Some readers emailed me about the fact that a company from my list of 15 Japanese net-nets I put out in a 2011 report is going private. The company is Noda Screen. It is up 124% in the last year. But only 32% since my “Buy Japan” post in March of 2011. Another company from the net-net list, Sanjo Machine Works, was taken private about a year ago.
For details on how Japanese net-nets performed from early 2011 through early 2012 see the post “How About Those Japanese Net-Nets” at Oddball Stocks.…
A lot of value bloggers have a problem with the management of Urbana. I don’t. But I do have a problem with the price of the portfolio that will be left after this merger. If you look at the stocks that make up the bulk of Urbana’s portfolio – which will be CBOE (CBOE) and some amount of Intercontinental Exchange (ICE) – these are pricey stocks.
Still, Urbana’s discount to net asset value was recently about 50%. It is a stock worth watching because the discount to NAV is often big and the portfolio is easy to understand. But the underlying assets are not something I’m interested in.
My favorite holding companies to invest in are situations where I like the underlying assets and think they are reasonably priced and then I get a discount to NAV. At Urbana, I think the discount to NAV is the only attraction.
But if you want to invest in securities exchanges, Urbana is the place to start.…
Two people I know have brought up the same stock idea to me: QLogic (QLGC). Someone I email back and forth with brought it up as an example of a company that has been a constant buyer of its own shares. And now The Graham Disciple has written about QLogic. His focus is on the balance sheet.…
Warren Buffett’s Berkshire Hathaway (BRK.B) put out a press release announcing it bought back over $1.2 billion of its own stock. Berkshire also announced it will pay up to 120% of book value for its stock. Previously, Berkshire had been willing to pay 110% of book value.…
Value and Opportunity has an excellent post on holding company discounts. The key point of the post is the division of holding companies into 3 types:value adding, value neutral, and value destroying.
Excellent point. I would take it a step further. The issue with the discount that should or shouldn’t be applied to holding companies is capital allocation. Capital allocation has a huge influence on long term returns in a stock.
But not just holding company stocks. All stocks. A company that buys back stock when it’s cheap deserves to trade at a premium to other stocks. A company that issues stock when it’s cheap deserves to trade at a discount.
I recently looked at a list of good, cheap U.K. businesses. I passed on most of them. Not because they were too expensive. Most were cheaper than similar quality U.S. companies. I passed on the U.K. companies because they tended to issue shares over the last 10 years.
Some of these U.K. share issuers traded around enterprise values of 6 times EBITDA for much of the last decade. Interest rates were not high during the last 10 years. Issuing stock at 6 times EBITDA is criminal. I don’t care what you were acquiring. You can’t make money doing it by issuing such cheap currency.
Capital allocation at non-holding companies is critical. And often overlooked. Because it’s complicated. Take Western Union (WU). Western Union made several acquisitions over the last few years. They overpaid.
That’s the bad news. The good news is that Western Union never stopped buying back its stock. And when they needed money – they borrowed. They didn’t issue stock.
Let’s take a look at CEC Entertainment (CEC). This is Chuck E. Cheese. The stock has returned 8% a year over the last 15 years – versus 4% for the S&P 500. That’s impressive for 2 reasons. For most of the last 15 years, Chuck E. Cheese’s operations have been getting worse – not better. Margins have dropped virtually every year for the last decade. And the stock is cheap right now. EV/EBITDA is about 5. It’s hard for any stock that cheap to show good past returns – an incredibly low end point is incredibly hard to overcome.
I doubt anyone is applauding CEC’s board. But they should be. It would’ve been very easy to deliver returns of zero percent a year over the last 15 years.
Operating income peaked 8 years ago. Earnings per share kept rising for the next 7 years. Shares outstanding decreased 57% over the last 10 years. Those are Teledyne like number.
Some might argue the return on those buybacks has been poor. And they would have been better off paying out dividends. Maybe. But let’s consider another alternative – the one most companies actually take. CEC could’ve invested that cash – not in buybacks or dividends – but in expanding the business.
Investors make an arbitrary distinction between operating companies and holding companies. They …
Someone emailed me with a link to a blog I hadn’t read before. It’s called The Graham Disciple. And so far it has posts on Xerox, Dolby, Rheinmetall, and Bijou Brigitte. Each post starts with a quote from Ben Graham.…
Everybody is narrow minded in their own way. I’m no different. And this blog suffers for it. But we each have our own style. And it wouldn’t do much good for me to write about stocks that don’t fit that style.
So, today I thought I’d point you to some other bloggers talking about two stocks that wouldn’t appear on this blog – but might just match your style.
A blog I read, csinvesting, has a post about Niche vs. Moat. In my experience, most investors underestimate the frequency of moats and overestimate their size. They assume large companies have moats and small companies don’t.
Most competitive advantages are cost advantages. And most of those don’t last. But they keep excess profits in and competition out for a time.
Cost advantages are inflexible. And so any change in technology, society, industry structure, etc. can destroy them. What’s worse is that the cost advantage often reverses from something that favored incumbents to something that favors entrants. You end up with unions, agents, etc. New entrants do not.
Greenwald stresses the local nature of moats. Local competitive advantages are common. If you look at very high return businesses in areas you wouldn’t expect – banks, grocery stores, etc. – they are due to superior performance at the most local level. Each store and branch is outperforming. And the market share situation in each town deters competition.
Most investors don’t consider that a moat. Because it can’t be repeated. In the next town over, it’s useless.
That’s true. But it’s also different from a big company making a hit tech product. They have nothing that can be defended. The profits are due to scale. But the scale – market share – is threatened by something others can and will try to take away.
There’s a book – in fact a whole series – on repeatability.
You shouldn’t read Greenwald’s book without reading Zook’s books. I recently read another book on moats – The Little Book That Builds Wealth – and it makes the same mistake Greenwald’s book makes.
They both downplay management. On the one hand, they are right to do this. Management is not a moat. On the other, they are wrong. Management often grows a culture around a moat.
In fact, today’s management is often less important than the management that formed the company’s identity. Day to day decision making is not important. Keeping the company focused on the moat is. The key manager doesn’t have to be alive to do that. People just have to remember him.
The most durable advantage a company can have is a cultural identity locked up in a moat. Most companies should not try to be cost leaders in everything they do. But if that is your moat – you shouldn’t spend a minute thinking about anything else.
The reason Southwest (LUV) and Wal-Mart (WMT) built the moats they built is due to the cultures their management created. They had one good idea. And they took it seriously.
Most companies are more scatter brained. If they see a good idea, they act on it. But ideas do not exist in isolation. A chain of good ideas often leads to one really bad habit.
Most companies that have moats are not conscious of those moats. Warren Buffett invested in the Washington Post (WPO). The people at the Washington Post knew how …
