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Arthur Q. Johnson
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Arthur Q. Johnson, CFA is founder and President of A.Q. Johnson & Co., Inc., a registered investment advisory firm that manages the Mundoval Fund, (www.mundoval.com) a no-load, global value equity mutual fund, as well as individual portfolios for high net worth and institutional clients. He... More
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  • Five Reasons To Own Baidu: Chinese For “Google”

    According to Alexa.com, a website traffic ranking company, Baidu, (NASDAQ: BIDU) the Chinese language online search engine service, is the most visited website in China and the fifth most-trafficked in the world as of April 2013.

    1) Sustainable Competitive Advantage- Baidu benefits from high "switching costs," or the concept that users become accustomed to one search engine and tend to use it by default, without seeking alternatives. Baidu has a strong "Network effect," or the notion that a growing base of users attracts yet more users which attracts advertisers, boosting ad relevancy and the user experience.

    2) Low Penetration Rate- Although Baidu commands 79% of the search engine revenue market share, there are approximately 40 million small and medium-sized businesses registered in China. Of that amount, Baidu currently serves 600,000 clients for a penetration rate of approximately 15%. The market potential for on-line search will only get larger as Baidu collaborates with smart phone manufacturers and network carriers such as China Mobile (NYSE: CHL) to pre-install its search services in new handset models.

    3) Distant Competition- In 2010, Baidu's largest competitor, Google, announced that due to China's strict online censorship laws, it redirected users to its Hong Kong based search engine service, Google.com.hk. As of the second quarter in 2012, Google maintained a 16% market share for search services in China.

    4) Shareholder Friendly Ownership: As of December 31, 2012, Baidu's Co-founder, Chairman & CEO, Robin Li, owns approximately 16% of the ordinary shares outstanding. When the management of a business owns a large percentage of company stock, shareholder interests tend to be closely aligned with corporate action & governance. The company initiated a share repurchase program in 2008 and 2009.

    5) Valuation: In 2012 Baidu generated more than $1.4 billion in free cash flow with a capital base of $6.7 billion. The business maintains operating margins in excess of 40% and utilizes minimal debt on the balance sheet. Baidu's revenue has grown by more than 60% in the past three and five years. Most importantly, the business is attractively priced in relation to its intrinsic valuation providing shareholders with a margin of safety and the potential for a satisfactory rate of return over time.

    Disclosure: I am long BIDU, GOOG, CHL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: CHL, BIDU, long-ideas
    Jun 12 5:38 PM | Link | Comment!
  • Why We Didn't Like The Facebook IPO

    When a company first makes its stock available to purchase in the open marketplace, it holds an initial public offering, or IPO.

    IPO shares historically have been sold for the account of a privately owned enterprise or syndicate, enabling the enterprise to cash in on favorable market conditions while diversifying their own finances.

    Although there are exceptions to the rule, investors should be wary of new issues for two reasons:

    1. Promoting an IPO involves special salesmanship often related to those syndicated entities that have made financial commitments to underwrite the offering.

    2. Most new issues are sold when conditions are believed to be most optimal for the seller and consequently, less favorable for the buyer.

    Facebook Sends the Marketplace a Friend Request

    On May 18, 2012, shares of Facebook (FB) were first sold to the public in an IPO priced at $38 per share for a total company valuation of over $100 billion.

    Underwriters for the issues touted a favorable story to prospective investors that focused on Facebook's 900 million users and leading market share in social networking. Yet prior to the IPO, Facebook reported that 2011net income was approximately $1 billion, putting the price-to-earnings or P/E ratio near 100 (for some perspective, as value investors we prefer businesses with a P/E ratio somewhere in the teens). Consequently, as lock-up periods expired and controlling shareholders were allowed to sell their stock, the share price dropped to less than $19. Even after the price plummet, Facebook shares still sell for a P/E ratio over 65.

    Facebook Price Drop Goes Viral

    As Facebook has fallen, social-gaming company Zynga (ZNGA), which counts on Facebook for a huge percentage of its user base and revenue, has also plummeted, seeing more than a 70% price decline since it offered 100 million shares at $10 in mid-December. In July, Zynga missed earnings expectation,reporting disappointing performance for games like Farmville and difficulties transitioning to mobile platforms.

    Similarly, Groupon (GRPN) the daily deals company, has dropped more than 75% since its IPO in December.Originally sold for $20 per share, Groupon's stock price has dropped to $4 per share as revenue and earnings guidance have come in well below original expectations. Since its inception, Groupon has yet to report positive net income.

    If the Market Likes it, We Probably Wont

    IPO's are sold to the public when controlling shareholders believe market conditions best suit their interests. Despite the expensive prices investors paid relative to company earnings and other traditional measures of valuation, the aforementioned IPO's were "successful" thanks to timing that caught investor perceptions of social gaming and networking near peaks of optimism.

    Ironically, the investing public will have an aversion to purchasing these very issues when their share prices drop to levels that are more attractive in relation to their historical operating performance and intrinsic business values! We often find investment opportunities when buyers become pessimistic, bringing stock prices down to attractive levels.

    The Mundoval Fund has never purchased an IPO for the aforementioned reasons. Instead, we will continue to invest in global businesses that are understandable, run by managers that are shareholder oriented, and priced at a level that we believe is favorable to buyers, not sellers.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: You should consider the investment objectives, risks, and charges and expenses of the fund carefully before investing. The prospectus contains this and other information about the fund. You may obtain a prospectus by visiting our website at mundoval.com or by calling 1-877-59-FUNDS. The prospectus should be read carefully before investing.

    Sep 06 6:13 PM | Link | Comment!
  • Dividends: Getting Paid to Wait
    What exactly is a dividend? When a company is profitable, it's board of directors may decide to distribute some of the earnings to shareholders in the form of a dividend. Dividends are typically paid each quarter and are often cash, but may also be stock or other property. Companies are not required to pay a dividend, and smaller businesses looking to grow will often plow all earnings back into the business instead of offering a dividend. More mature businesses, on the other hand, tend to pay a dividend, giving investors an incentive to own stock in a stable company that may not be growing as quickly.

    What is “dividend yield”? The dividend yield is a percentage value indicating the value of the dividend compared to the value of the stock. Dividend yield is calculated by dividing the amount a company pays in dividends per share each year by the price of one share of stock. For example, a company that pays $4 in dividends each year and trades at $80 per share has a dividend yield of 5%.

    Must a company pay a dividend to be in the Mundoval Fund (MUNDX)? No, but they often do. As value investors, we seek to buy quality companies at a good price. And in our estimation, a quality company is one that generates plenty of cash and is run by shareholder-focused managers. Profitable companies that prioritize shareholders are likely to pay a dividend.

    How do I benefit from the dividend-paying stocks in the Mundoval Fund? We generally use dividends in one of two ways: on occasion, we reinvest the dividend by purchasing more shares of the issuing company, but more often we use the dividend to buy shares of another company we feel is a solid investment. Either way, dividends let us build the fund’s position in companies we like without allocating any new capital. Also, we invest with a long time horizon often spanning several years and are willing to be patient as the market realizes the intrinsic value of our holdings. The steady income from a dividend rewards our patience; we get “paid to wait.”


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: You should consider the investment objectives, risks, and charges and expenses of the fund carefully before investing. The prospectus contains this and other information about the Fund. You may obtain a prospectus by visiting our website at mundoval.com or by calling 1-877-59-FUNDS.The prospectus should be read carefully before investing. I am the portfolio manager of the Mundoval Fund (MUNDX)and am long a position in the fund.
    Tags: value, long, dividend
    Dec 16 12:28 PM | Link | Comment!
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