Not The Best Reason To Add To A Position, But I Did

The best thing I can say about Devon [DVN] is that my basis keeps getting lower as I add to my holdings. It certainly hasn't been a financial winner. Past financial and operational engineering decisions all made sense to me, but it evidently didn't make actual sense as earnings have been inconsistent and the stock price has been lousy. The major change was selling all of their gulf and international properties and reducing debt to become a continental USA gas, oil, and liquids company. I still think that makes sense.

Over the last several weeks I've had a few strands of thought that have been intermingling. First, I've lightened up on some midstream MLPs as prices have been pushed high and multiples have been extended. That has changed to some degree as interest rates have risen, but MLPs are still priced richly. So I've taken some money off the table.

Next, Devon announced in June that it was going to do some more engineering and create a midstream MLP since those assets would be valued much higher than the market was giving DVN credit for them as a combined company. Given the MLP multiple of earnings, cashflow, and book versus Devons that seemed a no brainer. Assuming DVN sells those assets to the new MLP at similar multiples that should produce a lot of gain, cash, and share price improvement at Devon. 

The wife's been out of town for a week which left a lot of time for me and the dog to discuss whether I should up the ante again on Devon and anticipate some good reaction to the upcoming MLP. The answer came not from the dog, but from a very recent Jim Cramer article. Cramer named Devon as one of his 10 worst stocks and was not the least bit complimentary about company's management or prospects. So I bought some more even though I've had to fight the temptation to throw in the towel also over the past couple of years. 

The MLP is set for this Fall so we will shortly see if that or Cramer has any positive impact on DVN. If it doesn't I'll blame Gertie for not talking me out of the decision.

Three Quality, Two Really, Companies 20% Off Their Recent Highs Worth Buying

Since their arrival about a week ago, gulls have been using our no wake buoy as a soapbox. There's been a lot of important opinions offered. I have no ability to critique the value of their squawking, but some seem prouder of their messages than the less vocal.

After a long dry spell, Crusty is ready to do some squawking. Here are three companies worth looking at: Jones Lang LaSalle [JLL], Valmont Industries [VMI], and Vulcan Materials [VMC]. All are off their recent highs by about 20% with no terrible news announced. I've added to positions in JLL and VMI. VMC is a new long position for me. My last involvement with Vulcan was on the short side a number of years ago.

None of the three are screaming buys, but they are good companies at decent entry points with JLL and VMI oversold. VMC is finally starting to get some traction and will likely be able to grow revenue and earnings significantly next year. If they don't de-leverage by selling stock too soon, they will be able to really accelerate earnings as their three-legged stool of a business [public/highway, residential, commercial] finally sees demand in all areas.

Valmont has been doing well on all fronts and has positive trends going for it in agriculture, utility grid, and highway construction. The forward P/E is much lower than their historical multiple so not only can they grow earnings, but also should see some P/E expansion without stretching. Also, VMI is an Omaha company so they don't often shoot themselves in the foot. 

JLL is, in my opinion, the best of the commercial real estate brokerage/management companies. They don't take on a lot of risk for their own account [proprietary investments tend to stay in their investment arm for the benefit of customers]. They have a global presence and somewhat predictable revenues. 

The seagull stopped yacking and so should I. 

I'm Hopeful Flexsteel Will Not Join My Herd Of Turkeys

Gerts and I were out for our morning walk when I noticed a small herd[?] of wild turkeys in a neighbor's yard. They didn't pay any attention to us, but they got me thinking about my portfolio of under-performers. I often get enamored with a good company that seems to be a bargain, thus ensuring great profit, yet continues to languish for months or years before returning to an upward trajectory. These turkeys drive me crazy because I know I'm right and the market doesn't agree. Damn machines and kids!

Yesterday Flexsteel, the Dubuque, IA based manufacturer of furniture and seating, was taken out to the woodshed and paddled. It happened again this morning. I cannot find any bad news or forecasts. The company released record yearend and quarterly profitability, plus said current trends should continue.Sounds good to me.

FLXS doesn't have any debt and is paying a nice dividend. The yield is 3.0% and they are paying out only 25% of earnings. The current price is 1X book value, .4X sales, and less than 6X cashflow. Liquidity isn't an issue as they have a 4:1 working capital ratio. Looks like a well run Midwestern company.

I've pushed the buy button several times today and hope to get back quickly some of the 15% the stock price has fallen the past two days, plus a nice, growing, dividend.

THE KISS OF DEATH

Friday I pitched an old friend, Smart Balance [SMBL], as I believed it had risen too far, too fast. I enjoyed the ride, but the stock had moved from about $5 to $11.50 in a little over two months. It rode on the back of momentum and hope, not earnings or sales growth. Two acquisitions of gluten-free products vaulted the company into the orbit of organic foods and the race was on.

But the basic spreads business has been stagnating and the milk business has not really taken off and depends on heavy couponing. The move into gluten-free is a change of game plan. Additionally, they will be facing higher input costs going forward and they already sell high priced products. So I became nervous and satisfied at the same time which meant sell.

My sell decision often means that a buy order is appropriate for others as stocks continue to rise longer than they should. Also, Steve Hughes will sell SMBL at sometime and I could be really disappointed that I missed the deal, but for now I'm content on the sidelines.


Where did the proceeds go? Some went into PFXF, a new ETF that owns preferred stocks of "non-financial" companies that has a good yield. It really does own financial companies, just not banks, as it has some REITS and insurance companies. Some more went into another old friend that I had divorced a year or so ago, Neutral Tandem, IQNT. It has become obvious, at least to me, that they are setting the stage to be acquired. Several months ago they hired an advisor and recently announced that they will be making a special dividend of about $5 in the Fall and buying back stock. Their returns will look better with a lot of the cash gone and they sound confident that they will have enough cashflow to fund ongoing capex. The earnings shouldn't be under any additional pressure the ROE and cashflow/EV returns will be more attractive. Even though the price will decrease with the dividend, I will at least have some money back and hopefully the company will have found a suitor.

Time to sign off as I'm becoming increasingly interested in a beaver that is sitting in a tree in my backyard. I'm pretty sure it is a beaver but I didn't know they climbed trees and eat leaves. This one is stripping limbs and chomping on leaves and is fat. Since it is hard to type and peer through binoculars, I'm going to stop typing.

TWO SOLID HITS AND A WHIFF

Like most investors, I've spent the last several months vacillating between euphoria and despair. A self proclaimed smart investor descends into stupidity. Over and over again.

Of late, I've been encouraged by the performance of a couple of my holdings. Proof that a value investment approach can work over time. Markets will dive and confidence will sag, but some stocks will go up. I'm not discounting luck as a reason.

My last two posts, Smart Balance [SMBL] and Constellation Brands [STZ] are the holdings that have helped hold my net worth together during the market's flight away from commodities, Europe exposure, and other out of favor sectors. Since the first part of April, SMBL is up more than 70% and STZ has risen  over 45%. Both of these companies have good management and operating performance has been OK, but acquisitions have enlivened analysts and investors.

Mario Gabelli jumped on board Smart Balance and bought 5% of the company. He, and others, liked SMBL's acquisition of two gluten free product companies. The party at STZ didn't start when they owned Robert Modavi and a host of wine and spirit names plus 1/2 of Mexico's Modelo American distribution. But it sure started when they announced the purchase of the other half of Modelo's U.S. distribution. The financing is in place, but the final capital structure of the $1.5 billion deal isn't known. I'm sticking with SMBL longer term and may bail after awhile on STZ.

Now the whiff. I've written about Teva before stating that it is under valued and should produce good returns. When? It continues to act like a dead worm in the swimming pool out back; it just keeps sinking. I'm hopeful it has hit bottom and is resting at its low point. The same mindset that hated SMBL and STZ is at play with TEVA. It's hated for patent expirations, litigation, and who knows what else. Those concerns a overblown. Analysts are calling for $5.40 eps in 2012 and $5.80 in 2013. As a $39 stock the P/E is about 7X. Even as a "slow grower" it's worth more than 7X as the balance sheet is decent.

It's only a matter of time with TEVA and you get a 2% yield while waiting. Something will spark the investing community, maybe an acquisition like the other two companies or some break through drug or blockbuster generic opportunity, but it will happen and the upside is significant. I've been saying that for quite awhile, but I remain a believer.

Karate Kid Investing

I don't understand rapid fire trading, either by machines or humans. It's far from investing and only becomes, possibly, meaningful if you add lots of leverage. In terms of purchasing power, backing out inflation and new capital raising, I'm not sure much money has ever been made with this approach. But it can sure swing the markets and garners lots of press.

Mr. Miyagi's advise to the Karate Kid was "wax on, wax off". Today's hedge fund gurus practice the martial arts of "risk on, risk off". "Wax on, wax off" practice helped the Kid, but investing/trading shouldn't be practice, make believe, or foolish. It needs to be serious, since it involves other peoples' money. How does "risk on, risk off" grow wealth? Making a correct, big macro bet will make a person feel prosperous, but the next big, macro bet is likely to go the opposite direction and drive one to the ledge. Taking small amounts on and off the table in "risk on, risk off" maneuvers, only increases transaction costs. How does fleeing to Treasuries, only to return shortly benefit wealth creation?

How do you survive mentally in an investing world dominated by children with machines? Keep enough cash on hand to live, stay invested, and dabble around the edges with options. Pay very little attention to daily market movement.

No Officers Are Selling Smart Balance Shares

I'm either wisely patient or stubbornly stupid when my investment in Smart Balance [SMBL] is subject to critique. This past year has seen a nice move upward in stock price, due to operational improvements and the acquisition of Glutino, the leading gluten-free natural foods brand. But will 2012 be another good year or am I facing a return of dead money?

All of the financial metrics indicate continued progress. Market share and retail shelf space improvement should continue that trend. Healthy eating trends seem to be trumping family budget constraints. Okay, Crusty is convincing himself. How do the officers of Smart Balance feel?

