Browsing Category: "Superinvestors"
The second stock on the Magic Formula list that I generated last week is Anika Therapeutics (ANIK). I am not at all familiar with this company, but I’m interested in learning more about it.
I discovered that Anika Therapeutics develops, manufactures and commercializes therapeutic products and devices to promote the protection and healing of bone, cartilage and soft tissue. Their products are based on hyaluronic acid (HA), a naturally occurring, biocompatible polymer found throughout the body. A useful FAQ on Anika Therapeutics‘ website indicates that it currently has 61 employees and was founded in 1983.
I quickly reviewed the 5 primary factors that I use to help indicate whether a company has a wide moat. These factors include ROIC, equity growth, earnings per share growth, sales growth, and free cash flow growth over the past five years.
According to the ADVFN’s financials for Anika Therapeutics, current ROIC is 36.9 percent. However, average ROIC over the past five years is only 2.1 percent.
Looking at the equity numbers for ANIK, at the end of 2000 total equity was $26.7 million. By the end of 2005, that number has grown to $30.4 million. I estimate growth in equity has averaged about 3 percent over the past five years. Both ROIC and equity growth are both below 10 percent over the past five years.
Earnings, sales and free cash flow recently spiked. However, over the past five years these factors have not grown by an average of 10 percent.
Strickly looking at the numbers over the past five years, it does not look like Anika Therapeutics has a sustainable competitive advantage. However, it is also important to look ahead.
The FDA approval of Anika Therapeutics cosmetic tissue augmentation product has had a major impact on its current financials. Anika appears to have unique capabilities in researching and developing hyaluronic acid based products. According to their 10-K, their patents expire between 2009 and 2022. I’m not clear on exactly what these patents are and it appear that some of their technology is licensed from Tufts. The 10-K also notes:
We are aware of several companies that are developing and/or marketing products utilizing HA for a variety of human applications. In some cases, competitors have already obtained product approvals, submitted applications for approval or have commenced human clinical studies, either in the U.S. or in certain foreign countries. There exists major competing products for the use of HA in ophthalmic surgery. In addition, certain HA products for the treatment of osteoarthritis in the knee have received FDA approval and have been marketed in the U.S. since 1997, as well as select markets in Canada, Europe and other countries. In December 2003, the FDA approved an HA product for the treatment of facial wrinkles which has been marketed internationally since 1996.
That doesn’t sound like a wide moat to me. I think I will be passing on this stock for now. In time, it could become clearer whether or not Anika Therapeutics has a wide moat. Continued development of their products could result in some positive developments in the future and may expand their moat. For now, the best that could be said is that Anika Therapeutics could be developing and emerging moat.
Shai Dardashti finally shares the insights he gained from his January 18th meeting with Joel Greenblatt. I had been looking for Shai’s meeting notes for a couple of weeks. However, my suspense was turned to a slight disappointment with the answers Shai was able to share with us.
After reviewing the notes, I don’t think I see any direct responses to the questions we submitted to Shai:
- What do you think of going private transactions in this post Sarbanes Oxley Act environment that didn’t exist when you wrote “You Can Be A Stock Market Genius”? Do you think it is profitable for small investors to participate in these risk arbitrage opportunities associated with the reverse split/fractional shareholder cash outs used for some going private transactions? How should investors be evaluating which of these opportunities are good and which ones are bad?
- The Magic Formula produces an interesting list of companies. Some of the profitable companies on this list however don’t appear to have sustainable competitive advantages and their high profits may be temporary. When you personally use the results of the Magic Formula do you try to sort out which companies have sustainable competitive advantages versus the ones that don’t? What other criteria do you use to select which companies to invest in from the result of the Magic Formula?
Greenblatt did touch on the issue of special situations. Shai notes indicate Greenblatt said, “Special situations are just value investing with a catalyst.” He also notes, “Finding complicated situations that no one else wants to do the work to figure out is a way to gain an advantage.” That’s where my advantage regarding going private transactions comes into play. That advantage can also be your advantage if you gain access to Contributor’s Corner.
I found the following Joel Greenblatt’s comment regarding his Magic Formula reassuring. ”The Little Book is for people who cannot value companies. If you can value a company, you can start with the MF list. Then estimate normalized earnings, normalized free cash flow, and expected growth rates.” Joel acknowledges that digging deeper into the Magic Formula list is productive if you understand how to value a company, which somewhat addresses some earlier comments that I received.
“International investing may offer the best opportunity, at least in terms of cheapness,” notes Greenblatt. I plan on preparing myself better in regards to international investing. It is not something easy to do, and it can be expensive. However, like everything else, a little homework and preparation can help you achieve success.
I encourage you to visit Shai Dardashti’s site for the complete story.
