Thursday, December 31, 2009

Bought 100 MKZ at 9.96/Bought 50 DSPG at 5.62 and 30 BRKS at 8.62 as LTs/Sold 50 GJT-Some Details about Managing My Two IRA Accounts

1. Bought 50 DSP Group (DSPG) at $5.62 Tuesday (Lottery Ticket Category)(See Disclaimer): LB is being given too much work to do by our Great Leader, so some tasks are being postponed such as describing the immaterial purchases being made by the No Wit RB as Lottery Tickets. LOTTERY TICKET PURCHASES: LINKS IN ONE POST Between the Old Geezer and its nit wit ally, Headknocker will soon own 400 securities. How on earth can the LB keep track of these small LT positions, that don't amount to a hill of beans in HK's capital position? LB is going to trim some of these positions next year before it goes bonkers.

DSP Group was found with one of the screens that I use to find LTs which focus frequently on balance sheet cash, prices below 10, and low price to sales and price to book ratios. I will then do a cursory analysis of whether the company looks interesting enough to perform additional research, and I will place those candidates on a small cap or the micro cap monitor list. The micro cap list is defined for this limited purpose as those companies with less than a 250 million market cap, whereas small caps include those between 250 and 1 billion in market capitalization. Most but not all LTs come from one of those two monitor lists.

DSP is a new name for me. After I found it with a screen, I went to YF to start the research process, and the first item looked at was this recommendation by David Peltier, TheStreet TV. He noted that it trades at about 2/3rds of its tangible book value with $4.8 per share in cash. That is what I picked up in my screen.

On DSP's balance sheet, the cash is listed under both current and long term assets:
Current Assets: Cash and Cash Equivalents= 37.976 million
Marketable Securities & Short Term Deposits: 17.308
Long Terms Assets: Long Term Marketable securities and cash deposits: 58.436 million
This brings the cash up to 113.72 million. There are 22.901 "basic" shares outstanding, so that brings the cash to $4.96 per basic share. Peltier uses the diluted shares (23.662 million shares) to arrive at $4.8 per share which is what I would do too.

DSP made money in the 3rd quarter of 2009: Form 10-Q There were a lot of unusual items, positive and negative, in the 29 cent GAAP number. The non-GAAP number for the 3rd quarter was 18 cents. DSP Group, Inc. Reports Third Quarter 2009 Earnings Revenues have suffered a sharp decline from the 2008 numbers, falling to 65.5 million in the 3rd quarter of 2009 compared to 87.4 million in the year ago quarter.

YF lists the price to book at .78 and price to sales at .56. DSPG: Key Statistics for DSP Group, Inc. The forecast for next year is for 36 cents in earnings: DSPG: Analyst Estimates for DSP Group, Inc Three analysts cover DSP with a consensus hold recommendation: Reuters.com

The long term chart is consistent with many LTs: DSP Group, Inc. Share Price Chart | DSPG The price is currently hovering significantly below its range in 1994, which marked the commencement of the price data. In April 2000, during the crazy period, the common traded over $71. By February 2001, it appeared to hit bottom in the low 20s and started to move into a 20 to 30 channel until May 2007, when it broke down again, falling to its current level in the ensuing two or so years.

The reader will notice that nothing has been said about the DSP's business. The focus was on other matters which is the best that I can do given DSP's description of its business:

"DSP Group is a leading global provider of wireless chipset solutions for converged communications at home, delivering system solutions that combine semiconductors and software with reference designs. We provide a broad portfolio of wireless chipsets integrating DECT, Wi-Fi, PSTN and VoIP technologies with state-of-the-art application processors. We also enable converged voice, audio, video and data connectivity across diverse consumer products – from cordless and VoIP phones to home gateways and connected multimedia screens. Our current primary focus is digital cordless telephony with sales of our in-house developed Communications over Internet Protocol (CoIP), Digital Enhanced Cordless Telephony (DECT), and 2.4GHz and 5.8GHz chipsets representing approximately 92% of our total revenues for the first nine months of 2009." Page 20: Form 10-Q

This is a link to the profile description at Reuters.com which even caused my eyes to roll back into my head. The Key Developments page, which is always looked at before buying, shows that DSP estimated its revenue forecast for the 4th quarter at 50 to 56 million below the 59 million forecasted by the analysts. Reuters.com

2. Bought 30 Brooks Automation at $8.62 (BRKS) (Lottery Ticket Category)(See Disclaimer): This is the last of the 5 LTs that HK allowed the RB to select. Brooks is a name that goes way back here at HQ, and RB was going to buy a 50 shares based on its contention that prior trades had netted a profit which it could add to the Nerd's $300 stinking limit rule for Lottery Tickets. HK and OG could not remember anything about the amount of the profit, if any, and asked LB to look it up in prior tax returns. LB refused, saying it was sick and tired of doing the grunt and gofer work in this operation, so RB was limited to a trade under $300. That is just the way it happened here at HQ yesterday. The OG had a temporary moment of memory lucidity and said something like didn't Brooks acquire PRI Automation and maybe HK had owned that one too. No one really knew about the past relating to this security or the prior trades, keeping up with the present is enough of a chore. This LT did not originate from a screen.

