Thursday, July 24, 2014

SIX: First look

I decided to take a look at Six Flags Entertainment Corporation (SIX) after seeing this article, stating that the dividend yield was over 5 percent.  Not that I had any specific idea about investing for yield or anything.  I just thought that if the dividend yield was that high, and if that dividend was sustainable, and if there were any growth possibilities, then this might make a good investment.  That's a lot of ifs to end up with a maybe, but that's really no different from other stocks.

It also happens that I've been thinking that entertainment stocks in general might provide good investments going forward.  Economic growth appears to be gradually ticking up, unemployment is down, and entertainment, at least according to my personal experience, appears to be a relatively high priority in consumer spending.

So, with that in mind, let's begin with a look at some of the current data, as reported on Yahoo Finance.  The trailing PE (32), forward PE (25), and PEG ratio (2.68), all point to a relatively overvalued stock on the basis of earnings.  A beta of 1.85 indicates relatively high market risk, and the debt/equity reported there is high at nearly 197, indicating a high level of leverage.  Cash per share is reported at $0.24 for the most recent quarter, not enough to continue paying the current dividend.  So far, SIX doesn't appear all that promising.

Turning to the annual balance sheet, we see that in 2012, the company increased long term debt by over $400 million, and in 2013, apparently sustained large enough losses to wipe out retained earnings, leaving the balance at -$439 million.  Yeah, that's negative.  Also negative, net tangible assets come in at -$619 million.

Strangely, looking at the annual income statement, income itself doesn't seem to be the reason behind the large decrease in retained earnings, as net income was positive for the last couple of years.  As it turns out, the reason for the large drop in retained earnings can be found in the annual cash flow statement.  The company repurchased nearly $500 million in stock.  Without looking at any news for the time period, it appears the SIX made a rather large adjustment to its capital structure, exchanging debt for equity in effect.  Not necessarily a bad choice, although it is a choice that might cause some investors to invest elsewhere due to the higher risk that debt represents.

Looking at the 5 year chart , the stock has done well over the period, significantly outperforming the S&P 500 over the period.  The last year tells a different story.

In summary, it appears that SIX isn't a growth story at all.  Rather, the company is leveraging the assets it already has in order to return value to its shareholders.  In good times, stockholder returns should be better than normal, but if things turn south, it could be a disaster, as leverage tends to magnify both the good and the bad.

Tuesday, April 1, 2014

Business ethics

CEO Barra calls GM's actions on deadly defect 'unacceptable'
Lawmakers are investigating why GM and regulators missed or ignored numerous red flags that faulty ignition switches could unexpectedly turn off engines during operation and leave airbags, power steering and power brakes inoperable.
 So, I wonder how long this investigation will go on.  It's simple, really.  It's the same thing that Ford (F) did with the Pinto years ago.  They did a cost/benefit analysis.  And not surprisingly, the cost of the fix, even if small, was more than the value put on human life.  Of course, it isn't really the value of human life, but rather the expected cost of not fixing the issue that is considered.
Under intense grilling by lawmakers, Barra said she found employee statements "disturbing" that cost considerations may have discouraged the prompt replacement of faulty ignition switches now linked to at least 13 fatalities and the recall of 2.6 million vehicles.
Bingo.  But is it really "disturbing?"  I don't think so.  This type of decision-making has been going on for as long as business has been done.  I'm not surprised, nor am I disturbed.  I suppose that this is why I'm not the CEO of a multi-billion dollar corporation.  I have too much trouble feigning surprise.

But, on the other side of the argument is this:
House Energy and Commerce Committee Chairman Fred Upton, a Republican, told Barra: "With a two-ton piece of high-velocity machinery, there is zero margin for error; product safety is a life or death issue. But sadly, vehicle safety has fallen short."
But drivers' recognition of vehicle safety has fallen short as well.  Or perhaps a better way to put it is that drivers don't tend to recognize how unsafe the very act of driving is.  Most people don't really think of driving a "two-ton piece of high-velocity machinery" as being anything like that.  Drivers these days seem to assume safety.  And when it isn't so, they are shocked and appalled.  Driving is dangerous, and no amount of effort on the part of automakers is going to change that.  The "safer" cars become, the faster everyone drives and the more aggressive drivers become.

