Deep Value Letter - Banner Ad / Email Capture

Saturday, May 25, 2013

It is Memorial Day. Remember Me

They call to you this weekend. From Flanders Field, from Normandy, Khe San, Gettysburg, Concord and Lexington, the Chosin Reservoir, from the hull of the Arizona, and from all the hundreds of thousands of resting places marked and unmarked they call to you. They call to you from the depths of the Pacific and the jungle of Asia, from the deserts of the American Southwest, from the fields and cities of Europe, from Cuba, from around the world they call you with a request this weekend. Remember me.

Remember who I was and the hopes and dreams I willingly laid upon the altar of the great American experiment. Remember that like you I was once flesh and blood and I gave that up to secure a portion of the American Dream and secure essential liberties at home and even for people around the world.  You may not have agreed with the rational for some of the conflicts we have ensnared ourselves in over the centuries and I am not even sure I fully understood it. But our nation called and I answered. Liberty carries a price tag and I paid it for you. Remember me

War is an idiotic human endeavor and I wish we never had to go engage in such a wasteful exercise. But at times throughout history it has been necessary for good men to take up arms to secure our freedom from tyranny and defends ourselves against expressions of pure evil and hatred. When such times have arisen I have taken arms and defended the freedom and liberty in which I believed and for which all humanity years. Remember me.

Do not remember me with tears and sadness. Pray solemnly and shed tears if you must but that it is not my preference. Remember me in a violent celebration of all that is America. Take your families to the seashore and frolic as man has done since we emerged from the sea.  Go out on your boats and go as fast as you can over the waves with the winds of a free land and a free people blowing back your hair. Fire up your grill and invite the neighbors up for food, drink and laughter. This is why I laid down my life. Not so you would cry for me but so you could enjoy your life and your family, your loved ones and friends. Remember me in the laughter and joy of being alive.

Hear me in the sound of loud music coming from a dock bar. Hear me in the growling of a stock car engine taking a green flag or the whine of Indy car hitting 200 mph on the backstretch. Hear me in the laughter of a child skipping in the surf or running through the sprinkler in the back yard. Hear me in the chatter of friends around a BBQ pit. Hear me in the swell of an orchestral pop concert on a wide meadow as the sun settle over the land. In all the joyous raucous noises of being alive, hear me and remember me.

See me in the flag unwinding in the breeze. See me on the baseball diamond, the soccer pitch the basketball court. See me at the bar with my friends raining a glass to good times gone by and still to come. See me in the smile of your wife, your girlfriend or male equivalent thereof. See me in the hammock beneath the tree taking a slow summer nap. See me in all the moments and times of that make life special. See me and remember me.

Remember me best in living well. Think of me when you are passing around the steaks and steamed crabs. Remember me as you sip the cold gin and tonic in a sweaty solo cup under a shade tree. Think of me in the fisszt of a beer bottle opening, the fizzing of soda pop in a glass, the shaking of a martini, the pop of a cork, and the tinkle of ice. Remember me in the sounds of the party of life.

I do not want you to remember me in solemn sweaty ceremonies and pompous parades of politicians. You do not need to go to the cemetery to remember me for I am not there. I am at the beach, the ballgame and in the backyard. I am at the lake, on the boat and fishing on the riverbank. Do not remember me simply because I died. Forgetting to duck or being ordered to charge impregnable positions is a crappy legacy if you ask me. Remember me because I lived and I died protecting your right and ability to live and experience all the joys and madness that is life.

I am not merely a dead soldier who died in the service of his country. I am all the things that were made possible by freedom gained and protected. I am Mark Twain, William Faulkner and Hunter Thompson and all the words written by the geniuses spawned in the America. I am the music spawned among a free and talented people. I am Robert Johnson, Miles Davis Liberace and Ted Nugent. I’m all the great scientists and inventors that have graced this land. I am Edison, I am Feynman and I am Ford. I am all the great athletes born in the towns and cities of this nation. I am Mantle. I  am Unitas. I am Jesse Owens and Jim Thorpe. I am every greatness achieved by this nation born in a sea of blood and protected by rivers of it over centuries.  Do not mourn me for the time has past for that, but remember me.

Remember me for I am also the future of this great nation I died to build. Remember me as you live, as you build as you work and as your create. Remember me as you protect my legacy from the charlatans , thieves and idiots who make up our political  class. Remember me when you refuse to cede personal liberties I died for to those who have good intentions and bad ideas. Remember me when you take chances and reach for your dreams and ideal. Remember me when you refuse to participate in limiting freedom or opportunity based on skin color, sexual preference or genital make up. Remember me when you dream, when you achieve and when you celebrate. These are things for which I died and for which I would be remembered.

My voice calls to you today. Life, love, laugh dream, build achieve. Do this in remembrance of me.

Happy Memorial Day. Remember me

Sunday, May 19, 2013

Pondering Philosophy

The subject of the meaning of life and philosophy of it all is one that has popped up a few times in past weeks and its one I actually spend some time contemplating. The idea of combining the search for the meaning of it all and one of my little writing and thought exercises is somewhat appealing so I thought I would tackle it. Just for shits and giggles I am going to see what kind of spin and twist I can put on the quotations of some of the great and not so great philosophers of our time. It may or may not be useful but it just might be entertaining.

Happiness is the meaning and the purpose of life, the whole aim and end of human existence.

We might as well start off with a heavyweight. Although Aristotle had a somewhat different view of happiness that I might adopt he is right in this quote. We hear all kinds of self-serving BS about our purpose in life. We are told that our purpose is to serve others, to serve God, to serve our nation, or some other grand and glorious cause. Rest assured when you hear that drivel that what you are serving is someone else’s self-interest at your own expense. We are told that our purpose is to breed and carry on the species or to leave the world a little better than we found it. Its all crap.

