Posts tagged ‘Bill Ackman’
Searching for the Growth Stock Holy Grail
Remember Research in Motion (now Blackberry Limited – BBRY)? What about Krispy Kreme Doughnuts? How about Crocs (CROX)? Or maybe even Webvan, the online grocery delivery company that went bankrupt during the bursting of the dot-com bubble? These are all examples of once heralded growth companies that lost their mojo along their growth expansion ways.
Not every stock can grow to the $80+ billion market cap stratosphere like Apple Inc. (AAPL), Starbucks Corp. (SBUX), and Wal-Mart Stores (WMT), so finding companies with the right mixture of growth characteristics can be challenging. Objective stock market observers can disagree on the ingredients of a successful growth stock recipe, but generally speaking, the real explosive appreciation in stock prices come from those companies that can compound earnings growth over longer periods of time.
But how can one discover the Holy Grail of compounding earnings? At Sidoxia Capital Management, there are a handful of key factors we look for in successful growth companies. In the hyper-competitive global marketplace, these are crucial questions we want adequately answered before we invest our clients’ money:
- Does the company sell a product or service that cuts costs?
- Does the company offer a product or service with unique entertainment value?
- Does the company offer a superior product or service compared to its competitors?
Even if a target investment can affirmatively answer two or three of these questions, often the most important question is the following:
- Does the company have a sustainable competitive advantage in providing a product or service?
If the company does not have some type of durable competitive advantage, then some other company can just copy the product or service, and sell it at a lower price. This sadly leads to margin and P/E (Price-Earnings) multiple compression – both negative outcomes.
The aforementioned factors are not the end-all, be-all for successful growth stocks, but rather the minimum price of admission. Even if the previous criteria boxes are sufficiently checked off, the company being researched must still be fairly or attractively priced. For example, it doesn’t take a genius to figure out Apple is a successful company with unique advantages. More specifically, the company has $240 billion in cash, $50 billion in profits, and $215 billion in revenue. The real question becomes, is the stock fairly or attractively priced?
Although Apple appears attractively valued at current prices, in many other instances that is not the case. Often, great companies have been discovered by a large swath of investors, and therefore trade at significant premiums, which increases the risk profile or reduces the upside potential of the investment.
Sucking the Last Puff
If a company’s product or service isn’t superior, cut costs, or entertain at a reasonable/attractive valuation, then investing is like taking the last puff or drag out of a cigarette butt. Some value investors are good at this craft, but often these managers get caught into so-called “value traps” – ask Bill Ackman about Valeant Pharmaceuticals (VRX). Many value investors thought they found a bargain when they bought Valeant shares after it fell -80% in price. The stock subsequently has fallen another -50%…ouch!.
It’s worth noting that growth can come from many different areas. Even mature industries can produce periods of cyclical growth, however identifying cyclical winners is challenging. The art for the investment manager is determining whether growth in a target investment is sustainable. In many instances, companies temporarily benefit from a rising tide that lifts all boats, before the tide goes out and sinks fundamentals down to lower levels.
Growth investing can be a dangerous hobby for short-term traders because the price volatility stemming from ever-changing earnings growth expectations creates excessive trading, taxes, and transaction costs. However, for long-term investors, the great growth manager, T. Rowe Price, summed it up best here:
“The growth stock theory of investing requires patience, but is less stressful than trading, generally has less risk, and reduces brokerage commissions and income taxes.”
Growth investing is both a science and an art, but does not require a degree in rocket science. If you can focus on the important growth criteria, and combine it with a long-term disciplined valuation process, you will be well on your way to discovering the growth stock Holy Grail.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in AAPL and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in VRX, BBRY, SBUX, WMT, CROX, Krispy Kreme, Webvan, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Herbalife Strife: Icahn & Ackman Duke It Out
I have seen a lot of things in my two decades in the investment industry, but seeing a verbal cage fight between a senile 76 year-old corporate raider and a white-haired, 46 year-old Harvard grad makes for surprisingly entertaining viewing. The investment heavyweights I am referring to are the elder Carl Icahn, Chairman of Icahn Enterprises, and junior Bill Ackman, CEO of Pershing Square Capital Management. If getting a few billionaires yelling at each other on live TV is not enough to interest you, then how about adding some tongue-laced f-bombs coupled with blow-by-blow screaming from background traders?
