Professional Documents
Culture Documents
subjectid=10036&LastNum=10&NumMsg
s=10
Jim, Glad to see it working for you. Me, look at what I just did today (because it
would seem that I have lost the 'net net' faith, though I don't believe so):
Bought Washington Mutual, Ross Stores, Ethan Allen, more Clayton Homes,
more Tricon Global. Two days ago, I bought Philip Morris.
I feel like a kid in a candy store. There are quite a few values in the market,
IMO, and I don't feel the need to play net nets. The stuff I'm buying passes EVA
muster at the same time it passes various other value criteria IMO. This of
course raises the question whether I would ever play net nets at a true market
bottom. My strategy with net nets is the opposite of what Tweedy Browne found
(they having found that it was the money-losing crappy businesses that were
the money makers for net net investors). Rather, since I am not playing the
tried-and-true diversified approach to net nets, I'm only buying net nets when
I see "corroborating value" in the story/cash
flow/earnings/potential/insider activity/whatever. EBSC I own now, but for
different reasons than you might think. After buying, I realized it is not really a
net net when you consider the operating leases. There is corroborating value
though, so I held. With LKI, an updated 10Q revealed it wasn't a net net, and I
couldn't find corroborating value, so I sold. With General Cigar, I was up to my
ears in corroborating value no matter what the inventory really was worth.
I think the you hit it twister. When looking at net nets as individual picks in
a concentrated portfolio in a frothy market, we're not following Graham's
method very well anyway. So I insist on extra corroborating value
analysis/evidence to help me when I add my one or two or three net nets to
a portfolio. Tweedy Browne has done some proprietary research on this
which which is mentioned here and there in various investing texts. Their
feeling is that the net nets that actually did well when purchased as part of
a broad diversified portfolio of them were the ones that had horribly
negative earnings rather than positive earnings, and that had business
models that didn't seem viable. This makes sense, because net net is
really a proxy for a form of liquidating value, and becomes least relevant in
an operating company that is expected to continue to run forever.
Nevertheless, Jim and I and others here have had success picking up
operating companies with decent futures and decent stories at less
than 2/3 net net. Hence, inevitably we will each just have to reach our own
conclusions given the available personal anecdote and evidence.
If one does subtract out operating lease burden, then retailers become
doubly suspect as net nets - their inventories are already as suspect
Pre-Paid Legal (short at 24 3/4) I've gone through before (I shorted it from
$37ish down to 24ish last year). Cash flow continues to lag far behind
reported net income, membership retention stinks, and the CEO is engaging in
borderline stock promotion while he steadily sells. Many in the investor
community misunderstand this stock.
Bought Sara Lee, now trading at an EV/EBITDA of just over 8, and with return
on capital greater than 25%. Management's initiatives to maximize return on
capital and follow an EVA-type strategy over the last few years have been
successful, and the company has been buying back stock with its tremendous
cash flow. Its debt is rated AA-. Solid, defensive stock in an industry given no
respect by the market.
Hard to swallow? Yes. These are repeated gut checks for any value investor.
I've been using Enterprise Value/EBITDA with a maximum of 6 as one of my
criteria. Wow. When you hold one of these at 6 and then see the ratio fall to 3, it
is indeed hard to swallow. Especially when, like me, you usually don't take new
lows lightly but this time prided yourself on the fundamental value.
But you don't have to buy a high-flyer. That's just a lack of discipline. May I
suggest that any regular here, if ever tempted, try to justify buying a high-flyer
here first before buying? Without discipline, long-term, you might as well just
buy a mutual fund or hire a money manager. Because 99% of people are
undisciplined investors, and 100% of them will be part of the 99.9% of investors
that fail to achieve superior long-term gains. There's just no point.
Myself, I'm starting to see a lot of Buffett-like stocks laying around. This is a
change from when I had to buy a lot of cigar butts, cyclicals, and decent-
companies-at-a-discount the last few years. This is a switch from my version of
Graham-like investing to my version of Buffett-like investing. I sold Crane and
bought Liz Claiborne. That's my first switcharoo. Looking to make more in the
coming weeks and months.
