There You Go Again
Wednesday, April 30, 2008
One reason I haven't quit is I know that as soon as I quit, the method will start working again. John Maynard Keynes is attributed with the quote, "markets can stay irrational longer than you can stay solvent."
I have not decided whether
- the method doesn't work,
- needs more time or
- needs to be tweaked.
Tuesday, April 29, 2008
Remember my analogy to Pavlov and his dog drooling at the ringing of the bell and my aversion to earnings announcements? Well this morning was a classic case in point. I batted .250 (as long as we’re all comfortable with analogies… though perhaps the apropos analogy is I struck out on 4 pitches).
TRID – this chip manufacturer for high-end televisions had nothing but doom and gloom in their transcript (Trident Microsystems, Inc. Q3 2008 Earnings Call Transcript). They did make a little money and have added to their cash position, but they are losing ground with one (Samsung) of their three major customers. They clearly have some work to do. The only thing that kept the stock getting blown out of the water was their significant cash position. They did get a little squirrelly about their plans for all the cash. No mention of dividends or stock buybacks. End results? Down 9%. Strike One.
HSII – I was hopeful for HSII. The stock had risen from $32.50 to $37, in anticipation of good earnings. Well they disappointed the street (Heidrick & Struggles International, Inc. Q1 2008 Earnings Call Transcript). I wasn’t really sure the numbers and outlook were all that bad. I mean the stock had already dropped from $55 to $37 in the past year. The market didn’t agree with me… today. Result: down 11% and Strike two.
LCAV – deep down, I was worried about my laser vision company. Laser surgery has been getting negative press of late. And it certainly is a discretionary surgery for most people. Frankly, I am not sure I would do it, and I hate wearing glasses. I haven’t had a chance yet to peruse their results (LCA-Vision shares hit new low as 1Q profit drops), but they must have been poor as the stock sold off over 20% before I had taken the first sip of my Vanilla Latte. Result: down 19%... Strike 3!
OT – I did see where TGIS had their call today as well. I had bailed on them after their last call caused the stock price to drop about 50% immediately. (one reason I am so far behind the benchmark). I sold them around $3.11 and I see today they are down 9% to $2.46. I am not sure they can fall much further as they are pretty close to liquidation value. I am sorry for anyone that played by the rules and held TGIS post those last earnings, where all bets were cleared off the table. It was Green 00 on the roulette wheel.
TRA – I am starting to watch this stock. They are off about 7% today to around $38. They sell fertilizer and nitrate material, think agriculture. That is one area now down in the current economy. They had a terrific earnings call last week and are ranked well on the MFI lists. Now I just need some guru to buy them and I am on my way.
I just checked. HW has earnings tomorrow. I'll get my barf bag ready, though I will go on the record about being optimistic about them.
Monday, April 28, 2008
Just for yucks though, I did compare my performance against the Russell 2000 Value index. While I trail the Russell 3000 by a whopping 20%, I would trail the value index by a mere 10%... do I feel better? Heck no! I do wonder why I am doing worse than the indices and worse than my general tracking portfolios, which might be behind overall by about 5%. It is easy to think that I am just a poor stock-picker. And that very well may be the answer. Though I have had modest success (and continue to do so) outside of MFI.
It is getting harder (given the chasm) to catch the benchmark. When the market goes up and both portfolios go up by the same %, I lose ground as the benchmark percentage is on a bigger number.
I did add WH to my portfolio last week. It would easily qualify as an MFI stock if they has all the detailed elements on their balance sheet listed for the most recent quarter. WSTG and KSW are both about to hit their one year anniversary. Both are down, WSTG is down 31%. I will likely sell WSTG, but renew KSW for a 2nd year (I think it is still on the list!). Hmm, it is not, but clearly should be as I show below. BTW, if you are trying to maximize your returns by doing the opposite of me, then I suggest (or don't suggest) WSTG.
|Operating Income After Depreciation||6.07|
|Minority Interest - Income Account||-|
|Income for Calculation||6.07|
|Market Cap Yahoo||35,000|
|Market Cap Calc||35.00|
|Debt in Current Liabilities||-|
|Cash and Short-Term Investments||18.12|
|Property Plant and Equipment - Net||0.25|
|Other Current Assests||0.36|
|Current Liabilities - Other||5.73|
Saturday, April 26, 2008
I was right about BBSI crashing post-earnings. Down about 18%. Now down 40% for me since last September. It is frustrating. I am getting a Pavlovian reaction of dread when my companies ring their earning bells.
FTO had a very positive piece in Barrons. They commented that these are tough times for refiners, but FTO is the best positioned company. Here is a small excerpt:
However, many of the company's woes aren't likely to dog the stock. That makes Frontier, one of the industry's most profitable independent refiners, an attractive opportunity for value investors.
Despite its recent woes, the company boasts some of the highest returns among independent refiners. Its return on capital of 42% is more than twice that of Valero Energy (17.4%), Sunoco (20.2%) and Tesoro (13.5%).Pretty consistant with what I wrote a couple weeks ago comparing WNR, HOC and FTO.
