Value Investor

RIG

2008-10-21T17:25:00.000-07:00

To me this stock looks incredibly cheap. first of all it has beat earnings expectations for the last 8 quarters except for Q3 of 2007. Its growth rate, while expected to slow is still incredibly high especially for the price that it is selling at. its price to earnings ratio is 4.94 which is very good. most companies with slow/no growth have p/e ratios under 10 but this company has a p/e under 10 even though it can still be considered a growth stock. this is reflected in another metric called the peg ratio or price/earning/growth ratio. RIG has a peg ratio of .22 which is the lowest in its industry suggesting that it is a good value. The company also has a very solid balance sheet and operates in an industry that is unlikely to take a serious hit even if the world does slide into a recession. As long as oil stays roughly were it is now or goes higher then the demand for oil rigs should go up. Currently oil is priced for a pretty major worldwide recession and I do not see it getting nearly as bad as that.

So if you decide that you like RIG don't just jump in an buy it right away. there are many ways to play this company that offer a potentially better risk/reward ratios.

1. buy the stock. this is the obvious trade and could easily get, in my view, a yearly return of around 50-60% over the next few years. the risk is limited and if the stock does go down significantly(10% or more) I would simply recommend buying more (unless the fundamentals have changed) which would lower your average buying price and allow you to make even more money when it does go back up

2. Jan,15 2010 120 strike call option. this option is currently selling at 7.50 per contract and offers incredible potential returns. If you don't know what options are then read what I am about to write. If you understand how options work then skip it.

an call option is a contract that is sold on the market that gives the buyer the right to buy a specified stock, at a specified price, before a specified date. the specified price is know as the strike price. I think the best way to explain how options work is to do a simple simulation.
the date is October 2 2008
imagine stock Z which has a market price of $10 per share
A call option, Zabc, has an expiration date of November 2 2008, a strike price of $12.50, and currently sells on the market for $1 per contract.
You buy one Zabc option on the market.
you now have the right at anytime before November 2, to buy stock Z at a price of 12.50 REGARDLESS of the market price of stock z. for example, on October 5 stock Z could be selling on the market at a price of $17 per share. If you choose, you could exercise our call option and then buy 1 share of Z at a price of 12.50 even though it is selling on the market for $17. after executing the option you make an instantaneous $4.50 because of the difference between the stock price and the strike price of your call option. you paid $1 for the call option so your net profit is $3.5 off of a $1 investment which is a gain of 350%. had you simply bought stock Z on october 2 for $10 per share and sold it on October 5 for $17 per share you would have only made a profit of $7 off of an investment of $10 which is only a 70% gain which is by comparison a small gain. if that confused you which it proly did (I dont know anyone who ever understood options after their first time hearing what they were) then try hearing it explained in a slightly different way and it might make sense. http://optionmonster.com/education/

ok back to the analysis
buying the jan 2010 option 120 strike give the stock 451 days to go back up to $120 per share and once the stock starts to go up beyond that the profit will start to growth extremely fast. it would not surprise me to see the stock selling at 200 by that time which would lead to profits of over 1000%. the amount at risk in this investment should not be more than half the investment worst case scenario and i deem that to be EXTREMLY unlikley.

3. May 15, 2009 120 strike selling for $3.20. If you, like me, think that this stock will start to head back up relatively soon then this is probably the contract for you. in my opinion RIG could be selling at somewhere around 150+ by the time of expiration which leads to profits well over 900% in a shorter time than listed above. of course this is one of the riskier plays on this stock but in my opinion it is a well calculated risk that offers HUGE potential rewards.

The reasons options are advisable for this stock is because I think that it has the potential to move up very significantly (+50%). The best way to take advantage of such a large move at a relatively low cost is to get out of the money options which is what both of the options listed above are. There are many other possible option contracts that could be used to play RIG, the two above are just my favorites.

NCAV List

2008-10-21T15:15:00.000-07:00

Here is an updated list of stocks trading below their net current asset value that you might want to take a look at. Given the recent panic this list is very large but many of them are probably not even worth looking at because they are very unstable companies but I will do my best to take the worst ones out of the list. Remember that these are recommendations on what to research not on what to buy. Also note that an overwhelming majority of these are small cap tech stocks that I don't really understand. I have decided that on my next list I will include a non tech section so you don't have to go through a bunch of stocks that you might not be interested in at all.

vvtv
asfi
crv
nuhc
twmc
msn
cobr
neng
voxx
tbac
haup
infs
tues
issi
dram
tiii
wga
tlgd
trid
axti
mfi
hdng
plcc
tecd (first glance I have no idea why this company is selling this cheaply)
trci
duck
ttil
prls
mlr
fep
smrt
sts
atrm
auth
bhe
trt
wmar
parl
zap
dswl
gv
usu

Hedging

2008-10-21T15:12:00.000-07:00

In recent weeks the market has crashed and if you have an account, it has probably been getting crushed. The markets are simply not functioning properly and with that in mind I propose various strategies of hedging your portfolio against further losses, assuming you have not run away from equities.

