Note to readers: #WeeklyInvestorReader contains a few of the articles I read during the week. Visit my Twitter @HurriCap for any other articles that may not have been included.
To survive in an increasingly unpredictable world, we need to train our brains to embrace uncertainty – Quartz, January 9, 2017| We don’t like experts to express uncertainty. Imagine a politician running for president who promises “I’ll try to make good decisions most of the time. Our policies will probably improve the economy.” Would you vote for them? Probably not. We also want doctors devoid of any doubt over treatments and scientists with perfect foresight about climate change variables. That’s because we believe that leaders and authorities are supposed to know and tell us exactly what’s going to happen, thereby absorbing our uncertainty. But life is rife with risks. Misperceiving and underestimating these risks can lead to vital mistakes. Therefore, to make well-informed decisions, we need to become comfortable with uncertainty.
Inside Sears’ death spiral: How a billionaire who was ‘the next Warren Buffet’ drove an iconic American brand to the brink of bankruptcy – Business Insider, January 8, 2017| Lampert, a former Wall Street prodigy, took control of Sears more than a decade ago and became its CEO in 2013. But he’s rarely seen in the office, typically visiting about once a year for the shareholder meeting and projecting into videoconference rooms at Sears’ Hoffman Estates, Illinois headquarters the rest of the time, according to interviews with employees. He prefers to stay on Indian Creek Island off the coast of Miami, behind a desk dressed up with the Sears logo. The island has been dubbed the “billionaire bunker,” partly because of a private police force that protects the island’s 86 residents.
Lessons from the Strategy Crisis at Netflix – strategy+business, September 6, 2016| Netflix would seem to be on a roll. The world’s largest online entertainment distribution business has seen its streaming revenues grow from US$1.2 billion in 2007 to $6.8 billion today.
How to Analyze a Company – Science of Hitting, January 10, 2017| A fellow GuruFocus reader recently sent me an email with the following question: “Which books would you recommend if I want to start investing in individual companies?”
Why I don’t use watch lists – Oddball Stocks, January, 2017| I remember as a kid sitting in a chair near our kitchen with my grandfather two chairs away. I was leafing through a toy catalog. The catalog’s pages were worn and I knew the items and their prices by heart. Suddenly my grandfather looked at me and said “What are you doing? Looking at all the things you can’t buy but wish you could?” I was stung by the criticism, but he was right. I had almost no ability to purchase any of the items. I was just envying items I couldn’t have. As I reflected on this story recently it reminded me of why I don’t keep a stock watch list or research stocks that I wish I can buy someday.
No More Moats in Self-Storage Stocks – Morningstar, January 13, 2017| After taking a deeper dive into the self-storage industry, focusing on how the efficient scale moat source applies to competitive dynamics, we have downgraded Public Storage’s (PSA) economic moat rating to none from narrow. Peer Extra Space Storage (EXR) already has a no-moat rating. The main reasons for Public Storage’s rating change were (1) moaty qualities related to intangible assets were identified in only 25% of the portfolio, while switching costs were determined to be too small to retain tenants; (2) new supply can easily challenge the company’s presence in less densely populated areas; and (3) occupancy is decreasing as competition pressures market share. Our fair value estimates stand at $229 per share for Public Storage and $85 per share for Extra Space.
How to Read a 10-K Annual Report Efficiently – Rational Walk, January 8, 2017| Effective techniques for reading books have been well documented for years but the same isn’t really true for S.E.C. filings. S.E.C. filings are legal documents that a company is required to file on a periodic basis and the consequences for making mistakes can be significant. Depending on the nature of the company, risks and disclaimers of a legal nature can vary in length. Nearly all companies include information that is, in some regards, repetitive or unenlightening due to the need for legal cover. While all information in a filing should be read prior to making an actual investment decision, trying to read filings sequentially on a page-by-page basis when just getting to know a company is not the best approach.
Importance of Knowing Your Investment Boundaries (Sears Mini-Case Study) – Base Hit Investing, January 12, 2017| A week ago I read an article in Business Insider that referenced a Q&A from 2005 where Buffett was talking to a group of students from the University of Kansas and he was asked about the chances of success of the Sears/Kmart merger (which had just recently occurred at that time).
Lifelong learning is becoming an economic imperative – The Economist, January 14, 2017| Technological change demands stronger and more continuous connections between education and employment, says Andrew Palmer. The faint outlines of such a system are now emerging.
Amazon Stock’s Exceptional Price History Meets Value Investing – The Conservative Income Investor, January 14, 2017| Revenues have grown from $10 billion to $134 billion in the past twelve years. The market cap has increased from $10 billion to something approaching $400 billion. And yet, Amazon’s profits are below $3 billion. That is 133x earnings for one of the ten largest corporations in the United States. History shows you tend to get into trouble when you pay much more than 25x earnings for even an excellent, fast-growing company.
Netflix Stock Still Has A Profit Problem – The Conservative Income Investor, January 19, 2017| When you see the price of Netflix stock climb to $143 per share in after-hours trading, the $60 billion valuation for the streaming giant at first sounds reasonable. But the reality is more complicated than that. Netflix is distinguishable from firms like Pepsi, Colgate, or Johnson & Johnson because its fixed costs are enormous. It has to pay obscene-sounding licensing fees to have access to the content it streams to its consumers. And, the more appealing the content, the higher the fees.
Netflix Ends 2016 on High Note; Margin Improvement Expected to Be Steady, Not a Hockey Stick – Morningstar, January 19, 2017| Netflix ended 2016 on a high note with stronger international subscriber growth (5.12 million net adds, versus guidance of 3.75 million) and U.S. growth (1.93 million net adds, versus guidance of 1.45 million). Despite the impressive fourth quarter and better-than-expected guidance for next quarter, the most important information from the conference call may have been management’s admission that the operating margin will improve modestly on a yearly basis, as opposed to a “hockey stick manner.” Our long-term model for the company still projects that the operating margin for the international segment will improve slowly but will remain well below that of the U.S. segment over the next five years. We retain our narrow moat rating and are modestly increasing our fair value estimate to $73 from $69 to account for the time value of money from rolling our model forward and an additional year of margin expansion for the international segment. With shares trading well above our new fair value estimate, we advise investors to steer clear of this very high uncertainty company.
BOOK REVIEW: “THE ART OF THE DEAL” – DONALD J. TRUMP (WITH TONY SCHWARTZ) – Value and Opportunity, January 20, 2017| As with stock analysis, I am a big fan of “Primary resources” and so I decided that I should at least read one book co-authored by “his Trumpness” himself. There are many Donald Trump books out there but the first one from 1987 is “the Art of the deal”. I thought that maybe the first one is also the most authentic one.
It’s Time to Shake Up the Legal Industry – Craig Shapiro, January 6, 2017| Close your eyes and picture the dream industry waiting to be disrupted. What’s it look like? Probably: It’s massively important to the functioning of society but doesn’t work for most people. It’s dominated by old incumbents that enjoy huge profit margins. Those incumbents don’t have much, if any, consumer brand recognition. But this isn’t a dream. This is the law industry, and it desperately needs to be shaken up.
Retailing In America: Brick & Torture – Danielle DiMartino, January 18, 2017| Outright bankruptcies, nonetheless, are not where the pain is most acute. That preserve is on reserve for a different kind of demise, an appreciably slower descent into irrelevance. At first, the disruptive power of E-Commerce appeared to apply only to things that could be read or viewed on a screen. More recently, though, any product that’s quantifiable at any level is fair game whether it be Jimmy Choo’s, a trip to Katmandu or Vintage Scooby Doo. Hence the frantic game of catch-up so many retailers are playing to raise their online visibility. The problem is catch-up can be costly. Just ask any retailer closing stores, one not-quite-lethal cut at a time, and they’ll set you straight.
