Financial stocks to buy? Check out FNM, FRE

[raylopez99]

PSP, AEL, PSEC and two "too big to fail" Federal GSEs: FNM and FRE
(Fannie, Freddie Mac).

Why the last two have dropped so much in the last 30 days is a
mystery, but as they are essentially backed by the Federal Government
(especially if Bush's folly of a fed bailout comes closer to passing)
they might be the best bet of the lot.

RL

[JOSE BAILEN]

Right, the financial stocks are now probably the most undervalued of
all categories (that's not my opinion, but Morningstar's and other
market analysts). Once again, the market overreacted to the bad news
in this sector.

Just finished reading "The EVA Challenge", and the most interesting
chapter was perhaps the last chapter. It compares the valuation of an
"Old World" company with a "New World" company such as RealNetworks
-the one that developed RealPlayer-. A typical Old World company had
an EVA -return on capital investment minus cost of capital- of just 1
percent; and with an expected EVA growth rate of just 5%, the
intrinsic value of the company was just 1.33 times its book value
(i,e; its fair P/B ratio was just 1.33). By contrast, RealNetworks
-which showed NEGATIVE accounting earnings because it accounted
research and development and marketing and advertisement expenses as a
cost, not as an investment- had a huge EVA margin of 40% (i.e, the
return on capital investment was the cost of capital plus 40%) once
R&D and marketing expenses were accounted as an investment that would
be amortized over 8 years. In addition, the growth rate of this EVA
was 28 percent a year in the late 1990s.

The author of the chapter shows that IF WE EXTRAPOLATE the EVA margin
and the EVA growth rate over a 20 years period, RealNetworks was worth
50 times its book value. This is quite close to the actual valuation
reached by the company in the early 2000. So it wasn't so obvious at
first that this company -or many other technological companies- were
overvalued just before the dramatic drop in its values in the early
2000s.

What happened, of course, is that such a high EVA margin and growth
rates were unsustainable. If there is no monopolistic power -and the
technological companies do not have many barriers to entry other than
their technological advantage due to R&D expenses- other companies
enter into the same highly profitable market, eroding the EVA margin
and growth rates. It is worth to note that RealNetworks is now worth
just $900 million (it was worth nearly $14 billion at its peak).

The lesson is, of course, that valuation exercises depend always on
the assumptions you make. If you just extrapolate recent past trends
in the future, without considering how economic forces and competition
work to erode things like EVA margins and growth, you may obtain an
"intrinsic" value which is completely out of line once one considers
the most likely result from market competition. Almost any valuation
could be justified if you use assumptions which are optimistic enough.
This is why it is better to be realistic and stick with "dull" Old
World value stocks, with low growth and small EVA margin, but that can
be sustained over time. These value stocks are the ones that yield the
highest long run returns, as empirical shows.

[raylopez99]

I've put this book on my read list, thanks.

I note that RealPlayer is about the same price now as in 1998, and
last year got some tie-ins with the big mobile phone carriers, but
it's got negative return on assets (I think because of their debt) and
they are a little cost heavy (the officers make millions, and they are
laying off people, they employ 1500+ people).

So it's not a completely bad company, just one that I am leery of
investing in at this price.

BTW, I did go to Thailand and checked out the country; it's a fine
country, but frankly I don't see what cost advantage they have
relative to China (stuff in TL is dirty cheap but that's also true in
CN, like Xian town where they work for a few dollars a day). But the
Thai stock market is, as you have pointed out, historically reasonably
well priced at the moment, and I did buy some big ticket electronic
items from Thai companies when I was there... still, lots of farming,
like in Turkey, which I think is supposed to be a drag on the economy,
though with food prices going through the roof due to the price of
oil, that might change in the future.

RL

[JOSE BAILEN]

Right now, RealPlayer's price doesn't look unreasonable -it's trading
at just 1.02 times its book value-, the problem is that, given how
risky this stock is -beta of 2.19- I don't think that the current
return on investment/ROI -8.27 percent- and negative earnings growth
justifies even this "a priori" good valuation, unless one assumes that
the performance of the company is going to improve quite a bit in the
near future....

Debt, by the way, is not that high -the debt/equity ratio is just
0.12- the problem is that ROI is less than the cost of capital, given
the "beta" of this stock price. If ROI doesn't improve over the medium
term, this means that this company should be trading at a price lower
than its book value....

[raylopez99]

On Dec 11, 10:26 am, "JOSE BAILEN" <jose.bai...@gmail.com> wrote:
> Right now, RealPlayer's price doesn't look unreasonable -it's trading
> at just 1.02 times its book value-, the problem is that, given how
> risky this stock is -beta of 2.19- I don't think that the current
> return on investment/ROI -8.27 percent- and negative earnings growth
> justifies even this "a priori" good valuation, unless one assumes that
> the performance of the company is going to improve quite a bit in the
> near future....
>

Sorry to bother you, but where do you get data on ROI? ROE is easy to
find, but not ROI. I took a look at your other posts and could not
find any info.

> Debt, by the way, is not that high -the debt/equity ratio is just
> 0.12- the problem is that ROI is less than the cost of capital, given
> the "beta" of this stock price. If ROI doesn't improve over the medium
> term, this means that this company should be trading at a price lower
> than its book value....

Market got hammered today, after the rate cut, which is a buying
opportunity IMO.

BTW the numbers for ROE on IBM look great, and morningstar thinks IBM
is a $150 stock: http://quicktake.morningstar.com/StockNet/Profitability10.aspx?Country=USA&Symbol=IBM

Also these Thai companies below look tempting (construction in
Thailand is booming...for now). Assuming no recession, or maybe even
so?!

ETrade now allows you to buy foreign stocks directly. BTW for legal
reasons, if you invest offshore, you should always buy a foreign stock
if you're a US citizen and never a foreign mutual fund that's not
registered in the USA (it's complicated as to why; do your own
research, but it has to do with reporting requirements under the
Patriot Act)

RL

http://finance.google.com/finance?q=BAK%3ASCC
The Siam Cement PCL (Public, BAK:SCC) - Discuss SCC

Name Symbol Last Trade Change Mkt Cap
TPI Polene Public Company Limited
Siam City Cement PCL
Thailand Iron Works PCL
Thailand Carpet Manufacturing PCL
PTT Chemical PCL
Thai Wire Products PCL
The Aromatics (Thailand) Public Co. Ltd.
Thai Cane Paper Public Company Limited
Dcon Products Public Company Limited

[JOSE BAILEN]

ROI equals NOPAT/(capital + debt). The most difficult issue is the
calculation of NOPAT (Net Operating Profits After Tax):you should make
plenty of accounting adjustments to obtain NOPAT on a cash basis
(accounting profits are on an accrual basis). For practical purposes,
Reuters gives you the ROI of a company here (look under Management
Effectiveness ratios):

http://stocks.us.reuters.com/stocks/ratios.asp?symbol=RNWK.O&WTmodLOC=L2-LeftNav-16-Ratios

Thanks for the tip about Etrade. The Thai market still looks
attractive, but maybe the South Korean market looks even more
attractive. It has a lower average P/B and P/E, and arguably with less
political risk: remember what happened just one year ago, when the
Central Bank of Thailand imposed a 30% reserve requirement on short
term capital inflows (the measure was reversed two days later, but the
risk of these measures is always there). These are the latest
valuation ratios for international stock markets:

http://www.globalindices.standardandpoors.com/sandp/index.jsp?pg=/apps/fundamental/fundamental.jsp&rp=returns

On 12/11/07, raylopez99 <raylo...@yahoo.com> wrote:
>
>
>

[raylopez99]

Thanks for that information on ROI. For future reference (mainly
mine) I reproduce it below. As an aside, I note ROE is greater than
ROI for the SP500, perhaps because of stock buybacks, or debt/equity
ratios (which a high one I think helps ROE). So in the future I'll
use ROI / EVA as outlined below.

