Friday, April 3, 2009
Saturday, March 21, 2009
A friendly 'bot: ISRG
I look for "hot stocks" that are way overvalued on any objective basis
and then wait to buy them when the market over reacts in the other
direction. I think that ISRG is an example of such a company-- it's
been thrown out in the bathwater.
All of you who spend some time in the OR are probably familiar with
this company: they make the famous Da Vinci robot used for minimally
invasive surgeries such as prostatectomies, hysterectomies and some
cardiac indications.
Each unit costs the hospital $1.5 M and $120,000 p.a. to maintain the
device. There's one at Vancouver General Hospital. We have a single
surgeon on our staff who is trained to use the Da Vinci. He is
threatening to leave for greener pastures (down South) if the hospital
doesn't acquire one soon. (I hope he can speak American..... lol... I
wouldn't hold my breath waiting for it to come).
Target procedures:
Urology (over 150K target procedures in US)
da Vinci®Prostatectomy –dVP
dV Nephrectomy
dV Cystectomy
dV Pyeloplasty
Gynecology (over 350K target procedures in US)
da Vinci®Hysterectomy –dVH
dV Sacral Colpopexy
dV Myomectomy
Cardiothoracic (over 120K target procedures in US)
da Vinci®Mitral Valve Repair
dV Revascularization
General Surgery
The reason it is a GARP stock is that it is not remotely cheap in
absolute terms (sorry about the formatting):
Stock Industry S&P 500 Stock's 5Yr Average*
Price/Earnings 19.0 21.4 13.6 53.8
Price/Book 3.0 2.2 88.5 7.5
Price/Sales 4.4 2.0 19.4 13.2
Price/Cash Flow 13.9 12.7
8.1 20.3
Dividend Yield % --- --- 3.1 ---
* Price/Cash Flow uses 3-year average.
The thing is that even in this depressed economic environment, double
digit earnings growth is expected in this company for the next 5-8
years. The reasons for this are:
1. low market penetration so far
2. being designated "standard of care" for prostatectomies and
probably soon for hysterectomies. (as you all know these procedures
are demographically loaded! The expectation is that the number of
procedures will undergo almost logarithmic growth over the next 20
years).
3. high barriers to entry-- regulation, difficult to learn and
resistance to changing to new 'bots by surgeons
Other financial considerations:
1. no debt
2. very high and increasing free cash flows (215 M p.a. 2008)
3. "fat" net margins in the mid 30's
4. carrying $23/share of cash on the balance sheet to help it through
the recession/downturn.
Downsides to consider:
1. competition will eventually arise and squeeze margins
2. political risk-- Obama has his eye squarely on big Pharma and the
med device makers-- draconian legislation is not out of the question
3. pipeline? very expensive R&D
My approach will be do buy in the 80's and sell at $160 and above. I
don't intend to hold for the very long term (over 5 years) as I prefer
to invest in boring companies that are in slowly changing industries.
Surgical robots sure don't fit that criterion, eh?
and then wait to buy them when the market over reacts in the other
direction. I think that ISRG is an example of such a company-- it's
been thrown out in the bathwater.
All of you who spend some time in the OR are probably familiar with
this company: they make the famous Da Vinci robot used for minimally
invasive surgeries such as prostatectomies, hysterectomies and some
cardiac indications.
Each unit costs the hospital $1.5 M and $120,000 p.a. to maintain the
device. There's one at Vancouver General Hospital. We have a single
surgeon on our staff who is trained to use the Da Vinci. He is
threatening to leave for greener pastures (down South) if the hospital
doesn't acquire one soon. (I hope he can speak American..... lol... I
wouldn't hold my breath waiting for it to come).
Target procedures:
Urology (over 150K target procedures in US)
da Vinci®Prostatectomy –dVP
dV Nephrectomy
dV Cystectomy
dV Pyeloplasty
Gynecology (over 350K target procedures in US)
da Vinci®Hysterectomy –dVH
dV Sacral Colpopexy
dV Myomectomy
Cardiothoracic (over 120K target procedures in US)
da Vinci®Mitral Valve Repair
dV Revascularization
General Surgery
The reason it is a GARP stock is that it is not remotely cheap in
absolute terms (sorry about the formatting):
Stock Industry S&P 500 Stock's 5Yr Average*
Price/Earnings 19.0 21.4 13.6 53.8
Price/Book 3.0 2.2 88.5 7.5
Price/Sales 4.4 2.0 19.4 13.2
Price/Cash Flow 13.9 12.7
8.1 20.3
Dividend Yield % --- --- 3.1 ---
* Price/Cash Flow uses 3-year average.
