Today, I wrote the first of what will be a weekly series of net-net articles over at GuruFocus.
The article is called “How Many Net-Nets Are There?”
And the answer is 142.
By the way, a new issue of GuruFocus’s net-net newsletter comes out tonight. It’s free for GuruFocus Premium Subscribers.
The weekly articles are – of course – free for everyone.
The articles will appear each Friday. The newsletter comes out on the first Friday of each month.
Read moreIt’s been about 6 months since I bought a basket of 5 Japanese net-nets.
A couple people have asked about how my Japanese net-nets have done. I started making these investments around April of this year. I wrote the “Buy Japan” post before buying my 5 Japanese net-nets. And it took me about a month of bidding for these micro caps to get my orders filled.
Since then, in dollar terms, the 5 stocks are up: 6.41%, 7.53%, 12.80%, 18.35%, and 20.88%.
You can use the March 16th date of my “Buy Japan” post as a convenient way of measuring the influence the Japanese Yen / U.S. Dollar exchange rate has had on the performance of those stocks. For Japanese investors, your results would obviously not include these Dollar exchange rate changes.
Let’s just say these Japanese net-nets have done better than my U.S. net-nets this year. It doesn’t matter if you are calculating returns in local currency or dollars. My Japanese net-nets have been my best performers this year.
I will re-evaluate the positions around June of next year.
I generally hold net-nets for at least a year before considering whether they should be sold. This gives them time to run.
Most people sell net-nets too fast because they dislike the underlying businesses and are not used to having such large gains in a single year.
Of course, the truth is that a net-net that rises 50% or even 100% is usually still a very cheap stock. So it’s silly to sell a net-net just because it’s gone up.
Talk to Geoff About His Japanese Net-Nets…
Read moreSome people have asked where they can find episodes of my defunct podcast.
Here they are:
Talk to Geoff About the Investor Questions Podcast…
Read moreSomeone who reads the blog sent me this email:
Hi Geoff,
My question for you is about the recent market correction. I know you might not be comfortable talking about any stocks you bought, but I’d love to hear anything you can say about how you approached Mr. Market’s most recent mood swing; what kind of actions did you take? Did you stick to pre-researched stocks on a watch list or did you go into overdrive with researching new businesses? I guess my question is mostly about mindset and preparedness. How do you prepare for this, and what does your thought process look like while it’s happening?
Thanks,
Mike
I answered Mike’s question over at GuruFocus.
In my article, I talk about 12 stocks I’d consider buying:
1. Omnicom (OMC)
2. Regis (RGS)
3. Fair Isaac (FICO)
4. Moody’s (MCO)
5. Dun & Bradstreet (DNB)
6. Birner Dental (BDMS)
7. VCA Antech (WOOF)
8. Prestige Brands (PBH)
9. Carnival (CCL)
10. Dreamworks (DWA)
11. Nintendo (NTDOY)
12. CEC Entertainment (CEC)
Talk to Geoff About Stocks He’d Consider Buying…
Read moreSomeone who reads the blog sent me this email:
Hi Geoff,
The thing I have been pondering is what are the tools in valuing a shrinking / dying business. The one I have been looking through is Journal Communications (JRN).
They trade under their book value, but only half of that is tangible so the market price would be about 1.5x tangible book. Most of that is PP&E so definitely no net-net situation. The bright side is that if you own 33 radio stations, 13 TV stations & a bunch of local newspapers there has got to be some intangible value there. Is it worth the 110m in the books is a whole other story.
I’m a bit stuck as what should I use to value the business. If I just take the average 10% FCF margin, apply that to current year revenues of ~370 & discount that to perpetuity with 22% (which is basically a hurdle rate of 10% + historical shrinking rate of revenues ~10-12%) I get something in the range of the current market valuation. The problem is that in real life your depreciation can´t exceed cap-ex till the end of days (if we ain´t liquidating) so the FCF would need to start to come down when they have to start to upkeep their PP&E. On the other hand the management has shown that they can keep ROE reasonable so the raising of cap-ex wouldn´t be such a bad thing IF they could maintain those revenues.
On second thought, am I barking the wrong tree here. Should I focus on the intangibles? I’m pretty sure the company is at least worth its book value (including the intangibles).
What got me to think about this was your article on Asset-Earnings Equivalence. Simplified I just see a lot of assets that have been historically successfully converted into cash (ok so there have been a couple of crappy acquisitions as always the case).
Best Wishes,
Pekka
One of the people I email back and forth with quite a bit is Gurpreet Narang. Here is his write-up on Journal Communications.
Gurpreet Narang’s Report on Journal Communications (JRN)
And now my thoughts.
You’re absolutely right when you say:
On second thought, am I barking up the wrong tree here. Should I focus on the intangibles? I’m pretty sure the company is at least worth its book value (including the intangibles).
What got me to think about this was your article on Asset-Earnings Equivalence. Simplified I just see a lot of assets that have been historically successfully converted into cash (ok so there have been a couple of crappy acquisitions as always the case).
That’s really where you turned your thinking in the right direction. Asset-earnings equivalence is the way to understand Journal Communications (JRN). This is both good and bad. On the good side, the asset values – when you actually go out and look at what radio stations and TV stations sell for – are well …
Read moreOn June 30th 1914 the New York Times ran the headline:
Trading Very Dull, with Prices a Little Lower
The article had this to say about Europe:
The assassination of the heir to the Austrian throne was an event whose consequences were closely considered by the markets abroad, but the calmness which they showed indicated clearly that political complications were not feared as a result of this incident. Indeed, the view that it would tend to lessen rather than to increase political strife in Southeastern Europe found wide acceptance.
