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The tale that WAG's a dog



March 31, 2011 – Comments (16)

Apologies for the post title, but I get more recs the dumber my headlines get.  If you cared to drop a rec, I would be delighted.

Ilan Moscowitz is a Fool contributor who has just published an article about whether or not WAG is a Buffett stock.  These articles are prefab and built with a little boilerplate and a few charts of numbers - return on equity being the focus of this latest article.

Moscowitz, I think, doesn't really understand Warren Buffett-style investing.  In an April 2010 article, for instance, in an article about Buffett she pointed out that "according to Forbes, he lost $25 billion of net worth in 2008."  Buffett didn't sell any of those shares at the bottom; and Buffett himself would have cheerfully told you that the true worth of his position varied little between 2007 and 2008.  Forbes, and Moscowitz, are unwittingly accepting mark-to-market as the one, true and only way of valuing a company - and that's fine, unless in the very next sentence you start explaining how you're going to attempt a Buffett-style valuation of the company.

See, Mr Buffett doesn't accept mark-to-market as the one, true and only way of valuing company shares.  He doesn't buy in to the efficient markets hypothesis.  He has made a career - and a fairly good one, all told - of identifying shares that the market has mispriced - and buying them.  Moscowitz dismisses this in two words as "reasonable valuation" and proceeds to ignore the idea for the rest of the article, focusing on things like return and a history of earnings growth.

I read an article once that purported to debunk the idea that Buffett could be a value investor.  Rather, he is a growth investor, the authors argued; his track record shows that he is capable of identifying high growth companies before they start a big years or decades-long run of growth.  I think both sides of these arguments are correct.  Buffett identifies companies that go on to compile stellar records of earnings growth; and he does so when their shares are grossly underpriced.  If I could do the same consistently, I would have a lot more money than I do!  It is a wininng formula.

Moscowitz also makes the statement that drugstores are immune to technological disruption.  Moscowitz has clearly never comparison shopped for Neutrogena soap, fragrance-free bar, 3.5 oz, at both Amazon and a Walgreen's.  "But that's front end," you say.

Well, let's talk about the drugstore business.  Right now, in my clinic, by federal mandate, I have an e-prescriber.  I know I have to prescribe a medication to a patient.  While the patient is in the room with me, I fire up the computer.  The computer knows the patient's SSN and fires it off over the Internet to a database in Iowa or somewhere.  The answer comes back: here is the pharmacy benefit manager this patient is entitled to use.  Here is the approved formulary, with tier 1, 2 and 3 drugs, non-formulary, prior auth, and non-approved.  Here is what it will cost this patient to get their drugs at bricks and mortar, and here is what it costs to get them from the mailorder pharmacy benefit manager.

Moscowitz isn't spending time in my clinic, because I tell you what, patients crave this information and they always opt for the lowest-cost-to-them option.  WAG's decision to keep its mailorder business prices the same as the bricks and mortar prices; and not to open a pharmacy benefit manager business; has essentially made them a non-starter in this horse race, which is being waged between Medco, Allscripts, ExpressScripts, and CVS Caremark.

I think WAG's management is of the same mindset as Moscowitz - they're running a decades-old business model that hasn't changed and that until lately enjoyed one of the few AAA credit ratings.  As long as return on equity stays up, they're doing their work (even if their 7000-store expansion target by 2008 had to be sharply curtailed.  Why?  Why didn't it work?  Why didn't the business grow as they expected?  Crickets chirp as directors fail to provide an answer to shareholders.)

Well, WAG's going to get their lunch ate.

Disclosure: was long on WAG 2005-2008.  Not going to repeat that mistake.  Currently no position in any of the companies mentioned.

16 Comments – Post Your Own

#1) On March 31, 2011 at 3:44 PM, Valyooo (33.71) wrote:

I think the thing that most of these "buffett style" pics people make is that buffett doesn't really care that much about ultra specific figures.  Does the company clearly dominate their market or no?  PM, KO, WMT, PG, WPO...does some sort of graham number tell you the answer or can you use your head plus look at things like uptrending earnings combined with low SG&A and good margins?

BTW, ikkyu2, I know you share the same love I do for PM.  My only problem moving forward with it is I can't help but to think 'how much more can it possibly grow'?  What kind of returns do you think are reasonable for me to expect if I hold it for a while?  I usually short term trade, and only hold index funds for the long term (like the SPY) with some medium term trades (1-5 years).  This will be my first long term, non-spy investment since I invested my candy sale money at age 5.  Do you think its a lifelong stock or will the limited growth eventually make it underperform the SPY?

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#2) On March 31, 2011 at 4:28 PM, TMFBabo (100.00) wrote:

Ilan is a guy.

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#3) On March 31, 2011 at 4:51 PM, TheDumbMoney (67.22) wrote:

Another thing Buffett will tell you is that there is no such thing as a "growth" investor or a "value" investor at all.   It just happens to sometimes be easier to build a model for so-called "value" investments because the intrinsic value is based more on 1-though-5 year cash flows that are easier to estimate, rather than on-longer term estimated cash flows. 

You know who is a very Buffett-ian investor?  Tom Gardner.  The emphasis on management quality is very Buffet, and the first mover, disruptive competitive advantage, etc., stuff is one way of looking at moats.  What Tom is doing is using those intangibles in order to (hopefully) transcend our inability to calculate cash flows from years 7-15ish out.  It's exactly what Buffet does, though Buffet is not interested in that sort of definition of moat.

Also, I suspect Buffet would never calculate a graham number; he hasn't been a Graham investor since at least the 1970s. 

