Monday, November 30, 2009

Position Update/Market Thoughts

I wanted to take some time to update where I'm at with a few positions and what I'm looking for in this market:

We've now sustained a rally that many (myself included) doubted would last this long. I'm still not bullish on what I call "just buying stocks", but there are pockets of value out there and that's what we need to focus on now. The Dubai factor provided some fear last week, but the market appears poised to shrug it off. There will be more "shocks" that the market will undoubtedly have to deal with, and they will likely be larger that that. But those will be awfully difficult to account for.

Many people I follow whose opinions I value continue to be cautious at these levels, and although I've been cautious as well, I have waded into a few small positions.

-The Wyeth-Pfizer transaction closed and I received 33.00 per share cash, as well as some Pfizer shares. In this market, I do like the safety of a name like Pfizer, and although their dividend is lower, they picked up a great business in Wyeth. At this point, I'm holding my PFE shares and may actually add to them.

-I bought a small position in small cap Tii Network Technologies (TIII). Small cap, pure value play. 16M market cap, and 12M in cash, with almost no debt. Being lightly traded is the only reason I haven't taken too large of a position. This one could take some time.

-I bought a small position in RHI Entertainment (RHIE), on their earnings sell-off. The stock has continue to drop even much below my purchase price. I do feel its important to at least see how they come out during the current quarter, when the bulk of their revenue is expected to come in. Just looking to a return to it more normally, but still undervalued valuation as opposed to its current, dirt cheap levels. Things aren't perfect here, but I think they'll hold it together.

-I finally bit the bullet and bought some Compass Diversified Holdings (CODI) on the holiday shortened Friday sell-off. I've been writing about and following this name for far too long without actually having a position. And even though I couldn't buy it at prices I've tracked it at, its still an undervalued company at less that 1x book value. At this point, I know they are going to make their next acquisition soon and that will likely lift shares further. If it sells off from here, great, because I'd like more shares. Great management at this company.

Like I said earlier, strategy wise, I'm looking at value almost exclusively. There are some growth names out there I like (FISV, FSYS, CFN, TDC are a few examples), but I'm in no rush to buy them with the market at these levels. I see more safety in companies that aren't relying on the economy to grow at highly anticipated levels to advance further. As an aside, I do still own ABB and a few various mutal funds.

Disclosure: Long PFE, CODI, RHIE, TIII, ABB

Wednesday, November 11, 2009

More of the Same

The market continues to show strength, as most of the news out there is positive.

RHIE dropped again today as it still hasn't found a bottom. It will be interesting to see if Seth Klarman picks up any shares at these levels, as he has in the past. As usual when this happens with a stock, you get people on message boards and blogs saying they are done for. They are most likely short the stock and aren't willing to have a conversation about it. There are always risks and its important never to risk more than you can afford to lose, especially with a stock that is this volatile. That's about all I have to say about that. I had reasons for buying it, and I still see value there. It may take time for that value to be realized. If it was easy, everyone would do it.

I continue to see more confidence out there, and as much as I feel stocks should pullback, it may just as easily not happen for awhile. There are still pockets of value out there. I don't like many large caps at this point, as most are overvalued when looking at the whole situation.

As always, I'll report any transactions and/or ideas that come up and I welcome your ideas as well.

Thanks for reading.

Disclosure: Long RHIE

Tuesday, November 10, 2009

Picked up Some RHIE

RHI Entertainment (RHIE) is a small cap name I've spoken about for a good portion of 2009. They reported a bad quarter today, and the stock is off 60%! I took a small position at 1.16 for a couple of reasons:

-Yes the quarter was bad, but keep in mind this is a company whose earnings are tied to the releases they put out (many more coming in next quarter than previous), and their library. Seasonality is a big factor here. I'm not saying this quarter will be outstanding, but it will likely be better. I may not even own the stock by the next earnings release.

-They do have way too much debt for a company this size and are burning through their cash at this point. My bet isn't on the long-term viability and ability to grow earnings, which still remain to be seen. My bet is more on an overreaction by the market, and the possibility to make some money on the return to "normalcy" so-to-speak. Seth Klarman still owns a large stake here (I believe) and he bought when this same thing happened in the spring. Its an opportunity to buy at less than 50% of book value.

This isn't necessarily my style for buying stock, but in some ways it is. Just looking for value out there. Again, its a small position and I'll be watching it closely. Might not be the best one to follow unless you're watching it closely. If it continues to go south, I'll likely dump it quickly.

