I think BRK likes the fact that VRSN essentially operates as a legal monopoly. BRK more than doubled its share count in 1Q13 and now owns over 5% of the company.
The author is correct in stating that the new ICANN agreement fixed the .com registry price at $7.85, but two important provisions weren't addressed:
1. VRSN can increase prices if the cost of maintaining a stable & secure infrastructure also increases, and 2. If warranted by market conditions, the price restrictions can be removed.
Also, the migration from a fixed to variable ICANN fee is a negative for VRSN, but isn't a major cause for concern b/c ICANN fees are a tiny part of the cost structure (about 2-3% of revenue over the previous 3 years). Moving to 3.5-4% of revenue isn't going to make or break VRSN. In my opinion, there is a fair amount of potential to lean down the operation which should happen as scale increases. If VRSN can realize some operational efficiencies, the uptick in the ICANN fee is a moot point.
Bottom line, unless VRSN does something completely ridiculous, it will retain the exclusive right to operate the .com registry. This translates to a monopoly on receiving an annual fee on each and every .com domain name. It doesn't seem likely that the number of .com registries will decrease anytime soon so a growing market and the ability to increase prices at least at the rate of inflation seems like a classic BRK investment.
Note: I ignored .net and the other tiny pieces of business b/c .com generates the bulk of VRSN's revenue.
Great points. The market doesn't seem to be giving COH any credit for opportunities in China. Over the last 3 fiscal years, revenues from the "Other International" segment (of which China is the largest contributor) accounted for 9.8%, 12.2%, and 14.2% of total revenues, respectively. That equates to sales growing at a CAGR of 38%.
Over this time period Victor Luis was the individual in charge of this segment. He just so happens to be the one who will replace Frankfort when he steps down early next year. I find this reassuring because 1) he understands how to execute in China and 2) he fully recognizes the significance of the region to COH's future success.
While competition between COH and KORS is one of the most discussed issues in North America, this isn't the case in China. KORS continues to be very much a North American brand with sales of 97%, 95%, and 91% coming from the region over the previous three years. Obviously KORS is trying to move away from such a heavy NA focus, but remains very concentrated when compared with COH--generating 30%, 30%, and 32% of sales abroad over the past three years.
The majority of KORS global expansion has been in Europe. Since KORS lacks a meaningful presence in China, COH has the huge advantage of being more widely known, and more integrated. China should provide a nice long runway for COH to continue growing.
BP: With Uncertainty Looming, Not Yet A Buy [View article]
By the time all uncertainty is eliminated, BP will no longer be an attractive investment.
There seem to be a couple hints that tell me the pending liability is not something that will materially hinder BP. The first is the recent 14% dividend increase. There is not a chance this increase would have been approved if there were any concerns the payout might have to be cut or decreased in the foreseeable future. Additionally, in 2010, BP took a charge of $40.9B on the inc stmt relating to the spill. Then on the 2011 inc stmt BP recorded a $3.8B gain thus taking the net charge for spill costs to $37.1B. Again, I don’t think the benefit in 2011 would have passed muster if there wasn’t some level of clarity into future costs.
I can make elaborate projections on the future liability and read endless opinions on the situation, but none of it really matters. Why not go straight to the most knowledgeable source with the most on the line? This would be BP’s management and legal team. By observing the actions of the most informed parties we can deduce a great deal about future expectations.
It's Not Too Late To Short Financials [View article]
Investors unfamiliar w/ leveraged ETFs need to be mindful that daily rebalancing can create a return shortfall. As Nicholas mentioned, FAZ amplifies the returns of the Russell 1000 Financial Services Index by negative three. However, since the holdings are rebalanced daily an investor cannot assume the same leveraged relationship will hold over time. These instruments are best suited for traders who initate and close a position in the same trading day.
Ceragon Networks: A Telecom Diamond in the Rough [View article]
As with any industry, the technology is always evolving. ALU's radio cube seems to operate with the same basic premise as cloud computing. The flexible infrastructure allows resources to be routed to areas of the network experiencing increased demand. Another notable difference is the single, multi-frequency antenna.
As far as I know, ALU is first to market with this technology, but I would be surprised if CRNT doesn't have a similar technology in the pipeline. The good news for Ceragon is that there are always implementation issues with any new technology, and an entire industry cannot migrate to new infrastructure overnight. I wouldn't consider the radio cube the death of Ceragon. In fact, I think CRNT is very attractive at the current price.
3 Lessons I Learned From Warren Buffett's Annual Letter [View article]
I was having a conversation about BRK this morning and I was alerted to the fact that GS and GE will likely be repaying their preferred shares. Add to this the fact that BRK's portfolio companies kick off ~$1B each month, and it is not out of the question to see the firm holding upwards of $70B in cash by the end of 2011.
