Why I'm Not Buying Anything Today

This article is part of our Rising Star Portfolios series.

The short answer: I don't see any screaming buys. 

Don't get me wrong; I would love to kick off my Rising Star portfolio with a juicy fat pitch of a stock pick. What better way to ignite the portfolio than to put our money to work on day one?

The thing about fat pitches, though, is they don't come along very often. Charlie Munger, Warren Buffett's investing partner at Berkshire Hathaway (NYSE: BRK-B  ) (NYSE: BRK-A  ) , claims that if you take away Berkshire's 15 best investments, their investment record will go from world-class to mediocre in a heartbeat. And they've been at it for more than 40 years. To be frank, I refuse to buy something less-than-stellar for the sake of timing it well with the portfolio's launch. I'm about making money for the long term -- optimal publication dates be damned.

But I almost bought ...
I have, however, come close to buying shares of Pebblebrook Investment Trust (NYSE: PEB  ) . Pebblebrook is an investment vehicle formed for the express purpose of buying up hotels on the cheap. In the past six months, the pickings have been good. The economic downturn has wreaked havoc on the hotel business, and many heavily debt-laden hoteliers are being forced to sell their properties or risk defaulting on their loans. That's where Pebblebrook swoops in, buying hotels at fire-sale prices -- and usually without the debt. As it turns out, it's a lot easier to turn a profit in the hotel business when you aren't using all of your operating income to pay the interest on your loans.

Betting on the jockey
An investment in a vehicle like Pebblebrook is really an investment in the guy or gal making the investment decisions. Enter Jon Bortz.

Bortz is our jockey, and he has a track record of buying hotels on the cheap and turning them around operationally. After starting the hotel investment division at real estate firm Jones Lang Lasalle (NYSE: JLL  ) , Bortz founded his own venture, LaSalle Hotel Properties (NYSE: LHO  ) , and bought up 31 hotels over the course of a decade. Apparently, he couldn't pass up the deals he has been seeing lately because in the past 11 months he has come out of retirement, launched Pebblebrook, and already bought five prime-time hotels, including the Sir Francis Drake in San Francisco and Hotel Monaco in Washington, D.C.

Are the deals really that sweet?
The reason I'm unprepared to commit capital right now to Pebblebrook shares is that I'm not positive that Bortz is making out like a bandit on all his hotel deals.

Some of the deals look incredible. For example, Bortz bought the Intercontinental Buckhead in Atlanta for $105 million; by my calculations, the hotel is worth $115 million even if profits never grow again -- and considering how poorly the hotel has done the past couple of years, it is hard to bet that it won't generate more cash in future years.

But then there are deals like the one Pebblebrook made to buy the Sir Francis Drake. I have a hard time reconciling the $90 million price tag to the iconic hotel's earning power.

Don't get me wrong, Bortz can definitely be a savvy buyer. He bought the Doubletree Bethesda outside of Washington, D.C., for $67 million. This seemed like a break in protocol to me; Pebblebrook generally focuses on upscale hotels in major urban areas, and buying a chain hotel that happened to be in the same town as Pebblebrook's offices seemed fishy. Further digging, however, revealed that the Walter Reed Medical Center, the U.S. Army's flagship hospital, is being moved to Bethesda -- directly across the street from the Doubletree. The day the new medical center opens its doors, that hotel's occupancy struggles will be history.

What's next?
Pebblebrook certainly has potential as an investment. But before I buy stock, I need a better understanding of Bortz's modus operandi. He has the track record, and he's certainly been around the block. But still, I'm not about to put my, and, more importantly, your money in his hands on faith alone. For now, the jury is still out on Pebblebrook. When I reach a verdict, you'll hear from me straight away.

In the meantime, head to our discussion boards with your thoughts, questions, and comments on Pebblebrook Investment Trust.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).

