December 17, 2010 § 3 Comments
Sorry for all the recent CAPS picks, but I am trying to populate the page and I don’t want to leave any of em untalked about. So it means a bunch of mini posts.
But let’s get down to business. My pick today is Heska Corp. They make vet products, like heartworm tests and lab equipment so that Fluffy and Mittens can live happy, productive lives. I picked it for CAPS because:
1. It’s at half book value
2. Their CROIC is pretty sweet at almost 19%. (CROIC stands for Cash Return on Invested Capital. So in this instance that means that for every dollar they borrow, they make 19% on it. If you borrowed a buck and made a $1.19 I’d totally let you take me to lunch, you genius you.)
3. Although they’ve had bad margins, they have stabilized these past 2 years. Let’s hope that trend continues. Same with Free Cash Flow. Now seeing as they are at a 52 week low, now’s a good time to make the pick.
I’m not really a big penny-stock kinda guy (HSKA is trading at $0.42 for the pick) but I do like a good CROIC producer at half of book value. Definitely CAPS worthy.
Full disclosure: Long on HSKA. But, I mean, let’s not go crazy. It’s like a super small position. In my view this is a low risk pick because of the cheap price. They either go bankrupt (doubtful) or they go up. I told myself that I would act on my common sense more and stop overthinking everything. Let’s see if I’m right.
EDIT: So you can’t pick HSKA in CAPS right now. Dunno why, but let the record show! HSKA at $0.42
December 16, 2010 § Leave a comment
There are lots of old people. Everywhere. And if there’s one thing I know about old people it’s that they hate going outside and they wont if they don’t have to. That’s why I love these home healthcare companies like Amedisys and Almost Family ($AFAM.) Healthcare right in the comfort of your own home. It’s a good business model and I think it works well for their clientele.
Also, looks like these home healthcare companies got a little…um…creative with the way they were keeping their books and working with some fun loopholes in healthcare legislation. So much so that the regulation hammer began to fall (hmmm…are you sensing a pattern with my picks!?) and then their stock took a beating. Regulation wont kill the industry so I expect good times ahead for people taking care of old people. A good long term CAPS pick. They are also worthy to look into in greater detail to see if they are worth buying with non-monopoly money. My first concern: I want a moat and I don’t see one. Also: old people are stingy.
AMED makes the pick.
December 12, 2010 § Leave a comment
Just a quick update on a CAPS pick: Corinthian College ($COCO). Yes, it’s a dreaded for-profit school. Yes it may have done predatory scouting and funding for students, as they all did. But everyone knows that now and the government is going all regulatory on them, so they’ve gotten pretty cheap. I have yet to do the long leg work to see if they would be a long-term buy, but they are cheap enough to be CAPS worthy. Plus their ticker is COCO. You go Glen Coco.
Disclosure: I do hold a small survey position. Which I know is dumb because I haven’t done all the leg work I should do. But it’s my view that regulation will help an industry like this and that they are in a good position to make money off of providing a service that tons of recently unemployed (or English Lit/Theology grads like me!) need in order to like, find jobs. Look for my leg work at a later date.
Knowing you don’t know what you don’t know, or, how I stopped worrying and learned to love the Margin of Safety.
December 11, 2010 § Leave a comment
From my limited experience in the market, what I’ve found is that it is less about going with what you know, but learning to avoid the things you don’t know. This may sound like a weird and incredibly unhelpful statement, so let’s put it into an example regarding an industry I am interested in. And the magic of avoiding the thing you don’t understand is by being a good friend with Mr. Margin of Safety.
We are still in a pretty serious market restructuring craziness–century old banks go belly up, new tech stocks going to 60 P/E ratios in under a year and unemployment being a huge problem. People are freaked out, survivalblog.com is getting huge numbers and people are buying gold coins on the way home from picking up the blue-ray of The Road at Wal-Mart. So you value investors out there should be all skin-tingly and pumped about finding great opportunities in places that have been on the business-end of all the hysteria.
One section I am particularly looking at is dry bulk goods shipping. Woo. Super exciting eh? Putting stuff on a boat and floating it to other places. Turn down the awesome on that one.
But, obviously, this industry was rocked during 2008 and hasn’t shown near the type of recovery as other industries. Have people stopped needing things floated around? Not likely. But if Mr. Market is still stuck watching the dvd commentary about Viggo Mortensen’s angsty performance, the pitches coming down the pipe may seem less rosy. Which is good for me.
So what am I looking for?
1. Relatively stable performance in a pretty unpredictable industry. I’m not looking for a hero, just someone who can move stuff well in a time when people thing stuff shouldn’t be moved.
