Day: June 22, 2013

On Researching Industries

On Researching Industries

From a reader:

Hi David,

I’ve been a classic “bottom-up” investment advisor for a few years now, but I agree with your assessment that industries, in general, are under-analyzed by the masses.

What is the best way to learn about a particular industry? Are you aware of any comprehensive publication that sheds light on both the qualitative characteristics of an industry and the appropriate valuation methods?

Thanks!

There are several ways to learn industries.? I’ll try to explain:

1) You can choose a bunch of companies in an industry, email the investor relations area, and ask for packet equivalent to what they send buy-side analysts.? I’ve done that at various points in time for industries I wanted to learn.? Compare and contrast.? Who is doing well, badly and why?? In the mid-90s, I did this for the trucking industry, and learned a ton of information.? I also talked with some trucker friends of mine who gave me on the ground data.

2) You can read industry publications.? When I was a buy-side analyst for the insurance industry, I read those regularly.? They exist for almost every significant industry.

3) You can go to industry meetings.? Almost every industry has meetings where they discuss industry conditions.? Just don’t be too pushy in trying to get information.? Be interested in the industry as a whole, and don’t try to gain material nonpublic information.

4) Value Line & Morningstar both provide industry analyses.? So do most major investment banks.? You can review those and compare and contrast.

5) You can use the quality screen to look at what industries have a rising ratio of gross profits from operations, versus a falling ratio of gross profits from operations.? Here is a chart from the last seven years:

PRICINGPOWER_8574_image002

The colored field reading “Chg” is the difference between the average of years 1-3 and years 5-7.? Profits are noisy, that’s why I did an average.

Gross profits from operations as a fraction of assets [GP/A] is a good measure of the quality of an industry, and whether their sustainable competitive advantage is is improving or declining.

Now, when I look at a measure like that, I do one of two things:

  1. I buy cheap companies with strong balance sheets among those industries where GP/A has fallen hard, and buy them, knowing that they are survivors, and will rebound.
  2. I buy moderately strong companies in industries where GP/A has been improving, and after research, the trend is not well understood.? It helps if the industry is dull, and few people follow it.

That’s what I do.? Whatever you do, size it to your own abilities, or the abilities of your firm.? Beyond that, look at cheapness of a company relative to normalized earnings, i.e., average earnings over a full market cycle.

Sorted Weekly Tweets

Sorted Weekly Tweets

Bernanke press conference (reverse order)

  • It’s over!
  • FOMC Participants Central Tendency of PCE inflation @ Year-End 2013-5, LR 1.22% 1.68% 1.88% 2.00% change -0.33% -0.07% -0.05% 0.00%
  • Bernanke gives an odd answer to Nikkei reporter, particularly given the Fed’s adoption of failed Japanese economic & monetary policies $$
  • Yeah, weird answer. RT @Matthew_C_Klein: “Volatility is linked to the BOJ’s efforts. Seems logical.” Um…
  • BB shows his ignorance on the topic of money market funds, a floating NAV will destabilize, and lead to runs on funds
  • FOMC Participants Central Tendency Unemployment Rate @ Year-End 2013-5, LR 7.23% 6.60% 6.02% 5.57% Change -0.12% -0.17% -0.19% 0.00% $$
  • FOMC Participants Central Tendency Change in GDP @ Year-End 2013-5, LR 2.40% 3.14% 3.19% 2.43% Change -0.13% -0.03% -0.07% 0.00% $$
  • BB, markets do not care about the past, they care about the future. Stock levels of bonds r the past, future behavior affects markets now $$
  • FOMC Participants Target Federal Funds Rate at Year-End 2013-5, LR 0.26% 0.58% 1.78% 4.01% Change from prior -0.03% 0.03% 0.47% 0.00% $$
  • Overview of FOMC participants’ Appropriate Timing of Policy Firming central tendency shrinks by 2 months to 2.3 years
  • Bernanke questioned on MBS holdings, denies that the Fed is having a big effect on the market. If so, why buy there for policy reasons? $$
  • BB is confused think that holding securities will keep rates low; yields react to changes in expectations of future actions $$
  • Cutting off asset purchases at 7% unemployment further clouds the market view of Fed policy; the Fed is far more flexible than that. $$
  • BB also refuses to talk about his future at the FOMC, after being asked by a Washington Post reporter. $$
  • Bad question from Bloomberg reporter suggesting that the unemployment trigger should be lower. BB gives no much of an answer. $$
  • Good question on the rise in real rates from the FT reporter. BB says that he doesn’t get why that happened. $$
  • Question on long term interest rates — BB says that is is an improving economy. Points to housing again (the dead cat bounce) $$
  • Hilsenrath asks a decent question on punk economic growth. BB responds with housing and State govs & 2 small of a deficit (!) $$ #pleasego
 

