Well I didn't expect that -- to take a 3 week break from writing. Certainly knew a week off because of a trip but the rest was just getting too busy and not finding the time.
Why was I busy? part of it was looking into a few new secular trends to decide about potential new investment ideas.
First -- on a trip out west I saw the longest train ever -- container after container load. It was at that moment that I realized why rails have been doing so well -- why Buffett bought them. I just couldn't see it before -- I saw railroads as slow growers that could never earn their cost of capital and would produce negative free cash flow forever. That's changed -- consolidation has reduced competition within the railroads and rising energy prices has reduced competition outside of rails. Globalization has created lots of new trade, which is driving up demand too. The stocks have all gone up huge in the last several years but they probably have more room to go especially if energy prices stay high.
don't know enough to understand, which rail is best or what the differences are between them. Probably won't buy one but its something to keep in mind.
Next I was reading a conference call transcript from a call given by the CEO of Alliance Bernstein -- one of my largest holdings. He made a comment about the coming electrification of the automobile and the impact that might have on various industries. It reminded me that a couple of guys -- Peter Huber and somebody named Mills have written an investment newsletter for several years about power. So I searched on google and at forbes.com for awhile and realized they have written a book. The Bottomless Well that basically says we have unlimited amounts of energy its a question of what form its in.
They make the case that electricity is the real secular growth story within energy. Over the last several decades the amount of electricity used has been steadily rising. Certain processes on the industrial side that used to be mechanical in nature now use electrical parts -- one example is a steel mill which now uses an electric arc furnace rather than one driven by burning coal -- i.e. a blast furnace. All the computers, networks, data centers, etc. -- they all rely on electricity. Their case is that improvements in power semiconductors would translate into an electric drive train partly out of energy efficiency but mostly because electricity is easier to control than mechanical processes -- you can more fine tune the process.
so that leads to multiple thoughts on how to play this secular trend.
1. Utilities -- especially ones that produce non-regulated or wholesale power using a low cost fuel option such as nuclear, hydro or wind. Utility prices are often set by the fuel costs used for producing peak power. Since natural gas is most often what is used for peak power, that means has natural gas prices rise, power prices rise too -- even if that power is produced by nuclear, wind or hydro (none of them have fuel costs that amount to much).
After some review, I chose FPL -- florida power and light because its one part regulated and one part non-regulated. This provides some risk reduction since I am buying in after utilities have outperformed for years. FPL's regulated territory has been growing -- they gained 1 mill new customers in the last 10 years or about 33% growth. Their fuel for the regulated side is nat gas, coal and nuclear.
They have a merchant power business that sells power all over the country -- large part is nat gas but the rest is nuclear and wind -- they are growing their wind production from 5 gigawatts to 13 gigawatts over the next 5 years. Other large merchant companies don't have diversified territories or their fuel is not low cost or their valuation is high or their stock has been an unbelievably strong performer.
2. electrical equipment manufacturers -- for me their are only 2 possible answers here -- Emerson Electric or Eaton. Emerson is my main choice because they have been well managed for decades. Eaton is more of a turnaround. Trouble is that even though Emerson has incredible management and strong prospects and an attractive valuation, its stock returns have been mediocre at best. over 20 years the stock barely keeps ahead of the market. Now the good news is that it is ahead of the market. The bad news is that many of the utility stocks I was researching outperformed Emerson over long periods -- boring utilities yet they have strong performance. As the stock drops I continue to think about it.
3. Power semiconductors -- most of these are commodities but there is one company -- Power Integrations POWI -- that is a differentiated product that sells power supply chips based on an integrated solution -- majority of current solutions are discretes or other older technologies. they are cheap and low cost but take up space and are not energy efficient. Power Integrations has a similar cost but its partly due to much fewer components. I'm still researching and debating this one.
Also trying to determine how to come up with the cash to invest in these kind of ideas. I realize now that I have too much in financials -- MCO, FDS, CME and AB -- although they aren't lenders and aren't caught up in the problems of today, their growth potential is tied to the size of financial services in general -- MCO is about growth in debt during a deleveraging period. FDS is about giving employees the tools they need to do the job so employment in money management is key. CME is providing a market for traders to trade derivatives -- fewer traders means less derivative trading.
that's plenty to think about tonight -- will hopefully have more to say this week.
Sunday, June 29, 2008
Sunday, June 8, 2008
catching up
This one will be quick updates on various stocks and maybe a market issue or two.
