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King Pharmaceuticals 2Q 2010 Results

Portfolio holding King Pharmaceuticals (KG) reported second quarter results earlier this week. Earnings equaled $371 million compared to $445 million in the second quarter of 2009. The Company reported net income of $18.0 million and diluted earnings per share of $0.07 during the second quarter of 2010, compared to a net income of $37.9 million and diluted earnings per share of $0.15 in the same period of the prior year.

Most of the drop-off was because of a greater-than-expected decrease in sales of Skelaxin -- sales off 95%.

Going forward, I'm looking for positive results generated by new abuse-deterrent pain drugs such as Embeda, Remoxy and Acurox. KG stock plunged earlier this year when the government gave a thumbs-down to one of its abuse-deterrent drugs. The company will be going back to the FDA later this year, early next year, and I'm cautiously optimistic for now.

While I'm waiting I'm comforted by KG's solid balance sheet with cash and equivalents of $573 million and access to a $500 million credit line.

I probably should have reduced my KG position back to a 5% holding last year when the stock enjoyed a big run up. That would have partially locked in a nice gain.

Now the stock is below my original purchase price. And it will take a few quarters for everything to shake out to my satisfaction.

Patience is the word.

EGI Financial Holdings 2Q 2010 Results

EGI Financial trades in Toronto under symbol EFH. The stock is up since I bought it in 2009, but still trades at less than 80% of hard book. There's no dividend, but I still like it being a Canadian company with me being down here in the US.

The company has been battling headwinds recently in its core Ontario market. Market conditions there are improving now, and the company is seeing promising things in Quebec and the Canadian Maritime provinces.

What's more, EGI has started doing business in Texas and will soon being writing coverage in Florida as well.

Execution is the risk here -- as it is in practically every stock I hold. But EGI has good, conservative management and that, along with the discount to book, leaves me feeling comfortable despite any fluctuations in the stock price.

Douglas McIntyre, CEO of EGI, said, "We reported continued growth in our Personal Lines and Niche Products divisions during the second quarter, despite operating in a challenging environment for property and casualty insurance companies. We believe our ongoing volume growth is another strong sign of hardening market conditions in the Ontario automobile insurance market. In the first six months of the year our premium volumes increased by 25% and we expect this trend to continue throughout the remainder of the year. While insurance market conditions have had a negative impact on our business, our underwriting results have improved significantly from the first quarter of 2010."

You can read the release on the latest results here.

Jerry Flint, R.I.P.

Jerry Flint, most known these past years as an auto columnist for Forbes, died this past weekend from a stroke at age 79.

Flint had covered the auto industry since the late 1950s. I've always thought one of the best things about his writing was that even if someone wasn't a "car guy" they'd still enjoy his columns.

Flint was certainly a "car guy" -- and no one lamented Detroit being taken over by finance people more than he did. Or entertainingly dished out stinging copy on the subject.

Controlled Greed hadn't been linking to his columns as much since our misadventure with GM stock. Yet his opinions continued to attract and hold attention.

Steve Forbes wrote a remembrance you can check out here.

Rest in Peace, Mr. Flint.

Portfolio Holdings & Strategy: August 2010

My single largest holding continues to be the SPDR Gold Shares ETF (GLD), which holds gold bullion in London.

I also own four gold mining plays: Newmont Mining (NEM), Goldcorp (GG), Agnico-Eagle Mines (AEM) and the Market Vectors Gold Miners ETF (GDX). GDX is a modified market capitalization-weighted index of publicly traded gold and silver miners. I bought GDX to ensure I’d get proper diversification of major gold miners.

Gold recently corrected and, if I didn’t already have so much exposure to it in my portfolio (roughly one-third of total assets), I’d have seen this as a good entry point (fully realizing it could fall further here). GLD and NEM are up from my purchase prices, with GG, AEM and GDX slightly underwater or about where I bought them earlier this year. All the miners just reported great results, though NEM didn’t meet analyst expectations. Big deal -- the company increased its dividend.

I think the longer trend Bull remains intact, so I’m holding. Normally gold mining stocks overtake the metal itself at the end of gold Bull markets. That hasn’t happened yet -- but I’m confident it will.

In the tech/media/telecom area, I hold the following stocks: Microsoft (MSFT), Geeknet (GKNT), BCE Inc. (BCE), XETA Technologies (XETA) and a small position in Media General (MEG).

MSFT has been trading in the mid-$20s, which is still up from when I bought it for less than $19 a share. I was tempted to add some, but since it is already a full position I’ve decided to hold off. The company recently reported blowout earnings, which confirmed that its strongest product upgrade cycle ever is underway.

BCE just reported excellent earnings exceeding analysts’ expectations, and announced it is increasing its already fat dividend -- paid in Canadian dollars -- by 5%. The company has also been buying back stock.

Geeknet has changed its symbol from LNUX to GKNT. Much more importantly, Kenneth Langone has been named Executive Chairman and interim CEO. Langone stated on the analyst’s call last week that he and his partners own about 30% of the stock. I’m anxious (in a good way) to see what’s in store for Geeknet.

In the property & casualty insurance sector, I own Fairfax Financial (FFH/Toronto), EGI Financial (EFH/Toronto), and NKSJ Group (8630/Tokyo).  Fairfax and EGI are based in Canada and NKSJ Group in Japan. Fairfax is one of my largest holdings in the portfolio, but I’ve sold enough of it to get my original capita out, so it is a free ride. It too just reported excellent results. NKSJ formed out of the NipponKoa merger with Sompo Japan earlier this year.

Unifi Inc. (UFI) just reported good results and has had its first profitable year since 2000. Ken Langone also serves on UFI’s board of directors.

I continue holding King Pharmaceuticals (KG), Capital Southwest (CSWC) and a small position in 3i Group PLC (III/London). CSWC still sells for much less than book value. I expect to hold this stock for years to come. And it is the only stock I own where my broker is instructed to reinvest the dividends (not that the dividend is big, it yields less than 1% last time I checked).

Lastly, I hold Superior Industries International (SUP). I don’t expect much from this until things pick up in the auto sector. Yet management maintains a strong balance sheet and I’m patient with the dividend near 4%.

My cash position is less than 10%.

Levy Harkins 2Q 2010 Letter

Michael Harkins is full of wit and wisdom, which we can see at times on Pimm Fox's Bloomberg show. He's also been mentioned by Jim Grant, and I think has appeared at Grant conferences in the past.

His firm's 2nd quarter letter to shareholders is up on the firm's website. A part:

In America, the Obama government is not helping matters.  The President alternates between language sharply critical of business one day, to outright vitriol the next.  The people who create jobs grow frightened when they are vilified, and so a President venting about a part of the population he’s never liked does none of us any good.  Longing for more jobs and despising the people who create them is a logical absurdity and a common position in the Democratic party.  Republicans offer the policy of “no”, but after that, what?  So far, a doleful silence.

And another:

Uncertainty has made stocks cheap, and that is the best thing you can ever say about an investment.  Indeed, the pessimism bubble has grown so large that last week the New York Times took to disparaging the cash on hand at a number of technology companies, saying maybe their cash should be discounted from their valuation, or even ignored entirely.  Here’s a question for the Timesman, “If you don’t like cash, and the rapid accumulation of more of it, what is it you do like about business?”  What an about-face in ten years time.  A decade ago many and many a technology firm had multibillion dollar market valuations and not a penny to their names.  That ended very badly.  This moment sees companies like EMC and Qualcomm and Google with cash hoards that are a quarter to a third of their stock prices, and growing rapidly.  We will take that any day. Indeed we lust after it.

McElvaine Partners Investment Conference

Tim McElvaine has posed a transcript of a presentation he made at the McElvaine Partners' Investment Conference held last May. (Go here to download.)

As you might expect if you've been reading this blog over the years, I can't recommend reading -- and re-reading -- this presentation enough.

It's 30 pages, and McElvaine talks about his trust's performance, the good and bad, and the way he's approaching the investment landscape these days.

He freely explores investment mistakes as well as successes, and delves into some of his current holdings.

