Sunday, November 28, 2010

This Loose Cannon Either Made Me Lots Of Money Or Will Be The Cause Of My Shrunken Net Worth

I'd been watching Posco [PKX], the huge South Korean steel manufacturer, for several months as its stock price trended downward. Last week North Korea lobbed some artillery shells at a South Korean island and the price of Korean securities cratered. I took that opportunity to buy PKX.

Some back of the envelope calculations indicate that you can buy PKX for a hair above book value, 7ish X forward earnings, and 5 X cashflow. The balance sheet is sound with debt at about 40% of equity. The world economy is performing adequately and Posco is well positioned in Asia. Input costs are obviously rising, but so far not crippling. PKX is at a reasonable entry point for the longer haul.

I'm already in, and ahead a couple of dollars, so it is unlikely that I'll buy more, even if the little dictator puts on his uniform, stops drinking beer, and causes more problems on the Korean Peninsula which causes PKX shares to drop further. That may happen and prove to be a gift as I don't believe we are in for a repeat of the Korean War and PKX owners will be rewarded as demand for Posco's steel grows.

Friday, November 26, 2010

Life Is Good In Spite Of The Goverment

I've already exercised, we have plenty of turkey for sandwiches, Nebraska football is on the television soon, and the dog is sitting next to me and thinks I'm wonderful. Could it get any better? Yes it could if our government entities would lessen their intrusion into our collective lives and businesses.

After decades of misguided government programs and policies, combined with very poor corporate leadership, we've found ourselves in a debt saturated world. No matter how the politicians, the Fed, the economists, and the opportunists spin their story, there is only one answer to our problem. I've done the research. The capital has been squandered and haircuts must be taken and losses recognized. Further, the losses must stop being assumed by tax payers.

When you invest you take risk. When you're stupid, unlucky, conned, or short on due diligence you are apt to lose some of your capital and you should. That's where discipline is learned and reinforced. Default and failure is necessary if we are to rescue ourselves from our current situation that rewards the risk taker and burdens the taxpayer for other's mistakes.

On the national level the Treasury/Fed is engaged in a weakening of the US Dollar in an attempt to lessen the pain of debt service and improve the ratio of debt to GDP. The alternative is austerity and/or default. I've done the research and they're not going to abandon "business as usual" so rule out austerity, except for tinkering around the edges then declaring victory. They won't default either, but the bond market will demand greater yields before long and that, unfortunately, will be born by all taxpayers again. What they can do to help, and the populace must insist, is to stop bailing out companies, industries, states, and foreign governments. Let the haircuts and losses commence. Investors and owners need to bear the losses from here forward.

Beyond a commitment to quit institutionalizing losses, governments, and the electorate, needs to recognize and believe that the best of all possible worlds are corporations and employees that agree to share the wealth without any capital contribution by the government. A new business agrees to commit the capital, build or lease the facility, fund the inventory, keep the lights on, make the product,pay the employee wages and benefits, AND GIVE THE VARIOUS LEVELS OF GOVERNMENT 50% OF THE PROFIT!!!! Why isn't that encouraged? I've done the research and lower levels of taxation lead to more new businesses, expansions, and hiring.

Since I'm not full of BS, who is? Don't believe their line and hold government's feet to the fire on future bailouts, regulations, and taxation. I am full of turkey.

Sunday, November 21, 2010

Waste Management Is A Core Holding

Mount Dora is a town with a canopy of live oaks covered with spanish moss. Consequently, acorns are always falling. Occasionally they hurt as they drop on the unsuspecting walker's head. Mostly they are just a nuisance as neighbors are always sweeping walks and street cleaners are tidying up the avenues.

On my walk today I commented to an ernest sweeper " it's a endless job isn't it?". Her response was apt : "I wish they had value and we could sell them." Alas, acorns don't have any value, they're just waste. Other than acorns and spanish moss, most waste does have a value and that brings me to a long time holding, Waste Management.

I've owned this company longer than any other and have grown accustomed to it and its yield, about 3.6% at todays share price. The market values it fairly, not cheaply, at about about 9 X cashfow, 15 X forward earnings, and 2.75 book value. WM uses debt, but isn't overly leveraged.

