Lazy Investing

MSFT june puts

2010-06-11T14:15:00.000-07:00

Sold some MSFT june $22 put for .06 cents. Currently, MSFT is trading at $25+. Figured there is no chance that MSFT will go down to less than $22 in a week. Even if it does, I'll be owning a good company for 10 times earnings.

Safe Bond (PMK)

2010-06-05T07:05:00.000-07:00

In this low interest environment, it is nice to find a relatively safe bond or preferred stock that pays > 8%. One of the ones that are really like that Ive mentioned before is PMK. PMK pays a monthly dividend (.o71cents) and in total pays .85cents per year. It is currently 9.75 so it pays a yield of > 8.5%. The par value is $10 and it matures in 2018.

The company (PMACA) is relatively safe profitable insurance company. Also, it is important that the bond matures in 2018 as opposed to something longer like 2040 since people are expecting an inflationary environment in the near future.

Target covered calls

2009-01-18T10:26:00.000-08:00

I like the idea of selling covered calls on Target (TGT). It's currently trading at $35. The Jan' 10 calls are trading around $10. If you buy the stock and sell the calls, you are paying $25 for the stock. As long as the stock is above $25 on Jan' 10, you make money. And if it is $35 or above, you make 40% or $10. It seems like a good deal since Target is such a great company. I'm waiting for the stock drop a little, so i can get a better deal.

High Yielding preferred

2008-12-24T10:27:00.000-08:00

I have a couple of preferred shares which are very high yielding, but a little riskier than the aegon preferred. But they do offer a compelling risk/reward ration.

The first one is bee-pa This is a preferred for Strategic Hotels & Resorts. They own a bunch of branded luxury hotels. Right now it is a horrible time for hotels as people don't have money to spend of vacations. However, they look like they will be cash flow positive next year. They have halted their dividend. Also, they do not have any debt to pay off until 2011. They also have 116 million in cash with some of the cash being restricted. However, they do have financial covenants to be able to borrow under their bank credit facility. Currently, they do meet these convenants.

It is hard to predict what will happen with the economy over the next year. However, my gut feeling is that they will survive. Currently their preferred is paying 50% yield at these depressed prices. This seems like a great deal to me. If economy comes back, bee-pa will go from $4 something to $20 something.

Another one I like is slm-pb. This is Sallie Mae (Studen Loan Lender). This preferred has a par value of $100 and it trading at $16. It is a floating rate preferred based on the libor rate. As current prices it yielding around 20%+. However, if the libor rate goes up, this could yield much, much more. However, I dont like Sallie Mae that much as a business. They might have to take big writedowns on their portfolios if students do not pay their loans this coming year. This could cause liquidity issues. However, they will be supported by Department of Education, which will provide them with funding. This company will never go out of business, but if things get horrible the government could just take them over and if the deal is like what happened with fannie mae, then the preferred could be worthless.

satyam

2008-12-22T12:21:00.000-08:00

Satyam (say), an indian computer outsourcing company, stock price recently plunged because it's ceo wanted to buy two construction companies (completely unrelated to current business) controlled by the ceo's family business for 1.6 billion dollars. However, when investors complained, the ceo abandoned his plans, but the damage had been done. The managment has lot its credibility. However, if you look at the company is very, very attractively valued. It is trading at $8/share. Almost half of the $8, it has in cash. And it supposed to earn almost $1.50/share this year. With a PE of almost 5 and with that much cash on hand and the ability to genearte tons of free cash flow, this is a very cheap stock. I initiated a position at $8.15. Hopefully, they follow their plan do use the cash to buy back shares or somebody takes them over.

Aegon preferred

2008-12-21T11:13:00.000-08:00

I really like the preferred stocks for the dutch insurer aegon. I currently own aeb. This is a floating rate preferred based on the 3 month libor rate. Even with the 3 month libor rate being so low, it is yielding around 15%. If and when libor rate goes up or when the stock market returns, this should definetly double in value. The dividend is safe as the insurer is getting billions of dollar from the dutch government to shore up its balance sheet. While you wait, you get a nice dividend.

REITs

2008-11-11T14:47:00.001-08:00

The stock market has been brutual to me this year. However, I think it is signficantly undervalued. I have been buying a lot of reits lately. I bought HPT and HRP in the last week. HPT is right now yielding over 30% and after todays results, it seems the divident is safe. HPT owns hotels and leases them out to big companies such as HOST, TA etc... For the lease, they get paid a minimum yearly rental and a percentage of revenue. As a result, in bad times and in good times, their revenus is somewhat more constant. Also the companies that lease from them put down a deposit just in case they cannot meet their yearly rental. HRP leases office space. Usually their contracts span on average 6 years and also its biggest tenant is the US Government. So, they should be somewhat shielded from the current economic crisis. Both of these companies trade at a significant discount to their NAV. And they should be able to maintain their yield.

