Hi Pcyhuang -
My investing philosophy uses no specific formula or rules for picking investments but rather I follow a general value approach. I like to buy companies undervalued and find that my best buys occur when other people are dumping their shares (a contrarian investor). This is especially true when large institutional investors decide to throw in the towel and liquidate their large positions. This occurs as a result of some external event or bad decisions (or lack of decisions) by management.
In WON's case this occurred in late 2005 and early 2006 through several large sales spread out over several months. You have to go through the SEC forms during this period to calculate the total amount of shares sold and by whom. It was substantial, almost 20% of the outstanding shares by two separate shareholders.
As this article summarizes, new management was put into place in early 2006 and changes have been made moderngraham.com
From the article:"...
2. Does the business have a consistent operating history?
The company was founded in the 1970s and has grown over the last 30 years to be one of the largest radio networks. Financially, the company has provided a positive net income for over 10 straight years, has grown its earnings per share over the last 10 years, and recently began paying a dividend.
3. Does the business have favorable long-term prospects?
The last couple of years the company has faced an increase in competition with the advent of satellite radio and mp3 players. The industry has changed, and so must the company’s approach. During my research on the company, I discovered a past article from The Wall Street Journal. The article mentions the problems the company is facing, and highlights the approach new President and CEO Peter Kosann is taking. According to the article, “Mr. Kosann has cut around 100 jobs, recruited new executives and introduced initiatives to get Westwood onto new platforms, such as iPods and mobile phones. But his biggest plan is simply trying to improve the programming lineup.” We believe Mr. Kosann is right on target with his plan. Technology has improved – the company must adapt itself to the changes, but first and foremost must ensure its programming is the best it can be. Westwood One appears to be setting itself in position to move forward and resume its growth...."
A contrarian investor would see the negative quarterly revenue and earnings numbers as a positive event and the result of previous management's mistakes. It's the future revenue and earnings reports that are important and will verify if the new management is on the right track. I guess when there is insider buying then that would confirm management's new direction is working. However, generally when this occurs, the stock has already bounced.
The two things that make this an interesting speculation are (1) the 5.4% dividend while one waits for the turn around and (2) that the free flow cash flow from operations is still positive even with management's new capital investments and business changes.
Finally, I have learned that it is almost impossible to time an investment in "days" but rather it generally takes month's to establish an entry point especially with news driven events. Do you recall MRK and their VIOX issues. What exact day was their capitulation? The wise investor accumulated shares below $25 and continued buying (most definitely a contrarian move).
The key is to use these "rules" as initial guidelines, evaluate the source of the information and quantify the "event" that has caused the sell off. Then determine how it can be fixed and how much money and time it will take. Remember that new management is an easy fix that is controllable.
I do find it interesting to hear other people's investing methodology. It is always helpful to learn from other's previous successes and why & how they made their investment decisions.
EKS |
