Wednesday, November 19, 2008

Buffett's Israel Unit Iscar Seeking More Acquisitions

Nov. 18 (Bloomberg) -- Warren Buffett's Iscar Metalworking Cos., the Israeli toolmaker that agreed to buy Japan's Tungaloy Corp. in September, is seeking more acquisitions and sees the global financial slump as a buying opportunity, Chairman Eitan Wertheimer said.

``I've learned from my guru to be greedy when others are fearful,'' Wertheimer said in an interview in Jerusalem, echoing a statement frequently made by Buffett. Iscar is part of Buffett's Berkshire Hathaway Inc., which made two acquisitions in October and has comitted $8 billion to buying stakes in General Electric Co. and Goldman Sachs Group Inc.

Iscar, based in Tefen, northern Israel, makes cutting gear for industries ranging from aerospace to auto manufacturing, for clients including Toyota Motor Corp. Berkshire paid $4 billion two years ago for an 80 percent stake in Iscar, which competes with market leader Sandvik AB. Iscar is looking for industrial companies that are in the same business, according to Wertheimer.

``We like to stick to basics,'' he said. ``If you sleep on the floor, you can't fall out of bed.''

Iscar agreed Sept. 21 to buy a 71.5 percent stake in Japan's Tungaloy, a manufacturer of tools for cars and airplanes. The deal was for $1 billion, Haaretz reported.

Iscar is ``Gillette on steroids'' in the metal-cutting tools industry, said Shai Dardashti, managing partner of New York-based Dardashti Capital Management. The Berkshire shareholder cites Iscar's ``tremendous innovation'' and its commitment to research and development.

Read Article Here

Monday, November 17, 2008

Joel Greenblatt buying stocks up rabidly!

What we are seeing here is the raging market purchases of Joel Greenblatt. When normally he has a concentrated portfolio, it seems to me that this time he is taking on a more diversified approach and this is evidence that he feels that the market as a whole is undervalued. Being diversified this time as opposed to his conventional concentrated portfoliios also means that there is much more to choose from.

Read article here

Bershire "ups" shares in ConocoPhillips

Buffett's Berkshire Boosts Stake in ConocoPhillips (Update3)

By Erik Holm, Edward Klump and Linda Shen

Nov. 14 (Bloomberg) -- Warren Buffett's Berkshire Hathaway Inc. became the largest shareholder in oil producer ConocoPhillips and took a stake in manufacturer Eaton Corp. in the third quarter as stock markets tumbled.

Berkshire had more than 83 million shares in Houston-based ConocoPhillips as of Sept. 30, compared with about 17.5 million on March 31, the company said today in a regulatory filing. Buffett also disclosed a reduced holding in Bank of America Corp. and more shares of NRG Energy Inc., the second-biggest power producer in Texas. The Standard & Poor's 500 Index dropped 8.9 percent in the three months ended Sept. 30.

Berkshire, which purchased MidAmerican Energy Holdings in 2000 and reported record profits last year from selling holdings of PetroChina Co., is betting on a long-term increase in energy demand worldwide. Global oil consumption will increase about 25 percent to 106 million barrels a day by 2030, the International Energy Agency said this week.

``Buffett is thinking decades ahead,'' said Jeff Matthews, author of ``Pilgrimage to Warren Buffett's Omaha'' and founder of Greenwich, Connecticut-based hedge fund Ram Partners LP. ``He's thinking about oil production falling and an eventual doubling of worldwide demand as countries like China reach U.S. levels.''

ConocoPhillips traded as low as $67.31 a share in the third quarter after closing 2007 at $88.30. The company slipped $1.79, or 3.6 percent, to $47.39 in New York Stock Exchange composite trading today before Berkshire's disclosure.

Waiting for Spring

Buffett, the world's preeminent stock picker, has said he's also spending his own money to buy U.S. stocks as prices decline amid the worst financial crisis in 75 years, switching holdings from government bonds. Berkshire, where Buffett is chief executive officer, spent about $3.94 billion on stocks in the quarter and sold shares for about $300 million, according to separate filings.

``Most major companies will be setting new profit records 5, 10 and 20 years from now,'' Buffett said in a column in the New York Times in October. ``If you wait for the robins, spring will be over.''

Berkshire held about 59.7 million ConocoPhillips shares as of June 30, Buffett revealed in a separate filing. Buffett, 78, won permission from regulators to omit that number from his second-quarter filing and withhold it until today to prevent copycat investing.

Looking for Stability

``Energy is an industry that has the stability that he's looking for,'' said Michael Yoshikami, the president of YCMNet Advisors in Walnut Creek, California, which manages $850 million, including Berkshire shares. ``Conoco is a huge refiner, and while refiners are certainly under some pressure, they are essentially a service-for-fee business, so they are a classic kind of stable, core business for his portfolio.''

ConocoPhillips rose $1.06, or 2.2 percent, to $48.45 at 7:10 p.m. in New York in extended trading. Bill Tanner, a spokesman for ConocoPhillips, had no immediate comment.

Berkshire increased holdings in NRG Energy by 54 percent to 5 million shares, a 2.2 percent stake. The firm was the object of a takeover offer from Exelon Corp. after the Princeton, New Jersey-based company lost half of its market value in two months. NRG's board of directors this month rejected the offer.

Buffett also disclosed a 1.8 percent stake in Cleveland- based Eaton, the maker of parts for Boeing Co. planes and Volkswagen AG cars.

Eaton Corp.

``Eaton fits exactly with his investment strategy,'' said Gerald Martin, a finance professor at American University's Kogod School of Business in Washington. ``He likes to say that he wants to invest in companies that he can understand, that he can really get his arms around, and take a look at them and project their cash flows.''

Eaton rose $1.54, or 3.7 percent, to $42.69 at 6:24 p.m. in late trading in New York. Prices for new Berkshire holdings typically jump as mutual funds and individual investors mimic the stock picks. Martin co-wrote a study in 2007 that found buying after such disclosures would have delivered annualized returns of about 25 percent over 31 years, double the performance of the S&P 500. Eaton spokesman Peter Parsons declined to comment.

Buffett cut his stake in Bank of America by almost half, while increasing his investment in U.S. Bancorp. Charlotte, North Carolina-based Bank of America, which purchased money-losing mortgage lender Countrywide Financial Corp. in July, has lost 64 percent of its market value in the last 12 months.

Read Article here

Eddie buys more of Autonation

Billionaire investor Edward S. Lampert continued to buy shares of AutoNation Inc., putting nearly $1.4 million more into the nation's largest car dealer last week.

Lampert, a former AutoNation director who was already the company's largest shareholder, bought 228,700 shares for between $5.90 and $6.15 per share on Thursday and Friday, according to a regulatory filing.

Read more here

Wednesday, November 12, 2008

Warren Buffett can teach the world a thing or two about derivatives

He’s sold billions of dollars of them through his Berkshire Hathaway investment group. And with markets in a mess, he’s taking paper losses. But Berkshire has a huge financial cushion. That and Buffett’s management of investor expectations offer lessons for other mark-to-market sufferers.

First, he keeps that cushion plumped up. Berkshire has written derivatives on stocks and bonds with an underlying value of nearly $50bn. That’s much higher than the derivatives’ market value, which fell an estimated $1bn in the third quarter, contributing to a 77pc decline in Berkshire’s profits compared with a year earlier.

But Buffett’s company still made a profit, even with the markets in disarray. So although the final profit or loss on the derivatives won’t be known for years, he appears to have scaled his exposure so that paper losses along the way are highly unlikely to put a big hole in Berkshire’s balance sheet, undermining its other businesses.

Second, it helps that Berkshire doesn’t borrow much. The company doesn’t have to post collateral on its derivative positions – provided, among other things, it doesn’t lose its strong credit rating. With little leverage, there’s enough of a buffer that even much bigger paper losses won’t trigger that. American International Group, for one, found out the hard way that a vulnerable credit rating plus huge mark-to-market losses can quickly lead to downgrades and a life-threatening outflow of hard cash.

Third, Buffett has always told shareholders to look beyond quarterly earnings and to keep in mind the somewhat artificial accounting effects at work on both the upside and downside. He has even, once in a while, hinted that he thought Berkshire’s stock was over-valued.

By contrast, Wall Street bosses who paid themselves handsomely based on paper gains on the way up have zero credibility when they try to excuse mark-to-market losses. It’s just possible Buffett will still end up losing a lot of real money on his derivatives. But others could learn from his skills in setting the stage so that investors aren’t scared off by paper losses along the way.