Our purpose is to be happy. The caveat here is that you have to find achieve and support your own happiness. Don’t ask me to pay for your happiness.  Finding what makes you happiest in life and doing so with zeal and exuberance is the single purpose of your life. In the isn't ironic category it is also the best way to serve your society, the Deity of your choice and leave the world better than you found it. If you love being a parent and raising children then you should do so and you will raise better kids than someone who did it out a sense of convention. If you love designing and building things you will leave behind better buildings and monuments than one who does it as a job.  Life is short but full of beauty and wonder. Your job in life is to find that which makes you happy and embrace it. Serve yourself first and your contribution will be far greater than any of those serve others first folks could ever hope to achieve.

Do what makes you happy. If you want to marry someone, marry them. If you want to write the great American novel, write it. If you want to run a great business, go build it and run it. If you want kids, have them and raise them well. If you want to be a farmer and work the land, then do that. If you want to sit around and think great thoughts then by all means do that. Do whatever makes you happy as long as you pay your own way. A final thought to keep in mind is that your right to happiness ends right where it may harm someone else’s.

In order to please others, we loose our hold on our life’s purpose.

Epictetus is one of those overlooked philosophers who really came close to nailing the meaning of it all in my opinion. He was in some ways the Nassim Taleb of his time believing that most external events are randomly determined by fate but we can be responsible for our own actions and responses to the hand we are dealt by the fate. In this one sentence he nails the single biggest factors for most individual misery and unhappiness. We care too much about what others think and want and too little about we want.

It starts early in life and unfortunately most of us carry that shit to the other end of life. We worry what others think about our career choices, our lovers, spouses and friends. We allow others to tell us how we should think, dress, talk, love and live. We do things to please our boss, our parents, our teachers and so many others in life. Screw them. Stay true to your purpose and make the choices that make you happy. It doesn’t matter if your parents like your spouse if you love them. It doesn't matter what the nosy neighbor thinks of your life as long as you like your life.  Find your own way through life and seek only the counsel of those you admire and trust. To hell with what everybody else thinks. You are the only one who has to answer questions about your life when you lay facing death someday. No one else will be there. Live your life so those answers please you and allow you to leave with a smile.

There is only one good, knowledge, and one evil, ignorance.

Socrates is best known for his death but according to Plato and Xenophon he had much to say while alive and this may be the best of it. Knowledge is to be found everywhere and so few take the time to look for it. It is ironic that in the information knowledge is so readily available and so rarely sought. A mind that is not always seeking and processing new information might as well already be dead. You do not have to sit amidst a stack of dry dusty encyclopedia to find new knowledge or expand your mind. There is knowledge in fiction, in painting, in music, in nature, in conversation and in most activities that involve the mind. It seems to me that most would prefer to spend their time and brain cells observing honey boo-boo and other such garbage. It is sadly ironic that the greatest tool for expanding knowledge in the history of the world is used more for angry birds and sharing cat videos. The quest for knowledge is the quest for life itself.

One has only to look to our political system today to understand the evil of ignorance. It is far better to let party leaders tell you what to think than investigate and develop informed opinions.  I hear people speaking passionately speaking about immigration, abortion, gay marriage, wealth redistribution and other such matters without so much as a single fucking clue what they are talking about.   We believe and repeat what we are told based on the initial on our voters registration card.

Our schools and universities are no long places where people go to gain knowledge. We teach today to standardized tests. Individual thought and exploration seems to be discouraged. We teach a sanitized version of history that leaves out all the blood, piss and vomit that make up the story of the world. I am appalled by kids who can tell you we had a revolution but cannot tell you what the founders believed. I talk to high school kids who have no clue who Eisenhower was, or what the Federalist papers are, or why Vietnam happened or even where it is and what it was. We teach to the test and no one learns. As Richard Feynman once pointed out falsehood and evil can be taught as easily as good and true. Unfortunately this is far too often the case.

Ignorance breeds contempt and hatred. If you do not understand people who look, feel, or love differently than you it is easy to hate them. Not taking the time to learn about another’s religion has been the cause of more death that anything in the history of the world. Ignorance is the cause of evil and evil in and of itself. It lacks any excuse as it is so easily cured.

Which of course brings us to Descartes and his opining that “ I think therefore I am”. Many people better hope this is not so because if this maxim is true they simply aren’t.

The highest forms of understanding we can achieve are laughter and human compassion.

This one comes from one would assume to be an unlikely source for such a touchy feeling statement. Those who toil in the world of physics and science are not usually noted for things like laughter and compassion. Of course most them do not play the bongo drums or hang out doing equations in strip clubs like Richard Feynman did either. The man who exposed cargo culture, worked on the atomic bomb and figured out why the space shuttle exploded was one of the greatest thinkers of this or any other age. Along with the hard science he figured out the physics was not the most important thing. Love and compassion are. The book of his letters over the years, Perfectly Reasonable deviations, shows a deeply compassionate and passionate man.

The lack of compassion in the world bothers me deeply. We hate what we do not understand and even the simplest forms of polite behavior escape so many today.  Why snap at the clerk who made a simple error instead of understanding that no one is perfect and he may be having a very bad day of her own. Maybe that waitress that was a little slow with your food is working a double shift to pay medical bills for a sick child who is home with a sitter. I guarantee you that homeless person you stepped over is not having a great fucking day and is not worthy of your anger and disgust. I wrote the following a few years ago on the subject of compassion and it seems unnecessary to reinvent the wheel:

This is something that those of us who call ourselves libertarians fuck up beyond belief. While I deeply believe that government redistribution of wealth, uneven taxation and handouts is wrong this does not mean that there should be no compassion. Believing in myself and taking responsibility does not excuse me from giving a shit about those with whom I share the planet. I should not have an obligation to give my money to anyone I do not want to. However I should want to help some of those who have struggled along the way. If life has smiled on you why not help those who feel frowned upon right now.

