The Investors Podcast (9/17/17, Small Cap Investing w/ Eric Cinnamond)
Eric Cinnamond (a veteran small-cap manager…writes a good blog)
“Back [when I started my career], the largest holders of these small cap stocks were traditional small cap value managers like the Royce Funds, Heartland, Gabelli, and when prices got out of whack, they were there to police the market almost like a market maker. But now when I look at the top holders, I see Vanguard, Dimensional, Blackrock. They are price insensitive investors…this is what’s going to be a significant contributor to small cap opportunities in the future.”
“Cycles vary between industries and businesses, so you got to be careful not to use a standard 5 to 10 year [when normalizing profits]. The Schiller P/E is 10 years. Well, 10 years could include 2 upcycles and 1 downcycle, so you’re not really normalizing. Or it could include 2 down and 1 up. I like to customize my normalization to the particular business or industry.”
“1993 to 2000, for most of that cycle, everything I touched turned to gold, it was unbelievable. 1993 to 1998, I mean I had just graduated from college, I was running trust money, $300mn, I couldn’t believe they had given me all this money to run and I was doing well. And then in 1996, I joined Evergreen Funds as a small cap value manager and the trend continued. […] It was the profit cycle and I had no idea. I was a young analyst and I thought I was a genius. But then of course the tech bubble hit and ‘wow’ that was a humbling experience, where I went from the genius to the idiot. That was a very difficult cycle. I’m most proud of 1999 because I lost 8%, I don’t know if you tried you could lose 8% in 1999 but somehow I did it because I ignored tech.
Bill Miller is right in that where you start can influence how you perceive yourself and how others perceive you. You think about the average age of an analyst or manager now, I would guess it’s 8-10 years maybe? And what’s the length of the cycle, 9 years? So it’s interesting, lots of the investors now running billions and billions, they’re in the same position I was in in the ’90s when I thought I could do no wrong and I was bullet proof. And that’s kind of scary. […] The losses that could occur in this cycle with where valuations are? If you just revert to normal valuations, you could lose half your capital in small caps.”
“Mutual Fund cash levels are at 3%. Meanwhile, there’s a survey that showed that 80%+ of portfolio managers believe stocks are as expensive as 2000. So, you have a huge conflict here…so, if they think stocks are overvalued and they start losing 10%-30% of their clients’ capital, I don’t know how they’re going to respond. I think because they know stocks are expensive, they’re going to be quicker to sell.”
“It’s been so long since we had a panic that when it does happen, it’s going to be so new to so many people, even people who are experienced, they haven’t seen it in so long. […] Everyone thinks they’ll be the first one out when the cycle ends, but if you’re running a billion of small cap money and the Russell 2000 drops 30%, I have news for you. You’re not getting out.”
“Another way I screen for stocks is I do role playing, where I’m trying to pretend I’m a relative return manager with a really big house, country club membership, etc. and running $1bn+ and then I think to myself, all right, I’ve got 10 very large consultant meetings next week – what do I not want to talk about? That is usually one of the best ways to be a contrarian. And right now where would you look? I would think you’re approaching the year-end performance panic…I think you might want to start looking at energy and retail. Those might be the two most embarrassing sectors right now for professional managers.”
“A lot of high quality value investors won’t even consider commodity companies because we’re taught in school and in all the great books that they’re bad businesses. But if I can buy natural gas in the ground for a dollar and it costs $2 to find and develop that or if I can buy an ounce of gold in the ground fully developed for $150/ounce and it cost $300/ounce to find and develop that, those are the kinds of things I’m interested in. I view mining businesses more from valuing a balance sheet…I want to buy the reserves for less than it costs to replace them and that has worked very well for me over time. Commodity stocks and other cyclicals are either extremely undervalued or extremely overvalued. […] but they need to have a good balance sheet, this is the key. You need a runway and you need to determine the appropriate runway…Tidewater had $50/share in book value and it went bankrupt.”
