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March, 2008: 2 10 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.

My top-ten equities for mention today are: AXYS; CF; FINL; FRD; FTO; HIG; ISRG; MOS; POT; and WFR.

My focus currently is on a new Wild Wizards (WW) selection, Axsys Technologies, Inc. (AXYS) (recent price $44.00). AXYS's trailing price to earnings ratio is 29.10. Its forward P/E is estimated at 20.47. The asset's market-capitalization size is micro-cap: $478.19 million. Axsys Technologies, Inc. has no dividend. Its PEG ratio is 1.39. The shareholder equity to total assets ratio is 0.74. The price to sales ratio is 2.85. AXYS's price to book value is 3.21. There is positive free cash flow. Return on equity is 9.96%. Debt to equity is 0.00. The current ratio is 2.00. In the last 52 weeks, AXYS has risen 167.97%. This stock has advisory support, low debt, positive free cash flow, and healthy momentum in its favor.

Axsys Technologies, Inc. will be added to our WW tracking portfolio at its market price early on Monday, 3/3/08.

3/10/08-Since the last entry, our Leapin' Lizards (LL) pick, AGYS, purchased on 3/5/07, has been held over a year. It will be sold at the early market price Tuesday morning. It will then be removed from the LL open positions portfolio, and its closed position info recorded, based on the 3/5/07 to early 3/11/08 per share performance. Through the close of trading on 3/10/08, after subtracting a commission (while not counting any dividends), AGYS had been down 44.85% in the past 12(+) months.

My top-ten equities for mention today are: BRK/A (BRK/B); CF; CUB; DNR; EBF; FCN; FTO; MON; MOV; and POT.

The focus this time is on a new Classic Value (CV) selection, Ennis, Inc. (EBF) (recent price $14.76). EBF's trailing price to earnings ratio is just 9.24. Its forward P/E is estimated at 8.39. The asset's market-capitalization size is micro-cap: $378.65 million. Ennis, Inc. has a 4.10% dividend, with a dividend payout ratio of 0.40. The price to sales ratio is 0.65. EBF's price to book value is below average at 1.13. There is positive free cash flow. Return on equity is 12.52%. Debt to equity is 0.29. The current ratio is 3.45. The shareholders' equity to total assets ratio is 0.66. This stock has low price to earnings, low debt, low P/S, a relatively low P/Bk, and a healthy dividend in its favor. It meets Benjamin Graham's safety and value criteria as a bargain stock.

Ennis, Inc. will be added to our CV tracking portfolio as well as our own nest egg at its market price early on Tuesday, 3/11/08.

With the last CV sale, ZNT, our average closed positions' annualized performance has fallen to about 17.2%, or a roughly 18.9% (if one includes an average dividend of about 1.7%) total return. Our target for awhile has been an annualized total return of around 20%, so this is a disappointment. It may turn out that the target level will again be achieved in the long run. We shall see. But it is also possible that the one year and a day sell rule is too stringent, particularly in bear markets such as we are in at the moment.

In the long-term hypothetical portfolios (LL and CV), this rule will be maintained here, for it would be cumbersome as well as much less meaningful to provide asset stats for which the buy and sell rules have been changed.

Nonetheless, the reader is encouraged to come to her or his own decision on this issue. Partly it depends on how comfortable one is with a little more active, less mechanical approach to stock investing.

I am pleased that, so far at least, the cumulative closed position total return of the CV assets, despite several down markets in the intervening period since the portfolio's inception, in 10/04, has at least been superior to the annualized return one would have had with simply a buy-and-hold then in one of the major market average index funds.

I am not certain this would have been true if one were to have dollar cost averaged investments in, say, a low fee S & P 500 Index fund at the same time as each of the CV investments were made, but it is my impression that, even against this yardstick, our CV selections would have proven more profitable.

