Tuesday, December 17, 2013

McRae Q1 Earnings Up 55%

McRae Industries reports revenue up 27%, earnings up 55% yoy. See below. The company reported the diluted earnings per class A share as $1.33 for the quarter.

Last 5 Quarters (mils)

A significant contributor was the military segment; the company now produces boots for the Israeli military! The good news just doesn't stop.

For the last few years the company has been on a tear. See below.

But the company has said that western/lifestyle segment, which is the most discretionary, typically goes on a 3-4 year cycle, and we are on the 4th year of this cycle. So McRae investors must be wary. That said, I feel much of the world today has an overabundance of life's necessities, and consequently many are moving beyond necessity to luxury. Thus there will be more demand for goods such as pet products, alcohol, healthcare, recreational drugs such as marijuana, high-end watches and the western/lifestyle boots that McRae sells. I am trying to profit on all of the aforementioned areas - well, all except except marijuana.

In other news, I found this thought-provoking article on Shiller's CAPE. I wrote, and so have many others, that the CAPE is an excellent historical measure and that the CAPE indicates the market is overpriced now. However,  this article argues that this conclusion is incorrect because accounting rules have changed and therefore CAPE values are based on inconsistent rules over time. This article's argument has huge ramifications for me because I am reducing my equity exposure as the market continually hits new highs. But if I can be convinced that the market is not overvalued I will have to reverse course! I recommend this article to any serious investor.

Monday, December 16, 2013

Why I Own Insurance Stocks

Over my investing years, I have tried to make some general rules to hopefully help me avoid trouble. Currently, my general minimum critera are:
  1. low PE
  2. profitable over last several years
  3. low debt requirement for operations, and
  4. domiciled in a developed country

I have other requirements which are desirable but not necessary: I prefer small caps, and I have touched on it extensively in this blog.

When I initially invested and wrote about it last year, AIG fits the criteria except that it hasn't been profitable recently. But that was last year. In the year plus since, it has earned money consistently. In all, AIG has been profitable the last 9 consecutive quarters. I feel that companies that don't regularly need tons of capital expenditures are in general better investments. That's in general Warren Buffet's strategy up until recently when he bought Burlington Southern.

I bought AIG over a year ago when it was $30, and was trading at around 0.6x book. Since then it has run up to $50. A year after I bought AIG I tried to find a small cap company like it. I found Kansas City Life Insurance to be a small cap that also trades at 0.6x book; 0.6x is just about the lowest book I could find for insurance companies. KCLI has since run up 30%. The following table summarizes KCLI and AIG today

AIG does primarily Property and Casualty and Life Insurance and Annuities. KCLI only does Life Insurance and Annuities. AIG also owns ILFC, which is a aircraft leasing business. Just today, AIG announced it will divest ILFC to another company, AerCap. Although I don't think AIG will have any gains or losses from this transaction, I think it is yet another sign that AIG's dark days of five years ago are behind them.

My other insurance holding is Wellpoint; but then again WLP is not really an insurance company as much as a healthcare company. I have written many times about WLP as my bet on Obamacare. I have never really heard of any other investor taking my view. Until I saw a Forbes piece on Larry Robbins. Larry Robbins runs a hedge fund that is one of the best performers this year because he made a big contrarian bet on the healthcare sector. After following the hedge fund moves in the last year, it seems like to me the hedge funds are just being too conventional when their name implies that they should act contrarian.

My bottom line is, I am really liking insurance right now!

Thursday, December 5, 2013

Why I Own Fujimak

I found Fujimak (5965:TSE) while looking for small Japanese net-nets. Although Fujimak is not a net-net, it got my attention for its great earnings. The stock trades at only 5 times trailing earnings. I have only seen this in very special situations. But from what I have seen Fujimak can earn this type of earnings regularly, and without much leverage. The only negative that stands out to me is that this is a Japanese microcap. Its current market cap is only $55 mil USD.

Fujimak makes kitchen equipment for commercial use. The company has been around since 1950. The company only provides investors online information in Japanese. The online data only go back six years. Their equity and earnings per share are shown below.

Equity and Earnings per share (yen)

I don't have any information prior to the six years. I can only assume that the company was just humming along when earnings took off around 4 years ago. The stock price currently is 860 yen. The expected income for fiscal 2014 is 130 yen.

But digging deeper, the data is peculiar. The income increase did not come from greater sales, it came from greater margins. And what an improvement this makes.

The following table shows the gross margin is relatively constant, but the profit margin benefited greatly from improved SG&A expenses. So the improved performance comes from selling possibly less and more profitably products. Other than that, I don't have much more to add because I can't read the reports in Japanese, and even if I could I don't think they would reveal much. But whatever the reason, the numbers, if true, is compelling enough reason to buy Fujimak.

Fujimak should also benefit from the current Japanese resurgance. The USD is worth 102 yen now. Between 100 and 110 is a wonderful sweet spot for Japanese exports. And I can tell that Fujimak is pushing its expansion into Asia. They recently opened an office in Vietnam.