BRK's investments have to continually become larger to have any impact on the bottom line due to the past success of the company. I agree with the author when he says that a deal similar in size to the Burlington acquisition is likely to happen in the not too distant future. The biggest hurdle is finding a high quality business of that size. It is difficult to pay a fair price after considering buying premiums.
What Do You Get When You Buy Netflix? [View article]
Rob,
I think you are underestimating the much higher costs associated with streaming. As NFLX migrates their business model from DVD by mail to streaming, they will not be able to keep their costs anywhere near historical levels. The 2010 Epix deal was estimated at $200M per year with a total contract value of $1B over five years. This is a high price to pay when one considers that NFLX won't have access to the content until 6-12 months AFTER premium movie channels. The company also paid between $150M-$200M for a one year deal w/ Disney that isn't overly attractive. NFLX gets various ABC, ABC Family and Disney channel shows, but can't stream the content for 15 days (Hulu gets exclusivity during this period).
NFLX is picking up huge annual costs that the company hasn't had to worry about since it was started. I'm not going to argue that NFLX is a bad company. In fact, NFLX is facing these problems b/c it is such a strong company. The Starz deal was unbelievably attractive b/c NFLX wasn't seen as a serious threat. Starz figured they could pick up some free money. However, the past several years have shown that NFLX is a company that has the potential to change the media landscape. Due to this fact, content providers are going to be sure that if they make a deal with NFLX, they get their money's worth. NFLX is a great company with a great product, but that doesn't mean the shares are immune to overvaluation.
Cramer's Mad Money - The Market Isn't Ready for the Social Media Revolution (1/31/11) [View article]
The argument for NFLX anywhere near $400 is ludicrous. It doesn't matter if it appears cheap compared to other companies that are equally (if not more) overpriced. If in fact social media stocks do demand premium valuations, it won't last long. Castles in the air are short lived and always come crashing back down to earth. When it comes to markets people always want to say, "It's different this time." But it never is. Learn from the dotcom bubble, the nifty fifty, and the "tronics" craze. These events didn't happen very long ago, but many investors seem to quickly forget the lessons they taught.
Short Netflix? Questions Remain Regarding Cash Flow and Sustainability of Results [View article]
Great article, Matt. Thanks for the analysis. I think this paragraph says a lot:
"NFLX did not buy back any stock in Q410 -- making it the first quarter with no buybacks in at least the past two years. Stock buybacks had averaged about $55M per quarter for the previous four quarters. If NFLX had hypothetically bought back this same amount of stock in Q4, they would have used up roughly two-thirds of their net cash generated in the quarter. At a minimum, this is a fairly big departure from previous capital management strategy, and likely speaks to management's view on the attractiveness of their stock (or lack thereof) at current valuations."
Buy Three Shipping Stocks and Slowly Step Away From the Rest of the Market [View article]
I was first attracted to this sector after the BDI fell over 90% in the 2nd half of 2008. I haven't done much analysis lately, but I noticed that GNK has underperformed the S&P by ~22% YTD. The bulk of that lag has come since the Egypt unrest has surfaced. I would assume this is due to Greece's close proximity to the Suez Canal, and GNK's heavy reliance upon the canal. Has the share price overreacted? International treaties state that the canal should remain open both in times of peace and war. Would this actually be the case if the situation worsens in Egypt? More research needs to be done, but maybe this could be a jumping off point for further analysis.
Barry I respect your thoughts, but I would have liked to have seen a bit more quantitative support for why you think a long position in NFLX is still appropriate.
The point you made about NFLX being "an aggressive bidder" for better content will be a major reason, in my opinion, the stock price will move lower. Better content should attract more subscribers, but the company is going to be forced to pay a pretty penny for this new content. A major driver of NFLX's amazing growth has been the low cost of content that could be leveraged across a wide subscriber base. I do not think there will be enough new subscribers to offset the bigger price tag of premium content.
Egypt Market Outlook: To Buy or Not to Buy? [View article]
Will the ultimate end of this situation justify the massive losses in EGPT, which tracks the national index? The ETF has dropped 22% in less than two weeks and 15% in a matter of days. The performance of this benchmark is dependent upon the companies that make up the index. Of course political upheaval and a change to the status quo will impact the business environment, but I'm not convinced Egyptian companies will face the hardships that are being priced in at this point.
My Five Picks From the Market's Cheapest Sectors [View article]
I was also drawn to the for-profit education sector b/c of the poor relative performance compared w/ the S&P. After looking at APOL, DV, ESI, EDMC, and STRA; I concluded that APOL offered the best upside price appreciation potential and bought a few weeks ago.
I also did some in-depth analysis on AMED. All the fundamentals look great and, from a macro perspective, AMED is in an attractive industry. Population trends show there should be a substantial increase in demand for home health care and hospice services. AMED has historically been a top performer in the industry. The company has experienced explosive revenue growth over the past five years while keeping both operating margin and profit margin in a narrow range. This shows management is competent and can operate profitably in a very competitive and highly regulated environment. It also shows the firm can execute its focused growth strategy. Numerous acquisitions and start up launches have expanded AMED’s footprint and client base while avoiding high costs that can materially hurt margins. Implied growth rates also seem unrealistically low. However, in spite of the fact that AMED seems to be a value investor's dream, I decided to avoid investing after reading the following article:
The article was published in 2009, but I think the risks presented still remain. So far I've been proven wrong b/c the stock is up 32% since I decided to pass. Personally, I am very sensitive to risk and try to find scenarios where the risk/reward characteristics are skewed in my favor. AMED offers big reward potential, but the risks that could be lurking could absolutely decimate the share price.
Great article. Succinct theses with a lot of substance. I agree with BIDU, NFLX, LULU. I won't say the implied growth for these companies is unattainable, but even the slightest slip up could translate to a substantial drop in share price.
Interesting thoughts on DNDN. There are so many external factors weighing on this stock that it almost can be classified as a speculative play. It certainly will be interesting to track the Provenge developments.
VeriSign's Slowing Growth Underlies Our $41 Valuation [View article]
The author is correct in stating that the new ICANN agreement fixed the .com registry price at $7.85, but two important provisions weren't addressed:
1. VRSN can increase prices if the cost of maintaining a stable & secure infrastructure also increases, and
2. If warranted by market conditions, the price restrictions can be removed.
(Source: http://bit.ly/11aNrQE )
Also, the migration from a fixed to variable ICANN fee is a negative for VRSN, but isn't a major cause for concern b/c ICANN fees are a tiny part of the cost structure (about 2-3% of revenue over the previous 3 years). Moving to 3.5-4% of revenue isn't going to make or break VRSN. In my opinion, there is a fair amount of potential to lean down the operation which should happen as scale increases. If VRSN can realize some operational efficiencies, the uptick in the ICANN fee is a moot point.
Bottom line, unless VRSN does something completely ridiculous, it will retain the exclusive right to operate the .com registry. This translates to a monopoly on receiving an annual fee on each and every .com domain name. It doesn't seem likely that the number of .com registries will decrease anytime soon so a growing market and the ability to increase prices at least at the rate of inflation seems like a classic BRK investment.
Note: I ignored .net and the other tiny pieces of business b/c .com generates the bulk of VRSN's revenue.
Coach Vs. Michael Kors [View article]
Over this time period Victor Luis was the individual in charge of this segment. He just so happens to be the one who will replace Frankfort when he steps down early next year. I find this reassuring because 1) he understands how to execute in China and 2) he fully recognizes the significance of the region to COH's future success.
While competition between COH and KORS is one of the most discussed issues in North America, this isn't the case in China. KORS continues to be very much a North American brand with sales of 97%, 95%, and 91% coming from the region over the previous three years. Obviously KORS is trying to move away from such a heavy NA focus, but remains very concentrated when compared with COH--generating 30%, 30%, and 32% of sales abroad over the past three years.
The majority of KORS global expansion has been in Europe. Since KORS lacks a meaningful presence in China, COH has the huge advantage of being more widely known, and more integrated. China should provide a nice long runway for COH to continue growing.
Is The Market Really Overvalued? Not When You Look At These Companies [View article]
BP: With Uncertainty Looming, Not Yet A Buy [View article]
There seem to be a couple hints that tell me the pending liability is not something that will materially hinder BP. The first is the recent 14% dividend increase. There is not a chance this increase would have been approved if there were any concerns the payout might have to be cut or decreased in the foreseeable future. Additionally, in 2010, BP took a charge of $40.9B on the inc stmt relating to the spill. Then on the 2011 inc stmt BP recorded a $3.8B gain thus taking the net charge for spill costs to $37.1B. Again, I don’t think the benefit in 2011 would have passed muster if there wasn’t some level of clarity into future costs.
I can make elaborate projections on the future liability and read endless opinions on the situation, but none of it really matters. Why not go straight to the most knowledgeable source with the most on the line? This would be BP’s management and legal team. By observing the actions of the most informed parties we can deduce a great deal about future expectations.