So, one may wish to stick with the simplicity of every other week or so buying the best classic value asset one can find and selling it after about 366 days. I think it likely (though it is by no means assured!) that, over extended periods, the results of such an approach will turn out to have been somewhere in the 15-20% annual total return range. Even with various downs as well as ups along the way, this may be quite good enough. Certainly, if one begins early, it should be adequate to make one financially independent by the typical retirement age.

On the other hand, if one is flexible about sell criteria, a little better overall return may be possible. For instance, one might sell after a year plus a day only if the asset in question is no longer then a good value play, and otherwise hold it for up to two years, awaiting a possible better realization of its potential. As an example, if an asset were bought with a price to book value of 0.66 and, 366 or 367 days later, its price to book value is still low at, perhaps, 0.85, the investor might continue to hold it till its book value had fallen or its price had risen and the resultant price to book value were 1.2 or above, or till two years after purchase, whichever first.

A simplified version of 4 sell rules that Ben Graham suggested for non-professional investors would be to: sell if the asset has increased 50% or more or been held two years, whichever first. (This is more efficiently profitable in a tax-deferred account, since a number of 50% or greater increases may occur before the assets would have been held long enough to convey lower tax treatment by IRS.) At times in our personal money management I have used this approach, with pleasant results. Especially in the current market environment, I am tempted to return to this generally satisfactory sell strategy for our hard earned nest egg.

Other things to consider when stocks are down and quite possibly headed lower are: 1. There seems usually to be less risk in a stock if it pays a dividend (and has a payout ratio of 0.5 or below), though Berkshire Hathaway is probably the exception to this rule; and 2. It pays to establish some value criterion for one's equity holdings that is fairly independent of what the market does.

My favorite in this regard is total book value. There was a book popular some years back called Do What You Love - The Money Will Follow. I'm not sure the author was correct in that maxim, but I do believe in one that goes like this: Acquire plenty of book value - The money will follow.

We try to increase our portfolio's book value by at least 12 1/2% a year. Even if stocks are down now, they tend eventually to bounce back to around twice their book value. So, I would have people pay more attention to book value in their holdings or in the new assets they acquire.

One's nest egg will likely do alright over the years if his or her own personal price to book value is substantially lower than the market's. To find out what one's overall stock price to book value is, just add up the book values from each of the stock holdings in the portfolio (book value per share times the number of shares held) and divide the current market value of all one's stock holdings by that figure. (In our case, currently it is down around 1.1, giving our assets hopefully a lot of potential buoyancy once the markets begin to turn around and head upward again.)

3/17/08-Since the last entry, our Wild Wizards (WW) pick, MON, purchased on 2/5/08, has been held at least 4 weeks. And it no longer meets our WW buy or hold criteria. So it will be sold at the early market price tomorrow (Tuesday morning). It will then be removed from the WW open positions portfolio, and its closed position info recorded, based on the 2/5/08 to early 3/18/08 per share performance. Through the close of trading today, after subtracting a commission (while not counting any dividends), MON has been down 5.83% since purchase.

Also since the last entry, our Classic Value (CV) pick, TDW, purchased on 3/12/07, has been held over a year. It too will be sold at the early market price Tuesday morning. It will then be removed from the CV open positions portfolio, and its closed position info recorded, based on the 3/12/07 to early 3/18/08 per share performance. Through the close of trading on 3/17/08, after subtracting a commission (while not counting any dividends), TDW had been down 6.93% in the past 12(+) months.

My top-ten equities for mention today are: AXYS; BRK/A (BRK/B); BWS; CF; EBF; HIG; KELYA; NFLX; POT; and WFR.

