Larry's Blog

Investor Education, Information, Research, Tools, Analysis & Second Opinion

This is the personal blog of Lawrence Sautter. You should consider hiring me.

 

Have you ever wanted to invest in financial markets, but were always afraid that you didn't have the proper tools or knowledge to make informed decisions?

 

We will introduce you to the most important ideas and concepts in investment management, to help you better understand your financial future.

 

This blog and website is about fresh insights and sharing compelling ideas for further analysis, to help you get a better understanding of sustainable investment solutions.

Keep a clear picture and protect yourself against manipulation, emotions, fake news and the daily noise. Stick to your strategy and re-balance accordingly!

 

Follow me on Twitter: www.twitter.com/sautterlas65

or view my profile on Linkedin: www.linkedin.com/in/sautterinvest

Wed

01

Mar

2017

The SNAP IPO

To SNAP or not to SNAP

By Lawrence A. Sautter, 1st March 2017

 

SNAP IPO the next Twitter or will it be a dominant platform?

 

As a general rule, buying into IPOs is a bad idea, as the empirical evidence and statistics show from Jay R. Ritter. From 1980-2016 his data crunching shows that from over 3000 Tech IPOs only 50% have been profitable. During the Technology Bubble in 1999-2000 the Median Price to Sales ratios for 630 Tech IPOs were peaking at 49x and 14% were profitable. Since 2008 the Median Price to Sales ratio hasn’t been around 7x and fell to 5x in 2016. For the last four years less than 30% have turned out to be profitable.

 

With an estimated market capitalization of US$21 bn SNAP would have an IPO Price to Sales ratio of about 52x which looks very expensive. SNAP would have to reach up to nearly $4 bn in revenues by 2021 or a compounded annual growth of more than 58% p.a. to reach a P/S ratio like Facebook did 5 years after the IPO. That is a huge challenge.

 

Pre-IPO Price to Sales Valuation comparison:

 

 

post IPO

 

 

 

last

Q4 2016

 

CAGR 5y

5y post IPO

 

 

CAGR 5y

YoY rev

 

rev.growth

P/S

IPO P/S

P/S (ttm)

rev. Growth

rev. Growth

Facebook

47

11x

25x

14.2x

33.4

50.8

Google

57

5x

10x

6.4x

17

22.2

Twitter

no hist.

no hist.

12.4x

4.5x

 

0.9

SNAP

 

 

est. 52x

 

 

 

Median Internet Company*

 

6.5x

2.86x

Source: sautterinvest.ch

* Source: Jay R. Ritter, Warrington College of Business

 

1st March 2017

 

 

 

Read More 0 Comments

Tue

31

Jan

2017

When Markets get frothy...

When markets get frothy, make sure you have a balanced portfolio!

 

By Lawrence A. Sautter, 31st January 2017

 

As the financial markets generally are unpredictable, it is crucial to have a well diversified portfolio with different assets. In an environment where you have increasing interest rates, high valuations and rising inflation expectations, you could suffer a big capital loss on long-duration bonds and overvalued stocks, but during a recession the fixed income part of an asset allocation could give you the cushion you need for lower volatility and stability within your portfolio.

 

However, you want to have some kind of an inflation-hedge over time, so you will need some balanced exposure to equities that can grow their earnings and dividends over time. You can stick with Dividend Aristocrats and Dividend Kings with above average Dividend yields and Dividend growth, low payout ratios and low beta as a core holding within your equity exposure.

 

Evidence: 

 

The Dividend Aristocrats for example (stocks with 25+ years of rising dividends) have outperformed the S&P500 over the last 10 years by 2.88% per year.

 

Because we do not have a crystal ball, we need a long-term balanced portfolio-solution with bonds, equities and perhaps some alternative investments that do not correlate at all with classical assets. Diversification with some real assets like commodities (Gold and Silver) and real estate could be a further step towards an inflation-hedge. Treasury inflation-protected securities (TIPS) may be an attractive alternative to Treasuries and fixed-income assets tied to real assets such as commodities and/or real estate. Floating-rate loans would be a good alternative to cash.

 

Low volatility Dividend-stocks with low-payout ratios are especially interesting and contribute to a lower portfolio volatility and offer higher real income. They have produced excellent risk-adjusted returns and historically seen smaller drawdowns during recessions.

So for uncertain times, it is safer to have a balanced portfolio versus a bond portfolio, especially when central banks follow a Zero-Rate or Negative-Rate policy the downside risk for bonds is capital loss and inflation risk looming around the corner.

 

 

Just have a look at this portfolio example:

 

 

You would have lost more than 9% on 20+ year treasury bonds (TLT) over the last 3 months and -3% over the last 12 months, while the low beta Dividend Portfolio managed to gain 3.9% and 9% over the same period. That’s an awesome  outperformance of 13% and 12.2% respectively with a better Sharp Ratio. 

