Wednesday, September 29, 2010

Bought 100 MTY at 10.49/Bought 50 IRM at 21.76/Sold 90 HBAN at 5.83 & Added 50 NWBI at 11.10/Bought 50 ALJ at 5.24

The first part of this post will be a discussion of the remaining trades from last week. Since I am busy on other matters, it will take some time to catch up summarizing my trades. I do not have the time now to discuss macro economic issues, but my opinion on such issues always influences my investment decisions.

I also trimmed last week my positions in Emerson Electric (EMR) by selling shares at $53.31 and Glimcher Realty (GRT) at $6.36. In both cases the shares sold were my highest cost shares using FIFO accounting. My remaining 100 shares of GRT, bought as a Lottery Ticket, were purchased in two fifty share lots, the first at $1.61 in 2/09 and then at 2.79 last December. One of the best LT buys ever made, and the shares are still owned, is a cumulative preferred stock issue from Glimcher, GRTPRF, bought at $2.9 with a 8.75% coupon on a $25 par value. GRTPRF: A WALK ON THE WILD SIDE The REIT has not missed paying its regular preferred dividend since that purchase in November 2008, even though it was given up for dead by the "smart" money. It went ex dividend for its quarterly distribution yesterday. GRTPRF closed yesterday at $24.90 on the day of its ex dividend, and is yielding 75% annually at a total cost of $2.9-just incredible. (.0875 x. $25=$2.1875 per share ÷ $2.9 cost=75.43% annually). RB just said that the Nerd did not buy enough shares. RB wanted to buy a million at $2.9. And the common has also been a star performer in the LT category. The remaining Emerson shares have a total cost basis close to $34 per share.

1. Bought 100 MTY at $10.49 Last Week (See Disclaimer): I already own 200 shares of a similar security, MOL, at 9.95. When I purchased MOL, I mentioned that I would consider selling 1/2 of that position when and if I received a decent annual distribution. The first annual coupon period for MOL ends on 11/18/2010, whereas MTY is already in its second annual coupon period which ends 7/27/2011. So, one benefit for owning both MOL and MTY is the different time periods for measuring the percentage increase in the spot gold price.

Both MOL and MTY are principal protected senior notes , maturing in 2014 at $10, that pay the greater of a guarantee or a percentage increase in gold's spot price. Both notes are obligations of Citigroup Funding and are guaranteed by Citigroup. Of course, a purchaser of these notes will receive the $10 par value only if Citigroup is able to pay it, and that is what is meant by "principal protection" in this context. If Citigroup is in bankruptcy, then the owners of these notes would be unsecured creditors and would receive substantially less than par value. Apparently, some investors in Lehman principal protected notes did not understand this very basic fact that would be apparent to anyone reading the first few sentences of a prospectus. See Item # 2 Principal Protected Notes There is no excuse for laziness when investing your own money. The prospectus has to be read, and the investor must take the time to identify and to assess all the risks and benefits of any potential purchase.

MTY has much better terms than MOL. When I buy these notes, I generally want to buy them at a discount to their par values or at most a small premium. If I held MOL to maturity, and Citigroup survived to pay me the $10 par value, I would not lose any money on the 200 shares bought at $9.95. The worst outcome would be to receive only the 2% guarantee in each annual period when Citigroup survives to pay par value.

By purchasing 100 shares of MTY at $10.49, I will lose the $49 premium plus the commission cost at maturity. On the other hand, I stand to benefit more between now and then compared to MOL.

MTY has a 3% guarantee, compared to the 2% guarantee of MOL. That is not the most important difference however. This is where it becomes complicated and each investor just has to spend time becoming familiar with how these securities work.

MTY pays annually the greater of 3% or up to 35% based on the percentage increase in the price of gold, provided there is not a single daily close above that 35% maximum increase. If there is one day during the applicable annual period where the gold price increases by more than 35% over its "Starting Value", then there is a reversion back to the guarantee of 3%.

