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The Shock of Loss

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October 21, 2007 – Comments (8)

I hope when I say this, that you will believe it. But since you don't know me, or know anything about my investing style, I won't be upset if you start to yawn or begin to think about something other than what I am saying. Honestly, it will be all right if you do.

I was looking back through some of my CAPS picks, trying to understand where I went wrong. I mean one of my CAPS picks is down more than 57%, and when you add the changes in the S&P the stock is now down about 72%!

The thing about this stock, Georgia Gulf Corporation (NYSE: GGC) is that I continue to add it to my real world portfolio. At the moment I own 700 shares and have an average cost per share including sales commissions of $20.0996. The stock closed recently at $11.95, and I'm thinking I'm going to buy more shares.

Another stock in my CAPS portfolio is WP Stewart and Company, Ltd. (NYSE: WPL). This company is a publicly traded money management firm that manages the investments of extremely high net worth individuals by investing their clients money in large blue chip stocks.

In my CAPS portfolio I'm down more than 44% with this little gem, and when you add in the S&P changes, I'm down against the index by more than 55%.

This is another one that I own in my real world portfolio and one I continue to buy. I've now managed to accumulate 500 shares with an average cost per share including commissions of $12.1498.

I bought the stock because at the time I came across the company it was my belief that the housing/credit markets were going to implode which would put our economy on its ear.

Looking at WP Stewart I saw that, at the time, they were investing in larger cap consumer companies, companies like Kimberly-Clark Corporation (NYSE: KMB), Wal-Mart Stores, Inc. (NYSE: WMT), and Colgate-Palmolive Company (NYSE: CL).

I guess I zigged when I should have zagged since this one has not worked out like I thought it would.

Another of my picks, and I'm sorry but I really like this company, is Griffon Corporation (NYSE: GFF) maker of garage doors. The company does a few other things and has recently received several contracts from the government for their electronic information and communications systems division.

In my CAPS portfolio the stock is down more than 55%, 40% of which is the decline in the stock price. I own 750 shares of this one in my real world portfolio, with an average cost per share including commissions of $19.0417. The stock closed recently at $14.42.

The other stock that is down pretty good is Accuride Corporation (NYSE: ACW). The company makes truck body and chassis parts as well as seating assemblies, gearboxes, and steerable drive axels for large trucks.

In my CAPS portfolio this one is down against the market a little over 25.5%. In my real world portfolio I own 1000 share of the stock, with an average cost per share including commissions of $13.5108.

The point of all of this, and the thing I started out to tell you, was that being a value investor is really really hard. If you don't believe me, consider what happened on Black Friday (10.19.07) when the markets were slaughtered.

Working people, average Americans, closed investment positions by the millions. They got out of every stock they could, then got down on shaky knees behind the Wall Street Bull and prayed they would wake from a nightmare. To lots and lots of folks, the sky really was falling.

For me the recent market down turn is a buying opportunity, a chance to deploy yet again, my margin of safety. [Collective gasp]

Certainly, with all of the money I have invested in the stocks I mentioned, and with the decline in prices, continuing to add to my positions in these stocks as the prices fall ever further is not easy, nor is it pleasant, and it is certainly not any fun...yet.

But adding to my positions during a market correction fits my investing philosophy, a philosophy that includes:

**My belief that price determines return
**My belief that if you buy great companies at great prices, then what the markets do or don't do really doesn't matter
**My belief that you should sell a bit along the way
**My belief in dollar cost averaging
**My belief in long term buy and hold
**My belief in a margin of safety

For most of us, the markets are a place where our savings ends up, the money is taken out of our paychecks and since we never see it, we never miss it.

We tend to think of it like taxes, and because we do, we seldom get involved with where that money goes. But the simple truth is, for most of us, one day we are going to need that money.

It seems to me that for almost all our working lives, we struggle, seemingly always a few bucks short because the kids needed braces or dance lessons, or because the water heater went out or the air conditioner died, or heaven forbid we needed a new roof.

For those of us that are truly blessed, as I was, we're going to have more than one child in college...at the same time!! No wonder we just never seem to have even the smallest of financial cushions.

What we fail to realize though is that the entire time that money is being removed from our pay and sent to somewhere that never really mattered...we're getting older.

