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Geoff Gannon June 26, 2006

Noteworthy News Items

First, let me say that I am back from a week’s vacation, so blog posts and new podcasts will now resume. The next podcast is scheduled for tomorrow.

There are some noteworthy news items worth mentioning today:

Last I checked, (OSTK) was up just under 20% on the day. No news was immediately evident – however, this may have changed by the time you are reading this post. These aren’t exactly new prices for Overstock. So, the move does not change the conclusions reached in my past posts on Overstock. You can read these posts by following the links below (arranged in reverse chronological order – i.e., most recent to least recent):

Overstock’s First Quarter Results

On Overstock’s Fourth Quarter

On Overstock (Again)

On The Rationale for the Overstock Post

On Overstock

As you’ve probably heard, Warren Buffett will transfer the vast majority of his wealth to the Bill and Melinda Gates Foundation. At current prices, the Berkshire stock to be transferred has a market value of approximately $30 billion. You can read more by following these links:


Warren Buffett Gives Away His Fortune

A Conversation with Warren Buffett

How Buffett’s Giveaway Will Work

The Global Force Called the Gates Foundation

There are several noteworthy mergers and acquisitions news items. A few are complicated. None were entirely unexpected. However, the dollar amounts involved are quite large:


Merger Monday, With Heavy Metal Soundtrack

Happy Ending for Arcelor and Mittal? Not Quite Yet

Mixed Prognosis for J&J;’s Pfizer Deal

Please feel free to discuss any of the above stories by clicking the “comments” link for this post (below).

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Geoff Gannon June 16, 2006

A Week Without Posts or Podcasts

There will be no new content for the blog or podcast for a little over a week. I’m spending next week on Martha’s Vineyard – and I’ve decided I wouldn’t mind taking a vacation from my computer as well. So, I’ll be completely incommunicado.

New content will appear around the 26th or 27th of June.

Until then…

Happy Hunting…

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Geoff Gannon June 13, 2006

On Maintenance Cap-Ex and “The Pleasant Surprise”

There was an interesting comment posted in response to last Thursday’s podcast. I gave three replies. I’ve reproduced them below, with questions interspersed:

Maintenance Cap-Ex

The nice thing about having low capital spending, is the pleasant surprise it creates. You find a company that is earning more (economically) than other companies with the same GAAP numbers. So, the P/E ratio tends to exaggerate how expensive the business is.

This is kind of like finding a business with excess cash. While it’s true that a business can have too much cash from an efficiency point of view, finding more cash on the balance sheet than you expected is always a good thing, right? The point in each case is that the headline numbers (EPS, P/E, etc.) sometimes lie – and an inordinate number of bargains are found where such “lies” exist – simply, because others aren’t looking there (it’s a less conspicuous bargain).

“Wouldn’t it mean the company wasn’t reinvesting in P&E;?”

Some businesses have a very strong relationship between the value of the assets in the business and earnings.

Others have almost no correlation between the two. For an example of a business that will likely have very different ROAs from year to year (and longer-term) look at Forward Industries (FORD). A less extreme example is Craftmade International (CRFT), further down the spectrum (but still very asset light) you have companies like Timberland (TBL) and K-Swiss (KSWS).

For an example of a business, that long-term at least, has to add to assets to add to earnings look at Village Supermarket (VLGEA). In this case (as in the case of most retailers), the long-term correlation between assets and earnings is somewhat obscured by operating leverage; however, logically at least, you do recognize that a supermarket’s earnings will be determined in large part by the number (and size) of the stores being operated.

Also on this side of the spectrum (businesses with a strong long-term correlation between assets and earnings) you have various businesses that own distinct, identifiable assets such as: theme parks, pipelines, parking lots, bowling alleys, golf courses, hotels, etc. Of course, you also have asset-heavy manufacturing businesses, especially in price sensitive, commodity-like products.

Both of these types of businesses tend to have more predictable returns on assets (at least on the margins). I add the qualifier, because it’s a rare business that is both capital intensive and highly profitable – although I’m sure you could name a handful of such conglomerates.

Some asset-light businesses have predictable returns on assets – not so much because there is a strong correlation between assets and earnings, but rather because there is the absence of disruptive change and some real protection from price competition. An example from this podcast would be McCormick (MKC) – a business that has a fairly predictable ROA largely because it’s simply a great business (albeit a slow growth business).

One of the greatest investing conundrums is the fact that it is usually …

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Geoff Gannon June 9, 2006

New Podcast Episode: Mailbag

In this latest podcast episode, I answer email questions from listeners. Topics include book value bargains and how to value an insurance company. The discussion of Peter Lynch’s book will be pushed back a full week (until next Thursday), because this podcast episode already ran long (39 minutes).…

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Geoff Gannon June 7, 2006

(More) Recent Highlights from Fat Pitch News

Here are some of my personal favorites over at Fat Pitch News (to read the complete story, click the blue URL just below the green banner):

When Buffett Gambles, He Gambles Big: Warren Buffett’s Berkshire Hathaway is becoming “the last resort” for the largest companies seeking hurricane insurance. Berkshire is using its financial strength to take on more risk, just as many other insurers are reducing their exposure to single events. Buffett has always said Berkshire would risk large losses on a single event and the “lumpy” returns they produce, if the price was right. Apparently, the 2006 prices are right for Buffett.

Homebuilders Ready For Contrarians?: Bill of Absolutely No DooDahs looks at homebuilders, a group that currently trades at very low price-to-earnings ratios even after one adjusts for the expected near-term earnings decline.

I Value My Homeys: Bill of Absolutely No DooDahs discusses discount rates, inflation, and how to value equities. He then attempts to use what was discussed to value the homebuilders covered in his previous post. An excellent post – as is the first post (above) that discussed homebuilders.

Bank Stock Moats: George of Fat Pitch Financials looks at competitive advantages in banking. He refers to my post: “On Banks” and an earlier Morningstar article. If you enjoyed my series of posts on banks, you’ll enjoy reading George’s take on the subject.

Visit Fat Pitch News

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Geoff Gannon June 6, 2006

New Podcast Episode: Value Line

This is the first new episode in quite some time. It’s mainly a discussion of per-share historical data in general and the Value Line Investment Survey in particular. The episode ran a little long (34 minutes); so, my discussion of Peter Lynch’s “One Up On Wall Street” will be part of Thursday’s episode instead. I hope you enjoy the podcast. As always, comments and questions are welcome.

Listen to the Gannon On Investing Podcast: “Value Line”

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