Your highest conviction idea for 2014 + why

[frommi]

My best one is probably Strayer Education Inc(NASDAQ:STRA). The thesis is described in great detail here:

http://www.beyondproxy.com/strayer-education-analysis/

 

The guy that has written this analysis is also the author of this excellent book:

http://www.amazon.com/Investment-Checklist-Art--Depth-Research-ebook/dp/B005OYGOZW/ref=la_B00548ANRI_1_1?s=books&ie=UTF8&qid=1386759294&sr=1-1

 

Summary: This is a business Buffett would love (he owns Kaplan through The Washington Post). ROIC is in the order of 50% + plenty of growth potential. This particular one trades at P/FCF of around 5. No serious problems with regulators, litigation, etc when compared to peers who are deep in it. Great management.

 

Enjoy, fellas!

 

Ouch, i don`t think he would ever invest there. The numbers look good, but who said that education has to cost money? (There are enough countries in the world where education is free.)

[Edward]

Ouch, i don`t think he would ever invest there. The numbers look good, but who said that education has to cost money? (There are enough countries in the world where education is free.)

Education is never free. In a lot of countries it's subsidized, and the citizens pay indirectly. In the for profit education industry in the US, the subsidies to education actually work in favor of the for profit schools because they are a lot more efficient, and the subsidy is based on the marginal cost of education in the public colleges/universities.

 

To kill the thesis you would need the subsidy to be limited exclusively to public education, but currently everyone enjoys access to title 4 funding. I'll grant you that a lot of public colleges and universities are funded by states, but the funding is limited - so it doesn't affect the marginal cost of education.

[mrvlad0]

That's a big advantage over Wall Street, whose definition of "long term" is the time between Lightning Round segments on CNBC. If Wall Street is thinking about the next ten months, and you're thinking about the next ten years, case closed -- that's your advantage.

 

bit.ly/14fLmaF

 

[frommi]

@Edward Look at the Strayer thread under Investment Ideas there are enough arguments to destroy the bull thesis. I don`t want to discuss it in this thread, perhaps we can resume the discussion there.

[yadayada]

yeah it seems with all those stocks out there, there are better picks. MOOCS would destroy paid for education. Especially since this is targetted for older people.

[Guest Dazel]

 

Altius Minerals-see thread

 

Don't let the minerals name fool you...they are royalty-merchant bank with the capability of creating greenfield royalties...

More importantly they are going to go from a lumpy cash-flow model to a steady predictable cashflow stream. Their 17 year company record is top quartile anywhere. Great management with great assets in a depressed sector...looks like 2014 could be their coming out party...with longterm cash producing assets for the future.

 

Disclosure:I am biased as a shareholder.

 

http://www.altiusminerals.com/

[Edward]

@Edward Look at the Strayer thread under Investment Ideas there are enough arguments to destroy the bull thesis. I don`t want to discuss it in this thread, perhaps we can resume the discussion there.

Sure thing, I posted there :)

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/stra-strayer-education/40/

[Uccmal]

I know it says one idea but I have 4:

 

1) cash

2) BAC leaps or common - discussed elsewhere - fully hedged

3) Aig leaps/common - discussed  elsewhere - 20 % hedged

4) Seaspan - should grow itself and dividend at 20% per year- discussed elsewhere

 

Cash -  I am slowly raising cash into this year and throughout the year.  In the past I wouldn't have bothered but I need this money to live on for at least a couple of years starting soon. 

 

Cash - part 2 - This bull market has gone on for almost 5 years.  We have gone 1.5 years without a significant correction.  The easy ideas are gone.  Therefore one must move down the quality curve or raise cash slowly and wait it out.  Everytime I have moved down the quality curve the result has been poor.

 

I will cheat and add Pennwest - discussed elsewhere. 

[Hawks]

Uccmal

Ditto. I own all 4. Minimal cash though.

[Myth465]

ROIC Leaps - Up 400% in 2013 then sold. Rebought and now up 40%.

There is a small chance I could get 200% out of them in 2014 by October.

