Friday, August 17, 2007

Update on Freightcar America Inc.

Usually when I research a company I look for trade journals in the relevant industry. I currently subscribe to Railway Age. I have learned a lot about the railroad industry from this magazine. I received the latest copy via email today. I found something that is relevant to my recent purchase of RAIL:

EPA sees continued "solid" freight car demand

"Despite a slowing momentum in orders during the current traffic downturn, Economic Planning Associates in a newly revised forecast says there are signs that "demand for rail cars will remain on solid footing for a number of years to come." EPA cited "replacement pressures and technological advances as well as legislative measures" as reasons for optimism. EPA expects builders to deliver 66,500 cars this year and 63,000 in 2008. Meanwhile, actual figures from the Railway Car Institute Committee of the Railway Supply Institute said builders delivered 16,643 new freight cars in the second quarter, down from 19,466 in the corresponding period last year. New orders were placed in the first quarter for 11,595 cars, compared with 19,190 in the 2006 quarter. The backlog of new cars on order but undelivered slipped to 73,921 on July 1, compared with 85,692 on July 1, 2006 . First-quarter 2007 orders included 4,236 tank cars, 2,706 open top hoppers, 2,200 inter modal platforms, 831 non-inter modal flat cars, 632 covered hoppers, and 500 boxcars."

The figure above are for rail cars in general not specifically coal cars. Nonetheless, coal car figures generally follow total rail car figures.

A recent Fortune article titled Going nuclear discussed the merits of nuclear power. As many as 150 coal power plants were in the planning stages as of this summer. But, political opposition has caused many of the utilities to abandon plans for new coal power plants. Despite this many of the plants did get approval and are currently being built or are in the planning stages. Just like nuclear power, coal is being questioned because of its negative environmental effects. Nuclear power has many of the same issues as well. Utilities and scientists are working on ways to decrease the amount of CO2 emissions that coal power plants generate. The amount of coal deposits in the U.S. has oftentimes been compared to the amount of oil in Saudi Arabia. I continue to believe that coal will fill a larger part of our energy needs in the future.


In my first post on RAIL I calculated that the company will be able to earn 67 million in normalized earnings. Another interesting way to think about this situation is to calculate what the company has to earn to maintain the current price.

Market cap is 533 million - 200 million in cash = enterprise value of 333 million. So, if RAIL earned just $33 million and traded at only 10 times earnings the current price would be maintained. So, therefore if I am extremely off on my calculations and RAIL makes half of what I calculated it will make, I will break even. In other words, I have a strong margin of safety if I am wrong on my calculations or something negative happens to the company.

Thursday, August 16, 2007

Interesting Psychology Resources

I am convinced that if an investor has a basic understanding of psychology they will be better investors. The following is a number of the best psychology resources that I have read recently.

Stanford Prison Experiment: "A Simulation Study of the Psychology of Imprisonment Conducted at Stanford University: What happens when you put good people in an evil place? Does humanity win over evil, or does evil triumph? These are some of the questions we posed in this dramatic simulation of prison life conducted in the summer of 1971 at Stanford University."

Born Suckers: The greatest Wall Street danger of all: you. by By Henry Blodget
"Human beings, it turns out, are wired to make dumb investing mistakes. What's more, we are wired not to learn from them, but to make them again and again. If there is consolation, it is that it's not our fault. We are born suckers."

Influence: The Psychology of Persuasion by Robert B. Cialdini

Psychology of Intelligence Analysis


The Expert Mind
"Studies of the mental processes of chess grandmasters have revealed clues to how people become experts in other fields as well."

Wednesday, August 15, 2007

Companies in my watch list are falling, falling, falling

Every day I glance at the daily 52 week low list. This is a good way to find companies that are undervalued. I noticed the companies listed below come up on this list recently. Most are quality companies. I have researched a few in the past but I will take another look because they have fell substantially in price.

Maui Land & Pineapple Co: MLP has prime acreage in Hawaii. It's down 25% in the past few months.

Moody's Corporation: Down over 60% during the past few months. Growing concern on Wall Street over the ratings MCO made on sub prime debt has pushed shares lower.

Wal-Mart Stores Inc: Down around 13 percent this past month. WMT is expanding into India. The company also announced that they will be repurchasing shares.

American Eagle Outfitters: Down over 30% in 6 months. I'm a strong believer in this brand.

USA Mobility, Inc: Down nearly 35% the past month. Held by many value managers.

CryptoLogic Limited: CRYP's stock price has suffered recently because of the ban on internet gambling in the United States. Mohnish Pabrai acquired shares at around $25 and CRYP is trading at $21 currently.

M&T Bank Corporation: Down around 20% in 6 months. Berkshire Hathaway has owned shares for a long time.

Lexmark International, Inc: Down 40% in 6 months. Berkshire Hathaway owns shares.

Sears Holdings Corporation: Eddie Lampert's company is down nearly 30% in 6 months.

Tyco Electronics Ltd: TEL just spun off from Tyco. It's down 15% since it first started trading about a month ago.

AutoNation, Inc: AN is down about 20% in 6 months.

Bank of America Corporation: Down about 10% in 6 months. Berkshire Hathaway recently disclosed it owned shares.

Walter Industries, Inc: Recently spun off Mueller Water Products. Down about 10% since it spun-off MWA.

Mueller Water Products, Inc: Down about 15% in a month. Recent spin-off from WLT as mentioned above.

USG Inc: Down 33% in 6 months. I recently researched this company. At the time it was trading at about $45 and now its at $36. I really like the company and if it falls further I will most likely make an investment.

Nicholas Financial, Inc: Down around 20% in 6 months.