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    Tuesday
    Nov122013

    How high can it go? Also, should I buy Bitcoins?

    Returning to the idea of the market as model rocket, we have now entered the period of the “Delay Charge”. See the scientific diagram below.* During the propellant period, one can find undervalued companies that are growing sales, profits and cash. However, as prices climb, stocks become fully valued. Even so, the rocket coasts upward while burning through the delay charge prior to reaching the ejection charge, which, one hopes, expels the parachute for a soft landing.

    You know the propellant period is over when small investors, sensing a 24% rise in the market, determine that it’s now time to invest. Columnists write about wealthy investors turning to cash, and the new sport is guessing the top.  

    But wait – the market overreacts on the top and the bottom. How well I was reminded of this when I sold my juicy JCP Puts only to see JCP drop into the abyss. (I should be so lucky with SHLD Puts.) In 2000, I remember gray-haired money managers retiring rather than trying to play in the “new” Internet stocks. “I just don’t understand this anymore,” opined one. No, he did understand it – he just couldn’t believe how long the delay charge lasted.

    I remember talking to one bozo at the time who expected Cisco to become the first trillion dollar market cap ($126 billion today.) Eventually, we will again be treated to theories about how valuations and monetary controls have changed forever. Sometimes, you get to hear former personnel managers talking about how they can get a job any time, but that they now make more money flipping (1) stocks (2) houses (3) or another asset – perhaps Bitcoins.

    But we are not there yet.

    First, the preternaturally prescient must invest in the new new technologies like TWIT – sorry, TWTR. Second, some of the cash piling up will seep out and make the rest of us feel successful and jaunty. Restaurants already seem busier. New technologies will excite again, and banks, which fed on each other before the last bubble, may be the last group to approach fuller valuation this time around.

    Recommendations

    BUY UVE at $8.08 on Oct 30. Already up from $4.5 to $8 in 2013, UVE is an insurance company that pays a 5% dividend and has a Perfect Company score of 15.9. ORI, another insurance company, is up 12% since I bought it on Oct 15.

    SELL some AVY, which has run up from $25 in 2011 to $47 today.

    BUY HFC, a petroleum refining company that grew sales but missed on profits. Holly Frontier pays a 2.7% dividend and has a PC score of 5.6.

    My main portfolio is now up 39% for the year which still holds these winners: CBRL, ANCUF, AOS, CTMMA, AOS, and MRVL. For the future, I’m still hoping for gains from TRST, CFR, CRWS, ORI, CPSI, AIRT, CMTL, and TNH. CODI and MGIC are each up over 30% this year.

    Dad’s portfolio is a different mix, but is up the same percentage from this time last year. JKHY and RFIL are each up over 40% this year, and Cracker Barrel has been helpful there, too.

    Fewer “perfect” companies present themselves lately, so I am in about in about 20% cash. I will increase my cash position over the next year as the rocket coasts silently up toward its parachute event.

    I may even buy more puts like those I still hold on Sears, that paragon of real estate and asset sales. The rising tide has lifted this flotsam lately, though it managed to lose $194 million last quarter.  Why you won’t shop at Sears: http://www.businessinsider.com/photos-that-show-why-sears-is-vanishing-2013-10 

    Should I buy Bitcoins?

    A news story circulated last week in which a man remembered that he had purchased $24 of Bitcoins a few years ago, and sold them for $680,000. Bitcoin is an Internet currency defined by an anonymous person or group to create tokens for purchase. The tokens can be “mined” by computers that solve increasingly complex algorithms.

    Bitcoins look like both a new currency that might be worthy of speculation and the beginning of another mass delusion like those described in Extraordinary Popular Delusions and the Madness of Crowds.

    The reasons not to invest leap to mind: no government backing, potential risk of government interference, no known control, possibility of a run on the currency, etc. You don’t bet the farm on Bitcoins.

    On the other hand, our current economy is manipulated by people who may be even less trustworthy than Bitcoin promoters. I hardly need to elaborate. Here is the case for a small Bitcoin investment:

    • They are very tough to mine.  See: http://techcrunch.com/2013/04/08/how-to-mine-bitcoins/
    • Unlike other currencies, there is a limit on Bitcoins – just 21 million. At today’s price, the entire market cap of Bitcoins after mining stops is just $6.9 billion – less than a third the valuation of Twitter. This makes Twitter an even more ingenious scheme for creating wealth: convince everyone that mass-texting is super important and worth $25 billion, then sell your “Twitter Shares” for gobs of cash.
    • The persons who started Bitcoin are probably sitting on a big chunk of Bitcoins. It’s good to have the founders involved because they will work to ensure an orderly and profitable exit for themselves.
    • Despite the recent press, Bitcoin is still a new phenomenon, which you can judge by the votes on Quora. Questions are asked, but only few people vote for each. 
    • The price seems high, but, at some point, you could have purchased Warren Buffet’s company for just $350 a share.  Berkshire Hathaway closed Friday at $173,201 a share. Unlike Buffet’s company, there is no way to value Bitcoin: it’s worth whatever someone is willing to pay.
    • Smart people are getting involved. Companies like Coinbase are hiring legitimate execs to legitimize the business.  See:  http://blog.coinbase.com/post/66099800643/welcome-martine-niejadlik-and-adam-white-to-coinbase
    • The size of the market could become much larger. Let’s say that fractional Bitcoins were traded and that the 100 million people in the world who have some money each put $500 each into the currency. The market would expand from $6.9 billion to $50 billion.

    That’s why I would not invest. I’d put the odds of Bitcoin failing or being a scam at 80%. For the other 20%, the upside is about 7x. The risk-weighted return is 40% over maybe 6 years, so I am not buying Bitcoins. The upside is simply not attractive enough. Bitcoins are pure speculation, so they may wildly increase in value, but that is why I am not buying.

    Black Swans and Hedge Funds

    I read these unrelated items today:

    “Our inability to predict in environments subjected to the Black Swan, coupled with a general lack of the awareness of this state of affairs, means that certain professionals, while believing they are experts, are in fact not. Based on their empirical record, they do not know more about their subject matter than the general population, but they are much better at narrating – or, worse, at smoking you with complicated mathematical models. They are also more likely to wear a tie.”  The Black Swan, Nassim Taleb

    “11.3% Stock hedge-fund returns through October, compared with 25.3% total return for the S&P 500” Wall Street Journal, 11/11/13

     

    * No, Joe, I do not think that a diagram of a model rocket engine is scientific. I am amusing myself.

    Monday
    Oct212013

    "Everything is proceeding as I had foreseen."

    Emperor Palpatine said that not long before the Death Star blew up, which is a reminder never to be too smug. Still, it was a great week. As I predicted on October 7, the moneyed interests brought the politicians to heel. My core portfolio is up 35% for the year versus 22.32% for the S&P.

    RFIL, which I loved, and which nose-dived after I recommended it on June 11, is now up 17.69% since then, and the shares that I purchased after the drop are up 47.38%.

    My Sears Put Options are up 16% in the past month (SHLD June 21, 2014 $55) and CMTL, which seemed like it might never move was up 4% on Friday.

    Sell EVOL

    EVOL is up 63% since I recommended it on June 25, but it has declined in the past week when many other fine companies were up. EVOL is no longer the attractive value it was.

    Sell DGX

    I recommended DGX at $59.90 on 6-25-12. DGX has a PerfectCompany Score of less than 1, and has traded in a saw-tooth pattern for the last year. With its 2% dividend, I’m getting out even. 

    Finding Value Now – What’s next?

    Looking back, finding value has been easy in the past year. A year ago, fear was everywhere: you may remember TV commercials and Internet mailings about the end of the fiscal world that would make 2008 look cozy. Where is that guy today? He drowned in dollars that kept down interest rates, made their way into stocks, and drove up asset prices for the rich. The prices of Ferraris, Patek Philipp watches and penthouse condos have gone up faster than inflation, but who cares? The rich will just have to live in four houses instead of five. Inflation for everyone else has been manageable, and the price of gas is down.

    Of course, the last year wasn’t really easy because it’s not easy to bet against fear – or even against the unfounded optimism of Penney’s and Sears execs, but it’s a lot easier to make money when opinions substantially differ. What’s next? Let’s consider a macro position and work backward…

    The U.S. will continue to print currency until companies and the rich have accumulated so MUCH currency that they will want to buy up smaller companies or even create new ones. This is has not happened yet because people were SO burned in 2008 that all they wanted for years was to pile up cash in companies OR to issue the cash back to themselves as dividends – so the cash that the government hoped would create jobs instead enriched companies and the very wealthy, and inflated high-end assets.

    Continuing to print currency would have another important benefit: global cash flows have cut back as countries have become protectionist. If our trading partners continue to erect barriers to U.S. goods and insist on selling us cheap stuff, their economies will eventually fill up with our cash; we will have lots of useful stuff, and they will have our paper. (They will also have remarkably polluted countries with a medieval living standard, and we will have a comparative paradise.) At some point, these trading partners will use that paper to buy the stuff that we make or they will invest in our assets. That money will power another round of development, confidence and new jobs. In this scenario, the next few years could be a golden age of American economic vigor. Prices will eventually rise (horrors), but we will also inflate our way out of the debt that so many find so frightening.

    Returning to the Death Star analogy, what are the pin pricks that could cause our world to explode? Few people anticipated 9/11; a few more anticipated the mortgage crisis. The work of the world is finding better ways to live, and to charge people for delivering better technologies or services. New data processing and manufacturing technologies – even crowd-sourced manufacturing like www.quirky.com – are creataing better ways to innovate. I’m having a hard time imagining cataclysmic issues besides asteroids and wars that could devastate the economy in the next year.

    My biggest problem is that it’s getting more difficult to find Perfect Companies that are undervalued, growing, profitable, and pay dividends. When values go up, it’s time to consider shifting to more cash so one can buy on pullbacks, or to prepare for wild markets where confidence overwhelms valuations – as in 2000. This happens, and I have already sold too early many stocks hoisted further on their own petards. I have so far not regretted this because buying back into better values has protected my portfolios during periods of fear when celebrated balloons let out some gas.

    If I were preparing for a supercharged market, I would look for perfect companies like ORI, which are already on their way up and have a business that can benefit from an ability to raise prices in a frothy environment. I would keep riding these companies past the point where I normally sell. I like ORI a lot because it turned profitable two quarters ago, and it pays a nice 4.68% dividend.

    Revisiting High Risk Stocks for Young Investors

    On February 9, I considered the question, “What might a young investor buy with $200?” You’d want to buy a small high-risk companies that could make a difference, so I recommended GenVec, iRobot and Magic Software. Curiously, these three provided a better result than my regular portfolio: an average 35% since Feb 9. Even after allowing $27 in purchase commissions, the $200 would be worth $233 today.

     

    The big news at GenVec is that they decided not to dissolve the company because their Novartis deal may produce revenue. See: http://www.bizjournals.com/washington/blog/techflash/2013/09/genvec-drops-dissolution-plan.html IRBT and MGIC are keepers. It will be interesting to see how this little portfolio grows.

    Now leaving the Valley of the Shadow of Death?

    For months now, the top values in PerfectCompany screens have been regional banks. A friend says his ETF-picking software selects regional banks as the best ETF. Sometimes I wonder if we’ll look back and think, “Man – it would have been so easy to buy great small banks!”

    My father was a chartist who would have liked the pattern at TRST (TrustCo Bank) because it dropped, built a long base and may be breaking out on the upside. This $620 million market-cap gets 5 stars from Bauer Financial (a bank-rating agency), pays a 4% dividend, and has seen the CEO and directors buy 119,946 shares this year. Insiders sell for many reasons, but they only buy when they think the price is going up. Our PerfectCompany score for TRST is 9.39, and I’m buying at $6.59.

    I also recommended finance or banking companies CNAF, UBCP, HWDY, UNB, CFR, NBTF, and BANF starting about February 24. Here is a comparison of their performance:

     

    The two best, BANF and SFNC, had PerfectCompany scores of 61 and 9.7 in April – now only 1.2 and 2.4. Only 1.2% of the companies we survey have PerfectCompany scores of 9 or above. Since so many of these stocks have continued to lag the market, I am resolved to sell banks with mediocre PerfectCompany scores and market caps less than $200 million. I like small companies, but their lack of liquidity is one more impediment to a great return.

    Bank Stocks to Buy:

    • TRST  TrustCo; insider buying; PC Score: 9.39; 4% dividend
    • BANC  Bank of California; insider buying; PC Score: 60.43; 3.3% dividend
    • HVB  Hudson Valley Bank; insider buying, PC Score: 11.97; 1.26% dividend

    Bank Stocks to Keep:

    • CFR 

    Bank Stocks to Sell:

    • BANF  
    • CNAF
    • HWDY
    • NBTF 
    • SFNC
    • UBCP
    • UNB
    Monday
    Oct072013

    Do I feel lucky? Well, do you, punk?

    Hey, I gotsta know. (Braces for bullet. Dirty Harry pulls trigger. The gun is empty). Sonofabit…

    The question we have to ask ourselves is, “Do the monied interests work for the politicians or do the politicians work for the monied interests?” Heck, that’s easy. The politicians can’t close the hedge fund loophole, keep farm checks from flooding Park Avenue where all the farmers live, or catch any big fish from the 2008 meltdown. Seriously, this “Shut Down” is some bad theater.

    The House has already voted 407 to 0 to pay 850,000 federal workers for not working and the president has endorsed the bill. Now it’s a matter of saving face or destroying the people who are holding up the train. Politicians will get in line, keep the party going and get re-elected.

    Where does that leave investors?

    I’m pretty happy: my main portfolio is up 30.28% this year versus 18.53% for the S&P. I continue to sell winners and a few losers and reinvest in better values. My happiness is often an indication of misperception, so I’m holding Sears puts, which will provide some comfort if a committed group of Tea Partiers throws the nation’s treasure into the abyss.

