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Uncertainty of Risk, Real or Imagined?
by William Spetrino Jr
It has been said that "uncertainty" is necessary for above average returns and being that I achieved financial security and a huge return with Phillip Morris now Altria (MO) in the early 2000's I would be remiss to disagree. Warren Buffett in the 1960s put 40% his portfolio into American Express (AXP) during the "Salad Oil" scandal and was well rewarded. However Countryside Financial (CFC) seemed like a bargain at $34 per share on July 23 rd, which is down almost 25% from $45 on Feb 5th. Could this "uncertainty" with subprime be a similar opportunity? How do you distinguish between an Altria and a Countryside Financial? This article will try and help you distinguish.

When I bought Altria in 2000 and 2001 there was talk that smoking would become illegal in the US and the lawsuits that saw multi billion dollar verdicts that could bankrupt the company. My "theory" was that all the talk about smoking being illegal in this country was not valid and these lawsuits would be overturned on appeal. Would a country that was 6 trillion dollars in debt "bankrupt" the largest taxpayer to the US Treasury? Would the legal system be able to handle all the lawsuits that would surely flood the system? Even if this did happen Kraft was worth about what I paid for the entire company and International tobacco would be "basically" free. The 9.5% dividend yield was MORE than covering my debt service. Since 1957 18 of the top 20 performing S&P stocks were either pharmaceutical or consumer staples companies if reinvested dividends were factored in. This information and the low PE, High ROE and High Dividend yield (read past articles to "recap" how important these traits are) made me feel that with #1 US food company #2 Beer company and #1 cigarette producer with the discount price from averaging down provided a sufficient margin of safety. The "uncertainty" in this instance was actually more "imagined" than real.

Countrywide Financial Corporation, a holding company, engages in mortgage lending and other finance-related operations. The company operates in five segments: Mortgage Banking, Banking, Capital Markets, Insurance, and Global Operations. The Mortgage Banking segment originates, purchases, sells, and services non-commercial mortgage loans, as well as provides various loan closing products and services, such as credit reports, appraisals, title reports, property valuation services, flood determinations, and other related services. The Banking segment deposits and invests in mortgage loans and home equity lines of credit, as well as provides short-term secured financing to mortgage lenders. Is the subprime mortgage "crisis" real or "imagined"? The foreclosure rate nationwide has continued to increase and the glut in home sales are both proven by real statistics. Was the drop from $45 to $34 based on something real or "imagined? The key in these cases is what are company insiders doing?

When I owned MO Carlos Slim Helu, now the world’s richest man was a director that bought 4 million shares of MO between $20-$24 per share. He continued to own them for more than 7 years finally selling most of his stake last year. Certainly he felt confident. Countrywide Financial has had 111 sales by insiders over the last 15 months totaling over 4.5 million shares. Over 80% of the shares were sold by colorful CEO Angelo Muzilo who sold over 870,000 shares between Nov 1 and Dec 31 of 2006. Earlier in 2007 he sold over 2.5 million shares and then again on July 11 to the end of July he sold 610,000 shares. The first 13 days of August he "only" sold 278,000 shares as the price began to fall drastically. A person wondering if they should buy Countrywide at the $34 on July 23 rd which had dropped 25% in about 5 months should first look at the key insider transactions. One look at Muzilo's consistent selling would cause a thorough investor to realize that if the CEO was selling then maybe this subprime mess might hurt Countrywide in the near future and this "uncertainty was not imagined but VERY real. My point here is not to say CFC is good or bad but to show the difference between imagined and real uncertainty. How many investors want to buy a stock that the CEO himself has been selling the last 10 months? Keep this article in mind the next time you buy into "uncertainty".

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I am trying to boost some of the earlier articles that some of you might have"missed"