Positive! No one has diversified or unconcentrated their net worth. A number of officers purchased shares over the past two years when the share price dipped to the $3-5 range. Hopefully that means they think there is more upside coming, as no one is selling.

Now everyone go out and eat a slice of Glutino gluten-free bread slathered with Smart Balance spread and wash it down with some Smart Balance milk. I can go on forever and I hope ConAgra, Kelloggs, General Mills, and are thinking about it as well.

Robert Mondavi Just Went On Sale

The past several days have been grim market days. No QE3 forthcoming and traders are beside themselves, driving the markets lower. One of the few green arrows during that time span has been Constellation Brands [STZ]. The catalyst for STZ's rise was Goldman's new Buy rating from Neutral. I don't know what specifically convinced Goldman to increase their enthusiasm level, but I'm glad they are on board and am comforted.

This morning STZ reported results that didn't lift Wall Street's spirits even though spirits are their business. They make Robert Mondavi and a host of other wine brands, several well know vodkas and whiskeys, and import Modelo and Corona beer. That mixture didn't produce the intoxicating results that some traders were looking for and the stock is off 13%, about $3. That's as good as finding a coupon in the newspaper that I can take to Publix. So I bought some.

While net was off expectedly from last year, the adjusted eps for the quarter beat analysts guestimates by a ton. Their divestitures and operational changes must be working. However, guidance was less than had been expected and that's the rub. Twenty less cents eps for this year and down you go. But the Company is still calling for eps of about $2 which is a P/E of 10-ish, not a steal, but reasonable. The balance sheet is decent and they are set to buy back stock which may help stabilize the share price.

Constellation isn't a home run at these levels, but I think it will beat the market this year, and so does Goldman. This morning is a good entry point. My middle son arrives for Easter this afternoon and I'm sure the two of us will goose Constellation's revenue. If the rest of the country does likewise I'll get my 20% up swiftly. TaTa.

Feeling Smart Again

The past several months were void of posts as it is nearly impossible to type when you have assumed the fetal position. Brilliant investment decisions all turned into losers no matter how well thought out. Why write positive pieces about soon to be disasters and feel somewhat responsible for readers losing money? So I laid down the pen and continued to lose money silently.

Thank goodness that has changed and the year finished decently. My brilliant purchases have been looking better. The dividend portion of my portfolio and the options that I write against them allowed a reasonable return and the speculative group is behaving well except for solar which still resembles a rat hole. Oh well, at least I've removed my helmet and now stand erect, my crouching days behind me.

While not screaming bargains, I did add some names during the hiatus. Thermo Electron [TMO], Jones Lang LaSalle [JLL], and Nordic American Tankers [NAT]. The first two are top notch outfits and worthy of holding onto for a long time. NAT is much riskier as it hasn't been earning its dividend, but the balance sheet is solid, at present. It bears close watching, but the dividend is 8 percent and the board of directors has stated they feel comfortable with the payout.

Enough rambling, I need to assemble some shelving in the garage. That project also languished during my fetal period as its also hard to work with hand tools when crouched over in a ball. TaTa.

What's That Sound I Hear? It's Us Eating Our Seed Corn!

You can't grow crops without seeds. That's why they have always been valued. They are essential to human existence and progress. Eating those kernels wouldn't be a good plan.

Financially, we are doing the equivalent. We are eating our financial seed corn and that's not prudent. You need capital to make more capital and the western world is destroying capital. Destruction by debasing currencies, destruction by artificially lowering interest rates, destruction by algorithmic high frequency trading, destruction by greed, and destruction by over-reaction all will prolong our despair and delay our recovery. 

How much capital has been destroyed since the beginning of July around the world? I haven't invested the time in determining the answer, but the number far surpasses any measure of Greece and the PIIGS. Yes, I know that "markets" have also worried about double dip recessions and European bank balance sheets, but come on, clearly we have over-reacted. 

The purpose of capital markets is to funnel cash to worthy companies. No matter whether it is in the form of debt or equity, it should make sound business sense. Our current environment is more like a casino mentality than investing capital to help companies grow. Five percent intra-day swings are proof that valuation has little to do with today's markets.

Just like in Washington, if some adults don't take charge of Wall Street soon, we will have eaten a good portion of our seed corn. Pension plans, university endowments, individual 401Ks, will all be decimated as the desire to buy a piece of a profitable company will have been extinguished. 

Three simple ideas worth immediate consideration are: first, much higher margin requirements on stocks, options, and commodities will require investors to risk their on capital and increase caution; second, bring back the uptick rule for short selling as it will slow down the speculation and enforce a ban against naked short selling; third, re-instate Glass-Steegle which separated commercial and investment banking and remove the investment bank's access to the Fed. 

If the special interests negatively affected by the three proposals don't like it and they, and their cronies in DC, continue to play business as usual while destroying our capital formation ability, then we need a Financial Tea Party to restore sanity in our financial leaders.