Monday, January 30, 2006

On my bookshelf

In an earlier post, I had named Hedgehogging as my next read. I am half-way through the book. It is a good read if you want to know what raising money and then meeting performance expectations is like. While the author is skilled at name-dropping (and place-dropping!), he is still humble and honest when it comes to admitting investing mistakes. That itself makes the book worth reading.

The final chapter on the not so well-known aspects of Keynes' life is a fun read.

Along with Andy Kessler's Running Money, this should be read by anyone planning to manage other people's money.

Also sitting on my shelf -
  • Inside the FDA by Fran Hawthorne
  • All about dividend investing by Don Schreiber.
I am also planning to add these to my shelf shortly -
  • Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joseph Ellis,
  • Fischer Black and the Revolutionary Idea of Finance,
  • My life as a quant - Reflections on physics and finance by Emanuel Derman
  • Kellogg on Biotechnology - Thriving through integration by Alicia Loffler
  • Practical Speculation by Victor Niederhoffer

Hit #79

Intrado (TRDO), a provider of 911 emergency telecommunication support services, is being acquired by West Corp for $26/share.
This cash transaction amounts to a 21.8% premium over my average cost of $21.34/share.

While on emergency services, a recent IPO, Emergency Medical Services (EMS), is a good long-term investment. The stock has so far not received much attention and is still going for close to the offering price. EMS runs the widely-recognised American Medical Response, AMR ambulance services.

Air Methods (AIRM), is also similarly attractive, though it has been around for a while as a public company and has seen its stock triple over the last year or so.

Previous hit - Central Freight (#78)

Hit #78

Central Freight Lines (CENF), the trucking company, agreed to be acquired for $2.25/share, a 39.7% premium over my average cost of $1.61/share.

Given that the stock has lost 70% of its value over the last few months, this is a real cheap buy. An activist shareholder fighting for a better price is badly needed to counter such deals.

The buyer, the Moyes family, also owns Swift (SWFT) trucking.

This buyout comes just a week after another trucker, SCS Transportation (SCST), announced that it may be looking to sell the company. I own SCST shares, which have now gained around 70% since I bought a few some months ago.

Since I cited trucking as an attractive sector, I have bought shares in various trucking companies, many of which have seen renewed interest.

Among the ones I bought, Covenant (CVTI), Sirva (SIR) and US Xpress Enterprises (XPRSA) are worth watching and adding positions in.

Special carriers like temperature-controlled goods experts, Marten (MRTN) and Frozen Food Express (FFEX), are also likely targets down the road. I own a few Frozen Food Express shares and will continue buying at current prices.

In a recent post on Arizona, I touched upon trucking/rail and logistics in general. I recently opened a position in ABX Air (ABXA), an airport-to-airport freight provider that has seen strong insider activity.

Previous hit - Sports Authority (#77)

Monday, January 23, 2006

An opportunity revisited

Back in November, I wrote about Africa being an opportunity for patient investors. The only company I mentioned there as an example was Millicom, the Luxembourg-based provide of cellular services in Africa and other emerging markets.

I had bought a few Millicom shares in September at around $18/share and intended this to be a long-term hold, possibly buying more at opportune moments. Well, something interesting happened last week. Millicom announced that it has received unsolicited takeover offers, and is considering them!

The stock has taken off since then, including a $9/share jump on one day. The shares now trade at $39 and are not cheap anymore. An offer is likely to be higher than even this price, but buying more at this point is risky. I am holding onto my shares, and if a pullback ensues if the takeover does not materialise, will be looking to add more for the longer term.

Another related investment I made was in Turkcell (TKC), Turkey's largest cellular service provider. The second largest provider in Turkey, Telsim, was bought recently by Vodafone. Turkcell will also ultimately be bought by a Dutch/French/German telco. A cheap entry point to Turkcell was possible thanks to the bird-flu scare. Shares have recovered since then, though they are still attractive. Buy on any more avian panics.

