Just About Time

Here is the cover of this week's Time magazine. This reminds me, although to a lesser extent, of the famous Business Week cover from 1979 - published just before the start of the greatest bull market in history - 1979 to 1999.






It's important to note that these publication are not wrong in the data they present. In fact they are basically right on, with respect to the problems the economy faces both then and now. The problem is their timing - they are out of sync with the market. They are reporting on issues and events that are already discounted in the market. The current soft patch is baked into the cake. So, anyone reading this cover would get the idea that it's time to sell. Remember the market looks out 6 to 12 months. The recovery is happening, just not at the brisk pace that everyone expects or wants. The S&P 500 is down 7.1% over the past 6 weeks. The TSX is down 9.1%. Prices are more reasonable now then 6 weeks ago - but you still have to be selective. My crystal ball is no clearer than yours, but lower prices are good - for buyers. It's good to have cash now, for those down days when you can pick away at good & cheap stocks. There's value in BIG, CSCO, BAC (bought some today @ 10.61) and BRK-B. It's just about time - to buy.

Move Over Costco

As a follow-up to my last post about the retailers - I failed to mention that I also closely follow Costco (COST) as they are one of North America's best retailers. Jim Senegal is one of the best CEO's out there. It's a company I'd love to have in my portfolio, but it never seems to get cheap enough for me to pull the trigger and buy. My wife is personally responsible for the steady same store sales increases at select stores throughout Ontario - she loves a deal.

The retailers continue to be under pressure. I have taken an opening position in Big Lots (BIG) earlier this week with an average cost of $32/share. This is not a deep value asset play, but a discount to earnings power play. BIG is a good business with a good future and good management - worthy of hitching my wagon to. BIG has sold off over the past 3 months as several potential private equity buyers failed to offer enough to take BIG private and worries about a softer economy ahead. CEO, Steven Fishman is well aligned with shareholders and has made the right decision by staying public - for now. It's nice to see a CEO who is so focused and will publicly speak about areas of the business that need improvement, (see page 5 of the 2010 AR) not just tell shareholders about what has gone well. The crew at BIG are very good capital allocators. Just look at some of these statistics:

EPS growth 10 yr:           11%
Cash flow Growth 10 yr:   8%
Long-Term Debt: NIL
Share buybacks: bought back 1/3 of the company in the last 5 years.
ROE: consistently >20% - even more impressive as they have no debt.
Rising op. margins over the last 5 years. 5.7% ------> 8.8%
Free cash flow: a little over $200 million, for a FCF yield of 10%

BIG recently lowered guidance for the year - which for me doesn't matter - but the "street" has become a little pessimistic. I'm looking out a few years - if Fishman and his team just continue to do what they have done in the past BIG shareholders will do well. On a conservative ( little or no growth) basis, the company is worth somewhere around $45/share and maybe as much as $55 if they just grow at modest rates going forward. If another buyer does emerge - and is willing to pay $55 - I'll tender.

I will continue to add to BIG over the next few months if the market moves lower.