Author: RW

need to do some work on CTXS soon. This is right in the wheelhouse of a low capital intensive business with a strong brand, and huge growth prospects in a market that will improve businesses, improve their security for networking, and save them money. A really compelling business proposition.

If I can get comfortable with valuation, this could be a big position.

(Of note from a process perspective…. Noting 1) the quality of the business, strategic position 2) growth opportunity and 3) focus on reasonable valuation. Good company? Good opportunity in front of it? Can I get it for cheap?)

Don’t forget how you get to ROE or ROIC….

It’s not make-believe. You get a better investment if:

1) Your earn more on every dollar of sales
2) You make more sales with every dollar of capital
3) You get more assets with every dollar of equity investment

A margin story, an organic growth or accretive acquisition story, or a balance sheet story (recapitalization) – stock-buybacks, etc.

As an example – WCN

-Margins are going to improve as increased gas costs get passed along to customers
– Asset Turnover will improve as recent high levels of Cap-Ex start reaping benefits by higher utilization of landfills
– Higher Equity Leverage will come into play as the company continues to buy back stock (~$100m a year) and Invested Capital Declines.

All three factors will help improve ROE and ROIC.

Chilean Chemical Company serving Agricultural Industry, but also importantly Chile has large amount of Lithium reserves which could be strategically significant with development of battery technology – especially with Electric Cars.

Company is SOCIEDAD DE CHILE SC (NYSE:SQM) or Chemical & Mining Co. of Chile Inc. (SQM).

Big spike in price over last two months, now it’s trading at ~30x trailing earnings.

In lower volume offerings that have taken big drops, there seems to be a somewhat predictable cycle of lower prices leading to underinvestment (or underplanting in grains), which then leads to shortages and a big moves off of bottoms on futures….

Although the Ethanol market clouds the picture, this occured with corn, and with wheat.

When pork was in a similar situation last fall (06′), I don’t believe that reversal was as direct as the demand from China derived from diseased animals was somewhat exogenous.

In all, it seems like when lower than average prices combine with diminished supply (lower plantings, weather, exogenous events), there is often a spring-back effect to be had if you can ride out short-term volatility…

Is it a cop-out to remain unconstrained on how to find new ideas? Is it cheating to subscribe to a newsletter?

The best feedback I’ve gotten thus far is to seek out areas where you can leverage what you know. This is resonant for people with tech, or engineering, or industrial, or even retail experience. What do I ‘know’ – restaurants? outdoor sporting goods? financial services? – but really only as a consumer, not an insider.

I think the crux is to focus on working to understand the interplay in an industry on a relatively simple level independent of someone else’s point of view on the space.

Real Estate is a good starting point, as I have a good sense of what matters in the space.

Next Steps: Frame out an evaluation methodology:

Tentatively:

1. Identify Favorable Space
2. Figure out best part of the Value Chain – Test using Porters
3. At best part of Value Chain identify public/private players and do a quick/dirty assessment
4. If step 3 yields anything choose no more than 3 players
5. Read Investor Presentations and Business Descriptions in 10K’s
6. Evaluate level of Street Coverage
7. Map Porters Framework for the relavent players
8. Put last three years’ Income statement into a Model and calculate growth rates and margins
9. Determine whether stock has catalysts, is undervalued, or has opportunity for margin expansion
10. Make list of 10 drivers and then attempt to stress test them to boil down to 2 or 3 with biggest impact on earnings and/or operating results.
11. Arrive at a modeled bull case and bear case based on divergance in key drivers.
12. Identify key evaluation metrics and commit them to paper with both bull and bear scenarios.