Within the past week we had just begun accumulating shares of Easylink Inc. symbol ESIC. Our cost was in the $5.90 to $6.10 per share range. I regret that only a handful of accounts were able to buy the shares as this morning Easylink has announced it will be purchased by Opentext for $7.25 a share. The market for ESIC is currently at $7.15 and within a few days we’ll be ringing the register and taking the quick profit.
Long ESIC
It was a cold and snowy day yesterday which isn’t uncommon this time of year in the Rockies, actually many of the heaviest snowfalls of the year occur in April. But last night I was able to see Moneyball which is movie starring Brad Pitt and based on the experiences of Billy Beane who’s the general manager of the Oakland A’s baseball team.
The movie captured the highs and lows of the A’s 2002 season in which they found themselves losing three key free agents to larger franchises and trying to find a way to cope with the realities of being a franchise with a $35 million dollar payroll competing with teams like the Yankees who at the time had a $120 million payroll.
Due primarily to one of the strongest unions in the country: the MLB players union, a salary cap on team payrolls is nonexistent and has made for an unfair, unlevel playing field between large market teams (Yankees, Red Sox) and small market teams (Royals, A’s, Padres for example).
Billy had to find a way to replace his stars with players who could contribute enough to make up for the loss in production yet be cheap enough to fit within his payroll. He simply could refit the roster with high priced free agents or trade for players with large contracts, there was no question he couldn’t expand his player payroll budget.
Baseball has long been a sport in which scouting has played a significant role. Scouts were frequently older baseball men who used their experience to extrapolate what a young players potential could be. The process is highly subjective and as in most professional sports, most of the prospects never make to the major leagues let alone be stars. Billie was tired of hearing the old phrases “he’s built like a ballplayer, a five tool player, a smooth level swing, and he’ll improve with time”. All Billy wanted to know was: “Can the kid get on base?” If the kid can’t get on base, be it from a walk or a hit he’s of little use to the team and all the pat phrases from the scouts won’t mean a thing.
While visiting the offices of the Cleveland Indians in an attempt to make a trade his offer is shot down based on a mouth to ear relay of information to the Indians GM from an unlikely looking young man. This young man was one of the first to use data analysis to formulate opinions on their young players.
This young man catches the eye of Billy Bean because is on the cutting edge of incorporating data or quantitative analysis (QA) to determine if the player had the potential to contribute. The young man didn’t care if the player could even field his position he only cared about his on base percentage (OBP).
The use of quantitative analysis (QA) in baseball was the brainchild of Bill James. Eventually the use of QA in baseball spread, even to the large market teams like the Red Sox who in fact are owned by John Henry who is a proponent of QA in managing his hedge fund. However, to this day the issue of QA is still contested since baseball is an old school sport where change rarely occurs and jobs are entrenched.
But this isn’t really a post about baseball as much as it is a post on the advantages of quantitative analysis in many of life’s endeavors especially investing.
In place of the subjective “it has a great looking chart” / “the stock has a low PE and a 2% dividend and we expect it to move 20% higher this year!” is our proprietary RMHI model that allows us to backtest over a decade of data to determine which balance sheet profiles and stock selection formulas actually work in creating above average shareholder wealth. Can this stock “get on base?”
In baseball the large market teams are captivated every year by the super stars that hit the free agent market just as investors are fascinated by the attention getting stocks such as Apple. The past does not equal the future and while the Angels may feel adding Albert Pujols to their roster for an average of $25 million a year till 2021 is a good deal, you must consider he is a richly valued player who is peaking at age 32. Will he be able to contribute at ages 38 to 41? For every Ted Williams there are many more Manny Ramirez’s who were done at 38 leaving the team stuck with a dead money contract.
But investors miss the questions they should be asking themselves: Is my chance of making an above average return on Apple (which sells at 17x 2012 eps, 4.4 times revenue and 6x book value) better going forward than shares of a stock selling 9x 2012 earnings, 0.46 times revenue and .75 times book value). This is the essence of Moneyball or as a wise man once said to me “Price is what you pay and Value is what you get”. FYI the unnamed stock is Voxx International, symbol VOXX.
And the Oakland A’s won their division in 2002 with a better record than the year before.
Long VOXX
First quarter 2012 returns are in as follows:
While the S&P 500 returned 12.6% (total return)
RMHI Growth accounts returned 18.31%
RMHI Moderate Growth returned 16.76%
RMHI returns are net of all fee’s and expenses.
Quick comment: While I’m very pleased with these returns the RMHI model performance exceeded our client returns due to accounts having diversified positions in Gold and in some cases a higher level of cash than normal. Portfolios diversified from equities lagged in performance due to the lack of upward price momentum in gold and bonds. Realizing that the government may not be in support of QE 3, we’ve sold our gold positions and would prefer to own cash in lieu of metals or bonds.
All market models remain in Bullish mode where any form of market weakness is being fought by aggressive buyers. While we do see some signs of incoming economic weakness (today’s poor job creation stats for example) the weakness has not translated to declining equity prices.
Since the start of this rally in December market declines have been rare and limited to just three days of selling. Thus, I’m looking for the markets to regain their footing or we must consider a potential change in trend.
There are several issues to keep in the radar including debt worries in Spain and a further slow down in China. No doubt there will be a market correction at some point and even if 2012 turns out to be a terrific year there are always potholes along the way. Yesterday I spent a few hours sifting through data of how our model reacted in 2004. The back test data showed a terrific return by any measure but there were also two pullbacks in the range of 10%.
At this point in time only Investor Sentiment measures are in the warning zone, all trading and momentum models remain bullish. For the time being we remain fully invested.
Buyers are obviously in control of this market today with the Dow up 127 and the Russell 2000 up 12, a very nice way to start the week. There can be no doubt that we’re in the midst of a very vigorous bull market in the intermediate term. Internal market momentum and breadth remain excellent so I remain fairly optimistic in all time periods but with an eye open for the facts to change.
The current psychology of the market is “risk on” which also means alternative investments that need “risk off” such as bonds and gold are doing poorly and I don’t expect this situation to change anytime soon. While I have almost no bond positions, I am liquidating our GLD holdings into strength and just holding cash with the proceeds. GLD has become a drag on performance and until there is a change in the trading trend of GLD, I prefer to take the most conservative option.
While most market participants are transfixed on Apple shares I continue to look elsewhere for largely unknown names that are quite cheap with positive trading trends.
Intertape Polymer Group symbol ITPOF represents a socially benign company, a Canadian small cap company with interesting postential: They manufacture a wide variety of tape for retail and industrial clients. Example are masking and packaging tape, cloth tape foil and film tapes, packaging tapes, and duct tape.
The market value is small: $270 million but the Price to Sales is just .30%. After several years of lagging operational profits but losing money after tax the company has seen accelerated growth in revenues and margins along with a sharply reduce tax expense. Revenues have risen from $615 million in 2009 to $786 million in 2011 and net income of (-$14,389,000 2009 / -$48,549,000 2010 to a profit of +$8,954,000 in 2011).
Long ITPOF, GLD
It doesn’t matter what the market is: real estate, tulip bulbs, stocks, bonds or baseball cards when the price move becomes parabolic the ending is never far way nor is it pretty. A parabolic move in the price of Apple is a warning sign that must be heeded. Its impossible to say when the run will end, MSNBC is breathless in their reporting but parabolic moves are unsustainable and a sign that the buying has gotten out of hand.
I have great admiration for Apple and the legacy of Steve Jobs and today my gorgeous wife finally got her Ipad. My guess is we have 9 Apple products in our home (does the Jobs bio count?) and love them to bits but being a consumer and owning the stock are two different things.
No positions.