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    More Bad News – Time to buy?

    Should we wait for even worse news?  As yesterday’s surprise Fed announcement showed, good news can happen, too.

    My goal is to beat the S&P, so I’m reallocating today.  HI and KDN don’t meet my new standard of value with Value Factors of 8.7 and 6, so I sold them.

    Today, I bought ABV – AmBev, a Brazilian company with 70% of the Brazilian beer market and Pepsi’s international bottling operations.  It pays a 4% dividend, and has had both excellent earnings growth in the last four quarters and sales growth in the last three years.  At these prices and with a Value Factor of 18, ABV is a better value than HI and KDN.

    Also bought Jan 13 $30 Call Options on VALE, the South American mining giant whose shares I already own.  With VALE at $26 today, you can buy these calls for less than $3.  The only time to buy options is when the market thinks you're dead wrong. Here’s their recent history:


    What can go right?

    “Human sacrifice, dogs and cats living together... mass hysteria!”

            - Dr. Peter Venkman, Ghostbuster

    Yesterday, I was wishing that I had bought MORE Apple Puts two weeks ago when people were telling me that, by all rights, Apple should be valued at a bazillion dollars.  AAPL puts were up 105%, though thankfully they’re down today reflecting an upsurge in the market.  It goes to show that the BEST time to buy is when everyone else thinks you’re crazy.  There was NO WAY that Apple could go down.

    On the flip side, the U.S. is not going out of business.  In fact, our politicians finally have a chance to do something positive.  We force them to play a game of non-cooperation until some crisis appears, and then they can take meaningful action. 

    If you have ever tried to lead an organization, you know that the only time you are empowered to make real change is during a crisis.  The rest of the time, governing bodies do what is easiest and causes the least trouble:  in good times, unions extract ridiculous benefits to keep the company running, CEOs get extravagant bonuses because they control the board and New Jersey borrows as much money as it can.  But when the poop hits the prop, all bets are off.  The compromisers slink away, and leaders are allowed to lead.  People expect real change.

    You’ll start to see some good news in the media, too.  While the media relishes its role as Urinator in Chief, media companies are businesses that, when the world starts to slide off the table, do their best to change the sentiment.  FOX and CNN will work side-by-side to calm the markets and hype the latest “good” employment numbers.  Pretty soon, we’ll all be telling ourselves that things might not be so bad.

    The best days tend to come near the worst days, so today is a great day to look for value.  I’ve put together a “Value Factor” that ranks a company based on the real cost of purchasing the whole company, net return on recent earnings and growth in the last two years.  Most companies score below 10, and I’ve been selling those out.  On the other hand, these are good values and I’ve been buying more:

    • BSQR   51
    • INSP  22
    • JCS  17

    I also like TINY because nanotech is not going away, and WPRT because we have 50 times the natural gas that we thought, and WPRT is making engines to use that cheap energy.

    Today, I bought VALE, which gets an absurdly high Value Factor of 75 and EZPW with a VF of 18.

    Here’s the other thing.  Every year, Wall Street pays itself bigger bonuses.  They will do anything and say anything to move the market by the end of the year.  It’s only August.



    After the recent buying holiday, some companies are looking gift-wrapped.  Take, for instance, B-Square, a smart device (cell phone) software company in Bellevue, Washington.  BSQR got obliterated this week because they announced soft sales and earnings in an already cratering market.

    What’s left is a software company with a market cap of $52.4 million (up from $45 million earlier today), $23 million in cash, no debt, and sales of $102 million in the last four consecutive quarters.  In the same period, BSQR netted $5.84 million, but, after cash, you can buy the whole company for just $29 million, or about a 20% return on the effective cost of the business.

    BSQR is a small company, so I don’t expect sales and earnings to be smooth.  They’re investing in new platforms that will help them grow as part of the biggest consumer market in history:  cell phones.  I’m mainly happy that they’re not LOSING money, but the ups and downs are enough to make BSQR cheap today.

    Here’s the other news: 

    • BSQR specializes in Windows software for smart phones.  Who cares about Windows?  One analyst told me that he expects Windows to be the #2 smart phone platform in the world due to MSFT’s relationship with Nokia.  “Nobody cares about Nokia in this country,” he said.  “They’re just a rounding error, but, in the rest of the world, Nokia is still huge.”
    • My analyst’s #1 platform pick, Android, is under what appears to be an effective patent attack from Apple and Microsoft, so BSQR could benefit from weakness there, too.
    • BSQR announced on August 3 that China Mobile (600 million subscribers) has licensed its handset testing platform.
    • 95% of the billions of phones outside the U.S. are NOT smart phones, but it’s pretty clear that everyone wants a smart phone and that they’re growing fast.  (Even in the U.S., the smart phone market was recently about 25%.) 

    Will a bunch of smart guys from Bellevue, Washington figure out something useful to do with Microsoft in smart phones?  I’m betting they will, and that a price of $5 a share today is going to look real cheap in a year.


    Up the Down Escalator

    Would you buy a smallish tech company in search?  I would.  I love companies and industries that have been chastened.  I should have bought Amazon when Internet companies got killed.  I DID buy TINY after nanotech fell off a cliff and the Motley Fool dumped them.  Once a good idea has been kicked in the teeth and survives, people leave it alone:  besides making it cheap, this allows the executives to do what they have to do and makes them hold onto their cash.

    This year, I like InfoSpace a lot.  INSP is a former Internet hot shot that you can buy on the cheap today:

    1. Market Cap:  $349 million
    2. Plus Debt:                    $0
    3. Minus Cash:  $263 million

    You get a little search business for just $86 million.  INSP even earns money.  They just announced an operating profit of $6.384M, but lost money by selling an e-commerce business at a loss:  that’s OK -greater focus, more cash.  If you tote up the net profits from the last 4 consecutive quarters – after losses and taxes – INSP earned $9.71 million.  You can’t get that anywhere today:  spend $86 million to get $9.71 million back – 11.3% after tax!  I can’t believe that analysts quibble over whether INSP hit revenue or earnings estimates:  11.3%!!

    Even better, INSP is growing.  In the last two years, sales have grown 32% and 19%.

    Best of all, in the recent market melt-down, INSP held its own.  On Friday, July 29, INSP was at 9;  today, it closed at $9.50.  Year-to-date, you would have done better in INSP than Google, Yahoo or Microsoft.

    Many companies are held aloft by chest pounding and hot air;  when the reaper comes, as it did this week, they get reaped.  INSP is inflated by cash and earnings.  It’s time to buy more.


    Sell Curis

    In January, I bought shares in Curis, a company with a promising agent for skin cancer.  This could be a home run, I thought.  The news is still promising:  trials seem to be going well with 43% and 30% of tumors responding in tests conducted with Genentech.  I could be making a terrible mistake selling this.

    On the other hand, I don’t know anything about drug development.  Here’s what I know:

    • I bought CRIS at $2.20 on January 8, 2011 and sold it at $3.55 today for a profit of 61%.
    • The stock came down from $27 in 2000 and has rarely touched $5 since.
    • CRIS has a market cap of $271M and Q2 sales of $393 thousand.
    • Perhaps most telling, the CEO holds only 65,000 shares.  Two directors have bought in, but director James McNab, with 1.4 million shares is a consistent seller.  If they were more confident in their plan to cure cancer, these insiders would be avid buyers.
    • It costs about a billion dollars to develop a drug, so this is a highly speculative opportunity:  shareholder value could get wiped out by financing development or simply because the drug didn’t pan out – as it did in the last go-round when Curis had a pact with P&G to cure baldness.

    Too much is unknowable here, and nothing but hope supports this valuation.  The company has burned through $729 million in cash so far.


    AMZN, BAC puts, SCX

    Buying Amazon

    I’ve capitulated to AMZN.  Having sold at $160, I bought back in at $224 against most of my principles – mainly because it’s a great company that will dominate online retail and distribution.  I even spotted an Amazon swimsuit shop in a fashion magazine.  I’ve dealt with Amazon’s cloud services and their publishing services, too.  They do everything well, and they’re becoming an international company.  It’s hard to build great systems, but Amazon does it.  Others could, too, but they don’t have the gumption to do it.  If you love Apple at $364 billion, consider Amazon:  you can own the whole juggernaut for just $100 billion. 

    Cashing in BAC Puts

    The market got trashed yesterday, which was good for my Bank of America Jan 12 puts.  They’re up 78% since I bought them in January.  BAC is about the worst company I can imagine: a grab bag of pillaged banks with zero customer service skills.  Of course, it IS too big to fail, so, while my puts could get a lot more valuable, I don’t want to wait around to see which random act of support keeps BAC going.  The sentiment is temporarily bearish, so I’m taking my gain on BAC’s distress.

    Buying Starrett (SCX)

    This will sound naïve:  it’s time for American manufacturers to come back.  Maybe just a little, but maybe a lot.  We have been operating under the premise that China will kill everything.  My experience is that the Chinese ship the wrong stuff and don’t stand behind their products.  Further, now that everything is made there, it’s harder to get reliable deliveries.  Chinese pricing may not be such an advantage either: I recently had a mold quoted in Pennsylvania and in China:  the Americans wanted $33,000 and the Chinese wanted $34,000.  (The disadvantage of making the mold in China is that it may not be there the next time you want to use it.)  Maybe the remaining American manufacturers will compete harder and smarter.

    There’s a lot to like about SCX, an American tool company based in Athol, MA:

    • Sells at a discount to equity:  $142 million equity vs $77M market cap
    • Pays a 3.09% dividend
    • Lost money in 2010, but has made money in each of the last 5 quarters.
    • Operating income in the 3rd qtr 2011 was $2.2M versus $0.9M in 3rd qtr 2010
    • The only reported insider activity is a director who bought at the current price in November 2010.
    • The stock actually gained yesterday and has been gaining while the overall market has been getting pummeled.

    SCX closed yesterday at $12.95.


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