Sunday, August 29, 2004

Oracle's shopping list

Check out Oracle's internal evaluation notes on various companies it was eyeing - Targets - upside/drawback.
This is a must read if you are seriously interested in M&A. These notes were made public as part of the current anti-trust battle involing Oracle's hostile bid on PeopleSoft.
I missed only one in this list! - SCT Corp.

Here is my take on all the targets listed :
  • Sybase (SY) : I own a few; worth adding at current price. Don't bet big time on it. On shaky ground, if it doesn't get acquired.
  • BEA systems (BEAS): Very risky now after the recent departure of top execs (6 have left so far!). Still has lots of cash (around $1 billion!) and hence worth adding to your portfolio.
  • Lawson Software: I own a few, but not adding right now. No growth by itself. If acquisition doesn't happen, no real future.
  • Cerner (CERN): This was a good Mean Reversion play when the stock tumbled to around 16 more than a year ago on extremely bad news. I bought a large chunk, and sold most of my holdings in the 23-27 range. I sold the last remaining ones last week at 44!. Way too expensive right now. Buy if it goes below 25.
  • Business Objects (BOBJ): good buy at current price. Not at all speculative, since the potential buyer list is large.
  • PeopleSoft (PSFT) : good buy at current price. If not Oracle, someone else will end up buying this someday.
  • J.D. Edwards (JDEC) : acquired by PeopleSoft a while ago. This is the one that started off my lucky M&A hit run!
  • Documentum (DCTM): bought by EMC a while ago. Another hit for me.
  • SCT: never heard of it!

If you want to buy just one from the above list, it should be Business Objects (BOBJ).

On Mean Reversion

In a comment to an earlier entry, my friend Bharat asked me about Mean Reversion and if I use it. Definitely!

Mean Reversion is normal with stocks since too often people tend to act emotionally rather than rationally on good/bad news and extreme reaction (on either side) is a daily occurence. Just using this phenomenon, you can make a good chunk. The most important quality you need to use this is patience, since there is no set timetable for the eventual return to the mean.

A lot of my non-M&A picks belong to this category. You can play mean reversion both on the long and the short side, but short-selling is something that I haven't gotten into seriously. So i just look for companies whose stock get battered on bad news, but the underlying business model is still stable.

One recent example : Synopsys (SNPS) has gone from around $31/share to $15/share in 6 months on a stream of bad news. Around $32/share there were atleast 2 strong-recommendations from investment mags, and at $15/share no one seems to be interested, with some even asking you to sell! Yeah - buy high, sell low!

Synopsys's dominant position is still intact and at its current price it is a bargain. It will recover eventually (I would say 1-3 years) and if you have a few grand to spare, buy this one! You won't regret it. I added some recently after watching it for a long-time. Since this isn't a takeover target, I will be selling it when enough analysts start asking you to buy (probably at much higher levels than the current one).

Mean Reversion is even more appealing with a stock that pays a dividend, assuming that the dividend is not threatened. This is very, very rare. A dividend stock takes a much lighter hit on bad news, and a lot of automated buys kick in when the yield crosses a threshold, thus placing a cap on the downside.

M&A pent-up demand ?

I noticed atleast 4 different articles recently (including one each in Barron's and Wall Street Journal) about a future upsurge in M&A, especially tech M&A.

In general, when 2 or more business publications agree on something, i tend to take the opposite view (and that has helped immensely in the past), this time around I take this as a contrarian indicator with a twist. While I too believe that an M&A surge is around the corner, this consensus may indicate that the actual surge may be a bit far away.

Companies have been hoarding cash at rates not seen before and cash levels are at historic highs. Eventually, when the current uncertainty fades, we will see this cash deployed in different ways - share buyback (which to me indicates a lack of imagination on the company's part), dividend hikes, one-time dividend payout and ofcourse, big-time acquisitions.

The tech industry is particularly ripe, since there are literally tens (and in some cases hundreds) of software companies doing the same thing, with little or no worthwhile differentiation. Many of these software vendors did end up getting customers during the 90's boom, but have nothing new to offer and hence are seeing no increase in customers. Bigger players looking to cross-sell will be eyeing these just for their customers (and most likely willl layoff most of the employees of the acquired company).

You only have to hear Larry Ellison's comments on Oracle's plan to acquire Peoplesoft. It is not for the technology or the engineers!

The number of car manufacturers went from hundreds (200 or so during the 20's) to 3 US majors now. It is time the same happened to the software industry - it is good for the customer!

Saturday, August 28, 2004

At your service!

Buffett recently disclosed that he bought a stake in Service Master (SVM). Made me happy - I have been slowly accumulating this stock. It falls into my very uncool, but can't do without category of companies.

I first came across this company through those Merry Maids coupons that get stuffed in the mailbox on a regular basis! From there I did some research; the financials and the comforting dividend (3.5%) confirmed that it was worth owning.

