Monday, November 28, 2016

Elliott Management's Letter to Cognizant

Today Elliott Management disclosed a $1.4 billion 4% stake in Cognizant Technology Solutions(CTSH).  The activist firm identified a few key areas they feel could create significant and immediate value to shareholders.  According to their research and plan the company could easily boost it's stock price to $80-$90 with ease. You can read the entire letter here. Here is an article highlight.

– Cognizant is viewed as being shareholderunfriendly. In contrast, Accenture is viewed as being a responsible steward of shareholder capital and is therefore awarded a multiple of more than 20x NTM P/E, a meaningful premium to the entire peer group, despite having the lowest revenue growth rate. Its robust capital return and margin expansion programs support a far higher multiple than its slower growth alone warrants, because it offers shareholders a balanced set of drivers to deliver investment returns. Cognizant, on the other hand, gets penalized with a significant discount. Because Cognizant has a limited capital return program and explicitly commits not to expand margins, shareholders must rely on the Company delivering above-average revenue growth for investment returns. When selecting companies in which to invest capital, shareholders will naturally gravitate toward management teams with proven capital allocation track records.

For the most part they identified the lack of a plan to consistently return cash to shareholders(ie buybacks & dividends), adherence to an old margin policy, and a misguided reliance on revenue growth. Furthermore they cited the company had excess cash and very little debt, which they made it seem is bad. The last problem I'd be ecstatic to have.  I'd put that comment in the list of "things you don't hear people complain about".

I'd have to agree that the company needs to make some changes. It's just part of the business cycle. Revenue growth has been tailing off compared to it's historical growth rate.  That alone is a big clue it's time to change your focus. I've been a champion of the company, and even I was starting to wonder if they would initiate a dividend soon.  The company could easily handle it. 

Saturday, November 19, 2016

TLH Market Review 11/19/16

"That's two weeks" - TLHI
"Two weeks of what?" - You
"Two weeks of post-election market highs even though the world was supposed to end" TLHI

Yep that's right! Two weeks of new highs even though the "smart" people at Goldman Sachs with a huge research budget, and boat loads of MBA's from Ivy League schools all said a Trump victory would be bad for the market.  I hate to get political but they were backing HRC the entire time so take their word with a massive grain of salt. That's why there is the phrase "Follow The Money"

With the Dow Jones and Russell 2000 climbing into uncharted territory it's only a matter of time before the S&P 500 and Nasdaq follow.  My guess is we'll see it by year end, or by February at the latest. The line won't be straight up, but it will be up.  

Either way the last few weeks have seen a lot of change within the market.  Financials and Industrials have been leading the rotation with respective gains of 13.7% & 7.17% the last month.  Meanwhile Utilities and Real estate have taken a beating as each are down -4.4% & -6%.
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These aren't the only areas seeing massive moves. Small caps have been on fire as the Russell 2000 has surged over 13% the last couple weeks and now sports a 16% YTD gain. 

It's crazy how quickly things can change as investors are now flocking into cyclical and riskier assets.  At the beginning of this year investors were clamoring for utilities, real estate, telecom, and staples as the market see-sawed all over the place. Many back then were calling for a recession and a crash in stocks. We did see some dangerously low growth, but it seems the worst was avoided. 

Bonds and Gold have also had some divergent paths as big money re-positions.  The 10 year yield has soared 50bps to 2.34%, and safe haven gold has seen its price drop from $124 to $115.
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I think it's safe to say risk and inflation trades are back on. 

Speaking of inflation we did get CPI this week which showed a 0.4% rise for October. That's a good number. The markets pretty much think it's a lock for the Federal Reserve to raise rates in December. This has been the most widely broadcast rate hike in recent history so it shouldn't be a surprise. Either way the market has rate hike odds at 95.4% now. 


The portfolio had no earnings. We did get a statement from Hain Celestial(HAIN) that their investigation into their revenue recognition found no intentional or inappropriate actions. That was good enough for the stock to pop 10% on the news. Remember I sold part of the shares out of the portfolio on the news release.  I still don't want to buy back in.  Maybe that will turn out to be a mistake as I do think the company trades at a nice value right now.  Either way I don't like getting burned.

I was very close to cutting ties with CTSH too, but they were very clear upfront that improper payments were made. These are two separate issues which have to be looked at individually.  Either way it looks like I made the right calls so far.

Have a great weekend!

The Long Haul Investor

Friday, November 18, 2016

USD Continues Post-Election Surge

Incredible to see how strong the dollar has been since the election. It's shooting up faster than Facebook!


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Saturday, November 12, 2016

TLH Market Review - 11/12/16

Crazy. That about sums it up so far this year, and this election.  Turns out both Democrats and Republicans enjoy protesting and being violent.  Although at this point protesting solves nothing. Your vote is what really would have mattered. Protesting our Democratic process shows to others that you think it's your way or the highway. Un-Democratic.  Hillary needs to come out and condemn this type of behavior, and Obama should put more effort into calming everyone down. Off my soap box now.

