Morgan
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Posts posted by Morgan
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Same to you Parsad and everyone else here! Happy Holidays!
To another successful year!
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You can take a look at Wilmington Trust (WL) as the bad bank model. They are being acquired by M&T at large discount to book, based on the amount of bad loans. WT did everything wrong on the banking side. Over 20% of loan book were in construction and development loans, concentrated to a small geographic area, and had large single borrower concentrations.
First thing I look at now in the small banks is what years did they grow their loan book, how large is their construction and development book, and do they have retail deposits to match loans.
I looked at M&T Bank and they have acquired quite a few banks (22) since 1987 (http://ir.mandtbank.com/acquisitions.cfm) and have gone from $2bn in assets in 1983 to $84bn today. Their stock appreciation hasnt been too shaby either - $1.20 in Jan 1983 to $115 today or about 16.5% annualized. That sounds like a pretty good business to get into.
Inspired by the history of M&T I'm wondering if anyone has here been involved in aggresively growing a bank starting from something decently small? Or gone through the merger or acquistion process of a smallish community bank?
Other questions:
What was your process for investigating banks to buy?
What made you reject a bank?
Once a bank was purchased, how did put your culture in place?
How did you decide which lines of business to expand?
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Racemize, there is no mystery about small caps. It depends on how hard you look. It also helps when you find some original ideas. I apply Joel Greenblatt's concept to small/micro cap investing. The result is very satisfactory. I bought a few issues last year at 2-3x normalized earnings with high ROIC. And they returned triple digit.
can you give me detail in the process you look for them ? And how you value them?
Hi King, I have been thinking about giving an example. Here it is.
I own a company in AU called Jumbo Interactive. I bought it @ 30 cents. The annual report laid out everything very clearly. It is trading at 2.5x P/E before cash. JIN's business is to sell lotteries on the Internet, which is highly scalable. In the last five years, the business has grown just like other online businesses. In normal condition, this kind of business should garner 20x P/E. This is an outstanding business trading at ridiculous price. You see, magic formula wants good business trading at cheap prices. That is simply not enough for me.
But the situation is not normal here. JIN's online business hangs on a contract with Tatts, which is expiring at the end of 2014, although the contract will be renegotiated a year earlier. Tatts is a monopoly in the lottery industry which owns the only nation-wide license given by the government. Recently, Tatts launched its own website to compete with JIN. Therefore, the probability that JIN will renew the contract seems low.
I believe each of us has different opinion about risk/reward and you can make your own guess. Here is mine. Let's say JIN simply operates until the end of 2014 and then liquidate, the cash will cover more than the current market cap. This is third grade math so I would not give the details here. This is is the bottom line. I personally believe, after some thinking, that there is around 30% chance that the contract will be renewed as it is now. If it is renewed, I will hit a home run; if it is not, I would not lose much. There are also other complications, but I will keep things simple here.
This is basically how I make my investment decisions. Hope this helps.
Just looked breifly into JIN. Nice job on the analysis Baoxiaodao! As you said, if they sign the lease it'll be a home run. Depending on when you sold, you may have had a 10 bagger!
Any update on what you did with your position?
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OddBallStocks writes a good bit about banks on his blog (http://www.oddballstocks.com) and has a website with all the data you could ever want on banks (http://www.completebankdata.com/). From there you should albe able to get a decently solid grasp on banking.
He also hs some banking primer posts. Read those posts and the comments:
1. http://www.oddballstocks.com/2013/02/a-banking-primer.html
2. http://www.oddballstocks.com/2013/08/a-banking-primer-part-2.html
3. http://www.oddballstocks.com/2013/09/banking-primer-part-3-first-northern.html
4. Case study - http://www.oddballstocks.com/2013/12/versailles-financial-almost-too-good-to.html
From there get, and maybe sooner, get annual reports for small banks and read, read, read!
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But it's the TBTF banks that are willing to make certain bets (or according to them, obligated to make certain markets), specifically, in the world of derivatives (a world invented, and encouraged to flourish by them within the last 30 years). There was recently article about Morgan Stanley getting $3.4 billion from Italy to unwind a swap transaction and booked $600 MM gain in 4th quarter. Now what if Italy actually did default? Morgan Stanley would be on the hook for $3.4 billion, just from the one transaction that became known. The top 10 institutions in the world account for something like 90% of the derivative notionals outstanding. Italy being the 3rd largest sovereign issuer, derivative notional outstanding with them as the counterparty runs into the hundreds of billions at a minimum, and that's just on the more plain vanilla interest rate kind, let alone the more exotic credit derivative side bets. And once you question the credit worthiness of counterparty, it's gross, not net notional that matters. If you measure the gross notional on JP Morgan or Deutche, I bet the number goes into the trillions.
