Ballinvarosig Investors
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Posts posted by Ballinvarosig Investors
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I am not being smart, but if there's one thing that makes me tremble when coming to evaluate a supposed value investment, it's the words "patent portfolio". Motorola, Nokia, Nortel, a whole bunch of companies that ended up imploding were supposedly value at some point because of their portfolio of patents. It feels that when you start evaluating a company on past achievements, the future really must be bleak.I should also add that Nike continues to build up an extensive patent portfolio which will allow them to stay several steps ahead UA & Adidas.
http://www.investors.com/news/a-nike-apple-watch-an-under-armour-baseball-line-patents-hold-secrets/
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"This was the pre-eminent brand when I was at college 15 years ago, yet here it is seemingly at risk of going under."
15 years ago is the key point. The company is no longer hip, and they can't seem to regain that mind share. I think it is in a death spiral and will follow Aeropostale and American Apparel.
I much prefer NKE, UA or LULU at today's prices. Not as cheap, but much less likely for sales to cliff dive.
Death spiral seems too strong a term. Aeropostale was heavily bleeding cash for 3 years before it went under, its brand was nowhere near as strong, it had no international exposure worth speaking about, gross margins were poor. Abercrombie is a much better business and a stronger brand. The positive free cash flow has only just went negative this year.
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A whole pile of companies in the apparel business are getting smashed up. Nike and Under Armor have hit 52 week lows while Abercrombie & Fitch is at an unbelievable 16 year low.
The latter seems pretty unbelievable. This was the pre-eminent brand when I was at college 15 years ago, yet here it is seemingly at risk of going under. The stock price decline is all the more startling when you consider it is has gone from 92M shares outstanding to just 68M outstanding today. I would have thought this was normally a good thing, but just ask Aeropostale shareholders if they thought the same about their stock buy back binge. It doesn't seem all bad for Abercrombie though, gross margins are still relatively strong, and despite the strong dollar, growth seems to be continuing internationally (just over 1/3 of revenue), with the US stores leading the declines. Having said that, the real worry is the US store sales are the leading indicator here. With $3.5B in sales, I do have to feel that this thing is worth more than $1B current market cap to someone out there.
Thoughts?
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When I see a wealth tax of 2% on assets above a Billion, Buffett can lecture the rest of us about paying more in taxes. Why does the media not point out that someone with 60000Million, whose net worth grew to 66000Million paying 1.8M is personal income taxes is insane. Buffett amd co. are amazing escape artists and sivert the publics attention very well.
Or even just look at the blended tax rate on his income. $11.5M income, $1.8M in income tax.
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Can people debate this lifestyle stuff in a separate thread please?
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I have a lot of anecdotal stories of companies trying to do anything to escape the clutches of IBM, for cost, for performance, just to be away from IBM.
You are not the only one. My brother works for a large multinational that is trying to disentangle itself from IBM. He said the reason why the IBM mainframe business is so profitable (and hated by customers) is the fact that customers are charged on a MIPS (millions of instructions per second) basis. Historically, they have been willing to pay this cost due to the stability (and some inertia) that a mainframe platform provides. Technology has moved on though and the upstarts at Facebook, Google, and other companies have developed technology (that's open source and can be run on commodity hardware) that allows customers to scale applications horizontally. This has left IBM selling a solution that's obsolete and too expensive, little wonder customers are leaving. The process isn't all or nothing though, and it is being staggered. If a company has just bought a lot of IBM mainframe hardware, they will want to get the full life from it before upgrading. This is why IBM are able to manage the decline. Make no mistake though, this part of the IBM business is dying.
Of course, people will say look at the free cash flow yield. It looks great, and if you believe the story that products and services outside of the mainframe (the other cash cow) can take up the slack, then IBM is a screaming buy. I asked my brother about this one too, and he actually said that not only is his company trying to get off the mainframe, they are trying to stop using other IBM products and services too (people are less willing to spend $200k on a fully loaded IBM web server when you can configure environments on Amazon for much cheaper). Again, like the mainframe, a lot of the benefits that IBM were able to provide for a price is now free and much of this technology is still in varying ways of early adoption. That leaves me wondering, what products do IBM actually have a genuinely competitive advantage in?
What I will say about IBM is that they are doing right by shareholders and are managing the decline reasonably well, so there is the possibility to buy it if it's cheap and sell when it's dear.
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Not going to list everything I own because I have lots of tiny positions, so here are my main ones. FYI - cash the biggest position by far at ~40%.
