I know there is no conflict of interest in the following Interest List idea because my employer told me that he would not invest in it if I offered him "10 times leverage and completely insured downside." That's a deep value idea if I have ever heard one!
Spartan Stores Inc. (SPTN) stock has been pummeled due to the threat of supercenter (think Wal-Mart and Target) competition and because its retail stores are primarily in Michigan. As a result it is trading at 7.4x FY09 earnings and 4.3x EV/EBITDA. I believe there is upside of 25% to the shares. The catalysts include a move to staples from more discretionary retail company names from investors and the demonstration that the Company can work through the economy and supercenter expansions, like it has done in the past.
SPTN was the product of a co-operative that did a reverse merger in order to go public in 2000. Upon going public a number of the co-op members sold shares, most significantly one that was annoyed SPTN was going into retail and sold its whole 750k shares (when the stock was only trading 20k per day). So, the stock has been troubled from its beginning.
SPTN experienced poor performance after going public due to a CEO whose ideas did not work and did not manage retail for the customers, but for the best deals SPTN got from suppliers. New management had to come in 2003 from the Midwest division of Great Atlantic and Pacific Tea Company. The Chairman today is the CEO from back then. In the first quarter at the Company they went from double digit SSS declines to flat. The Chairman said that two more quarters of SSS retail decline at that time and he could not have saved the Company.
The new management team turned retail into a consumer driven business and a “performance driven corporation”. However, in 2005 Wal-Mart was expanding rapidly in the state of Michigan and brought seven supercenters on (exactly what is happening in the next 12 months). The Company claims this hurts the 4, 5, and 6 local grocers, while the 1, 2, and 3 players end up taking share. SPTN is 1 or 2 in all of its markets, according to the Company. So, there is this perfect storm of investors believing MI is just too auto dependent, the competition from the supercenters and food deflation.
SPTN has managed through the same issues in the past and seem prepared to do it again. 4Q provided +1.2% SSS and the 11th consecutive quarter of retail SSS (Company suggesting +0.3% for this year). Management expects GM% to continue to improve, which means continued benefit from mix at retail. Other pushes for FY09 include implementing efficiency improvements in distribution business, seeking expansion opportunities in adjacent markets, and selling the assets of the remaining Pharm retail operation. Meanwhile, SPTN said the distribution sales SSS is “running flattish”.
In the most recent quarter the distribution business, not retail, accounted for 84% of operating income. As an astute friend in Connecticut pointed out, is Michigan really going to go bankrupt and people stop shopping for food? The government does not seem to be allowing it in California.
In conclusion, for a grocer that has shown decent growth, past ability to manage through competitive cycles, and a trailing twelve months return on capital of almost 14% in a year of a sizeable acquisition and economic downturn, I think SPTN is pretty compelling at today’s valuation. SPTN is the cheapest grocer/distributor on an EV/EBITDA basis in the FactSet screenable universe and has the best Return on Assets of the bunch. If the market sees any move to staples or indication that the Company is dealing with the competition, this will be a solid Long. As such I placing it on the Long Interest List at $12.41/share.
-2outof4
Sunday, May 31, 2009
Tuesday, May 26, 2009
Stock Interest List Update
It looks as though I was beaten to the punch on this idea. Last Friday none other than CNBC's own Mr. Jim Crammer said CKE Restaurants Inc. (ticker: CKR) despite being "worst of breed" has the most upside in an improving market. Unfortunately, I was unable to post this last week ahead of him.
Well, like any true deep value stock, CKR is beaten down for a number of reasons. If the Company is able to see its way through the prior mess it created for itself, there is potential 25% upside on top of the 14% "Crammer gain" seen today.
CKR is a quick serve restaurant (QSR) chain that owns the Hardees and Carl's Jr. brands. The current management team came in 2001 to turnaround the Hardee’s brand, which had been bought from a Canadian Company in 1997 – apparently Hardee’s had been under invested in and was a deteriorating brand. By year end FY09 179 Hardee’s out of 482 company owned restaurants will be left to remodel. Management believes the remodel portion of its turnaround is close to complete and it can now focus on growth at the Hardee’s brand. Furthermore, same store sales (SSS) and average unit volumes (AUV) have been strong at Hardee’s but SSS pressured at Carl’s due to CA exposure. The Company is trying to combat this with aggressive Texas expansion and offering breakfast at Carl’s. (Note: Mr. Crammer did say he believed the decline in CA is turning around.)
CKR believes it can bring Hardee’s operating margin to Carl’s if it increases the AUV, and that management is actively focused on trying to do this. The Company recently held a corporate retreat in Vegas and Hardee’s franchisees were excited about the revitalization and the margins that CKR restaurants offer compared to comps – 30% of the store base is Company owned, which the Company considers a competitive advantage because it is vested in making the restaurant as profitable as possible for the franchisee.
