Been adding back to my portfolio

I'd raised alot of cash a few months back, but now moved some of that back into the market recently.

This week I've added to or opened positions in the following stocks:

MSFT - Microsoft - back in again. I like the softy. It just looks cheap to me and I can't figure out why.
AAPL - aaahhhh! I broke down and bought the Apple too! First time for me, but it looks cheap too.
EBIX - Added some more back to my position today.
MDF - Metropolitan Health - I doubled up my position here. This is a deep value play for me.
MED - Medifast
DST - DST Systems

I've got my eye on a few others, but sticking my toe back in the market with these.

Revising Greenblatt's Magic Formula approach

I've been spending alot of time working on Joel Greenblatt's Magic Formula approach to stock selection, and thought I'd refine an initial model that I'd put together to help select investments. Over the past week I've spent almost every free waking hour away from work working on this new model (I say waking hour because I'd often fall asleep at my PC at night while building out the calcs). The new model was designed to take into account several more factors than the one he describes in his book. I added several variations of return on capital, a few more measurements on valuation, added an entire section on growth measurements, and added a couple of components on balance sheet strength and price strength.

Well, the new model is pretty much completed and I downloaded new data, sorted things, and .... despite all the changes I pretty much end up with the same list of stocks that the initial simplified model supplied. Maybe in slightly different order, but they're all there. Greenblatt's initial criteria of Ranking stocks based on Return on Capital and EBIT earnings yield seems to be pretty robust, even when supplemented with quite a bit of other types of similar desirable measurements.

Stocks at the top of the interest list are same as before: ARO Aeropostale, WDC Western Digital, TJX TJ Maxx, MRK Merck, BBY Best Buy, GD General Dynamics, and so forth for the bigger names.

I'm still digging around with some of the smaller company names, but overall I'm being presented with a similar set of companies as before.

I guess the next step in working with this is figuring out buy/sell points to make this an ongoing/workable approach.

Stock purchase activity

I had the day off work and spent some time working on my investments. I'd been doing a lot of work on a new investment method advocated by Joel Greenblatt called Magic Formula Investing. Greenblatt is the author of "The Little Book that Beats the Market" where he describes his quantitative value investing approach - an approach that suits me well since I like stock screens (from AAII Stock Investor software) and working with and modeling data in Excel.

Today I opened positions in quite a few companies that seem to score highly using a modified version of the Greenblatt methodology. I'm still not completely comfortable with what's going on, but there's nothing like having real money on the line to make me pay attention better and learn from the trades I do using this method. Greenblatt's methodology directs us toward some underperformers and many of these companies have well-known issues, but that's the kind of company that often scores well using Greenblatt's approach: it's often "hold your nose and buy" because he's found that stocks with issues are often undervalued (when they meet certain criteria).

Purchases today
INTC Intel - semiconductors
NE Noble Corp - oil drilling
GILD Gilead Sciences - Drugs
AZN Astrazeneca - Drugs
TXN Texas Instruments - semiconductors
ROST Ross Stores - retail apparel
GES Guess Inc - branded apparel
TEO Telecom Argentina - telecom

The most troublesome stocks to me are the drug companies because I don't understand the industry, patents and pipelines, so I'm just going with the approach on these so far. I also had a buy order in for MRK Merck today that didn't fill. I may end up getting MRK at a future date. There are tons of drug companies showing up on the screen right now, and I'm also currently in JNJ Johnson and Johnson. I'll watch and learn how to deal with Health Care stocks as things progress. The drug companies pay big dividends so I like that cushion with these stocks.

Normally I should exclude ADR's from the screens, but I often don't do that just to see where they fall in the rankings. That left foreign stock AZN in the mix for me, and also left TEO Telecom Argentina in there. I liked the return on capital they're getting, the growth rate, and the 7% dividend (albeit likely not sustainable) given the 100+% payout ratio. We'll see how this goes. (edit: I see the dividend yield was mis-stated. It's an irregular dividend - likely not more than 4% in practice, maybe less depending on if it's paid every year)

I've got my eye on several other retailers, but I started today with ROST Ross Stores and GES Guess. TJX TJ Max is one I'm looking at, as well as companies like COH Coach, BKE Buckle, ARO Aeropostale BIG Big Lots, PETS Petsmart, BBY Best Buy... and several others. My wife likes TJ Max so that may be the next one I go with.

