During the year Michael and I issue various opinions about stocks that we feel strongly about. We do this whether we have purchased/sold them in our personal accounts, or just because we feel strongly about the direction a stock will take but aren’t in a position to capitalize. We have been writing this blog for a several months now and feel it would be instructive to analyze our picks and determine what worked and what didn’t, and provide our current insight on those stocks. Current market prices will be taken from the close of market today, January 7th, 2010.
Some That Went Well:
B SHAW @ 28.20: I bought the Shaw Group (SHAW) on October 16, a day where they got hit hard by a number of events. Shaw just announced earnings which beat expectations, taking their stock to $32.36, for a return of about 16% in 3 months. I saw them then, just as I do now, as an undervalued and under-appreciated infrastructure play with a nuclear energy kicker.
B BNI @ 79.20: I bought Burlington Northern Santa Fe (BNI) on October 1. I was looking at a cyclical play as the economy recovered, I figured that rail was going to see a huge rebound as the economy recovered. What would be the chief driver of this? The efficiency of rail, as energy prices rise (another bet I am taking), rail will become more and more attractive relative to other methods of over-land material shipping. Towards the end of last year, Warren Buffet announced that he was buying the rest of the BNI shares he didn’t already own for $100/share, and the stock rose to that level generating a return of 26% in 2 months. I eventually sold that position instead of receiving the equivalent in BRK.B shares.
S PALM @ 17.40: I nailed this one. I didn’t own the stock, so I couldn’t sell it, but had investors heeded my warning they would have saved themselves from 34% of downside given the current price of $11.45. I wrote this as PALM was riding high on the prospects for the Pre smartphone, but I saw the dark clouds on the horizons. With Google releasing their Nexis One yesterday, if puts another nail in the coffin of Palm’s WebOS, as the ability for manufacturers to customize Android, and the immense Apple App store, give massive advantages over Palm’s new system.
S GRMN @ 37.63: This is another one that I didn’t own and so couldn’t sell, but the stock is now 17% below the price at which I recommended selling. Again, this is smartphone related as GRMN released their Nuvi to much hype, but little substance. GRMN is losing marketshare to smartphone applications like on the iPhone, Motorola Droid and Google Nexis One, and this is a trend that will continue. The Nuvi was supposed to help, but it was a confused hybrid between stand-alone GPS and a smartphone that made a mess of both functions. Investors will do well to continue to stay clear.
B RIMM @ 56.60: Mike nailed this price for RIMM. He used discounted cash flows analysis to determine that it was severely undervalued, and that turned out to be the case. RIMM is currently trading at approximately $65, for an upside of about 16% in the 2 months since his article was published. RIMM is the biggest player in the smartphone market, and their strength will likely continue as they release new products that are competitive with the other market leaders.
S RIMM @ 83.60: Again, Mike nailed this one. With a current price of $65, Mike saved himself and any readers who heeded his warning from 28% of downside over the course of 3 months. His hypothesis was that expectations for performance had outstripped actual results, and that was the case as RIMM reported earnings that disappointed.
There was also Mike’s December 17th post, on Meredith Whitney’s calls on Goldman Sachs & Co. (GS), Morgan Stanley (MS), and JP Morgan Chase & Co. (JPM) where he proposed that it would likely be profitable to ignore her calling considering that the stocks had already fallen quite a bit and that even with her lower earnings estimates, they still represented great values at their prices at the time. Mike has so far been proved correct, and all three are up by 10%, 13% and 11% respectively in the two weeks since his post. All returns are more than doubling the 4% gain of the S&P 500.
And Some That Did Not Go So Well:
B VXX @ 48.30: The problem was not the argument, but the vehicle chosen to execute that argument. VXX is an ETF that is designed to follow the short-term VIX futures contract price. The problem is, it doesn’t. Since my article was posted, this ETF is down 37%. Luckily I got out pretty quickly (at $45.96), but in retrospect this was a horrible idea.
S AAPL @ 189.59-190.00: Our hypothesis on this article (which incidentally got us a note from Apple’s lawyers…check out the original post) was that AAPL had fully priced in any future good news, and was excluding the possibility of poor performance. A week after our original article, Apple released record earnings, and the stock shot up to above $200. It has shown volatility since then, but now stands at $210 for a missed upside of about 10%. We stand by our convictions, but with the utmost respect for AAPL’s continued performance.
B RIMM @ 70.07 and 67.20: After RIMM missed earnings on September 25, the stock dropped by 15% in a day. I bought that dip, and Mike bought a few days later. I underestimated the investor disappointment concerning earnings, and bought way too early. The fallout from earnings hadn’t happened yet, and the stock would eventually settle in the mid $50s before recovering. At its current price of $65, the decline isn’t so painful but it definitely hurt for a while.
B BAGL @ 10.12: Mike found this one while searching through relatively unwatched industries for low-beta stocks that were severely undervalued on a cash flow basis to their peers. It is currently down only 4% but this is following a more than 11% gain off of where it fell in the mid-8’s. Einstein Noah Restaurant Group continues to trade at less than half a years revenue even though the company is still growing. Mike still feels it offers a very compelling value especially compared to it’s peers, however, he recognizes that it was probably a mistake to dive in until there was a potential catalyst to drive the stock higher considering that they don’t even pay a dividend.
