The Genius Guide to Value Investing

Financial Gravity: Fannie, Freddie and the DOW

2008-08-22T03:50:47Z

Continued lessons this week in financial gravity: The Fannie and Freddie situation. I still hold both stocks. I will tell you why:

Under the Bush Administration, there has been a tactical rape and pillaging of Fannie and Freddie. Big fundraisers at the brokerages and banks that compete with both of these GSEs wanted to roll out more of the business in less secure ways. They got their wish, and we now have this massive mess of loans so poorly bundled that it may take years to figure out what they are really worth. These are not Fannie and Freddie loans, mind you. They had to clean up house over the time period that everything was going to hell in a handbasket at Lehman, Citi, and the other places scooping up flaky originations.

Now, the forces, largely hedge funds, that overheated the market, which I told you previously had no business being much over a DOW 12000, are finding points of attack in the bear.

Fannie and Freddie are good shorter targets. Their losses in real terms have been well within the specifications of normal. Their leverage leaves them vulnerable, as does their position as GSEs, to shorters. After all, if you're going to short a company, what better than ones so pivotal to the stability of the housing market, that Congress, in an election year, cannot let tank?

Both have tested their recent lows again. On Fannie, 4 and change seems about as much blood as the shorters can wring out of the turnip.

While many Republican "experts" are calling for the government to privatize Freddy and Fannie, and now even a few Dems may be buckling, I would pay heed to what Barney Frank has said in the NYT... These companies are doing what they are supposed to do, and the situation we are in now would have been far worse had the private sector and its unregulated bundling of loans been there instead of Fannie and Freddie.

The government does not want to be in the housing business. Republicans don't want it, and when the mortgage system stablizes, neither do many of the same banks and brokerages who tried to cripple these institutions, because they will need both of them healthy to help take loans off of their books and make new ones.

In spite of the hysteria, the notion of standing by what a GSE means, and backing up the institutions, seems to be more in keeping with the government's pledge to stand behind them. Inviting shareholders into the party, only to say that the GSE label had no value would call into question the full faith and credit of the United States Government, something, which, as deeply as we are in debt to the Chinese, Saudis, and others abroad, would have far greater impact than on just the investors in these companies.

Politics doth make cowards of them all. They will not nationalize. They will rationalize. They will stablize. They will find a few shorters and hang them out to dry, perhaps, to vent common rage on some nice scapegoat.

Share price, not default rates, are Fannie and Freddie's real problem at the moment, along with their leverage position. If the companies can continue to de-leverage to a more acceptable point, and the government can calm trading fears, then they can weather the storm.

This does, however, rely on the kindness of strangers in the Bush governmental structure, one of the more corrupt and inept kingdoms in history. The stewards at the helm may still screw the pooch on this, but I doubt it. Too much at stake.

I really don't want to contemplate the alternative, if I am wrong. If the government nationalizes "private" equity in the name of its GSE guarantee, the wheels will come off of the cart on a lot of other equity classes. Treasuries are suspect, muni bonds with federal guarantees are fundamentally at risk of pillaging, and that mattress may be worth more than your FDIC guarantees.

Financial gravity orbits around fair market values, and perception. Right now perception is depressing the market, and certain issues, far more than it should. Still, though, the Dow is only off marginally from a logical 12,000 orbit point. Matter is neither created nor destroyed. Same with capital. It just sloshes from one side of the boat to the other.

At some point, the market allays its fears of more financials write downs. It will probably happen after enough blood is spilled. Fannie and Freddie are misdirections. If you want to see where the blood hits the water next, look to the far less guaranteed brokerages. I hear that Lehman can't find asset buyers fast enough, and that a Deliverance-style Countrywiding of the firm may be on the horizon.

Couldn't happen to nicer folks, if you ask me.

Why Cemex, the Saudi Arabia of Concrete Should Be In Your Mix

2008-08-08T12:32:34Z

The analysts here at Morningstar are featuring Cemex (CX) today. The analysis, though, is a bit flawed. Yes, Cemex does business all through the smoking hot economies of Latin America. Yes. they just bought Rinker and are positioning themselves for the next housing boom.

Where the analyst got it wrong is in the downside of: What if the housing boom is delayed or just doesn't materialize.

This is the genius of going with Cemex. Concrete is fluid. It can build houses. It can build roads and bridges.

Natural disasters cause damage. More concrete.

Our aging highways and byways will need a lot of upgrade over the next few years. More concrete. Even if the economy slows, the mistake of our dear analyst is thinking that belt-tightening happens in public works projects. In a big economic slow down, politicians look for economic stimulus plans. Construction, particularly of public works, is a big, big win for the vote-getting set. Thinking that the Feds are going to sit around the table and tighten their belts, as the analyst does here, goes against the history of make-work government spends from FDR's massive WPA project to Gov. Richardson's New Mexico choo-choo project to the Alaska bridge to nowhere.

There is nothing that says votes like politicians employing a lot of unemployed construction workers. Highways fix complaints about infrastructure problems, and put a lot of people to work.

Even if commercial buiilding is affected, it may affect the budget of projects, but that well might benefit concrete. In Florida, for example, with steel prices rising, many big office projects go wide, not, high, and the buildings are often pre-fab sheets of concrete with a more minimal steel and glass structure.

The world keeps spinning. Some companies may make more or less in the construction trade. Oil, wood and concrete are life blood products to a wide variety of businesses and public projects.

Cemex has been dragged down with the rest of the construction business, but, its top-flight management, placement in the world's economies, and efficiencies in operation make it the Saudi Arabia of concrete.

Pour a bit into your portfolio.

Buy & Hold - Why Jim Cramer is an Idiot - Part IV

2008-08-08T12:13:03Z

While catching a Mad Money a couple of weeks ago, Jim Lemming, er Cramer, gave his dollar dittoheads some invaluable advice on the evils of buy and hold. Buy and Hold is bad, according to our momentum maven.

The way that the Big C framed it, you can hold on to stocks too long, and it will cost you because you didn't sell on the peak.

First, what he should have told you: Buy and Hold does not mean buy and hold forever.

All stocks are cyclical in nature. The question about the length of your buy and hold has to do with returns and with which cycles, the short-term, medium-term or long-term, you are interested in as an investor.

If you are in a bank stock, the dogs of the industry at the moment, and it is paying out, even with reductions in dividends at the 5%+ range, are you better off holding through the longer macro cycle and being rewarded short-term with the dividend, and long-term with the swing back to profitability in the sector and the company? Probably.

Some wide moat stocks picked up on the cheap are hard to replace, and their cycles are longer. GE, P&G, and other mega corps are behemoths that don't get a lot of fast run-ups unless they have a smooth-talking Jack Welch nuancing the analysts into economic ecstasy.

There are companies like the oil transporters, that, short of oil becoming obsolete, will produce exceptional dividends and whose market appreciation remains within a range that has improved and should, given the scarcity fears of the market, stay that way for some time.

You buy-and-hold in some of these companies for the long-haul because historically you make more money that way. Friends of Jim make money when you buy and sell, and think B&H boring. Personally I would rather have them all snoozing away.

