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   Strategies & Market TrendsBuffettology


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To: Brendan W who wrote (1693)7/20/1999 1:06:00 AM
From: Michael Burry
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If there's one thing I learned from Buffett, it's that not every investment winner is as universally loved as Coke. Kirby vacuum cleaner salesman are dirtbags. Door-to-door encyclopedia salesman are an intrusion. And a nice little monopolistic newspaper can be a hated institution.

I was turned off by the marketing strategy cuz it smelled bad. But I can't fault the financials too much. 93% of premiums are collected monthly and booked as they are collected. Meanwhile, they pay out a large percentage of any commission on the front end. So acquisition cash flow is negative, and continuing cash flow is positive. As it should be. Pyramid schemes and MMM campaigns don't have this quality. The loss ratio is just 33%. Compare that to HMOs struggling to pay the bills with 90% loss ratios.

Prepaid isn't perfect. I just saw an analogy to the jet timesharing in that it is a new industry. Earning great returns, and priced cheaply. With insiders mostly buying I took the plunge. Wish I'd bought earlier this month. Management holds big chunks, and is motivated. Yeah, there's going to be an internet angle too.

Mike

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To: Michael Burry who wrote (1694)7/20/1999 3:40:00 AM
From: James Clarke
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I remember my father telling me when I was little that the only thing lawyers are good for is suing doctors and other lawyers. If you can't beat 'em, join 'em, right Mike?

I'd like to hear a little more about what you see in the valuation. I've said a number of times that in this environment I would love to own a publicly owned law firm. The best proxy I could find would be to short tobacco stocks or buy paper stocks. Do they serve individuals or corporations? And how much risk do they take that their customer's legal expenses will be higher than expected? Isn't that kind of like a capitated HMO patient in a runaway cost environment?

JJC

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To: Michael Burry who wrote (1692)7/20/1999 9:22:00 PM
From: Shane M
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Michael,

PPD is one that was showing up on my watchlist too, but I hadn't looked into yet because a few others kept getting my attention. Unfortunately HMA was one of those that diverted me.

BTW, I re-evaluated HMA over the weekend and feel that the current price is a still a good buy despite the recent warning. HMA has consistently delivered in the past, and with rural hospitals they have targeted a segment that offers them the potential for market beating returns. They've also done very well purchasing distressed hospitals and profitably turning them around, recruiting staff, and enhancing services. Medicare reimbursement have made the environment more difficult, but are commited to controlling costs to provide shareholders solid returns. I'm not buying more currently because I'm saving my remaining cash for what I see as an inevitable correction, but otherwise I'd probably be averaging into HMA at this point.

Also, I tinkered around with the screening criteria at the base of my stock valuation spreadsheet, and I ended up loosening the "Buffet" criteria a little bit to see if any more companies would make the cut in valuation terms. Even though loosening the criteria allowed about 400 more companies through, only a handful were added to my watchlist. One that was particularly interesting to me is Dycom DY. It's a communications infrastructure stock. I view bandwidth as an area that has long term economics in its favor. They're in the phase for a tech company where past investment pays off, profit margins are expanding, and debt levels are coming down. I'll be reading more about them, and probably looking to accumulate should the market oblige with a scary correction.

Shane

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To: Shane M who wrote (1696)7/21/1999 10:32:00 AM
From: Art Vandelay
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Shane

Re: HMA I also bought in before the bad news. I however did average down, so I am a little over $9 a share. I like their strategy also although I agree with Mike that this is probably not a Buffett stock due to the risk and how much influence the government can have. I guess we'll have to wait and see what happens.

I'm not buying more currently because I'm saving my remaining cash for what I see as an inevitable correction,

You're not the only one waiting (hoping) for a correction! (ggg)

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To: James Clarke who wrote (1695)7/21/1999 1:59:00 PM
From: Michael Burry
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PPD serves primarily individuals and small businesses. It is hard to imagine their approach having much success in big-time corporate America, but for small businesses it makes sense. They have had success marketing to certain groups as well. Targeting police officers, school teachers, etc.

They take very little risk that expenses will be higher than expected. All memberships sold since 1987 have been "closed panel." This means that the insured must access benefits through one of the "plan" lawyers. The lawyers get a capitated fee per member covered. Just like the HMOs. But there's much less hassle from the government, since no one really cares what people pay for legal advice. Least of all Congress. This is because there is no Medicare/Medicaid equivalent to make it an issue. And that won't change anytime soon. As well, the cost of providing legal services is managed by only offering certain services. You can't go to a lawyer for just anything - only for what you are covered. The ethical wars are much less than the HMOs have to fight as well. 94% of its members were closed panel as of the end of December.

From what I understand, they expect quite a bit out of their lawyers, highest ratings and all that. But evidently the legal cost ratio is so favorable that lawywers want to do it. The kicker is, PPD doesn't bear any of the liability for potential negligence or fraud claims if a provider attorney screws up. It's in the contracts.

It's not all rah-rah, though. Evidently quite a few members quit. That's part of the "smells bad." If I just ignore everything else and look at the numbers, I'm ok with investing in it. If I think about the MMM structure, then I think I'll head for the exits at the first sign of significant insider selling. To date, insiders have been big holders and buyers.

