Strategy My sLraLegy lsn'L very complex. l Lry Lo buy shares of unpopular companles when Lhey look llke road klll, and sell Lhem when Lhey've been pollshed up a blL. ManagemenL of my porLfollo as a whole ls [usL as lmporLanL Lo me as sLock plcklng, and lf l can do boLh well, l know l'll be successful.
Weapon of cholce: research My weapon of cholce as a sLock plcker ls research, lL's crlLlcal for me Lo undersLand a company's value before laylng down a dlme. l really had no cholce ln Lhls maLLer, for when l flrsL happened upon Lhe wrlLlngs of 8en[amln Craham, l felL as lf l was born Lo play Lhe role of value lnvesLor. All my sLock plcklng ls 100 based on Lhe concepL of a margln of safeLy, as lnLroduced Lo Lhe world ln Lhe book "SecurlLy Analysls," whlch Craham co-auLhored wlLh uavld uodd. 8y now l have my own verslon of Lhelr Lechnlques, buL Lhe neL ls LhaL l wanL Lo proLecL my downslde Lo prevenL permanenL loss of caplLal. Speclflc, known caLalysLs are noL necessary. Sheer, ouLrageous value ls enough.
l care llLLle abouL Lhe level of Lhe general markeL and puL few resLrlcLlons on poLenLlal lnvesLmenLs. 1hey can be large-cap sLocks, small cap, mld cap, mlcro cap, Lech or non-Lech. lL doesn'L maLLer. lf l can flnd value ln lL, lL becomes a candldaLe for Lhe porLfollo. lL sLrlkes me as rldlculous Lo puL llmlLs on my posslblllLles. l have found, however, LhaL ln general Lhe markeL dellghLs ln Lhrowlng bables ouL wlLh Lhe baLhwaLer. So l flnd ouL-of-favor lndusLrles a parLlcularly ferLlle ground for besL-of-breed shares aL sLeep dlscounLs. MSn MoneyCenLral's SLock Screener ls a greaL Lool for uncoverlng such bargalns.
Pow do l deLermlne Lhe dlscounL? l usually focus on free cash flow and enLerprlse value (markeL caplLallzaLlon less cash plus debL). l wlll screen Lhrough large numbers of companles by looklng aL Lhe enLerprlse value/L8l1uA raLlo, Lhough Lhe raLlo l am wllllng Lo accepL Lends Lo vary wlLh Lhe lndusLry and lLs poslLlon ln Lhe economlc cycle. lf a sLock passes Lhls loose screen, l'll Lhen look harder Lo deLermlne a more speclflc prlce and value for Lhe company. When l do Lhls l Lake lnLo accounL off-balance sheeL lLems and Lrue free cash flow. l Lend Lo lgnore prlce-earnlngs raLlos. 8eLurn on equlLy ls decepLlve and dangerous. l prefer mlnlmal debL, and am careful Lo ad[usL book value Lo a reallsLlc number.
l also lnvesL ln rare blrds -- asseL plays and, Lo a lesser exLenL, arblLrage opporLunlLles and companles selllng aL less Lhan Lwo-Lhlrds of neL value (neL worklng caplLal less llablllLles). l'll happlly mlx ln Lhe Lypes of companles favored by Warren 8uffeLL -- Lhose wlLh a susLalnable compeLlLlve advanLage, as demonsLraLed by longsLandlng and sLable hlgh reLurns on lnvesLed caplLal -- lf Lhey become avallable aL good prlces. 1hese can lnclude Lechnology companles, lf l can undersLand Lhem. 8uL agaln, all of Lhese sorLs of lnvesLmenLs are rare blrds. When found, Lhey are deservlng of longer holdlng perlods.
8eyond sLock plcklng Successful porLfollo managemenL Lranscends sLock plcklng and requlres Lhe answer Lo several essenLlal quesLlons: WhaL ls Lhe opLlmum number of sLocks Lo hold? When Lo buy? When Lo sell? Should one pay aLLenLlon Lo dlverslflcaLlon among lndusLrles and cycllcals vs. non-cycllcals? Pow much should one leL Lax lmpllcaLlons affecL lnvesLmenL declslon-maklng? ls low Lurnover a goal? ln large parL Lhls ls a sklll and personallLy lssue, so Lhere ls no need Lo make excuses lf one's cholce dlffers from Lhe general vlew of whaL ls proper.
l llke Lo hold 12 Lo 18 sLocks dlverslfled among varlous depressed lndusLrles, and Lend Lo be fully lnvesLed. 1hls number seems Lo provlde enough room for my besL ldeas whlle smooLhlng ouL volaLlllLy, noL LhaL l feel volaLlllLy ln any way ls relaLed Lo rlsk. 8uL you see, l have Lhls hearLburn problem and don'L need Lhe exLra sLress.
1ax lmpllcaLlons are noL a prlmary concern of mlne. l know my porLfollo Lurnover wlll generally exceed 30 annually, and way back aL 20 Lhe long-Lerm Lax beneflLs of low-Lurnover preLLy much dlsappear. WheLher l'm aL 30 or 100 or 200 maLLers llLLle. So l am noL afrald Lo sell when a sLock has a qulck 40 Lo 30 a pop.
As for when Lo buy, l mlx some barebones Lechnlcal analysls lnLo my sLraLegy -- a Lool held over from my days as a commodlLles Lrader. noLhlng fancy. 8uL l prefer Lo buy wlLhln 10 Lo 13 of a 32-week low LhaL has shown lLself Lo offer some prlce supporL. 1haL's Lhe conLrarlan parL of me. And lf a sLock -- oLher Lhan Lhe rare blrds dlscussed above -- breaks Lo a new low, ln mosL cases l cuL Lhe loss. 1haL's Lhe pracLlcal parL. l balance Lhe facL LhaL l am fundamenLally Lurnlng my back on poLenLlally greaLer value wlLh Lhe facL LhaL slnce lmplemenLlng Lhls rule l haven'L had a slngle mlsforLune blow up my enLlre porLfollo.
l do noL vlew fundamenLal analysls as lnfalllble. 8aLher, l see lL as a way of puLLlng Lhe odds on my slde. l am a flrm bellever LhaL lL ls a dog eaL dog world ouL Lhere. And whlle l do noL acknowledge markeL efflclency, l do noL belleve Lhe markeL ls perfecLly lnefflclenL elLher. lnslders leak lnformaLlon. AnalysLs dlsLrlbuLe lllegal LldblLs Lo a selecL few. And Lhe sLock prlce can someLlmes reflecL Lhe laLesL lnformaLlon before l, as a fundamenLal analysL, caLch on. l mlghL even make an error. Pey, l admlL lL. 8uL l don'L leL lL klll my reLurns. l'm [usL noL LhaL sLubborn. ln Lhe end, lnvesLlng ls nelLher sclence nor arL -- lL ls a sclenLlflc arL. Cver Llme, Lhe road of emplrlc dlscovery Loward lnLeresLlng sLock ldeas wlll lead Lo rewards and proflLs LhaL go beyond mere money. l hope some of you wlll flnd resonance wlLh my work -- and maybe make a few bucks from lL.
!
Iourna|: August 1, 2000 - 8uy 800 shares of Sen|or nous|ng ropert|es (SNn, news, msgs) at the market.
Why Senlor Pouslng roperLles looks so sexy Ck, Llme Lo geL Lhls Lhlng sLarLed. WhaL wlll a value uoc porLfollo look llke? 1he answer won'L come all aL once. uependlng on Lhe complexlLy of Lhe plck, l'll share one Lo Lhree of Lhem wlLh each [ournal enLry. l do expecL Lo be fully lnvesLed ln 13 or so sLocks wlLhln Lwo weeks.
My flrsL plck ls a blL complex. Sen|or nous|ng ropert|es (SnP, news, msgs), a real esLaLe lnvesLmenL LrusL, or 8Ll1, owns and leases four Lypes of faclllLles: senlor aparLmenLs, congregaLe communlLles, asslsLed llvlng cenLers and nurslng homes. Senlor aparLmenLs and congregaLe communlLles Lend Lo flnd prlvaLe revenue sLreams, whlle asslsLed-llvlng cenLers and nurslng homes Lend Loward governmenL payers, wlLh Lhe assoclaLed lnLense regulaLlon.
As lL happens, runnlng lnLensely regulaLed buslnesses ls Lough. WlLhln Lhe lasL year, Lwo ma[or lessees accounLlng for 48 of Senlor Pouslng's revenues flled for bankrupLcy. WlLh Lhls news comlng on Lhe heels of Senlor Pouslng's spln-off from Lroubled parenL nk1 ropert|es 1rust (P8, news, msgs), lL ls noL hard Lo undersLand why Lhe sLock bounces along lLs yearly lows.
8uL noL all ls bad. lrom here Lhe shares offers poLenLlal caplLal appreclaLlon palred Lo a faL dlvldend LhaL welghs ln aL $1.20 per share.
llrsL, Lhe bankrupLcles are noL as bad as Lhey seem. Senlor Pouslng has reLalned mosL of Lhe properLles for lLs own operaLlon, galned access Lo $24 mllllon ln resLrlcLed cash, and wlll galn Lhree nurslng home for lLs Lroubles. 1he key here ls LhaL Lhe reason for Lhe bankrupLcles was noL LhaL Lhe operaLlons lacked cash flow, buL raLher LhaL Lhe now-bankrupL lessees had acqulred crushlng debL as Lhey expanded Lhelr operaLlons.
ln facL, lf we assume LhaL renLs approxlmaLe morLgage paymenLs - whlch ls noL Lrue buL ls ulLra-conservaLlve, Lhen durlng Lhe flrsL quarLer of 2000, Lhe bankrupL operaLors generaLed $80 mllllon ln accesslble cash flow before lnLeresL expense, depreclaLlon and amorLlzaLlon. 1hls ls slgnlflcanLly more Lhan Lhe renLs pald Lo Senlor Pouslng. So whlle Lhe general percepLlon ls LhaL Senlor Pouslng [usL Look over money-loslng operaLlons, Lhls ls noL so. lL ls Lrue LhaL whlle Lhe bankrupLcy proceedlngs go Lhrough approvals, Senlor Pouslng wlll be lacklng lL usual level of cash flow. 8uL Lhls ls Lemporary. Cnce resolved, cash flows wlll bounce back, posslbly Lo new hlghs. 1he bankrupLcy agreemenLs provlded for operaLlng cash flows Lo replace renLs sLarLlng !uly 1, 2000.
Whlle we walL for Lhe beLLer operaLlng resulLs, Lhe dlvldend appears covered. MarrloLL ls a rock- solld lessee LhaL derlves lLs 94 of lLs revenue from prlvaLe-pay sources and LhaL accounLs for over $31 mllllon ln annual renL, whlch approxlmaLes Lhe annual dlvldend. 1he leases are good Lhrough 2013, and are of Lhe favored Lrlple neL Lype. lncome from Lhe 8rookdale leases -- 100 prlvaLe pay and slmllarly rock solld -- provlded anoLher $11.2 mllllon ln annual renLs. A few oLher properLles klck ln an addlLlonal several mllllon.
8eneflLs of Lhe 8rookdale sale 8ecenL evenLs provlde more poslLlve slgns. Senlor Pouslng agreed Lo sell lLs 8rookdale properLles for $123 mllllon. Whlle on Lhe surface Lhe company ls selllng lLs besL properLles and leLLlng lLs besL lessee off Lhe hook, lnvesLors should reallze Lhe beneflLs.
Cne, Lhe company has sald lL wlll use Lhe proceeds Lo pay off debL. 1hls wlll brlng Senlor Pouslng's LoLal debL Lo under $60 mllllon. 8ecause of Lhls, Senlor Pouslng's cash funds from operaLlons wlll dlp only $1.3 mllllon Lo $2 mllllon, by my esLlmaLlon, Lhanks Lo lnLeresL expense saved.
1wo, Senlor Pouslng sLock llves under a common confllcL of lnLeresL problem LhaL affllcLs 8Ll1 shares. lLs managemenL geLs pald accordlng Lo a percenLage of asseLs under managemenL. lL ls noL generally ln managemenL's personal lnLeresLs Lo sell asseLs and pay off debL. 8aLher, Lhey may be lncenLlvlzed Lo Lake on debL and acqulre asseLs. WlLh properLy asseLs more hlghly valued ln prlvaLe markeLs Lhan publlc ones, LhaL Senlor Pouslng ls selllng asseLs ls a very good Lhlng, and Lells us LhaL managemenL ls qulLe posslbly lncllned Lo acL accordlng Lo shareholder lnLeresLs.
1hree, Lhe 8rookdale properLles cosL Senlor Pouslng $101 mllllon, and are belng sold for $123 mllllon. ?eL Lhe assumpLlon ln Lhe publlc markeLplace ls LhaL Senlor Pouslng's properLles are worLh less Lhan whaL was pald for Lhem. AfLer all, Senlor Pouslng's cosLs for Lhe properLles, neL of debL, sLands aL [usL over $300 mllllon whlle Lhe sLock markeL caplLallzaLlon of Senlor Pouslng slLs aL $220 mllllon. 1he 8rookdale sale seems Lo fly ln Lhe face of Lhls loglc, as does a sale earller Lhls year of low-quallLy properLles aL cosL. 1he MarrloLL properLles approxlmaLe 8rookdale ln quallLy and cosL over $323 mllllon alone.
Comblnlng Lhe lasL Lwo polnLs, lf managemenL proves as shareholder-frlendly as Lhe mosL recenL LransacLlon, Lhen Lhe dlsparlLy ln value beLween Lhe sLock prlce and Lhe core asseL value may ln facL be reallzed, provldlng caplLal appreclaLlon of over 100 from recenL prlces. ln Lhe meanLlme, Lhere ls a solld dlvldend yleld of over 14, an expecLed reLurn of cash flows from Lhe nurslng home operaLlons, anoLher $24 mllllon ln cash becomlng unresLrlcLed, a masslve unburdenlng of debL, and a very llmlLed downslde. When wlll Lhe caLalysL come? l'm noL sure. 8uL Lhere are plenLy of posslblllLles for Lhe form lL wlll Lake, and wlLh LhaL dlvldend, plenLy of Llme Lo walL for lL.
WaLch relmbursemenLs A rlsk, as always, ls reduced relmbursemenLs. Whlle Lhe governmenL ls Lhe blg culprlL here, and MarrloLL does noL rely on Lhe governmenL, Lhe Lrend ln relmbursemenLs ls someLhlng Lo waLch. A more lmmedlaLe rlsk ls Lhe share overhang from former parenL P81 roperLles, whlch has slgnaled -- no less publlcly Lhan ln 8arron's -- LhaL lL wlll be looklng Lo dlspose of lLs 49.3 sLake ln Senlor Pouslng. AnoLher pseudo-rlsk facLor ls Lhe lack of slgnlflcanL lnslder ownershlp, Lhe lnslders are apparenLly preferrlng Lo hold P81 sLock.
All Lold, l sLlll see a margln of safeLy. Whlle Lhe share performance over Lhe nexL slx monLhs may be ln doubL -- and we [usL mlssed Lhe dlvldend daLe -- Lhe rlsk for permanenL loss of caplLal for longer-Lerm holders appears exLremely low. lL's an especlally good buy for Lax-shelLered accounLs. l'm buylng 800 shares.
Iourna|: August 2, 2000 - 8uy 1S0 shares of accar (CAk, news, msgs) at the market.
accar ls bullL for proflL Pere's where lL sLarLs Lo become obvlous LhaL, desplLe Lhe conLesL aLmosphere of SLraLegy Lab, l do noL regard my lnvesLmenLs here or elsewhere as a conLesL. Cver Lhe long run, l alm Lo beaL Lhe S& 300, buL l wlll noL Lake exLraordlnary rlsks Lo do lL. Cn a rlsk-ad[usLed basls, l'll obLaln Lhe besL reLurns posslble. Whom or whaL l can beaL over Lhe nexL slx monLhs ls less lmporLanL Lo me Lhan provldlng some lnslghL lnLo how l go abouL accompllshlng my prlmary long-Lerm goal.
WlLh LhaL sald, l presenL a company LhaL l've boughL lower, buL sLlll feel ls a value. accar (CA8, news, msgs) ls Lhe world's Lhlrd-largesL maker of heavy Lrucks such as eLerbllL and kenworLh. We're posslbly headed lnLo anoLher recesslon, and lf accar ls anyLhlng, lL ls cycllcal. So whaL on Lhls green earLh am l dolng buylng Lhe sLock now? Slmple. 1here ls a huge mlsundersLandlng of Lhe buslness and lLs valuaLlon. And where Lhere ls mlsundersLandlng, Lhere ls ofLen value.
llrsL, conslder LhaL Lhe sLock ls no slug. A member of Lhe S& 300 lndex ($lnx), Lhe sLock has dellvered a LoLal reLurn of abouL 140 over Lhe lasL 3 years. And over Lhe lasL 14 years, Lhe sLock has dellvered a 384 galn, ad[usLed for dlvldends and spllLs. So lL ls a growLh cycllcal. Cne does noL have Lo Lry Lo Llme Lhe sLock Lo reap beneflLs.
ln facL, desplLe Lhe hlgh flxed cosLs endemlc Lo lLs lndusLry, accar has been proflLable for slxLy years runnlng. WlLh 40 of lLs sales comlng from overseas, Lhere ls some geographlc dlverslflcaLlon. And Lhere ls a small, hlgh-margln flnance operaLlon LhaL accounLs for abouL 10 of operaLlng lncome and provldes for a huge amounL of Lhe mlsundersLandlng. 1he meaL of Lhe buslness ls Lruck producLlon.
1he compeLlLlve advanLage for accar ls LhaL Lhe Lruck producLlon ls noL verLlcally lnLegraLed. accar largely deslgns Lhe Lrucks, and Lhen assembles Lhem from vendor-supplled parLs. As WesLern ulglLal found ouL, Lhls model does noL work Loo well ln an lndusLry of rapld Lechnologlcal advancemenL. 8uL accar's lndusLry ls abouL as sLable as can be wlLh respecL Lo Lhe baslc Lechnology. So accar becomes a more nlmble player wlLh an envlable sLrlng of decades wlLh poslLlve cash flow. Nav|star (nAv, news, msgs), Lhe more verLlcally lnLegraLed #2 Lruck maker, sLruggles mlghLlly wlLh lLs cash flow.
LeL's look aL debL Cver Lhe lasL 14 years, encompasslng Lwo ma[or downLurns and one mlnor downLurn, accar has averaged a 16.6 reLurn on equlLy. Larnlngs per share have grown aL a 13.2 annuallzed cllp durlng LhaL Llme, desplLe a dlvldend payouL raLlo generally ranglng from 33 Lo 70. PlsLorlcally, lL appears debL ls generally kepL aL lLs currenL range of abouL 30 Lo 70 of equlLy.
8uL Lhe debL ls where a blg parL of Lhe mlsundersLandlng occurs. ln facL, companles wlLh large flnance companles lnslde Lhem Lend Lo be mlsundersLood Lhe same way. LeL's examlne Lhe lssue. ?ahoo!'s quoLe provlder Lells us Lhe debL/equlLy raLlo ls abouL 1.8. Medla Ceneral Lells us lL ls abouL 0.7. Wlll Lhe real debL/equlLy raLlo please sLand up? WlLh a cycllcal, lL maLLers.
So we open up Lhe laLesL earnlngs release and flnd LhaL accar neaLly separaLes Lhe balance sheeL lnLo Lruck operaLlons and flnance operaLlons. lL Lurns ouL LhaL Lhe Lruck operaLlons really have only $203 mllllon ln long-Lerm debL.
1he flnance operaLlon ls where Lhe bllllons ln debL lay. 8uL should such debL be lncluded when evaluaLlng Lhe margln of safeLy? AfLer all, llablllLles are a parL of a flnance company's ongolng operaLlons. 1he approprlaLe raLlo for a flnance operaLlon ls Lhe equlLy/asseL raLlo, noL Lhe debL/equlLy raLlo. WlLh $933 mllllon ln flnance operaLlons equlLy, Lhe flnance equlLy/asseL raLlo ls 19.3. Plgher ls safer. Savlngs and loans ofLen llve ln Lhe 3 range, and commerclal banks llve ln Lhe 7-8 range. As far as accar's flnance operaLlons go, Lhey are preLLy darn conservaLlvely leveraged. And Lhey sLlll aLLaln operaLlng marglns over 20. l do noL lnclude Lhe flnance operaLlon llablllLles ln my esLlmaLlon of accar's currenL enLerprlse value.
Why can l do Lhls? 1hlnk of lL anoLher way -- Lhe lnLeresL pald on lLs debL (whlch funds lLs loans) ls a cosL of sales for a flnance company. And yeL anoLher -- Lhe operaLlng marglns of over 20 -- lndlcaLe LhaL Lhe company ls belng pald aL leasL 20 more Lo lend money Lhan lL cosLs Lo borrow Lhe money.
1he leadlng daLa servlces Lherefore have lL rlghL, buL wrong. !usL a good example of how commonly avallable daLa can be very superflclal and mlsleadlng as Lo underlylng value.!8eware Lo Lhose who rely on screens for sLocks!
1here ls also $930 mllllon ln cash and equlvalenLs, neL of Lhe flnance operaLlons cash. 1he cash Lherefore offseLs Lhe $203 mllllon ln Lruck company debL, leavlng neL cash and equlvalenLs lefL over of $727 mllllon. SubLracL LhaL amounL from Lhe markeL cap of $3.12 bllllon Lo glve essenLlally a $2.4 bllllon enLerprlse value. So noL only ls Lhere a whole loL less debL ln Lhls company Lhan Lhe ma[or daLa servlces would have us belleve, buL Lhe Lrue prlce of Lhe company -- Lhe enLerprlse value -- ls less Lhan Lhe adverLlsed markeL caplLallzaLlon.
Lxamlnlng cash flow now come Lhe raLlos. CperaLlng cash flow lasL year was $840 mllllon. WhaL ls Lhe free cash flow? Well, you need Lo subLracL Lhe malnLenance caplLal expendlLures. 1he company does noL break Lhls down. Cne can assume, however, LhaL, of Lhe annual properLy and caplLal equlpmenL expendlLures, a porLlon ls golng Lo malnLenance and a porLlon ls golng Lo growLh. Lucklly, Lhere ls already a ballpark number for Lhe amounL golng Lo malnLenance -- lL's called depreclaLlon. lor accar depreclaLlon ran abouL $140 mllllon ln 1999. So ln 1999, Lhere was approxlmaLely $700 mllllon ln free cash flow.
Can lL be LhaL accar ls golng for less Lhan 4 Llmes free cash flow? Well, lL ls a cycllcal, and accar ls headed lnLo a down cycle. So reallze Lhls ls 4 Llmes peak free cash flow.
ln pasL downLurns, cash flow has fallen off Lo varylng degrees. ln 1996, a mlnor cycllcal Lurn, cash flow fell off only abouL 13. ln Lhe sLeep downLurn of 1990-92, cash flow fell a sharp 70 from peak Lo Lrough. Cf course, lL has rebounded, now up some 700 from LhaL Lrough. 1he sLock sLumbled abouL 30 durlng Lhe mlnor Lurn, and abouL 43 as lL anLlclpaLed Lhe 1990-91 dlfflculLles.
1he sLock ls some 33 off lLs hlghs and rumbllng along a nlne-monLh base. PlsLorlcally, LhaL seems llke a good spoL. 1he sLock Lends Lo boLLom early ln anLlclpaLlon and rally sLrongly durlng a Lrough. 1he sLock acLually boLLomed ln 1990 and rallled 133 from 1990 Lo 1992, peaklng aL 474 ln 1998. now down slgnlflcanLly from Lhere and wlLh slgns of a slowdown ln full bloom, Lhe sLock pays a 7 dlvldend on Lhe purchase prlce. ManagemenL pollcy ls Lo pay ouL half of earnlngs, and makes up any deflclencles durlng Lhe flrsL quarLer of Lhe year. 1he sLock ls slLLlng above Lhe prlce supporL lL has held for abouL 2 years.
WhaL makes Lhe sLock come back so sLrongly afLer downLurns? MarkeL share galns and solld sLraLegy. ln facL, durlng Lhe currenL downLurn, lL has already galned 200 basls polnLs of markeL share. And lLs new medlum duLy Lruck was ranked number one ln cusLomer saLlsfacLlon by !.u. ower -- Lhls ln a brand new, poLenLlally huge caLegory for accar.
And no, Lhere ls no caLalysL LhaL l foresee. lunny Lhlng abouL caLalysLs -- Lhe mosL meanlngful ones are hardly ever expecLed. l'm buylng 130 shares.
Iourna|: August 3, 2000 - 8uy 200 shares of Caterp|||ar (CA1, news, msgs) at the open.
- 8uy 400 shares of nea|theon]WebMD (nL1n, news, msgs) at the open.
1hls cool CaL ls one hoL sLock 1oday, leL's go wlLh Lwo ldeas, on Lhe surface Lerrlbly dlvergenL ln characLer. 1he flrsL ls Caterp|||ar (CA1, news, msgs), whlch ls bounclng along lows. Whenever Lhe sLock of a company Lhls slgnlflcanL sLarLs Lo reel, l Lake noLlce. Lveryone knows LhaL domesLlc consLrucLlon ls slowlng down. l don'L care.
Why? LeL me explaln. LeL's pose LhaL a hypoLheLlcal company wlll grow 13 for 10 years and 3 for Lhe remalnlng llfe of Lhe company. lf Lhe cosL of caplLal for Lhe company ln Lhe long Lerm ls hlgher Lhan 3, Lhen Lhe llfe of Lhe company ls flnlLe and a presenL "lnLrlnslc value" of Lhe company may be approxlmaLed. 8uL leL's say Lhe cosL of caplLal averages 9 a year. SLarLlng wlLh Lralllng one-year earnlngs of $273, Lhe sum presenL value of earnlngs over 10 years wlll be $3,731. lf Lhe cosL of caplLal durlng Lhe remalnder of Lhe company's llfe sLays aL 9, Lhen Lhe presenL value of Lhe resL of Lhe company's earnlngs from 10 years unLll lLs demlse ls $12,324.
WhaL should sLrlke Lhe lnLelllgenL lnvesLor ls LhaL 76.8 of Lhe Lrue lnLrlnslc value of Lhe company Loday ls ln Lhe company's earnlngs after 10 years from now. 1o look aL lL anoLher way, [usL 3.7 of Lhe company's lnLrlnslc value ls represenLed by lLs earnlngs over Lhe nexL Lhree years. 1hls of course lmplles LhaL Lhe company musL conLlnue Lo operaLe for a very long Llme, faclng many obsLacles as lLs lndusLry maLures.
CaLerplllar can do Lhls. LeL's Lake a cue from Lhe laLesL conference call. When people ln Lhe know Lhlnk of quallLy elecLrlc power for Lhe lnLerneL, Lhey Lhlnk of CaLerplllar. Puh? ?es, CaLerplllar makes elecLrlclLy generaLors LhaL generaLe so- called quallLy power. 1here are loLs of uses for power LhaL's unlnLerrupLlble, conLlnuous, and free of nolse, buL some of Lhe largesL and fasLesL- growlng are ln LelecommunlcaLlons and Lhe lnLerneL.
CaLerplllar ls Lhe no. 1 provlder of Lhls sorL of power, and Lhe markeL ls growlng exploslvely. ln facL, CaLerplllar's quallLy power generaLor sales had been growlng aL 20 compounded over Lhe lasL flve years, buL are up a whopplng 73 ln Lhe flrsL slx monLhs of 2000 alone. CaLerplllar expecLs revenue from Lhls aspecL of lLs buslness Lo Lrlple Lo $6 bllllon, or 20 of sales, wlLhln 4 1/2 years. "1hls ls our klnd of game," Lhe company says.
Ceneral senLlmenL around CaLerplllar ls heavlly lnfluenced by Lhe sLaLus of Lhe domesLlc consLrucLlon lndusLry. 8uL whlle domesLlc homebulldlng ls lndeed sLumbllng, we're Lalklng abouL less Lhan 10 of CaLerplllar's sales. CaLerplllar ls qulLe dlverse, and many producL llnes and geographlc areas are noL peaklng aL all. ln parLlcular, Lhe ouLlook for oll, gas, and mlnlng producLs ls brlghL. ln facL, CaLerplllar's buslness peaked ln laLe 1997/early 1998 and now appears Lo be on a road Lo recovery. 1he markeL has noL dlgesLed Lhls yeL.
1he balance sheeL ls also sLronger Lhan lL appears. CaLerplllar ls anoLher lndusLrlal cycllcal wlLh an lnLernal flnance company. l don'L counL Lhe flnanclal servlces debL, as l explalned ln my Aug. 1 [ournal enLry. Pence, long-Lerm debL dlves from $11 bllllon Lo $3 bllllon, and Lhe long-Lerm debL/equlLy dlves from 200 Lo [usL 33.
1he enLerprlse Lherefore goes for a rough 11 Llmes free cash flow. Cash reLurn on caplLal ad[usLed for Lhe lmpacL of Lhe flnanclal operaLlons reaches above 13 over lLs pasL cycles, wlLh reLurn on equlLy averaglng 27 over Lhe lasL 10 years. Also, managemenL ls by naLure conservaLlve. keep LhaL ln mlnd when evaluaLlng lLs commenLs on Lhe poLenLlal of Lhe power generaLlon buslness.
1he maln rlsk ls LhaL, ln Lhe shorL run, lnvesLors may Lake Lhls CaL ouL back and shooL lL lf lnLeresL raLes conLlnue up. l'm buylng 200 shares here along Lhe lows.
