Deep Value Letter - Banner Ad / Email Capture

Friday, August 31, 2012

Labor Day Once Again

At last Labor Day weekend is upon us once again. This weekend marks so many special things doesn’t it.? The kids are back in school and the cries of “but I am bored” no longer echo across the playrooms and backyards of North America. College football season begins as we rediscover that violence with half naked women cheering the contestants to greater fury is the true embodiment of America. The pennant races are real now as baseball gets serious. It is celebrated the same way we celebrated all our holidays with copious amounts of alcohol, the ritual burning of tasty dead animals in the back yard and road trips down crowded highways.

Most of us have some vague idea of what the holiday celebrates. It is to honor all those who work right? The image many of us get is that of a factory worker or coal miner when we think of Labor Day at all. Indeed the holiday was started to honor them and the growing Labor Union movement at the start of the industrial revolution. It is a day to honor the contributions and sacrifices of all those whose labor built this country and continues to feed the engine of production. The men who built the skyscrapers, poured the steel, mixed the concrete and laid the block that form the foundation of this great nation. The celebration started in Oregon and spread around the country. By the time it became a federal holiday in 1894 in the aftermath of the Pullman strike, 30 states already had set aside a day to celebrate the contributions of the labor force.

We still honor and always should, these people. Those who rise early and descend into the earth to mine coal, or head to the rigs to bring oil and gas to the surface power our nation. The factory workers assemble the products that make our daily lives better. Millions of men (and  women) with calloused hands load their trucks each morning to build the homes we live in, the roads upon which we drive and the buildings where we earn our living. Labors contribution to our nation is incalculable and should be celebrated.

When I think of Labor Day I tend to broaden my definition somewhat. I include every American who gets up and goes forward to earn their living by making a contribution to society. I think of guys like my friend Carl in Key West. He makes a nice living in Key West as a cab driver.  Now driving drunken tourists around may not sound particularly laborious I wonder how many lives Carl has saved keeping folks from driving drunk or wandering around the streets Island Drunk? I think of the Tic-Tac kid selling software that makes companies work more efficiently and on a more cost effective basis.   How many jobs have been created because his products freed up resources and made a business run more efficiently? I think of my journalist friends who chase stories all over hells half acre and back to keep us all informed. What about the kid at the grocery store who stocked the shelves on the night shift last night so you had fresh produce and other products available to feed and care for your family? How about the bartender who poured your drinks, listened to your bullshit, put the right game on the TV and the called you a cab at the end of the night? Or the cook at the restaurant who fixed that perfect meal, the waitress who served you and the bus boys and dishwashers who cleaned up after you? They all work their ass off and make our world just a little better every day.

The definition of labor needs to be expanded to include more of us on this holiday. You know who I think we should honor on Labor day? Working moms. Especially single ones. I don’t care if you are a factory worker, an executive, waitress or a stripper on a damn pole. Be a working mother is LABOR. Even in homes with a father present there are some jobs and duties reserved to Mom. After carrying your fair share and earning a living all day women still have to come home to the kids and be Mommy with baths to be given, homework to be checked, boo-boos to fix, stories to tell, house work to do and other tasks that are pretty much reserved to Mom.  The single ones have even more as they have no one to help them fix the meals, pay the bills do the dishes or laundry or all the other tasks of making a home. Being a parent is hard work but it is even harder for a working mom.  I am pretty handy around the house and work from home but no matter how much of I do my wife is still being Mommy after my day has ended and I am parked on the couch with a book and a ballgame. When you are celebrating Labor Day this year pop one of those cold frosty delicious distilled beverages in honor of every woman who  works hard to earn a living and even harder to be a Mom.

We do not usually think of business owners on Labor Day as they are generally consider capital and nor worthy of recognition. That’s just wrong. These people work their asses off, rising early to open the store, dealing with the bills, the supply ordering, the staffing, the taxes, payroll and regulatory crap before the first employee arrives. They have to greet the customers, fill in for whoever didn’t show up today, solve problems, be a marketer and cheerleader, handle employee  problems, stay on top of trends and opportunities in their industry. They have to deal with salespeople, vendors, complainers and regulators. The responsibility for others families fall on their shoulders and it is a heavy burden. These entrepreneurs get up each day to open the liquor store, the gas station, the restaurant, the jewelry store, the barber shop and host of other businesses that provide the products and services that make our lives easier and better. They spend their nights with ulcers trying to eat them alive from the inside out as they sweat out the choices between payroll and mortgage, new equipment and the kid’s school bill, paying taxes or paying the bills and the other hard choices they must make each and every day as they grow their business.  As they reach a level of success they are the ones sponsoring little league teams, buying ads in school programs, buying tables at special Olympics fundraisers and contributing to other community causes and concerns. They Labor to make lives better for themselves and their families and by doing so they provide millions of jobs and make our communities better places. At least one of those frosty gin and tonics in a sweat covered cold glass of lime tinged deliciousness should be downed in honor of the engine of America, the small business owner this labor day.

You know who else labors t and should be honored this labor day. Immigrants. It is controversial subject and many are here illegally but a good deal of that is the result of ignorant policy. There are some who come here just to take advantage of social benefits and I am in complete agreement with deporting these freeloading bastards. Same with those with criminal records. Bye-bye thanks for trying, go the fuck home. But those who come here to work should be allowed to do so. The image of the lazy Mexican or Latino is just bullshit. They aren’t taking jobs from anybody, they are doing the jobs that our spoiled ass society doesn’t want to  and this has been the case since the dawn of time. Immigrants have always come here to take the lower paid jobs that society needs done. They have worked hard, sometime holding two or three jobs to make a future for their family. I see the same thing today in immigrants.  Those that come here to work, work hard and contribute to their new nation.  We need an immigration policy that can keep out the parasites and criminals but allows those who to come here to work, contribute and write a new chapter of the American dream.   I hear fears from some small minded people that letting all these Hispanic and Asian immigrants may change our precious nation. There is no doubt they will. Just like the micks, kikes, krauts, niggers, polacks, lunkheads, hunkies, hillbillies, white trash, ragheads, frogs, wops, dingo fuckers, chinks, goat bangers, and other races and nationalities that have come here in search of a new live and new hope, they will change our nation. For the better.  We are a nation of immigrants and the great melting pot of America has room for new generations of workers, builders and dreamers. I raise of glass of well chilled glass of New Zealand Sauvignon Blanc in honor of those who look to come here to labor for their dreams.

I think of those in our Armed Forces who labor to protect our freedoms. From basic training onward military service is hard work. It requires discipline, commitment honor and the bravery to rush to the guns when required. They serve often in missions they do not understand. They serve a public that is not always grateful for their service. From the highest ranking General to the newest private they serve for far less money than they could make in private life. They labor for their nation and the ideal we try to represent and I will raise a glass of cold delicious frosty beer in a salute to their labor and sacrifice.

 I even think we should raise our glasses this labor day to honor some government employees. The policeman and fire fighters who risk their lives to keep our homes and families safe. Those who rebuild and repair our roads, sewers, highways, bridges and electrical lines that makes our lives so much easier and safer. Those who keep our neighborhoods cleaner and free of unsightly trash and garbage by carting all our trash and junk off to the dump should be thanked and honored. To those teaches who labor to educate our children and push them to new heights of achievement I offer my thanks and appreciation. All of those whose toil and labor to improve our cities and towns should be considered this labor day. I raise this crisp, chilled martini in your honor.

Of course I do not offer any honor to the bureaucrats, politicians, administrators, tax creators and collectors and other parasites who live on the public dime without offering any real benefit to society. To those who make it difficult for workers to work, first responders to respond, teachers to teach and citizens to thrive I offer no honor or respect. I spit this well used cocktail onion in your general direction.

It is Labor Day. I think the definition of the day needs to be expanded to everyone who rises each day to earn their daily bread, to provide for their family, to offer their children a better life, to achieve their dreams and earn their success. It does not matter if you wore a coat and tie, grease stained coveralls, a business suit and heels or a nurses uniform if you went to work to make your life more secure, your labor in pursuit of your own dreams has helped to make our national dream closer to a reality. This nation is built not just on the hopes and dreams of our citizens but the effort, yes the labor that has gone into reaching for those hopes and dreams. To the dreamers who work I celebrate you and lift my glass high in praise of your labor and your contribution to the world.

Now light the damn grill, turn on the game and someone get me a refill. Happy Labor Day to all.

Wednesday, August 29, 2012

Invest or Bet?

Last night I had the inevitable discussion when we talk about how to select stocks. If you stick to value, Tim, you are going to miss all these great companies with such great products. The current spin off these days is where and when do you buy Facebook (FB). After all they have a billion users and are the new face of technology.  How can you just skip a stock like LinkedIn (LNKD) that is the future of networking and job search? What about game changers like Amazon (AMZN)? They have moved reading from paper to bytes and killed big retail for books and electronics.

All of this is true but there is another truth that needs to be considered.  These are great companies but they all have a value as a business. When I evaluate a stock I calculate the tangible book value, an estimated liquidation value, a financial value and strategic acquisition value based on current multiples and an ongoing intrinsic value. My models may not be the most eloquent but the time I am done I have what has proven to be a really good rough estimate of what a company is really worth as a business. Most of these darling stocks are great companies but the price is far disconnected from business value they are little more than betting slips in my opinion.

My more vocal opponents remind that these are great growth companies and you can’t value them based on current numbers. You have to consider all the fabulous growth in earnings and revenues. You have to price in potential. I think that is ridiculous but decided to give a try and see what the results were if we priced these stocks as ongoing concerns and based my ongoing concern intrinsic value based on the sunshine and lollipop estimates of Wall Street for these great companies.

I will start with Facebook the granddaddy stock that is the subject of endless discussion. I will start by saying I think that this company is a great example of Nassim Taleb’s theory of success. They just got lucky and were in exactly the right place at the right time. Management has not shown any exceptional talent for decisions or business and I doubt the company will be the raging success advocates are hoping. Having said that based on today’s numbers my intrinsic value calculation is $9.38 a share. Ridiculous given all the wonderful potential right? Now let’s apply the analysts’ estimates of a 30% earnings growth rate for the next five years. When I use those projections I come up with a value of $25.50 a share for the company. However that is based on numbers five years out so I have to discount it back to today.  Using a 10% discount rate (yes it is high. Using a low discount rate in future value calculations is absurd in my opinion) I come up with a value for the stock of $15.52.  Even with all those rosy assumptions the stock is still overpriced at current levels.

The exercise produces similar results for the other darling stock. LinkedIin on today’s numbers has an intrinsic value of about $14.57. If I use their highly optimistic 66% a year growth rate for the next five years I get a number of $73. Discounted back to today that is roughly $46 a share.

 Amazon today is worth roughly $31 a share. Based on the projected 30% growth rate the numbers based on the potential in five years the valuation is$58.25. Discounted back at a reasonable rate of return that value becomes $36.