Plumbing, lawn care, pest control may be unsexy but there is money to be made. The housing market is cooling down, but new home owners cannot avoid these services.

I own one more related stock - that of Lesco (LSCO) which is in lawn care management. It is still a relatively cheap stock with open-market purchases by insiders. I definitely think it is a takeover target. There was some activity recently in this space, when the lawn care leader The Scotts Co. (SMG) bought Smith & Hawken, a private company.

Roto-Rooter, recently renamed to Chemed (CHE), the plumbing giant (and now a hospice care player as well, after buying VITAS), is also worth following. Expensive at its current price, but a good buy on any significant pullback from here.

Sunday, August 22, 2004

Investing mags.

Over the last year i subscribed to every major investing mag/paper and am now prepared to settle on a couple of them, having given all of them a fair look.

Here are my ratings:

  • Fortune, Forbes : Don't bother reading these. Way too positive, optimistic. The picks seem to do worse than the market. Overall not neutral enough.

    If anything, these make for good contrarian indicators.

    An example : after Chambers was featured recently on the covers of 3/4 magazines in a span of couple of months, I knew it was time to dump Cisco. One of them even called Chambers a hero! He looks more like an options pig to me!
    Shortly after these cover stories, Cisco disappointed everybody and the stock took a good hit!

    Krispy Kreme (KKD) CEO, Livengood, was featured on a few covers with words like smart, hot thrown in. Krispy Kreme lost some 70% recently after a flood of bad news, the most depressing of them being what, to me atleast, looks like pure greed/accounting fraud. But at its current price, it is a good turnaround bet. I bought a few recently and plan to keep adding. The recovery may easily take 2/3 years, but I can wait for the reward.
  • Business Week : Good for keeping up with the happenings. Again, do not follow picks. One piece worth reading is the Barker Portfolio - the analysis here is very enlightening and the stock is usually an outperformer too down the road. Inside Wall Street, another column, is good at exposing some very little known companies doing great things in niche areas, but do not use this as an investing guide without more (a lot more) research.
  • Money : This does have some good pieces on personal finance management.
  • Smart Money : This is the only one i find worth continuing my subscription for. The stock picks are ok, but atleast the features seem to be neutral to skeptical of the Street / companies. The Smart Money Screen column has among the best long-term stock picks you will ever find - it is not for a day trader.
  • Fortune Small Business : This makes for a great read and you can use it to make very long-term stock picks - picks where you will have to wait for years before you see any action, but nevertheless potential blockbusters.
  • Business 2.0, Fast Business, Inc : Don't bother.
  • Worth : occasional detailed analysis of past corporate events for e.g is very enlightening, but expensive mag. Read it at the local store.
  • Barron's : Bad stock picks, but good on trends and interviews.
  • Wall Street Journal : too optmistic about business in general, but still the best for all-round updates. The Insider Trading lists are helpful, again for long-term investing only.
  • Investors Business Daily (IBD): The only one i like. This is a great read for company and sector analysis. Especially interesting is the coverage on small and upcoming niche players. The stock picks are good provided you buy on dips/pullbacks. The only thing disappointing about this paper is the political stand - while being pro-Bush is not a problem, some of the editorial pieces (like the recent one that sought to support Bush's Iraq-and-9/11/-are-linked line) just don't belong in an investing publication.

Moral bankruptcy ?

Apologies for a post that is not directly related to stock-picks. I promise to try my best to refrain from such posts in the future.

I have been reading details of every misdeed (market timing, late trading, ipo favors, doctored analyst ratings etc) on Wall St for the last couple of years. While disappointed by such actions of these guardians of investor wealth, nothing prepared me for the latest one. Market timing in annuities! These are instruments that are regarded as safe and fit for "Widows and Orphans". To think that someone would want to make an extra buck to buy an additional yacht, by cheating these risk-averse segment, is disgusting.

Be warned - greed is everywhere. And you probably have lost thousands to these soulless people.

Saturday, August 21, 2004

2 recent hits - sorta.

I had 2 interesting hits recently.

  • Warren Buffett announced that he bought 8 million shares of Pier 1 Imports (PIR). I had bought shares of Pier 1 just that week after watching it for a long time! I dislike the retail sector in general, partly because i cannot keep track of the latest ins and outs when it comes to fads and also because this sector is heavily followed by Wall Street thus overvaluing most players. Pier 1 started looking good after they disappointed the Street recently.
    I am also watching 3 others in this sector now - Saks (SKS), Tiffany (TIF) and Sharper Image (SHRP) - will probably be adding in the coming weeks.
  • Carl Icahn announced that he may end up with close to a 12% stake in Mylan Labs (MYL). I own a few Mylan shares and plan to continue adding at its current price. As i detailed in an earlier post, the entire generics sector looks attractive.

