“DPS was spun off from U.K.-based Cadbury PLC in May 2008. The Partnerships established their position at an average price of $23.84, which represents 12x estimated 2008 earnings. DPS exhibited many of the characteristics we have seen in successful spin-off investments, including favorable management incentives (which were struck while market participants were still wondering how bad the company’s initial outlook might be in the difficult industry environment), systematic selling by U.K. shareholders more interested in the global confectionary business and less so in the U.S. beverage business, and a conservative management posture. DPS is the third largest liquid refreshment beverage company in the Americas, with a portfolio of 50 brands including Dr. Pepper, Canada Dry, 7-Up and Snapple. The company is a combination of a high-margin concentrate business (like Coke and Pepsi, which trade at 17x earnings) and a lower-margin and more capital-intensive bottling and distribution operations (like Coca Cola Enterprises and Pepsi Bottling Group, which trade at 12x earnings). While the market seems to apply a discount for its bottling ownership, we believe that an integrated model affords DPS the opportunity to expand distribution of its underrepresented and newly-launched brands. Over time, DPS has the potential to generate meaningful earnings growth through new product extensions, increased use of its distribution capacity, further cost reduction, and increased exposure to single serve channels, where it is currently underrepresented. DPS shares ended the quarter at $26.48.”
David Einhorn (Greenlight Capital)
Sunday, March 29, 2009
Sunday, March 22, 2009
Seth Klarman - Margin of Safety
One of the all time best books on value investing! It is no longer in print. A quick search on amazon.com shows remaining copies are selling at close to $1000 USD. Not the typical price someone looking for value might pay! There are only a few remaining copies in existence. The New York City library has a copy in the rare books section (I believe in a protective casing).
I stumbled across a PDF copy of the book online, while looking up information on Klarman.
Margin of Safety by Seth Klarman
SG
Greenlight Capital - 2008 Annual Letter to Shareholders
David Einhorn, manager of Greenlight Capital, has been earning 26% average annual returns for his hedge fund over the past 10 years. He uses a long and short strategy, based on extensive research. I find it interesting to read some of the better managers' letters to shareholders. Here is a link to Greenlight Capital Annual 2008 letter to shareholders.
Greenlight Capital - 2008 Annual Report
SG
Greenlight Capital - 2008 Annual Report
SG
Saturday, March 14, 2009
Cheung Kong Holdings LTD - Value Opportunity
Market environments like the current environment often create opportunities that are so obvious that in-depth analysis proves pointless. Take for instance Cheung Kong Holdings LTD, a company that trades on the Hong Kong stock exchange and on the American OTC market as depository receipts (OTC: CHEUY).
Cheung Kong is a real-estate conglomerate, mostly focusing on property development and property management. However, they also retain a controlling interest in CK Life Sciences which is a pharmaceutical company. They currently have operations in 56 countries around the world, with a large focus in Asia.
This investment hypothesis is based on several quite basic, and quite obvious concepts:
1. The company has seen growth averaging around 25% for the past 15 years.
2. The company has about 20 projects currently in development set to be finished in the next year, so the growth rate is sustainable in the short-term.
3. China’s GDP has grown about 7-9% over the past 10 years and this growth will translate into a long-term prosperity for Cheung Kong.
4. Real estate is a stable industry. While it is interest rate sensitive, the future economics of the industry will look similar to how they have in the past under normal circumstances.
5. The current low-interest rate environment should allow for improved financing position. Strong financial position should ensure Cheung Kong’s ability to secure financing.
6. This investment can double as a play on currently depressed real estate prices.
7. Li Ka-Shing and Li Tzar Kuoi (chairman and managing director) own in aggregate about 77% of outstanding shares in the company. This will act as an incentive to shareholders’ interests.
8. Trading at only 7 times last years earnings. Even if the company was not growing at 25% per annum this would be a bargain. With 25% growth the market is effectively putting a negative value on growth.
9. If the company is able to earn $13 HKD a share in the coming years, an extremely conservative estimate, the company is trading for only about 4.5 times earnings.
10. The company is trading at $62.8 HKD which is about 66% of book value per share $98.9 HKD, using fair value accounting for investment properties. Once again, the market is applying a negative value to the operating business and future growth effectively offering them for free.
At the current price of $62.8 HKD per share (about $8 USD) this company investment is a bargain. Typically investors will have to pay out the nose for growth. The recent financial turmoil has created situations such as this one, where the investor is effectively paying nothing for 20+ % growth.
SG
Disclosure: I do not own shares of Cheung Kong.
Cheung Kong is a real-estate conglomerate, mostly focusing on property development and property management. However, they also retain a controlling interest in CK Life Sciences which is a pharmaceutical company. They currently have operations in 56 countries around the world, with a large focus in Asia.
This investment hypothesis is based on several quite basic, and quite obvious concepts:
1. The company has seen growth averaging around 25% for the past 15 years.
2. The company has about 20 projects currently in development set to be finished in the next year, so the growth rate is sustainable in the short-term.
3. China’s GDP has grown about 7-9% over the past 10 years and this growth will translate into a long-term prosperity for Cheung Kong.
