Bank Bonuses

Yesterday New York Attorney General Andrew Cuomo released some fairly damning numbers concerning $1 million bonuses handed out at banks that received TARP (your hard-earned) money. Here's a short synopsis of some of the bigger pigs. MS, GS, and JPM paid out bonuses that were greater than their profits for 2008!

Bank of America: 172

Bank of New York Mellon: 74

Citigroup: 738

Goldman Sachs: 953

JPMorgan Chase: 1,626

Merrill Lynch: 696

Morgan Stanley: 428

State Street: 44

Wells Fargo: 62

Check out this particularly troubling exerpt from the New York Times article:

At Morgan Stanley, for example, compensation last year was more than seven times as large as the bank’s profit. In 2004 and 2005, when the stock markets were doing well, Morgan Stanley spent only two times its profits on compensation.

Yet we still regard these banks as sophisticated investors? Hardly, they are big compensation schemes. I am aginst completely setting aside hundreds of years of contract law in order to claw back money, but this is obnoxious, tone deaf behavior. I have no problem with a self-supporting organization paying its employees whatever they'd like, but if Uncle Sam owns you, than that's different. You should at least pretend that you care about how this will look. The goverment owns a third fo Citigroup. Shouldn't it flex its muscles just a bit.

Allied Irish Bank

Allied Irish Bank (AIB) is one of the big boys of Irish banking. They pretty much do it all: corporate banking, retail banking, investment banking, asset management,etc. This company got killed in the last year, losing about 80% of it's value. It reached a 52-week low of 72 cents back in March. It's yielding 40% and is still cheap on a P/BV basis. It's selling for 0.16 of price to book! It's also selling for far less than the cash on the books.

What are the risks? Well this company was involved in pretty much every frothy real estate market in the West, especially Ireland. It's still unclear if the all the damage has been done. Their Tier 1 capital ratio is about 7%, which indicates that it's wouldn't be in a great position to sustain further massive losses. For instance, a conservatively-financed bank like State Street (STT) has a tier 1 capital ratio of 13.5%. I would say that you ideally would want the bank to be 10% or above in this environment. Still, it all depends on your loan portfolio. They also need to raise a significant amount of money next year in order to further solidify their balance sheet. They may sell some American and Polish assets in order to do this.

The bottom line is that this is a speculative pick in the short-term, but long-term, unless you think that the Irish growth story is dead, should pay off handsomely for the patient investor.

Insurance is still attractive

"You know what's worse than taxes?
What's worse than tax is insurance.
You got to have some insurance.
They shouldn't even call it insurance.
They just should call it ''in case shit.''
l give a company some money
in case shit happens.
Now, if shit don't happen,
shouldn't l get my money back?"
-- Chris Rock, "Bigger & Blacker"

I know that many insurance stocks have rallied off their 52-week lows, but they are still attractive. Take for instance, Conseco (CNO) which is up sizably today on better than expected earnings. It's still selling for P/S, P/B, and PEG ratios that at best would be described as meager. It's trading for about half the cash on the balance sheet.
If a money loser like Conseco scares you, then consider Unum (UNM). It's not as cheap, but still cheap. Plus, it has a positive P/E.

Put Saks and Dillard's on your watchlist

Saks Incorporated (SKS) is trading at two-thirds of its book value and half of EV/revenue. That's pretty damn cheap. Dillard's (DDS) is trading at three-tenths of book value and a quarter of P/S. It's EV/revenueis 0.26. Dillard's also pays a small dividend. Obviously, this is a play on the recovery of the consumer.

Is China Crescent Enterprises (CCTR) Too Good To Be True?

Or is it 2 legit 2 quit? I shall try to answer that question.

As usual, I was screening for absurdly cheap stocks. I wanted a market cap of 1B or less, trading under book value, with a P/FCF of 10 or less. I also wanted a stock that trades on average at least 50K shares/day.

CCTR is a tiny stock trading on the OTCBB. They are in the software development outsourcing business. They are trying to become a player in the smartphone and mobile computing market. It has a market capitalization of 173K! That's right, 173,000 dollars. It trades for 3 cents a share. It has a P/E of 3.7 and trades at a P/FCF of 1.7. It has a minuscule amount of long-term debt. This is a value investor's wet dream.

It looks too good to be true. So I'm starting to dig.

They filed for bankruptcy (Chapter 11) in Colorado March of 2005. However, it was dismissed in April 2006. Dismissal is not the same as discharge. Dismissal means that something went wrong with the proceedings. There's where the trail goes cold for me. I'm going to dig a little deeper and find out what happened. They also changed their name. That always seems shifty to me. Stay tuned.