CME -- stock has just been dropping like a rock. Finally dawned on me that almost half their trading related revenues come from fixed income products -- interest rate futures. its a huge portion of volume but lower pricing means its only half of revenues. Just realizing that potentially that's a problem -- as the fixed income market deleverages -- banks, brokers, hedge funds, CDOs, etc. -- they might use less hedging -- as in less futures. In addition, while we all got excited earlier this year about the volume that comes from high levels of volatility, bear markets usually mean less volume. So you get a spike in volume and then everything flattens out for awhile. so now we have two reasons to see less volume and potentially lower eps estimates. Then you realize that they went from being an organic growth story to a roll up and you realize that the future won't be as good as the past -- sure stinks to figure that out now some 150 points below our cost. ugh.
Not intending to sell it at this price -- stock is pretty cheap even if you assume the estimates drop. don't forget its still an almost 60% operating margin business with lots of free cash flow.
MCO -- well it didn't take long for the market to decide that cover up of wrong ratings wouldn't be a big deal. I know the deal with the NY attorney general and the analyst day were mostly responsible but if everyone was still concerned about the cover up the stock would never have gone up $8 off the bottom. The deal with the NY AG is critical because while it removes a conflict of interest -- ratings shopping -- it also could have the affect of reducing competition. Not to mention they will now get paid for due diligence when in the past they wouldn't. I wrote some more calls when the stock was $40 -- next day could have gotten a dollar more but then came Friday's whack and I'm in the black again. Analyst day showed me that they have a lot of growth drivers to get the business growing in the 10% range. Add share buybacks to that and its not bad. I thought about selling the $45's but decided to do the $40's instead. Hoping to get lucky on these to sell at a profit and maybe over time shift my selling to the $45's. I think its going to work its way slowly higher -- presuming we don't have another financial panic or a big rout in the market.
BLUD -- FY 2009 guidance -- no big deal. hoping they were conservative and that there will be good upside after they report in a few weeks. still wondering about this one.
New ideas again ---
Ritchie Bros Auctions -- RBA -- all that cap ex that I mentioned last note is for their 30+ facilities around the world. They are auctioning used heavy construction and farming equipment so it takes up a lot of space. They have 25% of their winning lots online but the rest is bought in person at the facility -- the buyer has kicked the tires on the actual piece of equipment. So in some sense they are like a retailer -- always growing stores and also fixing up their stores. Their cap ex is running near 17% of sales -- this compares to someone like FLIR which is near 7% -- that's 10% less for shareholders. Moody's probably runs around 3% of sales for cap ex in most years. Analysts are arguing that they will not be affected by the economic cycle -- maybe true but they are affected by the industry cycle -- boom times for heavy equipment which supports equipment prices by having plenty of buyers. When the infrastructure boom ends, who are all the users going to sell their now excess supply of equipment to? Right now the slowdown in the US is not a big deal because they can sell the equipment to overseas users in the mid east and asia. What happens when the mid east and asia slowdown and the US can't absorb it all? bummer.
Hope is that when that time comes the analysts will still be pushing the no problem thesis and you can get out at a higher price than you should be able to. Trouble is to spot the slowdown before everyone else. Now truth is that every stock I could buy will face a slowdown so that's not a reason to exclude these guys. But its also true that heavy equipment demand is going through a really strong cycle, which means the downturn will be bad when it comes. For me its key to understand the secular drivers for the company and the cyclical ones -- once the cyclical (current heavy equipment demand) wears off what will be left of the secular -- enough to be a reason to own the stock? Especially when that stock comes at 30X earnings -- ouch. When the cyclical runs out this thing will be at 20X if we are lucky.
All that said, I like the way RBA is managed -- like a family owned business that knows how to take care of customers. that is what you want in a management team.
market -- obviously the whack on friday was ugly -- could be the beginning of something uglier. banks have been hitting new lows and lots of talk about Lehman's future -- they are at 30x leverage. they raised $8 bill last week but who cares -- tell me when they either shrink to $400 bill in assets from $700 bill or when they raise another 30-40 billion in capital. at that point the leverage will be too low rather than ridiculously too high. Oil prices -- we may be getting near a point where the economy finally can't handle the high price -- we would see demand fall off and that should put a lid on the price of oil but then again I have invested the last 5 years betting against those that made that argument so take it with a grain of salt.
got to run
CME -- stock has just been dropping like a rock. Finally dawned on me that almost half their trading related revenues come from fixed income products -- interest rate futures. its a huge portion of volume but lower pricing means its only half of revenues. Just realizing that potentially that's a problem -- as the fixed income market deleverages -- banks, brokers, hedge funds, CDOs, etc. -- they might use less hedging -- as in less futures. In addition, while we all got excited earlier this year about the volume that comes from high levels of volatility, bear markets usually mean less volume. So you get a spike in volume and then everything flattens out for awhile. so now we have two reasons to see less volume and potentially lower eps estimates. Then you realize that they went from being an organic growth story to a roll up and you realize that the future won't be as good as the past -- sure stinks to figure that out now some 150 points below our cost. ugh.
