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What Would Lower CEO Pay Mean For Stocks?

I’m watching Eliot Spitzer run for comptroller of New York, and listening carefully to what he says. Whatever your feelings for Spitzer’s personal, errr…tastes, when it comes to enforcement and fiduciary responsibility, the man is both feared and respected. The closest to misuse of taxpayer money you can hit the guy with were some of his trips as government may have been more about prostitutes than business; like 2 parts hooker, 1 part official duty.

And there is no doubt that company executives fear him. That may have something to do with Spitzer’s willingness to shoot first, between the eyes, on the scantest of evidence, and then try to take testimony from the accused…

As comptroller, Spitzer would have oversight of very large funds of money. He is promising to be an activist on shareholder rights, pushing for reasonable CEO pay. These are resonating issues, even now five plus years after the recession.

So this is a thought experiment; what do you think would be the implications of shareholder activism pushing CEO pay in line?

My personal guess follows this line of thinking; the ability of CEO’s to make a big payday is predicated on granted options which in turn are pushed from stock buybacks. Buybacks hike earnings per share and directly support share prices, helping investors, particularly because capital gains taxes are lower than dividend taxes.

Of course, they could also be viewed as executives using corporate funds to rig their paychecks – the company buys up what will, to some degree, be given back to them directly.

If this process is brought under close scrutiny, then lost compensation will probably reverse the progression that got us here. I would expect share buybacks to become increasingly rare, with dividend hikes becoming the norm again – that would be the quickest, most direct way for company executives to increase their compensation. Accordingly, price/earnings growth would slow, and there could be immediate fallout from price/earnings resetting to lower multiples to expand dividend yields.

And I tend to think that more dividends/less buybacks may be what elected officials want. This would increase tax revenues without needing to start the messy and contentious debate about long term capital gains taxes.

What do you think? Leave a comment.

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BAS Sells Off 11% On Loss – Looking To Buy Lower

Untitled

If you are trading BAS, I want you to memorize this passage, which I put up inside of The PPT for the privileged and well connected.

BAS is down 11% at the time of this writing on bad earnings. Bad earnings should be expected with this company, for the moment and into the forseeable future.

As it stands, I actually was pleased with BAS’ earnings, as they were about what I expected. I will break them down later this weekend, when I have time. I will point out; even though the company lost money, their cash level increased from earlier this year. That has a lot to do with why I am in this name in particular, and not one of their competitors.

If you are following along, I caution you to reflect on what kind of person you are. Are you prone to panic? Do you actually understand what’s going on here?

I am in this name because I believe they will emerge, following a great consolidation in the fracking revolution taking place in the US, victorious and on top. I anticipate that they continue to lose money from fierce competition for the time being. It is the floundering deaths of BAS’ competitors that has put pressure on their bottom line, and will continue to do so for the forseeable future.

Just before July 4, I restructured BAS down, selling shares until it was only 7% of my account. I view this price collapse as a buying opportunity. But I want it lower, closer to $10-11.

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Setting Myself For A RGR Disappointment

Mentally, I must ready myself to see RGR miss on earnings and crater back towards $40. Statewide background checks are way down, save for the most liberal, anti-gun cities, where terrified freedom lovers accumulate weapons at an alarming rate.

Most of the energy to buy weapons was exhausted in the first three months of the year. You can only buy so many firearms.

However, I am not prepared to sell my position, exclusively because of the minute details of my personal trading and positioning.

I already made a boat load of money in RGR, first last November when I hit a rally then sold before December. Then, I repurchased around $40. And since then I’ve been buying and selling the ranges, always profitably. I’m currently sitting on just half the position size I started with (sold north of $50 I do believe), and at least a 20% unrealized profit baked into those shares…not counting all the realized gains and dividends.

So no, it doesn’t make sense for me to sell out.

RGR’s value depends a lot on where things go from here. At latest sales, RGR is cheap – but are they maintaining those levels with background checks slowing down? At 2012 levels, the stock is a little hot, but not too bad. And if sales settle somewhere in between, I’d say we’re just fine.

But if sales start going below 2012 levels, things get interesting. I’m counting on first time gun buyers getting the itch; you never stop at just one.

Still, I’m not going to be taking any form of wash on this; I’ve come way too far. I’ll sell if it gets to $44, lock in the last smattering of shares up +10%, and walk away up big on one of the most profitable 6 month runs in a single name I’ve had since APC.

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Naturally AEC Gets Disemboweled On Earnings Miss

If you’ve been following my mutifamily trade for any length of time, you already know that analysts absolutely “hate, hate, hate” this stock. They do not respect one Mr. Jeffrey I. Friedman, and work tirelessly to dethrone him.

AEC had a small miss on earnings and came in under expected revenue. For this, the company has been impaled by 3%, and the entire REIT space appears to be selling off hard.

I find the revenue, earnings, and FFO concerns to be dismissible for the moment at least. How many of these analysts were paying attention to the FFO blowout to begin with? Look at a long term chart of FFO growth in the multifamily space and then understand that what people are afraid of amounts to a zit on a rhino’s butt cheek.

It makes perfect sense that at this exact moment in time, it would have been hard for multifamily real estate to continue the 5% revenue growth the sector had been enjoying. Recall that FFO for AEC is up 30% for the first 6 months year over year between 2013 and 2012. That is gargantuan, and until now that cash flow has been directed continuously into reinvestment in the business.

Management at both AEC and CLP (and I presume other equally reputably managed multifamily REITs) took a very well announced break in the pace of acquisitions beginning sometime last year. They found that multifamily units had stopped selling at the rock bottom prices and became concerned about conditions that may impair access to financing. In short, they did what management is supposed to do; they applied the brakes, and got down to the business of actually using their brains and planning ahead.

The last 6 months has seen these companies redirect their cash flow away from reinvestment and into early debt extinguishment and balance sheet improvement. Both AEC and CLP have seen their credit scores upgraded inside of the last year. Once the easy money from financing activities is taken off the table, we’ll likely see a resumption of that high paced revenue growth we saw before.

As demand for rentals remains strong, and the market seems to be easily absorbing rates increasing (recent rates have been increasing at an annual rate of 3.2%), we may see a resumed push into asset acquisitions. AEC announced another purchase this month just before filing. If prices are not good enough or desirable locations can’t be found, then land development will take off.

If demand for new apartments starts to slacken or the company feels that new assets would not serve the network of apartment communities advantageously, then the bounty of FFO that has been built up over the last three years will be focused into a dividend yield hike that showers patient shareholders with cash.

The very large body of free cash flow from operations that has been painstakingly assembled here provides shareholders with a bounty of options. What confuses me, with AEC, is that their FFO is no less desirable, yet priced at a discount to the rest of the sector.

Consider CLP – I was buying them at $17-18 a share, at the same time I was buying AEC for $14-15. For all purposes, they are the same company. I have watched as AEC and CLP mirror each other’s moves practically perfectly; acquiring properties at the same time, paying off debt at the same time, sitting on their hands at the same time, engaging in strategic sales and expense reduction at the same time.

They are nearly identical in every aspect, yet over the last two and a half years, CLP has run to $25 a share, whereas AEC has been squashed repeatedly in its attempts to rally, today trading for $16.

At this discount, I am left to assume that AEC is a prime takeover target. CLP was recently merged into MAA. The sector is primed for some consolidation, with all this money sloshing around. Maybe AEC can get bought out too. I must trust that the great Mr. Jeffrey I. Friedman will do what is in the best interest of us shareholders. He has faithfully adhered to that standard so far.

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AEC Earnings – Small Disappointment But No Problem

AEC reported earnings this evening. The rehash goes something like this:

Net occupancy of their buildings remains very high at 96.6%, down a little from the 97.3% of last quarter, but nothing to fret about.

FFO missed expectations by a penny. The company management also brought down FFO estimates for 2013. But I would have expected that. They had another secondary equal to ~10% of their market cap this quarter. Of course there’s some per share disruption.

Earnings have never been worth talking about with this particular company, because AEC’s strategy has been an asset rollover into younger, more desirable locations that generate lots of depreciation, masks the performance and writes off against the revenues.

Despite the small disappointment in earnings and funds from operation, there’s much to like here still. The market remains in a daze about what is going to come for Associated Estates Realty.

The management has positioned the company expertly. The cash they raised has partially been put to work, purchasing one more property this month, and beginning development at two others in California, not counting a separate joint venture. The remaining cash, together with some credit line deals, have improved the balance sheet at the perfect time; as interest rates have begun to normalize and the cost of borrowing for corporate purposes and mortgages have gotten more expensive.

This should give the company opportunity to put cheap cash to work on better prospects, while simultaneously securing their occupancy by making it more difficult for renters to vacate.

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Gun Frenzy Won’t Slow Down

The most popular (and esoteric) argument for gun stocks being overpriced seems based largely on a riddle that goes something like this:

“You tell me, what happens when gun legislation passes and the buyers realize everything will be okay?”

Which is lovely. I enjoy riddles. And word games. And the works of Nabokov. But this isn’t about playful respite; this is about making money and being right. It becomes my duty, therefore, to thrash you.

I now present three illuminating bullets (I just proofread this and realized I made a pun):

* Stocks like RGR are only trading where they were before sales went crazy
* This legislation will not be hindering gun makers – background checks are perfectly doable because they will most likely have maximum waiting periods attached (1 month or less or else all clear); that’s a minimum to get the measure through the House (if anything even can)
* And, the big shebang…RGR hasn’t raised gun prices and I’m not sure the others have either

Yeah, see that’s the big open secret here. Guns are selling out of stock, but RGR’s CEO was adamant that his company would not be raising prices because, as he phrased it, “gun buyers as a group have long collective memories.” He doesn’t want to prey off his customer base, so RGR hasn’t raised weapons prices at all.

Ergo, once this bill passes and people go “oh, wait, that’s not so bad,” there will be no price incentive for them to cancel their order (“I could sit back and wait for prices to calm down…”). That, right there, isn’t happening. The guns that have been jumping in price are private sales. So, in RGR’s case (and I suspect the other manufacturers as well), there’s no clear financial edge to back out.

There is, however, still the looming possibility that Republicans could lose more seats (remind me, what is the popularity of the GOP at the moment?)…

(I told you I like riddles too)

And so, I am afraid (I’m not actually afraid) that this robust bounty of profitability RGR and the gun market at large are seeing is very much sustainable for a duration of at least a year (possibly two). While eventually and inevitably these orders will slow down, I really couldn’t care less. You see, the stocks are not pricing in this raw influx of cash, and one solid year of the orders they’re experiencing is the equivalent of several years worth of business, all front loaded and with minimum inventory risk attached.

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