Today, J.P. Morgan was rewarded with an upward revaluation of business value because even though they lost money, they didn't lose as much or as fast as some of the other banks. If that has a funny ring to it, it should. Now I spent two consecutive Summers at J.P. Morgan ('03 and '04). Those two years played an instrumental role in my development and I will be ever grateful for the opportunity. However, in 2003 J.P. Morgan was singular, and in '04 it purchased Bank One. But don't tell anybody in my department (Credit Card Division) that it was a purchase because it was more of a merger. In fact, the agreement when the "purchase" was made introduced Mr. Dimon to become the eventual CEO of the combined company.
In our credit card division, problems of power soon took center stage. Apparently as in most mergers (I mean purchases) one company does well in somethings, and the other in other things. Now the credit card division for Bank One was better than the one at J.P. Morgan. So everyone new there would be a power struggle, and believe me, anytime a merger happens in the banking sector there is the eventual power struggle. Nowadays, I don't even think I have a contact at the credit card division.
They all moved to the credit card division of Washington Mutual. When I say all, I mean top managers, top supervisors. I couldn't help myself from thinking out loud what if Mr. Dimon makes a purchase for Washington Mutual, there have been a few rumors. They say that if you stay in an industry long enough, you run into the same people many times over. I don't really care for rumors, but this situation is close to me for reasons mentioned in the first paragraph.
I'm not going to comment on if it would be a good purchase, they are both companies I find hard to understand. Further, while I don't follow either company, I have followed Mr. Dimons career, he is a very shrewd banker. So last year I e-mailed a former colleague of mine this quote from Mckinsey from an interview with Mr. Dimon:
"There are weaknesses- for example, the bureaucracy that can come with size. I think bureaucracy is the disease that kills businesses. It slows you down. It demoralized people. It drives out good people. It kills innovation. It can also breed hubris, greed, arrogance, a lot of attention to detail and politics."
I wanted his opinion, the answer:
"Jamie Dimon is 1,000% correct...too bad he doesn't believe his own hype or he wouldn't be talking about more mergers."
For what it's worth, Mr. Dimon about two years ago promised $100 stock price for J.P. Morgan within the next five years (2010). Sounds pretty ambitious to me.
Thank you and take care,
S.K.
Wednesday, January 16, 2008
Tuesday, January 15, 2008
The Guillotine and Sandpaper
“First there’s the guillotine stage – the sharp decline. That creates fear. Then there’s the feeling of being sandpapered to death. In place of fear come feelings of apathy, lack of interest, and finally, hopelessness.”
-Bob Farrell
I think by now most everyone has heard about the mortgage crisis and I also know that I've been writing about it since mid 2007. However, it bears mentioning that there are still too many people who are looking at the financial businesses for value, "bottoms" and "oversold." While I don't disagree with their perceived value of these businesses, I can only say that I don't understand what is on their books. Instead, I purchased puts on the financial index early last year because it was "cheap insurance."
Mr. Jensen from Third Avenue had this to say in the latest quarterly report, "In the wake of Citigroup's recent Abu Dhabi-led junk financing, and in the context of investment pain (patience?), a friend passed along an interesting graphic that reminded me of the virtues of patience...Citicorp's shares at the time Prince Alwaleed announced his $590 million investment in February 1991 for 15% of Citicorp. By year-end 1991, Citicorp's shares had declined more than 40% from their Ferbuary highs. Any investor who followed Alwaleed and remained patient was richly rewarded, however, as Citi's shares peaked at $178 per share in July 1998, before Citi's acquisition by Travelers in October that year, implying a rate of return of more than 10 times on the original investment."
I point this out because those who indeed choose to invest in financial businesses, have patience! Right now as the opening quote illustrates, the guillotine has fallen, sandpaper and apathy haven't happened. Please invest with great due diligence and enjoy the greater things in life. After a while, maybe I will be comfortable selling my insurance (gold, silver, puts) for cheap assets on the book.
We are looking at 20 years of expansion in an industry with simply too many people choosing one business major to another. This is not just a massive mortgage meltdown, it's a massive de-leverage for an industry with too much interest for too long.
I respect the sciences, the arts, and when I think about it, we haven't had a major surge in interest as majors for these unique studies. In my uranium post, I touched on this when I talked about the shortage in mining talent because of the low level of interest in Geology. These are the important facts to look at! I'm not a gloom and doom guy and I hope readers don't look at it this way.
To Touch on...
This past weekend I named a handful of businesses that I didn't hold a position in, but were interested in at the right price. Two have fallen sharply since being mentioned and I'd like to touch on that:
SNS- I knew this would fall because being a WSZL shareholder, I keep a close eye on Mr. Biglari's holdings. On Friday, SNS displayed their extreme ignorance in managing this business and that is why I stated: A company that I was about to leave out because it is one that I am closer to making a purchase in. I am an investor in WSZL and know Sardar is a better capital allocator than
SHLD- well they reported some not so decent numbers as has every other retailer and again we are entertained by the "Eddie Lampert just doesn't get it" rhetoric. I promised a more detailed writeup for SHLD this weekend, but I can't resist. If you make a decision to read what Mr. Lampert has written in his quarterly reports you will begin to understand: A)he doesn't care about same store sales, B) he doesn't care about top line growth, and C) he cares about profitability. So please, spare me the Mr. Lampert nonsense, the guy has a proven track record, amazingly smart people don't become dumb in one year. As promised, more on SHLD soon to come, I still haven't taken a position.
Good night and take care,
S.K.
Sunday, January 13, 2008
Give 'em Some Water
After a certain point, which comes from reading the business magazines, newspapers, listening to conference calls, and watching Bloomberg or CNBC you start to hear some of the same phrases.
For example, you will never get through a conference call without some analyst asking the company management, "So just to put some meat on the skeleton/bones what were the numbers for so and so?" This is probably the most used way of asking a question because so and so analyst has to put a number in his model to smooth out his price projection.
This week, I was watching Bloomberg and another one of the most widely used phrases was used. Gold on Thursday/Friday touched $900 and ounce and one of the commentators came on and said, " Investors were exhausted at the 900 level and couldn't move it past." Let's get a few things straight: First, "they" are not investors, they are short term traders. Second, these people that we are made to believe are exhausted have jobs that are white-collared jobs, they work from 9:30 AM to 4:00 PM, they have a cappuccino machine within walking distance and their work area is air conditioned. Teachers can be exhausted, construction workers are exhausted, I think you get the idea. So give 'em some water and tell 'em to shut up.
I promised some interesting businesses that I am looking at for this weekend, so let's get to it:
PFE- Interesting yield, very non-cyclical, they say that they will revive their product flow. P/E at depressed levels and if you live in Canada, it makes even more sense because of the currency situation.
PETS- I think this is one of the more interesting businesses out there. Certainly a niche market, ROE above 30%, P/E reasonable relative to growth. They are buying back shares from their 20 million dollar charter. I can't stress how much I like this business, people are married to their spouse and pets. This will never become a 50 billion dollar market cap business, but they have somewhat of a monopoly. No debt, 50 million in cash and will continue to add to it. Definitely has a moat.
KMX- Don't really know as much as I should about this company, it is priced at or near the same price as when Berkshire made their investment. I have some friends that work in this industry, but I'm not sure they have a moat and I'm probably wrong about that, but let me ask this question: 10 years ago, could the car salesman foresee Ebay taking business away from them?
CMCSA- I understand how it is relatively undervalued, but I'm not sure about it being undervalued on an absolute basis because there are better options out there for your hard earned money. Mr. Eveillard believe it is a great buy so it is worth looking at. In my city, San Antonio, Time Warner has a 95% market share of the market, I presume Comcast has the same level or near market share in some of their respective markets. There is definitely some moat here and I think once I look at it more closely, I can probably guesstimate the margin of safety.
