tag:blogger.com,1999:blog-67980740919427012352024-03-19T05:23:39.223-04:00Can Turtles Fly?A Contrarian Investment BlogSivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.comBlogger1699125tag:blogger.com,1999:blog-6798074091942701235.post-70052574677964509992024-01-05T18:40:00.002-05:002024-01-05T18:40:38.476-05:00Louis-Vincent Gave on China (Dec 2023)<p>I'm a big fan of Louis-Vincent Gave, and given that he is an expert on China, it is very finely to look at what is happening in China. This is a good interview from December 2023 by Manifold touching on many issues including China's future growth issues, possible future trajectory of its economy, US debt concerns, and some longer term investment ideas of you think US dollar will weaken due to inflation from potential monetization of US debt (LVG thinks Latin American debt, value stocks, commodities and maybe gold are with looking into.)</p><p><br /></p><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="266" src="https://www.youtube.com/embed/w7ApqW550LQ" width="320" youtube-src-id="w7ApqW550LQ"></iframe></div><br /><p><br /></p><p><br /></p>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-33597836014090123012023-12-29T15:35:00.002-05:002023-12-29T15:35:50.070-05:00Purchase: Cineplex (TSX: CGX)<p>Purchased Cineplex (TSX: CGX) which is the dominant movie theatre chain in Canada. It was distressed due to COVID-19 shutdown and took on debt to survive. </p><p>I don't think movies are going away and theatres are still important. I think business is stabilizing and if it recovers to what it was before, it is cheap. Historically, movie theatres have been somewhat resistant to recessions as well (movies are cheaper than many other entertainment options.)</p><p>Canadian dollar is also weak against US$ so I'm mostly looking at Canadian stocks nowadays.</p><p>Purchase price: $8.10</p><p><br /></p><p><br /></p>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-59499920643486893792023-10-26T01:13:00.001-04:002023-10-26T01:13:16.065-04:00Michael Lewis podcast on his FTX cryptocurrency book<p>Michael Lewis has a book out on FTX scandal, the cryptocurrency exchange that collapsed. The following Bloomberg Masters in Business podcast is pretty good and goes over many topics.</p><p><br /></p><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="266" src="https://www.youtube.com/embed/-bRh6yOBc4E" width="320" youtube-src-id="-bRh6yOBc4E"></iframe></div><br /><p><br /></p>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-88275337966300055192023-05-26T16:27:00.001-04:002023-05-26T16:27:06.194-04:00Purchase: Disney (DIS)Don't think you will get rich off this but shouldn't lose money either. Trading near 10 year lows (was about 5% lower before) and coming off pandemic business decline. They recently cut dividend, which is always a bad sign, but their streaming losses are declining. <div><br /></div><div>Risk with Disney (NYSE: DIS) is that they make a lot of money off sports cable television (ESPN) and that is declining and don't know how long they can earn so much off that.</div><div><br /></div><div>Long-term ROE should be 12-15% (median 10 year ROE is around 12%.)</div><div><br /></div><div>Purchase price: $88.78</div><div><br /></div>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-84414342085088371092023-05-24T13:11:00.007-04:002023-05-24T13:11:57.409-04:00Purchased more: Southwest Airlines (LUV)<p>Added more to Southwest Airlines (LUV.) Stock might fall a bit more during recession or due to higher oil prices, but that's hard to predict (recession appears to be mild.) </p><p>Stock price is trading near 10 year lows (ignoring 2020 COVID low.) Earnings should go back to what it was pre-covid so you are buying around P/E of 7. Airlines deserve discount but Southwest has historically been the best-run airline.</p><p>Price: $28.95</p><p><br /></p>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-51436720318687146512023-05-19T16:31:00.003-04:002023-05-19T16:33:55.621-04:00Purchase: Southwest Airlines (LUV)<p>Stock might fall more depending on how recession plays out but I decided to take a small position in Southwest Airlines (LUV.) Going to add more later. Historically, the airline industry hasn't been good for investors but I think Warren Buffett was onto something a few years ago when he took stakes in airlines (before it all went astray due to covid-19.) Southwest is rarely at the current valuations so decided to invest.</p><p><br /></p><p>Hope to write up my research and thinking when I get some time.</p><p><br /></p><p>Purchase price: $29.50</p><p><br /></p><p><br /></p><p><br /></p><p><br /></p>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-53891759466882757282022-11-01T19:27:00.001-04:002022-11-01T19:29:04.314-04:00S&P500 sector performance 2022 YTD (Q1-Q3)As of end of Q3 of 2022, here is how the s&p500 sector performance looks:<div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidsarHQT3aqfof3Ys384tmK-kHxidc3tFoVkW18B6CY-qkqxFLbxApC7MiCzPb_Bm_6qtLouadioIEHCsDzorY4IoUBlOMyzVk3C4qTb4wf6-h385uwdctHzeTeMCd8F16BNG-Et8kqMofdHxjrC6TxIKKnK-3VNbiKOYqjrCnTTn6xYO0napn4K5K/s1066/Screenshot_20221101-184051_Chrome.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1063" data-original-width="1066" height="319" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidsarHQT3aqfof3Ys384tmK-kHxidc3tFoVkW18B6CY-qkqxFLbxApC7MiCzPb_Bm_6qtLouadioIEHCsDzorY4IoUBlOMyzVk3C4qTb4wf6-h385uwdctHzeTeMCd8F16BNG-Et8kqMofdHxjrC6TxIKKnK-3VNbiKOYqjrCnTTn6xYO0napn4K5K/s320/Screenshot_20221101-184051_Chrome.jpg" width="320" /></a></div><span style="font-size: x-small;"><br /></span><div style="text-align: center;"><span style="font-size: x-small;">Source: <a href="https://www.visualcapitalist.com/cp/visualizing-sp-500-performance-in-2022-by-sector/">Visual Capitalist</a>, </span></div><div style="text-align: center;"><span style="font-size: x-small;">https://www.visualcapitalist.com/cp/visualizing-sp-500-performance-in-2022-by-sector/</span></div><div><br /></div><div>Who would have thought communication services would be the worst YTD so far? I never would have. Communications, especially media companies, is sensitive to the economy but telecom/cable/etc tend to be more stable so this sector usually does badly but is not the worst during bear markets. There are two reasons communications has underperformed:</div><div><ol style="text-align: left;"><li><b>Recession/economic slowdown: </b>Although the US economy is doing ok, the market is pricing in major slowdown. In particular, market is forecasting big declines in advertising revenue for media companies. This makes sense given that stock markets usually lead actual recessions by something like 6 months.</li><li><b>High leverage:</b> Telecom companies leveraged up to crazy levels and riding interest rates adversely impact them. Although the smarter ones (like Charter) took on very-long-term debt, it still means they lose flexibility and can't do what they where doing before. For example, issuing debt to buyback shares won't be feasible going forward.</li></ol></div><div><br /></div><div>The performance of the individual components shows how badly some have done:</div><div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgPmT9fhlm5Swb-FzJfAiYkxFD4KkRbqDeeXgwuk6ztnEPiVQwjwLG__x6ifo65k-BzQRUSI_H7bAOpq79vdc_zTEb8VJJlDfyFZ3FmWOXTMvnTbQOLdCyfcHC7JVnp7HqFMSH7Cd3T0STJrbNhnKslimjXMUwjpkM0JUD4OB-b0xSfeoYDWsxnZdNv/s1385/Screenshot_20221101-190221_Chrome.