If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
I am not standing still. Besides buying a condo, I bought and sold a series securities. One of the most notable ones is the new purchase of 500 shares of Medtronic (NYSE: MDT) at $33.37 paying $7.95 commission on October 11.
MDT is serving more than 7 million people annually with over 40, 000 employees. From 2006 to 2010, its revenue increased about 40%, per share dividend more than doubled, diluted EPS increased 35% and shares outstanding reduced by 10%. And yet, it is trading at a range of high 40s to high 50s in 2006. Right now, it is changed hands at low 30s.
During the market weakness, MDT bought a lot of businesses. In the last year, it acquired INVATER, COREVALVE and VENTOR. Those acquisitions eliminated competitors at a good price, leveraged its global footprint and created natural synergy.
For 2011, the company expects to earn $3.4 per share. It raised debt under the unusually low interest rate environment and used the money to make more acquisitions. It is in a triopoly market mostly avoiding price competition. People can perhaps postpone the medical device operation because of the bad economic situation but can’t avoid it. The postponed sales will come back in the following years. And with more entrenched position, MDT is going to capture more of the sales. Once the growth comes back, I can reasonably believe the multiple may expand. While waiting, the stock is paying 2.6% dividend.
If in 5 years, the economy comes back to life, MDT will make about $5 per share. It may have 100% upside. Therefore, if the market continues to treat MDT without respect, I may add to my positions.
Tuesday, November 23, 2010
Monday, November 22, 2010
A small ad
If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
It has been a while since I last updated my blog. Apologies to my regular readers! Buying and operating rental properties take a lot of time. But I am not standing still. I updated my old condo and rent it with a positive cash flow. I also rented one room of my newly acquired condo. Currently, two rooms are rented while I am occupying the third room. Operating rentals are continuous efforts. I now have one renter to move out (after fulfilling his one year lease) early next month. Shamelessly, I am putting a little ad for my room.
Here is my Craigslist ad:
http://columbus.craigslist.org/roo/2073193317.html
Roommate Wanted Available on Dec 6, 2010
Call 614-716-8325 Tom
One room in a 3 bedroom/1.5 Bath Condo for Only 359/m Best Value in
Worthington/Polaris
The place is freshly painted and cleaned
You are going to share with two quiet and clean guys
Total 1222 Sqft + 200 Sqft finished basement and spacious storage room
Close to everywhere, convenient
Walking distance to: Worthington Elementary School, dentist, urgent
care and parks;
3 minutes to library, Kroger and Laundry
5 minutes drive to shopping and large employers: Costco, Polaris Mall,
Chase, United Healthcare and more;
15 minutes drive to: Ohio State University, Otterbein College
Your share of utility bills include only gas and electricity. Water
and condo fee are paid by us $35 application fee and one month rent as
security deposit
7894 Woodhouse Ln Worthington OH 43085
1. Why I created this blog?
2. How am I going to operate this blog?
It has been a while since I last updated my blog. Apologies to my regular readers! Buying and operating rental properties take a lot of time. But I am not standing still. I updated my old condo and rent it with a positive cash flow. I also rented one room of my newly acquired condo. Currently, two rooms are rented while I am occupying the third room. Operating rentals are continuous efforts. I now have one renter to move out (after fulfilling his one year lease) early next month. Shamelessly, I am putting a little ad for my room.
Here is my Craigslist ad:
http://columbus.craigslist.org/roo/2073193317.html
Roommate Wanted Available on Dec 6, 2010
Call 614-716-8325 Tom
One room in a 3 bedroom/1.5 Bath Condo for Only 359/m Best Value in
Worthington/Polaris
The place is freshly painted and cleaned
You are going to share with two quiet and clean guys
Total 1222 Sqft + 200 Sqft finished basement and spacious storage room
Close to everywhere, convenient
Walking distance to: Worthington Elementary School, dentist, urgent
care and parks;
3 minutes to library, Kroger and Laundry
5 minutes drive to shopping and large employers: Costco, Polaris Mall,
Chase, United Healthcare and more;
15 minutes drive to: Ohio State University, Otterbein College
Your share of utility bills include only gas and electricity. Water
and condo fee are paid by us $35 application fee and one month rent as
security deposit
7894 Woodhouse Ln Worthington OH 43085
Tuesday, August 3, 2010
It is time!
If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
Fellow Toastmasters and guests;
There were two condos for sale across the street from mine. On July 18, I took a look at one of them and made an offer on the spot. After negotiations, my offer was accepted. Buyer’s remorse overwhelmed me afterward. What if I can’t find a tenant? What if there are uncovered deficiencies? I was nervous, uncertain and even afraid, especially after I learned from a smart investor that I should have lowered the purchase price by another three, four thousand by offering cash. I can get a home equity loan later.
In May and June this year, the market was off significantly. Instead of a solid gain, my portfolio was at the break even point for the year. There were talking heads on the nightly business news convinced there will be a double dip and another recession. I was reminded that the US government had a lot of liabilities, medicaid, medicare and social security, unfunded promises. More taxes are on the horizon. Local government is going to lay off thousands of workers.