What’s the source of the venomous, spitting hatred between these stock market tycoons? In short, it can be boiled down to a decade old lawsuit (profitable for both I might add), and a disagreement over the short position of a controversial stock, Herbalife (HLF). Regarding the legal spat, in 2003 the SEC was investigating Ackman while his Gotham Partners hedge fund was collapsing, so Ackman asked Icahn to buy shares of Hallwood Realty in hopes of salvaging his fund. Eventually, Icahn bought shares, but a difference in opinion over the transaction led to a lawsuit that Icahn lost, thereby forcing him to pay Ackman $9 million.
Icahn also had a beef with Ackman’s handling of Herbalife: Parading in front of hundreds of investors to self-indulgently create a bear raid on an unsuspecting company is poor form in Icahn’s view, and Carl wanted to make sure Ackman was aware of this investing faux pas.
Normally, investing reporting over cable television is rather mundane, unless you consider entertainers like Jim Cramer yelling “booyah” amusing (see also my article on Mr. Booyah)? On the other hand, if you enjoy billionaires embracing the spirit of the Jerry Springer Show by screaming purple-faced profanities, then you should check out the CNBC cage fight here in its entirety:
If you lack time in your busy schedule to soak in the full bloody battle, then here is a synopsis of my favorite highlights:
Icahn on Ackman the “Crybaby”: “I really sort of have had it with this guy Ackman….I get a call from this Ackman guy. I’m telling you, he’s like the crybaby in the schoolyard. I went to a tough school in Queens. They used to beat up the little Jewish boys. He was like a little Jewish boy crying that the world was taking advantage of him.”
Ackman Referring to Icahn as a “Bully” and Himself as “Roadkill on the Hedge Fund Highway”: “Why did he [Icahn] threaten to sue me? He was a bully. Okay? I was not in a good place in my business career. I was under investigation by Spitzer, winding down my fund. There was negative press about Gotham Partners. I was short MBIA (MBI). They were aggressively attacking me and Carl Icahn thought this guy [Ackman] is roadkill on the hedge fund highway… This is not an honest guy [Icahn] who keeps his word. This is a guy who takes advantage of little people.”
Agitated Icahn Tearing a New One for Scott Wapner (CNBC Commentator): “I didn’t get on to be bullied by you [Wapner]… I’m going to talk about what I want to talk about. Okay? If you want to take that position, I will never go on CNBC. You can say what the hell you want. I’m going to talk about what Ackman just said about me, not about Herbalife. I’ll talk about Herbalife when I want to, not when you ask me. I’m never going on a show with you again, that’s for damn sure. Let’s start with what I want to say. Ackman is a liar.”
Icahn on Another Ackman Rampage: “I will tell you something. As far as I’m concerned, he wanted to have dinner with me and I laughed. I couldn’t figure out if he was the most sanctimonious guy or the most arrogant… the guy takes inordinate risk…I don’t have an investment with Ackman. I wouldn’t have one if you paid me, if Ackman paid me to do it… I made a huge mistake getting involved with him…After he won [the lawsuit], he planted some article in the New York Times pounding his chest telling the world how great he was. You know, as far as I’m concerned the guy is a major loser.”
New CNBC Revenue Stream?
There hasn’t been this much fireworks since Professor Jeremy Siegel took Bill Gross to task on the Pimco Boss’s assessment that the “cult of equity is dying” last July. In retrospect, that minor tiff was child’s play relative to the Icahn vs. Ackman battle. With CNBC viewership down from pre-crisis levels, the network may strongly consider instituting a new pay-per-view revenue stream dedicated to battles between opposing investment enemies. I will even offer up my services to verbally smack down some of the enemies I’ve written about previously. If my phones don’t ring, then I can always offer up my American Investment Idol concept in which I can play Simon Cowell.
