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Mr Spacely

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  • 3 Likely Benefactors Of The ICD-10 Medical Coding Switchover [View article]
    dgulick got it right on Nuance. This article got it wrong. Nothing irks me more than people on SA who write articles that are just flat out wrong. Regarding Nuance, this article got it flat out wrong. And the article started out so well too.

    Debt is the least of the concerns for Nuance especially when they have relatively low levels of debt in a low rate environment like we have today. What’s more important is the debt service. They have ~$2.5 b of debt which costs them ~$100m per year to service. That’s like a 4% all in cost - pretty cheap for a non-investment grade company. And yes, roughly $500m of their debt is a floating rate bank loan so they are exposed to rising rates, but the rate on the loan is 3M LIBOR +275. 3M Libor is like 25 bps and has actually come down over the last year. Plus 80% of their debt is fixed rate with nearly $1 bln being 2.75% converts. So this articles argument about debt being a concern and NUAN needing to pay it down is ridiculous and shows that the author knows nothing about corporate finance and how to capitalize a business.

    Plus, even after their $100m interest expense, they can generate AT LEAST $300m of FCF which can used for a number of items like invest in new biz dev, expand R&D, return to shareholders or if needed, pay down debt. This seems like a lot of flexibility for the company to what it needs to do.

    The reason that the stock sold off was that investors were concerned about the company's growth trajectory vs prior guidance, not because there was a concern with their debt levels. Take a look at NUAN's chart. You will notice large (~20%) drops after each of the conf calls in 2013 because the company adjusted future guidance each time. Debt levels were flat in 2013 except for the increase in Q1 which was used to fund the JA Thomas acq. This is the very platform that allows them to access the coding mkt and capture growth from ICD 10. As an investor, if you think they can get above WACC growth from the ICD 10 transition but pay below WACC rates (ie ~4%) to do it, it’s huge a win.
    Mar 21 04:20 PM | 2 Likes Like |Link to Comment
  • VeriSign: Short Signals Are Flashing [View article]
    I don’t disagree that valuation is in transition, but I take issue with the arguments presented. Take a step back to put into perspective the bigger picture.

    First and foremost, VRSN’s biz is about reconciling web addresses. They are given this job by ICANN which is the international agency overseeing web addresses. Their agreement with ICANN gives them exclusive ownership and the right to sell all .com and .net top level domain names. In exchange for this privilege, the company must maintain a minimum level of service which requires continual investment in a network of hardware and software. As long as they maintain that service, they can continue to sell and manage those TLDs and in essence, maintain a monopoly. We should expect mgmt to continue to do this.

    The reason sales were growing at those levels in 2012 was that both .com and .net could, by virtue of their agreement with ICANN, increase prices charged for domain names on average 7-10% a year. In 2013, the renewal of their .com agreement prohibited them from any further price increases. This removed a major growth driver since the bulk of their biz is .com names.

    That means growth going fwd will be limited. It will only come from unit increases in .com which is 1-3% per year, unit increases + price increases in .net plus growth in their services biz along with any new TLDs they win. Combining these sources means growth will be in the mid single digit range vs the double digit ranges seen previously.

    By the way, none of this is new to investors. Mgmt has been talking about this for over a year. So if you didn’t expect lower sales starting in 2H13, you weren’t paying attention.

    So what has mgmt done to address this? First, they issued new debt with the sole purpose of increasing EPS accomplished in two ways - buying back shares and getting a tax shield. Second, they recently announced a transaction that will allow them to repatriate a significant portion of their intl cash in a tax free manner. They havent yet said what they will do with the cash, but its a safe bet to assume they buy back more shares thus increasing EPS further.

    I dont deny that this is a gimmick but it is a known gimmick. None of what is happening with this company is a surprise. As an investor, that makes me happy and comfortable investing in the stock. It wont be a growth stock but with huge margins, a stable cost structure and thus stable cash flows, a new investor should assume the company will continue to return that cash to shareholders.

    This company has essentially gone from a growth stock to a value stock. The question is what price to apply to the new value stock.
    Mar 12 02:29 PM | 1 Like Like |Link to Comment
  • Low-Priced Stocks To Avoid: Round 9 [View article]
    Amen! I understand that this article is specified for (conservative) long term investors but if that is your investing style, then none of the stocks mentioned, either the ones to avoid or the supposed good comps, should be in your portfolio. These are tech stocks. Most are tied to consumers. Add those two together and you get 2x the volatility. Because of these factors, these should never be buy and hold stocks. But that doesn't mean an investor with a shorter horizon couldn't make money in these. In fact, professional investors love volatility because it creates opportunities to make outsize returns.

