RTCrawford's Weblog

I don't make this stuff up. I'm not that smart.

Archive for August 2008

AEO Response

with 4 comments

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:

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Written by rcrawford

August 29, 2008 at 10:16 am

Posted in Investments

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Two Girls and An X-Ray

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Thumbnail Sketch of New Blog Header

Thumbnail Sketch of New Blog Header

It has been some time since I’ve posted to this blog. In the last entry, I lamented the difficulties of WordPress uploading images from Excel, which I use to display analysis of equities (stocks) — asserting at the end that I have other ways to productively spend my time. My principle interest outside of work, family, and investing is painting.

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Written by rcrawford

August 28, 2008 at 2:31 am

Posted in General

The “I Quit” Follow-up on Two IT Sector Stocks

with 5 comments

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.

Written by rcrawford

August 14, 2008 at 3:08 am

Posted in Investments

Request for Comments Concerning Some IT Stocks

with 3 comments

Normally, I post advocacy pieces — presenting analysis conducted on stocks I’ve considered for purchase or analysis of stocks in a given sector. This time, I have taken the screen of the non-financial stocks in the S&P 500 and sorted them iteratively for those selling with:

  1. DCF discounts greater than 50 percent,
  2. Price-to-adjusted-book values below 2.5,
  3. CROIC greater than WACC,
  4. CROIC growth rates greater than 13 percent,
  5. Free Cash Flow yields that are double 10-year bond yields (or more),
  6. Free Cash Flows greater than 25 percent of Current Liabilities,
  7. Altman Z-Scores greater than 3.00,
  8. Earnings Power Values greater than Replication Value in the most recent year and in at least 70 percent of years during the past decade,
  9. Returns on Assets and Profit Margins greater than 20 percent, and
  10. At least 10 years worth of 10Ks available for consideration.

Believe it or not, there were just four stocks that met the criteria, and all but one is an IT stock. The one exception is Forest Labs, which is already in my portfolio.

Well, I am not a complete Ludite, but there are times when I feel like one — given my frustration with computers and software and programming. Yes, I program in VBA and am confident I will die sooner than if having elected to live a calm, non-programming existence.

So, I am going to provide the list and give you the opportunity to educate me on the relative merits and detractions of each. Aren’t familiar with any of them? Don’t worry, I’m an open-source kind of guy when it comes to other people’s time and intelligence, and, while I am not prepared to release my screening and analysis system, I’m happy to share the results on this non-money-making blog. So, lets see if we can get some synergistic brilliance going (a la Peter Senge’s “Learning Organization”).

Here are the results of the initial screen:

Name Discount P/Adj Bk EPV / RV CROIC/WACC CROIC FCF / P Ops CF FCF/CLIAB FCF ShE 1/2 Kelly PIO ALTZ EPV>RV Years
NVDA 0.96 1.62 2.39 2.86 0.39 0.16 0.41 1.12 0.52 0.40 0.49 6.00 7.06 1.00 10.00
ADSK 0.61 2.14 3.19 3.49 0.45 0.08 0.21 0.89 0.24 0.10 0.38 7.00 8.93 1.00 10.00
TXN 0.70 2.20 2.12 2.71 0.35 0.10 0.11 1.84 0.24 0.01 0.42 7.00 13.47 0.70 10.00
FRX 0.80 1.81 2.01 2.34 0.30 0.10 0.29 1.89 0.32 0.18 0.46 8.00 14.13 1.00 10.00

Along with the Dupont breakdown of Profit Margin and Asset Turnover, the price at close yesterday, and the DCF-identified value:

Name PM AT ROA Value Price
NVDA 0.22 1.28 0.28 291.71 11.49
ADSK 0.21 1.08 0.23 86.82 34.20
TXN 0.25 1.04 0.27 82.51 25.01
FRX 0.25 0.86 0.22 186.83 38.05

I hope you can see why each of these is of interest to me, as a value investor.

Of course, often as not, there is a reason why a stock is cheap. Most cheap stocks warrant their low valuations. The trick is to find those that sell at a significant discount to intrinsic value — where the efficient market has gone off for a two-martini lunch and, taking a nap afterwards, has been asleep at the wheel (I can mix metaphors with the best of them). Any of these strike you as fitting that description … and, if so, why? Please be specific — here at the blog, we hire the handicapped and, as its single employee, I am evidence of it.

Written by rcrawford

August 7, 2008 at 11:57 pm

Posted in General

Altman Z-Scores

with 3 comments

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.

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Written by rcrawford

August 7, 2008 at 9:25 pm

Posted in Investments

Tagged with

Teva Pharma (TEVA) August 4, 2008

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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.

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Written by rcrawford

August 5, 2008 at 9:29 am

Posted in General, Investments

Tagged with ,

Sears Update

with 5 comments

In late May, I wrote about Sears Holdings (SHLD) and its value — declaring it undervalued at around $86 per share. In early June, I learned of an external valuation of the real estate holdings and posted a blog entry on that subject. Since then, the stock dropped into the low $70s, would-be shorts began complaining about the poverty of available short shares, and the stock began rebounding — returning to the $80 a share range. Today, the stock is up over 5 percent, and it appears the predicted short squeeze may be underway.

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Written by rcrawford

August 5, 2008 at 2:50 am

Posted in General, Investments

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