idea #25 ebay? yes, ebay.

Something about the idea of owning eBay stock is unattractive.  Online auctions are silly.  Will the fad will wear off?  Will another competitor kill them?    Ebay surprised analysts a little bit with their 4th quarter and analysts have moved their earning's estimates up.   What is the right price to pay for a debtfree, "tollbooth" style internet business that offers a great value proposition to clients in any economic climate?   Merrill calls it "defensive e-commerce," yet they rate it a "hold" with a $28 price target.   The company is bringing in over $2 per share in cash, and it's sitting on nearly $4 per share in cash, with no debt.  So the big questions are: (1) Is their service here to stay? (2) will they pursue another money losing investment like SKYPE?    Ebay will start showing up on Magic Formula style screens with their almost 20% ROA and 13x p/e ratio (the sale of skype hit their earnings this year).  Plus, Magic Formula doesn't care about margins or financial leverage, 2 areas that eBay would compare favorably with others.  Here's a  big name,  high margin, unleveraged, stable cash cow trading at under 20x sustainable earnings.  Those qualities are unusual.  Someone on VIC wrote up eBay when it was at it's bottom of $12ish back in December, 2008.  They argue it has a nice moat.  You don't find stocks with "moats" and have fat profit margins that trade at 10x earnings and have no debt (as it did, it has since doubled). Will Google start online auctions?  Can eBay's empire be dismantled?  What is their 25% share of Craigslist worth?  At the rate eBay is bringing in the cash, they can buyback the company every 9 years... I'd buy a quality business with a 9 year payback if I could be sure that management will reinvest wisely.  I think they're being fairly punished for their Skype sale.  Tech investors don't care about valuation, they're too worried about topline growth.  Value investors aren't used to seeing value in headline stealing technology names that used to be high flyers.

idea #24 Sunoco

In 1998, there were 168 million shares of Sunoco stock outstanding.  Each share cost you $40 and it would earn you $1.50.  Back then, they had 5 main refineries and company-wide capabilities to process 760,000 barrels of oil per day.  Not much has changed.

Nowadays, there are only 116 million shares outstanding.  The stock costs you a lot less ($26) and will still earn you… the same $1.50 (estimates for 2010).  They still have the 5 main refineries and are capable of processing 910,000 barrels of oil per day.   Their capital structure has shifted to partially explain the share quantity change... now they have $2.4 billion in long term debt, a decade ago they had $940 million...but their debt cost them only 5% after tax now vs. 7% a decade ago. 

Meanwhile, the number of cars on the road has steadily increased by an average of 1.4% since 1960.  Three years ago Bush said the reason oil prices were skyrocketing was because of refinery shortages.  The market has certainly responded... apparently the market over-responded.  Now, they are shuttering refineries.   At the time of Bush's words, Sunoco stock traded at $70+ per share and was booking $7+ per share in earnings (10x p/e ratio! how cheap is that?!?).  The cashflow from operations is as volatile as the share price, in excess of $2 billion during peak years, and back down to the $500 million range recently.  Still, at $500 million it's substantially higher than the periods I reviewed a decade ago ($300 - $400). 

The entire refining industry is on hold:

From Tina Vital at S&P:
"U.S. demand for refined products fell by more than 3
million b/d from the peak in February 2008 to the
trough in June 2009 on a global economic
slowdown, and according to the International
Energy Agency (IEA), a minimum of 2 million b/d per
year of new refining capacity worldwide is slated to
come on stream between 2009 and 2014. With
pending changes in the U.S. vehicle fleet and
greenhouse gas (GHG) legislation, we believe U.S.
gasoline demand has peaked and will decline
through 2030, while U.S. distillate (including diesel)
demand will increase."

Sum it all up...

In 1998, Sunoco stock traded at 26x earnings and yielded 1.25%.  I'm pretty sure I was getting at least 4% in my money market account at Schwab.  At the time, I could've also bought a 10 year treasury that yielded 5.5%.  