It, like its major competitor, Republic Services, run little monopolies in the communities they serve. Even if the monopoly comes unraveled by losing a franchise renewal on the pickup of refuse, they still control the landfill and are in an excellent negotiating position. Besides the standard garbage pickup and recycling, they have a large and growing portfolio of gas from waste and electricity from waste projects. They are the ultimate green company. They make money off of everything, including the acorns that adorn the streets of Mount Dora.

I bought WM years ago as a turnaround and both it and its share price have done nicely. I don't think there is any large underpricing here and the share price will mirror the market moves. But that's OK as I also get the 3.6% dividend yield. The payout ratio is about 60%, higher than I'd like, but the rather consistent revenue stream gives me comfort.

Waste Management is a fine company available at a reasonable price that throws off an excellent dividend. A core holding that pays much more than a CD or savings account.

Thursday, November 18, 2010

Pensions And Commodities Are Stiff Headwinds For Industrial And Consumer Product Companies

Recent news articles on Honeywell, UPS, and General Motors have served as a reminder to pay attention to pension obligations and their corresponding impact on cashflow. Before establishing a new position I attempt to make sure that I've factored into my decision making the potential negative impact of a defined benefit pension plan. Occasionally I'll take a shortcut and that aspect is missed. Annually I scour my portfolio to make sure I'm aware of pension issues. Many multi-national industrial and consumer product companies are saddled with underfunded plans that must be addressed.

The impact on earnings isn't always negative, as in HON's case, as they may be able to change accounting treatment and lessen the impact on net profit. But they can't change the impact on cashflow. Less cashflow, less balance sheet cash, or more debt are the only real ways for a company to bring their pension plan up to snuff. None of which are positive for the cautious investor.

While the stock market's rebound is beneficial to pension funding, the bond component of pension assets remains dismal. Plan assumptions have been too optimistic, for too long and companies are addressing the issue. But the timing is far from perfect.

Not only are we in a global slowdown, commodity input prices are raging. Any company that makes a product is facing significant pressure on margins. Now, after several years of poor performance in equities and low bond yields, companies are needing to start a more aggressive refunding of their defined benefit pension plans. Unfortunately it is at the same time as sales growth is difficult to capture and input costs are soaring. Difficult headwinds.

QE2 and emerging market growth may continue to lift all stocks, but my suggestion is to cull portfolios of the weakest firms with underfunded pension plans. Battling rising costs in a tough sales environment is difficult enough.

Saturday, November 13, 2010

Annaly Remains A Reasonable Position Despite Cramer's Endorsement

A 15% yield is normally an omen of impending dividend suspension. Combine that yield with leverage usage and the mortgage industry and one should generally avoid the security in question. Now toss in a recommendation from Jim Cramer and it is often time to duck. I'm now worried, but I agree with Cramer that I should keep my position in Annaly Capital Management [NLY].

Annaly is a REIT that invests in agency securities, therefore it takes no credit risk assuming you view the U.S. Goverment's guarantee as solid. It leverages its capital to purchase more securities, although not like the financial time bombs of several years ago, and enhance earnings. It does take on interest rate risk, but through asset/liability management attempts to limit the impact of interest swings. It uses a barbell strategy of floating rates on the shorter durations and fixed rates on the longer holdings. How well it will work as QE2 accelerates interest rates remains to be seen, but the management team has done a credible job since its creation in 1997.

Is a dividend cut coming down the road? Don't know. As a REIT they have to distribute 90% of their net income, so it is all dependent on NLY's continued earnings ability. Clearly the current rate environment is one that is working for them. As rates rise their profitability will depend on how well they execute their A/L strategy. A sudden, sharp interest spike would be the worst scenario, but with a Fed intent on keeping rates low, NLY probably faces a slow creeping interest rate environment which is easier to navigate. Thus, several more years of attractive dividends and yields. Continued dividends and low yield alternative investments also leave room for share price appreciation.

NLY has treated me well for quite some time and I remain confident it can overcome Cramer's recent praise.

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