Generals
UNIQA Insurance Group (Austria)
Karelia Tobacco Company (Greece)
Brainjuicer (UK)
Yahoo Japan (Japan)
Eni (Italy)
Lloyds Banking Group (UK)
Wells Fargo (USA)
Special Situations
LXB Retail Properties Plc (UK)
Bowleven PLC (UK)
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I would have thought Biglari was the most successful one out of any of them. With very little money down, he has effectively managed to make a $1bn company his own personal piggy bank.
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This has shades of Bob Goldfarb and Sequoia all over again, selling down good positions to keep bad ones. Are Sears, Fannie/Freddie, and St Joe really so good to sell Berkshire and AIG in order to keep? Personally, I just can't see it, if these positions were so good, they would have worked out by now. That's the one thing I have learned in investing - the good ideas are the one that don't need years to come good. So I have no idea why he is engaging in this strategy of doubling down on losers, especially considering the investment vehicle that he runs (a mutual fund that is likely to have a lot of unsophisticated investors). If he is getting redemption's, then he really has no one to blame but himself. One thing that disturbs me about Berkowitz is just how disingenuous (whether it's accident or not) he's being about Fairholme's current position. He keeps talking about how this is like the time in 1991 when he had 35% of his assets in Wells Fargo. I have to call BS on this. Firstly, I don't think that Wells Fargo ever fell by 50% during the real estate crash of 1990. Looking at the share price over the period it's more like a 35% decline. Even at that, within a few months of the trough, the share price just went up and up smashing new highs with each month. Operationally, the real estate crash really only caused Wells to wobble for a few quarters. Just look at that 1990/1991 annual reports and you'll see that what Wells experienced was really only a hiccup that the market over-reacted to (but rapidly corrected).
I have to wonder are there any vulture hedge funds out there looking at Berkowitz's very public book and desperate liquidity position in order to engineer some sort of attack on his fund.
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Call it the Great Grocery-Store Giveaway of 2016.
In Austin, Texas, Randalls slashed prices for boneless beef ribs by 40 percent, to $3.99 a pound. Not to be outdone, the H-E-B grocer down the street charged $1 a pound less. Not long ago, Albertsons advertised a deal you don’t normally see on your finer cuts of meat: “buy 1 get 1 free” specials on “USDA Choice Petite Sirloin Steak.”
And what does $1 buy these days? In North Bergen, New Jersey, you could pick up a dozen eggs at Wal-Mart. OK, the price was actually $1.14. A mile away, check out Aldi, the German supermarket discounter, which can actually break the buck -- 12 eggs for 99 cents. A year ago, you would have paid, on average, three times that price.
Very interesting article on competition within the grocery sector.
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Not sure it's been mentioned before, but it looks like Parsad has himself a new website. I noticed there's a new section with annual reports which I will be devouring.
http://www.cornermarketcapital.com/annual-reports.html
Cheers ;D
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Is it time to stage an intervention for Berkowitz? Almost nothing of what he says these days has any basis in reality. It's crazy how someone who has been so insightful in the past has just lost their way so badly.
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Anyone got the full letter? The editing at Value Walk is awful and often misses out good bits.
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I have a good one.
We owned close to 1% of a micro cap British company that's listed on AIM (not saying the name as it's still going). We thought the company was cheap, it was growing, was in an ok business (8-12% avg ROE); we liked management, and they were also considering a dividend. It had almost no institutional investors, and with the dividend being initiated and ok growth, it'd sooner rather than later that investors would pile in. It was literally 2 weeks after we got our full position, we learned the CEO was ill and would be resigning. We were a little worried, but decided to hold the course. Needless to say, the replacement CEO that was brought in had a "colourful" past. What worried us more was the long-term incentive plan that the company signed up for to get him on board. He only had to increase the share price by 23% to be granted a chunk of the company for nothing. We eventually got to meet him and within minutes, we just knew he was an oily character, too much promotional talk, too much focusing on the stock price. The alarm bells were ringing at this stage, and when by chance we ended up meeting an old acquaintance of his who told us he was a bad egg, we unloaded our stock. I am almost certain that he is defrauding the company, because the stock price to a literal day managed to stay in the 90 day range above a certain price so his performance options would vest. We thought that he would do something like that to get the options to vest, so probably could have held on and made money.
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Acquirers Multiple recently discussed an old interview with Berkowitz from back in 2009. It really illustrates just how much Berkowitz has deviated from his core principles of investing by looking at free cash flow.
Kiplinger: Do you pay any attention to earnings?BB: No. I look at free-cash-flow yield.