BTW, sold Mattel today; I was suspicious and started looking for an exit when
the numbers came out. Now S&P's debt downgrade nicely summarized my
suspicions. I'm outta there. This is a good example of a free S&P debt report
detailing the magnitude of the troubles better than any retail stock
report. http://biz.yahoo.com/rf/000224/5p.html
Fast food stocks on the whole are down, and I can't figure out a justification for
such beatings. Seems like most are steady growers. Heck, even MCD is starting
to look good again. Jack in the Box and YUM are trading at EV/EBITDA ratios
under 4 while their businesses are on firm growth tracks. I own a whole lot of
YUM personally. In some other accounts I had forgotten to buy it, and I took
advantage of the recent dive to add it.
Like Wayne and Jim, I've felt tinges of the insanity this market's
dissociative characteristics can bring to bear on the typical value investor.
Absolutely outrageous comparisons. Infuriating. And unlike Wayne and
Jim, I've been plain stupid with some of my trading. The insanity has driven
me from mumblings to my wife in the car and in bed to actual point-and-
click trades that I would never have done had I had a brain.
But then, PG is now only becoming fairly priced. Same really goes for PEP.
I mean, if we are expecting 1970's Washington Post-type or 1986 Coke-
type Buffett bargains, these things need to be halved again. The S&P
Index buying drove many of these "buy what you know" stocks way too
high, and it will the S&P Index selling that will drive them way too low. I
think some patience is still in order. I'm not buying them yet. Same goes for
the drugs - another big S&P500 component that is only now getting fairly
priced after 50% haircuts.
Jurgis, your position is clarified, and I agree. When the market really
falls, I go for quality. As the non-tech market has fallen sharply over the
last 6 mos, I've already been doing that, slowly phasing out of my Graham
mode and into my Buffett mode. Last night, I finished compiling a list of
techs that I would like to own. I see one, Symantec, that is interesting to
me at current prices, and then only because I know it pretty well from legal
inside info. The pharms are not near where I would buy yet.
TSG I am buying Monday. I was trying to buy it below 34 Friday but never
could. DNB I own. RAL I just don't "get" yet. But on the whole Jurgis, I'm
with you. I don't believe you're on the wrong thread.
Mike
Let's keep an open mind though. The question is how long will techs take to get
there? I think they have a long way to go in terms of distance, but the travel time
is an open question. We're at the gates of hell for many people. Some have the
luxury to ponder what to do Monday. Many will be sold out by their brokers to
meet margin calls . And if even a fraction of mutual fund holders call in for
withdrawals, it will a nightmare (although I'll admit to a very gleeful feeling when I
see the market crash so bloodily). So I've compiled my wish list.
Today, I did buy Symantec as my first pure tech holding since Oracle
andApple . Only in one of my portfolios, in which the owner wants to be more
aggressive. But I did buy it. The reason I am attracted to it is that they are not
only a growing tech company at a reasonable multiple well below their 5-year
sustainable growth rate, but like my Apple and Oracle picks last year, they are
not being recognized for two big things:
1)Many still think of Norton Utilities and its second-banana Antivirus product. It
has expanded into much more than that, and dominantly. There is much growth
left and it is not Y2K or PC dependent. It doesn't seem that this is priced into
the stock, for whatever reason.
2)Cost controls at the company are excellent. The company is just about the
only tech player in Silicon Valley who does not think money is water to be
thrown on every fire. Very little excess. The company works from a tight
working capital base, keeping minimal inventories and tight credit with
customers.
After I bought, the company beat estimates by 10 cents. I was hoping it would
fall lower so I could get a chance to add it in some other portfolios, but it does
not look like that will happen. Here's hoping for another Nasdaq crash.
Re: ANF, I've watched it fall since it hit 40. Around 20, I thought really hard.
Went to a store. Turned around and walked out immediately. Too trendy.