Berkshire reports losses

Berkshire Hathaway, the investment firm run by Warren Buffett, the world’s richest man reported a 77 per cent drop in third-quarter profits, as a $1.01 billion loss on derivatives and other investments combined with sharply reduced results from its operations across the board.

The group announced net earnings of $1.06 billion, it’s fourth straight quarterly decline, down from $4.55 billion the year earlier as so-called operating earnings on its insurance underwriting business plummeted by 83 per cent

Profits on investments made by Berkshire’s insurance unit fell by 12 per cent to $809 million in the third quarter, while the non-insurance businesses it owns contributed a collective profit of $1.08 billion, 7.8 per cent down.

Read article here

Tuesday, November 04, 2008

Major pointers in a Leveraged Buyout/ Recapitalization

What to look out for in a Recap/LBO situation and how to analyze one?

In recapitalizations and Leveraged Buyouts, the theme is often similar in that these companies often trade below their intrinsic value. These are probably the old economy type of stocks versus the new economy type stocks plagued by generally slower growth rates. These old school companies generally grow at slower growth rates as compared to the "googles" and "apple" of today and hence are ignored by the general public at large and hence trade at a discount to intrinsic value. Other reasons as to why these old school companies trade at discount is that these companies generally have so much cash and are in a net cash position that the public is afraid that the company's management will dissipate the cash through inefficient capital allocation reinforcing the fear that when there's cash, it is easily spent. What the public often wants is a redistribution of that wealth to its shareholders and often a reorganisation of the company to allocate capital more efficiently. Now even if the latter is not what the general investing public wants immediately, a recapitalization can help the investing community "see" that it is pursuing appropriate capital allocation which you will see in following paragraphs.

Typical elements of a Recaitalization should include:
1) Non cyclical Industries - When a leveraged recap occurs, it normally occurs in mature industries without cyclicality. Why? Because companies that encounter cyclical downswings that go through a recap or LBO usually have a lot of debt and hence downswings would magnify the losses or reduce earnings drastically due to altered capital structure where higher interest payments need to be forked out. Conversely as well, any form of topline growth assuming all things constant will magnify the bottomline. Hence, companies that are cyclical in nature are inappropriate candiates for a leverage recap or an LBO. But it can also be argued that during a cyclical upswing, a leveraged recap can occur such that bottom line earnings are magnified. My answer to that would be because the economy behaves in a haphazard fashion, predicting a cyclical upswing in the middle of a cyclical downswing would be disastrous for the private equity firm that does so in my opinion.

2)Steady financial profiles- When companies have stable cashflows, an extension of the previous point above are normally suitable for going private transactions. You do not want any form of cyclcality in this business.

3)Competive advantage and dominant market share- The company most preferrably should have some form of "moat" and dominant market share which adds a stability and predictability element.

4)Low debt plus company in a net cash position- You, as an investor would want the company to have a net cash position = cash and cash equivalents - total debt . If the industry leverage ratios are higher compared to the company that you are looking at it is a good sign that this company is a potential recap candidate because chances are that it has unutilised debt capacity which means that it can take on more debt. One point that Ben Graham adds to the process is that a company's capital structure can be optimised when it can serve very comfortably the debt it can put on its balance sheet. Normally, interest coverage ratios are between 3 to 4 times are very comfortable to be serviced by a corporation with a net cash balance, unutilised debt capacity and generate excess and stable operating cash flows.

5)Low Capex- The company preferably should have a low capex requirements such that its free cashflow is enhanced. The good thing about a recap is that valuation metrics are shifted to a cashflow basis instead of an EPS basis due to the need to pay down debt and interest payments after a recap.

Effects of a recap

1) Short term spike in earnings and ROE- This happens due to the tax shield that the larger interest payments has on the bottom line if the top line is stable. This is a catalyst that investors should look out for.

2)Internal Changes- A recap forces the management to be more disciplined in handling its capital allocation. For one, i believe that capital allocation will be handled in a more efficient manner than before the recap as there is a tremendous need to focus on cashflows to pay down debt and interest. There is in a sense fiscal discipline being practised as opposed to lax capital budgeting processes previously.

