Discover Spinoff from Morgan Stanley

DiscoverMorgan StanleyOn June 30 Morgan Stanley (MS) will be spinning off it’s Discover Financial Services business to shareholders.  I believe this poses a great opportunity for investors as Morgan Stanley, like it’s peers in the investment services industry, is quite undervalued.

However, credit card companies like Mastercard and American Express are commanding good premiums for their shares.  Therefore, once Discover is it’s own publically traded company, it’s shares should rise to meet it’s peers valuations.

Discover should be able to increase earnings as independent company as there won’t be the conflict of interest when getting banks to distribute cards any longer.  Many firm/banks didn’t want to deal with Discover because the parent company Morgan Stanley is a competitor of theirs.  This won’t be a problem now.  Also, being independent should unlock the entrepreneurial spirit in the company.

There is also the possibility that another firm may want to buy Discover, especially if the price doesn’t rise significantly right away.

After the spinoff, keeping Morgan Stanley is still worthwhile, even though you may not see much appreciation in their stock for a while as the market has been keeping them and their peers down for some time, but holders should be rewarded eventually.

I grabbed a few shares yesterday.

Full Disclosure: I own shares of Morgan Stanley.

Goldman Sachs Creates Own Private Trading System

Goldman SachsGoldman Sachs (GS) has created their own private trading system called Goldman Sachs Tradable Unregistered Equity system or GSTRuE to compete with the pubic trading system. This will provide a great alternative for companies who want to raise capital but don’t want the regulatory and disclosure requirements that come with a public listing.

NEW YORK (Reuters) – Top IPO underwriter Goldman Sachs Group Inc. (NYSE:GS – News) this week launched a platform allowing an exclusive club of big investors to trade unregistered, privately placed securities, in the latest challenge to U.S. equity markets.

Last year, according to Nasdaq, $162 billion of capital was raised through unregistered private placements compared with $154 billion through IPOs, which are registered with the Securities and Exchange Commission.

This should be a great opportunity for Goldman Sachs.

However, under SEC rules, companies can sell securities without registering them as long as issues are limited to qualified institutional buyers, investors with at least $100 million of assets, and there are no more than 499 stockholders. So this means that the individual investor has no chance of direct participation.

This is most likely due to the public system being afraid of losing all their business to a better private solution… much like how the USPS won’t allow Fedex or UPS to deliver first class mail.

However, you may of course benefit from the system by owning Goldman Sachs shares and I’m sure there will be publically traded entities or ETFs that will trade in securities within the private system.

Full Disclosure: I own shares of Goldman Sachs and I am considering adding to my position.

A Defensive Investment for Uncertain Times

Berkshire HathawayWith the Dow, Nasdaq and S&P 500 all hitting new highs on a regular basis, I’m starting to get more defensive in my investing.

While my goal is to always seek out the best investments at the lowest cost, when the market begins to look like it could be peaking and getting ready for a fall I want companies that will most likely survive the fall with little damage or may even thrive in a market pullback or even a recession.

Usually, these kinds are companies are diversified conglomerates and consumer staples such as Johnson and JohnsonPepsiAltriaKraft, or GE as no matter what happens to the economy people will continue to eat and buy the everyday necessities that these companies provide. Also, these kinds of companies have much global exposure, so if things are bad here in the US, their international operations will pick up the slack.

However, there has been one company that I’ve always considered, but never pulled the trigger to buy and now it just feels right and that company is Berkshire Hathaway, the company run by billionaire investor, Warren Buffett. Not only is Berkshire Hathaway a diversified conglomerate, but it has interests in many consumer staples. There are also many other reasons to like Bershire Hathaway. Here are a few…

  • A very long record of steady growth.
  • The most successful investor ever, Warren Buffet, running the company for only $100,000/year. A real bargain! Much better than what you would pay a mutual fund manager, but with the similar benefits of buying into a mutual fund.
  • Management’s pay is tied to the performance of the stock, meaning that they have a strong interest in seeing the stock increase in value.
  • Management has had a long history of honesty, integrity and frugality.
  • Berkshire’s holdings are strong and divisified.
  • Berkshire’s main business of insurance, which includes Geico (of which I am a customer), produces large floats (which is the cash remaining of insurance premiums paid after all claims are paid). The float is used by Buffett to purchase more great companies.  The best part about the insurance business is it’s a business where the customer pays and hopes to never receive it back!
  • Buffett is great to picking great companies with distrissed prices. So, any downturn in the market will provide him more opportunities to make great deals.
  • As mentioned earlier, when there is market downturn, investors usually sell riskier investments and put their money in safe investments such as Berkshire, which should automatically increase the price of the stock as demand increases.
  • And best of all, Berkshire is currently undervalued! The stock is currently undervalued by 5-12%, by conservative estimates.

