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