Paying for Growth? Case Study


What Price for the whole business would YOU pay? Then tell me the per share price.  The company had operations for 25 years prior to going public. The company’s stock price will under perform the market (SPY) about 1/3 of the time over the next forty years.


BUSINESS XXX? 1974 1973 1972 1971 1970
Cash $2,238,263 $2,168,224
Working capital 27,132,580 16,796,897
LT Debt ** 10,578,269 5,065,567
Shareholders’ Equity 30,734,128 $24,753,623
Outstanding Shares 6,542,250 6,512,950
Net Sales $167,560,892 $124,889,141 78,014,164 44,286,012 30,862,659
Income Bef. Taxes 11,883,754 8,917,188 5,569,027 3,170,599 2,198,764
Pro-forma Net Income $6,158,520 4,591,469 2,907,354 1,651,599 1,187,764
EPS $0.93 $0.70 $0.47 $0.30 $0.23
Units in operation 78 64 51 38 32
ROE 38.67% 36.02%
** Co. has a $12 mil. Credit line renewed yearly of which it has borrowed $4 mil.
Assume Co. needs all cash for operations
Assume strong growth for 40 years.You need a required rate of return of 15%

XXX Company Worksheet (Excel Spreadsheet)

Can you guess the actual name of the company?

To give you some historical perspective of 1974 see:A Study of Market History through Graham Babson Buffett and Others

Winner gets a date with my Ex:  (PLEASE do NOT click on the link unless you win the prize)


Keys to A Few Value Vaults

Click on VIEW FOLDER and there are many books, cases, and more. Let me know if you wish more posted. Here are a few vaults.

Books View Folder
VV_CS_Inv View Folder


UPLOAD_Contributors View Folder

Value Vault Update; Information Overload and Investing


Many have recently asked for keys to the Value Vaults. Unfortunately many keys have expired, therefore they need to be refreshed. I plan to have new keys for all by Monday so check back.

Meanwhile, new investors can learn from this story about Matt Drudge and information overload–very applicable for investors.


Gold Discipline Melts Away or Case Study in Reading the News

This morning I read the news…Oh boy!  –The Beatles

(Editor: Read the following article and ask how YOU, as a reader or investor whether you have no opinion; are hyper bearish or hyper bullish gold or miners, benefit. Is there a particular BIAS? Finally, what is the main question you want answered? So what is the acquisition __________?  Prize awarded.

Gold Discipline Melts Away from Heard On The Street Column (WSJ April 17, 2014)

And they were doing do well. The intensifying battle of Osisko Mining is fast undoing gold miners’ work to restore credibility.

Wednesday Yamana Gold raised its offer to 8.15 Canadian dollars (U.S. $7.42) a share, this time roping in Agnico-Eagle Mines as a joint bidder, valuing Osisko at C$3.9 billion. Goldcorp raised its own bid to C$7.65 a share last week.

Takeover battles, with their risk of overpaying, are always unnerving for investors in the bidders. With gold miners thate is added concern: The sector has dropped about two-thirds since September 2011 as a history of overpriced deals an busted investment budgets caught up with it.

Miners have worked to address this, cutting costs and investment and, in many cases changing top management. Citigroup estinmates the average all-in cash cost per ounce, which includes things such as capital expenditure, fell by a fifth last year.

It remains more than $1,400 an ounce, though–still above today’s gold price of about $1,300. So this is no time to succumb to the old ways. Yet, even before Wed, both Yahmana and Goldcorp had made offers dilutive to their own value, ssays adam Graf at Cowen. That they are engaging in this now suggest talk of discipline is just that–or that their own project pipelines aren’t as robust as though.

Osisko’s stock now trades at C$7.94, and the break fee on the latest bid is worth 44 Canadian cents a share. To counter, Goldcorp would have to raise its bid roughly C$1, or 13%.

It should resist the temptation, but may not. One thing is clear. With the recently rediscovered discipline now apparently crumbling, it makes more sense to own junior gold miners, the potential targets, then their bigger rivals. –Liam Denning.

I will post my “answer” this weekend. Your thoughts?

Editor: Also, this article should spur you to do a valuation of Detour (DRGDF)–hint! hint! See:


Note the extreme tightness for leasing gold. See: Gofo It will be interesting to see if gold can continue to decline in the face of bullion demand. Leasing rates are close to the most negative since mid-August 2013 when gold rallied to $1,400.

