Thursday, September 09, 2010

BAGAKOAA September 9, 2010 Live and Die by the Sword

BAGAKOAA; September 9, 2010 Live and Die by the Sword

 It must be fall. I just got back from a great night with my lovely wife at my favorite restaurant (Hanna’s) while watching New Orleans spank the Minnesota Vikings.  Ok it wasn't a spanking but they won.  Life don’t get much better than that.

The market kicked off nice today because of the good jobless claim numbers (we got that one right- we guessed aggressively at 447,000 claims down about 25,000. The number came in at 451,000 which was much closer than all the gurus who had the range at 465-480). Unfortunately due to a lack of players in the casino (volume) we got distracted by some mediocre Euronews and then the market came back a little bit and closed a little ahead. When the market diversifies into emerging market and more global investments, we do live and die by headlines around the world. Everyone was trying to figure out what Duetche Bank was doing indicating they needed more capital. At the same time, The World Economic Forum announced the US has slipped to fourth place in world economies due to excessive debt and pessimism about the government. That dampened the market.

The Bank of England did what we indicated in the blog on Monday. They left rates alone.

Exports were higher than expected and imports were lower than expected surprising the analysts estimates and my estimate. The final number was -42 Billion.

Apparently the good news about the economy helped balance the bad news out of Europe.

Bondage is the Spice of Life

Sorry, but maybe that teaser will help readership. In the past we have spoken about bonds. The snapshot of the SL portfolio indicates that it is about 40% bonds. The yields on those bonds are in the 9% neighborhood, a nice neighborhood by the way. It may have triggered some questions about bond strategies and we just wanted to pass on a valuable resource. Two actually. Bonds: The Unbeaten Path to Secure Investment Growth (Bloomberg) is a great book about using solely bonds to have a rewarding portfolio. Even if that is not your plan, the book is a great primer and more for that asset class.

The other resource is a website I have been playing in for about a week now. And that would be
It is one of the best and few places to go look for current bond offerings. Its content is free at the moment, but I would bet you will see this become subscription based soon. If you want to know what kind of bonds are available for a certain company or municipality, this is a great place to find them and look for the yield that meets your goals. Have some fun and check it out.

Slim Pickins

Ok I am excited as we have had a few requests about stock picks. That tells me people are thinking about buying stocks. That is a good sign. We are going to pretty much follow the type of homework we outlined here on August 28, 2010. I did notice that some of these are all coming up with earnings report here soon.

The first one is RIMM, Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Research In Motion Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. The company was founded in 1984 and is headquartered in Waterloo, Canada with additional offices in North America, Europe, and the Asia Pacific.

The stock is selling for 45 a share as of the close this afternoon. From a descriptive analysis, you figure out how they make money from the description above. In reading the news articles from, you can figure out that the base market they play in is growing exponentially. However those same articles reveal that they are loosing market share. Motorola, HTC and AAPL are eating their lunch. Because they focused on corporate users, they attempt to move into the retail end will force them to compete with the likes of those three companies and it will hurt their margin. In the last six months we have seen target prices drop from the 100 dollar range to the 60 dollar range. (Personally I feel that is being generous.)

Fundamentally, it has no debt. It throws no dividend. Its ROE is a spectacular 35.7%. Its 3 year earnings and revenue growth are what dreams are made of. (Ok throw in a pretty girl, a nice restaurant, a cool car, great bottle of wine, in the mountains, But I digress) Its price to book is one of the few fundamentals that don’t look good and at 3.1 for a popular name like RIMM, its not that bad. Its free cash flow is real pretty. Here is the problem. All of this is historical in nature. If you look close you see the revenue growth slowing a bit and its margin eroding a bit. It has a quarterly earnings report on the 16th. The consensus is 1.36 a share in earnings. The Whisper Number (the whisper number is what the “axe”- the analyst recognized as that stocks guru) will be a bit weaker than 1.36 and will be 1.35 a share. We do not own the stock and its been a while since we looked at it.

We would avoid it and say even the “axe” got it wrong. Look for a weak 1.32 a share. This is a 45 dollar stock for a good reason. It has all the makings of a 40 dollar stock. DO YOUR HOMEWORK.)

