Sunday, September 28, 2014

Young Money - Why Value Investing In Tech And Retail Companies Doesn't Work

New post:

"To accurately value a business, investors need a guide as to what margins and economic returns it will earn. Past results are often the best guide: if an industry has earned a 10% average return on equity over multiple economic cycles, but it's currently losing money because of a recession or overcapacity, then it's likely to earn a 10% ROE again at some point. Some companies in the industry may go bankrupt, but when supply and demand adjust, the survivors will profit. In other words, the typical industry reverts to the mean.

By contrast, new technology standards and products replace old ones all the time. Instead of reverting to the mean, struggling tech companies usually revert to non-existence. The same is true for retail: what people like to buy and where they like to buy it change constantly."
Recently, many value investors have had to figure this out the hard way.

I don't understand the "Standard General" (ridiculous name) hedge fund guy who keeps sniffing around American Apparel and Radio Shack.


Unknown said...

Thanks for the link.

I know you;ve written about BBY before, I think it's an obvious value trap that's facing a future of constant, profitless decline. I don't know how much it would temporarily benefit RSH liquidation, or to what extent the market is factoring that into the share price, but l-t it's toast.

There's a thread on VIC that makes IBM look like a value trap:

I looked at CSCO a while ago and came away with the impression that it was doing the same thing, i.e. it was using acquisitions as a form of capex so that earnings and cashflow are overstated. But IBM has a worse balance sheet.

CP said...

I would guess that a RSH liquidation will help BBY.

Also, BBY at least makes money. It has higher revenue than SHLD, which I didn't realize.

CP said...

"First comes the strategic bankruptcy, well in progress at Best Buy, where management’s sole focus is improving some arbitrary metric from last quarter, even when doing so actually interferes with customers trying to buy something else. The financial collapse comes later. But if history is any guide, the second part, once it starts, will be quick."

This reminds me of Radio Shack - the strategic bankruptcy was selling cell phones.

CP said...

The Shack turns over inventory about 4.3 times per year. There's about $180,000 of inventory (cords and widgets?) per store. By comparison, Best Buy turns over inventory close to 8 times per year.
Best Buy sales are $300k/employee, Shack sales are $125k/employee.
So, Shack takes almost twice as long and 2.4x as many employees to sell a dollar of inventory.

CP said...

Buffet loves IBM, of course.

John said...

"Buffet loves IBM, of course."

Yea, that's because in Buffet's eyes "America is so exceptional I gotta wear shades"!!

CP said...

Further thoughts on the VIC: