Money and Investing Thoughts

There are two stocks in my Income Portfolio for this site that have me completely baffled. Their stock prices continue to erode and I am at a loss to find a good reason. These two point out some of the challenges of investing in smaller cap stocks where often the only news available is the quarterly earnings report and the investor has to live with the share price swings for the 3 months in between without much information to decide whether to hold or sell or buy more. Compare this with a popular stock like Apple (AAPL: 459.68 +4.56 +1.00%) where I count 15 news headlines at Yahoo Finance for today alone (and it is still relatively early). One of my goals and challenges here is to try to find those companies and stocks where the lack of news leads to an undervalued stock. So as these stocks start to fall in price, the new challenge is are they more undervalued or is there a hidden problem?

First, up I will discuss City Bank (CTBK: 0.00 N/A N/A) of Lynnwood. WA. This mid sized ($1.3 billion in assets) bank has 30+ years of conservative management and growing profitability. It pays a quarterly 15¢ dividend which gives a yield of over 4% at the current share price and has recently paid an additional $1.00 dividend at year end. City Bank is an industry leader by most of the metrics banks are measured by. Earnings per share were $2.62 in 2007 and current estimates have 2008 earnings at $2.25. This puts the PE for 2008 at 6.3 based on today’s (still falling price).

I first reviewed and added City Bank to the tracking portfolio here in October, 2007 when the price was about $23. I was looking for a banking sector stock that was down trodden by the market distrust of financials, but was stable and profitable. I though CTBK was a good fit for what I wanted. Since then (before this recent downturn) the stock varied between $18 and $24, based on how the market was feeling about banks and has paid $1.30 in dividends. I made my initial, personal purchases in the $21 range. CTBK started the 2nd quarter at almost $24 and has been sliding downward since. I picked up some additional shares at $18 and have watched the stock continue downward to about $14 today. In the last 2 months the only news were 1st quarter earnings report and a 2nd quarter dividend announcement.

So now my stock is down 1/3 and I scour the news daily for reasons: Nada. I check Seattle area news to check if there is an economic change there: Still appears relatively strong. My only guesses on the price meltdown are that City Bank’s large portfolio in construction loans is in big trouble, and we will not find out until the next earnings report or the many individual share holders (very little institutional ownership) are bailing out as the stock continues to fall. At this point, I plan to hold my position until actual financial results are revealed.

My other falling stock that I do not understand is Aircastle Ltd. (AYR: 14.29 +0.10 +0.70%). I have expounded enough for today, so check back tomorrow or Monday for my thoughts on Aircastle.

Note: I have long positions in CTBK and AYR.

I have been reading with great interest recent articles on the current housing market. The recent Case-Shiller report shows average home prices have fallen 14% over the last year and there is currently an 11 month “inventory” of 4.55 million homes. This report has widespread news reporting, but there are other reports out there that paint a slightly different picture. I would like to reference some of these reports with a little analysis of my own.

First, let us talk about housing “inventory”. Jeff Miller at A Dash of Insight has a nice discussion on the errors of mass media discussion of housing inventory. He points out that the difference between motivated and unmotivated seller and demand of buyers changes tremendously with pricing and perceived price directions. I have put housing inventory is several classes:

• New home building: This is the only source of new inventory, all other are existing homes someone is trying to sell. Home builders have slashed new construction and managed to sell the bulk of their existing inventory. This news release from the California Building Industry Association – New-Home Production Remains Weak in April, shows that California home builder’s will build the lowest number of homes in 2008 since records were started right after WWII. Further, the 80,000 new homes this year and 92,000 projected for 2009 are well below the 200,000 that are needed annually to account for population growth in the state. The results (from the press release):

“Furthermore, if the current projection comes true and we build the lowest number of homes since at least World War II this year, the current increase in affordability could quickly turn around when the pent-up demand for new housing starts outweighing the supply.”

• Finance forclosure homes: This is a significant portion of available housing “inventory” and is owned by extremely motivated sellers–banks. This is the portion of inventory that is both pulling down prices and offering buyers tremendous opportunities. This article (subscription req.) from the Wall Street Journal documents that sales are increasing in the hard hit areas of the housing meltdown: Las Vegas, Sacramento, CA, Ft. Myers, FL and inner city Detroit. Quote:

In the Las Vegas area, sales of single-family homes in April were up 30% from a year earlier. The Greater Las Vegas Association of Realtors says properties being sold by lenders account for more than half of recent sales.

I have written earlier here on the positive sales reports from Sacramento, where a large amount of foreclosed homes are being snapped up by value conscious buyers. In many areas of the country, once potential buyers believe the prices of foreclosed homes have leveled many will jump in to buy and get a “deal”.