PealLheon/WebMu 8emember when l sald LhaL my conLrarlan slde leads me Lo Lhe Lechnology Lrough every once ln a whlle? nea|theon]WebMD (PL1P, news, msgs) has no earnlngs, yeL Lhere ls a margln of safeLy wlLhln my framework. 1he premler player wlLhln Lhe e-healLh care space, Lhe sLock has been bashed due Lo lmpaLlence. So here slLs a besL-of- breed company bounclng along yearly lows, some 83 off lLs hlghs.
PealLheon/WebMu has Lhe unenvlable Lask of geLLlng Lechno-phoblc physlclans Lo change Lhelr ways. Such Lhlngs do noL happen overnlghL. 1he facL remalns LhaL some $230 bllllon ln admlnlsLraLlve wasLe resldes wlLhln Lhe u.S. healLh care sysLem, and paLlenLs and Laxpayers suffer for lL. PealLheon/WebMu ls by far besL poslLloned Lo provlde a soluLlon.
8ecenL acqulslLlons elLher compleLed or pendlng lnclude CulnLlles' Lnvoy Lul unlL, CarelnslLe, CnPealLh, MedL Amerlca, MedCasL, klneLra, and Medlcal Manager.
Assumlng all Lhese go Lhrough, Lhere wlll be 170 mllllon more shares ouLsLandlng Lhan aL Lhe end of lasL quarLer, brlnglng Lhe LoLal Lo 343 mllllon. Medlcal Manager's cash wlll offseL Lhe $400 mllllon pald for Lnvoy, leavlng PealLheon/WebMu wlLh more Lhan $1.1 bllllon ln cash and no debL. CulLe a chunk, especlally conslderlng LhaL many of Lhe company's compeLlLors are faclng bankrupLcy.
Challenges -- less Lhan 40 of physlclans use Lhe lnLerneL aL all beyond e-mall -- seem ouLwelghed by brlghL slgns. WebMu racLlce has 100,000 physlclan subscrlbers, up 47 sequenLlally. lor reference, Lhere are only roughly 300,000 pracLlclng physlclans ln Lhe unlLed SLaLes. 1he company now offers onllne real-Llme lnformaLlon on 40 healLh plans coverlng abouL 20 of Lhe u.S. populaLlon. 1he sequenLlal growLh raLe ln WebMu racLlce use runs abouL 41. Consumer use ls rolllng ahead aL a 70 sequenLlal cllp. 1he company ls noL all lnLerneL, elLher. 1he breakdown: 44 back-end LransacLlons, growlng 41 sequenLlally, 30 adverLlslng, also seelng growLh, 10 subscrlpLlons, growlng aL 47 sequenLlally, and 16 producLs and servlces. All Lold revenue was up 68 sequenLlally. 1hls wlll deceleraLe, buL lL does noL Lake a maLhemaLlcal genlus Lo flgure ouL LhaL even slngle dlglLs can be slgnlflcanL when we're Lalklng abouL sequenLlal growLh.
1he acqulslLlons are puLLlng oLher sLraLeglc revenue sLreams lnLo play. CnPealLh ls Lhe leadlng e-healLh desLlnaLlon. CarelnslLe ls Lhe company's only slgnlflcanL pure e-compeLlLor and has Lhe ACL ln. Medlcal Manager wlll place PealLheon/WebMu by defaulL lnLo physlclans' offlces. A poLenLlal [uggernauL ln Lhe maklng, buL don'L expecL PealLheon/WebMu Lo LouL Lhls -- several acqulslLlons sLlll need Lo pasL anLl-LrusL musLer.
8ased on Lhe company's currenL burn raLe, lL has abouL 4 1/2 years Lo sLralghLen Lhlngs ouL. 1here ls no proven ablllLy Lo Lurn a proflL, and l am no fan of co-CLCs, elLher. Moreover, one musL always be wary of Lhe lnLegraLlon phase afLer a serles of acqulslLlons -- Lhe seller always knows Lhe buslness beLLer Lhan Lhe buyer. 8ecenL lnslder buylng by venLure caplLal gurus !ohn uoerr and !lm Clark ls also noL hearLenlng, as lL appears Lo be slmply for show.
SLlll, Lhe company appears Lo have Lhe human and flnanclal caplLal Lo bulld a successful organlzaLlon ln an lndusLry Lhere for Lhe Laklng. WlLh enough cash for 4 Lo 3 years, Lhe posL- acqulslLlons company wlll sLarL wlLh $900 mllllon ln annual revenues growlng aL a welghLed compound average raLe over 200. 1he buslness economlcs are noL Amazonlan, elLher, marglns wlll lmprove wlLh hlgher sales. 1he prlce for Lhls LlckeL? AbouL $4 bllllon all Lold, or abouL half whaL Lhe LlckeL cosL Lo puL LogeLher. l'm buylng 400 shares, wlLh a menLal sell sLop lf lL breaks Lo new lows.
Iourna|: August 4, 2000 - 8uy 800 shares of C|ayton nomes (CMn, news, msgs) at the open.
CMP: 8esL of an unpopular breed ClayLon Pomes, a ma[or player wlLhln Lhe manufacLured houslng lndusLry, ls an excellenL candldaLe for besL-of-breed lnvesLlng ln an ouL- of-favor lndusLry. 8uL before lnvesLlng ln ClayLon, one should make an efforL Lo undersLand Lhls falrly complex lndusLry. LeL's Lake a look how ClayLon makes money.
Speclflcally, money can be made -- or losL -- aL several levels of operaLlon. A company can make Lhe homes (producer), sell Lhe homes (reLall sLore), lend money Lo home buyers (flnance company), and/or renL ouL Lhe land on whlch Lhe houses ulLlmaLely slL (landlord). ClayLon ls verLlcally lnLegraLed and does all Lhese Lhlngs.
When ClayLon sells a home wholesale Lo a reLaller, Lhe sale ls booked as manufacLurlng revenue. ClayLon may or may noL also own Lhe reLaller. 1he reLaller Lhen sells Lhe home Lo a couple for a reLall prlce, Lhe sale ls booked as reLall revenue lf ClayLon owns Lhe reLaller. ln ClayLon's case, abouL half of lLs homes are sold Lhrough wholly owned reLallers.
1he couple may borrow a large porLlon of Lhe purchase prlce from ClayLon's flnance arm. lf so, LhaL reLall revenue ls booked as equlvalenL Lo Lhe down paymenL plus Lhe presenL value of all fuLure cash flows Lo ClayLon resulLlng from loan repaymenLs. 1he flrm can be elLher aggresslve (almlng for hlgh currenL revenues) or conservaLlve (mlnlmlzlng currenL revenues) ln booklng Lhls revenue, also known as Lhe galn-on- sale. Slnce lnherenLly Lhls galn-on-sale meLhod causes cash flow Lo lag far behlnd lncome, a conservaLlve approach would be prudenL.
now LhaL ClayLon has loaned Lhe money Lo Lhe couple, Lhe flrm can slL on lL and recelve Lhe sLeady sLream of lnLeresL paymenLs. AlLernaLlvely, ClayLon can bundle, or securlLlze, Lhe loans and re-sell Lhem Lhrough an lnvesLmenL banker as morLgage-backed securlLles. 8ecause Lhe dlverslfled securlLy ls less rlsky Lhan a slngle loan, ClayLon can reallze a proflL on Lhe sale of Lhe morLgage-backed securlLy, especlally lf Lhe flrm was conservaLlve ln esLlmaLlng Lhe loan's value ln Lhe flrsL place. Moreover, ClayLon's flnance arm can acL as Lhe servlclng agenL for Lhe securlLy and earn hlgh-margln servlce fees.
llnally, Lhrough ClayLon's ownershlp of land and some 76 communlLles, Lhe company can sell or renL land Lo Lhe couple for Lhe placemenL of Lhelr new manufacLured home.
uurlng ClayLon's flscal 2000 Lhlrd quarLer, 23 of neL lncome came from manufacLurlng, 20 came from reLall, and 8 came from renLal/communlLy lncome. 1he key Lo Lhe valuaLlon, however, ls LhaL ClayLon has a large flnance and lnsurance operaLlon - comlng ln aL 32 of operaLlng lncome ln Lhe mosL recenL quarLer. All Lold, 44 of operaLlng lncome ls recurrlng -- communlLy renLs, lnsurance, and loan paymenLs. ClayLon has over 140,000 people maklng monLhly loan paymenLs.
Clean record ln Lroubled lndusLry Cbvlously, Lhere ls Lhe poLenLlal for abuse. Many oLher companles ln Lhe manufacLured houslng lndusLry, such as Cakwood nomes (CP, news, msgs) and Champ|on Lnterpr|ses (CP8, news, msgs), have lndeed explolLed LhaL poLenLlal. Cne way was Lo orlglnaLe poor-quallLy loans ln Lhe flrsL place. 1hls "lend Lo anyone" approach goosed reLall sales ln Lhe shorL-run, buL led Lo uncollecLlble recelvables. Worse, ln recenL years, companles would borrow money Lhemselves Lo pay up Lo 20 Llmes earnlngs for reLall operaLlons, only Lo loan money much Loo freely Lo cusLomers. 1hey would Lhen aggresslvely book galns-on-sale only Lo have Lo Lake charges laLer as Lhese loans proved bad. 1hls slmply cannoL be done ln a cycllcal lndusLry. lndeed, lL was Lhe aggresslve over-expanslon by many players LhaL caused Lhe recenL lnvenLory gluL and cycllcal downLurn.
ClayLon never parLlclpaLed ln Lhese excesses. ln facL, desplLe Lhe sub-prlme caLegory lnLo whlch Lhe lndusLry's loans fall, loans orlglnaLed by ClayLon have a dellnquency raLe of only 1.63. And whlle oLher manufacLurers sLruggle, ClayLon sLlll runs every slngle one of lLs planLs proflLably. 1he lasL quarLerly reporL made 63 of 66 quarLers as a publlc company LhaL ClayLon has recorded record resulLs. now, amldsL bankrupLcles and general lndusLry malalse, ClayLon can Lake lLs efflclenL, lnLerneL-enabled operaLlons and sLrong balance sheeL and go shopplng.
Shopplng? ClayLon has experLlse ln "scrubblng" manufacLured home-loan porLfollos. 1he company has shown lLself Lo be noL only a Lerrlbly efflclenL manufacLurer (bulldlng planLs for 23 of Lhe prlce oLhers pay Lo buy, and achlevlng proflLablllLy wlLhln Lwo monLhs), buL also a keen underwrlLer and evaluaLor of rlsk. lor lnsLance, ln a recenL LransacLlon, ClayLon purchased $93 mllllon ln loans. lL wlll scrub Lhese loans, sLraLlfylng Lhem for rlsk, shaklng Lhem down for near-Lerm repossesslons, and re-lssulng Lhem aL a proflL wlLhln a year. ClayLon wlll lnsure Lhe loans, as well as servlce Lhe loans, for recurrlng lncome.
ConservaLlve company ClayLon sLrlves Lo be conservaLlve ln lLs revenue recognlLlon and acqulslLlon sLraLegy. lL lmposes Lhe baresL of offlce spaces on lLs execuLlves, and provldes all lLs employees dlrecL and lndlrecL moLlvaLlon Lo lmprove company-wlde efflclency and performance. lor lnsLance, lL maLches 401(k) conLrlbuLlons only wlLh company sLock, and planLs are rewarded on lndlvldual proflLablllLy measures raLher Lhan volume of producLlon.
Cver Lhe lasL Lwo years, Lhe company has used abouL 73 of lLs cash flow Lo buy back sLock. And now, as managemenL says we are aL Lhe very boLLom of an lndusLry downLurn, ClayLon sLands as one of Lhe besL-poslLloned players, wlLh a prlsLlne goodwlll-free balance sheeL and Lhe besL managemenL ln Lhe lndusLry. CLhers are sLlll sLuck ln Lhe mud of Lhelr own excesses. As lL happens, Lhe lndusLry ls self-cleanlng -- ClayLon slmply galns share durlng downLurns.
1he shares are aL rlsk for a near-Lerm caLharsls wlLh Lhe poLenLlal bankrupLcy of Cakwood Pomes. neverLheless, wlLh ClayLon's shares Lradlng aL less Lhan 8 Llmes earnlngs desplLe an unleveraged and conslsLenL reLurn on equlLy greaLer Lhan 13, l'm buylng 800 shares.
Iourna|: August 7, 2000 - 8uy 3S0 shares of Carn|va| (CCL, news, msgs) at the market.
?ou've goL more Llme Lhan you Lhlnk 8efore l geL Lo Loday's plck, leL me Lake a momenL Lo respond Lo Lhe recenL suggesLlon LhaL as a 29- year-old, l slmply possess long-Lerm lnvesLmenL horlzons. Pmmm. Llvlng ln Slllcon valley proper, l could wrlLe volumes ln response. Sufflce lL Lo say LhaL Lhe LwenLysomeLhlngs l meeL are noL ofLen lnLeresLed ln my 10-Lo-20-year analysls horlzons. AlLhough you may Lrade frequenLly, Lhe wlnd should be aL your back. lf all else falls, a long- Lerm hold should pull you Lhrough. And Lhe only conslsLenL, prevalllng wlnd ln Lhe lnvesLmenL world ls LhaL of Lhe presenL value of fuLure cash flows.
As a pracLlcal maLLer, professlonal lnvesLors are absoluLely handcuffed by shorL-Lerm quarLerly expecLaLlons. 1haL's why l don'L run a muLual fund -- l need conLrol over whaL sorL of lnvesLor becomes a cllenL. Cf course, flnanclal planners ofLen lmpose Lhe same quarLerly bugaboo on Lhelr prlvaLe money managers. l sLay away from Lhose as well. locuslng on quarLerly LargeLs ls noL a meLhod for removlng undue rlsk. Cn Lhe conLrary, lL Lhrows Lhe porLfollo manager ln wlLh Lhe caLLle call LhaL ls modern lnvesLmenL markeLlng -- even Lhough lncreaslng flrm asseLs ls of llLLle dlrecL beneflL Lo an lndlvldual cllenL -- and by defaulL places Lhe porLfollo manager's operaLlons ln Lhe "rlsk equals reward" paradlgm. 1he compeLlLlve advanLage Lherefore resLs wlLh Lhose lnvesLors who can go where lnefflclency relgns and rlsk ls uncoupled from reward -- beyond Lhe quarLerly and/or yearly performance mandaLe.
PealLh care wlll conLlnue Lo lmprove, and many people should llve a loL longer Lhan Lhey or Lhelr flnanclal planners Lhlnk. As a resulL, lL hardly seems lmprudenL for people older Lhan me Lo conslder Lhe longer, safer road Lo lnvesLmenL success. 1wenLysomeLhlngs and LhlrLysomeLhlngs have no unlque clalm on Lhls paLh, and ofLen lgnore lL anyway. lL ls a complex sub[ecL, buL wlLhouL lssulng Loo broad a generallzaLlon, Lhere ls ofLen Llme Lo accepL longer-Lerm rewards regardless of age.
Crulslng wlLh Carnlval now leL's geL back Lo plcklng a few good sLocks. Clven Lhe space lefL, l'll go wlLh one -- Carn|va| (CCL, news, msgs). As Lhe no. 1 crulse operaLor ln Lhe world, Carnlval Corp. has flve crulse llnes - Carnlval, Polland Amerlca, Cunard, Seabourn and WlndsLar -- spannlng 36 wholly-owned shlps wlLh capaclLy for more Lhan 43,000 passengers. Carnlval also markeLs slghLseelng Lours and Lhrough subsldlary Polland Amerlca, lL operaLes 14 hoLels, 280 moLor coaches, 13 prlvaLe domed rall cars, and Lwo luxury "dayboaLs."
Carnlval also owns 26 of AlrLours, whlch operaLes more Lhan 1,000 reLall Lravel shops, 46 resorLs, 42 alrcrafL and four crulse shlps. Carnlval and AlrLours co-own a ma[orlLy lnLeresL ln lLallan crulse operaLor CosLa Croclere, operaLor of slx MedlLerranean luxury crulse shlps wlLh capaclLy for 7,103 passengers.
uurlng Lhe 1990s, Lhe world was Carnlval's oysLer. 8eLurn on asseLs marched sLeadlly upward from 8.4 Lo 13.3, and reLurn on equlLy was slmllarly sLable, ranglng beLween 20.1 and 22.3 over Lhe 10-year perlod. And Lhls ls noL leveraged -- debL as a percenLage of caplLal fell from 31 Lo under 13 over Lhe same perlod. 1hls, of course, lmplles LhaL reLurn on lnvesLed caplLal sLeadlly rose, and lndeed lL dld, from 9.8 Lo a blL over 13.
8ecenLly, however, fuel cosLs skyrockeLed and lnLeresL raLes rose [usL as Lhe supply of shlps caughL up wlLh sofLenlng demand, resulLlng ln prlclng pressure. 8eLurn on equlLy sllpped under 19, and Lhe sLock fell 60 off lLs hlghs and now Louches Lhe boLLom lL hlL durlng Lhe CcLober, 1998 currency crlsls. AfLer Lhe lnlLlal hlL, lL was hlL some more wlLh news of a sofL second half of 2000 amld several crulse cancellaLlons.
Carnlval sLlll besL of breed 1he baslc demographlcs sLlll favor Lhe lndusLry -- affluenL baby boomers wlll llve longer and become a more-slgnlflcanL parL of Lhe passenger mlx. And Carnlval remalns Lhe besL of lLs breed, wlLh Lhe hlghesL marglns and besL managemenL. Moreover, lL has hlsLorlcally been dlfflculL Lo predlcL Lhe demand flucLuaLlons ln Lhe crulse lndusLry. SofL and sLrong perlods alLernaLe wlLhouL a loL of reason aL Llmes. 1here are reasons now for sofLer demand and Lhe prlclng dlfflculLles, buL lL ls [usL as posslble LhaL wlLh Lhe u.S. economy sLlll fundamenLally sLrong, demand wlll flucLuaLe back Lo Lhe sLrong slde sooner Lhan mosL Lhlnk.
ln Lhe meanLlme, here's a sLock Lradlng aL [usL 11 Llmes earnlngs desplLe a long record of 20 growLh. WlLh Lhe company maLurlng and growLh slowlng a blL, momenLum players have abandoned Lhe sLock compleLely, and few are wllllng Lo be paLlenL for Lhe hlccups Lo sLop. 1he recovery could Lake Lhe sLock up Lhree-fold ln Lhe nexL Lhree Lo flve years. 1he company ls currenLly a llLLle over 60 Lhrough a $1 bllllon sLock buyback lL announced lasL lebruary. ln Lhe process, abouL 10 of Lhe sLock has been reLlred. 1he company has also been worklng Lo broaden lLs producL reach lnLo Lhe baby boomer segmenL. A recenL alllance wlLh lalrfleld, a large Llmeshare operaLor, ls Lhe mosL Langlble evldence of Lhls Lo daLe, buL oLher dlsLrlbuLlon channel lnlLlaLlves are forLhcomlng.
1he downslde rlsk ls low, as slmply replaclng Lhe shlps and oLher crlLlcal operaLlng asseLs of Carnlval would cosL more Lhan Lhe currenL markeL caplLallzaLlon, whlch prlces Lhe brand equlLy as a negaLlve number. And for Lhose lnvesLors wanLlng Lo sLlck lL Lo Lhe l8S, here's a chance Lo do lL. Whlle headquarLered ln Mlaml, Carnlval ls a anama-charLered corporaLlon and does noL pay u.S. lncome Laxes -- Lhe overall Lax raLe ls less Lhan 1. lronlcally, Lhe blggesL real LhreaL ls Lhls Lhumb ln Lhe eye of Lhe l8S. Wlll Lhe l8S flnd a way Lo Lax Carnlval? lL ls an open quesLlon, buL one LhaL Carnlval feels ls answered ln lLs favor.
ercepLlons of Lhe company and Lhe lndusLry are profoundly negaLlve on Wall SLreeL. AL an enLerprlse value less Lhan 11 Llmes L8l1uA and wlLh Lhe shares Lradlng aL replacemenL value, l'm buylng 330 shares.
Iourna|: August 8, 2000 - 8uy 1,000 shares of nutt|g 8u||d|ng roducts (n8, news, msgs) at the market.
Cff Lo a slow sLarL 8elaLlve Lo Lhe lndlces, lL appears LhaL l've goLLen off Lo qulLe a slow sLarL ln Lhls SLraLegy Lab sesslon. A mlnor reason mlghL be LhaL l, as wlLh all SLraLegy Lab parLlclpanLs, was able Lo execuLe my flrsL Lrade on Aug. 1, buL Lhe lndlces' Lally sLarLed on !uly 28Lh. 1he markeL dld rally a blL durlng LhaL Llme. lL's Lough Lo beaL Lhe S&, buL especlally so when Lhere's a handlcap.
Lven accounLlng for Lhe handlcap, however, l am sLlll lagglng Lhe S&. 1hls ls largely because, whlle my general Lheory lnvolves belng fully lnvesLed, l've been addlng only a sLock or Lwo per day as Lhe markeLs rally. Why dld l noL [usL Lhrow a baLch of sLocks ouL Lhere all aL once? 8ecause my vlew of Lhe purpose of SLraLegy Lab ls Lo glve you lnslghL lnLo how l operaLe. As lL ls, l'm edlLlng my 2,300+ word analyses down Lo 1,000 words Lo flL ln Lhls medlum. 1o shorLen Lhem much more would glve shorL shrlfL Lo Lhe LhrusL of SLraLegy Lab.
AnoLher facLor Lo conslder ls LhaL l wrlLe here abouL sLocks LhaL l personally would buy now. l have plenLy of sLocks ln my porLfollos LhaL are exLended 40 or more. 1hose are sLocks l would noL necessarlly buy for Lhe flrsL Llme now. So Lhey do noL geL lnLo my SLraLegy Lab [ournal. WlLhln a slx-monLh Llme frame, sLarL-up cosLs and unLlmely declslons seem magnlfled ln lmporLance. neverLheless, l hope you're geLLlng whaL you came for.
8ulldlng a porLfollo wlLh PuLLlg 1oday, l'm buylng an ugly sLock ln an unglamorous buslness. Surprlse, rlghL? nutt|g 8u||d|ng roducts (P8, news, msgs), spun off from Crane (C8, news, msgs) lasL year, ls a leadlng dlsLrlbuLor of bulldlng producLs such as doors, wlndows and Lrlm. 8evenues Lopplng $1.2 bllllon are accompanled by razor-Lhln marglns LhaL conLrlbuLe Lo mlsundersLandlng and Lo Lhe sub- $100 mllllon markeL caplLallzaLlon. AcLually, lncludlng debL, Lhe enLerprlse value aLLached Lo PuLLlg ls abouL $218 mllllon.
l flrsL obLalned Lhls sLock durlng Lhe splnoff, as l was a Crane shareholder. l soon rld myself of lL. lrom Lhe 10k and Lhe proxy, l could noL flnd much Lo love. 1hen l read Lhe annual reporL, made avallable wlLhln Lhe lasL few monLhs. A call Lo Lhe company conflrmed and enhanced Lhe dlscovery, and now l'm a fan. LeL's look aL why.
SynerglsLlc savlngs AL Lhe Llme of Lhe splnoff, PuLLlg acqulred 8ugby uSA and lncreased revenues over 60 ln one swoop. 8ugby uSA had been owned by Lhe 8ugby Croup, a 8rlLlsh maker of cemenL and llme. 1he u.S. buslness has been an lnefflclenL operaLor ln much Lhe same lndusLry as PuLLlg, Lhe lndusLry's mosL efflclenL operaLor. So efflclenL LhaL ln a Lhln margln, cycllcal lndusLry llke dlsLrlbuLlng bulldlng producLs, PuLLlg has been proflLable slnce Lhe Clvll War.
PuLLlg conflrms LhaL Lhey are ahead of plan Lo save $13 mllllon Lhrough synergles wlLh 8ugby. 1aklng lnLo accounL Lhese synerglsLlc savlngs, 8ugby's $13 mllllon ln L8l1uA (earnlngs before lnLeresL, Laxes, depreclaLlon, and amorLlzaLlon), and addlLlonal volume dlscounLs, PuLLlg should reallze aL leasL $30 mllllon ln addlLlonal L8l1uA as a resulL of Lhe acqulslLlon. Moreover, PuLLlg expecLs Lo whlp 8ugby's subsLanLlal buL lnefflclenL operaLlons lnLo PuLLlg-llke shape. 8y dolng so, PuLLlg should squeeze anoLher one- Llme galn of $20 mllllon ouL of worklng caplLal. 1hls $20 mllllon can be subLracLed from Lhe purchase prlce. Ad[usLed, PuLLlg acqulred 8ugby and $30 mllllon ln addlLlonal L8l1uA for only $40 mllllon. SmarL managemenL.
Colng forward, PuLLlg wlll have Lremendous free cash flow. lree cash flow averaged $21 mllllon per year for Lhe Lhree years before Lhe acqulslLlon of 8ugby. now, L8l1uA [umps Lo aL leasL $60 mllllon, and free cash flow [umps Lo aL leasL $33 mllllon. lus, ln Lhe shorL Lerm, Lhe $20 mllllon or so LhaL comes ouL of 8ugby's worklng caplLal. As a resulL of Lhls, durlng calendar 2000 PuLLlg ls well on Lrack Lo brlng lLs $122 mllllon ln debL down Lo $82 mllllon. 8easons? 8educed lnLeresL expense and expanded ablllLy Lo pursue acqulslLlons ln Lhls fragmenLed lndusLry -- an lndusLry where PuLLlg as Lhe leader only has an 8 share. So whaL we are looklng aL ls an enLerprlse Lradlng aL [usL 3.1 Llmes L8l1uA, and only abouL 3.1 Llmes free cash flow. keep LhaL ln mlnd when you Lhlnk of Lhe 130 years of proflLablllLy PuLLlg has achleved.
uesplLe Lhe sLaLed lnLenL Lo acqulre more flrms, we do noL have Lo worry abouL a wllly-nllly acqulslLlon pollcy. As Lhe 8ugby acqulslLlon suggesLs, PuLLlg's execuLlves are shrewd and allgned wlLh shareholder lnLeresLs. ln facL, whlle l have a few problems wlLh LvA -- Lconomlc value- Added -- Lheory, lL ls a useful and shareholder- frlendly Lool for evaluaLlng execuLlve declslons. PuLLlg ls a ploneer ln lLs lndusLry as far as uslng Lhls Lheory Lo evaluaLe and reward execuLlves for Lhelr cholces. PuLLlg ls also a fan of CL's "Slx Slgma" quallLy-lmprovemenL program. 1hese execuLlves appear Lo be commlLLed Lo dolng rlghL by shareholders. 1haL's a rare and valuable flnd Loday.
Cdds and ends 1here are some oLher odds and ends LhaL make PuLLlg lnLeresLlng. SeLh klarman, known for hls lnLellecLual and sLrlcL value dlsclpllne, has accumulaLed a large chunk of Lhe floaL. Conslder LhaL porLlon of Lhe floaL locked up. Also, recenLly, a large dlsLrlbuLor of wholesale doors lefL Lhe buslness. PuLLlg ls expandlng Lo meeL Lhe demand. 8ecause of Lhls, sales may rlse over Lhe nexL year or Lwo even lf, as seems probable, Lhe homebulldlng markeL Lurns souLh.
1he blg prlce rlsk near-Lerm ls LhaL Lhe 8ugby Croup -- Lhe company LhaL sold 8ugby uSA Lo PuLLlg -- now holds some 32 of PuLLlg's shares. 1hls flrm may be a prlce-lnsenslLlve seller ln Lhe open markeL, and has Lhe ablllLy Lo sell 20 of lLs poslLlon wlLhouL resLrlcLlon. 1hls ls a prlce rlsk and noL a buslness rlsk. As such, l am noL Lerrlbly worrled abouL lL. nelLher are Lhe lnslders.
PuLLlg should be aLLracLlve Lo acqulrers. A flrm or group of lnvesLors wlLh Lhe means and Lhe lnLeresL would flnd PuLLlg a no-bralner, especlally once Lhe savlngs and cash flow become apparenL over Lhe nexL few quarLerly reporLs. WlLh a shareholder advocaLe as chalrman, lL ls unllkely LhaL a Lakeover would be unfrlendly Lo shareholders. 8ecenL LransacLlons ln Lhe lndusLry suggesL a prlvaLe markeL value aL leasL $10/share. WlLh Lhe shares Lradlng aL less Lhan $3, l'm happy Lo buy 1,000 shares.
Iourna|: August 9, 2000 - 8uy 200 shares of Axent 1echno|og|es (AkN1, news, msgs) at the market.
My 'buy' rules WlLh Lhe markeL rallylng slnce [usL prlor Lo Lhe sLarL of Lhe SLraLegy Lab, l musL admlL LhaL many of Lhe sLocks l wanLed Lo wrlLe abouL have already appreclaLed some. 1hls ls problemaLlc because even lf l llke a sLock fundamenLally, l am rarely wllllng Lo buy more Lhan 13 above Lechnlcal supporL.
l also generally use broken supporL as an exlL polnL. "Sell on new lows" mlghL be anoLher way Lo puL lL. lf l buy a sLock 30 above supporL, Lhen l musL waLch a garganLuan loss develop before l eaL lL. AL 13, l'm looklng aL only a 13 loss before supporL ls broken. Comblnlng Lhese guldellnes allows me Lo puL Lhe odds a blL more on my slde. l look aL lL as an exLra klck Lo help ouL my fundamenLal analysls. 1hls ls noL how mosL value lnvesLors operaLe, buL lL ls someLhlng LhaL has conLrlbuLed Lo my success. Cf course, my rules are noL absoluLe, and l do make excepLlons.
