Value Stocks and Investing

Introduction Intentionally, this Podcast starts out with my voice talking about Euphoria and it ends up getting swallowed by the music of the jungle - the market. ===== THE LETTER A couple weeks ago, I was reading a letter from May 29, 1969. This is what it said... "...personal considerations were the most important factor among those causing me to modify our objectives. I expressed a desire to be relieved of the (self-imposed) necessity of focusing 100% on BPL. I have flunked this test completely during the last eighteen months. The letter said: "I hope limited objectives will make for more limited effort." It hasn't worked out that way. As long as I am "on stage", publishing a record and assuming responsibility for management of what amounts to virtually 100% of the net worth of many partners, I will never be able to put sustained effort into any non-BPL activity. If I am going to participate publicly, I can't help being competitive. I know I don't want to be totally occupied with out-pacing an investment rabbit all my life. The only way to slow down is to stop. Therefore, before yearend, I intend to give all limited partners the required formal notice of my intention to retire." === The letter I just read to you was written by Warren Buffett... The world's 2nd richest man... Fast forward to May 5th, 2006... I'm on an airplane heading to the Berkshire Hathaway Annual Meeting... My trip to Berkshire Hathaway started at the Nashville, TN airport, but things didn't start getting interesting until I got to Memphis, TN. It was there that I boarded the plane to Omaha, NE. One after one, people got on the plane. One guy with Benjamin Graham's "Security Analysis" book, another with Benjamin Graham's "The Intelligent Investor", another with Robert Hagstrom's "The Warren Buffett Way", and on and on. In hindsight, I think the entire flight was full of Berkshire Hathaway investors because I saw a bunch of them throughout the weekend at various events. When the plane was landing, I was talking to a guy and his wife. He's been a Bershire shareholder since the early 1990's and this was his seventh visit to Omaha. He said he had to thank Warren because he did a lot of great things for him. For me, it was my first visit and the excitement of the trip only allowed me four hours of sleep the night before. I picked up my rental car at the Hertz place - a Pontiac Vibe. It was a nice car that got me around the city with ease. THE FRENCH CAFE At 11:15 AM, my first stop was the French Cafe in the historic district. The restaurant opened in the 1960s and had those sixteen foot ceilings. I ordered a beef tenderloin sandwhich and a quadruple Dewar's. Then I started asking the bartender and manager about the city and about Warren Buffett. They said Buffett showed up the night before around 6-6:30 PM for pictures with friends. He ordered a Cherry Coke and stayed for about 30 minutes. They also said he was going to show up Saturday night to eat there. The bartender said it's intimidating to serve his table because he's so admired and everyone runs around frantically. BERKSHIRE HATHAWAY HEADQUARTERS From there, I went to Berkshire Hathaway's main headquarters. I didn't get the chance to go inside, but I did get some pictures of the building from outside. BUFFETT'S HOUSE Then I swung by Buffett's house for a few pictures. It's amazing he's been in the same house since 1958. People could drive into his driveway if they wanted to, but I'm not sure what happens after you do. I wasn't about to find out. HOUSE For a guy worth $50 BILLION, you would think he'd have heavier security around his house. ------------------ YELLOW BRKer PARTY At 4:30 PM, I showed up for the now-famous Yellow BRKer party. It was another opportunity to talk to other Berkshire shareholders. I met some interesting people there and learned a few things. One guy asked me what stocks I was holding, so I ran down the list: ACAS, APA, APT, ARLP, AZO, BBBY, BRKB, COF, CVX, DELL, DG, DVN, ET,...