Disclosure: Long RHIE

Monday, November 9, 2009

Loews Still Attractive

Loews (L) continues to provide value to its shareholders, while the market continues to undervalue its shares. I'm not going to break down each of its companies, but rather look at the bigger picture and the comments from their management.

Here are some statements by CEO Jim Tisch (one of the best around, I may add).

-Loews reported a solid quarter reflecting improved results in CNA, continued strong results in Diamond Offshore, and higher investment income in the holding company portfolio. During the third quarter Loews' book value per common share increased by over 14%, primarily as a result of the $1.7 billion increase in the mark-to-market value of CNA's investment portfolio. What a difference a quarter makes.

-At the end of the third quarter, CNA's book value per share stood at $35.38 compared to $20.92 at year end '08. This improvement was primarily the result of narrowing credit spreads in the fixed income market. While we are quite pleased to see the improvement in CNA's balance sheet, the volatility of fixed income security prices over the past year underscores how one could be potentially mislead by mark-to-market accounting, especially with the respect to unrealized losses at property and casualty insurance companies.

-And with that I'll get off my accounting soapbox and get back to our results. Diamond Offshore reported another quarter of excellent results. The big story for the quarter was Diamond's purchase of the Ocean Valor, a newly constructed dynamically positioned drilling rig that is capable of operating in 7,500 feet of water.

-Diamond was able to acquire the rig at auction for approximately $490 million, well below the recent cost to construct a similar new build rig. The rig is being actively marketed for work commencing in early 2010, which by our calculation is a lot better than waiting three years for the completion of a new build rig. This acquisition is consistent with Diamond's successful strategy of buying attractive assets at a time when purchases are possible at favorable pricing.
To replenish available cash after the rig acquisition, Diamond used its strong balance sheet to go to the debt markets and was able to issue $500 million of long-term debt due in 30 years at the very attractive rate of 5.75%. Diamond's board of directors recently declared special and regular – regular and quarterly dividends which together total $2 per share and market continuation of Diamond's policy of paying out special cash dividends reflecting the earnings and financial position of the company.

About acquisitions:

-We are always looking. The issue right now though I believe is exactly what's going to happen in the economy. My guess is that the economy is going to be very sluggish for a long time, maybe on the order of, if we're lucky, 1% to 2% growth. And I don't see this as a typical recession and I don't see this as a period where we're going to have 4% to 6% growth for the next year or so. I think it'll be very sluggish and I think that additional taxes and mandates will just be additional headwinds for the economy. I say all that as preamble because if we were to buy anything, I would not want to pay up in price anticipating that the economy and, therefore, business in the business cycle will resume. So like it said on the front page of the Wall Street Journal, jittery companies stash cash. You can count Loews Corporation as one of those companies.

And as what is usually the case, Tisch comments about the stock being undervalued:

-Well, there are two things you can do. You can complain about the prices of stock and the value of the stock, or you can do something about it. And there are multiple ways to do something about it. One is, I guess as you suggest, is to cast some holdings overboard. We're not looking to do that. The other way to deal with that is to buy in shares and in the past four months the company's brought in 4.5 million shares.

-As I like to say about our share repurchase history, we have a long and glorious history of share repurchases, buying in shares when the stock trades at a discount. Just to get on my soapbox again and provide an advertisement, Loews' stock has appreciated. Loews shareholders for the past 50 years have had a 16% rate of return on their shares compared to 9% for the S&P 500. So that if you have $1 50 years ago and you invested in the S&P 500, it would be worth about $75 now.

-On the other hand, that dollar if you would have invested in Loews at 16% would be worth $1,600 or $1,700. So the appreciation of Loews has been quite extraordinary. And one reason for that has been that we have aggressively bought in the shares. In 1970 we had the equivalent of 1.3 billion shares outstanding. Today it's below 430 million.

-For the life of me, I do not understand why the market values Loews so cheaply, but having said that I'm not complaining about it. Instead we're buying in the share and we're using that as an opportunity to create long-term value for all Loews shareholders. Beyond buying in the shares and doing what we're doing, I don't know what else we can do to close that valuation gap. It is a great frustration to me, but also I see it as a great opportunity.

So to summarize things, Loews remains on the same path. Conservative about the economy and its balance sheet. They'll look for acquisitions if they make sense. Their stock remains undervalued, and they'll continue to buyback shares if it continues. This is the kind of stock you can just buy and sit on. I plan to do some of that, but have just been a bit picky about where I buy. On a side note, that's a common approach for me. I'm usually pretty good at finding opportunities, and you're welcome to buy when I do, or be a bit more aggressive, which may pay off for you.