 Apple (AAPL) has a value on today’s numbers of $337 a share and using a 21% growth rate the number becomes $769 discounted back to $477.

Just a sure as the sun came up today someone is going to take great umbrage at the discount rate used in my calculation. You would be better served by focusing on the fact that only Apple, and that just barely, trades for less than the undiscounted valuation derived using very aggressive 5 year estimates.

These are great companies that do indeed have world changing potential. However their stock price is not reflective of current or potential business value in my opinion. They are priced as betting slips in a personality contest. Trade and invest accordingly.

Friday, August 24, 2012

Follow the Leader

In addition to never learning to play the piano or hit a curve ball I really regret never learning to program. I love to sit down and play with market based ideas and concepts.  I have some friends who can have 20 years of data scrolled up and crunched in R before I can get the idea out of my mouth. On my own however I have to crunch it all though good old Excel and it can be a tad laborious. I am told it is painful to watch and I have invented new words during particularly cumbersome projects. I recently tested some ideas related to insider buying and I am happy to report that Jon Moreland’s databases at Insider insights make it easy even for me.

I have been playing around with a simple idea for a few weeks and testing verifies I am on the right path. The CEO and CFO of a corporation know more and the condition and plans of a company that anyone else. When they buy a large amount of stock in their company it would seem to be a significant event in my opinion. I am happy to report that my suspicions were correct. From 2008 to the end of 2011 riding the coat tails of the two top executives resulted in 75% winning stock picks with an average gain of more than 80%. So far in 2012 we have 36 of 48 winners with an average gain of 74% according to the database test.
I only count direct open the checkbook and buy in the open market purchases. Option exercise, stock grants and other forms of compensation are not included in my search. The individual buy has to be at least $50,000 in value to make the list. For the purposes of the study the shares are held until then of the calendar year. That actually caps the potential gains but it also saved me about two hours of wrestling a spreadsheet. It appears that a longer holding period delivers higher returns confirming that insiders tend to be long term investors in their company shares.

 Looking at the data we can often go many weeks, and even months, between buy signals. However ion the past couple of weeks we have seen some strong buying activity that might be profitable trading and investment opportunities. The largest purchase was of course the monster $17 million dollar investment by JP Morgan (JPM) CEO Jamie Dimon. Although a large chunk of the purchase was funded by the sale of preferred stock Mr. Dimon opened the checkbook and added about $3.6 million to buy shares. The last time he bought shares was in January of 2009 and although they fell sharply after he purchased the stock recovered and he now has a gain of more than 50% on those shares.

We also saw buying on one my favorite long term banking names. Both the CEO and CFO of First Niagara Financial (FNFG) have been buyers of their company stock in the past week. CEO John Koelmel purchased 25,000 shares and CFO Gregory Norwood added 10,000 shares to his stake in the company.  Two directors were also decent size buyers of the shares recently. The stock currently trades at a small premium to tangible book value but with an equity to assets ratio of 13 and nonperforming assets below 1% of total assets the bank is a solid investment. It’s up sharply today but I would be a buyer in a market decline with the intention of holding for many years.

Boston Scientific has struggled over the past few years. The company has struggled in the very competitive market for hear stents and although they have several new products for the cardiac rhythm management market sales have yet to take off in a meaningful way. 45% of the company’s revenues are form the stent market and BSX is struggling to gain market share in a crowded field. The CEO, William Kucheman, appears to think that the new products and increased exposure to emerging market swill lead the company fortunes and stock price higher as he recently opened his checkbook and bought an additional 10,000 shares of stock. Last week President Michael Mahoney also purchased 22,000 shares of BSX in the open market. I like this stock as a long shot stock pick for aggressive minded patient investors.

Following the top executives of a company when they buy shares is not foolproof but it does tip the odds in your favor. Always do your homework but it makes sense to track CEO and CFO open market stock purchases.

Originally Published on RealMoney on 8-3-2012

Thursday, August 23, 2012

Hedging and Shopping

Two months while expressing some concern about the markets I played around with ways to hedge the risk of news driven volatility in a portfolio. I formed some portfolios that were hedged dollar for dollar short position in the index. I looked at using the biggest 52 week losers among index components, those  yielding at least 3% and trading at new lows and the ones trading below book value. I also had one using F scores but that failed almost out of the box and was discarded. The results are informative and I want to review them and share some other observations about the portfolios. I am also going to rebalance and continue testing this approach.

The portfolio of stocks at new lows didn’t work that well. Overall the mix had a two month return of (1.76)%. As the market rose 10% the long positions gained just 6.59%. Although 16 of the 20 stocks went higher the four losers averaged more than 11% with GameStop (GME) and Lexmark (LXK) leading the way on the downside. I am going to keep tracking this one to see how it performs when we finally have a down cycle in the market. As a long biased portfolio the short term results are disappointing. If you were leaning short two months ago as many were this approach saved you a ton of cash.

The portfolio of stocks trading below stated book value did well in the rally. Overall the fully hedged portfolio gained 4.53%. 9 of the 11 stocks went higher for an unhedged gain of 19%. Unfortunately since we used stated and not tangible book Alpha Natural Resources (ANR) was in the mix and the shares declined more than 34%. Stocks like First Solar (FSLR) Phillips 66 (PSX) and NRG Energy (NRG) led the way higher with huge gains in the tow month period. If you were long biased but nervous this approach has worked okay for you so far.

