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The Private Market Value Strategy: Part 3 - Leveraged Companies
- The private market strategy seeks to capture the value that a private investor (including a corporation making an acquisition) would attribute to an entire company.
- Leveraged companies can contain hidden value which would be attractive to a private investor.
- Leveraged companies have to be analyzed carefully to isolate cash flow, debt terms, and valuation and to determine actual private market value.
- In a sluggish economy, leveraged companies offer one of the rare opportunities to generate earnings growth as debt is retired and interest expense declines.
- The two companies which I have written about using this strategy have both been acquired by larger companies; the third - Aemetis (AMTX) is one of my highest conviction holdings.
Aemetis Still Looks Like A Winner
- A recent article suggests serious problems for Aemetis; the article suggests excessive leverage and an impending downward spiral.
- The article overstates the amount of debt owed by AMTX and exaggerates the degree of difficulty AMTX will have in repaying the debt.
- AMTX is generating strong cash flow and should be able to pay off roughly $35 million a year of the outstanding debt.
- With EBITDA of some $45 million and debt of roughly $42 million in July 2015, AMTX will have many alternatives for dealing with the remaining debt.
- With debt fully paid down in less than 2 years, AMTX can generate $2 a share in earnings and support a share price in the $20 - 30 range.
Current Economic Data Does Not Suggest A Rate Increase Anytime Soon
Wed, Aug. 6 • 3 Comments
- There has been some recent speculation that the 4% GDP growth in the second quarter may suggest an imminent rate increase.
- In fact, the second quarter followed a disastrous first quarter and GDP growth for the last six months is less than .5% or 1% per year.
- Other data - especially labor force participation numbers - suggests a great deal of "slack" in the economy which militates against a rate increase.
- Other central banks are still expansive which means that a US rate increase would push the dollar upward, increase the trade deficit and create deflation.
- I will stick with my earlier prediction that there will not be a two handle on the Fed Funds rate until 2017, most likely the second half of 2017.
The Market Is Overpriced But The Correction Will Likely Be Shallow
- The dividend yield methodology for valuing the market has been reliable for the five years since the Crash.
- Under this methodology, the S&P 500 trades between a 2.2% dividend yield and a 1.8% dividend yield with a midpoint at a 2.0% dividend yield.
- At Monday's closing price, the S&P yields 1.89% in dividends making it overpriced in comparison with the midpoint of the range.
- A pullback to 2.0% would imply a correction of roughly 5% in the Index; a less likely result would be a pullback to 2.2% or a 14% correction.
- The methodology should continue working until there is a major disruption in dividend flow or a major increase in interest rates.
What Happened To 'Peak Oil'?
- M. King Hubbert's prediction of a peak in US oil production proved eerily accurate in 1970.
- Peak oil enthusiasts predicted a peak in world oil production between 2004 and 2008.
- In fact, depending upon how it is measured, US oil production is now approaching the 1970 peak and world oil production has been increasing since 2009.
- The reason is that more expensive sources such as shale fracking, tar sands, and tertiary recovery have emerged and are increasing rapidly.
- A new oil market is emerging with higher marginal costs of production and more stable (but high) prices; there are very important investment implications.
Book Review: Stress Test By Timothy Geithner
- Geithner was in the center of the 2008-09 Panic and this book provides a useful perspective from an excellent vantage point.
- There are some "holes" in the analysis - why didn't authorities jump to action in 2007 when the subprime mess had been revealed and why wasn't it detected even earlier.
- The book reveals that Dodd Frank may have actually made our financial system more dangerous.
- I agree with Geithner on most points but I think he papers over some very tough and important issues.
- The book supports an important thesis of mine - intelligent investors absolutely have to assess public policy responses and incorporate that assessment in their investment decisions.
Dividend Investors Should Consider Private Equity Managers
- Private equity managers, including Blackstone and Kohlberg, Kravis, Roberts, are now publicly traded and pay attractive dividends.
- These stocks offer retail investors exposure (with liquidity) to the private equity market which has traditionally been a high performer.
- There are eight stocks in the sector and recent performance has been solid.
- Downsides include K-1 tax forms, transparency risk, and sensitivity to economic cycles.
- On balance, an exposure to these stocks will produce both yield and appreciation for dividend investors with some appetite for risk.
Aemetis Is A Potential Four- Or Five-Bagger
- Aemetis has converted first generation ethanol and biodiesel plants into advanced refineries and has recently obtained NASDAQ listing.
- At its current price and projecting from first quarter results, AMTX now trades at an enterprise price of less than 5 times enterprise owner cash flow.
