any thoughts? Hopefully you have noticed the new look -- I like it better but if you have any thoughts please let me know.
I have changed the ads too -- there used to be 2 adsense buttons but now I have added 2 referrals areas -- these appear to get higher quality ads which is nice. let me know if the advertising becomes too much and I'll cut it back. its on the side so I am hoping its not so bad.
feedback would be great -- since its now almost 3:40am -- probably hitting bed soon.
Saturday, September 29, 2007
update on stocks not bought
Over the last couple of months I researched many many stocks and commented on most of them here in the blog -- I even wrote up long descriptions of why I liked the stocks and probably made it sound like I was either buying or about to be buying them. Instead, most of the time, I would just move on to the next story and not buy anything -- until I got to FLIR. Which I have bought a small position in and am hoping to buy more at more attractive prices.
One of the first stocks I reviewed was Ecolab (ECL) -- it was in the low $40s and selling at a discounted valuation vs. its history. fundamentals seemed fine so this looked like a good time to get in -- no real catalyst that could get the stock moving soon but often its hard to spot them ahead of time -- hard enough to pick a winner let alone picking the timing of it.
Sure enough ECL is now $47 -- new all time highs and up from a recent low around $41. Not bad for a few weeks work. Not uncommon either for me to have a strong return in a stock I have chosen not to buy. that's one reason I mention them all -- perhaps the story will sound interesting to you and after your own due diligence, you might decide its more attractive then I give the stock credit for and choose to buy in. great for you. I can't own them all. I am very happy with FLIR but it would be nice to own some ECL too -- now it dawns on me that maybe ECL would have been a better choice than GGG given all the icky news about housing but oh well.
Interesting that ADBE -- another stock I have mentioned but did not buy -- had great earnings yet the stock has been flat to down since I mentioned it -- hmmm.... as the chartists say its not the news that matters but the market's reaction (it seems the market expected good results).
IHS had great earnings and the stock popped from the low $50's to the $57 range. Not bad. again, I am very happy with FLIR.
One of the first stocks I reviewed was Ecolab (ECL) -- it was in the low $40s and selling at a discounted valuation vs. its history. fundamentals seemed fine so this looked like a good time to get in -- no real catalyst that could get the stock moving soon but often its hard to spot them ahead of time -- hard enough to pick a winner let alone picking the timing of it.
Sure enough ECL is now $47 -- new all time highs and up from a recent low around $41. Not bad for a few weeks work. Not uncommon either for me to have a strong return in a stock I have chosen not to buy. that's one reason I mention them all -- perhaps the story will sound interesting to you and after your own due diligence, you might decide its more attractive then I give the stock credit for and choose to buy in. great for you. I can't own them all. I am very happy with FLIR but it would be nice to own some ECL too -- now it dawns on me that maybe ECL would have been a better choice than GGG given all the icky news about housing but oh well.
Interesting that ADBE -- another stock I have mentioned but did not buy -- had great earnings yet the stock has been flat to down since I mentioned it -- hmmm.... as the chartists say its not the news that matters but the market's reaction (it seems the market expected good results).
IHS had great earnings and the stock popped from the low $50's to the $57 range. Not bad. again, I am very happy with FLIR.
Ralph Wanger Lunch
I had the privilege this week of having lunch with Ralph Wanger (former manager of the Acorn fund and member Morningstar investor hall of fame) ... well it was me, Ralph and 100 other close friends! You can see Ralph's influence on my portfolio in several stocks -- UEPS, NVT, ILMN, FLIR as well as some not so obvious choices like GOOG.
Ralph was a small cap manager because he thought small caps had the best growth opportunities (true) and were the least followed or least efficiently understood by wall street -- meaning you had the best chance to outperform benchmarks, while investing in small caps. He used a strategy often called GARP -- growth at a reasonable price although in the end he would rather focus on value then growth -- value reduced risk and increased returns.
He has written a book called a Zebra in Lion Country, which I would highly recommend to anyone interested in investing in stocks -- especially small caps. Ralph is unusual in the investing world because he is so funny -- while I didn't learn too much new at the lunch that wasn't in his book or other things I have read about him, it was well worth it because of how funny he was.