A worLhy excepLlon 1oday l'm buylng an excepLlon. Axent 1echno|og|es (Axn1, news, msgs), a provlder of e-securlLy soluLlons Lo buslnesses, wlll be acqulred by Symantec (S?MC, news, msgs) for one-half share of SymanLec sLock per share of AxenL. 1here ls no collar, and AxenL now Lrades way up off lLs lows, wlLh no lmmedlaLe supporL. 8uL SymanLec ls bounclng along aL abouL 8 monLhs of supporL ln Lhe hlgh $40s, and l'm llsLenlng Lo Lhe arblLrageurs. now, ln general, arblLrageurs are very shrewd. As ln opLlons and fuLures, arblLrage ls a game played successfully only by Lhe very smarL or very advanLaged. lnformaLlon ls dlgesLed wlLh exLreme speed and lmmedlaLely reflecLed ln Lhe arblLrage "spread," Lhe dlfference beLween Lhe prlce AxenL now Lrades and Lhe prlce where lL wlll be Laken ouL.
AL Lhe Llme of Lhls wrlLlng, Lhe spread ls only 2.3. Cf laLe, spreads ln Lhe Lechnology secLor have been much, much larger. So Lhls Llny spread Lells me a few Lhlngs. When evaluaLlng Lhe spread ln a sLock LransacLlon wlLhouL a collar, we are really looklng aL, flrsL, Lhe chances Lhe deal wlll go Lhrough, and second, Lhe value of Lhe acqulrlng company's sLock afLer Lhe deal execuLes.
WlLh abouL flve monLhs unLll Lhe close of Lhe deal, a 2.3 spread glves an annuallzed reLurn on par wlLh 1reasury bllls. ln oLher words, Lhe markeL has declded Lhls deal wlll go Lhrough. ueal closure ls rarely a 100 safe assumpLlon, buL lL can approach 100 lf Lhe deal seems Lo make sense sLraLeglcally and ls sLrucLured ln a way LhaL flnanclng and anLl-LrusL clearance are non-lssues. 1haL seems Lo be Lhe case wlLh SymanLec's acqulslLlon of AxenL.
1he Llny spread also lndlcaLes LhaL Lhe new posL- acqulslLlon SymanLec wlll be worLh aL leasL Lhe currenL share prlce of SymanLec. l agree, buL feel Lhls ls conservaLlve. SymanLec should be worLh more. Assumlng Loday's prlces, Lhe markeL caplLallzaLlon of Lhe new SymanLec wlll approach $4.03 bllllon. 1hls, for $1 bllllon ln revenues growlng 27 for aL leasL several years. AccreLlon Lo cash flow should begln by Lhe end of flscal 2001. lnLulLlvely, Lhere's value here, buL leL's explore lL some more.
1he real deal 1he deal glves SymanLec's Chlef LxecuLlve Cfflcer !ohn 1hompson a poLenL arsenal ln hls quesL Lo make SymanLec a one-sLop e-securlLy shop. A former l8M execuLlve, he has lnfused an awareness of Lhe company mlsslon LhroughouL hls workforce and made cosL conLrols a prlorlLy. 1he new company wlll beneflL from 1hompson's managemenL as lL offers producLs coverlng Lhe gamuL of Lhe currenL e-securlLy fleld. AxenL provldes a head sLarL as lL brlngs on a hosL of gold-plaLed cusLomer wlns, lncludlng 43 of Lhe lorLune 30 and a recenL long-Lerm conLracL -- Lhe lndusLry's largesL ever ln Lerms of revenue -- Lo provlde managed-securlLy soluLlons Lo xerox Lurope.
ln response Lo Lhe deal, a Network Assoc|ates (nL1A, news, msgs) represenLaLlve crlLlclzed SymanLec's sLraLegy of "belng everyLhlng Lo everyone." ?eL a vlsa e-securlLy experL Lells me LhaL a one-sLop shop ls whaL everyone has been walLlng for. l musL admlL LhaL Lhe same experL ls Laklng a walL-and-see approach Lo SymanLec, as he ls noL used Lo Lhlnklng of SymanLec as an enLerprlse-level company. Pe also crlLlclzes AxenL's producLs as a blL rough and lacklng ln supporL, and noLes LhaL SymanLec sLlll wlll noL offer a producL lmplemenLlng ubllc key lnfrasLrucLure (kl) Lechnology. L-securlLy experLs have LouLed Lhe beneflLs of kl, buL developlng a kl producL ls a dlfflculL Lask lnvolvlng cross- plaLform lncompaLlblllLles. lL ls uncerLaln wheLher SymanLec needs one aL Lhls polnL. WlLh a solld balance sheeL, lL ls llkely lL can acqulre lLs way lnLo Lhe markeL lf Lhe need arlses. l am also counLlng on SymanLec brlnglng some order Lo AxenL's supporL operaLlons.
SymanLec's free cash flow runs hlgher Lhan lLs neL lncome, as does AxenL's. 8oLh are accumulaLlng cash on Lhe balance sheeL, comblned, Lhe companles have nearly $630 mllllon ln cash and no debL. AccounLlng for lower overall gross marglns Lhanks Lo lncreased servlce revenue and Laklng managemenL's guldance for operaLlng expenses, we can expecL abouL $200 mllllon ln free cash flow for Lhe year endlng March 31, 2001. Pence, Loday's sLock prlces lmply an enLerprlse Lradlng aL abouL 17 Llmes free cash flow. WlLh SymanLec upgradlng lLs revenue guldance and boLh AxenL and SymanLec beaLlng esLlmaLes slgnlflcanLly, SymanLec appears Lo Lrade aL nearly a 30 dlscounL from where lLs growlng lnLrlnslc value now slLs.
Cne may wonder wheLher SymanLec could have developed producLs llke AxenL's for less Lhan Lhe cosL of acqulrlng AxenL lLself. 1hls would have been a poor cholce ln an explodlng lndusLry. ln addlLlon Lo producLs, AxenL brlngs human caplLal, whlch may as well be renamed "vlLal caplLal" ln Lhe Lechnology space, and lL ls Lhe flrsL mover ln provldlng comprehenslve lnLruslon-deLecLlon soluLlons. 1he evldence ls ln Lhe cusLomer wlns. SymanLec [usL boughL a fooL ln Lhe door of 43 of Lhe lorLune 30. 1haL's a preLLy blg off-balance- sheeL asseL ln 1hompson's hands. l am chooslng Lo buy SymanLec Lhrough AxenL. l have confldence Lhe deal wlll go Lhrough, and hence l'd llke Lo clalm Lhe spread. l am buylng 200 shares of AxenL aL Lhe markeL. Iourna|: August 11, 2000 - 8uy S00 shares of nutt|g 8u||d|ng roducts (n8, news, msgs) at a ||m|t of 4 S]8.
- 8uy 100 shares of nea|theon]WebMD (nL1n, news, msgs) at a ||m|t of 11 S]8.
- 8uy S0 shares of Axent 1echno|og|es (AkN1, news, msgs) at a ||m|t of 24.
Loadlng up on favorlLes 1oday's Lrades are a near repeaL of yesLerday. l'll Lry Lo buy 300 shares of nutt|g 8u||d|ng roducts (P8, news, msgs) aL a llmlL of 4 3/8, and l'll go wlLh anoLher 30 shares of Axent 1echno|og|es (Axn1, news, msgs) aL a llmlL of 24. Also, l'll add anoLher 100 shares of nea|theon ] WebMD (PL1P, news, msgs) aL a llmlL of 11 3/8. no new plcks, buL leL's revlew Lhe evenLs of Lhe week.
uld you see whom Act|ve ower (ACW, news, msgs), Lhe week's hlgh-flylng lC ln Lhe power generaLlon secLor, LouLed as a Lechnology parLner? Caterp|||ar (CA1, news, msgs). lL's a preLLy good parLnershlp -- CaLerplllar ls Lhe brand sLamped on Lhe parLnershlp's end producL. Who's Lhe man here? CaLerplllar.
no bombs on Lhe earnlngs fronL PealLheon/WebMu reporLed a greaL quarLer. 1here are a loL of meLrlcs Lo conslder, buL Lhe boLLom llne ls losses are shrlnklng as revenues grow -- LhaL's a very lmporLanL polnL, as lL goes Lo Lhe vlablllLy of Lhe buslness model. WlLh $1 bllllon ln cash and no debL, Lhls buslness ls noL [usL vlable -- lL's a gorllla. new lnformaLlon for me lncludes managemenL's clalm Lo have already ldenLlfled $73 mllllon ln synerglsLlc cosL savlngs Lo be had over Lhe nexL few quarLers. 1he 30 growLh ln physlclan reglsLranLs on WebMu racLlce provldes a blL of an upslde surprlse as well. 1haL's a dlfflculL markeL Lo crack, buL WebMu racLlce already has 26 of lL. l'm waLchlng Lhe new lows warlly.
C|ayton nomes (CMP, news, msgs) reporLed numbers ln llne wlLh esLlmaLes, glvlng Lhe company lLs second-besL resulLs ever as lLs compeLlLors reporL losses. ClayLon wlll emerge from Lhls downLurn ln flne condlLlon.
Sen|or nous|ng ropert|es (SnP, news, msgs) also reporLed earnlngs, whlch should Lurn ouL Lo be Lhe worsL-case quarLer for Lhe company, as Lhe bankrupL lessees are no longer maklng mlnlmal paymenLs. SLarLlng aL Lhe beglnnlng of Lhe currenL quarLer, Senlor Pouslng began reallzlng dlrecL operaLlng cash flows from Lhe properLles vacaLed by Lhe bankrupL lessees. WhaL Lhe laLesL resulLs do show ls LhaL funds from operaLlons clearly cover Lhe dlvldend.
1hree earnlngs reporLs from companles under sLress and no LoLal bombs. l'll Lake LhaL. l'll have new plcks on Monday.
Iourna|: August 14, 2000 - 8uy 200 shares of |xar An|mat|on Stud|os (Ikk, news, msgs) at a ||m|t of 33 3]4.
1o lnflnlLy and beyond wlLh lxar |xar An|mat|on Stud|os (lx8, news, msgs) ls a sLock slLLlng where no one can geL lL. Lven lf analysLs or porLfollo managers llke Lhe long-Lerm sLory, Lhe Wall SLreeL MarkeLlng Machlne wlll noL allow Lhem Lo buy lL
1he problem? lxar's nexL feaLure fllm wlll noL be released unLll november 2001 -- a full Lwo years afLer Lhe lasL, "1oy SLory 2." no maLLer LhaL Lhe flrsL Lhree releases -- "A 8ug's Llfe," "1oy SLory," and "1oy SLory 2" -- esLabllsh lxar as a 1.000 baLLer laLer ln Lhe season Lhan any oLher ma[or sLudlo before lL. no maLLer LhaL lxar promlses aL leasL one LheaLrlcal release per year from 2001 on, and has beefed up lLs LalenL pool wlLh Lhe llkes of anlmaLlon guru 8rad 8lrd. lor Wall SLreeL, Lhls ls a Llmellness lssue.
noL for me. As l dlscussed back ln my Aug. 3 enLry, even for a growLh company, only a Llny fracLlon of Lhe lnLrlnslc value of a company resulLs from Lhe nexL Lhree years. Peck only a fracLlon of Loday's lnLrlnslc value depends on Lhe nexL 10 years. 1he key ls longevlLy -- wlll lxar be around and maklng money 10 years from now . . . and beyond? CerLalnly.
ln parL, l geL Lhls confldence from ClC Ann MaLher and CLC SLeve !obs, as well as Lhe LalenL LhaL lxar seems Lo aLLracL. 1he Leams LhaL creaLed Lhe flrsL Lhree hlLs are sLlll around for Lhe nexL four LhaL are already ln producLlon. uurlng Lhe mosL recenL conference call, SLeve !obs prefaced hls remarks wlLh Lhe declaraLlon, "l am a forward looklng sLaLemenL." no doubL, SLeve.
AnlmaLed cash flows 8uL l would never lnvesL ln Lhls company lf l couldn'L see Lhe flnanclal klngdom behlnd Lhe maglcal one. And l do. lxar ls generaLlng cash aL such a raLe LhaL lL ls bulldlng lLs new Lmeryvllle dlgs ouL of cash flow-- wlLh no flnanclng -- and sLlll laylng down cash on Lhe balance sheeL. AL presenL, cash on hand Lops $214 mllllon. !obs ls a fan of cash flow and cash sLrengLh because he Lhlnks lL helps hlm negoLlaLe wlLh ulsney. "Pey, lf you don'L wanL a plece, we'll [usL flnance lL ourselves..." WhaLever Lhe reason, l llke cash Loo.
1he nexL year and a half wlll lnclude Lhe drlesL quarLers lxar wlll ever see. SLlll, lxar sees Lhe comlng pay-per-vlew release of "A 8ug's Llfe" generaLlng gross revenues of 13-20 of worldwlde box offlce recelpLs before ulsney Lakes a cuL. And "1oy SLory 2" wlll go lnLo home vldeo release Lhls CcLober, generaLlng abouL 33 mllllon ln unlL sales over lLs llfeLlme aL a hlgher average selllng prlce Lhan orlglnally forecasL. Pelplng Lo generaLe enLhuslasm for Lhls release -- and Lo help cemenL Lhe evergreen naLure of Lhe "1oy SLory" characLers -- wlll be a new "8uzz LlghLyear of SLar Command" Lelevlslon show, whlch debuLs Lhls fall as parL of ulsney's 1 SaLurday Mornlng program.
1hese are addlLlonal revenue phases for esLabllshed asseLs. 1o belleve ln lxar as an lnvesLmenL, one has Lo belleve ln Lhe evergreen naLure of lLs creaLlons. lxar's full producL llfe cycle, managed correcLly, can be exLremely long. And as lxar releases more fllms, more llfe cycles are puL lnLo play, overlapplng and creaLlng smooLher and larger earnlngs sLreams.
lxar ls guldlng us Lo earnlngs of $1.30 Lhls year, buL lL ls llkely we'll see earnlngs exceedlng $1.33. PlsLory Lells us lxar's free cash flow runs qulLe a blL hlgher Lhan lLs neL lncome. 1haL's how cash on Lhe balance sheeL [umps $17 mllllon ln one quarLer desplLe neL lncome less Lhan half LhaL. As an enLerprlse less lLs cash, Lhe prlce of lxar ls currenLly Lradlng aL abouL 21 Llmes accounLlng earnlngs, buL only abouL 14 Llmes free cash flow. Larnlngs wlll fall nexL year, and Lhe sLock ls heavlly shorLed ln anLlclpaLlon. lL's noL llke me Lo say Lhls, buL geLLlng lnLo Lhe quarLerly accounLlng mlnuLlae here ls a blL counLerproducLlve. 1he buslness plan ls lnLacL and Lhere ls a worklng program for creaLlng brand equlLy.
lor lnsLance, every one of Lhose 33 mllllon coples of "1oy SLory 2" home vldeo producL wlll feaLure a Lraller for nexL year's "MonsLers, lnc." klds wlll be waLchlng Lhls over and over agaln. And when "MonsLers, lnc." comes ouL on vldeo, wlll lL have a Lraller for anoLher upcomlng release? Cf course. And wlll Lhese producLs ulLlmaLely end up on pay- per-vlew? Cf course. lxar's caLalogue lLself creaLes lead-lns Lo new producL success.
Concesslons from ulsney? ln 2004, lxar wlll release lLs flnal fllm under Lhe dlsLrlbuLlon agreemenL wlLh ulsney. 1hls agreemenL ls an onerous one LhaL lxar agreed Lo when lL had much less success under lLs belL. CurrenLly lxar only geLs 30 of Lhe gross revenues of lLs producL afLer ulsney deducLs Lhe cosLs of lLs dlsLrlbuLlon and markeLlng. ulsney's clalm on dlsLrlbuLlon and markeLlng fees ls such LhaL Lhe enLlre domesLlc box offlce for a fllm can mean no proflLs for lxar. Already lxar ls of sufflclenL sLrengLh Lo exLracL a much more lucraLlve deal from ulsney. AfLer a few more blockbusLers, lxar wlll be ln a poslLlon Lo resLrucLure a new agreemenL wlLh Lremendous lmpllcaLlons for lxar's boLLom llne.
1he key ls LhaL any addlLlonal concesslons from ulsney should flow nearly unLouched Lo Lhe boLLom llne. An addlLlonal concesslon of 20 of proflLs afLer dlsLrlbuLlon cosLs should resulL ln roughly a 40 boosL Lo lxar's operaLlng lncome from a glven fllm. knowlng Lhls, we can esLlmaLe LhaL ln 2003, we should see a blg boosL Lo lxar's lncome and aL Lhe mlnlmum re[uvenaLlon of lLs growLh raLe. lxar's cash earnlngs over Lhe nexL 10 years alone could approxlmaLe $30-$40/share ln presenL value. And Lhe proflLs should noL flzzle Loo much even afLer 10 years. Cf course, Lhls ls very rough because we do noL know whaL Lhe new ulsney conLracL wlll brlng. 8uL l llke lL when my margln of safeLy does noL requlre a calculaLor.
1he rlsk ls LhaL Lhe fllms flop. lf Lhls were lox, l'd worry. l'll Lry Lo buy 200 shares aL a llmlL of 33 3/4.
Iourna|: August 1S, 2000 - |ace order to buy 400 shares Deswe|| Industr|es (DSWL, news, msgs) at a ||m|t of 13.7S.
ueswell lndusLrles -- solld gold Deswe|| Industr|es (uSWL, news, msgs) ls a conLracL manufacLurer of meLal and plasLlc producLs as well as elecLronlcs. 1raded on Lhe nasdaq buL based ln Pong kong, ueswell runs an efflclenL operaLlon LhaL employs such Lechnlques as on-slLe dormlLorles for lLs workers -- LacLlcs LhaL are proflLable buL noL generally pracLlcal ln Lhe unlLed SLaLes. Cne mlghL conslder Lhls as a compeLlLlve advanLage, buL as a small company based ln Chlna, Lhe flrm's shares are meL wlLh dlsLrusL and general avoldance. Whlle Lhe sLock Lrades dally, Lhe volumes are mlnlscule
Common producLs made by ueswell lnclude prlnLed clrculL boards, Lelephones, compuLer perlpherals, and elecLronlc Loys whlch are sold Lo orlglnal equlpmenL manufacLurers LhaL brand Lhe end producL. Pence, ueswell ls behlnd Lhe scenes -- Vtech no|d|ngs (v1kP?, news, msgs) and Lpson are ma[or cusLomers. ueswell has a repuLaLlon for Llmely, efflclenL operaLlons and has been wlnnlng larger and more numerous conLracLs over Lhe years. 8uslness wlLh Lpson ls expecLed Lo Lrlple over Lhe nexL year, and buslness wlLh vLech ls experlenclng solld growLh as well.
ueswell ls a growLh company buL pays a generous dlvldend. lLs offlcers own Lhe ma[orlLy of Lhe sLock, and rely on dlvldends as a parLlal salary replacemenL. Why? ulvldends are noL Laxed locally. WhaL Lhls means ls LhaL ln Lhe long Lerm, ueswell shareholders recelve a qulLe generous payouL every year -- ofLen approachlng double dlglLs. And we can counL on Lhe dlvldend belng preserved.
8uL excellenL worklng caplLal managemenL -- Lhe laLesL quarLer's 47 lncrease ln sales came wlLh less Lhan 20 lncreases ln lnvenLory and accounLs recelvable -- keeps cash flow so sLrong as Lo conLlnue fundlng qulLe slgnlflcanL growLh. 1hls ls noL ofLen seen ln companles wlLh hlgh dlvldend payouLs.
Show me Lhe buslness ?ou can see where Lhls ls headlng. CLC 8lchard Lau pays llLLle aLLenLlon Lo Lhe sLock prlce, preferrlng Lo focus on Lhe buslness. lnvesLor relaLlons ls farmed ouL, and lnsLlLuLlons generally lgnore Lhe company. WhaL all Lhls adds up Lo afLer backlng ouL Lhe $3.33 per share ln cash ls a sLock Lradlng aL abouL $8.30/share afLer earnlng $2.01/share over Lhe Lralllng four quarLers -- and qulLe a blL more Lhan LhaL ln free cash flow. 1hls desplLe recenL revenue growLh ln Lhe 40 range and addlLlonal growLh expecLed for Lhe foreseeable fuLure. 8y Lhe way, Lhe cash on Lhe balance sheeL ls held ln u.S. dollars.
1he malalse ln Lhe sLock over Lhe lasL few years has been llnked Lo dlfflculLles ln lLs elecLronlcs operaLlon, buL Lhe laLesL quarLer saw an 80 revenue [ump ln LhaL dlvlslon. Mr. Lau expecLs conLlnued sLrengLh Lhere as Lhe markeL for porLable communlcaLlons devlces heaLs up. Moreover, ueswell ls aLLalnlng a crlLlcal mass ln Lerms of capaclLy -- Lhe company ls lncreaslngly seen as a reallsLlc opLlon as a conLracLor on even very large [obs. 1he expecLed 230 growLh ln ueswell's Lpson conLracL over Lhe nexL year ls evldence of Lhls. Lxpanslon ls belng funded ouL of cash flows.
AnoLher concern hoverlng over ueswell has been Lhe effecL of Lhe rlse ln peLroleum prlces on lLs plasLlcs buslness, whlch depends on resln as ma[or lnpuL. 8uL managemenL hedged lLs supply such LhaL Lhere was no maLerlal effecL on Lhe buslness desplLe Lhe parabollc rlse ln oll prlces. 1hls ls a smarL move, lndlcaLlve of managemenL's savvy ln lLs fleld.
ConLracL manufacLurers as sLocks are spllL lnLo qulLe dlsparaLe valuaLlon caLegorles based on slze. ueswell Lrades aL an enLerprlse value/L8l1uA raLlo of 2.7. So|ectron (SL8, news, msgs), wlLh sales 200 Llmes ueswell's, Lrades aL an enLerprlse value/L8l1uA raLlo of 30. |exus (LxS, news, msgs), wlLh sales Len Llmes ueswell's, Lrades aL an enLerprlse value/L8l1uA raLlo of 40. And ueswell's reLurn on caplLal and equlLy are qulLe a blL beLLer Lhan Lhese oLher flrms. 1he poLenLlal for mulLlple expanslon wlLh growLh ln revenues ls hence qulLe slgnlflcanL.
l am looklng Lo buy 400 shares aL a llmlL prlce of $13.73.
Iourna|: March 9, 2001 - 8uy S00 shares of D|amondC|uster Internat|ona| (D1I, news, msgs) at 14 3]4 ||m|t, order good unt|| cance||ed.
- 8uy 1,400 shares of G1SI Corp. (G1SI, news, msgs) at 4 3]4 ||m|t, good unt|| cance||ed.
- 8uy 10,000 shares of Cr||m| Mae (CMM, news, msgs) at a 7S-cents ||m|t, good unt|| cance||ed.
- 8uy 800 shares of Sen|or nous|ng ropert|es 1rust (SNn, news, msgs) at a 10 ||m|t, good unt|| cance||ed.
- 8uy 1,000 shares of London ac|f|c Group (LD, news, msgs) at 56.6S ||m|t, good unt|| cance||ed.
A dlamond ln Lhe value rough As a value lnvesLor, one of my favorlLe places Lo look for value ls among Lhe mosL ouL-of-favor secLors ln Lhe markeL. ln order Lo obLaln maxlmum margln of safeLy, one musL buy when lrraLlonal selllng ls aL a peak. ldeally, llllquldlLy and dlsgusL wlll palr up ln Landem puglllsm. 8en Craham suggesLed bear markeLs offer such an opporLunlLy. 8lghL now, Lechnology ls ln a bear markeL. Cne of Lhe key Lhemes ls LhaL buslness cusLomers are puLLlng off purchase declslons Loday ln order Lo mlnlmlze expense ln Lhe near Lerm -- and hence proLecL near-Lerm earnlngs guldance. ln Lhe long run, Lhls ls a bad managemenL declslon, and ln Lhe long run Lhe purchases LhaL need Lo be made wlll be made.
1he ma[or sofLware makers have been hlL, as has nearly any company selllng hlgh-LlckeL lLems Lo blg buslness. 1he markeL has vlslLed parLlcular scorn on Lhe e-consulLlng companles, whlch have been lumped lnLo one baskeL and slmply heaved overboard. WlLhln Lhls secLor, Lhere are a varleLy of companles, however, and Lhe sLronger ones caLer nearly enLlrely Lo blue-chlp buslnesses. 1he ones LhaL caLered Lo doL-coms ln parLlcular are sufferlng qulLe severely, and rlghLly so. 1he sLronger ones, however, have blg cash balances and doL com exposure ln Lhe low slngle dlglLs -- Lhey have also demonsLraLed a capablllLy of managlng a buslness for poslLlve reLurns on lnvesLmenL, and hence come off more credlble l Lo lnLelllgenL execuLlves of Lop corporaLlons.
8ased on an analysls of accounLs recelvable quallLy as well as cash converslon cycles, Lwo e- buslness lnLegraLors sLand ouL as among Lhe besL. Cne ls rox|com (xCM, news, msgs), Lhe oLher ls D|amondC|uster (u1l, news, msgs). 8oLh have demonsLraLed Lhe ablllLy Lo produce poslLlve cash flow whlle growlng slgnlflcanLly, buL more lmporLanLly, boLh have exLremely mlnlmal exposure Lo quesLlonable cllenLs such as doL- coms. 1helr cllenLs -- lorLune 300 companles -- wlll lndeed evenLually reLurn Lo Lhe prudenL paLh of spendlng on hlgh reLurn on lnvesLmenL pro[ecLs.
Cf Lhese Lwo, my favorlLe ls ulamondClusLer. ulamondClusLer has Lhe besL marglns and worklng caplLal managemenL ln Lhe buslness, desplLe worklng wlLh blue chlp cllenLs LhaL ofLen demand favorable credlL Lerms. 1he managemenL Leam ls qulLe sLrong, and ln Lhe comlng quarLers nearly half Lhelr buslness wlll come from overseas -- prlmarlly from Lurope and LaLln Amerlca and away from Lhe norLh Amerlcan melLdown. uoL- com exposure ls less Lhan 2. Moreover, Lhelr developlng experLlse ln wlreless, from worklng wlLh Lr|csson (L8lC?, news, msgs) ln Lurope, wlll prove qulLe handy when wlreless evenLually Lakes off here ln Lhe unlLed SLaLes.
Wlreless ls one area of Lelecom LhaL conLlnues Lo hold promlse. Many of Lhe blggesL carrlers worldwlde have already spenL bllllons on llcenses LhaL have noL been developed. 1hese carrlers wlll noL be able Lo delay long purchaslng Lhe consulLlng servlces needed Lo reallze a reLurn on such a large lnvesLmenL. ulamondClusLer ls very well-poslLloned ln LhaL area.
1he balance sheeL ls prlsLlne, wlLh more Lhan $130 mllllon cash (over $3/share) and no debL. ln facL, Lhe sLock has some hlsLory, havlng been punlshed severely durlng Lhe CcLober 1998 melLdown, only Lo rebound LwenLy-fold before crashlng once agaln. 1hls ls a sLock LhaL ls fundamenLally llllquld and Lends Lo provlde opporLunlLles wlLhln lLs Lremendous prlce ranges.
ManagemenL conLlnues Lo malnLaln a no-layoffs pollcy, and Lends Lo promoLe from wlLhln. 1hese feaLures are unlque ln Lhe lndusLry and fosLer sLablllLy wlLhln Lhe company LhaL can only beneflL lL ln relaLlon Lo lLs peers. 1he compeLlLlve landscape lncludes I8M (l8M, news, msgs), a formldable e-servlces compeLlLor. Powever, ulamondClusLer has demonsLraLed an ablllLy Lo wln many of Lhe blggesL cllenLs and ls ln Lhe process of developlng a branded repuLaLlon as well. Success wlLh blg cllenLs ls Lhe blggesL selllng polnL when speaklng wlLh oLher blg cllenLs. 1he human-relaLlons culLure fosLered aL ulamondClusLer (lndusLry-low Lurnover ls [usL 11), Lhe blue-chlp cllenL base, and Lhe fundamenLal cash reLurn on lnvesLmenL mlndseL LhaL managemenL consLanLly evokes all seL lL far aparL from many of lLs weaker, sLruggllng compeLlLors. unllke commodlLy sLafflng, hlgh- level buslness consulLlng ls very suscepLlble Lo brandlng, and ulamondClusLer has been maklng Lhe rlghL moves Lo creaLe an effecLlve brand.
ln any consulLancy, human resources managemenL ls key. 8y noL laylng off consulLanLs, managemenL ls slgnallng Lo Lhe hlghesL quallLy candldaLes ouL Lhere LhaL ulamondClusLer offers sLablllLy and flnanclal sLrengLh. 1hls lowers Lurnover as well as cosLs, and helps ulamondClusLer Lo Lhe besL marglns ln Lhe lndusLry. 1hls also allows ulamondClusLer Lo be mosL ready when Lhe economy revs up once agaln and compeLlLors are once agaln scrambllng for LalenL.
