Category Archives: Stock ideas

Great Moderation 2.0??

April 15, 2014 By in Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action, Stock ideas Tags: , , , , , Leave a comment

I stole this leadline from the FT blog of Gavyn Davies, hedge fund manager, former head of the BBC and, before that, a Goldman economist. Davies, in turn, lifted it from economist John Normand of JP Morgan.

Great Moderation 1.0

“Great Moderation” is what people began calling the period from 1984 (the recovery year after the two major oil crises of the 1970s) through 2008 (when the world financial system almost melted down).  The idea was very highly conceptual and self-congratulatory–one of those end-of-history, we’ve-reached-Nirvana sort of things.  Modern economics, it was asserted, had finally reached the point where it could control the business cycle.  Never again would developed economies overheat badly; never again would they experience deep recessions.

Obviously, this was wrong, as events of 2008-2010 proved.

In hindsight, the manual labor-intensive parts of Western economies were suffering severe structural damage as China emerged as a global economic power.  “Moderation” was being achieved only through an inappropriately loose money policy implemented by Alan Greenspan, and Mr. Greenspan’s failure to carry out his responsibility to supervise mortgage lending in the US.  For their part, the US banks, freed by Congress from the shackles of Glass-Steagall in 1989, were engaging in widespread, highly lucrative, mortgage fraud.   That enabled wild overbuilding of the domestic housing stock–employing all those displaced manual workers.

Then the music stopped.

Great Moderation 2.0

GM 2.0 is a different sort of animal, though.  The idea this time is that developed economies are barely out of intensive care, so they can’t get much sicker.  And, for the same reason, the energy necessary for wild partying just isn’t there.

The upshot of all this is that the world is in for a protracted period of slow but steady growth, with low inflation and without any sharp lurches downward.

The implications for equity markets are relatively favorable, I think.

The stock market in a slow-growth world would likely have two characteristics:

–mature companies in this sort of environment will grow mainly by taking market share away from others in its industry.  Me-too firms, whose chief virtue has been the ability to rise with the tide, will likely struggle, while innovators prosper.

–rapid growth will be hard to come by.  Firms in new areas or with genuinely novel products will be scarce and should therefore be highly prized.  Maybe not to the loony tunes level that many had soared until recently.  But, if correct, GM 2.0 is a strong argument for beginning to sort through the rubble sooner rather than later.

 

Candy Crush–ed: an odd but encouraging result (except for shareholders)

March 27, 2014 By in Current Market Thoughts, Portfolio management, Recent Market Action, Stock ideas, Strategy Tags: , , , , , , , , Leave a comment

King Digital Entertainment (KING), maker of the popular mobile game Candy Crush, went public yesterday, It sold 22.2 million shares at an offering price of $22.50 each, a price that was in the middle of the announced $21 – $24 range.  The offering was led by JP Morgan, Credit Suisse and Merrill Lynch–KING wanted no participation by Morgan Stanley or Goldman, powerful underwriters the company apparently felt were tainted by the Facebook IPO fiasco.

the odd part

The stock opened relatively quickly, before 10 am, but at $20.99 on 842,000 shares.  After some initial gyrations, it fell fairly steadily from there, closing the day down by 15% at $19, on volume of 41 million shares.

What’s peculiar is that I can see no effort by the underwriters to stabilize the price at the offering level.

Typically underwriters place about 15% more stock with clients than they purchase from the IPO firm.  This allows them to absorb any potential selling during the initial hours of the stock’s debut.  Yes, this is legal.  The underwriters declare when they are stabilizing the stock and when they have halted this activity.  Normally you don’t need to see an announcement, though.  The stock runs into a brick wall (for a while, anyway) that prevents it from falling below the offering price.

In this case, there was no trading at all at the offering price.  The underwriters trading books must have been hit by a wall of selling (presumably limit orders as well as market) that convinced them that resistance was futile.The odd part is that this all occurred less than a day after the offering price was set and the deal fully subscribed.

the good

It seems to me that KING must be regarded as a speculative stock.  Yes, the company earned $1.75 a share in 2013.  But the vast majority of that comes from a single game that competes in a notoriously fickle casual gaming arena.  One has to ask how long Candy Crush will remain popular and what other hits are in the pipeline.

