Barron’s observations October 17 2015

Excluding the news summaries, there have been three table-pounding endorsements of JPMorgan (JPM) in the last few days; first two were in the print edition, the third online.

1: Fund manager Chris Davis’ review of financial stocks recommends JPM, with the quote: “Jamie Dimon may be the greatest financial executive of my time.”

2: The Follow-Up column revisits an earlier recommendation of JPMorgan:

JPMorgan looks as good as it did six months ago at the time of our cover story. Under CEO Jamie Dimon, the bank has invested in key businesses and is a leader in investment banking, credit cards, and asset management. It is also looking to trim expenses.

At the current price, investors get a best-of-breed bank, with a management team that arguably is the industry’s best,”

3: “A Mega-bank selling at a discount price” on October 15 online.

JPM is at 62 now, yielding 2.8%. Great.

jpm 10 years

This performance almost identically tracks Wells Fargo, which is the other “well managed” money center bank. Heck there are really only four now, and let’s accept as a given that Citi and Bank of America were less well managed.

JPM v. WFC

But I can never get excited about these things. The Jaime Dimon-is-a-superb-manager seems to be one of the very non falsifiable managerial propositions. Maybe it’s not falsifiable because it is true. But a _great_ manager would have steered clear of the financial crisis. A better-than-others just avoids bankruptcy better than others. I’m not excited about this and feel when JPM is so regularly getting the drum beaten at Barron’s (which also had an article enamored of regional banks) my gut says pass.

 

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Coverage of the Dell buyout of EMC was a bit lazy spread out through the magazine – recommending that one could make 19% on an arbitrage over the deal. Not if VMWare ($69) continues to dive, a possibility only lightly explored in that article but was visited elsewhere.

There was a decent piece on the tower operators for cell phone companies, focusing on AMT ($96), CCI ($81), SBAC ($110): perhaps beneficiaries instead of victims of Google Fi/Fiber rollout (not mentioned in the article) as well as the national emergency system. Central contention from Alexander Eule is AT&T can’t let quality degrade more so fears overblow.

 

Musings on Autodesk…

I got an investor deck for a startup that was going to “disrupt” Autodesk. Pfft is my first thought. They have an enormous operational moat I replied and…then thought in the back of my head, why not look at Autodesk (NASDAQ: ADSK) itself. But it slipped my mind. Who thinks of Autodesk these days?

Then Alexander Eule of Barron’s wrote September 26th about Autodesk, which may as well be known as AutoCAD, after their dominant engineering design suite. They are undergoing a pricing change, shifting from boxed-perpetual to cloud-licensed product. Adobe is in the midst of completing their own pricing transition, to much applause from the street. The primary source for the article is Rob Nicoski of Disciplined Growth Investors who sees, if the transition is well executed, “a company with earnings power of more than $4 a share in five years.”

Aside from a pricing transition it’s pretty easy to conceptualize a large growth driver in the coming years: widespread – maybe even consumer adoption of? – 3D printing.

Autodesk over the years

Autodesk over the years

Does the Adobe chart presage anything for Autodesk investors?

ADBE max chart oct 2015

Beyond the fashion of cloud applications – though that’s a relevant consideration for investors looking to have multiples expand, the cloud subscriptions can also significantly reduce the piracy rate that afflicts so much high value software. In Autodesk’s case, that’s estimated at 43% (in this investor report, slide 20)

Autodesk like most tech companies has the problem of explaining GAAP to non-GAAP (meaning, huge employee option grants off the books) expenses but assuming market reception to his remains neutral, the product & cash roadmap is intriguing. From the investor presentation at 2015’s investor day in September:

ADSK key takeaways from Sep 2015 shareholder meeting

adsk recurring rev and projections

These numbers bear a great deal of similarity to the analyst estimates’ provided for stories in Barron’s so the likelihood of them should be taken with a grain of salt. That said, engineering and design software is awfully sticky, and deeply embedded into business processes that it would be harder for a start up to disrupt.

Autodesk has under-performed, severely, similar design-oriented software firms like Adobe & Ansys: almost no return in the last ten years versus a 300%+ and 150%+ return.

Autodesk, Adobe, Ansys comparison 10 year

Adobe’s break to new highs in December 2012 at around 36 presaged an enormous run to the low 80s today – though perhaps a bit ahead of itself now, with an unfavorably received earnings report tonight.