Are H&M store sales cannibalising online growth? – Just-Style, May 16, 2016| Swedish retailer Hennes & Mauritz (H&M) risks cannibalising store sales through the growth of its e-commerce business, analysts believe, adding that this could be detrimental to margins.
Cassandra’s Song – John P. Hussman, January 16, 2017| While valuations are extremely informative about full-cycle returns and potential risks, returns over shorter segments of the market cycle are primarily driven by the inclination of investors toward risk-seeking or risk-aversion, which is best inferred from market action. The challenge in the recent half-cycle had to do with Fed-induced yield-seeking, which disrupted the historical tendency for deteriorating internals to accompany or quickly follow extreme “overvalued, overbought, overbullish” syndromes as they had in other cycles across history. In the face of zero interest rates, one had to wait for market internals to deteriorate explicitly before taking a hard-negative outlook.
Harnessing automation for a future that works – McKinsey Global Institute, January 17, 2017| Automation is happening, and it will bring substantial benefits to businesses and economies worldwide, but it won’t arrive overnight. A new McKinsey Global Institute report finds realizing automation’s full potential requires people and technology to work hand in hand.
BlackRock Continues to Impress – Morningstar, January 20, 2017| We continue to be impressed by BlackRock’s (BLK) ability to generate solid organic growth, especially considering the size of its operations. With $5.148 trillion in total assets under management at the end of 2016, BlackRock is the largest asset manager in the world. Unlike many of its peers, BlackRock is generating organic growth in its operations with its iShares platform, which is the leading domestic and global provider of exchange-traded funds, riding a secular trend toward passively managed products that began more than two decades ago. We recently increased our fair value estimate to $410 per share from $385 to reflect changes in our assumptions about AUM, revenue, and profitability since our last update.
Think savvy business owners make savvy public investors? Not necessarily – The Globe & Mail, January 19, 2017| Having talked to dozens of successful private business owners in this country over the years, I have found they generally display a few consistent cognitive characteristics when talking about the operation of their business. Yet, when they invest in the stock market, it is almost as if they have completely lost their senses. As owners they are rational, logical and business-like; as investors they are ruled by emotion and irrationality. So while they have succeeded as private owners, many have failed as public investors. My conclusion after being in the investment business for so long: Public and private owners are not just different; they are opposites. Armed with this foreknowledge, I believe there is opportunity. Let me explain further.
Catena Media en tillväxtmaskin – Swedbank, January 17, 2017| Catena media är ett snabbväxande företag med globala tillväxtambitioner inom en ganska okänd, men betydelsefull nisch av spelsektorn. Swedbank anser att vinsten per aktie kan öka med 150 procent fram till 2019 och tar upp aktien till bevakning med rekommendationen Starkt Köp.
Larmet: Tiotusentals jobb på väg bort – Dagens Industri, 20 januari 2017| Nästan 42.000 svenska butiksjobb riskerar att försvinna inom mindre än tio år. Den dystra profetian kommer från Svensk Handel, som också varnar för lägre lönsamhet och färre aktörer. ”Tre handelsföretag om dagen går i konkurs”, säger vd:n Karin Johansson.
Uppgifter: Analytiker tvingas ge positiva omdömen – Dagens Industri, 20 januari 2017| En ny intressekonflikt inom finansbranschen har kommit i fokus i spåren av de krympande courtageintäkterna: att analytiker känner sig tvingade att ge positiva aktierekommendationer för få tillgång till bolagens högsta beslutsfattare, för egen eller för sina kunders del.
Axelssons i konkurs – Dagens Industri, 16 januari 2017|Modevaruhuset Axelssons har gått i konkurs, rapporterar Katrineholms-Kuriren.
Arctic Securities sänker Fingerprint – Affärsvärlden, 10 januari 2017| Fingerprint Cards besked till marknaden om sänkt intäktsprognos 2016 vid kapitalmarknadsdagen var nedslående, men risk föreligger för att även prognosen för 2017 kan behöva sänkas.