7 July 2012 – The Aleph Blog

Grow Embedded Value

Posted on 7 July 20128 July 2012 by David Merkel

One of my rules of thumb in equity investing is that if I buy companies trading below tangible book value,? with earnings yields over 10%, it is difficult to lose value, and the odds favor gaining value.

But there are some caveats:

Analyze the balance sheet, highly indebted companies are not to be trusted, but that varies by industry.
Longer dated assets, like property, plant & equipment should be discounted.
Banks and REITs must be scrutinized carefully, because of their weak liability structures.
Foreign companies need extra scrutiny, because the disclosures are often not as good.? This goes triple for Chinese companies.
Make sure you are not investing in a “buggy whip” industry, particularly in the era of the internet.? How can your company be disrupted?

The idea is a simple one.? Buy companies below their tangible book value when they have good earnings, and good earnings prospects. Over a long enough period of time, the growth in tangible book value will help drive growth in the stock price.

For companies with over $100 million in market capitalization, here are the companies that fit this description:

company	ticker	img_desc	country	exchg_desc	P / TB	P / E	Expected P/E	Mkt cap	LT Debt/ Equity
AerCap Holdings N.V.	AER	0939 – Rental & Leasing	Netherlands	N – New York	0.66	7.6	5.2	1524.4	263.6
Aircastle Limited	AYR	0939 – Rental & Leasing	United States	N – New York	0.64	8.4	8.1	931.2	202.1
American International Group,	AIG	0715 – Insurance (Property & Casualty)	United States	N – New York	0.55	2.9	9.8	56637	73.6
Anworth Mortgage Asset Corpora	ANH	0933 – Real Estate Operations	United States	N – New York	0.94	7.8	7.9	917.8	3.8
Assurant, Inc.	AIZ	0709 – Insurance (Life)	United States	N – New York	0.74	5.7	6	2992.7	19.6
AXA (ADR)	AXAHY	0709 – Insurance (Life)	France	O – Over the counter	0.88	7.6	5.8	29204.3	21.5
Axis Capital Holdings Limited	AXS	0715 – Insurance (Property & Casualty)	Bermuda	N – New York	0.86	8.3	8.8	4325.9	19.3
AXT, Inc.	AXTI	1033 – Semiconductors	United States	M – Nasdaq	0.94	7.5	9.9	129	2.8
Banco Bilbao Vizcaya Argentari	BBVA	0724 – Money Center Banks	Spain	N – New York	0.9	8.7	6	34554.8	250.4
Barclays PLC (ADR)	BCS	0727 – Regional Banks	United Kingdom	N – New York	0.42	6.9	3.6	31291.9	44.7
Callon Petroleum Company	CPE	0609 – Oil & Gas Operations	United States	N – New York	0.86	1.7	5.8	171.6	62.6
Chimera Investment Corporation	CIM	0703 – Consumer Financial Services	United States	N – New York	0.73	4.6	5.3	2434.6	59.2
China Gerui Adv Mtals Grp Ltd	CHOP	0121 – Iron & Steel	China	M – Nasdaq	0.55	2.3	1.7	157.4	0
China Zenix Auto International	ZX	0415 – Auto & Truck Parts	China	N – New York	0.49	1.8	1.4	127.3	0
Citigroup Inc.	C	0724 – Money Center Banks	United States	N – New York	0.53	7.4	5.8	77291.7	165.3
Corning Incorporated	GLW	1024 – Electronic Instruments & Controls	United States	N – New York	0.95	8	8.4	19410	14.7
Crexus Investment Corp	CXS	0933 – Real Estate Operations	United States	N – New York	0.85	6.6	9.4	779.2	0
Deutsche Bank AG (USA)	DB	0727 – Regional Banks	Germany	N – New York	0.65	7.6	4.7	31543.1	318.7
GeoEye Inc.	GEOY	0909 – Business Services	United States	M – Nasdaq	0.8	7.3	8.7	358.5	97.6
Hardinge Inc.	HDNG	0218 – Misc. Capital Goods	United States	M – Nasdaq	0.74	8	7.4	105.1	4.3
Homex Development Corp. (ADR)	HXM	0215 – Construction Services	Mexico	N – New York	0.91	8.6	5.5	846.4	85.4
Ingles Markets, Incorporated	IMKTA	0957 – Retail (Grocery)	United States	M – Nasdaq	0.91	9.9	8.2	400	183.1
Ingram Micro Inc.	IM	1006 – Computer Hardware	United States	N – New York	0.77	9.6	7.6	2591.2	8.7
Jinpan International Limited	JST	1024 – Electronic Instruments & Controls	China	M – Nasdaq	0.85	5.3	4.7	132	0.8
Kelly Services, Inc.	KELYA	0909 – Business Services	United States	M – Nasdaq	0.77	6.4	7.4	462.9	0
KeyCorp	KEY	0727 – Regional Banks	United States	N – New York	0.83	8.4	9.5	7339.2	90.7
KKR Financial Holdings LLC	KFN	0718 – Investment Services	United States	N – New York	0.89	5.1	4.7	1557.4	0
