Monday, January 28, 2013

Updated Tables Regional Bank Basket Strategy and Lottery Ticket Basket Strategy/Sold 30 DELL at $10.82/Added 150 TRST at $5.17/Bought 50 UNB at $19.45/MBVT, RNST, PCBK, KEY, TRMK

I am updating the tables for both the Lottery Ticket Basket Strategy and the Regional Bank Basket Strategy on the last Monday of each month. The prices shown in the preceding tables will be from last Friday's close.

My basket strategies will have a large number of securities in them. The focus is on the overall return of the basket rather than any component. 

1. Update for Lottery Ticket Basket Strategy: The Lottery Ticket Basket Strategy uses a deep contrarian value strategy appropriately characterized as catching a "falling knife". A common criteria for the stocks contained in this basket is a smashed stock price at the time of purchase and an ugly looking chart. Any technical analyst would most likely have a sell rating on the stock. Selections are made primarily on statistical criteria including price to book, price to sales, forward P/E, cash per share and/or free cash flow. For many selections, I may be pessimistic about the firm's future, but not as pessimistic as the market. I will also occasionally see a ray of light at the end of a dark tunnel. Since I expect failures, which are inevitable and unavoidable in this kind of approach, I limit my exposure to $300 per stock plus any prior trading profits. 

After experiencing some success with this strategy, I  now have a requirement that my total investment in all LT holdings can not exceed my total realized gains for this basket strategy.  

Total Realized Gain: $11,632 
Total Current Investment: $8,638 

Snapshots of all trades where the profit or loss exceeds $30 can be found at the end of this post:

Lottery Ticket Basket Portfolio as of 1/25/2013

Of those positions, I am most inclined to keep Forest City Enterprises long term and to possibly remove it from the LT category (Last Friday's close: FCE-A: 17.33 +0.09). Forest City is a large non-REIT real estate company. It was able to grow nicely during optimal times as shown in this long term chart: FCE-A Interactive Chart It had the peddle to the medal leading up to and into the Near Depression which did not work out well for its shareholders. The stock topped out at around $70 in 2007 and was searching for a bottom at less than $4 by March 2009. I played it as a LT selection initially BOUGHT 50 SHARES OF FCEA AT 6.3-FOREST CITY COMMON-Sold FCE at $13.23 (allowed to go over $300 due to prior profits: Realized gain on 50 shares=$327.48, see snapshot in Gateway Post).

The last purchase was just 30 shares bought in January 2012:

FCE-A Up 46.31% as of 1/25/13
The most high profile Forest City project is Atlantic Yards in Brooklyn.

Company Website: Forest City - Real Estate Management, Development and Services - Live, Work, Shop, Stay, Mixed-Use - Home

(Bonds are rated B3 by Moody's: FINRA)

My largest percentage unrealized gain is in RRsat Global Communications (RRST), an Israeli company. Bought 50 RRST at $3.95-LT Category (March 2012). Back in November 2012, the company declared a year end dividend of $.52 per share. RRsat Reports Third Quarter 2012 Results and Declares a Special Dividend With that dividend, I have a total return of almost 100%. I have no idea what I am going to do with those shares:

RRST UP 89.1% as of 1/25/13
The most successful recent purchases have been Qlogic bought on 12/7/12 and up 29.74% (discussed below); Tetra Technologies bought on 10/15/12 and up 40.09%; and Alumina bought in September and up 25.51%. A few others have had modest gains since their purchase, including Datalink bought last October and up 15.2% and STKL bought in December and up 16.16%. The worst recent purchase was Velti, also bought in October, which has declined 36.85%.

The overall basket has also done better over the last few months due also to some positions returning to profitability after being deep in the red. I had one reader ask me about ING which had fallen a lot after my purchase. I replied that I was not worried about the stock which was a true statement on two levels. One of those levels is that I owned only 30 shares and would not be concerned even if the price went to zero with that kind of capital exposure. ING stock is now back into positive territory with a 9.3% gain. EDG is another one that has recovered and is now up 7.64%.