Others worth watching are Hutchison (HTX), which provides cellular services in several Asian countries, incuding India, Indonesia, China Mobile (CHL), China Unicom (CHU) and Portugal Telecom (PT). I own PT shares, and see it as a takeover target for a European major.

Hit #77

The Sports Authority (TSA) today announced that it being acquired, in a going-private transaction, by Green Equity Investors for $1.3 billion in cash. This offer, of $37.25/share is a 67% premium over my average cost of $22.32/share.

I had bought TSA shares more than a year ago, after momentum investors started dumping the shares following evidence of slowdown in growth. Apart from what looked like a great value, some insider buying activity also provided comfort. More importantly, the secular trend towards a more active/healthy lifestyle wasn't going away.

A number of other players in the sector remain extremely attractive. Gander Mountain (GMTN) is trading at bargain levels, and has seen substantial insider buying recently. Ditto Cabela's (CAB). I own a somewhat large number of Gander Mountain shares, and recently also bought into Cabela's. I will continue buying both.

Big Five (BGFV) is also looking attractive, and it comes with a 1.4% yield to boot. I will be looking at it closely in the coming months.

Another interesting buy is Dover Saddlery (DOVR), one of the few IPOs of last year languishing in negative territory. This seller of equestrian products will be a great fit for a larger store operator.

Previous hit - Albertson's (#76)

Hit #76

Albertson's (ABS) finally agreed to be bought by a group that includes Supervalu, CVS, and Cerberus Capital. The deal values Albertson's at $26.29/share, with shareholders receiving $20.35 in cash and the rest as Supervalu (SVU) shares. This has been one of the more complicated deals in recent years, partly so in order to avoid anti-trust concerns.

Alberston's has been up for sale for a while now, and I made 2 posts on the upcoming deal - here and here. This current offer represents a premium of 29.4% over my average cost of $20.3/share.

Supervalu shares surged 7% after the announcement - unusual for a buyer, especially in the retail sector. CVS headed down a bit, but will emerge stronger from this deal. If CVS shares drop another 10%, they are worth buying for the longer term. For now, Rite Aid is a better, takeover, bet.

In fact, if Walgreens' growth phase is done, and it looks that way, a combined long CVS/Rite Aid and short Walgreens trade may be very profitable. Longs Drug Stores (LDG) also remains a target, and the recent pullback has made it less expensive, though not anywhere close to a bargain level. I own Rite Aid and Longs shares, the latter bought at much lower prices.

There will definitely be more activity in this sector soon. Safeway and Kroger, the latter was part of the initial takeover discussions, will have to react. Will they come up with a merger ? Such a merger proposal will invite strong anti-trust scrutiny though. I own Safeway stock, bought after some bad news last year.

Wild Oats Markets (OATS) remains a takeover target, and even after the strong gains over the last few months, looks attractive. I own a somewhat large number of OATS shares, bought after a spectacular earnings miss some months ago.

I will likely end up selling the Supervalu shares I get in exchange as part of this deal. Supervalu's debt level after this deal is worrying and I don't want to be there holding the bag when things start turning ugly.

As for Albertson's, I am happy it will be gone. After one or two trips to Alberston's, I could never get myself to go there again - clean and organized aisles, but not enough compensation for the distressing service.

Previous hit - Identix (#75)

Sunday, January 15, 2006

Hit #75

Identix (IDNX) is being acquired by Viisage in a stock-transaction, valuing Identix at around $8.34/share. The offer represents a premium of 32% over my average cost of $6.34/share.

Identix is known for its fingerprint id and facial recognition technology, while Viisage was focused only on the latter. The combination will now create a powerful biometrics player. The markets recognised that and Viisage stock surged ahead, but not before a day of dumping following the merger.

The combined entity will itself be a target down the road for one of the defense majors. Companies like General Dynamics, Honeywell, Tyco and GE will look to enter this civilian security sector.

Other players worth watching in this sector are Digimarc (DMRC) and Cogent (COGT). The latter went public recently, and the Identix/Viisage announcement resulted in a pullback in the shares creating a buying opportunity. There is room for more than one player in this market in a post-9/11 insecure world. Digimarc leads in the secure identity cards market - everything from tamper-proof driver's licenses to social-security/national-id/travel documents.