My bottom line is that even despite 61% of Carl’s Jr. restaurants (about 20% of total Company) being located in California, the Company managed a decent comp of (1.3%) YTD as of April 20, 2009, and even in such a disastrous environment CKR has room for both margin and store expansion. CKR looks for 4.9% annual unit growth for the next five years and International franchise expansion is part of the Company's growth strategy - planned to account for 19% of overall unit count by FY14 compared to 10% today. On a low relative valuation to peers, I like the stock to advance a potential 25% from here and I am placing it on the Buy Interest List.
Besides any clear caveats about the consumer and potential risk that the Company needs to offer discounts in the future, etc., I would also point out that one might get a better price for the shares by waiting for the "Crammer exuberance" to die down a bit.
-2outof4
Well, like any true deep value stock, CKR is beaten down for a number of reasons. If the Company is able to see its way through the prior mess it created for itself, there is potential 25% upside on top of the 14% "Crammer gain" seen today.
CKR is a quick serve restaurant (QSR) chain that owns the Hardees and Carl's Jr. brands. The current management team came in 2001 to turnaround the Hardee’s brand, which had been bought from a Canadian Company in 1997 – apparently Hardee’s had been under invested in and was a deteriorating brand. By year end FY09 179 Hardee’s out of 482 company owned restaurants will be left to remodel. Management believes the remodel portion of its turnaround is close to complete and it can now focus on growth at the Hardee’s brand. Furthermore, same store sales (SSS) and average unit volumes (AUV) have been strong at Hardee’s but SSS pressured at Carl’s due to CA exposure. The Company is trying to combat this with aggressive Texas expansion and offering breakfast at Carl’s. (Note: Mr. Crammer did say he believed the decline in CA is turning around.)
CKR believes it can bring Hardee’s operating margin to Carl’s if it increases the AUV, and that management is actively focused on trying to do this. The Company recently held a corporate retreat in Vegas and Hardee’s franchisees were excited about the revitalization and the margins that CKR restaurants offer compared to comps – 30% of the store base is Company owned, which the Company considers a competitive advantage because it is vested in making the restaurant as profitable as possible for the franchisee.
My bottom line is that even despite 61% of Carl’s Jr. restaurants (about 20% of total Company) being located in California, the Company managed a decent comp of (1.3%) YTD as of April 20, 2009, and even in such a disastrous environment CKR has room for both margin and store expansion. CKR looks for 4.9% annual unit growth for the next five years and International franchise expansion is part of the Company's growth strategy - planned to account for 19% of overall unit count by FY14 compared to 10% today. On a low relative valuation to peers, I like the stock to advance a potential 25% from here and I am placing it on the Buy Interest List.
Besides any clear caveats about the consumer and potential risk that the Company needs to offer discounts in the future, etc., I would also point out that one might get a better price for the shares by waiting for the "Crammer exuberance" to die down a bit.
-2outof4
Have I Been Duped?
Before last night I had only seen two of filmmaker Michael Moore's movies, Fahrenheit 9/11 and Sicko. My basic take on each movie was that there was some interesting information, which appealed to my emotions but was obviously pushed through the lens Mr. Moore uses to view the world. I cautiously took in the information and kind of marked it as "to be looked into later".
Was I mad when Fahrenheit 9/11 depicted President Bush continue to read to the school children as word was coming in of the terrorist attacks? Yeah, I was a bit. Was I mad when the same movie depicted the administration in bed with the oil companies. Yeah, I was a little madder. Was I mad when Sicko described the plight of an injured man who had to choose which fingers to get sewn back on because certain fingers would cost him less than others. Yeah, it irked me. Did it annoy me that ex-Pats in Britain raved about the National Health Service (NHS) compared to the US system of health care. Hell yes, I wanted solutions to these problems!
As I said though, I took in the information and wanted to later on decide for myself on its accuracy. Unfortunately, I have never undertaken this effort, and I have not seen enough newsflow since the viewings of those films to soundly confirm or deny Mr. Moore's views.
The aforementioned films are relatively new though. Mr. Moore's first "big" movie was Roger & Me, a movie about GM's CEO Roger B. Smith closing plants in Moore's hometown of Flint Michigan and the resulting demise of that town. The film was made in 1989. Thus, we have 20 years of 20/20 hindsight to judge the film on. So, neither I nor you have to take the appeal to our emotions sitting down. We can view the film and know the outcome and whether Mr. Moore's assertions meant anything.
My question for the 2outof4 audience is what is the point of Roger & Me and are Mr. Moore's points based on any sound logic or just appeals to one's emotions? Is Mr. Moore trying to take advantage of mine and your naivete (which for this movie is far less today)?
If the plot and point of Roger & Me is to show how it sucks when people lose their jobs and how difficult it can be for them and their town of residence, then Roger & Me makes a stirring point. But the thing is that we all know Mr. Moore is trying to make a larger point. He's trying to say that somehow GM owes these people of Flint and the shuttered plants an existence and financial support. The problem is that Mr. Moore never once explains why that is the case or what exactly GM should have done. It is like he made a movie to appeal to people who could not think for themselves and would just cheer on his clear collectivist agenda for the unemployed GM factory workers.