In the Tech side of things I added INTC Intel and TXN Texas Instruments. I already had a pretty big position in MSFT Microsoft from a month or two back, and also have my eye on WDC Western Digital which I likely would've bought today if it hadn't have jumped abut 9% last Friday. WDC ranks well here too.

The last one to talk about here NE Noble Corp. They're a deep sea driller that's been hurt by the spill disaster in the Gulf. The other options I was looking at included DO Diamond Offshore and CEO CNOOC. The purchase in the energy segment was really done more in the spirit of diversification than anything else. I'm uncomfortable with capital intensive companies whose business can dry up /boom with uncontrollable moves in the price of oil.

In the end I'll plan to follow a rotation with these companies and keep updating the Greenblatt approach and changing stocks as appropriate. Most of these are in retirement accounts so I don't have capital gains to worry about.

Sold the rest of Garmin GRMN

I sold the rest of my Garmin GRMN position this morning. This is one of those stocks that looks so cheap to me on the metrics and their financial position is excellent, but I'm starting to buy into the idea that their business is trapped by new on-coming smartphone technology and they might not have a way out. I'm hesitant to write GRMN off because to me stand-alone navigation systems just seem so easy and make alot of sense, but the more I talk to fans of i-phones and google-phones I'm less sure of the future. I don't get really "get" what's going on here - but alot of people really seem to love their way expensive cell phone plans and - at least to me - "complicated" phones/multipurpose devices.

This is probably dangerous to me as one of my larger holdings at the moment is RIMM - makers of the Blackberry - and it looks very cheap to me also and growth is still there - but I'm keeping my eye open on it also.

I don't really have any other good ideas for where to put the proceeds right now, so I'll have to start some research for new companies.

Market Psychology

I've been taking a beating in quite a few of my stock positions during this prolonged market draw-down. In the past few days I found myself considering selling a position not because I thought it was a bad investment, but because I thought it might just keep on going down for no good reason. In the past I've found these type of thoughts on my part tend to mark the gut check moments that indicate bottoms might be near.

I've been distracted from the market for quite a while with my work, so perhaps I haven't been paying as much attention to happenings as I should, but I'm beginning to wonder if the people getting out now are thinking like me and might be selling just because "it's going down." It's dangerous to try to out-think the market, but I do think psychology matters quite a bit, and I'm wondering if there may be quite a few others who are starting to throw their hands up wondering why the selling persists in some companies that seem to be good values to me.

CTSH transcript of conf. call

Cognizant Technology's conference call transcript is here.

Very strong results and outlook is strong. This combined with the previous call from Infosys INFY (posted a while back) makes me think the upside in these companies will begin to reveal itself. These have been beaten down on economic fears, but it's just not showing up in their outlook or results. I'm long both, and CTSH is my largest individual holding, but I'm very optimistic going forward based on what I'm hearing.

IT environment in Businessweek

As readers are aware, I have a long position in several IT services companies including Cognizant and Infosys. Here's an article from Businessweek that does pretty good job of summarizing market conditions right now.

Month end holdings

I figure it's time to update my holdings for Nov07. There's been alot of movement over the past couple of months that we talked about, and I've been deploying alot of free cash into stocks over this time.