2. Low P/E, low P/Book (for the company AND for the industry) stable ROE (preferable > 15% over 10 yrs), and a Debt to equity under 1
3. Nothing crazy on the cash flow side. I don’t want to see money borrowed and burned at a fast clip
4. Margin of safety using a DCF and Graham Intrinsic Value calculation. It’s not a science, but gives me a relatively good handle if it is cheap or not.
5. Is it undervalued for dumb or for good reasons.
So I start looking at the big dogs.
DryShips (DRYS). Market Cap: 2.1 bil
Diana Shipping (DSX) Market Cap: 1.1 bil
Navios Maritime (NM) Market Cap: 560 mil
Excel Maritime (EXM) Market Cap: 473 mil
Well, Navios Maritime is off the list because it has too much debt, bad cash flow (with a dividend! I know! How can you pay a dividend consistently, but have high debt and negative cash flow. It’s like me trying to give my future child an allowance, but with an underwater mortgage and credit card debt. Fail) wonky margins, wonky ROE…man, NM you’re out to sea.
DryShips is the big dog of the bunch, but they have bad FCF, wonky ROE, no good EPS growth and has the highest P/E out of my bunch of 4.
Diana Shipping looks a little better, but they’re pretty new. Negative cash flow, but looks like they have been investing in PPE and paying of debt, but is positive cash flow really too much to ask for? They are trading pretty close to book, and their P/E is roughly 8 in the middle of a crisis. So they may be pretty fairly valued for shipping.
Excel Maritime is the one that kinda excites me. No, not because it’s the only one left on my list. I mean, I don’t have a little Greek man with a gun to my head, forcing me to buy at least one dry bulk shipper. (But if one industry was going to do that, I’d go with dry bulk goods shipping. I’ve watched season 2 of The Wire.)
EXM: stable margins, pretty good FCF (um except 2008. More on that later), P/E of 1.7 (yeah, not a typo), P/B of 0.3, stable ROE (except 2008…) debt/equity under 1. Oh yeah, and they have more boats than DryShips. Turns out they are 20% bigger than the big dog. Starting to look real cheap at 5 bucks.
Man, that P/E ratio and P/B alone is getting my attention. And a stupidly high EPS for the stock price. There must be something up.
Turns out there is. When you look at the numbers in 2008 they are all wonky. In 2008 Excel Maritime bought (or merged with… Guess it depends who you ask. Kinda like when you get dumped it was, well, you know, something we talked about and decided was best.) Quntana Marine. And turns out that it was a really complicated deal that did strange things to the book price and EPS numbers of EXM due to what is called “time charter fair value amortization.” You can read more about it here to get a nice overview on how much you don’t understand it. So yeah, when something this complicated happens (ie: funny smells from the spreadsheet) I get a bit more nervous about putting my money to it. How can I run a good DCF or Graham Intrinsic Value calculation when there is potentially smelly EPS or even book value numbers? How can I figure out if something is cheap if they may be playing fast and loose with some accounting. Especially the book value one. That worries me.
Well, enter my good friend Margin of Safety (the three most important words in investing.) Mr Margin of safety says to me that I can admit I don’t know what the heck is going on with some of these numbers but still be confident that it may be a cheap buy. How? Well, lets give EXM a brutal future scenario and see what sort of valuation we get from it.
EXM’s brutal scenario:
1. Let’s use the pre-2008 acquisition book value….cut in half: $10 per share
2. Their reported (and contested) EPS after the acquisition was 4.85. The EPS before the acquisition was 4.26 in 2007 and 1.56 in 2006. Let’s be jerks and say that they can only muster EPS of 1.30 (remember, we are building a crappy situation and seeing if EXM still looks cheap.)
3. Let’s say their revenue growth (sitting at a most likely unsustainable 44% 10 yr) drops to a crummy 5%.
4. In a DCF model lets have a high discount rate…like 15%.
That’s a lot of sucky factors not in their favor. I don’t even think that kind of scenario is likely. But, hey, who is Lehman Brothers er…John Galt.
In my this-sucks-we-didn’t-anticipate-this scenario we get a DCF fair value calculation of $21. In a Graham Intrinsic Value we get a value of $14. EXM is trading at $5.85.
Mr. Margin of safety is beginning to say to me that even if I don’t fully understand the merger/acquisition and the havoc it may have caused on the balance sheet, it is still cheap. Maybe even stupid cheap. And as far as dry bulk good shipping goes EXM seems to be doing a good/stable job (with DSX being an interesting one to watch as they grow.)
So I’m seriously thinking of them for my portfolio. If there is a big dip in the next little bit due to people freaking out some more, I may buy. I look for them to rise as people begin to remember that stuff gets shipped or the numbers are too large to justify the cheap price. They are definitely going on my CAPS.