You can update your charts with the gold price vs. 1 month and 3 month GOFO rates.  Is this the canary in the coal mine for financial stress? Gofo Rates and Gold.  Low interest rates mean–all things being equal–gofo rates would be lower, But negative rates can ONLY mean two things:

  1. Investors don’t want to lend their gold because of counter party risk
  2. and/or they don’t have the gold.

Blog for special situations

Anniversary Day for the April Gold Massacre

04-14-2014_GOFO_cleaned (1)

The paradox in investing hinges on the tension between having both the strength of one’s convictions and the intellectual flexibility necessary to admit, relatively quickly, when one is wrong.–Unknown

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.  It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.  Alan Greenspan (1966)

There are two ways to conquer and enslave a country. One is by the sword. The other is by debt. –John Adams, 1735-1826

When you consider the rate at which public debt is increasing, along with the fact that so many countries around the world instituted their own versions of quantitative easing (i.e. printing money) while increasing debt levels, these conditions are unprecedented. We have found NO HISTORICAL example of so many major countries simultaneously engaged in quantitative easing. Just ten years ago we would not have thought such an economic environment even possible. –Arnold Van Den Berg, Feb. 21, 2014

Gold Massacre

Today’s price decline in gold is probably a gift for the long-term buyer. A year ago on tax day the gold market had a large sell-off with rising demand from China.  big gld

Today, gold gets sold off $35 in the New York open, because demand from China is falling due to weakening money supply, credit stress and ?? What else can we make up?  China is relentlessly accumulating gold.

small GLD

However, 2014 is far different in market structure than 2013. 900 tons have already been removed from gold ETFs and demand to hold gold is greater than cash based on negative GOFO rates–see chart at the top and read here:

Take a look at the negative rates here:  An article discussing gold’s anniversary day:

The cause of today’s sell-off is not manipulation, contrary to the howls from goldbugs, but traders getting ahead of possible collateral issues tied to swap agreements:  So, gold prices could continue to be pressured–welcome to markets. Which force will be greater?


Has anyone has attempted a valuation of Detour Mines (DRGDF) mentioned in this post: I won’t post my valuation until the $500,000 prize is awarded.

My quarterly report (The Horror!) :Gold and Miners_April First Qtr Report

A reader wished to share a report on investing in materials:  Fortnightly_Thoughts_-_14_04_14_-_Materials

Simple Discussion of Austrian Business Cycle Theory

Head or tails

An excellent discussion of how and why ABCT works.  Note that the speaker, David Howden, says the middle stages of production (like building infrastructure and maintaining stores) are declining now.  Excellent!

ThinkerAUDIO    Just copy and past into your browser. Thirty minute audio.

David Howden, economist, articles: and

Global Meltdown?  Thoughts?

Michael Price’s Case Study on Hospira HSP) Valuation


I wait for large discounts; I look for the growth guys selling to the value guys.”

Video Lecture: on November 9, 2013 in London.

Thanks to London Value Investor Conference, 22nd May, Featuring Mason Hawkins and Don Yacktman,  April 7, 2014 by Tobias Carlisle


Wait for bad news; wait for things (news/events) that can drastically affect the company. Be prepared to act on it. At MFP, we spend all our time determining intrinsic values (“IVs”). Try to lead them. Determine IV beforehand, so you can act quickly when events push prices below IV. The Sell-Side talks about this last quarter. How the hell helpful is that?  I don’t think one or two quarter’s matters or even a year’s worth of earnings reports. Understand what MIGHT HAPPEN not what DID HAPPEN.

Get prepared and wait for these opportunities like HSP,  today (Nov. 8, 2013) at $32. It will be worth $45 in a year.


Management has said they have fixed problems at the plant, the balance sheet is clean. Management will buy-back stock. The company has $2.00 per share in earnings now and in a year it will have $3 per share. A fifteen multiple (conservative given the business and competing investments) gives you $45.



Hospira (HSP) is a manufacturer of generic drugs, a pharmaceutical company. The Federal Drug Administration (FDA) regulates their plants for certain standards of cleanliness and to ensure the bio equivalency of their drugs.

So HSP was earning $3 EPS and was an absolute growth stock that never disappointed Wall Street up until 2010. Earnings were growing at a nice rate.

Then one day, the FDA shuts down one of HSP’s larger plants. The stock opens at $28, down $17 points from $45. So what happens when a company has 200 million outstanding shares and the stock declines 17 points—HSP loses $3.5 billion of market cap. I do not believe it will cost $3.5 billion to fix the plant to FDA’s standards. HSP has 17 plants and the FDA closed only ½ of one plant.

The stock market puts $3.5 billion discount on the bad news from Hospira. The market is OVER-discounting or over extrapolating the bad news (perhaps to ALL of Hospira’s business).

THAT situation—a good company hit with a temporary/fixable problem to go on sale—is what value guys wait for.

HSP was consistently growing, earning $3 EPS and trading at 15 times earnings. It was owned by all the growth guys. So what happens when a stock goes from $45 to $28 or 17 points? The growth guys are selling to the value guys and the value guys, at $28 per share, are saying that the company will be hit now for $1 per share (earning $2.00 per share temporarily) but will be back to $3.00 per share after the company fixes the plant, buys back stock, etc.

