PSB Monthly Issue October 2012

| October 4, 2012

October 2012


With QE3 underway, the Fed has started the printing presses up once again.  What’s amazing is, this time around, it’s all about jobs.

You see, the Fed is buying $40 billion in MBS products for as long as it takes for employment to see a significant recovery.

That’s an open-ended commitment that’s almost too good to be true.  If the Fed is successful, we’re sure to see unemployment back down under 7%… and we’ll no doubt see an improvement in the economy.

Now, there are certain areas of the economy that are poised to benefit from a major improvement in employment more than others.

In this case, I’m talking about consumer spending.

As the economy improves, we’re sure to see growth in manufacturing, industrial, and homebuilding.  But when people have jobs, they are more than happy to spend their money on virtually anything and everything.

And that includes discretionary spending…

It’s a common misconception that only “the rich” increase their non-essential spending (i.e. luxury items, travel, personal services, and entertainment) when times are good.
The reality is that everyone tends to increase the consumption of non-essential goods based on these following factors:

  • Job security
  • Confidence in the economy
  • Expectations for food prices, home values, and stock market
  • Expected household income growth

If people can afford to buy the basics such as housing, food, gas, clothing, and health care… they’re more than happy to increase discretionary spending.  And for Americans, they’re more likely to increase spending than save more when times are good.

It seems counter-intuitive by all logical measures.

Unbelievably, the savings rate in the US climbed all the way to nearly 8% as the last recession kicked in.  Take a look at the chart below to see how the overall economy has impacted personal savings rates in the US…

Source: St. Louis Federal Reserve

As the chart clearly indicates, personal savings increase as recessions take hold (the gray bars are recessions).  In other words, people’s fear during a recession tends to make them a bit more frugal.

Now, you’d think savings would fall when times got tough.  And that savings would improve when people had more income, which would allow them to save more.

Ironically, Americans have backwards spending and savings habits.

This becomes evident in how fast savings rates drop after a recession is over.  On the back end of the chart above, you can see the gradual decline of savings rates to less than half its peak in the last recession, down to just 3.7%.  It’s a sad fact, but one that’s true.

So how can we capitalize on this trend?

For a number of industries, a drop in personal savings translates directly into revenue. Now, if you were to name a single industry that can turn people’s expendable income into instant profits, there’s none other than the gaming (gambling) industry.

Owning a casino is like owning a printing press.  And that’s exactly what we’re going to buy, a resort and casino management group.

Introducing Full House Resorts (AMEX: FLL)…

Key Investment Data

Name:  Full House Resorts
Ticker Symbol:  FLL
Market Cap:  $66.5 million
Recent Price:  $3.58

PSB Rating System 4.8 Stars

Raging Revenue:  (4.9 stars) Revenue is up huge in the first two quarters of 2012 versus last year. Better still, analysts are forecasting revenue growth to continue at 16.5% for next year.

Beautiful Books:  (5.0 stars) With a cash balance of $27 million at the end of June, FLL has plenty of cash on hand to manage expenses and expansion costs.  Also, long term debt doesn’t exist, which frees up cash.

Stellar Structure:  (4.5 stars) Institutional ownership is decent at 33.84%.  I’d say the deep pockets on Wall Street aren’t yet aware of the growth potential of FLL.

Valuation Verification:  (4.9 stars) The P/E for FLL shares are just 2.5x. And with a price to book ratio of 0.84x, shares of this casino management company are well undervalued.

Meaningful Milestones:  (4.9 stars) Under the guiding hand of investment icon Lee Iacocca, FLL continues to make key acquisitions which will benefit top and bottom line growth.  The latest is the October 1st purchase of Silver Slipper Casino in MS.


Full House Resorts is a casino gaming company that was incorporated in January of 1987.  The company has two distinct business strategies which include ownership of local casinos, and the management of casinos on behalf of Native American tribes and other commercial clients.

FLL owns and operates the Rising Star Casino, Stockman’s Casino, Silver Slipper Casino, and the Grand Lodge Casino at the Hyatt Regency in Lake Tahoe.  All of these properties are owned by the company, except the Grand Lodge Casino, which is operated under a five year lease with the Hyatt Regency.

In addition, FLL has a management agreement in place with the Pueblo of Pojoaque for the operations of the Buffalo Thunder Casino and Resort and the Cities of Gold and Sports Bar casino facilities.

Prior to this management agreement, Full House successfully developed the FireKeepers Casino for the Nottawaseppi Huron Band of Potawatomi Indians.  In the process, the company generated over $57.8 million in management fees as well as sold their Gaming Entertainment Michigan (GEM) interest for $97.5 million in March 2012.

