Chasing Value: February review — 8 stocks for 2008 — testing my ‘metal’

03 03 2008

Chasing Value: February review — 8 stocks for 2008 — testing my ‘metal’

Posted by: in Companies Competitive Strategy

Filed under: Competitive strategy, Wal-Mart (WMT), Berkshire Hathaway (BRK.A), China, International Business Machines (IBM), Reliance Steel and Aluminum (RS), Valero Energy (VLO), Huaneng Power Intl ADS (HNP), Bargain stocks, Chasing Value, Commodities, Anglo Amer ADR (AAUK), S and P 500, DJIA, Stocks to Purchase, Newcastle Investment (NCT), Raytheon Company (RTN), Best Stocks for 2008, Bunge Ltd. (BG), Loews Corporation (LTR), NASDAQ

Two months into the year and investors’ true ‘metal’ was tested, and mine more than most. February showed signs of improvement over January, but the last week ended hopes of any rally. The last day of January saw a 370 point drop in the Dow and February’s last trading day closed with similar results, down 315 points.

The soft stock market did display many points worth noting. The Dow Jones Industrial Average was about break even for the month, indicating investors were showing some signs of support for large cap stocks, prompted in part by news of increased profits at Wal-Mart (NYSE: WMT) and share buy-backs at IBM Corp (NYSE: IBM).

I can’t say the same for the other major indices, NASDAQ Composite Index and Standard & Poor’s 500 Index, which dropped significantly last month.

Some of my picks also sagged a tiny more, although not as much, while two turned into positive territory. In January, only Raytheon Co. (NYSE: RTN), the high tech, defense contractor, was up. In February, the weak dollar and inflation concerns boosted Anglo American plc (ADR) and Reliance Steel & Aluminum (NYSE: RS) — two commodity plays.

I still like all of my picks for the year and if things follow the pattern that’s emerging, all should be fine for my eight picks. See Chasing Value: Final list — 8 stocks for 2008 for the original story. In January, I added Newcastle Investment Corp. (NYSE: NCT) and Huaneng Power to my holdings. I made no additions in February.

As noted among the indices, the DJIA lost the least while the NASDAQ’s losses increased. The average return for my eight picks was a loss of -8.06% (in January it was -7.82%). This outperformed the average return of the indices: -10.1% (last month-7.58%). But the stalking horse, Berkshire Hathaway (NYSE: BRK.B), improved during the month besting both my average and overall indices average. So once more, I must take my hat off to ‘my pal Warren’.

Now, including dividends for my picks, which average 3.91% yield divided by six for the two months, allows for an additional .652%, reducing the loss to -7.41% (-7.49%). Using 1.8% for the average dividend of the indices divided by 6 adds 0.3%, reduces the loss to -9.8% (-7.43%). You can see the importance of dividends here. When they are included, I actually have reduced my loss from last month and increased the marginal benefit over the indices. All things being equal, I will have an inherent advantage all year. BRK.B does not pay a dividend.

I hope 2008 does not end up being about who loses the least, instead of who makes the most. The following are my eight picks with the starting share price as of December 28, 2007:

Anglo American plc (ADR) (NASDAQ: AAUK) from $30.79 is Up to $31.72 for a gain of +3.02%.
Bunge Limited (NYSE: BG) from $119.03 it’s down to $110.84 for a loss of -6.88%.
Huaneng Power International, Inc. (ADR) (NYSE: HNP) from $41.75 is down to $32.50 for a loss of -22.16%.
Loews Corp. (NYSE: LTR) from $49.35 is down to $41.84 for a loss of -15.22%.
Newcastle Investment Corp. (NYSE: NCT) from $13.08 is down to $10.77 for a loss of -17.81%.
Raytheon Co. (NYSE: RTN) from$61.51 is UP to $64.84 for a gain of +5.41%.
Reliance Steel & Aluminum (NYSE: RS) from $54.32 is Up to $55.46 for a gain of +2.10%.
Valero Energy Corp. (NYSE: VLO) from $70.55 is down to $57.77 for a loss of -18.11%.

The Indices:

Dow Jones Industrial Average: 13,365.87 dropped to 12,666.39 for a loss -5.23%
NASDAQ Composite Index: 2,674.46 dropped to 2,271.48 for a loss -15.06%
Standard & Poor’s 500 Index: 1,478.49 dropped to 1,330.63 for a loss -10.00%

This year’s “stalking horse” Berkshire Hathaway (NYSE: BRK.B) was one of the few stocks that were up on Friday 2/29/08 as investors ran for cover while the DJIA sank 2.5%. I am tracking the ‘B’ shares, not the more expensive ‘A’ shares. The B shares are down from $4,685 to $4,674.50 for a loss of $0.002%, basically nothing. This is actually an improvement from January. I guess it is no shocker that ‘my pal Warren’ outperformed all of the indices and my average as well. Only RTN (defense sector), AAUK and RS (metals) made a better showing.

The Federal Reserve Chairman Bernanke, speaking before Congress, discussed his willingness to lower interest rates again. The “smart money” is looking for action the month of March. He spoke before Friday’s drop increased the odds of a rate cut.

The annual presidential pastime of embellishing the federal budget and deficits came out indicating a $400 billion deficit is likely — so maybe $800 billion is more likely given all that’s not included and the source of the predictions.

Most comments I’ve received during the past month support my notion that interest rates are a band aide remedy to an economic policy that has shown no signs of long or short term fiscal restraint. But I cannot say the American consumer has shown much restraint either.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. DISCLOSURE: I currently own shares of AAUK, BRK.B, HNP, NCT, and VLO.