    I almost never sell out at the top or buy in at the bottom.  At the bottom, “values” can keep going down. I recommended RFIL and bought shares at $7.28 on June 11; it dive-bombed, so I bought more on June 25 at $5.70. It was a better value at $5.70, and those shares are up 29% to $7.40 for a gain on the entire position of 9.53%.  I expect to keep RFIL for a while.

    The opposite happens at the top.  Good values become fully valued, and can shoot far beyond as the Motley Fool crowd piles in.  The company can do no wrong; it is changing the world – until it isn’t.  So I get antsy at the top.  I sold QCOR at $54.39, and it’s at $59 today.

    EVOL has been beautiful, and is one of the many targets of New Jersey housewife, Karen Singer, who is reportedly married to an “SEC-barred, convicted fraudster.” See: http://investorshub.advfn.com/boards/read_msg.aspx?message_id=53231371  Evolving Systems is up 59% since I recommended it on June 25, 2013.

    I sold my JCP 14 Puts on April 9 for a 103% gain; I could have made more if I had held the puts while JCP fell further from $14 to $7.86. Sears seems to be following the same path: they’re lining up more credit and losing more money. That story will unfold in the fourth quarter as department stores get crushed by Costco, Wal-Mart, Amazon, and online retailers.

    Koch Brothers offer to buy MOLX; time to sell.

    On January 14, I recommend Molex and bought some for Mom’s portfolio:  “Rising sales, lots of cash, very little debt and a 3% dividend.  A manufacturer of electronic connectors, Molex has plenty of opportunities to expand. What's not to like?” On September 9, the Koch brothers offered to buy it for $7 billion. http://dealbook.nytimes.com/2013/09/09/koch-industries-to-buy-molex-for-7-2-billion/?_r=0  That’s a 37% gain plus dividends since the close on January 14.

    Sell KLIC

    We rank about 4000 stocks according to “perfect” attributes:  sales growth, a good return on the actual cost of buying the entire company (value), and a dividend.  I looked at KLIC this week, and, while it’s a great value, our overall Perfect Company score is 0.29 because sales are declining and it pays no dividend.  I bought it at $11.66 on 2/1/13 and sold it at $11.44.  The company still makes money and piles up cash, but it can’t increase its sales.

    Buy Cracker Barrel or ELSE

    I still like Cracker Barrel because there are plenty more highway exits to occupy. One large shareholder has been agitating for a $20 per share dividend, but I wrote the company and asked them to keep their cash. Cash is becoming more expensive, and Cracker Barrel can continue to expand if they’ve got it. It’s no longer undervalued, but it’s can keep growing.

    On the other hand, ELSE (Electro Sensors) has a PC score of 8.15 – partly because of the dividend, which they have just discontinued.  It’s a small American manufacturer that has just replaced its CEO/CFO (one person) and says it wants to grow faster. Nicholas John Swenson, an investor and 10%+ owner in some small companies, has been buying shares. 

    Buy ORI

    Old Republic Insurance has been going straight up. Its CEO and two board members have bought the stock. Fitch upgraded it. It pays a 4.76% dividend. Sales are growing. It turned profitable in the last two quarters. Buy at $15.04.

    Buy UNB

    UNB is another great regional bank. Board members are buying stock, sales and profits are growing, and it pays a 4.73% dividend. Buy at $21.21

    Tuesday
    Sep172013

    Perfect Company Trade Alerts 9/15/13

    Barron’s complains that Time has a bull on its front cover – surely a sign of a “top.”  Time’s article, though, is mostly cautionary and part of the celebration of the death of Lehman Brothers in which Businessweek and others have recently indulged.  “It could happen again” comes the refrain.  Of course, it could happen because Wall Street is in the business of blowing up bubbles for commissions:  it’s good for business before and after – and no one but Dick Fuld and Fabulous Fabrice Tourr gets hurt.  And nobody liked them anyway.

    I’m not feeling the bubble, though.  A bubble is when everyone you know is trading stocks, or when more than one of your friends are afraid they won’t get a house because of a bidding war.  What I witness instead is lots of people who are underemployed and big employers stringing along employees as part-timers or consultants to avoid fixed costs and benefits.  A former Citicorp exec told me that Citicorp down-sized, but now has 70,000 consultants.  We’re in a time of fractured employment, lowered costs and increased application of technology that puts the average worker at a real disadvantage.  For owners (stock holders), this increases profits and values, though one must wonder about the ultimate sustainability of an increasingly lopsided system.  The poorer end of the system is supported by government subsidies (despite your contributions, the major supporter of most inner city charities is federal programs), which effectively subsidizes companies that pay wages below the poverty level.

    That said, investors can continue to celebrate until attributes of their investments change.  Some have become richly valued, and some are unloved.  

    Sell IDT (and Apple if you have it.)

    I have been a long-time owner of IDT, but I sold my shares at $16.47 for four reasons:  (1) on days the market moved up, IDT moved down (2) most of their cash is not “their” cash but prepayments from customers (3) they have spun off most of the companies they can; though I like Zedge, it’s a $3 million operation (4) enthusiasts are starting to debate the merits of IDT the way they talk about Apple (market cap: $422 billion!).  When a company has had its run and the enthusiasts are still looking for reasons to get a little more, it’s over.  How much more do you want?  Why not move to a better value with new chances to grow.  People like to talk about what they have come to know, but without any reason.  IDT and AAPL are both fine companies that will now float up and down with the tide.  Time to go look for balloons that may cut loose from the bottom.  (I still hold CTMMA, a tiny IDT spin-out that is up 65% since I started buying it in late 2012.)

    Sell Facebook.  Avoid Twits.

    I hated Facebook at the offering, but recommended it on January 4, 2013 when it closed at $28.76.  On Friday, Facebook closed at $44.31 with a market cap of almost $108 billion. It may be the biggest thing ever created by man, but it’s pretty highly valued.  If we take Facebook’s first half sales and profits, and multiply by a generous 3x for the entire year, then FB would be a company with $9.8B sales and $1.7B profits in 2013. Trefis puts FB value at $30.  Time to sell.

    Life’s great challenge is identifying significance.  Twitter is a service devoted to short thoughts, self-promotion, and re-broadcasts of other people’s short thoughts.  I don’t see a $14 billion valuation, and they will need to become more like Facebook to succeed.  Unfortunately, FB is already there.  This article has more background, but I wouldn’t buy TWIT:  http://gigaom.com/2013/08/28/why-twitters-new-conversations-view-is-a-big-deal-and-why-it-matters-for-its-ipo/

    Fun times at Sears Holdings

    In my last note, I determined that puts on SHDS were too richly valued.  When everyone agrees, it must be wrong, and, as if to demonstrate that, Sears suddenly rocketed from $40 to $60 between August 26 and September 13.  Wow!  Someone suggested that the value of Sears’ real estate might be greater than the value of the whole company.  This has happened before with a company called Two Guys that became Vornado RealtyTrust. 

    Now we’ve got ourselves a game: people are betting on both sides.  Pick one: (1) the company is run by a financial genius who will cleverly turn assets into value even while the company loses $200 million a quarter or (2) the company is run by a hubristic hedge fund manager who knows nothing about retail, has already played the obvious real estate tricks by writing UP the value of the real estate during the K-Mart merger, and is now throwing every press release at the fire that he can while the company loses the retailing wars against WalMart and Amazon.  Oh, and no one cares about department store real estate any more:  there are vacant department stores everywhere.  I’m buying the June ’14 $55 puts.  Sears is unlikely to grow against the market, so this is also my portfolio insurance:  if hell breaks loose, I’ll make money on Sears.

    Sell JCS

    Over the years, I have occasionally done well with small communications companies.  JCS just paid a nice dividend on 9/12, but I suspect is getting squeezed by Cisco, which is consolidating communications.  The rising tide has lifted this little boat, and it’s time to sell for a 9% gain plus dividends.  Not great, but I’m glad to get out.  I got out of WSTL too soon, but put the money into EVOL, which is up 30% since the trade.  That leaves CMTL, a company that pays a 4.5% dividend, earns a profit and has $350 million in cash on a $400 million market cap.  Comtech has declined by 9% since 6/10/2013, but I am inclined to hold it through the next product cycle.

    Sell ABBV

    AbbVie was spun out of Abbot Labs at $35 and has hit $45 at least four times.  I think the bankers left $10 of air on the table, and it’s reached that value.  Whether it goes beyond a $71B market cap requires more knowledge of drug development and distribution than I have, so I’m happy to take the 53% gain since I originally bought the mother company.  Everyone loves ABBV, so it’s a good time to sell.

    Sell ARRS

    I have a 33% gain in ARRS since 5/10/12.  Sales soared last quarter and they lost money.  Not a great value, and a communications company that sells modems to Comcast.  My mentor, Bob, always said, “You never go broke cashing show tickets.” 

    Buy BGCP

    BGC Partners is a wholesale brokerage company with about $1B market cap, growth, lots of cash and an 8.38% dividend.  I paid $5.81.

    Buy CCUR

    Concurrent is helping to reinvent the world of video any-time, anywhere.  See:   http://www.ccur.com/home/about/our-story  Pays a 6.13% dividend, sales and profits are growing, and the company is undervalued.  I paid $7.75

    Buy CFR

    Cullen Frost is the kind of bank I would like to do business with.  They refused TARP funds, they have a beautiful web site, and they serve cities in Texas, which has thrived despite the downturn in the rest of the nation.  With a $4.2B market cap, CFR pays a 2.87% dividend and continues to grow.  See:  www.frostbank.com  I paid $69.98

    Buy CRWS

    Crown Crafts is a children’s bedding manufacturer that has reduced its debt from $47M in 2001 to a surplus of $2.9M at the end of the last quarter.  CRWS pays a 4.28% dividend and the stock has risen steadily since 2009.  Major partners include Disney and Wal-Mart. The web site includes helpful investor presentations:  http://www.crowncrafts.com  I paid $7.36

    Sunday
    Aug252013

    Finding Companies with a Proper Pitch

    Reader Joe V. asks why I write PerfectCompany and why I haven’t written in a while.  Francis Bacon and Mr. Ed come to mind:

    “Reading maketh a full man; conference a ready man; and writing an exact man.”

    “Never speak unless you have something to say.”

    Writing helps me to think through investment decisions.  I wrote a column last month (now published below), but it was leading to the purchase of put options on Sears Holdings that I ultimately determined were already too expensive:  unlike Penney’s, which had its oddball supporters, Sears is already a known zombie.  Still, the idea of having a central “pitch” for every company is important to me, so I’m keeping the column below.

    I haven’t had much to say for the last month because the market has treated me well, and because I am satisfied with my companies and the business environment.  The money the government pumped toward risk assets is inflating stock prices, which, by creating corporate cash cushions and a feeling of greater wealth, eventually leads to actual business activity, which may eventually inflate the U.S. out of its scary debt.  At least that appears to be the plan.

    Joe also asked why I don’t report my results.  Mainly, it’s time-consuming and personal.  The easiest way to report is to copy the E-trade graphs that include commission costs and dividends.  My two portfolios have climbed 27% and 20.5% this year, and, while some of my “value” stocks have disappointed, they did not lose value in the August decline.

    My main portfolio benefited from increases in IDT (which spun out STRP, which I sold), Cracker Barrel, ANCUF, AOS, JCS, CPSI, EVOL, CTMMA, MGIC, and AIRT, and also from the dividends of many of the “perfect companies” that I have been buying this year:  that is, companies with growth, dividends, high cash, low debt, and a purchase price less than the market cap of the company.  Some of my favorite companies have fared poorly such as CMTL, which, while a terrific value, is being punished for negative growth, and CMKG, which is thinly traded, has a low share price, and does not pay a dividend.  Still, insiders buy CMKG, and I think some larger agency will buy this $130 million company for $30 million one day, which would triple its price – but I won’t wait around for the deus ex machina.

    Portfolio number 2 has mainly benefited from QCOR, which is up 145% since I bought it on February 15, 2013.  ABBV, JKHY, ARRS and LECO have also performed well while RFIL and SUP have declined.  I’m sticking with RFIL and SUP because they are good businesses, great values and pay a nice dividend.  I expect them to power a future quarter, and I would buy them now if I did not already own them.

    Other trades

    I have been selling BDX and have sold REPYY, which was a terrific turnaround after Argentina took back the state oil company they bought.  However, I can’t comprehend giant oil companies, so I took the profit.  NBTF has performed well in my mother’s portfolio, and, with a 5.26% dividend and excellent value, still looks like a great buy.

    If you don’t commit, you’re not worth spit.
    Judging companies by their promises

    Besides the numbers, the value of a business can be understood in its “pitch” and its ability to keep the promises that it makes.  The pitch is a commitment to an ideal that’s supported by promises, both explicit and implied.  Good CEOs are great pitchmen:  they neatly sum up what the company does, and they constantly pitch to customers, suppliers and employees.  Employees are more productive because they understand what is expected of them.  Suppliers understand the company’s goals, and can help solve the company’s problems.  Customers know when to complain, and the complaints help to improve the company.  The pitch makes it all possible.

    The grandest and most successful pitch is Wal-Mart’s “Always low prices.”  If you discover you could have paid less for your yoga pants, you notch a mark against them, so Wal-Mart is very serious about tuning up its entire system to deliver the best price.   Its system is a network of important details including price-marking in China, price comparisons locally and everything in between that, added together, crushes competitors.

    Wal-Mart also makes implicit business promises:  you can check out quickly, you can get most of what you need in one place, there will be plenty of parking, etc.  These promises are not easy:  if you have ever shopped at K-Mart, you are familiar with “Price check on aisle four” and the feeling that the company has no regard for your time.  K-Mart is part of Sears Holdings, another company that, like JC Penney until recently, is being run by a CEO who has over-intellectualized retailing and is the latest proponent of the Strangelove School of Management.

