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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Wednesday, February 28, 2007

Factset and Alpha Tester

This semester, we were encouraged to get to know Factset's Alpha Tester package. Wow, is this thing addictive (to me). After spending an hour with the online tutorial, I started testing away. I've built so many screens over the years that I have wanted to backtest, I can literally run a backtest per night if I want to.

Thus far, with the tool I have merely figured out many of the nuances such as which database to grab pricing information from etc. Some of my results have also been fairly intriguing. We have long joked that the Price to Sales ratio was pretty useless (Kenneth Fisher swears by it, though). It turns out this may not be the case...because of the factors I tried (23 of them, mind you) from 1987 through 2005 P/S was the most statistically significant explaining excess returns. I think there may be some serious internet bubble bias however...

I also ran a screen written during my internship here that has been shown to (initially) generate pretty strong returns. Alas, buying stocks from the screen results in a really risky portfolio, so the return can be explained, to an extent. I still have more work to do here, however, because I have learned some new Alpha Tester idiosyncrasies.


Portfolio holding up

Our equity portfolio in ASAP is holding up pretty well through the selloff. We performed roughly in-line with our benchmark on the selloff day (Tuesday), but today we had a good day. YTD, we are officially 93 bps (0.93%) ahead of the benchmark. (I know this because I'm the one that runs the performance stats every day to make sure our numbers haven't been messed up)

Tuesday, February 27, 2007

Ding, ding, ding...

Just caught the close on CNBC. The NYSE floor booed the close. So there's a correction happening, what does this change? Very little, really.

Good news for

Will today be the day?

...that we get a 2% market sell-off so we can stop hearing about it?

Let's be real - there are far more short sellers today than at anytime in history. I am not speaking about the short interest ratio - I am talking about the percentage of market participants that actually sell short. Maybe this is the reason for a reduction in volatility?

Thursday, February 22, 2007

Google piloting secondary market for employeed options

Google to test-run employee options auction plan (links to original Marketwatch blurb)

Google has chosen 20 employees to test its "Transferrable Stock Options" plan whereby employees can sell their options to the highest bidder. This gets me to wondering, why would Google do this? The first thought that came to me is that Google likes to be innovative and this would be. My second thought is that they believe the stock is priced too high and want employees to be able to cash out without any kind of backdating-esque scandals surrounding options practices.

My next thought is, "Why don't other companies do this?" Maybe we could begin a secondary market for these plans and sell the biz in a few years to an exchange.

Maybe I'm overthinking this altogether and it is a non-event.

Wednesday, February 21, 2007

Oversupply of funds?

Take a look at what you see in the graphic above. While 535 stocks in the US and Canada were hitting new highs today, 5,842 Mutual Funds did the same. Borderline ridiculous?

Tuesday, February 20, 2007

Top Investment Books

My list of favorite / most influential investment books:

1) One Up on Wall Street - Peter Lynch If I could give my parents one investing book to read, this would be the one. Lynch takes a complicated subject (investing) and boils it down to some simple lessons. Earnings drive stock prices, overpaying can be painful, and the best investments are all around us - just pay attention. Even professional investors should probably read this book once a year to dampen some of the noise we are subjected to daily.

2) Trading in the Zone - Mark Douglass This book isn't technically about investing, rather it is meant for traders. In the end, we're all just traders with different time horizons, anyway, so who cares? Douglass' lessons are all about the psyche needed to partake in our capital markets. This book should be read every year. Its genius is in its simplicity and the visual examples he uses. Anyone with intellectual curiousity will realize the discussion also could help explain many life experiences.

3) Expectations Investing - Alfred Rappaport & Michael Mauboussin This book helps to better explain how stocks are priced...that is it attempts to give a methodology for understanding the expectations of future company performance built into today's stock price. It is NOT for my parents - it uses finance and accounting terms that the layperson cannot understand, which is unfortunate. Nonetheless, the framework of thought is a good one to understand because it helps to understand how stocks are priced and why. The authors created a website to aid with the concepts, too.

4) How to Makes Money in Stocks - William O'Niel This book sort of breaks all the "rules". O'Niel will tell you that the P/E is useless (true from the alpha tests I have run) and that buying stocks high and selling them higher is the key to big returns. Who can argue with his track record? Professionals would simply call O'Niel a momentum investor - the equivalent of a used car salesman among money managers. But, his lessons are quite important and his methodology is tried and true, albeit not for the faint of heart type of investor.

5) The Little Book that Beats the Market - Joel Greenblatt Simple, but effective in its approach to finding stocks that can generate excess returns based on [generally] short term share price weakness in high return on invested capital (ROIC) companies. The book has a free website that gives its top picks at any point in time.

6) The Warren Buffet Way - Robert Hagstrom I like this book because it tells a story and gives great insight into what the world's greatest investor actually did. It also reminds you that traditional thinking does not lead to excess returns. Many managers today still rag on Buffett's methods - most likely because they are jealous of his success (plus he lives in Omaha, not on either coast - adding to the jealousy perhaps?)

7) The New Market Wizards - Jack Schwager Another book that breaks rules. It is filled with interviews of the best traders and money managers out there. What I glean from the book is that the people Schwager interviews are very confident in their ability even after losing tremendous amounts of money. Just wait till you get to the ZEN part!

