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Geoff Gannon November 3, 2017

My New 50% Stock Position is NACCO (NC)

Someone on Twitter mentioned it’s been 32 days since I put 50% of my portfolio into a new stock and said: “I’ll reveal the name of this new position on the blog sometime within the next 30 days”. Since, I promised 30 days this time, I’ll reveal the name now. In the future, I think I’m going to wait a full quarter (3 months) between the time I mention a stock on my member site (Focused Compounding) and on the blog. I want to be open with blog readers. But, I also want the people who provide me financial support through their monthly subscriptions to get real value for their money. The only reason I can afford to spend time writing content on this blog for free is because there are subscribers on the member site. So, the member site will always hear about my new stock ideas first.

Anyway….

On the morning of October 2nd, I put 50% of my portfolio into NACCO (NC) at an average cost of $32.50. That was the first day the North American Coal Company was trading separately from Hamilton Beach Brands (HBB).

NACCO operates unconsolidated (their debt is non-recourse to NACCO) surface coal mines that supply “mine-mouth” coal power plants under long-term cost-plus contracts that are indexed to inflation.

You can learn more about NACCO by reading:

The company’s investor presentation

Clark Street Value’s post on NACCO

NACCO’s first earnings report as a standalone company

You can also listen to the company’s earnings call here

Finally, you can buy a book that provides a complete corporate history of NACCO from 1913 through 2013. The title is “Getting the Coal Out”. The author is Diana Tittle. It’s available used at places like Amazon.  You may also be able to order it from the company. I’m not sure about that.

Yes, I do own a copy.

My NACCO position was posted immediately on the member site. I’ve written several articles about it there over the last month, mostly in response to questions from Focused Compounding members.

So, as of October 2nd, my portfolio was:

NACCO (NC): 50%

Frost (CFR): 28%

BWX Technologies (BWXT): 14%

Natoco: 7%…

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Geoff Gannon November 3, 2017

Buy Unrecognized Wonder; Sell Recognized Wonder

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

–          Warren Buffett

Richard Beddard has an excellent post worrying about whether the stocks in his Share Sleuth portfolio are becoming too popular.

I want to use his post as an opportunity to talk about how an investor – or, at least an investor like me – needs to cycle out of stocks that are getting recognized for what I believe them to be and into stocks that aren’t getting recognized for what I believe them to be.

I like “wide moat”, predictable businesses. But, I can’t afford to pay the kind of prices that stocks with recognized moats and recognized predictability trade for. So, I need to find unrecognized moats and unrecognized predictability.

The top three stocks I own are: NACCO (NC), Frost (CFR), and BWX Technologies (BWXT). The best performer among that group is BWX Technologies. That good performance is the result of increased recognition of what BWX Technologies is. When I bought Babcock & Wilcox pre-spinoff (and then later sold my BW shares but kept my BWXT shares) I was seeing the company differently than the market was. Today, the market sees BWXT the same way I do.

Let’s look at this in chart form.

BWXT.jpg

Today, the market values BWX Technologies about 120% higher than it valued the combined Babcock & Wilcox. The stock you are seeing here spun something off (so it disposed of value) and yet it still more than doubled its market price.

 

The stock now has a P/E of 32. The return here is due to multiple expansion. BWX Technologies – as part of Babcock & Wilcox – went from being valued as an average company (a P/E around 15) to being valued as a wide-moat, predictable company (a P/E around 30). BWXT’s biggest business is being a monopoly provider to the U.S. government under cost plus contracts indexed to inflation. That’s not new information. The market just sees the same old information differently now that BWXT is reporting its own clean, independent EPS and giving long-term guidance for EPS growth as far as 3-5 years out.

The price on this stock (a P/E of 30+) indicates the market sees this business much the way I see this business. If we have the same understanding of the business – it’s time for me to consider selling.

Now, I don’t sell a stock just to have cash. But, if I want to buy anything new – I should buy something that’s a wide-moat, predictable business that has yet be recognized for being that and fund the purchase by selling BWXT which is also a wide-moat, predictable business but is now recognized as such.

The next chart is Frost. You can read an explanation of how I see the stock here.

Frost_Inked.jpg

The stock has about doubled. Here, though, it is not appropriate to use the P/E ratio for

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Geoff Gannon November 3, 2017

NACCO (NC): First Earnings Report as a Standalone Company

Two days ago, NACCO (NC) released its first quarterly results as a standalone company. Yesterday morning, the company had its first earnings call as a standalone company. The stock dropped 10% following these events. I’m not going to write about NACCO each quarter. But, some people asked for my thoughts on the quarter and the stock drop. So, I’ll do it this once.

Overall, the earnings call and the stock drop reinforced my belief that it could take a year or more of NACCO trading “cleanly” as a separate company before it’s well understood by investors. More on that at the end of this post.

First, the earnings release. Here, everything was as expected.

You can – and should – read NACCO’s full earnings release here. These are the items I highlighted:

  • “After the completion of the spin-off, NACCO ended the third quarter with consolidated cash on hand of $93.9 million, debt of $58.7 million and net cash of $35.2 million.  The cash on hand included a $35 million dividend received from the housewares business prior to the completion of the spin-off.” So, the company now has $5.13 in net cash per share.
  • “NACCO’s board of directors will evaluate and determine an ongoing dividend payout rate at its next regularly scheduled meeting in November. When doing so, the board will consider the financial conditions and prospects of NACCO and North American Coal following the spin-off of the housewares-related business.” We’ll see what they decide to start the dividend at. The “financial conditions” are strong. The “prospects” are bleak.
  • Not a highlight, but a note: The after-tax numbers are meaningless here because of a very unusual tax timing situation. The company had a 44% tax rate on continuing operations. In the future, I expect the normal tax rate for NACCO as a standalone company will be 23%. So, ignore all after-tax numbers.
  • Centennial is NACCO’s consolidated (so NACCO bears all the risk) failed mine: “Centennial will continue to evaluate strategies to optimize cash flow, including the continued assessment of a range of strategies for its remaining Alabama mineral reserves, including holding reserves with substantial unmined coal tons for sale or contract mining when conditions permit. Cash expenditures related to mine reclamation will continue until reclamation is complete, or ownership of, or responsibility for, the remaining mines is transferred.”
  • NACCO confirmed that the customer will bear the risks related to the Kemper plant / Liberty mine failure and NACCO will be paid to do the mine closure work: “The terms of the contract specify that Mississippi Power is responsible for all mine closure costs, should that be required, with the Liberty Mine specified as the contractor to complete final mine closure. Should the decision to suspend operations of the gasifier and mine become permanent, it will unfavorably affect North American Coal’s long-term earnings under its contract with Mississippi Power.”
  • “…capital expenditures are expected to be approximately $21 million in 2018.”
  • “While the current regulatory environment for development of new
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Geoff Gannon November 2, 2017

The Most Interesting Stocks to Start Researching Right Now

NACCO (NC): $35.90 – down 11% today

Cheesecake Factory (CAKE): $42.31 – down 6% today

Omnicom (OMC): $66.41

Under Armour (UA): $10.58 – down 6% today (only consider “UA” shares not “UAA” shares)

Hostess Brands Warrants (TWNKW) – $1.35 (a pair of warrants at $2.70 gives you an option to buy 1 share at $11.50 in 2021)…

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Geoff Gannon November 1, 2017

A Note on Under Armour: Always Prefer UA to UAA

Under Armour (UA) stock dropped a lot in the last 24 hours. So, some value investors may be looking at it. If you do look at it, make sure you consider buying only the class “C” shares trading under the ticker “UA” instead of the class A shares trading under the ticker “UAA”. The “UA” and “UAA” shares are identical in all respects except that the UAA shares have 1 vote and the UA shares have no voting rights. As Under Armour is effectively a controlled company (the CEO and founder holds Class B shares with super voting rights that give him a 65% share of total votes), there should be almost no premium on the UAA (voting) shares over the UA (non-voting) shares. However, as I write this, the “UA” shares trade at a price 9% lower than the UAA shares.

So, when you think Under Armour always think of the ticker as “UA” and never “UAA”.…

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Geoff Gannon November 1, 2017

The Best Investing Books for a Budding Value Investor to Read

Value and Opportunity just reviewed a book “100 Baggers” that I’ve read (and didn’t particularly like) which is basically an update of another book I own called “100 to 1 In the Stock Market” (which is outdated, not available on Kindle, but I probably like better). The fact that I’ve read both these books reminded me that I actually do read a lot of investing books and yet I don’t write much about books on this blog.

There’s a reason for that.

I get a lot of questions about what investing books people should read. My advice to most is to stop reading books and start doing the practical work of slogging your way through 10-Ks, annual reports, etc. There seems to be a tremendous appetite for passive reading among those who email me and no appetite for active research. It’s better to read a 10-K a day than an investing book a day.

But, there are good investing books out there. And, yes, I read a lot of books. Still, I’m going to give you a simple test to apply to yourself: if you’re reading more investing books than 10-Ks, you’re doing something wrong.

Assume you’re reading your fair share of 10-Ks. Then you can read some investing books on the side. Which should you read?

Practical ones.

 

How to Read a Book

A book is only as good as what you get out of it. And there’s no rule that says you have to get out of a book what the author intended. The best investing books give you plenty of case studies, examples, histories, and above all else – names of public companies. While you read a book, highlight company names, names of other investors, and the dates of any case studies. You can look into these more on your own later. Also, always read the “works cited” or “bibliography” at the back of any book you read. This will give you a list of related books you can read next. Since I was a teen, I’ve always read the works cited or bibliography to come up with a list of related titles. And I’ve realized talking to other people as an adult, that most people ignore those pages. They’re very useful. Read them.

 

 

My Personal Favorite: “You Can Be a Stock Market Genius”

If you follow my Twitter, you know I re-tweeted a picture of ”You Can Be a Stock Market Genius” that my website co-founder, Andrew Kuhn, posted. It’s one of his favorite books. And it’s my favorite. If you’re only going to read one book on investing – read “You Can Be a Stock Market Genius”. The subject is special situations. So, spin-offs, stub stocks, rights offering, companies coming out of bankruptcy, merger arbitrage (as a warning), warrants, corporate restructurings, etc. The real appeal of this book is the case studies. It’s a book that tells you to look where others aren’t looking and to do your own work. It’s …

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