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Jeremy Johnson, CFA  

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  • The Case for Best Buy (Redux): Low Valuation, Strong Brand and Cash Generating Ability [View article]
    It's not quite as cheap as you imply, certainly not being priced as a business that "won't be around in a few years". The market is pricing it as a 10-11% return on capital employed business, which are still very nice returns.

    Agreed, it is cheap on today's earnings, but the stock valuation could be consistent with a long-term earnings outlook for this type of business.
    Aug 15, 2011. 10:48 AM | Likes Like |Link to Comment
  • The Case for Best Buy, Part III: The Amazon Threat [View article]
    I'll let other people argue the relative merits of BBY vs AMZN, et al., but there is no question BBY is cheap on today's earnings -- that invariably means that the market is highly doubtful that today's earnings are sustainable.

    At present, BBY earns somewhere around 2.5x the cost of capital, but the firm is priced for earnings around 1.5x the cost of capital -- which implies a net income level about 60% less than where it is today. In other words, the market is pricing an annual net income level less than half of what it is currently. These are extreme back of the envelope calculations but I believe are directionally accurate.

    It really comes down to where the long-term business is for BBY -- with the virtual destruction of the book sellers, people are very nervous about electronics. I would probably become interested as a stressed play around a 1x cost of capital valuation -- i.e. a further 30% drop. However, if you can get comfortable with the earnings outlook, or as a trade given how undervalued it is, today's valuation could be compelling.
    Aug 15, 2011. 10:26 AM | Likes Like |Link to Comment
  • Despite Major Closed-End Funds Sell-Off, Values Are Out There [View article]
    I'm still trying to picture the optimal market environment to buy into a buy-write fund. Been looking at them for several years, but can't quite figure it out.

    I suppose if you have a big fall, and then stability, then most of the recent writes will expire worthless (good for the fund), while the underlying maintains value.

    But a quick snapback in prices will hurt returns versus just owning the index.

    I understand there is a long term rationale for such funds, but I'm trying to determine the upside "alpha" generating scenario.
    Aug 12, 2011. 02:26 PM | Likes Like |Link to Comment
  • Despite Major Closed-End Funds Sell-Off, Values Are Out There [View article]
    Agreed, my national fund has underperformed.
    Aug 10, 2011. 12:41 PM | Likes Like |Link to Comment
  • Despite Major Closed-End Funds Sell-Off, Values Are Out There [View article]
    Muni CEFs held up better than I would have expected the last couple days. A slightly encouraging sign.
    Aug 9, 2011. 04:02 PM | Likes Like |Link to Comment
  • An Opportunity in Healthcare Stocks [View article]
    I prefer HCP. Fair value is around $35, but all bets are off in a new recession. I own the stock and the preferreds but am as nervous about the markets as everyone.
    Aug 9, 2011. 12:30 PM | Likes Like |Link to Comment
  • An Opportunity in Healthcare Stocks [View article]
    It's been on multiple conference calls and is in the financials and/or press releases regularly. It's not about when it was negotiated, but rather the fact that HCP anticipated this action by Medicare and on the recent call they stand by 1.5 coverage post the change -- although they did say HCR MC will have to make some cost cuts due to this action because they stepped up spending with the extra money.

    You also have to look at the structure of this lease as it is very attractive versus deals done several years ago. I know this market well because I have been a private lender of tens of millions of dollars to SNFs. This lease has covenants and deal terms I could only have dreamed of in 2007.

    HCR MC was really forced into this deal because of the breakdown of the leveraged loan market for transactions of this size and I think their own desire to not play the 3-5 year refi game given the volatility in the economy.
    Aug 8, 2011. 10:11 PM | Likes Like |Link to Comment
  • An Opportunity in Healthcare Stocks [View article]
    Genesis is gone -- no longer any investment by HCP.

    HCR MC has a 1.5 DSCR coverage pro forma for the 11% reduction. This is a master lease and good properties will have to cover for bad properties within the portfolio. The deal was underwritten without the impact of the higher rates seen over the last 6-9 months. With the higher rates the DSCR would be about 1.65.

    I don't see any impairment to the HCR MC DFL based on this Medicare reduction.

    The investors that got taken were those that bought the SUNH IPO and in general equity holders in the operating companies that thought these rates would continue. Some of the operating company debt may be seeing some impairment as well.

    There will be some some smaller SNF players that this will hurt badly, because the cut is overdone compared to quality of care increases in connection with RUGs-IV.
    Aug 8, 2011. 08:49 PM | Likes Like |Link to Comment
  • An Opportunity in Healthcare Stocks [View article]
    I know most about HCP so I'll use that example. They have $50 million of goodwill, which is immaterial to their value and in any event is just a reflection of economic profits and is therefore the same thing as talking about net income. Saying there will be a write-down of goodwill is the same thing as saying profits will be down so we can deal with profits directly.

    Regarding the cash flow of the biggest skilled nursing provider in HCPs portfolio, the underlying properties have a DSCR of 1.5 excluding the impact (increased profits) of RUGs-IV. Inclusive of RUGs-IV, before the 11% reduction, the DSCR will top out in the 1.65 area. The operating company can easily more than cover the lease payments. I don't much care about the market value of the property, since it has little value, or at least significantly less value exclusive of the SNF operations. I just want HCP to get the lease payment, and be well covered so that the payment is not viewed as more risky.

    HCP has very little SNF exposure outside of the one big provider and yet the stock is down 20%. I know RUGs-IV isn't the recent.
    Aug 8, 2011. 07:41 PM | Likes Like |Link to Comment
  • How to Find Opportunities After a Flood of 20% Decliners Last Week: Part 2 [View article]
    For the healthcare names, your debt level is misleading. For example, SUNH's "debt" is in the form of operating leases. At 8x this is $1.2 billion in debt. Anyway, SUNH is a highly levered company and I am intimately familiar with their financials as I have funded their loans in the past.
    Aug 8, 2011. 05:10 PM | Likes Like |Link to Comment
  • An Opportunity in Healthcare Stocks [View article]
    I think all the value is in the real estate and not the operating companies. HCP, HCN, etc.
    Aug 8, 2011. 05:03 PM | Likes Like |Link to Comment
  • 5 Closed-End Funds With Low Beta/Expenses and Selling at a Discount [View article]
    Not sure 4 & 5 are all that better at the end of the day than LQD investment grade ETF.

    MTS may have materially shorter duration, but significant exposure to non-U.S. based financials; not to mention significantly more Ba and below rated paper.
    Jul 26, 2011. 03:08 PM | Likes Like |Link to Comment
  • Berkshire Hathaway Shares Are Absurdly Cheap [View article]
    You will systematically exclude any company with a large acquisition or lots of asset growth. Maybe not such a bad idea. Better to challenge that directly. This isn't really the forum to make such sweeping generalizations and assumptions and bury them in lots of math. People here want to know if BRK's recent growth in assets will produce good returns, not whether the average, generic, hypothetical company's asset additions produce shareholder wealth for which most people have a jaundiced eye in any event.
    Jun 30, 2011. 01:41 PM | Likes Like |Link to Comment
  • Berkshire Hathaway Shares Are Absurdly Cheap [View article]
    There is a second factor influencing your results which is that asset growth often impairs returns on assets, but it doesn't in every case. Without knowing your study methodology I can't comment further.

    However, in the case of BRK assets have grown by large amount in the last 5 years, you are making a large assumption to state that earnings on the 2011 asset base are well represented by earnings on the 2006 asset base.
    Jun 29, 2011. 01:42 PM | Likes Like |Link to Comment
  • Berkshire Hathaway Shares Are Absurdly Cheap [View article]
    You're valuing an insurance company. The operating assets are the investments. They produce the earnings stream you are valuing. You're trying to sell all the securities and keep the income stream. You're valuation in deeply flawed.
    Jun 29, 2011. 04:25 AM | Likes Like |Link to Comment
COMMENTS STATS
790 Comments
439 Likes