December 2007 |
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It is very easy to lose focus in the world of investing. With the recent market volatility (and, to recap, this includes a market drop of 10% from mid-July to mid-August, a 10% rise from mid-August to about mid-October, another 10% drop from mid-October to mid-November and now a 4% rebound), it isn't surprising that investors begin to feel a bit queasy. A renewed focus on the stocks we own is a helpful reminder of what this is all about and it may act as much needed dose of Dramamine.
It is important to remember that investing is about owning little slices of actual companies. The daily squiggles of a stock chart only tell a piece of the story and should mostly be interpreted as a signal of investors' emotional state. Investors are sometimes euphoric, sometimes depressed and right now they are susceptible to darting in either direction with only the slightest nudge.
Savvy investors understand this and attempt to keep their heads clear in unclear moments. We are in unclear times, and with our eyes wide open, we are seeing bargains and opportunities. As optimists and pragmatists, we know that moods will change and clarity eventually will emerge. In our minds, the timing is the only uncertainty.
The best defense against chasing your tail as an investor is to actually think about what you're doing, the assumptions you're making and finally, act on an investment process that is proven and reliable.
To that end, over the past few months, since July, we've been investing in some beaten down stocks. Here is an incomplete sampling of what gets us going in a stock market that's not going at all.
We've bought shares in a nationally recognized apparel retailer that caters to women who are 35 years old and up. This company has had a history of impressive growth (now slowing) and the company is run by a highly respected management team. Currently, they operate about 1,000 stores and we got interested in the stock after it had fallen 55% from its high in May/June of this year. Steep share price declines in great companies get our attention.
We own shares in another apparel company, this time a manufacturer and marketer of women's lingerie. We most certainly do not have an odd obsession about women's clothes, by the way. We just like bargain stocks! This company's stock was down about 45% from its high set in April. They show continued earnings growth as well and have been steadily improving their balance sheet by consistently paying down debt over the past two years.
We also began accumulating shares in a company we actually owned some years ago and, low and behold, they also operate in the apparel industry, but this time for kids! The great thing about this company is it pays a huge dividend as they collect a simple royalty fee for the use of their various brand names. Another great feature is their rapid diversification efforts into multiple high growth emerging markets with their relationships with local, dominant retailing partners. This one had fallen only 35% from its high set in June.
On another front, we've bought banks, two very large ones and two smaller ones. With our two mega bank stocks, we are collecting an average dividend yield of about 5.5% and each sells at about 25% lower than they did earlier in the year. The mortgage market mess has created really low stock prices in our view and we feel both are more than worth the risks at these prices.
With our two smaller bank stocks, in one case we are collecting a greater than 8% dividend yield with a price that is off 50% from its high and the other is off 55% and we think its large international shareholder and strategic partner should step in down here and take the whole thing over at a premium to this bargain price. We'd be a little irritated but also a little bit vindicated.
We cannot say we have been pleased with the results on these two small bank holdings yet, but averaging down will lessen the blow. There is a saying in this business, "The lowest average price wins". In these two cases, we think we'll be reasonably satisfied with the end result but certainly not the excitement of the ride.
Since July, we've gotten the opportunity to buy a bigger position in a small regional airline whose management continues to really impress us. They now operate routes with multiple major airline partners instead of just one as before. It has a pile of cash on its books, it's growing and it just repurchased a lot of shares at below market prices. Another good sign, one of its major shareholders disclosed that he too has added to his stake. We aren't alone on this one.
In a potentially embarrassing move, we even took a small stake in a national homebuilder in early September. If you go back and re-read our comments from not too many months before, this decision should come as quite a surprise. But the surprise should go away when you notice that this homebuilder's price is off over 60% from its high set earlier this year. We've not caught the exact bottom, but we think we've come pretty close.
This particular homebuilder was out in front of others in its efforts to discount homes in its inventory, sell its excess lots and write off land options. In the meantime, they've used the cash to pay a nice dividend and pay down their debt. These are precisely the right moves to take advantage of the better opportunities that typically emerge at the bottom of market cycles.
Aside from the collection of beaten down and bloodied stocks that we've added to in recent months, we still own a smattering of technology companies that have done pretty well in this market, a very cheap and very small frozen food processor, a headline-infected toy company, a golf shaft manufacturer, a real estate company dressed up as old time department store retailer, a coffee juggernaut that nobody seems to like anymore and a few other companies to boot.
Now, we'd certainly like to erase a few decisions we've made this year or at the very least wait a week or two before buying into a couple of companies, but pragmatically speaking that is almost always the case.
Investing is never all that clear. The clarity that one sees is always in hindsight. It only feels like foresight after the fact. Today, we are admittedly in a moment of particular economic cloudiness and to be sure, certain sectors have felt the pain much more acutely.
As we look toward 2008, we see the portfolio actions we've recently taken as sort of like pressing down on a coiled spring. While the potential energy is obvious to those doing the pressing, the timing of the release remains unknown to the observer. In our case, we are pragmatic enough to know that while we're voluntarily applying some of the pressure, we do know that we also play the enviable part of the optimistic observer.