Archive for the ‘General’ Category
Sometimes You’re The Windshield …
Well, I’ve been true to my word on the investing front. It has been some time since my last posting, and, at that time, I wrote that I planned to wait for the market to regain some measure of sanity, as measured by a VIX below 30. Prior to that, I reassessed my portfolio, insuring I was comfortable holding each regardless of the market’s crisis. Since then, I’ve made no changes and avoided the urge to post. The effect has been to lose just 2 percent of my portofolio’s value — down just under 20 percent at the market’s worst, when the market was down roughly 50 percent. With the market up from its recent lows, I fully expect that we will retest the lows, but it is time to start looking for values again … humbled, certainly, … . So, stay tuned.
Some times you’re the windshield … Sometimes you’re the bug.
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SC,
Thank you for the question on healthcare stocks. Since most of our correspondence has surrounded UNH, I should note that I have not sold a single share in that position. Ditto with TEVA, FRX, and quasi-health-stocks JNJ and PG. Sometime back, I did take a speculative position in SLP and have been aggressively acquiring MCK (which is now the largest single holding in my portfolio). Since the market highs last August, my healthcare holdings are up 8 percent in equity value appreciation (before taking dividends into account). By comparison, the S&P is down 30 percent and the index of S&P healthcare stocks is down 18 percent.
This (above) shows current holdings and the percentage paper gain/loss before dividends. It does not show realized gains and losses, which add a further 5.577 percent to the total.
More importantly, the question you ask is more germane to the dilemma confronting investors today — are any of these worth considering now. Here is my summary-analysis sheet for each of the stocks mentioned above:
Discount is the percent below estimated DCF value (using FCF growth rates for the prior decade), 1/2 Kelly should be ignored, PM and AT represent profit margin and asset turns, EPV and RV are earnings power value and replication value, CLIAB is current liabilities, ALTZ is Altman Z, and OE is owner’s earnings. Note that PG is selling at an exceedingly high price to adjusted book, TEVA’s ROE is low, and MCK’s profit margin (PM) hasn’t caught up with the latest results. JNJ’s DCF discount is roughly at the same value as when Buffett began acquiring. Otherwise, each is worthy of holding and all are worth considering as new investments if basing the decision only on prior results. [Note: I'm not touting any, specifically, because you didn't ask, and, until your note, I'd been pretty successful exiting this side of the blog. The graphic is provided just to indicate that, for my personal holdings, I still perform the analysis earlier postings documented.]
As for my strategic view of the health market place, there is considerable uncertainty with the administration’s efforts. Those efforts have not costed-out favorably by the Congressional Budget Office (as predicted when we — you and I — first considered this issue), and, within recent weeks, opposition efforts have gained traction (those opposing “reform” as a progression toward a single payer or socialized medicine system). I believe both sides are wrong on too many fronts to recount here, but, in general, the status quo is unsustainable and no proposed reform will deliver the desired results. Eventually, we seem destined to move away from a free market system (having dawdled during the decades when meaningful intervention might have made a difference). The electorate, however, has not recognized this (nor have our political leaders of either party). So, I suspect the health insurance industry will survive as current efforts at reform, either, fail or some element of free market healthcare is retained in any legislative compromise. In other words, the dawdling seems likely to continue.
The bigger issue for the investor is positioning. While I bought UNH on the way down and have marginally benefited as the price has recovered somewhat (it was down as much 70 percent at one point), it remains one holding in a portfolio that is diversified across sectors and within healthcare. If it goes to zero, I’ll still be up on the sector. Note, however, that latest results indicate weighted average cost of capital marginally exceeds cash return on invested capital, even as the company exceeds an Altman-Z bankruptcy gray-zone risk of 1.81 (current assets cover 317 days of operating costs — not shown above). Moreover, the other stocks in the healthcare sector have no exposure to health insurance. JNJ and PG are internally diversified. MCK is internally diversified, even though it is largely viewed as pharma-distribution play. FRX and TEVA produce generics, and SLP is a pharma-research/IT play. So, while I have not sold UNH, I’m not adding, either.
SC, I hope this helps, and my apologies for the delay responding. I’m preparing for the coming school year and have been working to meet publication deadlines for a seminar text.
