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Michael Swyers

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  • You May Think That The Market Is Overvalued But These Dividend Champions Are Not: Part 1 [View article]
    Chuck,

    I've been a fan of your perspective and have read your articles for a long time, however I strongly disagree with the use of S&P's Operating Earnings as a valuation metric. I think there are several fundamental flaws with the data series, which I outlined in an article (http://seekingalpha.co...).

    The biggest issue that I have is that a multiple of 15x earnings is a normal PE for As-Reported Earnings, not for Operating Earnings, which are biased upwards. Based on AR EPS, the S&P 500 is trading over 19.5x ttm EPS, making it slightly more over-valued than Operating Earnings would suggest.
    Nov 14 04:27 PM | 6 Likes Like |Link to Comment
  • The Fed Is Not Pushing Stock Prices Higher [View article]
    I have to agree with Lawrence. There are two sides to any transaction. The entire premise of QE is that the Fed uses newly created money to purchase existing securities. This means that as the Fed makes their monthly MBS purchases, someone is selling to the Fed and receiving cash in return. This money has to go somewhere.

    QE also has the effect of driving the prices of these securities higher and their yields down, making them less attractive to new investors who might otherwise purchase them. These investors must now look elsewhere for securities to fund their risk/return requirements.

    So now the Fed has created two groups of investors who will search for alternate investments. Some of this money invariably ends up in the stock market.
    Apr 3 01:36 AM | 6 Likes Like |Link to Comment
  • You May Think That The Market Is Overvalued But These Dividend Champions Are Not: Part 1 [View article]
    Chuck,

    First of all, thank you for taking the time to reply to all of these comments with such thorough responses; I imagine it takes a lot of time and energy!

    I should clarify my earlier comment by saying that I’m only opposed to S&P’s definition of Operating Earnings (which is markedly different from EBIT) and their corresponding data series for the S&P 500. For individual companies, I fully support the use of EBIT (operating earnings under its conventional definition), and I think it gives a great measure of ongoing business prospects.

    Returning to my point about S&P’s operating earnings, this is one of the issues I have with them: there is a limited history for operating earnings, dating back only about 30 years. And furthermore, this 30 year period happens to include the single worst period of over-valuation in market history, making it very difficult to establish a good baseline history for operating earnings. In contrast, As-reported earnings have a history that dates back over 140 years. It is this extremely long series of data that has produced a fair-value multiple of 15 times. My contention is that it does not makes sense to take this multiple, established by a long history of AR EPS and apply it to Operating Earnings, a number which is biased upwards. The only possible result is over-valuation.

    On the topic of buying into future prospects, I fully agree that the future is what matters; that investors buy future earnings, not the past. However, as mentioned in your article, no one can know the future with certainty, so we’re forced to use the past (measures such as ttm earnings) as a proxy for future prospects.

    As for profit margins, as we have established, we as investors buy into a future stream of earnings. Considering that, I would much prefer to invest for the long term when margins are low and have room to grow. Given that margins are elevated right now, and assuming you subscribe to the notion of mean reverting profit margins for the market as a whole (which I personally tend to), that suggests there is limited room for them to grow further and that companies must instead rely more heavily on growing revenues. So to summarize, yes businesses and their margins are healthy, but these conditions are already reflected in past earnings and current valuations. Looking to the future, I have to wonder how much more room profit margins have to grow, given the levels they are at now.
    Nov 15 06:03 PM | 5 Likes Like |Link to Comment
  • Why The 'Mean Reversion' Focus Can Be A Costly Blunder [View article]
    Hayden:

    Thanks for posting that, I had some of the same thoughts while reading Jeff's article.

    I did some quick math too, and for margins to work their back to normal at 5% nominal growth (~3% real and ~2% inflation), it would take 8.8 years. That's nearly 9 years of zero profit growth for margins to wend their way back to normal purely via revenue growth (and assuming fairly robust growth compared to what we have seen these last few years).

