Happy memorial day to all the US based readers. Seekingalpha has an excellent overview of Asian ETFs and their performance to date compared to SP500 index tracking fund IVV.
http://etf.seekingalpha.com/article/36655?source=feed
Monday, May 28, 2007
Friday, May 25, 2007
Whitney Tilson on Learning from Investment Mistakes
Another gem from financial times - http://search.ft.com/ftArticle?queryText=tilson&aje=true&id=070216005308
Whitney Tilson: Learn from your own investment mistakes
By Whitney Tilson, FT.com sitePublished: Feb 16, 2007
Investing is a game of averages: nobody bats 1,000 but, if your analysis and judgment are solid and your winners generally go up more than your losers go down, you can build an outstanding record. The key is not picking big winners; it is avoiding big losers.
That's why learning from mistakes is so important – ideally, as Warren Buffett says, others' mistakes rather than your own. In that spirit, here are 10 traps I've identified – many times the hard way – that are likely to lead to bad investment outcomes:
■Declining cash cows. There can be a fine line between opportunity and trouble when a once-strong business goes into permanent decline. One can profit if the market overestimates the speed of the decline or underestimates management's ability to transform the business. But this is a hard way to make money. Generally speaking, a business in decline – even a cash cow business – is a painful, drawn-out affair. Investors in newspaper stocks in recent years have seen this first-hand.
■High and rising debt. Value investors are naturally drawn to companies in trouble – that's what makes stocks cheap if the difficulties prove to be temporary – but beware of high and rising debt levels. Even if a company is positioned to benefit from improving conditions over time, equity holders won't benefit if its debt levels trigger a bankruptcy or a massively dilutive refinancing in the near term.
■Unions and legacy liabilities. When betting on a turnround, it's critical to understand the flexibility the company has – or doesn't have – in implementing painful but necessary changes. Poor union relations can prevent such changes, and legacy healthcare, pension and environmental liabilities can serve as the same drag on a company's prospects as too-high debt. ■Weak or erratic cash flow. Operating cash flow, because it adds back depreciation and amortisation to net income, should be higher than reported profits. If it's not, figure out why. Are there unusual items consuming cash? Are inventories or accounts receivable ballooning? In the 11 quarters ending in the second quarter of 2000, Lucent reported pro-forma profits totalling $9.4bn. Over the same period, it had a free cash flow deficit of $7bn. This should have been a tip-off for investors, who suffered as the stock plunged from more than $70 to less than $1.
■Over-reliance on one customer. In my experience, one of two things happen to companies that derive a large portion of sales from a single customer: at some point, the company loses the customer or the customer renegotiates the deal – either of which is devastating to the company and its stock.
■Consumer fads. Famed short-seller James Chanos put it well in a Value Investor Insight interview explaining why fad-driven companies often become great short ideas: "Investors – typically retail investors – use recent experience to extrapolate ad infinitum into the future what is clearly a one-time growth ramp of a product. People are consistently way too optimistic and underestimate just how competitive the US economy is in these types of things."
■Deeply cyclical industries. Fortunes can be made by investing in cyclical businesses if you have a deep understanding of the industry and you're buying at maximum pessimism. If neither is the case, discretion is often the better part of valour. Just ask those attracted to the ostensibly low multiples of subprime mortgage lenders before last week's revelations of deteriorating loan-portfolio credit quality.
■Focus on earnings before interest, taxes, depreciation and amortisation (ebitda). Used properly by those who understand its limitations, ebitda can be a useful measure. But too often it's used by unscrupulous management, investment bankers or analysts to make a stock appear cheap – a stock's ebitda multiple is always lower than its p/e multiple – or to deceive investors about the true nature of a company's capital requirements. It's not a coincidence that many big frauds, such as WorldCom, weretouted using ebitda metrics.
■Serial acquirers or mega-acquisitions. Given the research showing that two-thirds of all acquisitions are failures and a wide range of accounting shenanigans that can occur when one company acquires another, it's remarkable how often investors get excited about big acquisitions or roll-up stories. While my funds own Tyco today as a discount-to-the-sum-of-the-parts story as it sheds its conglomerate structure, we fortunately avoided it when it was a serial acquirer.
■Aggressive accounting. Grey areas in US Generally Accepted Accounting Principles (GAAP) leave management with tremendous leeway in how aggressively or conservatively it represents company operations. I have difficulty thinking of a single instance in my entire career of a company that blew up in which there were not signs of aggressive accounting.
Mistakes are inevitable but every savvy investor should at least try to make original ones. Recall the proverb: "Fool me once, shame on you. Fool me twice, shame on me."
Whitney Tilson is a money manager who co-edits Value Investor Insight and co-founded the Value Investing Congress. feedback@tilsonfunds.com
Whitney Tilson: Learn from your own investment mistakes
By Whitney Tilson, FT.com sitePublished: Feb 16, 2007
Investing is a game of averages: nobody bats 1,000 but, if your analysis and judgment are solid and your winners generally go up more than your losers go down, you can build an outstanding record. The key is not picking big winners; it is avoiding big losers.
That's why learning from mistakes is so important – ideally, as Warren Buffett says, others' mistakes rather than your own. In that spirit, here are 10 traps I've identified – many times the hard way – that are likely to lead to bad investment outcomes:
■Declining cash cows. There can be a fine line between opportunity and trouble when a once-strong business goes into permanent decline. One can profit if the market overestimates the speed of the decline or underestimates management's ability to transform the business. But this is a hard way to make money. Generally speaking, a business in decline – even a cash cow business – is a painful, drawn-out affair. Investors in newspaper stocks in recent years have seen this first-hand.
■High and rising debt. Value investors are naturally drawn to companies in trouble – that's what makes stocks cheap if the difficulties prove to be temporary – but beware of high and rising debt levels. Even if a company is positioned to benefit from improving conditions over time, equity holders won't benefit if its debt levels trigger a bankruptcy or a massively dilutive refinancing in the near term.
■Unions and legacy liabilities. When betting on a turnround, it's critical to understand the flexibility the company has – or doesn't have – in implementing painful but necessary changes. Poor union relations can prevent such changes, and legacy healthcare, pension and environmental liabilities can serve as the same drag on a company's prospects as too-high debt. ■Weak or erratic cash flow. Operating cash flow, because it adds back depreciation and amortisation to net income, should be higher than reported profits. If it's not, figure out why. Are there unusual items consuming cash? Are inventories or accounts receivable ballooning? In the 11 quarters ending in the second quarter of 2000, Lucent reported pro-forma profits totalling $9.4bn. Over the same period, it had a free cash flow deficit of $7bn. This should have been a tip-off for investors, who suffered as the stock plunged from more than $70 to less than $1.
■Over-reliance on one customer. In my experience, one of two things happen to companies that derive a large portion of sales from a single customer: at some point, the company loses the customer or the customer renegotiates the deal – either of which is devastating to the company and its stock.
■Consumer fads. Famed short-seller James Chanos put it well in a Value Investor Insight interview explaining why fad-driven companies often become great short ideas: "Investors – typically retail investors – use recent experience to extrapolate ad infinitum into the future what is clearly a one-time growth ramp of a product. People are consistently way too optimistic and underestimate just how competitive the US economy is in these types of things."
■Deeply cyclical industries. Fortunes can be made by investing in cyclical businesses if you have a deep understanding of the industry and you're buying at maximum pessimism. If neither is the case, discretion is often the better part of valour. Just ask those attracted to the ostensibly low multiples of subprime mortgage lenders before last week's revelations of deteriorating loan-portfolio credit quality.
■Focus on earnings before interest, taxes, depreciation and amortisation (ebitda). Used properly by those who understand its limitations, ebitda can be a useful measure. But too often it's used by unscrupulous management, investment bankers or analysts to make a stock appear cheap – a stock's ebitda multiple is always lower than its p/e multiple – or to deceive investors about the true nature of a company's capital requirements. It's not a coincidence that many big frauds, such as WorldCom, weretouted using ebitda metrics.
■Serial acquirers or mega-acquisitions. Given the research showing that two-thirds of all acquisitions are failures and a wide range of accounting shenanigans that can occur when one company acquires another, it's remarkable how often investors get excited about big acquisitions or roll-up stories. While my funds own Tyco today as a discount-to-the-sum-of-the-parts story as it sheds its conglomerate structure, we fortunately avoided it when it was a serial acquirer.
■Aggressive accounting. Grey areas in US Generally Accepted Accounting Principles (GAAP) leave management with tremendous leeway in how aggressively or conservatively it represents company operations. I have difficulty thinking of a single instance in my entire career of a company that blew up in which there were not signs of aggressive accounting.
Mistakes are inevitable but every savvy investor should at least try to make original ones. Recall the proverb: "Fool me once, shame on you. Fool me twice, shame on me."
