(Guest Commentary by Rick Konrad – December 18, 2009)
Dear Subscribers and Readers,
For those who had want learn more about picking stocks, evaluating companies, industry trends, and other issues related to the stock market, we have brought in one of our regular guest commentators, Mr. Rick Konrad for a guest commentary. Rick has been a regular guest commentator for a few years now and is offers his unique insights to us every first and third Wednesday of the month. We highly appreciate your investment insights and general wisdom, Rick!
In this commentary, Rick reflects on the wild swings and eventual bull market in 2009 – and reiterates why 80% of investing is just “showing up.” Rick ends with a list of promising low-priced stocks that he terms “stocking stuffers” (he will be covering these stocks in more detail on his Value Discipline blog in the coming weeks). This is a must-read. Without further ado, following is Rick's biography:
Rick is author of the excellent investment blog “Value Discipline,” founder of “Value Architects Asset Management”, and is a regular guest commentator on MarketThoughts.com (please see "The Great Depression in Listings" for his last guest commentary). Prior to his current role, Rick has been a professional portfolio manager for institutional investors for over 25 years. You can view a more complete profile of Rick on his blog. You can also email Rick at the following address should you have any questions or thoughts for Rick after reading his commentary. Rick is a very genuine teacher of the financial markets and treats it very seriously. Case in point: Rick has also been responsible for running the education program for the CFA Society in Toronto (which is the third largest CFA society in the world besides the New York and London Societies) and had also been involved with grading CFA examinations.
Disclaimer: This commentary is solely meant for education purposes and is not intended as investment advice. Please note that the opinions expressed in this commentary are those of the individual author and do not necessarily represent the opinion of MarketThoughts LLC or its management.
As the year draws to a close and the holidays approach, I reflect on what an amazing year it has been. Markets reacted in a tsunami of bullishness that few would have anticipated. After the tremendous ride that we have enjoyed is there anything left of reasonable value?
Certainly, one of the things that causes me concern is the increasingly bipolar politics that we seem to face in the States. The Bernanke confirmation hearings today were highly politically charged. Yet, it seems to me that the Fed chairman had little choice but to institute the policies that proved (at least so far) to bring confidence back to the system. Should the process fail to re-appoint Bernanke to a second term, I fear a tremendous international backlash. This seems quite unlikely, yet, given the tongue lashings that have been meted out, and the polarization that exists, I do fear the worst, though I view this as a low probability outcome, a black swan, as it were. Overall, I remain quite optimistic that equities will provide some reasonable though not spectacular returns for 2010. Treasury bonds regrettably provide rewardless risk in my view.
Looking back at our January Marketthoughts post, I started the year very positive and encouraging about these markets. These words continue to ring true, though clearly, the upside is not as substantial. Here's what we said at that time:
“Success in investing is not unlike Woody Allen's prescription for success…80% of it is just showing up. Stocks are on a half price sale compared to their previous peaks, in many cases, well below 50% corrections. Lots of cash seems to be poised on the sidelines waiting for “the right moment.” None of us really knows when that right moment will occur. As I have suggested before, nibble rather than chomp, diversify rather than concentrate. A Buffett temperament and ability allow massive swings at fat pitches…few of us can muster that courage or commit capital that well.”
“I continue to believe that disciplined investing will put the odds of success in your favor. I encourage you to keep swinging that bat, finding a few fat pitches in a stadium where most spectators are watching the out of town scores. Keep your eyes open and don't blink! Rallies of massive proportions come out of the swampy sludge of low expectations.”
Though it would be disingenuous to describe today's market as “a swampy sludge of low expectations,” the whole-hearted endorsement of most market participants is hardly there.
International and US markets rebounded, led by better economic forecasts, low valuations and improved liquidity in the market as the previous tight credit situation thawed. At the height of the financial crisis, credit markets almost had a complete shut-down. With the improvement in the credit situation, deals are stirring again and there are now more IPOs and merger and acquisition (M&A) activities globally. Corporate fund raising exercises in the forms of rights and share placements were surprisingly well-received, signaling that the market has the ability to absorb these issues and that the liquidity situation remains healthy.
