Monday, September 30, 2013

Updated Tables for the Lottery Ticket and Regional Bank Basket Strategies/Added 50 FISI at $18.8/Bought 40 IRDM at $6.82, 50 AT @ $4.08/Sold 50 NOK at $5.48

The Lottery Ticket and Regional Bank Basket strategies are updated on the last Monday of each month. The following two tables will have closing prices from the previous Friday. 

Friday 9/27/13 Closing Prices:
S & P 500: 1,691.75 -6.92 (-0.41%)
DJI: 15,258.24 -70.06 (-0.46%)
Russell 2000: 1,074.19 -4.22 (-0.39%)

1. Update of 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. I spend anywhere from thirty minutes to an hour researching a potential purchase prior to purchase.

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. My total exposure is currently under $7,000.

The name of the strategy aptly describes the risk. It is somewhat analogous in many cases to playing a hand of blackjack for the purchase amount knowing that the card count favors the house. It is a form of entertainment and an alternative to a casino visit. Based on the results to date, this strategy is far more likely to produce positive results even with the LB's skill at the tables. The primary purpose of the LT strategy is to entertain Right Brain, let it swing for the fences with up to $300, and keep the Nit Wit from interfering with Left Brain's management of Headknocker's portfolio.

Snapshots of realized gains can be found at the end of the Gateway Post on this topic: Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post

Net Realized Gains: $13,100.83

Lottery Ticket Basket as of 9/27/13

A. Bought 50 Atlantic Power at $4.08 (see Disclaimer):  Atlantic Power Corp. (AT) is an independent power producer with a generation capacity of 3,018MW, consisting of 29 generation projects in 11 states and two Canadian provinces. Atlantic Power Corporation Its aggregate ownership interest is lower at 2,098MW due to owning less than 100% of some projects.

SEC June 2013 Investor Presentation

The only reasons for buying a Lotto ticket are the smashed stock price and a gut feeling that the generation owned by this firm may become more valuable in the future. This firm owns natural gas, hydro, wind and biomass generation units. A list can be found at the Atlantic Power Corporation website. New base load generation derived from coal and nuclear seems to be unlikely. Obama's EPA is attempting to make it very costly to build new coal fired generation and many coal plants have been retired recently, or soon will be, due to costly retrofits required by existing regulation that make those mostly older plants uneconomical.{EPA; WSJTIME.comReuters (estimating that up to 20% of existing coal fired generating capacity will be shut)

Snapshot of Trade:

2013 Bought 50 AT @ $4.08
Atlantic Power is a typical lottery ticket selection. The stock price has been smashed into the low single digits after hitting a $16.25 price back in July 2011. Atlantic Power Stock Chart 

Investor sentiment is summarized in a recent Seeking Alpha where the author identified this stock as one of four to avoid.

The most recent earnings report is discussed in this Motley Fool article. Atlantic Power Corporation Releases Second Quarter 2013 Results; SEC Form 10-Q for the Q/E 6/30/13

Earnings Call Transcript - Seeking Alpha

As noted in the Motley Fool article, the stock dropped 30% after the first quarter earnings report, when the company slashed the dividend by 66%. The monthly dividend had been $.0958: Atlantic Power Corporation.

Atlantic Power Corporation is currently paying a monthly dividend, with the last distribution of C$.03333 going ex dividend shortly after my purchase.

Many investors argue that this company should not be paying any dividend given its earnings and debt. As of 6/30/13, long term debt was $1.462B including some non-recourse debt. (page 17 10-Q) I would agree with that assessment. While the dividend cut resulted in the usual class action suits, I view that reduction as prudent and would not mind an elimination provided the cash flow is used to reduce the debt.

I have demoted this stock to my LT Basket strategy, based on recent developments, after buying and selling 200 shares at much higher levels than now:

2010 Sold 200 AT $82.15
Item # 6 Bought 100 ATP:TO at $11.97 CAD (January 2010)- Item # 5 Sold 100 MCQPF at $7.18 and Bought 100 ATP:TO at 13.01 CAD (March 2010) -Sold 200 ATP:TO at $13.14 (July 2010)

(note: I included a reference in the foregoing link to another Canadian independent power producer, formerly known as Macquarie Power and Infrastructure, that changed its name to Capstone Infrastructure Corporation and now trades under the Toronto exchange symbol CSE. This is a link to the last quarterly report: "Capstone Infrastructure Corporation Reports Strong Second Quarter 2013 Performance")

When I bought and sold those shares, the stock was traded on the Toronto exchange, and my profit was adversely impacted somewhat by currency exchange relating to the relevant calculation for tax reporting purposes. Subsequently, the shares started to trade on the NYSE using the symbol "AT" which is where I purchased this 50 share lot.