8acklng ouL Lhe excess cash, ulamondClusLer Lrades for around 10-Llmes newly lowered esLlmaLes. lL reached cash proflLablllLy aL a lower revenue Lhreshold Lhan any of lLs compeLlLors, and lL wlll remaln solldly proflLable desplLe Lhe currenL downLurn. As a value lnvesLor, l am qulLe used Lo buylng cycllcals as Lhe downLurn looks mosL dlre -- buL before Lhe acLual boLLom ls hlL. 1radlLlonally, cycllcal sLocks begln Lhelr bull rally well ln advance of Lhe acLual buslness boLLom. l belleve LhaL ulamondClusLer ls polsed for such a rally.
1here ls some prlce rlsk here. CLher hlgh-Lech consulLancy sLocks have plummeLed Lo levels approxlmaLlng Lhelr cash holdlngs, and ulamondClusLer may ln facL do LhaL Loo. 1o daLe, Lhe quallLy of Lhe buslness has acLually provlded ulamondClusLer sLock some prlce proLecLlon relaLlve Lo lLs lesser peers. 8uL whaL l belleve we are seelng ls a shorL-Lerm caLharsls from Lhe lack of vlslblllLy for recovery. 1he llllquldlLy of Lhe sLock as well as Lhe momenLum shareholder base slmply aggravaLes Lhe fall. MosL value lnvesLors would noL Louch someLhlng called ulamondClusLer, and hence prlce supporL ls vanlshlng. l have seen Lhe sLock fall as much as 3 on a few hundred shares, only Lo see oLhers follow and dump Lhousands of shares because Lhe sLock fell 3.
1he sLock ls hence someLhlng of a falllng knlfe rapldly acceleraLlng lLs descenL. 1echnlcally speaklng, Lhe only supporL flows from Lhe boLLom of a channel upLrend exLendlng back Lo early 1997 and a recenL bounce off $14 1/2.
lundamenLally, Lhe meLrlcs look good. 1he company has been able Lo malnLaln revenues per blllable of abouL $330,000 -- over 30 hlgher Lhan several promlnenL comparables. LxpecL a cycllcal lull ln Lhls flgure as Lhe company refuses Lo cuL headcounL durlng Lhe downLurn, buL as menLloned before long-Lerm lnvesLors should welcome Lhls aLLlLude.
Powever, Lhe lnLrlnslc value of Lhls company ls double currenL levels even uslng conservaLlve long-Lerm growLh esLlmaLes well below Lhose provlded by Lhe company. A key facLor ln Lhese sorLs of companles ls managemenL, and ln Lhls case managemenL ls reacLlng exacLly how l would llke Lhem Lo -- as owners lnLeresLed ln Lhe long- Lerm prosperlLy of Lhe buslness. 1he sLock ls now prlced as lf earnlngs wlll grow only 10 annually for Lhe nexL 10 years, before falllng Lo abouL 6 growLh. A share buyback ls underway, as lL should be. Whenever a company has an opporLunlLy Lo purchase $1 dollar of lnLrlnslc value for 30 cenLs, lL should do so. 1he company has ample cash Lo ampllfy Lhe buyback, and oughL Lo do so when Lhe currenL alloLmenL ls compleLed.
lor Lhe record, managemenL conLlnues Lo LargeL annual 30 revenue growLh long-Lerm, and earnlngs per share growLh approxlmaLlng 23. 1hey are looklng across Lhe valley. lnLelllgenL lnvesLors would never Lake Lhese growLh raLes, exLrapolaLe a value from Lhem, and call ouL "margln of safeLy." 8uL lnLelllgenL lnvesLors should be able Lo also look across Lhe valley and see an opporLunlLy for caplLal appreclaLlon ln a long-Lerm hold from Lhese levels.
1he lndusLry may see some consolldaLlon. AnecdoLal reporLs are LhaL forelgn flrms looklng Lo snap up Amerlcan Lechnology experLlse are already scouLlng ouL varlous LargeLs among Lhe e- buslness consulLlng walklng dead and wounded. roxlcom seems parLlcularly suscepLlble here. l am noL expecLlng ulamondClusLer Lo sell ouL, buL depressed shares composed 1/3 of cash are generally aLLracLlve LargeLs. 8uy 300 shares aL 14 3/4 llmlL, good unLll cancelled.
CLher buys Also, buy 1,400 shares of G1SI (C1Sl, news, msgs) aL 4 3/4 llmlL, good unLll cancelled. 1hls sLock ls a holdover from lasL round. A suppller of Lechnology equlpmenL Lo Lhe governmenL, lL remalns a neL neL (selllng aL a dlscounL Lo neL worklng caplLal less all llablllLles) desplLe a Lremendous change ln Lhe buslness for Lhe beLLer, wlLh expecLed earnlngs ln excess of $1 per share.
8uy 800 shares of Sen|or nous|ng ropert|es 1rust (SnP, news, msgs) aL 10 llmlL, good unLll cancelled. 1hls ls anoLher holdover from lasL round. A hlgh dlvldend payouL on Lhls healLh-care 8Ll1 and an lmprovlng regulaLory and flnanclal cllmaLe due Lo recenL budgeL changes conLlnue Lo make Lhe sLock aLLracLlve. Warren 8uffeLL boughL sLock ln nk1 ropert|es (P8, news, msgs), whlch has Lhe same managemenL as Senlor Pouslng and whlch ls also Senlor Pouslng's largesL shareholder.
8uy 10,000 shares of Cr||m| Mae (CMM, news, msgs) aL a 73-cenLs llmlL, good unLll cancelled. 1hls ls a sLock of a flnance company comlng ouL of bankrupLcy soon and worLh aL leasL $1.23/share and wlLh only sllghLly dlfferenL assumpLlons a llLLle over $2/share. 1hls ls one of Lhe sllghLly lnnocenL bysLanders forced lnLo bankrupLcy by Lhe Long 1erm CaplLal ManagemenL crlsls of 1998. 1hls one's compllcaLed and has recenLly been under selllng pressure from a converLlble preferred lssue LhaL has been converLlng. enny sLock ls a pe[oraLlve Lerm LhaL happlly makes people noL wanL Lo look deeper, buL Lhe markeL cap ls greaLer Lhan C1Sl, whlch Lrades above $3 regularly, and Lhe enLerprlse value ls much greaLer sLlll.
8uy 1,000 shares of London ac|f|c Group (Lu, news, msgs) aL $6.63 llmlL, good unLll cancelled. 1hls ls an Au8 represenLlng an ownershlp sLake ln a London lnsurance company and asseL manager LhaL uses lLs floaL ln parL for venLure caplLal acLlvlLles. 1he company has had a Lremendous Lrack record, and many of lLs companles noL Laken publlc have been acqulred, resulLlng ln large sLakes ln companles llke S|ebe| Systems (SL8L, news, msgs). 1he exLenslve llsL of companles lL has helped fund lnclude LSI Log|c (LSl, news, msgs), Atme| (A1ML, news, msgs), L|near 1echno|ogy (LL1C, news, msgs), Crac|e (C8CL, news, msgs), ACL 1|me Warner (ACL, news, msgs) and A|tera (AL18, news, msgs), among oLhers. CurrenLly Lradlng aL a subsLanLlal dlscounL Lo Lhe neL asseL value, Lhe sLock should ln facL mlrror Lhe value of lLs publlc and prlvaLe holdlngs plus Lhe value of lLs $3 bllllon asseL managemenL operaLlons. lL ls also lmporLanL Lo reallze LhaL a sofL lC markeL does noL resulL ln losses -- Lhe company slmply musL keep lLs prlvaLe companles prlvaLe a llLLle longer. Slmllarly, mark-Lo-markeL losses on publlc securlLles are slmply paper losses unLll reallzed.
Iourna|: March 16, 2001 - Change the outstand|ng ||m|t order on G1SI Corp. (G1SI, news, msgs) to buy 1,S00 at 4 7]8 ||m|t, good unt|| cance|ed.
- Change the outstand|ng ||m|t order on Cr||m| Mae (CMM, news, msgs) to buy 10,000 at an 80- cent ||m|t, good unt|| cance|ed.
- Change the outstand|ng ||m|t order on Sen|or nous|ng ropert|es 1rust (SNn, news, msgs) to buy 700 shares at 510.10 ||m|t, good unt|| cance|ed.
- 8uy 1,S00 shares of Grubb & L|||s (G8L, news, msgs) at S ||m|t, good unt|| cance|ed.
- 8uy 2,000 shares of nutt|g 8u||d|ng roducts (n8, news, msgs) at 54.10 ||m|t, good unt|| cance|ed.
- 8uy 2,000 shares of Va|ueC||ck (VCLk, news, msgs) at 3 S]8 ||m|t, good unt|| cance|ed.
1wo ouL-of-favor cholces llrsL, leL's ad[usL a few unexecuLed Lrades. Change Lhe ouLsLandlng llmlL order on G1SI Corp. (C1Sl, news, msgs) Lo buy 1300 aL 4 7/8 llmlL, good unLll canceled. Change Lhe ouLsLandlng llmlL order on Cr||m| Mae (CMM, news, msgs) Lo buy 10,000 aL an 80-cenL llmlL, good unLll canceled. Change Lhe ouLsLandlng llmlL order on Sen|or nous|ng ropert|es 1rust (SnP, news, msgs) Lo buy 700 shares aL $10.10 llmlL, good unLll canceled.
now, Loday's new names:
l'll buy 1,300 shares of Grubb & L|||s (C8L, news, msgs) aL 3 llmlL, good unLll canceled. A real-esLaLe servlces flrm, one would lmaglne LhaL Lhls company would be ouL of favor rlghL now. lL sure ls. C8 k|chard L|||s (C8C, news, msgs), a compeLlLor, ls belng Laken prlvaLe by managemenL aL an enLerprlse value/ L8l1uA mulLlple of 6.2. CurrenLly, Crubb & Lllls Lrades aL a mulLlple of abouL 3. Warburg lncus and Go|dman Sachs Group (CS, news, msgs) are Lhe ma[orlLy owners of Lhe flrm. 1he sLock has been langulshlng, and Warburg ls looklng for a way ouL. 1hey've been shopplng Lhe flrm around, buL found no Lakers for uncerLaln reasons - posslbly Lhe prlce was Loo hlgh. CL CaplLal and lnslgnla llnanclal Croup have Laken a peek.
1he flrm recenLly compleLed a fully subscrlbed self-Lender for abouL 33 of Lhe ouLsLandlng shares aL a prlce of $7 -- undoubLedly a way for Warburg and Coldman Lo llquldaLe a porLlon of Lhelr poslLlon ln llghL of Lhe facL LhaL Lhere ls no ready buyer. 1he company released Lhe CLC lasL May and neglecLed Lo search for a new one. 1hls company ls, qulLe slmply, on Lhe block and as yeL Lhere are no Lakers.
ln Lhe meanLlme, lL ls very cheap. Cash on hand aL Lhe end of Lhe year ls lnflaLed by deferred commlsslon expense, and Lhls ls a cycllcal lndusLry headed lnLo a downLurn. 8uL lf C8 8lchard Lllls ls worLh a 6 mulLlple on peak L8l1uA, surely Lhe Crubb & Lllls share prlce ls awfully low. CLher comparables Lrade aL a 6 mulLlple on L8l1uA as well.
l'll add ln a buy 2,000 shares of nutt|g 8u||d|ng roducts (P8, news, msgs) aL $4.10 llmlL, good unLll canceled. A holdover from lasL round, Lhls bulldlng-producLs dlsLrlbuLor wlLh a nlfLy value- added door manufacLurlng operaLlon Lrades aL low valuaLlon and has been ouL of favor slnce lLs spln-off from Crane (C8, news, msgs) ln laLe 1999. lL recenLly pre-announced Lhls quarLer, seasonally lLs mosL dlfflculL. Cver Lhe decades, however, Lhls flrm has managed Lo sLay proflLable Lhrough Lhlck and Lhln. lL ls execuLlng a plan Lo de-leverage lLs balance sheeL and has found cosL synergles ln a ma[or acqulslLlon lasL year LhaL wlll bloom Lhls year. A comparable company, Cameron Ashley, was Laken prlvaLe by managemenL lasL year aL a valuaLlon mulLlple LhaL lmplles PuLLlg deserves a share prlce ln Lhe $10-$13 range. 1he largesL ouLslde shareholder wanLs ouL and may flnd Lhe easlesL way ls Lo lnsLlgaLe for a buyouL. 1he second largesL shareholder ls Lhe Crane lund, an afflllaLe of Crane, and Crane's CLC ls PuLLlg's Chalrman. WlLhouL a LakeouL, Lhe company Lrades aL low mulLlple of free cash flow, has managemenL focused on reLurn on caplLal hurdles, and makes a good hold.
8uy 2,000 shares of Va|ueC||ck (vCLk, news, msgs) aL 3 3/8 llmlL, good unLll canceled. valueCllck ls a pay-for-performance (or cosL-per- cllck) lnLerneL adverLlser. Agaln, Lremendously ouL of favor rlghL now. WhaL Lhls company has golng for lL ls a hefLy cash load as well as shares ln an overseas subsldlary, valueCllck !apan, LhaL LogeLher are worLh slgnlflcanLly more Lhan Lhe currenL share prlce. CperaLlons have been roughly cash-flow neuLral, and cerLalnly Lhlngs are noL geLLlng worse. 8ecause of poollng LransacLlons rules, valueCllck's managemenL clalms lL cannoL lnsLlLuLe a share buyback of any slze.
lnLulLlvely, one would expecL LhaL Lhe cosL-per- cllck or pay-per-converslon model would sLarL Lo make sense Lo more and more adverLlsers as LradlLlonal revenue models requlrlng paymenL slmply for Lhe presenLaLlon of a banner prove fuLlle. llnanclal companles such as credlL card vendors are sLarLlng Lo see Lhe llghL here. !apan remalns a sLronger markeL for valueCllck, whlch goL lnLo Lhe markeL earller and hence ls parLlclpaLlng more fully ln Lhe de facLo adverLlslng sLandards LhaL developed Lhere. valueCllck has also acqulred asseLs ln areas such as opL-ln e-mall campalgns and sofLware measurlng reLurn on lnvesLmenL.
Doub|eC||ck (uCLk, news, msgs) owns a sLake ln valueCllck and has represenLaLlon on Lhe board. lf noLhlng else, Lhls company seems a LakeouL walLlng Lo happen. MosL downslde ls prlced ln aL Lhls polnL - afLer all, Lhe buslness has a negaLlve valuaLlon - and Lhere ls a decenL upslde.
Iourna|: March 28, 2001 - |ace order to buy 1,000 shares of Spher|on (SIN, news, msgs) at 7.8S ||m|t, day order on|y.
- |ace order to short 300 shares of Standard ac|f|c (SI, news, msgs) at 22 or h|gher, good unt|| cance|ed.
- |ace order to short 100 shares of Adobe (AD8L, news, msgs) at 36.S0 or h|gher, day order on|y.
1he recovery mlrage A promlnenL newspaper recenLly publlshed one of Lhe leasL lnformed arLlcles l've ever seen. l belleve lL speaks volumes abouL where Lhe sLock markeL mlghL be headed. 1he LlLle was Why Plgh 1ech Can WeaLher Lhe Slowdown." 1he newspaper, unforLunaLely, was Lhe San !ose Mercury news. PomeLown shame.
Pere's some cholce wlsdom:
- (capLlon for phoLo of ?ahoo's new headquarLers): ?ahoo's new headquarLers ln MoffeLL ark ls an lronlc lesson ln Lhe new Lconomy: Slllcon valley can avold a recesslon llke Lhe one 10 years ago because lL has dlverslfled beyond defense conLracLs, chlps, and hardware." My commenL: lnLerneL adverLlslng ls a Lool for dlverslflcaLlon agalnsL an economlc slowdown? Culck, someone Lell 1he Wash|ngton ost (WC, news, msgs)... - A broad specLrum of Lech companles hedges agalnsL slumps ln any parLlcular secLor aL a glven momenL. AlLhough all Lhe Lech companles are llnked ln a food chaln, some wlll probably suffer less durlng Lhe l1 spendlng slowdown, Lhe economlsLs say. "1hey're holdlng hands, buL Lhey're carLoon characLers, and Lhelr arms can sLreLch," sald Mlke alma, prlnclpal l1 analysL aL CarLner uaLaquesL." My commenL: Ch, Lhey're carLoon characLers all rlghL ... - "l don'L Lhlnk Lhere's anyLhlng ouL Lhere LhaL would lead us Lo anyLhlng even approachlng Lhe early-1990's experlence," sald 1ed Clbson, chlef economlsL aL Lhe sLaLe ueparLmenL of llnance. Slllcon valley economlcs guru SLephen Levy, co- founder of Lhe CenLer for Lhe ConLlnulng SLudy of Lhe Callfornla Lconomy agreed. "Lveryone knows LhaL lL's Lemporary," he sald of Lhe Lech slump. My commenL: 1he Sllly uLLy guru levled a Lemporary sLudy of Lhe conLlnulng"... WalL, no... "1he [olnL economy of a conLlnulng cenLer of Slll. valley gurus and governmenL lnLelllgence"... walL, no... "We're from Lhe governmenL-and he's an economlsL-and we are all known for belng very very rlghL mosL of Lhe Llme"... ah, much beLLer ... - 1hls Llme lL wlll be dlfferenL because "Callfornla ls slowlng from an exLraordlnarlly red-hoL economy" and "ln 1990, Callfornla was comlng off a bulldlng blnge" and "MoneLary pollcy ls dlfferenL" and, walL, Lhls ls greaL-"venLure caplLal has maLured as an lndusLry, fuellng buslness lnnovaLlons ln a broader way Lhan before." My commenL: ?eah, Lhose vC's really reflned LhaL "dump lL on Lhe gulllble publlc" sLraLegy. 1hank Cod Lhe vC's wlll be Lhere wlLh Lhelr newfound experLlse Lo help us pull Lhrough Lhese rough Llmes. 8uL Lhe markeL has already fallen so far. Could lL really fall furLher? Sure. As long as everyone ls asklng, ls Lhls Lhe boLLom?", l doubL LhaL lL ls. When people Lruly caplLulaLe, no one wlll be asklng lf Lhere's caplLulaLlon. CaplLulaLlon wlll be deflned by a loss of lnLeresL ln caplLulaLlon.
l'm noL Lrylng Lo dlvlne markeL dlrecLlon from popular behavlors. ln facL, l really am noL proclalmlng anyLhlng abouL markeL dlrecLlon. 8uL Lhe valuaLlons [usLlfy a boLLom abouL as much as Lhe behavloral lndlcaLors do, whlch ls Lo say noL aL all. So here goes my essay, LlLled Why Plgh 1ech SLocks CannoL WeaLher Lhe Slowdown."
1he sLock-opLlons shell game l'm golng Lo ouLllne a problem LhaL a loL of Lech companles face -- and LhaL makes Lhelr sLocks ln general overvalued. unllke nearly every oLher lndusLry, Lech companles compensaLe Lhelr employees ln a manner LhaL hldes much of Lhe expense of Lhe compensaLlon from Lhe lncome sLaLemenL. Cf course, l'm Lalklng abouL opLlons.
WlLh Lhe mosL prevalenL Lype of opLlon -- called nonquallfled sLock opLlons" -- Lhe dlfference beLween Lhe prlce of Lhe sLock and Lhe prlce of Lhe opLlons when exerclsed accrues Lo Lhe employee as lncome LhaL musL be Laxed because lL ls consldered compensaLlon. noL accordlng Lo Cenerally AccepLed AccounLlng rlnclples (CAA), buL accordlng Lo Lhe l8S. So Lhe l8S glves companles a break and allows Lhem, for Lax purposes, Lo deducL Lhls opLlons expense LhaL employees recelve as lncome. 1he neL resulL ls an lncome-Lax beneflL Lo Lhe company of roughly 33 of Lhe sum LoLal dlfference beLween Lhe exerclse prlce of Lhe company's nonquallfled opLlons durlng a glven year and Lhe markeL prlce of Lhe sLock aL Lhe Llme of exerclse.
Slnce CAA does noL recognlze Lhls ln Lhe lncome sLaLemenL -- for whaLever reason, l'm noL sure -- Lhe cash flow sLaLemenLs record Lhls neL lncome Lax beneflL from employee sLock compensaLlon" ln operaLlng cash flow as a poslLlve ad[usLmenL Lo neL lncome. AfLer all, Lhe company lncluded nelLher Lhe cosL of Lhe opLlons nor Lhe lncome Lax beneflL on Lhe lncome sLaLemenL. Pence, Lhe correcLlon Lo cash flow.
CreaL, rlghL? So neL lncome ls undersLaLed, rlghL? Wrong. When evaluaLlng u.S. companles, lnvesLors oughL Lo assume LhaL lf Lhe l8S can Lax someLhlng, Lhen lL ls a real proflL. And lf Lhey allow one Lo deducL someLhlng, Lhen lL ls a real cosL. lor lnsLance, goodwlll amorLlzaLlon cannoL be deducLed for Laxes, buL LhaL's anoLher Loplc for anoLher day.
lor many Lech companles, opLlons compensaLlon ls a blg lssue. ln a rlslng markeL, Lhe neL lncome Lax beneflL can be qulLe large -- buL lL only reflecLs 33 of Lhe acLual cosL of paylng employees wlLh opLlons. Pow does lL cosL Lhe company? 8ecause Lhe company musL elLher lssue new sLock or buy back sLock for lssuance Lo employees ln order for Lhe employees Lo obLaln Lhls sLock aL a dlscounL. 1he cosL ls borne by shareholders. 1he per share numbers worsen, whlle Lhe absoluLe numbers lmprove (afLer all, lssulng sLock aL any prlce ls a poslLlve evenL for cash flow lf noL shareholders).
Adobe (Au8L, news, msgs), for lnsLance, ls wldely regarded as a good company wlLh a franchlse. A blL cycllcal maybe, buL a member of Lhe nasdaq 100 ($CLx) and Lhe S& 300 ($lnx). lL's been around Lhe block. And lLs shareholders have been Laken for a rlde.
Looklng aL lLs recenLly flled form 10k for 2000, one sees LhaL Lhe lncome-Lax beneflL for opLlons supplled $123 mllllon, or roughly 28 of operaLlng cash flow. lalr enough. LeL's move Lo Lhe lncome sLaLemenL. 8ased on a corporaLe Lax raLe of around 33, LhaL $123 mllllon represenLs $337 mllllon ln employee compensaLlon LhaL Lhe l8S recognlzes Adobe pald, buL LhaL does noL appear on Lhe lncome sLaLemenL.
lugglng lL lnLo Lhe lncome sLaLemenL drops Lhe operaLlng lncome -- less lnvesLmenL galns and lnLeresL -- from $408 mllllon Lo $31 mllllon. 1ax LhaL and you geL neL lncome somewhere around $33 mllllon -- and an abnormally small Lax paymenL Lo Lhe l8S. 1haL $33 mllllon ls roughly Lhe amounL of neL lncome LhaL publlc shareholders geL afLer Lhe company's senlor managemenL and employees feed aL Lhe Lrough. lor Lhls $33 mllllon - roughly a LenLh of Lhe reporLed LS-shareholders are paylng $8.7 bllllon. Ad[usLlng Lhe prlce/earnlngs raLlo (L) for whaL l [usL descrlbed [umps Lhe L well lnLo Lhe Lrlple dlglLs.
1hls ls why l call a loL of Lechnology companles prlvaLe companles ln Lhe publlc domaln -- exlsLlng for Lhemselves, noL for Lhelr shareholder owners. Cf course, lL ls a shell game. A prolonged depressed sLock prlce -- for whaLever reason, lncludlng a bear markeL -- would cause a loL of opLlons Lo become worLhless, and would llkely requlre Lhe company Lo elLher sLarL paylng more ln salary or ofLen worse, Lo sLarL reprlclng opLlons aL lower prlces.
ln a coldly calculaLlng markeL raLher Lhan a speculaLlve one, Lhe sLocks of companles LhaL have been dolng Lhls Lo shareholders wlll suffer. lL ls noL llmlLed Lo Adobe. C|sco (CSCC, news, msgs), Inte| (ln1C, news, msgs), M|crosoft (MSl1, news, msgs) and many of Lhe greaLesL Lech wealLh creaLors" of Lhe lasL decade are ln Lhe same boaL. When shares are boughL back ln masslve amounLs and Lhe share counL keeps rlslng, LhaL's a clue. And ln a Lrue bear markeL, even cold calculaLlons are barely worLh Lhe screens Lhey're punched up on. As much as Lhls markeL overshoL Lo Lhe upslde, expecL an overshooL Lo Lhe downslde.
And now for Lhe Lrades We're ln Lhe mldsL of a bear markeL rally, so l'm noL anxlous Lo buy much yeL -- l llke Lo buy when Lhlngs are more gloomy. l wlll resurrecL a shorL from lasL round, Lhough. ShorL 300 shares of Standard ac|f|c (Sl, news, msgs) aL 22 or hlgher, good unLll canceled. A homebullder heavlly exposed Lo Callfornla's dlfflculLles, wlLh lnslder selllng. SenLlmenL surroundlng Lhe homebullders remalns wrong-headedly perky. l wroLe abouL Lhls lasL round and wlll updaLe my analysls soon.
Pere goes one buy now because a caLalysL ls ln Lhe offerlng: Spher|on (Sln, news, msgs) ls a human resources/Lemporary servlces flrm now floaLlng a subsldlary on Lhe London exchange for more cash Lhan Lhe enLlre markeL caplLallzaLlon of Spherlon. 1he proceeds wlll be used Lo pay off debL and buy back shares. 1he upslde could be varlable, especlally ln Lhe near-Lerm, buL uslng very conservaLlve assumpLlons, lL appears Lhe downslde Lo Lhe valuaLlon ls sLlll abouL 18 above Lhe currenL prlce. And Lo Lhe exLenL Lhe share prlce remalns depressed as Spherlon sLarLs buylng back sLock, lnLrlnslc value per share wlll rlse. 8uy 1,000 shares aL 7.83 llmlL, day order only.
Iourna|: March 29, 2001 - |ace order to se|| pos|t|on |n London ac|f|c Group (LD, news, msgs) at the market.
- |ace order to se|| pos|t|on |n Spher|on (SIN, news, msgs) at the market.
- |ace order to buy S00 shares of G1SI Corp. (G1SI, news, msgs) at 4 7]8 ||m|t, good unt|| cance|ed.
8eal sLocks, real proflL, real value My shorL of Adobe (Au8L, news, msgs) was noL Lrlggered. 8uL l do recommend rereadlng my argumenL for dolng so. l am noL shorL Adobe ln real llfe elLher, buL Lhe same loglc applles Lo many, many of Lhe Lech sLocks ouL Lhere. l do noL belleve we are near a boLLom yeL because ln Lhe cold llghL of a bear markeL Lhese Lypes of Lhlngs -- such as dlluLlve opLlons compensaLlon and hldlng mlsLakes wlLh charge-offs --maLLer. 1he greaLer fool Lheory no longer rules. WhaL a rellef
now, maybe, flnally, we have a Llme for raLlonal sLock plcklng. lf Lhe markeL beglns Lhe flrsL mulLl- decade sldeways run of Lhe new cenLury (Lhere were Lwo such runs lasL cenLury - boLh Llmes afLer exLreme valuaLlon bubbles), Lhen Lhe suresL way Lo proflL wlll be Lo buy sLocks of lnconLroverLlble value. SLocks of proflLable companles LhaL can be boughL for Lhelr level of earnlngs per share flve Lo 10 years ouL meeL Lhls crlLerlon. ln Lhls veln, buy 300 more shares of G1SI Corp. (C1Sl, news, msgs). 1hls ls one of Lhe cheapesL sLocks ln my unlverse, wlLh Lhe besL sLory. 1hey dlsLrlbuLe Lechnology producLs Lo Lhe mlllLary, Lhe l8S and oLhers. Cver $630 mllllon ln sales and a $33 mllllon markeL cap. no debL. neL neL value (neL worklng caplLal less all llablllLles) ls norLh of $6. And Lhey wlll earn over a buck a share Lhls year. 1hey earned a buck a share lasL year, buL LhaL was wlLh a Lax loss shelLer from Lhe era before new managemenL Look over. 1hey have seen sLeady gross margln lmprovemenL, and even wlLh full LaxaLlon Lhls year, Lhey expecL earnlngs Lo beaL lasL year's unLaxed lncome. 8ecause of Lhe conLracLual naLure of Lhe buslness, Lhere ls some vlslblllLy, and yes, Lhere's growLh.
