Tuesday, February 27, 2007

Market Correction

Today, the US Market reacted severely to the correction in the Chinese market of approximately 9%. The emerging market funds took a severe hit - declining by about 7%. The emerging market funds declined more than needed as it has only 11% exposure to China. The Korean stocks are undervalued compared to the SP500 and the market overreacted.

Overreacted is the right word as the fundamentals dont support the declines we saw today. The oil prices went up but the oil and oil services stocks declined with the broader market. The SP500 index was not overvalued before today's sell-off and it isnt overvalued now. There was panic selling all across the board with broad helping from automatic stop loss orders.

It didnt help that Alan Greenspan thinks the business cycle is peaking and the US economy is headed for a recession at the end of 2007 or early 2008. Some of the emerging markets - especially China, India and Mexico was ripe for a correction. Even though the prospects for emerging markets still remain very good. A correction is healthy and welcome as it prevents overheating and takes speculators out.

I expect the US market to recover somewhat in the next few days but it probably wont return to its previous levels till later in the year when the economic outlook becomes clearer.

I am holding tight and building up my cash position. I am expecting some great buy opportunities to be available in the upcoming months. It should be possible to buy great companies at bargain prices and I am looking forward to the opportunity to load up the truck.

Sunday, February 25, 2007

Conoco Phillips update

In a previous article we looked at Conoco Phillips fundamentals and found it to be a value play among the energy players.

We will quickly take a look at the stock in light of the latest 10-K filing and see how the changes look like.

First the balance sheets and cash flow overview. The debt carried on the balance sheet declined by 4 billion to $23 billion. The book value per share increased to $50.5. The ratio of the current market value to book value is 1.33 for COP. This compares to 3.76 for Exxon Mobil, 2.29 for Chevron and ~3 for Petro China. In my opinion, this makes COP a screaming buy among the oil majors today.

For the year, COP spent 925 million dollars buying back stock and issues 2.25 billion in dividends. The plan of buying back stock makes the most sense as the stock is undervalued at the moment.

In this year, we expect COP to continue to pay down debt while buying back stock and increasing dividends. The debt should go down from the current 23 billion levels to below 20 billion level probably to 17-18 billion. This should lead to increases in book value of the company to 53 to 54 dollars a share all else being equal. This should help the stock break the $70 barrier and stay there.

Lowes vs Home Depot - updated

In a previous article, we looked at Lowes and HD. In that article, we found that long term prospects bode well for both Lowes and HD. The analysis still remains the same but the price points have changed somewhat and the discount isnt that deep any more.

Home Depot had a few issues to sort out especially the compensation and integrity of management. The departure of Nardelli is welcome news to the share holders of HD. However, it is not clear that the mess that Nardelli created may clear anytime soon. I used to have the Pavlovian habit of going to Home Depot as it is located closer to my home compared to Lowes. The poor customer service and Nardelli behavior have helped kick my Pavlovian habit - I now go to Lowes exclusively.

I like the way Lowes is doing its business - over Chrismas, I was able to find a few interesting toys at Lowes. I am also seeing more traffic at my local Lowes store now than was the case before. This is one micro example but just points to how things have changed in a short time.

First, let us look at the performance of the two stocks over the last three months, six months and a year respectively.

3 month chart

6 month chart

1 year chart

Lowes has done as well or better than Home Depot in each of these periods. The two year and five year charts also point in favor of Lowes.

Having said this, let us look at the fundamentals briefly. Lowes has a trailing P/E of 17.29 and a market cap of 53 billion. The stock is still at a discount to its fair price - although the discount isnt as deep as it once was.

Home Depot has a market cap of 83 billion, a trailing P/E of 15. The stock is at a discount to its fair price but the discount is primarily because of concerns over growth and the management shakeup. Lowes is growing even in a dismal housing market where as Home Depot is stagnant and its year over year sales are down more sharply.

While housing is the main factor affecting both companies, Lowes better execution and closeness to the customers should help it do better than Home Depot in the next five years.

Wednesday, February 21, 2007

Comparison of large cap asset class

In december, we looked at different asset classes and evaluated the interesting asset classes for investing. Our bias for investing has always been value. Consequently, in this blog, we have taken a bearish view on stocks such as Google, Ebay, Amazon.com etc.

In this segment, we will look at large cap domestic equities and again look at value, blend and growth segments to see how things look like.