Brooks does have a decent balance sheet, even after suffering two very rough years, losing $3.62 in its F/Y ending 9/30/2009 and $3.67 in F/Y 2008: Page 14 e10vk Part of these results are clearly tied to global economic conditions. Brooks also cut its workforce by 40% since the end of its F/Y 2007 and closed redundant facilities. Of the losses in 2008, 197.9 million was an impairment charge taken against goodwill. An additional goodwill charge was taken in F/Y 2009 of 71.8 million. There were also impairment charges to long lived asset including a 35.1 million charge as of 3/09. Charges for restructuring amount to 12.8 million in F/Y 2009. So it is important to realize that the losses are not as bad as they seem at first blush, with a lot of non-cash losses.

Revenues fell of a cliff in F/Y 2009 declining to 218.706 million from 456.222 million in FY 2008. Revenues hit 670.935 million in F/Y 2007 before the recession hit. So the first determination that has to be made, as best as I can, is whether or not the fall off in demand has to do with Brook's products or external events that it has no control over. I believe that it is the later. So, I suspect that an upturn in its business is about to occur.

Brooks had about 88 million in cash as of 9/30/09, and no debt. The current consensus estimate from the analysts is for earnings of 15 cents in F/Y 2010, and then 65 cents in F/Y 2011. I would not pay much attention to those numbers. This is a cyclical company that may earn a lot more or less than those estimates. The revenue forecast is for 402.9 million in F/Y 2010 and 544 million in the next year. BRKS: Analyst Estimates for Brooks Automation, Inc Those estimates show a belief of a substantial increase in the current FY compared to the 218.706 million actual number for the just concluded 2009 FY.

S & P has the stock rated 4 stars and estimates FY 2011 earnings now at 79 cents, and forecast a 97% rise in FY 2010 revenues.

This is a high beta stock at 1.9. Brooks said that it expects to break even in its first quarter of FY 2010. Reuters

Brooks is a major supplier of semiconductor tools (77% of revenues) and factory equipment with a leading market share in many of its product segments. A full description of its business can be reviewed at Reuters.

So why buy this one as a LT? The possibility of positive earnings surprises during the course of 2010 and 2011 seems more likely than currently reflected in the stock price, which is a judgment call. During the last up cycle for the semiconductor industry, Brooks was trading mostly in a channel of between $12 to $18. The stock broke above it 200 day moving average in July and has not come close yet to retesting that line: Brooks Automation, Inc. Share Price Chart | BRKS Although it is not certain yet, the price chart seems to indicate to me that the stock has broken the narrow $4 to $8 channel it was in from 10/08 to 10/09. Also, the movement in the semiconductor stocks in general seem to indicate a market perception of an upturn in the business cycle for this sector. Still I am not confident enough to even buy this position outside of the LT category. So, it is without question a speculation at this point.

3. Bought Another 100 shares of MKZ Yesterday at $9.96 (see Disclaimer): This buy was made in a taxable account, and I do not intend to go beyond 200 shares, which I now currently own. This is a complicated security that I explained adequately in Item # 3 from Wednesday's Post: Bought 100 MKZ at 9.91 in the Roth IRA In effect it is a senior bond issued by Citigroup which matures in 2014 that pays a guaranteed 3% per annum, and possibly more based on the percentage gain of the Dow Jones UBS Commodity Index, up to a maximum of 31%, with a lot of twists and turns. One of the main caveats is that a close for just one day above a 31% increase at anytime during the annual period will cause a reversion to the 3% guarantee, no matter where the index ends up at the annual closing date.

4. Sold 50 GJT at $17.5 Yesterday in the Roth-And More Detail About How I Managing My IRA Accounts (See Disclaimer): Before the market opened yesterday, I had a discussion with a reader, where I mentioned that my retirement accounts were now bond heavy with the accounts now yielding over 10%. It would be higher, I said, except for a few synthetic floaters which had low yields based on their guarantees, but those securities provided these accounts with some inflation protection. I mentioned GJT as one of those floaters, along with several others, including GJN, GJL, GJP, PYT, GYB, OSM, PFK, & GYC. (AEB & METPRA are also floaters with some shares in the retirement accounts with average costs around $5 and $7 respectively for the shares held in the IRA) All of my synthetic floaters are in the retirement accounts. Of those, GJT had one of the worse current yields since it did not have a guarantee. I expect OSM and PFK to move up in yield in the coming months, and the yield at my cost for those securities will look even better. I sold GJR and GJO already because they lacked the guarantee protection which comes in handy now. So when I saw GJT spurt yesterday morning 9.38%, with a ask price at $17.5.