3)Discipline forces management to think of ways to focus on EBITDA and there is potential for EBITDA to increase in the prcess of a recap due to capital allocation efficiency. The management stops splashing out on corporate jets and tries to reduce unnecessary expenses can help to increase EBITDA

4)A recap often comes with some equity incentive for management. Mangements become incentivised alongside ordinary minority shareholders. This is one that an investor should look out for. In fact, Joel Greenblatt emphasizes this point again and again in his book.

5) A huge payout can be given out in the form of a dividend and this can be 75% of the market capitalisation of the pre recap share price or larger, financed of course by debt mostly. This is the monetising of future cashflows and giving back to sharehlders which make them happy.

6)After the recap, the focus on deleveraging the company causes book value to rise.

So how does one look at such stocks. I reckon that one should look at such companies when the interest rate environment is falling because when rates fall, LBO activity increases due to the cheaper cost of funds. Owning a stock that has the above elements can be candidates for an LBO, going private transaction where premiums are offered.

In the case that an LBO is not offered, if management is astute, they will conduct a recap on their own producing a stub that will rise in value due to short term ROE and earnings growth expansion even though it is a stable industry! The effect of the distribution and stub's rise in price should prove to be quite lucrative.

Best regards,
Lucas Lim

Monday, November 03, 2008

Buy American. I Am.

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Read article here

Tuesday, October 07, 2008

Wednesday, October 01, 2008

Warren Buffet takes on GE Preferred Stock

General Electric Co. got a $3 billion investment from Warren Buffett and said it will sell $12 billion in common stock, gathering more cash to fund operations amid the worst U.S. financial crisis since the Great Depression.

For more read below:

GE Raises $15 Billion; Buffett Gets Preferred Stake

Best regards,

The pain and agony of a "social misfit" and why value investing works

On Monday, i was invited to a gathering of private bankers at a club. It was a networking session for private bankers in general to get together and have a good time and it wasn't just exclusive to private bankers , there were investment specialists and research analyst and a couple of investment bankers hanging out there too.

The word that got around most was speculation of which financial companies were going to go next. Some were saying Fortis was going next. In fact half a year back, someone told me that Merril was next to go but Merril was eventually acquired by Bank of America. The general theme of talk among the bankers seem to be that of "fear" and a random poll by me as i spoke about buying stocks from a valuation perspective was scoffed at mostly. And if it wasn't scoffed at, there were some who might agree with me but they will do so on the quiet, not echoing their views out loud.

And as i examined myself in the situation, i found that there there was tremendous group think and pressure to conform and i found myself a social misfit all of a sudden. And i remembered what i had read about psychology. There is a tremendous need to be part of a group and to be like the group. We need social proof to carry on our activities. It is like a cushion and some form of security. We do what other people do and find comfort in that. Because if we are wrong, it's ok because the others are wrong also. It is a very powerful force at work here and you will see it working in nearly every aspect of society. In fact there was an article "Rejection really hurts" Participants that were participating in a virtual ball tossing game who were eventually excluded seemed to experience some form of stress. For more read here:

Rejection really hurts

Value investing will put you in a similar situation. When markets head south, folks will tell you to stay away or sell. Not many will tell you to put a portion of your net worth into equities. In fact, going against the crowd probably means that they might incur some losses intially.Mohnish Pabrai talks about this and says:"When I buy a stock, two things ALWAYS happen: immediately after I buy, the stock tanks and once I sell the stock, it really takes off" Value investor must be able to take this and stomach "social pain" if their reasoning is right.

I have had the pleasure to meet with Professor Sanjay Bakshi recently during his trip to singapore and i would say that i have learnt so much from him both from a practical standpoint as well as an academic's standpoint. I would like to leave you with a quotes and conclusions by him in one of his articles:

"I think value investing is successful precisely because it is difficult to practice. What I have said it is easy for you to understand, but I can tell you that is not easy to practice.
I think it is successful because it's unpopular and because it is based on fundamentals and not stories that read about or hear or see on CNBC.
I think the value of value investing lies in its unpopularity and I think if value investing became popular there won't be any value left in it."

Best regards,

Tuesday, September 30, 2008

The amazing life of Warren E Buffet

The first authorised biography of Warren Buffet by Alice Schroeder is out! Check out some excerpts below:

In fancy dress; a young Warren playing the ukelele in the late 1940s;
and teaching a class in investing at Omaha university in the 1950s

Below an excerpt from FT Series Part 1: Warren Buffett by Alice Schroeder

“We’d just steal the place blind. We’d steal stuff for which we had no use. We’d steal golf bags and golf clubs. I walked out of the lower level where the sporting goods were, up the stairway to the street, carrying a golf bag and golf clubs, and the clubs were stolen, and so was the bag. I stole hundreds of golf balls.” They referred to their theft as “hooking”.

