Friday, September 30, 2011

Ron Muhlenkamp Interview - Forbes Intelligent Investing

 A nice interview where Ron talks about how stocks are for sale - there's a point where he makes a telling statement about being worried about redemptions from clients, even though he's convinced returns in 4-5 years on things like Cisco has very high positive expectation.

Americans Overwhelmingly Pessimistic About the Economy, Says TIME/Money Mag

In my view, another sign that the USA is ready for a turnaround.  I wonder if the more affluent people being more negative is a sign that stocks, held more by the affluent, have fallen even more than the economic reality Justifies...

Americans Overwhelmingly Pessimistic About the Economy, Says TIME/Money Mag

Wednesday, September 28, 2011

Tuesday, September 27, 2011

Comparing Canadian Equities to US Equities

The last several years have seen a strong separation between Canadian equity returns and US equity returns, made even stronger by the Canadian dollar's outperformance as well.  EWC is an iShares ETF that measures Canadian equities (in US dollars), and SPY is a good ETF to reflect US equities.  The graph below shows the ratio between these two ETFs, highlighting the strong out-performance Canada has had for almost 13 years now.

The interesting question is, can a difference like this continue for long?  The ratio has clearly had trouble going over 0.25 since mid-2008, and from the craze for commodities that has been behind this trend, I would be very worried about investing in Canada assuming this ratio can continue.

It's too bad this data isn't available for the seventies (the last big commodity surge).  I suspect it would show a similar run-up followed by a drop to the 0.1 level that you see in the 90s.  What and when will make it fall is impossible to predict, but some things that come to mind are a hiccup in China's debt-fueled growth, increasing interest rates causing construction slowdowns around the world, etc.

Monday, September 26, 2011

Why Best Buy Is a Better Purchase Than Amazon

An interesting contrarian analysis... I definitely think differently about ordering electronics online than I do about books... It's harder to return and shipping costs become much more relevant...

Why Best Buy Is a Better Purchase Than Amazon

Berkshire Hathaway Authorizes Repurchase Program

More evidence of cheap stocks available out there... Warren Buffett rarely buys back stock and only if he believes it is significantly under-valued...

Berkshire Hathaway Authorizes Repurchase Program

Saturday, September 24, 2011

Which half of the S&P500 is best?

People have done studies in the past of selecting stocks based on fundamental metrics like PE, price-to-sales, etc.  From what I've read, those studies show that buying the cheaper stocks is a winning strategy over the long run.  If you divide up the S&P500 into two halves by various metrics, you can aggregate the companies' sales, earnings, etc to get a view into what a holding company that held each of these companies would look like.  Below are a selection of details on these virtual companies, made up by taking the bottom or top 250 companies by various metrics.

Some results are obvious (ie. taking the lowest price-to-sales gives you a lower price-to-sales).  You may also wonder "what about growth?" - it is true that growth is not reflected in these numbers (the expectations for it are reflected through higher prices of course).  At the level of 250 companies in the S&P500, however, it seems unwise to expect a lot of value-creating growth, but I accept this nonetheless as an important caveat to the numbers below.

Here are some observations I found interesting:
  • The dividend yield is fairly similar unless you select for yield, in which case the high dividend half has a lower PE, but significantly higher ROE.  This highlights that maintaining a high ROE in companies that re-invest all their money back into the business is often difficult.
  • You can buy 65% of the earnings of the S&P500 for only 52% of the market cap (first two columns) - I was surprised to see this half has the same margins, and even slightly higher ROE.  The main downside seems to be a noticeably higher liability-to-assets ratio.

Friday, September 23, 2011

Update on Sector SPDR Weightings

In my last post on the relative values of the 9 sector SPDR ETFs, I showed a graph of the values across time (link).

Since then, the market has fallen a 17% or so from the monthly peak, so I thought I'd look at some peaks and troughs over the past 10 years from this point of view.  The table below shows the relative weightings for today, followed by the recent peak in May, the terrible low of March 2009, the peak before the credit crisis in October 2007, and the bottom after the dot-com bust in September 2002.  The colors show how that weighting compares to the previous one.

