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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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  • Buffett Fails The Taste Test

    Bloomberg's Betty Liu gave Warren the taste test, putting 4 unmarked cups of cherry flavored soda in front of him. He tasted them all, and chose number 1, which was Dr. Pepper.

    Here's a link:

    This is serious. Very serious. For several years now, I've been attempting to catch up with Warren in the investment field, drinking one coke daily (high fructose corn syrup and all). The thinking is, by applying the same fuel, I will get the same performance.

    Recently my performance has been lagging, and after considerable analytical effort I determined that Buffett actually drinks Cherry Coke. So I sent my wife out to get that instead of the regular Coke I had been drinking.

    Now I discover, Buffett can't tell the difference. Not only that, he drinks five of the damn things. That's an awful lot of high fructose corn syrup: I don't think my metabolism can handle it.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 17 8:58 AM | Link | 1 Comment
  • CAPE Since 1987 As A Predictive Tool

    The following chart demonstrates that CAPE has considerable explanatory power with respect to 10 year returns, provided the data used is from the modern era, which I define as commencing in 1987, the year of the first computerized market crash.

    (click to enlarge)

    The R2 is 0.78, high enough to get some respect. If data from prior periods is added, R2 declines significantly. I believe the explanation lies in the combination of more stable monetary policy and quicker communication of data.

    Disclosure: I am long SPY.

    Tags: SPY
    Jul 15 5:38 AM | Link | 4 Comments
  • Derisking But Staying In The Game

    Speculative value can be problematical during market declines. My position in Hartford Financial (NYSE:HIG) has been developing poorly, and a review of its behavior during the 2008-2009 crisis makes it suspect if the going gets really ugly over the next several months.

    Meanwhile, I saw an article by ZetaKap, a screen directed at companies that have high quick and current ratios, and are trading at low P/E's. Of the six stocks mentioned, I own two - Corning (NYSE:GLW) and Power One (NASDAQ:PWER). I previously owned another - Entegris (NASDAQ:ENTG) - briefly but profitably.

    I wrote the stock up favorably at the time, mentioning a diagonal call spread which proved to be profitable.

    Today, with shares at $7.56, I did the following vertical call spread on ENTG:

    Sold 10 ENTG Nov 17 2012 7.5 Call @ 1.02

    Bought 10 ENTG Nov 17 2012 5.0 Call @ 2.82

    At a net debit of $1.80, there is a profit of 70 cents if the stock stays above $7.50, for an IRR of 85%. Break-even is $6.80. With implied volatility at 51.09%, there is a nice combination of volatility and margin of security, due to the excess of current assets over and above what is required to operate the business in a prudent and orderly fashion.

    Three year average EPS is 73 cents. Applying a P/E of 12, I get $8.76, to which I add $2.32 for current assets above a 2:1 current ratio, arriving at a target price of $11. The 52 week high is $10.58.

    I also closed out a diagonal call spread on HIG, locking in a loss. I completed my transaction log for the trade, finding that I lost money at a -43.8% IRR. While painful, the options trade hurt far less than would have been the case if I had owned the shares. It amounted to $5.15 per share controlled, compared to $13.01 I would have lost by owning.

    This type of switch makes sense to me. You don't have to get it back where you lost it. At (or near) market bottoms, there are many undervalued situations, and they aren't all created equal.

    Disclosure: I am long HIG, ENTG.

    Additional disclosure: While I closed out the HIG diagonal call spread, I'm still holding some TARP warrants, which are easier to manage in a down market.

    Tags: HIG, ENTG, Options
    Jun 04 11:10 AM | Link | Comment!
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