I met a pretty lady in my church group. Her name is Kate. She is trying to find a teaching job after getting her license. Kate has tried everywhere and couldn’t find one and now the new school year is starting in one or two weeks. I can feel the anxiety from her voices. She may have to take the substitute teaching position and the pay will be very very low.
I like reading. I got this new book, written by Hank Paulson, from a local library along with many titles dealing with property management, real estate tax laws and do it yourself guides. The former secretary of treasury didn’t use a collaborator. He recounted the crisis in such a clarity that I recommend this book to anyone. It is a 450 page book and I finished it in two settings in two days.
After reliving the painful experiences of the great recession through the regulator’s perspective, I know what topic I should give for an inspiring speech. The doomsayers will always focus on the negatives. Although the past decade was a difficult chapter in our nation’s economic history, it is just one chapter, and there will be many more that are marked by economic gains and rising prosperity if we learn from our mistakes and make the necessary corrections.
I pray for Kate to get a teaching job. But the tight fiscal situation at the school district will give a rare opportunity to the board to cut waste, renegotiate the labor contract, get rid of the ridiculous seniority rules, and refocus on the quality of the education. The key is not to spend more, but to spend where it really counts. And like the school board, the state and local governments across
the nation will have to do the same, stop providing services the private sector can provide more efficiently, stop unsustainable benefits to public workers and streamline all the overlapping bureaucracies. Those will make them stronger.
And yes, the federal government has a lot of unfunded promises. But it also holds a lot of assets understated or not stated at all in its balance sheet. For example, the federal government owns 650 million acres of lands, about 30% of the land area of United States. Lumber, minerals, gas and oil. The government also has rights for all the seashores. Those are tangible. How about the intangibles? How about the most productive labor force, the most flexible and dynamic financial, legal and political system? After successfully tackling the financial reform and health
insurance reform, I believe the current Obama administration has wisdom and prepared to reform the entitlement programs. It is effective and efficient. I support all its moves with sole exception for the immigration reform. But it is for another speech. Those will make our federal government stronger.
And for me. During the last three months, I bought Sanofi, Pfizer, GE, Johnson and Johnson, and Merck. Even after the condo purchase, I still have ample liquidity and a strong balance sheet. As long as the deal is good, I am open for business. I am ready to write a check and my check will clear. I can easily cover the principal and interest, property tax and condo fee. Those make me stronger.
And for you. Now some well maintained, ready to move in properties are selling for less than a fully equipped Corolla. If you have cash under the mattress, or in a checking account earning close to 0 return, you can’t wait. If you sit on the fence, you will miss the boat. Be greedy when fear dominates. Those will make you stronger.
Together, those will make us stronger.
Thank you.
Mr. Toastmaster.
1. Why I created this blog?
2. How am I going to operate this blog?
Fellow Toastmasters and guests;
There were two condos for sale across the street from mine. On July 18, I took a look at one of them and made an offer on the spot. After negotiations, my offer was accepted. Buyer’s remorse overwhelmed me afterward. What if I can’t find a tenant? What if there are uncovered deficiencies? I was nervous, uncertain and even afraid, especially after I learned from a smart investor that I should have lowered the purchase price by another three, four thousand by offering cash. I can get a home equity loan later.
In May and June this year, the market was off significantly. Instead of a solid gain, my portfolio was at the break even point for the year. There were talking heads on the nightly business news convinced there will be a double dip and another recession. I was reminded that the US government had a lot of liabilities, medicaid, medicare and social security, unfunded promises. More taxes are on the horizon. Local government is going to lay off thousands of workers.
I met a pretty lady in my church group. Her name is Kate. She is trying to find a teaching job after getting her license. Kate has tried everywhere and couldn’t find one and now the new school year is starting in one or two weeks. I can feel the anxiety from her voices. She may have to take the substitute teaching position and the pay will be very very low.
I like reading. I got this new book, written by Hank Paulson, from a local library along with many titles dealing with property management, real estate tax laws and do it yourself guides. The former secretary of treasury didn’t use a collaborator. He recounted the crisis in such a clarity that I recommend this book to anyone. It is a 450 page book and I finished it in two settings in two days.
After reliving the painful experiences of the great recession through the regulator’s perspective, I know what topic I should give for an inspiring speech. The doomsayers will always focus on the negatives. Although the past decade was a difficult chapter in our nation’s economic history, it is just one chapter, and there will be many more that are marked by economic gains and rising prosperity if we learn from our mistakes and make the necessary corrections.
I pray for Kate to get a teaching job. But the tight fiscal situation at the school district will give a rare opportunity to the board to cut waste, renegotiate the labor contract, get rid of the ridiculous seniority rules, and refocus on the quality of the education. The key is not to spend more, but to spend where it really counts. And like the school board, the state and local governments across
the nation will have to do the same, stop providing services the private sector can provide more efficiently, stop unsustainable benefits to public workers and streamline all the overlapping bureaucracies. Those will make them stronger.
And yes, the federal government has a lot of unfunded promises. But it also holds a lot of assets understated or not stated at all in its balance sheet. For example, the federal government owns 650 million acres of lands, about 30% of the land area of United States. Lumber, minerals, gas and oil. The government also has rights for all the seashores. Those are tangible. How about the intangibles? How about the most productive labor force, the most flexible and dynamic financial, legal and political system? After successfully tackling the financial reform and health
insurance reform, I believe the current Obama administration has wisdom and prepared to reform the entitlement programs. It is effective and efficient. I support all its moves with sole exception for the immigration reform. But it is for another speech. Those will make our federal government stronger.
