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Jeremy Johnson, CFA

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  • Some money managers are getting excited by the latest holy grail for investors - using gross profitability as a basis for picking stocks. Research from University of Rochester's Robert Novy-Marx shows that cheap "quality" plays outperformed the overall market by over four percentage points a year from 1963-2011. "You get much more informative signals about the health of firms" this way, says Novy-Marx. [View news story]
    GAAP net earnings are a poor metric of future cash generation. There are lots of improvements you can make to it to add value. Four percent over 10 years is 50% more return -- would fix the pension problems plus some for any large American industrial company and is very significant.
    Mar 3, 2013. 08:43 PM | Likes Like |Link to Comment
  • Valuing The Yen [View article]
    I wrote a very long section on the balance of payments, but it made the article unwieldy. I may publish it separately. The trade deficit is mostly caused by the shock of the nuclear industry shutdown. Even assuming it stays shut forever, Japan can rebalance if it chooses but it will take some time. Meanwhile, the Japanese have one of the biggest stocks of foreign capital assets in the world, so they are not compelled to fix their deficit overnight. The nuclear industry will however restart and it will more or less fix the issue.
    Mar 3, 2013. 08:18 PM | 1 Like Like |Link to Comment
  • Footwear Stocks Are Appealing, Crocs Is A Definite Buy With Strong Potential In 2013 [View article]
    Arguing this isn't a cheap stock is a bit silly. 10x earnings in today's market, in fact most day's markets is cheap. I don't see major problems with the company's earnings either, they seem pretty clean. Something else has investor's worried about this.

    1) 2008-09 performance, both profit and stock price (this stock was $1.25 in 2009 and company lost money 08-09). How will Crocs do during the next downturn? My guess is much better because of lower reliance on clogs, but not everyone will jump in with two feet. There probably needs to be a "normalized" earnings concept applied to this company.

    2) Tax reform. This company has a very low tax rate due to the quirky international tax laws of the U.S. If there is any tax reform in the U.S., their effective rate will probably increase to ~25%. Also, nearly all the cash on the balance sheet right now is legally off shore.
    Mar 1, 2013. 05:08 PM | Likes Like |Link to Comment
  • Valuing The Yen [View article]
    Thanks, I could have written a lot about the Plaza Accord, but wanted to keep the article at its present length.
    Mar 1, 2013. 04:40 PM | Likes Like |Link to Comment
  • Valuing The Yen [View article]
    Japan is pretty filled up in terms of people, I think they will hover around their current population indefinitely. If the population declines much then you assume their are vacant houses, etc. Seems like a new families would take advantage of this. Humans have shown a pretty good ability to populate over time, I am not concerned about this changing on the island of Japan or anywhere else.
    Feb 28, 2013. 01:49 PM | Likes Like |Link to Comment
  • Valuing The Yen [View article]
    Japan has a low level of direct taxes, they make up for it with the financial repression tax: effectively forcing people to buy JGBs.
    Feb 28, 2013. 01:32 PM | Likes Like |Link to Comment
  • Valuing The Yen [View article]
    If real yields increase in Japan the debt will become more attractive. Japan has not demonstrated any difficulty funding its government. It took visible signs of distress in government funding for Greece, Italy and Spain before their bonds moved. And they didn't have a national central bank to backstop the market.

    Japan has a lot of debt because they have a lot of assets. Foreign reserves are only one part of that. Also, its not really possible to sell foreign exchange to fund the government -- the government needs yen, not dollars and the dollars are owned by an exchange fund that has issued debt against them, but that is beyond the scope of this article.
    Feb 28, 2013. 12:04 PM | Likes Like |Link to Comment
  • Valuing The Yen [View article]
    Feb 28, 2013. 11:34 AM | Likes Like |Link to Comment
  • Valuing The Yen [View article]
    Making more people is about the easiest thing in the world to do. That trend could turn in a few short years if they wanted it to. The Japanese are nonplussed about shrinking population with one of the highest population densities in the world. Consumption per capita can rise faster than population declines.

    Debt to GDP is high in Japan, but the country also has one of the greatest stocks of fixed and financial capital per person in the world including a net international investment position of +56% of GDP. The country's balance sheet is sound especially compared to other's.
    Feb 28, 2013. 11:03 AM | Likes Like |Link to Comment
  • What J.C. Penney Sellers Are Missing [View article]
    You're comparing Yahoo Japan to JCPs 30 year old big boxes?
    Feb 27, 2013. 10:03 PM | Likes Like |Link to Comment
  • What J.C. Penney Sellers Are Missing [View article]
    Forget what's in the stores, their locations are terrible. All in the old parts of town in run down malls. People buy clothes for fun -- none of these stores could pay their bills on clothes demand driven by necessity. All your margin is coming from discretionary purchases, sure people shop because they have to, but it is not enough; you have to entertain and get the extra dollars. Going to an old run-down store doesn't cut it. I am sure the investments they are making will help some, but you cannot turn around some of these locations. I would rather go to TJ Maxx: that is the future of middle class retail.
    Feb 27, 2013. 07:31 PM | 3 Likes Like |Link to Comment
  • VeriFone Now A Falling Knife [View article]
    I think you answered for me. Invest by P/E means you buy stocks with low P/Es and nothing more. This is not the same as investing in the market in general after a sell off, when P/Es are low. It just means picking all the stocks right now with 10x P/Es, for example. A lot of people just look at P/E and say its cheap, it must be good, or its expensive it must be bad. Lots of companies have been bought at 25x earnings that have generated fantastic returns for the buyer (I am not saying pay any price, just that 10x, 15x, 25x can all make the same ultimate return on investment).

    Even if you go by the most optimistic and outdated studies (outdated meaning a market inefficiency from 50 years ago must still be around today, right?), invest by P/E is giving you a couple percentage points a year of alpha. But no study I have seen has really been convincing to me because low PE stocks tend to be from the same industries and you could just be seeing a successful sector of the economy over the 15 year life of the study. Financials were always low PE stocks, for example and showed very good returns from 1991 to 2007 (if you chose that time period).

    And Buffett does not invest by P/E. Buffett pays big multiples for good businesses when buying stocks. If he is doing a special situation then he gets off market deals or no deal at all (GE, Goldman, etc. were off market and during times of significant distress).

    By the way, I do prefer being both completely and utterly wrong than either or, there is something about the totality of it that is compelling.
    Feb 25, 2013. 09:46 PM | 2 Likes Like |Link to Comment
  • A few too many on one side of the boat? The world's most popular short, the yen is strengthening in chunks now, with the dollar -2.5% and buying ¥91.10. More popular than long dollar/yen has been long euro/yen and that's getting pounded even harder. The twin trade to short yen has been long Japan stocks, particularly in the form of the hedged equity ETF (DXJ). It's off 3.3%[View news story]
    Exactly, there is little reason to believe the 40 year trend of yen appreciation will reverse.
    Feb 25, 2013. 06:58 PM | Likes Like |Link to Comment
  • 3D Systems (DDD) -9.5% following its mixed Q4 results. The 3D printer maker, whose 3-for-2 split goes into effect today, is guiding for 2013 revenue of $440M-$485M and $1-$1.15 vs. a split-adjusted consensus of $442.2M and $1.05. Q4 gross margin was 51.7%, -10 bps Q/Q and +460 bps Y/Y. Backlog +23% Q/Q to $11.4M. R&D spending (the subject of some criticism) +70% Y/Y to $7.8M (8% of revenue). SG&A +51% to $26.5M. Q4's 45% growth a slowdown from Q3's 57%. SSYS -6.5%. XONE -5.2%. PRLB -3.3%. CC underway (webcast). (PR) (slides[View news story]
    For decades, H-P made a bundle of money in "commoditized" 2D printers. I don't think that is the main issue to focus on. Most good companies have real competitors, if they don't they get regulated and at best turn into to bonds (like utility stocks).
    Feb 25, 2013. 03:51 PM | Likes Like |Link to Comment
  • VeriFone Now A Falling Knife [View article]
    Invest by P/E does not work.
    Feb 25, 2013. 11:59 AM | Likes Like |Link to Comment