Recent Actions, Portfolio Triage

by: David Merkel, CFA

Thursday Morning Actions

Bought a little Lafarge (LR)and Industrias Bachoco (NYSE:IBA) in to the Thursday morning decline. Eliminated Group 1 Automotive (NYSE:GPI), and began the acquisition of a little microcap trading below book value with no debt. The integrating theme here is holding onto businesses that don’t need external financing, and selling businesses that require external financing, starting with companies that haven’t been hit that badly yet.

Could the existing financing troubles spill over into auto financing and auto floor plan financing? That’s possible, though I don’t see the transmission mechanism now. The potential trouble with Group 1 (aside from a balance sheet with high intangibles), is that changes in financing terms could dent their earnings stream. Now, I know that the automakers are highly motivated to move the metal, and will aid the financing process, but I don’t think they can be relied entirely, unless they only selling for Honda (NYSE:HMC) and Toyota (NYSE:TM), which have superior balance sheets.

Thursday Afternoon Actions

I sold Lithia Automotive (NYSE:LAD) in the late morning for the same reason as Group 1 Automotive. Mid-afternoon, I replaced the position with PartnerRe (NYSE:PRE). As I commented at RealMoney:

  • Trades well below adjusted book
  • Reserves are conservative even prior to the fact that they don’t discount their reserves
  • Reasonable P/E multiple
  • Quality balance sheet
  • Quality management team
  • Conservative asset policy
  • Not overexposed to southeastern property risks
  • Triage

    I’m still working through my portfolio, but I have categorized some stocks:

    The Dead — Companies with bad balance sheets, but have been whacked so bad that it is still worth playing.

  • Jones Apparel (NYSE:JNY)
  • Deerfield Capital (DFR)
  • YRC Worldwide (NASDAQ:YRCW)
  • Walking Wounded — Companies with okay balance sheets that we feed more cash to.

  • Lafarge
  • Industrias Bachoco
  • Seemingly healthy that might have financing problems — Sold.

  • Lithia Automotive
  • Group 1 Automotive
  • Uncertain as of yet

    Barclays plc (NYSE:BCS)

    Safe New Names Bought

  • PartnerRe
  • Microcap yet to be named when I have my full position on.
  • More to follow. As you can tell, I am positioning my broad market fund more conservatively. I am not optimistic on how we work through the amalgam of debts that might not get paid.

    Full disclosure: Long PRE IBA DFR JNY YRCW BCS LR.

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