VRTB and PMK

2007-10-14T07:52:00.000-07:00

As I mentioned in my previous posts, I am a big fan of VRTB(Vestin Realty Mortgage II). And so far it has performed reasonably well. Although the stock price has fallen a bit from where I bought it, it has continued to pay over a 10% dividend each month. Another investment that I have recently purchased is PMK. These are senior notes that pay a 8.5% monthly interest. The insurance company that backs these notes PMACA is a reasonably safe company so these notes should be safe.

Thornburg Mortgage (TMA)

2007-10-12T08:38:00.000-07:00

Thornburg Mortgage has been hit quite hard by the lack of the liquidity in the credit markets. As a result, they are expected to take a huge loss when they report results next week (10/17). However, what is not known is whether they will cut their .68 cent quarterly dividend and if so, by how much. If they do not cut the dividend or they cut it to above .40 cents, the stock has a potential to jump. There is good reason to believe that the dividend will not be cut too much.

1.) The fundamentals of the business not have changed drastically. They are not a subprime lender. They just got caught by lack of liquidity in the credit markets and had to liquidate their assets at a discount.

2.) Heavy insider buying.

3.) TMA has been a seller of their stock over the past years to get more liquidity. So, if they keep their dividend, their stock will go up and they will be able to sell their shares at a higher price.

A good way to play this earnings/dividend announcement is to buy 12.5 october calls for .25 cents. They offer a good risk/reward ratio.

I own these calls. I am not a owner of TMA.

Moodys (MCO)

2007-10-08T14:07:00.000-07:00

With the current turmoil in the stock market, right now is a great time to pick up some great stocks trading at below intrinsic value. Lets talk about some stocks I have picked up in the past month… The stock that has the highest risk/reward ratio is Moodys (MCO).. Currently Moodys is in some hot water over the ratings it had provided for some sub prime lenders… This will be a temporary problem as the service that it provides is necessary… Although it’s trading at 20 times earnings, this company is a cash flow machine that also buys back a ton of its shares… And Moodys and S&P are the two dominant players in the rating agency game and it is impossible to get into this market… I bought the stock at $46, $44, and $43… it has moved up nicely recently (above $50)… but the potential for higher returns is still there..

Great Mutual Funds

2007-07-13T11:34:00.000-07:00

Two of my favorite mutual funds are Fidelity Low Priced Stock Fund (FLPSX) and Aegis Value Fund (AVALX). I personally dont invest in mutual funds, but I use these funds to get stock ideas. FLPSX is a very large mutual fund that has consistently beat the market for over a decade... Avalx buys on a price/book basis... its stocks have a price/book ratio less than 1 and if i remember correctly, it has not had a losing year since it was founded 6-7 years ago..

Partygaming Pink Sheets

2007-02-21T06:45:00.000-08:00

Trading partygaming on pink sheets or Over the counter market is a bit risky, if you are trading a substantial amount. The volume is not there as it is for regular exchange traded stocks. So, you need to be careful. BTW.. Partygaming has shot up today to over 41p or .82c.. GIGM was up a $1 yesterday. Maybe, people are finally realizing the potential of these stocks...

Performance (Continuted)

2007-02-19T06:13:00.000-08:00

Click on the picture (down below) to see the table more clearly...

Performance

2007-02-19T06:08:00.000-08:00

This is a performance of my actual portfolio. All of these stocks, I have recommended on this blog. As you can see, all have had a 10% or greater return. My job as a value investor is to get the best possible absolute return. I do not measure myself against the broader indexes. If you only have to pick 10 stocks out of a universe of thousands of stocks, you should be able to get a positive return almost every year.

Currently, out of this portfolio, HD is almost at my fair value price of $45. Once it hits that, I will get rid of both my options and shares.

UNH options, I will likely keep till January 2009 when they expire.

VRTB is a long term hold because it will be able to pay me a dividend of 10% a year. Should it reach $7, then I will most likely sell.

CFPZF (Canfor) is a long term hold until the housing market fully recovers.

If I were to initiate any new positions out of my portfolio, it will probably be with PYGMF (Partygaming) or GIGM (Gigamedia). As you know, Im very bullish on the online poker business and I think these two stocks have the highest risk/reward ratio. I plan to at least double my money with these two stocks.