    Whenever a company breaks its implicit promise, it damages its brand.  You always remember the gas station that told you, “The restroom is out of order.”  You had an important need that went unfulfilled, and you don’t go back there.   Recently, the business press told us that Barnes & Noble is tanking because the CEO focused too much on his electronic book.  Not true: as any Nook owner will tell you, B&N didn’t stand behind its products:  the charging cable did not work; people in the stores knew nothing and could not help with the charging cables.  Even for physical book sales, B&N employees would rather send you hunting – “The books you want are upstairs in section ^&F” – than help find them.  If you like books, you realized that it was easier, cheaper and even faster to buy at Amazon.  B&N’s implicit promise – “We will sell you books” – is poorly implemented.

    Like B&N, Apple decided to be in a whole new business:  it was a computer company that decided to make music players.  Unlike B&N, Apple nailed the details.  It created its own music system and improved the interface.  Writers rhapsodized about how Jobs used no screws on the back of iPods, and how Apple controlled marketing messages right down to their retail stores.  Apple’s implicit promise was, “We make cool stuff that works the way you expect it to work.”  You expect to pay more since most electronics and software suppliers are happy to ship products that kind of work most of the time.  Apple was wildly profitable, but, now that Jobs is gone, will probably become more like Sony – a brand without a mission, an empty promise that now means “better than average, but expensive.”

    It’s hard to articulate a simple company “pitch” or mission statement, which I think are the same.  Most companies post a stinky pile of bullet points about how they will be the best place to work and how their customers will love them.  No one believes it.  Wal-Mart’s mission statement is:  “We save people money so they can live better.”  Sears Holdings says, “Our Mission is to servedelight and engage our Members while they shop their way.”  When was the last time you were served, delighted or engaged at Sears or K-Mart?  Cracker Barrel says,

    Some companies pride themselves on long-winded and complicated mission statements, but that’s just not our way. In fact, since the very first Cracker Barrel Old Country Store® opened back in 1969 in Lebanon, Tennessee, we've kept things pretty simple. The way we see it, our mission is to please people. Nothing more. Nothing less. And if we do that, we have more than a fair chance of success. If everyone who walks in our front door gets a warm welcome and a good meal at a fair price. If they enjoy browsing through our old country store. If everyone who works with us or whom we do business with is treated fairly and with respect. If we do all those things, well, then we figure the business will take care of itself. And fortunately, so far, it has.

    Cracker Barrel’s mission statement is as homey as its image:  your old-timey kitchen away from home on a major thoroughfare.  I can’t get my wife to go there, but Cracker Barrel parking lots are full, and their iconic rockers are selling well.  CBRL is up 80% since I bought it on 2/27/12, and I think they can expand this simple idea for years to come.  Cracker Barrel market cap:  $2.4B, sales $2.6B;  Chiptole market cap:  $12.4B, sales $2.7 billion. 

    Similarly, Alimentation Couche-Tarde (ANCUF) can continue to grow and refine its network of convenience stores.  Their vision statement is here:  http://www.couche-tard.com/corporate/vision-eng.html   ANCUF is up an average of 44.5% since I started buying it in May 2012.

    The ultimate soup-to-nuts customer delivery system was built by Amazon, which owns the hosting technology, the warehouses, the company that makes the warehouse robots and the finely tuned shopping software that can deliver virtually any product more efficiently that anyone else.  AMZN is valued at $132 billion while Sears Holdings has a market cap of only $4.2 billion. 

    The real, measurable value of any business is its accumulated systems, but those systems are all imagined, implemented and refined in response to the company’s perceived purpose.  Value begins with a pitch, and grows with a commitment to stop at nothing to deliver on the company’s promises – not “to meet customers’ expectations”, but to spectacularly deliver the vision of the pitch.

    Sears Holdings SHLD

    Most businesses have poor systems because of a perceived diminishing return on investments:  why make it perfect if it’s OK now?  Also, refining systems is tedious, boring and hard to measure.  Grand gestures, buying companies, and introducing new products are exciting and show “leadership.”  You end up with a jumble of businesses where executives compete for resources and everyone pays lip service to the customer experience.  The business stands for nothing. 

    This is where Sears and K-Mart (both components of Sears Holdings) are now, but it gets weirder.  According to Businessweek, the CEO/hedge fund manager of Sears Holdings makes his executives beg him for money on a video screen in corporate headquarters.  See:  http://www.businessweek.com/articles/2013-07-11/at-sears-eddie-lamperts-warring-divisions-model-adds-to-the-troubles  Rather than lead a coordinated corporate effort to satisfy customers, CEO Edward Lampert imagines himself the ruler of warring kingdoms who compete for his attention.   Sears’ own Kenmore brand has a hard time getting representation in Sears’ own stores.  Economic survival-of-the-fittest winnows out not just executives, but customers; sales at Sears Holdings have fallen from $46.7 billion in 2009 to $39.8 billion in 2013.   Not yet as impressive a decline as JCP, but a good start.

    To his credit, Lampert has improved his Internet presence, and Sears’ web site ranks the fastest of major retailers in a recent research report.  Still, what’s the pitch?  Can K-Mart go back to discounting and compete with Wal-Mart?  Can Sears.com compete with Amazon?  What do Sears stores stand for if not higher cost retail space staffed with part-time employees who sell a limited selection relative to big-box stores?  Competing with the most efficient and most focused retailers in history is a tough gig. 

    Is it too late to bet against SHLD?  It’s overvalued:  if you bought the whole company today, you would pay the enterprise value of $7.9 billion.  The stock is slightly higher than the 2009 low, but sales have dropped and after-tax income has dropped from a profit of $99 million to a loss of $1 billion.

    It’s hard to imagine what can go well for SHLD, but Sears lacks the irrational turnaround talk that made JCP put options affordable.  I’m passing on this opportunity.

    Tuesday
    Jun252013

    Good buy or Good-bye?

    Last Friday, we met visitors from a potential Chinese supplier.  They marveled at how cheap my Acura was and how blue the sky is – it’s always green in China.  I knew about the pollution, but I was surprised that a Japanese car would cost 70% more in China.  As I write this, the Chinese market has been cratering at a rate that, if it happened here, would make Bernanke appear instantly on every major channel.  The Chinese, though, say they’re squeezing the shadow bankers.  Perhaps easy credit has pushed up prices and encouraged Chinese investment in hundreds of thousands of expensive, empty homes.  http://realestate.aol.com/blog/2013/03/05/china-empty-cities-photos/#!slide=5685996

    China hasn’t made sense to me for a long time, and I’m glad I sold CHL, which has fallen from $55 to $50 since May.  The list of Chinese stocks is littered with companies like Sino Clean Energy (SCEI).  How could you go wrong with both “China” AND “Clean Energy”?  The company was at $7 in 2010 and reported sales of $102 million before it abruptly stopped reporting and the stock dropped to 28 cents.  Wha?  The American shareholders send letters of perturbation and wait on the shore for the Chinese to do the right thing.  Seriously – they discuss their letters on their sad blogs.

    See also EDS (a Chinese footwear company), RINO (a waste water treatment company), FUQI (a jeweler), and CBPI, China Botanical Pharmaceutical.  The pattern is familiar:  decent sales, plenty of cash, no debt … and then, no reporting, which is why I no longer consider Chinese companies.

    The question is:  will China’s problems cause us pain, or is China correcting a Chinese problem?  I think China decided long ago to use its labor force to take over the world, and has succeeded.  We traded manufacturing jobs and pollution for inexpensive goods.  Now the Chinese have our problems:  pollution and an inability to control lending.  They need to deflate at least to the point where an Acura is as cheap in China as it is in the U.S.

    On the other hand, the U.S. has been pumping money into the system, which has been first absorbed by financial entities and then by other companies.  Financial companies are undervalued because of the assumption that rates will increase and squeeze their margins.  However, we’re starting at an absurdly low point.  I think that companies are now using their cash to acquire and expand their businesses.  They cut for so long that they must now spend to grow, and grow they must for that is what shareholders demand.

    At the end of another bad-news day, my #1 stock was HWDY, a small bank up 3.7% for the day.   Also holding or moving up today:  NBTF, an Ohio bank that pays a 5.6% dividend, SFNC, an Arkansas bank paying a 3.3% dividend, and BANF, an Oklahoma bank paying 2.6%.  Since the depths of the Great Recession, banks have underperformed the S&P. 

    WSTL has slipped on our value list, so I sold it for a small profit and bought EVOL, a software company that pays a 4.89% dividend and is being acquired by insiders.  “In the last 5 years insiders have on average purchased 545,622 shares each year.”  Operating income from the last 5 quarters is (thousands):  $575  $1,569  $1,682  $1,765  $1,781.  I’m also buying NBTF.

    RFIL  My cousin pointed out that insiders were selling, and the company subsequently announced that the completion of a major contract will reduce future wireless sales.  They also announced record sales and earnings.  The sudden price reduction doesn’t make RFIL a worse company;  it makes it a better deal.  People will continue to buy cables, and RFIL will continue to own major properties in that business.  I bought more of it.

    Monday
    Jun102013

    Sell on ignorance

    I got lucky.   On Wednesday, June 5, I was wondering why TIVO kept going up.  I had disconnected my own Tivo, and, while I liked the service, it was no longer worth $13 a month on top of the other monthly TV services such as Hulu, Netflix, Amazon Prime, HBO, and Verizon’s ever-expanding fees.  We may be in the golden age of television, but we’re shelling out a lot of gold for the privilege.

    There are eight possibilities for any stock:

    1. We understand the business and we know why it’s going up.
    2. We understand the business, and we know why it’s going down.
    3. We understand the business, and we don’t know why it’s going up.
    4. We understand the business, and we don’t know why it’s going down.
    5. We don’t understand the business, and we know why it’s going up.
    6. We don’t understand the business, and we know why it’s going down.
    7. We don’t understand the business, and we don’t know why it’s going up.
    8. We don’t understand the business, and we don’t know why it’s going down.

    I like 1 best, and am comfortable with 2 if I think it’s a temporary problem.  3 is alright for a while, but, as Tivo showed on Friday, a stock hoisted on its own petard can lose 19% in a day, which is what happened to Tivo of Friday.  I would have posted my sale here, but I usually sell well before a slide, so my timing is not particularly important.

    Chinese stocks often fall into categories 4 and 8:  sometimes the numbers look great, but the stock keeps falling.  I have seen Chinese companies behave that way so often that I now believe that Chinese managements would rather invent numbers than lose face, and I have stopped investing in China altogether.  Great frauds often happen far away, and I believe China nurtures even more fraud than American business schools, where, by the way, cheaters form a clear majority.  See: “MBA Students Cheat More Than Other Grad Students, Study Finds”  http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aw7s9m0BmcBo

    Large banks (and many large companies) fall into categories 5 and 6:  no one understands their asset portfolios or the interplay of their many divisions, but news stories and world events can move them in one direction or another.  The value of the company has been de-coupled from its underlying business as every panic discloses:  during a panic like 2008, “blue chips” get dumped as investors realize they have no idea what’s in the bag.  Here are GE, JP Morgan, Wal-Mart, and, my new favorite, computer cable company RFIL since 2007.  Of the large caps, Wal-Mart is the most know-able and the best performer during that period – partly because Wal-Mart benefited from the consumer squeeze.

    Most small investors want to play on level 7:  they have no idea what the company does, how it should be valued, or why it’s going up, but they are certain that they have an uncanny ability to spot the upward price trend.  Smarter minds than yours and mine have dashed themselves on trend analysis.  In fact, Businessweek reports this week on the extreme endgame of trend following: “High Frequency Trading’s Rise and Fall”:  http://www.businessweek.com/articles/2013-06-06/how-the-robots-lost-high-frequency-tradings-rise-and-fall  

    I spent most of last year trying to maximize my returns with expensive software that purported to spot trends:  it whipsawed me into the tops of rising trends and out of the bottoms of falling ones.   Given the computing power now focused on trading, the advantage may have returned to those who can keep their heads when all about them are losing theirs:  that is, bet on value and stick with it – or, as we did with JC Penny, bet against bad management and stick with it despite frequent pronouncements of new credit lines and new partners.

    Sell TIVO 
    See above.

    Buy CMTL
    Like JCS, Comtech Telecommunications is a boring technology company with a boring name.  CMTL makes money, pays a 4% dividend, and has $342 million in cash on a market cap of $441 million (no debt).  Communications continue to expand worldwide.  CMTL is at the bottom of a product cycle now, so sales have declined.  The nice thing about tech companies, though, is that new technologies can have an out-sized positive impact on the company.

    Thursday
    May232013

    Buy value, pocket dividends.

    May 23, 2013

    “What goes up must come down!” is the cry of newsletter hawkers.  If that were true, we would periodically return to Depression-era levels and our living arrangements would sometimes include outhouses.  Things do get better:  technology improves, people become more productive, and, despite our perception of danger, we live in the safest time in history.  The stock market, while always spikey, is inflated over the long haul by an inflated money supply, the growth in profits and the value of invention. 

    You may have recently heard that sales growth “has not met expectations,” but that does not mean sales have not grown.  Many companies continue to grow and profit.  Also, we are looking at an increase over the last four years after a disastrous economic shock.  What went down has come back up because there is more money in the system, better technology, lower costs and very low wage growth.  Many companies once burned are better positioned to keep operating if the world burns down again.

    Companies’ new cash cushions make the higher PE ratios more palatable.  PEs reflect only a return on a company’s price, but, if a stock is at $10 with cash of $5 per share and no debt, you’re really getting half the company for free, so you can halve the PE ratio.  If I sold you a car with a back seat full of cash, would you be as concerned about the gas mileage?

    Here is another indication that the broad market may not be ahead of itself:  we rank 4000 companies by a single value score, and the median value has remained the same over the last two months, so, while some story stocks may be out of hand, good values are available on the other side of the median.

