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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • Does Buffett's Buy Of Precision Cast Parts Reflect His Macro Thinking?

    Buffett paid 22x 5 year average EPS for Precision Cast Parts (NYSE:PCP). For many years I regarded 20x as the FMV of grade A #1 companies, a figure I recently increased to 22x to reflect current market realities.

    The Oracle is a patient man and has been known to hold large cash balances for years while waiting for the right opportunity. But now he maintains that he will reload his elephant gun over the coming year and then bag another. It really seems as if all that cash was burning a hole in his pocket.

    I've been operating under a "something's got to give" line of thinking. But Buffett's move seems to reflect an opinion that rates will be lower for longer and major corrections may not occur as frequently as they have in the past. Otherwise he could have sat it out another year or two and got a better price for something of comparable quality.

    The belief system necessary to support the idea that better prices won't be available in the short to mid term includes some improbable outcomes:

    • China's command economy can avoid a debt-induced crash indefinitely
    • A diminishing pie in oil dependent economies will lead to the elimination of sectarian and ethnic hatred and violence, and peace will prevail in the Middle East.
    • Big Banks will no longer game and destabilize the financial system
    • Fraud, abuse and manipulation have been permanently removed from all world financial markets
    • The EU will achieve a sustained economic recovery by the application of crushing austerity.
    • Demographic trends world-wide will revert to growth in the working age population
    • And so on and so forth

    I don't get it.

    Tags: BRK.B, BRK.A, PCP, SPY, DIA, QQQ, M A
    Aug 11 8:01 AM | Link | 7 Comments
  • Market Over-Reaction Around IBM's Earnings

    IBM share prices ran up into earnings, then gave it back rapidly in after hours, based on mixed results that were within a rounding error of expectations.

    There was a slew of instant analysis articles, providing zero insight behind negative headlines. The Q&A was marked by one analyst who seemed more intent on pushing a negative view than eliciting information.

    I watched in wonder.

    I'm still mildly bullish here, and plan to stay with my strategy of giving it two years, starting in January this year. Given IBM's seasonality, specifically the historically strong 4th quarter, there is no reason to get worked up over quarterly numbers.

    I have deep in the money LEAPS, expiring January 2016, that need to be rolled out to 2017 within the next six months. It seems that the price action around earnings is providing trading opportunities, and I will be looking to do the roll in a way that takes advantage of these fluctuations.

    Logically the easiest way would be to look for a repeat of the pattern next quarter: a run-up based on nothing, followed by a give back when the news comes out exactly as expected.

    Tags: IBM, Technology
    Jul 21 7:29 AM | Link | 4 Comments
  • CF Industries - Reacting To Potential Acquisition Of OCI

    Shares of CF Industries (NYSE:CF) spiked on news that the company is in talks with Dutch competitor OCI. Over the weekend, the story was confirmed by both companies involved. What we know so far is that OCI at a $6.2 billion market cap is 39% of CF at $16 billion.

    As a general rule, I resist the urge to invest in situations where an acquisition of more than 25% is part of the picture. The combination of debt, integration risks and market enthusiasm is a recipe for poor results, and occasionally disaster.

    I have a right size position in CF, taken in March this year, based on my belief that recent capex would bear fruit in increased earnings. My thinking was relatively simple, and is explained in an article written at the time.

    I'm not greatly enthused at the new direction. It seems to me management is getting overly aggressive here, pouring on the capex, adding to debt, buying back shares, and now acquiring competitors. Not a style I'm that comfortable with.

    Here's my position:

    (click to enlarge)

    The stock split 5 for 1, which was reflected in the options, and I right-sized the position soon after, since it is intended to represent 5% of the portfolio it's held in. At current prices I will have a fine rate of return on relatively short duration holding.

    Depending on how trading develops today, I plan to roll the LEAPS up from 48 to 55, to increase my cash holdings and position myself for a dip if the initial enthusiasm is not sustained. Most likely I will close the entire position in August, and go on to something else.

    Management is too aggressive.

    Tags: CF, Chemicals, Options
    Jul 20 6:45 AM | Link | Comment!
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