My focus currently is first on a new Wild Wizards (WW) selection, NETFLIX, Inc. (NFLX) (recent price $32.99). NFLX's trailing price to earnings ratio is 33.94. Its forward P/E is estimated at 21.99. The asset's market-capitalization size is small-cap: $2.02 billion. NETFLIX, Inc. has no dividend. Its PEG ratio is 1.31. The shareholder equity to total assets ratio is 0.67. The price to sales ratio is 1.69. NFLX's price to book value is 5.01. There is positive free cash flow. Return on equity is 15.85%. Debt to equity is 0.00. The current ratio is 1.96. In the last 52 weeks, NFLX has risen 58.23%. The asset has advisory support, momentum, and low debt in its favor.

NETFLIX, Inc. will be added to our WW tracking portfolio at its market price early on Tuesday, 3/18/08.

The next focus is on another Wild Wizards (WW) selection, MEMC Electronic Materials, Inc. (WFR) (recent price $81.27). WFR's trailing price to earnings ratio is 22.85. Its forward P/E is estimated at 15.54. The asset's market-capitalization size is giant-cap: $18.56 billion. MEMC Electronic Materials, Inc. also has no dividend. Its PEG ratio is 0.63. The shareholder equity to total assets ratio is 0.70. The price to sales ratio is 9.63. WFR's price to book value is 9.13. There is positive free cash flow. Return on equity is 51.61%. Debt to equity is 0.02. The current ratio is 3.58. In the last 52 weeks, WFR has risen 47.71%. This asset as well has advisory support, momentum, and low debt in its favor, plus a low PEG ratio.

MEMC Electronic Materials, Inc. will also be added to our WW tracking portfolio at its market price early tomorrow, 3/18/08.

I caution that the short-term WW strategy of buying generally high momentum assets with strong advisory support, even if with low debt and other factors in their favor, may result in a volatile portfolio and involve greater risk than a longer-term CV approach or even than a buy and hold (major markets) index fund method of investing.

The already existing WW portfolio is a daunting example. With so far 5 assets, it is down just 3.97% through this afternoon's close, after an average per asset hold period of 19.26 days. But on an annualized basis, this could mean a staggering loss of 53.75%.

That is only about half the WW story, however. The strategy's closed positions are up, at least prior to the anticipated sale at a loss tomorrow morning of MON. Once they are added to the annualized performance equation, for all one's short-term risk there is a hypothetical annual gain of a whopping 6.44%.

I am still interested in the performance over time of such a strategy, but not prepared to invest much real money in this one. Nor can I encourage the reader to do so. It is also not easy to explain to other investors how I determine which WW assets to buy and sell. By contrast, for CV the steps are numerous but can be readily set forth and followed and so are much more straightforward.

If in our next quarterly assessment (for the period through March) of the various hypothetical portfolios, the WW assets continue to present a cautionary tale, I shall end this particular experiment, just as I had new picks in the Leapin' Lizards (LL) methodology.

If so, I expect then to cease the hypothetical portfolio competitions entirely and instead simply concentrate on discovering and presenting attractive CV securities or making from time to time personal observations on the market, portfolio management, etc., as I had done here several years ago during the worst of the last bear market.

Of course, it could be, in beginning to shy away from the WW approach, I am just trying to get out of complicated record keeping for a system I am beginning to suspect is not the best for volatile, negatively trending market conditions. Though generally I try to stay far away from market timing, I must admit to being increasingly nervous about the prospects for profits in the short- to medium-term.

Rather, I have a sense that now is the time to batten down the hatches. Given that there are a number of significant risks built into the financial system, not merely the sub-prime mess but also the general credit crunch, above average inflation, globalization making for a less resilient labor market, massive amounts of government, corporate, and consumer debt making for a less resilient economy, and, among other concerns, the wild cards of vast derivatives speculation plus terrorism plus a falling dollar (which could become much less attractive to foreign governments as the U.S. seems to be weakened), if the Fed does not get things just right we could see a "perfect storm" with sustained and deep loss of confidence in the markets such as has occurred only rarely in the last several generations.

All in all, it seems to me a time more for true investing than speculating, keeping margin debts either at zero or very low, paying off one's other financial obligations, dollar-cost-averaging, living within one's means, and the proverbial Ben Graham margin of safety in each of our investments.