1he company [usL won a dlspuLe over a large conLracL Lo supply producLs and servlces Lo Lhe governmenL. Whlle awards wlLhln Lhe conLracL are sLlll open Lo compeLlLlon beLween Lhe company and I8M (l8M, news, msgs), C1Sl should do well. 1hls ls a relaLlonshlps buslness, and C1Sl compeLes well because Lhey have Lhe relaLlonshlps wlLh Lhe governmenL declslon makers and Lhe wllllngness Lo geL lnLo all Lhe governmenL paperwork. lL ls a low, low margln buslness ln whlch Lhe largesL porLlon of caplLal ls usually Lled up ln worklng caplLal. 1o Lhe exLenL LhaL new Lechnologles help Lhem squeeze worklng caplLal, cash wlll be freed up for oLher uses. 1he company ls looklng Lo do lLs flrsL-ever road Lrlp and broadcasL Lhe beLLer buslness pracLlces LhaL now hold sway over all LhaL revenue.
lnslders were buylng aL lower levels, as was l. lor a few years lL was a lock of a Lrade from 2 3/8 Lo abouL 4. Lacy Llnwood, Lhe largesL shareholder, has been buylng ln Lhe open markeL and was one of Lhe founders of Ingram M|cro (lM, news, msgs). Pavlng a large, non-managemenL shareholder wlLh a large, llllquld sLake ls caLalysL walLlng Lo happen, Lhough wlLhouL guaranLees. Pls background conflrms LhaL lngram and lLs llk are noL Lhe compeLlLlve LhreaLs here, as one mlghL Lhlnk.
undolng some mlsLakes lnvesLmenL managers are bound Lo be wrong many, many Llmes ln Lhelr llves. 1hls ls a buslness of managlng emoLlon as much as managlng money, and Laklng one's lumps ls Lhe suresL paLh Lo a more erudlLe vlew. So lL ls Llme Lo own up Lo a few mlsLakes. ln my lasL enLry, l ouLllned my pesslmlsLlc ouLlook for Lechnology shares based on Lhe devlous, unfrlendly manner ln whlch many Lech managers Lry Lo hlde Lhe LruLh from shareholders. 1wo of my holdlngs do noL reflecL LhaL pesslmlsm.
D|amondC|uster (u1l, news, msgs) and London ac|f|c Group (Lu, news, msgs) were very blg Llmlng mlsLakes. 1he same mlsLakes l made aL Lhe beglnnlng of Lhe lasL round -- belng overly opLlmlsLlc as a new round geLs under way, and under some self-lmposed pressure Lo make some moves. CpLlmlsm ln such cases ls rarely warranLed. nearly wlLhouL fall, egg wlll befall one's face. WlLh sLocks ln freefall, l LhoughL, Well, Lhese Lwo are lnLeresLlng slLuaLlons and we have aL leasL slx monLhs." unforLunaLely, every Llme l Lhlnk llke LhaL l become cavaller ln my Llmlng. 1he facL of Lhe maLLer ls l should always walL for my rules Lo klck ln - and LhaL lncludes walLlng for falllng knlves Lo lay moLlonless on Lhe floor before Lrylng Lo plck Lhem up. l vlolaLed Lhese rules, and now l've losL Lwo flngers Lo a couple of very sharp blades. 1here ls value ln Lhese companles aL currenL levels, however, and l'll hold ulamondClusLer for now.
l am selllng London aclflc Croup aL Lhe markeL open because of someLhlng l call Lhe 3 Lo 3" effecL. llllquld sLocks falllng beneaLh 3 ofLen fall much furLher because of margln calls LhaL klck ln ln Lhe 3-3 prlce range. lorced selllng ln llllquld sLocks ls a reclpe for prlce rlsk, so l have found lL prudenL Lo geL ouL of sLocks as Lhey cross below 3. lL ls a very rare case LhaL l pay aLLenLlon Lo absoluLe share prlces, buL Lhls ls one of Lhem.
l should noLe LhaL ulamondClusLer ls abouL Lo lose slgnlflcanL Luropean buslness because of Lr|csson's (L8lC?, news, msgs) cosL-cuLLlng and Lhe Luropean slowdown. 1hls non-u.S. buslness had shlelded ulamondClusLer from some of Lhe rampanL devaluaLlon ln Lhe e-consulLancy secLor. noL anymore. neverLheless, l expecL boLh layoffs and qulLe slgnlflcanL cash draln over Lhe comlng quarLers aL ulamondClusLer. AL currenL prlces, however, Lhls pesslmlsm ls largely dlscounLed. WheLher ulamondClusLer wlll recover before Lhe end of Lhe SLraLegy Lab round ls a maLLer ln serlous doubL. Moreover, ulamondClusLer has a blg opLlons compensaLlon problem, much as l descrlbed wlLh Adobe. neverLheless, Lhe value flve years or so ouL should be greaLer Lhan lL ls now, and Lhe company has become an aLLracLlve acqulslLlon LargeL wlLh a load of cash on Lhe balance sheeL. 1he earnlngs power ln good Llmes ls roughly abouL 33 of Lhe currenL share prlce neL of cash, wlLh no debL and a reslllenL buslness model.
An evenL play, sans Lhe evenL Sell Spher|on (Sln, news, msgs) aL Lhe markeL open. 1hls was an evenL-drlven value play, and Lhe evenL occurred afLer l submlLLed Lhe sLory. ln Lhls case, Lhe evenL dld noL look llke l LhoughL lL would look. 1oo laLe Lo cancel Lhe sLory, so Lhe order wenL Lhrough and l boughL a poslLlon. Cne more reason l say learn whaL you can from me, buL don'L lmlLaLe me. now l'm selllng lL because ln evenL-drlven lnvesLmenL lf Lhe evenL does noL Lurn ouL as predlcLed, Lhe only prudenL Lhlng Lo do ls Lo exlL Lhe poslLlon. Spherlon ls llkely Lo announce horrendous numbers, and Lhere ls prlce rlsk ln Lhe sLock. A good argumenL can be made LhaL lL ls only falrly valued ln Lhe 7's, noL undervalued. 1o [usLlfy a sell l musL only be able Lo make such an argumenL.
WhaL happened? As Lhls was an evenL-drlven value Lrade, for Lhe lnvesLmenL Lo work we had Lo have Lhe evenL go off nearly as planned. ln Lhls case, Lhe evenL -- a floaL of subsldlary Mlchael age ln London -- dld noL go off nearly as planned. AcLually, Lhe prlclng sLlll hlL Lhe boLLom of my model, so Lhere was some safeLy ln Lhe prlce l pald glven Lhe lnformaLlon l had.
1he clrcumsLanLlal evldence polnLs Lo some skullduggery, however. Mlchael age's offlcers had some lncenLlve Lo have Lhe offerlng prlced low. now any opLlons LhaL Lhey geL -- and LhaL Lhey can use Lo lncenLlvlze employees -- wlll be prlced low. Moreover, Lhey had lncenLlve Lo do an offerlng raLher Lhan Lo sell Lo oLhers ln a prlvaLe LransacLlon worLh as much as 23 more. 1he lncenLlve lnvolved Lhe facL LhaL age managemenL was geLLlng 6 of Lhe company and Lhere was a large 12 overalloLmenL for Lhe underwrlLers. unforLunaLely, Lhere was every lncenLlve, excepL flduclary responslblllLy Lo Lhe shareholders, Lo prlce Lhls offerlng low. Mlchael age ls a good buy now over on Lhe London exchange. l doubL LhaL lL wlll sLay under 200p long.
Also, lL appears LhaL 8ay Marcy, Lhe CLC of Spherlon, now wlshes Lo use Lhe proceeds Lo pay off some debL and Lhen hold cash for Lhe downLurn. 1hls ls opposed Lo Lhe prevlous sLaLemenL "pay down all debL and buy back sLock." 1he Lwo sLaLemenLs lmply drasLlcally dlfferenL levels of confldence ln Lhe buslness. Cne poLenLlal caLalysL -- agaln, Lhls was an evenL- drlven Lrade/speclal slLuaLlon -- was LhaL Lhe company would aL leasL supporL lLs sLock ln Lhe markeL. 1haL would be relaLlvely easy Lo do glven Lhe sLock's llllquldlLy. A buyback of 30 Lo 40 of Lhe caplLal sLock could even push Lhe moderaLely hlgher, and wlLh some more opLlmlsLlc pro[ecLlons, bulld more lnLrlnslc value per share. lL ls noL Lo be.
A board member who was selllng large chunks of sLock ln Spherlon durlng Lhe monLhs leadlng up Lo Lhe offerlng could be a LargeL of shareholder scorn. 1he prevalenL ldea was LhaL Lhls was dlsLressed selllng for hlm because of personal flnanclal dlfflculLles. Lven lf Lrue, he engaged ln masslve dumplng of large blocks ln Lhe monLhs leadlng up Lo some very bad news. Spherlon has never been Lhe besL-managed company, buL Lhe degree of funny buslness here ls lllumlnaLlng as Lo whaL managemenL wlll do wlLh fuLure cash flows.
LvenL-drlven Lrades occaslonally don'L work ouL ln Lhe shorL-Lerm, buL whaL you wanL ls a fundamenLal floor Lo your valuaLlon ln Lhe worsL posslble case. l Lhlnk we have LhaL here, and lL ls around Lhe mld 7's. 8uL l'm noL hanglng around for Lhe quesLlonable appreclaLlon poLenLlal and sure-flre bad news LhaL managemenL wlll announce regardlng earnlngs wlLhln Lhe nexL Lwo or Lhree weeks.
Also, before Mlchael age, Lhe company had slgnlflcanL dlfflculLles produclng free cash flow. lf Lhey [usL sold off all Lhelr free cash flow producLlon, Lhe slLuaLlon could deLerloraLe, and we can'L know Lhls for cerLaln yeL. 1hls slLuaLlon would have been mlLlgaLed lf Lhey had recelved $300 mllllon more ln Lhe offerlng, as we were recenLly Lold Lo expecL. lnsLead, we are lefL wlLh Lhe lmage of a desperaLe seller ln need of much more shareholder-frlendly managemenL and a beLLer economlc ouLlook.
Iourna|: Apr|| 2, 2001 - |ace order to buy 1,000 shares of Va|ueC||ck (VCLk, news, msgs) at a 3 1]32 ||m|t, good unt|| cance|ed.
WhaL prlce reprlclng? Where's Lhe lnslder buylng?
C|sco (CSCC, news, msgs), Inte| (ln1C, news, msgs), M|crosoft (MSl1, news, msgs), Sun (SunW, news, msgs)? Cf course, l could probably counL off hundreds, and lL ls a llLLle unfalr Lo slngle ouL Lhese companles. Cnly a llLLle. lL ls noL LhaL managemenL ls noL presclenL. ln mosL cases, Lhey knew Lo sell heavlly aL Lhe Lop -- or aL leasL as heavy as Lhey could wlLhouL seemlng lmproper. 1hese are lndlvlduals who have made mllllons lf noL bllllons, and yeL Lhey are noL buylng back Lhelr company sLock ln Lhls Llme of need. ln facL, many chose opporLune Llmes durlng Lhe !anuary bear markeL rally Lo glve glfLs of sLock -- Lhereby maxlmlzlng Lhe Lax beneflL whlle Lhe golng was good. Cood Lhlng Lhey dldn'L walL. (MlcrosofL ls Lhe parenL of MSn MoneyCenLral)
AnoLher conLroverslal aspecL of all Lhls ls LhaL many of Lhese companles have been execuLlng masslve share buybacks wlLh funds from corporaLe coffers as Lhese execuLlves and foundlng shareholders have sold off Lhelr shares. Shareholder cash provldlng llquldlLy for Lhelr offlcers Lo dump sLock? Sure. Pappens all Lhe Llme, especlally ln Lhe Lech lndusLry, where Lhe phenomenon of prlvaLe companles exlsLlng ln Lhe publlc domaln ln order Lo Lake advanLage of Lhe publlc ls rampanL. 1hls ls noL a new problem, buL Lhe venLure caplLallsL mlndseL of Lhe lasL decade has exacerbaLed lL.
Shareholders oughL noL expecL lnslder buys Lo sLarL anyLlme soon. Aslde from Lhe general lack of value, mosL corporaLe offlcers and employees have [usL had opLlons reprlced, and oLhers are conslderlng lL. Why pay for someLhlng you can [usL Lake? CpLlons reprlclng ls one of Lhe mosL blaLanL forms of LhefL from shareholders LhaL corporaLe offlcers have aL Lhelr dlsposal. 1he larger Lhe company, Lhe greaLer Lhe degree of LhefL. lf Clsco reprlces -- as has been rumored -- lL very well may be Lhe greaLesL slngle LhefL from shareholders ln hlsLory.
Moreover, porLfollo manager !ames Clarke of 8randywlne AsseL ManagemenL suggesLs LhaL opLlons LhaL can be reprlced are worLh a whole heck of a loL more Lhan 8lack-Scholes or Lhe company's annual reporL would have you Lo belleve. l know Clarke, a good frlend of mlne, Lo have aL leasL Lhrlce-dally orlglnal LhoughLs, and Lhls one was an excellenL one.
Pere's how lL works. 8e aware LhaL Lhls parL, however, ls my exLrapolaLlon of hls lnslghL. lf an employee has been glven a call opLlon Lo buy sLock aL cerLaln prlce, one can poLenLlally calculaLe Lhe value of Lhe opLlon because Lhere ls rlsk lf Lhe sLock prlce falls and Lhere ls galn lf Lhe sLock prlce lncreases. lf Lhe opLlon can be relssued or reprlced so as Lo ellmlnaLe or mlLlgaLe rlsk lf Lhe sLock prlce falls, how does one value Lhe opLlon? Well, you are baslcally puLLlng someLhlng akln Lo zero ln Lhe denomlnaLor of Lhe reward/rlsk Lradeoff, whlch uncaps Lhe value of Lhe opLlon. lf a company were Lo pay cash ln lleu of such opLlons of such hlgh value, whaL would Lhe cash amounL be? Would lL be lnflnlLy? no, buL lL would be very hlgh, and LhaL's noL good for sLockowners, mosL of whom are CMls (CuLslde asslve MlnorlLy lnvesLors), ln Lhe parlance of 1hlrd Avenue's MarLy WhlLman.
So leL's recap.
- er my [ournal enLry lasL 1uesday, many Lech companles are drasLlcally overreporLlng cash earnlngs per share -- by a facLor of 10 or more -- by relylng on opLlons compensaLlon LhaL does noL appear on Lhe proflL/loss sLaLemenL. Lxample:S|ebe| (SL8L, news, msgs), whlch would have masslvely negaLlve per share cash earnlngs lf lL pald ln salary whaL lL pald lLs employees ln opLlons lasL year. - WlLh few excepLlons, lnslders are noL sLepplng up Lo buy shares yeL, even Lhough Lhey are faL wlLh proflLs from selllng Lhe same shares aL much hlgher prlces, posslbly alded by masslve share buybacks uslng shareholder money. Lxample:Lxodus (LxuS, news, msgs), whlch saw lLs execuLlve offlcers sell down Lhelr holdlngs Lo near-nll lasL summer. 1here ls sLlll selllng occurrlng. And dare l menLlon MlcrosofL? WlLness vs galore locklng ln Lhelr forLunes and now holdlng only Loken amounLs of shares. - 1he rampanL pracLlce of reprlclng and relssulng opLlons afLer a sLock prlce fall ln effecL ls llke paylng employees wlLh lLems of near- llmlLless value, whlch ralses Lhe quesLlon of wheLher we should deducL near- llmlLless expense from Lhe lncome sLaLemenL. Lxamples: 1oo many. Cne or Lwo examples wouldn'L do Lhls [usLlce. 8uL waLch for Clsco Lo reprlce lLs opLlons. 1hey've shelved Lhe plans for now buL are conslderlng lL. Whlch brlngs me Lo my orlglnal Lhesls. When Lhese sLocks were golng up, greaLer fools worldwlde made mllllons. Many kudos Lo Lhose non-lnslders who were able Lo Lake advanLage of lL wlLhouL rolllng Lhe money lnLo yeL anoLher foollsh ldea. now Lhe zero-sum naLure of growlng companles LhaL conslsLenLly dlluLe ouL and Lake advanLage of Lhelr sLaLus ls crysLalllzlng ln Lhe naLlon's pockeLbooks. ?eL l cannoL begln Lo Lell you how common a quesLlon So, has Clsco boLLomed?" ls whenever people dlscover my occupaLlon. So wheLher any of Lhese lssues are crysLalllzlng ln anyone's mlnd ls anoLher maLLer.
now LhaL Lhe bubble ls prlcked, Lech sLocks wlll face scruLlny Lhey never faced before. lL ls a good Llme Lo sLarL plcklng prlces based on a solld undersLandlng of Lhe fundamenLals behlnd Lhese companles. WheLher we have a bear rally or noL, greaLer bargalns are sure Lo come, and some wlsh llsL" prlces may come lnLo vlew on Lhe Lruly greaL, shareholder-frlendly companles wlLh permanenL compeLlLlve advanLages. lor now, l remaln unexclLed by Lhe prlces l see ln general ln Lhe markeL, and l'm happy Lo keep some powder dry for beLLer values laLer.
Va|ueC||ck (vCLk, news, msgs), a currenL holdlng ln Lhe porLfollo, was knocked down no doubL by some wlndow-dresslng aL Lhe end of Lhe quarLer. Who or whaL would wanL Lo show valueCllck, an lnLerneL adverLlslng flrm, as quarLer-end holdlng? Popefully Lhls wlll draw ln more sellers. 1he company has norLh of $3 a share ln cash and securlLles and ls Lradlng aL $3 and small change. l should be clear, however, LhaL managemenL are acLlng foollsh. 1hey've been buylng companles wlLh Lhelr 60-cenL dollars, l.e., Lhelr shares, and LhaL ls [usL nonsenslcal and wasLeful. A buyback would work wonders for lnvesLor confldence and maybe even allow people Lo Lhlnk LhaL $3 ln Lhelr hands ls worLh aL leasL $3.
Iourna|: Apr|| 12, 2001 - Se|| ent|re pos|t|on |n D|amondC|uster Internat|ona| (D1I, news, msgs) at the open.
- Se|| ent|re pos|t|on |n Cr||m| Mae (CMM, news, msgs) at the open.
- Se|| short 7S shares of koh|'s (kSS, news, msgs) at the market.
reparlng for more bad news l'm selllng my enLlre Cr||m| Mae (CMM, news, msgs) and D|amondC|uster Internat|ona| (u1l, news, msgs) poslLlons aL Lhe markeL open.
A slgnlflcanL worsenlng ln Lhe commerclal real esLaLe markeL could undo Lhe former, and on Lhe laLLer, l am [usL Laklng advanLage of a mlndless bear-markeL rally ln Lech.
Also, l expecL LhaL ulamondClusLer sLock wlll noL hold up well ln Lhe face of as-yeL unannounced news of slgnlflcanL weakenlng ln Lurope. lLs largesL cllenL Lhere ls Lr|csson (L8lC?, news, msgs), whlch ls of course havlng some Lrouble. Word ls LhaL Lrlcsson's consulLanLs are geLLlng Lhe ax, and ulamondClusLer would be ln LhaL group.
l'll also shorL 73 shares of koh|'s (kSS, news, msgs) aL Lhe markeL. Same-sLore sales growLh ls clLed wldely as far and above Lhe besL ln Lhe lndusLry. Ck. 8uL Lhls growLh oversLaLes Lrue organlc growLh. Sales per square fooL has been Lracklng ln Lhe very low slngle dlglLs. 1he company ls Lurnlng Lo debL Lo flnance Lhe expanslon, and kohl's has been prlced much Loo hlgh for a whlle now.
Also, kohl's has Lhe same opLlons-compensaLlon problem LhaL l have dlscussed prevlously wlLh regard Lo Lechnology sLocks. LasL year, nearly $270 mllllon ln opLlons compensaLlon was handed Lo employees, whlch largely dlluLes much of lasL year's lncome.
Iourna|: Apr|| 13, 2001 - Se|| short 100 shares of Genera| L|ectr|c (GL, news, msgs) at a ||m|t of 44.
- Se|| short 100 shares of kr|spy kreme (kkLM, news, msgs) at a ||m|t of 36.
- 8uy 600 shares of De|ph| Automot|ve (Dn, news, msgs) at a ||m|t of 11.
CL: brlnglng good Lhlngs Lo earnlngs? llrsL, leL me [usL re-emphaslze LhaL my Lrades here ln fake-money land should noL be followed verbaLlm. ?esLerday l sold some shares of Cr||m| Mae (CMM, news, msgs) aL Lhe markeL open. 1he sLock gapped down nearly 20 before rallylng nearly 30. llllquld, low-prlced sLocks are sub[ecL Lo exLreme swlngs. 8ecause l ofLen lnvesL ln such securlLles, l always use llmlL orders, and l never enLer Lrades Lhe nlghL before ln real llfe. l llke Lo geL a look aL Lhe markeL before l sLarL maneuverlng for a besL-prlce execuLlon. Pere ln SLraLegy Lab, l Lend Lo be a llLLle fllppanL wlLh my Lrades - slnce Lhey are ofLen noL securlLles ln whlch l really have poslLlons. Also, Lo wrlLe someLhlng up and never geL execuLed - well, LhaL has happened Lo me Loo much here, so l enLered markeL orders
Slmllarly, l'd been meanlng Lo puL shorL kohl's" up here for aL leasL a week or so. l flnally goL around Lo lL -- and Lhe Llmlng was boLh forLulLous and unforLunaLe. 1he sLock fell slgnlflcanLly aL Lhe open on an announcemenL LhaL flLs my Lhesls qulLe perfecLly. ?eL because l enLered a markeL aL open order, Lhe Lrade execuLed on Lhe gap down. Agaln, noL someLhlng l would do ln real llfe, buL Lhls lsn'L real llfe and markeL orders are ofLen Lhe besL way noL Lo wasLe words. Clven Lhe unforLunaLe resulLs of my markeL orders ln Lhls forum, l wlll go back Lo poLenLlally wasLlng words (and uslng llmlL orders).
ShorL 100 shares Genera| L|ectr|c (CL, news, msgs) aL 44 llmlL, good unLll cancelled. CL has been brlnglng good Lhlngs Lo earnlngs for a long Llme now. unforLunaLely, Lhose earnlngs aren'L whaL Lhey are cracked up Lo be. Lverybody knows Lhls, buL everybody leLs lL sllde because Lhose earnlngs are so danged conslsLenL. WhaL happens Lo Lhese klnds of sLocks when Lhose earnlngs show any slgn of sLraln? CL wlll brlng every ounce of lLs subsLanLlal resources Lo manage earnlngs such LhaL CL does noL mlss whlle !ack Welch ls sLlll ln power. ?eL Lhe economy wlll hlL CL, desplLe !ack Welch's clalms Lo Lhe conLrary. 1he sLock should be aL leasL 30 cheaper. 1hey overpald for Poneywell, an acqulslLlon whlch wlll prove Lo be qulLe unforLunaLe. And Lhe facL LhaL Lhey have a reLlrlng legend ln Lhe CLC spoL, well, falry Lales are no good wlLhouL Lhe handsome prlnce.
ShorL 100 shares of kr|spy kreme (k8LM, news, msgs) aL 36 llmlL, good unLll cancelled. 1hls ls noL SLarbucks. no one ls really addlcLed Lo Lhese confecLlons. uonuLs are an expendable lLem comlng ouL of aL leasL seml-dlscreLlonary spendlng. 8uL LhaL's almosL beslde Lhe polnL, and Lhe polnL ls noL LhaL SLarbucks has had some dlfflculLy creaLlng shareholder value even wlLh an addlcLlve producL and cool concepL. no, Lhe polnL ls LhaL krlspy kreme's $17 mllllon ln neL lncome pales nexL Lo lLs nearly $1 bllllon valuaLlon. 1he neL lncome also sLopped navlgaLlng Lhe cash flow sLaLemenL durlng Lhe lasL nlne monLhs. lree cash flow ls ln Lhe slngle dlglLs. And sLock ls belng lssued ln abundance. 1here ls a lock-up explraLlon Lo deal wlLh. Ch, Lhe llsL goes on and on.
And, Lo flnlsh off Lhe Lrades, buy De|ph| Automot|ve (uP, news, msgs) aL 11 llmlL, good unLll cancelled. lf Lhls execuLes, l'll glve reasons why.
Iourna|: Apr|| 17, 2001 Don't be d|stracted. C|sco |s |n far worse shape than even the d|sma| forecast |t presents.
Pldden ln Clsco's bad news, more bad news C|sco Systems (CSCC, news, msgs) ls wrlLlng off well over 60 of lLs lnvenLory! 1hey are Lrylng Lo use Lhe one-Llme wrlLe-off sneak-a-roo Lo greaL effecL here. 1haL ls, "Pey, we've goL bad news on Lhe earnlngs fronL, so leL's Lake bllllons ln charges Lo wrlLe off all Lhe parLs of Lhe buslness we know we managed poorly. And Lhen leL's say we'll acLually be proflLable Lhls quarLer before Lhe charges!"
uo you buy lL? l don'L. 1hls ls a company LhaL suffers from a Lremendous lack of shareholder- orlenLaLlon. A prlvaLe company ln Lhe publlc domaln, exlsLlng Lo Lake advanLage of shareholders, noL Lo beneflL shareholders. Whlle !ohn Chambers, Lhe CLC, sLaLes LhaL Lhe hardesL Lhlng he has had Lo do ls lay off Lhese Lhousands of workers, well, LhaL's only because he and hls l8 crew leL only LrusLed "frlendly" analysLs ln on Lhe quarLerly conference calls.
LeL's look aL whaL Clsco ls dolng:
- Workforce reduct|on charge. Clsco ls Laklng aL leasL a $300 mllllon charge Lo lay off more Lhan 8,300 people. 1haL approaches one- quarLer of Lhe work force and Lells us LhaL Lhls ls noL by any means a Lemporary lull ln buslness. ln facL, Lhls Lells us LhaL Clsco really does noL know wheLher or noL Lhe long-Lerm growLh raLe can even approach 30-30, desplLe lLs asserLlons Lo Lhe conLrary. lf Clsco really belleved Lhls, Lhey would plan for lL. And a 23 work-force reducLlon lsn'L plannlng for lL. - Conso||dat|on of excess fac|||t|es. Pere's anoLher $300 mllllon ouL Lhe door and anoLher slgn LhaL 30-30 growLh "long- Lerm" ls a plpedream. Clsco was Lo bulld a brand-spanklng new campus abouL a mlle and a half from my house here ln souLh San !ose. orLlons of lL were supposed Lo be modeled afLer snooLy alo AlLo's downLown area. lans on hold lndeflnlLely, now. oor Clsco. 1hey couldn'L even bulld Lhelr very own Lrophy campus llke all Lhe oLher flash-ln-Lhe-pan never-can-fall growLh sLorles goL Lo do before Lhey wenL busL. Pow unfalr! - Asset |mpa|rment charges. 8ye-bye Lo $300 mllllon or so. 1hls ls a goodwlll wrlLe-off, whlch means, "We overpald aL leasL $300 mllllon for acqulslLlons over Lhe lasL few years." PonesLly, Lhls number seems low. LxpecL more where Lhls came from -- only Lremendous mlnd-over-maLLer denlal ls keeplng Clsco from puklng yeL agaln and ln greaLer volumes.
Cops, dld l almosL forgeL Lhe $2.3 bllllon charge for lnvenLory wrlLe-offs? Clsco would llke me Lo, buL Clsco's dreamlng agaln. 8ead Lhe press release: "Clsco expecLs Lo Lake a resLrucLurlng charge of $800 mllllon Lo $1.2 bllllon" -- and Lhen llsLs ouL Lhe Lhree componenLs of Lhe charge, as l dld above. And Lhen lL puLs an "also" ln Lhere. As ln, "Ch, by Lhe way, Lhere's anoLher $2.3 bllllon comlng ouL of lnvenLory, buL don'L pay Loo much aLLenLlon Lo LhaL."
1haL ls over 60 of lnvenLory vaporlzed wlLh a slmple charge. 1haL ls very real money ouL Lhe door -- cosLs LhaL Clsco experlenced buL wlll never recoup.
1o puL ln more real Lerms, remember Lhose $3.7 bllllon ln proflLs Clsco sald lL earned over 1993- 1998? Well, Clsco has goLLen so blg LhaL lL can now Lake a one-Llme charge Lo ellmlnaLe 1993- 1998 from Lhe record books. lmpresslve, huh?
AcLually, lL geLs more lmpresslve. lf one accounLs for Lhe shareholder dlluLlon from masslve opLlons compensaLlon abuses, you could poLenLlally add LoLal lncome from 1991-1994 Lo Lhe wrlLe-off.
Ch, numbers Lo warm a shareholder's hearL.now, we awalL Lhe reprlclng of opLlons, or shall l say, "sheer ecsLasy walLlng ln Lhe wlngs."
Iourna|: Apr|| 18, 2001 - no|d a|| pos|t|ons. Inte| |s much more d|ff|cu|t to tear apart than C|sco Systems, but I'|| try.
ueclpherlng lnLel's news now lL's lnLel's Lurn. llrsL Lhlng one noLlces ls LhaL Lhe press release ls noL sLrucLured Lo hlde much. 1haL's because Inte| (ln1C, news, msgs) beaL lLs lowered guldance, and ls lndlcaLlng lLs mlcroprocessor buslness has sLablllzed. no need Lo hlde good news
And Lo be perfecLly honesL, lnLel ls much more dlfflculL Lo Lear aparL Lhan C|sco Systems (CSCC, news, msgs). 1he abuses are slmply noL as egreglous. l'll glve lL a college Lry, however.
Cne blg number LhaL sLands ouL ls Lhe $23.2 bllllon LhaL lnLel has spenL slnce 1990 buylng back shares. reLLy lmpresslve. unforLunaLely, Lhere ls roughly Lhe same number of shares, ad[usLed for spllLs, ouLsLandlng now as back Lhen. ln facL, Lhere may be even a few Lens of mllllons more shares. Was LhaL enLlre $23.2 bllllon dlluLed ouL of exlsLence by opLlons programs and sLock lssuances for employees and managemenL under Lhe CAA Lable? AlmosL.
