Sunday, April 26, 2015

Stocks DD Opines: Investor Relations and some Best Practices

Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

Additional Disclaimer: This is a general article and no references is intended to any company.

What is Investor Relations  ?
National Investor Relations Institute defines IR as "A corporate marketing activity, combining the disciplines of communication and finance, providing current and future investors with accurate portrayal of firm's performance and prospects, thereby having a positive effect on total value relative to the overall market and the firm's cost of capital."

I would use the word Fair in lieu of Positive. I would also use word Price in addition to Value because of the following: What if the company has decided they are never going to raise capital again in the market ?

What does IR Best Practices involve ?

It primarily involves the following:

1. Quarterly Conference call with all stakeholders on Earnings, Outlook & Mid/Long term Strategy with adequate time for Q&A.
2. Annual attendance in a few Investment Conferences where fund managers and analysts go and where market peers present. After all, capital assets with similar risks(same sector) are often rated relative to one another by same market participants (Same Intermediary analysts and Mutual Funds).
3. Conducting Annual Investor Day with interactive Q&A with all stakeholders
4. Ensuring information on risk, 2-3 year outlook of business & high level strategy is provided (without disclosing commercially sensitive information)
5. Ensuring adequate number of analyst firms cover the stock.
6. Ensuring IR team is quick and responsive to existing or future investor information requests

All the 6 pieces are required so the risks and the outlook of the business are clearly known to as many market participants (including intermediary analyst firms) to ensure proper valuation and liquidity relative to other similar capital market assets . Ultimately, valuation is based on perceived risk on business outlook (not just past performance) in relation to similar capital market assets (peers). If adequate information is not disseminated, then likely the company will have less following by analysts, investors, less independent opinions on outlook,  leading to potentially reduced liquidity and an improper valuation. Free sharing of Information in adequate channels aids in price discovery. 

An example for disseminating Risk and Outlook information objectively ( point 4 above, without giving away anything to competition) is demonstrated in this below slide. Note this information DOES NOT have financial guidance.

Examples of Annual analyst or Investor Day presentations can be seen here

Annual Investor Days is a great forum to showcase the business, risks, outlook, strategy and how the company intends to add value to shareholders both in the mid term as well as in the long term. It is meant for market participants which includes Mutual Funds, Pension Funds, Hedge Funds, Analyst firms and Individual Shareholders. Investor Days could be a 2 way exchange of information. Shareholders could share their ideas of enhancing and protecting shareholder value with the management and get their feedback.

Investment Conferences
  • Barclays Global Heathcare Conference
  • RBC Global Healthcare Conference
  • J.P. Morgan Healthcare Conference
  • Goldman Sachs Healthcare Conference
  • Morgan Stanley Healthcare Conference

Summary - Robust investor relations practices  is needed so there is adequate information sharing, transparency and thus ensuring the integrity of the capital market system.

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Wednesday, October 8, 2014

Stocks DD Opines : A ruling in the Banana Republic creates a brouhaha and How will Ball Street Journal editorialize it ?

Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

Manshattan is submerged by a Flood, a huge calamity. Huge loss is anticipated and there are no private financiers. Anticipating an Armageddon, the Banana Republic Govt writes the HERO law on Manshattan and takes over to support and salvage the properties, in return for a 10% stake in all the private properties in Manshattan, including the private penthouse of a Ball Street Journal reporter. 2 months later the Floods subside and things start to look significantly better. Private financiers are available. However the Banana Republic is beset with its own deficit problems. The Banana Republic govt, in its wisdom, uses an egregiously outdated Manshattan Flood forecast and says we anticipate more money for flood support and hence we will take 100% ownership of all private properties in Manshattan (including BSJ's famous reporter) and all owners of private homes in Manshattan now immediately become renters of the same. Moreover the Govt does not talk to Private financiers who were willing to finance the flood recovery at significantly lower cost.
Manshattan ex-home owners(now renters) file a suit in the Courts of the Banana Republic alleging theft of their homes by the Banana Republic Govt. The Judge presiding over the case rules the HERO law gives Banana Republic Govt the right to 'hero'ically throw out the constitution including the private property rights and No Banana Republic court could even hear the case as guaranteed by the 5th amendment of the Banana Republic's constitution. The Ball street journal Reporter whose home has just been siezed by the Banana Republic, has been told to write a story on this  ? 
What will the Ball street Journal reporter write ? 

