Company of the Week – McClatchy Company (MNI)

The company of the week this week is McClatchy Company (MNI), a newspaper publisher.  The company owns and publishes 32 newspapers in Minnesota, California, the Carolinas, and the Northwest (Alaska and Washington).  As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for the Business & Management Review.  We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.

Business & Management Review

1.  Is the business simple and understandable?

     The newspaper industry is very simple and understandable.  Events happen in the world, whether local, national, or international, and must be reported to individuals.  We all (well, most of us at least) are interested in what happens in our surroundings.  McClatchy Company and other newspapers focus on reporting that news and rely on advertising revenues.

2.  Does the business have a consistent operating history?

     McClatchy Company has been publishing newspapers since 1857.  Over the years the company has acquired numerous newspapers and today is the second largest newspaper company in the United States, in terms of circulation.  The company has never deviated significantly from this operating focus.

3.  Does the business have favorable long-term prospects?

     The newspaper industry is currently in a state of renewal and change.  With the growth of the internet, the need for news delivered daily by paper has diminished.  It may seem that newspaper companies have reached the downslide of the business life-cycle.  However, the management of McClatchy has done an excellent job of transitioning to the internet age, having created Nando.net (now McClatchy Interactive), in 1994.  Over time, this online presence will likely lead to continued prosperity and growth by McClatchy Company.

4.  Is management rational?

     The management of McClatchy is very rational, and open to change – as evidenced by their focus on growing their online presence and acceptance that the future is the internet, and newspapers are the past.

5.  Is management candid with its shareholders?

     McClatchy Company has an extensive investor relations section on their website, which can be found at:  http://www.mcclatchy.com/.

6.  Does management resist the institutional imperative?

     Though most newspaper companies have been following the same approach by moving the bulk of their content online, we believe that this is not evidence that management is following the institutional imperative.  Rather, the management is realistic, willing to change, and realizes that they must adopt very similar approaches as their competitors in order to continue to operate and have favorable long-term prospects.
 

Financial and Value Review

This company appears to be very stable financially.  The company has had a positive net income for over 10 straight years, has paid dividends for over 10 years, and has increased their earnings per share by more than one-third over the last 10 years.  Following Graham’s approach, this stock appears suitable for the defensive intelligent investor.

We believe this company is also significantly undervalued.  The company has a low PE ratio and a low PB ratio.  In addition, the company has a high return on invested capital (calculated by using Buffett’s Owner Earnings and Contributed Capital).  We believe McClatchy Company has potential to reach $62.54 within the next few years.

Neither of us held a position in McClatchy Company at the time of publication.  Also, please read our disclaimer.
 

Please discuss this article in our forums.  Your comments help us mold our future articles.

The Market this Week

This week the market posted significant gains on tame inflation and lower oil prices. The DJIA posted a gain of 2.6%, NASDAQ gained 5.2%, and the S&P gained 2.8%. Major individual gains on the week included Altria Group (MO), which rose 3.9% due to court rulings that investors view will give the company the needed strength to fuel its planned breakup. Also, Microsoft (MSFT) posted a 4.3% gain on the week due to plans to buy back shares under a previously announced plan (Microsoft was our stock of the week).

On Tuesday, the Producers Price Index (PPI) fell 0.3% in July, which was below expectations of a 0.2% rise. Even when factoring in energy and food prices the PPI still only managed a minimal 0.1% gain. These numbers where music to investors ears as it eased fears of overheating of the economy. Further, it re-enforced the idea that the Federal Reserve’s pause in rising interest rates will continue.

Oil was down for the week on news that the Israel-Lebanon conflict had at least temporarily ended on a cease-fire agreement. Crude was down 4.32% or $3.21 a barrel. Also, BP announced that partial use of their Alaskan pipeline was back online, which helped the decline in oil prices.

Stocks that declined this week included Wall Mart which posted its first quarterly profit decline in a decade. Dell fell 2.9% on the week on news of disappointing earnings and regulatory investigation of accounting practices.

As we make our way closer towards the mid-term elections, we can expect volatility as we have seen in the past few months. Continue to select your stocks according to Benjamin Graham’s policy of value investing looking for undervalued securities that meet your individual investing criteria. Have a productive and profitable week!

-Ben and Jon

ModernGraham.com

Value Investing Weekly – Issue 2

ValueInvesting Weekly
Issue 2
August 17, 2006

We discussed last week about general ideas in value investing, Ben Graham, Warren Buffett, and the psychology of investing. This week we are going to discuss an example of personal experience regarding speculating and the downfalls of doing so.

My personal experience included a wonderful, well-known stock named Sirius Satellite Radio (SIRI). Allow me to explain how I became involved in this security and the reasons for doing so. In the winter of 2004, I began trading SIRI on a “tip” from a relative, and throughout the course of a few months, I netted a healthy return on purely trading on volume. I felt that it was easy enough to buy the stock in the morning watch it throughout the day, and maybe hold it overnight before getting out for a profit. I became confident of this strategy and before I had ever taken a course was convinced of technical analysis.

