Greedy When Fearful

With a Roth-IRA, you can withdraw $10,000 tax free for your first home purchase.

I was originally going to write an article called “Banks are un-investible. Time to buy the banks.”  Jim Cramer was telling people to stay away from the financials almost daily. The Motley Fool analysts on Market Foolery were just as negative.  Just last week, my investments in financials were down huge. Wells Fargo, down almost 20%, JP Morgan Chase, down  15%, Bank Of America (BAC), down 50% (78 billion)! I started buying the major banks in August 2009 so this is from those levels. Remember how great things were during the boom times of August 2009? Exactly. Gold just hit a new record of $1900/oz (gold currently trades to a ratio of fear). Yes, the market is that fearful right now.

There were only two people that I followed who were making sense. Warren Buffet was adding to his position in Wells Fargo. Warren Buffet is Wells Fargo’s biggest shareholder (owning 7% of Wells Fargo, and making up 20% of Berkshire’s entire investing portfolio), and the stock was trading almost exactly at Warren’s cost basis! Then, the Motley Fool Money Podcast sound engineer, Steve Broido bought Bank Of America because he “Thinks it will still be around in 5 years.” Steve joked about it probably continuing it’s free fall as everyone else in the room laughed but I thought “Steve, this one will probably work out for you, it’s just way too cheap here.” My plan was to add to my bank basket (which is way more fun than a financial ETF) and buy more WFC, JPM, and BAC. I knew that BAC had the most upside but it also has the most risk. They just announced up to 10,000 layoffs, they are being sued by AIG for 10 billion for massive mortgage fraud. The market is questioning if they are even solvent.

Then, Warren Buffet announced a 5 billion dollar investment in BAC. This is 10% of Berkshire’s cash, a major investment. Warren wanted to inspire confidence in the market, and he sure did with me. But, I wanted BAC to pay for it’s (Sleazy)slegal ways. Main Street runs parallel to Wall Street. If you own who you pay, you add balance to the system.  My family is young (we can wait decades), and we can handle a lot of calculated risk (we can wait decades). I recently read about people foreclosing on BAC. All this news lead me to the idea:

What if I could get Bank Of America to pay for our down payment on our first home purchase? The irony would be great!

With a Roth-IRA, you can withdraw $10,000 tax free for your first home purchase. With this in mind, I doubled down on our BAC investment at the price of 78 billion bringing it from 5% back to 10% (since it fell 50%) of our portfolio. Banks typically trade above book value, and for BAC, book value is 200 billion. If it makes it back to book value, it will be a 150% gain. That’s Bank Of America paying a huge chunk of our down payment. Now, the pros will say don’t follow Buffett because I’m not getting the same deal he is. Warren is getting a 5% yield, I’m not. But, I’m not here for yield. I just bought Waste Management a month ago for the 4.68% yield, not hard to find big yields right now. Warren has warrants for $7.14 that expire in 2021. What that means, is within the next 10 years, Warren has the option (but not the obligation) to buy 700 million common shares of BAC at $7.14. So, if in 2015 BAC trades at book value, 200 billion (or $20 a share), Warren can buy the shares at $7.14 and they would immediately be worth $20, a 200% gain. The pros talk about how sweet the warrants are but they are only sweet if they are exercised. I’m making a 10 year bet that Berkshire exercises those warrants at least at book value. If BAC goes bankrupt, I’ll lose. But, Warren would lose his sweet, sweet warrants if that happens and his 5 billion in preferred stock investment. By listening to the pros you would think Buffett’s preferred stock is shielded from loses and there is no risk. Not true.

The mortgage market used to be the most stable investment out there. People used to make their mortgage their #1 obligation. They would rather pay than be homeless. What madness! With BAC owning the majority of the mortgages, I’m betting the future rhymes with the past.  I’m betting on the side of the greatest investor of all time and plan to profit right along with him.