It will take two years to get back to earning $3 per share and cost the company about $500 million or a $1 billion to fix the large plant. Meanwhile, the company will earn 50 cents or a $1 less than it would with the plant operating normally ($2.00 to $2.50 per share), but the intrinsic value of the company is about $45 with a 15 multiple on normalized earnings of $3.00 per share that the company should earn once they get religion and run their plants a bit better.

Then the growth guys will come back into the stock and then the value guys sell to the growth guys.

You look for the most down stocks; down 25% to 35%. I look for the growth guys looking to sell the value guys.  Ask yourself if the discount is great enough. WAIT FOR BAD NEWS.

Michael F. Price 13F

% of Portfolio as of 12/31/13
Hess Corporation 7.48%
Intel Corporation 6.2%
Alleghany Corp. 3.85%
Boston Scientific Corporation 3.1%

See a more detailed Case Study: Case Study Hospira by Price London 2013

and a prior lecture: M PRICE Columbia Lecture Notes_2009 and G&D Spring 2011

A student should listen carefully to the above lecture and try to also value Hess, another company mentioned in his London speech.

Value AMEX during the Salad Oil Scandal (A Great Blog)

Momentum Stocks Mauled, A Lesson in ABCT


Momentum Mauled:

When momentum stocks crack, this is what it feels like:

When retail investors blindly buy Yelp, Tesla, Concur Technologies, and IBB, I see:




A reader asked if ABCT was helpful in timing purchases or sales.  I don’t believe so, but you see where the canaries are beginning to die in the coal mine. If artificially manipulated interest rates–through the Fed’s manipulating the value of the currency (The Fed monetizes the debt through “quantitative easing” which is just currency debasement/printing up fiat currency)–cause mal-investment, then you would expect to see the first cracks in the most over-valued areas of the market first.  Note the collapse of sub-prime in 2007 before the general equity collapse in 2008/09.

Here Ludvig Von Mises(1881 – 1973) explains, “The boom can last only as long as the credit expansion progresses AT AN EVER-ACCELERATED pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market.”  Note that the Fed is “tapering” or buying fewer bonds with newly issued fiat currency.   For the boom to continue, the Fed would need to VASTLY INCREASE the monetary madness.

This fractional reserve banking system allows banks to engage in credit creation by issuing notes and bank balances unsupported by any new wealth. Or the Fed simply creates the money out of thin air to purchase Treasury Debt from other individuals and institutions.  Since money substitutes are created out of thin air, the whole process is a risky venture. On its face, such a practice would be fraudulent except that it has a legal basis whereby central banks give commercial banks the legal right to issue “counterfeit” money.

All the interference of free market prices by the Fed to lower interest rates just promotes business activity that would be uneconomic at normalized interest rates (read: a higher cost of capital). Can you be surprised when Tesla, Yelp or (in 2000) are the first to plunge?

Fed buying

 A great blog:  In the chart above, note the last time in the 1940s when the Fed was monetizing the government’s debt to pay for WWII.

Today:Recent Fed Buying

 While perhaps investors and their money are moving here:
Staggered Start


Case Study: Valuing Detour Gold; Industry Map


A gold mine is a hole in the ground with a liar on top–Mark Twain

Industry Map:

Industry Map of the Precious Metals Sector   OK, I give myself a D- for effort and appearance but time has been passing so we need to move forward to a valuation of Detour Mines (DRGDF). Please see where Detour is highlighted in my industry map.

A reader was kind to share a brokerage report on the industry: Merrill_Global_Gold and Precious Metals and Gold-Special-Report-Time-to-Mine-2014 (I personally do not spend much time on jewelry demand, etc. because investment demand, in my opinion, drives the price of gold).   When you hear that China’s demand for gold is higher per year than annual production and the only reason gold is lower is because of manipulation in the “paper” (Comex/LMBA), think for yourself!  Because of the huge stock to flow ratio (190,000 tonnes supply vs. 2,500 annual production) what matters is the NET hoarding (buying) and/or dishoarding (selling) at the current price. Gold doesn’t disappear like wheat, it simply changes hands at a certain/specific price.  When silver hit $50 in 1980, Grannies started melting down their silver tea sets to sell into the market. 

Try to value Detour Mine with today’s gold price give or take $100 to $200 dollars–the range we have been trading through for the past year.  On Monday, I will give a big hint in how you might value Detour, but let’s see if you can spot the obvious, first.  Good luck!  What prize would folks like for their effort?  Money, gold bullion, or a date with my Ex?

Have a Great Weekend!

REMEMBER: It is a long, long way from searching for gold to this:

Gold Bars

James Grant; Corning the Gold Market; the 1960′s Bowling Bubble

James Grant’s speech about the Federal Reserve

How to corner the gold market:

The 1960 Bowling Bubble: