This thread is for the sharing of investment ideas and discussions about value investing.
>What is value investing? Value investing involves buying stocks that trade at below their intrinsic value. When the stock market finds out, the prices rises and a gain is realised for the value investor. Value investing is used by such legendary investors as Warren Buffett and Peter Lynch.
This thread could join/replace /sfig/ Biz has split into RHG, ASX, etc and no longer looks at core investment principles.
Make Biz Great Again.
Jack Turner
Iconix Brand Group Inc - NASDQ: ICON
Price: 9.34 Market Cap: 527.78M P/E: N.A.
Iconix is a brand management company that licenses brands to retailers and manufacturers, mainly in apparel and clothing. Iconix buys the IPs of name brands and earns royalty on the gross sales. This makes it an asset light, cash generative model. It's brands are highly diversified across shoes, male/female wear and internationally.
>why is this a bargain stock? Net income past 5 years 2011 - 126.11M 2012 - 109.41M 2013 - 128.05M 2014 - 103.72M 2015 - (189.3M)
In 2015 Iconix recorded a massive negative income of 189 million. Iconix dropped from $15 to $7 and rose back to $9 now. But if you dig up the financial statement, the loss did not actually happen. What happened was it took a massive $400M write off of its assets (brand names) which is deducted from the income. That year it actually earned a record $211M. The market eventually slowly got hold of this but right now it's trading at an incredible P/E of ~5 average earnings of past five years and 2.5 for last 12 months.
>Where is the margin of safety? Iconix has a steady earnings record of ~110M. It's management has proven competent, generating ROI of ~10% and ROE of ~20%. It's also trading at an extremely low multiplier mentioned above. This combined with its business model of royalties providing a steady income that isn't affected by business shocks and ~60% margins, means the income could decline by 60% before trading at the low P/E of 10, which is low compared to the S&P trading at P/E 24.
Another riskier margin of safety is the book value. It is current trading at 0.73 P/BV. However, this is 80% intangible assets of estimated value of IPs. If the underlying business of brands does go under, the assets will be worth nothing too. However, this is unlikely to happen given the diversification of brands. And people will always need new clothes and shoes.
>tl;dr Panic sold induced low p/e stock.
Leo Stewart
/sfig/ is a bunch of speculators trying to predict market movements. /vig/ is for investors going long on good fundementals at low prices.
Although shorts, hedging, distressed bonds and arbritrage are welcome if combined with intelligent analysis.
Camden Young
Cont
A price estimate based on historical p/e is ~8, so "estimate value" is $15.
>Bull case 2016 annual report released, price surges to $15 for a 54% return and we have a solid business for years after. >Bear case The underlying business declines. The brands were written off because their revenue generating ability was lower than initially taught. If so, Iconix has almost no tangible equity.
Facebook is the typical growth stock. It's trading at 44 P/E because of its high earnings.
Graham created a formula as a general guide to how to value P/E.
Instrinsic value = Earnings Per Share(TTM)*(8.5 * 2 * Earnings growth per year)
Facebook's net income has grown an amazing 45% per year since 2011. This gives it an intrinsic value of $1898.
HOWEVER, Facebook has only IPO'd since 2012, during the economic recovery following the recovery of the Great Recession. Whether Facebook will continue this trend requires a qualitative analysis of the business and macroeconomic conditions, which are far from reliable. Consistent growth is much harder to keep up than consistent income.
Qualitatively Facebook has little other margin of safety. It has an astoundingly small $44B in net assets against $330B, its P/BV is 7.5. Furthermore earnings growth has been erratic
Quantitatively (only looking at the numbers) the only margin of safety is its earnings growth, which IMO isn't reliable.
Cooper Jackson
Any comment on investing based off black swan events? Buying airlines when they are cheap after a terrorist attack. Or when Mr CEO gets caught doing meth and the companies stock tanks.
Thomas Roberts
My value stocks, you ask? F SDRL MRO DAL LL ADM DD
Carson Jenkins
Qualitative analysis of FB
Facebook generates 82% of its revenue through advertising and 18% through virtual games like Farmville. This raises red flags - the first things businesses cut when a recession occurs is advertising. Consumers likely won't be buying Farmville cash when times are tough too. This makes it not depression proof, which is key in any good investment.
>sustainability of growth The sustainability of this growth is also questionable. Facebook's user growth, see chart, is liner at about 250 million new users per year. This still has room to expand with countries like India increasing web penetration.
But this also suggests the compounded 45% earnings gross is unsustainable because a linear growth in users is a decreasing growth in percentages. When 500M users gains 250M users that's a 50% growth but when 1000M users gain 250M users that's a 25% growth.
Two notes relating to current events. One is that Facebook signed an agreement last year with UK to stop dodging taxes, how much it will be paying we'll see. Second is Trump. Trump's lowered tax rate will raise net income by maybe 10-20% one time. Facebook also has cash overseas, I can't find how much but probably tens of billions, which it might take back. This might become a special dividend.
>tl;dr Margin of safety is too small from quantitative and qualitative standpoints, but you're more than welcome to investigate further or argue against the points I made.
Luis Taylor
The key to buying based off black swan events is making sure the price goes down enough to be attractive from a statistical standpoint, e.g. a below 10 P/E using last 10 years average earnings or trading substantially below book value, and seeing if the black swan event is repeatable.
A terrorist attack does have a very big impact on people's perception of airline safety. You could expect decreased revenues for a year, or years later. A terrorist attack tends not to repeat because of the NSA, CIA, FBI et cetera taking action, so it's one off.
An example of a not one off event is electronic retail. Retailers like Sears are getting hammered because of Amazon, Alibaba et cetera. Its up to you to do a qualitative analysis to see if it's one time, but I'd say it isn't.
Aiden Cooper
>ADM user you have to post why you think they're value stocks
>SDRL Just commenting because I did some investigating into the offshore oil drilling business, there's a current overhang of drilling rigs. I can't remember the exact numbers but IIRC to match present demand, taking into account scrapping oil rigs to cut costs and replacing old oil rigs, it'll take at least two years for offshore oil to return to pre oil crash levels.
You can afford to do crazy things when you're worth 80 billion dollars.
Austin Moore
Thanks. Can't reply properly as I'm incredibly busy at the moment. My interest in FB is more qual. I think they'll take over the world of social media - every aspect, essentially killing off all forms of messenger/text (e.g. WhatsApp), YouTube (already in the process next year), Snapchat, IG, Tumblr, Reddit, etc. Their user base is so large they can do so unlike anyone else. Any new competition and they steal their business ideas.
Dylan Garcia
That's a guess. The markets aren't so deprived of value stocks that you have to resort to this kind of guesswork.
Valueinvestors is a good site.
Sebastian Long
Good DD user. I have this in my watch list based on price movement alone but was ignoring it/not during further research cause I thought it was just straight up retail which I tend to avoid. Thanks.
Leo Turner
Does Buffet own any BitCoin?
James Brown
>2016 >Recommended reading >Security Analysis by Benjamin Graham >The Intelligent Investor by Bejamin Graham
market cap too small. it's like a small stock.
Grayson Martinez
>rich people can't buy X because market cap is to small
They can buy fractions of it. Why does this meme exist?
Tyler Reed
You're relying on dangerous guess work there. Stick to the fundamentals. Are you willing to pay 44 times the earnings per share to make a capital gain and acquire the dividends?
My guess would be not. And neither am I. I only invest with a P/E lower than 20, and ideally much lower than that.
Institutional investors have to invest with big sums of money and there are much stricter rules about the risk they can take.
A "rich guy" with his own money can put a small amount of it into a smaller and riskier share, yes.
Blake Parker
>Institutional investors have to invest with big sums of money No they don't. They may choose to do so in order to minimize transaction costs, but is correct that the "too big to invest nimbly" thing is a meme.
Brody Reed
Update on Iconix
Iconix recently released it's third quarter results and it's share price jumped 7%, I'm not sure those are related.
Net income was as per as my thesis, Q3 earnings jumped 46% without the write down of brand names.
Two alarming things has come up. First is its revenue. Revenue was static for most of the year. However, the core businesses in the USA suffered a decline of 7% offset by a huge growth of revenue from Japan of 47%. What's worrying is that this might be a one time boost, while the decline in USA revenue is systemic.
On the brighter side this reflects our thesis point that geographical diversification stabilises revenue.
Noah Nelson
The second and more worrying thing is the net income statement. In 9 months ended 2015 Iconix booked a 50M "Other income" which declined to 10M in 2016. That's more than 30% 2015 untaxed net income and more than 60% 2016 untaxed income. Because of this expenses rose 1477% and Iconix posted a 33% decrease in net income.
The worry is compounded by the fact that despite the boost from not having to write down assets as in 2015, Iconix earnings still decreased.
Possibly this comes from "reconciliations between GAAP and non-GAPP accounting" as mentioned below. Would appreciate input about this from any accountants here.
Brody Walker
Bump for accountants. Maybe market knows something we don't
Wyatt Johnson
It's not a meme. They want to earn big returns and so generally spend a lot of money, if there are only 30 or so shares in a fund each one makes a material difference and so it's important they can put their money in companies who will use it wisely and who actually have the capacity to use large sums of money like that.