After a decade of lackluster performance there’s a lot of execution to prove. Waiting for a new high in ADSK might leave a lot on the table but that’s preferable to dead money for another ten years. With a market generally threatening a downtrend, there is no particular need to jump in now either. This is a classic case of wanting to follow quarterly reports to see when there is a good market response to successful strategy implementation. One is tempted to nibble at it now.

That said, if the product pricing strategy works, and the engineering software market widens or deepens, long dated call options are an interesting play. Open interest is high in the ADSK Jan 2017 60 and 65 calls, with a last ask of $2.11 & $1.39 respectively. Jan 2018 calls are more thinly traded, with a 70 strike at $2.60 ask, $2.20 last. Maybe not bad for the pivot potential in a stock that was at 63 not so long ago this year until cash flow fears materialized.

 

 

 

 

 

 

 

 

 

 

Some Summaries from week of 4/19/15 – $TSLA, $MSFT, $AMZN, $QCOM

Tesla Price Targets Pull Away From Profits: a classic example that momentum stocks really trade on fictional earnings reports. They’re irrelevant, til they’re not.  $TSLA (218)

Wall Street Journal graph of TSLA earnings projections

 

Amazon Reveals Just How Profitable the Cloud Can Be: by Tiernan Ray.  Ultimate conclusion is that Microsoft’s Azure is doing well too.  Which would you rather invest in, $MSFT (47) or $AMZN (445) a cloud provider in a hugely profitable if diminishing cash cow or one “trapped in a retailer.”  Unresolved: is Azure a function of that dying business of companies running on Windows?  Microsoft got other loving mentions in Barron’s as well from the usual spreadsheet watching crowd.

A Recharge for Qualcomm.  Can Jana partners get $QCOM (68) to split off the licensing from the chip business?  This is an article very related to the above MSFT & AMZN discussion so far as shareholders are concerned.

Let’s Take a Short Ride, a Heard on the Street Column from April 18-19 suggested the desirability of a strategy as follows:

bet against the 10% of stocks with the highest days-to-cover ratios, and bought the 10% with the lowest…it would have fared from the start of 1988 to the end of 2012.  The results: a return of 2,917%–almost double the total return of the [DJIA].

 

Shorting high-day-to-cover ratio WSJ chart

 

Fi Fiber Fo Fum, I Smell the Blood of a Telcoman

Long anticipated Google Fi is here. Specifically uncovered in regulatory filings last fall, providing a (good) network was a natural extension for a firm whose growth comes from increased internet usage.  It turns out to have been considered since at least 2007.  On Fi you’re on a, you guessed it, Wi-Fi network first.  If none is available you get Sprint and T-Mobile’s Network, whatever is working best at the time. No doubt Google’s wireless network to come to help replace, ahem, compliment them.

This comes on top of — and ultimately related to — Google Fiber.  One report a year ago had Google Fiber winning 75% market share…and 30% of low income households where after all the service at 5 megs is free.  Who cares if Time Warner and Comcast had merged or not?

Free – or less than free – is tough to beat, and the writing is on the wall.  Verzion and AT&T have higher quality networks…for now.  As Bill Gurley says in the link regarding the GPS market:

Despite these challenges, it would be a dangerous strategy for any of the many threatened players in these markets to hang on to this “quality” rationalization for very long.

It’s hard to see how the cable and telco stock prices haven’t tanked in anticipation of the forthcoming price war against Google that only Google (or Facebook, or Amazon, or Apple) can win.

End of 4/24/2015 prices of giants that could fall:

T: $34.01 (5.7% dividend yield)

VZ: $50.03 (4.5%)

S: $5.27 (0)

CMCSA: $59.64 (1.7%)

GOOG: $565.06 (0)

 

 

 

Nov 27 2013 Positions & Quick Notes on Future ones

* Successfully shorted ZN last few days, lowered the position size for unusual time period.  Long March Wheat at 662.75, short Twitter at 41.  The wheat has a nice risk-reward and I’ve put in a stop under the lows.