He is also humble -- at lunch I asked him the question what steps he took to try to avoid large declines in small cap growth stocks (a common problem because when a company misses their stock often declines 30% or more in a single day due to the lower liquidity and higher company risk within small cap stocks) and his response included the comment that of all the analysts and portfolio managers at his firm, he had recommended the highest number of stocks with big declines -- something he could get away with because it was his firm and because his winners were more important.
He explained how small cap stocks is a winners game -- slugging percentage matters. Your home runs offset your strike outs. He mentioned IGT -- slot machine maker as a stock his fund made 100 times its money in. wow -- that is a home run I would like to hit!. Best I have done is MSFT or about 14X my money. (if I had not been stupid in 1999 and sold my shares of BEN, I would have a 25X gain on my first shares and a 10X gain on my average cost but alas I sold.....)
Ralph uses secular themes to manage his fund -- he said turnover costs for a small cap fund are so high due to the price impact when you try to buy and sell small cap stocks. He would try to keep turnover around 20% -- equates to a 5 year holding period on average -- to minimize trading costs. No one can predict a company's earnings a few quarters out let alone 5 years! So he uses themes as a way of identifying stocks that he can be comfortable owning for 5 years and still be reasonably confident they will have good earnings growth over that time.
One of his themes he mentioned at lunch that was really interesting was to avoid technology companies themselves but instead target users or beneficiaries of technology such as IGT.
IGT buys microprocessors from some tech company for $40 -- that semi company makes $10+ in gross profits on that chip sale. IGT takes the chip and adds other stuff to create a $2000 cost slot machine, which they sell to a casino for $8000 or about $6000 in gross profits -- great business. But the casino buys the slot machine, puts it on the floor and makes $300 per day from gamblers who are bad at mathematics. That means the casino has a 3 month payback on that slot machine -- that's why there are so many casino operators on the Forbes 400.
One other interesting comment he made during lunch was how does he spend his time between existing holdings and new ideas. He said they have a database of stocks covering all the small cap stocks they could buy. For each stock they have an estimated future return potential based on a growth estimate and the valuation. He argued to look at the outliers -- the stocks that looked the most attractive were most likely using estimates that were too optimistic while the stocks that looked the least attractive were likely using estimates that were too pessimistic. Everything in the middle was probably fine -- if you owned them, then leave them alone because they are doing ok. If you didn't own a stock in the middle, it was probably fairly priced so not the best opportunity. That's a great idea although its not one that I have used I think it would be a great way to help with your time.
He didn't really answer the question of what themes he is playing now other than to say energy looks good -- thanks for that tip! not unexpected given that many managers like to keep their cards close to their vest -- why give away good investment ideas for free? one of his firms top holdings? number 12 is FLIR.
Ralph was a small cap manager because he thought small caps had the best growth opportunities (true) and were the least followed or least efficiently understood by wall street -- meaning you had the best chance to outperform benchmarks, while investing in small caps. He used a strategy often called GARP -- growth at a reasonable price although in the end he would rather focus on value then growth -- value reduced risk and increased returns.
He has written a book called a Zebra in Lion Country, which I would highly recommend to anyone interested in investing in stocks -- especially small caps. Ralph is unusual in the investing world because he is so funny -- while I didn't learn too much new at the lunch that wasn't in his book or other things I have read about him, it was well worth it because of how funny he was.
He is also humble -- at lunch I asked him the question what steps he took to try to avoid large declines in small cap growth stocks (a common problem because when a company misses their stock often declines 30% or more in a single day due to the lower liquidity and higher company risk within small cap stocks) and his response included the comment that of all the analysts and portfolio managers at his firm, he had recommended the highest number of stocks with big declines -- something he could get away with because it was his firm and because his winners were more important.
He explained how small cap stocks is a winners game -- slugging percentage matters. Your home runs offset your strike outs. He mentioned IGT -- slot machine maker as a stock his fund made 100 times its money in. wow -- that is a home run I would like to hit!. Best I have done is MSFT or about 14X my money. (if I had not been stupid in 1999 and sold my shares of BEN, I would have a 25X gain on my first shares and a 10X gain on my average cost but alas I sold.....)
Ralph uses secular themes to manage his fund -- he said turnover costs for a small cap fund are so high due to the price impact when you try to buy and sell small cap stocks. He would try to keep turnover around 20% -- equates to a 5 year holding period on average -- to minimize trading costs. No one can predict a company's earnings a few quarters out let alone 5 years! So he uses themes as a way of identifying stocks that he can be comfortable owning for 5 years and still be reasonably confident they will have good earnings growth over that time.