When I saw the abandoned houses in Roger and Me and the people being evicted from their homes was I sad? Of course I was sad. But did I think that somehow GM owed these people or the town of Flint, Michigan anything? No, I certainly did not. It seems Mr. Moore does not believe in hard work or personal development. One of the last clips of the movie shows a Flint-based lobbyist for GM saying that he does not think that one can expect a corporation to give "cradle to the grave" benefits and survive in a system of free enterprise. Moore expertly flashes on the screen that the lobbyist was fired and the office closed in a couple of weeks, and makes the viewer think that the lobbyist would have rethought his comments, if he had known he was going to be fired. Why would he? He clearly believed that no one was owed anything by corporate America and he likely just moved on.
I do not think the proof that the GM/UAW multi generational experiment in collectivism failed can be any clearer than the possibility that once in bankruptcy GM could have drawn as much as $90 billion from the US Government (and still likely fail). http://www.nytimes.com/2009/05/23/business/global/23auto.html?_r=2&hp In other words, your tax dollars supporting the very entity Mr. Moore suggested should just continue employing high cost labor.
Mr. Moore even goes so far as to disprove his viewpoint that these disposed GM workers deserved jobs by showing that the assembly line workers could not hold jobs at the local Flint Taco Bell. The Taco Bell assembly process was too quick for them and they could not work effectively in that "fast paced" environment. Moore somehow insinuates that Taco Bell line work is below these skilled assembly line workers, and this little experiment shows GM is the monster he makes it out to be. I have a lot more respect for a Taco Bell line worker who is doing his or her best to earn his or her money, than a filmmaker who is trying to make a whiny plea that somehow GM should provide jobs for everyone and keep his hometown relevant!
The film is littered with other examples that blast Mr. Moore's assertions that all Flintonians and former GM plant workers are moribund layabouts and just moping around waiting for GM to give them back their jobs. Moore shows postal workers saying that there had been 82,000 address changes processed. Moore wanted the audience to feel sad because Flint was falling apart. Isn't this exactly what is supposed to happen in a free economy? People move to where they can put their skills to use and get paid the most for their production? Homes were abandoned because hardworking people had to find jobs! Boohoo Mr. Moore. So, Flint was the place GM was founded, Moore seems to want the audience to feel angry that Flint is no longer the place where GM prospers and that GM should make amends. Especially 20 years down the road, I think most Americans would say who cares? If Flint could not keep up, that number of address changes tells me that the former Flintites surely adapted (and got out of town).
Roger & Me ends with some clever monologue by Moore to the effect of the Rich get richer and the Poor get poorer. Maybe the poor wouldn't be poor if they could keep up at Taco Bell. This kind of warped sense of entitlement and complete disregard to basic economic principles renders Mr. Moore's "argument" (i.e. his film) completely meaningless. In the end it is just a whiny plea for the viewer to feel sad for his dilapidated hometown.
My fear now is that what I had taken as somewhat factual accounts of events with heavy doses of Mr. Moore's biases in Fahrenheit 9/11 and Sicko, were really just pleas to my emotions based on nothing but his collectivist social agenda. Have I been duped!?!
-2outof4
Was I mad when Fahrenheit 9/11 depicted President Bush continue to read to the school children as word was coming in of the terrorist attacks? Yeah, I was a bit. Was I mad when the same movie depicted the administration in bed with the oil companies. Yeah, I was a little madder. Was I mad when Sicko described the plight of an injured man who had to choose which fingers to get sewn back on because certain fingers would cost him less than others. Yeah, it irked me. Did it annoy me that ex-Pats in Britain raved about the National Health Service (NHS) compared to the US system of health care. Hell yes, I wanted solutions to these problems!
As I said though, I took in the information and wanted to later on decide for myself on its accuracy. Unfortunately, I have never undertaken this effort, and I have not seen enough newsflow since the viewings of those films to soundly confirm or deny Mr. Moore's views.
The aforementioned films are relatively new though. Mr. Moore's first "big" movie was Roger & Me, a movie about GM's CEO Roger B. Smith closing plants in Moore's hometown of Flint Michigan and the resulting demise of that town. The film was made in 1989. Thus, we have 20 years of 20/20 hindsight to judge the film on. So, neither I nor you have to take the appeal to our emotions sitting down. We can view the film and know the outcome and whether Mr. Moore's assertions meant anything.
My question for the 2outof4 audience is what is the point of Roger & Me and are Mr. Moore's points based on any sound logic or just appeals to one's emotions? Is Mr. Moore trying to take advantage of mine and your naivete (which for this movie is far less today)?