I had originally bought the shares in April at $8.3 in a taxable account. BOUGHT VEU AND GJT. I later sold those shares on a pop as I recall, after I decided to transition all synthetic floaters to the retirement accounts. I then bought the shares back on a slide in the Roth at around $10. I then sold 1/2 of those shares in June at $13 Sold GJR, Trimmed GJT & JZH . And I sold the remaining shares at $17.5 yesterday. I made a decision to de-emphasize the synthetic floaters that do have a guarantee, and I no longer own any. I may buy one or more back on a substantial decline in price. The proceeds will be used to buy a higher yielding security, possibly another synthetic with a guarantee.

A number of the synthetics bought in the retirement account were bought at very attractive prices and will be held until I become spooked about the quality of the underlying credit contained in these securities. For example, I bought GYB at around an $11 average cost for 200 shares, and this synthetic is tied to a Goldman Sachs junior bond maturing in 2034. added another 100 gyb in regular ira/ Bought GYB This one has a $25 par value, so I have built into the security a $14 per share in profit assuming GS survives to 2034 to pay me. I will be paid (as long as the swap agreement creating the float stays in effect) the greater of 3.25% or .85% above 3 month Libor, which is a good float. So why is this a keeper as long as I have confidence in GS's surviving?I explained it in my post from April 21st and I will just highlight some of the passages:


"GYB is the best GS synthetic floater in my opinion based on the current pricing as of yesterday's close (I.E. APRIL 21, 2009 WHEN THE POST WAS MADE), and I know of five. The minimum rate is 3.25% and the maximum is 8.25%. The float provision is .85% plus 3 month LIBOR which is also good. Interest is paid quarterly. Since the minimum rate is the applicable rate now, the yield at my $11 cost is 7.38% and that would be the minimum yield for me for the life of this security which is 25 years. The maximum yield based on the float provision would be 18.75% (.0825% x $25 par value=$2.0625 per certificate in interest per year divided by $11 cost=18.75%). The maximum yield to me would be hit when the 3 month LIBOR rate rises to 7.15%. At a 3.5% average 3 month LIBOR rate over the next 25 years, the {current average annual} yield would be 9.88% (.035 3 month Libor + .85%= .0435% x 25 par value= $1.0875 in annual interest divided by $11 cost=9.88%).. . . . This is another link: LIBOR Rates History (Historical)"Bought GYB/DD/Will Hold Synthetic Floaters In Retirement Account / So this one does not have a high yield at the current guaranteed rate of 3.25%, but the 7.38% minimum yield at my cost is good with the float protection. But like some of the other floaters paying the guarantee now, they do lower my overall current yield in the retirement accounts.

Another synthetic linked to the same GS bond is PYT and I started adding that one at $11.2: Bought 50 PYT
This is the link to my post describing how I now analyze the GS floaters: Analysis of Prior Question about Goldman Sach's Floaters

The only other synthetic floater that is questionable long term hold is GJP, primarily due to the price paid reducing my overall long term potential returns. For now, I will keep it because it does have a guarantee and a decent float of 1.15% above the 3 month T Bill, plus it is senior security from Dominion. Bought 100 GJP at $18.97/Bought 100 BCE at $24.75/Bought 50 AHLPRA at $19.75 GJL had a good yield to maturity when I bought 200 shares: Bought Another 100 of GJL/ GYC and GJN were both bought at attractive prices that juices the value of their guarantees and floats.

Most of the yield in the IRA's is now coming from opportunistic investments in preferred stocks, European hybrids (AEH, INZ, AEB & AEF) and Trust Certificates, made during the meltdowns between October 2008 and April 2008. This would include several investment grade bonds yielding over 15% at their purchase price. Those opportunities are long gone. It is hard now to find anything to buy. Therefore, the best course now is to keep the best ones (including the ones with built in inflation protection) for income generation for as long as I do not become spooked about credit issues.

I have also emphasized CEFs that pay high dividends as an alternative to mutual funds. An example would be the buy of 100 JDD in April: Bought 100 JDD in Roth And I have limited myself only to a few individual stocks with high dividends bought during meltdowns such as the DD purchase in March at $16.68, which I will keep as long as the dividend is not cut, since my yield is currently close to 10% at my cost The Most Abused Word: Reform/Buys of IR & DD/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology I also bought AT & T at around $23 and hold it both the retirement and taxable accounts.

So all of this explains what I am doing in the retirement accounts and why I jettisoned a low yielding security with some inflation protection due to its lack of a guarantee on a pop in price. And why I intend to keep others, until some external event shakes me out of them. The income generation will allow me to add more income generating securities, possibly on a monthly basis going forward, so there is a compounding effect to this method of managing the IRAs.

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