Talk to Geoff About Mr. Market’s Predictive Power…
Read moreSomeone who reads the blog wrote me this email:
In your recent article you wrote:
“Intrinsic value is a guess. Buying is the belief. You don’t need to
use a lot of math to prove exactly what something is worth. You just
need to present a convincing case for buying it.”Interesting observation. I’ve seen a few YouTube vids with Bill Ackman
in them. The interviewers have sometimes pressed him for what he
thinks a stock is worth. He never gives a numerical answer. I get the
distinct impression that he never has a definite intrinsic value X
when he buys a stock; only that a stock is “clearly undervalued” at a
current price. As Ben Graham would say: you don’t have to know a man’s
weight to know that he is fat.All the best,
Mark
I think there are really 4 questions you answer before buying any stock:
The ideal stock would get 4 “yes” answers.
The 5 Japanese net-nets I own do not get 4 “yes” answers. But I made sure they passed questions #1, #3, and #4.
A lot of differences in style come down to how you answer these 4 questions. Someone emailed me saying he thought Mohnish Pabrai was more of a Ben Graham investor than a Warren Buffett investor.
Not really. Graham was obsessed with question #1. He wanted to know a stock was safe. Pabrai cares less about #1 and more about #3. Pabrai’s overwhelming focus is on getting a great price.
Graham wanted a great price. But safety always came first.
There are stocks Pabrai has owned that Graham wouldn’t. Nothing wrong with that. Different people invest differently.
We all rank these 4 questions a little differently. We obsess about one. And our standards are a little too loose on one of the others.
But I think most stock decisions come down to these four questions.
If you can answer those questions – you don’t need an exact estimate of intrinsic value.
Talk to Geoff About The 4 Questions to Ask Before Buying a Stock…
Read moreHere’s some good stock analysis for you.
Whopper Investments and Oddball Stocks spar over net-net ADDvantage (AEY). Whopper Investments owns the stock. Oddball Stocks explains why it’s a pass.
And Andrew August at The Frog’s Kiss writes about Dreamworks (DWA). It’s a 14 page report. After reading his analysis, I emailed Andrew saying it was “the best analyst report I’ve ever read.”
I’ll say that here too.
This is the best analyst report I’ve ever read.
You’ll notice Andrew never puts an exact value on the stock. Which tells you something about good analysis.
A lot of value investing blogs and articles calculate intrinsic value for you. If you read Ben Graham and Warren Buffett – you’ll see they almost never do this.
Intrinsic value is a guess. Buying is the belief.
You don’t need to use a lot of math to prove exactly what something is worth. You just need to present a convincing case for buying it.
Talk to Geoff About Stock Analysis…
Read moreSomeone who reads my blog sent me this email:
All else being equal, which measure is preferred for financial firms such as banks: ROIC or ROE? I am using ROIC for non-financial firms but I didn’t know if it gave a useful reading for financial firms or not.
Thanks,
Chad
ROIC is not useful.
For non-financial companies:
I know you like ROIC. But I think it’s too clever by half.
I use the pre-tax return on tangible invested assets.
In other words, I look at what a company earns and divide those earnings by the assets on its balance sheet excluding cash and intangibles.
For financial companies:
Normally you use return on assets. Then you multiply ROA by an appropriate leverage ratio.
Say Wells Fargo (WFC) has a long-term average ROA of 1.3%. If in the future you expect banks to be levered 10 to 1, you would multiply 1.3% times 10 to get a 13% ROE. If you expect normal leverage to be 12 to 1 – you’d multiply 1.3% times 12 to get a normal ROE of 15.6%.
And so on.
For a good discussion of financial companies, read Variant Perceptions.…
Read moreYesterday, Warren Buffett’s Berkshire Hathaway (BRK.B) announced it hired Ted Weschler as an investment manager. Weschler will manage between $1 billion and $3 billion of Berkshire’s money. He starts next year.
Weschler currently runs a hedge fund.
Here is his latest portfolio:
DirecTV (DTV): 25.98%
W.R. Grace (GRA): 25.11%
DaVita (DVA): 19.04%
Liberty Media (LCAPA): 11.83%
Valassis Communications (VCI): 7.74%
Cogent Communications (CCOI): 3.48%
Cincinnati Bell (CBB): 3.36%
WSFS Financial (WSFS): 3.04%
Fibertower (FTWR): 0.42%
These are long positions only. Weschler shorts stocks and uses leverage. For details, see Carol Loomis’s story.
Weschler is an investor after my own heart. His top 5 positions make up 90% of his portfolio. And he spent time at two of the companies he owns: W.R. Grace and WSFS Financial.
The W.R. Grace connection is well documented.
Weschler became a director of WSFS in 1992. He’s 50 now, so he must have become a director of WSFS at 31 or 32. By age 34, Weschler is shown as a director of 6 different companies. And described as “the general partner for several investment partnerships.”
Weschler worked for Quad-C which controlled Thrift Investors LP which in turn owned 24.81% of WSFS Financial back in 1996 (the earliest date when WSFS filed with EDGAR). So, in reality, Weschler was WSFS’s biggest shareholder as far back as the 1990s.
This supports the general impression that Weschler – like Buffett – buys what he knows. He holds few stocks. And he has relationships with some of these companies going back many, many years.
Talk to Geoff About Ted Weschler…
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