The Value View 3-27-2014

The markets are still tasting a little fear this week. The S&P; has not seen any rough selling so far with the index down a fairly orderly 1.7% or so in the past week. However some of the momentum darlings are starting to feel the effect of concerns about higher interest rates, Ukraine and the continued Chinese slowdown. TripAdvisor (TRIP)dropped by 12.97%, Netflix (NFLX) is down 14% and even stalwarts like Amazon (AMZN) and Facebook (FB) are down over 8%. When the going gets tough the high multiple stocks are the first to be abandoned by traders so this could be something of a canary in the coal mine. As always I will wait and see how it actually plays out rather than try to predict what the market will do but it is no secret that I would love to see and inventory creation even in the stock market.

The chorus of uber smart people sounding the alarm just keeps growing. I read an interview this week with James Montier of GMO Capital who said flatly that there is nothing cheap in the global markets right now. If you aren’t familiar with him I suggest you Google him, buy his books an down load all his white papers. He is one of the leading thinkers of our time on the subjects of value investing and Behavioral Finance. When asked what opportunities he sees Montier flatly stated “Nothing at all. When we look at the world today, what we see is a hideous opportunity set.” Speaking of general market conditions he said “Several valuation measures suggest that the S&P; is overvalued by 50 to 70%. Every piece of valuation I do says this market is too expensive.” Add his voice to others like Seth Klarman ,Professor Nejat Syhun and very smart people who are concerned about the level of the stock market right now. The growing concerns, al ong with the scarcity of cheap stocks, even have a relative dummy like me a little concerned.

I was talking with some friends this week about markets, the world and life in general when someone asked me why I would ever offer a newsletter when I trade so little and hold stocks so long most of the time. The bestselling newsletters tend to focus on technical analysis and trading the hot popular stocks. As my first sales manager in the brokerage business used to advise they are selling the food the dogs are eating today. My portfolio turns over very little and I won’t buy until I find something that’s safe and cheap and there is not very much of that right now outside the small bank stocks.

That’s exactly why I did it. The average investor earns far less than he should and the underlying reasons have been determined to be over trading and chasing the hot stocks. We hear about buy low sell high all the time and I have yet to meet more than handful of people who actually invest that way. If I can get a few folks to learn the businesslike approach to investing, how to use the concept of margin of safety to make money and quit trying to out trade Goldman’s Rocket Scientists and super computers then I will feel like I have done something pretty worthwhile. I just do not see any other reasonable priced newsletter practicing deep value investing in the style of Womack and Schloss. It was this or start a hedge fund and that just didn’t look like much fun to me so here we are!

For those of you who missed last weekend’s Value View video do yourself a favor and run out and buy a copy of Dan Jenkins new book His Ownself: A Semi-Memoir. Jenkins is one of the last of the whiskey soaked, chain smoking sports writers and this book has some fantastic sport stories from over the decades. It is entirely non politically correct and uproariously funny in spots.

Have a great weekend everyone. In honor of opening day on Sunday, have a great weekend and Play Ball!

Cheers

Tim

Song of the week
Are momentum investors stuck on one of these this week?

Must read interview with James Montier of GMO

​Montier is one of he best value guys of our time and he is spot on in this interview.

http://www.fuw.ch/article/equity-markets-are-overvalued/

Don’t forget we extended the special offer until the end of the tournament on APril 6. Put the power of deep value investing to work protecting and growing your assets AND get in on the trade of the decade at a special low price.

http://vip.marketfy.com/march-tim/

The Value View 3-20-2014

​The market has spent most of the past week just treading water for the most part. We have recovered a bit from last Fridays Putin Panic once it became clear that besides rhetoric there was little anyone could do to stop him from annexing Crimea. Janet Yellen shook some people up yesterday by indicating that interest rates might actually go up before the turn of the new century if the economy continues to improve. Of course the assumption that the economy is improving rests heavily on the “weather ate my economy” theory that is used to explain away any weakness in the current numbers.

I found it interesting that the Bloomberg Consumer Comfort Index keep getting worse since things are supposed to be getting better. A lukewarm jobs market, high gasoline and heating oil prices along with just really sucky weather in much of the country is making folks a little less comfort. While there is officially no inflation the prices food has been popping up pretty quickly as well. Everyone knows that bacon is the best solution to most of life’s problems and the price of that stuff has been skyrocketing. So has the price of my daytime beverage as coffee has bounced a lot higher so far this year. If wine prices were to jump higher anytime soon we could have a financial panic here at Chez Melvin. While the Fed and the markets think the economy is just fine, those of us playing along at home are not necessarily so certain.