Why not give money to help spread literacy? We have far too many people in our own country that never learned to read. What contribution might they make to the world or their own life if we open that door for them? Is giving the mentally handicapped the chance for a job or the ability to take some measure of direction over their life a handout or a hand up? Do you know what horrible circumstances led that mother and child to be homeless? Are you so perfect you get to judge? The five bucks you give her might go to the crack pipe, that’s true. It might go to feed the child for a day. Since you tip more than that for an overcooked burger and a beer at the bar why do you give a shit? The chance she feeds the baby is worth taking the risk in my feeble mind. You are right. I do not owe it to anyone to help them. I owe it to myself.

Buy the Ticket, take the Ride.

This of course comes from one of the greatest philosophers of the second half of the 20th century Hunter S. Thompson. You may not agree with all the choices the good doctor made but you cannot deny that he rode the ride of life about as fast and as far as anyone possibly could. He figured out early that you could embrace life and live on your own terms or hunker down in fear and settle for the middle mundane path. He took the ride.

The ride of life is right there but you do have to buy the ticket. You cannot be afraid to try. To risk, to love, to laugh, to scream down your fears and delight in the high speed passage is to really experience life. You cannot live a loveless life in which you take no risks, try nothing new, not laugh at the absurdity of it all and say you have lived. To truly live is not for the timid but it is the right way to live.

As the poet Baudelaire advised be drunk on life, on wine on virtue and on poetry.” So as not to be the martyred slaves of time, be drunk, be continually drunk! On wine, on poetry or on virtue as you wish."  Drink of life with great thirst and slam the glass down spilling drops of grape in all directions and demand more. Odds are you will get it.

 We are more often frightened than hurt; and we suffer more from imagination than from reality.

As someone who was tied up with Caligula, Claudius and Nero Seneca The Younger had to have learned plenty about fear. The poor bastardy was constantly being exiled or accused of some damn thing or another. But somewhere along the way he gave many nuggets of wisdom and this is probably his most important of all.

Fear is the fucker of life. Fear will freeze you, bind you and keep you from being who you can be and gaining what you desire. It is the bully in the playground and the bouncer in the bar of life. I have seen people walk away from incredible opportunities because they were scared to leave their nine to five job they hated. I have seen people not ask out their dream girl for fear she would say no. I have seen people pass up on so much of life because they were afraid of the unknown. I have known people who lose sleep because they are afraid of this or that or the other. Fear unconquered is a waste of time and killer of life.

Here is the thing about life. Sometimes it sucks and bad things happen. They just do even to nice people who go to church and help the poor. Now I have always lived fairly aggressively from the days of my misspent youth up through today I have had lots of bad things happen. I have had people I cared about die. I have been fired. I have lost all my money. Not so long ago I had the IRS take all my money. I have been beat up. I have been locked up a time or thirty in youth. I have had my heart broken. I have had horrible mistakes. I have had friends steal from me. I have broken bones, stubbed toes and everything in between happen. They all hurt. They all heal. Here’s the thing about bad shit and why you should not be afraid of it. If it happens and doesn’t kill you, you get over it and can recover. If it kills you, you won’t care anymore anyway. If it doesn’t happen you spent a lot of time being afraid of the boogie man for no damn reason.

If I let fear dictate my life I would have never quit my job as a broker and found a career I really love. If I let the broken hearts of the past keep from loving I never would have found Erin and the happiness we have found together. If I was afraid to drink too much I never would have had children. If past injustices made me harden my heart I would not have all the friends I have today. Bad shit does happen but so does good shit. Money can be made back. Love can be found and life can be worth living. But if you are afraid to try none of the good shit can happen.

I am by no means a great philosopher but I have learned a few things along the way.

History will not recall me as they do Cato the younger, the older or even Cato the village idiot but I have learned a few things along the way that have served me well and seem worth mentioning.

It costs nothing to be kind most of the time.

Love does indeed matter more than physics, markets, business and even baseball.

Read a lot. Read everything.

Be open to other points of view. Be honest with yourself that given all the stupid shit you have done no one else knows about and admit there is no way you have figured out everything. Don’t fall into the “not invented here” syndrome. Other people have good ideas too and there are lots of people smarter than me and you.

Live with abandon. Don’t be afraid of anything but the mediocre and the mundane.

Be responsible for yourself, your failures and mistakes as well as your successes.

Unless they piss in your drink, over tip.

Educated risks where you have a definable edge are not gambling. Go for it. If you lose go for it again as long as the edge exists.

If you can help someone, do it.

Try not to fuck up any more people than you have to as you go through life. You will make mistakes and hurt people; it is part of being alive.  Try not to do it too much.

Don’t let fear dictate your choices. As I said If it doesn’t kill you, you can recover .If it kills you, you won’t care anymore

Once in a while throw a bum $20 without worrying how they spend it. To be honest if they are down to living on the streets booze might be the best expenditure for them.

Read some more.

Wine polishes the good and blunts the bad.

Baseball is the game of the mind and worth watching often

 A good spouse makes the journey livable. A great one makes it a sparkling journey of excitement and passion. Thankfully I have a great one.

Be skeptical of self-proclaimed geniuses. Quite often they are just undiscovered idiots.

Never  trade your dreams for someone elses.

Don’t worry what other people think. Worry what you think and how you feel about your actions.

Live on your own terms and do what you will with your life with great passion and effort.

Keep in mind your right to happiness ends where the other guys starts. You can’t find your dream by crushing someone else’s.

Be fucking nice when you can.

Avoid all idiots, charlatans, fools and imbeciles. Should they wander into your life remove them, violently if necessary. Ignorance is not only evil it is often contagious.


Learn from Ben Graham. Not just in picking stocks but in his desire to do something foolish, something creative, and something generous. In a lifetime of saying some really smart things this is the smartest he ever said.