 

---

 

Aside from that Canadian Energy

 

Canadian Oil & Gas Service Companies - Yield 4% with minimal debt and trading at 4x cash flow - Essential Energy and High Artic - Xtreme drilling has no yield but had a great year in 2013 and will have a great 2014.

 

Canadian Oil & Gas E&P companies - Legacy O&G, Twin Butte, Spyglass, Lightstream.

 

Potential big win - Penn West leaps. As cheap as the ones above but in the dog house. Leaps are basically free and are for 2 years. If they sell significant assets in Q1 - Q2, the leaps will fly as the street rerates the stock.

 

Most of my losses are from Leaps, but this one looks interesting....

 

Those are my picks.

[Olmsted]

MMAB.  I've been meaning to start a thread on this, but no time.  I'll add some actual numbers to this when I start the thread.  For now, a teaser.

 

The asset base is very complicated and the balance sheet needs numerous adjustments to arrive at  a real net asset value.  I believe this results in a lot of hidden value.  Further, management is incentivized to start realizing this hidden value, having been very aggressively buying shares over the last year, sometimes at prices as high as $1.30(ish). 

 

An incomplete list of the hidden value:

 

-Fair value of the muni bond portfolio (most of the company's assets) is above carrying value on the balance sheet.

-Some of the debt is collateralized only by bonds on the balance sheet.  In essence, these bonds were sold, but didn't qualify for sales treatment.  The bonds that collateralize the debt are carried at less than the face of the debt - which means you can make an upward adjustment to net assets.

-There is owned real estate carried at what may be a lowball value.

-The company owns a stake in an African housing company, the value of which is not immediately apparent on the balance sheet.

-Tax credits.  At least $20m, from low-income housing deals

-NOLs!  A lot.  Like $1bn+

 

Just valuing the cash and bond portfolio (including the non-recourse debt), I get to an asset value net of debt around $2.30.  Everything else is upside.

 

By the way, thanks to @ErditCokaj for bringing this one back to my attention and discussing his analysis with me.  Any errors, of course, are my own.

[Aberhound]

Aber - besides valuation, what warning signs do you see right now that are akin to 2007? Recession, fed tightening cycle, European debt flare up?

1. New fed chief creates uncertainty which usually results in a dip. Yellen might be like the many Supreme Court justices who have acted differently than expected.

2. Currency weakness in India, Brazil, Turkey, Thailand, Egypt shows risk of 1998 Asian type crisis? country bond defaults often caused by currency problems and happen in waves of countries.

3. Bail-in will be more effective if done sooner and unexpectedly.

4. The loss of control of central banks is a logarithmic. The greater the intervention and the longer enduring the greater the fluctuations. No reasonable policy will work is the near future.

5. My thesis is that the central planners accentuate natural cycles. We are at or near the end of solar maximum so the natural cycle is a strong dip within 12 months of the end of solar max.

6. French government seems determined to harm their economy. Why should the prudent Northerners help? My read is that they care more about achieving federalism than prosperity and that they are working with the Germans to achieve that goal.

7. When I did econometric modelling as a summer student for John Helliwell the models suggested that when multiple countries drag, a vicious circle arises where all are dragged down unless there is offsetting stimulus. I see more new drag than new stimulus. Less stimulus is drag.

8. China tends to act prudently. A growing debt problem requires them to halt the growth in lending particularly in shadow banking. I believe the true debts are understated as private loans are illegal but culturally available. I was shocked one day to have a modest Chinese gentleman walk into my office with $250,000 which he held for someone else without any paperwork.

9. Austrian economics predicts well what may be expected. My interpretation is that it predicts a natural downturn then a crack up boom if the more extreme policies are used. Yellen will try taper before more extreme policies. We have yet see the Fed and Congress row in the same direction. If taper is to work Congress needs to help.

10. Each year another libor type scam is exposed. This year I suspect the scam exposed will be the fake interest rate swaps with the fake modelling which allows offsetting risks. It could be another whistle blower or a bank default. Libor is a small scam by comparison. A prosecutor once told me that being a criminal is a great way to make money except that you have to do business with other criminals.

