Monday, October 15, 2012

SOLD LT NYT at $10.45/Added 40 HBAN at $7.04/BZH/Added 50 TDIV at $19.2/Regional Bank Selloff Last Friday/Commonwealth REIT: FFO and CAD Distinction

Merrill Lynch had the foresight to predict in 1981 the start of a bond bull market. Their strategists are now forecasting the end of that bond bull era, with the rotation out of bonds starting next spring. Those strategists are recommending overweighting gold, corporate and emerging market debt, and U.S. stocks particularly technology and quality large capitalization names. (summarized at 24/7 Wall St.;  MarketWatch; and Barrons)

In an interview published by Barrons, Byron Wein that he was positive on technology and recommended that investors have 5% of their assets in gold.

One relatively inexpensive way to play large cap technology stocks is with XLK, which contains the technology stocks that are included in the S & P 500. The expense ratio for that ETF is .18%. Technology Select Sector SPDR Fund That fund had a 20% weighting in Apple as of 10/11/12. XLK Holdings I do not currently own it but may initiate a position with an odd lot soon. Instead of XLK, I have elected to start an initial position in the higher cost TDIV, which is focused on dividend paying technology and telecommunications stocks. Both funds are concentrated in large cap names such as IBM, Microsoft, AT & T, Verizon, Intel, Cisco, Oracle and Qualcomm. TDIV does not yet include Apple but will add that company when it has paid a dividend for a year. And, since Google does not pay a dividend, it is not owned by TDIV but has a 6.69% weighting in XLK. {Friday's Close for XLK: XLK: 29.92 -0.02 (-0.07%) and Maximum XLK Chart}

One of my recently purchased LTs, BEAZER HOMES USA, underwent a 1 for 5 reverse split last Friday. I now own 10 shares. BOUGHT 50 BZH at $2.92-LT Category That reverse split reduces the outstanding shares from approximately 123M to 24.6M. Beazer Homes USA, Inc. Announces 1-for-5 Reverse Stock Split

Last Friday, Raymond James initiated coverage of Velti with an outperform rating and a $12 price target. I recently bought 30 shares in the LT category. Bought 30 VELT at $7.7-LT Category Friday's Close: VELT: 7.68 -0.24 (-3.03%)

A favorable article on RRSat Global Communications (RRST) was published by SeekingAlpha. Bought 50 RRST at $3.95-LT Category (3/8/12 Post). Friday's Close: RRST: 6.11 +0.36 (+6.26%)

J P Morgan reported net income of $5.71B or $1.4 a share, up 34% from the year ago quarterly profit of $4.26B. The consensus estimate was for $1.24. (SEC Filed Earnings Release - Third Quarter 2012 Results). Friday's Close: JPM: 41.62 -0.48 (-1.14%)

Jaimie Dimon believes that the housing market has turned the corner. Wells Fargo made a similar statement last week. WSJ The economy will be much better over the next four years, compared to the last four in my opinion, irrespective of who wins this November. More time is required to recover from a recession induced by a financial implosion, particularly one resulting from too much debt (a balance sheet recession), than a garden variety, business cycle  recession. Still, 2% real GDP growth may be close to the optimistic case given the need to put the U.S. government on a diet.

The earnings reports from J.P. Morgan and Wells Fargo, released last Friday, were generally favorable but sparked a widespread selloff in bank stocks. Some of that response may be due to selling on the news and to certain components of those reports. For example, WFC reported a 25 basis point decline in net interest margin to 3.66%. The contraction in net interest margin is a problem for most banks, and is caused by the Fed's monetary policy. The cost of funds, as reflected in what savers receive in interest has already fallen to rock bottom levels, while prepayments on higher yielding loans increase and the yield on new loans decline. One ETF containing regional bank stocks fell 3.13% last Friday: KRE: 28.16 -0.91 (-3.13%) : SPDR S&P Regional Banking ETF. Another one declined 2.66%. IAT: 25.29 -0.69 (-2.66%) : iShares Dow Jones U.S. Regional.  My regional bank basket was down 2.09% last Friday with just three gainers (BHB, NBN, UVSP) generating a grand total of $12 in green.

Sears completed the spin-off of its Hometown and Outlet Stores, receiving $446.4M in gross proceeds. Of that amount, 100M was borrowed by Hometown and paid to Sears as a dividend. Press Release While I recently sold my 3 Sears senior secured bonds, I still own 100 shares of the $25 par value TC SSRAP.  (SOLD 3 Sears 6.625% Senior Secured Bonds Maturing in 2018 at 95.002)

CAD VS. FFO Distinction for CWH

Citi reiterated its sell rating on Commonwealth REIT (CWH) after that company cut its dividend in half. Friday's Close: CWH: 14.72 -0.47 (-3.09%) The Citigroup analyst noted that CWH was paying out more in a dividend than its free cash flow. CWH will make three calculations for investors. The first is GAAP Net Income which will include the non-cash depreciation expense, a major item for REITs. The second number will be funds from operations (FFO) and normalized FFO. That number will add depreciation back to net income. For many REITs the FFO number may be close to free cash flow which REITs will call Cash Available for Distribution (CAD) to shareholders, unless there are recurring and significant capital type expenditures.

There is a large difference between FFO and CAD for CWH.  CWH subtracts several items from FFO to arrive at CAD, and several of those numbers are significant:

‎SEC Filing at page 38

Two large subtractions deal with CWH's non-controlling share ownership of two other REITs, GOV and SIR. Those would be unusual items, and would not be a significant part of the reported FFO for either GOV or SIR for example. Dividends received by CWH are added to FFO. The major subtraction is $27.499M for an item called "recurring capital expenditures".  Cash spent for those expenditures are not available for dividends. For the Q/E 6/12, the CAD per share number was 45 cents and the dividend for that quarter was 50 cents. Recurring capital expenditures are explained at page 21 and encompass tenant improvements, leasing costs, and building improvements to replace obsolete building components which CWH believes will extend the life of a property. I would not profess an understanding of the $9.899M deduction from FFO for "straight line rent continuing operations", though I might understand the accounting with a decent explanation.

I did not find a similar CAD calculation for GOV. There is a calculation showing both FFO and normalized FFO at page 30 for the Q/E 6/30/12 and the six month period for 2012. Normalized FFO is shown at $1.05 per share for six months (page 30). The dividends paid out for those six months totaled $.84. GOV recently raised the quarterly dividend by 1 cent per share.  Page 18 does contain data for "recurring capital expenditures", which totaled 2.185M during the first six months of 2012 or roughly 4.64 cents per share. If I subtract that number from the normalized FFO of $1.05, I would still have over a $1 per share in cash to support that 84 cent per share in shareholder distributions.  


Once a voter becomes reasonably informed by making an effort to learn about the issues without distilling reliable information through an ideological prism, it becomes impossible to listen to politicians from either political tribe speak, at least for more than a few minutes. The reason is simple. Politicians find it inconvenient to be truthful and factually accurate. There is no such thing in American politics as a "debate" using accurate information and/or the more reliable evidence. Lying works in politics.

This is a link to SNL's version of the V-P debate.

Instead of watching the recent Vice-Presidential debate, I watched the Tennessee Titans play Pittsburgh last Thursday night and was shocked that the home team won the game. The Titans have made several mistakes with their first round draft picks including the choice of Vince Young over Jay Cutler (now the starting quarterback for the Chicago Bears). summarized for me the fact violations made by the candidates. (see also: Fact checking the vice presidential debate - The Washington Post) I view the distortions by both sides to be disgusting.

1. Sold 30 NYT at $10.45 Last Thursday (Lottery Ticket Basket Strategy)(see Disclaimer): The shares of the NYT rose almost 5% last Thursday after Barclays upgraded the stock to overweight from neutral and raised the price target to $11 from $9. I sold my LT position into that rally. While I subscribe to the NYT, and many freeloaders have decided to pay from online access, every young adult that I know has never subscribed to a newspaper. 

2012 NYT 30 Shares +$39.29
Bought 30 NYT as LT @ 8.61

2. Promoted HBAN to the Regional Bank Basket Strategy from the Lottery Ticket Basket Strategy: Added 40 at $7.04 Last Friday (see Disclaimer): Huntington is a large regional bank with over 680 branches in six midwestern states as of July 2012. The headquarters is located in Columbus, Ohio.

This purchase brings my position in Huntington Bancshares up to 100 shares. The transfer of the position to the Regional Bank Basket strategy reflects primarily my opinion about the risk. By removing the LT tag, I am now able to invest more than $300, plus prior realized gains in HBAN.  

The previous LT buys were made in 2011 when HBAN's recovery potential from the Near Depression and its self-inflicted wounds was viewed as less certain.

Bought 30 HBAN @ 7.25 as LT (2/7/11 Post); Added 30 HBAN as LT at $4.8 (10/24/11 Post).

I did harvest a profit of $139.64 on two odd lot trades in 2010:

2010 HBAN Two Odd Lot Trades +$139.64
The 40 share purchase last Friday raised my average cost per share slightly to $6.69. Assuming satisfactory earnings reports, I may add to my existing position when such an add would lower my average cost per share.

A long term chart of HBAN's stock price highlights the problem. HBAN Interactive Chart The most idiotic mistake, an indefensible one, was Huntington's acquisition of SKY Financial, and its subprime lending business, in 2007. The responsible CEO was removed in 2009.

The share price peaked near $25 in 2006. By February 2009, the price had fallen to below $1.5. Net income had already started to slide significantly in 2007. In 2008, HBAN reported a $160+ million dollar loss which leaped to over $3.268 billion in 2009. So, given the problems, I classified the holding as a LT which controlled my risk by limiting the amount of the investment.  The bank managed to earn $140.315 million in 2010, and the earnings vastly improved in 2011 with net income reported at $511.8 million. (see 2011 Form 10-K at page 22). That page also shows the improvement in the capital ratios from 2007 through 2011. The bank is on a recovery path.

For the Q/E 6/30/12, the bank reported net income of $152.7M or $.17 per share. The expectation was for $.15. Reuters The efficiency ratio was 62.8%; the net interest margin was 3.42%; the bank earned a 1.1% on average assets; non-performing loans stood at 1.19% of total loans, the coverage ratio was comforting at 181% of NALs; and tangible book value per share was reported at $5.49. News release of Huntington Bancshares Incorporated, dated July 19, 2012

The capital ratios are good:

HBAN Capital Ratios
Quarterly Financial Review, June 2012.

The current consensus 2013 E.P.S. estimate is for 67 cents, up from 63 cents in 2012.

Huntington Bancshares repurchased the government's preferred stock, issued under the TARP program, in December 2010.

Besides losing all of that money in 2009, another long term negative is that the bank sold stock at very low prices to replenish its capital base. During 2009, the bank issued 346.8 million shares that admittedly were "significantly dilutive to existing shareholders". (page 13 2010 10-K) Another 146+ million shares were sold in 2010 at $6.30 raising $920M in gross proceeds. The proceeds from that offering were used to buy back the $1.4 billion in government cumulative preferred stock. While those stock offerings diluted existing shareholders, the sheer number of shares will restrain E.P.S. growth for years to come.

There were 867+ million diluted shares outstanding as of 6/30/12, up from 367 million at the end of 2007. That dilution is just a huge negative going forward and will make a return back to a $24 share price a tough and long slog.

In addition to that massive dilution, the shareholders had their quarterly dividend cut from $.265 per share in 2008 to a penny in 2009. I wonder if the Board Members who approved the Sky Financial purchase volunteered to return their compensation and perks. The quarterly dividend is back up to 4 cents per share. Huntington Bank Dividend History

Ideally, now that HBAN has made considerable progress toward recovery, I would like to see it acquired by a larger bank searching for a large midwest footprint. Otherwise, I will need to hold the stock for years and hope for a continued recovery.  My goal would be to exit the position in the $12 to $15 range within five years.

Friday's Close: HBAN: 6.9280 -0.2220 (-3.10%)

3. Added 50 of the Stock TDIV at $19.2 Last Friday (see Disclaimer): I averaged down on the previously purchased 50 share position purchased in a taxable account. I also own 50 shares in the ROTH IRA and will not buy anymore in that account which is heavy into bonds, bond funds, and several different types of high yielding securities. It is highly unusual to have even a small position in an IRA account with less than a 5% annual payout.

I have recently discussed TDIV and have nothing to add, except that technology stocks have sold off since my original purchases. Bought 50 TDIV at $19.94-ROTH IRA (10/3/12 Post); and Bought 50 TDIV at $19.95 (8/28/12 Post). The 50 share add lowered my average cost per share from $20.11 to $19.73 for the shares held in a taxable account.

First Trust NASDAQ Technology Dividend Index Fund Holdings (TDIV)

While I may buy more of TDIV at lower prices, my next buy will more likely be an odd lot purchase of XLK, simply to gain exposure to large cap technology stocks that do not pay dividends. I own some some individual names, such as Intel, Microsoft and Applied Materials, that pay decent dividends with the largest individual tech position in Intel.

So far, the market does not appear to share my opinion about the attractive valuations of large cap tech stocks.

Friday's Close: TDIV: 19.15 -0.06 (-0.31%) 

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