Sold XTO Energy today after holding for one year. It is being bought out by ExxonMobil at a price not far from the current price. Returned a very nice 52% profit for me. And this was my 2nd stock to be bought out from me in last year.
More Housecleaning
Many of my stocks have come out with their 2009 10-k reports in the past few weeks. Upon review, I’ve decided to sell 5 of the remaining 10 stocks in the portfolio. These 5 all had 2009 cash flows which, although positive, were low enough compared to their prior years to leave me uncomfortable predicting the future cash flows of the company, and thus its Intrinsic Value. These 5 were Pfizer (PFE), Dish Network (DISH), Magellan Petroleum (MPET), Noble Oil (NBL), and Total System Solutions (TSS). These are 5 very strong companies who managed a profitable cash flow in 2009, which many (if not most) companies were unable to do. Still, having predictable cash flows is one of my most important requirements for holding a stock. In aggregate, these 5 handily beat the S&P500 Index, which is shown by a new column I’ve added to the tracking spreadsheet (see the ‘Closed Stock Positions’ tab).
This leaves me low on stock, with a decent cushion of cash.
There are 2 other reasons I am quick to pull out of these stocks:
-We are in the toughest 9 month period of the Presidential Cycle; and
-Yield pressures suggest the risk of an “air pocket”.
All together I feel better about raising some cash here. As always, I am on the lookout for predictable, undervalued companies who deserve investment. I have a Watch List that continues to grow with names.
Let’s Lock In Some Profits
Sold two energy stocks today. EOG Resources (EOG) and Berry Petroleum (BRY). Although these have not reached my estimate of their intrinsic value, I revisit stocks throughout the year, generally after holding a minimum of 6 months. Each of these stocks have recently filed new annual reports (10-K’s), so I could now adjust my estimates. EOG and BRY generated significantly less cash flow in 2009 than in recent prior years. While they remain “cash flow positive”, they now fall into a category of stocks where I don’t feel comfortable estimating future cash flows, due to the large variation in flows making the intrinsic value harder to predict. The obvious reason for their lower cash flows is the collapse of energy prices between 2008-09. However, at this point in the market cycle I don’t want to be holding ‘unpredictable’ companies. I hope to re-enter other energy companies over the next few years, some with more stable earnings. I’m locking in an 87% gain on BRY, and a 27% gain on EOG. With dividends, I earned an average of about 60% on these two stocks.
In fact I have a new energy company I’m tracking, need to make a decision on whether to purchase.
Warren Buffett On How To Become A Value Investor
Here is Buffett’s answer to a question about how to become a value investor.
Buffett: 49 colleges and universities visited Omaha this year. If I ran a business school there would be only 2 courses. How to value a business and How to think about markets. No modern portfolio theory, no beta, etc. You don’t have to be right on 4000 or 400 businesses, not even 40. Circle of competence. Start with a small circle and slowly expand. Don’t spend time on companies that don’t lend themselves to valuation. Accounting is useful, but sometimes it is not meaningful. Durability of competitive advantage is the key. And market fluctuations. The market is there to serve you, not instruct you. If you are an investor and you have a 150 IQ, sell 30 points to somebody else. Being a genius can be a bad thing in this business. You need an inner peace with your decisions, because they will be challenged. I don’t know how much of that is innate and how much is taught, but it is a very good quality to have. Simple but not easy. No higher math. It’s not complicated. But you need an emotional stability. If you have that you’ll do well over time.
Charlie: Half of future investors of the world are going to be in the bottom 50%. Skill does rise to the top in this business. There is so much that is false and nutty in modern finance, banking, academia, economics departments and business schools. Just reduce the nonsense.
Warren to Charlie: Isn’t emotional makeup more important?
Munger: Absolutely. And if you have a 150 IQ and you think it is 160, you are a complete disaster! (Laughter).
Buffett: The best question I have been asked in my meetings with students was: ‘What are we learning that is most wrong?’
Munger: How do you cover that in 1 session?? (Laughs).
Buffett: Efficient market hypothesis, it’s unbelievable that this has taken hold. It’s nutty. (German physicist) Max Planck talked about the resistance of the human mind to new ideas. Science advances one funeral at a time (quoting Max Planck).
Here’s the recap. These things should, in my opinion, be committed to memory:
Spend your time valuing businesses and thinking about market prices.
If you don’t understand a company, move on. There is no margin of safety if you don’t know what you’re doing. Would you play a game against someone when you barely knew the rules and they were an expert? How about if you were betting ten or hundreds of thousands of dollars on the outcome? As I believe Buffett said, “If you want to beat Bobby Fischer, play him in anything but chess?”
If you can’t value a business, move on. Most businesses, most of the time are priced in such a way that there is no glaring discrepancy between price and value. Some have questions about earnings power and assets that you cannot answer. Move on, because there are plenty of fish in the sea and forcing it or falling in love with a mediocre prospect will lead to mediocre returns.
Focus on finding businesses with a “moat”. If not, a business may be cheap and on its way to getting a whole lot “cheaper”.
The market is there to serve you, not inform you. Making this payoff requires a great deal of patience and discipline.
Gregory Speicher via GuruFocus
Two Technology Purchases Today
Purchased Western Digital (WDC), the storage drive maker, today at $39.08. Also purchased j2 Global Communications (JCOM) at $20.60. I’ve been watching JCOM for a few months now, but WDC just recently showed up on my screen. WDC is trading near all time highs, but the growth in memory storage – thanks to everything from photos to movies being stored on disk drives in our homes – seems unabated. JCOM is a global telecommunications company, with significant growth prospects around the world.
Technology companies are particularly vulnerable to competition – you never know when someone else might develop a new product that makes yours obsolete. These two, however, seem positioned right for the future. I used conservative assumptions to place a value on each.
To Russia, With Love
Two purchases were made today. Both were tough to pull the trigger on. I’m personally feeling bearish right now, but I have to limit my emotions and follow the systems that I’ve set in place. First, the cash signal, which has been in effect since October 19th, has finally cleared. This means we put 40% of the portfolio back into the ETF Momentum system. And for that, Russia leads the way. So we bought RSX (Market Vector Russia Index fund). We are truly playing ‘Follow the Leader’ with this pick, as the Russian stock market is already up over 100% in the last year.
Second, a company named Total System Solutions (TSS) has fallen into our buy zone. TSS provides payment processing services to financial and nonfinancial institutions. The company’s services include processing consumer, retail, commercial, and government services, as well as stored value and debit cards. It is a well run, financially strong company based in Columbus, Georgia. So why am I worried? TSS has been the beneficiary of the decades-long expansion of U.S. consumer credit. And that’s the problem. Consumer credit is contracting for the first time in generations. Families have reached the limits on their credit cards, and E-Z home equity loans are no longer. Less credit card transactions mean less revenue for TSS. However, the market has already discounted a lot of this information with TSS. And TSS is growing internationally, so as consumers around the world begin using credit and debit cards, TSS can take a slice of the pie. I calculate that TSS is worth at least what I paid for it, even if revenues remain flat from here. Further, I believe TSS is a great buyout candidate.
Hitting The “Stryke” Price
Sold Stryker (SYK) today at $56.81, just below my Intrinsic Value calculation of $57 per share. This gave me a 46% return since Stryker was purchased in May 2009 (8 months), not including the dividends collected also.
According to John Hussman, the market may be in the process of forming a new high just before significant losses just ahead. I’ve been hoping that a few more of my stocks would hit their Intrinsic Value prices so I could sell off at a possible top in the market. I intend to hold all the remaining stocks thru any downturn, as I feel comfortable knowing their true ‘Intrinsic Value’. The commodity stocks in the portfolio could fall harder than the overall market, but I (as Hussman) believe that inflation will drive these stocks much higher in the future. The portfolio is now over 50% cash so would weather any downturn much better than the overall market.
As an aside, my take on Hussman’s view is that he sees parallels to the 1973-74 Bear Market. A very nasty bear market before inflation takes over, just like the 1970’s. Not a good stock investing environment (unless you’re in commodities, or unless you bought stocks near the 1974 lows). In that regards, I have a long watch list of stocks that would be great buys at 30% discounts to today’s prices.
Portfolio Beating Hedge Funds
Not too shabby, I’ve beaten some big hedge funds the last two years..
From Marketwatch, “The Hennessee Hedge Fund Index, which tracks returns reported to the consulting firm by more than 1,000 managers, rose 24.6% in 2009, according to early estimates. The year before, hedge funds lost a record 19.8% on average, according to Hennessee data.”
Short Term Sell!
My Cash signal, which I use with the Momentum Portfolio, just went into an even deeper “Sell” signal today. We’ve been in cash since Oct. 19th with the signal, so this does not cause any portfolio changes. I hold on to the stocks thru thick and thin, since I think I know what their Intrinsic Value is. But the Momentum portion sits in cash until better times.
Of course, this could be early. According to ‘Registered Rep’ magazine, Steve Leuthold, a respected manager who called the 2008 fiasco, says the S&P 500 should climb by about 19 percent or so from yesterday’s close. “Then [it] will give up those gains in the second half of the year.” In short, the bull is getting old.
Nevertheless, the firm—managers of the Leuthold Core Investment fund (LCORX)—retains a 65 to 67 percent net exposure to equities, down slightly from 70 percent in mid-December. (Leuthold’s maximum exposure to equities is 70 percent.) Last year, the fund returned 26.93 in 2009, 273 basis points better than its category (large-blend, “moderate allocation” funds), according to Morningstar. Its three-year return was 3.97 percent, or 596 basis points ahead of its competition.
Doug Ramsey, a senior research analyst, put himself out on the line, making a prediction for the coming decade. “Looking back, simple projections of regression to the mean for both earnings and p/e ratios at the end of 1999 would have produced an S&P 500 close within 1.4 percent of the actual close on 12/31/09, ten years later.” He concludes: “Similar analysis for the next decade predicts better performance than the past decade, but still below average.” Of course, as Steve Leuthold always says, “Predictions are show; portfolio changes are for dough.”
Annual Portfolio Returns
Here’s a quick summary for my 3 accounts:
Regular IRA: Up 35% in 2009, hitting new highs. This account sidestepped most of the market freefall back in 2008, and is up big this year. Currently holds about half the stocks on our ‘Current Stocks’ list, and is about 2/3 cash.
Roth IRA: Up 31% in 2009, but is now only back to old highs. This account suffered most in 2008, and has rebounded nicely this year.
Education IRA: Up 37% in 2009. This account started following only the momentum system (no stocks) in July of this year.
For comparison, the S&P 500 was up 23.5% in 2009.
I’m not finding any stocks worth purchasing at current prices, and the momentum system is still in cash. So the accounts are holding lots of cash at the moment. I have a long list of stocks on my ‘Watch List’, waiting for the right opportunity.
