After seven months of tracking my 2008 picks -- Wham! -- I went from beating the indices and Berkshire Hathaway (NYSE: BRK.B) to being humbled by the market. However difficult it is to display your failings, once again I will share all. This is the low point since I posted the original story Chasing Value: Final list -- 8 stocks for 2008.
Only Reliance Steel & Aluminum (NYSE: RS) remained in positive territory, down from five stocks that were up in the last report. Sometimes, the reasons for the downslide were more obvious than they were in the cases for my picks. The cutting in half of Valero Energy Corporation (NYSE: VLO) has been reported often, as the largest independent oil refiner in North America has had its profit margins squeezed.
Loews Corporation (NYSE: L) has been hurt by its insurance interests and helped by its holdings -- a 51% stake in Diamond Offshore Drilling, Inc. (NYSE: DO) that has been doing well as the world remains desperate for more oil and natural gas.
Although Newcastle Investment Corp. (NYSE: NCT) continues to post losses, the real estate investment trust's board voted to maintain a quarterly dividend of 25 cents a share. The dividend is payable on July 30 to shareholders of record as of July 7. This continued support of the dividend leaves the stock above a 15% yield as of the close yesterday at $6.67.
Newcastle reported a loss in funds from operations of $87.7 million, or $1.66 a share, in the April-June period, compared with a gain of $34 million, or 64 cents a share, in the year-earlier quarter. The company booked a $63.2 million charge related to its sub-prime securities portfolio. Revenue fell nearly 40% to $115 million from $191.9 million in the second quarter of 2007.
This is a highly leveraged company that is trying to ride out a turbulent real estate and financial market. It holds a wide variety of industrial, commercial and retail notes, with about 10% of the portfolio in residential notes. It has been hurt by the collapse of the commercial mortgage-backed securities market (CMBS), which does not show signs of recovery in the near term.
Negative earnings and high leverage are not inviting to most investors right now. But I think the company will survive and it is paying a very high yield and has been for quite some time.
Yesterday the Dow Jones Industrial Average was down 225, so I decided to peg the financial stocks I wrote about investing in as a pool. We are often accused of bragging on the good days and having memory loss on the bad so I wanted to be transparent and forthright on the downside.
To my surprise the financial stock pool is actually up 9.96% on average. Six stocks increased in value, two were down and two stocks were even money. The big winner was MBIA Inc (NYSE: MBI) up over 68%!
In the same time frame the DJIA has gone from 11,397.56 to 11,431.43 (even) and the S&P has gone from 1263.2 to 1266.06 last night, for basically no change either.
The market is rebounding as I write so I expect the news is even better. Although, this pool of stocks beat the market so far in the short run, I hope to track this group for a year, or at least until Major League Baseball's spring training opens in 2009.
After the market closed last night, with the Dow Jones Industrial Average rebounding from Monday's notable drop and ending the trading day at 11,397.56, up 266.48 (+2.39%), I posted Serious Money: 10 finance stocks as the market bounces. This is the follow-up post listing the full pool of speculative stocks that as a group I believe will beat the overall market in the next 12 months.
The prediction business is thankless and the speculative business is even worse; it is often painful. I usually refrain from this activity but today I play the contrarian in a Sir John Templeton (RIP) sort of way, jumping into the stock market's worst performing sector with both feet. I believe the market is at or near a bottom and this summer is the time to buy.
Looking for a break in the clouds, yesterday I started choosing ten stocks knowing that three or four may go to zero, a few more will survive with modest gains, and three or four will rise, not returning to their old glory soon but more than covering the ones that fail. The first four picks have been bleeding all over Wall Street for a year now and the blood-letting is not done yet.
Initially I was looking for stocks that had fallen at least 70%. After reviewing my figures, I have compromised and changed that to 63% so that I could include some of the major companies like Citigroup Inc. (NYSE: C) that are broadly held and have strong reader interest. Prices are as of July 29, 2008.
