Best Money Making Month for the Blog Yet

I employ a few affiliate programs and Google Ads on this blog to attempt to generate revenue for the blog, the different ways are as follows:

• Google links under the intro to the blog
• Google ad unit on the sidebar
• Google image ad unit on the sidebar
• Amazon.com Affiliate code in links to books
• Blast Investor Real-time Plus affiliate
• The newest is a Blogads strip on the sidebar, Shai Dardashti was generous enough to be the first purchaser of one month - $15. Please check out his new fund, if you are an accredited investor.
• Finally donation links using Paypal. Raphael Kang was the first to donate earlier this month, he donated $10.

In June I made a grand total of - I hope the IRS isn't reading this ;-) - $61.07, not counting payments for articles I wrote for other sites.

According to Technorati:

My blog is worth $26,533.38.
How much is your blog worth?

Using a run rate to calculate approximate earnings for one year, my revenue would be $732.84. So currently the blog is trading at 36x sales.

Even though it has a 99.5% profit margin,has pretty good growth, is currently tax free - until I make enough that I have to file - and has, in my opinion, incredible management I wouldn't call it a bargain just yet.

16

I turn 16 today. That's code for if you are in Utah stay off the road.

In this fun-filled Birthday post I will write portfolio updates, new buys in the portfolio, why I purchased a new company, and birthday presents I have received so far.

The portfolio is here.

It has regained the lead over the S&P this year down 1.11% compared to the S&P, which is down 2.93% since January 17, 2006.

I will write about three of the companies in the portfolio.

Central Freight & Eupa International

Central Freight (CENF) and Eupa International (EUPA) are both special situations. I wrote about CENF before here. I found both of these situations through I service I use and highly recommend to any investors looking to be up in the coming bear market through different special situations.

On Fat Pitch Financials, George, the blogger, has created a Contributor's Corner. For a donation of $90 one-year access to the site is earned - you can pay $10 for one month as well. George keeps track of all Going Private Transactions as well as a model portfolio with over 30% CAGR, spin-offs, mergers and odd-lot tenders.

I have accessed the risk for both of these situations and allocated them with the correct amount I believe for the risk/return ratio. I will hold these until they are cashed out, but have limit sell orders at the tender price.

James River Coal

I have talked about the potential of purchasing this company before. I believe it is a double whammy - it's an undervalued situation with an activist acting as a catalyst to the releasing of value.

There are three write-ups on JRCC that I recommend before moving on to mine:

• Henry Lu of Blast Invest
• Kevin Kelly of Market Money
• pirate681 on Value Investor Club, I believe this is actually the activist so pay close attention

First the activist. As Kevin Kelly observes Pirate Capital has an excellent record, and has proven very influential in previous situations.

In the VIC write-up the author says he believes JRCC will be bought out at $50 per shares and, "If I could buy more, I would." Currently JRCC trades at about $27 per share if the company is bought out at $50, as Pirate suggests, it would present an 85% return from here.

This of course is not without risk but I am comfortable with Pirate Capital as a major shareholder and JRCC has already started to comply.

Pirate Capital's filing is here.

Though I am happy with the activist piggy-backing here, I also like the backdoor presented by JRCC being an undervalued situation called a 'potential rocket' by Henry Lu.

James River is a coal mining company, based in Easter Kentucky, which emerged from bankruptcy in 2004.

Currently it is priced similar to peers, because of low earnings derived from contracts to sell coal at $40-42 per ton, currently the coal is selling for about $65 per ton.

According to Henry Lu, using forecasted 2006 production rates, JRCC's value is $130 if the coal price is $60 per ton.

I'll take that margin of safety.

Birthday Presents

Here are a few of the birthday present I have received so far:

How to Read an Annual Report; Chairman's Letter

Before the actual 10k there are usually financial highlights, a letter from the Chairman of the board or Chief Executive (sometimes both) and sometimes glossy pages full of pictures of employees or their products. We will discuss the financials later, the other two here.

What to Look for in Chairman’s Letter

The letter is there for Chairman to review with shareholders what happened to the company during the fiscal year. Too often does the Chairman repeat the good things that happened and ignore those which are bad. When reading the letter look for what happened to the company during the year if you find only the good things, or no resolutions for the bad things you are probably reading a letter from non shareholder friendly management.

Don’t ever turn down an investment only because of the Chairman’s letter – that would be foolish. For whatever reason some companies don’t communicate well with shareholders – maybe they’re to busy running the business. The business they run may be great. I would not pass up a great business at a great price because its management doesn’t take the time to write a five-page letter to shareholders each year, if management owns a stake in the company and has produced good returns I am satisfied.

Another way to find out what management thinks about the current status of the company is to listen to the quarterly conference calls that are required by the SEC.