Friday, May 17, 2013

Cynics and Skeptics Wanted

It was worth some sadness I read of the passing of Alan Abelson last week. I have been reading him since I was a younger man ducking out of work doe a few hours to hang around in the old EF Hutton office instead of selling the insurance I was paid to peddle at the time.   I will miss his elegant writing style and commentary. Most of all I will miss his skepticism and cynical view of all things Wall Street. He was often derided for always being bearish on the market and the world but I always thought that was wrong. He was not so much bearish as skeptical about the claims and predictions offered up for the investing public by the cheerleaders and salesman.

We have plenty of cheerleaders on Wall Street. The sales machine of the Street is always bullish it seems. In a world where we have been sold such things as the 10% a year average return as an ATM for investors and brokers offered accounts funded by home equity right before the crisis kicked in back in 2007 we need a cynic or two to make us question the sales machine. Someone needs to cast a cynical public eye at  an industry capable of combining packages of garbage together to make an AAA security.

The unfortunate truth is that the relationship between Wall Street and Main Street is often adversarial. The Street exists to sell stuff and they often manufacture stuff that is not really good for us and hide the fact in a 400 page prospectus. In the course of my career I have seen tax shelters, leveraged bond funds, real estate limited partnerships, structured notes and a host of other really bad products hoisted on the investing public with promises of safe high returns. I have seen analysts strongly recommend stocks they knew were garbage and Investment bankers bring companies to market they knew would fail. In such a world having a good old fashioned skeptic around can help us protect our net worth.

It is not just the Wall Street folks that are worthy of a healthy dose of cynicism either  We find that economic reports released by governments around the world are often structured to tell a story more than provide information. Unemployment rates are lowered by adjusting the work force size. We see the unemployment claims numbers seasonally adjusted so that the official number goes down when the real number goes up in a given week. The headline number of most of these reports is what everyone follows and too few take the time to dig into the guts with a cynical eye.  I have seen stocks go up because stock and bonds went up enough to the prior month to jigger the Leading Indicators into positive territory. While billions of dollars are chasing the headline it helps to have some scratching their head and telling us these numbers just do not look right.
We see big promises and promises of enormous potential in individual stocks all the time. Company management with the assistance of Wall Street often brings us stocks that will be the next big thing and industries that create a new paradigm.  We regularly see Buy ratings on stocks with triple digit earnings multiples that actually have a negative earnings yield. Income statements can be constructed so as to say almost anything management desires.  Investors are sold hopes, dreams and growth at any price all the time. There needs to be someone who points out that everything has a value and even greatness can carry too high a price tag. Someone needs to remind investors that books can be cooked and that not all geese are golden.

Being a skeptic or cynic on Wall Street can carry a high price tag. For most of his career Mr. Abelson was vilified by the cheerleaders as a nattering nabob of negativism. Cynical newsletter editor Jim Grant often takes the same kind of heat and our own Doug Kass has felt that heat for some of his bearish and cynical comments. Jim Cramer can suggest buying fifty stocks in a row but when he points out that a market darling may be over priced the Twitterverse lights up with hateful commentary of 140 words or less. People like the eternal optimist and the truth is that hopes and dreams sell. They do not always work but they do sell.
We need the cynics and skeptics to point out that not everything the sales machine is selling is good for us. 

Someone needs to remind us that salespeople, fund managers and even our government have an agenda and it does not always fit our own. Someone needs to occasionally point out that valuations matter and that trees do not only grow to the sky they often collapse under the own weight with disastrous results.  Someone needs to be monitoring the quality and fit of the emperor’s outfit and that task falls to the cynical skeptic. We need them far more than they need us.

Monday, May 13, 2013

Follow The Teacher

All eyes have been on Warren Buffett since the Berkshire meeting where he is lauded as the greatest investor ever. Thats probably true but it is not correct to call him a value investor these days.Warren Buffett has not been a Graham like value investor for decades now. Although he launched his fortune using that approach he simply became too large to stick with it. Warren is not really even a stock market guy any longer as his business is run more like a private equity conglomerate than anything else. He is a very good investor to be sure. He is however the greatest business man in history. He no longer picks stocks, he runs businesses.

I have seen more money lost by would be Warrens than anything except poorly executed momentum investor over the course of my career. Individual investors simply cannot do what Warren does. Much is made of Warren’s affection for high operating earnings and a wide moat around the business. Any publicly traded company with those attributes is most likely valued at a very generous level. Warren values those because he plans to buy the whole company and control the cash flows. You and I cannot do that. As outside investors we have no influence over what is done with the cash flow. I have seen a lot of it squandered by bad management over the years and cannot rely on that alone when valuing a company. Unless I can be sure that the cash flow is going to be returned to me in the form of dividends and growth in book value, operating earnings are a secondary concern in the valuation process.

Warren also sees deals long before you and I are even aware they exist. He often, as in the case of Goldman Sachs and Bank of America cuts a special deal for himself with high yielding preferred stocks convertible into common stock. You and I as individual investors do not have that luxury.

He laos has access to some $70 billion in insurance float that is free money if the insurance operations at Berkshire turn an underwriting profit. They have every year for the past decade giving Warren a source of leverage that is not just free. He gets paid to use it to buy businesses and add to his stock holdings. You and I do not have that advantage either.

Warren also has a long history of advising investors to do thing he does not actually practice. Warren does not, in fact, have the bulk of his money in index funds. He trades derivatives in spite of calling them weapons of mass destruction. He once told investors to act as if they have a punch card with only 20 punches in it over their lifetime. I assure you that Warren has owned far more than 20 securities over his lifetime  He is not on Goldmans speed dial because he doesn't move money around in arbitrage trades and other such activities. He has made an awful of of money doing the very things he advises us not to do with our money.

There are some takeaways from Warrens approach that would benefit us all as investors. Buffett is most active after a full-fledged market crash. At the bottom in 2009 Warren was cutting deals and snapping up interests in businesses he wanted to won because prices were so advantageous. He pays little weight to quarterly progress reports because he understands that it’s the decade’s results that lead to enormous profits not a short term comparison. He reads constantly about a wide range of subjects that give him deeper insights into markets and companies than those who rely on research reports from Wall Street or the media.

