Top Financial Bloggers Face-Off: Gannon's Picks
Asif Suria of SINLetter.com is running a stock picking contest where Top Financial Bloggers Face-Off. He invited me to join the contest, so I thought I would post my entry on this blog. The contest length is Q1 of 2008. It requires that you pick three stocks (either long or short) and a prediction for the S&P 500 at the end of Q1 2008 (to be used only as a tiebreaker). I didn’t want to worry about the S&P 500 prediction – so I just entered 1470 as my prediction (last: 1468.36).
All three of my picks for the contest are long. They are Bank of Ireland (IRE), NutriSystem (NTRI) and YRC Worldwide (YRCW).
Bank of Ireland (IRE) - $60.44
Irish stocks are cheap. Irish banks are even cheaper. IRE has very strong position in attractive banking market. More conservative than most large banks trading at higher price-to-earnings, price-to-book, and price-to-dividend. A competitive dividend yield should help encourage buying even if dividends don't count toward the contest.
NutriSystem (NTRI) - $26.98
Stock shorted like a fad last year – but company isn’t a fad. Beaten down to extremely cheap levels. Should be buying back own stock at these levels. Wonderful business model with plenty of revenue from customers once acquired. Can afford to pay a lot in advertising to acquire a new customer. Program works; people actually lose weight without any unpleasant side effects. Hit hard by new diet drug. Launching a new, improved program (now) in Q1 2008. Management has shown they know how to design, market diet programs better than anyone else. But, most of all, the market has set the bar very, very low on this one.
YRC Worldwide (YRCW) - $17.09
Big, cheap trucking company. Cheap on just about every measure. Not expensive on trailing earnings; even cheaper on any sort of average, normalized earnings. High operating leverage causes extreme sensitivity to small changes in the U.S. economy – so those betting for a recession will bet against YRCW; but, in time, the price of YRCW has to move back to something approaching normalcy over a full cycle. No reason to think YRCW shares won’t improve before the industry does. Good stock at best; untimely at worst.
For the contest, the picks won’t actually be priced until after the first day of trading of 2008. So, the prices shown above are just year-end quotes on the three stocks. Contest rankings will be based on percentage changes in stock price over the course of the first quarter of 2008 – regular dividends don’t count for or against you whether long or short.
Comments
How concern are you with YRCW's underfunded pension plan? Last time I checked, it is underfunded by $4.5b (3q2007) up from $4b from eoy2006.
Posted by: ara1978![[TypeKey Profile Page]](http://www.gannononinvesting.com/nav-commenters.gif)
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January 1, 2008 09:27 PM
You’re referring to a disclosure made in connection with the Central States plan, a multi-employer pension plan.
“…the contingent liability in the case of a full withdrawal or termination from all of the multi-employer pension plans to which we contribute would be in a range from $3.5 billion to $4.5 billion on a pre-tax basis. This estimated range reflects an increase from the amount disclosed in our Annual Report on Form 10-K filed on March 1, 2007. If the Company were subject to withdrawal liability with respect to a plan, ERISA provides that a withdrawing employer can pay the obligation over time determined by the employer’s contribution rate prior to withdrawal, which, in some cases, could be up to 20 years. Even so, our applicable subsidiaries have no current intention of taking any action that would subject us to withdrawal obligations.”
I’m not especially concerned about the post-retirement benefits as an obligation relative to the company’s ability to meet them. I am, however, concerned about the nature of the company’s labor force, its collective bargaining agreements, and generally a cost structure that helps contribute to YRCW being far from the best business in trucking despite its size. The post-retirement obligations are a symptom of this problem. But, I’m not concerned about it from a balance sheet perspective – as the company is not heavily indebted and the current P/E ratio certainly doesn’t require a lack of debt.
The labor situation in particular and the cost structure overall is not good. YRCW is not and will never be a great business. Still, the stock looks cheap. Looking out one quarter (as the contest does) or two years (as the longest options do) an unreasonably low valuation is more important than a good business. If you’re looking for something to own for more than 3 years or so – I’d suggest looking for a better business.
Posted by: ghg777![[TypeKey Profile Page]](http://www.gannononinvesting.com/nav-commenters.gif)
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January 1, 2008 10:11 PM