Category Archives: Search Strategies

Michael Price’s Case Study on Hospira HSP) Valuation

Michael-Price

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

Video Lecture: http://youtu.be/Nph-sDz1EtA 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

SEARCH STRATEGY

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.

HSP

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.

VALUATION

See:HSP VL

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%
FXCM INC. CLASS A COMMON STOCK 3.87%
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)http://hurricanecapital.wordpress.com/

Case Study: Valuing Detour Gold; Industry Map

miners

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

Part 2: Analyzing a Gold Mining Company–Initial Steps

Mark Twain: “A mine is a hole in the ground with a liar standing next to it.” 
2-BGMI-Gold both-W2 (1)

Initial Steps

We first have to understand the product/market of our gold company. Gold companies produce gold and silver which is money. What is money?  Precious metals have exchange value which makes up a large part of their value.  You first have to understand the gold market. Note: why did gold go down LESS than other commodities such as oil in the 2008/2009 credit crisis?

You need to draw up an industry map. How? Find out who the participants are.

Start with history: http://www.fgmr.com/gold-mining-stocks-have-outperformed-the-djia.html

BGMI http://www.sharelynx.com/chartstemp/free/fchart-BGMI.php

QUIZ: What is the best environment to invest in Gold mining equities. Why?

We will circle back to an industry map after you have read about the industry.

What determines the price of gold: http://www.acting-man.com/?p=10251 Also, do a search for gold and/or mining stocks and then read his posts.

The Case For Gold by R Paul

Gold Dollar by Rothbard

Roubini Why Gold Won’t work

Study: www.monetary-metals.com

Gold as collateral: http://www.alhambrapartners.com/2014/02/26/gold-and-reverse-repos/   Also, do a search for gold.

Read free research on gold as money: http://www.myrmikan.com/port/

View all five videos on money: http://hiddensecretsofmoney.com/

Two excellent books: Gold, the Once and Future Money by Nathan Lewis. Also, Gold: The Monetary Polaris by Nathan Lewis.

Gold and inflation: http://www.garynorth.com/public/department32.cfm

The case for gold:  http://www1.realclearmarkets.com/2011/11/18/my_thoughts_on_lewis_lehrman039s_gold_standard_120618.html

Understand royalty companies: http://seekingalpha.com/article/1341411-gold-and-silver-royalty-companies-part-1-the-pros-and-cons-of-royalty-companies   (read all five parts)

Then read presentations of Royal Gold, Silver Wheaton, Franco-Nevada, Sandstrom from their websites for a good overview of the gold mining market(s).

These sites can get you started. Don’t believe the hype!

www.goldsilverdata.com Also, go to http://youtu.be/VjjLhPqO8bY to view video on valuing gold and silver stocks.

Go to www.youtube.com and search for Jim Grant AND gold,   John Doody and mining stocks.  Ditto for Brent Cook, Rick Rule. Search for their comments.

That will get you started and then next week, I will post an industry map. Ask questions.   In two weeks we will crack a company.

Update March 17, 2014: Discussion of Junior Resource Sector

Gold1800to2000

 

Understanding Bear Markets; Without Comment

Understanding Bear Markets:  http://www.nextbigtrade.com/2014/03/11/learning-from-the-devious-gold-bear/

Charts below from: http://www.alhambrapartners.com/2014/03/11/valuation-bonanza-march-2014/

ABOOK-Mar-2014-Valuations-FINRA-Margin-Debt

ABOOK-Mar-2014-Valuations-FINRA-Net-Worth

 ABOOK-Mar-2014-Valuations-FINRA-Net-Worth-Change

ABOOK-Mar-2014-Valuations-CAPE

ABOOK-Mar-2014-Inventory-to-Sales

 SP-500-vs-200-MA

 

Volatility-Index

 

Speculative Hedge Funds Piling In.

Nasdaq-COT

Market-Sentiment

Looking At Bottoms; Gold Stocks

200205666-001

No, not these…..

Bottom

 

 

 

I mean these……….. (Thanks to http://www.classicvalueinvestors.com/

Gold Stocks

The table below is meant to highlight the HUGE price ranges of the micro-cap junior precious metals sector. I tend to avoid or make allowance for some of these companies going to $0.00 or diluting shareholders with equity offerings.

GroupofMinersPerformanceFebruary182014-300x90

 If you go back and read the author’s post over the past two years, you will get a feel for the suffering of investors who ride a BIG BEAR market in small junior mining stocks. Be aware of the downside as well! See:  http://classicvalueinvestors.com/i/2014/03/goldgroup-mining-this-is-what-i-call-a-great-day/

How one investor changed his life by developing his OWN method of investing.

Below is an advertisement to get you to hear the audio story. The ad places the HOOK, “an unusual money-making secret.”  Baloney, he doesn’t use any “secret”. He simply found a method to value, buy cheaply, and manage a portfolio of precious metals’ stocks.  And over the years he has done extremely well while stomaching swings of 50% or more. He can hold on, because of his work and confidence. THAT is his secret. I know this guy and you should listen to the interview. Yes, a bit hokey at first –who cares that he got revenge on his ex-wife–but a true story. There are LESSONS here.

Dear Reader,

If you’re a middle-aged guy, divorce is one of the worst things that can happen to you. It can ruin you, both financially and emotionally.

But I recently heard the story of a Ft. Lauderdale man named John  (Actually, John Doody of www.goldstockanalyst.com) who discovered an unusual moneymaking secret after going through a bitter divorce.

John says this secret has made him a multimillionaire over the past decade… even though his ex-wife took almost all of his assets. And he asked us if he could share his story with you.

In fact, he says he even went through the expense of having his transactions verified by an independent auditing firm… just so he could prove his incredible story to the world.

Click here to listen to John’s story.

Jan. 2014 Interview of John Doody (down 50% in 2013!) http://youtu.be/95gjTXIGsgU

Regards,

Will Bonner, Publisher, Diary of a Rogue Economist 

Who Wants to Analyze a Gold Stock?

If there is interest, we can work through a company in a few posts next week.

HAVE A GREAT WEEKEND!

Activist Short-Selling

Easily offended

NBER short selling study finds Asensio to be the Pioneer of recently defined field.   See www.asensio.com  There are plenty of research reports and case studies on short-selling hyped frauds. A worthwhile education.

March 5th, 2014.  In January 2014 the National Bureau of Economic Research ["NBER"] published a behavioral finance article titled the first titled “How Constraining Are Limits to Arbitrage? Evidence from a Recent Financial Innovation.”  The study indentifies Manuel P. Asensio of Asensio & Company as the “pioneer” of short selling “arbitrage” and found that Asensio & Company’s short targets experienced the largest price correction among this recent class of short sellers during the study’s timeframe.   The study defines this recent class of arbitrage short seller as “information producers as arbitrageurs rather than as short-sellers, to distinguish them from uninformed short-sellers in the market.” 

The study describes a “recent financial innovation that allows limits to arbitrage to be sidestepped, and overvaluation thereby to be corrected” even in settings characterized by extreme costs of information discovery and severe short-sale constraints or limits.  Limits “interfere with arbitrage processes so that security prices can deviate from true values for extended periods of time” and include costs of discovering a mispriced security, the costs of the resources needed to exploit a mispricing and short-sale constraints and the risk that mispricing could get worse, forcing early liquidation of a position at a loss.  Limits mentioned in the study also include “sophisticated public relations campaigns against shorts” and targets that “put pressure on their shareholders to recall stock out on loan, to put a squeeze on short sellers.” Yet the study found that short selling arbitrage can succeed in correcting mispricing and generate cumulative abnormal profits “even in this uninviting setting.”

The study “arbitrageurs” expend considerable resources to identify overvalued companies and profitably correct overpricing.  It notes that short selling arbitrageurs reveal their information publicly as a way to sidestep the so-called limits and found evidence that “revealing the information voluntarily and thereby accelerating price discovery reduces the risk of the arbitrage strategy and sidesteps the arbs’ limited-resource constraint.”

