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DanielHolzman

DanielHolzman
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  • Intrinsic Valuation Of The S&P 500 [View article]
    I want to thank the author for an interesting and well presented analysis of DCF valuation of the S&P 500. There are of course other ways to develop an "intrinsic value" for a financial instrument, many of which have been discussed in various articles on SA and other sites.

    The critical question I have difficulty understanding is the connection between the "intrinsic value" of the S&P 500 and the price an individual investor, or the market, is willing to pay for the financial instrument. The author apparently believes that if the intrinsic value of the S&P 500, as determined by DCF, is above the current selling price, then it is likely that the price will rise. At least I think that is what the author is saying. And similarly, if the intrinsic value is below the current selling price, then the S&P average is likely to fall.

    Is this a fair understanding of the point of the article? Clearly one of the critical difficulties in predicting market direction is that, as the author has clearly noted, the "intrinsic value" depends on several variables which have no absolute value, but are simply estimated based either on historical data or some sophisticated mathematical analysis of the economy. Since stocks are traded at auction by millions of potential buyers and sellers, about whom we know little, it is certainly possible that there are thousands, perhaps millions, of opinions about what the "intrinsic value" of the S&P is at any given time.

    Even if we assume, without proof, that the average investor makes decisions about buying and selling based on the difference between current price and their personal intrinsic value, what actionable investment advice can we derive from this? Everyone has a different intrinsic value, we don't know anything about the distribution of those values, so how can we evaluate whether the market is oversold or overbought at any given time, let alone determine probable movement direction over an investment timeframe?
    Aug 27, 2015. 10:05 AM | 4 Likes Like |Link to Comment
  • Natural Gas Is Likely To Head Higher [View article]
    "I believe there's a good chance it might head higher in the short- to medium- term."

    I had trouble understanding this sentence, which I think is a prediction of sorts. Does the author mean that there is a better than 50% chance that the price of natural gas might head higher? Is that meant to be an actionable investment thesis, or some sort of probability puzzle?
    Aug 26, 2015. 07:40 PM | 2 Likes Like |Link to Comment
  • In Today's Overheated Market, Control Risk In Your Retirement Portfolios With Sound Valuation [View article]
    This is a very interesting article in a long line of articles with similar themes presented by the author. I believe the author is correct in terms of valuation of the company based on long term profits that the company is expected to earn. The intrinsic value of the COMPANY can be modeled based on some form of discounted cash flow, as the author likes to do with his FAST graphs and other tools.

    Here is where I differ with the author. The author appears to believe that the intrinsic value of the STOCK can be computed based on dividing the intrinsic value of the company by the number of outstanding shares. When the stock is trading above this figure, the author argues that the stock is overvalued, and of course if the stock is trading below this value, the author argues that the stock is a bargain, and will eventually return to "fair valuation".

    This seems obvious, yet I have never seen any hard evidence that the intrinsic value of stock can be derived by dividing intrinsic value of the company by the float. Certainly in the case of Cisco, the author carefully points out that the stock has not traded at what he argues is fair value for ten years. In fact, Cisco stock may never trade at fair value, except on those rare occasions where the market price just happens to intersect with the "intrinsic value" as determined by the author. This might happen as infrequently as once or twice per decade.

    If the assignment were to develop an intrinsic value of the company on behalf of a potential buyer, then certainly DCF is an appropriate tool to value the company. No doubt folks like Warren Buffer do some sort of DCF to determine how much to pay for BNSF or Kraft or whoever they are buying next.

    However, buying a few shares of stock is radically different than buying the company. I know that there are those who argue that buying stock is buying a piece of the company and its future earnings, but that seems to me to be a stretch at best. Walk into corporate headquarters, wave your shares at the front desk, and ask to speak to the CEO. Not likely to happen. In fact, unless you own a large portion of the shares, your opinion about how to run the company is totally irrelevant to those who run it.

    At best, it might be argued that you should buy stock "as though" you were buying the company. There might be some merit to this argument, perhaps it is better to buy stock in a company that you would like to own as opposed to a company where you think the stock might appreciate, but you don't really like the underlying business, perhaps for ethical reasons.

    My conclusion after studying this matter is that stock price and intrinsic corporate value are disconnected. Stock price, whether it be over the short term, medium term, or long term, is driven by investor psyche, which is controlled by a great deal more complex issues than how much profit the company actually earns. Unfortunately the most sophisticated, carefully performed valuation of the company may have little or no value in predicting the direction of stock price over the short, medium or long term.
    Aug 20, 2015. 01:26 PM | 13 Likes Like |Link to Comment
  • Emerge Energy Services - Buy The Drop For Long-Term Gains [View article]
    Perhaps the author can help me understand the business of frac sand better. The author carefully notes that frac sand consumption is increasing, both on a per well basis, and on a total basis. The author also notes that frac sand pricing has been hammered over the last year or so. The author attributes this to the drop in the price of oil. This part I do not understand.