Nokia is up 38.2% since my purchase:

A. Nokia: On 1/10/13, Nokia shares soared after the company announced better than expected Lumina sales and a probable forecasted profit its mobile phone business, excluding items. Nokia exceeds previous Q4 2012 outlook for Devices & Services and Nokia Siemens Networks » Nokia – PressBloomberg NYT The company sold 4.4M Lumina phones in the last quarter and 86.3M total handsets. Nokia also announced that Nokia Siemens Networks would have revenue of €4B and operating margins of 13% to 15% which was also viewed by many investors as good news. A positive article on the Nokia Siemens joint venture can be found at Forbes.

Positive on Nokia's Announcement:  Seeking Alpha

Remaining negative after the announcement: Seeking Alpha

Other positives include the following:

Nokia Partners with China Mobile to Launch the Lumia 920T, the First TD-SCDMA Windows Phone » Nokia – Press

Nokia and RIM enter into new patent license agreement » Nokia – Press While that press release does not provide any details, Nokia does state that RIM will make a one time payment to Nokia and ongoing payments.

Bought 50 NOK at $2.88-LT Category (May 2012)

Nokia shares did decline after reporting better than expected 4th quarter earnings. The company reported non-IFRS E.P.S. of €.06, up from a loss of €.29. Sales declined 20% to €8.041. Nokia justifiably scrapped its annual dividend to preserve capital. The company paid out €.20 per share last year. SEC Form 6-K

Last Friday's Close: NOK: 4.20 -0.06 (-1.41%) 

B. SuperValu: Headknocker would prefer a do over for the RB's SVU Lotto purchase, Bought 40 SVU as LT at $6.98, "not one of the RB's finer moments but it is all about the future, Go Vandy", a voice was heard in retort.

As noted in prior posts, this company took on too much debt when it acquired Albertsons. Over the past several months, SVU has been shopping itself to potential buyers.

On 1/10/13, the company announced an agreement with a Cerberus Capital Management (CCM) consortium to sell Albertsons, Acme, Jewel-Osco, Shaw's Market stores and related pharmacies. The terms of the deal are described in this press release. SUPERVALU Announces Definitive Agreement for Sale of Five Retail Grocery Banners to Cerberus-Led Investor Group An entity formed by the CCM consortium will assume $3.2B in debt. I am assuming for now that such assumption would include all of the debt originally issued Albertsons, but would not include the 2014 and 2016 bonds originally issued by SVU.

The press release contains a description of what will be left in the new SVU after the transaction is completed:

New Supervalu

I prefer the new SuperValu without the $3.2B in debt to the old SVU with that debt.

Positive comment on SVU after the deal: Seeking Alpha

C. Sold 30 Dell at $10.82 (see Disclaimer): The RB gave this transaction about two seconds of deep thinking which was about 1.9 seconds more than usual. If the NitWit had asked for LB's opinion, LB would have crunched the million or so variables and then concluded that there was a 93.10284756354% probability that Dell was about to announce that it was exploring a possible sale, thereby realizing an even larger gain for our Dear Leader Headknocker.

2013 Dell 30 Shares +$43.37
IDC estimated a 6.4% decline of global PC sales in the 4th quarter, with Dell's sales falling over 20% year-over-year in the quarter, according to that research firm. Bloomberg

After I sold the Dell position, Gardner released its 4th quarter estimate of PC sales. That firm estimated a 4.3% decline. Gartner had Dell's PC share fall to 10.2% in the 2012 4th quarter from 12.2% in the 2011 4th quarter. Gartner

The IDC report was sufficient for me to jettison the recently purchased Dell Lotto Ticket: Bought 30 Dell at $8.85

Subsequent to this sale, word leaked out that Dell was exploring going private.

Floyd Norris pointed out in a recent NYT that Dell had spent $39.7B buying back stock and the company was then worth $22. Tech companies have convinced many investors not to worry about excessively generous stock options since the company would reduce the dilution by buying back stock. In most cases, those stock options are simply a legerdemain for transferring shareholder money primarily to pockets of management.