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1385" data-original-width="1080" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgPmT9fhlm5Swb-FzJfAiYkxFD4KkRbqDeeXgwuk6ztnEPiVQwjwLG__x6ifo65k-BzQRUSI_H7bAOpq79vdc_zTEb8VJJlDfyFZ3FmWOXTMvnTbQOLdCyfcHC7JVnp7HqFMSH7Cd3T0STJrbNhnKslimjXMUwjpkM0JUD4OB-b0xSfeoYDWsxnZdNv/w313-h400/Screenshot_20221101-190221_Chrome.jpg" width="313" /></a></div><br /><div style="text-align: center;"> <span style="font-size: x-small;">Source: <a href="http://barchart.com">barchart.com</a>, </span></div><div style="text-align: center;"><span style="font-size: x-small;">https://www.barchart.com/stocks/sectors/sectors-heat-map/fullscreen?sector=telcomm&time=ytd</span></div></div><div><br /></div><div><br /></div><div>For a contrarian, these beaten down stocks look more attractive than other beaten down sectors. Unlike consumer discretionary, information technology and the like, communication services companies have more predictable future and earnings. </div><div><br /></div><div>I think Meta ($META) and DIS ($DIS) look attractive. I haven't researched it invested in telecom companies before (except in special situations) but Comcast ($CMCSA) and Charter ($CHTR) look interesting as well.</div><div><br /></div><div><br /></div>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-53133124270308303992021-08-05T17:01:00.002-04:002021-08-05T17:01:15.306-04:00Sold (liquidation complete): WesternOne<p> Liquidation of Western One (TSX: WEQ) was completed earlier this year around February 2021 (nearly all paid out near end of 2019) and I recieved final payment.</p><p><br /></p><p>Total Return: 10.66% (annualized (estimate): 10%)</p>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com2tag:blogger.com,1999:blog-6798074091942701235.post-33395686272489195132021-08-05T16:37:00.002-04:002021-08-05T16:37:20.508-04:00Purchase: additional Ming Fai (HK: 3828)<p> I added some more shares of Ming Fai (HK: 3828.) They announced they will be taking a loss due to worsening business conditions so it's getting a bit risky. But the price seemed low and I researched them a bit in the past so have some comfort level. If covid-19 gets worse, they will suffer for another year.</p><p>Purchase price: HK$ 0.60</p>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-2397135240350838962021-06-25T17:08:00.002-04:002021-06-25T17:15:57.595-04:00Long-term real estate pricesHard to find long term real estate charts and I found the following that is useful for future reference. Data and chart is from the 2018 <a href="https://www.credit-suisse.com/about-us/en/reports-research/studies-publications.html">Credit Suisse Global Investment Returns Yearbook</a> (summary version free.) Found it from the <a href="https://finalytiq.co.uk/lessons-118-years-capital-market-return-data/">following Finalytiq blog post.</a><div><br /></div><div>This chart is real prices (so add say 3% inflation) and doesn't include rent or imputed rent (so add another 4% (say $1500/month rent x 12 months on a $500k home.)</div><div><br /></div><div>For USA, annual price return was 0.3% so that's like 7.3% annual return if you go with my assumption for inflation and rent above.</div><div><br /></div><div>Overall world figure was better at 1.3% for the price return.</div><div><br /></div><div>Like all other assets, home prices were basically flat until the mid-1900s (partly due to deflation/gold-backed money supply and partly due to deflationary destruction from world war 2.) </div><div><br /></div><div>Australia has had the best price return at 2.2%, most of it from the last 30 years.</div><div><br /></div><div><br /></div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZRnSZQhduVZYecsqHbqE7NFPtq7kock60_mK7XYXVwA0XtrWhYSAHutCaj8ikHOH1F7Q31hSdv0OPBE_sv13Pu0ViGjle8MiRY1IlF_ssrhuwSrekKjprgMXZX4jZO3qKrPd_I5WrmNM/s1080/20210625_170556.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="455" data-original-width="1080" height="164" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZRnSZQhduVZYecsqHbqE7NFPtq7kock60_mK7XYXVwA0XtrWhYSAHutCaj8ikHOH1F7Q31hSdv0OPBE_sv13Pu0ViGjle8MiRY1IlF_ssrhuwSrekKjprgMXZX4jZO3qKrPd_I5WrmNM/w388-h164/20210625_170556.jpg" width="388" /></a></div><br /><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-65500464831434586792021-06-23T03:16:00.000-04:002021-06-23T03:16:11.881-04:00Ten classic investing myths from Peter Lynch<p>Advice from Peter Lynch. I agree with all of them but depending on the type of investor you are, some of them may not apply. Video is kind of humourous so do check it out.</p><blockquote><p><b>Ten investing myths by Peter Lynch</b></p><p>1. It can't go any lower </p><p>2. How High Can it Go? </p><p>3. They Always Come Back </p><p>4. How much can I lose </p><p>5. Darkest before Dawn </p><p>6. I will sell after rebound </p><p>7. I own conservative stocks </p><p>7. Money Lost bc not Buying </p><p>9. I must be right or I am wrong </p><p>10. Avoid Long Shot</p></blockquote><p><br /></p><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="294" src="https://www.youtube.com/embed/c-2uuIz_sAQ" width="366" youtube-src-id="c-2uuIz_sAQ"></iframe></div><div style="text-align: center;"><i>Video source: Business Basics on YouTube (original seems to be CSPAN-2 video from 1997,) </i></div><div style="text-align: center;"><i>https://youtu.be/c-2uuIz_sAQ</i></div><div><br /></div>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-26017849948581868912020-04-15T01:17:00.001-04:002020-04-15T01:17:17.717-04:00Oil stocks look interestingOne of the most interesting sectors for contrarian investors is oil. Oil stocks have crashed and oil price itself has not recovered in the last few weeks (although oil stocks are up 50% from bottom so some positive economic recovery is priced in).<br />
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Current WTIC oil price is around $21. It should be noted that oil price is even lower than it was a few weeks ago even though OPEC, Russia, USA and others have agreed to reduce production. This goes to show how political oil is--hence unpredictable. But if you think oil is low, the unpredictability is not a big risk since upside near a bottom is higher than downside (in fact, there is probably higher chance of it going up due to political events; this is obviously not true if oil price was high or during normal price).</div>
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Shown below is the WTIC futures curve from 1 month to 80 months:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggwHL7N1x5Q0F6qLQuL8ZqWesrlmznE7Bu4K_G765upkNJTvaRF3hTsZF4x1lGoao7FeZUT2hocKG654YtURYAF76gMH8TrQ3sGQBqWwEWQ0wlSBRCPb442G6NYtFrudql0KeN0miOIHY/s1600/20200415_011427.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1600" data-original-width="1061" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggwHL7N1x5Q0F6qLQuL8ZqWesrlmznE7Bu4K_G765upkNJTvaRF3hTsZF4x1lGoao7FeZUT2hocKG654YtURYAF76gMH8TrQ3sGQBqWwEWQ0wlSBRCPb442G6NYtFrudql0KeN0miOIHY/s640/20200415_011427.jpg" width="424" /></a></div>
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Source: ERCE, <span style="color: #1c94e0;">https://www.erce.energy/graph/</span><span style="color: #1c94e0;">wti-futures-curve</span></div>
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Futures are forecasting above us$35/bbl (WTIC) beyond 2 years. You can't blindly follow the futures curve but it does indicate what is a highly probable outcome assuming no major events materialize.<br />
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Anyone that can survive $35 oil might be worth looking into. The industry is not good for value investors but similar to cyclical industries, it can work out for contrarian-type investing.</div>
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Even some high cost Canadian oil<br />
sands might work out and I'm looking into them because:<br />
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# long reserve life<br />
# low sustaining capex needed<br />
# hated by investors (cheaper than supermajors and other popular oil companies)<br />
# declining c$ automatically reduces costs (vs oil sales in us$)<br />
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The hard thing I'm running into is figuring out the breakeven price for oil production at various companies.<br />
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<br />Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com1tag:blogger.com,1999:blog-6798074091942701235.post-33552374875205182792020-03-29T11:00:00.000-04:002020-03-29T11:26:32.460-04:00Thoughts on the stock market - March 2020Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg20etKV_NMWsIlGLJZPXrmK2w4xExKYu79tsqu1WTyiipEtAgpSMhyfqeX0w2UXNcB5OPGuDjnmTFgeIFsFk9rS8C_QD0zBVX1TNVod3pvEASYWtNwAjfTHOH_yAw6A1XQfDDYcm594nQ/s1600/Screenshot_20200329-021454_Chrome.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1600" data-original-width="821" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg20etKV_NMWsIlGLJZPXrmK2w4xExKYu79tsqu1WTyiipEtAgpSMhyfqeX0w2UXNcB5OPGuDjnmTFgeIFsFk9rS8C_QD0zBVX1TNVod3pvEASYWtNwAjfTHOH_yAw6A1XQfDDYcm594nQ/s640/Screenshot_20200329-021454_Chrome.jpg" width="328" /></a></div>
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Source: WSJ market Data</div>
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If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15.<br />
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Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average.<br />
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Forward P/E is in line with long term average but that assumes a strong V recovery. <a href="https://amp.cnn.com/cnn/business/live-news/stock-market-news-today-032720/index.html?__twitter_impression=true">Consensus forecast</a> is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E.<br />
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The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to:<br />
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<li>•<span style="white-space: pre;"> </span><b>Wait for market to fall another, say 30%, and buy high quality companies</b></li>
<li><b>•<span style="white-space: pre;"> </span>Buy now those distressed ones that have fallen a lot</b></li>
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You can also do a bit of both but you need to <b>decide on portfolio allocation way ahead of time</b>. It’s very complicated to compare good companies that are slightly undervalued versus distressed cheap ones while you are in the middle of a bear market and prices are fluctuating all over the place. So it’s better to think about your allocation, risk tolerance, portfolio weight, etc, ahead of time- do it nowif you haven’t before.<br />
If you want to deploy capital now, it’s probably best to look at the distressed ones. They fall into one of the following:<br />
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<li>•<span style="white-space: pre;"> </span><b>Directly impacted by covid -19 coronavirus</b>: eg. Airlines, cruiselines, hotels, movie theatres, etc. These are extremely cheap but have high bankrupty risk. You have to analyze politics, govt bailouts, future customer retention, and debt risk.</li>
<li>•<span style="white-space: pre;"> </span><b>Indirectly impacted by virus</b>: eg. Real estate firms, entertainment companies, retail, etc. These can be safer but you really need to understand the industry dynamics and future customer outcomes. For example, is a portion of a real estate company permanently impaired or not?</li>
<li>•<span style="white-space: pre;"> </span><b>Oil & Gas</b>: Hard to believe but while the virus pandemic is unfolding, we have a major oil economic war is going on. Production is being ramped up at the same time demand is collapsing, have oil prices and associated companies have fallen off a cliff. This is a very unique opportunity. A lot of companies may go bankrupt but if you can pick the right ones, you will make a killing.</li>
<li>•<span style="white-space: pre;"> </span><b>Distressed industries with no long-term virus impact</b>: Due to indiscriminate selling, I think, industries that struggled before the stock market crash (with possibly secular decline issues) have fallen drastically. Two industries I’m researching heavily are media and automotive parts. This category is interesting because I don't think the long-term business is impacted by the virus or a recession .</li>
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If I get some time, I’ll write up some stocks I’m researching. If you have some suggestions, email me or reply on twitter.<br />
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Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com33tag:blogger.com,1999:blog-6798074091942701235.post-84052246096963782172020-03-27T10:37:00.001-04:002020-03-27T12:05:29.639-04:00I'm tweeting more now... Check my twitter feed alsoNow that we have entered a bear market, I'm following it more. I'm tweeting more nowadays. I'll still post long articles or investment evaluations here.<br />
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For quick thoughts and articles I reference, follow my tweets at username <a href="https://twitter.com/Sivaram_V">@sivaram_v</a>. QR code below.<br />
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Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com2tag:blogger.com,1999:blog-6798074091942701235.post-86898556745847239832019-10-06T22:44:00.000-04:002019-10-06T22:44:05.394-04:00Good interview with Louis Vincent Gave - 2019 Have always been a big fan of Louis Vincent and ran across this <a href="https://themarket.ch/interview/gave-the-bond-market-is-the-biggest-bubble-of-our-lifetime-ld.945?mc_cid=86c69b7fb5&mc_eid=17eea0ec8f">good interview with theMarket.Ch</a> (thanks to Jesse Felder for bringing this to my attention).<br />
<br />
Below are some responses I found worth quoting. There is a lot more discussed and I recommend that you read the whole interview.<br />
<br />
<blockquote class="tr_bq">
<b>Q: What's ailing the automotive sector?</b> </blockquote>
<blockquote class="tr_bq">
Louis Vincent Gave: There are a number of structural issues, but the most significant development has been the realization that the Chinese car market is done growing. For years, the Chinese market has been growing by two to three million cars per year. Financial markets have just extrapolated this kind of growth into the future. But that turned out to be wrong. The Chinese car market has probably hit its limit at 25 to 30 million units per year. In most parts of the world, the auto sector has stopped growing. It’s no surprise then that Germany has seen such a collapse lately. </blockquote>
<blockquote class="tr_bq">
...</blockquote>
<br />
<blockquote class="tr_bq">
<b>You mentioned that in every bubble there is the belief that there will be another sucker who will buy the assets at a higher price. Who is that sucker today?</b> </blockquote>
<blockquote class="tr_bq">
Central banks. Bond investors think that the ECB, the Bank of Japan, now also the Fed again, will always step in and buy bonds. They don’t care if the yield on German Bunds is minus 50 or minus 200 basis points. The ECB will buy them.
</blockquote>
<br />
<blockquote class="tr_bq">
<b>And you think this belief will turn out to be wrong?</b>
That’s the big question: Will central banks continue to buy bonds regardless of what happens? And that brings us back to the subject of inflation. To me, this question is linked to energy. If energy prices stay where they are, central banks can continue with their crazy monetary policy. But if energy for whatever reason starts to shoot up, it will be much harder for central banks to say there is no inflation and therefore we can continue with our negative interest rate policy. </blockquote>
<blockquote class="tr_bq">
...</blockquote>
<br />
<blockquote class="tr_bq">
<br />
<b>How will that war be played out?</b> </blockquote>
<blockquote class="tr_bq">
Washington has decided to move the battle onto technology, because that’s one of the fields where the US has a competitive advantage. If this was really just a trade war, would the US government tell the semiconductor manufacturers not to sell to Huawei anymore? Of course not. If it was just a trade war, the Americans would want to sell more stuff to the Chinese. So, the battlefield of the new cold war is technology. The US government tells the American companies to divest from China. Meanwhile, China invests hundreds of billions of Dollars into building new tech competitors and into developing its own semiconductor industry.</blockquote>
<br />
<blockquote class="tr_bq">
<b>What will this mean for tech stocks?</b> </blockquote>
<blockquote class="tr_bq">
This is massively bearish for the tech sector. You get government intervention on both sides, that undermines their entire business model. It strikes me as crazy that the large US tech stocks are still performing so well. The battle field for the new cold war will be technology, and yet, investors go and buy tech stocks. This is insane. That is like buying real estate in Alsace in July of 1914. You don’t want to own the battlefield. </blockquote>
<blockquote class="tr_bq">
...</blockquote>
<br />
<blockquote class="tr_bq">
<b>What’s a more intelligent portfolio?</b> </blockquote>
<blockquote class="tr_bq">
I would buy equities with an underweight in US, and I’d hedge them with energy stocks. Instead of buying bonds, I’d buy the likes of Total, BP and Royal Dutch Shell. They will give you the hedge in case energy prices go through the roof. Plus, they offer a decent dividend yield of 5 to 6 per cent. So, in a way, I see energy stocks as the new bonds.
</blockquote>
<br />
<blockquote class="tr_bq">
<b>How about gold?</b> </blockquote>
<blockquote class="tr_bq">
I’m not a gold bug at all. I never liked the idea of owning something that does not produce any cashflow. But we have to accept that the global rules have changed. In the past year, we moved to a world where central banks, which have been net sellers of gold for 25 years, have become net buyers of gold again. This is an important change. For 25 years, we had two marginal sellers of gold: central banks, and the gold miners. We have moved to a world where the only sellers of gold are the mining companies, and because of their dreadful stock market performance, they have not been able to invest much capital into the development of new mines. This is the kind of world where we can see a large upward move in gold like we saw this summer. And mind you, this was in an environment of a rising Dollar.
</blockquote>
<br />
<blockquote class="tr_bq">
...
</blockquote>
<br />
<blockquote class="tr_bq">
<b>Which equity markets do you like?</b> </blockquote>
<blockquote class="tr_bq">
I’m fairly bullish on emerging markets for the coming year. Look at what’s happening there. India just cut its corporate tax rate from 30 to 22 per cent. Look at the tax cuts in China, the interest rate cuts in Russia, Indonesia, India, Brazil. Don’t forget, emerging markets are still the places where cutting taxes and interest rates has an effect. When interest rates in Europe go from minus 40 to minus 50 basis points, that does absolutely nothing to the economy. But if interest rates in India go from 7 to 5 per cent, that means more mortgage demand, that means more people borrow money to buy motorcycles, and so on. This has a big effect.
</blockquote>
<br />Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-57690752155715542542019-10-05T22:57:00.000-04:002019-10-17T22:34:21.226-04:00Purchase: Ming Fai International Holdings (HK: 3828) I will try to write up my evaluation when I get time but here are intial thoughts:<br />
<ul>
<li>cheap stock in highly competitive market </li>
<li>micro cap </li>
<li>insiders and prominent investor ( David Webb) owns huge stake </li>
<li>no moat </li>
<li>vulnerable somewhat to US-China trade war (20% sales and 25% profit from USA, China slowdown) </li>
<li>good long term growth from China tourism growth </li>
<li>strong balance sheet</li>
<li>high dividend </li>
</ul>
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<b>Purchase price (HK:3828): HK$0.81</b><br />
<b><br /></b>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-73578543109509700322019-10-05T22:42:00.001-04:002019-10-17T22:34:36.998-04:00Purchase: Lion Rock Group (HK: 1127)Not sure if timing is right--world economy slowing, China-US trade war likely to get worse, etc--but decided to take a position in two Hong Kong microcaps.<br />
<br />
You can find low P/E stocks in HK and unlike Japan, where you can also find low valuation , capital allocation is better (many actually pay out dividends instead of sitting on cash) and try to grow (may Japanese companies are facing deflation and population shrinkage). However, fraud risk is higher is HK compared to Japan.<br />
<br />
I will try to write up my evaluation when I get time but here are intial thoughts:<br />
<ul>
<li>out of view micro cap </li>
<li>rolling up in big fragmented industry </li>
<li>insiders and reputable investor (David webb) own big stake </li>
<li>low tax (Bermuda and HK have no witholding tax) </li>
<li>competitive industry </li>
<li>no moat </li>
<li>low growth but potential for China growth if they decide to enter market </li>
<li>strong balance sheet</li>
<li>high dividend </li>
</ul>
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<b>Purchase price (HK: 1127): HK$1.18</b><br />
<b><br /></b>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-36122134886543693752019-01-20T13:35:00.001-05:002019-01-20T13:35:29.677-05:00Sold: Nevsun (NSU) -- takeover completedHaven't had time to spend too much time on investing but I do keep up with news and research things here and there.<br />
<br />
With the American market selloff in Q4 2018, I have been investigating several stocks. As usual in these corrections, the lower quality stocks have sold off more. I notice that leveraged businesses are somewhat cheap right now. As an example, a lot of John Malone's companies have sold off quite a bit (some of it due to company/industry specific issues but market selloff amplified it). For example, Liberty Global (LBTYA, LBTYK) and Liberty Latin America (LILA, LILAK) have fallen a bit. They have lots of debt and the is concern over the future of the cable industry but they are getting cheap.<br />
<br />
In the meantime, in early January, the Nevsun (NSU) takover was completed (on Jan 4). Took a bit longer than forecast bute overall, satisfied with how things turned out.<br />
<br />
Price Sold: $6.00<br />
<b>Total Return: 4.88% </b>(annualized (estimate): 23%--not meaningful)<br />
<br />
With a small portfolio these small returns would not be worth it but with a moderate portfolio, it can be ok. <br />
<b></b>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-77379115183857997062018-11-19T00:21:00.000-05:002018-11-19T00:21:10.922-05:00Real Vision's Stanley Druckenmiller interview (2018)Thanks to <a href="http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/stanley-druckenmiller-interview-(2018)/">Liberty</a> for pointing me to this excellent interview with hedge fund superinvestor Stanley Druckenmiller, conducted by Real Vision. Druckenmiller is a macro investor so anyone who is macro- oriented should definitely check it out.<br />
<br />
As he makes clear in the interview, he made most of his money in interest rates and currencies and doesn't do much equity investing, so small investors like me who are focused on stocks won't find much practical insights. Nevertheless, you can glean some thoughts about global macro issues. Of note, the interview covers loose money policy over the last decade and potential trade war with China. In my opinion, these two are the most important issues, not just in the immediate future but also over the next 25 years.<br />
<br />
Druckenmiller also gives the most important investing lesson he learned: one should always know whether they are on a hot streak (doing well) or if they are on a cold streak (bad). You should realize what streak you are on and act appropriately. Don't be like a gambler who, on a losing streak, bets everything in order to make it back.<br />
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Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-23965065403724439182018-10-23T20:16:00.000-04:002018-10-23T20:16:52.930-04:00Purchase: WesternOne (TSX: WEQ)WesternOne (TSX: WEQ) is being liquidated and it seems like an attractive investment so I took a position in it. I came across the idea from Sculpin at <a href="http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/weq-western-one-inc/msg349257/?topicseen#msg349257">Corner of Berkshire and Fairfax</a> (thanks).<br />
<br />
You can read the <a href="https://www.weq.ca/investor-info/news-releases/westernone-inc-announces-sale-equipment-rentals-and-heat-business-united">official press release</a> but basically they are winding up operations and expect to pay out $2.20 to $2.43. It will be adjusted up or down by working capital but hopefully no negative surprises emerge. Initial distribution in Q1 2019 with another one upon liquidation.<br />
<br />
A shareholder vote is required but about 38% is held by insiders who approve the deal. So I think risk is low.<br />
<br />
The return is going to be driven by how much is paid out early. I'm hoping most of it will be paid out by end of Q1 2019.<br />
<br />
<b>Purchase price (TSX: WEQ): $2.10</b><br />
<br />
<span style="color: #38761d; font-size: large;">Return Expectation</span><br />
<span style="color: #38761d; font-size: large;"><br /></span>
Liquidation price (conservative, low): $2.20<br />
Return: 4.8%<br />
<br />
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Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-59039899475078230942018-10-19T18:00:00.000-04:002018-10-19T18:00:01.597-04:00Purchase: Nevsun (NSU)I took a position in Nevsun (TSX: NSU) which is being bought out by Zijin Mining, which is one of the largest gold mining companies in the world. zijin is a chinese company that trades in Hong kong and there should be no risk with financing and the like. I owned Nevsun about 10 years ago and this buyout would bring closure to one of my earliest stocks.<br />
<br />
Since the spread is so small, this deal is not worth it for you if your holdings are in a different currency and you don't hedge; or have a US$-denominated account. C$ currency fluctuations can wipe out any gains.<br />
<br />
NSU also trades in USA but company is Canadian and all my dealings are in C$ and on TSX.<br />
<br />
<b>Purchase price (TSX: NSU): $5.72</b><br />
<br />
<span style="color: #38761d; font-size: large;">Return Expectation</span><br />
<br />
Takeover price: $6<br />
Purchase price: $5.72<br />
<br />
Probability of success (my estimate): 99%<br />
Return on success: 5%<br />
Probability of failure (my estimate): 1%<br />
Return on failure (my estimate): -56% (assume it drops to $2.50, the multi-year low from early 2018 (it has traded between $3 and $4 over the last few years) (however, the price before another hostile offer (from Lundin mining) was $3.82 and Lundin hostile offer was for $4.75)<br />
<b><br />Expected Return: 4.3%</b><br />
<br />
<span style="color: #38761d; font-size: large;">Buffett's Four Key Questions</span><br />
<br />
<b>(1) How likely is it that the promised event will indeed occur?</b> <br />
<br />
No buyout condition and Zijin Mining is listed in Hong Kong and is a large company so low financing risk. Unlikely to be blocked by China or Canada (asset is in Africa so Canada should not have any concern and Canada does not generally block mining takeovers--it will hurt the mining industry and future foreign investments).<span style="white-space: pre;"> </span><br />
<b>(2) How long will your money be tied up?</b><br />
Companies expect deal to close by end of 2018<span style="white-space: pre;"> </span><br />
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<br /></div>
<b>(3) What chance is there that something still better will transpire - a competing takeover bid, for example?</b> <br />
None -- already went through prior hostile offer from Lundin at a lower price of $4.75.<span style="white-space: pre;"> </span><br />
<b>(4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?</b> <br />
Although not ideal, wouldn't mind owning business if deal fails. Gold exposure is likely attractive given rising trade wars and geopolitical risk (from a fairly peaceful era).<br />
Owned Nevsun about 10 years ago so somewhat familiar with it. midstage junior operating in very risky African country.<br />
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Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-20115055835857045682018-07-14T19:29:00.000-04:002018-07-14T19:29:03.376-04:00Sold: Monsanto (merger completed)Have been busy, and probably not efficient with my free time, so haven't blogged much... Need to get into a rythm and dedicate more time to investing. I think I'm going to give myself to post once a week and maybe just do a roundup of things I did that week, articles I read,etc.<br />
<br />
Anyway, the Monsanto buyout by Bayer successfully closed a month ago and I just got around to reviewing it. As with most mergers, it took a bit longer than initially forecast--this is why if you are into risk arbitrage, you should always factor in a longer closeout process which lowers your annualized return. As I remarked a while ago, m&a is getting riskier with potential USA trade war with China, and likely followed by escalating trade war with Europe, so deal breaks are likely to become more common. Already several Chinese and high technology deals ran into issues.<br />
<br />
Overall return wasn't that spectacular but I was satisfied with it. Dividends added about 1.8% which is always a positive with delayed deals (not all deals pay dividends when deal agreed).<br />
<br />
<br />
Price Sold: $128<br />
Total Return: 11.5% (annualized (estimate): 11.8%)<br />
<b>Total Return (C$): 12.34% </b>(annualized (estimate): 12.5%)<br />
<br />Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-28986304326847002902017-11-11T04:02:00.002-05:002017-11-11T04:02:54.971-05:00A Look at Tripadvisor (TRIP) and its Two ProblemsIt's hard to find anything that seems cheap in the current bull market but as in any market, some stocks do sell off for various reasons. One of the ones that attracts me is Tripadvisor (TRIP*). As the chart below illustrates, the stock is trading near a 5-year low and is down about 70% from its 2014 peak (share count hasn't changed much and no major return of capital to shareholders).<br />
<br />
(* You can also own TripAdvisor indirectly through John Malone's holding company, Liberty TripAdvisor, with ticker symbols LTRPA/LTRPB. You should evaluate this option as well. Sometimes holding companies, especially if it is well run like most Malone companies have historically been, are better; sometimes they are not (there may be additional overhead/fees for the holding company, may have worse shareholder rights (doesn't favour minority shareholders) and market generally places a holding company discount on such shares and they may be illiquid))<br />
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I remember looking briefly at TripAdvisor several years ago when it was spun out of Expedia (I was evaluating Expedia at that time--too bad I didn't buy that) and it seemed very expensive at its IPO. I think its P/E at IPO was 50+ and Price/Revenue was 10+. The market was definitely pricing TripAdvisor with expectation of very high growth rates.<br />
<br />
Now that the stock has sold off quite a bit, is it cheap?<br />
<br />
Well, the revenue has doubled since 2012 from $700M (roughly) to $1.5B now. But its profit has fallen from a peak $226M in 2014 to $120M last year and about $96M TTM. Profit may be temporarily depressed (depends on how you view their current problems).<br />
<br />
TripAdvisor is attractive for a few reasons:<br />
<ul>
<li><b>Massive moat:</b> TripAdvisor has 390+ million unique monthly visitors. This is a massive number and very few internet companies in any industry can reach such numbers. As a customer of TripAdvisor and someone who uses the site quite often for travel, I think the switching costs are very high and I doubt too many other companies can replicate its content for travel planning.</li>
<li><b>Low capex, high ROE:</b> When the company was doing well a few years ago, it had 20%+ ROE. Now it has dropped below 10% but it depends on if you think current profitability is temporary or not. The company has low capex requirement and product/service doesn't become obsolete easily.</li>
<li><b>Good (low to moderate) growth potential:</b> The online travel industry is likely to become more popular over time. Although TripAdvisor may have captured most of the obvious customers, it will still grow, at a minimum I think it will grow at inflation + population growth.</li>
</ul>
<div>
<br /></div>
<div>
Having said all that, there are <b>two big problems with TripAdvisor</b>...</div>
<div>
<span style="font-size: large;"></span><br /></div>
<div>
<span style="font-size: large;">Strong Moat, Low Profits?</span><br />
<span style="font-size: large;"><br /></span>
First of all, I have been thinking hard about this company and researching it quite a bit and... <b>is this one of those companies that has a strong moat but low ability to profit from it?</b> Is it another Yelp (YELP)--a dominant restaurant/event/shop review site that has been unable to make much money. TripAdvisor has a lot of online visitors and has tried all sorts of things over the years but hasn't really made much money. As a user of TripAdvisor, I don't think they can easily increase profitability (other than go into adjacent verticals or something).</div>
<div>
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">TripAdvisor vs Priceline/Expedia</span><br />
<span style="font-size: large;"></span><br /></div>
<div>
Secondly, TripAdvisor appears to have little bargaining power and seems to depend heavily on two companies for almost half of its revenue. <a href="https://www.sec.gov/Archives/edgar/data/1526520/000156459017001783/trip-10k_20161231.htm">From the 2016 10K</a>,</div>
<div>
<blockquote>
"We derive a substantial portion of our revenue from a relatively small number of advertising partners and rely significantly on our relationships. For example, for the year ended December 31, 2016, our two most significant advertising partners, Expedia and Priceline (and their subsidiaries), accounted for a combined 46% of total revenue."</blockquote>
This is actually listed under the risk factors at the front so it shouldn't be a surprise to most but it still makes me nervous. Basically, online travel agents, <b>Expedia and Priceline, contribute almost half (46%) of their revenue</b>. <br />
<br />
<b>To make matters worse, those two are sometimes direct competitors</b>, especially in some recent direct booking services being pursued by TripAdvisor. They are probably best considered <a href="https://en.wikipedia.org/wiki/Frenemy">frenemies</a>. Apparently TripAdvisor is rolling back those services (probably after Priceline and Expedia started a battle and decimated TripAdvisor).<br />
<br />
Furthermore, if I'm not mistaken, <b>TripAdvisor generates less than 5% of Priceline's revenue</b> (probably the same for Expedia). This basically means that Priceline doesn't care if it loses the TripAdvisor revenue; in contrast, TripAdvisor cares very much about Priceline's payments to TripAdvisor.<br />
<br />
If you ever studied corporate strategy or Porter's Five Forces or anything like that, you will see that <b>TripAdvisor is in a bad competitive situation here</b>. You just don't want to be in a situation where two entities, who are sometimes your competitors, are responsible for 46% of revenue, while they get less than 5% of their total revenue from you!<br />
<br />
<span style="font-size: large;">Worth Waiting and Seeing</span><br />
<span style="font-size: large;"><br /></span>
Although the competitive/supplier/customer industry dynamic looks bad for TripAdvisor, it is still worth investigating because some of its advantages are pretty big. I really can't see too many companies (except possibly something like Facebook) being able to capture almost 400 million global travelers who use the site on a regular basis. Even companies like Amazon likely can't (Amazon doesn't have strong brand outside a few regions like North America/India/etc, or outside tech circles). I'm just not sure how well TripAdvisor can monetize its users.<br />
<br />
TripAdvisor's heavy reliance on Expedia and Priceline is also largely due to the hotel segment. If TripAdvisor can generate revenue from other travel-related segments (attractions, airlines, train bookings, global/foreign events, etc), it can lessen its dependence. Remains to be seen what the company does.</div>
Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-43361193645978811732017-10-01T02:07:00.003-04:002017-10-01T02:07:31.969-04:00First Look: Chipotle Mexican Grill (CMG)<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1FwiPhS5hIoR8cda7LSMiGUvxaImh9VKez9XfHPp1w5oQc5JVCEr0j9auBzaJa2o1R_nRWqJjYEfTgSxHjfbGYEtXhjZkreDYrzB83e_GOK8lTwLtzpIYI5YMMNyzcsdF0cMnWTEuTcs/s1600/Chipotle+logo+v1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="738" data-original-width="715" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj1FwiPhS5hIoR8cda7LSMiGUvxaImh9VKez9XfHPp1w5oQc5JVCEr0j9auBzaJa2o1R_nRWqJjYEfTgSxHjfbGYEtXhjZkreDYrzB83e_GOK8lTwLtzpIYI5YMMNyzcsdF0cMnWTEuTcs/s320/Chipotle+logo+v1.png" width="310" /></a></div>
This isn't my type of company. <br />
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It isn't in my circle of competence...but I've been researching and studying the industry.<br />
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It doesn't have the valuation I like... but that depends on what one thinks is normal earnings.<br />
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What it is, is a contrarian, broken, growth stock with very good backward-looking numbers and uncertain future.<br />
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<span style="color: #783f04; font-size: large;">Overview</span><br />
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Chipotle Mexican Grill (CMG) is a restaurant chain that apparently pioneered and popularized "fast casual" dining--basically a cross between fast-food (e.g. McDonald's, KFC) and casual (eg. TGI Friday's, Chili's, Boston Pizza). The food is Mexican, prepared similar to fast-food restaurants and priced in between fast-food and casual (a burger at a fast-food place might be $4 whereas a burrito at Chipotle will be something like $6).<br />