It's Not Too Late To Short Financials [View article]
Ceragon Networks: A Telecom Diamond in the Rough [View article]
As far as I know, ALU is first to market with this technology, but I would be surprised if CRNT doesn't have a similar technology in the pipeline. The good news for Ceragon is that there are always implementation issues with any new technology, and an entire industry cannot migrate to new infrastructure overnight. I wouldn't consider the radio cube the death of Ceragon. In fact, I think CRNT is very attractive at the current price.
3 Lessons I Learned From Warren Buffett's Annual Letter [View article]
BRK's investments have to continually become larger to have any impact on the bottom line due to the past success of the company. I agree with the author when he says that a deal similar in size to the Burlington acquisition is likely to happen in the not too distant future. The biggest hurdle is finding a high quality business of that size. It is difficult to pay a fair price after considering buying premiums.
What Do You Get When You Buy Netflix? [View article]
I think you are underestimating the much higher costs associated with streaming. As NFLX migrates their business model from DVD by mail to streaming, they will not be able to keep their costs anywhere near historical levels. The 2010 Epix deal was estimated at $200M per year with a total contract value of $1B over five years. This is a high price to pay when one considers that NFLX won't have access to the content until 6-12 months AFTER premium movie channels. The company also paid between $150M-$200M for a one year deal w/ Disney that isn't overly attractive. NFLX gets various ABC, ABC Family and Disney channel shows, but can't stream the content for 15 days (Hulu gets exclusivity during this period).
NFLX is picking up huge annual costs that the company hasn't had to worry about since it was started. I'm not going to argue that NFLX is a bad company. In fact, NFLX is facing these problems b/c it is such a strong company. The Starz deal was unbelievably attractive b/c NFLX wasn't seen as a serious threat. Starz figured they could pick up some free money. However, the past several years have shown that NFLX is a company that has the potential to change the media landscape. Due to this fact, content providers are going to be sure that if they make a deal with NFLX, they get their money's worth. NFLX is a great company with a great product, but that doesn't mean the shares are immune to overvaluation.
Cramer's Mad Money - The Market Isn't Ready for the Social Media Revolution (1/31/11) [View article]
Short Netflix? Questions Remain Regarding Cash Flow and Sustainability of Results [View article]
"NFLX did not buy back any stock in Q410 -- making it the first quarter with no buybacks in at least the past two years. Stock buybacks had averaged about $55M per quarter for the previous four quarters. If NFLX had hypothetically bought back this same amount of stock in Q4, they would have used up roughly two-thirds of their net cash generated in the quarter. At a minimum, this is a fairly big departure from previous capital management strategy, and likely speaks to management's view on the attractiveness of their stock (or lack thereof) at current valuations."
Buy Three Shipping Stocks and Slowly Step Away From the Rest of the Market [View article]
Why I'm Still Long Netflix [View article]
The point you made about NFLX being "an aggressive bidder" for better content will be a major reason, in my opinion, the stock price will move lower. Better content should attract more subscribers, but the company is going to be forced to pay a pretty penny for this new content. A major driver of NFLX's amazing growth has been the low cost of content that could be leveraged across a wide subscriber base. I do not think there will be enough new subscribers to offset the bigger price tag of premium content.
Egypt Market Outlook: To Buy or Not to Buy? [View article]
My Five Picks From the Market's Cheapest Sectors [View article]
I also did some in-depth analysis on AMED. All the fundamentals look great and, from a macro perspective, AMED is in an attractive industry. Population trends show there should be a substantial increase in demand for home health care and hospice services. AMED has historically been a top performer in the industry. The company has experienced explosive revenue growth over the past five years while keeping both operating margin and profit margin in a narrow range. This shows management is competent and can operate profitably in a very competitive and highly regulated environment. It also shows the firm can execute its focused growth strategy. Numerous acquisitions and start up launches have expanded AMED’s footprint and client base while avoiding high
costs that can materially hurt margins. Implied growth rates also seem unrealistically low. However, in spite of the fact that AMED seems to be a value investor's dream, I decided to avoid investing after reading the following article:
www.citronresearch.com.../
The article was published in 2009, but I think the risks presented still remain. So far I've been proven wrong b/c the stock is up 32% since I decided to pass. Personally, I am very sensitive to risk and try to find scenarios where the risk/reward characteristics are skewed in my favor. AMED offers big reward potential, but the risks that could be lurking could absolutely decimate the share price.
8 Cult Stocks to Avoid in 2011 [View article]
Interesting thoughts on DNDN. There are so many external factors weighing on this stock that it almost can be classified as a speculative play. It certainly will be interesting to track the Provenge developments.