Author Topic: What are the danger signs for cannibal strategies  (Read 3943 times)

Contra123

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Re: What are the danger signs for cannibal strategies
« Reply #10 on: April 19, 2018, 06:23:44 PM »
I’d also add that IMO “are shares trading at a discount to intrinsic value” is a question that I think mgt teams should not be focusing on when making repo decisions. IMO vast majority of mgt teams will be inclined to believe their stock is undervalued, all the time, even if they are heading up a secularly challenged biz like BBBY with accelerating negative topline growth and high fixed costs. It’s that cognitive bias, that denial, that eternal optimism. If instead mgt focused on facts e.g. consistent and  accelerating top-line growth with expanding margins based on easy-to-verify secular industry or demographic factors (even if those are well-understood) and mainly relied on the presence of those things to make buy-backs (eg vs dividends), I think the end result could be quite satisfactory.
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LC

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Re: What are the danger signs for cannibal strategies
« Reply #11 on: April 19, 2018, 09:01:57 PM »
Scott - I have no idea about NVR other than what 10 min on google told me.

Contra - I totally agree. Management pretty much usually sucks. To be fair we are asking them to pretty much time the market, or to be professional investors in addition to managers. This is why I really like the dividend argument: it forces management to be prudent. They can either invest the remainder of their FCF or buy back stock - but the dividend makes it more difficult to do both. Therefore perhaps management puts a little more thought into their decision.
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ScottHall

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Re: What are the danger signs for cannibal strategies
« Reply #12 on: April 19, 2018, 09:11:17 PM »
Scott - I have no idea about NVR other than what 10 min on google told me.

Contra - I totally agree. Management pretty much usually sucks. To be fair we are asking them to pretty much time the market, or to be professional investors in addition to managers. This is why I really like the dividend argument: it forces management to be prudent. They can either invest the remainder of their FCF or buy back stock - but the dividend makes it more difficult to do both. Therefore perhaps management puts a little more thought into their decision.

You might like this video about NVR.

https://m.youtube.com/watch?v=7j6WXS0vRZI
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LC

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Re: What are the danger signs for cannibal strategies
« Reply #13 on: April 19, 2018, 09:18:14 PM »
Interesting for sure. The only real takeaway was how they manage inventory. I'm curious because I have no idea as to how that works. And if it's so successful, why is nobody else doing it? Weird, but thanks for bringing it up!
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Jurgis

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Re: What are the danger signs for cannibal strategies
« Reply #14 on: April 19, 2018, 11:04:46 PM »
Yeah, NVR is well known as the most conservative home builder with some nice characteristics (as shown in video). I've never invested on concerns similar to LCs: it seems like rather cutthroat industry and apart from conservativism, NVR doesn't seem to have a secret sauce, so why would they continue to perform well? But they do...

And, yeah, I knew about NVR in 2007-2008, I think I even had some at one point. Did not buy, did not hold...
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ScottHall

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Re: What are the danger signs for cannibal strategies
« Reply #15 on: April 19, 2018, 11:09:19 PM »
Interesting for sure. The only real takeaway was how they manage inventory. I'm curious because I have no idea as to how that works. And if it's so successful, why is nobody else doing it? Weird, but thanks for bringing it up!

Path dependency and corporate fiefs IMO. The economy isn’t as efficient as most investors think
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thowed

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Re: What are the danger signs for cannibal strategies
« Reply #16 on: April 20, 2018, 03:49:47 AM »
To be fair we are asking them to pretty much time the market, or to be professional investors in addition to managers.

I totally agree with this, and about dividends.  I read a piece by a great fund manager saying this, and arguing that a dividend should represent management's best estimate of their future FCF, which they are far more qualified to do than market timing or investing.

Cigarbutt

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Re: What are the danger signs for cannibal strategies
« Reply #17 on: April 20, 2018, 06:29:37 AM »
I’d also add that IMO “are shares trading at a discount to intrinsic value” is a question that I think mgt teams should not be focusing on when making repo decisions. IMO vast majority of mgt teams will be inclined to believe their stock is undervalued, all the time, even if they are heading up a secularly challenged biz like BBBY with accelerating negative topline growth and high fixed costs. It’s that cognitive bias, that denial, that eternal optimism. If instead mgt focused on facts e.g. consistent and  accelerating top-line growth with expanding margins based on easy-to-verify secular industry or demographic factors (even if those are well-understood) and mainly relied on the presence of those things to make buy-backs (eg vs dividends), I think the end result could be quite satisfactory.

