Archive for the ‘Investments’ Category
Investing and Healthcare — The Quality and Learning Link
A couple of years ago, my colleague Jim Porto at UNC Chapel Hill asked me to teach a two-day seminar on performance psychology, and I loved it. My students, on the other hand, initially evidenced a normal distribution, with agnosticism as the mean. In other words, a small number loved it, a small number hated it, and most figured it was a necessary block to check before moving on to more productive things. As I continued to teach it and my skills presenting the materials became better, the response improved, and, because the materials were taken from research rather than the self-help section at Borders, the impact has been rewarding (and the student evaluations would make my mother proud).
Well, I no longer teach the seminar (having handed it to others who are every bit as capable), but I’ve retained interest in the topic. Over the winter holidays, I read Malcolm Gladwell’s Outliers and Geoff Colvin’s Talent is Overrated. While both are interesting (Colvin’s is better, despite Gladwell’s higher standing on the New York Times Best Seller list), I decided to apply Jacobi and invert – looking at the causes of failure.
S&P 500 Trend Chart
Just a quick note on the S&P500 levels on this first day of 2009. The best fit regression trend line, using the data from 1950 through January 1 of 1995 (before the run up to the high tech bubble) provides a feel for the degree to which the market is over or undervalued.
The Lorax Investor
2002 Nobel laureates Daniel Kahneman and Vernon Smith used computer simulations to study behavioral finance, demonstrating that speculative bubbles arrive with greater frequency than most of us would otherwise expect. Those bubbles can be hedonistic or pessimistic, defying the “efficient market theory” — which argues that the market fairly prices openly-traded equities, commodities, and other goods and services with near-instantaneous accuracy. The mispricings associated with speculative bubbles often follow from a “herd mentality,” and this leads to the trading approach known as “technical analysis.” Eventually, however, bubbles deflate, no matter how analytical the technician.
Update on the Market and Other Musings — 10/18/08
It has been two weeks since my last update on this blog. Since then, the market has undergone gyrations that are unprecedented. While I can’t imagine that anyone is following this blog closely enough to mirror my investments, doing so would have significantly outperformed the S&P 500 – even in this dramatic environment. Since the market highs of October 2007, my portfolio is down 12.43% versus the S&P 500s decline of just under 40%. This is largely due to the recommended short position (of the S&P 500), but the long positions in my portfolio have strongly contributed to these favorable results, as well. Even during a market crash, owning value stocks is its own reward.
With this update, I would like to address several new items at this point in the market’s life. Longer than most postings, it looks at the current investing environment, considers international opportunities (first-world and emerging-market), addresses the Bretton Woods II proposal, considers the regulatory pedullum shift, provides a loose model for identifying winning and losing markets in the future, and ends with a non-partisan plea for political change in the US.
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).
Recent Changes In My Investments Portfolio
Several days ago I made a small number of adjustments to my portfolio, as the market entered “meltdown” mode. Allow me to describe each of those decisions.
AEO Response
Max at the AEO board asked that post my analysis of the stock, which I’ve done. In reviewing those postings, there are a small number of charts that were left out, in order to make those postings more palatable to the average reader. I’d like to take a minute to provide them here, starting with the common ratios:
The “I Quit” Follow-up on Two IT Sector Stocks
In my previous posting, I asked for comments concerning three IT sector stocks (NVDA, NTAP, and TXN). Today, two of the three reported earnings. NVDA and NTAP both reported lower-than-expected earnings (the previous links reference news reports on the earnings).
The AP report on NVDA’s announcement states:
Shares of Nvidia Corp. jumped Wednesday after the graphics chip maker posted second-quarter results that, though weak, were no worse than investors may have feared.
Nvidia, whose stock lost nearly 31 percent in a day on July 3 when the company sharply lowered its revenue forecast, posted sales of $892.7 million, below Wall Street’s muted expectations of $908.4 million (down from $1.1 billion in July).
The stock, however, is up strongly in today’s trading, posting a 10.75 percent gain. Wedbush Morgan analyst Patrick Wang noted “We believe that much of the bad news is understood and are hopeful that expectations and estimates will be largely reset across the board.” This is certainly consistent with the results from my earlier screen, which indicated the stock is significantly undervalued by several measures. At close of business, the stock was trading at $12.26 versus an estimate of fair value in excess of $200. This notes the inadequacy of relying entirely on earnings and street expectations for estimates of stock value — especially, when the discounted cash flow analysis indicates the stock is undervalued by more than 90 percent, if assuming the company is able to sustain the 51.6 percent yearly free cash flow growth rate posted during the past decade. If lowering that growth rate to a more sustainable 15 percent over the next decade, the company is still undervalued by more than 50 percent.