• Motivated sellers: These are those homeowners who really need to sell. They fall into two camps. Those who purchase at the price peak and are having trouble with their mortgage, but are not willing to let it go to the lender. These are very motivated, but may not get the price they want/need and go with another option, like mortgage work out. The other camp is those who need to move. If they purchased the home before 2004, they are most likely still have equity or a house payment that makes renting out the property and option.
• Unmotivated sellers: These are sellers who do not really need to sell, for example, retirees who would like to go buy a repo in Florida, but remember the prices of a few years and have listed their homes at unsaleable prices. Let us call this “dream inventory”, because these homes only sell in the owner’s dreams.

When we look at these classes of inventory, it is apparent that foreclosures are the driving factor in current housing sales. Sales figures from scattered areas of the country show pricing for bank inventory has started to reach levels to bring out additional demand. Once, public perception is that prices have stopped falling, demand will increase significantly, most likely starting serious bidding on most bank owned real estate. Because home builders have very few homes starting or in inventory, there will be no outlet for heating up demand. Individual home sellers will start moving up their asking prices as the 3rd alternative for home buyers who do not want to miss the “bottom”.

At this time I am looking for more of a leveling of prices and sales, with new home sales continuing to fall. True growth in home sales and prices are dependent on availability of financing and interest rates. At this point almost all financing must meet Fannie/Freddie guidelines and these are dependent on what the politicians accomplish.

Each week I review the past week’s performance of the WilderHill Global New Energy Innovation Index (NEX). The index consists of approximately 90 renewable and clean energy companies from over 20 countries. The index can be invested in through the PowerShares Global Clean Energy Fund (PBD: 9.73 +0.259 +2.73%). All returns are for the week that ended last Friday.

The NEX finished the week down 2.1%, not quite as big a drop as the S&P 500 and NASDAQ, down 3.6% and 2.8%, respectively. The only winning sector was the one with mini-hydro and geothermal companies, called “renewable-other”. The renewable-others gained 1.8%. The energy efficiency sector dropped the farthest, down 4.7% and wind energy was dubious second down 2.9%.

Here are the best and worst individual stocks from the index for the week:

NEX top gainers since 20/05/08
LDk Solar LDK + 17.9%
Evergreen Solar ESLR + 12.6%
GS Yuasa 6674 + 10.9%
Sao Martinho SMT03 + 10.4%
Brasil Ecodiesel Industria e Comercio de Bioc ECOD3 + 9.1%

NEX top losers since 20/05/08
Medis Technologies MDTL - 20.3%
Epistar 2448 - 14.7%
Sanyo Electric 6764 - 14.2%
Zhejiang Yankon Group 600261 - 13.6%
Aventine Renewable Energy Holdings AVR - 12.6%

Note: I do not have a position in any security listed.

Bill Rempel, a.k.a. NO DooDahs! » S&P 500 Earnings Ex-What?

I really like reading Bill Rempel. He is a very smart guy with more interest in finding ways to make money rather than expound a personal theory of the current financial condition. In the article linked above, he takes to task those who want to disregard those sectors of the stock market that go against their theory. He opens with this thought:

Bears will be mentioning S&P 500 earnings ex-big oil. Bulls will be mentioning S&P 500 earnings ex-financials. Both are full of shit, some particular ones more so than others.

He argues that if this is the current case you must disregard the hot or cold sector for every era to make proper comparisons. Bill sums it up this way:

Of course, one could argue that, since at any given time there are companies and industries with growing profits and companies and industries with shrinking profits, that the whole endeavor of examining S&P 500 Earnings Ex-What? is pointless and idiotic. I would tend to be among that group.

I think the reader of financial blogs and news needs to be discerning these days. Is the writer trying to help the reader be a better investor, or is the writer trying to generate interest in his opinion to further his own agenda? I believe there is some of both in all of us who write about these topics, but I find many Internet sites seem more interested in generating traffic and income than actually putting out helpful information.

Unsold single-family homes rise to 23-year high in April – MarketWatch

The MarketWatch article linked above shows that nationally unsold home inventories are still rising. This is the opposite of the news I wrote on for the Sacramento market, where unsold inventory has fallen by about 25% over the last year. Sacramento is one of the places where prices have fallen enough to really bring out the buyers. News from California show some other markets in the state showing signs of increased buying, decreased inventory. As one of the worst, and hardest hit, bubble areas, is California starting to lead the nation out of the real estate downturn?

One of my favorite pastimes these days is to read the comments on articles like the one above. I assume those who so gleefully cheer for further housing woes will never be able to afford to own a home at any price. As far as mortgages go, it appears there are still plenty of buyers who can qualify for low down payment mortgages, as long as they stay out of the jumbo arena. How much longer can the housing-bust-dot-com blogs hang on?