* Really liked Stanley Druckenmiller’s interview on Bloomberg including comments on what great managers are for, and that Japan’s Nov-May seasonal rise is one of the most reliable in the world (including 40k to 7k overall decline, you’d still have made money.)  Suggestion of shorting IBM given cloud computing challenge and their use of capital is a compelling idea that deserves more investigation (the low p/e as is makes me wonder about risk-reward versus other short possibilities.)  Declining free cash flow argument works even better against NFLX for example.  The Amazon comments – that AWS could be half of revenue soon also merit further examination.

* Looking closely at NFLX, HLF, TSLA, P, LNKD on top of TWTR as shorts.

Intuit’s PR Push

Barrons and Forbes both did big profiles on Intuit (INTU 58) this weekend.  When this happens it’s not likely by accident and you can thank a good PR company.  Rising stock prices affect the likelihood of feature articles.  Reporters want to explain to their readers what is going on, and whether to get on the bandwagon.  Sometimes they do themselves. Continue reading

Tale of Three Once and Future Dividend Providers, April 1996 to present

Investor return can come from appreciation, or dividends.  Microsoft (MSFT 31) announced this week the quarterly dividend will be raised to .23/quarter, going ex-dividend November 13.  It yields 3%.

I thought this would be interesting to compare to GE as classic growth stock, and Altria as a “high dividend payer” from the same approximate time.

If you’re even vaguely familiar with the market you’ll know MO & its descendants are going to come out ahead on total dividends, but what about total appreciation as well?

MSFT:

Microsoft paid a $3 special dividend in 2004, and has paid a dividend since 2003, starting at a humble .08 for the year.   In the fiscal 4th quarter of 2004, the dividend went quarterly at .08.   The dividend is unlikely to triple in the next eight years — for one thing the payout ratio has gone up.

It will have paid a total of $7.02 in dividends.  For those long term holders, this means if you bought in April 1996 congratulations you’ve just (before taxes) recouped your investment — of then a maturing company ten years after its IPO.   (This was a full two years after I made the worst investing decision of my life, selling the little America Online because Microsoft was coming to get it.)

Chart forMicrosoft Corporation (MSFT)

The classically safe large cap growth stock, GE, traded at 14.4 in April 1996 (now a humble 22, but probably a touch undervalued.)

GE has had their ups and downs of dividends, cutting it notably to .10/quarter in the financial crisis.  From the summer of 1996 you would have had $11.57 of dividends from GE (Genworth shares appear not to have been spun out to GE shareholders, but had some dividends they did.)

Chart forGeneral Electric Company (GE)

MO:

Phillip Morris a.k.a. Altria is the classic dividend stand out.  You would have made your $34.6 investment back in Altria dividends alone, $35.06 since the summer of 1996, but there is also Kraft and Phillip Morris International which were spun out in 2007 and 2008 respectively.

Each MO share got .692 of a share of KFT which has generated $6.51 of dividends, for $4.51/share.

Each MO share got 1 Phillip Morris International PMI share, which has delivered $11.35 of dividends.

$50.92 in total dividends of MO and its two major spin offs in the same time.

Chart forAltria Group Inc. (MO)

Chart  for Kraft Foods Inc. (KFT)

Chart forPhilip Morris International, Inc. (PM)

For total return calculation purposes you’re still ahead with Microsoft, but barely.

You’d have approximately $150 per share from that $34 investment, 440% price appreciation that is nearly identical to Microsoft’s, with higher dividend return!

I did hold MO, PM and KFT in a retirement account — to avoid the dividend taxation for a number of years, and reluctantly (and foolishly) sold to go into TBT instead.  Is the next MO…MO and its heirs?  Buy and hold is tough for me to stomach but when the right stock is found the results are spectacular.  MO was the classic poster boy for Jeremy Siegel’s The Future for Investors and it has held since the books’ publication.

Yield-hungry investors have piled into stocks like MO and PM and I think I will wait for a drop to get back in.

 

Lessons for Big Retail from The Great A&P and the Struggle for Small Business in America

Marc Levinson has a good history of one what probably should be characterized as the first dominant grocery retailer in America, the Great Atlantic & Pacific Tea company, or as ever more frequently known, the great A&P.   Histories of retail often benefit from the abundant number of records kept and A&P is no exception save for a mysterious void of corporate records from the 1920s.  This is an unfortunate loss whose vacuum is filled more by minuate of political response to A&P, most notably in the person of Congressman Wright Patton.  The more juicy loan  made by John Hartford under apparent pressure to Elliot Roosevelt is comparatively unexplored!

