Friday, October 28, 2005
Thursday, October 27, 2005
Mailbag: Wal Mart - The Capitalist Pig
- The wages that Wal-Mart pays are the byproduct of supply and demand, if we had a larger layer of educated people than Wal-Mart would have to pay higher wages to attract a smaller supply of of less educated labor - laws of economics.
- The consumer is less wealthy not because of WMT, but because of the external cirucumstances that have nothing to do with WMT - high enery costs, unaffordable healthcare, corporate investments in productivity, etc...
- I could be wrong, but I thought Ford's (F) biggest achievement (and a competetive advantage for awhile) was a creation of conveyor lines and specialization of production. It allowed for Ford to make cars cheaper than its rivals. Ford was able to pay higher wages because it was more efficient than everybody else. Arguably that's what set WMT apart from its competition from the very beginning - efficiency. However, as inventory management technology became ubiquitous, its competitors became more efficient, thus WMT needed a different edge - its size is providing that edge: bargaining power.
- Nobody has to sell goods at WMT, nobody forces suppliers to sell goods there - it is there choice.
- I agree with you on the last point - Wal-Mart will have to adjust to market forces even if that force is public opinion - that is how the free market works. Involvement of political "leaders" or unionization are not the solutions. If people will perceive that WMT abuses its workers - they'll stop shopping there (if they can afford to). Public opinion is growing more negative on WMT and if I worked for WMT I probably wouldn't like it much either. But I have a luxury of not having a personal involvement with WMT thus my opinion is unbiased. Wal-Mart may have to figure out how to do even more with less, but higher paid labor.
Vitaliy N. Katsenelson, CFA Copyright Minyanville.com This article is written for educational purposes only. It is not intended as a recommendation (or advice) to buy or sell securities. Author and/or his employer may have a position in the securities discussed in this article. Security positions may change at any time.
Wednesday, October 26, 2005
Wal Mart - The Capitalist Pig
Thursday, October 20, 2005
Thoughts on Abbott Labs and Lloyds TSB
Wednesday, October 19, 2005
The Good, the Bad and the Ugly – US Bank - 3rd Quarter 2005
Wednesday, October 12, 2005
A Good Company Versus a Good Stock
October 12, 2005 - Minyanville
October 12, 2005 - Minyanville
I know very little about baseball. Football (a sport that is insulted in this country as soccer), hockey and chess (a spectator sport in
As you can see I’ll not make the MIM3 (Minyans in the Mountains conference) softball team. Also, I cannot relate to baseball analogies very well. However, I can relate to the comment John Succo (fellow contributor) made yesterday about waiting for your pitch and controlling emotions while trading (and investing).
Investors often don’t make a distinction between a good company and a good stock – a very important and often an emotional error. It is perhaps one of the biggest fallacies in investing.
It is very easy to identify a great company: it has great brands, a bullet proof balance sheet, often great margins (true for consumer but not the case for retail stocks), high return on capital – the usual suspects. However, EVERYBODY recognizes those qualities and thus turning these companies into “religion stocks” - you-cannot-go-wrong-owning-this-company type of stocks and thus pushing their valuations to ridiculous levels.
The sad reality is: Yes, you can go wrong owning these kind of stocks. Pull up a ten year chart for almost any super large cap stock (it doesn’t have to be a technology stock). I’ll throw in some names: WalMart (WMT), First Data Corp (FDC), Microsoft (MSFT) (ok it is a technology one), Cintas (CTAS), Coca-Cola (KO), Colgate-Palmolive (CL), Procter & Gamble (PG), Pfizer (PFE) (is still far below the Viagra high) … I can keep typing... there are plenty of great companies that have not gone anywhere since the late ‘90s. Everybody will recognize the aforementioned companies as icons of corporate
Most of these companies (probably with exception of KO) have grown earnings in low to mid teens but their stocks still have not gone anywhere. As earnings were growing those very high P/E’s were shrinking and coming come back to earth.
I look at more than a hundred companies every year at various levels of analysis. Often I find a company I’d love to own because of the quality of its business, however, its stock doesn’t meet my valuation criteria. I put that company on my watch list. To be more exact I figure out what P/E (or price to cash flows) I am willing to pay for the stock and once it reaches my valuation target I’ll take a second look. Cintas (CTAS) is a great example, I looked at the company in 1999 – loved the business, but the stock was too expensive. Finally it is approaching my valuation target, though it is not quite there yet, however, once it does I’ll have to take a look if the fundamentals that I liked six years ago are still intact.
I take separating companies and stocks very seriously. In fact my graduate students have to make two conclusions in their analysis: is it a good company and is it a good investment. They are two very different conclusions to make.
I found that creating a watch list allows me to take the emotional element out and avoid falling in love with a stock. Also for every stock in our portfolio I set a P/E (and/or price) level at which I’ll sell the stock. Thus when it reaches our target the decision to sell becomes unemotional.