There’s a lot going on here at Full House, so let’s take a closer look at their facilities and management agreements…


Rising Star is one of the company’s marquis properties featuring 40,000 square feet of casino floor space, 1,300 slot machines, and 37 gaming tables.  In addition, the facility boasts five bars and restaurants, 201 hotel rooms, an 1,140 capacity Grand Theater, and Indiana’s only true Scottish links-style golf courses.

One of the key factors in Rising Star’s favor is the strong market and demographics in the area.  Over 5.2 million adults live within 100 miles of Rising Star, including the inhabitants of Cincinnati, Indianapolis, Lexington, Louisville, Frankfort, and Dayton.


Stockman’s is the smallest property FLL owns and operates.  This facility is located roughly 60 miles due west of Reno, NV in Fallon, NV.  This casino has just 8,400 square feet of gaming space, 264 slot machines, and four gaming tables.  To compliment the casino there are three bars onsite, and restaurants and a 98 room hotel just offsite.


Grand Lodge is a casino operated by Full House and located at Incline Village in Lake Tahoe, NV.  The casino is housed in the Hyatt Regency Lake Tahoe resort and is currently being operated under a five year lease agreement that started back in 2011.

Grand Lodge consists of more than 20,000 square feet of gaming floor space holding 260 slot machines, a sports book, and 25 gaming tables.  What’s unique about Grand Lodge is the fact that all the restaurants, bars, and rooms are all run by the Hyatt Regency.  This gives FLL a fixed monthly rent of just $125,000 a month with the overall feel of a full service resort.


Silver Slipper is the most recent acquisition made by Full House this year.  In fact, the deal just closed on October 1st, Monday of this week.  FLL paid roughly $70 million to make the deal happen.

In the process, Full House picked up one of their larger properties and a presence in the Gulf Coast gambling industry.  The property was opened in 2006 and has 37,000 square feet of gaming floor space that includes 1,000 slot and video poker machines, 26 table games, a poker room, and the only live Keno game on the Gulf Coast.

In addition, Silver Slipper has a large selection of dining options as well as two casino bars.  The property pulls patrons from the New Orleans metro area and other communities in the southern Louisiana and Mississippi.


FLL is currently managing the gaming facilities at the Pueblo of Pojoaque casino known as Buffalo Thunder.  The facility consists of 61,000 square feet of gaming space and over 1,762 slot machines, 18 gaming tables, 13 food and liquor outlets, as well as a 395 room hotel.

FLL earns a base fee of $100,000 a month plus expenses and has the option of earning a success fee for meeting certain financial targets.

Obviously Full House has a large and diverse stable of properties.  So let’s take a closer look at the numbers…


For the first six months of 2012, gross revenue grew from $39.4 million in 2011 to over $61.2 million for the same period in 2012.  That’s a jump of more than 55%!  What’s important to note is some of this growth has come from the acquisition of properties… not same store sales growth.

Since FLL has made a number of acquisitions, sales, and transitions during 2011 and 2012, further revenue analysis is less important than operating income.

And that’s where Full House is performing best…

For the six months ending June 2012, FLL has seen operating income grow to $47.7 million from $12.6 million in the same period of 2011.  A good portion of that can be credited to the sale of the GEM interests we discussed earlier.  Overall, that’s a gain of nearly 280%!

Now get this…

Due to the one time sale of joint venture interests, Full House saw earnings per share jump from $0.17 a share for the first six months of 2011 to over $1.42 a share in the same period of 2012!

In reality, we shouldn’t expect this kind of long term growth from FLL as this was due to a one time sale.  Looking further out, 2013 year-end revenue is slated to jump 16.5% reaching $147.49 million.  That is, of course assuming there are no more asset sales by FLL.

Before the huge $1.42 per share earnings last quarter, Full House was slated to earn about $0.09 a share for 2012.  And the analysts were forecasting EPS growth of more than 50% in 2013 to around $0.15 a share.  That’s still quite impressive growth no matter how you slice it.

What investors really should value about FLL is their balance sheet.

As a result of the recent sale, cash on hand more than doubled from $13.2 million to over $27.9 million.  And long term debt is non-existent.  That gives the company plenty of ability to expand and grow as new projects come online.


As with any investment, FLL does have a few risks.

Full House Resorts operates in a competitive industry.  As such, new competition can spring up at nearly any time within their current markets.

Shareholders should be aware that macro-economic conditions and employment levels in the US often have a direct impact on customer spending habits.  As a result, an economic downturn could have consumers tightening their belts once again.

Finally, as the company looks to expand, they could run into legislative or extensive cost issues that may prevent them from acquiring new properties.  This could negatively impact revenue growth rates.