Here's where I'm at now - from largest to smallest holdings
CTSH Cognizant Tech - IT consulting/services, India. Loaded for bear in this position - by far my largest holding.
GRMN Garmin - GPS maker
VDSI Vasco Data Security - data transactional security (paying for stuff electronically) - primarily customers are banks
INFY Infosys - large Indian IT consulting/services.
TRAD Tradestation - online brokerage
LIFC Lifecell - tissue products (like growing skin for burn patients.)
ASFI Asta Funding - a collections company (example: purchase bad debt from credit card companies and try to collect).
HANS Hanson Natural - Energy Drinks
NTRI Nutrisystem - weight loss program/food
BLUD Immucor - blood tests
MLR Miller Industries - Tow Trucks

Anyhow, that's what I'm in now. Obviously I have more confidence in the larger positions than the smaller. Another that I'm looking at now is QCOM Qualcom, but I haven't opened a position there

FrankenFinance

I'm not educated enough about the issues this article addresses as I don't understand the balance sheet issues mentioned, but found it interesting food for thought regarding the factors driving the current financial bubble. I like his observations that "We are trading recessions for bubbles, on what seems like a regular basis," and in the article he points out what he sees as key contributors. Read "Welcome to the World of Dr. FrankenFinance"

Stocks look cheap to me

I added to Cognizant Tech CTSH and VASCO Data Security VDSI today. I can't help but think both of these are just far too cheap. The market's obviously telling me I'm wrong and maybe I'm discounting some things that I should take more seriously, but these (and others) just look out of whack to me.

I read through Cognizant's conference call and while there's concern about IT budgets in Q4, we're talking about a company whose revenue increased 48% in Q3, EPS increased 60%, and reading between the lines the management seemed to be telling me the business has strong prospects looking into 2008. The company's PE is @30 right now, and it's forward PE is closer to 20. It's not often I can buy companies like this at these prices. I increased shares another 40% today.

Here's some numbers I like (current data doesn't include current quarter. y1 = last fiscal year. y2 = previous fiscal year, etc)

Return on Equity
curr 25.3
y1 26.0
y2 28.5
y3 27.5
y4 26.1

Book value growth
curr 47%
y1 45%
y2 51%
y3 57%
y4 57%
y5 63%
...

Sales per share change
curr: 48% current quarter change
y1 55%
y2 45%
y3 52%
y4 52%
y5 24%


I also am making a big move into VASCO Data Security VDSI. They've gotten hammered and I'm not as comfortable with the story there and expect greater volatility, but revenue and earnings are growing at over 60% clip, so they could still slow considerably here and still justify the current 33 PE. This is a smaller company, without as established trends as CTSH, but Return on Equity and Total Capital seems to be settling in around 40% over the past couple of years. They're clearly getting excellent returns on their capital.

Anyhow, I guess I look around and am just seeing so much cheap stuff out there. CTSH and VDSI were buys today, but looking to keep putting more cash to work moving forward.

I'm keeping an eye on the Garmin GRMN story. Sortof hoping GRMN drops the buyout offer for Tele Atlas and instead works with Nokia long term to have the Navtech maps give them the data they need. I honestly don't see why a partnership couldn't work, instead of having to buy one of the map providers outright. Garmin clearly has good places to put their capital to work other than a buyout offer.

More trades to place

It's strange, but I'm finding the need to place quite a few trades recently. I rarely find the need to place this many orders unless I'm cleaning house and on a bunch of losers.

Anyhow, I placed limit orders to buy more VASCO Data Security VDSI and Cognizant Tech CTSH. Will see whether I get tomorrow.

I'm a little concerned that exposure to India might be growing too large given sizable holdings in both CTSH and INFY, but these stocks haven't moved in quite a while, but the underlying business continues to be strong and they just seem cheap to me right now. At some point I think the underlying business growth has to push CTSH and INFY higher imho.

Investing Books

I finished reading Phil Town's "Rule #1" and while I'm still struggling with some of the technical analysis he talks about (I'm trying to figure out how to program the signals and back-test), I think it's a pretty sound approach and is very close to what I do in terms of stock selection. Again, I'm withholding judgment on the technical analysis/trading section of the book because I'm not sure it works in most of the cases I've examined for the stocks I select, but I'm still investigating.

With the addition of this book, I figured I'd list my favorite investing books. I don't think I've posted this before, but I found the following books to have been very useful for me in learning to invest.

Buffettology - Mary Buffett and David Clark. I've worn the library out reading my fair share of investing books, but this book contains much of the basis for how I value companies. It emphasizes consistency, predictability, and valuation. Maybe it was the culmination of alot of other things I'd read, but as I worked through Buffettology I had one of those "aha" moments that underlies much of my thinking about investments.