1. Every sector has a leader and every sector has a laggard. If you think you have found a company that is the absolute best in its industry then one of the best ways to hedge against this position is to short the worst company in that industry. for example, it has long been almost basic fact that Goldman Sachs was the leader of the investment banking industry. No one could really compare to Goldman Sachs. You could have bought GS and picked just about any other investment bank as your hedge by shorting it and you would have made a significant amount of money. This is despite the fact that GS is down over 50% from its high.

2. Sometimes there is no viable counterpart to a stock to use as a short. You might also be simply to bullish on an industry to short any company in that industry. If this is the case it is usually better to use the market as a hedge. You can do this by shorting an index fund that represents the market. My favorite is spy which represents the S&P index. You might choose to use 50% of your capital to buy stocks that you like and then devote the other 50% to shorting the S&P. in this way you gains would be exactly equal to your ability to pick stocks that beat the market. Different allocations could be used depending on your view of the risks involved in the market or your bullishness.

3. Hedging out risk is possibly the most useful function of options. When you buy a stock your risk is 100%. In other words it is entirely possible for an equity investor to lose all of his money. Options have the ability to change an uncertain but large loss into a certain but small loss.

Stock Z is selling $40 per share. put option Zabc has a strike of $40, expires in 50 days, and sells at $1 per contract. Remember that a put option gives the option owner a right to sell the underlying security at a price specified by the put option, regardless of the price of the underlying security. if you buy one share of Z and one Zabc contract, then the most that you could possibly lose on the investment is $1. In other words even though there is a risk that Z goes down to $20, you would only lose the $1 you paid to buy the put option. You would exercise the option and sell your share of Z for $40 even though it is selling for $20 a share on the open market.

Usually put options are the most viable option for hedging out risk in the market. Unfortunately the price to buy puts, the price to absolutely hedge out any uncertain risk whatsoever, has increased drastically. When the market reaches the height of uncertainty and panic that we are currently experiencing more and more people are buying put options, causing the price of put options to go up. However because the tendency of the market is to have very strong rallies following times of extreme uncertainty it is arguable that the price buying put options is almost always a good price relative to the risks that are faced.

If you have not yet been scared out of the market, remember that it is not to late to start hedging. And if you left the market behind you might want to consider getting back in with a hedged position.

Updated NCAV List

2008-03-04T07:44:00.000-08:00

After the most recent declines many stocks have been added to the list of NCAV stocks. This list has been pruned down but you can see http://www.grahaminvestor.com/screens/grahams_result for the entire list.

BZH
HDL
MSN
WCI
TAIT
TWMC
CRC
CRV
FORD
HOV
PMRY
ISSI

NCAV List

2008-02-27T16:23:00.000-08:00

Here is a list of stocks that are currently trading under NCAV according to http://www.grahaminvestor.com/screens/grahams_result. I've taken out the companies that do not have sufficient financial strength to be considered good investments. See NCAV for more information on the NVAC strategy. These are not necessarily recommendations but instead ideas for you to explore in greater detail.

BZH
HDL
MSN- questionable financial strength but worth looking at
WCI
TWMC
OHB- be careful with this one
FORD
CRV
FINL
ZAP-bad earnings history though

Net Current Asset Value (NCAV)

2008-02-26T20:44:00.001-08:00

Over 50 years ago Benjamin Graham, the father of value investing, began to utilized a measurement of a companies worth known as net current asset value. NCAV is value investing at its purest.

You are probably familiar with the measurement known as book value which is total asset minus total liabilities. But NCAV is slightly different. NCAV equals the companies current assets minus its total liabilities. For example:

OHB (Orleans Homebuilders) has the following items entered on its Q2 financial statements:

Current Assets = 3463.34

Total Liabilities = 2555.12

Total Common Shares Outstanding = 39.21

So the NCAV of OHB is 3463.34-2555.12 = 908.22

This number can then be converted into the more useful NCAV per share by dividing the NCAV by total common shares outstanding. Therefore, the NCAV per share is 908.22 / 39.21 = 23.16. At this point the NCAV per share could be compared to the market value of the shares to determine if the stock is trading at a fair value.

You might be wondering why it is recommended one uses NCAV as opposed to book value. The reason is simple- margin of safety. By using the NCAV you are essentially paying nothing for all the fixed assets- buildings, machinery, etc., or any goodwill items that may exist. As long as the company has a reasonable amount of financial strength (stay tuned for my next post covering this and other important details in value stock selection) it does not matter how the current earnings results are because you are paying so little for it.

The general recommendation for the use of NCAV in practical investing is to buy issues that are selling at only 66% or less of NCAV. It is my opinion that is far to rigid and up to 100% NCAV should be allowed for special circumstances.

