Well, Acorn International Inc (ATV) is another mainland chinese orphan stock. My main worry with these Mainland Chinese stocks is simple - Fraud. Is the cash really there? I've heard loads of horror stories about the Chinese and their companies. I just read David Einhorn's Fooling Some People All the Time. Which of course, doesn't engender much goodwill and warm feelings towards management and corporate governance. And I have personally found odd ball accounting practices with one mainland Chinese company (The9 Limited, NCTY). So my approach towards evaluating these stocks is one of skepticism and lots of research.
Acorn is a multi-platform marketing company in China. Basically, they are the equivalent of the Home Shopping Network in China. They sell everything from cell phones to slimming products through their various sales channels. These channels include TV, call centers and distributions to retail outlets.
The reason I'm interested in this company is simple. It's sitting on nearly $167MM worth of cash for a market cap of $117.15MM and notes payable of $3.3MM. Basically, it's selling for less than the cash on its books. Efficient market says that this should not be the case, but hey... don't look at me. It's there.
I'm looking through their income statements right now. For some odd reason SG&A is up quite a bit. Up 31% for the first 6 months of 2009 as compared to first 6 months of 2008. The reason given by the Company is: a 1 time charge of $1.6M for the Liaoning TV lawsuit and increases in salaries and benefits. Somehow I'm skeptical, why are salaries increasing at this point in time? The company lost money in 2008, 1Q 09 and 2Q 09. Why are salaries rising? Compare this to the behavior of the ACTS management who took a 20% cut to their salaries. Totally different approach to running a company.
Finally, the market in China for TV sales and other direct marketing techniques is very volatile. In the sense that the government has the ability and has intervened in the past to ban the sale of certain products. This has material impact on the revenues of the company. The gov banned the company from selling its branded neck massage product. This had a negative impact on the company's revenues.
All in all, ATV is starting to turn the company around but I'm not a big fan of the way the company is being run. Although it might be a viable investment from the stand point of the market cap being less than the cash position of the company, I am not comfortable with the industry or the management. I'm going to pass on this investment.
Thursday, September 24, 2009
Actions Semiconductor Co Ltd (NASDAQ: ACTS)
I know I haven't been posting a lot. I've been doing a whole bunch of digging out there in the market place. I just liquidated half my portfolio to cash. 'coz I wasn't comfortable with current market levels. A lot of the big name stocks are floating around at 2006/07 valuations. Yes, the economy is improving. But does it really justify such lofty valuations? I don't think so.
Anyway, I decided that if the market isn't going to correct. I'm looking into plays that are less market dependent - Special Situations. Odd ball plays.
Actions Semiconductor Co Ltd is one such play. It currently trades for less than the cash value on its books. It has $235MM in cash. The market cap is $195.5MM. ACTS lost $2.3MM in the first 6 months of 2009, specifically $777k in 2Q09. I think they are slowly righting their ship. Losses aside, the company is still sitting on a large cash pile. I believe that this is a good opportunity to take advantage of this.
This is not a company that I'd invest in long term. The company manufactures chips for MP3 players, which are seeing heavy competition from mobile phones as alternative music listening devices. Most importantly, the company is seeing margin contractions that is common to the industry. In 2Q 2009, ACTS reported a gross margin of 27.7%. Their prospectus reports that in 2004 to 2005, their gross margins were above 40%. So we can see that they are getting squeezed here.
The one thing that really impressed me about these guys is that all the senior management VP level and above, department heads took a 20% pay cut. That reduced their SG&A significantly. Very impressive that the senior management bit the bullet. On top of that, the company increased R&D expenditure by hiring more staff and increasing their research budget. Now that's the proper way to run a business!
All in all, this is still a good company to invest for the short term reset of the price or for a one time special dividend.
Disclosure: Currently, I do not own ACTS stock. I may invest in the company in the future.
Anyway, I decided that if the market isn't going to correct. I'm looking into plays that are less market dependent - Special Situations. Odd ball plays.
Actions Semiconductor Co Ltd is one such play. It currently trades for less than the cash value on its books. It has $235MM in cash. The market cap is $195.5MM. ACTS lost $2.3MM in the first 6 months of 2009, specifically $777k in 2Q09. I think they are slowly righting their ship. Losses aside, the company is still sitting on a large cash pile. I believe that this is a good opportunity to take advantage of this.
This is not a company that I'd invest in long term. The company manufactures chips for MP3 players, which are seeing heavy competition from mobile phones as alternative music listening devices. Most importantly, the company is seeing margin contractions that is common to the industry. In 2Q 2009, ACTS reported a gross margin of 27.7%. Their prospectus reports that in 2004 to 2005, their gross margins were above 40%. So we can see that they are getting squeezed here.
