Analysis

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Why Cognizant Shines Brighter as a Stock Pick

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We’ve been eyeing investment opportunities in business process outsourcing for a while; lately, our interest is on the rise because of the industry’s declining stock prices. Cognizant stands out as a shining star. Its revenue has quadrupled since 2008, and the company is growing at a faster pace than very competent competitors such as India’s Infosys and Wipro. Even as Cognizant’s growth slows from its explosive level of more than 30 percent a year in previous decades, the Teaneck, New Jersey–based company’s revenue should still increase at 8 percent to 10 percent annually. There are several reasons for that continuing strong growth. The world is getting more and more IT-heavy every day, and old applications need to be maintained as well as new ones written. Developed countries like the United States don’t produce enough software engineers to satisfy the insatiable demand for new IT solutions. There are other things we like about Cognizant. Its business is very sticky and requires very little capital — people are hired as needed — and thus it has a very high return on capital. Cognizant, which is still managed by its young co-founder, 48-year-old Francisco D’Souza, has about $6 a share of net cash on the balance sheet...

Discovering Discovery

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Discovery is a media company that owns some of the most popular TV channels – Discovery, TLC, Animal Planet, Opera Winfrey Network (OWN), ID (crime channel), Eurosport among others. Discovery stock has been scratching multiyear lows because of millennials.  If you are reading this and you are between 19 and 35 years old – it’s on you!  Millennials are the first purely digital-age (non-analog) generation.  The one that thinks the DVD/CD drive in your computer is a fancy, complimentary cup holder. The market fears that millennials will not embrace the traditional cable/satellite model.  Instead, millennials will “cut cord” – dump traditional costly TV subscriptions bloated with hundreds of channels and watch their favorite TV shows “over the top” on the internet. These concerns are not baseless, but they are more than offset by other positive trends, and thus the “cord cutting” fear is creating an interesting opportunity in Discovery stock. Discovery’s revenues are almost evenly split between advertising and affiliate fees.  Affiliate fees are very stable subscription fees Discovery collects through cable/satellite companies from several hundred million subscribers in the US, Europe, Asia, and Latin America. Discovery’s revenue will likely grow, not decline, over the next decade.  Here is why: The rate of cord cutting has...

The Dangers of Dividend Obsession

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By Vitaliy Katsenelson “This is a very bad, incoherent piece.” I received this feedback from a reader concerning my most recent article for Institutional Investor. I don’t expect everyone to agree with me, and I welcome negative feedback because it provides an opportunity to learn. But this stung. If this comment had been about almost any other article I’ve written this year, I’d probably have filed it under “let’s agree to disagree.” Looking back, however, I’m not sure this reader was wrong. While I stand by my original thesis, I think I could have made my case more clearly. So here is what I meant to say: [tweet_dis]We are in the freakiest investment environment ever[/tweet_dis]. [tweet_dis]Investors are buying bonds because they are looking for capital appreciation[/tweet_dis] — essentially gambling that the price of an asset delivering negative (if you are in certain parts of Europe or Japan) or almost no (if you are in the U.S.) current income will go up. And [tweet_dis]investors are buying stocks solely for income[/tweet_dis]. Dear reader, this is an upside-down world. In my original article I addressed a group of stocks I call bond substitutes: stocks bought solely for their dividend yield. They are a special group of...

Good Companies Don’t Always Make Good Stocks

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I was recently going through a new client’s portfolio and found it full of the likes of Coca-Cola, Kimberly-Clark and Campbell Soup — what I call (pseudo) bond substitutes. Each one is a stable and mature company. Your mother-in-law would be proud if you worked for any one of them. They have had a fabulous past; they’ve grown revenues and earnings for decades. They were in their glory days when most baby boomers were coming of age. But the days of growth are in the rearview mirror for these companies — their markets are mature, and the market share of competitors is high. They can innovate all day long, but consumers will not be drinking more fizzy liquids, wearing more diapers or eating more canned soup. If you were to look at these companies’ financial statements, you’d be seriously underimpressed. They paint a stereotypical picture of corporate old age. Their revenues haven’t grown in years and in many cases have declined. Some of them were able to squeeze slightly higher earnings from stagnating revenue through cost-cutting, but that strategy has its limits — you can only squeeze so much water out of rocks (unless someone like 3G Capital takes the company,...