Monty

From This

I love cars. I nostalgically remember drooling over my former employer’s 1997 Corvette. Like most teenage boys, I had pin-ups of sports cars in my room next to the hot chicks and posters of Depeche Mode, U2, and NIN.  I had a miniature model of a Porsche Boxster on my dresser.  I still long for the day when I can own a 1950s Cadillac.  So, when I heard of a company going public in April called ZipCar, I laughed at how stupid it was. American’s “sharing” cars? Zipsters? In Europe, sure. But not AMERICA! Then, the following happened:

1)  I was dropping off some papers at the University Of Utah and noticed a car sharing automobile parked in the stall. It was U-Haul’s version, but it was still the first shared car I have seen.

2)  The Motley Fool recommended it as a Rule Breaker  in June so I added it to my watch list.

3) I read about how car sharing can be used for company fleet vehicles. This was such a great, money saving idea I talked to one of my clients about it.

Then it clicked. This contrarian idea may not be stupid at all. It could be revolutionary. It could be the future.

Two weeks ago, ZIP reported massive revenue growth of 34% and an increase of its members by 29%. Yet yesterday, it hit a 52 week low (25% decline in the past 5 days and 39% drop since its peak! When it recovers, it will be an easy double).  Great company, broken stock. My favorite.  So, I just started a partial position (my wife said “It’s not done falling.” which I responded “Exactly. Wide scales!”) in ZIP at 684 million (market cap).  I’m an optimist, but I’m not stuck in the past. This is why I’m betting America’s auto love affair peaked in the 1900s:

1) Cars are uglier than ever. They remind me of the toy cars at our nearby theme park, Lagoon. If we loved our cars, would we really drive a Smart Car?

To This

1) The middle-class is shrinking and the cost of gas is increasing. People are driving less because of the cost of gas. According to AAA, the average person spends $10,000 a year for the privilege to drive (add up your car payments, insurance, repairs, and gas costs. What do you pay?). More people are car-pooling and taking public transportation.

2) Renting music, movies, books, and houses is more popular than ever. Unless you’re rich, owning is becoming passé.  The green movement is stronger than ever (each Zipcar shared takes at least 15 personally-owned vehicles off the road.)

3)  Dean Kamen, inventor of the Segway, once mentioned in an interview that it’s stupid to move a 200lb person with a multi-ton machine. That point has stuck with me. So has the thought that we dedicate huge portions of our houses to storing these beasts.

4) Anyone who has traveled to France will most likely testify to the efficiencies of the Metro and how nice it is to not have car. On my last trip I felt this exact same way, except when I went grocery shopping. ZipCar is perfect for this situation.

5) Ever borrow a pick-up from your parents? I did last week. You can reserve pick-ups or a swanky BMW without the bother or the budget.

Then, I realized Zipcar has my favorite type of business model, subscription! Members pay an annual fee of $60 and around $8 an hour (which includes insurance, cleaning, maintenance, AND gas!) when they are driving. You swipe the windshield with a smart phone or ID card to get into the car. Instead of being like Hertz or Enterprise, this business model could be more like Costco or Netflix. Costco makes almost all their money from membership fees, not product sales (which are sold almost at cost). Ever pay an annual fee to rent a car from Enterprise? Me neither.

I posted a Facebook update about car sharing, and only one person responded. I’ve only seen one car-sharing automobile in Utah. Zipcar isn’t in Utah yet, it’s still a baby. Buying babies and holding until adulthood is how you get rich. In the US (they own UK’s version called Streetcar) they are only in 14 cities and 230 universities. A decade ago I was testifying to friends and family about the revolutionary iPod and the game-changing Netflix. Investing in strong trends early is key to building wealth. This may be the next strong trend.

Zipcar has built their own new world and it could easily implode. This is an extremely risky investment. Alternative energy or cheap gas, a rising middle-class, population shrinkage, cultural trends, flying cars, competition from the big boys, etc. Also, you still have to get TO the car. Right now, this model works much better in Manhattan than in Texas. But, when companies invent their own world take a look at your feet, you may be walking on a yellow brick road.

Monty

Since my last post, I also did the following (you can always follow along with every buy/sell on Facebook)

5/16/2011

Sold entire position of #VITA @ $3.82. After terrible sales of Cortoss, last August, Jedi David Gardner said sell. I agreed but wanted to sell into strength. Today Stryker announced they are buying VITA. I held VITA for 1 year and 3 months. A 40% one-day increase is the moment I have been waiting for.

