From the front page of Investor's Business Daily, "Visa EPS Climbs 40% and Tops Views Raising Outlook for Operating Margins". But the real story from this earnings report actually appeared in this site's 4/27/2009 posting.
Visa cut quarterly operating costs by 50 million dollars while revenues remained stable. This resulted in better than expected income results on a per share basis.
When the economy and the equity markets go into a tailspin, the best public companies, Visa among them, use these times to trim the fat, cut off the dead wood, push back vendors, and emerge more profitable, leaner and more efficient. And for the value investor, these times are really really good because the cost of assets and future earnings is half what it was 12 months ago. (Value Building 4 / 27 / 2009).
Visa is an excellent example for us to analyze from a value perspective for a number of reasons. Visa's executive management really does squeeze the most equity value out of its operations that it can. Here is a company that exists and thrives almost entirely on consumer credit. And when the general equity market trends turned against Visa, and their stock dropped from year ago heights of 85.00 per share to a January 2009 low of 47.00, management steadily cut is operating costs, squeezed its vendors, wrote down its bad loans at times when no company had any influence in their share price, took advantage of a very favorable credit market (FOR COMPANIES WITH GREAT CREDIT RATINGS) and now has emerged leaner and more profitable. Of course to our readers it comes as so surprise that the illustrious Wall Street analysts missed another one. When everyone, businesses and consumers alike needed to rely on credit, Visa was in the financial position to offer it, at a higher price which is why their revenues remained stable.
The problem with Visa is that it is too expensive at its current 54.0 P/E Ratio for any self respecting value investor to approach it. As great a company as this is, are investors really willing to pay a share price equal to 54 years of earnings results to own it? Leave it to the speculators I think, but kudos to management for maintaining such a P / E ratio in this credit market environment.
Its main competitor, American Express sits on a relative value advantage with an 11.0 P/E Ratio. Hmmmm. Get any ideas readers on another company we may need to add to the list? American Express has an even more conservative approach to consumer credit, has much lower and selective market share and is likely trading below its fair value currently. Which means unless there is a systemic issue the company is not reporting, American Express, currently priced at 25.00 should approach $37.00 within 12 months. Let's begin watching it.
DELL - $11.25, Buy in price $10.00, Stop Loss $9.56
GE - $12.22, Buy in price $10.60, Stop Loss $9.70
AXP - $24.95, Buy in price $24.95, Stop Loss $19.96
Build Value Every Day
Brad van Siclen
Thursday, April 30, 2009
Monday, April 27, 2009
Value Creation in the Land of Day Traders - 4 / 27 / 2009
We have recently established that the market gyrations of late amount to deep pocketed day traders trying to beat other speculators into the next index momentum move, up or down. I add to that today's "Swine Flu" concerns. "Futures Lower Based Upon Swine FLU". This is time to be investing people. The financial media has lost its way. And when unsure how to bring value to their viewers and readers, they resort to attaching silly explanations to the momentum trades of the day. Put your value caps on and seek out those great companies you could not afford only a year ago. They are selling at relative bargains.
Meanwhile has any one been paying attention to the earnings announcements from major public companies? Here's what we have learned.
Public Company Executives took advantage of Fall 2008's banking crisis to fool the current crop of shoddy research analysts into reducing their earnings and valuation projections. Then, being masters of operational and profit efficiency, set about restructuring their businesses for a return to profits and profit growth, and "poof" virtually all component companies have beaten earnings expectations for Q1. Still most public company executives are once again cautious about their forward looking earnings commentary. But in truth this is simply more misdirection. I am not suggesting that the economy will improve, just simply that the best companies and executives are excellent in consolidating market share and profits during recessions.
Public company executives have learned long ago that you can't buck the general market trends their common stock trades in. So they have now begun to use this to their advantage and in times like these when their shares should be valued higher they cry the blues, discuss common buzz terms like China's Currency Manipulation, Consumer Confidence, European Protectionism, Health Care and Pension Costs, and my favorite generalization, "Unfavorable Economic Environment".
Well these are the supposed outlooks of companies who continue to operate in an economy that has seen 1) no real wage growth in a decade (labor costs flat), 2) a dramatic rise in out sourcing to cheap wage countries (production costs down), 3) A favorable dollar (low compared to its competitors), 4) inexpensive cost of capital (low low interest rates), 5) supreme financial management software (adds to efficient capital decisions), and 6) a hands off regulatory and tax system.
Sure the systemic banking crisis has created a recession, and has revealed significant issues with our regulatory systems, I don’t belittle this issue in the slightest.
But the best companies, the smartest companies, the companies with the most value use these events to trim the fat, cut off the dead wood, push back vendors, and emerge more profitable, leaner and more efficient. And for the value investor, these times are really really good because the cost of assets and future earnings is half what it was 12 months ago.
So let’s dust of our financial texts books and go bargain hunting. Sell your failed, professionally managed equity funds. And buy the great companies you always wanted to own. They will be the leaders out of this recession. They will be the leaders in earnings growth.
Set realistic investment return expectations. Select companies with a solid price base (we’ll discuss this later). Then sit back and let the speculators extend your returns. As you are hopefully a bit more expert in how the best company execs use Wall Street research experts as just another tool in managing their value creation.
Build Value Every Day
Brad van Siclen
Meanwhile has any one been paying attention to the earnings announcements from major public companies? Here's what we have learned.
Public Company Executives took advantage of Fall 2008's banking crisis to fool the current crop of shoddy research analysts into reducing their earnings and valuation projections. Then, being masters of operational and profit efficiency, set about restructuring their businesses for a return to profits and profit growth, and "poof" virtually all component companies have beaten earnings expectations for Q1. Still most public company executives are once again cautious about their forward looking earnings commentary. But in truth this is simply more misdirection. I am not suggesting that the economy will improve, just simply that the best companies and executives are excellent in consolidating market share and profits during recessions.
Public company executives have learned long ago that you can't buck the general market trends their common stock trades in. So they have now begun to use this to their advantage and in times like these when their shares should be valued higher they cry the blues, discuss common buzz terms like China's Currency Manipulation, Consumer Confidence, European Protectionism, Health Care and Pension Costs, and my favorite generalization, "Unfavorable Economic Environment".
Well these are the supposed outlooks of companies who continue to operate in an economy that has seen 1) no real wage growth in a decade (labor costs flat), 2) a dramatic rise in out sourcing to cheap wage countries (production costs down), 3) A favorable dollar (low compared to its competitors), 4) inexpensive cost of capital (low low interest rates), 5) supreme financial management software (adds to efficient capital decisions), and 6) a hands off regulatory and tax system.
Sure the systemic banking crisis has created a recession, and has revealed significant issues with our regulatory systems, I don’t belittle this issue in the slightest.
But the best companies, the smartest companies, the companies with the most value use these events to trim the fat, cut off the dead wood, push back vendors, and emerge more profitable, leaner and more efficient. And for the value investor, these times are really really good because the cost of assets and future earnings is half what it was 12 months ago.
So let’s dust of our financial texts books and go bargain hunting. Sell your failed, professionally managed equity funds. And buy the great companies you always wanted to own. They will be the leaders out of this recession. They will be the leaders in earnings growth.
Set realistic investment return expectations. Select companies with a solid price base (we’ll discuss this later). Then sit back and let the speculators extend your returns. As you are hopefully a bit more expert in how the best company execs use Wall Street research experts as just another tool in managing their value creation.
Build Value Every Day
Brad van Siclen
Friday, April 24, 2009
At a Loss For Words - 4 / 24 / 2009
Yesterday's announcement concerning Paulson, Bernanke, and Bank of America CEO Ken Lewis may have sent shock waves through a less savvy market. But the US markets took it all in stride. I will use this fact, again, as proof that traders are running the indexes now. That new investment money is still on the sidelines. And lastly as a reminder that the US Government sees Wall Street firms and the Commercial Banks that acted like them, as speculators and taxation profit centers, and not value builders.
Essentially, Paulson and Bernanke told Bank America that the American public should be kept in the dark concerning the condition of Merrill Lynch. That saving Merrill Lynch and its shareholders was more important than lying to and damaging Bank of America's shareholders. That Bank of America had enjoyed the favorable economic and regulatory conditions of the US markets for many years by the good graces of the US Government, and now the US Government was telling them it was pay back time. Oh, and if you are not happy with the US Government's position on this matter, we will remove you and your board and put another Liddy (AIG's government appointed CEO) in charge. I am truly at a loss for words. This public revelation essentially tells all CEO's that the cost of capitalism is, at any time, at the bidding of the US Governement and that the shareholders rights are nearly worthless in the Government's mind. That is a terrible precident.
Perhaps more shocking is that Paulson, a man who benefited enourmously from the government's lax regulations when working for Goldman Sachs, was able to lead the charge in the selection of survivors among AIG, Citibank, Lehman, Bear, Merrill Lynch, and now Bank of America, while maintianing and funding via government requirement, the stability of Goldman Sachs. One can only imagine the books that will be written on this era in the future.
In the past you may remember that JP Morgan bailed out the government. Well these days are long gone. And in their place seems to have arisen the greatest theft from American shareholders and investors ever perpetrated. It may not seem like it, but I really am at a loss for words on this subject.
But one thing is true. The President I voted for has proven to be a greater light weight than the most conservative media could ever have guessed at. Virtually all of Wall Street's value has been consolidated by this government's direct decisions into 2 banks, Goldman Sachs and Morgan Stanley. That, people was not through survival of the fittest, but through government selection led by former Goldman Sachs partners and consultants. This President has permitted this to happen and has yet to show that was his vision or even by his influence or approval that this consolidation occured.
So what good has come from all this? Perspective. You can rely on no one to make proper invesment decisions but yourself. And even when you make them the government may, at some point in the future determine that your equity position does not deserve the proper free market information its agency, the SEC, requires of its public companies by law. You have learned that the government has always been working with these large banks, and only during a bear market is that marriage exposed.
Wall Street professionals always knew this, they just didn't tell you. And that is why the markets shrugged off this news of forced collusion of public entities and the government at its highest levels.
I wonder, who other than Goldman Sachs will ultimately benefit from this government's efforts in the US economy? I also think we now know the conversation that was had with Warren Buffet and the US Government prior to his preferred investments in GE and Goldman Sachs.
GE closed yesterday at $12.03. Dell at $10.20 no changes needed.
Build Value Every Day, become more expert.
Brad van Siclen
Essentially, Paulson and Bernanke told Bank America that the American public should be kept in the dark concerning the condition of Merrill Lynch. That saving Merrill Lynch and its shareholders was more important than lying to and damaging Bank of America's shareholders. That Bank of America had enjoyed the favorable economic and regulatory conditions of the US markets for many years by the good graces of the US Government, and now the US Government was telling them it was pay back time. Oh, and if you are not happy with the US Government's position on this matter, we will remove you and your board and put another Liddy (AIG's government appointed CEO) in charge. I am truly at a loss for words. This public revelation essentially tells all CEO's that the cost of capitalism is, at any time, at the bidding of the US Governement and that the shareholders rights are nearly worthless in the Government's mind. That is a terrible precident.
Perhaps more shocking is that Paulson, a man who benefited enourmously from the government's lax regulations when working for Goldman Sachs, was able to lead the charge in the selection of survivors among AIG, Citibank, Lehman, Bear, Merrill Lynch, and now Bank of America, while maintianing and funding via government requirement, the stability of Goldman Sachs. One can only imagine the books that will be written on this era in the future.
In the past you may remember that JP Morgan bailed out the government. Well these days are long gone. And in their place seems to have arisen the greatest theft from American shareholders and investors ever perpetrated. It may not seem like it, but I really am at a loss for words on this subject.
But one thing is true. The President I voted for has proven to be a greater light weight than the most conservative media could ever have guessed at. Virtually all of Wall Street's value has been consolidated by this government's direct decisions into 2 banks, Goldman Sachs and Morgan Stanley. That, people was not through survival of the fittest, but through government selection led by former Goldman Sachs partners and consultants. This President has permitted this to happen and has yet to show that was his vision or even by his influence or approval that this consolidation occured.
So what good has come from all this? Perspective. You can rely on no one to make proper invesment decisions but yourself. And even when you make them the government may, at some point in the future determine that your equity position does not deserve the proper free market information its agency, the SEC, requires of its public companies by law. You have learned that the government has always been working with these large banks, and only during a bear market is that marriage exposed.
Wall Street professionals always knew this, they just didn't tell you. And that is why the markets shrugged off this news of forced collusion of public entities and the government at its highest levels.
I wonder, who other than Goldman Sachs will ultimately benefit from this government's efforts in the US economy? I also think we now know the conversation that was had with Warren Buffet and the US Government prior to his preferred investments in GE and Goldman Sachs.
GE closed yesterday at $12.03. Dell at $10.20 no changes needed.
Build Value Every Day, become more expert.
Brad van Siclen
Tuesday, April 21, 2009
You Are Officially Alone - 4 / 22 / 2003
Citibank. If you are invested in a fund or index, you own some. How? Your fund certainly owns a few index spiders. Citi is a part of most portfolios and equity indexes. And those in charge of managing your investments in equity funds have just officially vacated all fiduciary responsibility to you, the investors.
They have done this by allowing the Citibank board to be unanimously re-elected. These board members, super smart people, are paid to ensure that the executives of the company manage the corporation for the benefit of the shareholders. Do you think they upheld their end of the contract? This Board has sat back and done absolutely nothing for 2 years and presided over one of the greatest loses in value and operational in competence in the history of American Banking. And guess what? The professionals you pay to manage your investment and to cast your votes by proxy decided to reconfirm this excellent board.
It's official people, you are alone. Professional management of your money does not exist. And fiduciary responsibility is not at all a requirement in the eyes of Fidelity, Janus, Vanguard. I am terribly sorry if I offend some readers who work for these named funds and really do a great job for investors. But at some point they need to ask themselves if they take any responsibility for the record redemptions they have seen at their funds in the last 12 months. Those redemptions are investors casting their votes on the fund managers. Its that simple. Perhaps if fund managers had taken more responsibility in looking out for their investors money, had remained disciplined, had not been caught up in the speculative momentum of the last few years, and had made the necessary public statements and actions to ensure the boards of companies they invest your money in were beholden to the shareholders first, we would recognize their value in the process. Instead the vast majority of equity fund managers are little more than clearing houses for your investment money. They are not expert, or they were once but now take credit when the markets go up, and point fingers when the markets go down.
This is the very reason you must be more expert. You must learn some investment basics. You must decide your investment profile. And you must act on it. It's called taking responsibility. Because if these results of the Citibank Board re-election tell you anything, its professionals you pay to watch your financial back are not going to do it at all. Read future and past postings, send in your comments or questions or suggestions. Together we can become more expert.
Learn. Be Conservative. You worked very hard for your 401k.
Build Value Every Day (on your own).
Brad van Siclen
They have done this by allowing the Citibank board to be unanimously re-elected. These board members, super smart people, are paid to ensure that the executives of the company manage the corporation for the benefit of the shareholders. Do you think they upheld their end of the contract? This Board has sat back and done absolutely nothing for 2 years and presided over one of the greatest loses in value and operational in competence in the history of American Banking. And guess what? The professionals you pay to manage your investment and to cast your votes by proxy decided to reconfirm this excellent board.
It's official people, you are alone. Professional management of your money does not exist. And fiduciary responsibility is not at all a requirement in the eyes of Fidelity, Janus, Vanguard. I am terribly sorry if I offend some readers who work for these named funds and really do a great job for investors. But at some point they need to ask themselves if they take any responsibility for the record redemptions they have seen at their funds in the last 12 months. Those redemptions are investors casting their votes on the fund managers. Its that simple. Perhaps if fund managers had taken more responsibility in looking out for their investors money, had remained disciplined, had not been caught up in the speculative momentum of the last few years, and had made the necessary public statements and actions to ensure the boards of companies they invest your money in were beholden to the shareholders first, we would recognize their value in the process. Instead the vast majority of equity fund managers are little more than clearing houses for your investment money. They are not expert, or they were once but now take credit when the markets go up, and point fingers when the markets go down.
This is the very reason you must be more expert. You must learn some investment basics. You must decide your investment profile. And you must act on it. It's called taking responsibility. Because if these results of the Citibank Board re-election tell you anything, its professionals you pay to watch your financial back are not going to do it at all. Read future and past postings, send in your comments or questions or suggestions. Together we can become more expert.
Learn. Be Conservative. You worked very hard for your 401k.
Build Value Every Day (on your own).
Brad van Siclen
The Volatile Legacy of Netscape - 4 / 21 / 2009
We have a significant perspective issue that over took the equities markets in 1995. And we fear this perspective will haunt the markets for many years to come.
This was the dawning of the the internet bubble, and Netscape was the band leader. It was followed by companies like EBAY, Amazon, and AOL. These Companies were treated by IPO bankers as high risk propositions. And their IPO process and structure were all very standard for unprofitable, modest revenue concerns that were unable to raise the capital their business models needed to become profitable from the private markets. The IPO bankers offered a small amount of shares, typically between 5 and 7 million shares, to the public representing 10 - 20% of the company's total shares outstanding. The thinking was fairly sound at the time, no one knew when or in most cases how these companies would become profitable. All, including the companies, believed that more money would need to be raised in future secondary rounds from the public. So a modest IPO issue of a modest amount of Company equity, leaving more equity on the table for future public offerings was the preferred route. This was a sound model in an uncertain era not yet realizing it was the leading indicator of an explosion of new money, new share structures, new shareholder / management relationships.
The problem began when the demand for Netscape shares exceeded the availability of these shares by multiples. Some bankers believed that for each share offered in the initial offering, 20x that amount was requested by the investment public. Thus created an IPO issuance that doubled from $14 to $28 per share initial pricing and soon, once available for public buying, became $75.00 a share. This for a company who reported revenues of less than $1.0 million US in the 12 months prior to its IPO and had spent nearly all its money invested to date, accumulating losses of nearly $7.0 million dollars.
The question is why did the stock trade to $75.00 within a few days of its IPO given the historic financial performance of the company. The real reason - an imbalance of shares offered to satisfy the public demand. But Wall Street can't tell you that. It would be admitting to a mistake in the greatest IPO in more than 20 years. Instead, Wall Street set about using Netscape as an example of its forward looking genius. Its analysts spoke of new paradigms, future valuation models that proved the stock was under valued. And raving about a market capitalization value which exceeded 6.0 billion dollars based upon expected future earnings.
The reality was that Netscape's market value on a per share basis was more than 80% based upon shares that would never trade or be available to the public, held by insiders who were restricted by both the IPO bankers and the SEC's regulations from selling their shares. Had those insider shares been available for sale, it is highly unlikely that the shares of Netscape would have reached even $30.00.
But what was created was a new model that IPO bankers replicated for years during the tech bubble. By creating supply / demand imbalances in the public markets for interesting tech companies, investors were forced to go to the public markets to acquire shares, rather than the company directly, and share prices for IPO's soared. Now analysts were faced with the task of justifying the public prices and market values of these capitalization challenged firms. They wheeled out Excel spread sheets and began creating new rationale for value. And while this occurred these same valuation applications (Projected Revenue Multiples, Projected future customers, Discounted Cash Flow with Terminal Earnings Multiples) were being applied to the tried and true cash flowing companies of the S & P 100 index whose values soared with the markets.
It became normal to see a company trading at 25.0x earnings. Or to see a company trading at 3.0x projected revenues. And now today we are left with this legacy. Because who would pay 25.0x (or 25 years times) a company's earnings in order to own a company? The answer unfortunately is today's fund managers. They are caught in a cycle of over valuation that will take many many years to get to equilibrium, and until then, volatility in the markets of the last six months won't be an aberration, it will be the norm.
GE - $11.35, maintain stop loss at $9.90
Dell - 10.37, maintain stop loss at $8.50
Build Value Every Day
Brad van Siclen
This was the dawning of the the internet bubble, and Netscape was the band leader. It was followed by companies like EBAY, Amazon, and AOL. These Companies were treated by IPO bankers as high risk propositions. And their IPO process and structure were all very standard for unprofitable, modest revenue concerns that were unable to raise the capital their business models needed to become profitable from the private markets. The IPO bankers offered a small amount of shares, typically between 5 and 7 million shares, to the public representing 10 - 20% of the company's total shares outstanding. The thinking was fairly sound at the time, no one knew when or in most cases how these companies would become profitable. All, including the companies, believed that more money would need to be raised in future secondary rounds from the public. So a modest IPO issue of a modest amount of Company equity, leaving more equity on the table for future public offerings was the preferred route. This was a sound model in an uncertain era not yet realizing it was the leading indicator of an explosion of new money, new share structures, new shareholder / management relationships.
The problem began when the demand for Netscape shares exceeded the availability of these shares by multiples. Some bankers believed that for each share offered in the initial offering, 20x that amount was requested by the investment public. Thus created an IPO issuance that doubled from $14 to $28 per share initial pricing and soon, once available for public buying, became $75.00 a share. This for a company who reported revenues of less than $1.0 million US in the 12 months prior to its IPO and had spent nearly all its money invested to date, accumulating losses of nearly $7.0 million dollars.
The question is why did the stock trade to $75.00 within a few days of its IPO given the historic financial performance of the company. The real reason - an imbalance of shares offered to satisfy the public demand. But Wall Street can't tell you that. It would be admitting to a mistake in the greatest IPO in more than 20 years. Instead, Wall Street set about using Netscape as an example of its forward looking genius. Its analysts spoke of new paradigms, future valuation models that proved the stock was under valued. And raving about a market capitalization value which exceeded 6.0 billion dollars based upon expected future earnings.
The reality was that Netscape's market value on a per share basis was more than 80% based upon shares that would never trade or be available to the public, held by insiders who were restricted by both the IPO bankers and the SEC's regulations from selling their shares. Had those insider shares been available for sale, it is highly unlikely that the shares of Netscape would have reached even $30.00.
But what was created was a new model that IPO bankers replicated for years during the tech bubble. By creating supply / demand imbalances in the public markets for interesting tech companies, investors were forced to go to the public markets to acquire shares, rather than the company directly, and share prices for IPO's soared. Now analysts were faced with the task of justifying the public prices and market values of these capitalization challenged firms. They wheeled out Excel spread sheets and began creating new rationale for value. And while this occurred these same valuation applications (Projected Revenue Multiples, Projected future customers, Discounted Cash Flow with Terminal Earnings Multiples) were being applied to the tried and true cash flowing companies of the S & P 100 index whose values soared with the markets.
It became normal to see a company trading at 25.0x earnings. Or to see a company trading at 3.0x projected revenues. And now today we are left with this legacy. Because who would pay 25.0x (or 25 years times) a company's earnings in order to own a company? The answer unfortunately is today's fund managers. They are caught in a cycle of over valuation that will take many many years to get to equilibrium, and until then, volatility in the markets of the last six months won't be an aberration, it will be the norm.
GE - $11.35, maintain stop loss at $9.90
Dell - 10.37, maintain stop loss at $8.50
Build Value Every Day
Brad van Siclen
Thursday, April 16, 2009
Dow Jones No Longer A Good Thing - 4 / 17 / 2009
I have not written in 3 days for the following reason - nothing has happened in these markets that is surprising to traders, to you, or to me. Ask yourself why the market has traded sideways (compared to recent weeks) amid earnings season reports. Traders have learned to limit their own exposure in this market, not get caught by intraday market reversals, and now we have a market that reacts independently of Large Cap and Dow Component earnings surprises. It continues to amaze me that research groups find any value in paying Banking sector research analysts, and frankly that they continue to appear in the media restating what every other bank analyst has said and that is considered at all valuable.
What we do have is a problem. Dow Jones Components will trade in relative collusion so long as traders continue to enjoy the liquidity and expected volatility the index DIA offers. The only breakouts we are likely to see in any of the shares of these companies in the index will be to the down side as short sellers pile in against earnings misses. But unless there is a bankruptcy fear, funds will use these short term down swings to cost average their existing positions and modest price swings will occur. Here's the problem: membership in the Dow Jones index will reduce a company's upside share price potential. It would seem that Dow Jones Index inclusion, in anything other than a bull market, is detrimental to shareholders. Look what happened to the mighty Intel and Microsoft (MSFT) when they became Dow Components. Their earnings increased dramatically, but their multiple to earnings decreased dramatically reflective of the super stable growth of its Dow Component co-members. MSFT was so beaten down, even though their growth opportunity remained dramatic, that they announced a dividend. Forced by the Dow Jones investors to behave like Du Pont.
Meanwhile I have already heard the talking heads justifying the lack of market upswing in individual stocks that have dramatically beaten earnings expectations, by stating "there was no surprise in results". Have traders and fund managers already decided to ignore research analysts in favor of their own analysis? No. Unfortunately we have proven our Dow Theory for this period of market history. Dow Index day traders are in control of the value of our economy. And their sentiment is "How do I make money today with the least amount of risk". I don't see this changing for many months to come. Stick with components that have been unfairly beaten down on a P/E relative basis, expect 30% appreciation in those components over the next 12 months, and be happy with those returns. Momentum, bad, Value, good.
Build Value Every Day
Brad van Siclen
What we do have is a problem. Dow Jones Components will trade in relative collusion so long as traders continue to enjoy the liquidity and expected volatility the index DIA offers. The only breakouts we are likely to see in any of the shares of these companies in the index will be to the down side as short sellers pile in against earnings misses. But unless there is a bankruptcy fear, funds will use these short term down swings to cost average their existing positions and modest price swings will occur. Here's the problem: membership in the Dow Jones index will reduce a company's upside share price potential. It would seem that Dow Jones Index inclusion, in anything other than a bull market, is detrimental to shareholders. Look what happened to the mighty Intel and Microsoft (MSFT) when they became Dow Components. Their earnings increased dramatically, but their multiple to earnings decreased dramatically reflective of the super stable growth of its Dow Component co-members. MSFT was so beaten down, even though their growth opportunity remained dramatic, that they announced a dividend. Forced by the Dow Jones investors to behave like Du Pont.
Meanwhile I have already heard the talking heads justifying the lack of market upswing in individual stocks that have dramatically beaten earnings expectations, by stating "there was no surprise in results". Have traders and fund managers already decided to ignore research analysts in favor of their own analysis? No. Unfortunately we have proven our Dow Theory for this period of market history. Dow Index day traders are in control of the value of our economy. And their sentiment is "How do I make money today with the least amount of risk". I don't see this changing for many months to come. Stick with components that have been unfairly beaten down on a P/E relative basis, expect 30% appreciation in those components over the next 12 months, and be happy with those returns. Momentum, bad, Value, good.