In 2007, The world loved refineries.  Sunoco stock traded at 10x earnings and yielded 1.5%.   I think I was probably getting 3% on my money market account.  A ten year treasury yielded 4.5%  

Now, a single share of Sunoco stock is cheaper than ever ($26) and buys the largest claim *ever* on the same bunch of refinery assets, it yields 2.3%, ten year U.S. treasuries are 3.5%, cash yields zilch.  Sunoco doesn't look so bad.  Not great, but not so bad.   It may not be the bottom but it ain't the top.

idea #23 cybx

I found this from AAII's "Fundamental Rule of Thumb Screen".  This one only screened so well because they posted a one time tax benefit that boosted EPS by $1/share.  Despite that, they are still cheap looking given their guidance to double revenue in 5 years.  They are growing into Japan.  They have a focused, simple, and easy to understand business model.

They have neat technology with a significant competitive advantage; they make a pacemaker device to control epilepsy.  It is recognized as an effective treatment when drugs and surgery don't work.  It is less recognized for it's positive "side effect," increases in awareness and improved mood.

Trading at 17x sustainable earnings, 17x operating cashflow.  Buying back convertible debt.  It looks like a great growth stock.  I doubt it will ever get too cheap... if it does it will be for some scientific reason that I likely won't figure out until I've lost all my money.

idea #22 PC Mall, MALL

I was toying around with a concept for screen to find a company that has "managers with guts."  What companies got off their butts and bought back bucketloads of their own shares at just the right time when the market collapsed in March of 2009?  At the time most every stock was absurdly cheap but most investors were scared stocks would just keep getting cheaper... cheap, cheaper, cheaper, cheaper still was the way it went.  Mr. Market was screaming that the end of the world was near.  Any company that stepped up to the plate and "eliminated partners" was doing something massively accretive to the remaining shareholders, even though the remaining shareholders might not feel the effects for years to come.  So, it turns out that out of 8000+ companies, PC Mall was one of the gutsiest.  They bought back over 400k shares near the market low, and near their 52-week low of $3.70.  They eliminated 3.2% of the shares in one single quarter.

As with anything I see problems with owning this stock:  The CEO owns 17% of the company.  He gets paid too much.  $1 million dollar/year salary & bonus is too much for a company with a $60 millioin market cap.  Expressed another way, his compensation works out to be 8 cents a share, every year.  The most recent quarter, the operating cashflow was negative and inventory ticked up, as did shares outstanding.  Insiders are selling.  Earnings' history is not stable.

The stock is cheap relative to history, trading at .7x book value when it normally trades at 1.5x. 1.5x book value is expensive for the below average return on assets (low 2-3%).  A big discount to book value is appropriate for these assets.  A longtime VIC favorite, ePlus, is kind of a pc supplier and it is cheap.  It has stayed cheap for a very long time, which doesn't bode well for PCMall. 

On the bullish side, supposedly we're in the midst of a PC upgrade cycle... a big positive trend for the computer industry.  Windows 7 is acceptable to the market and people are upgrading.  Intel, Western Digital and numberous PC suppliers are doing well.

In a nutshell, I don't know what kind of catalyst will make this stock go up but they are producing cash and they are buying back shares so there's probably a lot worse places to be sitting right now than on some mall shares.  I have shopped at PcMall and see no sustainable competitive advantage in their business.

My PC Upgrade cycle
Discount to book value (what is BS?)
Lot of buybacks in 3/31/09 quarter
earnings discount

idea #21, LIFE PARTNERS, LPHI

Life Partners would be a screaming Magic Formula buy with it's high ROA and low P/E ratio, except for the fatal flaw that it's a financial stock.   It's growing fast and paying a big dividend. LPHI popped up on an AAII screen.  They are "life insurance policy dealers."  If you want to sell your life insurance, they will find a buyer.  Everybody wins.  The buyer is uncertain of the end return on the policy, the seller takes a discount to the potential final value in exchange for cash now (and to not have to keep paying on the policy).  Life Partners makes money putting the 2 together.  It's arguably a very necessary service for our society.  Baby boomers want their money now, not when they die.