Read from a recent Board of Directors corporate governance document discussing the share repurchase "revolution":

"Most directors who dispute the relevance of intrinsic value to buyback decision-making still support repurchasing shares, but they do not judge success based on stock price changes. “It’s not luck; it’s long-term confidence in your strategy and belief that you will create long-term value,” one director said."

"Company managers and directors are not smarter than the markets. Some directors go further and suggest that it is not possible for shares to be “undervalued.” “Assuming adequate disclosure, the board and management team are not smarter than the market as a whole,” one director said. Another noted, “If you believe in the efficient market theory as I do, the price accurately reflects value.”

...

The challenge may lie in the fact that the Board may have to look at the opportunity to buyback its own stock by comparing to other alternatives. So, if your stock is relatively "cheap", it must be hard to justify cash piling up.

Speaking of cannibal strategies, it looks like 2018 will be a landmark year:

https://www.forbes.com/sites/chuckjones/2018/03/16/2018-share-buybacks-could-exceed-800-billion-driven-by-overseas-cash/#29c9429139d9

BTW, ScottHall, thanks for the video about NVR, which is an interesting company. Liked it when they explain that the last two shareholders could be them and you. It seems to me that the true cannibals are those that are least promotional. In my experience, a rare combination.


 

ScottHall

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Re: What are the danger signs for cannibal strategies
« Reply #18 on: April 20, 2018, 01:01:56 PM »
I’d also add that IMO “are shares trading at a discount to intrinsic value” is a question that I think mgt teams should not be focusing on when making repo decisions. IMO vast majority of mgt teams will be inclined to believe their stock is undervalued, all the time, even if they are heading up a secularly challenged biz like BBBY with accelerating negative topline growth and high fixed costs. It’s that cognitive bias, that denial, that eternal optimism. If instead mgt focused on facts e.g. consistent and  accelerating top-line growth with expanding margins based on easy-to-verify secular industry or demographic factors (even if those are well-understood) and mainly relied on the presence of those things to make buy-backs (eg vs dividends), I think the end result could be quite satisfactory.

Read from a recent Board of Directors corporate governance document discussing the share repurchase "revolution":

"Most directors who dispute the relevance of intrinsic value to buyback decision-making still support repurchasing shares, but they do not judge success based on stock price changes. “It’s not luck; it’s long-term confidence in your strategy and belief that you will create long-term value,” one director said."

"Company managers and directors are not smarter than the markets. Some directors go further and suggest that it is not possible for shares to be “undervalued.” “Assuming adequate disclosure, the board and management team are not smarter than the market as a whole,” one director said. Another noted, “If you believe in the efficient market theory as I do, the price accurately reflects value.”

...

The challenge may lie in the fact that the Board may have to look at the opportunity to buyback its own stock by comparing to other alternatives. So, if your stock is relatively "cheap", it must be hard to justify cash piling up.

Speaking of cannibal strategies, it looks like 2018 will be a landmark year:

https://www.forbes.com/sites/chuckjones/2018/03/16/2018-share-buybacks-could-exceed-800-billion-driven-by-overseas-cash/#29c9429139d9

BTW, ScottHall, thanks for the video about NVR, which is an interesting company. Liked it when they explain that the last two shareholders could be them and you. It seems to me that the true cannibals are those that are least promotional. In my experience, a rare combination.

No worried, Cigar Butt. I like their videos; they have a lot of good ones.
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Spekulatius

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Re: What are the danger signs for cannibal strategies
« Reply #19 on: April 20, 2018, 07:17:38 PM »
I don’t think that a cannibal stock is something to really look for, as a successful cannibal requires cooperation from Mr Market (with a low stock price at an opportune time) to work.

One can always synthesize  a cannibal stock itself, via additional purchases.  Most cases, stock purchases are done procyclical, when the company is flush, which tends to be when stock prices are high. The giveaway is that most mangement team measure stock purchases by the effort (we returned $X million to our shareholders to last year) rather than the result ( reduced our outstanding shares by X%), so thwt tells us already how they look at this.
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