Friday 24 October 2014

Tesco: Expect full-year adjusted earnings per share (EPS) of 15.15p and about the same in 2015, says Deutsche.

Deutsche Bank has cut estimates for the second-half and for the full-year. The broker now expects full-year UK profit of £814 million, 23% less than previous estimates, and 13% less in Asia, driving annual group profit down 45% to £1.8 billion. In 2011, it was almost £4 billion. Expect full-year adjusted earnings per share (EPS) of 15.15p and about the same in 2015, says Deutsche.

At 174p, Tesco shares trade on 11.5 times forward earnings. That’s expensive given the ongoing price war will likely continue to crush UK margins, and without any guidance either on profits, or strategy. Much will be expected from the January statement. Until then, it’s difficult to see any positive catalysts.

http://www.iii.co.uk/articles/200463/tesco-horror-show-continues

http://www.iii.co.uk/tv/episode/tesco-fiasco-dissected


Thursday 16 October 2014

What is capitulation?

What is capitulation? CNBC Explains

Traditionally, the word capitulation describes a surrender between fighting armies. What is capitulation when it's used on Wall Street? What does it signify? We explain.

What is capitulation?

In simple terms, capitulation is when investors try to get out of the stock market as quickly as possibleand look for less risky investments. It's also described as panic selling. It's usually based on investor fears that stock prices will fall further than they have.

Capitulation is usually signaled by a decline in the markets of at least 10% in one day.

In getting out of the market, investors give up any previous gains in stock price. That means they take a financial loss, just to get out of stocks. The thinking is: take a smaller loss now rather than a bigger one later.

Real capitulation involves extremely high volume-or high numbers of traded shares-and sharp declines in stock prices.

Why do investors capitulate?

Suppose a stock starts dropping in price. There are two choices. Investors stick it out and hope the stock begins to appreciate-or they can take the loss by selling the stock.

If the majority of investors decide to wait it out, then the stock price will probably remain stable. But if the majority of investors decide to capitulate and give up on a stock, they start selling and that starts a sharp decline in a stock's price.

Are there any benefits from capitulation?

Only for those buyers ready to swoop in. After capitulation selling, common wisdom has it that there are great bargains to be had in the stock market. Why? Because everyone who wants to get out of a stock, for any reason, has sold it. The price should then, theoretically, reverse or bounce off the lowest price of the stock.

In other words, some investors believe that capitulation is the sign of a bottom and a chance to get stocks at a cheaper price than before the capitulation took place.

Is capitulation a way to gauge the markets?

Not at all.Capitulation is very difficult to forecast and use as a way to buy or sell stocks. There is no magical price at which capitulation takes place. Certainly during the trading day, stock prices and volumes are monitored and some measurement is used to determine if a capitulation is taking place and will remain so at the end of the day.

But most often, investors and market watchers look back to determine when the markets actually capitulated and see how far stocks have fallen in price for that one day of trading.

When have there been capitulations?

The stock market crash of 1929 that helped lead to the Great Depression, is a capitulation. In fact, it had more than one day of it.

On Oct. 24, 1929-what's known as Black Thursday-share prices on the New York Stock Exchange collapsed. A then-record number of 12.9 million shares was traded.

But more was to follow. Oct. 28, the first "Black Monday," more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 38 points, or 13 percent.

The next day, "Black Tuesday," Oct. 29, 1929, about 16 million shares were traded, and the Dow lost an additional 30 points.

More recently, there was a massive sell off or panic selling of stocks on Oct. 10, 2008, in what can be considered a capitulation. Not only U.S. stocks, but global markets had major declines of 10 percent or more on one day.

Investors flooded exchanges with sell orders, dragging all benchmarks sharply lower. It's believed fears of a global recession and the U.S. housing slump sparked the sell-off.


Sunday 12 October 2014

Slow and steady doesn't make headlines, but the company can continue to earn excellent returns on invested capital.

CTB operates worldwide in the agriculture equipment field.  Berkshire purchased it in 2002 and by 2009, it has picked up six small firms.

Berkshire paid $140 million for the company.  In 2008, its pre-tax earnings were $89 million.

Vic Mancinellis, CEO of CTB, an agricultural equipment company, one of Berkshire's boring manufacturing businesses, exemplifies another reason for optimism.

