Stay Small and Move Slowly

 | Aug 09, 2012 | 3:30 PM EDT
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Lately, most of the reader questions I have received have been mainly on three topics and I am going to use today's column to answer some of them.

A few weeks ago, I wrote a column entitled Raising the Caution Flag. Lots of folks want to know if I still feel the same way. The simple answer is yes. I can give you lots of reasons to be cautious. There is no real solution out of Europe yet. Earnings season has shown many companies are struggling to grow sales. We are still seeing momentum darlings like get crushed for missing estimates. The jobs picture is still not improving very quickly. Residential real estate is facing another wave of foreclosures. The Market Volatility Index (VIX) is getting back to levels where markets have reversed in the past.

These are legitimate reasons to be cautious. All of my regular stock screens support this as they are showing fewer companies qualifying as cheap stocks. Almost no new names are appearing from week to week. While I am not going to go net short or blow out my portfolio and go to cash, I am going to check though my holdings make sure they are still safe and cheap. I will also hold lots of dry powder. The key to long-term success is not losing money in overpriced stocks and having cash to put to work when stocks are cheap. The market going higher is not going to hurt me. In fact, looking at my energy stocks and recent cheapies such as  Kelly Services (KELYA), I hope stocks keep going higher so I can sit here and cautiously make money.

Readers have also been asking me about BGC Partners (BGCP). The brokerage and real estate firm has seen its business decline and the Street clearly did not care for its last earnings report. There is some concern about the dividend going forward but volumes in interest rate and foreign exchange are pretty much in line with the industry. Big banks and other large traders have pulled back as the low interest rate environment has reduced trading opportunities. The equities trading business has been hit hard as well, especially in Europe.

On the bright side, the newly acquired real estate brokerage and consulting businesses have been strong and the outlook is very bright for this division of the company. Management has said they are comfortable with the dividend for a few quarters of weakness, but if business does not improve, they will re-examine the payout. Debt levels have increased as management is holding dry powder for acquisitions. Given the weak economic outlook in the U.S. and Europe, they think there will be opportunities in the commodity and real estate businesses to grow the company. In the short run, the business and stock price may struggle. For the long-term, patient investor, it is a chance to scale into a few more shares.

The same statement can be applied to CommonWeath Real Estate (CWH). Its quarterly earnings report was not great -- the company continues to struggle to generate higher funds from operations. However, management refinanced debt at a lower interest rate and redeemed an outstanding preferred stock issue during the quarter. They also continued to acquire central business district properties with purchases in Columbia, S.C., Indianapolis and Austin. I think this reallocation of the property portfolio will pay huge dividends for shareholders over time. I have owned Commonwealth for about four years now and in spite of the stock's fluctuations, the accumulated dividends have kept my holding in the black. The dividend may come under pressure at some point -- and the Street is now happy with the pace of asset sales -- but I am still comfortable owning my shares.

Not every stock goes straight up, but I am confident that both of these will reward shareholders over time. As always, the key is to stay small and move slowly.

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