Show me the money

2011-11-05T16:53:00.000-07:00

deleveraging....it takes time

Lately quite a few folks have asked me about the economy (especially after the gyrations of the stock market), the truth is I have no clue what is in store for us.

However a few things are clear the western world over the last 20 years has eaten more than it can digest, be it mortgages, credit card, car and other consumer loans that we could not afford to pay. Offering cheap credit was a great solution to paper over all the real structural ill in the society primarily not investing in human capital (failing education, no focus on math, science, trade schools, high end manufacturing etc). People may have been unhappy with their minimum wage job, but as long as they had half a dozen credit cards, unregulated payday lenders…who cared. Well in 2008 the party ended, and the hangover has set it. Everyone has a lot of debt - households, governments and even banks. Let me be clear, we can and will resolve this, there is no doubt in my mind about that. There are three ways of lowering debt

a) pay it off

b) the creditor writes it of completely - bankruptcy, foreclosures etc.

c) the creditor takes a haircut - partial write down of the principal, payment plans etc.

Now all of the above a happening, but the key point is all this takes time. Probably the best evidence for how long these things take is based on history. In “This Time Is Different: Eight Centuries of Financial Folly” an amazing book by Carmen Reinhart and Kenneth Rogoff they talk about pretty much all kinds of past financial crisis.

Its clear based on history of such deleveraging events that it takes 8-10 years for the process to play out. So based on this I believe we’ll be treading water until 2016-2020, So basically we are looking at another lost decade as far as stock markets are concerned.

Also just a note its pretty much immaterial who wins elections etc. Democrats or Republicans they will tinker around the edges, bark louder than bite on Sunday morning talk shows and pretty much nothing will happen. The only solution is to wait out the deleveraging. Meanwhile here’s a great article on deleveraging from The Economist dated July 7th 2011.

2008-10-17T16:05:00.000-07:00

Image via WikipediaShall we start buying?

In today's New York Times Op-Ed my hero Warren Buffett said he was buying stocks and advised us to buy American stocks. Let me be clear he does say clearly that he has no idea if we have hit the bottom yet and that he is looking at a minimum horizon of ten years, preferably more. My two cents would be as follows

Buy good companies with strong economic moats i.e. virtual monopolies or companies that can extract a toll from customers regardless of the economy

When you buy, don't go all in buy gradually that way you dollar cost your way if the market goes down further

So what can we buy?
Johnson & Johnson (JNJ) : Tylenol, Band Aids, Heart stents are not going away, if anything we may need more of these during such challenging times
Diageo (DEO): Johnny Walker, Smirnoff brands command loyalty and stickiness, this is the worlds largest alcohol seller with a world wide distribution and brand
The DOW 30 - thru the exchanges traded fund ticker "DIA" own the top 30 american companies in one swoop, lower risk.

A more risky play if the market comes down a lot is Visa (V) its a risky one, but the key point is that Visa is a toll booth, credit defaults dont harm them its the banks that issue the cards that bear the responsibility. I would buy this puppy if it fell below its IPO price of $44.

2007-03-02T18:49:00.000-08:00

Weeks like this separate the men from the boys

The headline says it all. I loved to see the sell off in the market this week, such sell offs are healthy, prices come up and come down. The Valueline universe of 1800 stocks was at a p/e ratio of 19.6 when the week began. This is high, the long term average of past 15 years is somewhere around 17. Reversion to mean is a fact of life and markets are no different. Own good businesses and the stock will take care of itself.

Meanwhile Warren Buffet's annual letter came out yesterday as usual a super read, he was less scathing than usual about the excesses of Wall Street although does take on the high fees charged by hedge funds. He calls it the 2 and 20 crowd (2% management fees and 20%of the profits) . Mr. Buffet has been buying United Healthcare (NYSE : UNH) and Ingersoll-Rand (NYSE : IR), Here is the post on Industrial stocks and IR that I wrote about late last year.

Just finished reading Hedgehogging by Barton Biggs, its another great read. Talks all about hedge funds, the thing that struck me the most was the pressure that the managers feel to deliver. The fact that many funds get the 20% only if they beat an index and makes the point that 20% of zero is zero. Additionally most funds have a high water mark i.e. in the following year they have to first recoup the losses and then deliver. Another great read!!!

2007-01-21T13:26:00.000-08:00

Performance of the 2006 picks

In this game performance is everything, if you cannot beat the market then why bother? Invest in a index fund, go home and sleep peacefully! But stockpickers inherently believe that markets are inefficient and greater than market returns can be achieved by picking stock using any number of philosophies, that is the heart of any debate between active versus passive investing. So how did we do, on the stocks we picked last year. Without further ado

We did extremely well with Sherwin Williams (NYSE : SHW) and Bausch (NYSE : BOL) both classic short term distress situations up 58% and 17% respectively. Plum Creek Timber (NYSE : PCL) was a nice winner too up 18% with a juicy 4% dividend.

On a time weighted average , to account for the in and outs and well as timing issues we came out a 17.5% in returns assuming equal weights. Lets hope for a even better 2007.

Fedex and Caterpillar were the two laggards although CAT was recommended only in Nov 2006. Although I beleive longer term (5 years +) both are keepers. My usual term for stock holdings is forever.

2007-01-12T14:23:00.000-08:00

Top picks for 2007

Here we go with my top picks for the year and the reasons for them

Cummins Inc (NYSE : CMI) - Maker of generators and engines, low p/e around 8, cheap compared to its peers like Caterpillar. This is a gem that is trading cheap, do not get turned off by the high stock price. Price $116.75

Fedex (NYSE : FDX) - See my previous post, its trading cheaper to UPS and a great company. Price $108.86

Conoco Phillips (NYSE : COP) - Cheapest of all the oil giants, has a p/e of 6, hated by the market because of all the acquisitions and belief that they paid too much for Burlington Resources. Price $63.83

Taiwan ETF (NYSE : EWT) - Cheapest of all Asian markets, an indirect play on China. Worldclass companies like Hon Hai and TSMC. Price $14.46

Omega Healthcare Inc (NYSE : OHI) - This is a REIT that specializes in owning and financing of elder care facilities. They had some accounting issues last year but seem to have come out of it bruised but in good shape. Price $17.53

Limited Brands Inc (NYSE : LTD) - With brands like Victoria Secret, Bath and Body Works and others this company has built a strong economic moat (Warren Buffet's term). Limited trades at a p/e of 15, gives a decent dividend of 2.2%. Price $28.62

Cheers for a great 2007 - more to follow.
(Disclosure : I own OHI and plan to own all of the above, probably average into all of these during the next few months)

2006-11-22T17:59:00.000-08:00

CAT in the doghouse?
Mea culpa for being persona non grata. I am making an early new year's resolution - a promise to update the blog regularly, atleast once a month.