A few observations:
  • XLE and XLB (energy and basic materials respectively) are falling for the first time in a long while - could this mean the end of the resource/commodity boom that we have been in for the past ~10 years?
  • XLY and XLK (consumer discretionary and technology respectively) have been doing quite well, including in the recent pullback - there are lots of cheap stocks in those sectors, so this makes sense to me.  If we're headed into recession, shouldn't consumer stocks be falling by more?
  • XLF (financials) is as low as it was in March 2009... it doesn't seem like the same kind of environment from a risk of financial collapse perspective, so does that mean there are bargains in the financial sector?

22-Sep-11 112.86 -17.3% 10.7% 21.0% 4.1% 10.2% 8.4% 10.4% 11.7% 11.1% 12.4%
1-May-11 136.43 84.5% 11.9% 23.4% 4.8% 11.3% 7.8% 9.2% 9.6% 10.3% 11.8%
1-Mar-09 73.93 -51.7% 10.4% 22.2% 4.1% 9.2% 7.6% 11.0% 13.7% 12.4% 9.4%
1-Oct-07 153.08 105.5% 11.9% 21.0% 9.1% 11.1% 7.8% 7.7% 11.5% 9.8% 10.0%
3-Sep-02 74.49
9.8% 12.1% 11.3% 11.1% 6.9% 11.0% 9.7% 14.6% 13.4%

Tuesday, September 20, 2011

Chinese Real Estate Bubble, and US Bottom?

A nice article from GMO about real estate bubbles, and how many indicators are implying possible trouble in China (India and to a lesser extent Canada also seem to be showing this in my view).  The USA, on the other hand, seems to be close to bottoming out according to their analysis, which would line up with things that Warren Buffett has said in the past few months.  The link below is to a summary, and the original article is linked there for people who are registered with GMO.

Sunday, September 18, 2011

Large Caps on Sale - any way you look at it

I was thinking about my last post on large caps, broken out by quintiles.  It was market-cap weighted since I summed all the companies together and I was wondering whether some of the largest ones like Apple etc were dominating the numbers.  To look at it another way, I tried doing it with each company equally weighted and got similar results shown below for those interested... I did this by assuming the same amount invested into each company.

The results are not very different - the largest cap companies continue to be cheapest and have the best margins and ROE.  The Market Cap column in this table represents the sum of $100 million invested in each of the 100 companies.

Saturday, September 17, 2011

Large Caps on Sale? S&P500 By Market Cap Quintiles

Another interesting application of aggregating on the S&P500.  I broke the S&P500 into quintiles (5 groups of 100), sorted by Market Cap.  Quintile 1 was the biggest 100 companies by market cap, then the next 100, etc.  The table below shows how they look.  The interesting trend is that the bigger you get, there's a clear upward trend to higher margins and ROE (TTM), and yet also to a lower P/E ratio.  Some of this can be explained of course by the higher expected growth of the smaller companies, although the low margins and ROE make me wonder whether that growth adds to value or not.  Or perhaps this is another piece of evidence that large U.S. blue-chips are on sale?

Buffett's Berkshire Stock Holdings as an Independent Business

Benjamin Graham wrote a long time ago about the importance of seeing stocks as a share of a business, not as pieces of paper that are traded between investors.  Since Warren Buffett is one of Graham's most famous disciples, I thought it would be interesting to apply Portfolio Aggregation to the stocks that Buffett's company Berkshire Hathaway is invested in.

An easy way to get a list of stocks that Berkshire holds is from Buffett's annual shareholder letter.  I took this list, excluding a couple that I couldn't get information for (Munich Re & BYD), and added up Buffett's share of sales, earnings, etc into a separate holding company.  Here's what the holding company looks like with some comparisons to the S&P 500.  Some interesting things that jump out about Berkshire's holdings:

  • They are cheaper - 11 P/E ratio vs 14 for the S&P 500 (TTM).
  • They are more efficient with capital (no surprise there) - ROE is 4% higher.
    • Most of the efficiency seems to come from leverage, since the ROA (backing out interest) looks similar.
    • This may be because 34% of these holdings are in banks (WFC and USB) vs 16% for the S&P.
  • They have very little capex (2% vs 6% of TTM sales).  This may have been somewhat different if the BNSF railway hadn't been bought out and moved into Berkshire as opposed to in these holdings.
  • Their return on retained earnings is far higher (+13% vs -18% for the S&P).  This may be because the S&P earnings are so affected by bad banks & their associated write-offs, but is interesting nonetheless.