We will look at the ETFs offered by Vanguard and iShares respectively. First iShares ETFs. iShares offers several ETFs in the large cap domestic equity class but we will look at three ETFs in particular.

The three ETFs of interest are:

IVW -large cap growth - P/E of 22.38 and P/B of 4.92
IVV - mimics SP500 - P/E of 20.69 and P/B of 3.85
IVE - large cap value - P/E of 19.5, P/B of 2.84.

The returns on these three for the past three months can be visualized in the following chart.


The chart shows the value segment outperforming the growth segment by about 3% points. The value segment is also outpacing SP500 by about 1.5% percentage points.

The second category would be the Vanguard ETFs. Vanguard has VTV, VV and VUG.

VUG - large cap growth has P/E of 21x, P/B of 4.0x and earning growth of 22%.
VV - large cap blend, mimics SP500, has P/E of 17.2x, P/B of 2.9x and earning growth of 18.8%
VTV - large cap value, P/E of 14.5x, the P/B of 2.3x and earning growth of 15%

The numbers are updated as of 1/31/2007 by Vanguard. The earning growth numbers are a bit suspect as the SP500 earning growth has moderated to about 11% YoY as of the new year.

The returns from these three funds over the past three months is noted below.


As seen with iShares, the Vanguard funds also show the value segment outpacing the blend and growth segments in the past three months. While the difference isnt as great as was the case with iShares, value still outperformed growth by about a percentage point.

It is difficult to predict which category will do better in any given year. Growth is expected to do well this year because of the accelerating revenues from the technology sector. A defensive investor may look at various factors before committing money to an asset class. The usual risk factors for equities apply.

Monday, February 19, 2007

China Funds Comparison

In the last article in this blog, we looked at India investments through four mutual funds. In this section we will look at China mutual funds and compare it to the Shanghai Composite Index. Comparisons of the like are helpful to identify the asset classes that one can invest in with fair degree of confidence.

Some of the China funds of interest are noted below:

CHUSX Alger China-US Growth
DPCAX Dreyfus Premier Greater China
EVCGX Eaton Vance Greater China
FHKCX Fidelity Greater China
GCHAX Alliance Bernstein Greater China
GOPAX Gartmore China Opportunities
ICHKX Guinness Atkinson China & Hong Kong
MCHFX Mathews China Fund
NGCAX Columbia Greater China
OBCHX Oberweiss China Opportunities
TCWAX Templeton China World
USCOX US Global Investors China Region Opportunity

While we are not going to look at the expenses of individual funds, we will look at the performance of each fund compared to the Shanghai Composite Index.

The first chart below compares the Shanghai Composite to the first six funds noted above.

Chart1 Shanghai Composite vs First six funds

The first chart clearly shows the Shanghai composite outperforming the funds by about 80%.

Chart2 Shanghai Composite vs the last six funds

Again, all the managed funds lagged the index significantly. OBCHX was the best of the bunch trailing the index by 70%.

Next we compare the Shanghai Composite Index to FXI and PGJ. The comparison charts are noted below.

Chart3 Shanghai Composite vs FXI and PGJ

Both FXI and PGJ havent performed as well as OBCHX. FXI has done better than PGJ but lags behind OBCHX.

The main thing to note here is past performance is no guarantee of future performance. The charts presented in this blog present the funds for the past one year without looking at the focus of each fund in detail. As such, one has to look at the long term prospects, the current holdings and the expense ratio before making an investment decision.

I would also advice the readers to check the disclaimer at the very end of this blog before considering investmenting.

Saturday, February 17, 2007

Comparison of India Funds

Here is the comparison of India funds vs. the BSE Sensex Index.

IIF vs BSE Sensex for the past one year:


IFN vs BSE Sensex for the past one year:


MINDX vs BSE Sensex for the past one year


ETGIX vs BSE Sensex for the past one year


Of the India funds available to US investors, MINDX has the best performance vs. the BSE Sensex Index. However the index itself has done significantly better than any of the mutual funds.

EEM vs BSE Sensex


For the sake of comparison, we compare EEM vs BSE Sensex, the red hot Indian index has done a lot better than the emerging market as a whole for the past one year. However, EEM may offer better prospects for this year as its main component, the Korean market didnt do very well in 2006.



EEM handily beat all the India funds with the exception of MINDX. As we have examined in this blog in the past, several publications indicate that Indian market is overheating. The Walstreet journal also carried an article to the same effect this weekend. In contrast, EEM's main component is Korea where the reduced tensions with north Korea bode well to the stock market. South Korea didnt do well in 2006 and given the world wide economic growth, the Korean stock market should do a lot better this year.

