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Monday, January 28, 2013

Earl Goes to Wall Street

Not too long ago we had a tough weekend around Chez Melvin. We lost two baseball legends in Stan Musial and Earl Weaver. Although I respect and admire Mr. Musial it is Mr. Weaver that has had the most profound effect on my life. I grew up with his Baltimore Orioles teams and have adopted many parts of his baseball philosophy to my life and the markets over the year. On maxim in particular is applicable to the markets and especially the asset based value investing approach I favor. Winning, according to Earl, is about good pitching, defense and three run homers.

This is true in the markets as well. If we take the baseball analogy even further it was Warren Buffet who pointed out that investing is a game where you have unlimited strikes and can wait to swing at only the very best pitches. We can choose to miss all the new paradigms, technological breakthroughs and one hit wonder consumer stocks at nosebleed multiples. No one is going got make us close out account if we pass on three consecutive overpriced IPOs. You don’t lose you investing privileges for not chasing your brokers idea of the day. You can wait for the pitch you like and then, and only then, sawing away.

Playing good defense is critical to success in any endeavor but is especially true in the markets. Those who got caught up in the enthusiasm in 1999 and early 2007 can attest to the value of good defense. Buying high multiple stocks in hopes that someone will pay you an even higher price leaves you open to catastrophic wealth destroying declines like we have seen in stocks like NetFlix (NFLX) and Green Mountain Coffee (GMCR). Investing in stocks where there is evidence of fraud or a bad business model like Apollo Group (APOL) or Enron is poor defense and can destroy your chances of winning the investing game. The first job of a long term investor is to survive. Focusing on safe and cheap stocks allows one to survive and hopefully thrive over long periods of time.

When you play defense by focusing on safe and cheap the three run home runs will come in and of themselves.  Throughout my career I have purchased stocks because I thought the downside was limited and the business prospects solid and seen the stocks soar by many multiples of my purchase price over time. I didn’t buy Kimball International (KBALB)last year expecting the stock to double in six months. I bought because it was a decent collection of businesses trading at a cheap price and solid balance sheet. The fact that the market recognized the rapidly improving fundamentals as quickly as they did was bonus. I didn’t buy Forest City Exchange Traded debt (FCY) in 2008 because I thought it would quadruple over a few years. I bought them because they were so cheap that I would earn a profit even if the company liquidated in bankruptcy. The fact that they have risen by more than 400% and never missed a payment is a home run produced by careful pitch selection and a safety first mentality.

One of my favorite screens allows me to look for stocks where I can select my pitches carefully, pay attention to defense first and perhaps over time hit a long ball that adds to my overall returns. When I sat down this morning and looked for stocks trading below book value that are profitable with solid balance sheets I find some names worthy of my Earl Weaver portfolio. These stocks are not new ideas but they are safe, cheap and could return multiples over time.

Corning is still on the list and remains one of my favorite stocks for the long run. The stock trades at 90% of tangible book value and has more than $6 billion in cash on hand. They could pay off all their debt and still have more than $3 billion. The company is profitable and pays a dividend of about 3%. Given the company’s business lines its glass and fiber products will make Corning a growth stock when the economy begins to recover. They have exposure to smart phones, the medical and biotech industry, flat screen TVs and broadband networks, all areas expected to experience high rates of growth over the next decade.

Mineral sands and pigment company Tronox (TROX) has seen its shares fall off this year as a result of weak demand for its products. However there are signs of recovery ahead as the oversupply of the white titanium oxide pigment used in paints and plastics is being whittled down. The stock is a little higher than my original recommendation and purchase but still trades at 90% of tangible book value. The balance sheet is solid with a third of the capitalization in cash and a current ratio of over 5. As a bonus the stock yields more than 5%.
Pitching, defense and three run homers wins baseball games. It can also help you beat the market and build wealth over time.

Thanks Earl!

Wednesday, January 09, 2013

Volt Jolt

One of the real benefits to contributing  on Real Money is the incredible community of contributors and readers.  I have developed strong friendships with several other RM commentators and enjoyed some excellent email and phone exchanges with readers over the years.  They are extremely intelligent folks with some great ideas on the market and individual stocks. One such individual is John Rudolph of Glacier Peak Capital. We invest in a similar style and share some key interests and have talked often. A few months ago he bought me a great idea that is attracting some attention this week.

Volt Information Sciences (VISI) is a staffing company founded back in 1950 by two brothers, Jerry and Bill Shaw.  In 1957 Volt became the first publicly traded staffing company. Since then the company has grown into a major provider of technical and administrative personnel to employers. Their client list includes a substantial portion of the Fortune 100 including tech giants like Google (GOOG) and Apple (AAPL). They are estimated to be the fourth largest provider of technical staff in the US today.

The company is also involved in consulting, telecommunication services, printing and publishing. The publish telephone directories in Uruguay. The printing division offers printing services for books,  newspapers and directories in Latin America. The telecommunications division is basically in wind down mode as land lines and local residential voice service become less frequent components of the telecommunication industry. The other businesses add some value to the company but the heart and soul of the business is the staffing business.

I am a big fan of the staffing business, particularly the IT side of the business as a long term investment. I believe Volt is a great addition to my portfolio but the rub here is that I can only believe this to be the case. This company has not filed audited numbers with the SEC since 2009 after an initial accounting review determined some financials would have to be restated. It is believed that the review covers about 10% of the company’s revenues for the period in question but for three years the review has not been completed and costs appear to have exceeded $60 million. The delay eventually resulted in the company being delisted from the New York Stock Exchange.

The company and its issues have been in focus this week as the value investors who now own the majority of the shares of stock not controlled by the Shaw family are hoping to actually see the financials. The company securitized some of its receivable through PNC Bank (PNC) and after being granted an extension earlier this year audited financial are due January 31 after the latest extension granted in December. So far there is just silence coming from Volt as to the deadline and their ability to meet it.

 In addition an 8K filed last month has ignited a fair amount of turmoil. The company paid a hefty bonus and raised the salary of its Chief Executive officer after just six months son the job. That does not sit well with many investors, including my good friend Mr. Rudolph. He expressed his concerns over salary increases, bonuses and option grants being made without any sign of full financial or an updated business plan and guidance. The Shaw family still controls the board and 42% of the stock and it appears that they are not responsive to shareholder concerns. With so much of their net worth in a stock that has fallen from more than $35 to less than $7 over the past six years you would think shareholder value would be more of a priority.
The thing that really rubs the investors the wrong way is that the value does seem to exist. Working from old analyst comments and the company’s quarterly unaudited updates the company generates something like $40 million a year in EBITDA. Book value appears to be about $13 a share and between cash, short term investments and collateral posted for the securitization program they have $74 million cash available. The market cap is just $137 million with a stock price of $6.61 so the stock is extraordinarily cheap if these financial are audited and verified.

I own the stock because it appears that in spite of the lack of communication and apparent lack of concern from management the value is here. The stock should be trading in the mid-teens or higher based on the numbers I am seeing. If the stock just trades up to the same discount to book as Kelly Services, my other staffing stock, the shares would gain almost 50%.

It is likely that Mr. Rudolf, myself and other investors may have to break into our wine cellars to deal with the frustration of unlocking the value but the value is here. When management gets its act together this stock should return profits in many multiples and not just mere percentages.

Tuesday, January 08, 2013

Tim's Rules

So the New Year is upon us at last. I have thrown out a few ideas and predictions for the stock market in the year ahead. Hopefully these cheap stocks will allow us to make some money over the next year or two. Before we move deeper into the year  I would like to share some thoughts and ideas that might be even more helpful in approaching the markets than a handful of stock ideas.

These market maxims just might help you keep you approach to investing businesslike as Ben Graham suggested many years ago. Hopefully they give you the thought processes needed to stay calm and buy fear and sell greed. None of them are entirely original and have been stolen part and parcel form some of the greatest investors in history. They have served me well for a long time now and I hope they work for you as well.

First and foremost is book value matters. It is the single most important variable in stock selection in my opinion. You can keep the entire income statement and just give me the balance sheet. Form the absolute level of the book value and its growth rate I can determine pretty much everything I need to know about a company. Everyone else focuses on earnings and that is exactly the wrong approach.

