Someone I regularly trade emails with sent me this report on 5 Japanese net-nets he researched. And he said I could share it on the blog:
Gurpreet Narang's Report on 5 Japanese Net-Nets (PDF)
Sunday, March 25, 2012 You can read my thoughts here.
Talk to Geoff about Warren Buffett's 2011 Letter to Shareholders
Saturday, February 25, 2012 I finally made the move to Texas. And am now working full-time for GuruFocus.
Here are the articles I've written since joining them last week:
Can You Build a Liquid Portfolio with Illiquid Stocks?
Free Cash Flow: Adjusting for Acquisitions, Capital Allocation, And Corporate Character
What Are the Minimum Requirements for a Good Net-Net
Pain and Patience: Net-Nets, Magic Formulas, and Micro Caps
How to Read a 10-K: What is the Most Important Part?
Free Cash Flow vs. Owner Earnings: Which Matters More?
How Long Should You Hold a Net-Net?
You've Crunched the Numbers: Now What?
Western Digital (WDC): Ben Graham Bargain or Mispriced Bet?
Understanding an Industry: Is Simple Better than Familiar?
Are Most Net-Nets Uninvestable?
Do Working Capital Reductions Count as Free Cash Flow?
Warren Buffett's (Modern Day) Margin of Safety
Berkshire Hathaway's New Buys - And One Really, Really Old One
David Einhorn's Buys: More Tech and a Return to Yahoo (YHOO)
Glenn Greenberg's New Buys: Growth Stocks for Value Investors
What Books Should You Read About Ben Graham?
GAAP Accounting: Restatements vs. Realities
Vistaprint (VPRT): The Makings of a Moat?
How Do You Estimate a Stock's Intrinsic Value?
What Stocks Would Phil Fisher Buy Today?
I also write GuruFocus's Ben Graham Net-Net Newsletter and GuruFocus's Buffett/Munger Bargains Newsletter.
All my writing will be done over at GuruFocus from now on. But I'll still be on Twitter. And you can always email me.
So don't be a stranger.
Wednesday, February 22, 2012 Someone who reads the blog sent me an email asking about a specific Japanese net-net. Rather than trying to choose the best net-nets from among the entire hoard in Japan, I would suggest doing one of two things:
In my own portfolio, I went with option #2. I bought 5 Japanese net cash stocks last year. I've since sold one of them. I have some cash. And am looking to add a couple more Japanese net cash stocks. Right now, they make up 30% of my portfolio. Again, I'm willing to go as high as 50% in Japan. We'll see what happens.
But that's me.
What would I suggest for others interested in Japanese stocks?
Here's how I would look at Japan. If you can find stocks selling for less than net cash with few/no operating losses in their long-term history, buy them. Don't so much look for net-nets in general. Start with an even higher standard. Start with profitable, net cash companies. They are close to non-existent in the U.S. But not Japan. After that, I'm not sure I would necessarily just look at net-nets. For example, there are some cheap Japanese gas companies that are not net-nets (most of their assets are PP&E) but are super reasonably priced on an EV/EBIT basis. To me, it is more important to find totally obvious bargains than to get caught up in the definition of what a net-net is or isn't.
Totally obvious bargains fall into a few categories. Here are 2:
In fact, if you really look, you may find some gas companies, grocery stores, etc. that are very cheap on an EV/EBIT or EV/EBITDA basis that you like better than some of the net-nets. That’s fine. Buy the most obvious bargains. The things that are clearly selling for less than they are worth.
If you're only going to buy half a dozen Japanese net-nets, you should look for net cash bargains. Once we are talking about receivables, inventory, etc. you need to know more about the business. So it needs to be a simple business or a business you can learn about. That's harder. For me personally that means it makes sense to buy net cash bargains in Japan and look for net-nets on the basis of receivables, inventory, etc. in the U.S. Because in the U.S., I have a better chance of knowing the difference between a predictable business and an unpredictable business.
If I could find 10 consistently profitable companies selling below net cash in the U.S., I wouldn’t buy any Japanese stock. Because I understand American businesses better. But I also understand that a consistently profitable company selling for less than net cash will work out as an investment regardless of how well I understand the business. And, of course, the idea is to buy a handful of these companies.
Not just one.