When I analyze companies I try to get as many past years of annual reports as possible; reading what management has said in the past is priceless in one’s analysis. Read what management has forecasted for the future in past annual reports, if it has happened this is a good sign if not find out why.

Extra

Nowadays many annual reports feature 10, sometimes 20, glossy pages with pictures of employees, products sometimes even customers. I see no need for this part of the report, if the company needs to use the annual report to sell its products maybe it should spend the extra money used to pay for this nonsense on finding a new marketing executive.

There is no real analysis of the ‘extra’ portion of the annual report, but if you find a lot of references to EBITDA - or any variations of EBITDA a few extra letters make it worse - stay clear capital expenditures are a real expense and management is not doing shareholders a favor by ignoring it.

Paxar’s Annual Report

Paxar’s Annual Report has letters to the shareholders from the Chairman of the Board, Arthur Hershaft and form the new Chief Executive (CEO), Rob van der Merwe.

Hershaft’s letter is short and unimpressive, he mentions the year was challenging, but then uses the rest of his letter to announce people the company hired during the year.

van der Merwe’s letter is different. He doesn’t say much about any weaknesses probably because he’s been with the company for less than a year. He talks about Paxar’s response to a changing Global Environment, the release of a new handheld printer/scanner/data collector and Paxar’s strategy for the future:

Responsiveness

Relationships

Innovation

Information

Talent

The CEO’s letter is satisfactory but not impressive.

The next fourteen pages are glossy and filled with pictures and fancy texts describing Paxar products and customers. I am disappointed in this and feel it is a waste of money on something that could easily be put up on a website and does not need to be in the annual report.

Part 1

How to Read an Annual Report - Intro; How to Order

In an effort to get my thoughts organized I’ve decided to write a new series on the blog.

For the next week or two I will go through the Paxar annual report section-by-section, page-by-page and write a daily entry on how to read the different parts of the annual report, what to look out for and what calculations to make.

The first entry is possibly the easiest – How to Order an Annual Report.

There are two ways to order an annual report, have it sent to you or read it online.

Personally I like it better in print, so it’s easier to file and take notes on for future reference, we’ll go over how to order one first.

Some companies have easy to use order forms in the investor relations section – usually under About - of their site, like this. It’s a little bit harder on some sites and you have to send an e-mail to investors relations with your address and the request for an investor packet – comes with 8ks, annual report/10k, 10q’s and sometimes the proxy report – and as many possible years of past annual reports, and still for some companies you will need to phone investors relations with a request for the investor packet.

It’s easier and faster for those who like to read online. Usually companies will have a pdf version of their annual report available online in the investor relations section – some even go the extra mile like Electronic Arts. If you don’t find a link to it right away though it probably isn’t there and it will just need to be ordered.

The Enterprising Investor

In the Intelligent Investor Benjamin Graham describes two kinds of investors, defensive and enterprising.

Enterprising investors are those who are generally more aggressive then defensive investors. They aim to achieve a higher return than defensive investors, by taking more risks and buying more than just common stocks. Though they take more risks they make up for this with more research.

I am an enterprising investor, though I don’t take unnecessary risk, I wouldn’t put a second thought into buying a more risky company if I understand it and the margin of safety makes up for the risk I am taking.

How does an enterprising investor find companies to buy? Why not start with Graham’s own method for the enterprising investor? At least 50 software programs have been created to do the screen – make sure you don’t believe it all though.

I’ll go through the criteria then have a look at the currently passing companies.

1.Graham wrote, to narrow the list in the S&P Stock Guide first filter out all companies with a P/E above 9.
2.Financial Condition
a.Current Ratio > 1.5
b.D/E less than 1.1
3.Earnings Stability
a.Positive earnings in each of the last five years.
4.Dividend Record
a.Positive current dividend
5.Earnings Growth
a.This year’s earnings more than earnings five years ago.
6.Price
a.Price/Book

Any companies that pass the seven criteria above should be a good buy. Because Graham was 100% mathematical (with the possible exception of his purchase of GEICO) and dismissed any issue of business quality, before one buys any companies passing this screen he must first do his due diligence on the company.

I am using the screen at AAII partly because the company is not for profit and also because I have used it screens for a year and like them. Currently three companies pass the screen:

Ashland Inc. (ASH) – Ashland operates in two sectors: Chemicals and Transportation Construction. Thought its current P/E is 2.2 its forward P/E is 15.4, this throws a red flag in front of my analysis and it stopped there, I may look further into Ashland in the future.

POSCO (PKX) – POSCO is and ADR which produces steel in Korea. I don’t know much about steel – though I made 150% on a metal management company using fake money and technical analysis a few years ago – but this company trades at about 5x earnings and has an ROE of 23% this is one I will do more analysis on.

