Archive for May 2008
Reversion To The Mean
The question had to do with “Reversion to the Mean” in investment settings, but, in fact, it extends to management of firms, in general. Simply put, it sought a defense of reversion to the mean as a reliable and actionable model. The answer, in my view, requires an understanding of physics, psychology, philosophy, economics, and management. Here is the original question and my response.
OOT — Out of Town This Week — Lam Research (NYSE: LRCX)
I’ve been invited to do some work with the good folks at Martin Army Medical Center, Fort Benning, GA this week and will be out of town and away from this blog until at least the weekend. This is the first of several planned consulting trips this summer (Chicago and New York City in June and Charleston in July). If posting comments, there may be a delay before I’m able to approve them and get them posted for public consumption.
Next, we turn to analysis of Lam Research.
Like a Hamster on a Wheel — Time Management Versus Innovation
Reference: High School’s Worst Year?; For Ambitious Teens, 11th Grade Becomes a Marathon Of Tests, Stress and Sleepless Nights. Jonathan Kaufman. Wall Street Journal. (Eastern edition). New York, N.Y.: May 24, 2008. pg. A.1
I often wonder whether the “Life-Long Learner” is a conceptual myth. It isn’t that we can avoid intellectual growth as we age – it is all but compelled by the speed of change. Nor is it sustaining the love of learning that has me uncertain about whether the life-long learner remains viable. Instead, as the father of a high school junior, a teacher of undergraduates and graduate students, and as a consultant working with physicians, I see the problems from several informing perspectives.
Proctor and Gamble (NYSE: PG) — Hold or Sell Decision
I bought P&G on February 20th of last year for 64.75 (we will leave the number of shares blank to avoid unnecessary embarrassment). Since then, the shares have rocketed to $65.27 — a whopping $0.57 gain in a year. To be fair, I have been collecting dividends, currently yielding 2.4 percent. With any luck, I’ll have broken even after factoring in inflation but before considering buy and sell brokerage fees.
BHP Billiton Ltd. (BHP) — Buy, Sell, Hold … May 24, 2008
BHP Billiton Ltd. (NYSE: BHP) is a commodities play — Aluminium, Base Metals, Uranium, Diamonds and Specialty Products, Energy Coal, Iron Ore, Manganese, Metallurgical Coal, Petroleum, and Stainless Steel Materials -, and, most prominently, a China, India, and Brazil growth play. The longs view the commodities price increases of late as a secular bull market for commodities, while the shorts view it as a speculative bubble. While my wallet is rooting for the shorts, my brain understands international equilibriums. I understand that emerging markets want to emerge and, once started, government has little ability or desire to disappoint. All of this informs the business of BHP but it tells me nothing about the stock and its relation to fair value.
Sears Holdings (NYSE: SHLD) — May 23, 2008
Down from its high of $193 on April 17, 2007, the stock of Sears has been cut by more than half — despite stock buybacks (see graphic, below) and purchases by insiders.
Moreover, free cash flow and cash return on invested capital remain positive for the most recently reported year.
More recently, company prospects have taken a downturn along with the economy, as have other retailers. More importantly, the market has turned decidedly negative on the company, its management, and future prospects. When last reported, short interest has ballooned to 24,606,800 shares (19.31 % percent of float, a decrease of just 4.29 % over the prior reporting period), with days to cover at 12.7.
Given this pessimism, we are left to wonder whether a company which is evidently not a candidate for bankruptcy represents a short squeeze opportunity for long investors. So, let’s take a look at identifying intrinsic value, the financial health of the company, and whether there is a catalyst for a short squeeze.
Accuray, Inc. (NYSE: ARAY) — May 22, 2008
My friend Stuart from the Yahoo message boards indicated recent consideration of Accuray, Inc. (NYSE: ARAY) as a stock investment. Stuart is a journalist by training, with a focus on healthcare, and his investing approach relies on in-depth research into the market, the economy, and the story behind those companies he is considering. My approach is that of a deep-discount value investor. Comparing the approaches struck me as an interesting exercise, which includes my quantitative/fundamental assessment of Accuray.
Cavetching On-Line — The WWW.BullHorn for Patient Complaints
Studies indicate that it takes three times as many satisfied customers to overcome the damage to reputation from a single dissatisfied customer. Why? The satisfied customer will tell 21 of their closest friends about the negative experience, while the satisfied customer will tell just seven.
I’ve mentioned this statistic in previous postings, and I have gone so far as to note that it is not the average of three-to-one that is so compelling, but the disproportionate influence of the outlier. A single highly dissatisfied customer, possessing an abundance of motivation and friends, or one that is particularly well regarded in the community, can represent a business’s worst nightmare.
All Hail the Healthcare Simpleton — Easy Interventions Produce Dramatic Improvements
Dr. James Reason, M.D., is credited with creating the heuristics for identifying the causes of error… not in healthcare, but, instead, for the airline industry. He identified and catalogued the causes of human error, and the Federal Aviation Administration took them to heart in an effort that significantly reduced the frequency of airline accidents.
Dr. Reason, however, should not be considered a great catalyst of success in an altogether different industry without taking into account Jay Forrester. Forster, the father of Systems Thinking and Systems Dynamics, identified the causes for why we tend to get precisely the opposite result from those our systems and practices are designed to produce. He recognized that small influences at the start of a process tend to promote significant consequences at the end of the process, and that this works for, both, good and ill.
In “The Tipping Point,” Malcolm Gladwell describes the efforts of the Giuliani administration in New York to combat crime – focusing on arresting turnstile jumpers and whitewashing graffiti artists. While the law and order crowd credits the eventual success in reducing New York City crime to a “zero-tolerance” posture on infractions large and petty, it appears that this relatively low cost focus on turnstile jumpers and graffiti artists achieved precisely what Jay Forrester advocated. Namely, focusing on small and seemingly insignificant leverage points early in the process to achieve dramatic outcome improvements. ["The Tipping Point" book, lecture by Gladwell at the TED on spaghetti sauce and at the 2007 New Yorker Conference on genius.]
Balance Billing — Grief for Everyone
The practice of balance billing is increasing, according to this Los Angeles Times article.
Balanced billing is defined as “billing beneficiaries for amounts not reimbursed by payers (not including copayments and coinsurance amounts); this practice is prohibited by Medicare regulations,” according to “Understanding Health Insurance: a Guide to Billing and Reimbursement”, ninth edition, by Michelle Green and JoAnn Rowell.
