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Because it does not make sense not to

Back when I was growing up as a Hoosier in Indiana, I frequently played this basketball game called “Around the World.” Basically, you shoot 3-pointers as you work your way around the 3-point line. I wanted to use this concept to illustrate how easy it is to build a portfolio of undervalued companies if you’re looking hard enough. I frequently get asked questions like, “What’s the best dividend stock?,” “How do you protect yourself against a double dip?,” “How do you invest outside the USA?”

(Note that the day I wrote this, PSEC dropped the dividend. Gross!)
The corner shot. Prospect Capital Corporation (NASDAQ: PSEC) is a company that I’ve come to own because they acquired Patriot Capital, a company that I owned. I figure if they are smart enough to acquire Patriot Capital, I might as well take a look at Prospect. I did. It really doesn’t take a genius to figure out that this is a steal. I’m not that smart, but I can sit on a 15% dividend, a P/E less than 10, and growth that you have to see for yourself. Take a look (below). Nothin’ but net.

Working towards the middle. I’m a convert. I believe that peak-oil will cause oil analysts to “re-evaluate” their price forecasts where supply determines price more than demand. Longwei Petroleum (OTC:LPIH) may feel like a 3-point shot but to me it feels like a layup. Uplisting to the AMEX is imminent as all the requirements are met. 2011’s $0.71 EPS isn’t bad for a stock less than $3 that is growing rapidly and helps insulate you from the high prices of peak-oil that I think will become more visible around early 2012. Swish.

The middle shot. China Armco Metals (NYSE: CNAM) is not a company that you can price using past performance. In fact, past performance is a terrible indicator of future performance in this situation. Their ability to strategically position themselves with lines of credit greater than their Market Capitalization is enviable. Most companies in this space can’t even touch this. We recently saw double digit prices and I’m confident we will see them again. Backboard ballin’.

The far edge shot. I just flew down to Miami, FL to visit DJSP Enterprises (Nasdaq: DJSP). The decline in stock price likely came with a few big players getting out and going short. Recently the CEO of DJSP stepped in and began buying a notable portion of the float on the open market. In my opinion, the wave of foreclosures is being postponed by various government programs. Give it 180 days. There will be a lot of people scrambling to get back into foreclosure processing companies like DJSP. I’m confident that DJSP will get back to business with their merged, larger client. When a stock bottoms, it has to go up. DJSP bottomed at $5. Bounce off the ground, backboard, net!

Quick Shots. Look, I hate the idea of Gold. That said, I’d rather hold gold than any currency printed by global governments if I had to pick for the next 5 years. SPDR Gold Trust ETF (NYSE: GLD) is one way to play this. If I was you, I’d take cash to a local gold boutique and buy real gold with cash — just make sure you know what you’re doing. To me, China letting the Yuan float is really them saying, “We are tired of buying overvalued US Treasuries.” Go forth and short them with ProShares Ultrashort 20+ year Treasury ETF (NYSE: TBT). Also, it’s almost a race to short the Australian Dollar. The housing bubble is in Australia, not China. Kiss’d the rim.

Disclosure: Glen Bradford and his managed entities own Prospect Capital, Longwei Petroleum, China Armco, and DJSP Enterprises.

Feel free to disagree with me, but I’m just going to assume from the start that you want money. Given the two options of wanting more or less money, most people want more. That’s a lousy argument for me to use for justification, but it helps to have assumptions like this.

So, I’m asked a lot of questions about money. I just want to help people help themselves. I’m not here to help people that don’t pay it forward. So, although it’s incredibly unlikely that anyone who reads me would find themselves asking the question, (Q1) “Why don’t I have any money?” in vain. At this point, I think that most of the people that read me would be more likely to ask the question, (Q2) “What should I do with my money?” That’s at least the right start. What is money?

Money, in my opinion, is a store of value with which you can buy someone else’s effort at a particular moment in time. To get it, you generally have to assist someone else in doing something. So, if you are struggling with Q1, you really should be asking yourself Q2. Most people I know make at least some money. Much past that, it’s what you do with it that determines whether you amass a lot of it or not. Obviously, spending less than you make is a good start to building up to Q2. That said, if you want to have a lot of money, like I am assuming you do, figuring out how to help others is a good start. People that help society the most tend to acquire large sums of money.