    Despite the good news, invincibility has invaded corners of the market.  China Mobile is up again to $55 (a $223 billion market cap), and with the ex-dividend date on 5/31, it’s a good candidate to sell.  I sold CHL at $55.40.  Priceline, a company that most people think of as an airline reservation company, derives 85% of its business from hooking people up with the worst hotel rooms.  Hoteliers admit that they put Priceline customers in with leaky sinks and moldy carpets;  I’ve seen hotels lose my Priceline reservations when the hotel is full.  PCLN jumped from $700 to $842 this May, and had a market cap of $42 billion two days ago – now down to $40 billion.  The airlines figured out how to dis-intermediate Priceline from their businesses (better prices are now available on airline web sites), and hotels are starting to do the same by giving crappy rooms and poor service to Priceline customers.  Would you pay $40 billion for a company that earned $1.5 billion in the last four quarters?  Maybe, but it’s no terrific value.

    It’s been a great month.  Winners like IDT, ANCUF, CBRL, TIVO, BDX, CODI and others have continued to grow.  IDT is spinning out another attractive company;  CTMMA, a former IDT company, is up 25% and pays a 10% dividend.  JCP, whose puts I sold last month, is up.  I predicted that fat cats would pile in; George Soros and others are bottom fishing at Penneys.

    Sell losers; buy dividends.
    If you can’t make it here, you can’t make it anywhere.  Even with the market boiling, some stocks are still losers.  I’m selling losers like QLGC to get into companies that are also good values and pay a dividend.  Paying a dividend provides a return while I wait, enforces cash discipline on the management, and probably demonstrates that the major owners of the company – especially for small companies – have an interest in the operations and in extracting cash flow for themselves, which will protect my position.  Warren Buffett may hate dividends in other people’s companies, but you can bet that, when he buys a company, he demands cash payments every month, which is the same, but better.  Stocks like MGIC, MRVL, CODI, and AIRT have performed well, and I don’t mind TNH bouncing around as long as it pays 7.7%, earnings are up and the world still needs fertilizer.

    Buy RFIL, my new favorite tech company
    You may remember Fastenal (FAST) as one of the great stocks of the past two decades.  Building on the incredible innovation of reselling fasteners in stores, FAST went from $1 to $50 and is today worth $15.2 billion.  Maybe RF Industries will do something similar.  RF showed up in our value screens as a company with growing sales and profits, cash, no debt, and a 6% dividend.  This $48 million market cap company makes cables and has products in wireless connectors, too.  Their five divisions include the Connector and Cable Assembly Division, the Aviel Electronics Division, Oddcables.com, Bioconnect and Cables Unlimited.  Not sexy, but necessary stuff.  Operating income over the last five quarters ($1000s):  $201   $899   $1,094   $1,882   $2,061.

    As I prepare to send this, the market is melting down.  CNBC is probably reporting that someone said something that could cause bad things to happen somewhere.  However, most of my investments are growing and paying, and have a chance to stay ahead of inflation, which is a big concern.  The Motley Fool points out:  “Nearly all the inflation the U.S. has experienced has occurred since the end of WWII. The CPI has risen tenfold since 1947, while the S&P 500 is about 90 times higher during that time.  The real return on stocks in the postwar period is almost exactly the same as it was in the 19th and early 20th century, when inflation was virtually nonexistent.”

    Sunday
    Apr142013

    This is no bubble.

    In the last month, many of my recommendations have, like the market, gone up, and my downside insurance (JCP) has gone down, which is also good.  IDT, which I recommended on Feb 4, has been particularly helpful.  Here is IDT versus JC Penney since Feb 4:

    Companies are benefiting from three things:  (1) Low cost of money (2) Better, cheaper technology and (3) Zero wage pressure.  The lack of faster job creation announced last week is not all bad for companies because it means that wages will stay low, which, in combination with better technology, enables American companies to operate with fewer employees and put more cash in the bank.

    Cash is piling up, which makes companies less vulnerable to bankers and sets the stage for the next round of acquisitions and innovations.  For instance, Westell (WSTL) is up 15% over the same period because it used $30 million of its cash hoard to acquire an $80 million software vendor.   Superior Industries (SUP) is down 8% in that period and has announced both a $30 million stock buyback and a new factory.  I don’t mind waiting for companies like SUP to come around because they have cash, a good track record, a simple business plan, and they pay a 3.42% dividend while you wait. 

    If you held Bank of America, you would confront the opposite set of facts:  limited cash relative to their obligations, an abysmal track record, a business plan and assets no one could understand, and a negligible 0.33% dividend.  Run!  By the way, while B of A should be scuttled and sold for scrap, plenty of smaller banks understand their assets, run a tight ship, and are a good value.  CNAF and UBCP are up 20% year-to-date and are still great values. 

    Two other simple companies continue to grow:  ANCUF, the convenience store chain, is up 47% since I purchased it on 6/4/2012 and Cracker Barrel is growing and getting pressure from a Steak & Shake founder to deliver results.  CBRL is up 48% since 2/27/12.

    You don’t have to be a genius to make money in stocks right now, but you must have the fortitude to stay invested during mini panics like last week’s reaction to employment numbers because the market is climbing that wall of worry.  The market is hitting new highs, “creating a bubble,” and preparing for a crash that will change the world as you know it – wasn’t that supposed to happen last year?  However, there are plenty of companies like IDT run by shrewd people that have been through hard times, built up their cash positions, and prepared for new opportunities.  Now it’s paying off.  This is not a new normal:  it’s plain growth enhanced by lower operating costs.

    Anecdotally, the economy is turning around.  I have never known so many smart people creating so many interesting new businesses.  This is partly because the cost of technology makes it possible to start new businesses with less capital and partly because people are adjusting to the idea that they will have to create their own value.  The U.S. is becoming entrepreneurial again.

    At the local flea market yesterday, a table operator said, “I used to sell office furniture, but I was downsized for being too old.  They didn’t say that, but I’m in my 50s and they didn’t want to pay me.  About a year ago, I started working for commissions and made about half what I used to make, but, in the last four months, sales are up and my commissions are … beefy.”  He looked over his table.  “This was paying the bills for a while.”  He was a microcosm of the job market:  laid off, worked for less, started a business, and is now starting to make money again.  Also, if office furniture is selling, someone is expanding or starting up. 

    Sell Kodak (EKDKQ)

    I bought this on 6/25/12 at $0.185 and recommend selling today at $0.30.  Sales are shoring up, but Kodak loses money and, if you sell now, you’ll get a 62% gain from this speculation.  Kodak has been higher in the past year, and I think the overall upturn and hope for a buyer after Kodak exits bankruptcy is propping up the price.  It could go higher, but there is no reason to think that it won’t go lower.

    Sell JC Penney Jan 14 $20 Puts

    I’ve been flogging JCP Jan 14 Puts here since January 4, and, despite the management’s Dr. Strangelove business plan, it’s been nerve-wracking.  A hedge fund manager beat his chest about his contrarian upside (he’s not budging, he says), JCP has arranged new credit lines, the stores look nice, and they’ve even begun to discount again.  I visited a JCP store recently with a foreign fashion manager and we looked at the bright displays of $12 shirts and $19 pants.  My friend said, “I like to see a manikin accessorized – they should have displayed everything that you can buy with the outfit.”  Of course, that’s the “Apple” display: the big, bold product – just buy it.  Great for Apple, but bad for fashion.  Still, I thought the price points were compelling until I walked out into the mall and saw a new store selling shirts for $3.  Wow, that’s the new retail competition.  Penney’s is losing sales online, nobody cares about its shops, and it’s fired 1500 managers, so it has probably forgotten what it once knew about retailing. 

    CEO Ron Johnson was booted on April 8, so now someone with more money than skill may pump up the stock, or the market’s rising tide may lift even this boat, which has recently been the worst performer in the S&P 500.  I sold my Jan 14 $20 Puts at $7.31 on April 9 for a 103% gain, and recommend selling now or on Penney’s next bad news. 

    Need a Shirt?

    Sarbanes-Oxley was meant to save the U.S. economy from crooks.  Instead, it put them in charge by making it virtually impossible to raise money or go public unless you played ball with some scammers who had raised a big pool of money.  Big pools buy lawyers, congressmen and influence, so Sarbanes ensured that we institutionalized and industrialized scamming on the grandest possible scale.  Since Sarbanes, we have seen the near destruction of our economy, and a decline (until perhaps recently) in the formation of new businesses.   Entrepreneurs are not raising money because the system that resulted from Sarbanes-Oxley virtually ensures that they will lose control of their businesses.  The next time you hear that a company is going public, ask yourself, “Where are the founders?” 

    One view is that founders are not important to the long-term success of companies:  there are plenty of smart people who can be plugged into a company where they will quickly set about maximizing value.  As a founder who tends to associate with people who found companies, I am not in that camp.  I have been treated to many hilarious meetings where plug-in executives announce that they will innovate today.  Six or seven corporate soldiers who have barely used the company’s products throw out the first idea that pops into their heads, and then vote on them.  Seriously.  Then they devise an action plan and a spreadsheet, and commence wasting money.  Then they raise more money (further diluting the shareholders) because their goofy process requires prodigious amounts of money to overcome the waste.  Real innovation comes from people who think harder about a problem:  they talk to customers, they think like users, they adjust the plan, and they are shrewd.  As an investor, I look for companies that are still run by founders.  In fact, it’s hard to find a fast-growing company that isn’t.

    Fortunately, there are new tools for start-ups.  One is www.thefunded.com, a web site that lets entrepreneurs rate venture capitalists so you can ferret out the VCs who might really be helpful.

    Another hopeful trend is new sources of funding like Kickstarter.  These crowd-sourced alternatives should be allowed to become more robust and mainstream, but the entrenched money gangs are throwing cash at congress to delay or destroy them.  Nothing is more threatening than an idea whose time has come.

    Dan Norcross is raising money on Kickstarter for his new brand of shirts, and you can see how the Kickstarter process works today in which the company pre-sells a large order in return for special customer discounts.  Long ago, when I was in college, there were small men’s shops throughout our college town.  They are gone, and the quality of men’s clothing has suffered.  Buttons crack in half and the material is flimsy.  Dan proposes to bring back great men’s shirts.  See:  http://www.kickstarter.com/projects/1101566368/beyler-and-turk-luxury-mens-made-to-measure-shirti

    I hope that Dan gets Beyler and Turk going without giving up any equity and that his products have enough margin to power the company straight through to a sale or public offering.  Also, that he puts more women in his next video.  Without women, most of us would not feel silly in our Target sweat suits.

    Monday
    Mar042013

    PerfectCompany Trade Alerts 3-4-13

    Sell BHP

    Take a profit on BHP.  When even Citicorp downgrades, it’s time to consider the declining quarterly profits, declining Chinese demand, bombing in Colombia and cyclone in Australia.  I bought BHP on 8/6/12 at $67.87 and sold at a 11.5% profit plus 3% dividends With 9 divisions and a $200 billion market cap, BHP is one of those companies that is too big to understand or to grow much.  I think there are better opportunities.

    Sell cereal:  POST, General Mills (GIS)

    Sell cereal to move into better values.  Recommended POST here on July 20, 2012 at $30.34 and sold it 2/23 at $38.45 for a 26.7% gain.  I didn’t recommend GIS here, but bought it in a dividend portfolio on 8/6 and sold it 2/25 for $45.74, an 18.1% gain. 

    Sell OAS

    Oil is high, so we’re selling OAS at $36.48;  first recommend 9/24/12 at $30.17, a 21% profit.

    Buy CPSI, SUP, ELSE, ESP

    CPSI is a health information technology company that pays a 3.8% dividend and has grown steadily in the last five years.  The government offers incentives to companies that invest in health records systems, and CPSI should continue to grow and pay dividends – or get purchased by a larger company.  Market cap:  $587M  Current price:  $53.

    SUP makes aluminum wheels and took a tumble on Friday after it missed expectations.  Buy on this bad news:  revenue is down because of lower aluminum prices, it pays a 3.2% dividend, and, with all the cash, you’re buying at about a 40% discount.  Price:  $19.54.

    ELSE Electro-Sensors, Inc. is engaged in the manufacturing and distribution of industrial production monitoring and process control systems.  This $13.5 market cap company has $9.3 million in cash, no debt and pays a 4% dividend.  One insider who owns more than 10% of the company bought shares on Feb 21.  Current price is $3.90.  By the way, the same insider owns shares in AIRT, a small courier company (2012 sales = $89M), where insiders have been buying almost weekly.  Price:  $9.50

    ESP  Espey Manufacturing sells power supplies, power converters, filters, power transformers, magnetic components, power distribution equipment, ups systems, antennas and high power radar systems.  The CEO is buying shares, it’s growing, it pays a 3.85% dividend and it’s loaded with cash. 

    AOS  AO Smith says it has a singular focus on becoming a global leader in water technology.  The market loves this company, which strikes us as a better value than most of the stocks that the market loves, so we’re jumping in at $71.67

    JCP Update:  Put Options are up.

    The bad news was expected.  The unfortunate thing about JPC’s pricing strategy is that department stores cannot compete “every day” with low prices.  They’re in malls, so they don’t have the cost structure for that.  They compete by tricking customers to visit loss leaders or yo-yo-ing prices so that you don’t really know what price you’re paying.  Everyday low prices only work if the company gears its entire infrastructure around low prices like Costco or Wal-Mart.  The astonishing thing is that JCP has also aggressively killed off its online business, which, for many retailers, actually advanced. 

    The immediate danger to JCP puts is that they will fire the CEO, which could drive the stock up.  However, any new CEO will face the same challenge of pulling this dive bomber out of its spin.  The ground’s the limit.

    “J.C. Penney Has Another Train Wreck of a Quarter

    by Matt Brownell , Feb 27th 2013 5:20PM

    Stop us if you've heard this one before: J.C. Penney (JCP) had another dismal quarter, but Ron Johnson is optimistic.
     
