Soon to come…

I’ll be publishing something cliche to the extent of “Where to Look in 2007″ within the next few days, but don’t expect anything too special. I don’t like touting stocks when I don’t have very many good ideas (and trust me, I may have a few, but not many), and I’ll probably focus more on areas to look rather than specific stocks.

That said, I’m always on the hunt for bargains and ideas, and I research ideas every day. So I’ll continue writing as much quality content on specific companies as I can, but I want to be sure to give them fully deserved attention. Fair warning :-)

See you soon.


It’s hardly a problem when it comes to sex, but it’s a big problem when it comes to investing. What, was that too forward?

Okay, fine. I apologize. But seriously…Over Stimulation

When investing, it’s easy to become caught up in hype and activity surrounding the stock market. We have a natural tendency to want to just do something when everybody else is doing something. Red and green tickers flashing every few seconds, streaming news stories, hyper-active Wall Street types screaming their buy orders, and a host of other signals all tell us, often without our conscious awareness, that we are being left behind and that, to keep up, we must partake in the festivities. After all, who wants to miss that quick buck promise from a screaming Jim Cramer? And who wants to sit idly while someone (on TV, nonetheless!) tells them their favorite stock is a dud?

So what’s the problem with this? Well, to put it in plain English, intelligent investing often requires you to sit quietly on your ass. Active trading does several harms to your portfolio.

First, it fails more often than not. Those who believe they know where a stock is headed in the next day, week, or month often have no clue and are merely speculating. Second, it takes away valuable time for thorough research. Time spent sitting and staring at your tickers does nothing to give you great ideas, presents an opportunity cost since you could be reading a 10-K and getting to understand a company instead, and often results in anxiety because you’re so damn worried what the stock will do next. But who cares? If you’re right about it, it’ll go up eventually. Give it time and leave it the hell alone. Third, active trading increases transactions costs. Granted that with extremely low online commission expenses one trade is not that big of a deal, but if you’ve actively traded for an entire year, you’re looking at hundreds, if not thousands, of dollars in excess commissions by year’s end. For most people with portfolios of a small size, this can represent a large percentage of the portfolio. And finally, it ups the value of taxes you have to pay. With short-term capital gains taxed at income levels, trading gives you an extra hoop to jump through in order to beat the market.

How is one to deal with over-stimulation? I, for one, force myself not to look at my portfolio more than once a day (if that), and I never keep any sort of streaming quotes on my computer screen. I avoid reading anything having to do with a short-term trading idea (some say this is ignorant. If so, I say ignorance is bliss. And lucrative). I limit the amount of time per day I spend syphoning through blog posts, message boards, or any other potentially stimulating activities that don’t give much in the way of researched ideas or sound advice (do me a favor and please tell me if my own blog diverges from this). Finally, every time I’m tempted to check quotes or start buying and selling things on a whim, I walk away, take a break, come back and read a 10-K instead.

Conquering the desire to stay active and do something is no easy task. It often requires boring substitutes like reading SEC filings. But I believe avoiding the devastating tendency and conquering over-stimulation is necessary for prolonged success. After all, some things are better saved for the bedroom.

USG Corp. (USG): Behind the Sheetrock

USG has gotten a fair deal of press given Warren Buffett’s holding in the company and its emergence from Chapter 11 Reorganization to handle its asbestos liability claims. Plenty of folks are calling it a bargain, and some are itching to keep buying, but to temper myself I took a more in depth look at the company to get a feel for what it’s worth.

First things first. In summary fashion, the plan of reorganization and the company’s own plan to finance it are as follows: The company has paid $3.95 billion to a trust established under section 524(g) of the Bankruptcy Code which will be used to fund all past, present, and future asbestos liabilities. With over 100,000 cases previously brought against the company, at least they won’t have to bother with them again.

The company is financing this large sum with a combination of available cash, the use of an approximately $1.1 billion tax loss carryback expected in 2007 thanks to net operating losses incurred in connection with establishing the original asbestos reserve, and proceeds from a “Rights Offering,” in which shareholders had the right to purchase an additional share at $40 for each share they owned. With Berkshire Hathaway backstopping the offering, almost 45 million shares were sold, for net proceeds to the company of $1.7 billion. Despite the dilutive effect of the rights offering, I believe this combination was an intelligent way to finance the nearly $4 billion liability (of course, it helps that $1.1 billion of the liability is going to be financed by benefits received from the original loss incurred by it).

