Friday, October 17, 2008

SARAH and the Cook Inlet Beluga Whales/WALGREENS AND REFINERS

Scientists have estimated that the Cook Inlet Beluga whale population has declined from about 1300 in the 1980s to around 375 now, notwithstanding efforts to increase the population. Palin comparison | Gristmill: The environmental news blog | Grist  The federal government was considering adding this genetically distinct species to the endangered species list.  Sarah opposed this listing, arguing that it was premature.  The scientists responded that the evidence was clear cut that a decade long effort to insure the survival of this species had failed to ensure their survival.  The Bush administration disagreed with Sarah and placed the Beluga whales on the endangered species list.P  Los Angeles Times

I completed my research on Walgreen's and decided to add it next week on any weakness from the closing price today.  I will dip into my cash allocation to buy this one.  Cash available for investments still stands at about 20%.   While WAG is a retailer and will feel the effects of an economic slowdown, I view both Walgreen's and CVS Caremark (CVS) to have relatively stable businesses, with fairly predictable earnings growth.WAG: Analyst Estimates for WALGREEN CO - Yahoo! FinanceCVS: Analyst Estimates for CVS CAREMARK CP - Yahoo! Finance  The Morningstar report is favorable with a fair value estimate for Walgreen's at 43, with a consider to buy at 30. P.E.G. ratio is less than 1 over a 5 year period estimate for earnings growth.  The current P/E is around 10.  The balance sheet is solid.  Cash flow is currently around $3 per share.  The dividend at the current price of 23.3 results in a yield a tad over 2%.  Walgreen hit a 10 year low after its CEO resigned unexpectedly.  Yahoo! Finance  It has lost all of its appreciation since about 1998 which is not that unusual.     This is a link to   summaries of Walgreen's last earnings report.MarketWatch Walgreen A Bear-Proof Refuge (WAG)  |  October 01, 2008  | By Eric Fox - Investopedia Advisor I also reviewed the transcript of the earnings call.Walgreen Co. F4Q08 (Qtr End 08/31/08) Earnings Call Transcript - Seeking Alpha

  Walgreens has fallen about 10 dollars since this earnings report.  I would say that a recession has already been priced into the stock looking at it rationally.  But, when the next earnings report is released, showing even a more pronounced impact due to a slowdown in consumer spending, I would not be surprised to see it fall below 20 and even toward 15.  Unless we have a severe recession lasting a year or more, I would view a buy at 15 to be a gift.  Since no one knows what the future will bring I will just ease into a position, avoid taking anywhere near a full position with the first purchase and then add at pre-determined intervals as long as I stay positive on the company.   A full position for me for Walgreens would be 200 shares so I would start with a 50 in the 22 area, another 50 at or slightly below 20, then at 17 to 18 and lastly at 15 or below.   I recognize that it may stop falling at any time and resume a generally bullish trend but who knows when.  Better to be cautious.   This gradual buy-in is done because of the heightened uncertainty with any investment now.  I would exit the position the same way that I entered into it, by selling 50 shares using FIFO accounting probably in the 26 to 28 area and the next 50 shares at over 30 and so on.  Hopefully, if it works, these sales will be long term capital gains.  I might hold on to the 100 until well into the next bull market which will come.  For a stock like this one, I will be thinking years in advance and following it closely probably for three to five years.  Having said all of that, I suspect that CVS has better long term prospects with its acquisition of the pharmacy benefit manager Caremark, particularly at the current price.  I may buy 100 of that one too.  

After buying a position, I will always read stories that contain information about it.  I read tonight an unfavorable article about refiners in the WSJ.Heard on the Street -  This article recites the same potential downsides as I did but added one that I did not know.  The writer said that one day last week gasoline futures closed below the crude contract, implying a negative margin for refining crude.  I would not place much reliance on that kind of data in these volatile markets.  The demand issue is real however and falling demand for the products cracked from crude will adversely impact the refiners' margins. The author did note that capacity "could" rise by 10% by 2013, mostly in Asia.   I may be wrong but I am not concerned about 2013 for a refiner's common stock price in 2008, nor do I have much concern about capacity being added in  Asia to meet the rapidly increasing demand in that part of the world.
But I don't know what I don't know, and my knowledge is limited in this area.  That is why I took small positions in Valero at less than 17 and Alon at less than 7.

  If I finish this year down no more than 10%, I am going to pat myself on the back, buy a big present for myself, and throw a party in my honor.  That would be one of my biggest achievements ever since I started investing in high school with an odd lot purchase of Hospital Corporation of America after its IPO back in the 1960s. 

 I have to hit a few singles and doubles on trades  every week to work my way back up to even, which I have been doing all year, but not enough yet to bring myself back from the meltdown in September and October which did surprise me as to it severity and speed.  Given the market conditions, I will not risk much capital in any one position and will ease into everything.  I will also focus on niche areas where I have an intellectual advantage such as Trust Certificates.  I placed a limit order today for a TC containing an investment grade bond that did not fill selling at a substantial discount to the underlying bond's price in the bond market, price to yield 15% and close to a 50% discount to par value.  
But I know that the real serious money is made with long term investments made in the worst bear markets, so the groundwork needs to be laid over the next six months for the next six years.  Fortunately, for the world, the policy makers did not follow the advice of Marsha Blackburn or consult the Herbert Hoover playbook.  The radical actions taken over the past several weeks have in my view prevented a Financial Armageddon  and a meltdown of the stock market.     A slow repair process can start as soon as the volatility simmers down.  The hedge funds  and mutual funds are facing redemption requests and are consequently selling the kitchen sink to raise cash.  The VIX is still showing extremely elevated fear levels, more than at any time since the CBOE developed this index.

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