by Catherine Tripp
Investment Advice from the trenches
The economic disaster caused by Wall Street's self styled experts has brought to the surface the same devastating results when government and private industry give a wink and a nod to conflicts of interest where real competition does not exist. As a small investor and active American citizen, I have watched with dismay the results of crony capitalism, and the speed with which major players in the stock market can take it down. After writing my representatives, jumping into local politics, opining on opinion pages, it appears complaining has not made a dent in the level of corruption in Wall Street. Time to run with the Big Dogs, and use their ill gotten gains against them. Time to make that those student loans for a Masters in International Management pay some dividends.
In the past decade, stock brokerages has lost their stranglehold on timely financial information. Vast quantities of hitherto cloistered business information is available instantly to the little people. Bloomberg used to charge thousands a month to access their business data. New York Stock Exchange symbols and price quotes are no longer arcane and hidden. Remember ticker tape parades down Wall Street? Short for Stock Ticker, rolls of paper would spit out Bid and Ask quotes to expensive machines in the offices of the brokerage houses. Now, I suppose parades will have to do with shredded paper, as evidence of crony deals gone awry is quietly turned to compost. Better and better internet search engines assist smaller players in making their own stock choices in their own retirement accounts, so it's a whole new ballgame, and anybody with a mitt can play. Quicken.com has quotes, the company will have its own website, Schwab, Fidelity, etc. all have research tabs for anyone with an account - I use Fidelity for research, but start with Google.
In September 2005, an article from the Washington Post listed 5 firms who had been awarded no-bid contracts worth up to $100 million each by FEMA in the wake of Hurricane Katrina. FEMA spokesman James McIntyre said "We're familiar with their work, and they're large enough to get it done". Wow. No bidding process required. So I decided to invest in these companies after watching how their stock performed and thus was born the "Betting on the Cronies" Theory of Investing.
Politically incorrect, perhaps, but buying low and selling high on the open market causes profit to wind up in the investor's wallet, not the CEOs or the companies they work for. The money goes to the seller of the stock, and when you sell it, the money is paid to you (minus fees and commissions).
To clean up the Katrina disaster, besides Halliburton (politically connected but privately held) the following five companies received the largest (over $100 million each) no-bid contracts: Fluor Corp. of Aliso Viejo, California, Shaw Group Inc. of Baton Rouge, Bechtel National Inc. of San Francisco, CH2M Hill Inc., of Denver and Dewberry Technologies of Fairfax. Who were these guys, and how did they get all of this government scratch? Instead of complaining about corruption in an empty room, doesn't it make more sense to profit from their actions while adding nothing to their bottom line? We small investors are limited to publicly traded corporations, which eliminated three of the five, leaving Shaw and Fluor. Shaw Group in 2006 had a 57 P/E - too rich. Fluor's P/E was only 17 - much better. Price to Earnings Ratios (P/E) are useful indicators of what one might call the appraised value - is this stock selling for more money than its neighboring stock? Are people paying a premium for a well dressed stock? At 57 - that means the price is 57 times greater than the earnings, danger bells ring - over the last fifty years or so, 13 is an oft-quoted average Price Earnings ratio. There's more to look at, but P/E is a good quick and dirty calculation.
After watching the stock go steadily up, I bought stock in Fluor Corporation (NYSE: FLR) at $34 per share in 2008. Over the last few years, I sold 1/3 of it at $50 per share, sold 1/4 of it at $73 per share, another 1/4 at $66 per share. And now that I am writing this article, I am looking to sell the rest - that was a good ride, time to say goodbye with no hard feelings, and find another overlooked gem. Recent news reports regarding the Pentagon and the hundreds of millions awarded to private companies caught my interest. We start with Taxpayers for Common Sense (taxpayer.net), and scroll through their news announcements for company names.
Here's one: In March of 2010, Northrop Grumman walks away from the competition with rival company Boeing to build the next re-fueling tanker for the Air Force, a job with a potential $40 billion payout over time (the planes run $184 million each). That looks promising. Boeing won, let's look at Boeing (NYSE: BA). The P/E ratio is right about 13, and the company pays a dividend - but - the stock is selling at $73 per share, just a little below its 56 week high of $78. The 56 week low was $56 - this price is a little too high for comfort, and there's talk of reducing defense spending, so this one goes on the Watch List.
Another intriguing headline from taxpayer.net: In 2012 the ethanol subsidy looks to increase to 5 billion gallons. Called a "Renewable Fuels Standard" the RFS is worth $2.5 billion in annual subsidies - mostly used by Archer Daniels Midland (ADM) one of the biggest agricultural companies in the world. Let's see how they're doing. Oops -the VEETC was allowed to expire in December of 2011.
iwatchnews.org pops up with a 2011 article about sole source contracts and I find a company called DRS Technical Services of Herndon, VA. In July, they received a contract worth nearly $20 million for training and mentoring Afghan police. The company's website states: "DRS Defense Solutions, a wholly-owned subsidiary of DRS Technologies, Inc., announced that its Intelligence, Communications and Avionics Solutions (ICAS) business unit received a contract award from Boeing’s Defense Space & Security group to integrate its Intelligence Broadcast Receiver Block 2 (IBR2) tactical terminal onto the KC-46A Tanker aircraft."
This company is selling to Boeing; who has a $40 billion contract to build re-fueling tankers for the Air Force. DRS's press release goes on to say "This initial phase of the awarded contract will provide IBR2 systems, data and support to Boeing for the engineering and manufacturing development phase of the tanker program." It is not possible to buy stock in DRS Technologies because it is a wholly owned subsidiary of Finmeccanica North America, which is the U.S. headquarters for Finmeccanica SpA, a global aerospace, defense, and transportation holding company headquartered in Italy. Next stop, Wikipedia: " In May 2008 Finmeccanica announced its intention to purchase the U.S. defense contractor DRS Technologies for nearly $5.2 billion. On October 22, 2008, the sale of DRS Technologies was finalized.…In 2011 the company faced accusations that it had created slush funds with which to bribe politicians and chairman Pier Francesco Guarguaglini came under investigation. He denied any wrong doing but, following pressure from Prime Minister Mario Monti, he stepped down from his post on 1 December receiving a golden handshake of 4 million Euros." Looks like this Italian company fits the profile for banking on baksheesh. Finmeccanica is available for sale in the United States but the company is not listed on the New York Stock Exchange, so it's turning out to be a little more complicated than usual. According to e-research at Fidelity, FINMF's primary exchange is the Pink Sheets, a daily list of bid and ask prices of over-the-counter (OTC) stocks. There are no analyst reports to review, and very little trading information. The thinly traded stock is selling just slightly above its 52 week low of $3.31 share. That might be due to Italy's continuing fiscal woes, it may be due to the investigation. This could be a winner - just have to figure out how to to buy some shares of this global defense industry giant that I had never heard of before. In the meantime, there's always Boeing shares easily available - and more cronies to catch.
Betting on the Cronies (San Francisco Examiner)
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