Sold O’Reilly Automotive

Reluctantly, we sold ORLY and redeployed the cash. It has been a good performer but we needed to reduce the number of stocks in the portfolio (moving torward a total of 20 stocks). Although ORLY remains a quality company, the project average return dropped to 7.5%. We have replaced it with a stock of comparable quality and higher return.
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Sold Lincare Holdings

We sold LNCR today and redeployed the cash. LNCR’s revenue and earnings growth has declined over the past two years. See PERT A graph (above). Lower federal reimbursement for supplemental oxygen has cut into its margins. We used the above stock selection guide in making this decision.
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Sold Fiserv Inc.

We sold FISV today and redeployed the cash. FISV has had three quarters of declining revenue and earnings growth. See PERT A graph (above). Also, FISV’s market overlaps with two other portfolio holdings — JKHY and SNV. We used the above stock selection guide in making this decision.
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Sold Johnson Controls, Inc.

We sold JCI today and redeployed the cash. Although a still quality stock, revenue growth has been slowing and the project average return dropped to 6.5%. We used the above stock selection guide in making this decision.
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Portfolio Rebalancing

We are finally moving close to positive territory for portfolio return for the year in spite of or losses in UTStarcom and Pfizer. See year-to-date return report. Pfizer will most likely bounce back, but a recovery by UTStarcom is much less certain. Internal rate of return for the portfolio for the year to date is 0.5%. The S&P 500 is up 1.9% for the same period.

Most companies have reported their third quarter earnings. This is a good time to take a close look at the Moose Pond portfolio. The stock selection guides (SSGs) for all holdings have been revised. Go to the portfolio summary and click on the links for each stock to see the individual SSGs. Also, look at the current diversification report.
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Portfolio Summary Updated

The Moose Pond Investors portfolio has an average projected average return (PAR) of 14.2% and an average quality rating of 72.6 (out of 100). Both the portfolio summary and the related stock selection guides have been revised. Follow the links in the portfolio summary to open the SSGs.

You can cross check our calculations for PAR with the club dashboard from Manifest Investing.

Bought More JKHY & WMT

We purchased additional shares of Jack Henry & Associates (JHKY) at $17.85 and Wal-Mart (WMT) at $45.09. This increases our holdings in these companies to 4.4% for each. We are 97% invested.

Carnival Corp. & PLC

The October 2005 Better Investing magazine featured Carnival Corp. (CCL) as a stock to study. Here is a PowerPoint presentation and a stock selection guide analyzing Carnival from the NAIC DC monthly stock to study presentation. The presentation is also here in pdf format.

Here is the bottom Line: Carnival is a quality stock. Value Line financial strength is B+ and earnings predictability is 80, and RQR is 69.6 It currently has an upside/downside ratio of 3.5 and a relative value is 110. It has an estimated total return of 17.8% and projected average return (PAR) of 12.8%. Carnival is a hold. It might be a buy if the PAR was a little higher (greater than 15%).

Investors Financial Services

Investors Financial Services Corp. (IFIN) declined 13% for the quarter and 33.2% year to date. It is our second worst performing stock for the year. UTSI is the worst. The drop in IFIN stock price resulted from declining earnings growth. We looked at IFIN two months ago. This is a relook.

On July 17, Investors Financial cut its earnings forecast. The company gave 2005 earnings guidance of $2.30 a share, with core earnings flat with the year-ago $2.09. The company said 2006 core earnings would rise 8%-10%. Analysts had forecast earnings of $2.50 a share for 2005 and $2.98 for 2006. See page 2 of the second quarter earnings report for the companies explanation.

The announcement predictably drove the stock price down, although the market had already discounted the decline in earnings growth with the stock price slowly declining since February. See IFIN price chart. The bottom feeders of the securities bar immediately filed multiple class actions alleging that management had misled shareholders with false optimism prior to the reduced earnings guidance. The filing of class actions under the Securities Exchange Act of 1934 whenever a company announces bad news has become a cottage industry that ought to be closed. The litigating attorneys frequently settle these class actions for their fees and expenses and some minimal compensation to the shareholders. Most of these class actions are a wasteful drain on an overburdened legal system and on the finances of the targeted companies.

Morningstar rates IFIN with three stars, a narrow moat, and a “D” in stewardship, and concludes that it is fairly valued at $35. (It’s current price is $32.90). Manifest Investing gives IFIN a quality rating of 64 and estimates a PAR as 21.2%. The Investors Advisory service also has IFIN as a buy up to $53.

The company’s core business offers a wide range of administration services to mutual fund complexes, investment advisors, family offices, banks, and insurance companies. That business seems to be solid although it operates in a very competitive environment. The company’s banking services have suffered the same slow down as other banks due to flatter yield curve and narrower investment spreads. The market has probably over reacted to the news in July. Our current stock selection guide shows a projected average return of 19.4%. IFIN is a hold for now. However, we have four financial stocks, CBH, FITB, COF and IFIN. We may want to consider pruning back.

Third Quarter Results

The Moose Pond Investors portfolio increased in value 1.5% for the third quarter of 2005. In comparison, the S&P 500 increased 3.2% and the Russell 3000 Index increased 4%. Overall, the portfolio has a quality rating of 72 (out of 100) and a projected average return of 15.4%. the quality rating is excellent. The PAR is is very good too but could be raised a little. The percent changes this quarter for our five best and worst stocks are listed below.

The Russell 3000 Index is a total market index representing approximately 98% of the U.S. equity market. The S&P 500 Index is a large cap index that includes 500 companies reflecting 80% of the same market.

Q3 Portfolio Winners
Amgen (AMGN) +31.8%
Chevron (CVX) +15.8%
Maxim Integrated Products (MXIM) +11.6%
Lowe’s Companies (LOW) +10.7%
Cardinal Health (CAH) +10.3%

Q3 Portfolio Losers
Investors Financial Services Corp. (IFIN) -13.0%
Patterson Dental (PDCO) -11.2%
Fifth Third Bancorp (FITB) -10.0%
Pfizer (PFE) -9.5%
Wal-mart Stores (WMT) -7.8%