Rebalancing Completed

We rebalanced the portfolio this week. We sold our positions in JCI, FISV, LNCR, and ORLY. None of these are bad stocks. However, we were trying to reduce the overall number of stocks in the portfolio to about 20. Someone had to be voted off the island. We also were trying to raise the overall projected average return (PAR) of the portfolio by replacing low PAR stocks with equal or better quality stocks with higher PAR.

We took a new position in Synovus Financial Corp. (SNV). We increased our position in Chevron (CVX) and purchased a second energy stock, Occidental Petroleum Corp. (OXY). We also added to our positions in ACS, PFE, FTB, JKHY, BBY, and WMT.

Jack Henry & Assoc. (JKHY)

SSG and PERT A (11-18-2005) | Google “stocks: jkhy” | Company Website

Jack Henry & Associates (JKHY) is a stock that frequently shows up in screens for quality growth stocks. Using NAIC criteria, JKHY is a buy up to $22.90 (current price is $19.10). Projected average return over the next 5 years is 15.2%. The SSG assumes a 13.5% revenue growth based on Value Line projections.

Jack Henry & Associates provides integrated computer systems and processes ATM and debit card transactions for banks and credit unions. It describes itself as:

A technology provider for the financial industry. That’s the simplest way to describe what we do. But it hardly describes what Jack Henry & Associates is really about. We’re about solutions and support. We’re about building relationships and making things work. We’re about doing the right things for our customers, no matter what. It began as a vision, and it’s become our tradition.

A substantial amount of JKHY’s revenue, about 60%, comes from recurring sales. The company has a strong customer focus. 92% of its customers renw. Its several corporate aircraft are used to transport customer support teams — not company executives. Great concept!

Value Line rates JHKY’s financial strength “B++” and earnings predictability as 80 (out of 100). Its RQR quality rating is 63 — a little lower than the Moose Pond Investors portfolio average. Given the projected average return above 15% and the that fact that JKHY is a medium size company, the slightly lower quality rating is acceptable. Morningstar gives JKHY a rating of five stars and a wide economic moat. It estimates fair value at $23 assuming a growth in revenue of 12%.

Synovus Fin. Corp. (SNV)

SSG and PERT A (11-12-2005) | Google “stocks: snv” | Company Website

We took an initial position today in SNV. It has a projected average return of 18.7% and a RQR quality rating of 70.1. The director of investor relations spoke at the Better Investing National Conference in Atlanta. Two key points from the presentation were that SNV is well managed and the price of banks have been driven down based on concern about bank profitability due to the increase in long term interest rates. SNV has maintained very solid profitability with an return on assets (a key metric for banks) of about 1.9%. Return on equity has been steady aroud 18%. See Morningstar profitability summary below.

Business Description. Synovus Financial Corp., a holding company, provides various financial services. It operates in two segments, Financial Services and Transaction Processing Services (TPS).

The Financial Services segment provides commercial banking services, including commercial, financial, agricultural, and real estate loans; retail banking services, including accepting demand and savings deposits; individual, consumer, installment, and mortgage loans; safe deposit services; leasing services; automated banking and fund transfer services; and bank credit card services. It also provides portfolio management services; securities brokerage; trust services; insurance agency services; financial planning services; asset management services; and investment advisory services.

The TPS segment primarily provides electronic payment processing services in the United States, Canada, Mexico, Honduras, Puerto Rico, and Europe. It also provides back-end processing services to support merchant processing and offers other products and services to support its processing services. In addition, the TPS segment provides commercial printing and related services; programming support and assistance with the conversion of card portfolios to TS2; recovery collections, bankruptcy process and legal account management, and skip tracing services; Internet, Intranet, and client/server software solutions for commercial card management programs; targeted loyalty consulting, as well as travel, gift card, and reward programs; gift card processing services to Japanese clients; prepaid card solutions; and sells and leases computer related equipment associated with its electronic payment processing services. As of April 26, 2005, Synovus operated 41 banks and other Synovus’ offices in Georgia, Alabama, South Carolina, Florida, and Tennessee. The company was formed in 1888 and was formerly known as CB&T Bancshares, Inc. It changed its name to Synovus Financial Corp. in 1989. Synovus is headquartered in Columbus, Georgia.

Occidental Petroleum (OXY)

SSG and PERT A (11-17-2005) | Google “stocks: oxy” | Company Website

We took an initial position today in OXY (and increased our existing position in Chevron). This is our second energy stock. For an assessment of OXY, see the October 15 report by McDep Associates. OXY has the lowest ratio of market capitalization and debt to present value (“McDep” ratio) making it the best value among the medium and large cap independent oil and gas producers. Value Line rates its financial strength A+. OXY pays a 1.5% dividend.

Business Description. Occidental Petroleum Corporation primarily engages in the exploration for, development, production, and marketing of crude oil and natural gas in the United States, Latin America, and Middle East. As of December 31, 2004, the company had proved reserves of 2,489 million barrels of oil and gas equivalent. Occidental Petroleum also manufactures and markets basic chemicals, such as chlorine, caustic soda, potassium chemicals, and their derivatives; vinyls, including polyvinyl chloride (PVC), vinyl chloride monomer, and ethylene dichloride; and performance chemicals, including chlorinated isocyanurates, resorcinol, antimony oxide, mercaptans, and sodium silicates. PVC resins are used in piping, electrical insulation, external construction materials, flooring, medical and automotive products, and packaging. The company markets its chemical products to industrial users or distributors through its own sales force. Occidental Petroleum is headquartered in Los Angels, California.

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.
(more…)

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.
(more…)