One of his themes he mentioned at lunch that was really interesting was to avoid technology companies themselves but instead target users or beneficiaries of technology such as IGT.
IGT buys microprocessors from some tech company for $40 -- that semi company makes $10+ in gross profits on that chip sale. IGT takes the chip and adds other stuff to create a $2000 cost slot machine, which they sell to a casino for $8000 or about $6000 in gross profits -- great business. But the casino buys the slot machine, puts it on the floor and makes $300 per day from gamblers who are bad at mathematics. That means the casino has a 3 month payback on that slot machine -- that's why there are so many casino operators on the Forbes 400.
One other interesting comment he made during lunch was how does he spend his time between existing holdings and new ideas. He said they have a database of stocks covering all the small cap stocks they could buy. For each stock they have an estimated future return potential based on a growth estimate and the valuation. He argued to look at the outliers -- the stocks that looked the most attractive were most likely using estimates that were too optimistic while the stocks that looked the least attractive were likely using estimates that were too pessimistic. Everything in the middle was probably fine -- if you owned them, then leave them alone because they are doing ok. If you didn't own a stock in the middle, it was probably fairly priced so not the best opportunity. That's a great idea although its not one that I have used I think it would be a great way to help with your time.
He didn't really answer the question of what themes he is playing now other than to say energy looks good -- thanks for that tip! not unexpected given that many managers like to keep their cards close to their vest -- why give away good investment ideas for free? one of his firms top holdings? number 12 is FLIR.
Friday, September 28, 2007
300 bps
300 basis points of outperformance in 2007!!!!!
Pretty cool but its not nearly as much as it should be -- 3 stocks -- some of my biggest positions -- UEPS, TSRA and DFR are down for the year -- some double digits and some as much as 40%. That is creating a huge drag on the secular value investor's portfolio!
But today's thought is that the last time the portfolio had reached that level of outperformance was during July right near the peak of the market....hmmm.......
Pretty cool but its not nearly as much as it should be -- 3 stocks -- some of my biggest positions -- UEPS, TSRA and DFR are down for the year -- some double digits and some as much as 40%. That is creating a huge drag on the secular value investor's portfolio!
But today's thought is that the last time the portfolio had reached that level of outperformance was during July right near the peak of the market....hmmm.......
Tuesday, September 25, 2007
FDS
Factset reported EPS this morning and the numbers looked pretty good. They beat by a few pennies and maintained guidance for Q1 of fy2008 but the key for me was free cash flow. FY 2007 had EPS of 2.14 but FCF of about 2.28 -- about 5%+ MORE than EPS. It is rare for companies to have higher free cash flow than earnings. Wish I had some spare cash when the stock hit $52 -- that was a steal now that it hit $66 today.
Many worries about turmoil in money managers but FDS just kept right on going. They got 30% of revenues from overseas clients -- that is pretty cool.
Given the subscription nature of the business it is highly unlikely any issues with blowing up hedge funds or private equity or investment banking, etc. would show up so quickly. The subscription number they gave of over $500 mill suggests no issues yet. Factset is still fairly small compared to other service providers like bloomberg which has about 8X as many users as Factset. The stock is not cheap but it is one incredible business -- consistent sequential growth, high free cash flow, high margins, high return on capital, etc.
I'm up about 30%+ in the year or so that I have owned the stock. not bad -- here's hoping the next year is just as good.
Many worries about turmoil in money managers but FDS just kept right on going. They got 30% of revenues from overseas clients -- that is pretty cool.
Given the subscription nature of the business it is highly unlikely any issues with blowing up hedge funds or private equity or investment banking, etc. would show up so quickly. The subscription number they gave of over $500 mill suggests no issues yet. Factset is still fairly small compared to other service providers like bloomberg which has about 8X as many users as Factset. The stock is not cheap but it is one incredible business -- consistent sequential growth, high free cash flow, high margins, high return on capital, etc.
I'm up about 30%+ in the year or so that I have owned the stock. not bad -- here's hoping the next year is just as good.
FLIR and CME update
So far this week I have bought more FLIR and more CME -- just small increments to take advantage of the pull backs. In FLIR's case, its STILL less than 1% of my portfolio so we are talking baby steps here.
