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The Table of Wisdom, 2009 Portfolio is currently up +277.6% (as of the writing of this update 4/18/2010).

I am MrArbitrage. I have been a “Wall Street” professional since 1996. The most important lesson I learned from my experience is that success on Wall Street is not measured by how much money your clients make on their investments. “The street” is a place where the most successful Financial Advisors and brokers are the most consistent salesmen. When they bring you in, they don’t teach you how to be a great money manager. They teach you to tell your story, tell it well and tell it often. That is what I mean by “consistency”. The bottom line is that if you tell the story with enthusiasm and tell it often enough, you will make a great deal of commissions regardless of how good or bad your advice may ultimately be.

The other necessary ingredient is that you have to drink the proverbial Wall Street “Kool-Aid”. They are not looking for analytical types who do their due diligence. They are looking for people who care about making six or seven figure incomes for themselves and who will not question the quality of their products. One of the popular maxims they tell you in training is that “people don’t care what you know, until they know that you care”. That’s a GREAT saying and often true. The problem is that most of the brokers don’t “know” much (about investment selection) and are never encouraged to know much beyond the constant inculcation from product wholesalers who bombard brokers with lunches and dinners at the finest restaurants in town.

A Fundamental flaw in Wall Street Products
Wall Street is the most incredibly reactionary industry I’ve ever witnessed. They NEVER lead the way with anything useful. They are always designing new instruments to capitalize on fads. In down markets they come up with instruments that (for an exorbitant annual fee) will address the latest problems which have already happened to their clients (in case they’re still around for the next collapse that tends to happen every 60 years) –and- in bull markets they design instruments to capitalize on securities, themes and sectors that have already had their run (which are by then grossly over valued). These products would be worth every penny –IF- they had devised them and recommended them –BEFORE- the catastrophe or before the bubble occurred.

In the end, if you have an advisor/broker with more than a morsel of intelligence, you can make money.

The reason why –I- was disenchanted by the industry is because I couldn’t drink the Kool-Aid no matter how hard I tried. Despite being a fairly compelling speaker and professional broadcaster, I never could get enthusiastic about offering products that I believed were inferior. It wasn’t enough for me to offer an investment vehicle that “wouldn’t hurt” the client. How likely are you to give me your money when I have no enthusiasm for the financial instrument I am recommending?

Another major reason why Wall Street wasn’t right for me is because they are always biased toward the upside. Nothing sticks out like a sore thumb in a Wall Street firm like an advisor who bad mouths the market and the credulity of Wall Street analysts. All of the tools are technically there for a good advisor to make clients money; however, these firms do not want you going short; they do not want you hedging and they do not want your clients sitting in cash. With the help of bureaucracy, they make it very difficult to obtain approval to implement these strategies for the average client. If you have enough money ($1 million and up), they may allow you to invest in a hedge fund. As we have all seen, some are very good and some are very bad.

What separates the good money manager from the bad?
To answer that question, it’s important to understand where these money managers come from. Money Managers usually rise to that rank after establishing a record as a successful Analyst. Most Wall Street analysts get their positions by virtue of obtaining a high GPA at an Ivy League university. There is nothing wrong with a prestigious degree but the problem is that this requirement shuts out the opportunity for many bright and talented people. The most important attribute to being a good analyst is either an incredible streak of luck or innate business sense. Some analysts become successful because of the law of large numbers. If you have 10,000 people who are “dumber than dirt”, you will produce 100 or so who look like veritable geniuses despite their cluelessness or the lack of merit to their methodology. Business sense is the only ingredient that makes for a consistently successful analyst but business sense is not a concomitant of privilege and that is the well from which they are drawing. You cannot teach it in a college. Many of these “Junior Wall Street Analysts” never worked a day in their lives until they obtained their highly coveted jobs and the totality of their untested knowledge was imparted to them by a professor who never ran a successful business.

I would love to have had the opportunity to become an analyst at the outset but I majored in Communications, not Business and most of what I learned in business was from working my way through High School and College. I used to spend hours every day at the library reading biographies of successful business moguls and countless newspapers and magazines to get a clear picture of what was taking place in industry and technology. I found early on that God had given me an ability to process the information from various sources and put them together in a way that enabled me to see very early on – WHERE -trends and technology was leading and –WHICH- companies and industries would be the beneficiaries. It is this ability to anticipate, an innate intuition that I heretofore referred to as “business sense”. That alone is not enough. That is the most important ingredient but without the second most important ingredient, one knows enough to be dangerous.