The market in the meantime has been on a rip roaring ride. There are two aphorisms that come to mind, In a rising market everyone is a genius and a rising tide lifts all boats. So I suspect most stocks have done well, the key though is to beat the market and I will be doing a post mortem of all my picks and comparing them to the S&P 500 before the year ends.

Heavy machinery stocks have taken a huge beating while the market has been on a tear, mainly because these are cyclical industries and the US economy is slowing down, probably moderating is the right word.

One stock that is a fundamental value play is Caterpillar (NYSE : CAT). Caterpillar is being unfairly punished by the market it dropped almost 10% after last quarter's announcement. I believe it is a good buy based on the following
- on a strictly value analysis DCF the share price should be $68.00 (based on a Free Cash Flow growth rate of 8% for the next 10 years and 3% after that)
- the P/E ratio is 11-12x is below the historical norm of 14x
- although the residential construction is slowing down and the US economy is slowing down, this is being more than adequately compensated by international growth in mining and the China infrastructure boom, indeed today the company announced it was moving its Asia headquarters to Beijing from Tokyo. The 2008 Beijing Olympics should also give the construction boom in China a greater thrust.
- the company gives a 2% dividend

I believe that CAT will return a 12% gain over the next 12-18 months.
Since the stock is currently in Wall Street's dog house and probably will stay there for some time, it is probably wise to start buying in smaller blocks and lower your cost basis. (Disclaimer : I own CAT and plan to increase my holding)
Other industrials worth a look are Cummins (NYSE : CMI), and Ingersoll-Rand (NYSE : IR). Cummins is particularly interesting at a P/E of 9.5
All these three stocks CAT, CMI and IR are strong industrials, with great brands and economic moats, currently beaten down that are keepers. Even if you dont buy them make sure they are on your watchlist.

2006-07-15T10:36:00.000-07:00

Seeing the forest for the trees

The market seems to have embraced the old axiom "sell in may and go away". But the fact remains that its a great time for finding valuable gems in these rough times. Lets start with a Trivia question : Name an investment class that has beaten the stock market consistently over the long term? a hint: the Harvard and Yale endowments invest hundreds of millions of dollars in this investment. The answer "Timber"

So is timber really that good of an investment and how can you and me own the asset without the hassles of cutting down trees and hauling lumber to the yard?

Firstly timber as an asset class that has beaten the stock market consistently. From 1973-2002, managed timber returned roughly 15% annually as an investment, while stocks returned about 11%. Timber like most commodities is uncorrelated to stocks. Trees don't know about the rising oil prices or interest rate hikes. And ever more imprortant in today's rising inflationary environment, the price of timber has consistently beaten inflation. We should think of a timber investment as a good inflation hedge. According to legendary investor Jeremy Grantham, over the last century, timber prices have risen at 3.3% above the rate of inflation. Add 5% a year in income, and you've got a timber investment asset that has returned double digits, competing with stocks over the long run.

Large endowments and funds have the luxury of owning timberlands or holding options on the timber output on acres of forests. Large corporations like International Paper and Wayerhauser own timberlands that they use as raw materials in paper manufacture and sell timber in the open market but there are two companies that stand out in this area Plum Creek Timber (NYSE:PCL) and Rayonier (NYSE:RYN)

Plum Creek Timber (NYSE:PCL) ($34) is a Real Estate Investment Trust (REIT) and the largest private landowner in the United States. They have about eight million acres of timberland under management. The company produces lumber, plywood and fiberboard at ten facilities in the Northwest. It has a $6.5B market cap and pays a dividend of 4.5%. Currently PCL has set an aggresive $400M share buyback plan and as a REIT enjoys all the favorable tax advantages. A more attractive company on a fundamental and technical basis is Rayonier (NYSE:RYN) ($36.8) also a REIT a slightly smaller one. RYN has about 2.4M acres under timberland in the United States, Australia and New Zeland. It also has the added benefit of a diversified a performance fiber unit, these fibers are used in tires, rayon yarns, paints, ink and even diapers. RYN had a great run this year hitting $47.50 but is down almost 20% at $36.85 and yields a attractive 5%.

On a technical basis both the stocks have broken down (blame the housing slowdown) and are likely to go down south even further. Reasons as follows:
- timber is a key material in housing construction.
- these companies have in the past sold land at high prices for housing development
- the resolution of the US-Canadian timber dispute is making Canadian timber competitive again

However it may be a good time to watch these two since both these companies are long term keepers for the follwoing reasons:
-high income yielding companies
-owning a tangible asset "timber"
-inflation hedge

I think an attractive entry point may be at the stocks 52 week lows PCL ($33.60) and RYN ($34), only if you want to hold on to these for 5 years or longer.

2006-04-18T14:11:00.000-07:00

Wall Street hates the Dow - Dow Chemical Company

Here is a company that had record revenues and earnings in 2005, is expected to do the same in 2006, is a Fortune 50 company, has great brands and is a well known innovator.
Trades at an incredibly low P/E of 8.5, P/S of 0.8 pays a rich dividend of 3.5%. So why is Dow Chemical (NYSE:DOW) ($39.8), the largest chemicals/plastics company being ignored by wall street, because of a few reasons:
-high costs of natural gas and oil increase the costs of production
-perceived as commodity, boring businesses no sex appeal at all

Our retorts to the above:
-Dow is in a boring business, we actually like boring.
-Not all of it is commodity businesses, they have specialty agriculture, automotive and coatings also the company is investing in performance businesses to avoid the cyclical gyrations of the bulk chemicals business.
-Dow Chemical has been one of the engines of innovation in the specialty materials sector.
-The cost of oil and gas is a concern; here are two recent articles both could be construed as positives for DOW.

According to the Barron's article "Natural Gas: Lower Still" dated April 15th by Spencer Jakab (subscription required) -"Despite falling nearly 60% from their December peak to a recent $7.135 per million BTU's, gas futures may need to go below $5.50 to soak up a surplus unlike any ever seen by the industry. Total gas in underground storage at end of March, the official end of the heating season, was 1.695 trillion cubic feet, a whopping 63% above the average for the past five years and 13% more than the previous record high."

