A Tip Jar for Analyst Downgrades?

After the Great Depression, Ben Graham gave testimony before a Senate panel.  When asked why markets go down (or up), he replied that he had no idea.

A few weeks ago, I was discussing a company that I have watched since early this year.  I mentioned that the Company was finally within a reasonable (not great, but reasonable) price range in a conversation and the individual asked why the stock had fallen recently.  I replied that I had no idea.  It could have been due to an analyst downgrade, but I had no clue.

I came across this company in my alphabetical search process (it was toward the end of the alphabet and I started in reverse this year), so I was pleasantly surprised when I found a few of the following things:

1. Easy business to understand

2. Monopolistic–in fact, the company has been sued for its alleged monopoly (Company won).

3. Since reorganizing its business three years ago (selling a few subsidiaries), gross margins above 80%, operating margins above 50% and net margins also above 50%.

4. Decreasing Share Count–Shares currently outstanding are 55% of total share count in 2005.

5. After share price drop, valued at roughly 12x cash flow.

If we just stopped there, these rough facts would make me fairly interested.

And in a nod to every great QVC/Shopping Channel product ever….There’s More….

6. Lou Simpson, former chief investment officer at GEICO and heir apparent to Buffett before Simpson retired, is on the Board.

And there’s more….

Either Weschler or Combs (Buffett’s two new investment managers) own roughly 8.5% of the Company.

Back to the downgrade.  Wells Fargo downgraded the Company.  Keep in mind that Buffett is Wells Fargo’s largest shareholder.  I would venture a guess that he likes their banking operations much better than their analysts’ opinions.

Between the downgrade about three weeks ago and last Friday, Buffett’s lieutenants bought another roughly 2 million shares, increasing Berkshire’s stake from 8.5% to over 10%.  It appears that Combs and/or Weschler don’t give much weight to Wells Fargo’s analyst opinions either.

In summary, markets go up, markets go down.  Finding good ideas means finding them and waiting.  We should all thank analysts’ downgrades for the opportunities they provide patient investors.  Perhaps a tip jar?

 

 

 

 

 

 

 

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Some investors think a business is good, but know that management is bad.  These investors justify the investment based on the idea that the great price of the business is worth the bad management. This is akin to marrying a supermodel who is going to yell at you all day.  Whatever pleasure your eyes may derive from the marriage, your ears will endure a greater amount of pain in the long run. The pocketbooks of those partnering with bad management are likely to see a similar 50%+ decline in their net worth.

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