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    Value Investing Howard Marks Memo - Political Reality Meets Economic Reality

    January 31, 2019

    Value Investing Howard Marks Memo - Political Reality Meets Economic Reality

    Howard Marks Memo - Political Reality Meets Economic Reality

    Posted: 30 Jan 2019 04:34 PM PST

    Reasonable hurdle rates?

    Posted: 31 Jan 2019 03:49 AM PST

    Whats the industry average or does it depend on the rest of the details like profit share %? What do you guys think about 5%?

    For clarification, hedgefund.

    submitted by /u/voodoodudu
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    Breaking down Alibaba's 2019 Q3 - Observations, Questions, and Estimates

    Posted: 30 Jan 2019 01:07 PM PST

    BABA declared ~42% revenue growth and $1.84 GAAP EPS today and the markets responded positively.

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    Looks good on the surface, but my quick review shows some really interesting points:

    1. Of total revenue growth (34B RMB) YoY, the main source of revenue growth in the core commerce, Tmall and Taobao and related advertising fees, grew ~27% or 14B RMB. Other growth Alibaba included was mainly owing to the new supermarket chain Freshippo, new sales from the search engine/retailer Kubei. In the same period, fixed costs went up 33B RMB (26B from cost of revenue). Gross margin dropped from 58% to 48% owing to slim supermarket margins and 11/11 discounts aimed at spurring more purchases to continue growing that day's sales. Meanwhile, you have little to no organic growth in international (apart from companies they bought) and money-burning initiatives in direct sales and what they call "new retail" that continue to increase losses while growth is fairly slow.
    2. I'm confused on how when revenue for sales goes up 27%, Cainiao delivery revenue went up only 15%? wouldn't it be a 1 for 1?
    3. Operating income remained unchanged between 2017 and 2018. In 2017, Alibaba revalued Cainiao to generate 23B RMB in investment income. In the same period, they wrote down the amount they previously revalued for Alibaba Pictures (18B RMB in 2015 and wrote down 18B in 2017... suspicious), which offset this somewhat. In 2018 December, Alibaba revalued Kubei to generate 10B RMB in investment income. This grants them the ability to continue showing a net income YoY growth number, when it was actually flat.
    4. Alibaba continues to bloat to its balance sheet from investing in subsidiaries, goodwill, and borrowing. There are no equivalents in large US tech companies where goodwill and subsidiary "value" account for more than 50% of assets.
    5. Net income was 33B RMB and Amortization was 3B, but cash from operations was ~65B RMB. Where did the other 29B RMB come from?
    6. Related to this point, FCF was 25B RMB, but for their 25B increase in short-term assets they also have an additional 40B in short-term liabilities. They also spent 31B in investment while marking up their investments by about 60B in the same period. So cash should have decreased, not increased here.

    My eyes hurt from trying to adjust everything by the right amounts, but what it seems to me is that Alibaba revenue is actually slowing considerably for its main companies (maybe 15-20% growth fueled by lowering prices and deteriorating margins), offset by buying companies and continuing to revalue them. At some point it will mark down these big investments, but as long as there's another company to devour and revalue by 2-3x just by virtue of being bought by Alibaba then they can mask these deteriorating margins.

    ​

    The cycle continues and their "assets" and liabilities grow. Strip away these "revaluations" and you get a messy conglomerate trading at almost 60x earnings with halted revenue growth in its core businesses and widening losses in others, without profitability in sight. The one bright spot is the cloud, but it's not a significant source of revenue yet. Offsetting that, Alibaba is hit by the China slowdown, hard, and this trend should continue.

