Adding to BAC

Another quick update.  I just added 2500 BAC Class A TARP warrants at $2.01 apiece, for a total outlay of $5,030.

More Sears

Just a quick update.  After Sears's gut-wrenching plummet the other day, I decided to add to my position.  Specifically, I bought Jan 2014 $55 call options (20 contracts at $2.00), costing me a total of $4,012.

Questions?  Comments?  Email mevsemt@gmail.com

Trying Something Different... Again

On Friday I swapped out my Bank of America stock with Bank of America Class A TARP warrants.  Specifically, I sold all 2850 shares of BAC at $5.58 (for a total of $15,898) and bought 5000 shares of BAC-WTA at $2.09 (for a total outlay of $10,495).   By the way, if this sounds familiar, it's because I did the exact same thing back in July (http://mevsemt.blogspot.com/2011/07/trying-something-different.html).

And again, my logic for the swap is the same.  Simply put, I feel the warrants now have a better risk/reward profile.  It's actually pretty interesting, the common and the warrants usually move in tandem with each other, but recently their prices have deviated.  Here's what I mean.  I bought BAC on 11/25 at $5.18 (http://mevsemt.blogspot.com/2011/11/bac-my-favorite-mistake.html).  That same day the warrants closed at $2.47.  However, by last Friday, the common had RISEN to $5.58 and the warrants had FALLEN to $2.09.  In other words, in just under a month, the common outperformed the warrants by over 20%.  

Finally, for anyone who wants some light reading, I suggest you check out this 1992 OID interview with Bruce Berkowitz (http://www.fairholmefunds.com/pdf/oid1992.pdf).  The interview took place right after the Savings and Loan crisis, when just about everyone thought Wells Fargo was going bust and California was minutes away from falling into the Pacific.  So why do I bring this up?  Well, from 1991 to 1992, Berkowitz was buying Wells Fargo frantically, paying between $52 and $78 a share.  In fact, according to the interview, he put roughly 1/3rd of his liquid net worth in the stock.  So how'd it turn out?  Well, by 1998 the stock had risen to $374, at which time Wells merged with Norwest.  After the merger, Wells split 10 for 1, and by the end of 1999 the stock had risen as high as the equivalent of $498 a share.

Today, Berkowitz has been pounding his chest over BAC, much the same way he did for Wells over two decades ago.  In fact, he's even said BAC reminds him of Wells, and that he's basically staking his reputation on the company.  Given that he said this earlier in the year, when BAC was trading much higher, maybe it's time to listen?  

Questions?  Comments?  Email mevsemt@gmail.com

Kmart Smart?

I've written about Sears ad nauseum, yet I've got nothing to show for it but egg on my face.  Indeed, over the past year, the company's consolidated operations have gone from bad to worse.   However, I still believe there's a lot of underlying value here (real estate, Kenmore, Craftsman, Sears Canada, Lands End, Home Services, etc.).  Further, anyone who owns Sears common stock is closely aligned with Eddie Lampert (and if you look at Autozone's chart from the late 90's through today, you'll see there could be worse things!).

With this in mind, I decided to sell cheap to buy cheaper.  Specifically, I sold my 625 shares of JCP at $32.34 (originally purchased at $25.47 in September 2011) and bought 400 shares of SHLD at $45.81, making it my second largest holding.  Wish me luck!

Questions?  Comments?  Email mevsemt@gmail.com

BAC... My Favorite Mistake

Sometimes, things don't turn out as expected.  As an individual investor, there will be plenty of times when my picks are just flat out wrong.  The trick is knowing when my thesis is "broken" vs. when I'm having a knee-jerk reaction to a falling stock price.  If the thesis is broken, maybe it's time to sell.  If the thesis is intact, maybe it's time to double down.

With this in mind, I've been reevaluating my position in St. Joe.  In a nutshell, I viewed JOE as a "jockey" bet on the capital allocation skills of Fairholme manager, Bruce Berkowitz (http://mevsemt.blogspot.com/2011/05/new-coattails-to-ride.html).  However, Fairholme is in flux right now.  With recent redemptions and the departure of co-manager Charlie Fernandez, I'm guessing JOE is very far down on Bruce's list of priorities.

Coincidentally, while my confidence in JOE has been waning, my interest in another Berkowitz pick has been growing.  Further, it's a holding that I'm somewhat familiar with, after all I've lost money on it not once, but twice!  I'm talking, of course, about Bank of America (click the "zz Bank of America" label on the right for my previous posts).

It's worth noting that when I finally sold BAC back in August, I was just swapping it for a position in AIG (and locking in a tax loss).  Additionally, I made the point that BAC (and other big banks) could still be compelling values.  Since then, my big-bank-thesis hasn't changed, but BAC's stock has fallen by a third.  For anyone interested, check out Fairholme's most recent presentation on the company: http://www.fairholmefunds.com/pdf/fairholme_stays_the_course.pdf.

Now let's take a step back.  Generally speaking, I want to keep a high % of my portfolio in cash due to the significant macro uncertainty.  After all, when you have someone like PIMCO's Mohamed El-Erian saying an Italian default would be "worse than Lehman" and calling the U.S. political dysfunction "terrifying," I think it's safe to say that caution is the name of the game.  Nonetheless, I still want to position the rest of my portfolio for the best possible risk adjusted returns (duh).

So where does this long, rambling post leave us (or as my wife says, land the plane)?  Well, on Wednesday I decided to swap JOE (sold at $13.45) for BAC (bought 2850 shares at $5.18).  With BAC, I'm hoping the 3rd time's a charm.  Additionally, JOE is going to stay on my watch list - once things settle down at Fairholme, JOE could once again become an interesting opportunity.

Questions?  Comments?  Email mevsemt@gmail.com

Reshuffling the Deck

Generally speaking, some of my best stock picks have happened when the company is under duress.  Assuming the company is able to survive/turnaround, you've made several times your investment simply because so much of the perceived risk has disappeared.  For example, I bought Fairfax back when it was at $100 and sold several years later just shy of $300 (pre-blog).  I bought USG at the height of the financial crisis, and here's how it turned out: http://mevsemt.blogspot.com/2010/04/transaction-alert-sold-usg.html.

