December 22, 2010 § Leave a comment
Yeah! More CAPS picks! I love doing these. For me it’s the beginning of formulating potential investment theses while also setting up a track record for myself. Sometimes they actually result in my real portfolio buys. But most of these are just values that I see. It’s somewhere between a watchlist and a real portfolio.
Ok, first on the list is Brookfield Asset Management, or BAM. I’ve picked them purely because they have a fantastic management team that did a lot of buying of property during the financial crisis. You know, that time when the price of property basically plummeted. I’m convinced they at least got some good deals and will be rewarded for it. Plus their ticker is BAM! So fun. BAM! Picked em up at $31.37 (which sucks because I’ve been thinking about them and wondering if I should buy them when they were back at $20. Bah! I’m suck a purchasing-chicken! Actually, that is probably a good thing.)
Next is National Bank of Greece. Picked em up at $1.76. You can read all about my NBG misadventures (and reasons for buying) here.
Third is Microsoft (MSFT). People think Microsoft’s days are numbered and. I think a bit differently. I think Microsoft’s sexy days are behind it. It’s still got a pretty good moat. For example, I can’t buy Jae Jun’s (from Old School Value) awesome spreadsheets simply because I’m on a Mac and his excel files are for Windows. It remains to be seen if Google’s Chrome computers will eat into the marketshare, but for now I see Microsoft being destined to be the unsexy but stable computing company out there. The fact that they have a dividend that seems to be growing at a steady rate leads me to believe that they understand that they aren’t seen as the hot sexy tech darling anymore and want to move into the venerable blue chip company category. Fine by me. I love dividends!
Still rather expensive from a P/B standpoint and from a P/E standpoint, and I have yet to run any DCF or CROIC numbers on them. In other words, I haven’t done any legwork to see if I want them for my portfolio, but they are definitely CAPS worthy. Picked em up at $27.95
Third up is Noble Corp (NE). This one is pretty easy. They are a drilling company who (like anything with the word “oil” associated with it) got hammered during the BP spill. People are concerned that government regulation is going to hurt the oil industry. Which is, if you know anything about the oil industry and the political sphere, crazy talk. Plus NE got some new South American contracts too. Ariba ariba! Picked em up at $34.99.
Lastly I have a short to report. I’m not a huge fan of shorts in my real portfolio (actually, since I have a Canadian TFSA, I can’t short.) And I swear I decided to short them before Whitney Tilson published this. (Fun fact: I once applied to be a personal assistant to Whitney Tilson as I both love value investing and education reform, plus he could take me in as his apprentice and mold me into a little market guru, poised to take over the kingdom one day, like a Simba-Mufasa thing except without the wildebeest trampling, but I never heard back from his secretary.)
Anyway, Netflix is an amazing business, having manhandled Blockbuster in the whole movie rental deathmatch. But they are now moving into Hulu, Apple and free streaming (who doesn’t Megavideo? Honestly!) country. They could compete for sure, but at a 68 P/E they are being priced as if they can cure one legged puppies.
But they can’t. Netflix is no help to Lil Brudder. Sure they are here to stay, but their monopoly days are over. They now have to compete with the battleship, the car, the dog, the top-hat and (the crappy piece I always get) the iron. Good luck to em, but they’re not staying that expensive. I don’t know when everyone else will figure it out (another reason to not love shorts) but I’m confident in time the numbers will show that $180 is bonkers.
(Oh, and Mr. Tilson, if you’re still looking, I’m a fantastic PA and a good candidate for mentorship. And it won’t get all Obi Wan/Vader either.)
Full Disclosure: No position in BAM, MSFT or NFLX. Long on NE and NBG
December 22, 2010 § Leave a comment
When you are investing you can both be smart and stupid at the same time. It’s kinda like being an idiot-savant but with less games of chess. But you can’t be both wise and foolish. I learned/still learning this the hard way.