Mad Money w/ Jim Cramer (10/4/17)
Bill Ackman on ADP:
“Our new question for ADP is ‘why is it that ADP has lower employee productivity than all of their competitors.’ So, ADP generates $160k revenue per employee; the competitors average $224k. When you think about ADP, it has enormous scale vs. competitors, so if anything, they should have more efficiency.”
“25% of ADP competes directly with Paychex. Same size customer. So what we said to ADP was ‘Paychex has 41% pre-tax profit margins. But they’re largely an SMB company. ADP’s SMB segment, if it had the same margins as Paychex, it would mean the rest of their business has margins of 12%. And that makes no sense. So, clearly there’s a big opportunity.”
“We’re the third largest investor in the company by dollars spent. We’ve got a $2.3bn investment in the company and we own almost 9mn shares in the company so our interests are very much aligned with the other owners of the company. Look at all the directors on the Board. Our candidates haven’t even joined the Board yet [and they’ve] spent more money to buy ADP common stock for themselves than the entire Board has spent in the last 14 years.”
Jim Cramer on Dexcom
“We’ve talked about the benefits of Dexcom’s technology before, but in the last couple years the stock’s begun to stall. Then, last week the darn thing fell out of the sky, plummeting more than 30% in a single session…Dexcom’s problem is pretty straightforward. A week ago, we learned that Abbott Labs had received FDA approval for its new FreeStyle Libre Flash Glucose Monitoring System for people with both Type 1 and Type 2 Diabetes…In the old days, if you wanted to check your blood sugar levels, you had to prick yourself and draw blood with one of those finger sticks. With Dexcom’s system, you just wear a little sensor and get readings, but you still need to prick your finger twice a day to calibrate the machine. Abbott’s new system requires zero finger stick calibration…plus, you can leave Abbott’s sensor on your arm for 10 days, longer than Dexcom’s current system (although the same as the system the company hopes to launch later this year)…it got hit with substantial price target cuts from 6 different firms, and that’s how a stock goes from $67 to $45 in a single day.”
“First, why was this such a surprise? Wall Street expected that Abbott would have a harder time getting FDA approval or at least that it would take longer than it did. But with earlier than anticipated approval, Abbott has leap frogged Dexcom. Consider that Dexcom’s new system, which isn’t even out yet, still requires that you prick your finger once a day. However, maybe we should have seen this coming. Abbott’s Libre system was approved in Europe 3 years ago, it’s already being used by 350k people there. There aren’t many cases where a product works just fine in Europe but the FDA decides to reject it anyway. And remember, this is the Trump FDA, which means it’s very pro- business and less consumer safety. Second, was Abbott’s pricing strategy. They decided to be far more aggressive than anyone thought. Abbott’s system will cost $4/day, Dexcom’s will set you back between $8 and $10 per day, including the cost of hardware. And this is before any kind of insurance reimbursement for Abbott. Even worse for Dexcom, Abbott told us they already had 5 of the largest pharmacies lined up to sell the thing with distribution planned to start in December. This is brutal. Before Abbott’s system got approval, Dexcom’s system was pretty much the only player.”
“Even if Dexcom doesn’t lose tons of market share to Abbott, they’re going to have to get more promotional to keep that business, which means that the company’s excellent hardware margins are going to come down hard.”
“Dexcom’s product is actually better than Abbott’s…it’s more accurate and more reliable…[based on the] average relevant difference between the measurements from the monitors based on the readings you get from a blood test. Abbott’s system averages a 9.7% differential…Dexcom’s is more like 7.2%, sounds small but if you have diabetes the difference can matter. Plus, Abbott’s system can lead to a lot of false positives. Dexcom’s new system has also been shown to be more accurate than Abbott’s with no finger sticks at all. One reason why Abbott’s system is cheaper is because it takes a much more bare bones approach. One of the great things about Dexcom is that unlike Abbott’s system, their device gives you real time alerts or alarms, so if you fall asleep and your blood sugar gets too low, it’ll wake you up. […] With Dexcom submitting it’s new monitoring system to the FDA in the near future, I think the company might have a chance to turn things around. Plus, they’ve already partnered with Google to develop a cheaper, smaller system that requires no prick finger calibration, that’s expected next year.”
