Patiently waiting pho growth…

vietnam

 

If a stock I suggest ever goes down a few points, I’m sure to get an e-mail from my uncle.  “I’m losing so much money in XYZ!” It used to make me feel bad.  I was the cause of someone losing money, they trusted me and I failed.  The horror!  First, stock investing is risky, I think that’s understood by most people.  Second, judging a stock on its daily performance, or weekly, or monthly, is much too short-sighted.  Investing for one month, one week, is a very difficult exercise, and unless you know something the market doesn’t (it’s called being a Martha Stewart), it’s something I would advise against attempting.

So, the ATG has a couple big movers in its first weeks of investing.  VNM (Market Vectors Vietnam ETF) has taken a turn for the worse, down about 7% since ATG bought an initial position 3 weeks ago.  The country itself isn’t in any real danger(at least I haven’t heard anything, but I’ve always been suspicious of Laos), but the index took a tumble.  VNM is one of the stocks Maverick and I agree on.  We want emerging market exposure.  Over time poorer countries with stable leadership should outgrow richer nations as globalization continues.  Vietnam is an underappreciated economy with over 70 million people and an average age of 29 years old.  It’s growing faster than its neighbors, and has a reasonably well-diversified economy.  (Services ~40%, Industry ~40%, Agriculture 20%)  They have crude reserves.  (It’s their largest export). 

This Vietnam index has retail, oil & gas, banking, fertilizer, and the largest company is a conglomerate that does everything mentioned.  The index will be a good  measure of the economic growth of Vietnam.  I’m looking forward to the next purchase so we can average down.  Nothing has changed with my long-term thesis, I can now just buy at a better price.  Of course this ties into risk management, and position sizing, which we will talk about another time.

 

 

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The Wizard of Och-Ziff

wizard

I like OZM. It pays out a large portion of the firm’s profit in dividends. Public shareholders own ~1/3 of shares outstanding, the rest is owned by management and employees. Financial interests are fairly well aligned.

 

OZM is a huge hedge fund. At March 1st 2014, OZM had a little over 42 Billion under management.

 

Get ready for some math:

 

They earn a management fee (% of assets under management) and an incentive fee (% of profits). In 2013 they earned ~1.5% management fee on an average asset base of $36 billion. That’s $550 million. This year average assets are 15-20% higher so let’s say $650 million in management fee. Expenses are compensation and SG&A, in 2013 that number was about $700 million. Because I’m a simple guy, I’m going to assume that management fee just about covers all fixed expenses. That means all profit comes form the incentive fee.

 

The incentive fee is split 2/3 to management (they own a lot of shares) and 1/3 to public shareholders. The incentive fee is ~20% of all profits. So for every 1 billion they make, the firm takes $200 million. Since there are less than 500 million shares(including management shares), every $500 million in incentive profit is worth $1 in Earnings (paid as dividends). ALL NUMBERS ARE APPROXIMATE, because that’s how I roll.

 

Ok. Now that we all understand the complex financial model, what do we expect the firm to earn in a normal year? Since inception the firm has returned a little under 10% a year, so we shall discount that and say 8% annual returns. (some years will be more and some will be less-DISCLAIMER) 8% of 43 billion is $3.44 billion and 20% (the incentive fee) is $688 million. That would be earnings per share of ~$1.4 mostly paid out as dividends.

 

I like this stock at $12 bucks because on average it’s going to have a pretty juicy yield. It has market exposure because most asset managers do well when the market goes up. I like that I get payouts every year. DIVIDENDS are my favorite.

 

So what’s the risk?

Well, OZM is currently under investigation for taking money from people you shouldn’t take money from. As a lesson for all, don’t take money from dictators, unless you’re Jennifer Lopez and it’s for a couple songs. Second their fund performance this year is a rocking 0%. 0% is not a good performance. While the stock tends to trade on performance, that’s pretty short sighted for an institution that isn’t going away anytime soon.

 

So I’m buying on dips. I’d own some here at $12 bucks. (Leave room to buy more) Be prepared for negative headlines, I occasionally use those to buy more. Let’s talk about this stock again in a year, and see what’s what.