A very compelling reason to hold are the tax benefits. When you buy and sell in a stock repeatedly, the government and the brokers eat away at your profit. Having the discipline to hold within a 3 to 5 year range usually sees through most mid-to-long range cycles.

Some companies get hit by the shorter wolves and it takes a while for their rotting, picked over carcasses to stop stinking. It typically takes a business whose stock was savaged about 3-4 years to fully recover from an attack of the shorts. Economically, the conditions that placed the company in the jackpot have to abate, then the lemmings have to turn and smell opportunity. Since many use the yardstick of what the guy jumping off the cliff next to them is doing, it can take some time for the whole herd to "find" your company's shares.

When do you stop holding? Some good signs to think about not holding your buy:

When analysts can't see much forward growth over the next 3-5 years and your stock is at or near peak price for the last 3-4 years;
Change in management that muddies the water for continuity;
Too many momentum investors buying in and over-inflating the value of the stock well above its fair market value.
Major changes in an industry at its peak. If oil has been artificially high for example, that bubble is likely to either deflate rapidly or just bust, taking a lot of the companies whose busineses, like drilling, are exceptionally price dependent, on a ride down with the commodity. It is important, though, to know the companies well enough to know which ones are price sensitive, and which ones are not. Pipeline carriage companies, for example, are federally regulated and only the interruption of flow from a natural disaster or supply constraints would impact their price;
MUCK - Material Unforseen Circumstances that Kill - Poor financial controls, in-fighitng, accounting scandals, or the sale of junk that passed for financial instruments. The first two are hard to know unless you are intimately familiar with a company until they happen. If you have profits and hear a rattle, it may be a good time to take them and wait on the sidelines until whatever disaster sorts itself out.

The other BANK stocks

There are some stocks, which, if acquired at the right price, produce dividends in excess of what you can find in comparable bonds or bank issues. These can be long-term holds because you have the cash-flow of a bond with the liquidity of a stock. Royalty trusts, in oil, natural gas, etc. or limited partnerships traded as stocks generate medium to high returns, and often because of their high dividend appeal, maintain nice gains if you can get them on the dip. Past winners (not necessarily where you should look now) include BP Prudhoe Bay Trust, Kinder Morgan Partners (KMP), and Frontline (FRO) to name a few.

So, to counter Cramer's brilliant nugget: Buy low in the depths of the company's crisis in a company that is big enough to weather tough times. Hold as long as you can see enough forward growth that the day-to-day and short year-to-year burps don't look to impact the long-term value of the stock. If you see major changes in the way that the company is doing business, changes to management that are not conducive to the company making money in future, or any signs of bookeeping or management irregularities, then quit holding.

There is never a blanket formula to the process. Learning the exceptions to the rules will keep assets that have real long-term benefits, and help you dump the flavor of the year, or decade, that is about to flame out.

Don't You Just Love the Smell of Fear?

2008-07-11T15:13:41Z

Just like shorters love blood in the water, value investors like to clean up after the shorters have finished robbing the rich and cleaning the meat off of the bones of a stock caught mired in rumor and innuendo, braying for survival.

Okay, it's a bit too picturesque.

However, down days like this are a great day to go shopping. Fannie Mae and Freddie Mac and oil are weighing down the prices of pretty much everything.

As a value investor you want to buy on the down days.

Berkshire Hathaway (BRK.B) was down to 3910.00. That's a good opportunty to get a share or two on a stock with a ballpark fair market value of $5,100.00

Kinder Morgan Partners (KMP) is a phenomenal pipeline and natural resources transportation company that has outstanding management that derives most of its income like we do, from the shares. It is a limited partnership, so it puts out a K-1 form which adds a bit of complexity for your taxes, but KMP also has sweetheart tax deals on its earnings from its pipleline operations that boost its yield up nicely.

Depending upon how good your stomach is, you might even take a small fly with Fannie Mae (FNM). If the doom and gloomers are accurate, then you should be withdrawing your money from the market and find a good cookie jar to put it in. Default of, or the assumption by the government of the trillion dollar mortage system of FNM and FRE would be a disaster that even legendary shlock producer Irwin Allen couldn't cook up. If, however, as is frequently the case, they are overstated, then Fannie should level out again in the teens for some time, and, at 7-9 per share, you are buying 50% of the mortgages in the United States for about 10%-15% of their value. As of this morning, the New York Times called Fannie Mae's default rate at about 0.15% to 0.17% VERY SPECULATIVE, but if you think you can even park $750.00 and potentially turn it into $3000.00, 7,500 or more in a year or three, it might beat a Lotto ticket ;)

Of Beer and Chewing Gum and Harleys - BUD and Wrigley and Profit in Down Markets

2008-06-12T15:33:50Z

Being a value vulture, I like food, beverages, and snacks. Everyone likes 'em. Everyone eats 'em. As I sit here with my 100 calorie snack bag of Doritos, you can go to the bank that, even though these companies have their cycles, that buying into them is buying into bedrock of world food culture.

So, with that in mind, 13 to 24 months back, I was buying a bit of Bud and Wrigley. I bought BUD at 25, when it was very off-track. If I wait until the proposed IN-Bev buyout, I get a 160% return on my money. If I sell now, I double it.

Likewise, M&M Mars was good enough to buy my Wrigley's stock at 120% to its depressed price of about two years ago.

For the big fish assets, if you do not perform, you get eaten by bigger fish who will take your assets and make use of them.

Investors are behaving like ants in a rainstorm, scattering all over the pavement. Stick to solid, knowable investment vehicles. Look for a great company that produces strong Return on Investment (ROI), Return on Equity (ROE) and Return on Invested Capital (ROIC) that sells at a significant enough discount to value that it is a good buy, and has management that is either recovering from prior bad management, or that is navigating through some bad waters for the sector in which the business operates.

Buying a dividend stock that pays in excess of the current rate of inflation preserves capital to a degree, and buys you some patience as you watch the turnaround unfold.

Right now, of the food, and spirits group, Diageo PLC still offers an excellent price to value.

While I don't think that bottom has hit at Harley Davidson yet, it is coming. I am keeping an eye on the stock, but I have not personally pulled the trigger on it. HOG is a great company, and has a very predictable cost structure. The tea leaves on international demand are what the analysts are studying. I want to know more about how the boomlet, the kids of the baby boomers who flock to Harley, are looking at the product.

If you're looking for investment ideas, two years ago, you should have been looking at practical food items. Today, exactly because the luxury goods companies are now largely the depressed, you should be looking at the best of their beaten-down stocks to find opportunities.

The lemming-literati love using the term "flight to quality" for falling off the crowded cliffs of supposedly-safe bonds. The flight should be into the areas that have already been burned and scorched.

Once a stock has been pillaged enough, the shorters and other raiders, like termites, leave to attack another healthy host. Pick them up while they're cleaning up the smoking remains, and you get to benefit from the financial gravity that carries quality stocks out of the dumper and over their fair market value.

Why August is Likely to be a Real Banker's Holiday - Some banks to buy now. Yes, Banks

2008-01-24T20:17:44Z

August. It's hot. No one wants to work. In most parts of the world with less A/C, they all close up shop and head to the beach. This year HSBC, Citi and BofA should have no problem joining them.

