Thoughts on individual stocks

Mueller Water Products (MWA / MWA.B) - This has been a favorite of mine for awhile. A spin off from Walter Industries they make 50% of the fire hydrants in the U.S. along with ductile pipe and water valves. They are exposed to some residential housing (which has helped drive down the stock) but in general have a very steady business. It is a great razor / razor blade business because fire hydrants are fairly specialized and municipalities must come back to the original manufacture to get replacement parts. They compete in ologopolic industries where they are very successful passing on price increases in raw materials. At Highland I actually worked on the bank loan for this company and we ended up investing millions buying the bank debt. After already liking the company (and personally owning the equity) I came to really admire the way this company operated and the areas where they competed after working on the bank deal. Anyway MWA is the A shares and carry one vote per share while MWA.B is the B shares and carry 8 votes per share. That is the only difference between the shares (I have called to company and confirmed this) so hypothetically the B shares should trade at or slightly above the A share price. Oh but wait, they don't. At yesterday's close the A shares sold at 14.69 and the B shares traded at $12.30. Why do you ask? Few reasons. One the A shares were placed about a year ago in an IPO by Walter to set the trading range for the new company for the futre spin-off. There are 29 million A shares outstanding. The B shares were distributed when the spin-off was completed to Walter shareholders around 8 months later. There are 86 million shares B shares. So that is reason #1 supply demand equation. The second reason and I believe more important is that if you follow spin-offs you know the stock usually performs poorly immediately following the spin-off. This is because funds who were holding Walter wanted to own Walter and do not want to own Mueller. So they sell indiscriminately and depending on the spin-off sometimes forced to sell because of market size requirements, indexing requirements etc. Essentially if you bought the A share it was because you wanted to own Mueller. That is not necessarily the case if you own a B share. Also the A shares got added to the Russell 3000 (I think it was the 3000 not the 2000 but it is escaping me this current second). This creates quite a bit more demand for the A shares because of indexing funds. Then most recently you have had the huge market volatility and funds being forced to liquidate to meet margin calls and reduce risk. What better way to do so then sell something you did not really want in the first place? Of course if you did not want it that meant you had the B shares from the spin off. Might as well sell it. If you have been following the spread of the shares, the A shares kind of settled around a 10% ish premium. That has now widened to 20% and once again it should be 0% or the the B shares should have a premium! It could get wider but with the spread widening to this level it looks like a good pair trade where you short the A and long the B. Or you could just long the B. I think this is a great company, in a great industry, with a large moat, earning superior returns. This is one of my favorite ideas right now.

Wal-Mart (WMT) - This has been a favorite among all types of value guys. I have dabbled in it here and there when it gets really low in its trading range but it has never been a core holding for me because I have never believed the story. This company is one of the world's greatest importers. Everyone knew the dollar was/is overvalued. As the dollar continues to weaken the price they are paying for thier retail goods goes up and they are going to have a hard time passing all those increased costs on, especially as a discounter. As a result I think they are going to have margin problems for years to come. If there was ever a larger devaluing of the Chinese Yuan compared to the U.S. Dollar watch out, Wal-Mart I think would get murdered. Yes they are the greatest retailer on earth, yes they are one of the most efficient companies on earth, yes yes yes to all the other great things you want to say about it and it may go to 60 or greater. To me though the dollar is a big factor in this company. I know the favorite line among bottom up value guys, including myself, is that we do not care about big macro picture things. Agree, but here it just seems to be screaming at an extremely high decibel level where I just have not been able to ignore it over the past 12 months.

Halliburton (HAL) - Apparently last week a large hedge fund (thought to be Goldman's) was liquidating their position. The stock got killed all week into Friday. This is a stock that has underperformed its index by quite a bit over the last six months. This combined with a large liquidation based completely on non fundamental factors makes it an interesting stock. No position in it currently but it is interesting.