10/16/08-In case my small but responsive readership has not already deduced it, I have been on vacation the past couple weeks or so. While I was out of town, someone seems to have pulled the metaphorical plug on global equity markets. Fear is more rampant than I have known it in my lifetime. At times there have been around 2000 down stocks for each one going up in price. Pundits are struggling to find historical parallels for what is occurring or to suggest how things will go in future. In fact, no one knows whether we shall soon see an end to the market's extremely "oversold" condition. And nobody knows too if the U.S. government's now unprecedented set of tools for dealing with a fiasco of plummeting confidence, home prices, credit, etc., will prove sufficient. The word "depression" is being bandied about as if the repetition of our worst worry may somehow inoculate us from it or its effects.
In the midst of this crisis, I am in a quandary. Formerly, I have mentioned here an uncertainty about the best sell strategy to use with our Classic Value (CV) selections. But now, in the face of double digit declines within a day or two of my focusing on a particularly good stock bargain, there is even more doubt concerning the best buy approach. COP, for instance, suggested in just the last entry, is down 33.52% (as of 1 PM, Central Time) from its CV portfolio purchase price. Of course, it is an even better bargain today than when I cited it, but that is small comfort.
So, when liquid reserves are limited, should we or should we not keep buying on a dollar-cost-average basis (even) excellent price to value assets, knowing that a trading day or two later they may be selling at a mere 90%, 80%, or less of current prices?
Alternatively, should one employ one or another stock trading approach? For example, one might buy a stock only if its price is below both its 50- and 200-day moving averages (also one could then sell the asset only when above its 50- and 200-day averages).
Or one could limit purchases to the very safest, large corporations' stock and buy shares when they are down 5% or more in a single trading session, then hopefully wait just a few days till this volatile market has taken the price to 10% or more above one's cost basis and sell at a small net profit, but one which, when repeated scores of times a year and annualized, should look quite attractive compared with the traditional buy and hold approach. (There must be substantial risks to such an approach or more people would be using it, but at the moment I confess to being tempted to try my hand at this kind of stock trading. However, chances are my innate caution will outweigh any optimism I have that I could use this technique to turn dismal recent portfolio results around over the next several months.)
Or one might buy only if one's entire equity portfolio is down more than some percentage (20%, 10%, 5%?) and sell only if up by the same percentage amount. And if one uses this approach, how shall we determine that percentage level? If this really is the beginning of a new Great Depression, one could still lose almost everything, including one's gradually used up reserves, as stocks eventually might drop 80% or more.
Unfortunately, I do not have definitive answers. However, to do nothing when so many great bargains are appearing also does not seem an appropriate response. So, even if it is somewhat arbitrary, we are making our choices and stepping in modestly to buy good value at these low prices, hoping there will remain later enough dry "powder" (non-equity liquid reserves) still to use against subsequent, perhaps greater onslaughts of aggressive bearishness.
Our reserves of government bond holdings plus money market assets now stand at over 40% of liquid portfolio holdings. (They were one-third of liquid assets only last month, before further recent falls in stock prices.) So, we are devoting half (around 20% of our liquid assets) to ongoing dollar-cost-average purchases of great CV stocks, but such buys are now being done just monthly rather than weekly or every other week, etc. (I shall continue pointing out here good CV bargains more often than this, but shall normally add them to our nest egg just 12 times a year.)
The other half of our non-equity liquid portfolio shall be used to buy assets only as necessary to keep the equity part of our nest egg, as a minimum, at 80% (that is 20% down) of its target (cost basis), intending then to sell assets if/when the portfolio has risen above the 20% threshold. Thus, to illustrate, if our equity portfolio target were $100,000, we would buy $10,000 of new CV assets if the equity portfolio has fallen to $70,000, and then sell $10,000 in equities if our stocks have risen to $130,000. Thus, there would be buying when prices are low and selling when they are relatively high. Hopefully one will thus keep enough reserves to still respond to major drops and rises in this unstable market and yet be able to capitalize on the profit potential of the wild equity swings we are seeing. (This is a simplified example, of course. The target would also need to be adjusted for each dollar-cost-average buy or sell.)
Regardless of these overall conservative guidelines for when and how much to purchase, the intention to have the portfolio's total equity book value increase by at least 12.5% a year will take precedence and might result in a few purchases before either the monthly dollar-cost-average purchases of CV stocks or my acting on buy signals based on nest egg equities having fallen more than 20% since the prior rebalancing of our allocations.
Anyway, returning to my usual format, since the last entry, our Classic Value (CV) pick, AXS, purchased on 10/2/07, has been held over a year. It will be sold at the early market price Friday morning. It will then be removed from the CV open positions portfolio, and its closed position info recorded, based on the 10/2/07 to early 10/17/08 per share performance. Through the close of trading on 10/16/08, after subtracting a commission (while not counting any dividends), AXS had been down 38.42% in the past 12(+) months.
Since the last entry as well, our Leapin' Lizards (LL) pick, NSHA, purchased on 10/8/07, has also been held over a year. It too will be sold at the early market price Friday morning. It will then be removed from the LL open positions portfolio, and its closed position info recorded, based on the 10/8/07 to early 10/17/08 per share performance. Through the close of trading on 10/16/08, after subtracting a commission (while not counting any dividends), NSHA had been down 58.98% in the past 12(+) months.