Knightsbridge Tankers Limited	VLCCF	1118 – Water Transportation	Bermuda	M – Nasdaq	0.61	6.9	9.4	215.2	42
KT Corporation (ADR)	KT	0915 – Communications Services	South Korea	N – New York	0.89	9	7	7041.3	72.6
Le Gaga Holdings Ltd ADR	GAGA	0509 – Crops	Hong Kong	M – Nasdaq	0.89	8.1	4.1	200.3	5.3
Lihua International Inc	LIWA	0127 – Misc. Fabricated Products	China	M – Nasdaq	0.7	3.1	2.1	161.3	0
LUKOIL (ADR)	LUKOY	0606 – Oil & Gas – Integrated	Russia	O – Over the counter	0.68	4.2	4	47753.8	10.4
Mechel OAO (ADR)	MTL	0124 – Metal Mining	Russia	N – New York	0.8	4.6	3.5	3322.6	139.6
Metlife Inc	MET	0709 – Insurance (Life)	United States	N – New York	0.69	5.7	5.4	32402.5	45.3
Mizuho Financial Group Inc. (A	MFG	0727 – Regional Banks	Japan	N – New York	0.9	3.5	8.5	40165.5	236.3
Navios Maritime Holdings Inc.	NM	1118 – Water Transportation	Greece	N – New York	0.53	4.6	7.6	350.3	131.3
Newfield Exploration Co.	NFX	0609 – Oil & Gas Operations	United States	N – New York	0.98	5.9	8.8	3943.1	72.2
Olympic Steel, Inc.	ZEUS	0127 – Misc. Fabricated Products	United States	M – Nasdaq	0.86	8.8	6.4	181.8	95.4
Orbotech Ltd.	ORBK	1033 – Semiconductors	Israel	M – Nasdaq	0.78	6.3	9.7	329.7	13.1
Patterson-UTI Energy, Inc.	PTEN	0612 – Oil Well Services & Equipment	United States	M – Nasdaq	0.93	6.6	8.3	2276.5	18.7
Petroleo Brasileiro SA (ADR)	PBR	0606 – Oil & Gas – Integrated	Brazil	N – New York	0.9	6.8	6.3	126006.1	43.5
Phoenix Companies, Inc., The	PNX	0709 – Insurance (Life)	United States	N – New York	0.21	3.6	3.7	203.5	45
Popular, Inc.	BPOP	0727 – Regional Banks	Puerto Rico	M – Nasdaq	0.52	8.9	6.1	1664	47.1
Protective Life Corp.	PL	0709 – Insurance (Life)	United States	N – New York	0.7	7.2	8	2557	53
Reinsurance Group of America I	RGA	0706 – Insurance (Accident & Health)	United States	N – New York	0.68	7.8	7.2	4059.3	34.9
Republic Bancorp, Inc. KY	RBCAA	0727 – Regional Banks	United States	M – Nasdaq	0.94	4.7	8.7	489.6	7.7
REX American Resources Corp	REX	0103 – Chemical Manufacturing	United States	N – New York	0.65	7.8	6.8	163.9	41
Royal Caribbean Cruises Ltd.	RCL	1118 – Water Transportation	United States	N – New York	0.71	9.7	9.5	5542.1	91.9
Societe Generale SA (ADR)	SCGLY	0724 – Money Center Banks	France	O – Over the counter	0.29	5.8	3.8	16945.2	20.7
StanCorp Financial Group, Inc.	SFG	0706 – Insurance (Accident & Health)	United States	N – New York	0.84	2.5	8.7	1676.1	14.8
StealthGas Inc.	GASS	1118 – Water Transportation	Greece	M – Nasdaq	0.38	8.5	5	122.1	98.5
Symetra Financial Corporation	SYA	0709 – Insurance (Life)	United States	N – New York	0.47	7.8	8.5	1494.6	0
Tech Data Corp	TECD	1006 – Computer Hardware	United States	M – Nasdaq	0.96	9.8	8	1918.9	2.9
Ternium S.A. (ADR)	TX	0121 – Iron & Steel	Luxembourg	N – New York	0.81	8.3	5.8	3993.4	26.2
Thompson Creek Metals Company,	TC	0124 – Metal Mining	United States	N – New York	0.33	3.5	5.7	563.9	20.8
Transportadora de Gas del Sur	TGS	0609 – Oil & Gas Operations	Argentina	N – New York	0.43	5.6	7.5	191.7	80.6
TravelCenters of America LLC	TA	0963 – Retail (Specialty Non-Apparel)	United States	A – American	0.51	4	3.7	145	31.9
Triple-S Management Corp.	GTS	0806 – Healthcare Facilities	Puerto Rico	N – New York	0.76	9.4	8.6	510.6	18.2
Unit Corporation	UNT	0612 – Oil Well Services & Equipment	United States	N – New York	0.94	8.7	9	1819.7	15.8
Valero Energy Corporation	VLO	0609 – Oil & Gas Operations	United States	N – New York	0.86	9.1	5.6	13578.5	40.5
Vishay Intertechnology	VSH	1033 – Semiconductors	United States	N – New York	0.97	7.7	7.1	1433.8	23.4
Woori Finance Holdings Co., Lt	WF	0727 – Regional Banks	South Korea	N – New York	0.57	4.5	4.8	8482.1	0
Xinyuan Real Estate Co., Ltd.	XIN	0215 – Construction Services	China	N – New York	0.33	2	2.1	215.1	8.8
Yongye International Inc	YONG	0103 – Chemical Manufacturing	China	M – Nasdaq	0.55	1.9	1.3	163.7	2.8
ZHONGPIN INC.	HOGS	0515 – Food Processing	China	M – Nasdaq	0.89	6.6	5.5	371.9	18.1
Zuoan Fashion Ltd (ADR)	ZA	0403 – Apparel/Accessories	China	N – New York	0.6	2.4	1.8	102.1	0