The star so far is stocks with the largest 52 weeks losses. This was a portfolio that was long stocks down more than 50% in the last year hedged dollar for dollar with a short index position. The portfolio gained 6.28% over the two month period. The unhedged portfolio of losers would have shown a gain of 22.67%. Although 6 of the 15 stocks continued to move lower those that rebounded flew. Sprint (S) more than doubled. First Solar (FSLR) was up nearly 80%. Metro PCS  (PCS) stock price is up more than 60% higher than it was just 8 weeks ago. This seems to be a method that may have value for nervous investors looking for hedged exposure to an uncertain market. It’s early in the test but I will be watching developments with this portfolio carefully.

It is also instructive to look at the stocks without a hedge. Traders may want to start focusing more on stock in the index that are falling knives with large 52 week losses instead of the momentum darlings. These issues have rebounded sharply rising far more than the broad market. In today’s low volume short term trading dominated market once the fundamental sellers such as mutual funds and institutional asset managers are done exiting the stock there are few natural sellers left. When the index buyers and traders move into the long side of the market the buying pressure in the absence of sellers causes short covering and spectacular rallies. With no fundamental selling taking place these issues should track the market or even outperform slightly on the downside.   With a reduction in the number of natural sellers and absence of retail investors it appears that losing stocks may revert to the man much faster than years past. At least that’s the theory and I plan to continue tracking the results of these portfolios.

Hedged mechanical portfolios are not part of my regular activities but is a fascinating subject. In addition I suspect there is valuable information to be garnered by tracking and testing these ideas.When I was reviewing the hedging strategies yesterday I was impressed by the returns some of the individual stocks posted during a two month period. The list definitely provides traders with a solid source of ideas but I was curious to see if the current selection provided long term investment opportunities as well. I decided this morning to sit down and use them as a shopping list to see if there were any true bargains. I have written in the past about the strong returns available by investing in S&P 500 stocks trading below book as well as catching the falling knife stocks that had declined more than 50. I have not tested the higher yielding stocks at new lows but it is an interesting idea and may provide an opportunity or two for investors.

The largest stock on the list is McDonalds (MCD), a company I love to hate. This is a great company and one of the great American success stories. They dominate their industry and have one of the widest moats in the history of the world. Much like Coca Cola (KO) you could not recreate the brand with any amount of capital investment.  As the parent of a 9 year old I hate the place. The dividend yield is over 3% and the payout has grown by more than tenfold in the past decade. It is reasonable to assume that the dividend will continue to grow in the future. However the stock is not cheap on any reasonable metric for a long term value investor. The shares trade at 6 time book value. The EV/Ebitda ratio is ten and the price to sales is a healthy 3. Even at close to 52 week lows the stock trades at twice my estimate of intrinsic value. This is a stock that should be on your buy in a crash blue chip list but it is far from a bargain today.

One stock that does have some bargain appeal is Safeway (SWY). Having owned both Winn Dixie and SuperValu (SVU) over the past few years I am well aware of just how bad the grocery business is today. Wal-Mart has endeavored to crush the competition and for the most part succeeded. To complicate matters the weak economy has made it very difficult to pass along higher food costs to consumers. Safeway is one of the bigger chains and better known company’s in the industry and should be among the survivors of the industry. While the shares are not cheap on a book value basis the shares trade at an EV/Ebitda ratio of less than 5 and a price to sales ratio of less than $.10 on the dollar. Safeway also trades at a healthy 30% discount to my estimate of intrinsic value. The stock yields 4.6% right now and management has better than tripled the payout since 2005. Safeway is a solid company in a tough business and the stock should reward patient investors.

Shares of office supplies retailer Staples (SPLS) fell sharply recently as a result of weak revenues and lowered guidance. The stock now trades blow the 2009 lows. In addition to weakness in Europe US sales slumped in the quarter as businesses become more cautious about spending. The release of Windows 8 is expected to give some support to top and bottom line in the last quarter of the year. I suspect that we still see some continued weakness however as many businesses are delaying spending until after the election when the regulatory and tax picture is clearer. Staples in the largest office supply company in the world with sales of $25 billion so they should be able to weather the storm. They also have exposure to emerging markets that could drive long term revenue growth so there are some positives in the picture. The company has done a lot of acquisitions over the years and is not cheap on tangible book bases but the EV/Ebitda ratio is just 4.4 and the shares fetch just 70% of my intrinsic value calculation. At today’s price the shares yield more than 3% so you do get to paid for an economic turnaround to life the profits and share price.

Using the list of dividend paying stocks in the S&P 500 near new lows seems to be a useful approach for finding stock ideas. Not all of them are cheap but some are cheap enough to consider for long term investors. I would probably wait for a solid market pullback to buy any of them .

Tuesday, August 21, 2012

Civility, Municipal Bonds and Playoff Baseball

I have noticed of late a disturbing lack of civility in the world. Keep in mind this is coming from me. I couldn’t wait to grow older as I ASPIRED to be a curmudgeon. I am far from politically correct and have been known to be moderately to excessively foul mouthed at times. I call a fool a fool and will call you out for stupid statements if you insist on making them. Even with these truths, at a basic level of society I see all pretense of civility and basic kindness to others disappearing at a raid rate.

I blame the internet. You can be anyone anywhere on social media and this emboldens folks to say things they would not have to balls to say in person. Some think that being a semi arrogant asshole is hip.  One such character suggested the other night that I perform physically difficult sexual acts upon my person in response to a fairly innocuous, and certainly not insulting, remark. In the ensuing exchange we ended up blocking each other’s accounts. It’s a shame as the person in question occasionally had some interesting salient points to make but his need to embrace his inner asshole overrode any value he may have provided. I don’t care how brilliant you are, or imagine yourself to be, life is too short to put up with assholes.

