Wednesday, July 22, 2009

Instead of Rent-To-Own, the Market Makes AAN a Gift-To-Own

It occassionally happens and you have to take advantage when it occurs. A market over reaction is a gift and gifts goose results. Assuming that the market had AAN's priced efficiently yesterday at approximately $31.50, then today's $4.50 drubbing can only be attributed to Aaron's earnings release. Sellers didn't like what they saw and sold in volume.

What was it that they didn't like? The only negative present, and I don't consider it important, was that revenue at franchisee's stores were down a modest amount. The company attributed that decline to fewer early payouts compared to last year when the Bush stimuus checks put some extra money in the pockets of Aaron's RTO customers. So, revenue was down at franchisees. Not company stores, and there are twice as many company stores, nor same store sales, nor earnings.

What was positive in the report Let's start with quarterly eps of .51 vs. concensus of .44. Net income from continuing operations was up41% for the first 6 months and eps grew 29%. The quarterly numbers were similiar. Revenue was 891MM vs. 799MM and same store sales for stores open one year were up 8% and 2 year SSS were up 5%. In down economies RTO companies can do very well and AAN is validating that premise.

Looking forward for the last 6 months, the company RAISED guidance from $1.90-2.05 to $1.95-2.05. Growth of both revenue and profit. You don't hear that combination much lately.

The balance sheet remains strong with $85MM of cash, only 2MM of bank debt, and $50MM of long term senior debt. Equity stands at 836MM. AAN even pays a small dividend.

Todays sellers had buyers. The buyers were investors that actually read the earnings release and understood what they read. The share price will rebound as the sell off was over done.

In addition to the position that I already own, today I bought call options for August and September. The $25 strike cost me a modest premium, but I expect to get that back, plus more soon.

Thursday, July 16, 2009

Blah, Blah, Blah.......

Gheesus, do they ever shutup? Blah, blah, blah. The talking heads are driving me crazy. The head & shoulders top didn't hold as it bumped into the 50 day moving average that was being manipulated by the non-correlated hedge funds hoping that the core PPI didn't collide with the Obama administration's healthcare plan. None of that crap has any bearing on investors. Short term traders and computer trading programs maybe, but not investors and businessmen.

An investor needs to get the big picture correct and not listen to the drones on TV, except for comic diversion. Debt overload was a big picture event and we are still suffering from that trend. A continuation of deleveraging and Obama's spending is a problem that can't be ignored by investors. Increased taxation cannot be avoided since spending cuts are out of the question. Reduced leverage, high taxes, and growing unemployment are not the ingredients of an improving economic picture. Without a growing economy you can't justify high P/Es. Cash continues to look attractive and comforting.

My gameplan includes solid dividend payers, like WMI and FLO, yielding 3-4%. Writing covered call income on that same portfolio.Vanguard Ginnie Maes as the prepayment risk isn't high, the duration short, it's government guaranteed, and the yields are attractive. Add in some selected, shorter maturity, corporate bonds and you get a portolio that yields you 4ish%. I am happy with that return because I'm getting a return. The stock market is not going to give me a return as I expect to see it go lower over the next number of years.

Also, while I don't see wage and price inflation coming, I do see increased interest rates due to the reduced credit worthiness of federal, state, and local governments. Short duration investments will allow for a nice bond ladder in future years.

My remaining equity holdings are few and watched carefully. These positions are mostly for intellectual stimulation and gamesmanship as I will probably lose money, but I need to think I'm smarter than other investors. The big picture says bad economy and higher taxes so get out even though the 200 day moving average is about to form a teapot pattern and everyone will get rich again.

Friday, July 10, 2009

Barron's Is Wrong on K-12

Barron's recently had an article describing five short opportunities. Among them was K-12. The premise was that state education budgets will be cut and the impact on K-12 will be severe. I disagree.

I wouldn't risk shorting at this time. While LRN may decline with the general market pull back, the company itself is sound and in the sweetspot of education. Internet education, K thru 12, is on a huge uptrend. Ed budgets for virtual learning are being spared since they are a cost saver for school districts. Even the teachers unions aren't 100% against them as K12 uses unionized teachers in their instruction-just not as many per student load. Yes, the P/E is high, but so is their earnings growth as they have only reached profitability a few years ago. To use an overused term, their product is highly scaleable and the P/E will shrink as earnings grow. The company is worth holding long term and could see a huge pop, as it did about 2 weeks ago with a $7 move, if negative betters try to move to the door en masse.

Tuesday, July 7, 2009


Had I followed the old adage above, I'd have more money in my pocket. But, no, I ventured into two commodity stocks that looked promising even though commodities had been on a tear. Cosan [CZZ] is a Brazilian sugar and ethanol manufacturer. It's the world's largest producer of both and was selling for a reasonable valuation. India just relaxed sugar imports and the US eased ethanol imports as well. UNG is an ETF for natural gas and even though gas was in over supply, rig count was way down and the price had more upside thandownside, in my opinion.

Wrong in both cases. I should have waited for the end of Summer. Instead I BOUGHT IN JUNE LIKE A BIG BUFFOON.
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