WEEKLY COMMENTARY 1/30/17-2/5/17

WEEKLY COMMENTARY               1/30/17-2/5/17

 

 

CURRENT POSITIONS

 

 

 

COMPANY NEWS

 

There was no company news over the past two weeks.

 

 

INTERESTING LINKS

 

 

Expectations Investing: Reading Stock Prices for Better Returns (Michael Mauboussin)

 

A 2006 report by Michael Mauboussin when he was at Legg Mason discussing what he calls Expectations Investing. The report also discusses the link between ROIC and PE. (link) Mr. Mauboussin discusses how investors often only look at a company’s fundamental when investors should be assessing company fundamentals then comparing them to market expectations. He argues that any returns will be driven by a change in the markets expectations. Given there are many types of value investing (quality, deep value), value investing itself is the act of ensuring the market’s expectations are well below the probable path of a company’s fundamentals.

 

In the article, Mr. Mauboussin discusses the theoretical link between ROIC and PE. We studied the relationship between ROIC and EV/EBIT and EV/IC. Growth is eliminated from our study, as it is the most difficult value driver to forecast. We feel EV/EBIT is a more appropriate measure of earnings than PE as it eliminates all non-operating items and it takes into account the whole capital structure something that ROIC takes into account. We studied a number of different Emerging Market companies in a number of different industries from 2011 to 2015. We used a company’s estimated ROIC for the year (operating profit/ (net working capital + PP&E)) and the company’s valuation at the end of the year. As illustrated below, our study found no correlation between ROIC and EV/EBIT, with the adjusted R squared at 0.01, and a strong correlation between ROIC and EV/IC, with an adjusted R squared of 0.65

 

The scatter plots graphs below visualize the correlation between ROIC and the two EV valuation multiples.

 

As you may have noticed, EV/IC is not really mentioned in our reports as we use more in-depth valuation methods. We use EV/IC vs. ROIC as a shortcut when screening companies to determine whether there may be sufficient margin of safety to spend addition time analyzing the company. Using a 10% discount rate and no growth, you can easily determine the appropriate EV/IC given a company’s ROIC by multiplying the company’s ROIC by 10.

 

 

Thirty Years Reflections on the Ten Attributes of Great Investors (Michael Mauboussin)

 

A more recent report by Michael Mauboussin discussing the ten attributes of great investors. (link)

 

 

Ten Attributes of Great Fundamental Investors

 

The top ten attributes discussed in the paper are:

 

  1. Be numerate (and understand accounting)
  2. Understand value (the present value of free cash flow)
  3. Properly assess strategy (or how a business makes money)
  4. Compare effectively (expectations versus fundamentals)
  5. Think probabilistically (there are few sure things)
  6. Update your views effectively (beliefs are hypotheses to be tested, not treasures to be protected)
  7. Beware of behavioral biases (minimizing constraints to good thinking)
  8. Know the difference between information and influence
  9. Position sizing (maximizing the payoff from edge)
  10. Read (and keep an open mind)

 

 

7 Deadly Sins of Investing…..!!! (Tortoise Wisdom)

 

Given the previous link discussed the 10 attributes of great fundamental investors, it seems appropriate to include a link discussing what not to do in investing. Tortoise Wisdom discusses the seven deadly sins of investing. (link)

 

The seven deadly sins of investing are:

 

  1. Following the herd
  2. Overconfidence
  3. Trading too much
  4. Envy
  5. Keeping Unrealistic Expectations
  6. Uncontrolled Emotions
  7. Focusing on outcome, Not on Process

 

 

The truth about pricing power (and chocolate) (Intelligent Investor)
Graham Witcomb of the Intelligent Investor provides insight into pricing power. (link)

 

 

Video Library (Hedge Fund Conversations)

 

Hedge Fund Conversations created a library of videos of hedge fund investors. It may be a useful resource. (link)

 

 

Video Library (Ben Graham Centre for Value Investing)

 

While on the topic of video libraries, The Ben Graham Centre for Value Investing at Ivey Business School has a tremendous video library of presentation given to its students by practitioners. (link)

 

 

Understanding the Role of Emerging Markets in Your Portfolio (Fortune Financial)

 

Fortune Financial discusses Emerging Markets and their role in a complete portfolio. (link)

 

 

 A Profitable Industry You’ve Likely Never Considered (Fortune Financial)

 

Fortune Financial write an article discussing Mexican airports as a potential investment. (link)

 

 

How YouTube could capitalize on its rivals’ mistakes, and conquer the future of TV (Business Insider)

 

Business Insider discusses Youtube’s potential to take ad spend from television. (link)

 

 

Rolex is suddenly battling one of the biggest threats in history (Business Insider)

 

Business Insider examines the threats to Rolex and the watch industry. (link)

 

 

Conversation with Irish Hotel Mogul Pat McCann (Independent)

 

The Independent talks with Pat McCann on the hotel industry. (link)

 

 

Curing the Addiction to Growth (Harvard Business Review)

 

Harvard Business Review discusses retailers and strategies for when growth. Interestingly, they find the key metric in determining the winners and losers is ROIC as management teams that follow ROIC do not try to grow just to grow. Their focus is only growing when it creates value. The researchers focus on two other key metrics revenue per store and estimated revenue added per new store. (link)

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