4. Real estate is a stable industry. While it is interest rate sensitive, the future economics of the industry will look similar to how they have in the past under normal circumstances.
5. The current low-interest rate environment should allow for improved financing position. Strong financial position should ensure Cheung Kong’s ability to secure financing.
6. This investment can double as a play on currently depressed real estate prices.
7. Li Ka-Shing and Li Tzar Kuoi (chairman and managing director) own in aggregate about 77% of outstanding shares in the company. This will act as an incentive to shareholders’ interests.
8. Trading at only 7 times last years earnings. Even if the company was not growing at 25% per annum this would be a bargain. With 25% growth the market is effectively putting a negative value on growth.
9. If the company is able to earn $13 HKD a share in the coming years, an extremely conservative estimate, the company is trading for only about 4.5 times earnings.
10. The company is trading at $62.8 HKD which is about 66% of book value per share $98.9 HKD, using fair value accounting for investment properties. Once again, the market is applying a negative value to the operating business and future growth effectively offering them for free.
At the current price of $62.8 HKD per share (about $8 USD) this company investment is a bargain. Typically investors will have to pay out the nose for growth. The recent financial turmoil has created situations such as this one, where the investor is effectively paying nothing for 20+ % growth.
SG
Disclosure: I do not own shares of Cheung Kong.
Monday, March 9, 2009
Check out Buffett on CNBC
Check out Buffett on CNBC this morning!
3 hr interview with Buffett
His comment about the economy going "off a cliff", has been all over the news today. The media has a delightful way of spreading pessimism. He also says that he sees the economic "machine" functioning well within 5 years, and that we have put systems into effect that should help us recover before then. Another interesting point is that he thinks the worst is over. He stated that he could not get the 10% preferred yields today that he got from Goldman Sachs and GE a few months ago.
SG
3 hr interview with Buffett
His comment about the economy going "off a cliff", has been all over the news today. The media has a delightful way of spreading pessimism. He also says that he sees the economic "machine" functioning well within 5 years, and that we have put systems into effect that should help us recover before then. Another interesting point is that he thinks the worst is over. He stated that he could not get the 10% preferred yields today that he got from Goldman Sachs and GE a few months ago.
SG
Prescient?
“Owners of Capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits until the debt becomes unbearable. The unpaid debt will lead to the bankruptcy of banks which will have to be nationalized, and the State will have to take the road which will eventually lead to Communism.”
-Karl Marx, 1867
This is truly an incredible quote, and to think that it was said about 140 years is quite striking. Reading this quote, you almost think that it was something that could have been written today; an exact description of what we are currently facing!
SG
-Karl Marx, 1867
This is truly an incredible quote, and to think that it was said about 140 years is quite striking. Reading this quote, you almost think that it was something that could have been written today; an exact description of what we are currently facing!
SG
Friday, March 6, 2009
Warren Buffett's 2008 Letter to Shareholders
Here's a well written overview of Buffett's 2008 Berkshire Hathaway letter to shareholders. Written by fatpitchfinancials.com.
Warren Buffett's 2008 Letter to Shareholders
One of the most interesting parts in the letter is the debunking of the black-scholes formula for valuing long-term contracts. I agree with Buffett. In the short-term volatility is an accurate representation of risk, because the mark is unpredictable. And therefore, the Black-Scholes formula is about as good an indication of option value as possible.
However, in the long-term the economy will grow and the stock market will follow it. Therefore, volatility is no longer an accurate representation of investment risk. Investment risk in the long-term should be redefined as the probability of investment loss, and in the long term this risk, on average, will be next to 0%.
Of course, the definition of "long-term" depends on market valuation at the time of purchase. Purchases made 2-years ago, at the market peak, will not see break even levels for possibly 5-10 years. But Buffett's recently booked contracts were booked at depressed market levels and the contracts are set to expire in 10-25 years. Therefore, the probability of the market being at a level less then where it was recently, in 10-25 years is far less then 1%. These contracts can the be estimated at having a 99% probability of being profitable.
Disclosure: I do not own BRK shares.
SG
Warren Buffett's 2008 Letter to Shareholders
One of the most interesting parts in the letter is the debunking of the black-scholes formula for valuing long-term contracts. I agree with Buffett. In the short-term volatility is an accurate representation of risk, because the mark is unpredictable. And therefore, the Black-Scholes formula is about as good an indication of option value as possible.
However, in the long-term the economy will grow and the stock market will follow it. Therefore, volatility is no longer an accurate representation of investment risk. Investment risk in the long-term should be redefined as the probability of investment loss, and in the long term this risk, on average, will be next to 0%.
Of course, the definition of "long-term" depends on market valuation at the time of purchase. Purchases made 2-years ago, at the market peak, will not see break even levels for possibly 5-10 years. But Buffett's recently booked contracts were booked at depressed market levels and the contracts are set to expire in 10-25 years. Therefore, the probability of the market being at a level less then where it was recently, in 10-25 years is far less then 1%. These contracts can the be estimated at having a 99% probability of being profitable.
Disclosure: I do not own BRK shares.
SG
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