At that point, you may ask yourself again, what’s the point of having large sums of money? Well, those that do make the decisions on how society allocates its time and effort. So, you have people that helped a lot of other people getting to make larger and larger decisions on behalf of society. Maybe you can start by trying to help these people help everyone else? I mean, that’s what I do. Was that helpful?

Hey, I’m Glen Bradford and I could be on your team. I specialize in questioning everything, taking nothing for granted, valuing thousands of different opportunities, and picking the best ones to put my money into. I guess I must be pretty good at this, cause it’s paid my college from scratch, allowed me to write for TheStreet.com, and other people are giving me their money to invest. I rarely talk about what’s popular, because I’m usually talking about things before they happen — and in terms of popularity, I would be a lot more ‘cool’ if I talked about things that everyone else was talking about. Keynes puts it best, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” So, what should you avoid?

1. Don’t buy US Treasuries. Inflation, likely through monetizing the deficit, is going to surprise anyone who thought these were a store of value. The only people that should be buying these are foreign central banks to give their local economies a stronger export advantage. At some point in the future, you may want to short them by buying TBT (ProShares UltraShort 20+ Year Treasuries).

2. Don’t only invest in the USA. The long term outlook for the dollar is quite bearish. In fact, over the next decade, emerging economies will outperform developed economies on a relative basis. Buy US Listed Chinese Microcaps. The valuations here are ridiculous. Across the board a monkey can throw darts and hit 5-year 5-baggers. Most of them are priced to go bankrupt and are stick it to the man with double digit growth rates. I’ll let the rest of the clueless investors fight over fractions of a percent in annual returns.

3. Don’t short oil. There are two leading scenarios: Oil will double in the next 5 years or global economies will slump due to higher energy prices or both. When supply drops and demand is relatively inelastic at the current prices, the price rises to regulate the demand. Also note that it is likely that the US shifts to natural gas, probably starting with fleets for starters, but eventually moving more mainstream.

4. Don’t bet nominal housing prices will decrease. A lot of the stabilization has come from higher home prices. If home prices, regardless of the huge oncoming invisibly foggy wave of foreclosures, start to slide, the FED will combat this by printing more money to increase their nominal values. Interest rates are nil right now and can only go higher if housing stabilizes, but higher interest rates squeeze housing. Good luck raising rates, FED.

5. Don’t buy and hold. Historically, in periods where inflation rises above what it was forecasted to be, prices are more unstable and markets become more volatile. Be ready to trade or have someone who is ready to trade for you. Mutual funds are going to suffer as suckers sell bottoms and buy tops — just like they always do.

6. Don’t expect perpetual growth. The growth that we’ve experienced since the 1960’s in my opinion results from cheap energy sources. Fact. The ones we use the most are set to get more expensive, fairly rapidly.

7. Don’t bet on the European Union staying together. It’s likely that the irresponsible constituents will get kicked out after they are systematically deleveraged. That is, unless George Soros and others like him step in and profit from forcing them to panic.

Well, if you can avoid making those mistakes or at least have an awareness of them, you’ll likely come out ahead of where you would be otherwise. Blind diversification protects you against ignorance, but it’s not going to make you money like it has in the past. The best form of protection for the individual investor is going to be their understanding of the extent to which they don’t know what is going to happen. Overconfidence reigns supreme and people love making deals, even if they are foolish ones. Don’t be a fool. Avoid losing. That said, I can only help you if you can help yourself.

Disclosure: No positions.

I made it through the crash of 2008 without losing money for anyone that I was working with. I want to enable you to see things as I do, logically. When most people bet on what’s going to happen, they don’t stack the payout in their favor. I’ve been making my living by determining what is going to happen in the long run and betting on it. I hate being wrong, but am always looking for reasons to reconsider my investment hypothesis. I operate in highly inefficient markets. So do you. Here’s how you profit from it.

Look, I don’t come up with my own material, especially when someone else has already done it perfectly. Here’s how you manage through inefficient markets according to Adam with a few edits by me.

The only way to combat the inefficiency is to extend out how long you hold an investment for. The markets are inefficient short-term but fairly efficient long-term. Risk-aversion is quite high right now(and for some reason our space is classified as risky) but I doubt it will remain this high consistently for the next year or two. Remember that risk according to the general population comes from volatility and not from true risk, overpaying. At sometime during that two year span investors will get their appetite back and will take our stocks for a ride.

