Wednesday, August 16, 2006

Random Thoughts

I wrote these short comments on between August 14-16.
It's what good managers do to win ball games
At MIM2 (Minyanville in the Mountains 2) Jeff Macke and I discussed how being a public company impacts management's decisions, where management may do things that are not necessarily good for the long run of the business to please the short-term, result hungry Wall Street.
This excerpt from Lion's Gate Entertainment (LGF) is a good example of that.
Analyst: There does appear to be a move towards really squeezing those windows closer together. I am wondering what the pros and cons of that are.
Jon Feltheimer (CEO): We think 16 weeks is still about the right amount between windows. I do not think we see really compressing them much more than that. I think there are times, particularly as a public company, when you are trying to get certain revenues within your fiscal year, and you move a movie a couple of weeks, so maybe the window changes a little. Life Sentence
A WSJ article highlights how dysfunctional French labor laws are. Two-thirds of France Telecom's employees, for instance, have civil-servant status - a job for life guarantee. This is shocking, since this is a company that is fighting for its existence in the fast changing world of telecommunications. The majority of its workforce have little incentive to work. The article highlights the hoops the company has to jump through to convince its workers to voluntarily retire.
The employment for life mentality only works when there is no competition or when you compete with other employment for life entities. Meanwhile, employment-for-life Europe is competing with the rest of the world which operates under capitalistic conditions (employed until you create value), or even worse - sweatshop-like conditions, 20 hours a day, no-lunch labor laws.I don't know how Europe can remain competitive when it is still stuck in the 20th Century pre-flat world.
Danger of Cheap Stocks
By definition, a value investor is enticed by “cheap” stocks. However, quite often “cheap” stocks are cheap for the right reasons: fundamentals deteriorate or expected growth rates don’t materialize - welcome to the value trap, the value investor’s hell. I wish there was a silver bullet that would keep the investor out of value traps, but there isn't. Investors might want to do an un-American thing – assume a cheap stock is guilty of been cheap for the right reason until proven otherwise. The burden of proof should be on NOT buying the stock.
Though I don't short stocks – I run long only accounts, I believe an ability to short stocks may make investor more objective. A long only manager often lacks the dark (short) side’s perspective. The ability to walk on the dark side forces investors to look at the negative more objectively.
I’d love to spend as much time in value investor’s hell as the next guy. I’ve stepped in my fair share of value traps and (publically) avoided a few (here and here).
Recently I looked at Cedar Fair (FUN) which attracted me with its 7.6% dividend yield, however, as you’ll see from this article, I found that the risk profile of the company has increased exponentially after it bought Paramount Parks from CBS and dramatically leveraged its balance sheet. Though Cedar Fair may be able to maintain its dividend over the years (it will unlikely be able to raise it by meaningful amount), an economic slowdown or bad weather or any other unforeseen event (earthquake, hurricane, flood etc...) will put the company’s ability to pay its dividend in jeopardy.
Large and In Charge
A couple of weeks ago I wrote an article for the FT which also FT, making a case that quite a few large cap growth stocks like Microsoft (MSFT), Wal-Mart (WMT), Johnson & Johnson (JNJ) are trading at very attractive valuations. Their earnings more than doubled or tripled since the late 90s but the stocks have not gone anywhere, for the right reasons I might add - they were overpriced.
I believe the investors in these stocks that bought them in the early 2000s fell into what I call a "relative valuation trap" as they appeared cheap relative to the end of the bull market valuation. I believe today they are cheap on a more important absolute basis. However, after I wrote the article, I received several dozen "right on" emails and only one "you are out of you mind emails," this tells me I am probably too early as too many people agree with me.
Vitaliy N. Katsenelson, CFA


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