And therein is the key to its high ROE/ROA. It has been "in" fashion. The
problem with all these chains is that they can fall out of fashion. ANF is a
century-old name that decided to get trendy in 94-95. It has worked. But the
problem is the survivability of the trend and concept. So I discount the
ROE/ROA numbers very severely. Especially when I think how hard those
numbers will get hit in a recession.
That all said, I am buying ANF. Not in the portfolio I run so visibly on my web
site - yet. But in several other portfolios. In the 11-12 range, I feel there is a
bottom. My interest perked when the stock jumped on two downgrades. Finally,
the downgrades came. My wife was the one who alerted me: "You always say
wait for the downgrades. Well, they came."
The company is miniscule relative to something like the Gap and has much
room to grow in terms of store numbers. It also may benefit from Gap's fashion
missteps for all I know. For now, the earnings yield just seems to great to pass
up. Especially with a growing coupon.
Chilly,
Welcome to the thread. I didn't buy EBSC for its growth. It may grow 10%,
but not consistently, and not using its capital efficiently. In fact, investors
have reacted negatively any time the company does something that
indicates it will continue as a going concern, much less grow.
There were investors who bought a big chunk. The company is clearly
undervalued, but it is not a good company in terms of management or use
of assets. As you know, there has been some theorizing that there will be
shareholder maneuver to get the company to create more value for its
shareholders. A Barron's article helped that out.
The fact that it was a net net helped give this argument some bite here on
the Value Investing thread. So I and others here bought. I brought up the
issue of the huge operating lease liability. How it made it not a net net -
possibly a problem for all net net retailers. There was some debate about
this. To me, after some thought, I figured that this issue destroyed my
reason for owning the stock. Others argued that EBSC's operating leases
might be considered assets, for all we know, and hence should be held as
a wash.
Of course, I still find that hard to swallow, so I say, well maybe I really
should ignore the operating lease liability, but at any rate I thought "this is a
growing, cash-generating company trading at around net net value." So I
held onto it.
To me, it was a poor decision. I confused the "net net with a catalyst"
strategy with a "cash flow/growth" strategy and ended up violating a rule I
try to remember: to get out when the reason I bought becomes or is
realized to be no longer valid.
Mike
Congrats on the ANF. I would like to bring to this thread's attention that
GATX is announcing it will sell its Terminals division. In my web site
analysis justifying my buy, I had said,
"There are a lot of assets ripe for shedding (as indicated by the $115
million being paid for just two of its tens of terminals) as well as potential
for high returns in certain operating segments (especially Capital). This
company needs capital allocation expertise, and if it didn't have it before, it
has it in spades now."
The question is what is left? We'll have to see what all this goes for, but
this could drastically reshape the balance sheet and place a load of
capital in the hands of the master allocator. There's even a vehicle already
existing within the company, Capital, that is growing at least 15 years and
has interests in telecommunications.
GATX Rail and the steamship company are both still there too.
why "in a period that profits and revenue are growing and strong, why can
they not generate enough cash to provide positive cash from operations for
a single quarter?"
Bob, you hit on the primary reason I'm not in the home builders. Looking at
the cash flows of the few companies I was intereste in led me to the same
question. It wasn't always negative, but it was never big enough for me to
think it would not become so significantly negative during a downturn as to
wipe out the small positive during the boom time. Net zero or net negative
over the cycle.
I thought there might be a dynamic that I did not understand. And could not
understand. How comfortable for me to know that DHOM's CFO is in the
same boat. The way some of these companies purchase
inflated real estate during the boom times, I guess I shouldn't be
surprised.
Good investing,
Mike
To answer whether this is a good business (and not just apparently cheap
based on traditional superficial measures) I coincidentally just did a new return
on capital calc on WCOM today, based on its latest results. Largely, I go by
Stern and Stewart's version when doing this. In terms of earning cost of capital,
Worldcom is doing a poor job.