And this brings us to an unfortunate problem. The image above can not be read. It uploads without problem. It appears clear on my screen when editing this draft. It is in a format supported by WordPress, but, when published, it is useless. The problem holds whether the image is uploaded as a GIF or a PNG — the two formats for which Excel will export them as images. WordPress’ representatives indicate it should work fine in either format. Microsoft, which makes Excel, indicate their software is fine.
What I know with absolute certainty is that the problem is not with the customer. Why? Because the customer is always right. That is the benefit of being king, queen, and financier of the competitive market place. Besides, I can’t correct the problems associated with proprietary software, and I can’t continue to spend hours and hours manually capturing images, changing their format, and uploading them prior to drafting and editing the copy. I have a day job and a nights and weekends family, to say nothing of other interests that are equally rewarding. Blogging is fun but it is a peripheral interest.
So, until one or both (Microsoft and WordPress) can get their act together, no more postings related to equities analysis. Instead, I will be spending my free time posting about healthcare policy and doing this:
Well, if you made it through my rant, you deserve the bottom line of my analysis of NVDA, NTAP, and TXN. Of the three, NVDA is buy, due to the strength of the company (as reflected in the long-term financials and their positive trends). NTAP and TXN evidence problems that urge this value investor to avoid them at this point. I’d show you the evidence for these judgments but the technology won’t allow it without hours of pointing and clicking.
I should note that earlier recommendations of QSII, BRL, and CRDN have done nicely for those following this blog. SHLD has improved significantly, with the predicted short squeeze placing a floor under the stock at around $80 per share. QSII was my other short squeeze call, and, pleasantly, that worked out nicely for the longs. UNH is still down marginally, as is HANS, despite my recommendation of them. P&G is up marginally since my recommendation to sell. ARAY, which I panned, has declined significantly, but, long-term, I am bullish on the technology. LRCX is down marginally since I recommended it. AEO’s slide has stopped (for now) and has marginally rebounded. And Barrett is up big — a stock I recommended but did not purchase. So, during the short run in which this blog focused on financial analysis and equities investment, those blindly following these recommendations would have beaten the market soundly.
So, fundamental analysis works for working professionals with little time or stomach for day-trading, and the foundation behind value investing provides the passive owner (stockholder) a margin of safety and comfort not available if simply following the recommendations of Wall Street analysts — whose reports rarely present the granularity offered in the examples provided in previous posts. Both offer the non-professional investor a competitive advantage and a fighting chance. The large institutions may move in and out of a stock for an abundance of reasons (trading algorythms, hedges, trend following, gestalt, sector analysis, macro-economic expectations, etc.). Few impact the long-term prospects of sound businesses, but they can temporarily depress the stock price — and that provides what Benjamin Graham called “The Intelligent Investor” with, both, a margin of safety and a beneficial opportunity (recognizing that not all opportunities are beneficial).
Good Luck.
Altman Z-Scores
This entry provides a list of Altman Z-Score stocks at or below 1.81 and 3.00 based on an August 6 screen of the non-financial stocks populating the S&P 500. The Z-Score is a popular, academically tested, and imperfect indicator of bankruptcy risk. Nevertheless, it can be informative, as one input among many considered by the investor.
Teva Pharma (TEVA) August 4, 2008
Teva is a stock that seems to defy gravity. To defy gravity, it is not necessary to rise (levitate and hover). Instead, it is sufficient to do nothing more miraculous than not fall when gravity would suggest falling is appropriate behavior. I mention this not because I have a short position in the stock. In fact, I am long. Instead, I mention it because, normally, companies that buy other companies decline in stock value, while the acquired firm is bought at a premium and rises.
Why?
If the efficient market theorists are correct and the true value of each company is fairly priced, the two companies that were fairly valued separately should achieve the same total when combined. For Teva, which recently announced its intention to acquire Barr Pharmaceuticals (BRL) in a friendly takeover, the stock has held steady while BRL has jumped nicely (“nicely” because I own BRL, as well).
The only explanation for this gravity defying event is that Teva is undervalued — which, as a value investor, was my conclusion when originally buying the stock on November 5th of last year at $43.96 per share. The stock is currently selling for $46.01 — roughly a 4 percent increase, after deducting brokerage fees. Since I tend to buy stocks selling at a 50 percent discount to intrinsic value, the the stock should still be undervalued by roughly 46% — a little less after factoring in brokerage fees.