 

On the bright side a downturn is the best time to build wealth. I am thinking of putting in a trailer park for all those people who lose their homes. There is always something good to invest in.

[bmichaud]

In December 2007 there was one massive defined risk to the economy and stock market: the popping of the housing induced credit bubble and its associated ripples effects.

 

You just listed off 10 risks that could likely be listed off every 1 out of 2 years going back to 1900. How do you act upon that list?

[vinod1]

In December 2007 there was one massive defined risk to the economy and stock market: the popping of the housing induced credit bubble and its associated ripples effects.

 

You just listed off 10 risks that could likely be listed off every 1 out of 2 years going back to 1900. How do you act upon that list?

 

Could it be hindsight bias? There are risks every year, but in some years it is more pronounced than others. 2005, 2006, 2007 happened to be such years but it only materialized in 2007.

 

If things have played out only slightly differently (Govt stepping in for Lehman and possibly some arm twisting to get AIG CDS counter parties to back off, etc) we might have had an economic impact similar to 2000 tech bubble burst.

 

In hindsight it is easy to think that the financial crisis of 2008-2009 has a clear cut sign from the housing bubble. I do not think that is really the case.

 

Personally I was worried about housing bubble and high stock market values due to high profit margins which I thought were a near certanity to mean revert. I was very defensive but it worked out for all the wrong reasons. I had no clue about all the leverage and the risks that turned up are not remotely close to what I was worried about - except for the housing bubble.

 

The lesson I took from it is that when valuations are rich, bad things happen in ways we cannot anticipate and it is better to ensure that we live to fight another day i.e. no deep losses of 50% magnitude.

 

Vinod

 

[bmichaud]

Aberhound compared the current environment to December 2007, hinting that being defensive here is as much of a no brainer as back then.

 

December 2007:

- Buffett, Burry and Tepper all say housing is a disaster. Jeff Saut and Ned Davis, two prominent market watchers were adamantly warning against housing as well.

- housing and autos were declining

- rail carloads declining

- leverage was widespread

- profit margins at record highs

- Schiller PE was 27X

- 10y treasury over 4%

- low market breadth and rising volatility

 

Now:

- no prominent investor publicly pointing out significant risk

- housing and autos rising

- rail carloads rising

- leverage has been significantly reduced

- profit margins at record highs

- Schiller PE at 25.5x

- 10y at 3%

- strong market breadth and low volatility

 

Clearly overly optimistic sentiment and elevated valuation are not a recipe for a bad market, as this year demonstrated. There must be more to it. I'm trying to look at things on a more holistic basis in order to avoid bad hedging and missing out on individual opportunities.

 

1. I don't think there is any denying recessions are the biggest drivers of large market declines. There is no recession on the horizon right now, in fact it appears there is acceleration.

 

2. Volatility precedes even mild declines such as the 2011 mini bear. Right now I see strong leadership and low volatility. Yes this could change at any time, but it's not yet here and market tops take awhile to develop. 1929, 1987 and 2008 crashes were precedes by significant market weakness and volatility - in other words, the market tells you where it's going.

[Aberhound]

In December 2007 there was one massive defined risk to the economy and stock market: the popping of the housing induced credit bubble and its associated ripples effects.

 

You just listed off 10 risks that could likely be listed off every 1 out of 2 years going back to 1900. How do you act upon that list?

 

I find the hardest part is judging when the last bear buys into the bull run. It was not obvious in late 2007 but there was similarly many warnings. Look around you. Are there former bears now joining the bull run late in the game? The wave is powerful at the peak. You see buying strength on top of underlying structural weaknesses. You see buying psychology which could change suddenly as buyers notice the many problems. It is never easy to know when the mass will switch.

