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James Emerson, CFA

 
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  • Whitney Tilson: Why We're Short Netflix [View article]
    T2 is way more bullish than I am about NetFlix. T2 is assuming that NetFlix will continue to be able to license content. They are also assuming that NetFlix is only competing with other transmission services. With the advent of fully internet capable televisions and other devices, any content provider can stream directly to the viewer and capture 100% of the revenue. Granted there would be an increased cost of revenue related to the infrastructure and billing costs. At a minimum, NetFlix's margins will get crushed. Another big risk to NetFlix is the potential demise of net neutrality. Right now NetFlix is freeriding on bandwith controlled by competitors. Look at the model the cell phone companies are using to limit bandwith use after witnessing AT&T's problems with the I-Phone. If cable cos. and telcos were to start using a per mB charge the cost for an individual NetFlix subscriber could skyrocket, reducing demand dramatically. The key question is why in a decentralized information and content enviroment would a major content provider with an established brand need to cede economics to an aggregator? I would recommend buying long dated puts/put spreads.
    Dec 17 04:50 PM | 2 Likes Like |Link to Comment
  • Short St. Joe, Long Getty a Good Real Estate Market Neutral Trade [View article]
    More precisely, because the idosyncratic risk of JOE dominates the investment return, the historical Beta is not representative of the future correlation; therefore, the trade is not really market neutral. Additionally while many asset classes are highly correlated right now, more recently REITs returns have had a relatively high Bet with respect to equities; however, historically the price movements of REITs have been more correlated (inversely) to interest rates.
    Nov 21 01:03 PM | Likes Like |Link to Comment
  • Short St. Joe, Long Getty a Good Real Estate Market Neutral Trade [View article]
    While the trade looks market neutral in terms of Beta, JOE is subject to heightened idiosyncratic risk. Also the factors driving the stock prices are not correlated so while it is good diversification, it is not market neutral. GTY is a no growth prospect. It owns the property underneath gas stations in the northeast. Most are locked into long term leases and tenant risk is concentrated with one large leasee. The only way to grow is through acquisitions and those have been relatively small over the years. The stock trades solely on yield so the price is most influenced by interest rates. The upside is limited as interest rates have a floor of zero and management has been adverse to being acquired in the past. (Note: I had been long GTY and GTY pfd in the past).

    The potential return on JOE is driven by different factors. While low interest rates help by increasing the present value of the potential future cash flows, higher interest rates indicate improved economic conditions and would be a signal that those potential cash flows would occur sooner rather than later. As to valuation, two years ago, I came up with about $15 per share. Clearly that would be lower now and accepting Ackman's valuation the profit from being short is about $10. The risk to that realization is that this company gets taken private. Might not be a big premium but patient money or foreign capital could finance the deal. Mr. Berkowitz would surely like that outcome as it gets him out of a roach motel. (Note: formerly short JOE)
    Nov 19 04:13 PM | Likes Like |Link to Comment
  • Contrarian Ideas: 18 Downtrend Stocks With Worsening Analyst Sentiment [View article]
    Before buying any of these stocks, a potential investor would be wise to do some fundamental analysis.
    Just a few quick comments on the stocks with which I am familiar.
    3.) LPS: Generates income by providing services to banks and law firms involved in the foreclosure process. The foreclosure moratorium will at a minimum delay revenue and negatively affect near term EPS. If the problems with the foreclosure process result in fewer foreclosures, revenue and EPS growth will be permanently impaired. Listen to their recent conference call. Also although management denies it, the company may have potential liability for improper foreclosures based on documents produced prior to 2008.
    6.) WL: Needs to raise equity capital and the stock will be under pressure until the offering is complete.
    12.) IRM: Core business is probably in a secular decline. Other competitors lead in electronic storage. The stock will never have a premium multiple again.
    17. CFFN: Trades above book value. The company is held by a mutual holding company. The stock price is propped up by the dividend yield. Curiously, the mutual holding company waives payment of the dividend on the shares it owns.
    18) RAD: Crippled by debt. This company will eventually file Chap. 11.
    Oct 10 06:39 PM | 3 Likes Like |Link to Comment
  • An End to the Credit Rating Addiction [View article]
    "Realistically, of course, not all investors have the same ‘in house’ capacity for risk assessment. Smaller and less sophisticated institutions will have to continue to rely heavily on third-party ratings."

    No firm that relies heavily on third party inputs to its investment process should be in business. It is an acknowledgement that those institutions add no value to the investment process. Size has nothing to sophistication nor does size excuse a failure to devote the necessary resources to the investment decision making process. The regulatory framework should prohibit institutions that are incompetent at managing assets from aggregating assets through the sale of insurance and banking products.
    Oct 3 11:51 AM | 5 Likes Like |Link to Comment
  • Sirius XM, Naked Short Selling and Market Reform [View article]
    This is one of the stupidest comments, I have ever read and represents a fundamental lack of understanding of how securities and traded and held in the U.S. First, there are no counterfeit shares. Almost all shares of all companies are held in book entry form at DTC, The Depository Trust Corporation. When trading occurs electronic entries are made that transfer the ownership between the brokerage firms which hold the customer accounts. The SEC requires that a brokerage firm have custody of all fully paid customer securities. This rule 15(c)3-3 has been around for years and is rigorously enforced. So any time you buy a stock in a cash account you can be assured that the security exists and you can freely sell them on an exchange or ECN. All shares of a company are fungible and a short sale does not increase the number of shares outstanding or change the cash flows to shareholders of a company. Ultimately, valuation is all about cash flow, dividends, repurchases or takeover. If you purchase a stock, it represents an ownership interest in a company. If someone sells short a stock, it becomes an obligation to pay the same cash flows as the company does to all the registered holders. The obligation is enforced by the broker that settles the short sale. The broker holds the proceeds in a segregated account and marks the short position to market demanding additional capital from the short seller when the price moves up. The short seller has to pay dividends and also has to pay the acquisition price if a company is taken over. If the short seller fails to meet his/her obligation, the broker liquidates the position, a buy in, and seizes the collateral to pay for the trade. All a short seller does is increase the supply of stock to meet demand. Short selling does not affect the outcome. If you gamble on professional sports, does it matter if you bet with the sports book Vegas or your friend. If your team wins you get paid either way. You should be happy there are short sellers to keep the price down so that you don't overpay even more when you make poor investment decisions.

    Short sellers do not drive companies to bankruptcy, managements that borrow in excess of a company's capacity to repay do. The reason the playing field is not level is that the better professional investors (I am not talking about closet indexers who masquerade as large cap actively managed mutual funds) understand balance sheets and income statements, they create economic models and they do fundamental research. The better ones don't chase fads, they understand valuation and they don't overpay for growth. I would challenge almost anyone on this thread to tell me how much SIRI's EPS would increase if U.S. auto sales increased by 1 million units.

    The SEC, while not good at many things, is not there to make stocks go up in price or to make sure that you don't lose money by buying overvalued stocks.
    Jul 28 08:20 PM | Likes Like |Link to Comment
  • Sirius XM, Naked Short Selling and Market Reform [View article]
    Funny SIRI is not on the Threshold List
    www.nasdaqtrader.com/T...

    The from the NASDAQ site as of July 15 the latest short interest is 217,258,248. From the latest 10Q SIRI has 3,885,195,021 shares outstanding. So about 5.5% of the outstanding shares are short. This is hardly a naked short selling issue, nor does it appear to be a "bear raid".

    The issue with the stock is valuation not manipulation. The stock trades almost 60 million shares per day with a $0.01 spread between the bid and the ask. It doesn't really get any more liquid than this. By the way, there aren't really any market makers anymore, that business died with the advent of $0.01 spreads and high speed automated trading. Look on your Level II quote screen, it is all ECN's. So there is no consipiracy to manipulate the stock. Since 105% of the market is on the long side and only 5% is on the short side, any manipulation would tend to manifest itself by sending the stock hyperbolic.

    As one of the other contributors stated, this stock is basically an option with no expiration date. As long as the company can refinance its debt, the option will have value. Use a model to value the stock, key inputs are volatility (not of the stock but of the underlying assets, a proxy is the volatility of the debt), strike price in balance sheet terms, e.g. at what point are there excess earnings that flow to common stockholders and finally potential expiration date, for which you could use critical refinancing dates.
    Jul 27 01:03 PM | 3 Likes Like |Link to Comment
  • Sirius XM's Future Growth Potential Is Being Grossly Underestimated [View article]
    The problem is valuation. If you extrapolate from the latest quarter, the stock is trading above 50x fully diluted EPS. The growth rate has to be much higher to justify that valuation. Also beware of writedowns, the company has $1.8 billion of goodwill capitalized and about $700 million of intangible assets that are of dubious value. Fully 1/3 of the assets are accouting fiction. There are better places to invest.
    Jul 20 10:19 PM | 1 Like Like |Link to Comment
  • SEC Must Explain Why the NYSE Got 'CLOBered' [View article]
    The market downdraft is only evidence of the ineptitude of market participants. Any broker, trader, or portfolio manager that enters a market order or a stop which converts to a market order deserves the bad execution they got. No one should ever enter a market order always enter limit and stop limit orders. Price discipline is important.
    May 17 11:50 AM | Likes Like |Link to Comment
  • Saving Blockbuster [View article]
    Blockbuster has no competitive advantage in electronics retailing. The Blockbuster brand means nothing in electronics, the business model is different and the skill set required of the employees is completely different. Additionally, their store sizes are not large enough to compete. Best Buy is expected to be around because they have expertise in the space, witness the demise of Circuit City. What does renting movies and selling candy to people waiting in an endless line have to do with selling televisions. Any cash flow generated by the business should be returned to stakeholders, not invested in a new unrelated business. No sane bondholder would agree to a recapitalization in order to transition to an unrelated business. If electronics retailing was such an easy segment in which to prosper, someone would have bought Curcuit City's assets out of bankruptcy. I also don't see any blank check IPO's on the calendar looking to start a new debt free electronics retailer.
    Jan 23 02:07 PM | 1 Like Like |Link to Comment
  • Saving Blockbuster [View article]
    You are missing the big picture. There is no value in the distribution of physical disks containing entertainment. There are maybe five years of revenue left in these businesses and the terminal value of the businesses and the assets is close to zero. The mail order and kiosk models are decling businesses and are going to disappear. Content delivery is going to be all digital. I don't know who wins AAPL, NFLX, VZ or the cable companies, but the war for share is being fought on a different front, streaming and download. Once there is an installed base of devices capable of receiving and storing content that can be connected to the television, cable boxes, gaming consoles, smart phones, and i-pods, the market for physical disks will be gone. Who is going to go to a kiosk or even wait for a movie in the mail, when you can have the movie almost instantly electronically. The new paradigm will be the same as software and music distribution. The equity is worthless although you probably can't short it at $0.50.
    Jan 22 10:28 AM | 2 Likes Like |Link to Comment
  • GameStop's Advantage Isn't Found in Typical Metrics [View article]
    The secular trend is that the games will be distributed directly to the console. Look at the online store for the Wii. While the games are of low quality eventually when there is a large installed base of internet connected consoles, the better titles will be available for purchase over the internet. This trend will both disintermediate GME from new game sales and will completely eliminate the market for used games. GameStop will follow closely in the footsteps of Blockbuster's real estate intensive model and fail. Look for this stock to be trading at under $2 within 5 years.
    Positions: none currently but ocassionally short GME for short term trades
    Jan 12 10:58 AM | 2 Likes Like |Link to Comment
  • Fannie / Freddie - What Does Treasury Know? [View article]
    These stocks should be trading at zero. While the govenment has removed the shut down condition, the coming dilution is going to be massive. As public policy these entities should be closed. Let the portfolios run off and there is also no need for the vastly overpaid executives. There is no reason for the government to subsidize mortgages by allowing these entities to borrow at extremely low cost. The diversion of capital to the housing market is crowding out productive investment. The government, both parties, is doing its best to prop up housing prices and will continue to do so as no politician wants to be the one to crush the dream of home ownership. The reality is that home prices are too high for the average income level. By perpetuating the Fannie and Freddie frauds, the politicians, and this is a bipartiasan effort, hope to keep prices up until incomes catch up. The problem is the incomes are not going to catch up any time soon. The only way for the housing market to adjust to equillibrium is to let prices fall dramatically. The new equillibrium may also be at a lower number of transactions.
    Dec 26 12:09 PM | 9 Likes Like |Link to Comment
  • How Buying a Home Is Gambling [View article]
    Auto44 has the delusions of the propaganda that got us into this mess. A person should weigh the economic cost of owning versus the economic cost of renting and then factor in the intangible ownership factors both positive and negative such as the type of housing offered, privacy, maintenance, the ability to customize, modify and renovate, the amoritzation of the cost of improvements and decorations over the ownership period rather than the rental period. Renting is not an impediment to putting down roots or receiving government services or living in a nice neighborhood. People need to abandon the notion that "renting" is living in an apartment in a higher density area. It is also possible to rent single family homes in upscale neighborhoods. Americans have a cultural bias, embodied in Auto44's comments, toward home ownership and that is reinforced through generous tax allowances. However, the rational investor looking to maximize wealth should do an after tax rent versus own cost comparison that includes the expect return on other alternative assets, e.g. stocks, bonds, commodities.
    Dec 12 12:47 PM | 2 Likes Like |Link to Comment
  • How Buying a Home Is Gambling [View article]
    In postulating that there is a non-trivial chance of foreclosure and you will end up financially devasted, the author confuses the potential outcomes of purchasing the asset with the potential outcomes of applying extreme amounts of leverage to finance the purchase. For an all cash buyer, the possibility of foreclosure is ZERO! In evaluating a home purchase as investment decision is separate for determining how much leverage to apply. The asset price volatility of single family homes has increased; therefore, the prospect of a short term trading profit in a 1 to 5 year holding period is less likely. In fact if possible one should finance a home with all debt to create the free call and leave the lender with all the risk (where is the Wachovia pick a payment loan when you need it?). I digress but that is the rational economic decision many Americans made during the housing bubble and while they may be foreclosed upon, in financial terms they only lost their 5% equity rather than the entire 20% to 40% decline in home prices. But the true determinant is not the mark to mark equity. A house is not like a margin account or a portfolio of mortgage loans. There are no margin calls, collateral calls or forced liquidations. As long as, the owner can pay the monthly payments they continue to control the asset. Homes are similar to only one asset I can think of, viatical settlements, in that the monthly cash flow from owing the asset is negative. Besides the imputted rent, the goal of purchasing a home is tax free capital gains. The main risk is not that the home price declines because that does not trigger anything but that a person's other assets and/or income decline to point where they cannot pay the debt service.
    Dec 12 12:31 PM | 4 Likes Like |Link to Comment
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