ChadSandstedt

Preface: According to Urban Dictionary the phrase “make it rain” refers to: “When you’re in da club with a stack, and you throw the money up in the air at the strippers. The effect is that it seems to be raining money.” My background is in buying companies, 100% of them. I believe this experience has helped me with buying stocks. It allows me to value the entire company as if I were buying it myself. If the market is selling a share of the company for less than I believe it’s worth as a whole, I’m a buyer. One big difference between actually buying 100% of a company and buying shares in a company is control of the cash. If you buy 100% of the company you control the cash. If you buy shares, you don’t. This can be important if your approach, like mine, uses cash as a reduction in the purchase price. Let’s look at Apple as an example. In this week’s earning announcement Apple showed $97 billion of cash and marketable securities on their balance sheet. They have no debt and as of yesterday’s market close their market capitalization was $416 billion. If you were to buy the whole company
Read More »

I’m re-reading Margin of Safety by Seth Klarman and ran across this paragraph on page 88: Value investors will not invest in businesses they cannot readily understand or ones they find excessively risky. Hence few value investors will own shares of technology companies. Many also shun commercial banks, which they consider to have unanalyzable assets, as well as property and casualty insurance companies, which have both unanalyzable assets and liabilities.   In 2011, Buffett made a $10 billion investment in a technology company (IBM) and a $5 billion investment in a commercial bank (Bank of America). In addition, he has been in the property and casualty insurance business ever since he bought National Indemnity in 1967. This made me wonder if the definition of value has changed or if Buffett has changed. Is Buffett a growth investor now? I don’t think so. I think the growth companies like IBM have now matured to the point where they can be value companies. Take railroads as an example. 100+ years ago they were the darlings of Wall Street and were growing like crazy. They were going to power the economy into the 20th century. Today they are slow growth businesses with predictable cash flows
Read More »

By Chad Sandstedt of Value Investing Lab… Either equities are severely underpriced or apartments are severely overpriced. With cheap agency debt and every pension fund chasing the asset class like it’s the homecoming queen, my money (figuratively for now) is on apartments being severely overpriced. Here is a quick analysis that values the S&P 500 as if it were an apartment: S&P 500 Earnings (After-Tax)  $       83.87 (1) Effective Tax Rate 28.5% (2) S&P 500 Earnings (Pre-Tax)  $     117.30 Multi-Family Cap Rate 4.0% Value of S&P 500      2,932.52 Current S&P 500 Index Level      1,258.95 % Under (Over)valued 57.1% Notes: (1) Through 6/30/11 (http://www.standardandpoors.com/indices/articles/en/us/?articleType=XLS&assetID=1245178702929) (2) Source: FetchXL 'Get ValueWalk's Daily Edition By Email and Never Miss Our Top Stories'
Read More »

By Chad Sandstedt of Value Investing Lab This morning I decided that 2012 is the year the Sandstedt family goes paperless. After some research it looks like the Fujitsu SnapScan S1500 is the right solution. As a loyal Best Buy shareholder I searched their web site only to find an older model available online but not in their stores. A Google search identified several online retailers where I can purchase the S1500. Since none of the options have local retail presence in San Diego I will be purchasing on price alone. This purchase illustrates a missed opportunity for Best Buy and I can only imagine how many other opportunoties they’ve missed out on this black Friday. Best Buy has a great opportunity to leverage their retail network with a real web presence with real inventory. Amazon has Best Buy’s number right now for three reasons. First, they have the sales tax advantage. Next, their product selection is superior as my search for a scanner this morning highlights. Third, the quality of the Best Buy web site is lacking for 2011, although it probably worked well in 1999 which I’m guessing is when it was last overhauled. If I were CEO I would
Read More »

By Chad Sandstedt of Value Investing Lab This week Amazon announced a new service for collecting sales tax for its third-party merchants. In doing so, it tips its hand a bit on the issue of sales tax for items purchased online. According to Internet Retailer magazine, Amazon will offer to handle the sales tax collection process for its third-party merchants in exchange for 2.9% of the tax collected. I think this is a smart move by Amazon that could soon become a sizable business (link: http://www.internetretailer.com/2011/11/03/amazoncom-play-tax-collector-client-merchants). If the value of all retail ecommerce is about $150 billion (source: http://www.census.gov/econ/estats/2009/2009reportfinal.pdf) and assuming an average sales tax rate of 7.5% (source: Chad’s best guesstimate), the total sales tax bill could be over $11 billion. 2.9% of this would be $326 million for providing a service that Amazon is already doing for itself. Not every online retailer is going to use Amazon’s service, but this math demonstrates the potential size of the market. Just as important in this message is that Amazon believes the online sales tax train has left the station. This has ramifications for the brick and mortar retailers, specifically Best Buy. Right now the brick and mortars are operating at a disadvantage to Internet retailers because
Read More »

