Beware the 4th quarter...

I have been around some cable TV as of late (not mine), and have been noticing everyone saying that they should be prepared for the sky to fall. While I do think that some pullback is inevitable soon, I don't know if it will be drastic.

What I do suggest you look out for is fourth quarter earnings which in the coming months will be reported for a great deal of business. Despite what you believe about how truthful the first three quarterly reports are, I will tell you that typically the fourth quarter is as legit as it will get. This is due to companies having to report the official earnings to the government. They scrutize themselves thoroughly at this time and you will often find that major adjustments to the other quarters. I've seen GM and Goldman Sach's do this just this past year.

If you are a long term investor, often times you will follow stocks over a longer period. Notice the companies that do and do not have major adjustments after each report. Those that do not swing numbers around wildly likely chance of having both a straight forward business structure and more importantly honest business practices. I can think of a few examples, Trane before it was acquired by Ingersoll-Rand and while it was under American Standard's portfolio was extremely well honest with its practices, and has Baldor over the past 4 years or so (that I have seen).

So be careful and keep a watchful eye on your stocks, the fourth quarter is coming...

Articles of the Week: Baldor Bounces

I still like this company and it's latest earnings may help get my portfolio back on track. It may be a little late to get in at this point but this stock tends to fall until the quarterlies are reported, so you may want to keep an eye on it. If you need a little refresher on the company, here are the plus/minuses:

Plus:

• High effeciency, US made motor. The brand that everyone starts with when purchasing new motors.
• Consistant purchased product no matter what the economy.
• Metal prices have dropped while motor prices have stayed consistant.
• Future looks bright as they already make the highest efficiency electric motors and have recieved help with the US gov't to make the next iteration of the product.
• Begun some China production to support that market. (US production supports the US and Europe).
• Has consistantly beaten market expectations for at least 2 years.
• I absolutely think this stock will take off when either the economy turns around and/or real funding is released for green/smart energy occurs.

Minus:

• Carry quite a load of debt but doing extremely well at paying it down. This is the biggest risk of the company.
• Sales have fallen, but not as drastic as most industries.

The Articles:

Baldor Electric Company Announces First Quarter 2009 Results

UPDATE 1-Baldor Q1 profit tops Street; warns of difficult Q2

Funny Feeling...

Okay is anyone else getting a funny feeling about the markets right now. My investments have grown and now stablized for around a week now and it has interest me greatly. Mostly due to the fact that I am extremely sceptic about the market.

It is summer right now, and if consumers are going to buy anything, now is the time. Why do I say that? Traditionally most manufacturing occurs from the March to October time periods due to consumer spending increases. Stuff like lawn mowers, plant seed, bicycles, 2x4's, etc all start selling when the weather gets nice. So even in this bad economy, stuff will sell when the sun comes out. Money starts getting recorded and quarterly reports are reported, investors get jumpy and want back in. Which prices were so low, it wasn't a bad decision to make. A decision that I wish I had an option for.

Here is the thing. Manufacturing is still in the toilet. Every major production facility that I have contacts with are still running on fumes, bairly making anything. Which makes you wonder, why are stock prices going up? I understand a stabilizing in the market and am happy to see it, I just don't know if I believe that the market is truely stable.

My one buying idea is VIG, also known as Vanguard Dividend Acheiver's ETF. Essentially it is an ETF that covers constant dividend acheiving stocks. What is important to note is that it holds barely any banks and is mostly made of good companies that happen to pay a healthy dividend (don't believe me check for yourself here). It is also a Vanguard product so there is little in the way of fees and could potentially be a long term consistant dividend return product (currently ~3%) that could also grow in value over the long term. I am watching this ETF closely as I am looking to switch investing companies so that I can go with a service that does free automatic dividend reinvestment. I haven't decided a price point but will you all know when I do think it is a buy.

Article of the Week...

