Monday, December 29, 2008

January 2009 Super New Year Pick

Okay, so there's nothing particularly special about this month's pick. But I would like to take the occasion of the new year to remind my readers that the intended holding period for picks for the Fleabagger Portfolio is at least two years unless otherwise noted. The losses in NDAQ, CDE, and other TFP picks are still likely to be more than made up over the next 18 months or so.

Unlike my other picks, this is not the common stock of an individual company. This is an ETF. ETF stands for "exchange-traded fund," and ETF's are, as Ric Edelman points out, the best way for an individual with little time on his hands to invest his long-term savings. For an unstudied investor, you would want ETF's that track broad domestic and foreign indexes (like the S&P 500 and the MSCI EAFE, respectively), as well as commodity ETF's and perhaps even bond ETF's, and you would want to rebalance them every year or two, and you'd probably do all right.

The Fleabagger Portfolio is not the unstudied investor, however. It is the aggressive young investor seeking maximum return over the next two years, based on observable phenomena in the global economy. It is also rapidly becoming more convinced of the need to invest overseas.

Particularly worthy of notice are foreign markets that are relatively free, enjoy low (or no) inflation, and have strong mining, agricultural, or manufacturing sectors. Markets like Australia, with its relatively laissez-faire government, sound fiscal policy, and strong mining sector. Fortunately there's an ETF that tracks the good market in Australia without dross like Europe. Its symbol is EWA, and it's more than 50% off its 52-week high, and near its 5-year low. This is ridiculous, because Australia's miners and the banks that support them are likely to thrive in the hyperinflationary/recessionary environment I expect for the U.S. in 2009-2010, especially because East Asia's economies probably won't stop producing just because the U.S. stops buying. They'll just sell to richer countries, like, say, Australia.

This pick, I'll admit, comes a little late. I intended to post this last year (that is, this past Monday) when EWA was in the low $13's. Now it's over $14, but it's still a buy anywhere below $16.

Saturday, November 29, 2008

Stock Super Pick for December 2008

Hello, boys and girls. So far TFP's picks haven't turned out so great. Yes, judgement should be withheld until after the 2-year timeframe I originally set for them, but they were still a little disappointing, right? Well, fear not. Your Uncle Fleabagger (disclosure: not really your uncle) has a Super Pick this month.

Buy Marvel Entertainment (MVL). It is a doozie. I admit, it doesn't look like much if you look at the income statement, balance sheet, valuation, etc. That's as may be. What you don't see when you look at the numbers is that they've been changing their business model to generate less of their profits up front in order to generate greater profits overall.

Marvel is a comic book company that now has expanded into movies and toys. They used to just license their characters out to movie studios, which in turn would profit handsomely from enormous world box office receipts in exchange for chump change ("Spider Man" and sequels), or, what may be worse, the studio would hire some idiot writers/directors to create their "vision" of the character and almost ruin the franchise (Ang Lee's "Hulk"). Now, they are making their movies in-house, taking on more of the financial risk, but getting more of the financial reward (Iron Man). This and the clustered timing of the release of their movies make the earnings and cash flow choppier than those of most companies, but will probably pay off handsomely in the long run.

And let's be serious. Don't you want to own the company making movies like "Iron Man"? I know, "Thor" isn't nearly as exciting (for most of you), and they're even coming out with "Ant Man," but you might be surprised. Another encouraging step is the cross-promotion of their "stingers" - the short clips at the end of their movies. This should help their weaker franchises by letting them ride the coattails of their stronger ones, like Iron Man.

I'm recommending MVL anywhere under $31 (it closed at $29.45 Friday), and you might be able to write (that is, sell) covered Mar 09 call options with a $35 strike (MVLCG) for $2 apiece (last bid 1.90 on Friday), which would be like 7% cash back, capping your upside potential at about 19% (not counting the premium) for the next 4 months.

Thursday, November 6, 2008

November 2008 Stock Pick and Retail Options Explained

Okay, so you bought a few shares of one of Fleabagger's recommendations, you're down 70% and you want to know: "Why should I trust The Fleabagger Portfolio and its recommendations?"

As always, TFP has an honest answer: you and I may not know until 2010. Until then, I request that you just keep reading, and if I am a genius, we should know that in a couple of years, and I will probably start a subscription service for my faithful readers.

This is not just hedging and excuse-making. I remind you that I said from the outset that my time frame for stocks is at least 2 years, and that would be the end of May 2010 for my first pick, NDAQ. I expect this and my other picks to recover more and before the S&P, which is down more than 30% since May. (That may not be as bad as my picks, but it is an index, for crying out loud.)

This month's pick (sorry I'm late, but you have to admit: you did get a mid-month update last month) was going to be something else, but since American Capital Strategies (ACAS) went down about 40% yesterday, and is down again this morning, I couldn't pass that up. The second biggest loser in the whole U.S. stock market, the biggest loser on the Nasdaq exchange, and it is a company I track and respect, and that has already been beaten down really badly this year due to worries from the credit crunch and the deflation of almost all investment assets worldwide.

Let me disclose at the outset that I already owned an ACAS call option contract, I bought ACAS shares this morning, and I wrote (sold) a covered call on those shares.