When Lhe employee execuLes a $2 opLlon and Lurns around Lo sell Lhe sLock aL $30, Lhe company geLs LhaL $2 plus a Lax beneflL, boLh of whlch are offseL by dlluLlon of Lhe common shareholder. Cver Lhe lasL decade, lnLel has reallzed abouL $8 bllllon ln cash lnflows from Lhese opLlons exerclses and from Lhe assoclaLed Lax beneflLs. So lf Lhe share counL sLays abouL even over Lhe decade, Lhe absoluLe dollar amounL of dlluLlon Lo shareholders ls roughly $23 bllllon mlnus $8 bllllon, whlch equals $13 bllllon.
1haL $13 bllllon ls only roughly one-Lhlrd of Lhe $46 bllllon ln neL lncome lnLel reporLed from 1991-2000. Cver Lhe long-Lerm, Lhls ls how much lnLel's opLlons compensaLlon and sLock compensaLlon pollcles dlluLe shareholders, and hence a rule of Lhumb mlghL be Lo dock lnLel's reporLed earnlngs numbers by a abouL one-Lhlrd when Lrylng Lo flgure ouL value. lf lnLel demonsLraLes a penchanL for re-prlclng -- a pracLlce LhaL ls [usL sheer LhefL from shareholders, ln my oplnlon -- Lhen earnlngs geL docked a loL more.
AnoLher aspecL of lnLel's earnlngs reporLs ls LhaL lL reporLs earnlngs before goodwlll wrlLe-offs, amorLlzaLlon and ln-process 8&u charges. lf you are golng Lo add back goodwlll charges Lo earnlngs, Lhen you have Lo add back Lhe goodwlll amorLlzaLlon and charge-offs Lo Lhe balance sheeL. lnLel charged off $660 mllllon Lhls pasL quarLer, $1.7 bllllon ln 2000, and $803 mllllon ln 1999. 1hese are slgnlflcanL amounLs of cash ouL Lhe door. So whlle Lhey are non-cash charges now, lL ls lmporLanL Lo remember LhaL all Lhese charges are only money spenL by lnLel ln Lhe pasL flnally maklng lLs way Lhrough Lhe lncome sLaLemenL.
l am a blg fan of Lhe proposal Lo ellmlnaLe Lhe amorLlzaLlon of goodwlll. LeL Lhe goodwlll sLay on Lhe balance sheeL for all Lo see. 1hls way we can Lell exacLly how much money Lhe company has wasLed ln Lhe pasL by slmply looklng aL whaL Lhe company ls earnlng now and looklng aL whaL Lhe company has lnvesLed Lo geL Lo Lhe now. Coodwlll amorLlzaLlon hldes mlsLakes. When Lhe goodwlll amorLlzaLlon doesn'L hlde mlsLakes fasL enough, you see exLra charge-offs, as we saw wlLh Clsco earller Lhls week. Shareholders should noL wanL mlsLakes hldden.
As for lnvenLory concerns, nowhere dld you see ln lnLel's reporL anyLhlng close Lo Lhe horrendous wlpeouL of 60+ of lnvenLory LhaL Clsco reporLed Lhe day before. Clsco wroLe LhaL lnvenLory off and Lhen sald Lhey expecL Lo lncrease lnvenLory Lurnover. l would hope so! All ln all, LhaL sorL of blg baLh accounLlng/funny buslness ls noL ln lnLel's quarLerly sLaLemenL. lL ls clues llke Lhese LhaL lead me Lo have much more LrusL ln whaL lnLel ls Lelllng me Lhan whaL Clsco ls Lelllng me.
noL all ls rosy ln lnvenLory-land aL lnLel, Lhough. l see lnvenLorles [umped over 29 durlng Lhe quarLer even as revenues fell 23 sequenLlally. When you are ln a buslness LhaL seLs Lhe gold sLandard for planned obsolescence, such an lnvenLory bloaL ls noL generally good. lL also hlLs operaLlng cash flow. ln facL, Lhe $411 mllllon [ump ln lnvenLory nearly obllLeraLes Lhe $483 mllllon ln flrsL quarLer neL lncome.
LasL year, wlLh buslness plcklng up, lnvenLorles [umped only 3.7. Could Lhere be an lnvenLory wrlLeoff ln Lhe fuLure? Sure. ln facL, we should expecL lL. 8uL l don'L expecL lnLel Lo clalm anyLhlng abouL lmprovlng lnvenLory Lurns when Lhey do.
8y Lhe way, lL was reporLed ln Lhe 8ay Area LhaL lnLel would noL bulld any more planLs here due Lo Lhe hlgh cosLs of dolng buslness. SmarL. Clsco, meanwhlle, was plowlng ahead wlLh plans for Lhe new campus ln my nelghborhood. noL smarL.
8y and large, l don'L Lhlnk success wenL Lo Lhe head of lnLel as much as lL dld Clsco. And so lL ls noL surprlslng LhaL scaLhlng commenLary on lnLel ls noL so easy Lo wrlLe as lL was for Clsco. Companles LhaL manage Lhemselves Lo please some Wall SLreeL bogey are bound Lo say and do sLupld Lhlngs when Lhey can no longer please Wall SLreeL.
8uL [usL because lnLel ls relaLlvely beLLer doesn'L mean lL ls absoluLely good. lor Lhe reasons glven above, l do noL belleve LhaL lnLel's currenL valuaLlon ls [usLlfled, Lhe afLer-hours 10 pop ln Lhe share prlce noLwlLhsLandlng.
Iourna|: Apr|| 2S, 2001 - Cover short pos|t|on |n Standard ac|f|c (SI, news, msgs) at 16.2S ||m|t.
- |ace order to buy 1,000 shares of Amer|can hys|c|ans Cap|ta| (ACA, news, msgs) at 16.S0 ||m|t.
- |ace order to buy 400 shares of I8 Inc . (I8, news, msgs) at 1S.2S ||m|t.
1wo buys wlLh upslde Lo spare Cover Lhe enLlre Standard ac|f|c (Sl, news, msgs) shorL poslLlon aL 16.23 llmlL, good unLll canceled. Larnlngs wlll be released afLer Lhe close, and l cannoL ask for much more from Lhls shorL. lf you remember, l sLarLed Lhls shorL lasL round wlLh an lnlLlal shorL around 30. l re-enLered Lhe shorL Lhls round subsLanLlally ln Lhe low 20's. now wlLh Lhe prlce fllrLlng around book value, Lhe sLock no longer vlolaLes one of my mosL successful rules of Lhumb: ubllc homebullders should noL Lrade much above book value. resenLly, SLandard aclflc doesn'L.
1hls ls noL a buy recommendaLlon, Lhough. l anLlclpaLe LhaL SLandard aclflc wlll warn golng forward and LhaL lL may have Lo wrlLe down some of lLs book value. 8uL cerLalnly Lhe easy money has been made on Lhe shorL slde, and hence lL ls Llme Lo cover.
8uy 1,000 shares of Amer|can hys|c|ans Cap|ta| (ACA, news, msgs) aL 16.30 llmlL, good unLll canceled. A muLual lnsurance company LhaL demuLuallzed ln an lC Lhls pasL uecember, Amerlcan hyslclans ls a Lerrlbly cheap sLock. 8ook value ls norLh of 30 a share, and a share buyback wlll only lncrease Lhe per share book value. 1he company underwrlLes low-llmlL medlcal malpracLlce pollcles as well as some workers compensaLlon lnsurance. 1he raLlos are headed ln Lhe rlghL dlrecLlon, and Lhe company ls qulLe proflLable as well as Lremendously overcaplLallzed. AL Lhe very leasL, Lhls sLock should be Lradlng aL a more modesL dlscounL Lo book value.
8uy 400 shares of I8 Inc. (l8, news, msgs) aL Lhe 13.23 llmlL, good unLll canceled. l8 ls Lhe garganLuan $17 bllllon sales beef and pork processor. AfLer a blddlng war LhaL lnvolved a managemenL group and Sm|thf|e|d Ioods (Slu, news, msgs), 1yson won Lhe rlghL Lo buy l8 for 30 a share. 1yson loods goL heaL from lLs shareholders over sLraylng so drasLlcally from chlcken. AfLer all, many porLfollo managers had boughL 1yson as one Lo beneflL from Lhe mad cow scare, noL as one Lo suffer from lL. ln any case 1yson found a reason Lo back ouL and dld. So l8 has fallen all Lhe way down Lo 13 -- half Lhe wlnnlng buyouL offer and aL abouL 63 of Lhe lnlLlal buyouL offer from Lhe managemenL group. l8 ls no greaL shakes ln Lerms of lLs buslness economlcs, buL lL ls worLh subsLanLlally more Lhan 13 a share. ln Llme, l expecL SmlLhfleld Lo make a subsLanLlally reduced offer aL a subsLanLlal premlum Lo Lhe currenL prlce. 1he downslde here ls falrly llmlLed.
Iourna|: Apr|| 27, 2001 - |ace a buy stop on prev|ous pos|t|on |n kr|spy kreme (kkLM, news, msgs) at 46, good unt|| cance|ed.
- |ace a buy stop on prev|ous pos|t|on |n Standard ac|f|c (SI, news, msgs) at 22, good unt|| cance|ed.
- |ace a buy stop on prev|ous pos|t|on |n koh|'s (kSS, news, msgs) at 62, good unt|| cance|ed.
- |ace a buy stop on the prev|ous pos|t|on |n Genera| L|ectr|c (GL, news, msgs) at S1, good unt|| cance|ed.
- |ace order to se|| 1,S00 shares of Va|ueC||ck (VCLk, news, msgs) at 4 ||m|t, good unt|| cance|ed.
When Lhlngs go wrong Conslderlng l've had four shorLs go Lhe wrong way laLely, l can'L be Loo upseL wlLh my poslLlon ln Lhe SLraLegy Lab. ShorLlng Lhlngs llke GL (CL, news, msgs), kr|spy kreme (k8LM, news, msgs) and koh|'s (kSS, news, msgs) ln Lhe face of one of Lhe flercesL bear markeL rallles ln hlsLory could have lefL me ln much worse shape
As lL ls, l Lrled Lo geL ouL of my Standard ac|f|c (Sl, news, msgs) shorL before Lhey released resulLs. l anLlclpaLed a Lyplcally promoLlonal press release, and goL lL. Larnlngs, revenue, backlog all up. unforLunaLely, so are lnvenLorles -- well ln excess of sales -- and debL, and cash ls way down. no cash flow sLaLemenL provlded. And [usL as unforLunaLely, no sooner dld l enLer my order Lhan lL rallled 21 ln Lwo days on shorL coverlng - gapplng lLs way ouL of reach of my llmlL order. An example of a llmlL order worklng ouL Lhe wrong way. l would much raLher have covered earller, buL wlLh no opporLunlLy Lo alLer Lhe order ln Lhe wake of Lhe new houslng numbers -- we're on a 24 hour delay here -- lL wasn'L posslble. l'll puL ln a buy sLop aL 22, good unLll canceled.
1he kohl's shorL, a poslLlon l enLered on a markeL order LhaL wenL off qulLe badly, has been slmllarly unforLunaLe. My Lhesls remalns lnLacL Lhere. l wlll puL a buy sLop aL 62, good unLll canceled, however. no need Lo lose my shlrL lf Lhe markeL goes haywlre Lo Lhe upslde. kohl's ls a greaL shorL aL 62, buL lL's also a beLLer shorL aL 70. no need Lo lose 8 on Lhe way Lo Lhe beLLer shorL.
Ceneral LlecLrlc ls a sLock l am convlnced wlll Lrade subsLanLlally lower ln Lhe wake of !ack Welch's reLlremenL and Lhe Poneywell acqulslLlon. lLs collecLlve powers Lo manage earnlngs are conslderable, buL a slowlng economy wlll showcase CL's weaknesses. noLably, absenL Lhe 110 surge ln proflL aL CL ower, CL would have shown a 23 decllne ln operaLlng proflL Lhls pasL quarLer. 1hose klnds of surges wlll noL be an ongolng evenL aL CL ower. AL Lhls polnL, glven lLs recenL sLrengLh and Lendency Lo rally hard wlLh Lhe markeL, l wlll place a buy sLop on Lhe poslLlon aL 31, good unLll canceled.
krlspy kreme Lrades ln a manner decoupled from any reasonable fundamenLal valuaLlon, much llke Lhe lnLerneL sLocks of 1999-2000. ln such cases, Lhe sLock floaLs on senLlmenL alone. My Lhesls remalns lnLacL -- Lhe sLock ls worLh aL besL 1/3 currenL levels, and evenLually senLlmenL wlll correcL lLs error. AcLually, l'm belng generous - 1/3 currenL levels approxlmaLes Lhe lC prlce, whlch was surely a blL hlgh. ln Lhe lnLerlm, Lhere can cerLalnly be wlld swlngs Lo Lhe upslde as shorLs rush Lo cover on any change ln general markeL senLlmenL, as has happened recenLly. Pence Lhe sLock has Lremendous shorL-Lerm upslde rlsk. Clven LhaL SLraLegy Lab ls a shorL- Lerm acLlvlLy and Lhe currenL Lrend seems Lo be hlgher, l'll place a buy sLop aL 46, good unLll canceled.
ln real llfe, l never enLer markeL orders, nor do l enLer llmlL orders wlLh good unLll canceled feaLures. l look aL sLocks l wanL Lo buy and shorL, seL LargeL prlces, and waLch Lhe markeL acLlon -- along wlLh my Lrader -- for Lhe besL prlce ln llghL of markeL condlLlons and recenL news. When l aLLack, l aLLack wlLh lnLraday llmlL orders. 8uL such orders are noL pracLlcal here. l've had a few flLs and sLarLs here ln SLraLegy Lab Lrylng Lo flnd Lhe opLlmum mlx of markeL orders and llmlL orders, and l'm noL sure l've found a saLlsfacLory meLhod yeL ln llghL of Lhe delay. As a pracLlcal maLLer, Lhe amounL of conLrol l have ln real llfe wlll never be aLLalnable here ln SLraLegy Lab, so l musL make do. ALLempLlng Lo cover a houslng shorL wlLh a llmlL order Lhe nlghL before naLlonal new homes daLa ls released ls noL a good way Lo go abouL Lhlngs. noLed.
valueCllck ls a good example. 1oday Va|ueC||ck (vCLk, news, msgs) releases earnlngs, and a good parL of my declslon on whaL Lo do wlLh LhaL poslLlon wlll depend on whaL Lhe earnlngs release reveals - and especlally how Lhe balance sheeL looks, slnce Lhls ls Lo a large degree an asseL play. l flgure Lhe sLock ls worLh aL leasL 4.30 as a sLand- alone enLlLy accounLlng for recenL share dlluLlon. 1o a sLraLeglc buyer llke Doub|eC||ck (uCLk, news, msgs), valueCllck could be worLh much more. 8uL wlLhouL knowlng whaL Loday's news wlll reveal, l'll make a conservaLlve move LhaL wlll llkely resulL ln a non-evenL. Sell 1,300 shares of valueCllck aL 4 llmlL, good unLll canceled.
l had prevlously boughL sLock ln D|amondC|uster (u1l, news, msgs) Lhls round aL 14 per share or so (and subsequenLly offloaded lL aL 10 or so, Lhlnklng l could buy lL back cheaper laLer). My Lhesls was LhaL ulamondClusLer was worLh abouL Lwlce Lhe prlce l pald and would make a nlce acqulslLlon. ln LhaL same enLry, l broughL up rox|com (xCM, news, msgs) as an alLernaLlve Lo ulamondClusLer. ?esLerday, Compaq Computer (CC, news, msgs) announced lL was buylng roxlcom for 3.73 per share cash. normallzlng varlous mulLlples over Lo ulamondClusLer based on Lhls new sLandard for valulng e-buslness consulLanLs, and ad[usLlng for Lhe hlgher marglns and beLLer cash producLlon aL ulamondClusLer, one flnds ulamondClusLer Lo be worLh abouL 21.30.
1hls ls a blL lower Lhan my orlglnal esLlmaLe of value, and no doubL reflecLs Lhe dlsLressed fuLure faclng many of Lhese flrms as sLand-alone enLlLles. ulamondClusLer had Lhe besL shoL, ln my oplnlon, of remalnlng proflLably lndependenL, and because of Lhls lL mlghL deserve a hlgher valuaLlon. As for Lhe opporLunlLy Lo buy ulamondClusLer back cheaper laLer, l doubL LhaL opporLunlLy wlll occur now. no lnvesLor has a 1.000 baLLlng average, buL every mlsLake deserves scruLlny and Lhls one wlll geL lL.
l wlll noLe LhaL lL seems llkely LhaL Lhere was a leak ln Lhe roxlcom deal wlLh Compaq. roxlcom sLock has been leaplng ln a manner ouL of proporLlon Lo lLs breLhren ln Lhe lndusLry-over Lwo days laLe lasL week Lhe sLock [umped 138. 1haL was abouL Lhe Llme Lhls deal was probably sLarLlng Lo come LogeLher. Pence, someone knew someLhlng -- and many people Lraded on LhaL knowledge, slnce volume was up Lo flve Llmes hlgher Lhan normal. SecurlLy regulaLors wlll probably never lnvesLlgaLe, buL lnvesLors should be ouLraged aL Lhls Lransfer of wealLh based on whaL looks on Lhe surface Lo be lnslde lnformaLlon.
Iourna|: May 23, 2001 - |ace order to buy 700 shares of We||sford kea| ropert|es (Wk, news, msgs) at 16.40 ||m|t, order good unt|| cance|ed.
A cheap plece of real esLaLe l walLed a few days Lo posL Lhls here, and so Lhls sLock has run up a blL. 1he phrase "cheapesL plece of real esLaLe on Lhe sLock exchange" ls bandled abouL qulLe frequenLly, so l won'L use LhaL hyperbole here. neverLheless, l can make a good case for neL real asseL value here over $30/share, and lL has been baslng around $16 for Lhe lasL four years
WhaL has changed ls LhaL We||sford kea| ropert|es (W8, news, msgs) ls llquldaLlng lLs mosL vlslble lnvesLmenL -- a [olnL venLure wlLh Coldman Sachs. 1hls [olnL venLure speclallzed ln rehablllLaLlng offlce bulldlngs -- Lurnarounds. So Lhe book value underesLlmaLes Lrue asseL value. A recenL sale wenL for a 23 premlum Lo book value.
1he chalrman of Lhls new ?ork real esLaLe lnvesLmenL LrusL ls dedlcaLed Lo buylng back sLock, and Lhe company has reLlred 20 of lLs shares ln Lhe pasL Lwo years. Wellsford lnvesLs ln commerclal real esLaLe mosLly around Lhe norLheasL.
8uL aL Lhls polnL, l've leL oLhers do Lhe walLlng for me long enough. 1lme Lo Lake a poslLlon.
Iourna|: May 30, 2001 - Se|| the ent|re Va|ueC||ck (VCLk, news, msgs) pos|t|on at a ||m|t of 3.20.
- Increase the ||m|t buy pr|ce on We||sford kea| ropert|es (Wk, news, msgs) to 16.4S.
WaLch for reLurn Lo Aprll lows and lower 1he lasL few Lradlng days noLwlLhsLandlng, chances are LhaL you feel as lf every sLock you look aL has moved up recenLly. ?ou would be correcL ln LhaL feellng. 1he recenL rally has been lncredlbly broad, wlLh over 80 of n?SL sLocks parLlclpaLlng almosL regardless of markeL cap or secLor. 1he problem ls, very few people acLually boughL Lhe Aprll lows. Pence, chances are you have also waLched several of your favorlLe or mosL wanLed sLocks creep (or leap) sLeadlly upward wlLhouL you. lL's a faLeful and frusLraLlng experlence, no doubL. 8uL lL does glve some lnslghL lnLo whaL professlonal managers are feellng
?es, Lhe phenomenon ls no dlfferenL for professlonal lnvesLors -- Lhey mlssed Lhe early Aprll lows en masse and have had Lo deal wlLh Lremendous lags ln performance ever slnce. 1he dlfference? rofesslonals by and large were noL fully lnvesLed when Lhe Lurn came, whlle Lhe lndlces by deflnlLlon were. ?ou have seen Lhe resulLs of Lhls phenomenon here ln Lhe SLraLegy Lab, where all Lhe players recelved $100,000 as Lhe markeL enLered one of Lhe sLeepesL four- week dlves ln hlsLory only Lo rebound wlLhln Lwo and a half weeks of hlLLlng lLs lows.
Cf course, wlLh each passlng day of Lhe rally, a few (hundred) more lnsLlLuLlonal holdouLs crossed Lhe llne and sLarLed buylng. AfLer all, muLual fund lnvesLors never dld pull money ouL of muLual funds alLogeLher. lL wenL Lo Lhe money markeL funds, noL Lo Lhe maLLresses. 1haL money came rushlng back wlLh Lhe ease of a cllck or a phone call, compoundlng Lhe cash-on-hand problem. Pence, we goL a "can'L mlss" rally, as ln "can'L mlss Lhe nexL bull markeL." ?eL, Lhe lndlces lnched achlngly ahead of Lhe lnsLlLuLlons' performance noneLheless. Whlch of course begeLs even flercer buylng. 1he aggresslve ones are uslng leverage, lf Lhey are able, Lo caLch up.
l can only conclude LhaL lL ls qulLe posslble we have noL yeL seen Lhe boLLom. SpeculaLlve booms llke Lhe 1920s and Lhe 1960s were followed noL only by sLeep sLock decllnes, buL also by sLocks falllng Lo absurd values. 1he afLermaLh of Lhe speculaLlve boom of Lhe 1990s has seen osLenslbly severe sLock decllnes, buL never durlng Lhe Aprll lows dld l flnd sLocks, generally speaklng, go on sale. 1here was no sale ln Lech, buL nelLher was Lhere a sale ln Lhe flnanclals, consumer producLs companles, cycllcals, eLc. CllL-edged brand names llke Coca-Co|a (kC, news, msgs) and G|||ette (C, news, msgs) have seen Lhelr valuaLlons reduced sllghLly, buL Lhey remaln qulLe hlghly prlced.
lndeed, by my calculaLlons -- Laklng lnLo accounL Lhe masslve corporaLe governance abuses borne of Lhe bull markeL -- many of Lhe blggesL Lech names and some of Lhe blggesL non-Lech names LhaL dld fall fell only Lo falr value aL worsL. no flre sale ln a fundamenLal sense aL all. WhaL ls falr value? l use an annual 10 reLurn Lo shareholders afLer dlluLlon, sllngs and arrows.
ConvenLlonal wlsdom says LhaL elLher we've seen Lhe boLLom, or LhaL Lhere wlll be one more leg down, creaLlng a W-shaped boLLom. lL ls posslble, even llkely, LhaL convenLlonal wlsdom wlll be proven wrong, and LhaL Lhe only alLernaLlve Lo Lhese Lwo opLlons wlll lnsLead occur. 1haL ls, Lhe Aprll lows wlll noL only be LesLed, buL plerced.
8ull markeLs: glfLs LhaL keep on glvlng 1hls ls noL a common vlewpolnL, buL you shouldn'L expecL lL Lo be. Such a vlewpolnL would lmply we don'L know where or when Lhe boLLom wlll be hlL. 8uL surely, "l don'L know" does noL sell. lL doesn'L sell adverLlslng, generaLe commlsslons, generaLe deals or aLLracL lnvesLors.
1hus, everyone from Cn8C Lo any broker, sell-slde analysL, markeL maven or personal flnance magazlne has a vesLed lnLeresL ln advanclng confldenL-soundlng markeL prognosLlcaLlon. And Lhe blas, of course, ls for a bull markeL, noL a bear. 8ull markeLs are slmply Lhe glfLs LhaL keep on glvlng.
Meanwhlle, several lf noL mosL CLCs of our greaLesL corporaLlons are by and large blowlng Lhe proverblal sunshlne.well, you geL Lhe ldea. 1o Lhe degree Lhey can aLLempL Lo Lalk consumer confldence and caplLal spendlng up, Lhey wlll all do Lhelr darndesL. AfLer all, when !ack Welch speaks, people llsLen. no maLLer LhaL he's slmply cheerleadlng hls own exlL. 1hlnk of managemenL as a car salesman desperaLe Lo please. lL's an overreachlng meLaphor, buL lL puLs one ln Lhe correcL defenslve mlnd frame when llsLenlng Lo such charlsmaLlc characLers. lL ls qulLe llkely LhaL Lhe gllmmers of hope we are hearlng from such sources are slmply [usL LhaL -- gllmmers, easlly explalned away ln Lhe fuLure as never havlng been cerLaln ln Lhe pasL.
So, l wlll go on record rlghL now as saylng LhaL Lhls ls a Llme of Lremendous uncerLalnLy abouL markeL dlrecLlon -- buL no more so Lhan aL any Llme ln Lhe pasL. l conLlnue Lo belleve Lhe prudenL vlew ls no markeL vlew. 8aLher, l wlll remaln conLenL ln Lhe cerLalnLy LhaL popular predlcLlons are less llkely Lo come Lo pass Lhan ls belleved and LhaL absurd lndlvldual sLock values wlll come along every once ln a whlle regardless of whaL Lhe markeL does.
1rade updaLes l'm movlng Lhe llmlL prlce on my ouLsLandlng order Lo sell Lhe Va|ueC||ck (vCLk, news, msgs) poslLlon down Lo 3.20. 1hls sLock was a case of good asseLs, bad buslness, bad managemenL. 1he resulL was cerLalnly predlcLable, and hence Lhls was a mlsLake on my parL. 8y and large l was looklng for a flucLuaLlon upward Lo neL asseL value. Looklng aL Lhls conservaLlvely, LhaL's where we are now. 1he LargeL came down Lo meeL us, and hence lL ls Llme Lo mlnlmlze Lhe lmpacL of Lhls Lrade Lo a small loss.
l wlll also ralse Lhe llmlL a nlckel on Lhe We||sford kea| ropert|es (W8, news, msgs) buy. 1he llmlL buy prlce should now be 16.43.
Iourna|: Iune 13, 2001 - |ace order to se|| S00 shares of Amer|can hys|c|ans Cap|ta| (ACA, news, msgs) at a ||m|t of 20.40.
- |ace order to buy 900 shares of Cascade Corp. (CAL, news, msgs) at 9.00 ||m|t.
- Increase the ||m|t buy pr|ce on We||sford kea| ropert|es (Wk, news, msgs) to 16.4S, change order to 600 shares.
A nlckel beLween me and break-even SLlll pushlng Lo geL back Lo break-even. l'd have achleved LhaL goal by now lf l had been a nlckel more generous wlLh my llmlL buy on We||sford kea| ropert|es (W8, news, msgs). Wellsford [usL boughL back 24 of lLs shares aL a huge dlscounL Lo lnLrlnslc value. Pence, lnLrlnslc value per share [usL [umped aL leasL $3 per share. 1he shares moved up Lo reflecL Lhls accreLlve acLlon by managemenL, buL now Lhey're sofL agaln. lL's noL ofLen LhaL l'll ralse my lnlLlal buy prlce on a sLock (usually, l leL mlssed opporLunlLles be), buL ln Lhls case 18.30 now ls cheaper Lhan 16.43 was back before Lhe buyback. lncrease Lhe llmlL buy prlce on Wellsford Lo 18.30, buL reduce Lhe number of shares Lo 600.
Also, sell 300 shares of Lhe Amer|can hys|c|ans Cap|ta| (ACA, news, msgs) poslLlon aL 20.40 llmlL, good unLll canceled. l Look advanLage of a no- bralner prlce when l Look such a large poslLlon, buL aL Lhls prlce l'll scale lL back Lo a sLlll large buL more average-slzed poslLlon. l conLlnue Lo be qulLe bulllsh on Amerlcan hyslclans, wlLh Lhe blggesL rlsk belng a dumb acqulslLlon by managemenL.
8ack Lo baslcs WlLh only a couple of monLhs unLll Lhe end of SLraLegy Lab, l have Lo say l'm qulLe dlsappolnLed wlLh my performance Lhus far. As l dld durlng my flrsL SLraLegy Lab lasL round, l klcked off Lhe round buylng several sLocks LhaL possessed a loL of shorL-Lerm prlce rlsk. CpLlmlsm (assoclaLed wlLh Lhe beglnnlng of a new round) and a wad of cash (fake, granLed by MSn MoneyCenLral) make for Loxlc Lwlns ln Lhe world of lnvesLlng. l should have been smarLer, even lf lL ls only fake money. And once havlng boughL such securlLles wlLh near- Lerm prlce rlsk, l should never have sold Lhem slmply because Lhey fell ln Lhe near Lerm. Pad l slmply held all Lhe sLocks l boughL Lhls round raLher Lhan selllng some of Lhem, l'd be much beLLer off. 1hls was largely Lrue lasL round as well. Ck, Lwo sLrlkes. Wlll MoneyCenLral glve me a Lhlrd chance?
lL ls noL ln my naLure Lo scramble for excess shorL- Lerm reLurn by Laklng on exLra rlsk. Pence, you wlll noL see me Lake masslve sLock poslLlons or leveraged opLlons poslLlons slmply Lo Lry Lo shooL Lhe llghLs ouL ln Lhese lasL few monLhs. As l dld lasL round, l'll Lry Lo recover by golng back Lo baslcs.
SLarL off wlLh a new order Lo buy 900 shares of Cascade Corp. (CAL, news, msgs) aL 9.00 llmlL, good unLll canceled. Cascade, a maker of forkllfL parLs wlLh slgnlflcanL brandlng and markeL share, was Lhe sub[ecL of a managemenL-led buyouL offer earller Lhls sprlng. 1he offer puL Cascade ln play, and afLer a well-run blddlng process LhaL lncluded more Lhan 10 parLles, an ouLslde group offered Lo buy Lhe company ouL for 17.23. ManagemenL came back wlLh a laLe 17.30 offer LhaL was properly re[ecLed by Lhe board.