    None of these three stocks are blue chips, that goes without saying, so there is a higher degree of risk. That can be seen in the numbers above. AMD's trouble are due to the fact that they are largely tied to PCs and the introduction of tablets and larger phones has decimated the PC market. Intel, considered by many to be a blue chip, is in no different a situation. They may have more money to manage through it but they have the same negative trend impacting them. FLEX's volatility is tied to the fact that they are an assembler of hardware, much of it consumer, that goes through cycles. Imagine being the builder for the MOT Razr in 2005. You looked pretty good. Today you look like a clown.

    The real issue with these names is that they are all in transition. In the financial world, they are called special situations. These types of stocks require a significant amount of work before the purchase decision is made. If you are a conservative long term investor and don't want to do the work or don't know how, then stay away. But being a long term conservative investor doesn't mean you shouldn't do the work because if you do, you can be handsomely rewarded.
    Feb 27 11:54 AM | Likes Like |Link to Comment
  • Exide's Recent Price Collapse Was Unjustified [View article]
    @AInvestor, first thing, they said they will continue to operate, so Chap 7 is not an option. Second, at this point shareholder equity is a useless measure. Quite frankly, shareholder's equity is pretty much always a useless measure. You need to mark their assets to market. If you do that their net assets would be well below the stated $1.9 bln. Their market cap is ~16m which represents nothing more than option value that the judge might throw a bone to current equity holders. Unfortunately for equity holders, years of bankruptcy law precendence suggests that wont happen.

    The issue is liquidity. With LTM EBITDA of just 105m and NTM expected to be the same, they cant generate enough cash to fund the business and pay all their debts. If you are generous and give them a 6x multiple, that suggests the value of the biz is just over $600m. They have $170 in ABL debt, 675m in secured notes, 51.9m in cvts and just over 100m in general unsecured claims. As you can see, if the company is worth only $600m then the fulcrum security is the secured notes and they will recieve the lionshare of the reorg equity. The cvts will get a small recovery, think 5-15c, and the current equity holders will most likely be wiped out.
    Jun 11 09:53 AM | 2 Likes Like |Link to Comment
  • How Seagate Will Maintain Gross Margins And Continue To Trade Higher [View article]
    Great article and kudos for being one of the only people on SA (or even the Street) to acutally point out the relevant factors for investing in the storage drive industry.

    I have said these things many times in my comments to other articles about STX (or at least wanted to many times but often I didnt actually hit the Publish button). So many people missed this. I bought the stock at $16, before the Thai floods, on the belief that consolidation would lead to more rational (and higher) pricing. So far, I have more than doubled my initial investment and currently have a 9.5% div yield on my original cost basis.

    You're spot on with SSD as well. As has been pointed out many times on SA and elsewhere, there is simply not enough current SSD manufacturing capacity to create the storage capacity needed to fully replace HDD. That would probably need something on the order of $100 billion investment in facilities which is not going to happen next week. Until the time when those facilities are built, Seagate (and WD) will continue to print cash and buy back shares or increase their div or when needed, buy the capability of the smaller SSD players.

    One other thing, don't listen to the Street on these guys either. The sell-side equity machine is geared for high growth industries. The Street does not view disk drives as high growth. They view them as a melting ice cube. They have been wrong and will continue to be wrong.
    Jun 4 10:29 AM | 2 Likes Like |Link to Comment
  • OCZ: It Burned Me - Don't Let It Burn You [View article]
    Congratulations Ashraf. Your bio says you have degrees in Mathematics and Computer Science. It is safe to say that you have now earned your degree in finance and investments and Im guessing (hoping) it was cheaper than an MBA.

    Many of the items you highlight are included in the CFA materials in the quality of earnings section as red flags for earnings quality. But in the end it comes down to one thing - cash flow. You can't really game the cash number on a balance sheet and if its dropping while revs are increasing you need to seriously question what the company is doing.

    I praise your effort to highlight your mistakes. Many would be too proud to do so. And you provided pertinent lessons for all investors to heed. Again congratulations and thanks for the post.
    Feb 14 11:03 AM | Likes Like |Link to Comment
  • Is High Yield Overvalued? [View article]
    The time to invest in HYBs was Dec 2009. Not to brag, but that is exactly what I did in my 401k. I took HY from a 7% weight to 15%.

