Tuesday, April 30, 2013

Why I Sold Globus Maritime

Globus Maritime (GLBS) reported Q4 earnings yesterday. And it was quite a revelation to me. Their operating loss was to be $2.8 mil. However, they took a $80 mil write down of top of the small loss! I bought this stock a year ago because its book value was more than 5x its market cap. Now, with one stroke of a pen, it is less than 3x.

GLBS is a small shipping company. The company owns only 7 bulk ships. As with all shipping companies recently, the company's earnings were hit hard by the global glut of ships. The report says they expect the situation to persist until 2014. But the company has $10 mil of current assets. So cash flow is not a problem in the short term while management waits for the end of the shipping glut.

However, all this makes me realize that shipping is a hard, competitive business. Something that all veterans of the business know. While companies like GLBS are trying to wait out the downturn, others like Diana Shipping are using this opportunity to buy ships on the cheap.

For me, this is a lesson learned. GLBS may actually be cheap right now. I really don't know. But I know shipping investments are risky and they aren't for me, like airlines aren't for Buffett. And so, as a result, I have sold out my GLBS position, at a 10% loss.

Sunday, April 28, 2013

Why I Still Own WLP

Wellpoint reported earnings of $2.94 for the first quarter 2013. This is an excellent start for the new CEO Joe Swedish. If we project this earnings to a full year, it is a P/E of about 6! However, for some reason, WLP projects earnings to be $7.75 only. I am not sure why. The company did say integration costs of Amerigroup will be a drag on earnings. Still at a current price of about $73 per share, WLP is compelling.

WLP is a managed care company. The company has the Blue Cross/Blue Shield license in 14 states. Late last year, the company agreed to buy Amerigroup, a Medicaid manager, for $4.9B.

Last year I was bullish on WLP because it suffered from several big headline events. First was Obamacare's victory in the Supreme Court. Most had expected the mostly Republican Supreme Court to strike down Obamacare. Second was disappointing earnings for Q2 2012. Shortly after that, then CEO Angela Braly left. The following chart shows these events' affect on the share price. WLP was normally a stock with a P/E less than 10, and then in Fall of 2012 it drops more than 33% following two events.

Shortly after these events, WLP issued more debt and bought back more stock. That is a great idea. The company get debt at around 2.75% interest and get stock that yields 15%. In addition, WLP bought Amerigroup. And last quarter earnings shows that WLP at the moment is a cash cow.

Still the biggest overhang on the business is Obamacare. In October, as part of Obamacare, all states will implement exchanges. Exchanges are government run marketplaces where individuals and business can go to compare policies and premiums. Note that all this does not necessarily mean that the government will compete with managed care companies like WLP. In fact based on what I understand of government and healthcare, the government likes to outsource management. For example, more than 70% of all Medicaid enrollees use managed care companies like Amerigroup. With the expansion of Medicaid and insurance coverage overall, managed care companies now have 30 million more potential customers.

The flip side is fear of government regulation. Right now, government restricts benefit expense ratios to be 85% or less. Wellpoint's ratio is 86%. So it is within reasonable limits.

I am purposely being vague in my analysis of the Obamacare situation, because Obamacare is a confusing topic. It affects almost everyone in America yet I don't think the majority knows how it will affect them come October. How it will play out is very unclear, regardless of whether you are a lobbyist, politician, doctor or a WLP executive, we are all pretty much in the dark. But, to me, managed care companies have tremendous potential and WLP in particular has a huge margin of safety.

In my post last year, I listed some negative headline events that unnecessarily depressed decent large cap stocks. I participated in some of these events, namely Philip Morris. Now, the future will tell if Wellpoint is another. If it is, then I believe the WLP bears will capitulate when the dust begins to settle on Obamacare. That could take two to three years. By that time, who knows, WLP could double.

Tuesday, April 23, 2013

Why I Sold Intel, Microsoft and Pfizer

Recently, I noticed that people have read my old bullish posts on my holdings, for example, Intel. So, I want to update folks about my recent sells.

I closed my Intel position. I sold Intel in part because it was languishing in the low twenties, and near term I don't see any reason for the stock to move in either direction. Their recent earnings point to a P/E of just a bit over 10. But I was shocked to hear the recent news that PC sales are down 13.9% year over year. I generally don't heed the sensational headlines, like tablets are replacing PCs. But this statistic is a wake up call. I just don't see Intel as that attractive an investment. I bought it at about $20 a year ago. I made about 12%.

I reduced my position in Microsoft because of the aforementioned PC situation. Also, I don't see Windows 8 or their tablet push or their partnership with Nokia working that well. On the other hand, I still think Microsoft is a worthwhile investment.

I reduced my Pfizer position because it has doubled for me in the past four years. I was lucky to get a bunch during the financial crisis. Pfizer had a lot of headline problems due to patent expirations. But that headline risk is gone now, it being such a large cap stock, I don't see how it can grow profits much. I still have some left, but only because I want to avoid capital gains tax.

So, a lot of these sells are because I am in the process of changing my investment style. I want to invest in less large cap stocks. I still do own large caps but my positions will be much more concentrated.