With the market looking just plain awful these days, and with the theory of recession becoming more and more concrete as the dour days pass, the concept of shorting equities is gaining popularity, at least from a headline point of view. Here's an article that talks about utilizing ETFs to go short. My colleague Timothy Sykes also discussed shorting in a recent piece of his own. Both of these articles bring up excellent points, and like Tim, I don't feel there is anything unpatriotic about betting against stocks, whether they are rising or falling. We're a capitalist society, and the trading spoils should go to the winners, whether the winners be long or short.
However, I urge all individual investors out there to think before they short. Don't take betting against a company or a market average lightly. The problem with shorting now is that it might be too late. The time to have purchased, say, the Proshares Ultrashort Dow 30 (AMEX: DXD) might have been a week ago. Remember that shorting is not a long-term idea, no pun intended. Going long is, so you're essentially going to become a market-timer when you invest in a short fund. There is nothing inherently wrong about trying to hedge yourself in a downward-spiraling environment, but make sure you understand that you are making a guess about the direction of stock prices. That's a tricky endeavor at best.
One thing you must avoid doing is shorting individual stocks. I think it's safer to short averages than it is to short companies. Again, if you're really sophisticated, you can do what you want, but do you have the guts to short a General Electric (NYSE: GE) or a Coca-Cola (NYSE: KO)? Or what about a Newcastle Investment (NYSE: NCT)? A Citigroup (NYSE: C)? These are all stocks that I believe may be going lower in the short-term, but they all pay dividends, which the short-seller is still responsible for. Plus, at some point, the dividend yields will signal to investors that a bottom could be in. Besides, with short-themed ETFs around, there's really no reason to literally borrow shares and sell them into the market. There's also the method of buying put options to take advantage of a downtrending equity, so you're covered by that technique, too.
Monday was an extremely trying day for my portfolio and me. Talk about depressing. Let's see, CapitalSource (NYSE: CSE) took a dive of almost 15% on hellishly high volume (it traded more than 17 million shares on Monday, and AOL Finance lists the 30-day average volume as being a little under 3 million shares) on news about a money-losing sale of assets. Now, once I saw CapitalSource moving down, I knew that Newcastle Investment (NYSE: NCT) wasn't going to be trading higher. Sure enough, there was indeed something new at Newcastle. A new 52-week low. The stock closed Monday at $7.06, down 10% and one penny above the low. And then there's MFA Mortgage (NYSE: MFA). It too was down, although only about 2%. Yeah, only. All of these stocks are at prices well below my cost basis.
I'm at that weird crossroads all investors find themselves at some point. Is it too late to sell? Let me tell you, I don't want to be one of those panic sellers who regrets dumping his stocks because as soon as he does so they start to rise. But, I don't want to be one of those holders who doesn't know when enough is enough. It's pretty rough. You don't know whether to add to positions that are faring poorly and thus risk throwing away money, or whether to avoid adding money and thus risk not getting some bargain prices. And in terms of Newcastle, my colleague Sheldon Liber is with me on this. He thinks the stock may turn out to be a value. See this article.
My other colleague, Timothy Sykes, has counseled me to instead focus on strong stocks that are working. I can't say he doesn't have a point. Indeed, my portfolio does seem rather masochistic. For now, though, I will try to avoid any emotional decisions. I am going to continue to watch the financial carnage as it further unfolds and evaluate every potential stock trade very carefully. This summer is going to be a tough one. I'll let you know what happens.
Disclosure I own CapitalSource, MFA, and Newcastle Investment; positions can change at any time.
Checking on one of my big calls of the year:Newcastle Investments (NYSE: NCT), which is down significantly so far through mid June, it is nice to see that a dividend will be paid for this past quarter of $0.25 per share. This amounts to a current yield of over 12%.
Some would say it was to good to be true as the stock price drifted downward and the dividend was cut. I maintain that this is just a waiting game until the real estate market migrates back to a more sure footing while you collect a healthy dividend.
Most advisers would remind investors not to try and catch a falling knife and I would agree, but at some point there is real value and I have taken several "stabs" at this one trying to dollar cost average while a I wait.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of NCT.