Berkshire Hathaway is a Motley Fool Inside Value pick. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. Jones Lang Lasalle is a Motley Fool Hidden Gems recommendation. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days

Alex Pape does not own shares of any company mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (25)

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  • Report this Comment On November 01, 2010, at 1:40 PM, Englishman7 wrote:

    PEB aim to provide yield and capital appreciation, we'll see if they deliver. Couple of observations since you clearly invest in REITs and understand :

    Here's my take; there was no yield in 2009 the IPO took place in December so hence not possible. In 2010 they acquired the 1st hotel in June late Q2, so no income = no dividend. Q3 will provide the first qtr of income, which could be paid, Q4 should deliver real cash flow and possible they might provide a payout in line with REIT tax regualtions. In 2011 I think its all but guranteed they will pay a dividend, likely will initiate at similar hotel REIT levels, thats when investors seeking yield will dive in I expect, like you they like to see it first and I understand that, for me it's not such an issue, I want to learn with the company and don't see the capital I am investing at risk currently, I don't think we'll see <$17 again.

    To your point regards price/key I understand your fear of overpaying, I agree, but at this point in the cycle with few buyers other than the REITS, I dont think thats a concern, through the 5 hotels so far purchased all are 4/5* with minimal Capex needs in the next 1-3 years, all are in good firm growing markets, all are not easily replaced and all to my calculations are at below replacement cost at an average of $258,000 per key, a price I think in hindsight will look very cheap in a few years.

    You make your decisions on the facts and thus far I am pleased with PEB and am adding to positions any time it falls below <$18.

    Earning November 9th should give additional insight, also I think they are under contract for a 6th hotel, I think its the Nines, in Portland OR, we'll see.

    Glad to see some interest, I would wait for a pullback to $18 wait for earnings then layer in

  • Report this Comment On November 01, 2010, at 4:02 PM, XMFPapester wrote:

    Hello Englishman,

    Thanks for sharing your thoughts! You are right about the timeline - December IPO and the first hotel acquisition in early June. Because it's so early on, investors don't have a clear picture of operating results. Actually, that is why PEB initially piqued my interest. Besides playing in a space that is feared if not loathed right now (real estate, and, in particular, hotels), there currently exists an informational asymmetry in that investors don't have easy access to all the information they might want on PEB.

    I strongly agree with you about yield-seeking investors. A major, if not THE major, catalyst that can drive PEB's stock price higher is increasing yield. The mob of yield investors pay for yield, not for company prospects. If the company's prospects can offer increasingly higher payouts under REIT status, the yield investors will continuously drive the price higher.

    I am not waiting for the yield to be substantial (or even exist) to convince me to buy. Actually, I'd much rather get in before all that. Just need to make sure Bortz is the star he seems to be.

    By the way, you can also post on my discussion boards at http://boards.fool.com/rs-alex-pape-119865.aspx

    Cheers,

    Alex

  • Report this Comment On November 01, 2010, at 6:43 PM, daveandrae wrote:

    Friend,

    The best time to buy is ALWAYS when you have the money. Don't believe me? Take a look at my own Portfolio.

    November 2nd 2009 - November 1st, 2010, year over year Investment performance.

    Asset Allocation -100% equity

    McDonalds- 37.31%

    Dow Chemical - 34.42%

    Harley Davidson - 24.68%

    General Electric - 14.84%

    Pfizer - 7.72%

    Turnover ratio - 0%

    Total aggregate return - 23.79%

    S&p 500 - 16.68%

    I would buy more GE right NOW if I had the money. The dividend yield is above 3%, which will be raised again come January. The forward earnings yield is around 8%, and the price to book ratio is below 1.5. A level not seen since the late 1970's. When you compare this against 0% for cash and less than 3% for bonds, it's not even a contest.

    Here's the deal-

    There are over 3,000 stocks listed on the NYSE. If you cannot find anything worth buying then it is you who is the patsy, not the "market."

    Thomas Edmonds.

  • Report this Comment On November 01, 2010, at 6:49 PM, daveandrae wrote:

    P.S.

    to give you some perspective, there were my thoughts approximately 12 months ago.