This may or may not be the last round of the Carl Icahn and Bill Ackman fight, but the ultimate bragging rights may depend on the ultimate outcome of Ackman’s Herbalife short. If Icahn makes a tender offer for Herbalife, I will anxiously wait for CNBC’s Scott Wapner to invite Carl back on the show. I can hardly wait…
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in HLF, MBI, NYT, Hallwood Realty, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Balance Sheet: The Foundation for Value
Let’s talk balance sheets… how exciting! Most people would rather hear nails scratching against a chalkboard or pour lemon juice on a fresh paper-cut, rather than slice and dice a balance sheet. However, the balance sheet plays a critical role in establishing the foundational value of a business. As part of my financial statement analysis series of articles, today we will explore the balance sheet in more detail.
It’s not just legendary value investors like Warren Buffett and Benjamin Graham who vitally rely on a page filled with assets and liabilities. Modern day masters like Bill Ackman (CEO of Pershing Square Capital Management LP – read more about Bill Ackman) and Eddie Lampert (CEO of Sears Holdings – SHLD) have in recent years relied crucially on the balance sheet, and specifically on real estate values, when it came to defining investments in Target Corporation (TGT) and Sears, respectively.
Balance Sheet Description
What is the balance sheet? For starters, it is one of the three major financial statements (in addition to the “Income Statement” and “Cash Flow Statement”), which provides a snapshot summary of a company’s assets, liabilities, and shareholders’ equity on a specific date. One of the main goals of the balance sheet is to provide an equity value of the corporation (also called “book value”).
Conceptually the balance sheet concept is no different than determining the value of your home. First, a homeowner must determine the price (asset value) of the house – usually as a function of the sales price (estimated or actual). Next, the mortgage value (debt) is subtracted from the home price to arrive at the value (equity) of the homeowner’s position. The same principle applies to valuing corporations, but as you can imagine, the complexity can increase dramatically once you account for the diverse and infinite number of potential assets and liabilities a company can hold.
Metrics
Many key financial analysis metrics are derived directly from the balance sheet, or as a result of using some of its components. Here are a few key examples:
- ROE (Return on Equity): Derived by dividing the income from the income statement by the average equity value on the balance sheet. This indicator measures the profitability of a business relative to shareholders’ investments. All else equal, a higher ROE is preferred.
- P/B (Price to Book): A ratio comparing the market capitalization (total market price of all shares outstanding) of a company to its book value (equity). All else equal, a lower P/B is preferred.
- Debt/Equity or Debt/Capitalization: These ratios explain the relation of debt to the capital structure, indicating the overall amount of financial leverage a company is assuming. All else equal, lower debt ratios are preferred, however some businesses and industries can afford higher levels of debt due to a company’s cash flow dynamics.
There are many different ratios to provide insight into a company, nonetheless, these indicators provide a flavor regarding a company’s financial positioning. In addition, these ratios serve a valuable purpose in comparing the financial status of one company relative to others (inside or outside a primary industry of operation).
Balance Sheet Shortcomings
The balance sheet is primarily built upon a historical cost basis due to defined accounting rules and guidelines, meaning the stated value of an asset or liability on a balance sheet is determined precisely when a transaction occurs in time. Over time, this accounting convention can serve to significantly understate or overstate the value of balance sheet items.
Here are a few examples of how balance sheet values can become distorted:
- Hidden Assets: Not all assets are visible on the balance sheet. Certain intangible assets have value, but cannot be touched and are not recognized by accounting rules on this particular financial statement. Examples include: human capital (employees), research & development, brands, trademarks, and patents. All these items can have substantial value, yet show up nowhere on the balance sheet.
- Lack of Comparability: Comparability of balance sheet data can become fuzzy when certain accounting rules and assumptions are exercised by one company and not another. For instance, if two different companies purchased the same property, plant, and equipment at the same time and price, the values on the balance sheets may vary significantly in the future due to the application of different depreciation schedules (e.g., 10 years versus 20 years). Share repurchase is another case in point that can alter the comparison of equity values – in some cases resulting in a negative equity value.
- Goodwill & Distorted M&A Values: Companies that are active with mergers and acquisitions are forced to reprice assets and liabilities upwards and downwards (inflation, or the lack thereof, can lead to large balance sheet adjustments). Goodwill (asset) is the excess value paid over fair market value in an acquisition. Goodwill can be quite substantial in certain transactions, especially when a high premium price is paid.