Still, it also appears not unlikely stocks may be oversold and that a resurgence of non-financial equities could soon be in the offing. Perhaps my gloomy worries and expectations will not be fulfilled after all. We shall see. (But if they are, there should be a terrific lot of great bargains to be acquired by discerning value investors.)

3/23/08-Since the last entry, our Leapin' Lizards (LL) pick, WSTF, purchased on 3/19/07, has been held over a year. It will be sold at the early market price Monday morning. It will then be removed from the LL open positions portfolio, and its closed position info recorded, based on the 3/19/07 to early 3/24/08 per share performance. Through the close of trading on 3/20/08, after subtracting a commission (while not counting any dividends), WSTF had been down 54.54% in the past 12(+) months.

My top-ten equities for mention today are: AHL; EIHI; FTO; IPCR; MOV; NTRI; ORH; PLFE; PTP; and TRCR.

The focus this time is on a new Classic Value (CV) selection, Movado Group, Inc. (MOV) (recent price $18.96). MOV's trailing price to earnings ratio is just 9.36. Its forward P/E is estimated at 10.77. The asset's market-capitalization size is micro-cap: $494.61 million. Movado Group, Inc. has a 1.70% dividend, with a dividend payout ratio of 0.15. The price to sales ratio is 0.85. MOV's price to book value is below average at 1.12. There is positive free cash flow. Return on equity is 13.92%. Debt to equity is 0.14. The current ratio is 4.97. The shareholders' equity to total assets ratio is 0.67. This stock has low price to earnings, low debt, and relatively low P/Bk in its favor. It meets Benjamin Graham's safety and value criteria as a bargain stock.

Movado Group, Inc. will be added to our CV tracking portfolio at its market price early on Monday, 3/24/08.

In case it is of interest, I am placing buy orders this time for our own nest egg in five of the top ten assets mentioned above: AHL; EIHI; IPCR; MOV; and PLFE. To me, each of them has compelling value at these prices, and the purchases will help build up a portfolio that has been depressed by recent market bearishness. They will also add to our total equity book value ballast as, on average, these securities have significantly higher book value than their costs per share.

3/29/08-Since the last entry, our Classic Value (CV) pick, PRE, purchased on 3/26/07, has been held over a year. It will be sold at the early market price Monday morning. It will then be removed from the CV open positions portfolio, and its closed position info recorded, based on the 3/26/07 to early 3/31/08 per share performance. Through the close of trading on 3/28/08, after subtracting a commission (while not counting any dividends), PRE had been up 7.49% in the past 12(+) months.

My top-ten equities for mention today are: AHL; APA; AXYS; EIHI; FTO; LNN; MON; MOV; OMG; and PLFE.

My focus currently is on a new Wild Wizards (WW) selection, Apache Corp. (APA) (recent price $119.05). APA's trailing price to earnings ratio is 14.19. Its forward P/E is estimated at 10.21. The asset's market-capitalization size is giant-cap: $39.64 billion. Apache Corp. has a 0.50% dividend, with a dividend payout ratio of 0.07. Its PEG ratio is 1.13. The shareholder equity to total assets ratio is 0.54. The price to sales ratio is 3.98. APA's price to book value is 2.60. There is positive free cash flow. Return on equity is 19.69%. Debt to equity is 0.28. The current ratio is 1.03. In the last 52 weeks, APA has risen 68.39%. This stock has advisory support, low debt, positive free cash flow, and healthy momentum in its favor.

Apache Corp. will be added to our WW tracking portfolio at its market price early on Monday, 3/31/08.

It has been quite a time for the stock market over the last few months. Our next entry, due within a couple or three days, will be a quarterly review of the hypothetical portfolios' performances from inception through 3/31/08. The recent correction has taken quite a bite out of suggested assets, so the results should be both more sobering and interesting than usual.

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