Monday, September 29, 2014

Update for Lottery Ticket, REIT and Regional Bank Basket Strategies/Lotto Trades: Bought 100 CVO at $2.85 and Sold 50 ZAGG at $5.99/ Added 50 NPBC at $10.12 and Sold 50 LARK at $22.42


Google is still losing my URL It will stay lost for several days. I have notified Google of the problem, but they are of course unresponsive. The URL exists at Google's Blogspot, but Google can not find it. Instead, after waiting for awhile for the page to load, Google says that the site is unavailable. If you click "blogger help" in that message, it will take you to the blog with a message "sorry, this page you are looking for in this blog does not exist". The page that allegedly does not exist is my URL which does exist. Once you are at that page, however, you can access the latest blog entry by going to the right side of that page. Or, you can bypass this problem by saving as a link any post in the blog, such as the last one: Stocks, Bonds & Politics: Update for Lottery Ticket, REIT and Regional Bank Basket Strategies


The regional bank, REIT and lottery ticket basket strategies are updated on the last Monday of each month. The price shown in the following tables will be from last Friday.

I frequently use a basket approach, particularly with industry sectors, that will vary in size as to the number of components. The focus will be on the total return of the basket, rather than individual components. Some of the advantages to this approach include diversification and risk mitigation. I am not concerned about a few mishaps provided other components are doing better than I anticipated when I made the initial purchase. As noted previously, I have been surprised by some of best and worst performers in the regional bank basket.

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, though I may occasionally buy one who does not fit those common criteria. 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 substantially below my net realized gain number, so I currently have a lot of available capacity to expand this basket under this particular risk control rule.

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

There was one deletion and addition since the last update, both noted below.

Net Realized Gains: $14,140.68

Click to Enlarge: 

Lottery Ticket Basket as of 9/26/14 (poor performance last Friday)

This basket is having a bad September. Some of the leading gainers have retreated in price and a few other names, formerly just detractors from the overall performance, look like they want to make a hard run to zero (e.g.: KWK, SUTR). That is to be expected with a falling knife strategy and I have had some BKs.


AMOT +128.01%
RFMD +122.51%
AWCMY +72.22%
FCE/A +67.83%
ING +58.6%
FCF +40.41%
A. Sold 50 ZAGG at $5.99 (See Disclaimer):

Snapshot of Trade:

2014 Sold 50 ZAGG at $5.99
Snapshot of Profit: 

2014 ZAGG 50 Shares +$72.59
Bought 50 ZAGG (2/24/14 Post)

Return: 33.17% (holding period 6+ months)

Based on the consensus 2015 E.P.S. estimate of $.37, which I believe is a non-GAAP number, a $6 price seems to be high to me at over 16 times forward estimated "operating earnings".  In the Q/E 6/30/14, GAAP E.P.S. was just $.03 while the "pro forma" number was $.09. ZAGG Inc Reports Second Quarter 2014 Revenue of $50.2 Million, GAAP EPS $0.03; form10-Q GAAP earnings have been erratic over the past five years:  10-k at p. 22

B. Bought 100 CVO at $2.85 (see Disclaimer):

I have done okay with Cenveo's bonds. My last one was just called early by the company. Cenveo Bond Redemption (profit $117.39 for 1 bond)-Bought 1 Cenveo 8.875% 2nd Lien at 92.499 (May 2012 Post); and Sold 2 Cenveo 7.875% Senior Sub Bonds Maturing in 2013 at 95-Averaged Down by Buying 1 Cenveo 7.875% Senior Subordinated Maturing 12/1/2013 at 81.5

In my mind's eye, I was basically using my bond profits to buy 100 common shares.

Snapshot of Trade:

Closing Price on Date of Trade 9/10/14: CVO: 2.87 -0.08 (-2.71%)

Company Website: Cenveo

Cenveo Profile Page at Reuters

Cenveo  Key Developments' Page at Reuters

EDGAR Filings For CVO

Last SEC Filed 10-Q: CVO-2014.06.28-10Q

For the 2014 second quarter, Cenveo reported a 17.9% increases in revenues to $479.4M (organic growth up 2%) and a 6.7% increase in "adjusted EBITDA" compared to the 2013 second quarter. Second Quarter 2014 Earnings Release The increase in sales was primarily due to the integration of National Envelope (NE) which had been operating in BK. Cenveo Enters Agreement to Purchase NE Cenveo acquired substantially all of NE's operating assets in September 2013. Cenveo had an adjusted GAAP loss of $.03 share, which excluded a charge relating to debt extinguishment.

The chart looks awful, with the shares trading below their 50, 100 and 200 day SMA lines at the time of my purchase. CVO Interactive Chart That is par for the Lotto course. The maximum chart looks interesting with mountain tops hit near $25 in both 1998 and 2007, followed by waterfall declines to a splat.

The company has too much debt in my opinion. A slither of equity supports a mountain of debt. At a $2.85 price, the market capitalization is about $194M and the company had $1.252+B in debt as of 6/28/14 (page 2 and page 11, 10-Q referenced above). As noted at page 11, the company has retired some of the higher cost debt, but still had $225M outstanding of an 11.5% senior unsecured note  as of 6/28/14.

The purchase was made primarily on the hope that the consensus estimate for 2015 will be hit.  At the time of my purchase, the consensus of the 4 analysts providing estimates was for an E.P.S. of $.53 in 2015, up from $.19 in 2014. If that 2015 number is hit, then the forward P/E at a $2.85 price is 5.377 with a 179% increase in Y-O-Y earnings.  Calculate Percent Increase

Another reason is that the President and Chairman Robert Burton has been buying stock at higher prices than my buy and he already has a substantial stake in the company. Insider Trades-BURTON; Robert G. Burton, Sr. Profile at Cenveo Website

Competition is probably intense in CVO's business lines, an obvious point noted in the business risk section of the Annual Report, CVO-2013.12.28-10K (e.g. page 9: "highly competitive"; generally no long term contracts and business is cyclical)

2. Update for REIT Common and Preferred Stock Basket:

This basket is starting to contract, primarily though preferred stock deletions under the current trading guidelines. The first publication of this basket was made on 3/5/14: Stocks, Bonds & Politics: Equity REIT Common and Preferred Stock Table as of 3/5/14

I am using a blended strategy of including both common and preferred stocks. I am not likely to add back preferred stocks until there is another meaningful correction in their prices.

I will publish, probably within thirty days, a Gateway Post for this topic which will aggregate my profit/loss snapshots since I started this basket strategy in September 2013.

Since my last update, I have bought and sold the following securities:

SOLD: 300 HLP-UN:CA at C$14.17 and 300 AX-UN:CA at C$15.71 (9/26/14 Post)

Sold 100 MPW at $14-Regular IRA (9/13/14 Post)

I have bought the following:

Bought Regular IRA 100 APTS at $8.75 and Bought Back 100 ARCP at $12.88 (8/29/14 Post)

I  added last week 50 shares of MPW at $12.33 and 30 shares of EPR at $50.72 yesterday, which are included in this table, but will not be discussed until the next weekly post.

Click to Enlarge: 

Equity REIT Basket as of 9/26/14
REITs have had a bad September and many of them are selling below their 50, 100 and 200 days SMA lines.  Fortunately, my main problem, CCG, is a small 150 share position.

Vanguard REIT ETF (VNQ), one of the benchmarks that I use for this basket, has declined 4.88% over the past month but was still up 14.84% YTD through 9/26/14.

3. Update for Regional Bank Basket Strategy:

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

Snapshots of realized gains and losses can be found at the end of that post.

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.

Dividend Yields 5% or higher: Based on Total Cost
NYCB: 8.44%
WASH: 8.34%
UBSI: 7.66%
CZNC: 5.39%
FNLC: 5.38%
CBU: 5.15%
TRST: 5.1%
CCNE: 5.%

Washington Trust moved up after raising its quarterly dividend by 3 cents per share. The new quarterly rate will be $.32 per share ($1.28 per share annually). My total cost number for my remaining 50 shares is $767 or $15.34 per share. Since NYCB is unlikely to raise its dividend, I would expect WASH to surpass the dividend yield of NYCB next year based on my constant cost numbers.

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.

After a number of adds, I am now over my minimum $40,000 allocation after a bout of profit taking last year.

SPDR S&P Regional Banking ETF (KRE) Total Returns47.5% in 2013

I have not been impressed with several of the recent earnings reports from regional banks. Some of the banks discussed below had decent 2014 second quarter reports. While net interest margin has not contracted much, it is yet to show any expansion either for most banks. Chart: Net Interest Margin for all U.S. Banks - St. Louis Fed

One ETF will own several of the small cap regional banks and REITs that I own now or have owned in the past: PSCF | S&P SmallCap Financials Portfolio

In 2013, my dividend total from this basket totaled $1,932,93, up from $1,896.25 in 2012 and $1,660.57 in 2011. I will have to increase my current exposure in order to exceed the 2013 amount this year, given my light exposure for the first four months which was several thousand below the "minimum" level. I may make some light adds during October assuming the correction in prices continues.    

Regional bank stocks are in a funk this year as interest rates started to go back down. One of the regional bank ETFs, KRE, closed at $40.61 on 12/31/13 and at $38.22 last Friday, but has closed as low as $36.84 this year (2/3/14). SPDR S&P Regional Banking ETF ETF Chart

I have nibbled at this ETF: Bought Taxable Accounts: 50 KRE at $39.55 (9/20/14 Post)

The abnormally low rates benefited banks some when deposit yields were repriced down, but even 5 year bank CDs taken out in 2008 at higher rates have now matured, and the positive impact of that repricing is no longer present to any meaningful degree. 

Instead, the decline in rates for loans simply compresses net interest margin. When rates were rising last year, regional bank stocks were in an uptrend based on the common belief that higher intermediate and long rates would be a net positive for them, particularly when short terms were likely to remain near zero through mid-2015 and then rise slowly and modestly in 2016-2017. The rate spike starting last May impacted intermediate and long term rates. Short term rates remained anchored by ZIRP. 

I have used the downdraft in prices this year to add positions to my basket after selling into last year's strength.  

Realized Gains 2010 to Date: $16,321.83  (snapshots in Gateway Post)
Dividends Received 2010 through 2013=$6,623.72

Click to Enlarge:
Regional Bank Basket as of 9/26/14
Regional banks have had a tough September. I have lost since the last update about $1,000 of my unrealized gain.

Through 9/26/14, the SPDR S&P Regional Banking ETF (KRE), which is my benchmark for this basket, was down -4.83% and had lost -2.34% over the past month.

A. Added 50 NPBC at $10.12 (see Disclaimer)

National Penn Bancshares is a bank holding company that owns the National Penn Bank which has 110 branches in Pennsylvania. National Penn Bancshares, Inc. - Investor Relations

I discussed its last quarterly report in a recent post and have nothing to add to that discussion: Stocks, Bonds & Politics: Update for Lottery Ticket, REIT and Regional Bank Basket Strategies: NPBC

Last Earnings Report: National Penn Bancshares

National Penn Bancshares is in the process of acquiring TF Financial, a savings and loan, with 18 full services offices in PA and NJ. When announcing this acquisition last June, National Penn Bancshares asserted that the deal "is expected to accrete National Penn earnings per share by $.04".

National Penn recently sold $125M in senior unsecured notes, bearing a fixed coupon rate of 4.25% and maturing in 2024.

I own 30 shares as part of the LT basket. Item # 1 RB Bought as LT 30 NPBC @ $7.83 (4/26/11 Post) Those shares are still in that basket. This bank ran into some trouble during the recent Near Depression and cut its quarterly dividend from $.175 to $.01 in 2009 before starting to raise it again in 2011. The current quarterly dividend rate is $.1 per share.

I later elevated this bank to the regional bank basket strategy, which allows for more risk taking, and have now bought 200 shares for inclusion in that basket. Given the stock's valuation, I am reinvesting the dividend. Item # 2 Added 100 NPBC at $10.68 (8/17/13 Post)Added 50 NPBC at $9.85 (October 28, 2013 Post)

When I added this lot, the shares were then trading at below the 50, 100 and 200 day SMA lines. NPBC Interactive Chart I am more concerned about whether I am paying a fair price for the shares, rather than Mr. Market's current opinion about the shares. It is common for me to buy when the chart looks lousy.

At the time of my purchase, the consensus 2015 E.P.S. estimate was $.79, up from $.69 in 2014: NPBC Analyst Estimates.  Assuming those numbers are hit, which appears to be a reasonable guess, the forward P/E is about 12.81 at a total cost of $10.12 per share, with a 14.45% growth rate in E.P.S. Y-O-Y. The dividend yield is close to 4%. Altogether, the valuation and yield justify an add in my opinion, notwithstanding the technical weakness.

This kind of stock is not going to generate a home run or anything close to it. The general idea is simply to harvest an above average market yield and to realized a total annualized return anywhere over 8%.  The dividend gets me 1/2 of the way there, assuming it is not raised or lowered from its current quarterly rate of $.1 per share. National Penn Bancshares, Inc. (NPBC) Dividend History

Closing Price Last Friday: NPBC: $9.89 +0.12 (+1.23%)

B. Sold 50 LARK at $22.42 (see Disclaimer): Landmark Bancorp Inc. (LARK) is a bank holding company that owns Landmark National Bank which currently has 30 branches located in 23 communities across Kansas. Landmark National Bank Locations

Quarterly Dividend= $.19 per share Landmark Bancorp Inc. (LARK) Dividend History

Earnings Release for Q/E 6/30/14

I discussed that report in an earlier Post: Stocks, Bonds & Politics: Update for Lottery Ticket, REIT and Regional Bank Basket Strategies

Snapshot of Trade:

2014 LARK Sold 50 at $22.42
Snapshot of Profit:

2014 LARK 50 Shares +$117.08

Bought 50 LARK at $19.76 (7/28/14 Post)

The foregoing snapshot includes another 50 share trade from earlier this year. Sold Taxable Accounts: 50 LARK at $23.5 (6/29/14 Post)(snapshot of realized gain=$174.07)-Item # 3 Bought  50 LARK at $19.7 (1/13/14 Post) Together with that earlier 50 share lot, I have managed to hold onto the shares long enough to receive $28.5 in dividends this year:

I have developed a routine with this very small Kansas bank. I have been buying when the price falls below $20 and selling when the price goes over $22. I did not miss a quarterly dividend after selling the earlier lot.

This last trade was my third 50 share round trip.  The first round trip was at lower prices: SOLD 52 LARK at $18.75 (1/9/12 Post)(realized gain=$91.89)-Bought 50 LARK @ $16.6 (5/2/11 Post)

Total Realized Trading Gains (3 fifty share lots)=$383.04

LARK bounces around pretty good on extremely light volume. Only 514 shares traded last Friday.

Closing Price Last Friday: LARK: $23.13 -0.08 (-0.36%) 

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