Q:leading the market. But they are number one in the retail segment there, same goes for insurance, and really only a small player in the cooperative/logistic segment while not acting at all in the satellite segment
I assume you are referring to my Ituran post and their position in Israel. Interesting points.
Why I am Selling Ituran
Hi folks, see my recent post on why I am selling out all of my Ituran Location & Control (ITRN) shares on Monday, just published on Seeking Alpha.
A Few Brief Thoughts on United Health Group, Inc.
This is a stock I purchased in my IRA on September 1, 2010, when it was trading at $32.48/share. Today it trades at $58.92/share. Needless to say, it has been a big winner for me. However, it was always a small position, at a $617.12 original cost basis. I only bought 19 shares. By comparison, I own over $4,000 in XOM stock, and have similarly “large” (for me) positions in MSFT, INTC, and BRK.B.
The position has remained small because I have been guilty here of price anchoring. I think I got afraid of the increased nominal price, and have failed to pay attention to the underlying business.
It’s time for an update. In my update, I conclude that the company is not wildly undervalued. It would be a strong buy at $54.88, not far below where it is today. If it goes above $82.32/share, and the fundamentals have not changed, it is time to say adios. It is obviously nowhere near that level.
Here is my most recent sheet. As you can see, I keep things fairly simple.
I have used a WACC of 11% here, which is in-line with consensus. I assume no debt or cash. (The actual net cash/debt position is about $4 billion of debt, but I assume based on its cash generation it can basically maintain that in perpetuity.) For my free cash flow growth rate, I’m only assuming 3% growth over the next ten years, even though in last nine years it has averaged 9.67% annualized growth. The problem is in the last three years that stalled to 7.59%, and in the last year, the annualized growth was only 3.12%. I attribute most of this decline to recent regulatory changes, but I never assume higher growth than present growth. In fact, even my 3% growth assumption may prove too optimistic, and is the thing I’m most worried about in my analysis.
On the other hand, it matches Morningstar’s analysis closely, and even if you assume 1% growth, the stock is worth around $61/share. My pessimism is also tempered by the fact the company has reduced its diluted share count by 16.2% in the past four years, which is great, and future such reductions should prove accretive to the value of future free cash flows attributable to my shares.
Substantively, my thesis from 2010 has not been blown: Obamacare will not destroy this company, its scale confers massive advantages in such a highly-regulated industry, and it is well-run. Nothing since 9/2010 has changed these basic assumptions. I actually think Morningstar in evaluating United Health’s ”moat” is probably being too pessimistic in assigning the company only a narrow moat, given the regulatory environment in which it operates. They likely attribute the declining free cash flow growth to moat issues, whereas I attribute it to regulatory changes.
That said, I think the massive gains here are likely done. That is because these gains were to be had before the world had digested Obamacare as fully as it has now. I do think the stock remains somewhat artificially depressed because of lingering and overblown concerns about the full implementation of Obamacare, which is why opportunity remains.
Also, the dividend is quite low — 1.44%, even after it was increased from a quarterly $0.13 dividend to a $0.21 quarterly dividend, or a 61.5% increase, in the time I have owned it. That seems to be the level this company wants to be at, and it is not enough to attract all those seeking yield in a ZIRP environment, so I do not attribute its share appreciation to a hunt for yield. The fact that its P/E ratio has not really increased much at all since 2011 (in a time when the S&P P/E ratio has gone from under 14 to the 18 neighborhood) supports this view.
In short, I think this company remains highly investable. I should consider doubling my position notwithstanding the recent share price appreciation I have seen, particularly since the share price has basically been stalled for the past year. However, before doing so I should conduct a deeper analysis of Humana (HUM), which appears to be performing even better than UHN has been.
Investors Must Preserve Emotional Capital Too
I’m a buy-and-hold fundamental investor, but I follow a lot of traders on Twitter. I do this for two reasons. First, a lot of them are interesting and funny dudes (they’re almost all guys). But second, I recognize that some traders do actually make money on a consistent basis, and that the reason the money-makers do so is because they follow rules, and possess wisdom. And that’s applicable to fundamental folks like me.
Sunrise Trader had a great tweet this morning, that encapsulated what makes a good trader:
- Our job is to look for opportunity, manage risk, consistently take profits out of the market while preserving emotional and financial capital.
This is very applicable even to buy-and-holders like me. I’m not taking profits out of the market often — only when I think a stock is really stretched beyond its fair value. Instead, I’m just adding new capital every month from my earnings. But sometimes I must take profits. The really important thing that struck me again though is the importance of preserving emotional capital.
