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March, 2009: 2 12 30

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: BJS; ESV; GIFI; HCC; IOSP; MEI; PTEN; SCHN; TDW; and TIE.

The focus this time is on a new Classic Value (CV) selection, Methode Electronics (MEI) (recent price $3.55). MEI's trailing price to earnings ratio is just 4.14. The asset's market-capitalization size is nano-cap: $134.32 million. Methode Electronics has a 6.50% dividend, with a dividend payout ratio of 0.26. The price to sales ratio is only 0.25. MEI's price to book value is extremely low, at 0.38. The shareholders equity to total assets ratio is 0.82. There is positive free cash flow, with a price to cash flow of only 2.10. Return on equity is 9.17%. Debt to equity is 0.00. The current ratio is 3.57. This stock has low P/E, P/CF, P/Bk, and D/E ratios in its favor. It meets Benjamin Graham's bargain stock safety and value criteria.

Methode Electronics will be added to our CV tracking portfolio, as well as our own nest egg, at its early PM market price today (on Monday, 3/2/09).

Once again, as this market teeters perhaps on the edge of an even darker and more uncertain abyss, one wonders if it may be best to sell out, even with big losses. Despite all the scary headlines and 24/7 financial news and opinion, I believe the answer remains "No," on a net equity basis. In other words, I think the total sales less the total buys should be modestly in favor of keeping one's stock portion of a total portfolio either the same or gradually increasing.

I still think it best to use some objective criterion for determining one's asset worth, personally favoring the total book value measure as my means of doing this. In our nest egg, Fran and I continue to increase total equity book value about 12.5% or more a year.

Nonetheless, one way to do this, that is to maintain or raise total equity book value, is to sell one's losing stocks if they no longer have the best value, particularly if they are held in a taxable account and the losses can offset gains in other areas, then use the proceeds to buy assets that now have better value. Ideally, in this way one may increase the portfolio's total book value and perhaps also lower the overall P/E while increasing one's relatively safe dividend income.

Nobody knows how long this downturn will last. It may be, since the nation as a whole in multiple ways had for years expanded its debt load without any comparable increase in real productivity or profits, the amount of leverage having increased ultimately to levels not seen since 1929 (!), that we are already in the first stages of an economic depression. If so, it may be a decade or more before things begin to return to normal.

I think it more likely we are simply in the most severe recession since World War II, but believe the odds that I am wrong and that we shall have to experience a mild to major new depression are not negligible, and that any number of factors outside the government's capacity to correct the "bloodletting" may tip the balance, that I think is now at something like 30% (to pick a very arbitrary and subjective number) over in favor of the recession transforming into something much worse.

Under these circumstances, it seems to me foolish to do anything but hunker down into a conservative allocation and investment of resources, taking into account that they may need to sustain one through at least several years before assets prove again to be net winners.

Yet timing the market is a terribly risky business, fraught with failure. It could surge tomorrow and within a month or two be up 40%. Were it not so, I would be cleaning up now - which I definitely am not - with a number of strategically placed short sales. So, I believe it best to be in the stock market, but, as I say, to sell one's riskier, losing, and/or least valuable assets (such as those with HIGH P/Bk) and, in a limited way, be a net buyer of conservative, high value (low P/Bk) stocks, that preferably also have a decent dividend, not under threat due to excessive debt, as well as a low P/E.

In this regard, besides our Classic Value (CV) assets, I am a net buyer (from early November of 2008 through just this week) of key "Value Line" assets that have a nice dividend, good prospects over the next 3-5 years, and a "Value Line" safety rank of one (most favorable) at the time of purchase.

This type security is a slowly growing portion of our total portfolio and is doing reasonably well in a falling market, now down just about 6% after factoring in the yield.

Assets so far acquired for this, what I call my "Value Line Special Portfolio," include: AGN; GD; KFT; LMT; MCD; MDT; MSFT; SNY; SYY; and WAG.

3/12/09-Since the last entry, our Classic Value (CV) pick, EBF, purchased on 3/11/08, has been held over a year. It will be sold later this morning at the early market price (Thursday, 3/12/09). It will then be removed from the CV open positions portfolio, and its closed position info recorded, based on the 3/11/08 to 3/12/09 per share performance. Through the close of trading on 3/11/09, after subtracting a commission (while not counting any dividends), EBF had been down 50.59% in the past 12(+) months.

Please note: Although for tracking purposes and to be consistent with the hold rules that were originally put in place, I shall be "selling" EBF from the CV portfolio a little later today, that this is merely theoretical is highlighted by the fact that EBF is now also on my top ten list of attractive assets! So, I personally would just keep holding it. I invite the reader to do her or his own research and come to an appropriate personal decision, but to me it still represents good value, in fact better value than when it was bought a little over a year ago.

