Archive for July, 2012

Welcome to the Dog Pound! Portfolio Review Summer 2012 – Part 1

Welcome to the Dog Pound!

A value investor’s portfolio is a lot like the Land of Unwanted Toys in “Rudolph: The Red-Nosed Rain Deer”  We find the unloved and unwanted. The dog stocks that aren’t having their day.

Yes, our time horizons are long.  We also follow a discipline of avoiding fad and “sexy” stocks.

Apple has turned great money for its investors.  Unfortunately they attract lemmings, day traders, and other unreliably Wall Street fleas.  Sudden corrections to the market can create situations where companies like Apple, that rely on discretionary income, cause the fleas to fly away for weeks or years, devastating the price and evaporating value.  It is a great stock for people who watch them by the day week or hour. Let them have it.

We are not in an era of speculative growth at the moment. The data suggests that we are in a cautious rebuilding cycle leading up to the next major cycle of growth.

It is being impacted by major markets in Europe and the United States which are still struggling to absorb the toxic investments of the last two decades of excess.  At JP Morgan and the LIBOR scandal point out, uncontrolled greed is still a problem in the financial industry.  One person’s problem, though, is another’s gain.  Such is the view of the value vulture.

Our discipline is to buy securities at a 17% or better discount to fair market value, with high cash flow over the last few years and moderate to no debt.

At all times, we look for leading companies in their market sector, usually  experiencing transient bad news that can last 1-7 years.

We invest in the stock at their distress point, buy a bit more into the bottom of their cycle, then sell as they recover.  Meanwhile, since we also require of most stocks at least a 3% dividend at this time to buy patience, we can increase the overall yield of the investment over our time window.

What do we hold in the dog pound? There is some exposure to retail and real estate investment trusts (REITs) and Gold, but mostly we hold grimy “core” business like pipelines, miners, oil tankers, cement makers, or holders of precious and depletable resources like timber, minerals, etc. We also hold essential lifeline companies: Selected utilities, natural gas etc.

We are also holding and buying banks, because, as putrid as their toxic pond is over at the far corner of the dog pound, they will have their day too, and some of the bargain basement rates that the world’s major banks have traded at over the last few years will make up for a number of years of lag time.

I still believe that the DOW at 12000 is a bit overpriced given all of the cash in corporate coffers on the sidelines and the struggle for Europe to figure out what it wants to be when it grows up.  In a year or so, a march to a 14,000 DOW wouldn’t be out of the question, though, as the recovery hits stride.

I feel that the worst news from 2008 is behind the economy, but that several large tectonic shifts are taking place. China is on the rise, as the April data shows. Positioning in companies that can make money all over the world, or be a player in the world economy somehow is the smart plan for long-term holdings and steady appreciation.



We bought a little bit on a bounce down a year ago. Up 23.27%, at 88.10, with a 3.3% dividend at our entry price, it’s a few dollars out of buy range. Fair market value of $100 seems about right.  Always a great company to acquire when people are throwing it out the window in major/minor panics.  Reliable stable of office supplies, industrial products and home supplies that everyone uses and needs.

A T & T INC (T)

We took a small position in AT&T last year and are up 30.33%.  It pays a 5.5% dividend.  Even missing the T-Mobile deal. HOLD.


We made buys of pharma Abbott Labs (ABT) in 2010 and 2011 that have been rewarded with great product lines that turn out a 5.3% dividend based on purchase price, and a 30.90% improvement in the share price since then. HOLD.


Trading about 4% under where we bought it, the 4.95% dividend has been taking some of the sting out of the flat price. Recent acquisitions and continued strong operations, though, along with great free cash flow make it a pretty solid, stabile platform.  HOLD.


With high switching costs and a very stabile customer base, expansion by way of acquiring Heritage propane, and a juicy 7.8% dividend, we like APU.  It’s up 66% from where we bought it in the 2009. It recently acquired the propane operations of Energy Transfer Partners (ETP) another one of our holdings. HOLD.


We’ve held a small amount of this stock since 2006. It’s been as high as 38% up. Currently it’s down about 44%.  The dividend, currently at 5.6% will probably get cut in half in 2013, as the company is in the midst of a major restructuring with a new management team after the last team fell afoul of the SEC for allegedly corrupt practices.

The new management is streamlining, and learning to adjust to the changing realities of sales in some of the countries that it does business in, but the Morningstar analyst seems to think it will take at least two years to see how all pans out.  If it is a sizable holding of yours, you should consider that the time window may be longer on it. It will still pay a dividend that is satisfactory.

The fundamental model is good. They’re a world door-to-door cosmetics and goods marketer.  Their BBB+ Morningstar credit rating, which concurs with ValueLine’s estimates shows that their decades of scale building have given them some comfort to work out problems and position for the 21st century better.  Schwab has it on an outperform/buy, but we would recommend a more cautious stance until the details work out.

One other possibility is that another company buys Avon’s vast verticality world-wide.  We’ve seen it as a growth/risk opportunity with a decent dividend to buy our patience. HOLD


The dog with fleas continues to roll through its problems. This is a long term investment, though, with about a six-seven year window after the melt-down of the industry in 2008-09.  Changes being made to streamline and improve operations, reductions in the toxic assets left over from CountryWide, and meeting requirements for capital without seeking outside assistance all are incremental steps back.

BAC’s brokerage and other businesses are returning to more robust health faster than the banking side.  Value Line factors their book value at  20.35. Morningstar puts their fair market value at $10.00.

We see two scenarios: Either the biggest American bank gets its act together, and takes advantage of the massive scale that it holds, or it is consumed by it, and they split up the company back into component parts.  In either event, money is to be made by the patient with a longer time frame.  We’d look into the preferred but we hold it by way of Berkshire Hathaway.  HOLD.


Book value per share has increased 20% per year on average over the last 45 years. Buffet rarely sells acquisitions. He has solid managers and has created a whole network of top decision makers who are more than capable of continuing the firm’s fundamental investment philosophies after Warren and partner Charlie Munger pass on.  In effect you are getting the best mutual fund and super conglomerate the world has ever known. The stock is up 1% against an S&P down 7%.

