Robert C. Merton is perhaps one of the most brilliant financial theorists in the world.  He received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new method to determine the value of derivatives, Merton’s research focuses on finance theory, including life-cycle finance, optimal intertemporal portfolio selection, capital asset pricing, pricing of options, risky corporate debt, loan guarantees, and other complex derivative securities. No doubt, he is an incredibly brilliant man, but at the same time, he was the principal of Long-Term Capital Management, a speculative hedge fund that collapsed in the late 1990s after losing $4.6 billion.  Not only was he extremely smart, but all 15 of his partners were super smart too.

Long-Term Capital Management did business with nearly everyone important on Wall Street. Indeed, much of LTCM’s capital was composed of funds from the same financial professionals it traded with. After its collapse on September 23, 1998, Goldman Sachs, AIG, and Berkshire Hathaway offered to buy out the fund’s partners for $250 million, to inject $3.75 billion, and to operate LTCM within Goldman’s own trading division. The offer was stunningly low to LTCM’s partners, because at the start of the year their firm had been worth $4.7 billion. Warren Buffett gave Meriwether less than one hour to accept the deal; the time period lapsed before a deal could be worked out.

Unfortunately similar to the case of Robert C. Merton and LTCM, the stock market is full of smart people and companies doing stupid things… the list is long: Jeff Skilling of Enron, Bernard Madoff, AIG, Lehman Brothers, Fannie Mae, Freddie Mac, and so on.

As Warren Buffett mentioned in this great speech–what is important are the qualitative factors of a person, because everyone has the intelligence to do just the right thing.

When asked about Long-Term Capital Management just 4 weeks after the final call to agree on the bailout, Warren Buffett recounted one of the most valuable lessons I have ever heard in financial advice: [click to continue…]



Ted Williams Ted Williams

The Science of Hitting was a book that attracted Warren Buffet’s attention. The book was written by Ted Williams, one of the greatest baseball hitters of all times. His impact on the game, both as a player and as an inspiration to generations of hitters who followed, continues to this day. Williams combined the following:

  • Power (521 lifetime home runs)
  • Patience (he received more walks than any batter in his day); and
  • Control (a .344 lifetime average) that no player had ever done before.

He had the intelligence of a lead-off hitter and the brawn of a power hitter; the patience of a bench warmer, and the bat control of a single hitter.

His contribution to the game was to reduce the waiting time to hit a perfect pitch; he said that a good hitter can hit a pitch that is over the plate three times better than a great hitter with a questionable ball in a tough spot. Williams knew, for example, that a high and inside strike pitted his weakness against the pitcher’s strength. If he consistently swung at those pitches, his batting average would suffer. A low and outside pitch produced the same results – a success rate far below Williams’ lifetime batting average. However if Williams received a pitch in his optimum strength zone, he put all his muscle into it, knowing that he could consistently produce a higher batting average. In constructing a template for success, Williams outlined a pattern of patience. He realized that it was often better to take a pitch on the fringe of the strike zone rather than swing for a low average. A called strike was better than making an out.

Buffet extends the same reasoning to stock picking. The stock market is like a major league pitcher who fires thousands of pitches a day, with each pitch representing a certain stock at a certain price. As the batter, you must decide which of the thousands of pitches to swing at, and which you will let whiz by. What distinguishes you from a baseball player, however, is that you don’t ever have to swing. The game of investing doesn’t force you to take the bat off your shoulder and swing, unlike the batter in the stadium. No one will “call you out”. Buffet says: [click to continue…]

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Intel LogoIn 2013, Intel underperformed the Nasdaq index by 12.7%, and investors became concerned about the end of the era of Wintel domination. The Wintel alliance was virtually unstoppable from the 1980s to 2000. In April 2013, the research firm IDC issued an alarming report saying that world-wide shipments of laptops and desktops fell 14% in the first quarter from a year earlier. That was the sharpest drop since IDC began tracking this data in 1994 and marked the fourth straight quarter of decline – IDC Expects PC Shipments to fall by -6% in 2014 and Decline Through 2018.

Investors have been betting on mobile and tablets to fill the gap, but it doesn’t appear that the numbers investors were hoping for will ever materialize. As we know Intel does not have a strong mobile presence, Qualcomm has dominated this market segment for many years. The market for tablets and book readers has cooled down and it doesn’t appear that they will ever achieve the volumes investor were looking for.

