Inelegant Investor

It’s July 23, 2000. The Bubble has burst, though bottoms haven’t been reached. The World Trade Center still stands tall. Enron is one of the world’s most respected companies. The New York Times declares Hank Greenberg a better investor than Warren Buffett.

As the article points out, over the previous 5 and 10 year periods, AIG had substantially outperformed Berkshire. The article goes on at great length to paint Greenberg and Buffett as “Polar Opposites”, Buffett, “invests like a riverboat gambler,” while Greenberg “may act like the tough guy, but when it comes to investing A.I.G.’s capital, he turns cautious.”

ONE plays the part of the hayseed, the other the quintessential New York tough guy, complete with flinty stare and a vocabulary that might stun the crowd at a hip-hop concert. One loves bridge and jokes that he reluctantly drags himself around a golf course; the other is a bundle of energy whose idea of relaxation is rocketing down a frozen ski trail.

The events of the subsequent decade make the article seem laughable. Greenberg was forced out of AIG by NY Attorney General Spitzer, and AIG required nearly $200 Billion in government capital to avert the most spectacular corporate collapse in American history. Were AIG’s flaws already present? Could a careful investor have detected red flags back then?

One more hypothetical nags at us: what would the world look like today had Greenberg managed to hold onto his job as AIG CEO and if Buffett had lost his in the midst of a 1970s SEC investigation. It would be a different world indeed.

We are pleased to welcome you to the 175th Edition of the Festival Of Stocks. The Festival Of Stocks is a blog carnival dedicated to featuring posts on a variety of stock market topics.

Though the Inelegant Investor has published only sporadically of late, we were a frequent participant in early Festivals Of Stocks, including the first edition. We hope that hosting this will mark the beginning of our return from a long hiatus.

This week’s posts offer a wide variety of different perspectives and approaches.

Dividends Value provides a nice analysis of an interesting P&C insurer in Harleysville Group Inc. (HGIC) Dividend Stock Analysis

Dividend Growth Investor offers Five Consumer Stocks For 2010

ZachStocks examines the Healthcare bill and how investors might profit in Weakened Healthcare Bill Exposes Stock Risk
Fat Pitch Financials is the driving force behind the Festival Of Stocks, and this week, updates us on the (out)performance of the Fat Pitch Financials Portfolio in Fat Pitch Financials Portfolio 2009

I’ve always liked Stillwater Mining(SWC) as a play on Platinum and Palladium, but ETFdb explains what the state of Palladium ETFs is today in Definitive Guide To Palladium ETF Investing: Palladium ETFs 101

Bargaineering explains to us some of the mechanics of dividend investing.

The Sun’s Financial Diary wonders: Is The January Effect Real?

Wisebread has a 4 step program for those who would like to learn to invest in Learn to Invest in 2010: 4 Steps to Educating Yourself

The Digerati Life has advice on investing specifically for those who may be getting a late start on planning for retirement in Retirement Investing Advice For Late Start Investors

We know nothing of the Australian stock market, but the Australian Stock Market Investing Blog has much to say about 2010 Share Market Floats- What Can Investors Look Forward To?

Dough Roller provides a comparison of discount online brokerages.

Foreigner’s Finances weighs in with a review of Zecco.

Good Financial Cents writes about the yield curve and what it means for economic growth in The Yield Curve Flashes Green

Learning Stocks explains the basics of How To Read Stock Charts

We don’t follow forex, and have little interest in technical analysis, but for those who do, Forexoma explains How Forex Market Reacts to Bollinger Middle Band

Saving To Invest reviews 2009 and looks ahead to 2010

We’ve enjoyed hosting the Festival Of Stocks and look forward to reading and participating in future editions.

As always, the schedule of past and future Festivals can be found here. Next week’s Festival will be hosted by The Kirk Report.

Steak N Shake(SNS) has posted the annual letter from Chairman Sardar Biglari. Biglari has made great progress with the company since taking over, swinging from a loss of $23 million in 2008 to a profit of $6 million in 2009. The capital structure has been greatly strengthened. After beginning the year with just $6.9 million in cash and $30.7 million in debt, the year ended with $54.4 million in cash and investments, and just $18.6 million in debt. The swing in cash was largely driven by a decrease in capital expenditure to $5.7 million, down from $31.4 million 2008 and $68.6 million in 2007.

The fear when slashing capital expenditure is a decrease in sales, but Q4 featured a 20% increase in customer traffic and a 10.1% increase in same store sales, the best quarter yet in the recent reversal of a multi-year tend of declining sales.

Biglari also announced a 1 for 20 reverse split, effective December 18, in order to discourage speculation in the stock, marking an interesting counter to Buffett’s recent decision to split Berkshire Hathaway B shares as part of the Burlington Northern acquisition.

Biglari reitierated that increasing intrinsic value is his only goal, and promised that “Rest assured, we
will fire ourselves if we fail to create value over time.” Towards this end, we are told again of the holding company structure and Biglari as the sole authority on allocating capital.

