May 28 2007 Tracking Portfolio

May 29^th, 2007 hit its birthday today. Not sure if they were singing “Happy Birthday” or playing “The Death March”.

It ended up down 11.5%, which to date is the worst single month performer that I have tracked. The benchmark Russell 3000 was down 6.3%. Past portfolios have had standard deviations around 40%. This may have been the highest yet at 47.7%. That is huge. So while the average stock went down 11.5%, one standard deviation takes you from -59.2% to + 36.2%. It is all about picking the right stocks and avoiding the wrong stocks… not my forte of late.

There were a few outsized winners:

FDG: +188%, perhaps the best ever in my tracking

WDC: +104%

BPT: +64%

EGY: +58%

TGB: +51%

But some big time losers as well:

SCSS: -85%, definitely the worst I have had

WON: -80%, needs to change the name

CHCG: -72%, I feel the pain

PNCL: -64%, they certainly had a roller coaster two years on the list

TZOO, JTX, KG, & MTEX: all down more than 50% - there were certainly a bunch of potholes on May’s list in 2008.

Here are all of them:

ALOY $11.42 $8.51 -25.5%

AEO $26.46 $18.61 -29.7%

AMAT $19.03 $19.54 2.7%

AVCI $6.83 $5.43 -20.5%

AXCA $18.58 $23.34 25.6%

BPT $58.42 $95.76 63.9%

BBSI $24.47 $12.64 -48.3%

CHCG.OB $5.74 $1.63 -71.6%

CRYP $23.16 $16.96 -26.8%

FTD $16.66 $14.69 -11.8%

FDG $27.43 $78.96 187.9%

FTO $38.37 $30.29 -21.1%

GNI $100.83 $118.40 17.4%

HURC $47.0 $35.83 -23.8%

IVAC $20.05 $11.72 -41.5%

JAKK $25.83 $23.23 -10.1%

JTX $28.08 $13.61 -51.5%

KSWS $28.01 $15.61 -44.3%

KG $21.49 $10.21 -52.5%

KFY $25.20 $16.59 -34.2%

LRCX $53.26 $40.35 -24.2%

LXK $52.46 $36.54 -30.3%

MTEX $14.90 $6.43 -56.8%

NOOF $8.03 $4.85 -39.6%

NXG $3.16 $3.06 -3.2%

NUE $63.54 $75.0 18.0%

OVTI $15.08 $17.12 13.5%

PDII $10.55 $8.41 -20.3%

PWEI $35.01 $33.50 -4.3%

PACR $25.87 $21.88 -15.4%

PALM $8.59 $6.01 -30.0%

PNCL $17.98 $6.55 -63.6%

PPD $64.96 $40.52 -37.6%

PBH $12.86 $10.19 -20.8%

DGX $47.93 $50.43 5.2%

SCSS $17.88 $2.67 -85.1%

PCU $82.78 $108.64 31.2%

SUPX $31.93 $25.60 -19.8%

TGB $3.37 $4.90 45.4%

TCK $39.69 $50.22 26.5%

TZOO $26.05 $10.64 -59.2%

USNA $41.33 $25.84 -37.5%

UTMD $31.32 $30.25 -3.4%

EGY $4.98 $7.89 58.4%

VALU $42.64 $41.11 -3.6%

VGR $18.18 $17.46 -4.0%

WDC $17.98 $36.74 104.3%

WON $7.99 $1.63 -79.6%

Then here is how all the closed portfolios have performed:

Date	Total	IWV
1/6/2006	16.0%	10.9%
2/17/2006	21.2%	14.6%
3/29/2006	13.0%	9.6%
4/7/2006	10.3%	12.1%
5/12/2006	20.4%	18.6%
5/31/2006	29.2%	23.3%
6/30/2006	22.4%	20.0%
7/31/2006	19.7%	17.3%
8/31/2006	13.0%	13.3%
9/28/2006	12.7%	14.6%
10/27/2006	10.3%	12.0%
11/29/2006	-0.3%	4.8%
12/28/2006	-6.9%	3.4%
1/26/2007	-10.2%	-6.6%
2/27/2007	-3.7%	-1.0%
3/26/2007	-9.8%	-5.5%
4/27/2007	-10.9%	-5.0%
5/29/2007	-11.5%	-6.3%

Incredible Shrinking List

Every month I track the top 50 stocks over 100m for a year. I call these my monthly tracking portfolios. It has been a trying stretch for these portfolios as they now trail in aggregate the benchmark Russell 3000 by over 4 points. The past 9 months to close at their anniversary dates all lost to the benchmark and all 12 that are currently open (one closes tomorrow and trails by over 5 points) are also trailing. That is a string of 21 straight months if we were to close up shop today. Sobering.

