Sunday, October 08, 2006

Festival of Stocks Edition #5

Welcome everyone to the fifth edition of the Festival of Stocks. Thank you to all who have submitted a post. I am ecstatic about the high quality of posts and the variety of opinion. And thank you to the new guests that have arrived at Value Discipline. Welcome and look around.

It has been a most interesting week with the Dow Jones establishing new highs adding 1.5% hitting 11,850. The S&P 500 trailed the DJIA and small cap indices rising only about 1%. The Russell 2000 was up a full 2%.

I have attempted to add my own commentary and spin that hopefully will not detract from the underlying wisdom and insight of the original post. Onto the Festival!


Gold Stock Bull reviews Silver Wheaton Corporation, a Vancouver based silver mining company, in fact, the only pure play silver mining company. Its unique operating structure is intriguing…operating strictly as a royalty company with current royalties drawn from production at three geographically diverse mines. Its relationship to Goldcorp provides it a great deal of management acumen. The royalty structure affords it a high ROIC at about 14% for the TTM.

Silver Wheaton (SLW)

Goldcorp (GG)

Inelegant Investor reviews the environment of video rental in Blockbusted. What can a company do when its business model is made obsolescent by the next new thing? Investor reviews the rapidly changing world of video rentals as well as the ominous potential impact of cable's pay-per-view. Seeking refuge in offering retail DVD sales, Blockbuster does not have the scale or cost advantage of other retailers such as WalMart or Costco.The company appears to be burdened with $1 billion in debt plus $2 billion in lease obligations. If that weren't enough, operating margins appear to be negative for the TTM. Yet, Carl Icahn has established an 11.5 million share position in the stock.Be sure to read both the post and the interesting comments that are attached!

Blockbuster (BBI)

Netflix (NFLX)

Another interesting look at the economics of DVD rentals appeared this week in The Long Tail. Though not a submission to the Carnival per se, I thought the post contained a lot of pertinent information regarding the economics of the DVD business, especially the economics of "seasoned" DVD's versus new releases.

Kevin Kelly at ValueBlogger reviews iPass, a company which provides remote access to companies through its software-enabled enterprise connectivity services. At first brush, it appears to be a successful business model with over 300 corporate relationships and networks in over 160 companies. Despite the recurring revenue model, the financial characteristics appear to have deteriorated with excessive spending, poor deployment of capital, a series of acquisitions, and issues of corporate governance. ValueBlogger believes that the business is trading at less than 50% of its intrinsic value, an assertion that may well be shared by activist shareholder Shamrock Partners that now controls some 14% of the stock. Who knows…where there's smoke there may well be fire…the stock was up 8.5% on Friday in a weak market.

iPass (IPAS)

David Phillips of 10Q Detective has another tale of corporate greed in his review of Estee Lauder. The company has a return on capital of about 14% at an EV/EBIT of about 14 times. It appears that the insider stake is about 8.6% of the outstanding stock yet multi-generational family members are interspersed throughout senior levels of management with senior level compensations. Biology teaches the dangers of in-breeding and I suspect management successions that refuse to look beyond the family tree suffer similar fates.

Estee Lauder (EL)

StreetInsider reviews interesting 13D filings and this week has a look at Midwood Capital's increasing stake in Factory Card and Party Outlet. This tiny company has a market cap of only about $27 million. Putting things into perspective, insiders own a 3.9% of the company, about $1 million of value with the CEO owning merely a $440,000 of stock….a modest stake indeed given compensation last year that represented some $600,000 plus. Of course, along the way, stock option issuance has provided management a gratuitous sidebet on the market as I like to call it, with options providing fully diluted insider ownership of 15.8% of the stock. It seems like a disproportionately generous reward for a company with an operating margin of 0.05% for the last twelve months. Despite $75 in revenue per share, the company shows in a loss per share of 17 cents for the last twelve months. No wonder, the frustration and the activism!