Many institutional investors, including some of my best friends, have sat out this dance. I can hardly resist the Chuck Prince, former CEO of Citigroup's quote which essentially defines why asset bubbles persist until they don't:
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing,” Needless to say, the music stopped shortly thereafter for both Mr. Prince and Citi.
We have raised a bit of a caution flag in our last post which described defense stocks as defensive stocks. I want to make it clear that we do not suggest that investors head for the hills, I merely sense that more traditional defensive names such as foods and consumer staples are getting rather full. As I mentioned last month, we like Raytheon (RTN). Everyone's favorite retailer, Wal-Mart (WMT) hit our sell target last month at $55. Perhaps the bargain basement retailer phase that absorbed Wall Street's thinking for most of the last year culminated with the re-emergence of Dollar General (DG). As KKR unloaded half of the issue, at $21, what remains in my opinion is a still leveraged entity having negative tangible book value, a balance sheet that is still stretched despite the deal at 45% debt to assets, and fairly low productivity with sales per employee at $162,000. DG sells at about 10 times EV/EBITDA. Profitability measured by return on invested capital has come in at around 4%...in my view, this will be improving to perhaps 7-8% but it will take considerable change to manage above this. Comparing this to Family Dollar, a similarly positioned retailer, ROIC is around 17%, productivity per employee is $270,000, the balance sheet is clean with debt at less than 9% of assets, tangible book of $10.38, and EV/EBITDA of 6 times.
This is the holiday season, and a time for some fun. Many years ago, one of my favorite market technicians, Leon Tuey, who practiced his craft at a Canadian firm, Pitfield Mackay Ross(and believe me, given my fundamental soul and upbringing, I have very few technically oriented friends) used to put out a holiday gun-slingers list, a list of stocking stuffer ideas of low priced stocks. Leon came by his market technician skills quite naturally, as he was a frustrated artist who readily saw patterns where I had no such skills. In keeping with Leon's low-priced stock universe, I would like to introduce a few stocking stuffers. I will provide some write-ups for the ones I find most interesting in Value Discipline over the coming weeks.
Actuate (ACTU) $3.94
Company produces software called Enterprise Reporting Applications that enable organizations to extract and publish data across distributed computer environments
EV/EBITDA 6.7 times
ROIC 12% (TTM)
Price/Book 2.5 times
FCF generation last three years
Advance America (AEA) $5.99
EV/EBITDA 5.3 times
Price/Book 1.9 times
Debt to assets 36%
Improving gross margins, improving operating margins
Continucare (CNU) $3.83
Florida based outpatient treatment of musculoskeletal injuries and diseases, such as arthritis, osteoporosis, stroke, traumatic injuries, and terminal illnesses.
EV/EBITDA 6.5 times
Quick Ratio 6.0 times…extremely liquid balance sheet
ROIC 17% (TTM)
3 yr revenue growth 28%
3 yr earnings growth 34%
GigaMedia (GIGM) $4.18
Online gaming. China based.
Forward PE of 7 times
Price to book of 1.0
ROE (TTM) 21.7%
FCF generation last three years.
Star Gas Partners (SGU) $3.81
Home heating oil limited partnership
Generating FCF last three years
Last year Cash flow from operations $78 million vs $4 million in capex
Universal Travel Group (UTA) $10.26
Online travel service industry in China
EV/EBITDA 5.0 times (TTM)
ROIC 33% (TTM)
Yr/Yr revenue growth 76%
FCF generation last three years
Western Refining (WNR) $4.66
An independent oil refiner with a total crude oil throughput capacity of 234,000 barrels per day. It owns and operates four refineries located in Texas, New Mexico and Virginia. The company also operates 155 retail service stations throughout the Southwest.
Price to book 0.58
Price to Sales 0.1
Debt/ Assets 36%
Insiders bought about350,000 shares of stock in last 6 months
FCF generated in 4 of last five years.
Losing money on GAAP basis,-33% ROE on TTM
Needless to say, some of these are fairly high risk stocks with small market caps. Nevertheless, their valuation and in most cases, profitability should draw some attention. Good luck!
Here's wishing you and yours the very best of the holiday season! A Happy and a Prosperous New Year!
Disclaimer: I, my family, and clients may own some of the securities mentioned in this post.