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June, 2002: 4 7 14 18 22 28
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. |
6/4/02-Yesterday, my portfolio being down by more than the $10,000 threshold under my plus-or-minus 5% parameter limits, since I had last checked, I purchased 46 shares of Pulte Homes (PHM). Strictly speaking, this is not one of the best value plays. It does have a relatively low price to earnings ratio, recently between 8-10. And its total debt to equity is less than one. But it also has momentum in its favor. It will be part of my timeliness/growth portfolio, as this segment of our total assets is the lowest, compared with its target, lately. The home building and sales sector has being doing quite well in the market. PHM seems likely to do better than average over the next five years or so as well. Thus, I would not mind holding it for the long-term. In this instance, however, the hope is to see some short-term gains, then sell out in favor of a more promising asset, that meets the portfolio guidelines at least as well, if not better than, this one originally did.
I try for this segment of our assets to buy a stock with the best combination currently available of a "Value Line" timeliness plus safety plus technical ratings sum of six or below, plus less debt than equity, relatively low price to book value (price to book of PHM about 1.25) and/or a solid dividend, while it also looks good in relation to the market as a whole with respect to price to earnings. It is thus a more value and growth approach than the rest of our assets. We'll see. This system has worked well so far.
Meanwhile, the intention is for at least half of all asset purchases to meet strict value criteria. Thus, no more than every other asset acquisition will be timeliness/growth or non-equity selections. In addition, we are maintaining our policy of increasing the equities' book value by at least 10% a year, with the intention to keep our overall stock price to book value less than one. (I believe the price to book value of the market as a whole right now is more than three!)
Excellent value assets that have recently been in the news, recommended by Wally Weitz or other super investors, include:
- Liberty Media (L);
- Qwest Communications (Q);
- Charter Communications (CHTR);
- Washington Mutual (WM); and
- Berkshire Hathaway (BRK/A; BRK/B).
Fran and I are searching for a good second car purchase now, after having to sell hers for scrap in IL. This process of buying another vehicle is, for some reason, much more depressing and/or nerve-wracking than investing hundreds of thousands of dollars in bonds, equities, or liquid real estate assets. I suppose it all depends on with what we are already familiar. And we like doing what we do well! With car buying, it almost always seems like pure speculation. For a good mechanic, of course, cars may be his or her forte, while stocks could give the willies.
6/7/02-Placed an order to buy 473 shares of Charter Communications (CHTR), another of the beaten down telecommunications company stocks being decimated in the markets, particularly in recent months. My portfolio is once again well below its current target, as my holdings, along with the rest of US equities, have continued their downward spiral. So a new buy signal was generated.
Despite its long-suffering price, CHTR has several things going for it from a value perspective, beginning with recent price to book value of just .56, with recently increasing revenues, and low price to sales, per AAII. Charter Communications is the nation's 4th largest cable company. It has lately been recommended for buy or accumulate by 20 out of 23 analysts, per Schwab, and carries an accumulate rating, from Standard and Poors, as well as a Recommended List rating, from Goldman Sachs.
The asset is also among the top holdings of some stellar value oriented mutual fund managers, who apparently expect big things from CHTR in the years ahead.
Fran and I are coming to grips with having almost $9300 less funds available, except through margin debt, due to yesterday's replacement car purchase, plus the sales taxes, not to mention several other recent or upcoming expenses. We're optimistic about our finances, though, so long as bad luck's rain on our parade does not become a flood.
We may later need to return to at least part-time work, however, if the trend of extra costs and losses prevails. It would be better to simply face and deal with this than to let things go to the point we are seriously in jeopardy of a significantly reduced retirement nest egg.
6/14/02-Placed an order to buy 117 shares of Lone Star Steakhouse (STAR), for our growth/timeliness portfolio. Our buy/sell portfolio model is indicating another strong buy, the market having taken our equities down several thousand dollars below their target, again this week.
STAR has a "Value Line" timeliness plus safety plus technical ratings sum of 6, a price to earnings ratio of 10.77 (about half or less that of the market), based on the rating service's year-ahead projections of earnings, the highest (1) timeliness rank, zero debt to equity, a healthy, 2.86% dividend (more than twice that of the market), and a low price to book value of 1.09. With a solid dividend and good growth prospects over the next few years, the asset looks to provide a 15% annual 3-5 year compound return.
Exit Strategy-The intention is to hold STAR till it no longer has a timeliness rating of 1, and it's either up 60% in price and has been held a year or the price to book value is now 1.74 or above and the P/E 17.23 or above.
