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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Micah Lance who wrote (58082)	10/1/2016 3:07:08 PM
From: Graham Osborn	Respond to of 78753

Suppose I gave you a choice to acquire the option to take possession of the assets of one of the following two individuals in 10 years: 1) a person who earns 100k per year and saves 50k per year 2) a person who earns 200k per year and saves 20k per year According to your argument on earning power, you would pick the 2nd person. This is a very different concept of valuation than that advocated by Graham, and not one I go by (even in biotech). Biotech, like person (2), is quite effective at frittering away shareholder wealth particularly through 2 mechanisms: overpriced acquisitions and overpriced buybacks. GILD has done both. They took a big hit to tang book back in 2011 with the Pharmasset acquisition. Fine - more cash flows to create future shareholder value, right? Well, they made back some of their tangible book, but then started an aggressive buyback program. They've bought back somewhere around 22B worth of shares since 2008. No wonder their tang book has gone nowhere. Now, buybacks obviously make sense in some cases. Structurally, these are when a decent chunk of the shares outstanding can be bought back with a relatively small chunk of the surplus account. Sound unlikely? It is - which is why >90% of buybacks end up wasting long-term shareholder capital. The interesting thing is while the buybacks have stalled out all but maybe 5B in tang book appreciation since 2008, the share count has only been reduced from ~1.9 to 1.5B. You do the math. GOOGL does buybacks at the smallest scale it can, and as a result they've accumulated a huge amount of tangible shareholder wealth over the years. GILD's management has done well for themselves no doubt, and they have plenty of cash along with plenty of debt. But the shareholders have done less well. Sooner or later the stock will probably reflect this.