The NY Times had a very negative piece on laser surgery this week. I don't know how much of it is media hype, but they profiled people who actually lost vision in an eye or had their poor vision return post-surgery. The article made me wonder if I really mind wearing glasses?
WSTG had an earnings announcement on Thursday evening (no, no, please say they don't!). Yes they did. And they were poor. The stock was down about 10% on Friday, making them down over 30% for me as they approach their one year anniversary. The management write-up was quite downbeat:
"net sales for the first quarter of 2008 decreased 14% or $6.4 million to $40.5 million compared to $46.9 million for the same period in 2007. These results are entirely attributable to a continuation of the reduction of sales for our largest vendor because of intense competition and extremely low margins."
For me, I am having select discomfort with the MFI approach of late. Please, no more earnings announcements.
Wednesday, April 23, 2008
When I did, I got a return on capital of about 64% and an earning yield of 32%! That would likely place it in top 50 list. They are in an interesting sector: Oil and gas supplies/pipelines. Basically like a Chinese Tenaris (TS) or NSS (an early MFI stock for me). Vivian Lewis liked them as they are cheap (went public last year at over $9 and now at $6.23), and they have invested in a new facility that will really allow them to ramp production. I expect when they get the details behind the financials filed with Compustat they will appear on the list. I did buy them today as a double match of a Vivian Lewis recommendation and MFI ratios was impossible to resist. I don't think I'll count them in my portfolio, unless they hit the big time.
BVF, which has not exactly been on fire for moi, had some good news after the bell (US FDA approves Biovail drug for depression). They were up 10% during drive-time.
SIMG had decent earnings yesterday (Silicon Image Reports First Quarter 2008 Financial Results) and went up 4.7%. They really are not making much money, but the stock had dropped so far that it is now going up.
BBSI announced earnings this evening (Barrett Business misses by $0.08, misses on revs; guides Q2 EPS below consensus, revs below consensus). While headlines can be deceiving, that one pretty much says it all. It was a bleak quarter. Fasten your seatbelts tomorrow. This will be another Magic Diligence stock for me (along with JTX) to take a serious dive.
HBMFF did have a 6% pop. About time as all the other commodity firms had been on a nice run. Don't people need Zinc too? I'll start an ad campaign... Got Zinc?
Saturday, April 19, 2008
With the burst in the markets this week, I now have a few more stocks in the green. Not enough to get excited about, but still it is nice. ACN, HW, KFY, MRX, MSTR, SIMG, TPX and VALU. Even UG stuck its head into the green briefly.
Friday, April 18, 2008
If anyone cares, here is my portfolio:
|marshgerda ||Totals ||#DIV/0! || 136,534 |
|marshgerda ||Totals ||#DIV/0! || 136,534 |
Thursday, April 17, 2008
But I did a little reassuring research. Of course it is easy to bias your research and focus on that which agrees with you. The first point was that S&P had recently (in March) downgraded them to stable. Now stable isn't the best (I think positive is) but it does mean S&P had kicked the tires (pretty hard, as I know from experience) and at least thought things weren't terrible (S&P Moves Tempur-Pedic Outlook to Stable).
The other comforting thought was that two hedge funds recently took major positions in TPX and they were funds that knew the company and management well... so I assume they were "informed" buyers. After that, I decided to stand pat.
And it appears to be a good move (Tempur-Pedic Reports First Quarter Earnings). While TPX did not exactly have a "Google" moment, expectations were so low that the stock moved up 10% in happy hour trading (granted not the most reliable market). They said they expect to earn $1.20 to $1.45 next year... that is not a disaster in a down market for a $12 stock.
Tomorrow may be interesting. 35% of the stock is short. It wasn't a blow out, but it isn't a blow-up... I don't think I'd want to be short.
Not much other news. In the past two days PRLS has gone from a low of $1.95 to $2.15. I do think they'll start moving towards $2.85, which is my back of the envelope value. Being a WiNeR about WNR yesterday seemed to have worked... the stock was up 3.25%.
That is a wrap. Go out tonight and buy a comfortable Tempur-Pedic mattress., and tell a friend as well. I know firsthand that they are super-duper.
Wednesday, April 16, 2008
I first noticed WNR (Western Refining) in October of 2006 when it was trading under $19 a share and had a lot of insider buying. The stock was in many of my tracking portfolios and virtually tripled by the summer of 2007 to over $60. It was still on the lists when it dropped in August around $50, so I bought it... sigh.
I don't know exactly where they went wrong, but I suspect it was the purchase of Giant Industries (GI). This was another refiner, and WNR bought them when refining was a bit out-of-favor, so I was thinking it might have been a cheap price.
Of course, with the purchase came debt, a four letter word in today's world if there ever was one. About $1.5b in round numbers. Right now, that debt is costing WNR about $100m a year in interest. That seems pretty "cheap", I haven't done any research to see if that was a "teaser" rate.