Every investor has a style. Mr. Guzzo (now back at his regular gig) is a contrarian, but firmly believes in the teachings of Mr. Bogle. My college buddy Grant (over at the Corner Office Blog) firmly believes in stocks that pay a high dividend. Besides being a bit of those two (I always look for a dividend, and now about half of my portfolio is Bogle-esc), my stock picking is heavily influenced by Benjamin Graham and his modern disciple Joel Greenblatt of Magic Formula Investing. That is I am a value investor, recently a a good article popped up on Barron's that gives some insight to this style again. Enjoy:

A Back to the Future Value Strategy

Don't Believe the Hype, But...

So after the market has increased in value now for roughly 6 days, a lot of naysayers are starting to come around and say that we "may have hit the bottom". People are looking for more signs than a group of fourteen year old girls in an Ouija board. I don't believe the hype, until my friends at the paint company tell me that production is up, I am going to have a hard time believing it. There is just too many people on unemployment, too many scared to purchase more than anything besides the necessities. I won't believe it until consumer spending is up for a couple of quarters.

BUT,

The savvy investor, the contrarian, and myself know (I am the dumbest of the three) that if you wait too long you may miss the bounce. So I have begun the search for more good stocks. It is a gamble, no doubt. I have two ultimate criterion. 1] The potential company must be one that will exist when this economy has finally turned. 2] The potential company must be one that will be profitable when this economy has finally turned. Sorry GM doesn't qualify.

My favorite way to begin a stock search is through the magic formula screen. I have talked about it before, recommended buying the book, and believe in it's methodology. I won't go into full on stock research in this post, but will say that my findings turned up several good prospects including: CALM, MLHR, MSFT, PCU, PM, RIMM. Until I plow through their latest financials I won't recommend anything. Also there are a few perennial industrial powerhouse stocks that are 'relatively' cheap including LECO and EMR among others.

I will start doing the numbers because I am beginning to feel like it is a good time to start looking to buy. We will see how it goes.

If you have money left, where would you invest?

So if you have money, and want to actually invest in something still what would you do?

Before I answer that, let me just say that my parents grewup as children of parents that survived the Great Depression and the Dust Bowl of Oklahoma and as adults themselves survived the exodus of jobs in Oklahoma when all of the Oil Companies left the state in the 80's. They never have really invested other than, their home, some rental properties, and high interest CD's and Money Market accounts. They have saved some, but I am uncomfortable to think how much. Their current jobs are secure and they are close to retirement. I know that my brother and I wish they invested more, but now think at times maybe they might have been fairly right all along. I mean they have seen some of these economic times on a micro-economic level in Oklahoma and experienced the psychology of their parents in the aftermath of the Great Depression, and learned what is really true: money and stuff you own, and real estate.

Which gets me back to where do you invest in this market, that will have the best chance of returning a profit in the years to come? Me, I am leaning towards real estate. I know it is crazy, but prices are at a value and if you truly know your town, and make logical property purchases over the long term you could really do well. Nothing is a guarantee, but if you are truly a long term investor, it may be just the right way to go.

Thoughts???

Investing (sounds like) Gambling

With all the down activity in the market the average investor and really all investor needs to realize that investing in the market is like gambling. Spreading out the portfolio in different markets, ETF's, stocks, and bonds is the best way to hedge those bets, but like sitting out a few good hands in blackjack, you will eventually lose some money. Especially if you are not watching your stocks or at least the market. So all that being said I am trying to form my own strategy to protect and grow my own portfolio.

Invest in the long term.

Wanting to not worry about the markets everyday, I am investing in what I see as the best of long term opportunities. In stocks this means perrinial favorites KR and WMT, international smoking company PM, and my only US manufacturer (that is slowly growing in the world market) BEZ. Some of these may be what people consider odd bets but I am looking to solidify things for long term and historically these are good companies and I through my own research I feel as I will be proven right in the long run.

More importantly is my chunk of investment in the Vanguard Total Market ETF (VTI). With it's fair dividend payout (currently 3.5%) and low expense costs, it has some serious potential to make money when the market turns around.