And for me. During the last three months, I bought Sanofi, Pfizer, GE, Johnson and Johnson, and Merck. Even after the condo purchase, I still have ample liquidity and a strong balance sheet. As long as the deal is good, I am open for business. I am ready to write a check and my check will clear. I can easily cover the principal and interest, property tax and condo fee. Those make me stronger.
And for you. Now some well maintained, ready to move in properties are selling for less than a fully equipped Corolla. If you have cash under the mattress, or in a checking account earning close to 0 return, you can’t wait. If you sit on the fence, you will miss the boat. Be greedy when fear dominates. Those will make you stronger.
Together, those will make us stronger.
Thank you.
Mr. Toastmaster.
Tuesday, June 22, 2010
Bought OSG
If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
I sold my last Coach holding on June 15, 2010 for $8,824.90 and paid $5.10 commission. And finally, I got my hands on OSG. I bought 100 shares on March 26, 2010 for $3, 990.
If a public listed company in the last five years reduced shares outstanding by one third, doubled its revenue, book value and dividend, what valuation should Mr. Market assign it to? Let me add its current asset plus two years of free cash flow can pay off all its debt!
What if I add that its net margin is 18.6%, return on equity is 18.4% and return on capital is 8.2%?
Currently, its stock is sold for half of its book value, less than 3X free cash flow and about 3X earning. Furthermore, it yields 4.88%.
Yes, it is Oversea Shipping Group (NYSE: OSG). Its management is very smart, selling OSP for $19 per share in 2007 and are buying them back at $10 per share in 2009. The company owns the most modern fleets in the industry and 100% of the fleet is double hull. It has a strong balance sheet with ample liquidity. It is buying back its own shares like crazy and it is buying back shares of its subsidiaries. In Nov 2009, its book value is $68.90.
Why is it trading at this low? It is in a highly cyclical industry and 65% of its revenue is from highly volatile spot market charter rates. In the last 10 years, it lost money only once, in 2002, it lost 51 cents per share. Now, if the world economy keeps deteriorating, energy price goes out of the bottom, OSG will continue to sell its ships, reduce its operating expenses and paying its dividend. I believe it can do these things for at least 3-5 years. Actually, I am not that permissive to believe the global economy will remain in the dump. But I will not try very hard to convince you otherwise either.
1. Why I created this blog?
2. How am I going to operate this blog?
I sold my last Coach holding on June 15, 2010 for $8,824.90 and paid $5.10 commission. And finally, I got my hands on OSG. I bought 100 shares on March 26, 2010 for $3, 990.
If a public listed company in the last five years reduced shares outstanding by one third, doubled its revenue, book value and dividend, what valuation should Mr. Market assign it to? Let me add its current asset plus two years of free cash flow can pay off all its debt!
What if I add that its net margin is 18.6%, return on equity is 18.4% and return on capital is 8.2%?
Currently, its stock is sold for half of its book value, less than 3X free cash flow and about 3X earning. Furthermore, it yields 4.88%.
Yes, it is Oversea Shipping Group (NYSE: OSG). Its management is very smart, selling OSP for $19 per share in 2007 and are buying them back at $10 per share in 2009. The company owns the most modern fleets in the industry and 100% of the fleet is double hull. It has a strong balance sheet with ample liquidity. It is buying back its own shares like crazy and it is buying back shares of its subsidiaries. In Nov 2009, its book value is $68.90.
Why is it trading at this low? It is in a highly cyclical industry and 65% of its revenue is from highly volatile spot market charter rates. In the last 10 years, it lost money only once, in 2002, it lost 51 cents per share. Now, if the world economy keeps deteriorating, energy price goes out of the bottom, OSG will continue to sell its ships, reduce its operating expenses and paying its dividend. I believe it can do these things for at least 3-5 years. Actually, I am not that permissive to believe the global economy will remain in the dump. But I will not try very hard to convince you otherwise either.
Friday, May 21, 2010
I am back
If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
I am slow in new posts recently because I am planning a major life change event. Now, the dust has settled, I would like to catch up. First, I would like to talk in details on the GSK purchase I mentioned in my last post. Here is a speech I gave in a local toastmaster club.
There are bulls and bears in the market making noise on the mass media daily. While the large audience ruminates over deficit, interest rate and unemployment, a lot of abnormalities are ignored. With abnormality opportunity comes along. Coach versus GSK exemplified this abnormality.
I had a history with both. I have been owning GSK since 2006 and most recently added my position in February 2010. GSK is a global healthcare company selling products from toothpaste to vaccine. If you watch news, you can't escape the bombast of its ads. I have been owning Coach since 2008. It is a popular handbag brand for ladies. I most recently trimmed my position.
While people must brush their teeth and take their pills every day, it is always a mystery to me how many handbags a lady needs. Right now, there are only two types of vaccine for cervical cancer. On the other hand, there are more than 10 handbag brands selling at higher price point than Coach, more than 10 brands selling at lower price point and more than 10 brands selling at the price point.