Finding sub-NCAV stocks can be a very challenging and even impossible task, especially in a bull market. But in a bear market you will find that it is not all to uncommon for a stock to trade within our NACV requirements. There are many methods for finding these under priced issues. Some like to do a screen to narrow down the options to stocks most likely meet their requirements. Others just prefer to go through balance sheets by hand. My favorite is to visit http://www.grahaminvestor.com/screens/grahams_result which shows a list of all stocks currently trading below or near their NCAV. Of course this list contains many companies that would not be sound buys due to the fact that they may have insufficient financial strength to meet future road blocks. That is why I will be setting up a section of this blog dedicated to taking this list and pruning out the weaker companies, leaving only the most financially sound companies. This list will be updated weekly so you may want to check up on it every once in a while to see if any new value stocks have been added.

Well, that's about it for today, but I'll leave you with one final statement that is essential to any investor wishing to purchase NCAV stocks. That is- Do not be afraid. Do not be taken over by the pessimism of wall street that usually brings stocks to these levels. Remember that all bear markets pass, no matter how severe they may seem.

Basic Stock Investing 3: How do you buy stocks?

2008-02-17T22:15:00.000-08:00

Now that you know what a stock is and a little bit about the different types of stocks you may be wondering how you can get started buying stocks. In order to buy stocks you have to set up an account with a brokerage. Brokerage accounts are very similar to your everyday bank account except they allow you to buy and sell stocks. In exchange for this capability you have to pay a fee, or commission, for each transaction made. Depending on your account provider this commission could be anywhere from $5 to $50 but for the majority of small investors $10 per trade is the most common. One discount broker that I would highly recommend is ShareBuilder.

Basic Stock Investing 2: Different types of stocks

2008-02-17T10:27:00.000-08:00

You may be surprised to hear that there is more than one type of stock that a company might issue.

Common Stock

Common stocks are the most common (naturally) type of stock investment. A common stock is a stock that gives it's owner certain voting rights in the company. Common stocks still have a claim to the company's assets and earnings as described in my last post, but the most common way to make money off of common stocks is to buy the stock at a lower price and sell it to someone else at a higher price. Common stocks have the highest average annual return out of all types of investments, but they also have the highest risk. Because common stock holders have less of a claim to the company's assets than bondholders and preferred stock holders if a company goes into bankruptcy common stock holders will often receive little or no money.

Preferred Stock

Preferred stocks are similar to common stocks but most of the time don't carry any voting rights. One advantage that preferred shares have over common shares is that preferred shares have a guaranteed fixed dividend as opposed to common stock dividends which are not guaranteed and are subject to change. Preferred shares also have a stronger claim to the companies assets than common share holders. If the company decides to liquidate then it's preferred shareholders are more likely to get paid than common stock holders.

Basic Stock Investing 1: What is a stock?

2008-02-16T21:13:00.000-08:00

When a private company decides that it needs more capital for whatever reason, it may decide that the best way to raise this capital is through selling stock. This process of going public and selling shares is called an IPO or initial public offering. When an investor buys shares of stock that are being sold in an IPO the money that he spends buying the shares goes directly to the company which then can use it to fuel growth. In return for this capital contribution the investor is given partial ownership of the company. If a company issues 10,000 shares of stock in its IPO and you buy 1,000 shares of it, then you have a 10% ownership in the corporation. As an owner you are entitled to part of the corporation’s earnings, which are usually paid out by the company to its shareholders through dividends. Typically a company will only pay a portion of the earnings as dividends and then reinvests the rest to help the company grow. Most of the time you do not buy stock directly from the company but instead you buy it from another shareholder who for whatever reason has decided to sell his/her share of the company. Stocks are bought and sold on stock exchanges which help to bring buyers and sellers together. Stocks have a market value attached to them which is the price that it can be bought or sold for at that time. The market value of a stock is controlled by the laws of supply and demand. If demand goes up and more people what ownership in the company then an investor will be able to sell his shares at a higher price.

Saks: Strong Buy

2008-02-15T22:32:00.000-08:00

While the retail industry as a whole has been suffering as a result of decreased consumer spending Saks has pulled off quite a turnaround. The decrease of the dollar against most other major currencies has been a major factor in this turnaround. A weaker dollar allows wealthy foreigners to come to the US and shop at our stores at a significant discount. The result is 11.7 percent same-store sales growth for 2007. There is also the possibility of a buyout of Saks by Baugur Group which is an international investment company which focuses on retail investments. Most calculations put the potential bid at about $23 dollars per share. Another important factor affecting the price of this stock is heavy short interest. In other words a lot of people are betting that this stock will go down. This is a good thing because if the price of SKS reaches a certain level either by the buyout or by continuing its current success these people who are currently short will cover their short. The result is a short squeeze that would drive the price of the stock up massively. Currently short interest in Saks is at 17.2% of float which is a huge amount. Recently S & P increase their rating on SKS from 3 stars to 4 stars with a price target of 21 dollars per share. All in all I think that Saks is a strong buy and preferably before they report annual earnings on March 5th.