Wednesday, May 10, 2006

Bruce Berkowitz On Berkshire Hathaway

Bruce Berkowitz was recently interviewed at length by Value Investor Insight and Forbes with permisssion reproduced a segment of the interview. The article entitled "Buffet: Still The Best Jockey" concentrated on one of Fairholme's biggest position, Berkshire Hathaway.

"Berkshire is the perfect example of a company genetically engineered for adversity. The liquidity they have to take advantage of opportunities created by a crisis is really unique. I truly believe the big money in Berkshire will be made after some sort of blowup. I can sleep pretty well with that." Bruce Berkowitz

I agree with Bruce's assessment that Berkshire Hathaway is probably one of the best investment you can make if you are worried about the sustainability of current stock levels. The huge undervaluation protects you on the downside, and its huge cash holding puts it in an enviable position to capitalized on the opportunities when the market gives way. The team at Fairholme values BRK at $150,000.

Not A Lemming

Sunday, May 07, 2006

Bill Miller's Perspective On Commodities

Bill Miller devoted his 2006 1st Quarter commentary to the bull market in commodities. Noting the typical signs of a market top, he cites examples of johnny-come-lately pension funds including commodities in their portfolios for the first time. Prod on by investment consultants emboldened by hindsight, these funds are now convinced that including commodities in their allocation will increase returns and reduce risks. No speculative bubble is complete without the popular press giving their well argued case that we are in "a new paradigm and this time its different", in any case Bill goes on to debunk them.

Buying cyclical stocks is always hazardous, precisely because things looks most rosy at the very top. Even valuations looks deceptively benign. Looking at Bill's portfolio, he has decidedly taken a different approach to cyclical homebuilder stocks and so has Muhlenkamp and several value managers. Perhaps they know better, but to me these homebuilders look strikingly similar to commodity stocks.

Not A Lemming

Wednesday, May 03, 2006

Computer Associates (CA) - Cheap But Not A Compelling Buy

I have been tracking Computer Associates (CA) ever since I read Gregg Power's (principal of Private Capital Management) reasoning behind his firm's investment in CA. In fact you can find the same article extracted from Peter Tanous's book Investment Visionary on their website. It is hard to fault Power's reasoning and conviction (this is PCM's 2nd biggest position in their portfolio), but the stock has seriously lagged the market during the past 3 years.

This stock really had more than its fair share of negative publicity. SEC investigation, restating of previous years earning and finally cumulating in the conviction of ex-CEO.

Beyond these controversies, the company's growth is an issue. The company's fortune is intricately tied to the mature mainframe market, where their system management software dominates. As the world moves to towards distributed computing, CA strength becomes its liability.

Despite having underperformed for several years, CA's value is not immediately apparent. Heavy amortization cost makes the stock look very expensive on a PE basis at 71x (historical). Even at 15x EV/EBITDA the stock looks stretched. Proponents of the stock values it on a Price/Free cash Flow basis, which at 10x begins to look pretty interesting. The company generated almost $1.5 billion in free cash flow last year versus Market Capitalisation of $14.6 billiion and almost similar Enterprise Value.

The latest round of selling after a profit warning caused me to take another look at the company. I have consistently made money writing puts on CA in the past 3 years but this time round I am inclined to give it a miss. Although I think the downside is somewhat limited here, the pricing on the puts are just too low. Writing the at-the-money Jan $25 puts will provide an annualized yield of just 7.5%.

Not A Lemming

Monday, April 10, 2006

USA Mobility (USMO) – Is this A Cigar Butt?

"If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the "cigar butt" approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit."

- Warren Buffet

USMO is in an industry that many believe is on its way to obsolescence, but is it? Contributing to this view is a massive shift in the mass market from pagers to handphones and other mobile communication devices. I hold a contrary view, I believe that the industry is transitioning from one with mass appeal to one with a more limited audience. It will continue to be used by thousands of medical, security and emergency workers as a back up mode of telecommunication. The robustness and cost effectiveness of the paging option will ensure that this technology survive even though it will pass from popular usage.

And this is when it gets interesting. The market is probably big enough for only one player and USMO is the biggest and making sure that it is the most cost effective. Over time as other players leave the scene or gets consolidated, it will emerged as a natural monopoly in a smaller but stable market.