LM- I like the business, love their open access to their conferences because of the interesting people they bring in. Bill Miller deserves all the respect he receives, Michael Mauboussin is really a brilliant guy because of the time and effort he puts towards his writing. Chip Masons seems like a good guy. I don't know if there is a moat here, probably not, as investors are very short-term based and Bill Miller is witnessing that. Asset Under Management ("AUM") is the most widely used metric for this business, but I think there are some flaws to that because if AUM is decreasing, then well the intrinsic value has to have an AUM discount factor, I would think. Most valuations of these business involve the AUM increasing in future year, I think thats a flaw.
WPL- See LM, they are value investors and is at the lower AUM ratio, but again I'm not sure. More research necessary. On a side note, there have been many Value Investors that have caught the mortgage falling knife, I don't think we should easily discredit their respected abilities and that is what makes investing in WPL and LM so challenging. Again, I'm probably wrong unless I prove otherwise, that's usually how I approach most investments.
LUV- They are great at hedging their jet fuel cost, but is that a moat? Definitely not, even though they have proven they are best in class.
TM- Very consumer friendly, great product, and outstanding management. It was very ballsy of them to build their Tundra headquarters in the heard of Texas (San Antonio) knowing that Texas is a truck state. Still, I don't see as many of their trucks on the road as I thought I would.
USG- What can be said that hasn't been said already? We know who holds it, we might not know the value of the business and put a price on it, but we do know there is value. Very cyclical translates into lumpy earnings which is perfect for Sir Buffett. I know Marty Whitman has a stake here as well. I held a position in the mid-40's, and I sold at the same price shortly after because I wasn't comfortable with the valuation. However, I do know there is a replacement cost much higher than the current price quoted by Mr. Market. I guess time will tell. Definitely some sort of Moat just based on the market share they have.
HBI- Love their products, only two participants in this market, Fruit of the Loom is the other. Users are continuous buyers of their product, commercials are a little flamboyant, not sure about having two guys always giving high-fives and hugs all the time. Those type of commercials work for Victoria's Secret, but that's just cause I'm a guy. It is at the lower end of it's 52-week rang, which is usually where I look for ideas. Definitely a moat and I understand their business: socks, shirts, underwear. Also, Hanes benefits from putting on as many commercials as possible because it is very much a mind-share business.
Coal- no specific ideas here, but I know Mr. Watsa of Fairfax holds ICO and so does Wilbur Ross. You are in good company with those guys. It is commodity based, so moat is dependent on the cost structure and mineral rights. Coal prices have increased by about 25% since mid-august. Viewed negatively by media because of it's pollution. Still, I prefer Nuclear Energy and Uranium, but again I could be wrong.
SHLD- What can I say about one of the greatest capital allocators of my time: Eddie Lampert. Actually, I'm working on this project right now, I figure it will take me about 2 months and plan on having an ambitious 10-post writing on this. Everyone has heard the saying, "Your only as good as you want to be," and I think the same is true for the moat of SHLD, "It's only as wide/good as Eddie wants it to be." I have a lot of faith in Mr. Lampert and think he will prove all the doubters wrong.
FSR- When a person with the last name of Byrne is running the show of any company, it deserves a look. Jack did wonders in his day and now he has two sons running their own show. One at Overstock and the other here at FSR. This is an insurance business, something I am more comfortable investing in and understanding more so because of my job. We know that premium rates are under pressure and how it is a soft market, but did you know FSR trades at book value. Did you also know that Mr. Byrne is a Byrne? Sometimes the fruit doesn't fall far from the tree and sometimes it does, I think it's closer to the tree here.
OSTK- See FSR, except all the insurance business. Not sure if there is a moat here and Mark is as eccentric as it gets, very passionate about his business. The fact that he pursued a career other than insurance makes him the fruit that fell further from the tree, but that's not a bad thing. He is very business savvy and if you invest with him or his business you are guaranteed at least 1 of the more entertaining conference calls each year. Although, Lord of SLM maybe challenging him from here on out.
SNS- A company that I was about to leave out because it is one that I am closer to making a purchase in. I am an investor in WSZL and know Sardar is a better capital allocator than I. Management has taken notes from GM I assume because they are absolutely oblivious to all the disaster they have caused. Either way, something is bound to happen here, what I just said doesn't mean you should sell puts and buy calls. No moat here.
GLRE- This is more of a investment in David Einhorn and his abilities to invest the float a la Berkshire. Although, I think his track record is too short to pass judgment and not comfortable at all with his New Century relations. Still, I think it deserves a look.
PZN- see LM and WPL. Value investor Pzena is regarded by Greenblat as very smart. But, like I said earlier, I'm not sure I understand the AUM type company.
So this concludes a sample list of business that I am monitoring and getting to know better on a daily basis. There are others and I will talk about them maybe next week. Please tell me what you are looking at and please comment on the one's I did. Have a great week and take care.
S.K.
For disclosure purposes, I don't hold any position in any of the named businesses with the exception of WSZL, which I did classify as a position. I reserve the right to purchase any of the businesses mentioned at any time.
For example, you will never get through a conference call without some analyst asking the company management, "So just to put some meat on the skeleton/bones what were the numbers for so and so?" This is probably the most used way of asking a question because so and so analyst has to put a number in his model to smooth out his price projection.
This week, I was watching Bloomberg and another one of the most widely used phrases was used. Gold on Thursday/Friday touched $900 and ounce and one of the commentators came on and said, " Investors were exhausted at the 900 level and couldn't move it past." Let's get a few things straight: First, "they" are not investors, they are short term traders. Second, these people that we are made to believe are exhausted have jobs that are white-collared jobs, they work from 9:30 AM to 4:00 PM, they have a cappuccino machine within walking distance and their work area is air conditioned. Teachers can be exhausted, construction workers are exhausted, I think you get the idea. So give 'em some water and tell 'em to shut up.
I promised some interesting businesses that I am looking at for this weekend, so let's get to it:
PFE- Interesting yield, very non-cyclical, they say that they will revive their product flow. P/E at depressed levels and if you live in Canada, it makes even more sense because of the currency situation.
PETS- I think this is one of the more interesting businesses out there. Certainly a niche market, ROE above 30%, P/E reasonable relative to growth. They are buying back shares from their 20 million dollar charter. I can't stress how much I like this business, people are married to their spouse and pets. This will never become a 50 billion dollar market cap business, but they have somewhat of a monopoly. No debt, 50 million in cash and will continue to add to it. Definitely has a moat.
KMX- Don't really know as much as I should about this company, it is priced at or near the same price as when Berkshire made their investment. I have some friends that work in this industry, but I'm not sure they have a moat and I'm probably wrong about that, but let me ask this question: 10 years ago, could the car salesman foresee Ebay taking business away from them?
CMCSA- I understand how it is relatively undervalued, but I'm not sure about it being undervalued on an absolute basis because there are better options out there for your hard earned money. Mr. Eveillard believe it is a great buy so it is worth looking at. In my city, San Antonio, Time Warner has a 95% market share of the market, I presume Comcast has the same level or near market share in some of their respective markets. There is definitely some moat here and I think once I look at it more closely, I can probably guesstimate the margin of safety.
LM- I like the business, love their open access to their conferences because of the interesting people they bring in. Bill Miller deserves all the respect he receives, Michael Mauboussin is really a brilliant guy because of the time and effort he puts towards his writing. Chip Masons seems like a good guy. I don't know if there is a moat here, probably not, as investors are very short-term based and Bill Miller is witnessing that. Asset Under Management ("AUM") is the most widely used metric for this business, but I think there are some flaws to that because if AUM is decreasing, then well the intrinsic value has to have an AUM discount factor, I would think. Most valuations of these business involve the AUM increasing in future year, I think thats a flaw.
WPL- See LM, they are value investors and is at the lower AUM ratio, but again I'm not sure. More research necessary. On a side note, there have been many Value Investors that have caught the mortgage falling knife, I don't think we should easily discredit their respected abilities and that is what makes investing in WPL and LM so challenging. Again, I'm probably wrong unless I prove otherwise, that's usually how I approach most investments.
LUV- They are great at hedging their jet fuel cost, but is that a moat? Definitely not, even though they have proven they are best in class.
TM- Very consumer friendly, great product, and outstanding management. It was very ballsy of them to build their Tundra headquarters in the heard of Texas (San Antonio) knowing that Texas is a truck state. Still, I don't see as many of their trucks on the road as I thought I would.
USG- What can be said that hasn't been said already? We know who holds it, we might not know the value of the business and put a price on it, but we do know there is value. Very cyclical translates into lumpy earnings which is perfect for Sir Buffett. I know Marty Whitman has a stake here as well. I held a position in the mid-40's, and I sold at the same price shortly after because I wasn't comfortable with the valuation. However, I do know there is a replacement cost much higher than the current price quoted by Mr. Market. I guess time will tell. Definitely some sort of Moat just based on the market share they have.
HBI- Love their products, only two participants in this market, Fruit of the Loom is the other. Users are continuous buyers of their product, commercials are a little flamboyant, not sure about having two guys always giving high-fives and hugs all the time. Those type of commercials work for Victoria's Secret, but that's just cause I'm a guy. It is at the lower end of it's 52-week rang, which is usually where I look for ideas. Definitely a moat and I understand their business: socks, shirts, underwear. Also, Hanes benefits from putting on as many commercials as possible because it is very much a mind-share business.
Coal- no specific ideas here, but I know Mr. Watsa of Fairfax holds ICO and so does Wilbur Ross. You are in good company with those guys. It is commodity based, so moat is dependent on the cost structure and mineral rights. Coal prices have increased by about 25% since mid-august. Viewed negatively by media because of it's pollution. Still, I prefer Nuclear Energy and Uranium, but again I could be wrong.
SHLD- What can I say about one of the greatest capital allocators of my time: Eddie Lampert. Actually, I'm working on this project right now, I figure it will take me about 2 months and plan on having an ambitious 10-post writing on this. Everyone has heard the saying, "Your only as good as you want to be," and I think the same is true for the moat of SHLD, "It's only as wide/good as Eddie wants it to be." I have a lot of faith in Mr. Lampert and think he will prove all the doubters wrong.
FSR- When a person with the last name of Byrne is running the show of any company, it deserves a look. Jack did wonders in his day and now he has two sons running their own show. One at Overstock and the other here at FSR. This is an insurance business, something I am more comfortable investing in and understanding more so because of my job. We know that premium rates are under pressure and how it is a soft market, but did you know FSR trades at book value. Did you also know that Mr. Byrne is a Byrne? Sometimes the fruit doesn't fall far from the tree and sometimes it does, I think it's closer to the tree here.
OSTK- See FSR, except all the insurance business. Not sure if there is a moat here and Mark is as eccentric as it gets, very passionate about his business. The fact that he pursued a career other than insurance makes him the fruit that fell further from the tree, but that's not a bad thing. He is very business savvy and if you invest with him or his business you are guaranteed at least 1 of the more entertaining conference calls each year. Although, Lord of SLM maybe challenging him from here on out.
SNS- A company that I was about to leave out because it is one that I am closer to making a purchase in. I am an investor in WSZL and know Sardar is a better capital allocator than I. Management has taken notes from GM I assume because they are absolutely oblivious to all the disaster they have caused. Either way, something is bound to happen here, what I just said doesn't mean you should sell puts and buy calls. No moat here.
GLRE- This is more of a investment in David Einhorn and his abilities to invest the float a la Berkshire. Although, I think his track record is too short to pass judgment and not comfortable at all with his New Century relations. Still, I think it deserves a look.
PZN- see LM and WPL. Value investor Pzena is regarded by Greenblat as very smart. But, like I said earlier, I'm not sure I understand the AUM type company.
So this concludes a sample list of business that I am monitoring and getting to know better on a daily basis. There are others and I will talk about them maybe next week. Please tell me what you are looking at and please comment on the one's I did. Have a great week and take care.
S.K.
For disclosure purposes, I don't hold any position in any of the named businesses with the exception of WSZL, which I did classify as a position. I reserve the right to purchase any of the businesses mentioned at any time.
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