Biglari provides a brief history of his involvement with Western Sizzlin(WEST) and the upcoming merger, but does not mention his most recent move, the acquisition of a 9.9% stake in Fremont Michigan Insurance Corp(FMMH)

Biglari has produced impressive results in his short career, and it would appear that he is poised to build on his success and continue to deliver superior returns on capital.

Disclosure: I own shares in WEST,SNS, BRKB,and FMMH

For years, Warren Buffett has spoken of searching for an elephant of a transaction. Berkshire Hathaway’s(BRKA,BRKB) announcement today that it will be acquiring Burlington Northern Santa Fe(BNI) in a $44 Billion deal represents the final capture of an elephant that has been in Buffet’s sights for several years as Berkshire has consistently bought to acquire almost 22.6% of the company prior to today.

The deal will consist of 40% stock and 60% cash. That Buffett is paying with Berkshire stock says something interesting about his appraisial of Berkshire’s future prospects. Buffett has in the past lamented stock deals he’s done(in particular the General Re deal). Buffett stated that stock is included in this deal in order to provide tax free treatment for BNI shareholders. Using stock implies that Buffett believes that BNI will grow intrinsic value at a faster rate then the rest of Berkshire.

Also of note is that Berkshire will be splitting Class B shares 50-1 in order to be able to compensate even the smallest BNI shareholder in stock. Buffett has been notoriously resistant to splitting his stock. It will be interesting to see what impact this has on Berkshire. We believe it represents a significant step in Berkshire’s transition from an investment partnership run by Buffett to a global corporation that will thrive in a post-Buffett era. It is also likely that the split will pave the way for Berkshire’s addition to the S&P 500.

Disclosure: We own shares of Berkshire Hathaway

The Steak N Shake Company(SNS) filed an 8-k this afternoon disclosing that it has amended its credit agreement to “permit the Company to use up to $10.0 million of surplus cash to make investments of any lawful nature, so long as no event of default exists.”

In addition, the Company has granted “Chief Executive Officer, Sardar Biglari, full power and authority to make all investment and capital allocation decisions on behalf of the Company”

Biglari, through the Lion Fund, Western Sizzlin(WEST) and other affiliated parties controls 10.1% of Steak N Shake’s outstanding stock. After taking control of WEST, Mr. Biglari gained approval to invest cash and has made various investments including SNS.  His operating strategy of halting new company-owned stores, refranchising others and focusing on increasing sales and profitability of existing stores seems to be paying off as SNS earlier this week reported impressive same-store sales gains in a very difficult environment for casual dining. SNS is now doing sufficiently well, that Mr. Biglari and the board believe that cash might be deployed for a better return outside of its core business.

Though Mr. Biglari has shown a soft spot for casual dining stocks(he held a significant stake in Friendly’s prior to WEST and SNS, and at one time attempted a tender for part of JBX), he has also purchased a financial adviser, tendered for ITEX, a bartering company, and purchased real estate for development.  It will be interesting to see where and when Mr. Biglari decides to invest this excess cash.

Disclosure: I have a position in SNS and WEST

In February 2007(sadly one of our more recent posts), we wrote about Matrixx(MTXX) Initiatives.  At the time, Jove Partners had filed a 13D urging a sale of the company.  Jove noted at the time that the company’s single brand would benefit from the scale of being part of a larger company.

At the time, we noted:

One potential concern are claims that Zicam has caused users to lose their sense of smell. The company has already settled several lawsuits, but it is unclear what potential future exposure might be. This would clearly be a concern of a potential buyer.

What we didn’t discuss was how this particular risk, combined with Zicam being the company’s only product placed the company in a precarious situation.

Today, the FDA warned the public against using several Zicam products and declared that their sale should be subject to FDA approval as a drug.  The FDA’s entire letter can be found here.  As a result, MTXX plummeted nearly 70% today.   The company had been trading close to its 52 week high, was profitable and well-capitalized.  This will likely be a fatal blow to the company.  The future holds anemic sales and a slew of new lawsuits. MTXX holders might want to consider taking some Zicam; perhaps it will allow them to live with the stench of this stock.

Disclosure: No position in MTXX

What an inopportune time to be away!  What more inelegant time has there been for investors than the last 16 months? In our absence, many icons of the American economy have been transformed from gleaming towers of prosperity to piles of twisted, rusting rubble. Yet amongst the ashes, there are diamonds aplenty. Now is the time to rescue babies from the discarded bathwater.

Perhaps we’ll even find the time to write about some of the babies we find- or the salacious details of the bathwater.

From the description of Disney-MGM Studios’ Twilight Zone Tower Of Terror:

Board a phantom elevator, shoot up 13 stories and brace yourself for a thrilling plummet… but beware! The experience just got scarier. You rocket back up, only to plummet down yet again. You dare to ride once more, but wait! That’s not what happened before. That’s right, now the Tower is in control, so it’s never the same fear twice!

Last Friday, Geoff Gannon wrote briefly about his positive opinion on Hanes Brands(HBI). Gannon noted “I’ve yet to find someone who agrees with me on Hanes. I’m not sure if that’s a good sign or a bad sign.”