Gigamedia

2007-01-31T08:13:00.000-08:00

I bought 1000 share of Gigamedia (GIGM) @ $11 last week. It looks as the number of players for both partypoker and Everest Poker (owned by GIGM) has been going up dramatically this week. I am thinking about adding a little more to my position in Partygaming.

PartyPoker/Gigamedia

2007-01-23T16:59:00.000-08:00

The Department of Justice has ordered some big investments banks to hand over any "documents that will help build a case against anyone that could have profited from online gambling in the United States." This has caused Partygaming stock to go down the last couple days. It is trading around 26-27p currently.

I think this is an overreaction. Ironically, I think this is a positive for Partygaming.First of all, it seems DOJ is going after people and not the company. In Partygaming's case, the main victim will be the founders, who cashed out hundreds of millions in stock. Second, if DOJ makes an equal effort in going after other private poker companies, who are currently breaking the law, such as Pokerstars, FullTiltPoker and Bodog, it could be a huge positive for Partygaming. If DOJ can force these companies to stop taking bets from US players, you could see international players who play on these sites migrate over to Partypoker. This has occurred to some degree when Neteller, a ewallet site that is used to fund poker accounts, closed its doors to U.S. players. After Neteller went down, the number of players at these private poker companies has slowly been going down while PartyPoker's number of players has been steadily going up.

Another company that caters to only international players is Everest poker. Unlike PartyPoker, it has never taken a bet from U.S. players. So, it is clear from DOJ's wrath. Everest poker is owned by Gigamedia (GIGM). I think both Partygaming and GIGM are good stocks to buy. The number of cash players for both has been increasing nicely. Currently, Partypoker is the number 2 poker site in the world and Everest poker is number 4. I own around 40,000 share of Partygaming and I'm considering buying into GIGM.

In other news, I bought an another 1,000 share of VRTB and they did announce a .05 cent dividend for this month. Currently this company pays out a 12% dividend and it should be able to pay a 10% dividend comfortably.

Vacation

2007-01-11T18:22:00.000-08:00

I’ve been on vacation and will be back next week. My next post next week will have my performance for this current year. I have not purchased any new stocks recently. I plan to add more of vrta. I already have almost 4,000 shares.

Canfor Corp. (CFPZF)

2006-12-22T09:28:00.000-08:00

One of my favorite ways to find new stock ideas is to steal them from a couple of my favorite mutual fund managers. Aegis Value Fund is one of my two favorite mutual funds. (Fidelity Low Priced stock fund being the other.) So this next purchase of mine directly came from a recent purchase by that fund. And they give a good explanation of why they picked the stock in their advisors report...

"Another company we have found attractive to purchase in the past six months is Canfor Corporation. We have invested $4.5 million in this leading Canadian forest products company. The Canadian softwood lumber industry has been buffeted by a strong Canadian dollar, declining homebuilding activity in the U.S., and a larger than usual supply of lower-quality wood resulting from a mountain pine beetle infestation. We believe the company has sufficient balance sheet strength and management capability to see its way through the current storm. The balance sheet strength will be bolstered substantially by the Softwood Lumber Agreement that is set to be finalized this quarter. Once effective, we estimate the company will receive close to C$500 million after-tax in tariff refunds. The balance sheet as of June 30, 2006 did not reflect the vast majority of this C$3.50 per share cash infusion. To put the size of this refund in perspective, the stock has recently been trading at about C$11.50 per share. The
Softwood Lumber Agreement is likely to improve margins at Canfor in the mediumterm. However substantial margin improvement will only be achieved when lumber prices stabilize and the market more fully adjusts to recent events and higher Canadian exchange rates.
While the near-term conditions in the lumber market are challenging, Canfor’s mills are relatively well-positioned and efficient. Its costs are lower than many of its Canadian competitors in Quebec, who have been first to shut capacity. Canfor is also diversified into U.S.-based production, providing some hedge against adverse Canadian conditions. We expect it may apply its strong balance sheet and tariff refunds partly to increase its proportion of U.S.-based production. The housing market downturn may provide some good buying opportunities in the U.S. While the next few quarters are likely to prove challenging, we believe the company maintains the ability to generate strong cash flows in coming years."

The company is right now trading at C$10.50. I bougth 1100 shares @ $8.95 (us dollars). Also, I bought 15,000 more shares of Partygaming $.59. That brings my total exposure to Partygaming to 38,000 shares at around $.62.

