Hi Sergio -
First, I thought the Buffet challenge was to look at relative value candidate stocks (not necessarily using the exact Graham and/or Buffet metrics) but rather using the general selection criteria (ie GARP and/or market protected w/ moat) w/ a "value" twist. Value could be measured different ways (ie relative value, potential market growth, risk/reward, safety). I know my VZ pick is a bit out-side-the-box from the traditional Graham value measures but that is what makes the WEB challenge fun.
My thesis was to try to identify an undervalued, safe candidate stock w/ a positive risk/reward that would benefit from the exponential growth of the digital data boom. If you look at the population of companies that control the delivery pipes (both wired & wireless) many of these stocks have been acquired, merged and/or have morphed themselves into new competitors and as a result most all have negative TBV (look at the TBV for: T & CMCSA). Therefore, I excluded this value measure from my preview but mainly focused on (1) the potential growth of their markets, (2) look at the "best" undervalued companies in the sector using PE, (3) identify a management that has a proven record to grow revenues and maintain market share and (4) see if there are possible new revenue streams management can develop that adds significant future value.
Remember, the goal is to develop a 10 stock portfolio that in 36 months shows a better overall return than the WEB portfolio of 38 companies. When scanning the companies in his holdings, I noticed he really did not have any pure play to capitalize on this disruptive "digital data" technology which I feel is going to grow exponentially over this period and will/should make the world more productive.
VZ may not be the "best" candidate stock but IMO has the best risk/reward and will benefit from the growth in this dynamic growth market. The basic pricing models we now know will change. Just how I do not know. I do know that people will be paying a highrt % of their income for these services (similar to how land line revenue has morphed into mobile personal devise revenues). Products & services will be combined w/ premium content and/or service. For examples, Comcast recently added a security/home control internet based service allowing current subscribers to control their home mechanical systems (wifi based heat& air), security (networked wifi motion detector cameras) and other remote controlled systems using their mobile devises.
The key for me in the analysis was to find a large enough company that can capitalize on their technologies and management and has a "safe" risk reward profile.
When there was the transition from local operator assisted dispatched phone service to automated exchange national phone systems or from over the air TV to cable and/or local utility power grid to interstate power transmission many of the hard and fast Graham value rules were broken (like TBV as small systems/services were consolidated into mega systems). The survivors were stronger, more efficient and generated huge FCF from their customers typically by charging reoccurring monthly service fees.
Therefore, it is with this theme I am trying to identify one or more relative safe "value" companies that might directly benefit from this new disruptive technology. I do have one more traditional Graham stock (that is undervalued according to both their GN and EKS$) that will benefit from this theme. The company is a survivor and has been in business since 1851 but did change it's name in 1989. Yes, it one of my 10 10 holding too.
Perhaps others on this board can add value candidate stocks that fit w/ this theme. We should have at least one company in our 10 stocks that will benefit from the explosion of digital data.
FWIW, WEB recently added Viacom, Incorporated Class B ($75M) to his portfolio and it has a negative TBV @ -$6.81/share and a BV of $14.78/share. The PE is lower than VZ at 14.5 but VZ is 5x bigger in market cap. Therefore, VZ could benefit more (or lose more) from a change in the market. |
