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Short Pabrai Presentation on Internet Stock Valuations


Parsad
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Thanks, Parsad.

 

Does anyone remember a presentation in which Pabrai was talking about an investment he made during the IT bubble where a tech company was attached to a regular boring company and was later spun off or something and achieved a giant valuation? Can you link me the youtube video? Would be very grateful, thanks.

 

 

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I think it's a backward justification for owning GM.  You could have purchased AMZN back in 2005 with a sky high P/E and the current free cash flow can easily justify it as a savvy investment.  Also Tesla is probably going to grow annual revenue at 50% for the next few years.  A 100x multiple today on that future revenue at an 8% margin doesn't scream like the worst thing in the world.  As long as Musk is CEO there won't be any profits to try and value it from a P/E approach. 

 

But on the topic of cash flows, how does he get $10-12 billion in GM free cash flow?  And a P/E of 4?  Is he just backing out the cash that GM says they need to set aside for any future downturns?  I'm confused on that one.

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Great video.  Thanks for posting!

 

It is confusing to see P/E used for many bubble companies, but cash flow for GM, etc.  And, the GM numbers (on a cursory glance) look to be $10-$13 Billion in Operating Cash Flow, but only $3-$5 Billion of Free Cash Flow. 

 

Not looking to start a debate on GM, etc. as I certainly need to look more into the details.

 

Cheers!

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Why does Pabrai keep putting P/E multiples on FB or AMZN, etc.  It's disingenuous to the cash flows.  Not saying they're cheap but don't get the P/E approach here.

 

He's an old-timey style value investor would be my guess.

 

ZINC P/E:  N/A according to Yahoo Finance.  Alright, low blow.

 

Agree with Picasso's general point.

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I think the whole 40 year "mega bubble" point that Pabrai is trying to make is completely wrong. There are tons of industries that flare up every few years, 3D printing, marijuana stocks, savings & loans, commodities, shale, biotech .... He gives good examples but the fact that one happens to be right in the middle of the two others doesn't really mean anything.

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I suspect he is adding back some special item costs, such as recall expense, restructuring cost etc., that may not be repeated in following years. Still I could not get to his #s.

P/E: if we use 2014 NI of $2.8B + $4.1B recall = $7B, Mkt cap $50B, so P/E around 7

 

FCF: 2014 is about $3.7B + $4 recall = $7.7B.

 

He might add back some more. My concern is that where you stop. How do we know that restructuring is not going to happen again, just somewhere else. Or under increasingly tighter regulation, more (could be at lesser extent) recalls will continue.

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I think the whole 40 year "mega bubble" point that Pabrai is trying to make is completely wrong. There are tons of industries that flare up every few years, 3D printing, marijuana stocks, savings & loans, commodities, shale, biotech .... He gives good examples but the fact that one happens to be right in the middle of the two others doesn't really mean anything.

 

You are correct.  But he's simply discussing that the field of winners narrows so dramatically over time in these bubble industries, that anyone trying to buy for the long-term is likely going to get burned at some point.  While right now, the carcass of one of these so-called winners from the automotive age is selling at horse and buggy multiples...which company or companies would you say provide the greater margin of safety...GM or a basket of internet darlings?  Cheers!

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Does anyone remember a presentation in which Pabrai was talking about an investment he made during the IT bubble where a tech company was attached to a regular boring company and was later spun off or something and achieved a giant valuation? Can you link me the youtube video? Would be very grateful, thanks.

Are you talking about silicon valley bank? IIRC when they made loans to these tech co's they received warrants, which gave them exposure to tech equity valuations. Those valuations shot up in the 90s.

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http://www.heartlandadvisors.com/Insights/Investment-Outlook/Going-Against-the-Grain

 

Going Against the Grain

 

12/31/2015 Email Signup Insights: Investment Outlook

When investors move en masse in one direction, I’ve found it profitable to go the other way.

 

2015 was a challenging year for many equity investors.

 

Although the popular market indices are within 5% of all-time highs, the average stock has drastically underperformed.

 

It has been a very narrow market with a sliver of large capitalization growth/momentum stocks carrying the indices while the vast majority have declined in value:

 

Year-to-date (YTD) the average Russell 2000® stock is off -42.6% from its high.

YTD the top 20 stocks in the S&P 500 Index are up +55% while the remaining 480 are off -4.7%.

The "Have's" and "Have-Nots"

2015 Performance Within S&P 500 Index

Heartland Advisors Value Investing Market Insight Employment Rate Chart

 

Source: FactSet Research Systems Inc., Heartland Advisors, Inc., and Standard & Poor's, 12/31/2014 to 12/28/2015

Returns exclude dividends.

Past performance does not guarantee future results.

 

While we see sectors of strong value in the market place, investors have moved together as a herd in disdain of fundamental managers. As of December, investors have yanked out over $150 billion from active investment managers. Value based mutual funds have been especially disliked as shareholders fire portfolio managers, redeem their funds, and move on to hot performers. In my view, at no time since the great financial crisis of 2008-’09 has investor sentiment been so negative on value as it is today.

 

Ironically, investors have found comfort in index funds, which typically match individual stock weightings to those in an Index.

 

It baffles us that confidence can be found in an approach that over-weights stocks simply by size.

 

It appears valuation does not matter!

 

These factors have caused valuation disparities in the market place, which we find to be extraordinary, and provide a happy hunting ground for value seekers.

 

Here are two examples:

 

Ford Motor Company (F, $14.23 as of 12/29/15) is owned in our multi-cap strategy. Ford is a solid business, with growing sales and earnings, but in 2015, the stock declined 7%. In 2016, earnings per share are expected to increase more than 15% to $1.90 per share.

 

2015 Estimated Sales: $137 billion

Market Value: $56 billion

Price-to-Sales: 41%

Price-to-Earnings (forward 2016): 7.3x

Dividend Yield: 3.98%

Tesla Motors Inc. (TSLA, $237.19 as of 12/29/15), is a leading electric vehicle firm with rapidly growing sales, an estimated loss this year but profits next year of $2.10/share. Tesla’s stock is UP this year.

 

 

2015 Estimated Sales: $5.4 billion

Market Value: $30 billion

Price-to-Sales: 556%

Price-to-Earnings (forward 2016): 109x

Dividend Yield: 0%

Tesla makes a wonderful car and is an extremely popular company with its stock reflecting a high level of investor enthusiasm. We do not own Tesla believing this very optimistic view has led to its current rich valuation, leaving little room for disappointment, error, and perhaps future capital gains potential.

 

Ford also makes a very good product and in our view, priced at only 7.5x estimated earnings for a 13% earnings yield, represents outstanding value. The dividend yield of over 4% is also a potential safety net, lessening downside risk, should economic clouds appear.

 

As we look forward, no one can predict what 2016 will hold—of course, we’d like to see a return to fundamental value investing and believe after seven years of growth outperforming, a reversal is long overdue.

 

But whether the economy is booming, drifting lower, or somewhere in between, we’ll remain true to our investment approach by researching and analyzing attractively valued companies that should thrive.

 

The current investment climate may be challenging, but we prefer to see it as an opportunity to once again go against the grain for potential outsized capital appreciation.

 

Thank you for your continued confidence.

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Re: Heartland.

 

Yet another QQ against indexes.

 

The problem with most of these complaints is that the authors are just underperforming. And not just against the "overvalued" (perhaps, perhaps not) market weighted indexes. And not just last year. http://www.heartlandadvisors.com/Products/Mutual-Funds/Heartland-Select-Value-Fund - they compare their performance against Russell 3000 Value Index. That's a crappy index. And they don't even perform well against that. Compare their fund against RSP (hey, I don't want to compare against overvalued SP500, I give them an edge by comparing to not-market-weighted index) - they suck. Compare it against PRF - they suck.

 

It doesn't matter that their arguments make some sense. Ultimately, customers withdraw money because funds are not performing.

 

(I did not review every single fund they run, they might have better funds, etc.)

 

It's also annoying that complaints keep coming even when SP500 is flat. Active managers complained 2012-2014 because SP500 was running up too fast for them to catch up. Now they complain even in the year when SP500 was flat. So is the conclusion that they can only outperform when SP500 tanks? What if they don't? Will they say that they will outperform during next bull?

 

Look, I underperformed SP500 last couple years too. It's not my fault, it's those pesky evil index chasers, just give me your $$$$ now, I'll manage it based on "value investing" for next 10 years, I swear, KKTHXOK?

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  • 2 weeks later...

Sometimes i really question whether what he talks is what he does. I mean he speaks about investing in industries without rapid change and then invests a lot of his money into cyclical car companies where every 2 years a new carmodel has to be created and competition is intense? That makes no sense to me, but who am i to question him?

 

And i think he is wrong on Netflix, because they indeed become a very valuable content company going forward, financed with overvalued stock and float like Amazon. But that of course doesn`t make the stock a good buy right now, or at least its very hard to figure out if it does. But these bubble valuations in the NSDQ are probably worth looking at, maybe its a good idea to use QQQ as a hedge going forward over the summer.

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