Notice he put that before preserving financial capital. The first leads to the second. For the buy-and-hold guy like me, you preserve emotional capital in three ways:
- Size your positions appropriately. That means at a level you are comfortable with. I never hold more than 30 different companies. But never fewer than 10. That’s what I’m comfortable with. You may be comfortable with a different number. If I put all of my money in one or two names, I would not be preserving my emotional capital. This would leave me more prone to doing something stupid like selling on a dip even when I believe in the company. As I grow as an investor I hope to shrink the number of companies I own. But there is no reason to force it.
- Invest over time. I add money to my investments every month, incrementally. It is much harder emotionally to invest $100,000 or $1,000,000 or $1,000,000,000 all at once than it is to invest whatever your total capital is over a period of months. This also gives you additional time to scale up in positions as you gain comfort and additional knowledge of the companies and the industries in which they operate.
- Buy-and-hold. This itself is a means of preserving emotional capital. I am sitting on huge gains in Microsoft stock that I purchased at about $18/share during the financial crisis. I bought Intel for the first time at around $13/share during the financial crisis. I have held those positions. I bought Walmart under $50/share in 2010. I have held. Etcetera. This is not to say I never sell. Stocks I have sold at advantageous times include Hewlett Packard, Transocean, Tidewater and Exelon, and less smartly, Ebay and Disney. But if I think my qualitative thesis is blown or the stock is way overvalued, I sell. That’s my rule. Sometimes I win, sometimes I lose, but I follow a rule, just as traders do. (It’s just that my rule isn’t a price point based on technicals.) When you are a buy-and-hold investor, and you follow decent selling rules, and you sit on long-term winners in whose business models you still believe, you see a lot of green on your screen after a few years. This gives you emotional capital. This makes you more confident. This makes you less likely to do stupid things, even with your newer positions.
UPDATED IRA PORTFOLIO PERFORMANCE. Basically, I got hurt last fall by Intel and Apple, and I have been helped in the past few weeks by their rise, and the rise of Microsoft. This is only one account, but is the only one for which performance is easily available. In my other two accounts at Zecco/TradeKing and Firstrade, they did not properly account, respectively, for: 1) the Berkshire takeover of Burlington Northern (they gave me a $0 cost basis on the new BRK.B shares!) and the switch from Zecco to Tradeking, and 2) at Firstrade for a bunch of Phillip Morris stock I deposited physical share certificates for when I initially set that up as a drip account in the late 1990s. That’s what you get for being cheap with your online brokers. So the returns are screwed up. I’m eventually going to sell all of the screwed up holdings and consolidate those accounts at Merrill Lynch so that I can show true returns for my entire portfolio. Unfortunately, this may mean I have to liquidate the Zecco/Tradeking account entirely, because they are erroneously saying I made all of my purchases on a single day in 2010, so I’m worried that if I just transfer those holdings the failure to track will extend into the new account. It is really frigging irritating, because the Tradeking accoung is where I made all of my 2009 purchases, which means I’ll have to pay a bunch of capital gains tax for the privilege of being able to use an online broker that will correctly track my portfolio in the future. Not a fan of either of those two institutions…. I have recently been about $1,000 cash in this IRA, but recently added $2,000 more. I have just under $20,000 in this account in total.
Profit Margins, the WSJ Editorial Page, and Marxism
I saw two interesting posts this morning, one by Matthew Yglesias on Slate, talking about how the past four years have him feeling more Marxist, and the other from the bonddad blog, about how the stock market is not divorced from reality, and that high stock prices and all-time-high profits reflect reality — a reality in which wages are being squeezed. Also of note is Tom Friedman’s recent op-ed on the “401k World,” which Yglesias mentions, which is a very deterministic piece about how technology, etc., has made us much more individualistic and responsible for ourselves.
It does not take a genius to see the connections here. But first let me explain my own views, as I have here in the past and also in blog comments on others’ sites over the years. I have no ideological dog in any fight. Taxes are neither inherently bad nor good. Regulation is neither inherently bad nor good. I respect the idea that when we take from the rich in redistribution schemes we create inefficiency, waste, and bad incentives. I respect the idea that we must help the poor, and that the the private sector and religious organizations are not capable of shouldering that burden alone. I am a creature of circumstance. The questions I care about are: is this regulation worth the cost? What is a level of redistribution we must maintain in order to maintain social stability?
The WSJ Editorial page is not interested in such questions. It is ideological. Cutting taxes is always good. Reducing regulations is always good. The poor deserve it. The rich deserve their wealth. Extremely simple. Marxism is also very simplistic. Sharing is good. Equality is good. The wealthy are evil.
My response to the WSJ Editorial page, and to the high profit margins and lowered wages of which bonddad speaks, is different from Matthew’s. My response is to note his response as a shift in the cycle of ideology.