Kevin Gomez
How is some Veeky Forums guy going to beat the pros at this?
How long do you keep a stock in your crosshairs for? And how long do you hold it?
Cameron Collins
>They want to earn big returns No they don't, not all the time. Institutional investors have a variety of goals, and I assure you that "big returns" appears nowhere on their published investment philosophies.
>if there are only 30 or so shares in a fund Nice arbitrary assumption. Care to point me to the institution investor that limits themselves to 30 stocks because ... reasons.
I already explained that some large investors eschew small investments because of the transactional costs. But that's a far cry from saying they ALL can't or won't do small plays. That quote is a meme, and you're taking it out of context anyway. Buffett was talking about M&A not stock investing. Moron.
Henry Sullivan
These are my value based stock picks. All very undervalued great pe ratios and profits.
MNK- MYL- Famous for their $1400 epipens. WPT JE SVU
Also SSW. Maritime shipping is shit but this one has a %23 divided yeild and somehow turns a profit.
Evan Young
thread related How would you describe the current economic climate? I fear the stock market is overinflated and we're just waiting for a black swan to burst all the bubbles.
Samuel Parker
>MNK
Cursory qualitative analysis says it's a terrible stock. First, it's trading at 38 P/E if you take the average of the past 5 years.It's earnings have been highly erratic. The average 5 years P/E is about 3.5 times lower than 2016 earnings.
Secondly, in the past 5 years it has become incredibly leveraged with little effective result. Liabilities balloned from 1B to 10B. Interest expense coverage by earnings dropped from a healthy 20 times to 0.5 times. Considering the rapid rise in income of 141M in 2012 to 489M I'd say it's in a boom period for the industry, although this merits thorough qualitative analysis.
There is also no protection from the book value. 12B out of 15B of it is intangible assets which are likely drug patents. Pharmecuticals are a shifting field and if it loses revenue it will be because a better drug has been invented, making the patents worthless.
>tl;dr MNK's capital structure makes it a speculative stock despite it's apparently low P/E ratio. Additionally it's earnings are a result of a boom, not steady depression tested earnings.
Isaiah Perez
MYL is trading at 77 P/E and I don't see any reason why this is reasonable.
WPT is better. Here we have a depression tested, long established business that has steady earnings. Its earnings cover interest charges 3x and it has a steady ~115B in liabilities.
BUT it is not undervalued. Trading at 15 P/E, using Graham's formula you should be getting a 3.25% growth in earnings per year. Instead earnings has declined by about 4% from 2012-2015. Possibly a quantitative analysis of the business might show growth potential.
Book value isn't looking good. Retail stores are reasonably valuable - they tend to be worth money even if the business declines. But right now it's trading at 2.2 times book value.
tl;dr Definitely a good blue chip stock, but not undervalued.
William Edwards
>To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.
I don't beat the pros at it. There's no doubt that as I wrote my iconix thesis hundreds of hedge fund managers and investors were doing the same. But even more thought the opposite, probably the holders of iconix as it dropped. That's how it could become undervalued.
The pros are not flawless, impeccable geniuses as people think they are. Historically they have been wrong, sometimes colossally. Tech bubble, housing bubble, oil bubble. No doubt some of them are, but clearly not enough, and not always.
I keep them as long as the fundamentals of the business don't change, I sell when a better deal comes up.
Matthew Powell
Seaspan presents the best statistical showing of your list. It's earnings are steady and covers interest expense 2x. P/BV is 0.75 and p/e ~7 for last five years earnings. Possibly it will benefit from an upswing in the maritime industry. This might be considered an undervalued stock if a qualitative analysis of the maritime business is conducted.
Of note is its investing activists recently doubled.
Zachary Taylor
The major indexes - the S&P 500 for example, is definitely overpriced (P/E 24). The yield spreads for treasury securities and BoA junk bonds is also very small at the moment. Bargain priced stocks are scare now.
I can't accurately predict when the next recession will happen, but I can safely say recessions happen under these kinds of conditions. Low premiums for risk, stock market at record highs, historically high debt levels. The spread of recession has been statistically one per decade. It's been 10 years since the start of the Great Recession.
If you have the guts, you can pull all your money out or out them in liquid securities and wait for it. But it could be many years before it happens, and there's a danger you'll feel so left out you jump it right before it happens.
Brandon Smith
I only hold blue chips (energy, oil etc.) becouse its safe with long term contracts. You can buy it low every now and then and sell it few months laters. Its not exciting as shillcoin.