In fact, if you look at some of the best investments made by the great investors, you'll see they've done the same thing (Buffett - Geico & American Express, Berkowitz - Wells Fargo).  Of course there's a risk to this approach - maybe the market is right, and there's always a chance the company could indeed fail!  In fact, I bought AIG just as the financial crisis was hitting the fan, and lost over 50% before selling.

With this in mind, on Friday I decided to add to two of my "stressed" positions, and sell one of my holdings where I may have overestimated the upside.  Specifically, I bought an additional 500 shares of JEF at $9.92 and 1000 AIG warrants at $5.37.  The stock I sold was MIL (formally Terra Nova) at $6.80 (2268 shares).

Questions?  Comments?  Email mevsemt@gmail.com

Couldn't Resist

If you've been paying attention to the financial markets, then you probably know MF Global declared bankruptcy earlier this week.  Jefferies Group (JEF) is a similar company, and much like Lehman followed Bear Stearns, people are concerned JEF will follow MF.  

In fact, JEF plummeted over 20% today before trading was briefly halted.  When trading resumed the stock recovered somewhat, but is still down about 10%.  Having a significant % of my portfolio in cash, and being a big fan of JEF's management and a huge fan of their largest shareholder (Leucadia, which also happens to be a big holding of mine), I decided scoop up some shares.  More specifically, I bought 1250 shares at $11.11 for a total outlay of $13,886 (including commissions).  

So what's going to happen with JEF?  Frankly, I don't know.  However, my guess is they'll be just fine.  If so, JEF could be a huge home run.  But in the meantime I'll be keeping my fingers crossed!

Questions?  Comments?  Email mevsemt@gmail.com

Sold my MAS LEAPS

Well today I sold my remaining 100 MAS LEAPS at $0.80.  With the market bouncing around a 2 month high I just couldn't justify holding this highly leveraged position with the expiration date only a little over a year away.

So how'd I do?  Well, I originally purchased MAS just over two months ago (http://mevsemt.blogspot.com/2011/08/another-real-estatehousingconstruction.html) for a total outlay of $5,656.  I sold all 125 contracts at $0.80, so I my cash out was $9,960, netting me a profit of just over $4K.  In other words, not to shabby!

Questions?  Comments?  Email mevsemt@gmail.com.

Dialing It Back...

On Friday I made two transactions: I sold my remaining 550 shares of AHS (at $4.25) and reduced my MAS 2013 LEAPS by 25 contracts (sold at $0.80 per contract).

If you click on the "zz AMN Healthcare Services" label on the right you'll see AHS has been a lot of work, a lot of ups and downs, and very little profit.  But I guess sometimes that's just how it goes, right?  Anyway, although I still think the shares are undervalued, they were such a small % of my portfolio that it just wasn't worth holding them anymore.

The MAS LEAPS, on the other hand, have turned out really well over a relatively short amount of time.  I bought 125 contracts at $0.45 about 2 months ago, so selling 25 of them at $0.80 is great!  Unlike AHS, with MAS I'm just trying to be opportunistic and take advantage of the price Mr. Market is offering, so don't be surprised if I continue selling in the days/weeks to come.

The other reason for selling both AHS and MAS was to make my portfolio a little less risky.  The market has rallied nicely since the start of Q4, and as a result the % of my portfolio in cash had fallen to the high 20's.  However, after Friday's transactions my cash % is back in the low 30's, and if the market continues to rally I'll probably continue to trim back some positions.

Questions?  Comments?  Email mevsemt@gmail.com

Returns as of Q3 2011

Man, these last two quarters have been miserable!  Not only have my returns been negative, but they've lagged the S&P too.  Oh well, I guess this type of thing happens with a concentrated portfolio.  Besides, over the last 5+ years I've managed to outperform the S&P by roughly 10% per year, so I'm still hopeful I'm doing something right!  Anyway, here's a quick summary of where I stand for 2011:  

• I came into the year with $126,967.  During the year I've deposited $35,000 into my account.  YTD my holdings have DEPRECIATED by $22,073, leaving me with $139,894 as of 9/30/2011.  
• YTD my annualized IRR has been -19.4% vs. -15.0% for the S&P (assumes dividends are reinvested AND the $35K I deposited was used to buy additional SPY shares at that day's closing price).  

As I mentioned above, even though I got my butt kicked these last two quarters, I'm still well ahead of the S&P for the last 5+ years.  See below for details (click image to enlarge):

I also included a waterfall graph that shows a little more detail.  The blue bars are the beginning and ending balances, the green bars show appreciation/depreciation, and the red bars represent deposits (click image to enlarge):

So what about my holdings in particular?  Well, in general I'm still cautiously optimistic.  In fact, I think some of my holdings have gotten down right cheap, especially SHLD, JOE, and AIG.  I'm also surprised we're seeing LUK trade this close to book value.  I mean these guys have compounded book value at 20% per year for 3+ decades and there's no premium on the stock price whatsoever!  Of course there's also plenty to be worried about; Europe's a mess, China's growth may be slowing, and Washington is slightly less functional then my 21-month-old daughter's daycare class.  Anyway, below is a snapshot of my current holdings as of 9/30/2011 (click image to enlarge):

Questions?  Comments?  Email mevsemt@gmail.com.

Light Commentary and Some Links

I'm going to try something a little different today.  Recently there's been a handful of interesting articles/analyses/press releases on companies I own, so I thought I'd provide the links and do some light commentary around them.

First there's Terra Nova (TTT).  As discussed in previous posts, the company is basically an investment vehicle for Michael Smith.  But since no acquisitions have been made, owning TTT requires a bit of blind faith in Smith.  In this vein, here's one of the best analyses I've found on his historical track record: http://seekingalpha.com/article/290755-15-for-15-years-michael-j-smith-s-outstanding-track-record?source=yahoo.

