Sunday, January 13, 2013

investment ideas, too many

I had a giant position in Bank of America 'A'-warrants last year. I didn't mean for it to happen, but as BAC got cheaper and cheaper in 2011 the position size just grew. It wasn't 100% of my net worth, but it was close.  Even though BAC did remarkably well in 2012, I actually made a huge mistake owning it.

One of the best fundamental investors I know, sent me a write up on USG. He made a very good case for a 40+ USG stock and this was when USG was trading below 7 a share. I thought his analysis was correct, but I stubbornly kept my full position in BAC, and when my brain started to dethaw, USG had climbed over 10 and I refused to buy it. Of course now USG is trading over 29 a share.

I am not complaining about a great year, but let's be honest -- I screwed up. 

Currently, I'm riddled with lots of possibilities. Here are some I am thinking about. 

1. BAC.A.WS -- still cheap, BAC will much likely be worth much more in the future and the leveraged nature of these instruments should be beneficial. 
2. CHK -- very compelling write up done at OID, where the valuation is 50+, not bad for a stock trading at 17 a share. Holds one of the best positions in natural gas, the only commodity I am aware of selling below it's cost. 
3. INTC - worlds largest chip maker, selling for under a 10 multiple. Large R&D should allow them to start competing effectively with power sipping chips. The company is repurchasing a large amount of shares. Maybe profit margins will fall down much larger than I expect and it won't be as cheap I, but it's likely worth a hell of a lot more. 
4. ORCL  -- company with a sticky business and large cash flows. CEO has done an awesome job allocating capital and is repurchasing shares left and right. Seems like a steal with an EV/EBITDA at 8.73
5. WLP -- company is trading at a very low PE, and repurchasing a maddeningly amount of shares. I honestly don't know much about WLP, but I can't help being intrigued. 
6. FIATY -- Italian car company with world wide operations. Makes Ferrari, Maserati, Lancia, Fiat, Alfa Romeo (Top Gear loves you) and now it owns most of Chrysler and will probably own all of it. Fiat trades at EV/Revenue of 0.18, if profit margins can increase to what their impressive CEO says they can make -- Fiat is a steal. There is a good write up done by Greenwood on this. You can even own a parent company, Exor, that's trading at a discount to NAV. Very interesting.
7. Call options on MBI, if not the common. MBIA, seems outstandingly cheap, especially if they get their BAC settlement soon. Reminds me a Cornwall idea -- the question is when will they settle? 
8. Put options on Chinese Cos -- could very well see a lot more delistings very soon. Year end is up for these companies and with more auditors worried about signing off on crappy financials -- we could see some nice money made on puts. 
9. Japanese net-nets. Oddball, Geoff Gannon, Pabrai, Spier have shown lots of Japanese companies with negative EV, positive earnings, and dividends -- some even buying back shares. 
10. Japanese cos, that are good but selling cheap. Aida was an example of this, but Monex, Pronexus and others are probably very cheap and have more realistic ROE. 
11. Somehow copying Kyle Bass' trade on JGB. His analysis seems obvious, not sure how to do a trade off this and not sure what the pay offs are; but very interesting. 

Unfortunately, I don't know of any great short ideas.  Lots of things I don't like, but nothing that grabs me. 

Lots of things to think about.  Life is good. 

Sunday, January 6, 2013

Two Books on Warren Buffett's Desk - Japan Company Handbook and The Success Equation

Hat Tip to Oddballstocks and ASTA for noticing two books on Warren Buffett's desk.

(1) The Japan Company Handbook.

Lots of investors are finding net-nets in Japan. Maybe Warren is starting to bite? If you are interested in purchasing this book, you can find it here.

(2) The Success Equation: Untangling Skill and Luck in Business, Sports and Investing by Michael J. Mauboussin

You can find an interview (with transcripts) with Michael J. Mauboussin and Miguel Barbosa here.

Saturday, January 5, 2013

Lance Armstrong and Why Superior (Corporate) Results Deserve Skepticism

On July 15, 2005 CNN had a piece about Lance Armstrong called "Superman on Wheels" They explained Lance gets twice as much oxygen for every breath as a healthy twenty year old.

This should have been a red flag for skeptics, but most of us, we used it as the rationale for his success. We didn't stop to think how unnatural it is for a 35 year old who had been through chemotherapy to be twice as physiologically superior as a 20 year old. If we would have, we wouldn't have been so shocked when a mountain of drug abuse allegations came out.


For companies operating in the same industry with no durable competitive advantages, the laws that apply to Lance Armstrong also apply to them. When certain ratios, like profit margins, get out of line with competitors, it's psychological easy to attribute this to an overly competent management.

WorldCom was like Lance Armstrong.

In Dan Reingold's Confessions of a Wall Street Analyst, he mentions how "by 1993 it [WorldCom] had become the fourth-largest provider of international long distance services behind AT&T, MCI, and Sprint, with the fastest growth rates and highest profit margins in the industry."  Yet, why exactly did WorldCon have such superior results?

Just like Lance's competitors, WorldCom's were baffled. "WorldCom’s efficiencies and synergies had been, up until now, the envy of executives at Sprint and AT&T. Even as WorldCom faltered, executives at AT&T and Sprint remained completely obsessed with understanding how WorldCom managed to get its costs so much lower than their own."

In the end, Reingold explains how the fraud got perpetuated "The fraud, it turned out, had occurred mostly in the way line costs were accounted for. Line costs were those costs WorldCom paid to local phone carriers for originating and completing phone calls (the so-called last mile) and were WorldCom’s single largest expense. Apparently, Scott Sullivan and whoever else knew about it had decided to capitalize line costs, which meant spreading the costs over ten or more years instead of over one year, which juiced earnings and just so happened to be totally inconsistent with accounting rules. The idea of messing with such a large and important part of a company’s business was so audacious that it never occurred to most people that someone would try to do such a thing. It was the elephant in the room, the fraud too huge to fathom."


For WorldCom it was line costs significantly lower than competitors, for Autonomy it was a receivables to revenue ratio unreasonable for a software company, and for Lance it was an oxygen absorption that was inhuman.  

When things are too good to be true, it's important for an analyst to be guarded. Financial ratios might be a boring part of analysis, but it's an important one that must be based in reality.