Analysis

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Trump May Equal Volatility, but Volatiliy Doesn’t Equal Risk

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It is a new year, and my crystal ball was supposed to have become magically unfogged by the turn of the calendar. Well, I hate to disappoint you, but it hasn't. Unlike our new president, I lack certitude about the brightness of our future.My thinking is caught between two quotations from Mark Twain. The first is, "Whenever you find yourself on the side of the majority, it is time to pause and reflect." And the second: "I've lived through some terrible things in my life, some of which actually happened."On one side I am in agreement with the majority who expect Trump's policies to benefit the economy: lower corporate taxes, foreign corporate cash repatriation, deregulation, and so on. This inclines me to pause and reflect, not just because I find myself in the innately uncomfortable position of agreeing with the majority but because these in-your-face positives are only part of the new president's package.Trump's ascendancy also brings a lot of uncertainty – something the market is ignoring, for now. The business-oriented pragmatism that it loves today comes with nationalistic and protectionist "job creation" rhetoric that may result in trade (or even conventional) wars. U.S. foreign policy, trade, and military alliances...

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 Persistent Problems of Presidential Elections

in Analysis

The election is over. I am left with two very contradictory feelings.First is one of appreciation — every four years we peacefully replace our government.I remember my parents in the late 1970s discussing Soviet politics at our house with their close friend. Their friend said something anti-Soviet. I vividly recall the fear in my mother’s eyes when she realized I had overheard that part of the conversation.Views that were contrary to “politics of the party” were not tolerated. If I repeated in kindergarten what I had just heard, my teacher could report it to authorities and my parents (not me) would get in trouble.A six-year-old kid could have only heard this sort of anti-Soviet talk at home: TV, radio, and newspapers were a pro-Soviet propaganda machine. My parents would not have been sent to the gulag, but they could have lost their jobs. If this sounds farfetched, my father’s best friend, a colleague and professor at Murmansk Marine Academy, was fired for possession of anti-Soviet propaganda — a copy of Solzhenitsyn’s Gulag Archipelago. It took him years to get another job, and it was almost two decades later, when the Soviet Union fell apart, that he was finally able to...

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...

Good Companies Don’t Always Make Good Stocks

in Analysis

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

in Analysis

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...

Gilead Sciences’ Miracle Drug

in Analysis

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...

Time for an All-Terrain Investment Portfolio

in Analysis

As investors today we feel something like a traveler preparing to drive across an unknown continent. A look in the rearview mirror tells us we should pick a race car, and if the road continues to be as it has been, then our trip may be fast and uneventful. But what if the road that lies ahead is rocky, full of holes and maybe even strewn with giant boulders?A sports car will not get past the first potholes. What we need is a four-wheel-drive, all-terrain vehicle. This monster will not have the speed or the sex appeal of the shiny red convertible, but it will complete the journey. Its position at the finish line will depend entirely on one unknown — the road ahead. If it is a smooth, unbroken route, then our Land Cruiser will be left in the dust by the Ferraris and Maseratis. It will complete the journey; it just won’t be the first to cross the finish line. But if my prediction is correct, you’re going to be mighty glad to be in the ATV — you might even end up at the head of the pack.On the surface the U.S. and global economies appear to...

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