And then today's New York Times article "Chemical Companies Look to Coal as an Oil Substitute" by Claudia Deutsch has a quote from Dow's CEO Andrew N. Liveris "We want to be economically feasible in the United States, and coal enables us to do that," The article further goes on to say Dow Chemical, has tripled its research into coal-based ingredients. I will grant that this is perhaps a pipe dream or a long term soultion. Also I do not expect oil prices to fall but then chemicals and speciality derivatives are a part and parcel of our lives and eventually DOW will be able to pass the costs down to the consumer.

So we took a detailed look using Valueline data at DOW Chemicals

As seen on the left Free cash flow to Equity DCF value stands at $44, The stock trades at $39.8 close to its 52 week low and a 10% discount to the DCF value of $44. This is a classic Buffet/Graham situation where a gem is out of favor with the street, on basis of exagerated pessimism regarding high oil and gas prices. This company will deliver rich gains to investors in the next 5 years, and while you wait for it a 3.5% dividend is icing on the cake. (Disclaimer : I will take a position in DOW soon)

2006-04-12T11:52:00.000-07:00

Eye of the Storm
Bausch and Lomb (NYSE:BOL) ($45.6) the eyecare maker has been in a lot of news more so since the story of the fungal infection broke two weeks ago. The infection has afflicted 109 patients using its ReNu with MoistureLoc solution. However the company has been in trouble since a few months ago. Here is the chronology with closing prices

23 December 2005 - BOL moved to restate financial results back to 2000 because of accounting shenanigans at its Brazilian unit. Stock price falls from $79 to $72.

26 January 2006 - BOL says it will postpone its earnings filing to investigate improper booking of sales at its South Korean subsidiary. ($68.56)

2 March 2006 - declares dividend $0.13

31 March 2006 - First reports of fungal infections surface ($63.70)

10 April 2006 - BOL suspends shipments of ReNu ($57.44)

11 April 2006 - Company defends ReNu, says all tests are negative, Walgreen pulls entire line of ReNu, WalMart pulls the specific product. ($45.60)

These events usually qualify as one time opportunistic buys in my book, the previous call we made in a similar situation with Sherwin Williams on Feb 24 has paid us handsomely with a 25% gain in five weeks. However this is one is much harder to call. Here are the facts:

According to the 10Q filling dated 28 July 2005 (last filling on record). The six month revenues were broken out as follows:
Contact Lenses $359 M
Lens Care $269 M
Pharmaceuticals $ 278 M
Cataract & Vitreoretinal $ 185 M
Refractive $ 72 M
Total (6 months) $1163 M

Lens care generated about 23% of the company's revenue. 2005 Revenues from ReNu are estimated at $45 M about 2.25% of the total $2.3B. In the US there are reportedly 109 cases of "Fusarium" fungal infection reported by the CDC and according to a Business Week article about 36 million Americans wear contact lenses. Of the 30 cases investigated to date by the Food & Drug Administration, 28 wore contact lenses, and 26 of those patients used Bausch's popular ReNu products to clean and store their lenses. To date no direct link has been found to the usage of ReNu and the fungal infections. From the numbers and the facts it seems like this may not be a big deal.

The key here though is the statement from Walgreens released today -"There's a lot of customer confusion out there, which is why we decided to remove the entire ReNu line, - a Walgreen spokesman told Reuters." What is it that first comes to mind when you hear the words Baush & Lomb? Eyes, eyecare, contacts!!!! right. So calling this a Tylenol scare like situation that J&J was in is incorrect - afterall J&J is a very well diversified company selling Cordis heart stents, baby lotions and Band-Aids.

Although ReNu may be only 2% of revenue as the Walgreen statement implies Bausch &Lomb means eyecare to most customers and spillover effetcs are bound to affect sales in general. Moreover according to the 10Q "Growth for the first six months of 2005 was driven by share gains attributable to the Comapny's ReNu with MoistureLoc brand, the ReNu franchise gained 2% market share in Q2 05" So this was a major growth engine for the company.

Back to the fundamentals before the fungus story broke but after the accounting irregularities were uncovered the company traded around $65 a share - market cap of $3.5 B on sales of $2.3B a P/S ratio of 1.52

Lets look at the most pessimistic scenario for this company, assume that the company loses all of its share of lens care of about $ 500M and spillover into other areas, legal liabilities causes loss of another 15% of revenues $300M. This would imply a 2006 revenue number of about $1.5B (assuming no growth in other areas).

Now at today's price $45.6 (Market cap $2.45B) this gives the company a P/S of 1.63, still higher than the 1.52 it sported on March 30th. At $42.5 the stock should reflect its pre infection value.

So in conclusion, the company is in deep trouble has a great brand & franchise but its entire identity is associated with this franchise "eyecare" something people take very seriously. I believe that the company will recover and thrive but I want the classic "Margin of safety" before I play this one, I'll assign a 20% margin of safety and using $42.5 as my benchmark I would be a buyer at anything south of $34 a share. Speaking of J&J, once the air on this issue clears up they may just swoop in and buy BOL.

2006-03-17T19:32:00.000-08:00

Brown v. Board of Fedex

The two companies that are and will ride the wave of globalization and e-commerce (thanks to Web2.0 this is no longer a taboo word) are Atlanta based United Parcel Service (NYSE : UPS) and Memphis based FedEx (NYSE : FDX). Fierce competitors these two firms have epitomized efficiency. We have talked about capitalizing on this trend a while ago. But given a choice between the two who wins? Here is the result of both fundamental and relative analysis

On a strict fundamental valuation basis (using ValueLine and S&P reports), FDX looks rich about 15%, however I am inclined to believe that the growth rates these two esteemed publications have put out are low, anybody who has used the
Po=FCFE/(r-g) model or its variants
knows a small tweaking of the growth rate can do wonders to your results!!!

Based on a 13% growth rate the valuation comes out to $133 for FDX, It is also looks undervalued on a P/S and EV/EBITDA basis. Having said that FDX has had a remarkable run in the few months (look at the 200 day moving average) and UPS is still a great company, especially with that 2% dividend. It's just that I think Fedex has more juice in it.