Whitney Tilson is a money manager who co-edits Value Investor Insight and co-founded the Value Investing Congress. feedback@tilsonfunds.com
Thursday, May 24, 2007
Whitney Tilson on steps for value hunters
From http://www.ft.com/cms/s/cfa86a18-0559-11dc-b151-000b5df10621.html
Whitney Tilson: Not-to-be-missed tips for value hunters
By Whitney Tilson
Published: May 18 2007 18:25 Last updated: May 18 2007 18:25
My recent column detailing the 10 investment traps I’ve identified prompted several readers to ask if I have a comparable list of the opposite – types of opportunities that are likely to lead to good investment outcomes.
I do, and happily it’s a bit longer than the list of traps. Given that the first step to successful investing is knowing which ponds to fish in, here are the 15 most common types of value opportunities I have been able to capitalise on in my investing career:
● Out-of-favour blue chips. Even the greatest companies encounter problems or otherwise fall out of favour. We bought McDonald’s a few years ago when it fell below $13, believing in its assets and that it could return to its former glory through better management. The shares now trade above $50.
● Turnrounds of broken businesses. It’s difficult to fix a truly broken business, but when it happens, the returns can be extraordinary. One of my best investments ever was CKE Restaurants, which engineered a spectacular turnround at Hardee’s due to its new Thickburger menu. The shares, as low as $3 in 2003, are now above $20.
● Cyclicals at the bottom of the cycle. Success here usually involves correctly anticipating when a cyclical industry will rebound, though precision is not necessary as long as the company has a strong enough balance sheet to weather the tough times.
● Distressed industries. Our buying auto-systems maker Lear last year below $20 when its prospects were considered most bleak is a successful example of buying a good company in a distressed industry. Its shares have more than doubled off their lows.
● Overlooked small-caps. Among the 5,000 or so publicly traded US stocks that have no analyst coverage are fine businesses that are cheap because no one is paying attention to them or the stocks are thinly traded. A good example we’ve owned for years is Weyco Group, which makes Florsheim shoes.
● Fallen growth angels. When high-growth companies slow down, growth and momentum junkies often sell indiscriminately, which can create great opportunities for value investors. Just be careful not to anchor on the stock’s previous price or earnings multiple, which are no longer relevant.
● Growth at a reasonable price. These are also high-quality growth businesses, but the stocks haven’t fallen. They may not appear cheap on traditional valuation metrics, but can be excellent investments if the high growth can be maintained. Starbucks over the years has been a great example.
● Piggybacking on activism. There are select opportunities to invest alongside experienced activist investors pushing for prudent change. One of our most profitable investments over the past two years, for example, was following Pershing Square and Trian Group into Wendy’s International, which has more than doubled.
● Spin-offs. Many significant stock-price inefficiencies can occur when a company is spun off. A recent example we currently own is Mueller Water, which operates largely under Wall Street’s radar and is uniquely positioned to benefit from needed investment in US water-system infrastructure.
● Post-bankruptcies. There are also many reasons why companies emerging from bankruptcy can be inefficiently priced, not the least of which is investors’ reticence to back a recent loser. We’ve almost tripled our money in less than two years owning shoe retailer Footstar, which came out of bankruptcy with a solid balance sheet and plan for reviving itself.
● Let someone else do the investing. Certain public companies, including Berkshire Hathaway (which we own), Loews, Leucadia National, Alleghany and White Mountains Insurance are structured as investment vehicles for proven value investors. At a reasonable price, it can pay to let these investors do the heavy lifting for you.
● Free/mispriced option. In these situations, one or more ongoing businesses justifies the current market price and an investor gets a valuable option – in the form of a new market opportunity or turnround of a floundering business – for almost nothing. In Wendy’s, we thought the value of its Tim Hortons restaurant franchise was worth the entire stock price two years ago, so we were getting the Wendy’s brand restaurant and franchising business for free.
● Declining cash cow. At the right price – and if management wisely milks the business and allocates capital – the stock of a declining business can be a great investment. The shares of Deluxe, the leading check printer that many investors had abandoned, have tripled over the past year thanks to cost cutting under a new chief executive.
● Oddball companies. Certain companies have revolutionary business models that are poorly understood, resulting in cheap stock prices. Classic examples are Southwest Airlines, Dell and Kinder Morgan.
● Discount to the sum of the parts. Many companies lend themselves to valuing their different pieces and can be a great buy if the whole is trading at a sufficient discount to the pieces. We own Tyco because we think the three companies that will emerge from it in the next few months are worth more than $40, versus today’s share price below $33.
Whitney Tilson is a money manager who co-edits Value Investor Insight and co-founded the Value Investing Congress. feedback@tilsonfunds.com
Whitney Tilson: Not-to-be-missed tips for value hunters
By Whitney Tilson
Published: May 18 2007 18:25 Last updated: May 18 2007 18:25
My recent column detailing the 10 investment traps I’ve identified prompted several readers to ask if I have a comparable list of the opposite – types of opportunities that are likely to lead to good investment outcomes.
I do, and happily it’s a bit longer than the list of traps. Given that the first step to successful investing is knowing which ponds to fish in, here are the 15 most common types of value opportunities I have been able to capitalise on in my investing career:
● Out-of-favour blue chips. Even the greatest companies encounter problems or otherwise fall out of favour. We bought McDonald’s a few years ago when it fell below $13, believing in its assets and that it could return to its former glory through better management. The shares now trade above $50.
● Turnrounds of broken businesses. It’s difficult to fix a truly broken business, but when it happens, the returns can be extraordinary. One of my best investments ever was CKE Restaurants, which engineered a spectacular turnround at Hardee’s due to its new Thickburger menu. The shares, as low as $3 in 2003, are now above $20.
● Cyclicals at the bottom of the cycle. Success here usually involves correctly anticipating when a cyclical industry will rebound, though precision is not necessary as long as the company has a strong enough balance sheet to weather the tough times.
● Distressed industries. Our buying auto-systems maker Lear last year below $20 when its prospects were considered most bleak is a successful example of buying a good company in a distressed industry. Its shares have more than doubled off their lows.
● Overlooked small-caps. Among the 5,000 or so publicly traded US stocks that have no analyst coverage are fine businesses that are cheap because no one is paying attention to them or the stocks are thinly traded. A good example we’ve owned for years is Weyco Group, which makes Florsheim shoes.
● Fallen growth angels. When high-growth companies slow down, growth and momentum junkies often sell indiscriminately, which can create great opportunities for value investors. Just be careful not to anchor on the stock’s previous price or earnings multiple, which are no longer relevant.
● Growth at a reasonable price. These are also high-quality growth businesses, but the stocks haven’t fallen. They may not appear cheap on traditional valuation metrics, but can be excellent investments if the high growth can be maintained. Starbucks over the years has been a great example.
● Piggybacking on activism. There are select opportunities to invest alongside experienced activist investors pushing for prudent change. One of our most profitable investments over the past two years, for example, was following Pershing Square and Trian Group into Wendy’s International, which has more than doubled.
● Spin-offs. Many significant stock-price inefficiencies can occur when a company is spun off. A recent example we currently own is Mueller Water, which operates largely under Wall Street’s radar and is uniquely positioned to benefit from needed investment in US water-system infrastructure.
● Post-bankruptcies. There are also many reasons why companies emerging from bankruptcy can be inefficiently priced, not the least of which is investors’ reticence to back a recent loser. We’ve almost tripled our money in less than two years owning shoe retailer Footstar, which came out of bankruptcy with a solid balance sheet and plan for reviving itself.
● Let someone else do the investing. Certain public companies, including Berkshire Hathaway (which we own), Loews, Leucadia National, Alleghany and White Mountains Insurance are structured as investment vehicles for proven value investors. At a reasonable price, it can pay to let these investors do the heavy lifting for you.
● Free/mispriced option. In these situations, one or more ongoing businesses justifies the current market price and an investor gets a valuable option – in the form of a new market opportunity or turnround of a floundering business – for almost nothing. In Wendy’s, we thought the value of its Tim Hortons restaurant franchise was worth the entire stock price two years ago, so we were getting the Wendy’s brand restaurant and franchising business for free.
● Declining cash cow. At the right price – and if management wisely milks the business and allocates capital – the stock of a declining business can be a great investment. The shares of Deluxe, the leading check printer that many investors had abandoned, have tripled over the past year thanks to cost cutting under a new chief executive.
● Oddball companies. Certain companies have revolutionary business models that are poorly understood, resulting in cheap stock prices. Classic examples are Southwest Airlines, Dell and Kinder Morgan.
● Discount to the sum of the parts. Many companies lend themselves to valuing their different pieces and can be a great buy if the whole is trading at a sufficient discount to the pieces. We own Tyco because we think the three companies that will emerge from it in the next few months are worth more than $40, versus today’s share price below $33.
Whitney Tilson is a money manager who co-edits Value Investor Insight and co-founded the Value Investing Congress. feedback@tilsonfunds.com
Saturday, May 12, 2007
India Funds Revisited
In this blog, we have looked at emerging market economies and the options available to US investors to get into such markets. One of the hot emerging markets is India. In this blog we have looked at Indian equities and funds quite a few times. We will revisit the India funds again to see if they present an opportunity or two.
First a note about the Indian economy and stock markets.
