The Prudent Investor


Fourth WL Purchase
February 28, 2008, 10:23 am
Filed under: Financial, Update

Purchased 2 shares of WL at $32.23 per share. Why not 3 shares? I forgot to fund my account and did not have enough. <g> I will purchase 4 shares next week to complete the initial position.



Third WL Purchase
February 21, 2008, 1:35 pm
Filed under: Financial, Update

Purchased 3 shares of WL at $32.32 per share.



Second WL Purchase
February 14, 2008, 10:23 am
Filed under: Financial, Update

Purchased 3 shares of WL at $33.07 per share.



First WL Purchase
February 7, 2008, 10:15 am
Filed under: Financial, Update

Purchased 3 shares of WL at $32.69. Check the progress of the portfolio via the “The Prudent Investor Portfolio” link on the left.



A Decision
February 6, 2008, 7:26 am
Filed under: Financial

Looking at the three final companies in contention – Associated Banc-Corp (Nasdaq: ASBC), Wilmington Trust Corporation (NYSE: WL), and BB&T Corp. (NYSE: BBT) – shows a number of similarities.

  PE P/S Yield Market Cap
BBT 12.93 3.76 4.33 3.66B
ASBC 13.32 3.19 3.85 2.37B
WL 11.60 3.20 4.97 20.02B

The only thing that sticks out here is that Wilmington Trust has a much larger market capitalization than the other two. However, a closer look shows that they also have the lowest P/E, almost the lowest P/S (statistically insignificant), and the highest yield. Unless I can find something damning about this company, it could be the best of the three. However, before I get too far ahead of myself, let’s look at a description of the company.

Wilmington Trust Corporation operates as the holding company for Wilmington Trust Company that provides fiduciary, wealth management, investment advisory, financial planning, insurance, broker-dealer, lending, and deposit-taking services in the United States and internationally.

The Regional Banking segment offers various commercial banking services, including commercial loans, construction loans, and commercial mortgages; and retail banking services comprising consumer lending, residential mortgage lending, and deposit products, such as demand checking, certificates of deposit, NOW accounts, and savings and money market accounts in Delaware.

The Corporate Client Services segment offers various capital markets services, including owner trustee, indenture trustee, and other specialized services for capital markets transactions; entity management services consisting of independent directors, office space, administrative services, and corporate governance services to special purpose entities and captive insurance companies; retirement services that include trustee and administrative services for 401(k) and other types of retirement plans; and investment and cash management services.

The Wealth Advisory Services segment provides asset management services; family office services comprising family governance planning, investment consulting, real estate acquisition and disposition, cash flow management and budgeting, tax planning and compliance, risk assessment, insurance oversight, family security, bill payment, and payroll management services; and fiduciary services, which include trust, administrative, tax, philanthropic, and estate settlement services.

Now that we know what they do, we can look at the 2007 Q4 conference call. I do like the way Ted Cecala, the company’s CEO, began his portion of the call.

“If we had lending relationships with national builders for loans financing residential construction in Florida, Arizona, Nevada or the Midwest, I would discuss that; but we have none.

“If we have exposure to structured investment vehicles, I would begin my discussion by describing how we are valuing those assets; but we have none.

“If we had assets backed by sub-prime mortgages, I would also discuss them; but we have none.”

You can find this at www.SeekingAlpha.com and read how a couple of analysts raked them a bit over the coals, and this is reflected in the fact that they generally have a “Hold” on the stock. However, they do not appear to have exposure in the areas that have given the economy a hard time recently, so this gives me hope that this company has been unfairly knocked down.

Analysts have not recently given WL a favorable rating because the diluted earnings of 67 cents was five cents short of their estimate. I believe that we are back to realistic expectations and as the industry begins its recovery, Wilmington Trust will do just fine.

I believe that Wilmington Trust Corporation will be the next addition to the Prudent Investor portfolio.

In the past I have started each position with a $500 purchase, but since the trades are without commission, I am going to make a $125 purchase each Thursday of this month. That will help mitigate some of the risk due to the potentially volatile nature of the industry at the moment.  I will not be surprised to see financials continue to have a hard time, but do think that it is proper to start the position at this point.



Cutting Some Financial Institutions
February 4, 2008, 2:03 pm
Filed under: Financial

When I started putting this together my intention was to look through the financials and determine which financial company might be the best performer. That’s the typical way I go about things, but I decided to do things a little differently in this situation.

Problems with the economy started with the whole subprime mess, and all financial institutions began their big decline. Those with the highest exposure fell the hardest, so it seems to me that the easiest way to weed these losers out would be to look at the 52 week high and low and see how far each had declined. Those that had fallen the hardest would probably be the ones who must have relied on subprime issues the heaviest.

As the market tends to overreact and then correct, the companies that recovered better would be the ones of greatest interest. The whole group got severely knocked down, and the ones that shouldn’t have been grouped with the whole are in the process of correcting more quickly.

So below is the chart I put together at the beginning of the month. The first column is the 52 week high, the next is the 52 week low, the third is the percentage of the high the low represented (the higher the better), the next column is a grab of the current price, and the last column indicates the percentage recovery (the higher the better).

