We had the pleasure to be interviewed by Marc Lichtenfeld, the Chief Income Strategist at the Oxford Club. We talked about short selling strategies (Hint most investors should just avoid it) and about contrarian thinking.
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Phillip Fisher
“Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to…the operating results of his companies.”
—Ben Graham, The Intelligent Investor,
At Investing 501, Gregg and I try to help others improve their investment process by sharing our experiences on Seeking Alpha. One of our more popular articles was entitled, The Illusion of Control, which discussed how investors could improve their investment process by focusing on understanding businesses and how to value them and by not constantly trying to find that “new” piece of information that would bring more clarity to an investment idea. The stark reality is that we have significantly less control over our investment outcomes than we want to believe. We also posted an article on our blog entitled, “What are you hoping to gain by checking that stock price right now?” We consider the act of frequently checking stock quotes and looking at price charts to be part of the pursuit of trying to find “new” information and doing so can be detrimental to the performance of a long-term investor. In this article I will expand on the previous articles.
Next time you feel compelled to look up a stock quote, write down why you want to know what the stock is doing. After you know the quote, write down what you think you gained by doing so. How does that revelation help you in your long-term investment thesis on the company? If you truly believe that you are going to hold a stock for a few years, how does knowing what the stock is doing today add value to that thesis? There might even be some proximate news item (earnings perhaps) that is apparently driving the change in the stock price. If you are buying stocks with low valuations, the company is usually struggling from an operational standpoint. Turnaround results are not linear. The chances you bought the stock right before turnaround happens and therefore all stock price reactions to “new news” is positive is very low. My guess is there will be more negative stock price reactions to “new news” initially. Stop looking for validation of your long-term investment premise in the daily, mostly random, movements in stock prices.
We are posting a report by Shaun Currie, a former co-worker. Shaun’s work has been featured before and believe he is a good example of how a young analyst can improve his skills over time with a modest amount of mentoring. We encourage other young analysts to read his reports and follow his progress. He has started a research firm that you can find with this link. Young investors should develop their own process and analytical style by exposing themselves to a multitude of investors and deciding what fits their personality and mental make up. Value investing takes a certain type of personality and mental outlook and isn’t something that everyone can succeed at. The wide variance in styles of successful value investors (Schloss, Gabelli, Tweedy Browne, Buffett, Whitman, etc.) shows that there is a place for many types of personalities. At Investing 501 we try to encourage individuals to think for themselves, but try to focus that effort with examples and concepts we have found personally helpful.
Dick’s Sporting Goods: The Catalysts are Here – Take a Position before Analyst Day
Dick’s Sporting Goods recently presented at the Goldman Sachs (GS) retail conference, and the stock responded quite positively (up 10% since the presentation). But, with an investor day only a week away, there are plenty of catalysts to take the stock 20% higher. Catalysts Include:
- The new Field and Stream concept
- 2014 guidance is possible at the analyst day, and the company has a low bar to beat
- Increased guidance on store expansion makes the original 900 store goal more feasible
- The company is testing smaller store concepts, which has been something investors have been hoping for
- The company has a plan in place to reach double-digit margins
- The company is growing their e-commence and omni-channel platform, while increasing margins in the business at the same time
- The company is investing in more employees, which investors have been hoping for
- The company is taking share through their store-inside-a-store concepts with the major apparel companies
Date: May 2, 2013 Price: $12.50 Mkt. Cap.: $2.4 billion
An investment in Live Nation (LYV) provides investors with an opportunity to buy into a unique set of assets that provides an ecosystem to maximize that amount of revenue and profits available in the live entertainment industry. Unlike most of our typical investment reports which focus on free cash flow utilization, net asset value investing, mean reversion of margins or special situations, this report will look at the investment merits of a company that generates little free cash flow at the moment and is somewhat of a growth investment if company management is successful in achieving its objectives. Their dominant size is a competitive advantage and the presence of a significant, value creating long-term investor (Liberty Media) provides additional margin of safety from a liquidity standpoint. The strategy is not without risks and we will discuss those as well.. What follows is our analysis of the merits of Live Nation’s three year plan to grow its Adjusted Operating Income (AOI) by 30-35%.
This is the first of several reports on the aerospace/defense industry. Our goal is to find the stock with the most attractive risk/return characteristics. We have begun our review of 5 of the 25 companies in this industry. There is quite a bit more work to be done, but so far the “leader in the clubhouse”, is L-3 Communications.
The aerospace/defense industry is an ideal place for a value investor to begin searching for inexpensive stocks. As two wars grind to a conclusion, and the threat of a budget sequester has materialized, it is hard to imagine an industry where expectations could be any lower. Many of the stocks are selling at low multiples of cash flow and book value. It is exactly this type of “negative environment” that value investors must relish examining if they want to find real values.
Let’s get started by taking the first steps on a long journey. [Read more…]
Date: May 1, 2013 Price: 26.02 Mkt. Cap.: 2.8 billion
We recommend purchase of the shares of Allegheny Technologies (ATI). ATI deserves enormous credit for wisely reinvesting in its basic business despite fluctuating earnings. Too many U.S. industrial companies have increased dividends, made mistimed stock buybacks, or completed silly acquisitions. ATI is nearing the end of a long capital investment cycle that will leave it well positioned for future growth and sustained profitability. Highly cyclical companies like ATI are notoriously difficult to understand, value, and predict. However, it has been our experience that investors with patience and courage can profit from owning the shares of volatile companies that are competently executing a solid long-term strategic plan.
We will give an overview of ATI’s business, make an attempt at valuation, and finally discuss some of the “timing” issues involved in our recommendation
ATI is a difficult company to understand. It is in part a producer of many highly specialized steel alloys that have very interesting growth prospects, and above average profitability profiles. These products include titanium alloys that have increasing importance in the manufacturing of commercial jet airframes and jet engines. However ATI is also a large producer of stainless steel products that are closer to what one could call “commodity” grade and cannot really be considered a specialty product. Stainless steel adds certain alloys (mainly nickel, but many other are used) to prevent corrosion and rust. Growth in these products in highly dependent on economic growth, and competition is higher, and profitability is lower and much more volatile.
The slide below is borrowed from ATI’s 2012 annual report.
Some important things to note:
79% of sales are high-vaue products, only 21% is commodity grade
potential growth areas like aerospace and oil/gas are 51% of sales
the remainder is widely diversified, withonly an 8% exposure to the cyclical automotive business
Investors have a tendency to look at stock charts after a stock has significantly increased in value and think the could have made that big return if they had just known about the opportunity at the time. In reality it doesn’t work that way. Most stocks that are near their lows or out of favor are “cheap for a reason”. Here is an example of one, Body Central (BODY), a former high flying growth stock that is now trading at one-third its peak valuation and more importantly less than enterprise to sales ratio of 40% and cash equal to 30% of the market cap. Similar stocks have been acquired at 2X the current multiple.
When stocks are out of favor and priced inexpensively, investors tend to focus on the reasons they are out of favor. When they are in favor and priced fully, investors tend to focus on the reasons they are priced that way. In truth, most of the time those reasons are always present, it is just that investors tend to focus on just the negative when stocks are declining and focus on just the positve when they are increasig.
Here is our take on the reasons BODY is cheap and some thoughts on what the reasons could be when it isn’t cheap any more….
I have spent almost my entire career in the investment industry, over 27 years of it anyway, as an analyst focused almost entirely on “value” stocks. Most aspiring value investors are intellectually attracted to the investment style because it makes sense intuitively. Buy enough “safe” cheap stocks and thanks to mean reversion or shareholder activism or just plain time, your results should outperform the market. Investors see successful investment results ex-post and believe in “hindsight” they too could have made that investment. However, I believe that, “if you could have you would have.” What most investors fail to understand is that the value stocks that have done well where most likely “cheap for a reason” at the time the potential gains were the greatest and there was no clear reason or “catalyst” to buy the stock at that time. As others have said, “valuation can be its own catalyst.” What follows is an analysis of Body Central (BODY), a stock that is “cheap for a reason” and has no “visible catalyst.” Anyone that is still reading this article after that last sentence, thank you for your support!