April 2014 Trading Portfolio

Our trading portfolio has done very well this year.  Only one meaningless small loss against several dozen closed positions. Concentration on mostly low PE solid companies with little downside risk. Highly leveraged portfolio remains which points out that risk happens fast. 

AAPL...Continues to trade within a nice pattern from $500 to $550.  We own options at $500 and $490.  At a PE of around 12 forward earnings we see little downside risk and lots of premiums from option writing.  

AFL..Solid blue chip insurance company which we have at $60 strike price.  At a single digit PE we find this steady eddy quite safe for trading.  Little downside risk as well. 

BP..A PE of around 6 makes this oil company a bargain. As the legal issues resolve themselves there is good upside potential here and almost no downside risk at our strike price of $45

C..Another single digit PE stock and trading below book value.  Again little downside risk, but also little upside potential until they get their act together. We trade it at $46. 

CSCO..Continues to trade between $20 and $23 and shows no serious break out action so we trade it at $20 and sleep well at night. 

HFC..Continues our holdings of at least one stock in the oil refinery patch.  Another single digit PE that we trade with lots of room to move down at $42. 

IBM..Warren Buffet likes it so we will continue to trade this at $175.  Around a 12 PE.  Just got hit hard due to weak earnings report and offers good opportunities for trading at a low point. 

JPM..One of the few banks that have got back to a solid profitable level.  We trade it at $52.50 and another single digit PE. Even thought WFC has more upside potential, JPM is under such heavy regulatory pressure the price is suppressed to a point where downside risk is minimal. 

O..One of our favorite stocks of all time.  It continues to increase profits as a blue chip triple net lease operator.  We trade it at $40 with some interest rate risk. 

OCN..Newest addition to our trading portfolio from Doug Kass Katch file.  Expectations of improving sub prime mortgage market gives us belief our strike price of $35 is safe.  Only for the serious trader however since any bad news could send it down quickly. 

PM..Traded at $75 we are most comfortable with this high margin cigarette maker.  E-cigs continue to be an issue going forward however. 

SF..We have added this one of late as well.  Traded at $40 gives us plenty or room for this high growth financial company.  Again not for home gamers. 

SHLD..Lots of risk, but also lots of option profits.  We like the real estate story and not the retail story to keep the value here.  We trade at $34, but will likely move it down a bit when current holding expires since the stock took a hit after the latest spin off. 

T...Solid blue chip telecom. Trade at $34 and are comfortable, 

VZ..Solid blue chip telecom.  Trade at $44. 

NNC..One remaining long holding. Average cost at  at $12.12 with stock trading at $12.74.  Net asset value at $14.74 it still has some room to run.  Added several hundred shares last month and will likely add some more this month.  

              

The Sad Demise of Dolan Company.

This past month Dolan Company a small cap corporation formerly listed on the New York Stock Exchange declared bankruptcy.  Nothing new in that a small company declares bankruptcy because almost every week some company declares bankruptcy.  However in the case of Dolan we have some history in that we worked for a business that they acquired for almost six years.   For some time after we left the company we considered doing a blog post, but refrained since we had some former employees there in addition to friends in the company.  With the bankruptcy we believe it is time to do an opinion piece on the company and how the bankruptcy came to be and frankly how we believe it could have been avoided.  

Full disclosure:  We do not in any way say or imply that Dolan management broke any law or was unethical period. The following is our opinion only.  We also at one time in 2008 owned about 2000 shares of this company that we no longer own. 

We began employment with Lawyers Weekly in early 2003.  The first thing we remember was our then corporate supervisor telling us that our skill set was first rate, our experience very good, and they thought they were lucky to have us come aboard.  However the law journal business was different from any we had ever been associated and it would take at least a year before we fully understood the business.  We frankly considered that advice a bit premature due to our almost three decade work in the publishing business,  fact is we were proved wrong within two months. The law journal business is selling to attorneys and their firms and selling to attorneys is unlike any other publishing business.  Lawyers are trained to be skeptical and as John Houseman of Paper Chase fame said "think like a lawyer". So personal relationships built up over months or most likely years is how you do business. If you attempt to sell to them without a relationship or try to push something on them you will not only lose the sale, you will likely lose their confidence long term.  Point of sale business like other consumer advertising does not work with law firms. 

You also discover along the way that businesses using the pages of your law journal to sell to attorneys best take some time to get to know the attorneys, do lots of law conferences, and to plan on doing regular advertising to keep their products and services in front of their possible customers.   Our law journal employees attended most of these law conferences since it gave us contact with business with which we would like to do business as well as attorneys who we would needed to build relationships with as well.   Point is it takes lots of work and lots of time to make a single sale in the law journal business.  Investment in people and capital are important.  

Assembling the editorial portion of a law journal must be done by qualified talented writers to produce a premium law news product and of course justify the higher subscription price that we had to charge for this product.  This is a niche market with highly educated, high income, and high net worth readers who demand quality editorial.  If you are to be successful selling to them your product must contain information they NEED to operate their law firms.   Thusly we employed a good number of licensed attorneys to produce the editorial. Our product at the time of my hiring and for years on was top notch and lawyers would constantly let us know that in person. 

So with that background we enter as a department head at one of the five primary lawyers weekly offices. Once we got our footing and some experience we took on what was a weakening revenue picture in 2003.  In the next few years we helped guide the sales side of the publication to recover much of the lost ground and plowed ahead to gain new highs in revenue production.  We hired some new staff, helped guide existing staff, and as a team made inroads in new customers, find new areas of business, and most importantly worked with staff to build up very good relationships with attorneys.  In all the team we had turned around the business and were doing quite well.  After about three years in the business under private ownership of the founding family of the business, all of the five Lawyer Weekly publishing offices, we were sold to Dolan Media.  Dolan Media later on became Dolan Company when the non publishing platforms were added to the corporate structure. 

Dolan Media promised a good transition and told us that more capital would be available to future growth.  In all the sale to another company would be seamless and would give us new opportunities to gain sales and improve product.   That was not the case, as we expected a new owner brought new rules and new ideas.  We knew this up front  as we had through several ownership changes in the past.  Dolan Media was owner of a large number of business publications and had the idea of bringing the sales approach of a business magazine to a law journal. 

That idea did not work for our publication as we noted earlier selling to lawyers is different than selling to other business people.  Despite the fact this issue became clear early on the leaders of the company pushed on.   Many of us who had experience in law journal publishing told the new owners they were going in the wrong direction. The new management ignored us and as time went on many of the experienced talented management began to leave employment.  Our publication lost some significant advertising customers as well. We left employment in the Fall of 2008. 

 Dolan Company made what we consider another big mistake by what we refer to as not sticking to their knitting. Using capital gained from their publishing business they bought into the mortgage default processing business.  What looked like a good business to enter in 2008 was proved to be not so good as mortgage default procedures and government regulations changed and began to eat into the profits and speed of that processing business.  Of course being new to the business line there were others who had been doing business in mortgage default processing for some years who understood the game and began to take market share. 

Dolan also bought into the mortgage default business in our opinion again deploying precious capital into the legal discovery business where attorneys need assistance in organizing and assembling briefs and other information services.  This last entry business is growing and seemed to be a natural fit, but the entry into this new line of business just spread more resources and most importantly financial capital into another area when those could be used in the business segments where they were already doing business.  We opined privately that Dolan was a corporation in search of a business to operate. 

Dolan kept levering their balance sheet and their cash flow to keep paying for all this borrowed capital which became too large to maintain. A year or so ago they issued some preferred stock with a 8% plus interest rate which we suspect was due to not being able to access the capital market in a manner they liked.  Eventually the debt load became to large that they violated the covenants they had with lenders and a couple months ago those same lenders for all intents and purposes took over control of the company via a restructuring lead person. With the last couple of weeks the new leader said the assets could not cover the debts and took control of the company via a chapter 11 bankruptcy. Note that the current owner of the debt is not the original bank since the bank decided the risk of debt default some time ago had gotten too great and sold their ownership in the debt to a private capital fund. 

The demise of this company in our opinion was helped along by some egos who would not accept they did not understand the law journal business.   We found upper level management unresponsive to our concerns and all but unwilling to become more understanding of how to work with attorneys.  Our belief is that the egos at that higher level would not allow them to confront the fact they did not know what they were doing. A one size fits all approach was not going to work.  We personally told them over and over that the law journal business had areas were it could be levered for more revenue and better customer relations and not only were we rejected, but was told to cease operations where we were making significant sales gains.  Add to that the news product was changed to be more like the business publications with less attorneys doing the actual writing.  To this day we never got an answer to why any of this was done.  

 We will never know why Dolan decided to go off into other businesses besides the publishing side either.  Yes publishing has been given a bad press of the last few years but at the law journal where we were employed was prospering and doing well. It was our understanding all five law journal offices were in the black.  At the time of our departure we were producing sales gains as well.  In fact we personally saw such a solid future for the law journal where we worked we considered for a time to offer to purchase the business from Dolan since they seemed to have lost interest in publishing it.  

The new owners of the company, a capital fund, have teminated the employment of the founder of Dolan Company, Jim Dolan, as well as and his highest level associate. They along with all the stockholders have lost everything stock wise in the business.  Jim Dolan, to his credit, gave employees on the day the company issued it's IPO some years ago 100 shares each to participate in the company's success.  His options offerings ran deep into the management level as well.  Those options of course have no value any more as well as all the shares given other employees.  This is a sad ending to company which we think could have done better.  

Hopefully the new owners will take some time to learn the business and listen to some of the current head managers at the actual business level.  Might not hurt to spend some time talking to former department heads as well.  If it was my business I would sell off the mortgage default business and maybe even consider exiting the legal information processing business if the capital is needed.  There is a good business future in quality business journal publishing and quality law journal publishing, but they are not the same and can not be treated as such. 

One final note from the day we gave our notice to leave with a two month time frame not a single Dolan manager at the corporate level ever reached out to talk to us despite our efforts to do so from our end. We took that as did some other managers who left and felt the same coldness as once you leave you are considered to have betrayed the company.  We retired and did not go on to other employment which says we believe a lot about the Dolan culture as we were not jumping ship.