Home
Previous
Next

October, 2007: 1 7 14 21 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.

(The statistics combine open and closed portfolio position results and cover the period from 10/4/04 through 9/30/07 (financial results through close of trading on 9/28/07). Dividend income has not been included in the above portfolio performances. Commissions, though, have been subtracted from the tracked portfolio results, but not from the SPX gains.)

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

Observations about the portfolios so far:

• As indicated previously, the open positions continue to show more up and down volatility than the more numerous and longer-average-hold-period closed positions. Thus, as had been true at the last quarterly analysis, due to recent investor nervousness the LL open positions have been negative. Indeed, to date they have shown an annualized loss of nearly 22%! Though far less profitable than in our 7/1/07 assessment, the strictly value oriented open CV holdings are still up at an annualized rate of almost 6%. The difference between the two portfolios' open position performances is about 28%. Yet the steadier closed position info shows the two types of investments to be more comparable: +16.50% annualized performance for the LL closed positions vs. +19.62% annualized performance for the CV closed positions, a difference of 3.12%.

• Although in my 9/10/07 entry I suggested caution concerning the LL assets, since they have been such poor relative performers lately, nonetheless because the two kinds of investments often tend to offset each other under different market conditions, the best approach may continue to be to keep half of one's equity investments in CV assets and half in LL equities. Through the most recent quarter, a 50/50 investment in suggested CV and LL stocks would have given the investor a before dividends (but after commissions) 12.20% annualized performance (for both open and closed position holdings combined) in the almost three years of this CV vs. LL experiment. Using a very conservative (1.0% per year) estimate of the additional gains due such an investor from dividends, this strategy would have provided total returns averaging over 13%, compounded annually.

• If only the more dependable closed position performances are considered, adding in a 1.0% conservative estimate of the average dividends would have provided the 50/50 CV/LL Blend investor with an annualized total return of over 19%, a result roughly twice that of the major averages in the same period.

• The 50/50 CV/LL Blend's combined closed positions since inception now number 107. Of these, 36 turned out to be losing stocks in the periods they were held, while there were 71 winners. The win to loss ratio thus remains close to 2 to 1. Just slightly more than 1/3 of the suggested stocks held until bought out or kept for at least a year and a day (my usual sell point) lost the investor money, but nearly 2/3 of the stock purchases would have resulted in net gains.

• Because there is always the possibility of unforeseen developments spooking the stock market and causing substantial losses in paper value to one's nest egg, I caution that it seems best to maintain a reserve of short-term, cash equivalent assets. The individual may vary the percentage of total financial assets set aside in this way. My own preference is to begin with 1/3 in such reserves and two-thirds in equities, then to rebalance if there is more than a 5% shift in the relative valuations due to market strength or weakness. (Since there has been such a period of weakness lately, I am now putting more funds into equity purchases, taking amounts out of reserves for this purpose.)

• With careful selection, it should be possible over time to average a roughly 5% or better combined annual return on relatively safe assets to be held in this overall asset category of certificates of deposit, short-term bonds (or bond mutual funds), money market accounts, or similar relatively liquid reserves.

• If one's assets of this type average around 1/3 of the portfolio, if 2/3 are devoted to a 50/50 blend of CV and LL holdings, and if the portfolios' closed position performances to date were to prove the norm, the resulting nest egg should be relatively secure, certainly safer than a 100% investment in the S&P 500 Index, for instance, and yet one's total return would be roughly 14-15% a year overall, significantly better than that of the major market averages.

• I personally like to make more equity purchases when the market has been somewhat down and less when it has been up, so as to assure both a conservative nest egg allocation and an overall annual total return at or above a 15% target.

• I caution, however, that with so far only about three years' experience, there is as yet too little data to say with assurance that this will be the outcome. It is still true that the best we may definitely say of the above record is that the results are encouraging.

Since the last entry, our Classic Value (CV) pick, KMT, has been held over a year, and so it will be sold at the early market price tomorrow (Tuesday) morning. It will be removed from the CV open positions portfolio, and its closed position info recorded, based on the 9/29/06 to early 10/2/07 per share performance. Through the close of trading on 9/28/07, after subtracting a commission (while not counting any dividends), KMT has been up 46.75% in the past almost 12 months.

