Value Investing

2009-09-04T22:12:00.000-07:00

Consolidated Edison (ED)

Consolidated Edison, Inc. (Con Edison) is the holding company of
Consolidated Edison Company of New York, Inc. (Con Edison of New York), and
Orange and Rockland Utilities, Inc. (O&R), both of which are regulated
utilities. Con Edison’s principal business segments are Con Edison of New
York’s regulated electric, gas and steam utility segments, O&R’s regulated
electric and gas utility segments and Con Edison’s competitive energy
businesses. Con Edison of New York provides electric service in all of New
York City (except part of Queens) and Westchester County, an approximately
660 square mile service area with a population of more than nine million.
O&R, along with its wholly owned utility subsidiaries, Rockland Electric
Company (RECO) and Pike County Light & Power Company (Pike), provide
electric service in southeastern New York and in adjacent areas of northern
New Jersey and eastern Pennsylvania, an approximately 1,350 square mile
service area.

More from Reuters »

Filter 1: Insider Trading

Insider trading we will defined as the buying or selling of corporate stock
by a corporate officer in one’s own company. By examining Insider trading we
can hope to gain insight into the future of a business as it is seen by
those most closest to operations. As savitt put it so eloquently people sell
stock for all sorts of reasons but only ever buy it for one. To read more
about why we value insider trading click here.

Filer's Name	Relation Title	Trans. Date	Price	Mkt Value
Muccilo Robert	VP & Chief Accounting Officer	31/07/2009	$37.51	$1,900
Moore Elizabeth D	General Counsel	31/07/2009	$37.51	$1,056
Rana Louis L	President & COO (CECONY)	31/07/2009	$37.51	$2,639
Ryan Joann F	SVP, Business Shared Services	31/07/2009	$37.51	$2,639
Del Giudice Michael J	Director	29/07/2009	$39.07	$150
Ranger Michael W	Director	29/07/2009	$39.07	$1,500
Ranger Michael W	Director	16/07/2009	$37.82	$3,000
Del Giudice Michael J	Director	16/07/2009	$37.82	$300
Ranger Michael W	Director	15/07/2009	$37.38	$1,500
Del Giudice Michael J	Director	15/07/2009	$37.38	$350

Filter 2: Graham Analysis

Benjamin Graham is known as the father of value investing. Through his book
the intelligent investor he created a set of criteria that a company should
meet in order to merit his investment. To read more about this criteria and
why Graham considered each so significant click here. There is debate over
the utility of applying one set of rules to compare company’s in different
sectors and different markets, therefore we have provided comparisons
against, industry, sector and indice.

here.

(Blue= CONED, Green=Industry, Yellow=Sector, Red=S&P 500

P/E
		C:16.23 I:1.5 S:1.72 Ind:40.35	P/E is high I'd prefer to see this under 15 for an industry. Comparisons against industry and sector aren't very relevant as the majority of these companies don't pay a dividend.

Price to Book
		C:1.03 I:1.28 S: 1.30 Ind: 3	A price to book ratio of 1.5 is desirable to assure we aren't overpaying. ConEd comes in at 1.03 which is a bit lite of where we want to be.

Current Ratio
		C:1.10 I:0.58 S:0.70 Ind: 0.91	A current ratio of 2 indicates that the company is in a good position to control its debt position should the tides change. A 1.10 current ratio is not that good.

EPS
		C:3.35 I:-0.58 S:0.23 Ind:-0.30	A 5yr EPS is an important way of assuring we aren't buying a low quality company. In this case the EPS of 3.35 is low I wold like to see a much stronger number here.

Dividend Yield
		C:5.94 I:/b> S::0.11 Ind:1.55	A solid dividend is something I always like to see. Anything above 3.5% is a nice to see, 6% is very pleasant.

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We are moving to www.buyingvalue.com

2009-04-04T21:27:00.001-07:00

After what has been a fairly successful start on blogger we are moving to a new hosting service at www.buyingvalue.com I hope you will all follow us there and enjoy the new services and features available!

A Better Canadian Stock Screener

2009-03-15T14:32:00.000-07:00

As readers of my blog know I have been looking for some time for a good Canadian screener, specifically a screener that allows for Graham style analysis. After finding one earlier this year that ran as an application I set my sights on trying to find one that runs as a web application. Well little did I realize but there was one right under my nose.

Zacks has been around for a while and has recently released a new beta of there free stock screener.
I am pleased to report that Zacks has the ability to create screeners that you can point at TSX.

For info on the graham criteria have a look at my earlier post.
The screener can be found here, enjoy: Zacks Screener

The author of this article did not receive any payment for this recommendation.

Everything is amazing, nobody is happy

2009-03-11T07:09:00.000-07:00

Every once in a while it is good to put things in perspective. Here is a bit of a laugh but there is a good point in there too.

http://www.youtube.com/watch?v=jETv3NURwLc

The Truth about stock market returns

2009-02-20T16:18:00.001-08:00

If you had $100 to invest in the DOW in 1928 you would have $3128.52 today- what a deal right? Wrong, let me tell you why.

I've been to several financial offices where they proudly display the graph of the DOW since 1928. The desired effect being that we are to think that the market always goes up, you just have to be patient. I, like many people, didn't appreciate just how patient one has to be though until I examined the returns in more detail.

Lets work through the numbers. If I had invested $100 in an DOW index fund in 1928 as the market was starting to fall apart (yes I know they didn't exist but it serves our purpose well and I think you understand the intent) and left it there I would have had $3128.52 Feb 2, 2009. But who can wait 80 years for a return- not me, that is more than a lifetime.

The mind naturally assumes though that if I waited half of that time I should have approximately (give or take 10%) half of that return so somewhere around $1562.76- that is a pretty good return for 40 years. So does that hold up?

Sadly no, you would have a paltry $339.26 40 years after the initial investment, nowhere near our goal. But, you might say, 300% return in 40 years is still a pretty good return, not as good as what we see at 80 but I still like it. In the big picture though a 300% return over 40 years is really not that great- that is a long time to wait for 300%. So we hack it down again, could I get 150% in 20 years, I am patient enough to wait 20 years for 150% so how about $300 in 1948? Well how would you feel about $69.31 instead?

The reality of it is compound interest can help you or really hurt you. 10% return one year and a 5% loss the next year is not the same as two 5% gains.

Investment	Y1 ROR	Y1 Net	Y2 ROR	Y2 Net(Compound)
$10	10%	$11.00	-5%	$10.45
$10	5%	$10.50	5%	$11.03

Interestingly enough if instead of investing our money in the market in 1928 we had found a stable bank that could return us a paltry .31% on our investment compounded monthly, or 3.72% per year we would have a higher return on our investment from the bank account than the DOW almost every month until February 1987, some 59 years after the initial investment.

The point I am trying to make is simply this, the bad months can do incredible damage to your portfolio in the long run. Be wary of investment systems that advertise an average made up of huge gains, and substantial losses. Those losses may hurt you more than you might first think. Stability and consistency of returns wins the race in the long run.

Buffett's Biggest Mistake

2009-02-15T00:01:00.000-08:00

This article originally appeared on The Div-Net Feb8 2009
Much has been written about the success of Warren Buffett, but little on his failures. I think a great deal can be learned by analyzing the failures of successful people. By studying these failures hopefully we can avoid them ourselves.

The Deal

Buffett purchased preferred shares in US Airways in the early 1990's, and later remarked that this was one of his biggest mistakes. Now before getting to far into this it is worthwhile to comment that Buffett did in fact end up making a profit on his holdings of US Airways but Buffett certainly cannot claim credit for this. In his own words:

“Two changes at the company coincided with its remarkable rebound: 1) Charlie and I left the board of directors and 2) Stephen Wolf became CEO. Fortunately for our egos, the second event was the key...” Warren Buffett, Bershire Hathaway Letter 1997.

A few years after purchasing Buffett had pretty much written off the investment and had tried to sell out of the stock numerous times at a substantial discount. The investment had essentially become out of control and Buffett wanted out. Luckily he wasn't able to sell until sometime later when the company had started to rise again.

What Went Wrong?

So what did Buffett do so wrong? Lets look at the principals that Buffett uses for analyzing an investment:

“Charlie and I look for companies that have a) a business we understand; b)favorable long term economics c)able and trust worthy management d) a sensible price tag.” Berkshire Letter to Shareholders 2007

Understandable Business

Looking from the outside the airline business is fairly easy to understand. Money is made by moving customers and packages from one location to another. But behind the scenes the airline business is a huge gamble with 183 airlines having gone bankrupt since 1978. So much of the business is frozen in the assets in the business that any turn in the economy can destroy it over night.

Sustainable Competitive Advantage

Part of the reason that so many airlines have gone out of business is that consumer's are essentially unable to determine the difference between one airline and another. The planes are all the same make and model, you leave from the same airports, the pilots are all trained by the same schools and military, the food is very similar and they show the same movies. For the consumer in most cases it comes down to a question of price- who can get me there cheaper. Did US Airways have a way to keep their costs under any better control than their competition? No, unfortunately they shared several of the same unions as other airlines and were being charged the same airport fees as others also. It is difficult then to see the sustainable competitive advantage that US Airways had.

Able & Trustworthy Managers

Within a year of purchasing the preferred shares in United Airways the CEO Ed Colodny had been replaced and the stock price had gone into a deep dive. While Buffett still remarks that he has the utmost respect for Colodny he obviously could not get the job done and was on his way out as Buffett was coming in. In terms of Able then US Airways appears to fail this criteria.

Bargain Price

A bargain is only a bargain if you get something of value. While the preferred divided Buffett was to receive was an appealing 9.25% he was unable to collect that for 2 years. Several other ratios were also appealing; if the market teaches value investors anything its that sometimes things appear cheap because they, in fact, garbage.

Analysis Conclusion

Buffett failed to enforce his own rules of selection and got wrapped up in a bad decision. As he put it:

“I liked and admired Ed Colodny, the company's then-CEO, and I still do. But my analysis of USAir's business was both superficial and wrong. I was so beguiled by the company's long history of profitable operations, and by the protection that ownership of a senior security seemingly offered me, that I overlooked the crucial point: USAir's revenues would increasingly feel the effects of an unregulated, fiercely-competitive market whereas its cost structure was a holdover from the days when regulation protected profits. These costs, if left unchecked, portended disaster, however reassuring the airline's past record might be.” 1996 Letter to Shareholders, Warren Buffett

What Can We All Learn From This?

