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  • Why Should A Long-Term Investor Listen To Company Conference Calls? [View article]
    Casual Analyst,

    Thanks for the mention in your article. We generally agree with the premise of your article. We may also listen to a couple of calls in a quarter if there are some things going on that seem to be outside the realm of our expectations. In turnaround situations (especially smaller companies) management's competence and strategy are definitely keys to success. We will most likely listen to one call before we invest to see if they pass the "smell test." We rarely invest in early stage technology companies, so the dynamics of most of our companies are much slower. But it can be worthwhile to spend an couple of hours on specific calls.

    As an aside, we have probably listened to more company presentations than conference calls. We do find those more helpful in understanding how a business model works and how a company's management believes a company should be run. We are looking to avoid those situations where their plans seem either too ambitious for their time frame or to aggressive for how the company has operated in the past.

    We also like one on ones so we can ask very specific questions that we feel are important to our understanding of a business and not what analysts ask in general. It also gives you a chance to look someone in the eye to see how they answer a question.
    May 26, 2014. 09:58 PM | Likes Like |Link to Comment
  • The Greatest Farce On Wall Street [View article]
    Thank you for the mention in your article. We completely agree that the earnings game is a farce and choose not to participate in it either. We encourage investors to start with a "blank sheet of paper" when trying to guess (yes it is really a guess) what a company might be able to earn in the future. Don't start with WS concensus and then try and make your model give you the "right" answer of consensus. Sometimes your numbers will be similar and sometimes they will be different. Doing the work and understanding the difference is more important than the ending number. There is no way to do that without spending a great deal of time looking at the company's (and competitors') business model from the ground up. Too many investors start with a stock price and a story. But the stock represents ownership in a real business and long term value is created by earnings.

    1. Start with historical numbers and try to understand how the business works to understand which aspects of sales and costs are the most variable and why.

    2. Coming to a single point earnings estimate is ridiculous. We do many "what if" scenarios to assess what we consider to be a "reasonable" range of outcomes. Sometimes range is very very wide, but that is what it is. We are not worrying about making our numbers look like consensus, which is a huge pressure on WS analysts. Sometimes our numbers do fall into consensus and that is fine. Too often analysts "begin with the end in mind" and start with consensus earnings estimates and work backward to make the numbers fit. With our independent research product (shameless plug!!) we have talked to management to learn more about a company and have been asked "will your estimates be included in consensus estimates?" That is a good example of the game the author speaks of. Stepping outside of a small range is discouraged by company management as well and WS research directors.

    3. We do look at WS estimates and are looking for estimates where the estimates looks reasonable, but range of outcomes is much wider that it would seem. For example, there is a company we follow that has earnings estimates for 2014 of $0.40 per share and 2015 of $0.57 per share. However, the low estimate for 2014 is $0.30 and the high estimate for 2015 is for $0.75. In 2014 alone the range is $0.30-$0.60 and we are half way through the year!!!! Talk about "uncertainty"!!! That indicates a significant divergence of opinion on the earnings power of this company. This is where we find potential opportunity if we can gain a better understanding of the company's prospect. Although, our edge usually comes from getting it more "right and wrong" two or more years out. Compare that estimate range to something more mundane like MCD where the range for 2015 is just $6.05 to $6.55 with the average being $6.25. Look at AMZN's earnings estimates where the average for 2015 is $3.30, but the range is $0.93 to $6.92!!!!!

    4. When looking for short ideas, the opposite can work. If all the estimates are in a tight range, there is strong consensus on earnings and the multiple mostly likely reflects that "confidence". It is much easier to have a negative earnings "surprise" when consensus among analysts and investors is high and tight. Sometimes the company's model is fairly predictable and a narrow range is expected (think utilities or staples), but other times it seems like complacently has set it. 

    5. We actually like to see WS models on companies we are analyzing. We can usually spot where we think analysts are being "aggressive" or shockingly "conservative" in the assumptions. This is where we start are focus to see if we have a differentiated view of the company's ability to earn net income.