American Capital Strategies is a Business Development Organization (BDO), which means that they lend to or buy equity (part or whole ownership, like stock) in small companies that do not have their own publicly-traded stock. Since they lend to companies that are too small to attract other sources of financing, they can command a higher interest rate than most lenders, but because they exhaustively research the companies they lend to, and the management staff of those companies, they historically have kept their default (bankruptcy) and non-performing (late-paying) percentages low. If I remember correctly, their default rate in 2006 was less than 1%, and dropped to perfect 0 in 2007. And their non-performing rate historically is in the 5-8% range (though that recently ballooned to 10% - more on that later). They command average interest rates of 11-13%, and they often take equity that is later sold at a profit or remains in the portfolio as cash-generating assets.

Among the companies they own are European Capital (a European BDO-like company that they recently announced plans to buy the remaining unowned 33% of), Mirion Technologies (a company that monitors radiation levels in nuclear power plants and other facilities, and provides comprehensive radiation safety solutions), AAMCO Transmissions (an auto repair company you may have heard of), and scores of other companies that have impressive potential or profitable free cash flow. You can see a longer (yet still not comprehensive) list of their holdings here. Follow the links to their 10Q for the full list.

Now, the reason they plummeted more than 40% yesterday is similar to the reason they'd already gone down more than 50% in the months prior. First, the economy and the expectations for the economy's future are just bad. Also, their portfolio has been marked down again and again as government-mandated accounting rules forbid them to value the assets on their balance sheet any differently from what they could reasonably expect to sell them for in today's market. Well, nobody's willing to pay much for anything in today's market, so that value is low and getting lower every quarter (3 months). When they report their earnings, they have to count reductions in the value of those assets as money they lost, even though they didn't actually lose any money yet. Of course, if something happened that forced them to sell, they would lose that money, don't doubt it.

However, if they are not forced to sell low, this money they have to say they are losing will come back to them automatically when their assets are revalued upward, either in 2009 or 2010 or whenever. If they are not forced to sell, they can keep generating cash from interest payments and wholly-owned subsidiaries like AAMCO, and wait out the economic downturn, or even keep buying distressed assets, which is what they do during the good times, and the pickin's are even better now than they've been in decades. (You can tell I'm getting excited when the sentences are 3+ lines long.) Of course, there is a risk of them being forced to sell, and that's why they were cut to an all-time low.

ACAS has institutions that lent them money. It may seem weird to you for a lender to borrow money, but that's the way it goes these days. ACAS's creditors (lenders) have a provision that allows them to take early repayment if ACAS's net asset value (NAV) drops below $4.5B - they've been steadily dropping due to those asset write-downs, and they're at about $5B. They could very easily drop below $4.5B if things continue to worsen in the economy.

Notice that their creditors would be allowed, not forced, to reclaim their investment early, if ACAS drops below $4.5B NAV. First of all, they would sacrifice interest payments if they did. Much more importantly, they would risk driving ACAS into bankruptcy. That would be really horrible for those of us who bought their stock. But that would be almost as bad for the creditors themselves, because instead of getting cash from ACAS over and over again, they'd get the diminished value of their distressed assets sold off into a market panic. It's like killing the golden goose to feed your family the drumsticks. You would if you had to, but it would be a last resort.

So it seems more likely to me that ACAS's creditors would work with ACAS to make sure those scores of companies in ACAS's portfolio stay in business and keep generating cash to benefit everyone concerned. That is, if they even have the choice, which won't be unless and until ACAS drops another 8% or so of their NAV.

Another reason for the fall yesterday is that the non-performing assets in ACAS's loan portfolio jumped from 8% to 10%. You could call that a 25% increase in the non-performing ratio. I call it unsurprising, considering the economy. Also, these assets are not in default. They have not become write-offs yet. They are merely late, so far. 40% (now 45%) off the stock price is due to more fear than actual non-performing asset concerns.

One more thing (I know this seems like a lot, but the stock did drop 45% in less than two days): ACAS used to pay a quarterly dividend of $1.05. When they were trading in the $12 range, and I thought they were going to pay the dividend, it was an annual yield of more than 30%. Well, they suspended their dividend. Some investors see this as the financial equivalent of hospice care. I already explained why I don't see it that way. They continue to invest their capital (that's what they're supposed to do), and their portfolio continues to generate profitable free cash flow. Now they need more of that cash to stay within the company for a while, and I'm willing to give them a couple of quarters to see how that pans out. At these prices, a risk-tolerant investor has a lot of upside potential to balance those risks.

Another thought on balancing risks: when you buy 100 or more shares of a stock, you can write (sell) a covered call option contract on those shares. I will explain what that means.

A call option is the right to buy stock at a given price, before or on a fixed date in the future. Each options contract is for 100 shares of the underlying stock. For example, if I buy 1 call option contract for NDAQ, and its strike price is $30, and it expires in June 2009, then I have the right to buy 100 shares of NDAQ for $30 each on any trading day up to June 19, 2009. Right now, I might expect to pay about $400 for that contract. (I do not officially recommend buying this options contract. It is used as an example.)

So if NDAQ goes up to $32 by March 2009, I could buy 100 shares for $30 each, and I'm $200 up, right? Wrong! Since I paid $400 for the contract, exercising it at $32 would put me $200 behind. Now, I could hold onto it and see if NDAQ goes up beyond $34 before June 19, or I could see if someone else thinks that and is willing to pay me more than $400 for the contract since NDAQ has already started to go up. But it's hard to say what people will be willing to pay for options contracts in the future. Bid/ask spreads make it hard to get the price you want when you're buying or selling contracts.