If there ever was a case of making lemonade out of lemons, the banks are in the middle of doing it. Write a bunch of crappy sub-prime loans. Rattle the system into a bubble pop, and accelerate it with the properly-timed bits of write downs and fears of catastrophe.

It drives up CD buying, even though inflation and taxes on the earnings will eat away every penny of interest for 99.95% of the people buying them. It drives lots of cash into checking and savings accounts held by nervous people who react with panic to what they hear Katie Couric tell them (That Katie is a sharp financial cookie, btw.) by way of federally insured accounts into banks to make more loans.

If you're a bank, want to be making loans right now. They are your salvation, and a way to grow out of the mess that you just made.

You just scared the bejasus out of the Fed and forced interest rates down to very attractive rates for those trying to refinance their homes. There will be a tidal wave of people trying to de-ARM themselves with better, cheaper fixed-rates.

The banks will make a butt-load (a new economic term) of money on the re-fis.

Another likely phenomenon of this will be that the banks will end up refinancing a chunk of the crappy sub-prime debt into more manageable instruments in the fixed-rate world, actually taking some of their current write-downs and putting them back on the books as profitable.

So you want to look at banks which both pay a very high dividend that is less likely to be hacked badly, and who have the wherewithal to ride through this.

Of them, I like HSBC (HBC), Bank of America (BAC), Wells Fargo, and, to a lesser extent, Citi (C)

HSBC with 1.1 Trillion in assets and depth in 83 countries is paying out about 5.86% on its dividend at current pricing. BAC took its big hit, is eating Countrywide (knowing full well that the hit was coming), and is now positioned to be a much bigger player. Fargo is well run and pays out well. Citi is not well run but they will get there. Their stock is attractive at these prices, though in small doses, buying on any panic selling to make the yield all that plumper when the underlying fundamentals don't support the panic perspective.

Doom and gloomers, note: Nothing... NO THING in the jobs report, or in the huge buybacks that you are facilitating for lucky companies gobbling up their own stock at 20-25% of its real value, indicates that anything other than very slow growth and some regional contraction is happening.

HSBC is also the safest way to play China. The expansion in China is not lost on HSBC, which has 1/5th of its financial power there. A lot of companies that import and export do business with that bank. Their prosperity ripples through HSBC's bottom line as the best managed bank in that part of Asia.

Morningstar's Hair Shirt on Star Ratings

2008-05-04T12:32:42Z

Pat Dorsey's recent article on the performance of Morningstar's star rating system, and some of the changes in both the analysts and the type of coverage, show me something that is both disturbing and unnnecessary.

It was a noble attempt at self-criticism, don't get me wrong. It was just wrong-headed.

The star rating system on the equities side is really nothing more than a perception of deep enough value to make a commitment to a particular stock.

To lump them into an aggregate and trying to create an ANNUAL performance number out of it is a little bit like handicapping baseball batters' batting averages by how they're recovering from their injuries.

Companies generally have to fall into a particular level of disfavor, or dysfunction, to have their share price impacted enough to make the grade of a five-star rating.

For us value vultures, that is good.

We also know that if we wanted advice on the timing of the week, the month or really even the year, we would be getting it from Standard & Poors, or any of a half a dozen movement pickers out there that help the lemmings go screaming from one side of the deck of the financial ship to the other.

As I have recommended before, you must be the calm one who doesn't panic when the deck isn't tilting in your favor. Look at your best analysis, and make your pick, then stick with it over time. If you can't see a future for the company to make you significant money in a 3-5 year window, then you shouldn't have been in it in the first place. 12 months or less is just too unstable of an investment window, and throws you back into the sea with the rest of the lemmings knocked off the investment boat by the recent high winds of adversity.

So if the five-star indicator is really just a timing on your research, Morningstar is setting itself up for hyperextended results, up and down, by using it as a bellwether indicator.

The market during the "up" year had a huge number of companies that did some fast healing in a fast-moving market. The performance of stocks in the five star rankings of the last two years have been good. Many have done exceedingly well. Those that haven't owe a great deal of their performance woes to market headwinds.

In a world where the shorter hyenas have been controlling both specific stock attacks and the overall performance of the market some companies are going to become both victims of the moment and the victims of fear in the marketplace.

Let's take a few for instances of how this works.

As Pat points out, P.F. Changs (PFCG) has had a good run in spite of the economy. The stock recieved its unfair ding, and has climbed out of it. On the other hand, Ruth's Chris (RUTH), another five star pick, which was trading at 22 and sunk to the mid-single digits on the same lemming panic attack, is still in the dog house as the poster child of feared performance problems, even though, by the estimation of most Ruth's managers with whom I've spoken, the ding in their business from the economic jitters has not been significant or even noticed in a lot of the affluent markets to which they largely cater.

Both are great companies. I own both. Am I particularly worried that RUTH hasn't had a quick bounce? No. Why because, as Pat should have also reminded you, the time window of a Value Vulture should not be set to a year. This is Pat's mistake in his piece. Allow me to demonstrate why a five star stock, even in a good market, requires a longer window of time than 12 months:

McDonalds (MCD) sat in the dumper, flat for nearly three years after the mad cow scares, purely because they were the most visible purveyor of meat in the market. They never had a mad cow, ever.

So their stock sat in the Wall Street waste bin in spite of the fact that they were opening up units in China to lines around the block, because the myopic analysts (Sorry Pat) kept looking largely for the mad cows in Montana and not the burgers in Beijing.

Then one of the investment house big drips finally saw the light, got a better understanding of expanding into growing-affluent markets where one in 60 MILLION people is being served, realized that McD ranches don't have a mad cow amongst them, and fired off the report that set the lemmings running up the stock from 18 to 65+

If you had bought Mickey Ds during its flat period, another five star rated stock at the time, over three years, you would not have made a ton. If you had held it for 5 from an $18 purchase, though, and sold it at say 65 you would have made a 361% return overall BEFORE dividends in one of the iron-clad companies in the food business. That's a 72% return per year, which just kicks the snot out of the Dow or the S&P.

So I hope that Pat feels better about putting his performance anxiety out on the table. What troubles me is that there has been a large shift and purge of analysts because the Morningstar people seem to think that running with the fashion trend of the moment, the doom-and-gloom report written by the "serious" analyst with the five pound hair shirt on will somehow keep their peers on the Street and Jim Cramer (idiot) from calling them names.

The beauty of Morningstar is that it is so wonderfully value-oriented, and provides exceptional counter-current advice to the serious investor for whom long means a whole lot longer than 12 months.

If you remain patient, and do your homework as well as the Morningstar people do theirs, there are significant upsides to the vast majority of stocks that you will pick.

Five star, in and of itself, is not an indicator that you should buy a company. It's just an indication of the fairness of its price. Of the quality stocks in five star territory, it is a great market timer to push the trigger IN CONJUNCTION WITH ALL OF THE OTHER RESEARCH AND VARIABLES that you put into picking a stock.

I wish that Pat had told you that. I will reach far fewer people than he does with my little blog here.