The fact that the TBTF's can still keep derivatives off exchange, and make that their exclusive casino with little disclosure is quite bizarre. Cause that really continues to be the weak link. Think how many horror stories you've heard over the years, from Jefferson County to Greece to Italy. And if we have a dramatic rising rate environment ala 1970's, you'll have a different set of players blowing up, think Orange County, all with the TBTF's as their counterparty. It makes you really question the wisdom to have this market exist at all, as all these transaction does is redistribute the risk within the system, and give certain players a perceived hedge against rate movements, while they all took the credit risk of TBTF's. There is no net reduction of rate risk to the system. The only way for the entire system to reduce the rate risk is for the system to pay down debt, which certainly ain't a good thing for the financials.
All this rant is just to say that if TBTF's all just behave like a bigger version of US Bank, then it's one thing, but they don't, and therefore it's another thing all together.
This thread is pretty old but...
Why aren't the derivative markets regulated? If the big banks stand to lose potentially trillions (and presumably be wiped out) on defualts it seems that they should be regulated quite heavily. I can't remember off the top of my head but in "This Time is Different" by Reinhardt and Rogoff, on average a country defaults every, say, 15 years. From there if a country goes under, then it costs the banks hugely. Maybe they can afford it, maybe not. But what if there is another world war and a number of large countries defualt? Then how many of the TBTF banks go belly up? And how many at the same time? That has the potential to freeze the credit markets doesn't it?
If Buffett thinks they are finaicial weapons of mass destruction, it seems pretty likely that that is true. What do you guys think?
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I definetely agree that there can be some significant costs associated with owning real estate. One's own home isn't as investment, but a liability. Sure, some people make money buying a house and selling it later when it's time to move or they die. But I wouldn't be surprised at all if a pretty solid portion of people only break even becuase of all the transaction costs involved plus repairs/maintenance or bad market timing or whatever.
I think it'll probably be a while before I own a house of my own as opposed to just living in one of our apartment buildings. Essentially free living, but obviously not as nice or as private as a single family home. I certainly know all about the costs of maintenance though. :o
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My best friend is Korean and he said even the poor kids feel academic pressure from their parents. You don't see that as much in the poor communities in the United States.
Yeah, does the following statement make any sense?
The University of California is crammed with Asian students because they are the richest demographic in American society
I think he's saying that Koreans of all income levels generally value education more than low income American families. Which over two or three generations would make the Koreans quite wealthy, just as you say.
I think the whole thing is dominated cultural influence (in other words, the parents).
Completely agree.
Don't know about the rest of your questions though.
Debt is not an excuse, nothing stops you from doing a BK & starting again.
If I understand correctly, student loans (at least my students loans) are not forgivable in bankruptcy. Everything else though is pretty true. Everyone has many choices, people just need to live with the consequences of thier actions.
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My best friend is Korean and he said even the poor kids feel academic pressure from their parents. You don't see that as much in the poor communities in the United States.
Yeah, does the following statement make any sense?
The University of California is crammed with Asian students because they are the richest demographic in American society
I think he's saying that Koreans of all income levels generally value education more than low income American families. Which over two or three generations would make the Koreans quite wealthy, just as you say.
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Congrats on the new job!
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Just out of curiosity oddballstocks, and maybe this is a silly question, but how would you go about actually harvesting the timber to sell? Hire a company to do 50 acres? Hire a team, rent the equipment and give it a go?
Just thinking about it here - if you can buy land for 1k/acre and the timber is worth 5k/acre(?) and it costs 2-3k/acre(?) to harvest it you could definitely make some nice money. Especially so if you used some leverage.
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My concern is are we creating a generation of people in the west that will not be able to cope with higher interest later ...
I wonder about about that sometimes too. When getting loans to buy apartment buildings at 4%-5% thinking about the future where the rates may be 10% or 15% or higher... I mean, it seems crazy to buy more property. The purchase price of the building would need to be significantly lower to keep the financing costs in line. Maybe I'd get edged out of a high rate market, but who knows about others. People can be crazy.
To counter that though, I know a guy who way back in the day got a loan for ~20% to develop some property then refinanced when construction was completed. He has been very successful, but he said he hardly slept during construction. Crazy, but doable I guess.
