Margin of Safety

Housekeeping

2012-01-05T10:57:00.002-05:00

It has been a while since I made any changes to the Model Portfolio. That may be an understatement since the last trade in the portfolio was completed in October of 2009. Cadbury Schweppes did get gobbled up by Kraft (NYSE: KFT) which itself is spinning in to two companies. Two companies we have discussed in the past and held for some time in the portfolio.

I have decided to stop maintaining this portfolio going forward as I simply do not have the time to manage it. Having said that, I will continue to track the performance of the portfolio as is (including the cash position). It will be an interesting 'buy-and-hold' experiment to look back on years from now.

Since inception on September 1, 2006 the Model Portfolio's NAV increased by 16% versus the S&P 500's total return of 8.09% through the end of 2011. This does not include any dividends received since September 2010. Below is a snapshot of the portfolio as at the end of December 2011.

September 2009 Update

2010-06-10T13:19:00.008-04:00

For the Fiscal Year ending September 30^th, 2009 the Model Portfolio’s return was -3.9% vs. S&P 500’s total return of -9.4%. Since inception, the Model Portfolio's 4-year return through September 30th, 2009 is 16.5% vs. S&P 500's total return of -13.9%. To perhaps put Mr. Market's recovery from the spectacular slump in late 2008 and early 2009 in better perspective, consider that the Model Portfolio's return from January 1, 2009 through September 30, 2009 was 31% vs. S&P 500’s total return of 17%.

After a flurry of activity in November 2008, we remained on the sidelines for the remainder of the Fiscal Year notwithstanding a few small trades in August and September 2009. Many of the stocks we purchased in November could have been had at significantly lower prices in March 2010 but hindsight is of course 20/20. Still we managed to purchase high quality companies at a fraction of their intrinsic values. The analogy of feeling like a kid in a candy store could not have been more appropriate in November 2008. We added new positions by buying shares of Starbucks (Nasdaq: SBUX) and Goldman Sachs (NYSE: GS) and increased our holdings in Ebay (Nasdaq: EBAY), Intel (Nasdaq: INTC), Cisco (Nasdaq: CSCO) and Sears Holdings (Nasdaq: SHLD) among others at incredible prices.

October Trades

2009-10-13T09:48:00.001-04:00

October 13 2009
Sell 100 Goldman Sachs Group (NYSE: GS) $186.00

September Trades

2009-09-09T21:15:00.001-04:00

September 9 2009
Buy 200 Cadbury PLC (NYSE: CBY) $51.80

August Trades

2009-08-25T09:55:00.001-04:00

August 25 2009
Buy 500 Bank of America (NYSE: BAC) $17.55

November Trades

2008-11-13T19:52:00.004-05:00

November 12 2008
Buy 2 Berkshire Hathaway (NYSE: BRKB) $3,175.00

Buy 289 Bank of America (NYSE: BAC) $15.50

Buy 200 Home Depot (NYSE: HD) $19.50

Buy 300 Intel (NYSE: INTC) $13.20

Buy 300 Cisco (NYSE: CSCO) $16.00

Buy 300 General Electric (NYSE: GE) $15.25

Buy 140 Cadbury (NYSE: CBY) $31.50

Buy 180 Dr. Pepper (NYSE: DPS) $18.00

Buy 600 Ebay (NYSE: EBAY) $12.00

Buy 125 Sears Holdings (NYSE: SHLD) $41.00

Buy 350 Centex (NYSE: CTX) $8.20

Buy 500 Starbucks Corporation (Nasdaq: SBUX) $8.50

Buy 100 Goldman Sachs Group (NYSE: GS) $63.5

Buy 200 Moody's Corp. (NYSE: MCO) $19.50

Buy 300 USG Corp. (NYSE: USG) $8.80

Buy 200 Leucadia National (NYSE: LUK) $17.5

Buy 500 Mueller Water (NYSE: MWA-B) $5.00

November 10 2008
Buy 1000 Starbucks Corporation (Nasdaq: SBUX) $10.00

Buy 150 Goldman Sachs Group (NYSE: GS) $70.00

Buy 400 Ebay Inc. (Nasdaq: EBAY) $13.5

Buy 200 Moody's Corp. (NYSE: MCO) $25.00

Buy 300 USG Corp. (NYSE: USG) $12.75

Buy 200 Leucadia National (NYSE: LUK) $22.60

Buy 1000 Mueller Water (NYSE: MWA-B) $6.00

September Update

2008-11-10T17:00:00.012-05:00

For the Fiscal Year ending September 30^th, 2008 the Model Portfolio’s return was -11.0% vs. S&P 500’s total return of -20.6%. Since inception, the Model Portfolio's 3-year return through September 30th, 2008 is 21.2% vs. S&P 500's total return of 4.2%.

It was a tough year. Many of our holdings are deep in negative territory especially those with exposure to the housing market. For now we are happy to hold on to these holdings and in some cases will increase our positions. Many should emerge stronger from the current downturn. Coutrywide Financial which we bought aggressively throughout the year is now Bank of America (NYSE: BAC). We also added new positions such as Ebay (Nasdaq: EBAY) and General Electric (NYSE: GE). Finally, Cadbury (NYSE: CBY) completed the spin-off of Dr. Pepper (NYSE: DPS).

September Trades

2008-09-17T20:49:00.003-04:00

September 17 2008
Sell 100 Morningstar Inc. (Nasdaq: MORN) $57.00

Sell 100 Western Union (NYSE: WU) $25.00

Buy 300 General Electric (NYSE: GE) $23.00

Buy 200 Ebay Inc. (Nasdaq: EBAY) $22.00

Buy 100 USG Corp. (NYSE: USG) $27.20

July - August Trades

2008-09-17T20:48:00.001-04:00

NO TRADES

June Trades

2008-06-16T09:33:00.002-04:00

June 13 2008
Buy 2500 Countrywide Financial (NYSE: CFC) $4.75

February - May Trades

2008-06-16T09:32:00.002-04:00

NO TRADES

January Trades

2008-01-08T21:09:00.000-05:00

January 8 2008
Buy 200 Countrywide Financial (NYSE: CFC) $5.50

January 14 2008
Buy 1000 Countrywide Financial (NYSE: CFC) $6.00

Buy 35 Sears Holdings (Nasdaq: SHLD) $88.00

January 23 2008
Buy 800 Countrywide Financial (NYSE: CFC) $5.25

Buy 100 Ebay (Nasdaq: EBAY) $26.50

Buy 100 Cadbury Schweppes (NYSE: CSG) $43.75

Buy 200 USG Corp (NYSE: USG) $31.50

Buy 200 Cisco (Nasdaq: CSCO) $22.50

Buy 150 Intel (Nasdaq: INTC) $18.75

Buy 300 Mueller Water Products (NYSE: MWA-B) $7.80

December Trades

2007-12-26T22:19:00.000-05:00

December 26 2007
Sell 100 Lehman Brothers (NYSE: LEH) $65.00

Buy 50 Moody's (NYSE: MCO) $36.00

Buy 20 Sears Holdings (Nasdaq: SHLD) $101.00

Buy 100 USG Corp. (NYSE: USG) $35.80

November Trades

2007-11-20T23:12:00.001-05:00

November 20 2007
Sell 200 Electronic Arts(Nasdaq: ERTS) $56.00

Buy 75 Centex (NYSE: CTX) $19.25

Buy 150 Pulte (NYSE: PHM) $10.25

Buy 50 Moody's (NYSE: MCO) $36.00

Buy 200 Countrywide Financial (NYSE: CFC) $9.00

Buy 25 Sears Holdings (Nasdaq: SHLD) $110.00

October Trades

2007-10-15T23:08:00.000-04:00

October 18 2007
Buy 100 USG Corp. (NYSE: USG) $36.00

Buy 20 Sears Holdings (Nasdaq: SHLD ) $132.00

Buy 25 Cadbury Schweppes (NYSE: CSG) $50.80

September Update

2007-10-15T22:38:00.001-04:00

For the month of September the Model Portfolio’s return was 0.1% versus S&P 500’s total return of 3.7%. For the Fiscal Year ending September 30^th, the Model Portfolio’s return was 16.9% vs. S&P 500’s total return of 15.6%. Since inception, the Model Portfolio's 2-year return through September 30th, 2007 is 36.2% vs. S&P 500's total return of 24.2%.