You know, I can't take much more of the financial crisis. That's because I own Newcastle Investment (NYSE: NCT) and CapitalSource (NYSE: CSE). I'm kind of hoping we get out of the mess brought on by the housing-bubble pop and the mark-to-market devaluation so that these stocks will rise again. As we continue through this recession, another problem may soon assert itself.
According to this article, consumers are starting to rely on their credit cards a little too much. This could lead to a larger quantity of delinquencies. In fact, the piece states that card delinquencies were at 4.86% in Q1, a multi-year high. Further, revolving debt increased 7.9% in March, coming in at $957 billion. Not too far away from a trillion, my friends. Let me tell you, this is the last thing we need right now. Delinquencies will become a major problem for the banks, leading to further erosion of confidence on financials by investors.
As can be expected, two ideas immediately came up during the course of the article: Visa (NYSE: V) and MasterCard (NYSE: MA). How could they not? If people are taking credit debt, then they must be using those two brand names. Since Visa and MasterCard don't really have exposure to the debt side of things, they are relatively safe from that aspect.
After five months of tracking my 2008 picks, it is rewarding to finally have a breakthrough -- topping the three major stock indices and Berkshire Hathaway (NYSE: BRK.B) too. It has been painful to have to report each month that I was being bested. However, since I have not seen anything contradicting my original rationale for my eight picks I stood my ground.
Moving into positive territory by pennies was Loews Corporation (NYSE: LTR). Among its holdings is a 51% stake in Diamond Offshore Drilling, Inc. (NYSE: DO) that has been doing well as the world remains desperate for more oil and natural gas.
Bunge Limited (NYSE: BG) was the other stock to cross the line into the black, while Valero Energy Corp. (NYSE: VLO), although improving, remains my worst performer. It is still down almost 28% after five months.
This month saw great improvement after last month's disaster. Having to conclude my findings on a specific month end day, or any day, depending on the news, sometimes distorts results. For example news on March 31 sent the market down and on April first my picks shot up an unusual amount; hopefully the trend will continue.
My riskiest stock pick Newcastle Investment Corp (NYSE: NCT) was down the most in March but recovered about 35% of the loss in April leaving Valero Energy Corp. (NYSE: VLO) the dubious honor of being my worst performer, down over 30% in the first four months of the year.
April showed improvement as many companies reported positive earnings reports or beat expectations.
Most of my picks improved. Higher food prices no doubt helped Bunge Limited (NYSE: BG) which recaptured losses moving up 23% from its recent bottom. My two winners Raytheon Co. (NYSE: RTN), the high tech defense contractor, and Reliance Steel & Aluminum (NYSE: RS) were joined by a third, Anglo American plc (ADR) (NASDAQ: AAUK) which had a 10% swing entering positive territory.
After three months it is time to face the facts: two of the three indices beat my picks handily. I have not made a good showing so far and unlike most investment idea sources, I feel obliged to air my dirty laundry for all to see.
My riskiest stock pick Newcastle Investment Corp (NYSE:NCT) is down almost 37% this year, and the energy stocks did almost as poorly even though fuel prices are near all-time highs. The downers were not offset by this months' repeat winners.
March was a seesaw battle, but in the end there was not much to show for it. However, unlike the last day of January (down 370 points in the Dow) and February's last trading day (down 315 points), March had a final day of plus 46.49, which is not very meaningful.
Most of my picks sagged a little more, while two remain in positive territory. Raytheon Co. (NYSE: RTN), the high tech defense contractor is up and Reliance Steel & Aluminum (NYSE: RS) is way up.
MFA Mortgage (NYSE: MFA) had a good trading session yesterday. A cool thing, since it's well off its recent highs. The stock closed yesterday at $7.01, having risen over 11%. What was the catalyst? Well, some bullish commentary from an analyst certainly helped out, but, for my money, the bigger news was the increase in the dividend. MFA announced a Q1 payout of $0.18 per share, which is 24% higher than the previous quarter's dividend.