6/18/02-In keeping with an earlier entry emphasizing the importance of dividends for good returns and risk avoidance, I've found four likely stock candidates for purchase, all with healthy yields, reasonably low or no debt to equity, and below average price to earnings ratios. As a group, they also appear to offer better than the norm prospects for capital appreciation over the next several years.
| Allied Capital Corp. (ALD) | - Recent Yield 9.7% |
| Standex International (SXI) | - Recent Yield 3.4% |
| Reliant Energy (REI) | - Recent Yield 8.6% |
| Alliant Energy (LNT) | - Recent Yield 8.0% |
To these current suggestions I would add Pfizer (PFE). Though its yield is now only about 1.4%, this is a Buffettology stock screen selection with excellent long-term growth prospects. As the company grows, so should the dividend. It's rated A+ by Standard and Poors. Its recent five year annualized total return was 24%. Yet it's trading at or near its 12-month low. The company is strong financially, has been paying dividends year in and year out since 1901, and has superior prospects from an inventory of many important drugs, including cholesterol lowering Lipitor and the popular Viagra. Its research and development exceeds $5 billion a year. According to Morningstar, this is the largest holding of the T. Rowe Price Health Sciences Fund. It looks like a winner to me as well.
6/22/02-Have placed an order for purchase of 57 shares of Health Care Property (HCP), for our non-equities portfolio. HCP is a real estate investment trust (REIT) rated as above average for safety and projected to have a 16% compound annual total return over the next 3-5 years, per "Value Line." It's projected average dividend in this period is 8.4%. The asset will be helpful in an effort to increase the average yield of our liquid holdings and to balance the risk of our equities with bond, reserve, and real estate assets. Under current market conditions, with price to earnings ratios generally quite high, dividends very low, and the average stock price to book value more than three, we are trying to maintain a 1/3 ratio of non-equity holdings to stock assets, balancing again periodically and after a 5% or greater discrepancy from the target ratio. Added holdings are expected to provide three to five year projected annual total returns of 15% or greater (whether actually held for the long-term or not), and are not purchased unless, at a minimum, they meet that criterion. No increase in debt is involved in the ordered transaction, since an IRA cash account was used.
6/28/02-There's a rough rule of market timing, an exception to the usual truism that timing is a fool's game, and generally still applicable only when one has held back a significant proportion of one's liquid assets in relatively stable non-equity positions or reserves. It is that, when the Dow Jones Industrial Average is 10% or more below its level of a year earlier, it is a good time to buy. The theory is that, though markets fluctuate, the average asset does not descend to zero (while the individual stock surely may). And that, having plummeted, markets shall invariably rise again. The rest of the rule has it that when the DJIA is up 35% or more from its level a year earlier, 'tis an excellent time to sell. In each case one may be early, but should thereby garner in turn the bargains and the bounty, without the accustomed risk. In the intervening periods, one's advised to keep his/her powder dry with money market funds and certificates of deposit.
Well, such an approach, while it has much to commend it, would have gotten you entirely out of the stock market several years ago. You might have thus missed most of the devastation that began in March, 2000, but also much of the "irrational exuberance" that characterized the greater part of the 1990's.
For me, a mixed system seems preferable, with most holdings kept for the long-term but some available for the limited use of timeliness strategies.
The latter is particularly relevant in this instance, for, with the decimation of recent months, large segments of our overall equity portfolio are way down, including especially utilities, cable stocks, and telecommunications.
Using the Dow down at least 10% from a year earlier strategy, then, and noting that the DJIA is now about 12% lower than at the end of June, 2001, we have been loading up on quality and bargain assets, while nonetheless keeping one-third of liquid portfolios in non-equities, in case the downward stock spiral persists.
New holdings we have thus picked up, at what seem to be excellent value prices, include:
- Liberty Media (L) (Recent price $8.80)
- Allied Capital Corp. (ALD) (Recent price $21.85)
- Helen of Troy Ltd. (HELE) (Recent price $11.86)
- American Axle and Manufacturing (AXL) (Recent price $28.75).
Disclaimer and Disclosure Statement
Neither I nor Investor's Journal will be responsible for losses by anyone who obtained ideas from this site.
This diary is intended for personal interest and general information only. You are advised to do your own research (as well as to consult highly compensated professionals) before spending money on anything.
I know of no reason anyone should take my financial musings seriously. At best I am a dedicated amateur providing a bit of investment-related insight and entertainment, at worst an amusing diversion.
My wife, Fran, and I may at times own shares of some of the assets mentioned here. But neither of us receive any benefit from reference to them, unless you count the mutual misery when we get it wrong, or the opportunity to gloat when we get it right.