Given the large number of stocks i own, these hits are most likely just flukes for my portfolio. Still, a few more hits of this nature, and i may be able to claim lucky coincidence instead of flukes ;-)

Google and the Playboy interview.

The title of this post has names of 2 public companies - only one is worth investing in right now! Hope you got this one right - it is Playboy (PLA). Playboy came out with disappointing earnings recently and now trades at a bargain price. I have been continuously adding to my holdings. It is now a good candidate for going private, given that the Hefner family owns most of the stock.
For the morally upright among my readers, i suggest as alternatives :

  • Enron, Worldcom : oops, these guys destroyed the savings of thousands of employees and fooled investors. Strike them out.
  • Healthsouth, Tyco, Adelphia : oops, wrong again. Greedy CEOs destroyed whatever faith was left in the system.
  • Haliburton, Riggs : Sleazy is all i can say. So, strike them out too.
  • Goldman Sachs, Morgan Stanley, Citibank etc; screwed millions of small investors by favoring big clients. They ensured that small investors like you would have been better off putting their money in bank CDs!

I give up! Playboy looks squeaky clean compared to these characters.

Sunday, August 08, 2004

Against the Gods!

That title should get some attention to this piece!
That is the name of the book i just finished reading - a wonderful masterpiece on understanding risk , rational decision making and how, more often than not, emotion drives human actions.
Read this book and use it as a basis for your investing philosophy - you will come out ahead.

Hollywood Video buyout comes undone.

Hollywood Video (HLYW) shares fell on Friday after it was revealed that its buyout may be aborted. I see this as a good time to buy, since someelse must be eyeing them now just for their free cash flow.
In fact, a sub-theme within my overall takeover theme has been buying shares of such failed takeover targets. Here is a list :

  • Monolithic Systems (MOSY): proposed acquisition by Synopsys was terminated. I bought a few after this announcement.
  • Secure Computing (SCUR) : Cyberguard made a hostile takeover attempt. I bought a few after Secure Computing rejected the bid.
  • PeopleSoft (PSFT) : I will spare you the details. But again, i have been adding often.
  • Dana Corp (DCN) : Auto-parts maker - ArvinMentor (ARM) tried, unsuccessfully, to buy them last year. I have been planning to buy some.

A few months ago Barron's also had a piece focusing on such targets that were eyed by suitors but the merger failed for some reason. The article claimed that these were ultimately bought at a higher price by someone else or they appreciated considerably.
The point here for me is that someone else has done the due diligence to evaluate the company saving you some real hard work. Make full use of it!

System/asset management M&A revisited

I wrote a couple of months ago abt a surge in M&A in this particular sector.
Just saw a report yesterday from the The 451 Group predicting $3-4 billion worth of M&A activity in this sector. The targets mentioned are essentially the same as the ones i listed, with the only difference being that i (unlike them ?) actually downloaded/installed and evaluated a good number of these tools.

QRS - again!

QRS Inc. (QRSI) has received another offer - its 4th (5th if you include the one from JDA) - from a private equity group. Details were not disclosed.
I am still not sure why QRS is drawing so much attention.
Meanwhile, a few other players are worth a look :

  • Retek (RETK) : is worth buying at its current price. I don't own any, but am planning to add soon. Someone is probably seriously evaluating buying them currently!
  • Manhattan Associates (MANH) : This one looks expensive, so waiting for a pullback is a good idea before jumping in.
  • Manugistics (MANU) : is trading at near-alltime lows. They got a new CEO recently who is known for turning around companies. I own a few, bought at levels higher than the current value. I am still planning to add more - i think this will be acquired within a year or two, but not before it sees a substantial appreciation in value.

Monday, August 02, 2004

A hit and a miss!

Fifth Third Bancorp today made an offer valued at $25/share for First National Bankshares (FLB), a 41% premium over its Friday close of around 17.5.
I had added this to my buy list for tomorrow! I removed it now after reading this news.

Hit #21

Cox Enterprises is taking cable operator Cox Communications (COX) private at $32/share, a 16% premium over its most recent price.
But this is of little comfort to me since my average is around $33/share!
At 32 this is still undervalued - expect more such companies, that get no respect, to go private.

I may not lose money after all - COX zoomed up and is trading at around 33.7 - looks like someone is expecting the offer to go up!

The entire cable sector looks ripe for consolidation - in particular rural/small-town cable operators
Insight Communications (ICCI)
Mediacom Communications (MCCC)
should be snapped up soon by one of the majors. I have a few of both and am adding more.

In fact, the only cable company that is not worth owning today is the debt-laden Charter Communications.

All the others have something to offer -
Comcast (CMCSKA) : undervalued,
Time Warner (TWX) : undervalued,
Cablevision (CVC) : takeover target.

The 2 other undesirable ones have already gone bankrupt -
RCN Cable