One Up on Wallstreet - Peter Lynch. I haven't read this one in a long time, but it did a great job of educating me back in college when I was starting out. Lots of real-life examples in here.

A Random Walk Down Wallstreet - Burton Malkiel. Another college read. Anybody who's picking stocks is trying to do what this book says can't be done, but it's good to see where the efficient market hypothesis is coming from, and why low cost indexing is so successful.

Super Stocks - Kenneth Fisher. I read this back in the mid-90s and found it valuable in evaluating fast growing tech companies that don't yet have earnings but have some type of competitive moat. If you're into tech stocks this is a must read imho.

The Gorilla Game - Geoffrey Moore. Another must read for tech investors. What produces a sustainable long term advantage when thinking about technology stocks? The book fails to aid us in valuing technology Gorilla companies and alot of Gorilla gamers got hurt in the tech bubble bust as a result, but I like the way of thinking about how network effects contribute to competitive advantage.

Rule #1 - Phil Town. I just read this one, but it's gotta go on the list as it's so close to what I do. Not sure about the technical analysis pieces, but this method will turn up a lot of the same companies I invest in.

The Millionaire Next Door. Thomas J. Stanley and William D. Danko. The authors made a career out of studying millionaires. They find that often the secret to accumulating wealth is not how much you make, but simply living within your means. Great read.

Manias, Panics and Crashes. Charles Kindleberger. They're hard to spot when you're in them and they can persist, but this book helps us understand bubbles.

Short Note

Surprisingly all the trades I made yesterday went through. It rarely happens that way.

- sold 40% of HANS
- sold 50% of BLUD
- opened a new position in ASFI

Going to go and figure when to re-build the HANS position. I really like what the company has going on, it's just value concern right now.

Why Asta Funding ASFI?
It's always fun when I find a new stock that I've never seen that pushes most of my buttons. I don't know if I'd ever considered Asta as a holding before, but everything fell into place when I was evaluating last night.

Some of the things that I liked

Book Value has been growing at around 25% annually
6/07 $16.16
9/06 13.51
9/05 10.72
9/04 8.58
9/03 9.76
9/02 4.16
9/01 2.86
9/00 1.77

Return on Equity
6/07 25.9%
9/06 27.8
9/05 23.9
9/04 21.5
9/03 18.4

While sales per share have not been as consistent on an annual basis, we've still seen revenue more than triple over the past 4 years.

The PE on this is 10. A similar company that I like PRAA Portfolio Recovery trades at a multiple closer to 15. Many stocks appreciate via PE expansion and the opportunity is here.

Big fat net margins - over 40% for the past 3 years

Free cashflow - this is a cash business. No heavy investments in plant or equipment required.

Transactions

I haven't looked seriously at transactions recently, but I just placed some limit orders for tommorrow - we'll see what happens. Cramer always says take some off the table after a long run-up, so that's what I'm doing.

I put in an order to sell half of my Immucor BLUD position. They sell blood tests and blood test equipment. This holding has good momentum going for it, but I think it's getting close to fair value and want to ease out a bit.

I put in an order to sell a portion of my Hansen Natural HANS position. I'll probably get burned on this one and it may keep on running up, but it's gone a long way fast and like the other, I want to take a bit off the table. Hopefully can add back to my position on a correction. This is a dangerous trade to me because I think it's likely HANS will be higher 1-2 yrs out... but going to see if I can take some off the table.

Opening a position in ASFI Asta Funding. They are a collections company - buy up past due debt at pennies on the dollar and try to collect.

We'll see what happens tomorrow.

Adding to Garmin

I missed the news yesterday, but Garmin dropped over 15% over the past 2 days due to Nokia purchasing digital mapmaker Navteq. Navteq supplies the digital maps for Garmin.

I put in a small order to add to my Garmin position following the drop. Here's an article from Seeking Alpha that aligns with my thinking. It's normally good to hold off on sharp declines, but I think this drop is based on a combination of panic selling, and alot of folks riding large profits willing to sell a big gainer easy.