This is exactly what I want to see. I'm figuring that, over time, MFA will be able to make more increases to its dividend as it benefits from further rate cuts by the Fed. Granted, MFA did choose to reduce its leverage profile, as I mentioned in a recent post. Nevertheless, this dividend increase, in my opinion, shows that this particular mREIT is a cut above many and worth holding for now. It's going to be a volatile ride, and I expect some profit-taking based on yesterday's action, especially considering the fact that the volume of shares traded wasn't overly high.
Two of my other mREIT investments, Newcastle Investment (NYSE: NCT) and CapitalSource (NYSE: CSE), also fared well in yesterday's session. Another mortgage entity I'm keeping my eye on, Annaly Mortgage (NYSE: NLY), had a good day as well. Let's hope the financials are finally stabling -- granted, many financials, such as MFA, are way off their 52-week highs, but I have to say, I liked the way the second quarter started, and I certainly enjoyed MFA's dividend change.
Disclosure: I own shares of MFA, MFA preferred, CapitalSource, and Newcastle Investment; positions can change at any time.
Friday morning, lost in the midst of another bad day in the market, Newcastle Investment (NYSE: NCT) reported that it would be cutting its dividend to increase cash for additional liquidity and possible share buybacks. As the stock price has gone down, the trailing dividend yield continued to rise. When I bought at $12.50, the yield was about 22%. The trailing yield as of Friday's close was 32.50% at a stock price of $8.60. Looking forward the current payout will be $0.25 per share, decreasing the yield to about 11% going forward.
The lower yield is in line with the level of distributions made before the financial crisis, but many investors since were looking to enjoy the higher yields given their now higher level of market risk. The stock lost $1.64, almost, 16% on this news and the overall negativity, caused in part by one of the Carlyle Groups investment vehicles Carlyle Capital collapsing and Bear Stearns (NYSE: BSC) news on Friday that it was remaining open but only as a ghost of its former self with the help of the Federal Reserve and JP Morgan Chase (NYSE: JPM). Of course, we all know that by Sunday afternoon it was announced that JPMorgan will be acquiring Bear Stearns for $2 share.
Oh man, the news coming from the Fed seems to get worse and worse. On a day when financials like Citigroup (NYSE: C) continue to weaken -- Merrill Lynch (NYSE: MER) reduced Citi's outlook -- Fed head Ben Bernanke sends the market indication that we are not yet near the end of the mortgage debacle, and he is looking for a "vigorous response" to address it.
According to an AP article, Bernanke, in an address to a banking group, stated that the mortgage crisis was not done, and that more relief would be necessary for homeowners who simply are unable to balance their books. This isn't what anyone on Wall Street wanted to hear, and certainly not what an individual investor like myself was looking for, either; I have ample financial exposure in the form of MFA Mortgage (NYSE: MFA) and Newcastle Investment Corp. (NYSE: NCT).
Further, Bernanke made a suggestion that bankers would obviously find tough to implement -- he said that a reduction in loan principal might be an appropriate way to relieve a struggling owner of real estate. Hmmm, that might not go over too well, especially with the crowd that isn't happy with government intervention -- now Bernanke is calling for lenders to be more lenient? But, what should one expect? This is the Fed, after all, and it's the institution's job to promote some economic homeostasis in times of need. Bernanke believes more foreclosures are coming, and he wants to get ideas out there that will save as much home equity as possible. He brings up a good point, implying that lenders will benefit from loan-principal reductions simply because the rate of foreclosures would, in theory, decline as a result of such a tactic.
After seven months of tracking my 2008 picks -- Wham! -- I went from beating the indices and 
Although 
Yesterday the 
Checking on one of my big calls of the year:
After five months of tracking my 2008 picks, it is rewarding to finally have a breakthrough -- topping the three major stock indices and 
This month saw great improvement after last month's disaster. Having to conclude my findings on a specific month end day, or any day, depending on the news, sometimes distorts results. For example news on March 31 sent the market down and on April first my picks shot up an unusual amount; hopefully the trend will continue.
After three months it is time to face the facts: two of the three indices beat my picks handily. I have not made a good showing so far and unlike most investment idea sources, I feel obliged to air my dirty laundry for all to see.
MFA Mortgage
Oh man, the news coming from the Fed seems to get worse and worse. On a day when financials like 
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