Put options, as opposed to call options, are the right to sell stock at a certain price on or before a fixed date in the future. (A call buys, and a put sells.) If I buy 1 put option for NDAQ and the strike price is $20, I'm hoping the price of NDAQ goes down a whole lot, so I can sell it, as a put option gives me the right to do.

However, I recently decided I like writing (selling) covered calls more than I like buying options, as a general rule. To write a covered call, you simply own at least 100 shares of a stock that has options trading activity (as almost all but the tiniest of companies have), and you sell someone else the right to buy 100 shares from you at a certain price, on or before a fixed date in the future. The effect of this is that if the stock goes down, you lose less money than you would have without selling the call. If the stock stays flat or goes up a little, you make more money than you would have just by owning it. And if the stock goes way up, you make less money than you would just by owning the stock.

In some cases (like today) you can limit your potential profit to a maximum of about 25% over the next few months. I may be young and rambunctious, but I can live with that limit. Also, the risk of loss with the stock is still there, but it's mitigated by writing the call.

I recommend buying ACAS below $7.00, and if you can afford at least 100 shares, write a DQSBU.X contract for 2 or more ($200+). Even with online broker commissions, you should be up more than 25% if ACAS stays around these levels. And if the stock drops a lot from here, buy some more. I can't guaranty that this particular stock will do well, but I can prove from history that times like these are the times that make people rich.

Monday, October 13, 2008

Mid-Mayhem Update

This is your Uncle Fleabagger (disclosure: I am not really your uncle), and I'm here to talk to you about the market mayhem, and the effect that that will have on TFP's picks.

First, I would like to remind both of my readers that all my picks (except options) are for at least two years. If you've held on to them, you have not yet lost any money, and you probably won't (as always, no guaranties possible). For one thing, both recession and massive government deficit spending and interest rate slashing in an attempt to ward off recession would be good for owners of silver and gold. So I stand by my silver mining picks, as I expect at least one of those scenarios. The only difference is that they're cheaper now, so your potential gain is increased. The possible explanations of why include liquidation of large mutual fund/hedge fund/exchange-traded fund positions for the sake of returning capital to the funds' investors who are withdrawing their money in a panic. Also, there could be well-founded fears of inability of management to execute well in the face of credit annihilation and other challenges. This is why I am in favor of diversifying among silver miners.

Silver Wheaton (SLW - $5.03) remains the most respected of silver producers, and Coeur d'Alene (CDE - $1.08) remains rich in silver reserves, especially relative to their valuation. Apex (SIL - $1.80) is heavily debt-laden and very risky, but could pay off big if silver prices rise far enough, soon enough. Silver Standard Resources (SSRI - $10.17) is another good choice, and other silver miners to a lesser extent. Diversification is more important in this industry than most, so cast a wide net in relation to the amount of your investable capital.

One thing about CDE in particular: my trusted TMF CAPS colleague Christopher Barker quotes Coeur CEO Dennis Wheeler as saying that "the company has no need to access or seek new lines of credit in the foreseeable future." And that "capital expenditures [are] fully funded by cash on hand and cash flow." If this is true, there is no need to worry about the credit crunch affecting this particular business. With its enormous silver reserves, and a lot of tough luck behind it, factored into the share price, CDE is still poised to explode upward if the price of silver responds to the coming stagflation.

Nasdaq OMX Group (NDAQ - $26.75) remains a great brand name in a great business (stock exchanges), helmed by shrewd, invested managers. The decline in share price may have short-term justification in the worsening economy, the almost certain dearth of new IPO's and listings, and the gradual loss of trading volume in long-term bear market. However, Nasdaq is probably not about to disappear just because the going has gotten rough. In fact, this may turn out to be an opportunity for long-term expansion and further industry consolidation. Hold onto this one for the long term, and if you already have a diversified portfolio (across different industries and different economies), go ahead and invest extra capital here at these reduced prices.

Western Refining (WNR - $6.20) is still a junior refiner, easily wracked by increases in crude oil prices or threats to the credit market. I still like their chances for a big recovery, but would balance that with a company that could profit from higher oil prices, such as Bolt Technologies (BOLT - $8.05), or the somewhat safer (and now attractively priced) Transocean (RIG - $68.36). Just looking at the numbers, Bolt is astonishingly cheap, and marvelously fast-growing. That growth could be slowed by a pullback in energy prices, but there are some companies preparing for prices to go back up, and as a parts supplier, Bolt can still sell to those businesses, even if they turn out to be wrong. The pulse-pounding growth potential, however, is realized only if oil goes back up to $150 or higher.

It's a similar story with Transocean. As deepwater drilling services company, they will really prosper if oil goes soaring to new highs again. However, the downside risk is mitigated, in this case by already-inked contracts worth billions of dollars over the next few years.

The long and the short of it: now is a better time than ever to buy most of these stocks, as well as many others. Outside of financials, homebuilders, and other companies heavily dependent on debt or an asset bubble, most companies are already oversold. Now is the time to start buying, and it will be time to keep buying probably for a while yet. Good hunting!

As always, own your own decisions, as The Fleabagger Portfolio is not responsible for losses you may sustain in following the advice found here. All investments are subject to risk.

The author owns call options for SLW and CDE, and shares of CDE and NDAQ, and intends to buy shares of BOLT.