But seriously–margins of safety are the biggest things to look for. Search for them, cling to them and your portfolio should be fine.
December 3, 2010 § Leave a comment
NB: For these CAPS picks, I will be using a lot of things that I’ve learned over the past couple of years of investing. Discount Cash Flow models, balance sheet analysis, Free Cash Flow analysis. In the CAPS picks I wont stop and explain every single tool. I will go into them in future blog entries (ie: “What is a DCF!?”) but for these, I am assuming previous knowledge.
For my CAPS page, click here
My investment strategy is a pretty simple one. When something takes a big dip, or falls out of favor for any reason (say, a Tylenol recall, for example; just pulling it off the top of my head) or the stock price seems to take a beat down for silly reasons, I take notice and start my due diligence. And if that thing has a nice dividend attached to it, all the better.
So enter my first pick for the CAPS page (and I actually have this in my portfolio too.)
My first pick for my CAPS page in Johnson and Johnson ($JNJ). JNJ is one of those fantastic cash generating companies. They are pretty close to being models of consistency: 12% earning growth (10 yrs), 11 % FCF growth (10 yrs), 10 years of raising book value (this for me is a big plus), ROE over 25% annual for 10 years, 15bn of cash sitting around. In other words: they are very good at running their business.
Yeah, but are they cheap?
In order to find this, I need to determine their fair value and then I need to see if the pitch coming from the mound is attractive (ie: lower than my perceived fair value.)
For a company that has such a good track record a DCF model can be helpful in seeing if it is cheap. In my DCF models, I normally like to use a higher discount rate (like around 15%) mainly to build in more margins of safety, but for more of what I perceive to be a steady company, I don’t feel nervous using a lower rate (like around 12%.) Especially if they have a dividend (and especially if that dividend is at a nice juicy 3%.) I also tend to lean more towards using the FCF growth over 10 years as the growth rate rather than the earnings growth rate. (I’d love to know if this is smart, or totally stupid.)
So if you plunk all these numbers into a DCF
Growth rate: 11%
Terminal Growth Rate: 4%
Discount Rate: 12%
Book value: $7.9
You get the intrinsic value of roughly $75 a share. JNJ currently trades at $62.56. Seems that a model company is selling at a 15% off price. Mix in a 3% and this seems like a pretty smart choice.
Pretty smart, but not “blow your socks off.” Smarter people than me will be able to allocate their capital in a much better value play than I can. And I want to be one of those people one day that can learn how to find those sorts of things. But for now I can’t resist owning something as fantastic as JNJ–and have them pay me annually–at what I perceive to be a 15% discount. CAPS worthy and portfolio worthy. (That being said, a 15% margin of safety isn’t very big. It’s actually less than I am normally comfortable with. But not for JNJ.)
Hit me up with your thoughts on my method. I’d love to hear it!
December 1, 2010 § Leave a comment
Don’t you hate it when you read something, and as you’re reading it you’re like “yeah, man, this is good. Good stuff. Gotta remember this.” And sure enough, you do and it’s made a good impact on you and you think about it all the time. But then you want to use it in some more formal context (you know, like a blog. The most formal of mediums) and you can’t for the life of you remember who said it in the first place, where you read it and it’s vague enough that even a Google search isn’t going to help you.
Yeah. I hate that.
But I read something the other day. It was about a young, ambitious investor who started an investment agency or hedge fund but couldn’t get people to invest their money with him because he didn’t have a track record. The part that stuck out to me so much was he simply said to himself “well, if I want to get a track record, I just got to start. You can only have a years experience by working for a year.” So he scraped together a little bit of money with a business partner and then, obviously, had great returns, big float at the parade and won the girl before the credits. Moral of the story: get to work.
That notion of “ok, I have no experience. Guess I’ll just start here and go for it” has stuck with me. I’m a baby investor. I didn’t know a stock from a stalk 3 years ago. I got sucked in during the crisis of 2007-08 and a window of interest I never knew I had (ie: finances and business) was opened and I devoured anything I could get my hands on. (You can read more about it in the about section if you like.) I started a portfolio with some savings, made a bit, lost a bit. But it hasn’t been til recently that I decided to really put some effort behind this.
Hence this blog.
And the idea of a track record is an important one.
One of the things I am going to do (and learn by doing) is business (and therefore stock) valuations in hopes of finding great business at cheap prices or even “yeah, ok, whatever” business at awesome prices.
And I want to keep score! But I don’t have unlimited funds in order to do this in real life.