Companies & Industries

 

  • Validus Plunges, Credit Suisse Cites Cat-Bond Threat stks.co/sHbj Cat bonds, ILTs r useful, but no threat 2 reinsurers FD:+ $VR $$
  • Warren Buffett Bought This Stock. Should You? stks.co/rHeV $YHOO has2 get a technical analyst 2find someone 2disagree w/Buffett $$
 

Market Impact

 

  • Credit market rout may force US IG issuers to do more legwork stks.co/jaNp This is normal for Wall Street; this is not news $$
  • Gold Trade Most Bearish Since ?10 as Fed Spurs Drop stks.co/rHeI The juice comes out of every risk asset w/end of QE hint $$
  • Nobody Is Paying Attention To Junk? stks.co/ia6G As I have argued before, yields r better indicators of risk than spreads. $$
  • Honeywell CEO: Boomer Retirement ?Will Crush the System? stks.co/sH90 Duh, it took you this long to figure it out? $$ #FTL
  • Risks of Too Much Oneness stks.co/dYNb If assets bundle into risky and riskless, it is usually time 2 reduce risk $$
  • stks.co/cYAf Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term “Shibor” borrowing rates $$
  • Income hunters: Bank on this dividend stock play stks.co/iZpo Feels like a tired bunch of large cap blend stocks $$ #noedge
  • With a Month to Go Before Dell’s Buyout Vote, Eyes on Proxy Firms stks.co/qGyq Q boils down2 what %age of $DELL is held by arbs $$
  • Missing the Target stks.co/rGpy Target date funds should b called asset allocation funds with varying levels of volatility $$
  • The Intelligent Investor: Why the Markets? Latest Stumbles Are Good News @jasonzweigwsj stks.co/sGm7 Areas 2consider investment $$
Rest of the World

 

  • Brazilian Revolt Claims Second Life as Violence Erupts stks.co/pHkL Tensions spread partly due 2 easy $$ pushing EM inflation
  • Moody’s warns on China’s local govt debt stks.co/dYmW China’s debt crisis will be a national crisis b/c China won’t let cos die $$
  • PBOC Said to Inject Cash After China Money Rates Jump stks.co/iaQe Like the US in 2007, where insolvency hid behind illiquidity $$
  • Abe?s Arrows of Growth Dulled by Japan?s Three Principles stks.co/dYhU Flexible labor markets r an aid 2 growth in any economy $$
  • China Banking Stress May Come Faster on Cash Crunch, Fitch Says stks.co/pHI7 Interbank market failures plague Middle Kingdom $$
  • G8 three Ts: trade, tax and transparency stks.co/fa2Z Stem tax leakage from corporations & individuals, & maybe trade freely $$
  • Cracks Appearing on the Great Financial Wall of China – Remember 1997? stks.co/fZnQ Interbank lending market skittish over Fed $$
  • Chinese Consortium, $AIG Extend Deadline on Deal for Plane-Lease Unit stks.co/ha1q Makes 10% downpayment, financing rest shaky $$
  • In Japan, Reform Plan Faces Troubles With Mergers stks.co/sGm3 Some cultures r averse 2change, even if there r gains 2b made $$
  • Friendships Die Hard for Hezbollah Angering Gulf Over Syria stks.co/cYAq Increasingly a Shia-Sunni proxy war, raising tensions $$
  • Rohani Wins Iran Presidential Vote in First Round stks.co/dY2Z Now 2c what he can do vs the mullahs that hold economic power $$
  • The Cracks in China’s Shiny Buildings stks.co/fZgu Adjusted 4 quality, China is not the 2nd largest economy in the world $$ #GIGO
  • Ancient Roman Concrete Is About to Revolutionize Modern Architecture stks.co/jZaF Roman cement had lyme &volcanic ash: enduring $$
  • Obama Says Bernanke Has Been @ Fed ?Longer Than He Wanted? stks.co/cYOk Long than we wanted, rather, but who wants Yellen? $$ #yuk
 

Illegal Spying by the Government

 

  • Booz Allen, the World’s Most Profitable Spy Organization stks.co/faUn Almost nothing gets done in DC w/o a contractor $$
  • NSA Surveillance Leaks Startle Privacy Board Back to Life stks.co/haI3 Weak privacy board brought to attention by whistleblower $$
  • It’s OK For The NSA To Spy On Americans, But Don’t Monitor A Mosque stks.co/jZiD Profiling is controversial, but it saves $$
  • Phone Metadata Proves a Powerful Tool 4 NSA, Police stks.co/cY4A If fewer crimes get solved thru lack of metadata, that’s fine $$
 

