Thursday, August 18, 2011

Vote "None of the Above"

Marketwatch.com has a poll on its front page.  The heading:  What's your response to market plunge?

The possible responses (and associated voting percentages):
  • I've had enough, sold most of my portfolio. (22%)
  • A little nervous, trimmed some holdings. (19%)
  • I made big bet on market drop --- go, gold, go. (19%)
  • I'm deer in headlights -- nothing at all. (40%)
Some observations:
  • Apparently words like "a" and "the" are non-essential.
  • Obviously the idea that you can actually BUY stocks on a market drop has escaped the poll designer.
  • There are a lot of people who call themselves investors, who are actually just speculators, using the stockmarket as a glorified casino.
  • At least some people have the good sense (or fortitude) to do nothing as opposed to doing something dumb.
This afternoon Leon Cooperman was on CNBC talking about the markets.  He mentioned an old saying... In bull markets, who needs analysts and in bear markets, who needs stocks.  His point: Unfortunately this is true.  We've seen this type of selling before and have learned nothing.  And Leon is a billionaire... he didn't get that rich by selling into panic.

Most market participants, however, are ruled by emotion, bouncing between extremes.  Yet we know that it is the dispassionate investor that makes the best decisions.  Today, the 10 year Treasury yield fell below 2%.  Obviously, somebody thinks this is a fair rate and a safe haven.  Forgive me if I disagree.

For my money there is no margin of safety in Treasurys... and a great pile of risk.  And the same with gold.

In my humble (and irrelevant) opinion, analysis is not dead.  Mass psychology trumps reason in times like these.  But this is when the real money is made.  Only later will others look back dispassionately and realize what happened.

Call me early, stupid, brave, or whatever... BUT,

In recent days, I've been buying more of my favorite European multinationals (Vivendi - VIVHY, Telefonica - TEF, Vodafone - VOD, etc).   Oh, don't tell me.  I already know that Europe is where risk lives and that all these companies are going to zero.  Just turn on the TV and the talking heads will tell you.  "Whatever you do, don't invest in Europe!"  They have the luxury of not even needing to read financial statements.  One wonders if/when the dividend yields on the above companies go to 10 or 12 percent, will anyone notice? Or care?

Financials, anyone?  God no.  But don't tell anyone... I actually have bought a few...  Janus (JNS) is one.  A company with little if any net debt.  It has problems, but they seem priced in.  Solid free cash flow and a dividend that is far more than the aforementioned 10 year Treasury.  But whatever you do... don't follow me into this one.  Money management is a HORRIBLE business.  And strong balance sheets don't matter.  Not.

And then there is little Bladex aka Banco Latinoamericano de Comercio Exterior (BLX).  With a yield of 5 percent, it trounces anything issued by the US government.  Risky?  You decide.

I even bought some Oshkosh (OSK).   If you haven't heard, they have exposure to the defense industry.  Horrors.  In fact, they have one contract that is giving them considerable problems.  Just ask the WSJ, they will tell you all about it (Oshkosh Labors Under Army Truck Contract).  After reading this article, I went to the financials expecting to see carnage.  Instead OSK generated over $200 million in cash in the first 9 months of the year (all of which went to pay down debt).  Current market value?  A whopping $1.6 billion.  Doesn't Carl Icahn own a chunk?  Didn't he just make out big on Motorola Mobility (MMI)?  No matter.  Oshkosh is on the trash heap, which is ironic.  Aside from making "army trucks", OSK also makes garbage trucks!

And today my old favorite Cato Corp (CATO) announced Q2 earnings.  $18 million in profits for the quarter.  $48 million for the first 6 months.  Showing that they are not immune to the economy, the company said earnings going forward would be at the low end of guidance.  That range?  $2.15 to $2.21, which is still higher than last year.  And that irrelevant balance sheet?  Well, net cash equals $267 million (40% of current market value).  And the company's dividend yield is approaching 4%.  Treasurys anyone?  Anyone? Ex-cash, Cato is selling at under 10x earnings based on just the last 6 months.  Can you believe they have the audacity to plan on a profit for the next 6 months?

Maybe Cato should close their stores and invest their remaining assets in GOLD!?

Want a hedge against all that risk you're taking at Cato?  Recall here that the company is debt-free.  But the stock is down today... so perhaps it is risky.

To "protect" myself, I shorted some Ralph Lauren (RL) yesterday.  Yes, I shorted it near it's 52-week high... what was I thinking?  I covet Ralph's car collection, but not his stock.  Somebody has taken the "high end retail is immune" thesis to ridiculous ends.  Last week I saw RL gear at Sam's Club!  It didn't look too high end sitting next to charcoal and watermelon.  And the valuation of this high-flier?  Suffice it to say that I'll take low-end Cato over RL any day.

So Marketwatch can put me down as a NONE OF THE ABOVE.  I like to buy when there is a sale!  And I vastly prefer analysis to blind emotion.

Disclosure:  Long all the stocks mentioned, except MMI, which I just sold.  And RL, which I am short.  And yes, I will probably add to all these positions. 



12 comments:

  1. Lonely Value Investor:

    Always enjoy your thoughts. Hope you will update some previous discussions (e.g., Ternium and UTMD...hey, whatever you think of their recent acquisition, at least they're not using cash to pick stocks!).

    Keep up the good work!

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  2. I second that, this is a good blog and a touch of sanity in a febrile market. I like the way it has become more active as the market has plunged, truly counter-cyclical!

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  3. Great advices, since you like CATO, just wondering your thoughts on ARO and BBY, both seem cheap and buying back alot of their stocks recently...

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  4. ARO is probably worth a look at these prices, but why not just buy CATO... not beholden to fickle teens and FAR better financed.

    As for BBY, I think they have structural problems and I own RSH instead

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  5. well RSH prob has better balance sheet and margin than BBY, but I just think BBY is a much better franchise than RSH. In both cases, I think i know both ARO and BBY better than CATO and RSH, Buffett always say that buy what you know =) Thanx for you input anyway, keep up the good work with your blog.....

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  6. Thanks for sharing. It has been very insightful to read your articles.
    Do you recommend any other blog/online resource for education?
    Thanks.

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  7. I am not a good source for online resources, sorry.

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  8. JAKK: $9 in cash, no debt,just started 2.5% yield div, 12X erns. Boring toy business? Any quick read you could offer?

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  9. Take that back, $100mm debt due 2014.

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  10. Very nice post. I have never understood the GOLD argument myself. How is it a store of value? It does not generate cash and in fact, you have to pay to store it. In the end, you have to count on the next "fool" to get a quote. If that is not speculation, I don't know what is.

    Specialty retail is a tough one. I myself prefer RSH. RSH has slightly better operating metrics but what stands out for me is its gross margins are close to 2x better. It must be quite costly for BBY to maintain the franchise. Radioshack is unattractive and gets higher margin from selling private label products. It has a fairly liquid B/S and the lower dollar per share does not hurt either.

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  11. Hey Henry - What do you think of ETFC? Selling at about 10 times 2012 earning. They have a decent brand and loan loses are expected to go down and has been going down.

    Would you invest in something like EVK - Micro cap Chinese company?

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