Second Half 2014 Trading Portfolio

Our current trading portfolio for the last half of 2014.  Of course changes can be made at any time.  But we continue to favor stocks that have low PE's and are have been sold down for reasons we believe are temporary.   Going into the last half of 2014 we find the market fully valued and sometimes overvalued and prefer less risk exposure. Hence four of our selections are mobile phone related that young people will buy with their very last dollar. Three are insurers who have been beaten up a good bit since the recession and now have gotten back on their feet and have upside potential.   Risk happens fast and we prefer to be prepared just in case. 

AAPL...we continue to hold a large position in this stock.  We believe there is little downside risk and trading offers significant opportunities for short term profits. Strike prices range from $70 to $85. 

AFL...The duck insurance company continues to trade a single digit PE, which makes it a safe pick for trading.  Strike price of $57.50

ARCP...We still own this security, but will likely drop it in July due to the lack of forward guidance.  As a long term holding it still looks good and  offer a significant dividend.   Strike price $12.50

CHL...China Mobile is new for us and we like it for the same reason we like AAPL above, young people are addicted to their cell phones and will let other consumer buys go to have this drug.  Strike price $45. 

HFC...As long as Obama keeps the Keystone Pipeline from going forward we see nothing but up sized profits for Texas based refiners.  Strike price $43

IBM...This stock carries some risk, but as long as Warren Buffet has shares we see good trading profits here. Strike price $175

JPM...Still an undervalued large cap bank.  Strike price $50. 

MET..Insurer that is selling for single digit PE and has upside and little downside risk. Strike price $50. 

O...Safe blue chip triple net REIT, priced a bit high now, but we will wait for it to back off some and trade. Strike price $40. 

PRU.. Insurer with single digit PE and little downside risk.  Strike price $80

SF.. We continue to like this medium sized financial firm for the long haul. Strike price $40. 

SHLD...The risk profile has increased and so have the option premiums.  Trade carefully, but use the real estate play to make some cash. Strike price $36.

T...Note the comments under CHL. Strike price $33.

VZ...Note the comments under CHL. Strike price $44. 

Where are you going to be buried?

Yep we are talking about the deep six here or as we prefer to call it pushing up daisies.  Trust us this subject is the one that every single time you want to get the kids and under 40 years old crowd finding somewhere to go to not be around to discuss a subject this one will do it.  We know from experience and we expect others do too that when someone is under 40 years old they are convinced they are immortal, as in never die, never get terminal illness, never get killed by accident, and nothing they might do food wise, daring wise, or in a car is remotely by any chance going to make them dead.   Death is something others do and we will avoid such a fate is what they think so therefore no conversation about where you are going to be buried is needed.  I mean the young crowd continues to text and drive, right? 

Once one gets past say 45 years old you realize at some point that like it or not you will die and glory be there are places and events that you should avoid, and then know should have avoided earlier, that can bring death quickly.  Fear enters the vocabulary, where it was not there before.  Note females find this immortal stuff much earlier than males. 

So once someone comes to grip with you are going to die the need arises as to where you are going to be buried.  Yes some of us have decided to be cremated or some other means of body disposal but they too will need some place for their body to spend eternity.  Our family has discussed this issue for some time as we expect many of you who are older have as well.  With so many people now no longer in the area they were born or grew up the discussion can be no more than to be buried where we are now or back home where we grew up.  Others who stayed where they have lived all their lives for the most part can narrow this decision down to which cemetery.  Trust me here this is serious decision making if you have not considered the options. 

Where do you want your body to spend eternity?  Will someone build a road there and move us?  Will it flood is an important consideration if living in say New Orleans?  Will it be in the church yard cemetery?  How about the old family cemetery?   Tough huh? Well Small Town Investor is here to help you with this decision as we have been there and yes we have decided. 