The trend towards uncivil conversation is most marked in political discussions.  I am appalled by the things those on the other side tend to call each. Nazi and communist are two of the nicer labels tossed around.  Incredibly it is the least informed that yells the loudest and resort to the most base of insults. Volume replaces intelligence and fuck you stands in for actual policy statements. I love a good argument or spirited political discussion. I happen to think both parties are evil personified and delight in hoisting their adherents on their own petard any chance I get. However I have never lost a friend or resorted to base insults as part of the discourse. I have certainly never insulted someone I have never or just met over their political beliefs. I may think it but civility demands I get to know them better before informing them of their intellectual shortcomings.

It has spilled over into everyday life. I may be happy and quick to tell a Red Sox fan that they root for a slime encrusted scum sucking baseball team but in my day to day life I try to be civil to those whose path I cross. Please, thank you, have a nice day, excuse me, pardon me are all phrases that are disappearing form the world. People seem to think that being rude to a server or store clerk is a birth right. Pushing and shoving through crowds is the norm not the exception at most venues. By the way I can now confirm that this is indeed truer in the North than the South.I heard thank you and excuse me more in the first week in Orlando than in a year in the Mid Atlantic.

I am never going to be the nicest guy in the world. I will always have a foul mouth.  I will never suffer fools easily. But I do manage to get through the day without going out of my way to antagonize, belittle or insult those I meet along the way. Unless they really deserve it. You do not have to be a milquetoast but there is no need to be a random and constant asshole either. Save that shit for your friends like I do. They are used to it.  Especially those who root for the Red Sox and believe in growth stocks.

Warren Buffet has caused a bit of furor in the municipal bond markets in the past week. The sage exited his portfolio of credit default swaps on munis to the extent that he could. He still holds some but any he could contractually cancel were cancelled by his insurance companies. This caused quite the  conversation and lit some of the investment oriented social media networks on fire. Is he concerned about state and local government finances? Some speculated it was a reallocation of assets to a higher return vehicle but since they have cash to the tune of $40 billion that they have been unable to deploy I doubt that is the case. I think it is simple math. If there is a 20% chance of a muni financial meltdown then writing the swaps has a huge negative expectation. Simply put the squeeze is no longer worth the juice and Berkshire wants out.  

We will not hear from Warren on this matter unless we get widespread defaults.If that occurs Warren will come out and in a self-deprecating grandfatherly fashion inform us that his extraordinary common sense has once again saved him from a grievous error. If nothing happens we will never hear another word about the decision.

Some postulate that this indicates that we are on the verge of a huge meltdown in the muni market. Dear God I hope so. Right now long term municipal bonds yield a little over 3%. That’s not worth the risk of owning for long term investors. I would love to see a sell off in this market place. Muni yields of 5% or higher are a long term conservative income investors best friend. I do not think we will see a sell off as a result of Warrens moves but interest rate movements and government policy may push yields higher over the next few years.

I am not a muni expert by any chance but I have learned enough over the years to know a few things. From 1953 to 1980 muni yields rose almost continuously. From 1980 to today yields have fallen in similar fashion. Buying during recessions has always been a solid profitable trade for muni buyers. GO default rates are very low even when times are horrible. Buying individual binds works better than funds. Unless you can buy a closed end municipal fund at a double digit discount. Yield chasing in lower rated or unrated binds is a horrible idea unless you have very specialized local knowledge. Municipal bear markets are usually the result of a rising interest rate environment. Sell offs are usually a result of a lack of buyers rather than widespread selling. Most munis are held by individuals, funds and insurance companies that are very slow to sell in volume. From 1970 to 2009 there were 54 muni defaults. Only three were General Obligation bonds. The default rate of AAA binds over that period was 0. From 1970 to the end of 2011 there were a total of 71 defaults by rated bond issuers. 2450 unrated bonds defaulted. Don’t buy unrated bonds without in depth specialized and local knowledge. Never ever buy muni closed end funds on the IPO or at a premium to NAV. Wait for those rare occasions when they sell at large discounts and buy the higher quality portfolios with great abandon.

The day to day minutiae and movement of the muni market is over my pay grade. For individuals the rules are simple. Buy when we are in a recession, interest rates have risen and you can lock in yields of 5% or greater. Buy when Muni funds trade at discounts. Ignore what Warren Buffet says or does. You are not Warren and contrary to his persona he does not give tow shits about you or your portfolio. That goes for every other guru and talking head. Think for yourself and go opposite the crowd in all markets.

  Looking at baseball the standings tell me we have an interesting Spetmeber coming up. All of the divisions are fairly close with no lead being more than 6.5 games. In the NL East it is Washingtons to lose and I do not think they will. Even if they shut Strasburg down early to save him for the playoffs they have the best pitching staff in the league. They have a team ERO of just 3.24 and teams are hitting an enemic  .232 against them The bats aren’t bad either. The team is fifth in the NL for batting average and fourth for home runs. Atlanta has a shot and the teams play six more time before the end of the year but I don’t think they can do it. Davy Johnson and crew will make a playoff run and I would not be shocked ot see them in the series.

No one is going to catch the Reds in the Central Division. They are sixth in average and second in home runs. The pitching staff is third in ERA. They have a tough schedule but Votto will be back for September and I think they finish s strong. Pittsburgh will make a run but I do not think they can catch the Reds.
The Giants and Dodgers have five games left to play against each other. The Dodgers need to sweep them as the Giants have a far easier schedule to finish the year. I think they do and the Boys in Blue are playing ball in October.