Still, for this type of problem, GM (GM) should certainly be held accountable for their action, or inaction as it were.  But I'm pretty sure this was already considered in the cost/benefit analysis, and in the end, the result will be more of the same in the future.  Because, consumers will do their own cost/benefit analysis, even if subconsciously, and decide that the perfectly safe vehicle is not worth the cost.  Just like they made the same decision with seat belts when seat belts were a new thing.

While I usually reserve this type of commentary for my other blog, I chose to comment here because it is directly relevant to the ethics of business and finance, of which, despite what professional associations would lead us to believe, there are none.  Well, except for my ethics, of course.

Tuesday, October 15, 2013

Wal-Mart's growth strategy

Wal-Mart predicts sales will grow faster next year
Wal-Mart Stores Inc (WMT) expects slightly stronger sales growth next year as it makes changes such as opening more smaller U.S. stores and shutting 50 poorly performing stores in Brazil and China, executives said on Tuesday.
Of course they do.  Everyone always expects better sales next year.  And it looks like Wal-Mart has a plan, although it does depend on technological glitches, government failure, and greed (pretty good bets these days, I think):

EBT card system failure leads to empty shelves in Louisiana Walmart stores
The Louisiana Department of Children and Family Services is investigating possible fraud allegations stemming from the incidents, according to a spokesperson.
Nope, no fraud there.  It was all just a mistake.  Cuz, you know, it's really hard to have any idea whatsoever how much you've actually got left to spend on those darn cards.  This woman's story demonstrates just how hard it is:
One woman in Springhill was detained by police after trying to get $700 worth of food when she only had 49 cents on her card.
Yeah, the management at Wal-Mart really came through, in a clear case of helping their fellow man:
“We did make the decision to continue to accept EBT cards during the outrage so they could get food for their families,” Walmart representative Kayla Whaling said. 
Well, my guess is it turned out to be a pretty darn good day for sales at Wal-Mart.  I just have a sinking feeling that the taxpayers will be the ones footing the bill.

Sunday, October 13, 2013

Risk premium

Even though our government is a week closer to default, the market risk premium appears to be edging lower.  This is one of those times that maybe the stock market doesn't behave terribly rationally.  Then again, maybe it is perfectly rational.  After all, can't we be relatively certain that Congress won't allow a default?  I'm not so sure.

Anyway, the market risk premium is sitting right about the same as last week, about 7.5%, perhaps a bit low considering the risks.  That said, I wouldn't exactly be loading up the truck right now, unless you've got the inside scoop on a great investment that no one else knows about, which is unlikely.  Also, about the same as last week, it looks like low beta stocks are still undervalued relative to high beta stocks.

As of right now, it looks like we'll be off to a rocky start on the week, with S&P futures in Sydney currently down 0.9%.  As we approach actual default, I would expect increasing volatility.  If we actually do default... well, maybe the Fed will just buy ALL the outstanding Treasuries and be done with it.  After all, it wouldn't much matter if the government defaulted then since the interest payments made to the Fed are basically just refunded back to the government anyway.  Clearly, there's nothing to worry about here.

