Quick Thoughts on Healthcare ETF’s and Lumber Liquiditators (LL)

Lumber Liquidator

Investing in area you know nothing about…  I agree with Maverick, for any well diversified portfolio you need exposure to any big industry.  Pharma and Biotech is a huge part of the overall market.  Not having exposure there means you are overweighting the things in your portfolio.  (For us that’s been energy… sad face.)  But how do you wisely invest in an area you know little about?  Going with a hot tip can work, but I’m leaning towards more diversification.    How about some sector ETFs?  IBB (Biotech), IYH U.S. Healthcare), IHI (U.S. Medical Devices), IHE (US. Pharmaceuticals), and IHF (U.S. Healthcare Providers) are all healthcare-related stock ETFs with a particular focus.

On another note, I’m interested in Lumber Liquidators (LL).  There was a 60 Minutes story about how some of their flooring has too much formaldehyde and may cause cancer.  Now cancer is not good, and causing cancer is both evil and expensive.  But I’m thinking this story is probably overblown.  Anytime a financial story is broken by the popular media it has a dramatic effect on the stock price.  The 60 minutes story was actual proposed by a hedge fund that is short the stock!

Now LL has had some issues.  They are expanding and yet sales growth has really slowed down.  Same store sales were negative for all of 2014, and margins came down.  But the stock has been cut in half in the last month (from $70 to $35), at $35 bucks they are trading at less than 1x revenue, at historical net income margins of 6-8% the stock trades between 12x – 16x depressed earnings.  (all home material stocks took a beating this quarter)

I’m debating whether I should wait for a March 12th call management is putting together to address these issues or pick up some stock before hand.  If they announce an increase in the buyback plan jump on before it’s too late.


The $1,000 Pill

GILD pill pic

Anyone who knows me well can attest that the world of science is not my strong suit.  I managed to get through AP Chemistry through rote memorization and very little practical understanding of what on earth a “mole” or “Venn diagram” really means.  If you want help on a paper maiche volcano or an explanation of what a gallbladder actually does, I am not your man for the job.

This is probably why I’ve always been under-allocated to science and healthcare-related stocks in my investment portfolio.  I have no common sense gauge to judge the risk of a business or how they might stack up to their competition.  With specific regards to biotech firms, I’ve always wanted to invest in them but the idea of relying on proprietary cures for diseases and ailments after years and years of regulated testing truly scares me.

Having said all of this, the ATG portfolio needs at least some healthcare/ biotech exposure.  I’m going to have to get over my personal insecurities in the sector and rely on (i) external research and feedback and (ii) a review of their basic financials to select a security for the portfolio.  After some basic screening, we are deciding whether to open a position in Gilead Sciences, Inc.  (GILD).

GILD has been on my radar for a while through a personal connection.  I have a friend who has worked for GILD for several years- unfortunately his frequent comments on the rapid growth and success of the company never quite resonated above the bar-room chatter about girls, sports, and who knows what else.

He directly recommended the stock to me again back in March 2014 (when it was around $70/ share) because the biotech stocks were getting hammered and he thought GILD’s earnings would pop with the release of their Hepatitis C drug Sovaldi.   I didn’t bite simply because the P/E was still scary high and I couldn’t justify taking a flyer on a new drug release.  When GILD reported Q1-14 earnings in April 2014, I wish I had trusted my friend’s inside perspective- GILD earnings tripled from the prior quarter with a 62% upside surprise to consensus estimates.

Ever since then, GILD has been on a tear to the point where their earnings (both on a trailing 12 months and forward year) now suggest value-stock pricing (14 trailing P/E and 10 forward P/E).  Below is a charge of their earnings growth over the past three years:

GILD earnings

In addition to an attractive P/E ratio, GILD has negligible debt, ample free cash flow, and a gaudy return on equity.  Additionally, a few different research reports I read about the company alluded to their market-leading and “strong economic moat” position in Hep C and HIV treatment drugs.  Sounds awesome, right?

Well, after a little juvenile research on their business I did find one red flag that causes me some concern.  It turns out that one of their main money makers, the Hep C drug Sovaldi mentioned above, literally costs $1,000/ pill, which translates to over $80k for a basic treatment.  In fact, they have a newer Hep C drug called Harvoni that will cost even more!  Here’s where I get nervous- maybe their Hep C drug is so superior that the market simply has to accept this pricing.  On the other hand, I can’t see Obamacare being down with covering that level of cost.   If they drop the hammer, the universe of people that can pay for the treatment out of pocket is probably equivalent to the current number of Weight Watcher members (sorry- that’s a deeply painful, inside joke).

ATG needs some biotech/ healthcare exposure and I’m still intrigued by the stock- the financial metrics are right up our alley and analyst coverage on the stock remains fairly bullish from what I can tell.  But my personal science background inadequacy and the $1,000 pill is giving me hesitation- please reach out to me if you have any advice or thoughts on this stock (or a better one in the sector)!!


Weight for the BOOM!

WTW chocolate phone

“Fortune favors the bold, but it also favors the smart. And for marketing savvy advertisers, there’s no smarter place to be than on the Super Bowl. It’s worth every million.”- Rob Siltanen, founder of industry leading ad agency Siltanen and Partners.

I am so proud of Weight Watchers (WTW) right now.  Amidst declining membership rates and short-selling pressure driving their stock to a 52-week low, they made the bold decision to purchase their first ever Super Bowl ad this coming Sunday.  I love this move on multiple levels, starting with the successful execution of their new re-branding efforts:

  • There simply is no better forum to reach a mass amount of people feeling bloated and out of shape at one moment!
  • Dieting in January simply doesn’t work for men (ahem, College Bowl Games and NFL playoffs?!!), but the day after the Super Bowl is absolutely perfect.  It’s cold, there’ no football, shortest month, need I say more??
  • The Super Bowl is very unique in it’s ability to resonate with both men and women of all ages; if the ad is done right, it could have a massive impact on new sales for both men and women, especially from men who previously viewed Weight Watchers as primarily a “weight loss support group for chicks”.

Weight Watchers has the unique challenge of holding an industry-leading, time tested  method of weigh loss that is losing market share to unproven, but more cost -effective and technologically advanced alternatives.  I think a Super Bowl ad is the perfect venue for attracting new customers in this environment- while the obesity endemic spares no age group, boomers and Gen-Xer’s are much more likely to respond to a Weight Watcher’s TV ad than a twitter feed or facebook page.

While I’d love to geek out on the financial case for Weight Watchers (WTW) as an intriguing stock pick, I think the their future success is  primarily tied to the success or failure of their marketing campaign.  Hence, I’ve decided to back up the truck on my personal portfolio for WTW stock in belief that the Super Bowl campaign will be the perfect avenue for promoting the industry-leading service that Weight Watchers provides.



If I was in charge of the Grammy’s…

kish album


WIth the 2015 Grammy’s fast approaching, I thought I’d chime in with my personal best song list of 2014.   I was going to start this quick post with listing the current Grammy nominees for Best Song, but after reviewing it, I simply I can’t bring myself to publish it.  “Shake it Off” by Taylor Swift and “Take me to Church” are songs I’ve admittedly jammed to with my 3 yr old daughter on occasion, but best song of 2014??  And don’t get me started on “Chandelier” by Sia or “All About the Bass” from Meghan Trainor.  To each their own I suppose…

Without further adieu, here’s my personal picks for best song of 2014 (in no particular order):

1.  Brill Bruisers – New Pornographers.

This song wasn’t on my radar until being invited to the New Pornographers concert by a friend a few months ago.  The concert was nothing earth shattering (we actually left early), but when they played “Brill Bruisers”, I suddenly felt like a college kid again, emboldened  to thrust ahead into a world with no limits.  Musically, the song pairs an incredibly catchy sing-a-along main riff with an unexpected, atmospheric transition that takes the song to a level well beyond your typical inde-rock anthem.