    Conventional economics suggests that the price of frac sand is driven by the relative supply versus consumption. The author claims that consumption is up. The author does not discuss total supply, which presumably consists of the amount of sand produced by Emerge and its competitors. But I do not see why the price of frac sand is directly connected to the price of the product (oil) it is used to produce. That would be like claiming that if Starbucks lowers the price of a cup of coffee, that would cause a drop in the price of beans. Exactly the opposite of what economics suggests.

    If Emerge is getting hammered on pricing, that is likely because there are competitors out there willing to sell a similar product at a lower price, not because oil goes up or down. I could see reduced oil price resulting in a reduction in drilling and fracking, which would reduce total consumption of frac sand, but the author claims quite the opposite. So help me understand the economics of the game.
    Aug 19, 2015. 08:14 PM | 1 Like Like |Link to Comment
  • Stillwater Mining: Deteriorating PGM Market Is Now In Plain Sight [View article]
    I am a bit confused by the conclusion reached by the author. The author carefully points out that the platinum and palladium market is heading downward, both in terms of pricing and consumption. The author notes that this is not likely to change for a year or more. Based on this data, why would the author recommend purchase now, rather than waiting a year or so, when by the author's data the price should be lower? Does the author believe that the Stillwater stock price is going to appreciate in advance of the theoretical uptick in PGM pricing? If so, what is the basis for this belief?
    Aug 18, 2015. 12:46 PM | Likes Like |Link to Comment
  • Greenbrier Is Our Favourite Rail Car Manufacturer [View article]
    This was a well researched, well put together article on a relatively obscure company in an important sector. I want to thank the author for sharing his knowledge with the SA community.

    I have some knowledge of the railroad industry, and I certainly agree with the author that railroads are generally slow to adopt new technology, perhaps because conservatism is baked into their DNA. At one point the author noted that slowing backlog would likely reduce profitability of Greenbrier. Perhaps the author can expand on this seemingly critical point. Does Greenbrier have options to maintain profitability in the face of a reduction in new car orders, for example shifting of production to lower cost facilities, reduction in workforce, automation of production, that sort of thing. And even in the face of reduction of growth in new car orders, how quickly does this begin to impact profitability? They still seem to have a large backlog, will it take several years to impact profits, or does the author believe the impact will be more immediate?
    Aug 18, 2015. 08:39 AM | 2 Likes Like |Link to Comment
  • Don't Try To Time Micron, Just Buy Now [View article]
    Micron is a classic case of a company with one value, and a stock with another. If you were going to buy the company, it might well be worth $30 a share, based on cash flow, potential growth, and market position. The stock is a completely different story. Since the value of the stock is strictly based on a daily auction, any discussion about the intrinsic value of the company must account for the apparent disconnect between company value and stock.

    The author has noted that investor sentiment is poor based in part on weak management, concerns about the future of DRAM, and lack of excitement about the XPoint product. Analyst projections about future profits seem to vary significantly, based on what assumptions are made about the future of DRAM vs. NAND memory, the future of XPoint, and the future of the management of Micron. Certainly one thing is clear, a tech company trading at 6 times earnings is an anomaly, and until investors choose to believe in the Micron story, the stock cannot recover to 15 times earnings or whatever you choose to believe it is "rally" worth.

    In disclosure, I own Micron shares, I am currently selling covered calls on them, based on my belief that a buyout is not imminent. I could be totally wrong, someone may buy them tomorrow, and I will lose out on the potential profit, but that's the game.
    Aug 15, 2015. 01:32 PM | 7 Likes Like |Link to Comment
  • 2015 Exposes Shaky MLP Fundamentals [View article]
    This was an excellent article, written in a way that I could understand. I always suspected there was hidden risk in MLP's, else why the high returns, but I never understood where the risk was buried, or how to estimate it. Nice to have an article that disassembles MLP's and presents a clear eyed view of how they work.
    Aug 14, 2015. 04:34 PM | 11 Likes Like |Link to Comment
  • Further Devaluation Of The Yuan Will Drive Gold Prices Higher [View article]
    As a US citizen, and not familiar at all with FOREX trading, how exactly do I buy gold using yuan, for example, and how does it affect my rate of return if I buy in yuan and sell in dollars?
    Aug 14, 2015. 01:59 PM | 1 Like Like |Link to Comment
  • Is First Solar Worth The Risk? [View article]
    "First Solar definitely has potential in this space because its cadmium-telluride panels have a higher theoretical upper limit, so the company is targeting efficiencies close to 20% by 2017."

    This statement is certainly true, in that the bandgap of cadmium telluride is about 1.5 ev versus 1.1 ev for silicon, meaning that in theory CdTe cells can achieve a higher efficiency than silicon cells. However, the theoretical efficiency of silicon is approximately 29 percent in diffuse sunlight, and the best cells commercially available are around 15%, so silicon certainly has a long way to go in terms of achieving maximum potential. See http://bit.ly/1WmiJDd for more details on the theoretical limit.