Tuesday, September 30, 2008

October 2008 Stock Pick

The last time I recommended a silver miner, I picked one with large silver reserves and without a reputation for excellent management. That was Coeur d'Alene Mines (CDE), and it is way down, despite an imminent explosion in silver prices. I still think it's a good buy, and I still own it myself. This month, I am going to recommend a silver miner with far less reserves, but a strong reputation (as silver miners go): Silver Wheaton, ticker SLW.

Silver Wheaton actually buys silver from miners of base metals. These other miners, for whatever reason, are willing to part with their silver ore for just a fraction of spot prices. Then they can get back to mining base metals and Wheaton can profit from the spread. Wheaton still has some silver reserves, and they never hedge their prices. Also, they suffer fewer production problems than companies like Coeur. SLW is probably an excellent way to profit from the coming stagflation.

SLW closed at $8.15 today, and is a good candidate for new capital anywhere up to about $10. All silver miners are screaming buys right now, and SLW happens to be one of the safer, better-managed companies of the bunch.

Other silver miners I am officially recommending now are SSRI, HL, and wild riders PAAS, MVG, EXK and (perhaps the wildest, favoritest of all) SIL.

Sorry I about the dearth of detail, but I am tired and need to go to bed early tonight due to a change in my work schedule.

Saturday, August 30, 2008

September 2008 Stock Pick

TFP will do something different this month. Not only will there be two new picks, but there will also be a conditional sell recommendation. In this post I am giving updates on my existing picks, in addition to making two new picks. No, I'm not abandoning my theses, but I've had a change of heart about whom to serve with this blog. No longer am I dedicated exclusively to those risk-loving financial daredevils in their early 20's who want more volatility in their stocks than in their stormy personal relationships. Even though I am typically not a fan of hedging (because I am a risk-loving financial daredevil in my early, or rather mid 20's), I am going to talk a little bit about mitigating risk today.

First of all, NDAQ is no longer quite so much of a screaming bargain as it was for most of the past two months, but it is still enormously undervalued. BATS (yes, that's actually the name of one of Nasdaq's competitors) is potentially going to cut into Nasdaq OMX's market share, but the risks there are already more than priced into the stock, especially considering the headway that Nasdaq OMX is making in Europe, with the aptly named Nasdaq OMX Europe. In the past, competition hasn't stopped NYSE, CME, CBOT, Nasdaq, and plenty of other exchanges from growing their revenue and cash profits all at the same time. BATS isn't going to bankrupt the big girls either.

NDAQ is still a buy at $32.69 (Friday's closing price) up to $39. (I am lowering my maximum buy price out of respect for BATS. I'm not afraid of BATS, I just have a healthy respect for them.) This is probably my safest pick so far. (Disclosure: I own shares of NDAQ.)

CDE, my second pick, is way down, partly due to the laughably shortsighted dip in silver prices, and partly due to company-specific problems, particularly at the San Bartalome mine in Bolivia. I remain concerned that company-specific problems may make the stock an unprofitable investment despite what I see as an almost inevitable rise in the price of silver. For those of you who want a guaranteed return in the event of a rise in the price of silver, you can buy the ETF that goes by the ticker SLV. It has some modest expenses, but for it tracks the price of silver almost exactly. I think gold will go up less than silver, but there's a fascinating ETN with the ticker DGP, which allegedly doubles the monthly price change of gold. If this works like it's supposed to, and gold goes up as much as I expect it to, this would be a very fine investment. For those who don't mind the added risks of CDE, I still consider a Screaming Buy at Friday's closing price of $1.79. Silver and SLV are Buys at $13.69/oz and $13.37, respectively, and gold and DGP are Buys at $831.90/oz and $17.90, respectively. (Disclosure: I own shares and call options of CDE.)

My most recent pick was WNR, a refiner that, as of the close Friday, was up more than 19% from where I recommended it, and more than that (37%) from where you bought it if you bought it after the market opened the following Monday. Better still are the returns of those who bought the December calls with the $5 strike. Now, I am recommending that you sell all of them. Unless...

(Brilliant segue into the new stock pick, n'est-ce pas?) Buy BOLT. Bolt Technology Corp. makes energy sources and cables for marine seismic imagers. If you guessed that that has something to do with oil exploration, you get a cookie! (Disclosure: you don't actually get a cookie unless you buy it for yourself.) Bolt (ticker: BOLT) is also very small, at a market cap of just $165.90M. This means their annual revenue growth rate could continue to be 50-70% for a long time before they become big and slow. And their earnings and free cash flow could continue to double or triple every year for several years before they become a mega-cap industrial giant like GE or ExxonMobil. But why should their growth continue to be torrid? Well, because marine seismic imager energy sources are a growth market, and they will be as long as oil prices stay high or, better yet, go higher.

You see, seismic imagers are used more and more by oil exploration companies the more confident they feel that offshore drilling will be worth the cost -that is, the more oil stays over $100/barrel. In fact, if the price of oil skyrockets, oil companies will be scrambling to seismically image the whole ocean in search of more oil. If oil stays flat from here, BOLT could still see substantial revenue growth as oil companies start to feel confident that they will get more than $100/barrel for oil that has to be found using marine seismic imaging. If oil starts to go up again (which I think it will in the not-too-distant future), BOLT could see a return to frenzied revenue growth, with exploding cash earnings propelling its share price skyward. From its current share price of $19.25, BOLT could see a 300+% gain within 3 years. I expect oil prices won't stay down for long, and that's why I'm setting a 3-year price target of $80 per share on BOLT.

