Booms do not merely precede busts. In some important sense, they cause them. This idea, on which so much of the analysis of these pages rests, is borrowed from the Austrian School of economics. It was the Austrians who observed that people in markets periodically miscalculate together. One important source of misjudgment is the interest rates that the central banks impose. A too-low rate provides high spirits and speculation; a too-high rate induces morbidity and contraction. Thus, the ultra-low money-market rates of 1993 not only strengthened balance sheets and reduced mortgage-interest costs, as policymaker intended. They also cause an outpouring of capital investment, as policymakers might or might not have intended. If precedent holds, these projects will be carried to extreme lengths. Like the Manhattan skyscrapers of the 1920s and the Texas oil rigs of the 1980s, the white elephants of the 1990s (coffee bars and semiconductor fabricating plants are the top candidates at this moment) will bring grief to their sponsors and drama to the next recession. Overbuilding and underbuilding constitute opposite sides of the same cyclical coin. James Grant in The Trouble with Prosperity (1997)
Ken Shubin Discusses his Advanced Value Investing Course At Columbia’s GBS
http://www.valuewalk.com/2012/02/ken-shubin-stein-on-value-investing-at-columbia-business-school/
Ken mentioned the CIA Manual for Intelligence Analysis (120 pages): https://www.cia.gov/library/center-for-the-study-of-intelligence/csi-publications/books-and-monographs/psychology-of-intelligence-analysis/PsychofIntelNew.pdf
Even Value Investing Professors struggle with understanding how to grasp the critical aspects of a business and its industry. We are trying to avoid such a misunderstanding by our diligent study of competitive advantages.
QUIZ
Ken Shubin is Spence774 here: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/2998. Here he recommends Winn Dixie Stores(WINN) – $18.61 on Nov 29, 2007
Shubin’s Summary: WINN is less than a 50 cent dollar. It is a post-bankruptcy supermarket chain located in the Southeast in the midst of a multi-year turnaround. WINN’s margins are currently 1/6 of industry average. WINN has temporary, fixable problems with no structural impediments to the achievement of industry average operating metrics. With a strong balance sheet, excellent management, and strategic assets with great potential, we believe WINN shares have the potential to more than double over three years, with little risk of capital loss.
–
The price dropped 50% from his recommended price before the company was bought in December 2011 by another Supermarket chain.
QUESTION: What key question must you ask about Winn-Dixie (Winn)? Where might Winn have any chance of a competitive advantage? How would you analyze this industry? Your studies of Wal-Mart and competitive advantage should give you the understanding to answer this quiz. An answer will be posted in the comments section by tomorrow. What does the “Professor” neglect in his analysis?
Short Idea on Winn: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/28593
Recommended Blog: http://www.oddballstocks.com/2012/03/adams-golf-gets-buyout-and-other-net.html An investor on the journey of learning how to invest.
The Results of My Aptitude Test
I recently had an extensive aptitude test to prepare me for a career upgrade. Video of my results: http://www.youtube.com/watch?v=gV5OAfKhe34&feature=related
Hi John
the article you posted needs a user name and password to enter value clube!!!
then use my email: aldridge56@aol.com
and PW: glass
thank you John,much appreciated
very strange,now it opened without asking for the password !!!!
Does this company have any competitive advantages/barriers to entry? If so, what are they and how sustainable are the advantages?
From our study of Wal-Mart, and due to the nature of the business/industry, we know to look for structural cost advantages through regional economies of scale combined with limited customer captivity. Evidence of these advantages would show up in the numbers vs. competitors. We would need to look at market share stability over time and ROIC over a decade or two to see if WINN has any advantages.
The “professor” fails to answer this question (so as to decide whether he’s looking at a franchise or an asset based investment). Also, he uses EBITDA metrics in his analysis, which are pretty much useless given the fact that grocery companies require a significant amount of maintenance capex to remain competitive.
Part of his thesis is that the company will spend money to remodel stores, and these store remodels will contribute incremental sales and profitability (EBITDA) over time. The main concern I have with his analysis is that if this company does not benefit from any CA/BTE, the money spent on the remodel program will NOT generate incremental sales and profitability over time because competitors (Wal-Mart, Publix, etc.) will copy WINN and, therefore, the incremental capex will fail to earn a return above the cost of capital (and could earn a return below the cost of capital–thus destroying value). These expenditures should be seen more as maintenance capex.
I have looked at a few national grocery chains. SWY is a company that embarked on a similar capex program from in the mid 2000′s and is failing to see a return on their “investment.”
With these companies you need to do your own work and thinking. If you call up the IR department or listen to “analysts” talking to management on conference calls, many of these companies fail to truly understand maintenance capex vs. growth capex. From my own experience, many think true maintenance capex is less than depreciation, but if you track actual capex vs. depreciation, capital spending is increasingly greater than depreciation (except at SWY, where they front end loaded a bunch of store remodels… but their capex is going to have to go up again once the stores need new remodels–every 7 years or so).
Perhaps the reason that capex is higher than depreciation over time is that the cost of remodeling a store increases over time?
Thanks.