    Same-store sales for the beleaguered retailer fell 31.7% in the fourth quarter of 2012, even worse than analyst projections of a 28% decline. Online sales struggled even more, with sales at jcpenney.com falling 34.4% versus the fourth quarter of 2011.
     
    Total sales for the quarter were down 28% to $3.9 billion, despite the fact that the fourth quarter of 2012 was a week longer than in 2011. In all, the retailer posted a $985 million net loss for the year.
     
    That's a loss of nearly a billion dollars in Ron Johnson's first full year at the helm after arriving from Apple (AAPL), and he acknowledged that sales for the year were below expectations.”

    http://www.dailyfinance.com/2013/02/27/jc-penney-fourth-quarter-results-ron-johnson/

    Sunday
    Feb242013

    Investing for 100 days, 3D printing, free company

    How can you win a stock-picking contest?

    My mentor, Bob, always said, “Get rich slowly,” a maxim that I may have taken too much to heart.  However, my 13-year-old daughter posed an interesting problem:  how can she win a stock-picking contest in 100 days?  Usually, I have no interest in the next 100 days because 60% of what will happen has already been set in motion and the other 40% will result from random events:  bad Tylenol, bad legislators or unknowable events.

    If you wanted to win in 100 days, you would bet on trends or earnings forecasts of analysts who, truth be told, follow each other closely and could never fathom the intricacies of the many divisions of the companies they pretend to cover.  In essence, you would bet on gossip, but gossip can power up a stock – until it stops.  NFLX is a popular example:

     

    You might also want to avoid dividend stocks, which are great to own, but bad for contests because they’re less likely to pop and you won’t be rewarded for the dividend return in most simple contests.  If you’ve only got 100 days, you might also want some smaller companies that can grow superfast on a great story or be acquired for a game-winning pop.

    VectorVest is a service that ranks stocks by its own measures of relative Value, Safety and Timing.  We looked through a list of VV’s best picks and chose these ten stocks that we consider good values:  that is, they have a good return on the Enterprise Value in the last four quarters, and their sales are growing.  These were our picks for week one:

    1. WDC
    2. HFC
    3. HP
    4. RES
    5. WAB
    6. AMZG
    7. MEI
    8. ARII
    9. CSTE
    10. QCOR

    The boys jeered, but, at the end of the first week, Faith was in first place.  This week, she’ll sell CSTE, an Israeli countertop maker that is behaving poorly, and buy IDT, an awesome bargain that was up during a bad week.

    Free Company:  CMKG

    MKTG is a marketing company with an $11.1 million market cap, $11.3 million in cash, and no debt:  in other words, you could buy the company with its own cash.  CMKG earned $3.9 million after tax in the last four quarters.  They have great customers and a great web site.  www.mktg.com  Insiders buy it.  So will I.

    Sell COLM

    Columbia Sportswear is a profitable company with plenty of cash that I bought on July 2, 2012 at $53.76.  I’m selling it now at $56 because it has not moved much higher, because I’m not a fan of sportswear, and because I think there are better opportunities.  The Motley Fool pushed COLM as a growth company.  I’m not seeing it and I don’t know much about fashion.

    Buy CNAF

    This is the third small bank I have recommended in recent weeks.  Large banks continue to demonstrate they cannot understand their own assets or their traders, and, as the economy recovers, which I think is happening, small banks, which can understand their businesses, will benefit.  Many banks are undervalued:  the trick is to identify the most undervalued that are best operated.  If interest rates go up, bank profits will fall, but so will everything else, so I don’t see rates increasing soon, no matter what people say about the debt. 

    Commercial Bank & Trust of PA is a small, undervalued, well capitalized, profitable bank that pays a 4.74% dividend (ex-dividend date is 2/27/13). 

    JCP Update

    A hedge fund is pushing JCP around, so my Jan 14 put options are down.  JCP has expanded its credit lines, which only means they will burn up more assets.  The thing that matters will be the fourth quarter report next week, which is expected to be a loss.  It’s hard to get people back into stores once you’ve chased them out, and even Wal-Mart is reporting soft sales.  If JCP couldn’t make money in the fourth quarter, I feel safe on the downside despite the show of optimism.  Now we await the facts.

    3D Printing Saves the World – watch your wallet

    In 2010, I submitted to a Motley Fool contest an article about TDSC, which had labored for 24 years on an idea called 3D printing.  It seemed like Apple in the early days – they were promoting at festivals and selling a nifty concept to do-it-yourselfers.  From 10/8 to 12/23/2010, I rode the stock from $16.59 to $33.  The article won a prize that included a ticket to their conference in Alexandria and a free subscription to a newsletter.  I sold too early, though, because TDSC became DDD, the leader in 3D printers, and it split and kept going up – until recently.

    Anyone who can spell 3D is now going public and getting a valuation of 10 times sales.  Such excitement!  Wait for the exuberance to end with a big crash in this sector – then buy the companies that are still growing.  If you had bought Internet stocks after the crash in 2001, you would be a philanthropist today.

    Saturday
    Feb092013

    Stocks to buy your baby / What about WinTel?

    Dear Dylan,

    I’m sorry that I didn’t invest the money I had put aside for you in Microsoft when you were a baby.  Things would be considerably easier for you today.  I could have.  I was in the business.  Bill Gates spoke at our company’s customer appreciation night.  I recommended the stock to my father, and he didn’t buy it either.  And now you wonder what you should buy for your son with a couple hundred dollars.

    The truth is:  it’s almost impossible to know the best stock at the beginning of a trend because almost everything looks dicey.  About 1987, IBM announced that it would bury Microsoft with an operating system called OS/2.  Industry pundits agreed it would happen, but now, no one even remembers OS/2.   Yahoo, AOL, and Netscape were all great companies for a while.  This is why you’re better off diversifying into 15 to 20 positions:  no single company can sink your portfolio, and you’ll have a few good wins.

    But you want to buy just one stock now and hold it.  Here’s how to think about this decision:  what will change in the next 20 years?  You want a company in a new industry that has the chance to double 8 or 9 times.  That means, if it has a market cap of $500 million today, it might grow to $128 billion in 20 years, and your $200 could grow to $51,200.  You’re looking for a bull’s eye in a one-dart game.

    Here’s a stock that would NOT be a great buy:  Facebook.  Sure, everybody is on Facebook, and it could grow, but it already has a billion users and is worth $68 billion.  For you to make $51,200, Facebook would have to grow to $17 trillion, which is more than the entire U.S. GDP.  That will not happen.

    To get your bull’s eye, you’ll need to buy small companies with big prospects – and probably companies that no one else is in love with yet.  Here are three for your consideration:

    GenVec

    This is a microcap biotech stock – only $23 million in market cap with $18 million in cash, but they’re losing money every quarter.  The executive team has been window-dressed with bigheads from Baxtor Healthcare and Stifel, an investment banking company.  To attract the bigheads, something good must be going on there, but they’re not saying much yet.  Here’s the guy that matters:  the VP Research.  “Dr. Brough was a Research Fellow in the Department of Molecular Biology at the Lewis Thomas Laboratory, Princeton University.  Dr. Brough received his B.S. in Biology from Purdue University, a M.S. in Microbiology and Biochemistry from Idaho State University and his Ph.D. in Microbiology and Molecular Genetics from Rutgers, the State University of New Jersey and the Robert Wood Johnson Medical School.  Dr. Brough performed post-doctoral research in molecular biology at Princeton University.”   The human body is a big database, and we are approaching the moment when gene-mapping, supercomputers, and problem-solving software will discover valuable breakthroughs in healthcare.  If GenVec succeeds in its mission – “GenVec is using differentiated, proprietary technology to create superior therapeutics and vaccines,” – it would be a big payoff for your son.  100 shares at $1.80 each would be just $180.

    iRobot

    Robots are here.  They’re vacuuming, delivering mail, working warehouses, defusing bombs and killing terrorists.  iRobot is an early leader in the field, and their consumer business grew by 28% last year.  Unfortunately for iRobot, military spending on robots declined as the U.S. wraps up two wars and cuts military expenses.  That will come back.  IRBT will benefit from cheap computer technology and breakthroughs in sensors in the next two years.  (Sell lawn mowing companies.)  iRBT is a good value right now:  with a market cap of $572 million and $139 million in cash, the company is out of favor, but is still a leader in robot applications.   10 shares at $20.67 each would be just $206.70.

    Magic Software

    If you want something that’s slightly less speculative (you’re less likely to lose your $200 right away), here’s a little company that grows every year, pays a dividend and is a good value.  MGIC’s  annual sales have grown since 2007 (in $millions):  58.4  62.0  55.3  88.6  113.3.  It pays a 2% dividend and has a market cap of just $177 million.  Small software companies may benefit from virtually free computing power in the near future.  Buy 40 shares at $4.84 each for just $193.60. 

    If you want to open a brokerage account, I would call Ameritrade, which says it has no minimums or other charges.  Just $9.99 to buy or sell stock.  See: https://www.tdameritrade.com/pricing.page 

    Why Intel and Microsoft may not be great buys

    People love to recommend great companies that have stalled.  It’s only moderately contrarian, and one feels powerful suggesting that a powerful company will have a powerful rally.  However, the same questions apply to a mature company:  (1) is it a good value and (2) do they have anything interesting that will command higher sales and large margins?

    Intel is in a business that is rapidly commoditizing.  My partner, Jay, just bought a computer called the Raspberry Pi for $35.  See:  http://www.raspberrypi.org/faqs.   It includes a CPU, 512MB RAM, SD slot (storage), HDMI video, audio, USB and LAN on one board.  Add the free Ubuntu operating system, and you have a very capable computer that needs only a keyboard and screen.  No wonder Google granted them $1 million.  This also makes you wonder if it’s a good time to buy back Dell, which spent more money on share buybacks than all the money it ever made as a publicly-held company.  The better investment will be in companies that can figure out what to with free computing power.

    As for Microsoft, look first at insider sales.  Bill Gates sells about 4 million shares about every two weeks.  He has 428 million to go.  Even for MSFT, $200 to $300 million a month is something to absorb, which helps explain why Microsoft never goes up.  And Microsoft has to contend with Linux, which is free and looks better all the time.  At least Microsoft is moving into hardware, which will make it harder to steal its products in the third world.  However, MSFT is unlikely to score a fundamental world-wide product like the iPhone.  It’s hard to imagine the product that would produce powerful growth for Microsoft.   Microsoft is a good value:  it has $68 billion in cash and is selling at a 23% discount to its value.   It pays a dividend of 3.34%.

    A former Microsoft exec tells a story about trying to get two departments to agree on his project.  At the beginning of the story, Microsoft was breaking ground on a new 10-story building.  At the end, the exec was having the same discussion, and he looked out the window and realized that the building had been completed.  We’ve all been there:  corporations that build incrementally, closely follow innovators, and lack visionary leadership, which is where Microsoft is today.  Like the Surface tablet that can’t run existing software, they make stuff that is almost good enough, but not so great that people line up to buy it.  Microsoft won’t go out of business, but it won’t help you retire either.  Unless you’re Bill Gates and you can sell another 4 million shares next week.  Boy, can you retire.  You’ve worked hard, and you’re one of two people on the planet who has earned more than $100,000 for every hour you’ve been alive.  

    Wednesday
    Feb062013

    Sell Alexion ALXN

    Alexion ALXN is one of those fantasy companies that could go to the moon on drug discoveries -- or crash trying.

    I bought ALXN on 1/5/12 and recommended it on Perfect Company.  I sold it today for a 29% profit for these reasons:

    1. ALXN focuses on "orphan" diseases and makes the most expensive drug treatment in the world:  $400,000 a year for Soliris.
    2. If it cost a lot to make, Soliris might be a sustainable business.  However, the company has been piling up cash and profits.  Last quarter, on sales of $294 million, they had an operating profit of $173 million.  Nice work if you can get it, but can you keep squeezing the patients with the rare disorder -- and their insurance companies?
    3. After the last quarterly announcement in October, the share price fell off a cliff.  They announce again on Feb 14.
    4. Even with all their cash, ALXN is selling about equal to its enterprise value -- the value to buy the company outright.  It's not a great value unless you believe that ALXN will discover more great drugs.  I have no information about that outcome.
    5. I believe that insider information moves biotech companies: "experts" are hired by traders who know other experts inside the company, and the news is reflected in the stock price.  Today, when most of my portfolio is up, ALXN is down.
    6. My mentor always said, "You never go broke cashing show tickets."

     

    Monday
    Feb042013

    The Cycle of Innovation

    Trade Alerts 2-4-13

    A friend tells me that he purchased shares in a company that every every analyst and a few expensive advisory services loved.  All agreed that Seagate shares would rise, so he bought the stock.  Then STX announced disappointing earnings on Tuesday, the price dropped by 12% and he sold it.  Once more, I thought, when everyone agrees, it’s probably wrong.  There is no certainty.

    Friends tell me that the only reason to buy a stock is that it’s going up, but, while their trading systems perform well on historic data, they lose their edge in real time – probably because obvious trigger points like moving averages are factored into computerized trading.

    My own favorite loss was Pinnacle Micro, the first company to sell re-writable CD-ROMs and a company started by Hewlett-Packard alums (not to be confused with a new company called “Pinnacle Micro.”)  I had seen the products, talked with the management, and expected to reap the whirlwind.  Unfortunately, Pinnacle Micro was cooking the books, and I lost most of my substantial investment.  You cannot know that managers will be dishonest, that technology or drug interaction will be flaky, or even that certain assets actually exist in a very large company – especially a financial or Chinese company.  This is the best reason to hold more than just a handful of positions:  you can never know what a bunch of people will do for money.

