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

To: James Clarke who wrote (6540)	4/2/1999 11:35:00 AM
From: Michael Burry	1 Recommendation Read Replies (1) \| Respond to of 78655

OK, so I never went to biz school, but I'll confess I've studied finance texts and done mini-cases to get up to speed a bit. Where all of what I studied fits in to a successful investment strategy, I don't know. It seems trial-and-error and Graham and Buffett have been more helpful. Looking at Journal Register (JRC) is a good example. So there's this M&M proposition that debt/equity ratio doesn't affect firm value, and that if it does it's mainly because of taxes, and that because of this stable growth firms with minimal tax loss reserves should take on lots of debt to decrease their weighted average cost of capital, constrained by the increased return required by investors for the increased risk of bankruptcy. That's way way oversimplified to the point of having some errors, I know. Still it tells maybe that JRC maybe is doing the right thing with all its debt though. So JRC has all this debt, all these acquisitions, a big A&D expense, free cash flow of $66M up steadily from $53M 2 years ago, with annual interest payments (tax-deductible of course) of $45M last year, down from a little over $50M a few years ago. To me, the cash flow doesn't offset the interest expense enough to catch my eye, especially given the market cap, but I do see that the trend is favorable. And I see that I'm not worried about them going bankrupt. I'm not sure what to make of it. I liked Tricon Global at $26 despite negative equity and it has done very well. But then I knew that Pepsi had purposely loaded Tricon with debt precisely because the cash flow was so high. The perception of newspapers is in the dumps, too, as restaurant stocks have been. But Tricon was one of the top 10 performers in the S&P 500 last year. So isolated success stories do happen within depressed industries and debt/equity or -(equity) isn't prohibitive of this. And I appreciate that JRC is probably earning its weighted cost of capital. I haven't taken the time to figure it out, but I'm assuming its WACC is pretty low. Interesting. It's still making new lows. I'll stand back and see how cheap it gets. And I'm still not convinced that small-town newspapers won't lose out to the internet, but that's not entering my decision now. Mike