Closing Price Last Friday: AT: $4.25 -0.04 (-0.93%)

B. Bought 40 IRDM at $6.82 (see Disclaimer): I have demoted this stock from the Flyer's Basket Strategy to the Lottery Ticker Basket based on the last earnings report. SEC Filed Press Release On the day of that release (8/1), the shares plunged 19% after the company reported E.P.S. at $.18 vs. the consensus estimate of $.22.

Iridium Communications provides mobile voice and data communications services through satellites worldwide.

Link to recent article about Iridium in the

Link to recent article about Iridium published at Seeking Alpha.

Snapshot of Trade:
Bought 40 IRDM at $6.82
I originally bought and sold 100 shares as part of the Flyer's Basket strategy.

2013 Sold 100 IRDM +$34.89
Item # 1 Bought 100 IRDM at $7.68

I no longer view this stock as worth the risk of a 100 share investment. I do not recall what provoked me to sell the shares earlier this year, but something spooked me. I did not note the sell in the blog so I can not consult this log of HQ's trading operation to refresh my memory about the rationale for selling that prior 100 share lot.

Profile Page at Reuters

Key Developments Page at Reuters

This selection is based primarily on statistical criteria:

IRDM Key Statistics at $6.8 price, as of 8/27/13
IRDM Key Statistics
TTM P/E=8.85
Forward P/E=6.94
P/S= 1.42

The stock is heavily shorted with 16.9% of the sold short as of 8/15/13. The short ratio at that time was 12.4. A short ratio is generally determined by dividing the number of shares sold short by the average trading volume over 30 days. While the high short ratio can lead to a short squeeze, particularly after an unexpected dose of positive news, it will also frequently reflect a negative view on the firm's prospects by institutional investors.

At the time of my purchase, the consensus E.P.S. estimate was for $.78 in 2013 and .98 in 2014 which would represent slightly over a 25% growth rate assuming those numbers are hit on the button. IRDM Analyst Estimates

Closing Price Last Friday: IRDM: $6.87 +0.03 (+0.44%)

C.  Sold 50 Nokia at $5.48 (see disclaimer):

Snapshot of Trade:

Snapshot of Profit: 

2013 Sold NOK 50 Shares +$114.09
Item # 3 Bought 50 NOK at $2.88-LT Category (MAY 2012)

Nokia shares rose over 31% on 9/3 after it was announced that Microsoft would be buying NOK's handset and services business for $7.2B.

Closing Price on 9/3/13: NOK: $5.12 +1.22 (+31.28%)

Part of that deal includes a 2.18B payment to license Nokia's patents. SEC Filed Press Release;  (Transcript) - Seeking Alpha

This acquisition is a way for Microsoft to use its overseas cash which is earning almost nothing at the moment.

In the press release, Microsoft claimed that the deal with enable it to accelerate the growth of its share and profit in the mobile device space "through faster innovation, increased synergies, and unified branding and marketing." Microsoft makes its case in more detail in this investor presentation: Microsoft StrategicRationale.pdf

Assuming that transaction is completed, Nokia's primary assets would be its patents, its "Here" mapping and location business (NAVTEQ Maps), and telecommunications equipment (NSN – Telecommunications Infrastructure – Mobile Broadband and Services )

Nokia acquired Siemens' 50% stake in the NSN business for $2.2B last June. The potential appeal in the NSN segment is the 4G Long Term Evolution (LTE) technology. (see for recent contract wins: Press releases | Nokia Solutions and Networks).

Nokia acquired Navteq in 2007 for $8.1B. Nokia completes its acquisition of NAVTEQ » Nokia – Press; Navteq - Crain's Chicago Business.

Jim Cramer recommended selling NOK on this news, a ring the register type of event. He further opined that Microsoft could burn its excess cash in an incinerator or buy Nokia's handset business.

While I like NOK better with the $7B in additional cash, and without the money losing handset business and its 32,000 employees, I have no way to gauge the value of the company going forward without spending an undue amount of time for such a small position, so I rang the register.

Closing Price Last Friday: NOK: 6.66 +0.02 (+0.30%) (sold too soon)

2. Update for Regional Bank Basket Strategy

This strategy is explained in my Gateway Post on this topic:

I am not tracking reinvested dividends in the following table. The dividend yield showed in this table is calculated by Yahoo Finance based on last Friday's close. My dividend yield for each position will be different based on my total cost numbers. In most cases, with FNFG and VLY being notable exceptions, my dividend yield will be higher.

The unrealized gains per holding do not include reinvested dividends.

Over the life of this basket strategy, I anticipate that the dividends will provide 40% to 50% of the total return. I am generally keeping my total exposure between $40,000 to $50,000.