The economy has been growing at a fast pace, inflation has also been growing at around 6% range flaming fears of overheating or an outright crash. In order to eliminate this scenario, the Indian central bank has increased interest rates and has not interfered with the strengthening Indian Rupee. The strength in the Indian currency will most likely hurt the Indian exporters but may help reduce inflation.
The Indian stock market is an old institution, the oldest in Asia. However, the market is loosely regulated and has had a couple of major scandals in the nineties. The market is also known for its major peaks and valleys. In FY07, the Indian stock market hasnt done particularly well and this is a good sign for investors. The Indian stock market has been flat for the year while many other indices around the world have hit new highs.
The India funds of interest to us are IIF, IFN, MINDX, ETGIX, EEB, ADRE, EEM and VWO. EEB, EEM and VWO are not pure India plays but provide exposure to India. Let us compare these funds and see the pros/cons of each.
IIF is Morgan Stanley India Investment Fund. It is currently trading at almost 12% discount to NAV. The fund has an expense ratio of 1.35%. The fund hasnt kept up with the BSE Sensex Index in the past and the performance of the fund and charts were discussed in the previous article.
IFN is another India fund. It carries a slightly higher expense ratio of 1.41% and has a lesser discout of 11% to NAV. This fund has also lagged BSE Sensex index. This fund has returned -10% so far this year.
MINDX is a mutual fund and has done better than IIF and IFN thus far in the year. This is largely because the mutual fund doesnt develop a large discount or premium to NAV. MINDX has an expense ratio 1.41% and has a separate management fee of 0.7%.
ETGIX has also done relatively well but has underperfomed MINDX. The fund has a front end load of 5.75% and management fee of 2.14%. This is not a good fund for individual investors with less than a million dollars of capital.
EEM has a 5.68% exposure to India, the lowest amongst the BRIC countries. EEM has a larger exposure to Russia, Chian and Brazil.
VWO has a larger 6.1% exposure to India. Similar to EEM, it has larger exposure to other BRIC countries.
From a performance point of view, EEM has done fractionally better than VWO in 2007 despite a higher expense ratio. In the past, EEM has done somewhat better than VWO.
EEB has a larger exposure of 13.5% to India. EEB is concentraded on BRIC and mainly BIC. The growth of Chinese market has helped this fund out perform both EEM and VWO thus far in 2007.
ADRE has a 7.88% exposure to India but is based off the ADRs. It has a lower expense ratio of 0.3% compared to other funds. This fund has a larger exposure to China and lesser exposure to Russia. This has done better than both EEM and VWO thus far this year.
In comparison, an emerging market fund with a cocktail of countries might prove to be a better investment in the longer term as opposed to one country alone. There are several choices available in this category for savvy investors.
First a note about the Indian economy and stock markets.
The economy has been growing at a fast pace, inflation has also been growing at around 6% range flaming fears of overheating or an outright crash. In order to eliminate this scenario, the Indian central bank has increased interest rates and has not interfered with the strengthening Indian Rupee. The strength in the Indian currency will most likely hurt the Indian exporters but may help reduce inflation.
The Indian stock market is an old institution, the oldest in Asia. However, the market is loosely regulated and has had a couple of major scandals in the nineties. The market is also known for its major peaks and valleys. In FY07, the Indian stock market hasnt done particularly well and this is a good sign for investors. The Indian stock market has been flat for the year while many other indices around the world have hit new highs.
The India funds of interest to us are IIF, IFN, MINDX, ETGIX, EEB, ADRE, EEM and VWO. EEB, EEM and VWO are not pure India plays but provide exposure to India. Let us compare these funds and see the pros/cons of each.
IIF is Morgan Stanley India Investment Fund. It is currently trading at almost 12% discount to NAV. The fund has an expense ratio of 1.35%. The fund hasnt kept up with the BSE Sensex Index in the past and the performance of the fund and charts were discussed in the previous article.
IFN is another India fund. It carries a slightly higher expense ratio of 1.41% and has a lesser discout of 11% to NAV. This fund has also lagged BSE Sensex index. This fund has returned -10% so far this year.
MINDX is a mutual fund and has done better than IIF and IFN thus far in the year. This is largely because the mutual fund doesnt develop a large discount or premium to NAV. MINDX has an expense ratio 1.41% and has a separate management fee of 0.7%.
ETGIX has also done relatively well but has underperfomed MINDX. The fund has a front end load of 5.75% and management fee of 2.14%. This is not a good fund for individual investors with less than a million dollars of capital.
EEM has a 5.68% exposure to India, the lowest amongst the BRIC countries. EEM has a larger exposure to Russia, Chian and Brazil.
VWO has a larger 6.1% exposure to India. Similar to EEM, it has larger exposure to other BRIC countries.
From a performance point of view, EEM has done fractionally better than VWO in 2007 despite a higher expense ratio. In the past, EEM has done somewhat better than VWO.
EEB has a larger exposure of 13.5% to India. EEB is concentraded on BRIC and mainly BIC. The growth of Chinese market has helped this fund out perform both EEM and VWO thus far in 2007.
ADRE has a 7.88% exposure to India but is based off the ADRs. It has a lower expense ratio of 0.3% compared to other funds. This fund has a larger exposure to China and lesser exposure to Russia. This has done better than both EEM and VWO thus far this year.
In comparison, an emerging market fund with a cocktail of countries might prove to be a better investment in the longer term as opposed to one country alone. There are several choices available in this category for savvy investors.
Sunday, May 06, 2007
Infosys Analysis
In this blog, we have looked at Infosys and we will take a look again to see how the company is doing.
Infosys is an Indian company that trades on Nasdaq. The businesses the company is into is noted below from its web site.
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 72,000 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.
First, let us look at the financials. For FY07, revenues increased by 44% and profits increased by 53%. For FY08, the company expects revenues to grow by about 30% compared to FY07. Profits will probably grow at a faster pace of about 40%.
The main concern with the outlook is the increased cost of hiring and retaining employees. Infosys pays about $7000 per entry level employee in India and this price is expected to go up by about 15% on the average in the next two years. The company is also increasing the salary of overseas employees by about 5-6% this year compared to about 3% last year. In addition to this, the company is also getting squeezed by the sudden appreciation in the Indian currency of about 10% in the last month and half. Hopefully the company has hedging operations - otherwise this is a double whammy of higher salaries causing 25% increase in costs.
In the conference call, the company talked about some of these challenges. Previously, the company only recruited engineering graduates - now it recruits 10% of its work force from non science and engineering fields. One can see this percentage going up as there is more demand for skilled labor.
Infosys is a well run Indian company - probably the best of the outsourcing companies by far. The management is well known for adding share holder value and for ethical behavior. While the stock is not cheap - given its growth rate, this is a good buy during market dips. It is already the top Indian company in all the emerging market funds that have exposure to India.
Infosys is an Indian company that trades on Nasdaq. The businesses the company is into is noted below from its web site.
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 72,000 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.
First, let us look at the financials. For FY07, revenues increased by 44% and profits increased by 53%. For FY08, the company expects revenues to grow by about 30% compared to FY07. Profits will probably grow at a faster pace of about 40%.
The main concern with the outlook is the increased cost of hiring and retaining employees. Infosys pays about $7000 per entry level employee in India and this price is expected to go up by about 15% on the average in the next two years. The company is also increasing the salary of overseas employees by about 5-6% this year compared to about 3% last year. In addition to this, the company is also getting squeezed by the sudden appreciation in the Indian currency of about 10% in the last month and half. Hopefully the company has hedging operations - otherwise this is a double whammy of higher salaries causing 25% increase in costs.
In the conference call, the company talked about some of these challenges. Previously, the company only recruited engineering graduates - now it recruits 10% of its work force from non science and engineering fields. One can see this percentage going up as there is more demand for skilled labor.
Infosys is a well run Indian company - probably the best of the outsourcing companies by far. The management is well known for adding share holder value and for ethical behavior. While the stock is not cheap - given its growth rate, this is a good buy during market dips. It is already the top Indian company in all the emerging market funds that have exposure to India.
Saturday, May 05, 2007
Value or Growth?
We looked at different ETFs to invest in December 2006 starting with this article. Let us revisit the large value vs growth segments to see how things are faring in 2007.
We looked at the large cap segment in December 2006 and analyzed a couple of ETFs. In this segment, we will look at large cap segment again and compare a few ETFs available in this space.
From vanguard, we have VTV for large value, VV for SP500 index and VUG for large cap growth.
From iShares, we have IVE for large value, IVV for SP500 index and IVW for large growth.
Comparing the Vanguard ETFs, the value fund VTV has done better than both SP500 and the growth funds. A chart showing the relative performances can be found here.
Comparing iShares ETFs, the value and SP500 index have done better than the growth segment which includes technology stars like Microsoft and Google. A chart that shows the differences is noted along with.
In 2006, value segment far outperformed both the growth and SP500 indices. Although the outperformance isnt as obvious in 2007, let us look at the P/E ratios where available to compare the funds.
VUG has a P/E ratio of 21.1 and P/B ratio of about 3.9. VV has P/E ratio of 16.9 and P/B ratio of 2.8. VTV has a P/E ratio of 14.2 and a P/B ratio of 2.2. These numbers were updated as of 3/30/2007.
