ExpectedValue
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Posts posted by ExpectedValue
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Ah, the antitrust case? I'll have to look into that. Thanks.
Still, on a 10-year historical free cash flow average of around $7 billion a year, a $50 billion market cap just seems... wrong.
But if credit card fees are reduced/limited, that FCF average from the past 10 years is rather meaningless.
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I thought this was interesting, Netflix is a company with a product that I really admire. I'm not an investor in them, but here is one take on the company from CEO Reed Hastings.
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Sadly, you can't add notes on the iPad, but it certainly saves on printing reams and reams of annual and quarterly filings.
If you use GoodReader, which connects to DropBox, you can read and annotate pdfs. I don't though. I usually take my ipad and a legal pad with me. That way I can read through the report and take notes of important details. Writing helps me remember a bit better, especially when it comes to key details.
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MAAL is a business with some good characteristics (high ROIC, usually can buy at a low P/E, great CEO). At the same time, I just don't know what the end game really is with it. I don't think they can grow a whole lot, this would be a good biz if they had a good capital allocator -- maybe similar to See's. But it seems like the BoD likes things the way they are and Tim is doing a good job.
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thanks guys, feel free to leave any follow up questions!
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I just posted my interview with Dave Carlson on insurance stocks:
http://streetcapitalist.com/2010/12/08/my-interview-with-dave-carlson-on-insurance-stocks/
A while back I asked for questions on the board here: http://cornerofberkshireandfairfax.ca/forum/index.php?topic=3256.0
I tried to ask as many as I could, some questions were kind of the same thing so I combined them together. Hope it helps some of you who are new at investing in insurers!
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I think that some of the ideas in Hidden Champions, where you see what makes these businesses great, can be applied to investing.
It's a favorite book of Paul Sonkin of the Hummingbird Fund, who suggested the book to me a while back in an interview:
http://streetcapitalist.com/2009/08/10/my-interview-with-paul-sonkin/
If you study the kinds of companies Sonkin invests in, he manages to find these tiny businesses that are market leaders in niche products that still have large markets.
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Here is my take on breaking into the investment biz:
First off, there are a ton of different ways to do it. There are traditional paths and then some very non-traditional paths. I would suggest that first, you look at local hedge fund managers and see what their career path was like, every country is kind of different.
Here in the US though, the most common way is to get your start in ibanking/trading at a bank/or sell side research, do that for a couple of years, and then make the jump. Most funds (particularly value shops) like to get people who already have a good deal of modeling experience so this is an easy filter. Or, if you're already working, getting into a top MBA program where there is good recruiting can be another avenue.
Are there people who join funds straight out of school? Definitely. But it's usually pretty tough. Most of the time it requires just a lot of luck on your part. If you're in school and can intern for a fund, that helps because you can build real analytical experience.
Some people look at graduating and then just trying to manage money for friends/family. I've spoken to some of these young fund managers and quite a few of them have regrets about going this route. Unless your friends/family are well connected and wealthy, capital raising is going to be difficult and probably not a quick process. Moreover, you just might not know enough. Unless you've got a great multi-year track record to back it up, you might want to wait.
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If you are comparing firms, EBITDA is a helpful metric because you are getting a more neutral picture, especially if two firms are using different methods of depreciation.
Plus, if you are using enterprise value, then it makes sense to add back in the interest charge because to do enterprise value you're already adding back in the debt. That's why it usually is EV/EBITDA and P/E, not EV/Net Income.
I don't hone in on any 1 metric, I look at EV/EBITDA (or EBITDAR), P/E, EV/FCF, P/FCF when comparing between different companies.
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Or take a look at TXIC which also demonstrates the danger of investing in a Chinese company, even if it has a Western CEO.
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I think you'll get more value listening to audio lectures off of iTunes-U than an audio book version of Security Analysis.
Do you have anything specific in mind? I am taking a long road trip over the holidays and would appreciate having some good lectures on my iPod. I often load it up with interviews from Youtube (or more recently with lectures from khanacademy.org , which is quite good).
Thanks - Pablo
Robert Shiller's class at Yale has podcasts up which are nice.
I actually love the LSE Audio Lectures, the topics are varied and they follow the format of a speaker giving their lecture and then a Q&A portion. They get famous authors, businessmen, political leaders, it's pretty great.
Some of the Bloomberg audio podcasts are good as well, you can get insights into different industries with the Talking Stocks podcast, which has analysts discuss different industries/companies.