If the plot and point of Roger & Me is to show how it sucks when people lose their jobs and how difficult it can be for them and their town of residence, then Roger & Me makes a stirring point. But the thing is that we all know Mr. Moore is trying to make a larger point. He's trying to say that somehow GM owes these people of Flint and the shuttered plants an existence and financial support. The problem is that Mr. Moore never once explains why that is the case or what exactly GM should have done. It is like he made a movie to appeal to people who could not think for themselves and would just cheer on his clear collectivist agenda for the unemployed GM factory workers.
When I saw the abandoned houses in Roger and Me and the people being evicted from their homes was I sad? Of course I was sad. But did I think that somehow GM owed these people or the town of Flint, Michigan anything? No, I certainly did not. It seems Mr. Moore does not believe in hard work or personal development. One of the last clips of the movie shows a Flint-based lobbyist for GM saying that he does not think that one can expect a corporation to give "cradle to the grave" benefits and survive in a system of free enterprise. Moore expertly flashes on the screen that the lobbyist was fired and the office closed in a couple of weeks, and makes the viewer think that the lobbyist would have rethought his comments, if he had known he was going to be fired. Why would he? He clearly believed that no one was owed anything by corporate America and he likely just moved on.
I do not think the proof that the GM/UAW multi generational experiment in collectivism failed can be any clearer than the possibility that once in bankruptcy GM could have drawn as much as $90 billion from the US Government (and still likely fail). http://www.nytimes.com/2009/05/23/business/global/23auto.html?_r=2&hp In other words, your tax dollars supporting the very entity Mr. Moore suggested should just continue employing high cost labor.
Mr. Moore even goes so far as to disprove his viewpoint that these disposed GM workers deserved jobs by showing that the assembly line workers could not hold jobs at the local Flint Taco Bell. The Taco Bell assembly process was too quick for them and they could not work effectively in that "fast paced" environment. Moore somehow insinuates that Taco Bell line work is below these skilled assembly line workers, and this little experiment shows GM is the monster he makes it out to be. I have a lot more respect for a Taco Bell line worker who is doing his or her best to earn his or her money, than a filmmaker who is trying to make a whiny plea that somehow GM should provide jobs for everyone and keep his hometown relevant!
The film is littered with other examples that blast Mr. Moore's assertions that all Flintonians and former GM plant workers are moribund layabouts and just moping around waiting for GM to give them back their jobs. Moore shows postal workers saying that there had been 82,000 address changes processed. Moore wanted the audience to feel sad because Flint was falling apart. Isn't this exactly what is supposed to happen in a free economy? People move to where they can put their skills to use and get paid the most for their production? Homes were abandoned because hardworking people had to find jobs! Boohoo Mr. Moore. So, Flint was the place GM was founded, Moore seems to want the audience to feel angry that Flint is no longer the place where GM prospers and that GM should make amends. Especially 20 years down the road, I think most Americans would say who cares? If Flint could not keep up, that number of address changes tells me that the former Flintites surely adapted (and got out of town).
Roger & Me ends with some clever monologue by Moore to the effect of the Rich get richer and the Poor get poorer. Maybe the poor wouldn't be poor if they could keep up at Taco Bell. This kind of warped sense of entitlement and complete disregard to basic economic principles renders Mr. Moore's "argument" (i.e. his film) completely meaningless. In the end it is just a whiny plea for the viewer to feel sad for his dilapidated hometown.
My fear now is that what I had taken as somewhat factual accounts of events with heavy doses of Mr. Moore's biases in Fahrenheit 9/11 and Sicko, were really just pleas to my emotions based on nothing but his collectivist social agenda. Have I been duped!?!
-2outof4
Monday, May 25, 2009
Stock Interest List Update
Happy Memorial Day Weekend and thank you to all our Veterans out there, as well as the men and women currently serving in armed forces!
I have been very slow in updating the Stock Interest List following a recent spate of earnings releases. I will provide a brief recap and some adjustments to the list below. As you will see, these updates leave me with only one Long idea on the Long Interest list, so if you have any suggestions please post them.
PETS - reported 4Q08 and FY08 earnings on 5/12. Expected sales and EPS for 4Q were ahead of Street consensus and the stock raced up +/-15% on the day. One of the contributing factors to this was a high short interest, which means a lot of investors were shorting the name. So, when the Company reported decent results, a lot of the investors who were short the stock covered and drove the stock price up. At the price the stock reached intraday on 5/12, it looked way overvalued. I just don't think it is worth paying 17x earnings for a company who has no defensible advantage (moat) and a high net margin, which competitors could easily force down.
Also, earnings growth during the year was only about 10% based on lower interest income - hardly a growth stock.
PETS has subsequently sold off, like I thought it would, and the shares are up 0.73% since the original Interest List posting compared to the S&P, that is up 1.97%. I truly struggle with whether to keep it on the interest list or not at this point. However, there were some strange comments on the conference call about taking advantage of lower costs and buying in excess product at a discount from the suppliers, while also complaining that product costs were driving down gross margins - statements that seem to be in contradiciton. This led to the highest inventory level at PETS in the last 14 quarters. I wonder if these inventory levels will reflect more margin pressure in the near-term? As such, and combined with the second lowest trailing twelve month reorder growth in the last 11periods, I will keep PETS on the Short Interest List.
