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April 2007



Barclays vs ABN

April 25, 2007 – Comments (0)

Barclays bid US$80bn for ABN, which was on the high side of what analysts were expecting. As I stated, I think Barclays is making a stretch. I said goodbye to my shares, sadly. It is good that ABN is divesting LaSalle bank, in the Chicago area, to Bank of America, but that doesn't sweeten the deal enough for Barclays.

Now, Royal Bank of Scotland plus some private equity people have made a bid of $100 billion, 70 cash and 30 stock. The LaSalle deal acts a little like a poison pill. I do not know if BCS will have to sweeten the pot any further. For their sake, I would rather they walk away than pay any more, because the price will be a huge drag as it is - remember Guidant and the still-struggling Boston Scientific. If they get outbid, and their stock price gets dragged down enough, I may very well jump back in!  [more]



International Game Technology...

April 24, 2007 – Comments (0)

IGT is a growthy stock with a wide moat. Last year, and the first month of this year, was a very good time for IGT's stock price. Since then, it has lost quite a bit of value, I think over concerns about slowing sales.

However, the firm's product sales pretty often come in lumps. Half of their revenues come from machines leased to casinos, which generate a pretty stable revenue stream. Additionally, IGT's server-based slot machines, which will hit the market between '08 and '09, have very good prospects. And IGT makes significant investments in research, more than its competitors, to come up with new game themes.

I bought a few IGT shares when I was just getting started in picking stocks. When the stock hit a high in January, I wished I'd bought more. However, if the stock falls any further, I will indeed buy more, assuming I have cash to spare. Right now, the only stock I have that I think at or over fair value is Mastercard, and I have no intentions of selling that one. Regardless, IGT could soon be at a point where I would pick it in CAPS. The short-term weakness is nothing to be concerned about.  [more]



Good old Novartis (NVS)

April 23, 2007 – Comments (2)

Novartis' share price is essentially the same since I picked it in August-ish last year. It's recently been punished by some pipeline-related worries. However, I'm not worried. It's a very high-quality big-pharma firm, with a deep pipeline, and an excellent generics franchise attached. I think the business risk is low, and that NVS should continue to grow faster than average for its industry. NVS is one of my larger real holdings, as is JNJ, a competitor and peer that also has been unfairly punished by the market. The thing about the market, though, is that it will eventually act to undo any punishment it has inflicted unfairly, so now's a good time to buy.  [more]



Banco Popular and value investing

April 20, 2007 – Comments (0)

Value investors can aim to buy great companies at good prices, or good companies at great prices. You rarely get great companies at great prices, although we came pretty close late last year when a lot of great companies like JNJ and JPM were on sale. Well, BPOP is a good company selling at a great price. At today's price, I'd buy more. 

They ceased their subprime loan ops quite some time before the market crashed, which was fortunate. They've also had to increase their loss reserves as charge-off rates have increased. 2007 will not be great, especially with the inverted yield curve. But Moody's did upgrade their senior debt rating to A2 from A3 in March.

BPOP is still being guilted by association with Puerto Rican banks like Doral that have had accounting scandals. It's not JP Morgan, but it is a good regional bank, and it is selling at a steep discount. And it has a lot of good community initiatives, especially those that target the Hispanic community in the US. The goodwill generated cannot be priced, but I think it will convince more Hispanics, who are underbanked in general, to open accounts with them.  [more]



Oh, by the way... reflections on Compton Petroleum and Sallie Mae

April 13, 2007 – Comments (0)