Thursday, October 10, 2013


Stocks soar on hopes for deal to avoid US default

No kidding.  Only, I guess market participants forgot that a possible default wasn't actually priced in to stocks.  So, the Dow (^DJI) ended the day up over 2%, or over 300 points.  And why?  Because of this:
The gains accelerated after House Speaker John Boehner told reporters that the House would take up a short-term extension of the government's borrowing authority.
Okay, I guess that's good news, since the deal would avoid a default next week.  But, isn't that really just ensuring yet another crisis over the same thing in what, a few weeks or months?
"It allows politicians to turn down the heat a bit while still keeping the broader issues on the front burner," Ablin said.
The last time the debt ceiling became an issue was 2 years ago.  The way I see it, Congress has had 2 years to figure out what to do this time, since it hasn't been a secret that we would yet again reach the debt ceiling.  It definitely hasn't been a secret since sometime in May when Treasury said it was implementing special measures to prevent hitting the debt ceiling.  All this accomplishes is a delay, and an even bigger crash should a default actually materialize.  Awesome!

Worst of all, this just shows the government doesn't even need to spin things any more.  Investors will provide their own spin.  So, remember that post I wrote yesterday about the market risk premium being surprisingly close to historical norms?  Well, I haven't figured it yet, but I'm sure it's back to some really comfortably low number now.  And more than that, I'm fairly sure that low beta stocks are even more under-valued relative to high beta stocks now.
In another bullish signal, small-company stocks rose even more than the rest of the market.
And small-company stocks tend to be high beta stocks.

Wednesday, October 9, 2013

Market imbalances

Last weekend, I built a model using the Dow Industrial stocks (^DJI) to determine what the market risk premium is for stocks.  The results weren't exactly what I expected.  I have, from time to time, estimated the market risk premium using some "back-of-the-envelope" calculations to get a feel for whether market valuations in general were high or low.  The last time I did that, I estimated a market risk premium that was, on an historical basis, relatively low, perhaps 4 or 5%.  So, I was somewhat surprised to find that using this model revealed that the risk premium is currently (as of last weekend) about 7 or 8%, or about average for the last few decades.  And this result implies that current stock valuations are, in general, about average.

Knowing this, an investor might think that the stock market isn't accurately reflecting the risk of default on U.S. debt, and I have to agree with that, especially given the other global risks that we are facing.  These are not average times, and being that the risk premium should be a reflection of investor fear, the risk premium should be high.  It isn't.

In fact, one other surprising result from this model was that low beta stocks tended to be undervalued relative to high beta stocks.  It's as if investors are not looking at beta as a measure of risk, but rather a measure of reward.  Both of these are somewhat true, since a stock with a beta of 2 would be expected to rise twice as much as the market, but it would also be expected to decline twice as much, and it appears investors are ignoring that second part, perhaps because no one really believes the market is going to correct, or crash, any time soon.

And the result of this thinking, for whatever reason it is happening, is that there are some imbalances in the stock market, resulting in a better risk/reward ratio for lower beta stocks in general.  It's important to keep in mind that this is just a general statement and should not be taken as a recommendation to start loading up on low beta stocks.  But, perhaps, it does provide a good starting point for where to look for value priced stocks.

Saturday, October 5, 2013

Sometimes you really don't want to follow the herd

You say Twitter, I say Tweeter: Investor mix-up?
A bankrupt electronics retailer appears to have gotten caught up in the investor fervor for Twitter.
Apparently, there was some confusion between the tickers TWTR and TWTRQ.  Just a guess, but I doubt that there's ever been an IPO with a ticker that ended in Q, except maybe Q.  Of course, the fair thing to do would be to cancel all the purchases, because it's an easy mistake to make!?!  Takes a couple of seconds to check what the company name is too.  Besides, Tweeter, Twitter, what's the difference?

It just seems un-American to me to stop trading because of some confusion.  I mean, why shouldn't we be allowed to profit from someone else's confusion?  It happens in the real world all the time, so why not in the Wall Street dream world?

This is probably a good demonstration of the herd mentality that often takes over in stocks.  Someone got excited because a stock started moving up, and not having any idea why it might be moving up decided they needed to get some of that.  Besides, if we're going to stop trading because of some confusion, then we might as well just shut down the stock exchanges altogether.  In case nobody noticed, there's a lot of confusion in the market.