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)