Regardless of this ‘crisis’ in the PC industry, I believe Intel still has a lot of potential. Investors should stop looking to PC shipments as a means of assessing a potential investment in Intel. What is now driving the growth at Intel and will become the next big things are wearables, servers, and the Internet of things. While these three are still nascent product categories, Intel is already playing a big development role in each of them.


“Wearables” is still a new product category, but one that Intel has a vested interest in. Earlier this year, the company acquired wearable maker Basis for around $100 million. Some day soon the term wearables will no longer only be synonymous with wristbands. Applying technology to fashion is just beginning to emerge as a new approach to integrating technology products into our daily lives, and so far we have only seen the tip of the iceberg.


The global demand for datacenters and servers is growing exponentially. As cloud services become more available and affordable, servers will play an increasingly critical role. Cloud, networking, high-performance computing, and enterprise revenue all grew more than 15% in the second quarter of 2014 for Intel. The company’s data center business also had a strong second quarter with 19% growth year-over-year leading to all-time record revenue $3.5 billion. The server processors division is now the most important division at Intel – generating 26.9% of the total revenues, 5.7% more than notebook processors (21.2% of total revenue) and 12.8% more than desktop processors (14.7% of total revenue).

Internet of Things

Finally, the Internet of Things is another area where Intel could see a lot of growth in the near future. This business segment grew 24% YoY in the second quarter of 2014. The Internet of Things division is growing fast as Intel brings intelligence to more and more devices. The “Internet of Things” division now generates 8.5% of total revenues for Intel.  While this may seem like a small percentage, keep in mind that this is a category that was basically non-existent just a couple of years ago.

Intel makes up 3.41% on my portfolio, but this is a position that I will most likely increase in the near future. I see big opportunities for Intel down the road and I really like the senior management of this company. Additionally their dividends, stock buybacks, and cash flow all meet my standards.

Below the performance of other positions in my portfolio

Summary Portfolio Performance

Since inception (01/19/12), the model is up 53.4%, versus the S&P 500 62%. The return of the S&P 500 in August 2014 was 3.77%, as compared with 3.89% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 10.87% as compared with 8.39% of the S&P 500.


In August JC Penney (JCP), Ralph Lauren (RL) and Apple (AAPL) all performed well. They were up 15.1%, 8.6%, and 7.2% respectively. JCP continues on its road to recovery by focusing on discounts and promotions to bring back customers. They are also adding more items to the company’s portfolio, while private labels are making a comeback in JCP stores. These strategies appear to be working well as sales are increasing and losses are dropping.

Ralph Lauren (RL) continues to perform well.  The company has beaten analyst EPS estimates in each of 4 most recent quarters. Ralph Lauren’s balance sheet looks great, with $15.55/share in cash and short-term investments.

Finally, Apple (AAPL) is up, ahead of the release of the bigger and better iPhone 6 and perhaps other new products that could boost sales.


In August Lukoil (LUKOY) was down -0.5% and was the only position in the negative territory for the month.  As the conflict in Ukraine persists, most likely Russian stocks will continue to underperform in the market. The company is very cheap based on different valuation standards, so as soon as the conflict is over, I expect this stock to fly really high.

Acquisitions in August 2014

In August 2014, I didn’t add or increased any positions in my portfolio.

Liquidations in August 2014

No positions were closed in August.


As Warren Buffett used to say, “Only when the tide goes out do you discover who’s been swimming naked.” That adage applies perfectly to the apparel sector right now. Although the industry has had a terrible year, one of its major players is still financially strong with incredible competitive advantages, and a solid global presence.

To give you a quick snapshot of the sector, here is how some of the major players have done YTD in 2014.

  • Aeropostale (ARO) down -64%
  • Guess (GES) -15.4%
  • Express (EXPR) -14.9%
  • Urban Outfitters (URBN) -2.94%
  • Abercrombie & Fitch (ANF) -19.84% and
  • Bebe Stores (BEBE) -46.7%

While Ralph Lauren (RL) is among these players and is also down -11.5% YTD, it is a company like no other in this sector. Below I’ve listed just a few of the reasons why I believe Ralph Lauren is a great buy.

