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Am I misreading the situation?

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February 05, 2011 – Comments (23) | RELATED TICKERS: IMAX , NFLX

I have been researching a few stocks and ran across a few problems in some stocks that even some well respected fools like a lot...I want to know if I am misreading the problem

IMAX and PM: 80% owned by institutions.  From everything I hear, you don't want to touch a company like this.  But NFLX, GMCR, OPEN, CRM, AMZN, etc all have high institutional ownership, and look how well their stocks have done.

 

COST: Costco is a great company.  But they have cash of $4750  and receivables of $884 and accounts payable of  $5947....how are they going to stay solvent?

Since everybody else seems to love the two, and I doubt Costco is going to go out of business and NOBODY except me noticed, what am I misreading?

23 Comments – Post Your Own

#1) On February 05, 2011 at 3:25 PM, thecherryz (90.79) wrote:

You probably don't understand the concept of cash flow yet, which i would say is in the top 3 of the most important things to understand.  

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#2) On February 05, 2011 at 4:40 PM, Jbay76 (< 20) wrote:

I have never heard that you should not invest in a company with high institutional ownership.  I have read that fluctuations in the share price of companies with high institutional ownership may be due to the fact that fund managers may have to sell shares to meet financial obligations from customers wishing to sell  their shares of  a mutual funds.  With DD, you'll be able to identify when a sell off is warranted or just an event like previously mentioned.  Now, I am open and would be appreciate if someone else could verify this as well.


I really IMAX.  In my area, the movies are cheaper than Regal CInema or AMC, great quality screens etc.  They are continously making new contracts with movie theatres to implement IMAX screens in  theatres, and in doing so get a % or concession profits as well.  At their current price, they have a PEG of 1, have little debt (22%), and are doing remarkably well in these tight economic times.  Their debt may be due to the fact that they help finance theatres implement the IMAX screen technology.  They are also spreading out to other countries as well.  I'll look for links and TMF articles that discuss this.  If I had more $$ available, I would get IMAX.  But, my $$ is tight and there are a host of miners and REIT's I wish to get first.

 

My 0.02...

J

 

Can't vouche for the other companies you listed though.

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#3) On February 05, 2011 at 5:01 PM, TSIF (99.96) wrote:

I'm not sure where you're doing your reading, but:

Both institutional owernership and insider ownership are good things.  If a company is overly, (95% or more) institutional owned then that doesn't leave much for the insiders, so there needs to be a balance.

80% institutional owned is great.  When institutions own there is typically less erraticness.  I don't subscribe to the theory that institutions "know best", but they should be doing more due diligence at a level the regular stockholders can't drill into.

PM is well liked because of it's increasing dividend. The concerns the government were going to regulate them out existance and the cigarette users were going to sue them out of exisitance are pretty much negated.  It could be that the government will tax their product to death, but that doesn't seem to be hurting them yet either. No insider ownership, but the larger a company is, the less insider ownership can be percentagewise.

Personally, I don't like IMAX, but it is liked because it is alone in an industry.  Insider ownership is 22%, which is just about right. Too large and insiders may have too much control and do things not in the best interest of shareholders, some insider ownership gives the insiders some appetite to grow and puts them generally on the same front as shareholders with risk/reward.

Institutional ownership, again, adds stabilty. If institutions are buying, it's in large volume and generally pushes up the share price. As long as investors are giving money to institutions it has to go somewhere and short of some rebalancing, institutions are generally pretty loyal.

In a down economy, people want their money out of institutions, institutions sell off large blocks and can push an equity down harder. I'd rather take my chances with the instituional ownership as long as the company in question is performing and the economy is stable.

Now Costco....they have cash in the BILLIONS, or $12 per share.  Yes, payables are more than CASH and receivables, but this is pretty normal for an inventory intensive busines.  They have inventory of $6 Billion that churns regularly. They have $77 Billion a year in revenue that constantly comes in, pays recievables, and buys new inventory, letting them skim a scant, but consistant small margin off each transaction that leads to a Billion a year in profit.

