Borrow like the Rich.

Yes most articles you read try to tell us how to invest like the rich, but sometimes it is better to know how to borrow like the rich.   Now is one of those times.  Bill Gross, who has forgotten more about bonds and borrowing, noted such in a posting over the weekend.  He is a billionaire and like Warren Buffet knows that contrarian investing is the way to serious riches. 

Foolish people borrow for consumer goods and run up credit card balances. Only big ticket items should be bought with borrowed money.  Education and homes are a good example in that borrowing to buy them also offers the chance of both purchases being more valuable in time.  Automobiles, due to the large price tag, are also usually purchased with borrowed money, but smart borrowers use short time frames for their loans.  Foolish people also borrow when rates are high, which generally means the economic cycle is most positive, thinking that the good times will continue and of course that does not happen. 

The economic cycle now is producing the lowest rates in generations.  As we posted a couple of postings ago we expect these rates to continue for some years.  Smart seasoned borrowers are taking full advantage of these low rates.  Corporations are issuing bonds and reissuing debt at these low rates to use the proceeds for other purposes.  Warren Buffet has been using the float in his insurance business to buy companies when the financing is cheap.  Home buyers are buying homes and locking in cheap financing for 30 years.  So how can the average person take advantage of these lower then low rates, other than buying a home.  Simple, find a company that can borrow at these low rates, that is doing so, and buy some shares in that company. 

This morning gave us a perfect example of just that happening.  Annaly Mortgage announced they are buying Hatteras Financial.   Both are basically buyers of mortgages guaranteed by the Federal government.   They borrow money on the cheap in the private market and then buy these mortgages which yield a higher rate and make money on the difference.  Simple business in that they are holding government guaranteed mortgages and the only risk is if the borrowing they have to do to buy the mortgages get more expensive it squeezes their profits.  Annaly is obviously comfortable enough with long term cheap money that they are willing to double down on their business by buying out a competitor.  You can get in on this deal by buying what is known as a mortgage reit.  Lots of them out there, but Annaly Mortgage symbol NLY is the largest and best.  A 12% dividend is the payoff. 

Another way to get in on the borrowing is with what are known as leveraged bond funds. They do basically the same thing as Annaly above but buy bonds instead.  This is done in a closed end bond fund where there is a limit to the number of shares issued.  The fund buys bonds, and then borrows money to buy more bonds and makes additional interest on the difference between the cost of borrowing for the bonds and the interest rate on the bonds.  Again the only risk is the concern over interest rates going up cutting into the value and profits from the leveraged bonds owned.  These bond funds have been rocketing up in value lately as more and more people find these deals.  Most of the slow rabbits have been caught here, but there is still some out there to purchase.  We like municipal closed end bond funds here for the safety and tax free interest.   Invesco has some good ones, so do your shopping, and pick.  We own a large position VKI, which has run up, but still yields over 6% tax free. We are up about 8% this year in value since we purchased in January not adding in the 6.6% tax free yield, which is about 8,8% tax adjusted for us.   Bill Gross suggested taking a look at DPG and JPC, both which are solid choices and safe for long term investing. 

One other choice we like is high yielding stocks, that can borrow for their growing business and pass on the profits to their shareholders.  We posted last time about one such selection in New Media Investments Group.   They pay a 9% dividend, which we think should grow and the opportunity for capital gains is there as well.  We also own a large position in NEWM.

Having money in a savings account at a bank, or owning low yielding US Treasuries in this environment might give you a sense of safety, but you are earning basically nothing on your money and only helping the bank and the government do well.  So consider some of the alternatives above and begin borrowing and making money like the rich. 

A Newspaper Life Continued.

We did not retire some eight years ago to do newspaper consulting, but frankly we have found continuing our association with the newspaper business personally rewarding.  So as we sat in the chair in the prospective new building we had a chance to consider how much, or maybe not how much, the newspaper business has changed over these past several decades. Indeed now into our 41st year of working with the community newspaper publishing business, as a employee and dept. head and now as a consultant, we find not as much as changed as others would have you think.  

The reason we were in the vacant building was this was a prospective site for the moving of the newspaper operation for which we are currently doing some consultation work.   The new location was being considered since the printing of the newspaper is now off site and the shrinking of the staff means the publication is using less than half of the current building.  Smart business says move and lower the monthly costs of running a 30000 square foot building and help the bottom line.  We agree, but in truth this is not a sign that the newspaper business is dying, but in our opinion actually cleaning up some efficiency issues and becoming a more profitable business for their owners. 

For years we have told those who would listen that newspapers having once been a monopoly operation made bad management decisions and inexcusable business choices that were being protected by just that monopoly status of consumers having few other choices to get news but by newspapers.  Organizations that value consensus promote average people and during that time newspapers got lots of average owners and publishers who made non forward thinking decisions since the idea was to not rock the boat.  During the 1990's and into the early 2000's big chains kept on buying newspapers at prices that were absurd since the idea of continuing to have 30% plus margins would pay for those foolishly high prices.  When consumers finally got another choice, the web, early in this century all those bad decisions on debt finally took hold in those chains that had leveraged up too high, such as Lee, Freedom, and McClatchy, who could not meet their high indebtedness with shrinking revenue bases.  Today I still wonder if some of these operations will survive the next decade.  Freedom is already gone. On the contrary smart operators like Jim Boone and Warren Buffet bought properties with cash or real estate backed loans that assured they could make payments and keep the operation running on cash flow.  

So yes newspapers have changed a good bit, but frankly not as much as one might think as we see well run local newspapers as a solid choice for a future and growing business.  In fact we have stated several times in meetings that if we were 30 years younger we would be buying newspapers ourselves and doing the due diligence of getting their business models intact and watching the cash flow grow.  The prices being paid for newspapers today is what it should have been all along and with the middle teens margins they are in line most other businesses too.  The idea of having printing done at a single plant where several newspapers do their printing should have been the model all along. The thinking of keeping expenses tight and pushing for extra revenue is frankly learning to operate in an competitive environment is just what any other business has done for thousands of years. We in the newspaper business are back to what is well normal for any other business. 

If you do not believe it consider that Warren Buffet, not exactly a fool, is buying local newspapers. Jim Boone who I highly admire is in his eight decade and has bought over a dozen newspapers in the last four years.  New Media Investment Group, run by a hedge fund billionaire, is buying newspapers as fast as he can find ones who want to sell.  Note ALL these buyers are looking at good sized community newspapers in the 8000 circulation to 30000 circulation range.  They, like us, see the metro newspaper model as dead.  In a metro market there are dozens of choices for news, in small to medium sized markets there is usually one, the local community daily or weekly. 

As we have suggested earlier if you are interested in buying into the newspaper business via owned stock there are two good choices now.  One is Gannett, symbol GCI, which owns a good number of medium sized daily newspapers across the country and has a low debt load and secure dividend around 2%. We believe GCI is priced at a fair price and not a buy currently.  The other choice is New Media Investments Group which has a large and growing medium to small newspaper group with a low debt load.  Symbol NEWM, currently has a right at 9% dividend. We believe that dividend is secure and likely to rise over time as NEWM buys properties. We personally like New Media since the recent sell off to around $15 per share for capital gains and of course the nice dividend.  We own a sizable number of shares now and will be adding to that share base after the recent sell off.  

The newspaper business is not dead if you know where to look and our involvement in the business continues so we believe via that inside involvement and knowledge of the financial structure of the two companies noted above they offer compelling stock purchase opportunities.