The Value View

​The market continues its strange dance higher even as revenue growth is getting harder to come by and profits are clearly engineered for the most part via buybacks, layoffs and outright income statement shenanigans. The stock market as measured by the S&P 500 closed at a new all-time high as fears of weakness in the economy just do not seem to matter to the equity markets at all. The consensus view is that it is either weather related or the Fed will slow the pace of taper. Janet Yellen is the new pin up girl of Wall Street and traders cheered with their credit balances when she told Congress “We see accommodative monetary policy as remaining appropriate for quite some time.” While the Fed and stock traders are not concerned about the economy the bond market is clearly concerned as yields have dropped across the board in the past month. How does it all play out? No clue. But I have plenty of cash on hand to respond to whatever the markets may do in the weeks and months ahead
I was asked yesterday by a friend who clearly does not “get” value investing if it bothered me that I was missing the equity rally as he and his short term mo-mo buddies made all the money. What he and just about everybody else fail to understand is that although safe and cheap stocks have been very hard to find safe and cheap stocks after about the mid-point of 2013 (It is yet another testament to my impeccable timing that I started my newsletters in July of 2013) it is not the stocks I bought in the past few months that are making me money right now. It is the ones I bought as far back as 2011 that are providing returns for portfolios today.

Yes we have a lot of cash on hand even in older portfolios. That’s a function of not being able to find a lot of new ideas and that stocks like Kimball International (KBALB), Bank of Ireland (IRE), Tesco Corporation (TESO), and Northstar Realty (NRF) have double and even tripled in value over the past few years and finally reached their fair value. I have several small banks like Annapolis National, Camco Financial (CAFI) and Danvers Bancorp taken over at huge premiums to my cost and that has increased cash levels as well . It is these stocks that drove my 2013 performance not the fact that it was hard to find new stuff to buy and we were holding lots of cash by year end. The few stocks that we have been able to find in the past six months will be the driver of performance between now and 2016 or longer.

I didn’t miss anything at all except sleepless night chasing chart squiggles and worrying about each and every news items that hit the tape. My brokers missed some things, most notably commissions.

Most people just do not have the patience for this type of investing and worry too much about the month to month or even day to day performance of their portfolio with I am far more concerned about what my stocks will be worth in five or even 10 years. Unless they fall enough to allow me to scale in at less than liquidating value I really could not care less what price does in the short run as long as there is a sufficient discount form asset value and a margin of safety. While I feel bad that most investors underperform dramatically because they pay to high a price relative to value and trade too much I am glad they do as it makes things that much easier for those of us who practice deep value investing.

I didn’t miss anything at all except sleepless night chasing chart squiggles and worrying about each and every news items that hit the tape. My brokers missed some things, most notably commissions.

This week was the Super Return International Conference in Berlin. The heavy hitters of the Private Equity world weighed in about where they thought there was opportunity. Healthcare, and Europe were the most frequently mentioned while Brazil , Financial services and Energy were also mentioned favorably. Most of the funds also reported that they were doing a lot more selling than buying and that dry powder for future investments is now at more than $800 billion industry wide. So basically the managers in the best asset class over the past 20 years are buying miners, Brazilian stocks, banks and energy stocks at low prices and holding a lot of cash. That sounds a bit familiar. Following private equity flows and adopting the buy it cheap, hold until you can sell it dear mindset of PE investors would is far more likely to generate consistent long term profits that frenetic and frantic attempts to trade short term price movements.

Now we are headed off towards the weekend and its baseball time again. I don’t have time to get all the way over to Sarasota to catch my Beloved Birds of Baltimore but will be popping over to Lakeland to catch the Tigers as the begin another season of almost made it to the top baseball against the Astros.

Have a great weekend everyone and good luck to us all.



Song of the week

The Value View

The market continues to just shrug off anything like worry or concern. It is a sharp turn from the dark days of January when traders had to sit though the horror of an actual 5% or so drop from all-time highs. We are back to the bad news is good news market as any sign of a weakening economy like the drop in the Philly Fed Index, slower than expected growth out of China and France continuing to drag on the Eurozone recovery are just good solid reasons for the fed to not consider raising rates and maybe even slow the pace of taper. As long as folks are ordering Teslas , drinking Keurig brewed coffee and rates are low then all is right with the world it seems. We cannot let little things like anemic revenue growth and a weak economy stop the equity party.