    To draw another parallel, this is the same sort of mentality that was applied to the sovereign debt burdens of countries like Greece back in 2010-2011: if they cut spending and raise taxes (austerity), their economies will adjust and they will be able to slowly reduce their debt obligations over the next decade or two, bond markets permitting.
    Feb 20 10:07 AM | 4 Likes Like |Link to Comment
  • You May Think That The Market Is Overvalued But These Dividend Champions Are Not: Part 1 [View article]
    Paul:

    Please re-read my comment directly above yours. I think you have misunderstood the premise of my argument. Once again, S&P’s “Operating Earnings” is NOT EBIT. They use a completely arbitrary definition of their own design, and the fact that they call it "Operating Earnigns" is very misleading. There is no data on S&P's "Operating Earnings" for individual companies, because S&P makes adjustments which they do not disclose.

    At the beginning of Chuck’s article, he concludes that the S&P 500 is not significantly over valued on the basis that we are trading at only 16.5x S&P’s Operating Earnings in conjunction with a fair value multiple of 15x. This is where I have an issue (and it is the ONLY place I have an issue). Where did 15x come from as a fair value multiple? The answer is that it is the average multiple from a very very long history of As-Reported Earnings. Therefore, to compare S&P’s Operating Earnings to a fair-value multiple established by As-Reported Earnings is comparing apples and oranges.

    Let me reiterate, I have absolutely no problem with comparing individual companies on the basis EBIT/operating earnings under its conventional definition, and in fact I find it very instructive to do so for reasons you mentioned (eg. factoring out capital structure and tax differences). I should mention however that depreciation is deducted in arriving at both EBIT and net income, and so would not have an effect when examining your hypothetical companies on a net income vs EBIT basis.

    I’m afraid I also don’t understand your comment regarding correlations. 15 as a fair value multiple is a constant. The formula for correlation is covariance / (standard deviation x * standard deviation y). The standard deviation of a constant is 0, meaning that the correlation is undefined, so I fail to see how using a certain multiple is relevant to correlations.
    Nov 17 02:33 PM | 2 Likes Like |Link to Comment
  • Economic Outlook For Rest Of 2014: Acceleration [View article]
    The US working-age population has grown by nearly 40% since then. A larger population needs more job openings to sustain it. 150-400k in payroll growth per month back then would be equivalent to 210-560k today.
    Apr 7 02:07 AM | 1 Like Like |Link to Comment
  • Is The Market Overvalued? Jeremy Siegel Says 'Not At All' [View article]
    Thanks for an unbiased look at two different perspectives!

    I don't agree with Siegel's argument that the massive losses at Citi, AIG, and BofA are invalid though. They were simply the companies who ended up holding the majority of the bad assets, but make no mistake, many other firms (and sectors!) prospered from the creation of those bad assets in the years prior to the crisis. Financial services via origination fees, CDO/MBS sales, any firms tied to the housing sector, raw materials firms, consumer discretionary (due to the availability of home equity loans), etc. All of those earnings are still included, despite that they are a direct result of the very same toxic assets which later had to be written off.
    Dec 12 05:33 PM | 1 Like Like |Link to Comment
  • A Consolidation Instead Of A Correction [View article]
    Cam,

    Thanks for the article.

    I wonder whether Soros did actually reduce his SPY put position though. I took a quick look at the link you provided and it mentioned that he took a $1.25 billion position in Aug, which now has a reported value of $470 million. The market is up ~7% since Aug, so the loss in value from delta + 3 months of theta decay from Aug to Nov could easily erode the value of put position by 2/3 depending on when they expire.
    Nov 20 07:44 PM | 1 Like Like |Link to Comment
  • The Fed Is Not Pushing Stock Prices Higher [View article]
    I don't think Japan is pursing "deflationary monetary policy". No sane central bank would actively pursue a policy like that. It encourages indefinitely deferred consumption (perpetually lower growth in other words). Japan is printing money at a faster pace than any other developed nation. There is nothing deflationary about that. The fact that they are experiencing deflation in spite of their best efforts is a testament to how little control they now have over their economy.
    Apr 3 01:43 AM | 1 Like Like |Link to Comment
  • Canadian Oil Sands: Analyzing And Valuing The Oil Sands Operator - Part II [View article]
    Thanks for the feedback!