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#4) On March 31, 2011 at 8:32 PM, HarryCaraysGhost (85.77) wrote:

+1 rec for the title... (jk:)

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#5) On March 31, 2011 at 8:45 PM, dragonLZ (86.73) wrote:

Ilan is a guy.

TMFBabo, I don't think that's an excuse.


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#6) On March 31, 2011 at 8:54 PM, TMFBabo (100.00) wrote:

Excuse? I wasn't refuting any of the blog post except the "she" part.

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#7) On April 01, 2011 at 12:02 AM, ikkyu2 (98.19) wrote:

I didn't know whether Ilan was a male or female name, but I suspected whichever I picked, I'd get it wrong.  No offense was intended.

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#8) On April 01, 2011 at 12:04 AM, ikkyu2 (98.19) wrote:

Valyoo, I do not expect to live to see the day when PM underperforms the broad market.  If you ignore ethics and social responsibility - and that is a big if - I think it may very well be the best stock traded on any exchange.

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#9) On April 01, 2011 at 12:09 AM, ikkyu2 (98.19) wrote:

I do not know that either Tom Gardener or Buffett would agree that the two of them share an investing style.   Buffett is all about the durable competitive advantage.  Tom is a technophile and a tech investor; the disruptive advantage requires a deep understanding of the technology in question, the kind of thing that Buffett doesn't interest himself in.

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#10) On April 01, 2011 at 12:29 AM, TMFBabo (100.00) wrote:

I didn't think you intended any offense.  I just know that if someone was like "Babo said this and that -- she really thought that company was going places..." I'd hope that someone would be like "I'm pretty sure Babo is a guy." 

I thought the bit about "she said this" and such were funny (knowing he's a guy), but I did want to clear that up.

I remember from a recent reading that some of Buffett's retailers such as furniture stores (Nebraska Furniture Mart and the 3 others) and the jewelry stores (Borsheim and the one or two others) -- funny I can't name more than just one specific example of each type although there are several -- are somewhat immune to technological advances.

It's really hard to buy big-ticket items online.  Online furniture and jewelry retailers seem to suffer from excessive returns, which don't help profitability.  With these types of expensive items, I'd say consumers still want to go see and feel the items before buying.  It's interesting that Buffett has specifically chosen those types of retailers as companies to acquire (the man is good).

I suppose you could point to his shoe company purchases as some that aren't so immune, but I'd still say it's an impressive collection of companies nonetheless.  

I'm beginning to think that Coca-Cola has the best brand (or at least one of them).  It's just a freaking beverage company but it still manages to grow year after year.  I know there are a ton of different juices, sports drinks, and other things under the Coca-Cola umbrella, but I'm still extremely impressed nonetheless.

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#11) On April 01, 2011 at 8:51 AM, dragonLZ (86.73) wrote:

I was kidding, but nobody got the joke. Sorry for the confusion. I guess, my bad.

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#12) On April 01, 2011 at 9:16 AM, Gemini846 (34.13) wrote:

You know, people don't really like mail order pharmacy. I mean sure there might be some people who think it's convienient, and many who do it for cost, but there is still value in picking up a script from someone who can tell you that certain foods will not treat you well while you are on those meds or what have you.

This information only matters to me if the retail price is less than the copay, or if its non formulary in which case it better be saving my life or I'm not buying it.

Your analysis may be correct that they should be in the benefit manager business, but I don't think they are completely off thier rocker.

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#13) On April 01, 2011 at 11:54 AM, ikkyu2 (98.19) wrote:

The day of the local neighborhood pharmacy is over, Gemini846.  Since I have been in private practice - 4 years - 12 local pharmacies have gone out of business, leaving 2, and only 1 new one has opened.  People don't get the kind of value or service you're talking about from the large drugstore chains, where the pharmacist position is sort of a sinecure and the pharmacist is rarely available to speak to patients.

I do believe this is a decision society has made, and I believe that in 10 years or so we're going to come to our senses, clutch our collective heads like a stunned monkey, and say "What have we done?"  I think you're right, that a patient oriented pharmacist can bring "value," and that these decisions being made to eliminate them put us on the wrong track.

However, fortunately I do not have to agree with the wisdom of a trend to be able to spot it. 

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#14) On April 01, 2011 at 3:07 PM, TheDumbMoney (67.22) wrote:

ikkyu, I'd have to let Gardner or Buffett weigh in on that.  :-)  I get the tech thing, and I noted it.  I was more drawing an analogy.  I think you make the point yourself, actually: disruptive adantage is itself a form of durable competitive advantage.  It is a different way of identifying a powerful moat.  Which is also why, like Buffett, Gardner is (to varying degrees) a buy and long-term hold guy.

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#15) On April 01, 2011 at 3:24 PM, Valyooo (33.71) wrote:

That "its unethical to own PM" stuff is garbage.  People decide to smoke, PM does not force them.  So many other companies do environmental damage, or sell food that is not nutritious (IMO, every company listed on a public exchange in the food busienss, besides WFMI, sells garbage).  PM treats their shareholders very nicely.

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#16) On April 01, 2011 at 3:52 PM, ikkyu2 (98.19) wrote:

Valyooo, if you founded a company tomorrow and it was soon discovered that your clients were routinely drowning in their own blood; or dying screaming, their broken bodies wracked with pain, as a direct result of patronizing your company's business; how long do you think *YOU* would stay in business?  You'd probably go to prison.

Tobacco companies, however, get a free pass on that.  The moment that society as a whole agrees to wake up and decide that it's wrong, it will put a stop to it.  That's a real risk of unethical corporate profits - that they will be legislated away.

Disclosure: long MO, PM.  :)

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