    I think you can understand the cycle of innovation.  People work – usually out of desperation – on an idea to differentiate their company and, in the process, gain some competitive expertise.  They may take an unusual risk:  for instance:  “we’re not winning in computers, so let’s make a little device to complement our computers and extend that device later into cell phones.”   If their idea catches on, sales increase, and they have five to seven years of excellent profits.  Success has many fathers, so, after four or five years, every top manager decides he is responsible for the company’s success, and is prepared to, for instance, run JC Penney’s.  Competitors have responded, business becomes difficult again, and the enriched shareholders cash out.  About this time, the company builds a new headquarters as a memorial to its greatness.  Of course, this example refers to Apple, which has fallen from 700 to 450 since September, but you would be congratulating yourself if you had purchased Apple stock two years after the introduction of the iPod.

    The companies that I want to buy have established their ideas or have had some success in the past, have a sustainable business, and have enough cash that another year like 2008 would only put them at a competitive advantage.  In other words, they have a platform that will give them time to build on their innovation.  Also, since I cannot know the exact best time to buy a company, I want to buy it at a discount:  it has significant more cash than debt, and the cost to purchase the company is really less than it appears because you’re getting a pile of cash, too.

    Why PE ratios are goofy

    PE ratios are calculated by the price per share – not the real cost to buy the company.  Let’s say I had a company with a $1 billion market cap and a PE ratio of 10.  That sounds good, but, if the company has debt of $1.1 billion and cash of $100 million then the cost to acquire the company is really $2 billion and the PE ratio is really 20.  On the other hand, if the company has no debt and cash of $500 million, then, if I were to buy the company, I could use that $500 million to pay half the purchase price.  The PE ratio is really 5, which looks like an excellent value.

    Ford Motor has $100 billion in debt on top of its market cap of $50 billion.  It’s in a very competitive, mature business, so I don’t see the opportunity that might be implied by its PE ratio of 3. 

    Why dividends are helpful

    Many people say that dividends should be paid only when managers cannot get a better internal return on the money:  give it back to shareholders so that they can figure out what to do with it.  I like dividends because I cannot be sure that I am buying at the bottom.  If every stock went up from the moment I bought it, I would never want a dividend.  However, I am buying value at a discount, and I cannot be sure that other investors will immediately perceive the same value.   If the price drops the next day, the company is no less valuable to me unless the company has changed or I sell my shares;  I believe it will eventually increase in value and I may even buy more.  A dividend pays some return while I wait for others to discover the value.  In fact, if I do not believe that the day-to-day price reflects the actual value of the stock, then, no matter what my monthly statement says, I know that I am earning a return on the money that I invested in that company.

    Economist announces the return of value investing:  The Value of Value

    Imagine my delight last night when I opened the Economist and read this:

    IS IT time for a change in investment style?  The general rise in stockmarkets this year may be disguising a fundamental shift within the market.  “Value” stocks, in Europe at least, are starting to outperform those in the “growth” category after five years in which the trend has been the other way round.

    The article also notes that this trend could last: “once stockmarket trends start to develop, history suggests they can last a long time. In America value stocks have underperformed growth stocks by 23% since the start of 1997.”  My goal is to find value with growing sales.  You can read the article here:  http://www.economist.com/news/finance-and-economics/21571173-fashions-are-changing-stockmarket-value-value

    Trades this week

    Bought MRVL at $9.38.  Profitable and pays a 2.5% dividend.  Not the comic book company bought by Disney, Marvell Technology is “a fabless semiconductor provider of application-specific standard products.”  $2 billion in cash on a $5 billion market cap. 

    Bought IDT at $10.25  Pays a 5.8% dividend.  About 2/3 of the market cap is in cash.  Last five quarters of sales growing ($000s):  $376,777  $365,449  $379,719  $384,891  $400,585

    Bought AVX at $11.53 on 2/1/13.   Pays a 2.61% dividend.  “AVX Corporation (AVX) is a manufacturer and supplier of a line of passive electronic components and related products. All types of electronic devices use AVX's passive component products to store, filter or regulate electric energy.”  Manufacturing is picking up.  $831 million cash on a $1.9 billion market cap

    Bought TNH at $241.15 on 1/17/13   Master Limited Partnerships (MLPs) are popular lately;  TNH is the best value among them (most are loaded with debt) and pays a 6.88% dividend.

    Bought ERIE at $72.52 on 2/1/13  Pays a 3.26% dividend.  Insurance company with lots of cash and no debt:  I added this to my parents’ dividend account.

    Bought KLIC at $11.66 on 2/1/13   “Kulicke and Soffa Industries, Inc. (K&S) designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits (IC), high and low powered discrete devices, light-emitting diodes (LEDs), and power modules.”  $494 million in cash on an $875 million market cap.  Profitable, but no dividend.

    Sold DE at $94.02   Bought Deere on 8/8/12 at $78.58.  +19.65%   Deere has had a nice run in a short period.  It has a $32 billion debt on a $37 billion market cap.

    Sold CTX at $26.88    Bought Qwest 7/12/12 at $26.21  These are exchange traded notes, and I became concerned about the unsecured nature of the debt. 

    Sold IVC at $15.75   Bought on 1/4/12 at $16.94. -7.03%  Invacare sold its supply group to Independence Medical.  Like many medical companies of its size, it was involved in a sale as I had hoped, but only of a division to raise cash, so the return here could be longer in coming.   

    Sold ABT at $33.24 on 1/15/13   Bought at $56.36 on 2/24/12   +24.95% including ABBV stock.  Company split into two parts:  ABBV, which pays 4.3% and ABT, which pays 1.65%.  I sold the lower dividend component from the dividend portfolio.   

    Sold EWM at $15.25 on 1/15/13   Bought 7/2/12 at $14.15  +7.8%   Only a 1.65% yield, and I don’t know Malaysia. 

    Monday
    Jan142013

    The Most Hated & Some Good Values

    JCP, which we have recommended as a Put opportunity for many months, has been named the #1 most hated company in America.  Short of George Clooney pitching for JCP, it's hard to imagine what could go right after they chased away customers.  See:

    http://finance.yahoo.com/news/the-10-most-hated-companies-in-america-162927740.html

    If you're seeking value in 2013, try one of these:

    MOLX
    Rising sales, lots of cash, very little debt and a 3% dividend.  A manufacturer of electronic connectors, Molex has plenty of opportunities to expand. What's not to like?

    ZBRA
    Profitable, rising sales, no debt.  Sales for the last three years in millions:  $738   $894   $983   With a niche in specialty printers, Zebra is everything HP is not.  Look for it to be acquired by a company that needs to broaden into mobile and specialty printing.

    QLGC
    More than half the market cap is in cash and profitable.  Stock is at near a recent low and turning up.  "QLogic Corporation designs and supplies network infrastructure products that provide and manage computer data communication."  Selling at 11 times earnings.

    GRPN
    I hated Groupon at $15 billion and recommended buying Puts.  Now the market cap is at $3.5 billion, one third of which is in cash.  Sales have grown and Groupon's earning money.  It's a great deal if you like the business model and all the competition.  The best time to buy a tech stock is after the initial hoopla and the big crash, which is where Groupon is today.  It's a good value, but is it a good business?  For your consideration...

    Friday
    Jan042013

    The Network

    2013’s most interesting event so far was the loud argument between a liberal investment manager and a communist therapist at our New Year’s Party.  That they could still so vehemently ascribe morality to our economic system was the big surprise.

    Our guests once again debated the best ways to reward hard work and innovation.  Important, yes, but in this age when new tools have amplified ridiculous fortunes for the fortunate, jobs are disappearing for the less fortunate.  The U.S. has seen 4 million jobs vanish since the beginning of the Great Recession and, by some estimates, needs 15 million to get back on track.  (See: http://www.aei-ideas.org/2012/12/the-jobs-gap-missing-15-million-jobs-from-the-private-sector/)  Why this is happening is worth contemplating from both the investment and human perspectives.

    The tools now obliterating old production patterns are digital:  communication, data base, and artificial intelligence – what I think of as simply The Network.  The old way to bring wealth to your town was to make something and ship it everywhere so that buyers would send back money.  Entire cities could prosper around a vacuum cleaner, steel, or textile plant.

    If you want to get wealthy today, you control a piece of The Network.  Facebook, Amazon, Apple, Google, Open Table and others are sucking in cash from all over the world.  Life is good in San Francisco and Seattle.  Not so much in Trenton, NJ.

    The Network is extending its power through pattern recognition and more flexible machines.  One robotic company will replace workers in lettuce fields with a tractor-pulled device that compares an image of each plant with two million reference images; the LettuceBot then squirts the correct amount of fertilizer to enrich or kill the plant so that the field fills with a perfect matrix of healthy lettuce plants.  Another company is releasing a hamburger robot:  stack it with meat, tomatoes, etc. and you’ll always get it your way.  Rethink Robotics offers a robot that can work alongside humans without accidentally killing us and can be trained by anyone for routine tasks; ironically, at $3 an hour, Rethink robots may help bring manufacturing back from China.

    Popular magazines tell us why the robotic future will be great, and it certainly IS great for anyone who owns a piece of The Network.   Enterprises can operate with fewer people, lower costs, and better quality.  However, the entry level jobs for mail clerks, bank tellers, toll takers, secretaries, warehouse workers, farm laborers, hamburger cooks, and paper pushers are going away and they ain’t coming back.  This has no moral meaning and it cannot be stopped.  Practically, though, it means that, despite the better unemployment numbers, 4 million people have simply disappeared from the U.S. work place.  The unskilled have less and less to do, and cities like Trenton that once proudly declared “Trenton Makes, the World Takes,” have become warehouses for the unskilled and their attendant charities.  (I once met with a Trenton councilman who complained that he could not tax the charities that occupied most of the office space.)

    Morally, this has severed the connection between reward and innovation/hard-work.  It’s a real stretch to argue that CEOs should take 500 times the shop floor worker or that the top 25 hedge fund managers deserve, on average, a billion dollars a year.  They have exploited every cranny in The Network and have been rewarded disproportionately to their innovation or hard work, though they would argue otherwise.

    This will only amp up as machines get smarter.  Jobs that were thought to require mental agility are beginning to disappear – for example, diagnostics of all types as machines learn from the vast databases on The Network.  Also, pieces of The Network will consolidate.  For instance, companies like McKesson (MCK) are buying everything in health care distribution.  At $122 billion in sales, McKesson now makes its own brands of many products; like Wal-Mart, it wants to own every channel into a healthcare provider, and uses product bundling to ensure its dominance.

    Ultimately, a handful of people will control a handful of Networks, and it will be obvious to everyone that almost no one can contribute to the society by simply working hard or innovating.  It will be time to redefine how we organize our society.  I have no idea what we should do then, but a few ideas on how we can profit in the meantime.

    2012 IN REVIEW

    I apologize for not writing more often in the last quarter of the year, but I was working on a consulting assignment, which I’ll discuss below.

    In 2012, I invested in three ways:

    1. Specific situations that made sense to me.  Companies like ANCUF, MPC and CBRL were good values and had businesses that I understood, and companies like JCP seemed like bad businesses that were worthy of Put options.
    2. Investments recommended by a software system that historically timed the market well, but disappointed in 2012.  I think that attempting to time the market is even more fruitless today because of the computing horsepower marshaled against small investors by market manipulators.  When a rocket like Chipotle or Netflix takes off, it no longer sits on a foundation of value, and can be blown by the winds of speculation.  Rather than timing the winds, I prefer to buy a firm launch pad or sell a broken one. 
    3. A basket of dividend-paying stocks across industries and countries that had a modest increase but paid out 1200% better than my parents’ bank.  This was a buy-and-hold strategy, and I was often surprised by which stocks performed best.  Ray Dalio says that, if you can have 15 or more uncorrelated income streams, you reduce the amount of risk by about 80%.  Mom was happy with her returns.

    THE ECONOMY

    The most interesting economic news arrived via Harry Shearer’s radio show when Shearer interviewed an associate professor at the University of Missouri.  Transcript: http://harryshearer.com/transcript-stephanie-kelton-interview/ 

    The professor explained away two popular analogies for the economy:  (1) If your home were run like the economy, you would GO BROKE!  The economy is unlike your home because your home does not have a printing press in the basement that allows you to pay off your debts whenever you want.  The country’s debts are denominated in dollars, and the government can pay off its full debt at any time.  (2) We don’t want to be like GREECE!  Unfortunately for the Greeks, they gave up their printing press by joining the Eurozone, so they cannot print drachmas or devalue their currency.  The Greeks have become more like your house than a country.  The U.S. is not in danger of becoming like Greece because we still have our printing press.  The professor has many other interesting observations, and I recommend the transcript.

    So why are we not experiencing more severe inflation?  I think it’s the lack of jobs holding down pressure on wages.  While we’re pushing more money into the system, it’s all winding up in a few pots:  cash is being collected in corporate coffers or by the 1%, so you see record-breaking penthouse and yacht prices, but relatively less inflation for toothpaste.  Stories abound of former mid-level Wall Streeters who earned $250K a year and now drive taxis because they were replaced by $100K employees.  Even in leading New York law firms, top associates now get $60K bonuses instead of the $110K in good years past.  Why?  Partners keep more of the revenue because people are lining up for fewer law jobs.  See:  http://www.businessweek.com/articles/2012-12-06/at-top-law-firms-a-class-conflict-during-bonus-season  As of this writing, Apple’s cash hoard is about $130 billion.  By percentage of applicants, it’s harder to get a retail job at Apple than it is to get into Stanford, so Apple still pays its geniuses $15 an hour while the cash piles up at a rate that would enable Apple to buy its old nemesis, IBM, for cash by late 2013. 

    We may fret over paying the national debt, but government jobs and expenses are giving people something to do while The Network hollows out unskilled and middle management jobs.  Meanwhile, the extra money injected into the system is being sopped up by a few giant sponges:  banks, dominant corporations and the 1%.  Structurally, these cash concentrators may be saving us from runaway inflation, but what does it mean?  (1) Small investors have less to invest and may not participate in the next frenzy.  (2) Large companies are consolidating industries and buying technology rather than innovating.  (3) Luxury goods sell. (4) If the government settles down again and cash-holders get a rule book, they may repatriate cash and start bidding for assets.  Business may get going again, as we may have seen in the New Year rally.  My father always said, “People don’t like to do nothing.”  Animal spirits may return.