I also wish that they would stick with the courage of their convictions, and have the intestinal fortitude that should accompany such sound and long range advice. When I see them back-pedal off of prior recommendations by switching analysts to justify the "sobering" changes in the coverage, that is the weak will of people who fear their Wall Street peers and the fashion of the moment rather than the rock-solid commentary of people with vision over time.

To all Morningstar analysts: True value investors have made a great deal of money from your sound advice. Stay the course, for your sake and ours.

Thornburg Mortgage is REIT-ous

2007-10-26T00:57:53Z

Thornburg Mortgage (TMA) never touched a sub-prime loan. In fact, they haven't done much other than jumbo and super-jumbo mortgages, the USDA prime of the lending biz. So why is the stock in the toilet?

Pressure to find liquidity to meet financial requirements meant selling off quite a bit of their inventory at firesale prices to meet their needs to keep a certain amount of money on hand. That has tanked the stock badly in the short-term. Estimates are that they will dig out slowly, but steadily. With no sub-prime exposure, the company may still face some bumps from the general volatility of the mortgage market, but since they deal in high end properties, they should endure the storm well in the long haul.

They have suspended their dividend, but I think they will move forward and upward from here. They have their capital requirement and they're able to keep on. I’m getting a bit more.

Best Defense is a Good Offense - Stocks to Buy in Value Space

2008-01-31T03:11:56Z

It works in football and in value investing. Last week when I was telling you to buy banks, the lemming leaders on Commentary Nothing But Crap (CNBC) were telling you to avoid them like the plague. Now that they've digested a few of the expected Fed drops, and actually started to look at the filings, banks are starting to look pretty. Go figure.

This is a world of the moment. What have you done for me lately, Brian?

So where is the smart play ahead of Fast Lemmings or Mad Lemmings? Your best defense right now is to find great value in the areas that the shorter hyenas have already picked clean and where the herd has stampeded out of the valley. You should also be looking at stocks that either pay a nice enough dividend to ride through the Dark side of the fiscal Force, or whose growth story is either not greatly affected or aided by the current market conditions.

Remember to read all reports, call your financial advisor, guru, rabbi, chiropodist or whomever gives you financial advice and check these out fully before dropping a plug nickel into anything. Some ideas and actions that I'm taking...

HOLD EM:

EV - Eaton Vance. Reminder that all sectors get sacked, and some companies get nailed unfairly. If you bought when I did, during the pillage fund houses phase of the lemming run, you are up 104.89%.

Buy:

Accenture (ACN) is up 51.59% even in this market at its current depressed price from the drubbing it got last year. Still, it's a five star buy right now, primariy because it's a target for fears that IT spending will go down. 1.23% dividend isn't meaningful, but it is still better than a poke in the eye with a sharp stick. Under 37.00 it is still a great company to own.

FWRD - Forward Air is a deep play into shipping infrastructure. A bit more sensitive to the economy, but less so than many other goods carriers because of the way that it is built. A niche player that plays well.

AutoZone (AZO) If the stock drops below $115.00 I will pull the trigger. My original purchase is up 38% even in this crappy market. I'm going to add to my holdings becuase that price seems pretty cheap to me. AZO doesn't pay out a dividend, but it has been a solid growth story in good times, and, if more people hold on to cars and fix them up in bad times, it still is a winner.

More to come...

Value 101: Being A Good Consumer of Financial Information & Understanding Risk

2008-02-16T17:36:50Z

What Hemingway said about writing is the same axiom that you should apply to all of the investment information that you get, good and bad: You need a good shockproof sh-t detector.

Every day there is as much misinformation, disinformation, ***-covering and spin applied to the financial analysis that is given to you as there is fact.

The most egregiously unfiltered sewage comes through CNBC. There, every kind of broker, trader, fund manager, and CEO is welcome to put out their own particular spin on the market, what to do, and what constitutes the truth of finance, usually without much critical analysis or attempt to discover the agenda of the guest by whatever talking head is on.

Not surprisingly, the gold guy wants you to buy gold. The broker that is shorting stocks talks down a sector or the market as a whole to shore up his gambling on the market. When someone even mentions that they are short-selling (See below for a definition) a stock or a market sector, no one even bothers to question the validity of their negative advice.

On CNN, there is a recession, because apparently, in spite of the financial data and facts that suggest otherwise, the fact that enough of these oracles have said that there is one is enough to give them hours of financial programming for the financial illiterate: "In our next segment, how to protect your money in these troubled times" really ends up being a six minute infomercial for popping your money into the same banks that raped and pillaged the public during the mortgage glut and are now stampeding the herd into financial instruments that will rape and pillage their investment portfolios to recover lost money from their poor management of the home loan process in a speculative housing market.

A Citi analyst used the term "run on the bank" relative to E*Trade, a wholly irresponsible comment that actually creates the self-fulfilling prophecy that drove a lot of money out of the company and nearly brought it to its knees.

Even here at Morningstar, an analyst will say privately that certain stocks that have had the snot hammered out of them by unwarranted lemming over-corrections look cheap, but when they end up writing the report for your consumption, the wrapper of "sanitized for your protection" is put on their opinion by Morningstar and you are getting a more cautious and less honest opinion of value because of their fear of having any more straightforward opinion not be well reflected in a volatile market like we've been experiencing over the past couple of months.

You have to learn how to listen to the news you get, and sort out the bipolar commentary that happens both when the "experts" gush and wring their hands.

Most of that commentary revolves around risk, and the perception of risk to people's investments. First, you have to really understand how "risk" is used and misused.

In theory, risk should be a gauge of how much potential trouble that a company or a stock might have if conditions in the world, political, climate, raw materials, etc., don't work out in their favor.

Risk is an attempt to quanitfy fear by wrapping it in a comfortable term or number. What does it mean when Morningstar ranks a stock at "Above Average" or "Average" risk?

In pure form, the number or term should be an assessment of the stock's strength or weakness given what the company sells, how its customers either want or can pay for what the company sells, and how outside forces outside of the company's control can affect its ability to do business with its customers, partners, and suppliers.

The practical problem with putting a number around an emotional state that one of the largest forces, sophisticated brokerages and other gamblers have a strangle-hold on the stock market and like to make money in an up or down market. The practice of short-selling, which I believe should be banned, allows traders to make as much, if not more, money by driving the momentum of the market downward as they make following the momentum upward.

A short sale is anti-investing, a bet, a gamble. Speculators are allowed by your broker to borrow your stock in, say, Citibank (C). They buy the access to your stock on the gamble that it will go down. If it does, they buy back the security at a lower market price and make as much money, less commissions and fees, as if they had held the asset as an investment to the upside. If the stock doesn't go down, lose their whole gamble.

This is a game played by the big boys, and by legions of high-risk junkies who momentum trade. So many of the brokers and financial institutions short sell that any advice about a stock or the condition of the market coming from any of them, on the tube or in print or on the web, should be considered highly suspect.

A big part of a risk rating in the real world is trying to assess how vulnerable a company is to being sacked by the short-selling hyenas. In some ways, they provide us value vultures with windows of opportunity as they gnaw the flesh of a stock down to the bone.

