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HOlmes Osborne

    What will 2016 Look Like?

  An election year. The Olympics. A Leap Year. Do these things really matter for financial markets? Probably not. How about rising interest rates? Rising rates cause bonds to drop in value, home owner’s variable mortgage rates to rise, and for companies to pay more in borrowing costs. The last t19ime our country experienced rising rates was in the 1970s and 1980s. Our financial markets did not perform well back then. Not in the way of making investors money.

What about the first wave of Baby Boomers, born in 1946, turning 70? There are 10,000 Baby Boomers retiring every day. Some people counter by pointing out that many Baby Boomers will continue to work. True, but are these folks as productive as when they were in their 40s and 50s? No.

The S&P 500 was down slightly in 2015. Had it ended up a few more points, it would have been up for an unprecedented seven years in a row.

In the first few days of January, the market has been down quite a bit, as has oil. It will be interesting to see if things quickly rebound or if this is an ongoing trend.

    Holmes Osborne #1 on
Seeking Alpha
Holmes Osborne is now the number one fixed income author on investing web site Seeking Alpha. This is out of 12,000 authors who range from hedge fund managers with billions of dollars in assets to freelance reporters. Holmes writes on underfollowed investments such as bonds, international stocks, and small companies. The articles are read by millions of investors from across the world. Clients can view many reports of their holdings on Alpha and other web sites that carry Holmes’s articles.

    MGP Ingredients

  In our research, we found an interesting company named MGP Ingredients. MGP is a grain processor based in Kansas. The company bought a liquor distillery in Lawrenceburg, Indiana, several years ago from Seagrams.

The distillery makes private label liquors for many smaller outfits. If you have ever heard of Bulleit Whiskey, Krakken Rum, or George Dickel Rye, all three are made by MGP. We wrote about this company back in May but at the time MGP would not divulge the name brands they were distilling. Another investor pointed us to a government site that shows the location of where brands are distilled. If you turn over a bottle and look at the back label, it shows the location.

There are only a handful of liquor companies in the world: Diageo, Pernod Ricard, and Campari are the major publicly traded companies. The profit margins are very high in distilled spirits.

MGP borrowed $20 million and invested the proceeds into a barrel facility. The company is expanding its production capacity which should increase profitability.

At the present time, the stock only trades at a price to earnings ratio of about 14, which is low. Because the company only has a stock market value of $368 million, it flies under Wall Street’s radar. Since we have written this latest article on web site Seeking Alpha, the stock jumped a few dollars a share and gained attention. The investing thesis is that the market does not realize the company is a major player in spirits and has undervalued the stock. We plan on holding the stock and watching the company grow its distillery production.

    Siegfried Holdings

  Siegfried Holdings is another undervalued stock that we purchased in the last quarter. Siegfried is a manufacturer of generic pharmaceuticals. Some of the drugs that the company manufactures include: morphine, codeine, methadone, oxycodone, and dozens of other drugs that are off patent.

What is enticing about the stock is that the company bought German chemical giant BASF’s generic division. BASF wants to sell off non-core businesses and focus its efforts.

When comparing Siegfried to its peers, the stock seems to be way undervalued. As an example, Teva Pharmaceutical’s stock trades at 2.5 sales. That means that the company’s market cap, the value of its outstanding publicly traded stock, is worth 2.5 times Teva’s revenues. Siegfried trades at only one times sales. Quite a difference.

As Siegfried integrates BASF’s division into the fold, it may take a few quarters before we see results.

If and when Siegfried can convert the new division’s efforts into earnings, the stock price should respond in kind.

We have written about Siegfried Holdings twice on investing web site Seeking Alpha. We will continue to publicize the stock in hopes that we can bring about attention and lift the stock’s value. Drug companies usually receive a lot of attention as their products are vitally needed and have high profit margins.

    Global Concentrated, LLP
  Our limited partnership, Global Concentrated LLP, ended with a good run. It was up 3.31% over its short life. This was versus negative 5.54% for the S&P 500.

The fund’s investment focus was on the Russian stock market and ruble. At first, we were investing in a portfolio of Russian stocks. This strategy was not working so we sold out and held cash. Then in the summer, we shorted the Russian market.

When you "short" a stock, that means that you want it to go down in value. The brokerage firm “lends” you the stock from another investor’s account. The strategy is very risky as you must pay the other investor dividends and could lose a bundle if the stock skyrockets in value.

The strategy did work and we “covered our short” on January 4. All in all, we were satisfied. The problem was that the Russian market was rising last spring when we were getting our ducks in a row and raising money from limited partners. By the time we were ready to invest, the Russian market had topped out.

We are closing the fund and sending our limited partners their money back. We are also not charging them a fee. Why charge a fee on a hedge fund when you have made such a small profit? Better to send partners their money back and part as friends.

    Bonds Abound!
  For the first time in years, there is an abundance of blue chip corporate bonds available. For the past few years, we have really had to search for bonds yielding north of 3%. In the past few weeks, we have found some reliable blue chips such as: Heinz, Walgreens, and Kansas City Southern Railways.

Why? It could be because the Fed raised interest rates. Perhaps the bond market senses something in the economy that the stock market does not. Who knows? Either way, it makes buying bonds a little easier.

The big boys can’t compete with us. If you have an abundance of wealth, you might choose Northern Trust, Brown Brothers Harriman, or some company of this ilk. Great firms. Very prestigious with marble floors and nice leather chairs in the lobby. Unfortunately, after fees and their bond picks, they’d probably earn you somewhere in the 2% range.

Part of our advantage is that we shop bond brokers for the best prices. We spend several hours every day shopping for deals. It’s not like buying a stock and paying a commission. Bonds have a mark-up. We don’t like mark-ups because they eat into our clients’ account values and decrease assets.

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