Monday, October 30, 2006

Where is the LUV???

G. Gerswhin-" Life is a lot like jazz... It's best when you improvise"

Sold the $15 November Put (20 days to expiration) for $.30/share. Net of commission, this amounts to a target return of 2.0% on my $14.71 VAR (value-at-risk). This amounts to an annualized rate of return of 35% on VAR that is invested in one of the best airlines EVER. I could cite labor costs, lack of strikes, no bankruptcy, consecutive years of profitability, hedged fuel costs below $40/bbl of oil, its own reality television show, but instead I think the most telling feature is that Southwest manages to accomplish its historical profitability without compromising on customer service (i.e- they still give out peanuts and an ENTIRE can of soda), unlike those bastards at other airlines.

The stock is at a 52-week and multi-year low, while I think it could have near-term downside to the mid $14 area, it should have some support at current levels...particularly given that the company has been earnings money the past five years and trades at a lower valuation than it did then...

Here is a chart-printing of the option. If you prefer to own the stock, but want a yield higher than Southwest's meager .12% payout (perhaps the major chink in the LUV bull argument), you can always write the $15 call. Again, these strategies only make sense if you have ultra-low commissions(similar to Southwest's ticket prices)

Is free peanuts a valid investment thesis? (The answer to that rhetorical question is yes, in case you didn't know). Look what happened to Lone Star Steakhouse when they removed the peanuts from their restaurant. There were some other problems with sales and earnings, which were probably due to the lack of peanuts I imagine.

Sunday, October 29, 2006

I Wanna (Florida) ROCK!

Pat Riley- "Giving yourself permission to lose guarantees a loss. "

Florida Rock rallied 15% on Friday (at the high of the day), before finishing up around +8%. I continue to own this position, which performed this rally on NO news and no earnings announcements. The key driver of the stock gain appears to be a buyout offer that Cemex launched to acquire Rinker. The buyout offer values Rinker at nearly 10x Ebitda, while at the same there is a private equity push at TXI (Texas Industries) , which is also trading above 10x Ebitda. While Florida is not currently considered the "hottest" residential housing market around... it has historically rebounded and still holds a lot of what can't be rebuilt on the prairie (namely, waterfront property).

Florida Rock is only about 40% exposed to the residential market in Florida, due to its diversification in the Southwest and maintains a very strong balance sheet, with negative net debt. At 7x Ebitda (trailing), its hard to want to sell this stock on a 15% up-day in trading, especially when one considers the chronic cement shortages that have plagued builders in that state for the past three years (state is a net importer). Perhaps I'm being greedy, but historically selling (too soon) good companies as they start to overcome investor pessimism has been my weakness. I would expect to see this stock approach the $50-55 area within the next few months, if only to move in-line with where other cement/aggregate companies are valued at in the marketplace.

Long FRK (up to $43, from purchase price at $38)- Writeup from Sept. 06 Journal below

Thursday, October 26, 2006

It A'int Pretty But Its Cheap!
Have noticed that some of these bank stock options are not paying close attention to the dividends on the underlying stock, too focused on volatility numbers, etc.

Here is the trade, sold $45 November calls on Citigroup @$5.80, while buying the stock at $50.80. If Citigroup closes above $45 (or does not fall 13%) by November 18th, then this trade will net me $50.80 per share, versus my cost basis of $50.80. Not a great-sounding trade you say? Lest I forget, Citigroup will pay a dividend to holders of the stock on November 6th.... of $.49/share.... which is really all you get out of the trade.

So doing the math, we are really only risking that the stock falls below $45, with that being our net investment in the trade. For a 23 day holding period then, we will earn ($.49-.02 commissions)/$45 at-risk =1.04%,annualized gain*(365/23 days)=16.5%

Tuesday, October 24, 2006

EXP- Eagle Materials: Attached to this post is a sample of one of my note-book writeups on Eagle Materials. They recently had several large insider buys in their stock, but hopefully this gives a sample of some of the info I focus on when analyzing a company/industry. I am extremely impressed with the grasp of EXP management on their market dynamics... however I would probably wait to buy the stock if it gets to the low 30's again.

Saturday, October 21, 2006

Well... the market is at a 52 week high and up about 12% for the past twelve months (depending on which market qualifies as "the market" to you. For the past 2-3 months, a lot of stock I have been following are up 15-20%, with very few of the decent-quality companies trading near their lows.

The only recent market overreaction has been in the energy sector, with many drillers and oil service companies getting clobbered due to oil price declines. I bought HYDL at $50.50, which has rallied up about 7-8 points in about a week. I only bought 1/3rd of a position, as I was buying into it as a falling knife. I like management, company has >10% of market cap in cash, no debt, and dominant market position in premium connections (deep sea oil drilling). I should have bought more exposure in this sector, possibly including GRP (grant prideco) below $35. Recent buyouts of NSS and MVK (steel tubing for drill pipe) bode favorably for this sector, possibly affording buyout interest in either GRP or HYDL longer-term.

Recent strong performers for me have been GTRC, CPWR. AGYS, FRK, CCRT, DEBS, IUSA,JBHT, YUM, HYDL, DRI, EAT, and several others. Am debating buying some WSM in the low 30s due to strong insider buying and decent niche retail concept. JLG is a solid trucking company (aerial lifts) that was oversold and had just hit my low-debt/valuation screen....prior to receiving a buyout offer more than 25% above its prior closing price. Ironically, even after the huge jump in stock price it is still on my low-valuation screen! Deluxe Corp (check printer) is also up nearly 50% from its $14-15 bottom of a few months ago. I hated this company and their extremely weak former management, however new CEO Lee Schram appears to have the right stuff and has made some tough decisions to preserve cashflow. Based on their high debt leverage and strong current cashflow, DLX is LBO bait if the stock price fell below $20/share, although I am less excited about it at $22/share (upside to $30?) Am not excited about a lot of names and am waiting for some opportunities to develop. Will continue waiting for some exciting names to go on sale....