A look at 5 Defensive Plays 1 Year Later!

Here is a look at five defensive stocks I wrote about 1 year earlier and where they are now. The market was tanking but did not reach a bottom for another 5 months. Keep in mind that their are many fundamentals to look for when picking individual stocks, however I tried to kept it simple with just a few important ratios mentioned here.

1) The P/E ratio All five stocks mentioned at the time had a P/E ratio of under 18. Only three currently have P/E's under 18.

2) Return On Equity or REO All had REO's of 14% or better while four of these still do. The higher this figure the better. REO shows how well a company uses investment funds to generate earnings growth.

3) Dividend Yield All paid dividends, and all have increased their payouts since.

4) Debt to Equity Ratio This is a measure of a company's financial leverage. Debt/equity ratio is equal to long- term debt divided by common share holders' equity. Generally the lower this figure the better. Last year P&G had the highest D/E ratio in this group which was .52 today it stands at .33 .

These are the types of companies that the legendary investor Warren Buffett invests in. In fact Coca Cola (KO), Costco (COST), Johnson & Johnson (JNJ), and Proctor & Gamble (P

G) are a part of Buffett's holding company Berkshire Hathaway. The five stocks mentioned returned a combined 11.05% before dividends. If you add on the average annual dividend yield of 2.67% for these five companies over the past year you will get a 13.72% total return. You will notice that all five issues are companies that make products we use and consume everyday, which is another trait that Buffet looks for.

One year later three out of five still look reasonably priced, those being HRL, JNJ, and PG.

Author currently long JNJ.

10 Small Caps with High "Insider Ownership"

All 10 stocks mentioned below offer double digit rates of return on equity as well as assets. ROE is a corporations measurement of how profitable the company is with the money shareholders have invested. ROA shows how efficient management is at using its assets to generate earnings. All ten are trading at reasonable P/E ratios. All 10 mentioned have current ratios above 1.9, any thing above 1.5 shows that the company is capable at paying back short term debt. All 10 have a large inside ownership with modest to low debt and free cash flow, with each paying a dividend.

Company	Symbol	Price$ as of 9/14/09	P/E Ratio	ROE%	ROA%	Market Cap	Free Cash Flow	Inside Ownership %	Current Ratio
AAON, Inc.	AAON	20.31	12.5	29%	18%	349 mil	20 mil	27%	2.1
Advance America	AEA	5.67	9.6	20%	11%	358 mil	168 mil	31%	5.2
Alliance Holdings	AHGP	20.16	11.9	38%	11%	1.2 bil	122 mil	79%	2.1
Alliance Resource	ARLP	35	11.3	52%	11%	1.3 bil	71 mil	44%	2.1
Buckle	BKE	28.54	11.5	30%	23%	1.3 bil	94 mil	44%	3.7
BreitBurn Energy	BBEP	10.95	.92	65%	21%	593 mil	37 mil	42%	1.95
Cal-Maine Foods	CALM	28.39	8.5	26%	14%	659 mil	113 mil	39%	2.3
Lancaster Colony	LANC	50.56	15.9	23%	16%	1.4 bil	64 mil	35%	2.9
Newmarket Corp	NEU	88.65	14.2	27%	12%	1.3 bil	42 mil	23%	2.8
Terra Nit	TNH	106	10	128%	63%	1.9 bil	375 mil	75%	5

* Deep Value Investor Seth Klarman of The Baupost Group holds 8.49 million shares of BreitBurn Energy which accounts for over 16% of the stock.