    ​

    With real earnings flattening, the company is worth closer to $250B than $400B, so around $100 a share; if I'm generous at $300B here it looks like a 25% downside or around 133 a share.

    submitted by /u/meeni131
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    LIVE: Fed Chair Jerome Powell holds press conference - Jan. 30, 2019

    Posted: 30 Jan 2019 01:08 PM PST

    Calculating CAGR with extreme volatility

    Posted: 30 Jan 2019 09:34 PM PST

    Hi everyone,

    I'm writing some Python code to calculate CAGR across time series data and I've run into a little snag. Assume we have a set of data like this (this is real data FWIW, year 1 being the most distant year):

    TSLA Profit Margin:

    Year 1 Year 2 Year 3 Year 4 Year 5
    -124.60% -95.90% -3.70% -9.20% -22.00%

    Now let's say I want to calculate the growth rate in profit margin from year to year, and I do it with the formula: 

    if prev_period in [0, None]: growth = 0 elif prev_period > 0: growth = (curr_period/prev_period) - 1 else: growth = (curr_period + abs(prev_period))/abs(prev_period)

    This gives me growth values of:

    Year 1 Year 2 Year 3 Year 4 Year 5
    0 23.03% 96.14% -148.65% -139.13%

    The idea is that from year 3 to 4 for example, margins dropped from -3.7% to -9.2%, a loss of 100% of the value plus another 48.65%, hence -148.65%. This is pretty standard IMO (correct me if I'm wrong).

    So now comes the tricky part. Let's say I want to calculate the CAGR of these changes, with the intent of calculating the average change in TSLA profit margins over this 5 year period.

    Normally, my CAGR calculation would be:

    ((1+0.2303) * (1+0.9614) * (1+(-1.4865)) * (1+(-1.3913))1/4 ) - 1 = -.1767 or -17.67%

    (i.e. the quadratic root of the product of all the percentages relative to 100%, ignoring zero). This works fine for numbers that don't swing more than 100% to the downside. It makes sense because in a mathematical sense, you can't lose more than 100%. But in a financial sense you can, so I'm unsure how to handle this in my code.

    The same thing would happen if a company were to swing from positive to negative or vice versa in any metric which is very possible ... cash flows, net income, etc. Calculating a geometric mean (aka CAGR) of a set of data seems to be problematic if there are large swings in volatility. Is there a standard practice for how to handle this? I'm just trying to make sure my code is as accurate as possible even in the face of oddities.

    Thanks!

    submitted by /u/ghostofgbt
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    Does anyone have a Wireless Spectrum Ownership breakdown?

    Posted: 30 Jan 2019 06:15 AM PST

    Does anyone have/seen a nice breakdown of who owns which wireless spectrum?

    submitted by /u/FloatsFlysOrFucks
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    Teck Resources Investor Conference Presentation Part 2

    Posted: 30 Jan 2019 12:11 PM PST

    Teck is perhaps the best run miner in the world. It is a hidden gem, too. Professional analysts seem to misunderstand what is going on at Teck.

    Speaking with other investors about Teck, you hear lots of bologna. This is my attempt to show people what I see: one of the best run miners in the world. Value investing is a cyclical business and so is mining. If I could design the perfect miner, it would look pretty close to Teck - buying during maximum pessimism, minimizing risks, and operating efficiently. Teck doesn't do exactly that, but 2.25 out of 3 ain't bad.

    We value investors make fortunes in years like 2009, 2004, and 1993. And we go long stretches when we could make investments, but shouldn't. That's something Don Lindsay, CEO of Teck, talks about all the time. They buy 50 year assets and make all their money back in the 2-3 good years out of each 10.

    ​

    Anyways, on to the presentation.

    ​

    URL to investor presentation: https://cibcvirtual.com/whistler2019/s/47

    ​

    Here are my notes from the investor presentation. These notes cover minutes 10-15.

    ​

    - Teck investing decisions "have to be made after great though, and very carefully. It has to be the right commodity, and in the right deposit, and for us in the right jurisdiction as well. We are still obviously reasonably risk averse when it comes to jurisdiction."

    Q: Where do you see the prices of Met Coal going?

    A: Met coal analysts are too bearish, and too anchored to the low prices of 2015 and 2016. Teck sees significantly higher long term prices. (OP: Don't ask your barber if you need a haircut.) Teck has not seen lots of new capacity come online in Met coal.

    ​

    - Met coal for Teck generates "enormous" cash right now and they go on putting that cash away in the bank. (OP: And reinvesting it into copper and shareholder buybacks.)

    ​

    Edit: Made it more clear that the commentary in () is mine.

    submitted by /u/PrudentProfile
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