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Michael Spacey
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This is a pseudonym. Started my career in structured finance, moved into corporate debt, and now I'm investing in equities. My investment style is focus on the fundamentals, figure out what the company is worth, then check across the capital structure for opportunities. Writing is a way for me... More
My blog:
The Cleanup Call
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  • Keep It Simple, Buy Apple And Google

    I tend to write about smallish and mediocre companies on this blog, but those are just a portion of my portfolio. In fact, about half of my portfolio are highly liquid large caps that I consider high quality and intend to hold over the long run.

    The problem with this mixed approach of "cigar butt" versus quality at fair price is I end up spending most of my time on the former. Built to last companies just don't require as much attention as risky ones. When I buy a "quality" company my intention is to let it cruise along, check in once in a while to see if the thesis still holds, and perhaps add on the dips. This has all worked out very well so far. The problem is there's a strong temptation to equate "large" with "safe", and perhaps run the risk of complacency. I hope writing this blog will help prevent that.

    I'm under no illusions that I have any unique advantage when investing in these names. The thing is you don't always need an edge. Investing is not a zero sum game. Nor do you get points for creativity. I think some people read Joel Greenblatt and obsessively ask themselves "whats my edge? is this obscure enough?" But sometimes the crowd is right, and the best opportunities are the obvious ones. (more on that here.)

    With the market being volatile the past few months, I took the chance to get into Google and Apple at the lows. At today's prices (GOOGL at $565 and AAPL at $126), I would still buy them if not for the fact that they're already full sized positions.

    Google

    There's a decent chance this can double in 5 years. The way this works out, I think, is earnings double in 5 years (implying a a highly achievable 14% earnings CAGR). If earnings are still growing > 10% at the end of that period, then the market will put on a high P/E which doubles the share price.

    For a company that grew its net revenue at 20% in 2014, Google is priced very reasonably, (I look at this in terms of GAAP earnings, and back out the value of net cash, which gets me to <20x 2016E earnings). This deal is available due to worries about what mobile means for Google. Google still makes most of its money from text searches, the fear is that with the world shifting toward mobile and "apps", Google's earnings growth will slow or even decline.

    That seems exaggerated to me. Google owns Android and YouTube, so they do have a strong presence in mobile. Ok, they have not really monetize those two yet, but is it that hard to imagine they eventually will? Also, there are 2 trends that converges "mobile" together with traditional internet, where Google clearly dominates. One is that websites increasingly serve up the "mobile" versions, which are getting so sophisticated that there's no difference between normal internet site and an "app". Second, as phones get bigger and tablets more functional, there's less of a difference between the "mobile" world and the "desktop" world. In that sense cell phone, tablet, laptop...etc are all just screens where people interact with the internet.

    In 2014, gross profit grew 20%+ while adjusted pretax profit was up only 11%. This is due to Google's high R&D and other investments. These are discretionary investments though. If they just keep expenses under control, they can easily "show" a much higher earning growth.

    I'm no expert in tech, but Fred Wilson is. In this recent interview (around 37th minute), he was asked "Can YouTube be bigger than Google search?" to which he exclaimed "Yes! Easily!". Wilson also pointed out that Google's strength in data and the fact that it's still run by its founders.

    Apple

    For years I had a hard time getting comfortable with Apple. With technology changing so fast, I have no idea what products they will be selling in 10 years, so how can I put anything more than a 10x multiple on this? My thinking has changed into this: it doe not matter. Sure, eventually there is going to be tougher competition from Asia, but I just need to make sure 1) in the interim they will rake it in the next 2 years so that cash is worth something, 2) there are no close competitor in the upscale product /ecosystem / "fashion tech" segment.

    Apple made an absurd $18bn in the quarter ending December 2014. In one quarter alone, they made more than the entire market value of some large cap companies! Surely this is peak earning, no? I think there could be more. Growth opportunity could come from 1) higher iPhone penetration in emerging market. Apple's market share in China was only 16% at Oct 2014. Could have doubled at this point, but certainly there's some room to run. Similar idea with France, Germany, Italy..etc. 2) the bigger iPhone 6+ has higher price points. 3) Apple Watch opens another revenue stream that could offset iPad weaknesses. 4) Upside options such as Apple Pay, partnership with IBM, healthcare initiatives could all work out. 5) Apple solidifies itself as a "fashion tech" brand and sells eye glasses, hats, or whatever to fanboys for $400 a pop.

    What's the upside? Say earnings grow another 30% in a few years, put on a higher multiple and we could see 40-50% gain from the current price. There's a technical aspect that could accelerate the gains. With Apple being some 3.5% of the SP500, fund managers who are underweight Apple (and implicitly shorting it) could face a short squeeze, especially if iPhone 6 continues its spectacular run and Apple start doing some buybacks.

    The downside is Apple Watch turns out to be a flop, which not only fails to replace iPad sales, but also disproves the "Apple as fashion/luxury tech" theory and demoralize Apple boosters. Also, if iPhone 6 sales stalls later this year, the market would reasserts that this is a cyclical business unworthy of a high multiple. This is not a stable buy and hold. The downside is real and I would have to risk manage this if prices fall below my cost basis.

    Of the two, I like Google better and will allow it more time to play out.

    Tags: AAPL, GOOGL
    Mar 22 3:47 PM | Link | 1 Comment
  • HLSS

    For some reasons analysts do not want to discuss these risks--

    cleanupcall.blogspot.com/2015/01/hlss-an...

    the other important thing is dividend yield is not a good way to value this company. The asset naturally decline overtime. Even if they can be replaced, the servicing costs have gone up due to compliance costs

    Tags: HLSS
    Jan 12 3:07 PM | Link | Comment!
  • Management Turnovers At Pharmacyclics (PCYC)

    I normally don't like to dwell on management too much. In fact in my blog post here I concluded that management turns at PCYC can arguably be a secondary consideration depending on your investment style.

    Then I learned that the drugs are made in China. Why would you do this? So you have a biopharma who keeps losing medical/science personnel; core executives couldn't answer questions about IMS data in their own presentations (and get yelled at by the Morgan Stanley analyst). And oh, by the way the drugs are made China.

    I don't have the guts to outright short this company given strong reviews about Imbruvica, but at some point the red flags pile up and I stop looking further.

    Tags: PCYC
    Oct 02 11:32 AM | Link | Comment!
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