Blair (BL) – According to Google, Blair is, “engaged in the sale of fashion apparel for men and women, plus a range of home products.” I have to say I probably don’t have much idea how to evaluate this business, and its ROE of only 13% makes it even less attractive.

I will post an update on this screen in the future.

Right Price on Different Sites

I recently begun writing for numerous other blogs as a guest writer.

The blogs where I have guest written , or been interviewed, are:

• A few of my articles have been re-printed at Buffetteer. In the future I will write some article exclusively for Buffetteer.
• Two book reviews have appeared first at Gannon on Investing.
• Tim at My Money Forest interviewed me recently.
• Lastly, a few of my article have been or will be re-printed at Guru Focus

I admire all of the above bloggers and recommend their sites to every investor.

Trade Like Steinhardt

According to his autobiography, No Bull, Michael Steinhardt’s hedge fund returned over 30% per annum for 28 years.

Steinhardt was one of the first managers to take ‘hedge’ fund seriously; he was as nimble on the short side as on the long side. Because of his ability to accurately predict where the market was headed, and his ability to seamlessly change from net long to net short his fund was down less than 5% of the months during his tenure.

Steinhardt’s succeeded by investing only when he found variant perception from the market, and the constant vigilance of making his analysts stick with their convictions anytime the stock made had an up or down move.

Thought Steinhardt’s style cannot be deployed by the individual investor, because of the frequency of trading needed, one can use his method of stock analysis to find worthy companies.
In his book Steinhardt talks about four points his analysts had to tell him in two minutes if he were to consider a stock.

1. The Idea – The idea, whether it be a stock, bond or arbitrage play.
2. The Consensus View - What the market says about the idea.
3. Variant Perception – What the analyst thinks is different. Now we call this contrarianism.
4. Trigger Event – The catalyst, which will unleash the variant perception of the stock.

What Steinhardt Owns Now

Steinhardt revealed, in a recent SmartMoney interview, two companies he has big positions in.

James River Group (JRVR)

TranSwitch (TXCC) – Steinhardt says a money manager he knows has volunteered to let Steinhardt cut off his pinky if the stock does not triple by the end of the year. TranSwitch makes semi-conductors, and Steinhardt own 9.9% of it.

Visit this page for more info on companies Steinhardt is buying.

Carnival of Capitalists

Welcome to the June 12 edition of the Carnival of Capitalists! Last week's carnival was at Rethink(IP) next week will be at Blog Business World.

I attempted to use the Gongol Template but the html didn't agree with blogger and the template didn't work as it was supposed to.

I still used the template but it is now vertical in stead of horizontal.

The hosting blog is Value Investing, and a Few Cigar Butts, the aim of Value Investing is to analyze companies using the principals of superinvestors such as Joel Greenblatt, Eddie Lampert and Charlie Munger. For more on the blog go here.

--

The Scratching Post



The Best Place for a Kids' Lemonade Stand Is...




Lessons from a lemonade stand.







Entrepreneur's Journey



ItÂ’s Time To Reduce Your Stress




Advise






Towards Better Life



Compound Interest - Way to Millionaire




The return on investment and length of investment determine the total return. Compound interest is the key to better returns.







The Sharpener



In defense of small government liberalism




Free markets, free politics and the twilight of Blair's Britain. A lot of conflicting voices work better than one unassailable one.






Minor Thoughts



Immigrants: We Need Them




Immigrantss are needed tofilel the jobs left open by retiring Baby Boomers






David Maister's Passion, People and Principles



Strategy, Scarcity and Rewards




The essence of strategy is to find a way to be different.






samaBlog



Scam




The basic process of "identity theft insurance" and how someone could use such aproductt to perform identity theft on their own consumers.






Stock Market Beat



Does AppleÂ’s Decision Signal India Outsourcing Peak?




The offshoring boom isn't over.






Wordlab



Cows for Silk




No competitor will have find a name as good as silk.






The Entrepreneurial Mind



Confusion Over Employment




So just what is going on in the US economy? There seems to be confusion over recent employment figures and what that means for future growth. Looking deeper at the numbers shows it may be a supply problem, which has implications for current debate over immigration.






The Other Bloke's Blog



Should I Be Polite To My Clients?




Customer prospects visiting a website demand something that works for them. If the website only gives them company self-promotion and waffle, they will rapidly go elsewhere. Website owners need to hear how those prospects really feel about the website.






The Boring Made Dull



Rent Control, and Lifestyles of the Rich and Famous




Rent Control is stolen goods






GroovyStocks



Is This An Emerging Markets Bargain? (TKC)




Turkcell (TKC) is the dominant wireless service provider in Turkey with fat margins, a clean balance sheet, and a cheap valuation. Is it a buy?







