Mike, Y2K is a very real liability. If you know its there, you might as well subtract that cost (the whole cost, including loss of customer goodwill if things blow up) from the valuation. When major airline A told me Y2K is going to cost $250 million, and a week later major airline B told me it will cost $30 million, I sold B immediately. But it is so hard to calculate. The best way I have found is to call competitors and ask what they're doing. Consider the most conservative estimate (i.e. the highest) the most realistic, and also assume that that number is too low. And don't assume its discounted in prices. It is not in my opinion. I read Wall Street analysts all the time and live in the world of insitutional investors, and believe me, everybody is talking about it but nobody knows what to do with it, so they just ignore it (kind of like stock option dilution - another future liability which is not difficult to quantify - and don't assume a bear market will solve that one, many companies are already feeling out investors about repricing their options. Directors who do that should be shot in my opinion.)
Cendant may be very interesting. It is just so hard to sort the wheat from the chaff in this one. Which numbers can you believe and which can't you believe. And are there investments with similar upside out there now without the uncertainty?
TOY may be a buy just because everybody hates it. And it is unquestionably the industry leader. If that is your standard, you also want to look at IBP, NUE, ACK, TRN and HPH. But looking at a firm which has squandered its franchise for 10 years makes me wonder if there is a franchise to begin with. Maybe you make your toy play on MAT if it drops another 20% in a panic.
I am in no hurry to get back into the market. I see no sign of a bottom, so I am spending my time patiently putting together a wish list of great companies which I have always wanted to own, but were nowhere near my price. If the market drops 25% further and some of them get there, I want to be ready to buy them immediately. It is a hard transformation for somebody who has resigned his analysis to $10 million market cap loser shoe companies at net-net valuations with the hope of a 30% gain. This is when I shift into Buffett mode. Some financial companies are starting to get interesting.
Jim |