In fact, it is not earning its cost of capital. After accounting for past pooling
acquisitions, and breaking down Worldcom's cash flows, I figure the company is
going to earn, optimistically, $8 billion in cash earnings on invested cash thus
far somewhat above $90 billion. Even looking ahead and taking analysts
estimates into consideration, I'm seeing at best a 10% return here and hence
WCOM is not earning whatever its cost of capital may be - I'm estimating at
least 12%.
Right now, it trades above its capital even though it is not earning the cost of its
capital. Not good. This may change as WCOM finds a way to leverage its
investment into further profits down the road. The latest quarterly report
provides a hint of this. But it has said it will have
massivecapital expenditures in the future - and current cash levels imply
additional borrowings to do it. All this will dilute returns further.
I think with T and WCOM, we'd have to find a way to analyze the current levels
of investment and somehow come to a conclusion that future earnings will grow
quite significantly off this base alone. One wonders what degree of empire
building is going on - what is motivating management? Right now, T seems to
have the greatest potential because of its cable assets, but it is potential.
Management has to execute. Plans to spin off or merge with BT tell me that
management is responding to the wrong inputs right now. Ebbers' Sprint plan
told me he is responding to the wrong inputs as well.
Mike
You held CCN? Bongo for you! That was a good buy, and a timely exit.
Congrats. I range-traded that and gave up. Looked like a good move for about
a year.
Good investing,
Mike
Paul recommended MTW to be privately and I found it quite a nice find. Quite the value.
in technovalueland land --
NSM, KEM & KLIC have been my heart-throbs lately.
http://partners.nytimes.com/2000/09/11/technology/11CHIP.html
http://www.electronicsweekly.co.uk/issue/articleview.asp?vpath=/articles/2000/09/06/special01.htm
But I am predominantly in pure valueland. FBN, SPR, WBB, NWPX, USFC, MAIR, WNC, CTB, RO
AMES, JNY, JBX, APPB, .....
I feel like I'm writing to myself sometimes on this thread, so why bother.
I think we're learning something about Gap and fashion in retail. Basically,
it's all fashion-driven. In a post earlier on this board, I brought up that from
my store visits, Gap didn't seem any less exposed to fashion risk than
anyone else in the industry. Now ANF and AEOS are rallying because
experts are saying they had the right fashion mix for this fall. BUT I would
still say that this just cements the fashion fate even more so. A while ago,
we were talking about ANF being the next GAP. Well, let's hope not.
BTW, I've completed a review of Buffett's holdings, and doesn't appear that
he has any GAP. Not the last few years.
Good investing,
Mike
Soon after I posted that, I picked up some. The industry is ripe for
consolidation, and Horace Mann's ratio issues appear temporary - a
confluence of unfortunate events. I think management can turn it around.
But it may be bought before then. The ratio even in bad times is still well
into profitability.
I also picked up Carnival Cruise Lines. I've wrestled with this one. All the
bad news. And the obvious fact that there's more to come. But I think this
is a good place to start a position. Favorable demographics, much like my
RV pick, National RV. Except much, much, much bigger. And one
absolutely knows this business will come back.
Mike
Horace Mann was almost bought/sold less than a year ago for more than
twice the current price . It's a steal. Just how low can it go? I'm
watching it carefully right now.
Mike
And in the case of Gap, the clothes are nearly as unappealing as those of
Abercrombie. I don't think it is a crazy stretch to say Abercrombie could be the
next Gap, because I think Gap is as much a beneficiary of a trend as
Abercrombie - and it is primarily the kids-to-young adults crowd. But I also
would double or triple discount my DCFs if somehow it had become stuck in my
mind that something was "the next" big thing. One of the oldest rules in the
investor's handbook - there is NEVER a "next" big thing.
Gap is like any retail organization. The gravy train has passed, and it will not
give and give to investors for decades to come. What growth has not yet been
realized has been fully discounted.
So that's where ANF's advantage lies. If it can become half the next Gap and
grow 4 times in size, we've got a winner.
Mike
I also added Symantec (SYMC) back to the portfolio today at 57 1/2. That
has been a trading vehicle for me the last two trips to the 70's. Maybe I can
get myself to hold on the next time it reaches that level.