    I am now selling my overweight position down to a normal weight because the past 4 years of double digit returns are over and expected return is now only coupon at best. If you want to buy HYBs today, please let me know because I will gladly sell you mine.

    If you havent done so already, buy stocks, although I also bought stocks in Dec 2009 and have had a doubling of my money since. However, there is still room to go on stocks.

    BTW, the reason retail investors get burned is not because of Wall Street or some conspiracy theory, its because they are uneducated, dumb some might say. They will buy HY now because they see 4 years of great returns which is exactly the wrong time. Now is the time to buy the asset class that has had 4 years of low returns. Mean reversion and proper asset allocation are two of the most dominant (successful) themes in investing since the dawn of investing.

    Happy investing!
    Jan 11 01:01 PM | 1 Like Like |Link to Comment
  • The Network Effect: Why Apple's iOS Will Win The Platform War Over Google's Android [View article]

    I completely disagree about your view of Apple. I just recently got an iPad but for nearly the past 2 yrs I have had Android phone. The first thing I noticed about apps on the iTunes store was that all the reviews for competitor apps like Amazon, Dropbox, Google Drive, Youtube, Chrome, SkyDrive, Adobe, etc etc, got negative comments because they seem to be so buggy. That’s peculiar since I can run any of these apps flawlessly on my Android phone, but oddly enough, they have problems on Apple's system. And all the comments are directed at the programmers of the apps. How can this be? Do Google or Amazon engineers not know how to create a good app on iOS? Is there some magical talent that only Apple’s non-competitor engineers and programmers have? My personal opinion is that Apple deliberately makes it difficult for major competitor’s products to run on their platform so that users are forced to accept only what Apple provides. You seem to think that all consumers should be happy about this because Apple has a superior platform, but I think iOS is shit. The Android OS is much better.

    Here are some very simple examples. The keyboard on the iPad requires me to toggle to another screen to access commonly used items like an apostrophe or an exclamation point instead of allowing me to long press a key. And when I click a box in a form that could only be filled with a number, Android brings up the number keyboard because it knows you can only use a number whereas iOS brings up the letter keyboard which requires an extra step to get to the numbers. These may seem trivial but for those who only use Apple and swear by it, they don’t realize that they are being shortchanged. They get caught up in the hype and perceived status of that half eaten apple on their package.

    And finally, there may be plenty of people who are perfectly happy having Apple control all their devices and content, but I am not one of them and I know many people who stop buying Apple devices after their 2nd because they don’t want to be completely tied to Apple’s platform. So while yes, Apple will continue to take its 35-40% share because it is a competitive platform, I don’t see it every growing more than that. In fact, it’s exactly the opposite, the fact that its open, that Android will remain the OS of choice for many more people.
    Jan 11 12:09 PM | 5 Likes Like |Link to Comment
  • Taking A Longer Look At Apple's Secret Hedge Fund [View article]
    This article as well as Zero Hedge’s is pure sensationalism. Does anyone on here have any actual investment experience? Judging from the general quality of comments I would guess not. All the necessary information is given in the 10K.

    First of all, according to GAAP, in order to be included as cash and cash equivalents, these investments have to be liquid and of a short duration. According to the 10K, “All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.” GAAP states that to be included in current assets it has to be less than 1 year. This includes the short term marketable securities. Together with cash, these comprise $29 bln or nearly 1/4 of the total. The balance of the cash hoard, $92 bln, is in long term marketable securities. These are longer than a year but I would guess still not much longer than a year or two. And while I don’t deny that there are some equities included in the corporate bucket, why assume they are all equities? My first guess would be that they were investment grade debt with maybe some preferreds and a slug of high yield for extra juice. And if there are equities, they are probably low vol, div paying stocks.

    That means that this fund of ~$120 bln is basically a money market fund that moved out the credit curve as evidenced by the addition of MBS in last year. This idea is somewhat confirmed by the “Return on YE Total Cash” of 74 bps in my calcs below which uses the unrealized G/L from the statement of shareholders equity divided by the prior year end balance of $81 b. This isn’t clean because the unrealized G/L is for one point in time and the base is probably not the prior year end total cash and marketable securities, but it’s the best I can do with the data given. Plus the prior three years unrealized G/L has been 123m, -41m and 601m, none of which are large numbers. From the K, “The Company’s marketable debt and equity securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported as a component of shareholders’ equity.” This suggest that the marketable securities are short term in nature and don’t produce much in the way of gains. Additionally, if you follow the cash, you see that in 2012 they generated “excess cash” of about 39.4 bln, most of which they used to buy more securities, but the increase in total cash and investments was 39.68 bln. So, over the course of the year the additional 39.4 grew to 39.68 or 70 bps.

