Sunday, July 26, 2009

How to Find Stocks Masquerading as Lottery Tickets/Bary's Columns In this Week's Barrons

1. How Do I Find Lottery Tickets: The lottery ticket strategy is explained in a previous Gateway Post. LOTTERY TICKET PURCHASES: LINKS IN ONE POST This post is simply intended to explain the processes used to find and to evaluate potential purchases in this immaterial part of my investment portfolio.

The best way for me to find potential selections is to conduct screens with just a few key criteria. The most important search terms are price to sales and price to book of less than 1. A firm like National Dentex (NADX) was found just based on those two criteria. I then might add one or more of the following to the screen: stock price of less than $5 or $10, cash greater than $2 per share, and/or no debt. I then review the results and pick a few that may interest me after a brief amount of research. I then conduct more research on the few remaining selections to learn more about the business, why the share price has been smashed to smithereens (sort of a requirement for a lottery ticket), whether the fall in the stock's price was more likely due to general macro factors as opposed to the something specific to the firm, and whether the firm is likely to survive long enough to turn itself around. Too much debt will eliminate some companies from further consideration.

Some firms are found using the stock screen at Morningstar. I am a subscriber and this service is not available to non-subscribers. Morningstar: Premium Stock Screener One of the criteria added to that screen is a large discount from Morningstar's fair value estimate, using at least a 50% discount of current price to estimated fair value (use under "Valuation Measures", "Price/Fair Value). This morning I used that screen with 2 criteria, price less than .6 of Fair Value and Price to Sales of less than 1, and 70 stocks met both of those criteria. That is how I found Digirad (DRAD) when it was selling at $1.24. I then added another criteria of price to book of less than 1 and that narrowed it down further to just 35 companies. That is a manageable number for me to examine. On that list I currently own only one as a LT, RF, and I sold another Solta. But having done this exercise for purposes of writing this post, I am going to look at the list closer today. I am familiar with most of these companies to varying degrees except I have never heard of Goldsmith International (already excluded just on its existing debt levels). The vast majority of these companies, on further inspection, will not even make the cut to placement on the YF monitor list, eliminated for one reason or another.

Occasionally I might find a company suitable for more than just a LT purchase. If I wanted to limit the screen to only potential LT purchases, I would add the criteria of last price below $10 (found under "risk and return data", then "price and market data", then scroll to under 2. "last close", then in 3. use the less than symbol, then in 4 use enter number value, then I use less than 10). This knocked it down to LT size orders with just 24 companies to examine. One of those was prior to today being considered for an LT purchase. Which one?

The stock screener at Yahoo! Finance allows me to add criteria such as cash per share coupled with no debt.

Some of the bank stocks bought as lottery tickets were identified using the Morningstar screen criteria of discount to fair value, as potential candidates for purchase in the LT category, but I was already familiar with those firms, such as Wilmington Trust and EWBC. I had never heard of Digirad before its name pop up on a screen. For the bank stocks, their addition has more to do with my memories of what happened after the last near death experience for banks back in 1990 and 1991 and the ensuing bull market in financial stocks.

The firms that pass the initial evaluation are placed in a separate portfolio at Yahoo Finance. This enables me to review the prices and news with ease. Prior to purchase, I will at a minimum read the latest 10-Q filing and important news for the past six months or so. If there is an analyst report on the company, I will read it. Sometimes, there is nothing of consequence available from brokerage firms about the company, and that will not deter me. I also mentally frame a range of potential buy targets, and an idea of where I might sell the stock, before doing any actual buying.