Central Banking

 

  • Bernanke Makes Life Even More Difficult for the Euro stks.co/iaWC All risk assets r getting hit; the Euro has its own problems $$
  • Bullard’s Unusual Dissent stks.co/tHci Unworthy of the St. Louis Fed. Time to find a new president who believes in sound money $$
  • ?Central Banking at a Crossroad stks.co/rHcO Agree w/Volcker on monetary policy, but not on all aspects of regulation. Good read $$
  • Tapering 101, Courtesy of Japan stks.co/qHbB Bernanke needs to learn from Japan; the biggest item is that QE did not work $$
  • Market Calls Fed’s Bluff stks.co/eYWn Fed is now tied into the markets; they have lost the freedom to jolt markets w/o cost $$
  • ?This was really eye-opening for me?: Fed?s Raskin shocked@ low quality of work @ local job fair stks.co/aYWN Utter Lightweight $$
  • Obama Says Bernanke Has Been @ Fed ?Longer Than He Wanted? stks.co/cYOk Long than we wanted, rather, but who wants Yellen? $$ #yuk
?

US Politics

 

  • Case Closed? Far From It. stks.co/faTx Whatever Rep. Elijah Cummings says, the opposite is usually true. $$ #endtheMDgerrymander
  • IMF calls on government to reduce wage and firing costs even further stks.co/eYvg Deregulation is the only economic free lunch $$
  • Pension Fund Takes Neighborly Advice stks.co/tHWe Jack Bogle advises his county pension fund to index & they do so $$
  • Jefferson County Debt Plan Is Costly stks.co/cYOi Presence of capital appreciation bonds increases the debt load $$ cc: @munilass
 

Financial Companies

 

  • Reason: banks have short, callable liability structures and insurance companies generally don’t. Insurance is better regulated than banks $$
  • US Weighs Doubling Leverage Standard 4 Biggest Banks stks.co/faTm Insurance companies have ~10% capital, banks should have more $$
 

Other

 

  • Sodomy Hazing Leaves 13-Year-Old Victim Outcast in Colorado Town stks.co/qHbF Rape of any sort should be automatic expulsion $$
  • A Few Voices Warn of US Energy Revolution ‘Hype’ stks.co/sH8y Depletion is the issue here, $ fracked wells tend 2 deplete fast $$
  • Impossibly Efficient stks.co/sH8w Good note on EMH, points out how EMH needs people who don’t believe in it to make EMH work $$
  • The Curious Case of Doug Kass and the Twitter Haters stks.co/rHCF I don’t know; a man as stalwart as @DougKass will return $$
  • A Warning Shot on Management Buyouts stks.co/sH8v Basically a slap on the wrist that might expand 4 future violators $$ $REV #FTL
  • Wrong: Even Pessimists Feel Optimistic About American Economy stks.co/ha2y These r economists being interviewed, biased views $$
  • Nuclear Decommissioning Surge Is Investor Guessing Game stks.co/qH0U It pays 2 delay final cleanup, radiation levels fall $$
  • Meh: LinkedIn Builds Its Publishing Presence stks.co/iZqP I guess it works for some, but I rarely find their publishing useful $$
  • Rupert Murdoch Files 4Divorce From Pie-Deflecting Wife stks.co/tGox Who will protect him now? He doesn’t have 2 worry about her $$
  • Wrong: Detroit Looks to Pay Less to Bondholders stks.co/hZuv Bold words from a man whose city will lose in court vs creditors $$
  • Bloomberg Reporters? Practices Become Crucial Issue for Company stks.co/rGpZ Q: Is this disclosed in the subscriber agreement? $$
 

Replies, Retweets, and Comments

  • @TheStalwart QE Increases debt. In a situation where there are too many debts, deflation comes b/c ppl think that debts will not b $$ good.
  • Join me in calling on the NSA and the US government to #stopwatchingus. Sign this now: stks.co/qGtB Stand up & b counted $$
  • @c_c_saunders I would prefer John Taylor, Lacker, Plosser, Warsh, Fisher, Hanke, James Grant, etc. I would even take the challenge, & win $$
  • “We’re down 4% since BB started talking. Markets are discounting mechanisms; you know that well?” ? David_Merkel disq.us/8dow0x $$
  • @ReformedBroker Knew she was a lightweight; this just confirms it. I thought the Fed was exempt from diversity requirements…
  • Except through M&A, IPOs, etc., money doesn’t really enter or leave markets. That said, relative?” David_Merkel disq.us/8dmh20 $$
Theme: Overlay by Kaira