UNTD - this one is a little more simple than PETS. In brief, the earnings reported on 5/5 did not correspond to the limited Street consensus out there. But as hypothesized the cash generating ability and operating income growth opportunities were demonstrated in UNTD's results. As was originally posited in the first posting regarding UNTD, it was/is a misunderstood company. The stock price has risen 36.10% since the original posting compared to the S&P 500 increase of 2.00%. The Company still appears interesting but given the lower margin of safety and the inherent riskiness of its businesses to a slowdown in consumer spend, UNTD is being removed from the Long Interest List.
WFMI - reported what were widely considered strong 2Q results on 5/13. Most of the "strength" came from cost cutting. There was no real earnings growth. It was all on cost-cutting. WFMI has no real plans to grow going forward (like it has in the past), which is confirmed in talks to Street analysts. Therefore, I cannot justify paying 20x forward earnings for this stock. If there is a rollover in the broader market I do not seeing cost cutting stories holding high valuations like WFMI. The companies and stocks that will hold up in that type of market will be true growers - companies meaningfully growing their revenues and operating earnings from normal business operations. WFMI remains on the Short Interest List.
-2outof4
I have been very slow in updating the Stock Interest List following a recent spate of earnings releases. I will provide a brief recap and some adjustments to the list below. As you will see, these updates leave me with only one Long idea on the Long Interest list, so if you have any suggestions please post them.
PETS - reported 4Q08 and FY08 earnings on 5/12. Expected sales and EPS for 4Q were ahead of Street consensus and the stock raced up +/-15% on the day. One of the contributing factors to this was a high short interest, which means a lot of investors were shorting the name. So, when the Company reported decent results, a lot of the investors who were short the stock covered and drove the stock price up. At the price the stock reached intraday on 5/12, it looked way overvalued. I just don't think it is worth paying 17x earnings for a company who has no defensible advantage (moat) and a high net margin, which competitors could easily force down.
Also, earnings growth during the year was only about 10% based on lower interest income - hardly a growth stock.
PETS has subsequently sold off, like I thought it would, and the shares are up 0.73% since the original Interest List posting compared to the S&P, that is up 1.97%. I truly struggle with whether to keep it on the interest list or not at this point. However, there were some strange comments on the conference call about taking advantage of lower costs and buying in excess product at a discount from the suppliers, while also complaining that product costs were driving down gross margins - statements that seem to be in contradiciton. This led to the highest inventory level at PETS in the last 14 quarters. I wonder if these inventory levels will reflect more margin pressure in the near-term? As such, and combined with the second lowest trailing twelve month reorder growth in the last 11periods, I will keep PETS on the Short Interest List.
UNTD - this one is a little more simple than PETS. In brief, the earnings reported on 5/5 did not correspond to the limited Street consensus out there. But as hypothesized the cash generating ability and operating income growth opportunities were demonstrated in UNTD's results. As was originally posited in the first posting regarding UNTD, it was/is a misunderstood company. The stock price has risen 36.10% since the original posting compared to the S&P 500 increase of 2.00%. The Company still appears interesting but given the lower margin of safety and the inherent riskiness of its businesses to a slowdown in consumer spend, UNTD is being removed from the Long Interest List.
WFMI - reported what were widely considered strong 2Q results on 5/13. Most of the "strength" came from cost cutting. There was no real earnings growth. It was all on cost-cutting. WFMI has no real plans to grow going forward (like it has in the past), which is confirmed in talks to Street analysts. Therefore, I cannot justify paying 20x forward earnings for this stock. If there is a rollover in the broader market I do not seeing cost cutting stories holding high valuations like WFMI. The companies and stocks that will hold up in that type of market will be true growers - companies meaningfully growing their revenues and operating earnings from normal business operations. WFMI remains on the Short Interest List.
-2outof4
Monday, May 18, 2009
Lone Star
As the friend who sent this to me said, "Texas is awesome!"
http://online.wsj.com/article/SB124260067214828295.html
Fill in "California" or "New Jersey" with "America" and "Texas" with "Germany", and we get back to the issue raised in this prior post:
http://2outof4.blogspot.com/2009/05/haste-makes-waste.html
Raising taxes and/or taxing both overseas and domestic earnings, will only drive businesses/people from the country/state with higher taxes.
A Barron's article this weekend stated that 20% of the workforce supplies over 80% of the tax revenue for the US. Putting pressure on and forcing these economic drivers out of their states or countries of residence makes zero economic sense.
Our elected officials should be figuring out what makes these individuals so efficient and productive, not just how to suck their profits away. The latter being an action that will ultimately either compel the top earners to leave or just reduce their will to be as productive - either of which would hurt the current tax jurisdiction in which he/she lives.
