Week 37: Is This A Bootstrap Paradox?

We make decisions at this Company for the long term. We don’t make them for the week, we don’t make them for the month, we don’t make them for the quarter, and in some cases we don’t even make them for the year. But we look for long-term, profitable, sustainable growth.
— Henry Maier, President and CEO of FedEx Ground

Please refer to Important Disclosure Information at the end of this research note.

The Markets

The S&P 500 (i.e., the “market”) is down around 5% for the year, excluding dividends.  Healthcare and consumer discretionary are still doing better and commodities are doing worse.  While gold is still down for the year, the commodity is showing some signs of life.

As an aside, for those wondering why we discuss year-to-date price movements, we believe it’s a happy middle ground between weekly prices, where we get the full blast of Mr. Market’s bipolar gyrations , and five-year prices, which can be like watching paint dry.

For a day trader, this was an action packed week with the markets rising and then falling and ending up where it started the week.  

So let’s recap what happened:  The market ran up into the Fed meeting on Thursday. TV pundits urged the Fed not to raise rates as it would be “bad” for the markets.  Fed Chair Janet Yellen obliged and the pundits rejoiced. The markets fell sharply on Friday giving back all the gains from early in the week!

Is this a Bootstrap Paradox? i.e., is the market driving the Fed who is driving the market?

Markets do strange things in the short run – all the time! Traders live for these short-term gyrations.  Traders buy and sell stocks and rarely care about the value of the underlying business. 

Long-term investors begin with the value of the underlying business and look for divergences between price and value.  We like to think we belong to this camp. We like the businesses we own and we love to talk about them.

 

Know Your Dollar Exposure

Do you know what a 1% move in the dollar versus the Brazilian Real could do to your portfolio? If you own a commodity company such as FMC Corp (FMC) which appears to be sinking everyday, here may be one reason:

 

Cable for Sale

This week, Altice, a European cable company, announced they were buying Cablevision (CVC). This follows on their Suddenlink bid from earlier this year.

See our post on cable stocks from earlier this month for our favorable view on the cable industry. If cable stocks remain undervalued, global strategic acquirers will keep stepping in.

 

Fedex – Getting lost in the weeds

FedEx (FDX) reported quarterly earnings.  Their reports are always interesting because they provide a “feet-on-the-street” perspective on the global economy and sometimes FDX’s founder, Fred Smith, steps in for his unfiltered views on the world.  

Regarding the macro-environment, they took down their 2016 GDP and industrial production forecasts citing “weather report closures, lower oil CapEx and weak export from the strong dollar.”  

Unlike most public companies, FDX provides analysts with copious amounts of data.  Analysts can write pages upon pages citing their favorite data-points and can sometimes get lost in the weeds. 

We try to focus on a few areas that we believe will be material to the business’s underlying value:

  • What is the progress on the FedEx Express profit improvement plan?  When complete, we believe, FDX’s Express business alone could be worth 75% of FDX’s current market capitalization.
  • Has anything changed in the FedEx Ground business? FDX Ground is a “crown jewel” taking share from competitor UPS and the U.S. Postal Service.  In a few years, we believe this business could also be worth 75% of FDX’s current market capitalization.  

  • So the Express and Ground businesses taken together could be worth 1.5 times the current market capitalization of FDX. That doesn’t even take into consideration the Freight business which is worth something greater than zero.

  • FDX also announced a price increase.  For such a high quality duopoly business with pricing power and long-term oriented management (please see Henry Maier's quote at the top of this post), we believe the divergence between price and value is unwarranted.  Too bad, market participants don’t seem to care, right now.

 

Celebrating Entrepreneurship

This week we recognized Constitution Day (September 17th) in the Personal Finance class I teach, with a lively debate on the first clause of the first section of the Fourteenth Amendment to the Constitution.

On a somewhat related note, did you know that United States ranks seventh in “ease of doing business” according to doingbusiness.org. Singapore ranks first.

When it comes to “starting a business,“ New Zealand ranks first.

In contrast, India ranks 142nd (out of 189) in “ease of doing business” and 158th in “starting a business.” So how is 21-year old Ritesh Agarwal able to build India’s largest hotel network?  Read more here and here

 

Important Disclosure Information:

At the time this report was submitted for publication, the principals and clients of Burr Capital LLC owned securities issued by FMC Corp. (Ticker: FMC) and Fedex (FDX).  At the time this report was submitted for publication, the principals and clients of Burr Capital LLC owned securities issued by Charter (Ticker:  CHTR), Liberty Broadband (LBRDK), Liberty Global (LBTYK), Time Warner Cable (TWC), Liberty Ventures (LVNTA), Cable One (CABO), Comcast (CMCSA), and LiLAC (LILAK). Stock price charts created in Google Finance.

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