A good site to track the progress of the number of players at PartyPoker is PokerScout. It seems the number of players at PartyPoker is increasing nicely. The 7 day average of the number of cash players was around 3800 a couple weeks back. Now it's around 4400. Pretty good.

Partygaming (Revisited)

2006-12-14T05:50:00.000-08:00

Today Partygaming reported that overall revenue for the last four weeks has been nearly $1 million per day. This is comparable to overall international revenue during the last quarter. Although international revenue went down a little bit after U.S. players were banned from gambling online, it has stabilized and is improving. I still own 23,000 shares at around .63/.64c/share. I continue to believe this stock is significantly undervalued. Revenue and margins should increase from here and Partygaming continues to bring out new games such as Bingo, Backgammon. It should easily be able to cross market these other games to their already growing poker base. This stock easily worth $1.00/share (.50p) and I would not be surprised if a company like MGM makes a bid for this company.

Vestin Realty Mortgage II, Inc. (VRTB)

2006-12-08T21:54:00.000-08:00

I recently purchased (3,000 shares@$6.92) a great small cap stock called Vestin Realty Mortgage II, Inc (VRTB). This stock primarily invests in short terms loans secured by real estate. The company currently trades at 75% of tangible book value. It has hardly any liabilities and the assets are the short term loans. Its loans are geographically well diversified (California is the highest at 25%) among 10 states. The loans are primarily backed by commercial properties (49%) and land (28%). Because of this, the income and 11%+ monthly dividend that it pays out seems safe. The price on this could go up 25% in my estimation. If not, sit back and collect the monthly dividend. This stock is doing a 1 for 1.3 split in the middle of this month (December). So, expect the price to fall accordingly.

In reply to Aravind's ( http://aravindsuri.blogspot.com) question about my opinion of Microsoft (MSFT) and Walmart(WMT), I think they are both fairly valued. If WMT, went below $40 (highly unlikely), I would be a writer of bull call spreads. Usually, I write bull call spreads when the stock is somewhat undervalued and I know the upside is limited. In the example of Home Depot, I felt the fair valuation of the stock is $45. This is why I bought a $35 jan 2009 call and sold a $45 jan 2009 call for a net price of $3.50. Right now, it's worth near $5 for a gain of 40%+.

Wellpoint Inc (WLP)

2006-12-02T19:53:00.000-08:00

Response to Fangstar’s question of deciding between buying Wellpoint Inc(WLP) or UnitedHealth Group (UNH)

Wellpoint Inc (WLP) and UnitedHealth Group (UNH) both seem to be undervalued equally. Their earnings growth over the past year seems to be nearly identical, and they are trading at a similar P/E ratio. Analysts are also predicting similar earnings growth rate in the future.

The only difference I see is that UNH has the options scandal in the background. Personally, I don’t think it is that big of a deal, but you never know how the market might react when the actual charge is revealed. So, that is a negative for UNH. The positive I see is that UNH has had a higher earnings growth rate over the past 5 years than WLP. But, both of these stocks are undervalued.

UnitedHealth Group (UNH)

2006-11-29T05:31:00.000-08:00

UniteHealth primarily provides health insurance in the United States. This company has grown very rapidly in the last five years. Revenues have almost doubled from $ 23,454 in 2001 to $45,365 in 2005. At the same time, earning per share has almost quadrupled from $.70c to $2.48.

However, because of its size, growth is slowing down considerably. This year UNH is supposed to earn around $3/share or almost $4 billion dollars. Conservatively, earnings growth should be in the 10-15% range over the next 5 years. Plus, since it's an insurance company, it generates tons of free cash flow that will be used to buy back shares.

At 15 times earnings ($47), this company seems pretty cheap. The big hang over right now is an options scandal. The company stated that its sec filings should not be relied upon and that it will take "significantly greater" charge than prior estimates of up to $286 million. Once these charges are finally cleared up and the ridiculous amount of options granting is cleaned up, the stock should rise. The other possible hang over is medicare reform by the newly elected democratic party.

At this point, the stock looks cheap enough for me to buy. Because the growth rate will be more tepid over the next 5 years, I’m using the same spread options strategy as I used when buying Home Depot. I bought a Jan 2009 $45 call and sold a Jan 2009 $50 call for a net price of $2.50 on Monday. If UNH stays above $50 on Jan 2009, my profit will be 100%.

Dollar General

2006-11-18T08:12:00.000-08:00

In my last blog, I mentioned that Dollar General (DG) might be a good retail investment. It was trading around $13.70-$13.80. Since then, it has jumped above $15. Unfortunately, I was waiting for a price below $13 to start picking up some shares. As a result, I did not pick up any shares.