G&D: Is killing the company a mindset that you employ when you analyze a business, or is it a separate process you take on after you have analyzed a business or when you are talking to experts? You’ve described it before as a role-playing exercise.BB: I think killing a business is the research process. We tend to start off looking at industry sectors and businesses that are under stress. And by stress, I mean that their stock prices and their market values have fallen off a cliff.
Then we try to understand the current free cash flows of those businesses and try to understand how much free cash flow can be maintained. Or if it can’t, what level can be maintained assuming that they will be able to maintain the business at some level. Also, how are those free cash flows going to get to the owner?
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The funds look quite terrible. It's not just the performance )or lack thereof) that is bothersome - but when I look at the portfolios, I see a pattern of the largest position (by cost) going bust, while a lot of the smaller ones work out. Maybe he averages down on bad bets?
The rationale for VRX looks amateurish too. I would not out a penny in these funds.
That is exactly what I was thinking.
When I look at Francis' portfolio, I see a few stocks I have owned myself, along with others where I can see why they are in his portfolio. Some are up a little, some are down, but as a whole, he's winning. As you've correctly pointed out, the problem is in over-sized losing positions. My natural assumption as to the reason for this is the same as yours - Francis is doubling down on bad positions. It almost looks to me like he's unwilling to accept a loss, so instead of just cutting the loss, he doubles down his position without paying attention to the deteriorating fundamentals. I mean, when you look at his large positions (Sears, Valeant, the Greek bank), you can hardly say that the fundamentals of these companies were anywhere near as strong as they were when Chou first went into these positions.
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Not just the Japanese.
http://www.fuw.ch/article/the-fed-is-now-hostage-to-wall-street/
Obviously, the financial markets like this cautious mindset of the Fed. Earlier this week, US stocks climbed to another record high.Isn’t that a funny thing? The stock market is at record highs and the bond market is acting as if this were the Great Depression. Meanwhile, the Swiss National Bank is buying a great deal of American equity.
Indeed, according to the latest SEC filings the SNB’s portfolio of US stocks has grown to more than $60 billion.
Yes, they own a lot of everything. Let us consider how they get the money for that: They create Swiss francs from the thin alpine air where the Swiss money grows. Then they buy Euros and translate them into Dollars. So far nobody’s raised a sweat. All this is done with a tab of a computer key. And then the SNB calls its friendly broker – I guess UBS – and buys the ears off of the US stock exchange. All of it with money that didn’t exist. That too, is something a little bit new.
Other central banks, too, have become big buyers in the global securities markets. Basically, it all started with the QE-programs of the Federal Reserve.
It is a truism that central banks do this. They’ve done this of course for generations. But there is something especially vivid about the Swiss National Bank’s purchases of billions of Dollars of American equity. These are actual profit making, substantial corporations in the S&P 500. So the SNB is piling up big positions in them with money that really comes from nothing. That’s a little bit of an existential head scratcher, isn’t?
Genius really :o
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Buffett cutting WMT is not at all surprisingly. Look at the ROE, look at the net margin, you don't notice it quarter to quarter, but over the years, the squeeze has been relentless. When you look at how Tesco imploded, I am surprised he hasn't cut the position sooner.
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You are missing the most important one (of our time). Klarman.Here's a quick list of value investors, many still alive.
Buffett
Graham
Munger
Pritzker
Zell
Icahn
Ackman
Schloss
Shelby Davis
Tom Evans
Einhorn
That's just the billionaire ones I can remember.
None of them do anything that Graham didn't do or didn't write about. They use the same valuation methods and strategies he wrote about. He wrote about or practiced activism, growth, net net, distressed bonds, arbitrage, etc. I don't recall Graham writing about real estate but it wouldn't surprise me if he did. The principles are the same.
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Its interesting that value strategies (which obviously vary to a great degree) have dramatically underperformed in recent years. The very title of this thread indicates to me that "value" is likely due for a period of out-performance.
On a side note, I think the idea of "value" investing being dead is ridiculous. All value investing means (in my view) is trying to buy assets for less than they're fundamentally worth. There is a lot of art in asset appraisal which makes it interesting.
When I say value, I mean in the traditional sense of the word. Buying unloved companies, companies at a discount to underlying value, companies at low PE's, etc.
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IMO, investing nowadays takes more imagination/insight.
If you're looking for spectacular returns, I agree.
Speaking of imagination/insight, I am reminded on Buffett's purchase of Coca Cola 30 years ago. It was already a large, well followed company with scores of analysts. Yet Buffett was able to make a simple extrapolation that vast untapped markets outside of the US could be opened up to Coke's products. It was a simple deduction that a ham sandwich could have made, yet Buffett was the only one to do so.
Anyone care to speculate what in plain site opportunity like KO exists today? My thought would be Bank Of America. You have a CEO that is telling you that the company has $35-$40bn in normalized earnings. you have all the wreckage of the financial crisis now firmly in the rear view mirror, you have a stock that's priced well under book value. I don't think it'll be a 20 bagger like KO, but in 5 years time, I simply cannot see how it will not double from today's price.
Incidentally, it ticks the value investing criteria ;D single digit PE, priced under book, in a sector that is hated.
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I think the old Ben Graham/Walter Schloss/Buffett Partners version of value investing is basically dead. On life support, anyway. Trying to sell the idea of buying ultra-cheap companies with very visible problems to the masses was never going to be popular, but I'm even seeing the idea of it die out even among value investors.
Sorry to pick you out, but that statement actually gives me hope that value investing has a future if anything. I think so many folks have been so badly stung by value (whether it's through permanent capital loss or awful performance) that they're now increasingly embracing growth. It seems to me that the growth story is now so ingrained into investors, that their expectations have become detached from reality. I actually read an article a few days ago that suggested that stocks were actually cheap as their returns were favourable when measured against long term bond yields. It's like no one can conceive interest rates ever going up ever again.
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Jeff Matthews wrote the following about Mattress Firm (MFRM) just two months ago, I hope he does not mind me reproducing.
http://jeffmatthewsisnotmakingthisup.blogspot.com/2016/06/mattress-fire.html
Mattress FireBack in May—that’s less than two months ago—the Chief Marketing Officer of Mattress Firm (ticker: MFRM; Tangible Book Value Negative $30.32 Per Share if our Bloomberg is correct)—was asked how business had started the new year.
“It continues to be a bit choppy…” he began—choppy being one of those euphemisms Wall Street hates to hear—before adding, in the true nature of a marketing guy, “…but we’re SUPER optimistic that we’re coming up on summer selling season, Memorial Day...”
Sure enough, Memorial Day did come—even if Mattress Firm appeared to begin the Memorial Day sales event a week or two before the actual weekend—giving the CEO something positive to talk about on the ensuing earnings call, when some of the more important numbers were otherwise going the wrong way.
Specifically, while MFRM showed 49% revenue growth in the first quarter, it was thanks mainly to the acquisition of Sleepy’s and other mattress retailers the previous twelve months. What analysts call “organic” growth was somewhat less than 49%.
Like, 5,000 basis points less.
Comp-store sales were down 1.1% in the quarter (despite a boost from the inclusion of e-commerce sales from the recently acquired 1,000-store Sleepy’s chain in those “comp-store sales,” for some weird reason).
For a clearer picture of the sales trend at what management itself likes to call “the first truly border-to-border, coast-to-coast multi-brand mattress retailer,” it’s worth noting that comp-store transactions—i.e. stripping out the effect of sales mix—were down 0.9%.
That decline in comp-store transactions at MFRM was not, however, a new phenomenon: MFRM has reported declining comp-store units in each of the last five quarters (except for one that was termed “roughly flat”).
The seemingly innocuous 0.9% comp-unit decline in the most recent quarter looks a little less innocuous when you consider it was up against a seemingly easy-to-beat 6.4% unit decline in the same quarter last year.
As usual with MFRM, however, things got better after the quarter ended, according to management on the call: “Since Memorial Day our trends have been positive and in line with our revised same-store sales guidance,” they said.
We’ve heard that kind of “things got better this week” from companies reporting otherwise dour news many times…in fact, we heard it from MFRM last year, when it reported that negative 6.4% unit comp quarter: “However, late in the quarter we implemented certain initiatives to drive units and we had subsequently seen positive results.”
Prosperity at Mattress Firm is always just around the corner.
Unfortunately, just around that corner is a new competitor: the internet.
Specifically, what are termed “Bed-in-a-Box” competitors (Tuft & Needle, Casper et al) that sell mattresses rolled up in boxes delivered straight to your door by UPS and therefore have no need for 3,500 stores like MFRM, or commissioned sales employees or delivery trucks.
Indeed, according to figures disclosed at a Furniture Today conference in May, the “Bed-in-a-Box” industry—and full disclosure, your editor is a happy repeat Casper customer—is running at a $900 million sales rate right now, from a standing start 4 years ago.
While $900 million might not sound like much in an industry reported to be worth $7 billion in total (mattresses, not all bedding-related products), it would be the equivalent of about 700 Mattress Firm stores by our math, or about 20% of those “boarder-to-boarder, coast-to-coast” stores.
Is it any wonder MFRM comp-store transactions have been flat-lining lately?