I thought it might be almost interesting to look at the average stock market cap by tracking portfolio.

Row Labels	Average of Cap	Median of Cap
5/31/2006	1,531	649
6/30/2006	2,292	619
7/31/2006	1,577	610
8/31/2006	1,576	734
9/28/2006	1,400	642
10/27/2006	2,408	789
11/29/2006	4,225	947
12/28/2006	2,704	694
1/26/2007	3,181	687
2/27/2007	3,373	651
3/26/2007	3,918	760
4/27/2007	2,073	778
5/29/2007	3,259	771
7/3/2007	2,095	721
7/30/2007	1,858	618
8/30/2007	2,310	649
9/27/2007	1,973	650
11/2/2007	2,180	506
11/28/2007	1,629	485
12/28/2007	1,873	415
1/25/2008	1,236	341
2/26/2008	1,134	374
3/24/2008	956	380
4/25/2008	1,015	393
Grand Total	2,153	649

Pretty stunning statistics. Back in October/November of 2006, I would read this as suggesting there was more value in larger stocks with average market caps in excess of $3b and median market caps over $700m. Today it is an exact reversal with average caps running at just $1b (65% lower) and median market caps under $400m. Is this a buy signal for smaller cap stocks? These stocks are really out of favor right now.

Small caps will come back when the larger fish start buying them again… I suspect that’ll be the true buy signal. The problem is that it is getting very expensive to buy companies, even if they are cheap. I saw where Liberty Mutual is buying Safeco and their debt will be 11% annually… cheap money is a thing of history. I suspect that some of the buyers will be from Europe and Asia as the US firms are extra cheap to them with the weak dollar.

Quick notes on various stocks

AEO – had better than expected earnings today and jumped 8%. They still have a long way to go.

WNR – if you’d have had courage and bought them the day after their bad earnings report May 15^th, you’d be up 41%.

LCAV – cut their dividend from 72 cents to 24 cents (been there) and stock is down 50% for me.

SIMG – don’t touch that dial. I was tempted to sell after they went up 10 to 15%. They are now up 56% for me… not sure why.

PACR – I have owned this as an MFI stock since 2006, renewing it in 2007 and 2008. The first two years were poor, but it is up 38% for me in 2008.

JTX – had a terrible tax season. This is likely dead money for the rest of the year. Very disappointing.

WH – my only “individually calculated” MFI pick is up 35%.

IAR & CHCG – my biggest dogs continue to be big dogs. And that is not a good thing.

HURC – I don’t own them, but they have been slaughtered, down from $47.13 before earnings last week to $35.90 today (24% decline). Probably will be worth looking at once they hit bottom.

I Love Art

I mentioned a week or so ago that I bought Sotheby's (BID). I bought them a day or two too early at $27. They then reported earnings and dropped as low as $24 as people were unhappy that they lost money in the quarter, even though BID said their business is very seasonal and the first quarter had lost money 18 of past 20 quarters.

Well, they caught fire after dipping briefly below $24 and over the past two days jumped to $28.76 as both Christie's and Sotheby's had extremely successful art sales, showing the rich are still rich (Sotheby's shares jump as Bacon artwork sells for record price). Remember, the stock price is depressed from a high of $61 becasue people feared the financial problems in the US would put a damper on auctions. But demand for these pieces of art is truly worldwide.

I did get less than positive earnings from WH today (WSP Holdings Reports First Quarter 2008 Results). They weren't all that bad, but apparantly people were expecting something really great as the stock had been bid up a lot recently.

Finally, ELOS had respectable earnings (Syneron Reports First Quarter 2008 Revenues of $34.1 Million and Net Profit of $8.3 Million) on Wednesday and they have risen about 10% since then and are in the black (finally) for me. This was the stock I bought as Seth Klarman had been buying them hand over fist.