However, it is still important to understand why Dollar General is a good investment below $13. The last year has been tough for Dollar General. They have missed same store sales numbers and will report earnings of $.90 this year as compared to $1.08 last year. But the important fact remains that there has been no dynamic shift in the industry. The dollar store format still seems like a viable business. The same store sales miss can probably be attributed to a variety of external factors such as high oil prices, etc... The miss could also be attributed to addressable internal factors such as merchandising issues. But the most important fact is that the business model is still viable. Also, add to the fact that Dollar General is a cash flow machine (like most retailers) and is buying back tons of its own shares, you have a good investment.

There is no magic formula to figure out when to start buying the shares. Generally, I like to buy the shares at 12 times the reduced earnings estimates.

Chico's and Dollar General

2006-11-06T18:34:00.000-08:00

All great investors from Warren Buffett to Peter Lynch always stress the importance of thoroughly understanding the business before purchasing the stock of a company. Some of the easiest businesses to understand are the ones that you use in your every day life. My personal favorites from among those are retailers.

Besides the aforementioned fact that retailers are easy to understand, there is a definite methodology to investing in retailers.

Every first Thursday of each month, retailers report same-store sales. Same-Store Sales are sales dollars generated only by those stores that have been open more than a year and have historical data to compare this year's sales to the same time-frame last year. Basically, it compares how the company is doing this month to how they were doing in the same month of last year. Usually, if there is a sharp discrepancy between what is expected by analysts and what is reported by the company, the stock becomes very volatile (up or down). Usually, when a good company has a bad couple of months, it creates a nice buying opportunity for a vigilant investor. The important piece in that last sentence was that the company has to be good. If the business of the company is fatally flawed, you could potentially lose your investment. In most cases, the problems are temporary, unless there has been some dynamic shift in the industry.

A couple of months back, I picked up a women’s retailer called Chicos (chs). Chicos reached a high this year of around $50. At that point, it was trading above 40 times earnings (pretty high valuation, especially for a retailer). As investors realized that Chicos could not maintain its high earnings growth rate of the past, the stock started to go down. By August, it had missed some same-store sales numbers and was trading in the mid 20s or around 20 times this years forecasted earnings. Then in August, it reported a decrease in same-store sales number. This was the first time in something like 9 years that they had reported a decrease in same-store sales. The stock crashed all the way to $17 or about 15 times this years lowered earnings estimate. I picked about 350 shares around $17.91 with the hopes that it would fall farther and I could buy more. To be continued…

In my next blog, Ill explain the reasoning behind picking up chicos and describe a retailer that is almost ready to be bought in Dollar General (DG).

TSY bought out

2006-10-31T18:04:00.000-08:00

TSY (Trustreet Properties) agreed to be bought out by General Electric Capital. The shares shot up 35% and the preferred convertible shares I had recommended a couple weeks back went up nearly 20%. I sold the 500 shares that I had bought for $20 a couple months back for above $25 yesterday. Obviously, I got lucky that Trustreet Properties got taken over. But even if it had not been taken over, it would’ve paid me a fat 9% dividend over the next couple of years with little chance of any downside.

Answering Questions

2006-10-26T19:38:00.001-07:00

There was a recent comment on one of my posts that I was lazy about replying to comments. So, I’m replying to a couple of comments that have been posted on this blog.

There have been a couple of posts regarding my recommendation on Partygaming. The posts state the following:

1.) Partygaming has lost its U.S. players.
2.) Everybody is selling it (including large institutions) and that's why it's going down.
3.) Partygaming is not a safe investment because it’s going down.

Here is my reply to these 3 statements...

1.) Everybody knows this and my valuation of Partygaming do not take into account the U.S. players
2.) Who cares is if everybody is selling it and usually stocks go down when people are selling.
3.) Just because a stock goes down, it doesn't say anything about the risk of the investment.

Now some people who are posting comments are missing the point of this blog and the point of value investing. Value investing is about making logical, rational decisions. Value investors profit when other investors make emotional decisions. The people who posted comments gave no real reason why they think Partygaming is a bad investment, but simply stated that it will go down because other people are selling it or that U.S. players are not allowed to play on the site. In fact, I see Partygaming as the perfect value play. Luckily, I was able to add 15,000 more shares at .5575c this week. This is in addition to the 8,000 shares I bought at .74c. I will try to buy more.