Following the signing of big profile broadcasters, most notably Howard Stern, I felt that Sirius was ripe to explode purely because of Stern’s listening base and the potential increase of subscribers. Further, I thought of satellite radio as this generation’s cable television. I personally subscribe to Sirius, and actually really enjoy the programming.  I purchased shares in the fall of 2005 before Stern’s debut in January on Sirius. Instead of following my previous strategy, I decided to go long on Sirius because of my interpretation of expected growth. Grant you at the time, and currently, Sirius was loosing millions of dollars each quarter in trying to acquire subscribers and spur growth of the company. They hired a top notch CEO from Viacom, Mel Karmazin, who had a proven record of accomplishment in terrestrial radio over the years. Everything in my eyes looked great and I was merely waiting for the profits to come rolling in.

Well they did not; I purchased Sirius for a price of $7.12/share, with the closing price of Wednesday (8-16-06) at $3.65/share. I have incurred a net loss of 48.95% over the course of roughly a year and a half. So the questions are “Jon why did you ever buy this stock in the first place, you should have just looked at the financial statements and seen what was going on?”, and “Why did you stay in the position for so long?”

To answer the first question, I fell under the spell of what I call the “speculation potion” by that I mean you place rose colored glasses on and view the potential of a company not seeing the disaster in the waiting. I was convinced that if I didn’t get in on this stock, I would regret it just as I did Chicago Mercantile Exchange (CME), Google (GOOG), and countless others. What I realize now that I didn’t then is that in investing you must develop a strategy and stay the course. Further, as we spoke in last week’s issue, you become an owner of the company, not an owner of the stock. In my mind at the time ownership ended on the screen of my Ameritrade account.

The second question regarded why I didn’t and still haven’t exited my position. This issue is purely psychological as I was adamantly against having a loss and decided to hold the stock until it recovered the losses. I am coming to terms with my poor investment decision and am ready to exit my position. It is similar to Alcoholic’s Anonymous where everyone stands and states “Hi I am_____ and I’m an alcoholic”, well I am standing up and stating that I am a former speculator and am seeking treatment. Just for the record, I by no means am comparing the two; I am merely using this example for comic relief.

Where Sirius will go in the future is beyond me or anyone else, currently their financial position is worse then ever. The ROE for fiscal year 2005 was (265)mil, and its Q2Y2006 EPS where (.87) down from (.83) the quarter prior. Every aspect of Graham’s investing strategies screams to stay away from this stock. Although sales are increasing extraordinary, because of subscriber growth (see article below), expenses rise linearly as well.

Ending, I hope that you all learn something from my painful lesson, do research, think logically, don’t expect to become rich overnight, and never trust other’s judgment and research.

-Jon

ModernGraham.com

WSJ article on Sirius 
Reuters article on Sirius
Discuss this article in our forums. 

Company of the Week – Microsoft (MSFT)

This week I thought I’d use a little bit different approach to the company of the week.  Specifically, I wanted to bring Warren Buffett’s approach and strategy into play a little more.  So, using Robert Hagstrom’s The Warren Buffett Way, I have a list of Business and Management Tenets to consider with the company.  Hagstrom also mentions Financial and Value Tenets, but these are in essence the same as Benjamin Graham’s teachings.

Business & Management Review

1.  Is the business simple and understandable?

I believe this is a question that is dependent upon each investor’s understanding of the business.  For Warren Buffett, Microsoft probably would not pass this test, as it is a technology company and he has traditionally stayed away from technology for this very reason.  However, I feel that I understand Microsoft’s business plan, strategy, and believe it to be simple enough to be worthy of my further research.

2.  Does the business have a consistent operating history?

Microsoft has now been in business for 30 years, and has been an industry leader for over 15.  The company has not changed its approach significantly over time, but has gradually adopted new strategies and opportunities.  Overall, I believe the company has had a very consistent operating history.

3.  Does the business have favorable long-term prospects?

Long-term, I believe Microsoft will continue to be an industry leader.  Though competition is growing from other operating systems for computer servers, it is hard to imagine a world where the majority of computers do not run a version of Microsoft Windows.  The company is also pursuing other endeavors, in attempts to compete with Apple Computers (AAPL) and Google Inc (GOOG).

4.  Is management rational?

Recently, Chairman and Chief Software Architect Bill Gates announced that he will be stepping down and taking a reduced role with the company.  Current Chief Executive Officer Steve Ballmer will be increasing his control over the management of the company.  While on the surface this appears to be a change that could cause uncertainty over the future of the management of Microsoft, I believe that the approach the company is using to ease the transition will be beneficial long-term.  It is apparent that the company has been rationally preparing for this change of leadership for some time now, and Steve Ballmer’s history with the company and friendship with Bill Gates will lead to a smooth change.  You can read more about this transition in this Wall Street Journal article:  http://online.wsj.com/article/SB115405072580419987.html.

5.  Is management candid with its shareholders?

Microsoft has a very extensive Investor Relations page, located at http://www.microsoft.com/msft/default.mspx.

6.  Does management resist the institutional imperative?

I believe that the company does resist the institutional imperative.  Essentially, Buffett describes this phenomenon as when a company’s management tends to mimic the behaviors of other managers.  Microsoft in the past has tended to create its own approach to different situations, and clearly does not resist change – as evidenced by their recent announcement to enter the MP3 market to compete with Apple’s iPod.

Financial and Value Review

Microsoft has had a good financial history.  The company has had a positive net income for over 10 years, has a good current ratio, has increased EPS from 10 years ago by over 1/3, and currently pays a dividend.  Microsoft may be a suitable company for enterprising intelligent investors, but not defensive investors. 

Upon my review of the company, I have found that the company seems to be significantly undervalued, and believe there is strong potential for the company to reach $37/share within the next few years.

Jon currently holds a position in Microsoft (MSFT).  Also, please read our disclaimer.

The Market this Week

This week the market was tested by various factors that created an overall downturn. All major indices saw a decline of roughly 1% with the S&P 500 showing the lowest loss of all with a .5% loss for the week.

There were major factors that tested the market this week including the terrorist threat in Europe, rising energy costs, and continued fears of inflation. The latter two have been impacting the market for quite some time, but the former had an interesting effect on the market. The United States equity markets have become very resilient to terrorist threats and this week’s events did not change that trend. All indices produced positive gains on Thursday following the announcement in the UK that terrorist suspects had been apprehended in an apparent aviation planned attack. These events, however, had adverse effects on the airline sector still trying to recover.

Energy costs actually declined following the events in Europe as investors anticipated a decrease in air travel. The developments in the Alaskan oil fields earlier in the week, however, created turbulence that shot oil prices higher on fears of deceased supply and higher costs. British Petrolium (BP) is unsure when the pipelines will be back functioning fully, so we will have to wait and see what effect this has on oil prices, and the overall market long term.

Overall, it seems that we are stuck in the middle of fears of a slowing economy and rising inflation, but if corporate profits maintain their overall health there are still opportunities. Again, though, as value investors we are concerned with weekly events, but it does not affect our long term investing goals. We cannot be blind to current events, nor ignore them as we must continue to be as Ben Graham calls “Intelligent Investors”. Have a productive and profitable week!

-Ben and Jon

ModernGraham.com

Value Investing Weekly – Issue 1

How relevant is value investing in today’s markets? Is there still legitimacy in the theories and practice of such investing? Welcome to the inaugural issue of ValueInvesting Weekly, where we will explore all of these questions, and generate useful ideas that will be beneficial to the investor in the 21st century. These weekly letters will be constructed on the foundation of Benjamin Graham and his legacy of value investing. We look forward to opening an informed and educational dialogue that will benefit all. We encourage you to participate and ask any questions that might arise, or offer any corrections that we overlooked.

ValueInvesting Weekly
Volume 1

As you flip through the channels on cable television, or read the financial pages of newspapers, it is easy to get caught up in the hype that is investing. “Stock ‘A’ surged from 8 to 13 today”, only to be followed by, “Bear markets are going to bring Wall Street to its knees!”. Where does one find the calm within the storm? This is where the concept of value investing creates stability in the investors mind and allows them to think clearly and accurately. Taking a step back first though, allow us to explain and define value investing in simple terms.

Value investing is simply looking for securities that are undervalued for whatever reason, and are currently being traded at a discount in comparison to its true book value. By book value we mean the value of the company as a whole: buildings, inventories, accounts receivable, etc. Finding these securities is not something that is as easy as turning on Cramer on CNBC and having him inform you of what stocks are selling at a discount. Rather, it requires analysis to determine such intrinsic value. Now there are simple ways to get ideas of which stocks might fit into these criteria, such as looking at a company’s working capital. Working capital is the liquid assets of a company, which can be drawn upon by going to the SEC’s webpage (EDGAR) and downloading filings of financial reports and looking for liquid assets. This essentially describes the analytical side of value investing briefly and without digging deep into the theories, but we will address these techniques in later volumes.

Taking value investing into a more psychological setting, let’s consider the greatest investor, Warren Buffett. Warren Buffett was taught by Ben Graham and learned everything he knows of investing from Graham. Buffett learned that investing is not speculating in a company, but becoming an owner with a vested interest. Speculation is looking at a company and off of a hot tip putting hard earned money into a stock – key word here is stock. Investing is intelligently placing your money into a company that you have done research on and are interested in becoming an owner – key word owner. Do you see the difference between the two? Investing is ownership of a company, and speculation is ownership of stock. Again, we are speaking psychologically here, as the two are the same in the fact that you purchase securities whether you are speculating or investing. Buffett never thought of himself as a speculator, but invested in companies that made sense to him because he now owned a piece of that company. Consider the following example: would you want to buy a laundry business that had four competitors on the same street within one mile just because the current owner assures you his business is through the roof? Of course not, but would you want to buy one that is located in the heart of a major metropolitan neighborhood with no other Laundromats in sight? The same thought process can be implemented into investing. Buying a stock that is hyped up without doing any research is as foolish as buying a Laundromat on the current owner’s assurance that it’s a good business. This is why Warren Buffett never did two things: he never bought a stock without researching it, and never bought a stock that he could not understand the business model of the underlying company.

Next week’s issue will begin to look into the theories of value investing deeper, and produce useful ideas of how to implement these into your personal investing.  

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