I don't think this is a Buffett investment in the manner of Coke. But maybe in the manner of Kirby or Execujet. Mike

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To: Michael Burry who wrote (1698)7/21/1999 10:46:00 PM
From: Michael Burry
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I should add that a downer re: PPD is that their cooperative arrangements with Conseco and CNA have not gone well. This could mean that live, straight-faced brokers can't sell PPD's product. And if it takes an army of profit-minded members to get the product sold, one must wonder what the long-term prospects are. I would be much more comfortable if the traditional channels started working for them.

BTW, is it becoming obvious to anyone here yet why Apple has Buffett characteristics. I couldn't pound the table hard enough back at 34, and I'm about to pound the table again even up here.

Mike

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To: Michael Burry who wrote (1699)7/22/1999 1:41:00 PM
From: LauA
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I still fail to see Apple as a Buffett-type stock. I remain unconvinced that it will be in business 10 years from now. My most recent piece of data comes from private conversation with an internet start-up that's getting lots of press, targeting a major sector, and is well-funded by Sand Hill VC's that is not even bothering to code a Mac version despite certain obvious attraction. Reasoning? Apple remains difficult to work with. Declining market share - If Apple wants to participate, they'll have to fund the R+D.

BTW, they are running their backbone on Linux boxes from VA Research.

Lau

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To: LauA who wrote (1700)7/22/1999 1:52:00 PM
From: Michael Burry
1 Recommendation   of 4657
 
What tells me Apple is a Buffett stock can be summed up in recent events.

Analysts expect the new iBook to retail for 1299. Apple jumps the price 30% to 1699 and gets some criticism for the price at the same time analysts are saying "they'll sell as many as they can make."
If this isn't market power, I don't know what is. To look at all box makers, lump them in one group, and say Apple has only this much percent is the wrong way to look at it (even so, the share is growing, not declining). To say that corporate IS isn't going to rally behind Apple is also missing the point. This is a consumer franchise, not a corporate one. And I think Buffett's point has always been that in the long run it is the consumer franchises that last. There is not another box-maker out there that could pull off what Apple is doing. No, not even Dell, jhg. That software makers (including Microsoft) are once again pouring resources into Apple development at breakneck pace is another clue as to the longevity here.

Plus, you have all of Wall Street trained to think that Apple is the antithesis of good business thanks to case studies from the 80s. How can you go wrong? ;)

Mike

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To: LauA who wrote (1700)7/24/1999 2:15:00 AM
From: James Clarke
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Disney

"Zippedey doo da, Zippeday 'ey.
For internet presence we're gonna overpay.
Plenty of losses comin' our way.
Zippedey doo da, Zippeyday 'ey"

My question is what price Disney? 25? 22? 20? This puppy is clearly a Buffett stock, and the stock price is disintigrating under current management. (Remember what Buffett says - buy a business that could be run by morons, because someday it will be - that is where Disney is today). These guys just bought out a large internet company at a premium to the market price. And then Eisner shows up on CNBC talking about what a great deal it was. You just want Bambi to grow some horns and gore him.

And if they are doing deals like that, I don't know how relevant any valuation analysis can be. I am interested below 25, but I have a lot of trouble having much conviction.


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To: James Clarke who wrote (1702)7/24/1999 1:05:00 PM
From: LauA
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Mike and James, your present value thinking appears to be much more profitable than my speculations on the future. When I posed the question to the GEICO porfolio investment guys about how they determine if a company with high ROE will return value to the shareholder in the future via higher stock price, they recommended such a look to the past, and present.

In Fry's yesterday a salesman was laughing at customers who buy iMacs, but he admitted that they buy them. He told of a graphics designer who bought one recently, and then had to upgrade it so much that it cost the same as a G3. He said consumers are buying them as decorator items - what color goes with other things in the room? Blueberry, grape, and tangerine sell. Strawberry doesn't. So Mike's observations on pricing of the iBook trump my thoughts that it is an iBrick (because of weight) and that its announcement has a quality of 'vapor' because volume shipments will begin after the back to school buying has ended.

At Fry's the salesman said that customers are buying iMacs to get on the iNet - he said that's about all it does well. Meanwhile eMachines in Fry's is being given away - Free with a sign up for 3 years of ISP at $22/month. Of course next week Alta Vista will be offering a Free ISP.

Which brings up new complications in valuation of the net. AOL has bankrolled eMachines which is currently the 4th largest producer of PC's. (Is Apple in the top 10?) They bundle an eMachine with Compuserve (an AOL ISP). But with Free ISP's around, how long will the conventional AOL, Earthlink, Mindspring model survive? The Free ISP will sport targeted ads. They catalog every URL that's visited and construct a profile for each user (who's anonymously, but uniquely identified by his/her log in password. The business model will approach commercial radio and TV with the fillup of allowing impulse buying.

Hence a Disney needs to be there. Their choice is to buy or build. It's hard to know how to value a current iNet player, but you must recognize that it's not all that easy to find worker bees to build a new company. Paradigms seem to be shifting every 6 - 12 weeks, but most of the real estate has been staked out already. Passive branding may get more valuable as stores become places you shop, and the 'Net becomes the place you buy. On the other hand, if your on-ramp guides you to a certain universe of names, these 'free' ISP's may develop the merchandising power that WalMart has today.

"Hi Ho, Hi Ho, it's off to thunk, I go"

Lau

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