Burlington Northern
Buffett's century long play
But not a bargain
Saturday, November 14, 2009
Friday, November 13, 2009
China Approaching Bubble Territory
China may be one of my favorite long-term bets, but articles like this make me think it's about to overheat in the short term:
There's other evidence that retail loan growth is getting to the point where the average Chinese consumer thinks they absolutely must max out their credit to avoid being left behind. That's the same mentality that inflated the U.S.'s housing bubble all the way until it burst in 2005-6.
I've been long FXI for a while, but soon I may start to take some money off the table.
China is doing what it can to expand domestic demand and rebalance its economy, President Hu Jintao said Friday, calling for renewed efforts to improve international financial oversight to prevent future crises.
There's other evidence that retail loan growth is getting to the point where the average Chinese consumer thinks they absolutely must max out their credit to avoid being left behind. That's the same mentality that inflated the U.S.'s housing bubble all the way until it burst in 2005-6.
I've been long FXI for a while, but soon I may start to take some money off the table.
Thursday, November 12, 2009
3Com: A Special Situation
HP announced a buyout of 3Com (ticker COMS) for $7.90 cash per share. I see the appeal, as HP's brand strength can help it sell 3com's product line in markets where 3Com has failed to penetrate.
This was too tasty for me to ignore. I bought some COMS and I'll hold it until the deal closes. It's that simple. No options plays this time. The annualized gain will probably amount to only around 4%, but that's better than any bond of comparable duration.
This was too tasty for me to ignore. I bought some COMS and I'll hold it until the deal closes. It's that simple. No options plays this time. The annualized gain will probably amount to only around 4%, but that's better than any bond of comparable duration.
Sunday, November 08, 2009
The Limerick of Finance 11/08/09
China knows Africa has it rough
And offers to help them build stuff
There's resources galore
A lot left to explore
With new wealth they'll all soon have enough
And offers to help them build stuff
There's resources galore
A lot left to explore
With new wealth they'll all soon have enough
Friday, November 06, 2009
Job Losses Have NOT Peaked
All of those fake jobs "created or saved" by the stimulus aren't showing up here:
Things aren't getting better here in the U.S. Even Berkshire Hathaway is cutting jobs, probably to raise cash to pay off all of that BNSF debt they'll assume. Monetary stimulus remains in place but the fiscal stimulus will soon wear off. When it does, stocks will probably (hopefully?) start to pull back to a lower level that reflects the true condition of the economy.
The unemployment rate in the U.S. soared to a 26-year high of 10.2 percent in October and employers cut more jobs than forecast, underscoring why Federal Reserve policy makers say interest rates will remain near zero.
Things aren't getting better here in the U.S. Even Berkshire Hathaway is cutting jobs, probably to raise cash to pay off all of that BNSF debt they'll assume. Monetary stimulus remains in place but the fiscal stimulus will soon wear off. When it does, stocks will probably (hopefully?) start to pull back to a lower level that reflects the true condition of the economy.
Thursday, November 05, 2009
Allied Nevada's Positive Earnings Surprise
Lo and behold, my one truly speculative gold play is finally paying off. ANV has reported its first profitable quarter:
Of course, it's just one quarter's numbers, but now there's a factual basis for the faith that I (not to mention George Soros) have placed in ANV. I bought ANV as a new-venture bet on its founders, but now I think I can put my thinking on firmer footing. My confidence in my ability to value established stocks (confirmed by Warren Buffett's purchase of Burlington Northern) leads me to believe I can construct a similar valuation for speculative mining companies.
I will soon begin constructing a formal valuation methodology for mining stocks. The principles are simple: The company's intrinsic value should be the dollar value of recoverable ore in the ground minus the cost of extracting and processing that ore for sale. The details can get complex, so I've got a lot of thinking left to do. I'll let you know when my model is ready.
Nota bene: Anthony J. Alfidi is long ANV (with short puts covered by cash) at the time this post was published.
