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  • A Look Inside The Fama-French 3-Factor Model [View article]
    I like the tree analogy.

    Who would invest in crap, expensive, tiny companies? retail investor gamblers! they are all over the bulletin boards. These little guys get fleeced every day, every week, on the latest 'hot' commodity/oil stock/other scam. I actually don't have the figures to hand, but I suspect that small cap growth is dominated by a small number of tiny companies that do very well from a very low base. The majority are terrible investments. Similarly, 'boring' stocks that don't grow too fast (~inflation at revenue line + operational gearing + financial gearing) and pay nice covered shareholder yields (dividends + share buybacks + debt pay down (e.g. tobacco)) are great investments and you should fill your portfolio sky high with these.
    Aug 5, 2014. 07:00 AM | Likes Like |Link to Comment
  • A Look Inside The Fama-French 3-Factor Model [View article]
    True. But momentum works in many markets (indeed, better in FX/interest rates/macro, google trend following articles), and I'm told that simple momentum strategies have historically worked very well in asset allocation, so you can use that. MPT is a nice theoretical model but is flawed in practice because markets aren't efficient.
    Aug 5, 2014. 06:54 AM | Likes Like |Link to Comment
  • A Look Inside The Fama-French 3-Factor Model [View article]
    Investors pay for negative alpha all the time, at least after the formerly extortionate compounded fees levied by fund managers. Such is the nature of this dreadful investment industry. Or perhaps I am missing your point!
    Aug 5, 2014. 06:50 AM | Likes Like |Link to Comment
  • A Look Inside The Fama-French 3-Factor Model [View article]
    In aggregate, but there is quite a lot of research showing that their best ideas outperform. The problem, in my view, is the structure of the industry, with very few active fund managers actually doing what they say they will do for clients. ~25% of 'active' fund managers in the US have been shown statistically to actually be passive trackers, charging high fees. I hope that the current growth in quant strategies will change this for the better, forcing fund managers to be benchmarked more sensibly (e.g. read the excellent 'Buffet's alpha' paper), over longer periods of time.
    Aug 5, 2014. 06:48 AM | Likes Like |Link to Comment
  • A Look Inside The Fama-French 3-Factor Model [View article]
    That is one data point, and those academics were derivatives experts, not systematic equity investors. Keynes was apparently a great investor, and there may be others. However, I do agree that academia is stuck in a rut regarding market efficiency: its pretty clear, just from the name 'Efficient markets Hypothesis' that the idea of market efficiency has always been merely an idea with little evidence, and yet every piece of academic research assumes efficiency as its starting point, and when sensible, logical investment approaches are found to work (using large, market-wide data sets without much refinement), they are referred to as 'equity market anomalies'. Not a terribly scientific approach ...
    Aug 5, 2014. 06:44 AM | Likes Like |Link to Comment
  • Which Is The Best Tobacco Stock In The Industry? [View article]
    Hi, decent summary. I'm out of date but used to cover the sector (European tobacco stocks + US + Japan tobacco). LO is the highest quality tobacco stock: if you go back a bit further, you will see that it trounced peers on sales growth for the last 5 years. It has lower margins perhaps because it has lower market share than peers, but it has a very strong exposure to African American smokers in democratic voting states who are incredibly loyal to menthol and, specifically, its Newport brand. Its also growing share and has potential to expand its geographic footprint more than MO, suggesting that it may have a higher long-term sustainable growth rate. It also has more exposure to e-cigarettes, a small division but growing incredibly fast, and not something that one can ignore (but I've not done analysis on this myself). MO is a great, extremely well-managed company with a leading global consumer brand (Marlboro). There are two other factors to be considered: MO's stake that it owns in SAB Miller (so PM is cheaper than it in fact appears: subtract SAB from the market cap and recalculate the PE etc.) Secondly there is some 'dodgy accounting' ... MO's free cashflow conversion is consistently sub par, I seem to recall that this is because they have a financing arm hidden in the accounts; this reduces the quality of the company further, I also seem to recall that there were concerns about the financial position of this division in the dark depths of 2009.