- A number of factors should increase cash flow going forward.
- Key factors which will increase earnings are: 1. operations at its plant in India, 2. replacement of expensive debt with cheap debt, and 3. the reduction of outstanding debt.
- Making conservative assumptions, AMTX could earn well north of $2 a share and trade north of $30 within the next 2 years.
Why Piketty Is Wrong: Part 3 - Policy Recommendations
Mon, Jun. 9 • 60 Comments
- Further review reveals the importance of housing values for Piketty's thesis and suggests some counterintuitive results reached in his work.
- Piketty's recommendation for very high marginal income tax rates would lead to a preoccupation with tax avoidance and his tax on capital idea is unworkable.
- A better solution for the United States would be much lower income taxes, a value added tax and other policy revisions targeted at our real problems.
American Capital Is Attractive Below $15: Here's Why
- American Capital (ACAS) current price of $14.73 offers the investor a discount of 26% to the true value of $19.81.
- ACAS management has been shareholder oriented and is currently exploring restructuring alternatives that may unlock substantial latent value.
- ACAS has a subsidiary, American Capital Asset Management, which may be the focus of the restructuring and which could generate substantial value for investors.
Why Piketty Is Wrong: Part 2 - The Spirit Of An Age
Mon, May. 26 • 47 Comments
- Further review has revealed some dubious aspects of Piketty's calculations.
- Piketty assumes we are headed back to the world of Jane Austen and Balzac, a stultifying world dominated by inherited wealth.
- In reality, a world of "too much capital" will be more like the Wild West with opportunities (and unfortunately pitfalls) galore.
Why Piketty Is Wrong: Part 1 - The Math
Sun, May. 4 • 65 Comments
- Thomas Piketty's "Capital in the Twenty-First Century" raises important issues.
- It argues that returns on capital will eat up ever larger shares of national income.
- Piketty's argument is flawed because of assumptions about the return on capital.
- He also makes unwarranted assumptions about the elasticity of substitution between capital and labor.
- Piketty neglects the fact that under reasonable scenarios, implausibly large levels of savings would be necessary for his projections to materialize.
The Perils Of Pauline And The Power Of Monetary Policy
Fri, Apr. 18 • 48 Comments
- We have had a series of economic potholes since the Panic of 2008.
- These have included the Horizon oil spill, the Flash Crash, the Greek default scare, the US debt ceiling crisis, the MF Global Bankruptcy, and the Fukushima nuclear disaster.
- Despite these setbacks, aggressive monetary policy has enabled us to avoid a relapse into deflation.
- The old mantra "Don't Fight the Fed!" has a lot of truth to it; monetary policy is still a very powerful tool indeed.
S&P 500 Is Below Fair Value With A Strong Support Level Of 1668
- The dividend yield model of the S&P 500 has worked very well for more than 4 years.
- The model suggests a fair value based on a 2% yield - this suggests a price of $1835 for the index.
- The yield level of 2.2% has not been breached since the Fall of 2009 - that price level is now $1688.
Municipal Mortgage & Equity: Big Upside For Limited Downside
- MMAB is worth at least $2.00 a share.
- This value does not include several potential windfalls buried in the balance sheet.
- The biggest is a massive ($405.9 million) net operating loss carry forward.
- Other goodies include a tax credit and residual interest in managed funds.
- Management has executed brilliantly and is shareholder oriented.
- The Private Market Value Strategy: Part 2 - Cheap Cash Flow
- The Private Market Value Strategy: Part 1 - Discounted Assets
- The Macroeconomic Implications Of America's Energy Renaissance
- The Market Is Still A Bit Overpriced In Terms Of Dividend Yield
- Digital Cinema Destinations Has Much More Upside Than Downside
- 2014 Will Be The Turning Point For Clean Energy Fuels And Westport Innovations
- Equity Residential Is Attractive Because Of Location, Location, Location
- GT Advanced Techologies Has A Promising But Cloudy Future
- 2 Christmas Presents From Mr. Market
- Methanex Can Continue To Go Much Higher - Here's How
- This Post-Apocalyptic Market Metric Suggests A Modest Pullback Followed By A Strong Uptrend
- The GSV Capital Sell-Off Is Overdone
Book Review: 'Inventing Money' By Nicholas Dunbar
Oct. 19, 2013 • 2 Comments
- Low Rates For A Long Time: No Fed Funds 2-Handle Until 2017
- What Interest Rates Mean For The Stock Market
- GSV Capital: Ride The Roller Coaster But Try To Get On At The Bottom
- New Rule: Buy American Capital Below $13.33