The thing is that even in this depressed economic environment, double
digit earnings growth is expected in this company for the next 5-8
years. The reasons for this are:
1. low market penetration so far
2. being designated "standard of care" for prostatectomies and
probably soon for hysterectomies. (as you all know these procedures
are demographically loaded! The expectation is that the number of
procedures will undergo almost logarithmic growth over the next 20
years).
3. high barriers to entry-- regulation, difficult to learn and
resistance to changing to new 'bots by surgeons
Other financial considerations:
1. no debt
2. very high and increasing free cash flows (215 M p.a. 2008)
3. "fat" net margins in the mid 30's
4. carrying $23/share of cash on the balance sheet to help it through
the recession/downturn.
Downsides to consider:
1. competition will eventually arise and squeeze margins
2. political risk-- Obama has his eye squarely on big Pharma and the
med device makers-- draconian legislation is not out of the question
3. pipeline? very expensive R&D
My approach will be do buy in the 80's and sell at $160 and above. I
don't intend to hold for the very long term (over 5 years) as I prefer
to invest in boring companies that are in slowly changing industries.
Surgical robots sure don't fit that criterion, eh?
Monday, March 16, 2009
Sunday, March 15, 2009
Positioning for a recovery---- whenever that will be
KSW Inc KSW.-- a microcap "value" engineering firm based in NYC that is highly profitable, holds 33% more cash than its market cap and pays a generous dividend (for now). Benjamin Graham would smile. I bought an original position at $2/share. A more detailed analysis will come out in our newsletter-- hopefully this week.
Fortress Paper Inc. FTP.TO-- I've covered this in detail in January and this was my first newsletter stock to study. Their Q4 numbers were strong, as expected. The balance sheet and valuations are highly favourable and management is executing their promised iniatives. The security paper segment is bottlenecked and FTP has had to politely turn away business to their competitors. An accretive acquisition or even a new build is likely in the offing and I believe the management has the experience and track record of good stewardship to pull it off without getting into trouble. Like many value investors, I'm very leary of M&A's as most don't go well, are not in the best interest of the shareholder and achieve only diworseification!. I plan to add to my small position at the company's 52 week low of $4.60/share.
DOW Diamonds Trust DIA , an ETF that buys all 30 DOW Industrial companies, weighted according to their market cap-- I was able to buy in near the short term bottom at $67/share. The dividend yield of the basket is just under 5%, providing incentive to sit on it for the intermediate term rather than play trader and try to time the market (which frankly, I suck at). I realize that the components of the DOW will be changing soon as it casts off some of the uber-dogs like GM and possibly Citigroup. This is a play on historically low valuations (except for McDonalds), cheap diversification and global exposure leading the recovery. I've mentioned before that the DOW companies should not be thought of as "American". Many of the larger components (i.e. IBM) get over 50% of their revenue from overseas. I'll buy (cautiously) again if DIA drops to 6000 and again at 5000. If it drops lower than that, we will be in interesting times, indeed! It's pretty tough to pin a fair market value on DIA as it would be even more of a moving target than its components' FMVs. To simplify matters, I'll take Graham's approach of selling (part or whole of a position, depending on the fundamentals at the time) after a 50% capital appreciation and/or 2-3 years pass by, whichever comes first. I could be persuaded to wait as long as 5 years-- the 2-3 year rule seems pretty arbitrary to me.
Belzberg Technologies BLZ.TO-- I've touched on this company in the past. In short, it provides secure, turn-key brokerage systems for trading equities and options for banks and the big brokers. It's in a hated sector, debt free and trading below its cash holdings ($1.50/share cash v.s. $1.33/share trading on Friday). Last quarter Q4 reported a small loss/share for the year due to restructuring charges. I think it represents another asymmetric intermediate term bet, with the catalyst being the eventual and inevitable return of Wall St. along with the European trading centres that represent BLZ's customer base.