Tuesday, January 3, 2012 Someone who reads my blog sent me this email:
Geoff,
Reading your articles. I am confused between standard deviation and coefficient of variation. Standard deviation itself shows how much variation exists from the average then what does coefficient of variation tells us?
Gurpreet
Standard deviation shows the amount of variation. Not related to anything. The variation coefficient shows the relative amount of variation. The standard deviation related to the mean. You should always relate the standard deviation to the mean. Otherwise, you will think height varies a lot among NBA basketball players because they are all tall while height varies little among children because they are all short.
Standard deviation is not a number that ports well. The variation coefficient is. It’s a way of seeing how big the swings above or below the average have been in terms of the average. Have they been one-third of the average? Or have they been the same size as the average?
For example, two companies can both have a standard deviation of 10% in their operating margins over the last 10 years. If one company has an average operating margin of 10% and the other has an average operating margin of 30% – that same 10% swing is going to feel very different. The variation coefficient tells you this. The standard deviation does not.
I need to make two points here. One, I use stats to describe. Not predict. Two, I use stats to compare. To rank. Different people have different reasons for measuring the things they measure.
If your goal – like mine – is to describe the past and compare different company’s pasts to each other, the variation coefficient is the right number to use.
Saturday, December 31, 2011 Someone who reads the blog sent me this email:
Hey Geoff,
Thanks for posting up your old podcast episodes! Any chance you can put up the interview series episodes as well? Thanks!
-Drew
Sure. Here are links to all the interviews and episodes. Remember, they are old. So any references to stock prices, market conditions, etc. are out of date.
Interviews
Tariq Ali of Streetcapitalist (Interview/Site)
George of Fat Pitch Financials (Interview/Site)
Asif Suria of SINLetter (Interview/Site)
Jon Heller of Cheap Stocks (Interview/Site)
Toby Carlisle of Greenbackd (Interview/Site)
Episodes
Monday, December 26, 2011 My latest net-net article over at GuruFocus includes my clearest explanation of what to look for in net-nets – and more importantly – what it takes to make money investing in net-nets:
If the balance sheet is very liquid and insider ownership is very high – there’s a good chance something will happen. I have no idea what. And I have no idea when. But someday, something will happen to increase the return on those assets…Sometimes it’s as simple as returning the assets to shareholders, using net cash to make a management buyout super cheap, or using net cash to buy a totally different business…When you buy a net-net you are not buying future earnings. You are buying future assets. What I’m talking about here is asset conversion. At some point, you are expecting today’s assets will be converted into something you can profit from. Something a control investor will pay for. Or something the market will reward.
It’s very hard to imagine these events ahead of time. But you can still bet on them:
That’s the uncertainty in net-nets. Most of the best net-nets have this certain/uncertain duality. It is certain the stock is selling for less than it’s worth. It is uncertain how the stock will ever sell for what it’s worth.
Remember what Ben Graham told the U.S. Senate:
The Chairman: When you find a special situation and you decide, just for illustration, that you can buy for 10 and it is worth 30, and you take a position, and then you cannot realize it until a lot of other people decide it is worth 30, how is that process brought about – by advertising or what happens?
Mr. Graham: That is one of the mysteries of our business, and it is a mystery to me as well as to everybody else. We know from experience that eventually the market catches up with value. It realizes it one way or another.
Saturday, December 24, 2011 Here are the 3 net-net articles I've written over at GuruFocus:
When Is a Bad Business a Good Net-Net?
Expect a new net-net article each Friday. The net-net newsletter comes out once a month. The next issue is set for January 6th. The newsletter picks one net-net a month. And holds each pick for one year. Starting in April, I'll be writing about the performance of each net-net as it exits the portfolio. So you'll get to judge the newsletter's results for yourself.
So far they've been ugly. 2011 was not a good year for net-nets. At least not in the U.S.
On the bright side, it looks like one of my Japanese net-nets - Sanjo Machine Works - is going to be bought out.
Even though Sanjo is just one-fifth of my Japanese net-net portfolio the 140% return on Sanjo will end up making 2011 a good year for the group despite my other four Japanese net-nets doing absolutely nothing pricewise.
Friday, December 23, 2011 Today, I wrote the first of what will be a weekly series of net-net articles over at GuruFocus.
The article is called "How Many Net-Nets Are There?"
And the answer is 142.
By the way, a new issue of GuruFocus's net-net newsletter comes out tonight. It's free for GuruFocus Premium Subscribers.
The weekly articles are – of course – free for everyone.
The articles will appear each Friday. The newsletter comes out on the first Friday of each month.
Friday, December 2, 2011 Some people have asked where they can find episodes of my defunct podcast.
Here they are:
Saturday, November 26, 2011 It’s been about 6 months since I bought a basket of 5 Japanese net-nets.
A couple people have asked about how my Japanese net-nets have done. I started making these investments around April of this year. I wrote the “Buy Japan” post before buying my 5 Japanese net-nets. And it took me about a month of bidding for these micro caps to get my orders filled.
Since then, in dollar terms, the 5 stocks are up: 6.41%, 7.53%, 12.80%, 18.35%, and 20.88%.
You can use the March 16th date of my “Buy Japan” post as a convenient way of measuring the influence the Japanese Yen / U.S. Dollar exchange rate has had on the performance of those stocks. For Japanese investors, your results would obviously not include these Dollar exchange rate changes.
Let’s just say these Japanese net-nets have done better than my U.S. net-nets this year. It doesn’t matter if you are calculating returns in local currency or dollars. My Japanese net-nets have been my best performers this year.
I will re-evaluate the positions around June of next year.
I generally hold net-nets for at least a year before considering whether they should be sold. This gives them time to run.
Most people sell net-nets too fast because they dislike the underlying businesses and are not used to having such large gains in a single year.
Of course, the truth is that a net-net that rises 50% or even 100% is usually still a very cheap stock. So it’s silly to sell a net-net just because it’s gone up.
Tuesday, October 11, 2011 On June 30th 1914 the New York Times ran the headline:
Trading Very Dull, with Prices a Little Lower
The article had this to say about Europe:
The assassination of the heir to the Austrian throne was an event whose consequences were closely considered by the markets abroad, but the calmness which they showed indicated clearly that political complications were not feared as a result of this incident. Indeed, the view that it would tend to lessen rather than to increase political strife in Southeastern Europe found wide acceptance.
Monday, October 10, 2011 Someone who reads the blog sent me this email:
Hi Geoff,
The thing I have been pondering is what are the tools in valuing a shrinking / dying business. The one I have been looking through is Journal Communications (JRN).They trade under their book value, but only half of that is tangible so the market price would be about 1.5x tangible book. Most of that is PP&E so definitely no net-net situation. The bright side is that if you own 33 radio stations, 13 TV stations & a bunch of local newspapers there has got to be some intangible value there. Is it worth the 110m in the books is a whole other story.
I’m a bit stuck as what should I use to value the business. If I just take the average 10% FCF margin, apply that to current year revenues of ~370 & discount that to perpetuity with 22% (which is basically a hurdle rate of 10% + historical shrinking rate of revenues ~10-12%) I get something in the range of the current market valuation. The problem is that in real life your depreciation can´t exceed cap-ex till the end of days (if we ain´t liquidating) so the FCF would need to start to come down when they have to start to upkeep their PP&E. On the other hand the management has shown that they can keep ROE reasonable so the raising of cap-ex wouldn´t be such a bad thing IF they could maintain those revenues.
On second thought, am I barking the wrong tree here. Should I focus on the intangibles? I’m pretty sure the company is at least worth its book value (including the intangibles).
What got me to think about this was your article on Asset-Earnings Equivalence. Simplified I just see a lot of assets that have been historically successfully converted into cash (ok so there have been a couple of crappy acquisitions as always the case).
Best Wishes,
Pekka
One of the people I email back and forth with quite a bit is Gurpreet Narang. Here is his write-up on Journal Communications.
Gurpreet Narang's Report on Journal Communications (JRN)
And now my thoughts.
You're absolutely right when you say:
On second thought, am I barking up the wrong tree here. Should I focus on the intangibles? I’m pretty sure the company is at least worth its book value (including the intangibles).
What got me to think about this was your article on Asset-Earnings Equivalence. Simplified I just see a lot of assets that have been historically successfully converted into cash (ok so there have been a couple of crappy acquisitions as always the case).
That's really where you turned your thinking in the right direction. Asset-earnings equivalence is the way to understand Journal Communications (JRN). This is both good and bad. On the good side, the asset values – when you actually go out and look at what radio stations and TV stations sell for – are well above the value of the company's stock in the market.
But now the bad news. A company doesn't just earn money on its assets. Its earnings often become more assets. Over time, earnings are reinvested in the business as assets. This is not true of all businesses. The best businesses do not require much reinvestment. But – even when a company does not require reinvestment – management often chooses to reinvest in the field it sees itself operating in.
Many companies don’t define themselves in terms of what drives their profits. We call Google, Microsoft, and Apple tech companies. Really, Google is an advertiser supported media company. Microsoft is a business services company. And Apple is a luxury consumer goods business.
That’s how they make their money. But it’s not where they intend to put their money. They see themselves as tech companies. That tells you what new assets they will buy with their old earnings.
One of the concerns with any business is where the cash thrown off by the assets will eventually end up.
I have no special love for dividend paying stocks. But I do like it when you know – or think you know – where a company will put its cash. I write about a company like Birner Dental Management (BDMS) or Omnicom (OMC) or Fair Isaac (FICO) because I think I know the assets they have and the cash flows they will produce. That’s true.
But there's a bigger point. I think I know where they will put that cash. I think investment outside of their narrow field will be limited. I think BDMS will pay dividends, buy back stock, and buy or open some dentist offices every year. I think Omnicom will acquire some ad agencies – but will ultimately decide it can't reinvest most of its earnings. I definitely think that is true at FICO. Especially under the management that came in a couple years back.
What does this have to do with Journal Communications?
Everything.
Journal Communications is named for the Milwaukee Journal Sentinel. It is largely owned by employees. It only became a publicly traded company – with different classes of stock – in the last decade.
This is a business tied to newspapers. If you could separate that newspaper I would feel fine about the business. If you had Warren Buffett or Henry Singleton running the place, I'd feel fine.
The theory that you could reallocate cash flows from the newspaper, radio, and TV stations into buying more TV stations – that’s a great theory.
The math on that theory works.
But it's a theory. And I worry that it won't pan out in practice.
The key here – as in my Barnes & Noble (BKS) mistake – is the human element.
Just how much were they willing to sink into the Nook? As it turns out, B&N seems willing to sink years of free cash flow from the stores into the Nook if that's what it takes. They'll end up spending a good portion of the entire market cap of the company on this device. And you may have noticed Amazon came out with something even newer and better called the Kindle Fire. Amazon will keep doing this every year. Barnes & Noble will need to spend a lot to stay in place. That’s not the kind of business you want to own.
It will earn a lot. But then it will go out and blow those earnings.
We have the same sort of problem here.
The newspaper is making money. But it won't keep making money.
Newspapers in the U.S. only work as dominant local papers. They are advertiser supported. The death of classified advertising as much as circulation declines killed these papers.
This is sometimes misunderstood. People say that you have to make Americans learn to pay for their news again. The problem with that idea is that Americans never paid for general news. No one in the U.S. actually paid for the cost of their news. Subscribers paid maybe 25 cents per dollar of a newspaper company's revenues. That's less than half what it cost to produce the paper. You would've had to more than double the price of papers just to run them as non-profit enterprises. It was never about readers alone. Readers never valued newspapers enough to make them profitable. Advertisers valued readers. And newspapers had readers. So advertisers valued newspapers.
It was about having the biggest megaphone in town. And renting that megaphone out to advertisers. That's how profitable papers worked.
Online media works the same way. The business of Google, Facebook, etc. looks exactly like the business of local media. It just isn’t local. But you still have to be either broad and dominant or narrow and necessary.
The Milwaukee Journal Sentinel was broad and dominant. It was the Buffalo Evening News of Milwaukee.
That’s changed. The advertisers have moved on. The readers have moved on. The paper is making money for now. But it’ll start losing money soon. It could conceivably lose a lot of money. Exactly how much money it loses depends on how much the parent company is willing to subsidize losses in the newspaper with profits in TV and radio.
That's the question you should focus on here.
Do I understand this company? Its management? The culture?
How do they see themselves?
Do they have an interest in running a money losing paper for years and years as long as shareholders can subsidize those losses with TV and radio?
That's the question.