    On PM, this is a great, well managed company, but it trades at a premium, mainly due to the fact that american investors never seemed to fully understand the strong pricing power in the industry and were overly concerned on volume growth, and also the litigation situation which has dragged on since the '90s. They are also attracted to its international nature, including emerging market exposures, which resulted in positive volume growth trajectory, particularly in emerging markets, but also PM is thus compared with Imperial Tobacco and British American tobacco and much more widely held by many non-US institutions. But what they fail to grasp is that international exposure means more risk: on the one hand you have diversification amongst geographies, which is arguably a good thing, but on the other you have a large FX risk. You may say that the dividend is covered, but I recall Imperial tobacco being forced to cut their payout ratio because they had benefited from FX movements (eps +25% due to FX alone in one year) and were fearful the payout could not be maintained: the point is that the city had all penciled in the wrong dividend expectations and thus the stock suffered when everybody downgraded (and buy-side investors were really angry). FX exposure represents a real fundamental risk which US tobacco stocks do not experience to anything like the same degree (perhaps a little in their cost line although most of their tobacco is produced in Southern US states; lets not forget that the success of the US was built on the cotton and tobacco trades!). Finally for PM, I have spoken to a top hedge-fund broker and they are now short the stock! why? because China is introducing a smoking ban. China is ~1/3 of PM's business I believe, its the largest market in the world, and was a significant part of the long-term story for buying PM. Finally, when one considers valuation, LO is always a very cheap stock (perhaps due to fears surrounding a ban on Menthol; very unlikely if you ask me given the democrat voting profile, but Menthol looks likely to be banned in the EU so the fears are not entirely groundless), whereas PM has traded at a significant premium for the reasons discussed. When one considers share buybacks and dividends, the total capital return from Lorillard was in excess of 8% when I last looked. The stock is up about 10% so this won't have changed that much. All in all, LO is the one to own! internationally, when I last looked, Japan tobacco offered the best value and growth (it bought Gallaher a decade ago which was a very aggressive discount brand exposed to emerging markets). Once China fears are out of the way, it could be a great time to get back into PM. For now I would avoid and stick with LO, MO. And of course Swedish Match! good entry level right now. That is the highest quality tobacco-based business in the world. Snus and Snuff. I'd better stop now, I didn't mean to start writing!
    Mar 1, 2014. 06:01 AM | 3 Likes Like |Link to Comment
  • Statoil: 5% Yield And Cheap Valuation [View article]
    err. I was just being honest: I haven't followed the latest news on that litigation (and even if I had, from previous experience of following litigation issues, and some knowledge of the oil industry, these things can drag on for years).

    If you are going to rubbish my post, please me constructive. You might like to start with (i), (ii), and (iii) above.

    .I have 7 years experience as an investment analyst for a variety of hedge funds. You can download my free research template for the tobacco industry which I use to educate young university grads who want to enter the investment industry from a public dropbox http://bit.ly/12G53Ez.

    And you? ...

    Maybe I will turn out to be wrong on STL. I'm just sayin ...
    Jul 11, 2013. 07:46 AM | Likes Like |Link to Comment
  • Lorillard's Saving Grace [View article]
    nonsense: google the evidence. In fact, Nicotine is being widely researched as having potential medicinal benefit. And of course, it depends on the dosage: too much nicotine will kill you outright. But thats true of caffeine too.

    Be here now: I'm talking about the total return yield: divis + share bbs. 9% is the correct number. Really one should look at the FCF yield, but investors focus on total return yield, and particularly divi yield because they are getting the cash out of the company/increasing their stake. Of course, this also means that future growth prospects are lower (its otherwise better to reinvest cash in the business), but we know that. In fact, LO's growth prospects are likely better than MO and RAI (provided menthol does not get banned. Note European parliament news today, but bill has not yet been passed and does not affect LO unless a similar motion is passed in the US; that seems unlikely but then until 4 years ago, I thought the US was a free market democracy so anything is possible.)
    Jul 11, 2013. 07:40 AM | Likes Like |Link to Comment
  • Lorillard's Saving Grace [View article]
    LO's stock price is more volatile than peers. But thats irrelevant: its fundamentals are less volatile than peers (just put sales and EBITDA growth side by side with MO, RAI, IMT, BAT etc. for the last 5 - 10 years).
    Jul 11, 2013. 07:34 AM | Likes Like |Link to Comment
  • Statoil: 5% Yield And Cheap Valuation [View article]
    (i) Oil prices are falling, driven by fracking gas imports from the US, and potentially soon European supply. This undermines the sustainability of the dividend as these companies have high fixed costs and are geared to the oil price. Theres a strong historical correlation with gazprom, which has fallen heavily ... can statoil resist gravity forever?