Both GSK and Coach are highly profitable. They have similar net margins: GSK is 19.5% and Coach is 20%. While GSK spends heavily on R&D, Coach pays lavishly for its creative staff.
Coach's balance sheet is excellent. It can easily pay off its liability using its cash. GSK's balance sheet is not pristine but decent. It has global reach, diversified businesses and regulatory protection.
Coach is expected to grow fast. It is said that it has great potential in China and other emerging market. GSK is facing regulatory headwind. Its asthma treatment drug is under scrutiny, the new healthcare regime is trying to cut drug price and FDA is dragging its feet approving new drugs. But as senior citizen becomes larger and larger share of the population, the healthcare industry and GSK will keep growing.
Here comes the abnormality. GSK is selling for a p/e ratio of 11 yielding 5%. Coach is selling for a p/e ratio of 21 yielding about just a hair over 1%. And most analysts on the street call GSK a "HOLD" and Coach a "Strong Buy". Even after substracting the cash on Coach's balance sheet, it is selling for a p/e ratio of 18.27.
Let's summarize the case. Coach has one focused product line, faces more competition, selling almost twice as rich as GSK. GSK is paying out more cash, providing essential products and expanding in emerging market. As long as the abnormality exists, I will keep exploiting the opportunity by adding GSK and trimming Coach.
1. Why I created this blog?
2. How am I going to operate this blog?
I am slow in new posts recently because I am planning a major life change event. Now, the dust has settled, I would like to catch up. First, I would like to talk in details on the GSK purchase I mentioned in my last post. Here is a speech I gave in a local toastmaster club.
There are bulls and bears in the market making noise on the mass media daily. While the large audience ruminates over deficit, interest rate and unemployment, a lot of abnormalities are ignored. With abnormality opportunity comes along. Coach versus GSK exemplified this abnormality.
I had a history with both. I have been owning GSK since 2006 and most recently added my position in February 2010. GSK is a global healthcare company selling products from toothpaste to vaccine. If you watch news, you can't escape the bombast of its ads. I have been owning Coach since 2008. It is a popular handbag brand for ladies. I most recently trimmed my position.
While people must brush their teeth and take their pills every day, it is always a mystery to me how many handbags a lady needs. Right now, there are only two types of vaccine for cervical cancer. On the other hand, there are more than 10 handbag brands selling at higher price point than Coach, more than 10 brands selling at lower price point and more than 10 brands selling at the price point.
Both GSK and Coach are highly profitable. They have similar net margins: GSK is 19.5% and Coach is 20%. While GSK spends heavily on R&D, Coach pays lavishly for its creative staff.
Coach's balance sheet is excellent. It can easily pay off its liability using its cash. GSK's balance sheet is not pristine but decent. It has global reach, diversified businesses and regulatory protection.
Coach is expected to grow fast. It is said that it has great potential in China and other emerging market. GSK is facing regulatory headwind. Its asthma treatment drug is under scrutiny, the new healthcare regime is trying to cut drug price and FDA is dragging its feet approving new drugs. But as senior citizen becomes larger and larger share of the population, the healthcare industry and GSK will keep growing.
Here comes the abnormality. GSK is selling for a p/e ratio of 11 yielding 5%. Coach is selling for a p/e ratio of 21 yielding about just a hair over 1%. And most analysts on the street call GSK a "HOLD" and Coach a "Strong Buy". Even after substracting the cash on Coach's balance sheet, it is selling for a p/e ratio of 18.27.
Let's summarize the case. Coach has one focused product line, faces more competition, selling almost twice as rich as GSK. GSK is paying out more cash, providing essential products and expanding in emerging market. As long as the abnormality exists, I will keep exploiting the opportunity by adding GSK and trimming Coach.
Wednesday, March 3, 2010
The other purchases in Feb
If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
I also bought 100 shares of GSK at 38.74 and another stock which I will keep anonymous for now since I am not done building my positions yet. Once I finish building a full position, I will post all the history with that stock. For now, I can only say that it is an industry leader in the process of splitting itself and is way undervalued.
I owned 300 shares of GSK before I made the recent purchase. GSK is a healthcare conglomerate. I am buying it at a P/E of 11.36 and a yield of around 6. The healthcare industry as whole is facing political headwinds and GSK is having its own controversies. However, I believe it is one of the most undervalued stocks out there.
1. Why I created this blog?
2. How am I going to operate this blog?
I also bought 100 shares of GSK at 38.74 and another stock which I will keep anonymous for now since I am not done building my positions yet. Once I finish building a full position, I will post all the history with that stock. For now, I can only say that it is an industry leader in the process of splitting itself and is way undervalued.
I owned 300 shares of GSK before I made the recent purchase. GSK is a healthcare conglomerate. I am buying it at a P/E of 11.36 and a yield of around 6. The healthcare industry as whole is facing political headwinds and GSK is having its own controversies. However, I believe it is one of the most undervalued stocks out there.
Thursday, February 18, 2010
Bought LM
If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
I bought 200 shares of LM at $26.26 on Feb 03 2010 paying a commission of $4.95.
I owned 400 shares of LM before this purchase.