OK so it looks like we have all this mess because everyone is so shocked. Not surprised. I think even Donald Trump himself was a little shocked. I feel like you could just tell a little bit by the expressions on his face.  I really think he thought he was going to lose.  He did claim he felt the election could possibly be rigged, aided by the media, so I'm sure he felt the odds were overwhelming against him.

The markets sure didn't like everything at first. HFT's and big market makers at one point sent the Dow Jones futures down over 800 points Tuesday night. By Wednesday though everything was, well, GREEN!

Even more shocking was the Dow Jones hit a new ALL TIME HIGH! Holy Cow! I don't think anyone saw that coming for this week.  It's really hard to make out but if you look closely at the right side of the chart you can barely see when the market head straight up after the election :)



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Almost going unnoticed is the fact small caps have rallied 10.1% for the week. That's why it's important to stay invested. You never know when a huge rally will hit. Even for the S&P 500 and Dow they added most of their YTD gains back in this single week!

For the small retail investor there's no way they would have caught that move. Why? They've proven to professionals and researchers time and time again they are horrible at timing the market.

The bond market saw yields surge, and the probability of a Fed rate hike for December is coming at 81%. Yeah I'd say that's a lock. Finally.

Gold at first had a decent pop, only to see selling into the end of the week. I guess the yellow metal is just that, yella! I think that move has more to do with the fact there's less fear and anxiety now that people know what the future will bring. Add in the stronger dollar and the gold train seems to have a lot more going against it than for it right now.



Portfolio Adds
I did make a couple adds this week. McCormick and Phillip Morris both sold down to the $90's level and I felt this made sense for a buy at this price.  The rest of the market might be going for High Beta names, but I want more stability.  I'll be doing some much needed updating on the spreadsheet this weekend.

Earnings
We had earnings from 3 portfolio members.  Cognizant Technology Solutions, Universal Corp, and WhiteWave Foods. I won't be highlighting WWAV since their merge is less than 7 weeks away with Danone.  It looks like it will go off without a hitch.

Cognizant(CTSH) reported a great quarter which was really needed considering how controversial this quarter has been for them.  The company reported EPS of $0.73(up 12.3%) on revenues of $3.45 billion which was up 8.4% from a year ago.  Also they gave solid guidance which shows they are still on track to keep growing.  Non GAAP EPS was guided at $3.38 and $3.41. That’s an increase from their previous guidance range of $3.32 to $3.44 per share.

“Third-quarter revenue was within, and non-GAAP EPS was slightly above, our guided range, indicating that we continue to execute well on our stated strategy,” said Karen McLoughlin, Chief Financial Officer. “Our solid performance was also reflected in another strong quarter of cash flow generation as cash and investments, net of debt, increased by $390 million.”
 
I highlighted that I felt the big reason for the spike up was the fact their improper payments disclosure in the 10-Q didn't show much of a financial impact. The company has so far highlighted only $5 million in improper payments. That' doesn't mean a fine won't be large, but I think how they've handled it so far means this really won't be a huge financial issue going forward. Of course any ding to earnings is real, but this is a small one in the grand scheme of things. Helping companies integrate their digital platforms and become more efficient isn't going away anytime soon.  In fact the company has been on a hiring binge to help keep up with demand.









Universal Corp(UVV) reported earnings that initially sent the shares 4 points higher, but then the California tax increase sent all those great gains right back to the toilet. Sigh.








Still the company reported nice earnings report with EPS of $0.90 on revenues of $456 million.  The company is so stable it's sickening. So sickening we got an even sicker 46th annual consecutive dividend raise! Not many other companies can claim such a feat. The dividend was increased by one penny to $0.54/share. Not huge but a raise is a raise.

The California tax increase will no doubt affect the company. I think the pain will be well managed. The company does a great job at managing it's inventory. In fact I think this will continue to push all the tobacco companies into reduced risk products.  UVV has positioned itself as a supplier of liquid nicotine for vaping products.  That should help offset any losses from it's traditional business as this new area grows.

Cheers!

The Long Haul Investor

Friday, November 11, 2016

Election Edition - Low Volatility vs High Beta

The never ending struggling between low volatility(stable) and high beta(wild) stocks is putting on a fabulous display lately.

For most the past year SPLV has been leading it's wilder, more fun loving cousin - SPHB.






Then the elections came leaving stodgy old SPLV in the dust.  Safe to say it looks like investors are willing to take on substantially more risk in a Trump world.

Monday, November 7, 2016

Cognizant Technology Reports Q3 Earnings

I've been waiting to hear from Cognizant Technology Solutions(CTSH) as it's been a very tumultuous quarter for them as they disclosed improprieties.

For their third quarter the company reported EPS of $0.73(up 12.3%) on revenues of $3.45 billion which was up 8.4% from a year ago, and 2.5% sequentially. Cash flow was strong in the quarter, and operating margins came in at 16.8% and net income margins were 12.8%. Those are solid results. Also remember the company has $1.5 billion in cash, and $3.3 billion in short term investments which is mostly comprised of bonds(USD based) maturing in 2 years or less. Make no mistake they have a strong balance sheet, and strong industry trends behind them which show no sign of slowing down.  Overall strong results. 

