a good price and a few good companies at fire sale prices. Seems to me that that is the best way to profit over the 5-year pal. First, I say lets grab up a few shares of COMS. The beleaguered networking stock trades today at $3.55 and about half of that price is in cash. They have exposure to both china and on line video, two huge growth areas over the next five years. Next, more tech in the form of ADPT. The data storage company trades at 3.78 has a book value and has over 3 bucks a share in cash. Further Steel Partners is the single largest shareholder with over 15% and Warren Liechtenstein and friends have a pretty good history of unlocking value in stock. I would also add share of EDCI. Decent company in a crappy business. CD’s and DVD’s are pressured more everyday by online content. However we have a stock at 1.35 or so over a buck in share in cash and total book value of 1.50. They also have 4 dollars a share of NOLS that can be used going forward. Chapman Capital and Third Point two activist investors of some note are aware of the value of this situation and are large shareholders.

One thing the bernake Bust has done is steepening the yield curve and I suspect he will cut again to make it steeper still. This should allow the major banks to capture the net interest margin and earn their balance sheets healthier. One major beneficiary of this is going to be the small banks that didn’t really have a problem to start with. Many small banks share have started trading down near book value and historically this has been a great place to buy. First a couple of local guys. Severn Savings, SVBI, is consistently ranked of one of, and frequently the best savings institutions in the country. These are smart local guys. They know the real-estate markets, they know all the builders and developers, where to lend and when to say no. Further they are expanding their commercial loan business to insulate against too much real estate dependence. The stock is just under 1.5 times book and although I might normally let prices come off a bit, the hypothetical market is going to be closed and these guys should prosper over the next five-year. Selling at just 9 times earnings it seems a great inclusion to the five-year plan. Same with Annapolis National Bank (ANNB) at 1.3 times book value. The Annapolis area is unique in that we have lots of real estate demand from turnover in State, Local and federal government and of course, we have the only Chesapeake Bay right at our doorstep. It is a very vibrant are that has escaped real estate collapses in the pat. With the steeping of the curve local banks should thrive and prosper. From the slightly larger city of Manhattan comes BERK. This a 900 million in assets bank that trades at book value and does business primarily in Manhattan, an area also seemingly insulted from real estate woes based on demand.

From the grab bag lets add shares of GNCI. The infrastructure roads and bridges in this country are going to need massive repair and rebuild in the next five years. Trading at book value with solid earnings, this manufacturer of heavy equipment for highway construction and environmental control equipment should benefit handsomely. EIHI is just a high quality well run insurance company. Offering primarily workers comp and group benefits, the stock trades below book value, 10 times earnings and has a small dividend of 1.3%. Since I think coal becomes more and more of a player in the energy arena I will also add shares of ICO. The bonus ere is that the majority owner is Wilbur Ross ands he ahs a long tradition at magnetizing his assets over time. In the 4 dollar area the stock is cheap and appears to have a good future.

In the area of larger companies that are good business at good prices I like CHIC. The retailer of ready to wear for the younger set has a 20% return on equity, 87 million in cash with no debt and generates over 88 milliohm more every year. I also like Motorola here. The company has struggled off late but it is still a player in mobile technology. Also betting the Carl Ichan gets paid off over the next five years strikes me as a god bet. Energy will continue to be an issue going forth and at less than ten times earnings, driller PTEN should be a beneficiary. FSS, the maker of safety and security systems, fire apparatus industrial vacuums and street sweepers seems very cheap here and the heavy insider buying would indicate I am not the only one who thinks so.

So there we have it. Some stocks that I would be thrilled to own at these prices, tuck away and forget about for five years confident that we paid a low price for a portfolio of good business that will be worth more than they are today by a significant sum. In addition they all have great balance sheets, very little debt and there’s a greatly reduced risk of permanent loss of capital over time. I have talked to some bulls who say that the rate cuts and 4th quarter earnings will drive us substantially higher. I have talked to bears that think the parties are over and we are going to have a huge sell off soon. The stock market is party mode, the bond market and the dollar look like newly divorced guys under a neon moon so they are so pessimistic. Who’s right? I don't really know. My suspicion is they both are. We ll get a continued rally off the rate cuts, earning for the third quarter will be okay and we ll go a bit higher. However the bill in the form of inflation and reduced economic strength will get paid early next year. However, no matter what happens in the short run I think this portfolio of stocks will be much higher 5 years from now. If I am investor and conducting myself in a business like fashion that should be all I care about. Day to day and week to week don’t matter as long as we have great balance sheets and are able to improve the underlying business over the years.

Next time I ll look at the current environment form a trading angle and see what conclusions I can draw. You can be both you know. A five-year portfolio and a trading portfolio. That way if you blow it all out trading you know the five-year plan will bail you out over time. If you do well trading..BONUS!