Second Derivative

derivative

When a major news story breaks, stocks react instantly. First derivative stuff might take a little longer, while second and third derivatives sometimes never move at all. If auto sales plummet, GM is going to go down, but what about Goodyear? Or the company that makes robots for assembly plants? Or gas stations? Or highway toll companies? Finding that first, second, or third derivative can be a real way to find value before the market has priced in the news accordingly. BUT, while plotting a logical course from a seismic event is intellectually stimulating, conclusions drawn can often be too far removed for any financial impact.

Sometimes when a news story hits, I feel the obligation to find some moderately intelligent way to benefit from it financially. One story captured my interest recently; Tesla’s inability to sell to consumers directly in New Jersey. I was unaware that dealers are a mandated sales channel so that “consumers don’t get ripped off.” I see the benefit for the dealerships, as they don’t have to compete with a direct competitor who would have significant cost advantages. But I don’t really understand how the dealership structure benefits consumers or the manufacturers. The thought behind the law is that consumers need expert advice on car purchases, but in this day that just seems silly.

This brings me back to the group of car dealerships; PAG, AN, GPI, and ABG. Could Tesla’s push to sell direct-to-consumers affect buying habits of traditional car customers? Are dealerships outdated middlemen, when so much car information is available through other means? Probably.

But laws don’t change quickly and most of their money is still made from repairs. And the fact that I want to dislike a business model, doesn’t mean it’s bad. While doing something that makes sense intellectually can be quite satisfying, it’s not always a great way to make a buck.

Find me some out-of-favor brands!

My best trade in a long time:   I bought WWE a little over one year ago.  I bought it because I’ve owned the stock it the past and it was yielding over 5% and I love dividends.  Anything that gives me 5%, and I think the company will still exist it a few years and I think the dividend is safe, I’M A BUYER.  So apparently the TV contract is coming up and WWE is one of the few shows people actually watch live.  So the stock went up, and went up a lot. 

            So what did I learn?  First, dividends are the best.  The safety of a ~5% return makes stock price moves less painful.  Second, out-of-favor brands can have tremendous upside.  Check out ICON, or TUP, these are brands or companies that own brands that have been around forever, that were out of favor.  Playboy and Marvel are two decade old brands that got bought and were unvalued.  Yahoo, an out of favor media brand hires a new CEO and triples.

            On the flip side I did buy JCP at 20 and rode it down to 10 (ok, fine maybe 8).  I recently bought some again at $5.  I just can’t resist out of favor brands.  The problem with JCP is that it’s a retailer and not just a brand, but I just can’t resist the upside when people change their mind about a brand.   I think buying an out of favor brand, that has a history of at least 15 years is just too tempting. 

            I analyzed Marvel before it got bought, and looked at it two ways.   You can look at it as an EPS/cash flow story, on which the company was not cheap (it wasn’t too expensive either). Or you can look at it like, “Spiderman is worth at least 1 billion”. 

            Any good consumer brand companies out of favor right now?  Because I’m interested.

Car Dealerships:

There’s a group of publically owned dealership companies; PAG, AN, GPI, ABG.  As one can imagine these stocks have performed very well over the last 2 years, as the U.S. recovered and car sales bounced back from dramatic lows.  Dealerships have always been a profitable business with franchisees bestowed the exclusive right to pitch heavily branded wares.

            The public companies continue to buy up family run franchisees, consolidating and cutting out overhead.  I don’t see the OEMs flooding the market with franchisees, so these businesses will rise and fall with the fortune of their car makers.  GPI for example is 30% Toyota, and pretty well diversified for the remaining amount. 

            BUT…  I think you can see margins on new and used cars continue to decline.  With the proliferation of online pricing guides, getting anything above lowest available price is going to prove more difficult for dealerships.  Comparisons are easier, geography isn’t as important, it will be difficult to defend car sales prices. 

            Since I just thought about this in the shower, I have only looked up margins at Group One, and while small their selling margins are in decline.  In up revenue years that’s a strange event.  Thankfully service revenue margins are long and strong.  And while it’s only 10% of revenues, it’s 50% of the gross profit.

            So while I think the truecar.com, and kbb.com, etc… will change the economics of buying a new or used car, I don’t think it’s going to be the headwind I would need to short the group.  If cars keep selling these stocks will do well, and when the car stops selling, that’s when you can sell the stocks.

            Even if I think I’m ahead of a trend, it’s important to think about how much impact that trend will actually have.

-moMANon