Friday, December 17, 2010

Bought 1 Boyd Gaming Senior Bond/Bought 50 EBTC, 30 BYD as an LT/

Coca Cola (KO) has reached a price point where I am no longer interested in purchasing additional shares with the dividend payments.  I received some reinvested shares today and changed the distribution to cash.  

My current position in KO was started in early March 2009, and I am near my $10,000 exposure limit in its common stock.  That limit is based on my cost rather than the current market value. The purchases were made pursuant to the dividend growth strategy. {Buy of KO at 38.72 (March 2009) Bought 50 KO at 53.77 ADDED 50 KO AT 54.26 (April 2010)}

KO has been on a historical path to double its dividends every 7 years. {Item # 1 Barrons Recommendations and My Trades in The Barron's Columnists' Recommendations in 2009; see also Item # 2 KO}

The criteria for the dividend growth strategy are set out in  Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds.  (see also Item # 5 Coping with the Federal Reserve's Jihad Against Savers & Responsible Americans.)

1.  Bought 1 Boyd Gaming senior bond at $89.55 with Concession (see Disclaimer):  I am familiar with Boyd (BYD) and vaguely recall owning its common stock in the past.    

All of the Old Geezer's memories of events more than 24 hours ago can be labeled as "vague" without generating much controversy. I have not had a position since starting this blog, which is the historical record for HQ's trading operation prepared by our LB, in October 2008. How do I know? I used the Google Search box to the right. 

Due to the recession, the common has declined from around $54 in 2007 to less than $10 now, which incidentally is below the stated book value per share of $13.79. BYD Key Statistics 

BYD owns 15 casinos in five states, and nine of those are in Las Vegas. It also owns a 50% controlling interest in a limited liability corporation that operates the Borgata Hotel Casino in Atlantic City. 

A list of Boyd's long term debt amounts and maturity schedules can be found at page 23 of the last 10-Q filing. The total is shown at $3.175 billion as of 9/30/2010. Of that amount  there are senior secured notes on the Borgata casino totaling 800 million coming due in two four hundred million dollar chunks in 2015 and 2018 respectively. 

Those notes are described at page 26 of the 10-Q. "Neither Boyd Gaming nor any of its wholly-owned subsidiaries is a guarantor of Borgata's new bank credit facility." Page 26  Form 10-Q  

The coupon on the 2016 bond is 7.125%.  My current yield is close to 7.96%. My confirmation states that the yield to maturity (YTM) is 9.766%. The bond matures on 2/1/2016. The bond's rating starts with the letter "C" which should give any prudent person pause.

Sometimes the OG is prudent, sometimes not, and yesterday he was talking to the RB too much who kept saying "go for the gold" while playing "Born to Run" on the ITunes repeat cycle. 

Moody's has this bond rated CAA1 and S & P gives it a CCC+. Maybe that is a Gentleman's "C" as George JR. use to say about his grades at Yale. The OG is comforted some by the assets owned by the company, notwithstanding the scary grade.  

This is a link to the FINRA information on this bond.  The symbol for the bond is BYD.GK. To trade bonds at my broker, I have to use the CUSIP number which is 09689RAA7. 

This is a link to the bond's prospectus: Boyd Gaming

The current consensus earnings estimate is for an E.P.S. of 15 cents in 2010 and 22 cents in 2011. Boyd earned 6 cents per diluted share for the Q/E 9/2010:  Form 10-Q    

2.  Bought 30 Boyd Gaming (BYD) common at $9.78 (LOTTERY TICKET strategy) (see Disclaimer):  After doing all of that work on Boyd Gaming, just to buy 1 bond, the OG decided to buy a Lotto Ticket on the common shares.  Some of the work included reading all of the most recent brokerage reports available on this company here at HQ. 

If there was a central theme in these reports, it was the common human inclination to forecast the future based on present conditions. I am not able to forecast whether the U.S. economic recovery will gain momentum in 2011.  I suspect that it will.   

If the recovery gains its sea legs, and starts to become self-sustaining, then the conditions that have caused earnings issues at Boyd will be reduced, although I would expect the generally negative impact from high unemployment to continue for another three or four years.   

The reduction in taxes for lower and middle income wage earners, primarily the proposed 2% reduction in the social security tax rate, will likely provide a boost to the gaming industry next year, at least making it more likely that there will be one or more earnings surprises, which hopefully will boost the stock. 

In any event, when the entry point is low, at least in theory, the investor can afford to wait.  Maybe the robust recovery will not happen until 2012 or 2103, but the rational prediction is not to predict a continuation of the current sluggish operating environment for Boyd as the base line for valuing the company.  

This stock was therefore deemed appropriate as a LOTTERY TICKET purchase, which limits the amount to no more than $300 with an exception, which is adding to that limit gains and dividends, preferably tax adjusted, received on the same security.   

Given my preference for blue chip companies that pay good dividends, I am not going to risk much on this kind of company which is heavily indebted with relatively short term maturities and consequently very vulnerable to another economic shock occurring too soon after the Near Depression.     

I may take Boyd out of the LT category if I start to have more confidence in an economic recovery.   

Some of the reasons for purchasing BYD are similar to those given in the recent purchase of Speedway Motorsports ( TRK)Bought  50 TRK @ 15.77  I later averaged down to a round lot at by adding 50 TRK at $14.55.  
The stock is falling this morning after BMO downgraded BYD to underperform with a $6 price target.  Bloomberg

3.  Added 50 to EBTC Last Week at $11.27 (Regional Bank Stocks' basket strategy)(see disclaimer): I try to mention all of my trades in the regional bank basket strategy but neglected to mention that I added 50 to EBTC last week (12/09).   

This brings my total to 150 shares.  

This stock is lightly traded and YF shows the average volume per day over the past three months at 3654 shares. If a seller is motivated to dispose of say 10 or 20 thousand shares, the price will get knocked down which happened on 12/9 with 31,100 shares traded on no public news that I could find. EBTC Historical Prices There are no analysts estimates but the earnings reports discussed in several prior posts have been favorable in my opinion. The trailing P/E is around 9.5 and the dividend yield at my purchase price is about 3.5%.  

EBTC is a small savings bank operating in Massachusetts. Enterprise Bank :: All Branches/ATM Locations

The bank earned 30 cents per share in the Q/E 9/2010, up from 28 cents in the year earlier quarter: Form 10-Q  

The bank earned 99 cents per share in 1999,  up from 69 cents in 2008. (page 32 annual report,

As of 9/30/2010, NPLs to total loans were 1.64%; NPAs to total assets were 1.36%; the net interest margin was at 4.4%; and the capital ratios exceeded the limits set for well capitalized banks (see page 33). And, those capital ratios do not include any government preferred stock, a status which I like to call "clean". EBTC did not participate in TARP: 

Since I am trading some in the regional bank basket to book profits and to lower my average cost where possible under FIFO accounting, I may at some point sell 50 shares of EBTC purchased at 11.75, the first shares purchased, and keep the shares bought at $10.33 and at $11.27.  While that may sound picayune to most everyone, it is one way that I manage risk in my stock portfolio.   

Other risk control measures include of course security selection, the decision on the amount to invest in each security, and the vast dispersal and variety of holdings and asset classes. 

The following is my regional bank basket as of 12/16/2010.  

As previously noted, where there is more than one purchase, I used the weighted cost and the last trade date. The dividend yield is calculated by YF and is at the last market trade rather than at my cost. I am keeping track of the realized gains  in Item # 3 2010 Realized Gains Regional Bank Stock basket.  

Regional Bank Basket 12 16 2010
4. The Here and Now Method of Valuing Companies-Extrapolating into the Distant Future By Assuming a Continuation of the Present Conditions:  I thought that I would copy part of a post from last March 2009 that describes one of the key failings in many brokerage reports, noting in passing in connection with the reports on Boyd: 

"There is a common valuation technique in a bear market, which I will describe with a phrase: "It is bad and it is never going to get any better". 

The here and now, what is happening this minute and day, becomes the best forecast for as long as a human can see, which is not very far. Maybe it is due to the slow motion effect of real time living, where days seem long and a year becomes an eternity when one dwells on the passage of minutes or days rather than the ebb and flow of history in the minimum unit of years.  

Generally, somehow and someway, the economy sinks and then prospers, then sinks and expands again. 

Ultimately, it is foolish to extrapolate the present into the indefinite future. This is sort of obvious looking back at a few centuries, but you would never know it based on how investors value companies based on a year or two of declining earnings caused by the latest in a long series of economic calamities.  

Maybe it is due to an incomprehensible inability to "remember" much of anything that happened more than a few minutes ago. It is sort of affliction of the human race, always predicable, to forecast the present condition into the indefinite future.  

Understanding investor psychology is always important, which is one reason why I read Professor Schiller's book Irrational Exuberance as soon as it was published in 2000. Home Page of Robert J. Shiller Irrational ExuberanceAkerlof, G.A. and Shiller, R.: Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.

So now, after a bad year in 2008, and another one likely in 2009, it is going to be bad until the end of days, so turn back the clock fifteen to twenty years or more when valuing a company.  

Is a single company in the world going to survive, seems to the prevailing sentiment? Knowing that this is likely to happen in a major bear market that may last say 18 months, the prudent investor who is not stuck perpetually in the present probably needs to anticipate the madness of crowds, duck, squirrel away some money, and wait for the sun to return, or at least a better entry point for a long term hold.  

Otherwise, the more sensible ones will just be trampled by the thundering herd. For some companies, managed by the arrogant and ignorant, though highly compensated and rewarded for failure, the sun will never return and they will be relegated to the dustbin of history by the downturn. Leverage does work both ways in case anyone needs to be reminded.

 Most major companies will survive and prosper during the next upturn.  Many of these companies are now traded at levels prevalent in the early 1990s or even 1980s, as if nothing has transpired in the last twenty years, or at least nothing good.  

I have mentioned several that I have recently purchased with strong hands and a long gaze into the future. One company which I do not yet own, working its way back to a 1980s price, is Alexander & Baldwin. Alexander & Baldwin/Stock Rallies and Quantitative Easing (MARCH 2009)

Incidentally,  Alexander & Baldwin closed at $38.98 yesterday, up from its March 2009 low of $16.21. 

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