Since Buffett bought CTB in 2002, it has earned roughly an average 11 percent annual return, compared to the S&P return of only 3 percent.

How can such a basic business produce eye-popping results?

It wasn't through financial innovations or game-changing acquisitions.   Instead, Mancinelli focussed on "blocking and tackling, day by day doing the little things right and never getting off course:"

Ten years from now, Vic will be running a much larger operation and, more important, will be earning excellent returns on invested capital.

But slow and steady doesn't make headlines.  Investors approaching the stock market continue to put their money in the hare, not the tortoise.

Betting on tortoises can create long-lasting wealth.


Goodwill. Understand the "cost" of goodwill.

Goodwill is an accounting term that describes the dollars paid to buy a business over and above its book value.  Goodwill is a real number, but it tells us nothing about the future earning power of a business.

Berkshire owns some terrific businesses.  Many of them were purchased, however, at large premiums to net worth - point reflected in the good will item shown in its balance sheet.  In year 2008, its balance sheet reported a goodwill of US 16,515 millions.  The company earned an impressive 17.9% on average tangible net worth in 2008, but if goodwill was included, this reduced the earnings to 8.1%.

Buffett paid more for these businesses because he expects them to earn gobs of money in the future.  In this happy event, the goodwill number is not relevant.

However, if increased earnings don't materialize, the amount of goodwill will weigh on the earnings of a business.  How will this affect investor returns?

By including the amount paid for goodwill in the return calculation, Buffett clearly reports the "cost" of goodwill.

In 2008, Berkshire investors got a return of only 8.1% on their total net worth, including goodwill, compared to a return of 17.9% on tangible net worth, excluding goodwill.

Most large U.S. companies have large amounts of goodwill reported on their balance sheets.  This information is important to know.  If companies pay more for acquisitions than the future earnings these ventures produce, investors will be harmed.


Saturday 11 October 2014

Ignore the noises that rattle the markets. A conclusion about the economy does not tell us if the stock market will rise or fall.

In 75% of those years (from 1965 to 2008), the S&P stocks recorded a gain.   You can guess that a roughly similar percentage of years will be positive in the future too.Can you predict the winning and losing years in advance?  I don't think anyone can.

The economy was in shambles throughout 2009, but that did not tell us whether the stock market will rise or fall.

A conclusion about the economy does not tell us if the stock market will rise or fall.

Understand accounting allows you to understand how companies create value.

To better understand the wealth-producing advantages of the businesses, you have to understand accounting and the "vastly different" financial reporting characteristics of various businesses.

Accounting, just like eating spinach, may not be what you want, but it sure is good for you.  :-)

A little patience brings great rewards.  You can learn something important about each business and can also use your knowledge to understand how other companies create value.

You want to be informed, confident and loyal in your investing.


Buffett: See's Candies - A Great, Not Just a Good, Business

Buffet never forgets that growth is good, but only at a reasonable cost.

In 2007, See's Candies sold 31 million pounds of chocolate, a growth rate of only 2 percent.  What does Buffett see that other misses?

1.  He paid a sensible price for the business.
2.  The company enjoys a durable competitive advantage:  Its quality chocolate is bought by legions of loyal customers.
3.  It is a business he understands.
4.  It has great managers.

But See's Candies possesses one more attraction.  It throws off cash and requires very little capital to grow. 

Here is Buffett explaining See's value proposition in his 2007 shareholder letter:

" We bought See's [in 1972] for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million.  The capital then required to conduct the business was $8 million.  (Modest seasonal debt was also needed for a few months each year.)  Consequently, the company was earning 60% pre-tax on invested capital.  Two factors helped to minimize the funds required for operations.  First, the product was sold for cash, and that eliminated accounts receivable.  Second, the production and distribution cycle was short, which minimized inventories.

Last year See's sales were $383 million, and pre-tax profits were $82 million.  The capital now required to run the business is $40 million.  This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth - and somewhat immodest financial growth - of the business.  In the meantime pre-tax earnings have totalled $1.35 billion.  all of that, except for the $32 million, has been sent to Berkshire."

Buffett uses See's cash to buy other attractive businesses

"Just as Adam and Eve kick-started an activity that led to six billion humans, See's has given birth to multiple new streams of cash for us.  (The biblical command to "be fruitful and multiply" is one we take seriously at Berkshire.) .. There's no rule that you have to invest money where you've earned it.  Indeed, it's often a mistake to do so:  Truly great businesses, earning huge returns on tangible assets, can't for any extended period reinvest a large portion of their earnings internally at high rates of return."