D. Qlogic (own): QLogic announced better than expected "preliminary" results for its fiscal third quarter. The previous guidance has been non-GAAP $.14 to $.19 from continuing operations. The new guidance was $.19 to $.2.

That announcement was made on 1/15/13 before the market opened and caused a $.56 or 5.5% spurt in the stock price. QLGC Historical Prices

Subsequently, QLogic reported adjusted earnings per share of 20 cents for its fiscal third quarter ending 12/30/12. Cash generated from operations was reported at $32.7. The company ended the quarter with $495.2M in cash.

Last Friday's Close: QLGC: 11.80 +0.98 (+9.06%)

Lottery Ticket Buy: 30 QLGC at $8.83

2. Update for Regional Bank Basket Strategy:  This strategy is explained in the following post:


I am not tracking reinvested dividends in this table. The dividend yield shown in the table is calculated by Yahoo Finance and is based on last Friday's close. The basket underperformed the regional bank ETFs last Friday. Almost every position was up since the last table was posted: Update for Regional Bank and Lottery Ticket Basket Strategies

Regional Bank Basket as of 1/25/2013

Total Realized Gain: $9,921
Total Dividends 2010-12: $4,615

My most problematic holding in this basket is First Niagara: First Niagara Dividend Slash; First Niagara: Just Another Incompetent Bank Board of Directors

A. Trustmark (own): For a few banks in my basket, the earnings reports for the 2012 resulted in stock sell-offs. Those reports were decent and represented improvements over the 2011 4th quarter, but confirmed that an earnings slowdown would likely continue into 2013, marked by continued compression in net interest margin.

For example, I recently bought back 50 shares in Trustmark. Bought 50 TRMK at $21.54.

This is what happened on the day of this bank's earnings release: TRMK: 22.80 -0.85 (-3.59%). The bank reported 2012 4th quarter E.P.S. of 43  cents, up from $.38 in the year ago quarter.  The consensus estimate was for 44 cents.

This was some of the other data as of 12/31/12:

Total Risked Based Capital Ratio: 17.22%
Tangible Common Equity to Tangible Assets=10.28%
Net Charge Offs to Average Loans: .29%
Return on Assets=1.1%
Net Interest Margin=3.94% (down from 4.19% as of 3/31/12)
NPL Ratio=1.41%
Coverage Ratio (excluding impaired loans)= 174.46%
Coverage Ratio=95.6%

Overall, those numbers are good, and non-performing loans declined to the lowest level in 6 quarters. The Board also declared the regular 23 cents per share dividend. So what was the problem?

The E.P.S. number of 43 cents represented a decline from the prior three quarters.

This is the problem in a nutshell:

E.P.S./Net Interest Margin:
$.43 in the 2012 4th quarter/3.94%
$.46 for the 2012 3rd quarter/4.06%
$.45 in the 2012 2nd/ 4.15%
$.47 in the 2012 1st quarter/4.19%

 SEC Filed Press Release

I am keeping this position, at least up to a point. The bank has excellent capital ratios and has used the banking debacle to expand its service territory through FDIC assisted acquisitions. The decline in the net interest margin is understandable given the Fed's monetary policies. The dividend is well covered by earnings, and the yield is over 4% at my cost.

As I noted in the post discussing this last purchase of TRMK shares, it is viewed as a positive that the bank did not cut the dividend during the Near Depression. However, it is viewed negatively that the dividend has not been raised since the 4th quarter of 2007, though that is understandable given the circumstances.

Last Friday's Close: TRMK: 23.07 +0.19 (+0.83%)

B. Keycorp (own): A favorable article about KeyCorp was recently published by Barrons.

I liked the first sentence of the article that made a football analogy to what Woody Hayes once said, "focus on the basics and good things happen".

Without question KeyCorp lost its moorings in the period leading up to the Near Depression. The author of the article refers to "poor loan-underwriting standard" that were exposed during the meltdown, causing KEY to write off $3.9 in bad loans and to sell two dilutive stock offerings. Morningstar estimates that those two large share offerings diluted pre-crisis shareholders by 60%.

