CONTROLLED GREED.com

Nikko Cordial Scandal Widens

The ADRs of Nikko Cordial (NIKOY/OTC) had largely recovered recently. But expect them to sink again. News broke in Japan that an inquiry has blamed Nikko management for a fraud that may cost the company its Tokyo stock market listing:

Shares of Nikko dropped by their maximum 200 yen limit to 1,184 yen today, after the Tokyo Stock Exchange said it will use the probe's findings to determine whether to delist the company. The stock probably will fall further as sell orders outweigh buy orders by 60 to 1, according to data compiled by Bloomberg.

I'm not dumping my ADRs. I wouldn't recommend anyone selling their Nikko Cordial ADRs or ordinary shares (if they bought in Japan). If you follow Controlled Greed.com, you bought Nikko at a great price back in 2005, and took partial profits later.

I first thought the company wouldn't get delisted. Now I'm wondering if a delisting followed by a HUGE stock price plunge would prove to be an excellent buying opportunity. It would depend on the value of the business remaining intact, scandal aside. Let's stay tuned.

Emerging Markets, China

I used to enjoy reading Paris-based Michael Sesit when he penned his weekly "Global Player" column at The Wall Street Journal Europe, which I accessed via WSJ.com. Then Sesit joined Bloomberg and I've come across this column of his on the emerging markets, including China.

You'll recall I recently posted I'm certainly not investing directly in mainland China, and wouldn't recommend anyone do so. I don't mind playing growth there via holdings in General Motors (GM/NYSE) and 3i Group (III/LN), and with companies in the region. But that's it for now.

Back to Sesit's piece:

Are there risks? You bet. Strategists at Citigroup Inc., UBS AG and HSBC Holdings Plc are advising clients to be wary of China, whose Shanghai and Shenzhen 300 Index has soared 155 percent in the past 12 months, including 26 percent in 2007. At 38 times projected 12-month earnings, the index's price-earnings ratio is more than double the MSCI Emerging Markets Index's 15.

And, over at Maoxian, The Chairman offers up an illustration of What It Will Look Like When the Chinese Stock Bubble Bursts.

The Davos Cosmos

If you're like me, you probably don't get the whole Davos thing. I'm sure something important happens there, though after reading countless news stories and watching endless roundtables re-played on cable TV over the years I can't quite figure out what.

So I couldn't help but chuckle reading Michael Lewis' new Bloomberg column:

It's become almost obligatory for the world's most important economic people, at the beginning of each year, to travel joylessly to the base of a Swiss ski slope and worry. And to worry not privately, with dignity, but publicly, to anyone who will listen.

Lewis is more charitable than the late Ernest Hollings. When he was a US Senator from South Carolina, Hollings said Davos participants from African nations just came up to Switzerland to "get a warm meal" because the rest of the year they were just down in the Dark Continent "eatin' one another."

Good thing for Hollings he was a Democrat. If he were a Republican -- think Trent Lott or Jessie Helms -- he'd have been eaten alive politically. Instead it was a one day story, the kind of thing objective journalists shake their heads at and move on. And no, I'm not getting political. My politics run libertarian, not Dem or GOP. Just calling a spade a spade, no pun intended.

Mark Steyn writes in his new book, America Alone, "Worrying is the way the responsible citizen of an advanced society demonstrates his virtue: he feels good about feeling bad." Steyn's not talking about Davos, but his words apply.

And, as Lewis writes in ending his article:

Is perhaps the only point of standing in the snow and expressing your doubts to a television camera to prove that you are the sort of person whose doubts matter?

Witmer Makes Waves Across the Pond

Here's an example of why we shouldn't rush out to buy a stock when someone we admire recommends it. One of Meryl Witmer's stock picks in the 2007 Barron's Roundtable is FKI, a UK-based firm. The company stock shot up more than 5% on Monday, and several news reports credited her recommendation as the reason.

This is the Bloomberg report (scroll down):

Meryl Witmer, general partner at Eagle Capital Partners, likes FKI for its division that provides ropes and wire-rope fittings for construction, cranes and oil and gas production, Barron's cited her as saying in its final "Roundtable'' article on Jan. 27. Demand is strong, allowing FKI to pass on higher steel costs to its customers, Witmer said, according to Barron's.

If you were a reader of Controlled Greed.com a year ago, you'll recall a similar thing happened Down Under when Witmer recommended Goodman Fielder, an Aussie outfit.