InsureBlog



O What A Tangled Web...




What happens when a major insurer (or even two) gets caught with its hand in the cookie jar? How about a double-dippin' agent? You might be surprised.






Free Money Finance



The Keys to a Great and Prosperous Retirement




Spend less -- It's the key to a prosperous life and retirement. Investing -- Save and invest for years and years -- then watch the power of time and compounding turn your savings into a fortune.






Young and Broke



Career change is possible




Dispelling some career changing myths and providing some tips on how to do so.






Houston Chronicle's "FanBlog:Texans"



Texans brass gives Cass a class sendoff on grass




In both football and business, it is important to allow people to retain their dignity because of how it reflects on your organization and makes the remaining employees feel.






Trizoko



What Really Motivates People?




Purpose, not money, is what motivates people.


Blog Business World



Business leadership: Crisis management




Keeping one's head in time of crisis is a sign of good company leadership.






Econbrowser



Bernanke tells it like it is




Some critics don't like the Federal Reserve Chair's message, but Bernanke tells it like is.






Financial Options



The Week Ahead: Your Financial Road Map for June 12 to 16, 2006




A review of the week's economic indicator releases, Treasury auction schedule, select earnings reports and other events that may move markets. Actual economic indicator results are linked to the post throughout the week.






The Coyote Within



Beware of Emotional Reasoning




Adrian Savage explores how emotional reasoning leads to us see our world though faulty perspective, making the "good" parts appear better then they are, and the "bad" bits look more threatening and terrible.







Workplace Prof Blog



Report: Five of Top Ten Grossing Class Action Settlements Involved ERISA Claims




For people who believe law school will help them become millionaires.






Slow Leadership



Business Killers




Every source of leadership values has an opposite "business kileer." Extra effort cannot make up for a lousy style of management. Carmine Coyote argues it's time to stop and question what's going on






Rethink(IP)



Whatever Happened to Manners




What has happened to manners in our society? Rudeness seems to prevail everywhere �which makes me wonder if it is any easier to be rude than it is to be mannered?






MineThatData



Business Review: Netflix




This week, MineThatData looks at the profitable online business model at Netflix, exploring customer acquisition costs and lifetime value metrics that make Netflix successful.







Sox First



Reading Your E-mail




With emails now a compliance minefield, more and more of the big corporations in the US and Britain are now bringing in snoops to monitor and vet emails at the workplace






PRMama



Marketing To Go




Dream Big with Homeschool marketing






SportsBiz



Hey World This Bud's for you




Anheuser-Busch is the official beer of the World Cup making it the only branded beer sold in World Cup stadiums. While that angers the German fans, who are not too fond of the taste, will it expand Bud's global sales or will it fall victim to the taste buds of the German fans.






Fat Pitch Financials



Tracking Insider Buying




How easy it was to legally circumvent SEC rules as an insider.






Photon Courier



On TrustinExpertsst and which Experts to Trust




A decision made by Kaiser Wilhelm II has implications for decision-makers of all types.






Financial Methods



Slowdown, More Fed Tightening in Store




Fed tightening should produce a slowdown in the economy. If commodity prices continue to rise expect even more rate increases by the Fed.






Mover Mike



The April Trade Gap Spin




The "spin" gets tiresome, but it is interesting to see how various papers cover a government press release. Some do no digging whatsoever!






Financial Reference



Diversification or Performance Chasing?




Recent investments in international stocks appear to be performance chasing more than driven effort to diversify.






View From a Height



WACC and ROIC




What's the best metric for measuring management effectiveness? Not ROA, not ROE, but ROIC-WACC







Ask Uncle Bill



Many Americans May Struggle In Retirement




So we have to go through all that angst to get to the bottom line--save 6% and you will be ok.






Seeking Alpha



Can You Make Money From Jim Cramers Picks?




Nearly 400,000 people watch each episode of CNBCÂ’s Mad Money and thousands more learn about Jim Cramer's picks through TheStreet.com (TSCM) and Seeking Alpha. TheStreet.com even redesigned its entire website recently to take advantage of the "Mad Money Effect". But if everyone knows what Cramer likes, can a small investor make money buying what Cramer recommends on Mad Money?







Paul's Tips



My eight best negotiation tips




Negotiation is a part of life we all have to deal with. Being able to do so successfully can make a big difference to our outcomes. Here are eight tips that have helped me.






The Big Picture



Google vs Microsoft: Now We're Getting Serious




Will Google's foray into spreadsheets take down Microsoft?







Bizinformer



Burning Bridges




Appalled, embarrassed and intrigued to witness a professional bridge being publicly burned today.






