Posts
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:
http://seattlepi.nwsource.com/business/1310ap_goldman_sachs_berkshire.html
Better and better,
Lucas
Sunday, September 28, 2008
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,
Lucas
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,
Lucas
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.
Enjoy!
http://vinvesting.com/docs/munger/human_misjudgement.html
Best regards,
Lucas
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.
Enjoy!
http://vinvesting.com/docs/munger/human_misjudgement.html
Best regards,
Lucas
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,
Lucas
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,
Lucas
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,
Lucas
Subscribe to:
Posts (Atom)