Emails I Wrote.
This one is from October 7, 2008.
Gents:
Okay, so you know that my belief is that the market still has something
left to give, and any bounce back is a day-trading rally where funds
immediately sell into any strength that they can find.
(Incidentally, when I started writing
this missive this morning, the Dow
was up 100 points, so my call about
the market going down to 8500-8200
seemed a lot gutsier. DJIA closed the
day at 9,447, down -508 points.)
Here are some ideas for when
the market begins a snap back.
Any one of these, if you get it at the
buy price window, may make a nice
add to the portfolio. If they don't
get down to that level, don't buy.
Even if they do, re-evaluate the
thesis.
GOOG (Google, currently 356, year range
is 356 to 756, PE is 23X)
Google is out of fashion because it's
essentially an advertising shop now.
It doesn't make any money from its
other investments (YouTube, eg), and
its GoogleDocs (competitor to Windows
Office) is a non-starter.
That said, the Internet remains a good
advertising tool relative to big media
for mid-sized businesses, even in
recessions.
I look for Google to dip back around
260 to 290, at which point it becomes
just too damn cheap for people to
not take notice, and bid it up again.
Even if earnings fall 30%, at 280 it
would still be priced at PE 25X, and
the bet on GOOG's future is cheap.
GS (Goldman Sachs, 115, range 86-250,
knows)
Goldman is still the pre-eminent bank,
and you have heard me say that this
whole bailout is a Goldman bailout,
because they bet right, by and large,
but just don't have anyone to collect
their "wins" from. Buffett is in at
115 per share. That provides in
market psychology a bottom-feeler.
But when the market falls even further,
not be immune… especially when the
regular market recalls that Buffet's deal is a
first-preference, whereas the common
is left hanging out to dry.
Look for GS to fall to the 60s or 70s at
some point. Why that number? At that
point, it becomes a good L-T bargain.
Below that point, it becomes a better
bargain. Above that point, we might
miss it, but there are other opportunities.
I don't think that GS's having to become
a "bank" is going to be too big a drag on
GS's profits. GS will just do what it does
best with less leverage. The world needs
GS to be in the trading business, and don't
think that the western world doesn't know
that.
As for the potential brain drain from GS
to hedge funds, PE funds, etc…. forget
about it. Ain't gonna happen. First off,
both types of funds are screwed right now,
and they're not taking on any new employees
or partners. They're getting hit by with-
drawals and liquidations, and their profit pie
is done shrunk. Secondly, daddy Goldman
is going to seem a very nice place for their
current employees to weather the storm.
Finally, all of GS's formerly rich employees
with GS stock options are no longer so rich,
and (being great competitors, because
that's who GS hires) they want every chance
to get GS's stock price back up again.
BAC (Bank of America, 26, range 18-53,
forward PE is 8X, but nobody really knows)
B of A is going to fall further, and how much
further nobody really knows. Their balance
sheet is still a mess, despite their deal-making.
That said, they do have some good profit
engines, and their Countrywide purchase
is going to produce some value after the
initial 2008-9 pain. The Merrill Lynch purchase
is also a giant question mark.
You have to wonder whether Ken Lewis is
just in the business of being too big to fail,
with these deals. The next 2 months with
more market distress will be a proving ground,
but absent any new bad news during this
time period, BAC may just make it through.
BAC is an opportunistic long-term hold ONLY
at the right level. That level would be around
15 or so. If it never gets down to that level,
there are other opportunities. It's a weird
stock at a weird time, so you have to beware
on this one. For instance, yesterday it was
at $32. Today it's at $25.70. A drop of -20%.
(they slashed their dividend by half)
This is without short-selling being allowed.
Further, they can't seem to finalize their
new stock sale at $23 per share, even.
Just wait until a few weeks out, when the
shorts can finally get ahold of them again.
PBR (Petrobras, 31, range 28-77, forward
PE is a ??, trailing PE is 13X, and forward
PE is expected to be better.)
This stock has just gotten slammed by
virtue of being in the BRIC countries when
the market is plummeting. Not to mention
being in the Oil business when Oil is sitting
at $87/bbl amid global recession.
So expect this one to fall further, sadly.
But the plain fact is that oil is just going to
be more expensive five to ten years from now.
Petrobras is sitting on huge reserves, may
have a huge find in the Atlantic Ocean
(largest discovered field since the North Sea),
and even if oil falls back to its 2005 levels,
that year they were still making $10.3 Billion,
or $2.35 per share. At $21-23 per share or so,
their stock begins to look very cheap to me,
around 10X.
The biggest risk is their financing. I have to
do more work on that. Their Portuguese
balance sheet is impossible to read, and their
English-language version is equally opaque.
DIS (Disney, 26.75, range 26-36, forward PE
is 10.8X).
Disney is getting hit by worries over ad
spending for its media, consumer spending
for its movies and TV divisions and its
ancillary products (licensed clothing, etc.),
and travel spending for its theme parks.
In other words, the perfect storm for a
bad showing from a consumer-discretionary
spending stock. However, it is Disney…
Their treasury function is excellent: they
have a lot of long term debt on their BS
financed at very attractive rates, and not
a lot of short term debt. ($12 B of long-term,
only $2B of short-term, which includes
near term maturities of long-term debt).
In other words, they borrow like us, which
gives me great comfort that they're not going
to have to go out into the CP markets.
I look for Buffett or Chinese to start buying
this thing more aggressively as soon as it
falls to around $22. Yes, their earnings are
going to get hit. They may in fact get
halved or more before this is all done. But they
are Disney, and they are not going out of
business.