With this success and Buffett’s purchase and commendation of the company, it’s no wonder many are tempted. So now let’s look at the operating business, independent of the now bygone liabilities. USG is the top producer of gypsum wallboards and boasts a strong brand image (ever heard of Sheetrock?), low-cost producer status, and great economies of scale. It’s qualitative moat, if you will, rests on the fact that anyone, even with tremendous resources, will have difficulty achieving the scale, distribution, and cost structure of USG’s main product lines, and will probably have a tough time replacing Sheetrock’s brand image. Given management’s experience and its top-notch performance in bankruptcy court, you can rest assured that the company is in good hands.

Regular operations (prior to distored earnings from last year) sport a high return on equity and strong cash flows. The company has been successful in expanding its top and bottom lines over the long term. While plenty of pundits predict slowdowns in the residential property sectors and hence USG’s sales, the company draws over half of its revenues from commercial buyers. And regardless, the long-term, big picture is more important than trying to predict the next swing in the housing market. So, what about the valuation.

Before getting too giddy about Buffett’s buying, investors should consider 1) that he originally purchased shares at bargain basement prices in 2001 and 2) that his recent accumulation of shares was done at $40-45 (as opposed to the current $55 pricetag). Also, keep in mind that his costs were partially offset by USG’s $67 million fee to Berkshire Hathaway for backstopping the rights offering. Thus, enthusiasm tempered, we can try to look at a DCF.

Generally speaking, I don’t like quoting anything near precise figures for any DCF, since the output is only as good as the inputs, and because if the analysis doesn’t scream at me as giving a huge margin of safety, I’m not too interested anyway. That said, I estimate the value of the shares to be somewhere between $50 on the low end and $85 on the high end. I know, I know, that’s a wide discrepancy, but like I said, I think seeking a high degree of safety (a margin of error) is paramount to seeking a high degree of precision. Considering the limited downside and potential 60%+ upside, investors looking to coat-tail Mr. Buffett may still do reasonably well in USG, though no one should expect many-fold increases with high probability (though I’m the first to admit it is possible).

Citigroup, Lampert et al.

I just scooped up some Citigroup shares. I’ll be honest: I didn’t dig ultra deep into any filings yet, as I figured the thesis may no longer be applicable by the time I finished reading the massive tome that is a Citigroup annual report. My reasoning was simple — the sprawling firm has some premier properties, trades at what I consider unjustifiably low valuations, sports a strong dividend yield to provide downside risk protection, and has garnered the sponsorship of a few well-respected value guys, namely someone I consider a Graham and Doddsville superinvestor, Eddie Lampert.

Given that I don’t have many extraordinarily knockout ideas right and had some cash that could have been put to work, I felt this was a safe place to park some dough with the added benefit that a catalyst (breakup, anyone?) could send the shares significantly higher. My back of the envelope calculations put a break-up value at somewhere between current prices and a whole lot more. This highly scientific reasoning is coupled with the fact that Citigroup sports solid returns on equity, respectable — albeit modest — growth for a behemoth its size.

Bottom line: potential for outsized upside, downside protection with dividend yield around 80% of Treasury yields, and lots of smart money showing interest in catalyzing an opportunity.

FreightCar America (RAIL) still temptingly cheap

I’m still doing some work trying to understand the railcar and coal industries, motivated largely by my feeling that RAIL represents a great opportunity. With 80% North American market share in the coal car manufacturing and with the substantial majority of the company’s business tied up in delivering to this market’s participants, it’s clearly an important item of research.

The industry is in a bit of a bubble, some say, that will burst within the next few months/years. Nonetheless, I think this may be a good time to by RAIL, since the bearishness on the industry going forward in the short-term has left the stock under-appreciated and poised to break out over the next few years, as coal has become a more long-term viable and growing business.

Things I like about the company:

– Great market share

– Working to diversify its revenue stream by offering cars catered to the needs of other buyers (not just coal transporters)

– Great returns on capital and respectable margins

– Growing institutional interest given Buffett’s recent railroad purchase and the cheapness of the stock

– Transparency of a good chunk of the next year to two year’s revenue given the nature of contracts with customers and order backlog records.

Things I don’t like:

– Cyclical business

– Product with long life-cycle, dependent upon spotty orders and infrequent repeat business for replacements

– My own uncertainty of the coal industry