GEICO, the Burlington Northern Santa Fe railroad system, and General RE insurers are a handful of their vast and deep direct holdings. They also invest substantial positions in Coca Cola, Wells Fargo and other major institutional holdings as well.  The company holds $38B in cash and virtually no debt.  If the price drops a bit more, we might move to buy more, even though it is one of our largest holdings. HOLD/ACQUIRE.


BHP is a gas, oil, copper, diamonds and other commodities producer. The market is slowly heating up for raw materials while fuels like oil and nat gas have been flat to down.  Its mixed asset base though gives it punch in a wide range of conditions. The dividend is currently at 3.9% which isn’t exciting but is 300% better than most government paper and at least based on raw materials that have real value. Down about 4% right now, it’s about flat to where we bought it, but as the economies of the world upswing, it should be worth considerably more. We’d buy a bit more on a 17% discount to fair value. HOLD.


BT has been a long term hold, and has finally turned the corner. In spite of competition from Virgin’s VMED service, they are picking up new Internet/Cable TV business faster than they lose traditional subscribers, and their business operations have began to turn around as well.  They have paid down debt, streamlined and done so while continuing good growth. The dividend, Value Line expects, will rise 10-15% over the next three years.  If you purchased in 2010, and locked in a 60% gain in addition to the double-digit dividend, you aren’t complaining. We held some prior to 2008, which has the asset about 8% down, but, with dividends, above water.  Now we expect to see the slow gain and recovery as BT advances. HOLD.


 Truly not one of my better picksThis organization has had more lives than a cat.  During the period where start-ups were flying out the door, CapitalSource was doing big things in business development, which we tried to have some minimal exposure to in the early part of 2008.  That was a mistake.  It has since been a REIT and a bank. Its management has proven itself poor. They have had a rapid ramp up of loans but that could implode if the market around them destabilizes again. It is doing better, but subject to any major or minor corrections in market conditions. We are holding on to the asset at this point while we wait and see what the results of an IRS audit of its REIT days, and a reversal of its tax asset valuation at the end of the year bring. HOLD/SELL.


Cherokee licenses its brand names to merchandise sold largely at Target, Walmart, Tesco, and other box discounters. This was not a stellar year, even though return on equity was 69.85% and return on assets was 35.38% compared to return on equity of 69.96% and return on assets of 28.4% a year ago.  It pays about a 5% dividend based on our entry price.  Nothing to do here but wait for the economy to pick up. HOLD.


Uniform supplier Cintas is a giant in its sector, and has unparalleled reach and scale.  It pays a 1.4% dividend annually, which, while not sexy, is better than the .03% or worse that the banks pay. When the business market starts hiring again, probably after the election, uniform rentals will increase and growth in the share price will make it ripe for the picking. HOLD.


There will be more road bumps ahead as the LIBOR scandal rolls out, until the Justice Department names which banks were responsible. Still, their credit quality and capital base continue to improve while their toxic debt cache continues to decline. They have also moved their fortunes into the international markets, setting up bank operations in emerging countries in Asia and Latin America.  That recognition that they need to be a world bank is good, even if the numbers in the immediate quarter did not reward the logic short-term. They are still positioned for something unheard of in an American bank of late: Loan growth.  This was a long-term purchase to ride through the cycle with them from the bottom up.  The penny dividend is a placeholder. We don’t see return to normalcy for at least two years.  HOLD/ACQUIRE.


Utilities may not be pretty, but when they get hammered along with the rest of the financial world, they are attractive. Consolidated Edison’s 200-year-old NYC business generates dependable earnings and dividends. Infrastructure improvements should provide growth investment opportunities for Con Ed over time, supporting long-term earnings and dividend growth. Our purchase is up 37% since acquisition, and pays a respectable 5.25% dividend based on our entry point. HOLD.


Purchased before Countrywide went under, the preferred has been paid by Bank of America as part of its really bad acquisition deal with Countrywide. Preferreds are the bastions of scoundrels, upper management (same thing in the banking biz) and value vultures.  Their loss is our gain: Based on our entry price, we get an 8.75% dividend yield and we’ve seen 24.71% appreciation on the price since acquisition. HOLD.


Cross Timbers Royalty Trust is a majority-held subsidiary of Cross Timbers Oil, which owns majority interests in oil and natural-gas wells in Oklahoma, Texas, and New Mexico. Cross Timbers Royalty Trust distributes royalties for Cross Timbers Oil, and is a grantor trust that provides its owners with tax-advantaged cash distributions from net-profit interest in royalties, overriding royalties, and working interests owned by the parent company.  The price is soft on the stock right now, about 14% down from where we bought it, largely on softer demand for oil and slumping natural gas prices. Short term issues don’t trouble us.  It is paying a 7.92% dividend and there is no sign that depletion of their proven reserves is occurring faster than expected. HOLD/ACCRUE.


A mutual fund with 100% treasury swap Credit Suisse holdings. HOLD.


The Company is engaged in the acquisition, ownership and administration of Royalty Properties and Net Profits Interests (NPIs) that hold mineral, gas, and oil rights. It owns two categories of properties: Royalty Properties and NPIs. The Royalty Properties consist of producing and nonproducing mineral, royalty, overriding royalty, net profits, and leasehold interests located in 574 counties and parishes in 25 states. The NPIs represent net profits overriding royalty interests in various properties owned by the operating partnership. In English: They own land and lease it out to people who extract resources from it. It has low risk to the holder other than their properties aren’t being worked as hard by the companies who lease them if market conditions soften. After a bumpy 2008-2009, revenues solidified for two years. Softer commodity prices of late have caused a slight retreat, but it pays out an 8.46% dividend.  We can ride out Europe’s burps because China will need the materials if the Euros don’t. HOLD/ACQUIRE.


A smart, well run company positioning itself for even better days ahead.  ETP sold its propane operations to AmeriGas Partners (APU), one of our other holdings, for $1.4B in cash and about 29 million APU limited partnership giving ETP a 33% interest in AmeriGas, with about $95 million in cash distributions this year.ETP used the money to refinance debt, shaving off $55 million of interest this year.

