The Third Pig

January 05, 2009

"The Third Pig" On Reuters, Yahoo Finance and Others

The Third Pig

Articles that appear on The Third Pig occasionally appear on the Seeking Alpha website and are regularly picked up by the general financial media outlets including Yahoo Finance, Reuters and other financial blogs. I have listed some of the latest entries and other locations they can be found:

Asset Allocation in 2009: Best to Go with the Devil You Know at:
Yahoo Finance: http://finance.yahoo.com/q/h?s=SBUX and http://finance.yahoo.com/q/b?s=BRK-A
Fav.or.it: http://fav.or.it/post/953406/asset-allocation-in-2009-best-to-go-with-the-devil-you-know

Coach: Luxury on the Cheap at:
Guru Focus: http://www.gurufocus.com/forum/read.php?2,42620
Fav.or.it: http://fav.or.it/post/929527/coach-luxury-on-the-cheap

Five Things to Be Thankful for in This Market at:
Reuters: http://www.reuters.com/finance/stocks/marketViews?symbol=COH.N
Yahoo Finance: http://finance.yahoo.com/q/b?s=COH&t=2008-12-15T03:55:28-05:00

GM Bailout Would Be Agony For Taxpayers at:
Yahoo Finance: http://biz.yahoo.com/ic/news/330.html?time=1226885400

Obamanomics and the Stock Market at:
Stock Shoot: http://stockshoot.com/content/view/6602

Buffett and Cramer Agree: It’s Time to Buy Stocks at:
AOL Finance in the Headlines area: http://finance.aol.com/related/berkshire-hathaway-inc-cl-b/brk.b/NYS?topic=144012971&tab=3

Greed, When Others Are Fearful, Is Good at:
Wall Street Oasis: http://www.wallstreetoasis.com/newswire/greed-when-others-are-fearful-is-good

If you would like to share some of the above articles with your friends, family or associates just click any one of the icons below for the various websites including ShareThis, Digg.com and Facebook. Here is to a wonderful 2009 in the market.

Disclosure: none

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Posted by Benjamin Taylor at 05:28 PM |
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January 02, 2009

Best To Go With The Devil You Know

The stock market ended the year of 2008 posting one of its worst annual price performances ever. The Standard & Poor's 500 index dropped 38.5% for the year marking its worst performance since 1937’s 39% drop in the index. In fact it was the first time the index saw a 30% or more drop in price in those 71 years. So if you survived this year, give yourself a pat on the back.

Investors over the past year made many wrong moves, paralyzed by fear, they drove down stock market prices to unreasonable levels. One bright spot is patient investors could invest in stocks very cheaply. Valuation levels had not been at those levels since the early 1980’s. Although the S&P 500 has advanced more than 20% from its low of November 20^th, there remain bargains to be had.

With so many bargains to choose from, some investors may experience paralysis because of greed. Which stock does one pick? In such an instance, it is best to invoke the spirit of Charles Munger, co-chairman of Berkshire Hathaway. In an Outstanding Investor Digest article some years back Munger was quoted as saying:

“For an ordinary individual, the best thing you already have should be your measuring stick. If the new thing isn’t better than what you already know is available then it hasn’t met your threshold. This screens out 99 percent of what you see.”

Although I picked up a few new positions for myself and my clients’ portfolios, in following Munger’s advice I found that the positions already in the portfolios were of solid companies that were similarly beat down as the market. Every nook and crannie of the market was hurt this year. It couldn't be avoided. And the potential of being hurt further is still present. However, when choosing where to allocate funds, sometimes it is best to go with "the devil you know".

Instead of scouring the investment universe for the new thing, I simply averaged down. The following chart marks the return of a few positions from the beginning of the year to the S&P 500’s low on November 20^th and then the return to the end of the year from that November date compared to the market’s return.

Although as a group the stock of these companies declined to a similar degree as the market, their rebound so far as been nearly 50% greater. Although it is too soon to say, I believe superior companies will bounce back to a greater degree than the average stock. I think this is what we are seeing in the chart above.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares in all the companies mentioned in this post at the time of this writing. But positions may change at any time.

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Posted by Benjamin Taylor at 06:10 PM |
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December 24, 2008

Coach’s Bags Are Expensive, But the Stock Is Cheap

Source: Flickr by danperry.com

When the holiday shopping season is done for 2008 the results for retailers will show disappointing numbers. Consumers continue to pinch their pennies in this tough economic environment. The International Council of Shopping Centers expects November and December sales at stores open at least a year to fall as much as 1 percent, the largest drop since at least 1969, when the trade group began tracking such data [video].

However, there’s beauty in those numbers for stock investors. While the industry as a whole has performed poorly operationally, some have weathered the storm quite well. But panicked investors have thrown the baby out with the bathwater, pricing the stock of strong companies below reasonable levels.

Take for instance luxury bag and apparel designer, Coach, Inc (COH). Year-to-date, Coach is down 34% right along with the Apparel, Accessory and Luxury Goods sector which is down 37% as of December 19^th. But the company has been around for nearly 70 years, a period which has seen at least 10 recessions. Certainly it has seen and weathered some bad times before. Since going public in 2000 they’ve done nothing but continue to strengthen the company.

According to Standard & Poor’s, “For the five years through FY 08, COH exhibited a revenue compound annual growth rate (CAGR) of 27%, a gross profit CAGR of 29%, an EBIT CAGR of 37%, and a net income CAGR of 40%. Total assets grew at a five-year CAGR of 30%, and inventory at a modest 19% CAGR, attesting to a tight operating structure that reduces inventory risk.” The company also sports gross margins of 74%, the highest in the industry. Only Luis Vuitton (LVMHF.PK) comes close with gross margins of 64%.