FDX has a small edge on UPS in China (2 extra routes)
FDX is recognized as a premium brand, may give it more pricing power
FDX is a smaller company ($32B) versus UPS' $84B - more nimble and a faster growth story

FDX also may be a great bargain today if a Private Equity firm/s decide to buy it out, the year 2006 promises to be one where the largest 1988 buyout of RJR Nabisco for $31.4B may be finally topped - why not Fedex? its an ideal candidate with a cash flow rich, unglamorous and capital intensive business. For the more conservative types there's always UPS.

2006-03-05T19:40:00.000-08:00

ETF Innovation

Lately innovation has been associated with technology, especially the web2.0 phenomenon. However innovation can be found in the most staid and unlikely places take Exchange Traded Funds (ETF's) for example. ETF's are an asset class I have often blogged about, are essentially index funds that trade like shares. They are a great way to play sector bets and I have been especially impressed by the country and geography ETF's as a way of international diversification. They are liquid and have low fees. Although ETF's have assets of $313 Billion, this number still dwarfs the $9.2 trillion of assets in mutual funds. (source : WSJ)

The ETF business is booming though, there are a handful of players

Barclays lead the pack with its myriad of ishares
State Street Global identified by its popular Spider (NYSE : SPY) ($128) and other ETF's.
Vanguard joined the party with its Vipers
Rydex is most well know for its equal weighted S&P 500 ETF (NYSE : RSP) ($174) is launching six new ETF's this week.

However the company that deserves the "Oscar" for bringing some life to this class of assets is undoubtedly "PowerShares Capital Management". PowerShares recently was snapped up by London based Amvescap (NYSE : AVZ) ($18.42) for $230M.

PowerShares burst on the ETF stage in late 2004 . They currently offer more than 35 ETF with $3.5 B under assets, some of the most esoteric and exotic ETF's are.

PowerShares Nanotechnology portfolio
PowerShares Water Resources portfolio
PowerShares Clean Energy portfolio
PowerShares Valueline timeliness portfolio
PowerShares MicroCap portfolio portfolio

Each of these offer never before available options to investors, this was true innovation and is bound to do well for its new owners. Amvescap looks richly valued at a P/S of 2.58, On a discounted free cash flow to equity basis, using growth rates seen in the industry the share price should be approximately $14, currently trades at $18.42

However the ETF industry looks to be growing especially with the industry now having approached the SEC for launching actively managed ETF's. I believe that PowerShares will continue its innovation and be a tremendous growth engine for Amvescap (NYSE : AVZ) ($18.42) (justifying a higher growth rate).

Amvescap will bring rich rewards to its investors, I believe in a few years Amvescap will itself be acquired most likely suitor the Boston giant Fidelity, who has been AWOL from this scene.
So the best way to play the ETF game buy the most innovative company in the business!!

2006-02-26T09:41:00.000-08:00

I see a lot of "green"backs

In his state of the union speech on Jan 31st 2006, President George W. Bush said"Keeping America competitive requires affordable energy. And here we have a serious problem: America is addicted to oil, which is often imported from unstable parts of the world. The best way to break this addiction is through technology. Since 2001, we have spent nearly $10 billion to develop cleaner, cheaper, and more reliable alternative energy sources -- and we are on the threshold of incredible advances."

On Jan 12th 2006 at a colorful debate hosted by the Churchill Club a gathering spot for Silicon Valley's movers and shakers. John Doerr of Kleiner, Perkins, Caulfield & Byers said "Green is the new red, white, and blue" Doerr, whose firm is investing in clean/alternate energy startups, was echoing comments made by New York Times writer Tom Friedman in a recent column (subscription required).

With crude hitting $60 a barrel and oil politics roiling the middle east, looks like alternate energy may be a good bet for the long term. While we have briefly talked about this in a previous post, there are several ways to play the alternate energy market.

- One diversified way to invest is the PowerShares Clean Energy ETF (NYSE:PBW) ($20.5), this is a new and innovative ETF by PowerShares (expect a post on this company and its innovations)

- P et er Thiel the founder of PayPal whom we have talked about in an earlier post Peter, is betting big on the Canadian oil sands and expects oil to hit $80-$100 by 2010. There are several Canadian plays in this area, Suncor Energy (NYSE : SU) ($76.8), Encana (NYSE : EC A) ($42), Nexen (NYSE : NXY) ($53) and Canadian Natural Resources Ltd (NYSE : CNQ) ($56.12) . Suncor is an integrated oil company with $9B in revenues and Encana is North America's largest natural gas producer with $16B in revenues. Both these companies have trillion plus reserves in the Alberta oil sands. Nexen is a much more risky bet , a pure play on Canadian oil sands.

- In the clean energy arena

Hydrogen fuel cells - the king of the game here is Canada based Ballard Power Systems (NYSE : BLDP) ($6.35), this stock is extremely volatile and a safer bet may be the diversified conglomerate United Technologies (NYSE :UTX) ($58.89)
Nuclear power - Cameo (NYSE:CCJ), ($37) the world's largest uranium producer, again based in Canada.
Wind power - Iberdrola (Madrid CATS:IBE.MC), the world's largest owner of wind farms.
Solar power - SunPower Corporation (Nasdaq:SPWR) ($39.7), a recent spinof from Cypress Semi or Suntech Power Co (NYSE : STP) ($36.6) a Chinese company specializing in solar panels and photovoltaic cells.

P.S. - Another good play in this sector particularly in fuel cells, hybrid technologies and batteries is Johnson Controls (NYSE : JCI) ($69), its a well diversified industrial company recently highlighted during a visit by President Bush.

2006-02-24T12:57:00.000-08:00

Sherwin Williams - Blood/Paint on the streets

In one of my previous blogs Martha Stewart and Flu Shots I had talked about investing in companies that get into trouble, in the US thanks to the tort system that often means legal trouble. Wall Street hates uncertainty and institutions dump shares at the first sight of a legal hurdle. BTW Martha Stewart (NYSE : MSO )is up 200% since its founders legal troubles and Chiron (Nasdaq:CHIR) is up 50% since its regulatory quagmire and is being bought by Novartis.

