Value Investing – Page 91

The Major Article List is Live!

Posted on 7 March 20077 March 2007 by David Merkel

Though it is something that will grow, the major article list section of this blog is now up-to-date. It is a complete index of my long-term writings at RealMoney (primarily).

The one thing that would make it better would be to index my long term Columnist Conversation posts. It is my favorite part of RealMoney, and that is why I have concentrated there, even though I don?t get paid for cc posts. (sad that) What would be interesting would be to scour my cc posts for long term value, though I have over 1500 cc posts. I?m not doing that anytime soon. 80% of my cc posts are ephemeral, and I?m not sure it is worth the effort to get the other 20%.

35 Out Of 35 Up

Posted on 7 March 20077 March 2007 by David Merkel

I can’t remember the last time that all of my stocks were up. 28 of them were up by more than 1%. If anyone would like to track the performance of my broad market portfolio, I have it listed at Stockpickr.com. Two notes though, at present I am running with 8% cash, and Allstate and the Japan Smaller Capitalization fund are roughly 1.5x the size of the largely equal-weighted portfolio. Today, the portfolio continued to beat the S&P 500, returning roughly 1.9%. Leading the charge were Fresh Del Monte (what a move over the last month), Barclays plc, Royal Bank of Scotland, SABESP (wish it had gone down more, would have bought a bunch), and Deerfield Triarc. Deerfield Triarc pointed out that as a mortgage REIT, they had minimal exposure to subprime mortgages. No surprise to me, but in this environment, everyone is suspect. Nice yield of around 10%.

As for my project of the week, I have all of my tickers contending to be in my portfolio, and I will share them with you here:

ABY ACI ADM AGU AIMC AL AMGN AMK APPB AVT AXL AYI BBV BEZ BG BGG BLX BP BPOP BRL BRNC BTU CAJ CAKE CALM CAR CAT CHK CMI CMP CNQ COO DB DF DGX DSW DT DUK EAC EAT ECA EMN ENI EPD ESV EVEP FCL FINL FL FSTR GGC GI GIL GMK GMR GPI GRC GSF HAL HES HSOA HTCH HTZ ICO IDCC INSP IOM JRCC KBR KOMG KONG KPN LABL LAD LCUT LINE LMC LNG LNX LRW LSCO MCHX MEE MEG MOT MU MUR MWE NAT NBR NCOC NEM NFX NGPC NOV NTE NXG NXY NZT OCR OPMR PCA PD PDS PHG PMTC POT PSO R RAD RDC RIG RIO RSG RSH RTP SCM SKX SNSA SON SPC STX STZ SUG SVU SWFT TAP THE TJX TK TKR TMA TMO TNP TOT TSCO TSN TSO TUES UNT URI VLI WDC WERN WIRE WPI WTI YRCW YZC

The next two tasks are calculating the industry ranks from two different models, and setting up the spreadsheet so that I can compare companies against one another. That’s for tomorrow and Thursday.

Full Disclosure: Long ALL FDP BCS RBSPF SBS DFR JOF

Closing Comments for 3-1-07

Posted on 2 March 20072 March 2007 by David Merkel

It’s been a weird three days as far as portfolio management goes. Each day I outperformed the S&P 500 by 10-20 basis points. It’s been too regular, and it has to shift, but which way?

Cement names hurt me today, including Cemex and Lafarge SA. Barclays plc also hurt. On the plus side were SABESP and Grupo Casa Saba. On net, the results were nearly breakeven to me.

There may be other exogenous discontinuous events ready to smack the market around, but after early panic yesterday, the market became very rational in aggregate. The panic is over. Time to adopt a normal posture of moderate bullishness.

Moderate bullishness should be the posture of most investors because absent famine, plague, war on your home soil, and aggressive socialism, markets tend to appreciate over the intermediate term.

As I have pointed out at RealMoney, it is important to avoid non-prime lenders and homebuilders for now. Short them?! Well, that is for gamblers, not investors.
long SBS SAB CX LR BCS

What I Have Learned Over the Past 42 Hours

Posted on 1 March 200720 June 2017 by David Merkel

I was a little ahead of the market yesterday, say 10-15 basis points ahead of the S&P. Leading the charge were Fresh Del Monte (my current largest loser), and Grupo Casa Saba (what a great undiscovered stock). Fresh Del Monte was upgraded from underperform to neutral after their less bad earnings. Grupo Casa Saba reported excellent earnings. They run drugstores in Mexico, an excellent industry for a country with a growing middle class. For my balanced mandates, I kicked out the QQQQs that I bought yesterday. The rally wasn’t as big as the reduction in short term risk implied by the VIX.
At RealMoney.com, I had a post late in the day called, “What I Have Learned Over the Past 36 Hours.” It attempted to put forth a dozen things that have been revealed since the recent crisis hit. Here’s an explanation:

China sneezes; the world catches cold. If we needed any proof that America no longer solely dominates the global scene we saw it on Tuesday.
Systemic risk may or may not be a problem now, but a lot of people acted like it was a problem. Thus the rallies in the currencies used to finance the carry trades. The Yen and the Swiss Francs are good hedges here. I am more dubious about long Treasuries, though not long TIPS. (It was neat to see the rallies in the yen and swiss francs. Thne long bond fell more today than the carry trade currencies did.)
The current equity market infrastructure is marginal to handle the volume of the last two days. Given the nature of modern finance, major errors are not acceptable. I got off a couple of good trades as a result of the accident, but those trades were accidental as well.
The lack of human intermediaries with balance sheets leaves markets more volatile than before. It genuinely helps to have someone who can stop the market at certain volatile points, and then restart with an auction so that a fair level can be determined after news gets disseminated. Also, liquidity providers show their value in a crisis.
Algorithmic trading and quantitative money management is making stock price changes more correlated with one another than they used to be. Markets behave differently in normal times, and under stress. The methods that make money when the market is calm exacerbate volatility when market stress appears
Panic rarely pays.
Patience usually pays.
Diversification pays.
In a crisis, strong balance sheets and free cash flow are golden. During times of stress, these four bits of wisdom pay off. They protect an investor from his own worst temptations.
People want the Fed to loosen more than the FOMC itself does. The FOMC doesn’t care about weak GDP if labor employment is robust. The FOMC certainly doesnot care about te stok market unless i affects the banking system, which is unlikely.
The oscillator is not oversold, yet. Sad, but true. We have a decent number of days in the rear-view mirror that aren’t so bad. The intermediate-term panic level is not high.
What do you know? Cyclicals are cyclical. I’m just glad I didn’t get kicked worse yesterday. That’s the danger in playing cyclical names. I take my risk therethough, rather than in growth that might not materialize.

All this said, I feel well positioned for the next few trading sessions. I am working on my quarterly portfolio reshaping, which will take out a few companies, and replace them with cheaper companies in industries with more potential. Once I complete that analysis, you will hear about it on RealMoney and here.
Long SAB FDP

In Large, Red, Friendly Letters, It Reads “Don’t Panic!”

Posted on 27 February 200727 February 2007 by David Merkel

With the long bond, Japanese Yen, Swiss Franc, and option implied volatility rising today, there is a panicky feel to the markets. Though this could be the start of a “big, bad event,” the odds are that it will not be so bad. One signal of panic that I see is that the VIX is up 21% today, against an S&P 500 down 1.5%. Under ordinary circumstances, that ratio is 10, rather than the 14 we are seeing today. if that ratio gets over 20, it is a sign that too many people are buying index puts to protect their portfolios. If it gets under 5, too few are doing so.

And, as with most investing, stick to your normal way of doing business. Don’t overreact to the markets. We haven’t had significant volatility in a while, and frankly, we need some to keep people from speculating overly. Don’t react to today; ask yourself what things will likely be like three years from now, and use that as your guide to investing. The manic Mr. Market may serve up some bargains. If so, my rebalancing discipline will edge me more into the markets, bit-by-bit in a measured way. This takes the emotion out of it, which leads to better overall performance.

Late Update
Sold my TLT positions slightly after 3PM today and bought some QQQQs with the proceeds. I think that the short run selling is overdone, with the TRIN over 14, and my ratio mentioned above, which I call DeltaVIX over 17, I felt it was better to add a modest amount of equity exposure to my balanced mandates. We added some Hartford as well at the hedge fund. None of my broad market portfolio hit a rebalance point, so I didn’t do anything there, despite 32 out of my 35 stocks being down over 1%, and only one up. In aggregate, it looks like my braod market portfolio will be down 3% or so, and my balanced mandates down a little more than a percent.I’ll have more on this later this evening. I plan on reviewing all of my indicators tonight, and see what they suggest.

PS — a friend pinged me and suggested that today’s move in the VIX did not come from put buying, but from options selling. He cited the increased correlation of stocks to one another. I’ll have to think about this some more.

long FXY FXF QQQQ HIG (and apologies to the late Douglas Adams) and now after the update flat TLT

Eat Dessert First?

Posted on 26 February 200726 February 2007 by David Merkel

I want to give credit to Roger Nusbaum on his brief commentary on Dow Chemical. Too many people think short term about investing, and don’t consider how much a company might be worth over time, versus a buyout today.

I faced the same problem on National Atlantic Holdings. I believe it is more valuable as a going concern than as a buyout candidate at present. I was happy when the Commerce Group negotiations broke down, because Commerce wouldn’t pay up!

I don’t have to get all of my gains today. So long as I do well enough over the next 3-5 year period, I will be happy enough. I don’t have to make a killing today. Having slightly better than average performance over a moderate period of time is reward enough.