Full disclosure: long AIZ, PBR, RGA, SFG, VLO

PS — be wary of Chinese companies, I mean it…? Also, use the Ctrl-Minus key to view this in entire.

The Failure of Government-Provided Prosperity

Posted on 7 July 2012 by David Merkel

If I had one bit of advice to reach the ears of Barack Obama, Mitt Romney, and Ben Bernanke, it would be this: stop the illusion that you have any significant control over the US economy.? Government is designed for justice, and does not do well when trying to promote prosperity.? At most, economically, the government can set ground rules that reduce the probability of fraud.

As it is, at present, the US still has an over-indebted economy, and as a result, will grow slowly, because businesses and individuals in danger of default do not spend freely.

Politicians claim that they can being prosperity, but they rarely do that.? I’m not talking about marginal tax rates, or monetary policy, which offer transitory relief, but changes in regulations.? The economy as a whole would do a lot better if marginal regulation were reduced.? That would be a help, but few politicians in either party want to reduce the power of the government.

Prosperity exists aside from the government.? Yes, in the short-run the government can tweak the economy to grow faster, but at the price of the situation we are now in, where nothing works.? Far better for the government to focus on things it can do well: defense, internal security, public health, etc.? But it does not do well with macroeconomic management, so it should give up on that, run balanced budgets, and replace the Fed with a currency board.

At that point, we would have predictable policy, and businessmen might be willing to take more risk and grow the economy.? Unsustainable policies cause producers and consumers to pull back.

At best, in economics governments set ground rules to reduce fraud.? Beyond that, governments reduce the flexibility of economies, and reduce growth.? Socialistic governments produce dependency cultures that inhibit work, initiative, and growth.

Do not look to the government for prosperity.? Governments are umpires; Umpires allow for good games, but they aren’t the ones playing the games and creating the excitement.? Governments can never make us prosperous; if government action were what made us well off, the Soviet Union would be dictating term s to the world today.