• Some Thoughts on Nicholas Financial
    Posted by on October 21st, 2008 at 1:53 pm

    Yesterday, Felix Salmon had some questions for value investors and he concluded by saying: “I might have some faith in the ability of value investors to find cheap stocks, but I have no faith at all in the ability of value investors to time the market.” As usual, I agree with him.
    Personally, I don’t try to time the market, and the times that I have tried, I’ve been awful. Perhaps I’m a contrary indicator. Of course, even when I try to go against my instincts, I’m still lousy. I guess it’s just me.
    That’s why I stick to stock-picking. As followers of my Buy List know, I’m a buy-and-hold type of guy. The Buy List has 20 stocks that I choose at the beginning of the year. Each year, I’ve only replaced five stocks, so that implies a four-year holding period.
    One stock that’s been on my mind lately is Nicholas Financial (NICK). This is what I would call a deep value stock. It’s a very low-priced micro-cap and in all honesty, it probably won’t do much of anything for a bit of time. Still, I like it and I own it.
    The reason I find NICK so interesting is that it’s almost a perfect lab experiment for looking at some theories of investing. First, it’s a value stock. Second, it’s a micro-cap stock. Historically, both groups have outperformed the market as a whole. This of course doesn’t mean NICK will outperform, but it’s got those two characteristics on its side.
    I should add that NICK isn’t just a micro-cap. It’s really micro. The company has a market value of just $33 million. Some Yankees make more than that. I was buying it last week, and trying my best not to throw the price out of whack, but it’s hard to avoid. Some days, no shares trade.
    Also, NICK isn’t just a value stock, it’s a deep value stock. The shares are going for less than four times trailing earnings. The company’s book value runs $7.91 a share. Yesterday’s close was $3.21. That, my friends, is a value stock.
    Why is it so cheap? Well, NICK is in the worst possible industry right now. The company makes loans for used cars. Cars sales are plunging and the credit market is frozen. NICK isn’t officially called a subprime lender, but it sort of is. The stock has dropped from $14 to $3. But there’s a lot to like about NICK, and I’m comfortable owning it. Let me explain why.
    One thing that makes NICK interesting is that they actually hold their loans to term. Shocking, I know. They don’t sell their loans immediately. Most of the loans they buy from dealers at a discount. NICK also originates some loans, which tend be of decent quality, but that’s a small part of their portfolio.
    Here’s very generalized description of their financials from last year. (Please check the SEC docs for the exact numbers. I’m just using this to explain what NICK does.)
    NICK has a loan portfolio of about $180 million. That carries an interest rate of 26%. Their debt is about $100 million and they paid about 6.5% on that (it’s tied to LIBOR). So we’re talking about a company leveraged 2-to-1 with $50 million coming in the door and $6 million going out. That sounds good to me. That’s a yield of around 23%. Costs for running the business take out another 10%. The real killer is provisions for credit losses. That ran about 4% last year. This year I think it will be around 7%. NICK’s accounting tends to be fairly conservative. In fact, they could be over-providing, but I’m not complaining.
    Earnings last quarter were 15 cents a share down from 27 cents a share a year ago. Earnings will be lousy for the next earnings report (due sometime in early November), but they will be positive. I think they’ll probably be about five cents a share, give or take. So they are making money, which is impressive in this environment.
    The big driver for NICK is the provision for loan losses. The rest of their business is fairly stable. The major driver of loan defaults in unemployment. There’s a strong relationship between the jobless rate and NICK’s defaults. I think unemployment will top out around 8% sometime in 2009, maybe early 2010. The company isn’t in any danger of going under, although there will be losses for a bit. Once things start to improve, NICK ought to prosper.
    If you’re tempted to buy NICK, I will warn you. You probably won’t make anything for over a year. Once the market wakes up and isn’t afraid of less liquid stocks, NICK should rally.

  • Lincare and WR Berkley
    Posted by on October 21st, 2008 at 12:26 pm

    Two notes from the Buy List to pass on. First, Lincare (LNCR) reported third-quarter earnings of 76 cents a share, which beat estimates by four cents a share. The company earned 66 cents a share for last year’s third quarter, so that’s pretty decent growth. Earnings were squeezed by a 6% cut in Medicare prices.
    There’s also some trouble on the horizon.

    Revenue and earnings also were impacted by a change in ordering patterns for certain inhalation drugs by customers worried they were going to lose Medicare coverage for these drugs. Some patients placed large orders in June in an effort to get their drugs ahead of the Medicare change, which has since been delayed until Nov. 1.

    Wall Street currently sees Lincare’s 2009 earnings falling by 27%.
    The other news is that WR Berkley (WRB) said it expects to post a loss for the third quarter between 15 and 20 cents a share. Operating earnings, which is more important for insurance companies, will be between 70 and 75 cents a share. The company is taking an after-tax loss due to the hurricanes. The company also got screwed from owning preferred stock in Fannie and Freddie. WR Berkley is already up about 40% from its panic low on October 10.

  • Fed Chairs for Obama
    Posted by on October 21st, 2008 at 9:52 am

    The Bearded One has stepped into the minefield and, apparently, endorsed Obama. Or at least, the Democrats’ stimulus idea. Perhaps Ben just wants four more years as Fed Chair. Is Princeton that bad?

    While the Fed chief said any stimulus should be “well targeted,” even a general endorsement amounts to a political green light. Mr. Bernanke certainly knows that Mr. Obama and Democrats on Capitol Hill are talking about some $300 billion in new “stimulus” spending, while President Bush and Republicans are resisting. And by saying any help should “limit longer-term effects” on the federal deficit, he had to know he was reinforcing Democratic opposition to permanent tax cuts.

    That probably wasn’t a smart move, and I seem to recall Bernanke saying he would try to avoid such actions. One of my complaints about Alan Greenspan was the way he injected himself into policy debates. Still, I don’t see any reason why the Fed Chair can’t give his opinion on fiscal matters.
    On an interesting side note, Monica Langley points out in today’s WSJ that Obama is now BFF with 81-year-old Paul Volcker.

    On Tuesday, Mr. Volcker is scheduled to appear on the campaign trail with Sen. Obama for the first time. At a round-table discussion with voters in Lake Worth, Fla., he’ll “give his view on the state of the economy and the credit markets, and what needs to be done to fix them,” says one campaign adviser. Longtime Fed watchers are amused that Mr. Volcker, known for his muttered statements during Fed meetings in the 1980s, will be in a political role on the stump.
    For Mr. Volcker, a connection with Sen. Obama could help burnish his record as Fed chairman. The cigar-chomping central banker from 1979 to 1987, he received blame for driving up interest rates and tipping the U.S. into the deepest recession since the Great Depression. But Mr. Volcker is just as well known for taming the runaway inflation of that era. His stock has risen in recent months as his gruff warnings about the risks of deregulating the financial sector have come to look prescient. His successor’s reputation, meanwhile, has come under a cloud. Alan Greenspan is under criticism that the low interest rates and deregulatory ideology of his tenure contributed to today’s crisis.

  • Financial Crisis Hits Journalism
    Posted by on October 20th, 2008 at 9:25 am

    Credit crisis hits America’s farmers
    Financial Crisis Hits Moscow’s Wealthy and Fancy
    Crisis hits Aussies’ holiday plans
    Wall Street Crisis Hits Maine Housing Agency
    Credit crisis hits Sands’ Macau resort plan
    Crisis hits art world in auction flop
    Economic Crisis Hits Northwestern, “We Ok, Though,” Bienen Reassures
    Financial Crisis Hits Hungary Hard
    Crisis hits Asia’s love affair with luxury
    Financial crisis hits common man hard
    Financial Crisis Hits Billionaires
    Global credit crisis hits the poor, hard
    Economic crisis hits home in Brookline
    Stallion Fees Sink as Financial Crisis Hits Thoroughbred Market
    Financial crisis hits pheasant and partridge shooting
    Financial crisis hits your morning joe
    Economic Crisis Hits NY’s Northern Suburbs Hard
    Crisis hits Maine lobster industry
    Credit crisis hits Harrisburg incinerator
    Global financial crisis hits undertakers
    Mortgage Crisis Hits Queens Especially Hard (FYI: They mean the borough)
    Credit Crisis Hits Canada
    Financial crisis hits many where it hurts the most
    Elite Nightclubs Empty as Crisis Hits Oligarchs
    Credit crisis hits feeder, stocker cattle