The other question was on currency trading. Now I am not smart enough to do currency trading. If you feel you have an edge in currency trading, then by all means go for it. If I did currency trading, it would purely gambling on my part. Long term currency is affected by many factors such as the health of the economy, interest rates, etc… I am not a macroeconomic expert and neither are most small investors. So, I would leave currency trading alone. Why would you do currency trading when stocks are so much easier to pick???

Shorting Stocks

2006-10-21T14:35:00.000-07:00

Usually shorting stocks (selling a stock and hopefully buying later at a lower price for a profit) is not something you would hear a value investor talk about. But, since you can apply value investing principles to determine if a stock is undervalued, you can theoretically use the same principles to determine if a stock is grossly overvalued.

However, shorting stocks is far more dangerous and far less profitable than simply just buying a stock because generally stocks tend to go up (U.S. stocks have had a historical 7% inflation adjusted return) Also, the maximum you can lose buying a stock is 100%. But, in shorting stocks, your loss is infinite. Even, if you are correct in analyzing that a stock is overvalued, it might take time before the market realizes this. And you could be broke by that time.

Because of these dangers, you shouldn’t short stocks. If you do decide to short, you should do it with a very small percentage of your overall portfolio. In my next blog, I’ll examine what you need to understand about a stock before you short. Also, I’ll give you some examples from stocks I’ve shorted and try to come up with a stock that could be a short in today’s market.

Bush signs Gambling bill

2006-10-18T19:16:00.000-07:00

President Bush signed the Unlawful Internet Gambling Enforcement Act into law which would effectively ban online gambling (see previous posts). This would affect the biggest online poker room operator, Partygaming. I recommended buying the shares at .74c. Now, the shares trade at .62c. I still highly recommend buying the shares as nothing as fundamentally changed.

Although, I was able to buy 8,000 shares at .74c, I haven’t been able to buy any more shares. These shares trade over the counter in the U.S. and because of this, they do not have much liquidity. Today, I tried buying 15,000 shares at .58… then at .59c… then at .60c… all the way up to .63c… but it didn’t go through. The shares closed at .62c. This is the first time I’m buying an OTC stock. Anybody have any idea on how to better execute my purchase?

Bought Partygaming

2006-10-13T10:40:00.000-07:00

I was able to purchase 8000 shares of Partygaming on Wednesday for .74c. Unfortunately, I think I overpaid a little because the exchange rate had gone down a couple of cents between the dollar and the pound. Today, Partygaming is trading around .34-.35p as President Bush is preparing to sign the bill into law. I will try to make an another purchase at this point.

TSY-PC undervalued preffered

2006-10-11T09:55:00.000-07:00

Preferred stocks are the one of the most overlooked investments. Large investors tend to stay away from them because of liquidity issues and the size of outstanding shares. Small investors usually do not know where to look for these stocks. And if they do, they do not how to analyze them. Luckily, I've done some research and found an undervalued preferred stock.

TSY-PC (Trustreet Properties) is a 7.5% convertible, cumulative preferred stock with a liquidation value of $25. This means it pays a $1.875 ($25*.075) dividend every year. Obviously, as the stock price goes below $25, the dividend as a percentage goes up. Currently, the stock is trading around $21. This means you are getting about a 9% dividend. Pretty good.

Also, at any time you can convert this preferred stock into 1.28205 shares of the parent
company TSY. At the present time, TSY trades near a 52-week low of $12.5. So, obviously it doesn't make sense to convert them. But, essentially on top of the 9% dividend, this is lottery ticket that comes with buying these shares. For example, if by chance TSY stock rebounds and goes to say $19.5, the preferred stock will trade around $26. TSY, after 2/25/2009, has the right to buy these shares for $25. So, now the only thing you have to worry about is TSY going bankrupt and potentially losing all of your investment.

TSY is a REIT that owns restaurant properties. The company is very stable and has nearly $1 billion is shareholder equity. So, the company isn't going to go away anytime soon. In the very rare case of bankruptcy, preferred shareholders are next in line after debt holders. So, that's why shareholder equity is important to look at when you analyze any preferred stock. This is a great investment for people looking for some income with the added upside of owning a stock. I own 500 shares at around $20. A great place to look for preferred stocks is http://www.quantumonline.com/

Option on HomeDepot

2006-10-09T19:22:00.000-07:00

In my last article, I wrote that at $37, Home Depot is undervalued even if you assume no earnings growth. Currently, Home Depot trades at 12 times this years earnings, and its earnings have grown over 15% the post couple of years. If it were possible for Home Depot to grow earnings that much over the next 5 years, then it would easily deserve a P/E multiple of 20. However, this won’t be possible.