    CdTe has a more favorable bandgap, so could in theory achieve 33% efficiency. CdTe is around 16% commercially, so it too could theoretically double in efficiency. The key issue is cost, it is far from clear how much it is going to cost to boost efficiency for production modules, so betting on silicon versus CdTe versus a potentially completely different type of cell (see http://bit.ly/1WmiGHo for a long list of alternative types of photovoltaic technologies) is something of a gamble.

    My take is that success in the photovoltaic business will be driven more by the ability of the manufacturers and installers to differentiate themselves based on total installation cost, and not so much by the efficiency of the individual cells, or even the cost per watt of the cell, since the cell represents perhaps ten percent of total installation cost.
    Aug 13, 2015. 01:13 PM | 3 Likes Like |Link to Comment
  • Chesapeake Energy - Why The Turnaround Will Continue After Q2 Results [View article]
    Perhaps the author can comment on the earnings for CHK. According to Fidelity, CHK lost $5.72 per share in the quarter ending 5/6/2015, and lost $6.27 per share in the quarter ending 8/5/2015. If those results are accurate, it would appear that voluntary bankruptcy must be a consideration for the company at this time, not mentioned in the article.
    Aug 13, 2015. 11:49 AM | 5 Likes Like |Link to Comment
  • Left For Dead: Gold Miners May Finally Be Worth Buying [View article]
    My concern with buying gold mining stocks is that the company may go bankrupt either voluntarily or involuntarily, similar to what is happening in the coal industry. Nothing wrong with bankruptcy, it is a time honored part of the capitalist system, wipes out debt, eliminates high priced labor contracts etc., but of course if you happen to own the stock you get hammered. May be better to wait a little while longer, see which companies go bankrupt, then consider buying newly issued stock after bankruptcy, if you think gold has a future.
    Aug 13, 2015. 11:31 AM | 1 Like Like |Link to Comment
  • The Coal Industry Is Ready To Implode [View article]
    Articles predicting the imminent demise of coal are premature in my opinion. Certainly many of US coal companies made spectacularly bad decisions about acquiring expensive assets several years ago, resulting in their current desperate financial situation. However, the fact that many coal companies will go bankrupt is nothing more than the brutal workings of capitalism. These companies will emerge from bankruptcy leaner, having dumped the majority of their debt, wiping out union contracts, and shedding perhaps some of their responsibility for cleaning up existing mines. Then they will continue doing what they do, namely mining coal.

    The coal industry will continue to supply perhaps a quarter of the U.S. electricity market, and higher fractions in other countries. Coal plants provide baseload power, which is essential to the operation of the grid, and simply cannot be supplied effectively at this point by solar or wind power due to the intermittent nature of solar and wind. The alternative baseload power generation comes from nuclear or gas fired power plants. Despite the recent uptick in nuclear generation, there is no likelihood of more than 100 new nuclear plants being constructed worldwide over the next 20 years, and it is likely that 25 or more nuclear plants will be retired in the same period, so nuclear is not going to supply worldwide baseload power.

    Possibly natural gas will supply the required baseload power, however most of the world does not enjoy ample supplies of cheap natural gas, unlike the U.S. So certainly solar and wind will continue to increase total installed capacity worldwide, but like it or not, coal is not going away, at least within the next 20 years. From an investment standpoint, I would suggest considering purchases of US coal companies after they emerge from the bankruptcy process. If they have a smart, tough management team, they might be able to earn a profit in a tough business, and might then be a good investment. For the really aggressive investor, buying bonds from a company looking at bankruptcy may be a good play, but this is for those with a cast iron stomach, who do their research carefully up front.
    Aug 10, 2015. 09:10 AM | 3 Likes Like |Link to Comment
  • Alpha Natural Resources Files For Chapter 11: What Now? [View article]
    Claims of the demise of the thermal coal industry are a bit premature in my opinion. Not the individual stocks, likely they will all go bankrupt either voluntarily or otherwise. But the industry will live on, and will simply adapt to a lower percentage of electricity generation than it currently holds. The metallurgical coal industry is more complex, as primary blast furnace steel making is very competitive, and the entire metallurgical coal market has a lot of overseas competition.

    Investing in a U.S. coal stock at this point is certainly risky, anyone bold enough to consider it may want to purchase protective puts, if they are available at a reasonable price. An interesting way to play the market would be to consider purchase of the stock after the company emerges from bankruptcy, or maybe even before. I recall that American Airlines went bankrupt a few years ago, yet the stock in bankruptcy turned out to be a great investment.
    Aug 6, 2015. 02:36 PM | 1 Like Like |Link to Comment
  • Oil Plunge An Opportunity Of A Lifetime For Certain Investors [View article]
    The note below the article indicates that the author has no position in any of the stocks mentioned, and no intention to purchase in the next 72 hours. So presumably the author is not one of the "certain investors" for whom oil is now the opportunity of a lifetime. Perhaps the author can more fully explain who the "certain investors" are who should jump into oil now, and why he is not one of them.
    Aug 6, 2015. 09:00 AM | 1 Like Like |Link to Comment
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