The Giants will be there as well. I think they beat Pittsburgh for the Wildcard.

In the AL West the Angels are going to have make an incredible run to make the playoff picture. They have the talent. They have the talent but do not seem to have the will. If Oakland continues to win the most talented team on paper will miss the play-offs. Texas wins the division going away.

Chicago is second in the AL in home runs but Detroit is hitting for a much better average. The pitching staffs are close with both hovering around a 4.0 ERA. They have seven games left against each other. Whoever wins that series wins the division and goes on to the playoffs. I think it is Chicago this year. The Robin Ventura story and Adam Dun comeback  are just too good for the baseball gods to ignore.

In the East it’s the Yankees once again. Tampa Bay has a pitchers chance and may make it interesting but the Yankees just have too much offense. With a fifth in the league ERA the pitching staff is not terrible and they will hold off the pesky Rays. Baltimore has chance f the pitching staff holds up and they can continue to hit the long ball. The September schedule in the AL East is brutal and that favors the Yankees.

There is a very good chance that the Orioles and Rays play the wild card game. If that happens I think the baseball gods will honor the 15 years of sacrifice and send the Orioles to the next round. If they fold then the Rays will probably face the second place Central division team and get homered into postseason oblivion.

That is all for today. To sum up:

Be Fucking Nice.

Buy munis with over 5% yields or when the CE funds trade at a double digit discount. Ignore the noise.

The Orioles have a shot at this thing. 

Thursday, August 16, 2012

Mandels and Alligators

We are finally pretty much settled into the sunshine state at last. They really should call it the “sunshine interrupted by a few hours of intense end of the world type thunderstorms” state. It is of course summertime in Florida and it is hot during the day and just about every afternoon you get a low budget end of the world movie type thunderstorm to shake things up. We really hit the neighborhood lotto given that we negotiated everything from Maryland and had a friend check the place out for us. The Summerport neighborhood of Windermere is as close to sitcom perfect as you can get. Lots of kids, friendly neighbors so far, trails for walking and biking, countless lakes and ponds in the area, a great pool and just about everything else we hoped to find.

To sum up, I fucking love it here. My northern friends worry about the heat of summertime. Who gives a sht. Yes it is hot and humid but so is the Mid Atlantic in the summer. You will never hear me bitch about the heat. I will sit on the lanai (Floridian for screen in porch) and read a book, smoke cigarettes and drink iced tea in the middle of the day. I take the dog for several long walks a day regardless of temperature. The upside there is that I lost about 10 pounds since we got here without giving up grease or gravy. I love this shit. I will love it when there is a foot of snow on the driveways of my “can’t handle the heat “friends up north. No one ever shoveled sunshine. Getting me back north of the border may turn out to be impossible. I should have moved here when I first started thinking about ten years ago. I can take all the old people move to Florida jokes. Fuck you I am getting old and I live in Florida. I have mandles and a sun hat. Kiss my happy ass.

One of the cool things about this development is that they have kept a ton of open space and left large pockets of undisturbed nature. In this case this means lot of lakes and what was once a swamp apparently. Every day on my walks I see a shitload of wildlife and birds. Now, herons, cranes, armadillos and lizards of various stripes are interesting but I am absolutely fucking fascinated by alligators. I see one or two a day at least lurking with their nose and eyes just above the waterline in the various ponds and lakes around here. Most of them are smallish but we did have about a five footer swim over to take a look at us one day. They are just stealthy fucking death machines and cool to watch. I am told that when they get over six feet or so or become aggressive they are removed to less populated areas and I have to admit I cannot fucking wait to see a gator capture on one of my walks.

Now lets move on to more interesting topics. The market continues to befuddle and bewitch most participants. Old traders and investors as just confused as shit these days. All the old patterns, statistics and told that worked for decades just are not worth a shot right now. The macro guys are getting screwed like a hooker holding a two for one sale at a Viagra clinic. There are almost no carry trades left with the developed world holding firm to ZIRP and money printing. The macroeconomic fundamentals are just fucking horrible but the central banks keeping throwing the markets treats in the form LTRO and money printing so shorts get just crushed in spite of near depression levels of economic activity. To make it worse China has discovered a new source of enjoyment in screwing traders with rhetoric. Gonna ease, shorts get crushed. Growth slowing, longs get crushed. I suspect they are just making this shit up and then watching the carnage they create in the markets.

It is no better domestically. Jobs still suck. Real estate is being talked up but there is another wave of foreclosures to come in many areas of the country so I doubt we have a true bottom yet. The first guys to call a bottom usually get crushed and I suspect that happens here. The introduction of hedge fund money into the rental real estate market is probably going to create an excess of rental single family homes while simultaneously driving purchase prices up at the same time. If I was sitting on a shitload of cash I would get in front of the funds right here and accept some downside pricing risk on rental homes. You can get a better price and pick up a much higher term rental yield that the funds will be able to when they all rush into the local markets.  I would become best friends with the officer of every bank in town that has OREO on the books and offer to take it off their hands at a reasonable price. We are not at a bottom but we are close enough that a shitload of money can be made, especially if hedge and private equity money begins to distort valuation over the next few years.

The stock market has worked higher even as the fundamentals worsen. Revenues this earnings season were just awful. Margins held up and are still at historic highs as corporations fight to control costs and caught a break from lower material costs in the quarter. We have seen many of the mo-mo stocks get crushed in here as a result of revenue shortfalls, earnings misses and lowered guidance. The sluggish economy is catching up with many of these stocks and this is usually a warning sign.

