Industries in Recession

[Packer16]

In one of Marty Whitman's book he describes the current condition (since WW II) as one where there are rolling recessions amongst industries versus an economy wide recession.  2008 was probably the exception so we are probably back to industry recession model.  Two industries that I think are in that state and have firms priced that way are defense and telecom.  From what I see, I think autos and banks are coming out of their recessions and have a way to go.  What are your thoughts?

 

Packer

[Green King]

Correct me if i am completely wrong or industry change i see is overblown.

 

There is also Coal and supporting industries, but there is also a bit of structural change attached to them.

But Telecom seems to be touched by structural change. <Industry dynamics seems to be too hard to tell for some.>

Defense seems also more normalized since IRAQ war give a big boost in earnings which dose not seems to occur more.

[no_free_lunch]

Is china an industry or is it a sector?  I can never remember how these classifications work.  ;)

 

Either way it is for all intents and purposes in a recession.

[Green King]

Is china an industry or is it a sector?  I can never remember how these classifications work.  ;)

 

Either way it is for all intents and purposes in a recession.

 

How do you know? please tell. I don't watch Marco closely. I thought China was just slowing down.

[Packer16]

You bring up a good point about obsolescence.  It is important recognize a secular decline (coal) versus a cyclical decline (telecom and defense).  The telecom area of growth is broadband connectivity and for defense it is the next TBD threat.  With coal you have a secular declining portion (coal) in a cyclical industry (energy).

 

Packer

[no_free_lunch]

How do you know? please tell. I don't watch Marco closely. I thought China was just slowing down.

 

I don't really know for sure, just my opinion.  I have read that china's growth this year will be the slowest since 1999.  By the true definition of a recession, 2 quarters of negative growth, they are not there yet.  However, in a relative sense they are in a recession.  With stocks it's more important to look at things relatively than used some canned formula. 

 

I just remember the buzz about china in 2006/2007 and now the index is about 1/3 of where it peaked back then.

 

It is also one of the cheapest countries based on shiller PE.

 

http://topforeignstocks.com/2013/02/19/pe-ratios-of-emerging-markets/

 

Sorry for distracting the thread.

[mcliu]

How do you tell if it's a structural change vs. a cyclical change? Can one not argue that telecoms and defense is going through structural changes as well?

[valueorama]

I think shipping and  For-profit education are in recession. Shipping is due to cyclicality  and For-profit is due to structural/regulatory reasons.

[Uccmal]

pulp & paper - Its a bit like Buffett's parade.  Everyone is adding "black liquor" energy,  but pulp prices and demand is stagnant.  Permanent or not? 

 

I am no longer confident that there will ever be a comeback, at least until supply actually becomes tight due to permanent plant closures.  You dont want to be the owner of the shuttered plant. 

[racemize]

I think shipping and  For-profit education are in recession. Shipping is due to cyclicality  and For-profit is due to structural/regulatory reasons.

 

I've been looking a fair amount at the for-profit education, but it is very hard to get behind them due to the slimy sales practices that they have engaged in (at least in the past).  Strayer looks interesting, but I might put it in my "too hard" pile. 

 

In any event, there's a lot of regulation risk, so the whole industry may have some structural issues.

 

Further, education seems primed for disruption, e.g., MOOCs.

[ilike]

pulp & paper - Its a bit like Buffett's parade.  Everyone is adding "black liquor" energy,  but pulp prices and demand is stagnant.  Permanent or not? 

 

I am no longer confident that there will ever be a comeback, at least until supply actually becomes tight due to permanent plant closures.  You dont want to be the owner of the shuttered plant.

 

But will supply ever become tight? I consume way less paper, magazines and books both at home and at my job than even one year ago. Still consume a lot of packaging though.

[Packer16]

I think you can tell if the industry in question is becoming obsolete.  I think of coal versus nat gas, oil and other forms of energy.  For telecom, I think although there is replacement (high speed internet and mobile for phone) some the firms providing the obsolete services are also providing the replacement.  For defense, there always be a need the question is how much at a given time so I think of it as more of cyclical depending upon the threat.  If I though the threat was going away then it would be secular.

 

Paper is interesting because it has components of both.  Cyclical coming from housing and secular from migration away from paper to electronic media.

 

Packer

[AchilliesValue]

Paper is interesting because it has components of both.  Cyclical coming from housing and secular from migration away from paper to electronic media.

 

Also because a lot of those paper companies have substantial hidden asset value.

 

A lot of the ones I thought of initially have been mentioned but a few more publishing (dying), healthcare dependent on medicare, government IT contractors and gold miners (particularly junior minors)

[infinitee00]

I think shipping and  For-profit education are in recession. Shipping is due to cyclicality  and For-profit is due to structural/regulatory reasons.

 

I've been looking a fair amount at the for-profit education, but it is very hard to get behind them due to the slimy sales practices that they have engaged in (at least in the past).  Strayer looks interesting, but I might put it in my "too hard" pile. 

 

In any event, there's a lot of regulation risk, so the whole industry may have some structural issues.

 

Further, education seems primed for disruption, e.g., MOOCs.

 

I would agree with shipping ( although tankers maybe better off than the rest of the sector) and for-profit education ( I am short one dry-bulk shipping company and long a basket of for-profit stocks).

 

Drybulk shipping is one industry I don't see much hope for in the next few years, contrary to what the talking heads on TV say. In spite of record scrapping there is almost ~30% oversupply of ships. Also, with chinese banks offering loans to shipping companies to build ships in chinese shipyards at very attractive costs, quite a few shipping companies are ordering more ships (why? It is beyond me, go figure!). So I don't see the oversupply issue abating anytime soon.

 

China was the chief driving force behind the commodity boom in the last decade and consequently led to the phenomenal rise in TCE rates for dry bulk shipping. With demand for commodities apparently slowing in china and large oversupply of ships, I don't see anything in the immediate horizon to believe that dry bulk shipping will see a turnaround anytime soon.

 

As for for-profit education, there was a long discussion/debate on for-profit education and disruption of MOOCs in this thread. So check it out

 

http://www.cornerofberkshireandfairfax.ca/forum/strategies/investing-in-%27for-profit%27-industry

[ASTA]

Strayer Education Inc

http://klarmanite.com/write-ups/

http://www.gurufocus.com/news/226480/strayer-education-stra-a-bright-spot-in-a-dark-industry

http://mevsemt.blogspot.com/2013/05/what-just-happened.html

 

Michael Shearn on the Uses and Misuses of Investment Checklists

Author of "The Investment Checklist" describes how investors can employ checklists to their advantage

this guy owns and writes about this stocks in his book. and he mad a small pitche on this at MOI a 10 min video.

He has been buying since 100 :D

 

And I own 7% of my portfolio(does not mean much) with a 7% loss. 

If anyone is interested check out all the links and make your own decision.

trying to spark some ideas and be helpful :D

[Guest hellsten]

Thanks. I've followed Strayer Education for a while now. I haven't invested yet…

 

Michael Shearn's book gives you a lot of details on what Robert Silberman thinks about Strayer and the for-profit education industry.

 

The due diligence he did on the for-profit education industry and Strayer is really amazing. Here are just a few excerpts:

 

Grusky and his partners needed someone to

come in as CEO and asked Silberman to join the company.

 

Silberman’s first reaction was, “How can you own a university?”

He had never heard of the business model before this phone call.

At the time, Silberman was the chief operating officer (COO) of

Cal Energy, which was owned by Berkshire Hathaway.

 

Before formally accepting the position, Silberman spent the next five months

completing an in- depth research study of the for-profit education

industry and Strayer Education.

 

The renewable energy business

that I was in had incredible capital requirements, very low returns

on capital, and all sorts of extraneous risks such as technological

risks, political risk, and currency risk. The education sector in this

country, at the post- secondary level, was the exact opposite. It had

low capital requirements, very high demand, very limited supply,

and if you really ran a great university with a good reputation, a

very wide moat.”

 

Silberman learned that the earnings potential for college graduates was

high and rising as the U.S. economy shifted away from its manufacturing base,

where a high-school degree and limited technical training had been enough to support a middle-class lifestyle.

 

As the United States moved toward a knowledge- and service-based

economy, achieving a middle-class lifestyle with only a high-school

degree was getting tougher.

