After the market's lifeguards kicked me back to the kiddie pool today, I wanted to see if I could come up with anything constructive out of the drubbing.

The financial press attributed much of today's sell off to the Fed minutes indicating they were more worried about inflation than the stock market and, therefore, a rate cut might not be in the cards. If that's the case, stocks should have performed in the opposite direction from what they would have done in response to a rate cut, i.e. the stocks that would benefit most from a cut should have been hit the hardest in today's market. It seemed like a good opportunity to grade myself on my portfolio ranking for the question of the week.

The table below shows the stocks in my portfolio, their percentage change today, where my assessment over the weekend placed them and how they actually ranked. It's disappointing not to see a single positive return in the crowd.

I missed Northgate Minerals (NXG), Unilever plc (UL) and AT&T (T) pretty badly and didn't see any significant news on any of them. Overall, I thought my predictions tracked the actual response pretty well.

I'm not sure this tells me much, there were a lot more variables than just the Fed's minutes acting in the markets today and one-day results would have quite a bit of random noise in them. But, it was more interesting than watching TV.

Thanks for reading.

Disclosure: I own shares of CVX, WFC, GSF, T, CSCO, and PSEC.

Comments: View Comments |  Tuesday August 28, 2007

The SLO highlight for me this week is the portfolio NAV breaking above ten bucks and passing all the slackers who've been sitting in all cash since the start. The heavy lifting was done by my biggest holding, Global SantaFe (GSF), bouncing back from much of its sell-off.

Portfolio changes this week were selling off my last few shares of American Railcar Industries (ARII) and managing to trade myself out of Mattson Technologies (MTSN). Will keep on eye on MTSN and buy back in if the price comes down again.

Other than those sells, just traded around some of my positions. Volatility was quite a bit lower this week, so not as many lowball buy/highball sells triggered. Thursday was calm enough that none of my trading orders tripped. I had part of Friday off, so played daytrader for awhile, added a little to the market gains but hardly worth the effort.

No big moves planned going forward. Still looking for GSF to continue recovering and will lighten up some more as it (hopefully) goes up. This stock typically has pretty big intraday swings, so I'm going to try trading to lighten the position; sell 200, buy back 100 lower, rinse, lather, repeat. Cash raised from scaling back will either be distributed among the other holdings or used to add a new position, maybe a global industrial play or a railroad.

Question of the Week
Identify which of our portfolio stocks we think will benefit most if the Fed cuts the funds rate and explain why. I'm going to use this as a portfolio review. Stocks are ordered from least benefit to most benefit from a cut as I see it. Caution - on rare occasions (like daily), I've been known to be wrong.

Prospect Capital (PSEC) - Too tough to call. PSEC is a business development fund focused on energy companies. As a financial company first instinct is to say PSEC would be a big beneficiary of a rate cut. However, they operate with very little leverage and an easy money environment would increase competition from private equity, hedge funds, and the like for attractive business opportunities. On the flip side, a lower short term interest rate will make that nearly 10% divvy look even more attractive.

Rocky Mountain Chocolate Factory (RMCF) and Rubio's (RUBO) - Basically no impact from a rate cut. Both of these companies have cash on the books, no debt, and are financing their growth out of cash flow. Neither business, selling chocolate and Mexican restaurants, is very sensitive to economic conditions. RMCF may get a little boost as the dividend gets more attractive. RUBO doesn't pay a dividend.

Cisco (CSCO) - Small positive impact from a rate cut. With $16 billion of net cash, CSCO has no need to access credit markets. However, an easier money policy should stimulate growth and increase demand for their products.

Anheuser Busch (BUD) - Small positive impact from a rate cut. I would have put this in the 'no impact' category except BUD has quite a bit of debt and pays a dividend. A lower rate environment should save them a few bucks in interest expenses and the dividend gets more attractive with lower cash rates.

Novartis (NVS) and Unilever plc (UL) - Small positive impact from a rate cut. The businesses aren't economically sensitive, but these are foreign companies so a weak dollar should result in higher share prices and lower rates will make the dividends more attractive.

AT&T (T) and RPM International (RPM) - Average impact from rate cut. Quite a bit of debt on their books = lower interest expenses if rates come down. Much of their businesses are economically sensitive, so stimulating growth should be good for T and RPM. Lower rates also make the dividends more attractive.