Buffett has a good system, when he settles on an investment choice he writes down the reasons that he feels it is a good investment. If he can't persuade himself to buy based entirely on what he writes down on the paper then he walks. This would have been one of those times he should have looked more carefully at the paper.

We can all learn from this mistake; do your homework and, most importantly, stick to your principals. If you have rules for investments make sure you are sticking to them. What went wrong here then is that Buffett stopped using his rules and veered off the track- don't make the same mistake in your investing.

The Best Month To Buy Stock

2009-02-11T10:40:00.000-08:00

Before starting I should say that I am not a fan of market timing, I think trying to plot an irrational event rationally is next to impossible. However, having said that, if you have the choice between two options both with equal merit why not pick the option with a track record of previous success? In my case the question is, should I get my tax forms prepared early and wait for the final forms to arrive next month and then send in, or wait until the final forms arrive before I start putting everything together.

I thought it would be interesting to see what month has historically had the highest average rate of return for a one year investment in the DOW.

This Chart can be read then to say that if you took a sum of money and only ever invested it on every May 1st (from 1928-2008) into a DOW index fund and then withdrew it May 1 of the following year you would see an average rate of return of 7.4%. Whereas if you had done the same but invested on August 1st you would have seen a 6.2% average rate of return.

On a quarter by quarter analysis then Q2 has the highest average rate of return. Followed by Q1, then Q3, and finally Q4.

Being a value investor I wondered, does the picture change at all if the investment changes from a one year to a five year investment?

While the grouping is much tighter, the results are similar. So again, if you invested every June 1st and then sold out 5 years later on June 1st you would have an average rate of return of 28%.

On a quarter by quarter analysis you would achieve the following.
What does this all mean? Well there is no motivation for procrastination here it appears. if I hurry up and get organized I will be able to put my tax return in and have it processed before the end of Q2 which historically speaking would give me the opportunity at a higher rate of return. Food for thought.

When Greed Interferes: Puget Power (PSD)

2009-02-09T08:25:00.000-08:00

On Friday February 7th Puget Power announced the closing of the sale of its core business at $30 per share. Regular readers of my blog will recall that I recommended a purchase of PSD in November of last year at $18. If one includes the $.25 dividend payment from Jan 16th, and the pro rata dividend of $.04 this transaction returns $30.29, or a profit of an impressive 68%.

While I am very happy to have a 68% win on a 3 month investment (and hope several of you are also counting your fortunes this weekend) I think this is a good time to turn around and look at the trade again to see if it was a wise trade or a bit of wisdom and a bit of luck.

Pretrade Activity

Prior to the trade I listed off my thoughts here. In reviewing them I have the following thoughts:

Insider confidence was high so I am glad to see that this metric proved accurate. Regular readers know that I spend a fair bit of time looking at insider buying to find the next potential company to purchase stock in.
The dividend was appealing. Even if the deal failed I think it is highly likely the dividend would continue to be paid.
Puget Power failed to meet the majority of my criteria for a normal purchase, I think it was a mistake to have discredited this so quickly in my earlier assessment. As I will make note of in a coming post when we stop following the rules of our own systems we are well on the road to disaster.
I think my assessment of $20 intrinsic value may have been a bit rushed. In assessing comparable companies it is reasonable to conclude that if the deal had not gone through the stock would have plummeted to somewhere in the area of $13. Its intrinsic value is higher but the reality of the situation is that the company had restructured itself for the merger and if the merger had failed to go through the company would likely have needed to restructure again- something the market would have surely punished it for.

Post Trade Activity:

I had no sense of when the deal would close. All I had was speculation from other investors like myself and the few clippings that made the newspapers and investment papers.
This last point leads into my next point. I had no real connection with the facts of the case, I did not go to any of the meetings in Washington to understand the situation. I simply read and researched from a distance. In short I did not do my due diligence to stay connected to the facts.
There were a number of good exit points, a number of times shortly after the purchase that the stock touched $25. There is an old expression in investing, "leave a dollar on the counter for the other guy." What it basically translates to is when you make a big win don't chase the pennies if it means you are risking the dollars.
After the announcement of the final merger date we can see in the volume that a number of investors sold off the stock. I am glad to see that in the final week and a bit I did not make the same mistake, once the risk is removed there is really no reason not to ride the trip out and collect.

Final Conclusions:

I think greed may have played too much of a role in my initial selection criteria. Puget Power had a reasonable dividend but on the other criteria to which I normally base decisions on it falls short of the mark. I realized this shortly after the purchase in November and should have taken the early exit points and been happy with the substantial return I would have received.

The basis of Graham style value investing is all about reducing your risk of loss to 0%. By skipping several of the criteria of assessment, being distant from the story itself, and not selling when I had the opportunity- I let greed play too much of a role. Don't get me wrong I am happy with the profit from the trade, but there is always something to learn even when you win.

Why I Fired My Broker

2009-01-24T10:37:00.000-08:00

I haven't had a broker for a few years now but every once in a while someone asks me how to pick a good one and I dig out this story from my own experiences.

In the early days of the turn of the century I had a broker who managed 100% of my portfolio- Stocks, Mutuals, Investment Portfolio- everything. I like to be involved with my money so would have regular meetings to review the status of my portfolio. As many of you know this was about the same time when then market soured and tech stocks fell apart completely. I had seen a substantial down turn in my portfolio and had come to him to get some answers as to why I had been beat up so much, and to understand where we should go to from here. In reviewing my latest holding before the meeting I could see that most of my portfolio was in tech stock that were all purchased at or very near 52 week highs.

When I left the meeting I was more frustrated than when I went in, and it took me a car drive home to figure out why that was the case. I went over our conversation in my head and realized that my broker had done a lovely job of being completely Teflon to the responsibility for the impact to my portfolio. This was not surprising as surely there are forces in the market beyond his control, but even more than that, he had learned absolutely nothing from the lessons the market had taught him. I was reminded of what Albert Einstein once said of insanity:

“insanity is doing the same thing over and over again and expecting different results”

And this was exactly what my broker was electing to do. Instead of taking a step back and evaluating his trading technique and taking some personal responsibility for the mistakes he had made and how he could learn from them he instead elected to shirk responsibility and continue to smash his head against the wall.

I fired him shortly after.

The lesson here is that as investors we can learn more from our mistakes than our successes. Don't be afraid to say I made a mistake and here is what I learned from it. This is the true way to guarantee that you won't ever do it again. Fear of calling something you did a mistake only means that you are doomed to repeat the same mistakes again.

When picking a broker then ask them this very question. What is the worst trade you have made and what did you learn from it? They will likely never have heard this question so you may actually get an honest answer, listen hard to the answer and use it in concert with other criteria to help guide you in picking the best broker.

Vancouver Olympics and Fortress Investment Group

2009-01-22T21:19:00.000-08:00

Vancouver is currently preparing for the 2010 Winter Olympics. As part of the Olympics Vancouver is constructing a residences for athletes. The city had planned to see the residence sold off as condos after the Olympics for a healthy profit. With the credit crunch and the downturn in housing in Vancouver though the story is changing. To boil it down, basically Fortress Investment Group was loaning the money to complete the work on the site and has now stepped back and stopped funding the project, leaving the city of Vancouver in the lurch.
Wherever there is money it is worthwhile to ask; is there a opportunity here for investors?

Lets examine this further. Why would Fortress back away from the current deal, is it a ploy to refinance a better deal with the city and therein create an interesting buy opportunity on its stock?

What possible reasons would Fortress back out:

Unhappy with the interest payment? Unlikely, the deal had a strike price set before the interest rates really began unwinding so they are receiving fair dollar value- rumors are that it was somewhere in the neighborhood of 8%.
Better Opportunities for Fortress to spend on? Unlikely,with the current economic condition there does not appear to be high number of viable options available.
Belief that the construction will not finish? Impossible, the City of Vancouver signed a deal promising to see the project through to completion.
Fortress does not have the capital and is using a loophole to escape. Now we are getting somewhere.

The last year has been tough on Fortress, it has posted massive losses over the last two quarters and its stock price (which in this case can be thought of as a thermometer of investor sentiment) is under $2 after having traded as high as $30 a year ago, it has also faced several recent downgrades. It is highly unlikely that Fortress is finding it easy to come up with the millions of dollars in funding to finance the rest of the construction.

Is there a buy opportunity here, unlikely. I see the likely results of this being any of the following:

The city/province will finance the project to its completion.
The city will sell the site at a deep discount to another developer with the promise that they will complete the site on time.
The city will find one of the few fiance companies left out there to carry the project through to completion.

All in all I don't see much of a future for Fortress in this situation, and therein no real buy opportunity.

Stock Analysis Methanex

2009-01-18T01:00:00.000-08:00

Originally published on: Div-Net
After much searching I found a stock screener for Canadian stocks (more on this in another post). I was able to assemble a Graham style screener with the following criteria:

Exchange TSX
P/E less than 15
Dividend Yield > 3.5
Average EPS > 33%
Revenue > $550M
Current Ratio > 2
Price/Book Ratio less than 1.5

Up popped two companies one of which is Methanex (MX-T). Showing up on the screener is not sufficient to merit my investment. So here is the abridged version of my analysis. Before diving in though I am compelled to say that I never analyze a company with the intent of buying and selling it within a few months. Also please, please this is my analysis any investment you make should supplement what I present here and possibly involve consulting your own investment consultant.

Company Intro

Methanex is in the business of extracting and shipping methane (surprise). Methane is the central component in natural gas (about 87% by volume). Its principal use therefore is in heating and energy production in addition to a number of industrial uses.

Company Fundamentals

P/E ratio 3.12
Yield 5.69%
Average EPS Growth Rate 650%- only 6 yrs available here are the exact numbers:
EPS 3.63 (2007), 4.4(2006), 1.39(2005), 1.95(2004), 0.06(2003), 0.18(2002)
Growth Rate -17.5%(2007), 216.55%(2006), -28.72%(2005), 3150%(2004), -66.67%(2003)
Avg EPS 5yr growth rate 86.3%
Revenue $2250.99M (2007)
Current Ratio 2.79 ($988.59M / $354.42M) See here for how this was calculated.
Price/Book =.76
Return on assets 12.92
Return on Capital 2007 1.47 ($2266521 /($2869899 - $1335354))

Revenue Looks solid and continues to grow.