ETF's will be my anchor.

When this year's Roth investment ($5k for 2008) gets put in a majority will be in Vanguard ETF's with decent dividends and low expense fees. I want to get to a 70-30 rule with the 70 being in market ETF's. I will define the others later, but for now I am VTI all the way.

A stock strategy???

I sometimes have written about I have believe I have a knack for finding good stocks but as far as finding a good strategy for keeping, selling, and growing stocks, I lack a strategy. In the past I have hit 20%-30% growth on certain stocks and just let it ride. Let it ride all the way back down (okay not always). My goal is on speculative stocks, not the long term ones listed above, (assuming they go up) that somewhere above 15% growth I may sell off my original investment money wise. Meaning if stock X cost me $1k and is now at $1.5K, I will sell of that $1K of the stock and let the rest ride so to speak. For now that is what I am looking to do, we'll see if it works. I may iron out a few more details before the big Roth investment for 2008, we'll see though.

What else is out there?

I think the current downturn in the economy points to the importance of variety in your own personal portfolio, for me that means stocks, bonds, and interest may not be the only place to store cash. I am probably a year away from having the money for a side venture, but it is my goal to either own some rental property or *a laundromat*. The laundromat is my dream for some day. This year will be a year of ironing out some finances like paying off the car and attempting to get a better mortgage rate.

Should be an interesting year...hedge your bets.

My own private market update

Well after I lost roughly 46% of what I had put away in my Roth IRA I have been slowly climbing instead of digging with a portfolio shuffle that I think will work for both the short term and long term. I am now firmly only at a 26% lost. That means I have raised my funds roughly 20% from there worst point in the past 2.5 months. How did I do it, mostly buying two stocks that are a couple of the only companies that will do well in this economy Kroger (KR) and Walmart (WMT). Not to mention timely purchases of Baldor (BEZ), Philips Morris International (PM) and Vanguard Total Market Etf (VTI). I am buy no means a savvy investor again (was I ever) but I resolved late last year to make conservative long term purchases in the market. Also, I am going to go forward with an investing strategy which I will explain someday in a later post but the biggest impact is going to be anchoring ETF's like VTI and smaller investments for long term stocks using principals that I have laid out over the past year in this blog.

I haven't even begun adding to my 2008 Roth yet, so a big plop of money is going to get infused soon into my future funds and a close scrutiny of the market will litter my posts once again.

ROK looks cheap...

Market had a big fall on Friday and one huge loser was Rockwell Automation (-$3.02 per share). I spoke about them before when I revealed how I found Baldor, and I liked them then and still like them now. ROK stock value has been faultering ever since they missed analysts predicted earnings last quarter. Here is what baffles me the market reacted to analyst's predictions not the company's. If you review their last call you will quickly find out that there was siginificant revenue growth not only in every business category, but in every geographical location as well. Not many companies can say that and yet it has loss over $12 per share since the beginning of the year.

Take a quick look at the charts and it has been nearly three years since this stock has been this low and it is a better company now than it was then. Again the things I like are the good ROA, strong growth, ~2% dividend, extremely robust and strong product (Allen-Bradley Controls), and their firm commitment to the growth of that product by intelligent acquisitions. I should talk about the A-B product a little more, although I did cover it thoroughly before. It is a great product in the current economic climate, the controls are modular and are considered the best in the business. The controls are prodominately used in PLC applications in all sorts of industries from factories to oil rigs to building temperature controls. The whole world is modernizing these industries right now and the modular setup of A-B controls allows both new and old equipment to talk and work more efficiently.

Final thought, I'm buying tomorrow!