-2outof4
http://online.wsj.com/article/SB124260067214828295.html
Fill in "California" or "New Jersey" with "America" and "Texas" with "Germany", and we get back to the issue raised in this prior post:
http://2outof4.blogspot.com/2009/05/haste-makes-waste.html
Raising taxes and/or taxing both overseas and domestic earnings, will only drive businesses/people from the country/state with higher taxes.
A Barron's article this weekend stated that 20% of the workforce supplies over 80% of the tax revenue for the US. Putting pressure on and forcing these economic drivers out of their states or countries of residence makes zero economic sense.
Our elected officials should be figuring out what makes these individuals so efficient and productive, not just how to suck their profits away. The latter being an action that will ultimately either compel the top earners to leave or just reduce their will to be as productive - either of which would hurt the current tax jurisdiction in which he/she lives.
-2outof4
Friday, May 15, 2009
Quick Debt Snapshot
I am trying to ditch my burgeoning reputation for posting meaningless charts and graphs.
As such, here is a quick snap shot of debt and the household in 1982 versus today. The contrast is fairly stark to me. We have clearly experienced a lot of economic growth spurred by debt over the last 27 years.
Can we put off any kind of retrenchment and live the in the same manner as the past? Or do we simply have to shrink both our personal and Federal balance sheets - ASAP?
I continue to question just leaving the money (debt) spigot open...
-2outof4
As such, here is a quick snap shot of debt and the household in 1982 versus today. The contrast is fairly stark to me. We have clearly experienced a lot of economic growth spurred by debt over the last 27 years.
Can we put off any kind of retrenchment and live the in the same manner as the past? Or do we simply have to shrink both our personal and Federal balance sheets - ASAP?
I continue to question just leaving the money (debt) spigot open...
-2outof4Bipolar?
Huh? If the President believed his own sound bites, wouldn't the administration have pursued some other, maybe more fiscally sound, type of action?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJsSb4qtILhg&refer=worldwide
Sounds almost like a political defense for potential calamity is already being weaved.
When one combines the above with the administration's recent non-sensical stance on taxing US Companies with foreign subsidiaries and the notion that it would limit compensation somehow at non-TARP receiving entities, I cannot help but feel a complete lack of long-term foresight and planning within this group.
If the administration does not slow down and come out with some form of legitimate direction, the revolution will end - quickly! Common sense and long-term planning hopefully trump the scatter shot, flip flopping approach we are seeing today.
-2outof4
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJsSb4qtILhg&refer=worldwide
Sounds almost like a political defense for potential calamity is already being weaved.
When one combines the above with the administration's recent non-sensical stance on taxing US Companies with foreign subsidiaries and the notion that it would limit compensation somehow at non-TARP receiving entities, I cannot help but feel a complete lack of long-term foresight and planning within this group.
If the administration does not slow down and come out with some form of legitimate direction, the revolution will end - quickly! Common sense and long-term planning hopefully trump the scatter shot, flip flopping approach we are seeing today.
-2outof4
Thursday, May 7, 2009
AMZNing?
If you have read anything on this Blog, you know that I consider innovation and entrepreneurism to be the drivers of our economy and general quality of life Americans enjoy. Jeff Besos is both an innovator and entrepreneur.
My buddy, growth investor and reformed venture capitalist, on the Left Coast has been pumping Mr. Besos company, Amazon.com Inc. (ticker: AMZN), to me for a while. I can’t in good conscious put AMZN on the Long Interest List because it is trading at 50x FY09’s expected earnings, and there is just no margin of safety there. In my view, if you invest in AMZN here, you will either make a lot of money or lose a lot of money. The stocks of interest posted on 2outof4 hopefully have a little less room to the downside.
That does not mean to say that I am incapable of putting on my former growth investor hat and looking at the facts. Besides being an awesome retail platform and a place value oriented consumers are turning in hard times, AMZN’s new product, the Kindle, may have the potential to be a game changer. Some of all of the above is clearly in the stock price. It must be at 50x Price to Earnings. But can Kindle, as a platform, revolutionize the consumption of books and AMZN as a Company? There seems to be evidence that it can:
http://www.businessinsider.com/henry-blodget-kindle-sales-now-a-shocking-35-of-book-sales-when-kindle-version-available-2009-5
If this is close to true, it is not difficult to imagine the revenue growth from Kindle that AMZN could experience with penetration expansion. The new Kindle DX could gain traction in other places too:
http://www.virginia.edu/uvatoday/newsRelease.php?id=8566
That is what growth investors count on - that a company’s product will go where people are not imagining today. Sure Mrs. 2outof4 would prefer the touch and feel of a “real” book today, but carrying 15 of her favorite Chick Lit books to England this summer may be a tad impractical!