Warren Buffett started as a great investor and grew along with his own success into a brilliant businessman. His stock selection methods today are of little use to the individual investor. Individuals would be better off studying his early career and that of his mentor Ben Graham and some of his other super investors who were in that famed classroom at Columbia University.

Buffett used the Ben Graham cheap stock approach to build the first part of the fortune that is Berkshire today and those techniques can be used by most of us still today. The idea of buying stocks that trade for less than asset value and have a margin of safety is still a successful approach and one that give individuals an edge they can use to profit even in today’s snake pit of a stock market.

One stock that I think might attract Grahams attention is an old favorite we haven’t discussed in a while. We still haven’t seen completely audited financial form Volt Information Sciences (VISI) but unless they have committed massive fraud we can piece together some information form their periodic updates. Business is not setting the world on fire but the staffing company is holding its own in a weak economy. Revenues are flat and the company has a small profit in the first quarter according to their recent release. If I put it all together it looks to me like the stock trades at about 4 times operating cash flow and 60% of tangible book value. Because of the long delay in restating the financials no one cares about the stock, Wall Street is not following it and very people outside a select group of asset based types have been buying it. If you do not own it I would start scaling into the stock at current prices.

There a whole bunch of parts in motion at MFC Industrial (MIL) but the stock appears to be safe and cheap right now. The company has snapped up oil and gas related assets in Canada and abandoned its Indian mining operations entirely. The increased their operations in the commodity supply chain business with acquisitions in Mexico at what appear to be bargain prices. While it take a little sorting out the stock is cheap based on the most recent numbers. The shares fetch about 4 times earnings and are at 60% of the tangible book value. The challenge for the company now is to integrate its recent acquisitions while continuing to look for cheap commodity operation to buy while they are out of favor. MFC has $280 million of cash and short term securities compared to just $118 million in long term debt so they appear to have an adequate margin of safety right now. The company also just increased its dividend by 9% and the stock now yields 3%.

I would be a buyer at the current price. Much as falling real estate prices led to being heavily invested in REITs and Real Estate operating companies back in 2009-10, the collapse of commodities is leading to a heavy concentration of those stocks in 2013. I do not make market or sector calls as such but there are times when the focus on cheap takes me into a specific sector. I have no idea when commodity and resource stocks will recover but I am pretty sure than buying them at the current low prices will end very well for me.

 Spending a portion of the week thinking about how Ben Graham might behave in the current era is challenging to say the least. In Graham’s era we did not have the institutional dominance that exists today, there were no futures or options markets for equity traders. It was a much more lax operating environment in terms of regulation. There was no high frequency trading or discount brokers. There was no financial television blaring a wide range of thoughts and meaningless predictions at us all day. Could Grahams approach work today in the new, much more complex version of the financial markets?

Obviously I think they would. The caveat here is that if you want to use Grahams methods in today’s equity markets you are not going to be the biggest kid on the block. If you want to be a billionaire fund manager who is on Page 6 of the NY post with executive jets this is not the approach for you. Even the best value managers today who are closest to the Grahams methods apply his approach to markets beyond equities. Seth Klarman at Baupost reminds me most of Graham and his portfolio is only about 20% equities with the rest in other assets such as real estate and distressed debt.

I have spent some time worrying and chewing on this and I figure that somewhere between $100 and $200 million is the most you can manage using a pure deep value asset based approach. If you add earnings and cash flow based techniques you can probably ramp that up to $400 to $500 million. While you can make a very nice living at the asset level with today’s fee structure you will not be the biggest kid on the block.
In considering how Grahams approach might apply in today’s world I went back and revisited the Margin of Safety Chapter in The Intelligent Investor. Graham outlines the simple fact that margin of safety should be the central principle of a successful investment operation. Specifically applied to the search for bargain issues the concept means that the business value is in excess of the market value and the business can withstand adverse conditions. He points out that you may not necessarily love the business but it a stock is cheap enough and has a margin of safety its generally best to own it anyway.

I sat down this morning and ran some quick screens to look for stocks that are cheap and have a fairly rigid margin of safety. The stocks had to trade below tangible book value of course, have a current ratio of more than 1.5, a Piotroski F Score of 5 or more and finally, an Altman Z score of greater than 3. The combination should give us a list of cheap stocks with a very high survivability factor.

As you can imagine given the run in the market the past couple of years we did not get a huge list of stocks. In fact among US based companies we found just 67 stocks that meet our strict criteria. As with almost every other screen we have run the past few months the results skew towards smaller companies. Just 15 stocks with market caps of over $100 million make the list. 46 of the companies have a market cap of less than $50 million. The deep value stocks in today’s world are smaller and trade far away from the valuation distortions caused by index traders and HFT gang.

While the rest of the Value World turns its attention towards Omaha the next few days I will devote my attention to the three things that matter most in my version of the value universe: The Kentucky Derby, My Birthday weekend and this list of cheap stocks.

I found 15 stocks that trade below book value and have high F scores and Z scores as measure of safety that have market caps over $100 million. The first, Kelly Services (KELYA, we have covered often and own. The second stock on our is Multi-Fine Electronics (MFLX) a electronics company providing electronic circuit boards and component assembly. Business is not fantastic for the company as sales have fallen off a bit and margins are compressed in the ongoing global slowdown. However the company trades for less than 80% of tangible book value and has an F-Score of 5 and a  score of 3.3 The have $130 million of cash on hand and no long term debt so they should be able to muddle through until we see a real economic recovery.

Seneca Foods (SENEA) is not exactly an exciting company. The company cans fruit that is then sold under the Libby label and a few other brand names. They also pack frozen and canned vegetables of the green Giant label owned by General Mills (GIS). The company is profitable and has been on an annual basis for the past decade. The company has an f-Score of 8 and a Z-score of 3.3 so there is a margin of safety and the potential for a solid return. The stock currently trades at 90% of tangible book value and is trading just 10% off the annual highs. I might wait for a bit if a selloff in the stock but it looks like a solid holding to me.