He refers to his days with Peter Cundill, and an interesting side note is that John Templeton had money invested with Cundill.

Anyway, I'm not going to waste your time by paraphrasing the presentation. But if you review it, you'll want to stash a copy in your files -- it's likely to prove worthwhile to go back and look at from time to time as you think about investing.

Selling My Cheung Kong ADRs

Yesterday (Wednesday) I dumped my stake in Cheung Kong Holdings (I owned the ADRs trading in the US on the OTC). The price was $11.96.

I first bought Cheung Kong in late 2008, and added to the position in the early part of 2009. My average cost was $8.58, about 70% of book value.

I decided to sell for a variety of reasons. The company is now trading just under book value, the ADRs had risen about 39%, or more than 23% on an annualized basis not including dividends.

With concerns of a property bubble brewing in Hong Kong, and worries of uncertain things in the Greater China region, I chose to lock-in a decent gain and add some cash to the portfolio.

Overall, Cheung Kong is a great company with great assets and top-notch management. Its finances are rock solid and, since Li Ka-shing has been adding shares, I may look back on this with regret. Yet the company isn't the bargain it was in late 2008/early 2009. Not much out there is.

More McElvaine

Tim McElvaine ranks among my all-time favorite value money managers. His just posted his "We Are Here" letter for the quarter ended June 30 (you can get it going here).

McElvaine reports not owning any gold, unlike yours truly. He's owned gold mining stocks in the past, but thinks owning gold today is too much "investing with the crowd." I think there's more to gold than that, but agree with him about the gold advertising on TV. What's more, I suspect many gold dealers on TV are ripping people off with outrageous fees and the like. Many but not all. That said, Tim lives in Canada and the gold-as-insurance play applies much more to those of us in the US. Though my last point on this particular subject is the most important one: McElvaine is the real deal and way, way, way smarter than I'll ever be.

One area we have in common is small caps -- even micro caps. My recent purchases include Geeknet (LNUX), Unifi Inc. (UFI) and XETA Technologies, all of which qualify as micro caps. McElvaine points out these types of stocks increases volatility. Very true and something anyone in that area must understand. And have a strong stomach for at times.

Be sure to read the linked report. And if you've never done so before, take the time to read the other reports listed on the McElvaine Investment Management site.

Geoff Gannon interviews Jon Heller of the Cheap Stocks blog

Man-oh-man, we're talking serious ear candy here, folks. The Investor Questions Podcast with Geoff Gannon has an in-depth chat with Jonathan Heller of the Cheap Stocks blog.

This interview is really long -- not sure how long but REALLY long. Yet it contains zero puffery. Well worth every minute of your time.

If you've been reading Controlled Greed over the recent years, you know this blog is a big fan of Cheap Stocks. The way it covers net/nets and spots stocks with significant real estate and/or water assets has been a unique approach in the investment blogging arena.

Truly a standout in a crowded field.

This interview details Jon's take on many stocks as well as his thoughts on blogging (like yours truly, he hasn't been blogging as much over the past few months). For me, Jonathan's thoughts on blogging and writing about stocks was perhaps the most interesting part of the interview. Why? Because I've been thinking about what I want my blog to become -- if it even stays a blog -- and what was said in the interview provided me with even more food for thought.

More about that later.

Another key point in the interview was when Jon said investing in net/nets should not be a core part of someone's investing portfolio -- because most of these companies are losing money, are very small and often provide little or no information. He said he only owns a handful of these stocks at any one time.

I may have missed it, but I'd like to hear his thoughts on what he does/recommends for core portfolio positions -- value mutual funds? Anyway, again, I may have missed that and apologies to Geoff and Jonathan if I did.

And it in now way at all detracts from an otherwise GREAT interview. Between now and over the weekend block out some time and listen to this. Beats anything you'll get on CNBC, that's for sure.

Controlled Greed Portfolio Performance: Mid-Year 2010

For the year through June 30, 2010, the portfolio lost -2.9% including dividends. The S&P 500 lost -7.6%.

