Subject: LAMR, and by implication BFIT, WDRY. Also, miscellaneous ramblings, off-topic questions, and perhaps the fate of the free world.
Friday afternoon I phoned one of the analysts following LAMR. He was out of the office, but I spoke with his assistant, who sounded as though he might have been the one doing the actual work. I introduced myself as a small, private investor, and told him that Lamar Advertising seemed very overvalued to me, and I was wondering what he thought. He was kind enough to talk with me for a few minutes.
[Off topic question #1: Does anyone else ever call analysts? Do they generally speak with you, or do some of them only speak with clients of their firm? I'm curious if they are all accessible, or if this guy was unusually pleasant.]
He felt that LAMR was fairly valued. Not overvalued, not undervalued, but fairly valued. "But the P/E is 600," I pointed out. "The Price/book is 24; the Price/sales ratio is over 8."
"The analysts aren't looking at any of that," he answered. "Our consideration is that cash flow is high."
The company's price/cash flow is around 12. I used to be a value investor, when there were values to be had. It seems that a good value was a price/cash flow of around 6. So I don't know if LAMR's cash flow is that good. Still, it's only (only!) twice what a low number would be, whereas their other ratios are about twenty times what they should be.
When I was looking for value investments, (even before the market went crazy) it was hard to find a company that had good numbers on every ratio. Likewise, when looking for a short, it's hard to find one that has terrible numbers on every ratio. Thus, I had looked at things like P/E, P/book, PSR, debt, and profitability ratios, and decided that LAMR was a good short. (I actually never shorted it, only buying a few puts.) At the time, the price/cash flow was an almost reasonable 8.5, but I ignored it in light of the other ratios.
"The company has 90% debt!" I exclaimed. "That's debt to total assets," he answered patiently. "But their debt to cash flow isn't bad."
I have no idea if this is true, or even possible. I never would think to look at such a thing. Most companies have sales that are several times their debt, whereas this company only has sales of about 1/3 of its debt. But as far as comparing debt to cash flow, I don't know how this stock compares with others. I remain skeptical.
However, in today's market, we obviously need to consider not just the fundamental side, but also the psychological perception. Stocks don't rise because of valuation, but because supply is greater than demand. Where does this demand come from? I think buying, and increases in share price, can come from: (a) insider buying; (b) institutional buying; (c) individuals buying when recommended by their stockbroker; (d) individuals buying because of word-of-mouth from friends or Internet message boards; (e) manipulation.
In LAMR's case, we know the insiders have been selling, so (a) is out. I don't think manipulation is a problem with big companies, so I'd throw out (e).
What about (b)? I mentioned the rumor that CCU had been interested in LAMR, but had instead gone for another company. He said that while there was always a chance that someone would buy LAMR, it was more likely that they would consider to be a consolidator themselves. He said they'd probably buy Martin Media, and pick up the unwanted pieces from the CCU takeover (or pieces they were forced to divest). I'm tempted to thus say that there isn't a lot of institutional investment going on.
We can also rule out (d), because LAMR is never mentioned by anyone as a long, except maybe once or twice when it popped up on a momentum screen. There are no threads discussing the company anywhere.
That leaves (c), and I conclude that individuals are buying LAMR because their brokers have told them to. Eventually, the brokers will decide to move their clients elsewhere, but it's impossible to predict when.
[Off topic question #2: When a broker upgrades a stock, I assume they have already invested all they want for their own account, and maybe for their favorite clients, and then they let their small clients and non-clients boost the price. What motivates a broker to downgrade a stock? I understand, in fact, that there are many more upgrades than downgrades, which makes sense. But if a broker decides a stock is fairly valued, and gets his clients out, what is his motivation for then announcing to the world that the stock is no longer a buy, but it now a hold?]
The bottom line is that LAMR isn't a short, because it's followed by seven analysts, who think that it's a buy or at least fairly valued, based on cash flow.
What other companies have been cited for their cash flow? BFIT and WDRY come to mind.
Is there any way for a short-seller to tell when a company thus supported by several analysts might be downgraded to the extent that the price will drop? LAMR seems to be an unsafe short, because its business has been around forever, and the model seems to be proven. Presumably, they think that someday the company will stop buying other billboard companies, and the cash can then be used to pay off their 90% debt, and then pay big dividends. The fact that it might take ten years for that to happen means nothing to them.
However, BFIT and WDRY seem to be more vulnerable. Both Asensio and The Motley Fool questioned WDRY's cash flow numbers, which is probably the only thing that it has going for it. This will make the analysts take note, and double-check their calculations (if they even made any, rather than relying on the company). Perhaps they'll even want to take a look at WDRY's books. If they also find trouble with cash flow, which was their main reason for investing in the company, they will pull out completely, and the stock will plunge!
BFIT's cash flow hasn't been questioned, but the legality of their 3-year contracts have been questioned in some states. Other practices has also been questioned: the tendency of the company to damage people's credit (whether through poor management or maliciously); rudeness and sexual harassment; and "bait and switch" type marketing. Many companies have disgruntled customers that hate them. Many people hate AOL because of busy signals, pop-up ads, and other issues. But you don't hear AOL accused of ruining people's credit, rudeness, sexual harassment, etc. When dozens of people begin contributing such complaints to an anti-BFIT website, it's time to pay attention. If these allegations are true (and the large number of complaints gives more credibility), it's only a matter of time before they'll lose new business, will have contracts invalidated in some states, will be hit by huge fines by some attorneys general, etc. And then, the cash flow won't be quite as impressive.
I really think that the best shorts aren't based strictly on valuation, but rather on some actual or perceived impropriety. |