And when people start buying they may take that stock with a PE of 3 up to maybe a PE of 9, a solid 200% return. So what does it matter if you have to wait two years(or 3, or 5) to get it, it’s still an excellent return even five years out.

Should 200% returns really be easy to get? No, that’s why it usually takes a little patience to achieve them. The difficulty lies in finding the quality companies you are willing to stick with through thick and thin because it’s guaranteed your conviction will be tested more than once during the two year time frame.

And if the company drops to a PE of 1, sell something else that hasn’t dropped as much and load up(just as many of us here did a little over a year ago). Then when it returns to a PE of 3 you have a 200% return on those newly purchased shares. Even if you had to sell something with a PE of 2 in order to buy the stock with a PE of 1 it is worth it. It’s all relative.

I’ve been 100% invested through this entire downturn and am flat for 2010 because of the method mentioned above. And I was 100% invested for the entire economic crisis and had enormous returns using the same strategy.

But again the key component is you really have to believe in the companies you are invested in, otherwise it won’t work because buying more of something that has dropped 50% is not easy unless you are very confident in your analysis and research.

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=51055616

DJSP Enterprises (DJSP), one of the largest providers of processing services for the mortgage and real estate industries in the United States, today had its Q1 conference call after announcing results last night. They lowered their full year guidance and since then, the stock has fallen over 25%. I want to use this opportunity to hit on the main points of the call and re-iterate a strong ‘Glen Bradford’ buy. I’m upgrading the stock.

I listened into the conference call. Lowered guidance in most situations comes from future problems down the pipeline. That isn’t the case this time. Lowered guidance this time is just a temporary setback. Company prices should be a discount of their future earnings — and in this case, the discrepancy between price and value appears to be fairly large right now. The main points:

Two of their largest customers are merging, and in my opinion, this is going to make Q2 and maybe the beginning of Q3 temporarily weak. That said, I would argue that DJSP is incredibly likely to continue working with this new merged entity and get the backlog of foreclosures that they have built up.

They are in the process of picking up a second REO customer in my opinion, but the time that it takes to ramp up here might push those earnings into Q1 2011 at this point.

Fannie Mae (FNM) and Freddie Mac (FRE) have been touring the facilities to make sure that DJSP has the capacity to ramp up processing.

David Stern has been getting phone calls from his customers on a daily basis to make sure that DJSP has the capacity to handle a future ramp up in capacity.

There is currently a rumor circulating suggesting that foreclosure processing is being pushed back another thirty (30) days for mid-summer election purposes.

In the Q&A section, someone yelled at David Stern for not disclosing this setback through an 8-K earlier. In my opinion, taking all things into consideration, David Stern has been making the right judgment calls. The future for foreclosure processing is brighter than ever.

I want to reiterate that this is a strong buy and I’m looking for over 100% gains in the next year — especially at these prices.

Disclosure: Glen Bradford owns DJSP (He doubled up today).

Wake up America
By Glen Bradford

I’m an MBA now. That means that everything I say is a fact, right? In the last few years, I started with less than nothing and essentially graduated into early retirement. It’s been a while since you’ve heard from me. In that time, I’ve had several incredible learning experiences and I have many things to share. That said, sharing everything in one article would not be effective and I’ll do my best to summarize my thoughts and outline actionable ideas. I advise that move forward and ignore this article if you’re not interested in improving who you are, financial situation included. I want to first cover an overall perspective of what’s going on. I honestly believe that you need to have an idea about what is going on before you can really take any coordinated, planned, successful action. Hence, I default to doing nothing. All man’s miseries derive from not being able to sit quietly (Blaise Pascal). Note that Warren Buffett and Mohnish Pabrai would agree with me here.

Don’t be a wimp, buy the dip. The market dip we’ve seen is likely to rebound. Crashes happen when things are getting worse. As far as I can tell, the European bailout is going to be contained and deleveraged without much more panic. China is slowing down their growth engine and adding oil so it doesn’t overheat and break (smart). When people were on TV Thursday telling me that “Any sale is a good sale,” I promptly logged in and bought as much as I could. Heck, if I can name the price, I guarantee I can name one where I won’t lose money. I feel like I’m trading paperclips for gold sometimes.
The Next Black Swan. Alright, this one is going to be a shocker, but everyone and their mom is in denial. During finals week, you could have found me in the fetal position on the floor for 2 reasons. The first of which is that I got the pleasure of having a kidney stone. The second of which is that I was in disbelief to which we are completely ignorant about hitting the peak production of the non-renewable resource that has been powering our economy for the last century. Nouriel Roubini, called “Dr. Doom” by the New York Times, forecasted a housing bust and an oil shock in 2006. Well, I’m telling you that we haven’t even seen the oil shock. Sure, we had high prices, but they went away. Yes, I’m advocating preparation for something like oil supply being 10 million barrels a day less than what we have today in the next 5 years. I guess the price of oil could more than double from here, easy.

Redefining Inflation. Recently, I’ve questioned the theory in Economics that I’ve been taught which suggests that inflation is mostly proportional to the amount of money in circulation. In my opinion, money is a store of value, which basically enables you to purchase someone else’s personal effort/energy at a later date. If the cost of energy doubles, that dollar is going to go less far. Just something to think about. I have recently written about Buffett’s Burlington Northern purchase being savvy (http://www.thestreet.com/story/10637235/1/buffetts-burlington-bet-was-savvy.html). I’ve got news. As this plays out, he’s going to look like a genius. He’s got the moat of the cheapest transportation, and is in line with trade between the USA and China.

The Game Plan. Alright, so what have I been doing? Well, I believe that people will live in denial until they are forced to face the facts. So, the markets are likely to rise in the near term. That said, in real terms, we are way overpriced right now in terms of long term valuations. I’ve been loading up on CHEAP companies like Longwei Petroleum (LPIH), China Armco (CNAM), Lotus Pharmaceuticals (LTUS), and DJSP Enterprises (DJSP). It’s laughable how cheap these are right now. Also, I’ve been looking into stocks that I’ll be allocating into when oil goes up. So far, I’ve got Chesapeake Energy (CHK) and Gushan Environmental Energy (GU) at the top of my list of ideas to load up on. And then, I’ll probably try to allocate into S&P500 puts when the VIX finally decreases to a point where buying protection is cheap again. If you have ideas, I want you to send them to me.

Disclosure: Glen and his limited partners own Longwei, China Armco, Lotus Pharmaceuticals, and DJSP Enterprises.

I’m the type of person that mostly doesn’t do anything until prices start getting slammed, at which point it’s my priviledge to be on a position where I get to use my skills to sort through as many companies as I can to find the stocks that are getting slammed the hardest and have become the most undervalued in the world.

mos – like how it got crushed really hard when oil prices crashed, same as chk, and gu – mental note for peak oil strategy.
qkls – no
ccme – yes, need to relook at the numbers myself – but a yes even without looking
sdth – prolly a doubler but out of my price range
tpi – i like this one now. for a long hold. http://investorshub.advfn.com/boards/read_msgs.aspx?board_id=9884&NextStart=40685&BatchSize=100
csol – bad q, but the next one i guess is going to be good? lol… turnarounds.
yong – yep
steeledge thinks CWBYF (.01) CNDWF(.52),CFQWF(1.05), and NHR(.35) warrants are going to be homeruns
cwbyf – ??? no clue but i read something about hydrogen fuel cells i think
cndwf – china cord blood again? nah
CFQWF – isnt this wowjoint now? isn’t cclwf better?
NHR – nah
xodg – haha, private financers. haha
cmm – dropped big on big volume very recently, caution! someone might know something bad.
ecbi – prolly net income around 15 mil, shares of 14M, Price? $3.50 is where the low is going to go, likely. no clue. 50%+ growth
hghn – nah
amcf – it’s ok, not great, probably a doubler or so easy, could be wrong here, just looked at numbers
qkls – price 5.15, shares 40M, market cap 200M, revs 250M., bv 100M, earnings 20M, nah
cpqq – sure
bwow – ni = 12M, warrants @ $5, 16.8M shares eps = 0.71, puts exercise price at p/e of 7 with cash of $36M. 2.14 cash/share, bleh, not compelling
cbpo – p/e of around 7 i think on a forward basis? staying away.
wwin – too expensive
cadc – p/e of 5.6, turnaround? NOPE, the non GAAP cuts eps in half. lmao
xnyh – could be really cheap, but too small for me
dyp – $91M of cash? cash – total liabilities = $60M 30M shares, takes out $2 of eps, real price around $5 P/E around 8-9, last quarter sucked, no thanks
nep – lpih is cheaper
cgyv – nah
chfi – bleh, where are they?
cgdi – a pink now
jada – like it
visn – i cant find the price here
cntf – nah
sgzh – expected up and running july, yes
cncm – lol no
WKBT – yes, Q1 EPS = $0.17 P/E of 4.5 and growth…Sales = $13.96M…Net Income = $4.45M…Cash & Equiv = $18.1M…A/R UNDER $1M…Total current liabilities = $10.7M….And they’re paying taxes !! Share price = $3.75.