If you see any nice Korean stocks feel free to post them here.

RL

Eva - how to value stocks

***********
I just added a file to the group which explains clearly the valuation
of a company/stock following the EVA approach. According to this
approach, the value of a company should be equal to

- book value -i.e., assets minus liabilities- plus the present
value
of future EVAs.

EVA is defined as :

(ROI (return on investment) minus WACC) * Total invested capital

[note: ROI can be found from reuters: ROI equals NOPAT/(capital +

debt). The most difficult issue is the calculation of NOPAT (Net
Operating Profits After Tax):you should make plenty of accounting
adjustments to obtain NOPAT on a cash basis (accounting profits are on
an accrual basis). For practical purposes, Reuters gives you the ROI

of a company here (look under Management Effectiveness ratios): - for
example, here: http://stocks.us.reuters.com/stocks/ratios.asp?symbol=RNWK.O&WTmodLOC=L2-LeftNav-16-Ratios
]

where WACC is the weighted average cost of capital (includes capital
financed throuth debt and capital financed through equity). The cost
of equity capital is defined as the risk-free interest rate (say,
about 4%) plus beta*expected return premium of equity investment
(historically, around 6%).

For example, if a company's stock has beta =1 (same risk as the
market
average), then the cost of equity capital is equal to 4% + 6% = 10%;
if the stock has
beta= 1.5, then the cost of equity capital is 4% + (1.5)*6% = 13%.

If a company has a return on investment (ROI) of, say, 10%, no debt
-i.e., all capital investment is financed through equity-, and a beta
of 1.5 -which means a cost of capital of 13%, as shown above), then
the intrinsic value of this company is BELOW the book value of a
company, because the difference between ROI and WACC is negative (it
is 10% - 13% = -3%). Therefore, this company would be overvalued even
if the market price equals its book value (because its intrinsic
value
is below its book value).
EVA-Introduction.ppt
305K Download


Some more material on EVA calculation here (more sophisticated than
the basic approach described above):

http://www.valuatum.com/tutorials/eva_valuation.shtml
http://www.valuatum.com/tutorials/eva_valuation.shtml
***********

On Dec 12, 12:51 am, "JOSE BAILEN" <jose.bai...@gmail.com> wrote:

[JOSE BAILEN]

I'm also adding this spreadsheet that calculates the ROI of a company,
given cash benefits, depreciation, amortization of assets, and taxes:

[raylopez99]

Buy FNM, FRE for the same price you could 11 years ago, or, if you're
bold, do as the rich do.

RL

Branson, Lewis Know What You Don't About Subprime: Matthew Lynn

By Matthew Lynn

Dec. 12 (Bloomberg) -- What do Britain's billionaires know that the
rest of the world doesn't?

The headlines are dominated by the damage inflicted on the global
financial system by the subprime crisis. The money markets are in
turmoil. Banks are forced to announce massive write-offs. Chief
executives of financial companies are getting fired faster than soccer-
team managers.

And yet in the U.K. at least, some of the country's richest men are
making big bets in precisely the opposite direction. The likes of
Richard Branson and Joseph Lewis are suggesting this is the moment to
be buying into the battered financial sector.

Are they right? Probably. For anyone with the money to withstand a
turbulent stretch, there are fortunes to be made. When a market goes
haywire, it is always worth watching what the wealthy are doing with
their money.

Last week, we learned that Lewis had boosted his stake in U.S.
investment bank Bear Stearns Cos. to 8 percent. He has now spent $1
billion accumulating shares in Bear Stearns since the subprime crisis
broke. That is serious money -- even for a man who ranks among the top
400 in Forbes magazine's 2007 billionaires list, with an estimated
fortune of $2.5 billion.

Likewise Branson. Usually the Virgin Group founder is a lot faster to
open his mouth than his wallet. But he has stepped up with a rescue
plan for failed British mortgage bank Northern Rock Plc, the most
visible victim of the subprime crisis so far in the U.K. The
government has backed Virgin as the preferred bidder for the bank,
Northern Rock said last month.

