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June 16, 2006 |
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With the 2Q06 Wish List only a couple of weeks away, the big question is whether or not we will be making any new company additions. Put another way, is now a good time to buy stocks? Taking this as a general question there is only one safe answer: no.
Bonds are a safer bet than stocks not only on a strict yield basis, but also given that the US economy is likely to slow down in the coming quarters. With economic slowdown will also arrive an earnings slowdown and, with any luck, a deeper correction in the markets. As prices drop, opportunity knocks Of course a general answer must always be subject to appropriate qualifications. Even with the market negatives in mind there are always interesting stories, and potential opportunities, to be found. One company that again springs to mind is Angelica Corp (first covered as a Watch List target in 2Q05). Addicted to acquisitions, management has damaged the company’s once sturdy balance sheet, and this could bring about change at the company’s October annual meeting. At the minimum, the annual meeting should bring with it conflict between the company’s largest shareholders and the current board. With Angelica shares off 24% from their 2006 peak and the real possibility that shares could weaken further ahead of the company’s annual meeting, a long-term opportunity could arise. If well managed, the company can successfully operate in a non-cyclical industry (linen services to the healthcare industry) that produces consistent and attractive rates of profitability. A couple of other companies that jump to mind are CMGI and Keynote systems. CMGI, which we are currently investigating, trades for around one dollar per share. The company’s vast and changing venture capital interests make an in-depth understanding of the business tricky, and its recently acquired business (supply chain management), while profitable, has less than a 2-year historical record to draw on. Another concern is that CMGI’s financials are messy and subject to countless unsettling revisions every year. Even so, with more than 40 cents in cash and nearly 60 cents in working capital the downside to the stock is limited. As for Keynote, which deals in Internet performance management services, it is one of the 400+ companies we are looking at that trades below book value. Some initial concerns are that the company is expanding its customer base at the expense of margins and that new ventures/acquisitions offer unpredictable returns. However, perhaps already reflecting these concerns, Keynote’s stock price has tumbled below $10 a share in 2006 (-23% YTD). Rest assured that another 23% tumble from $9.88/share is unlikely over the near term. Keynote has more than $7.00 in cash and short term investments. Precious metals stocks are another area of interest. We have not been in any precious metal stocks since 2002 (we prefer to own physical), but recent events are making this area more appealing. As a quick example, earlier this week you could have purchased a company like Golden Star Resources for $2.50 a share and written the November $2.50 calls for an attractive return: with a 50 cent bid the calls would have immediately paid the investor a 20% return on their investment! 20% in 6-months in any market is attractive, and you only end up with egg on your face if GSS dives below $2. On this prospect we will reserve comment. After all, GSS does not have strong reserves, and it is difficult for the outsider to know when, and if, the company can start extracting grades high enough to turn a solid profit. Despite risky stocks being unattractive compared to safe bonds, the steep co | |||||||
