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December 2006 Volume 3 Issue 17
Taking Advantage of Short Termism
In the last issue we briefly discussed the difference between business and quotation risk. Quotation risk is the risk that the price of your stock investment declines after purchase. If the market were completely efficient, any decline in a stock's price would be a direct result of an increase in business risk. In other words, a riskier company should trade at a lower valuation (to compensate investors for the added risk) than one whose business model is deemed more sound.
Luckily for the conscientious value oriented investor the market is not perfectly efficient and often affords opportunities to buy strong businesses at depressed prices. We've highlighted the words company and business for good reason. Too often investors focus solely on quotation risk without giving much thought to the quality and value of the underlying company. When good businesses sell for depressed prices, they are ignored because short-term price risk trumps long-term business risk. One goal of the Fallen Angels Report is to uncover cheap high quality gems whose market prices are trading below business value.
Recoverable Calamities: A Case Study on Quotation Risk
American International Group's (AIG) decline from the low $70s to the lows $50s in the spring of 2005 was a panic induced sell off that wiped out $billions of market cap. The imbroglio involved charges of fraud, bid-rigging and improper accounting practices at the global financial services behemoth. The fallout: embattled CEO Maurice "Hank" Greenberg was forced into "early retirement" and the company settled a civil suit filed by NY attorney general Elliot Spitzer for more than $1.6 billion. No doubt a business calamity, but a very recoverable one for AIG. The Stock price currently sits at around $70, a 40% increase off the bottom.
Company Name |
Symbol |
Price* |
| Bausch & Lomb (contact lens solution) | BOL | $49.38 |
| Housevalues Inc. (real estate marketing) | SOLD | $5.24 |
| KB Homes (homebuilder) | KBH | $51.54 |
Company Name |
Symbol |
Price Then |
Current Price* |
| Cavco Industries (housing) | CVCO | $34.95 | $35.05 |
| Champion Enterprises (housing) | CHB | $8.94 | $9.49 |
| Fleetwood Enterprises (housing) | FLE | $7.43 | $8.29 |
Company Name |
Symbol |
Price Then |
Current Price* |
| Florida Rock (materials) | FRK | $42.40 | $42.30 |
| Eagle Materials (materials) | EXP | $39.90 | $43.38 |
| USG Corp. (materials) | USG | $51.18 | $56.27 |
| Cemex (cement) | CX | $31.22 | $32.11 |
| Freeport-McMoRan (copper/gold) | FCX | $58.82 | $61.81 |
| BHP Billiton Ltd. (mining) | BHP | $42.31 | $40.63 |
Company Name |
Symbol |
Price Then |
Current Price* |
| Gannet (media) | GCI | $60.29 | $59.96 |
McClatchy (media) |
MNI | $44.31 | $42.43 |
| Alcoa (materials) | AA | $28.30 | $31.11 |
| U.S. Steel (materials) | X | $68.74 | $78.75 |
| Conoco Philips (energy) | COP | 61.19 | $71.04 |
| Halliburton (energy) | HAL | $32.15 | $32.81 |
| Handleman (music) | HDL | $8.04 | $6.64 |
| Tandy Leather Factory (retail) | TLF | $6.97 | $7.68 |
Company Name |
Symbol |
Price Then |
Current Price* |
| Yahoo (internet) | YHOO | $24.42 | $26.34 |
| Google (internet) | GOOG | $427.30 | $484.11 |
| Aegon (insurance) | AEG | $18.62 | $18.14 |
| Prudential (insurance) | PRU | $77.69 | $86.24 |
| Wal-Mart (retail) | WMT | $48.64 | $46.35 |
| Costco (retail) | COST | $53.20 | $53.69 |
| Ford (auto) | F | $8.17 | $7.23 |
| Toyota (auto) | TM | $116.20 | $121.99 |
* Current prices as of 12/08/06.
The Fallen Angels Funds
Gabriel Wisdom and Michael Moore manage two no-load mutual funds, the FALLEN ANGELS VALUE FUND and the FALLEN ANGELS INCOME FUND.
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American Money Management, LLC, an SEC Registered Investment Adviser, manages accounts for individuals, companies, trusts and retirement plans. Minimum account size is $100,000 but investors are invited to try a managed account with as little as $25,000 (AMM reserves the right to withdraw this option at any time). For more information on our managed accounts program, please call us at 888-999-1395 or visit us on the web at www.amminvest.com.
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Disclaimer
The opinions expressed are those of Gabriel Wisdom and Michael Moore and do not necessarily reflect the opinions of American Money Management, LLC (AMM), an SEC registered investment advisor who serves as portfolio manager to private accounts as well as to mutual funds. Clients of AMM, Mr. Wisdom, Mr. Moore, employees of AMM, and mutual funds AMM manages may buy or sell investments mentioned without prior notice. This newsletter should not be considered investment advice. The opinions expressed do not constitute a recommendation to buy or sell securities. Investing involves risks, and you should consult your own investment advisor, attorney, or accountant before investing in anything. Current stock quotes are obtained at http://finance.yahoo.com. Prices are as of the close of the market on the previous day of trading.
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