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From what I know, he's published four books:
1. Real Estate: A Case Study Approach by William J. Poorvu (Mar 1992)
2. Real Estate Challenge, The: Capitalizing on Change by William J. Poorvu (Dec 22, 1995)
3. The Real Estate Game: The Intelligent Guide To Decisionmaking And Investment by William J. Poorvu and Jeffrey L. Cruikshank (Sep 13, 1999)
4. Creating and Growing Real Estate Wealth: The 4 Stages to a Lifetime of Success by William J. Poorvu (Feb 27, 2008)
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Thanks for the list of books Liberty.
Also the video was good too. I can see why Gates likes him. Smart guy. Thanks for sharing.
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Just ordered the newest one. Looking forward to it.
When you say newest one, do you mean "Creating and Growing Real Estate Wealth: The 4 Stages to a Lifetime of Success" from 1999? Or does he have a new book out?
I just realized I didn't have one of his books, "The Real Estate Challenge: Capitalizing on Change". Has anyone read it? I just ordered it for a penny.
Since this is a general RE thread, has anyone been involved in RE development? It seems to be filled with uncertainty and significant pressure to get space leased or face serious CF problems (you start from 0% occupancy!). The main benefits of developing over buying are that you get exactly what you want where you want it and it's cheaper? Does anyone know what percentage of developments fail compared to buying and managing?
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"BH has $100m in cash? I just checked their latest 10-q (July 2013) and it says $22.358m in cash and equivalents. Have I been looking in the wrong place all this time?"
They raised 75.7 million in a rights offering.
The company received the funds 7-10 days after sept 16.
Special div info is in proxy filings for cracker barrell.
Ah, didn't see the rights offering. Don't follow BH too closely though. Or Cracker Barrell either. Good to know. Thanks wecobrk!
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Actually they have 100 million in cash,
They will have 195 if the special dividend is approved.
The investment is down in value about 45%.
Not sure why he went after something so small.
BH has $100m in cash? I just checked their latest 10-q (July 2013) and it says $22.358m in cash and equivalents. Have I been looking in the wrong place all this time?
I was unaware of the special dividend though, where did you find that info? Thanks!
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What is Biglari's angle here? He owns ~6.3% or has ~$1.5m invested in CAW. BH has $23m in cash and equivalents and $131m in investments. How will a double, triple or even a quadruple in CAW move the needle at BH? This doesn't really seem like a good use of time for Biglari.
Is he simply chasing sales? Add another $50m in sales to boost his ego? As arrogant as he can be, he's too smart for that.
The products the company sells seem to be low quality with poor ad/packaging designs, silly (although usually descriptive) names and almost a gimmick of a product (Mood Magic - "color changing lipstick works with women's body chemistry to create the perfect shade"). It would make more sense, I think, if Biglari wanted to buy the company, revamp the product line over the next few years and focus on creating global brands for the long haul. This might be a cheap way to get into that business. Surely he could seriously boost the margins in the meantime for the company. Proctor and Gamble, Colgate-Palmolive and Johnson & Johnson have ~10%-13% margins. If Biglari could get CAW to half of that, say 6%, CAW's NI would go up ~6x from ~500k to ~$3m. That seems like it might be interesting to Biglari. Especially if he thinks he can grow sales 10x-20x in the next 5-10 years. It could be a nice company to own.
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After writing this, maybe this should go into the Investment Ideas board...
LEGO is a cool company. Despite being privately held they release financial reports (2012 AR attached), which seems odd to me (anyone know why? For the LEGO foundation maybe?). Just looking at some of the stats for the last five years shows they have a solid business.
Ratios (%) 2012 2011 2010 2009 2008
Gross margin 71.1 70.5 72.4 70.3 66.8
Operating margin 34.0 30.2 31.1 24.9 22.0
Net profit margin 24.0 22.2 23.2 18.9 14.2
ROE 66.7 66.8 84.8 82.3 72.2
ROIC 140.2 133.4 161.2 139.5 101.8
LEGO has a few competitors that do blocks. Mega Brands, CoCo and Best-Lock Construction Toys. LEGO has sued all of them and only won against CoCo. Maybe that's why they been expanding into more branded lines (Star Wars, Harry Potter, etc) rather than their own designs.
Other relatively similar building toy competitors are K'nex, Erector, and those marble track toys. They're pretty different than LEGO, but are still fun toys for kids. I know my friends and I all had some of them, but overwhelmingly we had LEGOs.
