Here?s the final list that I worked with in making my trades. Working up from the bottom of my list, I decide on what to sell. If I?m not selling something that rates low on my quantitative screen, I have to have an explanation as to why I am keeping it.
What I Am Not Selling
St. Joe ? This doesn?t score well. The idea here is the land is considerably more valuable than the share price would indicate.
SPX Corp, Sara Lee ? These are still in turnaround mode. Metrics don?t look good now, but should improve.
Sappi ? Value of underlying assets not reflected in the metrics. South Africa is also out of favor.
Dow Chemical ? it?s still cheap, and there are probably transactions that can unlock value.
DTE Energy ? My one US utility. Would benefit from a sell-off of their energy production arm. I might be close to selling, but am not there yet.
Premium Standard ? The merger with Smithfield will go through, and Smithfield will be able to take out costs. They might also gain a wee bit of pricing power. I think cost pressures have reached their maximum here, and profits will improve more than street estimates.
What I Am Selling
ABN AMRO ? Barclays may do the deal or not. ABN Amro is fully valued here, and then some.
Devon Energy and Apache ? I like them both, but their valuations have risen, and I have other places to deploy money.
What I am not Buying
After this, I look from the top down, and look for replacement candidates from the list. If I reject a highly rated name, I have to have a reason:
Group 1 Automotive ? I already have Lithia Motors and Sonic Automotive. It?s in less desirable areas of the country, so I will pass on it for now, but will revisit it at a later date.
Georgia Gulf ? It?s cheap, but I worry about the balance sheet, and I already own Dow and Lyondell.
Thornburg Mortgage ? Would give me conflicts of interest with my employer.
Optimal Group ? This is the most interesting of the ones that I did not buy. They have some interesting payments technologies, but the earnings estimate momentum was negative, and I could not really discern what competitive advantages they had.
Encore Wire ? A bit of a cult stock. I just don?t like the business that they are in.
Arkansas Best, P.A.M. Transportation ? I own YRC Worldwide, and these are not appreciably cheaper.
Foot Locker ? Too many earnings disappointments.
Spectrum Brands ? Lousy set of brands, and a poor earnings history.
Stolt Neilsen ? I own Tsakos, and I think it has better growth prospects.
National Coal ? Too small.
Home Solutions of America ? I don?t like their business, given my view of the housing market.
What I am Buying
Bronco Drilling ? Seems to be a cheap land driller, and replaces some of the exposure I lost selling Apache and Devon.
Komag, Nam Tai Electronics, Vishay Intertechnology ? Cheap technology stocks that are near the beginning of the technology food chain. The businesses are more stable than those who buy their products.
Full Disclosure: long VSH KOMG NTE BRNC BCS LAD SAH DOW LYO JOE SPP SPX SLE DTE PORK YRCW TNP
David,
I noticed that you decided not to buy National Coal because the market cap was too small. Do you have a preferred range of market cap?
Thank you for posting your process of portfolio building/rebalanacing. It has been very informative, and has inspired me to develop a more systematic approach to portfolio management. Like a lot of non-professional value investors, I tend to acquire shares in companies I have researched without giving enough consideration to portfolio risk.
Thank you much, and if you ever decide to start the newsletter, I will subscribe!
oblomov – $100 million is my cut-off for market capitalization. In general, I like mid-cap stocks, but am willing to go anywhere in an effort to produce returns. Back in the mid-90s, I did a lot with microcap value, and it is a treacherous place to play. Many more home runs and strikeouts. Management quality varies more when you get down to microcaps. They are simpler to analyze in everything except management.
I now just try to hit singles. Since adopting that as my strategy back in 2000, I have had over 80% winners, and the winners have been larger than the losers. Take care.
I was wondering whether you are familiar with Kurt Wulff’s work at http://www.mcdep.com? He is a highly regarded energy analyst and has his own valuation methodology which is pretty interesting. He has DVN rates as the cheapest independent large cap E&P company. Anytime two analysts I respect come up with the opposite conclusion I take notice!
David,
Devon and Apache are E&P’s while Bronco is a land driller. While they all will trade generally with natty gas and oil prices, the service names have their own dynamics. What’s bad for them (falling dayrates) is good for the E&P’s. If you wanted to keep exposure in the production theme, why not one of the midcap E&P’s with significant growth profiles and reasonably cheap metrics (ROSE comes to mind)?
James, you should listen to Mr. Wulff. I am good but not great with energy stocks. My quantitative model is not purely a cheapness model, but has a little bit of sentiment and earnings quality thrown in. DVN may return to the portfolio, maybe as soon as the next rebalance. Net operating accruals scored high — I’ll have to take another look at the balance sheet.
Peter, that’s the first time I had heard of Rosetta Resources. I’m adding it to my pile for the next portfolio reshaping. I wanted more in oilfield services relative to E&P. The other energy names in my portfolio are COP, XEC, PTEN, HP, APC and VLO. Two other energy related names are LYO (refinery) and DTE (synfuels) as portions of their businesses.
If day rates and usage go down, this shift will prove to be the wrong decision.
Full disclosure: long COP XEC PTEN HP APC VLO LYO DTE BRNC
David
Nam Tai has had higher margins than many of their competitors on average. While margins are down for everyone in the industry, did you give any thought to how sustainable Nam Tai’s higher than peer margins will be? My fear would be that as the cycle turns, their margins may not improve as much as others and their stock could lag (not to mention not be as cheap as it appears).
how do you think about competitive advantage? some firms have a better track record of execution than others in the EMS industry but for the most part it is difficult for companies to differentiate themselves — what factors helped you feel more comfortable that Nam Tai would continue to do well in the industry?
NTE has about $4-5 of cash on hand but they have also talked about capital spending plans for the next few years that could use most of that excess cash — just wondering how you factored the cash into your valuation assumptions.
always appreciate your insights and I really like the blog as a nice addition to your realmoney comments.
Kyle