SoftBank CEO Masayoshi Son Banks on Exponential Growth

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I am about to go out on very thin ice. I am a value investor, but I’ll probably get banned from the value community for what I am about to say: Current valuations don’t mean much for companies in industries that are entering an exponential growth phase. As I type this, I catch myself thinking that it sounds so “dot-commish,” but bear with me as I try to bring my statement into a more familiar value framework. Wall Street hates SoftBank’s recent decision to purchase ARM Holdings for £24.3 billion ($32 billion) — at a whopping 48 times earnings! SoftBank is paying a 43 percent premium for an already richly priced stock, and it doesn’t have any synergies with the U.K.-based supplier of semiconductor intellectual property — there are no costs to cut or additional revenue to capture by adding ARM to its existing businesses. Masayoshi Son, SoftBank’s founder and CEO and the reason my firm owns SoftBank stock, is not liked today as a result of the deal. I heard this (understandable) reaction from a friend about Son and the ARM purchase: “a bored rich man who needs to spend because he has too much.” To understand this acquisition, we need...

The Values of Value Investing

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This article has been in the works since last November.  It started out as a speech I gave to the Swiss CFA Society.  To me it is an important framework for understanding value investing.  I think the rise of the consulting industry, armed with cheap computing power and an abundance of stock-specific data, has harmed the industry, because according to them, a “value” investor is one who holds statistically cheap stocks and a “growth” investor is one who holds statistically expensive stocks.  The truth is somewhere … well, actually it’s a lot more complex, and the consulting industry's crude segmentations don’t capture it.  - Vitaliy The Values of Value Investing I organize a conference every summer called VALUEx Vail. Vail is a quaint, beautiful, ritzy ski resort town tucked away in the gorgeous Rocky Mountains, about 100 miles from Denver. One day I received an e-mail from a reader asking why I — a value investor — would have a conference in an expensive place like Vail. He suggested that as a true value investor I should hold the conference in a hotel somewhere by the airport where prices are much cheaper. His precise comment was, “I thought value investors were supposed to like cheap stuff.” This e-mail challenged my...

Downhill Racing Meets Value Investing

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I wrote this article in May 2015. Every time it was destined to be published in the pages of Institutional Investor, it got bumped by another, more timely one I had written. Finally, when a space opened in September, the market had taken a major dive, and what was supposed to be an “evergreen” article was suddenly out of touch with reality. Here is the irony: This piece addresses complacency, but its author was complacent too. The market has recouped its summer losses, and this article is relevant again. I am a skier. When someone says this, you assume he or she is good. Well, I thought I was good. I was not Lindsey Vonn, but I had the technique down. I’d be the fastest person going down the mountain, always waiting for my friends at the bottom Then, at the beginning of last season, I went skiing with my kids at Vail. It had snowed nonstop for a few days. Vail is a very large resort, and the mountain crew could not keep up with the snow, so I found myself skiing on unusually ungroomed slopes in powder more than knee-deep. Suddenly, something changed. I could not ski. I could barely make...

Gilead Sciences’ Miracle Drug

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It was 1986. I was a junior high school student in Soviet Russia. In political information (propaganda) class, the teacher told us that the HIV virus was killing millions of people in the U.S. Though she didn’t say it explicitly, she made it sound like HIV was a just punishment for the U.S.’s flawed economic and political system. When asked if this virus could be cured, she said that because it constantly mutated it was incurable. (And in fact, HIV reproduces 12 million times daily.) Once you get sick, it’s a death sentence, she told us. I still remember the chilling and morbid certainty in her voice. For a very long time, she was right. Fast-forward to 2016. Thanks to the once-a-day miracle drugs Truvada and Atripla from Gilead Sciences, a biotech company in Northern California, AIDS is not a death sentence anymore. Today, people infected with the HIV virus can expect to live an almost normal lifespan. Their lifestyle and energy level will not be different from a healthy person’s. If they continue to follow the regimen, they will not spread the virus. Gilead’s drugs completely eradicate the virus from the bloodstream (though it still hides in bone marrow and lymph...

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How buying a cow is like investing in stocks
Tevye from Fiddler on the Roof explains

(Chapter 4 from Vitaliy Katsenelson`s 
Little Book of Sideways Markets)

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