The downside, in the event oil plummets to $90 or less per barrel, is pretty well covered by owning a refiner, such as WNR, which would profit tremendously in such a scenario. Other risks include the company not performing well and failing to exploit the opportunity afforded by higher oil prices. In that case, both BOLT and WNR would probably go down. I doubt the likelihood of such a scenario, but it could happen. I think it is more likely that both will profit from oil trading in a 110-140 range and refined petroleum products increasing in price. Anyway, BOLT seems to have a lot of potential reward relative to its risks. Still, a much safer (though less likely to quadruple) oil pick is RIG. Transocean, Inc.

From over $160 in May, RIG has dropped more than 20% to $127.20 as of this past Friday. RIG had had a marvelous 5-year run from below $20 in much of 2003 to over $160, a >700% gain. That was because oil prices were shooting up, and much like Bolt, Transocean was in demand when oil companies went after underwater oil wells. Unlike Bolt, Transocean works with oil that has already been discovered. They have things known as jackups and floaters, and they go and get the oil that oil companies found using Bolt's equipment. They charge substantial fees for their services, too, because it's dangerous, difficult work.

Well, like I said, oil will probably continue to climb again over the next 3 years. It will probably be way up in 2009 and 2010. Petroleum is used in so many applications besides energy, it's not even funny. And we're finding less and less of it all the time, especially in easily accessible, dry land-type areas. That makes Transocean's services all that much more valuable, because they can go get the oil out in the deep water, the oil that's hardest to reach.

In addition to all these peachy things, Transocean's risk is further diminished by the sizeable portion of their revenue that comes from contracts that are signed years in advance of the actual drilling, with high prices written in. Also, this is a $40B company, by market cap. That means that if something happens that wipes out $10M of value, they can pretty much absorb it and move on.

If you really want to avoid company risks and hedge your refiner, you could even buy USO, the ETF that tracks the price of a barrel of oil, minus expenses. But that would make you a weenie in my eyes, if you care.

So, basically, if you have WNR and you can afford to buy BOLT, I recommend that. If you're nervous about small, niche companies, buy RIG instead of BOLT. If you're a real nancy, you could buy USO. And if you can't buy some company that profits from rising oil prices (and no, Exxon and solar companies don't count), just sell your refining stocks, take your profits, and move on.

As always, do your own due diligence, and own the decision(s) that you make. Disclosure summary: I own shares of NDAQ and CDE, as well as call options for CDE.

Monday, August 4, 2008

August 2008 Stock Pick

Sorry I'm a little late with this pick. I've been very busy with other things, and I want to take the time to make this the sort of high quality pick my readers have come to expect (stop snickering!) As always, Fleabagger's recommendations are not endorsements of the companies mentioned, and Fleabagger Portfolio disclaims all responsibility for your portfolio. You make your own decision, and you own it.

Okay, so my first two picks are down about 8% per month each. Like I said last month, if you haven't bought Nasdaq stock (Nasdaq: NDAQ) yet, I strongly urge you to do so now. It's a great company trading at a great price. Also, if you believe as I do that we will have a spendthrift government financing their largesse by inflating the currency, Coeur d'Alene Mines (NYSE: CDE) will profit from the flight to silver and gold as inflation hedges. Both of these companies are trading near or below their book value, at bargain valuations compared to their history and their potential. Hey, I own them, right? So they must be great.

Well, here's another pick for the history books, so a year or two from now I can point to this as a reason to start charging for my ideas. What is my idea? Why, buying low of course!

There are plenty of good companies you can buy low right now, considering that many stocks of companies with great brands are trading 30%, 50%, or more off their recent highs in anticipation of a bad recession, with perhaps a dash of inflation (see my July pick). But I think that most of those great companies you could "buy low" right now you will probably still be able to buy low in September, October, and perhaps beyond, much like how you can still buy Nasdaq (NDAQ) low, two months after I recommended it. So I am recommending something that I think could see rapid price increases in the next few months. Western Refining (NYSE: WNR).

As a refiner, Western, like its fellow refiners Valero (NYSE: VLO), Frontier (NYSE: FTO), Tesoro (NYSE: TSO), and Holly (NYSE: HOC), does not extract its own oil, but buys it from drillers. So when oil prices go up, Western, Valero, etc. are spending more money to get what they need to do business.

Now, of course refiners sell gasoline, and gasoline prices have been going up. We've all felt that. But they've been going up a lot less than oil prices. So that puts a squeeze on refiners.

The good news (for refiners) is that other refined petroleum products have been going up in price more than gasoline, and their profit margins are not squeezed as much as the straight oil/gasoline comparison would indicate. They also sell jet fuel, diesel, heating oil, and petroleum coke (not an illegal drug), among other things. Many of these things have been closer to tracking the price of oil than gasoline has been. That's partly because of the political pressure to keep gas prices low, and the fear of gasoline sellers that there may be repercussions for sustained $4/gal gasoline.

Nevertheless, profit margins for refiners have been dropping. And that's bad news for companies like Western. But it could be good news for you. Why? Good question. It's because of supply and demand.