A quick look reveals that the CEO (age 66) owns over 50% of the company and gets a very high salary for such a small company.  The company is involved in numerous lawsuits and subject to bad publicity from unsatisfied investors...  afterall, people are living longer now.  They are the only publicly traded company in this "highly fragmented" space.  Interestingly, they finance their operations by direct investment so they sailed through the financial crisis without a hitch.  Investor demand went up, people wanting to cash in policies went up.  It was a beautiful thing.
 
Government regulation is a risk.  There is a licensing process to deal these insurance policies, i.e. Consumer Protection Licensing  .  "The consumer protection-type regulations arose largely from the draft of a model law and regulations promulgated by the National Association of Insurance Commissioners (NAIC).  At least 40 states have now adopted some version of this model law or another form of regulation governing life settlement companies in some way.  These laws generally require the licensing of providers and brokers, require the filing and approval of settlement agreements and disclosure statements, describe the content of disclosures that must be made to insureds and sellers, describe various periodic reporting requirements for settlement companies and prohibit certain business practices deemed to be abusive."   I wonder if this organization could shed light on other, non-life insurance settlements.

Of particular interest in their standard "risks" disclosure in their 10k is something that is conspicuously absent.  Insurance companies have to make good on the payment when the insured person dies.  AIG could default, major insurers default, etc.  That is a real risk and it is not mentioned.  Is the risk so inconceivable that it doesn't have to be disclosed?   I called their investor relations number and spoke to Andrea.  She said that if major insurance companies default then you will have a lot more to worry about than your investment in a life insurance policy.  So it appears that to them, that risk is inconceivable.

 

Interesting, high roa biz
Listen to conference call to learn about default risks associated with insurance companies.

Listen to how it holds policies on balance sheet

Life Partners looks cheap, and like the last idea, some of the discount is likely because of the controlling interest (& very high salary) of the CEO, Pardo. 

idea #20 Broadview Institute BVII

This came up on some screens for it's high ROA and low p/e.  It's in the "private education" sector, and lots of these businesses have been coming up on screens.  Same old story, valuation is attractive because of their uncertainty over student loans.  I decided to give this particular name a closer look.  I hoped it might have some competitive advantage that the bigger, more established players do not have, or that it's focus was on a higher growth area.  It's historical revenue growth has been higher than the big players because it focuses on nursing/medical.  It's "cohort default rates" are very low.  It sounds like a winner.

While all that is attractive, the valuation doesn't seem to justify that it trades only a few hundred shares a day and insiders own 60% of the shares.  There are plenty of insider interdealings noted on their proxy.  Maybe they will sell to Coco or Devry but otherwise it will be hard to let market forces make this stock more expensive if good corporate governance is absent.
 

idea #19 Tidewater (TDW)

Tidewater came up on a "defensive Graham" AAII screen.  Someone wrote it up on VIC in late 2006 as a short.  On the surface, I like that it's shown 3 years of disappointing shareholder returns, all the while posting nice earnings.  It has a moderately high ROA and low P/E.  It's trading at around $45 and the lowest it hit during the financial crisis was only $33. 

The VIC writeup's thesis was that earnings were temporarily too high and that the share price should fall to $30ish, 12x normalized earnings of $2.50 per share.   I think the writer's perspective is wrong on a couple of fronts;  It's hard to find stuff, even if it is cyclical, with attractive balance sheets and reasonable earnings multiple.  12x unleveraged earnings is cheap. And 2nd, his perspective on normalized earnings has proved to be too low.  Even given the fact that their shipping contracts are for 18+ months (which the original author might have missed), I still think they can earn $4 over the long term.

The company is in promotional mode.  They just did an investor presentation that argued "vessel retirements are higher than replacements" so prices will likely stay high.  This is the exact same issue the short thesis was focused on in 2006.  The thing that impresses is me is that prices stayed high throughout recession and commodity collapse, thus I'm understanding the $4 normalized earnings.  This company has low fixed costs, and high variable costs.  It would be nice to own if you could get it really, really cheap.  I think it's current price is a little cheap.  Based on the screens, I think it's likely to get a little more expensive.  Global warming is a farce, drill baby drill?

Buy this type of strong balance sheet & good asset investment when OSV dayrates collapse.  Right now, they are strong.