We made no changes to the portfolio in September. Meanwhile, housing related stocks including Sears Holdings (Nasdaq: SHLD) were hit hard in September dragging down the Model Portfolio’s performance for the Fiscal Year. Consider that at the end of August the Portfolio was outperforming the S&P 500 by 4.9% for the trailing 11-month period.

Earnings season is right around the corner. Perhaps Mr. Market will be so kind as to provide us with a few fat pitches.

September Trades

2007-09-12T21:09:00.002-04:00

NO TRADES

August Update

2007-09-12T21:09:00.001-04:00

For the month of August the Model Portfolio’s return was 2.6% versus S&P 500’s total return of 1.5%.

August was turbulent for the markets to put it mildly. The S&P went on a roller coaster ride and based on an intraday low was down to the tune of almost 6% from its July 31^st close. We raised more cash by exiting out of the Tyco spin-off companies and divesting ConocoPhillips (NYSE: COP) and Anheuser-Busch (NYSE: BUD). The Tyco companies should do well in the long run. But our thesis of buying the single stock prior to the spin-off had played out. In hindsight, we should have liquidated our position immediately after the split. Conoco had performed tremendously in the short period of time since we bought it and we will maintain our exposure to oil through Diamond Offshore Drilling (NYSE: DO). Finally, a cash infusion of $50,000 gives us more flexibility in building new positions or adding to existing ones without having to trim or altogether trade out of existing positions on a continued basis. Of course if we are not able to invest this cash, it will hurt the portfolio’s performance going forward. It should be emphasized that the goal of building a concentrated portfolio will preempt us from using this new found capital to add new positions without considering the opportunity cost of holding onto existing positions.

The subprime debacle presented us with great entry points into several stocks on our watch list. Moody’s (NYSE: MCO) was a new addition as well as Lehman Brothers (NYSE: LEH) and Countrywide Financial (NYSE: CFC). Please see Margin of Safety for more comments on these companies. Another new addition is Cadbury Schweppes (NYSE: CSG) which we have written about in the past. Worries about the disappearance of private equity bidders for the drinks division depressed the stock to levels too attractive to pass on. We also continued to add to our positions which have housing exposure in one way or another.

On the earnings front, Morningstar (Nasdaq: MORN) and Expeditors International of Washington (Nasdaq: EXPD) came through with stellar results. Morningstar is trading near all-time highs. Expeditors touched a 52-week high but could not sustain it and was probably caught in the market downdraft. CEO Rose did not disappoint and continued with his colorful commentary in the quarterly press release: "This quarter's results once again illustrate that steady growth is reliant upon both consistent and fundamental execution. We experienced good solid growth in all of our major geographic areas," commented Peter J. Rose, Chairman and Chief Executive Officer. "When Yogi Berra said, 'It ain't like football. You can't make up no trick plays' he was speaking of baseball, but he might just as well have been talking about the global logistics business. Indeed, there are no 'trick plays' or short cuts that can bail you out in this game. When the final box scores are published in this business, those who have attempted to rely on either have typically found themselves thrown out at home. While the spectacular, but intermittent, long-ball game may garner the headlines, it's the more tedious, but consistent, short-ball game that takes home the trophies," Rose said. Our kind of CEO.

August Trades

2007-08-01T21:32:00.001-04:00

August 1 2007
Sell 75 ConocoPhillips (NYSE: COP) $81.00

Sell 100 Intel (Nasdaq: INTC) $23.40

Buy 150 Moody's (NYSE: MCO) $52.50

Buy 100 USG Corp. (NYSE: USG) $40.00

Buy 300 Mueller Water Products (NYSE: MWA-B) $13.00

Buy 50 Centex (NYSE: CTX) $35.00

Buy 100 Pulte (NYSE: PHM) $18.00

Buy 50 Home Depot (NYSE: HD) $37.00

August 15 2007
Sell 150 Anheuser-Busch (NYSE: BUD) $48.00

Sell 75 Covidien (NYSE: COV) $38.00

Sell 75 Tyco Electronics (NYSE: TEL) $33.00

Buy 50 USG Corp. (NYSE: USG) $36.50

Buy 50 Centex (NYSE: CTX) $32.50

Buy 100 Pulte (NYSE: PHM) $17.00

August 16 2007
Buy 50 Centex (NYSE: CTX) $29.50

Buy 100 Pulte (NYSE: PHM) $15.75

Buy 200 Mueller Water Products (NYSE: MWA-B) $11.90

Buy 50 Moody's (NYSE: MCO) $45.00

Buy 100 Home Depot (NYSE: HD) $32.5

Buy 50 Expeditors International of Washington (Nasdaq: EXPD) $43.50

Buy 100 Lehman Brothers (NYSE: LEH) $50.00

Buy 125 Cadbury Schweppes (NYSE: CSG) $42.25

Buy 300 Coutrywide Financial (NYSE: CFC) $17.00

Buy 25 Sears Holdings (Nasdaq: SHLD) $129.00

August 31 2007
Buy 200 Mueller Water Products (NYSE: MWA-B) $10.85

July Update

2007-08-01T21:31:00.000-04:00

For the month of July the Model Portfolio’s return was -2.8% versus S&P 500’s total return of -3.1%.

It was a tough month for the markets. It was the right time to jettison Chaparral (Nasdaq: CHAP) and CBS (NYSE: CBS) and raise some cash. Chaparral will be taken private and CBS had rewarded us nicely since we purchased it post spin-off from Viacom. Finally, we sold out of Tyco (NYSE: TYC) choosing to hold on to Tyco Electronics (NYSE: TEL) and Covidien (former Tyco Healthcare) (NYSE: COV). Tyco should do well in the long run but with a 14% gain, this was a good chance to raise some cash and let the other Tyco businesses provide us with the upside.

We used a portion of the proceeds to continue to build our positions in USG (NYSE: USG) and Pulte (NYSE: PHM) both of which were dragged lower as a result of the sub-prime and housing jitters. Sears Holdings (Nasdaq: SHLD) lowered its earnings guidance for the second quarter and announced a $1B buyback. The stock's decline from it's high was a good opportunity to add to our position.

Earnings for many of our companies began to trickle in throughout July. No major surprises. the homebuilders continued to struggle and Diamond Offshore's (NYSE: DO) results were stellar. Ebay (Nasdaq: EBAY) tried hard and continued its buyback program but Mr. Market was not impressed. Intel (Nasdaq: INTC) was also shunned as analysts zeroed in on lower than expected margins for the quarter. Still, the company maintained its guidance for the year and is looking for a strong second half. Meanwhile, its rival Advanced Micro Devices (NYSE: AMD) is reeling. Corning (NYSE: GLW) is also worth a mention. Results were just fine but again investors chose to focus on slightly weaker telecom sales and management's reluctance to raise LCD sales guidance for the year. Meanwhile, this is a company executing a beautiful turnaround and rekindling its innovation machine. What we are focusing on is Corning's reinstatemant of its dividend and announcement of a $500m share buyback.

July Trades

2007-07-10T23:24:00.001-04:00

July 24 2007
Sell 100 Chaparral (Nasdaq: CHAP) $83.90

Sell 280 CBS (Nasdaq: CBS) $34.75

Sell 75 Tyco(Nasdaq: TYC) $49.50

Buy 60 USG (NYSE: USG) $44.50

Buy 100 Pulte (NYSE: PHM) $20.85

Buy 25 Sears Holdings (Nasdaq: SHLD) $151.00

June Update

2007-07-10T12:45:00.001-04:00

For the month of June the Model Portfolio’s return was -1.5% versus S&P 500’s total return of -1.7%.