 

Read More 2 Comments

Tue

23

Aug

2016

Are you hunting for Yield?

Read More 0 Comments

Sun

03

Jul

2016

What's in a name?

Read More 0 Comments

Wed

29

Jun

2016

How much Gold for diversification do you need?

Read More 7 Comments

Wed

01

Mar

2017

The SNAP IPO

To SNAP or not to SNAP

By Lawrence A. Sautter, 1st March 2017

 

SNAP IPO the next Twitter or will it be a dominant platform?

 

As a general rule, buying into IPOs is a bad idea, as the empirical evidence and statistics show from Jay R. Ritter. From 1980-2016 his data crunching shows that from over 3000 Tech IPOs only 50% have been profitable. During the Technology Bubble in 1999-2000 the Median Price to Sales ratios for 630 Tech IPOs were peaking at 49x and 14% were profitable. Since 2008 the Median Price to Sales ratio hasn’t been around 7x and fell to 5x in 2016. For the last four years less than 30% have turned out to be profitable.

 

With an estimated market capitalization of US$21 bn SNAP would have an IPO Price to Sales ratio of about 52x which looks very expensive. SNAP would have to reach up to nearly $4 bn in revenues by 2021 or a compounded annual growth of more than 58% p.a. to reach a P/S ratio like Facebook did 5 years after the IPO. That is a huge challenge.

 

Pre-IPO Price to Sales Valuation comparison:

 

 

post IPO

 

 

 

last

Q4 2016

 

CAGR 5y

5y post IPO

 

 

CAGR 5y

YoY rev

 

rev.growth

P/S

IPO P/S

P/S (ttm)

rev. Growth

rev. Growth

Facebook

47

11x

25x

14.2x

33.4

50.8

Google

57

5x

10x

6.4x

17

22.2

Twitter

no hist.

no hist.

12.4x

4.5x

 

0.9

SNAP

 

 

est. 52x

 

 

 

Median Internet Company*

 

6.5x

2.86x

Source: sautterinvest.ch

* Source: Jay R. Ritter, Warrington College of Business

 

1st March 2017

 

 

 

Estimated Revenue growth and possible market cap growth at rate of 15% p.a.

SNAP says DAU growth is likely to be “lumpy and unpredictable”, fluctuating with new product updates and investments, and user behavior. 

 

 

Will Snapchat have a Twitter problem?     

 

 

SNAP DAU comparison with Twitter MAU data which is fading fast:

 

Snap’s valuation is far too high to get excited at the moment. However, its advertising business has only just began. Snap has incurred operating losses in the past and may never achieve or maintain profitability, that’s the down side risk.

 

As a general rule, buying into IPOs is very tricky and you have to pay sufficient attention to profitability in valuing IPOs.

 

What does IPO stand for? “It’s probably overpriced”, right you are. This is a good approach to start with.

 

Make sure you understand the story and the business behind it.

 

The Snap Hype, a lot of noise about nothing?

 

Well, it is not just about messaging. The company moved into hardware late last year with Spectacles, sunglasses with a built-in camera that can take and share short video clips. So is Snap now a camera company with just another product?

 

Nathan Furr from INSEAD says: “If Snap intends to build products as a bridge to new platforms, or as an effort to creat a hybrid business model more robust than its current platform business model, that may make sense. So, how should you judge the viability of Snap’s strategy? If you believe the company is (1) mistakenly placing its focus on easily imitated products, rather than platforms, (2) losing sight on its core interaction, and (3) building on hardware platforms that will one day be commoditized, then you might be worried about Snap. On the other hand, if you think Snap’s “product” language is code for defensible, value-added additions to the core platform interaction, which you believe it can deliver, and that it is building bridges to future platforms with its camera strategy, then you have cause to be optimistic about its long-term viability.”

 

However, investors will watch user growth very closely and should it start to fade faster than expected, it could hit Snap’s share price very quickly and very hard.

 

Does Snap have to reach a much broader audience? Probably yes. We will see. It is already challenging Instagram from Facebook regarding users under 30 and is head-on-head with Instagram concerning total time spent on social apps under 30.

 

Finally, it’s good to know, that, according to the Council of Institutional Investors, companies with a controlling shareholder tend to underperform those that don’t.

 

 

Snap is structured in such a way that new shareholders won’t have voting rights and the input on matters usually associated with such rights, including board composition and executive pay. In the case of Snap, self-interest seems paramount.

 

So I wish the punters good luck with SNAP and don’t get burned.

