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ForMyOwnAccount is a seasoned Wall Street veteran and former buy-side investment manager schooled in the Graham & Dodd approach. He now regularly employs the long-term investing principles he practiced for years. He will trade anything and everything for his own account on both the long and... More
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  • Apogee Enterprises: An Undervalued Equity


    It's Super Bowl Sunday, the Saints came marching in, and it was a close game.  Yet I'm more excited about a small cap company called Apogee Enterprises (NASDAQ:APOG) than I am that the underdog Saints won tonight.  

    The Super Bowl saw two excellent quarterbacks compete; yet they are far from the top five quarterbacks of all time.  The Associated Press ranks the following as the top 5 NFL quarterbacks of all time:  1. Dan Marino; 2. Joe Montana; 3. John Elway; 4.  Johnny Unitas; and 5. Fran Tarkenton.  Their ranking is based strictly on the stats.  

    I base my buy decision strictly on the stats, too, and the numbers on APOG are good enough to make a plausible long-term investment thesis for APOG.  Apogee provides products such as special glass and engineering services for commercial buildings.  Their products reduce the amount of energy that commercial buildings need to operate. 

    It so happens that commercial buildings consume almost half of all the energy generated in the US today, most of it during peak hours.

    Apogee currently trades at $13-14 per share.  That's (a) a market cap of under $400 million; (b) a Price/Cash Flow of less than 5X; and (c) a Price/Earnings of less than 9X.  The company has an ROIC of greater than 15%, very low debt, and a promising long term future.  APOG is a terrific play on the "green building" movement that is still afoot across the land. 

    Apogee  was mentioned two years ago by Cramer as an undervalued infrastructure/retrofit play, then forgotten when the company missed its earnings "guidance" one quarter.  In fairness to the company, Cramer had the CEO on after the earnings shortfall. APOG, like many other companies, got hit by the weak economy, cut-backs in efficiency improvements, and reduced cap ex.  This has caused the stock price to drift from about $20 to below $14.

    Here are the stats that count for me:
    1.  Mkt Cap/Sales:  APOG has a market cap of less than one-half of sales.  
    2.  Sales and Earnings Growth:  APOG has sales of about $800 million, down from a peak two years ago of just shy of $1 billion, and earnings fell accordingly.  But I expect top and bottom line growth to resume.
    3.  Debt-to-Equity Ratio:  APOG has almost no debt (under $9 million).
    4.  Quality of Management:  APOG has a dedicated and experienced management team that thinks like owners.  

    This may be an excellent long-term investment and a play on the recovery of the economy.  The possible negatives are, why pay a dividend when your ROI is in the teens?  And STOP GIVING WALL STREET ANALYSTS EARNINGS GUIDANCE.  It creates a short-term focus.  

    I am a possible buyer of Apogee Enterprises Inc. shares on dips below $13 unless the investment thesis changes. 

    Disclosure: No Position in APOG

    Feb 07 11:16 PM | Link | Comment!
  • WHY I HATE DIVIDENDS

    I see many articles, comments and blogs on Seeking Alpha that stress the importance of dividends and suggest that the dividend decision by boards of directors is a very important one and that a high or increased dividend is a good thing.  Just today, someone wrote "Earth to GE:  Boost Your Dividend."  You can read this article at seekingalpha.com/article/176927-earth-to....

    I could not disagree more.

    There is a long-standing controversy in the investment community about the relevance of dividends as opposed to earnings as the true source of value of a company's common stock.  However, economists Merton Miller and Franco Modigliani debunked the dividend argument in the 1960s with their Miller-Modigliani Financial Theory. 

    As the home page of Seeking Alpha today demonstrates, the love of dividends persists.  Why?  I can only attribute it to illiteracy about numbers (called "innumeracy") and a lack of knowledge of accounting.

    In the course of a firm's conducting business, that firm basically does only two things:  it generates revenues, and it incurs costs.  The difference -- the excess -- is called cash flow (if cash accounting is used) or earnings (if accrual accounting is used).  Dividends are paid out of these earnings or cash flow.  If dividends and new investment are greater than earnings, the firm may have to issue new equity, which is dilutive to existing shareholders. 

    If the firm has a stock price selling below its true value, or if it has investment opportunities where the net present value (NYSE:NPV) of the investment is positive, the firm should use those earnings to repurchase shares or invest in new projects that have a positive NPV.  By doing either of these, the firm INCREASES its value by retaining earnings instead of paying them out as a dividend.  Repurchasing its own stock increases the percentage of the company that each existing shareholder owns.  Investing in existing or new businesses that are profitable, i.e., have a positive NPV and high return on investment allow the firm to make more money with the money it did not pay out in dividends.  These are rational managerial decisions.  Paying dividends is seldom rational and often just a palliative for naive shareholders.  If those shareholders need cash, they would be better off selling off judiciously small amounts of stock at the more favorable long-term capital gains rate.

    As for GE, nothing could be more value destroying for the firm than a dividend increase.  GE should not merely have cut its dividend, it should completely eliminate it!  Mr. Immelt, drop the dividend entirely and buy back more of your own shares and invest in high return businesses!

    The dividend discount model has been discredited in most academic circles.  The dividend irrelevancy argument suggests that current stockholders are not better off -- or worse off -- receiving a dividend.  A company should not pay a dividend except when the firm has poor management that makes bad investment decisions with the retained earnings, or when management has a lack of positive NPV investment opportunities.  

    Dividends are not a tax-efficient way to return cash to taxable shareowners.  If you are a taxable investor, you pay a hefty (usually 35% or higher) tax on dividends received.  If instead, you let the company buy back its own shares, you effectively get that dividend in the form of increased ownership percentage -- without the accompanying tax liability.

    The founder of Seeking Alpha, David Jackson, in a great article opposing  dividends and written fully four years ago (http://seekingalpha.com/article/616-why-dividend-paying-stocks-are-a-mistake) asked the same question:  why do investors like dividends?  

    I simply do not know why.  There are strong tax reasons to avoid paying dividends.  There are deceptive signaling reasons why management likes to announce dividend payments and dividend increases. That is frequently misleading.  There is something called the "information content of dividends hypothesis" which suggests that management pays a dividend or increases a dividend because it has better information about the future of the firm.  

    For most taxable shareowners of most profitable companies, paying dividends is unwise.  Given how uneducated shareholders are, the paying of dividends strikes me as a kind of bribe and an exploitation of the ignorance of a firm's shareholder base.  An intelligent shareholder base, such as those of Berkshire Hathaway (BRK.A, BRK.B), know that they are far better off if the firm retains the earnings and reinvests them in high-return businesses.  [Note that Berkshire's own love of dividend-paying investments such as Goldman and GE stem from the favorable tax treatment that corporations get from preferred-stock dividends, namely that federal tax law requires corporations to pay tax only on 30% of a preferred stock dividend, while individual investors must pay tax on all 100% of the preferred dividend.  This means that fully 70% of the dividend that Goldman and GE pays Berkshire is tax free.  Mr. Buffett knows how to use tax laws to his advantage].

    Paying a dividend is to me a sign of management failure and/or bribery and exploitation of shareholder ignorance.  Attention all managers:  if your ROI is high, if a new project has a positive NPV, or if your stock is underpriced, PLEASE!  Don't send me a dividend check:  reinvest in the high return businesses or use the retained earnings to buy back as much of your own stock as possible.

    Now you know why I hate dividends -- and why you should too.  

    Happy investing.

     



    Disclosure: Long BRK.A and BRK.B. Long GE call options
    Dec 09 12:04 AM | Link | 10 Comments
  • What Is A True Contrarian?
    Does the word "contrarian" really mean anything anymore? If a large consensus says that U.S. stocks in the aggregate are overvalued, then I guess if you go long an S&P Index Fund, you are in some sense a contrarian, even though buying an index fund and holding it for years is the ultimate in conventional passive investing.

    What about someone who has a so-called hedge fund that, for lack of a simple label or pigeon-hole, is called a "flexible, multi-cap long/short opportunistic" hedge fund?

    First of all, the term "hedge fund" tells us very little.  I once ran a "for-sophisticated-investors-with-high-net-worth-only" pooled investment fund that went long stocks only and held them for a long time. I hedged nothing.

    Yet investment consultants and their clients insist on labels, so my fund got labeled an opportunistic, long/short hedge fund.  There is also the problem that, if you deviate from how the consultants label you, you can lose the engagement because of "style drift."  If you pop a big fat gain like John Paulson did when he bet on a collapse of the sub-prime market, and when asked, "how did you know?" I would be hiring the manager who struggles for words and can't quite tell you how he knew and then finally says "I felt it strongly in my gut."  Despite reams of empirical data that Paulson & Co., no doubt perused, it came down to what you feel in your gut and acting on that gut instinct. 

    I'm guessing nobody fired John Paulson for "style drift."  

    In my view, anyone who uses the label contrarian is just as blindly succumbing to labels as are the investment consultants and institutional investors who employ them.

    And frankly, I wish we would all stop using the term "hedge fund" and start using the term "private investment fund." Neither the term "contrarian" nor "hedge fund" is a true reflection of what good investors and traders really do.

    Yes, smart investors may have discovered over time that crowd behavior when it comes to investing can and often does lead to exploitable mispricing in securities markets.  But I would never invest in a "contrary" way just to be a contrarian.  I will only do so if I believe that I can profit by investing in securities where the conventional wisdom seems to be wrong.  

    I am not short Apple (NASDAQ:AAPL) because I have no sense that the widespread positive conventional wisdom about the company is wrong.  Indeed I wish I had played the long side of this stock that great day years ago when Steve Jobs came back to the company.  AAPL has the numbers to support the favorable view of the company.
    Ditto Goldman Sachs (NYSE:GS).

    And yes, sentiment indicators and size of the short interest may be good information to use when taking a contrary position on a stock, bond, commodity, or derivative.  But sometimes it's just this simple:  "the the trend is your friend."

    At the end of the day, the only thing that counts when you are running money, either your own or others, is your total return after taxes and inflation.  Period.

     



    Disclosure: Author has no positions in AAPL or GS
    Dec 04 3:23 PM | Link | Comment!
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