I’ve been exploring the Magic Formula detailed in Joel Greenblatt’s latest book, The Little Book That Beats the Market
Great ideas for investment opportunities can often be found when reviewing the investment decisions of great investors. When Barron’s reported on 19 mutal funds that have beaten famed mutual fund manager Bill Miller over the past 15 years, I decided to take a closer look at the holdings of these top fund managers. Below I list out the 20 funds with links to their detailed mutual fund information offerings and the list of their top 25 holdings as reported by Morningstar: Read the rest of this entry »
Fellow value investing blogger, Shai Dardashti, has secured a meeting with Joel Greenblatt the author of The Little Book That Beats the Market
1. What do you think of going private transactions in this post Sarbanes Oxley Act environment that didn’t exist when you wrote ”You Can Be A Stock Market Genius”? Do you think it is profitable for small investors to participate in these risk arbitrage opportunities associated with the reverse split/fractional shareholder cash outs used for some going private transactions? How should investors be evaluating which of these opportunities are good and which ones are bad? 2. The Magic Formula produces an interesting list of companies. Some of the profitable companies on this list however don’t appear to have sustainable competitive advantages and their high profits may be temporary. When you personally use the results of the Magic Formula do you try to sort out which companies have sustainable competitive advantages versus the ones that don’t? What other criteria do you use to select which companies to invest in from the result of the Magic Formula?
Do you have any other questions that you would like answered by Mr. Greenblatt? Please post your questions below or send them along to Shai or me.
I wish Shai the best of luck with the interview. I look forward to reading about his experience soon. I’ll post a link to it when Shai posts his notes about the meeting with Joel Greenblatt.
You might wonder why I spend so much time discussing and referring to Warren Buffett here at Fat Pitch Financials. I just ran across an academic article that might help support why I think Warren Buffett’s approach to investing is superior to the market average.
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In addition to preparing your mental toughness, it is important to develop a good set of mental models for evaluating various business scenarios. Charlie Munger, Warren Buffett’s investment partner, recommends that you develop a set of mental models that you can call no to analyze various situations. Developing an ability to utilize a wide array of mental models in an interdisciplinary fashion can help you become a better investor.
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I have been recently thinking about my purchase of Microsoft (MSFT) stock. I have been struggling with how to explain its economic moat, until I ran across an email written by Warren Buffett on this very same topic!
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Earlier this week, the SEC gave us a peek into Berkshire Hathaway’s(BRKa BRKb) current stock holdings. Berkshire Hathaway filed a Form 13F-HR detailing their major stock holdings as of June 30, 2005. Most of the large holdings listed on this form were stock selected by Warren Buffett but others could have been purchased by one of Berkshire Hathaway’s subsidiaries.
It appears that Warren Buffett may have been involved in the purchase of over $231 million worth of shares in Sun Trust Banks (STI). I was a bit surprised by this retail bank purchase given the current trends in interest rates, but there might be more to Sun Trust than meets the eye. I may need to look a bit more closely at this one.
Another surprising stock purchase involves Berkshire Hathaway’s recent holdings in both major home improvement retailers, Home Depot (HD) and Lowe’s (LOW). This virtual duopoly does have a wide moat in the home improvement retail sector. I would, however, be a little nervous buying these two stocks considering the potential that the current red hot housing market might slow down and/or interest rates could climb. I think that either of these two events would slow down sales of home improvement products, but with people potentially staying put in their homes they may also continue to spend on smaller, but necessary, home improvements. It is interesting to note that Berkshire Hathaway selected both of these retailers versus picking a winner between the two.
One clear value opportunity in my mind was Warren Buffett’s purchase of Tyco (TYC). The legal problems surrounding this company have dropped the price of this stock dramatically. The recent guilty verdicts against former CEO Dennis Kozlowski and other top executives have created a great entry point into this stock. However, there has been some dramatic changes in leadership that may result in a good future for this conglomerate.
Finally, Berkshire Hathaway purchased $65 million worth of Lexmark (LXK). This purchase does not look like a typical Warren Buffett purchase, but it might be the work of Lou Simpson of Geico. The price of Lexmark has dropped dramatically over the past six months and now has a P/E of 15. However, there is intense competition in the computer printer market. It will be interesting to see how Berkshire Hathaway does with this investment, along with their other new purchases, in the long-term.
An update of a post made on May 4, 2005.
This past weekend, Warren Buffett and Charlie Munger shared their wisdom at the Berkshire Hathaway’s 2005 annual meeting. I always enjoy learning about the great insights imparted by these value investment masters at their annual meeting.
Matt Stichnoth shared some of his meeting notes over at Bankstocks.com. They are definetly worth reading. There are also some additional Berkshire Hathaway meeting notes listed at Vinvesting, including those by Rich Rockwood of Aldebaran Capital, Shai Dardashti, and BuffettJr. Paul Allen also posted some notes on his blog. Some “Gems from the Berkshire Hathaway Meeting” were also reported on by Morningstar’s Pat Dorsey. Finally, one of my readers, Sarah Roach of J.V. Bruni and Company, sent me a link to their discussion of the top 20 questions answered at the Berkshire Hathaway annual meeting.
Let us know if you attended the meeting, and please share your own impressions of what was said if you were there.