I own stocks and make my living in the markets so I am always delighted when my stocks go up. However one just needs to look at today’s Wal-Mart (WMT) report to see that the disconnect between Wall Street and Main Street is getting wider. The company reported a 21% year over year drop in earnings and blamed reduced government benefits, most notably food stamps, higher taxes and bad weather for the decline. Wal-Mart stores saw their fourth consecutive quarter in a row. It is not just Wal-Mart either as McDonalds (MCD) recently reported lower same store sales for three months in a row. Coca Cola (KO) said that sales had declined in the quarter. When people are not ordering off the value menu and shopping t Wal-Mart while guzzling soda conditions are worse than we are being lead to believe!

It is pretty broad across the retail sector. Conns (CONN) announced slower than expected sales and profits today and the stock got whacked for more than 30%. Best Buy (BBY), Penneys (JCP) and Sears (SHLD) have generated headlines in the past few weeks because of poor results in the last half of the year. The once red hot teen retailers like Aeropostale (ARO) and Urban Outfitters (URBN)are seeing poor revenue growth as well. For the past few years retail has been generating profits through cost cuts and financial engineering an s those options dry up we see that the emperor is indeed under dressed.

Ordinarily this type of poor performance would be generating some inventories of cheap stocks but that’s not the case at all. The vast majority of retailers are still trading at relatively high valuations. There are less than a handful that qualify as safe and cheap or legitimate turnaround candidates. There would appear to be a lot additional downside to the sector and most of us just avoid the consumer related stocks right now. As long as job growth is weak consumers are not going to consuming much at all.

I am seeing improvements in our super cheap silver miners. They have moved up a but in spite of pretty poor earnings reports this week Helping boost them a little higher was a report from UBS that was bullish for gold. The report said that gold was losing its stigma and momentum was returning to the metals markets. Since gold usually drags silver in its wake this could be additional good news for silver miners. The miners we own are trading at about half of book value so their potential in a recovery is huge.

We are still faced with a situation where there is simply not a lot to do in the current market. I have been accumulating the small banks following the private equity money into the very cheap mining and energy sectors but we are not seeing too many stocks that fit my strict safe and cheap criteria. I am perfectly content to sit with a large cash hoard and wait for conditions more suited to our old friend Mr. Womack and bargains abound.

Being patient can be the hardest part of using a deep value approach to the markets. You have to wait for bargains to be created by a slightly psychotic marketplace in the deep grip of fear. Then we have to wait for conditions to improve and the market to take note of the improvement or an event like a takeover to unlock the value of our holdings. However for those of us who have the discipline it is more businesslike, safer and far more profitable over time than chasing ticks all over the screen. As bonus it also allows us to slip away from the screen and catch spring training games, read a book or just go for a long walk with the dog.

I find it kind of ironic that with all the attention paid to trying to make money trading frantically the most profitable approach to all this is also the ones that allows us to have an actual life away from the markets.

Have a great week and good luck to us all.



Song of the Week: The Retail Theme

Think Like Ben

While I am aware that today should be pontificating about the economic numbers and its likely impact on the prospects that the Fed eases up on its Quantitative easing programs I decided that adding my voice to the noise wouldn’t help matters much at all, especially given that I haven’t bother to read the release as of yet. I am more interested in all the Ben Graham interviews I read last night and the direction those led me this morning. I will read the various reports and Fed Minutes but they won’t have any impact at all on my investment decisions unless at some point the wonks decide its horribly bearish and create an opportunity for me to buy cheap stocks.