Interesting pattern here.

Analysis of General Market

As Methanex essentially trades in a commodity it is worthwhile to look at the overall health of the industry:

Data collected from: http://www.methanex.com/products/documents/MxAvgPrice_Dec232008.pdf

We see then that generally last year was a good year for the sales of methane with an average strike price of $1.65 compared to the year before of $1.42. There is some cause for concern though with the January prices receding back to $.70, a price not seen since December 2003.

Understanding How the Company Came to be Cheap

Working with Argentina: Reading the company's financial statements one can see that a large part of the business in based in Chile. Chile has, in the past, been refining Argentinian gas. Argentina though has for the past few years blocked the export of gas due to concerns over a possible shortage within its own borders. As a result Methanex claims that its plants in Chile ran at around 60% of max production. Reading some more on this it appears Chile has made great efforts to make itself fully independent of Argentinian resources over the last few years and should continue to do so in the future. One news story quoted a senior Chilean government representative as saying they would be gas independent of Argentina by the end of 2008. As such we should expect that this 60% should grow steadily in the future closer to the company average of 87.1% it has been running over the last 10 yrs.
Refinery in New Zealand: Methanex has a refinery in New Zealand after having fired it up earlier this year they appear to have shut it down again this quarter. This news appear to have scared off some investors but in my opinion this appears to be just a prudent business decision based on market conditions. In reviewing Methanex's financial statements starting and stopping facilities appears to be a regular activity with a plant in Canada currently offline.
Softening in the Price: As we can see from the chart above the price of methanol has dropped off substantially for January of 2009.
Global Downturn: Every area has seen a downturn over the last few months.
Possible End of Year Capital Gains Losses: As we are at the end of the tax year investors tend to sell more than they buy so as to assume the necessary tax losses.

Other Opinions on Methanex

President Lincoln believed in surrounding himself with people who did not necessarily agree with his opinion. I believe this is one of the best ways to test your research. I would encourage you to read the following, please keep in mind that some of these links refer to the American stock, not the Canadian so prices targets will differ:

Summary Comments

Negative

Methanex was incorporated in 1992- traditionally I like to see a company with a longer history.
Methanex started paying a dividend in 2003 so the history of a long consistent dividend is not there.
The Methane market has gone soft-like everything else.
Methanex is likely to report negative results for the year.

Positive

Methanex has never decreased or canceled a dividend it has also raised its dividend each year since inception by an average of 21.2% (usually in the second quarter of the year).
Methanex has been buying back its own stock since 2004.
The issues in Argentina appear to be coming to a conclusion with the Chilean government stating it would not be dependent upon Argentinian gas by the end of 2008.
While industry is the largest consumer of electricity and a global downturn will decrease residential energy needs will most certainly be a constant.

Disclosure

At the time of writing the author is in the process of purchasing MX.

Have an opinion on this stock, please leave a comment would love to hear from you.

Easy ways to Make Money: Secretary Calls

2009-01-16T15:41:00.000-08:00

Ask anyone who works at a large corporation and they know that if you want to learn the dirt about what is going on in the office you just need to talk to the secretary. Secretaries know everything about what is happening in the company, they may not have the acumen to diagnose the severity of problems but they certainly have the acumen to understand how upset their bosses are that week.

Secretaries are a great resource in understanding the health of the company. This may sound a bit foolish but I will often give an executive secretary a quick call before making any sizable investment in a company.

I recently made one call to a company, with some simple honesty about being an investor and wanting someone's personal opinion who works at a company I learned the water cooler gossip. Nothing unethical here just asking a few questions about someone's personal opinion, and nothing that would get anyone in trouble with their N.D.A.

I know this sounds silly but try it some time, again in the big picture of things what is a five minute phone call with a receptionist when you consider this is your hard earned money.

Easy ways to Make Money: Investor Calls

2009-01-13T15:14:00.000-08:00

Many listed companies will setup an investor call every quarter to allow shareholders and others to ask questions about the company's latest financials and overall health. Investor calls are often skipped by the common investor as they are thought to be too technical or too involved. But, to pull a Yogi Berra, "you can hear a lot by listening". So what if you don't know what a tipping point ratio is, so what if you don't understand what the market bend is, it does not matter in the least. Listen to how the people in these calls talk as much as you listen to what they say.

The execs they march out for these calls are salesmen here to persuade investors to buy their company's stock, if you don't feel sold after a call it is probably by no shortcoming of your own- pay attention to that gut feeling. There have been some phenomenal details revealed (purposely and accidentally) in more than one of these calls. In an Enron call just prior to the collapse one exec went as far as to call an investor an "a**hole" after asking being a tough question- think he was trying to cover up an obvious problem in the company?
Another call I remember sitting in on involved an exec being asked if he thought his company would survive the year, his response was something to the effect of "Well John that is a tough question...". I ran for the door.

There is also another opportunity for the common investor with these calls- listening to other analysts before they recommend a buy or sell. Listen to the questions they ask, are they focusing in on one area of business and asking a lot of questions- perhaps this is something you should look at more deeply. Are the analysts upbeat? Maybe they are all going to post positive buy rating on the company.

At the end of the day do not skip the call because you are afraid of not understanding the nature of the call. When you consider the amount of time you spend deciding if you want to buy a company an extra hour or two listening to an exec and some analysts talk is pretty insignificant, pick up that phone and listen in you never know you might just hear something!

Buy What you Know: A Recipe for Investing in Tough Markets

2009-01-10T10:24:00.001-08:00

"Buy what you know", this quote first coined by Peter Lynch has been interpreted a number of different ways throughout the years. I am going to add to that list and suggest there is a way to interpret it in this economy and secure your investments.

During the stock market crash of 1929 almost all companies plummeted, but some investors still profited by picking companies that could make money in the economy of the day. If some of the dire predication about how long the current recession will continue are correct we may be entering a similar phase. So what companies are setup to make money when times are tough? Companies that serve our core human needs.

Let me give you an example, in the 1920's, prior to the crash, radios were flying off store shelves all across the country, farmers were buying new tractors and automobile sales were just starting to kick into high gear. When the crash came these markets evaporated, we don't need radios, new tractors, and new cars- we can live without them or at least continue to utilize the ones we current have. Not all people are responsible spenders but when it comes down to choosing food or a radio even the most irresponsible will tend towards the correct choice.
In today's world the same can be said again of plasma TVs, GPS controlled tractors, $7 coffee, and SUVs- we simply don't need these things to exist.

My recommendation then is to "buy what you know", look at what you purchase on a monthly basis that you know you could not do without- those are the types of products to invest in. Notice how I say products here, though not companies, once you have found the products the next stage is to find the best priced healthiest companies that make these products.

Unless I starve to death I am always going to need food, water and housing- explore markets like these, look at companies like grocery store chains, and energy providers. Above all else find those sectors and those companies that you know have stability and enduring market value written into their very names.

Canadian Stock Screener

2009-01-06T14:53:00.000-08:00

As I have mentioned in previous posts, screeners are an important tool I use to narrow the focus the list of companies I look at. There are a number of stock screeners out there for US markets, Google Finance and Yahoo both sport some excellent tools. Finding a screener for Canadian stocks has been infinitely more difficult. MSN and the Financial Post both support very rudimentary screeners. The Financial Post will also sell you something that "may" be better, but finding something I can at least try before I buy has been tough.
Then I stumbled onto ChartSmart. While ChartSmart doesn't have a free license they at least provide a 30 day demo in order for you to experience their product.

ChartSmart is a very sophisticated product- not pretty, just sophisticated. It allows the user to perform both screening of Canadian stocks and technical analysis of stocks. For my purposes I was able to create a custom screener for Canadian stocks that meets the same Graham style criteria that I have used in my U.S. screeners (see here for more on this).

I hope that I will be able to find a free screener in the future, but for the next 30 days I am at least set!

Disclosure: The author of this post did not receive any compensation for the recommendation of this product.

Killing Sacred Cows Book Review

2009-01-05T16:12:00.000-08:00

“

Some years ago I was struck by how many false things I had believed, and by how doubtful was the structure of beliefs that I had based on them. I realized that if I wanted to establish anything in the sciences that was stable and likely to last, I needed - just once in my life - to demolish everything completely and start again from the foundations.”

P. 1, Rene Descartes, Meditations on First Philosophy

After having read through several heavy investment books over Christmas I was fortunate enough to have Killing Sacred Cows (PP.270, Green Leaf Books, 2008) fall into my hands. This is not your typical investment book please be warned.

In his book Garrett Gunderson asks a fundamental question- why do we hold the beliefs we do about money, or as he puts it:

“The purpose [of this book] is to get us to stop and think about the advice we hear instead of quietly internalizing.”

P. 233, Garrett Gunderson, Killing Sacred Cows

For Gunderson each chapter is an opportunity to explore an expression, saying or typical belief about money. He makes a compelling case that each of these expressions is itself a money myth.

Ch1- There is only so much money to go around (The Finite Pie).
Ch 2- Compound interest can backfire (Your in for the long haul).
Ch 3- Making money is key (It is all about the numbers).
Ch 4- Security comes from others (Financial Security).
Ch 5- Money is power.
Ch 6- High Risk = High Returns.
Ch 7- Insurance is a waste (Self Insurance).
Ch 8- Avoid Debt like the plague.
Ch 9- A penny saved is a penny earned.

Killing Sacred Cows cannot be considered a classical investment book- in fact Gunderson in many ways is recommending that we do not invest in the traditional senses at all. If one follows his recommendations we should never invest in Mutual Funds or ETFs and instead take our money and invest it directly in our own educations or business as they are the true vehicles for returns.

I resist some of the conclusions Gunderson makes- the idea of purchasing as much insurance as possible still feels wrong. Making a decision based on feel lacks the rigor that any investor should apply to a decision, so Gunderson has certainly achieved his purpose of forcing the reader to question those beliefs we hold so close.