Then there's Sears.  They're spinning off Orchard Supply, started selling Craftsmen tools at Costco, and hired a new CFO.  Taken individually these may not sound like much, but taken together this may signify the beginning of a transformation from a retail operation to a brand/real estate/asset holding company.  Here's a good blurb on the Craftsmen part: http://seekingalpha.com/article/292376-sears-holdings-externalizing-brands-could-be-major-catalyst-for-stock?source=yahoo.  Here's the Wikipedia page on the new CFO: http://en.wikipedia.org/wiki/Robert_Schriesheim.  Clearly, Schriesheim is a turnaround/restructure guy - my guess is Sears wouldn't have hired him unless this is their intent AND he wouldn't have accepted the job unless he judged there was a reasonable likelihood of succeeding.  And lastly, if you're sick of my bullish sentiments, here's a good commentary with a bit more of an even keel: http://seekingalpha.com/article/292409-whether-we-should-throw-in-the-towel-on-eddie-lampert-and-sears-holdings?source=yahoo.

And what about JOE?  Well, regular readers know I'm a huge fan of Bruce Berkowitz.  In fact, his involvement with St. Joe is one of the main reasons I bought the stock (http://mevsemt.blogspot.com/2011/05/new-coattails-to-ride.html).  Additionally, Berkowitz has been an investor in LUK (my largest holding) for 10+ years.  So what's the connection?  Well, LUK has done commercial/residential real estate development on the Florida panhandle, and JOE's recent appointments/hires of Brady, Bienvenue, and Keil all come from LUK.  Frankly, it wouldn't surprise me to see LUK and JOE partner up sometime in the near future.  Lastly, JOE has recently agreed to let Berkowitz acquire up to 50% of their shares (he currently owns 30%), so my guess is he's confident in their prospects.

Well, I hope you enjoyed the commentary and links!  And I always like hearing from my readers, so feel free to email me with any comments or questions (mevsemt@gmail.com).

Selling Cisco

Today I sold my 1,000 shares of Cisco.  I originally purchased it back in February (http://mevsemt.blogspot.com/2011/02/buying-some-cisco.html) because I viewed it as "significantly more attractive than holding cash."  So let's see, I purchased it at $18.88 (outlay of $18,875) and sold at $15.48 (proceeds of $15,476).  Whoops...

Anyway, the main reason for selling CSCO is last week I purchased JCP.  Basically, this was a sell-cheap-to-buy-cheaper trade out.  Additionally, after buying JCP the % of my portfolio in cash had fallen to the low 20's, and selling CSCO brought it back up to the low 30's (a level at which I'm much more comfortable given today's environment).

Questions?  Comments?  Email mevsemt@gmail.com

More retail? Great...

Many people, myself included, have a tendency to make investing a lot more complicated than it needs to be.  IMHO successfully picking stocks can be broken down to two simple guidelines, 1) don't overpay and 2) make sure you're aligned with a capable and intelligent management.

These opportunities are rarely black and white, so you're usually left navigating the grey (for instance, how many times have you said "this stock is really cheap, but there are a few things I'd change about management?").  However, every once in awhile there's a fat pitch right down the middle, the only trick is you have to be ready to swing.

With that in mind, on Friday I bought 625 shares of J.C. Penney (JCP) at a price of $25.47, for a total outlay of $15,924.  On a numbers basis alone, the price of JCP is somewhere between "cheap" and "reasonable."  However, the real draw for me is both management's talent and alignment with shareholders.

First there's Bill Ackman, the activist/value investor who runs Pershing Square Capital Management.  A little under a year ago he began acquiring shares, and now owns about 18% of the company. During this time he was also elected to the Board, and recently signed a new agreement that would allow him to increase his stake to 26% without triggering a poison pill.  This new agreement is significant - you have a great investor with insider knowledge wanting to buy more stock - it's not much of a leap to conclude the stock is cheap.  Then there's the alignment thing - Ackman's goal first and foremost is to earn a return for his limited partners at Pershing, so my guess is he's pretty focused on maximizing shareholder value at JCP.

Next there's Steven Roth, the chairman of Vornado Realty Trust (VNO).  Through VNO Mr. Roth acquired shares and was elected to the JCP Board in tandem with Mr. Ackman.  Vornado itself has an interesting history; it was a struggling retailer until Mr. Roth took control about 30 years ago.  He closed down the retail operations and transformed it into a REIT, and since then the returns for shareholders has been spectacular (http://www.fundinguniverse.com/company-histories/Vornado-Realty-Trust-Company-History.html).  Like Vornado JCP owns a significant amount of real estate, so I wouldn't be surprised to see some sort of real estate play here (although I think that's just part of the story).

Last but not least is Ron Johnson, the newly elected CEO of JCP slated to start in November.  Mr. Johnson's claim to fame is the Apple retail store and the Genius Bar, but before Apple he was the VP of merchandising for Target.  Mr. Johnson made over $100MM through stock options at Apple and now he's invested $50MM of his own money in JCP (in the form of about seven million warrants with a strike price of $29.92 and an expiration date in 2017).

So what's not to like here?  In Ackman, Roth, and Johnson you have some of the most talented professionals in capital allocation, real estate, and operations/merchandising, respectively.  They've all invested significant amounts of their own money, and by buying JCP stock I've directly aligned myself with them.  Of course that's no guarantee of success, but I'd say the odds are tilted in my favor!

Questions?  Comments?  Email mevsemt@gmail.com.

Another Real Estate/Housing/Construction Stock... Really?!

Between Sears and St. Joe you might've thought I had plenty of exposure to real estate/housing/construction and I'd be looking elsewhere for opportunities.  If so, you're probably right about the "plenty of exposure" but you're wrong about the "looking elsewhere," as today I bought 125 Jan 2013 $12.50 call options on Masco (MAS) for $0.45 per contract.  In plain English these LEAPS give me the right to buy 12,500 shares of MAS on or before January 19, 2013 for $12.50 a share. 

So what does Masco do?  Well they've got five segments which I'll list below (it's OK if you cringe a little, I did too):

1. Decorative/architectural products (including Behr paint)
2. Plumbing (including Delta faucets)
3. Cabinets & related products
4. Installation and other services
5. Specialty products

As you may have guessed Masco's operating performance has been horrendous over the last several years.  Revenue has fallen about 40% from the peak, and FCF has fallen from $1.1 B to $225 MM.  So why did I buy today?  Well, it's my belief that these horrible results, dire outlook, etc. are more than priced into the stock.  Further, the company's management has done a great job of cutting costs and right-sizing the business - the fact that they're still FCF positive is actually pretty good. 

