Friday, December 18, 2009

Cabela's Remains Inexpensive

I opened a position in Cabela's about two weeks ago at $12.00. At the time it was selling for about 3.5Xebitda and less than book value. I didn't catch the bottom, but CAB has moved up about $2.50 quickly.

Besides being a retailer, CAB has a large credit card bank, World's Foremost Bank, that not only confuses the numbers, but scares investors. Cabela's runs a conservative book of credit and has experienced better deliquencies and charge-offs than it's industry peers. It also securitizes asset backed bonds and, like other banks, faces the prospect of putting those assets back on their balance sheet and having capital available for support. There was a dilution worry.

The company addressed the new accounting issue that causes the securitizations to come back on the balance sheet by increasing their line of credit and making allowances to contribute enough capital to its subsidiary, WFB, so there won't be any dilution. At 4Xebitda[ttm] CAB sells at a discount to competitor DKS and most other retailers. Earnings have been decent even during the past year so, with the credit card concerns waning, the stock could march upward to 6Xcashflow which would be $20. It hasn't been at that price in the past several years, but I'm hoping.

Since I was becoming light headed and buying retailers, I also bought PSMT. It is the reincarnation of Price Club. When Price Club sold out to Costco, the owners opened up a Central American operation that now has 25 warehouse clubs. I've convinced myself that this is an international diversification investment, not another retailer.

I'm attempting to stay nimble as I still do not see a lot of sustainable signs of prosperity.

Tuesday, December 1, 2009

Waiting For The Next Shoe To Drop

Everyone feels better after the market's spectacular rally in 2009. Almost everyone is leery of the sustainability of such a rapid rebound. The investment world continues to play financial musical chairs even though they collectively know better. The Fed's zero interest rate policy has taken safer investments off the table and the Government's spending will ensure future inflation that will harm bond holdings. So, equities continue to march upward. But, for how much longer?

At some point, even the brave and foolish will become fearful. Since everyone is playing the same game, investing in stocks since there isn't an alternative, the rush out the door, when the time comes, will be crowded and painful. What might cause that panic? Here are some guesses.

So far Australia has raised rates twice lately and a Scandinavian country also increased short term rates and has signaled that they were starting to take stimulus funds out of the system. Other countries are starting to talk the talk. A rate increase trend could signal that the U.S. won't be too far behind.

Iran's latest announcement, that they will build another ten enrichment facilities, was not the news that Israel and Obama peacemakers had hoped for. The deadline nears. When the Israelis attack, Iran will retaliate somehow. The markets won't like it and prices will tumble during the panic stage.

Soft demand has held oil prices down. Middle East turmoil would accelerate price spiking and have an immediate, negative impact on the economy. Even without war, the declining dollar and flight to commodities may drive oil higher with the same result.

A failed Treasury auction where buyers demand significantly higher yields than anticipated, would signal to the world that the world views the U.S. as a weakened credit and not worthy of cheap interest rates.

Dubai's debacle is being softened by the UAE's potential willingness to help. Greece, Ireland, Spain, Italy and a few other Euro zone countries are also having significant problems with their sovereign debt chewing up a high percentage of GDP. Will the Germans come to their aid? A major country default or restructuring would not be pretty.

Jobs, jobs,jobs are on everyones mind. We've all heard that job growth is a lagging indicator and that we will start to see job creation in 2010 as the recession has officially ended. A stubborn jobs number; one that continues to stay negative well into 2010, could ruin any rebound in confidence and affect the market.

After passage of a healthcare bill, immediate work on Cap & Trade could cause further concern as the impact on the economy from both of those gigantic, negative pieces of legislation will tax both business and the consumer.

Finally, maybe we'll wake up and realize that the "new normal' doesn't justify current stock prices. My bet is that won't happen, but one of the other scenarios, or one I didn't anticipate, I've listed will cause stocks to find a lower level. Cash will feel comfortable, even if it earns little, if the market tumbles during the first half of 2010.

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