1he buyouL fell Lhrough when Lhe ouLslde group encounLered some sklLLlshness on Lhe parL of lenders. noL surprlslng, several deals have been scuLLled because of weak debL markeLs. WhaL ls surprlslng ls LhaL Lhere was a flnal offer from Lhe group -- $13.73 a share -- LhaL was re[ecLed by Lhe board as well. ln oLher words, a leveraged buyouL can be done aL prlces 30 Lo 100 greaLer Lhan Lhe currenL prlce, and sharks are clrcllng.
8ecenLly C8 k|chard L|||s' (C8C, news, msgs) golng-prlvaLe LransacLlon goL a shoL ln Lhe arm when lL successfully placed [unk debL ln an oversubscrlbed offerlng. 1hls ls a good slgn LhaL wlLh lower lnLeresL raLes offseLLlng Lhe economlc rlsk, Lhe [unk markeLs are aLLempLlng a comeback. l expecL Cascade Lo be Laken ouL ln a reasonable Llme frame. 1hls llllquld sLock, whlch was Lransferred from Lhe hands of long-Lerm owners Lo arblLrageurs durlng Lhe blddlng process, was unceremonlously dumped by Lhose arblLrageurs when Lhe deal fell aparL. now approachlng half Lhe prlce bld [usL a few monLhs ago, Lhe shares of Lhls old economy dlehard appear a bargaln aL 4.3 Llmes Lralllng nonpeak L8l1uA (earnlngs before lnLeresL, Laxes, depreclaLlon and amorLlzaLlon) wlLh slgnlflcanL free cash producLlon. 1he sLock ls aL abouL Lhree Llmes peak L8l1uA. no doubL Lhe company faces rougher economlc Llmes ahead, buL wlLh a Lrlo of bldders wllllng Lo pay over $16 a share [usL a few monLhs ago, Lhere ls a margln of safeLy here.
Iourna|: Iune 20, 2001 - Se|| the ent|re pos|t|on |n I8 Inc. (I8, news, msgs) at the market.
1aklng Lhe easy Lrade 8uy sLocks cheap enough and Lhe news ls bound Lo be good. As Lhe deal for 1yson Ioods (1Sn, news, msgs) Lo buy I8 Inc. (l8, news, msgs) blew up ln laLe Aprll and wenL Lo Lhe courLs, l8 sLock fell Lo around $13, desplLe Lhe facL LhaL compeLlLlve blddlng for Lhe company less Lhan slx monLhs earller had prlced Lhe company aL $30 Lo $32 a share. Moreover, $13 represenLed a 30 galn back Lo Lhe $22.30 prlce aL whlch a managemenL-led group had offered Lo buy Lhe company. And flnally, $13 meanL LhaL lf Lhe deal wenL Lhrough as planned -- roughly 30 sLock, 30 cash -- Lhen you were geLLlng 1yson sLock for free. lf Lhe deal dld noL go Lhrough, one was geLLlng a slgnlflcanL cash-generaLlng buslness aL less Lhan book value. ln shorL, aL $13, one could argue LhaL any news was golng Lo be good news
l8 won lLs flghL Lo have Lhe merger agreemenL sLand, and so now l slL on appreclaLed shares of l8. lf 1yson's currenL share prlce holds and Lhe prevlously negoLlaLed merger agreemenL sLands, Lhen l8 wlll be boughL for a sum LoLal of abouL $23.40 per share. l8 closed aL $23.32 1uesday.
So Lhe naLural quesLlon ls, "WhaL now?"
8lsk arblLrageurs would now buy l8 sLock and shorL a pro raLa amounL of 1yson sLock ln an efforL Lo obLaln Lhe dlfference beLween LhaL $23.40 and Lhe $23.32. 1haL's an 8 spread, whlch, lf reallzed ln a reasonable Llme frame, represenLs a good reLurn. 8lsks for Lhese arblLrageurs lnclude LhaL Lhe deal prlce ls reduced or LhaL Lhe deal does noL pass anLlLrusL musLer. ln such a case, 1yson's sLock would rlse and l8's would fall. Cn Lhe arblLrageurs' slde ls a courL order mandaLlng 1yson do Lhe deal and 1yson's sLaLemenL LhaL lL would noL llkely appeal.
l am noL a rlsk arblLrageur. l belleve LhaL rlsk arblLrage ls a qulLe overcaplLallzed fleld and, by and large, noL currenLly a very proflLable endeavor unless one has slgnlflcanL access Lo borderllne lnslde lnformaLlon. 8ecause Lhere are only a few monLhs lefL ln Lhls round of SLraLegy Lab, Lhe only loglcal opLlon for me ls Lo sell l8 now and Lake Lhe galn.
1hose wlLh a longer-Lerm horlzon could make a good argumenL for holdlng onLo l8 and Laklng dellvery of Lhe $13 per share plus 1yson sLock when Lhe deal closes. lndeed, selllng l8 now ls equlvalenL Lo selllng Lhe 1yson sLock aL $7.16 per share before even recelvlng lL. 1he key Lo remember ls LhaL Lhe value of Lhe deal ls noL Lhe same Lhlng as Lhe shorL-Lerm compensaLlon Lo be recelved by l8 shareholders. 1haL ls, Lhe value of 1yson sLock ls noL necessarlly LhaL whlch Lhe markeL ls now quoLlng, as Lhe sLock ls under lnLense shorL pressure from rlsk arblLrageurs. Longer-Lerm holders who feel Lhey can correcLly [udge Lhe underlylng value of 1yson sLock as posslbly $11 or greaLer would flnd Lhe lmplled prlce of Lhe 1yson shares embedded ln Lhelr currenL l8 sLock Lo be qulLe a bargaln.
WlLh respecL Lo l8, l'm a blL laLe here ln SLraLegy Lab -- Lhe news was announced lrlday afLer Lhe deadllne for submlsslons for Monday Lrades. Maklng myself even more laLe, l dld noL submlL an enLry on Monday. Pence, my "auLomaLlc sell" of l8 ls on Llme-delay and lL has cosL me a buck or so. 1wo days laLe and maybe a buck and a half shorL.
Iourna|: Iune 22, 2001 - Se|| the ent|re Grubb & L|||s (G8L, news, msgs) pos|t|on at a 6.2S ||m|t, good unt|| cance||ed.
Pow Lo geL even An ouLslder mlghL Lhlnk flnd lnvesLors' Lhlnklng odd. resenLed wlLh new money Lo lnvesL, mosL seL goals of growlng LhaL money. 1hey seL LargeLs of 20, 30 or someLlmes much more. And Lhey seL off fully lnLendlng Lo do so. noL so odd, yeL.
Powever, once havlng losL money, lnvesLors Lend Lo seL a seemlngly conservaLlve new goal: breakeven. 1he lrony ls LhaL breakeven maLh ls one of llfe's crueler reallLles. 1haL ls, breakeven requlres a percenLage galn ln excess of Lhe percenLage loss lncurred. noL so conservaLlve.
Moreover, losses are Lhe ulLlmaLe sllppery slope. lf one has losL 20, Lhen one requlres a 23 galn Lo break even. lf one has losL 30, one requlres a 100 galn Lo break even.
As a resulL, Lhe goal of breakeven ls ofLen much more aggresslve Lhan one's lnlLlal lnvesLmenL assumpLlon. ln an aLLempL Lo geL back Lo breakeven, mosL lnvesLors slmply raLcheL up Lhe rlsks Lhey Lake. Cf course Lhls usually [usL raLcheLs up Lhe losses - and lncreases Lhe requlred reLurn back Lo even. 1alk abouL a deaLh splral.
My experlence ls LhaL when one has losses LhaL look oLher Lhan Lemporary, Lhere ls usually a reason. 1he approprlaLe correcLlve acLlon ls Lo lnvesLlgaLe Lhe reason for Lhe loss. More ofLen Lhan noL, l flnd LhaL l have sLrayed from Lhe conslsLenL meLhod of lnvesLmenL LhaL has served me so well for so long. lndeed, Lhls flndlng ofLen needs no lnvesLlgaLlon - l knew aL Lhe onseL of Lhe lnvesLmenL operaLlon LhaL l was sLraylng, yeL foollshly plowed ahead anyway.
All lnvesLors sLumble. usually some sLubborn lnslsLence plays a role. 8uL fools wlll noL be suffered llghLly ln a bear markeL. 1he rlsk of ruln ls real. As lnvesLors, we musL conLlnually guard agalnsL Lhe mlssLeps LhaL mlghL lead Lo losses - and reacL raLlonally lf we flnd ourselves down. AcLlng llke a fool afLer Lhe facL wlll only compound Lhe error.
orLfollo updaLes Sen|or nous|ng (SnP, news, msgs) ls acLlng beauLlfully and pays a nlce dlvldend. l would noL be a buyer here, and l do noL expecL flreworks for Lhe remalnder of Lhe round. 1he sLock was a sLeal aL 10 or below, and falr value ls beLween 13 and 17. 1he upper end of LhaL range may be reached as Lhe paymenL slLuaLlon ln senlor llvlng lmproves even more. 1he dlvldend cerLalnly enhances Lhe reLurn for long-Lerm holders.
nutt|g 8u||d|ng roducts (P8, news, msgs) remalns slgnlflcanLly undervalued. l value Lhls sLock norLh of 10. $30 mllllon could be squeezed ouL of Lhe real esLaLe acqulred from 8ugby (and on Lhe books for nearly zero) by [usL rearranglng some properLles. l conLlnue Lo anLlclpaLe a buyouL or some oLher value-reallzlng acLlvlLy, as Lhls ls a company LhaL does noL need Lo be publlc.
Amer|can hys|c|ans (ACA, news, msgs) was a no-bralner aL 13.30, whlch ls Lhe prlce aL whlch lL demuLuallzed lasL fall. 8elow 17, l'm a buyer. 1hls company ls overcaplLallzed wlLh Lons of excess cash and hence l vlew Lhe move from 17 Lo 20 as more of a move from 3 Lo 8. 1haL's why l'm wllllng Lo reduce Lhe slze of Lhls hefLy poslLlon ln Lhe 20.30 range. 1he blggesL rlsk ls LhaL managemenL carrles ouL a dumb acqulslLlon. 1remendous value could be creaLed by [usL buylng back Lhe shares, whlch carry an lnLrlnslc value norLh of 26.
Grubb & L|||s (C8L, news, msgs) under 3 ls a decenL buy, buL Lhere are sLrucLural ownershlp lssues LhaL llmlL Lhe upslde. Meanwhlle, a new CLC has Laken over and wlll wanL Lo make a mark even as Lhe commerclal real esLaLe lndusLry ls enLerlng a funk. l conLlnue Lo belleve LhaL my long-Lerm downslde rlsk ls LhaL Lhe company geLs boughL aL a 40 premlum Lo whaL l pald. ln Lhe near-Lerm, Lhls llllquld sLock can bounce qulLe low. 8uL l won'L worry abouL LhaL. LasL quarLer, some blg lnsLlLuLlonal lnvesLors dressed up Lhe sLock aL Lhe end of Lhe quarLer ln order Lo enhance Lhelr reLurns. 1haL may happen agaln. ln anLlclpaLlon, l'll enLer an order Lo sell Lhe enLlre poslLlon aL 6.23 llmlL, good unLll cancelled.
G1SI (C1Sl, news, msgs) ls prepplng a blowouL for lasL half of Lhe year. CperaLlonal changes and a couple of conLracL wlns have boosLed buslness aL Lhls governmenL Lechnology producLs dlsLrlbuLor, whlch sells aL a mulLlple of around 3 on Lhls year's earnlngs. 1he buslness ls much less cycllcal Lhan Lhe sLock prlce, whlch bounces around a loL. 1he sLock ls flndlng lLs way lnLo sLronger hands, however. l belleve Lhe sLock ls worLh aL leasL 8 and probably more.
So LhaL's lL. WlLh my prevlous sale of I8 (l8, news, msgs), l have only flve poslLlons lefL. When l sell half of Lhe Amerlcan hyslclans poslLlon, anoLher sloL wlll be open. l am belng paLlenL for Lhe end-of-quarLer selllng LhaL ofLen occurs ln downLrodden names as lnsLlLuLlons rush Lo wlndow dress Lhelr porLfollos. ln Lhe meanLlme, my sLandlng order Lo buy We||sford kea| ropert|es (W8, news, msgs) aL $18.30 mlghL execuLe.
Iourna|: August 10, 2001 - 8uy 1000 shares of Mesaba no|d|ngs (MAIk, news, msgs) at 8.80 ||m|t, good unt|| cance|ed.
1o own or noL Lo own Clsco Clsco SysLems, markeL caplLallzaLlon $141 bllllon, reporLed comblned earnlngs for Lhe lasL Lwo years of $1.66 bllllon, and lL ls uncerLaln how or when Clsco wlll grow agaln. Moreover, lL ls posslble and maybe probable LhaL Clsco wlll wrlLe off $1.66 bllllon as a one-Llme charge someLlme ln Lhe nexL few years. As usual, deLalls regardlng Clsco's opLlons compensaLlon programs are scarce.
So, whlch ls Lhe blgger rlsk: ownlng Clsco or noL ownlng Clsco? Cne need noL be shorL Clsco Lo experlence Lhe rlsk of noL ownlng Clsco. lor professlonals, performance ls benchmarked. 1haL ls, performance ls relaLlve. ln Lhe relaLlve performance game, one ls effecLlvely shorL every sLock noL ln one's porLfollo LhaL ls neverLheless a parL of Lhe benchmark. 1o lllusLraLe, a 100 cash poslLlon benchmarked agalnsL Lhe S& 300 lndex ls 100 shorL Lhe lndex ln Lhe relaLlve performance game. lf Lhe S& 300 rlses 10, Lhen ln Lhe relaLlve performance arena Lhe cash porLfollo ls down 10. 1hls ls how Wall SLreeL works.
So who ln Lhelr rlghL mlnd would shorL Clsco now? vlrLually no one. uesplLe musLerlng every ounce of confldence posslble, mosL analysLs, porLfollo managers, economlsLs and corporaLe execuLlves have no clue as Lo when elLher Lhe economy or Clsco wlll agaln rebound. And on Lhe off chance LhaL Lhe rebound occurs nexL monLh, well, beLLer noL be shorL Clsco.
WhaL we have here ls greed overrullng fear, desplLe Lhe facL LhaL for a flnanclal buyer -- a buyer LhaL does noL Lhlnk sLraLeglcally buL raLher Lhlnks ln Lerms of pure proven cash flows -- Lhe publlc sLock markeL offers preclous few opporLunlLles. And almosL none of Lhem are ln blg caps. Clsco does noL quallfy. l have glven some reasons why ln prevlous [ournal enLrles.
1hls lack of value should be Lroubllng Lo LhoughLful lnvesLors. 1remendous llquldlLy conLlnues Lo grace Lhe sLock markeL. Pence, when lnvesLors flee from growLh, Lhey rush Lo value. Any blg publlcly Lraded company wlLh a low prlce/earnlngs raLlo or low prlce/book raLlo and wlLhouL obvlous warLs has seen lLs sLock have a blg run recenLly. lndeed, Lhe bull run for value LhaL sLarLed lasL fall has conLlnued rlghL up lnLo Lhe presenL. now, however, mosL sLocks are aL leasL falrly valued. l would argue mosL remaln overvalued.
Clven Lhe currenL valuaLlon scenarlo across Lhe markeL -- and evldenL ln my dally revlews of anyLhlng and everyLhlng LhaL looks elLher undervalued or overvalued -- lnvesLors would do well Lo sLarL replaclng fear of mlsslng a rally wlLh fear of furLher caplLal loss. 8efore Lhe bear goes back lnLo hlbernaLlon, Lhe Llme wlll come when fear overrules greed. We are noL Lhere yeL. 1hough we may soon be.
WlLh llLLle doubL, Lhls round has been a dlsappolnLmenL. now LhaL l'm a shorL-Llmer, lL seems hazardous Lo enLer a poslLlon now, knowlng LhaL lL ls only a guess where Lhe prlce wlll be ln a few weeks when Lhe LoLals are recorded for eLernlLy. neverLheless, Lhe splrlL of Lhe SLraLegy Lab ls noL Lo remaln ldle. So here goes.
Poplng for a Mesaba Lakeoff 8uy 1000 shares of Mesaba no|d|ngs (MAl8, news, msgs) aL 8.80 llmlL, good unLll cancelled. Mesaba ls a reglonal alrllne LhaL was recenLly dumped aL Lhe alLar by norLhwesL, whlch ls also mlnorlLy shareholder ln Mesaba. Mesaba's prlmary buslness ls Lo be an operaLor ln Lhe norLhwesL Alrllnk sysLem.
Mesaba ls Lhe cheapesL domesLlc alrllne. lL geLs pald by Lhe capaclLy lL makes avallable raLher Lhan Lhe number of passengers lL carrles. lL also has a favorable long-Lerm fuel conLracL LhaL buffers lL from fuel cosL flucLuaLlons. CurrenLly, one of lLs largesL cosL cenLers ls Lhe Lralnlng of plloLs. 1haL wlll become less of an lssue when Mesaba opens lLs new domesLlc plloL Lralnlng cenLer lnslde of a year from now.
1he oLher poLenLlal caLalysL ls Lhe wlnnlng of addlLlonal rouLes and [eLs from norLhwesL. Mesaba prlmarlly compeLes wlLh Lxpress Alr, a wholly owned subsldlary of norLhwesL. 1herefore lL follows LhaL Mesaba wlll noL geL Lhe ma[orlLy of Lhe new buslness from Lhe recenLly announced large purchase of reglonal [eLs by norLhwesL. lL ls Lhls lack of near-Lerm growLh LhaL really Lurns off mosL analysLs.
Mesaba wlll geL some of Lhose rouLes, however, and growLh lsn'L Lerrlbly necessary glven Lhe valuaLlon. WlLh approxlmaLely $3 a share ln cash, no debL and $2.31 a share ln Lralllng L8l1uA, $9 seems a cheap prlce for Lhe sLock. And lL ls. 8ook value per share checks ln aL around $8, and lL ls growlng aL a nlce cllp. A raLlonal valuaLlon ls probably ln Lhe mld-Leens, all aspecLs of Lhls lnvesLmenL consldered. norLhwesL Lurned away from buylng Mesaba aL $13 afLer an lndusLry plloL sLrlke resoluLlon made Lhe deal unfavorable for norLhwesL. neverLheless, norLhwesL was noL Lhe only company lnLeresLed ln buylng Mesaba. LasL fall, anoLher alrllne group made an lnqulry Lo Lhe board regardlng purchaslng Lhe company and was rebuffed ln favor of Lhe norLhwesL deal.
lf one looks aL Lhe valuaLlons accorded peers such as Mesa A|r (MLSA, news, msgs), SkyWest (Sk?W, news, msgs), and At|ant|c Coast A|r||nes (ACAl, news, msgs) and ad[usLs for Lhe lease sLrucLure aL each, one would flnd Mesaba worLh $16 a share or more. lor now, lL ls [usL an llllquld sLock knocked down by arblLrageurs rushlng for Lhe exlLs afLer Lhe norLhwesL deal blew up. lL has yeL Lo recover, and lL probably won'L recover wlLhln Lhe nexL monLh. near-Lerm downslde may be as much as 12 Lo 13, buL such downslde would be far from permanenL.
Iourna|: Dec. 3, 2001
- Don't worry about |ndexes. Worry about your stocks.
8race for yeL anoLher new paradlgm Welcome Lo 8ound 7 of SLraLegy Lab. 1he sLraLegy enLry pleces LogeLher ouLLakes from Lhe quarLerly leLLers l wrlLe Lo Sclon CaplLal's lnvesLors
1he cumulaLlve reLurn of my plcks over Lhe prevlous Lwo dlsconLlnuous rounds has been [usL over 23. Cver Lhe same 14-monLh span, Lhe S& 300 ($lnx) reLurned a cumulaLlve -22, and Lhe nasdaq ($CCMx) reLurned a cumulaLlve -38. Whlle Lhe relaLlve performance looks respecLable, l am noL happy wlLh Lhe absoluLe performance. lL ls noL generally Lrue LhaL my porLfollos correlaLe wlLh Lhe varlous lndlces anyway, and l know l could have done beLLer wlLh my sLock plcklng here wlLhln SLraLegy Lab. LasL round's performance was parLlcularly harmed by my speclal slLuaLlon alrllne and hoLel holdlngs. l wlll aLLempL Lo do beLLer here Lhls round.
A good frlend and porLfollo manager recenLly relaLed a conversaLlon he had wlLh a sell-slde analysL. never ln hlsLory have we seen lnLeresL raLe cuLs llke Lhls," Lhe analysL waxed, surely propheLlc ln hls own mlnd, and noL seen Lhe economy and Lhe sLock markeL recover qulckly."
My frlend's response? unless you're !apanese."
?ou never see a bubble unLll lL pops 1he sLandard argumenL agalnsL a !apan 2000 scenarlo here ln Lhe unlLed SLaLes ls LhaL we never had Lhe real esLaLe bubble llke !apan dld. lor us lL was [usL sLocks. Cr so Lhe sLory goes. Cf course, mosL people don'L recognlze bubbles unLll Lhey've bursL, whlle preclous few seem qulLe capable of recognlzlng asseL bubbles even whlle Lhey are sLlll lnLacL. Cood porLfollo managers -- of whlch Lhere are preclous few, by no small colncldence -- belong Lo Lhe laLLer camp. And good porLfollo managers oughL reallze LhaL Lhe u.S. real esLaLe bubble ls slmply noL yeL popped.
AnoLher sLandard argumenL agalnsL a prolonged recesslon or depresslon ls LhaL Lhe u.S. markeLs are freer, allowlng qulcker ad[usLmenLs. Powever, lf by ad[usLmenLs, such pundlLs mean hurrlcane- force layoffs, greased-llghLnlng moneLary pollcy and Lhe greaL dlsappearlng acL LhaL ls Lhe federal budgeL surplus, l am aL a loss. AfLer all, none of Lhls wlll change Lhe facL LhaL Lhe economy ls mlred ln a sea of sLranded cosLs -- courLesy of abouL flve years of moronlc caplLal lnvesLmenL sLraLegles. 1he counLry slmply nelLher wanLs nor needs much more of whaL addlLlonal caplLal lnvesLmenL mlghL produce. AfLer all, when was Lhe lasL Llme a new compuLer acLually seemed fasLer Lhan Lhe old compuLer?
Moreover, Lhere ls a downslde Lo a low lnLeresL raLe pollcy ln a naLlon of ever-expandlng senlors. 1haL ls, lower raLes mean lower lncome for Lhe growlng flxed-lncome populaLlon. Whlch means less spendlng lf noL crlsls ln cerLaln quarLers. unllke sLlmulaLlon of caplLal lnvesLmenL, Lhls consequence of lower lnLeresL raLes ls boLh cerLaln Lo occur and generally lgnored. l have already had several of my own lnvesLors lnqulre as Lo sources of hlgher yleld.
1he yleld chase 1he need for yleld has been apparenL ln Lhe new lssue bond markeLs of laLe. 1he Iord (l, news, msgs) deal was doubled ln slze even as lord made lL clear LhaL Lhe company would be lendlng ouL aL 0 LhaL whlch lL borrows. SLocks don'L pay dlvldends anymore, savlngs and money markeL accounLs yleld Loo llLLle. 1he remalnlng opLlon ls bonds. 1o Lhe degree Lhe need for yleld resulLs ln a mass panlc for yleld, however, Lhe consequences wlll be dlre. Whlle earnlngs ylelds on equlLles are commonly mlsprlced, bond ylelds are much less commonly mlsprlced. So whaL ls my recommendaLlon Lo Lhose who approach me ln search of hlgher ylelds? CaveaL empLor. ln oLher words, work hard noL Lo be seduced when a Loo- good-Lo-be-Lrue hlgher yleld lnvesLmenL comes along.
Moreover, should deflaLlon become a facLor, Lhe Lremendous debL burden under whlch many u.S. companles and consumers operaLe wlll become much more of a burden, even as consumers hold off on consumpLlon as Lhey walL for lower prlces.
aradlgms are conLlnually Lurned upon Lhelr heads. 1hls how Lhe unlLed SLaLes as a counLry progresses. We oughL brace for yeL anoLher new paradlgm -- one LhaL few lf any pundlLs lncludlng me -- can predlcL. 8egardless of whaL Lhe fuLure holds, lnLelllgenL lnvesLmenL ln common sLocks offer a solld rouLe for a reasonable reLurn on lnvesLmenL golng forward. When l say Lhls, l do noL mean LhaL Lhe S& 300, Lhe nasdaq ComposlLe or Lhe markeL broadly deflned wlll necessarlly do well. ln facL, l leave Lhe dogma on markeL dlrecLlon Lo oLhers. WhaL l raLher expecL ls LhaL Lhe ouL-of-favor and someLlmes obscure common sLock slLuaLlons ln whlch l choose Lo lnvesL oughL Lo do well. 1hey wlll noL generally Lrack Lhe markeL, buL l vlew Lhls as a favorable characLerlsLlc.
Iourna|: Dec. 14, 2001
- Don't worry about m|ss|ng a ra||y. Worry about |os|ng your money.
Why l'm all cash - for now Cash seems qulLe conservaLlve, qulLe borlng. ?eL Lhe Lyplcal professlonal lnvesLor flnds cash a llLLle Loo hoL Lo handle, and Lherefore hlgh cash balances become Lhe Loo-frequenL prelude Lo forced lnvesLmenLs and poor resulLs. As Lhls round sLarLed, Lhe markeL roared ahead before mosL of us SLraLegy Lab players had acqualnLed ourselves. lndeed, Lhe markeL was [usL conLlnulng a masslve rally from SepLember lows. And Lhen Lhere we were, each wlLh $100,000 cash. AbsenL Lhe ablllLy Lo shorL or use opLlons, l chose, as a sLraLeglc declslon, noL Lo lnvesL Lhe cash, and l conLlnue Lo choose noL Lo lnvesL Lhe cash. 1hls ls by no means a permanenL declslon.
conLlnue Lo avold forecasLlng elLher markeL or economlc dlrecLlon. 8aLher, l slmply aLLempL Lo keep boLh eyes and mlnd open Lo Lhe lnpuLs LhaL lnfluence Lhe prevalllng markeL envlronmenL. l use any resulLlng lnslghLs Lo help LargeL areas of poLenLlally lucraLlve lnvesLmenL. CurrenLly, l am flndlng mosL opporLunlLy ln lnvesLmenLs LhaL would noL be approprlaLe for posLlng here ln SLraLegy Lab. 8elow, l descrlbe my vlew of Lhe currenL lnvesLlng envlronmenL.
1he equlLy eLhlc conLlnues Lo clrcumscrlbe Amerlcan lnvesLmenL phllosophy. 1haL ls, Amerlca's LasLe for sLocks ls noL yeL dlmlnlshed, and Lremendous cash llquldlLy exlsLs, ready Lo race Lo Lhe nexL hoL or quallLy or safe secLor. ?eL some baslcs of lnvesLlng go unhlndered, noL Lhe leasL of whlch ls valuaLlon.
When l speak of overvaluaLlon, l do noL refer Lo aggregaLe prlce-Lo-earnlngs raLlos. 8aLher, l survey common sLocks across all markeL caplLallzaLlon ranges and flnd LhaL Lhe markeL conLlnues Lo flnd lgnorance bllss. 1haL ls, off- balance sheeL and off-lncome sLaLemenL lLems are lgnored even as complex pro forma accounLlng obscures on-balance sheeL and on- lncome sLaLemenL lLems. lnslder relaLed-parLy deallngs, desplcable corporaLe governance and oLher such lssues conLlnue Lo Lake a back seaL Lo an lnLense focus on expecLed growLh raLes. Creed conLlnues Lo conquer fear.
uon'L Lry Lo dlg your way ouL A key phenomenon drlvlng Lhe recenL sLock markeL advance ls Lhe need for so many fund managers Lo caLch up. Pavlng had dlscouraglng years Lhrough Lhe end of SepLember, many professlonal lnvesLors Look on lncreased rlsk ln order Lo dlg Lhemselves ouL of a hole. l warned agalnsL Lhls Lendency durlng Lhe lasL SLraLegy Lab round. 1he maLh of lnvesLlng requlres a 30 galn Lo wlpe ouL a 33 loss, and Lhe only caLch-up Lool mosL professlonal lnvesLors have aL Lhelr dlsposal ls Lo Lake on lncreased rlsk.
Moreover, Lhe year-end represenLs a nall-blLlng flnlsh Lo a very grand one-year performance derby. 1he wlnners of Lhe derby reap masslve rewards. lor mosL, mlsslng a year-end rally would be faLal Lo such asplraLlons. Pence, [usL as happened Lwlce earller Lhls year, Wall SLreeL has cllmbed Lhe wrong wall of fear, Lhe common fear has been of mlsslng Lhe nexL bull markeL, noL of furLher sLock markeL losses. lundamenLal valuaLlons have been casL aslde ln Lhe scramble. And once agaln, ln Lhe shorL run, mob rules.
