New Trades

Here is an overview of recent trades:

Sold BlackBerry (BBRY) last month at 10.50-11.  This was a money-losing investment.  I sold soon after the news that the company was putting itself up for sale.  I think management has been unsuccessful in implementing its strategy, and my investing thesis was incorrect.  More on my thoughts on why this was an unsuccessful investment below.

Sold Nokia (NOK) a couple weeks ago at $6.40.  I sold because the capitalization increased about $9 billion after Microsoft purchased all phone assets for $7 billion.  In my opinion, the phone assets were worth more than -$2 billion.  Therefore, the investing thesis about undervalued assets and operations had mostly played out, based on the catalyst of the Microsoft deal.

Sold Yahoo! (YHOO) a few months ago at $24-25.  This sale may have been a little premature.  But it was a nice gainer.  This was another undervalued asset play. The catalyst that allowed the assets to realize more value was Marissa Mayer's initial success as CEO.  I sold because I felt that the assets were no longer undervalued, and she seemed to be spending the cash somewhat rapidly on startup purchases.

Purchased Fiat (FIATY) at $7 a couple months ago (approx $8 billion market cap).  My purchase was based on my belief that Sergio Marchionne is a smart business man, and he can bring Chrysler and Fiat together and make both profitable companies.  I also believe the assets are undervalued (including 60% share of Chrysler).  Fiat uses an interesting method of measuring liabilities on its balance sheet in quarterly reports.  I think they emphasizes liabilities more than typical in an American auto company, and this could cause some analysts to undervalue the company.  I think that Fiat is well positioned to reach profitability once the European market turns around, hopefully late next year.  Marchionne also has an incentive to downplay the value of Chrysler and downplay the value of Fiat because he is still trying to negotiate a deal with the United Auto Workers for purchase of 25% of Chrysler.  I think the merger of those two companies could help the stock price increase.

Purchased Google (GOOG) at $900 - $300 billion market cap.  Google is trading at 25x earnings.  They have a near-monopoly in two very high-profit industries (search and online video) and have many other growing businesses (mobile phone operating system, mapping, web browser, laptop operating system) that are not yet profitable but may be in the future.  Additionally, Google is working on new projects that may become profitable in the future (self-driving cars, glass, laying fiber cables across America).  I think this is a growth stock, a good, safe business, and is either fairly valued or a little undervalued at 25x earnings.

Purchased Telephone and Data Systems (TDS) at $28 (about $3.1 billion market cap).  This is because I think TDS's assets are undervalued.  TDS owns about 83% of U.S. Cellular (USM).  U.S. Cellular has a market cap of about $3.7 billion.  Just accounting for U.S. Cellular, TDS should be trading at $28.  In addition, TDS has a profitable business of its own in the wireless, long distance, and cable business.  That business is worth about $500 million by my estimation.  Finally, TDS has $600 million of excess cash based on U.S. Cellular dividends and business profits.  Therefore it appears that TDS in undervalued.  U.S. Cellular's value seems very stable, as it owns lots of 700 mhz spectrum.  This spectrum is the lowest frequency spectrum that has the ability to penetrate buildings.  Spectrum has been at a premium recently, and U.S. Cellular has agreed to two separate transactions where it sold spectrum to larger wireless providers for hundreds of millions of dollars.  Some of the spectrum it owns will be devalued temporarily when an upcoming 2400 mhz auction takes place, adding Advanced Wireless Services to the mix.  But in the long run, wireless companies are going to need as much spectrum as they can get to keep up with the growing use of 4G cell towers to access the internet.  I believe U.S. Cellular should be able to realize the full value of its assets over time.


A note on undervalued asset purchases:  Based on my experience so far, my investing philosophy has changed from just investing in undervalued assets, to investing in assets that are slightly undervalued with solid business models and strong leadership to back them up.  In one of his early shareholder letters, Warren Buffett cautioned against investing in a cheap business with bad management, because by the time the business is able to realize the value of its assets, the management may have eroded a lot of the excess value through bad decisions.  I believe that was my error with BlackBerry.  In addition to purchasing cheap companies, I am also taking some time to familiarize myself with the quality of the underlying business and the management of the company, and I can avoid similar mistakes such as the BBRY investment in the future.

What to look for in a company:
Undervalued Company
Solid Operations
Good Management
Upcoming catalyst to bring company to full value


Companies I like but did not invest in:

T-Mobile (TMUS).  I believe they have hit a winner in the uncarrier strategy.  Their pricing is extremely competitive, and they appear to have good leadership.  AT&T and Verizon will be unable to lower prices to match T-Mobile because that will cause them to lose a big chunk of their profits, so T-Mobile has a sustainable niche.  The reason I did not invest is that Deutsche Telekom (DTEGY) has a 75% equity share and $11 billion in debt in T-Mobile.  I think DTEGY would be a smarter investment than TMUS.  But they have other European assets that I did not have time to look into.

TomTom (TMOAY).  TomTom has a decent business trading at just over $1 billion market cap.  It owns one of the three remaining mapping services along with Google and Nokia.  It purchased that mapping service (Tele Atlas) in 2007 for about $4 billion, or 3x its current market cap.  Nokia purchased its mapping software around the same time for $8 billion.  These mapping systems have lost a lot of value because Google developed its own maps that it does not charge much to license.  Additionally, there is now Open Street Map which is free.  Still, TomTom's mapping software is used in many mobile phone maps including in the iPhone.  Apple is moving away from using Google services because Google makes Android OS, its competitor.  We may see an increase in the value of these mapping services in the next few years, as existing licensing deals expire.  Garmins' licensing deal with NAVTEQ expires in 2015, with an option to renew through 2019.  I will research what other companies may have upcoming license expirations that could operate as a catalyst for TomTom.