But a company like slow-growing See's is rare in corporate America.  In order to grow earnings like See's, CEOs in other businesses typically would need "to invest $400 million, not the $32 million" that See's required.  Why is this true?  Because most growing businesses "have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments."  Not so at See's.

Buffett opines that the great business, like See's, is like a savings account that "pays an extraordinarily high interest rate that will rise as the years pass." 

See's is not just the candy.  To Buffett, the company is a chocolate-powered cash machine.



Additional notes:  Great, Good and Gruesome Businesses of Buffett

Capital Allocation and Savings Accounts

Buffett compares his three different types of great, good and gruesome businesses to "savings accounts." 

The great business is like an account that pays an extraordinarily high interest rate that will rise as the years pass.

A good one pays an attractive rate of interest that will be earned also on deposits that are added.

The gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

Bill Gross: Financial markets are artificially priced. Discounting of future profit streams by an artificially low interest rate results in corresponding high P/E ratios. Real estates are affected in the same way.

bill gross

Financial markets are artificially priced. In the bond market, there is nothing normal about a three year German Bund yielding a “minus” 10 basis points. Similarly, UK Gilts and U.S. Treasurys have in recent years never experienced such low yields and therefore high prices. The same comparison can be applied to stocks. While profits in many cases are at record highs, the discounting of future profit streams by an artificially low interest rate results in corresponding high P/E ratios. Real estate cap rates, which help to price homes and commercial shopping centers, are affected in the same way. While monetary policy with its Quantitative Easing and forward guidance for low future interest rates have salvaged a semblance of growth and job gains – especially in the U.S. – they have brought prosperity forward in the financial markets. If yields can’t go much lower, then bond market capital gains are limited. The same logic applies in other asset categories. We have had our Biblical seven years of fat. We must look forward, almost by mathematical necessity, to seven figurative years of leaner: Bonds – 3% to 4% at best, stocks – 5% to 6% on the outside. That may not be enough for your retirement or your kid’s college education. It certainly isn’t for many private and public pension funds that still have a fairy tale belief in an average 7% to 8% return for the next 10 to 20 years! What do you do?

Well the obvious advice on a personal level: Retire later, save more, accept a revised standard of living. But the financial advice varies with your age and willingness to take risk. Younger investors with a Texas Hold’em “all in” attitude could push all of their chips onto the equity table. Boomers nearing retirement probably cannot afford to. A lengthy bear market could force them permanently out of the game. So, one size does not fit all here. It never has.

What might be applicable for most generations, however, is an “unconstrained strategy” that I managed well for the past few years at PIMCO and which now provides me the opportunity for 100% of my time at Janus. An unconstrained strategy sounds very open-ended, and it is. But it allows a professional and experienced investment firm like Janus to select the most attractive alternatives across many asset categories while hopefully diminishing the risk of bond and stock bear markets. The strategy seeks to protect principal while providing an acceptable return in this low yielding, low returning world that I have just described. Unconstrained investors should expect a shorter average maturity for bonds; an ability to profit from currency movements currently taking place with the euro and the yen fits the description as well; taking advantage of what is known as “optionality” and investing in what I have successfully applied in the past with what is called “structured alpha,” would be an important component too. The simple explanation of an unconstrained strategy:

Take your best ideas within the context of a low duration/short maturity portfolio and try to help investors achieve what they consider to be an acceptable return. Watch the fees as well.

Whatever your risk/return persuasion, whether it be stocks, bonds, unconstrained, real estate, or “other,” an “intelligent investor” (as initially described by Benjamin Graham in the late 1940s) should be aware that returns almost necessarily cannot equal the magnificent prior decades that some of you might have experienced during my days at PIMCO. But I/we look forward, with the same intensity and “client comes first” attitude that led to my second marriage at Janus. James Bond famously said that “you only live twice.” I hope to emulate Mr. Bond as Janus Denver and Janus Newport Beach link hands and ideas to improve your financial balance sheet, and ultimately provide a better life for you and your family. Perhaps you only dance twice too. Sue and I would like that.

https://finance.yahoo.com/news/bill-gross-only-dance-twice-153815259.html

24 of the most profitable companies return an average of 573% in a decade

It might seem simple, but if you pick stocks based on earnings, you will be a winner


Bloomberg News/Landov Gilead Sciences (CEO John C. Martin) has been the most profitable of S&P 1500 member companies in health care over the past six months. Its stock has returned 431% in three years. 
 
