As always, I spent a fair amount of time this week catching up with friends and associates around the country to talk markets and economics. My wife usually points out that we also spend an extraordinary amount of time discussing baseball, books and other unimportant subjects while sitting on the couch swilling coffee. Being naturally upbeat, I prefer to focus on the productive parts of the endeavor. One thing that struck me as I caught up with my network of traders and investors is that the complacency that pervades most market participants does not seem to apply to my older, more grizzled friends. They are talking about things like Europe and rising interest rates again. Most are not net short, but they are trimming longs and raising cash.
I do not make market predictions and I rarely pay attention to anyone else's directional call. I cannot imagine sitting around studying charts, short-term price movements and various other entrails and indicators for a clue of what is going to happen in the stock market. I track a couple of indicators and they all seem to have rolled down from overbought levels as the market has weakened in the past few weeks. Combined with my Nervous Old Guy Indicator, I can see that there's a good chance stock prices continue to move lower over the next several weeks.
This doesn't mean I am in a rush to sell. A quick check of my portfolio shows that everything I own is still undervalued. There is no need to disturb any of my long-term positions because of short-term concerns. If the prices decline along with the market I will simply buy a little more. What I will spend time doing to prepare for a stock market selloff is prepare an inventory list of stocks I want to own if prices drop substantially.
I looked for stocks this morning that are close to selling for cash on the books and are profitable. Owning a company trading at or below net cash on the books is my favorite investment technique. You are getting the operating business free, so it doesn't have to be a great company or a growing enterprise. It just needs not to be losing money to have value for a long-term investor.
One of the more intriguing companies on the list of potentially cheap stocks is Daily Journal Corp. (DJCO). The publishing company puts out 11 newspapers for specialty audiences, primarily the legal, real estate and business markets in California. The company also has websites and information services for the same markets. The company is actually seeing slower results as the economy recovers. More than a third of its advertising revenue comes from trustee sale notices, and that revenue has declined as foreclosures and bankruptcies have slowed from near-catastrophic levels of the past few years. Although newspapers, even specialty publications such as those the Daily Journal produces, are not a great business any more, this company is still profitable and generating free cash flow.
The company has a market capitalization of $104 million. When I look at the latest balance sheet, I see cash and Treasury Bills of $3.1 million and marketable securities of $76 million. According to regulatory filings, the marketable securities are invested in three Fortune 200 U.S. companies and two foreign manufacturers. It also holds certain debt securities of another U.S. company.
The intriguing part of the investment portfolio is that the investments are overseen by Charlie Munger and his longtime associate J.P. Guerin. There has been a lot of speculation as to which stocks they hold, with best guesses including Wells Fargo (WFC) and U.S. Bancorp (USB), but it is not possible to know for sure. It is possible to know that Munger is a very successful long-term investor and a good friend of Warren Buffett. Guerin and Munger own almost 40% of the company between them (including the Guerin Family Trust) and appear to have plenty of incentive to pay close attention to the portfolio.
There is another possible bonus in the balance sheet. Daily Journal owns two office-and-production facilities in Los Angeles: a two-story 34,000 square foot building built in 1990 that is 75% offices and the rest for production and printing. In 2003, Daily Journal built a second 37,000 square foot building and parking facility on land purchased in 1996 and 1998, respectively. All of this is on the books for $12.4 million. As the L.A. economy recovers, this real estate should be worth far more than the carrying value of the property in the future.
The cash and securities on the books total about $57 a share. The real estate is roughly $8 a share. If the market declines further and I can but the stock for less than the cash and real estate value I will be a buyer. At less than $65, you get the business and Charlie Munger's oversight free. I would consider that a huge bargain.
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