6/1/2011

*click**click* RELOAD of #UA @ $65.64 (5% of portfolio) and @LULU @ $89.49 (5% of portfolio)

8/8/2011

Taking advantage of the S&P USA downgrade. Picked up #MAKO @ $22.43 making it 1.6% of my portfolio. MAKO Surgical has been delivering on their promise to change the world through robotic knee and hip surgery and is the 905 million little brother of Intuitive Surgical. Picked up #WM (Waste Management) @ $29.14 making it 1.7% of my portfolio. With a 4.68% yield and decades of trash to come I love picking this up at a 52 week low. MAKO reports earnings tonight. Normally I wouldn’t buy right before earnings but MAKO sold off almost 10% today making it worth the risk IMO. August 9^th, Got really LUCKY here! MAKO closed up 35% from yesterday after blowing away earnings. That’s a record for me! Usually 1 billion companies never have days like this. WOW.

Note: This applies to my limited interest in trading, not investing

Peter Lynch describes buying a plunging stock as trying to catch a falling knife. I know exactly what he’s talking about as I’ve bought stocks on their way down to zero. I was hoping for a recovery, like in the case of my five-bagger with Ford (F), only to be greeted with bankruptcy. For every Ford I find I can have four losers and still break even. Not bad. But, these losers can take years to turn around (like my current trade with National Bank Of Greece (NBG)) and take nerves of steel.

I’ve got a new strategy I would like to try for my trades (I still love buying falling stocks for my 30 year investments). Buying The Right Of The V is an attempt to buy a recovery story near the beginning of its recovery. The advantage of buying a stock on its way down is its always on your radar. When good/bad news hits the stock, you know, because the stock will swing in double-digit percentages. With this new strategy, I’ve created a watch list called “Bankruptcy Watch.” In this list, I keep track of turnaround stories I’m interested in. The trick here is when a stock gets hammered, I edit the cost basis on my watch list as if I were doubling down on the stock. If a $5 stock rally’s 50% to $7.50, that’s a huge move and probably means the fundamentals have improved. If it was on my watch list at $10, it would look like a 25% loss. A loss might slip under my radar, but, a 50% gain? I won’t miss that. Adjusting the “virtual cost basis” on the way down is a crucial component to this strategy. Another crucial component is to find out what caused the massive move. I’m waiting for the moment the fundamentals change. Stock price alone won’t tell you this, but it’s a great alarm system.

**ALERT** **ALERT** SVU IS LESS BAD THAN IT WAS A YEAR AGO **ALERT** **ALERT**

I’m trying this strategy today with the hated, worst-of-breed discount grocer, SuperValu Inc. (SVU). You probably know them as Albertsons, Cub Foods, Jewel-Osco, Save-A-Lot, Shoppers, or Acme. Since 2007 their sales have been on a steady decline, and their debt increased to a massive 7.4 billion. The market has punished SVU with a 80%+ decline which is why it’s been on my “Bankruptcy Watch” list for the past 8 months. But, I think the stock bottomed in January because things are getting better. SVU beat analysts’ expectations and gave positive 2011 guidance with their latest quarter. They are paying down another 500 million in debt with their improved cash flow. SVU is less bad than it was a year ago and was rewarded with 55% increase in share price since it’s January bottom. Motley Fool Hidden Gems analyst Seth Jayson 8 months ago mentioned this story and its been on my radar ever since. He has recommended it and purchased it three times already for his Hidden Gems service. I have been watching and waiting for that quarter that signals SVU is off life support and ready to fight. The one major disadvantage of waiting for the company to improve is you miss the bottom and some of it’s easy money. But, Seth Jayson is a brilliant analyst, and extremely conservative. He thinks SVU can reach at least $16-$20 a share by just becoming mediocre. I agree with his logic.

Even though I missed the first 55%, I think I can still land a double-bagger trade here with less risk because the fundamentals are finally starting to improve after 4 years of pain. I’ll be selling SVU after a double. I typically avoid grocers like the plague and only like this company as a recovery play. That’s the strategy of Buying The Right Of The V.