My hope is the economy manages to stay out of a deflationary spiral and we see housing rebound in a year or two.  If this is case, Mr. Market's manic depressive mood around Masco should change as well, and the stock could easily climb to the mid-teens.  Looking at my investment checklist (http://mevsemt.blogspot.com/2010/08/investing-checklist.html) this stock meets most of the criteria - insider buying, 52-week low, guru buying, discount to Morningstar & my fair value, high degree of leverage on the options, and asymmetric payoff all fit here (althoug insider and guru buying is a bit light). 

To give you an idea of the upside I'll take a haircut to Morningstar's fair value of $22 and assume the stock gets to either $15 or $17.50 at expiration.  The cost of these LEAPS was $5,656 and if MAS hits $15 they'll be worth $31.3K.  If MAS hits $17.50 they'll be worth $62.5K.  Can you say asymmetric?!

Lastly, on a cautionary note I should stress that this is a very speculative bet.  In the past some of these have really paid off (SD and NRG) and others completely flopped (EXC and so far SHLD).  I have no idea how this one will turn out, but I personally feel the risk-reward is worth it.  Wish me luck!

As always I'm available for questions and appreciate comments.  Email mevsemt@gmail.com.

Out of the Frying Pan?

This week has been absolutely insane!  Typically I'm not a "trader", but the volatility we've had this week has created some interesting opportunities...

Regular readers know Bank of America has been a huge thorn in my side - first I took a loss on the common stock, then I traded it in for TARP warrants only to have things go from bad to worse!  But there's a silver lining; over the last three days BAC-WTA has rebounded about 50% off its lows.  Now this isn't a function of a great earnings release or anything like that, rather it's simply a bi-product of the volatility that's been dominating the market.  

Anyway, as a result I decided to sell my stake in BAC-WTA for two reasons.  First, I'm still underwater on this position so I wanted to lock in a tax loss.  Second, I wanted to use the proceeds to buy AIG TARP warrants (AIG-WT), which are still right around their all-time lows and IMO represent a better value at this time.  Specifically, I sold the 4,000 shares of BAC-WTA for $3.40 (netting me $13,595) and used the proceeds to buy 2,000 shares of AIG-WT at $6.94 (costing $13,885).

For anyone interested in AIG there's a great analysis here: http://longtermvalue.wordpress.com/2011/05/13/american-international-group-aig/.  Bruce Berkowitz has also commented extensively on the company, so you can check that out as well.  And lastly, just because I sold BAC doesn't mean I've given up on the company (or banks in general).  In fact, Citigroup is another company high on my watch list.

Questions?  Comments?  Email mevsemt@gmail.com

Cash and Cojones, Part II

Back in May I wrote a post titled "Cash and Cojones," (http://mevsemt.blogspot.com/2011/05/cash-and-cojones.html) in which I said the following:

Recently I've read a handful of articles that basically say the same thing in different ways: proceed with caution.  Or, to put it more colorfully, in early 2009 you only needed two things to make a killing: cash and the cojones to commit it.  Ironically, if you had those two things in 2005-2007 you probably got killed.  So what does the market feel like today?  Well, while we may not be quite at the excesses of 2005-07, we're definitely nowhere near the palpable fear of early 2009.

So the real question is what’s an investor to do?  Obviously I have no idea what the right answer is (remember, I'm just some guy with a blog), but I’ve been focused more and more on mitigating risk and less and less on reaching for returns. 

So, out of a general sense of concern and nervousness I managed to keep a large % of my portfolio in cash.  In fact, at the end of Q2 my cash position was 37% (http://mevsemt.blogspot.com/2011/06/q2-2011-returns.html).  However, over the recent days/weeks the fear in the market has grown steadily and, while it might not be 2009 all over again, I'm wondering if maybe now is the time to start using some of that dry powder... 

With that in mind I decided to dip my toe in the water by adding to my SHLD LEAPS.  Specifically, I bought Jan 2013 $95 call options (10 contracts at $3.00) for a total outlay of $3,010.76. 

On a side note there are a ton of stocks I've added to my watch list, some of them are new (MS, JEF, AMD) and some are old friends (SD, USG, NRG).  As always, if I buy or sell anything I'll do a quick write up that day.  Good luck everyone, and for those of you worried about the market decline just remember - this too shall pass.

Questions?  Comments?  Email mevsemt@gmail.com.

Trying Something Different...

Today I made an interesting trade - it's not really a new investment but rather a different flavor of an old one.  The company I'm talking about is Bank of America, and what I did was buy the class "A" TARP warrants ("BAC-WTA" on yahoo finance) while at the same time selling my 2000 shares of BAC common stock.  I purchased the TARP warrants for $4.52 (costing me $18,085) and sold the common for $9.76 (netting me $19,516).  In other words, I simply exchanged the common for the warrants.

For those of you not familiar with TARP warrants I suggest reading the following as a quick primer: http://www.choufunds.com/pdf/SA10%20pdf.pdf (the relevant commentary is on pages 2-5).  As you can see the terms for BAC-WTA are really quite interesting - the warrants don't expire until Jan. 2019, the strike price is $13.30, and if BAC starts paying a dividend the strike price is adjusted down dollar-for-dollar so long as the dividend exceeds $0.01 per quarter. 

So why'd I make this exchange?  Well I've been following the big banks and TARP warrants for over a year now, but only recently has the price fallen to the point where I THINK the risk/reward favors the warrants.  Prior to this I preferred to be conservative and just own the regular stock.  Keep in mind this is a levered investment, so if BAC does well the warrants will be a home run, but if the economy falls off a cliff and BAC flounders I'll end up with egg on my face. 

Lastly, Bruce Berkowitz just gave a great interview in which he discusses BAC, which can be found here: http://www.fairholmefunds.com/pdf/amaii2011.pdf.

Questions?  Comments?  Email mevsemt@gmail.com

Adding to Bank of America...

Today I bought an additional 600 shares of BAC at $10.93, bringing my total share count to 2,000 and making it my second largest position after LUK (as of today BAC accounts for 12-13% of my portfolio).  Obviously I think BAC is a good deal at these prices, but this transaction also has the added benefit of reducing % of my portfolio allocated to cash, which had gotten a little too high after my recent deposits.  Lastly, Fortune published a surprisingly good article on the CEO of BAC, Brian Moynihan (http://finance.fortune.cnn.com/2011/07/07/can-brian-moynihan-fix-americas-biggest-bank/?iid=HP_LN).  It's well worth reading if you're a current BAC holder or are thinking about buying the stock.

