Nortel Accounting All Over Again!

[Myth465]

Parsad I have learned alot from you over the years, and this is how I plan to move into tech, using in the money options at 3% positions. It worked well with WDC, but I wish I bought more.

 

If I may ask, how many positions do you typically hold?

[Parsad]

If I may ask, how many positions do you typically hold?

 

Usually 6-12, depending on what's available.  The fewer positions we have, the more certainty there is in the ideas.  Cheers!

[Myth465]

If I may ask, how many positions do you typically hold?

 

Usually 6-12, depending on what's available.  The fewer positions we have, the more certainty there is in the ideas.  Cheers!

 

Thanks again.

[ubuy2wron]

Unfortunately, our timing stinks usually.  We are almost always early in and early out due to our conservative nature. 

 

This is the complaint of EVERY value investor, we started buying too soon and we sold too early. Think of how awfull it must be to be a momentum investor you are buying too late and selling too late. ;D

[goldfinger]

The reason being is that discounted prices can last years, but heavily discounted or absurd prices, usually don't last that long and the long-term survival of the business becomes less important.  Markets will correct a significantly undervalued opportunity rather quickly, whereas moderately undervalued businesses can remain that way for years.  This occurs because the severly undervalued opportunity tends to get recognized much faster by the investing community.  Cheers!

 

Forward PEs of less than 9 for MSFT  and less than 7 for DELL and HPQ: isn't that absurd already? At what point do you consider them that severly undervalued?

[Parsad]

Forward PEs of less than 9 for MSFT  and less than 7 for DELL and HPQ: isn't that absurd already? At what point do you consider them that severly undervalued?

 

They are very undervalued already...more so in MSFT's case.  Not quite Berkshire at 40K in February of 2000, but closer to Berkshire at $50-55K in 2000.  You remember the rapid correction in Berkshire's price through November of that year!  Like I said, if it goes down further, back up the truck.  MSFT should be in the $35-45 range.  Cheers!

[goldfinger]

Forward PEs of less than 9 for MSFT  and less than 7 for DELL and HPQ: isn't that absurd already? At what point do you consider them that severly undervalued?

 

They are very undervalued already...more so in MSFT's case.  Not quite Berkshire at 40K in February of 2000, but closer to Berkshire at $50-55K in 2000.  You remember the rapid correction in Berkshire's price through November of that year!  Like I said, if it goes down further, back up the truck.  MSFT should be in the $35-45 range.  Cheers!

Ok we are in full agreement!

[Cardboard]

I really like your market logic Sanjeev.

 

"In MSFT's case, our position is through in the money call options...nominal value is 3%, and notional value would be 20%...so we are pretty long!  If the price gets hammered, then we will step in and buy equity."  

 

Another strategy that I have been experimenting with is to sell a put with same strike, duration and notional value once the stock gets hammered at or slightly below my strike on the call (the call is in the money when I buy it to minimize premium cost as you mentioned before, close to equity). The position becomes automatically a synthetic long.

 

An advantage over buying the equity at that point is that I receive a nice premium to sell my put or much larger than it would have been when I bought my call. Fear premium could also be elevated at that point. And I am still not investing a dime more, actually receiving money (note: the impact on margin/buying power is identical to buying the equity).

 

The issue is that I still have to deal with the expiration of the contracts. At that point, I will be forced to buy in the equity or settle if below strike (due to put) or cash in a nice gain if well above strike (due to call) or realize my likely loss if above strike and decide what is next.

 

Of course, this strategy won't work if the notional amount on the call bought at the beginning is much larger than what one could afford to buy. 20% of a portfolio could be significant if no cash is on hand. However, I guess you could still sell fewer puts than the number of call contracts or the equivalent of buying the equity in an amount that one is comfortable with. You would still receive some premium or lower your cost of ownership.

 

I like using options especially with U.S. stocks since it minimizes the currency impact having very few dollars involved to replicate an equity exposure.