We made one significant trade in the Model Portfolio and replaced our position in Comcast (Nasdaq: CMCSA) with Ebay (Nasdaq: EBAY). To be sure, Comcast's prospects remain bright and the company should continue to be successful in rolling out its Digital Voice product while generating oodles of cash. Skeptics remain and continue to rumble about the web's competitive threat to Comcast's business model. I believe Comcast will do just fine. The reason for eliminating our position in Comcast and buying Ebay is simple. Comcast had a great run since we bought it and is no longer as cheap. However, it is not overvalued either. Ebay, on the other hand, is a cheaper stock which has been unduly punished as the fear of Google (Nasdaq: GOOG) dominating the world has blinded investors to Ebay's potential. Ebay has a dominant position in online auctions and its PayPal division is growing nicely. Its decision to buy Skype remains a question mark but that is just gravy if it pans out. The company has a squeaky clean balance sheet and is a cash machine. Ebay is also buying back it shares with an additional $2 billion authorized in January. This is growth at a reasonable price.

The end of June also brought with it the end of Tyco as a conglomerate and the creation of three new companies. They began trading on the first day of trading in July. Tyco (NYSE: TYC), Tyco Electronics (NYSE: TEL) and Covidien (NYSE: COV) which was formerly Tyco's healthcare division. You can check on Tyco's web site for more information on how to split your original purchase price among the three stocks. For now, we are staying put and holding all three.

Finally, the stellar performances of our energy holdings in ConocoPhillips (NYSE: COP) and Diamond Offshore (NYSE: DO) were offset by the retreat in the homebuilders. The bad news continued to pile on and they are now trading below book value. On the bright side, Home Depot (NYSE: HD) which certainly has exposure to the housing market, sold its supply business to a private equity group for about $10 billion and announced a massive $22.5 billion share buyback. We will take that.

June Trades

2007-06-11T09:09:00.000-04:00

June 8 2007
Sell 25 Chaparral (Nasdaq: CHAP) $68.00

Sell 300 Comcast (Nasdaq: CMCSA) $26.10

Buy 300 Ebay (Nasdaq: EBAY) $30.75

May Update

2007-06-11T09:06:00.001-04:00

For the month of May the Model Portfolio’s return was 2.9% versus S&P 500’s total return of 3.5%.

It was a quiet month for the Model Portfolio. We used a persistent drag on USG shares (NYSE: USG) to add to our position. Meanwhile, the market continued to rumble with Dow setting record after record.

Cisco (Nasdaq: CSCO), Electronic Arts (Nasdaq: ERTS) and Tyco (NYSE: TYC) all reported earnings in early May. Cisco’s earnings were stellar but the Street was unimpressed with the company’s guidance. It seems 15% to 16% top-line revenue growth and gross margins north of 60% are not good enough. The stock has dipped back to the mid 20s and has stayed there. We would use further weakness to add to our position. If you want to get a sense of what a networked world will mean for companies like Cisco, you should pick up a copy of Forbes’ 90^th anniversary issue on Networks.

Mr. Market was not too kind to Electronic Arts either. The company’s forecast for its upcoming fiscal year fell short of analysts’ expectations. The transition to the new gaming consoles has not been as swift as anticipated, not to mention the fact that the company has decided to delay Spore, the much anticipated game by the creator of The Sims. But all this should be short term in nature. To be sure, the company has to execute better going forward. Still, with no debt on it balance sheet and a business which is throwing off plenty of cash, there is time to right the ship.

Finally, there is Tyco. Not much surprise in the company’s earnings announcement and the break up into 3 separate entities remains on track. The shares of the 3 companies are expected to trade on a When Issued basis on June 14^th. The spin-off will be completed on June 29^th. Stay tuned.

May Trades

2007-05-02T22:35:00.001-04:00

May 2 2007
Buy 40 USG Corp. (NYSE: USG) $48.00

April Update

2007-05-02T22:34:00.000-04:00

For the month of April the Model Portfolio’s return was 3.5% versus S&P 500’s total return of 4.4%.

Maintaining our exposure to the steel sector through Chaparral (Nasdaq: CHAP) has proven a to be a profitable one. A month after reporting earnings and less than two years after becoming an independent company, Chaparral announced in April that it has retained Goldman Sachs to explore strategic alternatives causing the stock to rally to yet another high. We have trimmed our position into this rally and deployed the cash into holdings with, in our opinion, a superior price/value proposition.

Earnings began to roll in throughout the month and into early May. No major surprises. Intel's (Nasdaq: INTC) earnings were received well. The price war with rival Advance Micro Devices (NYSE: AMD) may be over and margins should improve. Moreover, by waking a sleeping giant, AMD has managed to dig itself into a mighty big hole. Intel has regained the technological lead and is introducing new products at a ferocious pace. AMD is struggling and there are rumors the company may be a buyout candidate. Our thesis appears to be playing out nicely. We added to our position in April.

The majority of our companies continued to progress nicely. Comcast's (Nasdaq: CMCSA) triple play is on a roll. Corning (NYSE: GLW) had a good quarter and is reopening a fiber manufacturing plant to meet demand. Diamond Offshore Drilling (NYSE: DO) blew away Wall Street's estimates. We built up our position in this company which we believe remains attractively valued. A substantial dividend payment should be coming our way.

Morningstar (Nasdaq: MORN) and Mueller Water (NYSE: MWA) held their own and continued to execute their strategy. Morningstar hit an all-time high in April and the company is methodically growing its business. Mueller's results appeared to breathe some life into the stock. The company continued to demonstrate pricing power while containing costs and paying down its debt. Our thesis has not changed on either of these companies and we would use any weakness in shares to add to our position.

Our holdings with exposure to the housing sector continue to struggle. Centex (NYSE: CTX) and Pulte (NYSE: PHM) had nothing kind to say about the outlook for homebuilders. USG (NYSE: USG) reiterated the tough business conditions for its products. The shares of all three companies have retreated from the levels hit in late 2006 but seem to have found a floor near the lows hit last summer. USG meanwhile completed a share offering at $48 and used the proceeds for an acquisition and to further pay down its debt. In early May, we added to our position in USG and we will look for opportunities to further build our position in these companies.

During the first part of May, Expeditors International (Nasdaq: EXPD) reported earnings and Sears (Nasdaq: SHLD) held its annual shareholders meeting. Expeditors announced good results despite recently weaker demand. We have quoted him before, we will quote him again. Peter Rose, Chairman and CEO, had this to say, "We do measure our internal progress by how well we do at achieving our own expectations. Regardless of what might, or might not, be going on in the global economy, we always expect to do a little better this year than we did last year. Our first quarter results, on a net earnings basis, were very close to what was reflected in our 2007 budget. Taken in a net earnings context, we've nearly doubled our first quarter profitability since 2005 and we think that we've managed that growth pretty well. Finally, we'd be remiss in closing without publicly thanking our employees for their outstanding efforts and our customers, our vendor/partners, and our shareholders for their support. Thank you one and all!" As for Sears, the stock was punished for a weak Q1 outlook. But we are unphased by Mr. Market's reaction and leave you with this quote from Eddie Lampert at the annual meeting, "The opportunities for us to allocate capital are very significant, and we have a lot of choices." Indeed, he has transformed Sears into a cash generator and is sitting on more than $2B in cash. He is on the prowl. Stay tuned.

Finally, as May rolls on, we await earnings reports from Tyco (NYSE: TYC), Cisco (Nasdaq: CSCO) and Electronic Arts (Nasdaq: ERTS).

April Trades

2007-04-22T20:18:00.000-04:00

Apr 20 2007
Sell 50 Chaparral (Nasdaq: CHAP) $64.00

Apr 27 2007
Sell 25 Chaparral (Nasdaq: CHAP) $69.25

Buy 25 Diamond Offshore Drilling (NYSE: DO) $87.00

Buy 150 Intel (Nasdaq: INTC) $21.95

March Update

2007-04-02T20:47:00.000-04:00

For the month of March the Model Portfolio’s return was -0.4% versus S&P 500’s total return of 1.1%. For the six months ending March 31st (our fiscal year ends in September), the Model Portfolio's return is 12.0% versus S&P 500’s total return of 7.2%.