Factory Card and Party Outlet (FCPO)

Markets, Macros, and Miscellany

Mr. Market at the Margin of Safety provides some terrific insight into what he labels The Deficient Market Hypothesis, a cleverly labeled post that pokes holes and fun at the efficient market hypothesis (EMH,) the subject of value investors’ scorn and contempt. The conclusions read like a value investor's mantra:

1) Welcome volatility, it brings cheap prices.

2) Markets are inherently inefficient

3) Risk and return relationships do not hold in extremis.

4) Doing nothing is also a strategy…wait for the fat pitch!

5) Today may not be the time to buy…don't succumb to ready, fire, aim strategies!

6) Concentrate your ideas…diversification is an antidote for not knowing your stocks.

7) Value=Growth=Value…

Controlled Greed has a great post on How to Research Foreign Stocks. This is a good follow-up to an article he had written some weeks earlier on how to trade foreign stocks. In my opinion, most investors in North America are under-invested internationally. Though segmented markets are rare and correlations with more traditional markets are getting higher all the time, the benefit of accessing a larger opportunity set of companies is substantial. Valuation jewels can be found if one digs and certainly, Controlled Greed has uncovered some fabulous jewels in his work internationally.

In a similar vane, the what I would argue is the inaccurately named Confused Capitalist examines Emerging Markets. Jay Walker has often addressed these markets in his posts…have you done so in your portfolio? He argues effectively that some 25% of World GDP lives in emerging markets, yet few of us have more than a smattering of representation here.

Fat Pitch Financials adopts the crisp, concise, and clear communication skills of that well-known writing coach Warren Buffett!

Another non-submitted submission that I propose for your reading this week is Seed, which examines a biological reason for the bravado of serial acquirers and investment bankers. Pitting the desire for personal gain against the desire to punish someone else seems to be the basis for more than a few acquisitions. Makes you think, is this why there was a battle for Guidant?

Hedge Funds

Size, Strategy, and Swagger from Abnormal Returns is another terrific read on what likely will be declining returns and increased financial risks in the private equity hedge fund world. It all comes down to hubris.

Book Reviews

Enough Wealth has adopted Joel Greenblatt's Little Book methodologies from his/her Australian base but agonizes over the lack of foreign content in Greenblatt's database. I suspect that there are some uniquely profitable businesses in Australia that might meet Greenblatt screens, unfortunately many of them are commodity based and the sustainability of that profitability comes into question. I found a $Aus 700 million mining company called Aquarius Platinum that appears to have a 26% ROIC for the TTM with a low EV/EBIT of about 6.5 times. Credit Corp Group is in the collection agency business that appears to buy troubled receivables for pennies on the dollar and earns about 17.5% on its capital with an EV/EBIT of about 15 times. Can anybody think of other Greenblatt qualifiers in Australia?

Finally, Geoff Gannon has a book review of the newest "Little Book" the Little Book of Value Investing. The post, written by Steven Rosales, recommends the book written by Christopher Browne of Tweedy Browne, a firm that had the privilege of having several important clients over the years, Ben Graham, Warren Buffett, and Walter Schloss! The evolution of brokerage firm into investment management firm is discussed as well as many insights into bringing common sense into common stock selection. Buy when they're cheap! Buy international in order to double your opportunity set from which to select bargains!

Thank you everyone for your submissions! I am pleased by the quality of what has been brought forward and I hope that my commentary doesn't diminish the fine work that you have presented.

Prior editions of Festival of Stocks can be found on its homepage link.

Next week, look for the Festival of Stocks #6 at Stock Market Beat.


At 12:15 AM, Blogger George said...

Thank you for hosting this week's Festival of Stocks. Nice work!

At 11:41 AM, Blogger Mr Market said...

Rick, you have given a very distinct flavour to the Festival of Stocks with your commentary!

Also, many thanks for featuring our post on the Deficient Market Hypothesis in this edition's Festival of Stocks! Margin of Safety has also put up a link to the festival and Value Discipline.

At 7:51 AM, Blogger KVSSNrao said...

Very happy to come across this blog. I am studying investment texts once again to make presentations on them and I am posting important ideas from them in my blog I also modified the Graham's analytical method for defensive investors to bring in growth criteria and a formula to value the same.



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