Good investing,
Mike
New stock for this thread: Liqui-Box. This is an illiquid, boring company.
Somehow it earns high return on assets and high return on equity in the
business of liquid delivery. High insider ownership, and the thing generates
cash. Is there a moat here? Buffett has said that if he were smaller, he'd find
lots of stuff to buy right now, and last year he said he could do 50%/year if he
were managing less than $10 million. Is this the type of company he might be
talking about? Due to apparently limited growth prospects, and lack of a
"consumer" link, possibly not. But it nevertheless in the past seems to have
been growing, albeit slowly, and buying back shares. It revealed itself to me
during my April "Target Management" screen on my web site. A day later I saw
Wayne started posting on the LIQB Yahoo message board. If that was due
to my screen, I'm very flattered. But regardless we have two of us interested.
Wayne has said he has a small position, and I am contemplating it.
Good investing,
Mike
As you might guess, I don't think that risk necessarily equates with potentially
tradable, i.e. "Graham" or "Buffett I" stocks.
What I'm saying is that I'm looking for the price that will return me 15%
annually after tax, per Buffett's guidance. Higher is a higher margin of
safety. I'm not looking for the price equivalent in 30 year bonds. Any price
below that which will return 15% is an extra margin of safety. You're telling
me how to calculate intrinsic value (equivalents in instruments of similar
risk). I'm just concentrating on what I can expect to earn over time.
Remember the intrinsic value is not static and is likely to grow over time, so
just knowing the discount from today's intrinsic value does not tell you your
expected return.
He'll spend $350 mill on advertising, and more on additional personnel and
support investment. And what he's saying is he'd spend $1 billion if need
be. And then he's saying that the auto insurance business is worsening
and becoming more competitive, with poorer ratios. I know there is not a
parallel with Bezos. Just a vague semblance.
Mike
To: Daniel Chisholm who wrote (2349) 3/13/2000 3:18:00 PM
From: Michael Burry 2359
Read Replies (2) of 4077
Daniel, re: picking apart twister's statements, thanks for doing what I was
too tired this weekend to do. What you point out exactly explains my read
vs. twister's read, mine being right of course <g>.
Thanks on the return part too. You're right - if anything this letter provides a
fairly strong statement that one ought wait for lower prices if one wants
23.9% returns (if it ever gets that low, who knows). I figured 1500 meant
15% returns. But then he goes and says what he said (and not what twister
said he said) and I simply must conclude that in his estimation the 1500 is
possibly too high for 15%.
Checklist and wait
Mike
My read is that the read is vague. He certainly did not come out and say
that at current prices he is willing to buy back shares in the open market. I
mean, who is going to call up his broker and offer their shares at less than
the market? To me that implies that while we are below intrinsic value in
his estimation, we are not "significantly below" it- in his estimation.
In the past,his estimations have been fairly accurate. Just remember that
he's looking for 15%! 1500 was 15% in my opinion. What this tells me is
that I was wrong and that the intrinsic value is actually lower than I
thought.
Critically speaking, what is with the Jeff Bezos imitation on GEICO? All of a
sudden, it's OK to spend all kinds of money on marketing ($1 billion this
year he says) in order to grab market share , even if it means a loss?
He then excuses it by saying how Gen Re will offset in all likelihood. But
that does really excuse the approach with respect to GEICO? I don't
understand it.
Every year the report becomes more a marketing tool. Never more than
this year.
Why buy Buffett's Berkshire when one can buy a portfolio of many of his
stocks (Freddie Mac, Gilette, Coke, Amex, Wells Fargo) near yearly lows
and without the capital gains liability embedded in Berkshire.
Moreover, one can make an educated guess as to the several of the others
he either owns or would buy given the carnage in the market. IMO, now is
a good time to start piecing together one's own Berkshire-like equity
portfolio
Indeed, maybe a good time to buy an insurer and do it with the float <g>
Mike
One that he has moved into, and that I've bought, is GATX Corp. Glancing at it
won't get you anywhere, and even an analysis won't get you anywhere until you
see what Equilon is willing to pay for just two of GATX's terminals. And until you
see the strides GATX Capital is making. And until you see that management
talks like Buffett disciples. Not sure who lit the fire under these guys, but I can
imagine who might keep it burning. The stock is in the dumpster along with the
rest of the Dow Transports.
