Larry's Blog

This is the personal blog of Lawrence Sautter. You should consider hiring me. This blog is not investment advice. This is not a solicitation to invest. Follow me on Twitter: @sautterlas65, view my profile on Linkedin.





What's in a name?

What’s in a Name? – Rumors about Harley Davidson


Lawrence A. Sautter, 3 July 2016



Rumors should come without surprise, especially on Fridays when options are set to expire. It keeps investors thinking over the weekend. Sleepless nights?   Imagine, markets without rumors? What a boring stock market and life it would be.

Valuation and debt. (leverage)

What’s in a name? Brand recognition and the Harley-Davidson lifestyle.


Shares of Harley-Davidson soared nearly 20 percent Friday on speculation that it received a bid from private equity firm KKR.


Harley-Davidson and KKR declined to comment.

Valuation and debt

HOG is valued at a forward P/E of just 13.4x. The company trades at a price/sales of 1.8x and an EV/sales of 2.75x. The company is leveraged with $7 bn debt.

If the price of the acquisition would be 65$ per share or even higher, valuing the company around $11.5B or more and a 11x multiple to the Ebitda. This would imply a minimum additional 20% potential gain.


If you go for a fair value of $70 you would have a healthy margin of safety of approx. 22%.

What’s in a name? - Or the goodwill and value of brands, accounting for intangibles

The brand is the most valuable asset at most companies. It is also the most difficult asset to hang a dollar sign on. With intangible assets accounting for as much as 80% of market value of the S&P 500, being able to forecast the value of brands is essential to investors. Although brand value may be abstract, it is still the single most important thing about most stocks.

Goodwill is something which only arises when a business is sold and until this happens the value of goodwill is not included in balance sheet assets. In this view, goodwill is the difference between the price paid for the business and the value of its net assets at that time.

According to Interbrand, the Harley-Davidson brand is worth $5.4B (up 14% compared to last year) and it is the 79th most valuable brand worldwide.

Determine the economic value of your brand’s premium market position

When businesses get ready to sell brands, often they begin by calculating the actual economic advantage of the brand. You can assess your own economic advantage by watching two indicators:

·         Price elasticity: When your consumer demand remains high even when your prices go up, your brand enjoys pricing leeway known as favorable price elasticity. Price elasticity usually results from high brand value and usually leads to premium pricing.

·         Premium pricing: To assess your brand’s pricing advantage, determine how much extra consumers are willing to pay in order to purchase your branded product instead of the offering of a lesser-known or lesser-valued brand. This difference, multiplied by your sales volume, indicates the economic value of your premium market position.

In other words, high brand value leads to favorable price elasticity, favorable price elasticity leads to premium pricing, and premium pricing leads to higher brand equity.


 Adjust your result to account for future brand performance projections.

These projections include the likelihood that customers will continue to behave in a similar manner in the future, that the brand’s current economic reality is transferable to new owners, and that the brand’s momentum will continue at its current pace.

For example, if a service business commands premium pricing in large part due to the powerful reputation of the owner, and if the owner wants to sell the brand and depart the business, then the value of the price premium would likely be discounted by those considering a purchase of the brand.

When calculating the worth of a brand’s premium price position, be aware that the number you arrive at is a valuation starting point, not the finishing line. The effect of future brand-building activities, market growth or retraction trends, actions of competitors, and other market realities affect whether the value of the price premium should be adjusted upward or downward in assessing the brand’s worth.


"If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you."

- John Stuart, Chairman of Quaker (ca. 1900)


On Rumors and Takeover chatter:

Always ask yourself if it is worth chasing and if you should play the news?

Would a buyout make sense? And at which price?


Harley-Davidson is more than a brand! However, to quantify that value is more an art than science!


Harley-Davidson is almost a philosophy, committed to preserving an renewing the freedom to ride.


 Opportunity or Challenge?  

Product evolution and innovation for loyal customers and a new generation

The motorbikes of the future with its all-electric motorbike.


This type of product is likely to excite a younger, environmentally friendly crowd. But only if Harley-Davidson stays loyal to it’s self and sticks to its traditional roots, keeping it’s style and myth story a life, while transforming slowly into the next generation.


Long term prospects look interesting. One alternative strategy would be to sell put options at a strike of 50$. For example, Nov 18 can be sold for approximately bid $2.90. This would guarantee a nice income if the option is not exercised (probability of 67%) with a yield boost of 15% annualized, and a safe point of entry if it is trading at 47.1$/share. Alternatively, it would be possible to buy call options and/or buy the shares directly on a pull-back, if you have the chance.

Not only KKR, also Honda, Suzuki and Kawasaki could be interested.


I whish you a very nice ride, either on the stock-exchange or enjoing your free ride outdoors. 


The motorbikes of the future with its all-electric motorbike. $HOG






How much Gold for diversification do you need?

Portfolio Diversification with Gold 

Physical Gold, in general,  provides valuable diversification benefits and improves portfolio efficiency, even during periods of extended equity bull markets (1972-2016).

