I am switching this blog over to a new domain name FinancialPolitico.com
The articles on Financial Politico will be more in depth then some of the quick notes I have written on this blog in the past. There will be less of an emphasis on individual stock picks and more emphasis on macro trends, politics in the boardroom, and world economic politics such as trade and monetary policy. It has been a pleasure writing for ValueSeeker.net and have amassed over 100,000 hits the past couple of years. Thanks for all the kind emails (and thought provoking hate mail) I have received.
Once again as prices at the pump skyrocket big oil executives had to defend themselves against critics in Congress. These hearings aren’t a surprise though. Every time gasoline prices make a big move to the upside Congress howls in anger pointing the finger at an “Oil Company Conspiracy”.Of course any rationally minded human being would know gasoline and oil were all publicly traded commodities as is heating oil and natural gas.
One would think the chairman of the House Select Committee on Energy Independence and Global Warming would have some insightful remarks to dispute the “evil oil company” claims unless of course the one making the most foolish remarks was the chairman himself. Rep. Ed Markey of Massachusetts demanded, “The American people deserve answers and it is time for Big Oil to go on the record about these record prices.”
“Given that the largest contributor to the cost of gasoline is crude oil, this has translated into record-high gasoline prices,” Peter Robertson, vice chairman of Chevron said.
He also wanted to know why big oil hadn’t put more money into alternative energies. Perhaps it didn’t cross his mind that he was questioning “Big Oil” hence the word “oil”. Maybe he should ask executives at Pfizer why they aren’t putting more money into Vitamins or why Exxon Pays more taxes to the US Government then they have US revenue. Why not ask why we push fuels with negative energy yields such as Ethanol and Hydrogen which do even more damage to the environment than the usage of gasoline? As someone who should have vast knowledge on the subject of the oil industry as well as alternative fuels and their contributions to pollution or lack thereof, these questions are nothing but disturbing as they show the lack of competence in Congress to one of the largest issues to not only the United States but the world.
Here’s an eye opening quote from political commentator G. Edward Griffin on America’s inflation tax that I found today:
“Inflation has now been institutionalized at a fairly constant 5% per year. This has been determined to be the optimum level for generating the most revenue without causing public alarm. A 5% devaluation applies, not only to the money earned this year, but to all that is left over from previous years. At the end of the first year, a dollar is worth 95 cents. At the end of the second year, the 95 cents is reduced again by 5%, leaving its worth at 90 cents, and so on. By the time a person has worked 20 years, the government will have confiscated 64% of every dollar he saved over those years. By the time he has worked 45 years, the hidden tax will be 90%. The government will take virtually everything a person saves over a lifetime.” – G. Edward Griffin
If you would like to do something about this please click here to send a letter to Congress
On September 10, 2007 I wrote an article about Dominion Homes, the struggling homebuilder based out of Ohio. The company was highly leveraged, had close to no cash on the balance sheet, and owned roughly 400 million dollars in land on the books. With tight liquidity in the housing market the company was having trouble selling off its inventory. With roughly 200 million dollars of long term debt on the balance sheet, the company was flirting with bankruptcy.
I suggested the company would make a fantastic buyout candidate as the company was trading for a mere fraction of the 200 million dollar book value. The reasoning behind a buyout was that a larger company with a stronger balance sheet could pay down its debt which would take bankruptcy out of the question as well as increase Dominion’s credit rating. The transaction would also allow for Dominion Homes to wait until the housing market rebounded to sell off its land instead of forcefully liquidate. While the company may get below book either way, there is no question Dominion Homes would get more for their inventory if they had the luxury of not having their lenders demanding payment. Of course the only way they could achieve that luxury would be paying down their debt and the best way to do that would be to have someone else do it for them.
On January 18, 2008 Angelo Gordon & Co., L.P. a well respected firm along with Silver Point Capital, L.P. decided to take the company over for the bargain price of 65 cents a share which would equate to about a 5.5. million dollar market cap. While Angelo Gordon and Silver Point are practically getting this company for nothing, shareholders of Dominion Homes faced two awful choices to make: Sellout at fire sale prices or go bankrupt and be left with possibly no equity. Bankruptcy was just an option they couldn’t afford so they had to do the next worst thing which happened to be the only other option.
Management made a press release that very day saying, “The homebuilding industry continues to be in a very difficult period,” said Mr. Borror. “This transaction will allow Dominion Homes to continue our 55-year tradition of building quality homes that exceed our customers’ expectations.”
The press release also hinted to one of the obvious reasons of the buyout saying , “The Company also announced today that it has entered into certain amendments to its existing credit facility with its lenders in anticipation of the merger transaction. The lenders have agreed to increase the Company’s borrowing capacity under the credit facility by approximately $3,500,000 and to forbear until the earlier of June 30, 2008 or termination of the merger agreement from exercising their rights and remedies under the credit facility.”
This deal could be no further from what was perfectly inevitable. While I did predict this several months prior, my feat was none other then logic and far from predicting the future. This is also a good example of why never to buy a company in hopes for a buyout. As the company looked cheap at 3 dollars which was where the stock price hovered at the day I wrote my original article. There is an arbitrage opportunity where one has to see whether the probability of the deal will go through. As I write this the spread is roughly 6.5% and levered up 2:1 that is a pretty nice rate of return within the amount of time the deal should go though, assuming it doesn’t fall through.
The following is something I wrote as part of my final project in my Macro - Economics class.
———————————————————————————————-
Following articles on the US dollar throughout this semester, I’ve encountered a wide range of very mixed opinions.Reading primarily the New York Times business section, some columnists make the case for why the US Dollar is going to go lower and some say a weak Dollar is good for the United States.Anyone working for the New York Times is going to have to sound convincing as they are surely very good at their jobs.After reading non stop on the subject I’ve come to some very controversial opinions of my own.