Allied Nevada Gold Corp. ("Allied Nevada" or the "Company") is pleased to report its financial and operating results for the three and nine months ended September 30, 2009, including its first quarter of positive earnings in the third quarter of 2009. The results presented in this press release should be read in conjunction with the 10Q (third quarter report) filed with SEDAR and Edgar and posted on the Allied Nevada's website at http://www.alliednevada.com/. The financial results are based on United States GAAP and are expressed in U.S. dollars.
Of course, it's just one quarter's numbers, but now there's a factual basis for the faith that I (not to mention George Soros) have placed in ANV. I bought ANV as a new-venture bet on its founders, but now I think I can put my thinking on firmer footing. My confidence in my ability to value established stocks (confirmed by Warren Buffett's purchase of Burlington Northern) leads me to believe I can construct a similar valuation for speculative mining companies.
I will soon begin constructing a formal valuation methodology for mining stocks. The principles are simple: The company's intrinsic value should be the dollar value of recoverable ore in the ground minus the cost of extracting and processing that ore for sale. The details can get complex, so I've got a lot of thinking left to do. I'll let you know when my model is ready.
Nota bene: Anthony J. Alfidi is long ANV (with short puts covered by cash) at the time this post was published.
Wednesday, November 04, 2009
Buffett's Big BNI Buyout Bets On Buoyancy
Tuesday brought big news on Berkshire Hathaway's proposed buyout of Burlington Northern Santa Fe (BNI) railroad at $100/share, cash and stock. This transaction is a textbook window into Warren Buffett's equity valuation model.
Uncle Warren has dropped hints over the years on how he values a stock. Buffettology books (particularly those by Mary Buffett) have done an excellent job outlining his calculation of "owner earnings" (net income plus depreciation minus average capital spending), his use of the 10-year Treasury yield as a discount rate, and his preference for companies that consistently grow retained earnings per share over long periods.
I built an equity valuation model using these principles and got an interesting result. Discounting BNI owner earnings for the past four quarters at a discount rate of 3.5% (approximately the prevailing 10-year Treasury yield in recent weeks) results in a share price of slightly more than $150. Warren Buffett doesn't buy anything unless he can get a severe bargain, so paying $100 for a stock he believes is worth around $150 represents a 33% discount.
I believe Uncle Warren's key insight is his tweaking of the growth factor used in traditional DCF models. In place of the "b" retention rate for net earnings not spent on dividends, he substitutes the average long-term growth rate of retained earnings on the balance sheet. Multiplying this modified "b" by his version of ROE (owner earnings divided by shareholder equity) gives us the annualized growth factor "g" that he uses to estimate those future owner earnings.
I'm intrigued that Uncle Warren chose to assume BNI's relatively high long term debt load onto Berkshire's balance sheet. Apparently he thinks the cash flow from Berkshire's finance and insurance lines will be sufficient to pay that off. If this gamble works, it gives Burlington the operational freedom needed to continue investing in technological innovation.
It's almost a done deal pending regulatory hurdles. Anti-trust scrutiny will probably force Berkshire to divest its other rail holdings, namely Union Pacific (UNP) and Norfolk Southern (NSC). Forced selling of those large stakes might make them attractive plays for other value-oriented transportation sector investors. It would also give Berkshire additional cash if they need to sweeten this deal.
My play? I immediately sold a few short puts under BNI at 95 on the premise that Buffett's bid establishes a firm floor for the stock and will be approved without any glitches early in 2010. The worst-case scenario for this special situation would be a market dislocation that tanks Berkshire's own share price, forcing it to further dilute its own shareholders to maintain the agreed mix of cash and equity for this buyout. If my puts are exercised against me, my own worst-case scenario is that I end up owning a long-term position in either BNI (if the deal collapses) or Berkshire, two companies that the greatest investor of all time thinks are terrific to have.
Full disclosure: Anthony J. Alfidi is short Jan 2011 puts on $BNI at 95 (covered with cash) and holds no position in any other stock mentioned in this post.
