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March, 2005: 7 17 23 29

Disclaimer - IMPORTANT - Read this first!

Investor's Journal is a diary focused strictly on investments and personal finance issues, primarily from a contrarian and retiree point of view. Follow along with an average guy's failures and successes as he learns, by trial and error, the fine art of value investing.

The favorite five this week, from which one would be chosen for addition to the Leapin' Lizards tracking portfolio (based on tomorrow's early market price) are: FFEX; HUBG; IAIA; SGR; and USG.

My pick among them is Intier Automotive (IAIA) (recent price $28.76). IAIA has a market capitalization of $1.44 billion. It has a reasonable P/E, at 16.40. Its price-to-sales ratio is only 0.34. The price to book value is below average, at 1.56. IAIA's free cash flow is positive. It has a low debt to equity, at 0.31. This company has a healthy (2.36%) dividend, with a low (5.91%) dividend payout ratio. Intier automotive has appreciated 72.80% relative to the S&P 500 Index over the last 52 weeks.

I continue to feel that a good overall strategy, offering lower risk than for the market as a whole and higher potential for profit, may be to combine a classic value and momentum plus low price-to-sales approach. Even though the average contest holding has only been about four months, utilizing an equal allocation of Leapin' Lizards and Classic Value assets would have so far provided about a 12% return (before dividends but after purchase commissions), easily beating the S&P 500 Index.

3/17/05-Since the last entry, equity markets have been rather choppy, and the outsize performance of the Leapin' Lizards has been substantially reduced. Nonetheless, at a positive 10.72%, it still is well ahead of either our average Classic Value asset, up 3.91%, or the S&P 500 Index's 5.12% appreciation, since the competition's 10/4/04 inception.

I still believe that, for combined appreciation and relative protection from dramatic price swings, a good strategy may be to invest equally in classic value and strong momentum/low price-to-sales stocks. In our small sample, at least, a 50/50 investment in the Classic Value and Leapin' Lizards selections would have provided an appreciation of 7.32% to date (43% better than the S&P 500 Index appreciation in the same period), yet with relatively low volatility, despite the fact that the average security would have been invested less than four months.

What cannot yet be determined, due to our small and relatively short duration samples, is how the portfolios (combined or separate) would hold up over longer investment durations or in prolonged correction or bear market conditions.

Readers with the capacity for "backtesting" might find it useful to research the performance of various classic value and momentum plus low price-to-sales approaches, using different holding periods. I suspect that a one- or two-year holding period may prove best for the strictly Benjamin Graham assets, while the momentum-plus-value holdings might be more profitably sold after 1-2 months, everything else being equal.

It also cannot be known, from the info in our portfolios alone, whether it might be better to sell after an asset were up 50%, 100%, or some other amount (or down some percentage, for that matter) vs. to just buy and retain them till the fixed hold period has expired.

Our original sell criteria here called for simply holding the Leapin' Lizards for one year and the Classic Value assets until a reasonable calculation of price to value is 1 or above. Now, to keep things simple and make performance comparisons easier, I am revising the Classic Value sell strategy. Assets in that portfolio will also be sold after one year, as with the Leapin' Lizards.

This week the contest selection will be added, at the early market price on 3/18/05, to the Classic Value tracking portfolio.

These candidates appear attractive: BCGI, IPSU, NHY, RSC, and TALK.

My choice among them is the Imperial Sugar Company (IPSU) (recent price $13.26). IPSU has a market-cap of $137.68 million, a trailing P/E of 8.11, a quite low price to sales ratio of 0.14, a price to book value of only 0.76, a return on equity of 11.95%, positive free cash flow, a small (1.50%) dividend, a current ratio of 2.68, and low debt to equity (0.05).

3/23/05-A 50/50 blend of Leapin' Lizards and Classic Value portfolio assets still would have beaten a buy-and-hold investment in the S&P 500 Index, with lower risk. The significant performances since a 10/4/04 contest inception are as follows:

• Leapin' Lizards: +9.63%
• 50/50 blend of LL and CV: +6.39%
• S&P 500 Index: +3.62%
• Classic Value: +3.14%.

This week, the new competition selection will be added to the Leapin' Lizards tracking portfolio, based on the early market price on 3/24/05.

