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Ray Merola  

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  • Union Pacific: How To Trade Around A Core Position [View article]
    Thank you, petermadson

    Overall, I've had success with the process since I contend it's "not a stock market, but a market of stocks." By this I mean my approach is bottom-up and specific to a corporation. It's not contingent upon broad market metrics. I can be mindful of interest rates and multiple compression, but life is a lot easier seeing specific data on a specific listing than trying to handicap "the market."

    In general, the fair value estimate requires 2 data points. First, good EPS estimates are needed. Shareholder-friendly management often provide good forward estimates and then bring home the numbers. Otherwise, consensus estimates may be used, and tempered as appropriate by a factor of safety.

    Second, a sound historic P/E multiple (assuming fair value is predicted upon P and E). Here history becomes an ally. Many companies demonstrate long-term, average P/E ratios that are easily determined throughout the economic cycle.

    For instance, Union Pacific Corporation has a long-term average ~17x P/E. It's stayed close to that mark throughout up and down cycles.

    Finally, to paraphrase Warren Buffett: It's better to be approximately right than precisely wrong. Whether I base UNP fair value upon a 17x or a 17.5x P/E won't break the process. It's close enough.

    In the article, I placed a fair value on UNP at $104. The shares ran up to $124 before reversing. That's actually a pretty big miss, right? However, scaling out in increments saved the day. The key was to start thinking "sell" at $104, not "buy." And of course, preparing to repurchase shares at below $110; not bailing out of the position altogether.

    Excellent question.
    May 25, 2015. 12:02 AM | Likes Like |Link to Comment
  • Union Pacific: How To Trade Around A Core Position [View article]
    Travel4Yields, thanks for not just commenting but contributing to this board. A large measure of S.A. appeal is good reader interaction and information exchange. Appreciate the added value.

    BTW, I grew up in NJ, too. Moved away years ago and now live in Texas.
    May 24, 2015. 09:03 PM | Likes Like |Link to Comment
  • Union Pacific: How To Trade Around A Core Position [View article]
    The additional Medicare surcharge can add 3.8% to the 20% top rate.
    May 23, 2015. 09:16 AM | Likes Like |Link to Comment
  • Union Pacific: How To Trade Around A Core Position [View article]
    Paul

    From first-hand experience, I believe that thesis is correct. Getting it on paper is another challenge......

    One variable is tax rate. Currently, long-term CG rates can vary from 0 to 20%.
    May 23, 2015. 09:11 AM | Likes Like |Link to Comment
  • Japan's Troubling Economics And AFLAC [View article]
    EiT

    Dividends are paid in USD; the Aflac stateside business covers it easily. While limited, the Yen-to-Dollar conversion is primarily to fund aggressive share repurchase and inter-office admin expense.

    Of late, the Investment manager has been emphasizing U.S. securities versus Japanese debt. This increased currency conversion. The move is strategic, not forced. This wasn't altogether clear in the article.

    Forex-pair rates go up and down. Not long ago, the JPY/USD rate was similar to what it is today. Then it went down, now it's back up. Currently, the Dollar is strong. Tomorrow that may change.
    May 22, 2015. 10:53 AM | 1 Like Like |Link to Comment
  • The Great Beta Hoax: Not An Accurate Measure Of Risk, After All [View article]
    I started reading the article through the same lens: risk and volatility are not synonyms. However, another outstanding article by Chuck Carnevale helped me think more about beta, its usefulness, and leveraging it for better investment returns.

    Perhaps a corollary to Chuck's outline, a S.A. article I wrote discussing investment risk (not beta) suggested, "...instead of 'Return is driven by risk,' I offer that, 'Return is a function of intelligent effort.'"

    Indeed, Mr. Carnevale noted he "concedes beta to be a moderately relevant measure of price volatility." Very well-spoken. As a backward-looking metric, it has but limited predictive power. Sound fundamental analysis has considerably more ability to gauge either risk or volatility.

    May 22, 2015. 09:02 AM | 8 Likes Like |Link to Comment
  • AT&T: Getting Ready For Mexican Growth [View article]
    Good recap, Albert

    AT&T's underlying strategy is to expand beyond U.S. borders. After some Vodafone overtures, the recent Iusacell, Nextel, DTV deals have filled the spot.
    May 22, 2015. 08:22 AM | 4 Likes Like |Link to Comment
  • Union Pacific: How To Trade Around A Core Position [View article]
    Augustus

    That view is correct.

    Notably, my Union Pacific investment thesis has not changed, and I continue to believe it's sustainable. Therefore, UP remains a core position. I am in for the long-term. This is my normal M.O. I trade in or out of whole positions infrequently, and very rarely swing trade. Big picture, I view trading, or "speculating," as a losing strategy; investing has a far superior likelihood of success.