Renewable Energy Group (REGI) barely makes the cut at about 97% of tangible book value. Some of my friends who know this space tell me that biofuels could take a leading role in the alternative energy markets in the years ahead and this company could actually become a market darling at some point. For now it is just cheap enough with an F-score of 5 and a Z score of 3.7. In his book Graham pointed out that bargain issue buyers would often find themselves owning businesses they didn't really like that much based on safe and cheap you own them anyway. With my distrust of alternative energy this is such a stock for me.

Two of the stocks on the list are ones I already own and have discussed at length in prior columns. I have started buying back into contract electronics manufacturer and furniture concern Kimball International (KBALB) at the current 70% of tangible book value. Volt Information Sciences (VISI) remains one of my favorite holdings and I think the stock easily doubles over the next few years. Both trade well below tangible book and have Z and F scores that provide an adequate margin of safety.

I am also not a huge fan of the small semiconductor companies but Alpha and Omega Semiconductors (AOSL) is in a segment of the industry that should do well. They provide power chips that are used in computers, smart phones, gaming systems and battery packs. Their chips are also used in industrial and lighting applications. More importantly with the shares trading at just 60% of tangible book value the stock is cheap. Score is a neutral 5 and the Z score of 3.8 indicates a healthy balance sheet. More than half of the market cap is in cash on the balance sheet right and the company is profitable.

Shares of John B. Sanfilipo (JBSS) have done pretty well since I first suggested them back in February of 2012 but they are still cheap enough to make the grade. They have a strong F score of 8 and a Z-score of 3.8 so the safety factor is strong as well. Peanuts and tree nuts are not the world’s most exciting business but I know I have several cans of them around the house and I bet you do as well. At 90% of tangible book the stock is still a buy. Management has done a fabulous job of growing book value and should continue to do so.

In The intelligent Investors Graham mentions that often investors will find businesses for which they have no particular enthusiasm but the bargain nature and margin of safety make the worth buying anyway. That has certainly been the case with this list.

Trans World Entertainment (TWMC) is a company for which I have no enthusiasm at all. The company operates video and music stores which is just not a very good business. The company is undergoing something of a transformation with more focus on selling trendy products including clothing and has developed an online presence as well. The founder and CEO still owns about 50% of the stock so he has a vested interest in getting things turned around. In the meantime the stock trades at 75% of tangible book value and an F Score of 6. The Z-score is 3.4 and the company’s market cap pretty much equals its cash balances.

There is some signs of a housing turnaround although I suspect hedge fund buying of single family homes is skewing the numbers. If housing does rebound strongly then the furniture business should improve markedly. That will be great news for two of the company’s on our list of cheap stocks. Flexsteel Industries (FLXS) trades at 99% of tangible book value with an F score of 5. The rock solid balance sheet gives them a Z score of over 6. Basset Furniture (BSET) comes in at 98% of TBV with an F-score of 6 and a Z score of 3.8.I am something of a skeptic on housing and the consumer but they are safe and cheap.

I have mentioned before that I am not a huge fan of small semiconductor companies. However Pericom Semiconductor (PSEM) is the second such companies to make the list. The company makes chips that are used in networking as well as data and telecom applications. Like so many of these companies business is basically flat as global PC sales and IT spending remains weak. The company has introduced a range of new products that give them exposure to higher growth markets like smart phones and cloud computing that management hopes can ignite growth. In the meantime the stock is just cheap at 75% of tangible book value. Most of that is in cash as the company has over $5 a share on cash and liquid securities on the books. The stock gets and F score of 5 and a Z score of 4.3. The company is buying back stock and as much as I hate buybacks above book value, I love them at this deep a discount.

Our final selection is another of those “gee I really hate this business” stocks. Rex American Resources (REX) is in the ethanol business. The company has interests in 7 ethanol plants and also has a real estate division. The real estate division still owns 11 former retail locations they are attempting to lease or sell. When you add up all the cash property and equity interests in the plants the company is selling at just 60% of tangible book value. The stock has an F score of 6 and Z score of 3.6 so there is a decent margin of safety in the shares. They are also buying back stock at a healthy discount to asset value.

You and I cannot due what Warren Buffett does today. We can however do what he was taught to do by Benjamin Graham and became the cornerstone of the vast fortune he controls today.

Originally published as a series on Real Money

Sunday, May 05, 2013

Ruminations and Ramblings Upon a Birthday Weekend

Ah the birthday weekend, a fine time to eat too much good food, drink too much wine and pontificate grandly about a wide…oh wait, that sound a lot like the average Tuesday around here. Nonetheless the anniversary of my arrival has passed this weekend. It was of course celebrated with  food, drink and family. These days the celebration is a step or two down from the full on bacchanalia of years past with good reason. Although the inner recesses of my brain tell me I am still 30 and can do whatever the hell I please my body is quick to step up and remind my brain that it is a damn idiot and we are getting older. I cannot run as fast or jump as high, nor recover as fast as I once did, so I tend to walk and skip these days. There was still too much food, too much wine, although only my wife is able to define too much of the latter, and a most enjoyable weekend.

I would be remiss if I did not point out that Erin took me to Chathams here in Orlando for a birthday dinner and it was one of the finest meals I have had in some time. The atmosphere is perfect, service impeccable and the food was beyond outstanding. I highly recommend the joint to those with a taste for the finer things in life.

Now, in no particular order so ramblings, pontifications and ruminations:

The Manhattan may well be the perfect cocktail. No other drink is as refined yet deadly in purpose. It is the John Wayne of cocktails that walks up to the bar kicks the living shot of the wimpy assed martini and takes the cosmo into his arms for a passionate kiss. It’s that damn good. The key is to use really good bourbon although one suspects that Templeton Rye would also suffice. Never order one in trendy bar or downscale joint. It’s a serious drink worthy of a bartender in a tie and red leather seating.