Monty

Anyone who invested $1,000 in Nike (NKE) in 1980 would be sitting on at least 120 times their money ($120,000, not including dividends). Any parent who would have purchased just $100 worth of Nike stock with their kid’s $100 Air Force 1 sneaker would be sitting on $12,000 for college.

Nike was born in 1964 and was a household name in 1980. I’m sure many people thought they already missed the Nike train in 1980. But, “Nothing succeeds like success.” Only investing in the cream after it’s risen to the top has proven to be a great investment strategy over the decades. Look up the charts from the companies that made your favorite products when you first discovered them and you may be surprised at their massive gains.

Since Doc Brown hasn’t invented the Flux Capacitor to send me back to 1980, my strategy is to find the next Nike, and invest like it is 1980.

Only about 1/8^th the size of Nike’s market capitalization, Lululemon Athetlica (LULU) and Under Armor (UA) are both 13 year olds that look like they might grow up to be Nike some day.  Jim Cramer would say I should only own one to stay properly diversified. But, when trying to predict the next 30 years, I have no idea which one will do better or even exist in 30 years. Great investors sketch the future, bad investors try to photograph it. I’m going to sketch the future by buying both.  

Lululemon Athletica

This is a company I didn’t even know existed a month ago. My wife confused it with Gap’s Athleta brand when I asked her about it. Jim Cramer mentioned it a couple of times on Mad Money. Then, Motley Fool’s David Gardner suggested it as not only a Rule Breaker but a Rule Breaker Core. Rick Aristotle Munarriz called it “The Hottest Retailer in 2011.” Lulu launched their first store in 2003, IPO in 2007, and their online store in 2009. No wonder I haven’t heard of Lulu, she was just a baby!  OK investing universe, you have my attention. I LOVE babies.

Though plenty of Americans still tie their ego to the price of a product, most men I know follow Tyler Durden’s advice (“You aren’t your f$#@% khakis”) when it comes to gym clothes. I wear the same decade old t-shirt and shorts to work out. Women are the polar opposite in this category however and that’s what gives Lulu an edge over Under Armor. Lulu was created to fill the void in athletic wear for women. Do you think of women when you think of Nike or Under Armor? Me neither. Lulu has invented a world where women rule the gym. When companies invent their own world take a look at your feet, you may be walking on a yellow brick road.

$350 for True Religion jeans, $200 haircuts at Lunatic Fringe, and shopping 399 hours a year is why women rule the shopping universe. Lulu is bringing Women’s fashion to the gym and now they’re sweating gold. Net revenue increased from 40 million to 459 million from 2004-2009, an astonishing 60% compound annual growth rate. They increased cash from 3.8 million in 2006 to 159 million in 2010. No debt. 31% growth in comparables in 2010. Lulu only has 100 US stores, only a few per state. They plan on growing to 300 US stores. If they can successfully execute growth to 300 stores expect the stock to soar. As Cramer says, “Growth is rocket fuel for stock price.”

A primary concern of mine is the mainstream appeal of exercising. With record obesity rates in America, exercising isn’t trendy like it was in the 80s (Thanks Schwarzenegger and Stalone!). I also typically avoid retailers like the plague as most middlemen can be easily replaced. They have no moat. However, when the retailer makes the product they are selling, brand loyalty becomes their biggest asset (think Victoria Secret, Starbucks, Apple).

In my next update, I’ll cover why I like Under Armor. Here are my purchase stats for both stocks:

I also purchased more NFLX @ $205.00 because I think the fears of Facebook and Amazon are over-blown. Doubled down on BYDDY @ $9.06 to turn a -28% loss into a -12% loss. Only 3% of China owns cars and I think China’s biggest home grown automaker will eventually be able to compete with GM and Ford. View the entire portfolio here:

Off to the gym….