    Thomas Edmonds

    #2) On November 09, 2009 at 3:48 AM, daveandrae (< 20) wrote:

    There are two types of investors, be them large are small. The first type of investor is the one that does not know what the market is going to do next. The second type of investor is the one that does not know, that he does not know, what the market is going to do next.

    Thus, if you are making your buy/sell decisions based on what you think "the market" is going to do, then you are nothing more than a speculator. And in the end, you will end up with a speculator's financial results. Which, will be poor, at best.

    Yes, the s&p 500 will eventually see 1400. Yet it is absurd to think that this particular index is going to grind higher than 1958-2008, 5 decade, annualized growth rate of 6.8%. Which, ironically, puts us right around a price level of 1043. Thus, if you REALLY wanted to be technical, you could argue, and quite strongly, that the current market is somewhat overvalued.

    It was most certainly ridiculously overpriced ten years ago.

    The reason to buy stocks is never because of what the market is going to do "next." The future is ALWAYS unknowable, so why put any energy into it? The reason you should be buying stocks is because of what the market is ULTIMATELY going to do! If you are less than 45 years old, don't smoke, and are in relatively good shape, as I am, then you are likely to live for another 35-40 years. Over that kind of time horizon, a 50-60,000 handle on the DJIA is simply inevitable.

    In addition, once you factor inflation and it's evil twin, taxation, into current interest rates, the real rate of return from both bonds and cash is quite negative. Thus, if you don't want to run out of money some day, you are now forced to be a 100% equity investor. At current interest rates, nothing else, including "asset allocation", makes any financial sense to me.

    Winston Churchill once said that democracy was the worst form of Government ever created by man, except for all of the others. The same could be said for Buy and Hold investing.

    Thomas D. Edmonds

  • Report this Comment On November 01, 2010, at 7:16 PM, goalie37 wrote:

    This sounds like a fun stock to keep an eye on. Thanks for the tip.

  • Report this Comment On November 02, 2010, at 11:13 AM, mikecart1 wrote:

    "The best time to buy is ALWAYS when you have the money. Don't believe me? Take a look at my own Portfolio. "

    1) No I don't believe you

    2) After looking at your portfolio, I still don't believe you

    3) That investing philosophy will have you leaving a ton of money on the table and have you buying at all the wrong times. Those that say you can't time the market aren't even trying. They basically give up. You might not be able to time the exact highs and lows but you can come pretty close if you make an educated attempt.

  • Report this Comment On November 02, 2010, at 4:57 PM, daveandrae wrote:

    "That investing philosophy will have you leaving a ton of money on the table and have you buying at all the wrong times. Those that say you can't time the market aren't even trying. They basically give up. You might not be able to time the exact highs and lows but you can come pretty close if you make an educated attempt."

    This has got to be the silliest thing I have ever read on this forum. This is yet another reason why 3% of the population controls a whopping 70% of the wealth in this country. If investing were "easy", if the market could be "timed" more people would be rich, now wouldn't they?

    I have personally watched Simon Property Group (sym SPG) soar over the last ten years from a closing price of 20, with a dividend yield of 9%, to a closing price of 100 today. Now why would anyone in their right mind sell a stock like that?

    Meanwhile, the s&p 500 has fallen from from 1525 to 1189 over the same time period. Obviously, there is no "wrong" time to buy.

    Ignorance, is truly bliss.

    Thomas Edmonds

  • Report this Comment On November 02, 2010, at 6:13 PM, XMFPapester wrote:

    Thomas,

    I am not suggesting that there are no stocks worth buying right now. I am only saying that I found any company I've thoroughly dug into to be a great buy right now.

    I do have my fingers on the pulse of 40,000 publicly traded stocks, and I do not try to. I look at companies from the business up, not the other way around. With that sort of process, you can't know all about thousands of stocks at a time.

    Also, there are certainly times when holding cash is preferable. I agree with you that right now it doesn't make much sense to buy a 10-year Treasury yielding 2.5% when many solid, stable companies are yielding well over 3%, but that is not the end of the story. If you have no dry powder, you can't take advantage of the dips.

    Just a question out of curiosity for you - if you are this enthralled with GE at today's price, and you don't have any idle cash, why not sell some of your other holdings to buy more of it?

    Cheers,

    Alex

  • Report this Comment On November 02, 2010, at 8:39 PM, daveandrae wrote:

    Alex-

    A truly diversified equity portfolio is never, ever, "firing on all cylinders." Instead, it tends to wax and wane. This has the dual effect of reducing price volatility and enhancing total return. For I am always refraining from buying what is most popular, and therefore the most expensive, and adding to what is the most out of favor, and therefore, the cheapest.

    Now you know that I am not anymore enthralled with GE than I was with Pfizer back in May or with Dow and Harley back in July. Instead I simply dollar cost average a set amount of capital into my portfolio month in and month out. Year end, and year out. When the market is down 30%, I double down on my dollar cost averaging plan.

    Selling one stock to buy another, invites turnover, and introduces speculation. Which I am completely against. It takes away from what the portfolio "naturally wants to do." , as well as well your fresh investment capital should "go." Meaning that your best performing stocks SHOULD be ones leading the portfolio higher. Just as the laggards should be the ones in the back of the pack receiving the most new capital.

    Once again, this reduces price volatility and enhances total return.

    Over the last 12 months, the percentage growth of my portfolio is 23.60%, yet the "dollar weighted growth" of this same portfolio is hovering around 29.74%. Thus, not only are my stocks "outperforming" the market. I am "outperforming" my own investments!

    This is hard for most people to do. For most people do not realize that there is no correlation between "investment performance" and "Investor Return"

    Thomas Edmonds

  • Report this Comment On November 02, 2010, at 10:38 PM, goalie37 wrote:

    Thank you again for the article Alex. I have spent quite a bit of time on the company and am very intrigued. I think the idea of buying extremely high quality assets (in this case hotels) at distressed prices is an excellent business model. Like you, I am not buying it yet though. Right now I am waiting for the next earnings report so I can see where all this cash on hand is moving.

  • Report this Comment On November 03, 2010, at 5:52 PM, XMFPapester wrote:

    Truthisntstupid,

    Thanks for your comments! I appreciate you sharing your thoughts. I too have many, many dollars worth of investing books on my shelves - great books are one of the best investments you can make.

    There are always great business out there. And great businesses matter. But price also matters. See Buffett's investment in Coke for a primer on that one.

    The main difference between Ben Graham and Warren Buffett is that Graham would go into a store and buy whatever was on sale, and Buffett would wait around patiently until the high-quality items were on sale. That means a lot of time sitting on your hands. It's unpopular, but its great investing.

    Also, just a note to Thomas - you wrote that "A truly diversified equity portfolio is never, ever, "firing on all cylinders." Instead, it tends to wax and wane. This has the dual effect of reducing price volatility and enhancing total return." That is generally true. I, however, never said that I am aiming for a "truly diversified equity portfolio," and I couldn't care less about price volatility. Volatility is not risk--its my friend; it gives me great buy prices some days and great sell prices others.

    For many people having a thoroughly diversified equity portfolio may be the way to go. I, though, am running this portfolio for one reason and one reason only: to make money.

    Hope to hear from you both again--and check out my boards for updates!

    http://boards.fool.com/rs-alex-pape-119865.aspx?source=irnsi...

    Cheers,

    Alex

  • Report this Comment On November 04, 2010, at 6:05 AM, daveandrae wrote:

    Alex-

    I sincerely hope that you read this article again a year from now. For you are beginning to sound a little green behind the ears.

    1. Your very first sentence states you're not buying because you don't see any screaming buys. This is in spite of the fact that a stock like GE has fallen from 60 to 16 over the last ten years and now trades at price to book ratio that is less than 1.5. Average, aggregate earnings from 1999-2009 are 1.51, or an earnings yield of 9.43% against a 2.59% ten year U.S. treasury bond and 0% for cash. Finally, an investor is now getting 67 cents of assets for every dollar invested. At these prices, one could argue that this entire business is being given away.....with no takers.