Gunderson has written a wonderful book in Killing Sacred Cows, the organization, visual elements and collection of fabulous quotes that litter the book make it a great read. I would recommend it for any investor. Even if you find you disagree with the opinions it is still a worthwhile exercise to explore your conclusions and look at them from a differing perspective.

Marty Whiteman On Risk, & Graham and Dodd

2009-01-04T15:40:00.000-08:00

A little food for thought on a Sunday afternoon. While I don't agree with Whiteman on a number of issues I do appreciate the arguments he makes. Have a look and see what you think.

If you are getting this via email try the following link:
http://www.youtube.com/watch?v=uwbToH2TAco

http://www.youtube.com/watch?v=Hlj3fMUx73c

Banks Stopped Investing and Started Speculating

2009-01-01T12:57:00.000-08:00

Over Christmas I have had a bit of a chance to catch up on some reading, one of the books I read through was Garrett Gunderson's Killing Sacred Cows: Overcoming the Financial Myths That Are Destroying Your Prosperity. In Gunderson's book he suggests individuals look at investing in the same way that banks do as they have been so extremely efficient. As Gunderson puts it banks mitigate investment risk in personal loans by doing the following:

“

Check your credit.
Secure their investments with collateral
Require a down payment
Determine the interest rate
Determine the payment
Determine the time period for each investment
Verify your work history and income
Have an exit strategy that allows them to be profitable, or to at least return their initial capital, in almost any scenario imaginable.
Transfer their risks to the borrower in any way possible.

”
The goal then from the bank is to remove risk, and securing the loan all by investing in the individual, knowing that individual, and creating firewalls to secure the investment.

This looks very similar to Benjamin Graham's discussion in the first chapter of his Intelligent Investor where Graham talks of the differences between investing and speculating:

“
An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

P. 18, Benjamin Graham's The Intelligent Investor

In thinking about the current financial crisis it seems to me that what really lead to our current predicament is that banks stopped investing and started speculating. They lost track of what they were so good at and started making decisions based on limited information and partial data.

Let's look at the list again and reflect on the what banks have actually done over the last few years:

~~Check your credit.~~
No limited credit checks were preformed and massive overstating of income occurred.
~~Secure their investments with collateral.~~
No, sometime collateral was not required at all.
~~Require a down payment.~~
No, sometimes another loan was made to create the down payment.
~~Determine the interest rate.~~
No, some loans had interest rates that were set and then reset later so the consumer or lender never really knew what the rate was going to be.
~~Verify your work history and income.~~
No, not at all.
~~Have an exit strategy that allows them to be profitable, or to at least return their initial capital, in almost any scenario imaginable.~~
Obviously not.
~~Transfer their risks to the borrower in any way possible.~~
Laughably no.

This lead to the crisis, now we are in essentially a credit freeze where gaining access to funds is difficult if not impossible. I would argue that it is not because banks are fearful to loan money, they simply do not have the tools they once had to assess the safety of the investments. Those tools were thrown out piece by piece over the last few years and installing them back again, or creating a new set of tools is difficult.
Understand, the industry went through a massive change to get to where it currently is and that getting back to what it was so efficient at in the past does not happen overnight.

Presidents and the Market

2008-12-29T00:36:00.001-08:00

I was flipping through some books in the book store over Christmas I saw something similar to this in the Investor's Almanac. So I borrowed the idea for this post (thanks Investor's Almanac).
With President Elect Obama's swearing in ceremony coming up in about 25 days it is somewhat interesting to have a look at what the first year in office typically looks like for new U.S. presidents.

President Bush(R)
President Clinton(D)
President G. HW. Bush(R)
President Regan(R)
President Carter(D)
President Ford(R)
President Nixon(R)
President Johnson(D)
President Kennedy(D)
President Eisenhower (R)
President Truman(D)
President Roosevelt(D)
President Hoover(R)

I'll let you draw some of your own conclusions on the info presented here, there seem to be a number of conclusions that can be made.

The Right Investment Tools For the Job

2008-12-23T21:53:00.000-08:00

“Give us the tools and we will finish the job.”
Winston Churchill

The evaluation of companies was once a very laborious exercise. Information about historic earnings and historic pricing information involved significant research and compilation. Today that effort is significantly reduced, thankfully there are numerous sources one can access to retrieve sets of desired information. Choosing just one source in all these options is often difficult though. Today we are going to have a look at some of the tools I use in analyzing companies I would love to hear so of your feedback and suggestions on other tools you use.

Tool 1: SEC Data

The Security and Exchange Department regulates that members of companies submit filings on buying and selling that they do in their own company within a few days of the transaction. There is a wealth of information here if you believe in the adage "people sell stock for all sorts of reasons but only buy it for one".

The SEC after much fighting made this information available via a website. http://www.sec.gov/edgar.shtml The usability of this website is, well, poor. There are alternatives if you happen to have $30K lying around to buy the "public" data. Or you can build your own data feed like I did.

Baring both of these alternatives I think the best source to get updates on SEC filings comes from J3SG they have a free daily email that comes out that shows some of the major trades from the day, they also have some interesting charts you can browse and it is all free.

Tool 2: Historical Data

Being a value investor the next place I go to is looking at fundamental analysis data such as balance sheets and income statements. Data is data so the key factor that sells me on a source is the number of years of available data. The winner in this category is Morningstar once you have an account setup with them you can access ten years of data.

Great site with 4-5 year data package and it is free!

The Morningstar website is a bit clunky though so if four to five years of data is acceptable Google Finance has a fabulous free site where info can be tracked down much more quickly.

Tool 3: Ratios

It is impossible to compare companies of different sizes and revenue streams without the use of some ratios.

Wow that P/E is high compared to the industry, but wait, the dividends are very different.

I personally like the ratios that are presented on Reuters they provide a number of the core ratios that I look at and also provide comparisons between the company, the sector, industry and market which helps greatly as a P/E of 10 may look good in one sector but absolutely dismal in another sector.

Tool 4: Charts

I am a not a huge fan of technical analysis but understanding a few things about a stock's moving pattern certainly does not hurt when you are getting ready to pull the trigger. I look at two sets of charts.

Looks like the market wasn't too excited about PSD purchasing another energy source.

I look at Google Finance to get a sense of any news stories I may have missed during my research of the company, and then I look at Yahoo Finance to review the insider trading patterns and stock volumes.

That is basically it my tools, the rest is just hard work. So what tools do you use?

* The author of this article was in no way paid or compensated for promotion of any website or service mentioned in this article.

Graham vs. Greenblatt (Session 5) Bringing it all Together

2008-12-22T18:42:00.000-08:00

We made it to the final installment of our Graham vs. Greenblatt series. Throughout the series we examined each of the ratios that Greenblatt recommended in his book The Little Book that Beats the Market. The final posting will look at how Greenblatt draws the ratios together and bring this all back around, so lets get into it.

What is it?

Greenblatt says:

“It then assigns a rank to those companies, from 1 to 3,500, based on their return on capital. The company whose business had the highest return on capital would be assigned a rank of 1, and the company with the lowest return on capital (probably a company actually losing money) would receive a rank of 3,500...

Next, the formula follows the same procedure, but this time, the ranking is done using earnings yield...

Finally, the formula just combines the rankings.”

P53-54.The Little Book that Beats the Market

What does it tell us?

Greenblatt creates a simple formula, he takes a value component (Return on Capital) and a Investing component (Earnings Yield) he ranks all companies best to worst on both these criteria and then sums the two rankings. What this does essentially is value both components equally, ROC and Earnings.

So What Would Graham Think about these Rules?

The Graham we see in The Intelligent Investor was all about buying value. When the value doesn't exist don't buy, sit on the sidelines. If one follows Greenblatt though you would buy in all conditions. Please note I am not making a comment about timing markets- merely that in an overpriced market Greenblatt would buy the cheapest of the expensive stocks while Graham would take the day off.
Return on equity treated with equal significance as value measurements? Graham would not have thought too highly of this. Nothing should be as important as finding value.

Summary:

We have spent a considerable amount of time looking at Greenblatt from Graham's perspective. To conclude the series it is worthwhile to highlight some of the major points we raised in the series:

Graham believed in finding the true value of companies. Where Greenblatt uses Market Capitalization in his key ratios Graham would have cringed. Market Capitalization puts a value on the company based on what the market thinks; not what the company is intrinsically worth.
Graham wanted to look at companies over the long haul. His ratios pulled 5yr and 20yr data to get a picture of the company. Greenblatt on the other hand looked at the company today.
Graham was happy to sit on his wallet if the time wasn't right. If the value didn't exist walk away. Greenblatt on the other hand was prepared to buy on any given day.

Final Thoughts:

Greenblatt has a creative investment system with proven results. There can be no doubt it is a value based system, but he is far less strict than Graham's. Personally I think there is merit in the way that Greenblatt looks at investment opportunities. Bringing in an understanding of Return on Capital is a welcome addition to the value perspective, to hold it in the same high regard as Greenblatt though may be a mistake.

If you missed any of the earlier series please have a look at the earlier parts to the series:
Part 1 Graham vs. Greenblatt (Session 1)
Part 2 Graham vs. Greenblatt (Session 2) Buy America Buy Big
Part 3 Graham vs. Greenblatt (Session 3) Return on Capital
Part 4 Graham vs. Greenblatt (Session 4) Buy some cheap earnings

Graham vs. Greenblatt (Session 4) Buy some cheap earnings

2008-12-18T12:00:00.000-08:00

In our last post we looked at Greenblatt's use of Return on Capital as a means of identifying quality companies that know how to turn a small investment into a substantial return. In this posting we will look at his next criteria earnings yield.

What is it?

EBIT
enterprise value

What does it tell us?

EBIT is defined as Earning before Interest and Tax, as we discussed in the last posting that works out to the raw income flowing into the company.

Enterprise Value is defined as market capitalization - cash and cash equivalents + preferred stock + debt

Market Capitalization is defined as the current number of outstanding stock multiplied by the current stock price.

So on the denominator what you have is the total of what it would cost to buy the company. To elaborate, if you bought the company outright you would have to buy all of the outstanding stocks + preferred stock + pay off all the current debt and only then could you access the cash reserves in the business.