The negative about Berkshire for a lot of people is that the actual cost per share is quite high. Berkshire Hathaway Class A shares go for $108,351.00 and Class B shares go for $3,604.30. Buffett has chosen to not split the shares because he wanted real investors to own share, not traders.

This also helps keep the price stable. He did introduce the Class B shares a while back which does make it more affordable. The only real difference between the two is that Class B shares don’t have voting rights and Class A shares can be converted in 30 Class B shares, but not the other way around. This keeps the price ratio 1/30 most of the time.

There are other companies that are similar, where the CEO runs the company in a similar manner as Buffett runs Berkshire. These are Sears HoldingsLeucadia National Corp, and Markel. All three have well known investors running the company that seek to increase revenue’s by reinvesting excess revenue generated by the core businesses. They also invest in a similiar fashion as Warren Buffett and seek to emulate Berkshire in various ways and their prices per share a lower than Berkshire.

I currently have all three on my watch list and am waiting for a good entry point.

Full Disclosure: I own shares of Pepsico, Altria, Kraft and most recently I initiated a position in Berkshire Hathaway (Class B shares).  Also, I am a Geico customer, which is fully-owned by Berkshire Hathaway.

Patience is a Virtue

When investing, you sometimes need patience. Especially when you invest in companies that are out of favor with wall street. However, it’s usually when wall street hates a stock, that it gets cheap. As an investor, it’s our job to research these stocks and determine which ones deserve to be down and which ones are simply a victim of an overreaction or loss of patience.

EbayTwo of my last investments fall in this category. Ebay (EBAY) and Microsoft (MSFT) both have been out-of-favor with wall street. Ebay has been down for what I believe are some misunderstandings by the media regarding their business, which if you researched you would have found they are stronger than wall street gave them credit for. There was also an over-reaction in the believe that Google Checkout was going to destroy Ebay’s Paypal business.

MicrosoftMicrosoft was simply a patience issue. Wall street was tired of waiting for new operating system and office software to come out. Wall street reacted as though they were never going to be released and so the stock was sold off very heavily. This posed a great opportunity for investors like myself to pick up some shares really cheap. However, for a while the shares did nothing, but the last 2-3 weeks have been great for both Microsoft and Ebay.

Labor ReadyA couple of my current situations that I believe to be similar are Labor Ready (LRW) and Sandisk (SNDK). They are both currently out-of-favor with wall street as their stocks are much cheaper than most stocks I watch. I imagine the Labor Ready is down due to fears that the recent minimum wage increase will hurt them and Sandisk is down to a current oversupply of chips, which they will most likely need to mark down to sell. I don’t think either of these problems are going to affect the companies in the long term. Both are strong and stable businesses. Labor Ready deals in temporary manual labor and they have minimal competition and they are very profitable. Labor Ready is expected to get a lot of work through post-Katrina construction. I think the wage increase concerns are overblown.

SandiskSandisk will simply discount their current stock and make more money on the forthcoming chip production. They continue to stay ahead of their competitors with new innovations and they have a ton of cash and no debt. With the increasing popularity of handheld electronic devices such as digital cameras, cell phones with storage, mp3 players, handheld video players there is going to be increased demand for small storage cards, which they’ve got. Sandisk’s cards are regarded as the most innovative and reliable. I would not bet against them.

Buying shares in either of these companies and waiting a few months or a couple years should pay off very well.

The bottom line is you must do your own research, don’t just take what the media and/or wall street says and you must have patience if you are going to bet against wall street.

Full Disclosure: I own shares in both Ebay and Microsoft. Sandisk and Labor Ready are potential new investments that I may or may not make in the near future.