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We currently work as a money managers, our team has over 55 cumulative years of experience. We manage with a bent toward cash valuation and fundamental valuation but pay attention to short term movements with more frequency than most true value managers. We have no rules in place of where we... More
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  • The Futility Of Most Advice

    We often have outside advisors or portfolio managers come through our offices and whatever they say tells us more about their ego than it tells us about what they are seeing in the market.

    95% of what we hear is "we are uncertain about the coming months, but we are positive on the long term." Or in other words, the words we hear when they prognosticate are "we don't want to be wrong in the short term because we understand volatility implications, but we are sure in the long term we will be correct in our assumptions."

    This tells us nothing.

    Not only do we persistently here this rhetoric, we read it in every avenue trying to predict the coming future. Since what we know with certainty in the market is 100% in the past and what truly matters to the market is 120% in the future every prediction seems to hedge their ego in some way.

    Again this tells us nothing.

    So in contrast to what we hear, our advice will try to throw out the hedges.

    The market is essentially flat for the last ten years or so going forward we will be on an upward trend. The economic/jobs/political environment is getting better. For the past 2 years it has been getting better and it will continue to keep getting better.

    We expect market growth in the coming years to be 6-8%. So let's take 7%

    As of 2:58 pm Eastern Standard, October 16, 2012 the S&P is $1,452.65. If we are right about our growth rate in year's time the S&P will be $1,554.4. In two years time $1.663.21 and in 5 years time $2,037.50.

    These are rough numbers but the expectation is 7% growth. We get 7% from 3% GDP growth, 2% inflation and roughly 2% dividend rate..

    It's not the growth we saw in the late 90's, but we will be happy with 7% average annual appreciation.

    Disclosure: I am long BAC.

    Oct 22 1:09 PM | Link | Comment!
  • Small Cap Financials Vs. Mega Cap Financials

    An institutional manager visited our office yesterday. He asked us what we were buying for our accounts. We said we have been buying a small cap bank in the heart of the Marcellus Shale but we said we didn't think he would be interested in it.

    The primary deterrent for him to buy would be the volume. The average volume on any measure is almost nonexistent. He couldn't come close to building a position in it without shooting it through the roof.

    The other deterrent is his possible misunderstanding off the investment thesis. He said he was more interested in buying mega cap financials due to attractive valuations and growing concentration in mega cap financial business vs. small cap financials. While we agree with his position on low valuations in mega cap financials like Bank of America. (We feel Bank of American has earnings power of roughly $3.00 per share, with at least a 10x multiple in normal financial conditions.) We also feel there is a bifurcation going on between mega cap and small cap financials.

    The divergence is intensified in areas of gas drilling. A large percentage of domestic gas drilling is taking place in rural areas. There is a tendency for rural residents to do business with local smaller banks. If a large component of domestic growth will come from future gas drilling, smaller local banks should be attractive for a long time to come.

    We feel a major theme of the next 50 years will be a decreasing dependence of foreign energy due to the emergence of domestic natural gas drilling.

    We are interested in Citizens Financial (OTCQB:CZFS).

    Citizen's is based in Mansfield, Pa, close to Williamsport, Pa-one of the fastest growing cities in the USA based on the abundance of gas drilling going on.

    They are trading at 8.8x forward earnings, 1.1x forward book. Citizens should finish up 2012 with a return on equity of 12.9%, return on assets of 1.65%, an efficiency ratio of 40.28% and loans to deposits of 67.5%.

    But more importantly, because of the drilling, they are growing. Growth in Northeast, Pa is hard to come by. They are growing via deposit generated by gas leases. As the drilling continues, increasing economic activity should ensue. So far, ancillary economic growth like restaurants and a few hotels have been popping up in Mansfield. Soon, infrastructure growth could take place, but if it doesn't Citizen's is attractively priced based on quantitative valuation methodology.

    Citizen's has a price to assets of roughly 14.6%. In Northeastern, Pa most small banks get bought out at 24% of assets. They should finish 2012 with $308 assets per share which implies a possible buy out at $74.00. They are currently trading at $45 so there is a possible gain of 64% from the current quote.

    Just because Citizen's has small volume and institutions won't buy it doesn't mean you can't make money in it. We starting buying around $19, it's now $45.

    We are long Citizen's Financial (OTCQB:CZFS) and Bank of America (NYSE:BAC).

    Disclosure: I am long BAC.

    Additional disclosure: We are also long CZFS which seems missing from Seeking Alpha's data base.

    Oct 18 1:05 AM | Link | Comment!
  • The Death Of Dividends

    If congress does nothing, starting January 1st dividends will be taxed at ordinary income tax rates. This means the top dividend tax rate will be 43.4%.

    What does this mean for investors? We believe simply that dividend paying companies are dead. We don't mean to say you can't buy Verizon and collect the current 4.61% dividend-which adjusted at the highest tax rate equates to 2.6%. But we are saying this; appreciation in dividend paying stocks will cease to exist. Dividend payers will morph into the hybrid alternative of the preferred. In fact, if you take a swath of preferred universe, the yield is higher than most dividends on the common so why not buy the preferred.

    It seems perfectly clear to us that government will take advantage of the recent surge of investors seeking yield in dividend paying stocks. Investors can't get it in Cd's; investors can't get it in Treasuries. The can't get it in Muni's without taking on too much risk. So they are left with the cash rich communities of corporate America paying a nice steadily rising dividend.

    We are reminded of the annual crossing of caribou on the Nile, the alligators are waiting for the largest surge of the crossing so they can take out as many defenseless caribou as possible. The government is hiding in the investing water waiting to devour dividend seeking investors.

    And why not, at least in the governments mind: investors are circumventing conventional income routes seeking higher yields. If investors are seeking higher yields-the government is only a few steps behind.

    Here comes the tax!

    What are the alternatives? Investors can seek out companies with a history of buy backs. Buy backs from a tax perspective make 200% more sense. The downfall is companies have a tendency to buy back shares at the wrong time. Most buybacks historically increase as the market values shares of the company higher and higher. In other words-buy high and keep buying.

    Another alternative is to purchase companies who have no history of buy backs-the downfall here is most who fall into this category have a high concentration of cash on the books creating a falling, dragging anchor to the firms bottom line. Microsoft is a good example of this. The more cash a company has on its books, the lower return they will have-thank you Stern and Stewart.

    Another route is companies with a high percentage of capital expenditures relative to sales. The danger here is acquisitions are hard to manage and continued capital expenditures drain the bottom line.

    What's the answer? It's never clear but here is a possibility.

    Invest in start-ups and financials with low dividend yields.

    An example of a current start up is Solarcity, a financial with a low yield-Bank of America or Citigroup.

    More to come on those companies in the coming writings.

    Disclosure: I am long BAC.

    Tags: SCTY, C, BAC
    Oct 18 12:46 AM | Link | Comment!
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