Offbeat Trading

A Slow Start

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Well, the market is off to a slow start since this competition started and I am off to a slow start, as this is my first blog. I have been preoccupied with other stuff and have left my portfolio intact from the end of the last competition, Sometimes the best moves are the ones that you don't make, as I currently stand 22nd out of 613.

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This Will Be Our Last Song Together

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Well, it is getting toward the end of the SLO. The title of this blog comes from a pretty song written by Neil Sedaka and Howard Greenfield. I couldn't find an English video version but you can find a You Tube video containing a Swedish version of the song by Agnetha Faltskog, formerly of ABBA.

The way the market has been lately, it has been difficult to make any progress. In fact, the market has been difficult to make much headway in since the competition began. The beginning was tough and the end has been tough. I reminds me of the joke about the guy who was on a date with a girl he just met and said, "Do you kiss on the first date?" "No," she replied. "Well then," he said, "do you kiss on the last date?" This market hasn't done much kissing since the starting date of this SLO. Given that, I am pleased to be up about 6% for the competition. As I write this (based on data from the close, yesterday), my portfolio stands in the 79th position out of only 317 competitors left. That is just about in the top quarter, which is exactly where I said that I was hoping to be when I wrote my second blog in October. (By the way, if anyone has any idea what happened to the over 1000 competitors who have disappeared from the competition, I would appreciate hearing from you.) Of the remaining competitors, 144 (over 45%) or so have lost money overall and only 40 have gained 10% or more. Another surprising statistic is that of the 78 people ahead of me, an astounding 59 (75.6%) are flagged as not being in compliance with the rules! If we only count those in compliance I am in the top 20! Although I have not summed the numbers up, the compliance rate looks even more abysmal for those portfolios below mine in the rankings.

Since I last updated my stock portfolio there have been a few changes. Global Santa Fe was bought out by Transocean (RIG). I made money on that one. I also bought stock in an British oil tanking firm, Frontline (FRO), attracted by the high dividend (at the time over 15%; currently 12.5% or so, but probably not sustainable). I lucked out on this one, making almost 20% in a very short time. In order to hedge my portfolio a bit, I bought $50,000 of an exchange-traded, S&P 500 short fund (SH) which is currently ahead about 1%.

My worst performing stocks to date are Blackstone (BX) Titanium Metals (TIE) and Fastenal (FAST), each of whom have lost close to 10% or more, but all of which I still believe in. My top performers have been Berkshire Hathaway B shares (BRK.B), the above mentioned Frontline (FRO), Archer Daniels Midland (ADM), Fording Coal (FDG) and Chesapeake Energy (CHK), all of which have gained about 10% or more.

I had a comment on my last blog from Don L. Ferk, alias Viking Warrior in the SLO, a petrochemical engineer. He implies that fastenal (FAST) is not a very sexy company, because they make nuts and bolts, and asks me to use my expertise to evaluate a series of biotech type companies. First of all, let me defend FAST. The price of their shares has more than doubled in the past five years and quadrupled in the last 10, a return of more than 14% per year, exclusive of dividends. Compare that to the S&P 500 rate of return of under 3% over the past 10 years.

Don, over the years I have learned that it is important to know one's limitations. I don't believe that I have the expertise needed to evaluate the biotech companies you listed. I have been involved in basic research in academic settings over the past 35 years, but this does not help me much, because my expertise in basic science is relatively narrow and because basic science itself is only one small component of what it takes to succeed in these businesses. For example, in the pharmaceutical business, the delivery of the drug is critical, clinical trials are a major hurdle and unanticipated side effects can always shoot down the most innovative science. For a lot of these companies, the legal department's ability to manipulate patent law may be more important than anything they discover in their laboratories. These biotech companies generally offer no track record (or in the case of Sanofi-Aventis, an unimpressive one) to go by, so investing in these companies involves a great deal of faith and making money in them involves a great deal of luck. I avoid them, both in real life and in the SLO. Sorry.

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Blog the Third: A biomedical scientist looks at the Fastenal Fiasco

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One of the stocks in my fund is Fastenal (FAST). Last Thursday, the earnings for the third quarter came in at $0.41 versus the $0.42 that was expected. The stock immediately plunged around 10% and continued down to around a 15% drop. This over-reaction makes no sense! The earnings disappointment was only about 2.5% so a drop of that magnitude might be expected. In reality, however, I do not consider that there is any significance at all to the difference between $0.41 and $0.42 per share. If I do an experiment and expect to get a value of 42, but the results come out to 41, I do not consider that the experiment is a failure. Quite the contrary; it is close to expected. In fact, it is likely that no matter how many times I repeat the experiment, taking into account limitations such as time and money, the difference between 41 and 42 will never be statistically significant!

I cannot understand why there is such an over-reaction, but I can take advantage of it. I have already added to my position in Fastenal at a reduced price and I plan to add more if the price declines some more. In my experience, Wall Street tends to overdo both runups and corrections and cashing in on these is one of the best ways to make money on stocks.