Ok, the most important part believe it or not is will someone keep up the 10 square feet of ground or so under which you are to be placed.  Old family cemeteries tend to get forgotten and grown over.  We know we got some in our family we used to help keep up and now we would not step foot in due to the fear of vermin and such.  There goes that fear thing again.  So pick a general maintained large cemetery or even better one owned by a government agency.  Government agencies are a slam dunk for future maintenance and trust us here too, about 50 years from your passing almost no one will ever visit your grave site again as the immediate family will mostly be gone. Even before immediate family is gone the last thing they want to do on a Saturday off is cleaning up a cemetery plot. 

Next up is what location, either in place where you are now or back home where you think you might belong.  We decided on the back home idea, but for reasons that might help you decide too.  Costs as in cemetery land costs have gotten quite high recently.  If you think funerals are expensive check out some burial plots now.  In our area a simple plot can cost you a couple thousand dollars or more.  We believe, and we expect those who will put you in the ground and inherit whatever you leave behind, will in the end be pleased you kept the burial plot costs low.  

This would be a good time to go to that drawer with all the stuff you inherited from your parents or other relatives and find in one of those drawers deep down buried under all those other legal documents that burial plot for dear deceased relative.  We are betting you already own a piece of ground. Personally we found that we own, get this, three separate plots in two cemeteries.  We found one that has three spots left, and two with one spot left.  All three plots free and freely maintained forever.    That saves maybe $5000 right off the top. So take a look and see if you can find something similar. 

The final consideration here is which location is best.  Nearer family?  Close to home?  Close to your hometown?  Well truth is again visiting your burial place is not high on family lists at any time.  Maybe on special occasions, maybe on holidays, but do not expect to have flowers to be placed on your behalf there often.  But seriously who cares about the flowers thing, as the point on location is what location makes you happiest now not later.   So pick your choice, but find a well maintained place, and hopefully like us you can find something already owned, which saves money. 

Now are you not glad you read this posting?

               

Where the REALLY rich put their money.

The reason for this is fairly simple for owning municipal bonds, excellent returns approaching 5% annually in interest.  Solid safe return of principal when the bonds mature.   Lastly and most importantly the interest is tax free both state and federal no matter how much income the person has otherwise.   For some very high income investors that 5% interest would compute to over 8% taxable return.  The interest being tax free also keeps some of their other income from reaching the highest tax rate in some cases saving money there as well. 

So the really rich own  sometimes up to two thirds of their portfolios in municipal bonds. The stocks they own tend to be high growth or tax efficient stock funds where they purpose is not income, but rather keeping their assets up with inflation.  Most of the ultra wealthy people view corporate and US Treasury bonds as losers since the interest rates generally do not keep their net worth up with inflation and are highly taxable. 

Now how can you participate in owning a municipal bond portfolio.   If you have significant income the best way is to find a good broker who has a municipal bond portfolio and begin building a bond portfolio.  Individual bonds are sold in $5000 lots and are priced at $100 par more or less.  One can buy either General Obligation bonds which are backed by taxing authority of the issuer.  An example would be a school bond issued by a county.  The other segment are called Revenue Bonds.  They are backed by the authority to raise rates and secure revenue from a source such as an airport or an electric operating plant.  For many years GO's as they are called were considered the safest, but now they are not as strong due to the push back from other interests wanting their share of the tax pot, such as public unions.  Of late Revenue bonds have gained favor due to the ability of the issuer to raise fees to support the bonds.  One must be honest with themselves and know that unless you are have at least a $250k to invest in individual bonds that approach might not be the best choice.  

The other option is municipal bond funds.  These have more principal risk than individual bonds since they are subject to the market forces of higher interest rates eroding bond values.  Individual bonds have the option of being held until maturity date and regaining all principal.  We have suggested and continue to suggest NNC, a Nuveen Bond Fund, which offers about 4.8% interest paid monthly for residents of North Carolina.  NNC is selling below par value and can offer some capital gains as well.  Note NNC using some leverage to gain their higher payout. That leverage is borrowing some money on the cheap, paying the interest costs, and gaining the higher bond payout as a gain.  The good news is those same bonds are below par value as well.  There are similar funds out there for people who live in other states. 

