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   Strategies & Market TrendsBuffettology


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To: Freedom Fighter who wrote (1685)7/17/1999 12:35:00 AM
From: Shane M
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Wayne,

I agree that the the numbers on MCY look very good relative to competitors. California I guess was the deal breaker. These things come and go though. Occassionally everybody wants to be in a given state for the growth prospects, and then something happens that makes everybody wish they weren't there. And then later everybody wants back in for some other reason.

At my company we were running from hurricane exposure in the years following hurricane Andrew, and still are to a degree. But the pendulum is perceptively swinging back to freeing up writing in CAT areas, despite the fact that it's actuarially still far from being profitable on a normalized basis. In some areas the normalized CAT loss _alone_ is sufficient to cause underwriting losses. i.e. Before we have the first XCAT claim we are losing money becuase the expected CAT losses are so high. When there's major pressure to grow the top line companies will do unpredictable things.

Shane

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To: Shane M who wrote (1691)7/19/1999 10:48:00 PM
From: Michael Burry
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Started a position in Prepaid Legal Services today. Like Execujet, a whole new concept/industry, and they're the leader. It showed up on my "Young Buffett" screen a few weeks ago. It moved to the top of my buy soon list after finding little not to like in the biz plan or financials, and especially after noting heavy insider buying. I had been waiting for it to fall a little bit and provide a buying opportunity. They announced earnings today, and the stock moved up. Figured that I wouldn't see the 20's again, so I got in just under 30. The risk is, how good are they at pricing this stuff? I mean, the tables can't be as established as the other arms of the insurance industry. But then, being the leader, they also have flexibility because of this lack of norms. Kinda like the supercat segment.

Mike

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To: Michael Burry who wrote (1692)7/19/1999 11:48:00 PM
From: Brendan W
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Mike, how did you evaluate Prepaid Legal's network marketing strategy? This is what turned me off when I looked at it a month ago.

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To: Brendan W who wrote (1693)7/20/1999 1:06:00 AM
From: Michael Burry
   of 4643
 
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
   of 4643
 
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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