Well, I’m not sure if it’s a good sign or a bad sign either, but I’ll throw my hat in the ring as agreeing with Gannon on Hanes.

The company was saddled with a large amount of debt as part of its spinoff from Sara Lee(SLE). At almost $2.5 billion,debt is roughly equivalent to its current market cap at Friday’s close of $26.10. Sara Lee was also kind enough to leave Hanes with an unfunded pension liability of over $200 million.

Despite this heavy burden, the company has begun to make strides in its first few quarters as a public company. It has funded its pension liability with over $80 million which should be sufficient for fiscal ‘07 and allow it to pay down debt over the balance of the year.

Though positive, the company’s earnings have been impacted not only by a large interest expense,but also by serial restructuring charges. Though like The Stalwart, I worry that moving out of the Dominican Republic in search of lower costs is a short term fix at best, I believe the company’s plan can be effective if it rationalizes the huge number of plants that it currently operates.

The business itself is a solid business. Hanes owns some of the most recognized brands in both innerwear(Hanes,Playtex, Bali,barely there,Wonderbra,L’eggs) and outerwear(Champion). It has excellent distribution for its products. While it will take several quarters to start seeing benefits(I don’t expect anything spectacular this Thursday), this is a company that can fairly quickly establish an accelerating virtuous cycle of increased profitability as it deleverages.

Anyone else care to agree or disagree with Mr. Gannon and I?

Disclosure: I hold a position in HBI and SLE

“Gluttony is good”, a modern Gordon Gekko might have said, in reference to the triumphant return of the coveted mustard belt to America. Joey Chestnut, paying no heed to rising beef prices, managed to consume, quite conspicuously, 66 hot dogs in 12 minutes. Like many former high-flyers, defending six-time champion Takeru Kobayashi suffered from a late ‘reversal’, and was able to manage a mere 63 hot dogs.

Hoping to do for stock picking what eating contests have done for sport, and in honor of the holiday, I have constructed a portfolio of companies whose names contain the word ‘independence’. The portfolio consists of five companies, two insurers, two banks, and one mining concern. Any ETF provider looking for an exciting new index to use is urged to contact me for licensing rights.

Independence Holding Company(IHC) is an insurance holding company with subsidiaries operating in the medical stop loss, fully insured health, life and disability insurance businesses. The company also owns 48% of American Independence Corp, the next stock on the list. While the largest company on the list, IHC is fairly small with a market cap of $315 million. At first glance, a dividend yield of 0.2% and a P/E of 21 look fairly prosaic, but some further looking is in order given a reasonable price/book of 1.3 and recent growth in revenue and earnings. 7/3 close: 20.75

American Independence Corp(AMIC) is a small medical insurer and reinsurer with a market cap of just $93 million. It is controlled by IHC and shares its management team. While the trailing P/E of 43 makes this look pricey, the most recently reported quarter showed a large improvement both sequentially and year over year. Management has stated that last year’s poor results stemmed mainly from business written in 2004, and that performance going forward will be improved. At 1.1 times book with recovering earnings, this stock doesn’t look expensive. 7/3 close: 11.07

1st Independence Financial Group(FIFG) is a Louisville, Kentucky based bank with 8 branches in Kentucky and southern Indiana. The bank yields 1.9% and has a trailing P/E of 21. Recently, the company announced it hired an experienced team of 6 bankers in Indiana who had previously worked at Regions Bank to expand their business in Indiana, and this could conceivably lead to material growth. With a market cap of just $33 million, 1st Independence has plenty of room to grow, and as a profitable company with a price to book ratio of .88 it provides protection on the downside. 7/3 close: 16.80

Independence Federal Savings Bank(IFSB) is a small, 4 branch bank located in the Washington DC area. It has been unprofitable, beset by turmoil of a failed merger and a fight with its largest shareholder. It generally just seems like a bad idea to own.7/3 close:10.11

Independence Lead Mines(ILDM.PK) is an old mining company with no revenue to speak of. Its only asset is land with mineral deposits which were leased to Hecla Mining(HL) in 1968. Under the agreement, Hecla is allowed to recoup costs before paying royalties, and though it has been mining the area for over 9 years, it still has a substantial un-recouped project claims. These peaked at $43 million at the end of 2005, and were down to under $25 million at the end of Q1. It is conceivable that sometime 18-24 months from now, the company might start receiving royalty payments. The company has been staying solvent by executing a series of private placements which have largely funded its litigation against Hecla. As of May, it appears Independence has exhausted its legal options, so the company’s value should be a function of its discounted royalties plus any dilution necessary to get to the first checks. Hecla might have an interest here as well as it gets closer to paying royalties. In any event, this is too hard for me to figure out. 7/3 close: 3.90

Of the five stocks, only the first three seem to warrant further consideration, but for the purposes of tracking this portfolio, we’ll assume an equal weighting of each of the five.

Disclosure: I own none of the stocks mentioned, nor do I recommend any of them