VitalyKatsenelson

Our investment process is both qualitatively and quantitatively intensive. Throughout the course of a year we look at hundreds of companies.  Most of them receive only a cursory look – we don’t like the business, the valuation is too stretched, or we simply have no insight into the business.  We usually glance at them and move on.  But if we really like the business and/or its valuation, we build a model.  Often, just from a cursory look we know that the stock is not cheap enough, but if we really (really!) like the business we’ll invest the time to model it so we can understand it better and set a price at which we want to buy it (and then wait).  We build a lot of models. I went back and looked, and we built over a hundred models last year (we bought only a handful of stocks).  Building models is important for us; they help us to understand businesses better. They provide insights as to which metrics matter and which don’t.  They allow us stress test the business: we don’t just look at the upside but spend a lot of times looking at the downside – we try to
Read More »

Berkshire Hathaway buying Heinz is unlike any deal Warren Buffett has ever done.  In his past deals he was always a passive owner – he let existing management continue to run the company.  In this case 3G, a private equity firm that has done terrific turnarounds in the past, will be the new management.  They are putting in $1 billion of capital for half of ownership, but also a lot of sweat capital.  On the surface Buffett is paying 20 times earnings, a fairly high multiple even for this high-quality business, but 3G involvement will likely elevate the earnings power of Heinz significantly over time.  So this is a classic Buffett deal in one respect: Buffett is saying, I’m willing to pay a premium for a quality business that has long-term pricing power. (Heinz scores great on both counts).  Buffett is willing to pay a premium for it, but this time the premium is less than it appears on the surface. 'Get ValueWalk's Daily Edition By Email and Never Miss Our Top Stories'
Read More »

Here are slides of my updated/revised presentation on sideways markets.  Over the last three months I’ve given talks on sideways markets three times, to CFA Societies in South Florida, New Zealand, and Atlanta.  It is very hard to be excited about the US stock market.  I read that Rich Bernstein, former chief investment strategist at Merrill Lynch, is very optimistic about US stocks; he believes we are at a point similar to where the market was in 1982 – at the beginning of the 1982-2000 secular bull.  After you’ve gone through my slides, you’ll understand why it is so hard for me to share Rich’s excitement. Stocks were so expensive in 1999 that 12 years of economic growth did not cure the excesses of overvaluation.  In fact, 12 years into this sideways market, valuations are still 30% above the historical average, while in 1982 they were about 30% percent below average!  Also, historically, stocks spent a good amount of time at below-average valuations before sideways market turned into a secular bull market. I hear that everyone is bearish, then I recall a line from a movie – would you rather believe me or your own eyes?  Well, my own eyes tell
Read More »

HMOs appear to be perfect stocks for today’s market. They have good balance sheets, terrific free cash flows and recurring, highly economics-insensitive revenues. The global macro stuff doesn’t really affect them. Greece could be abducted by aliens, Spain could go to war with Finland, and we’d all still be getting sick and buying health insurance. Rising unemployment and underemployment might put a small hole in my rosy thesis, but no worries: With 10,000 baby boomers signing up for Medicare every day and expected to do so for the next decade, that hole will patch easily. What intrigues me the most about these companies is that they are misunderstood by investors. Though we call them health insurers, they are not really insurance companies, at least not in the true sense of the term. Yes, they take premiums up front and pay out medical costs over time, but they are actually health care logistics companies — they pass on health care costs to their customers. They are only insurance companies if an investor’s time horizon is a few quarters, because once in a while they’ll misprice the risk and their profitability will stutter. However, since they reprice their business every 12 months,
Read More »

I don’t do writing assignments. I don’t like deadlines. I am not a writer; I am an investor who thinks through writing. So when Institutional Investor asked me to write on the future of investing, my instinct was to politely decline. But the topic did seem intriguing. So I decided to give it a try. At first, I felt like I needed a healthy dose of Prozac to tackle the article — it is easy to get depressed about the global economy. Europe is on the verge of disintegration; China risks a hard crash landing; Japan is a prick away from its debt bubble bursting; and emerging economies are too linked to China. The U.S., whose GDP grew at a less than inspiring annual rate of 1.5 percent in the second quarter, is the least-spoiled banana in the whole rotten fruit basket, the valedictorian of summer school. As I put down these words, the thought that came to mind was, Do I really want to be responsible for other people’s life savings in this tumultuous environment? Maybe I should learn to love deadlines and take up writing as a career. But when I step back and look at the past
Read More »

Not to buy is an active decision.  I took a serious look at Helmerich & Payne and, though we really liked the company, my conclusion was not to buy the stock at this price (see analysis).  However, this research was not a complete waste of time, because at a lower price, in the $20-30s, HP looks like a very interesting opportunity. Oil drilling is a game changer. In 2008 half of gas drilling was vertical drilling. From 2010-2012 over 80% of gas  drilling was horizontal or directional drilling. As natural gas prices declined to $2-3 mcf drilling for gas became  uneconomical, and gas rig count declined from 900 to 450 from 2011 to 2012 – by half! But since oil prices remained  high overall, total rig count has not changed much; it just shifted from gas to oil. Full document is embedded below in scribd: Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo.  He is the author of The Little Book of Sideways Markets (Wiley, December 2010).  To receive Vitaliy’s future articles by email, click here or read his articles here. HP Analysis 'Get ValueWalk's Daily Edition By Email and Never Miss Our Top Stories'
Read More »