Monty

There’s a saying, “The biggest risk is not taking risk” that applies to our investing youth today. Headlines everywhere are talking about how twenty-somethings are shunning stocks and staying with terrible CDs. This is a major mistake that’s going to prevent Generation Text from ever breaking the chains of their day jobs. What they don’t realize is now is the time to take the most risks in their life. If they fail, they have more time to recover than they ever will. Nothing is more valuable than time.

This philosophy is why I like to start the year with my most risky investments first. I’m younger in January than I will be in December. I also like to pretend I’m a professional hedge fund manager, and have to hit a yearly target. I have an entire year for my thesis to evolve. If one of my risky investments tank, I have more time to adjust accordingly before the year ends.  

The majority of people chase performance. They think the stock that did the best in 2010 will also do well in 2011. Though this is true for the best growth stories in their early stages, overall the facts prove this is wrong. Peter Lynch, one of the greatest investors of all time, beat Warren Buffet from 1977-1990 with a 30% annual return running the Fidelity Magellan fund. To understand what amazing performance this is, $30,000 becomes a million in just 13 years when it compounds at 30% (and yet it’s legal for credit cards to charge this rate). Instead of buying that SUV, you could take a flux capacitor, give the money to Peter, and come back a millionaire. Simple enough, right? How lucky his clients must have been to be in the right place at the right time? Unfortunately, no! The majority of his clients tried to time him and pulled their money out of the fund after a bad year and poured money in after a good year. They missed the huge gains and got the big losses. Because of this, they actually lost to the market.

I don’t chase performance, I do the opposite. I look at my biggest losers of 2010, find out why they are losing, and see if my investing thesis still holds. If it does, I like the stock more because it’s cheaper. That’s exactly the case with National Bank Of Greece (NBG), and that’s why I doubled-down. My investing thesis on NBG hasn’t changed and it’s almost been a year. I still don’t think Greece is going to default, and agree with Dr. Bob Froehlich position on the PIIGS. The French and Germans won’t allow defaults because everyone would fall together.

I believe Greece will turn between 2012-2014  because of this data and will sell the position after it’s recovered. This isn’t an investment, it’s a trade.

This is a volatile stock. I bought more of  NBG on January 6^th  when it hit its 52 week low. Thanks to DCA (Dollar Cost Averaging), it turned my 38% loss to a 19% loss. It dropped another 8%, only to rally 16% from its bottom in just three days because of a successful Porteguese bond auction. Portugal is the P in PIIGS, and the market figures if people are still buying their bonds then they won’t need a bailout. NBG is cheap because the market thinks of the PIIGS the same way it did about American banks two years ago.

This is an extremely risky stock. Though buying a stock on its way down can be a great way to lose money, I only need to find one Ford (450% gain) for every four bankruptcies to break even. Those are great odds!  NBG still only represents 7% of my portfolio.  Enough to where it has already helped boost my annual return by 4% in the past 3 days, but it won’t kill me if they default.

If a stock goes to zero you want it to break your leg, not put you in a coma.

Monty

Sam Adams takes up 1/6th of the Beer Rack space at the Sugarhouse state liquor store in Utah. Nice rack for only 1% market share!

In 1999 when I was practically living at the bars (more specifically, Salt Lake’s Port-O-Call (R.I.P.)), I would always order a Red Bull and vodka. Energy drinks were the latest fad, and you couldn’t go anywhere without seeing a Red Bull or Monster drink on the shelves or in the hands of a college kid. The universe was screaming “Buy energy drinks!!” and due to my most recent obsession with tech stocks, I ignored the maker of Monster Energy drinks, Hansen Natural (HANS). I missed a gain of 6,000%, a gain dreams are made of. Had I just invested one month of my bar tab ($1,000), I would be looking at $61,000 right now.

Watch for trends everywhere. When the universe screams, listen!

I missed the early years of craft brewery revolution too. 840 micro breweries started in the USA since 1980, 470 still exist. I noticed an increase of craft beers at parties but didn’t notice in an investing sense. Then, the universe screamed to me again, and this happened.

1)      Motley Fool’s Stock Advisor David Gardner picked Boston Beer as their stock for June.

2)      A few days later, while at the gym, I stumbled across “Beer Wars” on Netflix and watched it. Boston Beer’s founder Jim Koch was interviewed and made me realize “I’m living through the rebirth of the microbrew revolution.”