    Operational risks will always exist of course, but like you said they are certainly manageable and will lessen over time. Case in point, Syncrude recently strung together record run-times between maintenance for a couple of their upgrading units.

    Environmental risk and associated CapEx will probably continue to be an issue. COS seems like they're ahead of the curve in terms meeting the requirements of potential new legislation though, which should help control costs and risks to some extent.
    Jan 16 10:02 PM | 1 Like Like |Link to Comment
  • CARBO Ceramics: Priced To Recapture All-Time Highs Within 5 Years [View article]
    Hey Stu,

    Thanks for the feedback and glad you enjoyed the article!

    That's an interesting possibility you've raised, the potential for vertical integration by some of the larger oil & gas service providers. If they were to begin manufacturing their own proppants in house, that could seriously affect CARBO's growth potential.

    With that being said, I don't think that scenario is highly likely. The fact that so many foreign proppant producers have had such difficulty matching (or even approaching) CRR's quality tells me that manufacturing a high-quality proppant isn't as easy to accomplish as it seems. So even if say SLB/HAL were to start manufacturing now, it might be a long time before they reach the same quality threshold. For that reason, I think it's more likely that they would look to make an acquisition if they were interested in producing proppants. In that case, CRR could very well become a takeover target. (I don't view this as being highly likely, but it's something that could see some speculation if CRR's share price were to take a big hit).
    Feb 27 05:01 PM | Likes Like |Link to Comment
  • CARBO Ceramics: Priced To Recapture All-Time Highs Within 5 Years [View article]
    Hi Redbaron,

    I personally try not to predict where a stock will be in the short term as it's not always a function of fundamentals. Market momentum and sentiment tend to play bigger roles.

    That said, I think CRR's near-term performance will depend on how quickly we see some benefit from their cost-cutting initiatives. As I noted, Gross Margins got squeezed pretty hard during 2013. If they rebound quickly, this would be a good long-term sign.

    Also, if signs of returning pricing power emerge, this could give a big boost to the stock. Keep an eye on Kryptosphere's market acceptance as well.
    Feb 24 03:20 PM | Likes Like |Link to Comment
  • CARBO Ceramics: Priced To Recapture All-Time Highs Within 5 Years [View article]
    Hi Bob, thanks for your comment.

    Certainly in shallower fractures, there is less pressure and therefore less need for high strength ceramics. That said, drilling a short/shallow fracture is not a question of choice, it's a function of how deeply the hydrocarbons are situated. If reserves are concentrated at a depth of 10,000 feet, drilling at 5,000 isn't going to accomplish anything.

    Since shallow fractures are less costly (less time and energy involved in drilling, and fewer complications from pressure), I think they're likely to be used up first.

    As for Pioneer and EOG, they're more on the E&P side of things as I understand it. E&Ps will tend to hire service companies like SLB and HAL to drill for them. So CRR proppant may well be used by those companies, but the sales would be made to SLB/HAL on paper. CRR also won't disclose their other major customers (for competition reasons) unless they legally have to.
    Feb 20 08:49 PM | Likes Like |Link to Comment
  • Is The Market Overvalued? Jeremy Siegel Says 'Not At All' [View article]
    There was no "huge spike" in CAPE during 2008
    Dec 16 07:01 PM | Likes Like |Link to Comment
  • S&P 500 Operating Earnings: A Quick Path to Over-Valuation [View article]
    Thanks for your comment!

    I think you're right that financial turmoil will have a strong chance of spurring reporting changes/adjustments. My personal opinion is that it's always up to the individual investor to examine reporting measures for applicability, and that goes double for non-gaap figures.
    Apr 25 05:06 PM | Likes Like |Link to Comment
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