What are you buying today?

[muscleman]

Bought VRX today, 7% position.  My timing is no doubt horrible on this one, with it being up double over past year and 10-fold since 09.  Nevertheless, the more I read on the company the more I feel like I'm reading a case study from "the outsiders".  Their execution has been just incredible and in spite of the huge runup in price, they are still cheap based on next years forecasted earnings.

 

EDIT: I should also add, thanks to Gio for all the posts on this one.

 

I looked at VRX when gio suggested it earlier this year at the $70's. I could not understand it, so I didn't invest. What is your thesis on that?

[Philip Morris IV]

Holy crap - VRA float is 88% sold short?

[constructive]

Holy crap - VRA float is 88% sold short?

 

Yes - the bearish thesis is that inventory is stale and needs to be marked way down. And also that the brand is faddish, without the staying power of Coach, Michael Kors, etc.

 

There is some truth to their problems, but with this valuation and level of short interest the risk-reward appears skewed. Personally I like their style and think it could be a very good company if they get inventory under control.

[Liberty]

Bought VRX today, 7% position.  My timing is no doubt horrible on this one, with it being up double over past year and 10-fold since 09.  Nevertheless, the more I read on the company the more I feel like I'm reading a case study from "the outsiders".  Their execution has been just incredible and in spite of the huge runup in price, they are still cheap based on next years forecasted earnings.

 

EDIT: I should also add, thanks to Gio for all the posts on this one.

 

I looked at VRX when gio suggested it earlier this year at the $70's. I could not understand it, so I didn't invest. What is your thesis on that?

 

+1

 

Really curious to get your thesis and estimate of IV. I find it really hard to figure out how much it is reasonable to pay up for good businesses...

[Palantir]

If you're holding a heavily shorted stock, do you get interest payments if loaned out?

[constructive]

If you're holding a heavily shorted stock, do you get interest payments if loaned out?

 

Depends on your broker.

 

IB splits the lending proceeds with you 50/50, which is much better than other retail brokers.

https://www.interactivebrokers.com/en/index.php?f=shortableStocks&p=stockyield

[no_free_lunch]

I looked at VRX when gio suggested it earlier this year at the $70's. I could not understand it, so I didn't invest. What is your thesis on that?

 

Sure, but keep in mind that I just invest as a hobby.

 

Basically it is a story stock.  You have a CEO who is very aggressive and yet very disciplined from a capital allocation perspective.  When he first came in he got rid of all businesses where he did not see a competitive advantage or room to build scale.  He started acquiring companies and lopping operational expenses down aggressively.  He merged with biovail (while maintaining his role as CEO) and as a result now has a 5% tax rate.  With the Bausch & Lomb transaction he bought a company with $700M EBITDA and has plans to "bump" that up to $1.5B with cost-cutting over the next year and a half.  There is also decentralized operations, a focus on avoiding competitive areas, geographical diversity, focus on businesses not subject to government regulations (e.g. the bausch purchase), non-traditional accounting (you need to focus on cash EPS), willingness to walk from deals (they walked from a huge one earlier this year), his compensation agreement, more that I just can't think of right now. 

 

If you read the outsiders and then start to study this company, it's like you're reading another chapter in the book.  The CEO is not that old either, there could be quite a future ahead.

 

As for the pesky details of what you are paying, I go out on a limb and trust the cash eps forecasts that management puts out.  You guys are probably trying to figure it out from the traditional statements and I commend you, but I didn't do that.  With their cash EPS they add back amortizations, stock-expenses and one-time costs.  It is a similar concept to owner earnings but probably a bit more aggressive than buffet would like.

 

Anyways, they are forecasting ~$2.05 for Q4 of this year.  However, the cost-cutting for bausch and lomb, plus other acquisitions will not be done by q4 of this year.  I crudely estimated that with their total announced cost-cuts they will probably be looking at $2.3-$2.4 per quarter by Q4 of next year, that will be their rough run-rate.  So around $9.5 per share cash earnings run rate in 15 months.  So you are getting them for around 11x cash earnings once the cost-cuts are in effect.  That is assuming that they stand still for 2014 and just cost-cut/pay down debt.  I doubt they will do that.  There will be more acquisitions / stock repurchases / a merger but something else will happen.

 

IV is a tough one.  I think it's more than you are paying now but probably not that much.  Some of the other major pharma companies are around 13-14 times earnings.  I think valeant deserves a bit more, maybe 14x.  I actually think my 14 multiplier is probably too low, should be more like 16-18 given what he has done and the businesses he is in but you also have to consider how lean they run R&D and that their are concerns about organic growth.  For that reason I pull it back to 14 as they will always need acquisitions.  So if they get to $9.5 that is only $133 and that's not for 15 months or so.  So I am buying a dollar a year from now for $.75.  Not a great bargain but not overly expensive either.  My view is that in a year they will be talking about 2015 earnings at $11-12 and the stock could be at $150. 

 

You really need to get comfortable with the CEO to buy into it.  It's not a huge bargain unless you believe he can continue to work his magic.

[muscleman]

I looked at VRX when gio suggested it earlier this year at the $70's. I could not understand it, so I didn't invest. What is your thesis on that?

 

Sure, but keep in mind that I just invest as a hobby.

 

Basically it is a story stock.  You have a CEO who is very aggressive and yet very disciplined from a capital allocation perspective.  When he first came in he got rid of all businesses where he did not see a competitive advantage or room to build scale.  He started acquiring companies and lopping operational expenses down aggressively.  He merged with biovail (while maintaining his role as CEO) and as a result now has a 5% tax rate.  With the Bausch & Lomb transaction he bought a company with $700M EBITDA and has plans to "bump" that up to $1.5B with cost-cutting over the next year and a half.  There is also decentralized operations, a focus on avoiding competitive areas, geographical diversity, focus on businesses not subject to government regulations (e.g. the bausch purchase), non-traditional accounting (you need to focus on cash EPS), willingness to walk from deals (they walked from a huge one earlier this year), his compensation agreement, more that I just can't think of right now. 

 

If you read the outsiders and then start to study this company, it's like you're reading another chapter in the book.  The CEO is not that old either, there could be quite a future ahead.

 

As for the pesky details of what you are paying, I go out on a limb and trust the cash eps forecasts that management puts out.  You guys are probably trying to figure it out from the traditional statements and I commend you, but I didn't do that.  With their cash EPS they add back amortizations, stock-expenses and one-time costs.  It is a similar concept to owner earnings but probably a bit more aggressive than buffet would like.

 

Anyways, they are forecasting ~$2.05 for Q4 of this year.  However, the cost-cutting for bausch and lomb, plus other acquisitions will not be done by q4 of this year.  I crudely estimated that with their total announced cost-cuts they will probably be looking at $2.3-$2.4 per quarter by Q4 of next year, that will be their rough run-rate.  So around $9.5 per share cash earnings run rate in 15 months.  So you are getting them for around 11x cash earnings once the cost-cuts are in effect.  That is assuming that they stand still for 2014 and just cost-cut/pay down debt.  I doubt they will do that.  There will be more acquisitions / stock repurchases / a merger but something else will happen.

 

IV is a tough one.  I think it's more than you are paying now but probably not that much.  Some of the other major pharma companies are around 13-14 times earnings.  I think valeant deserves a bit more, maybe 14x.  I actually think my 14 multiplier is probably too low, should be more like 16-18 given what he has done and the businesses he is in but you also have to consider how lean they run R&D and that their are concerns about organic growth.  For that reason I pull it back to 14 as they will always need acquisitions.  So if they get to $9.5 that is only $133 and that's not for 15 months or so.  So I am buying a dollar a year from now for $.75.  Not a great bargain but not overly expensive either.  My view is that in a year they will be talking about 2015 earnings at $11-12 and the stock could be at $150. 

 

You really need to get comfortable with the CEO to buy into it.  It's not a huge bargain unless you believe he can continue to work his magic.

 

Thanks a lot! I will have to look into it more to get comfortable. I wish I had bought at the $70's. :)

[wachtwoord]

If you're holding a heavily shorted stock, do you get interest payments if loaned out?

 

Depends on your broker.

 

IB splits the lending proceeds with you 50/50, which is much better than other retail brokers.

https://www.interactivebrokers.com/en/index.php?f=shortableStocks&p=stockyield

 

I have used this for a couple of years now and it's great. I don't trade a lot and the amount made with this far exceeds the minimum trading fee IB charges.

[fareastwarriors]

Anyone adding to their positions today?

[Ross812]

Adding a little to MKC

[Uccmal]

About 5% to my AIG leaps.  This selloff it turning into a disappointment. 

[Palantir]

Might dip into Red Hat.

[fareastwarriors]

I was hoping for a bigger drop too. Maybe huge sell-off tomorrow if nothing gets done tonight.

[wachtwoord]

Might dip into Red Hat.

 

On first viewing Red Hat really doesn't look cheap.

[Palantir]

Might dip into Red Hat.

 

On first viewing Red Hat really doesn't look cheap.

 

I disagree. A 5% FCF Yield + historical growth rate of 15-20% gives me a pretty high expected return of 20-25%. Even if growth is cut in more than half to 7%, it gives an expected return of 12%, which is still good.

[wachtwoord]

Might dip into Red Hat.

 

On first viewing Red Hat really doesn't look cheap.

 

I disagree. A 5% FCF Yield + historical growth rate of 15-20% gives me a pretty high expected return of 20-25%. Even if growth is cut in more than half to 7%, it gives an expected return of 12%, which is still good.

 

Okay you're expecting continued growth in such high percentages. I usually don't do that . Thanks for the feedback though :)

[Palantir]

^ Not quite, even if growth slows, I still feel that return can be high.

[Guest wellmont]

Might dip into Red Hat.

 

On first viewing Red Hat really doesn't look cheap.

 

you are correct sir. it hasn't looked very cheap in years. it's a growth stock and if growth ever slows there is lots of room to fall. it's trading at 3.3% earnings yield based on average of next fiscal year estimates.

[Palantir]

Might dip into Red Hat.

 

On first viewing Red Hat really doesn't look cheap.

 

you are correct sir. it hasn't looked very cheap in years. it's a growth stock and if it growth ever slows there is lots of room to fall. it's trading at 3.3% earnings yield based on average of next fiscal year estimates.

 

Why would you ever use earnings yield to value Red Hat? Please familiarize yourself with the company.

[phil_Buffett]

bought more BP and ZINC

[fareastwarriors]

I guess I have to wait for the debt ceiling debate for a bigger pull-back.

 

 

[CorpRaider]

I expect it would have to stay closed for at least a week or two to make an impact. 

[Uccmal]

I am really wishing the 2016 Leaps for Aig and Bac were out right now.  Things are looking more buyable, but I dont like the tight time frames to January 2015 so much.

[enoch01]

I bought some BP yesterday.