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.
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.
The Network Effect: Why Apple's iOS Will Win The Platform War Over Google's Android [View article]
@jsweiter,
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.
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.
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.
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.
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.
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.
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.
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!
It's true that Gundlach is a mortgage expert. But is he more of an expert than the guys at Annaly? I think not. So who do you trust more? There is some merit in what Gundlach is saying but I don't think it's to the point where an investor needs to sell. And when I first saw reports about his saying to sell NLY my thought was that he was talking his book.
But to the point of the article and Gundlach, all of this can be put to rest quite easily and it surprises me that no one really brought this up already. Originations anyone? Who cares where rates are? Refi volumes are at some of the lowest levels ever. And that's with rates at some of their lowest levels ever and full public knowledge that they will stay there for at least 2 years. Why then aren't we seeing an uptick in refi's? The answer - after 3+ years of near zero rates, high unemployment and little change in the number of underwater homes, there isn't anyone left to refi. The number of employed borrowers with less than 80% LTV and high interest rates is pretty small. Dont take my word for it either. In the link below, there is another link to the MBA website article about current week's volume. The direct quote from there is “Remarkably low rates are not enough, as many homeowners continue to hold back due to lack of equity in their properties, poor credit and a weak job market.” Therefore, refi or prepayment or reinvestment risk is minimal going forward. This blows a huge whole in both the article above and Gundlach's comments.
Microsoft Is A Strong Buy From A Cash-Flow Perspective [View article]
This is a trap. From a cash flow perspective, you can look at just about any large cap tech company and make an argument that its cheap. Here is the problem. These companies started off as small and entrepreneurial and on the leading edge of tech and the founders and leaders of these companies were/are often brash, outspoken and arrogant. They are the cowboys of the tech world.
Today, these companies are mature, slow growth, cash flow machines but the operators (Ballmer, Ellison, et al) still think/act like they are these small leading edge companies. The CEOs egos wont let them accept reality so there is a disconnect from what they perceive these companies to be and what they actually are. And because of that, they horde their cash because they think they have all these great investments that will earn a better return, like they did when they were smaller, younger companies. But the reality is, they don't. They would have to turn into pseudo-venture capital funds to find the returns that will actually move the needle on such a big company and each one would have to hit on like 20 Facebooks, Groupons or Pandoras.
If you would have invested in MSFT on 11.22.01, your return would have lagged both the S&P and NASDAQ with nearly 90% correlation. Said differently, you'd be better off in the index. Given their current situation and lack of execution towards the growth parts of the market, I don't think there is anything that will make the next 10 years any different from the last 10. What they should do is lever the company up and use the proceeds along with all the cash on the balance sheet to pay another special dividend. Outside that happening, there wont be much that will push Mr Softy ahead of the market.
Exide's Recent Price Collapse Was Unjustified [View article]
JP - what are your thoughts concerning their investment in AGM. Some people, myself included, think AGM is only a bridge to a better technology that is needed to reach the 50+ mpg CAFE standards. If so, that means they need to spend $300-500m over the coming years, plus 75-80 per year for maintenance on existing structure, to achieve the 2.8m capacity target for AGM by 2015. Thats a big chunk of their liquidity. And even then, using JCI's target of 16m AGM capacity, they will only have 15% share. If AGM is only a 10 year bridge, then that $300-500m investment doesnt look to have too promising of an IRR.
PNC Financial Is A Banking Middleweight With Significant Upside Potential [View article]
Sorry Mr. Lea, this article doesn’t say anything of value. It sounds like you work in PNC's PR department. So you're bullish because the CEO talked about some nice things in the annual report? Really? You should probably buy every stock in the S&P 500 then.
You say significant upside potential? How? Better customer service? Investors don’t care about customer service, they care about future income and you said yourself in the article that they expect income to be flat. How does that provide significant upside potential?
And I have a problem with categorizing the current stock price as "trading at a discount of $16.79 (26%) to its 52 week high of $64.49 per share." So what. First, it's not a discount to anything. It may be 26% below its highest traded price over the past year, but by that logic, it’s at a 74% premium to its low, which would suggest it’s overvalued. Second, just because a stock traded at a specific price doesn’t mean that it SHOULD have traded at that price. The more accurate analysis would be to figure out its intrinsic value based on expected earnings, and then determine if the stock price is rich or cheap to that. 52 week highs mean nothing.
The reality is PNC is geographically constrained and they hold dominant market share in most of their regions. So they don’t have many options for growing. They have been benefiting from the industrial rebound in the US which for the most part has taken place in their footprint, i.e. their customers are growing and borrowing. They also benefit from the boom in gas drilling in the Marcellus Shale which is again right in the middle of their footprint. However, the only real way for them to grow outside normal market or economic growth is to buy growth. Buying growth is a better way to ensure higher than market growth rates but this strategy is full of risk. There are countless examples in US banking of poor acquisitions. Look no further than the consolidation spree in the 90s and the subsequent implosion of the large acquirers since then. Sure there have been veiled successes, like Citi under Sandy Weill or NationsBank/BofA under Hugh McConnell or even BankOne under Jamie Dimon, but in 2 out of those 3 you would have had to been a market timer to have made any money, meaning the growth they saw in their stock was unwarranted. If you would have bought when Sandy Weill took over Citi and held to today, your annualized split adjusted return with divs would be around -10%. Not really something you want in your portfolio longer term. PNC however has shown that they won't make an acquisition simply for the sake of the acquisition. They are conservative, value based buyers and are picky. This is a prudent strategy, but its probably not going to get you outsize growth rates.
I don't disagree that PNC is a valid long term holding for certain investors. It is a high quality, lower risk name. But in just about every market I know, high quality and low risk never equal "significant upside potential".
