Category Archives: stocks

Seeking The Asian Sanborn Map

Buffett’s Investment In Sanborn Map Warren Buffett wrote at length about his investment in Sanborn Map, a publisher of maps of U.S. cities and towns, in the Buffett Partnership’s 1961 letter . Sanborn Map represented 25% and 35% of assets for the Buffett Partnership in 1958 and 1959 respectively. Sanborn Map was referred to as a company which “published minutely detailed maps of power lines, water mains, driveways, building engineering, roof composition, and emergency stairwells for all the cities of the United States, maps that were mainly bought by insurance companies,” in Alice Schroeder’s The Snowball. According to Roger Lowenstein’s book “Buffett: The Making of an American Capitalist,” Buffett earned “roughly a 50 percent profit” on the investment in Sanborn Map. Going back to the Buffett Partnership’s 1961 letter, Warren Buffett shared how he exited the investment at a profit by exercising influence by virtue of his significant shareholdings: Our holdings (including associates) were increased through open market purchases to about 24,000 shares and the total represented by the three groups increased to 46,000 shares. We hoped to separate the two businesses, realize the fair value of the investment portfolio and work to re-establish the earning power of the map business…There was considerable opposition on the Board to change of any type, particularly when initiated by an outsider, although management was in complete accord with our plan and a similar plan had been recommended by Booz, Allen & Hamilton (Management Experts). To avoid a proxy fight (which very probably would not have been forthcoming and which we would have been certain of winning) and to avoid time delay with a large portion of Sanborn’s money tied up in blue-chip stocks which I didn’t care for at current prices, a plan was evolved taking out all stockholders at fair value who wanted out. The SEC ruled favorably on the fairness of the plan. About 72% of the Sanborn stock, involving 50% of the 1,600 stockholders, was exchanged for portfolio securities at fair value. The map business was left with over $l,25 million in government and municipal bonds as a reserve fund, and a potential corporate capital gains tax of over $1 million was eliminated. The remaining stockholders were left with a slightly improved asset value, substantially higher earnings per share, and an increased dividend rate. Sanborn still exists today and has transformed itself into a provider of “a full suite of photogrammetric mapping and geographic information system (NYSE: GIS ) services,” according to its corporate website . Sanborn Map ‘s Deep Value And Wide Moat In many ways, Sanborn Map represented a classic deep value cigar-butt investment that Benjamin Graham would have been proud of, although the company had elements of a wide moat (albeit diminishing) investment as well. In 1958, when Buffett first initiated a position in Sanborn Map, the stock was trading for $45 per share, compared with the company’s investment portfolio of stocks and bonds valued at $65 per share. This implied that the market was valuing Sanborn Map’s map publishing business at -$20 per share, suggesting that investors vested at current prices were getting the map business for free. I have written extensively about deep value bargains net of cash and investments in my articles “How Benjamin Graham Will Possibly Invest In A World Without Net-Nets,” “Seeking Value In Sum-Of-The-Parts Discounts” and “A Case Study On Large-Cap Value Investing” published here , here and here . Sanborn Map was also a wide-moat company in various aspects. Firstly, Sanborn Map dominated its market, as evidenced by Buffett’s choice of words in his letter “For seventy-five years the business operated in a more or less monopolistic manner.” Secondly, Sanborn Map enjoyed a high degree of recurring revenues. Maps required annual revisions (via pasteovers), for which Sanborn Map will charge its customer around $100 every year. Thirdly, customer demand was fairly predictable (insurance companies needed maps to assess risk and underwrite policies) and Sanborn Map did not need to invest heavily in marketing to retain its customers. Sanborn Map’s moat eventually narrowed as its key clients, the insurance companies merged, which meant less business and more powerful customers. Furthermore, “a competitive method of under-writing known as “carding” made inroads on Sanborn’s business and after-tax profits of the map business fell from an average annual level of over $500,000 in the late 1930’s to under $100,000 in 1958 and 1959″ according to Buffett. Asia’s Sanborn Map Japan-listed OYO Corporation (9755 JP) is potentially Asia’s Sanborn Map. OYO Corporation call itself the “Doctor to the Earth” and its corporate profile on the Japan Infrastructure Development Institute website reads as follows: OYO Corporation was founded in 1957 as a general consultant firm specializing in study of the earth by Dr. Fukuda and Dr. Suyama. OYO brings together geology, geophysics and geotechnical engineering to provide a wide range