" most of the time the market is efficient and fairly valued. However on occasions there is such disdain for the stock market and there is blood in the street. These are the occasions when the true value players like Warren Buffet make their killing. Roger Lowenstein in " The making of an American Capitalist "

Indeed just such an opportunity arose this week, shares of Sherwin Williams (NYSE : SHW) yes the venerable paints company dropped 20% after a jury in Rhode Island held the company liable for lead paint liability. This was a second trial, the first ended in a hung jury. Another defendant DuPont avoided trial by paying off the lawyers!! The stock dropped from $53 and is currently trading at $40.77, This reminds me of the tobacco trials, Phillip Morris (NYSE : MO) turned out to be one of the best investments made by deep value players who bought it in the mid nineties. Yes lead paint is hazardous but science has proven this only in the last 20 years, companies cannot be held liable for what was not known previously. No doubt the verdict will be appealed and saner heads will prevail, the current administration and the federal courts are quite business friendly these days you know!!

The company is solid
- Strong brands Dutch Boy, Sherwin Williams, Krylon
- Sales of $6.98 Billion at today's price a P/S ratio of 0.82
- Dividend of 1.8%
- Annual operating cash flow of $550M

More on the details on the fundamentals at Value Discipline Blog. Anyway I think this is a deep value play for someone willing to bet on the company coming out of the legal quagmire. Meanwhile while you wait it out there is a nice dividend. Although I think most of the blood letting is done, for those who are faint of heart put in a stop loss at 10-20%. I plan to dip my toes in paint later today.

Also of note Eastman Kodak (NYSE: EK) that we talked about last week is up 13% since then, in no small part due to the fact that Bill Miller of Legg Mason has upped his stake to 25%.

2006-02-18T09:10:00.000-08:00

China Investment Strategies
A paper by Burton Malkiel of the "A random walk down wall street" fame, Jianping Mei and Rui Yang in the Journal of Investment Consulting Vol7, No3, Winter 2005-2006 pg 32-47 touched upon why they believe the Chinese economy will continue to roar and ways for the investor to make money. Indeed some of the themes are very similar to the ones touched upon in two previous posts:

Profiting from long term trends and

Emerging Markets for the small guy

And some other suggestions - the conclusions are ways make money from China

Open end US Mutuals like "Alliance Bernstein Greater China", Fidelity China Region", "Matthews China", "Columbia Greater China Z", "Dreyfus Premier Greater China" and "Guinness Atkinson China"
Closed end shares like "Jardine Fleming China region", "Greater China" and "China Fund"
Investing in Taiwan, HK and Japan since these economies are and will be even more closely intertwined with China
Investing thru US companies with China exposure, they name UPS, Wal Mart, ProLogis (a REIT) and Yum Brands . (previous posts on UPS and WMT )
Investing in Chinese ADR's
Investing in Natural Resources (previous post on Canada, Australia, BHP Billiton and Rio Tinto)

Needless to say it was pleasant to see many of the themes and trends validated by Malkiel, it was however disheartening to see that the two China ETF's namely

FXI ($71.65) - the Barclays FTSE/Xinhua China 25 Index Fund
PGJ ($15.65) - the Power Shares Golden Dragon Halter USX China

that offer almost all the benefits of Open and Closed funds at lower costs were ignored. For a copy of the paper leave an address on your post.

2006-02-14T20:01:00.000-08:00

Eastman Kodak - Sinking or Surviving?
In the last five years one of the most venerated names in business was blindsided by disruptive technology - Eastman Kodak (NYSE : EK), the erstwhile king of photography will lose more than $1B in 2006. A simple comparison of Kodak versus Canon's stock tells it all.

Canon, Nikon and Sony jumped on the digital photography trend while Kodak completely missed the boat on this one believing they would ride out the storm selling film and throw away cameras - tough luck! The end result has been bloody 20,000 plus jobs lost in upstate New York and about $20billion wiped out in market cap. Needless to say Kodak has woken up the question is - Is it too late and too little. Kodak has been rapidly moved to becoming a digital company.
- Painful restructuring has stemmed losses.
- Kodak digital cameras were the largest sellers by volume in the US in 2005 (I was surprised to learn of this).
- Kodak has been cranking its innovation juices lately - In 2004 it was the first company to introduce the WiFi enabled digital camera and in 2005 it was the first to introduce a dual lens digital camera.
-Kodak has recently entered into an agreement with Motorola for developing sensors for cell phones.
- Kodak has a phenomenal intellectual property portfolio in CMOS sensors, indeed it has joined forces with Texas Instruments recently.

All this means Kodak may be the value play/turnaround of the decade Or EK may join the ranks of its cousin "Polaroid" in bankruptcy court. I believe Kodak should further its transition to a digital company by buying Lexmark (NYSE:LXK) and OmniVision Technologies (Nasdaq:OVTI) - A stock recommended on this blog that is up 60% since then.

As an investor willing to bet on a turnaround EK currently trading at $24.90 might be a good buy although personally I would be a buyer at anything less than $24 at these valuations. Will keep you posted.

2006-02-03T11:45:00.000-08:00

Profiting from long term trends

One of the things I often think about, as an investor are how can I make any money from long term social, economic and global trends. A few of my thoughts on the trends we see and how could we enrich ourselves from these.

China rising, on its way to become the largest economy - Buy the China Exchange traded fund a cheap way to get into the China market. The ETF is (NYSE:FXI) (See blog post below on investing in Emerging Markets)
We are living in an uncertain world (think 9/11, London, Madrid) and no doubt more unfortunate attacks will follow - We will be using a lot more biometrics made by companies like Identix (Nasdaq : IDNX) and Viisage (Nasdaq : VISG) (soon merging).
The populations of developed nations are getting older, the industry that will do well here is the assisted living companies , companies like Manor Care Inc. (NYSE:HCR), Sunrise Senior Living (NYSE:SRZ), Beverly Enterprises Inc. (NYSE:BEV) and quite a few smaller players.
The developing markets are hogging commodities, they need to if they are to achieve the western standards of living - the best way to play these is own one or both of the largest mining companies in the world BHP BillIton (NYSE;BHP) or Rio Tinto (NYSE;RTP), another way to own this piece of action is to buy the Canada (NYSE: EWC) or Australia (NYSE : EWA) Exchange Traded fund, both these countries economies are significantly weighted by commodity and energy companies.
Oil & Energy politics will roil world markets, alternative and clean fuels will be in vogue. Some plays on this theme are the PowerShares Clean Energy ETF (NYSE:PBW) , some pure plays here are Cameo (NYSE:CCJ), the world's largest uranium producer, Iberdrola (OTC : IBDRF), the world's largest owner of wind farms, or SunPower Corporation (Nasdaq:SPWR), a recent spinof from Cypress Semi.
Water will become the next precious commodity. The only diversified play that I know of here is the PowerShares Water ETF (NYSE:PHO)
Cell phones or similar handheld devices will become the norm for talk, information access, photos, music, videos, payments. There will be many winners here but the key is wavelength spectrum ownership. I would bet on Vodafone (NYSE:VOD) internationally and Verizon (NYSE : VZ) and Cingular (owned by BellSouth (NYSE:BLS) and AT&T(NYSE:T)) in the US.
globalization is here to stay, the US and other nations are actively pursuing bi-lateral and multi-lateral free trade agreements, regardless of the opposition - one way to play this trend is investing in companies that deal in movements of goods, prime examples are Fedex (NYSE:FDX) and United Parcel Service (NYSE:UPS). Also included are freight forwarders, logistics providers and shippers like Expeditors Intl (Nasdaq:EXPD), EGL Inc. (Nasdaq:EAGL).
The possibility of SARS, Avian flu like diseases that can mutate rapidly and devastate large populations is high. Some of the best companies working on vaccines and cures in this space are Novartis (NYSE:NVS), which recently bought Chiron, one of the world's largest vaccine maker and Glaxo Smith Klein (NYSE:GSK)