Ralph Lauren (RL) is a company committed to investors

If you’ve been following my posts, you’ll know that I like companies that respect and value investors. The best way to identify a company that does this is to see if company practices are in line with shareholders’ interests and benefits. Two clear examples of this are the continuous payment of dividends and periodically repurchase of shares. Ralph Lauren has a history of both. The company currently pays a healthy dividend of 1.15%. In the recent past, June 2012, the company doubled its dividend, and then again in December 2013 the company increased the dividend by 12.5% (from $0.40 to $0.45). Over the past 10 years the company has been buying back stock consistently.  Currently, Ralph Lauren has 88.7 million shares outstanding, as compared with 105.5 million in 2006. The company repurchased 3 million shares of its common stock during FY13 utilizing $450 million of authorized share repurchase programs at an average cost of $149, and returned an additional $128 million to shareholders via dividend payments.

Ralph Lauren is conquering the world 

Although Ralph Lauren is a global brand, design is centralized managed in New York City. The company has diverse design teams comprised of different merchants representing key regions around the world that work side-by-side in a highly collaborative manner. These teams conduct global line reviews and plan global buys. They work intimately with their respective brand teams across sales, logistics, and marketing in order to inform their planning with real-time feedback on sales trends, product performance, and marketplace dynamics. This business strategy creates product and company consistency around the world and connects consumers more closely with the brand.

The company’s management has articulated a goal of generating equal revenues from the Americas, Europe and Asia. Currently, nearly two-thirds of overall company revenue comes from the Americas, while Europe and Asia contribute 20% and approximately 10% respectively to the top line. The trend for RL’s international revenues has been generally positive over the last 10 years. International revenues have gained about a 13% share in the company’s consolidated revenue mix. The company is now focused on grabbing market share in high-potential emerging markets, such as Greater China and Central and Eastern Europe, by targeting each market with the optimal mix of retail, wholesale, and licensed distribution. While this expansion will take years to consolidate, I believe Ralph Lauren is on the right track.

Ecommerce expansion

Currently, RL’s direct-to-consumer activities encompass a broad range of global retail formats, both physical and digital. The physical formats include Ralph Lauren, RRL, Denim & Supply, Factory, and Club Monaco stores, as well as concession shops and licensed stores across Europe and Asia.  These physical locations showcase RL’s brand messages and product assortment. However, the fastest growing distribution channel for the company over the past several years has been the e-commerce segment. I expect this momentum to continue as the internet offers the consumer the convenience of pre-selection research and access to more products than in physical retail formats. Due to the the growing importance of these online stores, e-commerce has been an area of significant investment for the company. RL has greatly expanded the distribution centers for its North American e-commerce operations, launched e-commerce efforts in South Korea, and is now handling online transactions in 10 European countries.

At the end of 2012, e-commerce sales stood at $624 million. If RL’s e-commerce channels continue to record strong growth, the company will have the opportunity to make long-term changes to save operating costs (such as rental/leasing costs), boost profits, and yield more returns. The company may also consider closing some of its redundant brick-and-mortar stores. A maturing e-commerce channel also allows Ralph Lauren to reach new regions with significantly fewer investment in brick and mortar establishments.

No Debt

Low or no debt is one of the best indicators of a company’s endurance, success, and management strength. A company has no debt, is like if you didn’t have a mortgage, auto, credit card, or student loans to pay. It is a beautiful and enviable position to be in. RL has virtually no debt.  Current company debt stands just $300 million – this is small for a company that is generating $156 million from operations and $4.03 Billion in shareholder equity. Debt to equity ratio is just 0.074 and never has been above 0.6 – speaking very highly of how the company has been managed over the years. As I’ve said before, I have nothing but love for companies with no debt – it is a quality I very much admire.

More than just a clothing brand

Ralph Lauren is growing to be more than just a clothing brand. It is now a lifestyle alternative for audiences around the globe. The company is investing in restaurants and hotels, expanding the brand to new categories where they can reinforce its image and philosophy.  The Polo store on 5th Avenue is just one example. The store will open a restaurant a restaurant in 2014. This is not the first foray into restaurants for RL.  The brand’s Polo flagship in Chicago has a restaurant across the street, and the company’s Paris flagship store also houses a restaurant within the courtyard.