But Goodman's stock price eventually went back down, giving anyone wishing to follow Witmer's advice the chance to get in at her price. Nothing is guaranteed, yet my hunch is the same could be true with FKI. Patience is usually rewarded.

Barron's Roundtable

This week's Barron's has the third and final installment of the 2007 Roundtable. I will need more time to read over all the installments and digest them in the days to come. This is something I always do since I print out these pieces and enjoy going over them.

This week's installment has picks from Meryl Witmer, Marc Faber, Oscar Schafer, Fred Hickey and Mario Gabelli.

You know I'm a big admirer of Witmer and her firm, Eagle Capital Partners. Witmer offers up four stocks, which she states she had to go far and wide to find. One, Texas Industries, is a recommendation she made at a Barron's conference last October. That, along with her other three recommendations, sound interesting. After all, Witmer's selecting a company coming out of bankruptcy, a company getting delisted, a UK-based company and Texas Industries.

As for the others, Oscar Schafer is someone I increasingly enjoy as the years and these annual Roundtables go by. Faber, as I've said often, I enjoy reading for his "big picture" insights, yet cannot recall ever buying or selling anything based on anything he's ever written or said. Hickey, ditto.

Gabelli, even though he's a value investor, is someone I don't follow too closely. I don't know the reason for that, except to say, heck, you can't follow everyone.

Yet he's the only Roundtable participant recommending a stock I own: Liberty Capital (LCAPA/NASDAQ). Remember I own Liberty Media, which split into two tracking stocks (the other being Liberty Interactive). He also mentioned DirecTV figuring into his pick, speculating that John Malone might sell it to AT&T. Gabelli calls DirecTV a "cash cow."

"The British Are Coming! The British Are Coming!"

In this case, the Brits I'm referring to are 3i Group PLC (III/LN), the British-based private equity firm. The company has opened a new office in New York and plans investing beetween $20 million and $200 million in privately owned, fast-growing businesses with enterprise values of between $50 million and $1 billion.

That fits the 3i pattern. Long time readers of Controlled Greed.com know that one of 3i's competetive advantages is in doing small-to-medium sized deals. More from the linked Reuters report:

Publicly traded 3i, which has $14 billion under management, said it had hired nine executives for its new U.S. Growth Capital arm, with five more additions anticipated in 2007. "3i's competitive advantage in the U.S. is all about our sector depth and international reach," said Robin Marshall, one of three founding partners for the new unit.

3i Group was first recommended here in May 2005 and has been a winner for the portfolio. It was mentioned at $15.06 (adjusted for two subsequent reverse stock splits) and ended 2006 at $19.75 for a gain of +59.2% (including dividends). It has gone up more since then -- closing north of $20 lately.

If you're a regular reader of Controlled Greed.com and enjoy the coverage of uncommon stock picks like 3i Group, would you do me a favor and recommend this site to two or three friends today? I'd greatly appreciate it.

And if you've just arrived, you can get the feed by going here.

Jardine Matheson

Plenty of stock pickers say their biggest mistakes are often the stocks they didn't buy. I recalled one of mine when reading Stephen Vines profile of Jardine Matheson in The Spectator.

Jardine Matheson ADRs plunged to USD $1.00 (if memory serves) during the Asian crisis of the late 1990s. Yeah, it was a holding company managed in a less-than-optimal manner. But the company's stock price hit a ridiculously cheap price with assets that wouldn't be going out of business. It was a classic case of panic selling creating a wonderful opportunity.

Yet I didn't buy. Why? Because I didn't have the ready cash in my brokerage account. I probably should have sold another position to make room for Jardine, but didn't. Primarily due to the fact that I've never cared for the idea of selling something just to buy something else.

But I definitely made a mistake. Jardine Matheson ADRs closed yesterday at USD $23.75 according to the Bank of New York's ADR site. Ouch.

Back to the linked article:

The novelist James Clavell must have purchased a job lot of clichés when he wrote his two fictional blockbusters based on the history of the Hong Kong-based Jardine Matheson business empire. Noble House is set in the modern era, but it is Taipan, set in the 19th century, that is the more notorious of the two, filled with tales of intrigue in the opium trade and a smattering of sex. But in some respects Clavell’s imagination fell short of reality: the most extraordinary part of the story is the resilience and adaptability of this conglomerate as it marches towards its third century (it was founded in 1832) under firm family control.

