Nugget: J. M. Keynes the Stock Market Investor (research)

A paper found at the Social Science Research Network by D. Chambers and E. Dimson:

Abstract: Keynes made a major contribution to the development of professional asset management. Combining archival research with modern investment analysis, we evaluate John Maynard Keynes’ investment philosophy, strategies, and trading record, principally in the context of the King’s College, Cambridge, endowment. His portfolios were idiosyncratic and his approach unconventional. He was a leader among institutional investors in making a substantial allocation to the new asset class, equities. Furthermore, we document a radical change in Keynes’ approach to investment which was to the considerable benefit of subsequent performance. Keynes’ experiences in managing the endowment remain of great relevance to investors today.

Nugget: A Billabong write-up on Seeking Alpha

From the article: Billabong: A Cigar Butt With Upside? by Mike Arnold


Things look terrible at Billabong. However, as management sells off assets (West 49, etc), closes retail locations and refocuses on its distribution channels and brands, in my opinion, the company will survive, in one way or another.

The question is, will equity shareholders retain ownership in the future operations?

With a net debt position of only $152 million (not including some $350 million in off balance sheet lease commitments), it does not appear like an insurmountable hurdle to sell assets and/or issue a bond to protect shareholders and bank lenders.

In addition, I wouldn’t be surprised if a white knight came in to pick up the assets on the cheap and/or for strategic purposes. Nike (NKE), Adidas (ADDYY.PK), Columbia Sportswear (COLM), and Under Armour (UA) come to mind. VF Corp has already expressed interest in the assets.


In the comments section there is also a referance to an old NY Times article from 2003 on the purchase of Converse by Nike.

Nugget: PPR changes name to Keurig and starts Puma restructuring

From a Reuters article on June 18, 2013:

But beyond the name change and new logo featuring an owl, Pinault gave few answers to shareholders about the future of Puma or Fnac, the group’s CD and book business, which will list on the stock market on Thursday.

Pinault called on shareholders to hold on to Fnac shares they will receive when the business floats, valuing Fnac at 400 million euros ($533.90 million), significantly below the 1 billion euro mark some analysts had forecast two years ago.


Puma has lost its competitive edge and credibility in key areas such as the running shoe segment, allowing rivals such as Asics and New Balance to gain market share and bigger competitors such as Adidas and Nike to consolidate their lead.

Puma has made a number of mis-steps, including opening shops in the wrong places, poorly integrating licence businesses and back-office operations and spending money on sponsorships in sailing and rugby not closely linked to the brand. It suffered a 70 percent drop in net profit last year.

“I have the feeling that PPR took a long time to get into the business of Puma and really understand what was going on,” said Thomas Chauvet, luxury goods analyst at Citi.

Nugget: Goodwill and its Amortization: The Rules and The Realities

Masterpiece from Warren Buffett in 1983.

Outlier Allocators

The following entry is borrowed from Warren Buffett’s Berkshire Hathaway 1983 Chairman’s Letter as it was very informative and opened my eyes more clearly to the economic realities of goodwill. Amortization and goodwill are keys to understanding the intangible side of the financial statements.

“During inflation, Goodwill is the gift that keeps giving.”

(This appendix deals only with economic and accounting Goodwill – not the goodwill of everyday usage. For example, a business may be well liked, even loved, by most of its customers but possess no economic goodwill. (AT&T, before the breakup, was generally well thought of, but possessed not a dime of economic Goodwill.) And, regrettably, a business may be disliked by its customers but possess substantial, and growing, economic Goodwill. So, just for the moment, forget emotions and focus only on economics and accounting.)

When a business is purchased, accounting principles require that the purchase price first…

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Nugget: Great interview with Wilbur Ross

I am American business is a series of interviews with American business people by CNBC. They did Wilbur Ross and you can find the whole interview here:

CNBC interview with Wilbur Ross


“Right. The way we’re looking at things is to really own them. If we buy a bond at 30 cents on the dollar, it’s not that we hope it goes to 35 so we can sell it. If we buy a bond at 30 cents on the dollar, it’s because we want it to default and we want to own the business. When you own the business, it means you have to be in there for a number of years, because it takes a while to fix it, then it takes a while to get it public or get it sold. So it’s a completely different mentality. In our shop, it’s a big event if there’s a trade in the whole day. Most places are trading, trading, and trading like mad, so it has a very different rhythm to it.”


“When we’re looking at an opportunity, first of all we look at it on an industry basis, because we’ve learned over the years that when companies go bad, they generally go bad as a whole industry. At one point it’ll be all the airlines that are bad, another point all the steel companies, and another point the textiles. That’s because what happens is you have industries that have been high users of leverage and then some catalytic event occurs, so the industry tends to have problems simultaneously. This creates two sets of opportunities, one is to fix the individual company, and second is the potential for changing the dynamics of the whole industry. If you can do both, then you get two big increments to value. So that’s what we really try to shoot for.”