Special Request Stock Lookup: Ingersoll-Rand (IR)

Grant over at The Corner Office Blog asked me to look into a stock last week, namely Ingersoll-Rand (IR). This stock has had some recent interest by many investors due to the big purchase by the Big P.O.P.P.A. (Pimp Oracle of Potential Plays in omahA, aka Mr. Buffet). If you haven't read much about IR over the past two years, it has gotten rid of most of its industrial units including its most famous, Bobcat. What's left is a mishmash of industrial tool, refrigeration, and security units making up a roughly 9.5 billion dollar company. None of these businesses I find particularly exciting, although it should be said that their brands in each of their markets are either the leaders or top 2 companies in the industry. For example Schlage security and locks compete closely with Stanley security and locks. On paper, they look as if they have made each of their industries rather efficient and profitable.

The future for IR is the purchase of Trane, in my opinion, the foremost supplier of key HVAC components for business and commercial markets. IR claims that they would like to get into less cyclical market places and with their freed up capital, Trane looked like a good fit. Trane too has had its own set of splits over the last two years. Formerly American Standard, Trane was the result of a three way split of the former company. The new Trane is roughly a 9.5 billion dollar commercial and industrial HVAC company. Trane has an excellent company mix of products and services that is compromised of the markets highest efficiency residential HVAC units, commercial HVAC units, commercial chiller systems, and excellent technical services. This focus on high efficiency equipment will keep the company firmly planted for current and future commerce due to many companies needs for costs savings and government tax credits on energy saving projects. Trane is also known in the contract engineering world as the “go to” company for assistance in spec'ing components on new projects due to their own extensive technical support group. That status obviously pushes contracts towards utilizing Trane equipment. I should know I purchased a new chiller last year and found that the engineering companies in the Midwest area all work with Trane engineers first before drawing out the specifications for a project. Trane has seen some softness in it's residential market (roughly ~24% of the business) and plans on seeing more ahead, but in its most recent annual report believes that it's commercial unit has and will more than cover that loss for now. One other fact though, is much like the rest of IR's porfolio, is that Trane is a very competitive company in a very competitive market, competing with other good players Carrier, York, McQuay, and Danfoss.*

Much like my report on Baldor. Trane has products for the commercial market that will consistently need replacement. Industrial HVAC and chiller systems are always being replaced due to new more higher efficient machines or for old equipment failure. Their service department does most of the installations as well, so somewhere in the range of 65-75% of its revenue is tied up with the commercial contract dealings. From my contacts in the industry, this is a stable, profitable place to be.*

Upon further examinations I found the Trane annual report informative and helpful in formulating a position on the companies current financial status. However, IR's report was not very revealing of the companies current financial status. So I next searched the basics. IR has a absurdly low P/E of 3.2 and Trane's rather high P/E of 52.6, neither of which I don't really think is reliable. IR is particularly good at their profit margin at 44% compared to Trane's 2.37% and Return on Assets roughly the same at IR (5.33%) and Trane (7.19%). Although I am unsure how clear this data is affected by IR's sale of Bobcat and Trane's split from Amercian Standard. So I am uncomfortable with this analysis.**

Research of products from both companies fruited some good products including Trane's CenTraVac Chillers, Trane's CleanEffects air cleaning system, Trane's residential XV Furnaces, and IR's lightweight pneumatic tools. The Trane CenTraVac Chillers could be big money makers.

I do feel that when IR finalizes its purchase of Trane, it should provide some stabilization to each of the companies due to the amount of splitting, selling, and purchasing that each has experienced over the last two years. But again, my opinion though is that IR brings less to the table than Trane. Trane's infrastructure is mature and set in its ways, but like any large business purchase or merger, IR will want to put their imprint on the business. If they are not to careful, IR could really screw up a great company, but the great company looks as if it needs to cut costs (especially if the ROA is accurate for Trane). After seeing mergers from the inside out, it will take roughly six months to a year for the two companies to properly integrate into one another and see potential synergy savings. After that both companies might be able to flourish.

Official opinion: Wait on IR for now. I think the stock will dip back below $42.50 or lower and then start looking to buy. If it were my money though, I would wait four months from today and reevaluate. There is just too much unknown and too much competition to make me feel good about this right now.

