I’ve been a moderately satisfied brokerage customer at Zecco for almost 3 years. I was initially attracted to the broker for sole purpose: free trades.

At the end of last month, Zecco announced a significant change in their trading policy (emphasis mine):

“When Zecco Trading first launched in 2006, our focus was to deliver a good, solid service at a bare bones price. In the four and a half years since that launch however, our customers’ needs have evolved quite a bit. While investors today certainly value low commissions, they also demand a great trading service with a rich set of advanced features.

To better support this balance between offering remarkable value and continuing to deliver the innovative new technologies, tools and services that Zecco Trading customers require, we are modifying our commission structure. Starting on March 30, 2011, our new commission rates will be:

Equity trades: $4.95 per trade*

Options trades: $4.95 per trade, plus $0.65 per contract

With this change we are no longer offering 10 free trades per month. As before, there are no minimum balance requirements or inactivity fees to open or maintain a Zecco Trading account.”

While the new commission structure is reasonable, I’m disappointed in the news.

Broker History

I started out my investing career at Scottrade. For a discount broker, Scottrade had a nice interface, great customer support, and reasonable commissions.

However, with a small amount of starting capital, commissions – even $7 flat fee commissions – had a not-insignificant effect on the growth of my account balance.

While I consider myself a long-term investor, I am constantly adding capital to my brokerage account, meaning I’m often adding to positions every month.

In addition, after the first year, I started out getting into more special situations or workout investments. Scottrade, along with many other brokers, charges a “voluntary reorganization fee” for tenders or stock conversions.

The fee usually starts around $25, which can significantly cut into the profits for odd-lot tender offers.

So I shopped around for a new broker, and ended up with Zecco.

Zecco Experience

Support at Zecco could be much improved, especially with the email support option.

There is a reason why Zecco ranks very low in customer service surveys.

Phone support is much better, but I personally was transferred around to several departments before finding a knowledgable person around special transactions like a merger arb situation or going private transactions.

Let’s face it: Zecco had built up its business on the promise of free trades.

Over the years, the free trade aspect has been drastically modified:

• From 40 free trades per month to 10 free trades per month
• Then from a $2,500 min qualifying balance to a $25,000 min qualifying balance
• And now to no free trades at all

The company has added additional community features and mobile options to its product mix, but as a (somewhat) sophisticated investor, the only thing I care about is the commission rate and order execution.

Time for a New Broker!

The latest change at Zecco removes the last remaining reason for continuing with their service. While it is a pain to switch, I’ll be making the move before the end of the month.

What I’m looking for in a broker:

• Ability to trade penny stocks with little or no additional fee (a must)
• Option to trade internationally at a reasonable cost (Canada & UK to start)
• No ‘reorg charge’ or other fee for tender offers or other special situations
• Execution speed and ease of buying illiquid securities

I probably make 5-10 trades per month (often because I’m building up a position in an illiquid security). I’d like to minimize my transaction costs and open up my stock trading universe.

Please leave a comment below or drop me an email with your broker suggestions.

Note: This is my 100th post at ValueUncovered.com. Thank you to everyone who has visited and supported the site!

On Friday, Terra Nova (TNFG) announced a second dissolution payment as part of the company’s continued wind down. This second payment consists of $0.28 per share, payable on March 22 to shareholders of record on March 14.

TNFG was added to the Value Uncovered portfolio back in late October, when the original liquidation plan was announced. The initial plan estimated total distributions of $0.95 to $1.07 per share.

This second payment is on top of the initial payment of $0.72 per share in late November, bringing the total distribution to $1.00 per share.

At least one additional distribution between $0.04 – $0.07 per share will follow.

I’ve included a section of the press release below:

“Including the dissolution distribution announced today, the Company has declared cumulative dissolution distributions to shareholders of $25 million, or $1.00 per share, since the approval of its Plan of Dissolution. Based on TNFG’s current estimates of its post-closing expenses, assets and liabilities, TNFG estimates that after this distribution it will in time have approximately $1.0 million to $1.6 million in cash available for distribution to its shareholders (approximately $0.04 – $0.07 per share). One or more additional distributions are expected to be made in connection with the continued winding up of TNFG.”