In case it has not become gruesomely obvious in recent months, a simple one-year-and-a-day hold strategy, such as we began this experiemtn with, does not work out well. It may be an improvement, with value assets, over the S&P 500 Index, though even this is not clear, but as of last month's "sale" of HIG, our CV closed position performance since 10/2004, when we began the CV portfolio, has averaged just a bit above 3% annually. True, it is as yet not in negative territory, but this is not saying a whole lot!

So, in practice, I suggest, again, that value investors NOT use an arbitrary hold period criterion for when to sell, or at least not one shorter than two years. Rather, it now seems to me better to evaluate assets on a case by case basis, keeping them when good value persists and when there have not been adverse surprises, such as that a previously solid company has suspended its dividend, etc. As suggested in the final paragraph of this entry, if one can afford to keep assets that retain excellent price to value, they have a decent chance of benefiting from an eventual return to the bullish part of market cycles.

My top-ten equities for mention today are: BJS; BRK/A (BRK/B); DAKT; EBF; ESV; LECO; LUFK; MEI; PTEN; and SCHN.

The focus this time is on a new Classic Value (CV) selection, Daktronics, Inc. (DAKT) (recent price $6.14). DAKT's trailing price to earnings ratio is just 7.95. The asset's market-capitalization size is nano-cap: $249.62 million. Daktronics, Inc. has a 1.40% dividend, with a dividend payout ratio of 0.12. The price to sales ratio is 0.44. DAKT's price to book value is 1.23. The shareholders equity to total assets ratio is 0.67. There is positive free cash flow, with a price to cash flow of only 4.70. Return on equity is 16.44%. Debt to equity is 0.00. The current ratio is 2.02. This stock has low P/E, P/CF, P/S, and D/E ratios in its favor. It meets Benjamin Graham's bargain stock safety and value criteria.

Daktronics, Inc. will be added to our CV tracking portfolio, as well as our own nest egg, at its early market price today (that is, on Thursday, 3/12/09).

On 3/10, the U.S. markets were up 6-7%. Let's hear it for another 9-10 days like that in quick succession! Of course, things do not usually work out quite that way. There is remarkably good news, though, for the student of equities history and for patient investors. I looked over the Dow Jones Industrial Average performance in bear vs. bull markets since 1900. Counting all of them, even through the Great Depression and World War II, the average drop was 30% and lasted about 18 months. Yet they were followed by bull markets that averaged gains of 92% over the next 28 months.

But many of those were but mild bear vs. mild bull markets. What if I looked only at bear losses that were really severe, at least 30% and then the subsequent bullish periods? Considering that we have already seen a bear market drop of around 55% or so from the highs set in 2007, there is real encouragement here. These huge bears, which included those in the Great Depression, the 1973-1974 market debacle, the 1987 crash, the 2000-2002 downturn, etc., lasted on average for 21 months, by my calculations, and were followed, if my math is right, by bull markets with average gains of 94% in the subsequent 34 months. Well, of course, we all know nothing is perfectly average. This bear may turn out to be worse than most and could be followed by a weaker bull than most, but the odds would seem to favor some optimism at this point. Taking early in 2008 as a theoretical beginning of the current bear, we could see a transition into bullish territory by late this year and then might recoup most or all of our losses within the next three years, particularly if dividends are thrown into the calculation. But each time is virtually guaranteed to be unique, so who knows? It should be interesting to see how well or poorly reality matches that hypothetical scenario.

3/30/09-Since the last entry, our Classic Value (CV) pick, MOV, purchased on 3/24/08, has been held over a year. It will be sold early this afternoon at the prevailing market price at that time (Monday, 3/30/09). It will then be removed from the CV open positions portfolio, and its closed position info recorded, based on the 3/24/08 to 3/30/09 per share performance. Through the close of trading on 3/24/09, after subtracting a commission (while not counting any dividends), MOV had been down 57.65% in the past 12(+) months.

My top-ten equities for mention today are: CF; DBTK; MOV; ENDP; EPAX; ESV; GHM; LECO; PCP; and PTEN.

The focus this time is on a new Classic Value (CV) selection, Lincoln Electric Holdings, Inc. (LECO) (recent price $31.72). LECO's trailing price to earnings ratio is just 6.43. The asset's market-capitalization size is small-cap: $1.35 billion. Lincoln Electric Holdings, Inc. has a 3.10% dividend, with a dividend payout ratio of 0.21. The price to sales ratio is 0.58. LECO's price to book value is 1.44. The shareholders equity to total assets ratio is 0.58. There is positive free cash flow, with a price to cash flow of only 5.30. Return on equity is 20.39%. Debt to equity is 0.14. The current ratio is 2.87. This stock has low P/E, P/CF, and D/E ratios plus a healthy dividend in its favor. It meets Benjamin Graham's bargain stock safety and value criteria.

Lincoln Electric Holdings, Inc. will be added to our CV tracking portfolio, as well as our own nest egg, at its early market price this afternoon (that is, on Monday, 3/30/09).

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