When approaching the stock market, react do not predict. Hearing all the stories of people that successfully predicted some extreme market movement and mad a fortune make for good reading. It is usually luck far more than skilled. If you read about all the amounts of money lost trying to predict market moves you would find yourself working through a library of losses. The stock market will from time to time create an enormous amount of opportunities when fear holds investors in its chilly grip and selling is wanton. Be a buyer. When the champagne is flowing and everyone is bragging about all the money they made in the stock markets new world order it is best to be a seller.

Do not do what everyone else is doing. I talk to traders all the time about this. I patiently explain that by trading the same stuff everyone else does, they pretty much guarantee lackluster results. I suggest they focus on stocks where CEO and CFOs are buying as an example. 75% of the 350+ stocks that qualified this year went higher and the average gain on all positions was 33%. Why not concentrate on those? There is some good deal of evidence that traders would do well to culling the herd of falling knives to find those with technical or statistical tendencies to rise in the near term.

After agreeing with me that this makes sense they go on to point out that Apple’s  (AAPL)store in Billings had long lines last weekend the squiggle line is close to crossing the choppy line in an ascending diamond reverse mountain pattern and they need to jump on that sucker before it breaks out. Do not be that guy.  Look for niches and situations that give you an edge and concentrate on those situations. If you want to play around, head to Vegas for a weekend.

Investors should buy businesses, not electronic tickers. Think long term and ignore that quarterly short term focus of Wall Street. A penny or two variation in quarterly earnings is pretty much meaningless in determining what the hotels in Sunstone Hotel Investors (SHO) will be worth in five years.  Think like a private equity investor and buy unlived assets no else wants and own them for a long time. When everyone else in the market loves them and the assets sell at a premium go ahead and sell them to the clamoring public.
Scale in and out of stocks. You will never sell an exact top or buy an exact bottom. Move slow and stay small. Buy down days and sell stocks when they are overvalued a little at a time. Stocks that become overvalued are often rising in popularity and could go higher as momentum folks get involved. The opposite is true on the way down. Cheap stocks are unloved and usually being sold by the public as well as the funds. Make volatility work for you over time.

To thrive as a long term investor you must first survive.  When approaching a stock the two most important questions you must ask yourself are is it cheap and can the company survive? If the answer to both questions is yes you usually have a stock that has a margin of safety and over time the upside should take care of itself. Margin of safety first, upside second.

When selling options be aware that valuation is first and foremost as a consideration. Only sell puts on stocks you want to own and calls on stocks you wish to sell.  Sell puts as the market is declining and calls after a rise in share values. Most do the opposite but the idea here is to buy the stock below the market as it is falling and sell after a rise in prices capturing premium on both sides. Do not use margin unless you are hyper aggressive. Even then post 75% equity minimum on put sales. Most of us should post the full cost at the strike price. Sell only as many calls as you own shares of the underlying stock. The idea is to add premiums to your investment returns not make wild ass speculations on price direction.

Read everything you can. Know what’s going on in the world, in politics and in the markets.  A working knowledge of social and demographic trends and events will help you understand why a particular stock is cheap and its prospects for survival. Make it a point to read those that disagree with you and approach markets differently that you do.  Be open minded and only be dogmatic about book value.

Younger or more aggressive investors should devote a part of their portfolio to long shots. Use Value Line and S&P star ratings to find fallen angels, turnarounds and undiscovered growth stocks. Own several of them and keep the positions sizes relatively small. Ask yourself if the company can survive and why business will get better. If you are right 50% of the time you will rack up impressive long term returns on this portion of your portfolio.

 The hardest thing you will ever do is buy at the point of maximum pessimism. Buying coal stocks right now is as difficult as buying European banks was last year.  When no likes a company, sector or asset and they are selling as fast as they can it is time to evaluate the situation as a buyer. The best investments you will ever make are when you are something of a buyer of last resort in a panic.

Asset based value investing. It requires research, discipline and patience. It does work very well however and given most peoples short term focus and need for constant action it is not a very crowded field and I doubt it ever will be.

Good luck to us all in 2013.