“I don’t know how we didn’t get caught. We couldn’t have looked innocent. A teenager who’s doing something wrong does not look innocent.

“I took the golf balls and filled up these orange sacks in my closet. As fast as Sears put them out, I was hooking them. I had no use for them, really. I wasn’t selling them then. It’s hard to think of a reason why you had this multiplying group of golf balls in the closet, this orange sack that’s just getting bigger all the time. I should have diversified my theft. Instead, I made up this crazy story for my parents – and I know they didn’t believe me, but – I told them I had this friend, and his father had died. He kept finding more of these golf balls that his father had bought. Who knows what my parents talked about at night.”

The Buffetts were aghast. Warren was their gifted child, but by the end of 1944, had become the school delinquent. “My grades were a quantification of my unhappiness. Math – Cs. English – C, D, D. Everything Xs for self-reliance, industry, courtesy. The less I interacted with teachers, the better it was. They actually put me in a room by myself there for a while where they would kind of shove my lessons under the door like Hannibal Lecter.” When graduation day came and the students were told to show up in a suit and tie, Warren refused. With that his principal, Bertie Backus, had had enough. “They wouldn’t let me graduate with the class at Alice Deal, because I was so disruptive and I wouldn’t wear clothes that were appropriate. It was major. It was unpleasant. I was really rebelling. Some of the teachers predicted that I was going to be a disastrous failure. I set the record for checks on deficiencies in deportment and all that.

Part 2 of the FT series:

By August 1991, Warren Buffett’s investment company, Berkshire Hathaway, had held a large stake in Wall Street investment bank Salomon Brothers for about four years – he had helped to rescue Salomon from the attentions of the corporate raider Ronald Perelman in 1987 by investing $700m. The deal made Buffett a leading figure on Wall Street, whose excess and supposed corruption he abhorred.

On August 8, Buffett was informed of a potentially ruinous scandal at Salomon, in which Paul Mozer, who headed the government bond department, had secretly manipulated US Treasury bond auctions. Salomon – with $4bn of equity supporting $146bn of debt – faced possible indictment and sanctions from financial regulators that would almost certainly lead to a run on the bank. Buffett helped to orchestrate a change in management and agreed to take over as interim chairman to try to steer Salomon through the crisis

Extracts from ‘The Snowball: Warren Buffett and the Business of Life’ by Alice Schroeder

Buffet Buys Chinese Battery manufacturer

Below is the link to the article:

Buffett Buys Stake in Chinese Battery Manufacturer

Best regards,

Sunday, September 28, 2008

Thakral Corp : A cash bargain

Thakral Corp is a company that operates under the following business segments:

1) Supply Chain management
2) Electronic Manufacturing Services
3) Media Technology
4) Property
5) Investments

Recently the board room tussle has ignited media interests with the founder Katar Singh being attempted to be ousted by majority shareholder Hong Leong. Along with the recent drop in market prices and the system risk in our financial markets today, Thakral has fallen to a price of 4 cents oer share, a price low enough to warrant a closer study of its circunstances. The story goes that Mr Katar Singh was to take the company in a different direction by going full swing into the property market while Hong Leong was to pursue interests in the Electronics Business by focusing on controlling expenses and improving operating margins. I presume that these 2 goals are different in nature and hence the boad room tussle which has spilled over to the media.

Looking at its financials:

Cash and cash equivalents $111,980,000
Available for sale Investments $41,401,000
Debt $3,865,000
Outstanding Shares 2612113668

Looking at the above figures, Thakral Qualifies as a cash bargain as its net cash per share is 5.72 cents and definitely qualifies as a Benjamin Graham Stock with the net=net value being 6.1 cents according to the balance sheet.

However, despite the cheapness of the stock, i do urge readers and investors to be cautious because this company is literally bleeding cash. As of 30 June 2008 as compared to a year ago, its cash and equivalents position fell bled by 13 million. At such a rate, it could cease to be a cash bargain after bleeding more than 50 million in cash although i think that that is not likely to happen anytime soon.