Not intending to sell it at this price -- stock is pretty cheap even if you assume the estimates drop. don't forget its still an almost 60% operating margin business with lots of free cash flow.
MCO -- well it didn't take long for the market to decide that cover up of wrong ratings wouldn't be a big deal. I know the deal with the NY attorney general and the analyst day were mostly responsible but if everyone was still concerned about the cover up the stock would never have gone up $8 off the bottom. The deal with the NY AG is critical because while it removes a conflict of interest -- ratings shopping -- it also could have the affect of reducing competition. Not to mention they will now get paid for due diligence when in the past they wouldn't. I wrote some more calls when the stock was $40 -- next day could have gotten a dollar more but then came Friday's whack and I'm in the black again. Analyst day showed me that they have a lot of growth drivers to get the business growing in the 10% range. Add share buybacks to that and its not bad. I thought about selling the $45's but decided to do the $40's instead. Hoping to get lucky on these to sell at a profit and maybe over time shift my selling to the $45's. I think its going to work its way slowly higher -- presuming we don't have another financial panic or a big rout in the market.
BLUD -- FY 2009 guidance -- no big deal. hoping they were conservative and that there will be good upside after they report in a few weeks. still wondering about this one.
New ideas again ---
Ritchie Bros Auctions -- RBA -- all that cap ex that I mentioned last note is for their 30+ facilities around the world. They are auctioning used heavy construction and farming equipment so it takes up a lot of space. They have 25% of their winning lots online but the rest is bought in person at the facility -- the buyer has kicked the tires on the actual piece of equipment. So in some sense they are like a retailer -- always growing stores and also fixing up their stores. Their cap ex is running near 17% of sales -- this compares to someone like FLIR which is near 7% -- that's 10% less for shareholders. Moody's probably runs around 3% of sales for cap ex in most years. Analysts are arguing that they will not be affected by the economic cycle -- maybe true but they are affected by the industry cycle -- boom times for heavy equipment which supports equipment prices by having plenty of buyers. When the infrastructure boom ends, who are all the users going to sell their now excess supply of equipment to? Right now the slowdown in the US is not a big deal because they can sell the equipment to overseas users in the mid east and asia. What happens when the mid east and asia slowdown and the US can't absorb it all? bummer.
Hope is that when that time comes the analysts will still be pushing the no problem thesis and you can get out at a higher price than you should be able to. Trouble is to spot the slowdown before everyone else. Now truth is that every stock I could buy will face a slowdown so that's not a reason to exclude these guys. But its also true that heavy equipment demand is going through a really strong cycle, which means the downturn will be bad when it comes. For me its key to understand the secular drivers for the company and the cyclical ones -- once the cyclical (current heavy equipment demand) wears off what will be left of the secular -- enough to be a reason to own the stock? Especially when that stock comes at 30X earnings -- ouch. When the cyclical runs out this thing will be at 20X if we are lucky.
All that said, I like the way RBA is managed -- like a family owned business that knows how to take care of customers. that is what you want in a management team.
market -- obviously the whack on friday was ugly -- could be the beginning of something uglier. banks have been hitting new lows and lots of talk about Lehman's future -- they are at 30x leverage. they raised $8 bill last week but who cares -- tell me when they either shrink to $400 bill in assets from $700 bill or when they raise another 30-40 billion in capital. at that point the leverage will be too low rather than ridiculously too high. Oil prices -- we may be getting near a point where the economy finally can't handle the high price -- we would see demand fall off and that should put a lid on the price of oil but then again I have invested the last 5 years betting against those that made that argument so take it with a grain of salt.
got to run
Monday, June 2, 2008
potential new ideas
I recently received the quarterly report from Baron funds run by Ron Baron. He is definitely a bit promotional about his stocks and his funds but if you look through that he has a great track record. His process is close enough to mine that I can often find great ideas -- He owns Factset (I didn't get that from him, I'm a user of the service), CME, FLIR, CLB, etc.