    TRADE ALERTS

    BUY HEALTHCARE

    Buy any small health care provider with a good track record.  With Obama back, big players like McKesson ($120 billion sales) are buying everything in sight (National Rehab, a $100 million company, PSS/Gulf South, a $4 billion company, and others).  On Wednesday, Jan 2, iShares S&P Global Healthcare Sector Index Fund ETF (IXJ) saw 532,000 shares traded versus the three-month average volume of about 53,000.  Shares of IXJ were up about 1.3% on the day.  The time to sell is when people are buying, and many healthcare companies will be acquired in 2013.  Invacare (IVC; sales: $1.8 billion) is a good candidate.  Send me others if you have them.

    BUY LECO

    The opposite of love is not hate, but fear.  If you fear your employer, you’re not thinking of ways to improve the business –  you’re thinking about office politics or how you can escape to your next job.  Many employees live in fear, which is unfortunate for them and also for their companies.  Employees at Lincoln Electric must love it:  LECO has not lain off an American worker since 1948 and paid an average 2012 bonus to its 3000 American employees of $39,915.  This “unwavering commitment to our employees and a relentless drive to maximize shareholder value” has helped make LECO the world leader in welding and has consistently driven it to record sales and profits.  You can see LECO’s commitment reflected in its financials:  even in 2009, a bad year for almost everyone and a year of declining sales for LECO, the company increased its cash position and held onto its people.  The world needs to weld stuff, and LECO’s motivated employees will find new ways to weld.  At a $4.2 billion market cap and a 1.58% dividend, it’s a fine horse to ride.

    BUY FB

    I recommended against buying Facebook when it went public because the valuation was too rich.  Things have changed:  (1) Market cap slid from $100 billion to $60 billion.  (2) The company is earning money, increasing cash, and increasing earnings – it’s real now.  (3) FB is figuring out online advertising.  It may be ugly, but they’ll work it out.  FB is the biggest web site in the world, and is a key player in The Network. 

    BUY HWDY

    This is a long-term, buy-and-hope recommendation, but, if you’ve got the time, there might be some juice left in banking.  Hopewell Valley Community Bank is a commercial bank with 9 branches.  The company has already experienced the euphoria of its founding and public offering, and the stock has fallen from $18 in ’06 to $7 today – probably because of the taint of big banks.  I love that chart because, after the fall is the time when investors have opportunity and when managements have focus.  HWDY has a simple plan:  lend to small businesses (which are showing signs of life), take over dead branches of cruddy banks like Bank of Amerika (to reduce building costs and pick up customers) and expand into Hunterdon county, New Jersey (the fourth richest county in the U.S.)  The CEO says they want to expand at 12% a year.  They’re getting good results: take a look at net interest and operating income:  http://www.marketwatch.com/investing/stock/hwdy/financials  It’s a small market cap of about $23 million, but HWDY might run right between the legs of the giant banking trolls.

    BUY TIVO

    I bought TIVO on 9/17/12 and it’s up 27%, but I still like it.  Their user interface is great, about half the market cap is in cash, and there is a huge amount of interest in television.  Every online media company wants an edge in the living room:  if TIVO isn’t acquired, their new streaming video box could participate in the next wave of television.

    BUY WSTL

    This is a qualified recommendation because the CEO/Chairman is selling and because I cannot find any information about Antone Wireless products, which Westell bought in 2012 after selling other divisions.  Westell is down from where I last recommended it:   the $110M market cap is covered by $173 million in equity and a cash position of $120M.   You’re buying the company for less than its cash.  Though their sales are shrinking, these guys aren’t idiots:  they sold a lot of routers, which has become a bad business, and they’ve accumulated enough cash to reposition the company.  By the time the news reaches you and me that good things are happening, the ride will be over.  If you like to buy cash at a discount and feel hopeful, WSTL is an interesting bet. 

    SELLING…

    I’m clearing out of some of the stocks that I had attempted to “time.”

    • Momenta Pharmaceuticals (MNTA)  They’ve still got lots of cash, but the management has never had a great track record and I don’t understand molecules or government approvals. 
    • Enerplus (ERF)  They were a resources fund; they’re not great operators, so I’m taking a loss on this one. 
    • EZ Corp (EZPW) I’ve never even been to a pawn shop, and should not have gotten involved in this.  I’ll take my loss.

    BUY JC PENNEY JAN 14 PUTS

    I wrote, but did not publish the section below on 11-18-12.  People are happy in the fourth quarter, and I ended up selling my Jan 13 JCP Puts for an 86% profit on 11/28.  I’m still holding my Jan 14 JCP Puts, which are showing a 56% gain.  Since I wrote this, I learned that everyone’s favorite JCP section, Sephora, is opening their own stores in the same malls with JCP, which proves the weakness of trying to make a department store out of smaller stores.

    * * *

    I should be gloating that my JC Penney’s puts are up 169% and 89%, but, truth be told, I was starting to think I might be wrong.  The stores are tidy and more interesting, the employees are friendly, and they’ve got some decent promotions.  I even know people who are buying there.  The problem for JCP is that, when you drive customers away in retail, it’s prohibitively expensive to get them to come back – especially when your competition is Macy’s, Kohl’s, Target and Wal-Mart.  In yet another disastrous report on November 9, sales dropped another 26% generating a loss of $203 million.

    The financial establishment, which had been propping up the turnaround, finally capitulated.  Fitch downgraded JCP two notches to “B” and says the outlook is “negative”;  JP Morgan downgraded JCP to neutral from overweight;  S&P downgraded JCP’s credit rating to B-; and a Credit Suisse analyst wrote, “Time is no longer on JCP’s side, and going into 4Q12 and beyond, we are concerned that JCP’s technological overhaul of both its back and front end systems could serve to create an even more challenging internal environment than is the case today.”  When these guys pile on, it gets ugly, and the stock sank from $27 on Oct 17 to $16.28 just a month later.

    Central to Penney’s problem is their “pitch” to customers:  no one cares that a retailer has a “fair and square” price.  I’ve been a retailer, and I can tell you that if every customer knew their next great deal would put you out of business, they’d be OK with that.  On the other hand, retail shoppers like to be entertained, and JCP has done a nice job of revamping their theaters.  It’s time to drop the lame “fair” slogan and say, “JCP stands for Just Cut Prices!  We Just Cut Prices for the holidays!  You won’t find a better selection of gifts at lower prices!”  They need to hire some likeable lady-magnet spokesperson like George Clooney who is willing to say, “You know what?  The new JC Penney stores really ARE great!  You’ve GOT to see them!  And they’ve Just Cut Prices!  I know!  That’s JCP:  Just Cut Prices!  Wow – I can’t believe it!  Look at these prices!!  If you don’t shop JC Penney this holiday season, well, you’re Just a Crazy Person!”

    Short of George Clooney pitching for JC Penney’s new lower prices, it’s hard to imagine how this smallish, failing retailer will compete.  Soon comes the winter.

    WHAT I’VE BEEN DOING LATELY

    While I have been thinking about The Network from an investment perspective, my partner and I at Textler have been building a network for a healthcare company called Gentell.  Fastcare links tablets with a cloud-based wound management system that generates wound reports for nursing homes and product orders for Gentell.  It’s the most efficient way to track wounds and process wound care product orders.  Gentell has also hired a squadron of excellent nurses and medical salespeople who understand wounds and how to sell the technology.  Wound rates in some nursing homes drop as much as 40% in 90 days, and the company is signing up new accounts almost every day.

    Selling technology requires good packaging and documentation, and I have spent much of the last two years documenting products and processes for Gentell, which now has online videos, manuals, ordering systems and new packaging.  The work is exciting because it’s new and it helps people.  Delia Associates, a local marketing company, did a great job of polishing up the web site as you can see.

    Two years ago:  http://web.archive.org/web/20090220022856/http://gentell.com/

    Today:  www.gentell.com

    Fastcare explained:  www.gentell.com/fastcarevideo

    2013

    Now that I am no longer attempting to time the market, I will write intermittently about specific opportunities.

    Monday
    Sep242012

    The Wall of Worry, the Faith of Job

    Trade Alerts Sept 24, 2012

    Has any year ever better illustrated the axiom, “The market climbs a wall of worry?”  Amid the moaning of intelligent people about black swan events, the election, Europe, and the Arab winter, the S&P is up 16%.

    Here’s what I think is happening:

    We think of our government as a service organization that collects taxes, protects us and cares for us when no one else will.  In reality, our government dispenses favors and divvies up the wealth of the nation to those who can influence it or to those who are exceptionally clever.  They are usually the same group since, as soon as the influencers perceive a new game, they move to own it.  Facebook is a fine illustration:  monied interests pumped up the valuation of the new network, and dumped the stock at one of the great valuations in history.  That’s the new winner-take-all approach.  Facebook has terrific management, but, instead of selling the stock at a fair value that could grow a little (the old plan), they left nothing on the table for the new public buyers.  No, they left less than nothing.

    We think of our economy as a laissez faire meritocracy when, in reality, we have learned that it is a web of centrally-supported dependencies, and that the loss of one large entity like Lehman Brothers can crash the whole system.  We will not let that happen again.  Behind the political circus, economists and financiers negotiate for systems that will keep gamers at the table.  Our Fed buys $5 trillion of our own Treasury Bills and we wonder how we’ll ever pay the debt.  Do we really care if we borrow from one pocket to pay from the other?  Money is not part of the strictly rational, value-driven, supply-and-demand system that we were taught in college.  It is a unit of influence, and it can be sluiced around to fund markets and to make citizens feel better about our lives.  But it cannot stop flowing or the whole game is over.

    In this school yard, gangs sometimes arise that apply the rules in a new way.  They learn to manipulate the patent system, the insurance system, the lobbying system, the manufacturing system – and, once they achieve a certain size, they lord it over the other kids.  Apple and Google are good examples even though they are beating up each other over history’s biggest consumer product:  cell phones.  Both companies buy other companies for their patent portfolios and both companies have achieved an industry dominance that ensures dirt-eating for any upstarts.

    On the sidelines is a group of kids who bet on the gangs, and they have their own gangs that pool their lunch money to skew the odds, so it’s not enough for your gang to win;  you’ve got to contend with gangs of bettors who are gaming the game.

    As an investor, I no longer think about “creating value.”  Lots of people can create value, but few can extract the maximum value from the system for their own gang (in corporate parlance: “team.”)  I have met some of today’s industry titans, and can report that, with the possible exception of Steve Jobs, they weren’t particularly interested in creating great products or services:  they wanted to crush everybody else, and they didn’t care about being perceived as nice people.  The question is: which gang is going to excel at gaming the system, and which gang is bluffing?  Buy one and sell the other. 

    Is this man bluffing?  Or is he the savior?

    In my last note, I predicted that JC Penney would have “another disastrous quarterly report … that will drive the stock down further.”  The news was worse than anyone expected.  Brian Sozzi, chief equities analyst at NBG productions, said, "We knew the quarter was going to be bad coming in, but it was bad on top of bad.”  When management said, “we are confident the transformation of JC Penney is on track,” columnist Jeff Macke responded, “Unless the track is designed to lead JCP into Chapter 11 bankruptcy, nothing is moving in the right direction. ‘Confidence’ without past or present results is just arrogance.”  You can read Macke’s article here.  This spectacular train wreck is happening faster than anticipated.  A friend from Plano, TX writes:

    I have followed with interest your comments about JC Penney.  Their headquarters is about 3 miles from my front door, and we know a number of people who work there, sell to Penney or have retired from there.  The consensus from those folks is that you are right.

    Paradoxically, this worse-than-imagined news drove the stock up.  Let’s consider the potential reasons:

    • The U.S. is entering a period of expansion in which a rising tide will lift even this boat – even a retailer with sinking sales.  Probably not.
    • There is a scintilla of evidence that the new Penney’s sales plan is starting to work.  See above. 
    • The purchases of K-Mart and Sears have been so successful that potential acquirers are driving up the price of JCP.  First, retail is in decline.  Space-filling stores at your local mall now have names like “Shinee.”  Second, there is no reason to bid up JCP now if you want to own it.
    • The game is not what we think it is.  With a market cap of only $5.5 billion, there are individuals who can buy this company and plenty of institutions that can push it around.  On the day of its disastrous earnings announcement, trading volume shot to 438% of average.  The short interest increased from 28.9 million shares on 2/29 to 57.8 million shares on 8/15.  With 26% of the shares in the hands of short sellers, this upward trend could be nothing more than an attempt to squeeze the shorts.
    • JCP has an awesome new strategy that will change the way we think about retailing.  Consider that retailing is about price, selection and presentation.  The only innovation at retail lately has happened at Amazon, which, in addition to its eponymous site, owns beautiful online stores like www.casa.com that are run by Amazon subsidiary Quidsi.  Amazon even bought the company that makes the warehouse robots that ship its products fast, accurately and cheaply.  What did JCP online sales do last quarter?  They fell 32.6%.  What is the big innovation coming at JCP?  Carve up department stores into smaller “shops”.  I thought that’s what malls did, but malls don’t seem to be doing real well.  I would applaud Ron Johnson if he could bring the same kind of service to a Penney’s store that he championed at Apple.  Unfortunately, the economics don’t support it; Penney’s is staffed by zombies, not the “we’re changing the world” true believers over at Apple.

    Given its run-up since the day of its catastrophic earnings announcement, JCP has outperformed Macy’s, Target and Kohl’s – retailers with expanding sales and earnings.  Buying JCP now is like betting on the South after Pickett’s Charge.  (Still, the Civil War went on for almost two more years.)

