LSXMA is trading at a discount

Liberty SiriusXM Group (LSXMA/B/K) is trading at roughly a 27% discount to its NAV.  The latest investor presentation discusses the discount:

As LSXMA is actively taking advantage of the discount by buying back shares, the discount should resolve in due time.  In the past, LMCA traded at a discount to the DTV (DirectTV) shares that it owned and that trade worked out well.

My Google Sheets calculations are here (it is updated with LSXMA/B/K’s latest share prices).  Use File –> Make a copy to edit it.  I own LSXMA shares.  This is a bet on the NAV discount narrowing as well as a bet on Sirius XM (SIRI) itself.

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AMD and the death of the crypto-mining GPU

(AMD stock and its options are extremely liquid as AMD is one of the top 10 most traded stocks.)

Previously, I’ve written about how AMD’s profitability has been inflated by the cryptocurrency bubble.  This will likely come to an end in the coming quarters as the market for video cards will shrink thanks to the emergence of ASICs for top cryptocurrencies.  We are already seeing the effects of this as prices of video cards continue to normalize at the retail level.  From PC Part Picker:

Most investment bank analysts anticipate that AMD’s earnings will go to the moon.  While that type of behaviour may help their employer earn underwriting profits if AMD chooses their employer for an equity raise, these optimistic projectons are unlikely to materialize.

I/B/E/S estimates for AMD, courtesy of Sentieo.

In my opinion, AMD is a compelling short as its earnings will likely shrink rather than grow in the coming quarters.

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A model portfolio of large cap stocks

I’ve started an experiment where I’m keeping a public portfolio of large cap stocks via the Motley Fool CAPS system- you can view it here.  I would like to see if I can generate value on the long side… something that I find much, much more difficult than shorting.

My criteria are:

  1. Pick only the quality businesses in a particular sector.  For example, Dollarama is the clear leader among discounters.
  2. Not overpriced.  For that reason, Amazon and Netflix don’t make the cut (just look at what happened to Amazon during the Dot-Com Bubble).
  3. I avoid industries where there are no clear industry superstars.  Oil and mining stocks simply don’t make the cut as none of them are quality businesses.
  4. Lastly, I avoid dying or shrinking industries.  Profits ultimately don’t grow in dying industries and therefore those stocks almost never do well.

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Healthcare inflation is driven by bad medicine

According to the Commonwealth Fund (an endowment-supported US foundation), US healthcare spending has increased to 16.6% of GDP in 2014.  Other countries have seen less rapid increases in healthcare spending.  For the most part, inflation is being driven by doctors with a vested interest in pushing medical services, expensive treatments, and pharmaceutical drugs.  To my surprise, what I’ve found is that many aspects of modern medicine aren’t supported by rigorous scientific evidence.  While the FDA drug approval process superficially appears to be scientific, it often isn’t.  One way that pharma companies game the system is to prove that a drug (e.g. statins) affects a dubious biomarker (e.g. cholesterol) rather than prove that the drug causes more good than harm (e.g. lower mortality).

Unfortunately, mainstream views on science and medicine are quite ignorant of what goes on.  We are taught to only trust medical advice from “trained and licensed professionals”.  Much of society worships technology and has blind faith in the claims made by medical authorities.  I would argue that this environment is a fertile ground for the trend in healthcare inflation to continue going forward.  And if that trend continues, it is likely that American health insurance stocks will continue to do quite well.

Pharmaceutical companies researching active placebos may also do quite well.

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Dollarama: why I’m ignoring the nepotism and related party transactions

While I don’t think that Dollarama is extremely compelling at the current P/E of 26.5, I do own the stock because I am trying to diversify.  The company’s earnings growth is impressive and I like the new CEO, even though his father passed on the family business in 2016.  And while the related party transactions continue under Neil Rossy, they haven’t meaningfully impacted shareholder returns in the past two decades.

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US healthcare is worse than a free market system

Americans would like to think that their healthcare system resembles a free market system.  Canadians would like to think that theirs resembles a single payor system.  In reality, the reverse is true when it comes to prescription drugs.  In Canada, most Canadians pay for their drugs directly (out of pocket).  You could think of many Canadians as being uninsured when it comes to buying drugs.  In the US, most Americans receive prescription drug benefits from their employer, with the administration of those benefits being handled by a private company.  This is essentially private health insurance that employers are legally forced to pay for.  I would argue that this is the main reason why Americans pay dramatically more for an EpiPen than Canadians do (the listed price is roughly $600 for a pair while Canadians pay around $200 for a pair).  Private health insurance leads to higher costs.  When for-profit companies are compensated on a fee-for-service basis, they are incentivized to spend very little money on lowering drug prices for their clients.  In turn, drug makers take advantage of the situation by charging higher prices in the US than the rest of the world.  The drug makers exploit the payor.  Meanwhile, the insurance companies and PBMs spend very little money on protecting their clients.

This makes me more confident that the American government and states will continue to enact laws that benefit pharma companies, health insurers, and PBMs.  American citizens have the mistaken belief that their system resembles a free market.  On top of that, many people have difficulty understanding the US healthcare system.  Explaining healthcare shenanigans (here and here) is like trying to explain options: many college-educated people have great difficulty in grasping the concepts.  Change is unlikely to happen when American voters don’t understand the problem and its solution.  While the morality of US health insurers is questionable, their favorable economic dynamics may persist for a long time.

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