The main problem I see is the Federal Reserve.Bernanke is so fixated on patching up short term fixes and never has any insight on how we got here in the first place.It is logical to first understand why we have a certain problem then to just patch it up to delay the problem.Over the last few months the stock market has been rocky and the bond market has been even worse.Bernanke has said he is willing to cut interest rates to devalue our currency if it will help stop a recession.He’s also said that a low dollar wouldn’t affect Americans as long as they bought domestic goods.He also claims it would rid us of our deficit as the textbook approach says a low currency will correct a deficit.There are several logical fallacies with these statements and it’s more then terrifying that the head of our central bank is coming out and making comments like these.
First of all, Bernanke should not be so fixated on preventing a recession.It is a fact that if America never had a recession, we would be a lot worse off then we are today.Recessions are part of the business cycle as well as bankrupt the weaker companies and strengthen the stronger ones.If a company makes really terrible decisions, in a capitalist society that equates to bankruptcy or at the very least a massive loss of equity during a recession.A strong company may be temporarily weakened but when the recession is over they come out stronger because they’ll have fewer competitors as much of the competition went bankrupt as well as have the opportunity to buy their competitors in distress.It is also impossible to prevent a recession as the business cycle is a byproduct of capitalism.If you really don’t like business cycles, move to a country where free markets don’t exist.As the Federal Reserve’s shareholders are made up of men tied to private banks it makes sense that they would try to benefit themselves before the American people by attempting to bail out banks that took on way too much risk.By helping those out you make things worse.You set a precedent to take excessive risk because why not if you have the notion you will get bailed out by your friends if the investment turns against you.This is why Bernanke trying to prevent a recession at the expense of our currency is illogical.
The second statement Bernanke has made about the low dollar is that Americans wouldn’t be affected much as long as they buy domestic goods.Again, it is hard to believe that he sincerely believes this.A scenario which would disprove this is that of the average retired man or woman.You have a portfolio of CDs yielding 6% a year which you are living off of, you drive a car, and you eat food.When the dollar declines 50% against major foreign currencies, that man or woman has just had his or her standard of living cut in half.The 6% yield on those CDs are now yielding 6% but this time with a currency only worth half of what it used to be worth.If the oil supply and demand equilibrium stays the same, oil prices would still go up as we buy our oil in dollars.As gasoline is petroleum based, the price of gas in the United States would therefore increase.But it wouldn’t just be oil that increases most commodities from wheat to butter to sugar would increase as well.The average food company would face higher costs and would be more then happy to pass those costs onto the American consumer which would in return raise prices.It wouldn’t matter if the company was domestic or international.Unless Bernanke thinks the average retiree is living off gold krugerrands and 50 dollar palladium maple leafs, has no use for gasoline, and is willing to not eat then he has a case, otherwise I don’t buy it.
Bernanke’s other case for a low dollar as well as several New York Times columnists believe that the weak dollar would help reduce our trade deficit.They’re argument besides being a textbook example is that it is happening right now as during the course of this semester, The United States had the lowest deficit in two years.Unfortunately, to get to a trade surplus by devaluing our dollar would surly get us into a worse deficit then we are right now.So Bernanke is right in the short term, a weak dollar would temporarily reduce our deficit but in the long run it makes things much worse.As of now the United States stays solvent by borrowing 2 billion dollars a day much of it coming from the Chinese.Unfortunately, our currency is not backed by any asset but by people accepting that our currency is worth something.As of now OPEC is diversifying away from the dollar as they called the dollar, “a worthless piece of paper”.China is also diversifying out of the dollar as well.There’s a good chance they will retire the Hong Kong dollar which is pegged to the US dollar and switch over to the renminbi.Saudi Arabia will most likely get out of their fiat currency which is pegged to the US dollar and most likely move to some asset backed currency such as petrodollars.So if the dollar got so low for us to rid America of its trade deficit, these events, especially a Chinese pull out would certainly crash the dollar overnight and most likely cause a run on the dollar.When “dollar-bashers” make this argument, the US government and the Federal Reserve both say we have gold reserves at Fort Knox and currency reserves at the treasury.Fort Knox has not been audited since the 1960’s so who knows whether that gold is still even there.Assuming that it is, it would keep US currency stable for roughly two days.Our currency reserves are surely there (and if they weren’t the government could print more money as that is common when currencies are backed by nothing) and would last 8 seconds in the currency market.That’s why the reserve argument is also something to be discredited.
The way to prevent all this chaos from occurring is to get rid of our current system.When the founding fathers wrote the constitution, it was deemed unconstitutional to have a currency not backed by gold or silver.The market as a whole is very complicated and the CPI numbers are not taken seriously as an accurate measure of inflation.Many of the great investors such as Seth Klarman and Jim Rogers who worked with George Soros say that the CPI understates inflation and that the manufacturing index is more appropriate.The problem with fiat currency is that it is very easy to overprint money which leads to high inflation and a devaluation of the currency.A gold standard ensures you won’t overprint money as you can only print what is backed or partially backed depending on which gold standard you use.Instead of having a Federal Reserve micro-managing a free market economy you can get rid of the Federal Reserve which gets rid of all political and emotional bias and you leave it up to the market to determine borrowing rates, etc.While a bunch of guys debating what to do with interest rates may be really smart the individual decisions of everyone participating in the global market has been proven to be much smarter.Every major fiat currency has eventually had to reset and many of the time it retired for good.It is not a radical statement to say the US Dollar may very well go to zero and with this currency monetary policy the dollar will most likely not be the major currency anymore.
Berkshire Hathaway shareholders from all online communities are welcome.
If you feel most comfortable wearing a suit, go for it. With that said, it’s Omaha; please feel under no such obligation. This is a casual atmosphere, with light snacks available. It’s a “happy hour” type of gathering - not a formal dinner or anything of that sort.
The DoubleTree is located on 16th and Dodge. There may be some street parking, otherwise, one can use the parking garage with an entrance from the South at 16th & Dodge street, just east of the First National Bank.