So if you want to invest like the really rich consider some assets in municipal bonds. These assets are excellent for retired people looking to keep other income in lower tax brackets and gaining a higher return that US Treasuries with similar safety.  No one who has not first taken advantage of your company 401-k to the max and an individual Roth IRA should place money in other assets. 

We own NNC. 

               

A hot stock tip?

Looking for a bargain?  Got those animal spirits?  Want to make some quick money?  Well all of you wanting a hot stock tip that likely is as good as it gets over the next month or so I got one.  American Realty Capital Properties has sold down over the last week significantly.  The triple net REIT is trading today at $11.85 per share.  The net asset value is just north of $12.  The shares have traded as high as almost $15 within the last three months.   We believe a fair price for ARCP is around $13 per share.  The stock is yielding 8.4% which is as far as we can see is safe and even better pays out monthly.  At a $13 price it would still be yielding 7.6%.  

We have been pushing purchase of this security since the first of 2014.  Yes we know the story has changed a bit since then due to the large move by management to exit some shopping center assets and take a big bet on the Red Lobster lease purchase.  We expect the purchase of Red Lobster and the uncertainty there has got investors spooked.  Some financial services firms have downgraded ARCP to hold lately as well.   But go take a look at recent purchases by insiders and all we see is buy, buy, buy, so either these insiders want to throw good money after bad or they think the stock is a buy. We will not be foolish here, yes there is some risk, but we think the risk is worth taking and once all the selling settles out in the next week ARCP will move back up to where it should be trading. 

So if you are looking for an opportunity to make some quick bucks here it is for you.  One other note if you decide to buy watch those monthly ex-dividend dates.  

We hold 4800 options on ARCP. 

Just another Scholarship Sunday?

One would think that after doing what we call "Scholarship Sunday" for the third time in our life it would become more routine. Well it has not and in fact we find that being on the giving end of these few short moments that it is indeed more blessed to be giving than to receiving.  Maybe it is the joy of listening to young people who are focused and ready to move on in life or maybe as it was like yesterday when a sermon that hit home with us during the worship hour, but either way these scholarships my wife and I endowed now some three years ago are making us a better Christian. 

The whole idea behind these scholarships was to honor our parents for passing on their Christian based life to us for those many years and setting an example of how to live such a life.  The Bonner H. Jones and Wilma D. Jones "Leadership" Scholarship was exactly that to find young Christian leaders and honor them for their hard work and more so their willingness to begin a walk with God early in their lives.  Ragan Deal the youth minister at First Baptist Church Richlands preached on that very point yesterday in his sermon when he talked about having a "Walk Worthy" of God during your life. His point was brought home to us by some comments made by Pastor Gary McAbee at the church some time ago during a presentation by the youth one evening.  The point was that in today's secular driven world a young person attempting to be a Christian and live Christian values has it much tougher than they did when we were growing up.  We fully believe that to be true and surely most people can agree on that point too. 

So on this third Scholarship Sunday we get to meet several young people graduating from various schools and discussing their futures.  We get to listen to parents who consider Christian values an important bedrock of their children's lives going forward.  We had the blessing of one of our oldest friends Rita mention to us that the young lady who was honored with the scholarship this year was a good choice.  We get to experience the unique joy of coming home to a congregation where we found Christ and have the fellowship of kindred minds. All while still doing the one thing we wanted to do all along and that is honor our parents for their Christian service.

This brings us to a point my wife makes regularly that doing something for someone who has no chance or opportunity to pay you back in any way is most blessed for the giver and certainly one of the highest Christian values.  Somewhere along the way we will get old enough that making these pilgrimages to our home church the second Sunday in June to present the award will not be possible for either health reasons or just having passed on.  Hopefully that will be well past ten or maybe 15 such Sundays and this scholarship will be fully embedded in the culture of the institution.  The endowment will live on as planned and 100 Sundays from now some Christian young person having just graduated from Richlands High School will be blessed with the scholarship and my parents honored by something named after them and their Christian walk worthy of God.  

                

June 2014 Trading Portfolio.

Our current trading portfolio.  We continue to be very careful about buys and option sells with the market at all time highs.  Times like these are when doing nothing is the best move in many cases.  However our strike prices should offer good entry points for long term holders. 

APPL...We have three positions in this stock.  $490, $500, and $550, all seem safe, but we do not want any more with Apple selling at $633 plus.   We will wait for a sell off before buying more or even renewing any options we own. 

AFL...Strike price of $57.50 with this solid insurer.  We will continue to trade this single digit PE stock.  Safe for long term we believe. 

ARCP...Large sell off recently have put us modestly below our strike price of $12.50. We continue to like this triple net REIT, but the deal with Red Lobster does cause us to pause. Investors should consider a position here for a 8% dividend and capital gains. 

BP...Strike price of $45.  Good stock, good price, and lowest PE in the industry. Still undervalued due to Gulf spill issues. 

HFC... This well run oil refiner which we own at $42 continue to make us money and give us comfort.  The lack of oil pipelines makes for cheap oil to refine and sell at a large crack price.  Obama's recent decision makes this refiner a safe bet for several more years. 

IBM...We are in at $175.  Warren Buffet is in higher than we are so sleep is good at night.  Could be a value trap too. 

JPM...We still believe this big bank is not being given it's just place in the valuation game and we still own it at $50.  Forward earnings make it a single digit PE. 

O...Steady eddie triple net REIT.  Might be one of the safest stocks to own right now. Great list of properties bought at the right price and with cheap mortgage rates too.  Our strike price is $40. 

PFE..We continue to look for openings to move into this security.  We are looking at $27 with this single digit PE drug producer.  Much of the drug expiration issues are behind it now.  With Obamacare the opportunity to make money is significant. 

PM...We have it at $75 and still like it despite the recent move up to around $90. 

SF...We are liking Stifel Nicolaus more and more as a smart acquirer of bolt on financial businesses.  At $40 our strike price we would buy a boat load. 

SHLD...Sears at $34 is good for us right now. But we remain careful about how we trade SHLD.  The deal here is for real estate and not retail. 

T...Solid dependable telecom that continues to make us money month after month. 

VZ...See our comments on T above. 

NNC...We now have our largest net long position in this municipal bond fund of any security we have owned in years.  Our current return from our original purchase in January of 2014 has been in double digit percentage.  We just bought another  large block and if there is a small sell off will buy some more.   The fund is still selling at over ten percent plus less than net asset value.  With continued low interest rates this buy is a no brainer. 

Newspapers now in the Sweet Spot.

As someone who spend over three decades making a living and building a retirement in the newspaper industry we believe we have some credibility regarding the future of the newspaper industry.  So when we say that we believe newspapers are in the sweet spot economically we should have some cred.  There are some exceptions here we will explain, but for the most part owning a small daily in a small to medium sized town is future wise and profit wise as good as it gets now. 

There is a reason billionaires like Warren Buffet are buying small daily newspapers. Groups such as Halifax, Cooke, Civitas, Boone, and others are active in the market adding dailies to their already good sized portfolios of newspapers.  Also note on the reverse side groups such as McClatchy, Lee, and Gannett are looking for buyers and selling some of their properties in large dailies.  Let's deal with the selling side first. Many of these groups got way over leveraged in debt buying newspapers earlier when returns were high due to the economic environment and buying at a premium price made sense.  Now they are selling those same properties at a net loss to lower the debt load to make management of their remaining properties less burdened by that cost.  Also large dailies in population centers frankly are being hit hard by competition from other media.  Television, radio, other targeted print media, and yes web based advertising is cutting into their business.  With a declining business base and higher legacy cost structure selling large daily newspapers is needed by these chains, but plainly quite hard since most buyers do not want a large circulation daily unless the newspaper is in a city where a wealthy buyer is willing to do it knowing at best they will operate a break even operation while taking some pride in owning the local daily. Pride must have some benefits we guess. 

There was a time when owning a newspaper could net the owner a 25% plus return on their money.  We personally have known newspapers that returned 40% plus in turnover ratio operating in the 1980's.  Those days are gone.  Newspaper owners and newspaper chains took their semi-monopoly status for granted for too long and when the internet hit and the monopolies ended in the early 2000's these owners got hit with the real economic world.  In our opinion owners then did not position their properties to compete well and operate in the real world as many of us kept suggesting and when the real world hit they were hit hard.  Huge debt loads severely hurt many of the chains and McClatchy is the poster boy for that situation. Right before the bottom fell out in the newspaper industry McClatchy took on several billion dollars in debt from the purchase of Knight Ridder. Many of their newspapers were in large metros too and the present ownership of those newspapers by McClatchy is in some cases not a very profitable situation.  Lee had similar issues with some of the late in the cycle newspaper large daily buys. 

Nowadays those large metro dailies continue to suffer nationwide.  One constantly hears other media and even newspapers themselves lament the problems with business in their industry and how the future is not very bright.  Indeed in our opinion it is not very bright.  We personally would not want to own a newspaper with a circulation above 50000 and not sure we would want one above 30000.  The economics do not work and the business competition too intense.  On the other hand like Buffet and the billionaires who own Cooke Communications and Halifax Media we would love to own some of their properties. In our state of North Carolina newspapers in towns such as Jacksonville, Greenville, Concord, and Hickory, just to name a few, look like darn fine newspapers to own.  They exist in medium sized towns where their products are needed and desired.  They operate in markets where competition is not intense. They have employees who are not unionized.  All they need to do is stick to their knitting and business profits will do fine. Most importantly the owners are not over leveraged with debt and can accept 15% to 18% returns on their investments.  Think about that again, 15% to 18% returns,  that sounds pretty good to anyone who understands investing. Let's be honest here, that percentage is what newspapers should have been earning all along too.  Newspaper chains were their own worst enemies taking on high debt with maximum exposure to a downturn in the markets. If they had bought wisely we expect many now would not be as bad off as they are even with some of the poorly operating large metro dailies.  Boone Newspapers looks to us to have been one of the smarter operators keeping to their knitting and buying opportunistic as they came along. 

All this talk about newspapers being in trouble is seeping down into employee issues as well.  Many young people are forgoing excellent employment opportunities and careers in the newspaper field after listening to all this doom and gloom.  We find that the large number of job openings in the small to medium daily field to be a great entry point for long term employment.  Most of these jobs offer good pay with excellent benefits and the pleasure of working with and getting to know local merchants. They also offer the opportunity to be a part of small town life which in most cases is pretty good and cheap living too compared to larger cities.  We highly suggest young people take a look at these jobs. We would if we were younger. 

The operating model we noted earlier for small to medium dailies offers long term ownership benefits and long term employment benefits.  That is to us a true sweet spot for newspapers.  Unfortunately for investors seeking some exposure to this field there are few opportunities.  Lee, symbol LEE, has some promise, but again we have concerns about the debt load.  Warren Buffet owns some of Lee's stock, but has unloaded some recently.  McClatchy, symbol MNI, has for us too high a debt load as well as a list of large city properties we do not like.  Gannett, symbol GCI, has done a good job a cleaning up it's balance sheet and has some good properties and bad properties, but has moved into television more and more in the last year.  So if you have interest do some due diligence and consider. One other company to consider is Media General, not a newspaper company but a former holder of newspaper properties.  They sold off their portfolio to Warren Buffet and now own a nice portfolio of profitable television stations.  Note that Mr. Buffet also owns some debt in this company that he has the option to convert to ownership down the line. 

We have no ownership in any of the securities mentioned here.