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To me, one of the problems that some value investors run into is that they get a little too focused on Ben Graham and Buffett. After you have read enough of Buffett/Graham, it's time to move on and start focusing on learning what drives certain industries and then applying that knowledge in your valuations of individual companies.
So when you have passive time, where you are driving or commuting, I think it is best to take in information that will teach you about industries or specific companies. So I like to track down podcasts that are CEO interviews, industry-wide news (for example the FT has one focused on weekly news in the Financial Services biz), or talks with analysts.
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I think you'll get more value listening to audio lectures off of iTunes-U than an audio book version of Security Analysis.
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Here's one: Bermuda. Just got back from a week there. Per capita income: $107,000. Why? No income tax. Unemployment: no official stats, but apparently very low. Why? No dole is the explanation given to me by a working class Bermudan. Corporate business climate: unencumbered. Excellent, mostly self regulation. High sense of ethics.
Ordinary people not uncommonly travel frequently to the states for shopping, advanced education, etc. Cab driver showed me around his neighborhood. Nice cul de sac, three bedroom homes, well kept lawns. College graduates come back to Bermuda to work after graduation because the pay is better there than in the US.
Bermuda is a pretty tiny country population-wise, I feel like it's easier (and probably more feasible) to enact those sorts of polices in a country like that versus in the US.
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The BK position is really interesting I think.
I don't consider them to be a great business but at the same time, it seems like these fee-based financials are going to be in high demand going forward.
With the interchange charge that is hitting most banks, they are losing some crucial fee income. Plus you have issues with the consumer protection agency and loan supply/demand might not be so great either... So banks that have a ton of non-interest income should do well going forward IMO.
I would definitely spend some time watching the shares of trust banks, I feel like the bigger players might look to them as acquisition targets in order to diversify their income streams.
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I am beginning to understand why Watsa, Buffett, Berkowitz, Klarman, et al. are so rare in the investing world.
Most people seem to be hardwired to see a stock like SIRI and think, "Woo-Hoo! Lemme on that rocket ship!"
I guess while most crash and burn (1990s day traders, 2000s home flippers, 2010s SIRI "investors") the aforementioned value masters just keep stacking capital on top of capital all the way to the sky! ;D ;)
The other thing to note is that I think in 2 years or so Malone has an option to acquire more stock in the company. I've seen one idea tossed around where LCAPA acquires XM Sirius so that they can be spun out with actual operating earnings (right now LCAPA is basically a HF for John Malone). So maybe some people have this expectation and are investing because of it.
I don't own the stock -- but like I said, looking back there were specific times when it was very attractive, even to value investors.
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One of the things that works for XM Sirius' benefit is a lot of new cars feature a free trial offer, now for people that have to commute to work daily I think there is a good chance that they convert to full subscribers after the trial runs out, just because they fall in love with the service.
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I think you can actually argue that it was appealing to value investors at one point, specifically after John Malone did his deal with XM Sirius and they were able to pass on that price increase (back when they went to EBITDA positive for the first time).
If you had bought at that point you would have done pretty well I think.
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FFH has to be more risk averse and focus on the macro just because if their investments go south their cost of capital might rise due to ratings downgrades.
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Buffett can afford to sit on larger amounts of cash than Klarman though, because Berkshire can go out and swallow entire businesses (Burlington Northern).
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Ehh... I don't think the Kobo will achieve much success. I think this market will follow an iPod-like pattern where one device takes the majority of the market share and then the rest of the devices pick up the scraps. The only boasting point I see people make about the Kobo is the size of their selection which does not say much since you can manipulate that figure depending on how many free/public domain books you count.
I flew to Boston last month and on the plane the only e-readers I saw were Kindles, same with my trip to NYC in May (also spotted Kindles in the subway).
I don't think the point about Walmart says much to be honest. Buying an E-reader is a big up front investment (about 14 books at $10 a pop), so even if they were at Walmart, would they buy? Probably not. I would be willing to bet that E-reader sales at Walmart have been pretty lack luster lately.
Buying books via QR codes? I am not sure why you would need this. Most E-readers can access the internet and allow you to connect directly to the store where you can sample and buy books. The idea with either platforms, Kindle, Ipad, or Nook is so you can purchase and download books without leaving your house and without any delay -- that way in the end you are motivated to increase your purchasing volume overall.
I think the fixation on books is a bit backwards looking though, my guess is that it would be better to focus on where Amazon is going than where they was and that means paying attention to expansion areas. Like Myth, I think buying businesses with stock is great, especially since the stock is overvalued. I'd rather they do that than use cash.