The second most important ingredient is one that they CAN teach you in college, which is securities valuation. A person with exceptional business sense who doesn’t understand securities valuation is dangerous because they are vulnerable to buying a great company for a preposterous price. Without that latter ability and knowledge, one is prone to being caught up in “bubbles”. The most successful analyst or money manager who is so for more reasons beyond “luck” understands a concept known as “intrinsic value”. They understand that these are businesses, not just “stocks” and you can have the greatest company in the world but if you pay too much for it, it can be a losing proposition.

I won’t get into the minute details but if you want to read more on those principles, click the “My Track Record” tab here at and read my specific examples from my past decade of writings on various bubbles. I can sum up my philosophy by saying that my approach to securities analysis in the area of financials is that I look at each company as though it were a private company because a private market is a rational market. You don’t typically see such bubbles in private markets. I ask myself, if this were a private sale and I were an individual buying this entire company and had to run it and hold it for a long time period, would I be able to justify paying this price? Would the profits allow me to pay off this company in a reasonable length of time? If the answer is no, I wait. The fact that there is a public market where I can sell my entire position is only a luxury.

As when Tuesday Morning (TUES) was below $1.00 after the panic in 2008, I knew this was a great company (as you can read in my time-stamped analysis) and the fact that a crowd of lemmings were willing to pay .98 cents the day I recommended it was of no consequence. There is a reason for the phrase about “the madness of crowds” and just because the crowd was idiotic did nothing to change the “intrinsic value” of the company or my convictions about it. There is no “one size fits all” template. The concept of intrinsic value is not absolute science. One cannot know exactly what the intrinsic value is for any particular company – but they can get in the ballpark – and that’s all I ever aim to do.

Below are my collective stock picks for last year (2009). These are my ONLY stock recommendations for the entire year.

They were all made simultaneously and as always, I posted them at a well known, 3rd party source.

Those two distinctions are most important because:
1. Any investment letter can tell you about their winners and conveniently leave out their losers. If they omit them, this can be very misleading.
2. Anyone can go back and change the material in their own website to make their analysis look prescient and even skew the actual performance.

My recommendations are all included here and they have not been tweaked as the 3rd party, time-stamped references prove.

Tuesday Morning (TUES):
2/23/2009 closing price: .98 (cents) per share
4/16/2009 closing price: $8.24 per share
Return: + 841%

Daktronics (DAKT):
2/23/2009 closing price: $7.81 per share
4/16/2009 closing price $8.11 per share
Return: + 1.4%

Under Armor (UA):
2/23/2009 closing price: $14.12
4/16/2009 closing price: $33.74
Return: + 139%

Ebay (EBAY):
2/23/2009 closing price: $11.53
4/16/2009 closing price: $26.41
Return: + 129%

Total Return:
$40,000 invested ($10,000 per stock) from the February 2009 recommendation date would be worth $141,040
$10k in TUES = $84,100
$10k in DAKT = $10,140
$10k in UA = $23,900
$10k in EBAY = $22,900

Total = $141,040

Following are the recommendations (as noted and linked above) with the analysis and reasoning behind each recommendation.

MrArbitrage top 4 picks: TUES, DAKT, UA & EBAY
February 23, 2009

Tuesday Morning (TUES)

As of today, Tuesday Morning’s stock price of between $.94 - $1.02 represents a total market cap of approximately $42 million! To put that into perspective, if you look at their historical earnings, this is just a fraction of the average annual earnings for this company. They bring in close to a billion in sales annually. I believe this is an absurd price for Tuesday Morning as the company has a strong balance sheet and can likely weather the storm. To be safe they cut the dividend last year, which had been a large percentage of their total EPS.

Tuesday Morning is a closeout retailer of upscale home furnishings, gifts and related items in the United States. It opened its first store in 1974 and currently operates 732 stores in 46 states at December 31, 2005. Their stock price descent began during the time the housing bubble ended, along with Home Depot and other stores sensitive to the housing market. Certainly, their sales have been declining as can be expected; however, I believe that when the economy eventually turns around their revenue and earnings will return along with it. If that occurs, the market is not going to allow you to purchase cash flow, earnings and dividends for the current buck a share.

Between 2005 and 2006 TUES was trading at a high of $35.00 per share. I believe it is eventually possible for Tuesday to reach all time highs again as they have a very loyal customer base but even a less sanguine expectation of a $10-$12 price target would be a potential 1,200% return. I don’t think that will happen for a couple of years or however long it takes for this economy to turn around. I do think that $5.00-$6.00 per share is possible within the next 1-2 years.

This is a volatile stock but I believe the common stock offers potential option like returns for a minimal, speculative investment.

Daktronics, Inc. (DAKT).

