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.

HOLDS:

3M COMPANY (MMM)

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.

ABBOTT LABORATORIES (ABT) 

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.

AGL RES INC COM (GAS)

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.

AMERIGAS PARTNERS LP (APU)

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.

AVON PRODUCTS INC (AVP)  

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

BANK OF AMERICA CORPORATION COM (BAC)

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.

BERKSHIRE HATHAWAY INC DEL CL B NEW (BRK.B)

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 BILLITON ADR (BBL)

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 GROUP PLC ADR (BT)

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.

CAPITALSOURCE INC (CSE)

 Truly not one of my better picks. This 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 INC (CHKE)

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.

CINTAS CORP (CTAS)

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.

CITIGROUP INC COM NEW (C) 

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.

CONSOLIDATED EDISON INC COM (ED) 

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.

COUNTRYWIDE CAP V GTD CAP SEC 7% (CFC.PR.B)

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 RTY TR TR UNIT (CRT)

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.

DIREXION MONTHLY 10 YR NOTE  (DXKLX)

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

DORCHESTER MINERALS LP COM UNIT (DMLP) – 

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.

ENERGY TRANSFER PRTNRS  (ETP)  

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 S P A SPONSORED ADR (E)

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.

ENTERPRISE PRODS PARTNERS L P COM (EPD) 

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.

EXELON CORPORATION (EXC)

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)

EXXON MOBIL CORPORATION (XOM) 

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).

FEDERAL HOME LN MTG CORP COM (FMCC) & FEDERAL NATL MTG ASSN COM (FNMA)

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.

GENERAL ELECTRIC CO COM (GE)

 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.

GLAXOSMITHKLINE PLC SPONSORED ADR (GSK)

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 HOLDINGS PLC ADR (HBC)

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 CORP COM (INTC)

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.

KINDER MORGAN ENERGY PARTNERS UT LTD PARTNER (KMP)

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.

KINDER MORGAN MANAGEMENT LLC SHS (KMR)

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 LTD ADR  (KIROY)

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.

LE CHATEAU INC CL A (LCUAF) – SPECULATIVE

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.

LLOYDS BANKING GROUP PLC SPONSORED ADR (LYG) – SPECULATIVE

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 CORP (MAS)

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.

FUNDS

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.