KEMET Corporation: A Strong Value Play [View article]
Im still having hard time seeing how this is "cheap". Im following your math when you take MRQ, annualize it, then divide by 2. But that means even if you account for all of the next year's growth (by annualizing the MRQ) and convert all the shares, that the stock is still fairly priced, doesnt it? Unless you think that 190 for FY11 is a super conservative estimate. If you listened to the call, they expect sales to drop 3-4% in Q3 and they dont expect margins to remain at the 25% they posted in Q2 so your 190 is aggressive and should be more like 170-175. Maybe you get to 190 in FY12. All this would argue that there isnt much upside in the stock.
OCZ: It Burned Me - Don't Let It Burn You [View article]
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.
Is High Yield Overvalued? [View article]
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!
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.
Taking A Longer Look At Apple's Secret Hedge Fund [View article]
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.
Taking A Longer Look At Apple's Secret Hedge Fund [View article]
Check Out Seagate's New Market Share And 4.5 P/E [View article]
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.
Businessweek's Slanted Hatchet Job On AIG [View article]
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.
Avoiding Annaly Capital [View article]
http://bit.ly/AgyvD8
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.
5-Star Picks For Income Investors [View article]
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.
The One Reason To Avoid Microsoft Now And When To Know It's A Buy [View article]
Avoiding Annaly Capital [View article]
But to the point of the article and Gundlach, all of this can be put to rest quite easily and it surprises me that no one really brought this up already. Originations anyone? Who cares where rates are? Refi volumes are at some of the lowest levels ever. And that's with rates at some of their lowest levels ever and full public knowledge that they will stay there for at least 2 years. Why then aren't we seeing an uptick in refi's? The answer - after 3+ years of near zero rates, high unemployment and little change in the number of underwater homes, there isn't anyone left to refi. The number of employed borrowers with less than 80% LTV and high interest rates is pretty small. Dont take my word for it either. In the link below, there is another link to the MBA website article about current week's volume. The direct quote from there is “Remarkably low rates are not enough, as many homeowners continue to hold back due to lack of equity in their properties, poor credit and a weak job market.” Therefore, refi or prepayment or reinvestment risk is minimal going forward. This blows a huge whole in both the article above and Gundlach's comments.
Here is link to illustrate
http://bit.ly/si8mNH
Microsoft Is A Strong Buy From A Cash-Flow Perspective [View article]
Today, these companies are mature, slow growth, cash flow machines but the operators (Ballmer, Ellison, et al) still think/act like they are these small leading edge companies. The CEOs egos wont let them accept reality so there is a disconnect from what they perceive these companies to be and what they actually are. And because of that, they horde their cash because they think they have all these great investments that will earn a better return, like they did when they were smaller, younger companies. But the reality is, they don't. They would have to turn into pseudo-venture capital funds to find the returns that will actually move the needle on such a big company and each one would have to hit on like 20 Facebooks, Groupons or Pandoras.
If you would have invested in MSFT on 11.22.01, your return would have lagged both the S&P and NASDAQ with nearly 90% correlation. Said differently, you'd be better off in the index. Given their current situation and lack of execution towards the growth parts of the market, I don't think there is anything that will make the next 10 years any different from the last 10. What they should do is lever the company up and use the proceeds along with all the cash on the balance sheet to pay another special dividend. Outside that happening, there wont be much that will push Mr Softy ahead of the market.
Exide's Recent Price Collapse Was Unjustified [View article]
PNC Financial Is A Banking Middleweight With Significant Upside Potential [View article]
You say significant upside potential? How? Better customer service? Investors don’t care about customer service, they care about future income and you said yourself in the article that they expect income to be flat. How does that provide significant upside potential?
And I have a problem with categorizing the current stock price as "trading at a discount of $16.79 (26%) to its 52 week high of $64.49 per share." So what. First, it's not a discount to anything. It may be 26% below its highest traded price over the past year, but by that logic, it’s at a 74% premium to its low, which would suggest it’s overvalued. Second, just because a stock traded at a specific price doesn’t mean that it SHOULD have traded at that price. The more accurate analysis would be to figure out its intrinsic value based on expected earnings, and then determine if the stock price is rich or cheap to that. 52 week highs mean nothing.
The reality is PNC is geographically constrained and they hold dominant market share in most of their regions. So they don’t have many options for growing. They have been benefiting from the industrial rebound in the US which for the most part has taken place in their footprint, i.e. their customers are growing and borrowing. They also benefit from the boom in gas drilling in the Marcellus Shale which is again right in the middle of their footprint. However, the only real way for them to grow outside normal market or economic growth is to buy growth. Buying growth is a better way to ensure higher than market growth rates but this strategy is full of risk. There are countless examples in US banking of poor acquisitions. Look no further than the consolidation spree in the 90s and the subsequent implosion of the large acquirers since then. Sure there have been veiled successes, like Citi under Sandy Weill or NationsBank/BofA under Hugh McConnell or even BankOne under Jamie Dimon, but in 2 out of those 3 you would have had to been a market timer to have made any money, meaning the growth they saw in their stock was unwarranted. If you would have bought when Sandy Weill took over Citi and held to today, your annualized split adjusted return with divs would be around -10%. Not really something you want in your portfolio longer term. PNC however has shown that they won't make an acquisition simply for the sake of the acquisition. They are conservative, value based buyers and are picky. This is a prudent strategy, but its probably not going to get you outsize growth rates.
I don't disagree that PNC is a valid long term holding for certain investors. It is a high quality, lower risk name. But in just about every market I know, high quality and low risk never equal "significant upside potential".
KEMET Corporation: A Strong Value Play [View article]