I hope readers find this constructive. I find it is helpful to go back and learn from both your mistakes and successes. In general, I feel that we have done quite well in picking stocks on both sides of the trade.
Disclosure: Andrew is long RIMM and SHAW. Michael is long BAGL, BAC and net long the market although currently building a position in SH.
Warren Buffett has picked up one of the stocks I have championed before on this blog, railroad stock Burlington Northern Santa Fe (BNI). Berkshire Hathaway (BRK.A, BRK.B) had previously acquired a sizable minority position in BNI, and Mr. Buffett must have liked it a lot because he decided to buy the rest of the company at a price of $100 per share (about a 30% premium from the previous days close).
In addition to the announcement of his largest acquisition ever, Buffet announced a 50-to-1 split of the Baby Berkshire shares, his class B tranche (BRK.B). This announcement, he said, was so that he could offer the small investors some BRK shares, whereas before they couldn’t afford the high prices (somewhat of a contradiction to what he said a few years ago about how a stock split was stupid and would allow inferior investors to own its’ stock…).
This puts BRKB on the radar of both Mike and myself. Previously, we both had looked at BRK as a favorable investment, especially during March when it had reached such a low level, however, the price was cos prohibitive. Now, Warren has offered me the chance to either accept $100 in cash for my shares of BNI, or some of his new, cut price, BRK.B shares. And I am unsure how to act.
On the one hand, BRK is a one stop diversification stop. It has exposure to banks, insurers, manufacturing, transportation, and a host of others. It has a proven track record of providing its investors with outsized gains, and excellent capital preservation. And it is the best way to ride the coattails of the one who is considered the world’s greatest investor.
On the other hand, Mr. Buffett is not a young man anymore. I am aware that there are several remarkably smart people waiting in the wings at Berkshire, but it is a huge risk to assume that the company can continue its remarkable run without its point man at the helm. His deal with Goldman Sachs (GS) during the height of the financial crisis was inspired and hugely profitable, but his similar timing with a similar deal with General Electric (GE) was less so, with the warrants he acquired remaining worthless. Finally, BRK is highly leveraged to the US economy. With this deal, Warren openly admits that he is taking a huge risk on the future of America, which he is undyingly positive about. Add to this his other positions and you have a company which is leveraged to a country with anemic growth, a declining currency, and a government with a huge debt load.
During the course of writing that last paragraph, I have convinced myself that I will take Warren’s offer of cash to the bank. There are too many variables involved in Berkshire, especially as Mr. Buffett gets older. I respect him hugely as an investor, I just think I can achieve a superior Sharpe ratio investing elsewhere.
Disclosure: Long GE, GS and BNI (pending the buyout)
The Business Insider has posted an article here that reflects what I think is the first signs of the positive effect the weakening dollar is having on the economy.
Dollar Futures (/DX) have fallen by over 20% since it reached a local maximum at the end of last year, and a lot has been said about the negative ripple effects that that is having. Certainly, import prices are increasing, countries that have their currency pegged to the dollar are having to weaken their monetary policy to follow the fed, and the Republicans in Washington are harping on the White House for failing to live up to its strong dollar policy.
However, behind closed doors, these same politicians are actually supportive of a weak dollar, at least in the short term. One reason for this, as shown by this report, is that it will increase exports since America’s products become favorably priced on the open market as the dollar declines. Certainly coal (ETF: KOL) is a beneficiary of this, but other American exports such as steel, chemicals, and medical supplies will be helped. There isn’t much good to be said about domestic demand, and the hope is that foreign consumers will step up first and because of the weak dollar, American products will look relatively cheap.
To be specific, this development should benefit coal miners such as Peabody Energy Corporation (BTU), Arch Coat (ACI) and Massey Energy Company (MEE), but will hurt coal-centric utilities such as American Electric Power (AEP) as they compete for supplies with hungry overseas users such as China.
Shipping companies should also benefit, as water remains the only way to ship bulk goods between the US and other continents. Additionally, domestic transporters like Norfolk Southern (NSC) and Burlington Northern Santa Fe (BNI) will benefit as coal is transported from the mines in the Mid West to the ports at the coast.
Disclosure: Long BNI
Just bought BNI, for a number of reasons. At a PE of 16, they are undervalued relative to the industry which has an average PE of 20. Their loads are diverse, without too much exposure to energy, unlike some of the canadian railroads. Geographically, they are in a strong position with an extensive network in the Mid-West, a location which has been hurt less in this downturn than either of the coasts, but also to the West with it’s valuable ports servicing Asia. They pay a dividend of $0.40 per quarter, which equates to a 2% yield that is well covered by earnings.
On the negative side, they are leveraged to macro-economic performance, and the GDP numbers that came out today do not instill confidence that the country is performing that well. They are also tied to consumers, and consumer spending, which did increase during the previous month, but is expected to decline again as the savings rate recovers after the government spending incentives expire. And while they may be cheap relative to their peers, the whole industry may be overvalued, as 20 sounds pretty lofty.
Technically, their stock is developing some strong signals that say buy. If you draw a regression channel from the bottom of the market in March to today (10/1/09), it is currently approaching the bottom of that channel, which coincides with a previous high, creating some good resistance. The Relative Strength index has taken a tick higher after being at the lowest level in months, and while volume has been declining steadily for months, as is has for all stocks, volume actually has started increasing and September volume was higher than August.
Disclosure: Long BNI, no positions in any other railroad stocks.