  L H % Cur R%
SNV $10.35 $33.82 0.31 $13.30 0.13
MI $20.92 $51.48 0.41 $28.45 0.25
RF $17.90 $37.61 0.48 $25.40 0.38
CMA $35.01 $63.89 0.55 $44.35 0.32
BBT $25.92 $44.19 0.59 $36.27 0.57
ASBC $21.38 $35.46 0.60 $28.56 0.51
WL $27.78 $44.55 0.62 $35.16 0.44

The four companies with the biggest 52-week drop are also the companies with the slowest recovery. These companies will be removed from consideration. The remaining companies each dropped about 60% and recovered about half of the decline. So here is a list of the final contenders.

Associated Banc-Corp (Nasdaq: ASBC)
Wilmington Trust Corporation (NYSE: WL)
BB&T Corp. (NYSE: BBT)



Initial Cuts
February 1, 2008, 2:42 pm
Filed under: Update

When I look at the list of companies in the consideration list, I see some that I know will not make the cut for me, so I guess it makes sense to knock them out initially.  Although the cash (dividend) element is key, I am hoping to find a company that will do well going into the future.  If we receive a 5% dividend on a company whose stock falls 5%, then we are not using our money wisely.

Pfizer: PFE

I have owned Pfizer in my DRiP portfolio for about a decade and continue to hold it, only because of the dividend.  Indeed, the fact that the company has increased dividends for the past 41 years is quite impressive.  However, for the near future, at least, Pfizer is simply not the company that I would choose to purchase.

The numbers, at this point, speak for themselves, the PEG is nearing 2 and the P/S is over 3, both numbers I would like to see closer to 1, or lower.  Earnings and revenue growth (year over year) are negative, which is not the direction we wish to see any company go.  Most importantly for a drug company, the pipeline is not what it used to be – whereas the company had numerous drugs ready to go onto the market at the time I started my DRiP, these drugs have lost their patents and have not been replaced.  This could happen in time, but I do not currently see anything compelling that makes me want to take the plunge.

Gannett Co.: GCI

The problem with Gannett is that it is not in the right industry.  The company publishes 90 daily newspapers and about 1,000 non-daily publications, which is not a growing segment.  The fact that you are reading this outside of a printed publication is evidence that the population is moving away from newspapers and more toward online publications.  They have expanded to add websites to the company’s portfolio, but it does not own any of the large and popular sites.  Similarly, their broadcasting segment does not own any large and popular channels, and the television business is getting increasingly difficult as more small channels get added to customer’s cable choices that fill niches.  And just as a parting shot, how is it that Douglas McCorkindale takes millions of dollars from the company as a 68 year old consultant – I would think that some young blood, more attuned to the new media, would be needed to begin to turn this company around.

Old Republic International Corp: ORI

This is another company that is simply in the wrong place at the time we are looking for an addition to our portfolio.  Old Republic is in the Surety and Title Insurance industry, which has been hammered due to the subprime problems.  Accordingly, its one year chart shows that the company has approximately been cut in half.  There will come a time when this industry will come back, after all, people do need to take out loans, but I am not confident as to how this mess is going to shake out.  It seems to me that forecasting the future in this area is more speculative than I am willing to consider because this is a relatively conservative portfolio, so I will pass on this company.

Integrys Energy Group: TEG

I have not looked closely at this company, but the only reason it is being tossed from the list is that the portfolio already owns a utility, SJW Corp.  Although Integrys is a regulated electric and natural gas and SJW is water, they are both in the Utilities sector, so I will not consider it for addition to the portfolio.

UDR: UDR

The problem with UDR is simply a quick look at the numbers.  UDR operates as a self-administered equity real estate investment trust (REIT).  The PEG is at 2.75 and the P/S is almost 3.9, both numbers I would like to see closer to 1.  Debt/Equity is about 3.5, perhaps due to falling housing prices, which gives us a big question mark going into the future.  Certainly, housing prices will rise in the future, but working off that debt in the meantime could hold this company back and stunt its growth.

US Bancorp (NYSE: USB )
Bank of America Corporation (NYSE: BAC )
AT&T Inc. (NYSE: T )

One of the things that I wanted to do with this portfolio was to select companies that were relatively small, and the three above companies certainly do not fit that criterion.  Although they may be excellent additions to one’s portfolio, they simply do not fit the established purpose of this portfolio, each having a market cap of over $50 billion.  For that reason alone I am removing them from the list of considerations.

Below is a list of the remaining contenders for a place in the portfolio:
Associated Banc-Corp.
Synovus Financial Corp.
Regions Financial Corp.
Wilmington Trust Corp.
Comerica Inc.
BB&T Corp.
Marshall & Ilsley Corp.
Leggett & Platt Inc.

If you think that there is a theme here then you are absolutely correct.  All of the listed companies, with the exception of Leggett & Platt, are in the Financial sector.  We have all seen a downturn in this area, but over the course of the next decade, which is the expected lifetime of the portfolio, it should rebound nicely and make up for lost time.  As a matter of fact, it is possible that the negativity will be overshot for companies that have flowed downstream with the water of uncertainty, and if a good company is selected then the portfolio could nicely benefit.  I will be looking for the better company.

At this point I will make an executive decision.  Since the list has winnowed down to seven financial institutions, I am going to drop Leggett because it is not in the financial sector.  Simply put, this will offer an opportunity to better compare apples with other apples.  Leggett may be an excellent pick (I have not looked into this company), but for the purposes of selection at this time I am removing it from the list.

The next post will see the elimination of more companies from the consideration list.