 

Read about the Raven of Zurich. How did he know about the Great Depression in the early 1920s and the fall of capitalism in 1951. Look around and you see similar structural problems like Europe in the 20s which led to the debt collapse. Anybody could have listed the hundred problems. Few saw that the strength of the boom in the late 20s and the resultant growth in the debts were important causes. More impressive for me was his warnings from 1951 about the fall of capitalism arising from the wealthy elite refusing to take losses on their risks while enjoying the gains.

 

Read Diary of the Great Depression. The business lawyer concluded that the only way to profit was to sell during the bull run.

 

Read Hayek. He describes well the ponzi lending which results in the crash. This was very obvious in late 2007 where the only hope of being able to service the loans is continued price rise. Now we have just as much debt and inflated asset prices and interest rates are rising. So I have been selling and I plan to delay buying until a correction then plan to participate in the crack up boom. Perhaps I will get caught up in the mass psychology and I will be the last bear to buy. I have not sold BAC yet. It looks too early to buy the S&P puts. The vix products look interesting so I am studying those products which others here mentioned.

[Packer16]

In addition to the debt levels you need to look who are the debtors and do they have the resources to pay.  Today we are in a much better place than 2007.  In 2007, you had groups of uncreditworthy folks who were the debtors on all kinds of debt.  Today, the debtors are for the most part creditworthy entities.  The debt hose has been shut down to the uncreditworthy folks since 2008.  If you look at credit cards, the originated receivables are of much higher quality than 3 years ago.  The write-off rate has declined from 10% to 3%.  The regulators are keeping a tight reign on bank/credit card lending.  We are starting to see some alternative forms of credit (like Lending Club and Prosper) but these are still very small.  Over time if these entities continue to grow it will be a problem. 

 

I think we have the potential for a bubble but some elements are missing, namely, large amounts of credit to uncreditworthy folks and large inflows into an asset class.  Just my 2 cents.

 

Packer

[jay21]

In addition to the debt levels you need to look who are the debtors and do they have the resources to pay.  Today we are in a much better place than 2007.  In 2007, you had groups of uncreditworthy folks who were the debtors on all kinds of debt.  Today, the debtors are for the most part creditworthy entities.  The debt hose has been shut down to the uncreditworthy folks since 2008.  If you look at credit cards, the originated receivables are of much higher quality than 3 years ago.  The write-off rate has declined from 10% to 3%.  The regulators are keeping a tight reign on bank/credit card lending.  We are starting to see some alternative forms of credit (like Lending Club and Prosper) but these are still very small.  Over time if these entities continue to grow it will be a problem. 

 

I think we have the potential for a bubble but some elements are missing, namely, large amounts of credit to uncreditworthy folks and large inflows into an asset class.  Just my 2 cents.

 

Packer

 

I agree with this.

 

HY corps have me a little concerned though. If we get raising rates, then some could have difficulty refi'ing.

[bmichaud]

I think a thread discussing the next distressed debt cycle would be helpful. Soon I'm going to start screening for the junkiest names that are only surviving because of low rates.

[Packer16]

As we progress through this credit cycle, I think you will find many re-fi hidden bombs around.

 

Packer

[yadayada]

Also thought it was interesting reading hedge fund wizards. Alot of geniuses making money in different ways off the market were all pretty pessimistic in 2007. But they seem to all be more optimistic now. Or at least little over a year ago.  Not that you can read too much into that tho.

[jay21]

I think a thread discussing the next distressed debt cycle would be helpful. Soon I'm going to start screening for the junkiest names that are only surviving because of low rates.

 

Go for it.  I'll try to participate.

 

Most of the threads I make on the debt markets seem to fall flat though.

[bmichaud]

I'm hoping to participate in the next cycle, buying debt on the way down and holding equity on the way up. Not sure on the debt part, as I may not have enough assets, but definitely on the way up. My hope in screening for the junkiest companies with buoyant equity is to find some good shorts as well for the way down :)

[Palantir]

Anyone think firms with big pension liabilities are a good idea? As rates go up....

 

Then again, there is evidence that the market has a keen idea of which firms have high pension liabilities, so that may not work.

[bmichaud]

Fiat, GM and SHLD :)