Questions?  Comments?  Email mevsemt@gmail.com

Q2 2011 Returns

Well it looks like we've got another quarter under our belt, so that means it's time for another performance update.  However, this time around I've added some new exhibits I think you'll like, so read on!

• I came into the year with $126,967 and since then deposited $35,000 into my account.  YTD my holdings have appreciated by $8,340, leaving me with $170,307 as of 6/30/2011.
• YTD my IRR has been 12.4%, whereas the IRR of my hypothetical S&P Portfolio is 11.3% (assumes dividends are reinvested AND the $35K I deposited was used to buy additional SPY shares at that day's closing price).

Below I included a waterfall graph that compares my results vs. the hypothetical S&P - the blue bars are beginning and ending balances, the green bars represent appreciation, and the red bars show deposits (click to enlarge).

Additionally, I've also included a summary report that compares my portfolio to the S&P from 2006 through Q2 2011.  As you can see, the differing IRR's have had a huge impact on the respective ending balances.

Lastly, I wanted to take a sentence or two to talk about my holdings and the market in general.  With regards to the market I have absolutely no idea whether it's under or overvalued, although my gut tells me to err on the side of caution (which is why my cash balance is so high).  As for my specific holdings I'm actually pretty optimistic - I think CSCO and BAC are significantly undervalued and should do well over time.  As for LUK and TTT I expect the owner/operators to continue deploying capital and earning attractive returns for shareholders.  Lastly, I think SHLD and JOE are both undervalued and misunderstood (AND they are also controlled by two of the best capital allocators out there) - so while I have no idea what the future will bring I think the market is significantly underestimating the upside at these prices.  Anyway, see below for a snapshot of my portfolio as of 6/30/2011 (click to enlarge).

Questions?  Comments?  Email mevsemt@gmail.com.

Adding Money (Again)...

Today I deposited an additional $10K in my account, bringing my total assets under management to roughly $166K (of which $62.5K is cash, so I'll be looking to put some of it to work).  Obviously this won't impact my IRR calculation - after all this is simply an increase in AUM and not appreciation/depreciation of the stocks/options I hold. 

Additionally, since I track my returns relative to the S&P, I'll need to update my hypothetical S&P portfolio to keep everything on an apples-to-apples basis.  To do this I simply assume I purchased $10K of the SPY index fund at today's closing price of $127.02, thereby creating a similar growth in AUM.

A Triumph of Stubbornness?

I don't know about you, but when I make a good decision I like to THINK it's due to above average intelligence or some unique insight that only I was capable of making.  Of course, once I stop fooling myself I usually realize my good decision came about due to something else entirely - usually luck but in this case stubbornness.

Here's the background - in May of 2010 I purchased 1200 shares of AMN Healthcare at $8 (http://mevsemt.blogspot.com/2010/05/transaction-alert-bought-ahs.html).  Shortly thereafter the stock absolutely plunged, droping as low as $4.14.   Now here's where the stubbornness comes in - rather than hold or sell I dug in my heels and bought more at $4.68 (http://mevsemt.blogspot.com/2010/09/backing-up-truck.html). 

Today the stock's hovering around its 52-week high so I decided to sell the original 1200 shares (long term capital gain) for $8.54.  I would've sold my whole position but I figured this would be a bad strategy from a tax perspective (since most of my gains have come from the shares I bought at $4.68 and I've held these shares less than a year).

Questions?  Comments?  Email mevsemt@gmail.com

Cash and Cojones

Recently I've read a handful of articles that basically say the same thing in different ways: proceed with caution.  Or, to put it more colorfully, in early 2009 you only needed two things to make a killing: cash and the cojones to commit it.  Ironically, if you had those two things in 2005-2007 you probably got killed.  So what does the market feel like today?  Well, while we may not be quite at the excesses of 2005-07, we're definitely nowhere near the palpable fear of early 2009.

So the real question is what’s an investor to do?  Obviously I have no idea what the right answer is (remember, I'm just some guy with a blog), but I’ve been focused more and more on mitigating risk and less and less on reaching for returns.  This means keeping a high % of cash and only making new investments if I feel the downside is already baked into the stock price (CSCO, BAC, JOE).  Additionally, I’m thinking about trimming AHS as it’s been bouncing around its 52-week high.

So, while my conservative stance may come with opportunity costs in the form of missed returns, I’m sleeping well at night AND in the case of a market sell-off I’ll be able to swoop in and pick up some bargains.  Remember, even a cursory glance at history tells us market corrections tend to happen suddenly BUT with surprising regularity – real estate crash, tech crash, LTCM, savings-and-loan, 1987 crash, etc.

Finally, if you’ve got some spare time I highly recommend reading this memo by Howard Marks (http://www.oaktreecapital.com/MemoTree/How%20Quickly%20They%20Forget%2005_25_11.pdf) – it’s very readable and encapsulates my thoughts on the current market much better than I ever could.  And of course I always recommend reading the Hussman weekly commentary, the most recent of which is here (http://www.hussman.net/wmc/wmc110523.htm). 

Selling EXC

I'm doing a little bit of spring cleaning, and after reviewing my portfolio I decided to throw in the towel and sell my EXC 2012 options.  The thing with options is you either win big or lose big, and after the fact your either look really smart or really dumb - in the case of EXC it's definitely the latter.  To summarize, I acquired these options in May of 2010 (click the "zz Exelon" label to the right to see the posts) for a total outlay $4,123.  My proceeds from today's sales is... wait for it... $528... ouch!

Oh well, I guess stupid is as stupid does.  Next time I'll have to remember to only buy stocks that are going to go up ;)

Questions?  Comments?  Email mevsemt@gmail.com

New coattails to ride?

IMHO Bruce Berkowitz is one the best investors out there, and yesterday I came across a great article about him and one of his holdings, St. Joe (JOE) - http://www.institutionalinvestor.com/Article/2824162/Fairholmes-Bruce-Berkowitz-Is-Beating-Hedge-Fund-Managers-At-Their-Own-Game.html?ArticleId=2824162&p=1.  In fact, after reading the article I came to see JOE in whole new light... 