We also want to look at Cintas Corp. CTAS Cintas Corporation provides corporate identity uniforms and related business services in the United States and Canada. The company operates through four segments: Rental Uniforms and Ancillary Products; Uniform Direct Sales; First Aid, Safety, and Fire Protection Services; and Document Management Services. The Rental Uniforms and Ancillary Products segment engages in the rental and servicing of uniforms and other garments, including flame resistant clothing, mats, mops and shop towels, and other related items. It also offers restroom and hygiene products, and services. The Uniform Direct Sales segment engages in the direct sale of uniforms and related items, and branded promotional products. The First Aid, Safety, and Fire Protection Services segment offers first aid, safety, and fire protection products and services. The Document Management Services segment provides document destruction, document imaging, and document retention services. The company offers its products and services through local delivery routes and distribution network to manufacturing companies and corporations. Cintas Corporation was founded in 1968 and is based in Cincinnati, Ohio.

This is a US bound (yes the do service Canada as well) cyclical stock and is subservient to the economy and the industrial work force. Fundamentally it has little debt, less than 2% yield on their dividend, an unimpressive ROE, and a 15% future P/E ratio. This is not a sexy stock. If you feel we will se a robust economy book here in the US and if you think employment will recover in the next 12-18 months, and you think we will stop loosing industrial jobs overseas (where Cintas has no exposure), then you might think this 27 dollar stock is worth 27 dollars. Most target prices are in that range. We think this too is generous. Except for a couple of diversifications (first aid/document retention and destruction) we don’t see any game changers going on here. Stay away Joe. We do not own this and never have. This is the first time we have looked at this stock.

They report on the 20th and there is no whisper number but analysts are saying 38 cents a share. NOT. Unless they pull off some accounting miracles, I am thinking about 31 a share income.

Then we have Costco Wholesale Corporation COST operates membership warehouses that offer a selection of branded and private label products in a range of merchandise categories in no-frills, self-service warehouse facilities. The company's product categories include candy, snack foods, tobacco, alcoholic and non-alcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, office supplies, garden and patio, sporting goods, furniture, and automotive supplies; dry and institutionally packaged foods; apparel, domestics, jewelry, housewares, media, home furnishings, cameras, and small appliances; meat, bakery, deli, and produce; and gas stations, pharmacy, food court, optical, one-hour photo, hearing aid, and travel. It offers Business and Gold Star (individual) memberships. As of October 8, 2009, the company operated a chain of 560 warehouses comprising 407 in 40 states and Puerto Rico, 77 in Canada, 21 in the United Kingdom, 7 in Korea, 6 in Taiwan, and 9 in Japan, as well as 32 warehouses in Mexico and 1 in Australia. Costco Wholesale Corporation also offers its products through in the U.S. and through in Canada. It has a strategic alliance with Valdez Heli-Camps. The company, formerly known as Costco Companies, Inc., was founded in 1976 and is based in Issaquah, Washington.

Most of us know who they are and how they make money so let’s go to the fundamentals. We have never looked seriously at this stock, but right off the bat, I am impressed. In reading some of the SEC filings and press clippings, they all support that this stock has some legs. Unlike its competitors (Wal-Mart-Sam’s, and BJ’s) it has focused on a higher end consumer which hurt its revenues of late, but helped margins (once you strip out the gasoline business). The Kirkland brand is becoming very popular in many businesses kitchen and even at home. I can’t sy I would run out and buy the stock at this moment in time, but I would suggest putting it on a watch list. You got a great management and board team there with the likes of Charlie Munger (Buffets life long partner) and Bill Gates’s father.

They report on October 6th and there is no whisper number that I can find, which surprised me as popular as they are. I would venture to guess that Peter Bye of Jeffries is the axe on this stock, but he is not hinting about a whisper number. The Consensus is 95 cents a share. I am thinking a nice surprise, and look for 1.02 a share income. If we were a little more cash solvent we might consider a January $60.00 call option, but they are pricey in the $2.57 each which means you would not be in the money till $62.57 a 6% increase from today’s level. We don’t like it that much.

From The White House Photo Gallery

Secretary of State Clinton to The President.  "Oh, come on you really didn't know we could use our Blackberrys and computers on take offs and landings? You silly goof!"

Salve Lucrum


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