Ben Bernanke, Chairman of the Federal Reserve, recently testified in front of Congress under oath. When Ron Paul (R-TX) accused Bernanke of foolishly debasing the US Dollar, Bernanke gave a mind blowing response. His rationale was that since the CPI numbers were low, most of the economy was struggling, it made sense to lower interest rates. Bernanke always talks about how our economy comes first and that we need to avoid recessions. Bernanke also made the point that if the dollar weakens it doesn’t effect American citizens if they spend money just on domestic goods. He also said it can actually be a good thing as it would decrease our trade deficit.
…and now the politically incorrect version Ben Bernanke, Chairman of the Federal Reserve, recently testified in front of Congress under oath. When Ron Paul (R-TX) accused Bernanke of foolishly debasing the US Dollar, Bernanke gave an ignorant mind blowing response. His ignorant rationale was that since the understated CPI numbers were low, most of the economy was in recession or worse depending on the industry struggling, it made sense to lower interest rates. Bernanke always talks about how our economy comes first and that we need to avoid the business cycle recessions as well as attempt to bail out my friends at all the major US banks. Bernanke also made the point that if the dollar weakens it doesn’t effect American citizens if they spend money just on domestic goods which of courseroughly 0% of the population does. He also said it can actually be a good thing in fairy land as it would decrease our trade deficit as well as increase inflation due to increase in commodity prices as well as international goods which then would effect domestic prices. It would exacerbate a probable peak oil crisis, give Saudi Arabia the urge to unpeg their currency from the US Dollar, cause OPEC and China to get rid of their US Dollar reserves. An increase in shipping rates could easily dry up US supply. Also retirees, who are living on fixed income will also see a large devaluation in their standard of living due to a deterioration of the values of domestic bank accounts.
While I am no market forcaster, it is always entertaining to try and predict the future. My personal opinion is this last rate cut was not only a joke but also the last cut we will see for some time. I could not imagine the Fed cutting interest rates anymore then they already have and if anything they may even raise interest rates. Once the Fed sees our dollar becoming even more worthless and our misleading CPI begin a nice rise, the Fed will have no other options. The question in my mind isn’t if this happens, it’s when. I am still in the Jim Rogers school of thought that we are only halfway through this commodity bull market and peak oil has already happened with peak natural gas just around the corner. If that be the case as long as with all my other predictions of this post, it would be hard to lose a lot of money investing in gold, buying commodity rich currency, taking a position in credit default swaps, betting against a widening spread between investment grade and junk bonds, going long oil for the rest of 2007 and switching into natural gas late 2008.Of course this is only a fun prediction to make and I am not giving investment advice here either. If I have something wrong with my thinking I could easily lose a substantial amount of money with the actions above which is why I prefer bottom-up value investing instead of top-down.
When I said I would not be suprised if the Federal Reserve would lower interest rates I meant it. On Wednesday, the Fed cut the federal funds rate by one-quarter of a percentage point to 4.5 percent. The markets went up that day only to be down roughly 2.5 percent the day following. What’s funny about this scenario is how Bernanke, who vowed to focus on inflation, has already broken that promise. It took roughly 20 years for Greenspan to give into political nonsense and it appears Bernanke has already lost his sense of reality in only a matter of a few.
Today I had the chance to see Hilary Clinton give a speech and even got to shake her hand. Surprisingly, I was impressed with her speech but have a few disagreements with some implied policies she was proposing when it comes to energy. She has good intentions but I think she is ignorant to what our priorities should be. While she wants to become green and fight global warming, she also wants to take away tax subsidies away from the oil industry. While a company like Exxon Mobil doesn’t need those, many smaller oil companies do. Taking these away discourage exploration which is the last thing we need right now since oil may have already peaked and natural gas is close to peaking as well.
On a lighter note she also told the Wellesley students that when she went there, boys were only allowed in rooms during Sunday afternoons. She said there was a rule that the feet had to be on the ground so she said the way she would get around it was by only having the guys feet on the ground. The crowd went wild and I went from being into shock to breaking out in laughter.
Charlie Munger stated again in this year’s Berkshire Hathaway meeting that Ethanol was not a feasible solution to our energy needs. Similiar to what Carl and I have written about in recent weeks, Ethanol has three large problems associated with it.
The first problem is that it costs almost as much to make Ethanol as the energy it yields. Therefore it is extremeley inefficient. The second issue is that Ethanol predominately comes from corn. Munger talked about sacrificing ethanol with higher food prices was absolutely ridiculous. What he didn’t mention is that Ethanol is only 70% effective as octane gas.
– I wrote this post the the weekend of the this years Berkshire Hathaway Shareholders Meeting and for some reason it never showed up on the blog.
As many of you know, the Federal Reserve may very well slash interest rates this week. With a weak dollar and oil nearing $100/bbl, many economic policy critics including Jim Rogers, have said Bernanke should not be slashing the federal funds rate. Personally I have many problems with the Federal Reserve and have many of the same views as Rogers.
According to Rogers, it makes absolutely no sense for the Fed to lower the interest rate. With a rate cut, the dollar would tank even more and oil could easily top $100/bbl and inflation could potentially get out of control. Rogers also has argued that the United States may very well already be in recession. He said the housing and auto industries are already in conditions worse then a typical recession. Even big Dow Components such as Caterpillar (CAT), have said business hasn’t been this bad in fifty years.
Rogers, also claims that while a lower dollar does mean higher exports and probably a cut in the trade deficit short term, it would hurt us in the mid/long term. Historically no country has ever been successful mid/long term devaluing their currency. There is nothing wrong with keeping interest rates steady, even if it means driving the United States into recession (assuming we aren’t already in one). It’s a normal part of the business cycle. If you keep trying to bandage short term fixes, there will be many more negative long term effects. He also referred to Fort Knox, saying there gold would only be able to prop up the currency for maybe two days and our Treasury Reserve of 60 billion dollars would last about five seconds.
===
Who knows what will happen in the long term, but if we keep going down this road we will undoubtedly have high oil prices, a terrible currency, a potential run on the dollar, and even hyperinflation. By not lowering interest rates and giving into short term greed, we help reduce the risk of high interest rates further down the road.