So yes, cash flow is the metric here.  Accounts payable that grows with no revenue to pay them could be a problem. If their inventory was in Tanks, and the government wouldn't buy them or allow them to sell them to anyone else then their suppliers would really be down their throats.

There's a lot of metrics. I think P/B, P/E, and margins are worth more of a focu, but reading balance sheets and asking questions is a great exercise.  Cash flow is hugely important.

 Try Mary Buffett's book, "Warren Buffett and the Interpretation of Financial Statements"  

Good luck.

TSIF

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#4) On February 05, 2011 at 5:24 PM, Valyooo (99.40) wrote:

Thanks guy.

TSIF, I read that in Peter Lynch's "One Up on Wall Street" and from many fools that like him.  The logic is that insider holdings are very good, but institutional ownership means that the stock is "overly owned" or "over discovered", and doesn't leave much room for institutions to bid the price up since they already discovered what they like.

Why use P/B for a retailer?

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#5) On February 05, 2011 at 5:24 PM, projectal (30.18) wrote:

Before reading, please note that, as a student taking his first accounting class, I am not an expert. Having said that, I'll take a crack at your question.

I am guessing that Costco's accounts payables are, for the most part, funds used to purchase inventory on credit. The purchase of inventory results in both an increase in accounts payable, on the liability side of the balance sheet, and an equal increase in inventory, which is seen on the asset side of the balance sheet. So the accounts payable account has very little to do with whether or not Costco remains solvent. Unless of course they can't sell their inventory. I'm guessing this scenario is very unlikely.

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#6) On February 05, 2011 at 6:08 PM, thecherryz (90.79) wrote:

Valy, i don't mean to sound condescending or anything, but the answer that people keep skipping is cosco has cash flow coming in.

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#7) On February 05, 2011 at 6:56 PM, TSIF (99.96) wrote:

Thanks for the reference you are using Valyooo

thecherryz, I agreed with your cash flow, just tried to explain it, maybe poorly, but I think the question left is the institutional ownership.

Valyooo, that logic of already "overly owned' would apply if you are looking for a high growth stock. It all depends on your investment thesis and goals. If you are looking for some stable company's, with reasonable growth/dividends, that is maturing then institutional ownership is not bad.  If you are looking for a ten bagger and willing to take some risk, then it's not going to be a heavily owned institutional company. In the "big selloff" institutions had to sell to meet the withdrawal rate of scared investors, so some heavily institutional owned companys dropped hard also, but quickly rebounded. 

Lynch is all into multi-baggers. I believe he helped coin the term.

That doesn't mean a heavily institutionally owned company can't have some great growth spurts.  The amount being traded reduces the volume, people who think its a good investment will bid more to chase those shares.  This is what's happening with the ones you mentioned. They have high margins, high growth, and they are being chased, driving their P/E and P/B up above average. Whether they will pop or not remains to be seen. Those bidding them up need to watch for competitors, but most of the ones you mention have built a good size moat that isn't easy to breach.

I guess it all comes down to your investment philosophy, but to your original question, not all investors have the same metrics/goals and there may be some company's that are heavily invested owned that investors believe merit a premium based on potential future growth.

Why use P/B for a retailer?  Why not?  Any company that has a consistant track record and real earnings, (i.e. not a junior minor or a baby pharm), can stand a P/B and P/E analysis, especially against it's peers.  It's one metric. How overpriced is the company?  For example a P/B is over 2 on a retailer should have some margins/cash flow, etc to back that up.  If less than 1 then, assuming all else is accurate, there may be untapped falure there or it's distressed, maybe due to debt.  There are not any stand alone metrics. 

Your investment style will help you determine ones that work your style. If you're looking for a 10 bagger then maybe institutional ownership would be one of them, but it wouldn't exlude a market maker.

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#8) On February 05, 2011 at 7:14 PM, truthisntstupid (81.85) wrote:

Hi Valyooo

There you go!  Another rec for Warren Buffet And The Interpretation Of Financial Statements.  Valy, it's an easy read.  I know you already have it... so move it up on your reading list!  You'll really like this book and it will answer a lot of questions for you. 

