Stock Investment Tips Blog

With the November election around the corner, all eyes will start to be glued on to the polls and the likely winner. Many bears fear an Obama victory, coupled with continued democratic gains in the House and Senate, signals increased taxes, especially capital gains taxes, and doom and gloom for the market

With Obama, Reid, and Pelosi running the country, I couldn’t help but feel bearish too. However, I highly doubt this will happen. While most think this race will be a tossup, I think it will be a McCain blowout. As much as people may blame the economic slowdown on Bush, I just don’t think voters are going to vote for some wimpy-looking, inexperienced, snobbish guy named Barack Hussein Obama over a war hero and proven centrist.

McCain is already leading in the latest Gallup poll, and when you take into account the Bradley Effect, we may have another Bush-Dukakis type race on our hands. However, the market seems to still think that an Obama presidency is likely or at least this election is a coinflip.

I’ve been starting to look into how to make investments based on the election. In general, I’m very bullish based on my McCain prediction, so I’m staying long and am shorting some of those ultra-short index funds (like SDS- a double short of the S&P 500), which is just basically a way to leverage and gain more long exposure to the general market.

One problem for me, personally, is that I’m not very knowledgeable in some of the sectors that are typically loved by the Republicans. I don’t buy that McCain is particularly a war hawk, so while investing in defense stocks might seem like a sort of McCain bet, this isn’t a road I’m tempted to take. Moreover, it’s not clear which defense stocks to take, so while a defense-related ETF may be the way to go, someone with more knowledge in the defense department could probably make a killing in this department.

The health care sector is another one that loves a Republican administration, and this is a sector I’m going to look into. Since I’m betting we won’t have an Obama-style health care rehaul anytime soon, stocks that may have been badly beaten due to these fears may become good buys.

An area that I’m also going to look into are high-priced, high margin services, basically companies that cater to those evil people that make $250k+ a year that Obama wants to tax to death. One group of companies that comes to mind quickly are strip clubs. Hey, if a $300k a year executive just saw his pay cut by 10-20%, he’ll likely decrease his strip club visits substantially. One stock in this sector I’m looking into is Rick’s Cabaret, symbol RICK, though I haven’t checked out much about this company besides its ticker symbol. High-priced steakhouses is another group I’m looking into, such as Ruth’s Chris (RUTH), which is almost 70% off of its 52-week high.

Disclaimer: Author is short SDS

Oh, Luby’s. A company you most likely never have heard of, though it comprises the bulk of my portfolio. Luby’s is a Texas-based cafeteria chain that serves Texas-style food in over 100 locations around the Lone Star state. It’s not a particularly sexy company. It has been around for over 50 years, yet the stock’s price is still lower than it was than in the 80’s.

Why am I so enthralled with this perpetual laggard? For starters, I find the stock to be a compelling value right now. The stock is trading around its book value and I think its book value is grossly understated. The vast majority of Luby’s cafeterias are at least ten to fifteen years old, and Luby’s owns the land and buildings on 84 of its restaurants. Luby’s quotes its land values at the price it acquired it on its book, so unless you think Texas land prices are the same now as they were in 1985, that value is understated.

Luby’s has been consistently profitable, has a fair amount of cash on its balance sheet, and has almost no debt. So, in my view, the downside is minimal. Luby’s past few quarters have been fairly disappointing, owing largely to the sluggish economy and rise in commodity prices. But, I see light on the end of the horizon.

Luby’s has been building new-style cafeterias that have a much more modern feel to them and also serve some higher margin items, such as a coffee and ice cream bar. So far, the new style of restaurants have been a smashing success. They are showing to consistently perform better than the traditional, more depressing-style of Luby’s restaurants.

Luby’s is ran by the Pappas brothers, two of Texas’s most successful restauranters. The pair own about a third of the company and have bought up even more shares lately (in late June/early July) when the stock price took a dip in the $5.80-$6.50 range.

I view Luby’s as a long-term investment, and most of this article has so far been the case for a long-term holding. But I see a potential short-term spike. About 1.7 million of Luby’s shares are sold short right now, which is a little over 9% of the float. That certainly isn’t much by any stretch of the imagination. However, Luby’s daily volume is only around 100k shares a day, so its short interest ratio is a whopping 17. Good earnings from Luby’s next week (or perhaps the next quarter) could spark a short covering rally. The lone analyst covering Luby’s is throwing Luby’s a softball for the next two quarters, projecting just $.01 a share this quarter and $.02 a share next quarter.

I personally don’t plan on doing any buying or selling of Luby’s shares anytime soon. If the earnings are in fact good and the shorts get squeezed, I’ll be tempted to sell some shares to decrease the overall size of my holding.

Disclaimer: Author is long Luby’s (LUB)

Crocs (CROX) is the epitome of triumph and tragedy in the stock market.  AFter IPOing around $6.85 a share in February 2006, the stock began a meteoric rise in the fall of 2006, thanks to the rising popularity of its shoes. Its most famous shoes are a pair of rubber sandals with holes in them that are supposedly extremely comfortable. The shoes have since gained worldwide popularity.

Investors speculated the the fad would continue, and the stock continued to rise up to $75 a share in October 2007. Since then, its bubble has broken and CROX is now valued at less than 10% of what it was less than a year ago. On Friday, the stock closed just under $5.

I have been watching the CROX story off and on and it seemed like the epitome of what happens with asset bubbles. A perfectly decent asset, in this case a shoe company, becomes grossly overvalued, as owning the asset itself becomes a fad. The asset becomes so bloated with hot money that there’s no rational reason for its valuation. I thought about shorting the stock, but I never found the balls to do so.

What generally happens is that the asset quickly implodes, so much so that the asset goes below its fair market value. A good example is the tech bubble. While it was wise to sell tech in early 2000 at its insane valuations, it also made since to buy tech in early 2003 when tech stocks were sold too harshly.

I believed this was the case with CROX. After nosediving all the way down to about $6.70 a share, it had rebounded to about $9-$10 a share. It was trading at just a forward PE of 5 based on analyst estimates. I believed it was time to pile in, so I bought a lot of shares in the $9-$10 range.

The next day the management announces that it will be greatly missing its guidance and issued forward looking guidance. Instead of earnings of $1.56 for the year, Crocs expects to break even (in part due to a one time charge of $.13 a share for the closing of a plant). Revenues were guided down for the quarter from the $240-$250 million range to the $210-$220 million range.

Call me crazy, but I’m not willing to sell yet. While the revenue miss is disappointing, the sales are still there and the company is still cheap on a P/S ratio. I’m hoping Crocs will manage to boost its operating margins once it slims down its operations. I also think the company can maintain this amount of respectable sales since while its rubber shoe may be going out of style, the company now has many different types of footwear, and I think the company’s overall brand now is fairly strong.

One thing I’ll always remember from this incident is to take analyst estimates with a grain of salt. Buying mainly on an analyst forward PE is definitely not a mistake I’ll make again.

Disclaimer: Author still owns shares of Crocs (CROX).