Things like oil and refined petroleum products go up and down in price, and the refining margin goes up and down too. Those who believe oil is going to $200/barrel some time soon don't think refining margins will recover in time to make them a profitable investment. Not likely. Oil may well go to $200/barrel, but the speculators have gotten a little ahead of themselves. Too much buying on margin and too little concern for effects on demand have pushed crude oil prices higher than are sustainable in the short term. We are already seeing a pullback in crude prices. This has been accompanied by a pullback in refined petroleum product prices, and thus done refiners like Western no good yet. But refining capacity in the U.S. is so limited that margins are going to go higher soon. It seems very likely to me that at some point jet fuel and petrochemical prices are going to have to break upward away from a temporarily stagnant or diminishing crude price.

So what? Well, Western Refining has been severely diminished in price in the belief that refining margins are never going to go back up. Or that it will be too late for Western. Either way, Western has come down from over $65 per share last summer (in mid-July), and closed Friday at $7.58. They report earnings on Thursday, August 7, before the markets open. If you think they're going to surprise skeptics, the last time you can buy before the report is Wednesday, August 6, before 4:00PM. Even if they do surprise with better-than-expected earnings, however, there will still be time to catch some upside on Thursday, because they could quadruple from here without reaching half of last year's high. So without good news, buy anywhere below $8.00 and plan to hold for 1-2 years. With good news, pay whatever it takes, and hold for 1-2 years. If you are an experienced investor and are familiar with options, this might be a good time for some call options, because of the short time frame and the high volatility. Dec '08 calls with a $5 strike are going for about 3.30. That gives you two quarterly reports to get about $8.30. Not bad at all.

Whatever you do, research and own your own decision, consult a financial advisor, and do not mistake anything here for a guaranty.

Disclosure: the author holds stock and/or calls in NDAQ and CDE, but does not yet own any position in this month's recommendation, or any other stock mentioned. The author may yet open a position in any of the stocks mentioned.

UPDATE: WNR is down 12% or so to about $6.60 per share this morning. Also, call options involve greater risk than stocks. I should have mentioned that.

Friday, June 27, 2008

July 2008 Stock Pick

This may seem like an inauspicious time to come up with a new pick. My first and as yet only pick is down more than 20% - so if you trust me, you should be buying even more of that one, and if you don't trust me, what's the point of giving you more advice? Well, I want to go on record with more picks. I believe that there is a very high chance of my first pick being much higher in 1-2 years, and I want everyone to be prepared with another good opportunity in case that first one soars soon (i.e. before you can buy it).

This is a difficult choice. The company I really wanted to recommend is a recommendation of The Motley Fool's Rule Breakers paid subscription service, to which I was given a free trial against my will (not that I'm not grateful). I would feel too guilty were I to give away on my free blog what they are selling to their subscribers, even though I came up with the idea independently of them. So I will go with my second choice, a company that I think is not as well-run, not as likely to continue growing for more than 4 years, and not as likely to return 1,000% or more over the very long term. Maybe next month I'll get over my scruples and give you company A. This month, you'll have to settle for company B. Or should I say, "company C"?

Meet Coeur d'Alene Mines (CDE). To look at the financial data, this is not a great-looking company. Return on equity is less than 3%, and return on assets is less than half of even that. Lame! The earnings growth -66%... why! That's not growth at all, Jasper! That's shrinkage! And for all those lame stats we're expected to pay how much times their past 12 months' earnings? 32?! "Are you kidding us, Uncle Fleabagger?"

You're missing the big picture, kids. Do you remember the company's name? Coeur d'Alene whats? Mines. Silver and gold mines, to be exact. Virtually all of their revenue comes from mining the shiny metals. "Why does that change everything?"

Hear now and profit for the rest of your life: mining companies are rarely good investments, and miners of the rarest metals are accordingly more rarely good investments. This is one of those times.

Why? Well, because your government sucks. Literally. If you live anywhere in the Americas, Europe, Africa, South Asia, East Asia, or almost anywhere else in the world, then you probably are ruled by a government that inflates its currency to pay for political favors in order to stay in power, essentially sucking the value right out of your money. I'm not going to debate the merits of this, but just pay attention to how much more a gallon of gasoline or a bag of rice costs in that currency of yours, and you'll know I'm telling the truth.

So what does this have to do with precious metal miners? Well, wherever possible, people acquire gold and silver when they're afraid that their paper money is going to become more and more worthless. People are already waking up to this in Vietnam and India, and fabulously rich people Jim Rogers and Peter Schiff have been going this route. As more and more Norteamericanos start to figure out that "core inflation" is a scam to make people complacent, there will be a lot more silver and gold buying in the U.S. Not to be outdone, China and its East Asian tigers (Singapore, S. Korea, etc), as well as Japan, are still using trace amounts of silver (and sometimes gold) in the manufacture of all kinds of products (microprocessors, cameras, drugs, etc). That's because they still make things in those countries.

Yes, everyone in America will be much poorer in a couple years unless they own silver or invent something spectacular. So who will actually make more money over the next few years? People who own a lot of silver that is vastly undervalued because of fears of the costs of accessing that silver exceeding the value of that silver because it's underground in the midst of a bunch of worthless rock. That is, silver mining companies. Well, Coeur d'Alene has 278.8M oz in silver reserves and its market cap is equivalent to 92M oz at today's silver prices (which I think are going to go up). Now, of course there are costs associated with getting that silver out of the mines and selling it. And Coeur is busy diluting their equity to raise the capital to cover those costs. Yeah, that kinda sucks. But if you think (as I do) that silver prices are going to go up faster than most other prices, miners with huge silver reserves (such as Coeur) will stand to profit enormously, returning a substantial gain to shareholders despite share dilution and rising mining costs. If silver prices rise (or even just stay where they are right now), the numbers that look bad now (their return on equity and return on assets, for example) will look a whole lot better.