This very question regarding assets/liabilities we talked about on another one of your blogs, and I mentioned the specific chapters in this book that you needed to read. 

As far as the institutional holding thing, when you're digging for value in small-caps, then you've an advantage over the big boys if you're looking at companies too small for many of them to be investing ing in.  Which also means they'll be less followed, so you're more likely to benefit from market inefficiencies.

That's an advantage of investing in small-caps, but that doesn't apply to mid-  and large-caps.

Other investments (mid-caps, large-caps) won't have that particular advantage but they have other characteristics which make them attractive.  

It's just a matter of style preference.

I won't touch small-caps, unless they pay a good dividend.  Dividend investing has been awful good to me.  And any small-caps that do pay a decent dividend are likely to have too much investor interest to offer the small-cap advantage i just talked about.

They may not be held by large institutions, and they may not be followed by many analysts, but they probably don't often sink too low, because people like me would notice the minute they did.  Then we'd start buying and the price would go back up.

 

 

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#9) On February 05, 2011 at 7:16 PM, Valyooo (99.40) wrote:

That makes sense, thanks for clarifying.  I am not looking for a ten-bagg per se, but if I am going to hold a company for 10+ years I expect some bags.

And as for the p/b thing, I guess it makes sense for a retailer.  Where does it not make sense?  My guess would be oil and gas companies (since reserves are rough estimates), companies with strong brand names (since the name could be worth more than the book), and media companies since they dont often have much fixed assetts.  Costco I suppose would have liquid assetts, so p/b is important...is that correct?

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#10) On February 05, 2011 at 7:32 PM, Bays (30.05) wrote:

TSIF has made lots of good points.

Valyooo,

I've read that book as well, and if you're looking for that homerun stock you're going to need to invest before analyst coverage, institutional ownership, mentioned on CNBC, BNN, etc.. 

Unless you can jump into the Delorian and travel back to the spring of 2009, where you could have thrown darts and had a good chance of picking a home run. 

Personally, my core holdings are all index funds which all hold those "stalwarts".  I just don't think it's worth my time to analyze these large cap companies and trade against Wall Street, Bay Street, etc...  I'd rather hold a basket of index funds, and not have to worry about reading financial reports, analyst reports, earning calls, etc... My timeframe is forever on these ones.... Just buy more during corrections...

I supplement that core with a basket of more high risk stocks with little coverage, little or no institutional ownership, etc...   Not a single one of these investments would affect my portfolio if the story doesn't pan out, and they go out of business, but all it takes is one winner to really make a big difference on the total return of your portfolio. 

Out of all my individual stock selections, only one is considered a Large Cap; SLW.  It was a small cap when I had originally made my investment though.  The rest are Micro Cap to Mid Cap. 

 

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#11) On February 05, 2011 at 7:46 PM, thecherryz (90.79) wrote:

Valy, one thing that you will learn is when certain metrics apply and when they don't.  Although i'm sure most people always look at the book, it is more used in things such as financials, insurance, and companies in distress.  Think of book value as an approximate estimate of what it would take to replicate a business.  Example: Netflix book value is 5.50 a share.  It would take another company approximately 5.50 per share x shares outstanding to replicate the current balance sheet of nflx.  That being said, there are many reasons why companies trade significantly above it.  As you mentioned, brand name is a good reason.  The brand and scale are hard to match, and being the first big person in the arena makes it hard to compete. 

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#12) On February 05, 2011 at 7:56 PM, Valyooo (99.40) wrote:

Thecherryz, the reason it matters more in financials, insurance, and distressed companies is because the companies "brand names" are irrelevant, and most assets are liquid (or even straight up cash), right?

Bays, you're the man....because that is exactly how I want my assett allocation to be when I have more money.  I am actually going to post a blog on this right now, please comment on it.

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#13) On February 05, 2011 at 8:17 PM, RonChapmanJr (76.43) wrote:

Yes.

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#14) On February 05, 2011 at 8:22 PM, RonChapmanJr (76.43) wrote:

Sorry, didn't actually read your post. Just wanted to make a totally useless comment on your blog in response to your totally useless one on mine.