In the September 1976 editions of medical economist Ben Graham outlined a simple approach to picking stocks that he had tested by hand using low PE ratios and strong balance sheets that he had found easily beat the market over the past 50 years. I reread this article last night and recalled that earlier that year he had mentioned the study and said that one could apply a dividend or asset criteria in place of earnings and also get good results. I immediately sat down and started running quick and dirty back tests of the approach substituting price to book value for price to earnings ratio. He suggests holding the stocks for two years or gain 50% in value

The criteria are simplistic to say the least. I tested for stocks that traded below book value and had equity to asset ratios of at least 50%. Over the last ten years this simple approach returned 27% annually versus 9% for the broader market according to my quick test. It doesn’t lose much with time either as over the last 20 years the simple approach earns 18% annually on average. There are just 2 down years out of 20. The problem most people will have with this approach is that there are years where no stocks can be found and you are in cash. Of course I am a devoted follower of Mr. Womack the pig farmer so being completely out of stocks in years like 1998-99 and 2006-07 is not a huge problem for me!

I am well aware that back tests do necessarily lead to future results but this simple screen seems to have real potential to find potential bargain winning stocks capable of producing solid returns. When I sat down and ran the screen this morning I was gratified to see that according to the asset version of Graham’s simple stock picking theory I am pretty much on the right track with my deep value approach. The list came up with many of the stocks I already won and have written about over the past few months.
Miners are very well represented with companies like Couer Mining (CDE), Pan American Silver (PAAS), and Hecla Mines (HL) all make the cut. I have no idea when silver will go back up in price . Even it takes ten years buying the miners at these levels should give me substantial profits over the long run when metals prices do improve at some point in time. Several gold miners make the list as well bout I have a strong preference for the silver miners right now.

Energy companies on the list include two of my favorite oil and gas stocks. Both Penn West Petroleum (PWE) and WPX Energy (WPX) trade at steep discounts from book value and have adequate equity to asset ratios. I actually expect to make lot more than 50% form them over the next several years as energy demand will improve along with the global economy at some point in the future and these stocks should appreciate by multiples of this prices rather than just percentages.

Other stocks of note that make the grade include companies like MFC Industrial (MIL), Alpha and Omega Semiconductor (AOSL) and Transworld Entertainment (TWMC) that I have mentioned recently. They all trade well below book value and using my asset based version of Grahams simple stock picking market are all worthy of buying right now for long term value investors.

Graham suggest spreading the money across 30 or so stocks in different industries. It would be tough to get fully invested using this approach right now as energy and mining related stocks dominate the list. I do not necessarily view that as a bad thing given current market levels and conditions but I am very comfortable owning the stock that do pass the screen right now and holding a high level of cash.

I am always amazed more people do not use the techniques developed by Benjamin Graham but I am really glad they do not as it makes it a lot easier for me to uncover safe and cheap stocks.

A Value Investing Valentine

Many years ago the late Chris Browne of Tweedy Browne told me that you either “get” value investing or you simply do not. The idea of buying dollars for fifty cents and holding until full value is realized or it makes no sense to you whatsoever. When I talk dot the vast majority of market participants about the concepts of value investing I frequently see some glazing over the eyes. A lot of people pay lip service to value investing but very, very few actually practice as part of their investing activities. When I wander around the corners of the market looking for safe and cheap stock I do not usually have much company.

I prefer it that way to tell the truth. If value investing ever became as wildly popular as swing trading or mo-mo investing it simply would not work as well anymore. Money flooding into value stocks, especially the smaller ones that are my bread and butter, would provide the type of buying pressure that quickly moved the shares to full value and beyond.

The reasons for this avoidance of value investing are many. First it requires patience, something that most investors lack. You have to wait for stocks to be cheap enough to buy and then you have to own them for a long time, sometimes 5 years or more before the value of the stock is recognized. It requires the discipline to be a buyer when everyone else you know is selling with great abandon and scared to own stock s anymore. It is even harder to be a seller of fully valued shares when everyone is a cheerleader and the consensus is the rally will continue forever and beyond. The ability to ignore the day to day noise and not play just because the casino is open is crucial to success as a value investor and it seems most people just cannot do it.

The funny thing about it is that value investing based on buying assets at a steep discount works today as well as it did back when Ben Graham was inventing the approach, if not better. Robert Novy Marx of Rochester University recently wrote a paper called the Quality Dimension of Value Investing. He looked at various approaches to value and found some interesting facts. A dollar invested in classic value strategies such as low price to book and PE ratio turned $1 into $1040 from 1963 to 2102. That is about 15% annually according to my calculator. If you favored small cap stock sunder book value that scored high on the F-score scale developed by Joseph Piotoski your $1 becomes $1409 or about 15.%% compounded annually. If you used the Professors preferred theory of buying stocks for less than their book value where the company earns high gross profits as percentage of assets you single dollar becomes $1583 or almost 16% a year.

