Actually, the whole thing is worth reading:
http://streetcapitalist.com/2010/03/24/learning-from-michael-burry/
There is a discussion on shorting.
I like to do an experiment where I don’t take into account recent news and just look at the financial filings of the companies.
on that basis, the old tech guys are “cheap”.
thing with valuation I find is, there comes a point when the asset becomes undervalued and that requires you to take a look at the hard facts. if the company is selling for 3-4x cash flow, that needs to be taken into account. Yes, cash flow will/may fall but to simply dismise it outright is a lazy to me. companies don’t always just run to the ground and the seeds of change are sewing as we speak.
“cheap for a reason” fails to hold after a certain price range (hence value investing?).
main diff here is that these are tech companies where ‘change’ is more rapid.
they’re also not “balance sheet” tangible book value cheap.
i’m still reading…
Yeah but you’re assuming one of three scenarios:
a) Optimistic scenario - company restructures, and becomes great. (Apple)
b) Liquidation - Company is liquidated, investors get back cash.
c) Value Recognition - Market recognizes company as undervalued, valuation increases to reflect underlying assets.
Scenario A is fine, but it is rare. Even if it does happen, the firm can struggle for a substantial amount of time with wild swings, and even the “long term value” investors can bail out of it after it does nothing for a year. (JCP).
Scenario B never happens. Ok it might, but I can’t think of many scenarios.
Scenario C is I believe the one you’re thinking of. The problem with this scenario is that these tech firms are really valued by the business model. If they have a successful business model, they’ll reflect that, if they are in a difficult industry with bad fundamentals, they’ll show that as well. There is no guarantee that Mr Market will see eye-to-eye with you unless the company declares a dividend.
I think deep value can work, but you really need a substantial margin of safety. HPQ has like 9.5B in Cash and 30B in debt. If this was a net-net or something I could understand. For all you know, there could be some painful restructuring down the line.
I think the potential exists for this to become a good investment, but we would need to identify an inflection point first…
Alternatively what you could do is: find the “good” businesses inside HPQ, and add that to the cash - debt, and just ignore the PC business.
I assuming when I am buying Intel (which i bought more of today at $19.50+/-) that
a) cycle turns - things normalize and don’t go down forever (we’re in the down leg of the semi cycle which may last another two years) ; usage of chips will take different forms but outside of mobile, INTC is pretty well positioned to take advantage of an up swing in the cycle
b) franchise value - INTC survives the next 5 years with their key markets in tact because in my view they have the manufacturing capacity to keep up and innovate; may also get into mobile as they have already started though market share at effectively zero at this point makes this assumption “speculative” (not really speculative considering their mobile chips are not actually far behind if at all though I won’t debate this as I am no tech expert)
c) Growth in connectivity leading to greater usage of other chips (growth scenario that may not happen but thats fine). This was not factored into the equatio
I won’t dwell on the dividend/balance sheet/margins etc…i think those are pretty clear…even if you factor in margin declines of 50% INTC still earns an ROE of close to 10%
p/e is cyclical so its overstated here (9x trailing)…but the valuation is at an all time low according to my records…
bromion - what’s your take on looking at beaten down sectors? I know value investing orthodoxy favors looking at “out of favor, unloved, beaten down” sectors and finding bargains there. Have you had systematic success doing that? If so, what characteristics do you look for?
Frank - You’re right that Intel’s fabrication advantages give it an edge over other firms, and it does give them strategic advantages…I’ll have to mull this over…
Not systematically, but it comes up sometimes for industries. I never particularly look at sectors since that is very broad. If it’s relevant for an individual company, I will quickly look at all of the other players in their sub industry, trying to see if there are any trends in the numbers or qualitative factors that jump out.
Examples:
I helped the PM here with an industry overview of homebuilders. We’re long TOL and PHM because those will be winners over time. This was based on a proprietary internal screen that someone developed several years ago.
In June we targeted mortgage banks getting added to the Russell. Top pick was FBC. This was based on another internal screen.
In October I found a neat orphaned microcap in a niche software industry, so I looked at all of the comps, and one of those is a long as well.
It’s kind of one off like that. I don’t know how to specifically screen for industries that are down but likely to rebound (relatively) soon.
These are good points, I didn’t even notice some of them.
I see these upcoming changes happening:
I estimate new healthcare laws will add about $25 mill in expenses. This company has 54000 employees and a 1 billion market cap, about the same ratio as SHLD. But the sale of hair restoration services should bring in about $100 million after tax. --Adding this to their already decent cash balance, they will have more than enough cash to deal with new laws or any restructuring effort.
I think the cash flow can definitely recover but will be held down for a little due to higher expenses and establishment of a better strategy and development of management. The weak store sales (which I believe for some segments is the result of too many brands) and competition make me think they will probably operate below historical averages but have no trouble growing FCF 2-4% from there.
Supercuts was the only salon to have a positive same store sale increase q/q. Demographics are 66% male and the marketing is towards professionals. Competent management shouldn’t have trouble growing this brand.
Smartstyle salons. The salons are all in Walmart and operate on low price. Management just needs to control the margins better.
Regis (malls). This will be harder for management. They have to compete with other mall salons including JCP, who spent part of the year giving away free haircuts. Looking at where JCP is now, it might be possible they will close this segment in 1-2 years, which should free up competition. JCP needs to focus on making sales with clothes. Hair salons contributed no more than 5% of their overall revenue (its lumped in the service segment so I don’t know exact).
I think in the ST its ok in the chance it gets bought. In the LT I think it’s a little early and would wait for lower prices because it’s too uncertain how the cash will be used, what FCF will be, what management will do, etc.
That’s reasonable. I would look at this and try to understand why it’s declining, whether that can be stopped, and what sort of ultimate expense structure they might have leading to some estimate of operating margin / FCF. If they can stop the decline and then grow by rolling up, this thing could be a multi-bagger. It would be a fantastic company to visit because they’re so far off the beaten track (Minnesota) and it’s top of the first inning in the turn around. If you could sit down with the CEO and understand his vision, this could be one to take a shot at. It would be great if there is another sell off down to 12-14.
Edit: I learned early on that I don’t like buying things under the spec that it will get bought out. If it doesn’t and the stock goes down, you might be stuck in a subpar asset that you don’t want to own. I’d rather look at the company’s long-term prospects and buy on that basis with a buyout coming as a bonus if it comes at all.
INTC is based primarily on valuation versus replacement cost and earnings over time in a slow growth scenario in their key markets.
INTC is not “losing” their business to competitors in their key space. they remain the dominant player in PC/Servers. Thats a good thing as that means they still have a business intact. So lets say they never get into mobile how much money can this company make just by defending their positon?
Not getting into mobile is tragic, but that doesn’t mean the rest of the business is bad.