But because it is so cheap, we should monitor it for any impending catalyst available that might unlock shareholder value because great things happen to cheap stocks due to the way the market reacts in an assymetrical way. The bad news should already be discounted into the stocks price.

Using inverted thinking, for it to be worth 8 cents which is its NAV, it must earn 1 cent per share which works out to 8 cents if i put a multiple of 8 times(it is debatable if this is a suitable multiplier) which works out to approximately 26 million of net income which it has been achieved before. Not entirely impossible but it has made such profits before. But because of a cyclical down swing, that would not happen any time soon.

But if it should sell any of its business segments for above book value, that is something we might look out for which could be a catalyst.

This write up is not a recommendation to buy but rather to illustrate the point that the market does throw you some bargains which are worth acquiring. For the true value investor, he must be salivating now for there is so much to choose from. The appearance of cash bargains also signals that the market is already in a recession, at least on a technical basis and we should take advantage of that.

In the meantime, happy searching for bargains and do contact me if you have any ideas to share!

Best regards,

Great investors can be wrong-Richard Pzena

One of the greatest things that will go down in history is the nationalization of Freddie Mac and Fannie Mae. It is still currently debatable as to whether the Goverment should have bailed out Freddie and Fannie Mae. Richard Pzena made such a convincing argument that Freddie Mac was a great company and i bought into that or was i not?

There are three stories here. One, Freddie and Fannie did not need goverment intervention and were still well capitalised enough to carry on as a going concern as per Richard Pzena.

The 2nd story was : Freddie and Fannie were bleeding and were suffering from liquidity problems.

The 3rd story is built upon the first and that both Freddie and Fannie were fine but the government had to bail it out as confidence over its assets from other goverments holding them were dwindling fast in this crisis. The Govt had no choice but to bail it out to restore confidence in the markets.

On hindsight i am more inclined to the 3rd thesis stated above and even if Richard Pzena's thesis was the 1st, a variation played out and this really made me think hard on scenario analysis. My take is this: Pzena was probably right on most counts including his valuation of the company but more vital than any sound valuation technology, he probably did not factor in the fed taking control of the company by taking on a preferred equity stake which nearly wiped out most of tht value in common equity.

For those who do not understand the case, taking on a preferred equity stake eventually wiped out the commons. Simplistically if a company had a book of $10 and later $9 of preferred were issued, it would have reduced the book value of common equity to $1. That was what happened to the saga.

Key takeaways would be:

1) Diversify sufficiently to protect your portfolio. WE are human and mistakes are inevitable in investing

2)Do your own research before you coat tail others.

For more read:

Fooling around with freddie and fannie by forbes

Best regards,

10% dividend yield on Goldman Sachs Preferred Stock

The guru has done it again. Another excellent deal with Mr Market presenting him a fine bargain by virtue of the credit crisis in the markets today. With the goldman sachs deal sealed Warren is getting 500 million of annual dividends on an investment of 5 billion in Goldman preferred stock. It does'nt get any better than that when one could invest at a 10% dividend yield and at the same time get warrants that are excercised at a strike price of $115.

With the franchise value of the Goldman still intact and growing, this investment might prove to be One of Warren's most shrewd deals ever with him potentially getting 10% of the company of the warrants are excercised.

For more, go to:

Better and better,

Constellation Energy: A closer examination

Constellation energy is a debt ridden company which has just been taken over by Warren Buffet's Mid American. Being a debt ridden company, it is no wonder that during a credit crisis and a crisis of confidence such as what we are experiencing today, its shares have plummeted to end december 2001 levels, a dramatic fall caused by liquidity concerns.

When a company like Constellation is taken over by Warren Buffet, it sure warrants a closer examination. It has approximately 5.7 billion in debt and it has a enterprise/ebitda of approximately 5 times. At a PER of 5.5, it has an earnings yield of 18% while a 20 year AAA Municipal Bond only has a yield of 4.97%. By Benjamin Graham's Standard, it has more than met the criteria of double a AAA Bond Yield. However, lots remain to be see about what this company can do to increase shareholder value.

Constellation Energy is in the business of providing energy for the masses and it operates through Baltimore Gas & Electric company and a merchant energy business. It happens to be a close fit in terms of its business model to that of Midamerican which also happens to be in the same industry and MidAmerican is a subsidiary unit of the ever famous Bershire Hathaway, Buffet's Baby.

Constellation has had an growing Ebitda of 1.4 billion to 1.9 billion in its latest financual year end, an impressive CAGR of 10 %. However, its debt too has been growing and its latest balance sheet figures show a debt of 5.7 billion dollars.

5.7 Billion dollars worth of debt is scary in a credit crisis like this but it will be comforting to note that it has an interest cover of approximately above 4 times. Plagued by downgrades in credit,what the analyst have forgotten is it has a huge asset base that it can sell off to provide for liquidity. Its asset base is 29 billion huge. And chances are under MidAmerican, we could see some deleveraging of its balance sheet taking place. We could take comfort in the fact that at today's prices, dividend yield is an excellent 7%. You are essentially paid to wait for the price value gap to narrow.

The company has a firm business model and should still be a going concern. The only problem right now that should be tackled is the problem of liquidity and working capital issues.

Possible catalyst:

1) Selling off of assets to pay down debt - When its substatial Plant, property and equiptment are sold off to pay down debt, we could see a reduction interest expenses.

2)Selling the energy trading business that causes further liquidity problems

3) Potential dividend hike and growth of book value when debt is paid down

So if you look at it carefully, what we have is an investment at attractive prices. Not only is it trading at approximately 5 times EV/Ebitda but you also have an inbuilt catalyst around Warren Buffet.

Warren Buffet is a "catalyst" to effecting any of the several above catalyst which would help in unlocking shareholder value. Besides, buying over Constellation would merge MidAmerican and constellation energy's balance sheet into one making it a stronger one.

One point to be wary of though is that Warren's Preferred equity stake in Constellation would be good for him but buying commom equity for us might be dilutive to a certain extent for the book value of common will dwindle. Preferreds always have priority for any form of dividends and hence you can expect some form of dilution of intrinsic value. Still this is an interesting play that is worth studying and learning from.

Best regards,

Monday, September 08, 2008

Psychology of Human Misjudgement By Charlie Munger

Dear readers,

here is a great read on the psychology of human misjudgement bu Charlie Munger and it also explains to me why there are such irrationalities in the stock market. Ben Graham talks about Mr Market being a manic depressive. Charlie Munger has gone one step further by breaking it down for us almost scientifically by explaning the different biases that we as humans have.


Best regards,

Friday, August 29, 2008

Dollar Cost averaging in today's market

Dear readers and investors,

People often ask me a few things which pertains to investing. One of them being , when is the bottom due or how do you know that it is not going to go down further. Variations of such questions pop up time after time as i am in the wealth management industry. The truth is i really don't know where the bottom and honestly i don't care. All i know is prices are dropping. Things ain't looking that great but it is a great time to pick up bargains.

To try to answer that question, let us look at something simple and logical. Dollar cost averaging. Takes time to make an impact on your portfolio but it sure makes heck of a lot of sense to me especially for investors who are used to committing huge lump sums of cash. Well firstly that's ridiculous because once markets dip, that lump sum falls in value. But dollar cost averaging involves reducing the average cost per unit. This strategy reduces your average cost and helps one to ride out volatility in the portfolio. In an up cycle, the reduced unit cost will work in one's favour.

Financial advisers are often money mis-managers just to quote Chieftain Capital's Mr Greenberg. They are solely driven by commissions and are judged by the amount of revenue they bring to the bank or financial institution. It is a pity that they are not judged by the quality of financial advice that they give and no financial adviser in his right frame of mind will tell you to dollar cost average. Let me paint you an example. John convinces you to buy 100,000 of unit trust/mutual funds instead of putting it into a dollar cost averaging program. A 100,000 dollars worth of unit trust sold would give him 5000 revenue dollars/points for him. Typically he has got to hit a 100000 revenue points in order to get some form of commission. And just to add this chap is running against a time frame of 3 months to hit his targets, sometimes depending on the institution, they have one month to hit their targets. Their job is to far exceed that target for commission is tiered and goes up exponentially at different tiers. So as you can see, when you as a customer tells him that you have 100,000 dollars to invest, no financial advisor in the right frame of mind is going to tell you to invest $5000/$1000 every time the markets dips by 5% or monthly. It just does not make sense for him and that's the problem with the financial industry anywhere around the world. It's ultimately his pocket that he is looking after and not yours. Now, just a comparison, if he did invest $5000 for you over the next 3 months, that would work out to 750 revenue points for him, a tiny drop in a pool of a 100,000 revenue points. Hope that you now see the drastic difference and this post is really meant to answer some of the questions that you folks post to me as readers.