To ensure that USMO gets there, it has to continually cut cost and ensure that they remain the low cost provider. Over the next few years they will have to wrench out cost to stay as the low cost producer. During the last earnings webcast, it was heartening to hear management lay out plans to cut annual network costs by another $87 million over the next 5 years. This figure is significant in the context of expected revenues of only $575 million and EBITDA of $115 million. This $87 figure is not pie in the sky figure either, most of this savings will come from expiry of redundant leases just waiting to expire.

I see several catalysts that can take the stock back up. Its audited results has been held up as their new auditors had proposed accounting changes in their reported financial reports. Whilst this may result in the company restating some prior years earnings, none of the changes has any bearing on revenues or cash flow. The uncertainty pertaining to this should be lifted over the couple of weeks. Cash continues to build up as capex requirements are minimal; any decision to return money to shareholders will be welcome by the market. However, the biggest catalyst to this stock will have to come from stabilization of its subscribers base, paving the way for the market to value it as a ongoing entity rather than a stock with an expiry date.

The management is embarking on several initiatives that could materially impact future earnings. One of them is to allow utility companies to transmit meter reading from homes & buildings automatically using paging technology. Another involves putting paging functionality into cell phones. Buyers of USMO gets free options on these new business plans, but for buyers of the stock at this level, investment success is not predicated on the success of these new ventures. If any of these take off in a big way, it's pure icing on the cake.

I think many value investors are passing over USMO thinking it is just a cigar butt.
USMO is no cigar butt but a miniature cigar.

Not A Lemming
(Disclosure: My family and I has a position in the stock)

Friday, April 07, 2006

2006 Trade 6 - USMO

Established a new position in USA Mobility (USMO) at $24.50 yesterday. USMO is the largest paging service provider in the country. The industry has seen major contraction over the years as users migrate to handphones and blackberries. Still, current valuation is too pessimistic. At Entreprise Value/EBITDA of 3.7x, the market has put a very short "expiry date" on the company. Well I think this cigar butt may have a few more puffs left, I hope to put that into a fuller posting this weekend.

I am in good company here, Fairholme(Bruce Berkowitz) and Baupost (Seth Klarman) has taken a liking this stock as well. Ruane Cunniff is also in the shareholder list.
Have a great weekend.

Not A Lemming

Monday, April 03, 2006

Resources for Investors on the Internet

The amount of resources on the internet available to investors is just incredible, and best part is that most of it is free. I have compiled a list of useful sites for the benefit of readers of this blog.

Stock Screen
Hedge fund manager and the author of "The little book that beats the market", Joel Greenblatt created this site for the benefit of his readers. The screen throws up stock picks based on 2 criteria; cheap (measured by earnings yield) and good (measured by return on capital). My only caution is that this screen throws up quite a few cyclical stocks benefiting from a boom, making them look cheap based on peak but clearly not sustainable earnings.

Tracking Fund Managers
Here I go pitching Gurufocus again, but that site has been a great help to me. All investment managers managing funds in excess of $100 million has to file Form 13 quarterly, and NASDAQ's database allows you to extract the last quarterly portfolios of the managers you specify.You can even view the portfolios of hedge funds whose actions are typically shrouded in secrecy. Value managers tend to buy too early, so the delay in reporting is not always a big disadvantage to us.

Tracking Insiders

This sites consolidate Form4 filings, giving you quick summary of recent insider trades. I just started looking at them, but the listings look pretty comprehensive.

Option Pricing Calculator

This site has a basic calculator is free and is quite sufficient for my use. There is a premium version on the site but I have not tried it.

Discounted Cash Flow Calculator
Save you the trouble of creating your own excel spreadsheet. I won't take their advice to use EPS as proxy to cash flow as input, but otherwise the calculator works.

Hope the list is useful. Let me know if there any other sites you would recommend.

Not A Lemming

Sunday, April 02, 2006

1st Quarter Portfolio Review

I thought it would be a good idea to review the positions I had highlighted in my previous posts. In fact I think I will make this quarterly review a regular feature of this blog.

I remain comfortable with all my existing positions. Reliant Energy had to survive credit rating downgrades from Moody's and S&P, and reduced 2006 guidance from management. The price resilience in the face of these negative headlines is somewhat comforting. Otherwise, the other position are performing nicely.
I just managed to lay my hands on the out-of-print "Margin of Safety" by Seth Klarman. Used copies of the book is being offered on Amazon at $799. Well, let's see if the intrinic value of the book is really worth that much.

Not A Lemming