They have been on a buying track, acquiring 50% of Florida Gas Transmission, which moves 60% of Florida’s natural gas supply. They have also agreed to purchase Sunoco (SUN) for about $5.3 billion, half each in cash and units. The deal would broaden the company’s profit centers and reduce its exposure to commodity prices.  It will bring ETP 4,900 retail service stations. They also will pick up SUN’s 32% holding in Sunoco Logistics Partners, and profits from 8,000 miles of pipelines carrying crude oil and refined products. The deal is in antitrust clearance and requires the approval of Sunoco shareholders in September or October. It is expected to be immediately accretive to distributable cash per unit.

The quarter ending in March saw ETP’s intrastate, interstate, and midstream operations generate double-digit profit gains. Their new natural gas liquids division contributed as well, with  8% of that profit.   The stock is trading at 19.5% over what we all bought it at in 2009, and pays out, at our entry point, a 9.38% dividend. We expect cash distributions to rise. If a correction of a day or two drops it into the high 30s’, we’ll be buying again. HOLD.


Eni is one of the few major oil producers we hold. They specialize in working in the more difficult areas of the world where big American producers like Exxon or British producers like BP are not welcome difficult markets such as North Africa, the Middle East, and Russia. Eni is the largest international oil and gas producer in Africa. Recent years have seen roughly half of E&P capital spending going to Africa, and its major recent gas discovery in Mozambique means the company is unlikely to relinquish its top spot anytime soon. Their system took a hit in Libya, which accounts for 15% of its production, but it is slowly recovering, and not its largest holding.  European natural gas production and prices in their european markets may be weak with continued Eurozone turmoil for the short haul. Morningstar isn’t big on the government’s 30% stake in the company, but we’d argue it is both a cash cow that they need, it keeps the regulators in Italy tempered in their attitudes, and it has helped Eni achieve some Their dividend is up, paying $4.12/sh. annually it’s worth holding. HOLD.


A master limited partnership (MLP) operating oil pipelines, which are totally essential, get premium pricing for carrying oil supply across the US to loading/distribution points, and have tax benefits rigged into their R&D by the government.  Only a handful of master limited partnerships have the asset base, liquidity position, and ability to do big projects that generate strong cash-flow growth even in tough market conditions. Enterprise Products Partners ranks among them: Its savvy 2009 merger with TEPPCO Partners cemented Enterprise’s place as the largest MLP.  The 2010 consolidation with its general partner sets Enterprise apart from its large-cap peers. Enterprise is a top-tier MLP that is well-suited to weather tough markets and prosper in healthier times. Some like EPD also throw off a little passive loss, reported as part of the K1 that they send to add to your tax forms, which, depending on your tax situation, can be used to shelter some income. If you don’t get that, see a later blog on how pipelines and LPs work. S&P has it as a BUY with a $53.00 target.  It just raised its dividend to .6275/share.  It’s up 192% from where we purchased it originally, and has a dividend yield of 14.1% based on our entry price! Major outlets have it on a buy, so we HOLD.


With roots as the Philadelphia Electric Co. (PECO), it bought troubled nukes back in the day for a fraction of their value and got dismantling costs built in from the companies selling them. They ran them better and more safely, at a fraction of the cost, and became the largest nuclear-power company in the United States. Mergers turned them into Exelon, which still operates as one of the strongest utility companies in the industry. They just picked up utilities and ancillary holding from a new merger with Constellation Energy, including Baltimore Gas & Electric.

Nuclear power plus dismantling costs allow it to produce low-cost electricity with minimal greenhouse gas emissions. It should produce sustainability in growth of shareholder value for many years, regardless of what path power prices take. It also pays currently a 5.5% dividend, tops in the industry. (HOLD)


The major’s major in oil production. XOM delivers higher returns on invested capital than its peers through relentless improvements in their business model.  We’ve seen a 45% appreciation of the stock since we purchased it a couple of years ago.  Morningstar pegs a $91/share fair market value, which it is approaching. The dividend jumped 21%, up to .57/share/quarter, projected as $2.28 for next year, a 3.8% yield based on our entry price. Their push into Russia and other asian market opportunities suggest a wait and see for now, but we’ll move to retain the gain if more pronounced bad news plagues the market. (HOLD).


There are people who say just write off your losses here. We had smaller holdings in both Fannie and Freddie. There are trillions of assets though, and these institutions are stuck in limbo at the moment thanks to a Tea Party bent on driving social agenda rather than fiscal. Based upon their handling of the debt situation last year, the Congress has little or no fiscal comprehension.  Fannie and Freddie were also, ironically, stripped by the Bush Administration, allowing the pre-bundling by banks and taking the more secure mortgage inspection and bundling process out of their hands. The Bush Administration also kicked the companies into federal limbo prior to Obama taking office to make them a political football, which their media outlets have been happy to oblige. So it may be a while before we know the fate of Fannie and Freddie long term. I’m holding. There are pensions and mutuals doing the same. A few have sold for pennies on the dollar to others, but there is a reason that they’re net buyers. The risk/reward is pretty high, because at some point, when the Congress comes up for air from its social re-engineering, it may actually deal with the 400lb elephant on the financial sidelines. HOLD.


 GE has restructured its equity holders downward to a level that I find troubling. I’ve held these in my personal account since the days of Jack Welch. I bought when it cycled way down as well. Why? GE will be the only company big enough to go head-to-head with Big Oil and produce next generation electrical production systems, be it solar, wind, ocean or whatever. They have the capital to buy promising start-ups, and they have been slashing costs and improving their corporate focus since the 2009 Great Recession.  They dominate large-scale energy generation. They’ve sold off or reassigned controlling interest in non-energy ventures like entertainment. Their dividend at 3.45% is good enough for now. HOLD.


Drug makers took a hit in 2010, and we were there buying a bit. Our investment in GSK is up 34.17% since then, and paid out a 5.6% dividend for this year, although it included a small special dividend so 5.2% would be a more realistic projection of future dividend payouts. This is a massive company with a huge pipeline of product, huge economies of scale, and a top salesforce. HOLD.


HSBC has huge scale and deep reach throughout Asia, Europe, and a smaller presence in North America. Currently caught up in both Mexican drug cartel money laundering investigations AND the LIBOR scandal of interest rate fixing, they may see some penalty in Europe and America, but in the long-haul it’s just another blip for a world-wide bank that can absorb a fair amount of regulatory pain.  The bad news may put the stock, which is trading mid-range, in a slight buy position at some point.  We bought when everyone had holds or sell. Now the consensus seems to be buy and accrue.  We bought a small position. We’re buying a bit more with 60 day GTC orders in our price range of under $39/sh in case a bad news shock on the LIBOR front presents an opportunity. Their fair market is only $52/sh and thus the current price is not enough of a discount to that fair market value to warrant buying at these prices  HOLD/ACCRUE.


Intel is a tale of two cities for us that is almost at an end. There is the Intel of old that we held in the beginning of the century in the 40s. There is the 2006 crashed Intel and the 2008 still crashed Intel. Those are both up more than 44%.  It pays a 3.2% dividend at current entry price.  Intel has a pristine balance sheet, and dominant industry position. What it lacks is huge growth opportunity. It is working on efficiency to wring out more profit from everything it does, and it has the cash on hand to make acquisitions that open up new growth vistas.  There is talk about an 8 layer chip that will fly.  Value Line sees it as a 3-5 year out-performer. The picture gets better, and the company announced a .90/sh dividend, which puts our yield based on our multiple purchases back up to 3.1%.  HOLD.


KMP has been a flagship portfolio holding for years. Our original investment in 2001 is up 349.13% and has yielded dividends and carryover passive loss that has been nothing short of spectacular. When people were dumb enough to throw this out of their portfolios in 2008, we were buying big.  Our 2008 buys are up 52.34% on average as well.  The dividend based on our entry prices is a hefty 9.1%.  KMP is, thanks to recent acquisitions, the largest pipeline company in America, shore-to-shore, and a sophisticated driller that uses hedges to lock in cash flows. They don’t make as much on oil itself when it’s high, but they don’t lose as much in a down market and have to slash the dividend. Morningstar asked last year how Kinder could continue growth of the dividend and pay the master partnership their chunk, and they answered: They bought El Paso (EP) and they are folding the pipeline operations into KMP.  The dividends have some tax shelter because pipelines are tax sheltered entities. The partnership also throws off passive loss that increases the benefits of the investment. You have to file a K1 with your return, which can increase expenses, but they don’t outweigh the gain when KMP is selling at a good price. If there was a way to get into this we’d tell you, but it’s too close to its fair market value right now, and would expose you to corrections. If people get stupid again: BUY, BUY, BUY.  HOLD.


KMR, the management arm of Kinder Morgan, has also been a stunning success. The actual shares purchased are up 84.44%, but the subsequent dividend shares have driven up returns to 181.09%!  Much of the above applies here, as, theoretically, it’s just another entry point into the KMP world. The only difference is that KMR pays out dividends in KMR shares, not cash.  As you can see, though, that’s been a significantly better investment! HOLD.


Kumba Iron Ore Limited (Kumba) is a supplier of iron ore operating largely in South Africa’s Northern Cape Province that we found when looking at high yield stocks.  It just had a 2-for-1 stock split, and it’s up 15.15% from our purchase price last year. It pays out an 8.59% dividend as well. KIROY provides iron ore to the South African steel producers and it exports ore as well to China, the rest of Asia, Europe, the Middle East, and the Americas.  Kumba Iron Ore Limited is a subsidiary of Anglo American PLC. We took a small position in it, but it is rewarding nonetheless. We expect demand for steel to increase, not decrease in the coming decade, particularly in China. KIROY has been a good way to participate in that steel production. HOLD.


A cautionary tale that even the best laid plans oft go awry. We took a small position in Le Chateau,  a Canadian clothing retailer with 244 locations, a web business, and six stores licensed in the Middle East, on the recommendation of a Canadian friend. Its last few years have been pretty good. It was paying a reasonable dividend in 2011. It fared well through 2008 and 2009.  It had a good year up until Christmas of 2011, even filing to buy back shares. Then it nosedived when it elected to suspend its dividend that it had paid out for the last 18 years.

The balance sheet looks generally about the same, other than a shift out of cash into a heavy inventory position that was a bad bet on 2011. With American giants Target and WalMart moving into their price and style points, they went out of cheap trendy clothes to a more upscale line that did not resonate with their patrons.

The stock dropped 90% on the dividend cut, even though they’ve actually been retiring debt, even though sales remain weak, and their bottom line is still reasonably strong.   Their debt load wasn’t high, and has actually remained flat/down in the new fiscal year to date. They have to work that huge chunk of inventory out of their system over this quarter and next. The largest shareholder, the owners of the company, floated a $10M loan during the crunch.  It can’t be that bad, as GE Capital granted them a C$70M line of credit in April.

It doesn’t help that they launched their move to a new style line in the middle of a very weak Canadian retail market. Right now the stock is almost not traded.  We’re watching the numbers to see how they proceed. If they can get their act together, buying in at the low to a recovery point of 4-6/sh. might be in order once trading in the shares picks up a bit.  Keep it small, though. Right now,   HOLD.


London-based Lloyds Banking Group is a financial services firm. Its retail UK bank controls 50% of the country’s savings. It controls 30% of the U.K. mortgage market. Its insurance unit is one of the oldest and most well known in th e world.

Their poor choice of acquiring Halifax-Bank of Scotland (HBOS) during the bottom of their banking crisis crashed the stock that had been paying out monster dividends and enjoying the banks historic reputation as the financial fortress of the Empire.

Lloyds general disciplines prior to acquiring HBOS were quite good. Digesting the toxic assets of the other bank is going to be a 6-10 year enterprise, but we think that analysts are being overly glum.

The economy in the UK, as elsewhere, has been bad, and will continue to be that way for a while longer. The UK’s exposure to the Euro crises is there, but because the UK sits on the financial periphery with the much stronger Pound Sterling, the economic floor for British banks is much stronger.

That said, Lloyds has to meet Basel III requirements for liquidity, and, while they’re in sight, they still have a way to go.  When they get past that, though, the new Lloyds emerges as one of the world’s powerhouse banks, with an iron-clad hold on the home country.

It would not be out of the question in the next decade to see them also do as Citibank and others have begun to do, and seek a more global footprint.

We’re being patient and watching.  It would be a huge black eye for the most distinguished name in British finance to have greater problems. We think that both they and the government will be working assiduously to prevent that.  HOLD/ACQUIRE.


MASCO is 40% cabinetry business for big developers, but it owns Delta faucets and Behr paints.  The market is coming back after a very long bad few years for MASCO. We’re seeing signs of increased housing starts, particularly in Florida. MASCO will benefit.  Sales are up at the Home Depot, too, which is where Behr lives.  People are moving forward. By November, after the election, the process will accelerate. Our shares are flat right now.  It pays a 2.11% dividend to let us wait out the growth. HOLD.


I am not their biggest fan, typically, because I find that I can manage and make picks better than they can as I’m not beholding to the week day and hour of money going in and out like the tides. The Great Recession rattled funds badly, but I picked several that generally perform well, have better expenses and are managed by stable, thoughtful groups.

FIRST EAGLE GLOBAL FUND CL A (SGE1Z) – This is a loaded fund (5%) but that is GOOD. First Eagle has very low turnover (11.6%), and it puts its money where its mouth is in the investments that it makes. It earned its load back quickly, and then went on to do very very well, including a stellar performance during the Great Recession where it was one of the few above-water funds, primarily because the load and the management kept panic to a minimum. Even with the down years we’re still up 9.5% where many many funds are still under water.  The management proved itself when a succession went awry, and the old guard stood in until they were able to bring others from their long-term stable of managers up to a good place.  The fund gets straight positives from Morningstar and a 5-Star Silver rating.  We’re up 13.59% even with the dip of 2009. HOLD/ACQUIRE.

Real estate is a hard game to play, best left to people who know the REITs and what they’re up to. It’s a clubby and secretive world.

ALPINE REALTY INCM AND GWTH FD CL Y (AIGYX) – Alpine got the snot knocked out of it in 2009, but it’s powering back. It returned 10.32%, 36.12% over the last three years, and 0.02% over the last  five. It has a 16.99% YTD return.  It’s essentially a REIT, real estate investment fund with the objective of throwing off cash, which it is starting to do again.  Fund manager Robert Gadsden has been at the helm for the last 13 years. His relative “youth” was part of the outflow in ’09, but he’s weathered that storm and come back from the dead.  It’s out-powering REITs, Real Estate Index funds and other Real Estate Mutual funds, even though it took a harder fall in 2009 than most.  They are in Simon and Boston and other bigger, more stable commercial real estate outfits that weathered the downturn better.  Major downside is that it is small. HOLD.

Gold is something good to have exposure to in a severe down market, as they tend to benefit from the panicked running for cover, and gold prices rising on fear. When equities are hot, gold is not.  Gold funds that do not participate in bullion but cover mining companies were all hammered over the last two years. Miners, in spite of still selling the metal for nearly double what it costs to take it out of the ground, did not gain stock momentum when the market shot up, and it became harder to find gold mines which were undervalued.  Now would be a good time to get into one fund if you want a little hedge against the bad news in Europe. They are apt to suffer in up markets though, so patience will be a good thing if you believe that the markets are going to stay up.

I found that stocks that run with the miners, who usually profit handsomely, are better, but I bought into them admittedly later in the cycle than I should have.  They are down 7-23% depending upon the fund.  All underperformed more pure gold plays with bullion, but this is not characteristic of past lines of performance. Usually the mixed to mine only do better.  One has done well in terms of dividends in spite of their share price though.

FIRST EAGLE GOLD FUND (FEGIX) – A $2.6B gold fund with some of the lowest risk, and lowest expenses in the sector, this First Eagle fund does hold some actual bullion, which has allowed it, in spite of the market, to perform better than its high-mining peers generally over the last couple of years.  It holds 18% of its fund in gold bullion, which is why in large part it has been able to generate annual distributions of $2.00 per share in 2010 and $1.37 in 2011 even though the share price has suffered. If reinvesting, this could be promising as there will be more upside to the down shares purchased.  The Morningstar analyst is in love with Vanguard, but I believe that they are , comparatively, treading on pre-2009 past glories, even though I hold it as well. It produced returns of $1.29 and $1.58 respectively in those years. FEGIX has performed a bit better in tougher times, which earns my respect. MODEST BUY.

AMERICAN CENTURY GLOBAL GOLD FUND INV CL (BGEIX) –   The fund still has an 18% return, about 2 points shy of the category average, but nothing to sneeze at.  We got into it a bit later into the cycle so it’s down a bit at the moment. The management is stable, but the fund manager manages a number of funds of different styles and one wonders how much focus he has even with assistants for each fund. WATCH.

VANGUARD PRECIOUS METALS & MINING FD INV (VGPMX) – This is a great fund that we got into a little late into the 2010-2011 cycle. It made 37.00 when other funds in the sector lost money, but the next year it lost 21%, and it is losing this year at around 15%.  It, along with the other miner-based funds, was running into a wall of rising prices for the metal that weren’t lifting the boats of the mining companies. Then the market improved steadily, leaving gold out in the cold.  It has been a well run fund. It has hit a road bump. If the bump gets worse, we’ll have to re-examine the position, but mostly this seems to be a sector-wide issue for fund managers that will play itself out in time. HOLD.


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SELL: Kaufman-Broad Homes KBHome (KBH)


We’ve owned KBH a few times over the years.  Our current investment in KBH is up 14.92% since our purchase in the spring, but forward forecasting at least for the next 12-18 months does not look promising. In addition, problems with KBH’s mortgage lender, and some bad choices as to streamlining costs are not putting the company in a competitive frame relative to other volume builders.  Its debt remains too high, and is not trending well. The divided was also recently cut.  So we’ll take the gain and the small dividend (1%) and call it a day. If KBH can put itself back on track, and the price is right, we’d revisit them as a buy, as much of their model still works.  SELL.