 

Cardboard

 

[onyx1]

 We are almost always early in and early out due to our conservative nature.  

 

But by operating this way you are earning superior risk adjusted returns for your investors.  Hopefully current and future investors will appreciate this.

[tombgrt]

Forward PEs of less than 9 for MSFT  and less than 7 for DELL and HPQ: isn't that absurd already? At what point do you consider them that severly undervalued?

 

They are very undervalued already...more so in MSFT's case.  Not quite Berkshire at 40K in February of 2000, but closer to Berkshire at $50-55K in 2000.  You remember the rapid correction in Berkshire's price through November of that year!  Like I said, if it goes down further, back up the truck.  MSFT should be in the $35-45 range.  Cheers!

 

Parsad, I totally agree with you.

 

Btw, on BRK :

 

Last 10 years BV growth was around +9% annually for BRK.

 

So take your 55K stock price from 2000 and start compounding :

55 000*1,09^11 = 142 000

 

This would imply that a $142 000 price for BRK.A would already be cheap, let alone the current $118 000.

Take a stock price of 46K for 2000 and you will get a compounded result of almost 120K.

 

Am I correct to assume all this? Would you agree that BRK is at least as much undervalued today as it was at 50-55K in 2000?  

 

I have added to my BRK position this week and intend to do the same with MSFT. Highest risk/reward plays out there hiding in plain sight IMO.

[ubuy2wron]

I really like your market logic Sanjeev.

 

"In MSFT's case, our position is through in the money call options...nominal value is 3%, and notional value would be 20%...so we are pretty long!  If the price gets hammered, then we will step in and buy equity."  

 

Another strategy that I have been experimenting with is to sell a put with same strike, duration and notional value once the stock gets hammered at or slightly below my strike on the call (the call is in the money when I buy it to minimize premium cost as you mentioned before, close to equity). The position becomes automatically a synthetic long.

 

An advantage over buying the equity at that point is that I receive a nice premium to sell my put or much larger than it would have been when I bought my call. Fear premium could also be elevated at that point. And I am still not investing a dime more, actually receiving money (note: the impact on margin/buying power is identical to buying the equity).

 

The issue is that I still have to deal with the expiration of the contracts. At that point, I will be forced to buy in the equity or settle if below strike (due to put) or cash in a nice gain if well above strike (due to call) or realize my likely loss if above strike and decide what is next.

 

Of course, this strategy won't work if the notional amount on the call bought at the beginning is much larger than what one could afford to buy. 20% of a portfolio could be significant if no cash is on hand. However, I guess you could still sell fewer puts than the number of call contracts or the equivalent of buying the equity in an amount that one is comfortable with. You would still receive some premium or lower your cost of ownership.

 

I like using options especially with U.S. stocks since it minimizes the currency impact having very few dollars involved to replicate an equity exposure.

 

Cardboard

 

I use exactly the same strategy to isolate the currency effect. As A cdn investor the US dollar headwind has been pretty gruesome if you want US exposure which I believe is the cheapest mkt right now. I am going to put on a largish MSFT LEAP bull spread if the mkt gets cheaper over the summer if people get scared I am going to get just a little greedy.

[Parsad]

Am I correct to assume all this? Would you agree that BRK is at least as much undervalued today as it was at 50-55K in 2000?

 

Yes, except that Buffett is 10 years older...thus we are ten years closer to it being run without him.  With Microsoft, the transition has already happened, and things for the most part are running fine.  Cheers!

[tombgrt]

Am I correct to assume all this? Would you agree that BRK is at least as much undervalued today as it was at 50-55K in 2000?

 

Yes, except that Buffett is 10 years older...thus we are ten years closer to it being run without him.  With Microsoft, the transition has already happened, and things for the most part are running fine.  Cheers!

 

Yes, I was going to add that in my post too. But then I thaught :

 

- Will BRK stop outperforming the first 5, maybe 10 years (seen in 5-year periods) after Buffett's death? Small chance giving the corporate culture and structure, the amount of talent under management & the shift to wholly-owned subsidiaries.

- Will BRK sell off after Buffett's death? Maybe, but I won't wait for it to happen when Buffett is 87 and the stock price drops from 280K too 220K.

- Also, there is that slight possiblity that he keeps doing this amazing job for another 5(+) years but it looks like the market likes to discount the fact that Buffett could die now or in 10 years, a lot seems to be priced in at the current price.

[Hawk4value]

Since we are discussing Big Tech, has anyone considered Cisco. It has net cash of about $26.5bil, or $4.82/shs. At $16.53/shs you are buying the business for $11.71/shs. Earnings are about $1.28/shs, or a PE about 9.15. I am by no means a lover of Tech but this seems rediculous for a fortress balance sheet and a solid cash generator.

[ECCO]

Thanks for sharing Parsad.

 

I spend last thursday's night reading about CRM and was able to buy puts on friday's stock price pop.

 

Thats an incredible story. Insiders are selling as fast as they can, but the stock keep going up. There is 140M stock today and there will be 145M next year, so that mean 5M options exercised...I guess it wont be better for 2013 and later. As soon as it is exercised it is sold...

 

I just wonder who is buying this stock? What could be the reasons for someone to buy the stock? What are those people buying the stock right now are expecting?

 

In a few years, CRM story will be a nice case story.

 

 

ECCO

 

[twacowfca]

Forward PEs of less than 9 for MSFT  and less than 7 for DELL and HPQ: isn't that absurd already? At what point do you consider them that severly undervalued?

 

They are very undervalued already...more so in MSFT's case.  Not quite Berkshire at 40K in February of 2000, but closer to Berkshire at $50-55K in 2000.  You remember the rapid correction in Berkshire's price through November of that year!  Like I said, if it goes down further, back up the truck.  MSFT should be in the $35-45 range.  Cheers!

 

Parsad, I totally agree with you.

 

Btw, on BRK :

 

Last 10 years BV growth was around +9% annually for BRK.

 

So take your 55K stock price from 2000 and start compounding :

55 000*1,09^11 = 142 000

 

This would imply that a $142 000 price for BRK.A would already be cheap, let alone the current $118 000.

Take a stock price of 46K for 2000 and you will get a compounded result of almost 120K.

 

Am I correct to assume all this? Would you agree that BRK is at least as much undervalued today as it was at 50-55K in 2000?  

 

I have added to my BRK position this week and intend to do the same with MSFT. Highest risk/reward plays out there hiding in plain sight IMO.

 

BRK's Price/IV is much more attractive now than in 2000 because BRK's stock portfolio was very pricey compared to now.  Also, the economy was rolling over into recession then, but today the recovery is well underway.

 

BRK had serious latent reserve deficiencies then with Gen Re, but now there are considerable reserve redundancies in all insurance subsidiaries.

 

BRK's culture is much stronger now than then with the resignations of two of BRK's most important managers over ethical concerns in the last few years.  I'm sure that all the other managers know that borderline ethics are not acceptable at BRK.

[tombgrt]

Forward PEs of less than 9 for MSFT  and less than 7 for DELL and HPQ: isn't that absurd already? At what point do you consider them that severly undervalued?

 

They are very undervalued already...more so in MSFT's case.  Not quite Berkshire at 40K in February of 2000, but closer to Berkshire at $50-55K in 2000.  You remember the rapid correction in Berkshire's price through November of that year!  Like I said, if it goes down further, back up the truck.  MSFT should be in the $35-45 range.  Cheers!

 

Parsad, I totally agree with you.

 

Btw, on BRK :

 

Last 10 years BV growth was around +9% annually for BRK.

 

So take your 55K stock price from 2000 and start compounding :

55 000*1,09^11 = 142 000

 

This would imply that a $142 000 price for BRK.A would already be cheap, let alone the current $118 000.

Take a stock price of 46K for 2000 and you will get a compounded result of almost 120K.

 

Am I correct to assume all this? Would you agree that BRK is at least as much undervalued today as it was at 50-55K in 2000?  

 

I have added to my BRK position this week and intend to do the same with MSFT. Highest risk/reward plays out there hiding in plain sight IMO.

 

BRK's Price/IV is much more attractive now than in 2000 because BRK's stock portfolio was very pricey compared to now.  Also, the economy was rolling over into recession then, but today the recovery is well underway.

 

Good points! Just like FFH's portfolio I think there is enough upside in the long run. Also, comparing BV/price we are at a very low multiple compared to the past and this at a time where the operating businesses become more and more important for normalized earnings power. Weird!

 

Well, BRK is already 15% of my portfolio but I wouldn't mind to add more under $75.

[dual_bid]

Forward PEs of less than 9 for MSFT  and less than 7 for DELL and HPQ: isn't that absurd already? At what point do you consider them that severly undervalued?

 

They are very undervalued already...more so in MSFT's case.  Not quite Berkshire at 40K in February of 2000, but closer to Berkshire at $50-55K in 2000.  You remember the rapid correction in Berkshire's price through November of that year!  Like I said, if it goes down further, back up the truck.  MSFT should be in the $35-45 range.  Cheers!

 

I remember, 10 years ago, Mohnish Pabrai did evaluate MSFT, using a 8%-10%-10ygrowth DCF and Terminal 15xFCF combo, reaching about ~$20-$25 in IV (FCF at 25% of Rev)

 

What would his 'calculator' fetch today? Anyone?

[ERICOPOLY]

I really like your market logic Sanjeev.

 

"In MSFT's case, our position is through in the money call options...nominal value is 3%, and notional value would be 20%...so we are pretty long!  If the price gets hammered, then we will step in and buy equity."  

 

Another strategy that I have been experimenting with is to sell a put with same strike, duration and notional value once the stock gets hammered at or slightly below my strike on the call (the call is in the money when I buy it to minimize premium cost as you mentioned before, close to equity). The position becomes automatically a synthetic long.

 

An advantage over buying the equity at that point is that I receive a nice premium to sell my put or much larger than it would have been when I bought my call. Fear premium could also be elevated at that point. And I am still not investing a dime more, actually receiving money (note: the impact on margin/buying power is identical to buying the equity).

 

The issue is that I still have to deal with the expiration of the contracts. At that point, I will be forced to buy in the equity or settle if below strike (due to put) or cash in a nice gain if well above strike (due to call) or realize my likely loss if above strike and decide what is next.

 

Of course, this strategy won't work if the notional amount on the call bought at the beginning is much larger than what one could afford to buy. 20% of a portfolio could be significant if no cash is on hand. However, I guess you could still sell fewer puts than the number of call contracts or the equivalent of buying the equity in an amount that one is comfortable with. You would still receive some premium or lower your cost of ownership.

 

I like using options especially with U.S. stocks since it minimizes the currency impact having very few dollars involved to replicate an equity exposure.

 

Cardboard

 

 

This strategy makes sense if you are afraid of USD currency exposure as you point out.

 

Otherwise, instead of writing the put it is simpler to just ditch the calls and buy the stock directly.  The advantage here is that you won't have to pay tax on the put when it expires (and perhaps you wind up owning the shares longer than initially thought).

[Hoodlum]

At some point this will all unravel.

 

Salesforce’s Execs Bonus Bait and Switch

[bathtime]

Here are employee reviews of Salesforce, in case it's useful:

 

http://www.glassdoor.com/Reviews/Salesforce-com-Reviews-E11159.htm

[ECCO]

 

http://blogs.barrons.com/techtraderdaily/2011/05/24/crm-morgan-stanley-says-buy-200-target/?mod=yahoobarrons

 

Morgan Stanley’s Adam Holt this morning raised his rating on the stock to Overweight from Equal Weight, with a $200 price target, writing that workloads on “cloud” computing facilities, such as the company’s “Force.com” online platform, is going to rise 50% per annum, compounded, through the next three years

 

He sees $2.17 billion in revenue for this year, the same as his prior estimate, but for 2013 he sees revenue of $2.57 billion, from a prior estimate of $2.53 billion, and for 2014, he sees revenue of $3.23 billion, up from $3.082 billion previously.

 

That should produce non-GAAP EPS next year of $1.90, rather than the $1.80 he’d previously expected, and EPS of $2.43 in 2014, rather than the $2.31 he’d previously modeled. Holt models Salesforce earning $1.32 this year.

 

Holt’s $200 target is based on a 47 multiple of his projected free cash flow per share of $4.11 next year, which he suggests is a 1.3 times growth multiple

 

 

You're right Parsad, its like a repeat of the Nortel days. Amazing how history repeats itself!

 

 

ECCO

[Charlie]

twacowfca, what do you think Berkshire is worth at the moment?

 

I have recently sold most of my other holdings and bought Berkshire Hathaway.

 

At P/B 1,2 and Berkshire coming out of recession the stock is too cheap to ignore.

 

I´m also looking at Munich Re, because in a recent interview Buffett said he is buying

 

a lot of shares of one stock.

[bluedevil]

Here is a deeper look at CRM's questionable accounting:

 

http://seekingalpha.com/article/271799-salesforce-com-eye-popping-exec-bonus-plan

[twacowfca]

twacowfca, what do you think Berkshire is worth at the moment?

 

I have recently sold most of my other holdings and bought Berkshire Hathaway.

 

At P/B 1,2 and Berkshire coming out of recession the stock is too cheap to ignore.

 

I´m also looking at Munich Re, because in a recent interview Buffett said he is buying

 

a lot of shares of one stock.

 

BRK could be valued many ways:

 

By what the market is willing to pay for it.

 

As a sum of the parts if broken up and spun off or sold separately.  This, although unlikely, would probably be much higher than BRK's market price.  The current stock price reflects the lack of a Buffett Premium recently and the usual discount placed on conglomerates.

 

By Tilson's method which, if i'm not mistaken, mostly sums the value of net investments and puts a multiple on the pretax operating earnings of the subsidiaries.  Tilson's value was about $154M EOY 2010.

This is probably a conservative method that Warren would not disagree with because he expressed the opinion at the recent AGM that BRK's normalized pretax operating earnings were $17M.

 

Then there is Berkowitz' method that adds the idea of a growing stream of float to the evaluation as an interest free loan. His valuation in recent years has given a range of values that average perhaps as much as 20% higher than other valuations.  This is not unrealistic because there is very competent succession in place in BRK's insurance operations.  

 

Montross, Jain and others are exceptional managers, very loyal to BRK and its culture.  Hamburg is a very good de facto COO as well as CFO.  He would be an excellent interim CEO or permanent CEO, although some managers would rightly think he isn't the same soft touch as Warren.  He is probably the most underpaid large cap CFO in the country.  This shows great character, because other potential CEOs have fallen on the altar of greed.  The managers are used to reporting to him.  Therefore, there is a likelihood of a smooth transition.  This might not be the case with a different, successor CEO, no matter how talented.

 

My personal opinion is that all these valuations are on the low side.  I agree that BRK is the best large cap value in the current market.  During the last decade, BRK has  grown its book value per share nicely for a large cap.  Its diversification with many good businesses gives great stability.  Reserves are redundant.  The business cycle is expanding.  Many think a hard market for insurance premiums is at hand.  Most importantly, earnings are potentially available for owners, allocated by stewards with regard to maximizing value for stockholders without the usual waste from the institutional imperative.  :)