There’s no question the market is undervaluing FLL.  For starters, their price to earnings ratio is just 2.5x.  As a comparison, the industry average P/E is 15.7x.  If shares of FLL were to trade in line with the industry P/E, we could see a gain of 528%.

In addition, Full House has a price to book ratio of just 0.84x.  That means if you buy shares of FLL now, you’d be buying Full House Resorts for less than what its worth if it were sold off in pieces.  Even the cash on hand is worth $1.49 of the $3.58 share price.

Based on our analysis, we see the stock trading up over $8.50 a share.  Grab your shares of FLL now for potential gains of 245% or more!


BUY Full House Resorts (AMEX: FLL) up to $3.80 per share.

Recent price is $3.58.

Use a stop-loss of $2.60 on this position.

Don’t forget your position sizing and stop-loss rules.



The single best piece of advice any financial advisor can give you is this… diversify.

There’s no better way to protect your portfolio than to put your money in more than one type of sector, industry, or company. In addition, you give yourself exposure to many different profitable opportunities. Some may do better than others, but there’s no doubt that if one fails, you’ll be invested in a number of various industries.

After the great recession and the financial collapse back in the late 2000s, there are many investors who would have wished they were better diversified. In fact, there are many financial companies back then who could have benefited from diversification.

Instead, they leveraged their capital to the hilt buying mortgage backed securities (MBS) and their more complex counterparts, CDS products. And as everyone knows, this resulted in the downfall of many marquis Wall Street financial firms… and even worse the extinction of others.

Fast forward to the present time and the damage to the financial industry is still lingering. Take a look at the chart below to see how the financial industry has fared versus the overall market over the last five plus years.


As you can clearly see, the Financial Select Sector SPDR ETF (XLF) remains down by more than 35% as the S&P has fully recovered during the same time frame.

Fortunately for us, this presents a once in a lifetime buying opportunity. Eventually, the financial sector should catch up with rest of the broader market. And as that happens, we’re going to want to be invested in the financial industry.

Even so, the investment we make is going to be diversified.

Let’s say we were to buy just a mortgage lending company. What if the housing market collapsed all over again? Then we’d be in big trouble. No… for this purchase we’re going to want to have a financial services company that has their hands in not just the lucrative mortgage lending business, but also in other profitable financial services sub-divisions.

Introducing Security National Financial (NASDAQ: SNFCA).

Key Investment Data

Name:  Security National Financial
Ticker Symbol: SNFCA
Market Cap: $56.7 million
Recent Price: $5.43

PSB Rating System 5.0 Stars

Raging Revenue:  (5.0 stars) SNFCA had quarterly revenue growth of 55% from June 2011 to June 2012. This kind of growth is exactly what we like to see here.

Beautiful Books:  (5.0 stars) With a debt to equity ratio that’s in line with the industry average and a massive $4.47 per share in cash on hand, there’s nothing to contend on SNFCA’s books.

Stellar Structure:  (4.9 stars) We’d like to see more institutional ownership, but that’s ok… because insiders hold more than 46% of outstanding shares.

Valuation Verification:  (5.0 stars) Based on a price to sales ratio that’s well below industry average, SNFCA shares are a steal. 83% of the share price right now is made up of cash… now that’s what I call a true value.

Meaningful Milestones:  (4.9 stars) SNFCA turned around a mortgage portfolio that was bleeding money back in the 2008 to 2010 era. In 2010 alone, over 98% of the company’s losses came from the mortgage division. In addition, Security National settled litigation with both Lehman Bank and Wells Fargo for indemnification from mortgage sales during the housing crisis.


Security National Financial operates three main business segments which include mortgage loans, life insurance, and funeral services. The design and structure of their company is that each segment is related to the others, and contributes to the profitability of the whole.

For example, SNFCA’s cemetery and mortuary operations helps generate sales of insurance and pre-need cemetery/funeral products. Security National Life Insurance Company can then invest its assets in high quality mortgage loans. And while each segment is a stand-alone profit center, this horizontal integration clearly adds to profitability.

Now that you know the basics on SNFCA, let’s take a closer look at each of their businesses…


This is without a doubt the largest component of revenue generation and earnings for the company. In fact, over 62% of Security National’s second quarter revenue in 2012 came from this division.

SNFCA loans are made on real estate and construction projects in the residential and commercial segment. All of the current loans are first and second mortgages which require an 80% loan to value.


Security National Life (SNL) is the life insurance arm of the company and is the second largest division. SNL was formed in 1966 when they acquired Gran Canyon Life of Arizona. More importantly, nearly 34% of all revenue for the first six months of 2012 came from the SNL.