The very brokerage firms and mutual fund professionals from whom millions of investors buy their stocks and bonds and other instruments both make pronouncements on risk designed to promote their own agendas. Sometimes those are in sync with their investors, and sometimes they are just covering their own arses.

One of the general strengths of Morningstar is that they are not part of a brokerage, so the investment advice that they give to you is not influenced by large institutional clients or billionaires whose funds are being managed by the firms. Still even they will shade a risk rating to avoid either sticking out their neck on a value stock or to keep you from sticking your investment into a short-selling buzzsaw.

Take the very long cautionary statement by John Owens on Ruth's Chris Steakhouses (RUTH) which actually is a long advisory on a bunch of restaurants whose risk rating they're inching up from average to "above average." Is that really prudent?

In practical terms, John and others at Morningstar know that, long term, these restaurants are not only exceptional values (hence their five-star rating), but that they are well run companies that can probably withstand far more punishment than the current economy can dish out.

Witness the general track records of many of these companies through the post 9/11 years, which was a particularly bad time for restaurants, hotels, and airlines. Yet throughout that period, I do not recall Morningstar raising the risk level to "above average" because the analysts saw the after-effects of a man-made terrorist disaster as transitory. The rest of the market was fundamentally healthy and growing.

The good news is that the world economy, even with the housing crises, is fundamentally healthy and growing. Witness the irritated BASF CEO JÜRGEN HAMBRECHT who recently took to task banks for their bad management practices, and stated very confidently that not only his company, but that the super-corporations of the world were continuing to do healthy business even in the light of the financial crisis which their bad loan practices generated.

There is a lot of fear, uncertainty and doubt (FUD) driving the stock market right now. It is a reaction to the news that large banks and brokerages had to write down, rather than quantify the extent of, bad loans that they either made or picked up on the secondary market. Some of that reaction is organic fear, but a larger part of it is institutionally generated: It is in the interest of these banks and brokerages to just take the write downs and generate market conditions favorable to their long-term healing and growth than it is to quantify and isolate the problem and take years of punishment for their bad judgment. The Savings & Loans were bailed out by a company, the Resolution Trust Corporation to resolve that crisis. While that may be the last bastion of the current crop of financial scoundrels, the larger move seems to be to stampede conservative, risk-averse investors into bank-based financial investments that get the banks fat and healthy again, even at the cost of millions of more dollars in lost gains to the lemmings whom they are fleecing.

The Morningstar analysts are reflecting a certain amount of ***-covering by promoting the risk ratings of stocks that didn't get such an increase post 9/11 when they should have been far riskier. In part, this is being done because Morningstar is probably the only real value analyst in the mainstream market. It takes a lot of guff for being contrarian to the large corps of analysts supporting the investment community's general directional pushes. In this market, though, where it has drawn fire from other "profesionals" from S&P to Jim Cramer as being "lightweight" seems to not want to stick its neck out and state what I've had analysts here mention privately, that many of the five star stocks in restaurant and retail are highly undervalued and make for exceptional buying opportunities.

What is always somewhat amusing is that the very same people in the market, who are often telling you how risky a particular stock has become, are heavily buying up the stuff that you're frantically selling at exceptional discounts to fair market value after they panic you into making your exit at a loss.

So you have to take what you read with a grain of salt. You have to look at the health of the company, the balance sheet, and even, in the case of restaurants, visit a couple and talk to their managers about how things are going at their unit.

The market worries about Ruth Chris sales. I go into their Mizner Park, Boca Raton location and the place is mobbed. Same is true in Ft. Lauderdale area. I also couldn't get in to their Austin, Texas location on a recent trip. What does that anecdotal information mean?

First, it causes me to question about how bad the "recession" that we're allegedly must be. When I see a lot of patrons moving out of prime locations, the malls are full and the Apple Stores still look like it's Christmas in February (FEBRUARY!!), perhaps these guys need to get out of their Wall Street offices and LOOK AROUND more. I was in Texas recently and also did the same reality check. Even if I assume that there are enough places where the economy is hurting, like California, I can walk away feeling that my reality check shows at the least that there is a mixed bag out there.

When I see numbers that are generally supportive of a mild to modest correction to top off what I see in the real world, I then go back and look at the risk ratings of the companies not just here at Morningstar but with S&P and others. How much of what they're saying is street-speak risk and how much is reality? I then adjust my own risk assessments accordingly in my buy/sell decisions. The same also holds true in an up market. While analysts are singing the glowing praises of a company's future, if I see warning signs that suggests the analysts have had a lot of sunshine pumped up their collective skirts, I'm on the trigger to sell.

REMEMBER: Every degree that all of these ladies and gentlemen possess give them better tools to be making educated guesses, but in the end, even we poor laymen who do our homework are probably working with about the same information set. The difference is that we aren't beholding to a bigger company, or our bosses at a brokerage, to be politically correct. That allows you to assess risk, and the news that you digest in the best way possible: To your personal benefit.

Beyond Mad Mel Gibson - Conspiracy Theory on Banks/Sub Prime

2008-02-06T15:24:59Z

The sub-prime mortgage mess is not new news. It was a big concern this summer when the Dow was over 14K. The woes of the economy have to do with it in name only. The sharp increases in oil, corn, milk, the first panic over sub-prime, the "confidence" write downs in response, and more investment panic have been the cause of any wobble in everything from banks to bananas.

Most market movement has some larger engineering to it.

The hand of the sheiks of OPEC and the large oil companies was all over the oil run-up. With Bush in the White House, their lil buddy, very little was going to be done to stop them.

Likewise, if you consider the situation calmly for a moment, the hand of some agents within the financial industry can be seen in the subprime mess.

Who benefits from turning the investment herd into a stampede over the cliff, and sets off solutions to the problem to their own benefit? The financials, particularly the larger banks and brokerage houses.

Consider this: 96% of mortgages are still being paid on time. Durable goods orders, even with all of the market flux, are up. The jobless rate is still at near-historic lows, and nowhere near the triggers needed for a recession.

Yet the histrionic war whoop from the Can't Believe (their) News Channel (CNBC), and other financial publications has been epic. A Citigroup analyst and the New York Times even published a "run on the bank" in reference to E*Trade, which was wholly irresponsible and nearly caused that firm's collapse. Countrywide was scooped up by BofA when, in other times, it might have simply managed to continue operating, much as 98% of the other firms with similar sub-prime issues would have, because it became the sub-prime lightning rod and the stock went out of control. With $2B invested, maintaining the stream of bad news was much easier than bailing the company out, because BofA benefits hugely from assuming a $15-18 a share mortgage servicing arm plus much more minimal defaults than the doom and gloomers are shouting from the rafters, and all for the bargain price of $7.00/share.

What put these forces into motion? The same banks and brokerages that have the problem.

Why?

To move large segments of the market into line to eliminate the problem and get these same institutions healthy, fast.

Where do nervous people go, or, more aptly, where does the media help stampede them?

Banks.

Right now, with the inflation rate hovering around 3%, your 4.17% CD might make you 1.17% in real terms. Of course since the IRS will tax you on the 4.17, it means that you're actually losing money. But hey, you FEEL safe, right?