To add insult to injury, the quarterly dividend was slashed to 1 cent from 38 cents. Under new management, the quarterly dividend has been raised to 5 cents. As of 9/30/12, NPLs had been slashed to 1.3% of total loans, and the tangible common equity ratio stood at 10.4%. And the 2.5B in TARP money was repaid in 2011.

I thought that the description "poor loan underwriting standards" was excessively generous to KEY's former management.  Bunch of wild and crazy guys in my book.

Beth Mooney is the current CEO and she sounds and acts like a sensible person. Mooney is returning KeyCorp to the basics, blocking and tackling using the football analogy again, and has turned KEY into an "infinitely more focused" bank with a more predictable, less risky earnings and revenues streams. As noted in the article, about 45% of revenues come from fee income businesses, compared to 26% for its peers.

My last add was in December 2012: Added Regional Bank Basket: 40 KEY at $7.87

I have maintained that an investors focus for both KeyCorp and Huntington Bancshares has to be long term. I am more confident about those two banks over the long haul, meaning five to fifteen years from now, rather than over the next one or two. It will simply take a long time for the shares and the dividend to work their respective ways back to pre-crisis levels. Immense damage was done to these banks by their crisis leaders. The former CEO of KEY had over a $5M annual compensation package in 2006.

KeyCorp traded over $38 in 2007: KEY Interactive Chart
HBAN Interactive Chart 

Link to 2012 4th quarter earnings report: SEC Filed Press Release

Last Friday's Close: KEY: 9.29 +0.05 (+0.54%)

C. Added 150 TRST at $5.1667 (see Disclaimer): This transaction brings me up to 620 shares plus shares bought with reinvested dividends. The position is divided into two separate taxable accounts. This last purchase was made in a main taxable account and lowers my average cost per share to $5.33. I intend to sell those shares at some point, probably somewhere in the range of $5.8 to $6 assuming of course the market gives me that opportunity. I would then keep the shares bought in a satellite taxable account. I am reinvesting the dividend in both accounts.

Bought 150 TRST at $5.1667

TRST is a bank holding company that operates, through Trustco Bank, 138 full service banking offices in NY, NJ, Vermont, Massachusetts and Florida. It is primarily concentrated in the NY.

SEC Investor Presentation 11/15/12 (86 branches in 14 NY counties, see page 5)

When I bought these shares, I only had the third quarter results.

Q/E 9/30/12
SEC Filed Press ReleaseSEC Form10-Q
Net Income: $15.8M vs. $14.4M
E.P.S.=$.104 vs $.10
Net Interest Margin: 3.21% (down from 3.29% 2011 3rd q)
Efficiency Ratio: 49.18%
NPL Ratio: 1.92%
Coverage Ratio: 90%
NPA Ratio: 1.36%
Total Risk Based Capital Ratio: 17.42% (holding company)
Total Risk Based Capital Ratio: 17.71% (Trustco Bank NY)
Tangible Equity to Tangible Assets Ratio: 8.27%
Return on Average Assets: .89%
Dividend Yield at Total Cost of $5.17= 5.077%
Dividend Yield Based on Current Annual Payout of $.2625 per share
Dividend Declaration
Payout Ratio: 66.51%

Subsequent to my purchase, Trustco released its 2012 4th quarter results:

Q/E 12/31/12
SEC Filed Press Release
Net Income: $9.8M up 12.5%
E.P.S.= $.104 vs. $.093
Net Interest Margin: 3.21%
Efficiency Ratio: 53.11%
NPL Ratio: 1.96%
Coverage Ratio: .9
NPA Ratio: 1.1%
Tangible Equity to Tangible Assets: 8.24%
Return on Average Assets: .91%
Annualized Charge-Offs to average loans: .37%
Full Service Branches: 138

2012 Earnings vs. 2011
2012 Net Income $37.534 vs. $33.087
2012 E.P.S. = $.4 vs. $.389
Dividend: $.263 unchanged
Payout Ratio: 65.6% down from 67.71%

A negative is that the dividend was slashed from 16 cents per quarter to 11 cents in the first quarter of 2008, and then slashed again to $.0625 in the 2009 second quarter. A small and inconsequential raise to  the current payout of $.0656 took place in the 2010 second quarter. Trustco Bank Stock Splits & Dividends While the current dividend yield is north of 5%, this dividend history is a major negative.