The Company is a supplier of electronic scoreboards, large electronic display systems, marketing services, digital messaging solutions and related software and services for sports, commercial and transportation applications. Daktronics offers a complete line of products, from small indoor and outdoor scoreboards and electronic displays to large, multi-million dollar, video display systems as well as related control systems, timing, sound and related professional services. The Company is recognized worldwide as a technical leader with the capabilities to design, market, manufacture, install and service complete integrated systems that display real-time data, graphics, animation and video.

This company has been experiencing steady revenue and earnings growth. They just had a RECORD second quarter with a 29% increase in net sales and net income was up 52%.

The stock is down because the market has been obliterated. There is presently no such thing as a “premium” for growth in this market. That will eventually change when the economy improves. Prudently, DAKT tempered the enthusiasm of investors after announcing their record quarter because the advertising market is slowing due to the economic conditions. Advertising is an indirect part of their business as advertisers purchase their product and may slow down on new orders.

THE KEY: The reason why I love this company is because they are the undisputed leader in global industry in its infancy. You may have seen one of their billboards over the past year if you have driven through any major cities. They REVOLUTIONIZE a primitive industry. Currently there are millions of old billboards throughout the US that require people to climb scaffolds and wall paper these outdoor billboards by hand. That is expensive. There are the costs of making the actual material, transporting it and the man hours to hang it.

The digital billboards by DAKT eliminate that archaic method of outdoor advertising. The technology is impressive. It’s like driving down the road and seeing a high def television with active advertising. I see the future of driving the highways of the world being similar to surfing down the “Information Super Highway”. When we surf the Internet, the “billboard” advertising is targeted at us with a certain amount of intelligence. It’s not just blanket advertising. DAKT’s digital billboards won’t quite be able to pinpoint ads to the degree that the Internet does but I believe it will allow for them to change the ads to sponsors more appropriate for certain traffic times and locations. This will open up many new doors for those who sell ads to obtain more revenue from one piece of real estate and to offer a more dynamic and valuable presentation for advertisers.

Subsequently, Daktronics also manufactures those gigantic screens you see at sports arenas and stadiums. You also probably witnessed the capabilities of their product during the inauguration of Barack Obama as they were set up throughout Washington DC. I don’t mean to minimize these segments because these venues are also a substantial part of their revenue. It’s just that I see the most exciting part of the business to be in the outdoor advertising. Next time you take a road trip, start paying attention to the extraordinary quantity of primitive billboards with spotlights on them. Think about the man hours required to change the ads on them for new sponsors. Think of what a small percentage -the many you have seen- are of the total number nationwide. Than think globally because DAKT is selling them globally and they are the leader by far in this industry.

DAKT is currently trading at a total market cap of $319 million (at the current stock price of $7.90 per share). I believe the market for their products will drive this company to substantially higher revenues and earnings in the coming years. I believe DAKT will become a company with a multi-billion dollar market capitalization. It is difficult to pinpoint a specific top for a company well positioned in this auspicious industry. I’m not a technical analyst but I’m sure there will be plenty of ups and downs given the economy; however, my 5 year target for this stock would be in the neighborhood of $125.00 (not adjusting for stock splits of course).

Under Armor Inc (UA)

The company is managed by a visionary and they execute quite well. They seem to succeed in every new product line and there are many for them to exploit. They have been growing revenue and earnings in the double digit and will likely do so for years to come.

UA stock price is down because of the economy in which we find ourselves. Again, there is no premium for growth these days. Unless America DIES – which is looking more plausible than anytime since the Civil War – than UA should otherwise fare quite well. They may do well even if America dies by suicide, depending on which direction Maryland goes politically.

I believe UA will give NIKE a true run for the money. UA is currently a $700 million dollar company. NIKE is currently a $20 BILLION company. Some speculate on NIKE buying UA. I say it is possible but UA shareholders would not be stupid enough to sell for less than $5 billion and that may be too cheap. Either way, I believe UA is a $5 billion company within 3-5 years depending on the economic climate, making this a 5-6 bagger.

Ebay (EBAY)

I believe EBAY is preposterously cheap. They have had some challenges but Ebay is a cash flow machine that will do well during economic travails. At the current $12.00 stock price, $15 billion market cap, 8 x earnings multiple – I think it is selling for less than what PayPal itself is worth in a rational market. (Ebay owns PayPal of course; so in my mind, you are getting one of these great companies for free with the purchase of a share).

Disclosure: I have purchased stock in all of these companies and currently have an interest in them. I am not making recommendations to anyone reading this because I know nothing about your current asset allocation, time horizon or risk tolerance. I am sharing my own opinions on these companies and why I invested in them. I do not guarantee the accuracy of my projections or opinions
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