Banks bilk billions out of nervous little investors when the get them to run out of the big-bad stock market, or bonds, where they have to pay substantially more for your money.

The banks also pushed the Fed into lowering interest rates. Two-prong effect: Lower interest rates mean a land-office business in refinancing homes, both to get the lower rates and to get out of crappy ARMs.

Yessir, it's loot and pillage time in the big banks and brokers. You can get much better returns, not to mention some very sweet capital appreciation, off of many, many stocks paying 5% or higher dividends right now. There are many great dividend-paying stocks in great companies.

This instability will calm down as the banks bother to quanitfy what they hold. Look to see many of the write-downs, unless there is a calamity in the market, have to be repatriated because SURPRISE, they're really not bad debt.

Unless your cracked crystal ball says that there will never be another up cycle, something which all history and any analyst worth their salt will tell you is nonsense, and you can lift your worried little nose up above next week and look out into 2010 or 2012, when the dips happen, buy what you can!

Someone other than the big banks should be able to cash in on all of this man-made misery.

WU HOO! - Western Union is Still a Good Buy

2008-01-31T20:21:11Z

For those who razzed me about buying into Western Union (WU), read this excerpt from Morningstar's quarterly report:

Western Union WU reported solid fourth-quarter numbers and finished the year about where we expected... Western Union produced more than $900 million in free cash flow, most of which was returned to shareholders, as it repurchased $727 million of its undervalued shares.

WU is up 7% on the day, but still really cheap. Will money keep moving around the world from big markets to poorer countries? You betcha, and WU is the one safe way to get it there if you're not rich.

WU HOO!

Why the New York Times Should Leave Business to Business Newspapers

2008-01-30T13:54:32Z

The parade of stupid journalism at the NYT's Business section continues. Last week, NYT regurgitated the AP report on Apple's (AAPL) quarterly report which mistakenly forgot that iPhones are MP3 players, and to count the total number of MP3 players sold one has to ADD the iPhones and the iPods to see what the real number is. People who buy iPhones don't tend to spend another $300.00 on an iPod, after all.

Today, it was Starbucks (SBUX) turn for a ride on the NYT Business Spin-O-Rama. Their article "Overhaul, Make It a Venti" was another example of trying to make the story fit the buzz rather than look at the situation objectively. To which the NYT got this letter from me:

Editor:

In the shaping-of-news-to-fit-the-story department, your story “Overhaul, Make It a Venti,” by Michael Barbaro and Andrew Martin, appearing in the January 30, 2008 edition of the Times’ Business Section, was yet another shockingly bad piece of spin journalism.

The story of the Brave Little Coffee Company, Broadway Café, that chased out the big, bad corporate Starbucks, was used to illustrate the challenges that Starbucks CEO Howard Schultz faces in getting the company back to its roots. Mr. Schultz’ mea culpa on that subject over the summer aside, the thing that your crack team of reporters missed in this spin-tale was ubiquity: A cup of Starbucks coffee, and the experience of sitting in a comfortable, clean, familiar enviornment is the same in Miami, Singapore, and Round Rock, Texas.

While Broadway was reveling in its victory, Starbucks dropped new units across South Florida, driving Gloria Jean’s a smaller competitor, out of key locations in local malls and establishing its foothold as a neighborhood coffee store in places that don’t have one. Like a all corporations, Starbucks is not immune to closing stores. The example cited by your reporters is hardly emblematic of anything other than their desire to tell the story in their own way.

To be fair, the bigger question to which your business section should have committed the ink was: Did Mr. Schultz step in to appease his own ego? No one even questioned Starbucks’ corporate momentum until he did. In his quest to make Starbucks more “custom” on a local level, will he upset that ubiquity of taste, service, and environment that makes people like me drive right past Broadway Coffee just as lunch goers seek out a McDonald’s rather than the local burger barn?

For the prior screw up, I received a letter from one of the NYT business editors that told me that, to be fair, WSJ and the FT also made that mistake.

To which I replied: When my kids tell me that 'somebody else did it too' as an excuse, I tell them to stand up on their own two feet and take some personal responsibility.

NYT's Business section is becoming a journalistic lightweight. For their perceived gravitas, their budget, and prior reputation, hiring a better raft of editors and journalists with some investigative skills rather than a covey of regurgitative hacks would go a long way to improving their credibility.

A Short Shopping List for Value Buyers

2008-01-25T05:04:55Z

As much as it would be nice to be past the jittery market, the lemmings have dictated that the mid-summer will be the "big reset" so expect continued volatility. If something drops into range, you might consider buying it. These are stocks that I'm still adding to my positions. Look them up on Morningstar:

ECOLAB (ECL) - These guys don't print money. They just clean up after the people who print money, and keep the mice out. In their sphere, they have no peer.

Amgen (AMGN) - No better company in the health sphere. Dinged for some advisories on its best-selling bio-pharmaceuticals it took a dive pre-market turmoil. Analysts goofed on the numbers (no big surprise) and the company announced a late-test drug is doing better than expected in clinical trials. Long term they are one of the dominant players in health care. Others will jump on the bandwagon once it gets up some steam, but will the guys on Fast Money tell you about it until after their clients are taken care of... Go to the bank on it.

Ruth's Chris (RUTH) - Still the masters of the steak, their report was marginally better than their cautionary forecast in December. Still the shares took a HUGE tumble on the fear that they will be some bellwether of an economy in the dumper. The stock is still a $22.00 fair market value that you're picking up for currently about $7.60. Even if you generously, albeit incorrectly, sliced Morningstar's fair-value in half to 11.00, you are still left with a great company that you're getting at a decent discount to value. Truth is that you're getting it at a deep discount that is ill deserved. Morningstar needs to update this report, btw.

Kinder Morgan Partners (KMP) - If Kinder Morgan Partners takes a dip below 55, dip in! A master limited partnership running commodity transport pipelines, they are continuing to build and grow. Richard Kinder makes his money on the same stock that you do. I also hold EPD, a darling of Jim Cramer, but I think it's relatively pricey and that KMP offers better value long-term at the moment. I wouldn't hesitate to buy if EPD took more of a hit into the 20s and had its yield pushed back up over 10% where I originally bought it.

HSBC (HBC) - The Hong Kong mega-bank is paying a juicy dividend that might get cut, but that would seem less likely. 1.1 Trillion in deposits in 83 countries, and they are one of the biggest banks in the gateway of Hong Kong to commerce with the rest of the world.

IAC Interactive (IACI) - On a dip take this one. It will continue to fractionate into spinoff companies. The parts are greater than the sum. The shopping network will likely be bought off, which is good because it's not the big growth engine.

VALUE 101: Why CNN Should Stick to Iraq & Endearing Lost Kitty Stories...

2008-01-24T19:49:12Z

CNN Business news is an oxymoron if there ever was one. I heard one of these "experts" tell people to seek out those attractive 4.21% certificates of deposit in these troubled times.

PROBLEM: They can cost you money.