To explain that. In my view, based on my comments above, there is a utilitarian or pragmatic rationale for helping the poor, which has an historical basis. As far as I can tell, pretty much all Marxist/Communist and otherwise populist revolutions of which I am aware started when inequality was sky high, and when the rich did not give a hoot about the poor, and either blamed them for their problems or expected them to grit their teeth and bear it. The most famous expression of this is of course, “Let them eat cake.” But it’s not just France. Lenin arose in response to a deeply unequal and cruel Czarist system. Cuba before Fidel Castro was, famously, a society of haves and have-nots. Venezuela before Chavez, the same.
People with the WSJ Editorial viewpoint either do not understand this, or they do not care. They want to push the envelope as far as possible in their ideological direction, they want to maximize their present happiness, wealth, and efficiency. To the extent they worry about any of this, they think things will “work out.”
And they are right! That is where Yglesias comes in. The response when the WSJ ideas get too powerful is contained in our wonderfully non-rigid Democratic system: when life gets too bad, people start switching sides. People who didn’t previously care become desperate and start caring. I stand above and watch with interest, and to me, Yglesias is a sign. Yglesias thinks one view is more correct now. That is not true. The evils of Marxism are the same as they always were. But the evils of unfettered capitalism remain the the same as they always were, and they presently have the upper hand to some extent. The difference between this country and Czarist Russia, in other words, is in our flexible political system, in which all have a voice.
This is not the first time this has happened. The Right bemoans FDR and has been engaged for the last ten years in re-writing the history of the Great Depression. But they can’t write Eugene Debs out of the early Twentieth Century. They can’t write the Communist Party in America out. The reality is, this “bridge too far” in one direction has already happened at least once in this country, from about 1910-1934. FDR was not a radical. He was a popularly elected conduit by which enough of the evils of socialism (it is called “social” security for a reason, people) were mixed into our capitalist system that we did not elect Eugene Debs President or annex ourselves to the Soviet Union.
Can it happen again? I happen to think it already is. ”Obamacare” itself is part of a push back against policies dating back to the Eighties. Yglesias signals that shift has not ended. Occupy Wall Street. Elizabeth Warren. Daily Kos. The re-creation of MSNBC in response to Foxnews.
One can have three possible responses to all of this. First, one can be or remain ideological like the WSJ Editorial page is, and continue to fight for ever less redistribution and regulation, no matter the circumstances. Alternatively, one can go in the other direction, as Occupy Wall Street did, and as Yglesias signals is his inclination, and fight basically for pure socialism. Or, third, one can view this all as a cycle of the ascendance and fall of Leftist and Rightist ideas, a cycle that we have the luxury of having because the founders designed a system flexible enough to protect both the WSJ Editorial page and the Marxists from their own inflexibility, certainty, and short-sightedness.
You know where I fall. They sadly did not design our system well enough that people like me could just keep us on a relatively moderate path at all times. So we must content ourselves with these cycles.
Folks, there is virtually no such thing as a bad idea. All horrid things in this world represent good ideas taken to their extremes. This happens because people have a very hard time with uncertainty. They therefore do not realize that somewhere on the slippery slope is the best place to be. It is a fact I hope more will keep in mind as others continue in their respective ideological arms races.
A Brief Update on Coke
There has been a lot of talk about overvaluation of consumer stocks like Coke (KO) lately, some of it by me on Twitter. And I think inarguably stocks like this are somewhat leading the market right now. I therefore decided to take a quick check today to see if I should consider selling, if it was that overvalued. It has been awhile since I actually ran the numbers.
My results are here. What I found surprised me. I used a WACC of 7% as my discount rate, even though some sources put the WACC at 6%. Still I come out with a valuation roughly in the $39/share range. That puts me squarely in between Morningstar ($42) and S&P ($36) — I always check them AFTER I have run my numbers.
So as of today we’re around $42/share. Is the stock cheap? No. Is the stock wildly overvalued? No. I have pegged $48/share as a potential sell price, assuming the stock clears that level without further substantive improvement in the business. But for now, while there is always risk of a decline, I think the coast is fairly clear.
As many have said, part of what is driving stocks like $KO is the perception of safety, and the desire for the dividend. Fair enough. There has been talk of a “dividend bubble” lately, so I must note I first talked about the elevation in values of dividend stocks in a pitch on the fool.com website in 10/2010 for Intuitive Surgical (ISRG). Good thing I didn’t avoid dividend stocks since that time, though! This isn’t over. The Fed isn’t done what it’s doing, and we aren’t about to see ZIRP end, and the reality is, while dividend stocks are outperforming the market now, and some like Coke have been for years, this could go on for at least another year or two. And even when it ends, the reality is, Coke is not that overvalued. It’s not cheap, but at least part of what is going on here is a reach for moat, as well as a reach for yield. And the reach for moat won’t go away when ZIRP ends.