Mark Hulbert wrote an article on MarketWatch today about the insider indicator developed by the Godfather of Insider research Professor Nejat Seyhun of the University of Michigan. The article says “Not surprisingly, Prof. Seyhun, who is one of the leading experts on interpreting the behavior of corporate insiders, has found that when the transactions of the largest shareholders are stripped out, insiders do have impressive forecasting abilities. In the summer of 2007, for example, his adjusted insider sell-to-buy ratio was more bearish than at any time since 1990, which is how far back his analyses extended. Ominously, that degree of bearish sentiment is where the insider ratio stands today, Prof. Seyhun said in an interview.” We can add that little nugget to things like the VL Median Appreciation Potential and market cap to GDP ratio that are echoing Sergeant Phil Esterhaus in advising us to be careful out there.

I have no clue what the stock market will do. In reality no one really does and if you meet someone who offers their guess as a fact then I would suggest backing away carefully with one hand on your wallet. We know that it is on the high side of fair value and cheap stocks are hard to find right now but none of that can keep the market from feeding on low interest rates and moving higher for quite some time to come. We own some cheap energy, mining, and shipping stocks along with our small bank stocks so if it keeps going higher we will be fine. Of course we have a lot of cash as well so it rolls over and goes south we will be able to go on an epic buying binge as new safe and cheap inventory is created.

When we are in an uncertain market like the one we have now I often refer back to the classic 1940 book Where Are All the Customers Yachts? “by Fred Schwed. The book has the best advice ibn how to get rich in stocks ever penned. ““When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this – just wait for the depression which will come sooner or later. When this depression – or panic – becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks, No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you’ll have the pleasure of dying rich.” There are not enough cheap stock to be fully invested yet. There will be and when it happens an enormous amount of money will be made by those of us who held cash and stayed true to the simply rules of buying low and selling high.

I want to reassure readers that when I score a perfect NCAA bracket and cash in on Warrens billions I will still be writing these letters. I will just be doing it from my new island! Now that game shave topped doff and the games have begun I can tell you I have Florida, Michigan State, Wichita State and San Diego State in the final four with Florida beating the Shocker’s in the title game. Of course I also have Tampa bay winning the AL East with the Orioles taking the Wild card so I may be acting on some bias in these selections!

For those of you who have not yet signed up for Deep Value and Banking on Profit I am continuing my special offer until the end of the tournament on April 6th. Get both letters and Ten Tiny Banks with Huge Potential for just $679. That’s 51% off the $1388 the three would usually cost. Click here to sign up and join us on the value investing adventure and the Trade of the Decade in small bank stocks.
http://vip.marketfy.com/march-tim/?utm_campaign=website&utm_source=sendgrid.com&utm_medium=email

Cheers
Tim
Song of the Week

Brar Bank Checklist

The SAVR Checklist for Analyzing Financials (Banks)
POPE@BRARIFUNDS.COM

“It’s a black box. Too much risk. I don’t understand banks”. These are the common statements one hears with the mention of a bank as a potential investment. The recent financial crisis has negatively impacted the perception of banks and revealed hidden “spider webs” in the financial statements. The following checklist is based on our analysis of banks, and includes past mistakes of great investors such as Warren Buffett, Bruce Berkowitz, Peter Lynch and more. The checklist focuses on the four pillars of our investment analysis: 1. Sustainability of the business model, 2. Accountability of the management, 3. Value of the investment, 4. Risk factors (i.e. Business/Emotional Risk and Leverage). The factors are discussed our checklist for analyzing a bank.

Sustainability of the Bank

What is the competitive advantage “niche”? (i.e. Regional advantage, low cost, product offering, economies of scale).
What is the composition of earnings growth over the past five years? (i.e. Organic, buy-backs, M&A)
Have I performed peer analysis? Have I compared the following?
a. Net interest margin
b. Expense ratio as a percent of revenue
c. Overhead efficiency ratio
* Efficiency ratio – measures non-interest expense/operating costs as percentage of net revenues. (good banks have efficiency ratios under 55%; lower is better).
* Net interest margin – (the spread banks earn between deposits and loans), interest margin as percentage of average earning assets (3-4% average, look for trend), but look at interest rates – falling rates = higher margins, but check type of lending – cars = higher than house.
What is the 5-Year Growth Rate of Earnings per Share vs. current valuation based on PE/PB? A bank is a business like any, we do not want to over pay for growth. Traditionally, we equate the PE multiple to the long term growth rate of earnings.
If the company is enjoying regional success, can it be extended nationally?

Accountability of the Management

Have I analyzed for quality of the management? What is the rate of insider ownership? This is the most important area for banks, as management is responsible for risk-taking.
Have I checked the shareholder base? We want an ambitious group of shareholders that can steer the business in the right direction.

