Home
Previous
Next

July, 2008: 8 9 14 19 27

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.

In the next few days, I hope to get the hypothetical portfolio information back up to date, starting, this time, with a new top-ten list, suggested stock pick, and notification of assets that now have been held in our LL or CV portfolios a little more than 12 months.

Concerning assets held a year and a day, a reminder, though, that for classic value stocks, regardless of the suggestions here for the hypothetical portfolio, instead of simply selling mechanically after about 366 days, I now believe it will generally be more profitable to wait to sell an asset till it has been held a couple years or till it has achieved its price to value potential. I refer the reader to my entry of 3/10/08:

"...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.)"

Regarding that last parenthetical statement, as we have acquired more book value since then and the market, and with it to a lesser degree our portfolio, has still fallen further, the comment made in March about our own total equity price to book value is out of date. Our nest egg's overall equity P/Bk now stands at around .9.

Do I wish our retirement portfolio's market value were higher? You bet! But I also feel pretty comfortable with the buoyancy created by that low a P/Bk. Sooner or later, unless this is the end of the equity markets' world, there will be terrific pressure to buy more stocks. When that occurs, some of these low P/Bk and low P/E assets should do well. Meanwhile, they tend to fall less severely in down markets than their high P/Bk or high P/E cousins, everything else being equal.

Since the last entry, our Leapin' Lizards (LL) pick, MAN, purchased on 6/25/07, has been held over a year. It will be sold at the early market price Wednesday morning. It will then be removed from the LL open positions portfolio, and its closed position info recorded, based on the 6/25/07 to early 7/9/08 per share performance. Through the close of trading on 7/8/08, after subtracting a commission (while not counting any dividends), MAN had been down 39.59% in the past 12(+) months.

Since the last entry too, our Classic Value (CV) pick, ACGL, purchased on 7/2/07, has also been held over a year. It will be sold at the early market price Wednesday morning as well. It will then be removed from the CV open positions portfolio, and its closed position info recorded, based on the 7/2/07 to early 7/9/08 per share performance. Through the close of trading on 7/8/08, after subtracting a commission (while not counting any dividends), ACGL had been down 7.95% in the past 12(+) months.

My top-ten equities for mention today are: AM; BRK/A (BRK/B); EBF; FLXS; IPCR; MW; PLFE; RMCF; TSC; and UFCS.

The focus this time is on a new Classic Value (CV) selection, Men's Wearhouse, Inc. (MW) (recent price $17.56). MW's trailing price to earnings ratio is just 8.05. Its forward estimate of P/E is 8.17. The asset's market-capitalization size is small-cap: $906.61 million. Men's Wearhouse, Inc. has a 1.70% dividend, with a dividend payout ratio of 0.12. The price to sales ratio is only 0.42. MW's price to book value is below average at 1.09. There is positive free cash flow. Return on equity is 14.48%. Debt to equity is 0.13. The current ratio is 2.61. This stock has low price to earnings, low debt, and below average P/Bk in its favor. It also has a good record of earnings growth over the past several years.

Men's Wearhouse, Inc. will be added to our CV tracking portfolio, as well as our own nest egg, at its market price early on Wednesday, 7/9/08.

7/9/08-Here, through the first half of 2008, is the latest performance summary for the tracked portfolios:

(The statistics combine portfolio open and closed position results and are effective as of the end of trading 6/30/08. Dividend income has not been included in the portfolios' performance. Commissions, though, have been subtracted from the portfolio asset results, but not from the SPX gains.)

( *since CV, LL, & SPX inception, 10/4/04)
(**SPX is used as a proxy for the S&P 500 Index.)
(***since WW inception, 1/5/08)

Observations about the portfolio results:

• As the markets as a whole have continued to decline, particularly so for smaller-capitalization assets, since the last quarterly review (effective 3/31/08), the total return figures reflect that in our main long-term hypothetical portfolios even the usually stalwart CV assets have been taking a considerable beating. With conservative dividend rate estimates of about .5% for the open plus closed position LL assets and about 1.7% for the open plus closed position CV stocks, the annualized LL total return to date would still show only a 1.1% gain since inception, while the CV picks would have performed at a total return rate of about 8.9% a year.

• As indicated previously, though, I believe the longer term record of the closed positions more accurately reflects the potential and pitfalls of the respective portfolios than do the short-term swings of the open position assets. If we look only at the closed positions, then, we see that both the LLs and the CV assets have held up a little better. The LL closed position performance has averaged 2.8% compounded annually, for a total return of about 3.3% a year, once a conservative LL dividend of 0.5% has been included. The CV closed position performance has averaged 13.7% compounded annually, for a total return of about 15.4% a year, once a conservative CV dividend of 1.7% has been included. By this method of comparing the two hypothetical long-term portfolios, CV still tops LL by over 12% annually.

• For a hypothetical 50/50 CV/LL Blend, the closed position figures would indicate an annualized total return record of about 9.4%.

• The 50/50 CV/LL Blend's overall (open plus closed positions) annualized total return, though, is estimated, given the figures through 6/08, at only about 5.0%, about the same as the total return for a buy and hold investment in the S&P 500 Index (with dividends) begun on 10/4/04.

• The 50/50 CV/LL Blend's combined closed positions since inception now number 143. Of these, 61 have turned out to be losing stocks in the periods they were held, while there were 82 winners. The win to loss ratio has thus fallen even more significantly (than in our last quarterly analysis) since an evaluation of the portfolios 18 months ago (when it was 2.10) to a far more daunting and risky 1.34. The losers were a whopping 42.7% of the total.

• As reemphasized in yesterday's entry, I no longer am advising folks to sell all long-term hypothetical portfolio type assets after a year and a day, but rather to assess them on a case by case basis. If at the year plus a day analysis they still represent good price to value, I personally would hold them till that is no longer the case or they have been in my portfolio a couple years, whichever occurs first. It seems foolish to sell at a loss into a bear market when there remains good value in a stock.

• As I recall, the famous value investment pioneer, Benjamin Graham, has written that in any given 5-year period the average value investment performance should average 15% or better (and based on today's dividend levels, that probably works out to a compound average annual total return of around 17+%).

• However, by that he did not mean that every year one would see performances or total returns such as those. Rather, if there were down periods, his and his associates' experiences of over 50 years were that in any given 5-year interval the losing times would be so offset by the winning ones that the 15% or better (17% or better likely with dividends, particularly if dividend stocks are emphasized in one's portfolio) annualized results might be counted on as an average. The current bear market is one that may test our faith in Graham's encouraging words.

• Still, I watched the 1973-1974 market take over $1,000,000 out of my parents' portfolio, only to see it all put back and then some by the end of 1977. I have experienced similarly dizzying downs followed by ups with our own nest egg in 1987 through 1991, and then again, of course, in 2000 through 2004. This time could be the exception to that rule. There are no guarantees. However, I think it likely that a few years from now the equity markets will be comfortingly higher, and our classic value assets with them.

• Returning to the analysis of winners vs. losers, considered by themselves CV stock picks have shown themselves more vulnerable to market downturns in the past many months. Through 6/08, 38.8% of the 80 total CV closed position assets turned out to be losers, for a win to loss ratio of 1.58.

• Among the 63 LL closed position assets, 30, or 47.6% were losers. The win to loss ratio was just 1.1.

• Particularly given that this appears to be a bear market, the Wild Wizards (WW) continue to offer surprisingly good comparative results, though our experience with them is still way too short to draw serious conclusions. After but a few months' of monitoring them, though, it is fun to see such WW numbers as a better than 45% annualized performance. If only we could bank on that!

• So far, the (very risky) WW assets' closed positions have shown a 53.8% loss rate and a win to loss ratio of just 0.86. If they ultimately prove far more profitable long-term than CV, it may justify such high potential for loss. But that "if" is a large hurdle to overcome.

• Because there is always the possibility of unforeseen developments spooking the stock market further and causing large losses to one's nest egg (at least in paper value), I urge again that it seems best to keep debts low and to maintain a reserve of short-term or cash equivalent assets. If one has done so, this might be a good time to reallocate and gradually increase one's equity percentages relative to non-equities, since the former are clearly in a slump and so may present attractive bargains.

7/14/08-Since the last entry, our WW pick, MON, purchased on 5/2/08, has been held at least 4 weeks. It no longer meets our WW buy or hold criteria. So it will be sold at the early market price today (Monday morning). It will then be removed from the WW open positions portfolio, and its closed position info recorded, based on the 5/2/08 to early 7/14/08 per share performance. Through the close of trading on 7/11/08, after subtracting a commission (while not counting any dividends), MON has been up 3.75% since purchase.

Since the last entry too, our WW pick, SOHU, purchased on 5/27/08, 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 today (Monday morning) too. It will then be removed from the WW open positions portfolio, and its closed position info recorded, based on the 5/27/08 to early 7/14/08 per share performance. Through the close of trading on 7/11/08, after subtracting a commission (while not counting any dividends), SOHU has been down 8.71% since purchase.

My top-ten equities for mention today are: AXYS; BRK/A (BRK/B); CF; EOG; GHM; HES; MOS; OLN; POT; and RBN.

My first focus currently is on a new Wild Wizards (WW) selection, Robbins and Myers, Inc. (RBN) (recent price $47.96). RBN's trailing price to earnings ratio is 21.86. Its forward P/E is estimated at 18.96. The asset's market-capitalization size is small-cap: $1.66 billion. Robbins and Myers, Inc. has a 0.30% dividend, with a payout ratio of 0.06. The shareholder equity to total assets ratio is 0.53. The price to sales ratio is 2.17. RBN's price to book value is 3.45. Return on equity is 17.29%. Debt to equity is 0.07. The current ratio is 1.96. In the last 52 weeks, RBN has risen 61.67%. This stock has advisory support, low debt, and healthy momentum in its favor.

Robbins and Myers, Inc. will be added to our WW tracking portfolio at its market price early on Monday, 7/14/08.