The one thing that really impressed me about these guys is that all the senior management VP level and above, department heads took a 20% pay cut. That reduced their SG&A significantly. Very impressive that the senior management bit the bullet. On top of that, the company increased R&D expenditure by hiring more staff and increasing their research budget. Now that's the proper way to run a business!
All in all, this is still a good company to invest for the short term reset of the price or for a one time special dividend.
Disclosure: Currently, I do not own ACTS stock. I may invest in the company in the future.
Sunday, September 20, 2009
Overbought Market
Hi
Been following our recent rally. It looks and feels great to see my portfolio worth a lot more every time I look at it. Makes me want to look at it a lot more.
However, if you look at the PE ratio of the S&P 500, it's way over valued. 20+ times operating earnings. The historical average is 16. The full article can on the S&P PE valuation can be found here.
I've been keeping close watch on corporate insider sales over the last few months. Corp insider sales have outstripped buys by a lot. Insiders are selling in large amount way larger than insiders are buying. I don't have the figures as to how many times the insiders are selling over buying. But just read the insider trades page on Barrons and you'll see what I mean. It's been this way for a while.
These two key facts lead me to believe we are in an overbought market. It's simply too good to be true. It can't go on forever. I've started to move into cash.
Been following our recent rally. It looks and feels great to see my portfolio worth a lot more every time I look at it. Makes me want to look at it a lot more.
However, if you look at the PE ratio of the S&P 500, it's way over valued. 20+ times operating earnings. The historical average is 16. The full article can on the S&P PE valuation can be found here.
I've been keeping close watch on corporate insider sales over the last few months. Corp insider sales have outstripped buys by a lot. Insiders are selling in large amount way larger than insiders are buying. I don't have the figures as to how many times the insiders are selling over buying. But just read the insider trades page on Barrons and you'll see what I mean. It's been this way for a while.
These two key facts lead me to believe we are in an overbought market. It's simply too good to be true. It can't go on forever. I've started to move into cash.
Wednesday, September 9, 2009
Greif Inc (NYSE: GEF)
The word discipline and acquisitions rarely go together in this day and age.
Greif Inc (NYSE: GEF) is thus an oddity or a rarity rather. It has managed to be disciplined in its acquisitions. This is rare among companies. None of that one time big acquisition stuff. That doesn't work - many integration issues. GEF does its acquisitions small and frequently. It has a system called the Greif Business System to integrate and streamline all businesses that is acquires.
During financial year 2008, the Company completed acquisitions of four industrial packaging companies and one paper packaging company and made a contingent purchase price payment related to an acquisition from October 2005 for an aggregate purchase price of $90.3 million. During 2007, the Company completed seven acquisitions of industrial packaging companies for an aggregate purchase price of $346.4 million. These industrial packaging and paper packaging acquisitions are expected to complement the Company’s existing product lines that together will provide growth opportunities and scale.
The company has a policy of acquiring companies at a PE of 5 to 7 times earnings. It generally sticks to companies from 30M to 300M. It's current market cap is around $2.4B. It acquires companies to increase its product footprint in a given region.
Currently, trading at 26 times earnings, it is by no means cheap. I'm hoping for the market to turn, perhaps creating a buying opportunity.
Greif Inc (NYSE: GEF) is thus an oddity or a rarity rather. It has managed to be disciplined in its acquisitions. This is rare among companies. None of that one time big acquisition stuff. That doesn't work - many integration issues. GEF does its acquisitions small and frequently. It has a system called the Greif Business System to integrate and streamline all businesses that is acquires.
During financial year 2008, the Company completed acquisitions of four industrial packaging companies and one paper packaging company and made a contingent purchase price payment related to an acquisition from October 2005 for an aggregate purchase price of $90.3 million. During 2007, the Company completed seven acquisitions of industrial packaging companies for an aggregate purchase price of $346.4 million. These industrial packaging and paper packaging acquisitions are expected to complement the Company’s existing product lines that together will provide growth opportunities and scale.
The company has a policy of acquiring companies at a PE of 5 to 7 times earnings. It generally sticks to companies from 30M to 300M. It's current market cap is around $2.4B. It acquires companies to increase its product footprint in a given region.
Currently, trading at 26 times earnings, it is by no means cheap. I'm hoping for the market to turn, perhaps creating a buying opportunity.
Monday, September 7, 2009
The Art of Short Selling Chapter 2
Chapter 2 surveys the various hedge fund managers and what they look for in a short position.