By Chad Sandstedt of Value Investing Lab Best Buy has been hanging around with the wrong crowd. Most people are frequently comparing Best Buy to other big-box retailers as well as its online nemesis Amazon. I believe they are looking at Best Buy in the wrong light. Best Buy is really a service company that uses the sale of electronics as its delivery mechanism. Consider the following table from Best Buy’s fiscal 2011 10-K: 2011 2010  2009  Revenue Domestic $37,186 $37,314 $35,070 International 13,086 12,380 9,945 Total $50,272 $49,694 $45,015 Percentage of revenue, by revenue category Domestic:  Consumer electronics 37% 39% 39%  Home office 37% 34% 31%  Entertainment 14% 16% 19%  Appliances 5% 4% 5%  Services 6% 6% 6%  Other 1% 1% 1% Total 100% 100% 100% International:  Consumer electronics 21% 20% 26%  Home office 55% 53% 45%  Entertainment 6% 7% 9%  Appliances 9% 8% 10%  Services 9% 12% 10%  Other <1% <1% <1% Total 100% 100% 100%                             If we apply the services revenue percentages to the domestic and international revenue it gives us the following: 2011 2010 2009 Services revenue Domestic $2,231 $2,239 $2,104 International 1,178 1,114
Read More »

By Chad Sandstedt of Value Investing Lab The press and politicians love to point fingers at the evil empire of healthcare providers and insurance companies. Headlines with shock value that read something like “Acme Health Insurance Raises Premiums 39%” seem to be a weekly occurrence. What these articles fail to tell the reader more times than not is the real reason behind these premium increases. Here it is. There has been a brutal tug of war occurring in healthcare between private pay and public pay which is starting to get ugly, real ugly. Private pay is comprised of private health insurance companies like United Healthcare, Wellpoint, Aetna and Humana. Public pay consists primarily of federal programs for the elderly (Medicare) and state-run programs for low income households (Medicaid). The numbers in this example are for illustration only. For easy math let’s start our tug of war with a mix of 70% private pay and 30% public pay with each paying the hospital the same rates for the same procedure. In this example let’s use a broken leg which starts at $1,000 regardless of the type of coverage. The hospital is indifferent to the patient’s source of payment because they will receive $1,000 either
Read More »

By Chad Sandstedt of Value Investing Lab I’ve heard a lot of talk about the TV program called Storage Wars, a reality show dramatizing the buying of abandoned self-storage units at auction. One of the investments I’ve made recently is in a small portfolio of self storage properties. Self-storage is a great business that throws off lots of cash with minimal need to re-invest in the property. The popularity of this show has created crowds at our properties much like growth investors flocking to the next big thing. Anyway, my wife loves watching Storage Wars and is begging me to take her to one of these auctions. I think the odds of my Padres winning the NL West are better than the odds of me spending a Saturday morning at a self-storage property (note: the Padres are 19.5 games out of first place). The show makes the bidding of these units very dramatic as everyone is wondering what treasures might lie behind those mattresses and ripped couches. One of the show’s actors talked about the $250 “investment” he made by buying a unit where he had no idea of what lies inside. The show adds up the profits or losses as the
Read More »

By Chad Sandstedt of Value Investing Lab I’ve had several people ask me what I think about Warren Buffett’s recent op-ed piece in the New York Times titled Stop Coddling the Super-Rich where he argues for higher tax rates on the super-rich. I personally think Buffett is making the wrong argument. If you changed the name on the financial statements from the United States of America to anything ending with an Inc. he would streamline it faster than he eats an Oreo Blizzard. Here is one of the greatest capital allocators of all time arguing for the most successful sliver of our society to pick up the tab for an inefficient government structure. Instead of simply telling his billionaire counterparts to start writing checks, he should be arguing for a better, more efficient government structure. Since he became Chairman of the company in 1970, Buffett has employed an ultra-flat management structure for Berkshire Hathaway. If this is how he chooses to run the company he owns 23% of, why not apply the same approach to government? What would government would look like if it were run like Berkshire Hathaway? In a word, unrecognizable. Corporate Offices = Federal Government Operating Companies = State and Local Governments Customers
Read More »

By Chad Sandstedt of Value Investing Lab The year was 1998 and my first job out of college was at the Omaha World-Herald Company, publisher of the largest newspaper in Nebraska. The company was employee-owned and their approach was to re-invest the massive amounts of cash generated by the newspapers into other assets. It was actually a pretty neat structure developed by the former owner, Peter Kiewit, to make sure his home town newspaper would never be sold to an outsider following his death. The bylaws required employees to give up any proceeds over book value if the company was sold. Those old printers may well have been printing cash because the amount of capital that needed to be re-invested was significant. A lot of this cash was re-invested into other media companies, mostly direct marketing and community newspapers. We made a few investments outside of these markets including the largest provider of election systems in the world. Fast forward to 2011 and the newspaper business is almost unrecognizable. Thanks to the Internet and Craigslist the sacred cash cow of the newspapers, classified advertising, has been sent out for slaughter. Fortunately for shareholders of the Washington Post, the company’s board (including the
Read More »