Posts By: Geoff Gannon

On The Newsletter

I have received a fair number of questions about when the new issue will come out. Any confusion here is entirely my own fault for being unclear.

The newsletter covers all the stocks purchased for my personal portfolio during the last quarter. The word “all” is a bit misleading, because there are never more than a handful of stocks. However, it’s important to note that because the issue covers all changes to the portfolio, I don’t begin work on the newsletter until after the last trading day of the quarter.

Therefore, I can not possibly finish writing the newsletter within the first few days of the month. I should have been much clearer about this earlier. Many publications are delivered well before the nominal issue dates. I didn’t consider how this had conditioned people to expect the July Issue to be delivered within the first few days of July.

To avoid any further confusion, I’ve decided to set an exact delivery date. Previously, I had planned to send out the issues as soon as I finished them. I will no longer do this.

Instead, I will hold off distributing the new issues until the 15th of the month, regardless of whether they are complete or not. This should eliminate the need for questions about when the issue will come out. It will come out on the fifteenth. Every issue will come out on the fifteenth.

Also, I had previously allowed subscribers to choose between the PDF and print forms. From now on, I’m just going to send each subscriber both the PDF and the printed copy. Again, this is to clear up confusion and prevent frequent questions.

I enjoy answering emails from people asking about various stocks. I don’t enjoy answering emails asking about newsletter delivery dates and such. These questions were perfectly understandable ones, considering how loose I had left things regarding delivery of the newsletter. I hope this new solution will eliminate the need for such questions in the future.

As I had not given a particular delivery date in the past, I am clearly obligated to offer every individual who purchased the July Issue the opportunity to receive a full refund.

If you purchased the July Issue as a single issue or as part of a one-year subscription, I will be happy to refund the full amount for this issue if you notify me by the 14th of the month.

In the future, the final refund dates given on the Newsletter page of this website will again apply. This is a one time allowance caused by the change in the delivery policy. If you’d like a refund, please email me.

You can always read the full description of the newsletter by clicking the “newsletter” link on the right sidebar. I will also reproduce the (new) description below:

Description

Each issue of the Gannon On Investing Newsletter consists of a brief commentary on the quarter, a summary of changes to my personal portfolio, and a discussion of …

On Google’s Non-Search Products

Business Week has a good article about Google’s non-search products. Entitled “So Much Fanfare, So Few Hits”, the article makes a few obvious points that are often omitted in a discussion of Google’s innovation. The most obvious point is, of course, that these products have not exactly been great successes.

The press (both online and offline) is obsessed with Google (GOOG). An interesting exercise would be to clip the press coverage (or speculation) surrounding the launch of a new Google product and compare it to that product’s performance some months later. I’m afraid this exercise would prove the reality did not live up to the hype. Of course, most of this is not Google’s fault. It isn’t that these products fail miserably. In many cases, they are simply competent products that offer little advantage over the existing alternatives. So, Google moves on.

As one person interviewed for the article put it: “Google has product ADD”. I’m not sure if that’s true or not. The fact that Google develops these non-search products does not in and of itself suggest anything dangerous about Google’s future spending and the efficiency with which its capital is deployed outside of the core search business.

After all, these products are really little more than ideas. Has the company really put much behind any of them? That’s a more interesting question. It also happens to be one of the most important questions for investors to answer.

This Google article reminded me of a blog post on Microsoft I had found via Seeking Alpha. This blog post had one very memorable line: Name six innovations from Microsoft over the past 12 months.

That line jumped out at me, because I’m not eager to invest in a company where you can name six innovations over the past 12 months. No company develops six truly meaningful innovations in a year. The issue is not the number of innovations. It’s finding one that really works.

Both Microsoft (MSFT) and Google had the bad luck to develop a unique cash cow in their early years. As a result, both companies will inevitably have to face accusations of mediocrity in their future endeavors.

Microsoft’s Windows (and by extension Office) and Google’s search are once in a lifetime finds in an otherwise unforgiving competitive environment. These oases of extraordinary profitability can not be duplicated. So, if your reason for buying into either stock is an expectation that future products will rival past products in terms of profitability, you are on a fool’s errand. There will be growth within each franchise and there will be other (lesser) franchises. But, neither company will duplicate their initial success.

The reason they won’t has nothing to do with size or culture. It’s much simpler than that. Both companies were marketed to investors as a great franchise. There aren’t many such franchises and the odds that two such franchises would be developed by the same company are extremely low. Most of the …

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, Overstock.com (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:

Fortune

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:

DealBook

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).…

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…

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 …

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).…

(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…

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”…

Recent Highlights from Fat Pitch News

Fat Pitch News continues to provide worthwhile value investing links. George recently created a Feed Flare that lets webmasters include a link to bid up their stories on Fat Pitch News. You can read about the flare here.

I’ve added it to all of my blog posts at the bottom of the permalink page. So, if you click on the word “permalink” at the bottom of any of my posts, you’ll be able to bid up the story on Fat Pitch News by clicking a link at the bottom of the post.

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):

The 38 Stocks in the Buffett Portfolio: A comprehensive list that includes some very old positions that have not been sold. You may have forgotten about a few of the smaller names.

Overstock.com Analysis on Money Central: You’ve read my take on Overstock.com (OSTK), now read someone else’s.

<strongHome Depot Holders Tear into CEO Pay: This story has been widely reported elsewhere, but the behavior of the board and management is appalling enough to warrant reading about it again.</strong

Tribune Good News: Media conglomerate Tribune (TRB) announced a $2 billion stock buyback as well as plans to sell at least $500 million in non-core assets. Ratings agencies drastically cut the company’s credit rating, because of the added risk from the leveraged buyback. However, Tribune’s debt currently remains investment grade.

Claire’s Stores at Value Discipline: Rick looks at Claire’s Stores (CLE). It’s an interesting business. The stores sell cheap accessories to young girls. That’s not the kind of business where competitive pricing is a big concern.

International Speedway at MoneyMarketLetter.com: A post discussing an often overlooked wide-moat company, track operator International Speedway (ISCA).

Sleeping With an Elephant – Emerging Markets – How Diversified Are You?: Rick of Value Discipline discusses the possibility that simply picking a superficially diverse group of international securities may not insulate you against problems in the U.S.

Brunswick – Bargain Basement Boating?: Value Discipline profiles Brunswick (BC), a big player in boating and marine related recreation. The company also manufactures other (non-marine) recreational products and operates bowling alleys.

Funeral Pallor: What’s wrong with the funeral business? Burials are exactly the kind of highly fragmented, slow growth industry that should be highly profitable for the consolidators. Lately, that hasn’t been the case.

Coke Trying to Stay Fresh: You may have seen this story elsewhere. Coca-Cola (KO) is developing new specialty drink recipes by using restaurants as a test lab. The plan seems to be to increase the use of Coke in restaurants. I doubt it’ll lead to big results relative to Coke’s total sales, but it makes more sense than many of the marketing pushes for mature beverage brands.

Visit Fat Pitch News…

Series of Bank Posts

I recently concluded the week long series of posts on specific banks earning above average returns. The idea was to look at each bank’s business and ask why it is capable of earning above average returns. For a discussion of why banks, on average, earn returns above those of many other public companies, see my earlier post: “On Banks”.

Here are the five posts:

Wells Fargo & Company

Fifth Third Bancorp

Cascade Bancorp

TCF Financial Corporation

Valley National Bancorp…