I also have no problem with them acquiring businesses, as long as they do it in a disciplined manner. The lack of real integration yet with the verticals they've picked up means that looking at the metrics of those businesses when purchased is probably a bad idea because you are getting a static picture of what's happened in the past versus what can happen in the future. This is particularly true for Zappos where margins were razor thin but could potentially expand a bit if they can leverage some of Amazon's clout to help on issues like pricing.
Again, like I've said before, I don't own the stock but I think Bezos and his crew are worth watching because they've been doubted and ridiculed for much of Amazon's existence and have constantly managed to execute.
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Unless it continues, I don't see how returning $1 billion out of $23 billion is going to solve the problem.
The way I figure it, sometimes Klarman goes to 50% cash when he doesn't see many opportunities. In that case, the 5% becomes 10% which when you are getting in the billions is pretty significant. So maybe he is trying to put a soft cap on his assets.
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This is pretty interesting but it makes sense. To me, it must be really difficult for him to find opportunities with $23B in AUM. Even if he went 50% cash, he would still have to deploy more than $10B which is a real feat right now.
http://www.businessinsider.com/seth-klarman-baupost-group-to-return-capital-2010-11
-Seth Klarman's Baupost Group will return 5% of its capital to investors at the end of the year
-Baupost has generated an monstrous $6.5 billion in net investment profits from January 1, 2009 to September 2010
-This growth has propelled the firm to an enormous $23 billion in assets.
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I've spent a lot of time analyzing thrifts and MHCs, I even have a list broken up by state of the non-public thrifts with basic data on assets and loans. I spent a lot of time monitoring three MHCs in the past year and call their CEOs up every few months, so it's an area I feel comfortable talking about.
There are some problems with the strategy though. If you want to invest in a thrift pre-first step, the best bet is to go ahead and do deposits. The issue is that sometimes you can only do a deposit if you actually live in the state. There are ways to get around it (for instance, if your parents lived in MA you could have the deposits in their name)... but it's just a really convoluted process and quite frankly not worth the time IMO. The excess capital isn't really at the insane levels like it was back in Peter Lynch's day.
In the long run, thrifts face significant issues. They tend to put the majority of their assets into mortgages which are bound to take a hit when interest rates begin to rise. Earnings-wise they tend to be pretty poor, they mostly write mortgages and HELOCs, but HELOC lending is facing constraints at the moment (TFSL was told not to increase their HELOC book recently).
So instead, some people try to target MHCs (a thrift that completed the first step in the conversion process) and invest before they do their second step conversion. The problem is, a second step conversion can take years and sometimes might not even happen at all. During that time, MHCs tend to trade sideways.
Some people thought that with the OTS going away, it would serve as a catalyst for second step conversions. But again there is another problem - so far the second step conversion market has been pretty weak. Basically, it's like doing an entirely new IPO and if the market is not receptive to IPOs, you have to lower your offering price. So before, maybe you were seeing second step conversions priced at 100% of TBV, now they might get priced at only 80% TBV. If that happens, you don't get the "pop" in value appreciation that you used to get when a second step was announced.
In addition, most thrift and MHC bankers tend to have a bad reputation -- they are often looked at as being less savvy than commercial bankers and as a result tend to do bad deals when it comes to acquisitions. You have to watch these because when a thrift converts it ends up with a ton of excess capital. They can either use that excess capital to do buybacks, dividends, make more loans, or perform acquisitions. In the past I've seen thrift bankers pay really rich multiples for acquisitions that just weren't worth it.
In the recent issue of Grant's, Joe Stilwell mentions two MHCs he is bullish on - STND and FFCO. He owns 7-8% stakes in each and is a 13D filer (I believe). He has basically told management not to do any deals and to focus on paying dividends and buying back stock with their excess capital. It could work, but it will take a long time and they might run into issues with their assets.
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Is it helping or hurting his moat if he is selling the Kindle at Target? (same price as Amazon)
Helping. Ultimately the goal is to get you to buy your ebooks via Amazon. That's why it even makes sense to have a Kindle app for the iPad.
Netflix CEO responds to Whitney Tilson's Short Thesis
in General Discussion
Posted
I don't think insider buying/selling is that great of an indicator on the fundamentals behind the business and the people running it. I saw during the crisis buyback programs executed at companies like LEH and it was pretty meaningless.