I like this constructive debate about ACAS as a good investment. Jadedconsumer posted an argument against some of my arguments posted here and as a comment on his blog.
Here is simple question I would like to ask people who think ACAS as long term investment - ACAS cash flow from operations was $2.76 in 2007 and it paid $3.72 in dividends. How can a company which had an inflow of $2.76 from its busineess activities pay more in dividends ? Well by selling portfolio investments at a profit. But cash flow from investments is well negative. So we did not get the difference in cash from investements. That means it has to come from cash flow from financing activities. And there lies the proof of money flowing from Jane-to-John. There lies the point and there lies the beauty :-)
Saturday, January 17, 2009
Investment Fables
As Peter Lynch often says, companies will cut the flowers and water the weeds – when a company is in trouble it often sells the crown jewels.
- Case in point Citigroup's sale of Smith Barney to Morgan Stanley. So is Smith Barney a crown jewel ?
“The difficulty lies not in the new ideas but in escaping from the old ones”
- Case in point Citigroup's sale of Smith Barney to Morgan Stanley. So is Smith Barney a crown jewel ?
“The difficulty lies not in the new ideas but in escaping from the old ones”
Friday, January 16, 2009
Why ACAS is not a good long time investment ?
The jadedconsumer is fan of ACAS and has some compelling analysis of why ACAS is good long term value. I respectfully disagree with his views. Here is my take on ACAS.
I was considering buying when the stock looked cheap on valuation measures like P/NAV etc. Here is why I did not and will not invest. Let me be also clear that I would also like to invest for the long term i.e. forever if possible. If you look at the source of equity for ACAS, most of it comes from share issuance and if you examine equity over a number of years it can be proven that ACAS used the famous strategy "WEB" has warned against - taking money from "Jane" and giving it to "John" for a number of years and last few years more seems to be coming from earnings than Jane's contribution, still Jane's contribution trumps actual earnings contribution. Also ACAS is more like an REIT which has to pay out 90% of what it "earns" and the remaining 10% is not enough to finance its portfolio companies so it has to go to the "Jane" time and again to raise equity to keep with the 1:1 debt covenant. So although the debt-to-equity looks below one, most of it is Jane's contribution. So although it sounds attractive, its not a good proposition. For a long term investor - today when I want to invest, the dividend for last 10 years is history and is worth nothing and the next dividends which will come from what the underlying business will earn has more meaning. But only 10% has been retained and most years what has been paid came from "Jane". So your investment jadedconsumer's thesis ACAS as a long term investment is flawed. However I must agree that if you stay in it for 2-3, you are likely to profit from "price speculation" rather than "value appreciation". Most appreciation will come not from a sound investment thesis but from the speculative aspects. So the question becomes just because you profit on the price (1-day, 2-3 years), does it make a favorable long term investment in terms of investment in a value producing underlying business ?
I was considering buying when the stock looked cheap on valuation measures like P/NAV etc. Here is why I did not and will not invest. Let me be also clear that I would also like to invest for the long term i.e. forever if possible. If you look at the source of equity for ACAS, most of it comes from share issuance and if you examine equity over a number of years it can be proven that ACAS used the famous strategy "WEB" has warned against - taking money from "Jane" and giving it to "John" for a number of years and last few years more seems to be coming from earnings than Jane's contribution, still Jane's contribution trumps actual earnings contribution. Also ACAS is more like an REIT which has to pay out 90% of what it "earns" and the remaining 10% is not enough to finance its portfolio companies so it has to go to the "Jane" time and again to raise equity to keep with the 1:1 debt covenant. So although the debt-to-equity looks below one, most of it is Jane's contribution. So although it sounds attractive, its not a good proposition. For a long term investor - today when I want to invest, the dividend for last 10 years is history and is worth nothing and the next dividends which will come from what the underlying business will earn has more meaning. But only 10% has been retained and most years what has been paid came from "Jane". So your investment jadedconsumer's thesis ACAS as a long term investment is flawed. However I must agree that if you stay in it for 2-3, you are likely to profit from "price speculation" rather than "value appreciation". Most appreciation will come not from a sound investment thesis but from the speculative aspects. So the question becomes just because you profit on the price (1-day, 2-3 years), does it make a favorable long term investment in terms of investment in a value producing underlying business ?
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