As my West Coast friend points out, do not get caught up in the device per se. There will be tons of copy cats. The key is the Kindle platform and distribution. If AMZN can make those ubiquitous and be the conduit for the majority of electronic books going to a myriad of devices, then AMZN wins – in a HUGE way.
Plus, on last year’s Free Cash Flow (FCF) run rate, a relatively modest five year growth rate, and maybe a little too low of a weighted average cost of capital (WACC, I figure they have cash on the books and the cost of raising equity for them would be de minimus), I actually calculate slight upside to today’s share price. That of course is what AMZN’s investors are banking on at these multiples. They are assuming growth will be larger than Wall Street analysts can fathom today.
Maybe it will. My friend’s theory is that Mr. Besos will appear on stage with Steve Jobs (assuming full recovery) at a future Apple meeting and announce how Kindle and the iPhone, together, will revolutionize how we read books. It is at least an interesting theory.
So will the revolution happen and can AMZN’s share price go higher? It is hard to imagine, but that is what growth investors do!
-2outof4
My buddy, growth investor and reformed venture capitalist, on the Left Coast has been pumping Mr. Besos company, Amazon.com Inc. (ticker: AMZN), to me for a while. I can’t in good conscious put AMZN on the Long Interest List because it is trading at 50x FY09’s expected earnings, and there is just no margin of safety there. In my view, if you invest in AMZN here, you will either make a lot of money or lose a lot of money. The stocks of interest posted on 2outof4 hopefully have a little less room to the downside.
That does not mean to say that I am incapable of putting on my former growth investor hat and looking at the facts. Besides being an awesome retail platform and a place value oriented consumers are turning in hard times, AMZN’s new product, the Kindle, may have the potential to be a game changer. Some of all of the above is clearly in the stock price. It must be at 50x Price to Earnings. But can Kindle, as a platform, revolutionize the consumption of books and AMZN as a Company? There seems to be evidence that it can:
http://www.businessinsider.com/henry-blodget-kindle-sales-now-a-shocking-35-of-book-sales-when-kindle-version-available-2009-5
If this is close to true, it is not difficult to imagine the revenue growth from Kindle that AMZN could experience with penetration expansion. The new Kindle DX could gain traction in other places too:
http://www.virginia.edu/uvatoday/newsRelease.php?id=8566
That is what growth investors count on - that a company’s product will go where people are not imagining today. Sure Mrs. 2outof4 would prefer the touch and feel of a “real” book today, but carrying 15 of her favorite Chick Lit books to England this summer may be a tad impractical!
As my West Coast friend points out, do not get caught up in the device per se. There will be tons of copy cats. The key is the Kindle platform and distribution. If AMZN can make those ubiquitous and be the conduit for the majority of electronic books going to a myriad of devices, then AMZN wins – in a HUGE way.
Plus, on last year’s Free Cash Flow (FCF) run rate, a relatively modest five year growth rate, and maybe a little too low of a weighted average cost of capital (WACC, I figure they have cash on the books and the cost of raising equity for them would be de minimus), I actually calculate slight upside to today’s share price. That of course is what AMZN’s investors are banking on at these multiples. They are assuming growth will be larger than Wall Street analysts can fathom today.
Maybe it will. My friend’s theory is that Mr. Besos will appear on stage with Steve Jobs (assuming full recovery) at a future Apple meeting and announce how Kindle and the iPhone, together, will revolutionize how we read books. It is at least an interesting theory.
So will the revolution happen and can AMZN’s share price go higher? It is hard to imagine, but that is what growth investors do!
-2outof4
Wednesday, May 6, 2009
Hedgie Speaks Out
Mr. Asness wrote a note very similar to my "Sickening" post. However, not only is he more public and influential than me, he's a better writer too. There goes the "carry rule":
***
Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC
The President has just harshly castigated hedge fund managers for being unwilling to take his administration's bid for their Chrysler bonds. He called them "speculators" who were "refusing to sacrifice like everyone else" and who wanted "to hold out for the prospect of an unjustified taxpayer-funded bailout."
The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a "group letter", was the superb note from "The Committee of Chrysler Non-TARP Lenders" some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President's wishes out of justifiable fear.
I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President's comments (of course these are my own views not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called "Not Afraid Enough" as I am indeed fearful writing this... It's really a bad idea to speak out. Angering the President is a mistake and, my views will annoy half my clients. I hope my clients will understand that I'm entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally "sacrifice" their money without their permission.
Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It's not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders' contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.
The above is how it works in America, or how it's supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler's creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.
Let's be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients' money to share in the "sacrifice", they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients' money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That's how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could "share in the sacrifice", you would not be happy.
Let's quickly review a few side issues.
The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.
Let's also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won't work because of this irresponsible hectoring.
Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President's comments here are backwards and libelous. Yet, somehow I don't think the hedge funds will be following ACORN's lead and trucking in a bunch of paid professional protestors soon. Hedge funds really need a community organizer.
This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.
