A few things

I have a feeling that my PFE position that I have established earlier this year is going to end up like my BMY position, 5% yield for a year, another 5% capital gain for the same period, and exit without too much excitement.

Got out of LTD. The company is transition. I don't know if I like restructuring story. I thought they had a handle on bring the Express stores back to profitability. I was wrong. Nevertheless, a ride from $20 to $27 isn't that bad. At least it met my goal of 15% capital appreciation.

Also chopped was BER. Nothing against BER, I just have a little too much exposure in the hazard business. One of them insurers must go. This year is looking like a bad year with hurricanes, time to trim back a little

Screaming can kill

I thought this was funny. From Reuters:

BEIJING, Jan 24 (Reuters Life!) - Hundreds of chickens have been found dead in east China -- and a court has ruled that the cause of death was the screaming of a four-year-old boy who in turn had been scared by a barking dog, state media reported on Wednesday.

The bizarre sequence events began when the boy arrived at a village home in the eastern province of Jiangsu in the summer with his father who was delivering bottles of gas, the Nanjing Morning Post reported.

A villager was quoted as saying the little boy bent over the henhouse window, screaming for a long time, after being scared by the dog.

"One neighbor told police that he had heard the boy's crying that afternoon and another villager confirmed the boy screaming by the henhouse window," the newspaper said.

A court ruled the boy's screaming was "the only unexpected abnormal sound" and that 443 chickens trampled each other to death in fear.

The boy's father was ordered to pay 1,800 yuan ($230) in compensation to the owner of the chickens.

Recent transactions, part 2

On top of the position I established and unloaded, I also made some arbitrage trades:

• BRCD buying McData. MCDT holder will receive 0.75 share of BRCD that they hold in MCDT. The time that I made the pair trade, the spread was about $1, was about 18%. With the deal set to close end of Jan, that's more than 100% annualized return. There are some risks involved
  
  
  
  1. BRCD investors may not approve the deal (McData already voted yes). This is unlikely, as there is no objections form the BRCD investor community at this point
  2. FTC has some concern on BRCD having too much of market share after the merger. This is also not a very serious risk, but worth keeping an eye on
  
  
  At the present time, the spread has shrunk to less than $0.5. Indicating the perceived risk is lowered..


• I purchased 1000 share of EBHI @ $9.10. Eddie Bauer is in the process of being acquired by a private equity firm for $9.25/shr. There is virtually no risk involved in this deal and is set to close end of January. The annualized return for this trade is 20%.

I have established other positions as well. I am running out of time, and those position will be covered in the 3rd part of this series.

Recent transactions

I haven't been very good with keeping notes lately. Here's a little catch-up:

Before end of the year, I unloaded FDC. Reason:

• Western Union is spinned off. WU was the main reason I bought into FDC in the first place. While FDC's other business are still excellent, my focus is shift.
• Use the drop in price to off set the huge cap gain I got in 2006. Over all, the return from FDC with the spin off of WU was a moderate 10% annually.

Also before the end of the year, I added PFE. Reason:

• Market still undervalue drug companies. I sold off BMY earlier this year after I realized the company is not very well managed. PFE offers better drug pipelines, and better management
• PFE recently hiked it's dividend. At my point of entry, my annual yield was about 4%, slightly lower than the 4.5% yield that I got from MRK when I bought it for $30/shr. At this rate, with the potential (very likely) dividend hike in the future, PFE and MRK are my long term safe investment. It's thrilling to receive thousands of dollars in dividend. On top of that, pay less tax than bank interest (CD fans take note).

On 12/20/06 I bought into SBH. Reason:

• Special situation. SBH is a spin off. The best explanation can be found in Fat Pitch Financial's blog: Sally is a Beauty of a Spinoff. Although the situation deteriated a little.

After the new year, I unloaded FII. Reason:

• FII has been an under-performer in my portfolio.
• The reason for purchasing shares was murky. Best I can remember was that it was a safe bet (FII has been profitable), and Investment companies were hammer at the time (2003)

Over all, FII was only game me a 5% annual return for my investment. Not terrible, not great either.

I also sold off my AVP position. Similar reasoning to FII. The turn-around is slower than I expected. Sold off for a small profit. Although I recently check the price and found Avon has advanced quite a bit after I sold it. I suppose the Peter' law, or the Lynch Principal is at work.

One exciting addition I made after the new year is Sears Holding (SHLD). I watched the stock with infinite interest since it was in the mid-$90 and never bought. It's a masochism that I love the stock and yet kick myself not buying it. Lampert is a son-of-a-gun that can perform magic. I was scratching my head 5-6 years ago as how k-mart can ever survive let alone compete. After Eddie took over, with addition of Sears, the ship is finally chartered by a competent captain. I kept waiting and waiting for an entry point (I suppose that's how Warren was waiting for an entry point for Wal-mart). Finally after the new year, SHLD had another mini drop, and I got myself some share at $167.

sold off BBW

I sold off my position in BBW this morning. The reasons:

• The fad issue caught up to me.
• I believe weaker economy is ahead of us
• BBW usually has post-Christmas slide, usually after weak spring sales.
• Margin of safety shrunk
• There are other excellent investment opportunities around

I will get back into BBW, however, if it hits low 20's again.

Bad day, worse for insurance

I guess as a part time investor, I get to hear the news last in the wall street food chain. The news is out why HIG took a hit. Turned out HIG's CEO said that the industry's profit level might have peaked this year for at least the short term. A quick check, I found that the insurance companies in my portfolio also suffered: PGR down 1.84%, BER down 3.6%, FAF is down 1.2% (although title insurance is very different from casualty insurance). ZNT, which is on my watch list, suffers the least, down 0.5%. I am waiting for this baby to come down so I can swap it with PGR. In any case, the basis of this speculation is the underwriting margin is shrinking. With re-insurance rate going higher and premium not improving much, the money isn't much if you are looking to make a dime from underwrite policies. This is the time to test the specific company's ability to resist the temptation of a price war. Insurance is a commodity business, those can tough it out with financial strength will eventually emerge as the victor, and will be able to buy up competitors at the end of the tunnel at 50 cents on the dollar worth of business. With strong balance sheet, prudent management team, I expect HIG, BER, and PGR will come out ahead in a few year. This is good news indeed. (Probably good news for consumers in the short term, bad news in the long run)