Stock Splits are Going Extinct

A split “wouldn’t change the intrinsic value of the company and doesn’t provide any real benefit,”

“we want shareholders who focus on the investment itself, rather than on the currency it’s denominated in.”

Source: Death of the Stock Split: It’s Value Not Price That Matters – MoneyBeat – WSJ

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

Leon Cooperman on the Four Reasons for Selling a Stock

4reasonsellstock2

 

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.

 

An Expert in Valuation Says Uber Is Only Worth $28 Billion, Not $62.5 Billion

 

Uber

It already has a valuation higher than 80 percent of the companies in the S&P 500, and a finance professor at New York University says Uber Technologies Inc. has no more room to run when it comes to market value. According to Aswath Damodaran, a professor who specializes in equity valuation at NYU’s Stern School of Business, Uber is running up against the roadblock that has thwarted many upstart businesses: Profit.

“Disruption is easy but making money off disruption is difficult, and ride sharing companies would be exhibit 1 to back up the proposition,” he wrote in a recent blog post. “While the ride sharing option is here to stay and will continue to grow, ride sharing companies still have not figured out a way to convert ride sharing revenues in profits. In making this statement, though, I am relying on dribs and drabs of information that are coming out of the existing ride sharing companies, almost all of whom are private.”

Source: An Expert in Valuation Says Uber Is Only Worth $28 Billion, Not $62.5 Billion – Bloomberg

Shareholder Yield as a Valuation Metric

Shareholder yield measures the cash paid out both as dividends and as stock buybacks.

Shareholder Yield = Dividend Yield + Buyback Yield

Buyback Yield = Change in Number of Shares Outstanding ÷ Previous Number of Shares Outstanding

Shareholder yield can be looked at in addition to the dividend yield to see what kind of a return the shareholder will receive through the company’s capital allocation policy.  

A study by Wesley Gray and Jack Vogel of Alpha Architect (“Enhancing the Investment Performance of Yield-Based Strategies,” SSRN, 2012) found that stocks with shareholder yields ranking in the top 40% experienced higher annualized returns, particularly those ranking in the top 20%.

The Stock Market Summed Up

The final point is that stock prices reflect a set of expectations for future financial performance. A company’s stock doesn’t generate excess returns solely by the company creating value. The company’s results have to exceed the expectations embedded in the stock market. – Michael Mauboussin

Source: Thirty Years: Reflections on the Ten Attributes of Great Investors

Empirical Analysis of Warren Buffett’s Returns

Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks.

A good explanation of  how Warren Buffett has generated consistently high returns through his stock picking ability.  His focus on cash generating value stocks coupled with the use of a little leverage have led to an impressive track record and unimaginable wealth.

Source:  Buffett’s Alpha

Day to Day Noise in the Markets – Brexit Edition

“It is easy to confuse day-to-day noise with actual and significant signals. If you are merely reacting to the latest market action, then what you have is not a plan — you have an instinctual, fear-driven reaction, and it’s the makings of a disaster.”

Source: The Big Picture – Macro Perspective on the Capital Markets, Economy, Geopolitics, Technology, and Digital Media

Sequoia Fund Bails Out of Valeant Pharmaceuticals and You Don’t Have to Make Your Money Back in the Stock You Lost it In

Our new leadership elected to sell our position in Valeant Pharmaceuticals, exiting completely by mid-June. Valeant was our largest position to start the year and its 80% decline through June 30 badly penalized our results. – Sequoia Fund Shareholder Letter

Sequoia Fund management’s decision to finally exit their stake in Valeant Pharmaceuticals ends a painful almost year long slide in their biggest position and what was at one time their best performing holding.

Sequoia was an early investor in the Mike Pearson era Valeant.  A strong believer in what they saw as a savvy manager who took a value approach to buying healthcare assets and wringing efficiency from them.   Sequoia started purchasing Valeant in early 2010, probably at prices in the mid teens, and by the end of the year the position accounted for 10% of the funds assets.  At year end they already had a gain of 78%.  A fantastic return on investment in less than one year and a big boost to the fund’s performance.

The fund managers continued to build a position over the next five years and were enjoying the outperformance the stock added to the fund’s returns.  By 2015 the position reached 20% of the fund’s assets and Sequoia also became Valeant’s single largest shareholder.

Then in August of 2015 the position began to lose money.  You can’t fault the fund managers for sitting on the position while the stock declined in August along with the rest of the global markets. Continue reading