Since the last entry too, our Leapin' Lizards (LL) pick, HVT, has been held over a year, and so it will also be sold at the early market price Tuesday morning. It will be removed from the LL open positions portfolio, and its closed position info recorded, based on the 9/22/06 to early 10/2/07 per share performance. Through the close of trading on 9/28/07, after subtracting a commission (while not counting any dividends), HVT has been down 45.68% in the past 12(+) months.

My top-ten equities for mention today are: ACE; ACGL; AEIS; AFG; AXS; IVAC; NVR; PRE; VSH; and XL.

The focus this time is on a new Classic Value (CV) selection, Axis Capital Holdings, Ltd. (AXS) (recent price $38.91). AXS's trailing price to earnings ratio is just 6.54 The asset's market-capitalization size is mid-cap: $5.89 billion. Axis Capital Holdings, Ltd., has a 1.70% dividend with a dividend payout ratio of 0.11. The PEG ratio is only 0.81. The price to sales ratio is 1.81. AXS's price to book value is below average, at 1.35. There is positive free cash flow. Return on equity is 24.04%. Debt to equity is 0.19. The current ratio is 1.74. This stock has low price to earnings, low debt, and a low PEG ratio in its favor. It meets Ben Graham bargain equity criteria.

Axis Capital Holdings, Ltd., will be added to our CV tracking portfolio (as well as to our personal nest egg) at its market price early on Tuesday, 10/2/07.

10/07/07-Since the last entry, our Leapin' Lizards (LL) pick, VOL, purchased on 10/6/06, has been held over a year, and so it will be sold at the early market price Monday morning. It will be removed from the LL open positions portfolio, and its closed position info recorded, based on the 10/6/06 to early 10/8/07 per share performance. Through the close of trading on 10/5/07, after subtracting a commission (while not counting any dividends), VOL had been down 25.06% in the past 12 months.

My top-ten equities for mention today are: CMC; IESC; NGA; NSHA; PCR; PFSW; RAIL; SAB; VLO; and VSEC.

The focus this time is on a new Leapin' Lizards (LL) selection, Nashua Corp. (NSHA) (recent price $11.93). NSHA's trailing price to earnings ratio is 11.74. The asset's market-capitalization size is nano-cap: $65.40 million. Nashua Corp. has no dividend. The price to sales ratio is just 0.23. NSHA's price to book value is low, at 1.01. There is positive free cash flow. Over the past 52 weeks, NSHA has been up 70.43%. Return on equity is 9.36%. Debt to equity is 0.21. The current ratio is 1.99. This stock has below average price to earnings and price to book value, low debt, good momentum, and a very low P/S ratio in its favor.

Nashua Corp. will be added to our LL tracking portfolio (as well as to our personal nest egg) at its market price early on Monday, 10/8/07.

10/14/07-Since the last entry, our Classic Value (CV) pick, ASPV, purchased on 10/13/06, has been held over a year, and so it will be sold at the early market price Monday morning. It will be removed from the CV open positions portfolio, and its closed position info recorded, based on the 10/13/06 to early 10/15/07 per share performance. Through the close of trading on 10/12/07, after subtracting a commission (while not counting any dividends), ASPV had been down 1.71% in the past 12(+) months.

My top-ten equities for mention today are: ACE; ACGL; AXS; BRKS; INDM; ORH; PTEN; PRE; RAIL; and TGIS.

The focus this time is on a new Classic Value (CV) selection, United America Indemnity, Ltd. (INDM) (recent price $22.67). INDM's trailing price to earnings ratio is just 7.71. The asset's market-capitalization size is small-cap: $847.50 million. United America Indemnity, Ltd., has no dividend. Its PEG ratio is 0.73. The price to sales ratio is 1.33. INDM's price to book value is low, at 1.04. There is positive free cash flow. Return on equity is 13.56%. Debt to equity is 0.19. The current ratio is 4.26. This stock has quite low price to earnings, below average price to book value, low debt, and low PEG in its favor. It meets Ben Graham bargain stock criteria.

United America Indemnity, Ltd., will be added to our CV tracking portfolio (as well as to our personal nest egg) at its market price early on Monday, 10/15/07.

10/21/07-Since the last entry, our Leapin' Lizards (LL) pick, CC, purchased on 10/20/06, has been held over a year, and so 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 10/20/06 to early 10/22/07 per share performance. Through the close of trading on 10/19/07, after subtracting a commission (while not counting any dividends), CC had been down 70.70% in the past 12(+) months. Whew!