This is fun, I can see why you do it.

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#15) On February 05, 2011 at 8:22 PM, Valyooo (99.40) wrote:

Truth,

I realized the book I had was "The Essays of Warren Buffett" and not "The Interpretation of Financial Statements".  I just finished reading the essays, and today I bought the other book on ebay, it should come in a week, so I will have it finished in the next two weeks.

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#16) On February 05, 2011 at 8:28 PM, truthisntstupid (81.85) wrote:

You'll really like it, Valy.  It'll be a big help. 

 

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#17) On February 05, 2011 at 8:36 PM, Valyooo (99.40) wrote:

Yeah I am excited for it, thanks for reminding me.

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#18) On February 05, 2011 at 9:03 PM, Bays (30.05) wrote:

Will do.

Cheers

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#19) On February 05, 2011 at 9:34 PM, thecherryz (90.79) wrote:

Thecherryz, the reason it matters more in financials, insurance, and distressed companies is because the companies "brand names" are irrelevant, and most assets are liquid (or even straight up cash), right? 

 

Well, generally speaking all financial companies and insurance etc. hold assets that are marked to a certain value.   You do see companies trading above book value, i.e. berkshire hathaway, because they believe he will generate returns in excess of a typical companies return for the foreseeable future.

 

Another thing to keep in mind is the way book value works.  For example, land is recorded on book at the purchase price, and companies that have had land for many many years can have a possible "hidden asset" on their balance sheet. 

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#20) On February 05, 2011 at 9:55 PM, ag77840 (23.41) wrote:

 @thecherryz

I think that more important than Netflix's brand name is its moat (or potential moat for that matter).  IMO Netflix will either continue to shoot through the roof and completely replace cable/satellite television as America's #1 couch addiction, or eventually be taken over by another company.  It's interesting to me how I never read about people posturing Netflix as a potential takeover target. 

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#21) On February 05, 2011 at 10:25 PM, thecherryz (90.79) wrote:

Sah is right, moats are considered too, i disagree with netflix having a moat regarding streaming however.  Mail yes.

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#22) On February 06, 2011 at 12:06 PM, Valyooo (99.40) wrote:

thecherryz,

I know about the land thing, but how can you even discover that hidden asset without traveling to the site and having somebody appraise it? And how would I even know which sites to appraise?

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#23) On February 06, 2011 at 1:05 PM, TSIF (99.96) wrote:

#9, P/B can be a good metric for many companies, even those with "reserves" such as oil/gas/copper/gold.

You can't let an oil/gas gold, etc type company let you infer too much about their reserves unless they are actively extracting them. Those in exploratory phase may have great reserves, but may never raise the funds to extract them or meet the environmental requirements.  P/B wouldn't have as much basis for stable high cap company's, but a high P/B on a nonproducing one would infer that a lot of forward pricing is being based on success.

Baby Bios with medicine in trial states are the hardest. That's a breed that takes a lot of risk and there are different stages of the game.

AS far as the land/hidden assets. In most cases, it's in plain site. Retailers who own their own stores are an example, but I wouldnt' worry about having them assay'd before including them.  I would derate them heavily though, because if they decide to sell them, especially while in distress, they aren't likely to get near face value. REIT's with large rental assets are being forced to write them down.

 Those who have large tracts of land that use the land for income, such as timber/paper might be trickier, if you wanted to deep dive those and not use the market's assessment, then you'd have to do some roughing.

IN another example, Vail Mountain, MTN, many wrote them off at the height of the recession, because skiiing was a luxury that less people could afford and they were erratically profitable from season to season prior to the recession. This put their debt repayments in question. I don't think any appraiser could have given you a value on what the land was worth if they had to sell it at that time in distressed conditions, but banks were more liberal with their debt since they could hold the land as collateral. 

  I don't think I'd put a lot of energy in valuing those type of assets unless the company were distressed and I was trying to access their chance of survival. Many multi-baggers came from the recession by bettting on company's that others had given up on.   Not the norm, for regular investing, but one type of opportunity that you would need study and weigh your risk/reward.

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