Wow

Anyone who has paid attention over the past few weeks knows of the carnage that originated with financials and retailers and spread its way throughout the stock market.

Anyone who is smart has already started to take advantage of this. Within the past week I've cut my Overstock.com and Netflix positions in half and sold out of Western Union to raise cash to buy good companies now selling very cheaply.

I've learned from an article I read about Mark Sellers - I couldn't find it to link to - that when bargains are plenty reducing positions sizes to take advantage of that is OK. Sellers had 15 positions with which he did very well, at one point that was down to 6 and Sellers was kicking that market's asymptote.

So I've decided to, save for a few really good companies, try to average a 7% position size right now to take advantage of the great bargains.

First, I'll go over my current positions then do a brief rundown on a bunch of companies I believe represent good bargains even if I don't yet own them.

Portfolio Review

American Express

I actually bought this one before it took its most recent hit because of its status as a financial.
It’s just common sense, AXP will grow in the double digits over the next few years, Warren Buffett has repeatedly acknowledged the greatness of its moat, Returns on capital in the 30’s, good management, and it recently won its lawsuit over Visa and soon will probably do the same with Mastercard.

Yet it trades for only 16x earnings. Joel Greenblatt values it in the mid-$80’s and it trades under $60 – that’s what I call a common sense buy.

Cryptologic

A ton of cash and good profitability if the US decides to re-legalize internet gambling their immense earnings power will increase hugely.

Pabrai sold 10% of his position over the past week, but he has said over and over in his meetings that he won’t sell for two years unless he gets a better idea, so I doubt Mohnish has lost faith in the company, it’s more likely he needed to raise cash.

K-Swiss

Thankfully this is not a podcast – if it was you could hear my head banging against my desk.
I won’t spend a whole lot of time on this, but do think it is a good buy currently for those who do not own it.

K-Swiss has taken a huge hit because of its retail status and its falling earnings. Apparently the market is missing:

· K-Swiss management is experienced with falling earnings because of changing cycles and is well prepared. It still increased its cash since last year to $270 million which is now 43% of its market cap. And Management did not dilute the brand by reducing prices of its classic shoes.
· It is still growing strongly in Asia and Europe.
· Despite its huge earning fall it still returned 15% on equity showing a disciplined strategy.
· It is diversifying into clothes and other ‘gear’
· Even if earnings fall 25% it would still only trade for an EV/E of 8x.

Bottom line: With weathering this storm management has proven its competence and the stock trades a lot lower than it should.

Netflix

People thought Netflix would be killed by Wal-Mart then Amazon.com and although it didn’t it still sold for well less then its value, I was up almost 60% at one point but am now up only 37%.
Pabrai says a growing company with capable management should trade for 16x earnings plus excess capital that puts Netflix’s value at $31, which I believe is a conservative estimate.

Overstock.com

OSTK had a great quarter and that coupled with repeated positive news about its trial with Gradient pushed it to $38, almost a 125% gain.

It’s down to $27 because Gradient announced they were going to trial.

Overstock.com still has a great business and still has capable management, blah, blah, blah.

They are suing for $3 billion, which is 4.5x the current market cap.

Western Sizzlin’

Along with AXP this is the only position I currently have over 10% of the portfolio.

It trades for the value of its cash and the restaurant business, which gives you Biglari’s potential cash compounding abilities plus all fees from Western Acquisitions free.

This makes absolutely no logical sense but it’s a micro cap so its being largely ignored by Wall St.
Oh and did I mention Biglari continues to return value to shareholders, especially with his latest rights offering to raise cash?

Sears Holding
Alright not only is Lampert running this but its trading for below the value of its real estate. Cool stuff that common sense, huh?

Washington Mutual and Tandy Leather

These two are grouped because I’ve made my first purchase but have not finished research.
Tandy is a micro cap with a niche that announced its earnings would fall then fell off a cliff. Still a great, wait have we heard this before? well whatever I’ll continue, still a great company and a promising turnaround is quite possible. A lot better info is here,

Washington Mutual is getting massacred by the subprime mess. This pick is at the epitome of contrarianism.

Other Ideas

Pfizer

Another large cap that is currently beaten down and Wall St. may be way too pessimistic here. The 5% yield and only 11x earnings multiple is hard to ignore.

McGraw-Hill

Mc-Graw Hill has moats in all of its businesses and good returns in all of them. It also generates tons of cash which it in turn returns to shareholders.

Though its fundamentals keep forging ahead its has fallen $35 per share in the past few months because of the sub-prime crisis.

I haven’t done a lot of research here, but I plan to soon.

W.P. Stewart

Another one I haven’t dug into but have read a lot on message boards about. It’s AUM has plummeted because of bad returns, but it now has a value guy at the helm who can turn it around. It has a really tight capital structure which allows most of the fees to fall to the bottom line.

It currently trades around 2x AUM plus book – Marty Whitman’s measuring stick – so this is a turn-around bet.

Delta Financial and CompuCredit

Wish I had the slightest idea how to value these, Pabrai loves them, sigh too bad.

That’s all I have time for, would love to hear other’s ideas.