From iShares, IVE has a P/E of 18.84 and a P/B of about 3.01. IVW has a P/E of 21.4 and a P/B of about 4.93. IVV has a P/E of 20 and P/B of 3.93. These numbers were updated as of 3/30/2007.
Comparatively, value funds carry less risk because of the lower P/E numbers. One thing to note though is that the value fund is dominated by oil and gas companies who have done relatively well thus far into the year. The growth funds haven't done as well as SP500 or the value funds historically. This year the earnings for the technology companies was expected to accelerate so it will be interesting to see how the rest of the year plays out. Value is definitely the defensive play and growth is more of a speculative play for 2007.
We looked at the large cap segment in December 2006 and analyzed a couple of ETFs. In this segment, we will look at large cap segment again and compare a few ETFs available in this space.
From vanguard, we have VTV for large value, VV for SP500 index and VUG for large cap growth.
From iShares, we have IVE for large value, IVV for SP500 index and IVW for large growth.
Comparing the Vanguard ETFs, the value fund VTV has done better than both SP500 and the growth funds. A chart showing the relative performances can be found here.
Comparing iShares ETFs, the value and SP500 index have done better than the growth segment which includes technology stars like Microsoft and Google. A chart that shows the differences is noted along with.
In 2006, value segment far outperformed both the growth and SP500 indices. Although the outperformance isnt as obvious in 2007, let us look at the P/E ratios where available to compare the funds.
VUG has a P/E ratio of 21.1 and P/B ratio of about 3.9. VV has P/E ratio of 16.9 and P/B ratio of 2.8. VTV has a P/E ratio of 14.2 and a P/B ratio of 2.2. These numbers were updated as of 3/30/2007.
From iShares, IVE has a P/E of 18.84 and a P/B of about 3.01. IVW has a P/E of 21.4 and a P/B of about 4.93. IVV has a P/E of 20 and P/B of 3.93. These numbers were updated as of 3/30/2007.
Comparatively, value funds carry less risk because of the lower P/E numbers. One thing to note though is that the value fund is dominated by oil and gas companies who have done relatively well thus far into the year. The growth funds haven't done as well as SP500 or the value funds historically. This year the earnings for the technology companies was expected to accelerate so it will be interesting to see how the rest of the year plays out. Value is definitely the defensive play and growth is more of a speculative play for 2007.
Friday, May 04, 2007
Berkshire Q1 Earning Release
In this blog, we have analyzed Berkshire quite a few times, especially as a stock that has been undervalued and as a good buy. Now, that the Berkshire faithful are getting ready to celebrate another annual meeting at the woodstock of capitalism in Omaha, Nebraska, the Q1 results are out. Let us go through some of the numbers.
Berkshire is a conglomerate with many old economy industries varying from candies to carpets and paint. It also does a significant portion of its business in insurance. Berkshire is run by the iconic figures Warren Buffett and his pal Charlie Munger.
Let us briefly look at the earnings in Q1. The total income after taxes in Q1 was 2.595 billion. This compares to earnings of 2.313 billion in 2006. The year over year increase is 12.19%. In the quarter, the cash flows from operating activities was 4.625 billion dollars compared to 2.359 billion dollars in 2006. 5.3 billion dollars worth of equity securities were purchased in the quarter. Despite the heavy buying, total cash on the balance sheet increased by 1.5 billion dollars.
The Equitas deal also closed in the quarter which added 7+ billion dollars of float to the balance sheet. Berkshire provides an additional 5 billion dollars of coverage expected to be paid out in the course of next forty years. The name of the game here is to make money on the float before the time comes to pay out. The pay out period is expected to be upto 40 years. The company also boosted the loss reserves to conservatively account for the deal.
In Q1, the revenues from operating businesses increased by 47% compared to Q1 of 2006. The earnings from operating businesses increased by 25% in one year. The increase in profits by operating subs with old line businesses would put the dot coms and internet companies to shame.
Given the rise in SP500 since April ( after the quarter close ) of about 5%, one can also expect Berkshire's equity position to also have improved in the same period by a similar or higher percentage. The book value for Berkshire is about 110 billion dollars at the end of Q1 and the overall market cap of the company is only 165 billion dollars. While Berkshire's value has increased, its stock price has dropped in the year. One can expect the stock price to rally at some point in the year.
My estimate of Berkshire's intrinsic value is 139,000 dollars/class A share. The stock is selling at a discount of 27% to its intrinsic value and looks like a good buy at current prices.
Berkshire is a conglomerate with many old economy industries varying from candies to carpets and paint. It also does a significant portion of its business in insurance. Berkshire is run by the iconic figures Warren Buffett and his pal Charlie Munger.
Let us briefly look at the earnings in Q1. The total income after taxes in Q1 was 2.595 billion. This compares to earnings of 2.313 billion in 2006. The year over year increase is 12.19%. In the quarter, the cash flows from operating activities was 4.625 billion dollars compared to 2.359 billion dollars in 2006. 5.3 billion dollars worth of equity securities were purchased in the quarter. Despite the heavy buying, total cash on the balance sheet increased by 1.5 billion dollars.
The Equitas deal also closed in the quarter which added 7+ billion dollars of float to the balance sheet. Berkshire provides an additional 5 billion dollars of coverage expected to be paid out in the course of next forty years. The name of the game here is to make money on the float before the time comes to pay out. The pay out period is expected to be upto 40 years. The company also boosted the loss reserves to conservatively account for the deal.
In Q1, the revenues from operating businesses increased by 47% compared to Q1 of 2006. The earnings from operating businesses increased by 25% in one year. The increase in profits by operating subs with old line businesses would put the dot coms and internet companies to shame.
Given the rise in SP500 since April ( after the quarter close ) of about 5%, one can also expect Berkshire's equity position to also have improved in the same period by a similar or higher percentage. The book value for Berkshire is about 110 billion dollars at the end of Q1 and the overall market cap of the company is only 165 billion dollars. While Berkshire's value has increased, its stock price has dropped in the year. One can expect the stock price to rally at some point in the year.
My estimate of Berkshire's intrinsic value is 139,000 dollars/class A share. The stock is selling at a discount of 27% to its intrinsic value and looks like a good buy at current prices.
Thursday, April 26, 2007
MSFT earnings update
In the previous post, we looked at Microsoft valuation from several angles and found Microsoft stock to be not so attractive. In this post, we will take a look at the earnings from the most recent quarter.
The operating margin for the company as a whole declined by 0.25 points in the first nine months of this fiscal year compared to 2006. This isnt a good sign - indicating that XBoX, MSN and other money losing divisions arent executing well.
When looking at free cash flow, the figures arent impressive either. The company gained a bit from exchange rates, increased amortization and slight benefit from stock based compensation. The company spent 5.6 billion issuing new stock and 20 billion buying back stock from the open market. So despite the massive spending on stock buy backs, the outstanding stocks declined only by 4.4%.
Overall, Microsoft's earnings surprise is not built on a solid foundation. The problems with capital allocation continue to persist. In addition, the company isnt making inroads in the search or ad business. The next year would be the make or break year for Microsoft.
The operating margin for the company as a whole declined by 0.25 points in the first nine months of this fiscal year compared to 2006. This isnt a good sign - indicating that XBoX, MSN and other money losing divisions arent executing well.
When looking at free cash flow, the figures arent impressive either. The company gained a bit from exchange rates, increased amortization and slight benefit from stock based compensation. The company spent 5.6 billion issuing new stock and 20 billion buying back stock from the open market. So despite the massive spending on stock buy backs, the outstanding stocks declined only by 4.4%.
Overall, Microsoft's earnings surprise is not built on a solid foundation. The problems with capital allocation continue to persist. In addition, the company isnt making inroads in the search or ad business. The next year would be the make or break year for Microsoft.
Sunday, April 22, 2007
MSFT Analysis
Microsoft is an interesting company. It was a feared technology behemoth a few years back but the stock return has been lackluster for the past nine years. In this segment, we will analyze Microsoft from three angles. (a) Discount cash flow analysis (b) Compare it to the 10 year bond and (c) finally analyze it with the option contracts.
One of the main complaints against Microsoft is that it doesnt know how to allocate capital. This part was covered in great detail in the following story. As the article points out, the XBoX division has bled 5.4 billion on 21 billion of investment in the past five years. A 2% return on 21 billion over five years would have yielded 2.1 billion to the share holders. If it were distributed as dividends, it comes to about 21 cents a share, not exactly chump change.
In addition to XBoX, the other divisions such as MSN, Mobile and Embedded Devices and Microsoft Dynamics have been bleeding cash. Only the windows and office divisions have been profitable and have been keeping Microsoft aloft.
First, let us look at Microsoft's discount cash flow model. The cash flow has been declining in the past few years and one can expect the trend to stabilize in the upcoming years but not subside. Let us look at the free cash flow in the past eight years.
9,447.0 13,082.0 12,319.0 13,739.0 14,906.0 13,517.0 15,793.0 12,826.0 11,917.0
As one can notice, the cash flow has been trending downwards primarily because of XBox and MSN divisions.
