Steve Alexander

China Sky's Financial Statements: Huge Discrepancies

Asensio, save yourself from this one. You are not using logic. Look at it from your point of view. Let's assume the SAIC filings are gospel and TDR is losing $100k a year.

How on earth is CSKI internally funding a $13 million headquarters expansion? They are moving in this month, and it is verifiable.

Why would the company even consider (or be in financial position to) export products to Canada? Yet, that's what they are doing, and it is verifiable.

Even you mention the low revenues of the suppliers (presumably Heilongjiang Kangda Medicine Co. and Harbin Zhongjia Chem) in their SAIC filings - is it conceivable that a lot of Chinese companies under-report revenue?

Finally, if the company does what it says and the 2009 SAIC filing matches up with the SEC filings, you are in big, big trouble with your short position.

This is a dangerous short, and your case against it is not that strong.

'Up Listed Chinese Companies: Above Average Returns

The phenomenon you described has produced a lot of Magic Formula stocks, like CEU (mentioned), UTA, CSKI, and others. Good article.

Sturm & Ruger's Brief Burst of Value

ttm: 265.596mm, 44.144mm op profit, 16.6% op margin
2008: 181.483mm, 13.537mm op profit, 7.5% op margin
2007: 156.485mm, 10.258mm op profit, 6.6% op margin
2006: 167.620mm, 0.922mm op profit, 0.6% op margin
2005: 154.722mm, 1.837mm op profit, 1.2% op margin
2004: 145.624mm, 7.024mm op profit, 4.8%

This is all directly from SEC filings. I agree that new management is doing a good job with manufacturing, but I would argue vociferously that ttm margin improvement is more due to 100% utilization than any sustained lean manufacturing. I've accounted for improvements in my higher op margin assumption, as well as in a sustained revenue figure, largely due to high ASPs for the SR-556, despite what is sure to be lower volume due to pushed up sales.

There are no factual errors in the analysis, and margin assumptions are of course open to speculation. The gun business is not a secular growth market (in fact probably the opposite), so I believe it is difficult to justify $200mm in revenue. It is competitive as well, making it difficult to justify margin assumptions that are significantly and sustainably higher than historical averages.

5 Things to Consider Before Buying and Holding

How many straight traders are on the Forbes 400?


On Oct 18 02:50 PM VennData wrote:

> The idea that "For one, it is much easier to see and predict long-term
> business trends and advantages then it is to predict what is going
> to happen over the next few months or weeks." is comical.
>
> Prove it.
>
> This is just more Wall Street marketing (aka give me your money to
> invest for you.)

KHD: A Promising Value Stock

Great job, thanks.

eBay: Growth at the Right Bid

eBay will continue to grow, but most investors missed the boat on this one when it was sitting at just over $14 at this time last year. That was a ridiculous valuation for such high margins, cash flow, growth potential, and balance sheet. Now its about fairly valued, maybe slightly overvalued. No word on valuation in the article, although the business analysis is solid, IMO.

Steve

Jacobs Engineering: A Constructive Long-Term View

Jacobs is the best of the E&C picks out there, with a relationship business model and nice diversification across energy, government, and industrial. It has been on the Magic Formula screen for almost a year now. Nice write up.

Steve

Questcor Pharmaceuticals: Risky, But Cheap

Indeed, Vigabatrin (marketed as Sabril in the U.S. by Lundbeck) was approved by the FDA at the end of August and became commercially available September 21. It is the first officially approved FDA treatment for IS.

Thanks for the comments.

Polo Ralph Lauren: Doing Fine, But There's Cause for Concern

Yes, thanks for the corrections guys. I need an editor!

3 Intriguing Points About Qiao Xing Mobile

> Contradiction: "I've given Qiao Xing a C+ for growth potential. The
> Chinese mobile phone market is one of the most attractive in the
> world for several reasons."

It would be a contradiction if Qiao Xing was a market leader with little competition. It is neither. It may or may not benefit from market growth due to price and feature competition. It's unclear, and hence a C+.

Nokia's a Juggernaut, But What's Left to Conquer?

> Can you explain what you mean by "Symbian is not inherently a smartphone
> OS like Apple's or RIM's" and why those of Apple and RIM are ?<br/>I
> am not aware of any technical reasons why one of them is not for
> true smartphones.

Apple and RIM both designed their operating system to handle smartphone activities like email, internet, and so forth, and have structured them to be expandable through third party applications that utilize QWERTY keypads and other hardware features.

Symbian was historically developed for phone hardware - number keypads that could perform some tasks like text messaging. Trying to shape and mold this into a good smartphone OS will be a challenge. You need to have a lot of low level features like memory management, task switching, data protection, power management, and so forth. Symbian was not developed with these in mind and adapting an operating system can take as long as creating a new one.

Why Return on Capital Is So Important to Investors

> 1) In your invested capital formula, what's the intuition behind
> using those particular accounts? It seems more intuitive to me to
> define "invested capital" as net debt + equity. More explanation
> on your invested capital formula would be great.

The idea is to count "invested capital" as the net assets that are employed in generating profits. Lots of good companies have huge cash wads that are not employed in core profit generating activities. If you include these extra assets, your return on capital figure will be unduly low.

> 2) Also in your invested capital formula, you have (Short-term Liabilities
> + Interest Bearing ST Liabilities). But Interest Bearing ST Liabilities
> are already in Short-term Liabilities, so aren't you double counting
> here?

No, it removes Interest Bearing ST Liabilities from the equation. I would be double counting if it was (Short-term Liabilities - Interest Bearing ST Liabilities).

Why Return on Capital Is So Important to Investors

On Apr 16 04:47 AM ArtfulDodger wrote:

> Steve Alexander:
>
> This is a good article with good points. Thanks.
>
> These calculations certainly help to quantify a stock. Do they provide
> you with enough info to buy?
>
> Would you buy without qualifying the company? I.e., how well management
> works, how well the company markets, the quality of its products,
> competition, etc.
>

ROC is one point to look for when qualifying an investment, not the only point. Like Buffett says, a great business does not always make a great investment if it's priced too high. I always do a management and competitive analysis before recommending a stock. The Magic Formula strategy itself helps with price, as it only filters out stocks with a high operating earnings to enterprise value ratio (earnings yield).

Thanks for the comments everyone!

The Right Way to Look at Cash Flow

Not really. The '01 cash flow numbers would have been generated by the stores existing at the time, as would the depreciation figure. Same with '08. There is no future assumptions in the calculations.

It's interesting that it cost Home Depot 3x the depreciation in '08 for roughly 2x the stores. Logically it makes sense though, as older stores would require more upkeep than newer ones.

LCA-Vision: Have Revenues Bottomed?

Saj - How do you see the board room battle playing out here? I'm concerned that all this good news is just posturing to win the proxy battle against the Joffes. Do you really believe current management?

I do agree with you that LCA has a great chance to be a stellar investment when the market turns, seeing as TLC is in a much more precarious position.

Steve
MagicDiligence.com