And while MFRM would probably note that many of the bed-in-a-box vendors are establishing show-rooms in major cities like Manhattan, we’d bet money that they won’t open anything close to 3,500 stores when it’s all over.
Why bother? They’re already “boarder-to-boarder, coast-to-coast” mattress retailers, in the sense that they can ship anywhere a UPS truck can go, without the fixed cost structure.
All this makes last night’s news that MFRM had disclosed a “material weakness” in its just-filed 10Q involving “controls relating to accounting for significant transactions” even more interesting than the usual “material weakness” disclosure in your average 10Q:
"Specifically, we did not design and maintain effective controls related to the recording of the expense for the flow through of the inventory step up fair value adjustment in the Sleepy's acquisition. We believe the financial statements included herein properly reflect the correct amount and proper classification of the flow through of the Sleepy's inventory step-up adjustment….”
You might think that a company with $1.1 million of cash and $1.6 billion of total intangible assets on its balance sheet (thanks to its “coast-to-coast” rollup of mattress retailers) against $1.45 billion of debt, negative $55.4 million of retained earnings and $477.4 million of total shareholder equity would have been on those issues before they cropped up, but apparently not.
Meanwhile, and unfortunately for MFRM, the Caspers of the world are not sitting still, and watching a reported $900 million worth of mattresses get siphoned off to direct-to-consumer competitors is exactly the thing Mattress Firm doesn’t need at this moment.
The company spent years steadily snapping up new geographies as part of its grand plan—Mattress Giant, Sleep Experts, Mattress Liquidators, Best Mattress, Sleep Train and, finally, Sleepy’s—at the very moment clever Millennials were figuring out how to design, manufacture and ship a mattress in a box so that they and their friends didn’t have to deal with the process of schlepping down to one of those stores Mattress Firm has been accumulating.
So when we hear the word “choppy” to describe the sales environment—as we did in May from MFRM’s own marketing man—our ears perk up.
“Choppy” is one of those Wall Street euphemisms that can often mean a whole lot more than it looks on paper.
It’s right up there with analysts who are “tweaking our estimates lower” (i.e. slashing them) and sales that have “come in a bit light” (i.e. not even close to plan).
Or, our favorite, management that is “laser-focused” on the company’s problems (i.e. playing solitaire on their iPhones).
Unfortunately for MFRM, “material weakness” is not a euphemism.
Yesterday, Mattress Firm was offered an all cash buyout of $64 per share; a 100% on the share price as of when Jeff wrote his blog entry.
I am not having a go at Jeff (whose work is always illuminating) and I am not really suggesting value investing is actually dead. But the current investment environment has become almost totally bifurcated towards growth rather than value. Even looking at the ideas on this forum, considerable bullish argument is made unicorn stocks with the most extended valuations. You look at the traditional value funds, performance has generally lagged badly. I won't name names, but plenty of people are badly under-performing the market, especially in the 10 year period following the financial crash.
With the S&P at all-time highs and the valuations of growth stocks certainly looking frothy at least. Are we finally reaching a stage where value could out-perform growth?
What Have You Jackasses Done...
in General Discussion
Posted
Pretty insulting comment you've made there.
If you're involved in manufacturing in America's rustbelt, you have probably lost your job or seen a decline in benefits and wages. You've watched the hollowing out of America's manufacturing base by successive generations of Republican and Democrat governments over the past few decades. This free trade, lassiez faire doctrine has been economic mantra since the days of Reagan. Sure, you've seen the benefits of cheap imported goods, but the devastation reaped on middle America has hit the rustbelt hard. When you look at living standards, particularly in the rust belt, they've gone nowhere since the financial crash. As a corollary, you see corporations and the 1% growing fatter and fatter off the inflated assets prices driven by QE.
Is it any wonder people are fed up with the disparity in wealth that has only widened through Democratic government?
The first person who has drawn a line in the sand and said enough is enough has been Donald Trump. You can debate the merits of free market economics or protectionism if you want. The reality for the electorate is that if they're suffering, they won't care. They just want someone to come in and improve their lot. Therefore, I think to label struggling people as "jackasses" shows an incredible lack of hubris.
Whether you're in Europe or the US, people on this forum who manage capital (whether their own or others) have seen huge benefits from economic/monetary policies of the last decade. We should be pragmatic enough to realise that we live in a democratic system, and we can't simply continue to reap a windfall while others out there are suffering.
For the record, I am not suggesting that Trump is the man who can help make change for middle America. I think he is just a reaction to a Democratic party that has completely lost its way, a party that should never have gotten into bed with the big investment banks, hedge funds, etc.