The products offered by SNL include:

  • Final Expense Policies
  • Pre-Need Funeral Funding
  • Fast Funding (Cash Advances on Death Benefits)
  • Diver and Boater Injury Policies


This is SNFCA’s mortuary and cemetery company. It is also the smallest of SNFCA’s division, providing less than 5.5% of the total revenue.

The company handles pre-need death services, cemetery plot sales, burials, caskets, embalming, and most other products and services common to this business. Currently Memorial Mortuaries & Cemeteries operates in three states, California, Utah, and Arizona.

Being a financial services company, the numbers are what we are interested in… so let’s dive in.


For the first two quarters ending June 2012, Security National generated over $103 million in revenue. This is a massive 47% increase over the $70 million for the same period of 2011.

Of that total, life insurance grew by 4%, cemetery revenue fell by 15.8%, while the mortgage division made a massive comeback from 2011 and grew by 109%! And remember, mortgages make up nearly two-thirds of SNFCA’s total revenue… so growth like that’s key here.

On the earnings front, which is what really counts, SNFCA didn’t disappoint…

For the second quarter of 2012, the company grew earnings by a massive 723%! How? Well, they turned a $1.2 million loss they experienced during the same quarter of 2011 into a $7.3 million profit.

The best part, again, is that mortgage earnings grew by over 226% in that period. Net earnings per share for this period surged to $0.55.

After looking at their books, we can tell you SNFCA is doing great in this department. Most mortgage and life insurance companies have large levels of debt to service, and SNFCA is no exception. Their long-term debt to equity ratio is in line with the industry average, at just 0.41.

But cash on hand is where they shine. The company has a massive $4.27 in cash on hand (yes, $4.27). So SNFCA can more than handle any cash flow issues it faces.

Moving on, let’s take a look at some risks…


While SNFCA has managed to work through their non-performing loans to obtain a workable performing/non-performing ratio, a downturn in the economy could increase the percentage of non-performing loans, thereby effecting profitability.

As a mortgage company (primarily), the value of the underlying assets (property) are critical. While many experts agree the housing market has bottomed and is in full recovery mode, a reversal of this could affect the value of the underlying assets on which the mortgages are based. This could impact profitability.

Lastly, SNFCA has had to settle a number of litigation cases for mortgage sales to larger financial institutions back during the financial crisis. Some of these companies are continuing to try and litigate against SNFCA. At this time, the company feels they have met their obligation to virtually all of these claims and are vigorously denying any pending suits.


Right now, shares of Security National Financial are in a major breakout… yet still significantly undervalued by the markets (even after the recent 30%+ run).

As a matter of fact, SNFCA shares have a price to earnings ratio of just 7.6x. The industry average hovers closer to 26x. If shares of Security National were to trade closer to the industry average P/E ratio, we could see shares trading near $18.52. That would be a gain of 245%!

What’s more, SNFCA has a price to book ratio of just 0.62x. That means you’re getting Security National Shares right now for just two-thirds of what the company would be worth if it were broken up and sold off in pieces.

Now this is the crazy part…

The company has $4.47 in cash per share on hand. That represents more than 83% of the current share price. At a share price of $5.40, you’re simply paying a 17% premium on just the cash. You’re basically paying $1 for the rest of the company!

Based on our analysis, we could see shares trade over $18.75 once properly valued.That would give us a gain of more than 245%. Buy shares of SNFCA for gains of 245% or more!


BUY Security National Financial (NASDAQ: SNFCA) up to $6.00 per share.

Recent price is $5.43.

Use a stop-loss of $3.50 on this position.

Don’t forget your position sizing and stop-loss rules.


Portfolio Update

As the monetary stimulus hangover wears off, the reality that QE3 has put a floor under stocks is setting in. A short consolidation was necessary, and healthy. With very minimal downside action, traders are buying up stocks once again.

Most of our portfolio is doing great, and we even have a huge turnaround in Jinko Solar (JKS). In fact, the stock was up by nearly 20% today alone! That put our position back in the black with the stock returning a high of more than 15%. Let’s keep holding JKS.

On the other hand, there is one stock in our portfolio that we’re going to sell… Westell Technologies (WSTL).

This stock has proven to be a non-starter for us and is simply a waste of investment capital at this point. As the stock price has continued to fall, we’re going to sell shares of WSTL before they get any lower. Sell WSTL.

Finally, Culp (CFI) reached a new high for us last month of $12.15… giving us a 37% return. In addition, shareholders of CFI on 9/27 will receive a $0.03 dividend from the company on 10/15/12. Let’s continue to hold CFI for even greater gains!

Overall, the portfolio is performing very well. I can see us moving much higher from here in the coming months… so hang on to your seats!

Category: PSB Monthly Issues

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