I'd like to add comments on Compton Petroleum, a current pick and real portfolio holding, and Sallie Mae, an ex pick and real holding.
First, Compton. When Morningstar assess an economic moat, they look for consistent returns on invested capital above the cost of that capital. The Motley Fool describes some (smaller) stocks as having a moat while M* rates them as no-moat; simply having a niche of the market isn't enough. CMZ actually hasn't produced returns above cost of capital in the past. However, it can in the future. Now, I am taking a bit of a gamble that they're right on Compton. Basically, although the stock had been punished because of a reduced drilling outlook, CMZ has future potential because its reserves are typically well-defined geographically, which reduces exploration risk, and CMZ got permission from regulators to commingle wells. I think there are potential environmental concerns with commingling (someone correct me if I'm wrong), but this basically allows them to use the same well to extract oil or gas from two different strata, instead of drilling one well per strata. This would allow them to decrease costs. Also, their drilling program should pick up, and energy prices should remain high.
Sallie Mae is up 11% on private equity rumors. I picked it before Congress started talking about student loan rate cuts. I sold, and I ended my pick. If I'd held on, I would still be underwater. SLM is still a strong company, but industry conditions are bad with the new Congress, and now's as good a time as any to launch a takoever bid.
Higher ed expenses are spiralling out of control. I have to agree that loan rates should be trimmed. However, I also don't think that's the main problem. We've tried to contain Medicare and Medicaid reimbursements, but medical costs are still going out of control. Universities are going to have to find a way to do more with less, and students are going to have to make do without shiny new facilities for each batch.  [more]



April reflections

April 13, 2007 – Comments (0)

Fastenal (FAST) took a big jump yesterday on a positive earnings surprise. I invested a fair chunk of my real portfolio in FAST, and it's stagnated in the last few months. However, I'm confident in management, and the company's performance and growth prospects. I believe FAST will continue to grow up. And it will continue to raise its still-small dividend faster than the S&P.

I just discovered that I entered my initial investment amounts for Expedia (EXPE) wrongly in Morningstar's stock tracker. It turns out I'm up about 50% since I bought the stock (in real life), and I wish I'd bought more. Oh well. I think EXPE is still undervalued, but I wouldn't buy today. Bill Miller has a fair-sized chunk of Legg Mason Value in EXPE. I don't think the stock's growth prospects are so hot, but I won't be selling yet. 

Getty Images (GYI) is another stock I bought when it was severely undervalued. I'm up about 15%. I think Getty Images is a good buy at today's price, and that its growth prospects are good. I would consider buying more. It was up quite a bit more than 15% earlier in the year, but the market in general took a correction, as I'm sure people noticed.

Mastercard has more than doubled since I bought it in real life, and it's contributed 60+ points to my CAPS score. I really wish I had bought a big chunk right at its IPO, which was way undervalued. Oh well.

Two strong companies I recently bought in real life are Marsh and McLennan, and Carmax. MMC has gone sideways for years, but now that its sold Putnam, I think it will be able to focus on its core business, and that the stock will rebound. I think it has a wide economic moat because of scale and other factors, and that it's very cheap at today's price. Carmax took a bit of a dive on a negative earnings surprise, but this is a strong company with great growth prospects and little real competition. I think the shares will continue their strong upward climb after not too long. Kind of like Chicos, which took a dive earlier in the year, and is now up 20-ish% from when I picked it in CAPS. I didn't buy CHS in real life, but I wish I had.

There are a few companies I hold in real life and on CAPS whose stock hasn't done well, but whose performance I'm confident in. Whole Foods is one, and it's down about 5% YTD. WFMI has a lot of room to grow and an excellent management team. They are the biggest player by far in the growing organic grocery market. I wish I bought the stock today rather than in Q3 last year, but that's life.

Amgen and Novartis have both had adverse clinical results, but they are very strong, innovative companies with strong pipelines. Their stocks are sure to rebound. NVS is also a very diversified business, with a generic drugs franchise (Sandoz) attached. I think NVS will weather whatever political risks occur in the US. I would consider buying more of both companies today.

International Game Tech is a stock I hold in real life, but haven't picked in CAPS. It's down about 15% for the year, and I'm not really sure why. This is a really strong company with good growth, and I wish I'd bought a lot more early last year, when it was very undervalued. I think this will be a good year for IGT. I don't think the stock is cheap enough today that I'd buy another big chunk of it. When I started off in CAPS, I thought IGT was around fair value, so I didn't pick it. I'm definitely not selling at today's price, though.

I'm disappointed in Barclay's, and I sold the stock from my real portfolio, and ended my CAPS pick. I was up about 15%, the stock having been driven mainly by merger expectations with ABN AMRO. However, I think that ABN's assets are generally mediocre. I know that John Varley said he would back BCS out of a merger if the price was wrong. However, if BCS is to acquire ABN at all, I think it will have to pay quite a high price, and that they will have to sell many of ABN's assets. I wouldn't mind being proven wrong, but my money is off the table.  [more]

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