Author Topic: Ideas with Catalysts  (Read 21126 times)

Kraven

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Re: Ideas with Catalysts
« Reply #10 on: April 10, 2013, 06:35:27 AM »
Every one of my ideas has a catalyst and most ideas on the board do.  Catalysts can be intelligent growth (BRK), industry tailwinds (autos, rails, banks), workouts (post re-orgs, spin offs), recaps (buybacks, reduction of debt), etc.

The poorest investments are ones where a small discount exists between price and IV and the risk of IV falling is high.  The best ideas are where there is a large discount between price and IV and IV is growing.

To give examples:

Recap - DTV
Industry tailwinds and workout - GM

What about value being it's own catalyst?  And who would make what you label the "poorest investments"?

I only do extensive work on companies I feel are growing in value.  From what I do know, I would consider the poorest investments to be some tech companies like DELL, RIMM, and HPQ, where I don't really see how they are growing value.  The discount to IV could be large with their low PEs but the risk of IV halving or more seems real to me.   I am also talking about the universe of investments that people on this board look at.  Obviously buying a company above IV and the probability of IV decreasing is high is worse than if there is a discount to IV.

I am not sure if value can be it's own catalyst.  I much prefer the adage, if it is cheap a catalyst will emerge to narrow the gap.  But you could probably frame it so that the value is the catalyst that causes the catalyst?

I am not sure even where to start.  I think I know what you're trying to say, but it's all over the place.  I don't know how a low p/e could provide you a large discount to IV, but then the IV could be halved?  That's 2 concepts that are mixed up.  A low p/e might provide an attractive price point (or might not), but doesn't have anything to do with what IV is.  Remember, price is what you pay, value is what you get.  2 different things.

I would take issue too about the investments "people on this board" look at.  In this post and your prior post there is an implication that the board is a homogeneous group looking at the same or a very similar pool of investments.  While there is certainly overlap, I don't think there is the homogeneity you may believe exists.

Finally, I would disagree that value can't be it's own catalyst and that at best cheapness needs to cause an external or additional catalyst to emerge.  There are simply too many examples.
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LC

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Re: Ideas with Catalysts
« Reply #11 on: April 10, 2013, 06:37:43 AM »
I don't think their business is in terminal decline in the way of video rentals or yellow pages.  I think there is certain value add of going on oversea trips where the student get to meet politicians and/or important figures.  They are certainly in the premium niche of the market.  With the current economics, $5,000-$7,000 discretionary trips for high school students are tough to sell.

I agree, there is value-added. I also agree that it is a large discretionary expense for this economic environment (hence the sagging sales).

I don't feel the company is undervalued, though, despite the operating leverage. Nor do I see a catalyst, other than a general economic turnaround...which I don't really think is a catalyst specific to this business. I'd love to be convinced otherwise, though!  ;D
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jay21

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Re: Ideas with Catalysts
« Reply #12 on: April 10, 2013, 07:36:32 AM »
I am not sure even where to start.  I think I know what you're trying to say, but it's all over the place.  I don't know how a low p/e could provide you a large discount to IV, but then the IV could be halved?  That's 2 concepts that are mixed up.  A low p/e might provide an attractive price point (or might not), but doesn't have anything to do with what IV is.  Remember, price is what you pay, value is what you get.  2 different things.

Sorry, I tend to be too brief on message boards. 

For those tech investments, the price is low based upon TTM P/Es.  The market is pricing in some decline in the earnings of the company.  I feel those companies are susceptible to disruption and the earnings decline can be more severe and unpredictable than the market is pricing.  Plan made some good comments on what I am trying to describe here: http://variantperceptions.wordpress.com/2009/10/12/turnaround-lessons-when-the-tough-gets-going/

"A good financial position, like Dell’s or Yahoo’s,  can give them time to experiment and look for alternatives. But from the point of view of an investor even if the plan is successful the company will probably be a follower in the new industry, product, segment, business model: a shadow of its former self.

So the downside is not that well protected, the probabilities of success are not that good, and the upside will probably be limited: does not look like the recipe for successful investing. This is an area where I think value investors have to be careful."

Let me try to re-phrase what I was trying to say.  I would rather invest in companies with improving fundamentals than in companies with deteriorating fundamentals.  (That is probably what I should have typed instead of discussing price and value).
@jay_21_

Palantir

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Re: Ideas with Catalysts
« Reply #13 on: April 10, 2013, 08:04:33 AM »
How do you know that value will be its own catalyst? A stock can stay undervalued for ages. Especially if you're like me, and prefer to run a concentrated portfolio, then you're just screwing yourself.
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Palantir

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Re: Ideas with Catalysts
« Reply #14 on: April 10, 2013, 08:07:52 AM »


I only do extensive work on companies I feel are growing in value.  From what I do know, I would consider the poorest investments to be some tech companies like DELL, RIMM, and HPQ, where I don't really see how they are growing value.  The discount to IV could be large with their low PEs but the risk of IV halving or more seems real to me.   I am also talking about the universe of investments that people on this board look at.  Obviously buying a company above IV and the probability of IV decreasing is high is worse than if there is a discount to IV.

I am not sure if value can be it's own catalyst.  I much prefer the adage, if it is cheap a catalyst will emerge to narrow the gap.  But you could probably frame it so that the value is the catalyst that causes the catalyst?

In technology, some of these companies (HPQ, YHOO, BBRY, AOL) are experts at destroying value. Bridge tolerates 2.5 tons, you're at 2 tons (#marginofsafety), but as you get on...it starts crumbling.
« Last Edit: April 10, 2013, 08:09:35 AM by Palantir »
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oddballstocks

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Re: Ideas with Catalysts
« Reply #15 on: April 10, 2013, 08:13:29 AM »
How do you know that value will be its own catalyst? A stock can stay undervalued for ages. Especially if you're like me, and prefer to run a concentrated portfolio, then you're just screwing yourself.

How can it not be?  We're talking true value, not a 10% undervaluation.  Imagine if Apple were selling for half of their net cash, deep value for sure and their business was the exact same as it is today.  Wouldn't that cheap valuation be the catalyst to get people involved?  Private equity firms would be falling all over themselves to bid for the company.

At some point a company gets so cheap it's almost silly, that's where value becomes a catalyst.  At those extreme valuations people tend to pay attention and will act because there is almost no downside risk and a lot of upside.

Sometimes the action is taken by the company, executives realize how cheap it is and go private.  Other times it might be a hedge fund taking a position or the appearance of an activist. 

When something is cheap enough things will happen, always has and always will.
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Hielko

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Re: Ideas with Catalysts
« Reply #16 on: April 10, 2013, 08:33:26 AM »
It wouldn't surprise me if investments without an obvious catalyst outperform in the long run because everybody wants to own something with a catalyst these days.

premfan

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Re: Ideas with Catalysts
« Reply #17 on: April 10, 2013, 08:37:47 AM »
How do you know that value will be its own catalyst? A stock can stay undervalued for ages. Especially if you're like me, and prefer to run a concentrated portfolio, then you're just screwing yourself.

How can it not be?  We're talking true value, not a 10% undervaluation.  Imagine if Apple were selling for half of their net cash, deep value for sure and their business was the exact same as it is today.  Wouldn't that cheap valuation be the catalyst to get people involved?  Private equity firms would be falling all over themselves to bid for the company.

At some point a company gets so cheap it's almost silly, that's where value becomes a catalyst.  At those extreme valuations people tend to pay attention and will act because there is almost no downside risk and a lot of upside.

Sometimes the action is taken by the company, executives realize how cheap it is and go private.  Other times it might be a hedge fund taking a position or the appearance of an activist. 

When something is cheap enough things will happen, always has and always will.

Yes value itself is a catalyst. There are many ways to value and usually 1-3 main metrics to determine if the prices get to the silly range. The problem i faced as a young investor was i tried to value companies all the same way. Doing discount to cash method doesnt work for high growth companies. Knowing how to value certain companies in different industries is critical in not fooling yourself.  Also having a mental model of how the numbers "really" work.  Like if X happens then y will happen.  Also having a checklist of 7 main items is really helpful. If all the items line up its in the " no brainer " camp. Above all sentiment is number 1. Then followed by a catalyst. I would always look for bad sentiment and make a bet against wall street when the downside is clearly covered. Binary situations are awesome if you have a major buyer on your side ( like prem with rim).  The catalyst itself will be time. Merely surviving is the catalyst. Wall street tries to model everything. In the real world business cant be modeled exactly. I like stuff that wall street cant model or doesnt care to model.

luck

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Re: Ideas with Catalysts
« Reply #18 on: April 10, 2013, 08:56:46 AM »
good points jay21.   

i'm also long both dtv and gm.  5% positions in both.  gm and fiaty clearly cheap on a ev/ebitda basis versus comps, auto tailwinds, etc.  to arrive at fair value for dtv, one should probably factor in buyback rate into intrinsic value calculation as this company generally acts on their buyback announcements in an intelligent way.

mevsemt

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Re: Ideas with Catalysts
« Reply #19 on: April 10, 2013, 09:06:06 AM »
I like what premfan said, here's an old blog post of mine along those lines for those interested: http://mevsemt.blogspot.com/2010/09/uu-investing.html

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