I’m a bit of a crisis guy. I like when things get all crazy, people get all squirrely and big irrationalities begin to form (people bailing on good positioned businesses, a crisis being touted as zombie apocalypse etc.) I like them because the irrationalities (and therefore opportunities) are easier to see then opportunities buried in the numbers. Mainly it’s a laziness/time issue. It’s a lot easier to see that BP is undervalued at $26 as its pumping dinosaur-juice into the gulf and people are setting up fake twitter accounts then it is to see that (for example) Microsoft is constantly increasing its dividend while trading at a fairly low valuation. The only thing you need to keep in check is your emotions. (Edit: I also like crises because I’m a young investor and that’s all I’ve ever known!)
And that is where the “stupid” of the “smart-stupid” comes from. Emotion. Getting jacked up about this potentially exciting and profitable devaluation and jumping in at way the wrong time. Thinking “hey, everyone is being irrational and way underselling this guy; I’d better get in while they’re getting out” while not waiting for people to stop being irrational and selling. I am learning this the…uh…very real way from my position in National Bank of Greece (NBG).
Warren Buffet famously said about market crashes, that when the tide goes out you get to see who was swimming naked. One of the big wet shiny bums from this crisis was the bad boys of the EU–the so called PIIGS (Portugal, Ireland, Italy, Greece and Spain.) These were the countries who either fudged their books, borrowed more than they could sustain, or, in Greece’s case, did all of that including an entire population paying their taxes with shrugs and grins. Michael Lewis did a fantastic piece about it for Vanity Fair.
Unlike the American credit crisis–which was mainly bank led–the European Sovereign Debt Crisis was more of a government led crisis. Now, obviously, when the money dried up and the skinny dipping Europeans were revealed in the bright sunlight of shame, stock prices reacted. Bank shares dropped like crazy. And when things dropped like crazy, I took notice. The National Bank of Greece was on my radar pretty quick. When it was down about 60% (from about $8 to $3) I decided to buy.
Let us travel back in time to speak with Then-Graeme about his investing thesis:
Now-Graeme: So, Graeme, what is your reasoning for buying NBG at this time?
Then-Graeme: Man, this bank is taking a pounding and it’s kinda not really their fault. They’ve even managed to pass a stress test and creepy-China has even said they will prop up Greece. When sanity returns, this bank should be the best bank in Greece.
It must be said that Then-Graeme was still pretty new at this whole thing and he didn’t know how to value a financial institution. Actually, Now-Graeme has that problem too. But still, I felt it was a good thesis then.
(And it still is now, as far as I am concerned. But currently that’s not really the point.)
This is where my good friend stupid comes in. I felt that I needed to be part of the action. Needed to get my position in the game. My thesis was sound for an investment, but I ignored the very important “when sanity returns” part of Then-Graeme’s reasoning. So I bought in the summer around $3 but the craziness has continued (with Ireland) and NBG is now sitting at a very frowny $1.74. Brutal. I mean, heck, if I held off and bought now I could have had double the shares. But instead I have a big red double digit percentage looking at me every time I log in to Yahoo! Finance.
So you can have a thesis you believe in (The Smart) but act before you’re ready/before you’ve thought it through/before the craziness is over (The Stupid) and that costs you in the end. It just remains to be seen if the Stupid or the Smart will win in the end. I’m fairly confident that $3 was a good buy price, but $1.74 makes me sad because it is a stellar buy price. Now the biggest decision on my plate is whether to put more money into the position or seek out better value plays (or hold on to the cash.)
What you can’t have both at once is Wise and Foolish (the bad kind. Not the awesome fool.com kind.) What I am in constant search for is to build up the wise and tear down the foolish. But you only learn this by doing it yourself (or, you know, read blogs.)
December 17, 2010 § 3 Comments
Sorry for all the recent CAPS picks, but I am trying to populate the page and I don’t want to leave any of em untalked about. So it means a bunch of mini posts.