Holly vs Western

HOC and WNR are both refiners within my MFI portfolio. But the similarity ends there. They both announced their earnings today and they were as different as night and day.

HOC - made 17 cents per share, which was pretty darned good given the market environment (Holly Corporation Reports First Quarter Results). They have $438m in cash with no debt. They will be financing all their projects from their own cash. They were asked about recent fire at one of their refineries. It looks like damage was minimal and they had the parts on hand to get fired back up quickly. That is good management. Result? HOC went up 8% today.

WNR - I am really starting to hate this stock (must not get emotional). First, they didn't issue a press release about their earnings, but they did file a 10Q. I went and read the 10Q at sec.gov (WESTERN REFINING, INC. Files SEC form 10-Q, Quarterly Report) and let us say it wasn't pretty. They lost 40 million which works out to 60 cents per share. The Q comments on their debt covenants (recall they went way in debt to buy Giant Industries (big big mistake). They have to maintain a 250% income to debt coverage ratio. I expect that means over a year as their earnings are lumpy. Their annual debt cost is about $100m, that means they need to make $250m to not run a foul of the covenants. Can they do that? hmmm... here are their past 4 quarters before interest expense and taxes: -60m, -8m, +67m and + 241m. I'll tell you, that doesn't seem a slam dunk. I assume they are not running full tilt yet, I think the Giant refineries were in worse shape than they realized and then of course the high price of oil and the fact that pump prices haven't increased as much is really squeezing WNR. The stock is down 5% after hours, but I fear it will be down much more, though expectations have to be low.

I do wonder if down the not to distant road whether some one will be buying some or all of WNR. It could even be FTO. There were a lot questions about FTO's appetite for buying distressed assets.

In other news, I saw where HP has made an offer to buy EDS (HP in talks to buy EDS to compete with IBM), a large cap MFI stock. EDS jumped 27% in late afternoon. Maybe that'll be good news for ACN.

Top 25 Stocks - MDP

Hmm, "MD" could stand for Mother's Day, so happy Mother's Day everyone! I thought I'd continue my series of looking at new stocks in the top 25 (since October 2007). MDP is Meredith, a old school magazine publisher (thing Better Homes and Gardens) in Iowa.

It doesn't take a rocket scientist to know that magazine publications are on the decline (like radio stations, CD sales and newspapers) as more and more people use the internet. That being said, some publishers do have a very steady cash flow and there is value in that flow. Also, many publishers have internet properties which may be increasing in value.

Here their MFI calc:

mdp
+ Operating Income After Depreciation 300.67
- Minority Interest - Income Account -
= Income for Calculation 300.67
Market Cap Yahoo 1,580,000
Share Price 34.20
+ Market Cap Calc 1,580.00
+ Preferred Capital -
+ Debt in Current Liabilities 125.00
+ Long-Term Debt 320.00
Cash and Short-Term Investments 45.48
- Excess Cash 34.72
= Enterprise Value 1,990.28


+ Property Plant and Equipment - Net 194.13
+ Receivables 255.58
+ Inventories 62.97
+ Other Current Assests 103.80
+ Working Cash 10.76
- Accounts Payable 101.07
- Current Liabilities - Other 332.03
= Invested Capital 194.13
Earnings Yield 15%
ROIC 155%


So they made about $300m before taxes in operating earnings in the past 12 months. Analysts expect them to be down one or two percent this year and then to grow slightly. This is not a growth industry. They do pay a 2.5% dividend. They are trading at $34.20, which is at the low end of their 52 week range of $30.52 - $63.41. MDP has $320m of debt, they have debt coverage of about 12x with their income.

This is certainly a "cheap"company. Not sure it is a great company, in the mold of Jason's gum shops as this is a very mature industry. I will keep them on my watch list.

That is enough rambling... I am off to read the "Family Circle" on my dining room table.

Top 25 Stocks PPD

I saw today that there were 3 new stocks on the top 25 list (new to the top 25 that is). I thought that this weekend that I would do a little diligence on two of them,

PPD -this is a rather unique stock. They provide pre-paid legal services. I am not sure if anyone else does this, though I have seen some adds with Robert Shapiro selling Legal Zoom dot com, which might have some similar elements. I suspect most people don't want to trust the internet for legal services, they'd rather be face-to-face with an attorney. I know I would.

