When the economy was in full tilt boogie and everyone was drinking champagne with hookers in a hot tub full of money on the deck of their McMansion, BBY was the shizzow. The plasma television was becoming democratized and you needed a big one (or three) to cover all of that McMansion wall space. BBY was the place to get one. Would you get a good deal? Probably not. In fact, there’re a couple of items in my house purchased from the Blue Shirts over the last decade that I’m sure I got hosed pretty good when I went through the checkout line, especially the overpriced Johnny Quest box set (although my sons have gotten a lot of mileage out of it and you have to admit, it is the coolest cartoon EVER).
But when the economy was body slammed in 2008 by the financial crisis and the realization that, like stock prices, house prices can also come down, consumers lost jobs, dug in and kept their powder dry. Things have improved somewhat and consumers are tiptoeing out to the store. However, the deals on boom time era, big ticket electronics are a little better. You can pick up a decent sized HDTV at Wal-Mart (WMT), Sam’s or Costco (COST) for between $300 to $400. That’s probably a third of what they cost four years ago. The big TV that accentuates Susan Lucci’s nose hair is no longer a status symbol. And when you’re in the business of selling something that used to be an overpriced status symbol, business won’t be that great going forward.
Whenever I get bummed about work, I remember that I’m not in the electronics retailing business and I feel better. Lounging on the sofa, I can swivel my head and count five electronic things that came from three different big box, electronic retailers that no longer exist and they weren’t bought out by a bigger company. Everyone explains away Circuit City’s failure to the usual factors: poor planning, over extension, financial mismanagement, bad leadership and I could go on. But I think it’s the model in general. The big box electronics store model is the same as when the console television with the built in record player was all the rage. Don’t argue. You know it’s true. The only difference is that the maroon, polyester blazers have been replaced with polo shirts.
But isn’t BBY more than HDTV? Sure. But tablets, phones, all that stuff is jumping the shark pricewise. And while the Geek Squad was a kitschy, fun branding idea, your neighbor’s 23 year old kid who was laid off from the IT firm he worked for can do the same thing, if not better, for less with less paperwork and attitude.
Let's change channels and look at this week's three lil' piggies... Duke Realty Perpetual Preferred 6.50% Series K (DRE) Legg Mason, Inc. Preferred 7.00% (LMI) Full Circle Capital Corporation (FULL) Disclosure: None
Is BBY a deal? I don’t think so. Maybe as a trade. A very quick trade with modest targets on either side. Would I buy DLTR here? Nope, at least not a full position and then, at best, maybe. If I absolutely had to add a retailer (probably better to do so after the first of the year), it would probably be Fred’s (FRED). More of an outlier and a helluva lot more defensive. Plus there’s a dividend. Despite the bad news, the majority of the rabble is still BBY bullish. I’ll bet they felt the same way about Circuit City at some point.
“Well…pilgrim…people prefer the Duke”
Recent Price: 22.49
Current Yield: 7.22%
All kinds of preferreds have enjoyed nice gains this year. Besides the main reason that the market just likes them, many issues are being called in due to changes in tier one capital requirements for financial institutions. This event has buoyed the preferred market as a whole as investors look for substitutes for called securities. REITs have also enjoyed a bit of a comeback as well. DRE.PK is the best of both worlds. Issued by Duke Realty (DRE), the largest publicly traded office and industrial real estate company in the U.S., the preferred is a bit more attractive to us than the common shares. The most important is the 151 bps advantage over the common dividend yield and a truly discounted price (vs. par of $25). As a company DRE is in good shape. They’ve fared better than other REITs thanks to a diverse asset base and less leverage. The company has also been active in increasing acquisitions in the industrial sector which should improve cash flow. The preferred shares carry a BB/Baa3 rating (half junk…half investment grade). Not bad. There are worse ratings out there.