In the next article in this blog, we will look at China funds in more detail.

Wednesday, February 14, 2007

ECR Analysis

ECR is a public company that is in the subprime lending business. It has faced some tough times of late with losses in 2005 and 2006. Currently, the company's book value is more than the per share value. The company is trading for .93/share where as the book value as of Sept 30th 2006 was $2.07/share.

The company is getting out of the mortgage origination business. It has securitized and is selling its subprime mortgages. The company was expected to pay out $80 million to shareholders one month after the close of its deal to sell the mortgage origination business to Bear Stearns. The company was also expected to pay out another 56 cents a share in dividends. The total comes to 1.36 per share about 40% premium to the current valuation.

The press release put out by the company gave the following outlook for dividends.

1. First it says a payment may not be made before March 30th( I think this is the 80 cents/share that was supposed to have beenpaid within 30 days of bear stearns deal closing )which wont be forthcoming now.

2. The second amount is 56 cents/share - it seems this paymentwill be made in two parts at worst ( by June 29 ) or in one lump sumby March 30th. Most likely, the 80 cent payout is likely be replacedby this payment.

3. Additional payments may be made outside of these two payments in the future. ( dates unknown )

4. Even then, the company re-affirmed the payment of $1.34 - timing isthe question mark. Future payments are now dependent on "cash flowsfrom ECC Capital's residual interests in securitizations and thecompletion of transactions related to the financing of its residuals."

What does this mean? Is the company not able to meet its obligations while the balance sheet is deteriorating? Here is one take on this after studying the last 10-Q in detail.

1. The company had plans to give away $80 million in dividends right after the close of Bear Stearns deal. The company also expected the payment of 33 million to happen over a period of time as opposed to happening immediately. The deal closed about a month and a half later and 33.6 million payment happened immediately. Not all issues regarding the deal are closed and may take some more time for it to close.

2. The company seems to have the subprime default rate under control with adequate provisions for losses. At least it said so in the 10-Q.

3. The CEO bought 500K shares from the co-CEO.

4. My guess is that the immediate payment of 33 million to Bear Stearns ( as opposed to over a period of time ) as well as the 10 million payment to the unit of GMAC caused the cash reserves to dip below the comfortable level for management to give away 8o cents/share dividend immediately.

The company planned to be in existence through 2007 as per the previous 10-Q. It remains to be seen if the company will be liquidated and if so, how soon.

While my estimate is based on the currently available public docuementation, the reality may differ from the estimate. This will become clearer as more information becomes available in due course. In addition, it should be disclosed that I own shares in this company.

Friday, February 09, 2007

Indian economy and stockmarket overheating?

There were several articles in the past week that focussed on India. The first one was in the economist which wrote that the Indian economy is overheating. The article, which requires a paid subscription described the situation as follows:

THE economy is sizzling and foreign businessmen and investors are swarming to Bangalore and Mumbai to grab a piece of the action. India's year-on-year growth rate could well hit double figures at some point in 2007, and the country may even grow faster than China for at least one quarter. But things are so hot there is a big problem: India's current pace of expansion may not be sustainable.…

If one thought this article got it wrong, the NYTimes carried an article on the same theme. The article was titled "India finds its economy on the verge of overheating". The article had the following to say:

With breakneck growth, an outsourcing industry that leads the world and hundreds of millions of consumers demanding more class and comfort, India has an economy many countries would envy.

But now, after three years of near double-digit growth, signs of a potentially dangerous inflationary spiral are beginning to emerge. Prime Minister Manmohan Singh and his closest economic advisors gathered just last weekend over fears that India’s extraordinary economic expansion was starting to overheat, an issue they labeled as a “key short-term priority.”

As if this werent enough, cnn carried an article titled "India a superpower? Thing again". The article highlighted some of the deep rooted problems in India.

To add more ammo to the overheated debate - the seeking alpha website carried an article that made a compelling case why one should not buy Indian equities at current prices.

Since 1997, the Indian economy has grown 146% at a compound annual growth rate [CAGR] of 9.41%. Over the same time period, earnings of the 30 companies that make up India’s BSE Sensex have grown around 150%. No surprises there. However, over that same 10 year period, India’s BSE Sensex has risen 345% at a CAGR of 16.11%.
In comparisons such as the one above, an abnormal base period can distort the figures. And January 1997 was an abnormal month for the Sensex, characterized by a depressed price/earning [P/E] multiple of 13.5. However, had the Sensex been trading at a P/E multiple of 17, which is the average multiple over the 10 year period, the Sensex would’ve still risen 260%; way above underlying companies’ earnings.

There was another article in the same site that said Indian stocks are losing momentum compared to other stock indices in the emerging markets. But the article also said that so long as the economy keeps growing, there is little chance of a steep correction.

Overall consensus is that the Indian stocks are not cheap at the moment and it is not worth investing more at the current prices.

Wednesday, February 07, 2007

Decline in SP500 earnings

CNN carried an article claiming decline in SP500 earnings in FY07 compared to FY06. The article had the following prognosis for SP500

Earnings for the energy sector are expected to fall 2 percent in the first quarter or 2007, dragging on broader earnings growth.
But downward revisions to technology and consumer earnings are also contributing. As of Jan. 1, the tech sector was forecast to post earnings growth of 17 percent, whereas now the growth is set at 12 percent.
The consumer sector was expected to see a decline of 1 percent at the time. Now the decline is pegged at 4 percent.
2007 earnings are currently on track to grow about 7.3 percent, down from a forecast of 9.3 percent on Jan. 1.
Should the numbers hold up, that would make 2007 earnings growth the slowest since 2002, when S&P 500 earnings grew one-tenth of a percent

While this may mean less than average growth for SP500 index in 2007, this may also provide opportunities to buy quality companies at reasonable prices. I already have several companies in my list who I am hoping will decline in price through the summer of 2007.

Sunday, February 04, 2007

Wipro (WIT) or Infosys (INFY)?

One of the readers asked the question - which stock is a better investment Wipro or Infosys? For people that arent familiar, both are Indian information technology companies that do offshore as well as consulting work. Both the companies are listed in the NASDAQ and are competitors to American heavy weights such as IBM and Accenture. We will provide a brief overview of the two companies here.

From Infosys website, the company's description is as follows:

Infosys Technologies Ltd. (NASDAQ: INFY) provides consulting and IT services to clients globally - as partners to conceptualize and realize technology driven business transformation initiatives. With over 69,000 employees worldwide, we use a low-risk Global Delivery Model (GDM) to accelerate schedules with a high degree of time and cost predictability.
As one of the pioneers in strategic offshore outsourcing of software services, Infosys has leveraged the global trend of offshore outsourcing. Even as many software outsourcing companies were blamed for diverting global jobs to cheaper offshore outsourcing destinations like India and China, Infosys was recently applauded by Wired magazine for its unique offshore outsourcing strategy — it singled out Infosys for turning the outsourcing myth around and bringing jobs back to the US.Infosys provides end-to-end business solutions that leverage technology. We provide solutions for a dynamic environment where business and technology strategies converge. Our approach focuses on new ways of business combining IT innovation and adoption while also leveraging an organization's current IT assets. We work with large global corporations and new generation technology companies - to build new products or services and to implement prudent business and technology strategies in today's dynamic digital environment.

From Wipro's website, the company description is as follows.

Wipro becomes the first Indian IT Service Provider to be awarded Gold-Level Status in Microsoft’s Windows Embedded Partner Program
Wipro is the world’s largest independent R&D Services Provider
Worlds 1st PCMM Level 5 software company
Wipro one among the few companies in the world to be assessed at maturity level 5 for CMMI V1.2 across offshore and onsite development centers, 2007
Worlds 1st IT Services Company to use Six Sigma
The pioneers in applying Lean Manufacturing techniques to IT services
World’s first SEI CMM/CMMI Level 5 IT services company
The first to get the BS15000 certification for its Global Command Centre
Functional RFID Enabled Concept Store and Global Data Synchronization Laboratory BS7799 and ISO 9000 certified
Among the top 3 offshore BPO service providers in the world
Wipro is a strategic partner to five of the top ten most innovative companies in the world* (*Technology Review Innovation Index 2005)
Over 40 industry facing ‘Centers of Excellence’
592 clients - 53000+ employees
46 development centers across globe

Now, let us look at the two companies from financial as well as the management view points. We will also see the future trends to see how these two companies stack up against each other.

Market cap and valuation:

Wipro has a market cap of 25 billion dollars. It has a P/E of 42 ( trailing ) and forward P/E of 32. The price to earning growth is at 1.35.

Infosys has a market cap of 33 billion dollars. It has a trailing P/E of 43 and estimated forward P/E of 32. The estimated price to earning growth is at 1.28 - slightly lower than that of Wipro.

From a valuation view point, Infosys and Wipro look quite alike with a slight advantage to Infosys in price to earning growth.


Wipro is primarily owned by Azim Premji. The management succession is not clear - though most likely it will be family owned in the same way as most of Indias conglomerates. Wipro has had a history of management attrition. In some cases, this has resulted in competitors such as Mindtree.

Infosys on the other hand is not owned by one person and is more egalatarian. The management succession is clear. Infosys is also a storied Indian company as it was the first Indian company to be listed in Nasdaq and the first to be included in the Nasdaq 100 index.

From a management and succession view point, Infosys has the advantage.

Financial Ratios:

Infosys has a dividend yield of 0.9% and Wipro has a dividend yield of 0.6%. Infosys dividend has grown from 5 cents a share in 2003 to 51 cents a share in 2007. Wipro's dividend growth is sketchy - it yield about 11 cents a share now.

Infosys has a return on equity of 36% on the average for the past five years and return on asset of 30%. Both these are phenomenal numbers compared to even the best US based companies.
Wipro has a return on equity of close to 30% and return on asset of about 23% for the past five years. While these numbers are very good, they are not as good as Infosys.

Infosys's top line growth of about 35% in the most recent year moderating from a higher growth of 40%. The EPS growth has also been very strong at around 35% per year.
Wipro has had the top line growth of about 30% for the past five years while the EPS growth has been about 25%.

Infosys has a free cash flow of about 350 million dollars that has been growing steadily. Wipro has a cash flow of 280 million that has also been growing steadily.

Overall, in this section, Infosys is looking a lot stronger than Wipro.

From a valuation point of view, niether Infosys nor Wipro is cheap. While stacking the two companies side by side, Infosys has edge in almost all the segments compared to Wipro. The outsourcing/offshoring business is getting to be more competitive but both the companies are now well entrenched and should continue to do well. If I have to allocate my investment dollars between these two companies, Infosys would be my choice.

Thursday, February 01, 2007

Google FY06 Analysis

In the past articles in this blog, we have analyzed Google and have typically taken a bearish view of the stock. Although Google is a strong growth company that is gaining market share in the search space, it doesnt have what one would term a "wide moat". Wide moat is the ability to raise prices and not lose market share. In this article, we will look at Google's FY06 earnings and see the forecast for FY07. We will also look at the analyst estimates ( a consensus target of $600 ) and see if it makes sense. We will also look at the competitors and see how Google compares to Yahoo! and Microsoft.

First FY06 results. The reported EPS is 10.21 per share where as the diluted EPS is 9.94. The diluted share count is 309 million. The year ago figure is 291 million. The share count increased by 6.2% year over year. The EPS was below the analyst consensus estimate of 10.33/share. Consequently the Google shares went down by 3.94% the day after.

The EPS for Google is expected to be around 36% higher in 2007 compared to 2006. While it is impossible to predict the future, the accounting treatment of the stock options and awards will play a large role in the EPS for 2007.

Let us now compare the competitors Google, Yahoo! and Microsoft. Let us look at the different ratios to see how they compare.

Let us start with Yahoo! The ROA and ROE for Yahoo! for the past three years are as follows.

ROA - 11%, 19% and 11.5% respectively.
ROE - 14.7%, 24.2% and 15% respectively.

The numbers for Microsoft are as follows.

ROA - 15%, 18% and 19%.
ROE - 20.3%, 28.8% and 31% respectively.

Let us finally look at Google.

ROA - 19%, 21.6% and 19.24% respectively.
ROE - 26%, 24% and 21% respectively.

Google numbers are pretty good and it is pretty clear that Google is a superior company to Yahoo! The trailing P/E for Google is 48 which is a bit pricy compared to other top companies. The predicted forward growth rate for Google is around 35 for FY07 which is lower than the P/E.

The good news for Google is that it seems to be widening its market share compared to its rivals. Although both Yahoo! and Microsoft are interested in competing, Google seems to be ahead of the curve and increasing the lead every passing year. 2007 should be very interesting as it should show the market trends and future prospects for the search based advertizing. After trailing SP500 in 2006, it is anybodies guess what will happen to Google stock in 2007. One thing is sure - Google share holders can expect a wild ride in 2007.