Legg Mason, one of the world largest asset managers, is trading at less than 10x trough earnings. Currently LM has approximately $700Bn under management, with 55% invested in fixed income products, 22% in money market, and the remainder in equity. LM is structured in an affiliate model: this means that it operates as a holding company and owns a number of relatively independent money managers. The affiliates keep a percentage of their revenue generation with the rest going to LM Corporate. This percentage varies, but most believe approximately 30% is kept by the affiliates' employees. The holding company provides certain shared services as well as retail and international distribution.
The shares had been traded around $100 before the crisis. Here is what happened:
The Company's largest affiliate, Western Asset Management, needed to be bailed out due to its exposure to structured investment vehicles. Because of the reduced liquidity for these products, Western suffered a run on its money market funds and required a costly bailout from its parent, Legg Mason. Compounding this, LM's all-star manager Bill Miller suffered the worst performance of his career. Miller saw significant outflows as a result and was ridiculed for calling the bottom of the market on multiple occasions. Legg Mason's total outflows were $225Bn from 2007 to Sept 2009, representing 22% of AUM at Sept 2007. Further, the market didn't help matters driving AUM down a further $190Bn. At its bottom, AUM had gone from over $1T to $630Bn. All this occurred under watch of a new management team that stepped in just as the markets were collapsing. More recently, Trian Investments, headed by Nelson Peltz, has taken a 4% stake in LM. As part of a standstill agreement, Trian is required to buy up to 8% of the outstanding shares and has been awarded a board seat.
A private equity heavyweight, KKR was involved too. Nelson Peltz is a very savvy investor and now has a board seat. Moreover, Peltz has agreed to buy more shares through his standstill contract. He is required to own 8% of the company by April of next year.
While a downturn in the market would be a negative, LM has a number of levers they can pull to help offset the decline in earnings. Hypothetically, if AUM's were to fall to $500Bn, or a 30% decline from where they are today, LM will generate, at worst, cash EPS of $1.50/sh (which implies an 80% incremental margin). At this point, it would be apparent that their distribution group was not fulfilling its duty, and this unit could be cut lose, saving an additional $1.20/sh. This alone helps to justify the current valuation in a downside case. However, as a little extra incentive, this decline in AUM would bring about added pressure from Peltz and may accelerate a sale or spin-off of one of the affiliates.
Giving further comfort to the downside, LM earned $1.80 cash EPS in 2005 on an apples to apples basis (stripping out performance fees and adjusting for the share count - this was also prior to the tax shield which has been excluded from the above EPS). 2005 was the year prior to the CAM acquisition, and while times were very different, LM was operating with an average AUM of $330Bn. Again, times are different, but this is prior to the distribution group joining and shows what the business can generate if such a scenario presents itself.
The bottom line is fund management companies are able to achieve reasonable size and also enjoy reasonable persistence in terms of AUM. And I am buying a fund management at very attractive valuation.
1. Why I created this blog?
2. How am I going to operate this blog?
I bought 200 shares of LM at $26.26 on Feb 03 2010 paying a commission of $4.95.
I owned 400 shares of LM before this purchase.
Legg Mason, one of the world largest asset managers, is trading at less than 10x trough earnings. Currently LM has approximately $700Bn under management, with 55% invested in fixed income products, 22% in money market, and the remainder in equity. LM is structured in an affiliate model: this means that it operates as a holding company and owns a number of relatively independent money managers. The affiliates keep a percentage of their revenue generation with the rest going to LM Corporate. This percentage varies, but most believe approximately 30% is kept by the affiliates' employees. The holding company provides certain shared services as well as retail and international distribution.
The shares had been traded around $100 before the crisis. Here is what happened:
The Company's largest affiliate, Western Asset Management, needed to be bailed out due to its exposure to structured investment vehicles. Because of the reduced liquidity for these products, Western suffered a run on its money market funds and required a costly bailout from its parent, Legg Mason. Compounding this, LM's all-star manager Bill Miller suffered the worst performance of his career. Miller saw significant outflows as a result and was ridiculed for calling the bottom of the market on multiple occasions. Legg Mason's total outflows were $225Bn from 2007 to Sept 2009, representing 22% of AUM at Sept 2007. Further, the market didn't help matters driving AUM down a further $190Bn. At its bottom, AUM had gone from over $1T to $630Bn. All this occurred under watch of a new management team that stepped in just as the markets were collapsing. More recently, Trian Investments, headed by Nelson Peltz, has taken a 4% stake in LM. As part of a standstill agreement, Trian is required to buy up to 8% of the outstanding shares and has been awarded a board seat.
A private equity heavyweight, KKR was involved too. Nelson Peltz is a very savvy investor and now has a board seat. Moreover, Peltz has agreed to buy more shares through his standstill contract. He is required to own 8% of the company by April of next year.
While a downturn in the market would be a negative, LM has a number of levers they can pull to help offset the decline in earnings. Hypothetically, if AUM's were to fall to $500Bn, or a 30% decline from where they are today, LM will generate, at worst, cash EPS of $1.50/sh (which implies an 80% incremental margin). At this point, it would be apparent that their distribution group was not fulfilling its duty, and this unit could be cut lose, saving an additional $1.20/sh. This alone helps to justify the current valuation in a downside case. However, as a little extra incentive, this decline in AUM would bring about added pressure from Peltz and may accelerate a sale or spin-off of one of the affiliates.
