Stock Up On Ragamuffins
Arise ye Prisoners of Starvation. As the market stutters I’m finding new untouchables to play. Couple of years ago, stocks like Halliburton and Ford sold down to 5 bucks, but then came back. Note the chart here on Halliburton, breaking out later to sell in the forties. I did better with poor Halliburton then Polaroid and Xerox in their sixties heyday.
Even Ford touched down at 5 bucks, which surprised me. After all, since they were in business nearly forever. Chrysler did bite the dust and then became a balance sheet play on cash flow. Chrysler’s bonds made me serious money thanks to Mike Milken’s cash flow analysis. When a property is floundering, check its balance sheet and cash flow statement to see how long it can stay afloat. Don’t project earnings.
Halliburton recovered in a 700% run, an average participant in the viciously cyclical oil service sector. Exxon Mobil forever pays out a nice cash dividend, but will never appreciate 700% even over 25 years of drilling and exploration. I used to promise my clients Polaroid and Xerox could appreciate 2% a month, but I was wrong. Later, both crumbled to single figured disasters.
In a deflating market, I’m readying my play in a collection of rag tag stocks that have dripped blood, sell at 10 bucks or under, but are recovery candidates. I’ll own close to a dozen and assume one or more will bite the dust in a deep recession.
Past cycle, I bought Lehman Brothers, but the U.S. Treasury refused them my infusion and they disappeared. Buffett then took a sizable bite of Bank of America‘s preferred stock at 5 bucks. He refinanced them in the 2009–’10 banking meltdown and the stock shortly thereafter ticked in the twenties. Bank of America offered Buffett warrants in his package on billions of preferred shares. No loss of sleep here. Never own a bank’s 5% preferred at par. You are not being compensated for inherent risk.
My new list of deadbeats, includes Macy’s, American Airlines, Hawaiian Electric, Dish, Spirit Aerosystems Holdings, American Telephone, Cleveland Cliffs, too
See my latest book, “Train To Outslug The Market” chapter 5. How $5 Stocks Turned Into $10 Stocks (Then more). Proved prophetic. Note Halliburton’s 12-month run from near $30 to a 5 dollar disaster over 4 quarters. Then, its recovery to $15 over a couple of quarters in 2020. Halliburton later traded as high as $43. Such outrageous swings in valuation uncovered a legitimate operator with a solid position in oil service.
I owned Xerox and Polaroid in their productive years, but never logged some 200% over 12 to 18 months, except early on.
Stocks do sell anywhere. Ford, for example, bottomed out as low as $5 a share. Couple of years later, it peaked at $25. When a property winds down to $5 you forget about its income statement and concentrate on whether it can sustain itself and stay in business. You need to pull a Mike Milken and analyze the market value of a company’s debt and whether it could sell equity or debt to stay in business. Let somebody else figure out the right valuation for Tesla, Apple and Meta.
My play in Xerox came about purely by serendipitous location. My cubby hole at E.F. Hutton joined the office of Ralph Reis, a Rochester boy, Hutton’s chemicals analyst. (I followed the financials.) While Ralph monitored developments of the Xerox 914 copier at Haloid-Xerox, he was then considered a specialty chemicals specialist, into an analyst of printers.
Somehow, Ralph prevailed on management to allocate its first 914 machine to Hutton’s back office. The copier carried a number meter in its body. We’d analyze daily numbers, in their swift ascent that looked more geometric than arithmetic. I think they charged around eight cents a page for copy work.
Secretaries began streaming in from all floors to make copies, dumping the four -page messy carbon booklets.
Xerox, OTC, started to creep up, but Ralph then cried himself to sleep. What if management locked down the 914 machine? Ralph, I said, get a hold of yourself. The 914 is a huge winner. Do the arithmetic on the
number of machines making copies on plain white paper. Xerox became a great stock over a string of years. Copy imagery was excellent, but the pivotal new variable became photocopying by Sony and Nikon was overwhelming. Not just for Xerox, but Polaroid, Intel, IBM, Texas Instruments and countless tech houses selling at huge premiums on the eve of their own technological obsolescence. Think of what happened to the Nifty 50 propelled by JP Morgan. Most fell apart and sold later at 10 times earnings. What you’d rightly pay for a manufacturer of toilet seats.
Aside from the magic of technology, when you enter a hot sector, nobody at first pays much attention. I’m thinking of cellular telephony especially Nextel, which gave us 1000%. The Street slept early on, too conservative on their saturation level for cell phones. Put them at a 10% share of phone users. Apple struggled under Steve Jobs and then broke out. Nextel shot into the thirties from $3. It sold out in its thirties to a staid utility no longer heard from.