I own shares in Digimarc. Digimarc and Cogent are both worth buying now.

Previous hit - Tommy Hilfiger (#74)

A must read

This is one book that you don't want to be caught reading - the title is very unimaginative! But the book itself was worth every cent I paid for it.

Joel Greenblatt's You can be a stock market genius is a great book about investing in special situations - spinoffs, recapitalizations, bankruptcies and the like. In fact, I have not found another book that covers these topics so well from an investor's perspective.

Buy the book - this one is worth keeping.

While on special situation investing, Mirant's emergence from bankruptcy has resulted in a variety of special securities being issued to stockholders. I haven't had time to look at them, but there must be money to be made here.

Also, Tyco's decision to split itself, announced last week, was not welcomed by the market. This has created an opportunity - if you are a patient investor, you should be using this chance to buy Tyco shares and wait for value to be unlocked over the next few years.

Another book that I will be reading soon (I just placed the order today) is Hedgehogging by Barton Briggs. Looks like a fun book to read - it is all about the interesting experiences in a money manager's career.

Previous reads.

It is not different this time

Back in August I wrote that it was time to reduce exposure to equities. A few events in the past two weeks has made me even more cautious and I have shifted more of my managed/retirement accounts' allocation to bonds. My takeover focused investing will continue.

While the markets have reached new highs, most sentiment readings are reaching euphoria levels. So much so that, an extremely high percentage of experts have called the recent yield curve inversion as not relevant and that this time it does not predict a recession! That is scary.

My own observation of holiday shopping and retail discounts tell me that the consumer is slowing down. Atleast no one is now questioning the rapid cooling down of housing taking place. I was hoping for just a mild, one-quarter recession, but I now expect it to be a deeper, longer recession. Some experts are predicting that any consumer slowdown will be offset by capital expenditure from industry. I hope so, since otherwise the outlook is pretty dark.

Sunday, January 08, 2006

Feeling Arizona

The alternate title, Arizona dreaming, didn't sound that enticing!

I have written before about my successful investments resulting from keeping my eyes open during road-trips. Check out Foothill Bank (Hit# 71) and Central Coast Bank (Hit #65). Having just returned from a week-long driving trip around Arizona, I am going to write about possible leads.

I watch out for 3 sectors when I am in new locations - banking, trucking/rail/logistics and retail. Among these, banking is a sector for which there is really no substitute to actually seeing them located in a community, and this is especially true about all the regional/community banks.

My lists follow:
  • Banking:

    • The Stockmen's Bank: This local bank has an extremely strong presence all over Arizona and as I found out later from their website, even some rural California locations. Unfortunately, they are not public. I will be there to buy the stock, when they do go public. Their story, here, is still worth reading.
    • Compass Bank (CBSS): Mostly a southeast bank, but has some prime locations in Arizona. Still trying to expand into New Mexico and Colorado. I have been watching Compass for a while - it is definitely a takeover target, but looks expensive given its exposure to some of the hottest real-estate markets. I will wait for a better price and yield.
    • National Bank of Arizona: Owned by Zions Bank (ZION). Zions has also been rumored to be a target for a while, but it is going on its own acquisition spree. I will wait for a better price.
    • Marshall & Ilsley (MI): This Wisconsin bank has a small presence in Arizona. MI looks attractive at its current price.
    • Canyon Community Bank: A bank with a small number of locations, but looks exposed to Arizona's real-estate bubble. Not public yet. At a good enough price, once it becomes public, this will be an attractive takeover target.
    • Bank of America, Chase and Citi have a much weaker presence than I expected. They will all have to buy to grow in Arizona.

  • Trucking/Rail: Arizona, along with the southern California deserts, is a great place to see the rail network in action. There aren't usually new companies in this sector that you get to see just because you are in a new location, but you do get to see the activity and an indication of market share of these service providers. My earlier posts on trucking/rail, here and here, have covered most of the companies of interest in this sector.