This report mentioned a few interesting ideas -- Ritchie Brothers Auctioneers (heavy equipment), an industrial distributor whose name escapes me (MSM is the symbol), CoStar (commercial real estate data base) and MSCI (MSCI indexes and Barra).
MSM is a great business but it is completely tied to the US. They are about using the Internet to reach more customers with more products. The stock got crushed during March but then they beat numbers and it exploded upward. Perhaps on another pull back but now it seems fairly valued.
CoStar -- great looking business that has way too high expenses -- supposedly to build out their infrastructure. They have built a database of info on 3 million commercial real estate buildings in the US and UK. Now that they have finally reached good coverage they are trying to boost revenues without growing expenses -- operating leverage. They should have margins about 2X what they are based on other similar businesses -- Factset and Navteq. Trouble is when I went to the yahoo message board to see what was there all the discussion is about what a horrible place to work it is and how there is constant huge turnover of sales people (like 60% a year). That's not good -- the business is good enough so that it doesn't hold them back too much but its bad enough that I don't want to get involved -- too many other choices that don't have those issues.
MSCI -- another one whose margins should be higher -- they have just recently been spun out of Morgan Stanley so their margins are still ramping. They dominate international indexes to serve as benchmark's for funds as well as ETF's -- they get fees for access to index data and they get asset based fees from the ETF's. Its a great buisness as long as ETF's based on these indexes keep growing. They probably will but the risk is more growth in more actively managed ETF's of the power.... something funds or with the Wisdom Tree type funds. Those ETF companies use their own indexes. They also have the Barra business which is a risk analytics type business -- pretty good except its all based on mathematical models which rely on standard deviation -- as you know I believe standard deviation is a concept that should be banned from finance because there are no normal distributions to be found anywhere. I would have to swallow my high horse and just focus on the business prospects regardless of whether I thought it was a good product or not to buy into this stock. Of course the index business represents most of the profits anyway. but this is the one I'm most likely to think about buying.
Ritchie brothers looks interesting except they have very heavy cap ex spending -- need to understand why because as an auctioneer I wouldn't think they would have a lot of cap ex needs. stock has a perfect chart.
This report mentioned a few interesting ideas -- Ritchie Brothers Auctioneers (heavy equipment), an industrial distributor whose name escapes me (MSM is the symbol), CoStar (commercial real estate data base) and MSCI (MSCI indexes and Barra).
MSM is a great business but it is completely tied to the US. They are about using the Internet to reach more customers with more products. The stock got crushed during March but then they beat numbers and it exploded upward. Perhaps on another pull back but now it seems fairly valued.
CoStar -- great looking business that has way too high expenses -- supposedly to build out their infrastructure. They have built a database of info on 3 million commercial real estate buildings in the US and UK. Now that they have finally reached good coverage they are trying to boost revenues without growing expenses -- operating leverage. They should have margins about 2X what they are based on other similar businesses -- Factset and Navteq. Trouble is when I went to the yahoo message board to see what was there all the discussion is about what a horrible place to work it is and how there is constant huge turnover of sales people (like 60% a year). That's not good -- the business is good enough so that it doesn't hold them back too much but its bad enough that I don't want to get involved -- too many other choices that don't have those issues.
MSCI -- another one whose margins should be higher -- they have just recently been spun out of Morgan Stanley so their margins are still ramping. They dominate international indexes to serve as benchmark's for funds as well as ETF's -- they get fees for access to index data and they get asset based fees from the ETF's. Its a great buisness as long as ETF's based on these indexes keep growing. They probably will but the risk is more growth in more actively managed ETF's of the power.... something funds or with the Wisdom Tree type funds. Those ETF companies use their own indexes. They also have the Barra business which is a risk analytics type business -- pretty good except its all based on mathematical models which rely on standard deviation -- as you know I believe standard deviation is a concept that should be banned from finance because there are no normal distributions to be found anywhere. I would have to swallow my high horse and just focus on the business prospects regardless of whether I thought it was a good product or not to buy into this stock. Of course the index business represents most of the profits anyway. but this is the one I'm most likely to think about buying.
Ritchie brothers looks interesting except they have very heavy cap ex spending -- need to understand why because as an auctioneer I wouldn't think they would have a lot of cap ex needs. stock has a perfect chart.