Junk Bond ETF

I'm buying iShares High Yield Corporate Bond ETF (HYG). Why? The spreads are tightening and companies are happily issuing new junk bonds. It's got a still-ridiculous yield of 10.5%. This is a trade that i couldn't pull the trigger on earlier in the year. I've been thinking about it since March. I feel so stupid about it, but I'm not going to make that same mistake again. I'm going to start dollar-cost averaging into this ETF. It won't necessarily be a smooth ride. Some default could easily rock the entire market. At that point, I will take a deep breath, and pile more on my plate. This is the old "blood in the streets" approach to getting rich. It's very hard to buy value when people are screaming and running for the exits, but I'm a big believer in mean reversion. It will probably take more time that I'd like to spend waiting, but spreads will continue to narrow. As a matter of fact, I should be praying for defaults so that I can really get a good bargain.

American Railcar Industries (ARII)

American Railcar Industries manufactues, manages, and repairs railcars. This stocks is like a pair of pants in the drawer in which you find $50 you didn't now that you had. It's trading for less than the cash/share it has on the books. It's trading for about half of book value and a quarter of sales. Insiders (including Carl Icahn) own over half the shares.

Let it $now

A great value-investing website, The Graham Investor, has turned me on to this undervalued microcap, Arctic Cat (ACAT). This stock is trading at half of tangible book value, a seventh of sales, and a eighth of its enterprise value/revenue for the trailing twelve months. It has no long-term debt. Arctic Cat makes snowmobiles, ATVS, related accessories. Like everyone else in this category, they've been losing money. ACAT has responded by cutting jobs.
This is not a great business selling at a bargain price. They are a luxury item in a weak economy. Their international sales have been hit by a resurgent dollar. Still, there's a lot to like here. In addition to the wonderful things I wrote about above, the company is cash flow positive and has $9 of cash/share on the books. Moreover, insiders own more than half the company.
I think the stock is pretty much bottomed and is a double.

Don't chase the triple

Yesterday, Human Genome Sciences (HGSI) more than tripled in value. Voume has increased by twice that. Thus far, today it is up another 10%. Don't chase performance. I know about the lupus trial. I know it's been upgraded. So does everybody. You missed your opportunity to buy this was days ago, before it took out its 52-week high. Don't rush into a money-losing biotech just because of momentum. Unless of course, you have a strong stomach.

China Digital Communications Group (CMTP)

This is an example for growth at a ridiculous price. This company has a P/E of 2.6, a P/CF of 2.36, no long term debt. Based on earnings for the trailing twelve months, the PEG is 0.017! Where else are you going to find growth that cheap? Let me throw a couple of caveats out. This is Bulletin Boad stock. It has a market cap of only 13 million. The average volume is only 35,000 shares per day.

Patting myself on the back

Back at the end of last year, I recommended buying Moody's (MCO). If you'd followed my advice, you would've made about 45%. I still like this stock. It's not nearly as cheap as it was 7 1/2 months ago, but it's still significantly off from it's 52-week high of $43.07. I'm going to put in on a watch list.
Despite the complete lack of credibility of this business, people still treat its pronouncements as the Gospel truth. That's a great moat for a business. Plus, look at the margins. in Q1, their revenues were down from $21.8 million, 19 of which was due to dollar gaining against the pound and the euro. Think about that, revenues were down only 5% despite the fact that the company's incompetence helped create and sustain our current financial crisis.

Nice numbers from JPMorgan Chase

JPM posted some good numbers in Q2. Buoyed by trading and underwriting profits, they earned 27 cents per share, easily surpassing expectations. They even ponied up $27 billion of TARP money. That's the good news. The bad news was in commercial real estate and credit cards. CEO Jamie Dimon doesn't see the recession ending just yet, so they're upping their loan loss reserves.

So how do you play this? I'm looking hard at shorting the KBW Regional Banking ETF (KRE). Compare it the Financial Select Sector SPDR ETF (XLF). The former is off about 36%, while the later is only down 3%. KRE is also trading at a higher P/E than XLF. I would think that's going to change soon. The regional banks don't have the same wherewithal as the big banks to handle the commercial real estate and credit card meltdown that's underway.

Is it safe to go in the water?

It seems that pundits are falling over each other in order to decree that the recession is over. Is Daniel Gross right? I don't know if Nouriel Roubini is right, but then again, I don't care either. All I know is that there are still stocks trading for meager multiples, many of them big caps with tons of cash on the balance sheet. Do not get caught up in timing the end of the recession. We won't know officially until well after it's over. Don't be discouraged that you missed the March bottom. After all, we may re-test it. Even if we don't, there are still great companies that are cheap, some justifiably, some not. In fact, stop reading this blog and start looking amongst the wreckage!

Were you buying in February, March, and April?

I must admit that I wasn't. I was scared. I didn't have the cojones to be greedy when others were fearful. I'd been salivating over Goldman Sachs (GS) for months. I even wrote about how I was going to pounce all over it when it went below $140. I got my opportunity, but I didn't go near it when it was trading in the 40s and 50s. Why? Fear. Confusion. I felt that the government wouldn't let it go down, but I wasn't sure the common wouldn't be wiped out. I eyed C when it was around a dollar, but I couldn't pull the trigger on that one either. Or what about Freeport McMoran in the teens? I think that I've learned my lesson, but I won't be sure until the next shakeout.