Giving further comfort to the downside, LM earned $1.80 cash EPS in 2005 on an apples to apples basis (stripping out performance fees and adjusting for the share count - this was also prior to the tax shield which has been excluded from the above EPS). 2005 was the year prior to the CAM acquisition, and while times were very different, LM was operating with an average AUM of $330Bn. Again, times are different, but this is prior to the distribution group joining and shows what the business can generate if such a scenario presents itself.
The bottom line is fund management companies are able to achieve reasonable size and also enjoy reasonable persistence in terms of AUM. And I am buying a fund management at very attractive valuation.
Tuesday, February 16, 2010
February 2010 is eventful
If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
I sold one stock so far and bought four.
I sold out LTD on February 04, 2010 at $20.24. Since it is in my Welltrade account, I didn't pay a commission. I first bought LTD in Oct 2007. During the holding period, I received $510 in dividends and $581.89 capital gain. It is an acceptable but certainly not brilliant return.
LTD has been consistently paying out a healthy dividend even in the most turbulent times. I believe it has two wonderful businesses although I think its recent discounting at Body and Bath Works is overdone. I believe its Victoria's Secret business has the potential to grow internationally. And I applauded the management's decision not to overextend itself. All that been said, I think LTD is still undervalued. Its intrinsic value is closer to $30 rather than $20.
I still sold it because I believe I find something cheaper.
In his most recent comment, Bill Nygren said,
" AMAT is the largest supplier of capital equipment used to manufacture semiconductors and LCD panels. It has the dominant market share across the vast majority of its product line, a world class service infrastructure, and a pristine balance sheet with over $2 per share in cash. Despite those positives, its business is wildly cyclical, and in the recent downturn, not many new semiconductor factories were built. In the technology frenzy a decade ago, AMAT stock reached a high of $57 which was 10x sales per share (yes, sales per share – it was almost 50x earnings per share). Sales in 2009 were about half the 2000 level, and AMAT lost money. But this is a growing industry, so we believe a strong cyclical recovery will soon produce sales and earnings that exceed the prior peak. On the basis of this business alone, we believe AMAT is undervalued at $14. In addition, AMAT has an emerging business selling equipment used to manufacture solar panels. The future of solar energy is hard to predict, and the value of AMAT’s solar division could range from almost nothing to half the current stock price if it were valued consistently with publically traded competitors. Though we aren’t comfortable valuing it at such a high level, it’s clearly worth something, and we don’t believe we are paying anything for it. "
I bought 500 shares on Feb 4, 2010 at $11.73 about 17% discount from what Bill Nygren's entry price without paying a commission. I think AMAT's fair value is closer to north of $20 rather than north of $10 it is currently trading at.
BTW, my friend, Allen, recently set up a website for shopping deals.
Here is the link:www.dealam.com.
1. Why I created this blog?
2. How am I going to operate this blog?
I sold one stock so far and bought four.
I sold out LTD on February 04, 2010 at $20.24. Since it is in my Welltrade account, I didn't pay a commission. I first bought LTD in Oct 2007. During the holding period, I received $510 in dividends and $581.89 capital gain. It is an acceptable but certainly not brilliant return.
LTD has been consistently paying out a healthy dividend even in the most turbulent times. I believe it has two wonderful businesses although I think its recent discounting at Body and Bath Works is overdone. I believe its Victoria's Secret business has the potential to grow internationally. And I applauded the management's decision not to overextend itself. All that been said, I think LTD is still undervalued. Its intrinsic value is closer to $30 rather than $20.
I still sold it because I believe I find something cheaper.
In his most recent comment, Bill Nygren said,
" AMAT is the largest supplier of capital equipment used to manufacture semiconductors and LCD panels. It has the dominant market share across the vast majority of its product line, a world class service infrastructure, and a pristine balance sheet with over $2 per share in cash. Despite those positives, its business is wildly cyclical, and in the recent downturn, not many new semiconductor factories were built. In the technology frenzy a decade ago, AMAT stock reached a high of $57 which was 10x sales per share (yes, sales per share – it was almost 50x earnings per share). Sales in 2009 were about half the 2000 level, and AMAT lost money. But this is a growing industry, so we believe a strong cyclical recovery will soon produce sales and earnings that exceed the prior peak. On the basis of this business alone, we believe AMAT is undervalued at $14. In addition, AMAT has an emerging business selling equipment used to manufacture solar panels. The future of solar energy is hard to predict, and the value of AMAT’s solar division could range from almost nothing to half the current stock price if it were valued consistently with publically traded competitors. Though we aren’t comfortable valuing it at such a high level, it’s clearly worth something, and we don’t believe we are paying anything for it. "
I bought 500 shares on Feb 4, 2010 at $11.73 about 17% discount from what Bill Nygren's entry price without paying a commission. I think AMAT's fair value is closer to north of $20 rather than north of $10 it is currently trading at.
BTW, my friend, Allen, recently set up a website for shopping deals.
Here is the link:www.dealam.com.
