Portfolio Review 6-8-2006

For only the second time this year the Right Price Portfolio lags the market – for the first time it is in negative territory for the year. It has fallen over 3% in less than three weeks, mostly because of a drop in the K-Swiss share price and a very severe drop in the International Coal share price. Here I will go through each company owned and review its progress. The portfolio is down 2.93% on the year and the S&P 500 is down 2.39% on the year.

I have made a few moves over the past week – I averaged down on K-Swiss, which had fallen and I believed it was still a good value, purchased shares of Central Freight Lines which I believe is an acceptable arbitrage, sold my shares of Discovery – more on that later - and on Monday (6/12/2006) I will average down in International Coal which is down 30% from its purchase price.

Costco (COST) – Costco is definitely overvalued. Even a moderately aggressive DCF puts the margin of safety at –10%. The reason for owning this company is purely because of how good a business it has; it is loved by the best business evaluator, Charlie Munger. Costco is simply a leftover from when I believed in just buying good companies and never selling. Because my philosophy has evolved since, to take value into consideration and buy situations which I expect to double in three years or less, I would not hesitate to sell my shares of Costco if I needed the cash.

Lazare Kaplan (LKI) – Lazare’s returns have been pretty stale for the past half-year. It still trades at a discount to NCAV and I believe the market will soon realize the company has valuable inventory and a good brand.

International Coal (ICO) – This one’s a dozy. I see two reasons for the very big fall in the past week. The first, is because of lawsuits the company faces from the Sago mine incident, the company has already paid of most of the owed money and the rest is only a fraction of revenues. The bigger reason was a reported operating loss and lowered guidance for the rest of the year, I won’t go deep into this now, but the reasons for the bad quarter were all short term factors that will not effect earnings in the future. International Coal is a strong company with a great CEO and a great businessman in Wilbur Ross to lead it. My investment in this company is long–term oriented and short-term earning falls should not and will not change my thoughts on the investment. On Monday I will add more to the position, I have not decided yet what percent to add but members of the Yahoo Group will be alerted at the time of purchase.

K-Swiss (KSWS) – On June 5th I purchased 10 more shares of K•Swiss at $26.95 per shares, putting my average cost at $23.72 and the allocation of K-Swiss at 15% of the portfolio. My review on K-Swiss is here.

Pfizer (PFE) – Pfizer is one of the first companies I bought in May of 2004. At that time I put half of my $1000 into Pfizer at about $38 per share, later I averaged down twice. Pfizer, like Costco, is a company I averaged down in because I thought I would own it forever. I still believe it is relatively undervalued but do not understand it enough to hold it forever, after it has reverted to fair value or if I find a better opportunity I will sell Pfizer like I would any other company in the portfolio.

Discovery (DISCA) – When I started my portfolio review I looked into Discovery again and could not figure out how to value it. Discovery is a company I purchased simply because an analyst I liked recommended it and it was a spin-off, at the time it seemed like a double whammy, but now that I have looked into it and can’t figure it out. I have decided to sell it to make better use of the part of the portfolio it took up.

Central Freight (CENF) – I wrote about CENF here.

Paxar (PXR) – I recently received Paxar’s 2005 annual report and will use it to write-up Paxar within the next week.

Cash – Currently $1,105.99 sits in cash in the portfolio. I can invest $156.95 of it. This is because The DISCA sale has not been settled and because of a limit order I have to buy a potentially profitable Going Private Transaction. The Discovery sale should be cleared within the next few business days and I am losing faith that the GPT will fall back to a price I would be comfortable allocating cash into. The portfolio will remain 20% cash until I find an investment worthy of that cash. I am not afraid of holding cash and would rather hold cash then buy a company I do not know a lot about.