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I don't know much about restaurants and am not really into food--sometimes I wonder if I should even be looking at this company--but from reading numerous articles, it seems that some of the things Chipotle does is somewhat unique and appears to be hard to duplicate (might write more about this and its possible moat (if any) in the future). Chipotle focuses on fresh, organic, ingredients while avoiding processed foods and attempts to prepare as much of the food in the restaurant as possible (this is not the case with fast-food restaurants). I don't know how much this matters to customers but it does appear that Chipotle is on the right side of the organic/healthy-food trend (not sure if this is a fad or a long-term trend).<br />
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Unlike a casual dining restaurant, Chipotle is set up more like a fast-food restaurant and serves customers much faster and at slightly lower prices. Thus, <b>it has very strong profitability and high throughput (orders per minute can be really high).</b><br />
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It's hard to say for sure, and I don't have any solid insight, but my guess is that Chipotle's food category (Mexican/ethnic) is probably a growth area. The US population is becoming a bit more Hispanic and I suspect there is an increasing demand for this type of food. The Mexican-type food is also something "new" and fresh and probably has room to capture market. Strictly speaking, it is nothing new--this stuff seems to be already popular in Southern US; and companies like Taco Bell have been around for decades--but compared to burgers and fries, or pizza, or sandwiches, or whatever, it looks like a different alternative, at least to me.<br />
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<span style="color: #783f04; font-size: large;">Why Look at This Now?</span><br />
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Chipotle was a high-growth stock in the mid-2000's up until a few years ago. <b>It was flying high until e-coli sickened numerous customers in 2015 and the stock crashed and burned.</b> Actually it has had several food-safety-related crises, including one norovirus outbreak in mid-2017, so the situation is a bit worse than it seems (it doesn't seem to be just one situation). <b>If you believe this company cannot overcome the food safety issues--say it is systematically related to their business structure and is unfixable--then you should not look into this stock.</b> I'm still researching this to see if they have actually instituted procedures to avoid the same problems in the future.<br />
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This is definitely a contrarian stock. The stock is trading near 5-year low and about 60% off its all-time high in 2015.<br />
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(As usual on this blog, you can click on any image to get a bigger, more legible, image.)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzMS49smXFimAP_QfQlcJ3WEs5XPTFzsQZkEBvnZvS65qxQ_xabz9Z3EOA6H9ZOgjs48TsJxE6nI7aAFZoHPScfrbM1yOTkqTOpbiWSiqP79bWigSsKUctyNdRhcMWEsLtqEcT_gcJ_50/s1600/CMG+stock+price+to+Oct+1+2017.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="715" data-original-width="1417" height="322" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzMS49smXFimAP_QfQlcJ3WEs5XPTFzsQZkEBvnZvS65qxQ_xabz9Z3EOA6H9ZOgjs48TsJxE6nI7aAFZoHPScfrbM1yOTkqTOpbiWSiqP79bWigSsKUctyNdRhcMWEsLtqEcT_gcJ_50/s640/CMG+stock+price+to+Oct+1+2017.png" width="640" /></a></div>
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Pre-crisis, when earnings were not depressed, the stock used to trade at obscene multiples--something like P/E of 50! So the fact that the stock is down so much doesn't necessarily mean it will go back to what it was. I doubt growth investors will be coming back to this stock, and even if they do, they probably won't attach such high multiples.<br />
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The stock is trading at the following ratios (note: figures are rough estimates (I usually just do round numbers and sometimes computed over a period of time). Figures will change depending on what current price is, etc):<br />
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P/E: 65<br />
Forward P/E (Wall Street analysts): 27<br />
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P/FCF: 54<br />
Forward P/FCF around 25<br />
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P/Sales: 2.1<br />
P/Book: 6<br />
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Earnings are depressed due to the crisis but even with optimistic forward-looking earnings, P/E and P/FCF are 25+. So it isn't exactly cheap. This is not a classic Graham value stock.<br />
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So why still investigate this stock if it seems to trade at high multiples?<br />
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<span style="color: #783f04; font-size: large;">Does History Repeat?</span><br />
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Chipotle's sales fell due to the foodborne illness crisis but appears to be recovering. However, note that store count went up quite a bit so some of the revenue increase is from that. Average store sales have declined from what they were in 2015. In any case, the fact that total revenue is sort of getting back to what it was pre-crisis, shows that customers still visit the stores and we may be seeing early stages of the recovery.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipYeKqs4uBvYgSWymPekJBEn3pj8t4SWQ3ORcXfYJppKJVQ1RAjez923bpQfwhOySUhXZiMuoG5ZbFVJQPcMYWDfOF4le4rO969-Fu8mbwTPEfxxrGdwDp00Q48-OWAH4a3ovhWJ_-z6I/s1600/CMG+historicals+-+revenue+and+profits.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="241" data-original-width="1003" height="153" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipYeKqs4uBvYgSWymPekJBEn3pj8t4SWQ3ORcXfYJppKJVQ1RAjez923bpQfwhOySUhXZiMuoG5ZbFVJQPcMYWDfOF4le4rO969-Fu8mbwTPEfxxrGdwDp00Q48-OWAH4a3ovhWJ_-z6I/s640/CMG+historicals+-+revenue+and+profits.jpg" width="640" /></a></div>
As seen above, before the crisis, the company was earning about $400M in profit or FCF (both are close), which is about 10% of sales.<br />
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Right now the profit or FCF margin is in the 3% range (based on the Morningstar figures I am looking at, FCF margin is about 3.9% and profit margin is 3.2%).<br />
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<b>The question for potential investors is whether the company can go back to 10% profit margin. A lot of qualitative analysis needs to be carried out but I think the company may be able to achieve 7% margin.</b><br />
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The other question to ask, especially for growth companies that are not cheap, is whether it can reinvest profits back into the business and if so, at what rates? Basically, what is the ROE? Or strictly speaking, what is its return on incremental reinvested capital, and what percent of its earnings/free cash flow can it reinvest at those rates?<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWQSxO5SXoWAeacs9DIQJUiTsPKGXZ2LbtVUPmZx9ZdF2fravjFN8__JC-SM5dtwhNPKnxnDeQYk0WSSYmbzBi_YXGQAWFvqm7d1n6qXZM98qnn03tC9TAj9v3gdJo1gvNcJGB2cSCXW0/s1600/CMG+historicals+-+ROE+and+margins.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="249" data-original-width="1003" height="158" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWQSxO5SXoWAeacs9DIQJUiTsPKGXZ2LbtVUPmZx9ZdF2fravjFN8__JC-SM5dtwhNPKnxnDeQYk0WSSYmbzBi_YXGQAWFvqm7d1n6qXZM98qnn03tC9TAj9v3gdJo1gvNcJGB2cSCXW0/s640/CMG+historicals+-+ROE+and+margins.jpg" width="640" /></a></div>
<b>Chipotle had amazing ROE (20%+) in the past (pre-crisis).</b> This is very good for a company with no debt (i.e. ROE not boosted by debt leverage), but like all restaurants and retailers, it does have sizeable operating lease obligations (so it is being boosted by leases--but this is common for the industry).<br />
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Furthermore, it paid no dividends and barely bought back any stock (only material purchase was recently, after the crisis). So it is able to reinvest most of the earnings back into the business. The rapidly increasing store count (pre-crisis) sort of proves that. I need to dig deeper into the SEC filings to make sure it is investing properly but <b>at first glance, this seems like it is able to reinvest almost all its earnings.</b> <br />
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<b>It is very rare for a company with an ROE of 20%+ being able to reinvest most of its earnings. No wonder the stock market attached a P/E multiple of 50, or whatever, to the company in the past.</b><br />
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The current market cap is something like $9B so Chipotle can't continue this for very long. However, it does have room to grow and I think if its business is intact and customers desire the food then it can grow for a solid 5-10 years. Compared to established restaurant chains, it is still moderately sized. For example, McDonald's has a market cap of around $100B, while Restaurants Brands International (Canada; Tim Hortons and Burger King) is around $36B, Yum Brands (KFC) is $25B, Starbucks is like $77B, and so on. The business models of these chains are all different--many are franchised whereas Chipotle is not; food types are different; etc--so it isn't a direct comparison but nevertheless, it does sort of give an idea of the potential.<br />
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<span style="color: #783f04; font-size: large;">More Homework to Do</span><br />
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Hopefully this post gave a sense of what we are looking at and why Chipotle may be worthy of an investment. I remember briefly looking at this about an year ago when William Ackman made a big investment--his firm owns around 10% of shares--but the stock seemed expensive. It has fallen maybe 20% since then and, although the valuation is still high, it is attractive. I think there are two key things one needs to answer:<br />
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i. <b>What caused the food safety problems and will is happen again?</b> Chipotle has rolled out new procedures and altered some food is prepared so what is the impact of this? Costs are probably higher now that there are more food safety procedures. But has the final product been altered to the point that consumers don't value it like they used to (taste? less fresh? etc)?<br />
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ii. <b>What is the long-term profitability and growth potential?</b> Can it really reinvest most of its profit at, say, 15% ROE? Is it really worth paying a P/E multiple of around 20-25 for this company?<br />
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I'll be thinking about these questions. Stay Tuned...<br />
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<br />Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0tag:blogger.com,1999:blog-6798074091942701235.post-1171350796701274872017-09-27T21:09:00.002-04:002017-09-27T21:09:59.323-04:00Sold: Cabela's (CAB) Merger Successfully ClosedI haven't had much time to blog and the highly-valued markets are frustrating for any contrarian or anyone waiting for low valuations. I have continued to research some companies and hope to write something up soon but the valuations are not compelling. If anyone has some stock ideas I should investigate, leave a message below or email me (If I am interested in them, I'll research it and write it up).<br />
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In any case, the Cabela's (CAB) merger went through. This was a low return, short time-frame, situation and it worked out as expected although it went through a turbulent period. The stock sold off quite a bit after I bought it, possibly due to risk of the financial division sale not going through. That would have been the best time to enter this risk arbitrage position. It kind of seemed like this deal might not close and I would take a loss but fortunately it didn't turn out that way. As is usually the case with risk arbitrage, in hindsight the market always looks like it was wrong (at least for deals that close). <br />
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As I mentioned when I first took the position, I made some currency computation errors and ended up with a much larger position than I would have liked. I'm glad the deal closed given that there was a real risk of taking some big losses due to the position sizing mistake.<br />
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I'm kind of backing off risk arbitrage positions now (if I like the company being bought out, I will probably still take a position). In some sense, it sort of reminds me of what happened in 2007 when there were a lot of deals being done in late stages of a bull market at high valuations. If you are into risk arbitrage, you should be extra cautious for several reasons:<br />
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<li><b>Market valuations are high:</b> One can't generally tell how overvalued a market is, or if it is even in a bubble, except in hindsight. But my opinion is that the market is highly valued and possibly in a big bubble. Risk arbitrage deals are kind of dangerous right now because the buyout deals are happening at high valuations (prices will fall a lot if deal fails), and purchasers will try to weasel their way out of deals (using any legal language permitted in the deals) during bad times (such as when the stock market falls and they realize they have bought something at really high valuation, or if they can't get financing).</li>
<li><b>Unpredictable American presidency:</b> The Trump administration is hard to predict and deal decisions almost seem arbitrary. I would definitely be cautious with foreign buyouts (especially from China, India, Korea, etc).</li>
<li><b>Currency fluctuations: </b>Might not apply to you but if you are Canadian, you have to be careful since the C$ has appreciated against the US$ recently and possibly may continue if FedRes doesn't raise rates but BOC does. It looked like I would lose money on this deal because the US$ fell quite a bit within the last few months, but it rallied in the last few weeks so I ended up only losing about 1% on fx.</li>
<li><b>Risk with numerous sectors:</b> Several industries are facing problems and it's not clear if you are taking positions in areas with potential secular declines. For instance, the retail sector has deteriorated way more than I imagined and I suspect the Cabela stock would have fallen way more than I initially estimated if the deal had broken.</li>
</ul>
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Overall, satisfied with how things turned out.<br />
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Price Sold: $61.50<br />
Total Return: 3.8% (annualized (estimate): 25%--not meaningful)<br />
<b>Total Return (C$): 2.8% </b>(annualized (estimate): 18%--not meaningful)<br />
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When I was starting out and had smaller portfolio, these small returns would not be worth it but with a moderate portfolio, it can be ok. <br />
<b></b>Sivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.com0