 

The gap in earnings between educated

and non-educated people was growing wider and creating intense

demand for higher education. Furthermore, the supply was essentially fixed.

 

As he saw professors and working adult

students interact, he sensed how intense the students’ desire was to

complete their degrees. He could see that the educational experience was life-changing.

 

Silberman developed an understanding of how the for-profit education industry developed; the

types of customers that typically enroll in for-profit universities

and the benefits these customers receive; and he visited campuses

to understand first hand the value of the education to the student.

This is the same process that an investor should use in order to analyze a business.

 

To me STRA looks like a high-quality business where psychological factors and incentives work in favor of the business model. Slightly similar to WTW.

[LC]

hellsten, I agree!

 

Strayer and WTW are very similar in mind-share. I think we discussed WTW prior, as well. Coincidence!

 

Here you have two industries which consistent effort by the customer is required. Students must go to class regularly, dieters must constantly manage their food intake and exercise.

 

Most people don't want to do this! We are biological creatures, and we gravitate to spending the least amount of effort for the same result as possible.

 

I will add that when required to expend energy in such a manner, it better be worth it!

 

This is where the moats come in. Both brands have quality reputations. Dieters know WTW works, and students know STRA provides a quality service. Therefore they can convince themselves that, if they are required to spend their energy to diet/study, these companies will provide the best results.

 

IMHO Strayer is a more certain investment. I say that because there is no "low-cost" solution that provides the same quality. With WTW, we have seen the advent of app-based diet/exercise programs.

[JEast]

?? How does a value investor consider a company selling at 12x book value an undervalued investment.

 

I asked this rhetorically in the case of Strayer.  I also asked this specifically to Michael Shearn back in May as it looked more of a short than a value candidate at the time.

 

I guess I am just too old school for the owner operator herd these days :)

 

 

Cheers

JEast

[ASTA]

JEast

Be prepared to be overrun by the owner operator shareholders I think we are entering a new paradigm shift and older folks will miss out  8)

[Guest hellsten]

?? How does a value investor consider a company selling at 12x book value an undervalued investment.

 

I asked this rhetorically in the case of Strayer.  I also asked this specifically to Michael Shearn back in May as it looked more of a short than a value candidate at the time.

 

I guess I am just too old school for the owner operator herd these days :)

 

Cheers

JEast

 

Where's the margin of safety in a worst-case scenario when P/B is at 12? Anyway, good question. Did Michael Shearn answer your question?

 

And why does e.g. COCO trade at 0.4 P/B vs 8.6 P/B (Morningstar data) for STRA?

[JEast]

The Strayer 8.6xBV is from the current 10-Q.  The 12xBV is my conservative margin-of-safety back of the envelope adjusted BV.  For example, they have a very nice building in my area but the parking lot is mostly empty on the rare occasions I have driven by.  Do they own it or lease it - I do not know, but the value of the property/lease is surely not stated BV.  Just an observation.

 

When some respected folks say it is the best in the business, then I am going to look as I like the space in very selective areas.  On the other hand, more than happy to step aside and let the owner operator herd pass by and spend the extra time refreshing up on Graham.

 

 

[Guest hellsten]

The Strayer 8.6xBV is from the current 10-Q.  The 12xBV is my conservative margin-of-safety back of the envelope adjusted BV.  For example, they have a very nice building in my area but the parking lot is mostly empty on the rare occasions I have driven by.  Do they own it or lease it - I do not know, but the value of the property/lease is surely not stated BV.  Just an observation.

 

When some respected folks say it is the best in the business, then I am going to look as I like the space in very selective areas.  On the other hand, more than happy to step aside and let the owner operator herd pass by and spend the extra time refreshing up on Graham.

 

OK, thanks for the details. I now remember you have a small position LINC. I'll follow your lead and avoid the heard by looking at LINC instead of STRA ;)

[ASTA]

JEast

Thanks for posting your concerns and how you see the business. I hope you did not take my comment before to strong as I was sarcastic and do think highly of your comments as I am just a beginner and maybe I need to read Security Analysis again(remember reading it in Nairobi as I was dead set of not working in Africa) :D