What’s Up At Appraisal Value
I fear I may have started this blog a bit too early, I’m still in the process of educating myself. This blog’s purpose is to allow me to communicate about investing. With that in mind, investing covers a pretty broad spectrum. The way I look at it, investing has 3 parts that have to be learned in depth from the top down. Portfolio Management, Investment Analysis, and Idea Generation. This blog will concentrate on my thoughts on investment analysis, primarily valuation as I believe valuation is the fundamental basis of any investment. I will, however, post on Portfolio management and investment analysis as I go.
Don’t get the wrong picture here, I am at best a novice investor. This blog is called Appraisal Value, and you may have some assumption that I already know how to “appraise” stocks…let me clear that up, I’m learning as I go and this blog is my attempt at becoming a stock appraisal expert, but I’m just getting started and I’m not even near my goal.
So now that we have that cleared up, a few thoughts: I’m starting to look into JCP in more detail recently. Almost Peter Lynch style, I asked my sister about JCP recently and she’s noticed some positive changes. I think the unique thing about JCP is that they have a lot of exposure to their market just in that their retail space is so ideal. In my mall, JCP is almost a main entrance to the mall, so I see JCP everytime I walk in. Like it or not, everyone’s going to find out about the changes in the JCP store, it’s just a question of whether they’ll like the changes…in any case the real reason I like JCP is that we have an activist on board, if there’s any value to be created it will be created with the management and Bill Ackman overseeing things. Also, I think there’s a real margin of safety at current prices even if they don’t successfully turnaround the retailer, just in cost cutting. Management expects to cut 900M in SG&A($2.5EPS) by the end of this year, and if they’re able to reach the SG&A as % of rev. that Kohl’s has, there is the opportunity to hit $5 in EPS….It’s fairly certain that they’ll get the $2.5, a long-shot to get the $5, but at a $21 price range($1 of old JCP earnings+2.5 of new=3.5…P/E under 7) that’s not too bad at all. So I think the real fear with JCP is that the turnaround will materially reduce their old revenue power by driving away core customers. JCP used to create $1 of EPS…if they lose enough revenue though that might not be the case going forward. It’s definitely something to look into. JCP announces earnings this friday, I believe they’ll disappoint and that it won’t have any real implications as to the state of the turnaround. If something like that does happen, I plan on going to my local JCP and checking it out before doing some further snooping.
-Here’s a link to Ackman’s Slides on why JCP is a winner….keep in mind that even Ackman can make mistakes so don’t blindly trust…do your own dd even with a value investor at your side. http://www.marketfolly.com/2012/05/bill-ackmans-ira-sohn-slideshow.html
-I think the toughest part of a turnaround is placing a value on JCP….without a real understanding of the FCF power of the post-turnaround business I can’t find a good way of finding intrinsic value and once we see the FCF power or the ROIC of the new business it will be too late. I’m going to have to value JCP on a relative basis and I’m still figuring out how best to do that.
Currently I’m reading Valuation: Measuring and Managing the Value of Companies(2nd edition)…it’s an old edition but it’s chalk full of learning, especially part 2(practical application of valuation)….it’s 2 valuation frameworks are 1)Discounting Cash Flow(FCF method) and 2) Discounting Economic Profit(ROIC and Invested Capital Method). I never understood how high growth could “destroy value,” and I don’t fully understand it just yet, but the answer is in this book, and after rereading it one or 2 more times I’m sure I’ll be able to tell you.
Good Thoughts-Have a nice day