My largest positions are 10% -- those are reserved for Asia and AB (money management) -- next are a few in the 3-4% range including UEPS, TSRA, CME, LH etc. I would like to get FLIR closer to 3-4% but its going to be hard -- it means selling shares in my existng holdings. Microsoft will only provide 1-1.5% of that so I would still need another 1% or so from somewhere else. Not sure where yet -- maybe take gains in a stock that worked like UEPS or TSRA or LH or MDT if it gets above $60.
Anyway, more CME because its a monopoly with strong growth and potential for rising estimates and the stock has been flat for awhile. I am thinking $20 for 2008 in terms of earnings is possible, which gives you a 27X kind of PE at today's 540-550 price. For a 60+% margin business with tons of free cash flow, no real capital requirements and lots of potential growth this is a bargain.
My largest positions are 10% -- those are reserved for Asia and AB (money management) -- next are a few in the 3-4% range including UEPS, TSRA, CME, LH etc. I would like to get FLIR closer to 3-4% but its going to be hard -- it means selling shares in my existng holdings. Microsoft will only provide 1-1.5% of that so I would still need another 1% or so from somewhere else. Not sure where yet -- maybe take gains in a stock that worked like UEPS or TSRA or LH or MDT if it gets above $60.
Anyway, more CME because its a monopoly with strong growth and potential for rising estimates and the stock has been flat for awhile. I am thinking $20 for 2008 in terms of earnings is possible, which gives you a 27X kind of PE at today's 540-550 price. For a 60+% margin business with tons of free cash flow, no real capital requirements and lots of potential growth this is a bargain.
Monday, September 24, 2007
CME
Just wondering why this stock hasn't moved over the last month or two -- volumes are up big time yet the stock is not moving? either this is a great opportunity or I'm missing something. Hmmmmm... probably a combination of both.
volumes are up but customers get volume discounts so the rate per contract will be dropping.
Could it be that the merger is dilutive and that the big volumes are masking its real impact?
or is it merely that the stock is flat most of the time with a step function jump when they report earnings?
Ah Ha! did some more reading and thinking and I believe I have the answer -- less interest income.
the BMO Capital markets analyst abbreviated model that I have shows revenues (proforma for the deal) up 15% Q/Q and operating income up 25% Q/Q but EPS up only 8%. At first I figured it was due to the 50% jump in shares but then I looked at Q2 numbers and realized that adding CBOT's income would result in about a 50% increase in CME group's income so that wasn't it.
Then I remembered CME paid a dividend (to CBOT shareholders) of close to $500 mill as part of the deal and even though the share buyback auction was very under subscribed, they still spent hundreds of millions buying back stock. So last quarter they had between the two of them close to $25 mill in interest and other non-operating income or about 8% of the total.
If you take away that income, then unless volume surges like it has, EPS would have declined sequentially. So the volume surge has helped to keep estimates where they were -- flat estimates = flat stock. have to think about whether it makes sense then to add to the stock. Its still possible that analysts are underestimating the numbers -- they do produce lots of cash flow so the hit to income may not be as bad as some are assuming.
interesting huh?
volumes are up but customers get volume discounts so the rate per contract will be dropping.
Could it be that the merger is dilutive and that the big volumes are masking its real impact?
or is it merely that the stock is flat most of the time with a step function jump when they report earnings?
Ah Ha! did some more reading and thinking and I believe I have the answer -- less interest income.
the BMO Capital markets analyst abbreviated model that I have shows revenues (proforma for the deal) up 15% Q/Q and operating income up 25% Q/Q but EPS up only 8%. At first I figured it was due to the 50% jump in shares but then I looked at Q2 numbers and realized that adding CBOT's income would result in about a 50% increase in CME group's income so that wasn't it.
Then I remembered CME paid a dividend (to CBOT shareholders) of close to $500 mill as part of the deal and even though the share buyback auction was very under subscribed, they still spent hundreds of millions buying back stock. So last quarter they had between the two of them close to $25 mill in interest and other non-operating income or about 8% of the total.
If you take away that income, then unless volume surges like it has, EPS would have declined sequentially. So the volume surge has helped to keep estimates where they were -- flat estimates = flat stock. have to think about whether it makes sense then to add to the stock. Its still possible that analysts are underestimating the numbers -- they do produce lots of cash flow so the hit to income may not be as bad as some are assuming.
interesting huh?
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