  • CEO Pay at the Nine Government-Owned Banks
    Posted by on October 20th, 2008 at 8:36 am

    Here’s the 2007 CEO compensation at the nine banks that have been semi-nationalized:

    Merrill Lynch
    John Thain
    $83,092,713
    Goldman Sachs
    Lloyd Blankfein
    $53,965,418
    Morgan Stanley
    John Mack
    $41,734,815
    J.P. Morgan Chase
    James Dimon
    $28,856,330
    Bank of New York Mellon
    Robert Kelly
    $20,515,810
    State Street
    Ronald Logue
    $19,551,400
    Wells Fargo
    Richard Kovacevich
    $18,510,694
    Citigroup
    Vikram Pandit*
    $3,160,000
    Bank of America
    Kenneth Lewis
    $20,040,000
    Total: $289,427,180
    * Pandit was promoted to CEO in Dec. 2007, 8 months after joining Citigroup.

    This, of course, doesn’t include taxes.

  • Go TED Go
    Posted by on October 20th, 2008 at 7:48 am

    The TED spread is down to 327.
    chart.gif

  • More Misery in Earnings
    Posted by on October 20th, 2008 at 7:03 am

    If I had to guess, I’d say the economy is in a recession right now. That’s not exactly a brilliant insight. It seems pretty obvious just by looking at equity prices.
    Next week, the government will deliver its first report on Q3 GDP and I’m expecting a dismal number. Or rather, whenever we get the final report on Q3 GDP, I expect a dismal number. The problem with GDP reports is that they’re subject to constant revising, so it takes along time, several years in fact, to find out how well the economy is really doing.
    A better measure is the unemployment rate. This, too, is imperfect, but it’s good at giving us a look at direction. And that direction has been nothing but down recently. The jobless rate reached 4.4% last March and got to 6.1% in September. If the rate gets to 8%, and we’re already nearly halfway there, that would be a 25-year high. I think 8% is very possible.
    We’ll also get a good look at how the economy did in the third-quarter from corporate earnings. This week, one third of the companies in the S&P 500 report. Earnings for the S&P 500 will probably drop about 10% for the third quarter. There’s a lot of guesswork involved but the earnings declines will most likely continue through the first half of 2009.
    The Wall Street Journal notes:

    Top-down estimates of 2009 earnings range anywhere from $87 a share down to $60 a share. An average of a handful of such forecasts is that earnings will fall roughly 10% next year to about $73 a share. Thus, Wall Street’s consensus may be overestimating earnings by at least 25%. Still, that means the S&P is trading at about 13 times forward earnings — also a relative bargain.
    That forecast also assumes earnings will bottom early next year, resulting in at least a 10-quarter earnings decline of 30% from the 2007 peak to their trough. That would roughly match the 1989-91 earnings downturn, which also started with financials, lasted 10 quarters and shaved about 24% off earnings.

    The problem with looking at this market isn’t valuations. Equity prices were never in a bubble. The problem was that fundamentals cracked, and we don’t yet know where bottom is.

  • Minorities and the Housing Market
    Posted by on October 20th, 2008 at 3:47 am

    I was doing some research on any connection between the rise of minority homeownership and the crash of the housing market. Personally. I’m skeptical but I’m open to the facts. I guess it’s a hot issue judging by these two quotes.
    Barry Ritholtz:

    The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act?

    Steve Sailor:

    About half of all mortgages for blacks and Hispanics are subprime, versus roughly one-sixth for whites. Not surprisingly, the biggest home price collapses have occurred in heavily Hispanic cities such as Las Vegas, Miami, Phoenix, and Los Angeles.

    I don’t have anything profound to add, but I thought it was interesting to come across this two quotes within a few minutes of each other.

  • CWS: The Most Accuratest Blog in the World
    Posted by on October 17th, 2008 at 3:03 pm

    Zignals did an analysis of the TickerSense Blogger Sentiment Poll. I’m proud say that your humble blogger is, by far, the most accurate prognosticator.
    Well, there’s one small caveat. I made my opinion known in just one of the 19 weeks ( but I was right)!
    Full disclosure: I have zero memory of making that call.

  • Bank of England to Cut Rates
    Posted by on October 17th, 2008 at 2:52 pm

    The Bank of England is poised to cut interest rates to their lowest level since ’94.
    That would be 1694.