YASmoney

The Long Case for Layne Christensen Company

This stock is plagued by quant trading right now. I'm liking it at $30 - $35 for a buy. I still think it's a rather speculative play on this one, however. I've tried several dcf models - the problem is the predictability of earnings growth after 4 or 5 years. It's really not a question of whether or not there will be high growth, the issue is HOW HIGH? The argument for 10% YOY earnings growth for years 4-8 can be made as easily as 30%. (history of earnings surprise does not help)

I really do think it's undervalued right now, but below $35 I would call it a steal.

Why Investment Banks Should Not Buy Hedge Funds

One more point to ponder: in a bank's valuation of a hedge fund there are brokerage-like synergies that should be recognized. Consider my last question in (ii). Let us assume that a bank plans on purchasing a hedge fund and has investors lined up to invest in it post-purchase. Also, assume the bank EXPECTS the hf's current clients to divest by the exact amount, so that the net change in AUM is zero. The bank can pay a premium for the price of the hedge fund if it handles the brokerage of equity between entering and exiting clients. The real issue is, what kind of premium are they paying and do the brokerage fees compensate for it?

Why Investment Banks Should Not Buy Hedge Funds

This article implies two assumptions that are not validated. (I) A 1:1 relationship between ROI and value. (II) An exodus from a fund acquired by a risk-adverse bank resulting in a net decline in AUM.

(i) I do not need to explain the difference between returns and risk-adjusted returns. However, it is important to note that the “value” of returns is objective and the “value” of risk-adjusted returns is subjective. Therefore, the leap of logic this article makes which argues that the transition from risk-tolerant strategies to more highly risk-conscious strategies is a negative outcome seems to be unfounded.

(ii) While the vested clients of an acquired fund may indeed demand specific risk taking and divest from the fund upon acquisition, bankers tend to have contingency plans for streaming in investment. In other words, who is to say that the bank cares about divestment from the fund by pre-acquisition clients? Is it unreasonable to say that the bank is capable of replacing those lost AUM and management fees, or eve that it may prefer to do so? Why?

I find it rather difficult to validate some of the logic in this article. That said, the points about the principal-agent problem between PMs and banks are very interesting. Is there any empirical data that evidences this issue?