Uncle Warren has dropped hints over the years on how he values a stock. Buffettology books (particularly those by Mary Buffett) have done an excellent job outlining his calculation of "owner earnings" (net income plus depreciation minus average capital spending), his use of the 10-year Treasury yield as a discount rate, and his preference for companies that consistently grow retained earnings per share over long periods.
I built an equity valuation model using these principles and got an interesting result. Discounting BNI owner earnings for the past four quarters at a discount rate of 3.5% (approximately the prevailing 10-year Treasury yield in recent weeks) results in a share price of slightly more than $150. Warren Buffett doesn't buy anything unless he can get a severe bargain, so paying $100 for a stock he believes is worth around $150 represents a 33% discount.
I believe Uncle Warren's key insight is his tweaking of the growth factor used in traditional DCF models. In place of the "b" retention rate for net earnings not spent on dividends, he substitutes the average long-term growth rate of retained earnings on the balance sheet. Multiplying this modified "b" by his version of ROE (owner earnings divided by shareholder equity) gives us the annualized growth factor "g" that he uses to estimate those future owner earnings.
I'm intrigued that Uncle Warren chose to assume BNI's relatively high long term debt load onto Berkshire's balance sheet. Apparently he thinks the cash flow from Berkshire's finance and insurance lines will be sufficient to pay that off. If this gamble works, it gives Burlington the operational freedom needed to continue investing in technological innovation.
It's almost a done deal pending regulatory hurdles. Anti-trust scrutiny will probably force Berkshire to divest its other rail holdings, namely Union Pacific (UNP) and Norfolk Southern (NSC). Forced selling of those large stakes might make them attractive plays for other value-oriented transportation sector investors. It would also give Berkshire additional cash if they need to sweeten this deal.
My play? I immediately sold a few short puts under BNI at 95 on the premise that Buffett's bid establishes a firm floor for the stock and will be approved without any glitches early in 2010. The worst-case scenario for this special situation would be a market dislocation that tanks Berkshire's own share price, forcing it to further dilute its own shareholders to maintain the agreed mix of cash and equity for this buyout. If my puts are exercised against me, my own worst-case scenario is that I end up owning a long-term position in either BNI (if the deal collapses) or Berkshire, two companies that the greatest investor of all time thinks are terrific to have.
Full disclosure: Anthony J. Alfidi is short Jan 2011 puts on $BNI at 95 (covered with cash) and holds no position in any other stock mentioned in this post.
Tuesday, November 03, 2009
Alfidi Capital Publishes Report on Put-Call Parity
Here's a short report I've created describing a way to find an arbitrage opporunity in a stock. I call it "Put-Call Parity Analysis of Market Ignorance." Read and enjoy.
Burlington Northern Santa Fe: A Special Situation
I haven't done much special situation investing lately, but today presents an opportunity that's too good to pass up. Rarely does one have the chance to ride the coattails of a master.
Warren Buffett has decided to go whole hog and buy BNI for $100 per share:
The offer comprises both cash and Berkshire Hathaway stock. I'll have more to say about this tomorrow as I believe I've succeeded in deconstructing Uncle Warren's valuation methodology. I played this by selling Jan 11 puts at 95 on BNI. This is slightly under the $100/share acquisition price, with the transaction expected to close in about 3 months.
Thank you, Uncle Warren, and not just for this opportunity to make some quick cash. Thank you for discussing your investment philosophy in public over these many years, because I think I finally understand it.
Warren Buffett has decided to go whole hog and buy BNI for $100 per share:
Warren Buffett's Berkshire Hathaway Inc. on Tuesday agreed to buy Burlington Northern Santa Fe Corp., making a $34 billion bet on the future of the U.S. economy.
The offer comprises both cash and Berkshire Hathaway stock. I'll have more to say about this tomorrow as I believe I've succeeded in deconstructing Uncle Warren's valuation methodology. I played this by selling Jan 11 puts at 95 on BNI. This is slightly under the $100/share acquisition price, with the transaction expected to close in about 3 months.