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TheValueGenius Sell: Lockheed Martin (LMT)


We’ve been selling Lockheed Martin (LMT) – It has been entirely profitable, and the business is very sound, but with about a 25.75% gain to be had, plus locking in some great dividends, our real return total has been about 38%.  Not bad for a year or two’s ownership.

After the November elections, it is possible that the Congress might actually return to doing the people’s business, and, with that, consider how to get the vast overspending of the Reagan/Bush years behind us.  Defense has been a cash cow for a long time. The move towards drones and other more effective/less costly projects will impact LMT, as will what will be certain to be significant cutbacks in U.S. defense spending, even with the industry’s heavy lobbying.  The closer you get to election time, the more this will start weighing on analysts. SELL.

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TheValueGenius Buy: General Motors (GM)


Some GM bonds became GM common stock when the company emerged out of bankruptcy. We became “involuntary shareholders” of the new GM when some of the GMAC bonds were converted from debt to equity.  There is a long bumpy test track to GM’s long-term success. American restructuring has made the company hugely profitable in the U.S.  Sales of light trucks are going screamingly well. They build great products.  Even the oft-maligned “Volt” if you see one up close, is an exceptional vehicle.

Their European divisions are still a boat anchor. Europe’s financial woes, combined with government problems in idling or closing plants make Opel and Vauxhall more net liabilities over the next few years until Europe can right its economy.

The restructuring has given them a much easier way of funding $32B in pension obligations, though and they’ve moved more than $6.4B into their voluntary funding.  Share appreciation will help reduce their debt load with VEBA, the stakeholders with the pensions, as they sell off their shares to pay the costs of retirees.

The government stake in GM needs to be bought back from the Treasury. They invested a 7% stake in Peugeot as part of a cost-restructuring of parts supply for their European divisions, which we understand. Confidence will be boosted when they retire the Treasury’s huge stake in GM.  That’s a political football waiting for after the election, to avoid politicizing GM and dragging the damaging “Government Motors” mantra in to cover Mitt Romney’s “let them die” remarks.  Even though you would think it would be good for Mr. Obama to say that GM was repaying the Treasury, anything negative, as we’ve seen outweighs its intellectual positives with the minions of Rush.

The long-term prospects, though, for GM, which is doing very well at least with American consumers, look bright in a few years. Warren Buffet’s investment of 10M shares for Berkshire Hathaway (BRK.B) is a good sign, as its’ not cheerleading; it’s a sound analysis of GM’s bottom line projected forward. GM Financial will slowly rebuild their mighty vehicle financing division.  Right now shares are trading at their historic (albeit short history) lows.    We’re not taking a huge position, but we will bring it up a bit.  BUY.

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Buy – Getty Realty Corp (GTY)


Value opportunity. Getty Realty Corp. is the largest gas station-based real estate investment trust (REIT) in the United States They also lease petroleum distribution terminals. The Company’s properties are located in 21 states across the United States with concentrations in the Northeast and the Mid-Atlantic regions. They operate under Getty, BP, Exxon, Mobil, Shell, Chevron, Valero, Fina and Aloha.

The REIT owns the Getty trade name in connection with its real estate and the petroleum marketing business in the United States.

As of December 31, 2011, GTY owned 996 properties and leased 153 properties. In January 2011, it acquired fee or leasehold title to 59 Mobil-branded gasoline stations in a sale/leaseback and loan transaction with CPD NY Energy Corp.

It has also had to reposition its properties leased by Getty Oil, which declared bankruptcy and took 788 stores into that proceeding.

The large drop in income caused a temporary suspension of the dividend, which had been a cushy .48/share last June.   The properties have been repossessed and are now being released. There is interesting potential for dividend growth in this REIT stock as it returns to full health. The short-term yield is 2.63% but it has the potential to return to its 5.8% dividend once the inventory is re-leased.  This is a speculative investment in that one assumes that GTY will be able to re-lease all of the stations that were tied up the bankruptcy proceeding. MODEST BUY/ACCRUE.

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EXPEDITORS INTERNATIONAL OF WASHINGTON (EXPD) – This is one of the few forward growth stock plays that we’re issuing, largely because of the unique parameters of EXPD’s high cash flow, low debt business model.

Expeditors International of Washington is a non-asset-based freight-forwarding and third-party logistics, or 3PL, provider.  It is the best and nearly the biggest in its business.  It has been profitable, and is a long-run-focused firm sitting on a mountain of cash.  It owes no debt, and produces strong cash flows of 17+% while deploying nearly no assets. Expeditors’ has had a record of steady growth, high margins, and high returns on invested capital.

We see it as a long term holding. With prices affected by sluggish demand for shipping, it is still trading near the bottom of its range.  Morningstar gives it a fair market value of $61.00, so current price is about a 38% discount to FMV.  The 1.7% dividend is nothing to write home about comparatively to our other holdings, but it does keep inflation out of the picture and allows time for a growth upswing in transportation which should start within a few months after the November elections here, and some improvements in Asia’s economy that are trending toward increased shipping.

It’s trading flat to down slightly (4% from our original position), but we’re adding shares as opportunities around $38.00 or less present themselves.  BUY/ACQUIRE.

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General Directions for Investing Research and Buy Ideas 7.16.2012

The economic plates are shifting. While we sit and argue about abortion and immigrants, our GDP has remained flat for a decade. China’s has soared to now rival the United States.  That is not to say that America is finished. If progressive politics can replace the internationalist gridlock that corporate America has on the Congress, we might see new opportunities ahead. The next Google. The next Space X.   Solar power.  The modern power grid.  Wind and water energy.  Newer more efficient cars and trains.  All of this has been held up in a political climate where narrow social agendae are grinding the wheels of government to a halt.  Where to invest in this climate?

A portfolio should be holding more American Depository Receipt (Foreign) stocks (ADR)s. Even with taxes and fees, there are opportunities and yields on dividends that position portfolios well to

Right now there are good value opportunities in Europe, Latin America, Australia, and Asia.