This section further down:

In 2000 a US investment group, Brandes Investment Partners, made a determined attempt to dismantle the structure in the belief that Keswick control was preventing the sale of parts of the group that were worth more than the whole. The Keswicks saw off the challenge at a closed-door shareholders’ meeting in Bermuda. But Brandes had delivered a message that could not be ignored and, quietly but decisively, Jardine Matheson has been evolving ever since. Assets that failed to make decent returns or did not fit were sold off. New life was injected into solid brand names such as the Mandarin Oriental hotel chain.

I remember reading about that fight. Peter Cundill and Mark Mobius voted their Jardine shares along with Brandes according to news reports. No one expected the revolt to succeed, but it's good to see positives develop for the shareholders come of it. Even if I'm not one. Darn it.

Mainland China

If you can believe news reports, stocks trading in mainland China are really getting overheated. My exposure to the Middle Kingdom is of the indirect kind -- companies like General Motors (GM/NYSE) or 3i Group (III/LN) having some business there.

Now surely doesn't look to be the time to get in on the Chinese mainland, that's for sure:

Shares traded on mainland Chinese exchanges cost twice as much relative to earnings as they did 18 months ago, and double the average for emerging markets, after extending last year's 121 percent rally in the Shanghai and Shenzhen 300 Index. The surge sent their value above $1 trillion for the first time and prompted the government to caution shareholders that "blind optimism'' is driving gains.

If someone wanted to "get in" on China now -- and I'm NOT saying anyone should, since I'm not -- my humble advice would be to stick to the indirect approach. Something like Templeton's Jeff Everett told Barron's several weeks ago -- to look at banks in Taiwan instead of those trading on the mainland.

Or look at what Templeton's Mark Mobius says in the linked Bloomberg article:

While prospects for rising consumer demand make China attractive, H shares offer a better value than mainland stocks, according to Mark Mobius, who oversees $30 billion in emerging- market equities at Templeton Asset Management Ltd. in Singapore.

"The valuations are beginning to look stretched'' in A shares, Mobius replied in an e-mail to Bloomberg News.

Templeton, which was approved to invest in mainland shares in 2004, hasn't received a final allotment authorization from the government that would allow the firm to start buying and selling shares, according to data compiled by Bloomberg.         

TheStreet.com Ranks Top 10 All-Around Value Stocks

This is an interesting list -- though I hasten to point out that I don't own any of them. I did make a mistake not buying Berkshire Hathaway a few years ago when it was trading lower. CNA Financial is another pick I've considered adding over the years. And, like Berkshire Hathaway, I've probably missed opportunities to get it really cheap.

Malone's One-Two-Three for DirecTV

The Breakingviews column in The Wall Street Journal speculates that John Malone may do with DirecTV Group (DTV/NYSE) what he did with TCI:

Mr. Malone's TCI playbook had three parts: create value by marrying distribution and exclusive programming; layer on debt to keep tax bills low; then find a suitor capable of providing a rich, tax-efficient exit. In TCI's case, this was AT&T.

Breakingviews editors break out the three steps:

Part one would be to beef up his sports properties. In his deal with Mr. Murdoch, Mr. Malone's Liberty  Media didn't just gain control of DirecTV; he also got three regional sports channels. But that's not enough to make an impact. Rainbow Media, the Cablevision subsidiary that owns the New York Knicks and Rangers and Madison Square Garden, would do the trick. Rainbow could cost $4 billion, estimates Credit Suisse.

Step two could be financial engineering. DirecTV already started the process. The deal saved $2 billion because it was structured as a tax-free asset swap. There could be more to come. DirecTV has a healthy balance sheet -- it could fund acquisitions or pay a special dividend of up to $9 billion, according to Bank of America.

And, finally, step three:

Mr. Malone's history as a trader suggests he already has his eye on an exit. There are two natural buyers: Comcast, the cable operator that failed to acquire Walt Disney; and Verizon Communications, the phone company branching into television. If Mr. Malone stays true to form, don't be surprised if he structured any deal down the road as a tax-free swap, ending up with a boatload of Verizon or Comcast shares.

Lots that could happen there and impact the portfolio. In addition to holding DirecTV, the portfolio also contains Liberty Media (I retained both tracking stocks) and Comcast. All three have done well to date. And toss in CBS and I'm glad the portfolio took on several of those "old media" stocks a year or more ago.

You see, no one knows how all this media stuff will play out. Except it's safe to think we'll see a fair amount of buying and selling among the sector's players. Let's stay tuned.