Thank you, Uncle Warren, and not just for this opportunity to make some quick cash. Thank you for discussing your investment philosophy in public over these many years, because I think I finally understand it.
Monday, November 02, 2009
Dollar Weakness Driving U.S. Manufacturing?
Declines in consumer spending haven't curtailed growth in manufacturing output:
The article uses tortured logic to ascribe the jump in manufacturing to stimulus spending. The claim that "rising sales led to a record plunge in stockpiles" contradicts the data showing the inventory index rising to 46.9 from 42.5; that number indicates that stockpiles are rising, not plunging. Maybe the plunge claim refers to data from earlier in the year.
I can only hypothesize that a weaker U.S. dollar is making U.S.-made goods cheaper in foreign markets. Let's see some trade data to confirm whether U.S. exports are rising, as indicated by the rise to 55.5 from 55 in their gauge of export orders.
Let's not forget that manufacturing comprises only about 12% of U.S. GDP. Any growth there is welcome if it makes us a nation of builders and producers once again.
Manufacturing in the U.S. expanded in October at the fastest pace in more than three years, a sign that factories will be the main drivers of the economic recovery in coming months.
The article uses tortured logic to ascribe the jump in manufacturing to stimulus spending. The claim that "rising sales led to a record plunge in stockpiles" contradicts the data showing the inventory index rising to 46.9 from 42.5; that number indicates that stockpiles are rising, not plunging. Maybe the plunge claim refers to data from earlier in the year.
I can only hypothesize that a weaker U.S. dollar is making U.S.-made goods cheaper in foreign markets. Let's see some trade data to confirm whether U.S. exports are rising, as indicated by the rise to 55.5 from 55 in their gauge of export orders.
Let's not forget that manufacturing comprises only about 12% of U.S. GDP. Any growth there is welcome if it makes us a nation of builders and producers once again.
Sunday, November 01, 2009
Effective Chinese Stimulus Needs Other Stimulators Too
China continues to grow (according to them, ahem):
How reliable are their figures? I wish I had more time to delve into that, as I'm kind of busy. At least China stimulated something important - manufacturing - whereas the U.S. stimulates transfer payments from one constituency to another. China also wants other stimulators to keep stimulating into infinity. So much for the de-coupling of emerging markets from the developed world.
Nota bene: Anthony J. Alfidi is long FXI (with covered calls) at the time this post was published.
The Purchasing Managers’ Index rose to a seasonally adjusted 55.2 in October from 54.3 in September, the Federation of Logistics and Purchasing said today in an e-mailed statement in Beijing. An index of export orders climbed to 54.5 from 53.3.
How reliable are their figures? I wish I had more time to delve into that, as I'm kind of busy. At least China stimulated something important - manufacturing - whereas the U.S. stimulates transfer payments from one constituency to another. China also wants other stimulators to keep stimulating into infinity. So much for the de-coupling of emerging markets from the developed world.
Nota bene: Anthony J. Alfidi is long FXI (with covered calls) at the time this post was published.
Saturday, October 31, 2009
The Haiku of Finance for 10/31/09
Happy Halloween
Bad numbers spooked the market
No treat for the bulls
Bad numbers spooked the market
No treat for the bulls
Friday, October 30, 2009
Consumers Prepare Early For a Blue Christmas
It is definitely not a good sign to see consumers caving in just as the stimulus effort is expiring:
Here's our first inkling of a weak Christmas shopping season. I'm trying to avoid confirmation bias, but that's hard when I see stories like this one. It's even harder when federal lawmakers scramble to extend the first-time homebuyer tax credit.
Americans cut spending for the first time in five months and a gauge of confidence weakened, signaling consumers will make a limited contribution to the recovery without government incentives.
Here's our first inkling of a weak Christmas shopping season. I'm trying to avoid confirmation bias, but that's hard when I see stories like this one. It's even harder when federal lawmakers scramble to extend the first-time homebuyer tax credit.
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