Being a Yankee fan, it’s very frustrating to see our team spending boat loads of money on players and often times having trouble getting past the first round in the playoffs. The only logical explanation for this would be that we are getting a horrible return on our investment. It turns out the Yankees aren’t the only team having this problem as well. I found an article that came out a few days ago that explains this concept in much more depth.
One of Buffett’s most notable investments was his investment in American Express during their one time scandal that effectively only hurt the company for a very short period of time. It seems about every year or two there is something that makes the news which will hurt an entire industry. Usually every company that is at all associated with the industry will have its stock devalued sometimes when it isn’t deserved.
I am not going to say that every crisis is over hyped. Sub prime is very real and many companies have gone bankrupt. While there are companies that won’t, I’m not going to prognosticate which ones will survive. As most people reading this blog know, the housing market is in a slump right now and one day it obviously won’t be, essentially the nature of a business cycle. In my opinion it is easier to predict which companies may be cheap in that industry right now.
Every once in a while an event happens that is obviously over-hyper by the media. For instance during the bird flu scare a couple of years back any company related to chicken eggs started becoming cheap and you had international growth stocks trading below their net tangible assets. It also seems shipping companies get cheap a couple of times every decade due to the volatility of the Baltic Dry Index used to determine shipping prices daily.
I have received several emails within the last month with questions about net nets. For those who don’t know, a net net stock is a stock trading net current asset value (NCAV). Ben Graham was famous for buying stocks at 66% or less of NCAV. If one is buying net nets blindly one should have a diversified portfolio of these as any one of these stocks could (and probably will) blow up. There are exceptions to the rule and one can find from time to time a net net that’s worth a large position but that’s only an exception.
So as of tomorrow I will be managing a hedge fund and it still hasn’t sunk in yet. I would like to share a somewhat amusing story to anyone who reads this post. This weekend I logged into the fund account for the first time and actually visually saw my assets under management. I play around with how to look up quotes and mess around with the trading tools which will personally serve me no use. At my personal account at TD Ameritrade there’s a buy and sell button, and a market and limit order button as well a place to type in the share or contract amount of the stock or option you wish to buy or sell. I figure to buy stock I need to know where the buy button is but I can’t seem to find it. About thirty minutes later I realize the buy button does not exist as I have my own broker. His name is Bill. “Bill the Broker”, has a nice ring to it!
It’s forty minutes untill midnight and I am wide awake and totally wired. I can’t fall asleep as I am excited yet petrified of investing other people’s money for the first time tomorrow.
(Luckily I have a blog to get the anxiety off my chest!)
I will probably be writing on this blog less frequently within the next few weeks as I have decided to go into the hedge fund arena so to speak. Therefore I will not be discussing individual securities on this blog as I would feel it would be a major conflict of interest. I’ll still be writing on this blog but again will not be writing or discussing individual investments for the time being.
For anyone who hasn’t read Joel Greenblatt’s The Little Book that Beats the Market they are definitely missing out on most of the most important contributions to the field of value investing since Ben Graham wrote Security Analysis. For a great review on the book check out the Value Vixen Blog
Jason Kelly is the author of several books including one that I read many years ago called The Neatest Little Guide To Stock Market Investing. Yesterday Mr. Kelly had an article about Starbucks, one which I had a major problem with.
Is Starbucks A Buy?
July 19, 2007 | archives
Several subscribers wrote recently to ask about Starbucks. Is it undervalued at current prices, and worth buying?
I think so.
From its split-adjusted price of $4.50 ten years ago, SBUX rose 789% to $40 last November. It then declined steadily to $29 in early March, rose to $32 over the following two weeks, then declined to $25.50 on June 22. It closed yesterday at $26.50, a 3.9% gain from its low a little less than a month ago, but still 34% lower than its November high.
So, what’s the problem at Starbucks now?
Its chairman wrote in a memo that the company’s expansion from 1,000 locations to more than 13,000 has watered down its brand. That doesn’t bode well for plans to add another 1,700 U.S. locations this year. Some analysts project that the company will eventually top more than 30,000 locations worldwide.
Also, insider sales of stock by the chairman and other officers last year made some question the stock’s valuation. In retrospect, the officers were right to sell last year. Some are waiting to see them start buying again as the “all-clear” signal to begin investing.
The reason I think the stock offers more upside than down from here is that, despite its massive market footprint, Starbucks is in a business that has room to grow. Its many stores are not a negative, they’re a positive in the sense that the number two coffee chain in the U.S., Caribou Coffee, has fewer than 500 locations. Starbucks has 9,400 and will top 10,000 by year-end. Having twenty times the presence of its nearest competitor is quite an advantage.
As for concerns that the coffee business is saturated, I don’t share them. Neither does the Specialty Coffee Association of America, which pointed out that only 15% of adults in the U.S. drank a cup of specialty coffee each day in 2005. Too, Starbucks does a lot more than just coffee. It was brilliant at creating a menu with something for any kind of weather, and that brilliance has continued in all of its endeavors.
It faces challenges. Its ambitious expansion plans could go awry, especially in new markets like Brazil, India, and China. In the latter market, it already got into some trouble when it opened a store in the Forbidden City in 2000, only to close it under intense pressure last Friday when accused of trampling over Chinese culture.
Growing pains are inevitable, though, and it’s better to have them than not. They mean the company’s trying to grow, after all.
Another challenge facing Starbucks is increasing competition. Its biggest threat might be not from another coffee chain, but from McDonald’s, which is offering its own premium roast coffee. Other encroachers include Tim Horton’s, Dunkin’ Donuts, and Panera.
Of these threats, only Panera looks legitimate to me. Nobody thinks of hanging out and doing work or homework at McDonald’s. Tim Horton’s is just another coffee shop, and Starbucks has proven quite adept at crushing all comers in that category.
Panera, though, offers an experience that is comparable to Starbucks’s experience, if not better. I’ve worked on Panera’s free wi-fi network in the states, and it was excellent. The food is fantastic and the coffee is great. It’s a real restaurant and bakery that offers coffee, as opposed to a coffee shop that offers some baked goods.