Out of Australia comes Alumina LTD ADRs (AWC) – A linked aluminum supplier to giant Alcoa (AA), which we also hold and like, Alumina Limited’s sole interest is a 40% stake in Alcoa World Alumina and Chemicals, or AWAC, the world’s largest alumina producer. Alcoa Inc. owns the 60% balance.  The stock, trading at lows in the high 2’s right now, is worth a fair market $10/share, and puts out an 8.6% dividend.  The pricing is in response to the processed metal’s falling price, but reports continue to show that aluminum forward growth generally looks good as new technologies need more lighter materials with which they can be built.  Alcoa posted a loss for the quarter, but still beat analyst numbers.  Remembering that we buy big companies on bad news this is an area where there is some profit to be made by adding stock to the dog pound with good yields, good management, and sound balance sheets that survive turbulent times.

Europe’s bad news continues to put pressure on even the best companies.  Utilities and telephone companies and other large, necessary, stabile entities with good cash flow and reasonable debt tend to be safe havens during turbulent times. They pay good dividends. They have predictable revenue streams in that regulation by governments usually provides operating parameters.

We’ve seen a nice turnaround in British Telecom (BT) over the last few years, and locked in double-digit yield on our dividend based upon the purchase price.  We’ve bought France Telecom (FTE) and continue to acquire it here and there as its 12.1 to 13.5% dividend is appealing, and there isn’t any particularly compelling bad news in the company’s news itself to suggest any danger to the dividend at this time. Even if they cut it in half, though, 6.5% would still be a far better return than we can find in bonds or (stop laughing) at the banks.

We’re looking at a smaller presence in Telefonica SA (TEF) for much the same reason. The Spanish telephone company hold telephone companies in Latin America and Europe.Telefonica has more debt than the others, and will be divesting some of its non-core assets over the coming months, but we expect that to help, not hurt the bottom line on debt retirement.

Both are posting yields in the 11-13% range, which far outstrips a bond, with far better liquidity and the likelihood that both operators will do reasonably well enough as the economies of Europe recover over the next 5-6 years to at least warrant the pickup of our minimum 17% discount to the fair market value of the stock in appreciation, possibly better, plus the dividend. Dividends can be cut, but at the moment it still looks secure.

The other avenue to look down are in any company which own raw materials and precious metals or minerals. Most are highly undervalued right now, but as the recovery rolls out, they will all do well. BHP Billiton (BHP), Alcoa (AA), and even more obscure oil or resources trusts.

Cross Timbers Royalty Trust (CRT), pays a monthly dividend in the 8.8% range.  It has virtually no liabilities. Other than the oil drying up in their various lease lands, the risks are relatively borne by the company doing the drilling and the pumping. Their stocks cycle in price as optimism and pessimism about oil prices surge like the tides. CRT is a domestic trust that pulls in money from lands it leases to others. A downward move in the long term would be based on decaying proven reserves. If you invest, make sure you read their reports to see what their forward projections on proven reserves are.  If they have less than 15 years, the stock should already be in price decay.  Great Northern Iron Ore (GNI) which we bought as a temporary refuge last year, has started its decay as the trust winds down. The interest rates are spectacular to the price, but its a comet not worth chasing as the principle will be impacted.

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July Buys 2012

NOKIA CORP SPON ADR F1 ADR REP 1 NOKIA CORPS (NOK) – We already hold some of this stock.  Nokia continues to be pilloried by the market. The stock dropped to a new 52 week low of 1.92 last week. We like the stink of decaying flesh on corporate bones.  Nokia missed the smartphone wave, and the Tsunami landed on it. They have made deals with Microsoft for the Windows platform and a joint project with Siemens.  Right now, the brain trust of analysts is saying that Nokia will cut its dividend (likely) and that one should sit on the sidelines.  Microsoft infused quite a bit of cash, over $1B into NOKIA to work with a partner to catch up on its Smartphone ambitions, but it did not give an exclusive to the phone manufacturer. They also are being hammered on the low end by Asian competitors who offer viciously low pricing, and their brand name has all but evaporated from the U.S. market. All that said, at $1.92, we think that  NOK isn’t going out of business.  Further, even though the company got burned going its own way with advanced mobile phone devices and got smoked by Apple and Google, it holds substantial patents that Apple and Google need to access, which we believe are worth more than its current very low share price. It holds a BB+ credit rating from Morningstar. Its dividend is at 9.2%. If slashed in half 4.5% is still not that bad to buy a bit of patience.  We are buying cautiously, but see a lot of upside potential at these basement prices. BUY

CEMEX (CX) – The Friday before last the Senate passed a two year, $105B transportation bill that should be good news for Cemex and other building material suppliers. Cemex has been a gradual build of purchases of the world’s largest producer of ready-mix concrete.  Cemex has operations in the US, Mexico, South America, Europe and Asia.  They have been selling off non-core assets to reduce their debt load after acquiring Rinker just before the 2008-2009 correction.  The stock has great recovery potential 2015-2017, which, while a bit slower than our original estimates, is in line with the pace of economic recovery. Look for book value to return to the $15/sh range in 2015-17. At $6.53 you’re getting a great company at a good discount to fair market value.  BUY


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The Value Genius – Buy Ideas – 07/06/12


Alcoa (AA) – We’ve bought Alcoa in its slide down, and we’re continuing to buy as opportunities present themselves. It hit its 52 week low and at 8.39 we find it very attractive. Aerospace use is picking up, and the aluminum giant has either temporarily or permanently shuttered locations to bring production into line. With even modest improvement in usage by the auto industry, already up, which is gearing up for lighter hybrids. China and ultimately Africa represent growth opportunities, along with the retool of North America, as that slowly unfolds. Alcoa’s fortunes will advance. Analysts are being particularly hard on Alcoa and we think it a bit unwarranted.

France Telecom (FTE) – Sure it hasn’t grown much in the last few years, but with a dividend yield of 13.1% and pretty decent cash flow, we’re not crying in our beer while we wait for them to work through the sluggish European economy. Huge cash flow. We pick up a bit here and there on the dips.