send me your comments and any new ideas. Disclaimer (I own FXI, BHP, IDNX and VZ)

2006-01-29T14:05:00.000-08:00

Emerging Markets for the small guy

While the S&P 500 returned a paltry 4.5% in 2005 the emerging markets were on a tear, Brazil, China, India, Mexico and South Korea returned stellar returns of 20-50% in 2005. And if January is any indication 2006 promises to be another block buster year for these economies that have been growing at 8-9% per year. These markets will prosper for the next 2-3 decades

Emerging markets have a large consumer middle class that wants to join the global economy
Emerging economies have cheap labor, that makes them attractive destinations for global companies to set up manufacturing and service industries

Now there is no question these returns come with added risk and volatility. Capital markets are still developing, and a lot of regulatory hurdles still exist and transaction costs can eat away at your gains. One easy way for small investors to take part in this exciting part of the investing world is through exchange traded funds also called ETF's.

ETF's charge 0.6-0.7% in fees
Emerging markets ETF's have been well structured to give appropriate diversification
ETF's are traded like stocks

The one disadvantage is that you pay trading commissions just like when you trade stocks, but if you are holding for 3-5 years, which you should they are ideal. The following ETF's will give an investor a greatly diversified portfolio and spectacular returns.

EEM ($98.14) - a must own the grand dady of emerging markets has exposure to most emerging markets (South Korea 17%, South Africa 12%, Brazil 11%, Taiwan 11%, China 8%, Mexico 8%, India 5%, Russia 5% etc)
FXI ($ 70.11) - an exclusively China ETF, a must own if you want to participate in what will become the worlds largest economy.
ILF ($140.48) - Latin America ETF (Brazil 51%, Mexico 36%, Chile 10%, others)

The rest of the ETF's are country specific like: EWZ (Brazil), EWM (Malaysia), EWW (Mexico), EZA (South Africa), EWY (South Korea), EWT (Taiwan)

I recommend that every small investor invest a minimum of 10-15% of their portfolio's in the emerging economies and the best way is probably thru EEM and FXI, an allocation of 10% in EEM and 5% in FXI can supercharge your portfolio.
For more information of these any other ETF's in general:

2006-01-29T12:43:00.000-08:00

"Always Low Prices"
Most often than ever markets are efficiently priced, but on occasions some awesome bargains are available to participants. Take a look at WalMart (NYSE : WMT) the stock is wallowing in the bad publicity that the company has been getting, some of it quite legitimate (currently at $45). Meanwhile it gives a 1.3% dividend and the stock has not been so cheap since the early 90's. The fact is WalMart is the world's largest retailer, the largest employer in the US, has established a firm presence in China, Mexico and an aggressive strategy for expansion in new emerging markets. WalMart.com Is one of the fastest growing online retail sites.

The fact is WalMart will and is beginning to clean its act up. A company that has such a large impact on the global economy cannot stay aloof from all the criticism and possible legislation/regulation (aka Maryland). The company recent announced a new environmental initiative for its vendors, has a new health care plan for its workers its appointed a new social impact czar etc. I believe the company can do better - it may actually take more that some of these window dressing activities, possible even a management shake-up to fully awaken the company's conscience.

But the fact remains WMT is a good buy that the market is mispricing, so if you have money you do not need for the next 3 years this "Always Low Price" wont be there for long.
(Disclaimer : I do not own WMT today, but plan to in the next few weeks)

2005-09-03T09:07:00.000-07:00

Fly but don't Buy

You don't have to be a business buff to realize airlines are in trouble, some blame deregulation,
others the labor unions etc. The fact remains that since the birth of commercial aviation, a hundred odd years ago the combined industry with all the numerous airlines has not turned a dollar in profit!!! In fact as Warren Buffet puts it aptly "In terms of shareholder value, the Kitty Hawk should have been shot down immediately."

Airlines are an incredibly bad business
-High capital costs (planes, engines, hangars etc) translates to high fixed costs, that extra seat doesn't cost you anything so the temptation to sell that at a terrible price is overwhelming, leading to internecine price wars.
-Requires skilled personnel (pilots, mechanics) who cannot be replaced easily since these jobs require a lot of training, gives the unions a lot of clout.
-A highly customer facing industry, the slightest issues with delays, cancellations, baggage handling leads to bad publicity and hinders new business.
-Add to all this the vagaries of the world oil markets.

So as an investment I stay away from airlines, there have been some remarkable successes with the likes of Southwest Airlines (NYSE : LUV) and JetBlue (Nasdaq : JBLU) . As a longer picture I can see a consolidation of between the larger players American, United, Delta, Continental, Northwest into 2 or 3 large carriers possibly even a trans- atlantic merger (think AA and BA) and possibly 3 or 4 regional/low cost carriers (the recent merger between US Air and America West is a good start).

Maybe then this industry with some pricing power may be an attractive place to parlay some of your hard earned money. (I do expect this to happen in the next 3-5 years). Meanwhile keep flying but heed the advice of the Oracle of Omaha.
AK
soundmoneyfuture@gmail.com

Ten baggers??