Enter: The Motley Fool CAPS system. If you aren’t familiar with http://www.fool.com, stop reading, go there now and read everything there. (Actually, no, finish this article, leave some insightful comments that advance my learning, tell a friend about B450, then go to fool.com). The Fool is dedicated to financial literacy and training, and one way they do this is through their CAPS system. It’s essentially a stock tracking system that gives points to the pickers (and weighs the points towards the better % pickers.) Sure it has its limitations (like, its not really a portfolio. Everything is weighted equally. You can’t weigh one pick at a higher % of your portfolio. On the plus side, you get hats!)
So I am setting up a B450 CAPS page. I’ll both blog here and on the Fool. I’ll do detailed stock writeups here and there and I will “buy” if it is at an attractive price. I may even do writeups on stocks I’m following in hopes that their price goes down. Shoot, and if I’m lucky, maybe some of the fool gurus will lend their expertise here on B450.
(If I buy in real life too, I will for sure let you know too. Full disclosure is important. I hear if you don’t Ben Bernanke actually brings his helicopter to your house and slaps you.)
So you can follow my picks here or search for Batting450 at fool.com. I’ll tag every post that I am linking to my CAPS page so you can stay up to date too.
The track record starts now! Time to learn by doing.
November 24, 2010 § Leave a comment
First off, don’t worry folks, I wont be always using a baseball metaphor for every post. That would be neither fun for you or…uh..doable for me. Besides, I’m much more of a hockey guy myself, but hockey doesn’t lend ample metaphors for investing. I mean, you could maybe do something with defensive +/- stats and stock volatility, but that’s way less sexy. And it would probably be a horrible idea for a blog name.
Anyway. They wont all be sports analogies.
But for this post, it is. The famous baseball-investment analogy is that the market is like a pitcher pitching you prices–some are good, some are laughable bad while others are there–right there, floating down the alley with a big “swing batta” sign on them. And you know that good feeling you get in your soul when you connect right in the sweet spot. Well, if you get the right pitch you’ll be fist-pumping around the bases Joe Carter style (touch em all Joe!) in no time. And the investing lesson we are to learn is to wait patiently for your pitch. And the bonus is, you don’t strike out by waiting. (And if this baseball analogy is something you enjoyed, you can read more about why we are called Batting 450 here)
But this raises the obvious question: what is a good pitch?
Well, in baseball different hitters have different spots. Some like down-and-away, others like up-and-in but no one can hit it out of the park, anywhere, all the time. So the thing you need to learn about yourself as an investor is where your swing is and what pitches you are looking for. Where are you comfortable? What do you know? What part of the plate gives you the best percentage chance at connecting and putting runs on the board?
For myself, I tend to look for pitches that (roughly) meet three criteria.
1. Solid companies with a history of returning equity to their investors. I know. It sounds lame to say “I like to invest in good companies who make money” but its true. Don’t overlook the simple. Therefore I usually look for 5-10 years of +13% in ROE (Return on Equity)
2. Mispriced. For some reason or another the market has either read doom and gloom for a particular business, or they have ignored some good things, or the market as a whole has tanked, bringing this great company to a price that looks like a bargain. This is perhaps the biggest factor. If you can judge whether a company is worth the price being quoted, well my friend, you are gonna mash some taters.
This can sometimes be easier to do, especially if there is some super crazy crisis that is driving the stock price down. I mean, when BP went to $26 a share, it was a pretty attractive buy. Except for the whole disaster thing. And if you bought some then while everyone else was dumping shares, well you’d have made about 50% return right now. I didn’t swing, and I learned my lesson. (Lesson: follow your rules and don’t let emotion or opinions of others get in your head. Trust your swing.)
But not every company is going to go through some major crisis, so it’s not always going to be glaringly obvious. But discrepancies will happen. Look for em.
3. Dividend. Call me crazy, but I like being paid for taking a risk. There are plenty of studies out there that show that dividend stocks fare better than non paying stocks, but that doesn’t mean it will always be that way. But if I’ve bought it at a great sale price the dividend is icing on the cake. If I misjudged the sale and the price doesn’t rise that much (or, er…at all) then the dividend is a great hedge against my own innate ability to be oh so wrong. And I love hedging against that. You should too.
But if you are in this market, thinking about being in this market, or are a brand new investor baby like me, you need to sit down and think to yourself what your sweet pitches are. Write em down. Study others. Learn. Read. Heck, that’s what this blog is all about: me trying to learn my swing by writing it out, learning from you and getting it out of my head and onto paper (pixels?) so that I can grow and be better.
Disclosure: I don’t own BP. I mean, they did have to sell a bunch of money making stuff to pay for the whole spill thing. Oh, and also I don’t have any money. Like I said: new investor baby.