The study found that “[f]or this strategy to work, critical that the information the arbs reveal to the market is credible – or else the longs will ignore it. We observe that the arbs in our sample argue their case by way of highly detailed reports which they post publicly and for free.  Compared to reports published by sell-side equity analysts at investment banks, which have a tendency to be bothoptimistic and biased.”

The study contributes to the “growing literature on the role of short sellers in producing and transmitting information in capital markets. There is little prior evidence on what short sellers know and how they acquire information. Our unique data allow us to observe the information discovery process at the level of individual information producers and to study how the information the arbs discover is then incorporated in security prices.”

The study found the short seller arbitrageur evidence ‘illustrates why financial markets need short sellers to function well. While some short sellers may indeed be speculators who do little more than destabilize share prices, as is often alleged, the short sellers in our sample are information producers who help correct mispricing and thereby help make markets more efficient. This is all the more remarkable given that many targets in our sample were held by highly sophisticated investors who apparently did not spot the overvaluation until it was too late.”

The study is available at http://www.nber.org/papers/w19834 

Banker “Suicides”; Economic Myths; Food Crises; Gold Stock Analysis?

jumper

The string of suicides among the leading bank employees is indicative of the change in trend. The major Wall Street banks including Bank of America, Goldman Sachs, JP Morgan, Credit Suisse, subsequently told junior bankers to take more time off since the death at Bank of America last August of a 21-year-old Bank of America intern who died after reportedly working consecutive all-nighters at the bank’s London office.

http://armstrongeconomics.com/2014/02/18/are-bankers-committing-suicide-for-a-connected-reason/

An excellent course on behavioral economics. I took this course and highly recommend but it is a time commitment of $six to eight hours per week. Improve the YOU. https://www.coursera.org/course/behavioralecon

POKER: To learn about investing in the 21st Century: The great poker movie, Rounders: http://www.tfmetalsreport.com/blog/5494/rounders

Munger on Investing: http://www.valueinvestingworld.com/

Any interest in analyzing a gold stock? http://youtu.be/NML5-dgp1u4

Economic Myths

Myth #8: The Fed provides a net benefit to the US economy

It never ceases to amaze us that people who understand that it would make no sense to have central planners setting the price of eggs believe that it is a good idea to have central planners setting the price of credit.

Myth #2: The Fed’s QE boosts bank reserves, but doesn’t boost the money supply.

It’s a fact that for every dollar of assets purchased by the Fed as part of its QE, one dollar is added to bank reserves at the Fed and one dollar is added to demand deposits within the economy (the demand deposits of the securities dealers that sell the assets to the Fed).

Myth #12: Inflation is not a problem unless the CPI is rising quickly

The conventional wisdom that “inflation” is not a major concern unless the CPI is rising quickly is not only wrong, it is also dangerous. It is wrong because monetary inflation affects different prices in different ways at different times, but the resultant price distortions always end up causing economic problems. It is dangerous because it leads people to believe that there are no serious adverse consequences of central-bank money printing during periods when the prices included in the CPI are not among the prices that are being driven skyward by money printing.

Read more:Economics_Myths_on_Fed_Reserves_Saville

An Expert on Bear Stearns:

 Why the rioting? fig1_crises

Social unrest may reflect a variety of factors such as poverty, unemployment, and social injustice. Despite the many possible contributing factors, the timing of violent protests in North Africa and the Middle East in 2011 as well as earlier riots in 2008 coincides with large peaks in global food prices. We identify a specific food price threshold above which protests become likely. These observations suggest that protests may reflect not only long-standing political failings of governments, but also the sudden desperate straits of vulnerable populations. If food prices remain high, there is likely to be persistent and increasing global social disruption. Underlying the food price peaks we also find an ongoing trend of increasing prices. We extrapolate these trends and identify a crossing point to the domain of high impacts, even without price peaks, in 2012-2013. This implies that avoiding global food crises and associated social unrest requires rapid and concerted action.

Tweet Map (clickable)

Clickable food prices tweet map

Press Release: Scientists show link between food pricing and global riots

A new Cambridge study issues stern warning for policy makers

(CAMBRIDGE, MA) — A new study shows that the timing of outbreaks of violence rocking North Africa and the Middle East is linked to global food prices.

Today’s headlines explode with stories of failed political systems, harsh regimes, and denial of rights underlying riots and warfare. The authors, however, point to rising food prices as a key factor too–not only in assessing the aftermath but in predicting future times of unrest.

The study, titled “The Food Crises and Political Instability in North Africa and the Middle East,” is by Marco Lagi, Karla Bertrand and Yaneer-Bar-Yam of the New England Complex Systems Institute.

Using detailed charts showing data from the FAO Food Price Index and the timing of the riots, the authors were able to demonstrate how food prices have a direct link to the tipping points of unrest and upheaval.

The authors also criticize the deregulation of commodities markets in the US as contributing to the rise in food prices.

The authors issued a stern warning that if food prices remain high, disturbances will continue. Averting further crises this year and next requires quick and concerted action by policy makers, they added.

“Our predictions are conditional on the circumstances, and thus allow for policy interventions to change them. Whether policy makers will act depends on the various pressures that are applied to them, including both the public and special interests,” said Prof. Bar-Yam.

David and Goliath: Underdogs, Misfits, And the Art of Battling Giants

Perhaps it is one secret of their (Bankers’) power that, having studied the fluctuations of prices, they know that history is inflationary, and that money is the last thing a wise man will hoard.–Will Durant in Lessons of History

Investment Strategy

Gold-vs-Gold-Miners-Ratio

Client Report Jan 29 2014

gold vs spy  Gold is money, not an investment.

Value Investing Videos (Manual of Ideas)

https://www.youtube.com/user/manualofideas?feature=watch

Pabrai lectures in India: https://www.youtube.com/watch?feature=player_embedded&v=Py95fWZV2Vo

Reader’s Questions

How much of your decision to not own stocks of businesses outside of the mining sector is based on a top-down or macro decision.  The reason that I as is because you mention that you owned COH in the past and that seems like a cheap stock at the moment.  I could understand that you might not want to own it because of it struggles in the US and possible brand erosion, but that seems more like a quality issue than a valuation issue.  Or is it a fear of a hurting consumer?

My reply: Actually, it is a bottom-up decision.  I have pawed through my 250 stocks that I target in Value-line but see little margin of safety. Yes, I owned COH many months ago but sold near $58 as I had about a $60 to $65 valuation on it.  I am very skeptical that the high end of their profit margins can be sustained because of their clientele and QE. But the undervaluations in miners gave me a better uses for my capital.  So bottom up on both sides push/pull. 

But I am certainly not suggesting anyone follow exactly what I am doing. I still own some non-miners like ESGR but I wouldn’t add to them. 
 
Question: Also, I’m still trying to understand the margin decline argument. I haven’t done enough homework on it myself to ask intelligent questions, but intuitively I don’t understand why a specific geography (in this case the US) couldn’t have more than average of the types of companies that generate higher margins.  The geographic lines on a map seem arbitrary to me.

My reply: Well, set aside geography, because the same principles apply to any country. The most mean reverting metric of companies in general would be profit margins.  Think about the inevitable law of competition and lack of barriers to entry.  But understanding this subject will make you a better investor and save you heaps of pain!  If an analyst projects an increase in multiples on top of today’s profit margins, then I suggest a mercy kill for that analyst and his boss/clients. We are in the death zone–a climber’s term for high altitude conditions. 

Cutting back on growth capex and returning excess capital to shareholders if there are no adequate opportunities to generate excess returns is the right thing to do, but how sustainable is it for large companies like IBM or CSCO? Also, buying stock today may not be below intrinsic value for every company that is doing it.