But let’s get down to business. My pick today is Heska Corp. They make vet products, like heartworm tests and lab equipment so that Fluffy and Mittens can live happy, productive lives. I picked it for CAPS because:
1. It’s at half book value
2. Their CROIC is pretty sweet at almost 19%. (CROIC stands for Cash Return on Invested Capital. So in this instance that means that for every dollar they borrow, they make 19% on it. If you borrowed a buck and made a $1.19 I’d totally let you take me to lunch, you genius you.)
3. Although they’ve had bad margins, they have stabilized these past 2 years. Let’s hope that trend continues. Same with Free Cash Flow. Now seeing as they are at a 52 week low, now’s a good time to make the pick.
I’m not really a big penny-stock kinda guy (HSKA is trading at $0.42 for the pick) but I do like a good CROIC producer at half of book value. Definitely CAPS worthy.
Full disclosure: Long on HSKA. But, I mean, let’s not go crazy. It’s like a super small position. In my view this is a low risk pick because of the cheap price. They either go bankrupt (doubtful) or they go up. I told myself that I would act on my common sense more and stop overthinking everything. Let’s see if I’m right.
EDIT: So you can’t pick HSKA in CAPS right now. Dunno why, but let the record show! HSKA at $0.42
December 16, 2010 § Leave a comment
There are lots of old people. Everywhere. And if there’s one thing I know about old people it’s that they hate going outside and they wont if they don’t have to. That’s why I love these home healthcare companies like Amedisys and Almost Family ($AFAM.) Healthcare right in the comfort of your own home. It’s a good business model and I think it works well for their clientele.
Also, looks like these home healthcare companies got a little…um…creative with the way they were keeping their books and working with some fun loopholes in healthcare legislation. So much so that the regulation hammer began to fall (hmmm…are you sensing a pattern with my picks!?) and then their stock took a beating. Regulation wont kill the industry so I expect good times ahead for people taking care of old people. A good long term CAPS pick. They are also worthy to look into in greater detail to see if they are worth buying with non-monopoly money. My first concern: I want a moat and I don’t see one. Also: old people are stingy.
AMED makes the pick.
December 12, 2010 § Leave a comment
Just a quick update on a CAPS pick: Corinthian College ($COCO). Yes, it’s a dreaded for-profit school. Yes it may have done predatory scouting and funding for students, as they all did. But everyone knows that now and the government is going all regulatory on them, so they’ve gotten pretty cheap. I have yet to do the long leg work to see if they would be a long-term buy, but they are cheap enough to be CAPS worthy. Plus their ticker is COCO. You go Glen Coco.
Disclosure: I do hold a small survey position. Which I know is dumb because I haven’t done all the leg work I should do. But it’s my view that regulation will help an industry like this and that they are in a good position to make money off of providing a service that tons of recently unemployed (or English Lit/Theology grads like me!) need in order to like, find jobs. Look for my leg work at a later date.
Knowing you don’t know what you don’t know, or, how I stopped worrying and learned to love the Margin of Safety.
December 11, 2010 § Leave a comment
From my limited experience in the market, what I’ve found is that it is less about going with what you know, but learning to avoid the things you don’t know. This may sound like a weird and incredibly unhelpful statement, so let’s put it into an example regarding an industry I am interested in. And the magic of avoiding the thing you don’t understand is by being a good friend with Mr. Margin of Safety.
We are still in a pretty serious market restructuring craziness–century old banks go belly up, new tech stocks going to 60 P/E ratios in under a year and unemployment being a huge problem. People are freaked out, survivalblog.com is getting huge numbers and people are buying gold coins on the way home from picking up the blue-ray of The Road at Wal-Mart. So you value investors out there should be all skin-tingly and pumped about finding great opportunities in places that have been on the business-end of all the hysteria.
One section I am particularly looking at is dry bulk goods shipping. Woo. Super exciting eh? Putting stuff on a boat and floating it to other places. Turn down the awesome on that one.
But, obviously, this industry was rocked during 2008 and hasn’t shown near the type of recovery as other industries. Have people stopped needing things floated around? Not likely. But if Mr. Market is still stuck watching the dvd commentary about Viggo Mortensen’s angsty performance, the pitches coming down the pipe may seem less rosy. Which is good for me.