Here's how the portfolio positions looked at the end of June:

Gold Mining Holdings    23.0%
SPDR Gold ETF              12.0%
Fairfax Financial            7.3%
Unifi Inc.                        5.6%
Microsoft                        5.3%
Superior Industries          5.3%
BCE                               5.2%
Cheung Kong ADR           4.9%
Capital Southwest          4.8%
EGI Financial                 4.8%
Geeknet                        4.8%
King Pharmaceutical       4.5%
XETA Technologies         4.4%
NKSJ Holdings                 4.2%
Cash                        under 3%
Media General          about 1%
3i Group                   about 1%

Some notes. These figures are not audited, just my calculator and me. So if I'm off a bit, sorry.

The portfolio stretches over three accounts: my regular brokerage account and two retirement accounts. The VAST majority of my liquid net worth is in the positions above. The "Controlled Greed portfolio" isn't some little portfolio on the side. It is real money. I’m working like the dickens not to lose it all and live out my life in soup kitchens.

The gold mining holdings listed above (and grouped as a single position) include Newmont Mining (NEM), Goldcorp (GG), Agnico-Eagle Mines (AEM) and the Market Vectors Gold Miners ETF (GDX).

I’m holding my SPDR Gold ETF, the double-sized position established in the summer of 2009. This means that my gold ETF and gold mining stocks together account for 35% of my portfolio.

Fairfax Financial is a nice-sized holding. Remember that I've sold enough of this stock a while back to get my original capital out of it. The holding is a free ride.

I'm mostly content with all these stocks, except for Media General and 3i Group. MEG has been a disastrous investment and represents money lost.

Let’s see what the second half of 2010 has in store. The “will we or won’t we” debate on a potential double-dip recession is interesting, but also baked into the cake. Much more interesting is the probability that the Fed will resume massive money-printing it calls “quantitative easing” -- also known as QE2 -- this fall.

Deleveraging

Stephanie Pomboy of MacoMavens is someone I discovered over the past decade by reading Barron's. They've done at least two interviews with her that I can recall, Alan Abelson frequently mentions her in his column, and Barron's sometimes includes her commentary in its Market Watch feature. I also recently caught her on Pimm Fox's Taking Stock program on Bloomberg TV.

She strikes me as interesting and smarter than I'll ever be on my best day. I like her "big picture" take on things -- pretty much the way I enjoy Felix Zulauf, Marc Faber and Jim Rogers.

In this week's Barron's, Alan Abelson writes of Pomboy's take on consumer deleveraging in America (scroll down):

There's no way, she says firmly, that households can seriously deleverage overnight. The task is truly humongous: To return to those halcyon pre-Greenspan days when the ratio of debt to income was about 65% would require, she reckons, debt to decline by $6.3 trillion (or, just as daunting, income to increase by $9 trillion).

That would mean a massive reduction in spending, year in, year out, spread over six to 10 years. But, she sighs, there's virtually zero chance of that happening, if only because the bottom 40% of households spend every last dollar they make—and then some—just to keep their heads above water.

Of the $14 trillion in household debt, she notes, $10.5 trillion is mortgage-related. And, as Stephanie puts it, since stiffing your banker is now "socially acceptable, deleveraging needn't entail the pesky inconvenience of foregoing consumption," and she predicts more homeowners will exploit this opportunity "to accelerate balance-sheet repair."

Food for thought, for sure.

Five for the Weekend (Back for the Moment at Least)

Well, it's been a while. But here are five items you might check out over the next few days.

• McElvaine Investment Management has revamped its website. Tim McElvaine is a top-notch value manager based in Canada, and he used to be with Peter Cundill. McElvaine has virtually of his net worth in his fund, though it's worth noting the single largest investor in the fund is Cundill is himself.

• XETA Technologies (XETA) is one of my recent stock purchases. It's a small company that trades very thinly. As a result, it receives very little press coverage (which I don't mind a ibt). Here's a recent profile of the Oklahoma-based outfit in Tulsa World.

• Another portfolio holding, Capital Southwest (CSWC), has released its annual report for the year ended March 2010. You can download it by going here. I always enjoy President and Chairman Gary Martin's letters. They're not the epic works of you-know-who in Omaha, yet they fit the company and its approach to doing business perfectly.