Coach also holds a commanding lead in the luxury handbag market in the U.S. and is making strides in Japan with a market share 13% behind only Luis Vuitton’s 30% share of the market. Coach sees promise overseas, especially in China. It expects the overall market to more than double in size over the next 5 years to more than $2.5 billion in annual sales, up from of $1.2 billion now.

Even in this difficult environment, Coach has increased sales 18 percent year-over-year has essentially no debt to speak of. Louis Vuitton on the other hand has $4.5 billion in long-term debt and a total-debt-to-equity (TDE) ratio 52%. The industry’s average TDE is 27% (Source: Reuters).

The bags may be expensive at Coach but the stock is cheap. In my humble opinion, a company that is able to perform like this even in bad times is deserving of more than the 9x trailing earnings it now fetches.

Disclosure: I and the clients of Brick Financial Management, LLC owned share of Coach (COH) at the time of this writing. But positions may change at any time.

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Posted by Benjamin Taylor at 02:08 PM |
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December 12, 2008

The Auto Bailout and Mental Accounting

Source: Flickr by Cobalt at www.flickr.com/photos/cobalt/1422157740/
Source: Flickr by Cobalt

Last night the $14 billion bailout for the auto industry failed in the Senate primarily because the United Auto Workers union refused to accept a pay cut for its members. This likely spells big trouble for the Big 3 as collectively they are asking for funds in excess of $30 billion. General Motors (GM) alone, which employs a quarter of one million workers, needs $8 billion over the next two months to stay afloat according to its CEO Rick Wagoner.

Supporters of the bailout are now looking to the White House and the Treasury to step in. To date the Bush administration has resisted dipping into the remaining balance of the $700 billion TARP earmarked for the banking industry to help the Big 3. The Bush administration’s position in this regard is well understood. It wants to reserve the remaining TARP funds for the banking industry “just in case”. But there is also no denying reluctance to use the TARP funds to assist the auto industry is really grand scale mental accounting.

Mental accounting, as studied by Richard H. Thaler, is the way we attribute a monetary value or utility to an economic transaction, situation or expectation. It tends to separate those values in different accounts according to their origins and purposes. Mental accounting can also be seen as the failure to see the entire financial picture and how one decision affects another. To understand this concept on a personal level it is best to consider a couple of examples.

A divorced mother holds a grudge against her ex-husband and father to her children on whom she depends for child support. In an effort to exact revenge against the ex, the mother makes crank calls to the father’s place of employment causing him to loose his job. This in effect decreases the mother’s income in the form of child support. The mother failed to connect that her income was dependent upon his. In her mind they were separate.

A consultant on a temporary project wants a file cabinet to store just a few papers. The local office supply store has small, medium and large size cabinets which cost $200, $250 and $300 respectively. Being analytically minded the consultant buys the largest cabinet as he calculated it would allow him to get the most space per cubic inch for his money. However, he failed to consider he had only enough files to fill half of the smallest cabinet. In essence, he wasted $100 dollars. When something sells for below the mental price we have assigned it, the deal takes precedence over the actual utility of the item.

Whether the government uses the TARP money, some other funds or does nothing at all, we as Americans will collectively “pay” for the automakers woes. Perhaps it will be in funds going directly to the companies. Or perhaps it will be in increasing the welfare and unemployment rolls. It may come in increasing bankruptcies and foreclosures among former workers of the industry. At this point, we, Americans, the government, cannot avoid expending these dollars either directly or indirectly.

In the interest of full disclosure, I wrote an earlier post suggesting giving money to the automakers amounted to a very bad investment decision. I stick by that position. In 2007, GM lost $38 billion in 2007 and Ford (F) lost $2.7 billion. However, in no way was I suggesting nothing be done. As an investor, I am against the bailout. As an American, I can see the government giving the Big 3 the billions they are asking for – I will just close my eyes and hold my nose when and if they do.

Disclosure: I do not, nor do the clients of Brick Financial Management, LLC, own any securities mentioned in this article. But positions may change at any time.

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Posted by Benjamin Taylor at 10:10 AM |
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November 27, 2008

5 Things To Be Thankful For In This Market (Part 4)

Source: Flickr by Egan Snow; http://www.flickr.com/photos/egansnow/343535886/

Over the last week or so I have been listing things to be thankful for in this market. So far I have covered three things. They are:

1. The Teachings of Benjamin Graham

2. Low P/E Ratios

3. The Inevitable Market Rebound

And now I am listing numbers 4 and 5:

4. Black Eyed Peas, and
5. Collard Greens

Seriously, do I really need to say more? There are few things in life that beat mom’s collard greens and pop’s black eyed peas thrown in with a little Jamaican corn bread. And with today's economy and the burden it is putting on the pocket book, a cheap meal is hard to come by. In fact, with Americans on food stamps reaching an all-time high, a cheap nutritious meal is just what the doctor ordered.

Southern folklore suggests, that a meal of black eyed peas and collard greens will bring with it good luck and financial prosperity. The peas represent coins and the greens represent folding money. Both foods are dependable sources of nutrients and antioxidants that protect your heart and maybe prevent cancer and both are great sources of folic acid.

So in the spirit of Thanksgiving and my hope we can all get a little more luck and wealth in our lives, I have decided to share a recipe from the Homesick Texan for black eyed peas:

http://homesicktexan.blogspot.com/2006/12/black-eyed-peas-for-new-years-day.html

And another for collard greens from Ms. Financial Savvy:

http://www.msfinancialsavvy.com/article.php?aId=141

Good eats and Happy Thanksgiving!

Disclosure: I do not, nor do the clients of Brick Financial Management, LLC, own any securities mentioned in this article. But positions may change at any time.