Monday, December 17, 2007

From GGG to MCO

Did it today -- sold some more of my GGG for Moody's (MCO) -- probably not a good price for the trade but at least I have some exposure which is what I wanted. My thinking is that I am not really increasing my exposure to housing/debt/financials but rather just shifting it from Graco which was about 40% exposed to housing. I expect Moody's to be faster growing than Graco over the next several years and its selling at a similar valuation despite Moody's having even better economics than Graco which is really hard to do.

I figured my loss exposure to MCO wasn't much greater than to GGG and it could be even better protection because Moody's has underperformed Graco significantly over the last couple of years -- prior to that MCO was a better stock.

Buying MCO at almost half off and I figure that the stock will not get truly cheap because Buffett owns 18% -- he will just buy more at the right price. So will the company -- figure on $500 mill in share buyback annually which should be enough to buy back between 10-15 mill shares (265 mill outstanding now). Between the company and Buffett, I figure the stock has some downside protection. If it falls further -- say to the low 30's I will buy more. If it just pulls back to the $35 area, then I will probably just buy some options in the stock. increase my exposure without risking a lot of capital. I just figure that this round of financial declines is done -- will there be further declines? quite possibly but this round is done. Think end of March 2001 as far as the tech stocks go.


Anonymous said...

Surprised you are concerned about where the stock might go on the downside; bringing up things which could prop up the stock in the future-buybacks and Buffett. As you well know all that is important is the price at which you buy and the price at which you sell and the time period therein. Where the stock therein really doesn't matter. What is important about Buffett is that he has found value using an analysis far beyond we mere mortals, and what is important about most buybacks is that there is excess capital being produced which can be used to buy in stock and increase our percentage of each earned dollar.

Anonymous said...

Good thoughts and thanks for the comment. here are some thoughts to get the conversation started...

In my mind, part of determining how good an investment opportunity is depends on some idea of the risk reward involved in the investment. I would agree that the buybacks and Buffett's potential purchases are not true business value but more trading support.

I worry about the downside because my capacity to handle downside volatility (pain) is not infinite -- In this case there are reasons why the stock price may drop that go beyond mere sentiment changes -- such as damage to their reputation that has people worried about the frachise; growth in rated debt slows to a trickle for the next 5+ yeas; etc. I can envision scenarios where the stock is 75 in 2-3 years or 35 in 3-5 years. if the stock is flat over the next 3 years, that would still be a negative given the opportunity cost (i.e. could have owned something else).

Excess capital that the company is earning is always a good problem to have. Using the excess capital
to buy back shares only makes sense at the right value. When the stock is expensive, dividends can be used to deal with excess capital.

Buying MCO for me is very hard for 2 reasons:

1. EVERY investor that I know and respect doesn't agree or if they do its only on a trading basis. Independence is valuable only when you use it to add value -- odds are these other investors are right that the timing isn't right to buy MCO.

2. we are in the bust of one of the greatest periods for debt issuance ever -- a hangover similar to what the tech stocks went through in the 2001-2004 time frame would not be surprising. very few technology stocks outperformed during that period just like I tink very few financials are likely to outperform now.

hope this helps.