Cash Flow Blog



Collections, A Necessary Evil of Businesses




We all hate collections, buts itÂ’s a reality of business life. Not all customers pay or pay on time. Regardless of whether youÂ’re mowing lawns, selling your time or selling multi-million dollar technology solutions, the reality is youÂ’ll encounter AR problems from time-to-time. As a reality, the practical objective is not to eliminate it (AR), but manage it as effectively and small as you possibly can.





Jack Yoest



Yvonne DiVita: Wonder Woman Writer




A big challenge for business is to determine what's core. And what's critical.

New Wilbur Ross Purchase

Wilbur Ross, who created International Coal through the bankruptcy purchases of different coal companies, has purchased a new company.

According to a thestreet.com article Ross purchased about $100 million dollars worth of re-insurer Montpelier Re (MRH).

Montpelier Re, which took a big hit during the hurricane season last year and has negative income, was founded by White Mountain (WTM) who has perhaps the best float management and insurance business in its industry.

Montpelier is probably currently undervalued and most likely has good management, but unfortunately I wouldn't know because insurance is not yet part of my circle of competence.

I encourage anyone with an opinion on Montpelier to post it as a comment here.

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.

Potential Arbitrage

Central Freight Lines (CENF) is being bought out for $2.25 per share; the current price is $1.75 per share.

The deal is expected in July so in at most a few months a 29% return can be gained.

Details

Jerry Moyes, who already owns 32% of the stock, is looking to buy-out the company. Add his share with other directors who have commited to voting in favor of the buy-out and 36% of the shares are commited to the buy-out.

The deal was announced in April, then postponed until July.

There is also a lawsuit against Moyes for misleading statements in the IPO documents.

Though there is some risk, I believe there is at least a 50% chance of a 29% return in only a month and will continue research.

Resources

SC 13E-3
Preliminary Proxy
Form 8k - Press Release

At the time of posting Mike Price did not own shares of CENF, but this could change at any time. Do your own research before investing in any stock, the author cannot be held liable for lost money.

Festival of Frugality #26

Welcome to the 26th Festival of Frugality. Last week's festival was at Mighty Bargain Hunter next week will be at Aridni.

This is my first time hosting a carnival or festival, etc. , so bare with me. I divided up the posts into five groups, Psychology, Economics, Frugal Deals, Freebies and Saving. Comments, in italics, are from the blogger who wrote the post.

See this post for more information on this blog, Value Investing, and a Few Cigar Butts.

Psychology

Paul's Tips: The easiest way to fool smart people. There's a saying among con-men that smart people are easier targets, because they don't think they can be conned.

The Bargain Queen: Cheap, chic and (mostly) sane

Economics

Becoming and Staying Debt Free: What do the Billionaires Drive? What do the billionaires drive? The answer may surprise you. No fancy limo's in this crowd. Brand new cars are rare to. They drive their cars into the ground, before getting another one. In a related article, their homes are very modest compared to their extreme wealth. They are different people we need to learn something from.

Financial Reflections: Why I Didn’t Buy An HDTV, Sometimes it doesn't pay to be an early adopter - especially when you're frugal. Here's how I'm doing great with my regular television. There's also a comment from a reader who ditched cable fees forever for just $160 in equipment!

Jack Yoest: Frugal Car Maintenance; Management by Your Business Blogger

Frugal for Life: The Luxury of Frugal, What is considered a luxury to you? You might not realize how simple it is to define.

Blueprint for Financial Prosperity: Pay Cash for Gas for Discount?

DebtBlog:Green Could Equal Green For You

Frugal Wisdom from Wenchypoo's Warehouse: Here's to Luxury Creep

Frugal Deals

Money and Values: Free Souvenirs

Christine Kane:Getting Things Cheap

buy an auto:Save On Car Insurance Now!

The MotherLoad: Frugal Graduation Gifts

Refrigerator Raid: Super-Sized Meals Will Cost You Big Bucks

Young and Broke: Cheapskate Grocery Challenge continued...

msSnow's blog: Saving money at the grocery store with coupons

Frugal Upstate: Gotta Keep Your Cool, Frugal Ways to Beat the Heat

Freebies

The Family CEO:Free(or Cheap)Family Fun

Personal Finance Advice: Advertise On Your Car For Free Gas. A system where you can get paid in the form of gas cards to place advertising on your car (to reduce the cost of your gas) is set to debut later this year.

Seattle Simplicity: A Trip to Europe Using Freebies

Getting Out of Debt: Here are the Freebies
Saving

Free Money Finance: Money Saving Tip: Save on College Courses

AllFinancialMatters:How Much Can You Save in a Lifetime

K-Swiss Red Flags

I decided to re-post an article I wrote as part of my K-Swiss(KSWS) write-up a while ago, the K-Swiss part is updated, and the red flags are timeless.

The following thirteen red flags come from the book The Focus Investor by Rich Rockwood.

1. Watch for companies conducting large amounts of merger activity

Companies practicing accounting deceptions or with slowing growth may try to mask that with a lot of merger activity.

The only way to find out about a lot of companies aggressive accounting is to follow merger activity, be cautious if a company's G+I/A (Goodwill + Other Intangibles/ Assets) ratio is higher than ten percent.

2. Watch for companies that consistently meet earnings target over an extended period of time or project high growth rates

If you're reading a 10Q/K and the company claims it will grow at 15% CAGR for the next five-ten years, be cautious, natural business activity is not that smooth and good management knows that.

“If it seems to good to be true; it's neither good nor true”

If you find a company that continually grows earnings or revenue at a generic number like 15% be extremely cautious, on the other hand if the company refuses to even release earnings target, this is perfect, it gives the value investor a chance to buy stock if and when the company doesn't meet Wall St.'s lofty target.

3. Watch Companies that take big bath charges

Some companies have seasonal quarters that are historically better than others. If a company is in a historically good quarter and won't make earnings estimates it may shift expenses from that quarter to a quarter that has historically low numbers.

For example a company can fire 1000 employees and reserve their severance packages in one quarter. This will boost income in future quarters.

For another example see this article.

The FASB (Financial Accounting Standards Board), in 2002, issued a new accounting statement, SFAS No. 146, which accounts for costs associated with exit or disposal activities. In other words, when a company terminates a lease or has to pay certain employee severance packages, this expense has to be realized when incurred.

For more on big bath charges see:

http://www.sec.gov/news/speech/speecharchive/1998/spch220.txt http://www.sec.gov/news/speech/speecharchive/1998/spch230.txt

4. Pay close attention to Accounts Receivables in the Balance Sheet

If the “top line” number is shrinking or growth is slowing while accounts receivables is rising faster, customers may decide to “flex their financial muscles” and wait to pay the company back, when that happens the company starts to lose money.

5. Determine if the company uses conservative depreciation practices

Try to determine what depreciation practices are used in the industry, if the company uses different methods find out why.

6. Watch for companies that rely heavily on options as financial incentives

Issuing some options to reward employees for good performance is not bad, but when it gets out of hand shareholders are the people who lose.

Watch out for companies that break in to your piece of the pie by diluting the number of shares, and don't be fooled by companies that buy back a lot of shares to try to make up for it.

7. Monitor Revenue/Expense Recognition Issues

Some companies recognize revenue before they actually receive money, or they realize expenses before the money is actually paid.

This is nearly impossible to determine before something bad happens so always invest with quality management, read in the footnotes to the financial statements how the company recognizes revenue if it doesn't seem conservative or you don't understand it pass on the company.

For more read this.

8. Monitor One-Time Gains

One-Time gains or losses are OK, if it only happens One-Time.

When calculating cash flow for a company always add one-time losses and subtract one-time gains.

Watch out for companies that always have one-time gains or use one-time losses to disguise a bad quarter.

9. Monitor Pension Plans

General Motors hasn't been performing very well lately, the main reason: after years of coddling the unions GM has $169 billion in Pension Fund debt, compared to a market cap $15 billion. This debt is cripplincar makerrmaker.

In the late 90's companies were reporting higher income because, under GAAP, theyallowedlowwed to report gains in the pension accounts because the stock market was going up and these gains made a big difference. Watch for companies that are predicting too high returns in their pension fund portfolios.

10. Monitor companies that report revenue as cross-company payments/barter transactions

Keep a close eye on companies that become involved in deals where they receive money now, but must perform a service in the future. Because something of value is being provided revenue should not be recorded.

11. Watch for turnover in the CEO/CFO Position

The CEO and CFO are intensely tied into the financial statements that a company issues, because these two people are so knowledgeable in this area when a CEO or CFO resigns it may be because of accounting issues.

Also if a type of incentive package is tied to earnings the people at these two positions may try to juice earnings to receive more money.

Most of the time the CEO and CFO are trustworthy, but because they are so powerful watch them closely.

12. Look for Inventory Write-downs

Sometimes companies will sell too much product to the distributor to juice up revenue, when this happens the distributor may not be able to sell the product and may not buy as much in the future, this is hard to see when it is happening.

When reading a press release or reading in the footnotes make sure you know why inventory is being writ down. If companies have inventory levels that have been rising higher than sales the inventory write down may not be their biggest problem.

13. Look out for companies that use EBITDA as a measure of performance

A quality management team knows deprecation is a real expense and not just an accounting entry. If management is trying to fool you into thinking depreciation isn't a real expense, what else are they trying to fool you on?