First, it’s hard to grow when your revenues approach $100 billion a year. There do-it-yourself outlets are so saturated that new stores are “canabalizing” older stores. So, as I mentioned before, the growth will either have to come from Home Depot supply or from international growth.

Second, the housing market is cyclical. Even though I don’t think the effect of the housing downturn will be as much as most people fear, it will still have an impact on growth. Since, the housing market was strong the last couple of years, the growth of over 15% is somewhat of an abnormality.

Now, I have no idea what the future growth will be, but I think it will be somewhere between 0 and 15%+. So, it has to trade with a P/E between 12 and 20. Conservatively, I think it should trade at 15 times earnings or $45 dollars. If this analysis is correct, an investor would make 20% on their investment.

Although, a 20% return is pretty good. There is another way to increase return with the use of options if you are sure about the performance of HD stock.

The easiest and safest strategy is to write a spread. For example, I sold a Jan 2009 $45 call and I bought a Jan 2009 $35 call at a net price of $3.50. If HD is $45 on Jan 2009, I will be able to sell it for $10 and make a 200% return. If at anytime, the stock goes up, the net price will rise. I bought 22 of these options for a net price of $3.50 or $7,700. The price is around $4.30 now. So that gives me over a 20%+ return. I bought it when HD was trading a little over $34. Of course, If HD stays below $35 on Jan 2009, I will lose all my money. :-)

Another options strategy is to buy a Jan 2009 call and sell a Jan 2009 put (synthetic buy). The net price should be somewhere in the $4 range at the current price. It essentially allows you to buy a share of HD. Obviously the returns are much nicer if HD goes up. This strategy is a little bit riskier because you could lose $39 if HD goes to 0. However, the upside is unlimited and better than the aforementioned options strategy.

If all of this is too confusing, you should just buy shares of HD. However, I feel options are the way to go with HD because of the fact that the shares have little downside.

Partygaming in Barrons

2006-10-08T16:28:00.000-07:00

Yesterday’s issue of Barrons had a negative article on a company that I recently wrote about, Partygaming, the owner of Partypoker. The article was mainly focused on the founder of Partypoker, Ruth Parasol, rather than the business implications of the anti-gambling legislation passed by the U.S. congress. Although, the article did state the obvious that revenue from U.S. players would be severely reduced, it didn’t delve into the current valuation of Partygaming shares. Just mentioning that “the outlook for this sector may well get worse in the months ahead, as the implications of the U.S. ban play through financial statements.” In fact, it seems the author had a negative bias even before writing this article.

As to the authors claim that Partygaming could face a potential cash crunch situation because of all the U.S. players cashing out, he conveniently forgets to mention the cash that the company will have earned since their last June 30 balance sheet statement. Before the U.S. legislation, Partygaming was earning $60 million dollars a month. That comes out to approximately $180 million at the end of September. This should be enough to satisfy the $192.6 million it owes its clients (not all clients are U.S. and not all will cash out). And from what I can see, the U.S. players aren’t cashing out just yet. As I’m writing this, 80,000 players are playing on Partypoker and most of them are from the U.S. And even if all these players cash out, as I mentioned in my previous article, I think Partygaming would still be a buy.

Performance (10/06/06)

2006-10-08T11:07:00.000-07:00

Lazy Investing Stock Performance

Home Depot

2006-10-06T19:01:00.000-07:00

There are a lot of very smart people that believe in the theory of efficient markets. Basically, the idea that at any give time a stock price fully reflects all public information, and that no investor has an edge in picking stocks. And risk adjusted performance that exceed market indexes is all luck (basically, I’m wasting my time writing this blog). But, then when you see a stock like Home Depot, you realize the efficient market theory is completely flawed.

By my aforementioned statements, you should realize that I think Home Depot is considerably undervalued. Now, I’m not going to go through a discounted cash flow analysis to prove my point (On this blog, I will never do that). Because most of the time, I feel this type of analysis is useless. You can make your stock go up or down by +-25% depending on what growth rate you chose, what risk free interest rate you choose, etc… Most of the time, you don’t need this nerdy, mathematical analysis to figure out whether something is cheap or not. And also, it’s pretty boring.

Home Depot is undervalued for one reason. If Home Depot kept its earnings steady (~$3.00/share) for eternity, and paid out all it’s earning in dividends, I would still buy the stock today. Because at $37, I would be roughly getting a dividend of 8%. The best I can do is a 6% 16-month cd at Digital Credit Union. This is probably the worst case scenario.