    (ii) If you look at Statoil capex, its been increasing rapidly, whilst production has been ~steady. Spending more money to stand still is not likely to have a happy ending.

    (iii) Statoil is currently undergoing investigation for price fixing along with other oil majors. Whilst I'm uncertain as to where those investigations are currently, I suspect it could drag on and its potentially far bigger than the problems which hit BP ... just think about it. Banks fixed Libor which is on a far smaller scale than oil companies fixing the oil prices as that affects the cost of *everything*. Just sayin ...

    (iii)
    Jul 8, 2013. 06:16 AM | 1 Like Like |Link to Comment
  • Peter Schiff Has It Totally Backwards - Gold Is Not Going 'To The Moon' [View article]
    "Gold has gone from about $250 to $1,800 when there was no real inflation". Sure, if you look at the official inflation statistics. If you look at the cost of property, education, healthcare, and many other staples of life, a different picture regarding inflation emerges. You could also say that Gold's drop to $250 was rather over-done. So what should the real 'fair' gold price have been given the huge inflationary forces clearly at play in the global economy since the $ was de-pegged from the gold-standard? Central banks have two choices: create a wealth-transfer back to the consumer to support current asset prices, or monetize the large levels of debt which led to the asset bubbles. The former is not possible under our current system and wage-growth remains stagnant having *fallen*. The reason we don't see the inflation now is that its already happened in the past, driven by a credit bubble ... what is happening is debt monetization. Although I have seen some charts which suggest that in gold terms property prices are back to their means i.e. gold could be fairly valued. Its prospects from here on out are tied to what central banks do however. If you believe QE is over, it may fall in $ terms, however, I believe that QE in other parts of the world (e.g. Eurozone) has just started. Gold is an insurance against total collapse, but I suspect its bull market may still be early stage given that the imbalances in the global economy have actually got *worse* since 2008.
    Jun 18, 2013. 07:27 AM | 1 Like Like |Link to Comment
  • Gold Liquidation Now Accelerating [View article]
    I don't disagree. But I would argue that just because the $ story has improved, the situation in much of the rest of the world remains grave. You have desperate 'Abenomics' in Japan which put pressure on Europe at a particularly difficult time whilst China continues to slow: Europe is likely to debase their currency soon (after German elections in the autumn I suspect), the Chinese and others may soon follow suit (there was an article in today's financial times complaining about Japanese policy), and this will affect other currencies such as the £. Whilst there may be fewer american buyers, there could be many more from other countries; remember there are only ~300 million americans compared with more than 6 billion people in other countries whose economies are currently struggling! there are 800 million europeans and another 2 billion asians alone whose currencies have remained relatively strong to date ...
    May 22, 2013. 03:16 PM | 4 Likes Like |Link to Comment
  • The Bull Case For This Tobacco Company [View article]
    (i) Japan tobacco international is the fastest growing tobacco company in the world, not PM.

    (ii) China's tobacco company is by far the largest in the world with ~>30% market share.

    Prefer Lorillard (safer, more resilient growth with total yield of ~8% (divis + share bbs), or imperial tobacco which has FCF yld of ~8% and is also returning >7% via divi + share bb. Not that PM is by any means a bad investment; its great. I just feel the others are all good and substantially better value.
    May 7, 2013. 04:37 AM | Likes Like |Link to Comment
  • Yields Of 5.3%-23.2%: How Investors Can Turn Gold Into Even More Gold [View article]
    its not gold that is volatile. Its the lousy paper money in which it is priced. That said, I believe in diversification. Nobody knows what the future holds ... or even what the 'real' rate of inflation is. Last I saw, in the UK it was 8% in 2011 and fell to about 4 % in 2012. The underlying theme is deflationary as we know, but how much inflation we get depends on a number of factors including how much money gets printed by central banks. The last time we saw debt levels as high as they are was after WW2 and we had 20 years of 'financial repression' in which real interest rates were negative. It seems intuitive to me that a yield of 5% is not high enough today to offset what the bankers and governments are going to do to savers to inflate away the debt in the system. Therefore I'm quite happy to hold some gold; there are still a few good companies with free cash flow yields of between 5 - 10%, and indeed there are companies which are returning 7% pa (e.g. a few tobacco stocks like Lorillard and Imperial tobacco) but there are others too. However, I think that these may well become more expensive until their yields drop to less attractive levels at which point yield will not save you from inflation and it will be very difficult to get a 'real return'. So frankly, the fact that gold doesn't pay a dividend doesn't bother me because even with yield investments you are effectively just losing money at a lower rate. The real question is 'what is the value of stuff in Gold. Is gold expensive today'. I don't have an answer for that question. I've seen arguments ranging from 'fair value' today, up to 'its worth $2500 all the way up to $55,000 (monetizing 100% of US debt and adjusting for historical inflation levels). Whilst it could fall further in the near term, this seems unlikely (and especially given the fact that governments worldwide seem to have caved in on austerity overnight as the world is slowing (also Reinhardt and Rogoff scandal but the reality is that their number was never statistically significant anyway; nobody has enough data to know irrespective of spreadsheet errors and extra data). So the printing presses are being fired up again, and indeed they may begin in Europe too after the German elections in the Summer. I'd be happier owning some gold as a form of diversified insurance, wouldn't you? its already done rather well for precisely this reason. And most of the world (India/China) already views it as a currency/store of wealth via jewellery so it is hardly a 'barbarous relic'.
    May 6, 2013. 03:54 PM | 2 Likes Like |Link to Comment
  • An Ideal Company By Warren Buffett's Standards [View article]
    Hi there,