    So the approach is to "work around the edges" only. In this particular case, the shares ran up whereas I believed they traded far above fair value, so I trimmed back. Then I immediately began looking to buy back a prices closer to fair value.

    While not part of this article, I think options provide remarkable flexibility and potential. Generally, I use them to generate income; covered calls or cash-secured puts. My objective is to augment equity portfolio income by up to 2% annually.
    May 22, 2015. 08:05 AM | 1 Like Like |Link to Comment
  • Friedman Industries: A Classic Graham & Schloss Play [View article]
    I covered Friedman Industries closely and owned shares for about 2 years. I turned negative on the company after attending the 2014 annual shareholder meeting. While the numbers continue to indicate deep value, I was disappointed that management could not (would not) provide a clear business plan. While strong operators that run a tight ship, the team indicated there was no "story" to tell. I pressed the CEO about what/how the board planned to create shareholder value.

    Recommend watching closely the capex drain and resultant return on the new facility being built in Lone Star, Texas. The nearby U.S. Steel plant, a revenue source, laid off workers.

    The downturn in the energy business continues to hurt oil country sales.

    I sold shares at a loss in late 2014/early 2015.
    May 21, 2015. 07:59 AM | 1 Like Like |Link to Comment
  • Union Pacific: How To Trade Around A Core Position [View article]
    Thank you Paul

    While I would prefer not to provide specific dollar gains, I can offer this:

    I accumulated a full position during the second half of 2013, then distributed ~50% of the position during the second half of 2014 for a pre-tax net gain of 25%. This gain excludes dividends and covered call option premiums earned during the period, which were significant.

    In 2015, I have re-accumulated 80% of the original position at share prices that average ~10% below that for which I sold shares in 2014. I plan to top-off the position if I can obtain additional shares that sustain the >10% repurchase discount benchmark.

    I hope this helps you with your article. All the best.

    May 20, 2015. 09:21 PM | Likes Like |Link to Comment
  • Union Pacific: How To Trade Around A Core Position [View article]
    Indeed, Augustus

    The concept is really about balancing the portfolio and exchanging overvalued securities for those perceived to be under-valued. It's not about swing trading; at least not for this old boy, I am not blessed with an over-abundance of stocks that rack up a 25% gain.... at least not quickly.

    You have the general approach to good portfolio management well in hand.
    May 20, 2015. 07:53 AM | Likes Like |Link to Comment
  • Union Pacific: How To Trade Around A Core Position [View article]
    Hello Diogenes

    Like so many Rules, there's no "right" answer for everyone. However, my view is taking some hard profits on an overvalued stock is just prudent. I'd prefer to place the resultant cash into another undervalued security, whether it be the same stock after a pullback to fair value or below; or another investment altogether.

    "Round tripping" a gain stinks. Take a little off the table, and enjoy it. Gotta pay some tax? In the long run, I've found paying taxes preferable to stubbornly holding onto a big gain until it's diminished or lost.

    If one believes a security is overvalued, what would make one think it will always remain so? Investing is largely about probabilities; that just doesn't sound like a good long-term approach to me.
    May 20, 2015. 07:45 AM | 1 Like Like |Link to Comment
  • Union Pacific: How To Trade Around A Core Position [View article]
    Thank you for sharing the link, T4Y

    DRIPs are an excellent way to compound dividends and often avoid any transaction fees. Smart!
    May 20, 2015. 07:37 AM | Likes Like |Link to Comment
  • Union Pacific: How To Trade Around A Core Position [View article]
    You are most welcome, HU4ROLLZ

    Indeed, buying in increments pays off time and time again. What if we buy a 1/3 position and the stock goes straight up? A high-grade problem, to say the least.
    May 20, 2015. 07:35 AM | Likes Like |Link to Comment
  • Union Pacific: How To Trade Around A Core Position [View article]
    Thanks for reading, jess

    While I can't provide tax advice, I have a couple of general ideas.

    I assume the gains are in a taxable account.

    From time-to-time, I have been in a similar circumstance. My view is, "don't fear the tax man." Manage your portfolio prudently, taxes are not the primary consideration; having to pay some tax on enormous gains is a high-grade problem. I won't jeopardize frittering away a big profit over worries that I have to pay CG taxes. "Round tripping" a nice gain on a market correction is worse than paying the tax.

    Second, it appears the gains are long-term. Today, the max rate is 15% (unless one is at the surtax level). That's manageable. I can recall times when our friends in Washington have jacked up those rates. CG rates are lower now than times past, and there's nothing guaranteeing it.

    I seek to be tax-efficient, but it's not an override v. good portfolio management.
    May 20, 2015. 07:32 AM | 1 Like Like |Link to Comment
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