Wax

8 Comments – Post Your Own

#1) On October 21, 2007 at 11:08 AM, StockSpreadsheet (71.86) wrote:

As long as you have done your DD and believe in the future of a company, then adding more shares when the price is down is a very good idea.  Just make sure that you do your DD and have a long-term horizon for your investments.

GGC's earnings have been falling for the past 2-1/2 years and they currently are losing money, (-$1.85 EPS on a TTM basis according to Yahoo!).  They are closing plants and taking charges to help try to reverse these losses.

Sales and earnings at WPL have both been falling for the last 2-1/2 years  and they currently show a $0.10 loss per share on a TTM basis according to Yahoo!.  Considering the bull market that has been going on the past few years, I find the declining earnings surprising.

Earnings for GFF have dropped 40% on a TTM basis compared to eoy results from 2006.  Didn't see any recent news on Yahoo! to explain this, but that is why the shares are currently falling.

EPS has also been falling for ACW.  Yahoo! shows their current EPS as $0.85 on a TTM basis, where my data shows they had an EPS of $2.33 for calendar year 2006.  This is a drop of almost 67%, though I saw no news on Yahoo! to account for this drop.  The falling earnings would be why the stock has fallen since July.

I'm not saying these are bad stocks or bad companies.  I didn't do enough DD to form an opinion on them.  I just glanced at them to see if I could see why their prices have fallen so much.  As long as you have done your DD, can account for why the earnings are falling and understand how the companies plan on reversing these declining earnings numbers, then buying more shares is smart.  I would suggest however that you make sure you understand why earnings are falling and how the companies are going to turn things around if you are going to add to your current positions.

This is just my opinion and my suggestion.  Take it for what you think it is worth, as it is your money and your decision.  Good luck with these stocks in the future and in all your stock positions.  May all your stocks be winners.

Craig 

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#2) On October 21, 2007 at 11:27 AM, hondo928 (99.62) wrote:

I found you article interesting, but I have a question what in particular do you see in the first 2 picks, they both miss estimates, don't have growth or earnings really, and I don't see daylight at the end of the tunnel for either...but maybe I'm missing sometthing.

 The next two I think are both good picks in the long-term and if you think you have something good then I agree in the dollar cost averaging approach. GFF is similar to a company that I like BLG as in it's got great fundamentals butis being depressed by a housing slump, which may present an excellent buying oppurtunity.  I think my biggest problem with them is the $5 Million plus 10 in options they pay the CEO.

 ACW is I think my favorite on the list, as they keep beating estimates, and again being hurt with everyone else in the sector although based on growth the company maybe even more than everyone else. They do make money though which is better than most of their competitors. I really liked you article though and am curious as to what you see in the first two.

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#3) On October 21, 2007 at 4:39 PM, devoish (97.09) wrote:

Wax,

The Motley Fool teaches to invest exactly as you are doing and I am trying to learn to do. Any player who wants a roadmap of what the MF means when they teach "understand the company, buy when it is cheap, and trust in your own judgement regardless of what the market says" should look at your picks and sort the worst performers to the top. And then read your pitches for those worst performers. What you are doing is exactly what I understand Foolish investing to be. I would recommend your pitches and blog and the links thereon to any one who wants to get a little better at investing.  

Thanks for blogging and writing and pitching,

Steven

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#4) On October 22, 2007 at 6:24 AM, wax (96.73) wrote:

Craig;

I don't know about Yahoo. What I do know is that according to GGC's 10-K stuff and the financial information I found in there, I was able to determine that to me the company has an estimated reasonable value of about $30 a share.

I had decided that with all of the housing/credit mess, the company would again have a tough second quarter, but that turned out not to be the case do to a recent acquisition.

As to WPL, admittedly that was more of a play against the economy. I believed at the time, and still do today for that matter, that with the coming economic upheavel brought on by the housing bubble, that we would face recessionary times.

To that end, I believed that from an investment perspective, a good place to put a few dollars was in large cap stocks that made stuff that folks use everyday. But when I got to looking at the Kimberly-Clarks and the Colgate-Polmolives and the 3Ms, I realized that the per share price was...up there.

The simplest thing for me to do if I wanted to have the benefit of those stocks was buy a mutual fund that held those stocks. But I know beans from apple butter about mutual funds.