EXPLANATION: First off, depending upon where you live, inflation is running at around 4% anyway. That means you are making a bargain .21%. But wait! There's more! If you let that thing mature, and collect your 4.21"% note, you get taxed on the money. Depending upon your rate, you will lose a fair chunk, to a good chunk, of your interest to the tax man as well.

So the scholar who was advocating this on national television was... Bueller? Anybody?

AN IDIOT. Or, perhaps, bought off.

Who, after all, benefits when you throw your money into a CD? Banks! They take the money, use it more wisely than you do, make a huge profit off of it, and then give you a little back for being a sucker and sticking it in their bank.

Yes, reactionary conservative who fears the market, change, and U2 (ask your grandkids... It's not the spy plane), you might think that this is a "safe" play. I would much rather trust their stocks than their depositary accounts any day.

Right now the banks, to make back some of the money that they have lost in the unknowns of bad mortgages are writing scads of new mortgages thanks to the panic that they started which forced the Fed to bring interest rates down. Interest rates come down, refinancing goes soaring as everyone wants a better deal to ride out potential bad times.

The banks will make out big on the refi. They will make out big taking a bunch of lemming money from people listening to Henny Penny on CNBC run around screaming "The Sky is Falling!"

Even if dividends at at some banks get cut, you are still making at least the 4%+ that keeps your money from shrinking short term, PLUS you have the growth of the stocks, which have been hammered flatter than a penny on a railroad track, to look forward to.

More on what to pick that beats this kind of bunker mentality investing in my next report.

VALUE 101: Hold Your Nose and Buy

2008-01-22T14:11:14Z

We've been looking for market bottom for a few weeks. It could be today. It could be another short plateau. In either event, stocks are going to get slammed again today. Companies with good balance sheets and numbers that, in any other market, would only pass with modest notice are going to see phenomenal gouging of their stocks.

Think of it like a riot. When panic breaks out, looters take advantage and grab whatever they can.

Personally, I want my near-free television set.

I know that it will be fashionable today to join in the hysteria, and that a few of you like dinging me for not joining you in the marathon for the cliffs, but if you look at the numbers, the hysteria is panic behavior, and not much more.

Stocks orbit. When they orbit high, they swing back to their fair market value. No different on the lows, other than it doesn't feel as good.

If you don't expect Bank of America to be in business next week, or any of the other thousands of companies that are going to get hammered today, you might sell. Of course, you should also be looking for a good rock to climb under because if they all go under, the entire system would go with them world-wide.

The good news is, if you read the underlying financial reports, that things are bad, but they're not that dire, in spite of what the media may be screaming at the moment.

Hold, or buy. If you sell in the down market, you're not protecting anything. You're just making someone else a bit richer off of your panic.

Catching Stocks Cast Off By the Lemmings Going Over the Cliff

2008-01-13T21:55:45Z

This was a pretty good week for value vultures.

The lemmings didn't just do their usual migration from one side of the financial ship to the other: They were running for the exits, making margin calls, and otherwise losing their minds. Good or bad, weak or strong, it didn't matter. If your numbers weren't stellar, companies, even with strong balance sheets, took big, big hits to their share value.

In a veritable smörgåsbord of stupidity, here are some of the week's winners, a few of which may still be on sale next week. If you want an indication of where lemming stupidity has hit an all-time high, just look to see which companies are gobbling back up their shares in repurchase programs. In the put your money where your mouth is, these are stocks I hold or for which I have orders pending.

Dividend Plays

I still like selected Oil & Gas Trusts, very selective REITs, pipelines and carriers. Dividend plays beat bonds in that they are more liquid, you can get rid of them faster if you want/need to do so, and, as stocks, they are subject to lower fees on the buy and sell. Appreciation is secondary to dividend payouts, which range in the 13% area for this week's picks. Thanks to A. Friend for pointing out a couple of these that they already hold.

PVX - Provident Energy Corp - With a 13.6% dividend paid in monthly increments, PVX is a mid-value oil & gas trust that has achieved a Zen-like harmony between its oil and natural gas production. Trading around 10.00.

CSE - CapitalSource - Yielding 14.6% paid quaterly, CapitalSource makes loans to mid-size businesses in retail and healthcare. They also bought a lot of bundles of home loans. Some are Fannie/Freddie products, so they are all right. The Morningstar analysts seem content with the security of the dividend even in the face of sore ARMs. Priced at $16.35.

Appreciation Plays

RUTH - Ruth's Chris Steakhouses - Where can you get a $39.00 steak for just $10.00? On the stock exchange only. Ruth's numbers came in lower than guidance, and the market hammered the hell out of the stock. A $22 fair value stock was going for $6.89. Ruth has stature in its sector of the market, is well run, has ubiquity of experience and scale, from Hong Kong to Layfayette, LA, and will weather the panic about the economy. One of the few well-run companies that I'll buy for straight appreciation without a dividend consideration.

WU - Western Union - I'm still acquiring more of this stock. I think that the US immigration issues that have been unsettling it, without cause, as the company is international and moves money in lots of places. The bad mojo on the street should lessen after the elections in the US in 2008 make forward US immigration policy clearer. I also think that, over time, as other countries' economies and major corporations rise, you will see some lift in the stock as Americans, chasing after wages that may not be available to them in this country, start internationalizing more and sending their money back.

AMGN - Amgen - The Ft. Knox of biotech - R&D and scale advantages make them more big pharma and less boutique bioT - Baby boomers and a world population modestly rising in affluence in pockets makes their products a growth business. Their political clout and ability to do battle with Medicare probably also bode well for the stock.

Dividend & Appreciation Plays

CX - Cemex - The cement giant from Mexico, this company moves very deftly to acquire the right assets and move product to the right places. In a sad state of affairs for the US economy, the Mexican economy may actually be brighter this year. Stock is Morningstar recommended, a dividend yield percent of around 3% and a price hovering in the mid 20's which puts it in 5-star value territory. I would buy a bit and look to buy a bit more if the market dings the construction or financial sectors again.

KMP - Kinder Morgan Partners - The oil and natgas pipeline experts. New projects coming on line suggest increase in the payout of the dividend on this Master Limited Partnership. If you bought it back with me a few years ago, your stock has appreciated 194% along with the good dividends. I'm buying more because continued forward growth looks attractive. Richard Kinder takes a buck and makes his money on the appreciation of the stock and the dividends. A 6.1% dividend and trading at current fair market value of around $55.00

CFC - Countrywide Financial - When it was cruising in the under $5.00 range, Bank of America's $2B marker on it was time to be called in. Why not own the biggest mortgage origination unit and massive retail lending infrastructure for a fraction of what you would pay for small midwestern bank? $6B and potential liabilities were apparently still a good enough deal to get you somewhere between $7 and $12.75 when the BAC-CFC deal closes in the third quarter. I've been buying, heavily under $5 with an average cost of about $5.50. At the negative face which is a stated $7.00, or Morningstar's estimate that the deal will probably mean an effective $12.75 price by the time that it closes, I'm holding BAC effective stock at a nice discount. If you bought some at $15-16, the combined company still seems well positioned for longer-term rewards. More than that and you have some loss in the deal.

In the sixes it still may offer some value. If Morningstar is right, and $12.75 is a better real number, then you still have significant appreciation in the purchase.