Thursday, September 15, 2011

Dell Could Repurchase 25% Of Its Shares In The Next 12 Months And Barely Dent Its Cash Hoard

An interesting analysis on how cheap Dell is and how they are spending capital on share repurchases (as opposed to acquisitions that other companies in the space seem to be doing).  The exact math is debatable since if Dell buys back 25% of their shares, it is unlikely they'll be able to do all of that at today's prices.  But with Mr. Market in a pessimistic mood these days, who knows?

Defense stocks are at historic lows: analyst

Some good names to investigate if you believe like I do that the USA will continue needing higher military spending to keep it secure...

Defense stocks are at historic lows: analyst*http%3A//

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China's Biggest Bubble Warning Ever

I continue to believe there's a problem in China that isn't getting enough attention in the media...the specific pharma plant mentioned in this article is eerie if it's true...

China's Biggest Bubble Warning Ever

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Tuesday, September 13, 2011

Prof Richard Sylla returns prediction

Richard Sylla is a professor at NYU.  He apparently predicted poor returns for the past decade and his current forecast shows good returns for the next decade (his approach seems basically like a "mean-reversion & overshooting" type argument).

Read more here, and the key picture is pasted below...

Monday, September 12, 2011

An Example of Portfolio Aggregation - Dell and HP

When you build a portfolio, you are really building your own holding company, with an ownership in the various companies you buy.  Below is an example of how to look at this for investing an equal amount in Dell (DELL) and Hewlett Packard (HPQ).  At a time when tablets are supposed to make PCs obsolete, and with both businesses facing lots of negative news, I thought it would be instructive to see how cheap the combination of these two companies gets.

Both of these companies are in the "Computer Hardware" industry, and in the trailing twelve months (TTM), HPQ has a 33.4% market share of that industry and DELL has 16.1%.  So in total they have about half (five years ago it was more like 60%).  So are they shrinking?  Actually, the industry has grown by about 9% per year over the last 5 years, while HPQ has grown 8% and DELL 2%.  The aggregate investment has grown by 5% per year (vs. 4% for the revenues of the S&P 500).

What else can we say about the HPQ+DELL holding company?  Margins have grown from 5.5% five years ago to 6.6% in the TTM, and ROE has grown from 23.7% to 29.5%.

In contrast, the valuation has dropped from a price-to-sales of 1.1 5 years ago to 0.4 right now.  Price-to-book dropped from 4.7 to 1.7.  The PE ratio went from 20 back then, to 5.9 right now (this doesn't back out the surplus cash that the companies hold, which would lower it a bit more).

Of course, all of this may be because PCs are going to gradually disappear, so if you believe that, this is a classic value trap.  If you think the industry is going to flat-line or do better over the next few years, though, you can buy most of the market share for 0.4x sales, in a business that is easily earning higher than 5% margins.  Even at 5% margins, you're getting an 8% yield on your investment.

Some of that return will no doubt get burned on pricey acquisitions, etc, although the return on retained earnings over 5 years for the aggregate has been 10.9% which isn't bad.

So is this a slam dunk investment?  I'm not sure - I think it's attractive at this price, but I could be wrong.  The main point of this post is to explore the value of aggregating different companies into holding companies to see what the aggregate looks like.

Saturday, September 10, 2011

Bruce Berkowitz Interview During Wells Fargo in 1992

Here's an interview from Bruce Berkowitz in 1992 (in the well regarded Outstanding Investor Digest publication).  He talks about why he is buying WFC so aggressively, and is interesting to compare to his current aggressive position in AIG.

Benjamin Graham speech from 1963 about investing and the market

Here's a typewritten copy of a speech from Benjamin Graham back in 1963...

Friday, September 09, 2011

S&P500 Return on Equity Over 2 Years

If you aggregate the 500 companies in the S&P 500, by market capitalization, you can look at the S&P 500 as a big holding company representing complete ownership of all the underlying 500 companies.  Doing so on September 1, 2011 would tell you, for example, that the TTM (trailing twelve month) P/E ratio for the S&P 500 is 13.7, which means your company has earned 7.3% on every dollar you invest, of which 2.1% was paid out in dividends (29% payout ratio) and the rest re-invested.

As Warren Buffett wrote about in the seventies (link), the re-investment adds to book value, and ideally gets some incremental return on equity (ROE) on your behalf.  What is the ROE of the S&P 500 right now?  You can figure it out with the same aggregation process as above.  As of September 1, 2011, the ROE of the S&P 500 was 13.8%, and the Price-to-Book is 1.9.