Concentrate On Value Part III - Debt/Equity Ratio

As I wrote in my previous two Post, Ignore the headlines and stick with the facts at hand, not the B.S. that is hyped in the media or the tips you hear at a party. Investing, although not so simple can be enjoyable and profitable if you approach it in the right manor. As mentioned in my previous two posts book value, free cash flow and return on equity are just some of the tools used to finding the right business to invest in. Another tool to help guide you is the debt/equity ratio which is simply liabilities divided by the stock holders equity. A simple example of this would be: Take your homes current market value, say it is $200,000 dollars and lets say you owe the bank $100,000 dollars, your debt-to equity ratio is 1.0 or 100 percent. Lets also take your neighbors home current value of $200,000 dollars and suppose he/she owes $150,000 dollars. The debt/equity ratio is $150,000/$200,000 3.0 or 300 percent. In this formula we are looking for low debt/equity ratio's. The lower the better. However keep in mind that some industry's will have higher figures than others. Also take note that this is how many company's finance their growth,however if the debt/equity ratio gets to be to high this could be a warning sign to get out or stay away altogether. Also let me reemphasize that you should never take just one of these methods all on its own. Choosing a stock using a combination of these methods can yield some profits for the patient investor with an eye for value.

Ignore The Headlines And Concentrate On Value Part II

As I said in my previous post concentrate on the fundamentals. We as investors are constantly bombarded with news via 24 hour news channels, the news paper and now that Ultra 24 hour news channel The Internet. Hey information is great and now we can receive more of it and at a faster speed than ever. As an astute investor one needs to turn off the hype and noise and concentrate on those fundamentals. I mentioned earlier terms such as book value and free cash flow, well their are other important things to look at when buying into a business. For example One of the most important profitability metrics is return on equity [or ROE for short]. Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. If you think back to lesson three, you will remember that shareholder equity is equal to total assets minus total liabilities. It’s what the shareholders “own”. Shareholder equity is a creation of accounting that represents the assets created by the retained earnings of the business and the paid-in capital of the owners.

A business that has a high return on equity is more likely to be one that is capable of generating cash internally. For the most part, the higher a company’s return on equity compared to its industry, the better. This should be obvious to even the less-than-astute investor If you owned a business that had a net worth [shareholder’s equity] of $100 million dollars and it made $5 million in profit, it would be earning 5% on your equity [$5 / $100 = .05, or 5%]. The higher you can get the “return” on your equity, in this case 5%, the better.

Some businesses that cosistantly have high returns on equity are Philip Morris International $PM w/59% ROE, Johnson & Johnson $JNJ w/30% ROE, and Coca Cola $KO w/28% ROE.

Return On Equity is another investment metric used by many famed Value Investors such as Warren Buffett, Bruce Berkowitz, Mohnish Pabrai and many other notabe investors.

A Cash Rich Insurer: Odyssey Re

Odyssey Re (ORH) is a leading reinsurance underwriter that provides property and casualty insurance as well as specialty insurance. Odysseys biggest shareholder is Fairfax Financial which I talked about in a previous post. Fairfax holds 66% of the outstanding common shares. Currently ORH has a market cap of 2.5 billion and its revenues are 3.2 billion. Total cash on hand is 2.5 billion, which means it only trades for 1 x cash. Very little debt with a debt/equity ratio of .18. ORH sports a 27% REO(return on equity). They pay a small dividend which yields .70% which was recently raised. With so much in cash and backing from Fairfax, Odyssey looks to be in a strong position to weather out the current financial crisis.



Author does not hold any position.

Fairfax Financial Holdings Looking Cheap!

I recently wrote an article that mentioned Fairfax Financial(FFH). Fairfax is an insurance holding company run in the same fashion as Warren Buffet's Berkshire Hathaway. They take the float from the insurance business and re-invest it in common stock, bonds, or whole companies. Fairfax is run by Prem Watsa who is looked upon as the Warren Buffet of Canada. Fairfax has sold off with the market in general reaching a high of $355 a share. Currently Fairfax is trading at book value of $252 a share with a market cap of 4.7 billion and sales near 8 billion. With over 6 billion in cash (which represents $333 per share) and a debt-to-equity ratio of only .35 this company is looking quite attractive. They have a high REO(return on equity) of 37% with a trailing P/E of 3.25 and pays 1.9% dividend. To boot they have a stock portfolio worth 3 billion.

The author suggest further research before investing.
The author is long FHH.

STOCKMANMARC