Taking that into account what the ratio gives us then is an equation where you look at what percentage of the earnings you are buying if you paid for the company outright.

An example: the company has 1M stock outstanding at a current price of $4, they have no cash on hand (or units easily converted to cash) they do not have any preferred stock, and they have $1M in debt. This gives you a market capitalization of:

$4 *1M (stock) - $0 (Cash) + $0 (Preferred stock) + $1M (Debt) = $5M
So to buy the company outright would cost you approximately $5M

If the company in question raises $.5M per year in outright earnings you have an earnings yield of .5/5 or .1 or 10%. To put it another way if you took the $5M out of our pocket and bought the company it would take you 10 years to get the $5M back in your pocket again- assuming you are able to take the raw earnings directly.

What Greenblatt has done then is selected an alternative to Price Earnings Ratio to find companies with value.

So What Would Graham Think about these Rules?

As we stated in a previous post I can't imagine Graham would have been wild about using equations with Market Capitalization. Market Capitalization is a measure of how the investing community values the stock, it is an emotional assessment and is not a valuation of the actual bricks and mortar company itself.
Same as the last posting he might also be frustrated by the fact that this is one period- a company can always leap up and have one great period and then plunge back- it is called regression back to mean and it happens.

Be sure to check the previous parts in this series:

Part 1 Graham vs. Greenblatt (Session 1)
Part 2 Graham vs. Greenblatt (Session 2) Buy America Buy Big
Part 3 Graham vs. Greenblatt (Session 3) Buy Some Cheap Earnings

Graham vs. Greenblatt (Session 3) Return on Capital

2008-12-17T00:00:00.000-08:00

Greenblatt in his book The Little Book that Beats the Market advocated a simple method for attaining substantial stock returns. In this series we are looking at the particulars of this investing theory to both understand why he advocated the elements of this theory and what Benjamin Graham would have thought of the approach that Greenblatt was advocating. The next part in this series looks at Return on Capital or ROC.

What is it?

Earnings Before Interest and Tax (EBIT)
Net Working Capital + Net Fixed Assets

EBIT is a raw calculation of the regular company income excluding the income from irregular or non-reoccurring activities.

In the denominator Greenblatt doesn't use the traditional element of Enterprise Value. (Should he have we could have jumped all over him for using another equation that leverages Market Capitalization otherwise known as shareholder sentiment) Instead he uses:

Net Working Capital = Total Assets - Total Liabilities
Net Fixed Assets = Purchase Price of All fixed assets (Land, buildings, equipment, machinery, vehicles, leasehold improvements) - Accumulated Depreciation

What Does it Tell Us?

By taking EBIT and putting it over Capital + Fixed Assets you have an earnings formula. You are saying what does it cost to run this money making machine? Let me explain.

Consider any company to be a money making factories- as essentially that is what we, as investors, hope it will be. If the company bought one machine that costs $100M (Net Fixed Asset), they own the machine outright and require no other assets (Net Working Capital) and the machine creates 10 $1M bills per year (EBIT) then you have:
$10M/ ($100M-$0) or return on capital of 10%. Or it put it another way for every dollar invested into the core of the company $.10 are generated in raw earnings.

The higher the number the better the return the company gets from buying the money making machine. A company therefore that has the same machine but is only capable of producing 1 $1M bill is therefore a less appealing investment.

So What Would Graham Think about this Rule?

Graham would have seen the value of understanding the return on capital. One can imagine though that the most recent return on capital would not suffice for Graham. He wanted a company with a past. There are always flash in the pan companies that have a phenomenal return on capital for one year. Just look at the company that makes croks if you need an example, for the year they were popular they had a fabulous ROC but the year before and the year after showed dismal results. One can imagine Graham would have thought that a year was simply not long enough. True, Graham believed in P/E ratio which can be accused of the same shortcomings, but he complimented that with an insistence that the company also possess

“Some earnings for the common stock in each of the past ten years.”

P348 The Intelligent Investor

This would mitigate some of the flash in the pan potential.

Be sure to check the previous parts in this series:

Part 1 Graham vs. Greenblatt (Session 1)
Part 2 Graham vs. Greenblatt (Session 2) Buy America Buy Big

Graham vs. Greenblatt (Session 2) Buy America & Buy Big

2008-12-16T13:00:00.000-08:00

Joel Greenblatt is a modern value investor, his approach as we outlined in our previous post was to find value companies like Graham, but he also wanted a company that has potential for the future. The first set of criteria looks very similar to Graham.

What is it?

Establish a minimum market capitalization (greater than $50 million is recommended).
Exclude utility and financial stocks and any foreign companies (Non US).

What does it tell us?

Market capitalization = Number of outstanding stock * Current Price of stock

Greenblatt wants this for the same reason that Graham wanted a company with Revenue over $100M- Big companies fail less frequently than smaller ones. Greenblatt also has a few other points to make in this respect:

“small capitalization stocks did not appreciably outperform large caps”

P.149 The Little Book that Beats the Market

“for larger stocks (market caps over $1 billion) the results for the magic formula remain incredibly robust”

P.150 The Little Book that Beats the Market

So basically go big because it works.

Greenblatt excluded Non US companies. The conclusion is based around the fact that some countries have loose regulations around investing. Greenblatt also seems to argue that there is no need to take on the additional risk if there are a sufficient number of American companies to invest in.

The final rule of excluding financial and utility companies is a bit confusing and is only addressed in a footnote:

“Utilities, financial stocks and companies where we could not be certain that the information in the database was timely or complete were eliminated.”

P.138 The Little Book that Beats the Market

So What Would Graham Think about these Rules?

Graham would have scratched his head a bit about the market capitalization. Market Capitalization is large as a result of investor consensus and is not tied to any true financial element of the company. Terrible companies can have a huge market capitalization, just look at the dot com bubble companies if you need examples. The way Greenblatt seems to say he used it because it works for his system would probably also cause some concern to Graham. If a consistent element for success was that the company had a 'G' in its name would Greenblatt have used this? I think we can temper this point though due to the manner that the book is presented- it is not intended to be a financial study it is intended for the junior investor.
Excluding foreign companies would not have been a point too difficult for Graham to understand. He recommends against some foreign endeavors:
“But we do know that, if and when trouble should come, the owner of foreign obligations has no legal or other means of enforcing his claim.”
P. 138 The Intelligent Investor.
The avoidance of utility and financial companies based on the reasoning presented would be a bit surprising for Graham though as he often recommended such endeavors.

Hope you enjoyed part two of the series. Drop me a line with your thoughts or questions and stay tuned for the next session where we will look further at some of the other criteria that Greenblatt put forward.

Be sure to check the previous parts in this series:

Part 1 Graham vs. Greenblatt (Session 1)

Graham vs. Greenblatt (Session 1)

2008-12-15T13:05:00.000-08:00

Graham passed away in September 21, 1976 well before Joel Greenblatt graduated from Wharton in 1979 but a linkage between the two men's investment theories is not difficult to find. Greenblatt during his time at Wharton went to great lengths to study the value approach that Graham had devised (there are stories that Greenblatt entered vast amounts of stock data by hand into a mainframe and then ran tests on it using Graham's system). He saw the benefit that could be returned from purchasing companies that were inexpensive.

Greenblatt struggled with Graham's rules- like so many professional investors do. If you stick to Graham's rules you make no estimation on the future and deal only with the past, you want strong companies with strong histories that are currently cheap. But if you do this you have two problems as a broker or hedge fund manager:

You don't buy much as there are few opportunities.
Besides the research you are doing on the companies what value do you create for your investors? Brokers and Hedge Managers are forced by investors to be crystal ball readers- they have to see tomorrow, not yesterday.

To be successful Greenblatt devised an alternative system. Find companies that are inexpensive like Graham, but also have a great rate of return meaning they can turn around sizable profits with little investment. This high return on investment (ROC) would intuitively seem to indicate that the company will have a good future: as investment increases the return should logically jump higher. Should the ROC decrease then it was already pretty high to begin with so there is still safety in the position.

What Greenblatt ultimately settled on is what is put forward in his The Little Book that Beats the Market:

Establish a minimum market capitalization (greater than $50 million is recommended).
Exclude utility and financial stocks and any foreign companies (Non US).
Determine company's earnings yield = EBIT / enterprise value.
Determine company's return on capital = EBIT / (Net fixed assets + working capital)
Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital.
Invest in 20-30 highest ranked companies, accumulating 2-3 positions per month over a 12-month period.

In the coming short series we will break down each of these criteria and compare it back to Graham's technique to see how they are similar and how they differ.

The truth about money

2008-12-14T09:26:00.000-08:00

I watched this series a number of years ago and found it very enlightening. After you watch the first in the series be sure to seek out the other parts on you tube.

Automotive Bailout

2008-12-13T16:50:00.000-08:00

A little bit of fun one today after so many serious articles. I was talking to my good friend the other day who works at a newspaper he was telling me how shocked he was that the bailout did not pass in its current form. Apparently he did not read my post in November :)

This is a perfect example of Mr. Market in action. In this modern era newsrooms don't do investigative journalism, they don't have the budgets, they recycle stories and do very limited research. If as a value investor you do your own research you can get the upper hand on the rest of the market.

New Design

2008-12-11T23:06:00.000-08:00

I was reviewing my web stats and less than 1% of viewers have a 800 x 600 resolution. So I started playing with the design a bit tonight at 800 x 600 I have made sure the text is all still very visible the sidebar goes off the screen a little. Please let me know if you like, or don't like it.

Building a Simplified Graham Value Stock Screener

2008-12-11T16:39:00.000-08:00

I did a search and could not for the life of me find a link to a prebuilt Google screener for Graham's value investing system. So lets quickly build one:

Through the Graham series we said we would only consider companies that:

Had a P/E of less than or equal to 15.
A book value of greater than or equal to 0.01.
A price to book value of less than or equal to 1.5.
A current ratio of more than or equal to 2.
Earnings Per Share Growth rate on average of greater than or equal to 33% over 10 years.
Revenue of greater than $100M ($555M)
A history of consistent dividend payment.
A dividend yield of greater than or equal to 3.5%.
Some earnings for the common stock in each of the past ten years.