2005-09-02T11:54:00.000-07:00

Peter Lynch is epitomized as one of the greatest fund managers and is associated with the term “ten baggers” stock picks that went up ten times their initial value. In his book “One up on Wall Street” he mentions stocks like La Quinta hotels where he spotted a long term trend in increasing business travel and saw potential in this stock. Ok so today is my day to play Peter Lynch.

One long term trend I have often blogged about is the ageing of America and the bounty coming the way of pharma and healthcare firms. (disclosure: I own JNJ. PFE & IYH). Another take on this is same theme is “Assisted living”, started doing some research on this when my realtor mentioned that she had two clients who were selling their homes and moving to assisted living centers. These are companies that own assisted living centers and provide healthcare and nursing to seniors.

The big boys here are Sunrise Senior Living Inc (NYSE:SRZ), Beverly Enterprises Inc. (NYSE:BEV), and Manor Care Inc (NYSE:HCR). This week Beverly Enterprise was bought out by North American Senior Care Inc. That leaves us with just two SRZ & HCR. My recommendation would be either of these HCR has a $3.2B market cap about three times that of SRZ, both have fairly strong balance sheets (debt/equity between 0.33 & 0.53). HCR does have a dividend yield of 1.5% and that always helps. But this is a rapidly consolidating industry and SRZ could be a take over play. The other advantage of this industry is that it’s a combined play on two themes “elderly healthcare” and “real estate”.

Another trend that I have observed is amongst the not so old crowd the fastest growing pastime in America is NASCAR racing. The statistics are compelling about 6.6 million plus households tune in to every race. The growth has been 10% plus per year and this is not a red state phenomenon (the biggest markets are Atlanta, Philadelphia, L.A., Dallas and New York). So who takes home the bacon again three players stand to benefit International Speedway Crop (Nasdaq : ISCA), Speedway Motorsports (NYSE : TRK ) & the much smaller Dover Motorsports (NYSE : DVD). These companies own speedways where the stock car races are help. ISCA is the biggest with ownership of 14 speedways including the top rated Daytona Beach speedway, followed by TRK with eight and the smaller DVD with four races.

ISCA has a market cap of $2.8B and is about twice that of TRK. The much smaller DVD has a market cap of $280M, but trades at a P/E Multiple of 57 almost double that of its bigger brethren. So how do these folks make money, well they have four streams ticket sales, TV & radio broadcast rights, food & beverage sales and sponsorships (think Nextel & Home Depot)

My bets for the next 5-10 years would be on Manor Care Inc (NYSE:HCR ) & International Speedway Crop (Nasdaq : ISCA).

2005-07-02T12:08:00.000-07:00

Asset allocation

Maximizing returns and minimizing your risks is the magic to achieving your investment goals and getting a good night's sleep. You can achieve these seemingly opposed aims by distributing you investments in different assets this is asset allocation.

According to studies by Nobel laureate William Sharpe and researchers like Brinson, Hood and Beebower (1986), asset allocation accounts for more than 95% of all variance in quarterly returns. (for purposes of this discussion I will restrict myself to non real estate assets). Using Ibbotson's data from the past 70 years on expected returns and standard deviations (geek speak for reward and risk), I ran some excel magic and came up with what I think is an ideal asset allocation for your non real estate investments.

If you are a US resident below 35 years of age

US bonds 15%
US Large caps 25%
US Mid Cap 15%
US Small cap 10%
International 25%
Commodities 5%
REITÂs 5%

Of course do not forget to keep 4-6 months of expenses in liquid cash for emergencies. As you age you want to reduce your exposure to stocks and increase exposure to bonds.

soundmoneyfuture@gmail.com

2005-06-01T16:45:00.000-07:00

One of the smarter guys in the room

Peter Thiel, in my humble opinion is one of the smartest and most articulate investor / fund manager around. He was the co-founder of Pay-Pal and now manages $ 700 Million at Clarium Capital Management LLC in San Francisco.

He takes an intermediate to long term view of things (3-10 years).
His current calls (May 31^st 2005) are

Long on the dollar – believes that dollar will strengthen against the Euro
Long on oil – believes oil will hit $80-100 per barrel in 5-10 years – recommends Canadian tar-oil stocks

Opti Canada
Western Oil Sands
Nexen

The housing bubble will gradually deflate when the Fed stops its rate increases by late 2005

I think I agree with his opinion on the dollar, after all as long as the welfare loving Europeans prefer afternoon siestas, wine and cheese to actually working the Euro isn’t going anywhere, after this weekends French rejection of the European constitution – its going to be even harder to get any business friendly legislation done. The Japanese are recovering but in the forex market it’s all a relative game and comparatively the US seems to be doing fine although not roaring along. I have to say I had recommended buying Euros in January 2005, but after a brief rally in March its been all downhill since, lost my shirt on those leveraged deals.

I cannot say anything about Oil, although as a small investor I would not invest in such small and speculative companies, it always pays to hold some large Oil stocks in your portfolio like Exxon, Shell, BP or Chevron – after all oil pretty much runs the engine of the world economy (no pun intended).

The housing phenomenon is an enigma to me – having always lived in the North-east and California my views are biased – In my experience housing prices were high in 1999 and they are higher today in 2005 – its as if the prices never really went down, so yeah maybe we’ll see a slight dip but as far as I am concerned a house is a place I got to have a place to live. So well if housing tanks - I dont think it will, so I would still hold on to the Home Depots and Lowes of the world.

Martha Stewart and the Flu shots

2005-04-25T13:08:00.000-07:00

In his biography of Warren Buffet, "The Makings of an American Capitalist" the
author Roger Lowenstein, makes a point that most of the time the
market is efficient and fairly valued. However on occasions there is
such disdain for the stock market and there is blood in the street.
These are the occasions when the true value players like Buffet make
their killing.

I think the same holds true for individual companies. I can point to
some recent examples where I did do something and occasions where I
wish I did do something, case in point Martha Stewart Living Omnimedia
Inc. (NYSE:MSO), In July of last year when it looked certain that
Martha was going away on her rehabilitation, the stock dropped to
$8.50, Today as Martha is making a comeback its up nicely to $20. The
question I should have been asking myself then was; would I stop
buying home decoration and other stuff marketed by MSO because the CEO
and founder of the company was in jail for a year (not sure of the
jail term). The answer of course is NO but I was swayed by the
naysayers who claimed that Martha was the face and life of MSO and
that this would do irreparable damage to the brand and blah blah blah.
Anyway case in point, I screwed up a marvelous opportunity to own a
household brand, a part of the America dream at a rock bottom price.