Build Value Every Day
Brad van Siclen
Monday, April 13, 2009
More Banking Upside Surprises - Analysts Caught Napping Again - 4 / 14 / 2009
First: Followers should move stop loss on GE from $7.95 to $9.60, maintaining the 20%down side protection. GE closed yesterday at $12.20. Dell at $10.40 needs no chnages.
Talk of the day surrounds Goldman Sachs and the PPI. Goldman has clearly hired excellent PR representatives to manage its new found national recognition as being the smartest, best commercial and investment bank the world has ever seen. Goldman now calls its need to pay back TARP funds a "Duty". Goldman like other stable commercial banks has enjoyed the same no-cost-of-capital advantages that Wells Fargo recently dined on. It must be great to have fired ten's of thousand's of employees, reducing the largest portion of its variable costs, and then have the Government hand you essentially no cost money from which to access the capital markets on a proprietary trading basis. (If you note only a hint of sarcasm, you are not reading my posts daily.) This is akin to a farmer not having to pay for seeds, fertilizer or feed, and then selling everything for pure profit minus the value of his own sweat labor - all in 90 days..amazing.
Does anyone know where Goldman's profits came from this quarter? Trading profits. During the first quarter, markets were up 25% across the board. Goldman took its share of the TARP money and money at 0.25% interest on federal interbank loans and invested it in the stock markets. Bang, $1.9 Billion in profits. Profits that will ultimately go to its remaining executives pockets in salary and bonuses. They are raising funds now by selling equity to repay the TARP loans. Then they ride their commercial bank designation and low, low cost of capital all the way to the Bank. Isn't US Government Led Capitalism great?
At least Wells Fargo made their surprise profits from fees generated in refinancings of business and home loans, and in capturing the increased spread from the same $0.25 interbank rate. That TARP and Federal Reserve money at least trickled down to you and me.
But I must ask readers of yesterday's posting...where were the banking experts on Goldman Sachs? The "experts" again did not do their homework and instead took the easy way out by following the herd all the way to a significant under estimate of Goldman's 1st quarter profits. Banking analysts are beginning to remind me of tech analysts of the late '90s. Except being banking analysts and more conservative by nature, they wildly underestimate bank operational performance. Worse it would appear they follow the same pack leaders that missed the banking stock crater of 2008. Just last week (4/7) Mike Mayo, esteemed banking analytical expert, who you may recall launched coverage on the banking sector with extraordinary bearishness sending the banking industry stocks into a tailspin. This was followed by Richard Bove, another "great" banking sector analyst who answered Mayo with an "agreed" except for Citibank, JP Morgan Chase and Bank of America. Neither one of these analysts said buy Goldman or Wells Fargo. Am I making myself clear? If you want to follow the herd read the Wall Street Journal and listen to analysts who follow large cap banks and continue to play the momentum game with your investment decisions. Or you can keep reading and become more expert yourself.*
Now for the PPI. Bernanke should be very very concerned, as should we all, about the level of unexpected drop in the PPI. This index is used to gauge the prices producers earn for their goods available for sale. And what it suggests is huge price slashes to generate sales across the board. I like to call price slashes at the retail level forced devaluation of inventory. And we are all left to wonder, have the federal stimulus packages already begun to hint at the future negative effects of massive currency printing? We all live in a global economy, but it is clear that US Business and the US consumer remain the targeted buyers of products made in other countries. So massive inflation (or reduced value) of the US dollar forces other nations who sell to the US to ultimately devalue their own currency simply to make sales to the US. Did the reduced PPI hint at that after effect? Doubtful yet, but it must be a great concern to Bernanke. Deflation has a nasty habit of making everything less valuable and making workers and savers less motivated.
Initially when a government prints massive amounts of money, economists fear inflation. That's an easy concept to get, there is more money out there representing the Full Faith and Credit of the US Government. So if you assume, like most do in this analysis, that the Full Faith and Credit of the US Government is based upon its ability to increase its revenues through tax collections on an domestic economy that is growing slowly, and, there are more dollars now than there were 3 month ago, each dollar is worth a bit less as a representation of the Full Faith and Credit of the US Government. Which means sellers of goods need to raise their prices to maintain the same relative profitability. That's inflation. And that's step one in a long process of global currency devaluation (which I'll discuss in more detail another day).
*in fairness to Mayo and Bove, they rely on discussions and review of historic performance data provided them, in large part, by executives of the same banks they cover. Making their foundation of information modest at best.
Build Value Every Day
Brad van Siclen
Talk of the day surrounds Goldman Sachs and the PPI. Goldman has clearly hired excellent PR representatives to manage its new found national recognition as being the smartest, best commercial and investment bank the world has ever seen. Goldman now calls its need to pay back TARP funds a "Duty". Goldman like other stable commercial banks has enjoyed the same no-cost-of-capital advantages that Wells Fargo recently dined on. It must be great to have fired ten's of thousand's of employees, reducing the largest portion of its variable costs, and then have the Government hand you essentially no cost money from which to access the capital markets on a proprietary trading basis. (If you note only a hint of sarcasm, you are not reading my posts daily.) This is akin to a farmer not having to pay for seeds, fertilizer or feed, and then selling everything for pure profit minus the value of his own sweat labor - all in 90 days..amazing.
Does anyone know where Goldman's profits came from this quarter? Trading profits. During the first quarter, markets were up 25% across the board. Goldman took its share of the TARP money and money at 0.25% interest on federal interbank loans and invested it in the stock markets. Bang, $1.9 Billion in profits. Profits that will ultimately go to its remaining executives pockets in salary and bonuses. They are raising funds now by selling equity to repay the TARP loans. Then they ride their commercial bank designation and low, low cost of capital all the way to the Bank. Isn't US Government Led Capitalism great?
At least Wells Fargo made their surprise profits from fees generated in refinancings of business and home loans, and in capturing the increased spread from the same $0.25 interbank rate. That TARP and Federal Reserve money at least trickled down to you and me.
But I must ask readers of yesterday's posting...where were the banking experts on Goldman Sachs? The "experts" again did not do their homework and instead took the easy way out by following the herd all the way to a significant under estimate of Goldman's 1st quarter profits. Banking analysts are beginning to remind me of tech analysts of the late '90s. Except being banking analysts and more conservative by nature, they wildly underestimate bank operational performance. Worse it would appear they follow the same pack leaders that missed the banking stock crater of 2008. Just last week (4/7) Mike Mayo, esteemed banking analytical expert, who you may recall launched coverage on the banking sector with extraordinary bearishness sending the banking industry stocks into a tailspin. This was followed by Richard Bove, another "great" banking sector analyst who answered Mayo with an "agreed" except for Citibank, JP Morgan Chase and Bank of America. Neither one of these analysts said buy Goldman or Wells Fargo. Am I making myself clear? If you want to follow the herd read the Wall Street Journal and listen to analysts who follow large cap banks and continue to play the momentum game with your investment decisions. Or you can keep reading and become more expert yourself.*
Now for the PPI. Bernanke should be very very concerned, as should we all, about the level of unexpected drop in the PPI. This index is used to gauge the prices producers earn for their goods available for sale. And what it suggests is huge price slashes to generate sales across the board. I like to call price slashes at the retail level forced devaluation of inventory. And we are all left to wonder, have the federal stimulus packages already begun to hint at the future negative effects of massive currency printing? We all live in a global economy, but it is clear that US Business and the US consumer remain the targeted buyers of products made in other countries. So massive inflation (or reduced value) of the US dollar forces other nations who sell to the US to ultimately devalue their own currency simply to make sales to the US. Did the reduced PPI hint at that after effect? Doubtful yet, but it must be a great concern to Bernanke. Deflation has a nasty habit of making everything less valuable and making workers and savers less motivated.
Initially when a government prints massive amounts of money, economists fear inflation. That's an easy concept to get, there is more money out there representing the Full Faith and Credit of the US Government. So if you assume, like most do in this analysis, that the Full Faith and Credit of the US Government is based upon its ability to increase its revenues through tax collections on an domestic economy that is growing slowly, and, there are more dollars now than there were 3 month ago, each dollar is worth a bit less as a representation of the Full Faith and Credit of the US Government. Which means sellers of goods need to raise their prices to maintain the same relative profitability. That's inflation. And that's step one in a long process of global currency devaluation (which I'll discuss in more detail another day).
*in fairness to Mayo and Bove, they rely on discussions and review of historic performance data provided them, in large part, by executives of the same banks they cover. Making their foundation of information modest at best.
Build Value Every Day
Brad van Siclen
What to Expect this Week - 4 / 13 / 2009
The business world remains in flux. Having read many of the financial sections this weekend and listening to the financial networks and radio hosts this morning no one can agree on the path for the US economy for the next 3 months. Will it worsen, plateau, improve? I heard all three this morning.
