Potential Value Investments

Now for a different way to play the markets. But, due to the semester winding down, I will also be keeping this short.

Possible undervalued stocks
TPX RGF DRL NAVR ASR JRN JAS LLY CRV PKX

As always, do your own due diligence.

Possible Trades

I'm going to keep this short. Here are a list of tickers I am watching for momentum trades:

RLI OXM SUPX CTXS WOOF DGIN JCI FFIV SIGI WBSN CBG BBBB GOL PETS CLDN PAL ARS HURC ASF OCR AIRM VAR SRLS PAYX TSU YHOO MORN TESOF WCC CMED BRC KNX HITT SMTS SAY SHG MTXX OXPS (my broker, actually) CHE PTC IRM CWTR CVCO DW ASGN SNDK CEN BEN BBY AIZ GS SMTC FAST

Other ideas that are different / longer term trades:
JCI GIL JOE KMT LYTS PTRY BUD GG/GLG JPM MOT HHH ATLS HUM

Potential Tail trades:
PAY, PETS

Value Bets

I recently read "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers" by Joseph Piotroski (Chicago Graduate School of Business).

The methodology he outlines is fairly simple. Take High Book-to-Market stocks who have no analyst following them and sort through 9 simple accounting ratios. Score them. The ones with high scores likely perform the best. I have not quite yet created a stock screen to use Mr. Piotroski's methodology. However, I have found what I think might just be a winner.

Check out CRV - Coast Distribution System, Inc. The company is an RV and marine parts distributor. It's a tiny company - 31 million market cap. It trades at 8.6 times earnings (P/E = 8.6). Price to Sales is 0.2! What's more, is that the F_SCORE on Piotroski's scoring scale is a 9.0 out of a 9.0. So, the company appears undervalued, and is seemingly turning the corner.

I'm not typically comfortable as a "Value Investor", so I will watch this company and learn from it. If any of you out there know anything about this company, let me know. There are NO analysts following the co.

RVB Meets Warren Buffett!

On Saturday, we had the pleasure of hearing Warren Buffett speak at the Field Club in Omaha. I was amazed by a couple of things -

• His general health and well being - At 75 years old, Warren is in great shape. He moves around much better than anyone I have met who is his age. He's as eloquent as ever. I can only hope to be in his shape at his age.


• His humbleness - we've all probably read stories about his style and his personality. All of it's true. He knows he's made mistakes and can readily admit them. The things he preaches are completely ground in his head (being loved=a good life, wealth means very little, good businesses with good people are what you should by...the list goes on). Whether you've read his teachings in a book or heard them live, the stories change very little. He's just much funnier in person than in a book.

I attribute #1 above to his never really having worked a day in his life. Most people work at jobs they don't love, and doing so takes a toll on them. Warren just did what he loved to do. It wasn't work. And his health is great. #2 above just is who he is. He runs Berkshire his own way and ignores his critics. He's not afraid to make big mistakes, and since he cares little about material possessions it's no wonder why he became such a great investor.

Here's the picture with both first and second-year Applied Security Analysis students and Mr. Buffett.


After we met with Warren, we took a tour of the Nebraska Furniture Mart, one of Berkshire's companies. The tour was neat, because we got to see the story in front of us. The place is even bigger than I expected.

Meeting a legend who completely impressed everyone = an awesome trip. If you ever get the chance to head to Omaha and visit the Oracle of Omaha, do it.

Value Investing

I also read a few papers this week on Value Investing. Value investors believe alot of similar things that momentum investors and traders believe - that the markets do not adjust to the right prices very quickly. This is generally because information isn't instantaneously understood. Unless you think humans are headed towards some kind on intel-fast mind, I would argue that this won't be changing anytime soon.

Value Investing tends to look for high book-to-market stocks that have been beaten down (although dividends, cash flow, intangibles, and low P/E are also part of the equation). A Value investor argues that the share beat down is wrong (overreaction, or some other reason). There does seem to be some evidence that those who are good at this game tend to outperform (Buffett comes to mind).

Learning this game is one reason I'm in the Applied Security Analysis Program (ASAP) at the University of Wisconsin. I want to be able to create an investment style and fun that takes the best of the ideas and throws them into one. Like a good football team, most everything is stolen. How often do you actually see a new football play? 90% of them all have been run, and the good ones plagiarized. The 10% is also very important for success, but putting it all together is the key, and it takes alot of work.

Stock market value

I read a great paper for class this week. It's a very simple paper written by Pu Shen from the Federal Reserve Bank in Kansas City. What's more, is that this article is written just as the market top in 2000 was forming, so even the author isn't sure if what he's seeing in terms of stock valuations is justified. This is one of the very few fairly easy academic reads in the investing world. I encourage everyone to download and read it:

The P/E Ratio and the Stock Market

In 62 hours I will be having lunch with Warren Buffet. How cool is that?

One week from today...

I will be in Omaha, NE having lunch with Warren Buffett, and about 50 other MBA students. Our entire ASAP class is headed there, plus some students from Kellogg.

Valuation

We're finally getting to the true mathematical ways to calculate valuations in our classes. In fact, we have a case due very shortly on it.

We have also done some study on relative valuation between stocks and bonds. What we're seeing is that stocks look better than they have in 25 years, as compared to bonds.