- Write-offs and Write-ups: In 2001, telecom component maker JDS Uniphase (JDSU) slashed the value of its goodwill by a massive $44.8 billion. This is an extreme illustration of how the accounting-based values on the financial statement can exhibit significant differences from a company’s market capitalization. Often, the market value (the cumulative value of all outstanding market-priced shares) is a better indicator of a company’s true value – conceptually considered the present value of all future cash flows.
Some balance sheets are built on shaky foundations. A risky, debt-laden balance sheet can resemble a shoddy home foundation built on sand, along an earthquake fault-line. In other words, a small shock can lead to financial collapse. In the credit-driven global bubble we are currently working through, many companies that were built on shaky foundations (i.e., a lot of debt) are struggling to survive. Survival may be dependent on a company restructuring, selling assets, paying down debt, merging, or other tactic with the aim of shoring up the balance sheet. Using the balance sheet value of a company in conjunction with the marketplace price of the same business can be a valuable approach in establishing a more reliable valuation. Before you make an investment or valuation conclusion about a company, do yourself a favor and dig into the balance sheet to verify the condition and soundness of a company’s financial foundation.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in TGT, SHLD, or JDSU. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Ackman Builds Fortune Through Optimism and Confidence
Source: Portfolio.com
Bill Ackman, 43 year old famed hedge fund manager and activist, was profiled by Jesse Eisenger in a May 2009 Portfolio.com piece with a title that has special meaning to me…The Optimist. I would never be presumptuous enough to compare myself to Mr. Ackman, but my firm, Sidoxia Capital Management, shares something in common with him – the name of my firm is actually derived from the Greek word for optimism (aisiodoxia).
Some confuse his confidence with arrogance, but regardless of your opinion, he has a track record to back up his bold assertions. For example, his six year investment in MBIA Inc. (MBI) netted Ackman about $1.1 billion in profits. At the end of 2008, his firm (Pershing Square Capital Management) managed $4.4 billion. His brainpower has been sought after by the upper echelon of Washington finance – Ackman has rubbed elbows and provided his views to the likes of Lawrence Summers (director of President Barack Obama’s National Economic Council) and Timothy Geithner (Treasury Secretary). Those who have invested for long periods know there is a fine balance between confidence and hubris as Ackman recognizes:
“The investment business is about being confident enough to know that you’re right and everyone else is wrong. Yet you have to be humble enough that you recognize when you’ve made a mistake.”
Another common trait with all good investors is the ability and willingness to put yourself out on a limb. As legendary investor Benjamin Graham states, “You’re neither right nor wrong because others agree with you. You’re right because your facts and reasoning are right.” This is exactly the approach Ackman took when he researched MBIA. While the rest of the world was following the real estate herd as they were about to fall off a cliff, Ackman realized the calamitous situation brewing and warned others of the pending disaster. Being a contrarian is hard-work, and requires detailed analysis for the necessary conviction, a key ingredient for successful investments. Lots of blood, sweat, and tears were certainly used in Ackman’s long-lasting review and attack on MBIA Inc. that began in 2002, punctuated with a 66 page report entitled “Is MBIA Triple A?”
Click Here to Watch November 2008 Interview With Charlie Rose
There is another universal bond between all great investors – failure. Ackman is no exception and suffered his fair share of bumps along the road. Most notably, the forced closure of his hedge fund and investment firm Gotham Partners in 2003 was an unpleasant experience. His concentrated fund that held Target (TGT) investments was down -93% in early March 2009, according to Portfolio.com. Throughout all the trials and tribulations, Ackman remains as he likes to call it, “resilient.”
Life is never easy for the great investors, or as Don Hays says, “You are only right on your stock purchases (and sales) when you are sweating.” Ackman has had to sweat out a volatile ride ever since he first dove in to purchase Target Corp. shares. As the article in Portfolio.com points out, at one point Ackman had nearly lost $2 billion with his bet on Target and suffered a hard fought loss in a proxy battle with the Target board.
Investing bystanders should do themselves a favor and carefully track Ackman’s moves. The outcome of his Target investment is unknown; however I’m confident and optimistic that Bill Ackman will ultimately build on his long-term track record of success.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, but at the time of publishing SCM had no direct position in MBI, TGT, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
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