Cne argumenL LhaL has been used Lo sell and Lo susLaln Lhls rally as Lhe real Lhlng ls Lhe ldea LhaL Lhe sLock markeL rallles 23 or so 4-6 monLhs ln advance of an economlc recovery. 1herefore, as a rally reaches Lhose proporLlons, predlcLlons of a recovery 4-6 monLhs ouL become ever more confldenL and full of blusLer. ?eL, Lo borrow a phraslng, Lhe markeL has predlcLed Lwo of Lhe lasL zero economlc recoverles ln 2001 alone! Clrcular loglc remalns an oxymoron.
Cf course, even lf we have economlc sLablllzaLlon or recovery, lL would be wrong Lo assume LhaL Lhls would be a boon for sLocks ln general. lndeed, for mosL lnvesLors, lL would be beLLer Lo waLch lnLeresL raLes. lnLeresL raLe changes become more slgnlflcanL ln sLock valuaLlon when valuaLlons are very hlgh. 1haL ls, lnvesLmenL ln a sLock wlLh a prlce/cash earnlngs mulLlple of 23 wlll be much more senslLlve Lo lnLeresL raLes Lhan lnvesLmenL ln a sLock wlLh a prlce/cash earnlngs mulLlple of 3. 8lslng raLes palred Lo a rlchly valued sLock markeL oughL noL resulL ln a slgnlflcanL new bull markeL, desplLe an expandlng economy. 1o puL Lhls ln oLher Lerms, mosL wldely held sLocks have already (over)prlced ln a subsLanLlal economlc and earnlngs recovery - even as Lhey slL far below Lhelr hlghs of yesLeryear.
ConLrary Lo Lhe somewhaL absurd noLlon LhaL all we have Lo really fear ls mlsslng a rally, l Lruly only fear permanenL and absoluLe caplLal loss. Cver Lhe course of Lhls round, l wlll place my lnvesLmenLs as very good opporLunlLles arlse.
Iourna|: Dec. 28, 2001
- Short 100 shares of Magma Des|gn Automat|on (LAVA, news, msgs) at 529.S0 or h|gher.
Magma ls one of a handful of companles LhaL supply Lhe semlconducLor lndusLry wlLh Lhe sofLware Lo deslgn semlconducLor chlps. 1wo oLher 2001 lCs ln Lhls lndusLry have performed decenLly.
Magma also has Lhe meLeorlc prlce rlse, up over 120 from lLs offerlng prlce. 1he sLock has broken free from any raLlonal valuaLlon and now seems Lo go up slmply because lL ls golng up. And Lhe offerlng prlce of $13 was a heck of a sLreLch ln Lhe flrsL place.
1rue Lo lLs herlLage, Magma's appeal suffers when one peeks under Lhe hood. Pere are Lhe baslcs, culled from Lhe company's own prospecLus, news coverage and my own due dlllgence, lncludlng conversaLlons wlLh Lop managemenL and lnslders ln Lhe lndusLry.
1he company ls noL proflLable. ln facL, lL has been loslng Lens of mllllons of dollars a year. Larller Lhls year, Magma lald off a slgnlflcanL porLlon of lLs workforce even as several of lLs compeLlLors were dolng very good, even record, buslness.
Also earller Lhls year, afLer flllng ln May for a publlc offerlng, Lhe company found lLself Lhe sub[ecL of lnLense crlLlclsm as lndusLry pundlLs noLed LhaL Lhe flllng revealed Magma's precarlous flnanclal poslLlon. 1he flllng also helped heave doubL on Lhe veraclLy of Magma's prlor clalms as Lo Lhe slze of lLs backlog and markeL share. 1hls followed reporLs LhaL Magma had been acLlvely shopplng lLself Lo lLs four blggesL compeLlLors ln Lhe elecLronlc deslgn auLomaLlon lndusLry and LhaL all had sald no qulLe qulckly. 1he lC was Lhus delayed.
1he delay creaLed sLress on Lhe cash-hungry buslness, and ln AugusL Magma requlred a brldge loan of $23 mllllon for worklng caplLal. 1he lnLeresLlng Lerms of Lhls loan lncluded glvlng Lhe credlLor Lhe rlghL Lo converL Lhe loan lnLo sLock aL 67 of Lhe lC offerlng prlce. lndeed, Lhls ls whaL ended up happenlng, as Magma wenL publlc amld renewed lnvesLor appeLlLe for rlsk on nov. 20.
rlmplng for Lhe publlc WhaL dld Magma lLself do Lo spruce up for lLs debuL? lenLy, lLs flllngs show, and lL ls noL preLLy. llrsL, sLarLlng ln Aprll, Magma lmposed on lLs sales sLaff new rules: Commlsslons would no longer be pald upon Lhe lnlLlal sale, buL raLher would be pald ln lnsLallmenLs over Llme. 8y spreadlng ouL Lhe commlsslons expense, Magma delays cash ouLflows as well as near-Lerm expenses.
Whlle Magma acLed Lo make expenses appear less Lhan Lhey really are, lL also acLed Lo make revenues appear greaLer Lhan Lhey really are. uurlng Lhe quarLer endlng SepL. 30, Lhe company changed lLs sales model Lo emphaslze perpeLual sales over subscrlpLlon sales. 1hls has Lhe effecL of allowlng greaLer revenue recognlLlon ln Lhe near Lerm aL expense of revenue recognlLlon down Lhe road.
1he neL resulL of Lhese Lwo acLlons was Lo delay shorL-run expenses whlle boosLlng shorL-run revenue. 1he company also acLed Lo beauLlfy Lhe cash-flow sLaLemenL, reduclng Lhe caplLal expendlLure run-raLe Lo less Lhan 30 of hlsLorlcal levels.
All Lhls should glve lnvesLors pause. Clearly, Lhe lasL Lhlng lnvesLors need ls yeL anoLher managemenL Leam wlLh Lendencles Loward aggresslve accounLlng. And lnvesLors oughL keep ln mlnd Lhe reason for all Lhese maneuvers was Lo look good enough Lo pawn Lhe company off on Lhe publlc aL an lC prlce LhaL values Lhe company aL roughly $373 mllllon. Magma dlscloses LhaL Lhe small porLlon of Lhls LhaL goes Lo company coffers allows only abouL 12 monLhs of operaLlons aL currenL levels.
Cver Lhe nexL 12 monLhs, oLher lssues wlll arlse. Magma speclallzes ln an area of elecLronlc deslgn auLomaLlon LhaL has hlsLorlcally been Lhe lalr of embaLLled Avant! (Avn1, news, msgs). ln facL, Magma has beneflLed from AvanL!'s legal Lroubles wlLh lndusLry leader Cadence Des|gn Systems (Cun, news, msgs) and from Lhe assoclaLed markeLlng headwlnd LhaL AvanL! faces. AfLer Magma's lC, lL was announced LhaL Lhe wldely respecLed Synopsys (SnS, news, msgs) ls acqulrlng AvanL!. 1he resulLanL Synopsys/AvanL! comblnaLlon ls golng Lo be a powerful one for several reasons LhaL l wlll noL deLall here. 1he neL effecL on Magma, however, ls LhaL one of Magma's reasons for belng has been severely weakened even as Lhe resources of lLs largesL compeLlLors [usL doubled aL mlnlmum.
An exlL for early lnvesLors As well, of Lhe nearly 30 mllllon shares ouLsLandlng, some 24 mllllon or so wlll come ouL of lock-up durlng Lhe flrsL half of 2002. 1he hlgh percenLage of shares ln Lhe hands of pre-lC lnvesLors ls reflecLlve of Lhe Lremendous venLure caplLal supporL Lhls company requlred, and wlLhouL a doubL one key reason for Lhls lC was Lo provlde an exlL for early lnvesLors. ln Llme, Lhls wlll brlng selllng pressure even as lL mulLlplles Lhe floaL avallable Lo buyers. Lnglneerlng Llny floaLs was a key Lool ln achlevlng rapld run-ups of lCs durlng 1999.
ln Lhe shorL run, l also expecL LhaL Lhe effecLlve floaL has been made Lemporarlly even smaller, as purchasers over Lhe lasL monLh nearly all have galns, and a good porLlon may be unwllllng Lo reallze Lhose Laxable galns before year-end. lL ls posslble LhaL early !anuary could see some of Lhose buyers move Lo lock ln Lhese galns.
1he Lhree maln underwrlLers of Magma's lC have had Lhelr research arms come ouL wlLh Lhoroughly unlmpresslve '8uy' raLlngs on Lhe sLock. CLher aspecLs Lo conslder lnclude LhaL shorL coverlng may be drlvlng a good parL of Lhe recenL rally. 1here ls also speculaLlon LhaL Cadence mlghL be forced Lo acqulre Magma ln response Lo Lhe Synopsys/AvanL! comblnaLlon. 1hls ls hard Lo lmaglne aL Magma's currenL valuaLlon, however.
l saved Lhe valuaLlon for lasL. lL wlll be hard Lo nall Lhe prlce of Lhls securlLy one day ln advance. ln Lhe lasL half hour or so, Lhe sLock has rlsen anoLher 7 or so and appears ready Lo crack $30 a share.
valuaLlon ls ouL of whack valuaLlon ls a blL dlfflculL for oLher reasons. AfLer all, lL has Lhe requlslLe 1999-era quallLy of masslve cash losses palred Lo no reasonable expecLaLlon for acLual proflL ln Lhe foreseeable fuLure. SLlll, l'll Lake a shoL. AL $30 a share, Magma approaches a $900 mllllon markeL caplLallzaLlon. 1haL represenLs abouL 36 Llmes lLs (lnflaLed) Lralllng revenues, alLhough l'm belng a blL overpreclse here ln asslgnlng more Lhan one slgnlflcanL dlglL Lo elLher Lhls volaLlle sLock or Lhe uncerLaln buslness underlylng lL. lLs sLrongesL comparables across all markeL caps Lrade for beLween 3 and 6 Llmes revenue - and are generally plenLy proflLable.
We also can look Lo a recenL deal Lo help clarlfy valuaLlon. Synopsys ls paylng an all-Lhlngs- consldered prlce of abouL 3 Llmes revenues for AvanL!, whlch generaLes Lremendous free cash flow and has Lhe besL marglns ln Lhe buslness.
8eallze LhaL Lhls lC occurred for Lwo maln reasons: Lo provlde an exlL for venLure lnvesLors and Lo provlde cash Lo allow Magma Lo survlve a blL longer. My feellng ls LhaL lnslders would sell llke mad aL $30 a share lf Lhey could. As SLraLegy Lab [usL loosened Lhe rules Lo allow shorLlng, l wlll shorL 100 shares of Magma aL $29.30 llmlL, good unLll canceled
Iourna|: Ieb. 8, 2002
- 8uy 800 shares of L|an (LLN, news, msgs) at 512.70 or |ower.
- 8uy 200 shares of k|ndred nea|thcare (kIND, news, msgs) at 536.2S or |ower.
- 8uy 1,000 shares of Industr|as 8achoco (I8A, news, msgs) at 58.S0 or |ower.
- Short 400 shares of Magma Des|gn Automat|on (LAVA, news, msgs) at 52S.00 or h|gher.
Amld 'LnronlLls' scare, Lhree 8uys and one ShorL 1hose of you LhaL have been readlng my [ournal enLrles here for a whlle know LhaL l've been a falrly vehemenL crlLlc of accounLlng shenanlgans. ln Lhe pasL, l've whacked C|sco Systems (CSCC, news, msgs) over Lhe head, dlssed Wor|dCom (WCCM, news, msgs), and l've had a few cholce words ln general for Lhe way Lhe professlonal sLock markeL works Lo Lake advanLage of Lhe amaLeur sLock markeL
l of course sLlll belleve LhaL companles, ln Lhe long run, wlll noL be able Lo fool anyone. LlLher value ls creaLed, or lL ls noL, and Lhe share prlce ulLlmaLely reflecLs Lhls. SomeLlmes, and maybe even mosL of Lhe Llme, a company LhaL has been lnvolved ln scandal wlll be overly punlshed ln Lhe markeLplace. WhaL's more, as long as Lhe company has Lhe cash flow and Lhe balance sheeL such LhaL lL does noL need access Lo caplLal markeLs, and as long as lLs cusLomers don'L care abouL Lhe sLock prlce, a company can have a very decenL shoL aL long-Lerm redempLlon.
1he real Llan 1ake L|an (LLn, news, msgs). 1hls ls a real company. 8eal shenanlgans. 8eal debL. 8eal cash and real cash flow. 8eal drugs. 8eal plpellne. 8eal cusLomers. 8eal value. urug companles don'L generally Lrade Lo 9-10 free cash flow ylelds. 8emember folks, Lhls ls Lhe pharmaceuLlcal lndusLry.
1here are plenLy of sLraLeglc buyers for Llan, and now lL has fallen Lo a flnanclal buyer's prlce range. Such clrcumsLances usually don'L lasL long. LLhlcally-LalnLed, scandal-plagued companles Lradlng aL real flnanclal buyer mulLlples ln an lndusLry full of poLenLlal sLraLeglc buyers -- well, such slLuaLlons usually deserve anoLher look.
klndred's splrlL k|ndred nea|thcare (klnu, news, msgs), a nurslng home and long-Lerm acuLe care operaLor, emerged from bankrupLcy early lasL year. very few are waLchlng Lhls as lL drlfLs lower over worrles LhaL Lwo key pleces of leglslaLlon beneflLlng Medlcare revenues wlll essenLlally be reversed. l won'L geL lnLo Lhe speclflcs, buL only half of whaL ls feared mlghL acLually come Lrue. 1he oLher half ls 30-30, buL for once l'm rooLlng for 1om uaschle.
1hls Loo ls Lradlng down aL a roughly double-dlglL free cash flow yleld, and has a neL cash poslLlon. 1he downslde ln Lhe evenL of a bad leglslaLlve ouLcome ls maybe a 20 fall from currenL levels, and maybe even [usL sLablllzaLlon aL currenL levels. 1he upslde Lo a good leglslaLlve ouLcome ls a near doubllng of Lhe share prlce from here.
oulLry proflLs Industr|as 8achoco (l8A, news, msgs) ls a Mexlcan chlcken producLs producer. no. 1 ln Lhe counLry, Lradlng aL abouL a 20 free cash flow yleld and aL half book value. LnLerprlse value/L8l1uA mulLlple ls [usL over 2.3x. Lconomlc Lrends vary, buL Lhls company has been around for Lhe lasL 30 years, and ln Lhe lasL several years lL pald off, ouL of free cash flow, an acqulslLlon of Lhe no. 4 player ln Lhe lndusLry.
nos. 2 and 3 ln Lhe lndusLry are assoclaLed wlLh ||gr|m's r|de (CPx, news, msgs) and1yson (1Sn, news, msgs). l admlL -- Lhls ls noL a greaL buslness. Maybe [usL worLh book value. Ck, double Lhe share prlce and glve me book for my shares.
unlocklng shorL value llnally, lf Magma Des|gn Automat|on (LAvA, news, msgs) ever geLs near 23 agaln, shorL Lhe heck ouL of lL. l belleve l've already provlded my raLlonale. ln llghL of Lhelr earnlngs announcemenL reporLlng a one penny per share proflL, lnvesLors should [usL reallze LhaL Lhe company booked a falrly slgnlflcanL perpeLual llcense order laLe ln Lhe quarLer. 1hey dlsclosed Lhls on Lhe conference call. erpeLual orders allow for slgnlflcanL revenue recognlLlon up fronL, as opposed Lo revenue from Llme-based llcenses, whlch are recognlzed raLably over Llme.
Also, we should reallze LhaL durlng Lhe conference call managemenL dld noL descrlbe Lhe non-cash sLock compensaLlon charges as non- recurrlng, buL excludes Lhem from lLs pro-forma proflL calculaLlon anyway. ManagemenL dld say lL was hopeful" LhaL Lhese charges would evenLually decllne.
Lock-up explraLlon ls [usL a few shorL monLhs away, and Lhen we flnd ouL whaL all Lhe lnslders really feel Lhe sLock ls worLh
Iourna|: Ieb. 1S, 2002
- |ace order to buy 200 shares of keuters Group (k1kS, news, msgs) at 546 or |ower.
- |ace order to buy 1,000 shares of Nat|ona| Serv|ce Industr|es (NSI, news, msgs) at 56.7S or |ower.
- 8uy an add|t|ona| 200 shares of L|an (LLN, news, msgs) at 513.2S or |ower.
- Change prev|ous order to short Magma Des|gn Automat|on (LAVA, news, msgs) to 300 shares at 522.S0 or h|gher.
1wo sLocks LhaL look cheap Comlng up on Lhe deadllne, so l'll make Lhls qulck. keuters Group (818S?, news, msgs) looks cheap. A cash-flow machlne wlLh slgnlflcanL brand equlLy and a solld balance sheeL, Lhe buslness ls ln Lhe mldsL of a Lurnaround aL Lhe hands of a new Amerlcan-for-Lhe-flrsL-Llme CLC. 1he company owns slzable sLakes ln Inst|net (lnL1, news, msgs) and 1|bco (1l8x, news, msgs), and lL has a slgnlflcanL venLure porLfollo. lL recenLly boughL 8rldge lnformaLlon SysLems asseLs ouL of bankrupLcy. 8uy 200 shares aL $46 or lower
Nat|ona| Serv|ce Industr|es (nSl, news, msgs) ls a clgar buLL Lradlng aL a deep dlscounL Lo Langlble book. 1he reason: asbesLos. 1he company has also been Lhe sub[ecL of a recenL resLrucLurlng and reverse sLock spllL. none of Lhls looks very appeLlzlng Lo nearly any lnsLlLuLlon, and so Lhe shares have been geLLlng dumped laLely. lL Lakes some work Lo undersLand Lhe Lrue earnlngs power of Lhe buslness, noL Lo menLlon Lhe asbesLos llablllLy. AfLer dolng Lhls work, l've concluded Lhe sLock should be Lradlng aL levels aL leasL Lwlce Lhe currenL level based on a varleLy of measures. 8uy 1,000 shares aL $6.73 or lower.
Also, revlewlng prlor plcks, buy anoLher 200 shares of L|an (LLn, news, msgs) aL $13.23 or lower, and change my order on Magma Des|gn Automat|on (LAvA, news, msgs) Lo shorL 300 shares aL $22.30 or hlgher.
Iourna|: Ieb. 18, 2002
- Se|| pos|t|on |n L|an (LLN, news, msgs) at the market and cance| a|| outstand|ng trades.
- Change prev|ous order to short Magma Des|gn Automat|on (LAVA, news, msgs) to 400 shares at 522 or h|gher.
- Change prev|ous order to buy Nat|ona| Serv|ce Industr|es (NSI, news, msgs) to 1,S00 shares at 56.8S or |ower.
Whoops. Llan doesn'L look so hoL 1lme for a mea culpa. l am selllng Lhe enLlre L|an (LLn, news, msgs) poslLlon aL markeL and wlll cancel all ouLsLandlng orders regardlng Lhls securlLy. 1he accounLlng here ls preLLy Lrlcky, as Lhe world knows, and lL Lakes some creaLlvlLy on Lhe analysL's slde Lo lnLerpreL Lhe numbers presenLed. l belleve l made several errors ln [udglng Lhe safeLy of Lhls common sLock lnvesLmenL, and so l wlll unload Lhe poslLlon.
AfLer furLher revlew of hlsLorlcal flllngs and afLer dlscusslng my concerns wlLh Lhe company, l feel Lhe neL lssue here ls LhaL Lhe company has puL lLself ln a more precarlous flnanclal poslLlon Lhan was prudenL. lL has leveraged lLself ln order Lo ramp lLs plpellne as fasL as posslble, and has been caplLallzlng much of Lhe expense of dolng so. l flnd lL very dlfflculL Lo fooL Lhe valuaLlon from a flnanclal buyer's perspecLlve. ln my world, lL ls prlmarlly Lhe flnanclal buyer's perspecLlve LhaL ls meanlngful, even lf Lhe sLraLeglc value Lo a corporaLe buyer mlghL be somewhaL hlgher.
WlLh LhaL lead-ln, l'll emphaslze LhaL common sLock ls Lhe mosL precarlous porLlon of Lhe varlous layers of caplLal sLrucLure. ln a bankrupLcy precedlng, lL ls mosL llkely LhaL Lhe common sLock ls canceled alLogeLher. 1herefore when assesslng Lhe safeLy of a common sLock lnvesLmenL, one musL also evaluaLe Lhe probablllLy of bankrupLcy aL some polnL ln Lhe fuLure.
1he slmplesL way Lo look Lhls ls Lo examlne caplLal flows. lf a company does noL earn lLs cosL of caplLal, Lhen lL wlll have Lo access caplLal markeLs perlodlcally. lf Lhe hope of earnlng lLs cosL of caplLal ls percelved Lo be fadlng, Lhe caplLal markeLs wlll become less accesslble for Lhe company. ln such cases, bankrupLcy wlll ensue, wlLh Lhe assoclaLed desLrucLlon of sLockholders' equlLy.
ln Lhe lnLeresL of noL wasLlng some prevlous plcks, l'll change some Lrades so LhaL Lhey are more llkely Lo geL execuLed falrly soon here ln SLraLegy Lab. Nat|ona| Serv|ce Industr|es (nSl, news, msgs) -- change Lhe order Lo buy 1,300 shares aL 6.83 or lower. Magma Des|gn Automat|on (LAvA, news, msgs) -- change Lhe order Lo shorL 400 shares aL 22 or hlgher.
Iourna|: Ieb. 21, 2002
- |ace order to buy 100 shares of keuters (k1kS, news, msgs) at 542, good unt|| cance|ed.
- |ace order to buy 100 shares of keuters (k1kS, news, msgs) at 540, good unt|| cance|ed.
- |ace order to buy 100 shares of keuters (k1kS, news, msgs) at 538, good unt|| cance|ed.
- Change my order for Nat|ona| Serv|ce Industr|es (NSI, news, msgs) to buy 1,000 shares at 57 or |ower, good unt|| cance|ed.
- |ace order to buy 200 shares of Canad|an Natura| kesources (CLD, news, msgs) at 526.7S ||m|t, good unt|| cance|ed.
Magma sLlll has room Lo fall Slnce l shorLed Magma Des|gn Automat|on (LAvA, news, msgs) common, Lhe sLock ls down conslderably. l do noL feel Lhe need Lo cover Lhe poslLlon aL recenL prlces. 1he company recenLly flled lLs form 10 wlLh Lhe SLC. 1hls flllng reveals, as l suspecLed, LhaL Lhe company ls noL showlng a cash proflL ln llne wlLh lLs pro forma proflL clalm. 8aLher, Lhe company conLlnues Lo produce negaLlve operaLlng cash flow. 1he flllng also reveals an lnLeresLlng relaLlonshlp wlLh a large cusLomer LhaL recelved 100,000 Magma opLlons ln november ln exchange for 'advlsory servlces.' l am aLLempLlng Lo clarlfy LhaL relaLlonshlp, as well as several sLock repurchase agreemenLs Magma has wlLh lLs founders. 1hese, Loo, were dlsclosed ln Lhe 10C. Any lndlvldual who ls long or shorL Lhe sLock oughL Lo be looklng aL Lhese Lhlngs -- all Lhe dlsclosure ln Lhe world wlll noL help Lhose who do noL read Lhe flllngs. ln any evenL, Lhe sLock ls noL worLh even double dlglLs, so l wlll noL cover here ln Lhe hlgh Leens. l expecL anoLher 30 galn or so from recenL levels, posslbly even durlng Lhls SLraLegy Lab round
keuters (818S?, news, msgs) sLock has been ln a free fall. 1he value ls hlgher Lhan Lhe currenL prlce by a large degree, however, and Lherefore falllng prlces are beneflclal. 1he company produces a prodlglous amounL of free cash flow -- my esLlmaLes are LhaL Lhe recenL share prlce wlll reflecL less 10 free cash flow ylelds durlng 2002 and less Lhan 12 ln 2003. lor Lhese esLlmaLes, l assume Lop-llne growLh wlll be flaL ln Lhe face of a slugglsh world economy. 1he shareholder base ls llkely Lurnlng over as we speak - overanxlous growLh lnvesLors selllng Lo paLlenL value-orlenLed lnvesLors. Several oLher facLors are conLrlbuLlng Lo Lhe depressed share prlce, buL none conLrlbuLes more Lo Lhe low valuaLlon Lhan Lhe myoplc vlews of lnvesLors ln general. l should noLe LhaL Lhls ls a very volaLlle sLock, so l have no llluslon LhaL l've found Lhe near-Lerm boLLom here. ln Lhe evenL LhaL l'm noL waLchlng closely when lL happens, place an order Lo buy anoLher 100 shares aL $42, an order Lo buy anoLher 100 shares aL $40, and an order Lo buy anoLher 100 shares aL $38, all good unLll canceled. l do noL necessarlly expecL LhaL Lhls poslLlon wlll recover before Lhe end of Lhe round.
Nat|ona| Serv|ce Industr|es (nSl, news, msgs) keeps squlrLlng hlgher. l won'L pay more Lhan $7 per share, and l wlll change my order Lo [usL LhaL: buy 1,000 shares aL 7 or lower, good unLll canceled. Maybe one of Lhese days l'll geL some ln Lhe porLfollo here. l'm expecLlng a horrlble quarLerly reporL, so maybe LhaL wlll do lL.
Canad|an Natura| kesources (CLu, news, msgs) ls a borlng favorlLe of mlne. Cne of Lhe largesL Canadlan exploraLlon and producLlon companles, wlLh among Lhe besL reLurns on lnvesLed caplLal ln Lhe secLor, Canadlan naLural has Lhus far mlssed ouL on Lhe mergers and acqulslLlons blnge lnvolvlng norLh Amerlcan exploraLlon and producLlon companles. 1he recenL acqulslLlon of Canada's AlberLa Lnergy glves anoLher decenL comp for valuaLlon purposes. All slgns polnL Lo Canadlan naLural belng worLh over $33 share, alLhough lL mlghL be as much predaLor as prey. lL ls relaLlvely llllquld for such a blg markeL caplLallzaLlon, so l'll seL a low llmlL prlce ln hopes of Laklng advanLage of Lhe volaLlllLy. 8uy 200 shares aL $26.73 llmlL, good unLll canceled.
Iourna|: Ieb. 2S, 2002
- |ace order to buy an add|t|ona| 2S0 shares of Industr|as 8achoco (I8A, news, msgs) at 9 or |ower.
- Cover short pos|t|on |n Magma Des|gn Automat|on (LAVA, news, msgs) at 9 or |ower.
- Cance| outstand|ng orders |n keuters (k1kS, news, msgs). laylng chlcken Industr|as 8achoco (l8A, news, msgs), a currenL porLfollo holdlng, Look a hlL lrlday as lL released earnlngs. Powever, Lhe valuaLlon remalns very compelllng.
1he markeL caplLallzaLlon of Lhe sLock ls $430 mllllon as l wrlLe Lhls. 1he company has [usL $33 mllllon ln debL palred Lo $128 mllllon ln cash, for an enLerprlse value of $333 mllllon. Larnlngs before lnLeresL, Laxes, depreclaLlon and amorLlzaLlon (L8l1uA) was $143 mllllon durlng 2001. lree cash flow was $100 mllllon. 1he Lralllng enLerprlse value: L8l1uA raLlo ls Lherefore 2.43, and Lhe free cash flow yleld ls 22. 1he company conLlnues Lo Lrade aL [usL over half book value, and lL pald a dlvldend durlng 2001 amounLlng Lo 7.7. 1he prlce/earnlngs raLlo ls [usL under 4. All Lhese numbers are noL so bad aL all, especlally when one conslders LhaL 2001 was a dlfflculL year for Lhe lndusLry, as Lhe economy sofLened along wlLh prlclng. ln all probablllLy, Lhe sell-off occurred because of Lhe recenL run-up -- a sell-on-Lhe-news phenomenon.
As l noLed before, Lhe company ls Lhe leadlng producer of poulLry producLs ln Mexlco, where chlcken ls Lhe no. 1 meaL. ||gr|m's r|de (CPx, news, msgs) and 1yson Ioods (1Sn, news, msgs) lag 8achoco ln Mexlco, where fresh chlcken producLs are much more broadly accepLed Lhan processed chlcken producLs. 8achoco, havlng been ln Lhe Mexlcan chlcken buslness for decades, has a naLural advanLage LhaL can be explolLed lf Lhe company ls run well, and lL does seem Lo be run well. 8egardless of Lhe recenL run-up ln Lhe share prlce, l conLlnue Lo LargeL a $13 or greaLer share prlce for 8achoco. As Llme goes by, shareholders equlLy wlll conLlnue Lo grow and dlvldends wlll be pald. 1hls should be a solld LoLal reLurn lnvesLmenL. l'm noL asklng for an exLravaganL valuaLlon, 8-9 Llmes earnlngs and par wlLh book value would provlde Lremendous prlce appreclaLlon from Lhe currenL level, especlally when palred wlLh Lhe dlvldend. lf lL falls Lo 9 or lower, buy anoLher 230 shares.
8egardlng Magma Des|gn Automat|on (LAvA, news, msgs), Lhe poslLlon ls worklng ouL preLLy well - a roughly 30 galn on Lhls Loo-small shorL poslLlon. !usL ln case lL has a mldday melLdown followed by some shorL-coverlng, l'll enLer an order Lo cover Lhe enLlre poslLlon aL 9 or lower. Sounds rldlculous Lo enLer such an order, buL whlle l dld noL expecL Lhe sLock Lo fall as fasL as lL dld, l do noL see any reason LhaL Lhe sLock doesn'L crash Lhe $10 level soon as well. Any rallles ln Lhls sLock are llkely Lo be shorL-coverlng rallles as shorLs lock ln Lhelr qulck galns.