Archive for February, 2006

FDP posts loss and stock heads south

Tuesday, February 28th, 2006

Fresh Del Monte is down over 1.50 (more than 7%) on lower than expected earnings. FDP reported a fourth-quarter loss of $3.5 million, or 6 cents a share, down from a year-ago profit of $19.1 million, or 33 cents a share. On an adjusted basis, excluding charges from asset impairment and restructuring activities, the Coral Gables, Fla., produce distributor lost 2 cents a share in the latest quarter. Sales fell in the latest three months to $757.9 million from $818.2 million in the same period a year earlier.

The company blames lower banana pricing and increased competition in Asian markets, weak sales of gold pineapples during the holidays, and increased competition in the U.K. prepared food business. The average estimate of analysts polled by Thomson First Call was for a profit of a penny per share in the December period on sales of $849.8 million.

An argument for value investing over growth investing

Monday, February 27th, 2006

Jeremy Siegel Ph.D. compares a value investment in Standard Oil of New Jersey (now ExxonMobil) vs. a growth investment in IBM. Assuming the investment was made in 1950 and that all dividends were reinvested in the company stock, which would have been the better investment?

Although both stocks did well, investors in Standard Oil earned 14.46 percent per year on the shares from 1950 through 2005, almost 1 percent percent per year ahead of IBM’s 13.09 percent return. Although this difference looks small, $1,000 invested in the oil giant in 1950 would be worth over $1,800,000 today, while $1,00 invested in IBM would be worth $867,000, less than one half the amount in Standard Oil.

The conclusion the author reaches is to avoid the “growth trap” because stocks with better valuations are better long term investments. This is true even with stocks that have small dividend yields if they do share buy backs (a company will be able to buy back more shares if its stock is not inflated by groeth investors).

Stocks that have the brightest prospects and are expected to grow the fastest are not necessarily the best investment. It all depends on the price you pay for the value you are getting. In fact, I will show in subsequent columns that it is growth relative to expectations that is the key determinant of investor returns.

Should I buy beaten down stocks or index funds?

Thursday, February 23rd, 2006

As I sold China Telecom do to risk Morning Star warned me about, I started thinking I needed to do more indexing. I usually tell people that I put most of my money in index funds and then a little money I manage actively investing in gold stocks and REITs in an effort to diversify.

Of course, my regular readers will know that’s not true. For example I own some Marvel. That stock has taken quite a beating (I’ve owned it before and sold at around 30 a while back – then bought back in around 20) and I was thinking this morning about buying more. Next thing I know the stock’s up 7% to 17.24 as they raised revenue forecasts for next year. I haven’t bought more MVL yet (still thinking).

I was also looking around for good companies with beat down share prices because of my OVTI story. I had bought it back in June of 2004 after some bad news and sold it today – it was up around 70%. Somewhere around that time MBNA (the credit card company) also went way down and I thought I should buy, but didn’t. Share prices doubled in the next few months.

So it’s certianly possible to buy good stocks cheap when investors overreact and turna nice profit. Even beat the market. Of course one day one of those stocks might never recover…

ETFs for your IRA / retirement portfolio

Wednesday, February 22nd, 2006

Vanguard Energy VIPERs (VDE) is an ETF that seeks to track the performance of the MSCI U.S. Investable Market Energy Index. With an expense ratio of .26% it’s quite reasonable.

The top holdings consist of well known names such as Chevron, ConocoPhillips, Exxon Mobil, and Halliburton.

I also came across a Motley Fool article from jan. 3 2006 which details the authors IRA: Vanguard Total Stock Market (VTI) which has a cost of .07% a year. Vanguard Emerging Markets (VWO) has an expense ratio of 0.30%, and tracks the performance of the Select Emerging Markets Index. The top holdings include Israel’s Teva Pharmaceutical (TEVA), Korea’s Kookmin Bank, and China Mobile. It has outperformed the S&P 500 by a wide margin in the past year.

Then there’s the iShares S&P MidCap 400 (IJH) ETF. The average company in the index has a market cap of just $3.4 billion. It has outperformed the S&P 500 over the past 5 years but the charts look very similar. This ETF seems to give you a shot at outperforming the broader market, but doesn’t truly diversify your portfolio.

Speaking of diversification, some would recommend Vanguard REIT Index VIPERs (VNQ), but a chart to chart comparison shows that while outperforming the S&P 500, VNQ still follows most of the broader markets ups and downs. Of course if terrible things were to happen to stocks, real estate investments (and VNQ) might hold more of their value than stocks.

Even Vanguard Materials VIPERs (VAW) seem to go up and down with the broader market when you compare the charts. I still feel that gold (for example streetTRACKS Gold Shares – GLD and iShares COMEX Gold Trust – IAU) is the most certain way to diversify. Other metals like silver would be a nice play as well but there is no ETF focusing on silver (when there is I would expect silver prices to increase even more quickly than they are doing now due to increased demand). That’s why I have CEF in my IRA.