So a few Google type searches later...viola, WPL. As I said, buying them was, and still is, strictly a play against the economy. I couldn't agree with more with your assessment...they really do suck.

As to GGF, the company is in the garage door business so with the housing bust, earnings are down. What I like about the company, and it's the main reason I bought them originally, is their communications division.

So far in October, the company's telephonics divisions has been awarded almost $57 million dollars in government contracts and  in September the company's telephonics division was awarded a $318 million contract from Lockheed Martin.

Contracts like these take awhile to turn in to cash in the bank do mainly to the way government contracts work. But once the dollars start coming in, they have a tendancy to keep coming in for a very long time.

While the garage door business was extremely profitable, so too will be the communications contracts.

As to ACW. According to my numbers, not from Yahoo, the company had TTM earnings of $1.88. But that $1.88 included  depreciation, which I view as an offset against taxes.

So when I back out the depreciation, I end up with an adjusted TTM earnings of $3.76, and when I couple that number with an ROIC of 31%, add in free cash flow of $4.48, and compare all of that to a TTM PE of 6, I think I have a winner.

But the markets are a funny place and anything can happen. At the moment, the markets don't know what to do with a stock that is in the "automotive" sector. The reason for this is the credit crunch caused by the housing bubble.

The markets also don't know what to do with a stock that is in the "long haul/off road" truck business because of high energy prices. Yet these long haul trucks are far more cost effective then anything else available, and stuff still has to get from one place to another. So eventually I look for the markets to "see" past all of that and coupled with decent earnings, I expect the markets to move the stock price higher.

At any rate, as you can see, I've sort of put it all out there so anyone that want's to can follow along, and as long as folks realize that the picks are 3-5 year holds, I hope they follow along and see what happens.

Thanx for the thoughts.

Wax 

 

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#5) On October 22, 2007 at 6:27 AM, wax (96.73) wrote:

Hondo;

Scroll up a bit, I think I addressed your concerns at the top of my response to Craig. If not, let me know and I'm more than happy to answer any other questions you might have.

Wax

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#6) On October 22, 2007 at 6:52 AM, wax (96.73) wrote:

Steven;

Wow...thanx for all of the kind words, they really do mean a lot!

I've sort of been through an investing evolution here in Fooldom, and my investing acumen has pretty much paralleled the Brothers "G".

I wish you had been here in the mid 90s when all of this stuff started and had been apart right up until today because you would be so floored at how things have changed.

I'm just a working guy that had two boys, a non working wife, and what to me was a big house note.

I drove a pretty old pick up with a bad shifting module that created a bunch of smoke. That smoke would end up inside the truck so for the first 5 minutes or so, regardless of the weather, I had to drive with the window down and my head hanging out so I could see where I was going.

When you're a "blue collar" worker, you sort of resign yourself that you aren't going to ever get rich, but you will always get by.

You "put back" a few bux here and there, you work 6 days a week, you do more "side" jobs than you can imagine, and all the while you "feel" like, financially, you're getting behind.

Then one day, your house is paid for, your kids have finished college, now you have grandkids, and something you never dreamed you would have....money in the bank.

When you look back trying to figure out how that money got there, you realize that you learned from your mistakes. You learned to pay yourself first. You learned to live below your means. You learned that "side" jobs really do suck.

You learned that your family is the reason you do what you do, and you learned that although you had a non-working wife, somehow she seemed to work a helluva lot harder than you did.

So thanx for the kind words, I'll try and live up to any expectations, and I hope you'll follow along, just to see how all this plays out.

Wax 

 

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#7) On October 27, 2007 at 11:22 AM, WhidbeyIsland (72.47) wrote:

Wax,

Seems to me that perhaps I'll follow some of your picks without doing my research of my own.

On the other hand, maybe I should research that option a little more carefully. 

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#8) On October 29, 2007 at 6:11 PM, wax (96.73) wrote:

WI;

Never follow anyone's picks without doing your own research.

For one thing my risk tolerance may be greater than yours, not to mention that there is a high probability that I could be wrong in my analysis.

I don't believe that my analysis is flawed, but that's not to say there isn't something lurking about that I was not aware of. Case in point was Office Depot (NYSE: ODP).

Wax 

 

 

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