Thursday, May 29, 2008
latest thoughts
Market -- pretty close to the top with last week's comments huh? Anyway, going to stick to stocks today:
FLIR -- wow - news keeps getting better and better for them. Big gov win that's almost as big as the business is now! no firm orders but they will come over the next year or so. stock has been moving up persistently so no chance to get in yet but there will be.
MCO -- wow again -- a cover up would be about the worst thing that could happen unless it turns out to be just an isolated incident which is what anyone owning or buying the stock is betting on. If it turns out to be widespread behavior, then the firm is gone -- a scapegoat for the ratings troubles. People seem to be overlooking the fact that despite the errors Moody's had the same ratings as S&P, which supposedly didn't have errors or a cover up.
ILMN -- conference and some other commentary suggest innovation is occuring faster than expected. they have released data about the performance of their 2nd gen system that was better than anyone expected. Cowen did a survey of smaller labs -- the ones buying about 60-70% of units so far and concluded that the market for next gen sequencing was bigger than thought and much more sticky -- people in small labs were going to choose a provider (generally either ILMN or ABI) and stick with them with subsequent units because the training and start up costs were too great to repeat. that means ILMN's 6-9 month lead is very important to the size of this business. Feeling better about the business -- strong as can be is my guess but with the stock flattening out much of this good news is already reflected. not sure what will get the stock moving again other than dramatically higher numbers.
TSRA -- small DRAM shop that was part of the DRAM suit set for September at the ITC has settled. This is good news is the sense of validation of the IP but not a big deal because they were small. Probably not much meaning in terms of what the big guys will do. That's why the stock popped but only back to $20. A real win will get this up to $30 or higher.
FLIR -- wow - news keeps getting better and better for them. Big gov win that's almost as big as the business is now! no firm orders but they will come over the next year or so. stock has been moving up persistently so no chance to get in yet but there will be.
MCO -- wow again -- a cover up would be about the worst thing that could happen unless it turns out to be just an isolated incident which is what anyone owning or buying the stock is betting on. If it turns out to be widespread behavior, then the firm is gone -- a scapegoat for the ratings troubles. People seem to be overlooking the fact that despite the errors Moody's had the same ratings as S&P, which supposedly didn't have errors or a cover up.
ILMN -- conference and some other commentary suggest innovation is occuring faster than expected. they have released data about the performance of their 2nd gen system that was better than anyone expected. Cowen did a survey of smaller labs -- the ones buying about 60-70% of units so far and concluded that the market for next gen sequencing was bigger than thought and much more sticky -- people in small labs were going to choose a provider (generally either ILMN or ABI) and stick with them with subsequent units because the training and start up costs were too great to repeat. that means ILMN's 6-9 month lead is very important to the size of this business. Feeling better about the business -- strong as can be is my guess but with the stock flattening out much of this good news is already reflected. not sure what will get the stock moving again other than dramatically higher numbers.
TSRA -- small DRAM shop that was part of the DRAM suit set for September at the ITC has settled. This is good news is the sense of validation of the IP but not a big deal because they were small. Probably not much meaning in terms of what the big guys will do. That's why the stock popped but only back to $20. A real win will get this up to $30 or higher.
Tuesday, May 20, 2008
market
They say that the market always does what will frustrate the most people. I would say that over the last few weeks the persistent upward bias has probably frustrated most everyone -- very few people have had the guts to be aggressively long since March 17th knowing that the market was going up more than others expected.
I think quite a few have been cautiously bullish figuring the next correction was always right around the corner. Others have been downright bearish -- figuring the housing and consumer troubles would bring about a deep recession that the market wasn't prepared for. The stocks posting the best gains have been those tied to energy and global demand -- its a broad group that includes more areas of the market than most realize. I haven't kept track in the last week of all financials but I suspect that moody's performance is in the minoritiy -- most are probably flat.
Health care stocks -- too US driven so they don't benefit from overseas demand. They also don't have the product cycles to boost demand -- that business is finished because the generics and PBMs make growth difficult. The life sciences area is different -- lots of product cycles. Labs too -- not enough of the cost structure for the managed care and medicare people to attack like they have the hospitals although bad debt expense is something we will have to watch (consumer related).
everything consumer is suspect given all the issues.
lots of industrials though -- Emerson for one have strong demand. Energy is obvious. Technology -- its about product cycles and global demand and some techs have it and some don't.