Nugget: The Penman-Nissim model of profitability analysis

The Bottom Line
ROE is an important metric used to help judge how well a firm is turning shareholders’ invested capital into earnings. Breaking ROE down into a series of ratios can be even more telling, as it adds precision to the analysis by showing just how a firm is achieving its overall ROE. The Penman-Nissim framework complements other means of profitability analysis because it gives a clear and accurate picture of a firm’s core operating profitability and its use of leverage. (For more, see Profitability Indicator Ratios: Return On Equity.)

Nugget: Eddy Lampert on Same store sales (SSS)

From the 2005 Letter to shareholders:

If we take a simple example of a single store, then a comparison of SSS from year to year is fairly straightforward. If a store does $1 million in sales at a 10% operating margin this year, generating $100,000 in operating profit, and does $1.1 million in sales next year at the same operating margin of 10% generating $110,000 in operating profit, it will report a 10% increase in SSS. Now, let’s add another dimension. Imagine that this same store spent $500,000 to improve the store experience during that year. The 10% increase in SSS generated an additional $10,000 in profit. Whether the $500,000 investment makes sense or not in hindsight will depend on the future performance of the store. Obviously, if the store only improves by the $10,000 in profit, the $500,000 investment doesn’t make sense. I believe that companies that pursue SSS growth at any cost often fall victim to these traps.

In reality, the calculation of SSS becomes even more difficult. Individual retailers are opening, closing, and remodeling stores all the time. In this context, the simple comparison of a single store breaks down. Let me explain. Imagine that a new store opens on January 1, 2006. In the first year of operation, this store would be excluded from a company’s calculation of SSS because most calculations only include stores that have been open at least a year. A retail store matures over time and the first year of sales is often at a level that is a fraction of its potential. If we assume that a store opens at 60% of potential and matures to potential over four years, we know that this store will grow by 67% over that period of time (from $6 million to $10 million, let’s say). On that $10 million-in-sales store that opens at $6 million in year 1, the SSS increase over the next three years will average 18.6% per year, with the higher growth rates occurring in years 2 and 3 rather than year 4.

At the end of that period of time, the $10 million store may be at a relative steady-state, and let’s say it is earning at a 10% operating profit, or $1 million per year. The key question is not how well the store did from a SSS standpoint but rather how much money was invested to generate the $1 million profit. If the store cost $5 million to build, a $1 million profit represents a 20% pre-tax return on investment, which is attractive. However, if the store cost $20 million to build, the 5% return on that investment would not be attractive at all. Nevertheless, regardless of cost, the store would still have reported 18.6% compounded growth in SSS.

Complicating things further and bringing things even closer to reality, the more stores that are opened relative to the outstanding base of stores, the higher the SSS metric a company can produce, regardless of whether the new store openings make economic sense or not. If the mature stores (i.e., those that are over four years old) grow at a 1% rate and the new stores grow at the 18.6% per year rate (remember, it is likely that in years 2 and 3 the rates are materially higher than the 18.6%), then mathematically it is simple to show that the more new stores that are opened, the higher the SSS calculation. Only after a period of years will one know whether the new store investments actually made sense and actually contributed to the creation of value.

Nugget: O. Mason Hawkins on Madison Square Garden

From the 2011Q4 letter to shareholders of the Southeastern Asset Management´s Longleaf Funds:

Madison Square Garden: Based in New York, Madison Square Garden (MSG) owns one of the most valuable regional sports networks at a time when live sports content is increasingly important to traditional distributors. In addition, the company owns two of the best franchises in the NBA and NHL (Knicks and Rangers) and the iconic Madison Square Garden arena in which these teams play. The Dolan family controls the company, owns 20%, and has done a tremendous job building network value. The market is punishing the stock because the teams are generating no profits currently, and MSG’s billion dollar arena renovation that will draw higher team revenues is depressing this year’s earnings. The media network generates a valuable cash coupon, and comparable transactions imply a breakup value of the teams and arena over twice the stock’s price.  Additionally, programming contracts with huge revenues are being signed, causing the values of big-market NBA teams to explode. Because of the current renovation, 2012 FCF will be negative. Adjusted for the arena renovation, the FCF yield is 7.0%.

Nugget: Leading Brands 3Q2011 results

Here is the press release:

“The Company repaid $1,239,000 of long term debt during Q3 and a total of $1,742,000 during the 2011 fiscal year to date. As at the end of Q3 2011 the Company had cash and available credit totaling approximately $1,900,000.

During Q3 2011 the Company repurchased an additional 38,800 shares of its common stock at an average price of $3.12 US per share, pursuant to its share repurchase program. As at November 30, 2011 the Company had outstanding 3,262,668 common shares. The Company believes that its common share price remains undervalued and will continue with its share repurchase program at appropriate times.”