That said, Panera is far, far behind Starbucks. It’s not as quick to get in and out, it’s not nearly as available with just over 1,000 locations, and its brand is nowhere close to being as recognizable as Starbucks’s. Plus, Starbucks has a lot more partnerships in place, with its brand appearing on grocery store shelves, airport kiosks, and on hair barrettes worn by high school girls in Japan.
All in all, I’d say the recent discount on SBUX presents an opportunity. I would hold out for $25 or less, a 6% drop from yesterday’s close.
Tomorrow: A long read ahead of the weekend covering the iPhone, U.S. health care, and Power Investor software. Don’t miss it!
What I didn’t understand was how he was valuing Starbucks. To me, buying at or below $25 may have been reasonable but I saw no analysis and figured it may have just been as arbitrary as when Jim Cramer shouts out random price targets, buy points, and what not.
To my pleasure and suprise this morning, Jason Kelly confronted my question in an article he wrote today and while I may not totally agree with his analysis, I believe it shows he has merit, something I started questioning yesterday. He wrote:
Starbucks
I wrote yesterday that Starbucks looks like a good value to me based on its dominant brand, good partnerships, and growth plans, and that I would look to pick up shares at or below $25. The stock gained 4.6% yesterday, thanks to my article and the market-moving power of my massive readership.
Well, it probably wasn’t just because of my article. It could also have had something to do with rumors that it would strengthen its partnership with PepsiCo and develop a premium hot chocolate drink with Hershey, as reported by Forbes.
One reader, Eric, called me to task for failing to justify my target buy price:
You say wouldn’t buy it above $25/share yet you make no reasoning for 25. Jim Cramer makes these claims all the time, “don’t buy company X under 100.” But Jim Cramer is more suited as an entertainer than an intelligent and rational investor. My question is why $25? Why not $30? Why not $23? Do you see my point? Your $25 seems like an arbitrary number, there’s really no real analysis behind it. I mean, I have no idea if you think this is a 50-cent dollar, a 30-cent dollar, or an 80-cent dollar. If I’m buying a shipping company for half of its ship’s scrap value, it’s clearly a 50-cent dollar or cheaper, but I have no idea about your reasoning behind Starbucks. Any explanation would be quite helpful.
Ah, just when I thought I could sail into the weekend.
Actually, Eric raises a valid point. I did toss $25 out there at the end of the article without explaining it.
The stock bounced off $25 and change twice in the past month. Throughout its history, SBUX has traded at a 1.25 to 1.5 multiple to its growth rate. It’s trying to hit an 18% earnings growth rate this year, but looks ripe for a disappointment. That makes me leery to jump right in, knowing full well that big pops like yesterday’s are always a possibility.
Run an 18% growth rate times a multiple of 1.25 and you get $22.50. Run it against 1.5 and you get $27. Take the average and you get $24.75, slightly less than the $25 I mentioned as my target.
Longtime subscribers know how I feel about targets. They’re flexible until I place an active order. I think Starbucks is ripe for a disappointment and that the stock could well get to the low-$20s before rebounding solidly and convincingly.
A chart-watcher wrote to tell me that the stock’s double bottom off the $25-ish range suggests that it won’t ever get to my sub-$25 target area. Funny thing is, that same chart-watcher told me the same thing about SBUX when it bounced twice off the $29-ish range back in March. Double bottoms don’t always hold, and it’s frequently worth looking beyond chart patterns.
I don’t think there’s a need to rush to buy Starbucks yet.
This weekend to subscribers: What the Fed said, why we’re sitting pretty in semiconductors, how we’re closing in on the stocks we’ve been watching so patiently, and more.
Next Week on this free site: Alternatives to my long- recommended Power Investor software, swing trading versus buying and holding, the accusation that my permanent portfolio strategies are “beyond ludicrous,” weaknesses in Google’s advertising platform, and more.
It’s all part of what one reader called “the best bargain in the business.” Tell your friends.
1. Business Meeting
2. Sardar Biglari, “Thank god we got over that portion!”
3. Intrinsic Value Increased in 2006 and 2007
4. Financing
- Rights Offering: Raised 4.2 million dollars without a consultant
5. Reverse Split
- Allowed shareholders to enter or exit stock with less transaction costs
- Attracted Long Term Investors
6. Capital Allocation
- Not let history of the company influence capital allocation. Western Sizzlin Corporation will flock to the “Greenest Pastures”
7. Invest in:
- Main Operating Business
- Joint Ventures
- Aquisitions:
i. Stocks
ii. Whole Companies
iii. Buybacks
iv. Debt Repayment
v. Dividends — “Highly Unlikely”
8. Investment Strategy
- Markets Are Imperfect
- Inefficient Organizations
- Believes activism is the way to go because the price gets to intrinsic value quicker
9. “Phil and I are willing to effect the destiny of corporations”, said Mr. Biglari
10. Western Sizzlin can function as a catalyst
11. “We want to do well from a capital allocation standpoint as well as with operational activities”, said Mr. Biglari
12. Jim Verney, president of Western Sizzlin makes a brief presentation.
- “More improvements to come”
- Work on three franchises
i. Western Sizzlin
ii. Wood Grill Buffett
iii. Western Sizzlin Express
- “We got more efficient in 2006 and will get more efficient in 2007″
Q&A Session (Please Note that these are not all questions from the meeting)
Question: What is the joint venture doing annualized?
Answer from Mr. Verney: The Wood Grill has seven months of history. I can’t really say the numbers but it has exceeded expectations!
Question: (Referencing page 10 of the 2006 Annual Report) 30% Laws, what’s that?
Answer from Mr. Biglari: If Limited Partners lock money up for five years, Western Investments would absorb 30% of the losses if losses should incur.
Question: Could you raise the Franchise Fee?
Answer from Mr. Biglari: That’s very hard to do because it’s taking away from franchises. That is not in our best interests.
Question: Friendly’s — What were you thinking?
Answer from Mr. Biglari: The signals were all there. The founder of the company revealed conflicts of interests of the board members, they had a terrific brand name that the directors weren’t exploiting, you had money being wasted, [cash] inflows were terrific but the outflows were terrible, it was highly levered, reducing capital expenditures wasn’t reducing SG&A.
Mr. Biglari says, ” We want to be active without being activists. We want to be agents for change.”
Question: What are the three to five best books on business
Answer from Mr. Cooley: Einstein by Isaacson. It’s not a business book though. Blink…there’s a lot to be said for making decisions which you see in the blink of an eye.
Answer from Mr. Biglari: There’s an article by Ted Levitt which changed the way executives think of what business they are in. If I get one thing out of a book it’s worth it for me. There are four good Warren Buffett books and his letters. Buffett would not be doing what he does today with small sums of money.
Question: Five year lockup period — Does this limit the maximum investment.
Answer from Mr. Biglari: We can cut off the amount of shares we issue.
Question: I come from the MSN Berkshire Boards. Since you want to turn Western Sizzlin into a holding company, what kind of culture do you want? Do you want the culture to be like Berkshire Hathaway, Leucadia, or Bidvest? (not sure what was said) Group.
Answer from Mr. Biglari: Buffett uses his reputation as an advantage to buy businesses. Non-Integration adds value, synergy is overrated, non intergration is understated. I will engaged in under performing companies as well. Berkshire was an under performing textile mill, Sanborn Map was one too. Lated he did the Gilettes and Solomon Brothers with private transactions. How an employee behaves when no one is around shows a lot about the culture. Comparing ourselves to Berkshire is pretentious. We aren’t trying to imply we are going to copy Berkshire’s companies.
Question: Why a rights offering?
Answer from Mr. Biglari: It’s quite small in the grander scheme of things — we can’t buy whole businesses with very small sums of money.
Question: How are you balancing Franchise Fees?
Answer from Mr. Biglari: We’re getting a fee by lending our franchise name. We need to keep them competitive. The only way to add franchises is by providing them services to keep them competitive.
Question: What about the buyout [referring to Friendly's]
Answer from Mr. Biglari: We agreed to the $15.50
Questions: When do you think you will deploy capital again?
Answer from Mr. Biglari: We have more ideas than money. We are going to wait for the right oppurtunity. Anyone who manages small amounts of capital will find opportunities in this market, there are opportunities. I don’t like issuing stock to raise money. It helps not having consultants around.
Question: What’s the cost basis of Friendly’s stock?
Answer from Mr. Biglari: $8.54 I believe.
Question: Would you buy insurance companies? Float at no cost?
Answer from Mr. Biglari: We like easy decisions. A lot of people who have gotten into insurance have not done well. If you can turn the cash conversion cycle into a negative number, that’s float right there. One day I want to get into a high quality insurance company. I don’t foresee it on the horizon for now.
Answer from Mr. Cooley: Everyone likes free money.
Question: What do you think the value of Friendly’s is?
Answer from Mr. Biglari: We just sold to an optimist!
Question: When will Western Sizzlin be on a market insted of over the counter?
Answer from Mr. Biglari: I presume over the counter isn’t a real market. We’ll try to list on the NASDAQ eventually.
Question: What are the fees for the partnerships?
Answer from Mr. Biglari: 1% management fee and 20% of profits.
Question: Do you have intentions of rolling the Lion Fund into Western Sizzlin?
Answer from Mr. Biglari: I have no intention of rolling the Lion Fund into Western Sizzlin.
Question: Why did the board resign when you came in?
Answer from Mr. Biglari: The Lion Fund and two shareholders formed a group. We were looking to change the board entirely.
If you don’t have a business sense and dont feel like learning about finance then thats fine. The first step you have to take is accept your ignorance. Dont think you can take a 3000 class and “Trade for money”. Don’t buy companies you think are neat either. Youll most likely do average and pay commission. You may be buying at wrong times and selling at horrible terrible times. Don’t buy a mutual fund either. most funds under perform the S&P500 because they are forced to over diversify. They are forced essentially to do average. So you are paying the managers and doing only average yielding returns below average. Instead buy an index fund which will give you an average return. How the market-savvy investor should invest:
If you understand income statements, balance sheets, basic economics, and understand “busines” then the first step my friend is patience. If you find a business selling at a discount be aggressive and put your money into it. If you have 3-10 major holdings you shall be content. Heavy diversification is the enemy to the investment savvy investor and a burden on performance. If you know something is a sure thing don’t be afraid to put almost all your eggs in one basket. I would say have 2 stocks at a minimum. If you have two sure things and one incredibly outperforms the market while the other does a little below average you will still outperform the market. If you owned 200 securities and a few did absolutely atrocious, a few outperformed, and a few did about average, you would yield average results. By having an enormous portfolio, you take on risk by giving yourself more opportunities for mistakes.
The typical Wall St. Analyst:
Analysts opinion makes me a realize how meaningless most of what they say is. One week a company is a buy and in 3 weeks its a hold. Also. the firms hardly ever tell you to sell. Oh yea, sometimes they think a company will under perform, outperform but if they don’t think it will outperform it might peer perform instead. If they don’t think its a hold they might say they’re neutral. So whats the difference between a sell, moderate sell, and strong sell. Does a strong sell mean sell your whole position and a sell mean sell half? Maybe you can sell it if you want. Maybe if your emotionally weak and attached to your investments the analysts can give you the strength to go on and issue a strong sell so you will have the stenght to let go. Sometimes analysts use dietitian terms such as when some analysts think stocks are overweight and sometimes they think they are underweight. Sometimes a stock is equal weight so that probably means it’s just right. Equal weight may imply a healthy stock. JESUS CHRIST! All these recommendations are so confusing. It’s almost like these guys spit out random crap. Oh that’s right it is.
Now I understand that there arent always random upgrades and downgrades. In a new biotech company loses their patent the analysts would become “bearish”. (ROAR). Now I would too, unless the company traded below cash…a value investor’s dream. I just think analysts for the most part are dangerously short term oriented. Analysts seem to always be thinking of good stories as well instead of looking at the actual valuation of the security in question. Analysts sometimes overlook if a stock has mediocre future prospects but is also screaming cheap. If you bought when an analyst screamed buy and sold when they urged everyone to panic sell, much of the time you will be buying high and selling low. It’s essentially a cognitive disconnect. It doesn’t always mean analysts are wrong but listening to analysts opinions and not doing any of your own homework is very foolish. Even if you do make bad decisions, the brokerage houses still make money. If you are trading for the short term then brokerage houses make more money off of commissions. Therefore brokerage houses want you to trade as often as possible and be as manic depressive as the market itself.
Net-Nets can be defined as a company trading below its working capital. The appropriate formula is Current Assets minus Total Liabilities minus Preferred Stock.
According to this net-net screeener there are 0 stocks trading at or below 66% of net working capital.
The companies trading below net working capital nowadays are slim to none and the quality of the companies to be blunt are garbage. The list as of today contains:
IFTH
MHO
AAC
BSHI
SODI
SPOR
TAIT
CRC
KDUS
LKI
PEAK
It is interesting to note that during times of recessions and depressions the amount of net-nets can reach into the 100’s. This could very well be an indicator that the market is expensive.
In an article here, James Chanos has decided to go short on Moody’s. In the article it states:
He said Moody’s may face lawsuits for keeping its ratings of loans to the riskiest home borrowers too high.
So what does this mean for investors? Well one’s first conclusion may be that it is bad for Moody’s investors. Yes, the stock price may fall but for bargain hunters like myself this should be a blowup that we hope for. If Moody’s temporarily blows up, the stock will surely not go to zero as the returns on capital of this business are extremely high. In conclusion, if Moody’s becomes a MagicFormula stock, it will probably be a no-brainer buy.
I have recently been looking at a company called IBSG International which is trading at Net Current Asset Value. I will be meeting with the company either this week or next week but so far here are my notes from the most recent 10-k.
Holding Company with four subsidiaries:
1. Intelligent Business Systems Group
2. Secure Blue
3. Intelligent Business Systems Development
4. A-Division IT
Why not just one company?
Foreign Markets
2004: Nigerian License Agreement
2005: Republic Of South Africa
- 299 Shareholders — a candidate to go private. Will they go dark?
- Gov’t or Quasi-Gov’t are considered a low collection risk on recievables.
- “Slow Pay” — Less than 12 months
Deferred Revenue: California, South Africa, Kenya, Drake Oil — (Call Drake Oil to see what IBSG is like)
COGS - 5% of Revenue
- No bad debt expenses
2006: Decrease in income tax expense
Increase in SGA
- How secure are the recievables is the real underyling variable for this investment.
- No Off Balance Sheet arrangements
- What does it mean to finance recievables?
- Can’t assure to mantain profitability — for legal reasons? Or is the company seriously concerned.
- How likely is it the company will curtail operations if they don’t have sufficient funds?
- Most of revenue comes from ONLY 3 customers
- Market Cap at 16M / NCAV at 16M
- Why did COGS go down in ‘06
- Why more stock dilution — not more buy backs.
- CEO, in 2005, took a cut on salary to contribute back into company –
a) mgmt believes in company
b) mgmt is desperate for company survival
Investors Business Daily, a well respected paper, occasionally publishes their 20 rules for investment success. Following many of these rules seems to me like it would make the investor pretty unsuccessful.
Rule #2: Recent quarterly earnings and sales should be up 25% or more.
- So when a company has a good quarter and the stock shoots up, pull the trigger baby and buy at the overinflated price.
Rule #3: Avoid cheap stocks. Buy stocks selling for $15 to $100 or more.
- If a company trades below net cash but is at $10 a share it should be avoided at all costs. Cheap stocks are bad (Clyde Milton Listen Up) — buy expensive stocks.
Rule #4: Learn how to use charts to see exact sound bases and exact buy points. Confine buys to these points as stocks break out on big volume increases.
- Find a company, no matter the valuation where you can see an EXACT buy point on the chart. Then when it gets really popular and everyone wants to jump in that’s your time to buy. Don’t buy when it is undiscovered and cheap otherwise you may have to wait more than a few days for price appreciation.
Rule #5: Cut every loss when it’s 8% below your cost
- When a cheap stock gets cheaper get rid of it.
Rule #7: Buy when market indexes are in an uptrend
- Buy when the market is getting expensive
Rule #8: Read IBD’s Investor’s Corner and Big Picture
- Learn how to time the market and read Investor’s Business Daily
Rule #9: Buy stocks with a composite rating of 90 or more and a relative price strength of 85 or higher.
- Buy stocks that are popular among your peers
Rule #14: Don’t buy stocks because of dividends or P/E ratios. Read a story on the company.
- Buy a good story, valuation is meaningless.
Rule #16: Invest mainly in entrepeneruial New America companies
- Buy high tech stock with no proven track record. Buy a good story, Let’s face it Coca-Cola is just boring.
Rule #18: Don’t try to bottom guess or buy on the way down.
- Buy on the way up as the stock gets more expensive.
Rule #19: Find out if the market currently favors big-cap or small-cap stocks.
- Buy what the market favors
Rule #20 Do a post-analysis of all your buys and sells. Post on charts where you bought and sold. Evaluate and develop rules to correct your major mistakes. It’s what you learn after you think you know what you’re doing that’s vital. That’s how you improve your results.
- It doesn’t matter where the stock goes when you own it but what happens after you sell.
So I am having a good year but then again the market is up so most people are. Of course a half a year means nothing but I prefer to do this just for my own amusement.
Anyway this year I am up 16%.
My Biggest Winner this year has been the Canadian oil sands company UTS Energy (UEYCF) which is up 55.54% and my biggest loser is furniture maker Natuzzi (NTZ) down 7.62%
Tweedy Browne is a well respected value investing firm. They put up, I’m not sure how long ago, a write up on what has worked in investing. It’s interesting to note that Benjamin Graham type stocks do the best.
There’s a very interesting Value Investors Club Article on Natuzzi dating back from 2002. While the company looks like utter crap right now losing money and facing tough times, the balance sheet is still very healthy and they do trade below net tangible assets. The furniture markets are very cyclical and are relatively tied to the housing markets. With a weak housing market in Italy, Natuzzi’s home turf, and as Natuzzi’s CEO says an even “softer US housing market”, the company isn’t doing that terrible. Perhaps that’s the problem. What if they don’t do that terrible for ten years — you have a company making 1 to 2% on their equity when profitable and will go on and off being profitable to non. Going back to the 2002 article the company had previously returned around 20% on their equity. Natuzzi is also a name brand and a household name to mom’s all over the world. You have good management facing tough times therefore you risk having dead money. As I see it and as Mohnish Pabrai would say in his book The Dhando Investor “Heads You Win, Tails You Don’t Lose Much”.
The article to the Value Investor’s Club write-up can be found here. Article Link
Kaiser Group Holdings, Inc. (KGHI) is an extremely interesting situation. KGHI is a holding company that owns 100% of Kaiser Group International. Kaiser Group International owns 50% of Kaiser-Hill Company and 100% of Monument Select Insurance Company. The company currently trades below liquidation value. Much of the company’s liquidation value is in cash yet how does one know if they will use the cash wisely. The answer is you simply don’t. Luckily for the small time investor there is a catalyst. The company has recently decided to go private therefore not having to deal with listing fees, etc. The company recently announced a 1 for 20 reverse stock split which will reduce the shareholder base to less than 300, which is the requirement for non-reporting companies.
“No fractional shares will be issued. Instead, the Company will pay, in lieu of fractional shares, $36.00 for each share of the Company’s Common Stock held by a holder immediately before the Effective Date of the Reverse Split and not converted to whole shares of Common Stock of the Company after the Reverse Split.”
Therefore if one buys 19 shares, he or she will get tendered out at a price roughly 40% higher than the current share price. This is arbitrage at its finest. It is also interesting to note that Warren Buffett made about half of his profits in his early partnership from arbitrage.
As a disclosure I am long Kaiser Group Holdings (KGHI)
Kaiser Group Holdings, Inc. (KGHI) is an extremely interesting situation. KGHI is a holding company that owns 100% of Kaiser Group International. Kaiser Group International owns 50% of Kaiser-Hill Company and 100% of Monument Select Insurance Company. The company currently trades below liquidation value. Much of the company’s liquidation value is in cash yet how does one know if they will use the cash wisely. The answer is you simply don’t. Luckily for the small time investor there is a catalyst. The company has recently decided to go private therefore not having to deal with listing fees, etc. The company recently announced a 1 for 20 reverse stock split which will reduce the shareholder base to less than 300, which is the requirement for non-reporting companies.
“No fractional shares will be issued. Instead, the Company will pay, in lieu of fractional shares, $36.00 for each share of the Company’s Common Stock held by a holder immediately before the Effective Date of the Reverse Split and not converted to whole shares of Common Stock of the Company after the Reverse Split.”
Therefore if one buys 19 shares, he or she will get tendered out at a price roughly 40% higher than the current share price. This is arbitrage at its finest. It is also interesting to note that Warren Buffett made about half of his profits in his early partnership from arbitrage.
As a disclosure I am long Kaiser Group Holdings (KGHI)
While I usually won’t bother looking at companies trading below more than 2/3 of net current asset value, Bexil (BXL) is a rare exception. Net Current Asset Value is defined as current assets - total liabilities - any preferred stock. As of the March 31, 2007 Balance Sheet the company has
Current liabilities:
Accounts payable and accrued expenses $ 366,698
——————-
Total current liabilities 366,698
This gives us a rough liquidation value of 38291986 - 366698 = 37,925,988
The current market cap of the stock is currently 29,730,000 or 78% of net current asset value.
The company has all this cash and cash equivalents from selling its 50% stake of a previously held insurance operation. The cash equivalents are just US Treasury Notes. The CEO certainly looks up to Warren Buffett as well which is why I really like this security. He states on his website
“Our objective is simple, straightforward, and sharply focused: to increase book value per share over time. We believe that long term stockholders will benefit from a rising book value as market recognition builds and investors come to appreciate Bexil’s intrinsic value as well.”
1) A proven track record with demonstrated earning power.
2) Sales of between $10 million and $50 million.
3) A seasoned business with solid customer relations.
4) Good return (at least 15%) on equity, little or no debt.
5) Solid management must remain. Audited financials required.
6) Particularly interested in a “spin-off” from a larger company.
To me, buying this stock is a no brainer. You are essentially buying risk free bonds at a 30% discount while waiting for a value investing oriented use of the cash. There isn’t much risk in that.
FreightCar America (RAIL) is the leading manufacturer of coal freight cars in the United States. It has a whopping 80% market share. Recently, the coal market has been in a slump taking the coal freight car market down with it. The problem RAIL is facing is with inventory backlogs which of course become worth less and less over time due to depreciation expenses. Orders are declining for freight cars which is really hurting the company. Fortunately, the company is still making money and while the latest quarter operating cash flow was negative, it seems like the worst is here. Any book on coal will tell you that coal demand for the next ten years is bound to increase which would substantially help the share price of RAIL. With much of its market cap in cash, the company will not go bankrupt. One should also take note that the company has a very high return on assets due to a lack of cap-ex. Every commodity company will face blips along the way (or in this case an industry directly correlated with commodities). The time to buy is when things are looking bad. This is a best of breed company at a bargain price. This does however drift away from my usual strategy of buying deep value stocks, ones trading below their liquidation values, etc. This is no Bexil or FEC Resources — rather a really well run company at a bargain price.
Chesapeake Energy Announced it will start drilling at the Dallas/Fort Worth Intenational Airport. This struck me as a bit strange so I thought I would share the article