At some point this rally will run out of gas -- the short covering will be over; the long only funds will have been pressured into buying; etc. Could be soon given yesterday's reversal. Are we headed lower again like January and March? That depends on whether there are more problems lurking within financials, whether overseas economies slow down, whether the dollar takes another plunge; rates rise; etc. we are like ducks on the water -- above everything looks calm and that is one reason the market is rising. below the water there is a lot going on and that is why we are likely to pull back at some point -- very useful prediction huh? right now I don't think we are headed for new lows. I expect the double bottom to work -- maybe it becomes a triple bottom. that said, I think I said similar bullish comments in october the last time the S&P was over 1400 (closer to 1550 actually).
once again its best to stick with stocks -- my musings on the market are for fun. stick with attractively priced stocks with strong secular tail winds and the competitive advantages to benefit from them.
I think quite a few have been cautiously bullish figuring the next correction was always right around the corner. Others have been downright bearish -- figuring the housing and consumer troubles would bring about a deep recession that the market wasn't prepared for. The stocks posting the best gains have been those tied to energy and global demand -- its a broad group that includes more areas of the market than most realize. I haven't kept track in the last week of all financials but I suspect that moody's performance is in the minoritiy -- most are probably flat.
Health care stocks -- too US driven so they don't benefit from overseas demand. They also don't have the product cycles to boost demand -- that business is finished because the generics and PBMs make growth difficult. The life sciences area is different -- lots of product cycles. Labs too -- not enough of the cost structure for the managed care and medicare people to attack like they have the hospitals although bad debt expense is something we will have to watch (consumer related).
everything consumer is suspect given all the issues.
lots of industrials though -- Emerson for one have strong demand. Energy is obvious. Technology -- its about product cycles and global demand and some techs have it and some don't.
At some point this rally will run out of gas -- the short covering will be over; the long only funds will have been pressured into buying; etc. Could be soon given yesterday's reversal. Are we headed lower again like January and March? That depends on whether there are more problems lurking within financials, whether overseas economies slow down, whether the dollar takes another plunge; rates rise; etc. we are like ducks on the water -- above everything looks calm and that is one reason the market is rising. below the water there is a lot going on and that is why we are likely to pull back at some point -- very useful prediction huh? right now I don't think we are headed for new lows. I expect the double bottom to work -- maybe it becomes a triple bottom. that said, I think I said similar bullish comments in october the last time the S&P was over 1400 (closer to 1550 actually).
once again its best to stick with stocks -- my musings on the market are for fun. stick with attractively priced stocks with strong secular tail winds and the competitive advantages to benefit from them.
Thursday, May 15, 2008
FLIR
Did you see that WSJ editorial about the sniper in Iraq never saw it coming when he was blown up? Fascinating story of the use of predator unmanned planes in Iraq and Afghanistan. The marines called in for help and the air force sent a remote controlled (from Arizona) plane with a Hellfire missile.
The plane used an infrared camera just under the nose to locate the sniper's muzzle fire and locked in on that location. The missile took him out while he was still firing. FLIR makes those infrared cameras and I'm pretty sure has some of the ones in those predators.
Cool stuff.
I know I said UEPS is my biggest opportunity -- depends on time horizon. I believe FLIR has the chance to be a big winner too but I don't see the same gains in the next 3-5 years -- might take them 10 years -- partly driven by the valuation since FLIR has a PE that is about 2X UEPS. Starting point matters -- the cheaper at the start the more money you can make.
One aside on Bill Miller too -- His issue is arrogance in my mind -- read his writings they scream of someone that can't imagine they could be wrong. But another point is I wonder if he was so focused on being different that he forgot that for his investments to be successful other investors have to follow him and bid the price up. Sometimes investing with the consensus can be very profitable -- energy stocks being a prime example. He has avoided them from the beginning -- missed them at the bottom and didn't want to chase. That's fine -- he has to stick to his discipline but on the other hand...... he has continually underestimated how big this cycle was going to be -- in 2005 he could have easily bought in and though he would have missed the first couple of years he would have captured the last 3. Look at Buffett buying those railroad stocks AFTER they had already doubled.
The plane used an infrared camera just under the nose to locate the sniper's muzzle fire and locked in on that location. The missile took him out while he was still firing. FLIR makes those infrared cameras and I'm pretty sure has some of the ones in those predators.
Cool stuff.