    it looks like a good company, but also look like its deteriorating a bit: just eyeballing my automatically generated spreadsheet model, I can see that ROA, and ROCE slowed last year, whilst admittedly bumpy and very attractive at 11.4% and 65% respectively, ROE has been falling for the past 3 years in a row from 19.9% to 16.5% in 2012 driven by a decrease in asset turns, suggesting that the company has been investing more to generate the same level of sales (although I don't see this immediately when I look at CAPEX and D/(PPE+nonGW intangibles of 7% implying life of assets of ~>10 years with CAPEX/D ~100% looks a bit low if anything)), cash conversion has also deteriorated slightly every year from 120% in 2009 to a still very healthy 97% last year,
    and then I note that sales growth was -3% last year, and EBITDA growth was -13% with a -14% growth in free cash flow compared with previous 3 year sales growth CAGR of 1.5% and EBITDA CAGR of 2.6% which makes consensus forward 3 year CAGRs of 3.2% and 10.4% look somewhat optimistic. GP mgn of 30% is pretty good, EBITDA mgn of ~10% is OK, GP/avg Assets of 65% is good quality although ROA is less inspiring. Overall, its clearly a very good quality company albeit with some operating deterioration.

    I note that while total capital return yield (divis + share buybacks) for '12 and '13e doesn't look too bad at ~5%, the company cut its total capital return (by reducing share buy backs) in both '09 and '11 leaving only certainty being a paltry 1.3% divi in '13e; FCFe yld is ~4.5% so the 5% level is sustainable at present, and the company is net cash (ND/EBITDA of -1). Fundamental momentum is average with a piotroski F-score of 5 in '12 vs 7 in '11 which seems consistent with the impression of slow-down/mild deterioration. Accruals on both Sloane TACCbs and Russel-Lundholm operating accruals have deteriorated each year from -1.9% in '10 to 25.6% in '12, and from -38% in '09 to -11% in '12, suggesting a reduction in earnings quality there. 8-factor Beneish M-score of -1.1 also suggests there could be some accounting treatment, although this is by no means for certain; only the increase in accruals as % of total assets is evident as the cause.

    Finally on valuation front, whilst relative valuation multiples don't look challenging with EV/sales of 1.0x, EV/EBITDA 9.7x which isn't low but EV/FCFf of ~18x is a bit on the high side, PE ~19x and PEg ~1.1 (thats ok), P/B ~3.62x.

    Given the slowdown and deterioration in quality, particularly at the accruals level, a WACC of 10% seems appropriate. Doing DCF on that basis, using terminal value of 2%, gives a fair value of 37.35, a 4% premium to the current price. Given that I think consensus could be optimistic there could be some downside risk, the stock doesn't look terribly attractive.

    So in summary, high quality company, but some deterioration in earnings quality, particularly in 2012, and a visible slowdown in earnings, coupled with a valuation that is probably slightly expensive given the risks (unless you believe the WACC should be lower; 8% still only gives 33% upside however), suggests that risk/reward isn't terribly attractive and there are better investments at this point in time.

    Interesting article though, and company looks like its worth a closer look. My assessment above is based only on 5-year historical headline numbers and 3-year forward consensus and has not involved any fundamental research of the business itself.
    May 1, 2013. 05:23 PM | 2 Likes Like |Link to Comment
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