I have decided that the biggest question to ask regarding any MFI stock is whether they can replicate or improve last year's earnings. If they can't do that, then the follow-up question is would you still buy the stock with lowered earnings? Here is my calc of the ratios for PPD:

		ppd
+	Operating Income After Depreciation	94.43
-	Minority Interest - Income Account	-
=	Income for Calculation	94.43
	Market Cap Yahoo	528,230
	Share Price	43.44
+	Market Cap Calc	528.23
+	Preferred Capital	-
+	Debt in Current Liabilities	18.26
+	Long-Term Debt	51.86
	Cash and Short-Term Investments	32.17
-	Excess Cash	11.89
=	Enterprise Value	586.47
+	Property Plant and Equipment - Net	56.79
+	Receivables	5.64
+	Inventories	1.56
+	Other Current Assests	28.17
+	Working Cash	20.28
-	Accounts Payable	15.41
-	Current Liabilities - Other	40.24
=	Invested Capital	56.79
	Earnings Yield	16%
	ROIC	166%

Obviously strong numbers, else would not be in top 25. They are trading at $43.44 with a 52 week range of $39.45 to $71.49. Looking at their balance sheet, they have $52m of debt, down from $70m a year ago. They cover their debt payment over 20x with income, so I don't think that is a major concern.

Their revenue has been very flat the past 5 quarters. In the current econmic environment, that isn't so bad. They have done a great job managing expenses, so not much expense ratio pressure.

It looks like no analysts follow the company, so we can't get a peg on whether they think the company will continue to make money.

They are actively buying back their stock with free cash flow and they are actually reducing share count ( down in past year from 13.348m to 12.116m) and plans in the hopper to buyback another million.

I like this company and their business model. I'd rate them a buy. They seem like a classic MFI stock. Cheap and a good company that could grow with little additional capital. What do other people think?

Russell 3000 Thoughts

We're at that time of year where the Russell 3000 gets re-balanced (actually end of July). I am not sure what the market cap threshhold will be to be in the index, but I am guessing somewhere north of $300m. So what MFI stocks might be moving into the Russell 3000 this Summer? I don't have the ultimate answer, but QSC looks like a viable candidate (I thought perhaps HGG, but they were added post IPO in the fall). QSC also looks like an interesting stock. I'll be selling VALU and AEO later this month and QSC is a possible replacement.

BID had a poor first full day for me as their earnings were actually negative (UPDATE - Sotheby's posts surprise loss; commissions off). While they said this is not unusual as their business is seasonal, the stock did sell off 9%. I am not worried as they said the 2nd quarter is off to a strong start, but I would have still rather bought a day later. Oh well.

I did actually have a relatively strong day and a strong week. MRX did very well with their strong earnings yesterday and went up over 10%. Another strong performer was WH (I always think of Waffle House and White House when I see that symbol). They are up almost 20% for me already (sell, sell, sell).

Pharma Thursday

Three of my stocks reported earnings today, all pharmaceuticals.

1. BVF - had a solid quarter and went up today (Biovail Reports First-Quarter 2008 Financial Results). I think investors were pleased the high dividend is being maintained and the company is reducing expenses.
2. KG - like BVF, KG has declining revenues due to losing patent rights to generics (King Pharmaceuticals Reports First-Quarter 2008 Financial Results). They were pretty flat today. They are certainly still making money.
3. MRX - reported after the bell (Medicis Pharmaceutical raises full-year profit outlook). I felt their numbers were very strong. They have like $15 a share ($20 price) in cash, are making good money and are growing. What is not to like? They are a top 25 stock already and these numbers will move them even further up the list unless the price pops.

I sold UG today, a month before their time. I had placed a limit order in a week ago as they trade with such low daily volume I was concerned about my sale literally moving the price. I actually got a good price, averaging about $12.28.... which makes UG a money maker for me (about 4%), a rarity in 2007.

I bought BID to replace UG. I like the idea of an auction house as that is a business with a solid moat, hard for new competitors to enter the market. The WSJ had an interesting article (Traders Take Bullish Positions In Sotheby's Ahead of Earnings) about action in their options and how some recent auctions have fared (Sotheby's auctions Leger painting for more than $39M). We'll see, I am in at $27.