The operable language in the prospectus on the forgoing important point is as follows, and I have highlighted in red the reversion language:
The coupon amount payable on each coupon payment date will depend upon the closing price of gold on each business day during the related coupon period, will be based on the percentage change in the closing price of gold during such coupon period and will not be less than $0.30 (3% of $10 principal amount per note) per note nor be greater than $3.50 (35% of $10 principal amount per note) per note. Thus, for each $10 principal amount note held, you will receive on each coupon payment date either:

an amount equal to the product of (a) $10 and (b) the percentage change in the closing price of gold from the first business day of the related coupon period through the last business day of the coupon period (which we refer to as the gold percentage change), if (i) the closing price of gold on every business day during the coupon period is less than or equal to 135% of the closing price of gold on the first business day of the coupon period (which we refer to as the starting price) and (ii) the gold percentage change is greater than 3%; or

an amount equal to $0.30 (3% of $10 principal amount per note), in all other cases.

As previously discussed, MTY ended its first annual period without triggering a reversion and made a $2.23 distribution per share based on the percentage increase in the gold price. I believe that the starting price for the second annual period is $1168 per ounce, but I am not 100% positive. I just pulled that price from the Kitco site as the closing price on 7/27/2010. Since MTY has a 35% reversion limit, this would put the maximum level for gold during the current period at $1576.8. The second coupon period ends on July 27, 2011. Simply put, I do not want to see a single close above that maximum level between the starting date on 7/27/10 and 7/27/2011.

The main advantage of MTY over MOL is the difference in allowable increases in the gold price. MOL has a 19% limit whereas MTY has the much better 35%. The 35% limit provides both more leeway in appreciation during the applicable annual period without triggering the reversion back to the guarantee and a greater potential annual distribution compared to the 19% maximum of MOL.

Although MOL only has a few weeks left in its first annual period (11/18), it is moving closer to its reversion number. It may be touch and go whether gold exceeds the maximum level for the reversion trigger. When I checked yesterday evening, gold was trading at $1309 per ounce. The maximum level for MOL is 1391.7. If there was no reversion trigger caused by a maximum level violation during the 1st annual period, and gold closed at $1309 on the end date, then the percentage gain would be almost 11.93% or $119.30 distribution on a 100 shares of this $10 par value note.

2. Bought 50 IRM at $21.76 on Monday (see Disclaimer): Iron Mountain has only recently fallen into my buy range as a result of price decline from around $28 in April. The five year peak was hit in December 2007 at over $37 per share.

Generally, I will establish what I consider a rational range for a potential purchase. I am always more concerned about over paying for a security. The current consensus earnings estimate for IRM is for $1.13 per share in 2010 and $1.32 in 2011. If those future estimates hit the nail on the head, this would represent a 16.8% increase in earnings from 2010 to 2011. At a total cost of $21.76, this would give me a P/E 16.48 based on the 2011 earnings estimate. This would give me a PEG ratio of around 1. The top end of my valuation range for this security would be a forward P.E.G. of 1.2 (divide P/E ratio by Earnings Growth rate).

If I am making a purchase outside the $300 maximum exposure for a Lottery Ticket, I try to remain disciplined about valuation metrics at the time of purchase, except I will make some allowances during periods where earnings are abnormally low or high due to economic conditions. As a consequence of this discipline, I was unable to buy most stocks in 1999-2000 and the large cap tech stocks have only recently fallen into acceptable valuation metrics, which include an evaluation of the following ratios: Price/Earnings, P.E.G., Price to Sales, Price to Book, & Price/Net Cash.

Iron Mountain is the leading document storage company in the U.S.

Berkshire has been acquiring shares and owned 8 million shares as of 6/30/2010, up from 7 million at the start of 2010. Form 13-F for Q/E 6/30.

3. Sold 90 HBAN at $5.83 on Monday and Added 50 NWBI at $11.1 on Monday ( Regional Bank Stocks' basket strategy)(see disclaimer): The regional bank strategy has a 5 to 10 year time horizon. While I hope that Huntington Bank (HBAN) will successfully turn its operations around, pay back the government TARP funds, and increase its dividend to some level deemed acceptable, I have started to question whether all of those events will occur in an acceptable time period, compared to other banks that are currently owned in my regional bank basket.

