Feeling Smart Again

The past several months were void of posts as it is nearly impossible to type when you have assumed the fetal position. Brilliant investment decisions all turned into losers no matter how well thought out. Why write positive pieces about soon to be disasters and feel somewhat responsible for readers losing money? So I laid down the pen and continued to lose money silently.

Thank goodness that has changed and the year finished decently. My brilliant purchases have been looking better. The dividend portion of my portfolio and the options that I write against them allowed a reasonable return and the speculative group is behaving well except for solar which still resembles a rat hole. Oh well, at least I've removed my helmet and now stand erect, my crouching days behind me.

While not screaming bargains, I did add some names during the hiatus. Thermo Electron [TMO], Jones Lang LaSalle [JLL], and Nordic American Tankers [NAT]. The first two are top notch outfits and worthy of holding onto for a long time. NAT is much riskier as it hasn't been earning its dividend, but the balance sheet is solid, at present. It bears close watching, but the dividend is 8 percent and the board of directors has stated they feel comfortable with the payout.

Enough rambling, I need to assemble some shelving in the garage. That project also languished during my fetal period as its also hard to work with hand tools when crouched over in a ball. TaTa.

What's That Sound I Hear? It's Us Eating Our Seed Corn!

You can't grow crops without seeds. That's why they have always been valued. They are essential to human existence and progress. Eating those kernels wouldn't be a good plan.

Financially, we are doing the equivalent. We are eating our financial seed corn and that's not prudent. You need capital to make more capital and the western world is destroying capital. Destruction by debasing currencies, destruction by artificially lowering interest rates, destruction by algorithmic high frequency trading, destruction by greed, and destruction by over-reaction all will prolong our despair and delay our recovery. 

How much capital has been destroyed since the beginning of July around the world? I haven't invested the time in determining the answer, but the number far surpasses any measure of Greece and the PIIGS. Yes, I know that "markets" have also worried about double dip recessions and European bank balance sheets, but come on, clearly we have over-reacted. 

The purpose of capital markets is to funnel cash to worthy companies. No matter whether it is in the form of debt or equity, it should make sound business sense. Our current environment is more like a casino mentality than investing capital to help companies grow. Five percent intra-day swings are proof that valuation has little to do with today's markets.

Just like in Washington, if some adults don't take charge of Wall Street soon, we will have eaten a good portion of our seed corn. Pension plans, university endowments, individual 401Ks, will all be decimated as the desire to buy a piece of a profitable company will have been extinguished. 

Three simple ideas worth immediate consideration are: first, much higher margin requirements on stocks, options, and commodities will require investors to risk their on capital and increase caution; second, bring back the uptick rule for short selling as it will slow down the speculation and enforce a ban against naked short selling; third, re-instate Glass-Steegle which separated commercial and investment banking and remove the investment bank's access to the Fed. 

If the special interests negatively affected by the three proposals don't like it and they, and their cronies in DC, continue to play business as usual while destroying our capital formation ability, then we need a Financial Tea Party to restore sanity in our financial leaders.

Lazard Stock Trades Like An IB Without The Trading Risk

Monday, Lazard was available at an all-time low. It has since bounced with the market, but remains attractive. This premier investment bank provides the investor exposure to the capital markets without the inherent risk of the typical investment bank's proprietary  trading desk. Financial advise isn't going away so LAZ, with its geographic and product diversification, will continue to perform.

Lazard operates closer to the old fashioned investment bank than the model chosen by Goldman Sachs and Morgan Stanley. LAZ is the world's sixth largest advisor and, of the top ten, the third fastest growing. Their customer base appreciates not only their financial acumen, but their unconflicted advise as they don't trade for their own account. Additionally, they have the world's largest restructuring business which provides a revenue cushion when M&A is lethargic. The banking and restructuring side of the business amounts to slightly more than half of the company. Asset management for clients handles $160 billion under management. Both sides of the business are producing revenue surpassing the peak year of 2008. Their business is truly global so you get continental diversification as well as currency.

Without the risks and leverage associated with trading, Lazard has a solid, low risk balance sheet. Long term debt has decreased from $1.2B to $.7B since 2008 and there are no maturities until 2015. They have no principal trading or lending book so assets are not suspect. 

Employees own 30 percent of the company and LAZ currently yields 2.7 percent. The biggest knock against the company has been the high level of compensation to their professionals. Management has been addressing the issue and is committed to bringing compensation expense as a percentage of revenue down. They succeeded in 2010 and so far in 2011. 

Without the home runs available from trading, LAZ will only see earnings grow through market share gains, but I'm more comfortable with that level of risk. I seem to never tire of catching falling knives so I bought some on Monday and so far I'm not bleeding. So far.......

Crusty Hasn't Written Because All My Ideas Have Lost Money

I've served all my readers faithfully by not opining about the bargains I've found over the past weeks. Lots of good companies have been pounded and could have been picked up for low valuations, even with a decent haircut to future earnings. The ones I bit on also pay a nice dividend and have low-to-reasonable pay-out ratios. However, they are all worth less today than what I paid. My vision seemed clearer when I entered the trades.

A week ago I had cataract surgery on my left eye. I can see like an eagle! Yet my vision of the future resembles the above eye chart. I'm pretty sure the stocks I buy are like the Big E, but things are kind of fuzzy. Over time, decent dividend payers should regain value and provide income. But what do you do with speculative positions that were blurry to begin with? Good question.

Most of my specs are solid, turnaround, companies. They've been killed and I think they still have value so I continue to bleed. But one company has been amazing and has actually made the past months fun, sort of.  When I bought it my vision was clear: hold for five years and let management build the brand and sell out to a larger company. Three plus years into the holding period my vision is foggy, but enjoyable. The company is my old friend Smart Balance [SMBL].

Twelve months ago SMBL sold for $3.50. Today it is pushing $5.50! During the market's last leg down, it has gained about 18 percent. BB&T upgraded the stock, but, other than that, nothing has changed. Management remains competent, the niche has promise, and they are not over-leveraged. But, they also don't make much money and sell at a salty valuation. The spreads business is not growing fast and milk hasn't been a huge success. Their new gluten-free products have not juiced sales/profits yet. I'm still a believer, and extremely happy as SMBL is one of my rare performers, but I wish my vision was clearer concerning the stock performance.

Next week I get my bionic right eye and with coordinated, clear eyesight, maybe I'll be able to see exactly why Smart Balance has been making me so happy. If not, who cares as it's fun to have a security that doesn't make me feel ill and stupid.

Care About Statistics That Matter

I scratch my head regularly if CNBC is droning on in the background when the chatter turns to the VIX. I suppose it is okay to track trends in market volatility, but evidently some people or machines, actually trade the index and care about it. Certainly the soothsayers of TV think it is important. I don't get it.

My eyes also glaze over when they talk about "fair value" in the early morning before the markets open. Supposedly the difference between fair value and the futures will tell where the markets will start the day. So what? It must have importance because a lot of time is devoted to discussing the subject.

While I'm on the topic of what I don't understand, I wish the television guys/gals and their gurus would learn that any single statistic or data point rarely has value. Trends are important, but a lonely piece of data is usually only a possible clue. But not on 24 hour television.

So, while it won't happen, I would like to hear more about balance sheets, income statements, costs, dividends, sales trends, and other actual business concepts that do affect actual values. Wouldn't that be nice?

When Is A Growth Stock Not A Growth Stock?

I need a diagnosis and this company's stock price needs a prescription. This growth company has become a value stock and it continues to lose value! Reports out of Tel Aviv this morning show TEVA dropping another 6 percent as the world worries about the U.S. debt downgrade. The way the company's share price has performed the past couple of years, it will probably crater on Monday also in American trading.

What's wrong with this picture? The numbers presented below usually would not accompany the chart depicted below. Revenue has grown from$11B in 2008 to $16B in 2010. They will be $18.5B this year and $20.6B in 2012. Gross profit has been growing steadily and net income has grown from 600MM in 2008 to $3.3B in 2010 or $4.54 eps. Analysts have that growing to $5.06 this year and $5.63 in 2012.

Teva isn't a one drug company. They have numerous business units and a nice compliment of generic and proprietary drugs. Yet it sells at a PEG of 93 and forward earnings of 7X. Obama is scary, but can he be that scary? I thought I was picking up a steal in the high $40s but I've been wrong ever since with this growth stock. I'll probably be more wrong Monday.

Transports and Retailers Are Doing Fine

Among all of our daily news doom and gloom, are two recent articles that show evidence that the world of commerce is ongoing. One only has to look a bit to be assured that the world isn't ending. First, July same store sales at the nation's retail chains, the heaviest portion of "back-to-school" buying and the second most important time period for retailers, were up impressive numbers. Almost all grew from 4 to 9 percent over last year's performance. Those statistics were from a broad range of stores, specialty to department, not just discounters. The economy may not be rosy and we have a large number of unemployed and underemployed, but the safety net cushions those unfortunate and the 85 percent are not in depression mode.