Return Scenarios

The latest payment will recoup the initial costs for the transaction ($0.94) and guarantee a positive outcome. The timing and amount of the final distribution will affect the total gain on the transaction.

Here was my initial scenarios:

(My forecasting skills are not my strong suit!)

The timing of the distributions went mostly according to my initial plan, but the first distribution was much smaller than I anticipated, reduced the annualized return.

Here are the revised scenarios:

Definitely a positive result but not quite as attractive as I had initially hoped.

Conclusion

Estimating the breakdown and exact timing of distributions is a difficult task, so ensuring a strong margin of safety is very important.

With the market continuing to shoot-up over the past few months, these annualized figures do not appear quite as attractive.

However, in a downward market, these transactions shine by offering a level of protection from broad-based market losses. I’m constantly on the lookout for additional qualifying transactions – contact me if you run across something interesting.

While they might cause the portfolio to underperform slightly in the short-term, they will be a nice protection during the inevitable pullback.

Disclosure

Long TNFG

Selling positions is often harder than buying. It is all too easy to get married to certain positions and hold on for too long.

To improve my performance in this area, I’ve tried to avoid eking out the last few percentage points as an investment rises closer to my valuation range.

Undoubtedly, I had some flaws in my original analysis (investing is not an exact science), which means my range probably wasn’t perfect in the first place – sometimes it’s best to just move on to a new position.

This is Part 1 of the thought process behind two of my most recent sales.

Stryker Corp (SYK)

My blog currently focuses on microcaps so this giant ($25b market cap) medical company is a bit outside of the blog’s normal scope.

However, the recent financial crisis brought about an amazing opportunity to pick up wonderful businesses at historically low prices. SYK was one of those picks.

The company competes in the ultra-competitive medical device segment with companies like Zimmer and J&J. – think hip replacements, knee replacements, and other medical supplies.

The company is an amazingly stable performer, with sales rising from $5.4B in 2006 to $7.3B in 2010 without a single down year.

EBIT has improved on a similar uptrend, as operating margins increased up to the current 24%.

FCF has followed, growing from $892m in 2006 to $1.5B in 2010, for a current FCF yield of 6.01%

5 year ROE (18.59%), ROIC (17.65%), and CROIC (21.06%) are all outstanding, especially for a company sitting on $3.3B in net cash.

So Why the Sale?

When I purchased SYK in the summer of 2009, the stock was selling for under $40/shr, for an EV of approx $14B.

This translated into an EV/EBIT of 9x and EV/FCF of 10x – very low for a company that showed no signs of slowing down its growth in sales, profits, or cash flow.

The stock is up over 60% since that time and currently trades at an EV/EBIT of ~12.5x and EV/FCF of 14.4x (or 14.4x and 16.5x using 5-year average EBIT & FCF figures respectively).

My conservative DCF valuation provides a valuation range of $65-$70 per share.

While there is still a good chance that the stock is undervalued, the margin of safety has shrunk considerably.

Short-term, the new health care legislation will affect the profitability of medical devices makers, with a 2.3% excise tax due in the next 2-3 years.

Conclusions

Long-term, I think the stock will outperform (the baby boomers are a driving force: older baby boomers = higher demand for joint replacements!) but believe there are better, and significantly more undervalued areas, to place my money.

So I sold.

When I started out investing, I tried to keep a significant portion of my portfolio in these large stable names with a strong competitive moat (many would describe this as the new Buffett philosophy).

Today, I’m more comfortable hustling to find the microcap stocks that are significantly undervalued (the old Buffett philosophy).

Since I’m willing to put in the work, I sometimes make the decision to sell a great stock for the chance to earn even greater returns in another investment idea.

At least for now, I’m sticking with the old.

Part II – Stay tuned!

Disclosure

No positions

P.S. –  Rational Walk has a great summary of closing his position in Noble Energy (NE). I went through a very similar experience with NE – check out his summary for a great write-up.