Sunday, January 31, 2010
Have Faith in the System
If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
The following is a speech I gave at a local toastmaster club.
I received an email last Thursday for the citizenship interview. I am going to be a United States citizen.
Becoming a US citizen is really hard for an immigrant from China like me. It took me 12 years. Actually, if I earned something really hard, I will treasure it. And often, if I get something out of nothing, I trash it. That's human nature.
According to a Gallup survey last year, 37% Americans consider China to be the world's leading economic power; only 39% choose the United States. I am waiting for the 2010 numbers. And Americans as a whole are pulling their investment dollars from domestic equity funds and putting them into China fund and other emerging markets last year. They voted by their dollars.
In 2009, all my savings stay in the United States. I voted by my dollars and my application for the US citizenship. I believe in the long run, the United States will maintain her status as the number one economic powerhouse because she has a wonderful self-adjusting system. The self correcting system will ensure long term prosperity despite the current economic difficulties.
Three recent events strengthened my faith in the system.
Event number one: The presidential proposal to reestablish the great wall between commercial bank and proprietary trading.
After lessons from depression, people learned that unchecked greed backed by other people's money will cause disaster. And congress passed laws to separate commercial bank and speculative trading. The United States is depression free for 50 years until people began to take it for granted. In 1996, the great wall was torn down. And after only 10 years, the United States had her first real encounter with depression over more than half a century. To save time, I don't even want to dive into the serious conflict caused by peeking into your clients' trading account while trading for your own account.
Event number two: The new healthcare reform.
The link between health insurance and employment is preventing employees from becoming entrepreneurs. If I can find affordable health insurance without pre-existing condition restraints outside my employment, I am more likely to set up my own business and hire people.
Event number three: The election of Scott Brown.
Although the healthcare reform has many potential benefits, the huge cost and pork barrel spending in a high deficit environment worry most people. People elect Scott Brown to break the super majority enjoyed by Democrat in the Senate. And the congress has to reduce the scope of healthcare reform and hopefully eliminate all the pork barrel spendings.
I see a pattern. After fixing a problem, the system goes on smoothly for a while. And then it goes astray and has another problem. Then the system finds a solution to fix the new problem with minimal social and economic cost. Of course, after a while, the system will go strayed again. And I believe, it will find a solution and fix itself again.
1. Why I created this blog?
2. How am I going to operate this blog?
The following is a speech I gave at a local toastmaster club.
I received an email last Thursday for the citizenship interview. I am going to be a United States citizen.
Becoming a US citizen is really hard for an immigrant from China like me. It took me 12 years. Actually, if I earned something really hard, I will treasure it. And often, if I get something out of nothing, I trash it. That's human nature.
According to a Gallup survey last year, 37% Americans consider China to be the world's leading economic power; only 39% choose the United States. I am waiting for the 2010 numbers. And Americans as a whole are pulling their investment dollars from domestic equity funds and putting them into China fund and other emerging markets last year. They voted by their dollars.
In 2009, all my savings stay in the United States. I voted by my dollars and my application for the US citizenship. I believe in the long run, the United States will maintain her status as the number one economic powerhouse because she has a wonderful self-adjusting system. The self correcting system will ensure long term prosperity despite the current economic difficulties.
Three recent events strengthened my faith in the system.
Event number one: The presidential proposal to reestablish the great wall between commercial bank and proprietary trading.
After lessons from depression, people learned that unchecked greed backed by other people's money will cause disaster. And congress passed laws to separate commercial bank and speculative trading. The United States is depression free for 50 years until people began to take it for granted. In 1996, the great wall was torn down. And after only 10 years, the United States had her first real encounter with depression over more than half a century. To save time, I don't even want to dive into the serious conflict caused by peeking into your clients' trading account while trading for your own account.
Event number two: The new healthcare reform.
The link between health insurance and employment is preventing employees from becoming entrepreneurs. If I can find affordable health insurance without pre-existing condition restraints outside my employment, I am more likely to set up my own business and hire people.
Event number three: The election of Scott Brown.
Although the healthcare reform has many potential benefits, the huge cost and pork barrel spending in a high deficit environment worry most people. People elect Scott Brown to break the super majority enjoyed by Democrat in the Senate. And the congress has to reduce the scope of healthcare reform and hopefully eliminate all the pork barrel spendings.
I see a pattern. After fixing a problem, the system goes on smoothly for a while. And then it goes astray and has another problem. Then the system finds a solution to fix the new problem with minimal social and economic cost. Of course, after a while, the system will go strayed again. And I believe, it will find a solution and fix itself again.
Bought FNF
If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
I bought 500 shares of FNF at $12.99 on January 28, 2009. Since I moved my account from Scottrade to Wellstrade, I get 100 commission free trades annually.
I had a little history with FNF. I first bought 400 shares at $15.85 on December 12, 2007. And I sold all my FNF at $18.32 on February 5, 2009. During the holding period, I received $420 dividend. I paid about $14 for the two transactions. All in all, that is 21.96% annual return in 2008. Not too shabby. At the time of selling, I wrote to myself:
"FNF is the largest title insurance company. It acquired the third largest player Land America, which landed in the bankruptcy court in the 2008 financial storm, on the cheap cementing its top spot in this industry. Its management focuses on returning value to shareholder. You can see this through its series buying and selling businesses. It pays a healthy dividend. It maintains the highest margin in the industry through tight cost control. It is a great bargain if I can buy it at a big discount of its book value (about $12.72 per share). It was sold at $18 per share at a reasonable gain."
