Dried Supply

In an excellent article, Forbes.com probes the financial woes of the other half of the Detroit auto disaster--the suppliers.

To engineers living in Metro Detroit, names like TRW, Lear, Federal-Mogul are common. We all know people who work at these places and in some cases have worked or interned for them ourselves. These automotive parts suppliers are huge employers and even bigger supporters of local engineering colleges within universities such as Lawrence Tech, University of Michigan Dearborn, and Kettering.

It's good to see that the Obama administration understands the importance of keeping an eye on these suppliers--so that all of the efforts going towards keeping GM and Chrysler afloat don't have the rug pulled out from under them.

All local Detroit pride and empathy aside, Forbes illuminates an ugly group of shares that have been de-listed (Visteon), may be de-listed (American Axle), and have lost more than 98% of their stock price from their 52 week high (Arvin Meritor, Dana Holding, Hayes Lemmerz).

Johnson Controls piqued my interest with its 27% long term debt/total capital ratio (low for this group). A further look at their financials show that they actually posted a $1.63 earning per share in 2008--another rarity for this group--and they are a company with a long history of posting profits.

Can anyone see a diamond in the rough here that will survive all of the turmoil and emerge on the other side? If you can you might have a winner.

Divi-don't????

With GE's dividend yield sitting above 11% right now, there was talk of GE cutting the dividend this week. Even in the midst of bankruptcy, a few months ago GM was looking to keep its dividend at $.01 so that its stock would show up on the radar of mutual fund managers that screen for dividend paying stocks. Retirees whose portfolios have been devastated by the market crash are hoping their quarterly dividend check will still be there to pay the bills. Dividends are on the mind of everyone right now as a means to get some sort of return in a time of uncertain and stagnant returns.

What are some reasons for a company to pay dividends? In my mind, the first is a purely aesthetic marketing ploy. Paying a dividend appeases shareholders who are used to it or who will only buy shares in dividend paying companies. Further dividend paying companies appear more stable.

The second is that the company does not have a good way to spend some of its profits to produce a return and rather than sit on the cash, decides to return it to the shareholder. Buffett does not pay a dividend on Berkshire Hathaway because he believes he can produce a greater return for his shareholders with that cash. Further releasing a dividend is not tax-efficient as it subjects the shareholder to a double tax, first on the corporate level via a tax on profits and second on the actual dividend being paid out. If the company is truly run well, the most efficient way to a return is by the company not paying out dividends.

This is not to say dividends don't have a place, depending upon the situation. Stay tuned for more discussion and analysis in this arena.

Agree/disagree/ferociously disagree...share your thoughts below.

The Investment Vig

I'm a numbers guy at heart, a statistical process control engineer, and a poker player who likes to roll dice occassionally. The one thing I hate most are taxes. In casino speak, taxes are called "vigorish" or "the vig." The vig is what casinos take out of your winnings to keep for profits.

Analogously with investments, the vig would be called "broker fees." With that in mind, I chose to open an account with Scotttrade where each trade costs me $14.00. No...$7 you heard. But consider that the only way to get your money back is to sell the stock you bought which costs an additional $7, right? So for me, I discount any investment by $14 on the assumption I'll eventually want to sell. Scotttrade also has a nearby office and great customer service so it's worth the slightly higher vig in comparison to Trade King.

In keeping the vig on my portfolio as low as possible, I figure I need to buy at least $1000 of a single stock at a time. Why? Because buying $100 worth of stock means I gave my broker an enormous 14% of the investment value. At $1000 minimum trades, the vig is reduced to 1.4%, a tax rate I can stomach.

Recent books by Jim Jubak and Peter Schiff have introduced me to agriculture/metals commodities and foreign companies, particularly in Brazil. In starting a personal investment portfolio, I'm looking at the following candidates in no particular order:

(1) BHP Billiton: An Australian mining company heavily ingrained in China's growing infrastructure.
(2) GE: A domestic mainstay banged up by the financial crisis yet ready to support infrastructure initiatives by Obama.
(3) Petrobas Brasiliero: A Brazilian oil company doing amazing stuff with technology that's fun to read about as an engineer. Their NYSE symbol is "PBR" so a must have anyway.
(4) Central European Distribution: Largest vodka producer in Poland and a Jubak selection. Yeah, yeah I've heard it already...do the vodka company before the PBR or the portfolio may get sick.
(5) Vale: Brazilian. Large producer of iron with a great Chinese market share. Other precious metals.
(6) Schlumberger: This amazing French company is trading near it's 52-week low due to slumping oil prices. It's available for less than 9 times earnings. Unreal. I wanna buy SLB right now but I don't know enough about investing yet.

Before I start buying Brazil, there are some dangers to evaluating foreign companies that requires additional research for me. I'll share what I learn in the future. -Schlitz

Paul Woodcreek's Personal Portfolio...

With this post I'm opening the books and giving you some insight into what I currently own, my thoughts about these particular stocks, and some insight into the performance to date. So, without further ado, and in no particular order, here we go...