Read what Warren Buffet said in his 2000 annual report:

"When Charlie and I read annual reports, we have no interest in pictures of personnel,
plants or products. References to EBITDA make us shudder; does management this the tooth fairy pays for CapEx? We're very suspicious of accenting methodology that is vague or unclear, since too often that means management is trying to hide something."

Rockwood recommends the following books to learn more about forensic accounting.

Financial Shenanigans - By Howard Schilit

The Financial Numbers Game - By Charles Mulford

More Debts Than Credits - By Abraham Briloff

Unaccountable Accounting - By Abraham Briloff

K-Swiss

1. Growth By Acquisitions

K-Swiss not attempting to grow with acquisitions, this ratio is under 2 for K-Swiss. Royal Elastics is the only notable acquisition K-Swiss has made in a while.

2. Project Too High Earnings Growth

After listening to the conference call I was impressed with K-Swiss' policy to only predict numbers for the whole year and next quarter.

K-Swiss does not forecast high numbers, and usually beats their own estimates.

3. Big Bath Charges

I did not find any big bath charges.

4. Accounts Receivables

Accounts Receivables have grown an average of 18% over the past nine years, compared to 24% revenue growth.

5. Depreciation Practices

K-Swiss uses "strait line and accelerated methods" I believe this is fine.

6. Options

Stock based compensation was less than 15%.

I discussed, in my K-Swiss Review, the use of options at advantageous times.

7. Revenue Recognition

If we look at this right from K-Swiss' footnotes:

"We record revenues when title passes and the risks and rewards of ownership have passed to the customer, based on the terms of sale. Title passes generally upon shipment."

It looks like K-Swiss does not have any Revenue Recognition issues.

8. One-Time Gains

K-Swiss had no one-time items in 2005.

9. Pension Plans

I didn't find any pension problems.

10. Cross-company payments

K-Swiss did not report any revenue from cross-company payments or barter transactions

11. CEO/CFO position

Steven Nichols has been with the company since he, and a group of investors, bought it in 1986.

12. Inventory

K-Swiss is OK with Inventory write-downs.

13. EBITDA

I did not find any references to EBITDA.

It looks like K-Swiss management is trustworthy.

K-Swiss Review

K-Swiss (KSWS) has fallen from its highs recently. This has happened for a number of reasons, I will discuss if I still feel it is an excellent investment.

I initially bought K-Swiss on October 25, 2004 I purchased 23 shares at $21.80 per shares, I proceeded to sell three shares at $32.19 on April 21, 2005 – that was a bad move.

What it does

K-Swiss is a shoe company that excels in selling shoes to people in my age group, this is what got me interested at first. A lot of people I knew wore K-Swiss, I liked (still like) the shoes also.

I took a page out of Peter Lynch’s book and researched it for its popularity, I found a company with a great balance sheet and an undervalued stock price at that time this was enough for me to buy.

Later, when I wised up to more research, I read the annual report and discovered I liked it more. K-Swiss has a unique advantage, almost 70% of its sales come from its Classic shoe, this prevents it from being vulnerable to fashion cycles among teens, because it does not use a lot of research to develop new shoes every few years it doesn’t waste money.

I went on to find out K-Swiss executives owned a very large percentage of its shares and I feel they are good at managing the company.

Magic Formula

K-Swiss repeatedly shows up on magic formula screens. Here are its results:

EBITDA…………………......$108.9 million

CAPEX…………………........$ 1.5 million

Enterprise Value………….$ 730.0 million

Working Capital…………...$ 265.8 million

Fixed Assets……………......$ 4.8 million

Earnings Yield - ~15%

Return on Capital - ~252%

Obviously K-Swiss excels in the Magic Formula.

Balance Sheet

K-Swiss has the best balance sheet in its industry. Current ratio is 7.5, quick ratio is 6.26, and it had a D/E of more than zero only once in the past six years – it was .03 – they have $197.5 million in cash and total liabilities of $60.9 million. The balance sheet is not in question.

Valuation

As before mentioned K-Swiss has an earnings yield of 15%, currently the treasury yield is 5.3%.

According to Quicken K-Swiss only needs to grow 3.9% annually over the next ten years, this is very easily attainable and I believe K-Swiss will be able to grow more than twice this amount.

Analysts estimate 13.3% growth for K-Swiss over the next five years, I estimate 10% for the next five years, 7% for the five after that and 3% into eternity, discount by 11% and the value is $48.74, I won’t add cash to this price. This implies a margin of safety of 45%.

I could do more measures then I have shown here, but I am satisfied K-Swiss is undervalued currently, and for a variety of reason put its intrinsic value at $40 per share.

Risks

There is always the risk that the Classic will become unpopular and sales will decrease, but I believe international sales – which have a tremendous growth rate –are a suitable hedge against this, and I have faith in the Royal Elastics brand to create profit in the near future.