So what am I looking for?
1. Relatively stable performance in a pretty unpredictable industry. I’m not looking for a hero, just someone who can move stuff well in a time when people thing stuff shouldn’t be moved.
2. Low P/E, low P/Book (for the company AND for the industry) stable ROE (preferable > 15% over 10 yrs), and a Debt to equity under 1
3. Nothing crazy on the cash flow side. I don’t want to see money borrowed and burned at a fast clip
4. Margin of safety using a DCF and Graham Intrinsic Value calculation. It’s not a science, but gives me a relatively good handle if it is cheap or not.
5. Is it undervalued for dumb or for good reasons.
So I start looking at the big dogs.
DryShips (DRYS). Market Cap: 2.1 bil
Diana Shipping (DSX) Market Cap: 1.1 bil
Navios Maritime (NM) Market Cap: 560 mil
Excel Maritime (EXM) Market Cap: 473 mil
Well, Navios Maritime is off the list because it has too much debt, bad cash flow (with a dividend! I know! How can you pay a dividend consistently, but have high debt and negative cash flow. It’s like me trying to give my future child an allowance, but with an underwater mortgage and credit card debt. Fail) wonky margins, wonky ROE…man, NM you’re out to sea.
DryShips is the big dog of the bunch, but they have bad FCF, wonky ROE, no good EPS growth and has the highest P/E out of my bunch of 4.
Diana Shipping looks a little better, but they’re pretty new. Negative cash flow, but looks like they have been investing in PPE and paying of debt, but is positive cash flow really too much to ask for? They are trading pretty close to book, and their P/E is roughly 8 in the middle of a crisis. So they may be pretty fairly valued for shipping.
Excel Maritime is the one that kinda excites me. No, not because it’s the only one left on my list. I mean, I don’t have a little Greek man with a gun to my head, forcing me to buy at least one dry bulk shipper. (But if one industry was going to do that, I’d go with dry bulk goods shipping. I’ve watched season 2 of The Wire.)
EXM: stable margins, pretty good FCF (um except 2008. More on that later), P/E of 1.7 (yeah, not a typo), P/B of 0.3, stable ROE (except 2008…) debt/equity under 1. Oh yeah, and they have more boats than DryShips. Turns out they are 20% bigger than the big dog. Starting to look real cheap at 5 bucks.
Man, that P/E ratio and P/B alone is getting my attention. And a stupidly high EPS for the stock price. There must be something up.
Turns out there is. When you look at the numbers in 2008 they are all wonky. In 2008 Excel Maritime bought (or merged with… Guess it depends who you ask. Kinda like when you get dumped it was, well, you know, something we talked about and decided was best.) Quntana Marine. And turns out that it was a really complicated deal that did strange things to the book price and EPS numbers of EXM due to what is called “time charter fair value amortization.” You can read more about it here to get a nice overview on how much you don’t understand it. So yeah, when something this complicated happens (ie: funny smells from the spreadsheet) I get a bit more nervous about putting my money to it. How can I run a good DCF or Graham Intrinsic Value calculation when there is potentially smelly EPS or even book value numbers? How can I figure out if something is cheap if they may be playing fast and loose with some accounting. Especially the book value one. That worries me.
Well, enter my good friend Margin of Safety (the three most important words in investing.) Mr Margin of safety says to me that I can admit I don’t know what the heck is going on with some of these numbers but still be confident that it may be a cheap buy. How? Well, lets give EXM a brutal future scenario and see what sort of valuation we get from it.
EXM’s brutal scenario:
1. Let’s use the pre-2008 acquisition book value….cut in half: $10 per share
2. Their reported (and contested) EPS after the acquisition was 4.85. The EPS before the acquisition was 4.26 in 2007 and 1.56 in 2006. Let’s be jerks and say that they can only muster EPS of 1.30 (remember, we are building a crappy situation and seeing if EXM still looks cheap.)
