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Some investment ideas for 2010

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December 27, 2009 – Comments (27)

I thought that as the new year approaches, I would offer some ideas and thoughts for 2010. 

First on the market(s) in general.   I shouldn't even pretend to know where the markets will head, but I will offer that in general I do not think they are overvalued, nor do I think they are cheap, they hover around something like what I estimate fair value to be.  

However, inside the markets it is still possible to find stocks that are cheap, especially when compared to historic valuations for their sectors or to normalized earnings.  I think we are very far from bubble territory, something that perma-bears love to state.  That said, I think the easy money has been mostly made in the markets.

Obviously alot of where the markets go will depend on whether we experience a "double dip" recession, something that could have a distinct negative impact on the markets, of course.  I think a fair bit of good news is priced in right now, basically the markets price in a sustained recovery (although not a glorious or V-shaped one).  

Looking at what has happened in the past, history suggests that we are in for a bit of a sideways slog.  After the vicious dip in the mid-70s, the S&P recovered violently, rallying nearly 70% over the next year.  From there, however, it slogged sideways for several years.  In 2003-2005 the market had lnearly doubled in a few months, but then slogged sideways for a couple of years before taking off again in 1935.  A similar sideways slog was seen after the rally in the Dow from the WW2 low to the just-after WW2 high.  Each enormous ramp out of a bottom seems to be followed by a period of consolidation.  

I consider that the most probable outcome for the markets over the next year:  a generally sideways slog with a fair bit of sector rotation.  

 

For specific sectors...  right now big-cap "quality" stocks are in favor.  Since September financials have stalled, small caps have underperformed, and big-caps have done well.  This flood to "quality" is touted by myriad professionals in their writings.  Its definitely, today, the "in" thing.  Generally when something is the "in" thing, while it may outperform for a while, and maybe a good long while, it will eventually underperform as the trend changes.  So I am going to go out on a limb and say that over the next 1-3 years financials will be at or close to the top performing sectors.  Even after how far they have come (they are still, generally, far from where they were).  My reason for this thought is that A)  they are the stocks that remain farthest from their historical prices.  Many big cap "quality" names are at or around their historical highs.   B) they are the stocks that continue to have the lowest valuations and lowest valuations relative to historical valuations.  and C) nobody seems to like them very much still, skepticism abounds and all of that.  

 

And for some specific stock picks...

MCGC.  MCGC is in by far the best shape of any of the deep-value BDCs.  BDCs, like REITs, have to pay out 90% of taxable income to shareholders as dividends.  Right now MCGC is not paying a dividend, but I suspect that it will be restored in 2010, which should have a positive effect on share price.  MCGC is trading at roughly 1/2 of book value.  I think that the dividend potential based on current operations is around 10-12%, and that they have a fairly well thought out plan to increase income and, hence, the dividend.  I think a share price of 8-10 dollars and an annual dividend of 60-90 cents are feasible here.

FSC.  FSC is another BDC (business development company) that, like all BDCs, is in the business of loaning money to private companies.  They have zero debt, a chunk of cash on hand, a current 10% dividend and a couple of things (like deploying the cash on hand and a deal with the SBA that would provide them with some financing) that should allow them to raise the dividend going forward.  I think share price will move with the dividend.  They seem very conservative.

PSEC, ALD.  PSEC is another company I like in the BDC space.  Big insider buying, cheap valuation, big yield, great purchase of PCAP earlier in the year.  ALD shares are interesting because ARCC, a very high quality BDC in good shape, is buying them for 0.325 shares of ARCC per share of ALD.  ALD is trading at a fair discount to 0.325*ARCC's price per share and I think the odds that the transaction goes through are very good.  This is one arbitrage play I like!

CNO.  Conseco, a company that John Paulson of hedge fund fame has taken a stake in.  CNO is profitable, and is priced at around 1/2 of book value.  They have made enormous progress towards resolving the financial problems that sent the shares under $1 earlier in the year.  With a foward p/e of 6 and a price/book of well under 1, CNO is very cheap.  A director recently bought $2 million worth of stock.

HIG/XL/GNW.  More insurers with cheap valuations.  GNW has the cheapest valuation by price/book, but it isn't  yet clear what GNW's earnings potential will be going forward.  I do think they will go a fair bit higher in time.  XL is in the best shape, is profitable, is growing book, has a current dividend worth mentioning, and a valuation well below historical averages.  Dividend raises and more evidence of improvement are potential catalysts here.  HIG is a tarp-baby, is damaged, but is making progress and has a very low valuation by either price/book or price/normalized earnings.  

BAC.  Of all the big tarp-baby banks I like this one the best.  It has monstrous institutional support (its a hedge fund favorite), probably $2.50-3/share of normalized earnings potential, and the highest capital levels of any huge bank except Citi.  Citi is also worth a look at these prices (low $3s).  In time BAC should go to $25-30.  

Risks to these financial stocks include a double dip recession, another crash in one or more financial markets, and the fact that they have not historically traded at high  multiples of earnings, etc.  In general, financial stocks are always a bit cheaper than others and as such it may not be prudent to consider a financial with a price/book of 1 on a par with a manufacturer that has a price/book of 1.  

 

RJET.  My favorite stock right now hands down.  RJET, historically, has flown regional airplanes for other airlines.  However, this summer it aquired Midwest airlines and Frontier airlines for next to nothing.  Midwest is not doing very well, Frontier is doing extremely well, and Republics formerly-core business of contract flying seems to be stalled but doing well enough.  The future of the contract flying business is probably not as great as it once was, but... I like management here, and I think the profit potential of the company is just huge relative to its market cap.  Its trading at a a price/sales of about 0.1, a price/book of under 0.5, has very little debt except debt collateralized by aircraft, has some cash on hand...  And Frontier has been operating at around $10M/month of profit, the contract business made about $19M last quarter (similar to its performance in 2007/2008), and they feel they can get Midwest profitable by the end of 2010.  That adds up to profit potential of around $200M when all of the organizing is done and accounting noise relating to the buyouts settles.  The market cap is about $250M right now.  Risks with RJET include them failing to accomplish their goals, airline stocks in general being hated by one and all, they now have fuel cost exposure, and all of that.  We'll see.  It definitely is off the radar, behavees randomly and erratically, and nobody likes it.  

 

I also like DOW (Dow Chemical), which is trading at about a 5.5% yield based on what the dividend was before they cut it, and with the aquisition of Rohm & Haas should wind up with a new all-time-high dividend at some day in the future.  I think this one works well as a buy and hold, especially if the shares retreat a bit...  And I think that whoever gets small regional banks right (timing and selection) makes out like a bandit!  I blew it big time on BOFL so maybe i shouldn't comment on these.

These are no doubt not the whole list of stocks that are worth owning out there.  Not at all.   But I think they are decent picks.

Don't take my word for it, though...

27 Comments – Post Your Own

#1) On December 27, 2009 at 2:29 AM, checklist34 (99.73) wrote:

i would be remiss if I didn't mention that the picks above are all stocks I already own, and in general are stocks (except RJET) that I own from lower prices, and in general are stocks I own as much of as I want to (except MCGC and maybe a copule others).  

XL, GNW, DOW, BAC, CNO, and ALD/ARCC and RJET are among by 10 biggest positions.  

Also, ... I have spent much more time analyzing companies I own in the last several months than researching new ones.  I'm sort of in a "hold" pattern in general as an investor, and as such my knowledge of whats out there and whats cheap isn't 1000% up to date.  

thusly disclaimed, I like those picks. 

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#2) On December 27, 2009 at 2:44 AM, TMFUltraLong (99.96) wrote:

Is following everything I say to the "T" not an investment idea for 2010???? =)

For the record, Dow Chemical is my favorite on that list because Rohm & Haas was always a company very high up my list.

UltraLong

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#3) On December 27, 2009 at 9:19 AM, hrc777 (< 20) wrote:

thanks for this post.  there is a fair amount of good info here.  i havent looked into bdc's before- interesting area

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#4) On December 27, 2009 at 11:49 AM, checklist34 (99.73) wrote:

hrc777, the BDC's are pretty interesting still.  The healthy ones aren't really super-deep values anymore, but they have great yields and the assets that they hold haven't bounced back in value yet the way that, say, the assets that insurance companies have held have bounced back.  MCGC is my favorite pick in that space right now.

Ultralong, I have a big old stake in DOW and have done alot of business with them in the past.  ARE YOU GOING TO SELL ME A WATCH ALREADY?  you can email me at my name here on CAPs at yahoo

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#5) On December 27, 2009 at 11:51 AM, checklist34 (99.73) wrote:

wait you have to put an underscore between the letters and numbers in my name here then at yahoo

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#6) On December 27, 2009 at 12:35 PM, Ticker007 (22.66) wrote:

Very interesting info & a recommend.

 You stated: And I think that whoever gets small regional banks right (timing and selection) makes out like a bandit!  I blew it big time on BOFL so maybe I shouldn't comment on these. 

I firmly believe the “correct” regional banks will outpace others in the financial sector in 2010, so even though you blew it on BOFL – I’m up for a few comments or choices on regional banks – that is - if you care to elaborate.

 

And what about the all mighty Citi which handles trillions of dollars everyday, Will this un-favored ruff gem reach $7 in 2010.

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#7) On December 27, 2009 at 3:15 PM, checklist34 (99.73) wrote:

Ticker007, I think Citi has a shot at giving really good returns from its current level, however... I haven't ever sat down to really analyze it and the monstrous (about 10x that of other banks, I believe) off balance sheet assets are probably un-analyzeable.  

A reverse split would probably help citi shares...  Paulson likes them and thats probably worth something.  

I should put C on my list of stocks to research.  It is definitely out of favor...

GRNB has a deep valuation and is heading back towards all time low share prices.  It has historically paid dividends.  Its loan portfolio is about 1/2 commercial real estate in the Tennessee area.  As of right now it reports good capital levels and its extremely cheap compared to historical dividend and income levels.  It recently declined an offer for a capital infusion from its largest shareholder stating that the terms were not favorable to other shareholders and that their capital levels were adequate.  

GRNB is a low volume micro-cap right now.  Thats one idea I have.  

SCMF is another, also a tiny cap with low volume, but also with deep value.  

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#8) On December 27, 2009 at 4:14 PM, FleaBagger (29.47) wrote:

In 2003-2005 the market had lnearly doubled in a few months, but then slogged sideways for a couple of years before taking off again in 1935.

Was anyone else confused by that version of history? I mean, I know time is relative and space is curved, but really: really?

Okay, I will now finish reading the rest of this post.

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#9) On December 27, 2009 at 4:32 PM, rd80 (98.75) wrote:

And what about the all mighty Citi which handles trillions of dollars everyday, Will this un-favored ruff gem reach $7 in 2010.

Citi has a very good chance of reaching $7 - after a reverse split.

$7 from current levels would put Citi at or near an all-time high market cap, but what new business operations or organic growth has occured to justify a new all-time high price for the business?  Nothing.

 

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#10) On December 27, 2009 at 4:46 PM, FleaBagger (29.47) wrote:

Thanks for the investment ideas. I might pursue some of those. As for the ARCC/ALD thing, I should warn you: I have very bad luck with acquisition arbitrages, probably because I go for the ones that seem to be the most lucrative, and those large disparities are surely due to the experts and big players knowing that they have no chance in heck of going through. But I still ascribe it to luck. So if I buy ALD and a protective put on ARCC, you can be almost certain that the deal won't go through. If you still hang onto your ALD shares in the long haul because of conviction of ALD's value, that's up to you.

I'll let you know.

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#11) On December 27, 2009 at 4:53 PM, FleaBagger (29.47) wrote:

@rd80 - Perhaps massive share buybacks, followed by a 20% appreciation in the notional value of their assets could result in a doubling of their price without any new business, organic price, or an all-time high market cap. Megabanks get enormous amounts of funny money from the Fed, and they can do a lot of things with it, short of pocketing it a sticking taxpayers with the bill. Or rather, not so much short of that, as finding creative and confusing ways of obscuring that that's what is happening.

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#12) On December 27, 2009 at 7:22 PM, checklist34 (99.73) wrote:

fleabagger, it looks like I must have accidentally wiped a sentence out of that paragraph before posting.  I'll re-do that paragraph here:

Looking at what has happened in the past, history suggests that we are in for a bit of a sideways slog.  After the vicious dip in the mid-70s, the S&P recovered violently, rallying nearly 70% over the next year.  From there, however, it slogged sideways for several years.  In 2003-2005 the Nasdaq rose 70% over 9 months before spinning generally sideways for nearly 2 years.  Looking at the Dow in the Great Depression we see that the market lnearly doubled in a few months, but then slogged sideways for a couple of years before taking off again in 1935.  A similar sideways slog was seen after the rally in the Dow from the WW2 low to the just-after WW2 high.  Each enormous ramp out of a bottom seems to be followed by a period of consolidation. 

 

thanks for the heads up!

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#13) On December 27, 2009 at 7:29 PM, checklist34 (99.73) wrote:

Fleabagger, lol @ letting me know if you buy ALD.  In this case I like that move as the arbitrage for holding ALD shares is quite a bit greater than the dividend for holding ARCC shares...  and in this case I really do think it will go through. 

 

RD80, i hear you on C and market cap and $7.  However, a share price of $7 would still have C priced lower in terms of price/book (a commonly used metric for banks) than most large cap banks like WFC, USB, etc etc etc etc etc. 

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#14) On December 27, 2009 at 7:31 PM, checklist34 (99.73) wrote:

Another idea that I have for 2010 is going short time premium on options.  I am short ~7% of my portfolio value in a combination of covered calls and naked puts.  These are often fairly well below the money or above the money.  Just betting there won't be huge moves in 2010 in many of my holdings, the market in general, etc.

The puts are naked and sold against stocks at prices I wouldn't at all mind owning those stocks.  

This is potentially risky business...  so proceed with caution.  

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#15) On December 27, 2009 at 7:41 PM, checklist34 (99.73) wrote:

deep in the money RIMM calls is another idea of mine for 2010.  Buy, say, jan 2011 orjan 2012 calls at $40 so as to own minimal time premium.  RIMM moves to $90-100 and you wind up nearly double your money.

I have made this move in real life some time ago, and also shorted at the money puts along with it, so as to be maximally short time premium.  

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#16) On December 27, 2009 at 8:39 PM, checklist34 (99.73) wrote:

And one more idea:  CRE

CRE is being liquidated.  It lists book value of about $11.60/share with a share price of $7.35.  So if it liquidated for book, you'd get a fairly large return in presumably a reasonable time frame.  But what are the assets and how much of them will ultimately be distributable?

The company is not bleeding money, it has operating profits, so they shouldn't lose a huge chunk of the potential liquidation value while liquidating.

It has about $5/share in cash.  

It has bout $90m of debt about $80m of which is collateralized by mortgaged property.  Its properties are 100% leased medical facilities which should be more saleable than many forms of commercial real estate in these distressed times.  If liquidated at stated book value, these properties would provide $1/share in liquidation.  If liquidated at a 20% discount from book they provide $0.

The next asset is $60m of loans held.  CRE has sold these at carrying value several times over the past year, and if sold at carrying value they are worth about $3/share.  If sold at a 15% discount (worse than any sale they have had in the past) these are worth about $2.50

And lastly, we have about $60M of real estate investment in partially owned entities.  This is fairly commonin commercial real estate, an llc or corporation is set up to own property and in turn that llc or corp has multiple shareholders.  These aren't generally highly liquid investments and selling them at carrying value may not occur.  This is $3 at carrying value and if we assume a steep discount to stated value they should be able to get $2.  

As always, my numbers are rounded for my typing convenience (I think in rounded figures, not pennies).  But we have at full value $5 + $1 + $3 + $3 = $12 (actually $11.6x).  

In the more conservative case we have $5 + $0 + $2.50 + $2 = $9.50.  Lets say the blow 10 million in liquidating costs we'd have $9. 

So the $7.35 shares should be worth somewhere between $9 and $11, and that return would have to be divided by how long it takes to liquidate to ultimately determine annualized returns, but...  

 

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#17) On December 27, 2009 at 9:10 PM, starbucks4ever (99.05) wrote:

Hi checklist,

I am amazed that CRE management should decide to liquidate. What do you think is the reason for such an extravagant step? Are they trying to cheat shareholders of future profits or what?

 

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#18) On December 27, 2009 at 9:33 PM, danteps (29.64) wrote:

Future profits from a healthcare REIT?  Run don't walk away from this space.  Further socialism of medicine shall bankrupt numerous hospitals, nursing facilities, outpatient centers, etc.

Read some analyst reports on the space.  Comrades Obama and Pelosi are running health care now.  Don't invest with a community organizer holding the keys to the kingdom.

Socialism destroys economic value and shall certainly erode the value of health care real estate holdings.  Would you want to own the paper for a building who's very business is soon to be government run?

I applaud the board in acting in the best interest of shareholders.  There are better areas to deploy capital. 

Possibly a great short opportunity.

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#19) On December 27, 2009 at 9:46 PM, checklist34 (99.73) wrote:

zloj,

   I am not, to be honest, sure why they are liquidating either...  My next step with CRE is to sit down and try to learn not the #'s but the why's of the liquidation...