I did notice where HURC has dropped under $43. Not sure if it is still on the list (it is), but at that price it is worth keeping two eyes on.

OT but Funny. I saw where an oil and gas company ATPG shot up 15% today on record earnings. The funny part is that had you been paying attention, you could have made some easy money. Look at the headline of this news release at 3:06 pm, with the market still open beforre they announced their earnings: ATP to Announce Record First Quarter 2008 Results

Quick Comments

FTO had what I felt were stellar earnings this quarter. they were projected to earn 12 cents and TSO and ALJ early this week actually lost money. What did our freinds at Frontier do? Simply made 44 cents a share. They have top rate management. I have no idea why they are only $27 a share as they had a minimal pop today. I may back up the truck tomorrow, after reading their transcript (Frontier Oil Corp. Q1 2008 Earnings Call Transcript) I am pretty bullish. These guys should easily moved into mid 30s by summer.

Lehman downgraded IAR to a sell today, dropping their target price from $4 a share to $3 a share. Given that they had just made 76 cents a share and popped over $4.50, I was scratching my head at their call. I pulled up their research note. They essentailly said that ad sales were down 5% and internet sales were only up 7% (below their expectations). Based upon this, they said that IAR will only earn $2.50 this year and $2.25 next year per share. I would be estactic with those types of earnings... I just want to stay out of bankruptcy. But the head scratcher was then how they justified a $3 target price for a stock they think will earn $4.75 a share next year... they used a P/E ratio of 1.2. Where the heck did that come from? Is there another stock in the world they give such a low ratio to? Geesh. 5 seems a bit more reasonable, but that would get them over $10 a share.

Good News - Hooray!

IAR reported earnings this morning. And guess what? The sky didn’t fall. They made 76 cents a share versus 70 cents a year ago (Idearc Announces First Quarter 2008 Results). Revenues were down under 5%. I haven’t read their call transcript (Idearc, Inc. Q1 2008 Earnings Call Transcript), but nothing horrible must have been said as the stock rocketed over 45% today to over $4.80. Think about it. At 70 cents a quarter, that is $2.80 over a year. $4.80 still seems pretty cheap to pay for those earnings. It may take one more quarter to prove the sky is still up there, but IAR will have a chance at making up some lost ground. I also think we have a pretty good opportunity for a serious short squeeze as about 30m shares (20%) was sold short.

TRID also made up some lost ground today. Their earnings were disappointing (to some) a week ago and they sold off over 10% to $4.26. Guess what? They are back up!

SIMG has been a big winner for me. I bought them around $4.50 and was sorely tempted to sell when they crossed $5 (it had been a while since I had had a stock go up over 10%!). But I held to the formula. Today they are at $6.30 and I am sitting on a 41% gain.

KSW announced they will begin paying a 20 cent annual dividend in May (KSW, Inc. Reports First Quarter 2008 Results). They had just come up on my one year anniversary. I have “renewed” them for another year. The dividend tells me they are not just going to sit on their 50% cash pile.

ACF (a non MFI stock for me) has been en fuego. I bought them a month or two ago because Ian Cummings of Lukadia was buying them hand over fist. They are now up over 40%. I think that’ll pay for my one year membership to GuruFocus.

WH has also been a good news story. This is my Chinese Oil Pipe company that has the financials of an MFI company, but hasn’t hit the list because of some unfilled subtotals in their statements. They are up 10% since I bought them and got a good write-up recently (Getting a Fix on a Broken IPO).

PACR announced solid earnings this evening (Pacer International 1Q profit nearly doubles, beats views). I have only skimmed the announcement, but it looks tremendous to me. Revenues are up 10% over last year and income is up even more. We’ll likely see a pop in the stock tomorrow. FTO (a beaten stock if there ever was one) announces tomorrow morning. Any positive word from FTO could cause a 10% pop as they are priced for doomsday. I am a mite worried about FTO (and HOC and WNR) as TSO and ALJ both reported losses the past two days. I didn't think it was possible for a refiner to lose money.

Oh well, maybe IAR will go up more tomorrow. There is also a large short contingent on PACR. Hate to see them fork over $!