Wednesday, September 28, 2011

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.......

Monday, September 26, 2011

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.

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