 

danteps, shorting a stock in liquidation when its difficult to imagine a scenario in which the payouts are substantially less than the share price doesn't seem like a great idea.

fear tends to create opportunity... and while i really don't follow the healthcare space I will offer that reality is usually quite a bit more normal than the excitement and/or fear that precedes it.  

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#20) On December 27, 2009 at 10:31 PM, TigerPackFund (< 20) wrote:

checklist-

We could use your best 5 picks at TigerPackFund.  Some of the microcap, mid-cap and larger capitalization names in this post would be welcome contributions to our group player.

Email your 5 strongest risk-adjusted ideas to tigerpackfund@yahoo.com so we can include your terrific smarts there!

-TigerPack 

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#21) On December 27, 2009 at 10:46 PM, danteps (29.64) wrote:

Read the risk factors.  IRS tax issues alone could wipe out a couple of bucks.  In addition, the lawyers and bankers will be paid hefty fees to liquidate the assets.  Perhaps that adds up to $0.50 to $0.75 per share.

 

One must feel quite confident that a bidder, or more likely, a group of bidders will be willing to purchase the assets at compelling valuations.  Given the uncertainties created by Washington regarding health care and the broader economy, one may reasonably assume there is the potential for these assets to be heavily discounted.

 

It’s a very bad sign that they tried to find an acquirer and failed.  A very bad signal.  Potentially buyers are aware of this dynamics and price collusion is tempting.

 

Furthermore, potential bidders will likely require capital to finance their bids (they probably will horde current cash as many companies are doing in this environment).  Credit is tight currently and this may prove challenging.  As a banker, I would not underwrite paper for anything in the healthcare services arena.  Why take the risk?

 

I would concur that I was being perhaps flippant and saying that this is a short opportunity.  I certainly wouldn’t short CRE.  The liquidation process will be opaque; I don’t know how any investor could get comfortable with being on either side of the trade.   

 

Better places to fish.  I am an investor in PSEC . . . got in over a few weeks back in the summer with an average basis of around $9 per share.   Valuation here feels close to fair value at just over 1x book.  Diversified portfolio with some energy exposure.  We shall see how it goes.

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#22) On December 29, 2009 at 8:12 AM, devilzadvocate (65.13) wrote:

Thanks for your suggestions. I own BAC, CNO,and DOW in RL. Am definitely going to do research on others mentioned above.. PSEC looks interesting..

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#23) On December 29, 2009 at 12:41 PM, FleaBagger (29.47) wrote:

I just wrote 18 ALD Jan 11 2.5 put contracts for .3 each. Here's my thinking: if ARCC buys ALD for .325 shares of itself per ALD share, then I have every scenario ARCC >= 7.50 for my 12% gain, while any significant drop in ARCC would equally reduce the value of ALD shares from their 15% arbitrage value. Of course, I miss the upside if ARCC and ALD both take off, but if the deal goes through some time in the next few months, my annualized return on these puts will be quite handsome, even if ARCC happens to dip to 8 or 9 in the meantime.

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#24) On January 01, 2010 at 5:16 PM, checklist34 (99.73) wrote:

tigerpack, I sent an email to your addy as above, with 3 picks.

danteps, ... I guess we will have to see how CRE plays out.  I don't at this time have a position, but I am considering one.  I'll post about it if I decide t ojump in & I'll take into consideration what you are saying.  However... I do not think that the health care sector is exactly shutting down over the recent bill.

 

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#25) On January 01, 2010 at 8:20 PM, checklist34 (99.73) wrote:

devilz, I am holding DOW, BAC, and CNO in real life as well, each big positions, and each unhedged.  Each of these is undervalued imo.  good luck!

Fleabagger, that is a pretty interesting play.  Presumably those $2.50 ALD puts will convert to ARCC puts...  and presumably they will expire worthless and you'll pocket the cash.  I have been wondering for awhile if shorting puts may not be the hidden gem of the investment world. 

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#26) On January 02, 2010 at 5:00 PM, FleaBagger (29.47) wrote:

Re: shorting puts-

It's the only sane way to buy stocks.

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#27) On February 04, 2010 at 1:34 AM, checklist34 (99.73) wrote:

flea:  its often a good move.  I would bet that if you added up the money made from buying puts over time it'd be an epic loss.

selling them, hence, not always, but en summe, would be an epic gain

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