There may well be good answers.  And the company may prove very successful.  However, predicting earnings for 2014, 2015…requires a substantial leap of faith.  This places it in the same camp as, say, WDAY, TWTR, TSLA and maybe AMZN and NFLX.

Anyway, everyone in the latter group has been selling off pretty heavily recently.  I don’t think the companies have changed much, if at all.  What’s occurring, I think, is that the stock market is taking a more sober attitude toward risk as the Fed lays out more concrete plans to end the emergency monetary stimulus that has characterized the past half-decade for it.

The more self-correction we see in the stock market now, the less likely it becomes that upcoming Fed action will cause the entire market to decline when it happens.

 

 

 

 

Intel (INTC) and next-generation semiconductor plants

March 26, 2014 By in Current Market Thoughts, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , 1 Comment

We’re living in a time of immense structural change.  For investors, the internet-led waning of established brand names and bricks-and-mortar distribution networks and the loss in value of existing manufacturing plant and equipment as new factories spring up in developing countries are among the most important.

One exception to this trend has been in semiconductor production.  There the engineering knowhow required to run the factories is very high and the pace of change has been very swift.  In addition, the cost of building a new fab is prohibitive for most:  a current-generation plant costs about $3 billion.  If a firm wants to fill the plant exclusively with its own chips, that requires annual sales of $7 billion or so.  In other words, only INTC and Samsung are big enough and rich enough to afford their own plants and the technological edge that brings.  Everyone else has to use third-party contract foundries like TSMC.

INTC currently has maybe a two-year lead over other semiconductor manufacturers in process technology.  It can make smaller, faster, less power-hungry chips than anyone else.  To preserve this advantage, the company has been making preparations–including funding research by equipment manufacturer ASML–to be the first out of the blocks with plants running new “extreme ultraviolet” technology and processing much larger silicon wafers to boot.

What has come to light very recently, however, is that these new factories are going to be mega-expensive, at $10 billion apiece or more.  As things stand now, that makes building one of them a bet-the-company move for anybody, even an industry giant like INTC.

Where to from here?

It’s not 100% clear, to me anyway, but:

–extreme ultraviolet lithography is probably at least a half-decade away, not a 2017 event as previously thought.  This means R&D and capital spending will be spread over a much longer period of time.  All other things being equal, this will mean higher cash generation by INTC.

–absent a significant cost-reducing breakthrough in EUL, INTC will likely partner with at least one other party to fund a next-generation fab.  Partnering could either be with other chipmakers or with one or two large deep-pocketed users of chips.   …AAPL?  …MSFT?

–it’s conceivable that INTC will itself end up with a substantial foundry business manufacturing chips designed–at least in part–by third parties.  One might argue that this would be a come-down for the premiere manufacturer of proprietary microprocessors.  However, the best foundry, TSMC, trades at a substantial PE premium to INTC even though its technology is inferior.  So morphing into a foundry could easily add a quarter or a third to INTC’s stock price.

Comcast (CMCSA) and Time Warner Cable (TWC)

March 21, 2014 By in Cable, Entertainment, Industry Analysis, internet, Stock ideas Tags: , , , , , Leave a comment

I laughed out loud when I heard the press report that the Roberts family, which controls Comcast, is concerned that customers are not giving them credit for their attempts to improve service.  On virtually any metric you’d care to choose, and for as long as I’ve been watching the company–both as an investor and as a customer–CMCSA has consistently ranked at or very near the worst in customer satisfaction.  It’s the only reason TWC isn’t in last place.

Hence the legislative and regulatory concern about consolidating the bottom of the pile into one low-service mega-company.   …and, I presume, the claim that customer service is now a priority for CMCSA.

I have only limited experience with TWC.  My impression is that no one is in charge.  This contrasts with CMCSA, where I don’t think incompetence is the issue.  Instead, I believe the profit-maximizing strategy of the firm is to:

–find the line where customer dissatisfaction turns into revolt and make the minimum investment necessary to stay just above it.  I’ve never discussed this with CMCSA management–in fact, I can’t recall ever having spoken with them.  But companies all have personalities.  And that’s the way CMCSA acts.