If you dig deep enough into the market there are still opportunities. I like the long term outlook for commercial real estate and think REITs like KRG, CDR, CWH, NRF and ABR will pay off huge for patient investors. Gradual improvement sin both commercial and residential real estate are going to help the banks improve their balance sheets and I like regionals like KEY, HBOS and HBAN. Smaller banks are facing higher regulatory costs and many will have to be sold to larger acquirers. I have a list of about 100 banks that trade below tangible book value, less than $1 billion in assets and excess capital. I expect to make a lot of money off these names. I am watching the 13d filings of bank activists like Joseph Stillwell and Lawrence Seideman for cheap banks with a potential catalyst.

 My energy names have all rallied well. Stocks like PTEN, NBR, PVA and HES have done extremely well. I am not going to chase them here nut I am not selling any either. I would be a buyer of EXCO on any weakness. Natural gas prices have improved but they are still very low historically.  Coal stocks have seen a dead cat rally but more problems lie ahead for these companies. The debt side of the coal picture is much more attractive than the equities right now.

I don’t really have a clue what the stock market is going to do. Neither does anyone else. Anybody with a strong conviction about the next 6 to 12 months in the market is a fucking idiot in my opinion. The market is not particularly cheap at a 16 trailing multiple and a Schiller PE well above the long term averages. The economy remains weak and it shows in corporate revenues. We are seeing cracks in market leaders. The fiscal cliff is looming. On the flip side sentiment readings are pretty neutral and indictors from the options market are actually bullish over the short term. Zero interest rates policies will be with us for two more years at least and this pushes money into stocks. We have never seen this type of global central bank activity so it is almost impossible to know what will happen. I am sticking with a policy of reacting rather than predicting and buying what is safe and cheap.

It is an election year so I guess I should comment on politics. Here is my comment. We have two groups of people telling us how much of our money they will steal and exactly which freedoms they will curtail and the great pool of idiocy that is the public is actually arguing which is better.  I swear to god if the republican would just say freedom means free and in addition to lowering taxes and creating jobs we no longer care who you fuck or what you do with your body they would never lose another election. They are just too fucking stupid. The libertarians say it and Gary Johnson is the best candidate they have ever had but the party has too weird an image to gain ground with most Americans. A quote in the Orlando Sentinel today sums it up. People like to vote for names they recognize. You fucking idiots are getting spoon fed pure shit from two sides and arguing over which tastes better.  Having said that I think that Mr. Obama has been an unmitigated disaster and has to go or we face real problems in the US. We cannot afford his brand of big government solutions. There is at least a hope that Romney will use more lube while fucking us.

Any politician who talks about anything but jobs and education is just another form of thief and liar. Quit relying on sound bites and ask yourself if you really want to pay for your neighbors at the point of a gun. Do you really want someone else determining who you can marry? Should a politician be in charge of your healthcare? Your personal habits? Your sex life?  Do you want your children dying to keep the peace in some far off land that even Sally Struthers won’t visit? I do not. Both parties are selling a version of lies that has nothing to do with freedom, liberty or prosperity. Provide a background where the economy can grow and provide jobs and the local infrastructure to give my children a world class education without the latest per theories and concepts fucking up their little brains. Beyond that Mr. Candidate and office holder take your good intentions and shove them up your ass. I really do not need you to run my life.

Now onto more interesting and important stuff. It is mid-August and the Orioles are still relevant. We are six games behind the Yankees and in a dead heat for the wild card right now. We are playing impossible ball and winning in spite of terrible stats. We have a huge negative run differential. We are 23rd in the majors hitting just .244. it is sure a s shit not small ball as we are dead fucking last in stolen bases. It is not defense as we are also dead fucking last in fielding percentage. It’s pitching with the fifth best team ERA and the long ball as we are fourth in the majors in home runs. It has to be management as the team is not looking any different than years past but we are winning and the bull pen is delivering like it has not in years. Whatever it is I will take it. The team is fun to watch and we matter in August. That is a lot more than I could have hoped for in April.

On the football front I have to pick some new teams. I will still cheer for the Ravens but I will only see their prime time games down here in Florida. Besides football is more fun when it’s local. I am going with Buccaneers since they are closest, the Jaguars suck and I spend too many years hating the Dolphins to cheer for them now. On the college side it was a bit more difficult. I could have gone with Miami as the U has been a great football school over the decades but they are too far away and the team looks like they will suck. FSU is a team I have rooted against forever. I am going with the University of Florida Gators. Gainesville is closer and I am fucking fascinated by alligators. With my sunhat, mandels and the cool ass blue shirt with an orange gator on it I am going to one stylish motherfucker all season long.

Life is good. The kids are all good. The wife is fantastic. The sun is one bright shining warm ass son of a bitch. I have palm trees and alligators.

Tuesday, August 07, 2012

Buy Ugly

Yesterday my son called to check in and talk alligators, fishing and baseball. While we were at it he wanted to rebalance his 401k as his company made changes in the offerings available to him. After some discussion we settled on a mix of large value stocks, Europe and Energy. I’m not a huge fan of domestic blue chips right now but he is 24 and will be dollar cost averaging on a bi-weekly basis for many years so I can live with them in his portfolio. The other funds were the cheapest asset classes available to us in the mix. Had there been a real estate or bank stock fund we would have allocated to those beaten up sectors as well. I am trying to build a portfolio of the cheapest assets available so that over time he benefits from the inevitable long term reversion to the mean. If the world doesn’t end he will do very well with this approach.