The problem is that so far they haven't had a whole heck of a lot to show for that debt. Their run rate of revenues pre-merger was around $4b a year. Now it has more than doubled, to say $9b. But the margins have been squeezed. In 2006 they were making about 7 or 8 cents for every dollar of revenues. In the 3rd quarter of 2007 it had dropped to a mere 4 cents and then in the 4th quarter it was under a penny! Think about that, $2.4b of revenues and they made $17m in operating income before depreciation. It doesn't take a rocket scientist to figure out that $17m isn't even going to cover the $25m of quarterly interest expense.
Now I have to believe this is a temporary problem. Other refiners don't have such a tight margin. HOC made over a nickel per $1 of revenues in the 4th quarter, FTO made over 9 cents (wow!) and TSO made just a penny... so it is clearly a function of what kind of oil you're refining and your location.
It is important to note there is seasonality in refining margins, the two upcoming quarters are typically the best. I don't think WNR is not going to be able to service their debt over the year. But it was telling today when HOC and FTO were up over 4% each today for me and WNR was down 1.6%.
Let us look at what they said last quarter:
“We have taken a number of actions to improve the Yorktown and Gallup refineries so that the safety and reliability at those facilities are more consistent with our El Paso refinery. We have also implemented numerous operational changes at the former Giant refineries that will lead to improved performance.”
Actions taken to improve performance at these facilities include:
If they can ride out the poor quarters, the 2nd quarter looks much more promising as margins are up at least 50%. Stay tuned.
Addendum: I did skim their 10K. A downgrade by S&P could really hurt. They have a revolving credit facility to buy the oil which they in turn refine. A downgrade could cause that to be more expensive. And they also have covenants on their 1.5b loan. Not meeting certain financial ratios could cause the maturity of the loan to be shortened. I don't think that would be very positive (understatement)
Tuesday, April 15, 2008
CROX was the latest value trap. I did not buy them as I felt they were a fad. But they appeared on the list in early March by my reckoning. Today they dropped a mere 43%. NVTL, another recent top stock dropped 22% today. Last month there was JTX and TGIS. The month before IAR. It gets a little disheartening to continuously see MFI stocks in the worst 20 performers of the day. Picking from the list is starting to feel like running through a TNT factory with a match.
Of the monthly tracking portfolios I started keeping in January 2006, the MFI portfolios have been steady losers thus far. I think MFI won the first 9 of 10. But is losing or has lost the past 20. And not to twist the knife, but MFI has had the "advantage" of excluding financials which have most likely been the worst performer in any index over the past 9 months.
I am not "giving up" and I sincerely hope to be proven wrong. But I think the question has to be asked. What does the peanut gallery think?
Friday, April 11, 2008
Thursday, April 10, 2008
First the Peerless part of this blog. Peerless (PRLS) reported their earnings this evening (Peerless Systems Announces Fiscal 2008 Fourth Quarter and Full-Year Results). I thought the numbers were strong, and I see where they're up 6% in after hour trading (pass me a gin and tonic while I buy some PRLS!). More importantly, they announced that shareholders will be voting on the sale of a chunk of the company to Kyocera-mita. This deal would net PRLS about $40m (pre-tax). They have $23m in cash right now, so you gotta believe they'll have north of $50m post the sale. Yet their market cap is under $40m. A real head-scratcher. I guess the market doesn't have confidence that they'll use the money wisely (let's party!) or I am missing something.
Now the Revision Part.
Improvements to the “Formula”.
Not sure if it’ll help us get better results, but we should come closer to matching the website. KD on the Yahoo! Boards had taken the formulas I had posted (which I had pretty much copied from Tony Brake) and made a few slight tweaks to get much closer to the website. The big change has to do with cash. I had toyed around with a very similar change as I was concerned that at time invested capital could get very close to zero, which didn’t make any sense.
The key is to split cash into two components, which I’ll call working cash (which will be part of invested capital) and excess cash (which will be part of the calculation of enterprise value.
The calculation for working cash = (accounts payable + other current liabilities) – (receivables + inventories + other current assets) subject to a minimum of $0.
If you stop and think about it, it makes sense. If you don’t have enough current liquid assets to meet your current liabilities you have to supplement with “working” cash. Of course the beauty of this change (if you think about the math briefly) is that invested capital can now never be less than Property, Plants and Equipment, which seems sensible. Before this change, I defaulted invested capital to PPE when less than zero, but this makes more sense.
KD also had several other smaller changes. He gets his market cap from another source (I use Yahoo). I have had trouble tying to the market caps in the website so I’ll keep using Yahoo until convinced otherwise. His final comment was that he matched better not adjusting for minority interest – income account. This doesn’t come up very often. But as that income is not available to the stockholders, I’d rather keep pulling it out (unless somehow in his market cap he increases for minority interest). Anyway, in total I feel we’re closer than ever.
So here is the new and improved formula:
| || || |
Operating Income After Depreciation
Minority Interest - Income Account
Income for Calculation
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Market Cap Yahoo
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Market Cap Calc
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Cash and Short-Term Investments
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Property Plant and Equipment - Net
Other Current Assests
Current Liabilities - Other
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note: working cash = Current liabilities - Current Assets (x PPE), subject to a min of $0