I wrote a very important article on the psychology of “religion stocks” – I recommend you read it as part of this discussion.Vitaliy N. Katsenelson, CFA
This article is written for educational purposes only. It is not intended as a recommendation to buy or sell securities. Author and/or his employer may have a position in the securities discussed in this article. Security positions may change at any time.
Tuesday, October 11, 2005
Show some respect for a solid British bank
Thursday, October 06, 2005
- I was educated in the United States and though I do speak and read Russian, my Russian business vocabulary is very limited. Speaking in Russian on a business topic is a very painful experience as I keep looking for the appropriate translation for investment / business words.
- I don’t know Russian GAAP, nor do I trust the numbers put out by Russian companies. That being said (to be fair), the Enron and WorldCom disasters did not happen in Russia. But Russia is still riddled with corruption. Bribery is widespread, though it is not an official expense line on the income statement – it should be - as it is a cost of doing business in Russia. I resented bribery all my life, it is opposite of taxation (not that I am big fan of taxes) – economic resources are shifted from the poor to the rich. The majority of us never encountered bribery that is instilled into the economical and political system. I remember when we were leaving Russia for the United States, on the way to the airport (a forty mile stretch), our car got pulled over three times by the police for no reason at all and every time the policemen wanted a bribe to let us go. We obliged. These types of incidents don’t cultivate fondness about the country and put it at a significant competitive disadvantage. Maybe that is in part the reason why Singapore has such a successful economy – the most uncorrupt country in the world (albeit without any bubble gum).
- The US stock market is much more fun to follow; it has a lot more breadth and width than the Russian market. The Russian stock market is dominated by three industries: energy, industrials and banks – very limiting in terms of constructing a diversified portfolio. I suspect that high oil prices are the reason why the Russian stock market (and economy) has done well lately. I would not want to have my future tied to only one single commodity.
- I left Russia and never looked back. It honestly still puzzles me why I write about it. I have mentioned several times before, and I’ll do it again – I am a capitalistic pig (and I think like one). In the 1980’s Brezhnev came up with a slogan: “The economy has to be economical” – I am still not sure what that means.
Personal Note: My memories from living in Russia are mixed. All of my fondest memories come from my family; all the bad ones came from the external environment – secondary school and college etc. I was not a good fit within a culture that encouraged uniformity and discouraged creative and descending thinking. Vitaliy,
Thanks for your terrific message. I am a bit perplexed however as even the Russians acknowledge their exports of crude oil have peaked and will decline soon yet you say: “Political stability in Russia will insure a stable flow of energy resources out of Russia. “ Where are these extra “energy resources?" The KGB has always lied yet even they say their energy exports have peaked. What do you know that the rest of us do not? They have been stripping assets rather than investing in new productive capacity [as you point out] so how does this lead to more energy rather than a decline as even the KGB acknowledges?
Russia and Oil
J, I think you are making an excellent point. You are right about Russian production - it has peaked. Privatization in large was responsible for oil production growth in Russia, as economic (free market) incentives that were put in place stimulated production growth (production grew from 6 million barrels a day in 1998 to 9 in 2004). On another hand, de-privatization of oil companies is likely to do the opposite. Gazprom going on an acquisition spree and becoming one of the largest oil companies (if not the largest) affirms that fear, as it will be run to maximize cash flows for the short run (you said it: thus stripping assets rather than investing in new production). I cannot argue with that logic as it makes total sense.
This paragraph also confirms your point: “Press reports from January 2005 are already attributing late 2004 production decreases to the Yukos 'affair.'" Also, a recent report from the Siberian branch of the Russian Academy of Sciences says that nearly 60% of all proven reserves in Western Siberia are near depletion.” As I mentioned I really don’t follow Russian markets very closely, I spend most of my time analyzing U.S. and lately European companies (our play on a belief that dollar will weaken). However, talking to my relatives (especially my father who follows Russia very closely), I gather that there is a lot of pressure on Putin to please retirees.
It is very likely that Gazprom’s oil/gas revenue will be diverted from capital expenditures on improving existing production and looking for more oil/gas to raise or probably just maintain pension benefits to retirees - an enormous liability for Russia. However, a very sad reality--relatively low life expectancy (61 years (men), 73 years (women) Source: UN) is working in Mr. Putin’s favor.
In my article I was making a general point, that the flow of oil out of Russia will be less predictable and lower in case of political unrest. So in other words, the bleak picture of peaking production (that you and I agree on) is likely to get bleaker in case of political unrest. And lower oil prices (not a prediction, though I do believe in mean reversion) are likely to create that political unrest. -Vitaliy
Did I just comment on Russia again?
My friend John Ray pointed out an excellent Business Week article that describes surging Russian government spending. Budget expenditures surged from $34 billion in 2000 to $129.5 billion this year, where tax revenue grew even faster, from $40 billion (in 2000), to $153 billion today. My limited knowledge of government spending tells me that it is a lot easier to raise spending than to cut it, thus this increase in spending is likely to stick while oil revenues may not. Note though that Russia did use oil revenues to payoff a very large chunk of its foreign debt.