Trading Portfolio June 2015

We trade options and sometimes hold stocks for capital gains in rare situations.  Our current trading portfolio selections are based on mostly mega and large cap stocks that are valued based.  We look for stocks that have small downside risk and upside opportunity.  Therefore as an individual investor who might be looking to buy individual stocks one can use this list for selecting individual issues that are good for capital gains.  We also remain convinced that financial engineering that consists of low Federal Reserve rates into 2016 and huge stock buybacks support the stock market.  As we have opined in the past large cap stocks such as these selections are supported by the current political economy of the Obama administration and likely future Clinton administration who favor huge corporations who fund the Democratic party and thus get favorable regulatory and tax treatment in return.  We also believe a correction if it comes will be short lived and bounce back rather quickly.  

              

AAPL..Are largest position since we believe Apple has very low risk.   We currently think the price has stalled out due to the recent upgrade cycle has matured.  However Apple runs in stages so holding it is the best choice.  Still undervalued. 

AGN..This drug maker Allergan has continue to ramp up with good acquisitions and a long line of branded and generic drugs. They are widely held in hedge funds and most holders believe there is significant upside here at around a 13 PE

C..Citigroup is a excellent long term holding for a bank stock.  The big four banks control the assets in this country as preferred by the Obama and soon Clinton administration and are protected politically.  A single digit PE. 

CHL..Chinese mobile phone carrier China Mobile is the largest such company on earth with several hundred million subscribers.  A low PE of about 13 makes us sleep well at night. 

CSCO..Cisco controls much of the switches and gears of the web and onsite business technology and again with a low PE they are a solid long term holding. 

FB..Despite a higher PE in the upper teens we like Facebook as the future of the social media atmosphere.  Any sell off will likely result in significant buying by funds and large holders placing a floor underneath the moderately high valued shares. 

GILD..Still at only a 10 PE this drug maker Gilead is a powerhouse of bio drugs. 

GS..Large investment bank Goldman Sachs is the top dog when companies need mergers and advice. A low PE of 10 makes for solid opportunity. 

IBM..We consider this low PE stock one of more risky selections, but as long as Warren Buffet owns shares we will too. 

JPM..Largest bank in the country and one of the big four.  JP Morgan is politically connected and will do quite well with Hillary Clinton in charge.  Best valued of the large banks. 

MET..Large insurer Met Life is selling under a 10 PE which is cheap. 

NEWM..Our most aggressive selection.  New Media Investments has been sold off way oversold now and we believe presents a significant opportunity for long term capital gains and a 7% dividend at current prices.  We have significant share numbers here. 

NNC..Our largest long position for some time is taking some lumps due to concerns over interest rate increases.  Nuveen North Carolina Fund is still yielding over 4.5% tax free and we believe is a bit oversold right now. 

ORCL..Large software company that offers software packages to businesses.  We are considering dropping Oracle due to valuation concerns.  Not high valuation, just not cheap anymore. 

PM..Large tobacco company that we will be dropping this month.  Good stock and safe dividend, just does not fit our trading profile at this time.  

PRU..Prudential has been on our list for some time as a single digit PE large insurance company and remains so for now. 

QCOM..A new selection for us Qualcomm is inside every mobile phone and has patents on most of those tech pieces.  That includes the phones in China as well.  The stock has been sold down too low and we believe it is safe at this low PE and lower price. 

T..Second largest phone carrier in the US AT&T is a solid choice for dividends and capital gains with almost no downside risk. 

TCAP..We like this stock and company, but will exit our position this month due to interest rate concerns.  We still believe it is a good long term holding and the significant dividend is safe. 

VZ...Largest mobile phone carrier in the US Verizon is a solid choice for dividends and capital gains with almost no downside risk. 

Eastern North Carolina Electricity Power Deal.

One our first postings on this blog some four years ago discussed the situation with the Eastern North Carolina towns getting crushed by extra high electricity rates and how to resolve this issue. Seems that issue has been put to rest effective mid year 2015.  Or has it? 

First off very soon as we understand it Duke Power is going to effectively deposit into Electricities account, the company that manages the eastern NC power system and towns that are members, about $1.2 billion dollars. Now that is a lot of money however it does NOT payoff the entire debt of the power system.  There will still be remaining about $500 million dollars or so to be paid off.  Talk about a serious capital loss this one is a doosie, but that is the lousy deal politicians made for taxpayers back in 1981 buying some power plants.  The debt remaining past the buyout amount for the power agency is in municipal bonds and those mature on a set schedule, up to about 10 years out. Some of those bonds are what is known as callable now and we expect, and hope, the agency will call those bonds and redeem them quite soon after they get the Duke funds. Then for those which come due along the way over the next few years we assume that Electricities and the member towns will redeem them and use the funds still in the bank to slowly eliminate the debt.  We hope. 

Electricities and the member towns have NOT been good custodians of power revenues over the years. When money piled up in accounts waiting for bonds to mature known as a sinking fund the politicians in the towns and bureaucracy at Electricities could not help themselves and spent the money.  Seriously would you expect anything else, they are who they are.  That is one of the reasons why the bonds originally planned to mature in total in 2011 are still another ten years plus out.  As we noted in our original post on this subject that money was spent on other "power" needs and frankly some of those "power" needs where in our opinion real sketchy. So the bonds not having the needed funds to pay them off where rolled over into longer dated bonds and the Electricities crew and politicians in the member towns just kept on keeping on with nary a worry in the world.  The problems  arose when the higher power rates came into conflict with no new residents, no population growth, and the lack of economic development.  That lack of the aforementioned growth was and is BECAUSE the lack of growth meant that those higher rates could no longer be spread over an expanding base of ratepayers.  So the ugly cycle of higher rates and higher rates kept going since not only was their no growth but in some cases there was declining numbers of ratepayers to shoulder the burden.  Of course if the powers that be would be minded their knitting and paid off the bonds in the timely manner planned then they would be completely free of the bonds and their cost now.  But what would that crowd at Electricities do and where would their operating funds originate? Those agencies need a reason to exist.  They want to keep their cushy high paid positions.  So the longer the debt and power agency game can be kept going the better.  Talk about the ultimate middle man job well these are it. 

So now they will soon sit with several hundred million dollars of new Duke money in the bank and frankly we do not trust them with it and we think with good reason.  If the bonds could be paid off immediately we would rest easy. The smart move would be to find some trustee say an insurance company that would love to have a cool billion dollars or so and deposit it with them, collect some negotiated high interest,  and make a deal to get funds as needed to pay off the bonds. Hey Warren Buffett's little operation might be a good place, how about someone placing the call for starters? Anyway here we sit with all that money and wonder if the towns and Electricities will find some more "power" needs for the money?  And of course remember there is still that $500 million or so hanging out there that needs to be paid off, wonder if they can just let those bonds mature on schedule and rid us of all this debt.   The past being prologue and as a ratepayer I am worried and you should be to if you live in a member town.  Yes we know that the bonds left will likely be put into what might be called pre-refunding mode backed by US treasuries, but we still do not trust them as US Treasuries can be sold and money spent. 

There is one other issue that concerns us too and this is totally a town governance one.  Let's go back to those higher than high electric rates.   With those bonds being paid off and the debt going down the cost of electricity should follow.  Maybe even a nice double digit drop shortly after mid year 2015 since the rate decrease should be around 18%, oh wait maybe it is 16% since we gotta pay those folks at Electricities their cut . Well do not count on it yet, remember we are dealing with some bureaucrats and politicians here. The savings will be large as in over $200 million annually in interest costs alone plus several million more annually in related costs of being part owners of power plants. Of course politicians see all that lovely cash flow they have had all along and they think special projects and other such government expenditures and we best be worried as they may well not cut rates or cut rates much to keep more of the cash flow for their favored interests.  They might even lower the rates for large businesses or even new industry sweetener than allow residents to see a cut in rates.  Yeah I do not trust them.  The smart move would be for each town to dump the entire power structure on Duke, like make a call and make a deal, and be done with all this mess.  Yes we are talking power poles, power employees, and power bills for good, get out of what should be a private business all along. But do not expect that to happen either since we still got those pesky people at Electricities to pay and some politicians who like that cash flow and we all know nothing succeeds in keeping itself employed like agency bureaucrats and government employees. So we expect they will sign another 20 year deal with Duke and we all will be some better off, but not as much as other power buyers in other towns. 

So keep a sharp eye out and keep up with what is going on here in your power agency member towns as we are not out of the woods yet and frankly I expect this is far from over. Yeah I will say it again I do not trust them. 

Bojangles as a stock

We like Bojangles...for food.  Their biscuits are unbeatable, their chicken we understand is lights out compared to other offerings, and yes they know how to brew some seriously good iced tea.  We even know some Yankees, and even some damn Yankees, who came south and can be found regularly at their restaurants.  Most of their customers literally crave this food. Heck we love their food and really like our local Bojangles and their crew.  With that said we are not so sure about their stock. 

Do not get us wrong here the company is well managed, maybe as well managed as any fast food business out there.  We love their concept and the business model.  We honestly think some of their restaurants are the best run and most pleasant places to dine we know, with the exception of some of those Down East NC. (Are you listening Mr. McRae?)  Absolutely love the use of what we consider a best business practice of selling at the price that generates the most sales possible and not at the price that is trying to make the most profit per sale. KFC is being pushed hard by Bojangles to reorganize their business to compete.  Those that think Popeyes will a better operator are wrong too, even though we really really think Popeyes is running a darn fine company too. With that said we are not so sure about their stock. 

The stock is selling around $26 as we speak and that is our best guess around a 35 PE, which is rich even for a good growing business.  The price ran up higher earlier on this month after the IPO and that was expected as those who hold stock in index funds who must buy this stock bought in.  Lately it has settled down a bit and we are waiting for the first ever earnings report which should come in about one week.  Now most new IPO's make sure, make real sure, that first post IPO earnings report is a sweet one.  You know cut expenses, shift costs, and push forward some revenue to hold up that stock price sooner rather than later. We spent a good bit of time reading their IPO and liked what we read, we will likely spend some time reading their earning report too.  But we believe this will be a show me stock in the ultra competitive world of the food business. Remember it is not what YOU think or even how the business does with stocks like these, it is how Wall Street thinks that could cause a buying of the shares and push up the price for the first few cycles. 

Also note that Bojangles did not get any proceeds form their IPO, it was a selling of some of the internal shareholders wanting some cash from their current holdings.  That is good that there was no dilution of the shares, but is is bad that Bos did not get any cash to expand store footprint.  I would not be surprised to see something like a secondary offering soon to do just that and that might come shortly after a good earnings report at some point. That will likely depress the shares and that might offer an opportunity to get in cheaper.  We would like it under $25 and would much prefer under say $22 or so.  But this is a speculative stock, not a swing for the fences stock. 

So be careful, and be patient here with BOJA.  Risk happens fast.