I know I said UEPS is my biggest opportunity -- depends on time horizon. I believe FLIR has the chance to be a big winner too but I don't see the same gains in the next 3-5 years -- might take them 10 years -- partly driven by the valuation since FLIR has a PE that is about 2X UEPS. Starting point matters -- the cheaper at the start the more money you can make.
One aside on Bill Miller too -- His issue is arrogance in my mind -- read his writings they scream of someone that can't imagine they could be wrong. But another point is I wonder if he was so focused on being different that he forgot that for his investments to be successful other investors have to follow him and bid the price up. Sometimes investing with the consensus can be very profitable -- energy stocks being a prime example. He has avoided them from the beginning -- missed them at the bottom and didn't want to chase. That's fine -- he has to stick to his discipline but on the other hand...... he has continually underestimated how big this cycle was going to be -- in 2005 he could have easily bought in and though he would have missed the first couple of years he would have captured the last 3. Look at Buffett buying those railroad stocks AFTER they had already doubled.
Wednesday, May 14, 2008
more on UEPS but first......
MCO -- yes I know this is one of the few non-energy stocks out there that is going up consistently and yet I've sold away my upside through the calls I wrote. oh well. I still have till June so no telling what kind of pull back we might see between now and then. Reality is that AFTER I sold my calls I realized that about 25% of the non-Buffett owned float was short the stock. that pretty much limits the downside. business is picking up but its still pretty slow and it has to pick up some just to make current estimates. so now we are around 21-22X estimates, which would seem to be the high end in this environment but who knows -- fundies are improving so should the valuation.
DFR -- key question -- what is forward earnings potential given all the changes to the company? some argue its 40 cents per year. that is possible but unlikely that too many others believe it given the $1 stock price. certain aspects worse than I thought so that is a little worrisome.
FLIR -- just saw a commercial about franklin resources (mutual funds) and they claimed to have made money owning an infrared supplier -- most likely FLIR. DRS Tech was a competitor too so the deal should help support FLIR's stock too.
I have owned UEPS for about 2 years now and so far the stock has done nothing. The business has continued to get more valuable and that is key but this is testing my patience. The stock has bounced since the earnings report but is still relatively flat with the last few years around $28.
When MA pulled back towards $100 some time in the last couple of years I wondered if I should buy some. I decided not to primarily because I thought UEPS had far more opportunity. Well the market has its own thoughts on opportunities.
This is an important lesson -- one which I continually relearn. Expanding margins and increasing returns on capital are key drivers of big returns in stock prices. MA's margins and returns have soared since they came public (Visa is working on similar improvements). MA has enjoyed strong earnings relative to expectations driven by higher margins. Revenues have been good too but they are not growing at the rates that UEPS has the potential to produce over the next couple of years. Between wage payment in SA, Nigeria, Ghana, Iraq, etc. UEPS has huge opportunities that should triple the earnings in 5 years. Margins though are already above 40%.
But the main issue for UEPS is timing -- it takes a long time to negotiate a contract and then to implement the process/strategy and then have enough new cards with people choosing to use them at merchants (rather than just getting cash). But once the cards are in place and people are using them for their shopping and their bill paying and other services, those cards are likely to be in place for many many years.
no reason for most to switch so UEPS ends up with a long term annuity on the growth and usage of their cards -- same business model as Visa and Mastercard although because UEPS is a smart card there are many more services that can be performed on these cards than on regular credit cards. More services per card offsets at least somewhat the disadvantage that UEPS is at from a spending per card basis -- obviously first world consumers spend more on their cards than third world types.
Once the SA contract is resolved and some of their current countries reach critical mass (i.e. enough cards and merchants that people that don't have one feel a pull to get one) the business will be very profitable (little incremental costs post set up) with high free cash flow and still pretty good growth potential. They will have a long term annuity from all their existing cards that will make this business very valuable -- I find it hard to believe they won't have a 20's PE.
The hard part is the wait -- a new country announcement is very exciting and everyone's first instinct is to ask how much is that going to help EPS -- that's a good question but don't forget the timing -- it may take 5 years for a country to be up and running and have a critical mass of users. When I first bought the stock in the summer of 2006, analysts were already talking about wage payment in SA and Nigeria as big catalysts. Here we are almost 2 years later and those are only now starting to build customers. Iraq is just finalizing the contract so it could take quite awhile to build out the infrastructure and start really having an impact on the overall P&L.