• Check out Eric King's interview with Jean-Marie Eveillard from last week. Eveillard is one of the very best value fund managers of all time (like Cundill). The interview covers value investing, gold, Austrian economics and Japan.

• I mentioned the other day that John Hathaway of the Tocqueville Gold Fund regularly speaks with Eric King of King World News. If you've never checked out any of these interviews -- or even if you have -- give a listen to the latest sit-down.

That's it for now. I haven't been blogging as much these past months, not to mention not doing the weekly Five for the Weekends, which based on emails and comments are popular with Controlled Greed readers.

As always, I thank you for your readership and your patience. Have a great weekend.

Portfolio Holdings & Strategy: June 2010

My single largest holding continues to be the SPDR Gold Shares ETF (GLD). I’d prefer my gold bullion play to be the Central Fund of Canada closed-end fund, which also holds silver bullion, but it has been selling at a premium. So I settled for GLD.

I also own four gold mining plays: Newmont Mining (NEM), Goldcorp (GG), Agnico-Eagle Mines (AEM) and the Market Vectors Gold Miners ETF (GDX). GDX is a modified market capitalization-weighted index of publicly traded gold and silver miners. I bought GDX to ensure I’d get proper diversification of major gold miners.

Gold has been reaching all-time highs, and a correction may be in order. I think the longer trend Bull remains intact, so I’m holding. Normally gold mining stocks overtake the metal itself at the end of gold Bull markets. That hasn’t happened yet.

In the tech/media/telecom area, I hold the following stocks: Microsoft (MSFT), Geeknet (LNUX), BCE Inc. (BCE), XETA Technologies (XETA) and a small position in Media General (MEG).

MSFT has been trading in the mid-$20s, which is still up from when I bought it for less than $19 a share. I was tempted to add some, but since it is already a full position I’ve decided to hold off. The company is entering its strongest product upgrade cycle ever. BCE pays nice dividend in Canadian dollars, which feels good since I’m living in the US.

In the property & casualty insurance sector, I own Fairfax Financial (FFH/Toronto), EGI Financial (EFH/Toronto), and NKSJ Group (8630/Tokyo).  Fairfax and EGI are based in Canada and NKSJ Group in Japan. Fairfax is one of my largest holdings in the portfolio, but I’ve sold enough of it to get my original capita out, so it is a free ride. NKSJ formed out of the NipponKoa merger with Sompo Japan earlier this year. Fairfax is one of my biggest holdings, but I remind you that I’ve sold enough over time that it is a free ride for me.

King Pharmaceuticals (KG) recently got hammered because it looks like its new tamper-resistant pain drug won’t get government approval, and it also looks like revenues will fall about 15% or so this year. The next few quarters look challenging, to say the least, but the company is putting a lot into some new pain products and its animal health business should remain strong. KG has a solid balance sheet and insiders have been buying since the stock price fell.

Unifi Inc. (UFI) is the company I recently bought when I dumped my remaining stake in DirecTV Group. UFI produces yarns and related materials used in home furnishings, apparel, legwear and sewing thread, as well as industrial, automotive, military and medical applications. It looks on track to post its first full-year profit since 2000.

Cheung Kong Holdings ADR (CHEUY) has been up nicely since I bought it during the global financial panic. Li Ka-shing has been buying the stock. I worry that if China has a property bubble pop on the Mainland, the spillover effects would hammer Hong Kong-based stocks like CHEUY. I’ve been mulling that over in my head.

I continue holding Capital Southwest (CSWC) and a small position 3i Group PLC (III/London). CSWC is up recently yet still sells for less than book value. I expect to hold this stock for years to come. And it is the only stock I own where my broker is instructed to reinvest the dividends. 3i is down a lot since I bought it several years ago. It has made some very good payouts in the past, but I must say it may prove to be a lousy investment like MEG.

Lastly, I hold Superior Industries International (SUP). I don’t expect much from this until things pick up in the auto sector. Yet management maintains a strong balance sheet and I’m patient with the dividend near 4%.

My cash position is small -- less than 5%.