Wayne, Re: D&B, take a look at how much Fitch is paying for DCR, a much
smaller company than Moody's. The key dynamic is how D&B is working with
the Oracles and Siebels of the world to ensure it maintains a leading position in
business information as ERP software flourishes. It is difficult for me to assess
that dynamic. But I assume Buffett can.
Brands are getting murdered once again today. Thanks Dial. I haven't bought in
yet. KO getting KO'd.
I just think of it as trying to get the fattest pitch possible, period. If there's one
thing I've learned from Buffett, it's that styles can be tweaked for the better.
Lord knows I don't generally invest like him.
Let me explain something about the "new lows" though. Buffett talks to
management. He knows the companies intimately, and he knows the
competition intimately before he makes a decision. He is an excellent judge of
character in CEO's. When a factor in the company's success turns south, don't
you think that he finds out about it through these contacts?
I don't have any of that. I have the 10K. I don't sit on any boards. I can't buy
enough shares to influence the board's or the executive decisions. What I do
have is the knowledge that when a stock makes new lows, the people that do
have that knowledge for some reason have decided not to provide buying
support at a place where in the past they have provided solid buying support.
To try to emulate Buffett perfectly without his full complement of skills and
advantages (which I do not have, but any of you here might for all I know)
seems foolhardy. So I take something else from Buffett - the willingness to
improvise new investment parameters as fits my situation.
No doubt. The big pharmas at currently prices are just correcting to fair
valuation, though. Most are still in no-man's land technically, and who
knows where it will stop. I'll look to fundamentals for that - and I see
loomingMedicare issues with subequent commercial payer issues,
increased costs (yes, costs!) due to genomic focus, decreased ability to
market effectively due to ethics guidance from hospital departments,
overarching power of pharmacy review committees, the lack of a good
internet strategy <g>... There's quite a list. None of these pitches are fat
enough for me yet (MOHNISH – yells cheap! 3-4 times per year) , and I
expect I'll see one that is really, really fat But they are tempting - the last
time Merck was at this level in terms of valuation I didn't buy and in
retrospect it was a no-brainer.
Mike
How about Equifax? The Yahoo numbers are confusing, but underneath
it there's a lot of potential.
I see about 320M in after-tax cash return on invested capital of 1.537B.
Excluding goodwill, capital base is 932M. This gives returns of 20.8% and
34.3% respectively. I'm sure that well exceeds their cost of capital.
They have a billion in long-term debts, but the interest coverage is >5.
Last year, they bought into Brazil just as the currency fell, undermining a
year's worth of earnings - lost to currency translation. This also impacted
EFX's equity base, cutting it drastically. This results in sky-high numbers
on Yahoo for return on equity as well as debt/equity.
Now the stock is trading around 12X after tax cash earnings. The company
just announced it was buying a respected direct marketing company. It
also continuing a significant share buyback.
There is mild support around 20. It can be played like I ususally do - selling
at new lows, or from these levels can be held long-term IMO.
Good investing,
When I compare the tone of Sara Lee's CEO to the tone of Liz Claiborne's
CEO in their respecive interviews posted here, I agree. One makes me say
"Eeewwww." The other "Lord, Buffett's found a friend."
Good investing,
Mike
Let's get the idea chain going again. Has anyone looked at
Intimate Brands as a Buffett-like stock potential? It is hard to
imagine their version of ultra-soft skin mag ever going out of
style, and they're earning some 40% on capital.
What I just don't get is all the fretting over BRK falling, and now the
subsequent cheering its <1hr rise. Tells me a lot about the true horizon of
people here, as well as others, who are investing in BRK. Isn't the idea to
root for lower prices once a great business has been identified?
Mike