    To give you some historical perspective, the last time GE traded at a price to book ratio of 1.5, was 1979. Twenty years later, the stock was up 60 FOLD. This is one stock, out of a bag of more than 3,000. Yet this business does not represent a screaming buy to you?

    Then what does?

    2. You're running the portfolio for one reason only, to make money.

    Well DUH!!!

    3. You've run out of gas, and now you're stranded in the desert. There's no water, and it's starting to get cold. Just as your tongue begins to swell, you begin to see a flickering light in the distance.

    A CAR!!!

    As it gets closer you notice that it's green. Awww Man, You HATE green cars! So you wave the guy on. My friend, volatility is the "green" car.

    Like leverage, it cuts both ways. Thus, if higher return is what you seek, then believe me when I tell you, higher "Volatility" is what you will find.

    Put simply, a 1,000 point "flash crash", an over seas 'debt crisis' , a summer long British Petroleum "oil spill" and a 17%, three month correction in the s&p 500 was the price to pay for my 25% annualized rate of return. It's a package deal. You cannot have one, without the other.

    Now rewind the clock back 12 months and honestly ask yourself if your stomach, not your head, can handle this kind of stress without hitting the panic button. Because that's the kind of "volatility" you're signing up for.

    At the end of the day, volatility may be many things, but sure as hell ain't your friend.

    Good luck, and God bless.

    Thomas Edmonds.

  • Report this Comment On November 04, 2010, at 10:24 AM, XMFPapester wrote:

    Thomas,

    I'll address each of your points.

    I'm not saying that GE stock isn't a good deal. I'm saying that I don't know; I haven't dug into GE, so I can't make an informed decision. This is just one stock out of many.

    Everything you quoted to me about GE is quantitative. Earnings yield, price changes, price to book. Quantitative is important, but I need a lot more qualitative thought before making an investment. How has that earnings yield changed? How do they recognize revenue? Are those earnings flowing through to cash from operations? What is in their book value? Is it likely understated or overstated? Has the industrial landscape changed? And so on, you get the point.

    So, no, this stock does not represent a screaming buy to me.

    My comment about my goal with the portfolio being to make money might have been unclear. I am saying, that is my only goal - smooth and steady returns are NOT my goal. I will have ups and downs, but will be managing for the long term.

    We clearly differ in opinion on volatility. Volatility is most certainly my friend. In the long term the market is mostly rational, but in the short term it is more emotional. Take, for example, as you said, the oil spill. It is nothing if not investor emotion that drove down the prices of many oil-related companies in the aftermath of that disaster. At that time, I did work on number of those companies pushed for Ensco, Atwood Oceanics, and Noble, among others. Even wrote an article about Noble when it was trading in the mid 20s. http://www.fool.com/investing/value/2010/07/23/its-time-to-b...

    Volatility is what gave us such great prices on these well-run businesses. And volatility can give us great sell prices, also. Great business with defendable moats don't often sit around vastly undervalued for long; but our friend volatility can pitch us softballs if we are patient.

    People run into trouble when they associate volatility with risk. A company like Atwood had a business whose cash generation ability was entirely unaffected by the Gulf oil spill, but whose stock got slashed more than 35%. They had one rig in the gulf, and it was a shallow water rig, so it wasn't even affected by the drilling moratorium. Cash flow didn't change. Investor emotion and volatility - thanks for putting this company on sale.

    Cheers,

    Alex

  • Report this Comment On November 04, 2010, at 11:02 AM, daveandrae wrote:

    Alex-

    If you are fortunate enough as I am to have well over six figures of your hard earned capital at risk in the market, then believe me when I tell you, when, not if, the market goes down 10% in one day, without warning, and 17% over three months, without warning, the last thing volatility will feel like, is your "friend."

    As for GE, you sure do know how to talk yourself out of buying something. Sorry, my friend, but this investing thing just ain't that hard.

    Buy Equities -HOLD Equities

    Everything else is commentary.

    good luck,

    Thomas Edmonds

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