Thursday, November 09, 2006

November Trades

Nov 16 2006
Sell 10 Google (NYSE: GOOG) $495

Buy 100 USG Corp (NYSE: USG) $52

October Update

October ended up being a busy month. The first of week of November was no slouch either. We have a lot to report. Most importantly, we have reached our $200,000 invested capital target. So from here, any cash requirements will be raised through portfolio turnover. For the month of October, the portfolio was up 6.5% vs. S&P 500’s 3.3% increase.

On top of the list has to be Berkshire Hathaway which announced great results and broke through $100,000 for the first time. Mr. Buffett’s bet on a tame hurricane season paid off handsomely. He can stop watching the weather channel now.

Meanwhile, Wendy’s and Tim Horton’s parted ways and we were the beneficiary of our Tim Horton’s shares which have performed well post spin-off and hit an all-time high today. Cisco’s results were a blowout and the stock reflected that today. Morningstar has also rebounded nicely and the earnings report was quite solid. Electronic Arts, Comcast and Google have rallied nicely after beating the Street’s earnings estimates. CBS continued to generate a ton of cash and has announced a sizeable share buyback. Music to our ears.

On the downside, Corning forecast a soft upcoming quarter. And Walter Industries has been on a roller coaster ride. But our thesis on these shares is unchanged. In fact we added to our Walter holding. The company has just announced that the spin-off of Mueller Industries will be completed in December and has also authorized a 2 for 1 stock split. We won’t know the exact distribution ratio due to the possibility that convertible senior subordinated note holders may elect to convert the notes into common stock prior to the December 6th record date. We have always used the fully diluted share base to make our intrinsic value calculations. So this has no bearing on our thesis. Incidentally, the 2 for 1 split is meant to protect Walter shareholders against excessive dilution in case the company does not prevail in its attempt to amend the convertible notes Indenture to correct a provision related to the adjustment of the conversion ratio in case of a spin-off transaction.

Other changes during the month were the addition of Harrah’s Entertainment (NYSE: HET) to the portfolio. As I mentioned in a recent post on Margin of Safety, you can think of this as a nice placeholder for some of your cash. There has been no recent news since the initial flurry of activity after the first and only private equity offer of $81 for the company. For now we sit tight on this position. We may trim the position to raise cash if opportunities arise that are too good to pass on. We also took a position in Western Union (NYSE: WU), a recent spin-off from First Data Corporation (NYSE: FDC), which appears undervalued even after the recent run-up. Western Union has a premium brand and a simple business model – enabling global wire transfers. The stock may have been held down initially because of worries of a possible immigration clamp down on Mexicans. Surely a risk, but the long-term prospects for Western Union are bright. You should read the November 1st front page Wall Street Journal article about “remittance-receiving” developing nations to get an idea of the magnitude of the opportunity for Western Union.