Value Market Basket: Post Christmas Bargoons..

2007-12-28T14:45:28Z

Sure there is a lot of carnage out there that is worth picking over. I only will tell you where I've bought, so I follow my father's adage of only investing with people who put their money where their mouth is.

My weekly specials:

I'm initiating buys in Biovail (BVF) and BT Group PLC (BT).

Biovail, the folks who brought you Wellbutrin, have been cleaning up their act and getting it together. With 500 million in forward R&D and $2 million in debt and a price that yields around 11% on the dividend, even if their next product hits snags this summer, it should, in the 3-5 year window, be a very attractive investment.

BT is British Telecom. Part of the holiday sale on British stocks of great value, you can't beat BT's dominance over the Empire. They have competition, but at the discount to fair market that it is trading at, plus the 7.52% dividend, I can afford to watch my money grow.

Still Buying American

I'm buying more American Express (AXP) and American Capital Strategies (ACAS).

American Express is well positioned for more growth, has a catbird's lawsuit that gives them negotiating clout with banks, and some of the financially strongest clients in the business. They focus on their core competencies now, and look to be able to move upward.

American Capital Strategies continues to develop a client base that looks to bring a healthy cash flow back to their bottom line. The stock is cheap, hammered along with the rest of the lemming tide out of the sector. If everyone abandoned the Ritz, short of a nuclear bomb dropping on it at any moment, I'm walking in for a glass of reduced-Euro champagne.

Value 101: Countrywide (CFC) & Buying in the Valley of the Shadow of Death

2008-01-11T13:19:52Z

The stock market is like an ADHD kid. It moves at a mile a minute and it's all over the place. One minute it's giddy, the next it's highly moody and petulant.

In a down market, or highly volatile market, FUD takes over: Fear, Uncertainty and Doubt. When animals in the herd panic, my dear value vultures, is when the hunters strike.

The last few weeks the lemmings have been fleeing Countrywide Financial Corp (CFC). The largest lender in a America saw its stock drop to just 11-12% of fair market value early in the week because some prudent person, probably shorting the stock, dropped the bankruptcy bug in the right ears and set off another market panic.

Could CFC indeed go bankrupt? Sure. Any company could. However, if CFC did go bankrupt, it may be time to put the country up for sale and get out your Greater Depression gear because they will take the entire financial system and the nation with them.

For the lender who writes one in five home mortgages, and services more home loans than just about anyone else to go ***-up would send the entire financial system down with it. Bear and the brokerage boys are just lifeboats that would get sucked down by the Titanic in that scenario.

The thought of which caused a large panic. The problem with the news outlets, and sadly most of the analysts, including our friends here at Morningstar, is that it is much easier to run around like they do at the lemming channel, CNBC, and interview guys shorting the stock and making money, than it is to calmly explain this thing called a BALANCE SHEET.

The market is presuming total catastophe at CFC, and has overpriced the catastrophe to the point that CFC was becoming more a vent of investor anger than it was a rational stock ownership acquisition.

So the the Bank of America acquisition this morning was no great surprise. They staked a small claim with their $2Billion investment in the company. Now they were moving in for the kill. Who wouldn't want to buy a company whose fair market value is $38-$42 and adjusted for even the most glum worst-case scenario is worth $19-20, for $7?

It was freakin' brilliant.

For them.

If you are a CFC shareholder, and you paid more than $10.00 for the stock, you have zero hope of recovering much from your stock now unless you bought some of the $4-5 stock this week to offset.

Every last one of you should vote down this deal. It works against your interests. CFC was healthy enough to ride out the mortgage storm.

So why did they sell?

The market is not only behaving irrationally right now, it's being downright vicious. CFC was the poster child for sub-prime. Right or wrong, investors were sucking it dry of cash, with the shorter hyenas plucking over the bones as it was being killed. CFC needed a white knight to get their name out from under the mess, and return the value to what has value within their massive financial services network.

Now the question remains: Will the mob turn on BofA? Probably. The difference ist hat BofA is one of the Untouchables. To assault them the way that Countrywide was pilloried would undermine US financial institutions. They have a big enough sea wall to bat back all of the shorters and naysayers, even if they take a short-term ding in their armor for making the move.

$7 for $42? Freakin' brilliant value play.

Value 101: Feasting on the Lemmings - Good Times or Bad all the same in Value Investing

2007-12-28T13:28:47Z

Whether CNBC is shouting success from the rafters or pouring gasoline on the subprime woes of the companies that they cover, it doesn't really matter: Value is the play that is always here to stay.

No matter what the conditions in the market overall, there are always specific large companies with good free cash flow and reasonable debt levels doing grungy and unsexy but very necessary things that either disappoint some analyst or become the target of the shorter jackals or just make the collective lemmings feel like jumping off of the cliff with the rest of the club. They take a quick pilfering, er profit taking, and deflate like so much bad cheese soufflé.

CNBC, WSJ, analysts, and a lot of the talking heads that populate the financial news sphere keep talking to you about their worries for the forest when you invest in specific trees. Even in the worst drought, a few trees still make it through. The trick is to pick those trees that have had a bit of a case of bugs, but have fended that off and are now a lot healthier, or trees that can withstand pretty much anything slung at them.

The primary filter I employ for searching for stocks puts up very tough criteria: High free cash flow, low debt, a dividend greater than one I can get from a bank, and good management, trading at a 15% or better discount to fair market value. Like all good cooks, I may have left an ingredient or two out of my recipe, but that is primarily it.

That tough filter creates a window that should only be 20-40 stocks at the most at any given time. What's even more interesting is to see where that window opens when you pull up the curtain.

In the month of November and into early December, all you saw were largely bank stocks, for obvious reasons. Some great names, like Lloyds PLC (LYG) or Citigroup (C) became just downright bargains.

How do you stomach the roller coaster ride that these stocks go on for a period of time? By knowing that, bottom line, companies of this size, given the world economy which is still pretty good even with mortgage scandals, increased oil prices, and increased food prices, are still going to be the aircraft carriers moving through choppy waters, not the PT boats.

In happier times, you continue to buy the unhappiness of others. McDonalds (MCD) and the mad cow scares. Southwest (SWA), the only consistently profitable airline, back when the bankruptcies dropped the whole business into turmoil. Boeing (BA) when Airbus was rattling its cage. If you bought Apple (AAPL) back when they had $5 Billion in cash reserves to fend off Microsoft (MSFT) and their stock traded for $6.00, you would be in value investor nirvanah with the $199.00 you're getting today.

To call momentum investors idiots would be wrong. They're not. Most of them are quite bright. I tend to think of them more as social conformists and adrenaline junkies. They live for the good news or bad, and trade on the moment, bobbing up and down in the financial waves and eating their little bits of fish.

Value investors are Shamu, baby. Sleek, smart, and patient. I'd rather open my mouth and scoop up a whole lemming feast than keep bobbing on the waves and pulling out my little bits of prosperity while patting myself on the back for reading the wavelets. I know the tide, and where it goes. That is what makes me richer, and leaves me with more hair than Jim Cramer.