Three SHLD Charts
Three charts for Gurufocus.com concerning Sears Holdings:
Danniyal is witnessing history
This title appeared as the Facebook status of my friend Danniyal — a first generation arrival from Pakistan. In grammar school, he became my son’s best friend, and, through that introduction, our families became exceedingly close. Today, he is a senior in high school, possessing a stratospheric GPA and a mind that amazes and delights the old fart who taught him algebra over a distant summer. During the election campaign, too young to vote, he volunteered for Barack Obama and, as occasionally happens with nacient campaigns, managed several events for the candidate. Today, amidst applications to college, Danniyal is interested in a career in public service, and, seeing his Facebook status, I sent him the following message:
Sears (SHLD) Real Estate Value Update — 1/14/09
Last year, CS estimated the real estate value of SHLD at $4+ billion (4x listed book for these assets). This struck me as unlikely (and I’m long the stock). Besides than the name and credibility of Credit Swisse, there was little to support the assertion in the reporting of that figure by the Wall Street Journal. So, I cut that figure in half and came up with a value of $104 per share (at that time). Since then, the market has tanked, retail has suffered (and continues to do so), and retail real estate is suspect and worsening (a comfort for shorts, a worry for longs, and a problem that increases the uncertainties for both). Well, I just came across a more in-depth analysis of the real estate value that provides the assumptions and valuations at various prices per square foot, and, at $25/sq ft, the $2 billion estimate seems reasonable, even if marginally conservative.
Here is the reference: http://www.manualofideas.com/files/shld_moi_20081223.pdf
Housing Market Projections
Recently, my friend Dave posted a link to as full an analysis of the current housing market as I’ve seen. It isn’t pretty and may require anti-emetics to read. Here is the link:
http://www.designs.valueinvestorinsight.com/bonus/pdf/T2_Housing_Analysis.pdf
For Want of a Gadfly, the Shoe Was Lost …
The subject at hand is the managerial practices of Citibank. While this is not obviously relevant to those seeking excellence as executives within healthcare (my area of professional focus), it informs it, nevertheless.
During graduate school, I recall a professor’s insistence that, in team settings, a “gadfly” should be appointed. The gadfly, for those who are not familiar with the term, is a “horsefly,” whose company is stinging and whose presence prompts the cow in the pasture to swish its tail in defense. In business settings, the “gadfly” is the person who questions every assumption, no matter who makes them. Without a “gadfly,” no team has a chance of withstanding the threat of “group think” or any of the other flaws associated with team dynamics – such as, deference to authority, appealed to convention, or mimetic decision-making.
The Milpo Lorax Response
I “simulcast” the investment related blog entries on my Motley Fool CAPS profile page — where my comparative performance against the S&P 500 can be tracked (my moniker in the Motley Fool is “Bertiii”). CAPS participant Milpo responded to the most recent submission (The Lorax Investor) with a series of thought-provoking questions and assertions. Of necessity, my response is long-winded (even by my standards), but it was a beneficial exercise — forcing me to confront long-established assumptions concerning the utility of value investing. Here is that response, starting with Milpo’s two comment submissions:
Sears Update — 10/20/08
On one of the message boards, my earlier call of a likely short squeeze for the stock was challenged. This follows the recent down-turn in the market and the drubbing of this stock in particular.
The Yaht Club and The Rehab Walker
A couple of weeks ago, I spent a long weekend in New York — something I try to do a couple times each year. My friends and the circle they inhabit are largely Wall Streeters. The story of the last visit was different than prior visits. Where the normal topic of conversation at parties and social gatherings would typically focus on the economy and the investments world, it was largely absent — almost entirely absent. This was the weekend when Lehman failed, AIG was the focus of high-powered meetings seeking a solution that would eventually culminate in its dismemberment, rumors concerning Merrill heated-up anew, and Washington Mutual was included among the whispered names of firms in peril. This was the back story, where the problems confronting each were understood by all, even if the financial press was not yet reporting it (beyond Lehman, at least).
Tiered Healthcare System?
In my Quality Controls class, a number of students have been debating the merits and detraction of a tiered healthcare system, where the wealthy have the option of buying high-end services and the poor get the quality of services their wallets and government support can afford. Here is my take on the question.