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Friday, August 29, 2014

Stocks DD Opines: An investment methodology

Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article
Disclosure: I am NOT a registered investment advisor. Investing in stocks is very risky. Please consult your RIA and read all the disclaimer here.

Invest in quality stocks
1. Invest in Strong businesses (high barriers to entry and historically less competition) 
2. Invest in Management with excellent track record for shareholder value creation. 
3. Invest at undervalued prices

Invest in special situations 
1. Firms in temporary Distress 
2. Drug development firms, with an asymmetric reward/risk...where you have strong conviction on an event (Eg: Clinical event). For example, reward could change valuation by 6 times and risk could shave it by 50%. 
3. Firms with huge growth potential but growth is not factored in the price today. (Eg: MMYT 2 years ago)

Where to scout for ideas ?
1. Look for the stocks that the best Funds (that have a good 10-15 year return history) have recently increased position and is in their Top 5 of their portfolio. You can see this in whalewisdom
  • Pershing Square
  • Carl Icahn
  • Baupost
  • Perceptive Advisors
  • Baker Brothers
  • Greenhorn
  • Orbimed
2. If fundamentals have not changed since these funds took their huge positions, research their stock thesis, if publicly available. Activist funds generally publish their thesis. (Avoid shorting as it entails limitless risk)
3. Read the stock coverage in Seeking Alpha including comments
4. Listen to 2 years of Conference calls from Management to get a sense of business and management. Does management sound and act honest and accountable to shareholders and are they dedicated to shareholders.
5. Go over their last 2-3 years of 10-K's and 10-Q's (esp Business, Management outlook, Risk Factors)
6. Look at stock chart to understand how it has reacted to news/business fundamentals
7. Try to develop the bull thesis. Make sure it is not value trap (look for business trends, governance risk, dilution risk, etc) before buying.
8. Sell purely based on valuation, or if a better investment comes along. Good businesses with management having a track record for shareholder value creation can remain in the portfolio even if they are fairly valued.
9. Have a concentrated portfolio
10. Frequently engage with management of the stocks you own. Ask them, "how they plan to improve shareholder value?" Provide ideas or solutions to improve shareholders value. Compliment them, if they have done a good job for shareholders

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Wednesday, August 27, 2014

Stocks DD Cites: Could Fannie Mae relist in NYSE?

Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

The GSE job posting that caused this speculation. This could be a red herring (one never knows).
Keep in mind, shareholders like Fairholme have rightfully asked the Fannie Mae Board of Directors to re-list the stock in NYSE. Link

It is my opinion relisting is very significant, if at all it happens. Remember most mutual funds and index funds are barred from investing in a OTC stock. 

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Thursday, August 14, 2014

Stocks DD Cites and Opines: Funds (including one of the best biotech funds, Perceptive advisors) significantly increase holdings in Taro

Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article
Disclosure: Long Taro.

Here is Q2 Whale wisdom 13F filings- link

As Taro continues to deliver on adding shareholder value, funds have significantly increased their stake. After >120% increase in share price from last year, Taro in June 2014 announced significant price hikes; This, in my opinion, is a signal that the board is continuing its intent on building value for ALL shareholders (as it should be; all shareholders are the owners). Taro's cash at the end of Q2 was ~$650m, expected to grow significantly in the 2nd half. In SUN's Aug 13th earnings call, Mr Shanghvi responding to an analyst question on the use of Taro's $650m cash said "Taro continues to look at potential acquisition opportunities. But we will remain disciplined about acquisition like we have been in SUN also. It needs to make long term business sense in terms of yield expectation post-synergy". This can be listened to between 27-30 min into the call. (I like Taro to lower risk profile and grow inorganically. I would like them look at specialty assets beyond just Derma, for example, an Opthalmology asset like Opthotech.) 

Notable Q2 Institutional shareholding change - Top 10 shareholders hold greater than 4 million shares (30%) out of 13.33 million minority/float shares
  • Consonance founder Mr. Blutt, a physician-businessman was a board member and part of the Corp Governance committee at Questcor. 
  • Perceptive Advisors in a dissidence vote successfully changed the entire Board at Penwest Pharma in 2010
  • While Bluemountain reduced its holdings, we have seen  Schroder, Consonance, Perceptive, Hotchkis, Renaissance and Acadian all buy into Taro. Together the top 10 hold greater than 4 million shares (30%) out of 13.33 million minority/float shares. This is a significant development as Israel provides minority shareholders significant voice and protections including a vote on the 2 independent director seats. There is a suit by Blue mountain and Iszo capital in Israel challenging the last proxy vote for independent director election. Please note that the margin of defeat for minority nominees wasn't wide. Here is Bluemountain's request for investigation of the proxy vote. Note that ALL current members of the Board are nominees from majority.
  • Consonance capital's founder Mitchell Blutt is a physician businessman with significant investment and medical experience and had served on the board and the corporate governance committee of Questcor. As a shareholder, I would like to see such experienced minds contribute ideas (even if, passively) and help take our company to new heights.
  • Joseph Edelman leads Perceptive Advisors and since 1999 the fund has returned an annualized 30.2%. Last year, the fund returned about 48%. Edelman works with six biotech analysts.  Ahead of Amicus P3 data release, Perceptive advisors significantly increased its holdings in FOLD in Q2. Amicus(FOLD) released data in August. The stock has since tripled from Q2. You can see Perceptive's Q2 activity and their current top holdings here
  • In addition, other green shoots can be seen in the Q2 13F filings. Taro is finally starting to be noticed by the most ubiquitous mutual funds of America namely the Dimensional fund advisors, Janus Capital, etc. This is great for the long term as these big mutual funds make the market in most of the listed stocks in blue chip companies. 
Valuation notes: 
Credit Suisse's Mumbai-based analyst recently in coming up with $150 price target has made the following assumptions:
  1. Taken into account only half of the $300m expected EBITDA increase due to the June price hikes. 
  2. Used 9 times EBITDA in valuing Taro (The Agila transaction that closed in Dec 2013 happened at 18.6 times EBITDA)
  3. ROW market potential and Novexatin ($6b Onychomycosis NDA opportunity) have no mention in the report.

ISZO CAPITAL MANAGEMENT LP1,104,168$ 154,849,00080.27%73.74%140
HOTCHKIS & WILEY CAPITAL MANAGEMENT LLC510,952$ 71,656,0000.25%0.19%8955,700
CONSONANCE CAPITAL MANAGEMENT LP378,372$ 53,063,0007.89%4.55%3103,140
RENAISSANCE TECHNOLOGIES LLC371,200$ 52,057,0000.12%0.07%182102,800
SCHRODER INVESTMENT MANAGEMENT GROUP310,800$ 43,586,5920.05%0.00303310,800
PERCEPTIVE ADVISORS LLC301,333$ 42,260,0004.15%1.13%6204,322
GREYWOLF CAPITAL MANAGEMENT LP277,936$ 38,978,0005.77%6.29%63,751
RAGING CAPITAL MANAGEMENT, LLC253,236$ 35,514,0003.78%5.08%96,378
BLUEMOUNTAIN CAPITAL MANAGEMENT, LLC192,389$ 26,981,0000.46%0.86%59285,999
ACADIAN ASSET MANAGEMENT LLC178,791$ 25,071,0000.12%0.02%183139,691
KENNEDY CAPITAL MANAGEMENT, INC.100,711$ 14,124,0000.26%0.21%111639
MOAB CAPITAL PARTNERS LLC93,133$ 13,061,0006.27%4.54%5300
MORGAN STANLEY58,267$ 8,171,0000.00%0.00%221518,382
JANUS CAPITAL MANAGEMENT LLC56,806$ 7,966,0000.01%0.00%72041,455

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