Thursday, April 29, 2010

Bet Against Brunswick

Everyone likes a ten-bagger and speculators have become giddy over the future prospects of Brunswick. The company was being given away at about $2 twelve months ago. Today it was up 27% to $22.69. Quarterly earnings handily beat analysts' expectations, but the company still lost .15 cents per share or $13 million. BC doesn't plan to make money in 2010 and is hopeful it can return to profitability in 2011.

Revenue is running about 1/2 of its 2007 level, but it did grow quarter over quarter for the first time in several years. Like housing, since the boating/recreation industry was also supercharged with home equity funny money, former revenue levels aren't coming back for a decade. The company is forecasting that industry retail sales will decline 20% this year and sales at BC are reflecting that pace in January and February. March was much better at the wholesale level, but the company is cautiously optimistic about the boating/marine outlook.

In 2007 when the company recorded sales of $5.7 billion, they dropped $111 million to the bottom line, or 2 percent. Analysts are forecasting sales of 3.7 B for 2011 and earnings of 2 cents per share. With 90 million shares outstanding, that $.02 is net income of about $1.8M. Not the stuff of legitimate ten-baggers. If by a miracle they were to get back to the 2007 earnings level of $100M, today's price would still be valuing BC at almost 20 X peak earnings. Management isn't even close to thinking about returning to peak earnings. But speculators and financial illiterates have become devotees.

Their marine business may be seeing some uptick in business with replacement mercury engines, but all 16 boat lines have to be suffering. My marina and reports from the lake of the Ozarks say that sales are slim as they have to compete with repo boats and inventories are slimmer as floorplan financing is difficult to obtain and afford. In exercise equipment, most individual sales are New Year related and health club chains have cut back new openings-not a lot of growth potential here. Pool tables flourished with easy home equity financing and newly purchased McMansions. We know the state of real estate. Finally bowling isn't a hot market, but may be the best BC has available to it at present. The more I talk about their prospects, the more I consider increasing my bet!

The last over-valued company that I wrote about, Valmont, was a well run, solid operation that had just run too far. I never did sell any shares short as the upward momentum was too great and the company too good. BC may have momentum, and that can be dangerous and costly, but it isn't a great company. It has about $900M of debt and, even after significant cost cutting, doesn't have the revenues to start making money. I'm not predicting bankruptcy, but I don't think the market should be valuing it, today, at 20 X peak earnings when those earnings are years away. The price may run further, but it isn't sustainable.

This afternoon I sold BC short and intend to sell some more, especially if it continues to run. There isn't a big dividend involved so the margin interest should be easily covered assuming I'm correct. Additionally, if I'm wrong and the market takes it upward then the rest of my long positions will do well, reduced by the BC short. If it tanks, by itself or with a market swoon, the gain will soften the pain of the decrease in value of my stock ownership.

The world is starting to understand that government debt is a huge problem and that realization can't end well. The swoon yesterday, on big volume, shows that there are lots of very, very nervous investors that are playing a game of chicken or musical chairs. Fear in the government arena will negatively affect the equity markets. All of those ten baggers are at significant risk.

No one go out and buy an exercise bike, new SeaRay, or open a bowling alley. It's okay to bowl a few frames, I won't be mad.

Tuesday, April 27, 2010

Sleeping At Night Is Superior To Yield

All my adult life I've secretly, and sometimes openly, sneered at goldbugs. The world wasn't going to end and gold didn't yield anything. There were better places to put my money. I put gold accumulation in the same camp as bombshelters and canned rations. Fools thought that way and ended up without any net worth.

While those people were fools, I'm aging and my world has definitely changed. The aging part may have made me more cautious, but I still prefer yield and growth to precious metal safety. The changed world part continues to scare me towards gold. Government deficits and debts worldwide are past out of control and, worst of all, we are now beginning to understand the situation. The potential resolution of governmental malfeasance is frightening.

Our world isn't going to end, but we're facing a decade of sovereign defaults and devaluation of currencies. I can't envision that helping the equity markets and it has to be a killer to the bond markets. Broad market index funds aren't going to perform well, most diversified mutual funds will underperform, and balanced funds won't be the conservative place to park money due to their bond and stock components both being out of favor. Picking the right sectors or individual companies will continue to be profitable, but, as always, that is extremely hard to accomplish. Hence, the need for metals.

A recent GAO report says that by 2020, 93 percent of U.S. Government receipts will be committed to entitlement programs and interest on the national debt. Ninety-three percent! Virtually no money left for the military, education, etc. Certainly no bailout funds available. I'm not talking about Portugal, I'm talking USA! And Obama's not done. Our future is uncertain at best and maintaining wealth, let alone earning some, is going to be difficult. I only hope it plays out slowly, not rapidly, like the subprime/banking meltdown of 2008. Another European banking/sovereign collapse would take stock and bond markets much lower.

Last year I weakened and bought some gold ETFs, but sold at a gain since i still hadn't had my conversion. This year I am convinced that there is a place for gold in all portfolios. The ETFs have become a part of mine as has a Vanguard mutual fund of miners.

A testament to my true conversion is my belief that physically possessing the metal is also appropriate. Rather than owning just a share of ore in the mountain or bars in a depository, coins in my safe deposit box now makes sense. I'm, going to need a larger size safe deposit box. maybe I'll need two larger ones in both Nebraska and Florida. I don't know where I might be when the world starts to end.

I haven't stooped to filling my downstairs with MREs yet, or buying small plots of ground where I could, at least intellectually, grow my own food, but I have become convinced that the next ten years isn't going to be like the prior decades that I've lived through and prospered in. Real change is afoot and it isn't going to be easy or pretty. I intend to continue to prosper, but I'll have to change some of my investment patterns.

Wednesday, April 14, 2010

The Broken Record of Omaha

I haven't written lately because nothing has changed. I continue to fear for the future, but am enjoying the increased value of my equities. My cash assets continue to under-earn, but provide an Ambien effect at nights.

I haven't followed through on any short, or put, positions except AMR. Valmont and a few other serious candidates have risen steadily since I considered betting against them. Once again, either procrastination or fear saved me some money. I keep my negative list nearby incase my gonads grow.

Given the stock market's current pricing, the economic negatives far outweigh the potential positives. Last summer the negatives were out manuvered by the economic rebound. But after a 75 percent run, reflecting the improved economy, the negatives remain and there can't be much left that is sustainable.

The market goes up, but on relatively light volume. Conviction, or mania, is lacking. That means there are lots of investors that know they should be selling, but are enjoying the present ride up. At the first sign of trouble the exits are going to get congested. We could see a large decrease in valuation. But when? And how much further will the averages rise before the descent? I don't have the foggiest on the timing.

Markets like to inflict the maximum pain on the maximum amount of people, so with light volume we probably aren't really close yet. I just deleted my guesstimate for the downturn as I really have no conviction in my ability to predict macro economic timetables. I'm the Crusty Credut Analyst, not the Crusty Forecaster.

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