March was a quiet month for the portfolio. One highlight was Chaparral's (Nasdaq: CHAP) strong earnings and guidance. The stock has marched on to an all time high. Speaking of steel, our decision to sell Posco (NYSE: PKX) may have been premature as Warren Buffett disclosed a 4% ownership in the South Korean steel maker in his annual report.

Meanwhile, subprime mortgage woes unfolded fast and furious and took many by surprise. Sure enough, homebuilders have been hit hard. Nothing is going right for the housing sector these days. All this happened after we made small additions to our positions in Centex (NYSE: CTX) and Pulte Homes (NYSE: PHM). At current levels, both stocks are trading barely above book value. To be sure more land write-offs could be in the works. And the housing slump may last well into 2008. Needless to say this is the time to be buying when all others seem to be fearful of anything related to housing. Further declines from current levels will provide us with the opportunity to continue to build our position in these companies. The Model Portfolio is a cash-constrained portfolio, so inevitably we will be forced to raise cash by selling or reducing other positions to add to our homebuilder positions. If any of you are interested in contributing cash to the Model Portfolio, we would be more than willing to oblige.

March Trades

2007-03-01T23:37:00.000-05:00

Mar 1 2007
Buy 25 Centex (NYSE: CTX) $46.50

Buy 50 Pulte (NYSE: PHM) $29.75

February Update

2007-03-01T23:36:00.000-05:00

For the month of February the Model Portfolio’s return was -1.5% versus S&P 500’s total return of -2.0%.

February ended with a bang. The market went on a wild ride over the last couple of days of the month. Fears of a recession sparked by comments from Alan Greenspan combined with a sharp drop in the Chinese stock market did not bode well and investors were hitting the sell button.

Before all this happened, as you may have noticed, the portfolio was having a busy month. High turnover is not something we strive for. However, we used the run up in prices of various positions as an opportunity to consolidate and build a more concentrated portfolio.

The original intent of the Wendy's (NYSE: WEN) trade was to buy before the spin-off of Tim Hortons (NYSE: THI). That thesis played out well and we recognized a profit in excess of 30%. Similarly, our thesis on Heinz (NYSE: HNZ) played out as Mr. Peltz succeeded in joining the board and the company began implementing the various strategic measures he was advocating. Walter Industries (NYSe: WLT) continued to struggle after spinning off Mueller Water (NYSE: MWA). We decided to eliminate our position in Walter at a small loss and instead built a bigger position in Mueller Water which we believe has fantastic prospects and is deeply undervalued. At Walter, coal production has not picked up and coal prices have been under pressure. Both problems may well prove temporary. However, we believe we have effectively redeployed our capital by adding to existing positions and by adding two new holdings in the energy sector - ConocoPhillips (NYSE: COP) and Diamond Offshore (NYSE: DO) both of which we recently mentioned in Margin of Safety. Finally, we eliminated our position in Mittal (NYSE: MT) with nearly a 50% return, keeping Chaparral as our only holding in the steel sector. The steel sector has shown signs of stabilizing and with price increases planned later in the year. Consolidation is expected to continue apace.

In February, a few more earnings reports trickled in. Electronics Arts (Nasdaq: ERTS) came in with good numbers and was subject of a positive article in Barron's. Our thesis remains intact on this company. CBS (NYSE: CBS) hiked its dividend and announced a large buyback. Meanwhile, the market seemed spooked by Expeditors International's (Nasdaw: EXPD) earnings which appeared to miss 'expectations' and the stock sold off almost 10% at the open before recovering. This is a solid business and a great way to play globalization. Peter Rose, Chairman and CEO, had this to say, "Looking forward to 2007, there is no time to rest on past success. We cannot lose touch with what's most important - our people and our customers. And we cannot forget 'from whence we've come'." Meanwhile, Cisco (Nasdaq: CSCO) surprised us all. Their earnings report was stellar and the guidance was not too bad either. Last but not least, Morningstar (Nasdaq: MORN) continued to roll along with a great quarter and capped it all off with the acquisition of S&P's mutual fund data business providing the company with a presence outside of the U.S.

February Trades

2007-02-09T15:55:00.000-05:00

Feb 15 2007
Sell 210 Mittal (NYSE: MT) $50.00

Sell 250 Tim Hortons (NYSE: THI) $31.25

Sell 200 Walter Industries (NYSE: WLT) $24.50

Sell 50 Chaparral (Nasdaq: CHAP) $51.50

Buy 200 Mueller Water Products (NYSE: MWA-B) $15.12

Buy 100 Western Union (NYSE: WU) $22.40

Buy 50 USG Corp. (NYSE: USG) $54.40

Buy 30 Pulthe Homes (NYSE: PHM) $32.60

Buy 25 Centex (NYSE: CTX) $52.30

Buy 75 Diamond Offshore (NYSE: DO) $79.20

Buy 75 ConocoPhillips (NYSE: DO) $79.20

Feb 9 2007
Sell 185 Wendy's (NYSE: WEN) $32.90

Sell 200 Heinz (NYSE: HNZ) $46.70

Sell 70 Chaparral (Nasdaq: CHAP) $49.00

Sell 40 CBS (NYSE: CBS) $31.80

Buy 100 Intel (Nasdaq: INTC) $21.00

Buy 70 Electronic Arts (Nasdaq: ERTS) $49.80

Buy 250 Muller Water Products (NYSE: MWA-B) $15.30

Buy 150 Western Union (NYSE: WU) $21.80

Buy 50 Expeditors International of Washington (Nasdaq: EXPD) $44.50

Buy 50 Home Depot (NYSE: HD) $41.15

Buy 30 Tyco (NYSE: TYC) $31.60

Buy 40 Anheuser-Busch (NYSE: BUD) $50.15

January Update

2007-02-04T01:02:00.000-05:00

For the month of January the Model Portfolio’s return was 2.5% versus S&P 500’s total return of 1.5%.

January was a quiet month for the portfolio. However, we did take the opportunity to significantly add to our position in Mueller Water Products (NYSE: MWA-B) at an attractive price.

Earnings have begun trickling in. Mueller, for one, held margins firm in the face of challenging business conditions by successfully driving its synergy plans and boosting prices. Budweiser (NYSE: BUD) and Comcast (Nasdaq: CMCSA) came in with strong quarters. The latter also announced a 3 for 2 split. After its earnings announcement, Mr. Market seemed to be warming up to Electronic Art’s (Nasdaq: ERTS) potential as a new growth cycle kicks in and new consoles gain traction. Western Union (NYSE: WU) affirmed guidance and exhibited stellar growth in

India

and

China

. But the company continued to see some weakness in its Mexican business as the

U.S.

immigration debate remains an overhang. We will use any weakness in shares to add to our position.

Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD) continued to battle. As we had predicted, Intel continued with its price war strategy to regain market share and it appears the company is regaining its footing. The stock has held steady while AMD’s shares have been decimated over the past month. The big question is when will the price war end? Intel has unleashed a barrage of new products commanding higher selling prices. And the company is at least a year ahead of AMD technologically. Still, Intel did not boost its gross margin guidance year over year putting a cap on the stock – for now. We will add to our position on any weakness.

Speaking of price wars, Corning (NYSE: GLW) pleased by announcing they will hold LCD glass prices steady through the seasonally weak first quarter. The stock has bounced nicely from its recent lows.

Steel continued to perform well. Elimination of Posco (NYSE: PKX) from the portfolio may have been premature. Still Chaparral (Nasdaq: CHAP) and Mittal (NYSE: MT) are trading at all time highs after Nucor (NYSE: NUE) and U.S. Steel (NYSE: X) announced stronger than expected results and signs of recovery in the steel sector began to emerge.

Homebuilders continued to be volatile but have not provided us with the weakness we had hoped for in order to add to our positions. Centex (NYSE: CTX) and Pulte Homes (NYSE: PHM) announced abysmal earnings as order cancellations, land option write offs and inventory adjustments continued. But Pulte’s CEO did give some hope, noting, "[W]e witnessed some promising signs of stabilization at the conclusion of the quarter, and into the first month of 2007, although it's too early to tell how strong and sustainable this may prove to be in the months ahead.” USG (NYSE: USG) also sounded a cautious tone for 2007.