One of the best things going for Coeur, according to my thesis, is that they do not hedge against silver prices, a process by which many miners sell their product in advance at fixed prices, limiting their potential profit if the price of the metal soars, and theoretically (but not really) limiting their risk. It's actually risky to hedge, because extraction prices could rise for the metal they've already sold at low fixed prices, forcing a company into bankruptcy because of their attempts to play it safe. Coeur doesn't do that. They are fully leveraged to the price of silver (and gold and everything else), just the way I like it.

Unfortunately, I am forced to publish after market hours, so something could happen to drastically change the price of CDE stock between when I publish this and when you are able to buy it. But it closed at $2.90 today, and it's a good way to play an increase in silver prices anywhere under $3.50, maybe more. Disclosure: I own shares of CDE and call options with various expirations. Consult your own financial advisor and/or astrologer. Whatever you do, own your decision, it's your own.

July 5 edits: I fixed the part about Coeur's ROE and ROA at the beginning and tied my thesis back to it in a later paragraph. I added some quotational marks. And I added a clause about how inflation "sucks." And by the way, CDE closed at $2.52 Thursday after making new 52-wk lows. It's amazing.

Friday, May 23, 2008

June 2008 Stock Pick

Here it is, the moment you've all been waiting for: my inaugural stock pick!

Here is the ticker: NDAQ (Disclosure: I already own shares of NDAQ, and I may buy more without notice.)

Here is the background: this stock represents the Nasdaq OMX Group, Inc. You may have heard of the Nasdaq. It is an American stock exchange that introduced electronic trading, and they have revolutionized the way people trade stocks. It used to be that you would write a letter to your broker and he would have a trader up in New York try to get you a good price by shouting at a bunch of other traders some time the next week. Then Nasdaq came along, with Cisco, Apple, Microsoft, Sun Microsystems, et cetera, and introduced computers to stocks and stocks to computers. They have been innovating and dominating the stock exchange business ever since.

Of course, as the home of all the tech stocks worth noting, Nasdaq experienced a lot of pain in 2001 and 2002, when the tech bubble burst. This was necessary, because a lot of companies that should not have existed needed to be wiped out for the good of the country and for Pete's sake, and Nasdaq had been collecting listing fees from them in the meantime. It was bound to end. Well, Nasdaq had a public offering of their stock in the worst of times, the summer of 2002, and their stock promptly fell from there until more or less the autumn of 2004. Meanwhile their business and their profits had been growing. People started to take notice that a fast-growing company with a moat (that means new companies would have a heck of a time doing what they do) was available cheap, and the stock octupled from its 2004 lows in a little more than a year.

This great company had gotten no respect for a long time, was cheap, then people started to notice, and some people who bought in near its lows made several times their investment in a little more than a year. This story is told over and over again in the stock market. And it might be in the retelling for this particular stock a second time.

Nasdaq's revenue and profits from that revenue have been growing rapidly and consistently, peaking in the short term with the acquisition of the Swedish OMX Nordic Exchange and the high trading volumes prompted by recession fears; however, earnings will reach new heights in the not-too-distant future, if anything in this world is to be predicted.

For one, Nasdaq has been gaining on NYSE Euronext (NYSE ticker: NYX), their main American competitor, for years. Nasdaq is like the new bully who has come along and pushed the old bully down and taken her lunch money. NYSE is the old bully, and she's been losing market share to Nasdaq for years now. So if trading volumes and listings stay flat, Nasdaq has proved it can still increase profits by taking them from the NYSE.

Probably more importantly, OMX has an extra revenue stream from providing other exchanges with software and technology. They estimate that they have about 2% worldwide market share in this, and it is 35% of their revenue, coming from 60 different customers (these numbers are actually almost a year old - sorry I couldn't find more recent stats). This sounds like a growth opportunity to me.

I have read that Jim Cramer says he likes NYSE Euronext more than Nasdaq OMX, and I know he's certainly not alone in that. NYSE's stock (NYX) is trading for 20.90 times their earnings per share (EPS). In investing lingo, this means they have a P/E of 20.9; NDAQ's P/E is 8.45, despite repeatedly proving itself a faster-growing, better-managed, nimbler company than the NYSE. Somebody is not telling us something.

Well, there's a reason NDAQ's P/E is so low. Their EPS this past year reflects one-time sources of income and so forth, so that their forward P/E (their share price divided by their estimated EPS for the coming year) is 13.62. If you know anything about fast-growing companies, you know that's still a very low P/E for any company that's expected to grow at any time in the near future, let alone grow a lot very fast for the extent of the near future, and turn into one of the world's biggest, most profitable companies with a combination of brand power, technology, and business relationships.

The Risky Stuff
1. There is cause for concern over the quintupling of their debt load in the most recent quarter, though that is balanced by similar increases in assets. That is why it is called a "balance sheet."

2. Another possible concern is the operating cash flow (OCF) that is not growing the way revenue and earnings are. But the company is largely an investment company, and their investments drive a lot of growth in free cash flow (FCF).