Grant its your turn, my stock Petrobras (PZE).

Also, if anyone else wants me to look at a stock for them and give an opinion, I'm up to it. My expertise are industrials, green energy, and raven-haired ladies. The only expectation is that you do the same for me.

*Stats from Trane's 2007 Annual Report and IR' s 2007 Annual Reports

**Stats from Yahoo's Finance coverage for IR and TT

Will the government do anything about the housing slump?

Answer: If they care anything about their city, state, and federal budget, you bet their ass they will.

Being the rabid NPR listener that I am (insert joke here), I have been listening to the senators and representatives dance around the delicate issue of the housing slump and the potential for the government to get involved. Bailing people out is not a something the government should be doing but what I find extremely interesting is that no one, and I mean no one is talking about how housing foreclosures is affecting the local and national governments budgets.

With each home added to the sales market and even more homes being foreclosed on, the government is leaking potential budget revenue by the bucket load. Homes values are decreasing drastically which in turn allows the government to collect less money for property taxes. After 5 straight years of increasing property taxes, a lot of the current government offices, especially on the local level, are filled with people who haven't ever dealt with a short fall, so heck yes are they going to try to put something together.

I think that right now they are simply slowing down some on the legislation to appease the renters of America, which they do not collect much money from, and then will go right back into pushing a bill forward to assist on some of these loan defaults. The problem is that it doesn't really fix the problem and could put the government at a big risk of inflation. They keep saying some sort of crap about making sure that the help gets to the right people who actually need the help, but what does that mean? Does a family who makes $100k a year who bought a $350k house with 0% down on a 3 year ARM get the help or were they the wrong people. Or is there even a different kind of people than that causing this insanity in the first place?

It is really scary when you think about it, because the people pushing things forward aren't thinking clearly, they see budget cuts and think, "crap, I can't afford for our budget to get smaller, I promised this, this, and this." Reality though, and I hope it wins out, is that the market needs to adjust for itself. The banks screwed up, the public screwed up, and now the government needs to stay out. The governments are going to hurt for a couple of years, but ultimately a market should be able to adjust for itself.

Here is the other problem, if government steps in and gets banks to accept homes at 75% of their current value for defaulting home owners (one proposal out there from the government), how is that fair to the home owners not missing payments?

I apologize ahead of time for this post being messy, but it is late and well that's my excuse.

Stock Analysis BEZ and ROK

I look for stocks in several different manners, I do screens, I read the news to understand so called expert opinions, and I look for trends. I am definitely a value investor but also have been known to make purchases based on dividend investing (largely influenced by my friend Grant). A past simple example of a trending purchase included Microsoft before it released Vista and Office 2007. The stock was cheap and new programs were coming out that would significantly affect there bottom line. In my mine easy money.

Well a current trend that my own job is closely tied to is the modernization of manufacturing. Over the past 10 years the costs for modernizing a production facility has significantly decreased due the wider availability of new efficient electronic controls. Two companies that should do well going well into the future are Rockwell Automation (ROK) and Baldor (BEZ). These two are interrelated somewhat due to recent sale of Reliance motors and Dodge gearboxes and bearings from Rockwell to Baldor. More on that later.

Rockwell Automation owns a key product that will provide profitable business for years to come, namely Allen-Bradley. Allen-Bradley is the Cadillac of the PLC Factory controls world. They are the most expensive, most well made, most utilized PLC setup for most factories in the US. Their programming is straight forward, their controls are extremely durable, and system is modular by design and easier allows for constant updating of a manufacturing process. So what you say, well based on that ease of use companies are willing to shell out more money for a safe, reliable product. Let's put it this way, you own a factory making 1,000,000 widgets a day. Well every minute that line is under repair you are losing a roughly 700 widgets that could possibly be made. So every minute counts, and when every minute counts an engineer or a maintenance department can justify Allen-Bradley equipment really quickly due to its proven reliability, its wide availability and modular integration (aka less downtime).