If you turn to even deeper value Victor Wendl , the head of an investment advisory firm in St. Louis, wrote a book in 2013 titled the Net Current Asset Approach to Stock Investing. This approach is based on Ben Grahams suggestion to buy shares at a discount to the value to their current assets minus all liabilities. For his purposes Mr. Wendl tests the idea of buying stocks for less than 75% of the net current asset value. He found that the portfolios of net-net stocks earned a return of 19.89% on average from 1951 to the end of 2009. This wasn’t a case of the good old days propping up a system that no longer works either as during the lost decade of 200-2009 these stocks returned on average 29% a year. The overall stock market lost a little over 1% during the same time period.
This stuff works and has for decades. It may underperform for short periods of time, or even a few years in a row during go-go bull markets. However the slow grind of value and time has consistently offered returns in excess of the mark as well as other approaches to investing in the stock market.

Institutions really cannot proactive to a great degree as many of the companies are just too small to accommodate their large cash hoard. Most people do not have the patience and discipline required to practice deep value investing. Buying a bunch of companies no one ever hear d of when the market is falling and selling them when others are finally hearing about them and buying aggressively is far more difficult than it may sound. Those of us who practice the deep value approach to investing are always grateful for the bells and whistles of the stock market casino that keeps most investors out of our arena. We hope that most people never “get “ it.

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Weekly Update: Buy Low Sell High

It’s been quite a week for the equities markets around the world. The S&P 500 is up about 4% week over week and the all World MSCI Index (URTH) is up close to 5% in the last 5 trading sessions. All those nasty fears about everything have dissipated as traders reacted positively to Janet Yellens first testimony. She didn’t say one thing new and seems to be committed to following the path of her predecessor but the comment that if the economic data showed slowing she might slow the taper has trades pretty excited. That’s the same thing Ben has said for some time now but hearing it in a new voice was a market mover.

There was a surprise drop in retail sales in January following a slight decline in December sales. This is a surprise only to people who work in big office towers toiling away at multi factor economic models and have staff that does their shopping. We have had two really bad jobs reports in a row, there is no meaningful income growth in the middle and upper middle class that make up the bulk of consumers right now. This makes for a cautious consumer. Look at the horrible Whole Foods numbers reported today. The economy is not strong enough that folks are feeling good about $27.99 for a block of fancy cheese just yet. Even McDonalds is seeing lower sales and when people are not comfortable hitting up the value menu then its hard to say we have a robust economy right now.

None of this matters to the markets where bad is the new good. If things continue to get worse we get to keep our free money punch bowl. The idea of investing in corporations based on data releases form government agencies and survey firms choose to release and essentially making bets on policy decision strikes me a form of high level insanity but that’s pretty much what’s going on in the markets right now. Its times like these I am glad I am a hard core value guy and focus just on the value of the assets a company owns because this stuff makes my head spin and I have serious doubts that its good for the overall health of the capital markets or the economy in the long run. At some point the conditions on Main Street and Wall Street have to converge as this type of wide gap between the two is simply not sustainable. The when and how is beyond knowing so I will just keep trying to buy cheap stocks and hold cash when I can’t find them.

The Credit Suisse Global returns report was released this week and it contained some information investor should take to heart. The report reveals that investing in countries where GDP growth has been the highest is actually a really bad way to go. In fact investing in companies with the lowest GDP growth works out much better over the next three to five years. If you are lucky you find one where conditions are horrible but improve substantially going forward you really hit the ball out the park. That is interesting to me because it just confirms the idea that buying when we are close to the point of maximum pessimism and not when everything is bright and beautiful really is the right way to go for long term investors. Using that scenario the worst economic growth the past few years has been in Europe. That seems to be close to turning and the countries with the best chances for a huge returns would appear to be the battered beauties like Italy, Ireland, Spain and (wince) Greece.

