Remember this April 2009 60 Minutes segment, which we previously referenced:
- The 401k Fallout - April 19, 2009 8:47 PM
- Checked your 401k lately? The recent financial collapse has devastated this retirement resource. Older workers are hardest hit, as their financial futures may now be at risk. Steve Kroft reports.
Although market indices have not reached pre-crash levels, the recovery in equity values was swift, meaningful, and skeptic-defying. Here's a five-year view of the S&P 500 from Google Finance:
Thus, people who thought they would "never make back" paper losses should find themselves pleasantly surprised. Here, we can again share advice from one of our favorite reads, Peter Lynch's One Up on Wall Street (first published 1989):
- "The basic story remains the same and never-ending. Stocks aren't lottery tickets. There's a company attached to every share. Companies do better or they do worse. If a company does worse than before, its stock will fall. If a company does better, its stock will rise. If you own good companies that continue to increase their earnings, you'll do well. Corporate profits are up fifty-five fold since World War II, and the stock market is up sixtyfold. Four wars, nine recessions, eight presidents, and one impeachment didn't change that."
We specifically mentioned j2 Global and Sonic Foundry in our post one year ago, Opportunity Costs Hard to Predict in Short-Term, Watch Over Full Market Cycle. While j2 Global's valuation is now more full, the company's high margin, high ROIC business model is an amazing free cash flow machine. For prior commentary on Sonic Foundry/Mediasite, we point to Passing the Torch, Plus Key Investment Musings and our earlier posts. We also relay the fact that Director Mark Burish recently added 15,000 shares at $13.73 to bring is position to 115,000 shares. There were some recent option exercises by members of management, yet these were options issued ten years ago and set to expire in February 2011.
- Slight digression: we always like seeing corporate insiders use cold, hard cash to purchase shares in our companies, particularly when such insiders already have meaningful positions. Insiders usually buy for one reason: they believe in the company and the outlook. More advice from Peter Lynch: "There's no better tip-off to the probable success of a stock than that people in the company are putting their own money into it."
Further, Wall Street embraced our waste resource management company Casella Waste Systems (CWST +63% Y/Y) and weight loss management company Weight Watchers (WTW +28% Y/Y), where we also see more upside. In addition, online merchant and payment giant eBay (EBAY +16% Y/Y) pushed higher as the company continues to generate mountains of excess cash flow.
Churchill Downs (CHDN +13% Y/Y), where we gained exposure via the company's acquisition of Youbet.com, nudged higher and currently implies an equity value of around $3.55 for former Youbet.com shareholders. We have been gradually reducing our exposure to Churchill Downs, but note that fundamentals now appear to be improving for the company. This bodes well for 2011.
Meanwhile, our Latin America exposure via Compania Cervecerias Unidas S.A. (CCU +54%) and PriceSmart Inc. (PSMT +71%) also performed very well, although like j2 Global, valuations are now more full. We're still holding these well-positioned, growing companies as part of our diversified portfolio.
All that said, we have experienced some disappointments such as Chinese medicine /pharmaceutical company American Oriental Bioengineering (AOB down 50% Y/Y) and online jewelry/fashion retailer Bidz.com (BIDZ down 45% Y/Y). We may come back with more commentary on these names, but we'll say now that we've been adding to our Bidz position in recent weeks. While our original Bidz thesis didn't pan out and retailing is a tough business, we still see value from several different angles. Separately, our sum-of-the-parts story Yahoo (YHOO down 3%) has yet to pan out, although shares are above our cost basis and we believe hidden value remains.
Other shortcomings were what some investors call mistakes of omission - e.g. not purchasing companies in 2009 or early 2010 that we've long followed and liked such as Netflix (NFLX +229% Y/Y), coffee behemoth Starbucks (SBUX +39% Y/Y), or auction house Sotheby's (BID +117% Y/Y).
For the big picture in 2010, the WSJ offered this summary article:
- Bumpy Climb for Stocks in 2010 - Investors Endured a Year of Wobbles and Worries, but Market Rewarded Them By MATT PHILLIPS And JONATHAN CHENG
- Stocks turned in another solid year, the Dow Jones Industrial Average gaining nearly 11% and the Nasdaq doing better still. Yet for much of 2010, it didn't feel like a winning year.
- Amid stumbles and scares, U.S. stocks clambered to a second straight year of gains, in which the Dow reached levels not seen since the fall of Lehman Brothers in September 2008.
- "It was a pretty hard-earned 11%," said Jeffrey Palma, global equity strategist for UBS Investment Research. "It was like a roller coaster—certainly nothing like a straight line."
- With one day of trading left in the year, the Dow Jones Industrial Average has gained 1,141.66 points, or 10.9%, and stands at 11569.71.
- The Standard & Poor's 500-stock index has added 142.78 points, or 12.8%, to 1257.88. The Nasdaq Composite index has risen 393.83 points, or 17.4%, to 2662.98.
- There was hopeful economic news Thursday, as initial claims for unemployment fell to the lowest level in over two years. An index of pending home sales rose 3.5% for November.
For example, this 12/30 FT article covers positive economic data released this week: US data point to surge in recovery. And, a worthwhile read from tongue-in-cheek Stanley Bing's blog (and Fortune column), Is it time to invest again? But, note one of his key points:
- Companies attain and lose favor based on whiffs and vapors and rumors and crazy fears and hopes and dreams. The Street lunges at short-term gain and flees anything that smells of patient strategy that will pay off over time.
Back to what will happen this year. Per our prior warnings, we shy from most forecasts and recommend reading this article from Fortune:
- Don't believe the rosy forecasts - Most economists and pundits predict a continued upward trend for most assets next year, but they will eventually be proven wrong.
- ... the anecdote amounted to a parable on the pitfalls of economic forecasting. Friedman also liked to use the aphorism, "Predictions are extremely difficult, especially when they're about the future."
- Friedman's lesson isn't that forecasting is impossible, but that the best prediction is usually the basic assumption that prices and growth rates will go back to their historic averages, or in economic parlance, "revert to the mean." What's difficult is guessing when that will happen. Indeed, the timing is truly unpredictable. But it invariably does happen.
Likewise, we continue to find unrecognized values, including some off-the-run franchise type companies such as Market Leader (LEDR) trading for less than a song (in this case, less than net cash value, although burning some cash). Large, high quality, dividend-paying companies are also offered at attractive multiples of earnings. We stand behind our stocks versus bonds stance and see more value in equities.
As always, "it's all about what you pay and what you get" (Fairholme Fund's Bruce Berkowitz, variation of Ben Graham and Warren Buffett). By assembling a portfolio of companies that are likely to be bigger, better, stronger in three to five years' time at the right price (e.g. discount to intrinsic value), risk is mitigated and performance is usually favorable over a full market cycle. With this strategy, short-term price fluctuations and broader "Market" palpitations can mostly be ignored. Of course, short-term, manic Market volatility is what creates incredible opportunities and is, therefore, the friend of the patient investor.
Thank you for reading CS$. Wishing you a happy, healthy, and prosperous New Year!
Disclosure: long JCOM, SOFO, GSL, SSW, FLY, WAC, PARL, FLWS, CWST, WTW, EBAY, CHDN, CCU, PSMT, AOB, BIDZ, YHOO, LEDR.
© 2011 Jeffrey Walkenhorst
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