One thing is for certain, volatility will remain in the medium to high range because we have extremely liquid markets and large amounts of uncertainty. Our best defense to this volatility remains large cap, industry leaders that are purchased at a relative value discount to their overpriced peers. And do not forget a 15% - 20% stop loss down side protection which moves up when your investment moves up. Sure your broker may complain, but its your money, right?
And when he's done complaining, ask where he or she is invested personally. Then watch those positions / issues carefully. It will give you some real insight into their value to you. You need to determine whether your broker is good at managing their firm's infrastructure (trade disputes, executions, clearing), research selection (discussing with you new ideas they believe in as well as new ideas they do not), and actual investment selections that match up to your investment profile. Anyone of these broker profiles is good enough. The key is knowing which one you are working with and remember the vast majority react to momentum in the markets and their tone on a specific day will correlate strongly to the Dow Jones Index daily trend.
This week should be more volatile yet again. We have a slew of earnings to be announced in this market combined with a overly cautious regulatory and reporting environment. We will see huge misses (because a small miss and a large miss is the same in a bear market), and smart public company executives who know they will miss their projected earnings or show a loss will use this opportunity to clean house. That is they will write down and expense everything they can from their balance sheet. These write downs will flow through the income statement and push earnings down further. The result for earnings misses is that we will hear 2 numbers from many reporting companies that miss their projected earnings, one will be earnings from operations, the other will be earnings from operations and one time charges.
The second type of earnings announcement we will hear is beating estimates by a large margin. This will be due to frightened financial and research analysts who would rather underestimate company earnings than due real research and economic application in the industry they are being paid to be "expert" in. I ask anyone with half a brain who paid attention to last week's huge beat of earnings expectations by Wells Fargo how this can ever happen? How is it that banking analysts can miss by that much? Does it not occur to them that Wells Fargo wrote off much of its bad debts already, reduced its variable costs dramatically (wages primarily), and has been operating on a virtual cost free basis (on capital) thanks to the government may actually show a real profit? Being fluent in research and industry speak and writing thick reports in support and poorly researched and analyzed information does not make anyone a good analyst.
Too many research analysts are making a living discounting the financial information provided them by self serving CEO's and CFO's of public companies. And this should be your perspective when surprises up or down on earnings occur.
Readers, corporate performance and results should not trend upward like a 20 degree angle. They should move about that trend line at least, sometimes higher, sometimes lower. Its when we see 2 deviations from that trend line we know that there is an issue. That's also when we as investors need to do our own investigation for value.
GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $10.76
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $11.33
Build Value Every Day
Brad van Siclen
One thing is for certain, volatility will remain in the medium to high range because we have extremely liquid markets and large amounts of uncertainty. Our best defense to this volatility remains large cap, industry leaders that are purchased at a relative value discount to their overpriced peers. And do not forget a 15% - 20% stop loss down side protection which moves up when your investment moves up. Sure your broker may complain, but its your money, right?
And when he's done complaining, ask where he or she is invested personally. Then watch those positions / issues carefully. It will give you some real insight into their value to you. You need to determine whether your broker is good at managing their firm's infrastructure (trade disputes, executions, clearing), research selection (discussing with you new ideas they believe in as well as new ideas they do not), and actual investment selections that match up to your investment profile. Anyone of these broker profiles is good enough. The key is knowing which one you are working with and remember the vast majority react to momentum in the markets and their tone on a specific day will correlate strongly to the Dow Jones Index daily trend.
This week should be more volatile yet again. We have a slew of earnings to be announced in this market combined with a overly cautious regulatory and reporting environment. We will see huge misses (because a small miss and a large miss is the same in a bear market), and smart public company executives who know they will miss their projected earnings or show a loss will use this opportunity to clean house. That is they will write down and expense everything they can from their balance sheet. These write downs will flow through the income statement and push earnings down further. The result for earnings misses is that we will hear 2 numbers from many reporting companies that miss their projected earnings, one will be earnings from operations, the other will be earnings from operations and one time charges.
The second type of earnings announcement we will hear is beating estimates by a large margin. This will be due to frightened financial and research analysts who would rather underestimate company earnings than due real research and economic application in the industry they are being paid to be "expert" in. I ask anyone with half a brain who paid attention to last week's huge beat of earnings expectations by Wells Fargo how this can ever happen? How is it that banking analysts can miss by that much? Does it not occur to them that Wells Fargo wrote off much of its bad debts already, reduced its variable costs dramatically (wages primarily), and has been operating on a virtual cost free basis (on capital) thanks to the government may actually show a real profit? Being fluent in research and industry speak and writing thick reports in support and poorly researched and analyzed information does not make anyone a good analyst.
Too many research analysts are making a living discounting the financial information provided them by self serving CEO's and CFO's of public companies. And this should be your perspective when surprises up or down on earnings occur.
Readers, corporate performance and results should not trend upward like a 20 degree angle. They should move about that trend line at least, sometimes higher, sometimes lower. Its when we see 2 deviations from that trend line we know that there is an issue. That's also when we as investors need to do our own investigation for value.
GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $10.76
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $11.33
Build Value Every Day
Brad van Siclen
Tuesday, April 7, 2009
Ahead of the Weekend, Something to Consider - 4 / 9 / 2009
1) Not Doing your own Research - Folks it shocks me that day traders and individual investors alike pick up the paper, look at a trend line, log into their on-line account and buy. That's reckless. Stocks are the currency of corporations. They are money, and too many of us throw money at a stock as if we were gambling. And Guess what, the odds are worse than at the casino. Want to reduce your investment down side dramatically? Take an extra 5 minutes and determine the relative value of your potential investment (Price Earnings Ratio, Operating Income multiple) against its industry competitors. When I look at Dell as an investment, I also look at HP. Is Dell by these easy ratio's priced at a lower multiple? An equivalent Multiple? Or at a higher multiple? If you think, as I do, that Dell is a better company than HP, then buy it IF it is trading at a lower multiple. This simple relative value review which can be done on yahoo or google finance will prevent most short swing losses which are your biggest enemy.
2) Momentum Trading - I have watched great traders get burned regularly by momentum plays. The Market for a certain stock goes up quickly and in they go, under the belief that the liquidity is so great that they can get out if they need to. These same expert traders, and many I work with, forget that there are other traders that have already hedged their upside in the very same stock, and therefor they have already locked in their profits and are now just watching the rest of the herd speculate.
3) Not Staying Disciplined - Here's what I mean. Each one of us has our own investment model / reasons. Write it / them down. Stick it to your computer screen. Each time you make a trade or investment, look at your model before you click "buy". Think about how many times you have hurt yourself by playing outside that model.
4) Believing that a Quick Investment Return Validates Your Expertise - Guess what, you are not an expert. Not even the so called experts are experts. See the Market recently? Quick Investment returns are luck people. They were made by your decision to speculate on an issue before some other Speculator bought those shares from you. That's called the Greater Fool Theory. If you think it something else, you will be the Greater Fool next time.
5) Blindly Following Your Broker - I know you have heard this one before, but having run 400 Broker's myself during the late '90s and through 2006 - I can tell you that Brokers, Investment Managers and Advisers, have no better information than you do. In fact their information is almost entirely speculative and momentum driven. Please do not agree to a trade without being in front of your computer screen so you may at least follow the steps laid out in 1) above. And by no means believe that the research analyst suggesting the trade to your broker has done this either.
Remember, you can't grow your portfolio unless you protect the gains or principal you brought to the table. Disciplined investing by your own definition with a few helpful downside protectors is really the best method to winning in the stock market.
Build Value Every Day.
Brad van Siclen
2) Momentum Trading - I have watched great traders get burned regularly by momentum plays. The Market for a certain stock goes up quickly and in they go, under the belief that the liquidity is so great that they can get out if they need to. These same expert traders, and many I work with, forget that there are other traders that have already hedged their upside in the very same stock, and therefor they have already locked in their profits and are now just watching the rest of the herd speculate.
3) Not Staying Disciplined - Here's what I mean. Each one of us has our own investment model / reasons. Write it / them down. Stick it to your computer screen. Each time you make a trade or investment, look at your model before you click "buy". Think about how many times you have hurt yourself by playing outside that model.
4) Believing that a Quick Investment Return Validates Your Expertise - Guess what, you are not an expert. Not even the so called experts are experts. See the Market recently? Quick Investment returns are luck people. They were made by your decision to speculate on an issue before some other Speculator bought those shares from you. That's called the Greater Fool Theory. If you think it something else, you will be the Greater Fool next time.
5) Blindly Following Your Broker - I know you have heard this one before, but having run 400 Broker's myself during the late '90s and through 2006 - I can tell you that Brokers, Investment Managers and Advisers, have no better information than you do. In fact their information is almost entirely speculative and momentum driven. Please do not agree to a trade without being in front of your computer screen so you may at least follow the steps laid out in 1) above. And by no means believe that the research analyst suggesting the trade to your broker has done this either.
Remember, you can't grow your portfolio unless you protect the gains or principal you brought to the table. Disciplined investing by your own definition with a few helpful downside protectors is really the best method to winning in the stock market.