But before we get into that let's take a quick step back.  For regular readers of my blog you know I've been following JOE for awhile, and what I've come to find is it's a bit of a unique beast.  They are the largest owner of real estate in Florida; most of it is timberland, some of it is beach front, and smack dab in the middle is a brand new international airport.  As you can imagine the housing bust was not kind to them, and if you take a look at their 10 year chart they've basically made a round trip and are back to square one. 

Personally, I think the NPV of JOE's real estate is worth somewhere between $25 and $35 a share.  This assumes the economy continues to recover and the housing market returns to normal over the next 5 to 10 years.  Of course, if JOE were to sell all their real estate today they'd only be worth $10 a share, but the fact is they have a healthy balance sheet and can afford to wait for prices to recover.

Now here's where it gets interesting.  Berkowitz (who owns about 30% of JOE via his mutual fund) recently decided he was unhappy with the way the company was being managed, so he went in and fired the top executives, swapped out most of the Board of Directors, and made himself Chairman of the Board.  BUT I'm not excited because I think Berkowitz will do a better job selling real estate...

The thing about Berkowitz is he runs a mutual fund (i.e. not a hedge fund).  So, when it comes to investing, he's got one hand tied behind his back due to restrictions on owning real estate or other illiquid assets.  The great thing about JOE is it solves that problem - by controlling the company's capital allocation Berkowitz can effectively invest in real estate and other illiquid assets via St. Joe!

So, over the next several years I'm guessing we'll see JOE monetize its real estate in various ways (outright sales, joint ventures, etc.).  Then, probably somewhere around the 5-year mark, we'll begin to see JOE dabble in non-real estate deals.  Finally, after 10+ years I think there's a very real chance that JOE looks a lot more like a Leucadia or Brookfield Asset Management than its current self, which would make an investment at today's prices an absolute home run.  More simply, it's my hope that Berkowitz uses JOE as a vehicle for allocating capital, and in doing so turns it into a wealth compounding machine... 

So with that in mind I decided to jump on his coattails now while there's still room, and yesterday I purchased 1000 shares at $22.23, for a total outlay of $22,235 (including commissions).  Wish me luck!

Questions?  Comments?  Email mevsemt@gmail.com

Finally!

Today I was finally able to sell the remaining 25 NRG LEAPS in my portfolio.  All things considered this was a very successful "trade" - in less than 3 months my investment of $6,071 turned into $17,486 (all figures are after commissions).  In a way this is very reminiscent of Sandridge (http://mevsemt.blogspot.com/2011/02/sold-sd-call-options.html), i.e. the stock popped and I couldn't resist locking in my gains.  However, like Sandridge, it may turn out I'm selling way to early and leaving a ton of money on the table, I guess only time will tell...

Anyway, for reference here are the posts from when I made the purchase: http://mevsemt.blogspot.com/2011/02/new-purchase.html and http://mevsemt.blogspot.com/2011/02/nrg-order-filled.html.

Here's why I made the purchase: http://mevsemt.blogspot.com/2011/03/so-why-nrg.html.

And finally here's where I've previously sold: http://mevsemt.blogspot.com/2011/05/selling-some-nrg.html and http://mevsemt.blogspot.com/2011/05/still-selling.html.

Still selling...

This is going to be a quick post - today I sold 64 NRG LEAPS at prices between $1.75 and $1.80.  Since I sold 11 contracts yesterday (http://mevsemt.blogspot.com/2011/05/selling-some-nrg.html) I'm now left with 25 in my portfolio - hopefully I'll be able to sell these at similar prices over the next few days.

Selling some NRG...

For those of you following NRG you've probably noticed it's been on quite a run.  Personally, I tend to get a little nervous whenever a stock is bouncing around its 52 week high, so today I placed a limit order to sell 50 NRG 2013 $30 LEAPS at $1.70 (as of this writing it's been partially filled at 11 contracts, leaving me with 39 left in the order and 89 left in my portfolio).  Anyway, I'll do a more in-depth write up as time permits (and of course I'll do a quick post each time more LEAPS get sold).

Questions?  Comments?  Email mevsemt@gmail.com.

Big Banks?!

For those of you keeping up with my blog you've probably noticed I have a huge % of my portfolio in cash, so today I decided put some of it to work by buying Bank of America (BAC).  Specifically, I just bought 1,400 shares at $12.38 (for a total outlay of $17,337, or about 10% of my portfolio). 

Rather than do a lengthy write-up I'm just going to reference 2 previous posts, which should go a long way toward explaining why I think the stock's attractive: http://mevsemt.blogspot.com/2010/08/investing-checklist.html and http://mevsemt.blogspot.com/2010/09/uu-investing.html. 

Questions?  Comments?  Feel free to email me at mevsemt@gmail.com.

I too like to live dangerously...

I just purchased 5 additional contracts (bringing my total to 25) of SHLD Jan 2013 $95 LEAPS at $4.50 for a total outlay of $2,258 (including commissions).  Wish me luck!

Adding Money...

Yesterday I deposited an additional $25K in my account, increasing my total assets under management to roughly $171K.  Obviously this won't impact my IRR calculation - afterall this is simply an increase in AUM and not appreciation/depreciation of the stocks/options I hold. 

Additionally, since I track my returns relative to the S&P, I'll need to update my hypothetical S&P portfolio to keep everything on an apples-to-apples basis.  To do this I simply assume I purchased $25K of the SPY index fund at yesterday's closing price of $133.26, thereby creating a similar growth in AUM. 

Q1 2011 Returns

It looks like my good luck from Q4 of 2010 has continued into 2011, here's a quick summary of my performance for the first quarter:

• I came into the year with $126,967 and finished Q1 with $145,937, for a gain of $18,970 (this increase was straight appreciation as I didn't deposit any money into my account). 
• On a percentage basis my portfolio increased by 14.9% during the quarter, while the S&P only gained 5.9%.
• I've been tracking my returns for 5 years and 3 months, during which time my annual rate of return has been 21.4%.  Had I invested in the S&P my annual return would've been 5.7%, or 15.7% lower PER YEAR. 