Fortress Paper Inc. FTP.TO-- I've covered this in detail in January and this was my first newsletter stock to study. Their Q4 numbers were strong, as expected. The balance sheet and valuations are highly favourable and management is executing their promised iniatives. The security paper segment is bottlenecked and FTP has had to politely turn away business to their competitors. An accretive acquisition or even a new build is likely in the offing and I believe the management has the experience and track record of good stewardship to pull it off without getting into trouble. Like many value investors, I'm very leary of M&A's as most don't go well, are not in the best interest of the shareholder and achieve only diworseification!. I plan to add to my small position at the company's 52 week low of $4.60/share.
DOW Diamonds Trust DIA , an ETF that buys all 30 DOW Industrial companies, weighted according to their market cap-- I was able to buy in near the short term bottom at $67/share. The dividend yield of the basket is just under 5%, providing incentive to sit on it for the intermediate term rather than play trader and try to time the market (which frankly, I suck at). I realize that the components of the DOW will be changing soon as it casts off some of the uber-dogs like GM and possibly Citigroup. This is a play on historically low valuations (except for McDonalds), cheap diversification and global exposure leading the recovery. I've mentioned before that the DOW companies should not be thought of as "American". Many of the larger components (i.e. IBM) get over 50% of their revenue from overseas. I'll buy (cautiously) again if DIA drops to 6000 and again at 5000. If it drops lower than that, we will be in interesting times, indeed! It's pretty tough to pin a fair market value on DIA as it would be even more of a moving target than its components' FMVs. To simplify matters, I'll take Graham's approach of selling (part or whole of a position, depending on the fundamentals at the time) after a 50% capital appreciation and/or 2-3 years pass by, whichever comes first. I could be persuaded to wait as long as 5 years-- the 2-3 year rule seems pretty arbitrary to me.
Belzberg Technologies BLZ.TO-- I've touched on this company in the past. In short, it provides secure, turn-key brokerage systems for trading equities and options for banks and the big brokers. It's in a hated sector, debt free and trading below its cash holdings ($1.50/share cash v.s. $1.33/share trading on Friday). Last quarter Q4 reported a small loss/share for the year due to restructuring charges. I think it represents another asymmetric intermediate term bet, with the catalyst being the eventual and inevitable return of Wall St. along with the European trading centres that represent BLZ's customer base.
Sunday, March 8, 2009
Interesting times and more mea culpa
“A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.”
My wife bought me a copy of the 6th edition of "Security Analysis" by Dodd and Graham for my birthday--- with forewards by Warren Buffett, Seth Klarman, Bruce Berkowitz and the like. I'm going to digest every word... I can hardly wait.
On the more sobering matter concerning the markets and our hemorrhaging portfolios, I've been slowly and methodically changing my positions in the following securities, while reflecting what I've done wrong and reasonably well:
LYG Lloyd's TSB: SELL (for a 90% loss)-->Pro forma results of Lloyds pre-merger business were very decent ($1 B profit) considering the toxic atmosphere for banks, particularly of the UK sort. Not that this matters a whit, as the hasty and politically motivated deal went through without much discussion with shareholders. The share price was quite rationally sliced to ribbons (<$3/share from over $20) as it became clear to investors that HBOS' aggressive corporate bond and mortgage portfolio was going to bring on eye-popping losses for an extended period. The combined entity has become semi-nationalized with the UK gov't owning 65% of equity in the company as it required more and more funding to cover these losses.The dividend was terminated about 6 months ago, of course. Where I made the error was not in assuming that LYG was "too big to fail"; it was in not realizing that the government needs to protect the interests of the national economy, often to the detriment of shareholders. I was impressed by Lloyd's track record of conservative management and their very good balance sheet. In the past, they have always been very careful about costs (to the point of having a reputation for being stingy) and I figured that this good stewardship would pay off down the line when the competitors gave up market share to LYG during the meagre times we're in now. After the HBOS merger was announced, I was lulled into complacency by the CEO's message that the new company would emerge from the crisis as a largely unchallenged semi-monopoly of the mortgage market in the UK. In retrospect, when management makes uncharacteristically risky moves (particularly a merger or acquisition), I should sell-- even if it means taking a loss. Lesson #12322, engraved into my eyeballs for posterity. UNH United Health (an HMO)-- sold for 30% profit due to difficulty of assessing political risks. For much the same reasoning, (I read Obama's budget carefully) I'm not entering a position in SYK Stryker or IHI (med device ETF) although I find the investment profile very appealling of those stocks. You just can't ignore the political aspects. Thanks To Steven Friedman for his insight here.
