Investment Update - 10-30

Just a quick update.

Added a few stock positions this week.

Added
ARO Aeropostale - teen retailer
WDC Western Digital - tech / hard drives
MRK Merck - major drugs
DO Diamond Offshore - offshore drilling, mostly shallower water (gulf of Mexico exposure)

Sold
AZN Astrazeneca - drugs. This one wasn't acting right, and decided to sell and swap into MRK instead.


My Stock portfolio has largely become dominated by Tech / Healthcare / Consumer Brand/ Retail over the past couple of months. It looks like this now from large to small:
EBIX Ebix
MSFT Microsoft
INTC Intel
DECK Deckers Outdoors
TXN Texas Instruments
GILD Gilead Sciences
TEO Telecom Argentina
NE Noble Energy
DO Diamond Offshore
WDC Western Digital
ROST Ross Stores
MRK Merck
ARO Aeropostale
GES Guess

Still sitting on a whole lot of cash.

New Theory of Money

I found this to be a very interesting read on financial systems.
Time for a New Theory of Money

I find the central arguments around the purpose of banking very interesting - that banks should exist for reasons other than the profit motive - that they serve a public role of money creation (due to fractional reserves banks essentially create money when they create a loan). It places banks somewhere between a pure economic animal and makes it a hybrid public/private institution. The discussion attributes much of the recent economic problems to banks getting into businesses they were never intended for, and argues for back to basics banks, even if state owned.

Stock update - 10-26-10

As part of my ongoing series of position trades I sold out of JNJ Johnson and Johnson for about 10-11% gain. In from 8-16 at 57.93 and out 10-25 at 64.08 and picked up a dividend along the way. The overall market moves have helped me considerably on the position trades that I've done up to now (KMB, PEP, WMT, CMCSA, and JNJ). I also group ongoing positions in MSFT and INTC into that same basket, although they fit into the Greenblatt Magic Formula approach I'm working on also.

Additionally I sold a smaller position in BID Sothebys after holding for a few years. Sothebys is one crazy acting stock. It's been bouncing all over the place.

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.

Crooked Still

Check out this tune by one of the more interesting bands I've come across in a while. They're called Crooked Still and this is one of my favorite songs by them: "Come into my Kitchen"

Naica's Los Crystales cave

See this video of the Naica's Los Crystales cave in Chihuahua, Mexico. Is this not one of the most unreal things you've ever seen? As you watch imagine 130F degree temps and 100% humidity as you slowly bake.



Read more about it on Wikipedia. There's a show on Natural Geographic about the caves also (where I heard about them in the first place).

My new hero: Peter Schiff

Whoa, I just saw a link to video from Peter Schiff on seekingalpha.com, an investing website with alot of great articles.

I'm going to have to read more about Peter Schiff but this guy called the economic mess we are in - and he put the other talking heads to shame. Watch this video of him on various news shows as he's literally laughed at by commentators and other guests when he warns about the coming mortgage crisis, banking collapse, and economic recession.

Peter Schiff is my new hero! Prepare to see who was clueless (utterly) - and consider whether you should listen to these guys ever again. They couldn't even imagine Peter Schiff's argument being accurate - to the degree that they dismissed him with laughs and giggles. It's scary how right Peter Schiff was and few others could see it.

Conundrum

I for-the-most-part try to keep political topics off of my blog, but I found this post from Politico interesting and curious at the same time.

How does a news organization cover White House hopefuls when so many are on the payroll? .... With the exception of Mitt Romney, Fox now has deals with every major potential Republican presidential candidate not currently in elected office.