Review of Defensive Low PE Portfolio

This portfolio is made up of the 15 defensive stocks that are trading at the lowest PE Ratio.  Each month we will review the list, and make any trades necessary to get the portfolio to match the list.  The list of defensive stocks is made by following modernized Benjamin Graham strategies, and PE Ratio is calculated using an average of the previous 5 years’ earnings per share (EPS).

There were two dividend payments for this portfolio this week.  First, on 8/15, Lennar Corp (LEN) paid a dividend of $0.16 which was reinvested at the day’s closing price.  Then, on 8/16, Thornburg Mortgage paid a dividend of $0.68 which was also reinvested at the day’s closing price.

This portfolio significantly outperformed both the Dow Jones Industrial Average and the S&P 500 over the week. 

The current value is calculated using prices near close from Thursday.

The snapshot:

Ticker

Total Cost

Current Value

% Gain/Loss

ASH $6,490.00 $6,541.00 0.79%
BL $6,479.20 $6,509.70 0.47%
DHI $6,527.35 $6,851.25 4.96%
FAF $6,420.70 $6,815.30 6.15%
FNF $6,458.10 $6,766.00 4.77%
FRE $6,338.30 $6,697.90 5.67%
KBH $6,577.35 $6,816.90 3.64%
LEN $6,463.95 $6,692.93 3.54%
MDC $6,544.00 $6,721.50 2.71%
MTG $6,523.60 $7,105.20 8.92%
PHM $6,508.00 $6,795.00 4.41%
RYL $6,435.60 $6,916.80 7.48%
SPF $6,522.25 $6,925.50 6.18%
TMA $6,460.10 $6,522.41 0.96%
TOL $6,478.80 $6,686.89 3.21%
Cash $2,772.70
Total $100,000.00 $104,136.98 4.14%

Performance:

 

Last Week

This week

Change

Overall

S&P 1271.81 1297.48 2.02% 2.02%
Dow 11124.37 11334.96 1.89% 1.89%
Portfolio 99890.5 104137 4.25% 4.14%

Neither of us holds a position in any of these stocks.  Please review our disclaimer.

Value Investing Weekly – Issue 2

ValueInvesting Weekly
Issue 2
August 17, 2006

We discussed last week about general ideas in value investing, Ben Graham, Warren Buffett, and the psychology of investing. This week we are going to discuss an example of personal experience regarding speculating and the downfalls of doing so.

My personal experience included a wonderful, well-known stock named Sirius Satellite Radio (SIRI). Allow me to explain how I became involved in this security and the reasons for doing so. In the winter of 2004, I began trading SIRI on a “tip” from a relative, and throughout the course of a few months, I netted a healthy return on purely trading on volume. I felt that it was easy enough to buy the stock in the morning watch it throughout the day, and maybe hold it overnight before getting out for a profit. I became confident of this strategy and before I had ever taken a course was convinced of technical analysis.

Following the signing of big profile broadcasters, most notably Howard Stern, I felt that Sirius was ripe to explode purely because of Stern’s listening base and the potential increase of subscribers. Further, I thought of satellite radio as this generation’s cable television. I personally subscribe to Sirius, and actually really enjoy the programming.  I purchased shares in the fall of 2005 before Stern’s debut in January on Sirius. Instead of following my previous strategy, I decided to go long on Sirius because of my interpretation of expected growth. Grant you at the time, and currently, Sirius was loosing millions of dollars each quarter in trying to acquire subscribers and spur growth of the company. They hired a top notch CEO from Viacom, Mel Karmazin, who had a proven record of accomplishment in terrestrial radio over the years. Everything in my eyes looked great and I was merely waiting for the profits to come rolling in.

Well they did not; I purchased Sirius for a price of $7.12/share, with the closing price of Wednesday (8-16-06) at $3.65/share. I have incurred a net loss of 48.95% over the course of roughly a year and a half. So the questions are “Jon why did you ever buy this stock in the first place, you should have just looked at the financial statements and seen what was going on?”, and “Why did you stay in the position for so long?”

To answer the first question, I fell under the spell of what I call the “speculation potion” by that I mean you place rose colored glasses on and view the potential of a company not seeing the disaster in the waiting. I was convinced that if I didn’t get in on this stock, I would regret it just as I did Chicago Mercantile Exchange (CME), Google (GOOG), and countless others. What I realize now that I didn’t then is that in investing you must develop a strategy and stay the course. Further, as we spoke in last week’s issue, you become an owner of the company, not an owner of the stock. In my mind at the time ownership ended on the screen of my Ameritrade account.

The second question regarded why I didn’t and still haven’t exited my position. This issue is purely psychological as I was adamantly against having a loss and decided to hold the stock until it recovered the losses. I am coming to terms with my poor investment decision and am ready to exit my position. It is similar to Alcoholic’s Anonymous where everyone stands and states “Hi I am_____ and I’m an alcoholic”, well I am standing up and stating that I am a former speculator and am seeking treatment. Just for the record, I by no means am comparing the two; I am merely using this example for comic relief.

Where Sirius will go in the future is beyond me or anyone else, currently their financial position is worse then ever. The ROE for fiscal year 2005 was (265)mil, and its Q2Y2006 EPS where (.87) down from (.83) the quarter prior. Every aspect of Graham’s investing strategies screams to stay away from this stock. Although sales are increasing extraordinary, because of subscriber growth (see article below), expenses rise linearly as well.

Ending, I hope that you all learn something from my painful lesson, do research, think logically, don’t expect to become rich overnight, and never trust other’s judgment and research.

-Jon

ModernGraham.com

WSJ article on Sirius 
Reuters article on Sirius
Discuss this article in our forums. 

The Market this Week

This week the market was tested by various factors that created an overall downturn. All major indices saw a decline of roughly 1% with the S&P 500 showing the lowest loss of all with a .5% loss for the week.

There were major factors that tested the market this week including the terrorist threat in Europe, rising energy costs, and continued fears of inflation. The latter two have been impacting the market for quite some time, but the former had an interesting effect on the market. The United States equity markets have become very resilient to terrorist threats and this week’s events did not change that trend. All indices produced positive gains on Thursday following the announcement in the UK that terrorist suspects had been apprehended in an apparent aviation planned attack. These events, however, had adverse effects on the airline sector still trying to recover.

Energy costs actually declined following the events in Europe as investors anticipated a decrease in air travel. The developments in the Alaskan oil fields earlier in the week, however, created turbulence that shot oil prices higher on fears of deceased supply and higher costs. British Petrolium (BP) is unsure when the pipelines will be back functioning fully, so we will have to wait and see what effect this has on oil prices, and the overall market long term.

Overall, it seems that we are stuck in the middle of fears of a slowing economy and rising inflation, but if corporate profits maintain their overall health there are still opportunities. Again, though, as value investors we are concerned with weekly events, but it does not affect our long term investing goals. We cannot be blind to current events, nor ignore them as we must continue to be as Ben Graham calls “Intelligent Investors”. Have a productive and profitable week!

-Ben and Jon

ModernGraham.com

Review of Defensive Low PE Portfolio

This portfolio is made up of the 15 defensive stocks that are trading at the lowest PE Ratio.  Each month we will review the list, and make any trades necessary to get the portfolio to match the list.  The list of defensive stocks is made by following modernized Benjamin Graham strategies, and PE Ratio is calculated using an average of the previous 5 years’ earnings per share (EPS).

 Since this is the first month of the portfolio, we will start with $100,000 and $10 commissions.  All of the stocks listed were “purchased” using prices from Wednesday’s close.  The current value is calculated using prices near close from Thursday.

The snapshot:
>

Ticker

Total Cost

Current Value

% Gain/Loss

ASH $6,490.00 $6,433.00 -0.88%
BL $6,479.20 $6,547.50 1.05%
DHI $6,527.35 $6,501.60 -0.39%
FAF $6,420.70 $6,451.50 0.48%
FNF $6,458.10 $6,485.50 0.42%
FRE $6,338.30 $6,447.10 1.72%
KBH $6,577.35 $6,502.25 -1.14%
LEN $6,463.95 $6,426.40 -0.58%
MDC $6,544.00 $6,442.50 -1.55%
MTG $6,523.60 $6,582.00 0.90%
PHM $6,508.00 $6,453.00 -0.85%
RYL $6,435.60 $6,483.20 0.74%
SPF $6,522.25 $6,557.85 0.55%
TMA $6,460.10 $6,307.00 -2.37%
TOL $6,478.80 $6,497.40 0.29%
Cash   $2,772.70  
       
Total $100,000.00 $99,890.50 -0.11%

Neither of us holds a position in any of these stocks.  Please review our disclaimer.

Review of Defensive Value Portfolio

This portfolio is made up of the 15 defensive stocks that are trading at the lowest discount to their intrinsic value.  Each month we will review the list, and make any trades necessary to get the portfolio to match the list.  The list of defensive stocks is made by following modernized Benjamin Graham strategies, and intrinsic value is calculated by a formula based on Graham’s overall philosophy of calculating value with a margin of safety.

 Since this is the first month of the portfolio, we will start with $100,000 and $10 commissions.  All of the stocks listed were “purchased” using prices from Wednesday’s close.  The current value is calculated using prices near close from Thursday.

The snapshot:

Ticker Total Cost Current Value % Gain/Loss
ASH $6,490.00 $6,378.00 -1.73%
BC $6,427.00 $6,390.00 -0.58%
BL $6,479.20 $6,426.00 -0.82%
BPOP $6,506.50 $6,670.45 2.52%
CB $6,419.80 $6,558.30 2.16%
DHI $6,527.35 $6,734.70 3.18%
LEN $6,463.95 $6,521.20 0.89%
LUK $6,505.40 $5,943.15 -8.64%
MDC $6,544.00 $6,376.50 -2.56%
MNI $6,422.50 $6,034.50 -6.04%
NFB $6,524.20 $6,412.06 -1.72%
NYT $6,535.40 $6,563.75 0.43%
PHM $6,508.00 $6,599.25 1.40%
RYL $6,435.60 $6,788.80 5.49%
SPF $6,522.25 $6,540.75 0.28%
Cash $2,688.85
 
Total $100,000.00 $99,626.26 -0.37%

Performance:

Last Week This week Change Overall
S&P 1297.48 1296.06 -0.11% 1.91%
Dow 11334.96 11304.46 -0.27% 1.62%
Portfolio 102025.7 99626.26 -2.35% -0.37%

Neither of us holds a position in any of these stocks.  Please review our disclaimer.

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