CEF is a closed-end fund limits its amount of shares. Because closed-end funds limit their shares, they can trade at a premium or discount to their net asset value. I believe that currently CEF is trading at a premium to its net asset value.

Robrt T. Kiyosaki article and Cashflow Quadrant investing advice

Tuesday, February 21st, 2006

As Robert T. Kiyosaki tries to redefine an active investor as someone who lives off of investments, I’ll stick with the more usual view – someone who actively chooses investment vehicles instead of following indexes.

Nevertheless there is some useful information in his article:

The sad thing is: Many people think they’re investors when they’re not. Lots of people think their 401(k)s and IRAs, which have stock, bond, or mutual fund holdings, are investments, but I consider them savings plans. People with such retirement plans are what I call passive investors. They’re simply “saving” for retirement.

Similarly, if you own your home and live in it, I don’t consider it an investment. Without cash inflow monthly (and with money going out each month for mortgage payments, utilities, property taxes, insurance, and maintenance), your house is a liability, not an asset. It might become as asset — if you rent it out for income each month that exceeds your expenses on it, or when you sell it and realize a capital gain.

I love his idea of investing for cash flow first and capital gains second, but as usual he only has some vague advice about real estate to offer. In his book Cashflow Quadrant, he argues that rich investors buy into IPOs, large real estate projects, and businesses while middle class investors go for mutual funds, blue chip stocks, condos, houses, and duplexes.

Before one can become a rich investor, one first needs to become a long-term investor with an approach recommended by Peter Lynch or Warren Buffet. So far so good, but here the advice gets confusing. On page 89 he says these investors “are actively involved in their own investment decisions.” On page 90 he cautions “Don’t try to outsmart the market,” and suggests the Vanguard 500 fund. At least we have one piece of specific advice from Robert T. Kiyosaki.

Passive investing, index funds, inefficient markets

Sunday, February 19th, 2006

Steven Thorley, Associate Professor and Finance Group Leader, the Marriott School at BYU, wrote an interesting paper in 1999. He argues that markets are inefficient. An inefficient market is one in which stock price does not always reflect fair value. Investors make money in an inefficient market by finding and investing in these “mistakes”, these stocks that are valued incorrectly.

The conclusions he draws are rather interesting. One is that making money as an active investor will become more difficult:

If active investing is a skill-based game, then skilled players will be worse off when lower skilled investors choose not to play. As an active investor, your ability to outperform the indexing alternative (be better than average) depends on the participation of players with below average skills. Someone has to buy the stock you want to unload at a higher than justified price, and sell the stock you want to buy at a bargain. Someone has to be wrong in order for you to be right.

The author believes that many active investors don’t realize this. Some simply don’t understand that the stock market is a competitive place where some people have to lose in order for other people to win. Other people realize this but continue investing actively because overconfidence blinds investors to the fact that about 2/3 of them would be better off indexing.

Thorley’s argument that markets are inefficient (and that investing is a competition won by skilled players) also shows the folly of investing in actively managed mutual funds:

In fact, when a given category of investor, for instance, mutual fund managers, consistently underperforms the market by more than can be accounted for by the extra costs of active investing, then some other category of investor must be consistently outperforming the market. The percentage of actively managed mutual funds that underperform the market has been reported as high as 95 percent. If this number is accurate and persists over time, then it is evidence that the market is a skill-based game, and that active mutual fund managers, as a group, have below average skills. If investing is a skill-based game, then prices in the stock market are not efficient.

The Great Mutual Fund Trap by Gregory Baer and Gary Gensler, former officials of the U.S. Treasury covers the topic of actively managed mutual funds in great detail while arguing that passive investing is the right approach for individual investors. The argument is a convincing one: over every five-year period only about 20% of actively managed mutual funds perform well enough to make up for their fees and expenses.

That doesn’t mean, investors should go pick one of the few funds that has outperformed the past 5 years. Picking a winning fund is not so simple. The authors show that funds that outperform for one five-year period are likely to underperform for the next five years! By the way, The Great Mutual Fund Trapalso calls for investors to avoid day trading, and stock-picking. Instead, investors should buy funds with low fees and expenses. The Vanguard Total Stock Index and 500 Index funds are the authors’ favorites. They also encourage investors to consider ETFs, focus on asset allocation, buy bonds directly from the government, and invest in tax-advantaged accounts like Roth IRAs for retirement and 529 plans for education expenses.

Thorley also notes that active investing is a more expensive game to play than passive investing. Transaction fees, capital gains tax (not an issue for some retirement accounts), time and effort (you either do the research yourself which may come with expenses such as using Morning Star or Motley Fool or you pay someone else – like a mutual fund manager – to do the stock picking for you). Active investors have less diversification and therefore, greater risk.