For all these reasons Ralph Lauren is a quality company that I plan to hold for years to come. The company is stronger than any other competitor in the apparel industry and its market capitalization ($13.87 billion) is larger than that of all the competitors mentioned at the beginning of the article combined.

Summary Portfolio Performance

Since inception (01/19/12), the model is up 48.0%, versus the S&P 500 55.9%. The return of the S&P 500 in July 2014 was -1.51%, as compared with -1.14% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 0.99% as compared with 0.65% of the S&P 500.


In July Bed, Bath & Beyond (BBBY), Intel (INTC) and JC Penny (JCP) all performed well. They were up 10.3%, 9.7%, and 3.6% respectively. BBBY continues to recover after hitting 52-week low on July 26th, the company is solid financially and continues to expand. I plan to keep BBBY for the rest of 2014. INTC was up in July mainly because they beat earnings and revenues estimates. This was driven by solid demand in its core server and PC markets (which many “experts” thought would be dead by now). Gross margin rose from 58.3% to 64.5%. Meanwhile, marketing, general and administrative expenses declined 5% and fell from 16.9% to 14.9% of revenue. These factors led to a whopping 41% surge in operating income as the operating margin expanded 21.2% to 27.8%. INTC is another stock that I’ll keep for the remainder of the year given that the company continues to pay excellent dividends (2.65%) and the mobile and tablets still have a lot of potential. Finally, JCP slowly continues to recover after facing quite a bit of turbulence in previous years. The company is so undervalued that even if the recovery takes time, any downside is very limited. Price to book value is only 1.02 as compared to Macys (M) at 3.42, and price to sales ratio is ridiculously low at 0.2 as compared with Macys (M) at 0.79. Companies take time to turn around, so I expect to hold to this stock for at least another 20 months.


In July American Express (AXP) was down significantly (-7.2%). Regardless, YTD the stock is performing better than competitors Mastercard (MA) and Visa (V). American Express is undertaking a big expansion to become a more inclusive brand and not an exclusive one. These efforts require large investments in new technology, infrastructure, human capital, and marketing that can affect EPS in the short term. If the stock goes down significantly, I may get more of it. I am a firm believer in the new American Express strategy and they certainly have all the necessary talent and resources to execute well.  The other stock down significantly in my portfolio was LUKOY (-6.7%), mainly due to investors avoiding Russian securities, especially after the Malaysian Airlines Plane that was taken down over a conflict zone on July 17th.

Acquisitions in July 2014

No positions were added or increased in my portfolio.

Liquidations in July 2014

No positions were closed in my portfolio.


Picking up a bargain in June

by admin on July 3, 2014

BedbathandbeyondIn June, shares of Bed Bath & Beyond (BBBY), one of the most efficiently run companies around, dropped by 5.7%. Year to Date, its shares have dropped 28.53%. This is one of those very rare opportunities to invest in a great company selling at a very good price. Price to sales is just 1.049 and price to tangible book value is 3.42, the lowest ratio over the past 12 months. Bed Bath & Beyond’s management has attributed the margin pressure to two factors. First, customers have become more price-sensitive, and are trading down to lower-priced items and using more coupons. Additionally, Bed Bath & Beyond’s costs are rising due to investments in a new technology infrastructure focused on improving online and “omnichannel” sales. To compensate for this decline and maintain EPS levels, BBBY has been buying back its own stock at a face pace. This is a fantastic commitment to investors that very few companies are willing to adopt. As you can see on the graph below, BBBY has been buying back shares constantly since 2010, and although the company doesn’t pay dividends, buying back stocks is another excellent way to return capital to investors. BBBY management is also committed to continuing these policies.

BBBY Chart BBBY data by YCharts

Despite another quarter of weak sales growth, I still think Bed Bath & Beyond is a good bet for value investors. The company’s management expects sales growth to strengthen later this year. There are also significant opportunities for adding new stores, like the ones they recently opened in Mexico in a joint venture with Home & More SA, and the ongoing expansion already taking place in Canada.  Bed Bath & Beyond’s technology investments also have the potential to drive a significant acceleration in online sales over time, and significantly improve efficiencies and operating margins.

Additionally, it is important to note that Bed Bath & Beyond has financed the entirety of its expansion with its own money, and has no debt.