 

 

Conclusion: It’s all about the long-term viability of the company’s strategy and the potential of building new platforms not products that can be commoditized like Facebook rolling out its most successful Snapchat copycat feature with Instagram Stories.

 

0 Comments

Tue

31

Jan

2017

When Markets get frothy...

When markets get frothy, make sure you have a balanced portfolio!

 

By Lawrence A. Sautter, 31st January 2017

 

As the financial markets generally are unpredictable, it is crucial to have a well diversified portfolio with different assets. In an environment where you have increasing interest rates, high valuations and rising inflation expectations, you could suffer a big capital loss on long-duration bonds and overvalued stocks, but during a recession the fixed income part of an asset allocation could give you the cushion you need for lower volatility and stability within your portfolio.

 

However, you want to have some kind of an inflation-hedge over time, so you will need some balanced exposure to equities that can grow their earnings and dividends over time. You can stick with Dividend Aristocrats and Dividend Kings with above average Dividend yields and Dividend growth, low payout ratios and low beta as a core holding within your equity exposure.

 

Evidence: 

 

The Dividend Aristocrats for example (stocks with 25+ years of rising dividends) have outperformed the S&P500 over the last 10 years by 2.88% per year.

 

Because we do not have a crystal ball, we need a long-term balanced portfolio-solution with bonds, equities and perhaps some alternative investments that do not correlate at all with classical assets. Diversification with some real assets like commodities (Gold and Silver) and real estate could be a further step towards an inflation-hedge. Treasury inflation-protected securities (TIPS) may be an attractive alternative to Treasuries and fixed-income assets tied to real assets such as commodities and/or real estate. Floating-rate loans would be a good alternative to cash.

 

Low volatility Dividend-stocks with low-payout ratios are especially interesting and contribute to a lower portfolio volatility and offer higher real income. They have produced excellent risk-adjusted returns and historically seen smaller drawdowns during recessions.

So for uncertain times, it is safer to have a balanced portfolio versus a bond portfolio, especially when central banks follow a Zero-Rate or Negative-Rate policy the downside risk for bonds is capital loss and inflation risk looming around the corner.

 

 

Just have a look at this portfolio example:

 

 

You would have lost more than 9% on 20+ year treasury bonds (TLT) over the last 3 months and -3% over the last 12 months, while the low beta Dividend Portfolio managed to gain 3.9% and 9% over the same period. That’s an awesome  outperformance of 13% and 12.2% respectively with a better Sharp Ratio. 

 

2 Comments

Tue

23

Aug

2016

Are you hunting for Yield?

 

Do you have enough Real Estate exposure?

 

This Index Change is an excellent excuse to get some higher yield into your portfolio. Lower your risk, increase your diversification and get more income.

                                            

GICS Sector Change:  Effective August 31, 2016

 

Standard & Poor's Finance Sector composition will change.

The existing Finance sector will split into two Sectors:

 

 

Finance (new) and Real Estate (REITs)

 

Real estate will become the 11th equity sector within the GICS structure as of the market close on August 31, 2016. It will be elevated from its current position as an industry group within the financials sector.

Portfolios will need to be rebalanced to account for the new group. Financials now will account for a smaller portion of the index, possibly triggering substantial reallocation of resources, while the new sector, and real estate investment trusts in particular, could attract even more investor capital.

REITs have accumulated about $1.1 trillion in total market capitalization, according to the National Association of Real Estate Investment Trusts, and have become an increasingly popular tool in a yield-hungry investment world.

 

With the removal of real estate, the financials sector may become more volatile, with positive exposure to long-term interest rates.

The new real estate sector is likely to be relatively low beta, with high correlations to defensive sectors such as utilities and health care.

 

This sector may provide a new lower-beta tool for investors seeking to diversify risk or reduce their exposure to market volatility. Given that many investors have been underweight to REITs, they may want to take a closer look at their exposure to determine whether it is ade­quate given their investment goals.

Hunting for yield, a lot of investors could be rebalancing in favour of REITs and selling Banks. The Dividend Yield of REITs are very attractive at an avg. 5.7% vs. Financials with an avg. 2.1%. REITs have an excellent diversification potential and a lot of investors are underweight Real Estate. While interest rates are still very low and even negative in some countries, Real Estate is an excellent alternative to bonds and banks.

In this environment, a balanced portfolio should have at least 5% Real Estate exposure. And being underweight banks has been a great idea.

 

So before you are hunting in Emerging Markets, you can get some local developed Real Estate.

0 Comments

Sun

03

Jul

2016

What's in a name?

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

 

Lawrence A. Sautter, 3 July 2016

 

Summary

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, 1st July 2016 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.

Conclusion

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

0 Comments

Wed

29

Jun

2016

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.

 

 

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