Global SantaFe (GSF) - Above average impact from rate cut. I believe part of the reason for GSF's sell-off the first few weeks of the contest was concern over the debt associated with the Transocean (RIG) merger. In an easier credit environment, those concerns are reduced and lower interest expenses are a big positive when financing $15 billion. Higher oil prices from a weaker dollar will also boost the share price. BTW, GSF continues to be the slightly cheaper way to buy the GSF - RIG merger.

Northgate Minerals (NXG) - Above average impact from rate cut. Gold. Lower rates = weaker dollar; more worries about inflation.

Bank of America (BAC) and Wells Fargo (WFC) - Above average impact from rate cut. Banks would normally get the biggest bang from a rate cut. However, in this case, I believe much of the expectations for a rate cut got baked into the share prices when the discount rate was cut last Friday. If that's the case, the financials will sell-off if the Fed doesn't cut rates at the next meeting. If the banks run up before the Fed meeting in Sep, I plan on lightening up and picking them back up after the market sells the news because I don't think the Fed will cut the funds rate. Dividends get more attractive if rates drop.

Chevron (CVX) - Most impact from a rate cut. Fed funds rate cut = weaker dollar; Weaker dollar = higher oil prices. Economic stimulus = increased oil demand; increased demand = even higher oil prices. Combine that with Chevron's dividend getting more attractive if cash rates drop and lots of international exposure and I think Chevron wins big with a rate cut.

Disclosure: I own shares of CVX, WFC, GSF, T, CSCO, and PSEC.

Rant: The Question of the Week box includes the following statement, "Want to get an interesting discussion going?" As much as many of us would like to get an interesting discussion going, the hoops you have to jump through to allow and make comments on the blog entries make it almost impossible. Combine that with links to only the four or five most recent blogs and a good discussion just isn't likely to happen. /rant off

Thanks for reading and have a great week. Comments cheerfully accepted assuming you can figure out how to post them and I can figure out how to accept them.

Comments: View Comments |  Saturday August 25, 2007

The week started off well with the portfolio threatening to edge over $10 per share at lunch-time Monday. Then, American Railcar Industries (ARII) reported earnings after the close (the train wreck). Revenues were well ahead of estimates, but they missed earnings badly. ARII was about 10% of the portfolio and I was expecting a strong quarter. Time to bail out. I put in two limit sell orders, one for 2/3 of the position at a price I was pretty sure would execute based on the after hours activity and the other 1/3 at a more optimistic price. Net result was I unloaded all but about 200 shares at 31.70 - 32.35, three or four dollars a share below my buy price. Holding on would have been much worse since it ended the week at 26. It was a big loss in the contest, but selling right away with reasonable limits helped keep it from being a disaster.

As I mentioned in last week's summary, I wanted to add a U.S. based defensive stock. Since I already had a drug company (Novartis) and consumer products (Unilever plc), I was looking at a beverage company. After a little research, I selected Anheuser Busch (BUD) over Pepsi (PEP), Coca-Cola (KO) and Molson-Coors (TAP). It was a tough call between the four. Had I been looking for more of a growth stock, TAP would have been my choice. Pepsi and Coke also fit the US defensive stock bill well, but in the end I liked BUD's slightly higher dividend. Besides, in the words of a Tom T. Hall song, "I like beer." Diageo is also attractive for this role, but I wanted something U.S. based since my other two defensive plays are based in Europe. Much of the cash from selling out of ARII went to building a position in BUD over the course of the week.

While researching these stocks, I stumbled across Rocky Mountain Chocolate Factory (RMCF) a little company that looked pretty interesting. RMCF is a $100 million market cap producer and retailer of chocolate. It trades at 15 times forward earnings and is estimated to grow earnings by over 15% next year. The company trades at about $15.50 a share, has 41 cents a share in cash and no debt. Margins look good and the current dividend yield is 2.4%. RMCF recently entered into an agreement with The Grove to market their chocolates in a number of airports. It's not a great SLO stock because it's thinly traded, so it's tough to build much of a position. I did put in a small position and may add some to it if the price stays low. One of my goals is to have fun with this contest and who doesn't like chocolate? I'm slightly ahead with it, a pleasant change from most stocks in this portfolio to date.