One of the gifts this year was a Phil Robertson bobble head doll. Duck Dynasty has become a runaway hit and I confess I like the show. Some of my more educated friends do not get the joke and lump it in with the rest of reality TV. If you think this is just a show about a bunch of dumb ass rednecks doing stupid stuff think again. These buy are college educated rednecks who have talked the dumb ass TV producers into putting on show that features their view of life. The show features a close family, guns, hunting, hard work, hard play, fishing, honorable military service and even touches on their faith. The joke here is that they are getting paid serious bucks to do it and the pile on impact on their original business is enormous. We could use a few more dumb ass rednecks like this.

I dropped the little one off at a birthday party this weekend and I told my wife later that I feel like I am dropping her off in the lion’s den. It would be more accurate to say that I feel like I am delivering a Chihuahua to a dog fight. At five and six little girls birthday parties are ribbons and puppies with giggle and cake. At ten they are already beginning to establish a social hierarchy with jostling for positions and alliances that form and melt quicker that Phyllis Dillers face in a sauna. From this age until their early 20s packs of girls are just evil shifting social circles of madness where lives can be ruined by liking Bieber instead of Perry or not having the right electronic device in your  back pocket. Such a world scares the hell out of me sometimes.

While we are on the subject I really think we are all guilty of a form of child abuse these days. The electronic devices, asinine television shows, iPods in their ears all day world we let our kids live in cannot possible be good for them. Standardized testing, rewritten history, politically correct madness, and the online world cannot possibly be good for them. I know every generation says this sort of thing but I really do worry about kids growing up in a world where they can sext with each other freely but get arrested for getting in a fistfight or using the wrong word. I see a general lack of original thought instilled by our rigid world of controlled curriculums. There is little Discipline and toughness and it worries me. Even more concerning is what appears to be waning sense of adventure and individualism among our children. The dilemma as a parent is that to do what appears right and remove all the electronic crap and garbage programs turns the child into a social pariah.

Our general misuse of technology is also something that disturbs me greatly. We have device that we can carry with us in our pocket that contain computing power that would have awed Einstein. The internet contains incredible wealth in the form of information, ideas and wisdom. We use these devices to listen to Beyonce, Facebook and play Angry Birds. Sad really.

While I am on the general subject make sure your kids learn statistics and how to program in statistical languages like R or Python. Make them learn another language, preferably given global demographics, Spanish or Chinese. Make them learn to play at least one musical instrument fairly well. These will give them a strong edge over their peers. I did none of these things in my youth and have played from behind ever since as a result.

I have long held that every male adolescent should be made to read all of the Louis L’amour Books. To this I will add the series of Robert Parker Spenser novels and all the John MacDonald Travis McGee series. The boys will learn how to stand on their own, think for themselves, throw a punch, make a quick tasty meal, prepare a cocktail, the right way to exercise, shoot a gun, treat a woman, be a gentleman, be independent, standup to authority, determine right and wrong and to identify good from bad as they make their way in the world. They are outstanding reads but also contain a wealth of information on being a man, being an individual and taking care of ones self. I am sure there are comparable offerings for young women and would love to hear suggestions of such.

There is a new Spenser novel in the continuation series by Ace Adkins due out this week as well as a new John Sandford. Going to be a good week.

My recent experiments with baseball betting using a paper account confirm that gambling is indeed a difficult endeavor. It also makes clear that using a deep statistical method to identify mispriced games and underdogs with an edge would be very profitable. Joe Petas excellent book Trading Bases shows some of the success that could be had using this approach. Edges always disappear but this is one that may last for a while. Shame I never learned to program.

Orioles play Central Division teams this week. Need a strong showing to gain ground.

Speaking of gambling I missed the damn Derby Exacta by a length as Calvin Borel took too long to let Revolutionary loose. I still think he and GoldenCents are the fastest horses on a dry track and look forward to the Preakness.

The baseball season is shaping up with some strange weirdness so far. Boston is supposed to suck by now but there they are. Tampa so far is much worse than they should be. They simply are not hitting the baseball when it counts. Colorado is a huge surprise thanks to some fortunate outing by their pitching staff. They are 21st in Walks and hits per innings pitched but just 10th in ERA so far. The Dodger and Angels pitching staffs are just disasters so far and neither team is anywhere near what was hoped. The Braves and Nationals are going to be a nasty battle all summer long.  The Orioles are where I expected and should get better as the years goes on. We should be in the mix as the summer goes on.

There still very few lazy pleasures as perfect as a good novel with an afternoon baseball game on the TV in the background.

Nor are there many things as good for a peaceful mind as going to a game by yourself and just focus intently on the drama that plays out over nine innings.

 Watching a game in bar with an old friend is one of life’s most perfect social experiences.

I am not an environmentalist or tree hugger by any stretch of the imagination. Resources are here to be used. If there is a snail darter on a piece of property that contains a chance for me to make money said snail has darted his last. However I see no need to walk around screwing up the planet and being an asshole about things. I walk my dog around the neighborhood several times a day. I enjoy a cigarette often on these walks. However you will not find my cigarette butts or dogs crap left behind. Simple matter to field strip the cigarette and throw the butt in a garbage can later.

As for picking up the steamy shit piles you folks who delusionally think its okay to just leave it because it is natural you need a reality check. In nature dogs roam their territory leaving their shit fairly widely disbursed. There also would not be as many dogs if they did no live comfortable lives with regular medical checkups and no larger prey trying to eat their furry little butts 24 hours a day. In a neighborhood it tends to become fairly concentrated. Now go read the ingredients of your dog food box. Most of that shit doesn't exist in nature and really does not need to be transferred into our groundwater and aquifers. Not to mention that all the dog shit lying around is just ugly. Nobody hates picking up steamy piles of shit more than me. Do it anyway.

The planet is here for us to use. That does not excuse screwing it up out of sheer laziness or malice.