Not Alone

Nor is he the only person who sees some value in Northern Rock. Philip
Richards isn't quite in the Branson or Lewis league. But the co-
founder of London-based hedge-fund manager RAB Capital Plc is among
the successful new breed of money managers. He has built a 6 percent
stake in Northern Rock since it ran into trouble, betting, like
Branson, that its problems can be fixed.

In effect, Lewis, Branson and Richards are all saying the same thing:
The subprime crisis is a lot of smoke, with only a small fire
underneath it. Once the smoke has blown away, we're going to be left
with a building that is basically sound and will be worth something.

There is no question that the mortgage and investment banks have taken
a hit.

What They See

``With the markets mired in a dysfunctional state and without any near-
term remedy or catalyst on the horizon to restore the credit markets
to working order, it will be tough going for brokers,'' Bank of
America Securities analysts Stanley August and Bryan Cook said in a
note to investors. ``It is, however, important to remember that these
firms have broad and diverse business models that transcend the
subprime mortgage mess.''

It would be foolish to dismiss men such as Lewis, Branson or Richards.
They are among the smartest investors in the world. So what have they
spotted?

Five things.

One, the losses are containable within a banking industry that remains
enormously profitable. The subprime hit will be taken, there will be
writedowns, but all the other businesses the banks are involved in
will carry on.

Two, global growth remains positive, and central banks are lowering
interest rates. The latest examples? The Federal Reserve yesterday
sliced its key lending rate to 4.25 percent, while the Bank of England
last week shaved its rate to 5.5 percent. So long as rates come down,
and economies are growing, there isn't going to be any financial
catastrophe.

Junked Models

Three, the main problem in the credit markets is that the old
valuation models have been junked, and new ones haven't been agreed
upon. That's serious, but not fatal. Pretty soon, investors will
figure out what all that subprime paper is actually worth, and then
the market will get back to normal.

Four, there is fresh capital out there. Look at the way the Abu Dhabi
Investment Authority has propped up Citigroup Inc., and the Government
of Singapore Investment Corp. has helped out UBS AG. Although they are
going to suffer losses, the banks are also finding new funding.

Five, no government is going to let these banks go bust. It might be
satisfying to see a lot of greedy feckless bankers lose their fortunes
for irresponsible lending. But no one wants to see the economy
collapse just for that moment of pleasure.

You will need deep pockets to ride out the next few months, but if you
can take that, there are profits to be made. And for every dire
warning you hear about the subprime meltdown, it is worth remembering
that some of the world's richest men think this is a storm in a
teacup. They are probably right.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed
are his own.)

[JOSE BAILEN]

A couple of questions about Etrade: what fees are charged by Etrade to
buy/sell foreign stocks directly? Do you need a US address to open an
account with Etrade - US (when I opened my account with Fidelity, I
was a resident in the US, but this is not the case now).

Thanks!

Jose

On 12/11/07, raylopez99 <raylo...@yahoo.com> wrote:

[raylopez99]

On Dec 12, 1:18 pm, "JOSE BAILEN" <jose.bai...@gmail.com> wrote:
> A couple of questions about Etrade: what fees are charged by Etrade to
> buy/sell foreign stocks directly? Do you need a US address to open an
> account with Etrade - US (when I opened my account with Fidelity, I
> was a resident in the US, but this is not the case now).
>

ETrade charges $5 for market and $7 to limit orders for all US
citizens/residents for US stocks--if said customers were ex Brown &
Company, which I was. Otherwise it's slightly higher. For buy/
selling foreign stocks directly, I recently looked into it quickly and
was disappointed to see that the fees were much higher. For a country
that I think was England, it was $25 for a routine $2k trade. But of
course you get access to stocks that you can't find in the USA.

Etrade does not require a US address, but, I would strongly encourage
you to use a US address, since I think they will try and stick it to
you if you're foreign (like everything else--including magazine
subscriptions). Legally, you can actually (if in good faith) use a US
address and still be legally a US resident if you have an intent to
return to the US (but for tax purposes, you can actually shield $80k
in income more easily if you do not intend to return to the US). But,
I don't think it's a big issue for commissions since ETrade is not
going to sue you if you mislead them into thinking you're a US
resident. So, I would use a friend's USA address as a mail drop (this
is what I do, and I have no intent to return to the US) and open an
Etrade account online, to take advantage of the lower fees given to US
residents. And if you have a bank account in the USA you can wire
money into ETrade (and out of it).

Sometimes, on rare occasion, the web server will refuse to allow you
to state you are a US citizen if it detects a foreign ISP (this is
very rare, but I've had it happen). I don't think ETrade checks for
this, but, if they do, I subscribe to a service (costs $13 for every
three to 12 month period, which you can buy just once, ie. just for
the next three to 12 months, I forget which but the cost is low)
called Steganos Internet Anonym(tm) VPN. This will allow you to fool a
web server into thinking you're from the USA. Very handy, it's saved
me money. Don't confuse this with "Tor" which is anonymous but a
public unsecured free service, which is absolutely the wrong thing to
use since you must never use a credit card or send financial
information over an unsecured (albeit anonymous) proxy. Bottom line:
if in the rare event ETrade refuses to consider you a US citizen since
you're posting from Spain, just buy the Steganos application above for
$13 and fool the server into thinking you're still in the US, then
transfer money from your US account (or write them a check) and you're
in business.

RL

[JOSE BAILEN]

Thanks. I have a US account -Fidelity's- so this shouldn't be a
problem. Anyways, I'm not planning to invest outside the US market
yet: I have some foreign stocks purchased in the US markets -Tsakos,
Korean Telecommunication Company, for instance- and in any case the
dollar is now well below its long-term equilibrium value -it's around
30 percent below this value vis-a-vis the Euro- so, since I'm planning
to hold my stocks for many years, it makes sense to have US stocks and
wait till the dollar starts appreciating again -this could take 1 year
or 5 years, but it would eventually appreciate versus the Euro-.

On 12/12/07, raylopez99 <raylo...@yahoo.com> wrote:
>
>
>

[raylopez99]

Timing is everything with the euro. Everybody including my neighbors
here think the Euro is overvalued, but just when the worm begins to
turn (or the curve) is anybody's guess. I think the shocker now might
be stagflation in the USA--witness the 17 year record jump in import
prices--if so, there might be one more panic rally for the Euro/
Gold.

RL

[JOSE BAILEN]

Right. The exchange rate determination literature shows that, in the
short term, exchange rates behave basically as a random walk
-impossible to predict-. In the long term, there is a convergence to
an equilibrium: more or less, the equilibrium is the one that makes
the prices of tradable goods similar in different currencies, i.e.,
different currencies have a similar purchasing power (the famous "Big
Mac" index developed by The Economist derives from this idea). The
problem is that nobody knows when the dollar appreciation will take
place, past experience shows that it usually takes several years to
reverse market trends.

On 12/12/07, raylopez99 <raylo...@yahoo.com> wrote:
>

[raylopez99]

From Morningstar...
Funds in the Basement with Fannie and Freddie

Some good funds have a lot riding on the mortgage giants.

By David Kathman, CFA | 12-14-07 | 06:00 AM | E-mail Article | Print
Article | Permissions/Reprints | David's Monthly Newsletter

As the fallout from the subprime mortgage crisis has widened, two of
the most recent victims have been Fannie Mae (FNM
Sponsored by:
FNM) and Freddie Mac (FRE

Sponsored by:
FRE). These government-sponsored enterprises (GSEs) provide liquidity
to the U.S. mortgage market by buying and packaging mortgages and
selling them on the open market as mortgage-backed securities. Both
firms went through accounting scandals a few years ago that depressed
their stock prices, but until recently, they had been steadily
recovering, and were at or near their two-year highs as of early
October. Even the subprime mortgage mess did not affect Fannie or
Freddie very much at first, since they were perceived as being
relatively safe, at least compared with other mortgage-related stocks.


That has all changed in the past two months. Both Fannie and Freddie
have been increasingly squeezed by the liquidity crisis that began
this summer, forcing them to slash their dividends and raise a
combined $13 billion in recent weeks through the sale of preferred
shares. Both firms reported big losses in the third quarter--$1.4
billion for Fannie, $2 billion for Freddie--mostly from markdowns in
the value of mortgages on their balance sheets. Nobody is sure how bad
things will get in the future, but on Dec. 11, Freddie Mac CEO Richard
Syron said that he expected credit losses of $10 billion to $12
billion before the crisis is over. All this turmoil has been reflected
in the share prices; through Dec. 10, Fannie Mae had lost 36% for the
year to date and Freddie Mac had lost 49%, with most of those losses
coming in the past two months.

We thought it would be interesting to see which mutual funds have the
biggest percentage of their portfolios in Fannie and Freddie, much as
we did recently with troubled financial giants Merrill Lynch (MER

Sponsored by:
MER) and Citigroup (C

Sponsored by:
C). Fannie and Freddie are each held by just over 600 funds. The first
table below shows the 10 funds with the biggest percentage of their
portfolios in Fannie, and the second table shows those with the
biggest percentage in Freddie. We've also shown each fund's category,
the size of its asset base, and its percentile ranking within its
category for the year to date as of Dec. 11.

Biggest Fannie Mae Holdings

Category
Size
($Mil) Fannie
(%) % Rank
Cat YTD

Fidelity Select Home Finance (FSVLX

Sponsored by:
FSVLX) Financial 148 15.55 100

Thompson Plumb Growth (THPGX


The same fund is at the top of both lists-- Fidelity Select Home
Finance (FSVLX


Sponsored by:
FSVLX), which has more than 22% of its portfolio in these two stocks
combined. That's not too surprising, since the fund's narrow mandate
requires it to invest in companies that offer or facilitate home
mortgages. This fund has had a predictably tough time in the current
market, losing more than 30% of its value for the year to date, though
it has actually rebounded a bit from its lows.

Four other funds are also common to both lists, including another
speciality-financial fund (Morgan Stanley Financial Services (FSVBX


Sponsored by:
FSVBX)) and three Touchstone funds managed by John Schneider. The
Freddie Mac list also includes three JHT/John Hancock funds that are
all run by the same management team from Pzena Investment Management;
that team's flagship fund, the $7 billion John Hancock Classic Value
(PZFVX

Sponsored by:
PZFVX), is the 11th-biggest holder of Freddie Mac, just missing the
top 10. The funds run by Schneider and the Pzena team have diversified
portfolios, so they're clearly making significant bets on Fannie and
Freddie. Those bets have had a painful effect in the short term, since
all of these funds are near the bottom of their categories (98th
percentile or worse) for the year to date, yet these managers have
compiled respectable longer-term records as value managers.

Having big stakes in Fannie and Freddie has been painful this year
across the board; of the 15 different funds in these two tables, 12
are in their respective category's bottom quartile year to date, and
only one, DWS Dreman Concentrated Value (LOPEX


Sponsored by:
LOPEX), is ahead of its category. Yet there are some good funds with
good managers here, in addition to John Schneider and the Pzena team
mentioned above. David Dreman of the DWS Dreman fund is a legendary
value manager; Thompson Plumb Growth (THPGX

Sponsored by:
THPGX) has a good long-term record despite lagging the past few years;
and Schneider Value (SCMLX

Sponsored by:
SCMLX) is an Analyst Pick in the large-value category. (The latter
fund is run by Arnie Schneider, brother of John Schneider.) Of course,
this is no guarantee that Fannie and Freddie will rebound, since even
the best managers don't get every bet right. But the fact that some
smart value mavens are big owners of Fannie and Freddie may give
comfort to other shareholders of those stocks.

On Dec 9, 6:24 am, raylopez99 <raylope...@yahoo.com> wrote: