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Thursday, May 5, 2011

The Big Short & The Big Long

This is a basic and unrefined idea, but I think in general this will work quite nicely.

Long a basket of old tech stocks: HPQ, MSFT, GOOG, APPL, INTC, CSCO

Short a basket of new tech stocks: CRM, OPEN, LULU, TZOO, NFLX

Of course, trim the long basket where you see fit and trim the short basket where you see fit; but in aggregate I believe this would be a solid idea.

There have been some great write ups posted on the web for most (if not all) the long positions, and there have been some equally good write ups for short positions.

It would have been better to have taken this kind of position about two weeks ago, but this also means lots of the momentum going for the ridiculously price over tech stocks are probably over.

The Big Short & The Big Long

This is a basic and unrefined idea, but I think in general this will work quite nicely.

Long a basket of old tech stocks: HPQ, MSFT, GOOG, APPL, INTC, CSCO

Short a basket of new tech stocks: CRM, OPEN, LULU, TZOO, NFLX

Of course, trim the long basket where you see fit and trim the short basket where you see fit; but in aggregate I believe this would be a solid idea.

There have been some great write ups posted on the web for most (if not all) the long positions, and there have been some equally good write ups for short positions.

It would have been better to have taken this kind of position about two weeks ago, but this also means lots of the momentum going for the ridiculously price over tech stocks are probably over.

Tuesday, May 3, 2011

#2 Investment Ideas & Great Links

Great Links

1. "Decline of Manufacturing" is Global Phenomenon: And Yet the World Is Much Better Off Because of It (hat tip to dataroma)

http://mjperry.blogspot.com/2011/04/decline-of-manufacturing-is-global.html

2. Munger on CBC, discusses Sokol (hat tip to dataroma)

Munger does a great job describing the Sokol incident as a tragedy, in the greek sense.

http://plus.cnbc.com/rssvideosearch/action/player/id/3000019268/code/cnbcplayershare

Investment Ideasa

#1 (L) Loews

This company is owned by the Tisch family, a well known value family. It's currently trading at around cash + CNA holding, DO holding, Boardwalk Pipeline, then you get a collection of natural gas assets and hotels for free. There is a nice talk about the company on the corner of berk website

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=3172.0

Presentation on Loews

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDI0NjM0fENoaWxkSUQ9NDM5NTA0fFR5cGU9MQ==&t=1

Thoughts on tradional supermarkets and Winn Dixie

The death of Dixie

Winn Dixie went bankrupt around 2006 and has been in turn around mode ever since. The big problem for Winn Dixie is that the traditional supermarket model has been disrupted quite dramatically. For a long time grocery stores enjoyed competitive advantages of having scale in a community (more efficient to service 10 supermarkets in a city, than just 1 in each city) and being the first supermarket in the area (acquire better lots, higher traffic, closer to residential areas, people become accustomed to the supermarket and it's employees and therefore it becomes sticky.)

Yet, there was a large disruption within the traditional supermarkets: WalMart.  Once Walmart started to offer groceries it became a huge hit with consumers, in fact it's currently the largest grocery retailer. The massive scale of Walmart and efficient distribution system allows WalMart to offer grocery products cheaper than traditional grocery stores.

This caused supermarkets to change or die. The supermarkets that have changed and thrived, have been service oriented supermarkets. Supermarkets that go the extra mile to service their customers in order to oblige those customers to come back.  Generally these supermarkets pay their employees very well with stock options, high salary and great benefits. Some grocers have thrived by being the organic grocery or simple & small, but for old supermarkets, a drive in customer service was necessary. The supermarkets that decided to keep the old model of paying employees below average wages and keeping the stores less than fresh have been in a tail spin, which allowed Winn Dixie to end up in bankruptcy court in 2006.

Spirit of Dixie

Peter Lynch took over Wnn-Dixie and has be on a mission since to change the supermarket around. He closed down over half the stores, and consolidated the operation from over a thousand stores to under 500 stores. He then went about making Winn Dixie a more service oriented supermarket, investing a massive amount of money in remodels and increasing the customer service of the overall operation. Yet, even with all the hard work to turn around the store, he couldn' control the economy of Florida that went into a deep recession since 2007 due to a hard hit real estate sector.

People were pinching their pennies and were willing to drive to Walmart in order to save on their grocery bill. Also, Winn-Dixie with their incredible turn around in customer service and store quality has not been able to top the store quality of their closet competitor, Publix. So Winn Dixie is in a rut, they will never have prices as cheap as Walmart and they will never have the customer service of Publix (Publix pays their employees very well, and is actually an employee owned company, giving it a structural advantage in giving employees an incentive for great customer care.)

Cheapness of Dixie

For all it's warts and faults,  does Winn Dixie deserve to be priced so low? Currently Winn Dixie has an EV/Sales of 0.05, that's opposed to Whole Foods with 1.14, SuperValue 0.24 or Kroger of 0.27. Winn Dixie also has over 7B in annual sales, which means means if Winn Dixie could reach a reasonable profit margin of 0.01%, that's 70M in net income. Currently, Winn Dixie has a market cap of around 400M and an enterprise value of 330M. The company also has over 500M in NOL and is trading below half of book.

My guess is, all the negativity of Winn Dixie is already priced in and most people have been too negative on Winn Dixie's prospects.  If Winn Dixie feels any material increase in year over year, same store sales the we will see a jump in price.  

What to do in an expensive market?

During the historic 2000 bubble, Buffett had his money invested in REITS
I have less than 1% of my net worth outside Berkshire and when the Nasdaq hit its high, I had nearly all of it in REITs, which were selling at a discount to their liquidation values.

BRK Annual Meeting 2005 Tilson Notes, via http://buffettfaq.com/

Which is interesting since if you would never put money in the stock market if you based your decision on over market valuations. Yet, there you had it, a whole industry of securities was dirt cheap in the height of the NASDAQ bubble.

So fast forward to today and if you were Shiller, you would once again say the stock market is over valued and stocks as part of your portfolio should be light. Yet, I think you would be making the same mistake again.  By bypassing today's market you'd also be bypassing some great values in Blue Chips, especially Old Tech companies like Microsoft, Intel, Johnson and Johnson and Cisco.

I am not saying anything new here to be honest. Lots of value investors have been saying Blue chips are cheap. Yet, I am just trying to come to terms with two thoughts. One, if the market is generally over valued it's time to be cautious and have a larger stock pile of cash, and two, bypassing great values because everything else is expensive is just as stupid as passing up the 10 cent bananas because the apples are selling for five dollars a piece.

No one likes buying in an expensive market, but maybe we just need to hold our nose. Heck, even Buffett thinks Microsoft is cheap.