Clearing out More Positions

As we gird our loins for what appears to be an extremely unsteady market -- though whether it will go up or down, I have no idea -- I've taken the opportunity to simplify my investments a little bit.

What does that mean?

Well, in my case, it means selling some of the more vulnerable, long-shot, non-profitable or highly valued companies in my portfolio -- particularly the small positions that I never got the urge to fill out with more cash.

So I've sold a half dozen or so of my smaller holdings in the last few days, a few at more or less break even and most at significant gains (these are primarily stocks that I've held for more than a year, most cases significantly longer).

And as with some of my earlier sell decisions, many of these are more personal than stock-related. I do not have specific news or numbers that make me want to sell these, but they don't fit what I want with my portfolio right now.

So what have I sold?

Myriad Genetic (MYGN) -- I bought this one because of the high growth of the genetic testing business and the promise of their early-stage drugs, but the story has changed somewhat. This has more than doubled for me, almost entirely on the promise of their Alzheimer's drug, Flurizan, that I wasn't all that confident about. That makes me extremely nervous -- many nice news articles and analysts have touted Flurizan as the most promising Alzheimer's drug currently out there, which may be true, but that's kind of like being the best dressed guy at the tractor pull -- Alzheimer's drugs are extraordinarily costly to get through FDA approval, and so far almost none of them have worked at all. I'll take my profits here instead of bucking the odds -- I might be wrong, but this small position isn't worth chewing my fingernails over. If Flurizan takes a big hit and the shares fall hugely on the news, I might reconsider my initial investment thesis and get back in.

Blackboard (BBBB) -- It's lovely to have a monopoly, which is why these shares are up quite nicely for me ... but I wouldn't buy more here, and it's a small position. They have so far had some difficulty in turning their near-monopoly into real profits, though it hasn't been that long since they took out their competitor, and I'm a little bit worried about higher education budgets moving forward. Out they go.

Barrett Business Services (BBSI) -- This one has mostly treaded water for me. I bought it because they had an appealing regional-to-national story unfolding and because they had piles of cash on the books and had recently instituted a dividend. That story still holds, but the difficult undercurrent is that they are still primarily a California staffing business, and they are going to have some serious difficulty making up for all the construction business that's falling by the wayside out West. They may get through this fine, they may not, but I wasn't going to add more to this small position unless it got hit for no good reason ... and if it hits now, I'm afraid it will be for a good reason. I'll keep this one on the watchlist to maybe get back in if the economy really tumbles and puts them on sale.

Akamai (AKAM) -- Oh, how sad I was to see this one go. Again, mostly for personal reasons -- I'm not terribly comfortable holding any significant amount of margin in my accounts right now, and stocks that are richly valued are vulnerable. Akamai is the titan of their industry, but there are lots of little guys nipping at the heels and I'm not confident that their growth is guaranteeed ... or that they will be able to continue to charge relatively high prices. I could certainly be wrong, and I like the company very much, but I would prefer to book my 100%+ gains at this point (even though I missed the chance to sell it all at the top).

Universal Display (PANL) and Harris and Harris (TINY) -- these are both relatively small holdings that I've had in my portfolio for a long time. PANL gave me a nice profit, TINY I'm selling at about the same price I paid for it ages ago. Why? Neither one is going to show a profit for a very long time, so while they may be in an important business segment (Organic LED lighting and display, and nanotech venture capital, respectively) I have no particular confidence that they're going to weather a bad market or become profitable in the near future. Expensive and uncertain seem to me to be the wrong holdings to focus on right now, so I'll move along to shares that I'm more confident in.

So ... for the first time in a long time I'm using no margin and have some cash available. Hopefully, many of the companies I'm most interested in will go on sale soon, but at least I do feel more insulated from some of the shares in my portfolio that had been the most likely to falter on bad company or economic news. I remain significantly overweight foreign companies, now at more than 50%, and have also pared back my long options positions significantly.

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New Company on the radar: Barrett Business Services (BBSI)

I've recently had a new company come to my attention, and thought I'd share some of my thoughts on it. The company is Barrett Business Services (BBSI), a staffing and HR company that works in several Western states and in MD, NC and DE, with most of their business being in California.