Tuesday, April 16, 2013

My Investment Performance in 2012?

As I look at the other investment blogs written by small investors like myself, I often come across a summary of the author's past year or quarter's returns. I can't do that though, because I just don't know. I classify my assets as equities (not counting cash and bonds) and everything else. I have some idea of the gains in the equity portion of my portfolio. I think I am regularly beating the S&P 500 total return index, but I can't be sure. At any given time I may add cash to my brokerage accounts, or the holdings may generate cash through dividends or capital gains. I may also take away cash to pay bills or taxes on April 15. So with all the mish mash of money going in and out, I can't figure out what is my return without excessive effort. And I am too busy tracking news from my holdings. Even if I could track my returns over a short term of a year or quarter, I don't think the information will be very useful. Instead, I like to look at my individual holdings and break them down into components and estimate how they fared in 2012.

Health Care / Contrarian

This group has the out of favour stocks that I love to own. I own Wellpoint (WLP) and Pfizer (PFE). Wellpoint is a real stinker right now because 1) it's margins are worse than it's competitors recently and 2) Obamacare could mean stricter regulation and scrutiny. Well, since these two factors really came into light last fall, WLP has gone up more than 30%. Pfizer has similar problems and is also rising with the market.

Another contrarian stock is Seaboard (SEB). It's my biggest holding and went up around 50% last year. I am selling a bit here and there.

Result: beat the market average

Old School Tech

I bought into this group in the last few years because they are just too cheap to pass up. No, I am not talking about Google or Apple or Facebook. I am talking about Cisco, Microsoft and Intel. The darlings of 13 years ago but who the markets now perceives as behind the times.

This group is continuing to be undervalued, I sold a bit here and there when I need the money for something else.

Result: (probably) lagged the market a bit

Resource Stocks

I own Chevron and Transcanada. Chevron has been really good to me. I have had it for almost a decade. The last time I added to my position was when 2008-2010 when it dipped. I just wish I bought more. Transcanada is a stock I don't really understand. This company makes money mostly through transporting natural gas over its pipelines. Its rates are fixed, but it has a P/E regularly over 20. I was a bit wary of the high P/E and sold most of my position in the last year. I still have a bit left because I want to avoid capital gains tax.

Result: beat the market average

Small Caps

My smallcap portfolio is well documented on this blog. I may be beating the market a bit, but it is really too early to judge this recent group.

Result: beat the market average

Everything Else

This is an eclectic bunch, from Berkshire Hathaway to Sears to Brazil Telecom. The Brazil Telecom investment (called Oi) is a real drag. However, their dividends are lumpy, and it could be as high as 20% in some years. I really am not sure how the stock has done considering the huge dividend. I suspect a small loss. But a small loss in a rising market is a blow.

Result: lagged the market

So the conclusion is I am doing ok. I track the S&P 500 more than most people's portfolios. But looking at a short term like a year isn't really useful. It would be much better to look at the markets over a full business cycle. I have gone through two crashes, in 2000 and 2008. And I came out of them ok. I think I am beating the S&P 500 total return by a bit over that time. I think!

Tuesday, April 9, 2013

Why I Bought IEHC

Recently I bought IEH Corp (IEHC), my sixth small cap. IEHC is really a tiny company, only $7 mil market cap! I came across this in the value blogsphere and found it very well suited to my style. It is extremely profitable (relative to market cap) and it is trading at net net.

Below is the summary of the financials.

IEHC, like so many of the attractive net nets serve a niche in the US military complex. IEHC makes special electronic connectors that can stand the stress of movement and require little force to install. The company appears to be very good at its product, but it is quite dependent on the military. I think that is one reason the company's price is discounted. Recently the company has tried to branch out to commercial applications, and it now has 31% of its sales in the commercial space.

Because this is such a small company I have very little source of information. The company's website says the business goes back 80 years. IEHC used to be listed on the NASDAQ, but moved to the OTCBB in the 1990s because it was too small. The company has been in the connectors business since the 1990s. It is amazing that a company can make the same type of connectors for so long and be growing so much. But then I think of it, my most common computer problem has been the connections. In fact, recently my computer failed because of a loose harddrive connection that eventually disconnected over time.

The company website says that the company was founded by the forefather of the current CEO Michael Offerman. The company used to be called Industrial Heat Treating Company. Somewhere along the line it changed to making electronic connectors. It wasn't doing that well in the 1990s and the stocks was regularly below the $1 range. The company was sometimes losing money, sometimes making money in that decade. Then starting in the early 2000's sales and profit really took off. The following chart shows its yearly profits.

In 2000 Offerman owned 17% of the company. At that time the company was only worth $0.5 mil! Then suddenly he upped his stake to 41%. Talk about getting control of a company on the cheap! The bet didn't pay off right away but it did a few years later. Virtually all the money in the 2000s went into equity which then is reflected in the stock price. The stock price at the very least follows the net net value. The company hasn't used its cash flow for anything but capital expenditures, paying off debt and for inventory. If the company keeps the earnings up, eventually it will build a cash hoard, then it'll be interesting to see what management does with the money.