Hence, one thing to learn would be, do not trust your financial adviser more than you trust yourself because the financial services industry is often more incompetent that you think it is. Do your own research and participate in an index fund if you will with a dollar cost averaging strategy to make your money work for you. This is my valued advice for all who are thinking of investing.

Better and better,

Let's profit from this recession

Dear readers,

its been a long hiatus for me and i apologise for that. These past few months has seen tumultuous times for global markets all around the world with the early ripples starting from the US and the subprime crisis. And honestly, i don't know or can tell how long or deep this probable recession is going to last and neither do the experts on cnbc no matter how opinionated they may seem. One thing is for sure, compared to 2 months ago, there are probably a lot more bargains around. Questions spinning in one's head include, how long, when is the trough or when should i buy all seem to try to do something impossible to achieve and that is to time the market. But dear investors, it is impossible to time the market. Let me give you an example of a company named washington post. Warren Buffet bought it when it was trading around a PER of 4X and it went lower after that. But Buffet took the opportunity to buy more. Great companies are available onsales right now and that has been evident with the dow at 11715 from a high of 14000. But still the down trend might have some way to go before it stabilises.

Now, reading some reports, it is said that an average span of recession from peak to trough actually last some 10 months while the longest span of recession can last 16months. If all is well, the down trending markets could end in 16 months. This is my interpretation of data compiled by the US Bureau of economic research. Correct me if i am wrong also but if it last beyond 16 months, it should be considered a depression. See below.

Now, if a recession lasts 16 months according to historical data from 1945, then any recession lasting more than 16 months would mean a depression. A depression would mean a period of low book values and declining activity within an economy. Are we heading towards a possible depression? Well, there could be a chance considering the deleveraging that is taking place in today's markets could depress values towards a level not seen in a long time. Well, i am not going to speculate at whether it is going to be a depression or not but what i am trying to do is to highlight the seriousness of today's falling markets with one advice. Let's face it. How many of us are Buffet like and have the ability to estimate accurately the range of intrinsic values of a company. Not many isn't it. Hence, let's all try to look at Ben Graham's approach, finding cash bargains and net-nets trading below two thirds of net current asset value cause we know that such companies thrived during the depression. After all, it is better to err on the side of caution. If you can't wait to get your hands on some of these stocks such as Wells Fargo, well do some bearing in mind that markets being irrationale as they are could beat the stocks down further. But if you do, do try to embark on a dollar cost averaging approach for cash is your number one weapon in today's markets. For more information or advise do email me regarding the nature of your portfolio and i will see how i can actually help.

Hence two takeways today:
1) Buy into tangible asset values
2) Perfom dollar cost averaging

Stay well. Stay Prudent and look out for great bargains.

Better and better,

Wednesday, January 02, 2008

Buffett is getting better as an investor!

Interesting comment about how Buffett has managed to improve upon his previous investment mistakes such as General Re( bad derivative contract, reinsurance fraud scandal with AIG) and handling Salomon Brother's near collapse and how this has had an impact on his strategy of starting a new bond insurer instead of bailing out market players such as Ambac or MBIA

People who follow Mr. Buffett said such wariness is a hallmark of his investing style. He has learned from past mistakes, said Gerald Martin, a finance professor at American University and Texas A&M University.

For instance, Berkshire’s 1998 acquisition of General Re, the insurance company, was marred by a portfolio of complex derivative securities and state and federal investigations into reinsurance policies written by the company. Salomon Brothers, the Wall Street firm that Mr. Buffett was pressed to take control of in the early 1990s amid a trading scandal, was another taxing experience.

Fixing a troubled company has “got to take a tremendous amount of management time,” said Mr. Martin, who in October published a paper on how well investors would have done if they had copied Mr. Buffett’s investment moves. “I can certainly understand him wanting to shy away from it.”

That may explain why Mr. Buffett has decided to start a new bond guarantor rather than take control of one of the many firms already in the business, among them MBIA, Ambac and FGIC. Critics say those bond guarantors do not have enough capital to cover future losses in the mortgage-related securities they have guaranteed.

Link to the entire article