Another negative, previously discussed, was the sale of 15.64M shares at $4.6, back in July 2011. Form 8-K I did not see any good reason for that issuance. Item # 1 TRST (July 2011 Post). That stock issuance was at a price prevailing in 1995. TRST Interactive Chart

The bank did not participate in TARP (page 5 of 2009 form10k), so there was no reason to sell stock in order to pay back the government.

Along with the dividend cut, the unnecessary share offering has probably placed this stock in the doghouse among a lot of investors.

The current price is at levels prevailing in 1996 which is obviously not good for long time shareholders, nor does it place TRST's management in a positive light. I am a relatively new shareholder whose average cost is near the current price. Given the bank's branch network and their location, the bank has recovery potential and may be attractive to a more competently run bank desiring to expand into NY.

Last Friday's Close: TRST: 5.15 -0.03 (-0.58%)

D. Renasant (own): I thought that RNST's 4th quarter report was noteworthy in that it managed to expand its net interest margin by 13 basis points to 3.97%, compared to 3.84% in the 2011 4th quarter. The bank reported net income of $7.3M or .29 cents per share, beating the consensus estimate by 1 cent. Renasant Corporation Announces 2012 Fourth Quarter and Year-end Results Nonetheless, the stock sold off after the results.

I quit reinvesting the dividend.

Bought 50 RNST at $14.14Bought: 50 RNST at $13.70Sold 50 RNST at $14.91Added 50 RNST at $15.85

Last Friday's Close: RNST: 19.06 -0.04 (-0.21%)

F. Pacific Continental (own): PCBK reported earnings of 19 cents, which included some merger related expenses. Pacific Continental Corporation Reports Fourth Quarter and Full Year 2012 Results The consensus estimate was 19 cents, but I do not know if the 6 analysts included or excluded the one time merger expense. As of 12/31/12, the total total risk based capital capital ratio was excellent at 18.15% (well capitalized 10%); the net interest margin was 4.11% (down from 4.59% as of 12/31/11); NPL ratio=.97%; coverage ratio=193.29%; efficiency ratio=64.26%; tangible book value per share was $9.05; tangible common equity to tangible assets was 11.94%; and return on average assets was .99%.

The contraction in the net interest margin is the only negative development, but the overall number is still above average.

Importantly from my perspective, PCBK raised its quarterly dividend by one cent to 8 cents and declared a special dividend of 8 cents. Pacific Continental Corporation Increases Regular Cash Dividend and Declares Special Cash Dividend

Added 70 PCBK AT $9 (and removed from LT category); Bought 30 PCBK as LT at 9.42

G. Bought Back 50 Shares of UNB at $19.45-In A Satellite Brokerage Account (see Disclaimer):

The stock went ex dividend on 1/23/13: Union Bankshares

Sold 50 UNB at $19.5-Bought 50 UNB at 18 (July 2010)

Bank Website: Community Banking for Northern Vermont and New Hampshire

Branches Located in Northern Vermont (14) and Western New Hampshire (4): Union Bank Branches

UNB expanded into New Hampshire in 2011.

Main Office in Morrisville, VT: Union Bank Morrisville, VT Main Office

Dividend History: Union Bankshares, Inc. (current rate $.25 in effect since 2nd Q. 2009 when it was reduced from $.28, the annual dividend was raised from 71 cents in 2001 to $1.12 in 2007)

The dividend yield at a total cost of $19.45 is about 5.14%.

UNB did not participate in TARP:

2011 Annual Report:  UNB

For the 4th quarter of 2012, the bank reported net income of $2.2 million or 50 cents per share, up from $1.7M or $.39 per share in the 2011 4th quarter.  Of the net income number, $1.24M was due to the sale of securities and real estate loans. There was also extraordinary charges including a prepayment penalty of $875,000 incurred when "high rate Federal Home Loan Bank" advances were prepaid. The income tax expense also increased by $193,000. Total assets and total loans increased by 4% and 6% respectively during 2012. The bank provides few details until it files Form 10-Q which is aggravating.