Since the last entry too, our Classic Value (CV) pick, INDM, purchased on 10/15/07, has been held over a year. It will be sold at the early market price Friday morning. It will then be removed from the CV open positions portfolio, and its closed position info recorded, based on the 10/15/07 to early 10/17/08 per share performance. Through the close of trading on 10/16/08, after subtracting a commission (while not counting any dividends), INDM had been down 43.64% in the past 12(+) months.
My top-ten equities for mention today are: ANF; BJS; CDI; ESV; GIFI; HCC; MEI; PLFE; PTEN; and WSM.
The focus this time is on a new Classic Value (CV) selection: CDI Corp., Inc. (CDI) (recent price $13.70). CDI's trailing price to earnings ratio is just 8.67. Its forward P/E is estimated at 11.14. The asset's market-capitalization size is nano-cap: $278.34 million. CDI Corp., Inc. has a 3.70% dividend, with a dividend payout ratio of 0.32. The price to sales ratio is 0.23. The PEG ratio is 0.53. CDI's price to book value is 0.79. There is positive free cash flow. The price to cash flow is just 6.40. Return on equity is 9.32%. Debt to equity is only 0.01. The current ratio is 3.77. The shareholders equity to total assets ratio is 0.77. This stock has low price to earnings, low price to sales, low price to book value, low debt, and a healthy dividend in its favor. It meets Ben Graham's value and safety bargain stock criteria.
CDI Corp., Inc. will be added to our CV tracking portfolio at its market price early on Friday, 10/17/08.
10/27/08-Since the last entry, our Leapin' Lizards (LL) pick, KEQU, purchased on 10/22/07, has been held over a year. It will be sold at the market price shortly before market closing today. It will then be removed from the LL open positions portfolio, and its closed position info recorded, based on the 10/22/07 to 10/27/08 per share performance. Through 9:30 AM, Central Time, today, after subtracting a commission (while not counting any dividends), KEQU had been down 46.72% in the past 12(+) months.
My top-ten equities for mention today are: AXS; CDI; DCO; HCC; LECO; MEI; MTW; PTEN; VR; and WSM.
The focus this time is on a new Classic Value (CV) selection, Patterson-UTI Energy, Inc. (PTEN) (recent price $10.92). PTEN's trailing price to earnings ratio is just 4.98. Its forward estimate of P/E is 5.55. The PEG ratio is 0.49. The asset's market-capitalization size is small-cap: $1.71 billion. Patterson-UTI Energy, Inc. has a 5.00% dividend, with a dividend payout ratio of 0.24. The price to sales ratio is 0.85. PTEN's price to book value is well below average, also at 0.85. There is positive free cash flow. The price to cash flow is only 2.90. Return on equity is 17.73%. Debt to equity is 0.00. The current ratio is 2.22. The shareholders equity to total assets ratio is 0.80. This stock has low price to earnings, low debt, a low PEG ratio, a low P/Bk, and a high dividend in its favor. Patterson-UTI Energy, Inc.'s shares currently meet Ben Graham value plus safety bargain stock criteria.
PTEN will be added to our CV tracking portfolio at its market price shortly before the market close today, 10/27/08.
Since it now seems reasonable to expect that U.S. financial markets, and indeed the global economy, will be suffering the effects of a prolonged and severe recession for some time to come, and since unusual market volatility also appears likely to be with us for awhile, I would suggest that investors wanting to put their toes into these roiling waters, and to make long-term purchases of some of the great bargains that currently are being created by panic conditions on both Wall Street and Main Street, do so cautiously.
For example, one might place limits on good-till-cancelled buy orders, set 5-10% below the current market price. Besides this, one might invest only a quarter of one's eventual intended total investment in a particular asset now, with subsequent quarterly investments to follow until the entire amount has been spent, making the later purchases, however, only so long as the asset's price to value and debt level remain low.
Thus, if one planned to invest $10,000 in PTEN, instead of putting all of that into it at a market price of, say $10.92 (the current price as of 9:30 AM, Central Time, today), one could first place a limit GTC order for $2500 of it at $10.37 (95% of the current price) and, assuming that order went through, place similar orders at 95% of the then current market price in each of the succeeding three quarters, spacing them roughly three months apart.
Incidentally, in my last entry I reflected on the difficulty of knowing when to buy these days and suggested in our own portfolio we would divide our reserves in half and use some for purchase of new assets only when the nest egg is down at least 20% since the prior rebalancing, while another portion would be used for dollar-cost-average purchases of Classic Value bargains, but just on a monthly basis, and a few additional buys might be made to keep our total equity book value on target, rising at least 12.5% annually.
I have now simplified this far too complicated buy regimen to an intent to merely buy, on a dollar cost average basis, low price to value assets as necessary to assure our total book value continues to increase 12.5% a year. We presently have enough reserves to achieve this type increase for the next couple years, assuming no emergencies that require additional funds. (In the event of such an emergency, the temptation would be to even borrow some on margin, to get through it, rather than to sell securities at a big loss.) We are hoping, and would not be surprised to see, some return to market normality in that period of time, so that further reserves might be freed up by the sale of assets that between now and then would have appreciated enough in value to no longer be at bargain levels, possibly instead even having risen into a profitable range.
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