The company first caught my eye because it's cash rich and debt free, has had very consistent sales growth and solid earnings growth, and it just started paying a dividend in the most recent quarter.

I think it's often a really good sign when a small cap company with growth potential starts paying a dividend, it indicates that management has a lot of faith in the company's prospects ... and if you own a company as they begin paying dividends, you have the chance to participate in a rosy future of dividend growth if business performance is solid (the declared dividend now is 28 cents/year, less than 1-1/2 percent on the recent share price of about $23, so not a big deal yet).

And as a further good sign, the CEO appears to have a lot of skin in the game (and a lot of experience in the business) -- William Sheretz and Nancy Sheretz, who I assume is his wife, together own more than 30% of the outstanding shares. High insider ownership and a dividend in a small cap stock that has excellent and consistent sales and earnings growth? That sounds to me like it's worth more than a market multiple -- but right now, if you believe the two analysts who cover the company, the shares are going for a forward PE of just about 14. And that's not taking into account the 20%+ of their market cap that they hold in cash right now.

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Though I'm still learning about their industry, I also like the business mix that BBSI has -- they provide three major services: HR management (or PEO, professional employer organization services), temporary staffing, and permant staffing. Of these, temp staffing and permanent staffing are pretty self explanatory -- they provide temps and handle recruitment and hiring of permanent employees for their clients, like any staffing company you've ever heard of. Those are pretty variable businesses -- sometimes temp workers are in much higher demand than others, and we all know that sometimes jobs are more plentiful than others. The HR management/PEO portion of the business, however, is very steady, growing and interesting.

HR management essentially means that you can outsource virtually your entire HR office to BBSI -- they can handle employee recruitment and retention and firing, safety training, employee benefits and all payroll paperwork, and even workers compensation issues (a big deal for some companies -- especially in California). This can be a desperately needed service for smallish companies, where owners or managers can spend a huge portion of their time just managing employee paperwork and related issues.

If you're interested in the business, there are plenty of good resources for learning more -- from a company perspective, there's a good article on finding a PEO at TheStreet.com, and a more cautious article about outsourcing HR from the Rockford Register. There's an association, too (of course), with good info on their website at www.napeo.org.

Now, BBSI isn't the only company that does this -- there are literally hundreds of them, mostly tiny and local (for a long list of just those that are active in California click here) -- but I like that they're a small but significant regional player, and a very profitable one, with a good history of consistently growing sales (weekly sales have gone from about $3 million in 2003 to about $22 million recently in a nearly straight line, and annual revenues have been growing at about a 40% clip for several years). And I like that they have a mind to consolidate the industry as a buyer, with one acquisition in 2006 and the potential to use their big cash hoard (more than $5 a share) to make strategic acquisitions in the coming years to help spur additional growth.

All this while the company has said they've still been able to pick and choose among prospective clients to keep their risk low (as essentially a co-employer with their PEO clients, BBSI is the one that takes out the workers comp insurance ... so, for example, they wouldn't typically want to contract for PEO services with a roofing company).

After my first run through on the company's materials and reports, this looks like a promising company with very steady and growing sales. PEO contracts generaly run on annual cycles, and BBSI has a very high (90%) renewal rate -- the hassle of changing companies in this business is pretty substantial, and the hassle of taking the work back yourself is worse still. This part of the business has been growing faster than the traditional staffing business for Barrett, and now makes up close to half of revenues.

As anyone with employees knows, finding good ones, hiring them, and managing the burden of regulatory oversight, benefits management, and payroll paperwork is a nightmare -- I think a company that can do this for you, and also has going for it a huge green field of potential growth in a very fragmented industry, is a pretty compelling investment idea.

I don't own BBSI yet, but I've almost talked myself into buying shares just by re-reading what I wrote above. I'll let you know what else I learn about the company, and whether I make a purchase -- my primary remaining concern is competition, since Barrett is sort of in the middle between the huge national players like Administaff and the tiny local companies that may serve just one town or region, or even a single company, so I need to understand better how they maintain their niche in the market.

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