Tii Network Technologies Reports

Tii Network Technologies (TIII) is one of those small caps I've been saying is attractive. I picked up a small amount of shares back in the middle of October. You can read my initial reason for buying through that link. Here's the release:

Net sales for the three months ended September 30, 2009 were$7,460,000 compared to $8,521,000 in the comparable prior year period, a decrease of $1,061,000 or 12.5%. Net sales for the nine months ended September 30, 2009 were $19,703,000 compared to $27,248,000 in the comparable prior year period, a decrease of $7,545,000 or 27.7%. The decrease in the 2009 periods was primarily due to the economic downturn, which has negatively impacted sales of our connectivity and network interface device products, and the loss of landlines by the service providers which has negatively impacted sales of our network interface device products. Additionally, in the three months ended September 30, 2009, the decrease in sales was partially offset by an increase in sales of our broadband products into the growing broadband market and to new customers.

Kenneth A. Paladino, President and Chief Executive Officer, stated, "The sequential increase in sales for the quarter was due to the improving economy's positive impact on our markets and sales to new customers from recent market share gains. Though total sales for the quarter were lower than the comparable prior year period, we are very pleased that sales of our more advanced broadband products were higher by almost 25%.

The decrease in gross profit margin for the quarter was to due to freight
and expediting costs incurred to satisfy an increase in demand for certain products with contracted delivery requirements where inventory levels for these products had been reduced due to the economic downturn. Increased production levels of these products have enabled us to significantly reduce expediting costs and as a result we expect to return to historical gross profit margin levels in the fourth quarter.

We continue to manage our other operating expenses and balance sheet
closely. Our operating expenses are down 22% or $1.9 million for the
first nine months. Cash is now $12.3 million, up $4.0 million for the same period.

Though our sales have not yet recovered to prior year levels, we are
confident that we are executing the right strategy and with the improved economic outlook, we expect that our profitability will also continue to improve."

I highlighted a couple of key points. The key with these small cap names is value. This company is now sitting on $12.3 million on cash with a $16.9 million market cap. In a normal market, companies like these might not be so undervalued. So this becomes more of a buy and hold until the market realizes some of its value more so than a bet on the company increasing earnings.

Disclosure: Long TIII

Not So Fast, Bears...

My claim that the market had turned negative last week appears to be a little premature. The melt-up is back on with the dollar declining and stocks off to the races again. A few stocks of interest to me have reported earnings, and they have all come in strong. I'm going to do a post about each, TIII, CODI, and L.

The reflation trade, or whatever you'd like to call it, remains on.

Tuesday, November 3, 2009

Well Hello, Mr. Buffett

If you follow financial news, or any news for that matter, you know what happened this morning. Warren Buffett's Berkshire Hathaway agreed to buy Burlington Northern. He already had a large stake (I believe around 20%), but this is a massive bet on the US economy. It really is classic Buffett. If you've read my blog at all, you know I'm bullish on railroads, and have felt BNI is the best out there. I don't own any shares, so I missed out on this one. Buffett isn't stealing it, but it will likely look like a good purchase five years from now.

In other news, Berkshire agreed to split their "B" shares 50 to 1, which is a big departure for them.

Buffett is clearly trying to make a statement here, and likely wanted another "signature purchase" (like Coca Cola, GEICO, or many others) to add to his legacy.

Monday, November 2, 2009

Market Has Turned Negative

In my opinion, the market action seems to have a downward bias to it now. In the past few months, anytime negative news would come out, the market would dip, only to see bulls push through and move the market higher. Right now, it feels like the opposite. Earnings haven't been making big headlines and economic data is carrying more weight, as is the apprehension of investors and fear that stocks are overextended.

Small caps are getting hit hard. They are the most volatile and have moved the a lot to the upside during this rally, so their sell off comes as little surprise. I have a few names on my radar that I may pick at if prices continue to improve. I know I've been saying that for sometime, but I'm a very patient investor.

I do think that things are improving and many stocks could become attractive if prices fall further. I think the economy is slowly recovering, but just not to the level that stocks priced in. So if we see another over-reaction to the downside, I'd view that as an excellent opportunity to buy some stocks. In March, when we hit the lows, there were still a fair amount of major risks out there. Some of those have subsided, and some have been forgotten about. Either way, conditions are likely better than in March. So, like I said, if stocks become more attractive price wise, I think I'll be a buyer of some pretty substantial amounts.

Lets see what this week brings.