3. Let’s say their revenue growth (sitting at a most likely unsustainable 44% 10 yr) drops to a crummy 5%.
4. In a DCF model lets have a high discount rate…like 15%.
That’s a lot of sucky factors not in their favor. I don’t even think that kind of scenario is likely. But, hey, who is Lehman Brothers er…John Galt.
In my this-sucks-we-didn’t-anticipate-this scenario we get a DCF fair value calculation of $21. In a Graham Intrinsic Value we get a value of $14. EXM is trading at $5.85.
Mr. Margin of safety is beginning to say to me that even if I don’t fully understand the merger/acquisition and the havoc it may have caused on the balance sheet, it is still cheap. Maybe even stupid cheap. And as far as dry bulk good shipping goes EXM seems to be doing a good/stable job (with DSX being an interesting one to watch as they grow.)
So I’m seriously thinking of them for my portfolio. If there is a big dip in the next little bit due to people freaking out some more, I may buy. I look for them to rise as people begin to remember that stuff gets shipped or the numbers are too large to justify the cheap price. They are definitely going on my CAPS.
But seriously–margins of safety are the biggest things to look for. Search for them, cling to them and your portfolio should be fine.
December 3, 2010 § Leave a comment
NB: For these CAPS picks, I will be using a lot of things that I’ve learned over the past couple of years of investing. Discount Cash Flow models, balance sheet analysis, Free Cash Flow analysis. In the CAPS picks I wont stop and explain every single tool. I will go into them in future blog entries (ie: “What is a DCF!?”) but for these, I am assuming previous knowledge.
For my CAPS page, click here
My investment strategy is a pretty simple one. When something takes a big dip, or falls out of favor for any reason (say, a Tylenol recall, for example; just pulling it off the top of my head) or the stock price seems to take a beat down for silly reasons, I take notice and start my due diligence. And if that thing has a nice dividend attached to it, all the better.
So enter my first pick for the CAPS page (and I actually have this in my portfolio too.)
My first pick for my CAPS page in Johnson and Johnson ($JNJ). JNJ is one of those fantastic cash generating companies. They are pretty close to being models of consistency: 12% earning growth (10 yrs), 11 % FCF growth (10 yrs), 10 years of raising book value (this for me is a big plus), ROE over 25% annual for 10 years, 15bn of cash sitting around. In other words: they are very good at running their business.
Yeah, but are they cheap?
In order to find this, I need to determine their fair value and then I need to see if the pitch coming from the mound is attractive (ie: lower than my perceived fair value.)
For a company that has such a good track record a DCF model can be helpful in seeing if it is cheap. In my DCF models, I normally like to use a higher discount rate (like around 15%) mainly to build in more margins of safety, but for more of what I perceive to be a steady company, I don’t feel nervous using a lower rate (like around 12%.) Especially if they have a dividend (and especially if that dividend is at a nice juicy 3%.) I also tend to lean more towards using the FCF growth over 10 years as the growth rate rather than the earnings growth rate. (I’d love to know if this is smart, or totally stupid.)
So if you plunk all these numbers into a DCF
Growth rate: 11%
Terminal Growth Rate: 4%
Discount Rate: 12%
Book value: $7.9
You get the intrinsic value of roughly $75 a share. JNJ currently trades at $62.56. Seems that a model company is selling at a 15% off price. Mix in a 3% and this seems like a pretty smart choice.
Pretty smart, but not “blow your socks off.” Smarter people than me will be able to allocate their capital in a much better value play than I can. And I want to be one of those people one day that can learn how to find those sorts of things. But for now I can’t resist owning something as fantastic as JNJ–and have them pay me annually–at what I perceive to be a 15% discount. CAPS worthy and portfolio worthy. (That being said, a 15% margin of safety isn’t very big. It’s actually less than I am normally comfortable with. But not for JNJ.)
Hit me up with your thoughts on my method. I’d love to hear it!