As for the value, it definitely exceeds the stock price.
If you had control of the company, you could profitably increase its value far beyond the current market cap. All you need to do is starve the newspaper, keep the balance sheet clean (a big advantage over JRN's competitors), and take the cash flow from radio and TV and direct it away from newspapers and toward intangible media assets that might actually hold their value over time.
This news about McGraw-Hill selling their TV stations to Scripps for $212 million might help you value that part of JRN's business.
Scripps says the effective price is really $190 million because of tax benefits. Scripps also says this is 8 times cash flow.
I would look at the price-to-sales multiple for something like a TV station. Free cash flow margins are very high at TV stations. The amount that needs to be reinvested is minimal. It's like having a government charter to exploit an area.
The multiple here is basically 2 times sales. If you believe Scripps about tax advantages the $190 million price tag is 1.96 times the $97 million in revenue those stations had. We can apply the same roughly 2 times multiple to JRN's TV stations – which had revenue of $105 million last year – and get a value of about $210 million for the TV stations JRN owns.
That just gives you some idea of how much these properties might be worth. You can do the same thing with the radio assets by searching Google News for reports of radio station sales or by checking the enterprise value to sales ratio for pure play radio station companies in the U.S.
All of these companies are heavily indebted. That's one of JRN's big advantages. Almost no one who just owns TV stations or radio stations in the U.S. has a clean balance sheet. They are totally unprepared for any long-term downward trend in station revenues. And they may become motivated sellers at some point.
This would be a big plus for JRN. If they were going the route of shutting down the newspaper when its time came and focusing on other media assets.
That’s the big question in this investment.
It's easy to fool yourself into thinking people will do the rational thing. Businesses are alleged to be much more rationally self-interested than they really are.
The truthth is: businesses have crazy hopes and fears just like the rest of us.
And they can be just as self-destructive when their identity is threatened.
Monday, October 10, 2011 Someone who reads the blog sent me this email:
Hi Geoff,
My question for you is about the recent market correction. I know you might not be comfortable talking about any stocks you bought, but I'd love to hear anything you can say about how you approached Mr. Market's most recent mood swing; what kind of actions did you take? Did you stick to pre-researched stocks on a watch list or did you go into overdrive with researching new businesses? I guess my question is mostly about mindset and preparedness. How do you prepare for this, and what does your thought process look like while it's happening?
Thanks,
Mike
I answered Mike’s question over at GuruFocus.
In my article, I talk about 12 stocks I’d consider buying:
1. Omnicom (OMC)
2. Regis (RGS)
3. Fair Isaac (FICO)
4. Moody’s (MCO)
5. Dun & Bradstreet (DNB)
6. Birner Dental (BDMS)
7. VCA Antech (WOOF)
8. Prestige Brands (PBH)
9. Carnival (CCL)
10. Dreamworks (DWA)
11. Nintendo (NTDOY)
12. CEC Entertainment (CEC)
Monday, October 10, 2011 Someone who reads the blog wrote me this email:
In your recent article you wrote:
"Intrinsic value is a guess. Buying is the belief. You don’t need to
use a lot of math to prove exactly what something is worth. You just
need to present a convincing case for buying it."
Interesting observation. I've seen a few YouTube vids with Bill Ackman
in them. The interviewers have sometimes pressed him for what he
thinks a stock is worth. He never gives a numerical answer. I get the
distinct impression that he never has a definite intrinsic value X
when he buys a stock; only that a stock is "clearly undervalued" at a
current price. As Ben Graham would say: you don't have to know a man's
weight to know that he is fat.
All the best,
Mark
I think there are really 4 questions you answer before buying any stock:
The ideal stock would get 4 “yes” answers.
The 5 Japanese net-nets I own do not get 4 “yes” answers. But I made sure they passed questions #1, #3, and #4.
A lot of differences in style come down to how you answer these 4 questions. Someone emailed me saying he thought Mohnish Pabrai was more of a Ben Graham investor than a Warren Buffett investor.
Not really. Graham was obsessed with question #1. He wanted to know a stock was safe. Pabrai cares less about #1 and more about #3. Pabrai’s overwhelming focus is on getting a great price.
Graham wanted a great price. But safety always came first.
There are stocks Pabrai has owned that Graham wouldn’t. Nothing wrong with that. Different people invest differently.
We all rank these 4 questions a little differently. We obsess about one. And our standards are a little too loose on one of the others.
But I think most stock decisions come down to these four questions.
If you can answer those questions – you don’t need an exact estimate of intrinsic value.
Talk to Geoff About The 4 Questions to Ask Before Buying a Stock
Friday, October 7, 2011 Here’s some good stock analysis for you.
Whopper Investments and Oddball Stocks spar over net-net ADDvantage (AEY). Whopper Investments owns the stock. Oddball Stocks explains why it’s a pass.
And Andrew August at The Frog’s Kiss writes about Dreamworks (DWA). It’s a 14 page report. After reading his analysis, I emailed Andrew saying it was “the best analyst report I’ve ever read.”
I’ll say that here too.
This is the best analyst report I’ve ever read.
You’ll notice Andrew never puts an exact value on the stock. Which tells you something about good analysis.
A lot of value investing blogs and articles calculate intrinsic value for you. If you read Ben Graham and Warren Buffett – you’ll see they almost never do this.
Intrinsic value is a guess. Buying is the belief.
You don’t need to use a lot of math to prove exactly what something is worth. You just need to present a convincing case for buying it.
Thursday, October 6, 2011 Someone who reads my blog sent me this email:
All else being equal, which measure is preferred for financial firms such as banks: ROIC or ROE? I am using ROIC for non-financial firms but I didn't know if it gave a useful reading for financial firms or not.
Thanks,
Chad
ROIC is not useful.
For non-financial companies:
I know you like ROIC. But I think it’s too clever by half.
I use the pre-tax return on tangible invested assets.
In other words, I look at what a company earns and divide those earnings by the assets on its balance sheet excluding cash and intangibles.
For financial companies:
Normally you use return on assets. Then you multiply ROA by an appropriate leverage ratio.
Say Wells Fargo (WFC) has a long-term average ROA of 1.3%. If in the future you expect banks to be levered 10 to 1, you would multiply 1.3% times 10 to get a 13% ROE. If you expect normal leverage to be 12 to 1 – you’d multiply 1.3% times 12 to get a normal ROE of 15.6%.
And so on.
For a good discussion of financial companies, read Variant Perceptions.
Sunday, September 25, 2011 Yesterday, Warren Buffett’s Berkshire Hathaway (BRK.B) announced it hired Ted Weschler as an investment manager. Weschler will manage between $1 billion and $3 billion of Berkshire’s money. He starts next year.
Weschler currently runs a hedge fund.
Here is his latest portfolio:
DirecTV (DTV): 25.98%
W.R. Grace (GRA): 25.11%
DaVita (DVA): 19.04%
Liberty Media (LCAPA): 11.83%
Valassis Communications (VCI): 7.74%
Cogent Communications (CCOI): 3.48%
Cincinnati Bell (CBB): 3.36%
WSFS Financial (WSFS): 3.04%
Fibertower (FTWR): 0.42%
These are long positions only. Weschler shorts stocks and uses leverage. For details, see Carol Loomis’s story.
Weschler is an investor after my own heart. His top 5 positions make up 90% of his portfolio. And he spent time at two of the companies he owns: W.R. Grace and WSFS Financial.
The W.R. Grace connection is well documented.
Weschler became a director of WSFS in 1992. He’s 50 now, so he must have become a director of WSFS at 31 or 32. By age 34, Weschler is shown as a director of 6 different companies. And described as “the general partner for several investment partnerships.”
Weschler worked for Quad-C which controlled Thrift Investors LP which in turn owned 24.81% of WSFS Financial back in 1996 (the earliest date when WSFS filed with EDGAR). So, in reality, Weschler was WSFS’s biggest shareholder as far back as the 1990s.
This supports the general impression that Weschler – like Buffett – buys what he knows. He holds few stocks. And he has relationships with some of these companies going back many, many years.
Tuesday, September 13, 2011 Barnes & Noble (BKS): Anatomy of a Screw Up
Adapt!: Trial and Error Investing
I've gotten a lot of good email questions lately. Usually, my GuruFocus articles are based on questions sent in by people who read the blog.
So if you want to read more articles: Send me your questions!
Wednesday, August 31, 2011 Thursday, June 2, 2011 