of services in the four fields of construction, resources, disaster prevention and environment. In addition to these technical services, OYO is continually expanding its development of measuring instruments based on our own abundant experience in the field.To date OYO has grown up to the largest specialist organization in Japan in geotechnical field. OYO has about 1,100 staffs, more than two-thirds of them are university graduates in engineering and scientific fields. Besides some 60 numbers of domestic branch offices, we have overseas branches and subsidiary companies in U.S.A., U.K.,and J.V. in France. OYO has devoted itself to research and development in an effort toward “The Creation of Geoengineering.” Our greatest desire is to apply our achievements and to provide services of higher quality to our clients and customers throughout the world. OYO operates in three key business segments: Engineering, Consultation and Instruments. The Engineering business provides ground structure information for the major motorway constructions in Japan; assists with post-disaster management by conducting investigations to recommend relevant repair work; conducts air, land and sea-born investigations for natural resource explorations; and does site investigation for pollution remediation projects. OYO’s Consultation segment involves itself in the site assessment and determination process of nearly all of Japan’s power plants; provides earthquake damage estimation to city planners; and conducts geotechnical investigations and subsidence forecasts for airports built on water. Its Instruments business develops measuring & monitoring instruments used for a wide range of purposes including monitoring the condition and movement of polluted underground water, seismographs for exploration of natural resources under the sea bottom, and geotechnical investigations from: shallow soft soil to deep hard rock structures on the ground and in the sea. OYO’s net cash and short-term investments of JPY 24.0 billion as of December 2015 currently represents approximately 77% of OYO’s current market capitalization, which values the company’s operating business at a mere 3 times trailing EV/EBIT. While OYO is not exactly as great a bargain as Sanborn Map, the stock is still the cheapest of listed companies providing surveying and mapping services. As a bonus for my subscribers of my premium research service , they will get access to: 1) a list of publicly-traded companies providing surveying and mapping services; and 2) a list of stocks with short-term investments exceeding their market capitalizations. Asia/U.S. Deep-Value Wide-Moat Stocks Premium Research Subscribers to my Asia/U.S. Deep-Value Wide-Moat Stocks exclusive research service get full access to the list of deep-value & wide moat investment candidates and value traps, including “Magic Formula” stocks, wide moat compounders, hidden champions, high quality businesses, net-nets, net cash stocks, low P/B stocks and sum-of-the-parts discounts. The potential investment candidates I profiled for my subscribers in May 2016 include: (1) a U.S.-listed market leader in a niche consumer lifestyle space which is trading at 0.80 times P/NCAV and 0.70 times P/B, but remains debt-free and profitable; (2) a U.S.-listed Net Operating Losses-rich deep value play valued by the market at 2.6 times EV/EBITDA net of the present value of its NOLs; (3) an Asian-listed manufacturer of wireless communication products which is the market leader in its home market and the first to export such products to the U.S.; it is a net-net trading at 0.75 times P/NCAV with net cash equivalent to its market capitalization; (4) a U.S.-listed Magic Formula stock trading at 3 times trailing EV/EBIT and Acquirer’s Multiple, sporting a 10% dividend yield net of withholding tax; (5) a U.S.-listed Munger Cannibal trading at 7 times trailing EV/EBIT and Acquirer’s Multiple; (6) an Asian-listed company which is a global leader in a certain medical device niche trading at 3.5 times trailing EV/EBIT and 3.5 times Acquirer’s Multiple, versus a trailing ROIC of 27%. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Declining Housing Starts Equals Big Profits

Since peaking at 2,111 on April 20, 2016, the S&P 500 has rolled over. The broad market index now sits at 2,050 – nearly 3% lower in just a couple of weeks. The S&P 500 chart below has a distinctly negative look to it. Click to enlarge As the S&P 500 peaked, the moving average convergence divergence (MACD) momentum indicator showed significant negative divergence. This is a strong warning sign that the current rally is exhibiting exhaustion and could be vulnerable to a reversal. The S&P is well-below its 9-day exponential moving average (EMA) of 2,068, which means the market could test its 50-day moving average at 2,035. But given recent negative readings on a host of economic reports here and around the globe, there’s a real possibility that a much deeper move is in the cards. And should the market pass through the 2,035 level, there is no real support until roughly 1,980. That’s another 3.4% from current levels. For this reason, traders should use any strength in the market to unload long positions, while also adding short positions. One possible short position is the S&P Homebuilders Fund (NYSE: XHB ) You see, the homebuilding sector is vulnerable here to a sharp pullback. Below is a chart of XHB… Click to enlarge This chart looks eerily similar to the S&P 500 chart. It shows that XHB has also fallen below its 9-day EMA, while also sitting at its 50-day moving average. This means the $34 level effectively becomes XHB’s new level of resistance. This provides an excellent opportunity to short XHB. With the close proximity to the new resistance level at $34, we can quickly exit the position if resistance with a small loss if resistance breaks. On the other hand, if the nine-day resistance holds, XHB should fall to one of the lower support lines at about $31.20 or as low as $30.20. Now, we hold that the $30.20 price target best aligns with our expectation of a moderate pullback (~3.4%) in the S&P 500. This make $30.20 a reasonable target over the next few weeks. XHB closed at $33.29 today. Now, by taking a short position at this level, we’re risking $0.54 per share if the stock moves higher. Conversely, we stand to pocket $3.00 per share if we’re right and XHB moves lower. That gives us a good risk/reward setup. But we can mitigate our risk even further by purchasing put options on XHB instead of shorting the stock. Here’s how… Let’s assume you’d typically short 500 shares of a recommended stock. At today’s price of $33.29, you’d pony up about $16,650 to short the shares. Now, most investors are willing to absorb a 10% drawdown on shorted stocks should the stock run the wrong direction. This would limit your loss to $1,665 before you exited the position. But, because $1,665 is the most you’re willing to risk, you could instead use the $1,650 to buy the puts. But let’s reduce our risk even further by cutting our maximum loss in half… The XHB June $34 puts closed Thursday at $1.15. With $825, you can purchase seven put options on XHB. Since each option contract covers 100 shares, that gives you control of 700 shares of XHB – versus the 500 shares you would have shorted with the $16,665. You’ve reduced the risk on this trade, while also increasing the potential reward by controlling more shares. This is the right way to speculate with puts. Of course, if we’re wrong on this trade, you could lose 100% of the money you used to buy the puts. But it’s far better to lose 100% of $825 than to lose 10% of $16,665. And if we’re right on this trade, you can make more money by owning seven puts than by shorting 500 shares. So, by purchasing puts instead of shorting the shares, we reduce our risk and increase our potential reward. It makes for a more intelligent trade for managing risk/reward. Here’s the trade in a nutshell… Buy the XHB June $34 put options (XHB160610P0003400) up to $1.25. This option closed yesterday at $1.15 when XHB closed around $33.29 per share. You should be able to get into this trade as long as XHB is trading above $33.30 per share by the time you enter your order. If the stock falls and the option moves out of range, or if the option spikes higher as a result of this recommendation, give the trade a day or two to come back into range. Going forward, if XHB falls to our downside target at $30.20 per share, the June $34 puts will be worth at least $3. That’s a 161% gain on the trade. Once the options have double in price, sell half the position. This will eliminate any chance of a losing trade. Then focus on maximizing profits if XHB moves lower. One caveat…. It’s important to remember this is a speculative trade. We’re buying short-term options in anticipation of a stock market pullback. There’s no guarantee the market will fall or that XHB will decline even if the broader market falls. You can lose everything you put into this trade. So, please, limit your risk to less than half of what you would normally be willing to lose on the stock. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Obama Fostering Uncertainty Over Smartphone Encryption Issue

The contentious issue over whether the U.S. government should be able to force tech companies to weaken security on their smartphones and software apps so that law enforcement agencies can access private data isn’t likely to be resolved soon. But it could be. All it would take is for President Barack Obama to make a statement supporting strong encryption on tech devices and Internet services. Obama holds himself up as a tech-savvy president, but his lack of leadership on the encryption issue has prolonged the dispute between the federal government and tech firms, tech groups and privacy advocates say. “The White House should be leading on this issue,” said Cindy Cohn, executive director of the Electronic Frontier Foundation (EFF). “President Obama is trying to be the best tech president ever. He’s got really good technical consultants, and the idea that he wouldn’t listen to them is shocking.” The tech industry is united in its call to keep encryption strong, saying that weakening software security or creating back doors for authorities to bypass privacy protections opens the door for hackers and criminals. “The math doesn’t change,” Cohn said. “The math is the problem that the FBI has, which is: They cannot build a back door that only they can use. It doesn’t matter which technical expert you bring to bear on it. … This isn’t controversial in the tech community.” The FBI has sought court orders in two criminal cases to try to compel Apple ( AAPL ) to unlock password-protected iPhones. In both cases, the FBI ultimately backed down when it found other ways to access data on the devices. One involved paying a third party to hack the phone, and the other was resolved when the phone’s owner provided the password. Encryption Petition Quickly Surpasses 100,000 Signatures Last September, EFF, Access Now, and a coalition of nonprofit and industry groups launched a public petition calling on President Obama to defend strong encryption and oppose back doors. They used the We The People API, Obama’s preferred petition tool, and quickly surpassed 100,000 signatures. Despite the White House’s pledge to respond to petitions with 100,000 signatures within 60 days, it has remained quiet and is now four months overdue in its response. But if Obama doesn’t support strong encryption for businesses and consumers, perhaps the next president will. On Wednesday, 13 U.S. tech industry groups representing companies such as Apple, Amazon.com ( AMZN ), Facebook ( FB ) and Uber Technologies urged the two presumptive major party presidential nominees to support strong commercial encryption. The encryption stance is among a list of tech industry requests made in an open letter to Democrat Hillary Clinton and Republican Donald Trump. The trade groups asked the candidates to strengthen cybersecurity and encourage other governments to do the same. The letter urged the candidates to recognize the importance of encryption as a critical security tool and to advance policies that enhance data privacy. Groups signing the letter included the Consumer Technology Association, the Business Software Alliance, the Internet Association and the Semiconductor Industry Association. The encryption issue made headlines earlier this year when the FBI secured a federal court order to force Apple to unlock a smartphone belonging to deceased San Bernardino, Calif., shooter Syed Farook. Apple fought the order, saying it would set a dangerous precedent. To help educate the public, Apple CEO Tim Cook stepped up to become the face of consumer data security. He gave high-profile media interviews and made public statements about the importance of strong encryption. Apple’s fight to protect its encryption is about securing the data on all iPhones in use from bad guys, Cook said. That means securing customers’ data, including financial and health information, confidential business documents, private communications and photos. The FBI might have retreated in the cases of the San Bernardino terrorist and a Brooklyn drug dealer, but it is likely to pursue similar cases against tech companies in the future. Unless the White House tells it not to. Meanwhile, law enforcement supporters on Capitol Hill are crafting legislation that could force tech companies to comply with all law enforcement demands for customer data. Sens. Richard Burr, R-N.C., and Dianne Feinstein, D-Calif., have proposed the “Compliance With Court Orders Act of 2016.” As drafted, the legislation would require any individual or company to comply with any U.S. court order and hand over data to authorities, including data that is encrypted. The bill has been roundly criticized by civil liberties and digital privacy groups. No Encryption Bill Expected Until After Elections “I don’t think anything will happen in this session of Congress,” said Gary Shapiro, president of the the Consumer Technology Association. Political gridlock, especially during an election year, will ensure that no encryption bill is passed in Congress, he said. It is more likely that a court case will work its way up to the Supreme Court over the next couple of years, he said. Even if the FBI gets what it wants from the courts or Congress, the law would only be enforceable in the U.S. Foreign companies and their encrypted products would be unaffected, putting U.S. tech firms at a competitive disadvantage, Shapiro said. Public support for encryption is growing, especially in light of major data breaches at companies like Anthem ( ANTM ), eBay ( EBAY ), Home Depot ( HD ), JPMorgan Chase ( JPM ) and Target ( TGT ), as well as at government agencies, Cohn said. “We don’t live in a world where computer security is abstract and the damages and problems it causes for people are something that’s theoretical anymore,” Cohn said. “I think it strikes a lot of people as absurd that the government is engaging in trying to attack our security and undermine it and convince companies to give less of it when it should be their job to promote it.” Weakening security on mobile devices and software, says Shapiro, would destroy the confidence people have in businesses to keep their private data secure.