I also tried the strategy I outlined last week - placing lowball buy and premium priced sell limit orders trading around core positions. I made a little money doing this, but it's tough to have much impact without risking a big chunk of your portfolio. I've been setting the buy and sell prices by looking at the recent range and making a guess, probably not the best approach, but I don't have a better method. As you might expect, this past week the lowball buys tripped more often than the premium sells. Basically built up the BUD position, added a little to CSCO and had some success trading PSEC and MTSN.

Global SanteFe, my biggest holding, continues to be a disappointment (read loser). It had a nice pop on Friday, but just made back Thursday's losses. I haven't given up on it yet, but also haven't added any more. There hasn't been any news to account for the price weakness. My best guess is the big debt load that's part of the Transocean merger is causing worries. I like the merger, but would like it better without the special dividend and debt. The merged company can handle the $15 billion in added debt, but it does limit the ability to tap credit markets if the need arises. Without the special dividend and debt, shareholders could always decide to pay themselves by selling part of their new shares - same basic outcome, but without all the debt. GSF has been the cheaper way to buy the new company every time I've compared the price to RIG. If anyone has any insight or theories why this has been such a dog, please post a comment.

Thanks to the Fed discount rate cut, Wells Fargo closed out the week strong (the soaring stagecoach). Bank of America carried its share of the load as well. I sold a small piece of each of them on Friday looking to buy back if the price pulls back next week. Cramer's show Thursday was bullish on WFC as a strong bank that would survive and thrive when the smoke clears; BAC was also mentioned favorably. I agree with him, even though he's little late to the party :)

At week's end, the portfolio is roughly 65% in income producing stocks, 30% in growth/cyclical and a little less than 5% in cash. I raised a little cash on Friday, but am looking for the strength from the discount rate cut to carry over into next week. Going forward, I'm waiting for GSF to quit bleeding and show a little strength, then lighten up on it. No other major moves planned. I'll continue trading around some of the positions to try and capture a few $$ off volatility.

An indication of how difficult it is to do well in this market is that even after Friday's run up, only 55 of 1771 players listed in the standings had positive returns; 414 have losses (including yours truly) and 1302 hadn't started trading yet (what's up with that). Hats off to those who have maintained $10+ share prices in their funds.

I was also honored to have my Cisco write-up from last week selected for one of the featured blogs.

Take care and thanks for reading.

Disclosure: I own shares of CSCO, WFC, GSF and PSEC.

Comments: View Comments |  Saturday August 18, 2007

Checked my e-mail after posting my weekly update and had one from Ken Kam asking those of us that had CSCO in our SLO portfolios for some more information on why we like the stock. Here goes, hopefully a little Maker's Mark (Scotch and Irish whiskey is good, but whiskey was perfected in Kentucky) won't mess up my thinking too much. Ken's questions in italics.

What is the conventional wisdom that explains the current valuation of the stock?

Conventional wisdom is closing the valuation gap in CSCO. After the earnings report on the 7th, the market is starting to believe John Chambers when he says the company can still grow earnings. My first blog ever was "Cisco on sale" at the Motley Fool (hope you don't mind mentioning a competitor) where I described why I thought the market had significantly undervalued CSCO after the May earnings report. At that time, I thought fair value for CSCO was 35-40 based on PE and PEG valuations compared to the S&P. The market has closed some of that valuation gap.

Why is the conventional wisdom wrong?

The conventional wisdom was wrong because the market believed a company the size of Cisco couldn't grow earnings at double-digit rates for much longer. The company seems to be playing with an open hand here; discounted cash flow and valuation comparisons all tell me CSCO should be headed to 35+ by year-end barring something completely trashing their market space. IMHO, the most significant words in the CSCO conference call were the CEO saying this is the best global business environment he's ever seen - read that again, listen to the call, read the transcript, this might be one of the most significant business statements of the year - the best global business environment John Chambers has ever seen.
The next most significant piece of CSCO is that huge cash pile. That cash may be one of the most undervalued assets in existence. This was mentioned in the conference call, but with credit markets unraveling cash will be king. CSCO has one of the biggest net cash hoards in existence. I don't know how they'll deploy it but the options are all good - acquisitions, R&D, venture capital, licensing hot technologies... All of this gets cheaper as Wall Street $$$ dry up. CSCO can earn a billion a year just on interest. Bottom line - if cash is king, CSCO is more kingly than almost anyone on the planet.

I'd love to hear your thoughts on those two questions, but the decision to buy is a lot more complicated than that. I'm very interested to hear what specifically convinced you to include Cisco in your Strategy Lab Open portfolio. What do you like about the stock right now? What sort of gains are you targeting by the end of the contest?

I hope I covered that in the first two answers, also see my SLO blog of Wed 8 Aug titled 'Go Cisco'.

Disclosure - I own shares of CSCO.

Comments: View Comments |  Friday August 10, 2007

Hmm, maybe there's a reason for this goofy market

I ran across some interesting bits describing how hedge funds and money managers are being cornered into liquidating some of their assets. From Friday's 10:30 am Briefing.com market update, "CNBC is reporting that there is a significant forced liquidation going on at a big risk-arbitrage hedge fund. That news has prompted a renewed sense of uncertainty and leaves the indices flirting with fresh session lows." Friday's Wall St. Journal ran a piece titled "Impact of Mortgage Crisis Spreads" by Gregory Zuckerman, James R. Hagerty and David Gauthier-Villars containing the following, "...as banks began getting worried about their hedge-fund clients in recent weeks, some hedge funds were asked to put up more collateral to back the loans, or anticipated these requests. The funds sold some of their holdings of high-quality stocks to raise the cash, and closed out "short" trades. ."

If those aren't isolated incidents, it would explain a lot of the market action we've seen lately. A lot of quality stocks have been falling with no real news while homebuilders and mortgage lenders have had some strong run-ups. Both would be consistent with fund managers selling off what they can sell to raise cash and being pushed to cover their short positions in the weaker sectors.

If that is what's going on out there, it represents a great opportunity for individual investors to accumulate some good names at fire sale prices. Of course, the final clearance sale might not be here yet.

Portfolio notes

The portfolio's still under water, but after a strong showing on Friday, break even is within reach. I'm pretty happy with the stocks in the portfolio right now, but would like to adjust the weights a bit. If and when GSF recovers, I'll sell some of that off and bring it to under 10% of the holdings. Proceeds will go to bringing NVS' weighting up some and possibly adding a US based defensive stock. I plan on looking at Anheuser Busch, Pepsi, Coca-Cola and some others over the weekend. With cash at 1.5%, I'm at the point where I've got to sell what I like least if I want to add something.

Other than that, I don't foresee any big moves. I will continue to trade around positions as opportunities present themselves, although that's tough to do with a job keeping me busy during trading hours. To take advantage of the volatility, I'll put in small buy or sell orders with limits well out of the money and look for volatility to trigger some low buys and high sells.

Portfolio Rundown, biggest % gainer to biggest lose
(reasons for picks are in earlier blogs)

Rubio's (RUBO) reported earnings on Wed evening, beating estimates by a penny. Apparently they sold a lot of those delicious fish tacos. They also reported higher same store sales and success with a new marketing strategy focusing on higher quality, higher priced menu items. This is a thinly traded stock and there was only enough volume to get a little over 2000 shares despite trading nearly the whole first week of the contest below by limit price. My biggest percentage winner, but the smallest holding in the portfolio.

Cisco (CSCO) - see my blog from Wed for more. Basically, beat earnings estimates and raised guidance. John Chambers, the CEO, also stated it was the best global business environment he's ever seen - good news for anyone with a global business model.

Prospect Capital (PSEC) raised their net earnings estimate for the quarter. The price action in this one since the contest began has been interesting, the stock got hammered from 16 and change down to 14, then the press release with the higher estimate triggered a run back up. It's been pretty volatile and I've had some success selling, then buying it back lower.

Wells Fargo (WFC) and Bank of America (BAC) are actually ahead for me in the contest; a little surprising given all the turmoil in the financial sector. WFC went ex-dividend this week and I'm looking forward to the payment in a few weeks. I was torn between these two as my financial sector holding at the start of the contest so got some of each. BAC yielding 5+ % is an attractive alternative for bond investors; Wells also has a good yield and has been handling the mortgage meltdown very well. The Federal Reserve pumping several billion dollars into the market on Friday certainly didn't hurt.

Northgate Minerals (NXG) is a gold miner. No new news here. Looks cheap on fundamentals because they need some approvals to proceed with one of their new mines. Had I looked at the commission schedule more closely, I wouldn't have chosen this one - 5 cents per share on a $3 stock puts a crimp in the returns. If I decide to raise my gold exposure, I'll pick something with a higher share price so the commission isn't as much of a hit.

American Railcar Industries (ARII) was one of my worst performers, but made up nearly all the losses on Friday, trading from down 4% to up 12%. No news, but they report earnings on the 14th. The last quarterly report was strong, looking for the same this time around.

Mattson Technology (MTSN) has been up and down a couple of times and is currently a slight loser for me. I have had a little success averaging down, then selling a piece as it popped up to $10.30.

AT&T (T) hasn't done much at all. I've averaged down a little bit.

Novartis (NVS) was added to put a defensive name in the portfolio. I bought in small chunks and was able to average down, but am still under water a bit.

Chevron (CVX) has been beaten down a bit. I thought it was a good value at the start of the contest and it's now a better value.

Unilever plc (UL) was also added as a defensive name. So far it's been a pretty lame defense, but I still like it as an income stock with some growth potential.

Global SantaFe (GSF) was my worst performer, but recovered a little late this week. I kept averaging down the first week of the contest and it kept getting cheaper. This is my largest holding and biggest dollar loser in the contest. Like CVX, it looked like a good buy at the start and has been marked down even farther.

RPM International (RPM) had a bad week with no news. I averaged down a little this week and the market continues to offer up an opportunity to average down further. It did recover a bit on Friday. Expect RPM to continue the 30+ year tradition of raising the dividend in Oct.

Disclosure: I own shares of CSCO, PSEC, WFC, T, CVX, GSF, and RPM

If anyone's actually reading this, thank-you and have a great week.

Comments: View Comments |  Friday August 10, 2007

Today was a pleasant change from watching my portfolio go down faster and up slower than the S&P 500. CSCO makes up about 8% of my SLO portfolio, and it wasn't even my biggest winner today.

So, how does a one-penny earnings beat by CSCO translate into a one-day gain of nearly 7%? The answer - it doesn't. What drove CSCO today was the higher guidance provided in the conference call and the picture he painted of a very strong business climate, new cycle of internet and networking build-out, outstanding growth in emerging markets, new technologies with exciting growth prospects, and John Chambers stating this is the strongest business environment he's ever seen. Add to that a huge pile of cash as we're entering a time when cash is king. If you at all follow tech / internet business, I highly recommend listening to the CISCO conference call and following along with the presentation slides.

And, if CSCO wasn't enough, about 7% of the portfolio is in Prospect Capital (PSEC), a private equity, closed end fund that lends money to and invests in small energy companies. PSEC has been hammered since the SLO contest began and I've just kept nibbling. This morning, PSEC announced an increase of about 16% in guidance for this quarter's net earnings. The stock closed up nearly 10 1/2% and was up as much as 15% during the day.

I entered several small trades today. Sold off about 1/4 of the PSEC position and used the proceeds to add to the RPM and UL positions. I also stretched a bit and bought a little Novartis (NVS). If PSEC pulls back, I'll buy at least part of what I sold off today back.

Global SantaFe (GSF), American Railcar (ARII) and Chevron (CVX) even had up days at last.

I hadn't planned on blogging this often, but doubt I'll get many more days like this one to brag about.

Disclosure: I own shares in CSCO, PSEC, GSF and CVX

Comments: View Comments |  Wednesday August 8, 2007

By chasing some falling knives last weekend, I got my SLO portfolio a little out of whack with my goal of a fund primarily focused on income. I also decided bringing in a consumer goods and/or healthcare company to bolster the defense and add a couple more divvy payers would be a good idea.

I'm getting pretty close to all in with the cash position now just a little over 5%.

New Adds
For a consumer goods company, I made a small buy in Unilever plc (UL). I also considered the other Unilever (UN) and Proctor & Gamble (PG). I selected UL primarily because it has slightly better long term growth estimates than PG or UN. Unilever PLC is based in London; currently trades at a forward PE of 15, PEG of 1; profit and operating margins are 12 and 14% respectively. Dividend yield is 2.9%. Trading today filled my order bringing it to about 2.5% of the portfolio.

From healthcare, I chose Novartis (NVS). Novartis is a Swiss based pharmaceutical and consumer health company. In addition to pharma, they have operations in animal health, Gerber baby products, and CIBA vision eyecare. It trades at a forward PE of just under 15, PEG of 1.25 and pays a dividend of 1.7% on the current share price. The pipeline looks solid and they've been reporting double digit revenue and earnings growth. NVS jumped above the limit price of my order on the open and didn't pull back enough to fill any shares during the day. I'll leave the order open and see if it'll pull back and fill over the next couple of days. If not, will either re-evaluate or shift to another, similar company.

Commentary
I finally had a positive day in the contest, although I lost ground to the S&P 500 so suspect my standing is still near the bottom. Overweighting GSF and then averaging down has really hurt the portfolio performance. I continue to believe the drilling sector is cheap and am looking for this to run up strongly - although it's beginning to look like it may not happen in my lifetime.

Other disappointments are Chevron, American Railcar and Prospect Capital.
The dip in oil prices is probably hurting CVX, like GSF, I think it'll come back up.
I can't find any news on ARII explaining it's drop from 40 to under 30.
Prospect Capital (PSEC) makes private placement loans to small energy companies and often takes equity positions as part of the deal. There's no news, so I believe it's just getting a double whammy by being associated with high yield debt and energy. Yield is now up around 10% if the payout holds. I scraped a few bucks together and bought a very small position in PSEC in my real portfolio this morning.

Disclosure: I own shares of CVX, GSF and (now) PSEC.

Comments: View Comments |  Monday August 6, 2007

Week one has been humbling. I closed at an NAV of 9.58, so have not only lost money, but underperformed the S&P 500. As noted in my first post, I started out with about a 30% cash position, nearly as much as I could and still meet Marketocracy's compliance rules. The compliance rules simulate the requirements a fund manager needs to meet in the real world.

Marketocracy's policy of allowing only a portion of the market volume to apply in filling orders makes buying thinly traded small caps interesting. My buy order for Rubio's has been open all week and still hasn't been completely filled.

I didn't add any new stocks to the portfolio beyond the 11 mentioned in my first post, but did put some of the cash to work over the week buying more of stocks as they got cheaper. So far that approach hasn't been terribly successful. I'm now down to about 10% cash.

My largest holding is Global SantaFe representing just under 15% of the portfolio. I continue to believe oil drillers are significantly undervalued. GSF is now trading at 7.25 times forward earnings, less than half the S&P 500's multiple. The conference call went well on Thursday, although there seems to be some concern among analysts that costs are going up for the drillers. Don't see why that should surprise anyone and the way GSF and others are able to roll over their contracts at higher dayrates, I don't believe they'll have any trouble passing those costs on to their customers - who will ultimately pass them on to us at the pump. GSF is the cheaper way to buy the new merger between GSF and RIG. At Thursday's close, GSF was at a 2.7% discount to RIG when both were put in terms of the newco (didn't run it for Friday's close). Every time I've checked them, GSF has been selling at a discount to RIG when converted to newco.

Other positions I added to over the week were Prospect Energy (PSEC) and American Railcar (ARII). PSEC is now yielding nearly 10% if the payout holds and I'm not aware of any reason it won't. I may be missing something, but it seems to me that the credit issues that have been hammering the markets should be good news for these guys since it removes some competition. If the price stays down here, this one will find a home in my real portfolio.

I haven't seen any news that would have caused the drop in ARII. Over the past two weeks it's gone from about 40 to 30. Last quarter's earnings report was a blowout, their order book is strong, and they've taken steps to add capacity. They report earnings on Aug 14. I think we'll see another good report. Another one that may find a home in my real portfolio if it stays down here long enough to come up with some cash.

I also added some to the WFC and T positions on slight dips early in the week.

I'm looking at adding Unilever NV (UN) or Proctor and Gamble (PG) to provide dividend income and add a defensive, consumer goods company to the mix. UN trades at a forward PE of 15 and has a dividend yield of 3.5%; PG trades at a forward PE of 16 and yields 2.2%, but has a little better earnings growth estimate. Need to do a little more research here and maybe look at some of the other companies in those sectors as well.

Gotta give a shout out to CSCO, RPM and T - the only picks that made money for me last week.

Don't know if I can call this fun so far, but it has been interesting.

Comments: View Comments |  Saturday August 4, 2007