8) Japanese Candlestick Charting Techniques Many do not believe in technical analysis. Nonetheless, if you want a great reference this is one to keep handy - it contains pretty much all the basics.

My investment library has some other books that I have yet to read and many that I have read but did not put on this list. I also didn't include any textbooks, like the McKinsey valuation "bible" which isn't much of a "read" although its topics are certainly useful for investors. The same would go for anything by Damodaran or any accounting professor (ugh).

Buffet buys UNH?

This headline last week confused me. Warren Buffet bought shares of United Health (UNH)? What?

This seems out of character for Warren. UNH has a technology product (Ingenix). Granted, he's old (76) and probably knows alot about health care costs. He certainly likes to invest in things he knows - that's one of his famous teachings. Another of his, is to picture "where the business will be in 5 years". This explains his purchase of BUD. He knows that in 5 years, people will still be drinking plenty of beer. Same goes for Coke, See's Candy...the list goes on.

It's also what I find confusing here. I mean, can you say that in 5 years you know that UNH will be around? Probably. But 10 years from now? Investing in managed care businesses comes with a huge array of fiscal policy risks. In fact, fiscal policy is directly responsible for making HMO's the great investment they've been during the Bush administration.

But what if, in 20 years, we figure out that our privatized health care experiment doesn't work and we decide to build a new system a la Canada? Ok, a stretch, but not completely impossible. However, it wouldn't even take that for the managed care investment to go awry. The dems hate Medicare Advantage and significant cuts could wound some HMO's (albeit it would hurt UNH alot less than Humana, for example). (I fully expect this to happen, btw)

So, while the stock is up 4% from the announcement of Buffet's buy, I must admit that I still find this one out of character for the world's second richest man. Then again, he didn't get to be that way by worrying about my thoughts...

Haemonetics (HAE) making software push

Long ago, I mentioned that I would write about a small-cap blood medical device company named Haemonetics (HAE). I did - you can find a link to my report on the right hand side of this page. Without getting into too much detail (there is plenty in my full research report), I believe the company is well-positioned for growth along with higher margins in the future. Conservatively financed, the company has $7.50 per share in cash on the balance sheet. When I wrote the report, the stock traded at $45 and now trades at $47.25, not quite the bargain it was. Nonetheless, the company has a very strong competitive foothold on this market and I still believe strongly in my investment thesis (after all, I do personally own shares).

Recently, the company has made it very clear that it is serious about its software business by buying IDM Medical Software. This software essentially provides data management capabilities for blood centers. Already growing around 20% this year, HAE's software business is beginning to become a significant revenue contributor to the company. I will admit that I do not yet understand what this means for HAE. I mean, how well can this company, whose core competency has historically been design and assembly (manufacturing) of its devices, run a software company? Clearly, the synergies here are the ability to cross-market the software along with the hardware. But, there is some integration risk now embedded into the business, albeit the risk is still small at this time. IDM is a one-location company with only $6M in revenues. Furthermore, the existing 5D software acquisition appears to be going very well.

The stock is niether a true value stock, nor a high-growth stock. In fact, it is not beating earnings estimates, nor is it a momentum mover. All of this probably explains why it has moved very little in the past year. Yet, something here (read: new product pipeline & cost cutting opportunities) still leads me to believe that the company's future earnings potential is still very attractive. (In addition to me owning shares personally, we do own the shares in ASAP, as well)

Monday, February 19, 2007

Midwest Cold Ideas

So off the sports, I am thinking that Panera (PNRA) may put up a poor comp number for February on the first Wednesday of March. I mean, the first two weeks of this month, I barely left my couch and when I did it was only when I absolutely had to. Friggin' cold. Period. (PNRA still has a strong Midwest bias in its geographic footprint) I tried to look at weather trends and compare them to the same-store numbers. Alas, I could not detect a significant pattern with precision. However, I do recall the company citing weather in other press releases. Two data points of anecdotal evidence here in Madison also counter my idea. Nonethless, if a poor number comes, it could be another buying opportunity. That said, the company does need to work out growing its same-store sales because lunch is so strong it is getting hard to grow that part of the biz. I'm still a buyer in the low 50's - love the risk/reward there.

We bought some CPSI the other day. At some point, the current softness in the rural HCIT market should ease and the company could trade at 20 times 2+ dollars of earnings potential. This means there could be some 40-plus % upside all the while collecting on a 5% dividend to wait for the turnaround. Seems like a solid opportunity to me - not much downside while there remains some serious upside. For "surprise" investors or momentum players, wait for the next quarter to see Q2 guidance. Backlog is still up 6% Y/Y while analysts think revenue will only grow 2.7% this year.

disclaimers: I do not own shares in either of these companies currently, however, I am planning on buying CPSI tomorrow (2/19)

Some things make no sense...

First off, why did the Chargers fire Marty who went 14-2 only to hire a guy who, after two head gigs has a losing record? Senseless!

Why won't Ron Rivera be back? It's not his fault that he lost the most important defensive player (not Urlacher, Tommie Harris). He's been doing a heckuva job there in Chi-town. Guess that's good for me. I'm a Packers fan.