John Hathaway on Gold and Gold Stocks

The featured interview in Barron's this week is with John Hathaway, manager of the Tocqueville Gold Fund. I recommend it to you, along with the periodic interviews he does with Eric King over at King World News. Several years ago, Jim Grant wrote in Forbes that he was invested in Hathaway's fund -- though I should add that I have no idea if that is still the case.

A key part from the Barron's piece, about some of the anti-gold bias in the media:

I love it when the media, which never told you to get into gold in the first place, is now telling you to get out. It is just classic. But [investor George] Soros has said that gold is in a bubble, and that statement has to be understood. I didn't speak to him personally. But I think what he is saying is, "This thing can really get out of hand and therefore I'm positioning my investments to reflect that, because I think people are going to go nuts about it." I don't think he was being dismissive; his funds own gold stocks and they probably own physical. But the media has taken it like that.

When asked about his favorite gold plays, Hathaway first steers the conversation to gold and gold stocks:

Before we get into that, let me add that for a conservative investor who simply wants protection and is risk-averse, whatever allocation he has to gold should be more heavily weighted to the metal, because that's safer. The only risk with gold is the price you pay. But for the investor who is more of a risk-taker, and sees gold as a strategy to get positive returns in the current macro environment, then that exposure should be more weighted to the stocks.

One of the gold stocks he likes is Newmont Mining (NEM), which I own:

Dick O'Brien came in as CEO about three years ago. He is not from the industry. He is very keen on financial analysis and all the things that I think the industry has to do. It is just terrible how bad a job the industry has done. So when you see a guy like Dick come in, you say, well, that is an uptick, because that is what has to happen. Newmont isn't a growth story. They have very high-quality assets. It is more about upgrading the returns on capital, which they are doing, and that's kind of the mandate that he has given to them.

They could be an acquirer, and they certainly have made acquisitions. But I think the acquisitions they make going forward will make sense. It's a very diversified portfolio. They are in Indonesia, which isn't great. But they are in Australia, Nevada and West Africa -- those are the core operations. They have things elsewhere, too. Here is a company which has assets in place to take advantage of a rise in the gold price.

Again, good interview. And, again, you might want to check out Hathaway's audio interviews on King World News.

Kevin Duffy at Mises Circle in Manhattan

Some months ago, I linked to a Barron's interview with Bearing Asset Management's Bill Laggner and Kevin Duffy, who apply value investing through the lens of Austrian economics. I've also linked to audio interviews Laggner has done with King World News.

Here's an address Duffy gave recently to the Mises Circle gathering in Manhattan. The title is "Navigating the Financial Markets with an Austrian Compass."

What's more, you might like to check out the full list of talks and roundtable discussions available. Marc Faber is among the many notables.

Finally, last but not least, let me give a HT to David at Finance Trends Matter for giving me and the readers of his blog the head's up these audios would be available on the Mises site.

Felix Zulauf Interviewed by King World News

Eric King of King World News interviews Felix Zulauf, most known for his participation in the Barron's Roundtables. This will be of great interest to anyone who appreciates Zulauf's insights in that forum, and his thoughts on gold in particular and the market scene in general prove no less worthwhile.

Hat off to Eric King, who consistently scores interesting guests.

Buying Unifi Inc.

Earlier this week I established a new portfolio position in Unifi Inc. (UFI), a producer and processor of multi-filament polyester and nylon textured yarns and related materials. UFI is headquartered in Greensboro, North Carolina, and its products are found in home furnishings, apparel, legwear and sewing thread, as well as industrial, automotive, military and medical applications.

My average cost is $3.44 and the stock ended the week at $3.95. The market cap is more than $200 million, with 60 million shares outstanding and about 44 million of float.

I bought the stock at 81% of book value and one-third annual sales. There is no dividend. The Current Ratio is more than 4 and Quick Ratio is over 2. There is some long-term debt the company is working to get rid of.

At the end of April, UFI reported its third straight positive quarterly performance and management expects its first profitable year since 2000. The company has achieved these results despite the lingering effects of the recession and continued high unemployment. Management is focused on generating cash and continuing to deleverage the balance sheet.