Regional banks fell in response to the FED's decision to continue asset purchases at $85B per month.

As noted in prior posts, it was my opinion that the recent rally in this stock sector was based on an anticipated expansion of net interest margin as the FED gradually reduced and then eliminated its asset buying. With intermediate and longer term rates gradually returning to normalized levels, banks could lend at higher rates and consequently earn more due to the net interest margin increase, particularly when ZIRP continues after intermediate and long term rates reset at higher levels. It was anticipated that there would be a couple of years when banks would continue paying their depositors almost nothing while being able to charge more for many types of loans.

Since my last update (8/26/13 Post), I have sold PBCT and PCBK. Sold PCBK at $12.99 (8/31/13 Post); Sold 100 PBCT at $14.61 Net realized gains increased to $14,599.87 from $13,938.48.

I bought 50 more of FISI, as noted below. I previously discussed purchasing American National Bankshares. Bought 50 AMNB at $21.16 (9/7/13 Post)

Net Realized Gains: $14,599.87
Dividends Computed Annually 2010-2012: $4,690.79

A. Added 50 FISI at $18.8-Satellite Taxable Account (see Disclaimer):

Snapshot of Trade:

2013 Bought 50 FISI at $18.8
This was an average down from my recent buy at $19.8. Added 50 FISI at $19.8 (8/26/13 Post). I discussed the last earnings report in that post. 

I will be reinvesting the dividend paid by the 100 shares owned in this satellite taxable account. The bank raised its dividend to $.19 for the third quarter. 

This brings me up to 150 shares with the remaining 50 bought at $15.55 (April 2012). I am not reinvesting the dividend paid by those shares. Financial Institutions, Inc. Announces Increase in Quarterly Dividend  The yield at that rate is about 4% at a total cost of $18.8 per share. 

On the date of this last purchase, regional bank stocks hit an air pocket. FISI declined over 5% on relatively light volume. The stock pierced its 200 day SMA to the downside slightly on 8/27 but then closed slightly above its 200 day SMA the next day. FISI Interactive Chart The 200 day SMA was at $19.61 on 8/29/13. 

As of 8/30/13, the consensus E.P.S. estimate was for $1.77 in 2013 and $1.92 in 2014.

After my last purchase, Sterne Agee initiated coverage with a buy rating and a $24 target price, which caused a pop in the price last Wednesday.

Closing Price Last Wednesday: FISI: $19.91 +0.71 (+3.70%)

Closing Price Last Thursday: FISI: $20.71 +0.80 (+4.02%)

Closing Price Last Friday: FISI: 20.78 +0.08 (+0.39%)

I own the 50 shares bought at $15.55 in the main taxable account. The two 50 shares lots were bought later and at a higher cost are held in a satellite taxable account:

FISI 100 Shares Unrealized Gain as of 9/27/13=$149.1
The cost numbers in that snapshot include a $6.95 commission charge for each trade. 

B. West Bancorp (WTBA): Zachs upgraded WTBA to a #1 strong buy rating, That research firm noted the recent 10% dividend increase and board authorization to buy up to $2M in stock. West Bancorp was a recent addition to the regional bank basket: Bought 100 WTBA at $11.67 (6/29/13 Post)

Closing Price Last Friday: WTBA: $13.97 +0.12 (+0.87%)

C. Valley National (VLY): I thought that this interview with VLY's CEO was interesting. He mentions that the refi activity at the bank just fell off a cliff when the 30 year rose to in the mid-4% range. He does not understand it. CEO: Video - Bloomberg Historically, a 4.5% to 5% rate would still be abnormally low, as shown in this historical statistics from Freddie MAC. Primary Mortgage Market Survey Archives - 30 Year Fixed Rate Mortgages - Freddie Mac When I built my home in 1982, the 30 year mortgage rate averaged 16% with .8% in points. Better or worse than now? Go figure.

I expect the refi activity to remain sluggish and will be concentrated now in those households moving into positive equity this year and who do not qualify for refinancing under HARP since the loan is not owned or guaranteed by Fannie or Freddie.

There may be an adjustment period lasting several months for new home purchases or new home buyers. Household formation will be key for new home construction and there is a huge backlog in new household formations estimated by one economist at 2.4M. Younger Generation

I am in the hole on VLY. The bank had been a 5% stock dividend every year between 1995-2012. I would prefer that companies avoid that practice. When adjusting for that dividend, and other stock splits in 1992, 1993, 1998, 2002 and a 10% stock dividend in 1994, I believe that the dividend has been raised most every year since 1986: Shareholder and stock split information - Valley National Bank The dividend payout ratio is way too high at close to 96% so a dividend cut may be forthcoming unless earnings start to accelerate.