2.   Tie:  “Something from Nothing” or “Outside”- Foo Fighters.  

I stumbled onto these songs by watching the season premier of the Sonic Highways documentary on HBO.  Not only was the documentary on the Chicago music scene and its influence on the Foo Fighters engrossing, but the song at the end of the video was simply fantastic.  I immediately downloaded the Sonic Highways album on iTunes and haven’t enjoyed a hard rock album this much in a few years.  If you like the Foo Fighters and haven’t given “Sonic Highways” a listen, I highly recommend that you check it out- their best album since “The Colour and the Shape” in my humble opinion.

3.  The Ballad of Mr. Steak – Kishi Bashi.

 If you haven’t had the good fortune of stumbling across Kishi Bashi yet, I’d like to take credit for introducing you to the most exhilarating new artist to emerge this year.  (My friend Baak gets credit for introducing him to me, mentioning Kishi as “a dude who used to play violin for Of Montreal before going solo”.)  If  “The Ballad of Mr. Steak” can’t get you out of a funk, you must be having a really, really, bad day.  The picture above is the album cover for “Lighght”.

4.  Coffee – Sylvan Esso.

This song is this year’s “Royals by Lorde” moment:  Sparse and haunting vocals, analog keyboards, and arhythmic beats combine to create the most unique mood and style in a song I’ve heard this year.  It reminds me of the Postal Service album in the way that smart lyrics are set against an understated electronic landscape.  The whole Slyvan Esso album is fantastic (much better than the more highly acclaimed St. Vincent album in my humble opinion), and Coffee stands apart as its masterpiece.

I think i’ll stop here- I’m sure I’ll wake up in the morning and kick myself for forgetting the BEST song of 2014 but  hopefully the songs above can provide you with a few new suggestions to check out and provide some fodder for discussion.  i’d love to hear any suggestions your have as well on this topic: don’t be shy in posting a reply to the post with your thoughts!


Avoiding the Oil Bet

Oil Picture 1-10

I don’t think I could ever work for a macro-strategy investment company.  When I hear about investment ideas centered around relative currency strength, anticipated interest rate movement, commodity prices, and yes, world-wide oil supply/ demand, my head starts to spin and I have trouble seeing the forest from the trees.  I’m much more comfortable opining on whether I think people would prefer to eat a Big Mac or Whopper (and who has a better balance sheet) than what’s going to happen to worldwide beef prices because of the political situation in Brazil.  That doesn’t mean that I don’t at least try to understand macro issues and their implications; rather, I try to know my limitations and keep the faith that my investment strategy will eventually weather various macro storms I don’t fully understand if I can find good value in great long-term businesses.

With oil prices down almost 50% in the last six months alone, every investment expert is weighing in with their view on how this will affect the market.  It’s a complicated issue- obviously lower gas prices for consumers is great in that people can spend their money on other things and great for countries that rely on importing gas, but it’s not so great if energy-related loans start defaulting and impacting banks or the U.S. loses a big chunk of the previous job gains over the past 5 years that were energy related.

My conclusion on this whole issue is that I simply don’t know what’s going to happen with oil prices and how it will affect the overall market, so I’d like to explore opportunities within the market that are less impacted by oil prices (or ideally not at all impacted).

Below are some of my thoughts on stocks/ themes that meet two criteria:  (i) I think they are good stand-alone investments ideas for 2015 and (ii) I don’t think that oil price movement (good or bad) will have a huge impact on their success or failure.