3. Also, there are a lot of stock exchanges in this world that could provide competition and loss of pricing power, but at this point, they look more like potential acquisitions than they do like bullies of the future.

End of Risky Stuff

You might think I'm painting an overly rosy picture of Nasdaq's future. Okay, maybe I am. I have a lot of respect for the company and what they've managed to accomplish. Maybe they won't do as well as I think, and competition in the stock exchange space is going to be worse than I think, and unforeseeable things could go wrong. Maybe there are things I don't see, even though I searched high and low for a well thought-out reason not to buy NDAQ, and I couldn't find one. Well, a lot of that is already priced into NDAQ with it trading at < 15x estimated earnings for the coming year. The price of the stock is such that a lot of things could go wrong for the company, and you still would not lose very much money. If just a few things go right, you stand to profit tremendously. It seems likely to me that some of you will look back on these times and say "I can't believe I didn't buy stock in Nasdaq when it was trading for less than 10x earnings! Fleabagger said to, and yet I didn't believe him. What was I thinking!"

Spare your forehead the wrath of the palm of your hand. Buy NDAQ while it's still cheap.

NDAQ is trading for $33.50 in intraday trading as I prepare to post this on Friday, May 23, 2008 between 12:30 and 1:00 PM EDT. I would call NDAQ a serious buy anywhere below $40, and I would call $29 my "all-in" price, where young investors with gainful employment should put as much as they can in. As always, do enough research to own your own decision, consult your financial advisor or whatever, and remember that all stocks have the risk of severe capital loss. Neither The Fleabagger Portfolio nor its author is in any way responsible for any loss you suffer by acting on advice found on this space. You are responsible for your own investments and financial decisions.

Thursday, May 22, 2008

How to start investing in stocks

One of the things that you often hear from financial publications and TV shows and whatnot is that you need diversification in your investments. This is nonsense, unless you are old or wealthy. If you are young and poor, like me, you need more money. Diversification only protects existing money from losing its value. If you are young and just starting out, you need good stock selection.

First, if you are going to be a really good investor, read everything you can that was written by Benjamin Graham, Peter Lynch, and/or I will also write about how to evaluate stocks in this space, going forward. Study long and hard, unless you want to learn investing by practice (which is really expensive, and can be hard on your relationship with your family, if the term "your family" refers to people who are, on average, about as young as you or younger).

Finally, when you know everything there is to know about value investing and growth investing and have several hundred dollars saved up for your first stock purchase, open an online brokerage account. The best of these is probably one of the cheapest. One good one for new investors is Sharebuilder (and I'm not just saying that because I get paid if you click on the Google ad for them in the corner). Sharebuilder is an online brokerage that I use, and they provide a service that allows you to schedule stock purchases for a Tuesday morning, and pay just $4 in commission. This is strangely cheap, and unusually restrictive, but it should do just fine for newbies who would otherwise be paying more to buy a stock. After all, you probably will be buying just one stock to begin with. (E*Trade might let you trade 25 times for free if you trade 50 times per month, or something like that, but that doesn't help someone like you, now does it?)

Other standouts in the cheap category are Scottrade ($7 per trade, and no fees for IRA's and Roth IRA's - more on those later) and TradeKing ($4.95 per trade), both of which I also use. You might want to try these once you are feeling more adventurous and want to know the joys of a limit order or a free tax shelter.

Now, what about all those people on CNBC and whatnot that fret about the direction of the market? Well, you can ignore them. Very few of the many investors and traders who are doing well actually need to know anything about the direction of the market. Just find a company that no one else seems to be paying attention to, and study it. Do they make money? Are they going to make more money in the future? Is there any reason their shares should be trading for a much higher price? Is it in an industry or sector that is going to do well? Is it better than its competitors in that industry or sector? Is there any risk that could make their shares trade at a much lower price? If you answer these questions Yes, Yes, Yes, Yes, Yes and No (or not much), respectively, you have a winner. Buy it. Follow it and the news about it and about its industry. Ignore the price movements of the other 10,000 or so stocks, because those don't matter. You and your portfolio matter.

Getting back to diversification, if you diversify you have two options: start buying stocks that you don't have time to know anything about, or buy mutual funds/ETF's. The first option is more dangerous than having shares of just one or two companies you know well (and by the way, working for a company or buying its products is nothing like knowing it well, unless you're the CFO), and the second option, while technically safer, is also going to kill your shot at sustained growth >30%. >30% growth is our goal here, so I encourage you to reject that option. We're still young: let's floor it!

Within the next ten days or so I will issue my first recommendation. I will call it my "June 08" recommendation. Pretty clever, huh? As always, do not buy anything unless you know enough about it to own it as your own decision as well as own the investment itself.

Tuesday, May 20, 2008

Welcome to The Fleabagger Portfolio

This blog is not related to the blog at It is, however, related to the FleaBagger of CAPS fame. (Okay, well, probably not fame, per se.) This blog is going to offer free stock advice, caveat emptor, and make one recommendation of a stock purchase every month. You are always completely responsible for the investment decisions you make, whether or not they were based on my advice. I sincerely hope that my advice will make all of my readers rich beyond their wildest imaginations, but if you follow my advice and lose all of your money, I will not be held legally liable. Consult your own financial advisor.

I expect to make my first pick on or around June 1, 2008. I may (or may not) decide to distinguish among different risk levels, intended holding periods, etc. Watch this space for updates.