The report also reveals that individual investors continue to shoot themselves in the foot as they search for returns. Over the past 20 years, the S&P 500 has returned, on average, about 9.3%. Managed funds have done a little worse, losing 1% to 1.5% as the result of poor selection, fees and expenses. Individuals lose as much as an additional 2 percentage points because of their tendency to buy hot markets, sectors and asset classes and sell ones that have declined. They sell low and buy high which has historically been a lousy investing strategy. In a world where risk based returns are more than 9%, individuals are earning less than 5 % per year before inflation is considered. That’s the average investor which means that half the folk are doing even worse than that. For what it is worth the worst market returns since the start of the century have been Japan, the Netherlands, Finland, Italy, Ireland and Spain suggesting that might be a good place for those with e patience discipline and common sense to invest with a long time horizon might want to explore.

It should be an interesting week ahead. Tomorrow we have industrial production numbers and the University of Michigan sentiment numbers that could be market movers. Earnings season really goes into high gear next week and we will have dozens upon dozens of earth shatteringly import announcements about how 100 year corporations did over a three month period. Trillions of market caps will be added and shed based on a very short window but if we are lucky we will get a chance to buy low in shares of companies that have the ability to survive until they thrive and we can sell them high in few years.

Song of the week: A Traders Hymn to the Market

The Wall Street Shuffle

Here is the recording of my interview on the Wall Street Shuffle talking stocks markets and banks:

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The Value View

Are we having fun yet? The market is bouncing all over the board this week posting 100 point swings in the Dow in both directions. We recovered somewhat today but the market is still down a bit on the week and the all World URTH ETF is off by about half a percent this week. To hear the media rant and rave you would think we were win the middle of a global financial meltdown when in truth we are just 4.92% off the highs in the URTH and 4.03% in the S&P 500 index. It’s a mild correction so far not a panic. No one has puked up any positions yet and we have heard no rumors of hedge fund closings due to margin calls. It might happen but it has not yet.
We are still in very much a do nothing market. It its safe and cheap don’t sell it but we have not created a massive amount of new inventory selling at a significant discount to asset value.

Mr. Womack ( has not left the farm and there is no smell of napalm in the morning hovering around Wall Street. I have mentioned in the past month or two that if you use commonsense measures like market cap to GDP and the Value Line Median Appreciation Potential to measure the market is on the high side of things so I am not going to fall off my chair in shock it the selloff steepens. Neither am I going to do anything until it does and I certainly will not be making wagers on short term market direction. We have very high cash levels in our portfolios so I would welcome a sell off but we shall just have to see how this all plays out. Just because the casino is open doesn’t mean I have to play.

About a year ago I wrote an article on Real Money.Com titled the Lonely Trade. At the time no one liked the shipping stocks as rates were scrapinga long the bottom and there was over capacity in the system that is being worked off very slowly. However I noticed in my daily reading that private equity firms like Apollo and Wilbur Ross were starting to move money into the sector and were buying ships and shipping concerns at fractions of book value. To say this worked out well would be a classic understatement as shipping stocks caught fire later in the year and many doubled or more.

Right now nobody likes the mining concerns no matter what they are digging up out of the ground. Guess what? Private equity friends are starting to raise money and are venturing out to buy mining companies and assets. Warburg Pincus just opened a new fund and hired some serious talent to find opportunities. Two ex JP Morgan (JPM) bankers just raised $375 million for mining related investments. The former CEO of barrack Gold is raising private investment funds to buy mines. KKR just opened an office in Canada to consider mining investments. I can find a lot of miners trading well below book value and everyone hates the stocks. It looks very much to me like we have another lonely trade setting up. I have no idea what the short term holds but I am highly confident we will sell out iron ore and silver miners for several times what we paid for them in the portfolios. We already own a few miners and I am open to the idea of buying more with a long term time frame.

Don’t get caught up in the noise that is being generated by a media that needs to sell ads and Wall Street who needs to sell investment products. This is very much a do nothing market right now. Be selective, be cheap and think long term. On the bright side the Arizona Diamondbacks pitchers and catchers reported this week and everyone else is in camp next week so we have something to watch until the market creates substantial opportunities for us.

Have great week everyone!

Song of the week: