Kevin Stecyk

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

Whoops...

<i>If government spending slows or if another competitor gets super aggressive</i>, CDWC would be vulnerable.

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

Here, this post might help you: www.speciousargument.c...

I didn't compare to <i>just NSIT</i> and, as stated, it was not part of a paired trade. While CDWC enjoys higher operating margins, there is significant incentive for others to catch up. And again, much of CDWC growth was/is from government. If government spending slows or if another competitor gets super aggressive.

Anyway, I think we've beaten this one to a pulp.

Good luck on your short. :-)

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

NSIT

Market Cap: $1.1B
Enterprise Value: $1.3B
Revenue: $4.2B
Income: $65.5M
Forward PE: 12

CDWC
Market Cap: $6.74B
Enterprise Value: $5.8B
Revenue: $7.1B
Income: $281M
Forward PE: 20


So for nearly double the revenue, CDWC gets a 6-7X multiple on market cap and an over 4 multiple on Enterprise value. Granted CDWC enjoys larger margins and is likely a better run company, as Alan earlier pointed out. In my view--again, the wrong view--being a retailer in computer goods is nothing outlandish. NSIT could have hired some key talent where it is lacking and embarked on a fierce retailing war.

I don't see the comparison between a disk drive manufacturer and a retailer. If CDWC only sold disk drives, then I'd be more sympathetic.

Anyway, it appears that we agree to disagree, and that's okay. That's what makes markets.

Thank you for your comment. :-)

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

Josh, your starting point is as good as any. And you're right, many shorts are put on as hedges.

My rationale for the short is missing? No, my rationale was that I believed--wrongly it turns out--that CDWC was overvalued compared to its peers. It's a rather straightforward rationale.

Was CDWC the most overvalued stock in universe? No, most defiantly not. I follow a limited number of stocks that interest me. CDWC was in my universe of technology stocks, and it was one that I thought was susceptible.

Did I have a hedge against it? Not directly, though I do hold other computer and technology related stocks. So in theory, if computer and software technology companies took a thumpin, CDWC would have formed part of a hedge. But that wasn't my rationale. I never performed a correlation analysis, nor did I make any attempt to hedge the same exposure short as I have long.

Did I expect a meaningful positive return? Yes, most definitely. I thought computer related stocks in general were due to correct because of lackluster demand. There's been nothing really new in the PC world for quite some time. Vista was and is not setting the world on fire. While most companies are doing well, there is no desire by most to spend aggressively on technology. In fact, the largest increases in sales by CDWC was not by the private sector, but rather the government sector. In summary, I thought computer related stocks in general would suffer and CDWC even more so.

You've picked one of the most overvalued stocks in general and chose some leaps as a hedge. Generally I don't like that strategy because of the decay of the put option. As time passes, the put option becomes less valuable. So you might even be correct in that the stock is overvalued and gradually drifts down in time, you might still loose on the trade. But I am sure you have thought that through and understand the risks and rewards.

Is picking the most overvalued stock the best strategy? Not in my opinion. One, they can go higher and often do. Two, they can often be momentum darlings and don't trade in relation to valuation. Three, there can be large short positions that result in squeezes, preventing the stock from being properly priced. Four, the analyst community might be in love with the stock and will continue to bull it higher. Have a look at Yahoo Analyst Opinion for your stock: finance.yahoo.com/q/ao.... And on and on. So I don't necessarily think that targeting the highest overvalued company guarantees you a win.

Instead, develop a broad portfolio of stocks, and if you believe that one of the companies you follow--and you can't follow them all--is a strong short candidate, then decide if you want to play the game or not.

The same applies to going long. Do I buy the most undervalued companies? No, I have a broad portfolio with a higher than average concentration in energy and precious metals. That fits with my belief that the commodities bull run has a long ways to go and that oil is not as plentiful as we wish it were. Given that one cannot predict the future price of commodities, I can't say that I have or haven't picked the most undervalued stocks.

I hope that helps Josh.

Thank you for your comment.

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

<i>The concept "Don't short without a catalyst" is repeated so commonly that it is a cliche.</i>

True enough, it is a common refrain. But at least with a catalyst, either you're right and you win. Or you're wrong and you cover. There is a decisive moment when you know where you stand. Shorting on valuation, you <i>hope</i>... the market comes to its senses and sees things as you do. While the phase, <i>Don't short without a catalyst</i> is cliché, at least there is some value to it.

There are many seemingly overvalued stocks. Those of us that engage in shorting pick stocks that we feel we have a reasonable shot at being correct. The short community as a whole is having a difficult time. As you point out, you have a favorite short that continues to defy gravity and logic. One thing for sure, though, shorting is both challenging and dangerous.

Thank you for your comment.

Acquisition Of CDW Highlights Challenges Of Shorting On Valuation Alone

I appreciate your comment Alan. Nobody bats a 1000 in this business, and Fleckenstein and I are no exception.

While I can't speak for Fleck's complete thoughts, I had compared CDWC to other companies such as Insight Enterprises, Inc., (NSIT) which is very similar to CDWC. As a person who shops for computer peripherals, would often compare prices on both sites. I usually found that CDWC had a better organized website, but slightly higher prices. Recently, however, I found CDWC had better prices too. I suspect that the pricing situation changes from time to time.

Given that these two companies are in the same industry, I expected that both would trade in the same general neighborhood, using the usual parameters. But CDWC traded significantly higher. As a customer, I found the biggest difference between the two companies was the website. Could that be fixed? Is CDWC's moat that impenetrable?

Obviously I bet the wrong way. It'll happen again.

<i>The company proved to have a better business model than DELL. You don't have to be vertically integrated to serve customers.</i>

No question Dell has struggled. I am not so sure that their direct to consumer business model is at fault. Rather, I suspect it has more to do with customer satisfaction, cost structure, and bulky and ugly designs. Apple Inc. (AAPL) is a study in contrast.

I agree with you that you don't have to be vertically integrated.

Again, thank you for your comment.