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SockMarket (34.31)

April 2010



Zerohedge: Somali Pirates Disclose They Are A Subsidiary Of Goldman Sachs

April 26, 2010 – Comments (1)

We will get to the article in a sec, but first two interesting pictures:  [more]



One Excellent Reason Not to Invest in Brazil

April 23, 2010 – Comments (29)

Well, every so often you come across an absolutely disgusting situation. One in which you want to have no part and something you would clearly stop if you could. Well, I found one. It’s a few thousand miles south of me down in the Amazon. When you start reading exactly what it is you might be tempted to dismiss me as someone who cares for only the environment, hear me out. I think you will find that this is quite a bit more serious than simply an environmental issue.

In case you have been living under a rock for the past couple days the indigenous people living as hunter-gatherers in the Amazon rainforest lost an appeal to stop construction of a dam on their land. So, other than the environmental damage to the Xingu river, which is no small issue in and of itself, what is the issue here?

Well, 40,000 people live in the area that is to be flooded, and the livelihoods of those living there would be “devastated” (MSNBC). Brazil doesn’t see a problem with the dam, they claim it is the most studied site in the world and so there couldn’t possibly be an issue; essentially what Brazil is telling the indigenous tribes who live there is:

“Hey we’re going to flood your homeland and destroy your life but its your fault because your ancestors chose to live where we want to build a dam!”

Does this strike anyone as a violation of human rights, of property rights, of basic human decency? If it doesn’t you have probably been dead for a while!

Heck if this was proposed in America, or any developed nation with some sense of humanity, it would be shot down in an instant. Imagine we told citizens in Salem, OR:

“Gee, I hate to break it to ya, but were going to dam a river and flood your city. We know it will destroy your jobs, and we know it will wipe out your homes, in which most of your value is stored [or in the case of the hunter-gatherer all of your value] and force you to, well you know, just go somewhere else to live. Good luck finding a good new home and starting your life over!”

Do you think this would have a chance to pass in the USA? As corrupt as we are, we stop the blatant stuff, like this. Unfortunately, Brazil doesn’t seem to have our level of decency and integrity (not that we have very much!).

Unless you, somehow, aren’t absolutely disgusted by this I think you would agree that this should be stopped, and at the very least, you want nothing to do with those who perpetrate such injustices.

The first thing is not letting the same bastards who do this manage my money. That means I won’t touch anything that has anything to do with the Brazilian government. I also don’t want to have my dough in something that helps the nation. Although that obviously won’t have huge negative impact on the company but I don’t want to make money when those in Brazil do. As a result I no longer have any positions in that BRIC country, I am, as of today, out of Petrobras and I suggest that if you have any guts, and you don’t agree with the destruction of the lives of 40,000 people, you do the same.  



A Due Diligence Worksheet for the Lazy (Value Analysis)

April 14, 2010 – Comments (6)

Well, we always hear "It's important to do your due diligence". Sure it is, but that is easier said than done. Why, well 2 reasons:  [more]



Excellent Piece: "US Faces the End of Cheap Credit"

April 12, 2010 – Comments (2)

Occasionally Yahoo has some good stuff. This is one of those cases.   [more]



My Blogs Seem to Have a Disease, Do Yours?

April 09, 2010 – Comments (29)

I, and from my observations the whole board, seem to have an acute case of no-rec-itis. For those unfamiliar with the disease some symptoms include:  [more]



What I Want to See When I Buy A Stock

April 08, 2010 – Comments (3)

I am not a great stock evaluator. Honestly, if you gave 10 annual reports and asked me to put a price tag on a company I would get it horribly wrong 9 of those times. That isn't a good record for an investor, if that is what you rely upon. Well, if your head is made of wax, don't walk in the sun (as Ben Franklin famously wrote). So, I get around it and manage to do pretty well. How? Simple: I don't try and blow the market away, I just try to earn what I figure I need to.

