vinod1

They have been gobbling up companies like crazy. I think as with any SEC case this would go for an year or more. I think the more immediate catalyst is their 2Q earnings on Aug 8 or 9th. If they reaffirm or give a revised estimate for 2010 earnings, we can expect some traction in the stock price. Vinod

My guess is a large fine ($100 million) is the most probable outcome. If they have done any intentional manipulation of patient visits I think they would be toast. So this is a probabilistic bet that there is no fraud. Vinod

AMED is a home health care provider whose stock was hammered down by about 60% due to a recent senate finance committee and SEC investigation. Medicare is their primary payor accounting for around 90% of their revenue. AMED provides care at patients homes usually for those recovering from surgery as this is lower cost than if patients remain at hospital. Medicare used to reimburse about $2200 for 1-9 visits and then pay an additional $2200 if visits exceed 10. A WSJ analysis showed that there is a large abnormal jump in the number of visits at 10 compared to 9. There is also a motivated short seller who has written up some fear mongering style articles on this company. The language and tactics remind somewhat of FFH. The company has written a letter to shareholders providing data and explaining their position and is available on their website. To me it looks like it is basically a poorly designed compensation structure by Medicare and there does not seem to be any evidance of criminal behavior. The patient's doctor determines the number of visits so there has to be a vast conspiracy of several thousand doctors and nurse practiotioners. This does not seem credible as the number of visits are going to be very subjective. It could just be that AMED is taking more patients that need 10+ visits or just the incentive scheme makes it unconciously tend to make 10+ vists more likely. AMED's licensed nurse practitioners make the recommendation as to the number of visits and the patient's doctor signs off on this. So there is a possibility that nurse's are more likely to recommend 10 visits if it falls in the 8-9 range. AMED is in a highly fragmented industry with 10,000 companies and it is the industry leader with just a 2% market share and it has been growing very rapidly by acquiring companies. Other companies in the industry have been accused as well but AMED has fallen the most as it is the industry leader with the highest profit margins in the industry and targeted by the short seller. Short interest is about 40%. Risks 1. Medicare may bar AMED. Very unlikely but that would essentially bankrupt the company. 2. Large fines by SEC. More likely but should be manageable for the company. Take a look, this might be a good opportunity. Thanks Vinod

Thanks Myth. Going to dig into this in a little more detail. Vinod

Great work Myth. Thanks for sharing the idea. I am too slow in doing the DD on this and it ran away. Have a few questions: 1. The liquidation value is heavily dependent upon estimated prices for Double Hulled barge fleet. Even a 10% cut in the estimate puts the BV closer to $6. I assume there would be some additional liquidation costs (employee termination, etc) that reduce the actual realizable value on these barges. How likely is a liquidation scenario? 2. Do you have a rough estimate of the utilization rate or EBITDA for next couple of quarters based on the new barges coming online and deployment of some barges for Oil spill? Thanks Vinod

I do see the margin of safety with L, jut not directly in CNA. I have a very small investment in L and if not for CNA it would have been a larger position. :)

CNA has in aggregate lost money over the last 10 years and its record over the last 20 years is not much better. It has not been able to increase its book value to keep pace with inflation over the last 20 years (just based on eye balling the data). The only reason for optimism would be the CEO change, but I am not sure if CEO by himself can change an organization culture from being a poster child for incompetent reserving/underwriting to one with disciplined underwriting. Based on a rough estimate of earnings of about 4% on its assets with an optimistic 104 CR, I get a ROE of about 8%. I would think such a business is not worth more than 0.6 or 0.7 book. Could you please share your thoughts on how you think CNA would be able to earn $1 billion? I think L is attractive from a sum of parts perspective in spite of CNA but do not see it as an attractive way to invest in CNA. Thanks Vinod

I approximated up the shares a little bit since Walmart's fiscal year does not match up to calendar year and I wanted to normalize it to calendar year. I need to double check this. Vinod

I did look that deeply into either Aldi or Leader Price. I need to look into them in more detail. Thanks!

I put together my rather sloppy valuation work on Walmart at the link below. I usually try to document my thesis for myself in a 1-2 page summary to make sure that I have record of my reasoning for any investment. Any feedback/critique would be much appreciated. I have went through all the AR from 1972 on and jotted down notes that strengthen at least in my mind their competitive advantages but I have not included them in the document as it is takes too much time. http://vinodp.com/documents/investing/WalmartValuation.pdf Thanks Vinod

Thanks!

This is as sensible an investment approach as any that I have read. You bought an exceptionally good business at a decent margin of safety with a catalyst and hedged market risk when the broad market is above its fair value. If it does not fit some definition of value investing, too bad :) Vinod

Thanks!

Thanks!

Yes, this is just for the near "inevitable's". Vinod

Graham frequently uses 30 years of data in many of his examples. Here is what he has to say on this topic "The soundness of a security purchase is determined by future developments and not by past history or statistics. But the future cannot be analyzed, we can only seek to anticipate it intelligently and to prepare for it prudently. Here the past comes in - through the back door, as it were - because long experience tells us that investment anticipations, like other business aniticipations, cannot be sound or dependable unless they are closely related to past performance." Businesses are characterized by periods of ups and downs especially when measured over decades and profit margins are one of the most mean reverting of all in a capitalist economy. I think a good knowledge of profit margins and the business factors that contributed to them would be of great help in evaluating a company. I tried to reverse engineer some of Buffett's purchases and from what I found given the same information (without hindsight) I would not have made those purchases - because they looked too expensive. Many of Buffett's home runs involved expanding profit margins from their historical low levels. Of course you need to know the business cold to assess why there might be an opportunity to increase profit margins. Take PG for example, its profit margin averaged around 4.7% as recently as the 1984-1988 period and is now triple that during the most recent 3 year period. There are many factors why the profit margins have expanded but if you look at their 40 year data, you have many such reversions of profit margins. None of this implies that profit margins are going back to those low levels, but should give you a good indication of the narrowness of margin of safety at this time when compared to other periods of lower margins. All this might be a waste of time - but I find it entertaining anyway and hope if an opportunity comes my way I would be much better prepared knowing the long term record. Thanks Vinod

Thanks all for the comments. I am mostly interested in the raw data, so it looks like I might not find it in the sell side reports. I subscribe to VL reports but it goes only about 18 years and some of the data is available only for the last 12-13 years. I bought up old S&P 500 guide books to get data all the way back to 1984. I am looking for 40-50 year data, primarily for the "near inevitables" like PG, JNJ, KO, AXP to get a better sense of how their margins have evolved and what factors might have contributed to it. It looks like I have to find the information the hard way. Vinod

Does anyone know how to get access to sell side research? I am thinking if this would be a quick way to get acquinted with a company, especially its long term performance. I got this idea after looking at Pershing Square's persentation on Kraft. I have painstakingly compiled the profit margins of its competitors in various categories just to see what kind of margin expansion is likely and saw that this is exactly what is already available in Pershing Square's presentation. I do not think I have seen any sell side research before other than Alice's BRK report and wanted to see how I would be able to get access to such reports. Do I need to have an account with a full service firm? Or is there an alternate way to get access to such reports. I am mostly interested in the data and could care less about the actual recommendation or price target. Thanks Vinod

Great idea! I was trying to find charities/non-profits, etc where you get the most bang for your buck, but so far I had been really disappointed when I took a detailed look at them. I found that the best charities seem to target only about 85% of total "collections" to go to actually helping the poor. The other 15% is overhead for example, charity drives, events, etc. Even this 85% is very inefficiently deployed and in some of the very small charities that I had an opportunity to look into, about $2 worth of service is being delivered for every $5 that is collected. I think many more people would be willing to donate large sums if there is some credible evidence that the money is really being put to good use. A rating agency for non-profits would go a long way in both improving the performance of existing charities by highlighting the amount of waste and in increasing the amounts donated by people. Thanks Vinod

I only took a quick look to see if it was interesting and definitely like what I see. Disciplined underwriting, consistent/conservative reserving, and a rational asset allocation policy. However, they could be better on the investing front (higher allocation to equities when market is overvalued and lower allocation to equities when market is undervalued). Based on an expected return of about 5.8% for the portfolio as a whole (based on their seemingly preferred allocation of 80/20 bond/stock mix and assuming a return of about 5% on fixed income and 9% on equities) and about an 88% CR (their last 11 year avg), their pre-tax earning power is about $150 million after a $6 million reduction for interest expense. With a 30% tax rate (past three year average) I get about $5 per share in normalized earning power or about a 12%-13% ROE. This would justify about a 1.5 book value multiple which at the current book value of about $40 translates into an IV of about $60. If you assume that their reserves are overstated by 12-15% then book value increases to about $45-$46 which translates to an IV of about $70. At a current market price of about $54 it is trading at about 80% of IV. This does not seem to offer sufficient enough margin of safety for investment at this time. I like what I see so far, so I am going to dig much more and hopefully Mr Market might give an opportunity may be in the next decade or two. Thanks again for doing this research and sharing it with the group. Thanks Vinod

Thanks for sharing your research. SUR looks like a very promising find. I took a look at a couple of their annual reports and as with evaluating any P&C company that passes the more mathematical filters so I am trying to assess the following qualitative factors (which prevalou has already pointed out): 1. They had an average combined ratio of 87% over the last 10 years. The question I would ask is what is the reason for this performance? What compititive advantage did they have that allows them to keep the combined ratio this low? Did the specific line of business itself have such low combined ratio overall across companies in this industry? It could not be just because they have discipline or have smart underwriters. Do they have lower costs than the compitition and if so how did they achieve it? Do they have some relationships/networking advantage? Do they have financial strength/ratings significantly better than compititors? I have not seen anything (so far) that leads me to believe they really have any compititve advantage that would generate lower CR than the compitition other than via discipline, which they do seem to have. So this leads me to believe that the surety line of business might be generating low CR across the board for all companies in the industry or at least those companies that do it right with enough discipline. I am not able to find a comparable mono-line writer focussing on surety that would allow a true comparision to peers. 2. What does the tail risk looks like? In this business the losses seem to come from just a few occurances as they generally do not expect to payout much i.e. very low premium relative to payout. So you need a really long time (say 25-30 years) to even begin to get a general idea of the true costs. They had a high CR of 119 once already in 2003 and not sure of the probable frequency of this due to having less than 15 years of data. Also if economic/credit conditions are going to be unfavorable going forward, how would this reflect into the CR? 3. What are the growth opportunities? This line of business seems to have relatively rational participants with stable pricing so no possibility of really hard markets that would increase the premiums and profits is ruled out. So is the current situation is about the best that could likely be expected in terms of profits? I think this looks like a very promising find and going to dig deeper and just wanted to pick your brain to see if you have any thoughts that you can share. Thanks Vinod

Both have different risk/return profiles but problem I am having with LUK is more around trying to nail down its IV at something other than its adjusted book value. LUK's value can vary quite a bit based on how you estimate the IV of NOL and Fortescue (stock and the 4% revenue note). I just am not able to get a good handle on these two items. Do you have any suggestions on this? Thanks Vinod

Thank you! Few lectures especially in investing can remain relevant after 50 years but this is gem. Vinod

I have not looked into it yet, but BAX is something you might want to consider. It price got down because of a short term issue with a recent recall. Vinod

Yes!