NKE (Nike, 59, range 51-71, forward PE is
13.1X)
Nike may have some space to fall further.
A realistic "opportunity target" is around
$35-40. It may not fall to that level, and so
be it. But if it does, it will represent an
attractive buy.
Thesis that NKE will break bad is by looking
at the Bollinger Bands and the 100 day
moving average, which has turned
negative. NKE has held up pretty well
in the downturn, but it looks to break
down through these technicals as the
market turns "even worse".
The Wall Street bet is that NKE is a
"last place to run". My bet is that the
Street will sit up and realize that NKE is
not as "final" of a place to run as Philip
Morris and P&G in discretionaries.
But Nike has NO long-term debt, and NO
short-term debt. They really never have
had any debt since the mid 1990s. Great
balance sheet for these troubled times.
So NKE will stay in business for sure. The
question, ergo, is their earnings. If we go
as far back as 2001, their EPS was $1.08 per
share, but that was with margins at 39%,
and sales at $10B.
For the year ended May, 2008, Sales are
now $18.6B, and margins are 45%.
Cut sales by around 30%, and take margins
back to 39%, and you wind up with Sales
at $13B, and EPS of approximately $1.80.
At a buy price of $38, $1.80 EPS yields a
buy at 21X EPS. That's given a very down
global sales market. You still would have
appreciation potential as sales re-increase,
and margins grow again.
It's one to watch.
INTC (Intel, 16.59, range 16-28, 13X trailing
PE, 11X forward PE)
Someone is going to make a very lot of
money in INTEL when it drops to $12-ish per
share. They have virtually no long-term
debt (only $2.6B), and they will be in
business for a very long time to come.
They will announce some very bad news
in the coming months. It will probably be
that (a) sales have slowed down significantly
since no corporations are buying big data
server "blades" and (b) there may be some
shock to their $4.3B "short-term investments"
portfolio, because that was in Commercial
Paper – maybe to Wachovia, who knows? –
and Floating Rate notes – maybe with Lehman,
who knows?
So look for the plummet. But when the plummet
happens, it will be a total over-reaction. Wall
Street will probably wipe out $15B of market cap
value in response to INTC's writedown of $3B of their
investments.
You will not get a chance to buy Intel for the low
teens again, other than during this potential window
of opportunity.
GE (General Electric, 20.52, range 20-42, 10X
forward PE but who knows?)
When the market hits 8200, this will be the
time for GE… because it will probably be
selling at around 13-15. If it never goes there,
don't buy it.
As you have heard me say, the commercial paper
component of the Gov bailout is the "GE Bailout".
GE is so fucked in so many ways that nobody really
knows what the hell is going on, and Immelt has
been suspiciously off the airwaves for a
very long time. Their short-term debt,
for instance, is a whopping $200 Billion…
mostly that's short-term CP, kids. How does
anyone push through that sort of CP in
today's world?
The Buffett deal is another suspect one.
Basically, he got a great win and GE got
the right to prop up its stock price for a
few days.
It ain't going to work in the long-term,
but the Great CP Bailout might help.
They still have a hell of a conglomerate,
and a great future. If the shit really hits
the fan, look for analysts to start slicing
and dicing what the break-up value of
GE is.
There should be a lot of anxiety with
GE, and there is. There is no silver lining
that I see. You've got to believe only
in future opportunity, and a rebirth of
short-term CP markets.
In the meantime, look for the stock to
go down, down, down. And when it
hits 15 or so, re-evaluate the thing.
CSCO (Cisco, 18.75, range 18-34,
forward PE is 12X but who knows?)
Great business, even if they do have
long term debt of $6.3B. They don't
seem to have any debt renewals in
the next 12 months, but if they did,
they could make it up out of their
true Cash Stash of $5.1B.
Also, did I mention that they show
short-term investments of $21B…
Typically, that sentence would come
with an exclamation mark(!).
Today, however, as to what's in there, per
Cisco's 10-K…
Fixed Income Securities
At any time, a sharp rise in interest rates or credit spreads could have a material adverse impact on the fair value of our fixed income investment portfolio. Conversely, declines
in interest rates, including the impact from lower credit spreads, could have a material adverse impact on interest income from our investment portfolio. Our fixed income
instruments are not leveraged as of July 26, 2008 and are held for purposes other than trading.
We monitor our interest rate and credit risks, including our credit exposures to specific rating categories and to individual issuers. There were no impairment charges on our investments in fixed income securities in fiscal 2008, 2007, or 2006. The following tables present the hypothetical fair values of fixed income securities, including the effects of the interest rate swaps discussed further under "Interest Rate Derivatives" below, as a result of selected potential market decreases and increases in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points ("BPS"), 100 BPS, and 150 BPS. The hypothetical fair values as of July 26, 2008 and July 28, 2007 are as follows (in millions).
In other words, Cisco may sit up
and find that their counter-parties
are gone, and/or their "investments"
are now 55 cents on the dollar.
The call is, the day after that day of
reckoning, when Cisco has to take
a $6.1B extraordinary loss, thereby
wiping out its entire fiscal year 2009
profit, is probably the day to buy CSCO.
Overall…
More pain is yet to come.
Just check out Intel and Cisco. These well run
businesses have hoarded cash, and dropped
a bunch of money into their Treasury
function, so some Wharton MBAs could buy
"Secure, yet High-Yielding" fixed income
investments… like, oh, Fannie, Freddie,
& Sallie paper… and corporate bonds of
"AAA-rated" companies… and those Lehman
auction rate securities… and… oops…
we fucked up.
We live in "interesting times". They are
getting more interesting every day.
Best,
Patrick
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