    This creates an interesting situation, and possibly a great investment opportunity in which analysts foresee consensus earnings next year of $2.10 with a consensus target price of $28.95.  (Source=EarningForecast.com)  I see a company that has driven away its customers, cut its cash and short term investments in the last year by half, increased its debt to $3.1 billion, earned debt ratings of “junk,” and seen sales fall off a cliff in a bad market for retail.  I like retailers that I understand (ANCUF is up 18% since I bought it on May 29), but JCP doesn’t make any sense.  The recent increase in price has made the puts more affordable, and I am buying January 2014 JCP puts.

    I was once on a board that had a charismatic CEO who presented a new, very detailed spreadsheet every quarter.  The results and the plan were worse every quarter, but the spreadsheets demonstrated that profits and cash would turn positive soon.  To my astonishment, other board members had no interest in what would make these numbers happen.  They were mesmerized by the spreadsheets and the positive attitude of the CEO.  Numbers are appealing:  they seem more concrete than ideas about consumer behavior.  I imagine that the same thing is happening with the Penney’s board and its analysts:  they are looking at imagined patterns in future spreadsheets and not talking with actual customers.  If you like the odds of disagreeing with the analysts, go poke around a Penney’s store and ask yourself, “Will customers be flocking back here soon?”

    OTHER TRADES

    One management gang showing a positive trend is Oasis Pete.  OAS sales in millions since 2007 are:  $13.8, $34.7, $37.8, $128.9, and $330.4.  The last four consecutive quarters are $492 million.  They had operating income of $152.5 million in 2011.  I’m buying.

    My friend, Jay, is a chartist who predicted that JCP would rise, so, when he sent me a list of other near-term candidates, I put them through a software screen and asked the usual question, “Would I want to own the whole company?”

    The one I liked was John Deere (DE).  It pays a 2.45% dividend and, like CAT, exports to the world.  Deere makes a lot more than tractors now and earned $3 billion after-tax for the last four quarters on a $32.6 billion market cap.

    I’m also buying back into an old favorite small cap, JCS, which has weathered a downturn.  JCS has $32 million in cash on an $88 million market cap, and pays a 6.18% dividend.

    Sell Sprint.  At $5.68, it’s in frothy territory now – well above its $4.01 Trefis valuation.  Sprint received few of the iPhone 5 in their allocation, which could have benefited them.  I’ve also sold VNO and DLTR.

    Growers I’m buying:  EZPW, TDG, JKHY, ARRS, ERF and PNRA.  These are good-sized companies with room to grow and good track records.  I was wrong to sell TDG.  If you sold, sorry….

    ERF is an energy company with a lot of natural gas that sells for less than equity value,and even less than its 2009 price, which is unusual.  By comparison, Exxon sells for 2.6 times equity.  ERF had an operating profit of $147 million last quarter.

    I’ve also bought more BDX and more WSTL.  WSTL releases its Home Cloud product this week.  See www.homecloud.com  Everybody hates WSTL, so you can buy the company for $12 million more than the cash they have in the bank.

    Monday
    Aug062012

    Trade Alerts  8-6-12

    One of the most interesting observations attributed to Steve Jobs is that people remember stories more than products.  Brent Schendler wrote in a Fast Company article:

    "The technology we've been laboring on over the past 20 years becomes part of the sedimentary layer," he told me once.  "But when Snow White was re-released [on DVD, in 2001], we were one of the 28 million families that went out and bought a copy of it. This was a film that is 60 years old, and my son was watching it and loving it. I don't think anybody's going to be beating on a Macintosh 60 years from now."

    Indeed, as machines are perfected, the main difference between human beings is one’s ability to hold another’s attention.

    Money is flowing in that direction – as evidenced by the growth of the gaming business and other leisure assets – so I was intrigued to learn that a company I mentioned on July 23, CTM Media Holdings (CTMMA and CTMMB), which spun out of IDT, is a combination of “advertising initiatives” and a 77% interest in IDW, a comic-book publisher focused on licensed properties like 24, My Little Pony, True Blood, Godzilla and more.  You can read more here:  http://en.wikipedia.org/wiki/IDW_Publishing 

    Financial information about CTM is not available in the usual Etrade / Yahoo / Google environment, but you’ll find it here:  http://ir.ctmholdings.com/profiles/investor/CSummary.asp?BzID=1967&Nav=1&LangID=1&s=0&tPName=Profile#  Income and cash flow are positive, but cash is consumed by dividends.  More interesting is that insider William C Martin has a taste for the company.  On Jan 18, 2012, he bought $676,850 of CTMMA, a security with a total market cap of just $3.9 million. 

    This is a special situation, but an interesting one:  a small company with little liquidity and with two securities with a total market cap of $14.8 million.  One insider appears to control the company, but he probably likes getting his dividends.  The company has an outside shot of becoming a story mill for a larger entertainment entity through its 77% ownership of IDW and a possibility of emulating the successful exit of Marvel Comics, which sold to Disney for $4 billion, which may be the real reason that Martin likes CTM.  An interesting opportunity for small investors.

    Buy BHP for dividends and growth

    I like mining companies because billions of people are joining the world economy, and they need commodities.  I was overenthusiastic about VALE last year, but am even more comfortable owning it at its current valuation;  the 6.3% dividend is helpful and, in the worst of quarters, VALE earns billions, which is far better than faddish stocks like GRPN. 

    Similarly, BHP earned $23 billion in the last four quarters and, if you divide that into the current market cap of $109 billion, sells at just 4.7 times earnings.  Last week, BHP announced it would take a $3.3 billion write-down against U.S. shale gas and the CEO declined his bonus.  The stock responded by moving up from $66 to $68.  The bad news is in.  BHP pays a 3.23% dividend.

    Buy Westell Technologies for growth

    WSTL is a $140 million market cap with $135 million cash and no debt.  It’s lost a little in each of the last two quarters, but in the last four quarters, it had operating income of $3 million (millions more with special income added in), so you can own the opportunity to make $3 million a year for about $5 million.  Is it awesome technology?  Probably not, but their experiment in www.homecloud.com shows that they’re thinking – though their investment relations person writes, “Homecloud is a unique and complex product in a somewhat congested marketing "space".  It is a remnant of our CNS business and not a core focus.  As a consequence, we have contained our investment while trying to get it to market.  The process has taken longer than we had envisioned.  I cannot selectively comment to you about details, but we will address the product on our call on August 7.”  I bought WSTL at $2.20 and it seems to be turning up.

    Sell QCOR

    The stock has dropped from $53 to $35 in the last month despite a good sales report.  This is either a good time to buy or a time to capitulate to the trend.  I sold.

    Sell TDG

    Precipitous drop on light volume in July;  you can sell on Monday or hope for a good conference call on Tuesday.

    Sell VIAB, SLG

    VIAB has declining sales and profits, and I don’t understand the media distribution business well enough to know whether VIAB has any leverage.  I sold SLG from the dividend portfolio because it only pays 1.22%.  There are too many other attractive dividend payers.

    Sell BMY

    Quarterly sales are down from $5.4 billion a year ago to $4.4 billion with profits dropping from $1.3 billion to $800 million while the stock went from $27 to $36 with a big drop Thursday.  Time to check out.

    SIDE BETS

    My two most profitable positions right now are side bets that Kodak was worth more than $74.5 million (it’s up 196% since 6/25/12) and that JC Penny would unravel (JCP Jan-13 puts are up 80% since 5/21/12.)  I visited a JCP store the other day and noticed the Liz Claiborne for Men display near the inside mall door – prime retail space that should be luring in passersby.  This is what happens when a retailer buys into a manufacturer:  the brand manager for Liz Claiborne for Men commandeers the best space, which ought to belong to something more exciting.  I’m no fashionista, but I think of Liz Claiborne as a creaky brand for women.  If you want to pull men through the door, how about Armani, Ralph Lauren, Lacoste, or Nike?  To be fair, farther into the store, the kitchen appliances were laid out like an Apple store and looked very attractive.  They would help draw in traffic at the mall entrance.  JCP has been selling off assets to support cash flow, but they’re also building boutique stores this quarter (that are closed for now but take up space) and thinning merchandise.  I think another disastrous quarterly report is coming that will drive the stock down further.  Fitch cut JCP’s rating on August 2 to double-B-minus on sales concerns.

    Monday
    Jul232012

    Trade Alerts: 7/23/12 6.35% Dividend Portfolio; Buy GSK

    The banker said that if Mom locked up her account for fifteen months, she would get 0.4% interest instead of the usual 0.2%.  This means that the marginal payback for locking up $100,000 for over a year is $200.  The government is saying, “We want you to invest in securities that are riskier and that might create jobs.”  Here is an actual portfolio balanced across many industries and continents that achieves a 6.35% overall return with the possible stock appreciation.

    The only investment you might not recognize is CTMMB, which was spun out of IDT Corp, a company that, in 2008, had more cash than market cap.  I bought IDT for $2.80 a share and remember saying to a VC who had worked there that I wouldn’t bet against the CEO because he had succeeded several times.  She did not say out loud that she thought I was a moron.  I sold the stock on 8/24/10 at $15.99; Forbes touted it in December 2010 at what became the five-year high:   http://www.forbes.com/forbes/2010/1220/focus-howard-jonas-idt-rupert-murdoch-cheney-not-just-business.html  As a rule of thumb, a great time to sell is when Forbes recommends.

    CTMMB was a nice side benefit of owning IDT because the new owners immediately set out to acquire the remaining shares.  William C Martin, a Princeton-based investor, seems to buy small companies that can generate cash.  You can draw your own conclusions here:  http://www.secform4.com/insider-trading/1463833.htm

    Symbol

    Last Price

    % of Portfolio

    Mkt Value

    Yield%

    Yield in Portfolio

    ABT

    $65.06

    7.20%

    $7,200.00

    3.14%

    0.23%

    AGNC

    $34.33

    7.60%

    $7,600.00

    14.56%

    1.11%

    AVF

    $25.64

    5.70%

    $5,700.00

    7.51%

    0.43%

    AVY

    $28.74

    7.50%

    $7,500.00

    3.76%

    0.28%

    BDX

    $74.79

    5.50%

    $5,500.00

    2.41%

    0.13%

    BMY

    $35.42

    5.30%

    $5,300.00

    3.84%

    0.20%

    CHL

    $56.30

    4.20%

    $4,200.00

    4.00%

    0.17%

    CODI

    $14.12

    8.40%

    $8,400.00

    10.20%

    0.86%

    CTX

    $26.40

    5.90%

    $5,900.00

    6.63%

    0.39%

    EPD

    $54.66

    8.10%

    $8,100.00

    4.65%

    0.38%

    EWM

    $14.40

    5.30%

    $5,300.00

    3.83%

    0.20%

    GSK

    $46.48

    5.00%

    $5,000.00

    4.92%

    0.25%

    HIS

    $2.39

    7.00%

    $7,000.00

    7.63%

    0.53%

    REPYY

    $14.94

    5.50%

    $5,500.00

    7.20%

    0.40%

    CTMMB

    $46.00

    5.20%

    $5,200.00

    10.43%

    0.54%

    VALE

    $19.08

    4.20%

    $4,200.00

    6.17%

    0.26%

    Cash

     

    2.40%

    $2,400.00

    0.10%

    0.00%

    TOTALS

     

    100.00%

    $100,000.00

     

    6.35%

    Friday
    Jul202012

    Trade Alerts : Bankers Say the Darndest Things – Buy POST and CTX

    Officials at HSBC, the world’s second largest bank, are really, really sorry that they gave “terrorists, drug cartels and criminals a portal into the U.S. financial system” by failing to “monitor $60 trillion in wire transfers and account activity, conduct checks on $15 billion in bulk-cash transactions, and review a ‘massive backlog’ of alerts about suspicious activity.” However, this behavior only persisted for seven or eight years, no one really knows if HSBC policies caused any actual deaths, and one executive has stepped down in embarrassment.  Good ole Bagley is taking one for the team, and the team will take care of him.

    Fear not:  nothing will come of this.  As one reader wrote after the Libor scandal last week:  “The law is like a spider web:  it catches the fly but lets through the horse.”  After several days of harrumphing, we’ll get back to finding needles in airline sandwiches.  Our politicians cannot afford to ignore that much campaign money.

    But it does make you wonder: what will banks do next?  They’ve been exposed for rigging rates and flouting national security in just the last two weeks.  Is it too soon to declare allegiance to Satan?  What do you think? 

    A Palate Cleanser

    In Washington, D.C. on Wednesday, we saw the last true public servant.  He is part of a group that earns little, has few opportunities to advance, and is threatened by politicians who want to cut non-essential services.  He still deals in “values” and can inspire fellow citizens.  On a 93 degree day in the Lincoln Memorial after 8 p.m., and having sweated through the top half of his shirt, the National Park Service Ranger was giving a fine talk about the Memorial, Lincoln’s life, and the Gettysburg Address.  He was a reminder of the potential we still have.

    Post Cereal

    On this trip, we also visited the Coca-Cola Museum last week where I was reminded how you can turn a “secret formula” for sweet drinks into a $172 billion market cap.  When General Mills popped up this week (market cap of $25 billion, $4 billion quarterly sales), I looked into POST with $1 billion market cap, $250M in quarterly sales, which was spun out of Ralston on January 16, 2012 and sold by Kraft before that.  Both POST and GIS have large goodwill and intangibles;  GIS sells at 1.5 times sales while POST sells about 1 times sales.  GIS, though, has distribution, growth and a 3.3% dividend; POST has a harder time getting shelf space and slightly shrinking sales.  Still, I like POST because (1) their products taste better (2) they have higher margins (3) they would be a nice acquisition for an international food company (4) as an independent for the first time in a long time, they might be able to innovate (5) Director William H Danforth bought 25,000 shares in February.  I own POST at $30.34

    CTX

    Formerly Qwest Communication, CTX has a yield of 6.6% and rising quarterly income.  Bought at $26.21