Monday, December 30, 2013

Update for Regional Bank and Lottery Ticket Basket Strategies/Sold: BZH at $23.95, LSI at $10.96-LT Basket/Bought as LTs: 50 RFMD at $5.18, 40 BSBR at $6.01/WASH, NPBC

Friday 12/27/13 Closing Prices: 
S & P 500: 1,841.40 -0.62 (-0.03%) 
Russell 2000: 1,161.09 -1.56 (-0.13%) 
VIX: 12.47 +0.14 (+1.14%)  (Stable Vix Pattern-Bullish)
Ten Year Treasury at 3.02%, up from 1.66% 5/1/13
30 Year Treasury at 3.94%, up from 2.83% 5/1/13 
Daily Treasury Yield Curve Rates
10 Year TIP Break-Even:  2.22%
Cleveland Fed Model for Average 10 Year CPI=1.75%
Cleveland Fed Estimates of Inflation Expectations :: Federal Reserve Bank of Cleveland

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.

The last update was on 11/25/13: Update for Regional Bank and Lottery Ticket Basket Strategies/Sold 50 TRST at $7.29/Sold 100 GST at $4.1-Bought: 30 ESIO at $9.88, 100 MRGE at $2.48, 40 LF at $7.49, 50 ELON at $2.23/BHB, UBCP, UBSI, FNB/STKL, CIDM, AMOT, VLY

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.

See 2004 Study by the Brandes Institute: "Falling Knives Around the World" 

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 slightly under $6,000.

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 to 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: $13,581.67 

As previously noted, Google owns Blogger, and its software is turning my snapshots dark, making it more difficult to read. The snapshot has a white background until it is uploaded to Blogger. This is a relatively recent flaw in Google's software.

Click to Enlarge:

Lottery Ticket Basket as of 12/27/13 
I do not have much hope for my mining stocks included in this basket. Gold and silver are in a bear market of uncertain duration. The last bear market lasted about 20 years. The current one started in 2011.

I have three mining stocks in this basket: Thompson Creek Metals (TC)AuRico Gold (AUQ); and Alexco Resource (AXU).

TC is primarily exposed to molybdenum which has been in a bearish price cycle. Prices had fallen 16% this year according to a Bloomberg article published on 11/13. This is a link to a recent bullish Seeking Alpha article and a recent bearish one on Thompson Creek Metals. I am more inclined to agree with the negative outlook. That outlook can change with a significant, non-temporary rise in cooper, gold and molybdenum prices, with an emphasis on molybdenum.

I would not buy as a Lotto today RSH and may elect to take my loss sometime next year.

The largest unrealized percentage gains as of 12/27/13 are as follows:

FCE/A +60.66%
STKL +60.09%

FCF + 46.61%

NPBC +40.95%
SUSQ +40.56%
CIDM +29.49%
Added Snapshot of ING:

ING +53.19% as of 12/30/13 Mid-day
A. Sold LSI at $10.96 (see Disclaimer): LSI is just another Lotto that went down shortly after my purchase back in May 2012. LSI Interactive Chart The stock had traded over $9 in March 2012 before starting a waterfall decline. I caught the falling knife at $7.28 and the price continued to fall until hitting $5.74 in mid-July 2012.

Before the market opened on Monday 12/16/13, Avago Technologies (AVGO) agreed to acquire LSI for $11.15 in an all cash transaction. That price represents a 41% premium to LSI's closing price on the previous Friday.

I went ahead and sold my shares.

Snapshot of Trade:

2013 Sold 40 LSI at $10.96
Snapshot of Profit:

2013 LSI Sold 40 Shares +$131.29
Bought 40 LSI at $7.28-LT Category (May 2012 Post)

B. Sold 10 BZH at $23.95 (see Disclaimer): Beazer Homes USA (BZH) is a homebuilder with operations in 16 states including Middle Tennessee. Profile |

I did not buy 10 shares of BZH. I bought 50. Item # 1 BOUGHT 50 BZH at $2.92-LT Category

The shares then underwent a 1 for 5 reverse split. Adjusted for that split, shares peaked at over $350 per share in 2006. BZH Interactive Chart

I wonder whether long time shareholders had any fun through the parabolic rise and subsequent crash. Unhealthy parabolas, like the one in new home prices between 2002-2007, will implode upon themselves.