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Blog, Part Deux

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The performance of my fund has been right about in the middle of the pack. That is not too bad at this stage of the competition. Due to my choices of solid stocks, over the long run, I expect to move up into the top 25% or so. Last time I wrote about my best performing stocks, and they are still doing well. FCX, FDG, BRK.B and VLO are still my top four holdings. TIE has dropped down a bit, behind Fastenal (FAST) a seller of industrial and construction supplies that has been a solid stock over the years, up about 300% in the last four years and around 30% since January. One of the company directors just bought 3,000 shares. I do own some FAST in real life as well. However, there is one caveat; the company has a higher P/E ratio than I like, around 34.5.

Another stock that has moved ahead of TIE is Chesapeake Energy (CHK), one of the largest natural gas producers in the country, with a P/E of just above 10 and a recent 25,000 share stock purchase by the company chairman. Another middle-of-the-road performer in my fund is Global Santa Fe (GSF) an oil drilling stock, supposedly favored by oil baron T. Boone Pickens. It has a P/E of 13.5.

A recent purchase in my portfolio is Blackstone (BX) a holding company owned by people who know a lot more about investing than I do. Because of its high volatility, I am using a dollar cost averaging approach towards buying BX. So far I have made two purchases, investing about $25,000 each time.. Last year earnings were $10.61 per share and may be higher this year. Since the stock trades below $30 a share, the P/E is phenomenal (currently 2.0), although the forward P/E is projected to be 16.9 once things settle down.

Another recent purchase is Telecom Corp New Zealand (NZT) which pays a 20% dividend. I bought it partly for the dividend and partly to diversify a bit more into foreign stocks. It is questionable as to whether the dividend can be sustained considering the earnings. So far, I am slightly behind on this stock, but it was purchased very recently, on October 3. I am also slightly behind on Archer Daniels Midland, which I bought primarily as an inflation hedge, and so far is just below break even.

I jettisoned two stocks that I bought early on, but were behaving like dogs. Wendy's (WEN) was supposed to be a takeover target and Nautilus (NLS) was experiencing significant insider buying. Neither stock has done much since I unloaded it; in fact NLS has gone down quite a bit more.

As I suggested last time, the Fed's move has ignited the market. It has already moved quite a bit higher, to new record highs on the S&P 500 and on the Dow. Recently the NASDAQ has been showning strength as well. Stocks should continue to be a good investment for the next few months and that is, after all, the time frame of this competition.

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Finally, my first blog

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Well, I finally figured out how to start blogging. I guess it is not too late because I haven't been disqualified yet.

I don't really expect to win the competition-that would require more skill than I have, more time than I have and more luck than I expect to have. I also suspect it will require taking a lot of risks. Instead, my overall investment goal is to try to beat the indices. I tend to favor companies with low price to earnings ratios and companies involved in resources. Everything that we have seen recently, including the subprime crisis and the interest rate cut point to the continuing debasement of our currency, the dollar. It is no wonder that the metals keep going up; actually they are probably staying the same but the dollar is going down; either way it looks the same.

So far, my best performer has been Freeport McMoran Copper and Gold (FCX). Too bad, I don't own it in real life. Even though FCX is up 17% since I picked it up, the P/E ratio is still under 13! Enough said.

Another big gainer has been Fording Coal (FDG, over 13.5% to date), although it has been up and down a lot. Another resource play, I do own some of this in my IRA. The PE on Fording is still only about 14.4 and they pay a 7% dividend as well. I don't know for sure that dividends are included in the results of Strategy Lab, but I assume that they are taken into account.

After the market dropped at the beginning of the competition, I wanted something that would go up a lot on a rebound. I thought that it would be fun to buy some Berkshire Hathaway, since in real life, even one share is too expensive. Even so, I had to buy the B shares (BRK.B), and could only get 30 of them since even one A share would be too large a part of my portfolio. So far they are up almost 9%.

A while ago Ken Kam asked me by e-mail why I chose Valero Energy (VLO). Even after the runup (I am ahead almost 7%) it has a ridiculously low PE of 7.2. Valero has the capacity to refine the lower grades of crude oil and should do well as oil prices increase (I think that this is a long term trend that must be reckoned with, both because of the problems with the dollar mentioned above and because of the fact that the world is running out of the "easy oil" and "hard oil" costs more).

My fifth best performer is Titanium Metals (TIE), a very volatile stock that I do own and like to write covered call options on because the return is high. You can't do that in this SLO competition, but the stock has the capacity to give a good pop to the upside. So far, it has popped up about 5%. The PE is only about 18.5 and the earnings seem to be rising.

That is it for now. Next time I will try to cover the rest of my holdings. Hopefully, they will be up by then, as the market continues to follow the "two tumbles and a jump rule" (two tumbles in interest rates results in a jump in stock market prices).

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