Visa: A wonderful business with a strong moat

Visa is basically a technology company in the payments processing industry.  Network effects and economies of scale contribute to the duopoly enjoyed by Visa and Mastercard.  Both companies should grow earnings as they are toll bridges on the secular trend towards electronic payments.

Unfortunately, the valuation remains a little high so this is not one of my best ideas.

Adjusted TTM P/E: 23.47 (source: Yahoo Finance / Capital IQ)
Forecasted earnings growth: “Mid to high teens” (source: Q3 investor presentation)

*Disclosure:  Long Visa.

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Aug 2013 Portfolio Update

This year could have been better since none of my major short positions worked out.  The long side is doing well mainly because of Altisource (up 45% since I wrote about it on Jan 10 at $93.57).  The junior mining-related part of my portfolio happen to be up even though the TSX Venture is down a quarter year-to-date.

Mining Mania

I used to assume that large mining companies would not chase projects with negative returns.  This is a dangerous assumption that I need to rethink.  I’m starting to realize that most large miners regularly chase projects with poor return.  Or, they engage in business decisions that don’t make a lot of sense.  I shouldn’t rely on the due diligence of senior mining companies when trying to value the assets of a junior.

Here’s my analysis of various large mining companies and why they are crazy.

Pharmacy Benefit Managers / Express Scripts (ESRX)

Express Scripts (ESI) is the largest pharmacy benefit manager (PBM) in an industry where scale is a competitive advantage.  It has been able to compound earnings, free cash flow, and free cash flow at very high rates (over 20%) over the past ten years.  Fundamentally, I believe that Express Scripts’ returns are mostly driven by its CEO, George Paz, who has held the position since 2005.  In the past, ESI never had the benefit of scale.  Its success was driven by the quality of its management.  In the future, ESI will begin to see advantages and disadvantages from its larger size.

On the other hand, the PBM industry has some dubious practices that creates regulatory risk.  The PBMs are rarely transparent with their customers and have often taken kickbacks from drug manufacturers.  There is a chance that future government intervention will target such practices.

Skimming DEF 14A filings

DEF 14A filings on the SEC’s EDGAR system are worth reading alongside the 10-K.  They provide information on insider compensation.  They are extremely helpful in figuring out the level of management’s integrity.

US Homebuilders: Time to Short Them?

In the past 12 months, homebuilding stocks have jumped in anticipation of a rebound in housing prices.  So far, the rebound hasn’t even occurred yet!  Home prices have stayed roughly flat since 2009.

While I don’t think that I am any good at predicting future home prices, it seems to me that some homebuilders are overvalued.  There are some homebuilders trading well above their book value despite being unprofitable.

What gets measured gets improved… or not

On the surface, it seems that measuring key metrics for a business can lead to improvements.  Many businesses will try to quantify their operations instead of relying on qualitative goalposts.  This is probably a good idea in most situations.  However, the real world is messy and difficult.  Sometimes employees will game the metrics used to measure their performance.