Snapshot of Position Before Trade:

Unrealized Gain at 55.67%
Snapshot of Trade:

2013 Sold 10 Shares BZH at $23.95

Snapshot of Profit:
2013 BZH 10 Shares +$77.65
What can I say? The profit will admittedly be insufficient to meet my nursing home expenses. I will be able to fill up my Saturn once and to stock up on some soda and pretzels for the bowl games.

A 1 for 5 split is generally an unfavorable sign post. The stock chart reflects the problems. The last downturn in new home construction was easily the most severe in my lifetime and is showing only faint signs of a recovery:

New One Family Houses Sold: United States- St. Louis Fed

That is one ugly looking chart!

The Census Bureau reported an increase in new single family home construction in November. The estimated seasonally adjusted annual rate was 464,000.

The Mortgage Bankers Association publishes weekly data on new mortgage applications.  Mortgage applications decreased 6.3% for the week ending 12/20/13, compared to the prior week.  MBA Weekly Survey Mortgage applications to purchase homes continued "to run more than ten percent below last year's pace".

While the 30 year mortgage rate is still abnormally low by historical standards (Chart 30-Year Conventional Mortgage Rate), it has been increasing since May. Primary Mortgage Market Survey Archives - 30 Year Fixed Rate Mortgages - Freddie Mac The average 30 year rate is hovering near 4.5%: Primary Mortgage Market Survey (PMMS) - Freddie Mac

While new home construction is improving, and will likely accelerate as the economy recovers more in 2014, there is still a large surplus of vacant homes and those in various stages of foreclosure as the nation works it way through the housing crash.

If there is a pickup in new household formation in 2014, and no major uptick in mortgage rates, then the homebuilders may do better than I currently anticipate in 2014. (The Street: "Low Household Formation Clouds Housing Recovery"Chart Household Formation; Builder Magazine)

Ultimately, the homebuilders will prosper as more young people decide to buy that first house.  It may take a few more years before homebuilders start to roll like its was the 1990s again.

One of the main drags on the budding U.S. recovery has been new single family home construction that is normally robust after a recession as shown above. However, since the last recession was caused by a housing price bubble and overbuilding, the recovery in new home construction has been unusually slow and tepid.

I would not place much, if any reliance, on the consensus E.P.S. BZH forecast. I would just note that the consensus is currently for an E.P.S. of $.59 for the F/Y ending in September 2014 and $1.59 for F/Y 2015. BZH Analyst Estimates At $23.95, the P/E based on the F/Y 2015 estimate would be about 15.

C. Bought 40 BSBR at $6.01 (see Disclaimer): As a reminder, RB is in charge of the Lotto basket and its motto is "don't sweat the details". Its most frequent refrains are "go all in" and "swing for the fences".

Snapshot of Trade: 

2013 Bought 40 BSBR at $6.01
When searching my own blog for any previous trades, I noted one prior purchase:  Bought 50 BSBR at $9.36 I did not find any reference to selling those shares. For this second trip, I demoted BSBR to a Lotto selection based on recent operating results.

Banco Santander (Brasil) S.A. ADS (BSBR) is an ADS for the ordinary shares of Banco Santander Brazil, the smallest of the six bank oligopoly that control banking in Brazil. Santander (SAN) owns a majority interest.

The YF chart goes back to October 2009 and shows a peak price of $15.2 on 11/1/2010. It has been downhill since that high.BSBR Interactive Chart A smashed stock price is the sine qua non of LT selections. The chart never looks pretty or comforting.

I was intrigued by the flatlining of the price starting in July 2013. In short, at least for now, the stock appears to be forming a bottom in the $6-$7 range. I would emphasize the word "appears".

The current consensus forecast is for .79 in 2013 and .85 in 2014. At $6.01, the forward P/E is around 7.07. BSBR Analyst Estimates

Profile Page at Reuters

Key Developments Page at Reuters

I did review the last earnings report filed as part of the SEC Form 6-K for a foreign company: bsbr 3q13_6-k The report highlights a major problem. The delinquency ratio (past due 90 days) was at 5.4% of total loans. The coverage ratio is somewhat comforting at 150.9%. Some of the positive numbers include the following:

ROE Annualized (excluding goodwill) 11.1%
ROA Annualized (excluding goodwill) 1.3%
Efficiency Ratio: 46.4%
Branches 2,372

For the third quarter, net profit excluding goodwill amortization was reported at R$1407, down from R$1410 in the 2012 third quarter. And, as noted in the charts presented at page 18, NPLs have been trending down after hitting 6.8% in the 2013 first quarter.

Morningstar currently has a four star rating on Banco Santander Brasil SA with a $10 fair value and a $5 consider to buy price. When I last discussed this bank, Morningstar had a $15 fair value number and a consider to buy at $9 or lower.

One reason for the decline in the ADS is the weakness of Brazil's Real against the USD over the past year. USD/BRL Currency Conversion Chart On March 13, 2013, a USD would buy about 1.9656 Reals. When I bought this LOTTO, the USD would buy about 2.3553 Reals.  That is a steep decline in the value of the Real which would flow through into the price of the ADS BSBR. The decline in the REAL has shown no significant signs of reversing.

This is a link to the ordinary share price in Reals: SANB11 Stock Quote - Banco Santander (Brasil) S/A Units  (SANB11:SAO) The price was R$14.11 Unlike the ADS shares, the ordinary shares have been fairly stable over the past year, moving in a fairly narrow channel: SANB11 Stock Chart On 3/13, the closing price was R$15.07. The closing price that day for the ADS shares was $7.61. The ADS shares had declined far more than the ordinary shares.

If I look at a five year conversion chart, the REAL was gaining in strength through 2009 and into 2011 reaching a low around 1.55 in July 2011.

The impact of the BRL decline on a USD denominated ETF, the iShares MSCI Brazil Capped ETF (EWZ), is discussed in this ETF Trends article. Another ETF Trends article summarizes some of Brazil's economic problems, including a 3rd quarter GDP report that showed a .5% contraction. I understand why Brazilian equities are down and why the decline is worse for a U.S.D. denominated investment in a Brazilian stock, either through an ADS or a fund.

EWZ had a tough year in 2013: iShares MSCI Brazil Capped Index ETF Chart Maybe 2014 will be better. Goldman Sachs recommended recently that investors cut their emerging market exposure by one-third. While I have a similar critical opinion of most Latin American governments, I am increasing my exposure from practically nothing having mostly liquidated my small positions earlier in the year.

It is important for the investor to understand currency risks. Those risks are particularly important when dealing with the exchange value of the USD versus one of those currencies.

If I am going to make an investment in a Brazilian stock, I am not going to invest much due to the many risks including those generally tagged with the names "currency" and "country". And, I would prefer making the purchase when the Real is weak against the USD and the ordinary shares have declined some in price. Stocks, Bonds & Politics: Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas (June 2010). One problem with that approach is that both the local currency and the ordinary shares can continue to weaken.

D. Bought 50 RFMD at $5.18 (see Disclaimer): This is my replacement for LSI.

Snapshot of Trade:

2013 Bought 50 RFMD at $5.18
RF Micro Devices manufactures radio frequency solutions for original equipment manufacturers in wireless and wired communications applications.

Website RF Micro Devices

Profile page at Reuters

RFMD 2013.3.30-10-K (historic E.P.S. numbers at page 28)

S & P currently rates the common at 4 stars with a $6.5 12 month target price.

Unlike other LT selections, the stock price has not been smashed recently. After peaking at over $69 in 2000, the stock price was thereafter smashed into single digits by 2002. The price has been meandering in the single digits for over a decade. RFMD Interactive Chart The low point was in early 2009 when the shares changed hands just north of a buck.

There are three general reasons why this stock was purchased as a Lotto.

(1) Based on a few stories that I read, RFMD supplies some components for smartphones sold by Apple and Samsung. Apple's deal with China Mobile deal will lead to more sales.; Seeking Alpha

(2) The current valuation is reasonable based on forecasted earnings. The current consensus E.P.S. estimate is for $.43 for the F/Y ending in March 2014 and $.56 for the 2015 F/Y. The forward P/E is a relatively attractive 9.25 based on the consensus E.P.S. for the 2015 F/Y and a stock price of $5.18. The forecasted earnings E.P.S. growth rate for the next fiscal year is 30% over the current fiscal year.

(3) Assorted other statistical criteria are relatively attractive. At a $5.18 price and based on results through the Q/E 9/28/13, the P/S ratio is 1.29. The five year forward P.E.G. ratio is .85.

The company had $149.9M in cash. RFMD 2013.9.28-10Q About $84.6 in convertible debt will mature in April 2014. The terms of that convertible are described starting at page 22 of the last SEC filed annual report.

During the 2014 second fiscal quarter ending in September 2013, GAAP E.P.S. was reported at just $.02 on a 48.2% increase in revenues. The company repurchased 2.4M shares at an average price of $5.03. Earnings Release 2013.9.28 On a non-GAAP basis, net income was reported at $.12 per diluted share. The company projects non-GAAP E.P.S. of between $.13 to $.14 for the F/Y third quarter on revenues of $310.7M to $326.2. The stock sold off after this report apparently due to that guidance which was not as robust as some were then forecasting.  Motley Fool Article

Q2 2014 Earnings Call Transcript - Seeking Alpha

Recent Investor Presentation: (Transcript) - Seeking Alpha

Needless to say, as with LSI, I do not have the knowledge to even understand RFMD's products except in a superficial sense, let alone evaluate them in the competitive landscape. This selection is based on the preceding simpleton criteria.

While I really do not know, one way or the other, a component supplier like RFMD would appear to be a viable acquisition target for a larger company wishing to expand its product lines.  

2. Update for Regional Bank Basket Strategy:

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

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.

I am not tracking reinvested dividends in the following table. 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.

As a result of profit taking over the past several months, I am currently well below my minimum $40,000 out-of-pocket investment threshold for this basket. I am not comfortable with valuations in this sector.

Since my last update, I have paired two positions. Sold 57 FFBC at $17.03-Highest Cost Shares (12/23/13 Post); Pared BDGE Selling Highest Cost 56 Shares at $24.71 (12/10/13 Post).

I did not buy any positions since the last update.

The 50 share position in Washington Trust almost edged out the 141+ shares of FirstMerit as the largest unrealized gain. The 50 share WASH continues to easily be the largest unrealized percentage gain in this basket:

WASH 50 Shares +$1,106.5 Up 144.26%
FMER 141+ Shares +$1110.62 Up 53.89%
Net Realized Gains to Date: $ 15,406.47
Dividends 2010-2012 (updated yearly only)= $4,690.79

In the next post, I will include the total for my 2013 dividends 

Click to Enlarge:

Regional Bank Basket as of 12/27/13
A. Washington Trust (own): Washington Trust Bancorp increased its dividend for the third time this year, raising the quarterly rate to $.27 from $.26.

The stock responded positively to this announcement, which was made on 12/19/13.

Closing Price 12/20/13: WASH: $37.21 +1.35 (+3.76%)

This stock continues to represent my largest percentage gain in this basket with shares bought at $15.26: Bought 100 WASH at $15.26-Sold 50 of 100 WASH @ 22.44 Needless to say, I took a profit on 50 shares too soon.

B. National Penn Bankshares (own): National Penn announced that the Board had authorized the repurchase of "up to" 5% of its outstanding stock in 2014.

The stock rose in response to this announcement:

Closing Price 12/20/13: NPBC: $11.30 +0.30 (+2.73%)

Initially, I bought NPBC as part of my Lottery Ticket Basket and those shares are still owned by me: Item # 1 RB Bought as LT 30 NPBC @ $7.83

Based on operating results thereafter, I elevated this stock to my regional bank basket strategy which allows for a larger investment: Added 100 NPBC at $10.68Added 50 NPBC at $9.85

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