My second focus this time is on another new Wild Wizards (WW) selection, Graham Corp. (GHM) (recent price $80.07). GHM's trailing price to earnings ratio is 26.85. Its forward P/E is estimated at 20.17. The asset's market-capitalization size is micro-cap: $399.55 million. Graham Corp. has a 0.10% dividend, with a dividend payout ratio of 0.03. The shareholder equity to total assets ratio is 0.69. The price to sales ratio is 4.55. GHM's price to book value is 8.11. Return on equity is 37.97%. Debt to equity is 0.00. The current ratio is 2.82. In the last 52 weeks, GHM has risen 211.80%. This stock also has advisory support, low debt, and good momentum in its favor.

Graham Corp. will be added as well to our WW tracking portfolio at its market price early on Monday, 7/14/08.

7/19/08-Since the last entry, there have been no assets held for at least a year in either of our long-term tracked portfolios, so sales are not in order at this time.

My top-ten equities for mention today are: AXS; BRK/A (BRK/B); CINF; ENH; HCC; IPCR; NSEC; PRE; TRH; and TRV.

The focus this time is on a new Classic Value (CV) selection, IPC Holdings, Ltd. (IPCR) (recent price $28.53). IPCR's trailing price to earnings ratio is just 4.93. The PEG ratio is 0.58. The asset's market-capitalization size is small-cap: $1.53 billion. IPC Holdings, Ltd. has a 3.10% dividend, with a dividend payout ratio of 0.14. The price to sales ratio is 2.81. IPCR's price to book value is 0.74. There is positive free cash flow. Return on equity is 18.80%. Debt to equity is 0.00. The current ratio is 1.66. The shareholders' equity to total assets ratio is 0.79. This stock has low P/E, low P/Bk, a healthy dividend, low debt, and a low PEG ratio in its favor. It meets Benjamin Graham's bargain stock safety and value criteria.

IPC Holdings, Ltd. will be added to our CV tracking portfolio, as well as our own nest egg, at its market price early on Monday, 7/21/08.

7/27/08-Since the last entry, there have been no assets held for at least a year in either of our long-term tracked portfolios (as I was on an extended holiday about a year ago), so sales are not in order among the Classic Value (CV) or Leapin' Lizards (LL) portfolios at this time.

Since the last entry, our Wild Wizards (WW) pick, APA, purchased on 5/27/08, has been held at least 4 weeks. It no longer meets our WW buy or hold criteria. So it will be sold at the early market price Monday morning. It will then be removed from the WW open positions portfolio, and its closed position info recorded, based on the 5/27/08 to early 7/28/08 per share performance. Through the close of trading on 7/25/08, after subtracting a commission (while not counting any dividends), APA has been down 20.22% since purchase.

Because of vacations or my computer being down at times over the past several monhts, there are a lower number of assets in the Classic Value (CV) portfolio than intended (ideally, 25 assets to be retained in this portfolio, but currently 23), I shall now and then be adding new CV assets, even if it has not been two weeks since the last such purchase, until the target number of portfolio holdings is again achieved and maintained. That is the case today. So, in addition to the regular Wild Wizards (WW) analyses, this time there will also be a focus on my best pick among the current CV bargains.

My top-ten equities for mention today are: AXS; AXYS; CF; CNA; HCC; IPCR; ISYS; MIG; POT; and TRH. These are a mixture of value and WW selections.

As indicated above, the focus this time is first on a new Classic Value (CV) selection, Transatlantic Holdings, Ltd. (TRH) (recent price $58.06). TRH's trailing price to earnings ratio is just 7.82. The PEG ratio is 0.53. The asset's market-capitalization size is mid-cap: $3.85 billion. Transatlantic Holdings, Ltd. has a 1.10% dividend, with a dividend payout ratio of 0.09. The price to sales ratio is 0.86 TRH's price to book value is 1.12. There is positive free cash flow. Return on equity is 15.41%. Debt to equity is 0.22. The current ratio is 0.72. This stock has low P/E, below average P/Bk, and low debt in its favor. It meets Benjamin Graham's bargain stock safety and value criteria.

Transatlantic Holdings, Ltd. will be added to our CV tracking portfolio, as well as our own nest egg, at its market price early on Monday, 7/28/08.

My second current focus is on a new Wild Wizards (WW) selection, Integral Systems, Inc. (ISYS) (recent price $45.39). ISYS' trailing price to earnings ratio is 23.24. Its forward P/E is estimated at 18.60. The asset's market-capitalization size is micro-cap: $384.45 million. Integral Systems, Inc. has a 0.20% dividend, with a payout ratio of 0.07. The shareholder equity to total assets ratio is 0.77. The price to sales ratio is 2.46. ISYS' price to book value is 3.89. Return on equity is 16.07%. Debt to equity is 0.00. The current ratio is 2.00. In the last 52 weeks, ISYS has risen 104.46%. This stock has advisory support, low debt, and healthy momentum in its favor.

Integral Systems, Inc. will be added to our WW tracking portfolio, and our own nest egg, at its market price early on Monday, 7/28/08.

Home | Previous | Next