The 10-Q for the September 2012 quarter contains the following pertinent information: 9.30.12 UNB 10-Q

E.P.S. $.44 vs. $.32
Net Interest Margin: 4.32%
Return on Average Assets: 1.4%
Return on Average Equity: 19.21%
Efficiency Ratio: 66.68%
NPA Ratio=.86%
NPL Ratio=.76%
Coverage Ratio=128.23%
Total Capital Ratio=12.17% (bank)
Tier 1 Capital to Risk Weighted Assets: 10.97%
Tier 1 Capital to Average Assets: 7.56%
Net Charge Offs= .16%

Prior Round-Trip: Bought 50 UNB at $18 (July 2010)-Sold 50 UNB at $19.5 (July 2011)

Last Friday's Close: UNB: 19.52 -0.53 (-2.64%)

H. Merchants Bancshares (own): An excellent article about Merchants Bancshares was published in SeekingAlpha and I left some comments to that article. I noted that the bank increased earnings during the last recession.  (page 47 of 2009 Annual Report: SEC Form 10-K)

The SA  article is the most detailed report on this small bank that I have read to date.

Of all of the banks that I own, it easily had the best NPL and NPA ratios during the Near Depression. In the third quarter of 2012, it had zero loan charge offs, and an NPA asset ratio of just .16%.

As you would expect, the bank declined to participate in the TARP program. SEC Filed Press Release

One downside to being a responsible banking enterprise is that earnings growth can be anemic at times.   After all, the bank is focused on loaning money to borrowers that can service the loan payments.

The 2012 4th quarter report highlights the good, as well as the earnings growth issue.

Net Income: $3.84M up from $3.71M in the 2011 4th quarter
E.P.S.= $.61 vs. .$59 (+3.3%)
Net Interest Margin: 3.2% down from 3.51%
Efficiency Ratio: 60.74%
Return on Average Equity: 13.08% down from 13.77%
NPL Ratio=.27%
Coverage Ratio=397%
NPA Ratio=.17%
Total Risk Based Capital Ratio=16.05%, up from 15.81%
Tangible capital ratio=6.92% (unchanged)
Book Value Per Share=$19.84, up from $18.29 for 2011 4th Q
(Note: MBVT has no intangible assets)

For 2012, total assets grew 6% and deposits increased by 7.91%. E.P.S. for 2012 was reported at $2.42, up from $2.35.

This is what I find comforting:

Annual E.P.S.
2012  $2.42
2011  $2.35
2010  $2.51
2009  $2.04
2008  $1.96
2007  $1.77

The jump in 2010 was largely due to a higher than normal non-interest income number of $11.631M vs. 10.315M in 2009, discussed at page 31 of the 2010 10-K. Non-interest income would include gains on securities sales, operation of a trust company division, service charges, debit card income and overdraft fees.

The Bank paid a $5.54 per share in dividend in 2004 that included a large special dividend of $4.5 per share. The current dividend is 29 cents per share, with the next ex dividend data as 1/29/13: Dividends | Investor Relations | Merchants Bancshares inc.

This kind of investment is not going to be a home run, a triple, or double. A 8-10% annualized return with the dividend would be more than satisfactory.

I have netted one round trip profit ($160.10) on a 50 share lot. Bought 50 MBVT at $22.9-SOLD 50 MBVT at $26.5 (July 2011). I currently own 50 shares: Bought 50 MBVT at $26.25 (May 2012). If I have an opportunity to sell at $32.25 on or before May 2015, I may not sell but I would view this position to be a successful

{at $32.25, excluding commission costs, the return on the stock would be about 22.86% at a purchase cost of $26.25, plus the 4.4% annualized dividend yield at a total cost of $26.25 with no dividend increases currently expected by me given the conservative nature of this bank. This hypothetical  would produce about a 12% annualized return over a three year period}.  

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