Monthly Round Up: October
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Portfolio Updates
Capital One
Net income of $1.8B and $4.41 in EPS to $597M and $1.38 in Q2, and compared to $1.8B or $4.51 a share Q3 2023
Revenue up 5% vs Q2, average loans up 1%, deposits up 1%
CEO Richard Fairbank commented that consumers on the whole in good shape, but some pockets of pressure from inflation and high rates
I think Capital One is fairly valued and I might sell my shares if I find a better opportunity
Verizon
Wireless revenue up 2.7%, total revenue flat YoY
Net income down to $3.4B from $4.9B, mostly due to restructuring
CEO said VZ is on track to meet guidance for the year
Verizon has been focused on managing its debt, however debt increased $1.1B from second quarter
Recent news includes pending acquisition of Frontier Communications for $20B, and an agreement with Vertical Bridge to lease and operate wireless towers for $3.3B
Verizon’s goal was to reduce debt and increase shareholder returns, so I’m not sure that I like the Frontier deal that will surely add on more debt
Verizon seems modestly undervalued, I might hold and clip dividends but I should review this stock to see if I really want to own it
Bank OZK
OZK earned a quarterly record $177.1M in net income and $1.55 of EPS, an increase of 4.4% YoY
Loans up 1.9%, deposits up 2.1%
Charge off rate for the quarter 0.36%, well below industry average
Net interest margin down 13 basis points, expected to continue declining until mid-2025
Latest tangible book value is now at $40.49
The stock is probably a good buy right now, but I might hope it dips back down to 1x TBV before I add more shares
Watchlist Update
New Additions: Molson Coors Beverage, Urban One, Dollar General, Surge Components
Deletions: Walgreens Boots Alliance
Fair Value Updates: Big5 Sporting Goods, Harbor Diversified
Comments
I was thinking about removing EMCORE from the watchlist because they keep suffering heavy losses and issuing shares. Then right when I was about to hit delete, it was announced that Mobix Labs was wanting to buy them out for $3.80 a share. EMKR is about the same market cap as Mobix Labs, but Mobix has hardly any revenue and a complicated capital structure due to bing a SPAC. I don’t see how Mobix will be able to come up with the cash to buy EMCORE.
The other week I was doing a deeper dive in to Walgreens and realized the business might be facing more permanent headwinds than I thought when I first wrote about it. Most of WBA’s US revenue comes from the sales of drugs, and Medicare, Medicaid, PBMs keep squeezing Walgreen’s gross margins by about 1% a year. This takes a big chunk out of their operating income, which is already very thin. There is no indication that margins on drug sales will stabilize or improve. Walgreen’s looks like a value trap, so I’m taking a pass and removing it from the watchlist.
For a while Motorcar Parts of America was bouncing around $6.00-6.50 a share, but within the last week it has slid down to under $5.25. I haven’t seen any negative news so I’m not sure what is up. The stock is now back around my cost basis so I may add some shares.
Harbor Diversified has been a net-net on the watchlist for a while but I haven’t written much about it since they haven’t filed any annual/quarterly reports in a year. The company owns Air Wisconsin and switched from flying for United Airlines to American Airlines. This caused a law suit and restated financials, delaying the reporting. HRBR finally released their 2023 10k, so I updated their NCAV for these latest, but still stale figures.
AMCON Distributing, a microcap distributor of goods to convenience and grocery stores, has started to become quite undervalued. A deeper dive into this company will be high on my priority list.
Books I’ve Been Reading: The Quants
Recently Spotify was suggesting audio books, so I decided to listen to The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. As an aside, when I first started learning about investing, I thought I could use my electrical engineering skills to use by developing a quantitative trading algorithms. That thought lasted about 10 minutes because I realized my statistics knowledge is severely lacking. It was probably for the best that I discovered Buffett and value investing.
The book is interesting, giving an overview of the history of quantitative trading and some of the key hedge fund managers that pioneered the strategy. I was vaguely aware of Ed Thorpe, Ken Griffen, and Cliff Asnes, but the book filled in a lot of back story. Other fund managers profiled include Boaz Weinstein and Peter Muller, whom I never heard of. I haven’t finished the book yet, but it alludes several times that the quant managers were on top of the world in the late 90’s and early 2000’s, then to some degree helped cause the financial crisis
The Quants is a narrative, jumping between the stories of the different managers from the beginning of their careers, leading up to the financial crisis. The book describes at a high level the different strategies like convertible bond arbitrage, statistical arbitrage, and credit derivatives trading. I felt like I got a general sense of how these strategies work, but the book is by no means a text book so you won’t get bogged down by the complexities of the math involved. Despite not being the typical kind of investing book I would read, this book has kept my attention. It even makes me want to take a stab at a convertible bond arbitrage
Stocks Mentioned: COF 0.00%↑ VZ 0.00%↑ OZK 0.00%↑ EMKR 0.00%↑ MPAA 0.00%↑ WBA 0.00%↑ $HRBR DIT 0.00%↑
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Have you read Ed Thorpe’s bio book? I am with you on $VZ. I own or looked at a few of your Net/Net and also have $VTS via a spin-off. Insiders did a little bit of buying of late. The market doesn’t seem to be impressed with the offer for $EMKR unless I am missing something. Nice write up.
I've looked at HRBR a few times and always concluded its a controlled company with a strong balance sheet—albeit with a primary asset being aircraft with little, if any, salvageable value. The main problem is that management doesn't want to share the company's wealth and there's essentially shareholder return. As for AMCON, the stock compensation is borderline egregious so I cannot get myself to buy that one either.