Continue reading

LULU to become a Downward Facing Dog?

I am looking into where a short short entry point is on Lululemon Athletica (LULU, $77).  There is motivation aplenty.  Competition from Gap’s Athleta?  Patents on pants?  Rising inventory?  Color Bleeding?  Who is John Galt?  Landmark Forum participation (see the correction obviously added after some legal notice)? One can over-react to errata but I’ll hone in on other details the website has spacing errors after periods:

 The training program was such a success that the lululemon people have created a life for themselves that most people could only dream of.lululemon is a company where dreams come to fruition.

Notifications about particular stores include information that the Walnut Creek, California store will in fact be open on July 4th.  Congratulations.  For a company whose prime value is brand identity these scratches on the fender do reduce the value of the car.

Chart forLululemon Athletica Inc. (LULU)

A small position probably could be had now with a stop over the spring highs…will look more closely in following days.  I feel bad to have missed the (first big?) decline in Deckers DECK 45, whose story has some eerie parallels with LULU

Chart forDeckers Outdoor Corp. (DECK)

LULU is a sloppy company, poorly managed, riding a fashion craze and about to hit severe price competition.  SHORT!  Namaste.

POSITION UPDATE: Soybeans vindicated today, only commodities position now.  Bought some ZNGA outright as it heads into a ferocious short squeeze.  Out of ANF.

Lazy Data Sets and Technology Dividends

Bloomberg reported and Barron’s amplified a very weakly corroborated story that technology stocks underperform when they begin to pay dividends.   Timothy Ghriskey of the Solaris Group among others claims it’s “probably not a good thing.”  The proof of this?

Apple Inc., Dell Inc. (DELL) and SAIC Inc. (SAI) are among the 13 companies in the S&P 500 that have initiated a quarterly payout this year, according to data from S&P. Dell dropped 11 percent and SAIC slumped 6.9 percent since announcing the decision, while Apple is up 13 percent.

and

Investors who bought Microsoft after the world’s biggest software maker started paying 8 cents a share in 2003 would have been better off owning its competitors. The Redmond, Washington- based company rose 5.9 percent that year, compared with a 47 percent surge for S&P 500 computer stocks. Technology companies that don’t pay a regular dividend make up seven of the 10 biggest gains in the industry since January 2003.

Ten years sounds like a long time in the course of things but this particular ten year period comes after:

a) a significant change in 2002 in the tax treatment of dividends, lowering the rate to 15% at the federal level: this ironically may have made some companies give out more in dividends than they should (see: Citibank!)

b) the largest run up in the history of technology stocks followed by a two year shake out when nearly every non-dividend paying technology stock dropped by 90%+.  A tweak of the window of study to fifteen years would generate tremendously different results.  Nearly _any_ 10 year period would produce dramatically different results.

c) Microsoft announced a $3 special dividend in 2004, characterized by Rick Sherlund, the famed Goldman Sachs software analyst as “breathtaking.”  So besides the fact from the second quote MSFT’s peers were coming off lower lows this alone was a 10% return.  The theory of risk-adjusted returns has some flaws, most notably how one calculates risk but if you were to look at risk-adjusted returns with this special dividend in mind the results were almost certainly different from what is described.

Dividend paying “tech stocks” including IBM, Texas Instruments, and the like almost certainly outperformed non dividend paying stocks; it is the tech companies that _cut_ their dividend (Kodak, Xerox, etc.) which is probably the more reliable forward-looking indicator.

It’s true dividend paying tech stocks are in a different phase of their corporate lives, and are no longer as high growing (read: capital intense.)  But high growth famously comes at a price for technology stocks.  Investor return?  That’s another matter.  In Jeremy Siegel’s “The Future for Investors” he writes about stock returns up to 2003 (p. 126):

From 1871 through 2003, 97 percent of the total after-infaltion accumulation from stocks comes from re-investing dividends.  Only 3 percent comes from capital gains.

Technology companies do really stupid things with large cash piles; even small tech startups lose discipline when they get their Series A wires in.  That technology companies return capital as large cap growth companies should be expected and should be demanded.  If you can find the 5 successful hypergrowth tech companies out of the 100 or so possible by all means skip the MSFT dividend.

 

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