Long DOW NAHC (the firm I work for owns 17%)

Time To Take Allstate Private

Posted on 26 February 200726 February 2007 by David Merkel

I remember once being at a First Boston Insurance conference and talking to the (now former) CEO Ed Liddy afterwards. I mentioned that we were shareholders and that I thought the stock was cheap (then around $40). He looked at me intently and said that he could not figure out why the market valued Allstate so cheaply. It was an incredible free cash flow machine.

With the hurricanes of 2004 and 2005 after that, one can see that the performance since then has been superb. But now we are in a soft pricing environment; profits will not rise rapidly, if at all. But even if profits remain level, Allstate looks cheap. EV/EBITDA is near 5x.
That should attract private equity. If one can take over Texas Utilities, Allstate should be easier. Here’s why: one can sell the life arm, Allstate Financial for $5 billion to one of the major life insurers. Along with that, the private equity buyers can lever up the holding company balance sheet to a BB- rating, which would leave the operating entities at a marginal investment grade of BBB-. The private equity buyers would use the free cash flow to repay the bank debt incurred, and five years from now, would IPO Allstate at a higher valuation.

Though I am not crazy about all of the increased leverage, a scenario like this could happen. It is just another ramification of interest rates that are too low.
Long ALL (the funds I work for and me personally)

The Right Chemistry, Driven By Leverage

Posted on 26 February 200726 February 2007 by David Merkel

The two chemical names in my portfolio are both doing well on an otherwise tough day, supporting my broad market portfolio. Lyondell Chemical [LYO] sells its Titanium Dioxide business to the Saudi-owned National Titanium Dioxide Co. This will allow them to focus on petrochemicals and refining, and (what!) reduce debt. Looks like a good multiple on the sale and a good deal strategically.

Dow Chemical [DOW] is a buyout target?! I would have thought that it was too large. Strange times indeed, where any asset with a low EV/EBITDA not only can be bought and refinanced, but are almost required to be so. And, with less leverage and a simpler structure, might not Lyondell be a target also? It’s much smaller.

In the short run, all of this is bullish for the market. Remember, bubbles are financing phenomena. Bubbles pop when cash flow is insufficient to continue financing them. We’re not there yet, but watch for signs of difficulty in these newly levered creations. Private equity is doing these deals at lower and lower IRRs from what I’ve heard, and eventually, that is not sustainable, given the levered up risks taken.

Long DOW LYO

Understanding How I View Insurance Stocks

Posted on 23 February 200723 February 2007 by David Merkel

Insurance stocks are tricky for several reasons. There are probably more unique accounting rules for insurance, then any other industry. Why? The cost of goods sold is not known at the issuance of a policy. Every dollar into an insurance company is equal, but every promise made is not equal. Over time, estimates of cost become more accurate, but with long-tailed lines the progress is often fitful at best.

Life reserving is a science (please ignore the new funky investment derivatives inside some policies). Short-tailed P&C reserving is close to a science. Long-tailed P&C reserving is an art, and a dark art. I’m not sure that even the internal actuaries reserving the long-tailed lines can be that comfortable with the accuracy of the reserves.

This is why it pays to stick with conservative and competent managements that have shown that they can manage the soft part of the cycle. I may miss some speculative gains managing this way, but for the most part, I will miss out on the losses. To give you further insight into my philosophy, here’s a presentation that I gave to the Southeastern Actuaries Club. (I am available for other speaking engagements if I can show my employer a business purpose.)

My Restrictions

Posted on 20 February 200723 February 2007 by David Merkel

I would have loved to have owned Assurant (and several other insurance names, like Prudential and MetLife) over the last several years, but I could not do so because I there are limitations on the stocks that I can own in my personal account. I pick insurance stocks for the hedge funds that I work for. I can’t personally buy if the stock is within 10% of the price that I recommend the funds to buy. I can’t sell until the last share held by the funds is sold.

This has held back performance on my broad market portfolio. Value managers always own financials. So what financials do I own now? Allstate, but I bought it prior to coming to the hedge funds, and ABN Amro, Barclays plc, Royal Bank of Scotland, and Deerfield Triarc. I offered each one to the hedge funds and they passed (excluding Allstate). I’ve made good money on all of them.

I would also add that I would buy HCC Insurance in this environment, though the funds I work for have passed on it. It would be politically ugly for me to get clearance to buy it, but I pass it on to my readers as a well run, high quality insurer trading at a cheap price.

I do have a few other restrictions that I should mention. For the good of the firm that I work for, I can’t mention companies that we are short without permission from the legal area. Also, I don’t mention companies that we own until we have built our initial position. Also, I usually don’t discuss microcaps that we own, but I’m willing to discuss any company that readers bring up, and my firm’s 13F is a matter of record. Finally, for now, I can’t talk about Scottish Re, which was my major mistake in 2006.
Beyond that, I can talk about almost anything. Let’s get the conversation started.Disclosure: the funds that I work for are long Assurant, Prudential, MetLife, and a teensy amount of SCT.? I am presently long DFR, ABN, RBSPF, and BCS.