Second, those goods have to move somehow from container to shelf and my trucking friends are busy, getting good rates, and adding to fleets. Again, some owner operators are going broke as are over-leveraged fleets, but the truckload carriers are busy. The second article was about hiring at the nation's train lines. The Union Pacific is headquartered in Omaha and Omaha based Berkshire Hathaway owns the Burlington Northern and that railroad also has a large presence in Nebraska. Both are hiring in large numbers nationwide. The jobs are across all categories, white and blue collar, and are the result of increased freight demand. Many require as much as 6 months training and aren't added without thought and commitment. Both roads are back up to pre-recession employment levels and are continuing to add people. The industry pays well in both salary and benefits so that bodes well for the economy. The freight being moved in greater quantities are agricultural products, energy, and autos.

I think I may send CNBC and all Wall Street firms complementary subscriptions to the Omaha World-Herald so they can find some factual, real world economic data to talk about and react to.

Panic Crept Into My Life Twice Yesterday

Twice yesterday I entered panic mode and hoped no one was watching. Several weeks ago I was ordered to buy some new underwear and I complied by picking up a nicely priced package of Calvin Klein's at Costco. Yesterday, at a public restroom urinal, I found out, after much rummaging, that there wasn't a fly opening in my new underwear. What the hell is that all about?

Later, at home, watching my computer screen, I nearly soiled my new Calvins as I observed sellers pitching stocks in full panic. Nothing new was on the horizon, but they found something to panic about and then the computers kicked in. 500 points down the drain on top of the serial drubbing we've been experiencing. Do these children really think that raising some cash, only to deploy it again in a couple of weeks is of value? I don't.

Debt ceiling, America's bond rating, Europe's problems, anemic economic growth; are any of these topics undiscussed? Soon talk will return of reasonable P/Es, attractive dividend yields, and a growing middle class worldwide; all positive for stocks. I'm pitching my new Calvins, but not my stocks.

Power-One Trumps The Debt Ceiling

Power-One's quarterly earnings release Thursday evening allowed me to relax on Friday. Instead of reading news releases and fretting over what to do next, I went to the movies to see Cowboys and Aliens. My PWER investment continues to make sense.

They posted a good quarter. Revenues continued to grow both year over year and sequentially. Profits were good and also grew. Guidance was basically maintained. The company sees renewed activity in Europe and made good progress in North America, China, and India. Selling prices didn't crater and inventory isn't piling up. I believe it was the most positive solar report this quarter.

The stock rose today in spite of Obama's debt ceiling issues and I believe it will continue to inch upward as thinking returns to the market. Power-One doesn't have the "Chinese accounting" baggage, sells inverters not modules, and has a power solutions side of the business that accounts for 40 percent of the company. Because of the foregoing I'm hopeful that it starts to trade at a premium like FSLR does in the module business. Today PWER is still very cheap on a PEG, P/E, B/V, and cashflow basis. That shouldn't last.

Now if I was just as confident and vindicated on JASO! I've added to PWER and am anxiously awaiting JASO's earnings release and guidance in mid-August.

Cowboys win.

An Opportunity To Buy Annaly Capital Management

I pity the fools that sold Annaly today in a panic. It might have been just market makers taking out stop losses at $14.05, but the sellers, either way, were abused as the stock immediately rebounded to the $16 level. I believe it will return to higher levels as people regain rational thought. A debt ceiling issue "may" affect the government's cashflow, but it doesn't hinder mortgage payments. People pay mortgages and GSEs only have to honor their guarantees upon default. A debt ceiling crisis isn't going to cause mortgage defaults.

If the debt ceiling or downgrade crisis affects Treasury rates and all other borrowers have to pay more, then mortgage rates will increase. Annaly will pay more for debt but so will the mortgagees that fund the bonds that Annaly buys. It's a spread business and NLY isn't a trader so they hold to maturity. They don't have to take a haircut if rates rise.

Annaly isn't overly leveraged, invests mostly in agency paper, and pays an enormous dividend which just got nicely bigger over the past couple of weeks. I've added to my position today and may do so again if the panic continues. The yield is now over 15 percent. Never bet the farm, but a few acres is warranted. I pity the fools that sold today and don't buy on Monday.

By the way, I know what I'm talking about because I brought Mr. T to Council Bluffs in the mid 1980s for the town's Pride Week Parade. Mr. T probably doesn't need the income Annaly throws off as his gold necklaces are worth a fortune today, but a retired banker can use dividend income and has thankfully increased his position.