Wednesday, August 03, 2005



My daughter received another BULL MARKET "SURPRISE" today. She has owned Reebok, RBK, for most of her life. She increased her position substantially about a year ago. Today the stock is up $13 per share on a buyout by Adidas. Her return in the past year is upwards of 70%!

The story is a repeat of a very old and often repeated story--buy good values, hold on and you will be rewarded. On a number of occasions, I have been asked how my family hits so many take-overs. In this market, if you are not hitting take-overs you are not buying good stocks.

The most common "take-over" lately has been share buy backs. Some folks are pressing hard for higher dividends and fewer stock buy backs. I like buy backs--they make sense to me. Buying back shares when a company has excess cash and when the stock is cheap is an excellent use of company funds and it is tax efficient for the owners. The problem is with companies who think they hide excess management compensation by offering generous stock options and using buy backs to soak up the excess shares.

Take-overs and buy backs (already at record levels) will continue for as long as stocks are cheap relative to the cash available. Why should a company use excess cash to pay off corporate bonds at 5% interest when they can buy a company that is producing an earnings yield of 6, 7 or 8%? Money, as always, will continue to flow to where it gets paid the most. Company managers have the obligation to use your cash wisely.

We expect to hit more BULL MARKET "SURPRISES" even though we are mostly buying very large companies. We believe the run in small caps has made them relatively less attractive than the big growth companies. Big companies are often take-over candidates in this market. Our NXTL deal has not closed, PG is closing on G and RBK is a large company.


By the way, my wife and I are enjoying today at the beach. The crowds have already thinned, the peak afternoon temperatures have moderated and it does not get much better than this. Write to tell me what you are buying and selling. In the early 80's, a party I'll always remember was held after Merrill Lynch zipped through "par". The anticipation of the stock hitting 100 and having a party was almost as much fun as the party. We plan to host a Myrtle Beach party after CAL hits $64 per share. Let me know if you own the stock!