The reality of the situation is that it doesn’t pay an 8% dividend. It is much better. Home Depot is a cash flow machine with a great business. They pay nearly a 2% dividend and buy back almost 4% of their shares and still manage to grow their earnings by over 15% the last couple of years. Pretty incredible.

However, even when I spit out these numbers, there are a lot of skeptics. The biggest complaint that people have is that housing is crashing. Yes, it’s true that housing is cyclical and might crash (home building stocks have certainly crashed). But I don’t think that’s really going to affect Home Depot all that much. If people need to fix something in their house, they will have to go to Home Depot. Sales will be down from people refinancing their house and doing some fancy project like remodeling the kitchen. But overall, it should not affect sales dramatically. Also, this is cyclical and not a long term issue (value investing). The housing crash might have more of an affect on Home Depot Supply, which caters to professional customers (contractors, businesses). However, this again is a short term issue and Home Depot supply is a much smaller contributor to revenue than the do it yourself retail outlets.

The second complaint I get is that, Home Depot will not grow that much since they are everywhere in the US. But based on past numbers (15%), they seem to be growing nicely. I agree that growth will be slow in the do-it-yourself outlets without strong same store sales. However, they are expanding in the professional customers market with Home Depot supply. This is where the real growth will come in the upcoming years. But even if I’m wrong and there is no growth, Home Depot still beats my 6% cd.

My next blog will feature how you can use options to magnify your returns with Home Depot… as much as a 200% return if we are right… I own 500 shares of Home Depot at an average price around $35 and I also have options (next blog)...

PartyPoker

2006-10-03T18:20:00.000-07:00

As you may have heard, a bill passed that would make playing online poker extremely difficult. The poker bill was attached to a port bill that was highly popular. So the poker bill easily went through even though there were a number of people against it (democrats). Anyway this bill will make it very hard for people to fund their poker account because it will stop banks and credit card companies from funding gambling sites. Contrary to my opinion and the state of California, poker is considered gambling.

As a result, partygaming, the company that owns the most popular online poker room, partypoker.com, said they are going to stop accepting real money play from US customers once Bush signs this bill into law. This seems a near certainty. Although he might get a bump up in opinion polls if he did veto it, but i doubt it. Anyway, since partypoker's revenue is primarily derived from US (77%), the stock tanked. It went down over 60% on Monday.

So, usually when stocks go down a lot it gets me interested to see if the stock is a good buy.

Partygaming trades around .75c-.80c in the US over the counter market. Partygaming doesn’t trade on the major US stock exchanges. It has around 4 billion outstanding shares, which gives it a market capitalization of around $3.2 billion. In the latest report, international revenue (not including US) was $150 million in the first 6 months of this year and it had grown 150% year over year from 2005. It was $60 million in the first half of 2005. Earning margins are very high, as you can imagine, around 50%.

If there is no growth from the first half of this year to the second half of this year, they will have international revenue of $150 million the second half or $300 million for the year. Last year the growth form first half to second half was 50%. So even if the growth is a reasonable 33% from first half to second half of this year, they will have international revenue of 200 million in the second half or $350 million for 2006. At 50% earnings margin, they will earn $175 million dollars or 4.5 c/share. That give you a p/e of .80/4.5 or around 18. This does not even include the US players who will get around the law and play.

A p/e of 18 is pretty good for a company that just experienced 150% growth. Also, partygaming is a cash cow. There is hardly any capital expenditure for growth. All you need to grow is to buy more servers, hire more people and spend some money on marketing. The rest of the cash can be used to pay dividends or buy back shares. Partygaming was just about to pay a 115 million dollar dividend before this law passed.

Also, if for some insane reason, this bill does not go through, the shares would really jump. They were on track to earn .20c this year. .80/.20 is a p/e of 4.

There is also a chance someday that the US would regulate online gambling like every other nation in the world. It would bring billions in tax revenue that could really be used by the government.

The downside of this stock is that competition for online gaming is immense. This could dampen margins in the future. Also, since the number of players playing on partypoker will significantly decrease, this might decrease the number of different types of poker games that they can offer. This will have a negative affect on international revenue. There will be one time charges because of the unwinding of the US operations. But this is not a long term issue.

But, overall this stock is worth investing in. It is hard to find a stock that has a p/e of less than 20 with 150% revenue growth. Poker is exploding all over the world like it has in the US and those markets still remain untapped. Partygaming seems to be in a good position to tap those markets.

I put in an order to buy today for 5,000 shares at .76c, but it didn’t go through. Ill try tomorrow.