http://sec.gov/Archives/edgar/data/1484042/000114420410028519/v185037_10q.htm

hfgb – dilution

Stocks I bought today? Sure:
CNAM, CCLWF, LPIH, LTUS, DJSP (marginable)

My twitter post: $$ $CNAM $LPIH $DJSP $CCLWF $LTUS – Conviction Buys! I feel like the Beast in Beauty and the Beast in the Wolf Scene http://bit.ly/brnikT

CCLTF / CCLWF: Here is their march presentation http://www.megaupload.com/?d=557XJU8E

They have 9M common shares outstanding.
They have 15M warrants outstanding (7.5 strike).
They will get 1.2M common shares for making earn-out in 2009.
For them to get 2010 earnout they need to show 30%+ growth.
For them to get 2011 earnout they need to show 30%+ growth.
They have some earn-outs based on $15+ price-per-share.

The common is currently BELOW the strike price of the warrants, as per GAAP accounting the warrants do not count at all towards the share count. Once the price is above $7.5 the warrants will count via the treasury method. That means that when the common is at $10 (Its now at $7, thats a very nice gain) the stock will be at a P/E of 5 by the treasury method.

If you do not like the treasury method, that is fine. Assume all the warrants have been exercised and there are 25M shares outstanding. In this scenario you must ALSO give the company 113M in cash from the warrant exercises. This means, assuming no other cash on the balance sheet, that the company has $4.5 in cash PER share. With 25M outstanding EPS for 2009 is $1.

Thus on a (P – Cash / EPS) basis, (7 – 4.5) / 1 = 2.5x.

Care to show me something else cheaper (based on 2009 numbers) growing at 25%+ with a decent balance sheet? Hopefully something that provides warrants so I can get insane leverage for years to come on that growth?

-Fernando

Well,

I am pretty sure that I’m graduating at this point. Hurray for me. Grades are in and somehow my teachers passed me. This would have never happened in undergraduate school, where they grade you on your ability to perform. Engineering was fun. Everything made sense. Anyway, I went through my entire college career’s grades and adjusted them so that I could graph them to illustrate the disconnect that I’ve been feeling this last year. It came out as expected.

So, this first graphic is simply the Grade shift that I’ve applied to graduate school grades to adjust them to the type of grade I think I actually deserved (2nd column), compared to the (1st column) grade I got.

This next graphic shows my college career cumulative GPA and where things went fine and dandy and my GPA was putting me into Honors every semester and I was top of my class, until I started to disagree with some of the fundamentals.

Anyway, the bottom line here is that I actually think that my inability to learn things I disagree with in the long run is going to be incredibly advantageous. Unfortunately, institutions reward the ability to reproduce their methods with higher marks. This was great for me when I agreed with their methods. This was terrible for me when I started to disagree.

Thinking for yourself may hurt your GPA. Thinking for myself has paid for my entire college degree. It’s a trade off. Most of my teachers in the beginning praised me for being at the top and finishing number 1 in several of my engineering weed-out classes that had failure rates so high that the university was trying to crack down. But, near the end, my teachers were pulling me aside, advising counseling, questioning my job-prospects, and asking me what I was looking for or trying to do. Yes, I will admit that I was actually trading stocks during my final exams in some cases… or that I finished 4 hour finals in under an hour to escape to make trades or even strategically used the bathroom to keep tabs on stuff. I always figured things were more important than school if the net present value of the thing was greater than that year’s tuition.

I mean, what would you do in March 2009 when companies are trading at P/E’s of around 0.25 and growing at double digit rates? I went nuts. I offered to pay people 50% of any money that they gave me and I lost in the next 5 years. I did that in late February, in anticipation of the bottom, actually. But, I will admit that I am one lucky duck. Chance favors the prepared.

Would you sit and reproduce theories that emphasize targeting corporate leverage ratios and encourage companies to repurchase their stock as their stock multiples increase, effectively buying their own stock back at higher prices?

Would you price companies based on the volatility of similar companies in the same industry?

OR, would you quickly assemble a discounted cash flows and guess a reasonable discount rate, quickly finish the final exam, borderline pass, and earn a fortune?

What I do isn’t for everyone. That’s a given. It’s for the kind of people that when they see an opportunity or a change in how life is going to work, you are willing to change what you do. The glass is half-full, always. Question Everything, Wake up. I’m now convinced Peak Oil is going to happen by 2015. My dad thinks I’m just as crazy as when I was listening to Conseco conference calls and laughing hysterically as uninformed investors asked uninformed questions, and panic sold to me at around 30 cents. I don’t talk about opportunities from the sidelines. I don’t comment on what I could have done. I capitalize.

I seek to continuously improve my methods. Kaizen. I’ve been exposed to lots of great concepts that work and lots of things I disagree with. This is balance. I think the best way to talk about the concept of Peak Oil is to use the Socratic Method. It’s tough as nails to talk about something scary and make friends. This is why politicians don’t do it. They’ve learned to strategically avoid questions and make it sound like they answered them.

Dr. Doom got the housing bust right. He got the oil shock right. He’s been overly negative lately, but I think that his long term focus is correct, it’s just that economists aren’t so good at the short term most of the time. Peak Oil will increasingly become a fact, if it isn’t already. Everyone knows we have a limited supply of non-renewable resources, but nobody is willing to admit that our time is as close as it can be to the peak of the rate of production. I say we hit in 2004. We’ve been at plateau since then. Drop is likely to come by 2012, which is ironic because that’s the year that everyone who is crazy predicts the end of the world. It sucks that I have to agree with those crazy people. Their reasoning is wrong, but their idea of large problems ahead is accurate. Good news is that problems can be solved. It just takes time, and that, my friends, is the scarcest, most unappreciated resource in the world.

I wrote this as a reply to a post on a forum, but figured it’s worth sharing here too.

There are days at which the most undervalued stocks become cheaper.

How else do you think we got to price levels like we saw last year around this time.

Irrationality can and may persist for long periods of time.

Buying undervalued, growing companies is a hedge against mostly everything. Even if they get cheaper, they’re still better than owning reasonably to overvalued companies. Also, the growth we are seeing will support the EPS in the coming years and in the long run reward those who continue to own.

That said, in times of turmoil, you have to be willing to sell stocks that haven’t gotten crushed even though they may have substantially gone down and are still undervalued in order to purchase even more undervalued companies.

I’ve been tied up in this thing called school for the last year, which hasn’t killed me mostly because there has been a strong, general trend: UP. (I called it, “against all odds.”)

Now, we are still in the glowing halo of recovery, but a lot of the recovery is priced in to the general market. Learn from Jesse Livermore. Bet the trend. As such, even though these companies are the most undervalued in the world and are worth more, rationally, you can take money off the table in the expectation that you will be able to pay less and get more in the future.

Well, that’s the game. I’m finally in a position to play it, no-limits. At this point in time, I’m still mostly all in. I had a feeling this bounce was coming, and even told a few friends the day that it was peaking that I should sell, but I was also in a state of unconscious kidney stone pain and slept through that day.

I think that the recovery won’t last for nearly as long as everyone else does. These blue skies are going to turn to thunder clouds and the black swan of the day is going to be peak oil. Until that day where the demand outpaces supply, however, there are enough ignorance-is-bliss people out there that are going to continue to power equities higher. That said, anyone discounting cash flows should consider factoring in higher oil prices to their models, and also consider the impact of these higher oil prices on the discounted cash flows of the global stock markets as well as the political implications of substantially higher prices.

But, maybe there are enough smart people out there to have put in a market top already? I dunno. I wouldn’t count on it. Common sense is fairly uncommon.