Thursday, January 13, 2011

Q4 Earnings... Random Musings

We'll I've been a little slow on the posting recently, but I have been extremely busy.  The holidays along with other commitments tie up a lot of time.  Despite this I have still been able to read a decent number of 10-k's and 10-q's along with a couple books over the holidays.  Have I mentioned how much I like to read?

Joel Greenblatt's book "You Can Be A Stock Market Genius", is a decent book although slightly dated.  The contents are nothing revolutionary, although he does highlight a number of places to look for bargains.  Particularly disclosure documents for spinoffs, partial spinoffs, and rights offerings.  He touches a little on bankruptcy and restructurings  Other content on recapitalizations, stub stocks, LEAPS, Warrants and options was decent but not as relevant for today.  The biggest thing I took from the book, which the average investor must realize if he is going to be an above average investor, is that you must read, read, read.  Opportunities that Joel recommends in the book are often in the front page of the newspaper for several weeks.  You must realize when an opportunity is present and then you must read up on the SEC filings to gain an edge.  If you think you will find great stock tips from someone on the internet, think again. 

We'll Q4 earnings are starting to come out and I am very interesting in seeing how things turned out for JP Morgan (JPM), due out tomorrow.  It will give further insight into the financial sector.  Jamie Dimon has said he wants to raise the dividend to around $1 per share but is waiting on approval from the regulators. 

Intel just reported some higher numbers today and that I believe will be the trend going forward.  I suspect Q4 GDP to be in the 5+ % range when released later this month.  Today's trade deficit report showed strong exports which really help the GDP number. 

Bank of America (BAC) has to be a top pick now that the majority of the repurchasing risk from Fannie and Freddie are out of the way.  The company announced a settlement a few days ago.  Compared to BAC, Wells Fargo (WFC) had about 1/3 less expected repurchase requests than BAC so there isn't really as big an issue for them.  If you take the time to look at any of the financial companies you will see that earnings will come back once writeoffs for bad debts come down.  It will take time, but it will come.  I know nobody reads any of the 10-Q's, but WFC release $650 million in reserves for bad loans in Q3.  That is important because they believe the worst is behind them, loan losses have peaked, and reserve releases will now add back to earnings.  JPM will likely release some excess reserves tomorrow giving them strong earnings and earnings growth (they have a 2x buffer compared to loan losses). 

If you take a look back into history Buffett has been buying WFC at an average of $31 per share (since around 2004), and US Bancorp (USB) at around $31 (pre 2007).  Wells Fargo today still sells for that price and could have been had for much less over the past 6 months.  USB is still cheaper than what Buffett paid for his shares.  I like both, but now that WFC has basically doubled it size by acquiring Wachovia, and only increased it's share count by 1/4, Wells Fargo has some huge growth ahead of itself.

I believe all of the recommended companies for 2011 are up year to date, and with the economy coming (strongly) back to life, expect earnings to growth this year.  I noticed someone put in a market bid for 1000 shares of Hardwoods Inc (HWD.un), and drastically overpaid.  If that was you don't worry you still bought at a cheap price but don't do it again.  You have to specify a bid price that you feel comfortable with and wait.  You have to be very patient with thinly traded stocks.

Among the other recommendations, BAC is still selling for a pretty steep discount compared to book value and compared to any other financial company out their.  I did get quite luck with by BAC warrants as I seem to have purchased within a quarter of the bottom.

Well I have a few other companies that I feel are quite cheap that I have been reading up on lately.  Perhaps I will mention more over the next few weeks.  Other than that, I have been learning quite a bit about distressed debt investing from friend, which while interesting is often quite difficult for an individual investor.

I am also contemplating posting my investment record on my blog.  I am still undecided, as I don't really think people would care.  The other reason why is because I really have come to hate Facebook.  Facebook has really become a joke... for insecure people to boast to their friends how great their life is.  Are people so insecure?  It's really does show a side of our culture that I find quite shocking. 

If you have read Warren Buffett's biography, The Snowball, you will already know that Buffett lives by an internal scorecard.  Buffett has put it this way, “would you rather be the world’s greatest lover, but have everyone think you are the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover? Warren’s father was 100% Inner Scorecard person and “taught him how life should be lived”. 

There is more truth to the above quote than meets the eye.  Our culture today derives their self-esteem from what other people think about them, almost a 100% outer scorecard. 

It is very difficult to be a good investor if you live by an outer scorecard.  You will buy something and then when it goes down you will feel bad because everyone else disagrees with your buy.  Then you will feel pressured to sell and cut your losses.  Instead if you have done your reading, determined a fair value, and your stocks go down you don't sell.  If you facts and reasoning were solid before your initial purchase your should feel excited to buy more shares at a even cheaper price.  That is living and investing by an internal scorecard.

Have a great weekend!


Best Regards,
Kevin

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