But Iraq could double the size of the company as it stands now -- so could wage payment and nigeria. Ghana continues to get bigger and they are trying to add more countries all the time -- especially because of what Ghana is doing. With all the catalysts I am comfortable they will be earning $4-5 per share in 4-5 years and receiving a 20PE on those earnings for a stock price close to $100.
This is without a doubt my biggest opportunity-- in terms of cash cost basis its one of my largest bets in the portfolio too -- I have larger positions but that is because those stocks have gained in value after I bought them. I would have bought even more of UEPS but I realize the timing of the business means catalysts can always take longer to play out. its hard in other words even though I have a lot of patience and enthusiasm for the story but in 2 years to have not much happen -- that's hard. I am confident the patience will pay off.
Bought some more CLB on Monday to get close to a full position. Thankfully I timed it well -- $123.50 so I enjoyed yesterday's pop to $133.
DFR -- key question -- what is forward earnings potential given all the changes to the company? some argue its 40 cents per year. that is possible but unlikely that too many others believe it given the $1 stock price. certain aspects worse than I thought so that is a little worrisome.
FLIR -- just saw a commercial about franklin resources (mutual funds) and they claimed to have made money owning an infrared supplier -- most likely FLIR. DRS Tech was a competitor too so the deal should help support FLIR's stock too.
I have owned UEPS for about 2 years now and so far the stock has done nothing. The business has continued to get more valuable and that is key but this is testing my patience. The stock has bounced since the earnings report but is still relatively flat with the last few years around $28.
When MA pulled back towards $100 some time in the last couple of years I wondered if I should buy some. I decided not to primarily because I thought UEPS had far more opportunity. Well the market has its own thoughts on opportunities.
This is an important lesson -- one which I continually relearn. Expanding margins and increasing returns on capital are key drivers of big returns in stock prices. MA's margins and returns have soared since they came public (Visa is working on similar improvements). MA has enjoyed strong earnings relative to expectations driven by higher margins. Revenues have been good too but they are not growing at the rates that UEPS has the potential to produce over the next couple of years. Between wage payment in SA, Nigeria, Ghana, Iraq, etc. UEPS has huge opportunities that should triple the earnings in 5 years. Margins though are already above 40%.
But the main issue for UEPS is timing -- it takes a long time to negotiate a contract and then to implement the process/strategy and then have enough new cards with people choosing to use them at merchants (rather than just getting cash). But once the cards are in place and people are using them for their shopping and their bill paying and other services, those cards are likely to be in place for many many years.
no reason for most to switch so UEPS ends up with a long term annuity on the growth and usage of their cards -- same business model as Visa and Mastercard although because UEPS is a smart card there are many more services that can be performed on these cards than on regular credit cards. More services per card offsets at least somewhat the disadvantage that UEPS is at from a spending per card basis -- obviously first world consumers spend more on their cards than third world types.
Once the SA contract is resolved and some of their current countries reach critical mass (i.e. enough cards and merchants that people that don't have one feel a pull to get one) the business will be very profitable (little incremental costs post set up) with high free cash flow and still pretty good growth potential. They will have a long term annuity from all their existing cards that will make this business very valuable -- I find it hard to believe they won't have a 20's PE.
The hard part is the wait -- a new country announcement is very exciting and everyone's first instinct is to ask how much is that going to help EPS -- that's a good question but don't forget the timing -- it may take 5 years for a country to be up and running and have a critical mass of users. When I first bought the stock in the summer of 2006, analysts were already talking about wage payment in SA and Nigeria as big catalysts. Here we are almost 2 years later and those are only now starting to build customers. Iraq is just finalizing the contract so it could take quite awhile to build out the infrastructure and start really having an impact on the overall P&L.
But Iraq could double the size of the company as it stands now -- so could wage payment and nigeria. Ghana continues to get bigger and they are trying to add more countries all the time -- especially because of what Ghana is doing. With all the catalysts I am comfortable they will be earning $4-5 per share in 4-5 years and receiving a 20PE on those earnings for a stock price close to $100.
This is without a doubt my biggest opportunity-- in terms of cash cost basis its one of my largest bets in the portfolio too -- I have larger positions but that is because those stocks have gained in value after I bought them. I would have bought even more of UEPS but I realize the timing of the business means catalysts can always take longer to play out. its hard in other words even though I have a lot of patience and enthusiasm for the story but in 2 years to have not much happen -- that's hard. I am confident the patience will pay off.
Bought some more CLB on Monday to get close to a full position. Thankfully I timed it well -- $123.50 so I enjoyed yesterday's pop to $133.
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