Meanwhile, Home Depot (NYSE: HD) finally departed with its embattled CEO, Bob Nardelli, leading to a minor relief rally. In January, a Forbes article estimated Home Depot’s sum of the parts valuation at $56.

Mr. Lampert’s Sears Holdings Corp. (NYSE: SHLD) provided solid guidance for its fiscal fourth quarter and forecast an eye popping cash balance of $3.5 billion.

In the coming weeks, more of our companies will announce their quarterly results. Of particular interest will be updates from Cisco (Nasdaq: CSCO), Expeditors International of Washington (Nasdaq: EXPD), Morningstar (Nasdaq: MORN) and Tyco (NYSE: TYC). The latter appears poised to complete its split up by early Q2 and has asked shareholders for approval of a 1 for 4 reverse stock split in preparation for the event.

January Trades

2007-01-07T15:27:00.001-05:00

Jan 9 2007
Buy 220 Muller Water Products (NYSE: MWA-B) $13.80

December Update

2007-01-05T23:01:00.001-05:00

For the month of November, the portfolio was up 1.0% vs. S&P 500’s 1.4% increase.

December turned out to be an active month. We sold our position in Harrah's (NYSE: HET) which finally accepted a winning bid of $90. The trade resulted in an annualized return of about 30%. Not bad. We also took the opportunity to sell our position in Posco (NYSE: PKX) which had a great run. We maintained our exposure to the steel sector through Mittal (NYSE: MT) and Chaparral (Nasdaq: CHAP).

Our patience with Comcast (Nasdaq: CMCSA) is finally starting to pay off. The company is starting to fire on all cylinders and the cash machine should continue to hum. We are holding on to the rest of our position for now.

These trades raised enough cash for us to be able to increase our position in Intel (Nasdaq: INTC) which had drifted lower to attractive levels. We also increased our position in Western Union (NYSE: WU).

There are two new additions to the portfolio. We have been watching Leucadia National (NYSE: LUK) for some time. Ian Cumming's reputation speaks for itself. He is currently sitting on a sizable cash position. Plus, there are the billions in net operating losses which can be used to offset gains. Granted, they will eventually expire, but I am willing to give Cumming the benefit of doubt. I encourage you to read his letters to shareholders which are posted on Leucadia's web site. This is not unlike our investment in Eddie Lampert and Warren Buffett. Notice the stock is not followed by Wall Street. Just like we prefer.

The second newcomer is Expeditors International of Washington (Nasdaq: EXPD). As the year was winding down, transportation stocks were coming under pressure. In the low 40's, Expeditor seemed too good to pass on. It is about 28% below its recent peak. At first glance the stock may appear expensive. Even at these levels it commands a hefty forward P/E. But consider that this company is very well run, has consistently delivered stellar results and boasts fantastic return on capital. In the latest quarter, revenues grew by 20% while profits increased by 32%. It is a debt free, asset-light business which will do just fine even in a slowing economy. Furthermore, it's a nice way to play the globalization and outsourcing trends. Once again, I encourage you to browse the company's annual report, and if that is too boring, at least read the letter to shareholders to get a feel for the kind of company and management you are investing in. It is not every day that you see management and rank and file employees all contributing and financially benefiting from the profitable growth of their company. One more data point. A couple of days ago one of Expeditors' competitors, EGL Inc. (Nasdaq: EAGL), received a buy-out offer from its CEO (and largest shareholder) at a 27% premium to the stock price.

December Trades

2006-12-04T22:23:00.001-05:00

Dec 28 2006
Buy 130 Intel (Nasdaq: INTC) $20.40

Buy 125 Western Union (NYSE: WU) $22.30

Dec 19 2006
Sell 150 Harrah's Entertainment (NYSE: HET) $81.98

Sell 110 Posco (NYSE: PKX) $83.00

Sell 60 Comcast (Nsadaq: CMCSA) $42.89

Buy 300 Leucadia National (NYSE: LUK) $28.00

Buy 200 Expeditors International of Washington (Nasdaq: EXPD) $41.70

November Update

2006-12-04T15:33:00.000-05:00

For the month of November, the portfolio was up 3.8% vs. S&P 500’s 1.9% increase.

A few more earnings trickled. Notably, Tyco (NYSE: TYC) came in with nice results and the breakup is on track for Q1 2007. Heinz's results were quite good and it appears Mr. Peltz's efforts are paying dividend. The company raised its guidance for fiscal 2007.

The steel sector got a nice boost due takeover speculation and M&A activity. – for now, one announced deal involved Russia’s Evraz buying Oregon Steel. Our steel holdings are trading at or near all-time highs.

Meanwhile, Comcast (Nasdaq: CMCSA) was busy signing a blockbuster distrobution deal with Disney, buying Disney's stake in the E! Network and last but not least, the company announced plans to raise cable rates. The kind of business we love.

The last day of the month also saw the upgrade of homebuilders by a Banc of America analyst who was gracious enough to slap a “neutral” rating on the sector, whatever that means. Shares of Pulte (NYSE: PHM) and Centex (NYSE: CTX) both got nice boosts as a result.

Finally, we were sad to see Google (Nasdaq: GOOG) leave our portfolio for now. But the price appreciation was much faster than we had anticipated last November when the shares traded at around $400 - they recently hit a high of $513. This opened up room for a new addition in USG Corporation (NYSE: USG) which we recently discussed in more detail on Margin of Safety. USG was itself subject of takeover rumors the same day as Banc of America upgrade of homebuilders.

Happy Holidays. See you in 2007.

November Trades

2006-11-09T22:44:00.000-05:00

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

Buy 100 USG Corp (NYSE: USG) $52

October Update

2006-11-09T22:18:00.000-05:00

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.

October Trades

2006-10-04T21:27:00.000-04:00

Oct 4 2006
Buy 70 Walter Industries (NYSE: WLT) $42

Oct 12 2006
Buy 65 Harrah's Entertainment (NYSE: HET) $76.34

Oct 17 2006
Buy 85 Harrah's Entertainment (NYSE: HET) $73.84

Oct 18 2006
Buy 225 Western Union (NYSE: WU) $18.75

Model Portfolio Launch

2006-09-30T21:20:00.000-04:00

Here it is. The inaugural Margin of Safety Model Portfolio which achieved a 1-year total return of 15.2% vs. S&P 500's 8.5% through the end of September. The portfolio is an eclectic mix of businesses which I am happy to continue holding for now.

Here is a quick update on the holdings.

Berkshire Hathaway (NYSE: BRKA)
Most noteworthy recent news was Mr. Buffett's decision to give his wealth away to various charitable foundations. The main portion went to the Bill and Melinda Gates foundation. He recently visited Israel to meet the founder of Iscar for the first time. Earlier this year he bought 80% of Iscar for $4 billion. While there, he also teased investors by pointing out that Berkshire would likely acquire another 1 to 3 utilities over the next decade. Of interest was a comment about private-equity firms providing Berkshire with some competition for potential investments. No worries. Berkshire has the luxury to wait things out and be approached by the kinds of businesses it covets. Oh, one more thing, Mr. Buffett got married at the end of August to his 29 year companion Astrid Menks.

Sears Holdings (NASDAQ: SHLD)
Eddie Lampert is on the hunt. In the most recent quarterly earnings report, Mr. Lampert couldn't have been any more specific:

"Our strong financial position and cash flow generation provide us with the flexibility to capitalize on a wide range of market opportunities as they arise. In addition to investing in our business and acquiring our shares, we are prepared to invest substantial amounts of capital if we identify other attractive investment opportunities which have the potential for returns we believe appropriately compensate the Company for the associated risks." said Edward S. Lampert, Chairman of Holdings.

Stay tuned.

Wendy's (NYSE: WEN)
The spin-off is complete. On Friday Tim Hortons (NYSE: THI) was officially orphaned and will begin trading as a stand-alone beginning Monday. One more surprise, Timmy's will e added to the S&P/TSX index. This was somewhat unexpected and caught many shorts by surprise. Our bet to invest in the Wendy's shares before the eventual spin-off has paid off handsomely. We will hold on to our newly found Timmy shares. Wendy's portion of the business remains under-appreciated by the Street and we may add to our position if the opportunity presents itself.