American Capital (ACAS) – I originally bought into ACAS to ride the tide of the capital companies buying and developing mid-path start-ups into profit generators. It paid a tidy cash dividend. Along came 2008 and 2009 and ACAS squeaked through. Dividend suspended.  I bought it down into the floor of  3.21 when it had been in the high 40’s.  They’ve weathered the storm. Their debt is 20% of equity, fairly low, and they’ve turned out a 53% annualized return for the quarter alone.  I hope to see them restore the dividend one day soon. At its current price, with the numbers that it generates we think its $9.60 price point is a pretty good bargain for the portfolio of companies which they hold.  I cautiously acquire a bit more, and advise caution, because this business, even with a much stronger balance sheet than it had in 2009, is still at greater risk of loss or delay in returning to profitability in any major correction.  Between 5 and $9, though, a good chunk of that risk is factored in.

Berkshire Hathaway (BRK.B) – Right now it is out of buy territory just slightly. If it drops into the low to mid seventies, BUY.  A highly diversified company which follows a lot of strict value rules and has returned stellarly for all involved. The concerns that its leadership, Warren Buffet and Charlie Munger, are old is unwarranted. They’ve been grooming the team that runs the place for decades.


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Value Genius Summer Equities Review – 2012 – Sells

It’s been a while since I reviewed the portfolio. I have had a few people tell me that Armageddon in the financial world is imminent, and that we won’t see a 12,000 DOW again ever. Take the profit and run.

My model assumes that there are apt to be a few shocks relative to the situation in Europe, not another melt-down.  The downgrade of the 15 banks last week was already priced in. Corporate profits remain at all-time highs.  I do not see a lot of cash-strapped companies, or a market near as over-heated as we had in 2008/2009.

As we approached the Great Recession, you may recall that I wrote to you that my “window” on the stock world had hit an amazing new low. Stocks were so overvalued that only a small handful, three or four, were in view. After the sharp correction there were nearly 300.  Today’s “window” features an average number of companies, about 39-49 suggesting that the market is not greatly over or under valued.

We’ve profited on discipline and patience. This is not a time to change that course, in my opinion. This is the way of value investing. If you buy a stock at a 17% or better discount to fair valuem you watch the tree, not the forest of the DOW.  We make money in up markets, down markets, and every one in between because companies with intrinsic value may sink for days, weeks, months or even years, as has been the case with the banks, but these dogs have their day.  We will always have “crops” growing and those ready to harvest.

If you avoid high flash stocks like GOOGLE, Apple or Facebook, which are darlings one minute and run out of the next, you can find profitable, reliable, and more shock-proof securities in grungy, “must have” lines of work.  Pipelines and big staple companies like Proctor & Gamble were places of refuge for many an investor not wanting to get hosed on the sale of flash stocks and then run into an equal screwing in near-zero Treasury instruments.

Here are my review of certain stocks, with an eye towards having cash to buy as the micro-corrections of Europe’s Greece mess roll out.


Home Depot (HD) – I’ve run about a 64.98% profit plus dividends to a 73% gain, which factors to about 14.72% per year.  In another year or two, it could be more, if the housing market picks up. On the other hand, we can’t complain about the gain, and the possible bounces of the market could jeopardize a tidy profit. If it runs away, it was a constructive relationship. If it drops again, we might pick it up on the next rebuild.

Raytheon (RTN)  & Lockheed Martin (LMT) – Up 21% to 23% there is a bit more ride in these, and a very nice dividend, but once reality hopefully seeps into the Congress, and a holistic approach to the budget takes hold, defense contractors can expect to see some contraction in their business forecasts.  The Pentagon isn’t pushing for things that their paid spokespeople on Capitol Hill are pushing for, and that is going to be the wedge that limits upside, in my opinion.  Wars are on the decline, and governments are cash-strapped as it is. Sell.

Pembina Pipeline (PBA) – Me, sell a pipeline?  Pembina pays a 6.1% dividend, but we made a 37.52% gain on it, and indications were that it will slide down a bit for a while.  It’s Canadian, so we don’t pick up the tax benefits of a Kinder Morgan (KMP).  It’s small, so it doesn’t have the scale of larger carriers like Trans-Canada (TCP).  It also had a spill in Alberta, which is causing Canadian regulators to look at them again.  Nothing has been done to them yet, but I’d rather watch this from the sidelines. When it drops again we may revisit it and take the ride again.

American Express (AXP) – American Express has a great model, but its rep with small and medium merchants has risen to fairly awful levels.  They’re trying to repair that damage, but their pricey merchant fees have stunted forward growth.  It’s slightly above where we bought it a couple of years ago. The pale dividend of 3% at the price we purchased it was not enticing enough to wait it out. It’s also in the financial services sector, for better or worse, which also could add extra anchor to its growth potential. SELL.

DIAGEO (DEO) – The spirit maker moved into an intoxicating 15% average gain.  I see it as slightly overvalued, about $8.00 over fair market. The 2.1% dividend isn’t enough to hold it in an over-valued situation. We toast its benefits.  If there was a sharp correction, I’d be back for another round.

Analog Devices (ADI) – An 18.21% profit on this chipmaker and a 5.6% dividend based on the price that we acquired it were pretty good. The company is well run, and I might have held on to it save the fact that chips are vulnerable to macro economic conditions like large market corrections. Europe’s potential gridlock put it on the sidelines until we see how things play out.  I’d definitely be back into this stock if the price and the market conditions are right for long-term opportunities.

Illinois Toolworks (ITW) – A 27% gain and a 4.2% dividend at time of purchase made this an unusually short love affair.  It’s fair market value has become more of a question mark. I get a lot of disagreement from the different services I research.  We’ll take the lock on the gain, and see if there is another opportunity for it again later.

Double Eagle Petroleum (DBLEP) – A small preferred with a 9%+ dividend, I bought it to hold through some bumpy months last year as a cash cow. It was about flat where we bought it in terms of the share price last year, but it still returned about 8.8% on our money for a year, which sure beats the bank, a CD or a savings account.  We’ll keep it in mind in future if we need parking space again.


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