I did scoop up quite a bit of Pfizer (NYSE:PFE) after the
Vioxx/Celebrex debacle, I had elaborated my reasons in one of my
previous blogs about why PFE is a great company and buying it at $24
was a great idea, The stock is up to the $26-27 range and still a
great buy. I think in two years this will turn out to have been a
great time to have bought this awesome company at these low prices.

Exhibit III is another drug/healthcare company Chiron Corporation
(Nasdaq:CHIR). These folks had their asses kicked in Fall of 2004 when
the British regulator forced a shutdown of their flu vaccination plant
in the UK due to compliance issues. This resulted in a major shortage
of flu shots in the US and all the rationing that followed. The stock
of course dropped down to $30 from $46 in a day or so. Fact remains
that Chiron is the largest maker of these flu shots. It is not so easy
or cheap for a competitor to come in and swoop their market (nothing
to mention of the compliance and drug approvals that the competitor
has to go through). The stock is up to $36 after about six months
although some competitors (Sanofi-Aventis) have gotten permits for flu
vaccines, Chiron still is the biggest player in the market and who can
say no to a 20% gain in six months.

Anyway we should let bygones be bygones and look to the future – I spy
two companies in such situations today the embattled insurance giant
AIG (NYSE:AIG) and the data services provider Choicepoint Systems
(NYSE:CPS) that are in trouble and the market hates them but the
underlying economic and competitive advantages these companies enjoy
will help them ride out these troubles.

AIG is the world's largest insurance company; eventually they will
settle with the SEC and the NY state, pay some humongous fines and go
back to business. That is how these things work (look at all the
mutual fund scandals, the analyst scandals etc). Elliot Spitzer and
other wannabee Governors get their name in the paper, the companies
settle pay the fine and go back to work. Meanwhile today the stock is
down from $72 to $52.

CPS has all your life's financial data - credit cards, car loans,
student loans, phone bills and even those unpaid book or CD club
bills, anything that you ever did with money. In today's information
driven world this is an economic moat that is hard to replicate. They
have been plagued by the identity theft scandal (they dropped from $46
to $36 in a week and are up to $40 now). CPS says they are cooperating
with the authorities, in the long run I think they are a winner.

I am following these two closely especially AIG to see how the cards
fall and then scoop some shares.

Anyway the point was great companies with great businesses do get into
trouble with the law, with crooks etc and usually these are occasions
when you can get great businesses at cheap prices; so keep your eyes
and ears open.

AK

2005-02-10T03:31:00.000-08:00

C for Cocktails - Celebrex, CMOS & Consoles

"Its a stock pickers market" is a term often heard especially from the
active fund managers who want your money and those commissions.
Considering that the S&P 500 returned a 9.5% last year (11% with
dividends reinvested), I am not sure you need active money managers,
but here is my cocktail for you to mull over as you decide to invest
your portfolio tonight two shots of Pfizer (PFE, $25.55) (disclaimer -
I own it) with one pint of OmniVision Technologies (OVTI, $16.99) and
a dollop of Electronic Arts (ERTS, $65.60) should be potent
combination of risk and caution.
Pfizer which has been clobbered lately is as much a sure thing as
there can ever be in the stock market. The world largest pharma
company, a pipeline filled with products up the wazooo, a friendlier
than ever administration in Washington. Yes there are some clouds with
the Vioxx and Celebrex controversy but tell me of one successful
company that does not have lawsuits or public perception problems, its
almost a badge of honor these days. And most of the Cox-2 inhibitors
controversy is going to rain down on Merck and drown them while Pfizer
will sail smoothly. So Pfizer is a no brainer especially if you can
stay invested for 2-3 years.
The most risky and maybe rewarding pick of the season is OmniVision
Technologies - they are a CMOS sensor manufacturer, 80% of the cell
phones that can take pictures are equipped with their sensors. They
have a strong balance sheet with a good cash position and no
liabilities. Having said that 70% of the company's revenue comes from
the cell phone OEM's. So if there is a major technological shift, or
if taking pictures with your cell phone is no longer cool, then this
company may see a lot of pain. But my guess is that this scenario has
a small probability and the company should see good growth.

Lets get that drink ready shall we Electronic Arts is the 10,000
pound gorilla in the video games market, $2.2B in cash and no
liabilities gives them an iron clad balance sheet. They have recently concluded deals with ESPN. Their NBA and other games are rocking the street, although they have had good competition from Take Two's Grand Auto theft II. But this San Francisco Bay Area company has the makings of a Hollywood media giant. Video games are here to play and stay. Well cheers and enjoy the drink.
AK
soundmoneyfuture@gmail.com

2005-01-29T14:01:00.000-08:00

Dial M for merger? plus Commodities, Euro and Skechers

Continuing on last months theme, that I thought the market was overvalued. Since the beginning of the year we have seen a downward trend I think the major averages are down 4-5% since my last blog. Well and as I predicted the merger mania goes on only now its become even bigger....well the IPO market is dry so the investment bankers have to make money somewhere. This week it was Proctor Gambling over Gillette so now do I get a Mach69 free with Tide? Anyway speaking of the wall street greed, I have to do some self promotion here I found myself venting at them during my writings on the Social Security mess too.

So do I still think the market is overvalued. Yes I do and the same reasons still hold as they did last month. However I do think there is money to be made here. Jim Rogers some of whose ideas are not the least eccentric has written a new book Hot Commodities, I managed to read it sitting at Borders and I think he makes some good points, so maybe some of these commodity players like Archer Daniel Midlands (ADM) and the Australian mining giant Broken Hill (BHP) (disclaimer: I own this stock) may be good bets here. I am not sure if the common investor should get into leveraged commodity trading though. Also following on the footsteps of Warren Buffett, I think the Euro is still a good bet and expect the dollar to fall even more to maybe 1.45E by the end of this year. Also came across a good read in the recent Smart Money article where they recommened the stock of footwear and sportswear maker Skechers (NYSE:SKX), closed at $14.25 yesterday. I bought some sneakers from them three months ago, great stuff - I know since I am a regular runner, also the staff was helpful and cooperative - almost a lost art these days. I am thinking of buying some here; havent made up my mind yet though.
AK
soundmoneyfuture@gmail.com