For all of the above reasons, I just couldn’t resist scooping up some shares of this company at the current price. Based on historical valuation, I believe BBBY shares have an upside potential of at least 30%

Summary Portfolio Performance

Since inception (01/19/12), the model is up 50.0%, versus the S&P 500 up 58%. The return of the S&P 500 in June 2014 was 2.1%, as compared with 1.96% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 1.34% as compared with 1.01% for the S&P 500.

In June, Intel (INTC), Lukoil  (LUKOY) and Ralph Lauren (RL) all performed very well. They were up 13.1%, 5.8%, and 4.7% respectively. The stock that hurt my portfolio in June was Oracle (ORCL), which declined -3.5%. However, I’m not concerned about this decline, the company remains very strong and its shares are up 6.55% year to date. In June the company made a large acquisition: MICROS Systems (MCRS) for $5.3 billion ($4.6 billion in net cash). Oracle has spent the last few years dogged by increased competition from companies such as SAP (SAP), Salesforce.com (CRM) and Workday (WDAY). The company has been criticized for not moving aggressively enough to capture more market share, and its large size has created many layers of bureaucracy, slowing things down for the company. Oracle products and services complement MICROS’ existing products and services for the restaurant industry. Additionally, MICROS Systems is a smaller company that has been able to move faster and adapt more quickly to changing customer demands and business constraints. By harnessing Oracle’s massive size and existing technology, MICROS Systems will be able to grow faster and contribute more to Oracle’s overall strategy and growth. MICROS is particularly strong in online ordering, reservations, inventory management, and workforce management. The company’s products also cover a wide range of solutions that Oracle’s current solutions do not such as kitchen management, table management, enterprise operations, and point-of-sale. This is an acquisition that I am very happy about.

Acquisitions in May 2014

In June 2014, I added two positions to my portfolio. Bed Bath and Beyond (BBBY), an opportunistic addition of a currently undervalued company, and Google (GOOG).  Google is by far the best technology company in today’s world. I am very excited to see what Google is doing with Google Flights, Google Hotels, driverless cars, Google Fiber, Google Loon and Google Play. I think Google is a company with an incredible business model and approach to innovation that will continue to expand, very difficult to replicate.

Liquidations in May 2014

I closed two positions in June because I found better opportunities in the market.  While I think these companies were worth holding, I found on BBBY and opportunity that I couldn’t pass up. The positions I liquidated in June were Aflac (AFL) and JP Morgan (JPM). I have no plans to add any new positions in July.


Apple is back but questions remain

June 4, 2014

On September 21, 2012 Apple reached $700 per share for the first time, only to go back down to $390 six months later. The company has had a fantastic run since 2010, but its current price of $628 is still under the $700 of those glory days in 2012. Apple invests huge amounts of money […]

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JC Penny (JCP) still volatile, but on track to beat the S&P 500 in 2014

May 12, 2014

In my February letter to investors I explained why I was increasing my position in JC Penny (JCP). Since that post, the stock has continued to be very volatile in 2014 with double-digit gains and drops depending on the day. This is always the case when companies are having trouble, and in the short term […]

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My JC Penny (JCP) and Ecopetrol (EC) holdings are paying off

April 1, 2014

In my February letter to investors I explained why I was a believer in the JC Penny (JCP) rebound. I cited some cases throughout history where struggling companies have rebounded, making millions for smart value investors. Warren Buffett did this in the seventies with Geico. By 1974, the company was not fairing well. The government […]

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Increasing my position in JC Penny

April 1, 2014

In February, JCPenny (JCP) had a stellar month, up 23%. While this stock is extremely volatile right now and not paying dividends (two points of concern for me), I think JCPenny is on the right track for recovery, and that the stock may soar later this year or in 2015. This is an investment I […]

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Focusing on dividends and buybacks in 2014

February 6, 2014

Just as the Super Bowl had an awful start last Sunday, so did the stock market in January after the largest annual jump in 16 years (29.6%).  This is a year to be conservative and focus on established companies paying large dividends and implementing wide buybacks programs.  Monetary policies will most likely tighten this year […]

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S&P 500 best return in 16 years

January 9, 2014

The return of the S&P 500 in 2013 was a whopping 29.6%. This is something we haven’t seen in the stock market since 1997 when the S&P 500 delivered 31.01%. This is good news for investors, but a reminder that we all should be cautious because we are still far from being out of the […]

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