    If you look in the 10K, all investments are either Level 1 or Level 2 meaning that they are relatively liquid and easily priced. That would exclude private equity, credit default swaps, distressed debt, certain commodities and other hard assets and just about any other esoteric asset class which are generally the ones used by hedge funds.
    2011 2012
    From B/S
    Cash 9.815 10.746
    STI 16.137 18.383
    LTI 55.618 92.122

    Total 81.57 121.251
    diff 39.681

    From SOCF (Investing)
    Purchase -151.232
    Mats 13.035
    Sales 99.77
    Net Purchases -38.427

    From SOSE
    unrealized G/L on
    marketable securities 0.601

    Return on YE Total Cash 0.74%

    Follow the cash
    Cash From Ops 50.856
    Capex -9.402
    Acqs -0.35
    Divs -2.488
    Net share activity 0.79
    Excess cash 39.406
    Net investment purchases -38.427
    Diff 0.979

    What does this all mean? It means that this is in no way a hedge fund. It invests in plain vanilla, easy to value, easy to sell securities which is what it should do because that is prudent financial mgmt. Apple is not a hedge fund and if it were engaging in such activities, shareholders would/should be raising hell.

    The bigger issue, to which some have already alluded, is that Apple chooses to keep $120 bln in assets yielding probably not much more than 1%. This would suggest that they have no better options for this money and that they are too stubborn to return it to shareholders. If I were an Apple shareholder, I would be making a lot of noise about returning this cash.
    Jan 9 03:44 PM | Likes Like |Link to Comment
  • Taking A Longer Look At Apple's Secret Hedge Fund [View article]
    @Ben. I'd like to know where you got that tidbit of info or if you are being facetious. My friend is an elementary school teacher and wanted iPads for all his students. He teaches in the city and so getting a $700 iPad for a lower income student is difficult if not impossible. So he went to Apple to ask if they would help with a discount. Fat chance. Apple charged full price and wouldnt budge. In the end, he had to write a grant to a charitable organization that funded his purchase of 30 iPads at full price. This from a company that is sitting on over $100 BILLION in excess cash.
    Jan 8 11:56 AM | Likes Like |Link to Comment
  • Check Out Seagate's New Market Share And 4.5 P/E [View article]
    Uggh!! Why is it that none of the authors on SA can get it right on Seagate or the HDD industry. There have been countless articles over the past week alone that have plain just got it wrong on Seagate. It’s driving me mad. I have written rebuttals to just about every article but by the time I complete my writing, I cool down and talk myself out of clicking submit, realizing that in the end it’s not going to make much difference. I can’t take it anymore.

    Seagate's share didn’t go up because of the Thai floods. It’s true, the floods helped increase their share since WD plants were down while STX’s wasn’t. But the bulk of their share gain that you cite, 29% to 42%, came from the purchase of assets from Samsung not from the floods! Samsung added roughly 12-13% of share. By the way, WDC’s share of 45% is due to their purchase of Hitachi. This article’s analysis is no worse than some guy the other day who wrote in his article on SA that one reason to buy STX was that their EPS was forecasted to grow something like 300%. Really! That’s your reason? Did you look into why it’s expected to grow that much? They bought Samsung you dope! It’s not apples to apples.

    And then your comment on the folly of markets?! The reason the stock was down had nothing to do with their “record” results which again, were “records” only because they included Samsung! The reason the stock was down was because their forecasted Q3 was below what people were expecting. Those of us who understand the story weren’t focused on what they did this qtr with their record results. Those of us who know the story were focused on what they expect going forward because as you may have heard, the stock market is forward looking!!!!!!!!

