Monday, April 12, 2010

Double Double: Celebrating Recent Investment Results

The Jaded Consumer has discussed investments on more than a few occasions, but rarely describes results. Having just noticed two doubles over the last year, I thought I'd share. To give a little perspective, my top seven holdings by (present) value have yielded the following returns ...

The top holding by present value is ACAS, in which as I mentioned last year I nearly doubled my position at $1.80. Now that ACAS has recovered from $0.58 per share to over $5 per share, it's nearly a 10-bagger off its nadir. Of course, yours truly started buying when ACAS was in the $40s, so it's actually been in the -98% return range while I've held it. Since ACAS remains dramatically below the company's asset value, I expect further increases. I don't think bailing out of anger makes much sense, particularly since my thesis regarding ACAS' underpricing seems to be proving out. Patience, patience. But note: I'm not hiding my losers, and I'm trying to keep my head on straight while thinking about them.

The second holding is a much newer holding, entered during the dark days when stocks were battered irrationally and I didn't think Berkshire Hathaway's B-shares were fairly priced below $3000 apiece (before a 50-for-1 split). I first bought BRK.B on April 3, 2009, so the 39% gain is nearly an annualized result. Not bad for a widows-and-orphans stock. As the broad market improves, the negative valuation given Warren Bufffet's long-term derivative investments (valued on the Black-Scholes model despite being exercisable only on the expiration date years from now) will plummet and the company will enjoy a recovery from the nasty shock its shares took in the crash. Meanwhile, GEICO and Dairy Queen and Sees Candies and Star Furniture and all those other businesses will keep cranking out cash for poor Warren and Charlie to invest for me. Poor souls. This one is a hold for the long term. Because there's no dividend, it's a fine hold for accounts with no special tax treatment – just don't sell and you won't pay any taxes.

The next stock, at plus 100%, is the first of the reasons I am posting: it's just doubled from where I bought it. General Electric looked great at $7 where I established half my current position on March 6, 2009, but I doubled the position on April 28, 2009 just over $11 and have an average price a bit over $9. Doubling GE in a year feels nice largely because I am not worried about finding an exit. GE is a stock I'd like to hold forever. GE is in a diversified business, pays a dividend it's announced it'll begin raising again next year, and is in a great position to benefit both from trends toward increasing investment in medical technology and energy, but also in credit quality: GE was hammered by people who feared it should be valued like a financial and bailed on it. I didn't see GE owning any defaulting home mortgages, but as financing to its long-known customers the purchase of productive business equipment. I actually like GE's finance business going forward. As the economy improves, demand for GE's big machines and little medical devices will also improve. And I will keep holding.

The last recent double is AAPL, from the 120 price at which I re-entered after liquidating to avoid the consequences of being over-leveraged during the crash. The AAPL repurchase occurred April 13, 2009, so the double is approximately an annualized result. I've gone on and on about AAPL on this blog so I don't feel I need to rehash the grounds for my long-term bullish position, but AAPL will require a more careful eye than GE or BRK.B because its business is more concentrated, its competition more vicious, and the valuation multiples more apt to change in a hurry based on market sentiments. I first invested in AAPL a couple splits ago when the stock was printing $14 and $20, after the NeXT purchase but before Jobs became iCEO. From a split-adjusted $5 or less, this has been some ride.

After AAPL on my highest-holdings list is a stock I only just bought December 4, 2009: Hasboro. HAS has leapt from 30 (where I had a GTC order) to past 38 in less than half a year, and I'm as pleased with the nearly 40% return in that time as I am with the return I've had on GE. Of course, GE did its thing while also paying me a dividend. Hmm. Looks like GE gave me a 100% return faster than I first noticed. I've discussed why HAS is a buy, and I continue to expect great things from management's efforts to realize value from its brand portfolio.

The sixth stock on that list, up less than 3%, was bought December 7, 2009 and has had some bad news since then. DVN's sale of assets to BP has been threatened by an ExxonMobil fight-of-first refusal. Confusion over the future of this sale has impacted folks' valuation of the company. Eventually, the numbers will come out and uncertainty will pass. I think DVN's onshore US gas operations are going to produce good value as energy demand increases, and I'm willing to wait for performance. Energy demand will increase, and everybody's hydrocarbons will become more valuable as that trend intensifies. As that occurs, domestic supply will be more valuable than offshore supply due to maintenance overhead and transportation costs. DVN is in a good place for the future of energy in North America.

The seventh stock was bought December 8, 2009, so having a 20% gain isn't bad. The company sells things like road salt and other unexciting things, but also ammunition. The recent publicity about the Second Amendment can't hurt ammunition demand, and military contracts are nice, but I think the company's real future lies in the unexciting business of delivering unexciting industrial chemicals – a market in which the company is a leader. Olin may be up 16% from where it was recommended by the market research team tool offered at TD Ameritrade, but it's up over 20% from where I bought. And Ameritrade can't really claim credit for recommending the stock, because the last "upgrade" was to "hold" -- presumably from the "run for the hills" rating it must have had before. Olin (OLN) pays a dividend that is about 4% of my purchase price, its lame-o ratings suggest it's not being overvalued by exuberant buyers, and it has a huge share of the market for some extremely boring chemical business lines in which its economies of scale make its process innovation investment much more profitable than in the hands of competitors. Olin's occasional wins like its recent sole-source Winchester ammunition contract are nice assurances that all its business segments are capable of landing profitable sales. So next winter, pray for hard freezes and a need for road salt, and enjoy the news every time you hear about some shack in Idaho found full of weapons and ammunition. Every frozen road and armed hillbilly is a harbinger of profit.

I can't say my investment has been all gravy, and my experience with ACAS since I first started applauding its management has been a prime example of how unappreciated risks can thwart even a largely-correct investment thesis. On the upswing of the economy, I expect all these companies to do well. Unfortunately, I get busy with my "real work" I haven't time to discuss it all, but feel free to comment – it helps to know what you're thinking.

I wish you the success I've been having this last year. Feel free to post your best ideas – I know I have!

1 comment:

clb said...

I'm with you on ACAS, BRK.B (which I awesomely invested in about one week before the split), and HAS. I looked closely at GE but couldn't convince myself that I had any idea where they actually made/lost money, so gave up on them. A couple of my other high confidence stocks are EVEP (nice dividend), SMTS, NATI, and TIE.

The most interesting stock on my radar is Neutral Tandem. They are debt free and have been steadily raising revenue and profit margins over the last 5 years. Their business is to provide interconnection services to all types of network carriers.

The reason for avoiding TNDM so far, is that a few of their patents have failed to hold up in court and I'm not convinced that it takes more than a few million in capital and a good IT guy to enter this high margin business. If they are not sufficiently entrenched in the business, I could see a larger company like ATT bullying it's way into the arena. Maybe the Jaded Consumer can find some insight to this business?