Return to the Homepage
Home About View Your Account Blog Newsletter Publicity Contact Us  
  This website can be used to
access your account, find and
print forms, view our newsletter,
and to send us email.

Please use the links at the top of
the page, or the large buttons
below to navigate the site.
View Your Account
Contact Us

HOlmes Osborne

    Third Quarter 2016

  The financial industry is changing everyday. Most firms are exclusively investing their clients’ money into mutual funds, exchange traded funds (which are like mutual funds), annuities, or have an outside company pick stocks.

There are many problems with this model. First, most only buy stock in enormous companies because they are the only ones wit the size that can take on billions of dollars. So there will be no more buying small companies. No more trying to scour the globe for the next Wal-Mart. Next, they want to exclusively invest safer money into bond funds. Oftentimes the fees from these funds eat into the small return the bond funds yield. Lastly, there is essentially no difference between firm A and firm B. If you leave one, the next firm is identical.

That’s why we buy individual bonds, are always on the lookout for great companies to invest in, and keep our fees low. When you add these three together, we think our portfolios will perform better in future financial markets. These markets are sure to have low returns (certainly in bonds) and eventually due for a correction.

   Used Equipment Takes a Beating

You’ve probably read our analysis on used heavy equipment and restaurant equipment. You can buy slightly used for half off. We have seen farm equipment and Caterpillar dozers and excavators with only a few hundred hours of time going for half off new. We’ve seen a slightly used commercial chicken rotisserie that retails for $22,000 go for $440. Are these signs of a weakening economy, secular industry problems, or further affects of globalization? It’s difficult to know but don’t own these stocks!
 Busy Third Quarter

We made several buys and sells in the third quarter. We bought shares in pharmaceutical/retailer CVS. CVS has been growing leaps and bounds with the new health care laws. The company has also taken over Target’s pharmacies and is opening up Minuteclinics every quarter. We will hold CVS as long as sales and earnings are growing.

We briefly owned Ark Restaurants. Ark got a favorable review in the weekend investing magazine Barron’s. The stock did not do much so we sold our position.

We sold our positions in John Deere, Case New Holland Tractor, and Agco. We found that slightly used farm equipment is selling for up to half off new. We certainly don’t want to own stock in the manufacturers. The financial media has not caught onto this fact. John Deere and Case have quite a bit of debt due to their financing of equipment. It makes one wonder why a farmer wouldn’t let the financing company repossess their equipment and then go to auction and buy it back for substantially less.

We owned shares in offshore oil driller Transocean for several years. The company, like everything else in oil and gas, has performed quite poorly. Transocean has done even worse as onshore horizontal drilling has become much more cost effective. We lost between 40% and 50% on the stock. It did pay a nice dividend which mitigated the loss.

Along with Transocean, we sold Apache. Apache had discovered a huge oil deposit in Texas and the stock had a nice short-term run. The issue with oil is that we thought it was going to range between $70 and $100 a barrel. We were wrong. It’s probably going to range between $25 and $50. Most clients lost 30% to 40% but a few made a profit depending on when they opened their account.

We hit a homerun in MGP Ingredients. MGP is a grain processor that also private labels liquor. We bought stock when it was $19 a share and helped drive it to well over $40. Fortunately, we sold shares when they became expensive. Subsequently, the company underperformed its quarterly guidance and shares dropped $9. We made over 110% in many accounts on MGP.

We sold off half of our position in GDX Gold Mining fund and Impala Platinum. Precious metals were beginning to drop as the Federal Reserve is talking about raising interest rates. Higher rates equal a strong dollar which does not portend good things for gold. Some people doubled their money on GDX since the beginning of the year. Others lost if they owned it for several years. We made about 34% on the sale of Impala. Fortunately, we did not sell all of Impala because the shares turned course and are back at 59% profit.

As for bonds, we bought a series of Osh Kosh debt that yields over 4% and matures in five and a half years. Osh Kosh has won a contract to supply the military with new armored vehicles.

We also purchased bonds in Edgewell Personal Care. Edgwell is a spinoff from Energizer Batteries. The bonds yield over 3% and mature in six year. Edgewell manufactures Schick razors, Edge shaving cream, Hawaiian Tropic suntan lotion, and Playtex feminine products. Edgewell has plenty of cash to cover its debt and other liabilities.

 The Difference Between Our Firm and Wall Street

There is a big difference between how we invest our clients’ money and how the typical Wall Street firm manages investments. Most Wall Street firms invest the lion’s share of an account in stocks and stock mutual funds. With financial markets trading close to all-time highs, we find this strategy risky.

We invest the majority of our clients’ accounts in bonds, yielding between 3% and 4%. Our theory is that these bonds will probably outperform stocks over the next ten years as stocks will return less and with much more volatility.

The typical stock in the S&P 500 trades at a price to earnings ratio of 20. The average, going back to 1871, is 15.5. Not only is the index trading higher than its average, it is also trading on peak earnings.

What we mean by peak earnings is that the revenues and earnings of these large companies have been doing well since the financial crisis in 2008 and 2009. Like everything else, these earnings are bound to “revert to the mean”. This means go back to average.

Most of the brokerage statements we see, people, regardless of age, have an enormous amount of money invested in stocks and stock mutual funds.

Not only is this tactic risky (in our opinion), the fees that Wall Street charge are quite high. Most investment firms use mutual funds these days—even the prestigious high net worth companies. You will see the same holdings over and over: CocaCola, Exxon, Wal-Mart, Pfizer. These are all great companies but why not just buy a low-fee index fund?

Why do you need to pay someone a fee when you can buy these blue chips on your own? Why buy load mutual funds? Why buy an annuity that can charge up to 2% a year, sometimes even more?

We are one of the few firms that researches everything we invest in. We scour the globe and invest in the entire capital structure. That means that we will invest in stocks, preferred stocks (that pay dividends), bonds, convertible bonds (that convert into stock), and many other securities.

We keep a good portion of our clients’ account invested in corporate bonds. Why? Going forward, the 3.5% that we receive on these corporate might actually outperform or at least keep up with equities, and with a fraction of the risk and volatility. Our competition can’t do this because their advisors aren’t experienced enough to buy individual bonds and their fees are too high and would negate the returns of a portfolio in a low return environment.

It’s been rumored that Merrill Lynch will no longer allow their financial advisors to pick individual securities. Many of these folks are basically salespeople who invest everything into one big cookie-cutter portfolio.

 Copyright 2004 Holmes Osborne, III Inc. | Site Designed by Kraeer Animation