Putting that all together 1, 3,4,5,8 are a piece of cake.

2. Google doesn't provide a book value option, but if we recall Book Value is (Total Assets – Intangible Assets (Goodwill) – Total Liabilities) So if a company has a Current Ratio of 2 that means they have 2 times as many assets as they have liabilities so therefore they have a book value greater than 0. Also having a P/E ratio over 0 indicates there are some earnings.

6. Google doesn't have a revenue option, you could go with Market Cap but that does not really express what we are after here.

7. Google doesn't have dividend history so more research would be necessary based on the candidates.

9. Google doesn't have a 10 year P/E ratio yet- hopefully they will add it in soon so we can set to 0.

So that leaves us with this:
Graham Google Stock Screener

As you will see it chops the list of viable candidates down a fair bit though. Remember showing up on the scanner does not indicate you should buy, it means you should look at it :)

Happy hunting!

Buy with a solid Dividend (Session 7)

2008-12-10T22:48:00.000-08:00

The final page in our series on Graham's investment theory is dedicated to dividends. I saved the best, and most contentious for last. Investors love to split themselves into groups- technical analysts, fundamental analysts, value investors, growth investors. In the same vein there are dividend investors and growth investors. Without further adieu let's get into it.

What is it?

At the end of every financial quarter a well run business will have funds left in its budget. The business can choose to invest that money into the business in order to hopefully make more money in subsequent periods- buy machinery, pay off debt, buy another smaller business, open another store etc. Or the business can give the excess money and give it back to its investors as a reward for investing in the business- this is a dividend. Dividends can be paid on any schedule, quarterly, yearly or any combination of the above.

What does it tell us?

A company chooses a direction when it decides to pay a dividend. They have decided to be a type of a business, the type of business that traditionally has somewhat slower growth because it is returning the investment to the shareholder. These businesses get a pass on lacking big bang growth- but it comes at a cost. The business must be consistent about the dividend. Buying a company that pays a dividend for one quarter then cancels it for a year and then reinstates it again is giving mixed messages on what type of business it is.

A dividend is like a snooze button for a long term investor. If I buy a stock I expect returns. If the stock is consistently going up I can see those returns as I know I can sell that stock off in an instant for a healthy reward. But what if it does nothing or even goes down- then what? Well then I either have to liquidate and take my loses or grit my teeth and hope for a return to profitability on my position.

Here is an alternative story for you though. Imagine my stock goes down or stays the same could I entice you to be more patient with the stock if I give you 3% of your money back now and make you believe I will give you a further 3% back in another few months? Graham liked dividend stocks, they rewarded this type of patience. We have talked all the way through this series about different measures of Graham's theory being used as insurance techniques- this is the biggest of them all: even if I am wrong about the potential of a selected company I know I can receive a return from my investment so long as the company continues its dividend.

Incidentally dividends also have another interesting feature about them- they cause more consistency in the price of a stock. Every time a dividend period is coming close no one wants to sell their stock as they know it won't be long until a free payday arrives. Even if there is bad news in this period more people will hold the stock and think about the move instead of the knee jerk reaction that traditionally happens in the market.

What does Graham use?

Graham liked dividend paying stocks as we mentioned above consistency is important. If the company has a long track record of having paid a dividend then there is a very good chance it will continue to do so in the future. Graham liked a company with an:

"Uninterrupted payments for at least the past 20 years."
P. 348 The Intelligent Investor

While this is challenging to find the sentiment is clear- if they are consistent about the dividend they will probably be consistent in the future.

"the defensive investor should be able to count on the current 3.5%"
P.25 The Intelligent Investor

Graham also looked at stock investments as an alternative to bond investments. So if a stock investment can't beat a comparable low risk bond's rate of return why would I buy the stock? To put it another way, if you could get 5% in a savings account why on earth would you risk the money in the market unless you knew you could be fairly sure you could beat that 5%.

Hope you have enjoyed the series on Graham investing please vote on the poll to the right to guide what series we will look at next and please be sure to see the other parts of this series if you missed any:

Intro
Buy on the Cheap: Price/ Earnings
Buy a Company with a Future: Book Value
Buy on the Cheap: Price/ Book Ratio
Buy a Company with a Future: Current Ratio
Buy a Company with a Future: Based on its Past

Buffet on the Economy

2008-12-10T12:48:00.000-08:00

I enjoyed this so much I thought I would share it. Clipped from a Fortune Magazine Blog earlier:
Warren Buffett emailed this note to the directors of his company, Berkshire Hathaway (BRK.B), Tuesday after he heard that the U.S. Treasury sold $32 billion in 4-week bills at a yield of 0%:

“This should be bullish for Berkshire. With great foresight, I long ago entered the mattress business in a big way through our furniture operation. Now mattresses have become fully competitive as a place to put your money, and sales will soon take off.”

It certainly does underscore the cool nature of Buffett during these hard times, and a reminder of how we should all keep our heads on and look for value.

Insider Trading December Report

2008-12-08T22:06:00.000-08:00

Every day I pull a list of the insider traders then I shorten the list to be only buys done by roles that have a proven track record (see my previous post for a little on this). Finally I run an evaluation of the companies based on some of the ratios that Graham used to find companies that are cheap (See my earlier series on this).

This is just the start for me though after a company reaches this level it is worthy enough for me to look at it further not necessarily.

Anyway a few of you asked so I'll post the 3&4 star companies that have made my list between November and December. Happy hunting!

symbol	P/E Ratio (TTM)	P/E Low - Last 5 Yrs.	Price to Sales (TTM)	Price to Book (MRQ)	Price to Cash Flow (TTM)	Dividend Yield	Dividend 5 Year Growth Rate	EPS - 5 Yr. Growth Rate	Quick Ratio (MRQ)	Current Ratio (MRQ)
TIN	0.29	0.56	0.09	0.43	0.24	12.94	77.79	77.98	1.29	2.19
BEZ	6.49	7.9	0.35	0.77	3.71	4.66	5.51	24.69	1.36	2.48
AIRT	3.02	4.66	0.16	0.75	2.77	4.92	15.81	59.77	1.5	2.67
CMC	4.77	5.65	0.1	0.65	2.91	5.12	41.26	64.07	1.05	1.86
BWS	5.97	NA	0.09	0.36	2.42	5.86	9.51	4.59	0.52	2.04
ESP	12.7	11.28	1.78	1.5	12.18	4.61	66.66	28.22	7.95	12.51
ETH	7.47	9.11	0.38	0.94	4.83	8.14	28.62	0.37	0.86	2.23
CDI	6.46	8.55	0.16	0.6	4.38	5.24	--	49.6	3.3	3.3
DOW	6.76	7.7	0.28	0.9	3.54	9.03	4.06	--	0.86	1.39
DMLP	7.22	10.8	5.23	3.24	5.89	22.02	19.5	4.37	30.33	30.33
DTE	9.88	NA	0.62	0.97	3.9	5.95	0.58	5.41	0.82	1.04
CTS	6.22	8.25	0.25	0.53	3.02	2.26	0	--	1.46	2.16
CYN	13.79	9.85	2.17	1.18	11.29	4.74	18.73	4.87	--	--
MWV	8.05	8.12	0.27	0.53	2.58	8.31	0	--	1.2	1.82
UTIW	10.71	12.48	0.31	1.21	6.66	0.6	19.14	21.74	1.23	1.23
BRY	2.72	6.98	0.6	0.79	1.55	2.82	8.45	34.11	0.58	0.58
SLI	5.1	7.58	0.18	0.52	3.25	NA	--	66.53	1.26	2.22
WDR	7.38	9.32	1.02	2.68	6.77	6.57	5.09	7.25	2.02	2.02
AVD	13.03	18.41	1.07	1.68	8.06	0.64	22.13	18.61	1.07	2.41
BP	5.98	NA	0.44	1.35	4.29	7.32	12	24.52	0.72	1.06
IUSA	13.41	5.97	0.25	0.74	3.34	10.87	--	12.87	0.92	0.92
HOT	6.7	9.64	0.46	1.53	3.73	5.74	1.39	16.02	0.43	0.79
LDSH	7.52	8.87	0.56	1	5.84	NA	--	77.94	0.97	2.31
DXPE	6.47	7.83	0.21	1.21	4.37	NA	--	50.17	1.18	2.32
PII	6.91	9.85	0.46	6.56	4.51	5.4	19.42	5.63	0.48	1.09
BKBK	7.1	7.52	1.54	0.69	5.86	5.97	3.04	19.29	--	--
EPE	13.05	NA	0.07	1.33	1.37	10.16	3.11	47.15	0.81	0.97
PRPX	7.16	9.52	0.48	0.85	5.03	4.34	--	13.63	0.97	1.96
MROE	9.62	8.83	1.65	1	8.04	5.81	2.35	6.34	--	--
FMFC	9.7	8.14	1.11	0.58	6.95	5.78	0.79	7.42	--	--

Are all insider traders created equal?

2008-12-07T19:57:00.001-08:00

Insider trading is the practice of purchasing shares in your own company. In accordance with the Security and Exchange Commission the purchaser must file within a few days of the transaction. Filings can be found on the SEC's edgar page.

Insider trading is an important tool for value based investors. Insiders have a better understanding of their company, if nothing else they have seen the faces of people at the office, heard the chatter in the lunch room- they have a feel. Insiders are like any other investor- they sell for all sorts of reasons but only buy stock for one reason. When insiders speak we should all listen.

But are all insiders created equally? Well for fun I took all of the titles of insiders: CEO, CFO, CTO and compared their performance since 2003. I am looking for a few things:

A low standard deviation in the role. (very, very, very important)
Some titles are handed out like candy and making conclusions when you have two roles acting completely differently does not seem to serve much purpose.
A high minimum return every quarter. (very, very important)
I want a consistence of returns, 30% up followed by 30% down scares me.
A high median return every quarter. (important)
In the same what that I like consistent returns I would like to get what I can.
A high max return every quarter. (a little important)
I like to see a solid return just like the next guy.