3)      My brother-in-law brought over Sam Adam’s Boston Lager to dinner. It’s his favorite beer.

Even though this revolution is well on its way (and has had a lot of casualties), I would rather jump on a moving train that hasn’t reached its destination than miss the entire ride.

As I type this, I’m drinking Samuel Adam’s Coastal Wheat brew (I’m out of my favorite Blackberry Witbier) to celebrate our starting position in SAM for $66.67 a share. You can see our entire portfolio here.

Here’s is why I think the universe is right and why I love Boston Beer (the company):

1)      Motley Fool’s Tom Gardner says insider ownership is the most important factor in the success of a company. I completely agree. When a company is a person’s baby instead of a paycheck, the company will probably grow to be a grandpa and outlive the father.   Common stock holders of SAM have no voting rights! Only class B shareholders do. Jim Koch owns 100%  of the class B shares and therefore controls most the company.  He owns 33% of the total company. Mr. Koch is a Harvard educated lawyer and MBA that gave up his consulting job to follow his passion.

2)      Boston Beer is younger than me, only 26 years old. It went public the year I graduated high school, 1995, and currently only employs 780 people. Production has only doubled since going public, from 1 million barrels to 2 million barrels. Even though SAM is the largest indie brewery in America they only make up 1% of every beer sold (the two majors Miller-Coors and AB make up 94% of sales). Craft brewers have been growing for five years straight since 2004. Plenty of room for growth! Corporations are people. They live and die just like people. Buy the babies, sell the grandparents.

3)      SAM’s Beers have won 1,424 awards in the past 10 years. First American beer sold in Germany (1985) and they invented the “born on date” in 1988. Named supplier of the year by Outback, TGI, and Darden.

4)      Like Coke’s secret recipe, SAM has a proprietary, protected strains of yeast it uses. SAM has a wide variety of great drinks including: Samuel Adams beers, Twisted Tea, Longshot contest beers, and Hardcore Cider. Also teamed up with the world’s oldest brewery, Germany’s Weihenstephan (founded in 1040 AD) and has a new beer (late 2010) which follows the 1516 beer purity law, the Reinheitsgebot.

5)      They treat their employees and community right. For over 3 years, they have loaned $7,000 (on average) to over 38 New England low income small business owners in the food and beverage industry during the recession via the American Dream Program. They created an employee weight loss program where employees lost a combined weight of 1 ton. Through the Long Shot contest, Sam Adams fans/employees brew their own beers for inclusion in the yearly Long Shot six-pack combo.

Here’s is why I think the universe is right and why I love Boston Beer (the stock):

1)      SAM stock has only doubled since its 1995 IPO and is currently valued at 950 million. Though savvy investors who bought post IPO (late 90s) could be sitting on a 600% gain, there is still a lot of upside here. Anheuser-Busch (BUD) for example is valued at 87 billion, more than 87 times more than SAM. Will SAM be the next BUD? If not, even getting a quarter of the way there will lead to huge gains.

2)      SAM repurchased 211,420 shares of its own stock in 2008 and 2009 at the excellent average price of $33! Well done Jim!

3)      147 million in property assets. I love companies that own lots of land in desirable areas. 

4)      39 million in cash on the balance sheet and zero debt

5)      Increased their cash 5 fold from 2008 to 2009.

6)      From 2005 to 2009 they almost doubled their sales and their net income!

7)      Stock trades only 16 times trailing free cash flow and has a 14% annual growth rate

8)      Generates almost 25% return on invested capital

9)      Stock has had a nice 7% pull back in the past 5 days. Normally I wouldn’t buy the day earnings will be announced but I think the “sell the news” may already be priced into the stock. SAM completely missed yesterdays major rally (indexes up 2%+ on average)

10)   Forward PE of 21 and a peg of 1.73. Not cheap, but still a fair price for it’s growth.

Though this David might not be able to take down the two Goliaths that control 92% of the beer industry, I’m betting that SAM will easily be able to beat its current 1% market share which will lead to major profits. Cheers!

Monty