Click the image below for a screenshot of my portfolio on 3/31.  The bottom section shows each security along with my cash balance.  The top section is a little redundant, but I included it b/c it shows gain/loss %'s (note: TradeKing is having some sort of IT/user interface issue in the top section, and the line that shows negative 226 shares of KWG.GR [TTT's spinoff which I sold earlier this year] should be ignored). 

If you'd like to see where I started the year click here for my yearend 2010 write-up - http://mevsemt.blogspot.com/2011/01/alls-well-that-ends-well.html.  If you'd like a little more detail on how I calculate my returns click on the "My Returns So Far..." link to the right.  Lastly, as you can see I have a very concentrated portfolio, so I want to emphasize that my performance over the last 5 years could be heavily influenced by nothing other than dumb luck (but I like to think I'm doing something right).

Questions?  Comments?  Email mevsemt@gmail.com

A Short Analysis

First, a disclaimer: this post should be put in the "food for thought" bucket and really wasn't part of my thought process when I bought SHLD LEAPS.  Nonetheless, I hope you find it interesting...

Sears is a pretty controversial stock; some view it as a collection of assets (real estate, brands, inventory, Sears Canada, etc.) and believe it's trading at a sum-of-the-parts discount, others think of it as a slowly-but-surely failing retailer with virtually no chance of a turnaround (which has created a huge short interest).  I invested in Sears b/c I'm part of the first group, yet I totally understand the second group's perspective... HOWEVER, what I don't understand is why anyone would short the stock.  Here's why:

• A small group of VERY patient long-term investors control a huge % of the stock and are unlikely to sell at anything close to current prices.  This group includes ESL, Fairholme, the Tisch family, and probably some others (ex. Francis Chou). 
• Under Eddie Lampert SHLD has been a serial repurchaser of stock, and as long as the stock stays under $100 there's no reason this won't continue.

So where does this leave us?  Click on the image below to find out. 

As you can see, if Eddie keeps repurchasing shares at this pace the short interest quickly becomes 100% of the remaining "free" float!  Hmmm... I'm no expert, but it feels like something's gotta give. 

At this point you may be wondering "so what?"  Well (and this is pure speculation), IF this dynamic is indeed setting the stage for a massive short squeeze, a high stock price can be a very useful tool in the hands of an experienced capital allocator.  Check out this article and maybe you'll notice some parallels, http://www.chicagotribune.com/business/chi-0411190237nov19,0,6287747.story

Lastly, for reference here are the previous posts I wrote when I was buying the LEAPS: http://mevsemt.blogspot.com/2010/11/transaction-alert-sears-holdings-2013.html and http://mevsemt.blogspot.com/2010/12/more-sears-leaps-in-eddie-we-trust.html.

Questions?  Comments?  Email mevsemt@gmail.com.

So why NRG?

Well I'm finally getting around to my NRG write-up, sorry for the delay!  Anyway, here's why I like NRG:

• I think the stock is cheap at $20 a share: EV/EBITDA and FCF yield are quite attractive plus the value of NRG's assets (i.e. power plants) alone could support a stock price in the high $30's.
• NRG's CEO, David Crane, is considered one of the best in the business.  Additionally, he is aligned with shareholders as he owns a significant amount of stock/options (many of which are out of the money).  

And here's why I purchased LEAPS instead of common stock:

• NRG has significant balance sheet leverage (i.e. debt): the more leverage a company has the harder it is to determine its fair value.  However, a high degree of leverage can really boost returns when things work out well.
• NRG has significant operating leverage: profitability for IPP's are highly dependant on commodity markets.  If the price of natural gas goes up (which is by no means guaranteed), NRG's revenue and profitability will go right up with it. 
• At $0.60, the LEAPS were cheap.  When buying out-of-the-money options I look for asymmetrical risk/reward situations.  In the case of NRG, if the stock goes to the mid to upper 30's I'll make a 10x return, if the stock goes to the low 40's I could make a 20x return, which IMO is well worth the risk.

So where does this leave us?  In short, NRG is a potentially cheap stock with quality management.  However, its high level of financial and operating leverage make its future very uncertain - the upside potential is significant but the downside risk is still very real.  Luckily for us the LEAPS were cheap, thereby creating an opportunity with decent odds and a very asymmetrical risk/reward if things go our way.

Questions?  Comments?  Email mevsemt@gmail.com.

Sold Covidien

It's been an active day for me, in addition to buying NRG LEAPS I also sold my shares of Covidien (COV) at $50.99.  I purchased COV in May of 2009 at $32.39 a share, so the returns on this investment were decent (however, the market's return over this time period was also very strong, so I'm not overly thrilled with how COV turned out). 

Questions?  Comments?  Email mevsemt@gmail.com 

NRG Order Filled

It looks like the rest of my order for NRG 2013 $30 LEAPS went through (for a total of 100 contracts).  All in all this order cost just under $6,100.  I'll try to do a write up later this week or maybe this weekend (if time permits). 

Questions?  Comments?  Email mevsemt@gmail.com

New Purchase

On Friday I placed a limit order for 100 contracts of NRG Jan 2013 $30 LEAPS at $0.60, but unfortunately it's only been filled on 5 contracts (thus far). 

I'll keep this order open and hopefully I'll be able to get it 100% filled.  However, rather than write a separate post each time I get another couple of contracts, I'll just post when the order closes (either b/c it was filled or canceled).

Questions?  Comments?  Email mevsemt@gmail.com

Buying some Cisco

I just bought 1000 shares of Cisco (CSCO) at $18.87.  I view Cisco as a high quality company that's somewhat undervalued, so while I don't expect massive returns I still think I'll do pretty well.  Also, IMO holding CSCO is significantly more attractive than holding cash (this transaction took my portfolio from $54K cash down to $35.5K), so it makes sense from an overall portfolio construction perspective. 

Questions?  Comments?  mevsemt@gmail.com

Sold SD Call Options

On Friday I sold my Sandridge call options, which have appreciated nicely since I purchased them a little over 5 months ago (here's my original post: http://mevsemt.blogspot.com/2010/08/fool-me-once.html ).  Specifically, I bought 50 contracts for $1.07 (or a total cash outlay of $5,387) and sold them at $3.65 (for proceeds of $18,211), netting me a profit of just under $13K. 