Those of you who insist on calling the trappers to catch every alligator or snake you see need to follow some basic advice. If the idea of alligators, coyotes, snakes, bears, bugs bothers you do not move to Florida. Especially do not move to Florida and choose a community with 15 lakes and ponds. If we shot everything was scary and ugly there would be no politicians or NFL players left in the world.

The Buffett bash in Omaha s over and as usual the wannabe Warrens went batshit crazy over the affair. Warren did make one astute observation about quantitative easing with which I agree. The first move by the Fed to raise rates will be the shot heard round the world and rattle the market pretty hard. No knows how all this ends according to Warren and he is right. There are predictions that the end of QE spells the end of the world. Some think there will be magic growth that brings it to a successful conclusion. Personally I have no clue how they wrap all this up and have a real hard time imagining a conclusion. Of course most who observe a heroin addict in the throes of addiction cannot fathom them ever escaping the clutches of the stuff but some do and go onto a full recovery. We shall see how our current addiction to cheap money plays out.

My mountain climbing friend from Seattle nailed the whole Buffett phenomenon in one phrase. He has sold himself to the world an image of a kindly grandfather making wise investments while operating with the mind of a gambler and soul of a loan shark. The world buys it hook, line and sinker and lines up to give him their money.

Beef prices just hit an all time high. If grapes also begin to spiral out of control higher this could be problematic this summer.

My wife is a saint. How that woman has not stabbed me to death in my sleep with a rusty serrated knife just escapes me.

My children need to get over the illusion they are grown ups able to live their own lives and move to Florida so I can keep a closer eye on them and correct their inevitable plethora of mistakes.

When running a series of screens for a recent series of articles it is really clear that the pool of safe and cheap stocks is shrinking in number and size. Only 16 names had prices below book and high Z and F scores with market caps over $100 million. Only 67 stocks passed at all and most of them had market caps below $50 million.  This is mildly troublesome to me. However some of the names are just too cheap not to own at this price.

I can find lots of shit to worry about. Greece, Crete, The Middle East, covenant lite junk bonds, High frequency trading, criminal big banks, Putin, China. The list goes on forever. All of this appears to be trumped by Zero Interest Rate Policies. Best just focus on individual valuations. The low number of opportunities keeps underinvested while preserving my upside. All that macro cap is bad for my indigestion and interferes with my real life.

As I look at the results of 52 years of weird living I have to say that I am a lucky man. I have wonderful family, fantastic kids and am married to the only woman on the planet who could ever actually put up with me. She is not just a trophy wife but my best friend and partner in this adventure of life. I have the best collection of friends one could ask with as wide a variety as you could possibly imagine. I have a career that suits me and keeps me interested and involved all the time. I have my books to entertain and educate me. I have baseball to obsess over, wine to enjoy and a dog to walk for exercise. It is all in all a damn good life. Happy Birthday to me.

Wednesday, May 01, 2013

Activist Net Nets

One of the regular screens I run is designed to look for stocks trading near or below their net current assets. This is an approach originally developed by ben Graham with a great deal of success and has been used and tested by many practitioners and academics over the ensuing decades. Finding stocks that trade for two thirds of their NCAV is pretty rare these days but there are a few issues that trade  cheap enough compared to the value of currents assets minus all debt that make are candidates for investment by enterprising value investors.

When I ran the screen this morning I found two interesting stocks worth buying as they have simply become too cheap not to own. Both are former growth stocks that have stumbled and now trade for around the value of the cash, inventory and receivables on the balance sheet. Interestingly both are in the data storage business. Continued delays in corporate IT spending as well as the dominance of companies like Seagate and EMC have hurt the companies but the long term future of the data storage business is pretty bright and I expect both s these to recover over time.

Back in 2009 STEC (STEC) was one of the very few stocks Wall Street was excited about. The stock rose by tenfold in a very short period of time as growth momentum investors piled into the shares. The company has since stumbled badly as demand for its flash memory and solid state drives fell off sharply. The stock crashed back to earth reversing the entire momentum drive move up and has languished in single digits for over a year now.

Business hasn’t gotten any better in recent months. The company saw revenues decline by 40%  in the last quarter of 2012a and the loss was larger than analysts had anticipated. Management has high expectations for its transition away from being entirely OEM driven but in the short term they lowered guidance below what Wall Street was expecting and the shares now trade near the lows for the year. The poor performance has attracted the attention of some activist hedge funds that are staging a fight to replace the board of directors as well as the CEO.

The stock is cheap on a NCAV basis. At the end of the fourth quarter the company had $158 million in cash and total current assets of $244 million. Total liabilities at STEC add up to just $58 million so we have a net current asset value of $186 million. This assigns no value to any of the other assets including the company’s patent portfolio or a 210,000 square foot facility the company owns in Malaysia. The market cap of the company right now is just $209 million. The activist shareholders think that’s too cheap and the company should consider putting itself for sale to unlock the value of the company.  I agree and think a sale of STEC could easily fetch more than twice the current stock price.

The other stock that stood out is one that I already own. I have done very well with shares of Xyratex (XRTX) so far after buying the stock around $7. The stock has run up to $10 and we collected a $2 a share special dividend back in December. The data storage company is still very cheap.  After adjusting the balance sheet for the special dividend Xyratex still has net current assets of $240 million and the market cap is just $272 million. Again this assigns no value to the company’s operations or intellectual property portfolio. The valuation has attracted the attention of Baker Street Capital, an activist investor that now owns 22% of the company. They believe the company is worth something close to $19 a share and management needs to seek strategic alternatives and rework their business plan.  I agree with tier thoughts and think the stock still has quite a bit of upside from the current level.

Searching for stock trading below net current assets can be a futile exercise after an extended market run up but right now these stocks trade near net current assets and have a decent underlying business. They both are being pressured by activist investors to improve the valuation or simply sell the company at a premium. Both are attractive investment candidates right now and appear to be too cheap not to own by enterprising investors.

Originally run as a Real Money Column