HBAN was barely profitable in the June quarter, earning just 3 cents, and has stated that it intends to repay TARP funds when it is "prudent" to do so. (page 5 Form 10-Q) There is 1.4 billion outstanding. FORM 8-K For the first five years, the government receives a 5% dividend on its cumulative preferred stock and then the rate increases to 9% . Huntington also has about 570 million dollars of trust preferred securities that will have to be phased out as tier one capital under the recently enacted financial reform legislation.

So, I decided to take my profit and reinvest the proceeds in another bank that does not have HBAN's issues. The percentage gain on the HBAN shares was a factor in the decision to sell. I bought 50 shares at $4.27 and 40 shares at $3.7. I do not intend to follow HBAN in an effort to cut down on my workload relating just to following the banks that have already been purchased as part of the regional bank basket strategy, currently over fifty names. I would add that HBAN could work out better long term than the security purchased as its replacement.

I used the proceeds from HBAN to buy another 50 shares of NWBI, bringing my total to 150 purchased shares. NWBI is one of the few bank stocks where I have elected to reinvest the dividends. This last purchase was an average down from buys at 11.88 and at 11.47.

Northwest Bancshares does not have any government preferred stock on its balance sheet (p.1 10 q) and has plenty of capital as a result of its demutualization. If I had a knock on the bank, it would be that it has too much capital due the capital raise made in connection with the demutualization. Page 33 of the last filed 10Q shows a total capital ratio of 21.02% and a tier 1 capital to risk weighted assets ratio of 19.79% (well capitalized is 6%).

NWBI earned 15 cents per share in the Q/E 6/09, up from 7 cents in the year ago period. The bank is paying a quarterly dividend of 10 cents per share, which equates to an annualized rate of 3.6% at a total cost of $11.10 per share. As of 6/30, NPLs to total loans was at 2.35%; NPAs to total assets was 1.87%; the tangible book value was at $10.24; the number of banking offices stood at 171; the net interest margin was 3.47%; and the tangible common equity to assets ratio was at 14.25%.

I am tracking the realized gains/losses in the regional bank basket in Item # 3 2010 Realized Gains Regional Bank Stock.

4. Bought 50 ALJ at $5.24 on Monday (LOTTERY TICKET strategy)(see disclaimer): It has been almost two years since I bought and sold shares in Alon USA Energy. My last purchase was 50 shares at less than $7. Refiners: ALJ and VLO (October 2008). I sold those shares in December 2008 at $9.37. Shortly before those trades, I bought ALJ in the summer of 2008, caught about a 50% pop, and sold those shares at over $12. The purchase on Monday was at the lowest price ever paid by me.

ALON USA is a publicly traded subsidiary of the Israeli company, Alon Israel Oil Company, who owns about 80% of ALJ. ALJ Major Holders The company operates in several business segments. Alon owns Southwest Convenience Stores that is the largest licensee of 7-Elevens in the U.S. with over 300 stores in the southwest. More importantly, and the primary cause of the stock's weakness, is the refining operations. A map of Alon's refineries, pipelines, and terminals can be found at ALON USA - Refining. The short term prognosis for earnings is not good, with the analysts forecasting a $2.15 loss in 2010 and a 15 loss in 2011. ALJ The recent earnings reports and this somewhat dismal future forecast has resulted in the shares sliding to their current level. In July 2007, the stock was traded above $46: Chart | ALJ

Price to sales is around .08 and price to book is .83 according to YF.

Given the debt level and the poor earnings, I classified this purchase as a Lottery Ticket which limits my total exposure to $300, plus prior net profits and distributions. Due to successful trading of ALJ in 2008, my trading system would allow me to go over $300 by several hundred dollars, but I elected to keep the exposure below $300 for now. I do not want to totally ignore ALJ, since it does have some long term potential in my opinion, but the risk is high too. The recent decline in the share price has just diminished the risk some.

S & P has a report on ALJ, rating the stock 3 stars with a $7.50 12 month price target. As previously noted in those 2008 posts on ALJ, the company acquired the Krotz refinery in Louisiana from Valero in 2008. That refinery has a 83,100 b/d rating. And, in June 2010, ALJ acquired a 70,000 b/d refinery in Bakersfield for just 40 million. 

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