    The only story pertinent to this industry and to this stock*, as you somewhat alluded to with your reference to the innovators dilemma, is that the industry is now made up of just 3 players - STX, WDC and Toshiba. For years, this industry was full of competitors trying to establish share and make money. Guess what, the only 2 who did were Seagate and WDC. I have a chart from early 2000s that shows Seagate made something like 120% of the entire industry’s profit over the preceding decade. Why? Because to grab share, companies were vicious on price. This was only compounded by the natural decline in ASPs caused by tech advancements. In the early 80s, there was something like 30 companies in the HDD sector. By 1990 that number cut in half. Just 2-3 years ago, there were six. Today there are 3. The impact that this will have on pricing and profit margins is huge and this is the story that is not being realized by the market. Forget the floods, forget share gains, forget EPS growth. Look at any other pseudo monopoly/oligopoly that has somewhat even share split between the top 2 and you will see a similar story – MCD/BK/Wendys, ATT/VZ/S, Coke/Pepsi/?, Fedex/UPS/DHL. The list can go on and on. Whenever industries consolidate, profits go up. And for Seagate that means cash flow will continue to go up because they no longer have to fend off irrational pricing and attempts to grab share by competitors. This is why they raised their div (and will continue to raise it) and why they are able to buy back so many shares. The story here is profit and cash flow. Nothing else.
    For me, paying ~ 4x for this cash flow stream is a no brainer. Here's another metric you might want to look at. Mkt cap = ~13 bln. LTM FCF = ~2.8. LTM Cash flow yield = 2.8/13 = 22%. NTM FCF (my est) = 2.5. NTM cash flow yield = 19%. Home run!

    FD - I am long STX and have been since $16.

    *SSD is also important but given the huge profits and cash flow generated by HDDs, STX and WDC can buy their way in when they need to. Unfortunately, the development of the SSD industry will be no different from that of HDDs and so we will see another arms race to the end.
    Aug 3 12:34 PM | Likes Like |Link to Comment
  • Businessweek's Slanted Hatchet Job On AIG [View article]
    can you say circle-jerk on the internet?

    Lets be honest here about the NOLs. Yes, its true the govt would essentially be paying itself. But thats only in the near term. Those NOLs have long term equity value and if the govt wants to exit at some point (in the next year), they want the equity value to be as large as possible. That is why they kept the NOLs in place. Those NOLs will last way the past the time of govt ownership meaning the equity value will acrete to the future owners. Its a way to entice people to buy this "unhealthy" company.

    BW is right in the fact that no other bankrupct company enjoys that benefit but then again, AIG was not the typical bankruptcy case.

    If the govt's goal was to not have them pay themselves taxes, they could have given AIG a tax holiday for as long as the US govt held a majority stake but still eliminated the NOLs like every other bankrupct company. But then the equity wouldn't have been as valuable, and the govt might not have made a profit. So I wouldnt call it a bailout, but it reeks of a conflict of interest.
    May 4 09:43 AM | Likes Like |Link to Comment
  • Avoiding Annaly Capital [View article]
    Please read this article. It helps support the author and Gundlach.

    When I'm wrong I will admit it. I'm not saying I'm wrong on NLY, but this article makes me think I could be. If Obama pushes through the Hubbard and Mayer plan, it will destroy agency REITs and Gundlach will have been right even though he may not have predicted that it would play out in this manner.
    Jan 5 02:41 PM | Likes Like |Link to Comment
  • 5-Star Picks For Income Investors [View article]
    FII poised for growth in 2012? I dont think so. The bulk of the business (~80% of assets) is short term money markets and with the Fed holding rates at essentially zero for 2 more years, FII will have to continue to waive fees. That is the reason the stock has dropped to the mid teens. The market is valuing the money fund biz at zero. The good news is that there is little downside risk from here and if you buy now, you get the money fund biz for free!

    But growth is not the story. The 6% yield is. Even with the fee waivers, the company can continue to pay at its current rate. Historically, FII has had a 2-3% div yield and that is where mgmt is the most comfortable. But given the unique times we're in with 0% rates, the stock is on super sale. The company is in no stress and has plenty of FCF to pay the current div so this is a once in a lifetime opportunity to buy in. I would still buy it but because of its yield, not because of its growth prospects. Its purely for income.

    Historically, FII is the most profitable near the peak of short term rates. This is true because the money funds have the highest asset levels and can charge the full fees, plus higher short term rates usually means a strong economy and better equity valuations which then makes the equity side of the biz more profitable. The stock peaked around $40 last cycle, so if you buy today and clip a 6% coupon until the next rate cycle peak and sell for $40, you will have a very nice return. But you have to be patient. Good luck.
    Dec 29 03:13 PM | 1 Like Like |Link to Comment
  • The One Reason To Avoid Microsoft Now And When To Know It's A Buy [View article]
    Wow! Great article. I have been anti-MSFT for years for all the reasons you described above. But I usually just say MSFT sucks and leave it at that because I'm too lazy explain all this or to write it all out. Your article describes in perfect detail the problems they have and what they need to do to fix the stock price. Thanks for not being lazy!
    Dec 29 09:45 AM | Likes Like |Link to Comment