My top-ten equities for mention today are: BRK/A(BRK/B); KEQU; MALL; NSHA; OIIM; PCR; RAIL; RCMT; SMDI and VLGEA.

The focus this time is on a new Leapin' Lizards (LL) selection, Kewaunee Scientific Corp. (KEQU) (recent price $15.81). KEQU's trailing price to earnings ratio is 19.00. The asset's market-capitalization size is nano-cap: $39.83 million. Kewaunee Scientific Corp. has a 1.70% dividend. The dividend payout ratio is 0.33. The price to sales ratio is 0.50. KEQU's price to book value is 1.69. There is positive free cash flow. Return on equity is 8.28%. Debt to equity is 0.21. The current ratio is 1.85. The KEQU stock price has risen 98.87% in the past 52 weeks. This stock has low price to sales, low debt, and high momentum in its favor.

Kewaunee Scientific Corp. will be added to our LL tracking portfolio at its market price early on Monday, 10/22/07.

A further few words of caution about the Leapin' Lizards portfolio and approach are appropriate. With the imminent sale of Circuit City (CC), and assuming there is not a huge run-up in its price by early Monday, which I certainly do not expect, even the more reliable (than open positions, which tend to be more volatile) average closed position performance of the Leapin' Lizards has been shown at times to be dramatically lower than has been true in 3+ years for the Classic Value assets: currently the figure is about a 12% average compound annual price increase for LL closed position assets vs. 20% for CV closed position assets.

With dividends, the total return for the LL closed positions would have been roughly 13%, compounded annually, while that for CV would have been at least 21%, in each case after commissions. Thus the record of slightly more than 3 years worth of LL vs. CV closed positions shows CV has beaten LL by around 62%.

Using the closed position figures, a 50/50 investment in the two strategies' assets, after commissions, would have resulted in a compound annual total return of about 17%. Though this is not at all a bad result compared with the major averages, even a 50/50 approach would have shaved 19% off the overall return of an investment in Classic Value alone.

So, while I expect to continue the competition between the two types of portfolios for yet awhile, for purposes of comparison, I cannot advise readers to invest in LLs and would suggest that, instead, every other week one simply buy the best CV stock one can find.

I would hold these assets for at least a year and a day. However, if at that point the asset has not appreciated 50% or more and still meets basic Classic Value buy criteria (low P/E and/or P/Bk .8 or below, dividend payout ratio 0.5 or below [if there is any dividend], and debt to equity 0.33 or below), it might be even more favorable to just keep holding the stock till it has gone up in price significantly or been held for a couple years, whichever first.

Based on our results so far, this is in a nutshell the best advice I can give for high equity returns with relatively low risk.

Meanwhile, I do not suggest that one just sell all previously bought LL holdings precipitously. A hold of a year and a day, particularly in taxable accounts, would probably still be better than to sell right away. LL holdings are just not as likely as CV to make the better of these two overall showings. But their results are nonetheless favored to at least beat the market.

10/27/07-Since the last entry, our Classic Value (CV) pick, RSC, purchased on 10/27/06, has been held over a year, and so 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 10/27/06 to early 10/29/07 per share performance. Through the close of trading on 10/26/07, after subtracting a commission (while not counting any dividends), RSC had been up 7.30% in the past 12 months.

My top-ten equities for mention today are: AFG; ASPV; AXS; ENH; ORH; ORI; PLAB; PTEN; RAIL; and VSH.

The focus this time is on a new Classic Value (CV) selection, Old Republic International Corp. (ORI) (recent price $15.01). ORI's trailing price to earnings ratio is only 7.91. The asset's market-capitalization size is mid-cap: $3.48 million. Old Republic International Corp. has a 4.20% dividend. The dividend payout ratio is 0.32. The PEG ratio is 0.88. The price to sales ratio is also 0.88. ORI's price to book value is just 0.77. There is positive free cash flow. Return on equity is 10.26%. Debt to equity is 0.01. The current ratio is 2.60. This stock has low price to book value, low debt, low price to earnings, and a healthy dividend in its favor. It meets Benjamin Graham value and safety criteria as a bargain stock.

Old Republic International Corp. will be added to our CV tracking portfolio at its market price early on Monday, 10/29/07.

Home | Previous | Next