Aaron Rents [AAN] Is An Auld Lang Syne Holding

Yesterday I accomplished two things. That's big in retirement world! First, I bought more shares of Aaron Rents [AAN] as the market was marking them down by 7 percent and, second, the wife and I attended the annual Burns Supper.

Burns Suppers, held world-wide to commemorate the birth of Scottish poet Robert Burns are full of poetry, kilts, bagpipers, and scotch malt liquor. I appreciate all of the foregoing. There are also lots of Scots speaking with thick brogues. I missed a lot of the presentation because I couldn't catch the cadence of the brogue. Earlier in the day I believe the market was having a Scottish moment as well, because I couldn't understand why they were throwing out a solid company like Aarons.

I've written about Aaron's before, lastly in 2009, so I won't delve into any numbers today as they've continued to perform well. Last quarter was solid and future guidance acceptable. The company uses debt sparingly and sells for a modest 12 X forward earnings. In a past life I owned 25 furniture rental stores, understand the accounting, and feel confident that a growing number of customers like the rental experience. So, the sell off presented an opportunity to add to my position.

I didn't understand the market's behavior Friday anymore than I understood the Burns revelers last evening. But Robbie Burns, that cool dude in the sunglasses, would understand my toasting auld lang syne to my long-time, old friend Aaron Rents as the market presented me with a New Year's opportunity to buy some more shares at a discount.

Enjoy Summer Because The Fall Is Coming

And I do mean the fall. Falling stock prices this Fall. The market, no matter how good it feels, is way ahead of reality. I know Warren Buffett says that markets rebound before economies do, but this economy has a long way to recover before it is healed. We have made only a small dent in deleveraging the years of debt exuberance.

This Summer I've lopped a couple of strokes off my golf handicap, worked down the honey-do list, grilled and floated in the pool with the dog. My remaining stock portfolio has done wonderful and I don't regret any opportunity cost associated with my outsized cash position. Grilling, beer, and a growing portfolio-perfecto!

It took a while but I finally got out of a stupid investment, Southwest Airlines. When I bought it I opined that it was a lousy industry and even Buffett had trouble making money in it. But I thought LUV was the best and the price was attractive. Well I've been in a deep loss for months and the market euphoria has finally pushed it up enough that I've exited with a decent gain. But, the industry stinks and I've learned a lesson. Never buy a great company in a bad industry.

Flowers reports soon and I think all the insider buying bodes well for the results and hopefully it isn't already baked into the price. Aarons and K12 have rebounded nicely and should continue to move upward as their sell-offs were overdone. My remaining stocks like the above names and Waste Management are all defensive and should do relatively well when the market moves South as I expect it to this Fall.

Why do I expect it to decline? Here's why:

Commodity prices don't signal growth, they signal speculation

China's growth will be modest and their commodity binge is troubling

The chicken and the egg question and I think the American consumer will not be enticed by cheap Chinese goods. Saving yes, buying no.

Financials are not healed and will need another round of capital raising, if they can get it.

Obama is finally starting to scare both business and consumers

I could be wrong, but as Charles Barkley says: "I don't think so". It remains better to protect capital than to miss gains.

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.