  1. Battered down brand names/ re-positioning stories:
    • Weight Watchers (WTW):  After a fantastic 50% run-up in the second half of 2014 due to new leadership, improved technology, earnings beats, and revised upward earnings estimates, the stock has mysteriously lost 30% in value over the past 3 weeks alone with no material news other than the fact that some people didn’t “like their new magazine layout”.  I’m still a believer in what the new management team is doing and am looking forward to another nice run.
    • Hertz (HTZ):  Despite being transportation related, I don’t think oil prices will swing the dial much for Hertz; it all comes down to whether the new leadership can execute a successful turnaround and restore investor confidence in their operations, strategy, and reporting.  If they can, this stock has tremendous upside.  If they can’t, you are at least left with an iconic brand name and infrastructure that is near impossible to replicate.
  2. Lower-end consumer product and food companies:
    • YUM Brands (YUM):  People might eat a little more junk food with lower oil prices, but a larger driver of growth for companies like YUM (parent company of KFC, Taco Bell, and Pizza Hut) is their ability to grow into new markets and take share from competitors.  moMANon wrote a great piece on YUM and why he feels that the Pizza Hut re-branding has the potential to take some meaningful market share from its competitors and move the earnings dial for YUM.
  3. Health/ organic oriented food companies:
    • Whitewave Foods (WWAV):  The other day at the grocery store I was shocked to have paid more for a gallon of organic milk for my kids than I typically pay for a gallon of dairy alternatives like soy or almond milk.  Oil prices won’t dictate whether people drink milk or diary alternatives, and Whitewave has been on fire with 10 straight quarters of beating earnings expectations, year-over-year revenue growth exceeding 40% and encouraging new partnerships in china to expand their reach.  ATG is going long again on lactose intolerance.
  4. High Tech:
    • My personal favorite play here is probably Corning (GLW), the leading manufacturer of durable glass for tv’s, phones, and tablets.  I don’t have a great “ATG” theory of why they will outperform other than I just love the company, their market dominance, and ability to continue innovating over the past 100+ years.  Google (GOOGL) also feels cheap to me right now, but if oil prices cause an overall market shock downwards for some reason, I could see the mega-cap, high trading volume companies getting crushed simply from investor fund withdrawals.
  5. Non-equity income and dividend plays (non-energy related of course!):
    • There’s nothing wrong with parking some money in non-equity dividend plays if you are nervous about energy prices rocking the market.  Within the ATG portfolio we have increased our allocation to iShares U.S. Preferred Stock ETF (PFF), a large basket of predominantly bank-related preferred shares that are currently yielding 6.33%.  If low oil prices were to trigger bank defaults, PFF would certainly be impacted, but not nearly as much as the underlying equities would be impacted.

With over 3,000 publicly traded companies in the U.S. alone and who knows how many mutual funds and ETF’s, investors have plenty of opportunities to pick their spots and limit exposure to certain factors of their choosing.  I’m not staying away from the market, but I am staring away from big oil price bets in my personal portfolio for now.

Dude, let’s order up some pizza!

wayne pizza hut


We’ve been looking for out-of-favor brands since ATG launched.  Some businesses are driven by management, some by macro trends, some by innovation, etc…  There are a lot of reasons why a business can excel; a resurgence of a brand is one of those reasons.  What better way to turn a brand around than a new global advertising campaign?   I’m always on the look out for new ad campaigns that could turn things around.

In this case I’m going to be talking about pizza.  As a lactose intolerant man, and a New Yorker, I’m not the global pizza brand customer.  But I know there are three major players in the industry:  Pizza Hut, Domino’s, and Papa John’s.   There are some secondary brands (Little Ceasers, CiCi, etc…) and then there are mom and pop shops.  Pizza isn’t a new category, nor is it going out of favor.  What drives the success of these companies versus the rest of the industry is branding, new products, and global/national food trends.

I really like the new Pizza Hut redesign.  Pizza Hut built its brand on the red roof stores, which was targeted towards eat-in customers.  As pizza consumption moved to delivery, the eat-in business suffered, and stores built for eat-in customers were not a good use of capital.  Pizza Hut has been on the decline for some time.   Same-store-sales have been negative for 8 quarters in a row.

So what’s going to change?  They are rebranding.



pizza hut new logopizza hut swirly



I like the focus on pizza sauces.  I like the spirals.  I like the new logo.  I think both Papa John’s and Domino’s have been running long term campaigns, which I like, but have been on for years.  Even good campaigns can lose their impact after a few years.  So maybe it’s Pizza Hut’s turn.  I have convinced myself I like the ads with grumpy Italians even though a writer I respect recently trashed them.