Learning my Lesson (Again) on Diversifying for the Wrong Reasons
In early 2011 I added small positions to my portfolio of EPI and BRF. In early 2012 I added to the EPI position at a much lower price. These, respectively, are small-cap ETFs focused on India and Brazil. At the time my thesis was that India and Brazil were fast growing economies, and that I even though I didn’t know a ton about the mechanics and details of their economies, I should “diversify” and capture some benefit from those markets, without taking on the risk of investing in individual stocks. Thus I made the same mistake I made in 2007.
I recently sold out of those positions. Who knows, maybe that will prove to be a mistake and those markets will roar in the next two years. But I don’t really care.
I sold because as I delved into their economies, I saw inflation and rampant corruption and particularly as to India, political sclerosis that makes US politics look exceedingly vibrant (which is saying something). I also was sitting on 40-odd points of under-performance vs. the S&P in each position. (A lot less in that later add to my EPI position.)
The kicker is that in 2007 I had bought a European index mutual fund for very similar reasons. It resulted in one of my largest-ever losses, and if I had held it, my performance relative to the S&P (which is my primary measure of performance) would have been lowered even further. It was a large position, and I sold it in fall 2008.
Thus I learn my lesson again. Even though I use a DumbMoney moniker to poke fun at those who say individual investors like myself are “dumb money,” sometimes I really am the dumb money. It hurts to say it but it’s true. I am not a hedge fund. I do not have dozens (or more) of analysts working for me to evaluate markets around the world. I have developed an expertise after years of work in what makes the US economy tick, and in how US companies work, and in how US companies interact with the world economy, as well as how to analyze companies both quantitatively and qualitatively. But every time I step out of my comfort zone, I get hammered, performance-wise and pride-wise at least (I didn’t lose a ton of money on these positions because they were quite small relative to my portfolio.)
I highlighted the bold text above because it shows my primary mistake. I think it is important that I recognize my limitations. I did not buy these ETFs because I knew a lot about the countries. I did not even buy these ETFs because I was simply wanted wanted rote diversification. I bought these ETFs because I made an ill-considered and uninformed bet that their economies would grow faster than the U.S. economy. In doing so I made two errors: I bought with inferior information and strategy, and I mistakenly assumed that stock prices are largely connected to GDP growth, even though I know in the context of the US economy that they are not.
Lesson (hopefully) learned. I do retain a position in VWO, Vanguard’s broad international ETF. I am keeping that because I bought it out of a more generalized sense of portfolio diversification. I am well aware, lest you worry, of contemporary ideas of correlation of asset classes, and the limited benefit of diversification, but I do allow myself this, wearing my hat as financial adviser to myself, rather than virtual fund portfolio manager. EPI and BRF were portfolio manager mistakes that I hope not to repeat a third time.
Why Cyprus May be BULLISH for the Eurozone
There has been a lot of discussion lately about the Eurozone bailout of Cyprus. Many pundits have focused on the horror of the fact that the Eurozone is planning to tax/levy/whatever the deposits of depositors who have money on deposit with Cyprus’ insolvent banks, in amounts above the insured limit. A lot of the bru-ha-ha arose because originally, the plan was apparently to tax even the insured deposits.
I think we can all agree that the insured deposits should not be taxed, levied upon, or in any way subjected to losses in the bailout of a country and/or banking system, and that no plan should ever have been floated that did so. When a bank deposit is insured, that has to mean something, or the banking system can have no trust.
However, it is perfectly acceptable for the non-insured deposits with these banks to be taxed, levied upon, or otherwise wiped out. And the fact that the Eurozone is willing to do so, indicates that there is a level of confidence in the system that has been missing, and that is often missing in the United States.
Here is what the populist depositnistas appear to be missing: bank depositors are creditors of the bank. The whole point of creating some sort of deposit insurance is to ameliorate the worst impacts of this. But nowhere is it written that uninsured deposits should be de-facto insured by tax payers. That is what people opposed to this are really saying. In a normally-functioning economy, when any corporation fails, it is the shareholders who get wiped out first, but the creditors, usually bond holders typically get wiped out as well, at least in part, and often in full.
So in fact, the Eurozone and the government are taking nothing from these non-insured “whale” depositors. Rather, by making them bear anything less than a total loss, the Eurozone is actually giving the “whale” depositors the remainder as a partial bailout, which they would not otherwise get as uninsured creditors of an insolvent banking corporation. That the Eurozone is willing to do this is perhaps foolish, but is also perhaps a sign that markets, and governments’ perception of their fragility, is returning to a more pre-crisis, market-oriented posture.