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April, 2005: 5 10 21 26

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.

For this week, the new selection will be added, at tomorrow morning's early market price, to the tracking portfolio for the Leapin' Lizards. The final candidates are: FFEX; HUBG; INT; LDG; and SGR.

My choice among them is Longs Drug Stores Corp. (LDG) (recent price $35.33), which has a market cap of $1.33 billion, a rather high P/E of 36.3, but a quite low price to sales ratio of only 0.29, a reasonable price to book value of 1.83, positive free cash flow, a return on equity of 5.10%, a current ratio of 1.51, and a low (0.21) debt to equity. LDG has a small (1.60%) dividend with a slightly high dividend payout ratio of 57.2%. It has already appreciated 25.67% in 2005 and 80.98% relative to the S&P 500 Index in the last 52 weeks.

4/10/05-Since the 10/4/04 inception of our Leapin' Lizards vs. Classic Value portfolios competition, the Leapin' Lizards (LL) are ahead 7.91%, Classic Value (CV) is up 3.19%, an initial buy-and-hold investment in the S&P 500 Index has appreciated just 4.33% (the same as for the last entry), and a 50/50 combination of the LL and CV portfolios (which provides both safety and good growth potential) would have gone up 5.55%. (All comparisons are based strictly on price performances, which exclude dividends, though commissions have been subtracted from the portfolio gains.)

For this week, the new selection will be added, at tomorrow morning's early market price, to the tracking portfolio for the Classic Value assets. The final candidates are: GTSI; MVK; NUE; ORB; and SAB.

My choice among them is Grupo Casa Saba, S. A. (ADR) (SAB) (recent price $16.60), which has a market cap of $440.60 million, a rather low P/E of 7.71, a quite attractive price to sales ratio of only 0.24, a below average price to book value ratio of 1.24, positive free cash flow (price to free cash flow: 5.95), a return on equity of 17.21%, a current ratio of 1.84, and zero debt to equity. SAB has an above average dividend of 2.17%, with a dividend payout ratio of 16.99%.

In our overall retirement nest egg, we have benefited from this competition. Our purchases among the Leapin' Lizards, which now are receiving a somewhat greater focus than the Classic Value assets picked here, are up 12.51% to date. Generally I only purchase a LL if in addition to the basic requirements (P/S .50 or below, debt to equity .33 or below, and 52 week price appreciation at least 50% better than for the S&P 500 Index) it has other characteristics making it attractive, for instance a low P/E or P/BK and/or a high dividend.

Nonetheless, the LL's are being added only gradually and are still only a small part of our total holdings. Thus far in 2005, our nest egg's net asset value is down 2.20%. So, I'm hoping the rest of the year will be better. At least our total equity book value remains considerably above not just the current but the year-end target (which is based on a 12.50% increase per year, after all our budgetary expenses).

I note that, despite some cautionary news reports about the company being under minor investigation, shortly after I had recently recommended Berkshire Hathaway (BRK/A; BRK/B), "Barron's" (4/4/2005, pp.17-18) also cited it as a good value stock, and it has been nicely up since then.

4/21/05-It's been a little while since the last entry as I had been out of town for several days. In that time, the stock market activity has certainly not been boring. As of mid-morning today, the S&P 500 Index is now down 5.5% for 2005 (does not include dividends - were they included, the S&P return would likely be only a little better, down roughly 5.0%).

Meanwhile, our nest egg's net asset value has fallen 3.3%, prior to our excess of expenses (taken out of the nest egg) over income this year. Once those expenses ($9123 so far in 2005) are factored in, our total portfolio's net asset value is down 4.5%, which, of course, is still ahead of the S&P 500 Index.

The correction has really taken a toll on our competition assets. Since the 10/4/04 inception of our Leapin' Lizards vs. Classic Value portfolios experiment, the Leapin' Lizards (LL) are now ahead just 1.96%, Classic Value (CV) is up a mere 1.42%, an initial buy-and-hold investment in the S&P 500 Index has appreciated just 1.15% (again, as of mid-morning today), and a 50/50 combination of the LL and CV portfolios (which provides both safety and good growth potential) would have gone up 1.69% (47% better than the 10/4/04 buy-and-hold S&P 500 Index performance). (All these comparisons are based strictly on price appreciation, which excludes dividends, though commissions have been subtracted from the portfolio gains.)

Even given their superior relative performance, only about 1-2% appreciation certainly does not seem impressive for our contest holdings. Please bear in mind in considering those figures that the average holding period in the tracked portfolios has been only about half the 6½ months since the competition's inception. On an annualized basis, which may be more accurate here, the LL gains would be closer to 7.2% and those for CV, about 5.2%, while the annualized gain for a 50/50 combination of the two portfolios would be about 6.2%.

For this week, the new selection will be added, at tomorrow morning's early market price, to the tracking portfolio for the Leapin' Lizard assets. I could find only two assets that met our minimum criteria: MHS and SGR.

My choice between them is Medco Health Solutions (MHS) (recent price $51.24), which has a market cap of $14.19 billion, a rather high P/E of 29.23, an attractive price to sales ratio of 0.41, a price to book value ratio of 2.46, positive free cash flow, a return on equity of 8.95%, a current ratio of 1.63, and debt to equity of 0.21. MHS has no dividend. It is up 29.81% so far in 2005 and up 52.98% relative to the S&P 500 Index in the last 52 weeks.

I believe the lack of many current candidates for the Leapin' Lizards portfolio is due to the selection criteria emphasizing momentum factors, which have been negative recently during this correction, so that substantially fewer stocks are now beating the S&P 500 Index by at least 50% over the previous year.

There is a benefit to any significant correction, crash, or bear market, though, in that such conditions create more value bargains. And I am, indeed, finding quite a number of such new buy candidates. The following, in no particular order, are my current favorites: BRK/A; BRK/B; MRI/A; AIG; HD; AA; DUCK; RSAS; RE; BER; and ROL. We cannot afford to buy BRK/A at this point, but I'll be selecting two of the others for purchase and addition to our nest egg later today.

4/26/05-Our nest egg's net asset value has fallen 4.1% for 2005, once all excess expenses over income are included in the calculations. But we are conservatively positioned, with about 1/3 in non-equity holdings plus plenty of book value relative to our equities' total price.

Since the 10/4/04 inception of our Leapin' Lizards vs. Classic Value portfolios experiment, the Leapin' Lizards (LL) are now ahead 2.46%, Classic Value (CV) is up 1.59%, an initial buy-and-hold investment in the S&P 500 Index has appreciated 2.30% (as of early morning today), and a 50/50 combination of the LL and CV portfolios (which provides both safety and good growth potential) would have gone up 2.03%. (The comparisons are based strictly on price appreciation, which excludes dividends, though commissions have been subtracted from the portfolio gains.)

As mentioned before, please bear in mind that the average holding period in the tracked portfolios has been about half the 6 months and 3 weeks period since the contest inception. On an annualized basis, these LL gains would be closer to 9.3% and those for CV about 6.0%, while the annualized gain for a 50/50 combination of the two portfolios would be about 7.64%.

For this week, the new selection will be added, at the market price late this afternoon, to the tracking portfolio for the Classic Value assets. The top candidates are: MVK; NUE; ORB; TALK; and WIRE.

My choice among them is Talk America Holdings, Inc. (TALK) (recent price $7.35), which has a market cap of $196.86 million, a very low P/E of 5.51, an attractive price to sales ratio of 0.43, a reasonable price to book value ratio of 1.39, positive free cash flow (price to free cash flow just 3.52), no dividend, but a return on equity of 27.40%, a current ratio of 1.63, and a debt to equity ratio of only 0.03.

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