Even though gold may not provide the same efficiency benefits over stock-and-bond portfolios in the current 2009-2016 bull run, they remain an effective performance stabilizer through turbulent periods.

Gold should not be expected to outperform equity markets during protracted equity market rallies. Despite the focus on performance alone by many in the industry, Gold aims at volatility reduction, improving diversification within a portfolio and typically deliver superior long-term risk-adjusted return.

Using an asset allocation framework, the empirical evidence demonstrates that investment in Gold would have improved the portfolio efficiency of cash, bonds and equity portfolios, for any risk tolerance level, for the period 1972 - 2016.

 “When analyzing efficient allocations, we found that the optimal Gold allocation for a balanced USD portfolio lies between 5 - 20%.

Physical Gold should be looked at as sort of an insurance, you hope you never need.








Are "quality stocks" a crowded trade?

As investors cluster around a handful of core names, you might have valuation risk


Not all large cap stocks are high quality, hence defensive investments. But a lot of index trackers and passive investors are crowding this segment, when the market gets worried. However, this does not mean that you cannot find value within the large cap stocks. You should not focus too much on your Benchmark and market cap weightings. Search for "quality" stocks within the whole market universe from small-, mid- to big cap stocks and globally with emerging market exposure. Concerning valuation risk, just stick to your own "quality" standards, when looking for a good company to invest for the long-term. You could look for the following characteristics:


1. High ROIC without accounting gimmicks or a lot of leverage.

2. Generating cash profits. (High profit margins)

3. Has predictable earnings and growing.

4. Not a natural target of regulation.

5. Owner-oriented management.

6. Understandable business model with a strong balance sheet.

7. Owns strong franchises, thus having the freedom to raise prices.

8. Low asset intensity with a lean expense structure.

9. High return on tangible assets.

10. Dominant and growing market shares in their principal products and/or service lines, long product cycles and excellent global market positioning. (strong product demand in a growing market)


Look for management with a record of doing what it says it's going to do and has a vision. Further management should spend on R&D and innovation.


Buy and stick to companies with the best global growth prospects.


Do your own diligent research before making any buy or sell decision.


Over time stocks are going to move with earnings growth.


You must calculate your "fair"-price you are prepared to pay for a good company and sometimes you have to wait for the price to come down first, before investing in a "quality" company. Never overpay, but do your fishing, when the weather is grey and terrible, when investors panic. This is called "bottom-fishing", when valuation risk is low and prices are attractive.

Price is what you pay. Value is what you get.

Warren Buffett






Is your bond portfolio vulnerable to rising rates?

Although current interest rates are at all-time lows, eventually they could rebound.

Because the value of existing bonds tends to decrease when interest rates increase, investment portfolios overweighted to fixed-income assets could see significant losses should rates rise.

Consider investing in equities

The chart below shows how rising rates on the 10-year Treasury bond would have affected different hypothetical portfolio allocations during the past 20 years, when rates increased seven times. In those years when interest rates rose, the 100% bond portfolio returned little more than 2% on average, while the pure stock portfolio returned an average of 17%.

Adding even a small portion of stocks to a bond portfolio can increase returns significantly.


Sources: Bloomberg, SPAR, FactSet Research Systems Inc. Hypotheticals assume quarterly rebalancing.






About chaos theory, fuzzy logic and emotions

Guesses made by securities analysts and investment advisors represent fuzzy estimates we aim to distill. This can be done through defuzzification. Taking an analogy from physics, what defuzzification essentially does is to establish boundary conditions. This is a subjective process but also very important because it permits us to better define the area within which we make our guesses. It is quite vital to underline that uncertainty (possibility) and randomness (probability) should not be confused. Whether in science or in the arcane arts of financial and economic analysis. The strength of fuzzy engineering lies in its ability to handle subjective judgments and emotions. The Monte Carlo Method is a very good tool to handle "noisy" data or better fuzzy data. And because the world is very uncertain and more chaotic than we think, we have to stress test our strategies more often, think in scenarios and do some Monte Carlo simulations which is a standard tool in portfolio construction, especially in a non-Gaussian world. Guesstimating the fair value of securities is indeed a fuzzy concept and the tail risks are mostly underestimated, because the bell curve is a myth and tomorrow's prices are not independent of past prices. By the way, our world would be very boring, if we had the algorithm to predict the future and without volatility you would not find any investment opportunities.

Market conditions, along with weather patterns, across most continents have been anything but stable over the past several years. Thats why we aim to produce consistent risk-adjusted returns over time by managing risk, volatility and enhancing diversification. So investors can remove emotion from the equation and stay invested to achieve long-term goals. Do not try to time the market, stick to your strategy and process to meet your financial goals. Traditional finance theory is bad at predicting what people really do. The mass oscillates between euphoria and panic. Are you a rational investor? What's your investment style, finance behaviour and market conviction?


We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

Warren Buffett