Here are my thoughts from the VALUEx Vail conference.  The idea for this conference came to me when I attended VALUEx Zurich, organized by Guy Spier and John Mihaljevic  in February 2011 (you can register for VALUEx Zurich 2012, here).  The thought of spending three days learning and sharing ideas with smart, like-minded value investors felt instantly right.  Investing on some level is a never-ending pursuit to get better.  Most of us are locked up in air-conditioned offices where we learn through reading SEC filings, magazines, blogs, etc.  Though reading is important, it should not be a substitute for interaction  and debate with other investors. That is why, for the second year in a row, I organized a conference in sunny (and at the time, wildfire-threatened) Vail, Colorado. conference, let me tell you more about the setting and the conference itself.  Vail is Colorado’s gem; think of it of as  a modern (better) replica of Switzerland, hidden in the Colorado Mountains, two hours west on I70 from Denver.  Vail is a green, neatly manicured town, with mostly two-story old-European-styled buildings sitting in the foothills of a gorgeous mountain.  It is acutely trying to be European – even its police force drives
Read More »

  Electronic Arts Inc. (NASDAQ:EA) stock is scratching 52-week lows.  It is unloved, but for some good reasons: its sales have stagnated for years; its earnings, though rising, are still below the 2003 level; and finally, industry-wide sales of packaged video games were down an apocalyptic 25% in March, and they’ve declined four months in a row.  On the surface there are plenty of reasons to hate this stock, but once you start unpiling all the negativity you discover that EA is a compelling growth company trading at a significant discount to its fair value. Electronic Arts Inc. (NASDAQ:EA)’s past is ridden with brilliant successes that lead to subsequent arrogance.  It was the largest video-game maker in the world in the 2000s; and, like many successful companies, it started to treat its success as an entitlement, not as a hard-earned victory.  In the mid-2000s it started to make too many games, and the quality of its games drastically declined.  To make things worse, Nintendo Co., Ltd (PINK:NTDOY) (TYO:7974) came out with Wii, less powerful then Sony Corporation (NYSE:SNY)’s or Microsoft Corporation (NASDAQ:MSFT)’s high-definition system, but instead of a joystick it came with motion control.  Since Wii was underpowered, EA did not expect it to be a
Read More »

I was recently on CNBC discussing the Facebook Inc (NASDAQ:FB) valuation, which I believe is priced for out-of-this-world perfection. The easiest way to assess the insanity of Facebook’s valuation is by comparing it to Google’s. Facebook is set to go public at a sweet valuation of $100 billion, and it has estimated revenue for 2012 of about $4 billion. However, investors are not buying Facebook Inc (NASDAQ:FB) today because they believe it is fairly valued, so what is the point of the comparison? Bear with me for a moment. Let’s say Facebook investors want to receive 15 percent a year over the next five years. In that case, Facebook’s market capitalization has to double in five years, to $200 billion. Conveniently, $200 billion happens to be  Google Inc (NASDAQ:GOOG)’s valuation today. Since both companies are in the advertising business and have very similar cost structures, all Facebook has to do over the next five years is achieve Google’s current sales level, which is a meager $40 billion (for purposes of this discussion, we’ll ignore Google’s $40 billion pile of cash, or about $100 a share, compared with Facebook’s few billion, though that would only further make my point here). For an investor to double his
Read More »

I am back from Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) Omaha.  Every year I come back feeling supercharged for the year ahead.  This year was no different.  From morning till night I had the pleasure of sharing and debating ideas with investors from all over the world.  Though I did not plan it this way, the first day I had dinner with value investors/friends from the UK, on the second from Germany, and on the third from Spain.  I have at least a dozen stock ideas to research and new thoughts to process. Charlie Munger, in his usual brilliantly succinct manner, spit out a few terrific zingers at the Berkshire meeting: “If an investment comes with a high commission, don’t even read the prospectus ” and “Prostitution is a step up for compensation consultants” and “If short-term performance is something that turns you on, you should not be in this room.”  Watch this interview with Munger.  He is too old (88) and too rich to try to be politically correct – he is very refreshing.  Seek out people who disagree with you While answering a question on his political views and their impact on Berkshire (see question 13), Buffett said something that
Read More »

I am back from San Francisco, where I had the great pleasure of attending and speaking at FAME Symposium, diligently put together by students at San Francisco University.  One of the other speakers was a famous international investor, Charles De Vaulx.  During a break Charles and I were discussing the Chinese bubble today vs. the Japanese bubble of the  late ’80s.  This conversation got me thinking.  In Japan the bubble was the most prominent in commercial real estate and to a lesser degree in residential real estate.  The house-price-to-income ratio (just take the average house price and divide by average income) in Tokyo at the height of the bubble was 9, while in China in 2010, in the big cities this number was much greater (Beijing 15, Shanghai 13), and in fact the ratio for the whole of China was over 8.  The commercial real estate bubble might have been greater in Japan; it is hard to tell.  I remember reading that at the peak of the Japanese bubble the Imperial Palace was worth more than a state of California.  But from different reports I’ve seen, China has plenty of empty skyscrapers. But China also has a couple more bubbles,
Read More »