Retail sales in UFI’s core markets still remain well below pre-recession levels -- Apparel is off 4%, Automotive is off 29% and Furnishings off 13%. I like the company’s performance in this environment so far, and think it is becoming well-positioned for when a recovery arrives.

The risks with this are most prominently the world sinking back into a deep recession or even global depression. I believe the company would survive, yet the stock price would get hurt. Another risk is with raw material prices. UFI has done well despite increases in raw material prices -- but if they shot up even more it could hamper the performance.

As always, anyone interested needs to do their own due diligence. And UFI is another stock that can trade thinly at  times.

Exiting DirecTV Group

I sold my remaining stake in The DirecTV Group (DTV) today. I got out at $36.70.

I first bought DTV in 2005 at $15.50, and sold half the position when the stock doubled in price. It has been a free ride since and the remaining shares accounted for more than 5% of the portfolio. I like the company, I like it being controlled by John Malone (and before that by the Murdoch people), but think it doesn't have much more to run -- though I'm sure I will be proved wrong and will look back one day and see that I've sold too soon.

I am currently using the proceeds to build a position in another company, in another industry. When the position is completed I'll name the company and give my reasons for buying.

Buying XETA Technologies

Last week I established a new position in XETA Technologies (XETA), which sells, installs and services communication technologies for small, medium and large (Fortune 1000) companies. My average cost is $3.83 and the shares closed Friday at $3.77.

XETA was founded in 1981 and is based in Broken Arrow, Oklahoma. This is a small company, the market cap is around $40 million or less, with 10 million shares outstanding. There's not much float most days, and it took me a long time to fill the position. Of course, the market sold off big the day after I finished building my holding. But that's the way it goes.

There's no dividend, and the stock trades at 1.2 times book value and less than 0.5 times sales.

XETA has greatly improved its balance sheet. The company has grown its cash balance from $63,600 in October 2008 to more than $5.4 million as of January 31, 2010. During that same time frame, total debt has been cut from $3.9 million to zero. Cash flow from operations has funded all of the cash increase. XETA will report its Q2 results later this month. Needless to say, I'll be particularly interested to see what it says, and also listen to their analyst call.

The industry for what is often called "enterprise communications solutions" is large and competitive. There are many regional players. XETA, despite being a micro-cap stock, operates nationally and this gives it a competitive advantage, particularly when bidding against the regional outfits. It has also announced agreements to buy two companies in the past month or so.

The risks with this holding include the fact that there is some customer concentration risk. Marriott accounted for 10% of XETA's sales last year, and the Miami Dade County Public School system accounted for another 5%. Also, XETA uses multiple vendors such as Avaya, Mitel, Nortel, Hitachi and Samsung, and there is some talk of pricing on Avaya products, which could negatively impact the company.

Anyone interested should, of course, do their own due diligence. And remember -- there is VERY LOW liquidity in the shares.

Richard Russell: "Don't Sell Your Gold or Gold Shares"

Peter Brimelow mentions Richard Russell of Dow Theory Letters in his new MarketWatch column. Russell says flatly:

"Do not trade your gold or gold shares. The third phase for gold lies ahead. The central banks do not want to see a new high in the price of gold, and they will do anything they can to keep the price of gold down. But the primary trend of gold is more powerful than all the world's central banks taken together."

"There is nothing more powerful than an idea whose time has come. The idea -- gold is the only money that's safe from the world's clueless governments, and their obsession to escape a recession or a depression."

I certainly think the recent move up in gold has to do with lack of faith in paper money. Specifically, paper money backed by thin air.

I hope you caught Mark Faber on Pimm Fox's Bloomberg TV show earlier this week. He said in the short run he's not betting against central banks -- but that in 10 years or so they'll be toast ("toast" is my word).

Keep in mind, nothing goes straight up. Gold will correct, and I suspect I'll encounter plenty of frustration waiting for my gold miners to overtake the metal itself. But as you've read me put it before, nothing has happened to make me even begin to regret my gold and gold mining holdings.

I think that will be the case for a very long time to come. So get used to it. ;-)