I won't post all of my results here for each role, but here are the top 5:

officertitle	STD	Min	Median	Max
CHAIR	0.09	4.80%	22.08%	34.94%
TREASURER	0.10	5.56%	18.83%	39.36%
CHAIRMAN OF THE BOARD	0.08	1.74%	16.79%	31.37%
HUMAN RESOURCES	0.11	8.35%	19.11%	41.58%
BOARD MEMBER	0.12	2.09%	25.42%	60.85%

Insider Traders Get Hungry

2008-12-06T23:28:00.000-08:00

There is on old phrase, people sell stock for all sorts of reasons, but only buy them for one reason.

I am a follower of insider trading, there is just too many companies to look at out there, insider trading can help raise a company onto my radar. I thought I would put up this chart I put together. Fore color are the number of transactions made by insiders (according to SEC data) back color is the Dow Jones (for reference purposes).

A few random observations:

Interesting to see that when things start to go sideways or down is when insiders get hungry to buy up their company's stock. In fact whenever there is a downturn in the DOW within 4 weeks we see insiders snapping up their companies stock.
Looks like the insiders called the bottom wrong in February of this year when they had a big buy in.
If we think about this as a CEO Confidence Index it is pretty easy to see they were shaken last month with one of the lowest trade weeks they have had in 2 years.
Also interesting to see they have heated up again though in the last 4 weeks on a buying frenzy.
As trading of this sort is only registered for buying in your own company a surge of buying would indicate to the layman that these company representatives have confidence in their own companies. Being most intimately familiar with the health of their own companies they seem to be resoundingly saying that they think their company is undervalued.

If we drop a trend line across the two we see that as the DOW goes up so to do the buy rates on insiders.

Lots of other things I could say here about these chart but would love to hear some of your own thoughts out there.

Buy a Company with a Future (Based on its past) (Session 6)

2008-12-03T11:05:00.000-08:00

The ratios we have looked at so far tend to be a snapshot of the current condition of the company and don’t really explore a company’s history. Graham didn’t believe in investing in the next hot company, he was about buying companies with history and tangible revenues; companies where the paint on the sign out front is dry- basically boring companies. Graham also wanted a company that had proved that it understood its business and was on a path to continued success.

What it is?

Some earnings in each of the past 10 years.

Earnings growth of 33% over 10 years (Average)
Revenue of more than $100 Million (1950 dollars)

Some earnings in each of the past 10 years.

A company has to make money, if there has been a period in which they have failed to earn they may be in the mist of a change in the company’s direction, are in a market that is too competitive to support future growth, or they may simply be poorly managed. All of these situations indicate something unhealthy that will affect the long term prosperity of the company. Earnings are the heart of any business; you don’t want your heart to stop even for a moment.

Earnings growth of 33% over 10 years (Average)

Growing earnings is an indication that the company understands its market and is good at capturing their consumer’s dollars. It also indicates that the markets this company is attacking are growing, or at least their percentage of that market is growing. We don’t want to get fooled by a flash in the pan industry that has just had one or two great years because they are servicing a fad. Obviously the company also has to have 10 years in business too, Graham sees young companies as just too risky; they haven’t had a chance to prove what kind of company they are.

Revenue of more than $100M (1950 dollars)

Without Graham here to provide us with an updated number we could probably take the equation and add inflation of 3% to the $100M.

2009 Value (FV) = Present Value (PV) * (1 + average inflation rate) years
FV = $100M * (1 + 3%) 58
FV = $555.34M

What Graham was trying to do here though was find companies with a stable base. Any list of things can cause a company to have a bad quarter or bad half; it can be as simple a cause as the condition of the overall economy. Graham and Buffet both believed that trying to guess what the economy is going to do is a fruitless endeavor, better to be safe than to get burned in a downturn. Big companies tend to have the resources to winter these conditions whereas the smaller companies tend to fall by the wayside when things get really tough.

Summary

It is really about not getting fooled.The past is our best indicator of the future unless you have a crystal ball. So if a company has proven it can grow its earnings, has never been in financial trouble, and is big enough that a few waves are not going to turn the boat over then is it not at least somewhat likely that it will continue to perform in this way in the future?

If you are coming directly to this article click to the main site to see other articles in this series.

Buy a Company with a Future (Current Ratio) (Session 5)

2008-11-27T20:11:00.000-08:00

Current ratio is an important one; it shows us how the company will survive in the short term. As I mentioned earlier there are reasons why the company is currently cheap our job is to figure out why and also to build in a safety margin to make sure they are going to survive the reason they are so cheap.

What is it?

Current assets
Current liabilities

What does it tell us?

We are familiar working with assets and liabilities in calculating book value, but now we are looking at current assets and current liabilities. Current assets include only those things that we can convert to cash quickly things like cash, bonds, inventory, accounts receivable. Current liabilities on the otherhand are only debts that will come due soon (1 year). So this is all about our short term future.
To continue to milk our example, lets say you are buying a company if the company has $1M in loans coming due in the next year but has an account receivable that shows you are due to have $1M in the nextwhile you are going to feel pretty safe in your purchase, if they have .75 M coming due you are going to feel not as good and .5M coming due you are going to worry a bit. This is what the current ratio does for us- tells us if we need to worry about the next little while.

$1M
$1M
= a current ratio of 1

.75M
1M
= a current ratio of .75

We take what they have that can be quickly converted and divide it by what they are expected to owe in the short term and we get a pretty good idea of how the company will hold up over the next year. The higher the ratio, or the number of times they could potentially pay off their bills if they had to, the better.

What does Graham Use?

For industrial companies current assets should be at least twice current liabilities—a so-called two-to-one current ratio. (P.348 The Intelligent Investor)

Buy on the Cheap (Price/Book Ratio) (Session 4)

2008-11-26T20:06:00.000-08:00

If you made it through price to earnings ratio, price to book ratio will be a piece of cake.

What is it?

Market Price per Share
BPS otherwise known as (Book Value / Total number of Shares outstanding)

What does it tell us?

We looked at Price to Earnings in the previous section. Price to earnings showed us what we were paying for as it relates to money coming in the front door, but what about the stuff the company already owns? If you bought a company I imagine you would be interested in what machines the company owns, any buildings, or real estate even any vehicles, and also what they owe. This is what price to book ratio does for us. From our example previously of book value we come out with a book value of $250M (so after selling all of the assets off and paying the bills we have 250M) if there are 900M shares outstanding that gives us a BPS of $.28 if the stock costs $1 that gives us a Price to book ratio of 3.57.

Market Price per Share
BPS otherwise known as ((Book Value) / Total number of Shares outstanding)

$1
(($1300M - $600M - $450M) / 900M)

If the stock was $2 we get 7.2.

$2
(($1300M - $600M - $450M) / 900M)

Summary:

The higher the price to book ratio the higher we have to pay to get our hands on the assets of the company after the debts are paid. We love a low number then.

What does Graham use?

Current price should not be more than 1 1⁄2 times the book value last reported.

(P.363 the Intelligent Investor)

Buy a Company with a Future (Book Value) (Session 3)

2008-11-24T19:03:00.000-08:00

Book Value is a pretty easy one as compared to Price to Earnings. So let’s get into it we will need it for other calculations.

What is it?

(Total Assets – Intangible Assets (Goodwill) – Total Liabilities)

What does it tell us?

As with price to earnings ratio imagine if you will that you are buying a company but instead of running the company you are closing it out and selling off all the equipment. To do that you have to pay off the debts of course no one is going to let you walk out the door without paying the bills.
So if you have $1,300M in current assets, Current and long term Liabilities of $600M and preferred shares of $450M. Then you have a book value of:

(Total Assets – Intangible Assets (Goodwill) – Total Liabilities)
($1300M - $600M - $450M) = 250M.

So basically if you close up shop after you buy the company pay off the bills and you pocket 250M- not too shabby.

What does Graham use?

A book value of greater than 0. The company has to have enough to clean off the liabilities that are coming soon and will come in the future- basically it has to be able to afford its own future.

Buy on the Cheap (Price/Earnings) (Session2)

2008-11-23T11:53:00.000-08:00

To follow up our Graham intro we will investigate Graham’s first insurance technique of buying on the cheap. Graham used a number of ratios to determine if a company is cheap. The first ratio we need to look at is the Price/Earnings ratio.

What is it?

Market Price per Share
EPS otherwise known as (Total Earnings / Number of shares outstanding)

What does it tell us?

Price to earnings is a ratio that shows us the price you pay to own the current earnings. Think about it like you were buying a company that had net income (total earnings) of 4 Million (4M) dollars per year and had 10 Million shares outstanding. If you bought up all the shares you in effect own the company and have access to that income, if you were to buy just one share though you own a piece of that.
So $4M earnings /10M shares outstanding = 1 share then owns $.40 of the earnings of the company. This is known as earnings per share (EPS), or the bottom half of the P/E equation.
So now that we understand what percentage of the earnings one share owns we can figure out how much it costs us to buy this piece of the earnings.
Let’s say that the company in question has a $10 stock price. So that means that to buy the $.40 in earnings every year you will have to shell out a onetime fee of $10 so if we take the $10/$.40 that gives us a final P/E of 25. So again if you bought the entire company at the listed stock price and put all of the earnings into your pocket it would take you 25 years to get your $10 back.

What does Graham use?

“Current price should not be more than 15 times average earnings of the past three years.”(P.349 The Intelligent Investor)

Graham sets the magic number of <15 as an ideal price to earnings ratio. I would argue that this number is a guide. Some sectors have ridiculously low P/E ratios, others have ridiculously high ratios. It is worthwhile to have a look at sector numbers before getting too excited about a company. Graham builds a case for this also, a point we will deal with later.

The basics of Graham Security Analysis (Session 1)

2008-11-22T11:10:00.000-08:00

Benjamin Graham had a great investment philosophy. Find great companies determine their intrinsic value and then only buy them when they are cheap. Or as Graham puts it:

"apply a set of standards to each purchase, to make sure that he obtains (1) a minimum of quality in the past performance and current financial position of the company, and also (2) a minimum of quantity in terms of earnings and assets per dollar of price." (The Intelligent Investor P347-348 Harper Collins Edition 2003)

Not a wildly different philosophy from many others, where he did differ was that he built in insurance. Investing is all about risk and return; you want to keep the risk low and the return high. What Graham’s formula was all about was saying no one is perfect at predicting the future of a return so build in stop gaps to lower the risk and give you the best chance possible. Let’s have a look at a very boiled down summary of the Graham insurance technique.

Insurance Technique 1 Buy on the Cheap:

Buying a cheap company is about buying something that no one else wants. When they run away you run in- but not always. Most of the time when people run away from companies or sectors there are perfectly good reasons why they should run away from a company, but sometimes there are not. The history of investing is littered with these stories. A nuclear reactor melts down in Europe and every nuclear stock in the entire world gets hit hard. Is there really any reason for that overreaction? Time will answer that question.

Insurance Technique 2 Buy a company with a future:

But what if you are wrong about the reasons the company is cheap, or what if people stay afraid of the industry in question? Using our nuclear reactor example, let’s say that reactor melt down once a month for the next year, or that that reason the reactor melted down is due to faulty components that are also installed in the reactors of the companies you buy. Everyone will run further away from this industry or company and then you are in a pickle aren’t you?
So how do you mitigate the risk involved with this? Buy a company with a future. Buying one stock in a company is just like buying the company itself. You want a company that makes money, doesn’t have debt problems and looks positioned to have a future that will continue to be positive. To carry forward our nuclear reactor example you want a company that has enough money to pay its debts throughout the crisis that made it cheap, and a good solid source of reliable revenue that will continue to feed the company into the future.

Insurance Technique 3 Buy with a solid dividend:

What if it takes a while for investors to wake up to the fact that a company is a cheap company, with a good future? We can’t have all our money wrapped up in a stock for years without returns no matter how cheap it may appear to be or how solid its future will be once the current crisis is over. That money has to work for us or else we would put it in a bank account or a bond where we could get a guaranteed return rate.
This is where dividends come in. A dividend is a regular distribution of cash from the company and for us it is a tranquilizer to keep us calm as we wait for the market to realize that it has unfairly mistreated our company. I don’t mind holding a stock for a year to wait for it to rebound if I am getting a 9% dividend payment to do so, and neither did Graham.

In the next few posts I will examine each of these techniques and describe the basics of how it is done in the graham methodology.

No Senate Bailout for Auto Industry (with new money)

2008-11-19T21:51:00.000-08:00

Ok, at risk of tainting my own poll a friend asked me my thoughts on this question today so here we go....

For the bailout plan to pass it must go though the senate first. Here are a few facts:

The US is an extremely polarized country with Republicans and Democrats standing on either side of many issues. When it comes to the issue of bail outs Republicans do not fundamentally support it- it is really that black and white if it ain't laissez faire they aren't interested. (Why did they support the bank bailout you might ask? Because voters were going to the polls in 30 days.)
Senators care about preserving their seats first and what may be best for the country second. Sorry to burst any idealist's bubbles out there but that is just the fact of the matter. Don't believe me pull some voting records on Senators.
The senate is currently composed of 48 democrats and 49 republicans, with a few wild card independents to keep it interesting.

Given premise 1 the senate will vote along party lines. Given premise 3 the vote will not pass unless the Democrats can get a few Republicans with premise 2.

So how do you appeal to premise 2? simple, if you don't vote for this bill a factory will close in your state which will cause people to loose their job and subsequently they don't vote for you. Which Republican senators are vulnerable then?

I made up a couple quick maps that highlight states that have plants in them from Ford & from GM.

Map of GM Plant Locations

Map of Ford Plant Locations

So given the collective list of Senators that represent these states what Republicans are up for grabs and how do they feel about the auto bailout? Surprisingly few.

Senate Seats (Blue= Democrat, Red = Republican, Purple = one of each)

Coleman, Norm (REP Minnesota) Has come out saying he will support the plan- in some capacity.

Bond, Kit(REP Mis) Has come out saying he will support the plan- in some capacity.

McConnell, Mitch (REP Kentucky) Very against the plan.

Bunning, Jim (REP Kentucky)Very against the plan.

Hutchison, Kay Bailey (REP Texas)Will not support the plan.

Cornyn, John (REP Tex) Will not support the plan.

Warner, John (REP Virginia)Retiring soon and has said little but expected to vote against it.

So based off of this there are two votes up for grabs, assuming the independents split, that passes the vote by 1 vote. But the two Senators mentioned said they will vote for it "in some capacity" in political talk that translates to: "We realize we hold all of the power and are going to make you give our states some other nice stuff if you want us to vote for this".

So my call on the whole situation? Run don't walk away from GM and unless you think Ford can hold up until the new Senate sits in January with a more heavily weighted Democrat side speed walk away from Ford also.

Anyway- that is my humble opinion love to hear yours!

****UPDATE: ****
There has been some recent speculation that the senate will approve the reallocation of the $25B that was given to the auto industry earlier this year (money that was suppose to be used on increasing the fuel efficiency of its vehicles) and let them spend it on financing instead. I stand by my conclusion that there will be no new money and with auto makers selling of parts of their businesses in a fire sale to raise capital I would still steer clear of the whole situation, but lets just wait and see!

TIN - Temple-Inland

2008-11-17T20:25:00.000-08:00

What I paid for it: Still looking thanks!

What I like about it:

I love to see recent insider buying. People sell stock for all sorts of reasons, but only buy stock for one reason:

Low, low, low P/E 0.42, industry at 7.42 (did I read that right... yup ya did).
Price to book 0.61, industry at 1.4.
Current Ratio 2.19, industry at 0.92.
Annual EPS growth at 77, industry at 4.16.
5 yr Dividend Growth rate 77.79.
Market Cap 470M
Low low price to sales ratio 0.12, industry .23
95% institutional ownership, they are running the long race here.

What I don't like about it:

Meets all the key criteria for Graham Investing... it is cheap, it can pay off its debts, and it has a great dividend... So what is wrong with it. No free lunch is there?
95% institutional ownership- when one bank sells, they all start selling and you are in chaos very quickly.
Half of the business is wrapped up in housing products. The other half is packaging for products. Not really happy little industries these days are they.
A couple new execs in the company indicates they understood they needed changes, but the people they shuffled around came from areas where they didn't really have a lot of success so is it enough?
$47.10 to $4 stock price in one year...humm that is quite a kick for 1yr, quite a kick.

Why I bought it:
Still thinking about it.

Best Case Scenario:
New management increase market confidence. 1 yr ride max and a nice return.

Worst Case Scenario:
Bankruptcy, loose it all good bye.

What are your thoughts?

PSD- Puget Power

2008-11-17T19:05:00.000-08:00

What I paid for it: $18.00

What I like about it:

Fair insulation from credit problems, and recession.
Good dividend yield at 4.1% (distribution Dec 1).
Company due to be purchased at $30 pending one final approval (this is the big one).

What I don't like about it:

P/E higher than industry, sector, and S&P.
Price to Sales higher than industry, sector, and S&P.
Doesn't really meet any of my traditional Graham investing rules.
One should never buy into litigation.

Why I bought it:
Company suffered a substantial downturn at the same time as everyone else did in October even though at the same time they received secondary approval for the sale of the company.

Put simply, reward was significantly larger than the risk. There is a very strong chance that the final approval will come through for the sale of the company in the next few weeks. A fact represented in today's $26.28 closing price.

Best Case Scenario:
In and out $30.

Worst Case Scenario:
4% dividend, intrinsic value still larger than $20.

What are your thoughts?

My history- as it relates to Investing

2008-11-17T13:34:00.000-08:00

After graduating from university several years ago I played with day trading as a get rich quick scheme (like so many others). I had limited success in this avenue- mostly due to the lack of funds I had as newly graduated computer sciences student. In the past few years though I have gotten married, and settled into a nice career- as such my financial situation has improved to some degree and I am finally able to return to look at investing options.
My wife and I didn't just jump back into investing though, when we left university we had also left with a significant amount of student loan debt. We elected to target that debt and pay it off quite rapidly.

As a side note, perhaps I will do a post at some points about the benifits of paying off the debt at a low interest rate instead of investing the money. Let me know if that is something that interests any of you out there and I get on that a bit more quickly

Once our student loan debt had finally been paid off we focused in on moving money into RRSPs. Admittedly our knowledge on these topics was quite limited but we knew enough to know RRSPs seemed to be the way that everyone seemed to go so it must be a go idea. Having worked every summer while at university both my wife and I had amassed quite a chunk of RRSP headroom. Not knowing what to do we started pumping money into an ING RRSP cash holding fund. It returned a modest rate of return and allowed us to use the RRSP on our taxes - that tax return in the first year was sure nice! Shortly after that I began the hunt to find a good financial adviser.

My wife and I had some minor experience with financial advisers. My wife had an adviser from, lets call it, the bank of Quebec. She had put in a few thousand dollars over the years- a tidy sum to a full time university student. When the tech bubble hit much of the funds were lost. In reviewing the investments the fund adviser had put her in it was fairly easy to see the poor quality, and basic lack of thought that had been put into shaping the portfolio. My wife asked me to accompany her to meet the adviser one afternoon and the meeting was rather short and brisk. At one point he suggested that perhaps "we would be better off putting her money under her bed". My wife may debate this point but I don't think I was overly aggressive with the adviser, I just wanted to understand what the plan was and where this was all going. He really didn't seem to have one.

So began the hunt for a new adviser. At this point we had less than one hundred thousand dollars to invest so the interest I was getting from meeting a few advisers was extremely limited. The advisers that did show some interest didn't seem to really have a theory for investment- it seemed to be all about the sale. When I asked why would you suggest we buy this or that fund the answer was always- well look at its past performance. Not really the answer I wanted to hear, my wife and I know how to buy stuff- just let my wife loose at a Chapters book store where history movies are on sale and she will show you how to buy! I was looking for an adviser. After some digging we finally came across an adviser a good friend from work was using. His investment strategy seemed a good fit for my own- find value and buy it. We moved over all our funds and now make regular month contributions. I won't say it has been pretty- I think anyone who as suffered through this last quarter will agree, but I do have faith.

I leave the RRSP funds to my adviser, whenever he wants to buy or sell we have a chat and see if it is a good fit but overall I leave it to him. Besides the monthly contributions my wife has been kind enough to let me play with some money every month for our own direct common stock investments.

This will mostly be the nature of this blog- what I buy on my own and why I buy it.
And so the fun begins...

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