Here's hoping panic is what's going on.

Also, Immucor BLUD announces earning tomorrow and I'm going to put in a limit order sell half prior to earnings. I haven't had this one long, but it's approaching fair value and I just want to take a bit off the table. It's had a good run and stocks with good momentum like this tend to keep running so I don't want to sell all.

Expenses

I hadn't really thought about it this way, but this Motley Fool article got me to thinking about annual mutual fund expenses.

If somebody has $100,000 of investments sitting out there in a mutual fund with a 1% expense load, then they're paying $1000 per year in expenses to the fund. At current discount broker rates thats easily over 50 round-trip trades per year...

Follow-up on trades

All of the trades I placed last Sunday got filled on Monday. (Sorry for the delay - I've been out of town and unable to post since then.)

CRDN Ceradyne is still my largest holding, but I just pared the position back.

The buy for PMTI Palomar increases my existing shares making Palomar my 4th largest holding now. It's interesting - possibly good news - that the stock was up today in an otherwise bad down market.

I doubled my position in TRAD Tradestation. The price action on this one is still bad but I just like the numbers on this one. I will not be adding more unless the stock moves higher.

Opened two small positions in stocks BLUD Immucor - blood screening equipment/tests - and VDSI Vasco Data Security - a very high growth e-commerce supplier. These are both small positions as I don't know much about the stocks and they're relatively new arrivals on my screens. BLUD hits alot of screens and the valuation looks decent so I took this small position to encourage me to follow the story a bit closer than I otherwise would.

Stock Holdings - July

It's been a while since I posted stock holdings, so here goes:

My stock holdings from largest to small-
CRDN - Ceradyne - ceramic armor (body armor)
CTSH - Cognizant Tech - information tech (India)
GRMN - Garmin - GPS systems
HANS - Hansen Natural - Energy Drinks
LIFC - Lifecell - tissue generation for reconstructive surgery (like skin for burn victims)
INFY - Infosys - information tech (India)
NGPS - Novatel - GPS system components
NTES - Netease - online video games (China)
PMTI - Palomar Medical Tech - cosmetic surgery lasers
TRAD - Tradestation - online brokerage and trading platform
CKFR - Checkfree - online billpay provider

the last 5 are really pretty small positions. I'm disappointed in the performance of recent purchases of PMTI and TRAD and am considering breaking my rule of not adding to a stock that's down, but I like both of these valuations right now.

Google's been doing well since I missed on my limit order a while back. I probably shouldn't have been so stingy on it as it seems on the move currently.

In the live and learn category: I sold half of my position in Garmin on 12-4-06 at 50.47. Garmin is at 76.05 today, up over 50%. Sometimes I should just keep riding a winning horse. I sold with expectation of buying back at lower prices, but sometimes the market doesn't give you that chance.

Stock update

Welp, just checked my portfolios and I got 3 of the 4 stocks that I placed orders on.

My orders for Lifecell (LIFC), Palomar (PMTI), and Tradestation (TRAD) were filled. Unfortunately I didn't get Google (GOOG), it bounced up at open and closed a good bit higher for the day. How's that Meatloaf song go? 3 out of 4 ain't bad?

Those buys lessened my cash position, but still sitting with around 45% cash in my trading accounts. I guess a little less bearish than I used to be.

For my next investments I've been thinking of just buying a big tank and filling it up with gasoline. The way it's going up it might be a top performer.

Placed some buy orders tonight

Well, I've been sitting on my butt for several months waiting on the market to pull back and figure maybe it's not going to happen.

I placed some buy orders for Google, Lifecell, Palomar Medical Tech, and Tradestation (GOOG, LIFC, PMTI, and TRAD). I'm not intentionally targeting tech-ish companies - it's just that these look appealing right now as I've posted before.

All were limit orders placed below today's close, so I'll have to see if I've actually bought anything when I get home from work tomorrow.

As far as contrary indicators go, me placing buys probably means the market is at a top, so this might be a good time to sell - and I'm only half kidding...