From what I know about playing with LEGOs as a kid (the other brands weren't as good) and looking at the current line up of big name products, they seem to have a solid hold on this market. I wonder how long it will last? Big margins and high returns will attract other entrants. What is LEGOs defense? A combination of patents/lawsuits and licensing deals with the hottest new brands? This seems to have worked on CoCo, but not with Mega Brands or Best-Lock Construction Toys.
In 100 years I would be very surprised if kids no longer played with LEGOs. Also, I'd be surprised if LEGO doesn't grow hugely all over the world.
What do you guys think of LEGOs? I wonder if Buffett would buy this company for the next hundred years?
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If you're really going to sell the place in two months don't rent it. Clean it and do some minimal work to make it more appealing.
If you think it might take six months to sell, consider it... only if you are really in need of the money. Bad tenants can do a huge amount of damage very quickly. I've heard stories from other landlords about tenants who were doing a rent-to-own deal, and they stole the siding off the building, ripped all the roofing off because they were going to replace it and never did. Not to mention pet damage, plumbing problems, etc. In general I don't let tenants do any updates, painting, anything... who knows what they'll do...
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I can recommend "Ragnar is a Pirate". The day job of the author is real estate. I can attest that he is very skilled and knowledgeable when it comes to real estate acquisition, rehabilitation, valuation, and anything related to it. What is interesting is that he will have articles on real estate from time to time in addition to stock investing.
A good site to check out written by a very capable investor.
Ragnar is also a member here, and will post here from time to time.
+1 on Ragnar
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Bill Poorvu (HBS/Baupost) has some good books. I enjoyed 'Real Estate Game' and the case study book. I believe Poorvu was the HBS professor who tapped Klarman to run Baupost.
Poorvu is the "po" in Baupost from what I read a long while back. I think a few families gave Klarman ~27m to manage after he graduated undergrad. He must have been simply amazing to be given that back then. Granted it wasn't a typical 2 and 20 setup like it nowadays. I think he earned a 35k salary and eventually they sold him the company.
As for RE, read all of Poorvu's books. They're great and cheap too. Another interesting and old one (1969) is "How to Get Rich in Real Estate" by Robert Kent. This book is about getting 2-6 unit buildings and how to deal with tenants to some extent. It's a cheap book and a fast read.
Basically if you're on here you probably have a value bent, know how to do some decent analysis and can figure out how much you're likely to earn from a building. Take that and see what your returns will be compared to how much cash you have to spend to buy it. If you use creative financing (leverage) you can get into more buildings more quickly and thus increase your FCFs pretty quickly. To be honest, arranging the financing is the easiest bit.
Dealing with tenants and doing maintenance is far more time consuming than financing. Read "How to Win Friends and Influence People" by Dale Carnegie. Good book regardless which industry you're in. Also get some books from the hardware store on home repair, plumbing, electrical, basic building concepts, etc. Watch youtube videos on specific stuff. In general, get good tenants, be nice to them, fix problems quickly and properly. Don't half ass things. Do it right the first time and you'll probably do pretty well.
If you're looking for info on REIT's I'm not the person to talk to. Never really looked into them.
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How do small companies structure their deals to use, within reason, as little cash as possible? Something like a LBO? Some other option?
Can you point me to small companies (1-2MM rev or less) that have grown to at least a decent size (100MM rev or bigger), where there is good detail from the early days? That way I can try to understand their thought process and financial picture and how they obtained funding for growth.
Thank you for any advice in advance!
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Visa/MasterCard seem very inflation proof. They must maintain their network though.
Real estate is generally good too. Collecting generally increasing rents. Not as good if there is deflation and there is still a big mortgage attached to the property.
I don't have any numbers, but I bet equipment and car rental companies are quite inflation proof. Does anyone have numbers offhand?
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Well, I'm just a young guy with no Wall St. experience, but I'll say she is probably a very intelligent person considering she works at GS and has a CFA. Perhaps not, but probably. That said, she operating in a system that has incentivized her to write anything to help sell products. Her incentives are aligned with her employers other business operations. Also, if anyone gives her or GS trouble they can say it is her opinion, not fact.
Look at incentives, opinion vs. fact and always do your own research. You probably know that though. ;D
But yea, kinda silly sometimes lol
impact of low interest rates
in General Discussion
Posted
I'm surprised you're having so much trouble Eric. In my little town in WV, we've been able to secure loans for multifamily properties relatively easily despite using more leveage and being (a lot) less wealthy than you.
The only things I can think of that would benefit us is that we run an apartment business (50 units now), and the market is different here (gas boom). Bu still just from what you say, you seem like a solid credit. Have you applied to a number of other banks?