Monday, November 26, 2012

Update for Lottery Ticket and Regional Bank Basket Strategies/Bought 30 Dell at $8.85/ Bought 50 TRMK at $21.54

An Update for he Lottery Ticket and Regional Bank Basket Strategies will be published on the last Monday of each month, as previously noted. And today is the last Monday in November.

An update for the  CEF Portfolio will be published randomly once a month, if I have sold or bought more than one position since the last update.

The stock discussions contained in this monthly post will be shorter and in a different format than the discussions in the weekly post. The primary purpose of this monthly post is simply to provide an update on two of my stock basket strategies.

The general format for the monthly post will be to provide a snapshot of the holdings in my Lottery Ticket and Regional Bank Basket Strategies. Prices will be the closing market prices for the previous Friday. I will then discuss one or two notable developments, and will also discuss purchases and sells that were not mentioned in the weekly post.

1. Current Holdings- Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post: While this strategy has generated a number of notable successes since its inception in 2009, I have been struggling as of late.

This strategy is primarily based on statistical criteria. All selections have certain common characteristics including a smashed share price and an ugly looking chart at the time of purchase. A technical analyst  would probably recommend a sell. Most will have price to sales and price to book ratios of less than 1.

The strategy is also subject to strict rules on the amount of each purchase. No more than $300 can be invested in one stock, plus any realized gains for that stock. And, after accumulating realized gains, I added a rule that the total amount invested may not exceed the total realized gains. These selections are called LTs for good reasons.

Total Realized Gains To Date: $11,588.63 Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post (snapshots provided)

Lottery Ticket Basket as of 11/23/12

A. RRST Dividend Declaration: RRsat declared a year end dividend of $.58 per share, payable on 12/13/12. The stock went ex dividend for that distribution on 11/19/21. The company reported third quarter net income of $2.4M or 14 cents per share. RRST ended the last quarter with $34.9M in cash, cash equivalents and marketable securities. I thought the dividend was noteworthy. Bought 50 RRST at $3.95-LT Category

RRST: 6.38 +0.02 (+0.31%)

B. Bought 30 Dell at $8.85 (Lottery Ticket Strategy: New Gateway Post)(see Disclaimer): After the close on 11/15/12, Dell reported third quarter results. The shares closed down 7.33% the next day, near a five year low.

Friday 11/16/12: DELL: 8.86 -0.70 (-7.33%)
Back to March 2009 Five Year Low: DELL Interactive Chart

2012 DELL 30 Shares at $8.85

Since I have no prior trading history in this security, or at least none in the prior decade, the maximum investment is $300 under the strict rules based LT basket strategy.

Tiernan Ray, the technology reporter at  Barrons, who wrote an earlier article about the PCs death titled "Bye-Bye, PCs", referred to the report as "deeply" disappointing. Ray notes that Goldman Sachs has a "sell" rating on the stock. He quotes a Loomis Sayles analyst, Tony Ursillo, who opined that a stock is never cheap when the fundamentals are bad. Those comments may prove to be perceptive or just another example of "group think".

A similar sentiment was expressed by a Bloomberg columnist who titled his article "Dell, HP Earnings Expected to Herald the End of PC Era"

Zacks called the third quarter report "dismal".

Okay, the PC is dead and the laptop is dead too. Just about everyone will start using mobile devices like the IPad.

Oddly given this death sentence, and even with the recession in Europe, the worldwide economic slowdown, and corporations being tight about IT budgets because they always find reasons to be fearful about something, worldwide PC shipments totaled 352+M in 2011. Gartner

IHC expects PC Shipments to contract slightly in 2012 to 348.7 million units.

Maybe the journalists and the herd are engaging in more than a bit of hyperbole. And, it remains to be seen whether the slowdown in the past few months was due in major part to customers postponing purchases until the Windows 8 launch. Still, it would be reasonable to claim that PCs are no longer a growth industry. Single digit growth may be a good year going forward.

The significant slide in the share price, the rampant negativity, and the usual statistical criteria made this stock eligible for a Lottery Ticket purchase.

A long term chart highlights Dell's woes: DELL Interactive Chart During the Crazy Period, Dell's stock peaked near $54 in March 2000. The stock thereafter slid to the high teens before rebounding to over $40 by early 2005. It has been downhill ever since, with brief rallies that petered out as the stock would fall in a series of lower lows.