    • JB Hunt (JBHT): I did not realise the significance of the intermodal segment of the market, where JB Hunt has close ties with Burlignton Northern Santa Fe and has a sizeable share. The number of JB Hunt containers I saw on BNSF trains, easily ran into hundreds just in a few hours time. Will such a close co-operation ultimately lead to a deal via a merger ? I see a possibility of that. JB Hunt shares look attractive today, and I am adding it to my buy list.
    • Forward Air (FWRD): Another company that I had added to my watch list a while ago, after a feature in IBD. I failed to act earlier since I did not realise the true nature/potential of the business. The doubts are gone after seeing tens (hundreds!) of Forward Air trucks, but the shares are not cheap anymore. Forward has a niche market - forwarding freight from airports - mostly to itself.

  • Retail:

    • Dollar General, Dollar Tree, Family Dollar : Dollar stores seem to be everywhere. Larger retailers may have to buy one or more of these guys to enter some communities. Along the same lines, I was surprised by the absence of national majors like Walmart.
    • Starbucks, Peet's: It is hard to say this about California, but Arizona definitely has room for more cafes. While Peet's does not have a presence in Arizona, I think they will, with their earthy colors and interiors, do great in Arizona and New Mexico. I have mostly sold my Starbucks and Peet's shares, though I am willing to buy Peet's again if I see a clear expansion story.

Saturday, January 07, 2006

Books to begin a new year

The past few weeks have been light in terms of how much I got to read. Here are 2 worth mentioning:

- A Passion to Win : Sumner Redstone and Peter Knobler : The story of Sumner Redstone and his Viacom empire. The most important sections are the ones detailing the negotiations and tactics behind the various mergers - Blockbuster, Paramount and CBS (which came undone last week).

- How We Got Here - A slightly irreverent history of technology and markets : Andy Kessler: Not as great as Running Money, but still a good sequel.

Previous reading list post.

Tuesday, January 03, 2006

Watching Ann, Cathy, Victoria and Bebe

Every few weeks, around shopping spike periods, I spend a lazy afternoon at a mall trying to gauge interest in various stores. The few malls I frequent are located in fairly wealthy suburbs and cannot be considered representative of the entire country, but the experiment still gives a good indication of relative popularity among brands/chains.

Here is what I saw over the last 2 weeks :
  • Extremely low traffic : at Ann Taylor, Bebe, Abercrombie & Fitch, Victoria's Secret, Zumiez, Wet Seal, Guess.
    Zumiez was a huge surprise and A&F was also somewhat shocking. Guess and Ann Taylor stock levels are way too high given the traffic that I observed. Bebe was almost empty, inspite of the big discounts being offered.
  • Medium to heavy traffic : Gap, Foot Locker, Forever 21, Restoration Hardware, Claire's, Sharper Image.
    Forever 21 is not public, otherwise I would be considering it seriously. It would take a miracle for a good number of the people shopping there to look like 21 again - I kept thinking that a Forever 41 would do well too!
  • No discounts: Oakley was among the few stores without discounts. That is an indicator of strength, though I would have liked to see more people shopping there. Similarly, at Sharper Image, iRobot's wares seem to be among the few that were not being discounted. iRobot, which recently went public is worth buying in small numbers.

I own shares of Oakley, Restoration Hardware, Sharper Image, Wet Seal and Limited. I will be looking at Bebe seriously, since any price drop from here will make it a very attractive takeover target.

Intel outside

Intel announced a major shift recently to orient itself towards the consumer segment of the market, away from business. This will definitely involve Intel getting into more specialized chip sectors, likely via buyouts.

A pairing of Intel with Texas Instruments and with Analog Devices has been rumored for a while. But I don't see such huge combinations on the horizon.

More probable targets include Omnivision (OVTI), Silicon Image (SIMG) and Sirf Technology (SIRF), to enter into the hyper-growth cell-phone camera and GPS markets.

I own Omnivision and Sirf shares, bought at substantially lower prices. They are now fairly valued, but a healthy premium can still be expected in the event of a takeover.