PODOMATIC Before I start the show, you may know, we use podomatic.com for our podcasting service. Podomatic.com has decided to put a bandwidth limitation on our podcast feed (this makes our show unavailable for listening or downloading sometimes) because we're their #1 business show and we're draining their bandwidth, so if you can't listen to this show, you can either: (1) try back in a week when the limit gets reset, or; (2) sign-up for a premium account at Quantinetics.com and get full unblocked access to our content. Podomatic wants me to pay for bandwidth, but I won't pay unless I get something in return. Why? Heck, I'm a Value Investor - I only pay less than what I can get out of it. Value people, KNOW... not to buy something unless we're paying less and we're getting an above average return on our dollar. We may switch away from Podomatic, but for now, we're going to stick with them. IN THE PREVIOUS SHOW We talked about "Taking Profits". The S&P 500 peaked at 1290.15 on Jan. 9th. On Jan. 11th, we told you to "Take Profits". We sold stocks, waited, and bought some more. TAKING PROFITS ....AGAIN Ladies and Gentlemen, it's time to take profits again. The S&P 500 is sitting at 1307.25 now. Over the past two months, we: sold GS for +11.85% (28 days) sold BBY for +15.10% (28 days) sold QLGC for +18.65% (49 days) sold BBY for +27.48% (232 days) sold GTRC for +8.05% (29 days) sold SYY for +0.05% (31 days) sold CAJ for +19.41% (161 days) sold FDC for +10.22% (207 days) sold SPLS +4.55% (235 days) sold NYB for -5.50% (281 days) sold NEW for +12.27% (74 days) sold YCC for +16.68% (56 days) sold AEOS for +16.10% (101 days) sold some ET for +148.25% (331 days) sold some RCII for +0.35% (278 days) sold LOW for 16.29% (278 days) MARKET TIMING Now, let's talk about why we should sell some stuff now... it's called Market Timing I don't think Market Timing works as a singular strategy... my tests show that Market Timing provides a 12% profit over 1.5 year period, which is unacceptable to me. However, Market Timing when coupled with value methodology is a great way you can enhance profits. If you want to sell some stocks to move into cash, market timing will provide you with the gunpowder necessary to get a couple extra percent gains out of your trades. Let's take a look at this chart: S&P 500 Market Cycle Chart The black diagonal line is a linear regression line. That line is used for estimating the future direction of what the average price should be. The green and red diagonal lines are the outer boundaries of the price range. When you hit the green line, Mr. Market is in a stage of euphoria, but we've peaked and it's time to sell... If we hit the red line, Mr. Market is pessimistic about the stock market and it's time to buy. The best thing we can do with Mr. Market's wallet is to open it up and remove some money from it. There's 3 vertical blue lines. They signify Jan. 1, 2006, July 1, 2006, and Dec. 31, 2006. The blue horizontal line is a dividing line. If we go above that horizontal line before July 1st, we're in overbought territory. If we go above the black diagonal line, we're also overbought. Every time the market goes up, it reduces our chances of it continuing to go up in the short-term. At some point, there's a tipping point where something triggers a reaction to send stocks plummeting. At 1307.25, we're about halfway between the black diagonal line (the linear regression mean line) and the green diagonal line, the max. However, during the period of about April 20, 2005 an August 3, 2005, the S&P failed to reach the green line and it might have caused a permanent shift downward of about 25 S&P points. This is signified by the blue diagonal line. I'm not sure what major news events were going on during that period, but there seems to be something significant about that time period in U.S. history. I'd like to challenge my listeners and readers to investigate and come up with the best reason why the S&P 500 could have shifted...

Be sure to TAKE SOME PROFITS while the market is in euphoria. There's an insatiable appetite for stocks right now.... an appetite for destruction for the retail investor. Recently, I : sold some TM for +45.11% (247 days) sold some BZH for +56.72% (247 days) sold some ET for +86.36% (257 days) sold some ET for +94.19% (258 days) sold PBG +3.05% (7 days) sold remaining BZH for +74.85% (253 days) sold remaining TM for +48.33% (253 days) We're reducing some of our exposure with homebuilders. Don't be piggish - take some money off the table sometimes. I'm in 20% cash now. Pullbacks usually last at least 45 days.... some people have to wait at least 30 days because of Wash Rules after they exit positions, so when the market pulls back, it's usually for a period of several weeks or months. The market knows how to use a retail investor's emotions: http://www.aistockbot.com/BullBear.html Don't be emotional ! Be robotic and systematic in your trades. Also, be sure you've got some oil stocks (7-10% or so) in your portfolio. I've been buying CVX and APA lately.

In this podcast, we review some of the Marketocracy tests we ran this year that didn't work. Companies in trouble (via high levels of shorting - SEC's Regulation SHO, class action lawsuits), pump and dump candidates, and previous losers, were the tests which had the worst performance compared to S&P for 2005. The lesson? Don't buy losers. Buy winners! Some of this year's winners: ET +93.28% BZH +60..32% TM +44.02% KRB +36.01% (we sold after BAC bought them out) DVN +35.5% (we took the profits) Our biggest losers this year (we're bagholding these): LXK -16.66% (we still like this toll bridge company because people are forced to buy print cartridges) RCII -16.71% (we still like this company after they sold their unprofitable stores) NEW -14.99% (we received some big dividends with NEW which cuts this loser way down. Plus, show listeners could have made +9.4% in a short period by buying this stock). We sold one stock for a loss this year: RGF -3.0%, but we also received dividends, so the real loss was more like -1.0%.

WE ARE RE-RELEASING THIS PODCAST AFTER FIXING A TECHNICAL AUDIO GLITCH. Today, we combine the free MSN Moneycentral Stock Screening feature at http://moneycentral.msn.com with the free Marketocracy fund management feature at http://www.marketocracy.com . CORRECTIONS: We said "it's gone up $3.68. Divide that by $39, is 9.4% profit". We intended to say, "it's gone up $3.68. Divide that by $36, is 9.4% profit". We said our email address is, "mike at Quantinetics.com". We intended to say, "michael at Quantinetics.com". SCREEN RESULTS: Here's the results of the screen we did on today's show: Symbol Company Name Rank ROE P/E FwdP/E P/S AHG Apria Healthcare Group Inc. 7 31.50 16.20 14.50 0.81 ATK Alliant Techsystems Inc. 15 23.90 16.40 16.40 0.91 BLL Ball Corporation 28 18.50 16.60 15.70 0.74 BZH Beazer Homes USA, Inc. 32 17.80 12.50 6.90 0.61 CRFT Craftmade International, Inc. 8 30.60 16.30 12.40 0.91 CTR The Cato Corporation 34 17.40 16.70 16.30 0.84 CTX Centex Corporation 19 22.20 7.90 7.20 0.65 CVX Chevron Corporation 27 18.60 9.10 8.60 0.74 DE Deere & Company 43 15.40 12.00 11.30 0.83 DHI D.R. Horton Inc. 17 23.50 7.80 6.80 0.82 DLTR Dollar Tree Stores, Inc. 30 18.00 15.70 15.40 0.77 DRTK Duratek, Inc. 45 15.00 14.60 13.60 0.79 EC Engelhard Corporation 29 18.30 16.40 16.00 0.85 ELUXY Electrolux AB (ADR) 38 16.60 14.10 13.70 0.38 FAF First American Corporation 37 16.70 10.30 9.60 0.58 FTO Frontier Oil Corporation 10 26.40 10.60 9.80 0.60 GGB Gerdau S.A. (ADR) 6 43.30 6.20 5.90 0.85 HOC Holly Corporation 26 19.00 14.20 11.30 0.60 HOV Hovnanian Enterprises 11 26.20 7.50 6.10 0.62 JBX Jack in the Box Inc. 39 16.50 14.30 14.00 0.50 JCI Johnson Controls, Inc. 40 16.00 15.60 14.30 0.51 KBH KB Home 16 23.80 9.10 6.60 0.83 LEIX Lowrance Electronics, Inc 25 19.10 15.90 11.20 0.87 LEN Lennar Corporation 18 23.20 8.80 6.60 0.79 MDC M.D.C. Holdings, Inc. 14 24.00 6.40 5.90 0.63 MT Mittal Steel Company N.V. (ADR) 3 62.40 6.80 5.50 0.50 MTH Meritage Homes Corporation 13 25.20 9.00 7.10 0.67 MVK Maverick Tube Corporation 44 15.20 11.70 11.00 1.00 NJR New Jersey Resources Corporation41 15.90 15.80 15.30 0.37 NTY NBTY, Inc. 33 17.80 13.20 11.80 0.65 NVR NVR, Inc. 1 71.70 8.80 8.10 0.88 OHB Orleans Homebuilders 12 25.20 6.50 5.70 0.38 PBG The Pepsi Bottling Group 22 20.70 15.90 15.80 0.62 PCAR PACCAR Inc 35 17.20 11.60 10.20 0.88 PHM Pulte Homes, Inc. 31 17.90 8.20 7.50 0.76 RYL The Ryland Group, Inc. 9 27.00 9.20 8.20 0.75 SLGN Silgan Holdings Inc. 2 66.80 15.50 15.50 0.56 STRT Strattec Security Corp. 23 20.10 12.30 12.20 0.84 SUN Sunoco, Inc. 20 21.40 12.90 11.10 0.37 TKS Tomkins plc (ADR) 5 47.60 14.20 11.70 0.68 TLB The Talbots, Inc. 24 19.50 16.90 16.00 0.83 TOA Technical Olympic USA, Inc. 36 17.10 6.40 5.90 0.50 TUES Tuesday Morning Corporation 4 53.00 14.40 14.40 0.96 VFC V.F. Corporation 42 15.80 12.10 12.10 0.98 WHR Whirlpool Corporation 21 20.90 14.50 13.90 0.40

TODAY'S NOTES: - MSFT increases dividend 12.5%, plus loses deal to GOOG - A spreadsheet error in our DNB purchase allowed us to make almost $1/share by luck. We dumped DNB this week. - We dumped RGF - the risk/reward ratio is out of whack - we lost -1.3%. - Our ET, went up from +86% to +96% in a couple days - Our LEN shot up this week PODCAST CORRECTIONS: - Today, on the podcast, we said MSFT said they would complete $16B stock buyback by "Dec 20, 2006", but we intended to say , "Dec 2006". - Today, on the podcast, we said GOOG will be spending "$5B" for a 5% share in the aol deal, but we intended to say, "$1B". - Last week, we referred to the "Visteon" Operating system, when we should have called it the "Vista" Operating System.

2005-12-13 In this podcast, we explain some of the reasoning behind our purchase in MSFT and our dumping of RGF.

2005-12-10 NEW is trading at $36.00 right now. This upcoming Friday is options expiration day and the maximum pain is $35.00, which means, the stock is probably going to drop a buck between now and December 16, 2005. However, the January max pain is around $45 and falling. With new contracts being added every day, perhaps, It'll fall all the way down to $35 again. I dunno. Perhaps you can make some money between this differential. It'll also be paying a dividend for those who hold the stock around January 18, 2006. CORRECTION: The dividend for the fourth quarter will be paid Jan. 30 to shareholders of record on Dec. 30, the company said. Per: http://biz.yahoo.com/ap/051216/new_century_dividend.html?.v=1

Some notes about AEOS: - It's been generous to the stockholders - it makes an increasing amount of earnings/share almost every year - It's been profitable for as long as the eye can see - one thing I learned from Buffett, as simple as it may be, profits help increase a stock's value and losses don't. - ROE 27.9% - Book Value $6.38, price/book ratio is a bit high (around 4:1), but much less than Buffett's purchases in BUD. - AEOS P/E Ratio is 13.6. S&P 500's P/E is 16.74. So we're more attractive than the S&P 500 as a whole. Plus, the S&P500 is attractive, which brings more bullishness to the marketplace. On average, AEOS usually runs in the 8-25 p/e range, so we're a little on the low (undervalued) side. - No dividends, but they continue to buyback shares when appropriate. - One of my friends works for AEOS. He has always been very positive on the upper management of AEOS, so high employee morale is a plus. During my last (six months ago) discussion with him, I told him of my recent (six months ago) purchase in PSUN (a competitor) because of valuation - it's a stock which I still hold. He was very aware of them and didn't say anything negative about them either. I'm up +17.74% with PSUN in less than six months. I don't know what he thinks of AEOS or PSUN today, but my intrinsic value estimation of AEOS was good enough to warrant today's purchase. - Per finance.yahoo.com: Profit Margin (ttm): 12.96% Operating Margin (ttm): 20.73% Return on Assets (ttm): 23.13% Return on Equity (ttm): 31.06% Qtrly Revenue Growth (yoy): 14.70% Qtrly Earnings Growth (yoy): 26.30% Total Cash (mrq): 556.38M Total Cash Per Share (mrq): 3.58 Total Debt (mrq): 0 Total Debt/Equity (mrq): 0 Shares Outstanding: 155.39M % Held by Insiders4: 14.11% % Held by Institutions4: 80.50% Shares Short (as of 11-Oct-05)3: 5.99M Short Ratio (as of 11-Oct-05)3: 1.4 Short % of Float (as of 11-Oct-05)3: 4.20% Shares Short (prior month)3: 5.08M - Share Buyback Program [biz.yahoo.com] "American Eagle Expands Buyback Program Thursday November 17, 2:40 pm ET American Eagle Outfitters Board of Directors Approves Expansion of Its Repurchase Program WARRENDALE, Pa. (AP) -- American Eagle Outfitters Inc. said Thursday that its board approved the expansion of its repurchase program by an additional 4.5 million shares, citing confidence in its earnings potential, growth prospects and financial position. The apparel retailer said it completed the repurchase of 6 million shares in the third quarter under its buyback program. American Eagle shares rose 6 cents to $23.56 in afternoon trading on the Nasdaq." Ok, so not only did they complete a repurchase of 6 million shares (a sign of real profits), but they are also expanding their share repurchase program by 4.5 million shares, albeit 4.5 mil is not much compared to 155 mil, but it's a good strategic move, imo. - This stock has taken a dip recently, but the stock's price is still better than it's 2-year long-term trend. This is a positive. - Next year's earnings estimate is $1.94/share. - One potential caveat is the market-as-a-whole. While the S&P 500's P/E ratios look favorable, we might be in the midst of a short-term market reversal. Look at this chart: [www.quantinetics.com] The S&P Index 1247.27 price was last Friday's closing price. The index has gone up to 1261.23 as of tonight, which puts us into that grey area where the market needs to do a pullback sometime. I'm anticipating the market doing a reversal this upcoming Friday, but since the avg S&P P/E is only 16.74 and since no one can predict the future, it's anybody's guess. However, since the S&P 500 market has already risen +7.17% recently, it might be wise to take a break regardless. I'm still doing research on Market Cycles (timing) even though the general consensus is that market timing doesn't work. Personally, I think otherwise. - We're on the verge of the holiday shopping season. I'm betting on AEOS. While I hate gambling (eg. lottery tickets, casinos, etc.), I...