A discount rate of 8% to 10% range gives a valuation in the range of 175 billion to 225 billion. The valuation is based on free cash flow growing at the rate of 8% per year which is optimistic. The current Microsoft market cap is about 280 billion dollars.
The second approach is based on EPS and comparison to the 10 year bond. If the analyst EPS of 1.47 and 1.64 for FY07 and FY08 holds true, a stock price of 29.4 and 33.4 seem appropriate. Looking at the current price of Microsoft, the upside in a year's time is about 13.6% if the company is able to meet the earning estimates.
The third aproach is based on option contracts. Looking at the option contract for January 2009, a range of values between 30 and 35 seem more likely with the median of 32.5 being more likely. This compares well with the long bond comparison approach noted above.
Looking at all the approaches, the upside in MSFT is somewhat limited even in the best of environments. There is significant concern about the cash flows with XBoX and the MSN/Search divisions burning cash with no return in sight. It is unlikely Microsoft will spin off these divisions and fend for themselves. It would be good to have these divisions compete on their own merit without getting a life line from Microsoft.
One of the main complaints against Microsoft is that it doesnt know how to allocate capital. This part was covered in great detail in the following story. As the article points out, the XBoX division has bled 5.4 billion on 21 billion of investment in the past five years. A 2% return on 21 billion over five years would have yielded 2.1 billion to the share holders. If it were distributed as dividends, it comes to about 21 cents a share, not exactly chump change.
In addition to XBoX, the other divisions such as MSN, Mobile and Embedded Devices and Microsoft Dynamics have been bleeding cash. Only the windows and office divisions have been profitable and have been keeping Microsoft aloft.
First, let us look at Microsoft's discount cash flow model. The cash flow has been declining in the past few years and one can expect the trend to stabilize in the upcoming years but not subside. Let us look at the free cash flow in the past eight years.
9,447.0 13,082.0 12,319.0 13,739.0 14,906.0 13,517.0 15,793.0 12,826.0 11,917.0
As one can notice, the cash flow has been trending downwards primarily because of XBox and MSN divisions.
A discount rate of 8% to 10% range gives a valuation in the range of 175 billion to 225 billion. The valuation is based on free cash flow growing at the rate of 8% per year which is optimistic. The current Microsoft market cap is about 280 billion dollars.
The second approach is based on EPS and comparison to the 10 year bond. If the analyst EPS of 1.47 and 1.64 for FY07 and FY08 holds true, a stock price of 29.4 and 33.4 seem appropriate. Looking at the current price of Microsoft, the upside in a year's time is about 13.6% if the company is able to meet the earning estimates.
The third aproach is based on option contracts. Looking at the option contract for January 2009, a range of values between 30 and 35 seem more likely with the median of 32.5 being more likely. This compares well with the long bond comparison approach noted above.
Looking at all the approaches, the upside in MSFT is somewhat limited even in the best of environments. There is significant concern about the cash flows with XBoX and the MSN/Search divisions burning cash with no return in sight. It is unlikely Microsoft will spin off these divisions and fend for themselves. It would be good to have these divisions compete on their own merit without getting a life line from Microsoft.
Two arbitrage deals
In this article, we will look at two arbitrage deals that may give the shareholder a 6% upside within a month and in the worst case two months.
The first one is FICC and the second one is TNOX. First FICC.
FICC is Fieldstone Investment Corp and is being bought out by CBass, a unit of MTG. ( ticket MTG ). The offer price is $4/share and the deal has got SEC approval. The share holders meeting is scheduled for the 22nd of May and the deal is expected to close soon after. Currently the stock is trading at a discount of 6.3% to the eventual buy out price. While the likelihood of the deal to close is good, it is by no means a done deal. However, low stock volume and steady price indicate that the likelihood of the deal going through is high. If the deal doesnt go through, the share holders wont be left with much.
The second company of interest is TNOX. The company is being bought out by Genentech for $20/share but is currently trading at $18.85. This gives a return of 6.1%. The share holders have already approved the deal but SEC approval is pending. The company is saying that the deal is expected to close in the first half of the year.
Both deals have considerable risk and some upside. If the deals dont go through there is a large downside as well.
The first one is FICC and the second one is TNOX. First FICC.
FICC is Fieldstone Investment Corp and is being bought out by CBass, a unit of MTG. ( ticket MTG ). The offer price is $4/share and the deal has got SEC approval. The share holders meeting is scheduled for the 22nd of May and the deal is expected to close soon after. Currently the stock is trading at a discount of 6.3% to the eventual buy out price. While the likelihood of the deal to close is good, it is by no means a done deal. However, low stock volume and steady price indicate that the likelihood of the deal going through is high. If the deal doesnt go through, the share holders wont be left with much.
The second company of interest is TNOX. The company is being bought out by Genentech for $20/share but is currently trading at $18.85. This gives a return of 6.1%. The share holders have already approved the deal but SEC approval is pending. The company is saying that the deal is expected to close in the first half of the year.
Both deals have considerable risk and some upside. If the deals dont go through there is a large downside as well.
Saturday, April 14, 2007
Guide to ETF Investing
Seekingalpha has a guide for ETF investing. The guide is worth a read. It covers the following topics:
1. The factors to optimize for higher investment returns.
2. Why Tech stocks dont work
3. Why one shouldnt buy mutual funds?
4. Advantages of buying ETFs
5. How to assemble and manage a ETF portfolio?
6. Analysis for different situations.
7. Putting everything together
Happy reading at http://etf.seekingalpha.com/etfguide.
1. The factors to optimize for higher investment returns.
2. Why Tech stocks dont work
3. Why one shouldnt buy mutual funds?
4. Advantages of buying ETFs
5. How to assemble and manage a ETF portfolio?
6. Analysis for different situations.
7. Putting everything together
Happy reading at http://etf.seekingalpha.com/etfguide.
Conoco Phillips (COP) Analysis
In this analysis, we will look at Conoco Phillips in a bit more detail than we did last time. COP ended FY06 with 51.4 $/share book value compared to 37 $/share book value in 2005. The book value improved by about 38%.
Let us look at some of the different segments of Conoco Phillips and how much they contributed to earnings.
E&P section was the highest contributor to earnings. World wide average sales price per barrel of oil was $60.37. For natural gas liquids/barrel, the earnings per barrel was $41.50. The revenues from abroad was about 5.5 billion dollars and was 4.348 billion dollars from the U.S. The average production cost has also gone up at around $5.57/barrel.
The other segment that contributes heavily to COP bottom line is R&M segment. R&M is the refining arm of COP. The refining segment resulted in 4.481 billion in income in 2006.
The chemicals segment resulted in 492 million dollars of income. This segment produces petrochemicals from natural gas, liquids and other feed stock.
Emerging Business segment has a net income of 15 million in 2006.
For 2007, the company plans to invest 13.5 billion in capital expenditures. The company plans to pay out about 3 billion dollars in dividends. The remaining cash flow is used to pay out debt and buy back shares. Last year, the cash flow in COP was 21 billion dollars. The total cash flow is entirely dependent on the crude oil prices. It is likely that the crude oil prices will hower around $60 for 2007.
The company expects to generate about 3-4 billion dollars from the rationalization of assets and has a plan to buy back stocks worth 4 billion dollars. The capital expenditures for 2007 has been reduced by about 2.5 billion dollars because of the scaling back of cost intensive projects. One can expect the company to reduce debt by about 3-4 billion dollars from the current level of 27 billion dollars. The company has debt obligations of about 3 billion dollars in 2007. The Venezuela liability to COP is about 2 billion dollars in the worst case.
COP is still cheap compared to its peers Chevron, Exxon Mobil and Petro China. However, COP carries significantly higher amounts of debt on its balance sheets.
Let us look at some of the different segments of Conoco Phillips and how much they contributed to earnings.
E&P section was the highest contributor to earnings. World wide average sales price per barrel of oil was $60.37. For natural gas liquids/barrel, the earnings per barrel was $41.50. The revenues from abroad was about 5.5 billion dollars and was 4.348 billion dollars from the U.S. The average production cost has also gone up at around $5.57/barrel.
The other segment that contributes heavily to COP bottom line is R&M segment. R&M is the refining arm of COP. The refining segment resulted in 4.481 billion in income in 2006.
The chemicals segment resulted in 492 million dollars of income. This segment produces petrochemicals from natural gas, liquids and other feed stock.
Emerging Business segment has a net income of 15 million in 2006.
For 2007, the company plans to invest 13.5 billion in capital expenditures. The company plans to pay out about 3 billion dollars in dividends. The remaining cash flow is used to pay out debt and buy back shares. Last year, the cash flow in COP was 21 billion dollars. The total cash flow is entirely dependent on the crude oil prices. It is likely that the crude oil prices will hower around $60 for 2007.
The company expects to generate about 3-4 billion dollars from the rationalization of assets and has a plan to buy back stocks worth 4 billion dollars. The capital expenditures for 2007 has been reduced by about 2.5 billion dollars because of the scaling back of cost intensive projects. One can expect the company to reduce debt by about 3-4 billion dollars from the current level of 27 billion dollars. The company has debt obligations of about 3 billion dollars in 2007. The Venezuela liability to COP is about 2 billion dollars in the worst case.