DELL-- SELL -half of my position was sold after digesting the last quarter's results, for a loss of 35%. I'm not certain that this company still isn't very undervalued and the balance sheet is very strong indeed; however, the key profile that brought me in in the first place isn't as compelling-- the cash flow/share.
PCs, laptops and netbooks are becoming commodities, pure and simple. Dell made its name for being the lowest cost producer and a reliable, quality product. It will now face fierce and probably insurmountable competition from Chindian firms. Its franchise has been deeply eroded due to austere product lines (albeit, better lately) and damage to its reputation by providing poor support for its products (outsourcing and poorly executed quality control of that support network). Insider and guru buying is mixed. This company has confounded me. What I am most certain of is that there are better businesses with fatter margins and wider moats to deploy capital into. We'll see if I'm wrong.
SGP Schering-Plough- SELL- a great company with a great pipeline of products that I was lucky to get in at $12/share after the Vytorin media spin knocked the stock down irrationally. The impending acquisition of SGP by Merck was announced today and the share price appreciated 14% just today. I plan to take profits, hopefully in the mid 20's. I have no interest in owning Merck and even less interest in owning a mega-mega cap combined company with all the execution risk involved in such a large deal and the hostile political exposure to big Pharma evident in the Obama administration's budget. I am interested in the smaller non-US companies who have excellent balance sheets, strong pipelines and generic exposure like SNY, NVS and NVO.
CX Cemex- SELL- for a 65% loss- a potentially great company that was crushed by its debt load. I made the mistake of expecting historic nadir cashflows (the bottom of previous business cycles and other recessions Cemex has weathered through) to be sufficient to meet Cx's debt covenants. I then realized that I wasn't aware of the massive derivative holdings of the company (other than the hedges held for feedstock) and the largely unhedged forex risk. This was poor research on my part and I can blame no one other than myself.
more on the "buy side" in another post...
Douglas Adams (author of "The Hitchhiker's Guide to the Universe")
My wife bought me a copy of the 6th edition of "Security Analysis" by Dodd and Graham for my birthday--- with forewards by Warren Buffett, Seth Klarman, Bruce Berkowitz and the like. I'm going to digest every word... I can hardly wait.
On the more sobering matter concerning the markets and our hemorrhaging portfolios, I've been slowly and methodically changing my positions in the following securities, while reflecting what I've done wrong and reasonably well:
LYG Lloyd's TSB: SELL (for a 90% loss)-->Pro forma results of Lloyds pre-merger business were very decent ($1 B profit) considering the toxic atmosphere for banks, particularly of the UK sort. Not that this matters a whit, as the hasty and politically motivated deal went through without much discussion with shareholders. The share price was quite rationally sliced to ribbons (<$3/share from over $20) as it became clear to investors that HBOS' aggressive corporate bond and mortgage portfolio was going to bring on eye-popping losses for an extended period. The combined entity has become semi-nationalized with the UK gov't owning 65% of equity in the company as it required more and more funding to cover these losses.The dividend was terminated about 6 months ago, of course. Where I made the error was not in assuming that LYG was "too big to fail"; it was in not realizing that the government needs to protect the interests of the national economy, often to the detriment of shareholders. I was impressed by Lloyd's track record of conservative management and their very good balance sheet. In the past, they have always been very careful about costs (to the point of having a reputation for being stingy) and I figured that this good stewardship would pay off down the line when the competitors gave up market share to LYG during the meagre times we're in now. After the HBOS merger was announced, I was lulled into complacency by the CEO's message that the new company would emerge from the crisis as a largely unchallenged semi-monopoly of the mortgage market in the UK. In retrospect, when management makes uncharacteristically risky moves (particularly a merger or acquisition), I should sell-- even if it means taking a loss. Lesson #12322, engraved into my eyeballs for posterity. UNH United Health (an HMO)-- sold for 30% profit due to difficulty of assessing political risks. For much the same reasoning, (I read Obama's budget carefully) I'm not entering a position in SYK Stryker or IHI (med device ETF) although I find the investment profile very appealling of those stocks. You just can't ignore the political aspects. Thanks To Steven Friedman for his insight here.