The five finalists are: FFEX, HUBG, LDG, SGR, and USG.

My choice among them is: USG Corporation (USG) (recent price $31.86). USG has a market-cap of $1.38 billion, a P/E of just 4.40, a P/S ratio of only 0.31, a price to free cash flow of 4.73, a P/BK of 1.34, no dividend but a current ratio of 3.14, a return on equity of 36.91%, and a debt to equity ratio of 0.00.

USG Corp. has been a victim of crippling asbestos litigation and so is not without marked individual asset risk. However, at present it does appear to be the best candidate for selection among the few stocks I can find with a price-to-sales ratio of .5 or below, a positive free cash flow, no or low debt, and price performance better than 50% above that of the S&P 500 Index over the past 52 weeks. In addition, I consider the risk in the context of the entire portfolio, which I believe is lower than for the major markets, as tends to be the case with value stocks generally and those with low price-to-sales in particular. Not coincidentally, I'm positive on this stock as it is over 15% owned by Berkshire Hathaway.

Speaking of good stocks for the risk, I continue to feel Berkshire Hathaway (BRK/A; BRK/B) itself is an excellent company with superb leadership and think that over the long-term it is likely to still best the record of the S&P 500 Index. This security seems significantly undervalued.

By contrast, the equity market overall appears quite overvalued. Who knows what will occur in the short-term? However, the long-term risk built into the average stock today, even after recent weakness, seems substantial. It is probable that at some point in the next few years market prices will be much more attractive than they are today. Perhaps only a fool would bet on when or how badly the next significant correction or bear market will play itself out. But, on an historical basis, the vast majority of stocks, especially in the U.S., are at least 25-50% above their average levels for price to earnings, price to dividend, or price to book value.

Accordingly, we have been gradually raising our money market funds as a percentage of the total portfolio. This has been easier to accept since, in contrast to 2002 at the worst of the last bear market, there are only a handful of well-priced companies available. It has now become quite difficult, for instance, since our Leapin' Lizards vs. Classic Value competition began, to find quality stocks meeting the basic purchase criteria. This very dearth of bargains seems ominous, reminding of the periods before the major 1973-1974, 1987, 1990, and 2000-2002 market drops, when such a scarcity of good value heralded those crashes or bear attacks to come.

3/29/05-For the market as a whole, our total nest egg, and the Leapin' Lizards vs. Classic Value competition portfolios, the performances recently have been disappointing.

Since the 10/4/04 contest inception and through close of business yesterday, the Leapin' Lizards, which at one time were ahead over 16%, have advanced now just 6.91%. The Classic Value assets are up only 2.24%. A buy-and-hold investment in the S & P 500 Index would have appreciated 3.71% since 10/4. (Thus, even with the slide lately, a 50/50 investment in the Leapin' Lizards and Classic Value holdings [up 4.58%] would have performed better than a buy-and-hold S & P 500 Index approach, with less risk.)

Meanwhile, in 2005 the S & P 500 Index has fallen 3.24% (down about 2.8% after dividends). Our total retirement portfolio's return since 12/31/04 has been a negative 1.49%, but after our excess expenses over income thus far this year ($7890), our nest egg's net asset value is down 2.68% for most of the first quarter.

Our total equity book value, however, is way above its target. The 2005 year-end book value goal (based on a 12.5% compound annual increase since I began keeping track of the portfolio's total book value) is $342,000, but the actual figure is already $384,300. Since assets tend to return to the price to book value mean, and that ratio for our equity holdings (1.23) is substantially below the average (now close to 3), we should have both good downside protection and potential for healthy price appreciation once the market trend is again positive.

This week in our competition, the next selection will be added, at tomorrow's early market price, to the Classic Value tracking portfolio. Our top candidates are: CRC, DITC, ORB, RVP, and VLGEA.

My favorite is Chromcraft Revington, Inc. (CRC) (recent price $13.70), which has a nano-cap market capitalization of $81 million, a P/E of only 7.53, a price to sales ratio of just 0.34, a price to book value of 0.91, positive free cash flow, a return on equity of 13.17%, and no dividend, but a current ratio of 3.92, with a debt to equity ratio of 0.09.

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