Pizza Hut is owned by Yum brands (YUM), which also owns KFC and Taco Bell.  So even if Pizza Hut does well, YUM brands trends could differ.  But I like the direction KFC and Taco Bell are going, and it appears taht the stock doesn’t have much built in for “The Hut.”

While this isn’t my typical value play, I don’t mind owning a world leader with a side story that could provide some upside.


Against the Grain: Countering the ETF Craze


I need to tread lightly in this post for a few reasons, not the least of which is that there is overwhelming evidence that a long-term passive index investment strategy has significantly outperformed active investment managers (including mutual funds and hedge funds) over the past several years.  In fact, I feel so uncertain about this post that I have to rely on a cute picture of one of my children to market the post!

Below is a passage from a Forbes article in August 2013 succinctly summarizing the data on active vs. passive investing:

“Using Morningstar’s fund database, we examined the performance of more than 2,000 active US equity funds during the 15-year period from July 1, 1998 to June 28, 2013. Result: only 25.6% of the active funds currently in existence outperformed their benchmarks (nearly 75% trailed the benchmark or had an insufficient track record to compare). Many other studies over extended time periods have reached a similar conclusion, including Standard & Poor’s, which found that 69% of all domestic equity funds were either outperformed after expenses by their benchmarks over the prior five years or had been liquidated during the period from Jan. 1, 2008 to Dec. 31, 2012 (Source: S&P Indices Versus Active Funds Scorecard).”

I don’t dispute the data.  I also would never claim to be smarter than the average professional investor.  But I truly believe that we are at a point where smart, active investment strategies grounded in value-investing principals are going to crush the index returns over the next twelve months, provided the fees are reasonable.  The rationale boils down to timing- passive strategies tend to do their ass-kicking relative to active strategies in strong bull markets  vs. sideways/ bear markets.  And with the huge institutional investors like CalPERS now abandoning active investment managers for ETF’s, it will drive down the fees that active managers will charge and create opportunities for smaller investors to partner with the better active managers.   

For everyone’s sake I hope the market continues to climb steadily, but muted GDP and real wage growth suggests we have a lot of catching up to do in justifying a continued stock market climb.  The U.S. economy and stock market has amazing advantages relative to other investment options in the world due to job growth, a strong dollar and oil production, amongst other factors, but in the end it’s hard to build an argument for outsized U.S. stock market returns next year.  There are still plenty of legitimate headwinds for continued growth- continued deficit woes, ineffective government, historically low labor participation rates, European stagnation, military instability via ISIS and Russia/ Ukraine, not to mention future problems from countries like Venezuela if oil prices spark political instability.  Don’t get me wrong- I’m still bullish on the American economy in particular- I just think healthy investment returns over the next 12 months will require a manager who knows how to pick the right spots vs. the consensus view of an a passive index approach.

Recently Bloomberg published a great article about the demise of many hedge funds in light of their under-performance to passively-managed portfolios.  Specifically, it references that through June 2014, 461 hedge funds had closed shop, the worst year for hedge fund closures since 2009.   Check out the link for a full flavor of their perspective and video dialogue on the commentators’ perspective:



At the end of the day, I don’t have a crystal ball.  But I do have my own personal investing experience over the past 20 years and gut intuition to believe that the current passive investing and ETF craze feels a bit like a bubble to me, despite ample amounts of credible evidence to the contrary.

Intuitively, how on earth can a competitive market be set for the fair value of investment securities if the majority of investment capital is being funneled via a passive vehicle that pays no heed to the intrinsic value of the asset?  In other words, an asset needs to be rationally valued somehow- the less that the value is determined by informed investors vs. index allocations, the more that opportunity arises for smart, active investors who can pick their spots.

Did I mention that the ATG Fund will be open to outside investors January 1, 2015?  Let me know if you are interested in learning more about the ATG investment fund and our specific strategies for 2015.