Tuesday, June 13, 2006

Ninja Stock Picks.

Well, like most things I do, this experiment started as idle boasting. Johnny Vegas was bragging about how he's winning our bet about the recession and I'll be owing him $65 soon. The subject turned to investing and I mentioned that, if I wanted to, I could start a hedge fund and outperform every index (like the S&P 500 or the Dow) and that there isn't a hedge fund manager or other stock picker out there who could shine my shoes. The conversation went something like this:

Ninja: Name one thing I do that isn't awesome.

Vegas: What about the whole law thing...you're not very good at that.

Ninja: What!?! I got mad legal skillz!

Vegas: Is that why you have a drawer full of press clippings of your former clients who are in federal prison? [in my defense, it's not a drawer full, it's just a few clippings]

Ninja: Okay...but that was when I practiced securities law. I kick ass as a derivatives lawyer. Plus I couldn't help it if my clients were shady...and don't know how to work a paper shredder.

Vegas: So your saying, with a straight face, that you are better at picking stocks than Warren Buffet or George Soros?

Ninja: Those bitchez? They can't hold my jockstrap when it comes to stock picking.

Vegas: Why haven't I heard about your mad stock skillz before today?

Ninja: Because I haven't bothered to try it before today, but I am still convinced that I'm better at it than everyone based on my past awesomeness at everything that I try.

Vegas: Is your awesomeness comforting to your clients rotting in federal prison?

Anyway, I'm in the middle of setting up an investing blog because I want this blog to remain about home improvements, random libertarian rants and ninja news. I reserved "The Investment Ninja" at Blogger and "the Investing Ninja" at Blogsome (I reserved Investment Ninja too, but I lost the password). I'm playing with the two to decide which is better. So far, Blogsome is kicking Blogger's ass. But anyway, it won't be done for a week or two, so heres' the ninja stock tips that I mentioned. Like all things relating to the shadow warriors, these tips are unorthodox but powerful.

First: The disclaimers:
  1. the opinions are my own, not those of anyone I work with, especially my bosses;
  2. i'm not an investment professional, these are just my opinions. You need to do your own research and come to your own conclusions;
  3. diversify! don't bet everything on one stock...ever. Have at least 8-10 different, well-researched stock plays that you are working on;
  4. don't bet with money you can't afford to lose. If your wife kicks you out because you blew the kid's college fund on something some guy on the net who thinks he's a ninja told you was a good idea, you are NOT crashing on my couch;
  5. I may buy and sell at any time without giving you advance notice, and contrary to my recomendations if I think the market is changing or I need beer money. So decide on your own entry/exit points, don't wait for me to tell you;
  6. Don't sue me. Read number 2 again;
  7. I meant what I said in number 6.
With that in mind.

So here’s my thoughts on Embarq (EQ).

It was recently spun off from Sprint/Nextel. Embarq is a rural ILEC (incumbent phone company) The index funds that own Sprint haven't sold Embarq because it's also part of the S&P 500. But the people who invested in Sprint because they wanted to own a cell company are selling the shares of Embarq. The situation is like if you bought a house and there was an old sailboat in the driveway. Most people buy the house and didn't want the sailboat so they will sell it (often way below top dollar) to get rid of it. Someone who knows about boats can buy the boat and resell it for what it's worth. So, as expected, with everyone selling it, the price of Embarq immediately dropped from 44 to 40. Now it’s starting to stabilize, so we take a look and see if it’s worth buying.

Here's the bad parts of Embarq:
  1. it has been losing phone subscribers (like every other phone company) due to increased usage of cell phones, and cable phone service;
  2. it's rural so it's cost per subscriber for all those wires is higher.
Here's the good parts of Embarq:
  1. it has been losing phone subscribers, but gaining market share in the use of DSL, which is very profitable;
  2. that high amount of wire per customer means high depreciation, which means it has more cash than the earnings would suggest;
  3. it's rural so it's unlikely to face as much competition from cable phone suppliers as ILECs in larger markets;
  4. it costs a lot to service rural customers, but they ARE the phone company and can charge a monopoly price;
  5. P/E or less than 10.

Okay, the forward Price/Earnings ratio of the stock is less than 10. The current P/E is 7.96. By comparison, the P/E of the S&P 500 is more than 20, but the real way to see if that's a good price is to compare it to other Rural ILECs. Citizens, a rural ILEC, has a P/E of 20 (but with an 8% dividend). ILECs as an industry have a P/E ratio of 14.88. So...assuming a fair price for this should be a P/E of somehwere between 12 and 15, then based on it's earnings per share of $4.96, a fair price for Embarq should be $60-$70. Since it's currently trading at just under $40, I think it's a good investment and has a large enough margin of safety to make it worthwhile to invest it. (but sell it when it gets to about $70, because then it's not on sale anymore).

I bought about $5,000 of this yesterday at $39.94. I was waiting for the price to come down more, but some joker put in a mini-tender offer which raised the price. I won't go into what mini-tenders are, but people who do them to should be kicked in the nuts. I want to buy more of this, but I'll hold off and buy on the dips unless I see it going higher, in which case I may add to my position and sell when it gets closer to $70.

Here's my thoughts on American Home Mortgage (AHM).

AHM is a Mortgage REIT. Everything in the housing sector has been getting battered lateley. You can thank Bernake and Greenspan for that. AHM has a trailing P/E of 8.13 and a forward P/E of 6.63 times earnings. Talk about a bargain! Now I know why you girls get all excited about a shoe sale. (okay, I'm a sexist pig...I've been looking at stock charts for a week, so sue me).

Anyway, sometimes stocks trade at a low P/E ratio because they suck, like New Century Finance (NEW). NEW Trades at a P/E of 5.89 and pays an incredible 16% dividend yield. But buying New Century is like dating Paris Hilton. It looks attractive at first, but then when you wake up with some sort of crotch disease, it won't seem like such a good idea.

AHM pays almost a 12% dividend yield. That's less than NEW's 16%, but it still rocks. AHM has made interest only loans, which are scary, but those loans make up only 15% of it's portfolio and they lend to high-quality borrowers. So they should be okay even if the housing market implodes because the people they lent money to, usually pay their bills. It' s competitor, New Century Financial has a 16% dividend yield, but it lends money to subprime borrowers and has about 40% of it's loan portfolio in California. Yikes. So the first one is like dating Ivanka Trump, the second is like dating Paris Hilton. Both are rich and sexy, but only AHM won't give you the stock equivalent of crotch rot in the morning.

I bought about $5,000 of this too. I got in at $32.18. I'll probably buy more on the dips unless I hear bad news about this particular stock. I think this is a good stock. I don't have an exit point for it though. I'm thinking this is a long-term play and I'd be happy if the stock stayed where it is and kept paying 12% dividends. That's better than the 2% I get from Bank of America. So I'll consider this like a savings account.


Liberal Banana said...

You can be like Cramer on Mad Money only you can be dressed as your bad ninja self and answer calls while doing high-flying kicks and using nunchaku!

(Note: I may be able to count to ten in Japanese but I had to look up how to spell 'nunchucks.' Nunchucks? Numchucks? Well apparently, it's nunchaku. I didn't know this. But now I do, thank god, because knowing is half the battle. A battle which I will win now because I just ordered myself some nunchaku.)

Anonymous said...

I like "The Investment Ninja." That just kicks ass.

Some fun food for thought today:

The Cunning Realist on the financial markets!

SmilingJudy said...

I do a lot of work for EMBARQ (brand-enforced all caps) and Sprint. Go short on EMBARQ. It seems to me they used this opportunity to clean house on their employee base.

Dan said...

Let me know when you profile some affordable stocks. The last time I spent $5,000 on anything it was 1893 and I was a gold prospector buying land in California in a past life. But if I had to take financial advice from anyone, I'm pretty confident saying it would be a ninja. Or a giant oak tree, because if the tree could talk obviously it is wise.

Twoste said...

I put my $36,000 per year degree to good use and did some research on your suggestions.
And: They look good.
Keep suggesting this stuff.
Twoste needs a retirement home in Australia.

Anonymous said...

Reading these picks again... what is the cash flow like? Better still, what's the return on invested capital? What are the prospects for actual growth?

HomeImprovementNinja said...

Banana, I like that guy, but I invest the exact opposite of him. I do it longterm after pouring over the financials, so it wouldn't work. I wouldn't mind a TV show though.

And I hope you got plastic nunchaku, those things will kill your elbows if you don't know what you are doing.

siryn, yeah I like the first one too, I just lost the password though. Oh well.

smiling judy, could you be more specific? I did a lot of work for Citizens, and I think they suck too, so it's gotta be worth at least as much as that.

Dan, the stocks aren't expensive. You can put in as much or as little as you like. Since I'm almost 10 years older than you (yikes!) if I didn't have $5k laying around, chicks wouldn't date me.

twoste: thanks. But remember, don't put all your eggs in one basket. I'm gonna try to come up with at least 10 good stocks this year.

Siryn: Per Yahoo Finance, The Return on Assets is 11.5% and the return on Equity is 18.2%. As for the prospects on growth? Eh? I picked it because it trades at a steep discount to other Rural ILECs. Even if it doesn't grow much (because it's just a phone company) it deserves a stock price of 60-70 based on the P/Es of other Rural ILECs. Very good questions though!

Stef said...

Ah, my Dad, the investment golfer/retired doctor would LOVE you. He lives for this kind of talk. Me, I just go for some diversified mutual funds and whatever picks Dad recommends. And I'm doing pretty darn well so far! I'll enjoy reading your picks, but I think I'm gonna stick with the funds for a while.