DELL-- SELL -half of my position was sold after digesting the last quarter's results, for a loss of 35%. I'm not certain that this company still isn't very undervalued and the balance sheet is very strong indeed; however, the key profile that brought me in in the first place isn't as compelling-- the cash flow/share.
PCs, laptops and netbooks are becoming commodities, pure and simple. Dell made its name for being the lowest cost producer and a reliable, quality product. It will now face fierce and probably insurmountable competition from Chindian firms. Its franchise has been deeply eroded due to austere product lines (albeit, better lately) and damage to its reputation by providing poor support for its products (outsourcing and poorly executed quality control of that support network). Insider and guru buying is mixed. This company has confounded me. What I am most certain of is that there are better businesses with fatter margins and wider moats to deploy capital into. We'll see if I'm wrong.
SGP Schering-Plough- SELL- a great company with a great pipeline of products that I was lucky to get in at $12/share after the Vytorin media spin knocked the stock down irrationally. The impending acquisition of SGP by Merck was announced today and the share price appreciated 14% just today. I plan to take profits, hopefully in the mid 20's. I have no interest in owning Merck and even less interest in owning a mega-mega cap combined company with all the execution risk involved in such a large deal and the hostile political exposure to big Pharma evident in the Obama administration's budget. I am interested in the smaller non-US companies who have excellent balance sheets, strong pipelines and generic exposure like SNY, NVS and NVO.
CX Cemex- SELL- for a 65% loss- a potentially great company that was crushed by its debt load. I made the mistake of expecting historic nadir cashflows (the bottom of previous business cycles and other recessions Cemex has weathered through) to be sufficient to meet Cx's debt covenants. I then realized that I wasn't aware of the massive derivative holdings of the company (other than the hedges held for feedstock) and the largely unhedged forex risk. This was poor research on my part and I can blame no one other than myself.
more on the "buy side" in another post...
Friday, February 20, 2009
A Silver-back Grizzly roars again
Prem Watsa, like Jeremy Grantham, was a perma-pessimist about equities until very recently.
Read this interview with him at the Financial Post
l
p.s. I've put in a bid for the DIA ETF at $70/share. I currently have a bid that will probably be filled soon for $40/share of NVS, one of my favourite pharm companies. I've been waiting to buy NVS for a long time this cheap.
Read this interview with him at the Financial Post
l
p.s. I've put in a bid for the DIA ETF at $70/share. I currently have a bid that will probably be filled soon for $40/share of NVS, one of my favourite pharm companies. I've been waiting to buy NVS for a long time this cheap.
Wednesday, February 18, 2009
Bear Market Rallies and Opportunities
When the general market rises on a hope and a dream rather than any tangible fundamentals, I use the opportunity to sell some of the companies I've been holding that meet any of the following criteria:
PHG-- Royal Phillips Electronics-- I sold my entire stake for a loss of 40% (not including dividends collected over 18 months). Compelling valuations, a generous dividend and the "green" angle (the LED arm) were more than offset by the inherent complexity of a large conglomerate, onerous competition (like GE and Siemens), a deteriorating balance sheet and a management that had a questionable record of execution. Although I liked what I saw initially when I first evaluated this business, I overlooked how complicated its corporate structure was and I certainly didn't have a feel for the committment and long term goals of the management. Mason Hawkins obviously doesn't agree and has increased his stake to 28M shares in December
UNH-- United Health Group (an HMO)-- I sold my entire stake for a gain of 30%, not including dividends. Very attractive valuation and what I thought was a overblown market reaction to political risk lead me to take a position. I sold because of a continuously deteriorating medical cost ratio, management with shaky ethics (I value reputation and this is one of the most hated companies in the world... hated by its customers!) and increasing competition from UNH's not-for-profit peers who will likely be more favourably treated in the upcoming reform measures (if they actually happen). I notice that many of my favourite gurus have sold recently as well including Warren Buffett, Seth Klarman, David Einhorn and Jean-Marie Eveillard.
