Contrarian

  • 18 Jul
    How undervalued is AT&T?

    How undervalued is AT&T?

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    As a value investor with a bit of a contrarian mindset, I naturally gravitate to stocks and industries that the market at large has discounted. Where most investors will look at a stock that is trading at yearly lows and immediately dismiss it as a viable investment, I will almost always take an extra look at the stock and its fundamentals, because those are the situations that tend to yield the best bargains no matter what is going on in the broad market.

    The telecommunications sector is an area of the market that most investors have been dumping since the beginning of 2017. Over that time period, the industry as measured by the iShares Telecommunications ETF (IYZ) is down more than 22%. Consolidation in the industry over the past few years has left just two really dominant players in the integrated telecommunications space, Verizon Communications Inc. (VZ) and AT&T Inc. (T). T’s price pattern since 2017 matches the downward trend of the broad industry, with the stock down more than 26% over the period. This is an extremely competitive industry, and it is true that revenues for many of these companies have been flat for the past year or so due to competitive pricing pressures; however it is also safe to say that market has probably over-discounted the industry as a whole. That’s a good thing for bargain hunters like me, because that creates some really attractive long-term opportunities in these kinds of stocks.

    T is one of those large-cap companies that we’ve all heard of, and there’s an excellent chance that you use one of more of the services that they offer. That’s because they’ve grown and diversified their business across a large number of business segments that make them a lot more than just the “phone company” that they used to be. Just last month, they completed what may have been the largest acquisition in the market so far this year, buying broadcast media giant Time Warner Inc. for $85.4 billion. They also own satellite TV provider DirecTV, and not surprisingly are pouring a massive amount of capital into building 5G infrastructure, the next phase of wireless technology and connectivity that will facilitate the next step in the continued emergence of the Internet-of-Things.



    Fundamental and Value Profile

    AT&T Inc. (T) is a holding company that provides communications and digital entertainment services in the United States and the world. The Company operates through four segments: Business Solutions, Entertainment Group, Consumer Mobility and International. The Company offers its services and products to consumers in the United States, Mexico and Latin America and to businesses and other providers of telecommunications services worldwide. It also owns and operates three regional TV sports networks, and retains non-controlling interests in another regional sports network and a network dedicated to game-related programming, as well as Internet interactive game playing. Its services and products include wireless communications, data/broadband and Internet services, digital video services, local and long-distance telephone services, telecommunications equipment, managed networking, and wholesale services. Its subsidiaries include AT&T Mobility and SKY Brasil Servicos Ltda. T’s current market cap is $195.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew almost 15% while revenues were mostly flat, posting a decline of about 3%. The slight decline in revenue is pretty consistent with the industry trend, and industry experts in general expect that pattern to continue through 2018, with flat revenues in 2019. That puts a premium on companies that can manage costs effectively. T fits that description nicely, with Net Income for the past quarter a healthy 12% of Revenues. For the year, that measurement increases a little over 19%.
    • Free Cash Flow: T’s free cash flow is very healthy, at more than $18 billion. While this number declined modestly in the last quarter, for the year it increased by a little more than $1 billion.
    • Debt to Equity: T has a debt/equity ratio of .91, which by most measurements is manageable. The company’s long-term debt has almost doubled since early 2015, but their balance sheet indicates that operating profits are more than adequate to service their debt, with healthy cash and liquid assets (more than $48 billion posted in the last quarterly report) to provide additional flexibility and liquidity.
    • Dividend: T pays an annual dividend of $2.00 per year, which at its current price translates to an annual yield of about 6.29%. This is well above the industry average as well as the S&P 500 average of 2.0%; more compelling is that despite the high yield, their payout ratio is just a little over 50% of their past year’s earnings.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for T is $23.69 and translates to a Price/Book ratio of 1.32 while the industry average is 1.8. More interesting is the fact that their 5-year historical average Price/Book ratio is 1.94. A rally to par with its historical average would put the stock at about $46.50. That offers a long-term upside of 46% over the stock’s current price.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s 2-year downward trend, from a high around $44 per share to a trend low in May around $30.50 per share. The stock rebounded from that point to hit a short-term high around $34.50 before dropping back again. It is now hovering close to that trend low, a point that has offered good support on multiple occasions since then. The red horizontal lines on the right side of the chart mark the stock’s Fibonacci trend retracement levels, which I expect to act as resistance against a reversal of the current downward trend. The stock would have to break above the $36 marked by the 38.2% retracement line to confirm a trend reversal. The $30 to $31 should offer strong support, since this level has marked the lowest point the stock has reached since the beginning of 2014. A break below $30 could see the stock drop down to its next major support around $27, last seen in late 2011.
    • Near-term Keys: If you’re a short-term trader, look for a push above $32 with good buying volume; that could provide a good signal to enter a short-term bullish trade using call options or by buying the stock outright. If you’re willing to take a longer-term view and don’t mind seeing the stock hover in its current range, or even move lower in the short-term, the stock’s dividend yield could be a very attractive incentive to hold the stock and wait for the trend reverse. The long-term target price offered by the low Price/Book ratio right now would put the stock a little above its highest level since 2001. If the stock breaks down and moves below $30, a short-term swing trade using put options or by shorting the stock could also be attractive.


  • 28 Jun
    DISH: Dead cat bouncing, or incredible bargain?

    DISH: Dead cat bouncing, or incredible bargain?

    Consumer trends can be a fascinating thing to watch, despite the fact that sometimes they are fickle. That’s because sometimes those trends can give you important clues about the viability of certain products or ways of approaching business. It’s easy to get caught up in the excitement of a new, groundbreaking technology, for example, but if the buying public doesn’t buy it, it doesn’t matter how great the tech is; it isn’t going to stick around for very long.

    In the 1980’s, my parents bought a video tape player for the family. We were excited because we could finally watch movies in our home without having to wait for network TV to broadcast them for us. The player was a Betamax player, and my dad went to great lengths about why Betamax players were superior to the VHS players we had been hassling him about. And it’s true, it was a terrific piece of machinery, and I thought that the quality of our home recordings, and of movie tapes in general, was far better than any comparable VHS tape.

    The thing was, not many other people felt the same way – or cared enough to make Betamax more than a passing fad. By the beginning of the 1990’s, Betamax was a thing of the past. We still had our player, and the tapes with our home recordings, but guess what we had sitting right on top of it? You bet – a VHS player, and all of the movies we bought to keep at home were VHS tapes. If you invested back then in Betamax development, you probably lost a lot of money.



    The same idea can be applied to very mature businesses as well; the advent of one kind of new technology often means that a previously lucrative and growing technology becomes obsolete. That is especially true if the new technology is widely adapted and erodes the consumer base the older technology relied on. Cable and satellite broadcasting is one of those mature technologies that consumer trends show may be looking at the end of its usefulness in the not-so-distant future. More and more customers of all ages are “cutting the cord” with traditional television viewing in favor of on-demand, web-based streaming services. It’s a trend that has built Netflix (NFLX) into a media powerhouse with a market capitalization larger than the Walt Disney Company (DIS) and has traditional broadcasting networks scrambling to find ways to evolve and survive.

    Dish Network Corporation (DISH) is among a number companies in the Media industry that finds itself at a crossroads, with a still large, but dwindling subscriber base that requires attention and a high level of service and quality, but a desire to redirect its business to evolve with the needs of a changing business landscape. The market has seen the numbers about their eroding customer base and has treated the stock accordingly, driving it into a clear downward trend for the past year that has seen it lose approximately 50% of its value over that period. A clear loser in the scope of broader market performance, the stock has actually rebounded almost 16% since the beginning of June. Contrarian, value-oriented investors might be tempted to bet on a reversal of the stock’s long-term downward trend, but others would be more cautious.

    “Dead cat bounce” is a term that investors like to use to describe what happens sometimes when a stock in a long, downward trend finds support and starts to rally higher. Generally speaking, the only way a long-term downward trend can manage a legitimate reversal is if the market sees a very strong fundamental reason to start buying the stock. Often, a stock experiences that downward trend for very good reasons, and in the case of DISH, an eroding customer base is one of those very good reasons. The problem the company has in reversing the trend is that the erosion isn’t to competitors in the same business; it’s coming from a “sea change” in consumer habits and preferences that typically marks the death of one business model in favor of another. The “bounce” comes when technical traders start to buy the stock at a low point, hoping for a quick, short-term gain in the stock’s price; but since there is no fundamental reason for other investors with a longer-term perspective in mind to jump in, that gain is extremely limited in both size and duration.



    The argument long-term investors might have for DISH, and that the company is absolutely trying to communicate to the market, is the way they have decided to evolve their business. Since 2008, the company has spent more than $11 billion buying wireless spectrum frequencies in order to build their own 5G wireless network. Their founder and CEO relinquished his role as chief executive at the end of 2017 to focus on developing that part of the business. The challenge is that the company is generating zero revenue from the licenses they hold, and they won’t begin to see any return on their already large and ongoing investment until they complete the buildout of their network sometime in 2020. So is DISH a “dead cat bounce” that only a fool would try to work with, or a real bargain opportunity? Here’s a few numbers to consider that might help you make your own decision.

