Wall St. Non-Sense

In the two months since my last post my portfolio is down over $1,000 - that's a lot relative to the total size. Meanwhile I invested all my excess cash two months ago so now I just watch as all the companies I own fall seemingly endlessly (with the possible exception of Western Sizzlin') and I have no cash to invest in them.

I'll go over a few of them plus some other options I'm looking forward to using at some point.

Overstock.com

Overstock has gotten utterly massacred since the last post. Worse maybe it should have fallen a little bit but not near as much as it has Wall St. has taken advantage of an extremely small amount of bad news to shoot it down.

There are two main bits of news here:

Byrne said the Gross Margins would be down

Jason Lindsey resigned

First, while Byrne said gross margins would be down, because of higher ad spending, he also remarked that they were experiencing good growth during the holiday season. That this would send the stock down makes absolutely no sense.

Upon, hearing the gross margin would be down because of higher ad spending, the first thought to enter my head was not, "Oh $#!+ lower gross margins," instead it was, " Oh, thanks captain obvious."

Byrne has repeatedly talked about new commercials they would be airing, including one where they had to close down an entire free-way to record it. Well, doesn't logic tell us that if they would be airing new commercials, then they would probably have to spend more money then they had, which would mean margins would be down.

'Pundits' all over wrote about how Overstock's margins and how it was a step back when all they needed to do was pay attention and this would have come as no surprise. More surprising, however is the fact that these comments alone sent the share price down more than $20 per share.

Secondly, I won't argue that losing Jason Lindsey is bad for the company that would be illogical. Instead I see this as a semi-good sign.

I don't believe Lindsey would leave the company again if it was crap, he knows his stuff - which is obvious from the conference calls - and I think he left this time because he knew Overstock could run well without him now.

Add these two bits together and Overstock trades at just $13.32 per share down from a high over $39 it reached less than a quarter of a year ago. This is a 66% decline in just a few months, and on the news that I addressed in the paragraphs above.

Yes, I do believe its utter non-sense. Overstock now trades at a .35 multiple of sales, which means they earn well more than twice their market price in sales. Sales that Byrne acknowledged had grown well during the holiday season.

They still have an amazing business that doesn't seem to be recognized by anyone other than Arne Alsin.

I'm not recommending anyone do this, but the move I would love to use here is to buy calls on OSTK that way when they report and go up 50% in a week - shorters covering should push it higher. Unfortunately, according to Scottrade a 35 year-old investor with a few months experience can trade options but a 17 year-old investor with four plus years isn't old enough.

Sears Holding

This one will be shorter since I haven't been following it as long, also it will be more of a rant.
Sears has fallen with the rest of the retail industry over the past year or so and also Herb Greenberg named Lampert the worst CEO of the year despite the fact he's not a CEO, and Sears and Kmart are performing a lot better than they would have had Lampert not gotten involved.

In 2003 when Lampert started buying Kmart it was about to file for bankruptcy and Sears was approaching the same fate very quickly.

After Lampert took control of Kmart he sold a bunch of real estate to pay down debt and buy Sears.

Now Sears is making over a billion in operating cash each year, and has ~$1.7 billion in cash compared to no Long-term debt, the only retailer who can claim that.

Still it trades for a fraction of its liquidation value and is run by a guy who Wall St. seems to have forgotten has earned 29% a year and was a huge factor in AutoZone’s turnaround.

K-Swiss

Not a whole lot as changed here, I'll go over the valuation.

K-Swiss has $8.13 in net cash per share - this is helped by the fact they have no long-term debt - which makes their EV/Share $8.82. They made $1.44 in cash flow per share which puts their EV/FCF ratio at 6.125 which is criminal for this company.

Even though K-Swiss's domestic business fell a lot over the past year their operating margins are still around the industry average, and they still earned 15% on capital, which is good for businesses hitting their stride.

Management also proved they are focused on the long-term by not discounting any shoes even though their earnings were falling; though this may have affected short-term growth rates long-term the margins and returns will remain healthy.

McGraw-Hill

No deeply held grievances here, but I am doing a 10 page research report on this company for English, so eventually I'll have a pdf up on it.

Mutual Funds

I've been thinking about possibly diversifying my portfolio by investing in a value fund to go along with the different companies I own.

So far the best fund I've seen is the Tilson Dividend Fund. I saw Matt Richey speak a CGI conference and have read their write-ups on Value Investor Club. The fund's NAV is down over the past few months with the rest of the market which I think gives one a good opportunity to invest in well selected undervalued companies.