But that's not what I think has the stock up over 4% today. 

Saturday, November 5, 2016

TLH Market Review 11/5/16

This week sure didn't feel great on the pocketbook.  The S&P 500 ended up down -1.9%, the Nasdaq -2.9%, and only the Dow saved us from some pain with a loss of -1.5%.There are a lot of election jitters and Fed Rate Hike Fears still lingering over this market.  For good reason.  They affect us all a great deal.

The Fed decided to do nothing. While mentioning the case for a rate hike increase was strengthening. Really? That's what you tell people. Talk about lacking credibility. Either way the do nothing approach makes it all the more likely December comes into play.  That gives investors 4 more weeks of uneasiness heading into the end of the year after we knock this election out of the way. Finally!!!

Thursday, November 3, 2016

Earnings - FB, CHD, VGR

Yesterday after the close we received earnings from one of the markets hottest and most talked about stocks, Facebook(FB). The company reported Q3 results with EPS of $0.82 up 165% on revenues of $6.8 billion up 59%. The company noted it's DAU's were 1.18 billion up 17%. On top of that mobile advertising revenues reprsented an 84% share. Staggering.

Unfortunately the company mentioned on the call that Q4 and 2017 would see a "meaningfully" decline in ad revenue growth rates and a pickup in expenses. That seems to be what is causing the stock to have a World Series Hangover today. Although looking at the chart it seems the stock was losing steam before this announcement. I wouldn't be surprised to see the stock pullback 20-25% overall. It's had a historic run already. So far today the shares have traded as low as $119.  Here is the company guidance given by the CFO during the conference call.

Turning now to the outlook for the remainder of 2016.
First, some color on revenue. We continue to expect that revenue growth rates will decline in Q4 as we lap a strong fourth quarter in 2015. We also continue to expect that our total Payments & Other Fees revenue in Q4 will be lower than it was in the fourth quarter of last year. 

I also wanted to provide some brief comments on 2017. First on revenue. As I mentioned last quarter, we continue to expect that ad load will play a less significant role driving revenue growth after mid-2017. Over the past two years we have averaged about 50% compound revenue growth in advertising. Ad load has been one of the three primary factors fueling 9 that growth. With a much smaller contribution from this important factor going forward, we expect to see ad revenue growth rates come down meaningfully. Secondly on expenses. Though it is premature to provide specific expense guidance, as Mark mentioned, we anticipate 2017 will be an aggressive investment year. Adding top engineering talent remains one of our key investment priorities as we continue to execute on our 3-, 5- and 10-year roadmap. We will continue to invest in our ability to recruit top technology talent both in the Bay Area and beyond. In addition, we expect to grow capital expenditures substantially as we continue to fund the ongoing data center expansion efforts that we have underway. Finally I wanted to share some plans on the use of cash starting in 2017. Beginning in January, we intend to fund withholding taxes due on employee equity awards via net share settlement, rather than our current approach of requiring employees to sell shares of our common stock to cover taxes upon vesting of such awards. We expect this change will increase our cash outflows and correspondingly result in less dilution. If we had used this approach in 2016, our cash outflows would have increased by approximately $1.8 billion in the year through September.

Our quiet strong arm, Church & Dwight (CHD), also reported Q3 earnings with EPS of $0.47 up 4.4% on revenues up 1% to $870.7 million. The company's core products in it's Consumer segment saw steady growth, especially internationally. The company lowered it's Q4 just slightly as it tightened guidance for EPS growth to 14% and 8%(reported & adjusted) from 14-15% to 8-9%. In other words a point off the top end.

The company's operating cash flow was up 21% in the quarter, and they announced their 463rd consecutive dividend. I expect a raise is coming for next year and I can easily see 10%. Either way shares are taking a beating today as they are currently down 7.6%. Maybe this will give me a buying opportunity I've been looking for.  Here is the CEO comments.

Matthew T. Farrell, President and Chief Executive Officer, commented, “We are pleased with our Consumer organic sales and the company’s earnings growth as our business overcame continued headwinds faced by our Specialty Products business. Our continued gross margin expansion in the third quarter provided us flexibility with our marketing and promotional investments to protect and grow our brand equities.”


Vector Group Ltd(VGR) reported Q3 results with EPS of $0.18 on revenues of $459 million. There was nothing really special that caught my eye in this quarter, but nonetheless shares are up near 3% on the day.  The company is a steady performer, and the dividend is still a generous 7.4%.  Although I would have liked to see some more growth out of the real estate portion of the business. That might be temporary though.

Tuesday, November 1, 2016

Earnings - HCP, CMI, EMR

If you own shares of HCP you may have noticed a few things differently this morning.  For one the share price of HCP is much lower as it's been adjusted for the spinoff of Quality Care Properties. That's the new company created from the HCR Manorcare business. Shareholders of HCP received 1 share of QCP for every 5 shares of HCP held in their account.  Fore more information see here. HCP also announced they were selling 64 Brookdale properties for $1.125 billion.  The company plans on using the proceeds from both transactions to deleverage, which is a wise move given the outlook for interest rates.

Now onto their earnings.