1. Wal-Mart (NYSE: WMT) - Wal-Mart is a good stock in a sector that currently terrible. Retail stocks have been a bust over the last year, but Wal-Mart was one of the few that actually fared well. Aside from McDonald's (NYSE: MCD up nearly 6% in '08) Wal-Mart was the only Dow gainer for '08 (http://online.wsj.com/article/SB123085827075747869.html?mod=googlenews_wsj) with an 18% gain for the year. I see Wal-Mart continuing to flourish in '09 due to a continuing deterioration of the economy. Consumers will continue to seek low priced goods and Wal-Mart fits the bill better than just about any other retailer. Since purchase in early Dec. '08 I've a 6.64% gain on WMT before fees.

2. Caterpillar (NYSE: CAT) - See my Caterpillar post for insights on this stock. Since purchase in early Dec. '08 I've seen a 22% gain on CAT before fees. Not too shabby!

3. Chesapeake Energy (NYSE: CHK) - This stock was one that came recommended to me as a speculative value play and I didn't do much homework on it prior to purchase. Consequently, I bought it at $16.90/share right before some bad news came out and Cramer bagged the stock on his show and my supposed great value plummeted nearly 70%! Not to fear though, CHK is back on the upswing and recently got some good news with changes in how the SEC counts unproven natural gas reserves (http://uk.reuters.com/article/rbssEnergyNews/idUKN3028354420081230). This stock continues to have a huge upside, but it isn't for the faint of heart. Since I bought this one in early Dec. '08, I've seen it down around $9/share and up near $18/share. Currently it is at $17.20/share giving me a 6.9% gain before fees.

4. General Electric (NYSE: GE) - See my General Electric post for insight on this stock. Since purchase in early Dec. '08, I've seen a 6.92% gain on GE before fees.

5. Coca-Cola (NYSE: KO) - Coca-Cola seemed like a good stock to buy during these rough economic times since it offers a fairly recession proof product. No matter how bad things get, people can always find a buck for a soda. So far, that logic has served me alright. Since purchase in early Dec. '08, I've seen a 3.75% gain on KO before fees. Not a huge hitter yet, but still nothing to sneeze at.

6. Skyworks Solutions (NASDAQ: SWKS) - Purely a speculative play based on Cramer suggesting it as such on Mad Money. The stock was beaten down despite being the chip provider for Apple's (NYSE: AAPL) successful iPhone. After doing a little homework on the company I decided to roll the dice and shoot for a nice rebound. Since purchase in mid Dec. '08, I've seen an 18.43% gain on SWKS before fees. I still have this one pegged for at least a two bagger and maybe as much as a two and a half bagger depending on the rebound. I'm planning to sell this one as soon as I get what I want out of it.

7. Manitowoc Co. (NYSE: MTW) - See my Manitowoc Co. post for insight on this stock. Since purchase in early Dec. '08, I've seen a whopping 33.52% gain on MTW before fees!


Total portfolio: All purchase made early Dec. '08 or later. Total return to date is 12.74% before fees.

Manitowoc Co.

When you read the name 'Manitowoc' it probably looks like nonsense, but after this post I'm hoping it looks a bit more like '$$$$$$$$$' next time you see it.

Manitowoc Company (NYSE: MTW) is an industrial manufacturer that makes cranes, ships and food service equipment. The cranes are made under the names of Manitowoc, Grove, Potain, National and Crane CARE brands. Next time you are driving by a construction site having a crane on site, it is almost a sure bet that it was made by Manitowoc.

Why is this stock worthy of your attention? Easy, Obama's infrastructure plan concerning the replacement and repair of highways and bridges. Manitowoc makes the cranes needed to lift the heavy steel beams and concrete barriers needed in road and bridge construction.

Management: This is an area that I couldn't find too much info on beyond the company's numbers. Based on the company's history I'd say it is pretty well run based on posting a profit in 9 of the last 10yrs, and it is a growing company having acquired Shirke Construction Equipments Pvt. Ltd in July '07 and Enodis PLC in October '08. That said, news came down on Friday that the Chairman, Terry Growcock (yes, that's his real name), is retiring. Who is taking over and what this means for the future is still a bit of a question mark as of this posting.

Financials: As previously mentioned, Manitowoc has been profitable in 9 of the last 10yrs and has a low P/E ratio of 4.19. The stock has a 52-week high of $51.49/share and a 52-week low of $4.56/share. After crunching some numbers, I currently show a relative value of $98.58/share, an initial rate of return of 29.94% and an annual growth rate of 0.59%. My feeling on this stock is there is a ton of upside and built in value considering the price is currently at $8.75/share.

Outside Factors: Obama's infracstructure plan and low interest rates. As I already mentioned, Manitowoc builds the stuff that builds our roads and bridges. What I didn't mention though was the fact that interest rates are amazingly low right now. Despite the rough economy, this might be a good time for companies to take out loans for large capital purchases with the thinking that the economy will eventually turn around. Also, these interest rates might spur the start of some large scale private building projects which would also benefit MTW.