Value of the Investment
Have I checked for the current tangible book value verses historical data and peers? Historically large banks typically sold for more than 1.5x book value. Most of the assets of a bank are in the loans. If you are convinced the bank has avoided high-risk lending, you can begin to have confidence in the book value.
Berkowitz elaborating on his Wells Fargo investment in 1992: “Wells Fargo began to fix its problems in several fundamental ways in the early 1990’s. However, the market did not reflect these changes in revaluing the stock’s price until years after the improvements began.”
Is the bank buying back shares? What is the average price paid in previous buy-backs? (Should be lower than current share price).

Risk Factors

What are loan loss provisions as a percentage of total loans? The ratio should improve as the recession fades. A consistent increase in an alert for risky lending.
What is the growth rate of loans? Rapid growth in loans potentially means the bank is not carefully evaluating its loan portfolio.
Have I checked for the Equity to Assets ratio? The most important number of all; it measures financial strength and “survivability.” The higher the E/A, the better. E/A’s have a wide range, from as low as 1 or 2 (candidates potentially headed for disaster) to as high as 20. An E/A of 5 to 6 is average, below 5 is the danger zone. Prior to investing we prefer to see that its E/A ratio is at least 7.
What is the percentage of Real Estate Owned (REO)? – This is property on which the bank has already foreclosed, watch out for rise in REO, it’s not the bank’s core business.
Commercial loans are more risky than others. What percentage of the loans outstanding are commercial? Ensure it’s below 10% or else potential for a large disappointment.

March Madness and Cheap Stocks

bbOver the years of scouring the web I have ended up on dozens of mailing lists for market related material. I have resigned from a few of the crazier ones and those that were hyping penny stocks and the next big thing but for the most part I have stayed on them. It is always interesting to see what other people are thinking and doing. There are some really smart people out there and even if I do not always agree with them it is helpful to know what they are thinking at a given moment in time.

I have paid even closer attention since I started offering a newsletter service for investors. I like to see what others are doing to market their product. Often I find myself thinking that I really hope some of the deals are NOT working because it is my fondest hope that people are smarter than that. The heavily hyped” try it now for just $29 instead of the usual $2199 we charge all the leading hedge fund managers” is just hype. I am not big on hype.
I am not big on marketing at all either. I like to spend my time picking stocks, doing research, flipping rocks and kicking tires. I know it has to be done but I really don’t want to do it. That’s was a big part of the reason I hooked up with Marketfy in the first place. They put together the marketing plans, I do what they tell me and then go back to researching stocks, reading books and watching baseball.

As a result of being on several different marketing and mailing lists I have come to a conclusion. All marketing people went to the same school and they talk on the phone a lot to share ideas. Every event or holiday I get a flood of special offers related to everything from the Super Bowl to 4th of July special deals. The guys and girls at Marketfy are no different and they have done a couple of those with my Deep Value Letters. Their most recent campaign idea is based in March Madness and while I have no idea what college basketball has to do with deep value investing, I will go along with it.

I put together a package that gives you access to my two flagship newsletters, Deep Value and Banking on Profits. This will give you access to my best deep value stocks picks that have the potential for market beating long term returns as well as the small community banks that I am buying to take advantage of what I call the Trade of the Decade.. I am quite sure, based on 28 year so experience in and around the markets, that helping you adopt a private equity mindset and focus on the cheapest stocks with the highest long term recovery potential can make you a more profitable investor.

We just started these portfolios back in July and we are off to a pretty good start. In the Deep Value Letter we have already been involved in 3 profitable takeovers of our stocks. We have had 1 stock hit our upside price target a few years ahead of schedule and booked profits of over 70%. The portfolio has a current price to tangible book value of about 81% and all of the companies shave solid credit scores as measured by my Credit and Fundamental Models. In spite of large cash balances we are beating the market so far in 2014.This is investing in undervalued stocks with a substantial margin of safety.

The Banking on Profits Portfolio is also performing very well. We have had three takeovers at nice premiums as the mergers and acquisitions wave begins to form in this sector. The regulatory and economic environment is forcing these little banks to merge and this is a huge opportunity for individual investors to make money in a sector in which most institutions cannot invest.The average bank in the portfolio trades at just 82% of tangible book value and has a solid balance sheet and loan portfolio. This portfolio is also handily beating the market this year.
So here is my offer for you. We normally sell Deep Value for $490. Personally I think the resource page with a large research section offering articles, studies, interviews, e-books and academic research related to investing and market is worth that much. However you also get the stock picks, instant buy and sell alerts when we do make a trade and direct access to me via email for questions on anything stocks , baseball or books. I update you every week a couple of times on my market and individual stocks thoughts and provide news alerts as needed.

I usually charge $799 for Banking on Profits. This is a highly specialized newsletter for those investors who want to take advantage of the most boring way to get rich in the history of the financial markets. Small banks really are the trade of the decade right now. I have been investing in the little community bank for decades and it is a great sector most of the time. Right now conditions are just great. They are spectacular. Banking on Profits also has a resource center to help you learn the ins and outs of investing in community bank stocks,and regular updates.