Greedy management - according to a recent article K-Swiss executives were granted options at strategic times to increase the gain. While I find this very un-nerving I believe it is not enough to write-off a great company that has a very good margin of safety.

Conclusion

K-Swiss management may be greedy but they own enough of the stock to have its success in their best interests. K-Swiss is a good company currently at a great price I will not be selling it anytime soon.

Disclosure

This site is for educational purposes only. The securities mentioned are not appropriate for all investors and nothing herein constitutes a recommendation to buy or sell. Please consult your financial advisor before making investment decisions. While all reasonable effort is made to ensure the accuracy of information and data contained herein, accuracy cannot be guaranteed. Past performance results does not guarantee future performance results. Results are not guaranteed and we assume no liability whatsoever for any material losses that may occur. Again, this site is for educational purposes only, consult your financial advisor before making investment decisions.

About

Value Investing, and a Few Cigar Butts

Author History

My name is Mike Price, I am currently 17 years-old, and am going to high school in Pleasant Grove, Utah. I will start going to Westminster College in the fall of 2008.

When I was 13, eighth grade, I was homeschooled, for a variety of reasons, because of this I had a chance to go to a Get Motivated seminar. My mom found a coupon to get two tickets for the price of one and Joe Montana was speaking so I was eager to go.

At the seminar Phil Town was promoting an Investools package. The ability to make a lot of money got me very interested.

We went to one Investools class and learned about stochastics, other TA and how to trade short-term using options. The whole class was basically how to use Investools' proprietary (and very expensive) software. Though there may have been more, but the only fundamental analysis I remember was checking the last two months news to make sure there weren't any scandals, obviously far different from my current investing style.

After the class we went to the library to find books on investing, I found three or four trading books, a gold book and The Motley Fool Investment Guide for Teens.

I don't think I use a lot of the book with my current philosophy, but it was the first time I read anything about a long-term focus and saving, it also turned me unto the Motley Fool Boards where I have posted almost 1,200 times most of those falling between 2004-6.

Soon after I started posting often, I wrote a post about ten investing mistakes, and won $1,000 in a teen writing contest.

Most of the stuff I know came from reading the boards and the books recommended by the posters there. I owe a lot of my knowledge to those boards.

Around the end of the summer of 2005 I started trying to find ways to make money from my articles (after The Motley Fool turned me down as an author three times because I wasn't 18).

The result was Value Investing, and a Few Cigar Butts

Blog History

The first post was How I Invest, which was a post on my investing philosophy, the post described which investments I liked and what percent of my portfolio I felt should be invested in them.

I named the blog Value Investing (which is the type of investing I prefer, buying good companies at a margin of safety), and a few Cigar Butts (special situations, or how Buffett could have made 50% per year, which about which I have become partially obsessive in my research and reading, and ended up writing five posts on them).

As I got annoyed by the overwhelmingly un investing related posts on The Motley Fool boards I started to post more often, posting 31 times in the lats few months of 2005 then 68 times in 2006.

During this period I basically experimented with risky speculations made to look like value stocks in my mind.

I even recognized this and repeatedly wrote about how I would change, in this period I lost 15% over three years and consider this the first chapter of my investing life.

In 2007 I got sick of my poor returns and poor hits results, and only posted 11 times, mostly because of school work and my job at KFC.

More recently I've started to post more often, reaching my 2007 post level by the end of March.
At the start of 2008 I'd made about $900 total since I started the blog, including all ad sales (google, blogads, adbrite), Amazon Associate links and a Blast Invest affiliate link.

This seems like a lot of money, but it's over two-and-a-half years, on over 65,000 page views and well over 300 pages of writing.

In an effort to monetize the blog and make it beneficial to write often, in March of 2008 I started posting almost every day and started using better ad placement. I also have plans to make a pdf (also a print edition) of the 'first chapter' of my investment evolution encompassing all of my posts up until 2008, including new commentary and updates on the progress of researched stocks. Plans to sell copies of my advanced security analysis spreadhseet have also been explored, there will be more info in the future about these potential products.

Portfolio Holdings

After I started the 'second chapter' I decided to follow my portfolio in more detail. I do a monthly post detailing each investment and any changes and also have added, on the sidebar, a list of my current portfolio holdings and the percent allocations in each holding. Underneath the holdings is a list of the investments I sold after the start of the 'second chapter' it does not include any investments (good or bad) that I have made in the past.

Book Store

I also started a Right Price Book store, that is in the progress of showing all my recommended books, from investing to business to economics to fiction.

Political Blog

In March of 2008, I created a political blog with my Uncle. The blog is The New Sons of Liberty and the articles detail our libertarians leanings and the benefits of small government and the Free Market.

Readers should visit the site at their own risk and I hope they will not hold any political disagreements against my investment writings.