Analysis of the stock shows that they failed to meet analysts predicted profit this last quarter and the price of the stock has fallen significantly. Personally, I am sitting back and waiting for the stock to even out. Over the long term this should be a good stock with good ROE 12.5%, nice divided yield 2.10%, and strong international earnings potential. As stated before they sold their Reliance and Dodge brands to Baldor this last year and now should see some benefits from concentrating on the programing and controls part of the business. Also, it previously (before the latest quarter) had shown up on my two favorite screens, earnings momentum and the Magic Formula.

Funny enough, through the analysis of ROK is when I found Baldor. Baldor makes motors, lots of them, in all sorts of useful sizes and types, and most importantly, at high electrical efficiencies. Baldor happened to be the last three motor purchases for my factory due to their competitive pricing, excellent customer and technical service, and a robust, reliable product that is made in the USA. Their acquisition of Reliance and Dodge was an excellent move. They essentially bouught their biggest competitor and doubled their business. Baldor typically made small to medium size motors, Reliance made medium to large size motors, it was a real good fit for both parties with only a little bit of overlap. Additionally, Reliance was known for all of the same things as Baldor (reliability, pricing, service, made in USA). The Dodge gearbox and bearing acquisition was brilliant as well, due to most of these Baldor and Reliance motors being directly fitted up internally with these bearings and to gearbox at the end user's factory.

Why do I think Baldor is great purchase for a long time? Easy, factory conversions from DC Motors to AC Motors. What's that you say? Forget the literal electrical stuff and I will explain it in simple terms. Lots and lots of processes run on variable speed electric motors. Examples of variable speed applications could be belt speeds on a conveyor belt, turning speed of a farm's irrigation system, or rpm speed of a milling machine. A lot of the equipment that is still utilized today were originally designed and built in the 80's and 90's with DC Motors. It was the only option available at the time that allowed for adjustable speed. Consequently DC Motors over time get really dirty and eventually fail. They can be rebuilt several times over, but that can be quite costly, or they can be replaced with new DC Motors which can be quite costly, or they can be replaced with new AC drives and motors which is quite costly. The “drive” is the electrical control that commands the motor, if you switch from DC to AC then a new drive has to be purchased as well. Why a switch from DC to AC? AC setups are 20-40% more efficient electrically and have minimal maintenance costs, usually no more than a bearing change every few years.

Enter Baldor's product line. First they are one of the few remaining companies that produce new DC Motors, and as such, they charge a premium. Second, Baldor and Reliance make high efficiency AC motors and drives that are among the best in the business. These motors and drives are well priced as well (not the lowest and not the highest). Third, the leaders in the drive market is still considered to be Allen-Bradley owned by Rockwell Automation. Well because Rockwell Automation is no longer in the motor business but recently sold the Reliance motors to Baldor, they still sell their AC motor and drive package with Reliance Motors and they charge a premium price. Which should means that Baldor may lose a sale on a drive but should still retain the same profitability of the motor.

To sum up, if you need a DC Motor, Baldor has a strong chance at a sell, if you want to switch to an AC motor and drive, Baldor has high likely hood of at least a new motor sale, and heck if you want to repair your DC motor, Baldor may even be your supplier of spare parts. This is the kind of market that even a Buffet fan would love. This DC to AC motor conundrum will probably continue to occur for the next 3-10 years until the majority of the equipment is AC driven. High usage DC Motors need overhauls every 3-5 years, so every overhaul is a good possibility of money in Baldor's pocket. That will provide a constant stable income for Baldor during these difficult economic situations in just repair sales. When you add that to strong OEM sales, an excellent quarterly reporting last week (23% increase net income), and decent dividend of 2.01%, it looks great for a long term prospect, especially when the economy turns up again. The one bad thing is Baldor's stock has increased ~10% since the quarterly report and may be a little high right now. I purchased shares $27.50 last week and already the stock is at $33.88, but I still think there is room to grow.

Good luck and in this market, happy hunting.