Intel (NASDAQ: INTC)
Not much to say here except, FINALLY! Ok, so the market has been on a tear. But Intel seems to be on the right course again. A slew of new products are being launched and the recent layoffs and divestitures shows management can act fast and decisively. AMD (NYSE: AMD), bring it on.

Cisco (NASDAQ: CSCO)

Cisco offered a beautiful opportunity in August when it dipped below $20 after I posted my April post. The Scientific Atlanta acquisition is looking good and with broadband and content proliferating, Cisco looks to be well positioned. Recently the company uttered the D word for the first time. It's not a matter of if but rather when Cisco will pay us a dividend.

Morningstar (NASDAQ: MORN)
Not much to report here. Company recently launched a Hedge Fund section on its web site. The stock has taken a breather and briefly touched our original purchase price recently. If it goes there again, we will add to our position.

Chapparal (NASDAQ: CHAP)
The thesis remains intact here. Steel prices have cooled off a bit. But commercial construction continues apace and consolidation should play into Chaparral's hands.

Wal Mart (NYSE: WMT)
What do you know. The recent decline in gasoline prices seem to have pumped up Wal Mart shares. The company has left the German market and is in the process of figuring out how to appeal to upper scale shoppers by redesigning stores. A risky strategy which will surely cause some pain in the short-term. Still, Wal Mart's scale and competitive advantages are hard to beat. Let alone replicate.

Corning (NYSE: GLW)
As with Cisco, Corning also took a nice little dip below $20 in August. Some softness in the LCD market spooked the market. But the company is in the middle of a solid turnaround. And forget about the fiber optics business. How come nobody is talking about the clean diesel technology the company is keeping in its back pocket?

Comcast (NASDAQ: CMCSA)
The naysayers seem to be quieter these days. The company is raking in phone subscribers after a slow start. The triple play of cable, broadband and phone are panning out. So now that the capital expenditures are over and done with, the cash is rolling in. The question is what are Comcast's plans when it comes to wireless. Will another round of mega dollar investments depress the shares? The shares have had a nice run and we may take some money off the table if the opportunity presents itself.

CBS (NYSE: CBS)
Divestments continue and dividends keep on rising. Music to our ears. And the supposedly stodgy CBS broadcast the NCAA tournament online. So there.

Heinz (NYSE: HNZ)
Mr. Peltz is now sitting on the board. Not all his nominees won a seat though. Still, Heinz management is implementing many of Peltz's recommendations without any admission.

Tyco (NYSE: TYC)
The plans to break up the company appear to be on track. The recent break out of the shares is also welcome. Stay tuned on this one.

Mittal (NYSE: MT)
Mr. Mittal and Arcelor have finally made friends. The merger is going through to create the world's largest steel maker. The industry remains fragmented and global demand should remain strong. The shares did dip below $30 after my March post and have since rebounded.

Electronic Arts (NASDAQ: ERTS)
Thank you Mr. Market for the the opportunity to snap up shares in the low $40s back in Q2. Lo and behold, analysts are coming out of the wood work after the recent run-up pointing out that the industry's fortune seem to be turning around sooner than anticipated. Date point: the company's Madden NFL 2007 generated $100 million in its first week after launch!

Home Depot (NYSE: HD)
Mr. Nardelli annoyed many people with his antics during the annual shareholder meeting. The housing market's roller coaster ride and high gasoline prices havent helped much either. Still, the stock price has languished even as Nardelli has significantly boosted Home Depot's financial since he took over. Meanwhile, the company continues to pursue its strategy of catering to professional contractors through Home Depot Supply.

Posko (NYSE: PKX)
See Mittal. The thesis hasn't changed here. The shares rallied nicely after I first mentioned the company in March but have since retreated some. Posco has forged closer ties with Japan's Nippon Steel to try and thwart any takeover attempts. Meanwhile, management is shedding non-core assets and is planning to expand globally through M&A. Did I mention the company has no debt?

Walter Industries (NYSE: WLT)
I first wrote about this company back in July. Since then the stock has been on a bit of a roller coaster ride. Coal and natural gas comprise one business segment for Walter. The entire energy sector has been under pressure. On top of that Walter's coal business has not performed as well as anticipated by some of the hedge funds that had loaded up on the stock. So some of the hot money has been heading for the exits. But the thesis remains intact. The Mueller spin-off is on track and on a sum of the parts basis, the shares seem significantly undervalued at these levels.

Budweiser (NYSE: BUD)
Things are looking up for the king of beer. Volume growth seems to be picking up, labeit modestly and prices are stabilizing. Meanwhile, August Busch IV has taken the helm putting the company under family control once more. Let's hope he is ready for the challenge.

Google (NASDAQ: GOOG)
Google has been busy taking market share and cranking out more products and alliances. The shares appear range-bound for now. We need a nice hiccup to add to our position.

Centex (NYSE: CTX) and Pulte (NYSE: PHM)
It's been a wild ride. The Fed is done. The Fed is not done. Inflation is under control. Inflation will force the Fed to raise rates again. Hard landing. Soft landing. Who knows. The shares were recently trading close to book value and have rebounded some as some data seems to be suggesting that the economy is cooling enough to entice the Fed to hold tight and maybe even cut rates. Not to mention the fact that oil prices have been falling easing inflationary pressures further. Meanwhile, homebuilder after homebuilder is ratcheting down earnings estimates and singing the blues. But nobody seems to be taking the CEOs seriously when they say they are being prudent with land purchases and new building projects. Nobody seems to believe that these companies are in better finacial shape than the last housing debacle and that the big boys could be in great position to consolidate and gobble up the smaller players. To be sure, risks remain. Adjustable-rate mortgages could come back to haunt those who didn't do their homework causing many to sell at any price, causing a housing inventory glut. And maybe the Fed will have to raise rates causing consumers to delay home purchases. None of these scenarios would be good for homebuilders. But no matter. If Mr. Market offers us the shares below book value, we will gladly take them off his hands.

Homes and Chips

2006-04-21T22:54:00.001-04:00

Hi everyone.

A few ideas for you to consider. There is more on these on my own blog so I won't duplicate all the content.

Intel (Nasdaq: INTC)
Price: $19.06

I know AMD is eating their breakfast and lunch and dinner. But Intel is getting cheap. On a forward P/E basis, it is trading at the same multiple as the S&P 500. The pain for the stock may not be over, but I think it is worth taking a position at these levels. Perhaps you will get a chance to add to your position at $17 or $18. I won't bore you with the details, but you can read more about my thoughts on this on my blog.

Pulte (NYSE: PHM) and Centex (NYSE: CTX)
Price: $40 and $62)

You probably think I am crazy. But that's OK. As a value investor, I will have to get used to that. What am I thinking? With a looming armageddon in the frothy housing market, why would I recommend shares of a couple of homebuilders? Well, the simple answer is that they are CHEAP, CHEAP, CHEAP. But, surely, there is a reason they are so cheap. After all, the housing bubble will soon burst. Right? Well, I am not so sure. These companies have been around for decades and have been through many ups and downs. They are solid businesses with solid balance sheets and sound management. And did I mention they are CHEAP? Mr. Sheasby may be thinking the markets are efficient and so the shares of these companies are deservedly beaten down. Maybe. But I will side with David Dreman on this one. You can read more about Dreman on my blog so I won't bore you with the contrarian blurb. In short, homebuilders are the cheapest, by P/E, of all the major industry sectors on the market. They deserve a serious look for the long-term investor.

Hotels, Theme Parks, Casinos and Telecom

2006-04-06T20:40:00.000-04:00

Ok Mr. Sparling, that is an excellent point. All those people still have to take a vacation. I presume tourism has declined due to weakness in the US dollar. Although ignoring the strength of our Canadian dollar, the USD actually held up quite well last year and appreciated against the yen and the euro.