I am ready for my "personalized" tax rate now
***
-2outof4
***
Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC
The President has just harshly castigated hedge fund managers for being unwilling to take his administration's bid for their Chrysler bonds. He called them "speculators" who were "refusing to sacrifice like everyone else" and who wanted "to hold out for the prospect of an unjustified taxpayer-funded bailout."
The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a "group letter", was the superb note from "The Committee of Chrysler Non-TARP Lenders" some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President's wishes out of justifiable fear.
I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President's comments (of course these are my own views not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called "Not Afraid Enough" as I am indeed fearful writing this... It's really a bad idea to speak out. Angering the President is a mistake and, my views will annoy half my clients. I hope my clients will understand that I'm entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally "sacrifice" their money without their permission.
Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It's not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders' contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.
The above is how it works in America, or how it's supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler's creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.
Let's be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients' money to share in the "sacrifice", they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients' money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That's how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could "share in the sacrifice", you would not be happy.
Let's quickly review a few side issues.
The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.
Let's also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won't work because of this irresponsible hectoring.
Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President's comments here are backwards and libelous. Yet, somehow I don't think the hedge funds will be following ACORN's lead and trucking in a bunch of paid professional protestors soon. Hedge funds really need a community organizer.
This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.
I am ready for my "personalized" tax rate now
***
-2outof4
Tuesday, May 5, 2009
Haste Makes Waste
In response to a follow-up comment on my "Sickening" post below, by db, I wanted to concur that the tax plan announced yesterday is both unimaginative and dumb. It is shocking that the big brains in the White House would even announce it.
http://online.wsj.com/article/SB124144387757983265.html
It feels like they just got together for five minutes, put something together and rushed it out to the podium to pump up the populous by sticking it to the evil corporations of America!
Again, I don't care which side of the political isle you sit on, but this is the kind of crap that will eventually make America a non-competitive, subservient, former super power. I am not just talking about the likelihood of the double taxation (foreign and domestic), yes Mr. President most companies based in places like Ireland and Bangalore actually do pay taxes there, driving US companies permanently overseas; but, about the lack of thought process and real caring for future generations in US policy making today.
Would it not be better to get at the root of the problem here, the mammoth and almost incomprehensible US Tax Code?
For example, if as Mr. Obama quips, he wants to keep jobs in Buffalo rather than Bangalore, why doesn't his team come up with a tax code that still provides needed revenue, but also incents businesses in Buffalo to keep jobs there. One way would be a modified version of the Fair Tax, where not just final goods are taxed with a Federal sales tax, but goods all along the manufacturing chain are taxed. Multinationals might want to keep operating units in the States as a result, due to no wage or income tax, and there would be more employed people buying things, and paying taxes. It would also capture tax revenue from the companies that are not doing business in a country but are merely there to avoid taxes (see BVI).
It is so obvious that having a US company taxed at the local level of its subsidiary (e.g. Ireland) and then back in the US is an unsustainable model for the competitiveness of US multinationals, that I can only assume the President's suggestion yesterday will be re-worked.
I came into this year an optimist, but with the nutty suggestions and assertions coming out of Washington recently, it is becoming more difficult to see the change we were promised. I prefer substance and real ideas than interest backed populism.
Let's find real answers! Please.
-2outof4
http://online.wsj.com/article/SB124144387757983265.html
It feels like they just got together for five minutes, put something together and rushed it out to the podium to pump up the populous by sticking it to the evil corporations of America!
Again, I don't care which side of the political isle you sit on, but this is the kind of crap that will eventually make America a non-competitive, subservient, former super power. I am not just talking about the likelihood of the double taxation (foreign and domestic), yes Mr. President most companies based in places like Ireland and Bangalore actually do pay taxes there, driving US companies permanently overseas; but, about the lack of thought process and real caring for future generations in US policy making today.
Would it not be better to get at the root of the problem here, the mammoth and almost incomprehensible US Tax Code?
For example, if as Mr. Obama quips, he wants to keep jobs in Buffalo rather than Bangalore, why doesn't his team come up with a tax code that still provides needed revenue, but also incents businesses in Buffalo to keep jobs there. One way would be a modified version of the Fair Tax, where not just final goods are taxed with a Federal sales tax, but goods all along the manufacturing chain are taxed. Multinationals might want to keep operating units in the States as a result, due to no wage or income tax, and there would be more employed people buying things, and paying taxes. It would also capture tax revenue from the companies that are not doing business in a country but are merely there to avoid taxes (see BVI).
It is so obvious that having a US company taxed at the local level of its subsidiary (e.g. Ireland) and then back in the US is an unsustainable model for the competitiveness of US multinationals, that I can only assume the President's suggestion yesterday will be re-worked.
I came into this year an optimist, but with the nutty suggestions and assertions coming out of Washington recently, it is becoming more difficult to see the change we were promised. I prefer substance and real ideas than interest backed populism.
Let's find real answers! Please.
-2outof4
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