Closing Price Last Friday: VLY: $9.76 +0.05 (+0.51%)

D. Community Bank System (CBU)Community Bank was upped to a strong buy by Zacks. CBU has a long history of annual dividend raises:  Investor Relations

Bought 50 CBU @ $23.18 (October 2010)

Closing Price Last Friday: CBU: $33.85 -0.01 (-0.03%)

E. Washington Trust (WASH): Washington Trust raised its dividend for the second time in twelve months. The latest increase takes the quarterly rate up one cent to $.26 per share.

This bank did not cut the dividend rate during the recent Dark Period. The rate was maintained at $.21 for 11 quarters, starting in the 2008 second quarter. Investor Relations The dividend was apparently cut in the 1991 recession, but was thereafter raised annually starting in 1993 first quarter, when the rate was raised to $.0435 per share until the rate was frozen for those 11 quarters at $.21.

Item # 3 Bought 100 WASH at $15.26 (January 2010)-Sold 50 of 100 WASH @ $22.44

Closing Price Last Friday: WASH: $31.20 -0.40 (-1.27%)


Politics and Etc.

1. Looming Government Shutdown and Possible Debt Default: Last Friday, I thought that it was likely that the GOP would cause a government shutdown, and consequently I slightly pared my stock allocation. I will discuss some of those sales in the next blog. If the GOP continues along its current path, and triggers a debt default, then I will be lightening up more.

The House Republicans have decided to condiiton a very brief continuing funding resolution on a 1 year deferral of the healthcare insurance law. Two Democrats voted with them and two republican congressman voted with the other 190 Democrats. Congressional Bills and Votes -

For the GOP's approval to fund the government through 11/15/13, the Democrats would need to do something that is just totally unacceptable to them. Then in about 45 days, we can do this again.

The GOP's irresponsible linkage will insure that a large part of the government will be shuttered as of 12:01 A.M. tomorrow. NYT This will hurt the economy and ultimately cost taxpayers billions.

I will hold the republicans responsible for the upcoming government shutdown and all of its costs. I will not vote for any republican who supported the foregoing linkage viewing it as extremely irresponsible and childish.

If the GOP triggers a debt default by insisting on demands clearly unacceptable to Democrats, I will never vote for another republican who supported that approach.

I live in a RED state and a gerrymandered congressional district designed to insure the election of a right wing reactionary. It does not make any difference that I may change my vote except in a statewide election and only if about 100,000 other independents, willing to vote for politicians from either tribe, reach the same conclusion. I seriously doubt that will happen.

If the Democrats controlled the House and conditioned their approval on a big tax hike, I would blame them with equal disdain and total disgust.

There is no room for the Democrats and Obama to negotiate with the House republicans who want the Democrats to defund or delay key parts of Obamacare, which they are not going to do. It is nothing other than blackmail.

The GOP claims to have polls that the majority will blame the Democrats.  I just view that as proof that their propaganda machine, which frequently delivers a simple and false or misleading message, is much better than the one proffered by Democrats which is more nuanced and difficult to grasp in a twitter culture.

I would expect a republican president to take the same refusal to negotiate approach with the House controlled by Democrats making demands unacceptable to all or virtually all republicans.

The GOP's talking points on this issue are transparent garbage. (e.g. Obama will talk with Assad, Putin and Iran but will not talk to John Boehner)

2. GOP and Guns: The GOP successfully won a recall election against two Colorado state senators who supported sensible gun regulations. Colorado had passed a law prohibiting the sell of those high capacity magazines that can spray a hundred bullets in a few seconds. Republicans were upset as one would expect. Colo. gun magazine - The Denver Post A maniac has a constitutional right to spray as many bullets as technologically feasible without having to reload with a new magazine. Perhaps it should be made really easy to buy a 100 round high capacity cartridge over the Internet.  High-Capacity Magazines

I noted in a post earlier this month that it is 43 times more likely for a gun to kill a family member than an intruder. Stocks, Bonds & Politics Guns kill twice as many children as cancer. (USA Today: Epidemic: Guns kill twice as many kids as cancer does)

In Sunday's paper, the NYT ran a long investigative piece documenting that far more children were being killed with firearms than previously estimated in official records. NYT  Just an unfortunate by product of the American gun culture promoted by the GOP.

One reason for underreporting the number of accidental deaths is shown by a Texas case. A two year old opened a dresser drawer, found a gun, and shot his nine month old baby brother while they were both in the crib. The Texas authorities did not label that as an accidental death but as a homicide. The two year old murdered a nine month old.

A number of commenters defended the actions of a father who gave his 3 year old a .22 caliber rifle as a Christmas present. 

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