The first graph below shows how the ROE has behaved over almost 2 years, with the early low points obviously caused by the drop-off (and write-offs!) in earnings during the credit crunch.  You can see that the earnings have bounced back well, although many seem to be concerned about how long it will last.  It is interesting to see the number hovering near the 12% that Warren Buffet mentions in his article so long ago.

So, investing in stocks right now gives you 2.1% in dividends and lets you re-invest another 5.2% into a 12-14% coupon.  That's a pretty good deal, especially when contrasted with 2% coupons for US Treasuries and not much more for high-quality corporate debt.  Incidentally, it's not surprising to see that companies that have no real need of debt (like Google, Johnson & Johnson, and Intel) are all issuing debt at super low yields, and often buying back stock in large amounts.

One last part of analyzing ROE I want to present is this:  you can also break it down into components - i.e. ROE = Net-margin * Sales-to-Assets * Assets-to-Equity.  The second graph below shows these three components - you can see that all 3 (margins, asset turnover, and leverage) have improved over 2 years.  To me this graph is underscoring that corporate balance sheets and earning power are doing well.

With all of these ways of looking at it, I'm having trouble seeing how you can do poorly investing in stocks, especially when contrasted with bonds.  If the whole financial system is going to go under, maybe the gold bugs will triumph over everybody, but I don't see it.

Procter & Gamble: Company's Dividend Vs. Debt Yield Shows How Cheap Stocks Really Are

Yet another piece of data showing how crazy equity vs bond yields are these days...

Procter & Gamble: Company's Dividend Vs. Debt Yield Shows How Cheap Stocks Really Are

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Wednesday, September 07, 2011

Wake Up and Smell the Profits

Another article, this time from Barron's showing how many cheap stocks there are out there... I especially like the quote "good things happen to cheap stocks" at the end...

Wake Up and Smell the Profits
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Half of the S&P 500 Yields More Than 10 Year Treasuries – Why Aren’t People Buying Stocks?

A great summary how investing is more about emotional discipline than being very smart... It seems hard to go wrong owning equities at prices like this...

Half of the S&P 500 Yields More Than 10 Year Treasuries – Why Aren't People Buying Stocks?
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Monday, September 05, 2011

S&P 500 Sector SPDRs - historical sector weights

Here's an interesting way of looking at sector weights, and their relative performance.  It's easy to do - just take the 9 sector SPDR ETFs, one for each sector, and divide each by the sum of all 9.  The graph shows the history of this since 1999.  This analysis leaves out dividends (which I know is not fair, since sectors like Utilities may have disproportionate dividends), but it gets the idea across.

It's interesting to note that the dot-com bubble burst when the XLK (tech sector) was around 25% of the sum... XLE has been having trouble breaking that 25% range as well in more recent years.  Although there's nothing magic about 25%, I wonder if that range is where a sector gets too big for the overall economy to support it?

Saturday, September 03, 2011

Will US follow Japan's path?

This article discusses the issue, although it's tough for any article to be conclusive the subject with all the factors that must be involved in these macro considerations...

The lowdown

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Friday, September 02, 2011

Whitney Tilson August Shareholder Letter

Some highlights from this letter:

- describes the redemption model that they use to prevent short term redemptions that happen during market crashes
- some good descriptions of philosophy even though I have no opinion of most of their picks

Whitney Tilson August Shareholder Letter

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Inventory Turnover: The Ratio That Beats The Market By 21.7%

A good article and interesting hypothesis that this metric could outperform so strongly vs the market

Inventory Turnover: The Ratio That Beats The Market By 21.7%*http%3A//

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20 Large-Cap Dividend Stocks With Impressive Profitability

Isn't it amazing that there are so many solid, multi-national blue chip companies yielding 100+ basis points more than 10-year treasuries?

20 Large-Cap Dividend Stocks With Impressive Profitability*http%3A//

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Thursday, September 01, 2011

ManTech: Interesting Defense Contractor That Doesn't Completely Add Up

An interesting company and a good write up on it...

ManTech: Interesting Defense Contractor That Doesn't Completely Add Up*http%3A//

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100 Million Elderly: China's Demographic Time Bomb

Another article that leads me to question the conventional wisdom of China being a miracle economy... How do you fight such a big demographic headwind?

100 Million Elderly: China's Demographic Time Bomb,8599,2091308,00.html

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