Of course, to be fair, we have to mention the benefits of active investing. It’s more fun, especially if you win (although when you lose it can be awfully stressful), than passive investing which is always boring. People with inside information can beat the market (this may not be legal, but it’s not uncommon). So can people who are more skilled than 2/3 of active investors. Here the author reminds us that 80% of drivers feel they are among the top third in driving skill. Thorley argues that most active investors make a similar mistake when it comes to evaluating their investing skill.

There is one final point to consider: size.

Size may be the one competitive advantage of the individual investor, because pricing errors on very small or illiquid stocks can not be exploited by large institutional investors. Either the market order itself will be so large that the pricing error evaporates as the order is executed, or the position taken will be too small to materially affect the bottom line of a large pool of money. The significance of this individual investor advantage is debatable, given the relatively high costs, both research and transactions, of active management in the small-cap market.

This means that maybe a small investor can take advantage of a situation that an insitutional investor would never bother with. To do your own research, buy The Great Mutual Fund Trap and check out Thorley’s paper online.

First-Health Coventry insurance denies cancer treatments, morphine

Monday, February 13th, 2006

Here’s a scary article for you. And the widow’s story is even worse.

“My mother always told me to get a good job with insurance. For what? It hasn’t done anything,” Julie Pierce said. Julie Pierce watched Tracy Pierce, her 37-year-old husband, die from cancer while their insurance company denied every doctor recommendation, from treatments for his kidey cancer to morphime to ease the pain after the untreated cancer had pretty much killed him.

First-Health Coventry deemed the treatments were either not a medical necessity or experimental. To me this indicates the importance of having enough savings and investments to take care fo yourself in case of an emergency. Perhaps that’s why I take few risks with my investments.

A handful of very mildly beaten energy stocks

Friday, February 10th, 2006

I’ve been nervous about getting into the energy sector for a while now, but considering the last few days, I have to wonder if this is a buying opportunity. I must stress that I’m only beginning to look into this and have done nothing yet.

Encana Corp (ECA) is down to 42.75 from around 48.00 a few days ago. There business includes exploration, production, and marketing of natural gas, crude oil, and natural gas liquids (NGL) in Canada, the U.S., Ecuador, and the United Kingdom.

CHK, Chesapeake Energy Corporation has also had a rough few days. CHK engages in the acquisition, development, exploration, production, and marketing of oil and natural gas in the United States.

Diito for Valero Energy Corporation, VLO, which operates as a refining and marketing company. It also produces a slate of gasolines, distillates, jet fuel, asphalt, petrochemicals, low-sulfur diesel fuel, and oxygenates.

Selling to avoid risk or lock in profit?

Thursday, February 9th, 2006

After writing about the risks inherent with China Telecom (CHA) I sold. After a 17% gain, I saw too little upside and too much downside risk.

I’m also considering taking some profit on OVTI which is up around 66% for me. I wrote about it being undervalued back in July 2004 and how it reminded me of the tech bubble. While it seems like a good time to take some profit, the PE is still a reasonable 21 and the PEG is a very nice 0.72 according to Yahoo Finance.

Refinancing advice with an example

Wednesday, February 1st, 2006

Refinancing question: Any advice with re-financing my home morgage would be appricated: First, a little background.

We found a very good townhouse in a great neighborhood for $275,000. The owners wanted to close quickly and we didn’t want to lose out on it. So I took on a bad interest only morgages. One for $219,000 at 5.5% for 5 years but the killer is $55,000 on the second interest only morgage at prime rate, so it’s been increasing every month.

I’ve managed to pay off all my other debt, car payments and credit card and my credit score is pretty good in the 740-750 range. So I want to refinance to one fixed morgage and this is where I need some help with people more experiance at it…

I was given an offer of a fixed 30 year morgage at 5.85% for a monthly payment of $1,678(not including insurance and tax which is ruffly $2,000 per year). I asked if there was a way to lower the per month payment and they also offered a fixed 40 year morgage at 6% for a monthly payment of $1,578 (not including insurance and tax which is ruffly $2,000 per year).

Do you know if these are good rates? I’ve gone to 5 different lenders/brokers and this has been the best offer. Any help or feedback would be appricated.

Answer: The rates are decent but to check, put a query out on Lendingtree.com. I’d go with a 30 year mortgage max, however.

And don’t be afraid to bargain. If you find a lower rate on LendingTree, take it back to the brokers and see if they will match. Also, look carefully at the closing costs. Some places have a low rate but then load you up on closing costs. Make sure you get a firm quote on that – otherwise you may get to the closing table and find $400 for doc prep and $100 for Fedex added. Closing costs are also highly negotiable, if you get down to 2 lenders with the same rate, see which will go lower on closing costs.