Performance to Date: I bought in to MTW at $7.19/share. As of this post, the stock was at $8.75/share to net a 21.7% gain in roughly 3-weeks of holding. The stock has seen prices as high as $9.88/share during the time I've owned it (37.41% gain over purchase price). I'm confident that MTW will rebound to a point closer to it's 52-week high at some point in the next 1-2yrs based on some of the factors discussed in this post. Even at $8.75/share a return to the 52-week high of $51.49/share is enough for a near six bagger! At my purchase price of $7.19/share, I'd net a seven bagger. This is a stock that I plan to invest further in over the next few months.

Caterpillar

Time for the second installment of "let's pick apart my portfolio"... this time we're going to discuss Caterpillar, Inc. (NYSE: CAT).

Caterpillar is an industry leader in heavy machinery used in the construction, mining and forestry industries, as well as being an engine manufacturer and financier of the products it sells. While the U.S. market for construction has slowed recently, CAT is a global company and has seen strong growth in emerging markets such as China. This has allowed CAT to remain profitable in each of the last 10yrs I looked at.

The primary reason I chose to look at CAT is because they build the equipment that builds our infrastructure... notice a hot trend here?

Management: While I don't know nearly as much about the management of CAT as I did about GE, I know enough to say that this company appears to be in good hands. They have a reputation of issuing dividends, buying back shares, and they have been profitable and growing over the last 10yrs.

Financials: I'll spare you from the math, but this stock appears to be greatly undervalued at the time of this blog. At the time of purchase, CAT was down to $38.45/share, while the relative value I calculated is up around $134.89/share. The 52-week low was $31.95/share and the 52-week high was $85.96/share, and I calculated an initial rate of return of 14.95% and an annual growth rate of 3.98%. While these rates weren't quite as attractive as GE's, they still looked very good to me.

Outside Factors: Once again, I'm going back to the incoming president's plan to fix our roads, bridges, and mass transit systems (although I'm not sure Detroit's People Mover or SMART Bus system really qualify as mass transit). In my eyes, this says orders for new equipment capable of upgrading these systems is coming soon.

Performance to Date: So far, nothing... I bought at $38.45/share about a week ago, and as of this post, it sits at $38.40/share. In this market, that might not be such a bad thing though. I still think this stock is poised to take off, but it may not be for a few more months, or even a year depending on how quickly things happen with the new administration.

General Electric

As promised, I plan to give you all a bit of insight on some stocks of interest to me, starting with my first stock ever purchased, General Electric Company.

General Electric Company (NYSE: GE) is diverse company with business in the areas of technology, media and financial services to name a few. They make everything from aircraft engines to medical imaging machines. The four major sectors of the company are GE Technology Infrastructure, GE Energy Infrastructure, GE Capital and Corporate Treasury, and NBC Universal.

I've always heard that diversifying your portfolio was a good thing, so I wanted to seek out a company that had a diverse range of products and services to serve as a foundation to build upon. GE seem to fit the bill in that regard, so it was definitely worth taking a further look.

Management: One of the intangible factors to picking a winning stock can be the management. This is a principle that many experts preach, but few investors seem to put as much weight into as they probably should. In the case of GE, they have a strong reputation for building strong management from within. From their long time CEO, Jack Welch, to their current CEO, Jeffrey Immelt, GE has a reputation of being a well organized, well run business. The research I did on this factor was reading the book 'Winning' by Jack Welch, GE's former CEO. This book gave me a good idea of the principles management at GE use, as well as some of the overall corporate culture of the company. While I may not have agreed with everything in that book, I still came away with the feeling that GE was a well run company.

Financials: Without boring anybody to tears with too many specific numbers or equations, I researched the financial history of GE dating back 10yrs and found it to be a strong and growing company. I also found its stock to be greatly undervalued. My calculations gave the stock a relative value of $46.89, I found that it had a 52-week high of $38.52 and a 52-week low of $12.58, and the stock was selling at only $15.90 at the time. Further, I calculated an initial rate of return of 12.16% and an annual rate of growth of 8.54%. My conclusion was that this was an undervalued stock that was suffering from a poor overall market.

Outside Factors: Another point of investigation on this stock was with outside factors and trends. With the election of Barack Obama and his talk about infrastructure investment, I felt that GE might be a company that could greatly benefit if this plan came to fruition. There seems to be a bit of a wake up from America following the $4+/gal gas prices we saw last summer, and many seem ready to consider alternative energy sources. GE is poised to flourish from this shift. Any upgrades or additions to the nation's power grid or further acceptance of alternative energies such as wind/solar/water power would directly benefit GE since they are an industry leader in these areas. This sealed the decision to buy GE as my first stock.

Performance to Date: Keep in mind that this is based on roughly a week's time, but to date, my GE stock is up 12.89% from $15.90/share at purchase to $17.95/share as of this post. I'll keep you all posted over the coming weeks on any additional buying and selling of this stock, as well as its performance.