While REIT shares have enjoyed a nice bounce back since the Lehman failure and subsequent credit crisis, it’s still a long row to hoe. Further regional declines in the Midwest and/or Southeast could affect DRE’s business. The credit picture is better but it’s still a far cry from the heady days of 2005-2007. Any further tightening could have a negative impact on portfolio values. Also, half of DRE.PK’s rating is junk. High quality junk but junk nonetheless. Last, shares were callable beginning in May of 2004. This means that they’re callable at any time within 30 days. As long as rates are low and companies continue to deleverage where they can, don’t get attached to those big coupons.
“Get a Legg up…”
Recent Price: 34.91
Current Yield: 10.02%
Once an old line, Baltimore based investment house, Legg Mason has been sliced and diced a bit over the years. The brokerage arm was sold off to Smith Barney. Its investment banking and research bought for a song by Stifel Nicolaus. The only part of the business left standing was the asset management division. Pound for pound, that is probably the finest part. Legg Mason (LM) has grown its money management business smartly to 15 well known brands that include value maven (although that’s debatable when he bought CSCO on a pullback in the 90s and considered it “value”), Bill Miller’s Legg Mason Value Trust, Royce, and bond manager Western Asset Management with $680 billion in assets under management. The company has recovered well through the financial crisis thanks to improved inflows (mostly to fixed income). Naturally, as assets increase both from flows and a rising market, so does revenue. With par at $50 per share, LMI trades at an attractive 30% discount to face value and throws off a nice, fat yield. They carry an investment grade, S&P rating of BBB- which adds a little comfort to the double digit yield.
Legg Mason has always been a premiere fund family in the advisor sold channel. However, they - like all other funds, load and no load - have experienced significant outflows thanks to skittish and shell shocked investors. Flows have stabilized and improved somewhat, but in the event driven market environment we live in that can turn on a dime. Despite 2011 bullish protestations by pundits, we’ve seen what weakness in the bond market can do to interest rates. That’s most likely a harbinger for things to come. Another outlier might be, though seldom discussed in open ended circle publicly, the increasing popularity of ETFs. Their proliferation is bound to eat into any open end fund complex’s business.
“Eventually…everything is full circle”
Recent Price: 8.89
Current Yield: 10.12%
We haven’t profiled a BDC (business development company) in a while. We didn’t plan to, we just stumbled on FULL as we were running our screens for the week. FULL, according to their website, is a BDC that lends to and invests in asset based, senior secured loans. They also participate in mezzanine financing as well as equity positions of smaller and lower middle market companies. Interesting portfolio: radio stations, billboard companies, a brewer, oil and gas development/exploration. Average investment size is around $4 million. Since the contraction of bank credit, BDCs who are capable of tapping the capital markets and other sources have stepped in to fill the vital small and midsized business lender role. FULL fits that profile to a tee. Total portfolio value is around $93 million with NAV at around $9.36/shr. FULL’s IPO was floated August of this year and based on current distributions, the yield looks accurate. Sure, they’re a new kid on the block but it looks like they’ve got their act together.
Stating the obvious, FULL shares have been trade publicly for a whopping four months. Might need to cook a little while. The second caution flag, of course, is their target borrower. While much of woe banks are experiencing is self inflicted, their commercial borrowers are still reeling from the economic slowdown. FULL specializes in that niche. They’re paid handsomely but that’s the risk trade. Also, the majority of FULL’s holdings are media companies, notoriously good at losing lots of money and going bankrupt. On top of that, they’re traditional media/advertising companies (broadcasting and outdoor). There’s no denying the internet and other forms of new, cheaper and more highly targeted advertising will continue to eat into the traditional business. Again, we’ll reiterate our first concern. Brand new issue still near its IPO price. Be careful, grasshopper.
Let's change channels and look at this week's three lil' piggies...
Duke Realty Perpetual Preferred 6.50% Series K (DRE)
Legg Mason, Inc. Preferred 7.00% (LMI)
Full Circle Capital Corporation (FULL)