    Finally, pay little attention to price targets. Not only are they based on the flawed analysis as the author points out, they can also be driven by WS agendas. For example, a couple of years ago there was a company our firm was long and two major firms (Goldman and JPM) had coverage on it. As is typical, Goldman was bearish and JPM was bullish. Goldman had a sell and JPM had a buy. Goldman's price target was something like 15% below JPM's. But what was interesting was that their earnings estimates for the next two years were virtually identical. So what was going on? JPM was putting a higher multiple on the out year's earnings estimate and Goldman was putting a lower multiple on current year's estimates. 14 X $1.00 in EPS vs. 16X $1.10 is the difference between a $14 and an $18 price target!!! So even though they basically agreed with each other on the near term earnings power of the company, they came to significantly different "ratings" on the company.

    Do your own work. Take the time to learn about the company from your own analysis and as the author suggests, ignore the noise and the "beat or miss" chatter in the media and you will be a better investor.
    May 23, 2014. 12:57 PM | 2 Likes Like |Link to Comment
  • If You Are A Long-Term Investor, Why Are You Listening To Earnings Conference Calls In Real Time? [View article]
    Thanks everyone for contributing to the discussion. We agree that there are times when listening to a call can add value. We will occasionally go back a listen to a call or part of a call if something doesn't seem to make sense in the transcript or if we have lots of down time while traveling or at a conference and there seemed to be a lot of attention on a particular call. Since management usually has a bigger impact on smaller companies, trying to assess their management skill by listening to a call probably makes more sense than listening to a large cap company's call. But again, we find that stopping down everything we are doing to listen to a call in real time just isn't helpful to us most of the time.

    It is important for each investor to tailor their investment process to what works for them. Our current series of "thought pieces" is meant to give other investors a perspective from long time professionals on practical analytical topics that aren't normally discussed on SA. While our point of view is what works in our process, others may not find it works for them. But we hope that these articles at least help investors develop and improve their own process that leads to success.

    Thanks again for your comments and feedback.
    May 23, 2014. 12:11 PM | 1 Like Like |Link to Comment
  • If You Are A Long-Term Investor, Why Are You Listening To Earnings Conference Calls In Real Time? [View article]
    I'll correct that. Thanks for catching it
    May 22, 2014. 07:53 PM | Likes Like |Link to Comment
  • If You Are A Long-Term Investor, Why Are You Listening To Earnings Conference Calls In Real Time? [View article]
    Ahh yep. 20% on 10% is 2%.. I should stop doing math in my head at midnight when I write this stuff.
    May 22, 2014. 07:50 PM | 2 Likes Like |Link to Comment
  • Virgin America and Southwest Airlines wait for decision out of Dallas [View news story]
    It was reported on WFAA Channel 8 in Dallas last night that Virgin would be awarded the two gates.
    May 9, 2014. 10:46 AM | Likes Like |Link to Comment
  • Incorporating Right-Brain Thinking Into Your Investment Process [View article]
    Thank you for your compliments. We have the same goal that you do.

    Here was an earlier article also meant to help investors improve their process.
    May 7, 2014. 03:16 PM | Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    Thank you all for your comments and compliments. We want to do a series of articles about subjects like this. We are glad that everyone found it thought provoking and inspiring. BTW we love the irony sentence too!!!!
    May 3, 2014. 10:14 AM | 5 Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    I have thought about this for a while. Since most value benchmarks are skewed towards financials 20-25% of weighting, I have not been a big fan of most funds in that space. While others claim to be successful at analyzing large complex balance sheets of banks and other financial institutions, Gregg and I have always passed on that. I think someone that runs a concentrated large cap value fund has a better chance than a broad based fund. The upside of large cap value is that usually the bad news is much more widely distributed by the media (BP or HPQ or AAPL) that may drive the valuations to such prices that attractive returns are very likely. Very few problems at large companies are life threatening and they have the financial ability to withstand what it takes to turn it around. I low PE or a high FCF yield is probably a good enough starting point. The analysis may be as simple as "things will eventually get better in the future".. Usually after major bear market selloffs is when large cap value becomes a viable strategy because everything in every index is going down, but companies are all different.
    May 2, 2014. 12:13 PM | 3 Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    thank you for your comments. I haven't watched CNBC or any other business TV show in over 15 years and don't even have a TV in my office.
    May 2, 2014. 11:58 AM | 5 Likes Like |Link to Comment
  • Lockup Expiration For Norcraft Companies A Built-In Shorting Opportunity [View article]
    Found these studies on IPO lockups and price performance.. There does seem to be a negative correlation, but the price decline related to it is modest (-1.5% or so). VC back firms do experience more potential selling that PE firms.

    Short Selling Around the Expiration of IPO Share Lockups

    We are the first to examine daily short selling activity around the expiration of initial public offering (IPO) share lockups. Overall, short selling is abnormally high over several weeks leading up to the lockup expiration date, peaks one day before the lockup expiration date, and declines in the following week. We find that more abnormal short selling prior to the lockup expiration date is associated with poorer stock returns on the lockup expiration date, suggesting that short sellers are informed. We also find some weak evidence that short sellers front-run insider sales. Unlike VC-backed IPO stocks, PE-backed IPO stocks do not
    experience a negative return or trading volume jump on the lockup expiration date.
    Apr 26, 2014. 12:11 PM | 1 Like Like |Link to Comment
  • Lockup Expiration For Norcraft Companies A Built-In Shorting Opportunity [View article]
    I have yet to see any analysis or peer reviewed studies that show any correlation between lock up periods ending and negative share performance. Do you know of any? Almost every SA article discussing an IPO usually lists the end of the lock up as a major risk.

    I have been in the business 30 years and have yet to see this as a real investable factor.

    I am always looking to learn new things, so if there are any peer reviewed studies on SSRN or in financial journals you can direct me to, I would love to read them.

    Many times the shares are redistributed in secondary offerings, which makes for a more orderly distribution of shares. If the holders of the shares are sophisticated investors, why would the just blow out their shares is such a way as to significantly drive down the price? Aren't they just hurting themselves? Or is your point that they made so much money on their initial investment that they really don't care what price they get for the rest of their shares?

    Also, why would anyone buy an IPO if with the next 90-180 days a ton of stock is going to come on the market and negatively impact the share price? And just how often to the owners of these lock up shares actually sell and what % of shares available do they sell? These are real questions to consider.

    I have no opinion on this particular stock one way or another.
    Apr 26, 2014. 11:57 AM | 1 Like Like |Link to Comment
  • Luby's: Undervalued Turnaround Play With Balance Sheet Stronger Than It Looks [View article]
    Ramius was the predecessor to Starboard Value. This was Jeffery Smith's original activist fund
    Apr 24, 2014. 05:34 PM | Likes Like |Link to Comment
  • Bally Technologies: Macro Headwinds Create Attractive, Best-In-Class Buying Opportunity [View article]
    IS this part of that patent dispute?

    Paradise Entertainment persists with patent case
    Posted: 3/25/2014 12:33:20 PM

    Gaming equipment supplier Paradise Entertainment Ltd says the courts have yet to dismiss its case that competitor SHFL Entertainment (Asia) Ltd infringed patents held by Paradise Entertainment subsidiary LT Game Ltd.

    SHFL’s parent company, Bally Technologies Ltd, said on Friday the Macau Public Prosecutions Office had told it that there was no evidence to support allegations by LT Game and Paradise Entertainment that SHFL had infringed two LT Game patents.

    A spokeswoman for Paradise Entertainment told Macau Business: “Our injunction preventing SHFL from displaying, promoting or marketing their product in Macau still stands.”

    The dispute is about an SHFL product, SHFL Fusion Hybrid, which combines live dealers with electronic betting terminals.
    Apr 1, 2014. 06:07 PM | Likes Like |Link to Comment
  • U.S Global Investor: What You Need To Know Before Considering An Investment [View article]

    I think you have made a significant analytical error in this article. You seem to be implying that the company's investment in its Ultra Short Bond fund is a bet that interest rates will rise and that it will make money when that happens.

    This fund is not a double inverse ETF type fund that goes up when interest rates rise. This is a short term bond fund that invests in T Bills and other government paper with a maturity of about 1 year. It used to be a money market fund that was converted to extend the maturity profile.

    Am I reading your point correctly?
    Feb 21, 2014. 04:55 PM | 1 Like Like |Link to Comment