Interestingly enough, while my gut tells me Sandridge OPTIONS aren't a good risk/reward bet after their recent appreciation, I still think Sandridge STOCK is undervalued and could have a much better risk/reward profile.  Earlier this year I also sold HAWK, so my portfolio is about 40% (or $54K) in cash.  This being the case, I'm considering buying SD common stock, especially if it pulls back.  Other stocks on my watch list include CSCO, NRG LEAPS, JOE, BAC, and ESI... stay tuned.

Questions?  Comments?  Email me at mevsemt@gmail.com

Sold KHDHF

A few days ago 226 shares of KHDHF were deposited in my account (KHDHF was spun off from TTT), and today I sold them at $10.20 for net proceeds of about $2,300.

As I mentioned in my year end post TTT has been trading ex div since December, so my 2010 ending balance was artificially low (but with the KHDHF shares finally showing up in my account I'm whole again).

Sold HAWK

I don't have time to do a full write-up, but I wanted to post that I sold my 1,000 shares of HAWK at $7.45 today.  My purchase price was $9.11, so I ended up lossing about $1,660 on this position... oh well, I guess you can't win em all.

Options are weird...

As you may recall I purchased 75 SuperValu (SVU) Jan 2013 $15 LEAPS back in December.  The contract price back then was $.50, so including commissions my cash outlay was $3,810.  Back when I purchased these LEAPS SVU stock was trading around $8.60. 

Earlier this morning SVU released earnings and they were absolutely horrendous, in fact as I type the stock is down about 13% to $7.50.  HOWEVER, I was actually able to sell my contracts for $.70 today, which after commissions came to $5,195!! 

So, just to recap, in the past month SVU's stock has fallen about 15% while the LEAPS have gone up 36%... did I mention options are weird?

All's well that ends well???

2010 was interesting, for most of the year my returns lagged the S&P (click "Returns" under labels for all the details).  In fact, going into Q4 my portfolio was DOWN 2.8% whereas the S&P was UP 3.5%.   This being the case, I didn't think I'd actually beat the market this year (btw I'm sure there will be PLENTY of years where I lag the S&P).  Luckily, during the fourth quarter things turned around, and several of my holdings did quite well:

• SandRidge - I purchased SandRidge 2012 LEAPS at the end of August for $5,387 and as of year end they're worth $13,600 (for a total return of 152% in just over 4 months).  Click here for the original post: http://mevsemt.blogspot.com/2010/08/fool-me-once.html
• Jackson Hewitt - I bought Jackson Hewitt call options in the middle of September.  This started as a very speculative $525 bet, but now these options are worth $4,140.  Here are the related posts: http://mevsemt.blogspot.com/2010/09/all-or-nothing.html and http://mevsemt.blogspot.com/2010/12/jtx-follow-up.html.
• Sears - I bought 2013 LEAPS in November and December (http://mevsemt.blogspot.com/2010/11/transaction-alert-sears-holdings-2013.html and http://mevsemt.blogspot.com/2010/12/more-sears-leaps-in-eddie-we-trust.html) for a total outlay of $9,323.  Sears stock has jumped since then, and so has the value of the LEAPS (which are now worth $13,500).

So where does that leave us?  Well, I started 2010 with $107,514 and finished with $126,967 (this number is actually understated, see footnote [1]).  I didn't make any deposits or withdrawals, so this increase is straight appreciation: 

• On an absolute basis, my portfolio gained 18.1% for the year while the S&P (w/ dividends reinvested) was up 14.6%. 
• I've been tracking my returns for 5 years, during which time my annual rate of return is 18.4%.  Had I invested in an S&P index fund (and reinvested dividends) my annual returns would be 4.4%. In other words, I've outperformed the S&P by 14.0% per annum. 
• Click on the "My Returns So Far..." link to the right for full details and to see how this outperformance translates into real dollars - it's actually pretty significant.

Now I should stress that the 2010 11th hour outperformance could be dumb luck.  I've mentioned this many times before and I'll do so again: my portfolio is VERY concentrated and it tends to bounce around A LOT (click the image below to see my current portfolio along with any gains/losses, I included the bottom screen shot b/c it show my cash balance).

Now with all that out of the way, what are my thoughts going into 2011?  Well, the recent market rally has made me pretty nervous about both valuations in general and my portfolio in particular.  Following is a brief discussion about my portfolio as well as a few names on my watch list:

• I'd like to increase my cash position after the recent run up.  In fact, I could see it going over $30K in the near future.  I have to sell JTX b/c the options expire in a couple weeks.  I'm also considering selling COV/HAWK outright and maybe trimming a few other positions.
• My watch list is perhaps as small as it's ever been.  It includes CSCO, BAC, NRG, and maybe 2 or 3 other names.  These names haven't participated in the recent market rally and IMO could be somewhat resilient if the market pulls back.
• Call me crazy, but I think something could happen with Sears in 2011.  Of course I have no idea what that "something" might be, but the possibilities include selling real estate, increased brand distribution, a short squeeze... heck, I've even read speculation that Sears, Autozone, and/or Autonation could merge one day.  I should also emphasize that my purchase of Sears LEAPS had nothing to do with any of this (but it's fun to speculate!).
• I think SandRidge will continue to do well.  It was one of the first natural gas E&P companies to focus on oil and it did so very aggressively.  Also, recent (and future) asset sales have given the market a glimpse into how valuable this company could be, and the stock has responded accordingly.
• Lastly, I think we might see TTT make an acquisition.  I think the company's significant cash hoard is burning a hole in Michael Smith's pocket, and I'm very interested to see if he can come up with something. 

Well, that's about it... I'd like to wish everyone good luck heading into the new year, and if you have any questions/comments I can be reached at mevsemt@gmail.com.

[1] The $126,967 is understated because TTT is trading ex-div BUT the spunoff KHDHF shares haven't been deposited in my portfolio yet (b/c KHDHF is traded in Germany).  Anyway, my 2,268 shares of TTT translates to 226 shares of KHDHF.  Since KHDHF closed the year at $9.00 these shares are worth $2,034.  This means my portfolio balance is really $129,001, giving me a return of about 20%, but for consistency I'm going to stick with my official statements as reported by TradeKing.