Julian Robertson of Tiger Funds
Hallmarks:
1. Prodigious research
2. Bottoms-up Analytical methodology
3. A long-term time horizon
Robertson feels that short selling based on high valuation/ price alone is a bad idea. There must be a fundamental change in the outlook of the company or a major misconception by the stock-buying public.
Alex Porter of Porter, Felleman
Hallmarks:
Short positions reduce the risk to the portfolio of a long term market decline. The trick is to be short the stocks where financial accounting/ analysis shows that something is seriously wrong with the company.
1. Company based analysis
2. Management does not own much stock
3. Management is not realistic and forthcoming about their business
4. The company itself is over-leveraged or has a fatal balance-sheet issues.
Joe DiMenna of Zweig Funds
Hallmarks
Total short exposure is dictated by:
1. The number of attractive short-sale candidates their research uncovers
2. Net exposure to the market that their macro indicators suggests
5 types of short candidates
1. Frauds
2. Earnings disappointments
3. Hyped stocks where there are major holes in Wall Street's consensus expectations
4. Industry themes where macro-forces are negative
5. Deteriorating balance sheets
He generally won't short stocks with strong relative strength and earnings momentum solely on the basis of overvaluation.
Feshbachs
Hallmarks
They look for stocks with the following characteristics:
1. Stock prices overvalued by at least two times Feshbach-perceived valuation
2. A fundamental problem at the company
3. A weak financial condition
4. Weak or crooked management
The Feshbachs' hallmark is intense work and informational overkill. They start with fundamental analysis and add on information from a wide variety of sources. They don't short a stock unless they think it's going to drop in price by 50%. The reason is short selling is too risky for marginal plays.
The most difficult part of short selling is timing. They don't have an answer as to what is the optimal point to short a stock. They believe that one has to be certain of an important factor that other people do not see. Furthermore, the factor must affect the way the company is ultimately valued. One then has to see those mechanics begin to impact the income statement and the balance sheet, visualizing how the change evolves through the health of the company. Talking to competitors and suppliers reveals the climate and how long it might continue and gives insights into possible triggers. He cautions that the first position is not necessarily the biggest because stocks go up and you want to be able to average up.
Most importantly, you need to remain analytical when other people panic.
McBear
Hallmarks
1. Short ideas based on extensive credit work
2. Gathers important information by visiting companies. Feels Wall Street analysts are a poor conduit for company insights because they screen out relevant facts.
3. He feels that being a good listener asking thoughtful questions can learn critical facts about business trends.
4. The market is inefficient because there is always a bias to buy. Therein lies the opportunity for short sellers to make money.
Jim Chanos
Hallmarks
1. Chanos' specialty is solving complex financial puzzles.
2. Typically shorts large-cap financial companies with a high probability of bankruptcy.
3. Average holding period is 9 months.
4. No problems with buy-ins because of his use of large-cap stocks.
5. Does not visit companies and he uses Wall Street as a corporate emissary or interpreter.
6. Unique is his use of return on invested capital as a key financial indicator. The formula is: EBIT divided by average total capital (defined as total liabilities plus equity minus current liabilities plus short-term debt. In other words, the return on all interest-bearing liabilities plus equity plus deferred taxes and short-term debt.)
7. Financial companies are lucrative shorts because of the potential for rampant earnings manipulation.
My thoughts and Summary
In summary, I believe that on the short side, shorting requires more extensive and in-depth research. The refrain that one should not short a stock just based on valuation is heard over and over again. There must be major problems both on the operations side and on the financial side (over-leverage etc) of the company. Poor management is another requisite.
Julian Robertson of Tiger Funds
Hallmarks:
1. Prodigious research
2. Bottoms-up Analytical methodology
3. A long-term time horizon
Robertson feels that short selling based on high valuation/ price alone is a bad idea. There must be a fundamental change in the outlook of the company or a major misconception by the stock-buying public.
Alex Porter of Porter, Felleman
Hallmarks:
Short positions reduce the risk to the portfolio of a long term market decline. The trick is to be short the stocks where financial accounting/ analysis shows that something is seriously wrong with the company.
1. Company based analysis
2. Management does not own much stock
3. Management is not realistic and forthcoming about their business
4. The company itself is over-leveraged or has a fatal balance-sheet issues.
Joe DiMenna of Zweig Funds
Hallmarks
Total short exposure is dictated by:
1. The number of attractive short-sale candidates their research uncovers
2. Net exposure to the market that their macro indicators suggests
5 types of short candidates
1. Frauds
2. Earnings disappointments
3. Hyped stocks where there are major holes in Wall Street's consensus expectations
4. Industry themes where macro-forces are negative
5. Deteriorating balance sheets
He generally won't short stocks with strong relative strength and earnings momentum solely on the basis of overvaluation.
Feshbachs
Hallmarks
They look for stocks with the following characteristics:
1. Stock prices overvalued by at least two times Feshbach-perceived valuation
2. A fundamental problem at the company
3. A weak financial condition
4. Weak or crooked management
The Feshbachs' hallmark is intense work and informational overkill. They start with fundamental analysis and add on information from a wide variety of sources. They don't short a stock unless they think it's going to drop in price by 50%. The reason is short selling is too risky for marginal plays.
The most difficult part of short selling is timing. They don't have an answer as to what is the optimal point to short a stock. They believe that one has to be certain of an important factor that other people do not see. Furthermore, the factor must affect the way the company is ultimately valued. One then has to see those mechanics begin to impact the income statement and the balance sheet, visualizing how the change evolves through the health of the company. Talking to competitors and suppliers reveals the climate and how long it might continue and gives insights into possible triggers. He cautions that the first position is not necessarily the biggest because stocks go up and you want to be able to average up.
Most importantly, you need to remain analytical when other people panic.
McBear
Hallmarks
1. Short ideas based on extensive credit work
2. Gathers important information by visiting companies. Feels Wall Street analysts are a poor conduit for company insights because they screen out relevant facts.
3. He feels that being a good listener asking thoughtful questions can learn critical facts about business trends.
4. The market is inefficient because there is always a bias to buy. Therein lies the opportunity for short sellers to make money.
Jim Chanos
Hallmarks
1. Chanos' specialty is solving complex financial puzzles.
2. Typically shorts large-cap financial companies with a high probability of bankruptcy.
3. Average holding period is 9 months.
4. No problems with buy-ins because of his use of large-cap stocks.
5. Does not visit companies and he uses Wall Street as a corporate emissary or interpreter.
6. Unique is his use of return on invested capital as a key financial indicator. The formula is: EBIT divided by average total capital (defined as total liabilities plus equity minus current liabilities plus short-term debt. In other words, the return on all interest-bearing liabilities plus equity plus deferred taxes and short-term debt.)
7. Financial companies are lucrative shorts because of the potential for rampant earnings manipulation.
My thoughts and Summary
In summary, I believe that on the short side, shorting requires more extensive and in-depth research. The refrain that one should not short a stock just based on valuation is heard over and over again. There must be major problems both on the operations side and on the financial side (over-leverage etc) of the company. Poor management is another requisite.
Market Rally
Hi Sorry for the long delay in posts. I was on a 2 week vacation in Aug.
It's been a week since I've come back from vacation and I've been looking. Hunting for good companies to buy at cheap prices. But to no avail. I can't seem to find companies that satisfy that criteria. It's kinda frustrating.
There are quite a few companies trading at really low price to book ratios like Seahawk Drilling Inc. (NASDAQ: HAWK). But after a lot of research, I find that there is a reason they are trading that way. The industries they are in face serious challenges and their assets might not be that valuable. Seahawk has a price to book of 0.5. But 10 out of 20 of their jack up oil rigs do not fit the depth specifications required by their largest client, PEMEX. And the average age of their rigs is 28 years old.
Sorry to sound so pessimistic but I really feel that this rally is starting to over price stocks for their current economic fundamentals.
I've been reading that quite a few hedge fund managers are rather pessimistic at this as well. For example Paul Tudor Jones.
As for now, I'm going to keep looking but maybe not buy anything yet.
It's been a week since I've come back from vacation and I've been looking. Hunting for good companies to buy at cheap prices. But to no avail. I can't seem to find companies that satisfy that criteria. It's kinda frustrating.
There are quite a few companies trading at really low price to book ratios like Seahawk Drilling Inc. (NASDAQ: HAWK). But after a lot of research, I find that there is a reason they are trading that way. The industries they are in face serious challenges and their assets might not be that valuable. Seahawk has a price to book of 0.5. But 10 out of 20 of their jack up oil rigs do not fit the depth specifications required by their largest client, PEMEX. And the average age of their rigs is 28 years old.
Sorry to sound so pessimistic but I really feel that this rally is starting to over price stocks for their current economic fundamentals.
I've been reading that quite a few hedge fund managers are rather pessimistic at this as well. For example Paul Tudor Jones.
As for now, I'm going to keep looking but maybe not buy anything yet.
Subscribe to:
Posts (Atom)