In any case, I don't know much about casinos and the hospitality business. I do like your Disney (Nasdaq: DIS) pick though. I am not sure about their theme park business (although Disney has amazing brands - who doesn't recognize Mickey!), but Disney's recent acquisition of Pixar and the arrival of Mr. Jobs changes many things. Not to mention that gem of an asset, ESPN. I used to own Disney many years ago but let go of it because I got tired of Eisner. I don't think the shares are cheap but they are no too expensive either. There should be upside from these levels.

Incidentally, a company in the Entertainment business that I think you should consider taking a look at is CBS (NYSE: CBS). Viacom and CBS recently split up to try and unlock some value for shareholders. But the shares have declined since the IPO. CBS' businesses may be boring (radio?!), but this company is a cash machine. My brother and I have both taken a position at the mid $24 range recently.

Now to telecom. The Alcatel/Lucent "merger" makes a lot of sense for Alcatel and it gives the company access to the lucrative US market. The telecom landscape is changing at a maddening pace. Consolidation may continue. Juniper (Nasdaq: JNPR) for example may find itself in limbo unless it makes a move. Other shares have been on fire. Remember JDS Uniphase (Nasdaq: JDSU)? It has participated in the rally also. Who knows, perhaps my brother and I will finally break even after stubbornly averaging down on our position over the years. The company's management team has quietly transformed and repositioned this company.

How to play all this? I am not sure. But I can tell you what companies I like in this space. Cisco (Nasdaq: CSCO) was a screaming buy below $20 and if it goes there again, I would add to my position. I also really like Corning (NYSE: GLW). Yes the same company that got crushed because it over invested in fiber optics during the bubble. I bought Corning more than a year ago when it became apparent that the company will play a significant role in the growth of the LCD market. Corning is the largest producers of LCD glass. Its fiber optics business is still hurting, I believe, but the rest is firing on all cylinders. The management team has done a good job paying down debt and going back to its roots of innovation. For example, the compay's diesel emissions control technology is not something people think of when you mention Corning. But this technology should contribute to growth substantially in the medium term. The shares are not cheap any longer and trade at a premium to the S&P on a forward P/E basis, but you should watch for any corrections to take a position.

Finally, I like Comcast (Nasdaq: CMCSA). My brother and I have built a position in Comcast over the past year and continue to hold. Cable shares have been under pressure recently as competition from telecom and satellite heats up. The landscape is changing everyday and the companies are encroaching on each others' turfs. Telecom is providing TV while cable is providing telephone service and so on. They all have been investing billions to build up the infrastructure to be able to deliver the "quadruple play" to the cunsumer: TV, wireless, broadband and telephone. Comcast is the largest cable operator and owns my beloved Golf Channel as well as OLN. Not too long ago they made a failed bid for Disney. Clearly part of their strategy is to build the content side of the business so that they can better leverage the pipes they own into people's homes. Meanwhile, the company is generating gobs of cash and buyig back shares. And hopefully they will soon be able to reduce Capex so that Mr. Market will begin to recognize the value in this company. One more thing, at these levels, you are buying the shares at or below the levels Mr. Buffett took his position at in 2004.

So in summary, Disney looks OK to me. You should consider CBS and Comcast also, while keeping an eye on Cisco and Corning.

Ali.

An Update from AA

2006-03-07T01:33:00.000-05:00

Hope you are all well. I thought I would do a quick update on my picks. Since I am not a big trader, I won't in general post a lot of picks. But here is an update on the stocks I have recommended in the past plus a few you should put on the radar screen or even consider taking a position in.

1. SHLD ($120.88) and PIR ($10.12)

Sears hasn't done much since I receommended it last November. But Lampert has continued with his program and seems to be making progress. I continue to like the opportunity to invest alongside Lampert especially when he has a significant amount of his net worth tied up in the company through his hedge fund.

As for PIR, it has been a wild ride. It is down about 20% since I recommended it. The stock bottomed at $8.50 recently but has bounced back nicely. I continue to like this company as a deep value play.

2. TYC ($26)

Tyco took a bit of a beating after their earnings came in below estimates and costs of restructuring were estimated by management to be on the order of $1 billion. Oh yes, and it will take the management a year to complete the split of the company into three separately traded companies about a year. All this spooked the market. One year? $1 billion?

Well, this baffles me. What did people think? They can get this done with a $5 million budget and in 6 months?! Tyco's three businesses may not be exciting (Fire and Security, Healthcare products and Electronics components). But the sum of the parts is worth more than $30. And with all the action in private equity these days, the spin-offs will be prime targets for acquirers. I continue to like the stock and my brother and I have added to our position at these levels.

3. MORN ($41)

Up about 17% since I posted and hit a high of $43 recently. The earnings came in and they were good! This company is executing well and is still under the radar. I think they will continue to grow. If the shares drop below $37, they would be worth a look to add to your position.

4. CHAP ($47)

Up about 56% since I posted and hit a high of $49 very recently. I didn't expect to see these levels for another two years. But thanks to Mr. Mittal's bid for Arcelor, steel stocks have been on fire. I still like CHAP for the long haul especially since the non-residential construction boom is still getting going. But I might take some money off the table here.

5. CWB.TO and IIC-LV.TO

CWB is up about 7% since December's recommendation. They report earnings in a few days. I still like them as a potential take-over candidate and because of a conservative management team. My brother and I are contemplating switching our position into NA.TO which has underperformed peer banks recently.

The call on ING Canada turned out well. The stock is up about 20% and they reported strong results in Feb. I continue to hold. Lots of growth opportunity ahead.

6. Energy and Materials

I continue to like the oil sands story and so PCA.TO remains a holding. As for ECA.TO, the stock has come back down to earth as natural gas prices have declined substantially. But Encana remains the largest natural gas producer in North America with exposure to the Oils Sands. If there is a severe correction, I would look to add to add to this position. My brother and I also took a small position in Goldcorp during Q4 of last year. I never posted this so I won't dwell on it here. But Gold has done spectacularly and Goldcorp has done a nice job increasing reserves and remains a low cost producer. I like the macro fundamentals behind gold and I think it will continue to do well.

On The Radar/Consider Adding

Value - Wendy's (NYSE: WEN)
Price: $60

I am not going to get into a long expose on Wendy's here. So I refer you to my own blog at http://alagheband.blogspot.com/ . We have taken a position in WEN at around $57. I personally don't see much downside in owning the shares before Tim Horton's IPO. And if my assessment is correct, you will end up owning Wendy's shares at a bargain price with room for much more appreciation post spin-off of Tim Horton's (if you are patient). I would still take a position at these levels.

Value - Heinz (NYSE: HNZ)
Price: $38

The same billionaire investor (Mr. Peltz) who nudged Wendy's management into action, is now on Heinz's case. Yes we are talking Ketchup here. Peltz is planning to nomimate 5 to the board and the stock has moved from $34 to $38 recently. Still, it has not gone anywhere in two years. It is unclear what stake Peltz's group has taken in the company, but probably he is building a position. A Barron's article this weekend noted the company could be worth $49 on a sum of the part basis. Plus, the stock pays a nice 3% dividend and can be a nice hedge against USD since 50% of revenues come from overseas. The CEO has been divesting non-core assets and buying back shares. But there may be more to squeeze out of this one. Peltz has a solid track record. I would be willing to put my money on him and initiating a position at these levels.

Value - Electronic Arts (Nasdaq: ERTS)
Price: $51

EA is the gorilla of video games. With game machines getting ever more powerful and online gaming catching on, they are in a sweet spot. Kids spend more time playing games than watching TV these days. EA and other game companies are going through a rough patch right now. Basically what is happening is that people are postponing purchases until they can get their hands on new XBox 360 and Playstation 3 consoles. Microsoft is still trying to catch up with demand and Sony's machine has been delayed into early next year (rumors). EA stock has been holding steady through all this at these levels which should mean the bad news is priced in. They have already brought down expectations during their last earnings call. My brother and I plan to take an initial position at these levels.

Value - Mittal Steel (NYSE: MT)
Price: $34

I know, yet another steel play. And frankly, I feel like we may be a bit late to this one. MT has made a nice run since the company made a bid for Arcelor. The opportunity to get in was when the stock was trading below $30. Mittal and his son have been on a tear and have quickly but quietly built Mittal into a global powerhouse. Consolidation will further insulate the company from the boom and bust cycle of the steel industry. Plus, they have managed to build a vertically integrated company with its own iron ore and coal resources. All this gives the company a competitive advantage.