I have no idea what it has to do with basketball but I want to make you a special offer to join us and help me build the best community of deep value and bank stock investors anywhere. I will give you both letters for one year for a combination price of $679. I will also throw in my Ten Tiny Banks With Huge Potential E-book. These are ten very tiny little banks that are too small to be in the main bank stock portfolio but offer huge potential for very high long term returns.

The marketing people are going to tie this into March Madness somehow but I think it is just a solid offer on a package of tolls that can help you change the way you think about stocks and markets and best of all make you more money in the years ahead.

You can” play ball” by clicking here to take advantage of this offer:

http://vip.marketfy.com/march-tim/

Thanks.
Tim

The Value View 3-13-2014

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The market may not be bulletproof after all. Signs of a continuing and even growing slowdown in China as well as sharp words between the potential combatants in the Ukraine hit the market pretty hard today. Early on it looked like it might be a good day as new unemployment claims were low and retail sales were less horrible than expected in February. We actually had opened up but as the day went on we began to slide. We got weaker than expected retail sales and output from China and the decline began. As the day went on the news out of the Ukraine dumped gasoline f the fire and we got a pretty slide selloff with the S&P down over 1% and the NASDAQ off almost 1.5% on the day.

The West may be making a big mistake in the Ukraine. Angela Merkel today warned of potential catastrophe if Russia does not back down in the Ukraine and John Kerry chimed in saying that the US and Europe would take serious measures if a referendum on Crimea joining Russia takes place on Sunday as planned. The thing is, I just cannot see Mr. Putin backing down from a fight he thinks he can win. He has been blunt about his aims and I think he is willing to pay the price to get what he wants. This could be a huge market moving event so it is probably worth paying some attention to developments out of the region.

The key with Ukrainian developments or any other potentially market moving event is to not try and predict what will happen but make sure you are in a position to react what does happen. I could be wrong and Mr. Putin will back down and cancel the vote Sunday. I do not know what any certainty what the major players in this game will do or how the market will react to and neither does anyone else. I do feel pretty good about the slug of cash in both Deep Value and International Deep Value Portfolios.

I was asked the other day if it was hard to sell a newsletter that was based on reacting not predicting and holding stocks for a long period of time. This was a huge issue when I first decided to go with a newsletter insisted of doing the hedge fund or RIA route. Several of the major players in the newsletter business suggested that in order to capture readers I would have to trade more often and show some shorter term gains in order to attract and hold readers. The problem is that this is exactly the opposite of what we need to do to make money in the markets over time. I decided to gamble that there were enough people who saw the wisdom of buying bad markets, selling strong ones and focusing on safe and cheap stocks for the long term. So far it is working.

I try to think more like a private equity manager than a traditional stock investor or trader. I want to buy unloved assets when they are cheap compared to their asset values and hold them until they are no longer cheap. I think they call it buy low and sell high but I could be mistaken. Much like Walter Schloss and others I want to own as many cheap stocks as I can find and I am not afraid to hold cash when I cannot find enough opportunities that are both safe and cheap. Our turn will come at some point and the stocks we buy as the market falls will more than offset any underperformance in the last stages of a bull market. Returns form the deep approach can be lumpy but holding just safe and cheap stocks and building cash as the market rises and then being a buyer in markets like 2002 and 2009 are how fortunes are made in the market.

We are still having some measure of success digging up little banks stocks that are cheap enough to own. We are closing in on being 65% invested in the Banking on Profits portfolio. These are solid little banks with plenty of capital, improving nonperforming assets ratios and trading as low as 70% of book value. The small bank sector is going to be one of the best sectors for individual investors for the foreseeable future as we see the consolidation wave begin to strengthen. You have two powerful forces at play that can make us a lot of money. The cost of complying with the never ending regulatory requirements is more than the bottom line of the small banks can support right now and the bigger banks are discovering that there is little to no organic growth possible in the banking sector right now. The only way to achieve revenue and earnings growth is to be a buyer of smaller banks to increase your branch network and asset base. The two factors are combining to create the most boring way to get rich that I have seen.

We are heading into another busy week around Chez Melvin. Spring training baseball is in full swing. The college basketball tournaments are in full swing and next week the Big dance begins. This is the only time of the year I pay any attention to basketball and in true value form will be rooting for the little schools like Wichita State and Creighton to make deep runs and for the four year students at Florida to k knock off the one and done “student athletes” to take the title. There are a bunch of newly released books worthy of my attention (and several that are worthy of just plain old fun reading). Hopefully all of will keep me from spending too much time worrying about short term market direction and the endless noisy news floating around every day!
Have a great week everyone.
Cheers!
Tim

Song of the Week. What Value Provides