COP is still cheap compared to its peers Chevron, Exxon Mobil and Petro China. However, COP carries significantly higher amounts of debt on its balance sheets.
Google and Doubleclick deal
In this blog, we have looked at google a few times. In this article, we will take a look at the double click deal to see Google prospects.
First, let us look at Google's earning yield. The trailing earning yield is 2.1% and the forward earning yield for 2007 is 3%. The expected earning yield for 2008 is 3.95%. The 10 year bond is yielding 4.76% at the moment and is more attractive as an investment than Google stock.
Secondly, Google's competition is intensifying. Yahoo!'s Panama project seems to have started well and Microsoft's search/ad strategy isnt firing yet. However, Microsoft is not expected to give up easily - expect Microsoft to continue pouring money into this space till it captures some market share or the business itself is no longer relevant. We can take cues from the way Microsoft battled AOL in the last one decade. MSN internet access got to be profitable after losing money for years.
One thing that has changed about Microsoft is that it cant afford to spend money as freely as it did in the past as it has quite a few business divisions that are leaking money.
This brings us squarely to the double click deal. At 3.1 billion dollars a year and 1200 employees, is it a good deal for Google?
First, we have to look to see if the deal is accretive to Google's bottomline. Taking into account its 2007 earning yield, double click must generate about 90 million in profit to be comparable to Google's earnings and grow at around 30% pace in the coming year.
However, it is likely that DoubleClick's profits are far lower as Google paid for the entire deal in cash. Since cash is earning a higher yield in treasury bonds, it was a bit surprising that Google paid cash for the deal.
DoubleClick has about 1200 employees and if Google keeps them all, it will end up shelling out about 150-200 million dollars a year in employee salary/benefits alone. Moreover, this deal is unlikely to provide a moat to Google against Microsoft and Yahoo! as these companies already have a significance presence in the display ads market place.
It is difficult to understand how this deal is beneficial to Google at the price paid. It will be interesting to see how the stock will perform in the next couple of years.
First, let us look at Google's earning yield. The trailing earning yield is 2.1% and the forward earning yield for 2007 is 3%. The expected earning yield for 2008 is 3.95%. The 10 year bond is yielding 4.76% at the moment and is more attractive as an investment than Google stock.
Secondly, Google's competition is intensifying. Yahoo!'s Panama project seems to have started well and Microsoft's search/ad strategy isnt firing yet. However, Microsoft is not expected to give up easily - expect Microsoft to continue pouring money into this space till it captures some market share or the business itself is no longer relevant. We can take cues from the way Microsoft battled AOL in the last one decade. MSN internet access got to be profitable after losing money for years.
One thing that has changed about Microsoft is that it cant afford to spend money as freely as it did in the past as it has quite a few business divisions that are leaking money.
This brings us squarely to the double click deal. At 3.1 billion dollars a year and 1200 employees, is it a good deal for Google?
First, we have to look to see if the deal is accretive to Google's bottomline. Taking into account its 2007 earning yield, double click must generate about 90 million in profit to be comparable to Google's earnings and grow at around 30% pace in the coming year.
However, it is likely that DoubleClick's profits are far lower as Google paid for the entire deal in cash. Since cash is earning a higher yield in treasury bonds, it was a bit surprising that Google paid cash for the deal.
DoubleClick has about 1200 employees and if Google keeps them all, it will end up shelling out about 150-200 million dollars a year in employee salary/benefits alone. Moreover, this deal is unlikely to provide a moat to Google against Microsoft and Yahoo! as these companies already have a significance presence in the display ads market place.
It is difficult to understand how this deal is beneficial to Google at the price paid. It will be interesting to see how the stock will perform in the next couple of years.
Sunday, April 08, 2007
UPS Analysis Update
In previous articles, we looked at UPS and Fedex respectively. Both the stocks have gone down somewhat since then and are relatively cheap. Let us look at these stocks, specifically UPS to consider its prospects for the next several years.
First, some high points from UPS annual report. UPS is going to celebrate its centennial this year. UPS annual report claims industry leading margins at 16.8%. For UPS, management expects 6-10% growth in 2007 over 2006. 2007 is decidely lacklustre year for this segment making it a good time to acquire shares in this industry.
UPS expects organic revenue growth of 6-8% between now and 2010 - getting the overall revenue to about $60 billion. EPS componded is expected to grow between 9 and 14%. This is good news for share holders. At the low end, the upside to share price is 40% from the current levels and at the high end, the upside is more like 70%. This is with a P/E of 18. Meanwhile, UPS will continue to pay out about 40% of the income in dividends - this comes to 2.4% yield per year. Four four years, this comes to about 9.6% over four years - it is likely that dividends will increase and the yield will be will over 10% over four years. In total, one can look at returns of 50% at the low end and 80% at the high end including dividends. This is a good pay out for the current investment.
Looking at the balance sheets - here are some trends for the past five years.
Growth of US Domestic Package - 4.6% per year
International Package - 14% per year
Supply chain and freight - 29% per year
Net income growth for the past five years is - 5.7%
EPS has grown at a rate of 6.4%
Dividends per share has increased at a rate of 15%.
The number of shares has declined in this period by 4%.
First, some high points from UPS annual report. UPS is going to celebrate its centennial this year. UPS annual report claims industry leading margins at 16.8%. For UPS, management expects 6-10% growth in 2007 over 2006. 2007 is decidely lacklustre year for this segment making it a good time to acquire shares in this industry.
UPS expects organic revenue growth of 6-8% between now and 2010 - getting the overall revenue to about $60 billion. EPS componded is expected to grow between 9 and 14%. This is good news for share holders. At the low end, the upside to share price is 40% from the current levels and at the high end, the upside is more like 70%. This is with a P/E of 18. Meanwhile, UPS will continue to pay out about 40% of the income in dividends - this comes to 2.4% yield per year. Four four years, this comes to about 9.6% over four years - it is likely that dividends will increase and the yield will be will over 10% over four years. In total, one can look at returns of 50% at the low end and 80% at the high end including dividends. This is a good pay out for the current investment.
Looking at the balance sheets - here are some trends for the past five years.
Growth of US Domestic Package - 4.6% per year
International Package - 14% per year
Supply chain and freight - 29% per year
Net income growth for the past five years is - 5.7%
EPS has grown at a rate of 6.4%
Dividends per share has increased at a rate of 15%.
The number of shares has declined in this period by 4%.
Tuesday, April 03, 2007
Roth 401(k) or Roth IRA?
In this article, we will take a look at two schemes - a Roth 401(k) and Roth IRA and see the pros/cons of both.
Wikipedia has a good description of Roth IRA. There is also a special provision where people not eligible to contribute to Roth IRA can contribute to IRA and then convert the assets to Roth IRA at a later date.
First some background on Roth IRA and IRA.
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006. This law made permanent increased contribution limits to IRAs (including Roth IRAs) that would otherwise have expired after 2010. It also made permanent the Roth 401(k), which would otherwise not have been available after 2010. For additional information, see the Roth 401(k) Web Site. On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 into law. This tax bill included a provision dealing with conversions of traditional IRAs to Roth IRAs. Starting in 2010, the existing $100,000 income test for converting a traditional IRA to a Roth IRA will no longer apply. Conversions that occur in 2010 will be able to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012. For additional information, see the statutory provisions and the conference report.
IRA Taxation:When you take money out of an IRA, you pay income tax on all or part of it, depending on whether your original contributions were tax-deductible or not. If your contributions were taxdeductible (in other words, made from pre-tax income), you’ll pay income taxes on the entire withdrawal. If your contributions were not deductible (in other words, you used after-tax dollars,) you generally will be taxed on the earnings only at the time of withdrawal.
If you made both deductible and non-deductible contributions, then each IRA withdrawal is taxed in proportion to the mix of deductible and non-deductible contributions in all your IRAs. For more information on calculating the tax, see IRS Publication 590.
Contribution Limits:
Year Traditional/Roth
2006 $4,000
2007 $4,000
2008 $5,000
2009 $5,000
The Roth 401(k), is also permanent. Roth 401(k) is similar to Roth IRA except that the plan works as part of the 401(k) plan. One has to forego tax deduction now to participate in the Roth 401(k) plan. Also - one has to live with the limited investment options available in the 401(k) plan.
Is it possible to have the best of both worlds? The answer is yes, absolutely. One can contribute to the traditional IRA and convert it to Roth IRA in 2010. Meanwhile, one can continue contributing to 401(k), maxing out the contributions if possible.
In 2007, there is time till 17th of April to contribute to IRA. I am going to avail this opportunity to open an IRA account. I plan to convert this to traditional Roth IRA in 2010. Meanwhile, I participate in a regular 401(k) at work where I get matching contribution and tax savings.
Wikipedia has a good description of Roth IRA. There is also a special provision where people not eligible to contribute to Roth IRA can contribute to IRA and then convert the assets to Roth IRA at a later date.
First some background on Roth IRA and IRA.
