Valuation Expert Finds Fault with Tesla/SolarCity Deal

I’m not the only one who thinks the combination of Tesla (TSLA) and SolarCity (SCTY) is “ludicrous“.  Aswath Damodaran, a Professor of Finance at NYU and one of the leading experts in corporate valuations, has taken a hard look at the valuation used by the bankers in order to justify the deal and come away outraged at the hijinks of the process.

In fact, it is far easier to make the case for reverse synergy here, since adding a debt-laden company with a questionable operating business (Solar City) to one that has promise but will need cash to deliver seems to be asking for trouble.

Source: Musings on Markets: Keystone Kop Valuations: Lazard, Evercore and the TSLA/SCTY Deal

Want a Hedge Fund Job? Knowing About Wavelets Improves Your Odds

Hedge funds that have relied on people to make bets are hiring quants like never before in search of answers to lackluster returns. They’re playing catch-up to firms such as Renaissance Technologies and Two Sigma Investments, among the leaders in using complex mathematical models for investing.

Source: Want a Hedge Fund Job? Knowing About Wavelets Improves Your Odds – Bloomberg

Buffett’s Method of Success

Buffett regularly makes the difficult, sound very easy. His knack for simplifying things, in a way a mass audience can understand, often gives the false impression that investing is easy.“Simple, but not easy” best describes it.Still, his simple messages get misinterpreted often. It leads some people to believe you can do it too without much effort. Others seem to think Buffett has a super secret formula that always spits out winners and he just refuses to share it.If only that were true.

Source: Buffett’s Method of Success • Novel Investor

How do the Mechanics of Negative Interest Rates Work?

Do bond holders that have a negative yield  pay the issuer?

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Now let’s look at an example with negative yields. If you buy the same bond at $101, and it matures a year later at $100, then your yield is -1%. You paid more for the bond than you received back when the bond matured, and you didn’t receive any coupon payments along the way. And this same mechanic can work for a bond that pays coupons. Say there is another bond that pays a $1 coupon in one year, along with the $100 you get back in maturity proceeds, in total you get $101. If you pay $102 for that bond today, then in a year you have again earned a yield of around -1%. You paid $102 in return for total cash flows of ($100+$1) = $101.

Source:  How do negative interest rates work?

ETF Tax Advantages over Mutual Funds

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If a mutual fund or ETF holds securities that have appreciated in value, and sells them for any reason, they will create a capital gain. However, due to the structural differences in the way the shares are created, an ETF fund can avoid recognizing capital gains on trading profits because they can avoid the outright selling of holdings triggering a capital gain that would have to be distributed.

Mutual funds and ETFs risk generating tax bills for investors whenever they sell stocks in a fund’s portfolio at a profit. Investors can be liable for taxes on those capital gains even though they themselves don’t sell their fund shares. Mutual funds are required to pass on capital gains taxes to investors through the life of the investment, but ETFs incur capital gains only upon sales of the ETF.  

When an ETF experiences redemptions, it can hand over a basket of the fund’s underlying securities instead of cash. It can also pick which shares to hand over, picking the shares with the highest cost basis will reduce the greatest embedded capital gains. Because the trade is conducted in-kind, no capital gains are realized.  Although, ETFs don’t shield dividend and interest income from current taxation.

From the perspective of the Internal Revenue Service, the tax treatment of ETFs and mutual funds are the same. Both are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are minimized for the holder of the ETF and the timing on the ultimate tax bill, after the ETF is sold and capital gains tax is incurred, is left up to the the investor.

Leon Cooperman on the Four Reasons for Selling a Stock

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What is your sell discipline?” Okay, and I say. We sell a stock for one of four reasons. The first and of the highest quality reason, is that we bought a stock at X ’cause we thought it was worth X plus 30 or 40 percent, and it goes up 30 percent. Nothing has changed. We sell.

Source: Hurricane Capital – Business Analysis & Investing

Picking High Quality Stocks

Sources of Durable Competitive Advantage

Source:  The Building Blocks of Investing Nirvana

According to Buffett’s Alpha,  Warren Buffett’s outperformance has been generated by investing in cheap, safe, quality stocks.  So how do investors trying to follow the same strategy define “quality”?

One way to define a quality stock is to look for attributes of the business that set it apart from competitors, and allow the business to sustain through the ups and downs of the economic cycle.  High quality stocks are profitable, provide predictable stable cash flows and make investments of capital to set the stage for further growth opportunities.

Each of these traits is attractive in its own right, but combined, they are the proverbial goose that lays the golden egg, enabling a continued cycle of cash generation, which can be reinvested, begetting more cash, which can be reinvested again or returned to shareholders.