Some companies which have been bought in this category are companies that I have owned in the past and generally follow virtually all of the time. Some event caused me to sell the position. And, then, I notice the price has fallen to a level where I am comfortable buying it back, but not in a significant way due to significant concerns about its prospects. CB Richard Ellis fell into that category. I had sold the stock at much higher levels, trading it on two prior occasions, first selling it at around 38 and then selling at around 23 in 2007. Both trades were profitable, but then I decided to stay away. CB Richard Ellis My next entry point was as a lottery ticket purchase at $3.77 in December 2008 (see last link) and at $2.39 in March 2009 ( SOLD NADX IN IRA/ Bought Lottery Ticket in CBG at 2.39). Those last shares were sold last Friday at $9.73. SOLD 1/2 CBG

Since I am familiar with a large number of companies, including many small cap names, with a monitor list of about 200 small cap names, I am aware of some companies, successfully traded for a profit in better times, that have had something go wrong since my last sale. The stock was not originally a purchase in the lottery ticket category but as one of my small cap purchases. Readers of this post know that I will range everywhere in making security selections. An example of this kind of stock would be Sunopta (STKL) where I had around a $800 profit in an earlier transaction and then the company ran into some serious problems. As a result of those issues, I would no longer devote much capital to it, so STKL was put in the lottery ticket category where my maximum investment is currently $300 per stock. I bought a 100 shares at $1.65 in December 2008, after selling more shares at around $15 in 11/2007. Buy of Sunopta: Highly Speculative This is a constant source of lottery tickets. In my mind's eye, I am already playing with the house's money and do not want to bet more than my previous gain on a second try. For STKL, I was not willing to commit more than 25% of my earlier winnings.

Some stocks are found at Joel Greenblatt's site (registration required, free site): www.magicformulainvesting.com, and his book is a worthwhile read-"The Little Book That Beats the Market". I found an interesting one there this afternoon with the 50 million market cap, 50 company screen.

Some selections are traded frequently to lower my cost basis, using FIFO accounting. My total exposure to all of the lottery tickets is never material to me. That allows me to have some fun with this activity since I do not have to be responsible, but I do not want to be stupid either which means RB is still controlled with the LB's iron fist in a velvet glove. If I think that I made a mistake, then I will sell for a loss, which will generally be small. The gains have recently been worthwhile. An example was the purchase of just 50 NADX in a Roth IRA at $1.27, which was quickly sold at $4, and on the same day 50 of CBG was bought at $2.39 and sold Friday at $9.73. So, that was a successful turn of only $60 or dollars into more than $500. I am not good at mental math, need to count numbers using my fingers, a slight exaggeration. In fact, I decided to attend Tulane in 1969, because that institution allowed me to substitute philosophy for calculus. Maybe New Orleans was tempting to a 17 year old too.

2. Andrew Bary: Andrew has yet to convince me of the merits of buying Citigroup, and his last effort in this week's Barrons failed to move me from my disdain. I was recently somewhat critical of his effort to convince small investors to buy Citigroup equity preferred as an arbitrage play to buy the common at less of a price.

Bary's column about stocks having more upside this year, based on the current consensus forecast of 2010 earning for the S & P 500 at $75, did relieve at least for now the queasy feeling that I was developing last week. Risk Reduction Mode this Week-That Queasy Feeling I am still wondering where Jim Bianco got his $52 number for 2010 as being from "most analysts". (See item # 1: Goldman Sachs Upgrades Forecast for S & P 500 Earnings)

3. Roubini and Schwartz Columns in NYT on Whether or Not Obama Should Appoint Bernanke for Another Term: If I am able to be coherent at 92, I will thank the Lord for my good fortune. Anna Jacobson Schwartz (born November 11, 1915) gave in an opinion column in the Sunday NYTimes her reasons why Bernanke should not be reappointed as Fed Chairmen. I would agree with her that Bernanke did not see the credit meltdown coming, and he may be underestimating now the potential inflationary impact of Fed money creation. I also agree with Roubini that, once the Fed Chairman woke up to the Great Depression II on the near horizon, Bernanke did take a number of steps that averted the implosion of the financial system. You will never receive much, if any, credit for preventing something from happening. (A politician being fiscally responsible will not be given much credit now for saying no to every new expenditure that the Democratic Party wishes to make and for starting to take now the necessary steps to fund the 100 trillion or so of unfunded liabilities from existing programs).

1 comment:

  1. Great Site!! I really enjoy reading it! Some of the bank stocks bought as Lottery tickets were identified using the Morning star screen criteria of discount to fair value, as potential candidates for purchase in the LT category.

    ReplyDelete