This isn't some brilliant formula that will give you 20% returns a year but I use it pretty effectively and I expect that just about anyone with an IQ north of 90 can do the same. So, what do I want in a stock that I buy?


Good Management

Unless you can go interview the management, you really have no definite idea of who has good management and who doesn't. However I think there are certain ways to get a reasonable idea of a management's quality:

1) analyze deals they make, as I did in my analysis of First Energy (FE) yesterday. If you can understand the rationale for the deal easily and you can see a good margin of safety priced in it is probably a good deal. (Remember the base for a good investment is an earn yield of 10%+)

2) look at old annual reports. See if the management has met the promises they set forth in both the letter to investors (aka the BS section) and the management’s discussion & analysis

3) have they consistently met, or positively surprised, the earnings targets they set for themselves?

4) have they preformed well vs. the rest of the industry?


A Profitable Company

Sure, I can take a quarter or two of poor, even negative, earnings, but I would never put my dough in a company that hasn’t yet proved that they can turn a profit. Simply put, its too risky for me: if I am not good enough to understand whether the company has a good chance start turning a profit in a couple years there is no way I will rest my dough on those chances.


A Good P/E

This, of course, changes industry to industry and company to company. However, as a general rule, I want a stock with a P/E under 30. It should also be less than the industry average (or under the historical average for the company).


Growing, Stable Earnings

This is over a 10 year period. Any company should be able to substantially grow earnings over that time period. I don't care what industry you are in, or what your conditions were, earnings should be up at least 31% in that time period (historical inflation rate is 3.1% per annum). If earnings are up, say 25%, I don't grouse but if they are flat, or peaked in a year long before the present I will not put my money there.

I want to see earnings growing, and a reason to believe that it will continue for quite a while in the future. I want to know that even if I pay a bad price for a stock it will "grow into" the price I paid for it.


A Good Price

I want to watch the stock for a while before I buy it so I have some idea as to how it moves. If I do this I can generally get an idea of when it will bounce and pick some up then. Further, when I see a stock I want to buy, if it falling I wait for it to go up for a day before I buy. This isn't an exact science, far from it, but it seems to work. At least for me, I have consistently gotten better purchase prices since I started this practice.




An Update from a Utlitarian Investor: One Utility Buy, One Sell, and One Hedge

April 06, 2010 – Comments (9)

Well its about time to add some new opportunities, and developments that have come up for me recently. We have a buy, a great growth stock for the past two decades selling near its 52 week low (note: this is not my usual dividend play). We have one, formerly decent stock that just put itself in the must sell bin with a stupid aquisition, and one hedge, based on some macro economic analysis. So, without further ado, I bring you, the companies in question:


Exelon (EXC)

Well I broke my 5% dividend rule. Barely. A couple days back I picked up a little Exelon (EXC) around $44, and wouldn't mind owning more at $45. Here's why I like them:

1) Nuclear power, 92% of their electricity production, will likely see costs stay relativly flat, compared to coal fired power plants, which should see an increase in costs due to an increase in coal price.

2) Natural gas, their other major raw material cost, is hedged.

3) They have over $5B in cash and cash eq.

4) They are reducing debt, to the tune of about $500M a year.

5) EPS, as always is quite strong, and has been grown well over the last decade

6) even based on last quarter's unusually low earnings figure P/E is still under 13

7) The yield, which is usually my biggest factor in making a decision, is 4.7%, with a payout ratio of about 50%.

8) ROE is 22%

9) Op. margin is almost 30% and profit margin is nearly 16%. Those are exceptional figures for the industry.

10) ROI is pretty good, I don't have any numbers but looking at a 20 year chart should tell you all you need to know about this.


About the only worry here is the book value, which is $19 a share, and creates a nasty little p/b of 2.4. Normally this would upset me and drive me off but when a company can get as good returns on book as EXC can I really don't care. I personally am not taking a large position, I would rather have high yielders, but this is just fine as a growth stock that gives you a decent yield while you wait. This is not a bargin basement price, there is still downside risk here so don't put your life savings in this just yet.  [more]

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