The best-run companies tend to have the widest profit margins. So how does that translate into stock-price performance?
 
The short answer is that they are superior bets.
 
But first, there are several types of profit margins. For example, the gross margin is the difference between net sales and the cost of sales, divided by net sales. That measures the profitability of a company's core business, leaving out general expenses, interest, depreciation, taxes, amortization and other items. It is a useful measure to track companies' progress over time.
 
A conglomerate such as General Electric Co. (GE) will report an €œindustrial margin, which excludes its financial business, and will even break down a separate margin for each of its lines of business.
 
Depending on the sector or industry, certain margin measures may not be available. But the net income margin is net income divided net sales or revenue is a common measure available for every profitable company.
 
So we developed a list of highly profitable companies, using components of the S&P 1500. We picked the top three in the 10 broad market sectors by net income margin over the past 12 months, as calculated by FactSet.
 
Here they are, with the sectors in alphabetical order:
 
 
Most profitable S&P 1500 companies across 10 sectors
Company Ticker Location Sector Net income margin - past 12 months
   
PulteGroup Inc. (PHM) Bloomfield Hills, Mich. Consumer Discretionary 46.50%
Iconix Brand Group Inc. (ICON) New York Consumer Discretionary 36.10%
Priceline Group Inc. (PCLN) Norwalk, Conn. Consumer Discretionary 27.96%
 
Philip Morris International Inc. (PM) New York Consumer Staples 26.60%
Altria Group Inc. (MO) Richmond, Va. Consumer Staples 24.31%
Brown-Forman Corp. Class B (BF-B) Louisville, Ky. Consumer Staples 22.12%
 
Gulfport Energy Corp. (GPOR) Oklahoma City Energy 51.83%
Approach Resources Inc. (AREX) Forth Worth, Texas Energy 30.05%
Atwood Oceanics Inc. (ATW) Houston Energy 28.92%
 
Capstead Mortgage Corp. (CMO) Dallas Financials 76.49%
LTC Properties Inc. (LTC) Westlake Village, Calif. Financials 56.54%
RenaissanceRe Holdings Ltd. (RNR) Pembroke, Bermuda Financials 54.02%
 
Gilead Sciences Inc. (GILD) Foster City, Calif. Health Care 42.64%
Anika Therapeutics Inc. (ANIK) Bedford, Mass. Health Care 36.20%
Edwards Lifesciences Corp. (EW) Irvine, Calif. Health Care 35.70%
 
Delta Air Lines Inc. (DAL) Atlanta Industrials 27.84%
Union Pacific Corp. (UNP) Omaha, Neb. Industrials 20.58%
ITT Corp. (ITT) White Plains, N.Y. Industrials 19.81%
 
Verisign Inc. (VRSN) Reston, Va. Information Technology 57.43%
Visa Inc. Class A (XNYS:V) Foster City, Calif. Information Technology 44.65%
MasterCard Inc. Class A (MA) Purchase, N.Y. Information Technology 37.14%
 
CF Industries Holdings Inc. (CF) Deerfield, Ill. Materials 31.44%
Royal Gold Inc. (RGLD) Denver Materials 26.41%
Sigma-Aldrich Corp. (SIAL) St. Louis Materials 18.59%
 
AT&T Inc. (XNYS:T) Dallas Telecommunications 13.75%
Verizon Communications Inc. (VZ) New York Telecommunications 12.50%
Atlantic Tele-Network Inc. (ATNI)   Beverly, Mass. Telecommunications 11.78%
 
Aqua America Inc. (WTR) Bryn Mawr, Pa. Utilities 26.92%
OGE Energy Corp. (OGE)   Oklahoma City Utilities 17.59%
Questar Corp. (STR) Salt Lake City Utilities 14.46%
 
Source: FactSet
 
 
A look at total returns (through Tuesday) for those groups of companies tells an interesting story:
 
Total returns 
Company Ticker Total return -   YTD Total return - 3 Years Total return - 5 years Total return - 10 years
 