    Fundamental and Value Profile

    DISH Network Corporation is a holding company. The Company operates through two segments: Pay-TV and Broadband, and Wireless. It offers pay-TV services under the DISH brand and the Sling brand (collectively Pay-TV services). The DISH branded pay-TV service consists of Federal Communications Commission (FCC) licenses authorizing it to use direct broadcast satellite and Fixed Satellite Service spectrum, its owned and leased satellites, receiver systems, third-party broadcast operations, customer service facilities, a leased fiber optic network, in-home service and call center operations, and certain other assets utilized in its operations. The Sling branded pay-TV services consist of live, linear streaming over-the-top Internet-based domestic, international and Latino video programing services. The Company markets broadband services under the dishNET brand. The Company makes investments in the research and development, wireless testing and wireless network infrastructure. DISH has a current market cap of $7.7 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both declined modestly, with earnings decreasing at a slightly greater rate (almost 8%) than sales (6%). In the last quarter EPS actually increased almost 23% while sales declined about 1%.
    • Free Cash Flow: DISH has very healthy free cash flow of more than $2.2 billion over the last twelve months, despite its decline from a little over $2.4 billion in late 2017.
    • Debt to Equity: the company’s debt to equity ratio is 2.07, which is high; levels at 1 or below are preferred. However, the company’s balance sheet indicates operating profits are more than adequate to service the debt they have, with adequate liquidity from their cash flow to provide additional stability and flexibility. High debt to equity ratios are also pretty normal for this industry.
    • Dividend: DISH does NOT pay a dividend, which is normal for stocks in the Media industry.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DISH is $15.69 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.14. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Media industry is 2.2, and the historical average for DISH is 6.53. The stock would have to move above $100 to be at par with the its historical average. While I believe that is an over-optimistic target on even a long-term basis, it does suggest that the stock’s 52-week high, which was $66 in July of last year, is useful and within striking distance over time.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red, dotted diagonal line traces the stock’s decline and concurrent downward trend for the past year. The stock has been rebounding since the beginning of this month but is now pushing directly up against that downward trend, which should push the stock back down to retest its recent pivot low around $29. A drop back down from that line, to around $31 would be a good sign that the “dead cat bounce” effect is at play. On the other hand, a push above the line to the $35 level, or better, $36 should give the stock some good short-term momentum to push up to the $40 level. That’s a range that short-term traders could find useful for a bullish trade. The stock would have to break above $40 to mark a legitimate reversal of the long-term downward trend.
    • Near-term Keys: Look for the stock to break above $35 per share. A move above this level could be a good opportunity to enter a bullish trade, either by buying the stock or working with call options. A move below $31, on the other hand could suggest the stock’s downward trend will reassert itself and push the stock even lower than $29, which could be a good opportunity for a bearish short-term trade by either shorting the stock or working with put options.


  • 26 Jun
    Don’t Follow The Herd: Why The Majority Of Investors Always Get It Wrong

    Don’t Follow The Herd: Why The Majority Of Investors Always Get It Wrong

    • Consider this, the question always remains the same: “What will my return on investment be?” But the answer changes all the time.
    • Thinking costs energy and humans prefer to let others do the thinking for them. Are you like that?
    • It’s important to know when to use history as a teacher.

    Introduction

    “Whenever you find yourself on the side of the majority, it is time to pause and reflect.” 

    – Mark Twain

    When Albert Einstein was teaching at Oxford University, he gave his senior physics students exactly the same exam he had given them the year before. His assistant was disturbed by such a mistake, but before intervening he asked Einstein whether he actually made a mistake. Einstein replied that the exam was exactly the same. The assistant was even more concerned and asked why he would do such a thing. Einstein replied, “Well, the questions are still the same, but the answers have changed.” More →

  • 09 May
    Investment Research: The Challenge of Finding Attractive Investments

    Investment Research: The Challenge of Finding Attractive Investments

    • Bargains can be found through book value, special situations, 52 week lows, merger arbitrages, bankruptcies, etc.
    • It’s necessary to be a contrarian to be a value investor, though it might be painful for a while.
    • With experience, it will take less and less time to assess a stock and whether it has the potential to be a good investment.

    Introduction

    Last week we discussed Klarman’s view on the best business valuation methods. You can find the article here. Today we’ll discuss his approach to investment research.

    Studying fairly priced securities won’t get you far because you’re competing with thousands of others who have researched those companies and, especially in the current market environment, if there is anything worth owning, it will probably be expensive. Therefore, to find bargain investments, an investor has to look where others aren’t looking or refuse to look. More →

  • 20 Nov
    Sunday Edition: Time To Buy E. Coli

    Sunday Edition: Time To Buy E. Coli

    Last week we discussed what it means to be a contrarian investor. And why, when done successfully, it can lead to substantial market outperformance.

    Today we are going to discuss a specific contrarian opportunity in the chain restaurant business. More →

  • 13 Nov
    Sunday Edition: The Art Of Contrary Thinking

    Sunday Edition: The Art Of Contrary Thinking

    I bought my first shares in a publicly traded company in ‘95, as a 22 year old college dropout. I can’t remember the name of the company or the ticker.

    What I can remember is that it was a hot tip from a friend and a pink sheet stock, although at the time I didn’t know what that meant. Yes, the company went out of business and I lost $2,000 bucks.

    Back then I was eager to learn and devoured every book I could get my hands on, that I believed held the key to getting rich in the stock market. More →