Fast forward to Sep 2009, its book value grew to $14.09. The company has not reported its 4th quarter results yet. But I will not be surprised if their book value is around $15 at the 4th quarter 2009. I am buying at about 15% discount at its book value. To finance its purchase Land America, FNF sold shares at $19. So how much does FNF worth now? I believe its intrinsic value is somewhere higher than its book value, maybe around $19.
1. Why I created this blog?
2. How am I going to operate this blog?
I bought 500 shares of FNF at $12.99 on January 28, 2009. Since I moved my account from Scottrade to Wellstrade, I get 100 commission free trades annually.
I had a little history with FNF. I first bought 400 shares at $15.85 on December 12, 2007. And I sold all my FNF at $18.32 on February 5, 2009. During the holding period, I received $420 dividend. I paid about $14 for the two transactions. All in all, that is 21.96% annual return in 2008. Not too shabby. At the time of selling, I wrote to myself:
"FNF is the largest title insurance company. It acquired the third largest player Land America, which landed in the bankruptcy court in the 2008 financial storm, on the cheap cementing its top spot in this industry. Its management focuses on returning value to shareholder. You can see this through its series buying and selling businesses. It pays a healthy dividend. It maintains the highest margin in the industry through tight cost control. It is a great bargain if I can buy it at a big discount of its book value (about $12.72 per share). It was sold at $18 per share at a reasonable gain."
Fast forward to Sep 2009, its book value grew to $14.09. The company has not reported its 4th quarter results yet. But I will not be surprised if their book value is around $15 at the 4th quarter 2009. I am buying at about 15% discount at its book value. To finance its purchase Land America, FNF sold shares at $19. So how much does FNF worth now? I believe its intrinsic value is somewhere higher than its book value, maybe around $19.
Thursday, January 21, 2010
Sold KMX
If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?
On Friday, Dec 18, 2009, Carmax (KMX) reported a good quarter.
From its earning release, it states,
"Net sales and operating revenues increased 19% to $1.73 billion from $1.46 billion in the third quarter of last year. Comparable store used unit sales increased 8% for the quarter. Total used unit sales rose 9% in the third quarter. The company reported net income of $74.6 million, or $0.33 per diluted share, compared with a net loss of $21.9 million, or $0.10 per diluted share, in the third quarter of fiscal 2009."
It took the market by surprise. Its share shoot up 7% or $1.53 in one trading session. I sold all my shares at $23.22 and paid $7.24 for this transaction. I bought KMX first in December, 2007 and added in June 2008. In the two years holding period, I made about 39.48%, satisfactory but not extraordinary. KMX has a unique business model, a strong balance sheet and a great management. It stands to benefit from current environment grabbing more market shares from its competitors. Its margin expanded, its sales increased and its cost reduced. Moreover, I don't think its current valuation, at almost two years high, is too rich.
I am selling primarily for portfolio management purpose. I am raising cash at my taxable account for a bigger opportunity, a more undervalued opportunity and a more controllable one.
A friend has asked the merit of stop loss order. Here is what Seth Klarman said in his famous and expensive book -- "Margin of Safety".
"Although this strategy may seem an effective way to limit downside risk, it is, in fact, crazy. Instead of taking advantage of market dips to increase one's holdings, a user of this technique acts as if the market knows the merits of a particular investment better than he or she does."
1. Why I created this blog?
2. How am I going to operate this blog?
On Friday, Dec 18, 2009, Carmax (KMX) reported a good quarter.
From its earning release, it states,
"Net sales and operating revenues increased 19% to $1.73 billion from $1.46 billion in the third quarter of last year. Comparable store used unit sales increased 8% for the quarter. Total used unit sales rose 9% in the third quarter. The company reported net income of $74.6 million, or $0.33 per diluted share, compared with a net loss of $21.9 million, or $0.10 per diluted share, in the third quarter of fiscal 2009."
It took the market by surprise. Its share shoot up 7% or $1.53 in one trading session. I sold all my shares at $23.22 and paid $7.24 for this transaction. I bought KMX first in December, 2007 and added in June 2008. In the two years holding period, I made about 39.48%, satisfactory but not extraordinary. KMX has a unique business model, a strong balance sheet and a great management. It stands to benefit from current environment grabbing more market shares from its competitors. Its margin expanded, its sales increased and its cost reduced. Moreover, I don't think its current valuation, at almost two years high, is too rich.
I am selling primarily for portfolio management purpose. I am raising cash at my taxable account for a bigger opportunity, a more undervalued opportunity and a more controllable one.
A friend has asked the merit of stop loss order. Here is what Seth Klarman said in his famous and expensive book -- "Margin of Safety".
"Although this strategy may seem an effective way to limit downside risk, it is, in fact, crazy. Instead of taking advantage of market dips to increase one's holdings, a user of this technique acts as if the market knows the merits of a particular investment better than he or she does."
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