Build Value Every Day.
Brad van Siclen
Dow Jones Neck Snapping - 4 / 7 / 2009
Daily Market watchers beware. Do not get caught by the talking heads providing clever prose like "Bear Market Rally", "Value Shopping", "Lack of Bull Market Conviction", "by historical measures, standards", "Backing and Filling". These folks are not expert in the market because they have yet to recognize that the Dow Jones Index is ruled by day traders. And day traders trade the index against news announcements. Today for example, Alcoa announced bad earnings. This was used as the rational for the Dow Jones futures being down. Bad earnings in this market are a surprise? Definitely not.
So ask yourself why the markets are moving lower. Its the emotional response by traders who are Bearish and sell the index into bad news. They are not selling Alcoa, they are selling the index. Volatility exists in an uncertain market. But volatility is amplified by index day traders who have more interest in liquidity and volatility and virtually no interest in individual companies. There are no downside earnings surprises during a recession. There are only upside earnings surprises in this market.
My latest "expert" bashing surrounds the amazing banking analysts who have begun releasing (finally) downgrades in bank stocks. WOW, brilliant. It just shocks me that after 6 months of the greatest financial crisis of the last 50 years analysts are still comming to the table with bank down grades or initiating coverage with a "sell" or "underperform". Where people is the value here? And what should we be doing ourselves.
First, enjoy the entertainment. Second, seek the best quality large caps trading at a discount to their peers on the simple P/E standard. Yesterday began my new value based portfolio with GE at $10.60, and Dell Computer at $10.00. GE has a 20% downside stop loss given its inclusion in the Dow Jones Index. Dell has a downside stop loss of 15%. I expect these companies operations and profitability to perform modestly better than their publicly listed competition.
So unfortunately we can not use equity indexes, the Dow, the S & P, NASDAQ as anything more than entertainment purposes right now. When the market is up 100 points, "experts" and the media make statements like "all the bad information, and bad earnings have been built into the current market levels". When the market is down 100 points, suddenly bad banking sector information is a reason for the slide of the market. But in truth none of this information is new and it is all, again, simply an excuse to sell or buy the indexes.
Pick shares in companies with proven value that have been unfairly beaten down over the last few months. They will have the best principal downside protection built into their long term investor base, and they will have be the first to move fundamentally when fund managers think its safe to put money back into the market.
GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $11.19
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $10.33
Build Value Every Day
Brad van Siclen
So ask yourself why the markets are moving lower. Its the emotional response by traders who are Bearish and sell the index into bad news. They are not selling Alcoa, they are selling the index. Volatility exists in an uncertain market. But volatility is amplified by index day traders who have more interest in liquidity and volatility and virtually no interest in individual companies. There are no downside earnings surprises during a recession. There are only upside earnings surprises in this market.
My latest "expert" bashing surrounds the amazing banking analysts who have begun releasing (finally) downgrades in bank stocks. WOW, brilliant. It just shocks me that after 6 months of the greatest financial crisis of the last 50 years analysts are still comming to the table with bank down grades or initiating coverage with a "sell" or "underperform". Where people is the value here? And what should we be doing ourselves.
First, enjoy the entertainment. Second, seek the best quality large caps trading at a discount to their peers on the simple P/E standard. Yesterday began my new value based portfolio with GE at $10.60, and Dell Computer at $10.00. GE has a 20% downside stop loss given its inclusion in the Dow Jones Index. Dell has a downside stop loss of 15%. I expect these companies operations and profitability to perform modestly better than their publicly listed competition.
So unfortunately we can not use equity indexes, the Dow, the S & P, NASDAQ as anything more than entertainment purposes right now. When the market is up 100 points, "experts" and the media make statements like "all the bad information, and bad earnings have been built into the current market levels". When the market is down 100 points, suddenly bad banking sector information is a reason for the slide of the market. But in truth none of this information is new and it is all, again, simply an excuse to sell or buy the indexes.
Pick shares in companies with proven value that have been unfairly beaten down over the last few months. They will have the best principal downside protection built into their long term investor base, and they will have be the first to move fundamentally when fund managers think its safe to put money back into the market.
GE - buy in 4/6/2009 @ $10.60, S/L $7.95, ClP $11.19
DELL - buy in 4/6/2009 @ $10.00, S/L $8.50, ClP $10.33
Build Value Every Day
Brad van Siclen
Monday, April 6, 2009
The Capital Markets Offer New Value - 4 / 6 / 2009
Having poured over financial journals and newspapers this weekend, it would seem we have reached the Rubicon. This is one of the rare instances in which we can truly say the Dow Jones index has found its fair value. New information has turned to a slow drip from the torrential gushers of financial information in January, February, and March. The upside last week was really the balance of remaining short covers and some new found optimism from the G20, and this weekend analysts had either nothing new to say or nothing to say at all. So this, value minded folks, is the time to go hunting. It's the time to begin seeking out great, large cap value and begin rebuilding that portfolio.
Please remember that there will be ups and downs as non-value minded speculators fuel daily momentum each way. There are very important disciplines to remember in value investing. Value looks out a year at least. Value sets its price targets the day of purchase. And value puts a minimum 15% downside stop loss into its principal purchases.
I won't pretend to have the ability to pick the best performers this year, but I will discuss the why's and hows of the companies purchased, always keep an eye on principal investments made, current pricing, and also manage stop loss barriers so those that chose to follow have a decent road map and understanding of my current thinking on each of the positions discussed today and in the future.
Also please recognize that in the spirit of keeping this daily piece limited to a 2 minute read, I won't include tedious competitive industry analysis, financial statement reviews, discussions of management, foolhardy projections, and misguided valuation models resulting in a 10 page research report for each. If you want to know why, please re-read past postings paying close attention to statements on research analysts and wall street's so called experts.
I'll begin with 2.
1. General Electric - "GE", NYSE, current price: $10.60 - This Company's stock price is down 60% in the last 12 months. Why? First, they are one of the most fully valued companies at any time. More analysts cover GE both in the US and in the World than cover virtually any other company. GE is considered the bell weather stock for the US economy. Fear of GE's GE Capital division's liabilities and massive redemptions in mutual and equity funds were also responsible for the price collapse. So now GE sits with a 6.3x trailing PE multiple. In recessions GE, like IBM, is able to sustain its operating margins and grow its sales. They can do this while their competitors fall victim to expenses assumed with overly optimistic fixed costs. Most of these costs were added by competitors in 2007. I expect GE to show modest revenue growth, but significant earnings growth (vs. Research "experts" predictions) and have a price target of $15.50 (that's 50% growth this year). My stop loss is a bit more than 15% given its Dow Jones index related volatility, and in at $7.95.
2. Dell Computer - "DELL", NASDAQ, current price: $10.00 - This company has the same industry position advantages as GE. They are the Walmart of the computer industry in the following way - their inventory management and supply chain management combined with their assembly costs - provide them with decisive margin control advantages its competitors do not yet have. Add to this their customer loyalty and quick service and you have a perennial winner in a commoditized segment. Currently trading at 8.0x earnings, this company's stock was beaten down by fund redemptions as well, and while I do not expect to see $30.00 any time soon, i do expect limited downside risk at $8.50 (15%) and have a price target in at $14.00 - that's 40% this year.
There you have it, 2 really great value investments beaten down unfairly by market forces.
Build Value Everyday
Brad van Siclen
Please remember that there will be ups and downs as non-value minded speculators fuel daily momentum each way. There are very important disciplines to remember in value investing. Value looks out a year at least. Value sets its price targets the day of purchase. And value puts a minimum 15% downside stop loss into its principal purchases.
I won't pretend to have the ability to pick the best performers this year, but I will discuss the why's and hows of the companies purchased, always keep an eye on principal investments made, current pricing, and also manage stop loss barriers so those that chose to follow have a decent road map and understanding of my current thinking on each of the positions discussed today and in the future.
Also please recognize that in the spirit of keeping this daily piece limited to a 2 minute read, I won't include tedious competitive industry analysis, financial statement reviews, discussions of management, foolhardy projections, and misguided valuation models resulting in a 10 page research report for each. If you want to know why, please re-read past postings paying close attention to statements on research analysts and wall street's so called experts.
I'll begin with 2.
1. General Electric - "GE", NYSE, current price: $10.60 - This Company's stock price is down 60% in the last 12 months. Why? First, they are one of the most fully valued companies at any time. More analysts cover GE both in the US and in the World than cover virtually any other company. GE is considered the bell weather stock for the US economy. Fear of GE's GE Capital division's liabilities and massive redemptions in mutual and equity funds were also responsible for the price collapse. So now GE sits with a 6.3x trailing PE multiple. In recessions GE, like IBM, is able to sustain its operating margins and grow its sales. They can do this while their competitors fall victim to expenses assumed with overly optimistic fixed costs. Most of these costs were added by competitors in 2007. I expect GE to show modest revenue growth, but significant earnings growth (vs. Research "experts" predictions) and have a price target of $15.50 (that's 50% growth this year). My stop loss is a bit more than 15% given its Dow Jones index related volatility, and in at $7.95.