LYG Lloyd's TSB Group and HOG Harley Davidson have both been thoroughly trashed but I continue to hold on to my stakes (despite the termination of the dividend in LYG and the cut in Harley's) as I remain to be convinced that either business will completely fail and instead emerge down the line in even a more dominant position than prior to the crisis. I am considering adding carefully to both positions although I'm more likely to do so for HOG than LYG. Buffett's almost usurious loan to HOG makes it less likely that their financial division will drag down their rather decent balance sheet. LYG's fate seems to be less to do with the market and what a solid, conservative bank it used to be and more to do with backroom deals with the UK government who pushed them into the HBOS merger and then on to the possibility of nationalization down the line. It's really impossible to have an edge in this kind of situation so I'm going to have to think long and hard about what to do about LYG.
Recent new positions:
LUK Leucadia National at $14
BLZ.TO Belzberg Technologies at $1.75
FTP.TO Fortress Paper Ltd. at $4.60
Addition to existing positions:
BBSI at $9.00
I'm actively researching:
IIC.TO Ing Canada
JOE St. Joe Company
BIP Brookfield Infrastructure Partners
KSW KSW Inc.
BNI Burlington North Santa Fe railroad
More on these later....
l
- the share price is at or near the target (usually 90% my estimated fair market value)
- the management, business plan or prospects for the business has changed materially and most likely, permanently
- Mea culpa--->I identify a mistake I made in the original analysis that either significantly diminishes the FMV of the company or makes it too difficult to determine.
PHG-- Royal Phillips Electronics-- I sold my entire stake for a loss of 40% (not including dividends collected over 18 months). Compelling valuations, a generous dividend and the "green" angle (the LED arm) were more than offset by the inherent complexity of a large conglomerate, onerous competition (like GE and Siemens), a deteriorating balance sheet and a management that had a questionable record of execution. Although I liked what I saw initially when I first evaluated this business, I overlooked how complicated its corporate structure was and I certainly didn't have a feel for the committment and long term goals of the management. Mason Hawkins obviously doesn't agree and has increased his stake to 28M shares in December
UNH-- United Health Group (an HMO)-- I sold my entire stake for a gain of 30%, not including dividends. Very attractive valuation and what I thought was a overblown market reaction to political risk lead me to take a position. I sold because of a continuously deteriorating medical cost ratio, management with shaky ethics (I value reputation and this is one of the most hated companies in the world... hated by its customers!) and increasing competition from UNH's not-for-profit peers who will likely be more favourably treated in the upcoming reform measures (if they actually happen). I notice that many of my favourite gurus have sold recently as well including Warren Buffett, Seth Klarman, David Einhorn and Jean-Marie Eveillard.
LYG Lloyd's TSB Group and HOG Harley Davidson have both been thoroughly trashed but I continue to hold on to my stakes (despite the termination of the dividend in LYG and the cut in Harley's) as I remain to be convinced that either business will completely fail and instead emerge down the line in even a more dominant position than prior to the crisis. I am considering adding carefully to both positions although I'm more likely to do so for HOG than LYG. Buffett's almost usurious loan to HOG makes it less likely that their financial division will drag down their rather decent balance sheet. LYG's fate seems to be less to do with the market and what a solid, conservative bank it used to be and more to do with backroom deals with the UK government who pushed them into the HBOS merger and then on to the possibility of nationalization down the line. It's really impossible to have an edge in this kind of situation so I'm going to have to think long and hard about what to do about LYG.
Recent new positions:
LUK Leucadia National at $14
BLZ.TO Belzberg Technologies at $1.75
FTP.TO Fortress Paper Ltd. at $4.60
Addition to existing positions:
BBSI at $9.00
I'm actively researching:
IIC.TO Ing Canada
JOE St. Joe Company
BIP Brookfield Infrastructure Partners
KSW KSW Inc.
BNI Burlington North Santa Fe railroad
More on these later....
l
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