CMCSA wouldn’t be the first to do this.  Marriott (MAR) had  similar thinking at one time.  It built its hotel rooms with the ceilings an inch or two lower than other companies and the rooms, say, 10% smaller in total area.  The hot water was never really hot.  MAR managment argued to that these deviations from the norm all saved money and were too small for anyone to notice.  People would, at worst, only be vaguely uncomfortable.  And then they wondered why they were never able to attract (lucrative) business customers.

Eventually, the lightbulb came on for the Marriotts. The family ousted the management that thought up this approach.  (Those guys decamped to Disney, where then created the Eurodisney fiasco, and, after being pushed out the door again, went on to severely clip the wings of Northwest Air.)  MAR began to build more comfortable hotels and built a thriving corporate business (by the way, I own MAR shares).

The difference between MAR and CMCSA is that the latter is a semi-monopoly.  Customers have very few other choices.  That’s why a customer-unfriendly strategy continues to work.  It’s also why the question of whether regulators should encourage this behavior is coming up.

I’m not a CMCSA customer any more.  I use FIOS now.  Superstorm Sandy did me in.

The week after the storm, Verizon (VZ, another stock I own) trucks were all over our neighborhood, repairing their mobile and wired internet infrastructure.  CMCSA trucks didn’t arrive for a month!!  Nevertheless, CMCSA continued to charge for the service it was not delivering.  The customer service representatives I spoke with on more than one occasion explained that I could get a refund for the time the service was unavailable.  To do so, however, I would have to submit proof that my electric power had been restored.  And I would not get a refund for any time (a week, in my case) that the electric power was out.  Yes, CMCSA cable and internet weren’t available for a month after the storm.  But for CMCSA that was irrelevant.  Their argument was that without electricity I couldn’t receive the service CMCSA couldn’t provide.  So I had to pay for the non-service anyway.   Talk about through the looking glass.

Anyway, like most everyone else on our street, we switched to FIOS.

It will be interesting to see how the regulators treat the possible merger of CMCSA and TWC.

buying Microsoft (MSFT) !?!

March 19, 2014 By in Industry Analysis, Recent Market Action, semiconductor manufacturing, software, Stock ideas, Technology Tags: , , , , , 1 Comment

Yes, that’s what I’m beginning to do.  I’ve bought a small amount and intend to add to it on weakness.

For me, this is an unusual step, since MSFT isn’t exactly what you’d call a growth stock.  Quite the opposite.  It’s a value idea.  I’ve been building to it for some time, though.  I few months ago I wrote that in a year like 2014, where I imagined (and still do) that a stock that’s up by 10% will be an outperformer, the bar is set pretty low.  And after thirteen years of decline vs. stocks in general, the news that the company had dysfunctional management and had gone ex growth had been pretty thoroughly worked into the stock price.  My son-in-law told me it’s the nicest thing he’s ever heard me say about MSFT.  (It was a big part of my portfolios all through the 1990s, however.)

I also privately scoffed at prominent value managers who loaded up on MSFT several years ago purely on the notion that the stock was cheap, ignoring the issue that change of control was well-nigh impossible.

What’s changed?   …or, better, what’s changed my mind?

As I mentioned above, the market situation is one thing.

The stock’s metrics haven’t moved much:  steady cash flow of $3+ a share, earnings of $2.75, a dividend yield of just under 3%.

There’s a chance earnings may improve over the next few years:

–the board of directors has put new top management in place.  A cadre of looks-good-in-a-suit-but-doesn’t-do-much lieutenants are disappearing, as well.  There’s no guarantee that the new guys are any better than the old.  On the other hand, it’s hard to imagine they’ll be worse.

–Apple’s failure to produce an adequate alternative to the Office suite has limited the inroads it can make into MSFT’s corporate market.

–Windows 8 (I just got a new touch-screen laptop) is pretty good–very iPad-ish.

–a new generation of Intel chips + the emergence of Samsung, Asus (my brand), Acer and Lenovo making high-quality products may well reenergize the US consumer market.  Much lighter weight, high-resolution screens, instant-on and touchscreens may counter some tablet momentum.

–with its consumer/small business products, MSFT has had a continuing (large) piracy problem.  The shift to the cloud will help police that.

–new management may do good things.  Even if not, the idea that the company is turning a new page will likely support the stock until we can make a better judgment.