2. Dell Computer - "DELL", NASDAQ, current price: $10.00 - This company has the same industry position advantages as GE. They are the Walmart of the computer industry in the following way - their inventory management and supply chain management combined with their assembly costs - provide them with decisive margin control advantages its competitors do not yet have. Add to this their customer loyalty and quick service and you have a perennial winner in a commoditized segment. Currently trading at 8.0x earnings, this company's stock was beaten down by fund redemptions as well, and while I do not expect to see $30.00 any time soon, i do expect limited downside risk at $8.50 (15%) and have a price target in at $14.00 - that's 40% this year.
There you have it, 2 really great value investments beaten down unfairly by market forces.
Build Value Everyday
Brad van Siclen
Friday, April 3, 2009
Lets Talk Executive Pay - 4 / 3 / 2009
How do you put an end to this crazy argument about executive pay? Here's a novel idea, align executive pay with the owners of the businesses they work for. And remeber the owners are shareholders. Ever since I have been in the Merger and Acquisition and restructuring business, I have found the executive pay issue to be one of the largest sticking points. And now, as we see more and more outrage on the issue of bonuses when shareholders have lost 20%, 50%, even 80% of their value the knee jerk reaction to executive pay is understandable, but completely misguided and counter productive.
I am the first to speak out against executive pay. But I speak out against executive pay, that is disproportionate to the operational performance of the businesss. And 10 million dollar share issuances in any market condition is silly. Or is it? The truth is, there are healthy, aligned situations in which Executives should receive these types of bonuses.
But let's take a step back. First, let's stop treating shareholders as captive, no rights, holders of paper. Shareholders can sell their shares at any time. They are not beholden to any investment in any public company. So any argument that suggests that shareholders should be outraged by big executive pay when their stock has plummeted is really very foolish. Why did they hold the shares? So let's stop with the "How can CEO's take huge pay when shareholders have lost so much?"
Second, there is a total disconnect that has occured between shareholders and their perceived rights. And to understand why, we need to look back to the Internet Bubble. These were the times when companies could not pay cash bonuses because they were not profitable. So the thinking was, give them their bonus equivalent in shares. Sounds neat and tidy. One would think that if Executives were earning the bulk of their compensation in stock, then their decisions in operating their corporations would lean heavily toward increasing the value of the stock and ultimately that is what the shareholders want.
Here's what we found. When Executive officers are receiving the bulk of their compensation in common shares of their company, they manage their revenues, profits, balance sheet and cash to sustain and propel their share price based upon Wall Street's valuation methods for the industry they compete in.
This is entirely backwards and over the course of any 3 year period is counter productive to the value of shares. One need only look at stocks of 3 great or once great companies for the proof in this. In these examples, Management became so concerned with the growth of stock prices that they risked their company's economic futures to satisfy shareholders needs (and their needs) in the short term. Further to this, does it surprise anyone that theses CEO's considered the greatest by their shareholders over the last 10 years retired at the height or near height of their share price values - AIG's Maurice Greenburg, GE's Jack Welch, Citibank's Sandy Weil - each man was a master at operating their business for maximum shareholder value, each was a huge shareholder, and each knew when times were changing..and left.
So here's the solution. Pay the CEO's bonuses through their portion of company profits, or dividends. Pay dividends quarterly, annually, semi-annually. And pay all the other shareholders too. This simple process aligns shareholders with executives and places each shareholder on an equal footing with management. This dividend policy needs to have a permenant distribution ration. Let's use 50% of earnings for my example, but it really can be any percentage.
Now let's apply that to GE in 2000. In 2000, GE earned 10.7 billion dollars. 50% of that number is 5.35 Billion. There were 3.2 billion shares outstanding. Each shareholder would therefor receive $1.67 in annual dividends per share. If Jack Welch was holding 10,000,000 shares ( less than 0.5 % of the total outstanding) he earns a bonus of 16.7 million in cash. That comes on top of his salary. And, If you held 100 shares, you as a shareholder could take the cash ($167.00) or buy more shares. Either way you have the decision that an owner of a business would have, do I reinvest in the business? Or do I take the cash due me as a an owner of the business.
This is alignment.
There is another point which I will touch on here only, and pursue in a later posting. When an executive team focuses on increasing earnings through proper expansion and the pursuit of operational efficiencies then the value of the business goes up. But this does not mean that the stock market will respond to the increased value created by this team. Eventually share prices will align with earnings, but that does not mean that increased profits means increased share price, and executives should not be held responsible for both...and wouldn't be if they paid out a real percentage of the earnings the business created to its owners, the shareholders.
Build Value Everyday
Brad van Siclen
I am the first to speak out against executive pay. But I speak out against executive pay, that is disproportionate to the operational performance of the businesss. And 10 million dollar share issuances in any market condition is silly. Or is it? The truth is, there are healthy, aligned situations in which Executives should receive these types of bonuses.
But let's take a step back. First, let's stop treating shareholders as captive, no rights, holders of paper. Shareholders can sell their shares at any time. They are not beholden to any investment in any public company. So any argument that suggests that shareholders should be outraged by big executive pay when their stock has plummeted is really very foolish. Why did they hold the shares? So let's stop with the "How can CEO's take huge pay when shareholders have lost so much?"
Second, there is a total disconnect that has occured between shareholders and their perceived rights. And to understand why, we need to look back to the Internet Bubble. These were the times when companies could not pay cash bonuses because they were not profitable. So the thinking was, give them their bonus equivalent in shares. Sounds neat and tidy. One would think that if Executives were earning the bulk of their compensation in stock, then their decisions in operating their corporations would lean heavily toward increasing the value of the stock and ultimately that is what the shareholders want.
Here's what we found. When Executive officers are receiving the bulk of their compensation in common shares of their company, they manage their revenues, profits, balance sheet and cash to sustain and propel their share price based upon Wall Street's valuation methods for the industry they compete in.
This is entirely backwards and over the course of any 3 year period is counter productive to the value of shares. One need only look at stocks of 3 great or once great companies for the proof in this. In these examples, Management became so concerned with the growth of stock prices that they risked their company's economic futures to satisfy shareholders needs (and their needs) in the short term. Further to this, does it surprise anyone that theses CEO's considered the greatest by their shareholders over the last 10 years retired at the height or near height of their share price values - AIG's Maurice Greenburg, GE's Jack Welch, Citibank's Sandy Weil - each man was a master at operating their business for maximum shareholder value, each was a huge shareholder, and each knew when times were changing..and left.
So here's the solution. Pay the CEO's bonuses through their portion of company profits, or dividends. Pay dividends quarterly, annually, semi-annually. And pay all the other shareholders too. This simple process aligns shareholders with executives and places each shareholder on an equal footing with management. This dividend policy needs to have a permenant distribution ration. Let's use 50% of earnings for my example, but it really can be any percentage.
Now let's apply that to GE in 2000. In 2000, GE earned 10.7 billion dollars. 50% of that number is 5.35 Billion. There were 3.2 billion shares outstanding. Each shareholder would therefor receive $1.67 in annual dividends per share. If Jack Welch was holding 10,000,000 shares ( less than 0.5 % of the total outstanding) he earns a bonus of 16.7 million in cash. That comes on top of his salary. And, If you held 100 shares, you as a shareholder could take the cash ($167.00) or buy more shares. Either way you have the decision that an owner of a business would have, do I reinvest in the business? Or do I take the cash due me as a an owner of the business.
This is alignment.
There is another point which I will touch on here only, and pursue in a later posting. When an executive team focuses on increasing earnings through proper expansion and the pursuit of operational efficiencies then the value of the business goes up. But this does not mean that the stock market will respond to the increased value created by this team. Eventually share prices will align with earnings, but that does not mean that increased profits means increased share price, and executives should not be held responsible for both...and wouldn't be if they paid out a real percentage of the earnings the business created to its owners, the shareholders.
Build Value Everyday
Brad van Siclen
Thursday, April 2, 2009
The Dow Jones Speaks - 4 / 2 / 2009
Feels good for a change watching the Dow go higher on bad news, doesn't it? One week ago we were still uncertain about what the Dow Jones Index moves were saying. This week though it has become clear. The speculators, the day traders, the risk takers believe a bottom has been made. They believe the total down side of the US economy for the next six months has been priced into the market. That US corporate and asset values won't go down any further, and that the risk of a deeper economic slide during the next six months is reducing. Reducing to the point that they want to begin speculating on consecutive upside days.
The recent week's Dow Jones gains are strictly sentiment moves though. These are days when any good news from the government on regulation, economic data or economic stimulus is released and regardless of its potential near term impact, it completely over runs any bad news released from corporations or the government. But sentiment moves are what market reversals are made of and over time they create momentum, renewed investor interest in the markets, and index moves to the upside.
At our economy's ground level, job losses keep advancing on a weekly basis. And while a few cheeky analysts suggest that the rate of decline is "declining", until we see 4 weeks of reduced job losses we can not be certain we have hit bottom. Job losses or gains are the only indicator of economic direction that we have been able to trust.
But for investors and investments, now is the time to get back into your favorite equity issues. Seek out the big names, the companies we know, who the speculators have beaten down equal to or below their industry competitors. Most have reasonable P / E multiples now, use that indicator alone as a relative value gauge. In this environment they will be the issues that protect your principal investment (your downside) while they continue to gain market share over their less well capitalized competition. These are easy days for value investors. Take advantage of your perspective.
Build Value Every Day.
Brad van Siclen
The recent week's Dow Jones gains are strictly sentiment moves though. These are days when any good news from the government on regulation, economic data or economic stimulus is released and regardless of its potential near term impact, it completely over runs any bad news released from corporations or the government. But sentiment moves are what market reversals are made of and over time they create momentum, renewed investor interest in the markets, and index moves to the upside.
At our economy's ground level, job losses keep advancing on a weekly basis. And while a few cheeky analysts suggest that the rate of decline is "declining", until we see 4 weeks of reduced job losses we can not be certain we have hit bottom. Job losses or gains are the only indicator of economic direction that we have been able to trust.
But for investors and investments, now is the time to get back into your favorite equity issues. Seek out the big names, the companies we know, who the speculators have beaten down equal to or below their industry competitors. Most have reasonable P / E multiples now, use that indicator alone as a relative value gauge. In this environment they will be the issues that protect your principal investment (your downside) while they continue to gain market share over their less well capitalized competition. These are easy days for value investors. Take advantage of your perspective.
Build Value Every Day.
Brad van Siclen
Wednesday, April 1, 2009
G20 - More Wasted Value? 4 / 1 / 2009
The all inclusive G20 are meeting in London today. Protesters will flock to the London Streets. There are many angry out of work Brits, so I expect the numbers of protesters to exceed estimates by 2x. President Obama and his 500 man entourage, will spend a few days trying to explain why the US was not the sole creator of today's financial mess. And he will be wrong.
When you are the worlds largest economy and by a multiple its largest supplier of financial "products" and the world economy tanks with systemic causes and effects originating from your economy, its your fault. Period.
Let's not spend anymore time discussing who or what groups are responsible (Greenspan, Clinton, Bush II, Greenspan, Wall Street and Money Center Bank CEO's and CFO's, Greenspan, China). Let's focus on this G20 meeting. Obama needs to spend his time reviewing the policies Fed and Treasury wonks are pinning together as solutions to this problem. Because 1 week from now no one is going to care that Obama has given an additional 4 "We are doing everything we are able to" speeches, or that the G20 members have each complained about the US and the international banking system.
But everyone will still care about where the economy is, and that we still do not have a handle on key corrective issues. Like how much longer are we going to keep non-productive white and blue collar workers in jobs with tax payer money? When are lazy fund and pension managers whose failed BB rated corporate debt bets on financial and manufacturing institutions going to write down their asset value? When will the clean out occur?
The longer managers of our economy put off the inevitable, the longer they seek to prolong the full write down of the US Economy, and thereby the World's collective economy, the longer they hope that interim fixes (Trillion dollar bailouts are not tiny I know) will limit the economic slide long enough so that stimulus packages can turn the economy around, the longer it will take for the markets to fix themselves and move forward and grow again.
See the managers of the US Economy (Money Center Banks, Federal Reserve, Treasury Department, Investment Banking Heads, the Executive Branch) have known for years what is coming. The US economy can only grow by growing the World Economies it sells its services to. Grow your business by growing the customer base, right? Basic economics but at a macro level. The problem is that you lose your position of dominance over time. You may still be the biggest and the best, but you are less dominant. When your manufacturing base is lost, and you are not building value but advising on how to leverage value, your position as world economic dominator is coming to an end.
The United States economy managers need to allow the forces of the world markets to reset the US value, much like they reset the Japanese value in the '90's (don't forget, Japan was "THE" Economy in the '80s), and they need to do it quickly. The current process allows non-value producers to cling to their jobs much longer then they should. Let our wages sink to a point that it makes sense for us to recapture and rebuild our manufacturing base. We make the best products (other than cars) it just costs too much right now to make them.
So here is the solution, devalue the dollar - force everyone to take their lumps. The dollar devalued will have a huge ripple effect through out the world's economy. It would cause political and social unrest in much of the third world, and damage most of the G20 economies to some extent. But it will force all currencies to devalue over time so they may access our markets. And given the efficiencies of the world markets, the recovery will be much faster than the 10 years of the Great Depression. Maybe 2 years.
Make no mistake, this day is coming, but let's hope its on Obama's watch, and not on the next President's watch 4 years from now. If the US fails over the next 4 years, the world's economy may take 50 years to recover to 2006 levels. Obama and the US economy managers can not fail to lead the US through the necessary changes. If this President wants to bring value to the G20 summit, he needs to tell the World Economy just how bad things are. Let them react, let the markets reset and then in 4 weeks when the dust settles present bold solutions to fix the problems managers of the US economy created over the last 15 years. Do not delay the process any longer or the value of the US economy will continue to erode.
Build Value Every Day
Brad van Siclen
P.S. Here is the list of the G20 members. Make your own conclusions -
* Argentina
* Australia
* Brazil
* Canada
* China
* France
* Germany
* India
* Indonesia
* Italy
* Japan
* Mexico
* Russia
* Saudi Arabia
* South Africa
* South Korea
* Turkey
* United Kingdom
* United States
* The Head of the European Union
When you are the worlds largest economy and by a multiple its largest supplier of financial "products" and the world economy tanks with systemic causes and effects originating from your economy, its your fault. Period.
Let's not spend anymore time discussing who or what groups are responsible (Greenspan, Clinton, Bush II, Greenspan, Wall Street and Money Center Bank CEO's and CFO's, Greenspan, China). Let's focus on this G20 meeting. Obama needs to spend his time reviewing the policies Fed and Treasury wonks are pinning together as solutions to this problem. Because 1 week from now no one is going to care that Obama has given an additional 4 "We are doing everything we are able to" speeches, or that the G20 members have each complained about the US and the international banking system.
But everyone will still care about where the economy is, and that we still do not have a handle on key corrective issues. Like how much longer are we going to keep non-productive white and blue collar workers in jobs with tax payer money? When are lazy fund and pension managers whose failed BB rated corporate debt bets on financial and manufacturing institutions going to write down their asset value? When will the clean out occur?
The longer managers of our economy put off the inevitable, the longer they seek to prolong the full write down of the US Economy, and thereby the World's collective economy, the longer they hope that interim fixes (Trillion dollar bailouts are not tiny I know) will limit the economic slide long enough so that stimulus packages can turn the economy around, the longer it will take for the markets to fix themselves and move forward and grow again.
See the managers of the US Economy (Money Center Banks, Federal Reserve, Treasury Department, Investment Banking Heads, the Executive Branch) have known for years what is coming. The US economy can only grow by growing the World Economies it sells its services to. Grow your business by growing the customer base, right? Basic economics but at a macro level. The problem is that you lose your position of dominance over time. You may still be the biggest and the best, but you are less dominant. When your manufacturing base is lost, and you are not building value but advising on how to leverage value, your position as world economic dominator is coming to an end.
The United States economy managers need to allow the forces of the world markets to reset the US value, much like they reset the Japanese value in the '90's (don't forget, Japan was "THE" Economy in the '80s), and they need to do it quickly. The current process allows non-value producers to cling to their jobs much longer then they should. Let our wages sink to a point that it makes sense for us to recapture and rebuild our manufacturing base. We make the best products (other than cars) it just costs too much right now to make them.
So here is the solution, devalue the dollar - force everyone to take their lumps. The dollar devalued will have a huge ripple effect through out the world's economy. It would cause political and social unrest in much of the third world, and damage most of the G20 economies to some extent. But it will force all currencies to devalue over time so they may access our markets. And given the efficiencies of the world markets, the recovery will be much faster than the 10 years of the Great Depression. Maybe 2 years.
Make no mistake, this day is coming, but let's hope its on Obama's watch, and not on the next President's watch 4 years from now. If the US fails over the next 4 years, the world's economy may take 50 years to recover to 2006 levels. Obama and the US economy managers can not fail to lead the US through the necessary changes. If this President wants to bring value to the G20 summit, he needs to tell the World Economy just how bad things are. Let them react, let the markets reset and then in 4 weeks when the dust settles present bold solutions to fix the problems managers of the US economy created over the last 15 years. Do not delay the process any longer or the value of the US economy will continue to erode.
Build Value Every Day
Brad van Siclen
P.S. Here is the list of the G20 members. Make your own conclusions -
* Argentina
* Australia
* Brazil
* Canada
* China
* France
* Germany
* India
* Indonesia
* Italy
* Japan
* Mexico
* Russia
* Saudi Arabia
* South Africa
* South Korea
* Turkey
* United Kingdom
* United States
* The Head of the European Union
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