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006. This law made permanent increased contribution limits to IRAs (including Roth IRAs) that would otherwise have expired after 2010. It also made permanent the Roth 401(k), which would otherwise not have been available after 2010. For additional information, see the Roth 401(k) Web Site. On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 into law. This tax bill included a provision dealing with conversions of traditional IRAs to Roth IRAs. Starting in 2010, the existing $100,000 income test for converting a traditional IRA to a Roth IRA will no longer apply. Conversions that occur in 2010 will be able to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012. For additional information, see the statutory provisions and the conference report.
IRA Taxation:When you take money out of an IRA, you pay income tax on all or part of it, depending on whether your original contributions were tax-deductible or not. If your contributions were taxdeductible (in other words, made from pre-tax income), you’ll pay income taxes on the entire withdrawal. If your contributions were not deductible (in other words, you used after-tax dollars,) you generally will be taxed on the earnings only at the time of withdrawal.
If you made both deductible and non-deductible contributions, then each IRA withdrawal is taxed in proportion to the mix of deductible and non-deductible contributions in all your IRAs. For more information on calculating the tax, see IRS Publication 590.
Contribution Limits:
Year Traditional/Roth
2006 $4,000
2007 $4,000
2008 $5,000
2009 $5,000
The Roth 401(k), is also permanent. Roth 401(k) is similar to Roth IRA except that the plan works as part of the 401(k) plan. One has to forego tax deduction now to participate in the Roth 401(k) plan. Also - one has to live with the limited investment options available in the 401(k) plan.
Is it possible to have the best of both worlds? The answer is yes, absolutely. One can contribute to the traditional IRA and convert it to Roth IRA in 2010. Meanwhile, one can continue contributing to 401(k), maxing out the contributions if possible.
In 2007, there is time till 17th of April to contribute to IRA. I am going to avail this opportunity to open an IRA account. I plan to convert this to traditional Roth IRA in 2010. Meanwhile, I participate in a regular 401(k) at work where I get matching contribution and tax savings.
Sunday, March 18, 2007
AIG Analysis
In this segment, we will look at AIG, a Dow component and look at its prospects. AIG's business is described as follows in the 10-K.
AIG’s General Insurance subsidiaries are multiple line companies writing substantially all lines of commercial property and casualty insurance and various personal lines both domestically and abroad. Domestic General Insurance operations are comprised of the Domestic Brokerage Group (DBG), Reinsurance, Personal Lines, and Mortgage Guaranty.
AIG is diversified both in terms of classes of business and geographic locations. In General Insurance, workers compensation business is the largest class of business written and represented approximately 15 percent of net premiums written for the year ended December 31, 2006. During 2006, 8 percent and 7 percent of the direct General Insurance premiums written (gross premiums less return premiums and cancellations, excluding reinsurance assumed and before deducting reinsurance ceded) were written in California and New York, respectively. No other state accounted for more than five percent of such premiums.
The majority of AIG’s General Insurance business is in the casualty classes, which tend to involve longer periods of time for the reporting and settling of claims. This may increase the risk and uncertainty with respect to AIG’s loss reserve development.
Insurance, especially long tail insurance can make the earnings lumpy. So, in this segment, let us look at various business lines to see how things look like.
The various business lines of AIG are:
DBG:
AIG’s primary Domestic General Insurance division is DBG. DBG’s business in the United States and Canada is conducted through American Home, National Union, Lexington, HSB and certain other General Insurance company subsidiaries of AIG. During 2006, DBG accounted for 54 percent of AIG’s General Insurance net premiums written.
Reinsurance:
The subsidiaries of Transatlantic Holdings, Inc. (Transatlantic) offer reinsurance on both a treaty and facultative basis to insurers in the U.S. and abroad. Transatlantic structures programs for a full range of property and casualty products with an emphasis on specialty risk. Transatlantic is a public company owned 59.2 percent by AIG and therefore is included in AIG’s consolidated financial statements.
Personal Lines:
AIG’s Personal Lines operations provide automobile insurance through AIG Direct, a mass marketing operation, the Agency Auto Division and 21st Century Insurance Group (21st Century), as well as a broad range of coverages for high net-worth individuals through the AIG Private Client Group. 21st Century is a public company owned 61.9 percent by AIG and therefore is included in AIG’s consolidated financial statements. During the first quarter of 2007, AIG offered to acquire the outstanding shares of 21st Century not already owned by AIG and its subsidiaries.
Mortgage Guarantee:
The main business of the subsidiaries of United Guaranty Corporation (UGC) is the issuance of residential mortgage guaranty insurance, both domestically and internationally, on conventional first lien mortgages for the purchase or refinance of one to four family residences. UGC subsidiaries also write second lien and private student loan guaranty insurance.
Foreign General Insurance:
AIG’s Foreign General Insurance group accepts risks primarily underwritten through American International Underwriters (AIU), a marketing unit consisting of wholly owned agencies and insurance companies. The Foreign General Insurance group also includes business written by AIG’s foreign-based insurance subsidiaries. The Foreign General Insurance group uses various marketing methods and multiple distribution channels to write both commercial and consumer lines insurance with certain refinements for local laws, customs and needs. AIU operates in Asia, the Pacific Rim, Europe, including the U.K., Africa, the Middle East and Latin America. During 2006, the Foreign General Insurance group accounted for 25 percent of AIG’s General Insurance net premiums written.
For followers of Berkshire, the AIG credit rating is not as good as Berkshires. In 2005, the AIG credit rating was downgraded and as a result, AIG had to put up significantl collateral. In contrast, Berkshire enjoys the top most credit rating that can be given.
2006 was an unusually good year for AIG as was the case for insurance companies in general because of the absence of major catastrophes in the world. In 2005, AIG paid out about three billion for the Katrina and other related catastrophes. AIG's business segment revenues and incomes were as follows for 2006.
General Insurance - 49.2 billion
Life insurance and retirement services - 50.1 billion
Financial Services - 8 billion
Asset management - 5.8 billion
The income was as follows:
General Insurance - 10.4 billion
Life Ins and Retirement Service - 10 billion
Financial Service - 0.5 billion
Asset Management - 2.3 billion
The major uptick in income came in the general insurance section where the income increased from 2 billion to 10 billion. Income from Financial Services declined significantly by about 2 billion in 2006 compared to 2005.
AIG is expanding aggressively in Asia and so far about 20% of its revenue is from Asia. The company is seeing growth opportunities in China, India and Japan.
One can expect the insurance rates to be soft this year - car premiums are staying flat or declining because of the decrease in accidents. The re-insurance sector is also expected to be soft this year because of catastrophe free year of 2006.
The value line investment survey published a survey of AIG. According to valueline, AIG's EPS will be 7.80 by 2011 and book value will be $60.00. Valueline thinks the share price will be 135 to 180 dollars per share in this time frame. However, this assumes the Price/Book and Price to earnings ratios to remain high or higher.
Overall, the value line forecast seems a bit aggressive to me including the low end. While AIG is a good company, my opinion is that Berkshire is a very compelling investment as well. Berkshire does insurance better than AIG and has other well diversified business and stock holdings. Currently berkshire is selling for about 28% discount to fair value.
AIG’s General Insurance subsidiaries are multiple line companies writing substantially all lines of commercial property and casualty insurance and various personal lines both domestically and abroad. Domestic General Insurance operations are comprised of the Domestic Brokerage Group (DBG), Reinsurance, Personal Lines, and Mortgage Guaranty.
AIG is diversified both in terms of classes of business and geographic locations. In General Insurance, workers compensation business is the largest class of business written and represented approximately 15 percent of net premiums written for the year ended December 31, 2006. During 2006, 8 percent and 7 percent of the direct General Insurance premiums written (gross premiums less return premiums and cancellations, excluding reinsurance assumed and before deducting reinsurance ceded) were written in California and New York, respectively. No other state accounted for more than five percent of such premiums.
The majority of AIG’s General Insurance business is in the casualty classes, which tend to involve longer periods of time for the reporting and settling of claims. This may increase the risk and uncertainty with respect to AIG’s loss reserve development.
Insurance, especially long tail insurance can make the earnings lumpy. So, in this segment, let us look at various business lines to see how things look like.
The various business lines of AIG are:
DBG:
AIG’s primary Domestic General Insurance division is DBG. DBG’s business in the United States and Canada is conducted through American Home, National Union, Lexington, HSB and certain other General Insurance company subsidiaries of AIG. During 2006, DBG accounted for 54 percent of AIG’s General Insurance net premiums written.
Reinsurance:
The subsidiaries of Transatlantic Holdings, Inc. (Transatlantic) offer reinsurance on both a treaty and facultative basis to insurers in the U.S. and abroad. Transatlantic structures programs for a full range of property and casualty products with an emphasis on specialty risk. Transatlantic is a public company owned 59.2 percent by AIG and therefore is included in AIG’s consolidated financial statements.
Personal Lines:
AIG’s Personal Lines operations provide automobile insurance through AIG Direct, a mass marketing operation, the Agency Auto Division and 21st Century Insurance Group (21st Century), as well as a broad range of coverages for high net-worth individuals through the AIG Private Client Group. 21st Century is a public company owned 61.9 percent by AIG and therefore is included in AIG’s consolidated financial statements. During the first quarter of 2007, AIG offered to acquire the outstanding shares of 21st Century not already owned by AIG and its subsidiaries.
Mortgage Guarantee:
The main business of the subsidiaries of United Guaranty Corporation (UGC) is the issuance of residential mortgage guaranty insurance, both domestically and internationally, on conventional first lien mortgages for the purchase or refinance of one to four family residences. UGC subsidiaries also write second lien and private student loan guaranty insurance.
Foreign General Insurance:
AIG’s Foreign General Insurance group accepts risks primarily underwritten through American International Underwriters (AIU), a marketing unit consisting of wholly owned agencies and insurance companies. The Foreign General Insurance group also includes business written by AIG’s foreign-based insurance subsidiaries. The Foreign General Insurance group uses various marketing methods and multiple distribution channels to write both commercial and consumer lines insurance with certain refinements for local laws, customs and needs. AIU operates in Asia, the Pacific Rim, Europe, including the U.K., Africa, the Middle East and Latin America. During 2006, the Foreign General Insurance group accounted for 25 percent of AIG’s General Insurance net premiums written.
For followers of Berkshire, the AIG credit rating is not as good as Berkshires. In 2005, the AIG credit rating was downgraded and as a result, AIG had to put up significantl collateral. In contrast, Berkshire enjoys the top most credit rating that can be given.
2006 was an unusually good year for AIG as was the case for insurance companies in general because of the absence of major catastrophes in the world. In 2005, AIG paid out about three billion for the Katrina and other related catastrophes. AIG's business segment revenues and incomes were as follows for 2006.
General Insurance - 49.2 billion
Life insurance and retirement services - 50.1 billion
Financial Services - 8 billion
Asset management - 5.8 billion
The income was as follows:
General Insurance - 10.4 billion
Life Ins and Retirement Service - 10 billion
Financial Service - 0.5 billion
Asset Management - 2.3 billion
The major uptick in income came in the general insurance section where the income increased from 2 billion to 10 billion. Income from Financial Services declined significantly by about 2 billion in 2006 compared to 2005.
AIG is expanding aggressively in Asia and so far about 20% of its revenue is from Asia. The company is seeing growth opportunities in China, India and Japan.
One can expect the insurance rates to be soft this year - car premiums are staying flat or declining because of the decrease in accidents. The re-insurance sector is also expected to be soft this year because of catastrophe free year of 2006.
The value line investment survey published a survey of AIG. According to valueline, AIG's EPS will be 7.80 by 2011 and book value will be $60.00. Valueline thinks the share price will be 135 to 180 dollars per share in this time frame. However, this assumes the Price/Book and Price to earnings ratios to remain high or higher.
Overall, the value line forecast seems a bit aggressive to me including the low end. While AIG is a good company, my opinion is that Berkshire is a very compelling investment as well. Berkshire does insurance better than AIG and has other well diversified business and stock holdings. Currently berkshire is selling for about 28% discount to fair value.
Sunday, March 11, 2007
MMM (3M) Analysis
3M is a diversified technology company with a global presence in the following businesses: industrial and transportation; health care; display and graphics; consumer and office; safety, security and protection services; and electro and communications. 3M is among the leading manufacturers of products for many of the markets it serves. Most 3M products involve expertise in product development, manufacturing and marketing, and are subject to competition from products manufactured and sold by other technologically oriented companies.
At December 31, 2006, the Company employed 75,333 people, with 34,553 employed in the United States and 40,780 employed internationally.
The company is growing at around 7-8% year over year but is facing tough comparisons this year compared to last with lower EPS this year compared to last. This is one of the reasons the stock is down. The analysts are expecting flat to slight growth this year compared to the previous year. Next year is expected to be somewhat better with a growth of about 10-12%.
Let us briefly take a look at the revenues by geographic region and growth by geographic region. The revenues by geographic region look as follows:
US - 38.6%
Asia Pacific - 27.3%
Europe - 25%
Latin America and Canada - 9.1%
The EPS has grown at around 9% for the past ten years. The top line growth is more abysmal at around 4.5% per year for the past ten years. The operating profit has increased at the rate of 6%.
In the same period, the number of outstanding shares has declined by about 8%. One can expect the total number of shares to decline slowly in the upcoming years. The cash flow from operations continues to be strong - growing at around 10% per year. The debt has also increased in 2006 compared to 2005. The dividend has grown at around 8% per year for the past five years. One can expect this ratio to continue in the upcoming years.
At December 31, 2006, the Company employed 75,333 people, with 34,553 employed in the United States and 40,780 employed internationally.
The company is growing at around 7-8% year over year but is facing tough comparisons this year compared to last with lower EPS this year compared to last. This is one of the reasons the stock is down. The analysts are expecting flat to slight growth this year compared to the previous year. Next year is expected to be somewhat better with a growth of about 10-12%.
Let us briefly take a look at the revenues by geographic region and growth by geographic region. The revenues by geographic region look as follows:
US - 38.6%
Asia Pacific - 27.3%
Europe - 25%
Latin America and Canada - 9.1%
The EPS has grown at around 9% for the past ten years. The top line growth is more abysmal at around 4.5% per year for the past ten years. The operating profit has increased at the rate of 6%.
In the same period, the number of outstanding shares has declined by about 8%. One can expect the total number of shares to decline slowly in the upcoming years. The cash flow from operations continues to be strong - growing at around 10% per year. The debt has also increased in 2006 compared to 2005. The dividend has grown at around 8% per year for the past five years. One can expect this ratio to continue in the upcoming years.
Indian market overview
In the previous article, we looked at major India funds and compared their performance against the BSE Sensex Index. We found that the mutual funds werent doing well and were lagging the BSE Sensex by a large margin. When we analyzed the Chinese market, we found the results to be identical - the funds lagged the index by a large margin.
The BSE Sensex index went down by about 15% since its peak and it is a good thing. People may think that the market should go up but this isnt the case. A correction like the one we have seen is very healthy as it ensures the long term health of the market and killing excessive speculation.
Let us take a look at different funds to see how things look like. Let us compare the charts of the various India funds and EEM looks like when comparing against the BSE Sensex Index. The comparative charts of the funds and their performance is noted below:
Chart comparing BSE Sensex vs other funds
Even with this correction - the expected return for Indian stocks in a best case scenario is 10-12% for the next four - five years. A deeper correction will provide more upside if the economy is managed well in the next several years.
The BSE Sensex index went down by about 15% since its peak and it is a good thing. People may think that the market should go up but this isnt the case. A correction like the one we have seen is very healthy as it ensures the long term health of the market and killing excessive speculation.
Let us take a look at different funds to see how things look like. Let us compare the charts of the various India funds and EEM looks like when comparing against the BSE Sensex Index. The comparative charts of the funds and their performance is noted below:
Chart comparing BSE Sensex vs other funds
Even with this correction - the expected return for Indian stocks in a best case scenario is 10-12% for the next four - five years. A deeper correction will provide more upside if the economy is managed well in the next several years.
Thursday, March 01, 2007
Berkshire Hathaway (BRK) Valuation
Today, Warren Buffett's holding company, Berkshire Hathaway released its earning report. The results were stunning - with 16.9 billion dollars of net worth added.
The annual letter provides a lot of details and is a joy to read. The worlds best investor clearly delivered in 2006 while adding significant positions to the equity portfolio and buying companies outright.
In this section we estimate the intrinsic value using two methods. First one is book value * multiple. The second one is a multiple of the book value.
For the first method, we will use two multiples - 1.9 at the low end and 2.0 on the high end. This gives a per share value of 132.5K at the low end and 139K at the higher end. The mid point between these two is 135.75K.
The second method would involve investments + sub earning * multiple. This is 80636 + ( 3625 * 12 ). This gives a value of 124316. This assumes that the insurance operations are worth only the investments per share. If we assume the insurance businesses are worth atleast 10 billion on top of the per share investments, it adds 6,600 per share. This gives a value of 130916.
Either way, we are looking at a valuation of 125K+ and currently the shares are selling at a 25% discount to intrinsic value.
The annual letter provides a lot of details and is a joy to read. The worlds best investor clearly delivered in 2006 while adding significant positions to the equity portfolio and buying companies outright.
In this section we estimate the intrinsic value using two methods. First one is book value * multiple. The second one is a multiple of the book value.
For the first method, we will use two multiples - 1.9 at the low end and 2.0 on the high end. This gives a per share value of 132.5K at the low end and 139K at the higher end. The mid point between these two is 135.75K.
The second method would involve investments + sub earning * multiple. This is 80636 + ( 3625 * 12 ). This gives a value of 124316. This assumes that the insurance operations are worth only the investments per share. If we assume the insurance businesses are worth atleast 10 billion on top of the per share investments, it adds 6,600 per share. This gives a value of 130916.
Either way, we are looking at a valuation of 125K+ and currently the shares are selling at a 25% discount to intrinsic value.
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.
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.
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