Dell reported  third quarter adjusted E.P.S. of $.39 on a 11% decline in revenues to $13.72B, compared to the 2011 third quarter. The adjusted E.P.S. number was in line with estimates but the revenue number was well below the consensus forecast. GAAP E.P.S. was $.29. Cash flow for the quarter was reported at $1.3B.

Consumer revenues fell 23% and produced an operating loss of $65.
Public revenues declined 11% with $352M in operating income
Large enterprise revenue fell 8% with $325M in operating income

Dell highlighted these areas, apparently viewed by the company as the positive news:

"Strategic Highlights"
As noted in that strategic highlight section, Dell is more than a PC company (desktops and laptops). Without question, they will need to be much more than just a PC company going forward.

The company expects sequential 2% to 5% growth in the 4th quarter and an adjusted E.P.S. of at least $1.70 per share for 2012.

Earnings Call Transcript - Seeking Alpha

Lottery Tickets are frequently selected based on statistical criteria and a smashed stock price. While the prevailing opinion about the company expressed in the stock price may prove to be accurate, I am making a small contrarian bet that the market has overreacted to the downside. I may also see a ray of light at the end of a dark tunnel.

Key Statistics Based on $8.85 Purchase Price:
Forward P/E=5.06
Trailing P/E=6.03
Price to Sales=.28
Price to Book=1.63
Total Cash=$11.27B
Total Debt=$9.03B
Cash Per Share= $6.5
Dividend Yield= 3.3%

Two of the few positive opinions about Dell, based on valuation, is expressed in this Seeking Alpha article published before the earnings release. Another positive one, is this this article published by  Seeking Alpha after the earnings release.

Lastly, Dell appears to me to be a much better managed company than the Hapless Hewlett Packard whose Board must want to destroy the company since that is the only rationale explanation for their boneheaded acquisitions.

I did spend some time looking through Dells' product offerings: Dell Official Site

While I am not currently in the market for a Windows computer, I did check Best Buy's website and compared the pricing on Dell All-in-One computers, equipped with Windows 8 and the Intel i5 processor.  Windows 8 : All-in-One Computers - Best Buy Dell had one with a 23" touch screen; 1TB hard drive; and a 8GB of memory for $930. That was cheaper than an HP model, priced at $1000, that had the i3 processor, 6GB of memory and a 750GB hard drive. If I was going to buy one now, it would be the Dell computer for $930. I may buy one when Tennessee has its next sales tax holiday.

I am not pleased with the last Apple IMAC that I purchased which has issues. I carried it to the Apple retail store, to the so-called "genius bar", to fix an obvious fan problem and the genius told me nothing was wrong, though there is a problem without any question.

Apple's products have acquired a cult status which could reverse at any time, particularly when consumers realized that similar or even better products are available at far cheaper prices.

Friday's Close: DELL: 9.55 +0.49 (+5.41%)

C. Is Nokia Coming Back to Life: When buying 50 shares of Nokia at $2.88-LT Category, I did not express any confidence in Nokia's future. Instead, it was not crystal clear to me-yet-that Nokia was dead. I noted Mark Twain's statement that the reports of his death had been exaggerated. Mark Twain quotations - Death Most investors had already jumped shipped when I bought my lottery ticket at $2.88. Possibly, they may be end up being right, but it is worth $150 to me to bet against the herd.

Nokia stock has risen sharply over the past two trading days. Last Friday (11/23/12), Nokia shares rose   $.25 or  +7.55% to close at $3.56, so for now I am in profit territory. On the day before Thanksgiving the shares rose 12.2% and are up 33% since closing at $2.67 on 11/15/12. NOK Historical Prices

This price spike may be short covering. Even an optimist about NOK's shares would have to admit that some of that move was due to short covering.

Still, NOK has launched its new phones based on the Windows 8 operating system. Some reports claim that the phones are selling well so far. Tech Trader Daily -; Lumia 920 - Zacks.

A more negative view of Nokia's prospects is articulated by Tiernan Ray in his Barrons column.

2. Current Holdings-Regional Bank Basket Strategy: In this table, I am not tracking shares bought with dividends. The dividend yield shown in the table is calculated by Yahoo Finance at the closing price for 11/22/12 as shown in the table. The dividend yield at my cost would be higher most of the time, with a few notable exceptions such as FNFG and VLY.

I will generally keep my out-of-pocket exposure to this strategy between $40,000 to $50,000. Currently, I am below the lower end of that range based primarily on concerns about the headwinds impacting the entire banking sector including net interest margin compression resulting from the Fed's monetary policy and increased costs due to new regulations. 

Going forward for the next few months, I will likely add small odd lots to existing positions based on price targets formulated in part to reduce my average cost per share. For those familiar with the trading history connected to this strategy, I will frequently average down in small lots and sell the highest cost shares on pops. When that strategy is successfully implemented, I will generally be left with my lowest cost shares, while collecting the dividends and realizing a gain on the highest cost shares. This kind of strategy requires monitoring of the price in addition to the bank's earnings releases, plus patience.

Regional Bank Basket as of 11/23/12 (excludes reinvested Dividends)

A. Bought Back 50 Shares of Trustmark at $21.54 (TRMK)(see Disclaimer): Back in August 2010, I bought 50 share of TRMK at $19.57 and sold those shares at $24.7. (January 2012):

2012 TRMK 50 Shares +$240.57

That long term capital gain represented a 24.39% return on my total cost of $986.45 excluding dividends.

The share price has declined fairly rapidly, based on no company specific news, after closing at $25.30 on 9/24/12: TRMK Historical Prices With the decent dividend yield, potential for capital appreciation and a 14.86% share price decline in less than 2 months, I decided to buy the shares back at $21.54.

2012 TRMK Buy of 50 Shares at $21.54

TRMK is currently paying a decent quarterly dividend of $.23 per share which goes ex dividend on 11/28/12: TRMK Quote At that rate, the dividend yield at a total cost of $21.54 would be about 4.27%.

I have my typical observations about TRMK's dividend. It is a positive that Trustmark did not cut the dividend during the Near Depression or its aftermath. It is slightly negative, though understandable, that the $.23 quarterly rate has been in effect since the 4th quarter of 2007. And, it is positive that TRMK was raising the dividend annually between 1987-2007. Trustmark Dividend History I am interested in regional banks that maintained or increased their dividends during the Dark Period, since it says a great deal in my opinion about the competency and caution of its managers.

A few of the banks in my regional bank basket actually raised their dividend during the Near Depression period.  Given the severity of the collapse, I am not critical of those who simply maintained the dividends at pre-recession levels. A BAC shareholder is receiving just one cent per quarter-even now.

Trustmark is a bank holding company headquartered in Jackson, MS. Its principal operating subsidiary is the Trustmark National Bank (TNB). Through TNB and its other subsidiaries, TRMK has 170 branches located in Mississippi, Tennessee, Georgia and Florida. This bank has used the Near Depression to expand its geographic service area, one of the many criteria used to select banks for inclusion in the REGIONAL BANK BASKET STRATEGY.

Trustmark Profile Page at Reuters

2012 Third Quarter Earnings:

E.P.S. $.46 diluted, up from $.42 Q.E. 9/30/11
Net Interest Margin= 4.06%
Efficiency Ratio= 62.39%
NPL Ratio=1.38%
Coverage Ratio=174.1% (excluding impaired loans)
Total Risk-Based Capital Ratio=17.25%
Tangible Common Equity to Tangible Assets=10.13%
Tangible Common Book Value Per Share=$14.64
Common Book Value Per Share=$19.43
Return on Assets= 1.21%
Net Charge Offs to Loans=.31%

Sources:  SEC Filed Press Release; SEC Form 10-Q for Q/E 9/30/12 (capital ratios at page 39)

NPL's declined 19.1% from the prior quarter.

The bank did participate in TARP and repurchased the government's preferred stock in December 2009 after selling shares at $18.5: 10-Q at page 51

The regional bank basket strategy is likely to last for another 5-7 years.  Over the life of this strategy, which started in 2009, I anticipate that dividends will provide between 40%-50% of the total return.

Friday's Close: TRMK: 22.41 +0.74 (+3.41%) 

No comments:

Post a Comment