I talked yesterday about how cheap I think real estate is from the perspective of a long term investor. I have also talked at length this year about energy and the cheap assets available in that sector. Both of these continue to be true. I have talked a little about Europe and have been a buyer of selected large European financials like Royal Bank of Scotland (RBS) and Aegon (AEG).  I have hinted about Europe a few time and even suggested that ETFs for Spain and Italy might be a reasonable speculation.  When I look at cheap assets around the world the simple truth is that Europe is cheap and has to be considered by long term patient investors.

The losses in European markets have been fairly substantial and this is creating compelling investments opportunities for long term investors. This is not a clarion call that Europe has bottomed and should be bought with abandon. The financial situation in the old world is still a mess and despite positive rhetoric form financial leaders no clear solution has emerged. The markets will still be news driven and extraordinarily volatile in my opinion. However buying during periods of great turmoil has been a successful strategy for long term investors as long as there have been markets.

I thought it might be helpful to look at what some of the leading value oriented European funds have been doing during these volatile times. One of the more successful finds has been the Royce Europe Small Cap Fund. Even after a 20% loss in 2011 the fund has one of the best 3 and 5 year returns in the class. The fund has the bulk of its assets in the northern European nations that have fared much better than the troubled southern sunny European nations. They are heavy in Germany and the UK and very light in financially stressed nations like Spain, Ireland and Portugal. Fund manager David Nadel recently told the LA Times that he is looking for companies that sell their products globally with an emphasis on those that have significant exposure to emerging markets.  Two stocks he highlighted were Pfeiffer (PFFVF), a semiconductor company and Victrex PLC (VTXPF) a UK plastics company. The funds top sectors are healthcare, and technology.

That also seems to be the approach favored by the value investors at Mutual European fund, the Franklin Templeton (BEN) offering that traces its roots back to Michael Price, Max Heine and the roots of value investing. The majority of the fund is in the UK, France, Germany and Switzerland with limited exposure to the more troubled nations. Top holdings are large multinational companies like Vodaphone (VOD), British American Tobacco (BTI) and Royal Dutch Shell (RDS-A).

Europe is a mess and it is probably not going to be pretty again anytime soon. However there is an opportunity to buy ugly and prosper over time. Along with real estate and energy Europe is cheap on historical measures and should provide very attractive long term returns for patient investors who can stomach the volatility.

Wednesday, August 01, 2012

Voo-doo and Oil

I have talked on several occasions of late about energy stocks being one of the few truly cheap sectors of the stock market. In addition to the large drop in natural gas that has gotten all the headlines oil prices weakened in the second quarter as well. Oil initially declined by roughly 28% before rebounding in the past few weeks.  Oil prices on the New York exchanges are still roughly 20% off the highs for the year. Performance for the exploration and production companies, as well as oil service stocks has followed pretty much the same track as the commodities. The price weakness has sent me scouring the oil sector for ideas and we have come up with a few so far.

It is no secret that I make my stock selections based on underlying asset value. I do not usually pay a lot of attention to PE ratios or analyst forecasts.  I find them to be unreliable indicators of absolute value and pretty much ignore them. This doesn’t mean they are wrong or can’t be used in some form to pick stocks. It means that as I rule I do not use them. I try to be pretty open minded  so when I received an email from the Voo-Doo Prof with some earnings growth compared to PE stock picks I looked a little deeper.

Profess Mark McNabb is the Director of the M.S in Finance at UT-Dallas and is a very astute investor and observer of markets. He recently had his class put together a spreadsheet of energy related stocks with PE ratios under 11 and expected earnings growth over the next two years of greater than 10%. The spreadsheet had some interesting names with strong price appreciation potential so I begged the good professor’s permission to share with readers. He kindly agreed.

A few of the names will be familiar. Hess Oil (HES) is one of my favorite energy picks and with a current PE of 7 and expected growth of almost 11% the company makes the cut. Nabors Industries (NBR) is a favorite pick in the group and also makes the list of potential undervalued energy growth names with a PE ratio of one third the expected growth rate. Both stocks also trade below tangible book value and are considered too cheap not to own at current levels.

Some of the more intriguing names are those that might never hit my normal screens. Matador Holdings (MTDR)is an oil and gas company that focuses on exploration and production in the unconventional US fields. Their primary operations are in the eagle Ford and Haynesville fields. Like many companies in the unconventional fields they have been switching focus from natural gas to oil and liquids. Matador seems to be achieving that goal quicker than many of their competitors. Capital expenditures for 2012 will be 94% focused on oil and liquids operations and oil production is expected to rises by 10 fold year –over year. So far they are on track to meet their goals. Earnings are expected to grow by 179% annually but the current price to earnings ratio is just 8.2. If they come anywhere close to the estimates the stock is extraordinarily cheap candidate for growth investors.

Global Geophysical (GGS) is another stock that probably doesn’t’ make my usual lists but may be very attractive to growth investors. The company provides seismic data to the oil and gas industry and has shown consistent growth. Over the past five years revenues have been growing by 35% while earnings compounded by 14% annually. For the next few years earnings are expected to explode by more than 100% and the stock trades at just 6 times earnings. The stocks also trades for less than 3 times free cash flow and has an EV/Ebitda ratio of just 2.5 so it is cheap on several earnings metrics. Insiders own 44% of the shares and at least one has been a buyer in recent weeks. The stock is down more than 60% over the past year but could surge higher as oil prices improve over the next two years.

Keeping an open mind is critical for long term success. When someone with a long record of success and strong idea generation like Dr. McNabb suggest a strategy investors should give it due consideration.