The Arcelor bid is turning out to be a major battle and it's unclear how it will all turn out. Also, the Mittal's own a majority of the company. That may make you nervous. But I personally like family owned businesses. I would have loved to have initiated a position in MT below $30.

Value - Home Depot (NYSE: HD)
Price: $41.5

Yes, another boring company that sells rakes and drills. And the first words out of people's mouths are, "but the housing bubble is going to burst!". That's all fine and well. But HD is becoming more than a retailer. The CEO is expanding the company's business into services and catering to professional contractors. There are also rumors the company is sniffing for opportunities in China.

The stock has been stuck in this range even as HD's competitor Lowe's has seen its stock soaring. The plan to add new businesses is risky but I think HD can pull it off. I think this stock is a nice long-term hold if you can get your hands on it below $40.

Value - Posco (NYSE: PKX)
Price: $60

Goodness, another steel play. Seriously, this is just coincidence. My brother had come up with the idea of buying a Korean index fund. After a bit of research we determined that we owned some Korean shares through a emerging markets index fund we already owned. So we did some digging and came up with Posco. They are THE steel company in Korea and have a monopoly on the market. As may be expected, the shares are cheap relative to other global steel players. This is the "Korea Discount". Moreover, PKX has underperformed the Korean stock market by a wide margin over the past year.

As you may have noticed Carl Icahn has recently forayed into Korea and trying to buy out the country's largest tobacco company because he thinks the stock is undervalued. Other 'experts' have also noted that the Korean market is undervalued relative to Japan and Hong Kong. Just today, the Wall Street Journal Asia had an article saying Posco could become the target of the next activist looking to prop up the shares. The company owns many ancillary businesses which can be divested. It has no debt and a nice pile of cash also. And its dividend could be increased significantly.

This would have been a nice pick up in the mid $50 range before they started moving amidst word of Mittal's bid for Arcelor. But my brother and I might take an initial position at these levels.

That's all for now.
Ali.

Starting 2006 With Some (Hopefully) Interesting Ideas

2005-12-30T20:42:00.000-05:00

It was interesting few months for the picks in our fledging blog. Not much activity since SAL's post in mid-November. There have been some great calls. Tony was right on (almost scary how good his call was) with PCA and ECA trading down before he would consider getting in. They hit his entry targets almost bang on! I continue to hold both. SAL's Newmont has made a nice move. And TX, how about VIA.TO! Nice call chief! As for me, maybe I should have stayed away from retail. But I still like SHLD. PIR on the other hand got clobbered. They are still struggling and things don't look so great. But I still think they will turn it around. It will be interesting to see if Buffett held on to the remainder of his shares after he dumped a bunch last quarter.

I thought I would get '06 started with a few picks that may be of interest.

Value - Tyco (NYSE: TYC)
Price: &28.86

This stock has been battered and still remains a turnaround story after the scandal. But the new CEO has had some success and has shed some non-core businesses. The sum of the parts seems worth more than what the stock is trading at. Buffett has taken a large position. TYC is also Legg Mason's Bill Miller's largest holding in his Value Trust fund.

GARP (Growth at a Reasonable Price) - Morningstar (Nasdaq: MORN)
Price: $34.64

You may have heard of MORN. They are the company that gives mutual funds their star ratings. They are well-respected and have a good brand. With calls for more independent research, they are well positioned to leverage their expertise to serve investors. What you may not know is that MORN also has some assets under management through Morningstar Retirement Manager as well as Morningstar Managed Portfolios. These assets are growing quickly and may be the hidden gem here. I also like the fact that the founder owns a huge chunk of shares and their customer service is top notch. Plus, nobody on Wall Street follows the stock yet.

Spin-off - Chaparral Steel (Nasdaq: CHAP)
Price: $30.25

Sound familiar? Yes, we did a case on these guys. I suppose at some point they must have been acquired by Texas Industries. But earlier this year, TXI decided to spin CHAP off and distributed shares to existing TXI shareholders. Unfortunately I missed this news. Since then, the stock is up 50%. But I think there is more upside. First, we know how this company is run. They have an awesome culture and all employees are shareholders. Second, the fact that they have remained solidly profitable through a downturn in non-residential construction shows how resilient this company is. Management is pretty much signaling that they see a turnaround coming. Hey, there is even talk of a few new office towers here in Toronto! By the way, in general, let's keep our eyes open for spin-offs. These can be quite lucrative if we cherry pick. Examples include GNW, HSP, AMP and FTI.

Financials/Insurance - Canadian Western Bank (CWB.TO) and ING Canada (IIC.LV.TO)
Price: $35.81 and ~ $51

You will see CWB branches if you travel to Western Canada. They are thriving. The bank doesn't pay much of a dividend. But they are extremely conservative when setting aside reserves for bad loans. Maybe too conservative. So you could say this is a value play. They continue to execute well and I think there is more growth to come. I don't think there is much downside at these levels. As for ING Canada, I missed this one too. Maybe you guys had noticed their IPO last year? Anyway, the stock has doubled in that time. My brother noticed Fidelity Canada has added significant position of ING Canada to its top 10 holdings in various funds. I am looking to accumulate positions in both these companies.

Hope to see you guys in the New Year.

Ali.

Sears Holdings and Pier 1

2005-11-17T22:18:00.000-05:00

Ok, so I am talking about the un-sexy world of retail. I am not sure if you guys know much about the Sears story. To make a long story short, Eddie Lampert, a well known hedge fund manager ended up as the largest Kmart shareholder when that company emerged from bankruptcy. Soon after he engineered a merger with Sears to create Sears Holdings (Nasdaq: SHLD). The stock has come off its highs as people are starting to get nervous that Lampert may be a good investor, but he does not have the operational expertise to turn Sears around. A recent New York times article tried to argue that even as a real estate play the stock is overvalued. However, the article's reasoning was quite flawed. Plus, insiders, including a director, have recently been buyers of the stock. Meanwhile, Lampert has been plouhing through the share buyback program and retiring stock to the tune of $500 million. Sears has a good, albeit, tired brand. It has a vast underlying real estate empire, a Canadian operation, as well as well-known brands such as Kenmore and Craftsman. As for the operational side of things, Lampert has been emphasizing margins as opposed to top line growth. This is an unusual approach for a retailer, but it's all about cash flow for Lampert. On top of all this, Sears' cash pile is growing by the day and stands at around $3 billion. Lampert has been given free reign to use this cash as he sees fit by the board of directors. There has been talk that Lampert will eventually turn Sears Holding into an investment vehicle a la Warren Buffett's Berkshire Hathaway. If anything, buying Sears is giving you a rare opportunity to invest alongside one the most successful investors of our time. His ESL Investments hedge fund has had annual returns in excess of 25% since the late 80's! He has many billions under managment and has been entrusted with capital from the rich and famous including Michael Dell. I would say the downside is somewhat limited, but the upside could be huge. You can nibble at these prices (around $119 today) and load the truck below $110. This is a long-term play and a bet on Lampert.

Now onto Pier 1 (NYSE: PIR). This stock has been hammered. The company is getting its ass handed to it by the likes of Wal-Mart and Target. I was excited that Warren Buffett had added 8 million shares to his portfolio in Q2 at around $18. However, during Q3 he unloaded 5 million of those shares. The stock is now trading at $12 and a price to sales ratio of 0.6. It has a 3.5% yield. They have recently mailed their first national catalog in the US. They are also trying new ads on TV. Their balance sheet looks clean, although continued struggle could put the dividend at risk. Meanwhile, management has been buying back shares. The CEO has been at the helm for 30 years. So he has been through these cycles before. He may have his hands full this time though. A few more quarters of this and he may be sacked. As with Sears, I think the downside is somewhat mitigated here. It has bounced off of $10 twice in recent months and might be stuck at these levels for a while. But if there is a whiff of a turnaround, this stock has lots of room to the upside. I believe the stock is undervalued.

Ali.