The Ezra Klein Show (David Remnick on journalism in the Trump era and why he hires obsessives)
David Remnick (Editor of the New Yorker)[In 1998, when Remnick took over as editor, The New Yorker was losing money]. “With The New Yorker, the zenith of advertising was in 1967. The New Yorker, which was invented in 1925, really as an economic thing, just rode a postwar consumerist boom with the developing middle and upper middle class and all those ads. And the reason The New Yorker started publishing 3 part and 4 part series was not only on the literary and journalistic merit but also the need to have editorial matter running next to…this travel agent and that department store, and this started to change. Television became bigger, all these other media. People’s tastes changed. So, the zenith of advertising for The New Yorker was the last ’60s.
And thereafter, there was a rather slow slide down. It wasn’t perceptible. The New Yorker was independent, it was owned by the Fleischmann family and it still made a profit. The Fleischmanns began to care too late, I would say. And the Newhouses bought it, it was kind of on the brink, red and black, and then it was distinctly in the red for a good while. The question was how to change that. And Tina Brown did a lot of great things to arouse interest in the magazine…and advertising continued to go down, no matter what. It was very clear after a while to me, this is before tech even really boomed, that despite the tech advertising bubble and Red Envelope, that 1967 was not going to return. […]
We’re now in a situation where Google and Facebook own 2/3 to 3/4 of web advertising. Retail has changed in this country, there are more options…and there are only two ways to make money in this business. Advertising and what’s gently called consumers, meaning the readers, what they pay. And 25 bucks for 52 issues was crazy…all you’re paying for it is 50c? Less than one issue of the newspaper on the newstand at the time? So the proposition now is that for a subscription, for each week you might pay what you’d pay for a small cappuccino at Starbucks. And I really think that what we turn out on the web every day, what we publish in print and online immediately midnight Monday, is worth that at least. And our readers have agreed and we’ve been making a handsome profit for quite some time.
The happy coincidence is that our readers want what we do when we are at our best. The worst thing I can do, not only as a moral and journalistic proposition, is dumb the magazine down, but it would be the stupidest thing I can do as a business proposition. That’s [not] what our readers want. I don’t need consultants or polls to tell me that.”
“I was always the oldest guy at these early internet dinners or events, and I knew why I was invited, as the kind of editor of a ‘legacy’ media outlet, which of course the glint in the eyes of my younger brothers and sisters, was that I was soon to become like the stegosaurus itself, dead in a ditch. And there were certain truisms I would be hearing: 1) no one would pay for any content because information wants to be free, which was a misapplication of what that phrase meant; 2) nobody would read anything on the internet of any length. That was also an evangelical, hard truism that I was hearing all the time. And I was wrong about a lot of things, but those two things they were wrong about. People will pay for things that are extraordinary. People will read things that are great. It may not be 330mn Americans. […]
I remember once I was interviewing Philip Roth and he was deploring the state of fiction reading audiences. This was before he became, again, a best selling author. So he was in a kind of despairing mode. But to cheer himself up he said, ‘if you write a novel and only 5,000 people buy it and read it, that may seem depressing, but if all 5,000 people streamed through your living room and shook your hand and said “thanks for the 4 evenings that I spent reading this novel”, you would be brought to tears with gratitude.’…Look at the readership of The New Yorker. There’s a million now…1.25mn readers out of a country of 330mn people. But if I imagine them as Yankee Stadiums full of people, that’s a whole lot of people being absorbed in texts that are often enigmatic, complicated, take time to read. I am filled with gratitude.”
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