PulteGroup Inc. PHM -10% 359% 83% -25%
Iconix Brand Group Inc. ICON -8% 135% 204% 785%
Priceline Group Inc. PCLN -5% 137% 537% 4,878%
 
Philip Morris International Inc. PM 0% 46% 109%
N/A Altria Group Inc. MO 24% 96% 244% 627%
Brown-Forman Corp. Class B BF.B 17% 103% 217% 382%
 
Gulfport Energy Corp. GPOR -22% 108% 481% 1,186%
Approach Resources Inc. AREX -31% -28% 47%
N/A Atwood Oceanics Inc. ATW -21% 18% 18% 225%
 
Capstead Mortgage Corp. CMO 11% 50% 63% 181%
LTC Properties Inc. LTC 10% 73% 107% 277%
RenaissanceRe Holdings Ltd. RNR 3% 66% 89% 130%
 
Gilead Sciences Inc. GILD 39% 431% 360% 997%
Anika Therapeutics Inc. ANIK -2% 505% 490% 156%
Edwards Lifesciences Corp. EW 61% 47% 207% 531%
 
Delta Air Lines Inc. DAL 29% 357% 331%
N/A Union Pacific Corp. UNP 28% 155% 300% 729%
ITT Corp. ITT -1% 209% 182% 268%
 
Verisign Inc. VRSN -8% 85% 171% 206%
Visa Inc. Class A V -6% 147% 205%
N/A MasterCard Inc. Class A MA -12% 137% 252%
 
N/A CF Industries Holdings Inc. CF 23% 118% 238%
N/A Royal Gold Inc. RGLD 39% 4% 40% 329%
Sigma-Aldrich Corp. SIAL 45% 124% 168% 432%
 
AT&T Inc. T 4% 43% 76% 119%
Verizon Communications Inc. VZ 4% 56% 130% 119%
Atlantic Tele-Network Inc. ATNI -2% 89% 19% 504%
 
Aqua America Inc. WTR 3% 53% 103% 135%
OGE Energy Corp. OGE 11% 65% 161% 319%
Questar Corp. STR -1% 32% 113% 267%
 
S&P Composite 1500 Index 5% 78% 104% 115%
 
Total returns assume the reinvestment of dividends.
 
Source: FactSet
 
This hasn't been such a good year for the group, with only 12 of 30 beating the 5% total return for the S&P 1500. But over longer periods, the story changes.
 
Over three years, 17 have beaten the index, and 14 have more than doubled.
 
For five years, 21 have beaten the S&P 1500, with 10 more than doubling the performance of the index.
 
Going out 10 years, all but one of the 24 companies (six haven't been publicly traded that long) have beaten the index. The average return is 573%, compared with 115% for the S&P 1500.

 
So being highly profitable provides protection against the type of decline that took so much out of the index during 2008 at the height of the credit crisis.
 
Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.
 

Three categories of businesses based on the cost of business growth: Great, Good and Gruesome

Buffett uses a simple checklist to determine the attractiveness of businesses as investments.  To meet his tests, companies must possess:

1.  a sensible price tag
2.  durable competitive advantages
3.  business he can understand
4:  managers who have integrity and who are passionately involved in their business creations.

Even though he is not involved in the day-to-day operations, Buffett pays close attention to how much cash each business generates.  He determines how much is needed to maintain a rate of appropriate growth and how much can be invested elsewhere to build intrinsic value in the Berkshire enterprise.

In his 2007 shareholder letter, Buffett offered a capsule view of how he assess companies based on their capital allocation profiles.  He sorts businesses into three categories based on the cost of business growth great, good, and gruesome.  This sorting allows him to see sizzle where others cannot.

Friday 10 October 2014

Buffett devotes his precious time to reading and thinking, looking for gaps in values that others miss.

In 1999, after 34 years in business, Berkshire had a market capitalization that positioned it as the 74th largest American company.  Yet it had no Wall Street research coverage.  In 1999, Alice Schroeder, a Paine Webber research analyst, wrote the first Wall Street research report on Berkshire. 

Buffett continues to rely on his managers to run their day-to-day business operations.  he continues to devote precious time to reading and thinking.  Like a miner panning for gold, he sifts data from newspapers, annual reports, and other publications, looking for gaps in values that others miss.